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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 SEPTEMBER 26, 2003
[ ] 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 by checkmark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
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 -- 12,671,795 shares outstanding as of
October 31, 2003
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CHRONIMED INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 26, 2003
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -- September 26, 2003 (unaudited) and June 27, 2003 2
Consolidated Statements of Income (unaudited) -- Three months ended
September 26, 2003, and September 27, 2002 3
Consolidated Statements of Cash Flows (unaudited) -- Three months ended
September 26, 2003, and September 27, 2002 4
Notes to Consolidated Financial Statements -- September 26, 2003 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, 3, 4, and 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
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHRONIMED INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 26,
2003 JUNE 27,
(unaudited) 2003
- ------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 15,973 $ 22,854
Accounts receivable (net of allowances of $6,380 and $5,940 44,673 40,001
at September 26, 2003, and June 27, 2003, respectively)
Inventory 9,374 8,614
Prepaid expenses 1,648 1,071
Deferred taxes 2,607 2,607
- ------------------------------------------------------------------------------------------------------------------
Total current assets 74,275 75,147
Property and equipment, net 4,375 4,487
Goodwill 30,233 30,233
Other assets, net 135 133
- ------------------------------------------------------------------------------------------------------------------
Total assets $ 109,018 $ 110,000
==================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 15,972 $ 19,085
Accrued expenses 2,824 2,136
Accrued bonus 350 1,420
Income taxes payable 894 821
- ------------------------------------------------------------------------------------------------------------------
Total current liabilities 20,040 23,462
Deferred taxes 1,025 1,025
Shareholders' equity
Preferred stock - -
Common stock, issued and outstanding shares--
12,619 and 12,541, respectively 126 125
Additional paid-in capital 56,684 56,248
Retained earnings 31,143 29,140
- ------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 87,953 85,513
- ------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 109,018 $ 110,000
==================================================================================================================
See notes to consolidated financial statements
2
CHRONIMED INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
--------------------------------------------
SEPTEMBER 26, SEPTEMBER 27,
2003 2002
- ------------------------------------------------------------------------------------------------------------------
Revenue $ 128,602 $ 99,893
Cost of revenue 113,427 87,917
- ------------------------------------------------------------------------------------------------------------------
Gross profit 15,175 11,976
Operating expenses
Selling and marketing 1,322 923
General and administrative 10,703 9,020
Bad debt 934 511
- ------------------------------------------------------------------------------------------------------------------
Total operating expenses 12,959 10,454
Income from operations 2,216 1,522
Interest income 52 63
Interest expense (1) -
- ------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,267 1,585
Income tax expense (264) (610)
- ------------------------------------------------------------------------------------------------------------------
Net income $ 2,003 $ 975
==================================================================================================================
Basic net income per share $ 0.16 $ 0.08
Diluted net income per share $ 0.15 $ 0.08
==================================================================================================================
Basic weighted-average shares 12,583 12,353
Diluted weighted-average shares 13,096 12,363
See notes to consolidated financial statements
3
CHRONIMED INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
-------------------------------------------
SEPTEMBER 26, SEPTEMBER 27,
2003 2002
- --------------------------------------------------------------------------------------------------------------------
Operating activities
Net income $ 2,003 $ 975
Adjustments to reconcile income to net cash (used in) provided
by operating activities:
Depreciation and amortization 573 596
Amortization of restricted stock - 28
Changes in operating assets and liabilities:
Accounts receivable (4,672) 3,582
Income taxes 73 158
Inventory (760) (1,507)
Accounts payable (3,113) 927
Accrued expenses (382) (1,221)
Other assets (579) (505)
- ------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (6,857) 3,033
Investing activities
Purchases of property and equipment (461) (309)
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (461) (309)
Financing activities
Net proceeds from issuance of common stock 437 -
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 437 -
(Decrease) increase in cash and cash equivalents (6,881) 2,724
Cash and cash equivalents at beginning of year 22,854 6,306
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 15,973 $ 9,030
==================================================================================================================
See notes to consolidated financial statements
4
CHRONIMED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Chronimed Inc. ("Chronimed" or the "Company"), a specialty pharmacy,
distributes prescription drugs and provides specialized therapy management
services for people with certain health conditions, including HIV/AIDS, organ
transplants, and diseases treated with biotech injectable medications. We work
with patients, physicians and other health care providers, pharmaceutical
manufacturers, health plans and insurers, and government agencies to improve
clinical and economic outcomes.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments, consisting of normal recurring accruals, considered necessary for a
fair presentation have been included. Operating results for the three months
ended September 26, 2003, are not necessarily indicative of the results that may
be expected for the fiscal year ending July 2, 2004. The balance sheet at June
27, 2003, 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 27, 2003.
FISCAL YEAR
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. Fiscal 2004 will include 53 weeks with the year ending July 2, 2004.
REVENUE RECOGNITION
Revenue is recognized at the time prescriptions are shipped to or
picked up by the patient. We participate in various third-party provider
networks and state Medicaid programs. Under a majority of these networks, the
amount to be paid for our products is determined (or "adjudicated") through
electronic connections with these networks at the time of sale. However, for
certain third-party providers and state Medicaid programs for which there is no
electronic adjudication process available at the time of sale, we bill a
standard list price (versus a known contracted price) and then simultaneously
determine an appropriate estimate for expected payor discount based on our
reimbursement history for each payor class. This reimbursement history is
updated quarterly. Revenue is then reported net of the estimated payor discounts
and adjusted in future periods as final settlements are determined.
STOCK-BASED COMPENSATION
We have adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123 (Statement No. 123), "Accounting for Stock-Based
Compensation," as amended by Statement of Financial Accounting Standards No. 148
but apply Accounting Principles Board Opinion No. 25 (APB 25) and related
interpretations in accounting for our stock plans. Under APB 25, when the
exercise price of an employee stock option equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
The following table illustrates the effect on net income and earnings per share
if we had applied the fair value recognition provisions of Statement No. 123 to
stock-based employee compensation.
5
THREE MONTHS ENDED
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SEPTEMBER 26, SEPTEMBER 27,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2003 2002
- ---------------------------------------------------------------------------------------------------------------------
Net income - as reported $ 2,003 $ 975
Plus reported stock-based employee
compensation cost, net of related tax effects - 18
Deduct pro forma stock-based employee
compensation cost, net of related tax effects (367) (257)
- ------------------------------------------------------------------------------------------------------------------
Net income - pro forma $ 1,636 $ 736
==================================================================================================================
Earnings per share - basic as reported $ 0.16 $ 0.08
Earnings per share - basic pro forma $ 0.13 $ 0.06
Earnings per share - diluted as reported $ 0.15 $ 0.08
Earnings per share - diluted pro forma $ 0.13 $ 0.06
ACCOUNTS RECEIVABLE ALLOWANCES
Allowance for Doubtful Accounts
We determine an allowance for doubtful accounts amount based upon an
analysis of the aging of the accounts receivable and historical write-off
experience. Bad debt expense is recorded as an operating expense in our
Consolidated Statements of Income.
Allowance for Payor Discounts
We determine an allowance for payor discounts based on an analysis of
historical payment experience. Payor discount allowances are recorded as offsets
to revenue in our Consolidated Statements of Income.
INVENTORIES
Inventories consist of goods held for resale and are carried at the
lower of cost or market determined under the average cost method.
PER SHARE DATA
Net income per share is calculated in accordance with Financial
Accounting Standards Board Statement No. 128, "Earnings Per Share." Potential
common shares are included in the diluted net income per share 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 net income
by the weighted average number of common shares outstanding during the period.
Diluted net income per share is computed by dividing net 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. The
table below is a reconciliation of the numerator and denominator in the basic
and diluted net income per share calculation.
6
THREE MONTHS ENDED
----------------------------------------
SEPTEMBER 26, SEPTEMBER 27,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2003 2002
- --------------------------------------------------------------------------------------------------------------------
Numerator
Net income $ 2,003 $ 975
Denominator
Denominator for basic net income per share -
weighted average shares outstanding 12,583 12,353
Effect of dilutive stock options 513 10
- ------------------------------------------------------------------------------------------------------------------
Denominator for diluted net income per share -
weighted average shares outstanding 13,096 12,363
==================================================================================================================
Basic net income per share $ 0.16 $ 0.08
Diluted net income per share $ 0.15 $ 0.08
- ------------------------------------------------------------------------------------------------------------------
Employee stock options of 1,034,625 and 1,971,420 for the first
quarters of fiscal 2004 and 2003, respectively, have been excluded from the
diluted net income per share calculation because their effect would be
antidilutive.
2. SIGNIFICANT CONCENTRATIONS
Payor reimbursements from Aetna, Inc. represented 22.5% of our revenue
in the first quarter of fiscal 2004 and 24.5% in the first quarter of fiscal
2003. No other private payor or single government agency represented more than
10% of our revenues.
We signed a contract with Roche Laboratories in March 2003 to be the
exclusive U.S. distributor of Fuzeon(R), its new HIV medication, during the
initial twelve month progressive distribution phase. Fuzeon(R) sales contributed
9.5% of our revenue in the first quarter of fiscal 2004 or $12.3 million.
We signed a three-year wholesaler agreement with Cardinal Health, a
large national distributor, for the majority of our pharmaceutical purchases
effective August 2003. We used McKesson Corporation, another large national
distributor, for the majority of our pharmaceutical purchases in fiscal 2003 and
until August 2003. Cardinal Health and McKesson together made up 83.7% of our
inventory purchases for the first quarter of fiscal 2004. McKesson Corporation
made up 93.1% of our inventory purchases in the first quarter of fiscal 2003. In
the event that we are unable to purchase pharmaceuticals through Cardinal
Health, 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 uncollectible amounts.
Aetna, Inc. represented 12.8% and 16.0% of our gross accounts receivable balance
at September 26, 2003, and June 27, 2003, 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.
3. SEGMENT REPORTING
Effective June 28, 2003, we are operating and reporting in one segment.
We are a specialty pharmacy that distributes prescription drugs and provides
specialized therapy management services for people with certain health
7
conditions, including HIV/AIDS, organ transplants, and diseases treated with
biotech injectable medications. Previously, we had identified two reportable
operating segments, Mail Service and Retail, based on separate management,
emphasis on different diseases, and a different distribution method for each
segment. Three primary factors have diminished the distinction between Mail
Service and Retail. First, we consolidated critical elements. In fiscal 2002, we
transferred our Kansas City retail headquarters to Minneapolis and consolidated
our accounts receivable and collections, accounting, and information service
functions into a single location. In addition, we changed from having a vice
president for each of our then defined operating segments to one vice president
for operations. Second, over the past year we have begun to serve persons living
with HIV/AIDS and persons with organ transplants at both our Retail and Mail
Service locations. In the past, Retail had predominantly served persons living
with HIV/AIDS, and Mail Service had served persons with organ transplants and
others needing biotech injectable medications. In fiscal 2003 we began to serve
many more persons with organ transplants through our Retail locations. We also
entered into an agreement with Roche Laboratories in fiscal 2003 to distribute
Fuzeon(R) to persons with HIV/AIDS. We distribute this drug through both our
Mail Service and Retail locations. Third, we have added the mail order
capability to our retail stores in addition to their local "walk-in" business.
In summary, although we continue to have two primary distribution methods, the
distribution method no longer drives the decisions made by our chief decision
makers regarding resource allocation. The chief operating decision makers
regularly review financial information and make operating decisions based on a
number of factors including disease state, drugs, payors, and location in order
to distribute prescription drugs and provide specialized therapy management
services.
4. COMPREHENSIVE INCOME
Net income equaled comprehensive income for the respective periods.
5. INCOME TAXES
Our income tax rate was 11.6% in the first quarter of fiscal 2004
compared to 38.5% in the first quarter of fiscal 2003. Income tax expense for
the quarter was $0.3 million, net of a $0.6 million benefit resulting from a
reduction in income tax liabilities associated with prior tax years that are now
audited and closed. Without this reduction, our income tax rate was 38.0% for
the first quarter of fiscal 2004.
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 27, 2003.
The following table represents income and expense items as a percentage
of revenue.
INCOME AND EXPENSE ITEMS AS A PERCENTAGE OF REVENUE
THREE MONTHS ENDED
-----------------------------------------
FISCAL YEAR SEPTEMBER 26, SEPTEMBER 27,
2003 2002
- ----------------------------------------------------------------------------------------------------------------------
Revenue 100.0 % 100.0 %
Cost of revenue 88.2 88.0
- --------------------------------------------------------------------------------------------------------------------
Gross profit 11.8 12.0
Operating expenses
Selling and marketing 1.0 0.9
General and administrative 8.4 9.1
Bad debt 0.7 0.5
- --------------------------------------------------------------------------------------------------------------------
Total operating expenses 10.1 10.5
Income from operations 1.7 1.5
Interest income, net 0.1 0.1
Income tax expense (0.2) (0.6)
- --------------------------------------------------------------------------------------------------------------------
Net income 1.6 % 1.0 %
====================================================================================================================
Revenue
Revenue increased $28.7 million, or 28.7%, to $128.6 million in the
first quarter of fiscal 2004 from $99.9 million in the first quarter of fiscal
2003. The increase in revenue for the quarter was due to several factors. First,
sales of Fuzeon(R), a new HIV medication, contributed $12.3 million in revenue
in the first quarter of fiscal 2004. Second, we increased the number of patients
served, particularly patients with organ transplants and rheumatoid arthritis.
Third, we had higher revenue due to inflationary price increases. The table
below shows disease state revenue for the first quarters of fiscal 2004 and 2003
as a percentage of total revenue.
THREE MONTHS ENDED
----------------------------------------------------------------
SEPTEMBER 26, SEPTEMBER 27,
(% OF TOTAL REVENUE) 2003 2002
- ------------------------------------------------------------------------------------------------------------------
HIV/AIDS 51% 47%
Transplant 19% 19%
Other disease states 30% 34%
- ------------------------------------------------------------------------------------------------------------------
Total 100% 100%
- ------------------------------------------------------------------------------------------------------------------
Our HIV patient revenue in the first quarter grew approximately $19.4
million, or 41.4%, from the same period in fiscal 2003. Revenue from Fuzeon(R)
patients contributed $12.3 million to this growth. Transplant patient revenue
grew approximately $4.8 million, or 27.6%. The remainder of our patient revenue,
including hepatitis C, rheumatoid arthritis, and multiple sclerosis, grew
approximately $4.6 million, or 13.5%. We plan to continue to expand the types of
specialty pharmaceutical medications that we distribute at all of our pharmacy
locations beyond our HIV/AIDS and post-transplant focus to include hepatitis C,
rheumatoid arthritis, and other disease states.
9
Our business consists of four major payor categories. Aetna, a single
large contracted payor, represented 22.5% and 24.5% of revenues in the first
quarters of fiscal 2004 and 2003, respectively. Aetna has recently decided to
carve oncology out of our specialty pharmacy contract. Aetna awarded Chronimed
exclusive distribution of the bone marrow transplant medications but did not
award us the other oncology conditions. We expect the net negative impact on our
current business to be about $10 million in revenue and $800,000 in gross margin
over the next three quarters. Except for Aetna, no other private payor accounted
for 10% or more of our revenues in the three months ended September 26, 2003,
and September 27, 2002. The approximate mix of our first quarter fiscal 2004
total revenue across the remaining three payor categories is as follows:
Medicaid and other state programs including State of Indiana programs, 33.0%;
Medicare, the federal program which covers many organ transplant recipients,
6.9%; and all other payors, 37.6%. A State of Indiana government-sponsored
payment program for HIV positive and other high-cost individuals, represented
approximately 3.0% and 3.7% of our revenues in the first quarters of fiscal 2004
and 2003, respectively. Beginning October 1, 2003, this Indiana payor reduced
its reimbursement rate which will impact our revenue and gross margin
approximately $1.8 million over the next three quarters.
Our StatScript stores had same-store-growth of 22.5% or $13.1 million
in the first quarter fiscal of 2004 compared to the same quarter last year.
Cost of Revenue and Gross Profit
Total gross profit dollars increased $3.2 million, or 26.7%, to $15.2
million in the first quarter of fiscal 2004 from $12.0 million in the first
quarter of fiscal 2003 due to the increase in revenue. First quarter gross
margins as a percentage of revenue decreased slightly to 11.8% in fiscal year
2004 from 12.0% in fiscal year 2003. The expected drop in gross margin rate was
due primarily to the addition of Fuzeon(R) to our revenue mix (now 9.5% of our
revenue) at a lower gross margin rate.
Aetna represented 13.2% and 16.1% of our margins for the three months
ended September 26, 2003, and September 27, 2002, respectively. Due to Aetna
carving out oncology in their specialty pharmacy contract, we expect the net
negative impact on our current business to be about $10 million in revenue and
$800,000 in gross margin over the next three quarters. The State of Indiana
government-sponsored payment program represented 4.7% and 5.4% of our margins
for the first quarter of fiscal 2004 and 2003, respectively. The October 2003
reduction in this payor's imbursement rate will impact our revenue and gross
margin approximately $1.8 million over the next three quarters.
As Fuzeon(R) continues to be a significant piece of our revenue mix at
a lower-than-average gross margin rate, we expect our overall gross margin rate
to be less than our historical 12.0 percent. We also expect continuing downward
pressure on our gross margins from our state Medicaid business along with the
significant reimbursement cut on October 1, 2003, from a specific uncontracted
government-based payor. We are working to offset this reimbursement pressure
with increased sales, our new Cardinal wholesaler agreement, stronger
manufacturer relations, therapy management programs, and improved spending
control.
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 G&A expenses (division management, customer service,
billing, pharmacy fulfillment).
Selling and Marketing Expenses
Our selling and marketing expenses in the first quarter of fiscal 2004
increased $0.4 million, or 43.1%, to $1.3 million from $0.9 million in the first
quarter of fiscal 2003. Selling and marketing expenses as a percentage of
revenue remained relatively unchanged at 1.0% in the first quarter of fiscal
2004 compared to 0.9% in the first
10
quarter of fiscal 2003. In fiscal 2003 we redefined our sales and marketing
strategy to focus more sharply on specific diseases. We increased our sales
force in the fourth quarter of fiscal 2003 resulting in higher payroll expenses
in the first quarter of fiscal 2004 compared to the first quarter of fiscal
2003. In addition we had higher travel and promotional expenses in the first
quarter of fiscal 2004 compared to the same period last year.
General and Administrative Expenses
Our general and administrative expenses increased $1.7 million, or
18.7%, to $10.7 million in the first quarter of fiscal 2004 from $9.0 million in
the first quarter of fiscal 2003. As a percentage of revenue, general and
administrative costs decreased to 8.3% from 9.0%. The dollar increase was due to
expense growth in customer service and the pharmacies related to patient and
revenue growth, higher insurance premiums, the investment required to launch
Fuzeon(R), and consulting fees incurred in preparation for compliance with
Section 404 of the Sarbanes-Oxley Act.
Bad Debt
Our bad debt increased $0.4 million to $0.9 million in the first
quarter of fiscal 2004 from $0.5 million in the first quarter of fiscal 2003.
Bad debt as a percentage of revenue increased to 0.7% for the first quarter of
fiscal 2004 from 0.5% for the first quarter of fiscal 2003. Bad debt expense as
a percentage of revenue for the first quarter of fiscal 2004 is consistent with
the average bad debt expense of 0.7% of revenue for fiscal 2003. The allowance
for bad debt expense increased slightly to $4.6 million as of September 26,
2003, from $4.5 million as of June 27, 2003. The bad debt reserve decreased to
9.7% of trade receivables as of September 26, 2003, from 10.1% of trade
receivables as of June 27, 2003, due to improved agings and lower write-off
experience. We expect our future bad debt expense to continue at or below 1.0%
of revenue.
Interest Income
Interest income, net of interest expense, remained the same at $0.1
million in the first quarter of fiscal 2004 as compared to the first quarter of
fiscal 2003. Interest income resulted from current cash balances while having no
outstanding borrowings on our line of credit.
Income Taxes
Our income tax rate was 11.6% in the first quarter of fiscal 2004
compared to 38.5% in the first quarter of fiscal 2003. Income tax expense for
the quarter was $0.3 million, net of a $0.6 million benefit resulting from a
reduction in income tax liabilities associated with prior tax years that are now
audited and closed. Without this reduction, our income tax rate was 38.0% for
the first quarter of fiscal 2004. Looking forward to the remainder of fiscal
2004, we expect our combined Federal and State tax rate to approximate 38.0% in
each of the next three quarters.
LIQUIDITY AND CAPITAL RESOURCES
As of September 26, 2003, we had $54.2 million of working capital
compared to $51.7 million as of June 27, 2003. During the first quarter of
fiscal 2004, we used $6.9 million of cash for operating activities primarily due
to an increase in accounts receivable and a decrease in accounts payable. Our
accounts receivable increased $4.7 million due to a combination of increased
sequential-quarter revenue and a constant days sales outstanding (DSO) rate. Our
DSO of 34 days on September 26, 2003, was the same on June 27, 2003. We have
experienced slower or delayed payments from a few larger payors that we do not
expect to result in bad debt. We expect our DSO to remain at or near to the
current 34 days for the remainder of fiscal 2004. We used a net $3.1 million in
cash to decrease accounts payable, due primarily to shorter payment terms with
our new pharmaceutical distributor. The average days of inventory on hand
remained level at 8 days at September 26, 2003, compared to June 27, 2003. We
used $0.7 million to finance inventory required to support our business growth.
We expect our inventory to perform at or near to the current 8 days on hand for
the remainder of fiscal 2004.
11
We used approximately $0.5 million of cash in investing activities
during the three-month period ended September 26, 2003, for leasehold
improvements, furniture, equipment, and computer hardware and software.
We had no outstanding borrowings as of September 26, 2003 and June 27,
2003. Shareholders' equity as of September 26, 2003, and June 27, 2003, was
$88.0 million and $85.5 million, respectively. Net tangible assets, an indicator
of borrowing capacity, as of September 26, 2003, and June 27, 2003, were $57.7
million and $55.3 million, respectively. As of September 26, 2003, we have a
secured line of credit totaling $30 million. We had no borrowings under our line
of credit during the quarter. We are in compliance with the debt covenants of
the line of credit. Under the terms of the agreement, the debt is secured by
receivables and inventory and bears interest at the Eurodollar rate plus an
applicable margin depending on our covenant calculation (approximately 2.92% at
September 26, 2003). The line of credit expires in April 2006.
We believe that our cash and cash equivalents, 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. We
expect our capital project requirements to be between $2 and $3 million in
fiscal 2004.
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 27,
2003.
RESTRICTED STOCK GRANTS
In August 2002, the Compensation Committee of the Board of Directors
granted 145,000 restricted shares of common stock to our officers under our 2001
Stock Incentive Plan. These restricted shares, valued at $0.7 million based on
our fair market value of $4.71 per common share at the date of grant, were to be
recognized as compensation expense over a four year vesting period, 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. The remaining 125,000 restricted shares vested on March 7, 2003,
as provided by the acceleration provision, and we recognized virtually all of
the $0.6 million compensation expense during the third quarter of fiscal 2003.
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 operating 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 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
biopharmaceutical 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 material contracts); loss of the Fuzeon(R)
distribution contract and related business volume; 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
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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 and bad debt expenses;
the impairment of a significant amount of our goodwill; the effects of and
changes in, trade, monetary and fiscal policies, laws and regulations; increased
competition; our ability to obtain competitive financing to fund operations and
growth; loss or retirement of key executives; 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 recognition of revenue and earnings; and adverse publicity,
news coverage, and reporting by independent analysts. We urge you to read the
cautionary statement filed as Exhibit 99.1. This cautionary statement discusses
specific factors which could affect our operations and forward-looking
statements contained in this Form 10-Q.
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 would bear interest at variable rates based on the
Eurodollar rate plus an applicable margin depending on our covenant calculation.
A 10% increase in interest rates would not have a significant effect on our
interest expense based on the fact that we had no borrowings in fiscal 2004. 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 (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) as of the end of the period covered by this report. Based on
such evaluation, the Chief Executive Officer and the Chief Financial Officer
have concluded that, as of the end of such period, our disclosure controls and
procedures are effective.
There have not been any changes in our internal controls over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during our most recent quarter that have materially affected, or
are reasonably likely to materially affect, our internal controls over financial
reporting.
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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 27, 2003.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (Chief Executive Officer).
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (Chief Financial Officer).
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Executive Officer).
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Financial Officer).
b) Reports on Form 8-K
A Current Report on Form 8-K with a report date of
August 13, 2003, was filed during the first quarter of fiscal 2004
to provide the full text of the fourth quarter and full year
financial results press release dated August 12, 2003.
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SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CHRONIMED INC.
Dated: November 5, 2003 By /s/ HENRY F. BLISSENBACH
----------------------------
Henry F. Blissenbach
Chief Executive Officer and
Chairman of the Board of
Directors
Dated: November 5, 2003 /s/ GREGORY H. KEANE
----------------------------
Gregory H. Keane
Vice President, Chief
Financial Officer and
Treasurer (Principal
Financial and Accounting
Officer)
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