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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 SEPTEMBER 29, 2000
[ ] 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.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1515691
------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10900 RED CIRCLE DRIVE
MINNETONKA, MINNESOTA 55343
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code (952) 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 (or for such shorter period that the
registrant was required to file such reports), 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 - 12,147,021 shares outstanding as of November 7,
2000
<PAGE>
INDEX
CHRONIMED INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - September 29, 2000 and June 30,
2000
Consolidated Statements of Income - Three months ended September
29, 2000 and October 1, 1999
Consolidated Statements of Cash Flows - Three months ended
September 29, 2000 and October 1, 1999
Notes to Consolidated Financial Statements - September 29, 2000
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
2
<PAGE>
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 the answers are negative.
Item 6. Exhibits and Reports on Form 8-K
a.) Exhibits
27.1 Financial Data Schedule
b.) Reports on Form 8-K
SIGNATURES
3
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CHRONIMED INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 29, JUNE 30,
2000 2000
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 187 $ --
Accounts receivable, net 45,890 47,352
Income taxes receivable 238 774
Inventory 6,149 6,111
Other current assets 874 848
Deferred taxes 1,311 1,311
------------ ------------
Total current assets 54,649 56,396
Property and equipment:
Property and equipment 14,077 14,889
Allowance for depreciation (7,632) (8,338)
------------ ------------
6,445 6,551
Goodwill, net 8,620 9,031
Net assets of discontinued operations 10,554 10,465
Deferred taxes 508 508
Other assets 130 109
------------ ------------
Total assets $ 80,906 $ 83,060
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,483 $ 10,507
Accrued expenses 1,788 2,366
Short-term debt -- 2,500
------------ ------------
Total current liabilities 12,271 15,373
Shareholders' equity:
Preferred Stock -- --
Common Stock, issued and outstanding shares--
12,147 and 12,147 respectively 121 121
Additional paid-in capital 52,839 52,839
Retained earnings 15,596 14,271
------------ ------------
68,556 67,231
Accumulated other comprehensive income --
Unrealized gain on available-for-sale securities of
discontinued operations 79 456
------------ ------------
Total shareholders' equity 68,635 67,687
Total liabilities and shareholders' equity $ 80,906 $ 83,060
============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
CHRONIMED INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(Unaudited)
<TABLE>
<CAPTION>
FIRST QUARTER ENDED
-------------------
SEPTEMBER 29, OCTOBER 1,
2000 1999
--------------- -----------
<S> <C> <C>
REVENUES
Mail Order $ 34,839 $ 26,833
Retail 29,580 24,045
----------- -----------
Total Revenue 64,419 50,878
YR TO YR GROWTH 26.6%
COSTS AND EXPENSES
Cost of revenues 54,696 41,963
Gross profit 9,723 8,915
% OF REVENUE 15.1% 17.5%
Selling and marketing 1,105 1,194
General and administrative 7,207 7,875
----------- -----------
Total operating expenses 8,312 9,069
% OF REVENUE 12.9% 17.8%
INCOME (LOSS) FROM OPERATIONS 1,411 (154)
% OF REVENUE 2.2% -0.3%
Interest income 50 --
Interest (expense) (48) (23)
Other income 21 --
INCOME (LOSS) BEFORE INCOME TAXES 1,434 (177)
Income tax (expense) benefit (573) 69
INCOME (LOSS) FROM CONTINUING OPERATIONS 861 (108)
% OF REVENUE 1.3% -0.2%
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX 464 436
NET INCOME $ 1,325 $ 328
% OF REVENUE 2.1% 0.6%
BASIC EARNINGS (LOSS) PER SHARE:
Income (Loss) from Continuing Operations $ 0.07 $ (0.01)
Income from Discontinued Operations 0.04 0.04
----------- -----------
Net Income per share $ 0.11 $ 0.03
DILUTED EARNINGS (LOSS) PER SHARE:
Income (Loss) from Continuing Operations $ 0.07 $ (0.01)
Income from Discontinued Operations 0.04 0.04
----------- -----------
Net Income per share $ 0.11 $ 0.03
AVERAGE SHARES OUTSTANDING--BASIC 12,147 12,096
AVERAGE SHARES OUTSTANDING--DILUTED 12,149 12,096
</TABLE>
5
<PAGE>
CHRONIMED INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
SEPTEMBER 29, OCTOBER 1,
2000 1999
------------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,325 $ 328
Less income from discontinued operations 464 436
Income (loss) from continuing operations 861 (108)
Adjustments to reconcile income from continuing operations
to net cash provided by (used in) operating activities:
Depreciation and amortization 871 1,073
Deferred income taxes -- (57)
Gain on sale of businesses (22) --
Changes in operating assets and liabilities:
Accounts receivable (543) (5,964)
Income taxes 536 (864)
Inventory (470) (621)
Accounts payable (24) 2,072
Accrued expenses (692) (1,354)
Other assets (264) (480)
----------- -----------
Net cash provided by (used in) operating activities 253 (6,303)
INVESTING ACTIVITIES:
Proceeds from sale of Home Service Medical Business 3,000 --
Purchases of property and equipment (566) (503)
----------- -----------
Net cash provided by (used in) investing activities 2,434 (503)
FINANCING ACTIVITIES:
Net proceeds from issuance of Common Stock -- 8
Net proceeds (repayments) from borrowings (2,500) 3,601
----------- -----------
Net cash provided by (used in) financing activities (2,500) 3,609
CASH PROVIDED BY DISCONTINUED OPERATIONS -- 1,115
----------- -----------
Increase (decrease) in cash and cash equivalents 187 (2,082)
Cash and cash equivalents at beginning of period -- 3,312
----------- -----------
Cash and cash equivalents at end of period $ 187 $ 1,230
=========== ===========
</TABLE>
Supplemental disclosures of non-cash investing and financing activities:
* The Company received a $3.8 million note receivable from
Express-Med, Inc. in the sale of the Home Service Medical
business, to be paid unevenly over 42 months through March 1,
2004. The Company has recorded the note on its September 29, 2000
balance sheet, offset by the deferred gain of the same amount.
6
<PAGE>
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 September 29, 2000 are
not necessarily indicative of the results that may be expected for the year
ending June 29, 2001. For further information, refer to the financial statements
and footnotes thereto for the year ended June 30, 2000.
The balance sheet at June 30, 2000 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.
The Company intends to divest the Diagnostic Products business operated by its
wholly-owned subsidiary, MEDgenesis, Inc., through a tax-free dividend to
shareholders or a sale of the business. The Company continues to engage in
negotiations to sell MEDgenesis while continuing to pursue the spin-off. As of
the date of this Form 10-Q, the Securities and Exchange Commission has not yet
approved the MEDgenesis Form 10 which is needed before the spin-off of
MEDgenesis can occur and the Company has not reached a definitive agreement
regarding the sale of the business. Until MEDgenesis is spun off or sold,
Chronimed must classify MEDgenesis as "discontinued operations" for financial
reporting purposes. As a result, all financial results concerning MEDgenesis
Inc., other than those classified as discontinued operations, have been removed
from this Form 10-Q leaving only the continuing operations of Chronimed Inc.
NOTE B--INVENTORIES
Inventories consist primarily of goods held for resale and are carried at the
lower of cost or market determined under the average cost method.
7
<PAGE>
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.
<TABLE>
<CAPTION>
$s and Shares in Thousands
--------------------------
First Quarter Ended
-------------------
September 29, October 1,
2000 1999
------------- -----------
<S> <C> <C>
Numerator - Net income (loss)
for basic and diluted net income per
share:
Continuing operations $ 861 $ (108)
Discontinued operations 464 436
------- -------
Net Income $ 1,325 $ 328
Denominator:
Denominator for basic net income
per share--weighted-average shares 12,147 12,096
Effect of dilutive securities:
Employee stock options 2 --
------- -------
Denominator for diluted net income
per share--weighted-average shares
and assumed conversions 12,149 12,096
======= =======
Basic net income (loss) per share:
Continuing operations $ 0.07 $ (0.01)
Discontinued operations 0.04 .04
------- -------
Basic net income per share $ 0.11 $ 0.03
======= =======
Diluted net income (loss) per share:
Continuing operations $ 0.07 $ (0.01)
Discontinued operations 0.04 .04
------- -------
Diluted net income per share $ 0.11 $ 0.03
======= =======
</TABLE>
Income from continuing operations was negative for the quarter ended October 1,
1999. Therefore, options were not included in dilutive securities as the effect
would have been antidilutive.
8
<PAGE>
NOTE D--BUSINESS SEGMENT INFORMATION
The Company has two reportable segments. The Mail Order segment includes the
results of the Company's Injectables, Organ Transplant, and Home Service Medical
businesses. The Home Service Medical business was sold to Express-Med, Inc. on
September 1, 2000. The Retail segment includes the Company's HIV/AIDS StatScript
Pharmacy, as well as the Clinical Partners' Strategic Services line and the
Clinical Partners' case management line which was written off in the quarter
ended March 31, 2000. The table below presents information by reportable
segment.
Mail Order Retail Total
---------- ------ -----
For the Quarter Ended 9/29/2000
Revenues $34,839 $29,580 $64,419
Income from Operations (556) 1,470 914
For the Quarter Ended 10/01/1999
Revenues $26,833 $24,045 $50,878
Income from Operations (160) 656 496
The difference between segment totals and the Company's consolidated totals
consist of over / under allocated corporate general and administrative expenses
and other non-operating items, both of which are not allocated to the segments.
The following table is a reconciliation of reportable segment income to the
Company's consolidated totals.
Q1 FY2001 Q1 FY2000
--------- ---------
Total Consolidated Revenue: $64,419 $50,878
----------------------------------------------------------------
Income from Operations:
-----------------------
Total for reportable segments $914 $496
Unallocated amounts:
- Corporate G&A 497 (650)
- Interest income 50 7
- Interest (expense) (48) (30)
- Other income (expense) 21 --
----------------------------------------------------------------
Income before income taxes $1,434 ($177)
================================================================
A change in segment assets occurred since June 30, 2000 with the sale of the
Home Service Medical business to Express-Med, Inc. on September 1, 2000. The
approximate net book value of the Home Service Medical business was $3.0 million
as of June 30, 2000. The assets of the Home Service Medical business are
included in the Mail Order segment. The following table presents assets by
reportable segment.
Mail Order Retail Corporate Total
---------- ------ --------- -----
As of 9/29/2000
Segment Assets $29,772 $37,539 $3,041 $70,352
As of 6/30/2000
Segment Assets $33,575 $35,408 $3,612 $72,595
9
<PAGE>
NOTE E--DISCONTINUED OPERATIONS
The Company intends to divest the Diagnostic Products business operated by its
wholly-owned subsidiary, MEDgenesis, Inc., through a tax-free dividend to
shareholders or a sale of the business. The Company continues to engage in
negotiations to sell MEDgenesis while continuing to pursue the spin-off. As of
the date of this Form 10-Q, the Securities and Exchange Commission has not yet
approved the MEDgenesis Form 10 which is needed before the spin-off of
MEDgenesis can occur and the Company has not reached a definitive agreement
regarding the sale of the business. Until MEDgenesis is spun off or sold,
Chronimed must classify MEDgenesis as "discontinued operations" for financial
reporting purposes. As a result, all financial results concerning MEDgenesis
Inc., other than those classified as discontinued operations, have been removed
from this Form 10-Q leaving only the continuing operations of Chronimed Inc.
On September 1, 2000, MEDgenesis paid a license transfer fee of $475,000 to
Hypoguard Limited, a UK-based medical device company. The license transfer fee
allowed MEDgenesis to continue selling certain diabetes strips upon completion
of the proposed spin off or sale based on technology developed by a subsidiary
of Medisys PLC. The license transfer fee has been included in the results of
discontinued operations. The license transfer fee was paid in consideration of
Hypoguard's consent to Chronimed's assignment of a technology license to
MEDgenesis, as necessitated by the spin-off or sale of MEDgenesis.
The discontinued operations represented by MEDgenesis contributed net income
after tax of $464,000 or four cents per share in the first quarter. This
compares to net income after tax of $436,000 or four cents per share in last
year's first quarter. Revenue for MEDgenesis was $9.1 million, up 12 percent
from last year's first quarter of $8.1 million.
NOTE F--SALE OF HOME SERVICE MEDICAL BUSINESS
Chronimed sold its Home Service Medical ("HSM") subsidiary on September 1, 2000
to Express-Med, Inc. of New Albany, Ohio for $6.5 million. HSM is a direct to
consumer, mail-order catalog business that contributed $14.9 million in revenue
to Chronimed's total results for the fiscal year ended June 30, 2000. The
Company received $3 million in cash and a $3.8 million subordinated note
maturing in 42 months and bearing an annual interest rate of 11%. In addition,
Chronimed will pay the buyer $282,000 on December 1, 2000 based on the
difference between the net value of the purchased assets on Chronimed's balance
sheet at June 30, 2000 and September 1, 2000.
Chronimed deferred the $3.8 million gain on the sale of HSM in accordance with
the SEC Staff Accounting Bulletin No. 81, "Gain Recognition on the Sale of a
Business or Operating Assets to a Highly Leveraged Entity." The gain will be
deferred until principal payments under the promissory note are received. The
Company recorded the $3.8 million deferred gain on the balance sheet as a
deduction to notes receivable.
10
<PAGE>
Based on the terms of the HSM asset purchase agreement, Express-Med, Inc. will
pay quarterly installments of accrued interest beginning March 1, 2001, and
annual $1 million installments of principal beginning September 1, 2001. The
entire outstanding balance of principal and interest becomes due on March 1,
2004. Given that there is no guarantee that Express-Med will be able to repay
the note and the long-term nature of the note, as stated above, Chronimed will
defer recognition of the gain on its income statement until the cash is
collected or deemed to be fully collectible. Chronimed believes that
Express-Med, Inc. will be able to fund the interest payments and therefore, the
Company will accrue the interest receivable monthly as earned.
NOTE G--SIGNIFICANT CONCENTRATIONS
Within the Mail Order segment, a major payor with whom Chronimed has a contract
(represented as two major payors merging into one during calendar year 1999)
represented 33% of the Company's revenue in the first quarter of fiscal 2001 and
24% in the first quarter of fiscal 2000.
11
<PAGE>
Part I. Financial Information
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Chronimed Inc. ("Chronimed" or the "Company") is a disease-focused
company excelling in specialty pharmacy distribution for people with chronic
health conditions. The Company distributes pharmaceuticals and provides
specialized patient management services nationwide for people with long-term
chronic conditions such as organ transplants, HIV/AIDS, and diseases treated
with biotech injectable medications. Chronimed works directly with patients,
providers, insurance companies, health maintenance organizations, preferred
provider organizations, government agencies and other third party payors
("payors") to improve clinical and cost-of-care outcomes. The Company was
founded in 1985 as a Minnesota corporation and has been publicly traded (Nasdaq:
CHMD) since 1992.
The Company distributes its pharmaceuticals and ancillary products by
mail and through its StatScript retail pharmacy chain. The patient populations
for which the Company's services are most effective include persons who:
* Have illnesses that generally occur in less than one percent of the
nation's population;
* Require high-cost, complex medications, the majority of which must be
taken for the rest of the patient's life and are not always available
through traditional retail pharmacies;
* 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 is able to
improve the quality of care for those people affected by these uncommon
diseases. In addition, the expertise Chronimed has developed makes it a valuable
partner for institutions, foundations and healthcare providers working with
patients afflicted with these chronic conditions. Chronimed also believes the
payors that pay a large portion of related healthcare costs do business with
Chronimed as a result of the Company's ability to improve care while minimizing
overall expenditures. Finally, Chronimed has spent many years establishing
relationships with the developers and manufacturers of 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.
12
<PAGE>
Chronimed provides patients with a convenient, competitively priced
source of prescription drugs, 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 disease, 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 provider support and
intervention, clinical outcomes can be improved, and long-term costs of care
reduced.
Chronimed obtains patients primarily through referrals from healthcare
providers, direct patient contacts, and contracts with insurers and managed care
organizations. According to Medical Economics (April 10, 2000), an estimated 90%
of privately insured workers in the United States were enrolled in some type of
managed care program during 1999, up from 52% in 1993.
The specialty pharmacy industry was developed principally in response
to the demand from employers and payors for more effective control of patient
care and cost increases in certain unusual chronic illnesses. As employers
attempt to control their escalating healthcare costs, they seek out providers
who have adopted various specialized managed care techniques. The increasing
majority of patient referrals come from contracts with payors and the
government as a result of the increased role of managed care and the Company's
experience in managing specific patient groups.
The Company has also developed relationships with 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 specialists treating these conditions.
Chronimed believes that its business model is well suited to support
developers and manufacturers of pharmaceutical products who are targeting small
or hard-to-identify patient populations. Chronimed provides these companies with
assistance in the rapid introduction of their products, a cost-effective means
for distributing these medications to specific patient populations, and a method
for monitoring product use and compliance.
13
<PAGE>
DISCONTINUED OPERATIONS
On October 10, 2000 Chronimed announced that it is engaged in
negotiations to sell its MEDgenesis subsidiary while continuing to pursue a
spin-off of the business. No definitive agreement to sell MEDgenesis has been
reached and there can be no assurance that an agreement acceptable to Chronimed
will be negotiated. The Diagnostic Business has been operated by Chronimed's
wholly-owned subsidiary, MEDgenesis Inc., since July 1, 2000. MEDgenesis has
filed a Form 10 registration statement with the SEC to register MEDgenesis'
common stock under the Securities Exchange Act of 1934. The SEC must approve
this registration statement before a spin-off of MEDgenesis to Chronimed's
shareholders can take place. Chronimed and MEDgenesis are awaiting for SEC
approval of the MEDGeneisis Form 10 as of the date of this Form 10-Q. Until
MEDgenesis is spun off or sold, Chronimed must classify MEDgenesis as
"discontinued operations" for financial reporting purposes. Following the sale
or spin-off of MEDgenesis, Chronimed and MEDgenesis will no longer prepare or
file consolidated financial statements and tax returns. The two companies began
independent accounting as of July 1, 2000.
CONTINUING OPERATIONS
REVENUES
Chronimed implemented the disclosure requirements of Financial
Accounting Statement No. 131, "Segment Reporting," in fiscal 1999. Chronimed is
comprised of two operating segments, Mail Order and Retail, based on the
business and how it is managed and resourced. The Mail Order segment currently
includes the Biotech Injectables program and Organ Transplant Pharmacy, and
prior to September 1, 2000, also included Home Service Medical (HSM). (Chronimed
sold the Home Service Medical business on September 1, 2000. See Note E of Notes
to Consolidated Statements). The Retail segment includes the Company's HIV/AIDS
StatScript Pharmacy, as well as the Clinical Partners' Strategic Services line
and the Clinical Partners' case management line which was written off in the
quarter ended March 31, 2000.
Total revenue increased 27%, from $50.9 million to $64.4 million, for the
first quarter ended October 1, 1999 and September 29, 2000 respectively. Price
increases and inflationary pressures have not been significant reasons for these
revenue increases. The contribution each segment made to total revenue is
discussed below.
Mail Order segment revenue grew $8.0 million and 30% over last year's
first quarter, from $26.8 million to $34.8 million. The Biotech Injectables
business had significant new patient intakes from the Aetna U.S. Healthcare
contract, which became effective July 15, 2000, that created the increase in
revenue. Also, HSM was sold during the first quarter, resulting in reduced first
quarter revenues of $1.2 million, from $3.4 million last year compared to $2.2
million this year.
14
<PAGE>
Retail segment revenue grew $5.5 million and 23% over last year's first
quarter, from $24.0 million to $29.5 million. This growth came from the
StatScript Pharmacy which grew $5.8 million and 25% in revenue over last year's
first quarter. Existing stores contributed 79% of the growth compared to 21%
from new stores. The Company slowed new store growth due to its focus on
exploring strategic initiatives and the MEDgenesis spin-off in the prior year.
StatScript's growth was partially offset by a $300,000 decline over last year's
first quarter revenue due to the fiscal 2000 exit from the Clinical Partners
case management line.
Overall revenue growth for fiscal 2001 is expected to be about 25 to 30
percent over fiscal 2000 and is expected to continue in both Chronimed's
operating segments. The Company expects revenue for the year to be approximately
$270 million. This would represent 28 percent revenue growth in fiscal 2001
against an adjusted fiscal 2000 revenue stream of $211 million (both years
having been adjusted for the September 2000 sale of the Home Service Medical
business). The Company's ability to maintain and add contracts in its Mail Order
business is important to this projection. The Company's expectation to open four
or more stores this year, resulting in at least 36 stores by fiscal 2001
year-end, is also important to this projection. The Company believes that its
supplier inputs and pharmacy fulfillment 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 9% from $8.9 million
last year to $9.7 million this year. First quarter gross profit percentage
decreased from 17.5% last year to 15.1% this year. The absolute dollar increase
was a result of the substantial increase in revenues. The sale of the HSM
business, which reduced margin dollars from $1.0 million in the first quarter of
fiscal 2000 to $500,000 in the first quarter of fiscal 2001, partially offset
the Company's increase in margin dollars. The decrease in gross profit
percentage was due primarily to reduced margins in the mail order business
caused by managed care pricing pressure within the Biotech Injectables business.
The gross profit percentage also decreased slightly due to the sale of HSM and
its higher gross profit percentage relative to the rest of the mail order
business. Managed care pricing pressure is expected to continue both in the mail
order and retail businesses.
15
<PAGE>
SELLING AND MARKETING EXPENSES
Overall selling and marketing expenses in the first quarter were down
approximately $90,000 and 7% compared to last year's first quarter, on overall
revenue growth of 27%. The Home Service Medical sale in first quarter fiscal
2001 and the discontinuance of the Clinical Partners contract/case management
line in third quarter fiscal 2000 resulted in a $200,000 decrease in selling and
marketing expenses compared to last year's first quarter. This decrease was
partially offset by expanded selling efforts in the Company's Organ Transplant
business in the Mail Order segment. Organ Transplant spending increased $95,000
in the first quarter of fiscal 2001 versus last year's first quarter. As a
percentage of revenue, selling and marketing expenses dropped from 2.3% in last
year's first quarter to 1.7% in this year's first quarter.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative (G&A) expenses for the first quarter totaled
$7.2 million, down from $7.9 million last year. As a percentage of revenue, G&A
expenses decreased from 15.5% last year to 11.2% this year. Total G&A expenses
decreased for several reasons. First, Chronimed incurred $400,000 of costs
related to the Company's pursuit of strategic alternatives in the first quarter
of fiscal 2000 and incurred no such related costs in this year's first quarter.
When Chronimed announced its intention to spin off its Diagnostic Products
business in the third quarter of fiscal 2000, it also announced the
discontinuance of its exploration of strategic alternatives with PaineWebber.
Second, approximately $700,000 of G&A costs from the Clinical Partners case
management line in the Retail segment were incurred in last year's first quarter
and no similar costs were incurred in this year's first quarter. The Clinical
Partners case management line was written off and shut down in the third quarter
of fiscal 2000. Third, the Home Service Medical business within the Mail Order
segment incurred $100,000 less in G&A expenses during this year's first quarter
compared to last year's first quarter. Due to its sale September 1, 2000, the
Home Service Medical business operated as a business unit of Chronimed only two
of the three months in this year's first quarter. Fourth, Chronimed received a
settlement on a previously written down receivable account in the first quarter
fiscal 2001 that created a reduction in bad debt expense against the first
quarter of last year. Absolute dollars spent in the first quarter increased in
the Biotech Injectables business of the Mail Order segment and in the StatScript
business of the Retail segment due to an increase in variable expenses that have
grown directly with revenue including StatScript pharmacies, customer service,
billing and fulfillment.
INTEREST INCOME
Net interest income increased to $2,000 in this year's first quarter with
$50,000 of interest income and $48,000 of interest expense. In the first quarter
of fiscal 2000 net interest expense was $23,000. Interest income increased in
the first quarter of fiscal 2001 as a result of the $3.8 million note receivable
from the sale of the Home Service Medical business. Although days sales
outstanding on receivables was 64 days in this year's first quarter compared to
69 days in the first quarter of last year, interest expense increased from
short-term borrowing to support a significantly higher revenue and asset base.
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INCOME TAXES
The Company's income tax rate was approximately 40% in the first quarter
ended September 29, 2000 compared to 39% in the first quarter ended October 1,
1999. The increase in the tax rate reflects the Company's decision to provide
for income tax expense at a rate slightly higher than expected in the event
certain expenses are deemed to be nondeductible upon audit. The current first
quarter rate of 40% is expected to continue or to be slightly higher through
fiscal 2001 year-end.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $253,000 during the first
quarter of fiscal 2001. Receivables increased by $543,000, net of the sale of
HSM assets, due to revenue growth. The days sales outstanding (DSO) of
Chronimed's accounts receivable decreased from 73 at June 30, 2000 to 64 days at
September 29, 2000. This reflects focused efforts on the Company's goal of
reducing DSOs to 65 days or better in fiscal 2001. The decrease in DSOs occurred
in the Mail Order segment. The Injectables business within the Mail Order
segment is beginning to see timing and process improvements in collections from
its largest payor. Inventory increased by $470,000. Even though the Company
experienced 7% sequential quarter revenue growth, days on hand inventory
improved from eleven days at June 30, 2000 to ten days at September 29, 2000.
The Company believes that it is properly reserved for excess and obsolete
inventory. Accounts payable and accrued expenses decreased $714,000 due to
timing of payments. Depreciation and amortization totaled $871,000 and the tax
receivable decreased by $536,000 during the first quarter of fiscal 2001.
Net cash generated by investing activities was $2.4 million during the
first quarter of fiscal 2001. The Company received $3.0 million in proceeds from
the sale of the Home Service Medical business. Capital expenditures totaled
$566,000 and were for computer hardware and software, and leasebold improvements
for StatScript pharmacies.
Net cash used in financing activities was $2.5 million used to pay the
balance on the line of credit. There was no balance outstanding under the line
of credit at September 29, 2000 and $2.5 million outstanding as of June 30,
2000.
As of September 29, 2000 Chronimed had working capital of $42.4 million
compared to $41.0 million as of June 30, 2000. The Company expects working
capital requirements for accounts receivable and inventory to increase as
revenues increase. 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 has a discretionary line of credit of $15 million. The
Company believes that the line of credit and cash provided by operating
activities will allow it to meet foreseeable cash requirements and provide the
flexibility to fund future growth. Any material business acquisitions would need
to be financed from debt or equity sources beyond the Company's line of credit
and cash flow from operations. The Company has no long-term debt. Shareholders'
equity was $68.6 million at the end of this year's first quarter and $67.7
million at fiscal 2000 year-end.
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GOVERNMENT REGULATION
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. Because
sanctions may be imposed for violations of these laws, compliance is a
significant operational requirement for the Company. Management believes the
Company is in substantial compliance with all existing statutes and regulations
materially affecting the conduct of its business.
Political, economic and regulatory influences are subjecting the
healthcare industry and prescription drug providers in the United States to
fundamental change. A variety of new approaches have been proposed, including
mandated basic healthcare benefits, controls on healthcare spending through
limitations on the growth of private health insurance premiums and Medicare and
Medicaid spending, and the creation of large purchasing groups. In addition,
some of the states in which the Company operates have adopted or are considering
various healthcare reform proposals. The Company anticipates that Congress and
state legislatures will continue to review and assess alternative healthcare
delivery systems and payment methods and that public debate of these issues will
likely continue in the future.
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 related 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 the
seasonal pattern will soften and that third quarter revenues will be the same as
or higher than second quarter revenues. In addition, the sale of the Home
Service Medical business will diminish the effects of seasonality in the Mail
Order segment due to HSM's high degree of seasonality. In fiscal 2000, Home
Service Medical's revenue was $3.4 million in the first quarter, increased 55%
to $5.3 million in the second quarter, and decreased 54% to $2.4 million in the
third quarter.
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OUTLOOK
Information contained in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations", other than historical or current
facts, should be considered forward looking statements as defined in the Private
Securities Litigation Reform Act of 1995. These statements reflect management's
current views of future events and financial performance that involve a number
of risks and uncertainties. Chronimed undertakes no obligation to update any
such statements to reflect later developments. Factors that could cause actual
results to differ include, but are not limited to, the following: changes in
economic conditions; general competitive factors; pressures on gross profit
margins; the Company's ability to execute its sales and marketing plans; changes
in the status of managed care contracts, particularly but not limited to Aetna
U.S. Healthcare; changes in ownership; material litigation; the Company's
ability to complete the divestiture of its diagnostic products business via sale
or spin-off; and the risks described from time to time in the Company's public
reports filed with the SEC. Please see Exhibit 99 filed with the Company's Form
10-K on September 27, 2000 for additional circumstances that could cause actual
results to differ from forecasts. Investors are specifically referred to such
cautionary statements for discussion of factors that could affect the Company's
operations and forward-looking statements contained herein.
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 as of June 30, 2000
and September 29, 2000 consisted of equity securities of Cell Robotics
International, Inc., with whom the Company had 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. The Cell Robotics
securities became the property of MEDgenesis Inc. effective July 1, 2000 in
association with the establishment of MEDgenesis as a wholly-owned subsidiary of
Chronimed and, accordingly, are included in net assets of discontinued
operations.
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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
27.1 Financial Data Schedule
b.) Reports on Form 8-K
None.
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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.
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(REGISTRANT)
November 9, 2000 By /s/ Henry F. Blissenbach
----------------- ------------------------
Date Henry F. Blissenbach
Chief Executive Officer and
Chairman of the Board of Directors
November 9, 2000 /s/ Gregory H. Keane
----------------- ---------------------------------------
Date Gregory H. Keane
Vice President, Chief Financial Officer
