UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the period ended September 26, 1997
-----------------------------
Commission File Number 0-19952
---------------------------
CHRONIMED Inc.
-----------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-1515691
-----------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
13911 Ridgedale Drive
Minnetonka, MN 55305
-----------------------------------------------------------------------
(Address of principal executive offices)
(Zip code)
Registrant's telephone number, including area code (612) 541-0239
---------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes ___X___ No ______
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value - 11,948,338 shares outstanding as of
October 24, 1997
<PAGE>
INDEX
CHRONIMED INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - September 26, 1997 and June 27, 1997
Consolidated Statements of Income - Three months ended September
26, 1997 and September 27, 1996
Consolidated Statements of Cash Flows - Three months ended
September 26, 1997 and September 27, 1996
Notes to Consolidated Financial Statements - September 26, 1997
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
PART II. OTHER INFORMATION
Items 1 through 5 have been omitted since all items are not applicable or
answers negative.
Item 6. Exhibits
11.1 Computation of Earnings Per Share
27 Financial Data Schedule
SIGNATURES
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
CHRONIMED INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
Sept 26, 1997 June 27 1997
------------- ------------
<S> <C> <C>
ASSETS (unaudited) (Note A)
Current assets:
Cash and cash equivalents $ 8,849 $ 5,038
Available-for-sale securities 10,032 10,274
Accounts receivable, net 17,628 20,372
Income taxes receivable -- 294
Inventory 7,761 7,858
Other current assets 405 274
Deferred taxes 965 965
---------- ----------
Total current assets 45,640 45,075
Property and equipment:
Property and equipment 14,153 12,916
Allowance for depreciation (5,993) (5,466)
---------- ----------
8,160 7,450
Intangible assets, net 11,307 11,639
Other assets, net 965 1,127
---------- ----------
Total assets $ 66,072 $ 65,291
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 9,869 $ 10,904
Short-term debt -- 350
---------- ----------
Total current liabilities 9,869 11,254
Deferred taxes 677 677
Shareholders' equity:
Preferred Stock -- --
Common Stock, issued and outstanding shares--
11,947 and 11,878, respectively 119 118
Additional paid-in capital 50,366 49,838
Retained earnings 5,004 3,408
---------- ----------
55,489 53,364
Unrealized gain (loss) on available-for-sale securities 37 (4)
---------- ----------
Total shareholders' equity 55,526 53,360
---------- ----------
Total liabilities and shareholders' equity $ 66,072 $ 65,291
========== ==========
</TABLE>
<PAGE>
CHRONIMED INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Quarter Ended
-------------
Sept 26, Sept 27
1997 1996
-------- --------
REVENUES
Services $ 25,392 $ 19,529
Products 6,281 8,977
-------- --------
Total Revenue 31,673 28,506
YR TO YR GROWTH 11.1%
COSTS AND EXPENSES
Cost of sales 22,991 20,768
Gross profit 8,682 7,738
% OF REVENUE 27.4% 27.1%
Selling and marketing 1,728 1,653
General and administrative 4,634 4,190
Research and development 55 207
-------- --------
Total operating expenses 6,417 6,050
% OF REVENUE 20.3% 21.2%
INCOME FROM OPERATIONS 2,265 1,688
% OF REVENUE 7.2% 5.9%
Interest income 351 267
-------- --------
INCOME BEFORE INCOME TAXES 2,616 1,955
Provision for income taxes (1,020) (708)
-------- --------
NET INCOME $ 1,596 $ 1,247
======== ========
% OF REVENUE 5.0% 4.4%
NET INCOME PER SHARE $ 0.13 $ 0.09
======== ========
AVERAGE SHARES OUTSTANDING 12,351 13,212
======== ========
<PAGE>
CHRONIMED INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
Sept 26, 1997 Sept 27, 1996
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,596 $ 1,247
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 859 929
Changes in operating assets and liabilities:
Accounts and notes receivable 3,038 (1,868)
Inventory 97 (8,150)
Accounts payable and accrued expenses (1,035) 6,254
Other assets 31 (95)
---------- ----------
Net cash provided by (used in) operating activities 4,586 (1,683)
INVESTING ACTIVITIES:
Acquisitions, net of cash purchased -- (9,234)
Purchases of property and equipment (1,237) (985)
Purchases of available-for-sale securities (1,963) (2,006)
Sales and maturities of available-for-sale securities 2,246 7,619
---------- ----------
Net cash (used in) investing activities (954) (4,606)
FINANCING ACTIVITIES:
Repurchase of Common Stock -- (1,577)
Net proceeds from sale of Common Stock 179 322
---------- ----------
Net cash provided by (used in) financing activities 179 (1,255)
Increase (decrease) in cash and cash equivalents 3,811 (7,544)
Cash and cash equivalents at beginning of period 5,038 11,434
---------- ----------
Cash and cash equivalents at end of period $ 8,849 $ 3,890
========== ==========
</TABLE>
<PAGE>
CHRONIMED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the quarter ended September 26, 1997 are not
necessarily indicative of the results that may be expected for the year ending
July 3, 1998. For further information, refer to the financial statements and
footnotes thereto for the year ended June 27, 1997.
The balance sheet at June 27, 1997, has been derived from the audited financial
statements at that date, but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
The Company uses a four-week, four-week, five-week (4-4-5) quarterly accounting
cycle with the fiscal year ending on the Friday closest to June 30 and the
fiscal quarters ending on the Friday closest to the last day of the respective
month.
NOTE B--INVENTORIES
Inventories consist primarily of goods held for resale and are valued at the
lower of cost or market under the average cost method.
NOTE C--INVESTMENTS
The Company's investment policy is to invest idle and excess funds in high
grade, fixed income securities generally for no more than two years. These
securities are classified as Available-for-Sale as of September 26, 1997 and
June 27, 1997. The Company considers the net unrealized gain (loss) on these
investments of $37,000 and $(4,000) at those respective dates to be temporary,
and as such has recorded it through shareholders' equity.
<PAGE>
NOTE D--RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform with the current
year presentation. These reclassifications have no impact on net income or
shareholders' equity as previously reported.
NOTE E--PER SHARE DATA
Net income per share is based on the weighted average number of shares of common
stock and dilutive common stock equivalents outstanding during the year. Common
stock equivalents consist of options and warrants outstanding to purchase shares
of the Company's Common Stock.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings per Share, which is required to be adopted by the Company in fiscal
second quarter ending December 26, 1997. At that time, the Company will be
required to change the method currently used to compute earnings per share and
to restate all prior periods. Under the new requirements for calculating basic
earnings per share, the dilutive effect of stock options will be excluded. The
impact, compared to primary earnings per share now reported, is not expected to
be material.
<PAGE>
Part I. Financial Information
Item 2. Management's Discussion
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Chronimed Inc. ("Chronimed" or the "Company") develops, markets and
distributes prescription drugs, medical products and educational materials by
mail and retail pharmacy to specific populations of patients with chronic
conditions. By focusing on specific chronic conditions, the Company believes it
is able to provide valuable services to: the patients affected by chronic
conditions; the insurance companies, health maintenance organizations, preferred
provider organizations, government agencies and other third-party payors
("Payors") that pay a large portion of the related health care costs; the
developers and manufacturers that produce the prescription drugs and other
products needed to manage chronic conditions; and the institutions, foundations
and health care providers working with these patients. The patient populations
for which the Company believes its services are most effective include patients
who:
* Require a costly regimen of maintenance prescription drugs or other
medical products over the course of their lives;
* Are treated by health care specialists; and
* Require a significant amount of self-management and on-going
education.
The Company is currently serving four such populations in the main: patients
with diabetes, patients who have had an organ transplant, patients with
HIV/AIDS, and patients who self-administer injectable medications. Starting July
1996, Chronimed increased its efforts in addressing the needs of HIV/AIDS
patients through the Company's acquisition of StatScript Management Services,
Inc., the operator of specialty HIV/AIDS pharmacies. The Company is
investigating programs for a variety of other chronic conditions.
Chronimed provides patients with a convenient, competitively-priced source
of prescription drugs, medical products, and a variety of educational materials
and counseling support designed to help patients achieve maximum control over
their chronic conditions. Often, the greater the effort a patient makes to
stabilize or control his or her chronic condition, the lower the incidence of
complications and the better the patient's quality of life.
Historically, the Company has obtained patients primarily through
referrals from health care providers and direct patient contacts. As employers
have attempted to control their escalating health care costs, Payors have
increasingly adopted various specialized managed care techniques in
<PAGE>
order to limit the costs of health care. The specialty managed care industry has
developed principally in response to the demand from employers and Payors for
more effective control of cost increases in certain sectors, such as patients
with chronic conditions. In 1996, an estimated 80% of privately insured
individuals in the United States were enrolled in some type of managed care
program, up from 69% in 1995. Chronimed seeks to adapt managed care techniques
or to develop new techniques to manage the particular delivery systems, cost
structures, and utilization characteristics of patients with chronic conditions.
As a result of the increasing role of managed care, coupled with the Company's
experience in managing specific patient groups, patient referrals are
increasingly coming from the Company's Payor programs.
The Company has developed relationships with certain treatment centers,
foundations and associations which specialize in the treatment or support of
patients with chronic conditions. These relationships provide the Company with
access to a large number of individuals with chronic conditions and to the
health care providers treating these conditions.
Chronimed believes that its system is well-suited for developers and
manufacturers of pharmaceutical and medical products designed for small or
hard-to-identify patient populations. Chronimed provides these companies with
assistance in the design and rapid introduction of their products, a cost
effective means for distributing these products to specific patient populations,
and a method for monitoring the use of these products as well as outcomes.
Chronimed continues to emphasize the development and licensing of
proprietary products suitable for distribution through its system. The Company
expects to launch a retail version of its Supreme blood glucose monitoring
system in 1998 and introduce several new products. Pursuant to a variety of
exclusive distribution agreements, the Company continues to market
diabetes-related products including blood glucose monitoring systems, lancets,
infusion sets and, beginning in 1998, infusion pumps. The Company is no longer
pursuing development of a continuous membrane system for blood glucose
monitoring.
REVENUES
The Company is revising its revenue categories to more appropriately
reflect its current line of business. Starting this quarter, revenue will now
fall into two categories: "Services" and "Products." The Services area primarily
includes the Self Injectables program, StatScript Pharmacy, Organ Transplant
Pharmacy, and Home Service Medical. The Products area includes the Diabetes
products and Publishing businesses.
Total revenue increased 11%, from $28.5 million to $31.7 million, for the
quarters ended September 27, 1996 and September 26, 1997, respectively. Price
increases have not been a significant reason for these revenue increases.
Services revenue grew 30%, from $19.5 million to $25.4 million, for the
quarters ended September 27, 1996 and September 26, 1997, respectively. The
growth came primarily from two
<PAGE>
businesses. First, the Self Injectables program grew $2.6 million and 84% over
last year's first quarter due to the continued high rate of new patients being
added to the system. Second, StatScript Pharmacy grew $2.9 million or 69% over
last year's first quarter, driven primarily by new store growth (eight new
specialty pharmacies since September, 1996) and the introduction of higher cost,
combination-therapy HIV/AIDS medications.
Products revenue declined 30%, from $9.0 million to $6.3 million, for the
quarters ended September 27, 1996 and September 26, 1997, respectively. The
decline was caused mainly by the discontinuance of a diabetes product supplied
by a third party.
Overall revenue growth for fiscal 1998 is expected to be 20% or more above
fiscal 1997 as performance is expected to continue in the Self Injectables
program and at StatScript Pharmacy. Equally important in this projection is the
Company's belief that its diabetes products business will be successful in
replacing lost revenue from the product discontinuance with its own proprietary
products. The Company believes that its supplier inputs and proprietary
production rates are stable and sustainable but may be subject to unforeseen
shortfalls. The Company cautions readers that this and other paragraphs in the
Management's Discussion section include "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 and that actual
results may differ materially from projections. Readers should review the
Outlook section in this Form 10-Q for further information.
GROSS PROFIT
Overall gross profit performance for the first quarter was 27.4% of
revenue against 27.1% last year. The improvement is driven primarily by higher
gross margins in the Products area, where the mix of Chronimed proprietary
diabetes products revenue has increased year to year. In the Services area,
gross profit performance as a percentage of revenue is down approximately one
percentage point in the first quarter, as expected, against prior year's first
quarter. This is due primarily to the continuing price pressure from managed
care.
SELLING AND MARKETING EXPENSES
Overall sales and marketing expenses in the first quarter were up 5%
compared to last year's first quarter, on overall revenue growth of 11%, as a
result of increased spending in preparation for product releases, additional
sales personnel, and increased promotional expenses. As a percentage of revenue,
selling and marketing expenses decreased from 5.8% to 5.5% in the quarters ended
September 27, 1996 and September 26, 1997, respectively. Overall, the Company
expects sales and marketing expenses to grow at a rate slightly lower than
revenue.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative (G&A) expenses increased 11% over the prior
year's first quarter, on overall revenue growth of 11%. As a percentage of
revenues, these expenses decreased slightly
<PAGE>
from 14.7% to 14.6%. The Company's G&A expenses include customer service,
billing, and pharmacy fulfillment, as well as traditional G&A costs including
Corporate and Division Management, Information Systems, Business Development,
Finance and Human Resources. These dollar increases reflect additional people
and systems to build an appropriate infrastructure for continued revenue growth.
INCOME FROM OPERATIONS
Income from operations increased from $1.7 million and 5.9% of revenue to
$2.3 million and 7.2% of revenue for the quarters ended September 27, 1996 and
September 26, 1997, respectively. This percentage increase reflects improved
margins and controlled selling, general and administrative expenses.
INTEREST INCOME
Interest income increased from $270,000 in last year's first quarter to
$350,000 this quarter. The increase is mainly due to the recognition of interest
income from the remaining balance due the Company from the Orphan Medical
distribution rights sale announced in June 1997. Looking forward, interest
income is expected to continue at or above the first quarter's level due to
positive cash flow and the continuing interest income from the Orphan Medical
receivable.
INCOME TAXES
The Company's income tax rate was approximately 36.2% and 39.0% in the
quarters ended September 27, 1996 and September 26, 1997, respectively. Last
year's rate differs from the statutory rate due primarily to favorable tax
treatment on municipal bond interest income. The current first quarter rate of
39% is expected to continue through year end.
LIQUIDITY AND CAPITAL RESOURCES
As of September 26, 1997, the Company had working capital of $35.8 million
with no long-term debt, and $55.5 million of shareholders' equity.
The Company believes that its current working capital, together with
existing sources of liquidity and cash generated by operations, will satisfy its
working capital requirements through at least fiscal 1998.
The Company's accounts receivable are generally with Payors for which the
collection periods vary depending on the practices of the individual Payor. The
average collection period for the Company's accounts receivable increased up
until the beginning of fiscal 1995 as the Company became more involved in the
reimbursement process through its specialty pharmacy programs for patients with
chronic conditions, including organ transplant and HIV/AIDS. Additionally, the
Company has obtained an increasing number of patients with benefits from
Medicaid and special
<PAGE>
state programs which tend to pay claims more slowly. The advent of electronic
billing is a recent positive trend that has begun to shorten cash collection
periods and improve cash flow. Nonetheless, the Company expects working capital
requirements to increase as revenues increase.
The days sales outstanding (DSO) of the Company's accounts receivable
improved to 51 at September 26, 1997, compared to 65 at September 27, 1996. The
decrease reflects improved collection efforts and the mix of business. Growth in
revenue from Payors which are billed electronically, low DSO in the StatScript
Pharmacy business, and large payments from a significantly past due customer
have contributed favorably to the decrease in DSO.
The reserve for bad debts remained flat at $1.1 million from June 27, 1997
to September 26, 1997, reflecting the improving quality of receivables with
continued revenue growth.
Inventory decreased approximately $100,000 from June 1997 to September
1997 as the Company continues its high inventory turns and tight inventory
management.
As of September 26, 1997, the Company had not made any material individual
commitments for capital expenditures for fiscal 1998. The Company's financial
plan for capital spending for fiscal 1998 is $4.5 million.
The Company has a discretionary line of credit of $15 million. There was
no balance outstanding under the line of credit at September 26, 1997.
HEALTH REFORM/GOVERNMENT REGULATION
Political, economic and regulatory influences are subjecting the health
care industry in the United States to fundamental change. A variety of new
approaches has been proposed, including mandated basic health care benefits,
controls on health care spending through limitations on the growth of private
health insurance premiums and Medicare and Medicaid spending, and the creation
of large purchasing groups and other fundamental changes to the health care
delivery system. In addition, some of the states in which the Company operates
have adopted or are considering various health care reform proposals. The
Company anticipates that both the public and private sectors will continue to
review and assess alternative health care delivery systems and payment methods
and that debate of these issues will likely continue in the future. Because of
uncertainty regarding the ultimate features of reform initiatives and their
enactment and implementation, the Company cannot predict which, if any, of such
reform proposals will be adopted, when they may be adopted, or what impact they
may have on the Company.
The Company's business is subject to substantial governmental regulation,
including laws governing the dispensing of prescription drugs and laws
prohibiting the payment of remuneration for patient referrals. Management
believes that the Company is in substantial compliance with all existing
statutes and regulations materially affecting the conduct of its business.
<PAGE>
SEASONALITY
The Company has experienced a seasonal pattern in its operating results.
Historically, the Company has had higher revenues in its second fiscal quarter
than in its third fiscal quarter. The Company believes the seasonality of its
revenues and earnings results from the acceleration of purchases of prescription
drugs and medical products by individuals prior to the beginning of a new
calendar year (which is generally when Payors impose new deductible
calculations).
OUTLOOK
Information contained in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations", other than historical
information, should be considered forward looking and reflects management's
current views of future events and financial performance that involve a number
of risks and uncertainties. The factors that could cause actual results to
differ include, but are not limited to, the following: competition and pricing
pressures; difficulties or delays in the development and marketing of the
Company's products; termination of key payor contracts; termination of key
supplier contracts; changes in or unknown violations of various federal, state,
and local regulations governing the business; loss or retirement of key
executives; and management of growth. Please see Exhibit 99 filed with the
Company's Form 10-K on September 25, 1997, for additional circumstances that
could cause actual results to differ from forecasts.
<PAGE>
PART II. OTHER INFORMATION
Items 1 through 5 required under Part II have been omitted since they are not
applicable or the answers negative.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Computation of Earnings Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company was not required to file any reports on Form
8-K during the quarter ended September 26, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHRONIMED INC.
(REGISTRANT)
October 29, 1997 /s/ Maurice R. Taylor, II
- --------------------- ----------------------------------------------
Date Maurice R. Taylor, II
Chairman of the Board and
Chief Executive Officer
October 29, 1997 /s/ Norman A. Cocke
- --------------------- ----------------------------------------------
Date Norman A. Cocke
Senior Vice President, Chief Financial Officer
and Secretary
EXHIBIT 11.1
CHRONIMED INC.
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended
Sept. 26, Sept. 27,
1997 1996
------- -------
<S> <C> <C>
Primary
Average shares outstanding ............................... 11,915 12,462
Net effect of dilutive stock options
and warrants -- based on the treasury
stock method using average market price ............... 250 750
------- -------
Total ............................................. 12,165 13,212
======= =======
Net income ................................................. $ 1,596 $ 1,247
======= =======
Net income per share ....................................... $ .13 $ .09
======= =======
Fully Diluted
Average shares outstanding ............................... 11,915 12,462
Net effect of dilutive stock options
and warrants -- based on the treasury
stock method using the higher of average
or ending market price ................................ 436 750
------- -------
Total ............................................. 12,351 13,212
======= =======
Net income ................................................. $ 1,596 $ 1,247
======= =======
Net income per share .................................. $ .13 $ .09
======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-03-1998
<PERIOD-END> SEP-26-1997
<CASH> 8,849,000
<SECURITIES> 10,032,000
<RECEIVABLES> 18,728,000
<ALLOWANCES> 1,100,000
<INVENTORY> 7,761,000
<CURRENT-ASSETS> 45,640,000
<PP&E> 14,153,000
<DEPRECIATION> 5,993,000
<TOTAL-ASSETS> 66,072,000
<CURRENT-LIABILITIES> 9,869,000
<BONDS> 0
0
0
<COMMON> 119,000
<OTHER-SE> 55,407,000
<TOTAL-LIABILITY-AND-EQUITY> 66,072,000
<SALES> 31,673,000
<TOTAL-REVENUES> 31,673,000
<CGS> 22,991,000
<TOTAL-COSTS> 29,408,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 249,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,616,000
<INCOME-TAX> 1,020,000
<INCOME-CONTINUING> 1,596,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,596,000
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
</TABLE>
