UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended October 1, 1999 or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _________________ to _________________
Commission File Number 0-19952
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
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes _X_ No ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value - 12,090,263 shares outstanding as of November 2,
1999
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INDEX
CHRONIMED INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - October 1, 1999 and July 2, 1999
Consolidated Statements of Income - Three months ended October 1,
1999 and October 2, 1998
Consolidated Statements of Cash Flows - Three months ended October 1,
1999 and October 2, 1998
Notes to Consolidated Financial Statements - October 1, 1999
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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INDEX (CONTINUED)
CHRONIMED INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Items 1,2,3,4 and 5 required under Part II have been omitted since all items are
not applicable or answers are negative.
Item 6. Exhibits and Reports on Form 8-K
a.) Exhibits
10.1 Retention Incentive Arrangement effective May 20,
1999, between the Company and Steven A. Crees.
10.2 Retention Incentive Arrangement effective May 25,
1999, between the Company and Perry L. Anderson.
10.3 Retention Incentive Arrangement effective May 18,
1999, between the Company and Patrick L. Taffe.
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)
Oct 1, 1999 July 2, 1999
----------- ------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 1,230 $ 3,312
Accounts receivable, net 43,068 36,274
Income taxes receivable 678 --
Inventory 9,652 9,786
Other current assets 1,370 1,529
Deferred taxes 787 774
-------- --------
Total current assets 56,785 51,675
Available-for-sale securities 544 610
Property and equipment:
Property and equipment 27,078 25,954
Allowance for depreciation (15,418) (13,745)
-------- --------
11,660 12,209
Goodwill, net 15,903 16,242
Other assets, net 690 159
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Total assets $ 85,582 $ 80,895
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,828 $ 11,230
Accrued expenses 2,396 2,992
Income taxes payable -- 186
Short-term debt 3,601 --
-------- --------
Total current liabilities 18,825 14,408
Shareholders' equity:
Preferred Stock -- --
Common Stock, issued and outstanding shares--
12,090 and 12,088 respectively 121 121
Additional paid-in capital 52,507 52,499
Retained earnings 14,037 13,709
-------- --------
66,665 66,329
Unrealized gain on available-for-sale securities 92 158
-------- --------
Total shareholders' equity 66,757 66,487
Total liabilities and shareholders' equity $ 85,582 $ 80,895
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CHRONIMED INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
First Quarter Ended
-------------------
Oct. 1, 1999 Oct. 2, 1998
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REVENUES
Specialty Pharmacy Services $ 26,833 $ 22,886
Disease Management 24,045 11,966
Diagnostic Products 8,072 7,944
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Total Revenue 58,950 42,796
YR TO YR GROWTH 38%
COSTS AND EXPENSES
Cost of revenues 46,898 31,413
Gross profit 12,052 11,383
% OF REVENUE 20.4% 26.6%
Selling and marketing 2,492 2,359
General and administrative 8,765 6,416
Research and development 235 146
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Total operating expenses 11,492 8,921
% OF REVENUE 19.5% 20.8%
INCOME FROM OPERATIONS 560 2,462
% OF REVENUE 0.9% 5.8%
Interest (expense) income (23) 317
INCOME BEFORE INCOME TAXES 537 2,779
Income taxes (209) (1,085)
NET INCOME $ 328 $ 1,694
% OF REVENUE 0.6% 4.0%
NET INCOME PER SHARE--BASIC $ 0.03 $ 0.14
NET INCOME PER SHARE--DILUTED $ 0.03 $ 0.14
AVERAGE SHARES OUTSTANDING--BASIC 12,090 12,100
AVERAGE SHARES OUTSTANDING--DILUTED 12,155 12,336
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CHRONIMED INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
------------------
Oct. 1, 1999 Oct. 2, 1998
------------ ------------
OPERATING ACTIVITIES:
Net income $ 328 $ 1,694
Adjustments to reconcile net income to net cash (used)
provided by operating activities:
Depreciation and amortization 2,184 1,623
Changes in operating assets and liabilities:
Accounts and notes receivable (6,794) (3,274)
Income taxes (864) 1,011
Inventory 134 (1,758)
Accounts payable and accrued expenses 1,002 4,208
Other assets (385) (323)
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Net cash (used) provided by operating activities (4,395) 3,181
INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (172) --
Purchases of property and equipment (1,124) (1,563)
Purchases of available-for-sale securities -- (300)
Sales and maturities of available-for-sale securities -- 6,537
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Net cash (used) provided by investing activities (1,296) 4,674
FINANCING ACTIVITIES:
Net proceeds from issuance of Common Stock 8 224
Net proceeds from borrowings 3,601 --
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Net cash provided by financing activities 3,609 224
(Decrease) Increase in cash and cash equivalents (2,082) 8,079
Cash and cash equivalents at beginning of period 3,312 1,027
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Cash and cash equivalents at end of period $ 1,230 $ 9,106
======= =======
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CHRONIMED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the quarter ended October 1, 1999 are not
necessarily indicative of the results that may be expected for the year ending
June 30, 2000. For further information, refer to the financial statements and
footnotes thereto for the year ended July 2, 1999.
The balance sheet at July 2, 1999, 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.
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NOTE C--PER SHARE DATA
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.
$s and Shares in Thousands
--------------------------
First Quarter Ended
-------------------
October 1, 1999 October 2, 1998
--------------- ---------------
Numerator:
- ----------
Net income for basic and
diluted net income per share $ 328 $ 1,694
Denominator:
- ------------
Denominator for basic net income
per share--weighted-average shares 12,090 12,100
Effect of dilutive securities:
Employee stock options 65 236
Denominator for diluted net income
per share--weighted-average shares
and assumed conversions 12,155 12,336
======= =======
Net Income per Share - Basic $ .03 $ .14
======= =======
Net Income per Share - Diluted $ .03 $ .14
======= =======
Options to purchase 1,815,396 shares of common stock at various prices were
outstanding as of fiscal 2000 first quarter end, but were not included in the
computation of diluted net income per share because the exercise prices of these
options were greater than the average market price of the common shares and,
therefore, the effect would be antidilutive.
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NOTE D--BUSINESS SEGMENT INFORMATION
The Company has three reportable segments: the table below presents information
by reportable segment.
Specialty
Diagnostic Pharmacy Disease
Products Services Management Total
-------- -------- ---------- -----
For the Quarter Ended 10/1/99
Revenues $ 8,072 $ 26,833 $ 24,045 $ 58,950
Income from Operations 714 (160) 656 1,210
For the Quarter Ended 10/2/98
Revenues $ 7,944 $ 22,886 $ 11,966 $ 42,796
Income from Operations 2,123 545 (115) 2,553
The difference between segment totals and the Company's consolidated totals
consist of over / under allocated corporate general and administrative expenses,
and non-operating expenses, all of which are not allocated to the segments. No
major changes in segment assets have occurred since July 2, 1999.
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Part I. Financial Information
Item 2. Management's Discussion
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Chronimed Inc. ("Chronimed" or the "Company") was founded in 1985 as a
Minnesota corporation and has been publicly traded (Nasdaq: CHMD) since 1992.
During this time, Chronimed has become an 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. It also provides specialized disease management services to
specific populations of patients with selected chronic conditions.
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).
By focusing on select chronic conditions, the Company believes it is
able to improve the quality of care for people affected by these chronic
conditions. In addition, Chronimed perceives that the expertise it has developed
in these conditions makes it a valuable partner for institutions, foundations
and healthcare providers working with these patients. Also, the Company believes
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 do business with Chronimed
as a result of the Company's ability to improve care while minimizing overall
healthcare expenditures. Finally, Chronimed has spent many years establishing
relationships with the developers and manufacturers that produce the
prescription drugs and other products needed to manage chronic conditions. The
Company currently 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.
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Chronimed provides patients with a convenient, competitively priced
source of prescription drugs, medical products, counseling support, and a
variety of educational materials 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.
Chronimed obtains patients primarily through referrals from healthcare
providers, direct patient contacts, and contracts with managed care
organizations. The Company 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. According to
PriceWaterhouseCoopers, an estimated 87% of privately insured individuals in the
United States were enrolled in some type of managed care program during 1998, up
from 48% in 1992. 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.
As employers attempt to control their escalating healthcare costs, they seek out
Payors who have adopted various specialized managed care techniques. 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 who are targeting 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.
On April 27, 1999, Chronimed announced that it had engaged the
investment banking firm of Paine Webber to explore strategic alternatives to
enhance shareholder value. The alternatives may include a merger or sale of all
or part of the Company. As of the dated of this Report, no definitive agreements
have been rendered regarding any such transactions. In addition, the Company may
sever its relationship with Paine Webber at any time, and not proceed with any
alternatives or their exploration.
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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 implemented at the end of the 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 38%, from $42.8 million to $59.0 million, for
the first quarter ended October 2, 1998, and October 1, 1999, respectively.
Price increases and inflationary pressures have not been significant reasons for
these revenue increases.
Specialty Pharmacy Services revenue grew $3.9 million and 17% in the
first quarter, from $22.9 million to $26.8 million. Most of the growth came from
the Injectables program - up $4.7 million in the first quarter - which
experienced strong patient intake from the managed care plans. Home Service
Medical revenue grew 22% in the first quarter, from $2.8 million to $3.4
million. Organ Transplant Pharmacy revenue fell 6% in the first quarter, from
$8.9 million to $8.4 million. In an effort to better focus on Chronimed's core
businesses, the Company closed two Diabetes Service Centers and chose not to
renew a Diabetes Care System contract. This results in quarter-on-quarter
revenue decrease of $793,000.
Disease Management revenue grew $12.0 million and 100% over last year's
first quarter, from $12.0 million to $24.0 million. All 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.
Clinical Partners revenues were slightly down for the first quarter.
Diagnostic Products revenue grew $128,000 and 2% over last year's first
quarter, from $7.9 million to $8.0 million. There was approximately $517,000 of
revenue in last year's first quarter from the Publishing business, which was
sold in fiscal 1999. Excluding Publishing, Diagnostics Products grew $645,000
over last year's first quarter. Significant new products, most notably the
Select GT blood glucose system, the Assure blood glucose system, and the
DiaScreen urine diagnostic tests have contributed to this growth.
Overall revenue growth for fiscal 2000 is expected to be about 25% above
fiscal 1999 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 mail
order Specialty Pharmacy Services business and its ability to maintain and grow
its customer base in the retail Disease Management
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business. 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 first quarter increased 6% from $11.4
million last year to $12.0 million this year. Gross profit percentage for the
first quarter was 20.4% against 26.6% last year. Percentage gross profit
reduction is a natural consequence of the growth of the Disease Management
business and 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 product mix,
price pressures, and underutilization of fixed manufacturing costs.
SELLING AND MARKETING EXPENSES
Overall selling and marketing expenses in the first quarter were up
approximately $130,000 and 6% compared to last year's first quarter, on overall
revenue growth of 38%, 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 5.5% in last year's
first quarter to 4.2% in this year's first quarter.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative (G&A) expenses for the first quarter totaled
$8.8 million, up from $6.4 million last year. As a percentage of revenue, G&A
expenses decreased from 15.0% last year to 14.9% this year. Much of the absolute
dollar increase in spending is due to variable type expenses that have grown
with revenue and increased bad debt expense as a result of revenue growth.
Included here are the one-time expenses of approximately $412,000 related to the
Company's current efforts in seeking strategic alternatives. 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 first quarter and the timing of some expenses.
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INTEREST INCOME / EXPENSE
Interest income decreased from $317,000 in last year's first quarter to
an interest expense of $23,000 this quarter. There are two major reasons for the
decline. First, last year's first quarter included $280,000 of interest income
from the Orphan Medical receivable arising from the Orphan Medical rights sale;
this first quarter, with the receivable balance paid in full, the Company did
not recognize any interest income from Orphan Medical. Second, in financing
Chronimed's significant growth, the Company has incurred short-term borrowings
this first quarter compared with average investable funds of about $2 million
last year.
INCOME TAXES
The Company's income tax rate was approximately 39% in each of the
quarters ended October 1, 1999 and October 2, 1998. The current first quarter
rate of 39% is expected to continue through fiscal 2000 year end.
LIQUIDITY AND CAPITAL RESOURCES
As of October 1, 1999, the Company had working capital of $38.0 million
with no long-term debt, and $66.8 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 2000.
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 55 at October 2, 1998, to 66 at October 1, 1999. This negative
trend is caused mostly by the Disease Management segment. A combination of 100%
revenue growth from prior year's first quarter and the recent conversion to a
fully automated billing system at StatScript's headquarters has caused this
segment's DSO to temporarily rise. In addition, the Specialty Pharmacy Services
business continues to be impacted by slower-than-expected collections from two
large, low-risk managed care accounts. Upon full redirection of these efforts to
the collection of receivables, expected to be accomplished during fiscal 2000,
the Company believes that DSOs will return to the 55 to 60 days sales
outstanding range that has been achieved in earlier quarters.
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Inventory levels improved from $9.8 million in June 1999 to $9.7 million
in October 1999, despite the 7% sequential quarter revenue growth. 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
a $3.6 million balance outstanding under the line of credit at October 1, 1999.
The Company believes that it may need to continue using the line of credit
during fiscal year 2000 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 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, the Company has included
all information systems and business functions in its assessment of Year 2000
readiness. A brief assessment of Year 2000 readiness follows: The Company has
completed the conversion of its core information technologies to Year 2000
compliant systems. With respect to the Company's non-mission critical systems
and business functions, the Company has been 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 has been 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 has been exchanging information with third party payors to
facilitate an uninterrupted electronic data interchange (EDI) and reimbursement
process. The Company has collected all necessary information and has been
testing the readiness of these EDI systems. 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
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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 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 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 $250,000 over and above its ongoing
productivity projects to specifically modify existing systems and applications
for Year 2000 computing. The Company estimates that up to an additional $50,000
will be incurred the rest of 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 have been reviewed and finalized in October 1999, with
ongoing updates and enhancements through year-end.
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HEALTH REFORM/GOVERNMENT REGULATION
Political, economic and regulatory influences are subjecting the health
care industry in the United States to fundamental change. A variety of new
approaches have been proposed, including mandated basic health care benefits,
controls on health care spending through limitations on the growth of private
health insurance premiums and Medicare and Medicaid spending, and the creation
of large purchasing groups and other fundamental changes to the health care
delivery system. In addition, some of the states in which the Company operates
have adopted or are considering various health care reform proposals. The
Company anticipates that both the public and private sectors will continue to
review and assess alternative health care delivery systems and payment methods
and that debate of these issues will likely continue in the future. Because of
uncertainty regarding the ultimate features of reform initiatives and their
enactment and implementation, the Company cannot predict which, if any, of such
reform proposals will be adopted, when they may be adopted, or what impact they
may have on the Company.
The Company's business is subject to substantial governmental
regulation, including laws governing the dispensing of prescription drugs and
laws prohibiting the payment of remuneration for patient referrals. Management
believes that the Company is in substantial compliance with all existing
statutes and regulations materially affecting the conduct of its business.
SEASONALITY
The Company has experienced a significant seasonal pattern in its
operating results. Historically, the Company has had higher revenues in its
second fiscal quarter (ending December) than in its third fiscal quarter (ending
March). The Company believes the seasonality of its revenues and earnings comes
from the acceleration of purchases of prescription drugs and medical products by
individuals with non-contracted indemnity insurance 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 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 in fiscal year 1999.
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;
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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 28, 1999, for additional
circumstances that could cause actual results to differ from forecasts.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pursuant to the Company's investment policy, idle and excess funds are
invested in high grade, fixed income securities generally for no more than one
year and are classified as Available-for-Sale. Investments at July 2, 1999 and
October 1, 1999, consisted of equity securities of Cell Robotics International,
Inc., with whom the Company has a distribution and development agreement for the
Lasette Laser Lancing Device. The Company considers any net unrealized gain or
loss on these investments to be temporary and reflects such gains or losses as a
component of shareholders' equity.
18
<PAGE>
PART II. OTHER INFORMATION
Items 1,2,3,4 and 5 required under Part II have been omitted since they are not
applicable or the answers are negative.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Retention Incentive Arrangement effective May 20,
1999, between the Company and Steven A. Crees.
10.2 Retention Incentive Arrangement effective May 25,
1999, between the Company and Perry L. Anderson.
10.3 Retention Incentive Arrangement effective May 18,
1999, between the Company and Patrick L. Taffe.
11.1 Computation of Earnings Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHRONIMED INC.
(REGISTRANT)
November 9, 1999 /s/ Maurice R. Taylor, II
- ---------------- -------------------------------------
Date Maurice R. Taylor, II
Chairman of the Board and
Chief Executive Officer
November 9, 1999 /s/ Gregory H. Keane
- ---------------- -------------------------------------
Date Gregory H. Keane
Vice President, Principal Financial Officer and
Treasurer
20
EXHIBIT 10.1
Chronimed Inc.
Memo CONFIDENTIAL
To: STEVE CREES FOR RECIPIENT ONLY
From: MAURY TAYLOR
CC:
Date: MAY 17, 1999
Re: RETENTION INCENTIVE
- --------------------------------------------------------------------------------
AS YOU KNOW, THE COMPANY HAS ANNOUNCED THAT IT HAS ENGAGED A FINANCIAL SERVICES
FIRM TO SEEK STRATEGIC ALTERNATIVES TO TAKE THE BUSINESS FORWARD AND GROW THE
COMPANY MOST EFFECTIVELY. THE END PRODUCT OF THIS MAY INCLUDE A TRANSACTION
WHICH RESULTS IN A MERGER, ACQUISITION OR SALE OF ALL OR PART OF THE COMPANY. IF
SUCH A TRANSACTION IS TO BE SUCCESSFULLY COMPLETED, THE COMPANY BELIEVES IT IS
NECESSARY TO RETAIN CERTAIN KEY PERSONNEL DURING THE PERIOD BETWEEN NOW AND THE
CLOSING OF SUCH A TRANSACTION. YOU HAVE BEEN SELECTED TO PARTICIPATE IN A KEY
EMPLOYEE RETENTION ARRANGEMENT, IF YOU SO AGREE. THE REST OF THIS MEMO EXPLAINS
THIS INCENTIVE PLAN, AND ITS CONDITIONS.
TO QUALIFY FOR THE INCENTIVE, YOU MUST REMAIN EMPLOYED UNTIL THE EARLIER OF A
TRANSACTION CLOSING OR DECEMBER 31,1999. HOWEVER, IF THE BOARD OF DIRECTORS HAS
ACCEPTED A LETTER OF INTENT BY DECEMBER 31, 1999, BUT A TRANSACTION HAS NOT YET
CLOSED, THE COMPANY MAY EXTEND THE DATE YOU MUST REMAIN EMPLOYED TO THE EARLIER
OF THE ACTUAL DATE OF CLOSING OR MARCH 31, 2000. PAYMENT OF THE INCENTIVE WILL
BE 30 DAYS FOLLOWING DATE OF VESTING (THE DATE YOU ARE FULLY QUALIFIED AND
ENTITLED TO RECEIVE THE INCENTIVE). YOU AGREE THAT IF YOU INITIATE A TERMINATION
OF EMPLOYMENT PRIOR TO BEING FULLY VESTED IN THIS INCENTIVE PLAN, OR IF YOU ARE
TERMINATED BY THE COMPANY FOR CAUSE, YOU WILL FORFEIT ALL RIGHTS TO THE
INCENTIVE.
THE INCENTIVE IS IN THE FORM OF A ONE TIME CASH BONUS, BEFORE TAXES AND
DEDUCTIONS OF: $30,000.00 (THIRTY THOUSAND DOLLARS)
<PAGE>
YOU UNDERSTAND THAT THIS IS A SPECIAL ONE TIME BONUS ARRANGEMENT. BY AGREEING TO
ACCEPT THIS INCENTIVE ARRANGEMENT, YOU AGREE THAT YOU WILL KEEP THE EXISTENCE
AND THE TERMS OF THIS AGREEMENT CONFIDENTIAL, AND YOU WILL NOT SHARE IT WITH ANY
OTHER PERSON EXCEPT YOUR IMMEDIATE FAMILY AND/OR FINANCIAL ADVISOR. THOSE
INDIVIDUALS ALSO MUST KEEP THIS CONFIDENTIAL. BREACH OF THIS CONFIDENTIALITY
PROVISION WILL RESULT IN FORFEITURE OF INCENTIVE. THIS CONFIDENTIALITY AGREEMENT
WILL REMAIN INTACT AS LONG AS YOU REMAIN EMPLOYED WITH CHRONIMED.
YOU ALSO UNDERSTAND AND AGREE THAT THIS IS SOLELY AN INCENTIVE AGREEMENT. IT
DOES NOT CHANGE THE STATUS OF ANY OTHER ASPECTS OF YOUR EMPLOYMENT RELATIONSHIP
WITH CHRONIMED, AND IS NOT AN EMPLOYMENT CONTRACT.
PLEASE SIGN THIS MEMO AS AN INDICATION OF YOUR ACCEPTANCE OF THIS AGREEMENT, AND
KEEP A COPY FOR YOUR RECORDS.
I HAVE READ AND UNDERSTAND THE TERMS OF THIS INCENTIVE PLAN. I AGREE TO ACCEPT
ITS TERMS AND CONDITIONS.
/S/ STEVEN A. CREES /S/ SHAWN FEATHERSTON VP HUMAN RESOURCES
- --------------------- ---------------------
SIGNATURE OF EMPLOYEE COMPANY - NAME/TITLE
- --------------------- --------------------
5/20/99
- --------------------
DATE
- ----
EXHIBIT 10.2
Chronimed Inc.
Memo CONFIDENTIAL
To: PERRY ANDERSON FOR RECIPIENT ONLY
From: MAURY TAYLOR
CC:
Date: MAY 17, 1999
Re: RETENTION INCENTIVE
- --------------------------------------------------------------------------------
AS YOU KNOW, THE COMPANY HAS ANNOUNCED THAT IT HAS ENGAGED A FINANCIAL SERVICES
FIRM TO SEEK STRATEGIC ALTERNATIVES TO TAKE THE BUSINESS FORWARD AND GROW THE
COMPANY MOST EFFECTIVELY. THE END PRODUCT OF THIS MAY INCLUDE A TRANSACTION
WHICH RESULTS IN A MERGER, ACQUISITION OR SALE OF ALL OR PART OF THE COMPANY. IF
SUCH A TRANSACTION IS TO BE SUCCESSFULLY COMPLETED, THE COMPANY BELIEVES IT IS
NECESSARY TO RETAIN CERTAIN KEY PERSONNEL DURING THE PERIOD BETWEEN NOW AND THE
CLOSING OF SUCH A TRANSACTION. YOU HAVE BEEN SELECTED TO PARTICIPATE IN A KEY
EMPLOYEE RETENTION ARRANGEMENT, IF YOU SO AGREE. THE REST OF THIS MEMO EXPLAINS
THIS INCENTIVE PLAN, AND ITS CONDITIONS.
TO QUALIFY FOR THE INCENTIVE, YOU MUST REMAIN EMPLOYED UNTIL THE EARLIER OF A
TRANSACTION CLOSING OR DECEMBER 31,1999. HOWEVER, IF THE BOARD OF DIRECTORS HAS
ACCEPTED A LETTER OF INTENT BY DECEMBER 31, 1999, BUT A TRANSACTION HAS NOT YET
CLOSED, THE COMPANY MAY EXTEND THE DATE YOU MUST REMAIN EMPLOYED TO THE EARLIER
OF THE ACTUAL DATE OF CLOSING OR MARCH 31, 2000. PAYMENT OF THE INCENTIVE WILL
BE 30 DAYS FOLLOWING DATE OF VESTING (THE DATE YOU ARE FULLY QUALIFIED AND
ENTITLED TO RECEIVE THE INCENTIVE). YOU AGREE THAT IF YOU INITIATE A TERMINATION
OF EMPLOYMENT PRIOR TO BEING FULLY VESTED IN THIS INCENTIVE PLAN, OR IF YOU ARE
TERMINATED BY THE COMPANY FOR CAUSE, YOU WILL FORFEIT ALL RIGHTS TO THE
INCENTIVE.
THE INCENTIVE IS IN THE FORM OF A ONE TIME CASH BONUS, BEFORE TAXES AND
DEDUCTIONS OF: $30,000.00 (THIRTY THOUSAND DOLLARS)
<PAGE>
YOU UNDERSTAND THAT THIS IS A SPECIAL ONE TIME BONUS ARRANGEMENT. BY AGREEING TO
ACCEPT THIS INCENTIVE ARRANGEMENT, YOU AGREE THAT YOU WILL KEEP THE EXISTENCE
AND THE TERMS OF THIS AGREEMENT CONFIDENTIAL, AND YOU WILL NOT SHARE IT WITH ANY
OTHER PERSON EXCEPT YOUR IMMEDIATE FAMILY AND/OR FINANCIAL ADVISOR. THOSE
INDIVIDUALS ALSO MUST KEEP THIS CONFIDENTIAL. BREACH OF THIS CONFIDENTIALITY
PROVISION WILL RESULT IN FORFEITURE OF INCENTIVE. THIS CONFIDENTIALITY AGREEMENT
WILL REMAIN INTACT AS LONG AS YOU REMAIN EMPLOYED WITH CHRONIMED.
YOU ALSO UNDERSTAND AND AGREE THAT THIS IS SOLELY AN INCENTIVE AGREEMENT. IT
DOES NOT CHANGE THE STATUS OF ANY OTHER ASPECTS OF YOUR EMPLOYMENT RELATIONSHIP
WITH CHRONIMED, AND IS NOT AN EMPLOYMENT CONTRACT.
PLEASE SIGN THIS MEMO AS AN INDICATION OF YOUR ACCEPTANCE OF THIS AGREEMENT, AND
KEEP A COPY FOR YOUR RECORDS.
I HAVE READ AND UNDERSTAND THE TERMS OF THIS INCENTIVE PLAN. I AGREE TO ACCEPT
ITS TERMS AND CONDITIONS.
/S/ PERRY L. ANDERSON /S/ SHAWN FEATHERSTON VP HUMAN RESOURCES
- --------------------- ---------------------
SIGNATURE OF EMPLOYEE COMPANY - NAME/TITLE
- --------------------- --------------------
5/25/99
- --------------------
DATE
- ----
EXHIBIT 10.3
Chronimed Inc.
Memo CONFIDENTIAL
To: PAT TAFFE FOR RECIPIENT ONLY
From: MAURY TAYLOR
CC:
Date: MAY 17, 1999
Re: RETENTION INCENTIVE
- --------------------------------------------------------------------------------
AS YOU KNOW, THE COMPANY HAS ANNOUNCED THAT IT HAS ENGAGED A FINANCIAL SERVICES
FIRM TO SEEK STRATEGIC ALTERNATIVES TO TAKE THE BUSINESS FORWARD AND GROW THE
COMPANY MOST EFFECTIVELY. THE END PRODUCT OF THIS MAY INCLUDE A TRANSACTION
WHICH RESULTS IN A MERGER, ACQUISITION OR SALE OF ALL OR PART OF THE COMPANY. IF
SUCH A TRANSACTION IS TO BE SUCCESSFULLY COMPLETED, THE COMPANY BELIEVES IT IS
NECESSARY TO RETAIN CERTAIN KEY PERSONNEL DURING THE PERIOD BETWEEN NOW AND THE
CLOSING OF SUCH A TRANSACTION. YOU HAVE BEEN SELECTED TO PARTICIPATE IN A KEY
EMPLOYEE RETENTION ARRANGEMENT, IF YOU SO AGREE. THE REST OF THIS MEMO EXPLAINS
THIS INCENTIVE PLAN, AND ITS CONDITIONS.
TO QUALIFY FOR THE INCENTIVE, YOU MUST REMAIN EMPLOYED UNTIL THE EARLIER OF A
TRANSACTION CLOSING OR DECEMBER 31,1999. HOWEVER, IF THE BOARD OF DIRECTORS HAS
ACCEPTED A LETTER OF INTENT BY DECEMBER 31, 1999, BUT A TRANSACTION HAS NOT YET
CLOSED, THE COMPANY MAY EXTEND THE DATE YOU MUST REMAIN EMPLOYED TO THE EARLIER
OF THE ACTUAL DATE OF CLOSING OR MARCH 31, 2000. PAYMENT OF THE INCENTIVE WILL
BE 30 DAYS FOLLOWING DATE OF VESTING (THE DATE YOU ARE FULLY QUALIFIED AND
ENTITLED TO RECEIVE THE INCENTIVE). YOU AGREE THAT IF YOU INITIATE A TERMINATION
OF EMPLOYMENT PRIOR TO BEING FULLY VESTED IN THIS INCENTIVE PLAN, OR IF YOU ARE
TERMINATED BY THE COMPANY FOR CAUSE, YOU WILL FORFEIT ALL RIGHTS TO THE
INCENTIVE.
THE INCENTIVE IS IN THE FORM OF A ONE TIME CASH BONUS, BEFORE TAXES AND
DEDUCTIONS OF: $30,000.00 (THIRTY THOUSAND DOLLARS)
<PAGE>
YOU UNDERSTAND THAT THIS IS A SPECIAL ONE TIME BONUS ARRANGEMENT. BY AGREEING TO
ACCEPT THIS INCENTIVE ARRANGEMENT, YOU AGREE THAT YOU WILL KEEP THE EXISTENCE
AND THE TERMS OF THIS AGREEMENT CONFIDENTIAL, AND YOU WILL NOT SHARE IT WITH ANY
OTHER PERSON EXCEPT YOUR IMMEDIATE FAMILY AND/OR FINANCIAL ADVISOR. THOSE
INDIVIDUALS ALSO MUST KEEP THIS CONFIDENTIAL. BREACH OF THIS CONFIDENTIALITY
PROVISION WILL RESULT IN FORFEITURE OF INCENTIVE. THIS CONFIDENTIALITY AGREEMENT
WILL REMAIN INTACT AS LONG AS YOU REMAIN EMPLOYED WITH CHRONIMED.
YOU ALSO UNDERSTAND AND AGREE THAT THIS IS SOLELY AN INCENTIVE AGREEMENT. IT
DOES NOT CHANGE THE STATUS OF ANY OTHER ASPECTS OF YOUR EMPLOYMENT RELATIONSHIP
WITH CHRONIMED, AND IS NOT AN EMPLOYMENT CONTRACT.
PLEASE SIGN THIS MEMO AS AN INDICATION OF YOUR ACCEPTANCE OF THIS AGREEMENT, AND
KEEP A COPY FOR YOUR RECORDS.
I HAVE READ AND UNDERSTAND THE TERMS OF THIS INCENTIVE PLAN. I AGREE TO ACCEPT
ITS TERMS AND CONDITIONS.
/S/ PATRICK L. TAFFE /S/ SHAWN FEATHERSTON VP HUMAN RESOURCES
- --------------------- ---------------------
SIGNATURE OF EMPLOYEE COMPANY - NAME/TITLE
- --------------------- --------------------
5/18/99
- --------------------
DATE
- ----
EXHIBIT 11.1
CHRONIMED INC.
COMPUTATION OF EARNINGS PER SHARE
See Note C of Notes to Consolidated Financial Statements for Chronimed Inc. for
periods ended October 1, 1999 and October 2, 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-03-1999
<PERIOD-END> OCT-01-1999
<CASH> 1,230,000
<SECURITIES> 0
<RECEIVABLES> 44,450,000
<ALLOWANCES> 1,382,000
<INVENTORY> 9,652,000
<CURRENT-ASSETS> 56,785,000
<PP&E> 27,078,000
<DEPRECIATION> 15,418,000
<TOTAL-ASSETS> 85,582,000
<CURRENT-LIABILITIES> 18,825,000
<BONDS> 0
0
0
<COMMON> 121,000
<OTHER-SE> 66,636,000
<TOTAL-LIABILITY-AND-EQUITY> 85,582,000
<SALES> 58,950,000
<TOTAL-REVENUES> 58,950,000
<CGS> 46,898,000
<TOTAL-COSTS> 58,390,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 748,000
<INTEREST-EXPENSE> 23,000
<INCOME-PRETAX> 537,000
<INCOME-TAX> 209,000
<INCOME-CONTINUING> 328,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 328,000
<EPS-BASIC> 0.03
<EPS-DILUTED> 0.03
</TABLE>
