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 January 1, 1999
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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
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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 - 12,192,878 shares outstanding as of January 29,
- -------------------------------------------------------------------------------
1999
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INDEX
CHRONIMED INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - January 1, 1999 and July
3, 1998
Consolidated Statements of Income - Three months ended
January 1, 1999 and December 26, 1997; six months ended
January 1, 1999 and December 26, 1997
Consolidated Statements of Cash Flows - Six months ended
January 1, 1999 and December 26, 1997
Notes to Consolidated Financial Statements - January 1,
1999
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Items 1, 2, 3, and 5 required under Part II have been omitted since all items
are not applicable or answers are negative.
Item 4. Submission of Matters to a Vote of Security Holders ---- Annual Meeting
of Shareholders held on November 18, 1998.
Item 6. Exhibits and Reports on Form 8-K
11.1 Computation of Earnings Per Share
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>
Jan 1, 1999 July 3, 1998
----------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9,936 $ 1,027
Available-for-sale securities -- 6,509
Accounts receivable, net 34,054 23,190
Income taxes receivable -- 1,011
Inventory 10,794 10,918
Other current assets 1,427 797
Deferred taxes 275 275
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Total current assets 56,486 43,727
Available-for-sale securities 513 --
Property and equipment:
Property and equipment 23,630 21,113
Allowance for depreciation (10,473) (8,115)
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13,157 12,998
Goodwill, net 15,530 16,259
Other assets, net 146 162
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Total assets $ 85,832 $73,146
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,223 $ 6,832
Accrued expenses 6,079 3,803
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Total current liabilities 18,302 10,635
Deferred taxes 192 192
Shareholders' equity:
Preferred Stock -- --
Common Stock, issued and outstanding shares--
12,106 and 12,080 respectively 122 121
Additional paid-in capital 52,520 51,668
Retained earnings 14,485 10,559
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67,127 62,348
Unrealized gain (loss) on available-for-sale securities 211 (29)
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Total shareholders' equity 67,338 62,319
Total liabilities and shareholders' equity $ 85,832 $73,146
======== =======
</TABLE>
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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
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Jan 1, 1999 Dec 26, 1997 Jan 1, 1999 Dec 26, 1997
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
REVENUES
Specialty Pharmacy Services $26,800 $20,580 $49,685 $38,811
Disease Management 13,901 7,937 25,868 15,098
Diagnostic Products 7,979 6,255 15,923 12,536
------- ------- ------- -------
Total Revenue 48,680 34,772 91,476 66,445
YR TO YR GROWTH 40% 38%
COSTS AND EXPENSES
Cost of revenues 36,508 24,294 67,921 47,285
Gross profit 12,172 10,478 23,555 19,160
% OF REVENUE 25.0% 30.1% 25.7% 28.8%
Selling and marketing 2,351 1,987 4,711 3,715
General and administrative 6,507 5,123 12,923 9,757
Research and development 180 78 325 133
------- ------- ------- -------
Total operating expenses 9,038 7,188 17,959 13,605
% OF REVENUE 18.6% 20.7% 19.6% 20.5%
INCOME FROM OPERATIONS 3,134 3,290 5,596 5,555
% OF REVENUE 6.4% 9.5% 6.1% 8.4%
Interest income 58 328 375 679
Other income--Publishing sale 503 -- 503 --
INCOME BEFORE INCOME TAXES 3,695 3,618 6,474 6,234
Income taxes (1,440) (1,398) (2,525) (2,419)
NET INCOME $2,255 $2,220 $3,949 $3,815
% OF REVENUE 4.6% 6.4% 4.3% 5.7%
NET INCOME PER SHARE--BASIC $0.19 $0.19 $0.33 $0.32
NET INCOME PER SHARE--DILUTED $0.18 $0.18 $0.32 $0.31
AVERAGE SHARES OUTSTANDING--BASIC 12,115 11,948 12,108 11,932
AVERAGE SHARES OUTSTANDING--DILUTED 12,316 12,327 12,319 12,244
</TABLE>
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CHRONIMED INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
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Jan 1, 1999 Dec 26, 1997
OPERATING ACTIVITIES: ----------- ------------
<S> <C> <C>
Net income $3,949 $3,815
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,461 1,889
Changes in operating assets and liabilities:
Accounts receivable (9,853) 372
Inventory 124 (407)
Accounts payable and accrued expenses 7,667 160
Other assets (779) (16)
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Net cash provided by operating activities 4,569 5,813
INVESTING ACTIVITIES:
Purchases of property and equipment (2,726) (2,097)
Purchases of available-for-sale securities (300) (8,869)
Sales and maturities of available-for-sale securities 6,536 5,253
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Net cash provided by (used in) investing activities 3,510 (5,713)
FINANCING ACTIVITIES:
Repurchase of Common Stock (45) --
Net proceeds from issuance of Common Stock 875 549
Net cash provided by financing activities 830 549
Increase in cash and cash equivalents 8,909 649
Cash and cash equivalents at beginning of period 1,027 5,038
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Cash and cash equivalents at end of period $9,936 $5,687
====== ======
</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 January 1, 1999 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 January 1, 1999 and July
3, 1998. The Company considers the net unrealized gain(loss) on these
investments of $211,000 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 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.
<TABLE>
<CAPTION>
$s and Shares in Thousands
----------------------------------------------------------------------------------
Second Quarter Ended Six Months Ended
---------------------------------- ---------------------------------------
January 1, 1999 December 26, 1997 January 1, 1999 December 26, 1997
--------------- ----------------- --------------- -----------------
<S> <C> <C> <C> <C>
Numerator:
- ----------
Net income for basic and
diluted net income per share $2,255 $2,220 $3,949 $3,815
Denominator:
- ------------
Denominator for basic net income
per share--weighted-average shares 12,115 11,948 12,108 11,932
Effect of dilutive securities:
Employee stock options 201 379 211 312
Denominator for diluted net income
per share--weighted-average shares
and assumed conversions 12,316 12,327 12,319 12,244
====== ====== ====== ======
Net Income per Share - Basic $.19 $.19 $.33 $.32
==== ==== ==== ====
Net Income per Share - Diluted $.18 $.18 $.32 $.31
==== ==== ==== ====
</TABLE>
Options to purchase 1,757,226 and 1,295,316 shares of common stock at various
prices were outstanding as of fiscal 1999 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.
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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:
o 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);
o Require treatment by healthcare specialists; and
o 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 - it
can support managed care customers with decision support tools, enhance patient
care, lower costs, and provide case management services for a fee or in a
risk-sharing arrangement. Chronimed intends to be a leading HIV/AIDS disease
management company. 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. Shipments of the institutional model of this product
designed for use in clinical settings began in November 1998. FDA approval for a
consumer use version was received in December 1998, with sales expected to begin
approximately September 1999.
REVENUES
Chronimed is comprised of three operating segments--Specialty Pharmacy Services,
Disease Management, and Diagnostic Products. This three-way view 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 this fiscal 1999 second
quarter).
Total revenue increased 40%, from $34.8 million to $48.7 million, for
the second quarter ended December 26, 1997, and January 1, 1999, respectively;
and 38%, from $66.4 million to $91.5 million for the six months ended December
26, 1997 and January 1, 1999, respectively. Price increases and inflationary
pressures have not been significant reasons for these revenue increases.
Specialty Pharmacy Services revenue grew $6.2 million and 30% in the
second quarter, from $20.6 million to $26.8 million. Most of the growth came
from the Injectables program - up $4.2 million in second quarter -- which
experienced strong patient intake from the managed care plans. Another
significant contributor to this growth was the Organ Transplant Pharmacy, which
grew $1.2 million in the second quarter due to continued focus on key transplant
centers.
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Disease Management revenue grew $6.0 million and 75% over last year's
second quarter, from $7.9 million to $13.9 million. Approximately $5.3 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 not included in the Company's results last year (Chronimed acquired
Clinical Partners in June 1998).
Diagnostic Products revenue grew $1.7 million and 28% over last year's
second 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 35% or more
above fiscal 1998 as revenue growth 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 the
marketplace with its newer 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 second quarter increased 16% from $10.5
million last year to $12.2 million this year. Gross profit percentage for the
second quarter was 25.0% of revenue against 30.1% last year. Last year's second
quarter included a one-time favorable supplier repayment of $680,000; without
this one-time event, the gross profit percentage for last year's second quarter
would have been 28.2%. Percentage gross profit reduction is a natural
consequence of the growth of the Specialty Pharmacy Services business,
particularly the Injectables program, 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 second quarter were up
approximately $400,000 and 18% compared to last year's second quarter, on
overall revenue growth of 40%, 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
dropped from
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5.7% in last year's second quarter to 4.8% in this year's second quarter. For
the full fiscal year, the Company expects selling and marketing expenses to grow
at a rate slightly lower than revenue, and to end the year at between five and
five and one-half percent of revenue.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative (G&A) expenses for the second quarter totaled
$6.5 million, up from $6.4 million in the first quarter and $5.1 million last
year. As a percentage of revenue, G&A expenses decreased from 14.7% last year to
13.4% this year. Much of the absolute dollar increase in spending is the impact
of the June 1998 acquisition of Clinical 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 important areas of G&A
spending growth include the addition of new StatScript pharmacies, information
systems, and facilities. The Company believes that these infrastructure
investments are necessary to support revenue growth. G&A expense decreased as a
percentage of revenue due to the significant revenue growth rate in the second
quarter and the timing of some expenses. We expect G&A expenses to end the
fiscal year between 14 and 15 percent of revenue.
INTEREST INCOME
Interest income decreased from $328,000 in last year's second quarter to
$58,000 this quarter. There are three reasons for the decline. First, in
financing Chronimed's significant growth, the average investable funds for this
quarter were down to about $5 million compared to almost $20 million last year.
Second, last year's second quarter included $90,000 of interest income from the
Orphan Medical receivables arising from the Orphan Medical rights sale; this
second quarter, with the receivable balance much lower, the Company recognized
only $15,000. And third, interest rates are down more than a full percentage
point from last year. The Company expects that interest income will be minimal
for the rest of the year.
INCOME TAXES
The Company's income tax rate was approximately 39% in each of the
quarters ended December 26, 1997, and January 1, 1999. The current second
quarter rate of 39% is expected to continue through fiscal 1999 year end.
LIQUIDITY AND CAPITAL RESOURCES
As of January 1, 1999, the Company had working capital of $38.2 million
with no long-term debt, and $67.3 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.
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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 50 at December 26, 1997, to 60 at January 1, 1999. 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, and slower-than-expected collections from a large, low-risk
account. Upon full redirection of these efforts to the collection of
receivables, expected to be accomplished in fiscal 2000, the Company believes
that DSOs will return to the low 50 days sales outstanding range that has been
achieved in recent quarters.
Inventory levels remained flat at approximately $10.8 million from June
1998 to December 1998, despite the 38% revenue growth for the first six months
of fiscal 1999. 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 January 1, 1999. 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 READINESS DISCLOSURE STATEMENT
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:
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The Company has completed its comprehensive inventory of all systems and
business functions. Concurrent with the inventory phase of the Year 2000
readiness program, Company personnel are assigning a priority to each system.
The Company has completed approximately 80% of its risk assessment analysis of
all systems and business functions. However, risk assessment analysis is
virtually complete with respect to all mission critical or high priority
systems.
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 are planned to be converted to fully compliant systems by
June 1999.
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.
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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 $150,000 over and above its ongoing productivity
projects has been 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.
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 is addressing
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.
15
<PAGE>
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). As the overall business grows, the Company expects that this
seasonal pattern will soften and that third quarter revenues will be the same as
or higher than second quarter revenues.
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; pressures on product margins; 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.
16
<PAGE>
PART II. OTHER INFORMATION
Items 1, 2, 3 and 5 required under Part II have been omitted since they are not
applicable or the answers are negative.
Item 4. Submission of Matters to a Vote of Security Holders - Annual Meeting
of Shareholders, held on November 18, 1998.
At the meeting, the director nominees described in the Company's Proxy
Statement were elected as follows:
FOR WITHHOLD AUTHORITY
--- ------------------
John H. Flittie Class I, three year term 10,971,425 551,799
Travers H. Wills Class I, three year term 10,969,134 554,090
The terms for directors Henry F. Blissenbach and Charles V.
Owens expire at the Annual Meeting to be held in 1999; the terms for directors
John H. Bullion and Maurice R. Taylor, II expire at the Annual Meeting to be
held in 2000.
In addition, all other proposals were approved by
shareholders as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTES
--- ------- ------- ----------------
<S> <C> <C> <C> <C>
Proposal to approve the Chronimed Inc
1999 Stock Option Plan 3,955,713 3,075,736 108,581 4,383,194
Ratify appointment of Ernst and Young LLP
as independent auditors for 1999 fiscal year 11,377,391 115,193 30,640 0
</TABLE>
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 January 1, 1999.
17
<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 5, 1999 /s/ Maurice R. Taylor, II
- ------------------ --------------------------------
Date Maurice R. Taylor, II
Chairman of the Board and
Chief Executive Officer
February 5, 1999 /s/ Norman A. Cocke
- ------------------ --------------------------------
Date Norman A. Cocke
Senior Vice President, Chief Financial Officer and
Secretary
18
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 January 1, 1999.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-02-1999
<PERIOD-START> OCT-03-1998
<PERIOD-END> JAN-01-1999
<CASH> 9,936,000
<SECURITIES> 0
<RECEIVABLES> 35,054,000
<ALLOWANCES> 1,000,000
<INVENTORY> 10,794,000
<CURRENT-ASSETS> 56,486,000
<PP&E> 23,630,000
<DEPRECIATION> 10,473,000
<TOTAL-ASSETS> 85,832,000
<CURRENT-LIABILITIES> 18,302,000
<BONDS> 0
0
0
<COMMON> 122,000
<OTHER-SE> 67,216,000
<TOTAL-LIABILITY-AND-EQUITY> 67,338,000
<SALES> 48,680,000
<TOTAL-REVENUES> 48,680,000
<CGS> 36,508,000
<TOTAL-COSTS> 45,546,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 231,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,695,000
<INCOME-TAX> 1,440,000
<INCOME-CONTINUING> 2,255,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,255,000
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.18
</TABLE>
