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 December 31, 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 - 12,133,031 shares outstanding as of January 19,
2000
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INDEX
CHRONIMED INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - December 31, 1999 and July 2, 1999
Consolidated Statements of Income - Three months ended
December 31, 1999 and January 1, 1999; six months ended
December 31, 1999 and January 1, 1999
Consolidated Statements of Cash Flows - Six months ended
December 31, 1999 and January 1, 1999
Notes to Consolidated Financial Statements - December 31, 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 October 26,
1999, between the Company and Steven B. Russek
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>
Dec. 31, 1999 July 2, 1999
------------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,613 $ 3,312
Accounts receivable, net 47,727 36,274
Inventory 10,241 9,786
Other current assets 1,446 1,529
Deferred taxes 774 774
-------- --------
Total current assets 61,801 51,675
Available-for-sale securities 619 610
Property and equipment:
Property and equipment 27,924 25,954
Allowance for depreciation (16,971) (13,745)
-------- --------
10,953 12,209
Goodwill, net 15,436 16,242
Other assets, net 138 159
-------- --------
Total assets $ 88,947 $ 80,895
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,972 $ 11,230
Accrued expenses 2,950 2,992
Income taxes payable 286 186
Short-term debt 4,100 --
-------- --------
Total current liabilities 20,308 14,408
Shareholders' equity:
Preferred Stock -- --
Common Stock, issued and outstanding shares--
12,131 and 12,088 respectively 121 121
Additional paid-in capital 52,748 52,499
Retained earnings 15,603 13,709
-------- --------
68,472 66,329
Unrealized gain on available-for-sale securities 167 158
-------- --------
Total shareholders' equity 68,639 66,487
Total liabilities and shareholders' equity $ 88,947 $ 80,895
======== ========
</TABLE>
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CHRONIMED INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
-------------------- ----------------
Dec. 31, 1999 Jan. 1, 1999 Dec. 31, 1999 Jan. 1, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES
Specialty Pharmacy Services $ 32,150 $ 26,800 $ 58,983 $ 49,685
Disease Management 26,196 13,901 50,241 25,868
Diagnostic Products 8,825 7,979 16,897 15,923
--------- --------- --------- ---------
Total Revenue 67,171 48,680 126,121 91,476
YR TO YR GROWTH 38% 38%
COSTS AND EXPENSES
Cost of revenues 52,183 36,508 99,080 67,921
Gross profit 14.988 12,172 27,041 23,555
% OF REVENUE 22.3% 25.0% 21.4% 25.7%
Selling and marketing 2,369 2,351 4,861 4,711
General and administrative 9,675 6,507 18,440 12,923
Research and development 318 180 553 325
--------- --------- --------- ---------
Total operating expenses 12,362 9,038 23,854 17,959
% OF REVENUE 18.4% 18.6% 18.9% 19.6%
INCOME FROM OPERATIONS 2,626 3,134 3,187 5,596
% OF REVENUE 3.9% 6.4% 2.5% 6.1%
Interest (expense) income (59) 58 (82) 375
Other Income - Publishing sale -- 503 -- 503
INCOME BEFORE INCOME TAXES 2,567 3,695 3,105 6,474
Income taxes (1,001) (1,440) (1,211) (2,525)
NET INCOME $ 1,566 $ 2,255 $ 1,894 $ 3,949
% OF REVENUE 2.3% 4.6% 1.5% 4.3%
NET INCOME PER SHARE--BASIC $ 0.13 $ 0.19 $ 0.16 $ 0.33
NET INCOME PER SHARE--DILUTED $ 0.13 $ 0.18 $ 0.16 $ 0.32
AVERAGE SHARES OUTSTANDING--BASIC 12,095 12,115 12,093 12,108
AVERAGE SHARES OUTSTANDING--DILUTED 12,106 12,316 12,121 12,319
</TABLE>
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CHRONIMED INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
----------------
Dec. 31, 1999 Jan. 1, 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,894 $ 3,949
Adjustments to reconcile net income to net cash (used)
provided by operating activities:
Depreciation and amortization 4,273 3,461
Changes in operating assets and liabilities:
Accounts and notes receivable (11,453) (9,853)
Income taxes 100 --
Inventory (455) 124
Accounts payable and accrued expenses 1,700 7,667
Other assets 104 (779)
-------- --------
Net cash (used) provided by operating activities (3,837) 4,569
INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (241) --
Purchases of property and equipment (1,970) (2,726)
Purchases of available-for-sale securities -- (300)
Sales and maturities of available-for-sale securities -- 6,536
-------- --------
Net cash (used) provided by investing activities (2,211) 3,510
FINANCING ACTIVITIES:
Repurchase of Common Stock -- (45)
Net proceeds from issuance of Common Stock 249 875
Net proceeds from borrowings 4,100 --
-------- --------
Net cash provided by financing activities 4,349 830
(Decrease) Increase in cash and cash equivalents (1,699) 8,909
Cash and cash equivalents at beginning of period 3,312 1,027
-------- --------
Cash and cash equivalents at end of period $ 1,613 $ 9,936
======== ========
</TABLE>
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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 December 31, 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.
<TABLE>
<CAPTION>
$s and Shares in Thousands
--------------------------
Second Quarter Ended Six Months Ended
-------------------- ----------------
December 31, 1999 January 1, 1999 December 31, 1999 January 1, 1999
----------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Numerator:
- ----------
Net income for basic and
diluted net income per share $ 1,566 $ 2,255 $ 1,894 $ 3,949
Denominator:
- ------------
Denominator for basic net income
per share--weighted-average shares 12,095 12,115 12,093 12,108
Effect of dilutive securities:
Employee stock options 11 201 28 211
Denominator for diluted net income
per share--weighted-average shares
and assumed conversions 12,106 12,316 12,121 12,319
======= ======= ======= =======
Net Income per Share - Basic $ .13 $ .19 $ .16 $ .33
======= ======= ======= =======
Net Income per Share - Diluted $ .13 $ .18 $ .16 $ .32
======= ======= ======= =======
</TABLE>
Options to purchase 2,195,783 and 2,144,090 shares of common stock at various
prices were outstanding as of fiscal 2000 second quarter end and year-to-date
respectively, but were not included in the computation of diluted net income per
share because the exercise prices of these options 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.
<TABLE>
<CAPTION>
Specialty
Diagnostic Pharmacy Disease
Products Services Management Total
-------- -------- ---------- -----
<S> <C> <C> <C> <C>
For the Quarter Ended 12/31/99
Revenues $ 8,825 $ 32,150 $ 26,196 $ 67,171
Income from Operations 1,061 499 1,448 3,008
For the Quarter Ended 1/1/99
Revenues $ 7,979 $ 26,800 $ 13,901 $ 48,680
Income from Operations 1,971 565 127 2,663
For the Six Months Ended 12/31/99
Revenues $ 16,897 $ 58,983 $ 50,241 $126,121
Income from Operations 1,775 339 2,102 4,216
For the Six Months Ended 1/1/99
Revenues $ 15,923 $ 49,685 $ 25,868 $ 91,476
Income from Operations 4,094 1,110 12 5,216
</TABLE>
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 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.
Chronimed provides patients with a convenient, competitively priced
source of prescription drugs, medical products, counseling support, and a
variety of educational materials to help
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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.
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 date 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.
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 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
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Diagnostic Products business includes the General Medical business (and
Publishing, which was sold in fiscal 1999 second quarter).
Total revenue increased 38%, from $48.7 million to $67.2 million, for
the second quarter ended January 1, 1999 and December 31, 1999, respectively;
and 38%, from $91.5 million to $126.1 million for the six months ended January
1, 1999 and December 31, 1999, respectively. Price increases and inflationary
pressures have not been significant reasons for these revenue increases.
Specialty Pharmacy Services revenue grew 20% in the second quarter, from
$26.8 million to $32.1 million. Year to date revenue grew 19%, from $49.7
million to $59.0 million for the six months ended January 1, 1999 and December
31, 1999, respectively. Most of the growth came from the Injectables program -
up $5.4 million in the second quarter, and $10.1 million year to date - which
experienced strong patient intake from the managed care plans. Home Service
Medical revenue grew 17% in the second quarter, from $4.5 million to $5.3
million, and 19% year to date, from $7.3 million to $8.7 million. Organ
Transplant Pharmacy revenue was flat compared to last year's second quarter at
$8.9 million, and down 3% year to date, from $17.9 million to $17.3 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 $800,000, and a year to
date decrease of $1.6 million.
Disease Management revenue grew $12.3 million and 88% over last year's
second quarter, from $13.9 million to $26.2 million; and 94%, from $25.9 million
to $50.2 million for the six months ended January 1, 1999 and December 31, 1999,
respectively. 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 second quarter, and down 8% year to date compared to prior year.
Diagnostic Products segment revenue grew approximately $800,000 and 11%
over last year's second quarter, from $8.0 million to $8.8 million. There was
approximately $300,000 of revenue in last year's second quarter from the
Publishing business, which was sold in fiscal 1999. Excluding Publishing,
Diagnostics Products grew $1.1 million over last year's second quarter. Year to
date revenue is up 6%, from $15.9 million to $16.9 million for the six months
ended January 1, 1999 and December 31, 1999, respectively. There was
approximately $800,000 of revenue in last year's first six months from the
Publishing business, which was sold in fiscal 1999. Excluding Publishing,
Diagnostics Products grew $1.8 million over last year's first six months.
Significant new products, most notably 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
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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 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 second quarter increased 23.1% from $12.2
million last year to $15.0 million this year; and year to date increased 14.8%
from $23.6 million last year to $27.0 million this year. Gross profit percentage
for the second quarter was 22.3% against 25.0% last year; and year to date gross
profit percentage was 21.4% against 25.7% 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 second quarter were up
approximately $20,000 and 1% compared to last year's second quarter, on overall
revenue growth of 38%. Year to date selling and marketing expenses were up
$150,000 and 3% compared to last year's first six months, on overall revenue
growth of 38%. This is the result of cost containment efforts, most notably in
the Specialty Pharmacy Services segment. As a percentage of revenue, selling and
marketing expenses dropped from 4.8% in last year's second quarter to 3.5% in
this year's second quarter, and from 5.1% in last year's first six months to
3.9% in this year's first six months.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative (G&A) expenses for the second quarter totaled
$9.7 million, up from $6.5 million last year. As a percentage of revenue, G&A
expenses increased from 13.4% last year to 14.4% this year. Year to date
expenses totaled $18.4 million, up from $12.9 million last year. As a percentage
of revenue, G&A expenses increased from 14.1% last year to 14.6% this year. Much
of the absolute dollar increase in spending is due to variable expenses that
have grown with revenue (StatScript pharmacies, customer service, billing, and
fulfillment) and increased bad debt expense as a result of revenue growth. Also
included here are the one-time expenses of approximately $470,000 in the second
quarter and $882,000 in the first six months related to the Company's current
efforts in seeking strategic alternatives. Other important areas of G&A spending
growth include information systems, management, and facilities. The Company
believes that these infrastructure investments are necessary to support revenue
growth.
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INTEREST INCOME / EXPENSE
Interest income decreased from $58,000 in last year's second quarter to
an interest expense of $59,000 this quarter. Interest income decreased from
$374,000 in last year's first six months to an interest expense of $82,000 in
this year's first six months. There are two major reasons for the decline.
First, last year's second quarter included $15,000 of interest income, and year
to date included $295,000 of interest income from the Orphan Medical receivable
arising from the Orphan Medical rights sale. This second quarter and year to
date, 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 throughout
the current year compared with average investable funds of about $4 million last
year.
INCOME TAXES
The Company's income tax rate was approximately 39% in each of the
quarters ended December 31, 1999 and December 1, 1999. The current second
quarter rate of 39% is expected to continue through fiscal 2000 year end.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, the Company had working capital of $41.5
million with no long-term debt, and $68.6 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 60 at January 1, 1999, to 64 at December 31, 1999. This negative
trend is caused mostly by the Disease Management segment. A combination of 88%
revenue growth from prior year's second 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 increased from $9.8 million in June 1999 to $10.2
million in December 1999, mostly due to the growth of the StatScript pharmacy
business. 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 $4.1 million balance outstanding under the line of credit at December 31,
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
The Company did not encounter any significant system issues related to
Year 2000. The Company will continue to monitor all systems for potential Year
2000 related issues.
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 and
earnings 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
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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.
However, with respect to the impact of seasonality on earnings, the Company
expects that fiscal third quarter earnings may be the same or lower than second
quarter earnings. This is mainly due to the higher than average margins
generated by the non-contracted indemnity patients who accelerate their
purchases into fiscal second (calendar fourth) quarter.
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 and Supreme blood glucose systems, 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
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
December 31, 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.
16
<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 October 26, 1999,
between the Company and Steven B. Russek.
11.1 Computation of Earnings Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
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)
January 31, 2000 /s/ Maurice R. Taylor, II
---------------- --------------------------
Date Maurice R. Taylor, II
Chairman of the Board and
Chief Executive Officer
January 31, 2000 /s/ Gregory H. Keane
---------------- --------------------------
Date Gregory H. Keane
Vice President, Principal Financial Officer and
Treasurer
18
- ------------ -------------------
Exhibit 10.1 Chronimed Inc.
- ------------ -------------------
MEMO CONFIDENTIAL
TO: STEVE RUSSEK FOR RECIPIENT ONLY
FROM: HANK BLISSENBACH
CC:
DATE: OCTOBER 26, 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 FEBRUARY 28, 2000. 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 B. RUSSEK /S/ SHAWN FEATHERSTON, VP HUMAN RESOURCES
- --------------------- -----------------------------------------
SIGNATURE OF EMPLOYEE COMPANY - NAME/TITLE
10/26/99
- ---------------
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 December 31, 1999 and January 1, 1999.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> OCT-02-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,613,000
<SECURITIES> 0
<RECEIVABLES> 49,847,000
<ALLOWANCES> 2,120,000
<INVENTORY> 10,241,000
<CURRENT-ASSETS> 61,801,000
<PP&E> 27,924,000
<DEPRECIATION> 16,971,000
<TOTAL-ASSETS> 88,947,000
<CURRENT-LIABILITIES> 20,308,000
<BONDS> 0
0
0
<COMMON> 121,000
<OTHER-SE> 68,518,000
<TOTAL-LIABILITY-AND-EQUITY> 88,947,000
<SALES> 67,171,000
<TOTAL-REVENUES> 67,171,000
<CGS> 52,183,000
<TOTAL-COSTS> 64,545,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,199,000
<INTEREST-EXPENSE> 59,000
<INCOME-PRETAX> 2,567,000
<INCOME-TAX> 1,001,000
<INCOME-CONTINUING> 1,566,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,566,000
<EPS-BASIC> 0.13
<EPS-DILUTED> 0.13
</TABLE>
