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 April 2, 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-12,060,820 shares outstanding as of April 30, 1999
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INDEX
CHRONIMED INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - April 2, 1999 and July 3, 1998
Consolidated Statements of Income - Three months ended April
2, 1999 and March 27, 1998; nine months ended April 2, 1999
and March 27, 1998
Consolidated Statements of Cash Flows - Nine months ended
April 2, 1999 and March 27, 1998
Notes to Consolidated Financial Statements - April 2, 1999
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
PART II. OTHER INFORMATION
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Items 2, 3, 4 and 5 required under Part II have been omitted since all items are
not applicable or answers are negative.
Item 1. Legal Proceedings
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
SIGNATURES
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Part I. Financial Information
Item 1. Financial Statements
CHRONIMED INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
April 2, 1999 July 3, 1998
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(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $4,532 $1,027
Available-for-sale securities -- 6,509
Accounts receivable, net 34,636 23,190
Income taxes receivable -- 1,011
Inventory 9,411 10,918
Other current assets 1,320 797
Deferred taxes 275 275
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Total current assets 50,174 43,727
Available-for-sale securities 400 --
Property and equipment:
Property and equipment 24,847 21,113
Allowance for depreciation (12,030) (8,115)
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12,817 12,998
Goodwill, net 16,483 16,259
Other assets, net 135 162
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Total assets $80,009 $73,146
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $9,424 $6,832
Accrued expenses 4,118 3,803
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Total current liabilities 13,542 10,635
Deferred taxes 192 192
Shareholders' equity:
Preferred Stock
-- --
Common Stock, issued and outstanding shares--
12,061 and 12,080 respectively 121 121
Additional paid-in capital 52,060 51,668
Retained earnings 13,995 10,559
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66,176 62,348
Unrealized gain (loss) on available-for-sale
securities 99 (29)
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Total shareholders' equity 66,275 62,319
Total liabilities and shareholders' equity $80,009 $73,146
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</TABLE>
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CHRONIMED INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
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Apr 2, 1999 Mar 27, 1998 Apr 2, 1999 Mar 27, 1998
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<S> <C> <C> <C> <C>
REVENUES
Specialty Pharmacy Services $26,224 $18,774 $75,909 $57,585
Disease Management 17,742 8,033 43,610 23,130
Diagnostic Products 7,717 6,892 23,640 19,428
------ ------ ------- -------
Total Revenue 51,683 33,699 143,159 100,143
YR TO YR GROWTH 53% 43%
COSTS AND EXPENSES
Cost of revenues 40,986 24,395 108,907 71,679
Gross profit 10,697 9,304 34,252 28,464
% OF REVENUE 20.7% 27.6% 23.9% 28.4%
Selling and marketing 2,300 2,117 7,010 5,833
General and administrative 7,440 5,007 20,364 14,764
Research and development 221 96 546 229
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Total operating expenses 9,961 7,220 27,920 20,826
% OF REVENUE 19.3% 21.4% 19.5% 20.8%
INCOME FROM OPERATIONS 736 2,084 6,332 7,638
% OF REVENUE 1.4% 6.2% 4.4% 7.6%
Interest income 28 354 402 1,034
Other income--Publishing sale -- -- 503 --
INCOME BEFORE INCOME TAXES 764 2,438 7,237 8,672
Income taxes (298) (963) (2,822) (3,382)
NET INCOME $466 $1,475 $4,415 $5,290
% OF REVENUE 0.9% 4.4% 3.1% 5.3%
NET INCOME PER SHARE--BASIC $0.04 $0.12 $0.36 $0.44
NET INCOME PER SHARE--DILUTED $0.04 $0.12 $0.36 $0.43
AVERAGE SHARES OUTSTANDING--BASIC 12,109 11,965 12,108 11,943
AVERAGE SHARES OUTSTANDING--DILUTED 12,223 12,271 12,263 12,206
</TABLE>
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CHRONIMED INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
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Apr 2, 1999 Mar 27, 1998
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<S> <C> <C>
OPERATING ACTIVITIES:
Net income $4,415 $5,290
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,519 2,810
Changes in operating assets and liabilities:
Accounts receivable (10,435) 561
Inventory 1,507 (1,787)
Accounts payable and accrued expenses 2,907 (2,445)
Other assets (496) 129
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Net cash provided by operating activities 3,417 4,558
INVESTING ACTIVITIES:
Acquisitions (1,673) (1,870)
Purchases of property and equipment (3,889) (3,750)
Purchases of available-for-sale securities (300) (15,377)
Sales and maturities of available-for-sale securities 6,537 12,259
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Net cash provided by (used in) investing activities 675 (8,738)
FINANCING ACTIVITIES:
Repurchase of Common Stock (1,842) --
Net proceeds from issuance of Common Stock 1,255 737
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Net cash provided by (used in) financing activities (587) 737
Increase (decrease) in cash and cash equivalents 3,505 (3,443)
Cash and cash equivalents at beginning of period 1,027 5,038
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Cash and cash equivalents at end of period $4,532 $1,595
======= =======
</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 April 2, 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--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 D--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
--------------------------
Third Quarter Ended Nine Months Ended
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April 2, 1999 March 27, 1998 April 2, 1999 March 27, 1998
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Numerator:
- ----------
Net income for basic and
diluted net income per share $466 $1,475 $4,415 $5,290
Denominator:
- ------------
Denominator for basic net income
per share--weighted-average shares 12,109 11,965 12,108 11,943
Effect of dilutive securities:
Employee stock options 114 306 155 263
Denominator for diluted net income
per share--weighted-average shares
and assumed conversions 12,223 12,271 12,263 12,206
====== ====== ====== ======
Net Income per Share - Basic $.04 $.12 $.36 $.44
==== ==== ==== ====
Net Income per Share - Diluted $.04 $.12 $.36 $.43
==== ==== ==== ====
</TABLE>
Options to purchase 1,697,757 and 1,630,756 shares of common stock at various
prices were outstanding as of fiscal 1999 third 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:
* Require a high-cost regimen of maintenance prescription drugs or other
medical products over the course of their lives (typically long-term
and life-long therapies);
* Require treatment by healthcare specialists; and
* Require a significant amount of self-management and ongoing education
(where patient compliance is critical for improving clinical and
financial outcomes).
The Company is currently serving four such populations in the main: patients
with diabetes, patients with HIV/AIDS, patients who have had an organ
transplant, and patients with complex diseases treated with injectable
medications.
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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 company specializing
in HIV/AIDS. By integrating these two wholly-owned subsidiaries, the Company has
expanded beyond product and services delivery - it supports managed care
customers with decision support tools, enhances patient care, lowers costs, and
provides case management services for a fee or in a risk-sharing arrangement.
Chronimed is a leading HIV/AIDS disease management company. The Company 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
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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 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 has
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 late in
calendar year 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 fiscal 1999 second quarter).
Total revenue increased 53%, from $33.7 million to $51.7 million, for the
third quarter ended March 27, 1998, and April 2, 1999, respectively; and 43%,
from $100.1 million to $143.2 million, for the nine months ended March 27, 1998
and April 2, 1999, respectively. Price increases and inflationary pressures have
not been significant reasons for these revenue increases.
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Specialty Pharmacy Services revenue grew $7.5 million and 40% in the third
quarter, from $18.7 million to $26.2 million. Most of the growth came from the
Injectables program - up $5.9 million in third quarter -- which experienced
strong patient intake from the managed care plans. Another significant
contributor to this growth was the Organ Transplant pharmacy, which grew $1.4
million in the third quarter due to continued focus on key transplant centers
and the introduction of Chronimed's Life Management program, which is designed
to improve medication compliance and lower the incidence of organ rejections.
Disease Management revenue grew $9.7 million and 121% over last year's
third quarter, from $8.0 million to $17.7 million. Approximately $9.2 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 $500,000 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 $800,000 and 12% over last year's third
quarter, from $6.9 million to $7.7 million. Significant new products, most
notably the Select GT blood glucose system and the DiaScreen urine diagnostic
tests, have contributed to this growth. There was approximately $500,000 of
revenue in last year's third quarter from the Publishing business, which was
sold this year. Excluding Publishing, Diagnostics Products grew $1.3 million
over last year's third quarter.
Overall revenue growth for fiscal 1999 is expected to be about 40% 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 third quarter increased 15% from $9.3 million
last year to $10.7 million this year. Gross profit percentage for the third
quarter was 20.7 % against 27.6% last year. 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. Also,
in Diagnostic Products, gross profit percentages have declined as a result of
the delays in the
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revenue ramp up of the proprietary Select GT blood glucose system and the
DiaScreen urine test strip products.
SELLING AND MARKETING EXPENSES
Overall selling and marketing expenses in the third quarter were up
approximately $200,000 and 11% compared to last year's third quarter, on overall
revenue growth of 53%, as a result of increased spending for product releases
and increased promotional expenses. The Company experienced modest selling and
marketing expense growth in all three of its operating segments. As a percentage
of revenue, selling and marketing expenses dropped from 6.2% in last year's
third quarter to 4.5% in this year's third quarter.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative (G&A) expenses for the third quarter totaled
$7.4 million, up from $5.0 million last year. As a percentage of revenue, G&A
expenses decreased from 14.9% last year to 14.4% 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. 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 third quarter and the timing of some expenses.
INTEREST INCOME
Interest income decreased from $354,000 in last year's third quarter to
$28,000 this quarter. There are two major reasons for the decline. First, in
financing Chronimed's significant growth, the average investable funds for this
quarter were down to about $2 million compared to approximately $16 million last
year. Second, last year's third quarter included $110,000 of interest income
from the Orphan Medical receivable arising from the Orphan Medical rights sale;
this third quarter, with the receivable balance paid in full, the Company did
not recognize any interest income from Orphan Medical.
INCOME TAXES
The Company's income tax rate was approximately 39% in each of the
quarters ended March 27, 1998, and April 2, 1999. The current third quarter rate
of 39% is expected to continue through fiscal 1999 year end.
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LIQUIDITY AND CAPITAL RESOURCES
As of April 2, 1999, the Company had working capital of $36.6 million with
no long-term debt, and $66.3 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.
The Company's accounts receivable are generally with Payors for which the
collection periods vary depending on the practices of the individual Payor and
whether or not Chronimed has a contract with the Payor. Electronic billing and
on-line adjudication of claims are positive trends that shorten cash collection
periods and improve cash flow. The Company expects working capital requirements
to increase as revenues increase.
The days sales outstanding (DSO) of the Company's accounts receivable
increased from 51 at March 27, 1998, to 59 at April 2, 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
earlier quarters.
Inventory levels improved from $10.9 million in June 1998 to $9.4 million
in March 1999, despite the 43% revenue growth for the first nine 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 April 2, 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.
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State of Readiness
- ------------------
The Company has created an internal team that has been assessing Year 2000
readiness and taking actions as necessary. The Company's primary strategy is and
has been to replace its older, inefficient systems with current technology to
improve productivity and customer responsiveness. Most of these systems projects
have been undertaken in response to specific business needs and not as a result
of the Company's planned Year 2000 efforts. Nonetheless, we have included all
information systems and business functions in our assessment of Year 2000
readiness. A brief assessment of Year 2000 readiness follows:
The Company has completed its comprehensive inventory and risk assessment of all
systems and business functions.
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 in the process of being 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. The Company has determined
that internal systems will permit an uninterrupted flow of pharmaceuticals and
related services to its customers and is verifying that it will continue to
receive an uninterrupted flow of inventory and raw materials from its major
vendors.
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 1997, and its pharmacy services system, which was implemented in 1998. 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
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projects are capitalized as property and equipment on the Company's
balance sheet and are depreciated over the estimated useful life of the system.
Because the Company has been active in implementing new systems as described
above, direct expenses related to specific Year 2000 modifications for both
information systems and business systems should not be material to the financial
statements. During the current calendar year, the Company has incurred
approximately $50,000 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 was 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
has begun with respect to the flow of raw materials and inventory, and the
Company is considering 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
15
<PAGE>
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). 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, as was the case this fiscal year.
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: changes in economic
conditions; general 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 gross
profit margins; the Company's ability to execute its sales and marketing plans;
termination of key payor contracts; failure to collect key accounts receivable;
termination of key supplier contracts; changes in or unknown violations of
various federal, state, and local regulations governing the business, including
FDA compliance and regulations; loss or retirement of key executives; a change
in the status of the Company's loan guarantee with a key executive; unforeseen
Year 2000 circumstances; material litigation; changes in the status of managed
care contracts; changes in ownership; 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 2, 3, 4 and 5 required under Part II have been omitted since they are not
applicable or the answers are negative.
Item 1. Legal Proceedings
On March 5, 1999, Chronimed (the "Company") commenced a declaratory
judgment action against Bayer Corporation in federal district court in
Minnesota. The Company's lawsuit seeks a judicial declaration that technology
used by the Company in its DiaScreen(R) 10 diagnostic urine test strip does not
infringe patents used by Bayer in its urine test strip. The Company's action
does not seek monetary damages.
Bayer Corporation responded to the Company's lawsuit by filing a separate
action against the Company on March 10, 1999 in federal district court in
Indiana. Bayer's lawsuit alleges that the DiaScreen(R) 10 test strip infringes
two categories of Bayer patents. Bayer's lawsuit seeks to enjoin the Company's
sale of the DiaScreen(R) 10 product, damages for infringement, pre- and
post-judgment interest, legal costs, and a possible trebling of damages and
recovery of legal fees if willful infringement is proved. The Company has denied
and is vigorously defending Bayer's infringement claims.
Both lawsuits are in preliminary phases with the parties seeking to
establish a single venue where all claims will be heard. Bayer has not presented
a quantification of its alleged damages. The Company will continue to evaluate
the likelihood of a negative outcome and the materiality of Bayer's claims.
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 filed a report on Form 8-K dated May 4, 1999.
The report covered the Company's fiscal 1999 third quarter
earnings release and the Company's announcement to engage
Paine Webber Inc. to explore strategic alternatives and
enhance shareholder value.
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)
May 10, 1999 /s/ Maurice R. Taylor, II
- ----------------- -------------------------------
Date Maurice R. Taylor, II
Chairman of the Board and
Chief Executive Officer
May 10, 1999 /s/ Gregory H. Keane
- ---------------- ------------------------------
Date Gregory H. Keane
Vice President, Principal Accounting Officer and
Treasurer
18
EXHIBIT 11.1
CHRONIMED INC.
COMPUTATION OF EARNINGS PER SHARE
See Note D of Notes to Consolidated Financial Statements for Chronimed Inc. for
periods ended April 2, 1999.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-02-1999
<PERIOD-END> APR-02-1999
<CASH> 4,532,000
<SECURITIES> 0
<RECEIVABLES> 35,836,000
<ALLOWANCES> 1,200,000
<INVENTORY> 9,411,000
<CURRENT-ASSETS> 50,174,000
<PP&E> 24,847,000
<DEPRECIATION> 12,030,000
<TOTAL-ASSETS> 80,009,000
<CURRENT-LIABILITIES> 13,542,000
<BONDS> 0
0
0
<COMMON> 121,000
<OTHER-SE> 66,154,000
<TOTAL-LIABILITY-AND-EQUITY> 80,009,000
<SALES> 51,683,000
<TOTAL-REVENUES> 51,683,000
<CGS> 40,986,000
<TOTAL-COSTS> 50,947,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 433,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 764,000
<INCOME-TAX> 298,000
<INCOME-CONTINUING> 466,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 466,000
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
