UNITED STATES
SECURITIES 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 December 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 - 11,962,223 shares outstanding as of January 23,
1998
<PAGE>
INDEX
CHRONIMED INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - December 26, 1997 and June 27,
1997
Consolidated Statements of Income - Three months ended
December 26, 1997 and December 27, 1996; six months ended
December 26, 1997 and December 27, 1996
Consolidated Statements of Cash Flows - Six months ended
December 26, 1997 and December 27, 1996
Notes to Consolidated Financial Statements - December 26, 1997
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
PART II. OTHER INFORMATION
Items 1, 3, and 5 required under Part II have been omitted since they are not
applicable or answers are negative.
Item 2. Changes in Securities and Use of Proceeds
Item 4. Submission of Matters to a Vote of Security Holders - Annual Meeting of
Shareholders, held on December 3, 1997
Item 6. Exhibits and Reports on Form 8-K
3.1 Articles of Incorporation of the Company, as amended
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)
Dec 26, June 27,
1997 1997
-------- --------
ASSETS (Unaudited) (Note A)
Current assets:
Cash and cash equivalents $ 5,687 $ 5,038
Available-for-sale securities 14,047 10,274
Accounts receivable, net 20,294 20,372
Income taxes receivable 0 294
Inventory 8,265 7,858
Other current assets 609 274
Deferred taxes 965 965
-------- --------
Total current assets 49,867 45,075
Property and equipment:
Property and equipment 15,013 12,916
Allowance for depreciation (6,700) (5,466)
-------- --------
8,313 7,450
Intangible assets, net 10,984 11,639
Other assets, net 808 1,127
-------- --------
Total assets $ 69,972 $ 65,291
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 11,414 $ 10,904
Short-term debt 0 350
-------- --------
Total current liabilities 11,414 11,254
Deferred taxes 677 677
Shareholders' equity:
Preferred Stock -- --
Common Stock, issued and outstanding shares--
11,949 and 11,878, respectively 119 118
Additional paid-in capital 50,386 49,838
Retained earnings 7,223 3,408
-------- --------
57,728 53,364
Unrealized gain (loss) on available-for-sale securities 153 (4)
-------- --------
Total shareholders' equity 57,881 53,360
Total liabilities and shareholders' equity $ 69,972 $ 65,291
======== ========
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CHRONIMED INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
Dec 26, 1997 Dec 27, 1996 Dec 26, 1997 Dec 27, 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Services $ 28,517 $ 22,296 $ 53,909 $ 41,825
Products 6,255 9,036 12,536 18,013
-------- -------- -------- --------
Total Revenue 34,772 31,332 66,445 59,838
YR TO YR GROWTH 11.0% 11.0%
COSTS AND EXPENSES
Cost of sales 24,294 22,634 47,285 43,401
Gross profit 10,478 8,698 19,160 16,437
% OF REVENUE 30.1% 27.8% 28.8% 27.5%
Selling and marketing 1,987 1,795 3,715 3,448
General and administrative 5,123 4,175 9,757 8,361
Research and development 78 78 133 284
-------- -------- -------- --------
Total operating expenses 7,188 6,048 13,605 12,093
% OF REVENUE 20.7% 19.3% 20.5% 20.2%
INCOME FROM OPERATIONS 3,290 2,650 5,555 4,344
% OF REVENUE 9.5% 8.5% 8.4% 7.3%
Interest income 328 191 679 458
INCOME BEFORE INCOME TAXES 3,618 2,841 6,234 4,802
Provision for income taxes (1,398) (1,078) (2,419) (1,786)
NET INCOME $ 2,220 $ 1,763 $ 3,815 $ 3,016
% OF REVENUE 6.4% 5.6% 5.7% 5.0%
NET INCOME PER SHARE--BASIC $ 0.19 $ 0.15 $ 0.32 $ 0.25
NET INCOME PER SHARE--DILUTED $ 0.18 $ 0.14 $ 0.31 $ 0.23
AVERAGE SHARES OUTSTANDING--BASIC 11,948 12,138 11,932 12,306
AVERAGE SHARES OUTSTANDING--DILUTED 12,327 12,695 12,244 12,887
</TABLE>
<PAGE>
CHRONIMED INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
Dec 26, Dec 27,
1997 1996
------- --------
OPERATING ACTIVITIES:
Net income $ 3,815 $ 3,016
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,889 1,771
Changes in operating assets and liabilities:
Accounts and notes receivable 372 (2,609)
Inventory (407) (10,641)
Accounts payable and accrued expenses 160 5,950
Other assets (16) (290)
------- --------
Net cash provided by (used in) operating activities 5,813 (2,803)
INVESTING ACTIVITIES:
Acquisitions, net of cash purchased 0 (9,234)
Purchases of property and equipment (2,097) (2,136)
Purchases of available-for-sale securities (8,869) (2,006)
Sales and maturities of available-for-sale securities 5,253 17,598
------- --------
Net cash (used in) investing activities (5,713) 4,222
FINANCING ACTIVITIES:
Repurchase of Common Stock 0 (13,254)
Net proceeds from sale of Common Stock 549 964
------- --------
Net cash provided by (used in) financing activities 549 (12,290)
Increase (decrease) in cash and cash equivalents 649 (10,871)
Cash and cash equivalents at beginning of period 5,038 11,434
------- --------
Cash and cash equivalents at end of period $ 5,687 $ 563
======= ========
<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 December 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 December 26, 1997 and June
27, 1997. The Company considers the net unrealized gain (loss) on these
investments of $153,000 and $(4,000) at those respective dates to be temporary,
and as such has recorded it through shareholders' equity.
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.
<PAGE>
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
--------------------------
Three Months Ended Six Months Ended
------------------ ----------------
Dec. 26, Dec. 27, Dec. 26, Dec. 27,
1997 1996 1997 1996
------- ------- ------- -------
Numerator:
Net income for basic and
diluted net income per share $ 2,220 $ 1,763 $ 3,815 $ 3,016
Denominator:
Denominator for basic net income
per share--weighted-average shares 11,948 12,138 11,932 12,306
Effect of dilutive securities:
Employee stock options 379 372 312 394
Warrants -- 185 -- 187
------- ------- ------- -------
Dilutive potential common shares 379 557 312 581
Denominator for diluted net income
per share--weighted-average shares
and assumed conversions 12,327 12,695 12,244 12,887
======= ======= ======= =======
Basic Net Income per Share $ .19 $ .15 $ .32 $ .25
======= ======= ======= =======
Diluted Net Income per Share $ .18 $ .14 $ .31 $ .23
======= ======= ======= =======
Options to purchase 919,000 and 1,065,000 shares of common stock at various
prices were outstanding as of fiscal 1998 second quarter end and year-to-date,
respectively, 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.
<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. is a healthcare company specializing in services and
products for patients with chronic health conditions. Such conditions include
diabetes, HIV/AIDS, organ transplantation, and complex diseases treated with
self-injectable drugs. The Company develops, manufactures, markets, and
distributes pharmaceuticals, medical diagnostic products, and patient education
materials nationwide directly to individuals, patients of managed care
organizations, and to institutions that serve these patients. 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 certain biotech 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 adopt 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, the Select GT, and introduce several new products. Pursuant to a
variety of significant distribution agreements, the Company continues to market
diabetes-related products including blood glucose monitoring systems, lancets,
and infusion sets.
REVENUE
The Company has revised its revenue categories to more appropriately
reflect its current line of business. Starting this fiscal year, revenue will
fall into two categories: Services and Products. The Services area primarily
includes: the Self Injectables program, which is a payor-driven program that
serves patients who self-administer certain injectable medications; StatScript
Pharmacy, which serves HIV/AIDS patients through localized specialty pharmacy
centers; Organ Transplant Pharmacy, which serves organ transplant recipients and
patients with other chronic health conditions; and Home Service Medical, which
is the mail order diabetes services business. The Products area includes the
Medical Products manufacturing and distribution business for diabetes blood
glucose diagnostic products and accessories. It also includes the Publishing
business, which emphasizes diabetes, nutrition, and health and wellness.
Total revenue increased 11%, from $31.3 million to $34.8 million, for
the quarter ended December 27, 1996 and December 26, 1997, respectively; and
11%, from $59.8 million to $66.4 million for the six months ended December 27,
1996 and December 26, 1997, respectively. Price increases have not been a
significant reason for these revenue increases.
<PAGE>
Services revenue grew 28%, from $22.3 million to $28.5 million, for the
quarters ended December 27, 1996 and December 26, 1997, respectively. The growth
came from primarily two businesses. First, StatScript Pharmacy grew $3.4
million, or 76%, over last year's second quarter, driven mainly by the
higher-cost combination therapy HIV/AIDS medications and new store growth.
Second, the Self Injectables program grew $2.9 million, or 80%, over last year's
second quarter due to the continued high rate of new patients being added to the
system under existing managed care contracts. For the respective six-month
periods, revenue from Services grew 29%, from $41.8 million to $53.9 million,
due primarily to $6.4 million in StatScript Pharmacy growth and $5.5 million in
Self Injectables growth.
Products revenue declined 31% from $9.0 million to $6.3 million for the
quarters ended December 27, 1996 and December 26, 1997, respectively. The
decline was caused mainly by the discontinuance of a non-proprietary diabetes
product in last year's third quarter. For the respective six-month periods,
revenue from Products declined 30% from $18.0 million to $12.5 million due again
to the discontinuance of a non-proprietary diabetes product.
Total revenue growth for fiscal 1998 is expected to be approximately
20% above fiscal 1997 as high growth performance is expected to continue at
StatScript Pharmacy and in the Self Injectables program. Equally important in
this projection is the Company's belief that its Medical Products business will
in time be successful in replacing lost revenue from the diabetes 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 from
projections. Readers should review the Outlook section in this Form 10-Q for
further information.
GROSS PROFIT
Gross profit dollars as reported in the financial statements for the
current quarter and six-month periods include a one-time repayment from a
supplier of $678,000 for inventory that had been previously written off in last
year's fiscal third quarter. Including this one-time repayment, gross profit
percentage for the current quarter and six-month periods was 30.1% and 28.8%,
respectively, against the prior year periods of 27.8% and 27.5%, respectively.
Excluding the one-time repayment, gross profit percentage improved from 27.8% to
28.2% for the quarters ended December 27, 1996 and December 26, 1997,
respectively, due primarily to improvements in the General Medical diabetes
product margins. Excluding the one-time repayment, gross profit percentage
improved from 27.5% to 27.9% for the six-month periods ended December 27, 1996
and December 26, 1997, respectively, due primarily to improvements in the
General Medical diabetes products margins. In the second half of fiscal 1998,
the Company expects that gross profit percentages will decline one to two
percentage points from the first half performance given
<PAGE>
a mix increase in its lower-margin Services area, which faces continuing price
pressure from managed care organizations.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses increased 11% over the prior year's
second quarter as a result of increased spending in both its Services and
Products selling programs. As a percent of revenue, selling and marketing
expenses were flat at 5.7% in the quarters ended December 27, 1996 and December
26, 1997, respectively. In the Services area, the Company has added senior sales
people to focus on the large account opportunities in managed care. In the
Products area, the Company has made changes to the organization including the
addition of salespeople, improved managerial spans of control, and increased
sales focus on large national accounts. For the respective six-month periods,
selling and marketing expenses increased 9% for the same reasons noted above. As
a percent of revenue, selling and marketing expenses decreased from 5.8% to 5.6%
in the six months ended December 27, 1996 and December 26, 1997, respectively.
Overall, the Company expects selling and marketing expenses to grow at a rate
consistent with revenue.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative (G&A) expenses increased 23% over the prior
year's second quarter. As a percent of revenue, G&A expenses increased from
13.3% to 14.7%. For the respective six-month periods, G&A expenses increased
17%, with expenses increasing from 14.0% of revenue to 14.7% of revenue. The
most significant areas of spending growth are in business unit and corporate
management, in new information systems, and in StatScript new store openings.
The Company's G&A expenses include customer service, billing, and pharmacy
fulfillment as well as other traditional G&A expenses such as Corporate and
Business Unit Management, Information Systems, Business Development, Finance,
Quality, and Human Resources. In the second half of fiscal 1998, the Company
expects G&A expenses to continue at about 14% to 15% of revenue.
INCOME FROM OPERATIONS
Including the one-time repayment from a supplier of $678,000, income
from operations increased from $2.7 million to $3.3 million for the quarters
ended December 27, 1996 and December 26, 1997, respectively. Including this
one-time repayment, income from operations as a percent of revenue for the
current quarter and six-month periods was 9.5% and 8.4%, respectively, against
the prior year periods of 8.5% and 7.3%, respectively. Excluding the one-time
repayment, income from operations as a percent of revenue declined from 8.5% to
7.7% for the quarters ended December 27, 1996 and December 26, 1997,
respectively, due primarily to increased G&A spending. Excluding the one-time
repayment, income from operations as a percent of revenue increased from 7.3% to
7.5% for the six-month periods ended December 27,
<PAGE>
1996 and December 26, 1997, respectively, due primarily to improvements in the
General Medical diabetes product margins.
INTEREST INCOME
Interest income increased from $190,000 in last year's second quarter
to $330,000 this quarter, and from $460,000 through six months last year to
$680,000 through six months this year. The increases for the quarter and
six-month period are mainly due to the recognition of interest income from the
remaining balance due the Company from the Orphan Medical distribution rights,
supported by continuing positive cash flow from operations.
INCOME TAXES
The Company's income tax rate was 37.8% and 38.7% in the quarters ended
December 27, 1996 and December 26, 1997, respectively; and 37.2% and 38.8% in
the respective six month periods. Last year's rates differ from the statutory
rates due primarily to favorable tax treatment on municipal bond interest
income. The company has since reduced its investments in municipal bonds. The
current year rate of approximately 39% is expected to continue through year end.
LIQUIDITY AND CAPITAL RESOURCES
As of December 26, 1997, the Company had working capital of $38.5
million with no long-term debt, and $57.9 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 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 50 at December 26, 1997, compared to 62 at December 27, 1996. The
decrease reflects improved collection efforts as the Company has implemented a
number of improvements in its quality
<PAGE>
processes. Growth in revenue from Payors which are billed electronically has
also contributed favorably to the decrease in DSO.
The reserve for bad debts remained flat at $1.1 million from June 1997 to
December 1997, reflecting the improving quality of receivables with continued
revenue growth.
The Company is carrying $1.6 million in receivables on its balance sheet
related to the June 1997 sale of certain distribution rights to Orphan Medical,
Inc. The balance is to be paid mainly from the proceeds of periodic issuances of
Orphan Medical stock. The Company expects to receive payments over the next 24
months until the balance plus interest is paid in full.
Inventory increased approximately $400,000, or 5%, from June 1997 to
December 1997, which was less than the Company's 11% revenue growth for the
period, as the Company continues its high inventory turns and tight inventory
management.
As of December 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 December 26, 1997.
THE YEAR 2000 SOFTWARE ISSUE
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
will 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 to process
critical financial and operational information incorrectly.
The Company's primary strategy is to replace older, inefficient systems
with software that is Year 2000 compliant.
To improve financial efficiency, in February 1997, the Company implemented
general ledger, accounts payable, and fixed assets software that is Year 2000
compliant. The Company is also in the process of implementing a pharmacy
services system to improve operational efficiency; this system is also Year 2000
compliant. Other operational systems are being assessed with the intent to
implement prior to the Year 2000.
During the current year, the Company has incurred approximately $50,000 to
specifically modify existing computer systems and applications for Year 2000
computing, and estimates that up to $250,000 will be incurred in each of 1998
and 1999.
<PAGE>
The Company presently believes that with modifications to existing systems
and conversions to new systems the Year 2000 issue will not pose significant
operational problems. However, there can be no assurance that all Year 2000
issues will be identified and resolved in a timely manner, particularly those
issues involving Payors' systems and other systems outside of the Company's
control. If the Company's remediation plan is not successful, or if these
outside systems should fail, there could be a significant disruption of the
Company's ability to transact business with its customers and suppliers.
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.
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
<PAGE>
are not limited to, the following: competition and pricing pressures;
difficulties or delays in the development and marketing of the Company's
products; the Company's inability to execute its service and product sales
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; 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, 3 and 5 required under Part II have been omitted since they are not
applicable or the answers negative.
Item 2. Changes in Securities and Use of Proceeds
At the Annual Meeting of Shareholders on December 3, 1997, the holders of
Common Stock of the Company approved an amendment to the Articles of
Incorporation and Bylaws to classify the Board of Directors of the Company and
modify the removal requirements for directors (the "Amendment"). Under the
Amendment, the (i) Board of Directors is authorized to increase or decrease (to
no fewer than four) the size of the Board of Directors, (ii) the Board of
Directors is authorized to fill vacancies on the Board created by increases in
the number of directors or by death, resignation, retirement, disqualification,
or removal of a director (whether such removal is by the shareholders or by the
Board of Directors), (iii) the Board of Directors is authorized to remove a
director for cause, (iv) the Board of Directors is authorized to remove a
director, with or without cause, to the extent permitted by the Minnesota
Business Corporation Act and (v) the affirmative vote of the holders of at least
80% of the voting power of the then outstanding shares of capital stock of the
Company entitled to vote is required to (1) remove a director, with or without
cause or (2) amend, modify or repeal the above-described provisions of the
Articles of Incorporation and Bylaws pertaining to the classification or removal
of directors.
Item 4 Submission of Matters to a Vote of Security Holders - Annual Meeting of
Shareholders, held on December 3, 1997.
At the meeting, the director nominees described in the Company's Proxy
Statement were elected as follows:
WITHHOLD
FOR AUTHORITY
--- ---------
Maurice R. Taylor, II (three year term) 10,654,364 696,074
Henry F. Blissenbach, Pharm. D. (two year term) 10,663,359 687,079
John Howell Bullion (three year term) 10,639,924 710,514
Donnell D. Etzwiler, M.D. (one year term) 10,721,453 628,985
Charles V. Owens, Jr. (two year term) 10,655,021 695,417
Lawrence C. Weaver, Ph.D. (one year term) 10,651,453 698,985
In addition, all other proposals were approved by shareholders as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTE
--- ------- ------- ---------------
<S> <C> <C> <C> <C>
Increase the number of authorized shares 10,544,312 736,881 69,245 0
Classify the Board of Directors and modify
their removal requirements 5,253,659 1,739,391 100,884 4,256,504
Ratify appointment of Ernst and Young LLP
as independent auditors for 1998 fiscal 11,230,608 71,830 48,000 0
year
</TABLE>
<PAGE>
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Articles of Incorporation of the Company, as amended
11.1 Computation of Earnings Per Share (see Note E of Notes to
Consolidated Financial Statements)
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 December 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)
February 2, 1998 /s/ Maurice R. Taylor, II
- ---------------- ----------------------------
Date Maurice R. Taylor, II
Chairman of the Board and
Chief Executive Officer
February 2, 1998 /s/ Norman A. Cocke
- ---------------- ---------------------
Date Norman A. Cocke
Senior Vice President, Chief Financial Officer and
Secretary
EXHIBIT 3.1
RESTATED
ARTICLES OF INCORPORATION
OF CHRONIMED INC.
ARTICLE I
The name of this corporation shall be Chronimed Inc.
ARTICLE II
The location and address of the corporation's registered address in
this State shall be 13911 Ridgedale Drive, Minnetonka, Minnesota 55305.
ARTICLE III
The total number of shares of all classes of stock that this
corporation shall be authorized to issue is Forty-five Million (45,000,000)
shares, divided into the following: (i) Five Million (5,000,000) shares of
Preferred Stock, of the par value of $.01 per share; and (ii) Forty Million
(40,000,000) shares of Common Stock, of the par value of $.01 per share. A
description of the respective classes of stock and a statement of the
designations, preferences, limitations and relative rights of such classes of
stock and the limitations on or denial of the voting rights of the shares of
such classes of stock are as follows:
A. Preferred Stock
1. Issuance in Series. The Preferred Stock may be divided into and
issued in one or more series. The Board of Directors is hereby vested with
authority from time to time to establish and designate such series and, within
the limitations prescribed by law or set forth herein, to fix and determine the
relative rights and preferences of the shares of any series so established, but
all shares of Preferred Stock shall be identical except as to the following
relative rights and preferences, as to which there may be variations between
different series: (a) the rate of dividend; (b) the price at and the terms and
conditions on which shares may be redeemed; (c) the amount payable upon shares
in the event of involuntary liquidation; (d) the amount payable upon shares in
the event of voluntary liquidation; (e) sinking
<PAGE>
fund provisions, if any, for the redemption or purchase of shares; (f) the terms
and conditions on which shares may be converted, if the shares of any series are
issued with the privilege of conversion; and (g) voting rights. The Board of
Directors shall exercise such authority by the adoption of a resolution or
resolutions as prescribed by law.
2. Dividends. The holders of each series of Preferred Stock at the time
outstanding shall be entitled to receive, when and as declared to be payable by
the Board of Directors, out of any funds legally available for the payment
thereof, dividends at the rate theretofore fixed by the Board of Directors for
such series of Preferred Stock.
3. Preferred Dividends Cumulative. Dividends on all Preferred Stock,
regardless of series, shall be cumulative. No dividend shall be declared on any
series of Preferred Stock for any dividend period unless all dividends
accumulated for all prior dividend periods shall have been declared or shall
then be declared at the same time upon all Preferred Stock then outstanding. No
dividend shall be declared on any series of Preferred Stock unless a dividend
for the same period shall be declared at the same time upon all Preferred Stock
outstanding at the time of such declaration in like proportion to the divided
rate then declared. No dividend shall be declared or paid on the Common Stock
unless full dividends on all Preferred Stock then outstanding for all past
dividend periods and for the current dividend period shall have been declared
and the corporation shall have paid such dividends or shall have set apart a sum
sufficient for payment thereof.
4. Preferences on Liquidation. In the event of any dissolution,
liquidation or winding up of the corporation, whether voluntary or involuntary,
the holders of each series of the then outstanding Preferred Stock shall be
entitled to receive the amount fixed for such purpose in the resolution or
resolutions of the Board of Directors establishing the respective series of
Preferred Stock that might then be outstanding together with a sum equal to the
amount of all accumulated and unpaid dividends thereon at the dividend rate
fixed therefor in the aforesaid resolution or resolutions. After such payment to
such holders of Preferred Stock, the remaining assets and funds of the
corporation shall be distributed pro rata among the holders of the Common Stock.
A consolidation, merger or reorganization of the corporation with any other
corporation or corporations or a sale of all or substantially all of the assets
of the corporation shall not be considered a dissolution, liquidation or winding
up of the corporation within the meaning of these provisions.
<PAGE>
5. Redemption. The whole or any part of the outstanding Preferred Stock
or the whole or any part of any series thereof may be called for redemption and
redeemed at any time at the option of the corporation, subject to and in
accordance with such terms and conditions as shall be set forth in the
resolutions of the Board of Directors establishing the respective series of
Preferred Stock. The holders of the particular shares of the Preferred Stock so
to be redeemed shall be entitled to receive, at the time of redemption of such
shares, the redemption price fixed for such shares in the resolution or
resolutions of the Board of Directors establishing the particular series of
which such shares are a part together with a sum equal to the amount of all
accumulated and unpaid dividends thereon to the date fixed for redemption at the
dividend rate fixed for such shares in the aforesaid resolution or resolutions.
B. Common Stock
1. Dividends. Subject to all the rights of the Preferred Stock or any
series thereof and on the conditions set forth in Part A of this Article III or
in any resolution of the Board of Directors providing for the issuance of any
series of Preferred Stock, the holders of the Common Stock shall be entitled to
receive, when, as and if declared by the Board of Directors, out of funds
legally available therefor, dividends payable in cash, stock or otherwise.
2. Voting Rights. Each holder of Common Stock shall be entitled to one
vote for each share held.
3. Issuance. The shares of Common Stock may be issued from time to time
at the option and discretion of the Board of Directors of the corporation for
such consideration as may be fixed from time to time by the Board of Directors
in compliance with the Minnesota Business Corporation Act, and shares so issued,
the full consideration for which has been paid or delivered, shall be deemed
full paid stock and the holder of such shares shall not be liable for any
further payment thereon.
4. Miscellaneous. Each and every share of Common Stock shall be equal
and without preference or without classification as between such shares of
stock, and none of such shares of stock shall, in the hands of any person
whomsoever, be liable, or render such person liable, to pay any assessment or
any obligation or payment on account of the debts or obligations of the
corporation.
<PAGE>
ARTICLE IV
Shareholders shall have no right of cumulative voting.
ARTICLE V
Shareholders shall have no rights, preemptive or otherwise, to acquire
any part of any unissued shares or other securities of this corporation or of
any rights to purchase shares or other securities of this corporation before the
corporation may offer them to other persons.
ARTICLE VI
(a) The Board of Directors of this corporation shall consist of four
directors or such greater number of directors as shall be fixed in the manner
provided in the By-Laws of this corporation; provided, however, that if the
holders of any class or series of Preferred Stock, voting as a separate class or
series, have the right to elect director(s) and such right is in effect, the
number of directors shall be increased by the number of directors that such
holders may so elect and upon termination of such right the number of directors
shall be decreased by the number of directors equal to such previous increase.
(b) The directors (other than those directors who may be elected by the
holders of any class or series of Preferred Stock voting as a separate class or
series) shall be divided into three classes (Class I, Class II and Class III),
with the number of directors in each class as nearly equal as reasonably
possible. The initial terms of office for the Class I, Class II and Class III
directors shall be as follows:
(i) Class I directors shall be elected to serve until the
conclusion of the 1998 Annual Meeting of Shareholders,
(ii) Class II directors shall be elected to serve until the
conclusion of the 1999 Annual Meeting of Shareholders, and
(iii) Class III directors shall be elected to serve until the
conclusion of the 2000 Annual Meeting of Shareholders,
and until such director's successor shall have been duly elected and qualified.
Commencing with the 1998 Annual Meeting of Shareholders and continuing at each
annual meeting of shareholders thereafter, a director (other than those
directors
<PAGE>
who may be elected by the holders of any class or series of Preferred Stock
voting as a separate class or series) elected to succeed a director whose term
has expired shall be elected to serve until the conclusion of the third
succeeding annual meeting of shareholders from the date of such director's
election and until such director's successor shall have been duly elected and
qualified.
(c) Subject to the rights of the holders of any class or series of
Preferred Stock then outstanding, newly created directorships resulting from any
increase in the number of authorized directors or eliminated directorships
resulting from any decrease in the number of authorized directors shall be
apportioned by the Board of Directors among the Class I, Class II and Class III
directors to keep the number of directors in each such class as nearly equal as
reasonably possible; provided, however, that no decrease in the number of
authorized directors shall shorten the term or effect the removal of any
incumbent director except upon compliance with the provisions of sections (e) or
(f) of this Article VI. Vacancies on the Board of Directors created by any
increase in the number of authorized directors may be filled by the affirmative
vote of a majority of the directors then holding office. A director so chosen
shall hold office for a term expiring at the next annual meeting of shareholders
at which the term of office of the class of directors to which such director has
been elected expires and until such director's successor shall have been duly
elected and qualified.
(d) Subject to the rights of the holders of any class or series of
Preferred Stock then outstanding, any vacancies on the Board of Directors
resulting from the death, resignation, retirement, disqualification, removal
pursuant to sections (e) and (f) of this Article VI, or other cause (other than
a vacancy due to an increase in the number of authorized directors) may be
filled by the affirmative vote of a majority of the directors then holding
office, though less than a quorum. A director so chosen shall hold office for a
term expiring at the next annual meeting of shareholders at which the term of
office of such director's predecessor expires and until such director's
successor shall have been duly elected and qualified.
(e) Subject to the rights of the holders of any class or series of
Preferred Stock then outstanding, the shareholders may remove a director, at any
time, with or without cause, but only if such removal is approved by the
affirmative vote of the holders of at least 80% of the voting power of all of
the then outstanding shares of capital stock of this corporation entitled to
vote on such removal.
<PAGE>
(f) Subject to the rights of the holders of any class or series of
Preferred Stock then outstanding, the Board of Directors of this corporation, by
the affirmative vote of a majority of the directors then holding office, (i) may
remove a director, at any time, with or without cause, pursuant to the terms and
provisions of Minnesota Statutes, Section 302A.223, subdivision 2 (or similar
provision of future law) or (ii) may remove a director, at any time, but only if
such removal is for cause (as defined below), regardless of whether (a) such
director was appointed by the Board of Directors to fill a vacancy on the Board
of Directors and the shareholders have elected any directors in the interval
between the time of appointment to fill such vacancy and the time of the removal
or (b) such director was elected by the shareholders. For purposes of this
section (f), "cause" shall mean (1) misconduct as a director of this corporation
or any subsidiary of this corporation which involves dishonesty with respect to
a substantial or material corporate activity or corporate assets or (2)
conviction of an offense punishable by one (1) or more years of imprisonment
(other than minor regulatory infractions and traffic violations which do not
materially and adversely affect this corporation).
ARTICLE VII
A director of the corporation shall not be personally liable to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director, except for (i) liability based on a breach of the duty of
loyalty to the corporation or the shareholders; (ii) liability for acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law; (iii) liability based on the payment of an improper dividend
or an improper repurchase of the corporation's stock under Section 559 of the
Minnesota Business Corporation Act (Minnesota Statutes, Chapter 302A); (iv)
liability for any transaction from which the director derived an improper
personal benefit; or (v) liability for any act or omission occurring prior to
the date this Article VI becomes effective. If Chapter 302A, the Minnesota
Business Corporation Act, hereafter is amended to authorize the further
elimination or limitation of the liability of directors, then the liability of a
director of the corporation in addition to the limitation on personal liability
provided herein, shall be limited to the fullest extent permitted by the amended
Chapter 302A, the Minnesota Business Corporation Act. Any repeal or modification
of this Article by the shareholders of the corporation shall be prospective only
and shall not adversely affect any limitation on the personal liability of a
director of
<PAGE>
the corporation existing at the time of such repeal or modification.
ARTICLE VIII
Any action required or permitted to be taken at a meeting of the Board
of Directors may be taken by written action signed by all of the directors then
in office, unless the action is one which need not be approved by the
shareholders, in which case such action shall be effective if signed by the
number of directors that would be required to take the same action at a meeting
at which all directors were present.
ARTICLE IX
No amendment, addition, alteration, change or repeal of the Articles of
Incorporation of this corporation shall be made unless such amendment, addition,
alteration, change or repeal is approved pursuant to Minnesota Statutes, Section
302A.437 (or similar provision of future law) unless a different vote is
required by law. Notwithstanding the foregoing sentence, any other provision of
these Restated Articles of Incorporation of this corporation, the By-Laws of
this corporation, or any provision of law which might otherwise permit a lesser
vote or no vote, no amendment, addition, alteration, change or repeal of this
Article IX or Article VI of these Restated Articles of Incorporation, after
which this corporation is to continue in existence, shall be made unless such
amendment, addition, alteration, change or repeal is approved by the affirmative
vote of the holders of at least 80% of the voting power of all of the then
outstanding shares of capital stock entitled to vote on such amendment,
addition, alteration, change or repeal.
EXHIBIT 11.1
CHRONIMED INC.
COMPUTATION OF EARNINGS PER SHARE
See Note E of Notes to Consolidated Financial Statements for Chronimed Inc. for
periods ended December 26, 1997.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-03-1998
<PERIOD-START> SEP-27-1997
<PERIOD-END> DEC-26-1997
<CASH> 5,687,000
<SECURITIES> 14,047,000
<RECEIVABLES> 21,394,000
<ALLOWANCES> 1,100,000
<INVENTORY> 8,265,000
<CURRENT-ASSETS> 49,867,000
<PP&E> 15,013,000
<DEPRECIATION> 6,700,000
<TOTAL-ASSETS> 69,972,000
<CURRENT-LIABILITIES> 11,414,000
<BONDS> 0
0
0
<COMMON> 119,000
<OTHER-SE> 57,762,000
<TOTAL-LIABILITY-AND-EQUITY> 69,972,000
<SALES> 34,772,000
<TOTAL-REVENUES> 34,772,000
<CGS> 24,294,000
<TOTAL-COSTS> 31,482,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 378,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,618,000
<INCOME-TAX> 1,398,000
<INCOME-CONTINUING> 2,220,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,220,000
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.18
</TABLE>
