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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 2002
[ ] 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
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CHRONIMED INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1515691
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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10900 RED CIRCLE DRIVE
MINNETONKA, MINNESOTA 55343
(Address of principal executive offices)
(Zip Code)
-----------------------------------
Registrant's telephone number, including area code (952) 979-3600
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value - 12,477,501 shares outstanding as of
November 5, 2002
CHRONIMED INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 27, 2002
INDEX
PART I. FINANCIAL INFORMATION PAGE
- ------------------------------- ----
Item 1. Financial Statements
Consolidated Balance Sheets - September 27, 2002 (unaudited) and June 28, 2002 2
Consolidated Statements of Operations (unaudited) - Three months ended
September 27, 2002 and September 28, 2001 3
Consolidated Statements of Cash Flows (unaudited) - Three months ended
September 27, 2002 and September 28, 2001 4
Notes to Consolidated Financial Statements - September 27, 2002 5 - 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 - 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Item 4. Controls and Procedures 13
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 14
Items 2-5 have been omitted since all items are not applicable or the answers are negative.
Item 6. Exhibits and Reports on Form 8-K
a.) Exhibits 14
b.) Reports on Form 8-K 14
SIGNATURES 15
- ----------
CERTIFICATIONS 16 - 17
- --------------
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHRONIMED INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 27,
2002 JUNE 28,
(UNAUDITED) 2002
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 9,030 $ 6,306
Accounts receivable (net of allowances of $7,182 and $8,923
at September 27, 2002 and June 28, 2002, respectively) 40,879 44,461
Inventory 9,841 8,334
Prepaid expenses 1,578 1,062
Deferred taxes 3,437 3,437
- ---------------------------------------------------------------------------------------------------------------------
Total current assets 64,765 63,600
Property and equipment, net 5,203 5,485
Goodwill, net of accumulated amortization of $5,340 30,233 30,233
Other assets, net 161 177
- ---------------------------------------------------------------------------------------------------------------------
Total assets $ 100,362 $ 99,495
=====================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 15,738 $ 14,811
Accrued expenses 2,720 3,117
Accrued bonus 350 1,174
Income taxes payable 806 648
- ---------------------------------------------------------------------------------------------------------------------
Total current liabilities 19,614 19,750
Deferred taxes 344 344
Shareholders' equity
Preferred stock - -
Common stock, issued and outstanding shares--
12,498 and 12,353, respectively 125 124
Additional paid-in capital 55,803 55,122
Unearned compensation (654) -
Retained earnings 25,130 24,155
- ---------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 80,404 79,401
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 100,362 $ 99,495
=====================================================================================================================
See notes to consolidated financial statements
2
CHRONIMED INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
---------------------------------------------
SEPTEMBER 27, SEPTEMBER 28,
2002 2001
- -------------------------------------------------------------------------------------------------------------------
Revenue
Mail Order $ 41,715 $ 40,325
Retail 58,178 53,103
- -------------------------------------------------------------------------------------------------------------------
Total revenue 99,893 93,428
Cost of revenue 87,917 81,884
- -------------------------------------------------------------------------------------------------------------------
Gross profit 11,976 11,544
Operating expenses
Selling and marketing 923 841
General and administrative 9,020 10,145
Bad debt expense 511 623
- -------------------------------------------------------------------------------------------------------------------
Total operating expenses 10,454 11,609
Income (loss) from operations 1,522 (65)
Interest income 63 112
Interest expense - (87)
Other income - 45
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,585 5
Income tax expense (610) (2)
- -------------------------------------------------------------------------------------------------------------------
Net income $ 975 $ 3
===================================================================================================================
Basic and diluted net income per share $ 0.08 $ 0.00
===================================================================================================================
Basic weighted-average shares 12,353 12,315
Diluted weighted-average shares 12,363 12,315
See notes to consolidated financial statements
3
CHRONIMED INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
--------------------------------------
SEPTEMBER 27, SEPTEMBER 28,
2002 2001
- ----------------------------------------------------------------------------------------------------------------------
Operating activities
Net income $ 975 $ 3
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 596 731
Amortization of restricted stock 28 -
Changes in operating assets and liabilities:
Accounts receivable 3,582 (1,300)
Income taxes 158 (30)
Inventory (1,507) (1,930)
Accounts payable 927 177
Accrued expenses (1,221) 329
Other assets (505) (213)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 3,033 (2,233)
Investing activities
Purchases of property and equipment (309) (460)
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (309) (460)
Financing activities
Net proceeds from borrowings - 6,300
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities - 6,300
Increase in cash and cash equivalents 2,724 3,607
Cash and cash equivalents at beginning of period 6,306 -
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 9,030 $ 3,607
======================================================================================================================
SUPPLEMENTAL DISCLOSURES
Income taxes paid $ 919 $ 31
Interest payments $ - $ 92
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
- In first quarter fiscal 2003, we granted 145,000 shares of restricted
stock to our officers. We recognized $28,000 of compensation expense in
the quarter ended September 27, 2002, related to the grant.
See notes to consolidated financial statements
4
CHRONIMED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
Chronimed Inc. ("Chronimed" or the "Company") is a distributor of
prescription drugs for people with certain chronic health conditions. We
consider our business to be unique and refer to it as specialty pharmacy. We
serve patients with highly specialized pharmaceutical needs and help employers
and third-party payors manage patient care costs. We distribute pharmaceuticals
and provide specialized patient management services nationwide for people with
chronic conditions including HIV/AIDS, organ transplants, and diseases treated
with biotech injectable medications. We work directly with patients, physicians,
healthcare providers, insurance companies, health maintenance organizations,
preferred provider organizations, government agencies, and other third-party
payors to improve clinical and financial outcomes for patients with chronic,
complex, and expensive pharmaceutical needs.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments, consisting of normal recurring accruals, considered necessary for a
fair presentation have been included. Operating results for the three months
ended September 27, 2002, are not necessarily indicative of the results that may
be expected for the fiscal year ending June 27, 2003. The balance sheet at June
28, 2002, has been derived from the audited financial statements at that date,
but does not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. For further
information, refer to the consolidated financial statements and footnotes
thereto included in our Annual Report on Form 10-K for the fiscal year ended
June 28, 2002.
We use a four-week, four-week, five-week (4-4-5) quarterly accounting
cycle with the fiscal year ending on the Friday closest to June 30 and the
fiscal quarters ending on the Friday closest to the last day of the respective
month.
2. INVENTORIES
Inventories consist of goods held for resale and are carried at the
lower of cost or market determined under the average cost method.
3. PER SHARE DATA
Earnings per share are calculated in accordance with Financial
Accounting Standards Board Statement No. 128, "Earnings Per Share." Potential
common shares are included in the diluted net income 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.
Our basic net income per share is computed by dividing income by the weighted
average number of common shares outstanding during the period. Diluted net
income per share is computed by dividing income by the weighted average number
of common shares outstanding during the period, increased to include restricted
stock awards and dilutive potential common shares issuable upon the exercise of
stock options that were outstanding during the period. A reconciliation of the
numerator and denominator in the basic and diluted earnings per share
calculation is as follows:
5
THREE MONTHS ENDED
-----------------------------------------
SEPTEMBER 27, SEPTEMBER 27,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2001
-----------------------------------------
Numerator
Net income $ 975 $ 3
Denominator
Denominator for basic net income per share -
weighted average shares outstanding 12,353 12,315
Effect of dilutive stock options and restricted stock 10 -
Denominator for diluted net income per share -
weighted average shares outstanding 12,363 12,315
Basic and diluted net income per share $ 0.08 $ 0.00
Employee stock options of 1,971,420 and 2,753,662 for the first
quarters of fiscal years 2003 and 2002, respectively, have been excluded from
diluted net income per share calculation because their exercise prices were
greater than the average market price of the common stock for the respective
periods.
4. SHAREHOLDERS' EQUITY
In August 2002, the Compensation Committee of the Board of Directors
approved restricted stock grants to our officers totaling 145,000 shares of
restricted common stock under our 2001 Stock Incentive Plan. These restricted
shares, valued at $682,950 based on our fair market value of $4.71 per common
share at the date of grant, will be recognized as compensation expense over the
four year vesting period of the grant, subject to an acceleration provision
based on increases in our stock price. Excluding the acceleration provision, the
expected financial impact of the stock grant will be approximately $106,000
annually, net of tax, or $0.01 per share.
5. SIGNIFICANT CONCENTRATIONS
Payor reimbursements from Aetna, Inc. represented 24.5% of our revenue
in the first quarter of fiscal 2003 and 25.3% of our revenue in the first
quarter of fiscal 2002. No other private payor or single government agency
represented more than 10% of our revenues.
We use McKesson Corporation, a large national distributor, to supply
pharmaceuticals for both the Retail and the Mail Order segments. This supplier
made up 93.1% and 89.2% of our inventory purchases for the first quarters of
fiscal years 2003 and 2002, respectively. In the event that we are unable to
purchase pharmaceuticals through this distributor, we believe we would be able
to purchase the same inventory through other national pharmaceutical
distributors under similar terms and conditions.
Our primary concentration of credit risk is third party payor accounts
receivable, which consist of amounts owed by various governmental agencies and
insurance companies. We manage our receivables by regularly reviewing accounts
and contracts and by providing appropriate allowances for uncollectable amounts.
Aetna, Inc. represents 21.3% and 21.7% of our accounts receivable balance at
September 27, 2002, and June 28, 2002, respectively. No other private payor or
single government agency represented more than 10% of our accounts receivable
balances. Concentration of credit risk relating to accounts receivable is
limited to some extent by the diversity and number of patients and payors and
the geographic dispersion of our operations. We grant credit without collateral
to our patients and payors.
6
6. BUSINESS SEGMENT INFORMATION
We have two reportable segments. The Mail Order segment includes the
results of our biotech injectables and organ transplant business lines. The
Retail segment consists of our StatScript Pharmacy stores which serve primarily
HIV/AIDS patients and organ transplant recipients.
Our reportable segments are made up of business lines that offer
related products and services to patients with chronic health conditions but
through separate distribution channels. We evaluate performance based on profit
or loss from operations before interest and income taxes.
The table below presents information by reportable segment.
(IN THOUSANDS) MAIL ORDER RETAIL TOTAL
- ------------------------------------------------------------------------------------------------------------------
For the three months ended September 27, 2002
Revenue $ 41,715 $ 58,178 $ 99,893
Income from operations 524 998 1,522
For the three months ended September 28, 2001
Revenue $ 40,325 $ 53,103 $ 93,428
Income (loss) from operations 270 (335) (65)
Income from operations for the three months ended September 28, 2001
includes special charges totaling $1.4 million relating to the retail segment
for transferring the StatScript headquarters from Kansas City to Minneapolis and
expenses associated with the fiscal 2001 financial restatement.
The following table is a reconciliation of reportable segment
information to our consolidated totals.
THREE MONTHS ENDED
-----------------------------------------------
SEPTEMBER 27, SEPTEMBER 28,
(IN THOUSANDS) 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
Total consolidated revenue $ 99,893 $ 93,428
INCOME (LOSS) FROM OPERATIONS
Total for reportable segments $ 1,522 $ (65)
Unallocated amounts:
- Interest income 63 25
- Other income - 45
- -----------------------------------------------------------------------------------------------------------------------
Income before income taxes $ 1,585 $ 5
=======================================================================================================================
7
The following table presents assets by reportable segment.
(IN THOUSANDS) MAIL ORDER RETAIL CORPORATE TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
For the three months ended September 27, 2002
Segment assets $ 28,543 $ 59,104 $ 12,715 $ 100,362
For the three months ended June 28, 2002
Segment assets $ 28,275 $ 61,419 $ 9,801 $ 99,495
Corporate assets consist primarily of deferred taxes, taxes receivable,
prepaid expenses, certain receivables and deposits, and unallocated corporate
fixed assets.
7. COMPREHENSIVE INCOME
Comprehensive income was $1.0 million and $0.0 million for the first
quarters of fiscal years 2003 and 2002, respectively. Net income equaled
comprehensive income for the respective periods.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following management's discussion and analysis of financial
condition and results of operations ("MD&A") should be read in conjunction with
the MD&A included in our Annual Report on Form 10-K for the fiscal year ended
June 28, 2002.
THREE MONTHS ENDED SEPTEMBER 27, 2002 VERSUS THREE MONTHS ENDED SEPTEMBER 28,
2001
INCOME AND EXPENSE ITEMS AS A PERCENTAGE OF REVENUE
THREE MONTHS ENDED
--------------------------------------------
SEPTEMBER 27, SEPTEMBER 28,
2002 2001
- ---------------------------------------------------------------------------------------------------------------------------------
Revenue
Mail Order 41.8% 43.2%
Retail 58.2 56.8
- ---------------------------------------------------------------------------------------------------------------------------------
Total revenue 100.0 100.0
Cost of revenue 88.0 87.6
- ---------------------------------------------------------------------------------------------------------------------------------
Gross profit 12.0 12.4
Operating expenses
Selling and marketing 0.9 0.9
General and administrative 9.1 10.9
Bad debt expense 0.5 0.7
- ---------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 10.5 12.5
Income (loss) from operations 1.5 (0.1)
Interest income (expense), net 0.1 -
Other income - 0.1
Income tax expense (0.6) -
- ---------------------------------------------------------------------------------------------------------------------------------
Net income 1.0% 0.0%
=================================================================================================================================
Revenue
Revenue increased $6.5 million or 6.9% from $93.4 million in the first
quarter of fiscal 2002 to $99.9 million in the first quarter of fiscal 2003.
THREE MONTHS ENDED
--------------------------------------
SEPTEMBER 27, SEPTEMBER 28,
(DOLLAR AMOUNTS IN THOUSANDS) 2002 2001 % CHANGE
- -----------------------------------------------------------------------------------------------------------------------
Mail Order segment
On-going business $ 41,715 $ 40,325 3.4%
- -----------------------------------------------------------------------------------------------------------------------
Total Mail Order 41,715 40,325 3.4%
Retail segment
On-going business 58,178 48,244 20.6%
Stores closed in FY2002 - 4,859 (100.0)%
- -----------------------------------------------------------------------------------------------------------------------
Total Retail 58,178 53,103 9.6%
- -----------------------------------------------------------------------------------------------------------------------
Total Company $ 99,893 $ 93,428 6.9%
=======================================================================================================================
9
The Mail Order segment revenue grew 3.4% for the first quarter of
fiscal 2003 compared to the same period last year. The Mail Order patient base
and order activity in fiscal 2003 is level with fiscal 2002. Payor
reimbursements from Aetna represented 58.6% and 58.7% of our Mail Order revenues
for the first quarters of fiscal years 2003 and 2002, respectively. Except for
Aetna, no other private payor accounted for 10% or more of our revenues in the
first quarter of fiscal years 2003 and 2002.
The Retail segment revenue grew 9.6% for the first quarter of fiscal
2003 compared to the same period last year due to continued additions of new
patients at existing stores. Excluding the revenue from the fourteen StatScript
retail locations closed during fiscal 2002, Retail revenue increased $9.9
million or 20.6% during the first quarter of fiscal 2003. The same store growth
was due to a combination of increased anti-viral medication volume bolstered by
increased post-transplant drug sales. We plan to continue our expansion of
Retail product offerings beyond our HIV/AIDS focus, to include post-transplant
and Hepatitis C medications. A single private payor represented approximately
6.4% and 6.0% of our on-going Retail revenues in the first quarters of fiscal
years 2003 and 2002, respectively.
Cost of Revenue and Gross Profit
Total gross profit dollars increased $0.5 million or 3.7% from $11.5
million in the first quarter of fiscal 2002 to $12.0 million in the first
quarter of fiscal 2003. Gross margins as a percentage of revenue declined from
12.4% to 12.0% during this period.
Mail Order margins as a percentage of revenue increased slightly from
the year ago period due to a stabilization in pricing pressures in markets we
serve, improved purchasing programs, and a change in product mix toward higher
margin products. Aetna represented 35.5% and 30.1% of our Mail Order margins for
the first quarters of fiscal years 2003 and 2002, respectively.
Retail margins as a percentage of revenue decreased slightly from the
year ago period primarily due to pricing pressures in selected geographic
markets and store locations. A single private payor represented 8.8% and 9.6% of
our Retail margins for the first quarters of fiscal years 2003 and 2002,
respectively.
We anticipate that payors will continue to exert downward pressure on
the prices we will be able to charge as payors continue to seek containment of
healthcare costs, which will negatively affect margins in the future. We are
working to offset this pricing pressure in a number of ways, including sales and
marketing efforts to direct more profitable medications into both the Retail and
Mail Order segments; enhanced programs with manufacturers, wholesalers, and
group purchasing organizations to reduce product costs; and a store-by-store
focus on payor and product mix to improve gross margins.
Operating Expenses
Our operating expenses include selling and marketing, general and
administrative (G&A), and bad debt expenses. Our 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). Our business model for operating
expenses is to continue to improve efficiency on greater volume.
Selling and Marketing Expenses
Our selling and marketing expenses increased $0.1 million or 9.8% from
$0.8 million in the first quarter of fiscal 2002 to $0.9 million in the first
quarter of fiscal 2003. This increase in expenses is primarily due to head count
additions and increased travel and promotion activities. Marketing expenses as a
percentage of revenue remained unchanged at 0.9% in the first quarters of fiscal
2003 and fiscal 2002.
10
We operate a consolidated selling and marketing organization serving
both the Mail Order and Retail segments. We believe this integrated approach
increases the effectiveness of our selling and marketing efforts.
General and Administrative Expenses
The following chart shows the quarter to quarter comparisons of general
and administrative expenses, excluding bad debt expense.
THREE MONTHS ENDED
---------------------------------------
SEPTEMBER 27, SEPTEMBER 28,
(DOLLAR AMOUNTS IN THOUSANDS) 2002 2001 % Change
- ---------------------------------------------------------------------------------------------------------------------
On-going business $ 9,020 $ 7,965 13.2%
Stores closed in fiscal year 2002 - 789 (100.0)%
Transition and restatement costs - 1,391 (100.0)%
- ---------------------------------------------------------------------------------------------------------------------
Total Company $ 9,020 $ 10,145 (11.1)%
=====================================================================================================================
Our general and administrative expenses decreased $1.1 million or 11.1%
from $10.1 million in the first quarter of fiscal 2002 to $9.0 million in the
first quarter of fiscal 2003. As a percentage of revenue, general and
administrative costs decreased from 10.9% to 9.0%. The decrease was due to two
significant factors. First, the first quarter fiscal 2002 general and
administrative expenses included $1.4 million related to the StatScript retail
business for the costs of transferring the Kansas City retail headquarters to
Minneapolis and costs associated with the fiscal 2001 financial restatement. No
similar costs were incurred in the first quarter of fiscal 2003. Second, the
first quarter fiscal 2002 general and administrative expenses included $0.8
million related to the operations from fourteen Retail stores that closed in the
latter part of fiscal 2002. The decrease was offset by higher lease and
pharmacist operating costs in existing specialty pharmacy stores.
Bad Debt Expenses
Our bad debt expense decreased $0.1 million or 18.0% from $0.6 million
in the first quarter of fiscal 2002 to $0.5 million in the first quarter of
fiscal 2003. Bad debt expenses represented 0.5% and 0.7% of revenues for the
first quarter of fiscal 2003 and fiscal 2002, respectively. The decrease in bad
debt expense reflects our consolidation of billing and collection operations to
our Minneapolis headquarters and related process improvements. We expect our
future bad debt expense to continue at or below 1% of revenue.
Interest Income
Interest income, net of interest expense, in the first quarter of
fiscal 2003 was consistent with the same period last year. Included in interest
income for the first quarter of fiscal 2002 was $0.1 million of interest on a
note receivable with the buyer of our HSM business in September 2000. This note
was paid in full in fourth quarter of fiscal 2002 and as a result did not
generate interest income in the first quarter of fiscal 2003. We had a $10.4
million balance on our line of credit at September 28, 2001, incurring interest
expense for first quarter fiscal 2002, compared to a zero balance on our line of
credit at September 27, 2002, resulting in no interest expense for first quarter
fiscal 2003.
Income Taxes
Our income tax rate was 38.5% in the first quarter ended September 27,
2002, compared to 39.0% in the first quarter ended September 28, 2001. Looking
forward, we expect our combined Federal and State tax rate to approximate 39.0%.
11
LIQUIDITY AND CAPITAL RESOURCES
As of September 27, 2002, we had $45.2 million of working capital,
compared to $43.9 million as of June 28, 2002. During the first quarter of
fiscal 2003, we generated $3.0 million of cash from operating activities. The
average days sales outstanding (DSO) of our accounts receivable improved from 44
days at June 28, 2002, to 40 days at September 27, 2002. We generated $3.6
million in cash from our receivable collections due to faster payment from our
larger payors and active collection efforts. We expect our receivables to
continue to perform in the low forty DSO range or better during the remainder of
fiscal 2003. The average days inventory on hand increased from 9 days at June
28, 2002, to 10 days at September 27, 2002. We used $1.5 million to finance our
inventory growth. We expect our inventory to perform at or below 10 days through
the remainder of the year. In addition, we used $1.2 million in cash to pay the
bonuses for fiscal year 2002 and to pay expenses accrued for the store closings.
We used approximately $0.3 million of cash in investing activities
during the first quarter of fiscal 2003 for leasehold improvements for the
StatScript specialty pharmacies and for computer hardware and software.
We had no long-term debt as of September 27, 2002. Shareholders' equity
as of fiscal 2003 first quarter-end and fiscal year-end 2002 was $80.4 million
and $79.4 million, respectively. Net tangible assets, an indicator of borrowing
capacity, as of fiscal 2003 first quarter-end and fiscal year-end 2002 were
$50.2 million and $49.2 million, respectively. As of June 28, 2002, we had a
secured line of credit totaling $30 million. We are in compliance with the debt
covenants of the line of credit as of September 27, 2002. Under the terms of the
agreement, the debt is secured by receivables and inventory and bears interest
at Prime Rate. The line of credit expires in January, 2003. We are currently in
the process of securing a new, long-term line of credit agreement, which we
expect to complete by December, 2002.
There were no short-term borrowings outstanding under our line of
credit at September 27, 2002. We believe that the line of credit and cash
provided by operating activities should allow us to meet foreseeable cash
requirements and provide the flexibility to fund future working capital growth.
However, we would need to seek additional debt or equity financing beyond our
current $30 million line of credit to fund any major business acquisitions or
capital spending projects. We are not currently planning any major capital
projects beyond our normal requirements of $2 to $3 million per year.
Our future contractual commitments consist entirely of payments due
under operating leases. See Note 5, Notes to Consolidated Financial Statements
included in our Annual Report on Form 10-K for the fiscal year ended June 28,
2002.
RESTRICTED STOCK GRANTS
In August 2002, the Compensation Committee of the Board of Directors
approved restricted stock grants to our officers totaling 145,000 shares of
restricted common stock under our 2001 Stock Incentive Plan. These restricted
shares, valued at $682,950 based on our fair market value of $4.71 per common
share at the date of grant, will be recognized as compensation expense over the
four year vesting period of the grant, subject to an acceleration provision
based on increases in our stock price. Excluding the acceleration provision, the
expected financial impact of the stock grant will be approximately $106,000
annually, net of tax, or $0.01 per share.
IMPACT OF INFLATION
Changes in prices charged by biopharmaceutical manufacturers for the
drugs we dispense, along with increasing labor costs, freight and supply costs
and other overhead expenses, affect our cost of revenue and general and
administrative expenses. Historically, we have been able to pass a portion of
the effect of such increases to the payor and patient pursuant to automatic
price adjustments made under our payor contracts. As a result, changes due to
inflation have not had significant adverse effects on our operations.
12
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 on-going arrangements with drug
manufacturers and wholesalers, and their ability to satisfy our volume, pricing,
and product requirements; decrease in demand for drugs we handle; changes in
Medicare or Medicaid; loss of relationships with payors (including Aetna or
other large contracts); negative cost containment trends or financial
difficulties by our payors; changes in or unknown violations of various federal,
state, and local regulations; costs and other effects of legal or administrative
proceedings; the adoption of new or changes to existing accounting policies and
practices and the application of such policies and practices; the amount and
rate of growth in our selling, general and administrative expenses; the
impairment of a significant amount of our goodwill; the effects of and changes
in, trade, monetary and fiscal policies, laws and regulations; other activities
of government agencies; our ability to obtain competitive financing to fund
operations and growth; continuing qualifications to list our securities on a
national stock exchange; developments in medical research affecting the
treatment or cure of conditions for which we distribute medications; the ability
of management and accounting controls to assure accurate and timely information;
computer system, software, or hardware failures or malfunctions; heightened
competition; and loss or retirement of key executives or changes in ownership.
We urge you to read the cautionary statement filed as Exhibit 99.1 to our most
recently filed Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to interest rate risk primarily through our borrowing
activities under our line of credit discussed in Item 2 of this report. Our
short-term borrowings bear interest at variable rates based on the prime rate. A
10% increase in interest rates would not have a significant effect on our
interest expense based on current borrowing levels. We do not use financial
instruments for trading or other speculative purposes and are not a party to any
leveraged financial instruments.
ITEM 4. CONTROLS AND PROCEDURES
Our management, including the Chief Executive Officer and Chief
Financial Officer, have conducted an evaluation of the effectiveness of
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14 within
90 days of filing this report on October 22, 2002. Based on that evaluation, the
Chief Executive Officer and the Chief Financial Officer concluded that the
disclosure controls and procedures are effective in ensuring that all material
information required to be filed in this quarterly report has been made known to
them in a timely fashion. There have been no significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date the Chief Executive Officer and the Chief Financial
Officer completed their evaluation.
13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments in legal proceedings involving
Chronimed Inc or its subsidiaries since those reported in our Annual Report on
Form 10-K for the fiscal year ended June 28, 2002.
We are involved in routine litigation incidental to the conduct of our
business. We do not believe that any of the litigation to which we are currently
a party will have a material adverse effect on our business or financial
condition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
99.1 Certification Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
b) Reports on Form 8-K
None.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHRONIMED INC.
Dated: November 6, 2002 By /s/ HENRY F. BLISSENBACH
----------------------------------
Henry F. Blissenbach
Chief Executive Officer and
Chairman of the Board of Directors
Dated: November 6, 2002 /s/ GREGORY H. KEANE
----------------------------------
Gregory H. Keane
Vice President, Chief Financial
Officer and Treasurer
(Principal Financial and
Accounting Officer)
15
CERTIFICATIONS
I, Henry F. Blissenbach, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Chronimed Inc;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of material fact or omit to state a material fact
necessary to make the statement made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial
data and have identified for the registrant's auditors any
material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 6, 2002
/s/ HENRY F. BLISSENBACH
- ----------------------------------------------
Henry F. Blissenbach
Chief Executive Officer
16
I, Gregory H. Keane, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Chronimed Inc;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of material fact or omit to state a material fact
necessary to make the statement made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
d) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial
data and have identified for the registrant's auditors any
material weaknesses in internal controls; and
e) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 6, 2002
/s/ GREGORY H. KEANE
- ----------------------------------------------
Gregory H. Keane
Chief Financial Officer
17