1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 29, 2001
[ ] 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)
A MINNESOTA IRS EMPLOYER IDENTIFICATION
CORPORATION NO. 41-1515691
10900 RED CIRCLE DRIVE
MINNETONKA, MINNESOTA 55343
Telephone Number (952) 979-3600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value per share
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting and non-voting common equity of
Chronimed Inc. held by non-affiliates as of close of business on August 31,
2001, was approximately $55 million based on the closing price of $4.60 per
share reported on the Nasdaq National Market System. The number of shares of
Common Stock outstanding as of September 30, 2001 was 12,315,314.
Portions of the registrant's definitive Proxy Statement for the Annual Meeting
of Shareholders to be held November 27, 2001, to be filed with the Commission
are incorporated by reference in Part III of the Form 10-K.
2
PART I
ITEM 1. BUSINESS
GENERAL
Chronimed Inc. is a disease-focused company excelling in specialty pharmacy
distribution for people with chronic health conditions. The specialty pharmacy
industry was developed to serve patients with highly specialized pharmaceutical
needs and to help employers and third-party payors to manage and control patient
care costs more effectively. Chronimed 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. We work directly with patients, physicians,
nursing services, and other healthcare providers, and with insurance companies,
health maintenance organizations, preferred provider organizations, government
agencies, and other third-party payors to improve clinical and financial
outcomes for patients with long-term, complex and expensive pharmaceutical
needs.
We distribute pharmaceuticals and related educational materials via mail service
and through our nationwide StatScript retail pharmacy chain. Accordingly, we
operate in two business segments: Mail Order and Retail. See Note 14 of Notes to
Consolidated Financial Statements in Item 14 of this Annual report on Form 10-K
for information regarding our segments.
Our specialty medications are quite expensive (ranging from $3,000 to $150,000
per patient per year), often need refrigerated packaging, may require overnight
delivery, and are usually part of a complex regimen -- all reasons these
medications are not routinely stocked in standard retail pharmacies. By applying
our unique distribution and management techniques and coordinating with our
healthcare partners, we are able to improve the quality of care for people
afflicted by very expensive diseases and to help the healthcare reimbursement
system contain costs. We also work with our healthcare partners to develop
patient and therapy management guidelines through ongoing monitoring and
evaluation of patient outcomes.
Our services are most effective for patients who:
- have illnesses that generally occur in less than one percent of the
nation's population;
- require treatment by healthcare specialists;
- require high-cost, complex medications that are not always available
through traditional retail pharmacies and the majority of which must be
taken for the rest of the patient's life; and
- require a significant amount of self-management and ongoing education
(where patient compliance is critical for improving clinical and
financial outcomes).
Our key relationships are with:
- Patients: For the patient, we provide a confidential, convenient,
competitively priced source of prescription drugs, counseling, and a
variety of educational materials to help the patient achieve maximum
control over his or her condition. Educating patients, improving
patient compliance, and increasing provider support and intervention
favorably affect clinical outcomes and decrease the long-term costs of
care. Our patient-specific, value-added services include counseling by
highly trained registered pharmacists and internally
2
3
certified patient specialists, confidentiality, the provision of
educational materials, compliance monitoring, insurance billing, refill
reminders, 24-hour pharmacist availability, automated reorder
capabilities, and timely shipments to patients' homes, workplaces,
physicians' offices, and treatment facilities.
- Healthcare Providers: We believe our expertise makes us a valuable
partner for healthcare providers working with patients experiencing
chronic health conditions. We have developed relationships with several
treatment centers, foundations, and medical associations that
specialize in the treatment or support of patients with chronic
conditions. Through these relationships, we are able to introduce our
services to a large number of individuals with chronic conditions and
the healthcare specialists treating them.
- Pharmaceutical Developers and Manufacturers: We believe our system is
well suited for developers and manufacturers of pharmaceutical products
who are targeting small or hard-to-identify patient populations. We
have established relationships with developers and manufacturers of
prescription drugs needed to manage various chronic conditions and
provide these companies with assistance in rapid product introduction,
a cost-effective means for distributing products to specific patient
populations, and a method for monitoring product use.
- Payors: Managed care plays a significant role in the provision of
healthcare in the United States, and the majority of our patient
referrals come from contracted third-party payors and the government.
We believe these payors benefit from our services because our
experience in managing specific patient groups allows us to improve
patient care while minimizing overall expenditures.
We work directly with all of these constituents in a concerted effort to improve
clinical and financial outcomes while enhancing the quality of life for the
chronically ill, in a manner consistent with our obligations to patient
confidentiality.
Chronimed was founded in 1985 as a Minnesota corporation and has been publicly
traded on the Nasdaq National Market since 1992.
In this Form 10-K, fiscal 2001, fiscal 2000, and fiscal 1999 refer to our fiscal
years ended June 29, 2001, June 30, 2000, and July 2, 1999.
MARKET AND GROWTH STRATEGY
We serve three patient populations within the specialty pharmacy industry:
people with complex conditions treated with biotech injectable medications,
people who have had an organ transplant, and people with HIV/AIDS. Descriptions
of our current services to these populations follow. Our growth strategy is to
expand our distribution of prescription drugs by increasing the number of
patients served. In addition, we plan to enhance our programs with manufacturers
and to expand our services to persons with other types of chronic conditions. We
anticipate that we will add to the range and depth of services we provide in
order to meet the demand for improved patient outcomes, cost of care, and
patient-reported satisfaction.
BIOTECH INJECTABLE MEDICATIONS
We began distributing biotech injectable medications through our mail order
pharmacy in 1994. The biotech injectables we provide treat many chronic
conditions, including anemia (both drug-induced and anemia that occurs in
connection with end-stage renal failure), cancer, cystic fibrosis,
endometriosis, growth hormone deficiency, hemophilia, hepatitis B and C,
immune deficiency
3
4
disorders, infertility, multiple sclerosis, neutropenia, rheumatoid
arthritis, and respiratory syncytial virus, or "RSV." Much of our injectable
business revenue is derived from the following five diseases:
Rheumatoid Arthritis
Rheumatoid arthritis, or "RA," is caused by inflammation in the lining of
the joints or other internal organs. It typically affects many different
joints. It can be chronic and can be a disease of flares (active) and
remissions (little to no activity). RA is a systemic disease that affects
the entire body and is one of the most common forms of arthritis. Cells in
the inflamed joint lining (called the "synovium"), release enzymes that
invade and digest bone and cartilage. The involved joint can lose its
shape and alignment, resulting in pain, stiffness, warmth, redness,
swelling, and loss of movement.
According to the Arthritis Foundation, RA affects 2.1 million Americans,
mostly women. Onset usually occurs in middle-age, but is often detected in
people in their 20s and 30s. About 50,000 new cases of RA are detected
each year. Drug therapy for RA consists of drugs used to reduce symptoms
and inhibit the progression of structural damage. We supply patients with
all currently available products, including Enbrel(R) and
Remicade(R).
Multiple Sclerosis
Multiple sclerosis, or "MS," is a disease of the central nervous system in
which the protective layer surrounding nerve fibers is damaged or
destroyed. Once damaged, electrical nerve impulses are not properly
conducted to and from the brain, resulting in the various symptoms of MS.
The National Multiple Sclerosis Society estimates that more than 333,000
people in the United States have MS and that 10,000 new cases are
diagnosed every year.
Therapy for MS includes use of drugs to lessen the severity or frequency
of attacks, to slow the increase of disability resulting from the disease,
and to treat the various resulting symptoms (muscle stiffness, fatigue,
and bladder problems). We supply patients with all currently available
products, including Avonex(R), Betaseron(R) and Copaxone(R).
Hepatitis C
The Hepatitis C virus, or "HCV," attacks the liver and can cause long-term
renal illnesses such as infection, cirrhosis, and cancer. According to the
Centers for Disease Control ("CDC"), as many as four million Americans may
be infected with HCV, and 36,000 new infections occur each year. HCV is
the leading cause of liver transplantations in the United States and
accounts for 8,000 - 10,000 deaths per year. The CDC also estimates that
the annual cost associated with treating HCV (excluding transplant costs)
exceeds $600 million.
We sell injectable drugs used to treat HCV, including interferon
(Rebetron(R)) with or without ribavirin (Intron-A(R)). Although the
CDC reports that these drugs are ineffective in about 60% of HCV
infections, for the 40% of patients who do respond, treatment usually
requires many months of sustained therapy for optimal effectiveness. Our
programs for these patients are able to reduce costs because of lower
acquisition costs, the provision of counseling and management of side
effects that may lead to non-compliance with treatment programs, and
efficient delivery of medication in temperature controlled packaging.
Growth Hormone Deficiency
The Human Growth Foundation estimates that 10,000 to 15,000 children in
the United States have growth failure due to growth hormone deficiency.
Growth hormone is a protein that is
4
5
produced by the pituitary gland and is vital for normal growth. Growth
hormone deficiency may occur by itself or in combination with one or
more other pituitary hormone deficiencies.
Growth hormone deficiency is treated with injections of synthesized growth
hormone. Some children receive three or four injections a week, while
others receive daily injections. There is usually a prompt increase in
growth rate after treatment starts, which may be noticeable to the child
and parent in three to four months. This faster-than-normal growth rate
slowly declines over time, but continues to be greater than the rate that
would occur without treatment. We supply patients with all currently
available products, including Genotropin(TM), Humatrope(R),
Norditropin(R), Nutropin Depot(R), Protropin(R), and Saizen(R).
Cancer
Chemotherapeutic agents are used in the treatment of a variety of cancers
to destroy rapidly growing cancer cells within the body. We offer most of
the medications used to treat the different forms of cancer. We distribute
these products to the patient's home for self-administration or to the
physician's office for administration in a clinical setting.
Drugs used to fight cancer also destroy the body's ability to produce
erythropoietin, resulting in a reduction in red blood cells. Without red
blood cells, which carry oxygen to cells throughout the body, a cancer
patient suffers from fatigue and can develop anemia. We also supply
medications such as Epogen(R) and Procrit(R) that increase the
number of available red blood cells by supplementing the body's natural
production of erythropoietin.
White blood cells are responsible for helping the body fight infections.
The chemotherapeutic drugs used to fight cancer substantially reduce the
number of white blood cells in the patient's body leaving the patient
susceptible to fever or serious opportunistic infections. We supply
medications such as sargramostim (Leukine(R)) and filgrastim
(Neupogen(R)) to stimulate production of white blood cells following
chemotherapy treatments.
ORGAN TRANSPLANT
Since 1990, we have served patients who have had solid organ and bone marrow
transplants. According to the United Network for Organ Sharing (UNOS), as of
August 2001 there are approximately 178,000 people living with transplanted
organs. Our experience has shown that transplant recipients typically require
about $12,000 of prescription drugs during the first year following
transplantation and about $9,000 per year thereafter. We serve organ
transplant patients primarily through our centralized mail-order pharmacy,
and are expanding that service to our community-based StatScript retail
pharmacies.
HIV/AIDS
We began to serve patients with HIV/AIDS through our mail-order pharmacy in
1994. Human immunodeficiency virus, or "HIV," results in immunosuppression by
attacking and destroying T cells that coordinate much of the network of
normal immune responses. Without normal immune responses, patients are unable
to fight and overcome routine infections. Patients with acquired immune
deficiency syndrome, or "AIDS," have a suppressed immune mechanism that
requires treatment through complex medication regimens. These patients face
many long-term physical, financial, and psychological challenges due to the
often debilitating nature of the disease. Our programs for these patients are
intended to assist patients in gaining maximum control over their disease in
an effort to lower the incidence of complications and improve their quality
of life.
5
6
The CDC estimates that there are as many as 900,000 HIV positive individuals
living in the United States, approximately 323,000 of whom have contracted
AIDS, and that approximately 40,000 new U.S. infections occur annually.
Currently, the average HIV/AIDS patient we serve requires approximately
$12,000 of prescription drugs per year. Our strategy for meeting this
treatment need has been to grow our StatScript pharmacy outlets. At the end
of fiscal 2001, we had 37 retail pharmacy locations.
PRODUCT DISTRIBUTION
We distribute our products through mail order facilities located in Minnesota,
California, Texas, and Florida, and through our nationwide proprietary retail
chain, StatScript Pharmacy.
MAIL ORDER
We stock approximately 2,700 brand name and generic prescription drugs, which we
distribute directly to the patients we serve through our centralized pharmacy
mail-order system. We believe that we can distribute these products with
considerably higher levels of service at a competitive cost in comparison to
local and national retail pharmacies. Cost savings are accomplished through our
distribution of a high volume of relatively less common products and efficient
processing of specialty products unfamiliar to many retail pharmacists. Patients
benefit from the convenience of having products delivered directly to their
homes and, in many cases, at lower initial out-of-pocket costs than they might
obtain from other sources. We maintain toll-free telephone numbers and automated
and online reorder capabilities for patients to place orders, and orders
generally are shipped by FedEx or UPS to ensure prompt delivery.
Our mail order revenue is derived from the sale of biotech injectable and
immunosuppressive drugs . Patients using the service may have standard indemnity
coverage, Medicare or Medicaid, or a pharmacy benefit defined by their managed
care health plans.
In fiscal 2001, we expanded our mail order business through the acquisition of
The Transplant Pharmacy(R), which provides mail-order distribution of drugs
and transplant patient management services, from SangStat Medical Corporation.
We paid $1.8 million in cash for the acquisition of the business and assets,
excluding inventory and accounts receivable.
COMMUNITY-BASED RETAIL PHARMACIES
Our StatScript retail pharmacies give us a significant presence in the retail
marketplace, and specifically in the HIV/AIDS disease market, from which to grow
revenues and profits. The StatScript pharmacy chain is the market leader in
providing retail specialty pharmacy services and prescription drugs to people
with HIV/AIDS. Our revenue growth in this business comes from the continued
rollout of the combination drug therapies of protease inhibitors, nucleoside
analogs, and non-nucleoside reverse transcriptase inhibitors, as well as
strategic new pharmacy openings and increased patient intake at existing sites.
During fiscal 2001, we opened three new pharmacy locations and acquired
additional pharmacies for a total of 37 store locations in 32 cities. In
February 2001, we acquired the four retail pharmacies of American Prescription
Providers, Inc. These pharmacies, which were located in New York City, Miami
Beach, Atlanta, and Philadelphia, were renamed and integrated into our retail
chain of StatScript pharmacies. (This acquisition accounted for a net one
location increase due to consolidation
6
7
with existing StatScript pharmacies.) We paid $16.0 million in cash for
substantially all of the four pharmacies' assets, excluding accounts receivable.
In May 2001, we acquired the stock of Los Feliz Drugs, Inc. d/b/a Oaks Pharmacy,
a California corporation, which operated a pharmacy in a suburb of Los Angeles.
This pharmacy was integrated into our StatScript chain. We paid $5.2 million in
cash for the stock of this pharmacy, and the seller retained its accounts
receivable as of the transaction date.
StatScript pharmacies are located within patient communities and are committed
to the HIV/AIDS patient through community resources, clinical team
communication, patient education, and complete patient tracking. We believe
StatScript to be the largest network of HIV/AIDS community-based specialty
pharmacies in the country.
In fiscal 1998, we began the retail distribution of organ transplant drugs
through our localized StatScript pharmacies in order to better meet the needs of
transplant patients. Transplant medications sometimes require same-day delivery,
and our local StatScript pharmacies offer an efficient, practical solution to
meet this need. Recently, we also have been using the local presence of our
StatScript pharmacies to distribute some types of biotech injectable
medications.
As of June 29, 2001, StatScript pharmacies were located in Atlanta, Austin,
Boston, Chicago (three locations), Dallas (two locations), Denver, Ft.
Lauderdale, Houston (two locations), Indianapolis, Kansas City, Las Vegas, Los
Angeles, Miami Beach, New Orleans, New York City (two locations), Orlando,
Philadelphia, Phoenix, Portland, Safety Harbor, Salt Lake City, San Antonio, San
Diego, San Francisco, Seattle, Springfield, St. Louis, St. Petersburg, Tampa,
Washington, D.C., West Hollywood, and West Palm Beach. On August 14, 2001, we
announced that we are closing the StatScript headquarters in Overland Park,
Kansas, to consolidate operations at our corporate headquarters in Minnetonka,
Minnesota. We expect to complete the consolidation in the second quarter of
fiscal 2002.
MANUFACTURER DISTRIBUTION SERVICES
We offer specialized distribution programs for developers and manufacturers of
prescription drugs for small or hard-to-identify patient populations. We
currently have agreements with manufacturers including Orphan Medical
(Cystadane(TM)), Aventis Behring (Stimate(TM)), and the American Red Cross
(AHF-M, a factor product for hemophilia), through which we distribute the
manufacturers' products and administer patient assistance programs. We believe
these programs demonstrate how the systems and relationships we have developed
in serving specific patient populations can be leveraged into new business
opportunities. In addition, we have volume-based discount and other service
arrangements with a number of other product manufacturers and distributors.
Among the more significant relationships are those with Schering (Hepatitis C),
Abbott and Novartis (transplant immunosuppression), Genentech (human growth
hormone), Amgen (neutropenia), and Biogen (multiple sclerosis).
7
8
PAYOR CONTRACTS
Healthcare costs have increased significantly in the United States in recent
years and are expected to continue increasing in the near future. According to
the Health Care Financing Administration ("HCFA"), national health expenditures
are expected to reach $1.4 trillion in 2001, up from $994 billion in 1995, or
13.7% of U.S. Gross Domestic Product. According to Partnership for Solutions (a
project of Johns Hopkins University and The Robert Wood Johnson Foundation),
health care costs for people with chronic conditions averaged in excess of
$6,000 per person in 2000, more than five times higher than for people without
such conditions. Employers bear a significant share of this cost through
payments for employee benefit plans. As a result, public and private employers
have been emphasizing managed care techniques in employee benefit plans in an
attempt to control rising health care costs.
Most managed care programs have plan design features that limit the number of
providers eligible to serve plan members. For example, most managed care plans
will not pay for services, or will require substantially higher co-pays or
deductibles, if a patient chooses to use a provider that is considered "outside"
the patient's plan network. The high costs of the specialty medications we
provide create a significant disincentive for recipient patients to use
"out-of-network" providers.
Payors often have difficulty quantifying and controlling the cost of the
medications used to treat chronic conditions. We help payors identify and lower
their costs by reducing product acquisition expenses, offering efficient
delivery systems, providing excellent patient care, and streamlining claims and
billing services. We have payor contracts with HMOs, major health insurers,
government agencies, and other managed health plans covering significant patient
populations. As part of these contracts, we offer payors customized programs
designed to maximize care and manage high-cost medications and low patient
utilization rates. Specifically, we offer payors the following services:
- Distribution of specialty prescription drugs at a cost
competitive with, or lower than, local and national retail and
hospital pharmacies.
- Review and monitoring of compliance with prescribed drug
regimens. By monitoring patient order patterns and drug use,
we assist payors and healthcare providers in early
identification of patients whose treatment outcomes may be
improved by more support or assistance in managing their
chronic conditions.
- Disease expertise. By focusing on the needs of specific
patient populations, our pharmacists become experts in the
requirements and treatment patterns for the identified patient
populations.
- Distribution of educational materials designed to help
patients achieve maximum control over their chronic
conditions.
SALES AND MARKETING ACTIVITIES
We believe that to be successful in our business, we must achieve the ability to
enter into payor contracts on a national or regional basis and also work with
healthcare providers at the local level. We use a multi-faceted sales and
marketing approach to support this strategy. At the national and regional level,
we employ a sales force that is responsible for negotiating and signing "network
provider" contracts with healthcare payors.
8
9
In exchange for network provider status, we offer our products and services at
discounted pricing. At the local level, we use a marketing team and our
StatScript pharmacies to build relationships with physicians, clinics,
hospitals, transplant centers, and support groups to secure additional patients.
By marketing through these various constituencies, we can improve care,
facilitate existing patient compliance, and achieve new patient referrals.
SUPPLIERS
We purchase prescription drugs and related products directly from manufacturers
and wholesalers. We stock approximately 2,700 brand name and generic
prescription drugs and related products. We take advantage of special discounts
offered by suppliers when available. When we receive a prescription for a drug
that we do not have in inventory, we generally can obtain the required item from
a wholesaler the same day. The availability and prices of the products we
distribute are subject to market conditions. We regularly seek to enhance our
distribution contract opportunities with existing or new manufacturers.
REIMBURSEMENT
We have developed a significant level of expertise in managing the reimbursement
process. Generally, before delivering products to a patient, we contact the
appropriate payor to determine the patient's health plan coverage and the
portion of costs that the payor will reimburse. Our reimbursement specialists
review issues such as lifetime limits, pre-existing condition clauses, and the
availability of special state programs. We accept assignment of benefits from
more than 4,000 payors, which substantially eliminates the claims submission
process for many patients.
INFORMATION SYSTEMS
Our mail order operations include a fully integrated information system and an
automatic telephone call distribution system. The information system provides
our service representatives with all of the on-line information needed to
service patients, including product purchase histories, payor billing and
account balances, inventory levels, and co-payment amount requirements.
Mail-order distribution sites are on-line with inventory control, purchasing,
shipping and receiving functions. The telephone system has an automatic call
distribution capability utilizing the latest advances in skills-based call
routing to distribute incoming calls to customer service representatives. We are
linked to key customers for eligibility verification and electronic claims
submission.
We have undertaken a major e-commerce initiative to create a commercial presence
on the Internet, including the sale of prescription medications, the
dissemination of disease-specific information, and the sale of health-related
products. Our initial emphasis has been to Web-enable the prescription ordering
and fulfillment functions for our existing customers. We expect that the
proportion of our transactions conducted by electronic commerce will increase in
the future.
9
10
COMPETITION
The distribution of prescription drugs is a highly competitive business. We
compete on the basis of service, convenience, product availability, price, and
outcomes impact. Although there are significant competitors in each of our lines
of business, we believe that only a few competitors offer a similar combination
of mail-order and retail specialty pharmacy distribution encompassing the
disease states that we manage.
LIABILITY INSURANCE
Providing healthcare services entails inherent risk. In recent years,
participants in the healthcare industry have become subject to an increasing
number of lawsuits, many of which involve large claims and significant defense
costs, and we may from time to time be subject to such suits. We maintain
general liability insurance, including professional liability coverage, in an
amount deemed adequate by management. We are further insured for product
liability under various policies held by drug manufacturers.
GOVERNMENT REGULATION
Our 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 us. Management believes we are in substantial compliance with all existing
statutes and regulations materially affecting the conduct of our business.
Our primary mail pharmacy is regulated under the laws of the State of Minnesota.
We are also regulated by the laws of each state in which we maintain a retail or
mail pharmacy. We also deliver prescription products from our licensed
pharmacies to patients in states in which we do not operate a pharmacy. Many of
these states have laws or regulations requiring out-of-state pharmacies to be
licensed as a condition to the delivery of prescription products to their
residents. We believe that we are in material compliance with these laws and
regulations in substantially all relevant jurisdictions.
Federal laws also establish standards for the labeling, packaging, advertising,
and adulteration of prescription drugs and the dispensing of "controlled"
substances and prescription drugs. The Federal Trade Commission and United
States Postal Service require mail service pharmacies to engage in truthful
advertising, stock a reasonable supply of drugs, fill mail orders within 30 days
and, if that is impossible, inform the consumer of his or her right to a refund.
We believe that we are in substantial compliance with these requirements.
Substantially all of our products are shipped by commercial delivery services,
with the exception of walk-in customers at our StatScript retail pharmacies.
We are subject to various federal laws that regulate healthcare services
receiving governmental reimbursement. These laws include the "fraud and abuse"
provisions of the Social Security Act, which prohibit remuneration in return for
referrals of patients who are eligible for reimbursement under the Medicare or
Medicaid programs. Violations of the law may result in civil and criminal
penalties. Civil penalties range from monetary fines that may be levied on a per
violation basis to temporary or permanent exclusion from these programs. In
addition, numerous state have existing or pending laws prohibiting financial
arrangements among healthcare providers. Violations of these laws include civil
and criminal penalties, as well as the suspension or termination of a provider's
ability to continue to provide services in the state.
10
11
The federal prohibitions on inducements for referrals are broadly drafted, and
the fraud and abuse provisions of the Social Security Act concerning illegal
remuneration arrangements have been broadly construed by federal courts, the
Department of Health and Human Services ("HHS"), and officials of the Office of
Inspector General. "Safe harbor" regulations define a narrow scope of practices
that will be exempted from prosecution or other enforcement action under the
illegal remuneration provisions, but due to the narrow scope of the safe harbor
exemptions, the legality of numerous types of business and financial
relationships between healthcare providers and practitioners remains uncertain.
Similarly, state fraud and abuse laws, which vary from state to state, are often
vague and rarely have been interpreted by courts or regulatory agencies.
In situations where we purchase or provide services and products or otherwise
contract with healthcare providers who may be in a position to refer patients to
us, we believe we have exercised care in an effort to structure such
arrangements to comply with existing federal and state laws.
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 we operate have adopted or are considering various healthcare reform
proposals. We anticipate 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. Any
of these developments could affect our ability to carry out our business.
SEASONALITY
Historically, we have had higher revenues in our second fiscal quarter (ending
December) than in our first, third, or fourth fiscal quarters. We believe the
seasonality of our revenues and earnings is a consequence of the acceleration of
purchases of prescription drugs 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).
EMPLOYEES
As of August 31, 2001, we employed 324 full-time and 23 part-time employees.
None of our employees are represented by a labor union, and we believe that our
employee relations are excellent.
RECENT ACQUISITIONS
In addition to our earlier described pharmacy and transplant acquisitions, in
February, 1999, we purchased the assets of Community Prescription Center, a San
Diego, California retail pharmacy specializing in HIV/AIDS. The business was
acquired for $1.3 million and was integrated into the Company's StatScript
chain.
RECENT DISPOSITIONS
In November, 1998, we sold our publishing division assets to John Wiley & Sons,
Inc., resulting in a $300,000 after-tax gain. The publishing division, which
consisted of approximately 80 book titles, had become a leading independent
publisher of trade books focusing on chronic diseases, health and wellness.
11
12
In September, 2000, we sold our Home Service Medical ("HSM") subsidiary to
Express-Med, Inc. of New Albany, Ohio. HSM was a direct-to-consumer, mail order
catalog business that contributed $15.0 million in revenue to our total results
for the fiscal year ended June 30, 2000. We received $2.7 million in cash and a
$3.8 million subordinated note maturing in 42 months and bearing an annual
interest rate of 11%.
In January 2001, we sold the assets of our wholly owned diagnostic products
subsidiary, MEDgenesis Inc., to Medisys PLC of Suffolk, England. The sale price
of $39.975 million consisted of $30.475 million in cash and $9.5 million in
Medisys common stock. In connection with this sale, we have classified
MEDgenesis as "discontinued operations" for financial reporting purposes. As a
result, all financial results concerning MEDgenesis, have been classified as
discontinued operations.
We have reported Net Income from Discontinued Operations (net of tax) separately
from the Gain on the Sale of Discontinued Operations (net of tax), on the
statement of operations. In total, Discontinued Operations contributed net
income after tax of $15.2 million, or $1.25 per share in fiscal 2001. See Note 3
of Notes to Consolidated Financial Statements in Item 14 of this Form 10-K.
ITEM 2. PROPERTIES
The Company believes that its properties provide a suitable work environment for
employees and the necessary productive capacity to distribute its products and
services. The Company currently leases all of its properties. These properties
are described below:
FUNCTIONS LOCATIONS SIZE LEASE TERMS
(square
feet)
Corporate office and Minnetonka, MN 62,000 Through March 31, 2005
mail order pharmacy,
including
customer service and
distribution
StatScript business Overland Park, KS 8,000 Through October 14,
office 2003; to be
discontinued in the
second fiscal quarter
of 2002.
Retail and Mail Order Arizona, California, Various Expire over periods
specialty pharmacies Colorado, Florida, up to extending to June,
Georgia, Illinois, 4,200 2010
Indiana, Louisiana,
Massachusetts,
Missouri, Nevada,
New York, Ohio,
Oregon,
Pennsylvania,
Tennessee, Texas,
Utah, Washington,
Washington D.C.,
Wisconsin
ITEM 3. LEGAL PROCEEDINGS
On June 15, 2001, a putative class action lawsuit captioned Judith Barclay v.
Chronimed Inc., et. al. (01-CV-1092 DWF) was commenced in the United States
District Court for the District of Minnesota against Chronimed and certain of
our current and former officers and directors. The Complaint alleges that
Chronimed and individual defendants violated Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10(b)-5 promulgated thereunder, and that the
individual defendants violated Section 20(a)
12
13
of the Exchange Act. Eight other lawsuits asserting claims identical to the
Barclay case were brought by other plaintiffs during the weeks following the
initial filing. The nine lawsuits have been consolidated into a single case.
The Complaints allege in general terms that Chronimed made false and misleading
statements about our financial statements in violation of the securities laws.
The alleged violations arise out of the requirement to restate previously issued
financial statements. We issued public statements regarding these matters on
June 14, June 21, August 14, August 23, and September 25, 2001. Each plaintiff
seeks compensatory damages in an unstated amount, interest, fees, expenses, and
unspecified equitable relief. We are unable to reasonably quantify the alleged
damages on the basis of the general allegations of the Complaints.
We believe that the above claims are wholly without merit and will vigorously
defend against the lawsuits. We have retained the law firm of Dorsey & Whitney
LLP to represent us in the shareholder actions. An adverse ruling in these
actions, in excess or outside of our insurance coverage could have a material
adverse impact on Chronimed.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
13
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock, $.01 par value per share, is currently traded on the
Nasdaq Stock Market. The following table sets forth the quarterly high and low
closing transaction prices as reported by Nasdaq for the years ended June 30,
2000, and June 29, 2001.
High Low
-------- ---------
Fiscal Year 2000
First Quarter $ 10.62 $ 7.19
Second Quarter 8.34 7.00
Third Quarter 9.94 7.19
Fourth Quarter 7.62 5.31
Fiscal Year 2001
First Quarter $ 8.31 $ 6.62
Second Quarter 12.12 6.00
Third Quarter 15.00 10.25
Fourth Quarter 13.94 4.09
NUMBER OF SHAREHOLDERS OF RECORD
The number of shareholders of record of the Company's Common Stock as of July
25, 2001 was approximately 380. The number of beneficial owners of the Company's
Common Stock was approximately 4,600 as of the same date.
DIVIDENDS
Chronimed has never declared or paid cash dividends on its Common Stock. The
Company does not anticipate paying cash dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
None.
14
15
ITEM 6. SELECTED FINANCIAL DATA
Selected financial information for the past five fiscal years is set forth
below. The Company's financial statements for the fiscal year ended June 30,
2000 and for the first three quarters of the fiscal year ended June 29, 2001
have been restated. The restatement reflects a reduction in revenues, an
increase in bad debt expense, and an increase in allowance for doubtful
accounts. The related adjustments are limited to the Company's Retail segment.
The restatement also reflects an increase to the gain reported in the Company's
results from discontinued operations from the sale of MEDgenesis in the third
quarter of fiscal 2001. See Note 2 to of Notes to Consolidated Financial
Statements.
JUNE 30,
FINANCIAL RESULTS JUNE 29, 2000 JULY 2, JULY 3, JUNE 27,
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 2001 (AS RESTATED) 1999 1998 1997
------------------------------------------------------------------------------------------------------------------------------------
Revenue $ 297,925 $ 222,497 $ 168,624 $ 115,614 $ 88,207
Bad debt expense 7,140 7,154 945 993 1,775
Income (loss) from continuing operations (5,774) (9,115) 173 1,046 693
Interest income (expense), net 568 (191) 419 1,453 798
Other (loss) income (1,837) -- 503 -- 1,700
Income tax benefit (expense) 2,585 3,398 (427) (1,019) (1,169)
Net income (loss) from continuing operations (4,458) (5,908) 668 1,480 2,022
Income from discontinued operations, 15,235 1,840 3,459 5,671 5,022
net of tax
Net income (loss) $ 10,777 $ (4,068) $ 4,127 $ 7,151 $ 7,044
====================================================================================================================================
Diluted earnings (loss) per share:
Income (loss) from continuing operations $ (0.37) $ (0.49) $ 0.06 $ 0.12 $ 0.16
Income from discontinued operations 1.25 0.15 0.28 0.47 0.40
------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.88 $ (0.34) $ 0.34 $ 0.59 $ 0.56
====================================================================================================================================
Weighted average share outstanding -- diluted 12,206 12,116 12,256 12,221 12,659
------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
------------------------------------------------------------------------------------------------------------------------------------
Working capital $ 36,982 $ 36,393 $ 31,472 $ 26,147 $ 29,812
Total assets 98,993 78,430 78,542 71,280 62,985
Shareholder's equity 75,502 63,057 66,487 62,319 53,360
------------------------------------------------------------------------------------------------------------------------------------
NOTES:
Fiscal 1997 results include the following one-time charges and benefits
(pre-tax):
-Write-off of $1.4 million receivable from Health Craft International,
classified as Operating Expense
-Gain of $1.7 million on disposition of Orphan Medical, classified as
Other Income
Fiscal 1999 results include a $0.5 million gain (pre-tax) on the disposition of
the Company's publishing division, classified as Other Income (see ITEM 1,
RECENT DISPOSITIONS)
Fiscal 2000 results have been restated (see Note 2 of Notes to the Consolidated
Financial Statements), and include the following one-time charges (pre-tax) to
Operating Expense:
-Write-down of $5.5 million investment in Clinical Partners, an HIV
contracts management business within the Retail segment
-One-time expenses related to the retention of an investment banker in the
review of corporate strategic alternatives of $0.9 million (see ITEM 7,
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS)
15
16
-One-time charges relating to the contemplated spin-off of MEDgenesis
(which did not occur) totaling $0.5 million (see ITEM 1, RECENT
DISPOSITIONS)
Fiscal 2001 results include the following charge and benefit:
-A one-time $13.8 million after-tax gain on the sale of MEDgenesis in
January, 2001 (see Note 3 of Notes to the Consolidated Financial
Statements)
-A loss on the sale of available-for-sale securities of $1.8 million
(pre-tax)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL RESTATEMENT
The Company's financial statements for the fiscal year ended June 30, 2000 and
for the first three quarters of the fiscal year ended June 29, 2001 have been
restated. The restatement reflects a reduction in revenues, an increase in bad
debt expense, and an increase in allowance for doubtful accounts. The related
adjustments are limited to the Company's Retail segment. The restatement also
reflects an increase to the gain reported in the Company's results from
discontinued operations from the sale of MEDgenesis in the third quarter of
fiscal 2001. The changes to the financial statements resulting from the
restatement are described below.
CONTINUING OPERATIONS
Revenue
In the fourth quarter of fiscal 2001, management determined that software system
and process errors in its Retail segment resulted in the overstatement of
revenue. Following the implementation of new software systems in early fiscal
2000, certain transactions that had been canceled or rejected at the pharmacy
level were transferred from the pharmacy operating system, without adjustment,
to the Retail revenue accounting system effectively resulting in a duplicate
revenue entry. As a result, revenue was overstated in the Company's accounting
records. The overstatement of revenue caused by these errors totaled $3,390,000
in fiscal 2000 ($827,000, $914,000, $979,000 and $670,000 for the first, second,
third and fourth quarters, respectively) and $2,595,000 in fiscal 2001
($815,000, $1,030,000 and $750,000 for the first, second and third quarters,
respectively). The Company has taken steps to correct its systems and processes
to prevent duplicate revenue entries.
In addition, management identified a large uncontracted payor in the Company's
Retail segment that began paying claims in fiscal 2001 using a significantly
lower rate schedule than the payor had previously used. As a result, the
Company's traditional methods of estimating the revenue allowance for payor
discounts did not accurately account for the significant reduction in
reimbursement. The resulting overstatement of revenue in the first three fiscal
quarters of fiscal 2001 totaled $1,918,000 ($760,000, $556,000 and $602,000 for
the first, second and third quarters, respectively). The Company has taken steps
to improve its methods for determining the revenue allowance for payor
discounts.
16
17
Bad Debt Expense and Allowance for Doubtful Accounts
During fiscal 2001, management learned that personnel at the Company's Retail
segment had fallen behind in posting cash receipts to customer accounts
receivable records and were preparing aging reports that contained significant
inaccuracies, which prevented timely and accurate monitoring of open accounts
receivable. Management determined that these inaccurate aging reports they had
relied upon to estimate the allowance for doubtful accounts receivable at June
30, 2000 and the first three quarters of fiscal 2001 had caused them to
underestimate the amount of the allowance at those dates. As a result,
management has reassessed its estimate for doubtful accounts receivable and
increased the allowance at June 30, 2000 and at the end of each of the first
three quarters of fiscal 2001. The allowance for doubtful accounts and related
bad debt expense was increased by $4,200,000 at June 30, 2000, and $989,000,
$603,000 and $902,000 at the end of each of the first, second and third
quarters, respectively, of fiscal 2001. The Company has taken steps to ensure
the accuracy of the information on which it will base future estimates of
doubtful accounts.
DISCONTINUED OPERATIONS
Gain on Sale of MEDgenesis
The financial statements for the third quarter of fiscal year 2001 have also
been restated to reflect a correction in the computation of the gain on sale of
MEDgenesis in January 2001. The restated gain was $13.8 million rather than
$12.8 million as previously reported by the Company. In the original
determination of the gain, the net book value of MEDgenesis' assets was
overstated because certain liabilities had not been properly assigned to
MEDgenesis, which resulted in the gain on sale reflected in Discontinued
Operations being understated by $1.0 million.
17
18
INCOME AND EXPENSE ITEMS AS A PERCENTAGE OF REVENUE
FISCAL YEAR
-----------------------------------
2000
2001 (AS RESTATED) 1999
-----------------------------------
Revenue
Mail Order 51.5% 53.6% 61.5%
Retail 48.5 46.4 38.5
--------------------------------------------------------------------------------
100.0 100.0 100.0
Cost of revenue 88.0 83.4 81.5
--------------------------------------------------------------------------------
Gross profit 12.0 16.6 18.5
Operating expenses
Selling and marketing 1.1 2.0 2.7
General and administrative 10.4 13.0 15.1
Bad debt expense 2.4 3.2 0.6
Other expense -- 2.5 --
--------------------------------------------------------------------------------
13.9 20.7 18.4
Income (loss) from continuing operations (1.9) (4.1) 0.1
Interest income (expense), net 0.2 -- 0.3
Other income (loss) (0.6) -- 0.3
Income tax benefit (expense) 0.8 1.5 (0.3)
--------------------------------------------------------------------------------
Net income (loss) from continuing operations (1.5) (2.6) 0.4
Income from discontinued operations,
net of tax 5.1 0.8 2.0
--------------------------------------------------------------------------------
Net income (loss) 3.6% (1.8)% 2.4%
BUSINESS
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 payors to improve clinical and
financial outcomes.
Chronimed is comprised of two operating segments -- Mail Order and Retail. This
view best describes the business and reflects how it is managed and resourced.
The Mail Order segment includes the biotech injectables program, organ
transplant medications, and Home Service Medical (the Home Service Medical
business was sold as of September 1, 2000 - see Note 5 of Notes to Consolidated
Financial Statements in Item 14 of this Annual Report on Form 10-K). The Retail
segment focuses primarily on HIV/AIDS through the StatScript specialty pharmacy
stores.
During the year, the Company disposed of or shut down certain lines of business
(together, the "Disposed Businesses"). Within the Mail Order segment, the Home
Service Medical ("HSM") business was sold and the diabetes service centers were
closed in the first quarter of fiscal 2001. Within the Retail segment, the
remaining Clinical Partners business ceased operations in the second quarter of
fiscal 2001.
18
19
RESULTS OF OPERATIONS
FISCAL 2001 COMPARED TO FISCAL 2000 (AS RESTATED)
REVENUE
Total revenue for fiscal 2001 was up 34% to $297.9 million from $222.5 million
in fiscal 2000, reflecting strong existing businesses as well as growth from
three acquisitions in the second half of the year, which together will be
referred to as the "Acquired Businesses". The existing business and the Acquired
Businesses together will be referred to as the "On-going Business". The Acquired
Businesses include four retail pharmacies of American Prescription Providers
("APP") (acquired in February 2001) and a single location pharmacy in Sherman
Oaks, California ("Oaks") (acquired in April 2001) in the Retail segment, and
the organ transplant pharmacy of SangStat Medical ("SangStat") (acquired in
April 2001) in the Mail Order segment. Overall, these three acquisitions
contributed one-fourth ($22.9 million) of the Company's 45% ($91.9 million)
year-on-year growth (excluding the Disposed Businesses, as noted below). By
revenue source, fiscal 2001 compares to fiscal 2000 as follows:
SOURCES OF REVENUE GROWTH
($ THOUSANDS) FISCAL YEAR
------------------------------------
2000
2001 (AS RESTATED) % CHANGE
------------------------------------
Mail Order Segment
On-going Business $151,224 $102,286 +48%
Disposed Businesses 2,237 16,884 -87%
--------------------------------------------------------------------------------
Total Mail Order 153,461 119,170 +29%
Retail Segment
On-going Business 144,104 101,192 +42%
Disposed Businesses 360 2,135 -83%
--------------------------------------------------------------------------------
Total Retail 144,464 103,327 +40%
--------------------------------------------------------------------------------
Total Company $297,925 $222,497 +34%
================================================================================
The Mail Order segment grew 29% year-on-year, despite the September 2000 sale of
the segment's Home Service Medical ("HSM") business and the closure of its
diabetes service centers. Excluding these businesses in both years, the
year-on-year growth was 48%. This growth was driven primarily by the addition of
new patients from the biotech injectables contract with Aetna that became
effective July 15, 2000. The SangStat acquisition in April 2001 strengthened the
Company's position in the transplant market and contributed approximately $2
million in fourth quarter revenue.
The Retail segment grew 40% for the year due to continued additions of new
patients at existing stores and the acquisition of the APP and Oaks specialty
pharmacies. The newly acquired stores accounted for approximately one half of
the 42% fiscal year growth in the On-going Business, while same store revenue
accounted for the remainder of the revenue growth, with a 22% increase for the
year. The Retail segment faced significant reimbursement pressure in fiscal
2001, which lowered the revenue growth, rate and reduced gross margins. The
Company has begun to expand its retail product offerings beyond its current
HIV/AIDS focus to include organ transplant drugs and biotech injectable
medications as a means to enhance future growth and profitability.
19
20
COST OF REVENUE AND GROSS PROFIT
Total gross profit dollars decreased by $1.2 million from $36.9 million in
fiscal 2000 to $35.7 million in fiscal 2001. Gross margins as a percentage of
revenue declined 4.6 percentage points, from 16.6% in fiscal 2000 to 12.0% in
fiscal 2001. However, exclusive of the Disposed Businesses, higher revenue led
to a gross profit dollars increase of $4.6 million, from $30.2 million in fiscal
2000 to $34.8 million in 2001, while margins declined 3.1 percentage points,
from 14.9% to 11.8% in the respective years.
Mail Order margins as a percentage of sales declined slightly due to a change in
product mix toward lower margin products, a continuing supply shortage of a
high-margin product (beginning in January, 2001), and lower than average
reimbursement rates under the Company's contract with Aetna.
Two primary factors contributed to a significant decline in Retail margins.
First, a large uncontracted payor significantly reduced its reimbursement
schedule, which caused an approximate two percentage point decrease in the
segment's margins. Second, continued pricing pressures from other payors at
existing stores lowered the overall segment margins by an additional two
percentage points.
Chronimed anticipates that payors will continue to exert downward pressure on
the prices we are able to charge as payors seek to contain healthcare costs,
which will negatively affect margins in the future. However, we expect the
pricing pressure to be less significant in fiscal 2002 than in fiscal 2001. The
Company is working to offset this pricing pressure in a number of ways,
including major selling and marketing efforts to drive the more profitable
transplant business into both the Retail and Mail segments; enhanced programs
with manufacturers and wholesalers to reduce product costs; and a store-by-store
focus on payor and drug mix to improve gross margins.
OPERATING EXPENSES
The Company's operating expenses include selling and marketing, general and
administrative (G&A), and bad debt expenses. The Company's G&A expenses include
both corporate G&A expenses (corporate management, information systems,
accounting, human resources) and direct segment G&A expenses (division
management, customer service, billing, pharmacy fulfillment). The Company's
business model for operating expenses is to continue to improve efficiency on
greater volume by leveraging infrastructure costs.
The following chart shows the impact of the Disposed Businesses on the
year-to-year comparisons of selling and marketing expenses:
SELLING AND MARKETING EXPENSES
($ THOUSANDS) FISCAL YEAR
-----------------------------------
2001 2000 % CHANGE
-----------------------------------
Mail Order Segment
On-going Business $1,198 $ 991 21%
Disposed Businesses 433 1,804 -76%
--------------------------------------------------------------------------------
Total Mail Order 1,631 2,795 -42%
Retail Segment
On-going Business 1,578 1,374 +15%
Disposed Businesses -- 286 -100%
--------------------------------------------------------------------------------
Total Retail 1,578 1,660 -5%
--------------------------------------------------------------------------------
Total Company $3,209 $4,455 -28%
================================================================================
20
21
Total Company selling and marketing expenses decreased $1.3 million, or 28% in
fiscal 2001. Chronimed's selling and marketing expenses for its On-going
Business actually increased $0.4 million in fiscal 2001, from $2.4 million to
$2.8 million, as a result of expanded efforts in both the Mail Order and Retail
segments. The Disposed Businesses accounted for a $1.7 million decrease in
selling and marketing in fiscal 2001.
Total Mail Order selling and marketing expenses decreased $1.2 million, or 42%
in fiscal 2001, due to the elimination of the Disposed Businesses. Excluding the
Disposed Businesses, selling and marketing expenses increased $0.2 million, or
21%, as costs remained essentially constant as a percentage of revenue at 0.8%.
Total Retail selling and marketing expenses decreased $0.1 million, or 5% in
2001, again due to the elimination of the Disposed Businesses. Excluding the
Disposed Businesses, selling and marketing expenses increased $0.2 million due
to increased sales activity in support of new specialty pharmacies, and declined
as a percentage of revenue from 1.4% to 1.1%.
In the fourth quarter of fiscal 2001, the Company consolidated its selling and
marketing efforts into one organization serving both the Mail Order and Retail
segments. The Company believes this integrated approach will increase the
effectiveness of its selling and marketing efforts.
The following chart shows a breakdown of the Company's corporate G&A and direct
segment G&A expenses, excluding bad debt expense.
GENERAL & ADMINISTRATIVE EXPENSES
($ THOUSANDS) FISCAL YEAR
------------------------------------
2001 2000 % CHANGE
------------------------------------
Corporate G&A $ 9,633 $10,306 -7%
Mail Order Segment
On-going Business 5,251 3,804 +38%
Disposed Businesses 244 1,423 -83%
--------------------------------------------------------------------------------
Total Mail Order 5,495 5,227 +5%
Retail Segment
On-going Business 15,603 10,976 +42%
Disposed Businesses 387 2,388 -84%
--------------------------------------------------------------------------------
Total Retail 15,990 13,364 +20%
--------------------------------------------------------------------------------
Total Company $31,118 $28,897 +8%
================================================================================
Total Company general and administrative expenses increased $2.2 million, or 8%
in fiscal 2001, due primarily to Retail store acquisitions in Fiscal 2001 and
higher operating costs in the specialty pharmacy stores. G&A declined as a
percentage of revenue from 13.0% to 10.4%. Excluding Disposed Businesses, the
increase was $5.4 million, or 22%, on comparable revenue growth of 45%.
Corporate G&A expenses decreased by 7%, or $0.7 million, and decreased as a
percentage of revenue from 4.7% to 3.2%. The decline is attributed primarily to
the cost of the Company's pursuit of strategic alternatives in the first three
quarters of fiscal 2000 ($0.9 million) and certain costs incurred in the fourth
quarter of fiscal 2000 related to the contemplated spin-off of the MEDgenesis
diagnostics products business ($0.5 million). When Chronimed announced its
intention to spin off MEDgenesis in the third quarter of fiscal 2000, it also
announced the discontinuance of its exploration of strategic
21
22
alternatives. The Company incurred no such related costs in fiscal 2001. Aside
from these items, corporate G&A expenses increased 9%, a favorable comparison
against a 35% increase in revenue.
Mail Order Segment G&A expense grew by 5%, from $5.2 million to $5.5 million.
However, expenses associated with the Disposed Businesses (primarily HSM)
decreased by $1.2 million, offsetting a $1.4 million increase in the On-going
Business. The increase is attributable to increased direct costs (customer
service, billing, fulfillment) associated with the revenue growth. As a
percentage of on-going Mail Order revenue, on-going Mail Order G&A expense
decreased slightly from 3.7% to 3.5%.
Retail segment G&A expenses increased 20%, or $2.6 million. Expenses relating to
the Disposed Businesses (primarily Clinical Partners) decreased by $2.0 million,
while expenses relating to the On-going Businesses increased by $4.6 million, or
42%, from $11.0 million to $15.6 million. The expense growth was in line with
revenue growth; as a percentage of revenue, these expenses increased only
slightly from 10.6% to 10.8%. The absolute dollar growth of $4.6 million in the
On-going Business is attributed to the APP and Oaks acquisitions by the Retail
segment during fiscal 2001 and increasing labor and facility costs in the
specialty pharmacy stores.
BAD DEBT EXPENSES
($ THOUSANDS) FISCAL YEAR
-------------------------------------
2000
2001 (AS RESTATED) % CHANGE
-------------------------------------
Corporate $ (119) $ 140 nm
Mail Order Segment
On-going Business 1,524 1,272 +20%
Disposed Businesses 39 424 -91%
--------------------------------------------------------------------------------
Total Mail Order 1,563 1,696 -8%
Retail Segment
On-going Business 5,693 5,124 +11%
Disposed Businesses 3 194 -98%
--------------------------------------------------------------------------------
Total Retail 5,696 5,318 +7%
--------------------------------------------------------------------------------
Total Company $ 7,140 $ 7,154 0%
================================================================================
Total Company bad debt expense remained nearly flat in fiscal 2001 compared to
fiscal 2000, at $7.1 million. As a percent of revenue, bad debt expense was 1.9%
and 2.4% in the respective fiscal 2001 and 2000 periods. As a part of the
Company's financial restatement as described above, management determined that
it had to reassess its allowance for doubtful accounts in the StatScript Retail
segment, including fiscal 2000. As a result, the Retail allowance for doubtful
accounts was increased by $4.2 million in fiscal 2000 and $2.5 million in the
first three quarters of fiscal 2001. Looking forward to fiscal 2002, the Company
expects that its bad debt expense as a percent of revenue will decrease
approximately one percent. The Company has taken steps to ensure timely and
accurate reviews of its reserve for doubtful accounts receivable.
INTEREST INCOME
The increase in interest income from an expense of $0.2 million in fiscal 2000
to income of $0.6 million in fiscal 2001 is due primarily to $0.3 million of
interest earned from the invested proceeds from the sale of MEDgenesis in
January, 2001, and $0.3 million of interest earned on a note receivable from
Express-Med arising from the sale of HSM. The MEDgenesis sale proceeds were
later used to fund acquisitions in the third (APP) and fourth quarters (Oaks and
SangStat) of fiscal 2001. The Company expects to return to a net borrowing
position as it continues its business growth.
22
23
OTHER INCOME (LOSS)
The $1.8 million loss in fiscal 2001 reflects the Company's loss on sale of
available-for-sale securities that had been received as consideration in the
sale of the Company's MEDgenesis business. These securities were received in
January 2001 (third quarter of fiscal 2001), and then sold in both the third and
fourth quarters of fiscal 2001. All securities have been sold as of June 29,
2001.
INCOME TAXES
In fiscal 2000 and 2001 the income tax benefits on operating losses were at 37%.
See Note 9 of Notes to Consolidated Financial Statements for the reconciliation
to the Company's statutory rate. Looking forward, the Company expects its
combined Federal and State tax rate to be approximately 39%.
FISCAL 2000 (AS RESTATED) COMPARED TO FISCAL 1999
REVENUE
Total revenue for 2000 was up 32% to $222.5 million from $168.6 million in 1999,
driven primarily by growth in the Retail segment. By revenue source, 2000
compares to 1999 as follows:
SEGMENT TOTAL YEAR
Mail Order +15%
Retail +59%
The Mail Order segment grew 15% for the year due primarily to continued patient
acquisition from managed care plans in the biotech injectables program. The
Retail segment grew 59% for the year due to continued growth from new pharmacies
and from new patients in existing stores.
COST OF REVENUE
Total gross profit dollars increased $5.7 million in fiscal 2000, from $31.2
million in fiscal 1999 to $36.9 million in fiscal 2000, but declined in fiscal
2000 as a percentage of revenue from 18.5% to 16.6%. The gross profit dollar
increase came from significant revenue growth in the Retail segment. Gross
profit as a percent of revenue decreased in both segments in fiscal 2000. Mail
Order declines were caused by the high-volume contracted pricing program with
Aetna and on-going managed care pricing pressure, most notably in the Biotech
Injectables program. Retail margins also decreased, as the retail market was
also negatively affected by the cost containment efforts of managed care
providers.
OPERATING EXPENSES
Total operating expenses increased $15.0 million, or 48%, in fiscal 2000, from
$31.0 million in fiscal 1999 to $46.0 million in fiscal 2000. Approximately
$11.1 million of this increase came from four specific charges that were unusual
or infrequent in nature, to be discussed below. Operating expenses as a
percentage of revenue increased from 18.4% in fiscal 1999 to 20.7% in fiscal
2000, including the specific charges that were unusual or infrequent in nature.
First, a $0.9 million expense is included in fiscal 2000 G&A related to the
Company's strategic planning endeavor, including its engagement with an
investment banker. Second, the Company incurred a $5.5 million charge,
classified as Other Expense within operating expenses, as a result of exiting
the Clinical Partner's contract management line. Third, G&A expenses also
include $0.5 million of costs associated with the disposition of the Company's
Diagnostic Products business (MEDgenesis), which was completed in January 2001.
Fourth, concurrent with the Company's restatement as described above, management
determined that the information on which it had based its previous allowance for
doubtful accounts receivable was
23
24
incorrect. As a result, the allowance for doubtful accounts was increased by
$4.2 million in fiscal 2000. Overall, excluding these four specific events,
operating expenses would have been $34.9 million or 15.7% of revenue in fiscal
2000.
Within overall operating expenses, selling and marketing expenses declined $0.1
million, or 2.3%, in fiscal 2000 as a result of cost containment efforts in the
Mail Order segment in both the biotech injectables and transplant businesses
while the Company assessed its strategic alternatives. As a percentage of
revenue, selling and marketing expenses decreased from 2.7% in fiscal 1999 to
2.0% in fiscal 2000.
INTEREST INCOME
The decrease in net interest income from $0.4 million in fiscal 1999 to net
interest expense of $0.2 million in fiscal 2000 is due to a decline in interest
income from the Orphan Medical receivable, which was paid in full in fiscal
1999, and to short-term borrowings incurred throughout fiscal 2000 to finance
Chronimed's growth.
OTHER INCOME
In fiscal 1999 the Company recognized a pre-tax gain of $0.5 million, recorded
as Other Income in the financial statements, as a result of selling its
publishing business to John Wiley and Sons, a New York publisher, for $1.8
million.
INCOME TAXES
The income tax rate changed from a 39% expense on an operating profit in fiscal
1999 to a 37% benefit on an operating loss in fiscal 2000 due to certain
potential non-deductible expenses incurred as part of the spin-off efforts in
2000. See Note 9 of Notes to Consolidated Financial Statements for the
reconciliation to the Company's statutory rate.
LIQUIDITY AND CAPITAL RESOURCES
As of June 29, 2001, the Company had $37.0 million of working capital, compared
to $36.4 million as of June 30, 2000. During 2001, the Company utilized $1.3
million of cash from operating activities. The average days sales outstanding
(DSO) of the Company's accounts receivable improved from 61 days at June 30,
2000 to 42 days at June 29, 2001. Faster payment from the Company's largest
payor, the discontinuance of the Disposed Businesses, and the higher proportion
of Retail sales, which generally are paid quickly, led to this improvement,
along with the write-off of old balances during the fourth quarter as part of
the Company's extensive review of accounts receivable. Nonetheless, the Company
used $1.4 million in cash to finance its receivables growth, separate from
acquisitions. The average days inventory on hand also improved from 13 days at
June 30, 2000 to 10 days at June 29, 2001. The Company used $1.5 million in cash
to finance its inventory growth, separate from acquisitions. The Company expects
its inventory to perform at or below 11 days on hand in fiscal 2002.
Approximately $24.8 million of cash was used to acquire APP, Oaks, and SangStat
during fiscal 2001, while cash provided by discontinued operations and the
proceeds from the sale of HSM and MEDgenesis provided $18.6 million. In
addition, $2.9 million was used for purchases of property and equipment,
primarily leasehold improvements to the StatScript specialty pharmacies.
Approximately $2.6 million of cash was provided by the issuance of Common Stock
under employee stock option and purchase programs and short-term borrowings.
24
25
The Company had no long-term debt as of year-end 2001 and 2000. Shareholders'
equity as of year-end 2001 and 2000 was $75.5 million and $63.1 million,
respectively. Net tangible assets, an indicator of borrowing capacity, as of
year end 2001 and 2000 was $45.2 million and $54.0 million, respectively. The
Company had an unsecured discretionary line of credit totaling $15 million that
was scheduled to terminate January 31, 2001 but was extended through July 31,
2001. Due to the need to restate its financial statements, the Company was not
in full compliance with its line of credit covenants as of June 29, 2001. On
July 31, 2001 the Company received an extension of this line of credit through
October 15, 2001. As part of the extension agreement, the Company obtained a
waiver of its line of credit covenants from the lender, pending the delivery of
audited financial statements by October 15, 2001. Under the terms of the
extended agreement, the debt is secured by receivables and inventory, and bears
interest at Prime Rate plus 0.25%. The Company also pays a commitment fee of
0.5% on the unused portion of the line of credit.
There was $4.1 million of short-term borrowings outstanding under the Company's
line of credit at June 29, 2001. The Company anticipates that upon presentation
of audited financial statements, it will be able to secure further extensions of
the line of credit agreement with its lender under acceptable terms. The Company
believes that the line of credit and cash provided by operating activities
should allow it to meet foreseeable cash requirements and provide the
flexibility to fund future working capital growth. The Company would need to
seek additional debt or equity financing beyond its current $15 million line of
credit to fund major business acquisitions or capital spending projects. The
Company is not currently planning any major capital projects beyond its normal
requirements of $2 to $3 million per year.
NEW ACCOUNTING PRONOUNCEMENTS
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement 141, Business Combinations, which prohibits the use of the
pooling-of-interests method of accounting for business combinations, defines the
methodology to be used in measuring goodwill and other intangible assets, and
defines certain disclosure requirements for business combinations. Statement 141
becomes effective for all transactions initiated after June 30, 2001, and for
all purchase method transactions completed after June 30, 2001. Accordingly, the
Company will adopt Statement 141 beginning July 1, 2001, but expects that there
will be no material effect to the financial statements.
On that same date, the FASB also issued Statement 142, Goodwill and Other
Intangible Assets. Under the new rules, goodwill (and intangible assets deemed
to have indefinite lives) will no longer be amortized but will be subject to
annual impairment tests in accordance with the Statement. Other intangible
assets will continue to be amortized over their useful lives. The Company will
apply the new rules beginning in its first fiscal quarter of 2002 that began on
June 30, 2001. Application of the non-amortization provisions of the Statement
is expected to result in a decrease of $2.3 million in amortization of existing
goodwill and an increase in after-tax net income of $1.4 million ($0.11 per
share) in fiscal 2002. In fiscal 2001, goodwill amortization totaled $1.5
million, which would have amounted to after-tax net income of $0.9 million or
$0.07 per share. During fiscal 2002, the Company will perform the first of the
required impairment tests of goodwill and indefinite lived intangible assets as
of June 30, 2001 and has not yet determined what the effect of these tests will
be on the earnings and financial position of the Company.
25
26
FORWARD-LOOKING STATEMENTS
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. These factors include, but are not limited to, the
following: our ability to maintain satisfactory ongoing arrangements with
product manufacturers and wholesalers; pressure from payors to reduce the amount
we charge for pharmaceutical products; compliance with various federal, state,
and local laws and regulations; political, economic and regulatory changes
affecting the health care industry and prescription drug providers; the failure
of management and accounting controls to assure accurate and timely information;
developments in medical research affecting the treatment or cure of conditions
for which we distribute medications; computer system, software or hardware
failures or malfunctions; the ability to successfully integrate acquired
businesses; heightened competition; the costs and the impact of any adverse
rulings in legal or administrative proceedings; our ability to obtain
competitive financing to fund operations and growth; continuing qualification to
list our securities on a national stock exchange; loss or retirement of key
executives or changes in ownership. We urge you to read the cautionary
statement filed as Exhibit 99. This cautionary statement discusses specific
factors which could affect the Company's operations and forward-looking
statements contained in this Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Investments as of June 30, 2000, which the Company classified as
Available-for-Sale, consisted of equity securities of Cell Robotics
International, Inc., with whom we had a distribution and development agreement
for the Lasette laser lancing device. The Company considered any net unrealized
gain or loss on these investments to be temporary and reflected such gains or
losses as a component of shareholders' equity. The Cell Robotics securities were
associated with the sale of the MEDgenesis business and, accordingly, had been
included in net assets of discontinued operations. As of June 29, 2001, the
Company had no material investments in Available-for-Sale securities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary financial information required to be
filed under this Item are presented on pages F-1 through F-24 of this Annual
Report on Form 10-K, and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
26
27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The discussions under the sections captioned "SECTION 16(a) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE", "PROPOSAL 1 - NOMINEES FOR DIRECTORS", "PROPOSAL 1 -
EXISTING DIRECTORS", and "EXECUTIVE OFFICERS" to be included in the Registrant's
definitive proxy statement to be filed with the Securities and Exchange
Commission and delivered to the Registrant's shareholders pursuant to Regulation
14A promulgated under the Securities Exchange Act of 1934 with respect to the
Annual Meeting of Shareholders to be held on November 27, 2001 (the "2001 Proxy
Statement") are incorporated in this Form 10-K by reference in response to this
Item 10.
ITEM 11. EXECUTIVE COMPENSATION
The discussions under the sections captioned "DIRECTOR COMPENSATION" and
"EXECUTIVE COMPENSATION" but excluding the discussions included under the
subsections captioned "EXECUTIVE COMPENSATION - Compensation Committee Report on
Executive Compensation", "EXECUTIVE COMPENSATION - EXECUTIVE OFFICERS", and
"EXECUTIVE COMPENSATION - Comparative Stock Performance" to be included in the
2001 Proxy Statement are incorporated in this Form 10-K by reference in response
to this Item 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The discussions under the sections captioned "OWNERSHIP OF CHRONIMED COMMON
STOCK BY CERTAIN BENEFICIAL OWNERS AND EXECUTIVE OFFICERS" to be included in the
2001 Proxy Statement are incorporated in this Form 10-K by reference in response
to this Item 12.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The discussion under the section captioned "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS" to be included in the 2001 Proxy Statement is incorporated herein
by reference in response to this Item 13.
27
28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
PAGE
(a) DOCUMENTS INCLUDED IN THIS REPORT
1. Financial Statements
Index to Financial Statements F-1
Report of Independent Auditors F-2
Consolidated Balance Sheets as of June 29, 2001,
and June 30, 2000 (As restated) F-3
Consolidated Statements of Operations for the years
ended June 29, 2001, June 30, 2000 (As restated),
and July 2, 1999 F-4
Consolidated Statements of Shareholders'
Equity for the years ended June 29, 2001,
June 30, 2000 (As restated), and July 2, 1999 F-5
Consolidated Statements of Cash Flows for the years
ended June 29, 2001, June 30, 2000 (As restated),
and July 2, 1999 F-6
Notes to Consolidated Financial Statements F-7
2. Financial Statement Schedule
Schedule II -- Valuation and Qualifying Accounts S-1
Financial Statement schedules not included in this Report have been
omitted because they are not applicable or the required information is
shown in the Audited Consolidated Financial Statements or Notes
thereto.
(b) REPORTS ON FORM 8-K
A Current Report on Form 8-K with a date of report of June 14, 2001, was
filed during the fourth quarter of fiscal 2001 to announce the Company's
intent to restate previously reported financial results. No financial
statements were filed with this current report.
A Current Report on Form 8-K with a date of report of June 21, 2001, was
filed during the fourth quarter of fiscal 2001 to provide additional
information regarding its previously announced intention to restate
financial results. No financial statements were filed with this current
report.
(c) EXHIBITS
Exhibits designated by the symbol * are filed with this Annual Report on
Form 10-K. All exhibits not so designated are incorporated by reference to
a prior filing as indicated.
Chronimed will furnish any shareholder a copy of any of the following
exhibits upon payment to the Company of the reasonable costs incurred by
the Company in furnishing any such exhibit.
Portions of the 2001 definitive Proxy Statement are incorporated herein by
reference as set forth in Items 10, 11, 12, and 13 of this Report. Only
those portions directly responsive to the Items of Form 10-K shall be
deemed filed with the Securities and Exchange Commission.
28
29
EXHIBIT
NUMBER DESCRIPTION
------- -------------
3.1 Articles of Incorporation of the Company, as amended. (6)
3.2 Bylaws of the Company, as amended. (7)
4.1 Specimen form of the Company's Common Stock certificate. (2)
4.2 Shareholder Rights Agreement between the Company and Wells Fargo
Bank, National Association (formerly Norwest Bank Minnesota, N.A.)
dated December 18, 1996.(5)
10.1 Form of Incentive Stock Option Agreement. (1) (2)
10.2 Form of Nonstatutory Stock Option Agreement. (1) (2)
10.3 Pharmacy Participation Agreement with Aetna Health Management,
Inc.(11)
10.4 Employment Agreement effective July 1, 2000, between the Company and
Henry F. Blissenbach.(1) (10)
10.5 Employment Agreement dated March 1, 2000, between the Company and
Gregory H. Keane. (1) (9)
10.6 Chronimed Inc. 1994 Stock Option Plan. (3)
10.7 Chronimed Inc. 1994 Stock Option Plan for Directors. (3)
10.8 Chronimed Inc. 1997 Stock Option Plan. (4)
10.9 Chronimed Inc. 1999 Stock Option Plan. (8)
10.10 Chronimed Inc. 2001 Stock Option Plan. (11)
10.11 Facility Lease Agreement with Red Circle L.L.P. dated November 1996.
(5)
10.11a Amendments dated April 1997, December 1997, and July 1998 to Facility
Lease Agreement with Red Circle L.L.P. (8)
10.12 Sale of Distribution Rights Agreement between the Company and Orphan
Medical, Inc. dated June 27, 1997. (5)
10.13 Separation and Release Agreement effective January 5, 2001, between
the Company and Maurice R. Taylor, II. (1) (12)
10.14 Promissory Note of Maurice R. Taylor, II, dated July 24, 2000 (1) (12)
10.15 Asset Purchase Agreement dated December 1, 2000 between Chronimed
Inc. and Medisys PLC. (13) (Incorporated by reference from Exhibit
2.1 to the Company's Form 8-K filed December 18, 2000).
10.15a Amendment to Asset Purchase Agreement dated January 5, 2001 between
Chronimed Inc. and Medisys PLC. (14) (Incorporated by reference to
Exhibit 2.2 in the Company's Form 8-K filed January 19, 2001).
10.16* Asset Purchase Agreement dated February 2, 2001 between Chronimed
Inc. and American Prescription Providers.
21.1* List of Subsidiaries.
29
30
23.1* Consent of Ernst & Young LLP.
99* Cautionary Statements for Purposes of the "Safe Harbor" Provisions of
the Private Securities Litigation Reform Act.
----------------
(1) Management contract or compensatory plan or arrangement.
(2) Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 33-45644), as amended.
(3) Incorporated by reference to the Company's quarterly report on Form 10-Q
filed with The Commission on January 31, 1995, under file number 0-19952.
(4) Incorporated by reference to the Company's quarterly report on Form 10-Q
filed with The Commission on September 26, 1996, under file number
0-19952.
(5) Incorporated by reference to the Company's 1997 Annual Report on Form 10-K
filed with The Commission on September 25, 1997, under file number
0-19952.
(6) Incorporated by reference to the Company's quarterly report on Form 10-Q
filed with the Commission on February 6, 1998, under file number 0-19952.
(7) Incorporated by reference to the Company's quarterly report on Form 10-Q
filed with The Commission on May 5, 1998, under file number 0-19952.
(8) Incorporated by reference to the Company's 1998 Annual Report on Form 10-K
filed with The Commission on September 30, 1998, under file Number
0-19952.
(9) Incorporated by reference to the Company's quarterly report on Form 10-Q
filed with The Commission on May 5,2000, under file Number 0-19952.
(10) Incorporated by reference to the Company's 1998 Annual Report on Form 10-K
filed with The Commission on September 27, 2000, under file Number
0-19952.
(11) Incorporated by reference from Exhibit A in the Company's Definitive Proxy
Statement filed with The Commission on Schedule 14A, October 13, 2000,
under file Number 0-19952.
(12) Incorporated by reference from Exhibit 2.1 in the Company's Form 8-K filed
with The Commission December 18, 2000, under file Number 0-19952.
(13) Incorporated by reference from Exhibit 2.2 in the Company's Form 8-K filed
with The Commission January 19, 2001, under file Number 0-19952.
(14) Incorporated by reference to the Company's quarterly report on Form 10-Q
filed with The Commission on May 14, 2001, under file Number 0-19952.
30
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: October 11, 2001
By /s/ Henry F. Blissenbach
-----------------------------
Henry F. Blissenbach
Chief Executive Officer and
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Henry F. Blissenbach October 11, 2001
--------------------------------------------------
Henry F. Blissenbach - Chief Executive Officer
(Principal Executive Officer and
Chairman of the Board of Directors)
/s/ Gregory H. Keane October 11, 2001
--------------------------------------------------
Gregory H. Keane - Vice President, Chief Financial
Officer and Treasurer
(Principal Financial and Accounting Officer)
/s/ John Howell Bullion October 11, 2001
--------------------------------------------------
John Howell Bullion (Director)
/s/ John H. Flittie October 11, 2001
--------------------------------------------------
John H. Flittie (Director)
/s/ Thomas F. Heaney October 11, 2001
--------------------------------------------------
Thomas F. Heaney (Director)
/s/ David R. Hubers
-------------------------------------------------- October 11, 2001
David R. Hubers (Director)
/s/ Charles V. Owens, Jr. October 11, 2001
--------------------------------------------------
Charles V. Owens, Jr. (Director)
/s/ Stuart A. Samuels October 11, 2001
--------------------------------------------------
Stuart A. Samuels (Director)
31
32
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
Schedule II Valuation and Qualifying Accounts and Reserves S-1
F-1
33
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Chronimed Inc.
We have audited the accompanying consolidated balance sheets of Chronimed Inc.
as of June 29, 2001 and June 30, 2000, and the related consolidated statements
of operations, shareholders' equity and cash flows for each of the three years
in the period ended June 29, 2001. Our audits also included the financial
statement schedule listed in Item 14(a). These financial statements and schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Chronimed Inc. at
June 29, 2001 and June 30, 2000, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended June 29,
2001, in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects, the information set forth therein.
As discussed in Note 2 to the financial statements, the 2000 financial
statements have been restated.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
October 5, 2001
F-2
34
CHRONIMED INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
JUNE 29, 2001 JUNE 30, 2000
----------------------------------------
ASSETS (As restated)
Current assets
Accounts receivable (net of allowances of $9,664 and
$8,459 at June 29, 2001 and June 30, 2000, respectively) $ 40,322 $ 39,762
Income taxes receivable 6,370 1,901
Inventory 8,833 6,111
Other current assets 1,030 848
Deferred taxes 3,918 3,144
------------------------------------------------------------------------------------------------------------------------------------
Total current assets 60,473 51,766
Property and equipment
Property and equipment 16,942 14,889
Allowance for depreciation (9,915) (8,338)
------------------------------------------------------------------------------------------------------------------------------------
Net property and equipment 7,027 6,551
Goodwill, net 30,294 9,031
Net assets of discontinued operations -- 10,465
Deferred taxes 1,030 508
Other assets, net 169 109
------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 98,993 $ 78,430
====================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable 15,524 10,507
Accrued expenses 3,867 2,366
Short-term debt 4,100 2,500
------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 23,491 15,373
Shareholders' equity
Preferred Stock -- --
Common Stock, issued and outstanding shares -- 12,315
and 12,147, respectively 123 121
Additional paid-in capital 54,961 52,839
Retained earnings 20,418 9,641
Accumulated other comprehensive income -- unrealized gain on
available-for-sale securities from discontinued operations -- 456
------------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 75,502 63,057
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 98,993 $ 78,430
====================================================================================================================================
See notes to consolidated financial statements
F-3
35
CHRONIMED INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
YEAR ENDED
----------------------------------------------------------
JUNE 29, 2001 JUNE 30, 2000 JULY 2, 1999
----------------------------------------------------------
(As restated)
REVENUE $ 297,925 $ 222,497 $ 168,624
COST OF REVENUE 262,232 185,606 137,445
------------------------------------------------------------------------------------------------------------------------------
Gross profit 35,693 36,891 31,179
OPERATING EXPENSES
Selling and marketing 3,209 4,455 4,558
General and administrative 31,118 28,897 25,503
Bad debt expense 7,140 7,154 945
Other expense - asset write down -- 5,500 --
------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 41,467 46,006 31,006
(LOSS) INCOME FROM CONTINUING OPERATIONS (5,774) (9,115) 173
Interest income (expense), net 568 (191) 419
Other (loss) income (1,837) -- 503
------------------------------------------------------------------------------------------------------------------------------
(LOSS) INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (7,043) (9,306) 1,095
Income tax benefit (expense) 2,585 3,398 (427)
------------------------------------------------------------------------------------------------------------------------------
NET (LOSS) INCOME FROM CONTINUING OPERATIONS (4,458) (5,908) 668
NET INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX 1,466 1,840 3,459
GAIN ON SALE OF DISCONTINUED OPERATIONS, NET OF TAX 13,769 -- --
------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 10,777 $ (4,068) $ 4,127
==============================================================================================================================
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE:
Continuing operations $ (0.37) $ (0.49) $ 0.06
Discontinued operations 1.25 0.15 0.28
------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share $ 0.88 $ (0.34) $ 0.34
==============================================================================================================================
Basic weighted-average shares 12,206 12,116 12,096
Diluted weighted - average shares 12,206 12,116 12,256
See notes to consolidated financial statements
F-4
36
CHRONIMED INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
ACCUMULATED
OTHER
PAID-IN RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS INCOME TOTAL
------------------------------------------------------------------------------------------------------------------------------------
Balance July 3, 1998 12,081 $ 121 $ 51,668 $ 10,559 $ (29) $ 62,319
Stock repurchase (200) (2) (862) (977) -- (1,841)
Shares issued for employee stock
purchase and option plans 207 2 1,437 -- -- 1,439
Tax benefit of stock option exercises -- -- 256 -- -- 256
Net income -- -- -- 4,127 -- 4,127
Unrealized gain (loss) on available-
for-sale securities -- -- -- -- 187 187
------------------------------------------------------------------------------------------------------------------------------------
Subtotal - Comprehensive Income 4,314
------------------------------------------------------------------------------------------------------------------------------------
Balance July 2, 1999 12,088 121 52,499 13,709 158 66,487
Shares issued for employee stock
purchase and option plans 59 -- 336 -- -- 336
Tax benefit of stock option exercises -- -- 4 -- -- 4
Net (loss) -- -- -- (4,068) -- (4,068)
Unrealized gain (loss) on available-
for-sale securities -- -- -- -- 298 298
------------------------------------------------------------------------------------------------------------------------------------
Subtotal - Comprehensive (Loss) (3,770)
------------------------------------------------------------------------------------------------------------------------------------
Balance June 30, 2000 (As restated) 12,147 121 52,839 9,641 456 63,057
Shares issued for employee stock
purchase and option plans 168 2 1,029 -- -- 1,031
Non-cash charge to compensation expense -- -- 938 -- -- 938
Tax benefit of stock option exercises -- -- 155 -- -- 155
Net income -- -- -- 10,777 -- 10,777
Unrealized gain (loss) on available-
for-sale securities -- -- -- -- (456) (456)
------------------------------------------------------------------------------------------------------------------------------------
Subtotal - Comprehensive Income 10,321
------------------------------------------------------------------------------------------------------------------------------------
Balance June 29, 2001 12,315 $ 123 $ 54,961 $ 20,418 $ -- $ 75,502
------------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
F-5
37
CHRONIMED INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED
----------------------------------------------------
JUNE 29, JUNE 30, JULY 2,
2001 2000 1999
----------------------------------------------------
(As Restated)
OPERATING ACTIVITIES:
Net income (loss) $ 10,777 $ (4,068) $ 4,127
Less income/gain from discontinued operations (15,235) (1,840) (3,459)
------------------------------------------------------------------------------------------------------------------------------------
(Loss) income from continuing operations (4,458) (5,908) 668
Adjustments to reconcile (loss) income from continuing operations
to net cash used in operating activities:
Depreciation and amortization 4,056 4,084 3,838
Deferred income taxes (1,296) (2,710) (825)
Gain on sale of business (22) -- --
Loss on sale of available-for-sale securities 1,844 -- --
Write-off of Clinical Partners contract management line -- 5,500 --
Income tax benefit of stock option exercises 155 4 256
Changes in operating assets and liabilities:
Accounts receivable (1,440) (7,229) (14,070)
Income taxes (4,469) (2,087) 1,197
Inventory (1,529) (716) 411
Accounts payable 5,017 (79) 4,019
Accrued expenses 1,354 414 (1,076)
Other assets (469) 513 (554)
------------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) operating activities (1,257) (8,214) (6,136)
INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (24,777) -- (1,444)
Proceeds from sale of OMI rights -- -- 1,317
Proceeds from sale of Home Service Medical Business 2,734 -- --
Purchases of property and equipment (2,850) (1,229) (1,848)
Sale of available-for-sale securities 7,656 -- 6,536
------------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (17,237) (1,229) 4,561
FINANCING ACTIVITIES:
Net proceeds from issuance of Common Stock 1,031 336 1,439
Repurchase of Common Stock -- -- (1,841)
Net proceeds from borrowings 1,600 2,500 --
------------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities 2,631 2,836 (402)
CASH PROVIDED BY DISCONTINUED OPERATIONS 15,863 3,295 4,262
Increase (decrease) in cash and cash equivalents -- (3,312) 2,285
Cash and cash equivalents at beginning of year -- 3,312 1,027
------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ -- $ -- $ 3,312
====================================================================================================================================
SUPPLEMENTAL DISCLOSURES
Income taxes paid $ 14,092 $ 2,466 $ 1,897
Interest payments $ 102 $ 233 $ 28
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 over 42
months through March 1, 2004. The Company has recorded the note on its
June 29, 2001, balance sheet, offset by the deferred gain of the same
amount.
- The Company sold its MEDgenesis subsidiary to Medisys PLC in January 2001
for $30.475 million in cash and $9.5 million in Medisys common stock.
See notes to consolidated financial statements
F-6
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
BUSINESS
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 payors to improve clinical and
financial outcomes.
FISCAL YEAR
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.
The fiscal years referenced herein are as follows:
FISCAL YEAR YEAR ENDED
2001 June 29, 2001 (52 weeks)
2000 June 30, 2000 (52 weeks)
1999 July 2, 1999 (52 weeks)
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All intercompany accounts and transactions
between consolidated entities have been eliminated.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year presentations to conform
to current year presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Those assumptions and estimates are subject to constant revision, and actual
results could differ from those estimates.
REVENUE RECOGNITION
Revenue is recognized at the time prescriptions are dispensed by the pharmacist
and shipped to or picked up by the patient. The Company participates in various
third party provider networks and state Medicaid programs. Under a majority of
these networks, the amount to be paid for the Company's products is determined
(or "adjudicated") through electronic connections with these networks at the
time of sale. However, for certain third-party providers and state Medicaid
programs for which there is no electronic adjudication process available at the
time of sale, revenue is reported at the estimated net realizable amount and
adjusted in future periods as final settlements are determined.
F-7
39
STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123 (SFAS No. 123), "Accounting for Stock-Based
Compensation," but applies Accounting Principles Board Opinion No. 25 (APB 25)
and related interpretations in accounting for its stock plans. Under APB 25,
when the exercise price of an employee stock option equals the market price of
the underlying stock on the date of grant, no compensation expense is
recognized. Disclosure of the impact of SFAS No. 123, as if adopted, can be
found in Note 10 to the Consolidated Financial Statements.
CASH AND CASH EQUIVALENTS
The Company considers all investments with an original maturity of 90 days or
less when purchased to be cash equivalents. Cash equivalents are available for
sale, are carried at cost, which approximates fair market value, and consist
principally of corporate commercial paper.
INVESTMENTS
In fiscal 1999, the Company invested $450,000 in the common stock of Cell
Robotics International, Inc. (CRII) as part of a development and distribution
agreement for the Lasette laser lancing device. Management determines the
appropriate classification of securities at the time of purchase and reevaluates
such designation as of each balance sheet date. Securities were classified as
Available-for-Sale as of June 30, 2000. The Company considered the net
unrealized gain on these investments of $456,000 at June 30, 2000 to be
temporary, and as such recorded it through shareholders' equity. The Cell
Robotics securities were associated with the sale of the MEDgenesis business
(see Note 3), and, accordingly, were classified in net assets of discontinued
operations at June 30, 2000. As of June 29, 2001, the Company had no investments
in Available-for-Sale securities.
ACCOUNTS RECEIVABLE ALLOWANCES
Allowance for Doubtful Accounts
The Company determines an allowance for doubtful accounts amount based upon an
analysis of the collectability of specific accounts and the aging of the
accounts receivable. Bad debt expense is recorded as an operating expense in the
Company's Consolidated Statements of Operations.
Allowance for Payor Discounts
The Company determines an allowance based on an analysis of historical payment
experience for both the retail and mail order businesses, and in some cases, by
an analysis of specific payor discounts. Payor discount allowances are recorded
as offsets to revenue in the Company's Consolidated Statements of Operations.
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.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation on property and
equipment is computed using the straight-line method. Depreciation occurs over
estimated useful lives of one to seven years. Depreciation expense for
continuing operations was $2,597,000, $2,456,000, and $2,140,000 in fiscal 2001,
2000, and 1999, respectively.
F-8
40
Property and equipment consisted of the following at June 29, 2001 and June 30,
2000:
(in thousands) JUNE 29, 2001 JUNE 30, 2000
Leasehold improvements $ 4,868 $ 3,134
Furniture and fixtures 3,839 3,303
Computer hardware and software 8,235 8,452
--------------------------------------------------------------------------------
Total property and equipment $16,942 $14,889
================================================================================
GOODWILL
Goodwill is amortized on a straight-line basis over two to twenty years. The
Company periodically evaluates its goodwill for impairment by comparison of the
carrying value against anticipated business performance. Amortization expense
for continuing operations was $1,459,000, $1,628,000, and $1,698,000 in fiscal
2001, 2000, and 1999, respectively. Accumulated amortization for continuing
operations was $5,340,000 and $4,274,000 as of fiscal year end 2001 and 2000,
respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates its long-lived assets for impairment losses when
indicators of impairment are present by comparing the undiscounted cash flows to
the assets' carrying amount. An impairment loss is recorded if necessary. In
fiscal 2000 the Company wrote off $5.5 million associated with the Clinical
Partners contract management line in accordance with its evaluation of
long-lived asset impairment.
INCOME TAXES
The Company accounts for income taxes using the liability method. Deferred
income taxes are provided for temporary differences between financial reporting
and the tax basis of assets and liabilities.
NEW ACCOUNTING PRONOUNCEMENTS
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement 141, Business Combinations, which prohibits the use of the
pooling-of-interests method of accounting for business combinations, defines the
methodology to be used in measuring goodwill and other intangible assets, and
defines certain disclosure requirements for business combinations. Statement 141
becomes effective for all transactions initiated after June 30, 2001, and for
all purchase method transactions completed after June 30, 2001. Accordingly, the
Company will adopt Statement 141 beginning July 1, 2001, but expects that there
will be no material effect to the financial statements.
On that same date, the FASB also issued Statement 142, Goodwill and Other
Intangible Assets. Under the new rules, goodwill (and intangible assets deemed
to have indefinite lives) will no longer be amortized but will be subject to
annual impairment tests in accordance with the Statement. Other intangible
assets will continue to be amortized over their useful lives. The Company will
apply the new rules beginning in its first fiscal quarter of 2002 that begins
June 30, 2001. Application of the nonamortization provisions of the Statement is
expected to result in a decrease of $2.3 million in amortization of existing
goodwill and an increase in after-tax net income of $1.4 million ($0.11 per
share) in fiscal 2002. In fiscal 2001, goodwill amortization totaled $1.5
million, which would have amounted to after-tax net income of $0.9 million or
$0.07 per share. During 2002, the Company will perform the first of the required
impairment tests of goodwill as of June 30, 2001 and has not yet determined what
the effect of these tests will be on the earnings and financial position of the
Company.
F-9
41
PER SHARE DATA
Earnings per share are calculated in accordance with SFAS No. 128, "Earnings Per
Share." Potential common shares are included in the diluted net income (loss)
calculation when dilutive. Potential common shares consisting of common stock
issuable upon exercise of outstanding common stock options are computed using
the treasury stock method. The Company's net income (loss) per share calculation
for basic and diluted is based on the weighted common shares outstanding. There
are no reconciling items in the numerator or denominator of the Company's net
income (loss) per share calculation. Employee stock options of 2,404,252,
2,229,809, and 2,886,227 for the years ended June 29, 2001, June 30, 2000, and
July 3, 1999, respectively, have been excluded from the net income (loss) per
share calculation because their effect would be anti-dilutive or immaterial.
2. FINANCIAL RESTATEMENT
The Company's financial statements for the fiscal year ended June 30, 2000 and
for the first three quarters of the fiscal year ended June 29, 2001 have been
restated. The restatement reflects a reduction in revenues, an increase in bad
debt expense, and an increase in allowance for doubtful accounts. The related
adjustments are limited to the Company's Retail segment. The restatement also
reflects an increase to the gain reported in the Company's results from
discontinued operations from the sale of MEDgenesis in the third quarter of
fiscal 2001. The changes to the financial statements resulting from the
restatement are described below.
CONTINUING OPERATIONS
Revenue
In the fourth quarter of fiscal 2001, management determined that software system
and process errors in its Retail segment resulted in the overstatement of
revenue. Following the implementation of new software systems in early fiscal
2000, certain transactions that had been canceled or rejected at the pharmacy
level were transferred from the pharmacy operating system, without adjustment,
to the Retail revenue accounting system effectively resulting in a duplicate
revenue entry. As a result, revenue was overstated in the Company's accounting
records. The overstatement of revenue caused by these errors totaled $3,390,000
in fiscal 2000 ($827,000, $914,000, $979,000 and $670,000 for the first, second,
third and fourth quarters, respectively) and $2,595,000 in fiscal 2001
($815,000, $1,030,000 and $750,000 for the first, second and third quarters,
respectively). The Company has taken steps to correct its systems and processes
to prevent duplicate revenue entries.
In addition, management identified a large uncontracted payor in the Company's
Retail segment that began paying claims in fiscal 2001 using a significantly
lower rate schedule than the payor had previously used. As a result, the
Company's traditional methods of estimating the revenue allowance for payor
discounts did not accurately account for the significant reduction in
reimbursement. The resulting overstatement of revenue in the first three fiscal
quarters of fiscal 2001 totaled $1,918,000 ($760,000, $556,000 and $602,000 for
the first, second and third quarters, respectively). The Company has taken steps
to improve its methods for determining the revenue allowance for payor
discounts.
F-10
42
Bad Debt Expense and Allowance for Doubtful Accounts
During fiscal 2001, management learned that personnel at the Company's Retail
segment had fallen behind in posting cash receipts to customer accounts
receivable records and were preparing aging reports that contained significant
inaccuracies, which prevented timely and accurate monitoring of open accounts
receivable. Management determined that these inaccurate aging reports they had
relied upon to estimate the allowance for doubtful accounts receivable at June
30, 2000 and the first three quarters of fiscal 2001 had caused them to
underestimate the amount of the allowance at those dates. As a result,
management has reassessed its estimate for doubtful accounts receivable and
increased the allowance at June 30, 2000 and at the end of each of the first
three quarters of fiscal 2001. The allowance for doubtful accounts and related
bad debt expense was increased by $4,200,000 at June 30, 2000, and $989,000,
$603,000 and $902,000 at the end of each of the first, second and third
quarters, respectively, of fiscal 2001. The Company has taken steps to ensure
the accuracy of the information on which it will base future estimates of
doubtful accounts.
DISCONTINUED OPERATIONS
Gain on Sale of MEDgenesis
The financial statements for the third quarter of fiscal year 2001 have also
been restated to reflect a correction in the computation of the gain on sale of
MEDgenesis in January 2001. The restated gain was $13.8 million rather than
$12.8 million as previously reported by the Company. In the original
determination of the gain, the net book value of MEDgenesis' assets was
overstated because certain liabilities had not been properly assigned to
MEDgenesis, which resulted in the gain on sale reflected in Discontinued
Operations being understated by $1.0 million.
F-11
43
As a result of the foregoing accounting adjustments, the Company's consolidated
financial statements for fiscal 2000 and the first three quarters of fiscal 2001
have been restated from the amounts previously reported. The principal effects
of these adjustments on the consolidated financial statements for the year ended
June 30, 2000 are set forth below. Effects of adjustments on previously reported
quarters for 2000 and 2001 are presented in Note 16.
STATEMENT OF OPERATIONS YEAR ENDED JUNE 30, 2000
($ thousands, except per share data)
--------------------------------------------------------------------------------
AS
PREVIOUSLY
REPORTED AS RESTATED
----------- -----------
Revenue $ 225,887 $ 222,497
Gross profit 40,281 36,891
Loss from continuing operations before income taxes (1,716) (9,306)
Income taxes 438 3,398
Net loss from continuing operations $ (1,278) $ (5,908)
Net income (loss) $ 562 $ (4,068)
Basic and diluted income (loss) per share
Net loss from continuing operations $ (0.10) $ (0.49)
Net income (loss) $ 0.05 $ (0.34)
BALANCE SHEET AS OF JUNE 30, 2000
($ thousands)
---------------------------------------------------------------------------------
AS
PREVIOUSLY
REPORTED AS RESTATED
----------- -----------
Accounts receivable, net of allowances $ 47,352 $ 39,762
Income taxes receivable 774 1,901
Total assets 83,060 78,430
Retained earnings 14,271 9,641
Total shareholders' equity 67,687 63,057
3. DISCONTINUED OPERATIONS - SALE OF MEDGENESIS
On October 10, 2000, Chronimed announced that it was engaged in negotiations to
sell its diagnostic products business, MEDgenesis Inc., while continuing to
pursue a spin-off of the business. On December 1, 2000, Chronimed entered into
an Asset Purchase Agreement with Medisys PLC of Woodbridge, Suffolk, England and
on January 5, 2001, the Company completed the sale of MEDgenesis to Medisys.
Chronimed has classified MEDgenesis as "discontinued operations" for financial
reporting purposes. As a result, all financial results concerning MEDgenesis
have been classified as discontinued operations.
Chronimed received $39.975 million from the sale of MEDgenesis to Medisys. The
$39.975 million received consisted of $30.475 million in cash and $9.5 million
in Medisys common stock.
F-12
44
The following shows the calculation of the reported gain from the sales
transaction, after restatement - see Note 2:
(in thousands)
--------------------------------------------------------------------------------
Purchase price proceeds $ 39,975
Less transaction and other related costs (4,485)
Less net book value of assets (11,591)
--------------------------------------------------------------------------------
Gain before income taxes 23,899
Less income taxes (10,130)
--------------------------------------------------------------------------------
Gain on sale $ 13,769
================================================================================
The following shows the transaction costs:
(in thousands)
--------------------------------------------------------------------------------
Contract assignment costs $(1,000)
Miscellaneous acquisition costs (1,321)
Severance (see Note 12) (2,164)
--------------------------------------------------------------------------------
Transaction and other related costs $(4,485)
================================================================================
The following table summarizes revenue and net income from discontinued
operations for the last three years. The activity shown for the year ended June
29, 2001 includes activity through the sale date of January 5, 2001:
YEAR ENDED
------------------------------
JUNE 29, JUNE 30, JULY 2,
(IN THOUSANDS) 2001 2000 1999
--------------------------------------------------------------------------------
Revenue from discontinued operations $ 19,443 $32,949 $29,672
Cost of revenue 10,903 20,283 15,691
--------------------------------------------------------------------------------
Gross profit 8,540 12,666 13,981
Operating expenses:
Selling and marketing 2,951 5,349 4,550
Research and development 596 1,087 858
General and administrative 2,713 3,751 2,902
--------------------------------------------------------------------------------
Total operating expenses 6,260 10,187 8,310
Income from discontinued operations 2,280 2,479 5,671
Other income 124 540 -
--------------------------------------------------------------------------------
Income from discontinued operations before
income taxes 2,404 3,019 5,671
Income tax expense 938 1,179 2,212
--------------------------------------------------------------------------------
Net income from discontinued operations $ 1,466 $ 1,840 $ 3,459
================================================================================
F-13
45
4. ACQUISITIONS
In February 2001, the Company acquired the four retail pharmacies of American
Prescription Providers, Inc. The Company acquired substantially all the assets,
including inventory, furniture, equipment, and leasehold improvements of the
four pharmacies for $16.0 million in cash. The excess of the purchase price plus
transaction cost over the fair value of the net assets was $15.6 million, all
of which has been classified as goodwill and which is being amortized on a
straight-line basis over 20 years.
In April 2001, the Company acquired the Transplant Pharmacy business of SangStat
Medical Corporation, which provides mail order distribution of drugs and
transplant patient management services. The Company acquired substantially all
the assets of the Transplant Pharmacy business excluding inventory and accounts
receivable for cash of $1.8 million. The excess of the purchase price plus
transaction cost over the fair value of the net assets was $1.8 million, all of
which has been classified as goodwill and which is being amortized on a
straight-line basis over 20 years.
In April 2001, the Company acquired Los Feliz Drugs, Inc., d/b/a Oaks Pharmacy
("Oaks"), a pharmacy that provides specialty pharmaceutical products for people
with HIV/AIDS and other chronic conditions. The Company acquired the stock of
Oaks for cash of $5.2 million. The excess of the purchase price plus transaction
cost over the fair value of the net assets was $5.3 million, all of which has
been classified as goodwill and which is being amortized on a straight-line
basis over 20 years.
All acquisitions described above were accounted for as purchases and,
accordingly, operating results of these businesses subsequent to the date of
acquisition were included in the Company's consolidated financial statements.
5. SALE OF HOME SERVICE MEDICAL BUSINESS
Chronimed sold its Home Service Medical ("HSM") business 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 $15.0 million in revenue
and $1.3 million in pre-tax operating income to Chronimed's total results for
the fiscal year ended June 30, 2000. The Company received $2.7 million in cash
($3.0 million at close less a $0.3 million working capital adjustment paid to
the buyer on December 1, 2000) and a $3.8 million subordinated note maturing in
42 months and bearing an annual interest rate of 11%.
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." Given that there is
no guarantee that Express-Med will be able to repay the note and the long-term
nature of the note, the gain will be deferred until principal payments under the
promissory note are received or are deemed to be fully collectable. Based on the
terms of the HSM Asset Purchase Agreement, Express-Med, Inc. will pay quarterly
installments of accrued interest and periodic installments of principal.
Quarterly interest payments began March 1, 2001, and the periodic installments
of principal will begin September 6, 2002. Principal payments will be paid as
follows: $1.0 million on September 6, 2002; $1.0 million on September 2, 2003;
and $1.8 million on March 1, 2004. The entire outstanding balance of principal
and interest becomes due on March 1, 2004. Express-
F-14
46
Med is current on its subsequent quarterly interest payments. Chronimed believes
that Express-Med, Inc. will be able to continue funding the interest payments
and therefore the Company will accrue the interest receivable monthly as earned.
The Company recorded the $3.8 million deferred gain on the balance sheet as an
offset to notes receivable, netting to zero and therefore not reflected on the
face of the balance sheet.
6. AVAILABLE-FOR-SALE SECURITIES
The amortized cost and estimated market value of available-for-sale securities
are as follows:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
(in thousands) COST GAINS LOSSES VALUE
As of June 30, 2000:
Equity Securities $270 $456 $ -- $726
As of June 30, 2000 the Company's Available-for-Sale securities included equity
securities of one company, Cell Robotics International, Inc., and are included
in net assets of discontinued operations. As of June 29, 2001 the Company held
no Available-for-Sale securities. See Note 1 of Notes to Consolidated Financial
Statements, Investments, for additional information regarding these securities.
The Company received $9.5 million in Medisys PLC securities as partial
consideration from the sale of MEDgenesis to Medisys in January 2001. Chronimed
subsequently sold the shares received for $7.7 million in cash, which resulted
in a $1.8 million loss in fiscal 2001. This loss has been included in the Other
Expense line in the Consolidated Statements of Operations.
7. OPERATING LEASES AND RENT EXPENSE
The Company leases its office space, distribution facilities, and retail
locations under operating lease agreements. The remaining lease terms range from
one to nine years as of June 29, 2001.
Future minimum lease payments for continuing operations, including current real
estate taxes and operating expenses, under the operating leases with lease terms
in excess of one year at June 29, 2001, are approximately as follows:
AMOUNT
FISCAL YEAR (000'S)
----------------------------------------
2002 $ 2,800
2003 2,548
2004 2,125
2005 1,558
2006 587
Beyond 1,021
----------------------------------------
Total $10,639
========================================
Total rent expense for continuing operations was $2,367,000, $1,978,000, and
$1,885,000 during fiscal 2001, 2000, and 1999, respectively.
F-15
47
8. LONG-TERM DEBT AND CREDIT ARRANGEMENTS
The Company had no long-term debt as of fiscal year-end 2001 and 2000. The
Company had an unsecured discretionary line of credit totaling $15 million that
terminated January 31, 2001 and which was extended through July 31, 2001. Due to
the need to restate its financial statements, the Company was not in full
compliance with its line of credit covenants as of June 29, 2001. On July 31,
2001 the Company received an extension of this line of credit through October
15, 2001. As part of the extension agreement, the Company obtained a waiver of
its line of credit covenants from the lender, pending the delivery of audited
financial statements by October 15, 2001. Under the terms of the extended
agreement, the debt is secured by receivables and inventory, and bears interest
at Prime Rate plus 0.25%. The Company also pays a commitment fee of 0.5% on the
unused portion of the line of credit.
As of June 29, 2001, there was $4.1 million of short-term borrowings outstanding
under this line of credit, bearing interest of 6.75% at that date (based on
prime rate plus a variable margin of 0.0% to 1.0% depending on the ratio of the
Company's earnings before interest and taxes to interest expense).
9. INCOME TAXES (Dollars in thousands)
The components of the provision for income taxes for continuing operations are
as follows:
2000
(As
2001 Restated) 1999
----------------------------------
Current $ (1,288) $ (688) $ 1,252
Deferred (1,297) (2,710) (825)
--------------------------------------------------------------------------------
Income tax (benefit) expense $ (2,585) $ (3,398) $ 427
================================================================================
The Company's income tax expense from continuing operations differs from the
applicable federal rate of 35% in fiscal 2001 and 34% in fiscal 2000 and 1999.
The reconciliation of differences is as follows:
2000
(As
2001 Restated) 1999
---------------------------------
Federal income taxed at statutory rates $ (2,465) $ (3,165) $ 370
State taxes, net of federal benefit (260) (314) 51
Goodwill amortization 61 7 5
Other, net 79 74 1
--------------------------------------------------------------------------------
Income tax (benefit) expense $ (2,585) $ (3,398) $ 427
================================================================================
F-16
48
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities are as follows:
2000
2001 (As restated)
--------------------------
Deferred tax assets:
Bad debt reserve $ 1,751 $ 2,521
Inventory reserve 70 24
Other reserves 2,997 779
Vacation accrual 134 112
Goodwill amortization 366 483
Depreciation 32 109
Deferred tax liabilities:
Prepaid assets (402) (331)
Other liabilities - (45)
--------------------------------------------------------------------------------
Net deferred tax assets $ 4,948 $ 3,652
================================================================================
10. SHAREHOLDERS' EQUITY
The Company has 5,000,000 shares of $.01 par value Preferred Stock authorized
and issuable in one or more series as the Board of Directors may determine, none
of which are outstanding. The Company has 40,000,000 authorized shares of $.01
par value Common Stock. There are no restrictions on retained earnings.
In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company continues to elect to utilize APB Opinion No. 25 and related
interpretations in accounting for its stock option plans and its employee stock
purchase plan. If the Company had elected to recognize compensation cost based
on the fair value of the options granted and shares sold pursuant to the
purchase plan as prescribed by SFAS No. 123, compensation expense (net of tax)
would have been $638,000, $1,278,000 and $1,671,000 for fiscal years 2001, 2000
and 1999, respectively. Consolidated net income (loss) and earnings (loss) per
share, including continuing and discontinued operations, would have been the pro
forma amounts indicated in the table below:
2000
(in thousands, except per share data) 2001 (As restated) 1999
--------------------------------------------------------------------------------
Net income (loss) - as reported $10,777 $(4,068) $4,127
Net income (loss) - pro forma $10,139 $(5,346) $2,456
Earnings (loss) per share - basic and
diluted as reported $ 0.88 $ (0.34) $ 0.34
Earnings (loss) per share - basic and
diluted pro forma $ 0.83 $ (0.44) $ 0.20
F-17
49
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option-pricing model with the following assumptions for the
fiscal years shown:
2001 2000 1999
------- ------- -------
Expected dividend yield 0.0% 0.0% 0.0%
Expected stock price volatility 55% 63% 67%
Risk-free interest rate 5.30% 6.20% 5.50%
Expected life of options 5 years 5 years 5 years
The Black-Scholes option-pricing model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option pricing models require the input of highly
subjective assumptions. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models may not
necessarily provide a reliable single measure of the fair value of its employee
stock options. Using the foregoing assumptions, the weighted-average fair value
of each option granted during fiscal years 2001, 2000 and 1999 was $4.06, $5.07
and $5.74, respectively.
The Company has five employee Stock Option Plans (1986, 1994, 1997, 1999 and
2001). Options to purchase Common Stock of the Company are granted to employees
at 100% of fair market value on the date of grant and are generally exercisable
at 20% of the total grant at the end of each year. The options are cumulatively
exercisable and expire seven years after the date of grant.
The Company also has a director performance Stock Option Plan that reserved
300,000 shares of Common Stock for option grants. The options are granted with
exercise prices equal to market value on the date of the grant. The options
become exercisable after seven years and expire ten years after the date of the
grant. Certain acceleration provisions apply if the stock price increases
significantly prior to the end of seven years.
In fiscal year 2001 the Company modified option terms in the Separation
Agreement entered into with Mr. Maurice R. Taylor, II. The modification caused
all of Mr. Taylor's options to vest immediately, and to extend the exercise
dates for all options through January 5, 2002. The Company recognized $938,000
of compensation expense as a result of the modification. See Note 12.
F-18
50
Stock option activity is summarized as follows:
Options Outstanding Options Exercisable
----------------------------------------------- --------------------------
Weighted Weighted
Shares Average Average
Available Number Price Number Price
for Grant of Shares Per Share of Shares Per Share
------------------------------------------------------------------------------------------------------------------------------------
Balance July 3, 1998 176,488 2,242,601 $ 10.91 915,331 $ 10.51
Reserved for future grants 1,500,000 --
Granted (1,099,700) 1,099,700 9.53
Exercised -- (152,413) 6.29
Cancelled 303,661 (303,661) 11.23
Expired (40,150) --
---------------------------- -----------
Balance July 2, 1999 840,299 2,886,227 10.60 938,566 11.24
Granted (33,000) 33,000 9.03
Exercised -- (49,038) 5.77
Cancelled 640,380 (640,380) 10.69
Expired (23,633)
---------------------------- -----------
Balance June 30, 2000 1,424,046 2,229,809 10.69 925,524 11.14
2001 Stock Option Plan 1,000,000 --
Granted (792,200) 792,200 7.63
Exercised -- (200,597) 8.89
Cancelled 417,160 (417,160) 10.30
Expired (97,960) --
---------------------------- -----------
Balance June 29, 2001 1,951,046 2,404,252 9.90 1,271,303 10.97
The following table summarizes information about the stock options outstanding
at June 29, 2001.
Options Outstanding Options Exercisable
----------------------------------- ---------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Price Number Price
Exercise Prices of Shares Life Per Share of Shares Per Share
--------------------------------------------------------------------------------
$ 5.03 - 7.38 608,200 6.2 yrs $ 7.31 61,980 $ 6.86
$ 7.50 - 8.28 608,852 4.3 yrs $ 7.97 325,239 $ 7.84
$ 8.31 - 12.25 567,600 4.5 yrs $10.47 362,504 $10.35
$ 12.38 - 21.88 619,600 1.1 yrs $13.81 521,580 $13.84
--------- ---------
$ 5.03 - 21.88 2,404,252 4.0 yrs $ 9.90 1,271,303 $10.97
========= =========
11. EMPLOYEE BENEFIT PLANS
The Company has a qualified 401(k) Employee Savings Plan covering substantially
all employees. Company contributions are required. The Company's contributions
to the Plan, representing 401(k) matching contributions only, to employees of
continuing and discontinued operations, were $188,000, $165,000, and $195,000 in
fiscal years 2001, 2000, and 1999, respectively.
The Company has an Employee Stock Purchase Plan. There were 127,138 shares
available for purchase under the Plan at June 29, 2001.
F-19
51
12. RELATED PARTY TRANSACTIONS
On April 9, 1997, the Company entered into a guaranty of indebtedness with US
Bank on behalf of Mr. Maurice R. Taylor, II, the Company's then Chairman and
Chief Executive Officer. Such indebtedness permitted Mr. Taylor to continue to
hold Company stock. There was $675,000 of indebtedness under the guarantee on
June 30, 2000. On July 1, 2000, Mr. Taylor resigned as Chairman and became
Chairman and CEO of the Company's wholly-owned subsidiary, MEDgenesis. Also on
that date, MEDgenesis assumed the Company's guaranty of Mr. Taylor's loan, and
subsequently loaned Mr. Taylor funds sufficient to pay off his debt to US Bank.
MEDgenesis obtained a promissory note due December 31, 2001, a residential
mortgage, and a pledge agreement from Mr. Taylor. Mr. Taylor is charged interest
at 0.5% above the prime lending rate on the note. The Company's guaranty has
been extinguished. Mr. Taylor's term as a Director of the Company ended on
November 27, 2000.
When Chronimed sold the MEDgenesis assets to Medisys on January 5, 2001, Medisys
did not acquire the Taylor promissory note, pledge agreement, or mortgage.
Accordingly, these commitments remain assets of Chronimed. The Taylor promissory
note evidences principal indebtedness of $599,900 as of June 29, 2001, accrues
interest at 0.5% above the prime lending rate, and requires quarterly payments
of interest plus $25,000 in principal. The remaining principal is due on
December 31, 2001. Mr. Taylor is current in his note payments, and the Company
believes the note to be collectable.
Concurrent with the sale of MEDgenesis assets, Chronimed entered into a
Separation Agreement with Mr. Taylor related to Mr. Taylor's Employment
Agreement. Under the terms of the Employment Agreement, the Company made a
payment to Mr. Taylor of $1.226 million. The Separation Agreement also created
an immediate vesting of all of Mr. Taylor's outstanding stock options and
extended his period to exercise options to January 5, 2002. The Separation
Agreement also allows for office space access and health care insurance for Mr.
Taylor for twelve months, or until he finds employment, whichever comes first.
The modification to the option terms created a new measurement date requiring
Chronimed to record compensation expense for the excess of the share price on
January 5, 2001 over the option exercise price at grant date. This modification
resulted in a $938,000 non-cash charge to compensation expense. Both the $1.226
million severance payment and the $938,000 non-cash charge were charged against
the gain on the sale of MEDgenesis.
13. SIGNIFICANT CONCENTRATIONS
Within the Mail Order business segment, two major payors with whom Chronimed has
contracts merged during calendar year 1999. As one payor, they represent 33%,
26%, and 25% of the Company's continuing operations revenue in fiscal years
2001, 2000, and 1999, respectively.
The Company has a national distributor who supplies pharmaceuticals for both the
Retail and the Mail Order segments. This supplier made up 82%, 79%, and 69% of
the Company's continuing operations inventory purchases for fiscal years 2001,
2000, and 1999, respectively. In the event that the Company is unable to
purchase pharmaceuticals through this distributor, the Company would be able to
purchase the same inventory through other national pharmaceutical distributors.
F-20
52
14. BUSINESS SEGMENT INFORMATION
The Company has two reportable segments:
- Mail Order - provides prescription drug and ancillary medical supplies to
patients with a wide variety of high-cost chronic conditions including
solid organ transplants, anemia due to end-stage renal failure, cancer,
endometriosis, growth hormone deficiency, hemophilia, Hepatitis B and C,
immune deficiency disorders, infertility, multiple sclerosis, neutropenia,
respiratory syncytial virus and rheumatoid arthritis. Chronimed has payor
contracts with HMOs, major health insurers, Medicare and Medicaid, and
other managed health plans covering a substantial population. Chronimed
distributes these critical medications directly to patients nationwide
while ensuring competitive prices to payors. Chronimed also coordinates
its services with payors, physicians, nursing services, and other members
of a patient's healthcare team. In addition, Chronimed works with its
customers to develop therapy management guidelines through ongoing
monitoring and evaluation of patient responsiveness and compliance to the
treatment.
- Retail - represents the Company's retail pharmacy operation, StatScript
Pharmacy, and Clinical Partners' historical disease management business.
StatScript Pharmacy is believed to be the largest network of HIV/AIDS
community-based pharmacies in the country, with 37 pharmacies in 32
cities. StatScript pharmacies are locally driven providers and are
committed to the HIV/AIDS patient. Key to the successful care of the
HIV/AIDS patients is StatScript's efforts with community resources,
education of the patient, clinical team communication, and complete
patient tracking.
The Company's reportable segments are made up of business units that offer
different, but related, products and services to patients with chronic health
conditions. The reportable segments are managed separately by senior executives
who report directly to the Chief Executive Officer. The Company evaluates
performance based on profit or loss from operations before interest and income
taxes. The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies. All of the
Company's operations and assets are located in the United States.
The table below presents information by reportable segment. Retail segment
amounts in fiscal 2000 have been restated.
(in thousands) ORDER RETAIL TOTAL
FOR THE YEAR ENDED JUNE 29, 2001
Revenues $ 153,461 $ 144,464 $ 297,925
Income (loss) from continuing operations (314) (5,110) (5,424)
Depreciation & Amortization 1,558 2,498 4,056
Additions to Property and Equipment 1,193 2,406 3,599
Segment Assets 31,210 55,612 86,822
FOR THE YEAR ENDED JUNE 30, 2000
Revenues $ 119,170 $ 103,327 $ 222,497
Income (loss) from continuing operations (213) (2,384) (2,597)
Depreciation & Amortization 1,486 2,598 4,084
Additions to Property and Equipment 801 654 1,455
Segment Assets 33,575 27,818 61,393
FOR THE YEAR ENDED JULY 2, 1999
Revenues $ 103,659 $ 64,965 $ 168,624
Income (loss) from continuing operations 351 1,173 1,524
Depreciation & Amortization 1,700 2,138 3,838
Additions to Property and Equipment 1,374 561 1,935
Segment Assets 29,809 32,848 62,657
F-21
53
The following table is a reconciliation of reportable segment information to the
Company's consolidated totals.
FISCAL YEAR ENDED
2000
(in thousands) 2001 (As restated) 1999
Total Consolidated Revenue $ 297,925 $ 222,497 $ 168,624
(Loss) income from continuing operations
Total for reportable segments $ (5,424) $ (2,597) $ 1,524
Unallocated amounts:
- Corporate G&A (350) (1,018) (1,351)
- Interest income (expense) 568 (191) 419
- Other (expense) income (1,837) -- 503
- Clinical Partners write-off -- (5,500) --
------------------------------------------------------------------------------------------------------------------------------------
(Loss) income from continuing operations
before income taxes $ (7,043) $ (9,306) $ 1,095
====================================================================================================================================
Depreciation and amortization $ 4,056 $ 4,084 $ 3,838
====================================================================================================================================
Assets:
Total for reportable segments $ 86,822 $ 61,393 $ 62,657
Corporate assets 12,171 6,572 4,261
------------------------------------------------------------------------------------------------------------------------------------
Total consolidated assets of continuing operations $ 98,993 $ 67,965 $ 66,918
------------------------------------------------------------------------------------------------------------------------------------
Corporate assets consist primarily of deferred taxes, taxes receivable, prepaid
expenses, certain receivables and deposits, and unallocated Corporate fixed
assets.
15. LITIGATION
On June 15, 2001, a putative class action lawsuit captioned Judith Barclay v.
Chronimed Inc., et. al. (01-CV-1092 DWF) was commenced in the United States
District Court for the District of Minnesota against Chronimed and certain of
our current and former officers and directors. The Complaint alleges that
Chronimed and individual defendants violated Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10(b)-5 promulgated thereunder, and that the
individual defendants violated Section 20(a)of the Exchange Act. Eight other
lawsuits asserting claims identical to the Barclay case were brought by other
plaintiffs during the weeks following the initial filing. The nine lawsuits have
been consolidated into a single case.
The Complaints allege in general terms that Chronimed made false and misleading
statements about its financial statements in violation of the securities laws.
The alleged violations arise out of the requirement to restate previously issued
financial statements. The Company issued public statements regarding these
matters on June 14, June 21, August 14, August 23, and September 25, 2001. Each
plaintiff seeks compensatory damages in an unstated amount, interest, fees,
expenses, and unspecified equitable relief. The Company is unable to reasonably
quantify the alleged damages on the basis of the general allegations of the
Complaints. The Company believes that the above claims are wholly without merit
and will vigorously defend against the lawsuits.
16. QUARTERLY RESULTS - UNAUDITED
The following tables present the Company's results of operations and earnings
per share on a quarterly basis for fiscal 2000 and 2001.
The Company's financial statements for the fiscal year ended June 30, 2000 and
for the first three quarters of the fiscal year ended June 29, 2001 have been
restated. The restatement reflects a reduction in revenues, an increase in bad
debt expense, and an increase in allowance for doubtful accounts. The related
adjustments are limited to the Company's Retail segment. The restatement also
reflects an increase to the gain reported in the Company's results from
discontinued operations from the sale of MEDgenesis in the third quarter of
fiscal 2001. See Note 2.
As a result, the 2000 and 2001 quarterly results of operations and earnings per
share have been restated. The effects of these restatements are shown
reconciling the previously reported results to the restated amounts.
F-22
54
QUARTERLY RESULTS AND THE EFFECTS OF RESTATEMENT
(In thousands, except per share amounts)
FY2000
------------------------------------------------------------------------------------------------------------------------------------
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Year Ended
Oct 1, Dec 31, Mar 31, Jun 30, Jun 30,
1999 1999 2000 2000 2000
-------------------------------------------------------------------
REVENUES
As reported $ 50,878 $ 58,346 $ 57,596 $ 59,067 $ 225,887
Correction of Revenue Overstatement (827) (914) (979) (670) (3,390)
------------------------------------------------------------------------------------------------------------------------------------
As restated $ 50,051 $ 57,432 $ 56,617 $ 58,397 $ 222,497
GROSS PROFIT
As reported $ 8,915 $ 11,320 $ 10,133 $ 9,913 $ 40,281
Correction of Revenue Overstatement (827) (914) (979) (670) (3,390)
------------------------------------------------------------------------------------------------------------------------------------
As restated $ 8,088 $ 10,406 $ 9,154 $ 9,243 $ 36,891
NET INCOME (LOSS) FROM CONTINUING OPERATIONS
As reported $ (108) $ 919 $ (2,526) $ 437 $ (1,278)
Correction of Revenue Overstatement (504) (558) (598) (409) (2,069)
Allowance for Doubtful Accounts -- -- -- (2,561) (2,561)
------------------------------------------------------------------------------------------------------------------------------------
As restated $ (612) $ 361 $ (3,124) $ (2,533) $ (5,908)
NET INCOME (LOSS)
As reported $ 328 $ 1,566 $ (1,891) $ 559 $ 562
Correction of Revenue Overstatement (504) (558) (598) (409) (2,069)
Allowance for Doubtful Accounts -- -- -- (2,561) (2,561)
------------------------------------------------------------------------------------------------------------------------------------
As restated $ (176) $ 1,008 $ (2,489) $ (2,411) $ (4,068)
BASIC AND DILUTED EARNINGS PER SHARE-CONTINUING OPERATIONS
As reported $ (0.01) $ 0.08 $ (0.21) 0.04 $ (0.10)
Correction of Revenue Overstatement (0.04) (0.05) (0.05) (0.04) (0.18)
Allowance for Doubtful Accounts -- -- -- (0.21) (0.21)
------------------------------------------------------------------------------------------------------------------------------------
As restated $ (0.05) $ 0.03 $ (0.26) $ (0.21) $ (0.49)
BASIC AND DILUTED EARNINGS PER SHARE:
As reported $ 0.03 $ 0.13 $ (0.16) $ 0.05 $ 0.05
Correction of Revenue Overstatement (0.04) (0.05) (0.05) (0.04) (0.18)
Allowance for Doubtful Accounts -- -- -- (0.21) (0.21)
------------------------------------------------------------------------------------------------------------------------------------
As restated $ (0.01) $ 0.08 $ (0.21) $ (0.20) $ (0.34)
WEIGHTED AVERAGE SHARES OUTSTANDING--BASIC AND DILUTED 12,096 12,095 12,133 12,144 12,116
The Company's results of operations for the third quarter ended March 30, 2000,
include pre-tax charges of $5.5 million or $0.28 per share for the write off of
its Clinical Partners contract management line.
The Company's results of operations for the fourth quarter ended June 30, 2000,
include pre-tax charges of $0.5 million, or approximately $0.03 per share,
related to costs incurred in preparing for a contemplated spin off of its
Diagnostic Products business, named MEDgenesis, which was eventually sold, and
not spun off, in fiscal 2001.
F-23
55
QUARTERLY RESULTS AND THE EFFECTS OF RESTATEMENT
(In thousands, except per share amounts)
FY2001
-----------------------------------------------------------------------------------------------------------------------------------
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Year Ended
Sep 29, Dec 29, Mar 30, Jun 29, Jun 29,
2000 2000 2001 2001 2001
-------------------------------------------------------------------------------
REVENUES
As reported $ 64,419 $ 70,680 $ 79,343 $ 87,996 $ 302,438
Correction of Revenue Overstatement (1,575) (1,586) (1,352) -- (4,513)
-----------------------------------------------------------------------------------------------------------------------------------
As restated $ 62,844 $ 69,094 $ 77,991 $ 87,996 $ 297,925
GROSS PROFIT
As reported $ 9,723 $ 9,935 $ 10,480 $ 10,068 $ 40,206
Correction of Revenue Overstatement (1,575) (1,586) (1,352) -- (4,513)
-----------------------------------------------------------------------------------------------------------------------------------
As restated $ 8,148 $ 8,349 $ 9,128 $ 10,068 $ 35,693
NET INCOME (LOSS) FROM CONTINUING OPERATIONS
As reported $ 861 $ 1,022 $ 963 $ (3,031) $ (185)
Correction of Revenue Overstatement (961) (967) (825) -- (2,753)
Allowance for Doubtful Accounts (603) (368) (549) -- (1,520)
-----------------------------------------------------------------------------------------------------------------------------------
As restated $ (703) $ (313) $ (411) $ (3,031) $ (4,458)
NET INCOME (LOSS)
As reported $ 1,325 $ 2,103 $ 13,718 $ (3,034) $ 14,112
Correction of Revenue Overstatement (961) (967) (825) -- (2,753)
Allowance for Doubtful Accounts (603) (368) (549) -- (1,520)
MEDgenesis Gain Correction -- -- 938 938
-----------------------------------------------------------------------------------------------------------------------------------
As restated $ (239) $ 768 $ 13,282 $ (3,034) $ 10,777
BASIC AND DILUTED EARNINGS PER
SHARE-CONTINUING OPERATIONS
As reported $ 0.07 $ 0.08 $ 0.08 $ (0.25) $ (0.02)
Correction of Revenue Overstatement (0.08) (0.08) (0.07) -- (0.23)
Allowance for Doubtful Accounts (0.05) (0.03) (0.04) -- (0.12)
-----------------------------------------------------------------------------------------------------------------------------------
As restated $ (0.06) $ (0.03) $ (0.03) $ (0.25) $ (0.37)
BASIC AND DILUTED EARNINGS PER SHARE:
As reported $ 0.11 $ 0.17 $ 1.12 $ (0.25) $ 1.16
Correction of Revenue Overstatement (0.08) (0.08) (0.07) -- (0.23)
Allowance for Doubtful Accounts (0.05) (0.03) (0.04) -- (0.13)
MEDgenesis Gain Correction -- -- (0.08) -- (0.08)
-----------------------------------------------------------------------------------------------------------------------------------
As restated $ (0.02) $ 0.06 $ 1.09 $ (0.25) $ 0.88
WEIGHTED AVERAGE SHARES OUTSTANDING--BASIC AND DILUTED 12,147 12,155 12,222 12,299 12,206
The Company's net income for the third quarter ended March 30, 2001 includes an
after-tax gain of $13.8 million, or approximately $1.13 per share, on the sale
of its MEDgenesis subsidiary.
The Company's results of operations for the fourth quarter ended June 29, 2001
include a loss on the sale of Available-for-Sale securities of $1.8 million, or
approximately $0.09 per share on an after-tax basis.
F-24
56
CHRONIMED INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For Continuing Operations
Column A Column B Column C Column D Column E
------------------------------------------------------------------------------------------------------------------------------------
Charged to
Balance at Charged to Other
Beginning Costs and Accounts - Deductions - Balance at End
Description of Period Expenses Describe Describe of Period
------------------------------------------------------------------------------------------------------------------------------------
Year ended June 29, 2001:
Reserves and allowances deducted from asset accounts:
Allowance for doubtful accounts $ 6,465,000 $ 7,140,000 $ -- $ 9,115,000(3) $ 4,490,000
Allowance for payor discounts $ 1,994,000 $ -- $16,719,000(1) $13,539,000(2) $ 5,174,000
------------------------------------------------------------------------------------------------------------------------------------
Year ended June 30, 2000 (as restated):
Reserves and allowances deducted from asset accounts:
Allowance for doubtful accounts $ 1,158,000 $ 7,154,000 $ -- $ 1,847,000(3) $ 6,465,000
Allowance for payor discounts $ 1,222,000 $ -- $ 7,524,000(1) $ 6,752,000(2) $ 1,994,000
------------------------------------------------------------------------------------------------------------------------------------
Year ended July 2, 1999:
Reserves and allowances deducted from asset accounts:
Allowance for doubtful accounts $ 1,201,000 $ 945,000 $ -- $ 988,000(3) $ 1,158,000
Allowance for payor discounts $ 881,000 $ -- $ 5,972,000(1) $ 5,631,000(2) $ 1,222,000
------------------------------------------------------------------------------------------------------------------------------------
(1) Estimated payor discounts charged to revenue
(2) Actual payor discounts taken
(3) Uncollectable accounts written off, net of recoveries
S-1