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 October 2, 1998
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Commission File Number 0-19952
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CHRONIMED Inc.
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(Exact name of registrant as specified in its charter)
Minnesota 41-1515691
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10900 Red Circle Drive
Minnetonka, MN 55343
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(Address of principal executive offices)
(Zip code)
Registrant's telephone number, including area code (612) 979-3600
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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 - 12,110,582 shares outstanding as of October 26,
1998
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INDEX
CHRONIMED INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - October 2, 1998 and July 3, 1998
Consolidated Statements of Income - Three months ended October
2, 1998 and September 26, 1997
Consolidated Statements of Cash Flows - Three months ended
October 2, 1998 and September 26, 1997
Notes to Consolidated Financial Statements - October 2, 1998
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
PART II. OTHER INFORMATION
Items 1 through 5 required under Part II have been omitted since all items are
not applicable or answers are negative.
Item 6. Exhibits and Reports on Form 8-K
27 Financial Data Schedule
SIGNATURES
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Part I. Financial Information
Item 1. Financial Statements
CHRONIMED INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
Oct 2, 1998 July 3, 1998
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ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9,106 $ 1,027
Available-for-sale securities -- 6,509
Accounts receivable, net 26,464 23,190
Income taxes receivable -- 1,011
Inventory 12,676 10,918
Other current assets 1,094 797
Deferred taxes 275 275
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Total current assets 49,615 43,727
Available-for-sale securities 200 --
Property and equipment:
Property and equipment 22,457 21,113
Allowance for depreciation (9,155) (8,115)
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13,302 12,998
Goodwill, net 15,924 16,259
Other assets, net 159 162
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Total assets $ 79,200 $ 73,146
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,635 $ 6,832
Accrued expenses 3,208 3,803
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Total current liabilities 14,843 10,635
Deferred taxes 192 192
Shareholders' equity:
Preferred Stock -- --
Common Stock, issued and outstanding shares--
12,106 and 12,080 respectively 121 121
Additional paid-in capital 51,892 51,668
Retained earnings 12,253 10,559
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64,266 62,348
Unrealized (loss) on available-for-sale securities (101) (29)
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Total shareholders' equity 64,165 62,319
Total liabilities and shareholders' equity $ 79,200 $ 73,146
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</TABLE>
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CHRONIMED INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Quarter Ended
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Oct 2, 1998 Sept 26, 1997
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REVENUES
Specialty Pharmacy Services $ 22,886 $ 18,231
Disease Management 11,966 7,161
Diagnostic Products 7,944 6,281
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Total Revenue 42,796 31,673
YR TO YR GROWTH 35%
COSTS AND EXPENSES
Cost of revenues 31,413 22,991
Gross profit 11,383 8,682
% OF REVENUE 26.6% 27.4%
Selling and marketing 2,359 1,728
General and administrative 6,416 4,634
Research and development 146 55
Total operating expenses 8,921 6,417
% OF REVENUE 20.8% 20.3%
INCOME FROM OPERATIONS 2,462 2,265
% OF REVENUE 5.8% 7.2%
Interest income 317 351
INCOME BEFORE INCOME TAXES 2,779 2,616
Income taxes (1,085) (1,020)
NET INCOME $ 1,694 $ 1,596
% OF REVENUE 4.0% 5.0%
NET INCOME PER SHARE--BASIC $ 0.14 $ 0.13
NET INCOME PER SHARE--DILUTED $ 0.14 $ 0.13
AVERAGE SHARES OUTSTANDING--BASIC 12,100 11,915
AVERAGE SHARES OUTSTANDING--DILUTED 12,336 12,165
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CHRONIMED INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
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Oct 2, 1998 Sept 26, 1997
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<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,694 $ 1,596
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,623 859
Changes in operating assets and liabilities:
Accounts and notes receivable (3,274) 3,038
Income taxes receivable 1,011 --
Inventory (1,758) 97
Accounts payable and accrued expenses 4,208 (1,035)
Other assets (323) 31
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Net cash provided by operating activities 3,181 4,586
INVESTING ACTIVITIES:
Purchases of property and equipment (1,563) (1,237)
Purchases of available-for-sale securities (300) (1,963)
Sales and maturities of available-for-sale securities 6,537 2,246
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Net cash provided by (used in) investing activities 4,674 (954)
FINANCING ACTIVITIES:
Net proceeds from issuance of Common Stock 224 179
Net cash provided by financing activities 224 179
Increase in cash and cash equivalents 8,079 3,811
Cash and cash equivalents at beginning of period 1,027 5,038
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Cash and cash equivalents at end of period $ 9,106 $ 8,849
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</TABLE>
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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 October 2, 1998 are not
necessarily indicative of the results that may be expected for the year ending
July 2, 1999. For further information, refer to the financial statements and
footnotes thereto for the year ended July 3, 1998.
The balance sheet at July 3, 1998, 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 October 2, 1998 and July
3, 1998. The Company considers the net unrealized loss on these investments of
$101,000 and $29,000 at those respective dates to be temporary, and as such has
recorded it through shareholders' equity.
NOTE D--RECLASSIFICATIONS
Certain prior year balances may have been reclassified to conform with the
current year presentation. These reclassifications have no impact on net income
or shareholders' equity as previously reported.
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NOTE E--PER SHARE DATA
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, EARNINGS PER SHARE. Statement 128 replaced the
previously reported primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where necessary, restated to conform to the
Statement 128 requirements.
Basic net income per share is based on the weighted average number of shares of
common stock outstanding during the year. Diluted 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. The following table sets forth the computation of basic and diluted net
income per share.
$s and Shares in Thousands
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Three Months Ended
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October 2, 1998 September 26, 1997
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Numerator:
Net income for basic and
diluted net income per share $ 1,694 $ 1,596
Denominator:
Denominator for basic net income
per share--weighted-average shares 12,100 11,915
Effect of dilutive securities:
Employee stock options 236 250
Warrants -- --
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Dilutive potential common shares 236 250
Denominator for diluted net income
per share--weighted-average shares
and assumed conversions 12,336 12,165
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Basic Net Income per Share $ .14 $ .13
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Diluted Net Income per Share $ .14 $ .13
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Options to purchase 1,290,991 shares of common stock at various prices were
outstanding as of fiscal 1999 first quarter end, but were not included in the
computation of diluted net income per share because the exercise prices of these
options was greater than the average market price of the common shares and,
therefore, the effect would be antidilutive.
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NOTE F--SUBSEQUENT EVENT
On November 6, 1998, Chronimed completed the sale of assets of its publishing
business. The selling price was $1.8 million. Chronimed expects to record a gain
on the sale of approximately $500,000 in its fiscal second quarter ending
January 1, 1999.
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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") is a leading integrated
healthcare company specializing in diagnostic products, specialty pharmacy
services, and disease management for people with chronic health conditions. The
Company develops, manufactures, markets and distributes pharmaceuticals, medical
diagnostic products and educational materials by mail and retail pharmacy, and
also provides specialized disease management services to specific populations of
patients with selected 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
healthcare costs; the developers and manufacturers that produce the prescription
drugs and other products needed to manage chronic conditions; and the
institutions, foundations and healthcare providers working with these patients.
Chronimed works directly with all of these constituents in a concerted effort to
improve clinical and cost-of-care outcomes - and enhance the quality of life for
the chronically ill.
The patient populations for which the Company believes its services are
most effective include patients who:
* Require a high-cost regimen of maintenance prescription drugs or other
medical products over the course of their lives (typically long-term
and life-long therapies);
* Require treatment by healthcare specialists; and
* Require a significant amount of self-management and ongoing education
(where patient compliance is critical for improving clinical and
financial outcomes).
The Company is currently serving four such populations in the main: patients
with diabetes, patients with HIV/AIDS, patients who have had an organ
transplant, and patients with complex diseases treated with injectable
medications.
To increase its efforts in addressing the needs of HIV/AIDS patients,
in July 1996, Chronimed acquired StatScript Management Services, Inc., the
operator of specialty HIV/AIDS pharmacies. To further expand its capabilities in
the area of full-spectrum disease management programs, in June 1998, Chronimed
acquired Clinical Partners, Inc., a medical case management
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company specializing in HIV/AIDS. By integrating these two wholly-owned
subsidiaries, the Company can expand beyond product and services delivery,
support its managed care customers with decision support tools and enhance
patient care, lower costs, and facilitate case management services for a fee and
risk-sharing arrangements. Chronimed intends to be the leading HIV/AIDS disease
management company in the country. The Company is investigating programs for a
variety of other chronic conditions and plans to apply its disease management
business model to other selected chronic conditions in the future.
Chronimed provides patients with a convenient, competitively-priced
source of prescription drugs, medical products, and a variety of educational
materials and counseling support 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. The Company believes
that by educating patients and increasing patient compliance, as well as
increasing provider support and intervention, clinical outcomes can be favorably
improved, thus decreasing long-term financial costs of care.
The Company obtains patients primarily through referrals from
healthcare providers, direct patient contacts, and contracts with managed care
organizations. As employers have attempted to control their escalating
healthcare costs, Payors have increasingly adopted various specialized managed
care techniques in order to limit the costs of healthcare. The specialty managed
care industry was 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 1997, an estimated 85% of privately
insured individuals in the United States were enrolled in some type of managed
care program, up from 48% in 1992 (according to KPMG Peat Marwick). 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, the increasing majority of patient referrals
come from the Company's Payor programs.
The Company has developed relationships with certain treatment centers,
foundations and medical associations that 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
healthcare 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.
Chronimed continues to emphasize the development and licensing of
proprietary diagnostic products suitable for distribution through its system.
Pursuant to a variety of exclusive distribution
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agreements, the Company continues to market diagnostic products including blood
glucose monitoring systems, lancets, and infusion sets. In February 1998, the
Company launched the Select GT(TM) Blood Glucose Testing System, an in-home
consumer-use version of its Supreme II(R) Blood Glucose Monitoring System used
in long-term care facilities.
In March 1998, Chronimed acquired DiaScreen Corporation, a dry reagent
chemistry technology company, which broadened the Company's proprietary product
offerings to include both blood and urine diagnostic testing. Chronimed
subsequently received FDA clearance to market its proprietary DiaScreen(R) brand
10-parameter urine test strip that detects chronic health conditions such as
kidney and liver disease, hepatitis, and diabetes. The 10-parameter urine test
strip is the most widely used urine screening test in the world.
In June 1998, Chronimed signed a development and distribution agreement
with Cell Robotics International, Inc., an Albuquerque, New Mexico-based
manufacturer of scientific and medical laser devices. Chronimed has exclusive
worldwide rights to the FDA-approved Lasette(TM) laser technology products,
which represent a new and improved technology for collecting capillary blood
from fingertips.
REVENUES
Chronimed is comprised of three operating segments--Specialty Pharmacy Services,
Disease Management, and Diagnostic Products. This three-way view more clearly
describes the business and reflects how it is managed and resourced. It also
aligns with the new disclosure requirements of Financial Accounting Statement
No. 131, Segment Reporting, which Chronimed will implement at the end of this
June 1999 fiscal year. The Specialty Pharmacy Services business includes the
Injectables program, Organ Transplant Pharmacy, and Home Service Medical. The
Disease Management business, focusing on HIV/AIDS patients, includes StatScript
Pharmacy and Clinical Partners. The Diagnostic Products business includes the
General Medical business (and Publishing, which has been sold in fiscal 1999
second quarter).
Total revenue increased 35%, from $31.7 million to $42.8 million, for the
quarters ended September 26, 1997, and October 2, 1998, respectively. Price
increases and inflationary pressures have not been significant reasons for these
revenue increases.
Specialty Pharmacy Services revenue grew almost $4.7 million and 26%
in the first quarter, from $18.2 million to $22.9 million. Most of the
growth came from the Injectables program, which experienced strong patient
intake from the managed care plans.
Disease Management revenue grew $4.8 million and 67% over last year's
first quarter, from $7.2 million to $12.0 million. Approximately $4.1 million of
this growth came from the StatScript Pharmacy network, with new pharmacies, new
patients in existing stores, and higher pharmaceutical prices all contributing
to the growth. The remaining $700,000 of revenue growth came from case
management and strategic services contracts through Clinical Partners, which
were
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not included in the company's results last year (Chronimed acquired Clinical
Partners in June 1998).
Diagnostic Products revenue grew almost $1.7 million and 27% over last
year's first quarter, from $6.3 million to almost $8.0 million. Significant new
products, most notably the Select GT blood glucose system and the DiaScreen
urine diagnostic tests, have contributed to this growth.
Overall revenue growth for fiscal 1999 is expected to be around 35% above
fiscal 1998 as revenue performance is expected to continue in all three of
Chronimed's operating segments. Important to this projection is the Company's
belief that its Diagnostics Products business will be successful in replacing
lost revenue from a previous product discontinuance with its own proprietary
products. Equally important to this projection is the Company's ability to
maintain and add contracts in its Specialty Pharmacy Services business and its
ability to maintain and grow its customer base in Disease Management. 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
Gross profit dollars for the quarter increased 31% from $8.7 million last
year to $11.4 million this year. Gross profit percentage for the first quarter
was 26.6% of revenue against 27.4% last year. Percentage gross profit reduction
is a natural consequence of the growth of the Specialty Pharmacy Services
business with its lower managed care margins. We expect this trend to continue
at least through the end of fiscal 1999.
SELLING AND MARKETING EXPENSES
Overall selling and marketing expenses in the first quarter were up 36%
compared to last year's first quarter, on overall revenue growth of 35%, as a
result of increased spending for product releases, additional sales personnel,
and increased promotional expenses. The Company experienced selling and
marketing expense growth in all three of its operating segments. As a percentage
of revenue, selling and marketing expenses remained flat at 5.5% in the quarters
ended September 26, 1997, and October 2, 1998, respectively. For the full fiscal
year, the Company expects selling and marketing expenses to grow at a rate
slightly lower than revenue.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative (G&A) expenses for the first quarter totaled
$6.4 million, up from $4.6 million last year. As a percent of revenue, G&A
expenses increased from 14.6% last year to 15.0% this year. Much of the increase
is the impact of the June 1998 acquisition of Clinical
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Partners. Most of the Clinical Partners' operating expenses, including goodwill
amortization, are classified as G&A expense, and therefore will slightly
increase Chronimed's overall G&A expense as a percent of revenue in the future.
Other areas of G&A spending growth include the addition of new StatScript
pharmacies, information systems, and facilities.
INTEREST INCOME
Interest income decreased from $351,000 in last year's first quarter to
$317,000 this quarter. The decline is due to a decrease in Chronimed's
investable funds in this year's first quarter, mostly offset by the recognition
of interest income from the residual balance due to the Company from the Orphan
Medical distribution rights sale announced in June 1997. The interest income
amount recorded this quarter from the Orphan Medical rights sale was $280,000,
leaving approximately $20,000 of interest income to be recognized from the final
payments expected this fiscal year.
INCOME TAXES
The Company's income tax rate was approximately 39% in each of the
quarters ended September 26, 1997, and October 2, 1998. The current first
quarter rate of 39% is expected to continue through fiscal 1999 year end.
LIQUIDITY AND CAPITAL RESOURCES
As of October 2, 1998, the Company had working capital of $34.8 million
with no long-term debt, and $64.2 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 1999.
The Company's accounts receivable are generally with Payors for which the
collection periods vary depending on the practices of the individual Payor and
whether or not Chronimed has a contract with the Payor. Electronic billing and
on-line adjudication of claims are positive trends that shorten cash collection
periods and improve cash flow. The Company expects working capital requirements
to increase as revenues increase.
The days sales outstanding (DSO) of the Company's accounts receivable
increased from 51 at September 26, 1997, to 55 at October 2, 1998. This negative
trend is caused mainly by the Specialty Pharmacy Services business, where the
Company has dedicated much of its efforts to the recent implementation of a new
pharmacy system. Upon full redirection of these efforts to the collection of
receivables, the Company believes that DSOs will return to the low 50 days sales
outstanding range that has been achieved in recent quarters.
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Inventory levels increased approximately $1.8 million and 16% from June
1998 to September 1998. Much of the increase reflects the Company's investment
in new diagnostic products as well as for second quarter demand. The Company
believes that it is properly reserved for excess and obsolete inventory.
The Company has a discretionary line of credit of $15 million. There was
no balance outstanding under the line of credit at October 2, 1998. The Company
believes that it may need to use the line of credit before the end of fiscal
year 1999 to fund certain investments and business growth.
THE YEAR 2000 SOFTWARE ISSUE
Background
The Company has assessed and continues to assess the impact of the Year 2000
issue on its reporting systems and operations. The Year 2000 issue exists
because many computer systems and applications currently use two-digit data
fields to designate a year. As the century date occurs, date-sensitive systems
might recognize the year 2000 as 1900 or not at all. This inability to recognize
or properly treat the year 2000 may cause the Company's systems, or the systems
used by the company's suppliers, payors, or other constituencies, to process
critical financial and operational information incorrectly.
State of Readiness
The Company has created an internal team that has been assessing Year 2000
readiness and taking actions as necessary. The Company's primary strategy is and
has been to replace its older, inefficient systems with current technology to
improve productivity and customer responsiveness. Most of these systems projects
have been undertaken in response to specific business needs and not as a result
of the Company's planned Year 2000 efforts. Nonetheless, we have included all
information systems and business functions in our assessment of Year 2000
readiness. A brief assessment of Year 2000 readiness follows:
The Company will have completed its comprehensive inventory of all systems and
business functions by November 1998. Concurrent with the inventory phase of the
Year 2000 readiness program, Company personnel have assigned a priority to each
system. As of the November 1998 inventory deadline, the Company will have
completed approximately 80% of its risk assessment analysis. However, risk
assessment analysis will have been fully completed with respect to all mission
critical or high priority systems on that date.
The Company has completed the conversion of its core information technologies to
Year 2000 compliant systems. Two of the Company's business units currently
maintain some dependencies on systems that are not yet Year 2000 compliant.
However, these systems will have been converted to fully compliant systems by
June 1999.
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With respect to the Company's non-mission critical systems and business
functions, the Company is in the process of evaluating readiness, testing
systems, and communicating with vendors and customers.
Communications with vendors and customers will continue through 1999. In
addition to compiling information related to the readiness of goods and services
provided to the Company, Chronimed is informing customers that all of its
proprietary medical devices are Year 2000 compliant. While the Company has
determined that internal systems will permit an uninterrupted flow of
pharmaceuticals and related services to its customers, the Company is in the
process of verifying that it will continue to receive an uninterrupted flow of
inventory and raw materials from its vendors. The Company anticipates that it
will have accumulated necessary vendor information by March 1999.
The Company is exchanging information with third party payors to facilitate an
uninterrupted electronic data interchange (EDI) and reimbursement process. The
Company anticipates that all necessary information will have been collected, and
EDI systems tested, by June 1999. The Company is also monitoring the state of
readiness of governmental payors. The Company anticipates that definitive
information from governmental payors will not be fully available until the end
of 1999. The Company is modeling its contingency plans to accommodate the
potential delay in receipt of funds from such payors.
Costs to Address Year 2000 Issues
The Company has implemented, and is in the process of implementing, core systems
designed to improve productivity and customer responsiveness that are also Year
2000 compliant. The most significant projects include the Company's integrated
general ledger, accounts payable and fixed assets system, which was implemented
in February 1997, and its pharmacy services system, which is implemented in the
Specialty Pharmacy Services business but is currently being extended to other
segments of the business. We do not view these and other similar projects as
part of the Company's Year 2000 costs because we did not accelerate their
replacement due to Year 2000 issues. These projects are capitalized as property
and equipment on the Company's balance sheet and are depreciated over the
estimated useful life of the system.
Because the Company has been active in implementing new systems as described
above, direct expenses related to specific Year 2000 modifications for both
information systems and business systems should not be material to the financial
statements. During the current calendar year, the Company has incurred
approximately $100,000 over and above its ongoing productivity projects to
specifically modify existing systems and applications for Year 2000 computing.
The Company estimates that up to $150,000 over and above its ongoing
productivity projects will be incurred in calendar 1998, and that up to $250,000
will be incurred in calendar 1999. Such costs have been or will be charged to
expense as incurred and are being funded through operating cash flows.
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Risks to the Company
The Company believes that its greatest Year 2000 risk is related to
reimbursement from third-party payors, particularly state and federal
governments. Risk also exists relative to the flow of raw materials and
inventory from vendors. Interruption of the Company's business due to
infrastructure failure, in the form of power or telecommunications breakdowns,
is believed unlikely. However, the Company's contingency plan will address
short-term loss of these basic utilities. Minimal risks are associated with the
functioning of the Company's information technologies, financial systems,
physical plant and equipment, internal communications and human resources
functions.
Contingency Plans
The principal focus of the Company's contingency plan involving third-party
payors will include the dedication of cash reserves or available credit to
accommodate delays in cash flow and the assignment of current and new personnel
to the processing of non-electronic reimbursement forms. Contingency planning
with respect to the flow of raw materials and inventory has not been undertaken,
although the Company will consider increasing inventory to overcome vendor
delays. All Company contingency plans, other than those involving governmental
payors, will be completed by June 1999. It is anticipated that contingency
planning with respect to governmental payors will be completed by September
1999.
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 have 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.
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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, particularly the Select GT blood glucose system, the urine
diagnostic strips, the Assure blood glucose system, and the Lasette laser finger
perforator system; the Company's inability to execute its sales and marketing
plans; 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;
unforeseen Year 2000 circumstances; and management of growth. Please see Exhibit
99 filed with the Company's Form 10-K on September 30, 1998, for additional
circumstances that could cause actual results to differ from forecasts.
17
<PAGE>
PART II. OTHER INFORMATION
Items 1 through 5 required under Part II have been omitted since they are not
applicable or the answers are negative.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on July 9,
1998 regarding its acquisition of Clinical Partners, Inc.
18
<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)
November 9, 1998 /s/ Maurice R. Taylor, II
- ---------------------- --------------------------------------
Date Maurice R. Taylor, II
Chairman of the Board and
Chief Executive Officer
November 9, 1998 /s/ Norman A. Cocke
- ---------------------- --------------------------------------
Date Norman A. Cocke
Senior Vice President, Chief Financial Officer
and Secretary
19
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-02-1999
<PERIOD-START> JUL-04-1998
<PERIOD-END> OCT-02-1998
<CASH> 9,106,000
<SECURITIES> 0
<RECEIVABLES> 27,465,000
<ALLOWANCES> 1,001,000
<INVENTORY> 12,676,000
<CURRENT-ASSETS> 49,615,000
<PP&E> 22,457,000
<DEPRECIATION> 9,155,000
<TOTAL-ASSETS> 79,200,000
<CURRENT-LIABILITIES> 14,843,000
<BONDS> 0
0
0
<COMMON> 121,000
<OTHER-SE> 64,044,000
<TOTAL-LIABILITY-AND-EQUITY> 79,200,000
<SALES> 42,796,000
<TOTAL-REVENUES> 42,796,000
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<LOSS-PROVISION> (143,000)
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<INCOME-PRETAX> 2,779,000
<INCOME-TAX> 1,085,000
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