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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 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)
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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 - 12,496,916 shares outstanding as of January
31, 2003
================================================================================
CHRONIMED INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 27, 2002
INDEX
PART I. FINANCIAL INFORMATION PAGE
- ------------------------------- ----
Item 1. Financial Statements
Consolidated Balance Sheets -- December 27, 2002 (unaudited) and June 28, 2002 2
Consolidated Statements of Operations (unaudited) -- Three and six months ended
December 27, 2002 and December 28, 2001 3
Consolidated Statements of Cash Flows (unaudited) -- Six months ended December 27,
2002 and December 28, 2001 4
Notes to Consolidated Financial Statements -- December 27, 2002 5 - 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 - 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Item 4. Controls and Procedures 14
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 15
Items 2, 3, and 5 have been omitted since all items are not applicable or the answers are negative.
Item 4: Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K
a.) Exhibits 15
b.) Reports on Form 8-K 15
SIGNATURES 16
- ----------
CERTIFICATIONS 17 - 18
- --------------
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHRONIMED INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 27,
2002 JUNE 28,
(UNAUDITED) 2002
- ----------------------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 14,423 $ 6,306
Accounts receivable (net of allowances of $7,075 and $8,923
at December 27, 2002 and June 28, 2002, respectively) 38,888 44,461
Inventory 10,918 8,334
Prepaid expenses 1,943 1,062
Deferred taxes 3,389 3,437
- ----------------------------------------------------------------------------------------------------------
Total current assets 69,561 63,600
Property and equipment, net 4,861 5,485
Goodwill 30,233 30,233
Other assets, net 139 177
- ----------------------------------------------------------------------------------------------------------
Total assets $104,794 $ 99,495
==========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 17,653 $ 14,811
Accrued expenses 3,065 3,117
Accrued bonus 700 1,174
Income taxes payable 1,270 648
- ----------------------------------------------------------------------------------------------------------
Total current liabilities 22,688 19,750
Deferred taxes 278 344
Shareholders' equity
Preferred stock - -
Common stock, issued and outstanding shares--
12,478 and 12,353, respectively 125 124
Additional paid-in capital 55,713 55,122
Unearned compensation (527) -
Retained earnings 26,517 24,155
- ----------------------------------------------------------------------------------------------------------
Total shareholders' equity 81,828 79,401
- ----------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $104,794 $ 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 SIX MONTHS ENDED
------------------------------------- ------------------------------------
DECEMBER 27, DECEMBER 28, DECEMBER 27, DECEMBER 28,
2002 2001 2002 2001
- ------------------------------------------------------------------------------- ------------------------------------
Revenue
Mail Order $ 45,094 $ 45,566 $ 86,809 $ 85,891
Retail 63,542 54,988 121,720 108,091
- --------------------------------------------------------------------------------------------------------------------------
Total revenue 108,636 100,554 208,529 193,982
Cost of revenue 94,976 88,512 182,893 170,396
- --------------------------------------------------------------------------------------------------------------------------
Gross profit 13,660 12,042 25,636 23,586
Operating expenses
Selling and marketing 1,002 871 1,925 1,712
General and administrative 9,549 9,861 18,569 20,006
Bad debt expense 953 821 1,464 1,444
- --------------------------------------------------------------------------------------------------------------------------
Total operating expenses 11,504 11,553 21,958 23,162
Income from operations 2,156 489 3,678 424
Interest income 81 117 144 229
Interest expense - (132) - (219)
Other income - 64 - 109
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,237 538 3,822 543
Income tax expense (850) (210) (1,460) (212)
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 1,387 $ 328 $ 2,362 $ 331
==========================================================================================================================
Basic and diluted net
income per share $ 0.11 $ 0.03 $ 0.19 $ 0.03
==========================================================================================================================
Basic weighted-average shares 12,353 12,315 12,353 12,315
Diluted weighted-average shares 12,444 12,316 12,400 12,316
See notes to consolidated financial statements
3
CHRONIMED INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
---------------------------------------
DECEMBER 27, DECEMBER 28,
2002 2001
- ----------------------------------------------------------------------------------------------------------------
Operating activities
Net income $ 2,362 $ 331
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,171 1,480
Amortization of restricted stock 65 -
Deferred income taxes (18) -
Changes in operating assets and liabilities:
Accounts receivable 5,573 (6,680)
Income taxes 622 52
Inventory (2,584) (1,544)
Accounts payable 2,842 (429)
Accrued expenses (526) 305
Other assets (853) (684)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 8,654 (7,169)
Investing activities
Purchases of property and equipment (537) (571)
- ----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (537) (571)
Financing activities
Net proceeds from borrowings - 9,000
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities - 9,000
Increase in cash and cash equivalents 8,117 1,260
Cash and cash equivalents at beginning of year 6,306 -
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 14,423 $ 1,260
================================================================================================================
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
- In August 2002, we granted 145,000 shares of restricted stock to our
officers and in October 2002 cancelled 20,000 of the shares. Related to
the grant, we recognized compensation expense of $37,000 and $65,000 in
the quarter ended and six months ended December 27, 2002, respectively.
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 six months ended
December 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 SIX MONTHS ENDED
---------------------------------- ----------------------------------
DECEMBER 27, DECEMBER 28, DECEMBER 27, DECEMBER 28,
2002 2001 2002 2001
---------------------------------- ----------------------------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Numerator
Net income $ 1,387 $ 328 $ 2,362 $ 331
============================================================================================================================
Denominator
Denominator for basic net
income per share - weighted
average shares outstanding 12,353 12,315 12,353 12,315
Effect of dilutive stock options
and restricted stock 91 1 47 1
- ----------------------------------------------------------------------------------------------------------------------------
Denominator for diluted net
income per share - weighted
average shares outstanding 12,444 12,316 12,400 12,316
============================================================================================================================
Basic and diluted
net income per share $ 0.11 $ 0.03 $ 0.19 $ 0.03
============================================================================================================================
Employee stock options of 1,150,245 and 1,476,345 for the second
quarter and six months ended December 27, 2002, respectively, have been excluded
from the 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. For the second quarter and six months ended December 28,
2001, employee options of 2,559,018, have been excluded from the 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 an increase in our stock price to $7.54 or more for five consecutive
trading days. In October 2002, 20,000 of these shares were cancelled. Excluding
the acceleration provision, the expected financial impact of the stock grant
will be approximately $91,000 annually, net of tax, or $0.01 per share.
5. SIGNIFICANT CONCENTRATIONS
Payor reimbursements from Aetna, Inc. represented 25.4% of our revenue
in the second quarter of fiscal 2003 and 24.9% in the six months ended December
27, 2002. This compares to 28.1% in the second quarter of fiscal 2002 and 26.8%
in the six months ended December 28, 2001. 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 90.6% of our inventory purchases in the second quarter of fiscal year
2003 and 91.8% in the six months ended December 27, 2002. McKesson made up 91.2%
of our inventory purchases in the second quarter of fiscal year 2002 and 90.2%
in the six months ended December 28,
6
2001. 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 22.3% and 21.7% of our accounts receivable balance at
December 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.
6. BUSINESS SEGMENT INFORMATION
We have two reportable segments. The Mail Service segment includes the
medications distributed through our mail service facilities. The majority of the
products are biotech injectable and organ transplant drugs. The Retail segment
consists of our StatScript Pharmacy stores which distribute HIV/AIDS drugs,
organ transplant medications, and biotech injectable products.
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 December 27, 2002
Revenue $ 45,094 $ 63,542 $108,636
Income from operations 521 1,635 2,156
For the three months ended December 28, 2001
Revenue $ 45,566 $ 54,988 $100,554
Income (loss) from operations 1,046 (557) 489
For the six months ended December 27, 2002
Revenue $ 86,809 $121,720 $208,529
Income from operations 1,045 2,633 3,678
For the six months ended December 28, 2001
Revenue $ 85,891 $108,091 $193,982
Income (loss) from operations 1,316 (892) 424
Income from operations includes special charges relating to the retail
segment totaling $0.8 million in the second quarter ended December 28, 2001, and
$2.2 million for the six months ended December 28, 2001. These charges relate to
transferring the StatScript headquarters from Kansas City to Minneapolis,
expenses associated with the fiscal 2001 financial restatement, and store
closing costs.
7
The following table is a reconciliation of reportable segment
information to our consolidated totals.
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------------------- ----------------------------------------
DECEMBER 27, DECEMBER 28, DECEMBER 27, DECEMBER 28,
(IN THOUSANDS) 2002 2001 2002 2001
- --------------------------------------------------------------------------------- ----------------------------------------
INCOME FROM OPERATIONS
Total for reportable segments $ 2,156 $ 489 $ 3,678 $ 424
Unallocated amounts:
- Interest income (expense) 81 (15) 144 10
- Other income - 64 - 109
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes $ 2,237 $ 538 $ 3,822 $ 543
=============================================================================================================================
The following table presents assets by reportable segment.
(IN THOUSANDS) MAIL ORDER RETAIL CORPORATE TOTAL
- -----------------------------------------------------------------------------------------------------------------------------
As of December 27, 2002
Segment assets $ 25,407 $ 60,775 $ 18,612 $ 104,794
As of 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
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.
The following table represents income and expense items as a percentage
of revenue.
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------------- ----------------------------------
DECEMBER 27, DECEMBER 28, DECEMBER 27, DECEMBER 28,
FISCAL YEAR 2002 2001 2002 2001
- -------------------------------------------------------------------------- ----------------------------------
Revenue
Mail Order 41.5 % 45.3 % 41.6 % 44.3 %
Retail 58.5 54.7 58.4 55.7
- -------------------------------------------------------------------------------------------------------------------
Total revenue 100.0 100.0 100.0 100.0
Cost of revenue 87.4 88.0 87.7 87.8
- -------------------------------------------------------------------------------------------------------------------
Gross profit 12.6 12.0 12.3 12.2
Operating expenses
Selling and marketing 0.9 0.9 0.9 0.9
General and administrative 8.8 9.8 8.9 10.3
Bad debt expense 0.9 0.8 0.7 0.8
- -------------------------------------------------------------------------------------------------------------------
Total operating expenses 10.6 11.5 10.5 12.0
Income from operations 2.0 0.5 1.8 0.2
Interest income, net 0.1 - - -
Other income - - - 0.1
Income tax expense (0.8) (0.2) (0.7) (0.1)
- -------------------------------------------------------------------------------------------------------------------
Net income 1.3 % 0.3 % 1.1 % 0.2 %
===================================================================================================================
Revenue
Revenue increased $8.1 million or 8.0% to $108.6 million in the second
quarter of fiscal 2003 from $100.5 million in the second quarter of fiscal 2002.
For the six months ended December 27, 2002, total revenue increased $14.5
million or 7.5% to $208.5 million from $194.0 million for the same period last
year.
9
The following table shows revenue by segment.
THREE MONTHS ENDED
-----------------------------------------
DECEMBER 27, DECEMBER 28,
(IN THOUSANDS) 2002 2001 % CHANGE
- ------------------------------------------------------------------------------------------------------------------
Mail Order segment $ 45,094 $ 45,566 (1.0)%
- ------------------------------------------------------------------------------------------------------------------
Retail segment
On-going business 63,542 49,892 27.4%
Stores closed in FY2002 - 5,096 (100.0)%
- ------------------------------------------------------------------------------------------------------------------
Total Retail 63,542 54,988 15.6%
- ------------------------------------------------------------------------------------------------------------------
Total Company $108,636 $100,554 8.0%
==================================================================================================================
SIX MONTHS ENDED
-----------------------------------------
DECEMBER 27, DECEMBER 28,
2002 2001 % CHANGE
- ------------------------------------------------------------------------------------------------------------------
Mail Order segment $ 86,809 $ 85,891 1.1%
- ------------------------------------------------------------------------------------------------------------------
Retail segment
On-going business 121,720 98,136 24.0%
Stores closed in FY2002 - 9,955 (100.0)%
- ------------------------------------------------------------------------------------------------------------------
Total Retail 121,720 108,091 12.6%
- ------------------------------------------------------------------------------------------------------------------
Total Company $208,529 $193,982 7.5%
==================================================================================================================
The Mail Order segment revenue decreased 1.0% in the second quarter of
fiscal 2003 compared to the same period last year. This is primarily due to
lower Synagis revenue in the quarter and the slow ramp-up of our payor
contracts. For the six months ended December 27, 2002, and December 28, 2001,
the Mail Order segment revenue increased 1.1%. The Mail Order patient base and
order activity in fiscal 2003 is level with fiscal 2002. Payor reimbursements
from Aetna represented 61.1% and 62.0% of our Mail Order revenues in the second
quarters of fiscal years 2003 and 2002, respectively. For the six months ended
December 27, 2002, and December 28, 2001, payor reimbursements from Aetna
represented 59.9% and 60.4% of our Mail Order revenues, respectively. Except for
Aetna, no other private payor accounted for 10% or more of our revenues in the
six months ended December 27, 2002, and December 28, 2001.
The Retail segment revenue grew 15.6% in the second quarter of fiscal
2003 compared to the same period last year. For the six months ended December
27, 2002, and December 28, 2001, the Retail segment revenue increased 12.6%.
Excluding the revenue from the fourteen StatScript retail locations closed
during fiscal 2002, Retail revenue increased $13.7 million or 27.4% for the
second quarter of fiscal 2003 compared to the same period last year. For the six
months ended December 27, 2002, and December 28, 2001, excluding the revenue
from the fourteen closed StatScript retail locations, the Retail revenue
increased $23.6 million or 24.0%. This increase is due to continued additions of
new patients at existing stores and to the revenue contribution of three
District of Columbia Department of Mental Health pharmacies we began to manage
in November 2002. 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, Hepatitis C, and other biotech
injectable medications. A single private payor represented approximately 5.2%
and 6.4% of our on-going Retail revenues in the second quarters of fiscal years
2003 and 2002, respectively. Year-to-date, the private payor represented 5.7%
and 6.5% of our on-going Retail revenues for the six months ended December 27,
2002, and December 28, 2001, respectively.
10
Cost of Revenue and Gross Profit
Total gross profit dollars increased $1.6 million or 13.4% to $13.6
million in the second quarter of fiscal 2003 from $12.0 million in the second
quarter of fiscal 2002. For the six months ended December 27, 2002, total gross
profit dollars increased 8.7% to $25.6 million from $23.6 million for the same
period last year. Second quarter gross margins as a percentage of revenue
increased to 12.6% in fiscal year 2003 from 12.0% in fiscal year 2002. Gross
margins increased to 12.3% for the six months ended December 27, 2002, from
12.2% for the same period last year.
Mail Order margins as a percentage of revenue increased slightly in the
second quarter and six months ended December 27, 2002 compared to the same
period last year due to improved purchasing programs and a change in product mix
toward higher margin products. Aetna represented 46.1% and 40.9% of our Mail
Order margins for the second quarters of fiscal years 2003 and 2002,
respectively. Year-to-date, Aetna represented 44.2% and 36.0% of our Mail Order
margins for the six months ended December 27, 2002, and December 28, 2001,
respectively.
Retail margins as a percentage of revenue increased slightly in the
second quarter ended but decreased for the six months ended December 27, 2002,
compared to the same period last year. The slight increase in second quarter is
due to a change in drug mix and the closing of lower margin stores in fiscal
2002. The year-to-date decrease is due to pricing pressures in selected
geographic markets and store locations. A single private payor represented 7.3%
and 9.1% of our on-going Retail margins for the second quarters of fiscal years
2003 and 2002, respectively. Year-to-date, the single private-payor represented
8.0% and 9.7% of our on-going Retail margins for the six months ended December
27, 2002, and December 28, 2001, 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 patients and profitable medications into 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 15.0% to
$1.0 million in the second quarter of fiscal 2003 from $0.9 million in the
second quarter of fiscal 2002. Year-to-date, our selling and marketing expenses
increased $0.2 million or 12.4% to $1.9 million for the six months ended
December 27, 2002, from $1.7 million for the same period last year. This
increase in expenses is primarily due to head count additions and increased
travel and promotion activities. Selling and marketing expenses as a percentage
of revenue remained unchanged at 0.9% in the second quarters and years-to-date
of fiscal 2003 and fiscal 2002.
11
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
------------------------------------------
DECEMBER 27, DECEMBER 28,
(IN THOUSANDS) 2002 2001 % CHANGE
- ------------------------------------------------------------------------------------------------------------
On-going business $ 9,549 $ 9,022 5.8%
Transition and restatement costs - 839 (100.0)%
- ------------------------------------------------------------------------------------------------------------
Total Company $ 9,549 $ 9,861 (3.2)%
============================================================================================================
SIX MONTHS ENDED
------------------------------------------
DECEMBER 27, DECEMBER 28,
2002 2001 % CHANGE
- ------------------------------------------------------------------------------------------------------------
On-going business $ 18,569 $ 17,776 4.5%
Transition and restatement costs - 2,230 (100.0)%
- ------------------------------------------------------------------------------------------------------------
Total Company $ 18,569 $ 20,006 (7.2)%
============================================================================================================
Our general and administrative expenses decreased $0.3 million or 3.2%
to $9.5 million in the second quarter of fiscal 2003 from $9.8 million in the
second quarter of fiscal 2002. As a percentage of revenue, general and
administrative costs decreased from 9.8% to 8.8%. For the six months ended
December 27, 2002, our general and administrative expenses decreased $1.4
million or 7.2% to $18.6 million from $20.0 million for the same period last
year. As a percentage of revenue, general and administrative costs decreased to
8.9% from 10.3%. The decrease was due to two significant factors. First, the
first and second quarter fiscal 2002 general and administrative expenses
included $2.2 million related to the StatScript retail business for the costs of
transferring the Kansas City retail headquarters to Minneapolis, costs
associated with the fiscal 2001 financial restatement, and store closing costs.
No similar costs were incurred in the six months ended December 27, 2002.
Second, general and administrative expenses of $0.8 million and $1.6 million for
the three and six months ended December 28, 2001, respectively, were directly
related to the operations of 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 in addition to the general
and administrative costs associated with our involvement in retail distribution
of mental health drugs.
Bad Debt Expenses
Our bad debt expense increased $0.1 million to $0.9 million in the
second quarter of fiscal 2003 from $0.8 million in the second quarter of fiscal
2002. Bad debt expense remained relatively unchanged for the six months ended
December 27, 2002, and December 28, 2001. Bad debt expense represented 0.9% and
0.8% of revenue for the second quarter of fiscal 2003 and fiscal 2002,
respectively, and it represented 0.7% and 0.8% of revenue for the six months
ended December 27, 2002, and December 28, 2001, respectively. We expect our
future bad debt expense to continue at or below 1% of revenue.
Interest Income
Interest income, net of interest expense, increased slightly to $0.1
million in the second quarter of fiscal 2003 and six months ended December 27,
2002, from $0.0 million for the same periods last year. Included in interest
income for the six months ended December 28, 2001, was $0.2 million of interest
on a note receivable with the
12
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 or second quarters of fiscal 2003. We had a $13.1 million balance
on our line of credit at December 28, 2001, incurring interest expense for the
six months ended December 28, 2001, compared to a zero balance on our line of
credit at December 27, 2002, resulting in no year-to-date interest expense in
fiscal 2003.
Income Taxes
Our income tax rate was 38.0% in the second quarter of fiscal 2003, and
38.2% for the six months ended December 27, 2002, compared to 39.0% in the
second quarter and for the six months ended December 28, 2001. Looking forward,
we expect our combined Federal and State tax rate to remain at 38.0%.
LIQUIDITY AND CAPITAL RESOURCES
As of December 27, 2002, we had $46.9 million of working capital,
compared to $43.9 million as of June 28, 2002. During the second quarter of
fiscal 2003, we generated $8.7 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 37 days at December 27, 2002. We generated $5.6
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 high thirty to low forty DSO range during the
remainder of fiscal 2003. We had an increase in cash of $2.8 million from higher
accounts payable due to inventory purchased to support our revenue growth. The
average days inventory on hand increased from 9 days at June 28, 2002, to 10
days at December 27, 2002. We used $2.6 million to finance our inventory growth.
We expect our inventory to perform at or below 10 days through the remainder of
the year.
We used approximately $0.5 million of cash in investing activities
during the six-month period ended December 27, 2002, for leasehold improvements
for the StatScript specialty pharmacies and for computer hardware and software.
We had no long-term debt as of December 27, 2002. Shareholders' equity
as of December 27, 2002, and fiscal year-end 2002 was $81.8 million and $79.4
million, respectively. Net tangible assets, an indicator of borrowing capacity,
as of December 27, 2002, and fiscal year-end 2002 were $51.2 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 December 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 January, 2003, and has been extended to April 2003. We are
currently in the process of securing a new, long-term line of credit agreement.
There were no short-term borrowings outstanding under our line of
credit at December 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
13
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 an increase in our stock price to $7.54 or more
for five consecutive trading days. In October 2002, 20,000 of these shares were
cancelled. Excluding the acceleration provision, the expected financial impact
of the stock grant will be approximately $91,000 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.
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. 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.
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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 2. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Two matters were submitted to a vote at the Annual Meeting of
Shareholders held November 20, 2002. The voting results on the two matters
considered at the meeting are stated below.
Matter 1: Election of Directors
The director nominees described in the Company's Proxy Statement were
elected as follows:
For Withhold
--- --------
Henry F. Blissenbach Class II, three year term 10,809,369 1,043,885
Thomas F. Heaney Class II, three year term 11,663,354 189,900
Charles V. Owens Class II, three year term 11,661,282 191,972
The terms for directors David R. Hubers and Thomas A. Cusick expire at
the Annual Meeting of shareholders to be held in 2003. Myron Z. Holubiak was
elected on September 20, 2002, to serve as a Class III director. Mr. Holubiak's
term expires at the Annual Meeting of shareholders to be held in 2003.
The term for director Stuart A. Samuels expires at the Annual Meeting
of shareholders to be held in 2004. John H. Flittie resigned from the Board
effective December 31, 2002.
Matter 2: Appointment of Independent Auditors
The appointment of Ernst & Young LLP as Independent Auditors for the 2003 fiscal
year was ratified as follows:
For Against Abstain Broker Non-vote
--- ------- ------- ---------------
11,739,175 104,654 9,425 0
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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHRONIMED INC.
Dated: February 6, 2003 By /s/ HENRY F. BLISSENBACH
-----------------------------------
Henry F. Blissenbach
Chief Executive Officer and
Chairman of the Board of Directors
Dated: February 6, 2003 /s/ GREGORY H. KEANE
-----------------------------------
Gregory H. Keane
Vice President, Chief Financial
Officer and Treasurer
(Principal Financial and Accounting
Officer)
16
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 registrant's
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: February 6, 2003
/s/ HENRY F. BLISSENBACH
- -----------------------------------------------------
Henry F. Blissenbach
Chief Executive Officer
17
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):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
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: February 6, 2003
/s/ GREGORY H. KEANE
- -----------------------------------------------------
Gregory H. Keane
Chief Financial Officer
18