Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Annual Report -- [x] Reg. S-K Item 405 52 224K
2: EX-10.1 Distribution and Spinoff Agreement 31 113K
3: EX-10.17 Employment Agreement 12 50K
4: EX-10.20A Lease Assignment 3 13K
5: EX-10.24 Pharmacy Participation Agreement 28 94K
6: EX-21.1 Subsidiaries 1 4K
7: EX-23.1 Consent of Ernst & Young LLP 1 7K
9: EX-27 Financial Data Schedule 1 6K
8: EX-99 Cautionary Statements 3 13K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER 0-19952
------------------------------
CHRONIMED INC.
(Exact name of registrant as specified in its charter)
A MINNESOTA IRS EMPLOYER IDENTIFICATION
CORPORATION NO. 41-1515691
10900 RED CIRCLE DRIVE
MINNETONKA, MINNESOTA 55343
Telephone Number (612) 979-3600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value per share
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No __.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting and non-voting common equity of
Chronimed Inc. held by non-affiliates as of close of business on August 31,
2000, was approximately $87 million based on the closing price of $7.313 per
share reported on the Nasdaq Stock Market. The number of shares of Common Stock
outstanding as of August 31, 2000 is 12,147,021.
Portions of the registrant's definitive Proxy Statement for the Annual Meeting
of Shareholders to be held November 14, 2000, to be filed with the Commission
are incorporated by reference in Part III of the Form 10-K.
PART I
ITEM 1. BUSINESS
GENERAL
Chronimed Inc. ("Chronimed" or the "Company") is a disease-focused
company excelling in specialty pharmacy distribution for people with chronic
health conditions. The Company distributes pharmaceuticals and provides
specialized patient management services nationwide for people with long-term
chronic conditions such as organ transplants, HIV/AIDS, and diseases treated
with biotech injectable medications. Chronimed works directly with patients,
providers, insurance companies, health maintenance organizations, preferred
provider organizations, government agencies and other third party payors
("payors") to improve clinical and cost-of-care outcomes. The Company was
founded in 1985 as a Minnesota corporation and has been publicly traded (Nasdaq:
CHMD) since 1992.
The Company distributes its pharmaceuticals and related educational
materials by mail and through its StatScript retail pharmacy chain. The patient
populations for which the Company's services are most effective include patients
who:
* Have illnesses that generally occur in less than one percent of the
nation's population;
* Require high-cost, complex medications, the majority of which must be
taken for the rest of the patient's life, and are not always available
through traditional retail pharmacies;
* Require treatment by healthcare specialists; and
* Require a significant amount of self-management and ongoing education
(where patient compliance is critical for improving clinical and
financial outcomes).
By focusing on select chronic conditions, the Company is able to
improve the quality of care for those people affected by these uncommon
diseases. In addition, the expertise Chronimed has developed makes it a valuable
partner for institutions, foundations and healthcare providers working with
patients afflicted with these chronic conditions. Chronimed also believes the
payors that pay a large portion of related healthcare costs do business with
Chronimed as a result of the Company's ability to improve care while minimizing
overall expenditures. Finally, Chronimed has spent many years establishing
relationships with the developers and manufacturers of prescription drugs and
other products needed to manage chronic conditions. The Company currently works
directly with all of these constituents in a concerted effort to improve
clinical and cost-of-care outcomes -- and enhance the quality of life for the
chronically ill.
Chronimed provides patients with a convenient, competitively priced
source of prescription drugs, counseling support, and a variety of educational
materials to help patients achieve maximum control over their chronic
conditions. Often, the greater the effort a patient makes to stabilize or
control his or her disease, the lower the incidence of complications and the
better the patient's quality of life. The Company believes that by educating
patients and increasing patient compliance, as well as increasing provider
support and intervention, clinical outcomes can be favorably improved,
decreasing long-term costs of care.
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Chronimed obtains patients primarily through referrals from healthcare
providers, direct patient contacts, and contracts with insurers and managed care
organizations. According to Medical Economics (April 10, 2000), an estimated 90%
of privately insured workers in the United States were enrolled in some type of
managed care program during 1999, up from 52% in 1993.
The specialty pharmacy industry was developed principally in response
to the demand from employers and payors for more effective control of patient
care and cost increases in certain unusual chronic illnesses. As employers
attempt to control their escalating healthcare costs, they seek out providers
who have adopted various specialized managed care techniques. As a result of the
increasing role of managed care, coupled with the Company's experience in
managing specific patient groups, the increasing majority of patient referrals
come from contracts with payors and from the government.
In addition, the Company has developed relationships with certain
treatment centers, foundations and medical associations that specialize in the
treatment or support of patients with chronic conditions. These relationships
provide the Company with access to a large number of individuals with chronic
conditions and to the healthcare specialists treating these conditions.
Chronimed believes that its system is well suited for developers and
manufacturers of pharmaceutical products who are targeting small or
hard-to-identify patient populations. Chronimed provides these companies with
assistance in the rapid introduction of their products, a cost-effective means
for distributing these products to specific patient populations, and a method
for monitoring the use of these products.
MERGERS, ACQUISITIONS, DIVESTITURES AND STRATEGIC PLANS
In July 1996 Chronimed acquired StatScript Pharmacy, a Kansas City,
Missouri-based specialty retail pharmacy chain focusing on HIV/AIDS, for $12.5
million. At the time of the asset purchase, StatScript had nine retail
pharmacies in various cities around the country. As of June 30, 2000, the
Company had increased its StatScript presence to 32 retail pharmacies in various
cities around the country, with plans to open additional retail pharmacies by
June 2001.
Chronimed acquired Clinical Partners, Inc., a specialty HIV/AIDS case
management company with significant data and information systems capabilities,
in June 1998. The Company paid $6.4 million in cash and stock for Clinical
Partners stock.
In November 1998 Chronimed sold its Publishing Division assets to John
Wiley & Sons, Inc., (NYSE: JWA and JWB), resulting in a $300,000 after-tax gain.
The Publishing Division, which consisted of approximately 80 book titles, had
become a leading independent publisher of trade books focusing on chronic
diseases, and health and wellness. Chronimed sought the sale of the Publishing
Division because it no longer fit the Company's strategic direction.
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In February 1999 Chronimed purchased the assets of Community
Prescription Center, a single retail pharmacy specializing in HIV/AIDS located
in San Diego, California. The business was acquired for $1.3 million and was
integrated into the Company's StatScript operations.
In April 1999 Chronimed announced that it had engaged the investment
banking firm of PaineWebber to explore strategic alternatives designed to
enhance shareholder value. In March 2000 the Company announced the
discontinuance of its engagement with PaineWebber and its intention to spin-off
its Diagnostic Products business, into an independent, publicly traded
corporation named MEDgenesis Inc. On July 1, 2000 MEDgenesis began distinct
operations as a wholly owned subsidiary of Chronimed. MEDgenesis has filed a
Form 10 disclosure with the SEC to obtain approval to publicly trade its stock.
Upon receipt of SEC approval, Chronimed will distribute all of its MEDgenesis
stock to the Chronimed shareholders as a tax free dividend, and the companies
will be completely separate entities. Until the SEC approval is obtained and the
MEDgenesis stock is distributed, Chronimed must classify MEDgenesis' operation
of the Diagnostic Products business as 'discontinued operations' for financial
reporting purposes.
In March 2000 the Company wrote down its investment in Clinical
Partners. The $5.5 million adjustment was necessary due to changes in the
healthcare market concerning case management of patients with HIV/AIDS.
Chronimed's management concluded that HIV/AIDS disease management would not be
as profitable as initially forecasted and was no longer strategic to Chronimed's
growth.
DISCONTINUED OPERATIONS
Chronimed's Diagnostic Products business has been operated by
Chronimed's wholly owned subsidiary, MEDgenesis Inc., since July 1, 2000.
Chronimed and MEDgenesis have filed a Form 10 disclosure with the SEC to obtain
approval to distribute the MEDgenesis stock to Chronimed's shareholders.
Chronimed and MEDgenesis are awaiting SEC approval as of the date of this
document. Until this approval is granted and MEDgenesis becomes a separate
entity from Chronimed, Chronimed must classify MEDgenesis as "discontinued
operations" for financial reporting purposes. With SEC approval, and
commencement of trading of MEDgenesis stock, Chronimed and MEDgenesis will no
longer prepare or file consolidated financial statements and tax returns. The
two companies have begun independent accounting, as of July 1, 2000, in
anticipation of the SEC approval.
4
MARKET AND GROWTH STRATEGY
Chronimed's growth strategy is to increase its distribution of
prescription drugs by increasing the number of patients served. In addition, the
Company plans to enhance its programs with manufacturers and is expanding its
services to meet the needs of persons with other chronic conditions. Chronimed
anticipates that it will add to the range and depth of services it provides in
order to meet the demand for improved patient outcomes, cost of care, and
patient-reported satisfaction.
Chronimed serves three patient populations: people with complex
conditions treated with biotech injectable medications, people who have had an
organ transplant, and people with HIV/AIDS.
BIOTECH INJECTABLE MEDICATIONS: The Company began serving patients with
injectable medication needs through its mail order pharmacy in late 1994.
Chronimed serves patients with many chronic conditions treated with biotech
injectable medications, including anemia, both drug induced and due to end-stage
renal failure, cancer, cystic fibrosis, endometriosis, growth hormone
deficiency, hemophilia, Hepatitis B and C, immune deficiency disorders,
infertility, multiple sclerosis, neutropenia, respiratory syncytial virus
("RSV") and rheumatoid arthritis. Much of Chronimed's injectable business
revenue is derived from the following three diseases:
Multiple Sclerosis
Multiple sclerosis is a disease of the central nervous system
in which the protective layer surrounding nerve fibers is damaged or
destroyed. If the protective layer is damaged, electrical nerve
impulses are not properly conducted to and from the brain, resulting in
the various symptoms of MS.
Drug therapy for MS consists of drugs to lessen the severity
or frequency of attacks, to slow the increase of disability resulting
from the disease, and other drugs to treat the various symptoms (muscle
stiffness, fatigue, and bladder problems). The Company provides all
currently available products, including Avonex(R), Betaseron(R) and
Copaxone(R).
Hepatitis C
The Hepatitis C virus ("HCV") attacks the liver and can cause
long-term renal illnesses such as infection, cirrhosis and cancer.
According to the Center of Disease Control ("CDC"), as many as 4
million Americans may be infected with HCV and 36,000 new infections
occur each year in the United States. Hepatitis C is the leading cause
of liver transplantations in the U.S. and accounts for 8,000 - 10,000
deaths per year. The CDC also estimates that the cost associated with
treating HCV (excluding transplant costs) exceeds $600 million per
year.
HCV is spread primarily through direct contact with human
blood. People most at risk of by HCV infection are:
* IV street drug users who share or use contaminated needles or
supplies.
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* Recipients of blood, blood products, or solid organs from a
donor whose blood contained HCV.
* Patients on long-term kidney dialysis who unknowingly share
supplies contaminated with HCV infection.
* Healthcare workers having frequent contact with blood on the
job and exposure to accidental needlesticks.
* Newborns whose mothers are infected with HCV at the time of
birth.
* Persons having sexual contact with a person infected with HCV.
* Persons who share hygiene items, such as razors or
toothbrushes with blood contamination, with HCV infected
persons.
Treatment for patients with Hepatitis C includes use of
injectable medications sold by Chronimed, such as interferon with
(Rebetron(R)) or without ribavirin (Interon-A(R)). Unfortunately, the
CDC reports that these drugs are only effective in about 40% of HCV
infections. For those who do respond to the medications, treatment
usually requires many months of sustained therapy for optimal
effectiveness. The Company's programs for these patients cut costs
through reduced acquisition costs, counseling and management of side
effects that may lead to non-compliance, and efficient delivery of
medication in temperature controlled packaging.
Cancer
Chemotherapeutic agents are used in the treatment of a variety
of cancers, to destroy rapidly growing cancer cells within the body.
Chronimed distributes most of the medications used to treat the
different forms of cancer. These products are distributed to the
patient's home for self-administration, or to the physicians office for
administration in a clinical setting.
However, the drugs used to fight cancer also destroy the
body's ability to produce erythropoietin resulting in a reduction in
red blood cells. Without red blood cells, which carry oxygen to cells
throughout the body, a cancer patient suffers from fatigue and can
develop anemia. Chronimed supplies medications such as Epogen(R) and
Procrit(R) that increase the number of available red blood cells by
supplementing the body's natural production of erythropoietin.
White blood cells (also called neutrophils) are responsible
for helping the body fight infections. The chemotherapeutic drugs used
to fight cancer substantially reduce the number of white blood cells in
the patient's body leaving the patient susceptible to fever or serious
opportunistic infections. Chronimed sells drugs such as sargramostim
(Leukine(R)) and filgrastim (Neupogen(R)) to stimulate production of
white blood cells following chemotherapy treatments.
According to IMS Health Inc. (Westport, CT, November 1998), the annual
U.S. expenditure on injectable medications is greater than $11 billion.
Considering there are more than 269 biotech injectable medications currently in
development (PhRMA, March 2000), up from 81 in 1988,
6
spending on injectable medications is likely to increase dramatically. Payors
often have a difficult time quantifying and controlling the cost of the
injectable medications used to treat these chronic conditions. Chronimed helps
payors identify and lower the costs by reducing product acquisition expenses,
offering efficient delivery systems, and streamlining claims and billing
services.
ORGAN TRANSPLANT: Since 1990, the Company has served patients who have
had solid organ and bone marrow transplants. According to the United Network for
Organ Sharing (UNOS), there were approximately 216,500 solid organ transplants
from 1988 through 1999, of which approximately 21,000 were performed in 1999.
UNOS also states that there are approximately 129,000 people living with
transplanted organs while more than 71,000 people are waiting for a transplant.
Finally, UNOS data reports that transplant recipients typically require about
$10,000 of prescription drugs during the first year following transplantation
and about $8,000 per year thereafter. Chronimed serves organ transplant patients
primarily through a centralized mail order pharmacy, as well as community
pharmacies co-located at StatScript retail sites.
HIV/AIDS: Chronimed began to serve patients with HIV/AIDS through its
mail-order pharmacy in 1994. The Company increased its commitment to HIV/AIDS
patients with the July 1996 acquisition of the StatScript pharmacies. Patients
with AIDS, or acquired immune deficiency syndrome, have a suppressed immune
mechanism that requires treatment through complex medication regimens. Human
immunodeficiency virus ("HIV") causes the immune mechanism suppression. HIV
results in immunosuppression by attacking and destroying T cells that coordinate
much of the network of normal immune responses. Without normal immune responses,
patients are unable to fight and overcome routine infections. These patients
face many long-term physical, financial and psychological challenges due to the
often debilitating nature of the disease. The Company's programs for these
patients are intended to assist them in gaining maximum control over their
disease in an effort to lower the incidence of complications and improve their
quality of life.
The CDC estimates that there are as many as 900,000 HIV positive
individuals living in the U.S., with approximately 350,000 of them receiving
treatment. The CDC estimates that approximately 40,000 new U.S. infections occur
annually. According to the market research firm Frost & Sullivan, the total
HIV/AIDS medication market was nearly $4 billion in 1999, and is expected to
rise to nearly $8.2 billion in 2005. The increase represents a 19% compounded
annual growth rate. Compared to prior years, these trends reflect a reallocation
of HIV/AIDS spending away from inpatient hospital, subacute and hospice services
to pharmaceutical therapies. This shift occurred after the introduction of the
new class of protease inhibitor therapies and reflects the growing clinical
acceptance of combination therapy (vs. monotherapy) as the preferred method of
fighting HIV infection. The Company projects that over the next five years, the
number of patients seeking early intervention oral medication therapy is
expected to increase to 55-70% of all HIV insured individuals, with the
possibility of 700,000 patients in treatment in the year 2002. Currently, the
average HIV/AIDS patient serviced by the Company requires more than $12,000
worth of prescription drugs per year. Chronimed's strategy for meeting this
treatment need has been to grow its StatScript pharmacy outlets. The original
chain of nine StatScript pharmacies acquired by the Company in July 1996 has
expanded to 32 pharmacies by the end of fiscal 2000. The Company plans to open
five or more additional pharmacies throughout fiscal 2001.
7
SPECIALTY PHARMACY SERVICES
In addition to persons with HIV/AIDS, organ transplants, Hepatitis C,
cancer and multiple sclerosis, Chronimed provides prescription drugs to patients
with a wide variety of other high-cost chronic conditions. These include cystic
fibrosis, endometriosis, growth hormone deficiency, hemophilia, Hepatitis B,
immune deficiency disorders, infertility, neutropenia, respiratory syncytial
virus ("RSV") and rheumatoid arthritis. Patients with these conditions are often
underserved by traditional drug distribution systems.
Chronimed has payor contracts with HMOs, major health insurers,
government agencies, and other managed health plans covering significant
populations. As part of these contracts, the Company offers customized programs
designed to maximize care and manage high-cost medications and low patient
utilization rates. The Company's value-added services include counseling by
highly trained registered pharmacists and internally certified patient
specialists, patient confidentiality, insurance billing, compliance monitoring,
educational materials, refill reminders, 24-hour pharmacist availability, drug
utilization and cost reports for payors, and timely shipments to patients'
homes, workplaces, physicians' offices, or treatment facilities.
Chronimed distributes life-maintaining medications directly to patients
nationwide, while ensuring competitive prices to payors. These drug therapies
are quite expensive (ranging from $3,000 - $150,000 per patient per year), often
need refrigerated packaging, may require overnight delivery, and are usually
part of a complex regimen -- all reasons why these medications are not routinely
stocked in standard retail pharmacies. The Company also coordinates its services
with payors, physicians, nursing services, and other members of a patient's
healthcare team. In addition, the Company will work with its healthcare partners
to develop patient and therapy management guidelines through ongoing monitoring
and evaluation of patient outcomes. Because of these services, Chronimed can
serve large volumes of patients and produce quality outcomes at lower cost.
PRODUCT DISTRIBUTION
The Company distributes its products through mail order facilities
located in Minnesota, California, Texas, and Florida, and through its
proprietary retail chain, StatScript Pharmacy.
MAIL ORDER
The Company stocks approximately 2,700 brand name and generic
prescription drugs. The Company distributes these drugs through its centralized
pharmacy mail-order system to the patients it serves. The Company believes that
it can distribute these products with considerably higher levels of service at a
competitive cost (in comparison to local and national retail pharmacies). This
8
is accomplished through economies of scale due to the high volume of relatively
less common products and efficient processing of specialty products unfamiliar
to many retail pharmacists, reducing misuse or abuse of prescription drugs.
Patients benefit greatly from the convenience of having products delivered
directly to their homes and, in many cases, also from lower initial
out-of-pocket costs for such items. Orders are generally received by telephone
and are shipped by Federal Express or UPS to insure prompt delivery. The Company
maintains toll-free telephone numbers that can be used to place orders.
The majority of the Company's centralized pharmacy services revenue is
from the sale of biotech injectable drugs and from immunosuppressive drug sales
to patients who have had a solid organ or bone marrow transplant. These patients
may have standard indemnity coverage, Medicare or Medicaid, or pharmacy benefits
defined by their managed care health plans.
COMMUNITY BASED RETAIL PHARMACIES
In July 1996 Chronimed acquired the assets of StatScript Pharmacy,
including its nine specialty pharmacies. This acquisition gave Chronimed a
significant presence in the retail marketplace, and specifically in the HIV/AIDS
marketplace, from which to grow revenues and profits. The StatScript Pharmacy
chain is the market leader in providing local, specialty pharmacy services and
prescription drugs to people with HIV/AIDS. Chronimed's revenue growth in this
business comes from the continued rollout of the combination drug therapies of
protease inhibitors, nucleoside analogs, and non-nucleoside reverse
transcriptase inhibitors, as well as strategic new pharmacy openings and
increased patient intake at existing sites. The Company opened three new sites
in fiscal 2000, for a total of 32 locations in 29 cities. StatScript pharmacies
are located within patient communities and are committed to the HIV/AIDS patient
through community resources, patient education, clinical team communication, and
complete patient tracking. It is the largest network of HIV/AIDS community-based
specialty pharmacies in the country, with continued nationwide growth plans.
Chronimed intends to open five or more StatScript pharmacies in fiscal 2001.
In addition to HIV/AIDS medications, in fiscal 1998 the Company began
the retail distribution of organ transplant drugs through its localized
StatScript pharmacies in order to better meet the needs of its transplant
patients. Transplant medications require same-day delivery and distribution
through a local StatScript pharmacy offers a logical solution when needed for
rapid delivery. Recently, Chronimed has been using the local presence of its
StatScript pharmacies to distribute certain biotech injectable medications.
StatScript Pharmacy is headquartered in Overland Park, Kansas, and as
of June 30, 2000 has pharmacies in Atlanta, Austin, Boston, Chicago, Dallas,
Denver, Fort Lauderdale, Houston, Indianapolis, Kansas City, Las Vegas, Miami,
New Orleans, New York City, Orlando, Philadelphia, Phoenix, Safety Harbor, Salt
Lake City, San Antonio, San Diego, San Francisco, Seattle, St. Louis, St.
Petersburg, Tampa, Washington, D.C., West Hollywood, and West Palm Beach.
9
MANUFACTURER DISTRIBUTION SERVICES
The Company offers specialized distribution programs for developers and
manufacturers of prescription drugs for small or hard to identify patient
populations. In 1994, Chronimed spun off Orphan Medical, Inc., then a division
responsible for pharmaceutical development. The Company is Orphan Medical's
exclusive direct-to-patient distributor for Cystadane(TM), indicated for
patients with Homocystinuria. The Company has since signed agreements with other
manufacturers such as Aventis Behring (Stimate(TM)) and the American Red Cross
(AHF-M, a factor product for Hemophilia) to administer valuable patient
assistance programs and distribute their products. The Company believes these
programs demonstrate how the systems and relationships it has developed in
serving specific patient populations can be leveraged into new business
opportunities.
In addition to the services outlined above, Chronimed has arrangements
with a number of other product manufacturers and distributors for pricing
concessions, and/or other services. Among the larger relationships are those
with Schering (Hepatitis C), Novartis (transplant immunosuppression), Genentech
(human growth hormone), Immunex (neutropenia), and Biogen (multiple sclerosis).
PAYOR CONTRACTS
Healthcare costs have increased significantly in the United States in
recent years. According to the Health Care Financing Administration, national
health expenditures are expected to reach $1.32 trillion in 2000 or 14.3% of
GDP, up from $994 billion in 1995 or 13.7% of GDP. Employers bear a significant
share of this cost through payments for employee benefit plans. Public and
private employers have been driving the increased use of managed care techniques
into employee benefit plans which has resulted in a slowing of the rate of
increase in health benefits costs in recent years. Between 1989 and 1996, for
example, health insurance costs for employees with family coverage enrolled in
HMOs increased by 58%, compared to an increase of 68% for families in
conventional insurance plans (General Accounting Office Report to U.S. Senate,
1997). Such data illustrate the potential of managed care programs to help
control benefits costs. Chronimed has built payor programs into its Specialty
Pharmacy Services.
Chronimed offers payors the following services through its payor contracts:
* Cost savings through distribution of specialty prescription drugs and
related products at a cost competitive with, or lower than, local and
national retail and hospital pharmacies.
* Review and monitoring of compliance with prescribed drug regimens. By
monitoring patient order patterns and drug use, the Company can assist
payors and healthcare providers in early identification of patients whose
treatment outcomes may be improved by more support or assistance in
managing their chronic condition.
* Patient counseling by pharmacists. By focusing on the needs of specific
patient populations, the Company's pharmacists become expert in the
requirements and treatment patterns for the identified patient
populations.
10
* Distribution of educational materials designed to help patients achieve
maximum control over their chronic conditions.
* Ability to communicate with specific patient populations regarding new
treatment techniques.
SALES AND MARKETING ACTIVITIES
Chronimed believes that to be successful in its business, its sales and
marketing efforts must be coordinated to achieve both the ability to sign payor
contracts on a national or regional level, and the ability to work with
healthcare providers at the local level. To support this strategy, Chronimed
uses a multi-faceted approach to increase its revenues. The Company competes on
the basis of service, convenience, product availability, price, and outcomes
impact.
At the national and regional level, the Company employs a sales force
that is responsible for negotiating and signing contracts with healthcare payors
that allow Chronimed to fulfill a patient's prescription as an "in-network
provider". Being an in-network provider gives Chronimed access to any of the
payor's patients with diseases managed by Chronimed, and acts as a barrier
against competition because most payor networks only allow a limited number of
providers to participate in the specialty pharmacy network. In exchange for
being an in-network provider, Chronimed offers its products and services at
discounted pricing.
At the local level, Chronimed uses a marketing team and its StatScript
pharmacies to build relationships with physicians, clinics, hospitals,
transplant centers, and support groups to secure additional patients. It is the
Company's belief that by coordinating care in this manner between payors,
providers and patients, overall healthcare spending can be controlled, while the
quality of care and the quality of life for the patient is improved.
SUPPLIERS
The Company purchases prescription drugs and related products directly
from manufacturers and from wholesalers. The availability and prices of products
distributed by the Company are subject to market conditions. When available, the
Company takes advantage of special discounts offered by suppliers. The Company
stocks approximately 2,700 brand name and generic prescription drugs and related
products. When the Company receives a prescription for a drug, which it does not
have in inventory, it generally can obtain the required item from a wholesaler
the same day. The Company anticipates enhanced distribution contracts with
existing and new manufacturers.
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REIMBURSEMENT
The Company has developed a significant level of expertise in managing
the reimbursement process. Generally, the Company contacts the payor before
delivering products to determine the patient's health plan coverage and the
portion of costs that the payor will reimburse. The Company's reimbursement
specialists review issues such as lifetime limits, preexisting condition clauses
and the availability of special state programs. The Company accepts assignment
of benefits from over 4,000 payors, which substantially eliminates the claims
submission process for many patients.
INFORMATION SYSTEMS
The Company's operations include a fully integrated information system
and an automatic telephone call distribution system. The information system
provides the Company's service representatives with all the on-line information
needed to service patients and other customers, including previous product
purchase histories, payor billing and account balance information, inventory
levels and co-payment amounts for patients in payor programs. Distribution sites
are on-line with inventory control, purchasing, shipping and receiving functions
to enhance order fulfillment. The telephone system has an automatic call
distribution capability utilizing the latest advances in skills based call
routing to distribute incoming calls to the customer service representatives.
The Company is linked to key customers for eligibility verification and
electronic claims submission. The Company has undertaken a major e-commerce
initiative to create a commercial presence on the World Wide Web, including the
sale of prescription medications, the dissemination of disease specific
information, and the sale of health related products. The initial emphasis is to
web-enable the prescription ordering and fulfillment functions for our
customers. The Company expects that the proportion of its business transactions
conducted using electronic commerce will increase. A state-of-the-art pharmacy
management information system allows for daily electronic distribution of
financial reports and key performance measures directly to each manager's
desktop.
COMPETITION
The distribution of prescription drugs is a highly competitive
business. The Company competes on the basis of service, convenience, product
availability, price, and outcomes impact. Although there are significant
competitors in each of the Company's lines of business, Chronimed believes that
only a few competitors offer the same or similar combination of mail-order and
retail specialty pharmacy prescription drug distribution encompassing all the
disease states managed by the Company, and none of these competitors dominate
the market.
LIABILITY INSURANCE
Providing healthcare services entails an inherent risk of liability. In
recent years, participants in the healthcare industry have become subject to an
increasing number of lawsuits, many of which involve large claims and
significant defense costs. The Company may from time to time be subject to such
suits as a result of the nature of its business. The Company maintains general
liability insurance, including professional liability, in an amount deemed
adequate by
12
management. The Company is further insured for product liability under various
policies of drug manufacturers.
GOVERNMENT REGULATION
The Company's business is subject to substantial governmental
regulation including laws governing the dispensing of prescription drugs and
laws prohibiting the payment of remuneration for patient referrals. Because
sanctions may be imposed for violations of these laws, compliance is a
significant operational requirement for the Company. Management believes the
Company is in substantial compliance with all existing statutes and regulations
materially affecting the conduct of its business.
In general, the Company's pharmacy operations are regulated by the
statutes and regulations of Minnesota, where it is licensed as a retail pharmacy
and wholesale distributor of pharmaceuticals, as well as all other states, where
it is licensed as a retail pharmacy or has a mail-order presence. The licensure
application process is underway in several other states where the Company
intends to open StatScript retail pharmacies. In addition, the Company delivers
prescription products from its licensed pharmacies to patients in other states
in which the Company does not operate a pharmacy. Many of these states have laws
or regulations requiring out-of-state pharmacies to be licensed as a condition
to the delivery of prescription products to patients in such states. The Company
believes that it is in material compliance with such laws in substantially all
relevant jurisdictions.
In addition to state regulation of pharmacies and pharmacists, federal
statutes and regulations establish standards for the labeling, packaging,
advertising and adulteration of prescription drugs and the dispensing of
"controlled" substances and prescription drugs. To the extent the Company uses
the federal postal service, Federal Trade Commission and United States Postal
Service regulations require mail order sellers to engage in truthful
advertising, to stock a reasonable supply of drugs, to fill mail orders within
30 days and, if that is impossible, to inform the consumer of his or her right
to a refund. The Company believes that it is in substantial compliance with
these requirements. Substantially all of the Company's products are shipped by
commercial delivery services, with the exception of walk-in customers at the
StatScript retail pharmacies.
As a healthcare company, Chronimed is subject to various federal laws
that regulate the relationship between providers of healthcare services and
physicians. These laws include the "fraud and abuse" provisions of the Social
Security Act, under which civil and criminal penalties can be imposed upon
persons who pay or receive remuneration in return for inducement of referrals of
patients who are eligible for reimbursement under the Medicare or Medicaid
programs. Violations of the law may result in civil and criminal penalties.
Civil penalties range from monetary fines that may be levied on a per violation
basis to temporary or permanent exclusion from these programs. In addition,
numerous states have laws or legislation pending prohibiting financial
arrangements among healthcare providers. Violations of these laws include civil
and criminal penalties, as well as the suspension or termination of a provider's
ability to continue to provide services in the state.
13
The federal prohibitions on inducements for referrals are so broadly
drafted that liability may be implied in a wide variety of business transactions
that have been traditional or commonplace in the healthcare industry. Federal
courts, the Department of Health and Human Services ("HHS"), and officials of
the Office of Inspector General have construed broadly the fraud and abuse
provisions of the Social Security Act concerning illegal remuneration
arrangements and, in so doing, have created uncertainty as to the legality of
numerous types of business and financial relationships between healthcare
providers and practitioners. "Safe harbor" regulations define a narrow scope of
practices that will be exempted from prosecution or other enforcement action
under the illegal remuneration provisions. Due to the narrow scope of the safe
harbor exemptions, these regulations do not eliminate this uncertainty.
Similarly, state fraud and abuse laws, which vary from state to state, are often
vague and have rarely been interpreted by courts or regulatory agencies.
In situations where the Company purchases or provides services and
products or otherwise contracts with healthcare providers who may be in a
position to refer patients to the Company, the Company believes it has exercised
care in an effort to structure such arrangements to comply with existing federal
and state laws.
Political, economic and regulatory influences are subjecting the
healthcare industry and prescription drug providers in the United States to
fundamental change. A variety of new approaches have been proposed, including
mandated basic healthcare benefits, controls on healthcare spending through
limitations on the growth of private health insurance premiums and Medicare and
Medicaid spending, and the creation of large purchasing groups. In addition,
some of the states in which the Company operates have adopted or are considering
various healthcare reform proposals. The Company anticipates that Congress and
state legislatures will continue to review and assess alternative healthcare
delivery systems and payment methods and that public debate of these issues will
likely continue in the future.
COMPLIANCE WITH ENVIRONMENTAL LAWS
The costs associated with the Company's compliance with Federal, state
and local environmental laws are minimal. For these reasons, the Company's
compliance with such laws does not have a material effect on its capital
expenditures, earnings or its competitive position in the marketplace.
SEGMENT INFORMATION
See Note 12 of Notes to Consolidated Financial Statements in Item 14
of this Annual Report on Form 10-K for information regarding the Company's
segments.
SEASONALITY
The Company has experienced a significant seasonal pattern in its
operating results. Historically, the Company has had higher revenues in its
second fiscal quarter (ending December) than in its third fiscal quarter (ending
March). The Company believes the seasonality of its
14
revenues and earnings comes from the acceleration of purchases of prescription
drugs and related medical products by individuals with non-contracted indemnity
insurance prior to the beginning of a new calendar year (which is generally when
payors impose new deductible calculations). As the overall business grows, the
Company expects this seasonal pattern will soften and that third quarter
revenues will be the same as or higher than second quarter revenues.
EMPLOYEES
As of August 31, 2000, the continuing operations of the Company
employed approximately 280 full-time employees. As of the same date, the
discontinued operations of the Company employed approximately 120 full-time
employees. None of the Company's employees is represented by a labor union, and
the Company believes that its employee relations are excellent.
ITEM 2. PROPERTIES
The Company believes that its properties provide a suitable work
environment for its employees and the necessary productive capacity to
distribute its products and services. The Company currently leases all of it
properties. These properties are described below:
[Enlarge/Download Table]
FUNCTIONS LOCATIONS SIZE (square feet) LEASE TERMS
CONTINUING OPERATIONS:
Corporate office, including Minnetonka, MN 62,000 Through March 31, 2005
customer service and
distribution
StatScript business office Overland Park, KN 8,000 Through October 14, 2003
Specialty pharmacies and Arizona, California, Various up to 3,900 Expire over periods
clinics Colorado, Florida, extending to September,
Georgia, Illinois, 2008
Indiana, Louisiana,
Massachusetts,
Minnesota, Missouri,
Nevada, New York,
Pennsylvania, Texas,
Utah, Washington,
Washington, D.C.
15
[Download Table]
DISCONTINUED OPERATIONS:
Manufacturing and product Eden Prairie, MN 18,000 Through August 31, 2002
distribution Edina, MN 16,500 Through November 14,
2001
ITEM 3. LEGAL PROCEEDINGS
The continuing specialty pharmacy distribution business of Chronimed
Inc. is not currently involved in any legal proceedings. However, the Company is
party to one lawsuit related to discontinued operations and involving a product
line belonging to its wholly owned subsidiary, MEDgenesis Inc.
The Company commenced a declaratory judgement action in United States
District Court, District of Minnesota, on March 5, 1999, seeking judicial
determination that the technology used in the leukocyte test pad of the
Company's DiaScreen(R) 10-way urine test strip does not infringe patents held by
Bayer Diagnostics. Bayer counterclaimed alleging infringement of its patents
covering both leukocyte and specific gravity tests. Bayer also plead unspecified
actual and statutory treble damages. The lawsuit was commenced in March 1999 and
is in the pre-trial discovery phase. The District Court calendar appears to
support a mid-2001 trial date.
Under the terms of the MEDgenesis spin-off, MEDgenesis will indemnify
Chronimed against all costs, fees, and damages incurred or assessed following
the spin-off. MEDgenesis will receive the benefit of any judgement rendered in
favor of Chronimed and the parties will share, pro rated on the basis of
expenditure, any legal fees and litigation costs awarded to MEDgenesis. While
MEDgenesis will not be substituted as the named Plaintiff, MEDgenesis will
assume the full prosecution of Chronimed's cause of action and defense of
Bayer's counterclaims.
While Chronimed and MEDgenesis are confident in the merits of their
case, and will continue to vigorously pursue Chronimed's rights, an adverse
ruling could have a material, negative impact on MEDgenesis' business. Possible
adverse judgments could include an injunction against the future sale of urine
test strips containing leukocyte or specific gravity tests, damages for past
sales, treble damages on a finding of willful infringement, and an award of
legal fees and costs.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
16
The Company's Common Stock, $.01 par value per share, is traded on the
Nasdaq Stock Market under the symbol "CHMD". The following table sets forth the
range of high, low, and close transaction prices as reported by Nasdaq.
[Enlarge/Download Table]
2000 1999 1998
------------------------------ ------------------------------ ------------------------------
High Low Close High Low Close High Low Close
---- --- ----- ---- --- ----- ---- ---- -----
First Quarter $11.13 $ 6.88 $ 8.38 $13.25 $ 7.88 $ 9.75 $12.75 $ 7.56 $12.56
Second Quarter 8.69 6.88 7.69 13.38 8.63 12.94 13.50 10.25 11.63
Third Quarter 10.31 6.63 7.50 14.00 4.88 6.13 14.63 10.25 13.75
Fourth Quarter 7.88 4.94 7.38 8.50 4.75 8.28 15.25 10.38 12.56
NUMBER OF SHAREHOLDERS OF RECORD
The number of shareholders of record of the Company's Common Stock as
of June 30, 2000 and July 2, 1999, was approximately 450 and 510, respectively.
The approximate number of beneficial owners of the Company's Common Stock was
5,500 and 7,000, respectively, as of the same dates.
DIVIDENDS
The Company has never declared or paid cash dividends on its Common or
Preferred Stock. The Company does not anticipate paying cash dividends in the
foreseeable future.
The Company has authorized the distribution of MEDgenesis stock as a
dividend to Company shareholders. The Company's Board of Directors has declared
June 16, 2000 as the record date for distribution and all holders of Company
common stock outstanding on the record date will be entitled to receive the
dividend. The Company will distribute one share of MEDgenesis common stock for
every three shares of Chronimed held.
Issuance of the MEDgenesis dividend is dependent on SEC approval of the
MEDgenesis Inc. Form 10. The Form 10 is under review with the SEC. MEDgenesis
has applied to have its stock listed on the NASDAQ national market system.
RECENT SALES OF UNREGISTERED SECURITIES
On June 23, 1998, the Company issued 42,000 shares as part of its
acquisition of Clinical Partners, Inc., a disease management company
specializing in HIV/AIDS. These securities were issued pursuant to Section 4 (2)
of the Securities Act of 1933 as a transaction by the issuer not involving any
public offering.
17
ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except per share amounts)
[Enlarge/Download Table]
YEAR ENDED
-------------------------------------------------------------------
JUNE 30, JULY 2, JULY 3, JUNE 27, JUNE 28,
FINANCIAL RESULTS 2000 1999 1998 1997 1996
Revenues $ 225,887 $ 168,624 $ 115,614 $ 88,207 $ 61,536
Income (loss) from operations (1,525) 173 1,046 693 (514)
Interest income (expense), net (191) 419 1,453 798 1,327
Other income -- 503 -- 1,700 --
Income tax benefit (expense) 438 (427) (1,019) (1,169) 4
-------------------------------------------------------------------
Income (loss) from continuing operations (1,278) 668 1,480 2,022 817
Income from discontinued operations, net of tax 1,840 3,459 5,671 5,022 4,642
-------------------------------------------------------------------
Net income $ 562 $ 4,127 $ 7,151 $ 7,044 $ 5,459
===================================================================
Basic earnings (loss) per share:
Income (loss) from continuing operations $ (.10) $ .06 $ .12 $ .17 $ .07
Income from discontinued operations .15 .28 .48 .42 .38
-------------------------------------------------------------------
Net income $ .05 $ .34 $ .60 $ .59 $ .45
===================================================================
Diluted earnings (loss) per share:
Income (loss) from continuing operations $ (.10) $ .05 $ .12 $ .16 $ .06
Income from discontinued operations .15 .29 .47 .40 .36
-------------------------------------------------------------------
Net income $ .05 $ .34 $ .59 $ .56 $ .42
===================================================================
Average shares outstanding -- basic 12,116 12,096 11,955 12,019 12,221
Average share outstanding -- diluted 12,116 12,256 12,221 12,659 13,137
FINANCIAL POSITION
Working capital $ 41,023 $ 31,472 $ 26,147 $ 29,812 $ 37,366
Total assets 83,060 78,542 71,280 62,985 64,397
Long-term debt -- -- -- -- 350
Shareholders' equity 67,687 66,487 62,319 53,360 57,162
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The fiscal years referenced herein are as follows:
FISCAL YEAR YEAR ENDED
2000 June 30, 2000 (52 weeks)
1999 July 2, 1999 (52 weeks)
1998 July 3, 1998 (53 weeks)
INCOME AND EXPENSE ITEMS AS A PERCENTAGE OF REVENUE
[Download Table]
2000 1999 1998
Revenues
Mail Order 52.8% 61.5% 70.9%
Retail 47.2 38.5 29.1
-----------------------------------
100.0 100.0 100.0
Cost of revenues 82.2 81.5 79.7
-----------------------------------
Gross profit 17.8 18.5 20.3
Operating expenses
Selling and marketing 2.0 2.7 3.5
General and administrative 14.1 15.7 15.9
Other expense 2.4 -- --
-----------------------------------
18.5 18.4 19.4
-----------------------------------
Income (loss) from operations (0.7) 0.1 0.9
Interest income (expense), net -- 0.3 1.3
Other income -- 0.3 --
Income tax benefit (expense) 0.2 (0.3) (0.9)
-----------------------------------
Income (loss) from continuing operations (0.5) 0.4 1.3
Income from discontinued operations, net of tax 0.8 2.0 4.9
-----------------------------------
Net income 0.3% 2.4% 6.2%
===================================
BUSINESS
Chronimed Inc. ("Chronimed" or the "Company") is a disease-focused
company excelling in specialty pharmacy distribution for people with chronic
health conditions. The company distributes pharmaceuticals and provides
specialized patient management services nationwide for people with long-term
chronic conditions such as organ transplants, HIV/AIDS,
19
and diseases treated with biotech injectable medications. Chronimed works
directly with patients, providers, insurance companies, health maintenance
organizations, preferred provider organizations, government agencies and payors
to improve clinical and cost-of-care outcomes.
RECAP OF 2000 RESULTS
In March 2000, the Company announced its intention to spin off its
Diagnostic Products business, to be named MEDgenesis Inc., as a tax-free stock
dividend to shareholders. As of the date of this document, the MEDgenesis Form
10 is awaiting final Securities and Exchange Commission ("SEC") approval. Until
this approval is granted and MEDgenesis becomes a separate entity from
Chronimed, Chronimed must classify MEDgenesis as "discontinued operations" for
financial reporting purposes. As a result, all financial results concerning
MEDgenesis Inc., other than those classified as discontinued operations, have
been removed from this document leaving only the reported continuing operations
of Chronimed Inc.
Total revenues increased 34% in fiscal 2000 to $225.9 million, caused
by strong growth in both the Retail and Mail Order segments. Gross profit as a
percentage of revenue declined to 17.8% in 2000 against 18.5% in 1999, although
gross profit dollars increased 29% over the prior year to $40.3 million. The
decline in the gross profit percentage is a result of reduced margins in the
mail order segment, primarily caused by the expected managed care pricing
pressure within injectables and diabetes supply lines. Operating expenses
increased slightly to 18.5% of revenues in 2000, compared to 18.4% of revenues
in 1999, due primarily to a $5.5 million charge incurred in third quarter as a
result of exiting the underperforming Clinical Partner's case management
business. Income from operations decreased from the prior year income of
$173,000 to a $1.5 million loss.
Income from operations, excluding the unusual or infrequent items noted
below, increased as a percentage of revenue from 0.6% in 1999 to 2.4% in 2000.
Income from operations, as reported, decreased as a percentage of revenue to a
loss of 0.7% in 2000 compared to income of 0.1% in 1999, caused primarily by the
decline in gross profit percentage and the unusual or infrequent items noted
below for Clinical Partners, strategic, and spin-off costs. The income tax rate
changed from a 39% expense on an operating profit in 1999 to a 26% benefit on an
operating loss in 2000 due to certain potential non-deductible expenses incurred
as part of the spin off efforts in 2000. Net interest expense was $191,000 in
2000 compared to the prior year net interest income of $419,000, due primarily
to a reduction in interest from the Orphan Medical, Inc. receivable (see Note 10
of Notes to Consolidated Financial Statements). The fiscal 2000 net loss from
continuing operations of $1.3 million and ($.10) per diluted share compares to
net income of $668,000 and $.05 per diluted share, respectively, for fiscal
1999.
It should be noted that several unusual or infrequent charges in fiscal
2000 and fiscal 1999 negatively impacted the comparisons for income from
operations. The most significant charge was the write-off of the Clinical
Partners contract management line for $5.5 million in fiscal third quarter.
Also, the Company incurred strategic costs and spin-off costs of $931,000 and
$530,000, respectively, in fiscal 2000 as it pursued strategic alternatives. The
total of these charges was approximately $7.0 million before taxes or $0.35 per
share negative impact on
20
income from operations. Fiscal 1999 income from operations included $800,000 of
strategic costs or $.04 per share.
REVENUES
Chronimed is comprised of two operating segments -- Mail Order and
Retail. This view best describes the business and reflects how it is managed and
resourced. It also aligns with the disclosure requirements of Financial
Accounting Statement No. 131, Segment Reporting, which Chronimed implemented in
fiscal 1999. The Mail Order segment includes the Biotech Injectables program,
Organ Transplant Pharmacy, and Home Service Medical (The Home Service Medical
business has been sold as of September 1, 2000 -- see Note 13 of Notes to
Consolidated Statements). The Retail segment focuses on StatScript Pharmacy and
the HIV/AIDS business.
2000 VERSUS 1999 Total revenues for 2000 were up 34% to $225.9 million from
$168.6 million in 1999, driven primarily by growth in the Retail segment. By
revenue source, 2000 compares to 1999 as follows:
FOURTH QUARTER TOTAL YEAR
Mail Order +15% +15%
Retail +32% +64%
The Mail Order segment grew 15% quarter-on-quarter in the fourth quarter and was
up 15% for the year due primarily to continued patient acquisition from managed
care plans in the Biotech Injectables program. Biotech Injectables and Organ
Transplant are both expected to grow in fiscal 2001 as a result of increased
selling efforts to transplant centers and providers and increased revenues from
large payor contracts. The Retail segment grew 32% quarter-on-quarter in the
fourth quarter and was up 64% for the year due to continued growth from new
pharmacies and from new patients in existing stores. During fiscal 2001,
Chronimed expects to open five or more new pharmacies and expects to acquire one
or more existing pharmacies.
1999 VERSUS 1998 Total revenues for 1999 were up 46% to $168.6 million from
$115.6 million in 1998, driven primarily by growth in the Retail segment. By
revenue source, 1999 compares to 1998 as follows:
FOURTH QUARTER TOTAL YEAR
Mail Order +17% +27%
Retail +103% +93%
The Mail Order segment grew 17% quarter-on-quarter in the fourth quarter and was
up 27% for the year due primarily to continued patient acquisition in the
Biotech Injectables program and in Organ Transplant. The Retail segment grew
103% quarter-on-quarter in the fourth quarter and was up 93% for the year due to
continued growth in patients and stores and increased use of new HIV/AIDS drugs.
21
COST OF REVENUES AND GROSS PROFITS
2000 VERSUS 1999 Total gross profit dollars increased $9.1 million from $31.2
million in fiscal 1999 to $40.3 million in fiscal 2000. The gross profit dollar
increase came from significant revenue growth and increased gross profit
percentage in the Retail segment. Gross profit as a percent of revenue decreased
from 18.5% in fiscal 1999 to 17.8% in fiscal 2000 as a result of managed care
pricing pressure in the Mail Order segment, most notably in the Biotech
Injectables program.
1999 VERSUS 1998 Total gross profit dollars increased $7.7 million, from $23.5
million in fiscal 1998 to $31.2 million in fiscal 1999. The gross profit dollar
increase came from both the Retail and Mail Order segments. Gross profit as a
percentage of revenue decreased from 20.3% to 18.5% as a result of price
pressure and business mix in the mail-order segment.
OPERATING EXPENSES
The Company's operating expenses include selling and marketing as well
as general and administrative (G&A) expenses. The Company's G&A expenses include
both core G&A expenses (corporate and division management, information systems,
accounting, human resources) and direct G&A expenses that vary with business
growth (customer service, billing, and pharmacy fulfillment).
2000 VERSUS 1999 Total operating expenses increased $10.8 million, or 35%, in
2000, from $31.0 million in fiscal 1999 to $41.8 million in fiscal 2000.
Approximately $7.0 million of this increase came from three specific charges
that were unusual or infrequent in nature, to be discussed below. Operating
expenses as a percentage of revenue increased from 18.4% in 1999 to 18.5% in
2000, including the three specific charges. First, a $931,000 expense is
included in fiscal 2000 G&A related to the Company's strategic planning
endeavor, including its engagement with PaineWebber. Second, the Company
incurred a $5.5 million charge, classified as other expense within operating
expenses, as a result of exiting the Clinical Partner's contract management
line. Third, G&A expenses also include $530,000 of costs associated with the
intended spin-off of the Company's Diagnostic Products business, named
MEDgenesis Inc., which is expected to occur in fiscal 2001. Overall, excluding
these three specific events, operating expenses would have been $34.8 million or
15.4% of revenue in fiscal 2000. Within overall operating expenses, selling and
marketing expenses declined $103,000, or 2.3%, in 2000 as a result of cost
containment efforts in the Mail Order segment in both the Biotech Injectables
and Transplant businesses while the Company assessed its strategic alternatives.
As a percentage of revenue, selling and marketing expenses decreased from 2.7%
in 1999 to 2.0% in 2000. The Company's business model for operating expenses is
to continue improving efficiency on greater revenue volume by leveraging
infrastructure costs.
1999 VERSUS 1998 Total operating expenses increased $8.5 million, or 38%, in
1999, from $22.5 million to $31.0 million. This increase is primarily due to the
Clinical Partners acquisition late in fiscal 1998, significant growth at the
Retail StatScript pharmacies, and general business volume.
22
Operating expenses as a percentage of revenue declined from 19.4% in 1998 to
18.4% in 1999 due primarily to efficiencies in selling and marketing,
particularly in Mail Order.
INTEREST INCOME
2000 VERSUS 1999 The decrease in net interest income from $419,000 in 1999 to
net interest expense of $191,000 in 2000 is due to a decline in interest income
from the Orphan Medical receivable, which was paid in full in 1999, and from
incurring short-term borrowings throughout the current year to finance
Chronimed's growth. The Company expects to be in a net borrowing position in
fiscal 2001 as it continues its business growth.
1999 VERSUS 1998 The decrease in interest income from $1.5 million in 1998 to
$419,000 in 1999 was due to the decrease in interest from the Orphan Medical
receivable, which was paid in full in 1999, and from a reduction in investable
funds used to support the Company's growth.
OTHER INCOME
In 1999 the Company recognized a pre-tax gain of $503,000, recorded as
Other Income in the financial statements, as a result of selling its Publishing
business to John Wiley and Sons, a New York publisher, for $1.8 million.
INCOME TAXES
The income tax rate changed from a 39% expense on an operating profit
in 1999 to a 26% benefit on an operating loss in fiscal 2000 due to certain
potential non-deductible expenses incurred as part of the spin-off efforts in
2000. See Note 7 of Notes to Consolidated Financial Statements for the
reconciliation to the Company's statutory rate.
QUARTERLY RESULTS OF OPERATIONS
The following table presents the Company's results of continuing
operations for the last eight calendar quarters. This data is unaudited and
includes, in the opinion of the Company's management, all adjustments necessary
to present fairly the data in accordance with generally accepted accounting
principles. Such quarterly results are not necessarily indicative of future
results of operations.
The Company's results of operations for the fourth quarter ending June
30, 2000, include pre-tax charges of $530,000, or approximately $0.03 per share,
related to costs incurred in preparing for the spin off of its Diagnostic
Products business, named MEDgenesis, expected to be completed in fiscal 2001.
The Company's results of operations for the third quarter ended March 30, 2000,
include pre-tax charges of $5.5 million or $0.28 per share for the write off of
its Clinical Partners contract management line. The Company's results of
operations for the second
23
quarter ended January 1, 2000 were favorably affected by a pre-tax gain of
$503,000 or approximately $0.03 per share on the sale of its Publishing
business.
[Enlarge/Download Table]
QUARTER ENDED (dollars in thousands, except per share amounts)
--------------------------------------------------------------
OCTOBER 1 DECEMBER 31 MARCH 31 JUNE 30
FISCAL 2000
Revenues $ 50,878 $ 58,346 $ 57,596 $ 59,067
Gross profit 8,915 11,320 10,133 9,913
Income (loss) from continuing operations (108) 919 (2,526) 437
Income from discontinued operations 436 647 635 122
Net income (loss) 328 1,566 (1,891) 559
Basic earnings (loss) per share:
Income (loss) from continuing operations $ (.01) $ .08 $ (.21) $ .04
Income from discontinued operations .04 .05 .05 .01
Net income (loss) per share .03 .13 (.16) .05
Diluted earnings (loss) per share:
Income (loss) from continuing operations $ (.01) $ .08 $ (.21) $ .04
Income from discontinued operations .04 .05 .05 .01
Net income (loss) per share .03 .13 (.16) .05
QUARTER ENDED (dollars in thousands, except per share amounts)
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OCTOBER 2 JANUARY 1 APRIL 2 JULY 2
FISCAL 1999
Revenues $ 35,370 $ 41,021 $ 44,046 $ 48,187
Gross profit 7,440 8,240 7,347 8,152
Income (loss) from continuing operations 431 1,084 (217) (630)
Income from discontinued operations 1,263 1,171 683 342
Net income (loss) 1,694 2,255 466 (288)
Basic earnings (loss) per share:
Income from (loss) continuing operations $ .04 $ .09 $ (.02) $ (.05)
Income from discontinued operations .10 .10 .06 .03
Net income (loss) per share .14 .19 .04 (.02)
Diluted earnings (loss) per share:
Income from continuing operations $ .04 $ .09 $ (.02) $ (.05)
Income from discontinued operations .10 .09 .06 .03
Net income (loss) per share .14 .18 .04 (.02)
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, the Company had $41.0 million of working capital,
compared to $31.5 million as of July 2, 1999. During 2000, the Company utilized
$8.2 million of cash from operating activities. The average days sales
outstanding (DSO) of the Company's accounts receivable weakened from 61 days at
July 2, 1999 to 73 days at June 30, 2000. Both the Retail and Mail Order
segments caused the negative trend. In the Retail segment, a recent conversion
to a fully automated billing system coupled with slower-than-expected payments
from multiple payors caused the segment's DSO to rise. In addition, the Mail
Order segment continues to be affected by slower than expected collections from
a large payor. The average days inventory on hand weakened slightly to 13 at
June 30, 2000 from 11 days at July 2, 1999. The Company
24
expects its inventory days on hand to continue to perform in the 11 to 13 day
range. Approximately $2.8 million of cash was provided by the issuance of Common
Stock under employee stock option and purchase programs and short-term
borrowings. Further, $1.2 million was used for purchases of property and
equipment, particularly for information systems and facility improvements.
As of July 2, 1999, the Company had $31.5 million of working capital.
During 1999, the Company utilized $6.1 million of cash from operating
activities. The average days sales outstanding (DSO) of the Company's accounts
receivable weakened from 53 days at July 3, 1998 to 61 days at July 2, 1999 due
primarily to key managed care accounts. The average days inventory on hand
improved from 18 days in 1998 to 11 days in 1999. Approximately $9.3 million of
cash was provided by the net sale of available-for-sale securities, the issuance
of Common Stock under employee stock option and purchase programs, and proceeds
from sales of OMI rights. Cash totaling $1.9 million was used for the
acquisition of a StatScript pharmacy (see Note 3 of Notes to Consolidated
Financial Statements) and for earnout payments on the 1998 DiaScreen
acquisition. Further, $3.7 million was used for purchases of property and
equipment, particularly for information systems, facility improvements, and for
the repurchase of Common Stock.
The Company had no long-term debt as of year-end 2000 and 1999.
Shareholders' equity as of year-end 2000 and 1999 was $67.7 million and $66.5
million, respectively. The Company has a discretionary line of credit totaling
$15.0 million, with $2.5 million outstanding as of June 30, 2000. The Company
believes that the line of credit and cash provided by operating activities will
allow it to meet foreseeable cash requirements and provide the flexibility to
fund future growth. Any material business acquisitions would need to be financed
from debt or equity sources beyond the Company's line of credit and cash flow
from operations.
NEW ACCOUNTING STANDARDS
The Company's revenue recognition policy meets the guidance in SAB 101
for all periods presented.
THE YEAR 2000 READINESS DISCLOSURE STATEMENT
The Company did not encounter any significant system issues related to
Year 2000. The Company will continue to monitor all systems for potential Year
2000 related issues.
OUTLOOK
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. The factors that could cause actual results to
differ include, but are not limited to, the following: Changes in economic
conditions; significant
25
reductions in reimbursement rates from key government and private payors;
general competition and pricing pressures; difficulties or delays in the
development and marketing of the Company's products; pressures on gross profit
margins; the Company's ability to execute its sales and marketing plans;
termination or changes in status of key payor contracts; failure to collect key
accounts receivable; termination of key supplier contracts; changes in or
unknown violations of various federal, state, and local regulations governing
the business, including FDA compliance and regulations; loss or retirement of
key executives; material litigation; changes in ownership; failure to complete
the intended spin-off of the Diagnostic Products business; and management of
growth. The cautionary statements filed by the Company on this Form 10-K are
included herein as Exhibit 99. Investors are specifically referred to such
cautionary statements for discussion of factors which could affect the Company's
operations and forward-looking statements contained herein.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Pursuant to the Company's investment policy, idle and excess funds are
invested in high grade, fixed income securities generally for no more than one
year and are classified as Available-for-Sale. Investments as of June 30, 2000
and July 2, 1999 consisted of equity securities of Cell Robotics International,
Inc., with whom the Company had a distribution and development agreement for the
Lasette laser lancing device. The Company considers any net unrealized gain or
loss on these investments to be temporary and reflects such gains or losses as a
component of shareholders' equity. The Cell Robotics securities will become the
property of MEDgenesis Inc. effective July 1, 2000 in association with the
spin-off of the Diagnostic Products business and, accordingly, are included in
net assets of discontinued operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary financial information
required to be filed under this Item are presented on pages F-1 through F-19 of
this Annual Report on Form 10-K, and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The discussions under the sections captioned "SECTION 16(a) BENEFICIAL
OWNERSHIP REPORTING COMPLIANCE", "PROPOSAL 1 -- NOMINEES FOR DIRECTORS",
"PROPOSAL 1 -- EXISTING DIRECTORS", and "EXECUTIVE OFFICERS" to be included in
the Registrant's definitive proxy statement to be filed with the Securities and
Exchange commission and delivered to the Registrant's shareholders pursuant to
Regulation 14A promulgated under the Securities Exchange Act of 1934 with
respect to the Annual Meeting of Shareholders to be held on November 14, 2000
(the "2000 Proxy Statement") are incorporated herein by reference in response to
this Item 10.
ITEM 11. EXECUTIVE COMPENSATION
The discussions under the sections captioned "DIRECTOR COMPENSATION"
and "EXECUTIVE COMPENSATION" but excluding the discussions included under the
subsections captioned "EXECUTIVE COMPENSATION -- Compensation Committee Report
on Executive Compensation", "EXECUTIVE COMPENSATION -- EXECUTIVE OFFICERS", and
"EXECUTIVE COMPENSATION -- Comparative Stock Performance" to be included in the
2000 Proxy Statement are incorporated herein by reference in response to this
Item 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The discussions under the sections captioned "OWNERSHIP OF CHRONIMED
COMMON STOCK BY CERTAIN BENEFICIAL OWNERS AND EXECUTIVE OFFICERS" to be included
in the 2000 Proxy Statement are incorporated herein by reference in response to
this Item 12.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The discussion under the section captioned "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS" to be included in the 2000 Proxy Statement are
incorporated herein by reference in response to this Item 13.
27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) Documents included in this report:
1. FINANCIAL STATEMENTS PAGE
----
Index to Financial Statements...................................... F-1
Report of Independent Auditors..................................... F-2
Consolidated Balance Sheets as of June 30, 2000 and July 2, 1999... F-3
Consolidated Statements of Income for the years ended June 30,
2000, July 2, 1999, and July 3, 1998............................... F-4
Consolidated Statements of Changes in Shareholders' Equity for
years ended June 30, 2000, July 2, 1999, and July 3, 1998.......... F-5
Consolidated Statements of Cash Flows for the years ended
June 30, 2000, July 2, 1999, and July 3, 1998...................... F-6
Consolidated Notes to Financial Statements......................... F-7
2. FINANCIAL STATEMENT SCHEDULE
Schedule II --- Valuation and Qualifying Accounts.................. S-1
Financial Statement schedules not included in this Report
have been omitted because they are not applicable or the
required information is shown in the Audited Consolidated
Financial Statements or Notes thereto.
(b) Reports on Form 8-K
None
(c) Exhibits:
Exhibits designated by the symbol * are filed with this Annual Report
on Form 10-K. All exhibits not so designated are incorporated by
reference to a prior filing as indicated.
Chronimed undertakes to furnish to any shareholder so requesting a copy
of any of the following exhibits upon payment to the Company of the
reasonable costs incurred by Company in furnishing any such exhibit.
Portions of the 2000 definitive Proxy Statement are incorporated herein
by reference as set forth in Items 10, 11, 12, and 13 of this Report.
Only those portions directly responsive to the Items of Form 10-K shall
be deemed filed with the commission.
28
EXHIBIT NUMBER
--------------
3.1 Articles of Incorporation of the Company, as amended. (5)
3.2 Bylaws of the Company, as amended (6)
4.1 Specimen form of the Company's Common Stock certificate. (1)
4.2 Shareholder Rights Agreement between the Company and Norwest Bank
Minnesota, National Association dated December 18, 1996. (7)
10.1* Distribution and Spin-off Agreement effective July 1, 2000 between
the Company and MEDgenesis Inc.
10.2 (Reserved)
10.3 Form of Incentive Stock Option Agreement. (1)/(2)
10.4 Form of Nonstatutory Stock Option Agreement. (1)/(2)
10.5 (Reserved)
10.6 Employment Agreement effective July 1, 1999, between the Company
and Maurice R. Taylor, II. (2)
10.7 (Reserved)
10.8 (Reserved)
10.9 (Reserved)
10.10 (Reserved)
10.11 (Reserved)
10.12 (Reserved)
10.13 (Reserved)
10.14 (Reserved)
10.15 (Reserved)
10.16 (Reserved)
10.17* Employment Agreement effective July 1, 2000, between the Company
and Henry F. Blissenbach.
10.18 Employment Agreement dated March 1, 2000, between the Company and
Gregory H. Keane. (2)
10.19 (Reserved)
29
10.20 Lease dated July 27, 1994, between the Company and Jorandcor, Inc.
(4)
10.20a* Lease assignment, dated August 29, 2000, between the Company and
MEDgenesis Inc.
10.21 (Reserved)
10.22 Chronimed Inc. 1994 Stock Option Plan. (3)
10.23 Chronimed Inc. 1994 Stock Option Plan for Directors. (3)
10.24* Pharmacy Participation Agreement with Aetna Health Management,
Inc.
10.25 (Reserved)
10.26 (Reserved)
10.27 Chronimed Inc. 1997 Stock Option Plan. (10)
10.28 Facility Lease Agreement with Red Circle L.L.P. dated November
1996. (7)
10.28a Facility Lease Agreement with Red Circle L.L.P. -- amendments in
April 1997, December 1997, and July 1998. (8)
10.29 Loan Guaranty Agreement between the Company and Maurice R. Taylor,
II, dated April 9, 1997. (7)
10.29a Amendment to Loan Guaranty Agreement between the Company and
Maurice R. Taylor, II, dated August 26, 1998. (8)
10.30 Sale of Distribution Rights Agreement between the Company and
Orphan Medical, Inc. dated June 27, 1997. (7)
10.31 Chronimed Inc. 1999 Stock Option Plan. (8)
10.32 Acquisition Agreement -- Dia-Screen Corporation, effective March
15, 1998. (8)
10.33 (Reserved)
21.1* List of Subsidiaries.
23.1* Consent of Ernst & Young LLP.
27* Financial Data Schedule
99* Cautionary Statements for Purposes of the "Safe Harbor" Provisions
of the Private Securities Litigation Reform Act.
---------
* Filed herewith.
(1) Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 33-45644), as amended.
30
(2) Management contract or compensatory plan or arrangement.
(3) Incorporated by reference to the Company's quarterly report on Form
10-Q filed with The Commission on January 31, 1995, under file number
0-19952.
(4) Incorporated by reference to the Company's report on Form 8-K with The
Commission on July 10, 1996, under file number 0-19952.
(5) Incorporated by reference to the Company's quarterly report on Form
10-Q filed with the Commission on February 6, 1998, under file number
0-19952.
(6) Incorporated by reference to the Company's quarterly report on Form
10-Q filed with The Commission on May 5, 1998, under file number
0-19952.
(7) Incorporated by reference to the Company's 1997 Annual Report on Form
10-K filed with The Commission on September 25, 1997, under file number
0-19952.
(8) Incorporated by reference to the Company's 1998 Annual Report on Form
10-K filed with The Commission on September 30, 1998, under file Number
0-19952.
(9) Incorporated by reference to the Company's 1999 Annual Report on Form
10-K filed with The Commission on September 28, 1999, under file Number
0-19952.
(10) Incorporated by reference to the Company's quarterly report on Form
10-Q filed with The Commission on September 26, 1996, under file number
0-19952.
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CHRONIMED INC.
Dated: September 22, 2000
By /s/ Henry F. Blissenbach
------------------------
Henry F. Blissenbach
Chief Executive Officer and
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Henry F. Blissenbach September 22, 2000
-------------------------------------------
Henry F. Blissenbach - Chief Executive Officer
(Principal Executive Officer and
Chairman of the Board of Directors)
/s/ Gregory H. Keane September 22, 2000
-------------------------------------------
Gregory H. Keane - Vice President, Chief Financial
Officer and Treasurer
(Principal Financial and Accounting Officer)
/s/ John Howell Bullion September 22, 2000
-------------------------------------------
John Howell Bullion (Director)
/s/ John H. Flittie September 22, 2000
-------------------------------------------
John H. Flittie (Director)
/s/ Charles V. Owens, Jr. September 22, 2000
-------------------------------------------
Charles V. Owens, Jr. (Director)
INDEX TO FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS ............................................ F-2
CONSOLIDATED BALANCE SHEETS ............................................... F-3
CONSOLIDATED STATEMENTS OF INCOME ......................................... F-4
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY ................ F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS ..................................... F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ................................ F-7
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES .............. S-1
F-1
Report of Independent Auditors
Board of Directors
Chronimed Inc.
We have audited the accompanying consolidated balance sheets of Chronimed Inc.
as of June 30, 2000 and July 2, 1999, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the three years in the
period ended June 30, 2000. Our audits also included the financial statement
schedule listed in Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Chronimed Inc. at
June 30, 2000 and July 2, 1999, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended June 30,
2000, in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects, the information set forth therein.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
August 3, 2000
F-2
CONSOLIDATED BALANCE SHEETS
(in thousands)
[Enlarge/Download Table]
ASSETS JUNE 30, 2000 JULY 2, 1999
-----------------------------------
Current assets
Cash and cash equivalents $ -- $ 3,312
Accounts receivable (net of allowance of $1,765 and
$1,158 at June 30, 2000 and July 2, 1999,
respectively) 47,352 32,533
Income taxes receivable 774 --
Inventory 6,111 5,395
Other current assets 848 1,358
Deferred taxes 1,311 929
-----------------------------------
Total current assets 56,396 43,527
Property and equipment
Property and equipment 14,889 13,850
Allowance for depreciation (8,338) (5,993)
-----------------------------------
6,551 7,857
Goodwill, net 9,031 15,373
Net assets of discontinued operations 10,465 11,624
Deferred Taxes 508 13
Other assets, net 109 148
-----------------------------------
Total assets $ 83,060 $ 78,542
===================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 10,507 $ 9,917
Accrued expenses 2,366 1,952
Income taxes payable -- 186
Short-term debt 2,500 --
-----------------------------------
Total current liabilities 15,373 12,055
Shareholders' equity
Preferred Stock -- --
Common Stock, issued and outstanding shares --
12,147 and 12,088, respectively 121 121
Additional paid-in capital 52,839 52,499
Retained earnings 14,271 13,709
-----------------------------------
67,231 66,329
Accumulated other comprehensive income --
unrealized gain on available-for-sale securities
from discontinued operations 456 158
-----------------------------------
Total shareholders' equity 67,687 66,487
-----------------------------------
Total liabilities and shareholders' equity $ 83,060 $ 78,542
===================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share amounts)
[Enlarge/Download Table]
YEAR ENDED
------------------------------------------------------
JUNE 30, 2000 JULY 2, 1999 JULY 3, 1998
------------- ------------ ------------
REVENUES $ 225,887 $ 168,624 $ 115,614
COST OF REVENUES 185,606 137,445 92,087
------------------------------------------------------
Gross profit 40,281 31,179 23,527
OPERATING EXPENSES
Selling and marketing 4,455 4,558 4,075
General and administrative 31,851 26,448 18,406
Other expense - asset write down 5,500 -- --
------------------------------------------------------
Total operating expenses 41,806 31,006 22,481
INCOME (LOSS) FROM CONTINUING OPERATIONS (1,525) 173 1,046
Interest income (expense), net (191) 419 1,453
Other income -- 503 --
------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES (1,716) 1,095 2,499
Income tax benefit (expense) 438 (427) (1,019)
------------------------------------------------------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS (1,278) 668 1,480
NET INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX 1,840 3,459 5,671
------------------------------------------------------
NET INCOME $ 562 $ 4,127 $ 7,151
======================================================
NET INCOME PER SHARE
Basic earnings per share - continuing operations $ (.10) $ .06 $ .12
Basic earnings per share - discontinued operations .15 .28 .48
------------------------------------------------------
Basic earnings per share $ .05 $ .34 $ .60
======================================================
Basic weighted-average shares 12,116 12,096 11,955
Diluted earnings per share - continuing operations $ (.10) $ .05 $ .12
Diluted earnings per share - discontinued operations .15 .29 .47
------------------------------------------------------
Diluted earnings per share $ .05 $ .34 $ .59
======================================================
Diluted weighted-average shares 12,116 12,256 12,221
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
[Enlarge/Download Table]
ACCUMULATED
OTHER
PAID-IN RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS INCOME TOTAL
Balance June 27, 1997 11,878 $ 118 $ 49,838 $ 3,408 $ (4) $ 53,360
Common stock issued for acquisition 85 1 858 -- -- 859
Shares issued for employee stock purchase
and option plans 118 2 820 -- -- 822
Tax benefit of stock option exercises -- -- 152 -- -- 152
Net income -- -- -- 7,151 -- 7,151
Unrealized loss on available-for-sale securities -- -- -- -- (25) (25)
---------
Subtotal - Comprehensive Income 7,126
----------------------------------------------------------------------
Balance July 3, 1998 12,081 121 51,668 10,559 (29) 62,319
Stock repurchase (200) (2) (862) (977) -- (1,841)
Shares issued for employee stock purchase
and option plans 207 2 1,437 -- -- 1,439
Tax benefit of stock option exercises -- -- 256 -- -- 256
Net income -- -- -- 4,127 -- 4,127
Unrealized gain on available-for-sale securities -- -- -- -- 187 187
---------
Subtotal - Comprehensive Income 4,314
----------------------------------------------------------------------
Balance July 2, 1999 12,088 121 52,499 13,709 158 66,487
Shares issued for employee stock purchase
and option plans 59 -- 336 -- -- 336
Tax benefit of stock option exercises -- -- 4 -- -- 4
Net income -- -- -- 562 562
Unrealized gain on available-for-sale securities -- -- -- -- 298 298
---------
Subtotal - Comprehensive Income 860
----------------------------------------------------------------------
Balance June 30, 2000 12,147 $ 121 $ 52,839 $ 14,271 $ 456 $ 67,687
======================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
[Enlarge/Download Table]
YEAR ENDED
------------------------------------------------------
JUNE 30, 2000 JULY 2, 1999 JULY 3, 1998
OPERATING ACTIVITIES
Net income $ 562 $ 4,127 $ 7,151
Less income from discontinued operations 1,840 3,459 5,671
------------ ------------ ------------
Income (loss) from continuing operations (1,278) 668 1,480
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,084 3,838 2,349
Write off of Clinical Partners contract line 5,500 -- --
Deferred income taxes (877) (825) 183
Income tax benefit of stock option plans 4 256 152
Changes in operating assets and liabilities:
Accounts and notes receivable (14,819) (14,070) (1,637)
Inventory (716) 411 (1,428)
Accounts payable (79) 4,019 (2,568)
Accrued expenses 414 (1,076) 3,770
Income taxes (960) 1,197 (2,055)
Other assets 513 (554) 564
------------------------------------------------------
Net cash provided by (used in) operating activities (8,214) (6,136) 810
INVESTING ACTIVITIES
Acquisitions, net of cash acquired -- (1,444) (5,893)
Proceeds from sale of OMI rights -- 1,317 133
Purchases of property and equipment (1,229) (1,848) (3,329)
Purchases of available-for-sale securities -- -- (15,377)
Sale and maturities of available-for-sale securities -- 6,536 19,117
------------------------------------------------------
Net cash provided by (used in) investing activities (1,229) 4,561 (5,349)
FINANCING ACTIVITIES
Repurchase of Common Stock -- (1,841) --
Net proceeds from issuance of Common Stock 336 1,439 822
Net proceeds from borrowing 2,500 -- --
------------------------------------------------------
Net cash provided by (used in) financing activities 2,836 (402) 822
CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS 3,295 4,262 (294)
------------------------------------------------------
Increase (decrease) in cash and cash equivalents (3,312) 2,285 (4,011)
Cash and cash equivalents at beginning of period 3,312 1,027 5,038
------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ -- $ 3,312 $ 1,027
======================================================
SUPPLEMENTAL DISCLOSURES
* Consolidated income taxes paid in fiscal 2000, 1999, and 1998 were
$2,466, $1,897, and $6,010, respectively.
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
* The Company acquired the stock of Clinical Partners, Inc. in June,
1998. The acquisition was financed by cash and the issuance of 42,000
shares of Common Stock.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
The fiscal years referenced herein are as follows:
FISCAL YEAR YEAR ENDED
2000 June 30, 2000 (52 weeks)
1999 July 2, 1999 (52 weeks)
1998 July 3, 1998 (53 weeks)
1. ACCOUNTING POLICIES
BUSINESS
Chronimed Inc. ("Chronimed" or the "Company") is a disease-focused company
excelling in specialty pharmacy distribution for people with chronic health
conditions. The company distributes pharmaceuticals and provides specialized
patient management services nationwide for people with long-term chronic
conditions such as organ transplants, HIV/AIDS, and diseases treated with
biotech injectable medications. Chronimed works directly with patients,
providers, insurance companies, health maintenance organizations, preferred
provider organizations, government agencies and payors to improve clinical and
cost-of-care outcomes.
FISCAL YEAR
The Company uses a four-week, four-week, five-week (4-4-5) quarterly accounting
cycle with the fiscal year ending on the Friday closest to June 30.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All intercompany accounts and transactions
between consolidated entities have been eliminated.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year presentations to conform
to current year presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Those assumptions and estimates are subject to constant revision, and actual
results could differ from those estimates.
REVENUE RECOGNITION
Revenue is recognized upon the provision of services, shipment of products, and
at the time of purchase in the specialty pharmacies and when all the following
criteria are met:
a.) Persuasive evidence of an arrangement exists;
b.) Price to the buyer is fixed and determinable; and
c.) Collectibility is reasonably assured.
F-7
STOCK-BASED COMPENSATION
The Company has adopted the disclosure only provisions of Statement of Financial
Accounting Standards No. 123 (SFAS No. 123), "Accounting for Stock-Based
Compensation," but applies Accounting Principles Board Opinion No. 25 (APB 25)
and related interpretations in accounting for its stock plans. Under APB 25,
when the exercise price of an employee stock option equals the market price of
the underlying stock on the date of grant, no compensation expense is
recognized. Disclosure of the impact of SFAS No. 123, as if adopted, can be
found in Note 8 to the Consolidated Financial Statements.
CASH AND CASH EQUIVALENTS
The Company considers all investments with an original maturity of 90 days or
less when purchased to be cash equivalents. Cash equivalents are available for
sale, are carried at cost, which approximates fair market value, and consist
principally of corporate commercial paper.
INVESTMENTS
In fiscal 1999, the Company invested $450 in the common stock of Cell Robotics
International, Inc. (CRII) as part of a development and distribution agreement
for the Lasette laser lancing device. Investments as of June 30, 2000 and July
2, 1999 consist entirely of these CRII equity securities. Management determines
the appropriate classification of securities at the time of purchase and
reevaluates such designation as of each balance sheet date. Securities are
classified as "available-for-sale" as of June 30, 2000 and July 2, 1999. The
Company considers the net unrealized gain on these investments of $456
and $158 at June 30, 2000 and July 2, 1999, respectively, to be temporary, and
as such has recorded it through shareholders' equity. The Cell Robotics
securities will become the property of MEDgenesis effective July 1, 2000 in
association with the spin-off of the Diagnostic Products business, (see Note 2),
and, accordingly, are classified in net assets of discontinued operations.
ACCOUNTS RECEIVABLE ALLOWANCE
The Company determines an allowance amount based upon an analysis of the
collectability of specific accounts and the aging of the accounts receivable.
INVENTORIES
Inventories consist primarily of goods held for resale, and are carried at the
lower of cost or market determined under the average cost method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation on property and
equipment is computed using the straight-line method. Depreciation occurs over
estimated useful lives of one to seven years. Depreciation expense for
continuing operations was $2,456, $2,140, and $1,353 in fiscal 2000, 1999, and
1998, respectively.
F-8
GOODWILL
Goodwill is amortized on a straight-line basis over two to twenty years. The
Company periodically evaluates its goodwill for impairment by comparison of the
carrying value against anticipated business performance. Amortization expense
for continuing operations was $1,628, $1,698, and $996 in fiscal 2000, 1999, and
1998, respectively. Accumulated amortization for continuing operations was
$4,274 and $3,807 as of fiscal year end 2000 and 1999, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates its long-lived assets for impairment losses when
indicators of impairment are present by comparing the undiscounted cash flows to
the assets' carrying amount. An impairment loss is recorded if necessary. In
fiscal 2000 the Company wrote down the Clinical Partners contract management
line in accordance with its evaluation of long-lived asset impairment.
INTERNAL USE SOFTWARE
In March, 1998, the AICPA issued Statement of Position (SOP) 98-1, "Accounting
for the Costs of Computer Software Developed for or Obtained for Internal Use".
The SOP requires the capitalization of certain costs incurred in connection with
developing or obtaining software for internal use.
DERIVATIVES AND HEDGING
In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which requires the Company to recognize all
derivatives on the balance sheet at fair value effective in fiscal 2001. The
Company does not anticipate that the adoption of this Statement will have a
significant effect on its results of operations or financial position.
INCOME TAXES
The Company accounts for income taxes using the liability method. Deferred
income taxes are provided for temporary differences between financial reporting
and the tax basis of assets and liabilities.
F-9
PER SHARE DATA
Earnings per share are calculated in accordance with SFAS No. 128, "Earnings Per
Share."
The following table is a reconciliation of the earnings numerator and the
weighted-average shares denominator used in the calculations of basic and
diluted earnings per share for the last three fiscal years.
[Enlarge/Download Table]
2000 1999 1998
---- ---- ----
EARNINGS
Net income for basic and diluted earnings per share $562 $4,127 $7,151
----------------------------------
WEIGHTED AVERAGE SHARES
Basic weighted-average shares 12,116 12,096 11,955
Adjustments for dilutive securities:
Employee stock options, net of tax proceeds -- 160 266
----------------------------------
Diluted weighted-average shares 12,116 12,256 12,221
==================================
BASIC EARNINGS PER SHARE $.05 $.34 $.60
==================================
DILUTED EARNINGS PER SHARE $.05 $.34 $.59
==================================
2. DISCONTINUED OPERATIONS
In March 2000, the Company announced its intention to spin off its Diagnostic
Products business, to be named MEDgenesis Inc., as a tax-free stock dividend to
shareholders. As of the date of this document, the Company is awaiting final
Securities and Exchange Commission ("SEC") approval of the MEDgenesis Form 10,
following which the Company may distribute the MEDgenesis stock dividend. Until
this approval is granted and MEDgenesis becomes a separate entity from
Chronimed, Chronimed must classify MEDgenesis as "discontinued operations" for
financial reporting purposes. As a result, all financial results concerning
MEDgenesis Inc., other than those classified as discontinued operations, have
been removed from this document leaving only the reported continuing operations
of Chronimed Inc.
The following table summarizes revenues and net income from discontinued
operations for the last three years.
[Enlarge/Download Table]
(IN THOUSANDS) JUNE 30, 2000 JULY 2, 1999 JULY 3, 1998
Revenues from discontinued operations $32,949 $29,672 $24,984
Cost of revenues 20,283 15,691 9,364
--------------------------------------------
Gross profit 12,666 13,981 15,620
Operating expenses:
Selling and marketing 5,349 4,550 3,751
Research and development 1,087 858 351
General and administrative 3,751 2,902 2,294
--------------------------------------------
Total operating expenses 10,187 8,310 6,396
--------------------------------------------
Income from discontinued operations 2,479 5,671 9,224
Other income 540 -- --
--------------------------------------------
Income from discontinued operations before income taxes 3,019 5,671 9,224
Income tax expense 1,179 2,212 3,553
--------------------------------------------
Net income from discontinued operations $ 1,840 $ 3,459 $ 5,671
============================================
F-10
3. ACQUISITIONS
In February 1999, the Company acquired selected assets of Community Prescription
Center, Inc., an HIV/AIDS pharmacy located in San Diego, California. The
all-cash purchase price was $1.3 million, with the full amount being assigned to
goodwill. The goodwill is being amortized on a straight-line basis over 12
years.
In June 1998, the Company acquired the stock of Clinical Partners, Inc., a case
management services company, in a merger transaction. The net purchase price was
$6.4 million and consisted of cash and stock of the Company (42,000 shares at
$12.125 per share). The excess purchase price over book value of the net assets
acquired was $5.7 million, of which $5.2 million was originally allocated to
goodwill and was being amortized on a straight-line basis over 12 years, and
$500 was originally allocated to non-compete agreements and was being amortized
over two and three years. In fiscal 2000 $5.5 million was written off. See
Note 1.
All acquisitions described above were accounted for as purchases and,
accordingly, operating results of these businesses subsequent to the date of
acquisition were included in the Company's consolidated financial statements.
Proforma information has not been provided due to immateriality.
4. AVAILABLE-FOR-SALE SECURITIES
The amortized cost and estimated market value of available-for-sale securities
are as follows:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
As of June 30, 2000:
Equity Securities $270 $456 $-- $726
As of July 2, 1999:
Equity Securities $450 $158 $-- $608
As of June 30, 2000 and July 2, 1999, the Company's available-for-sale
securities included equity securities of one company, Cell Robotics
International, Inc. and are included in net assets of discontinued operations.
See Note 1 of Notes to Consolidated Financial Statements, Investments, for
additional information regarding these securities.
F-11
5. OPERATING LEASES AND RENT EXPENSE
The Company leases its office space, distribution facilities, and retail
locations under operating lease agreements. The remaining lease terms range from
one to seven years as of June 30, 2000.
Future minimum lease payments for continuing operations, including current real
estate taxes and operating expenses, under the operating leases with lease terms
in excess of one year at June 30, 2000, are approximately as follows:
FISCAL YEAR AMOUNT
2001 $ 1,465
2002 1,260
2003 1,068
2004 979
2005 719
Beyond 494
--------
Total $5,985
========
Total rent expense for continuing operations was $1,978, $1,885, and $1,221
during fiscal 2000, 1999, and 1998, respectively.
6. LONG-TERM DEBT AND CREDIT ARRANGEMENTS
The Company had no long-term debt as of June 30, 2000 and July 2, 1999,
respectively.
The Company has an unsecured discretionary line of credit totaling $15 million
that terminates January 31, 2001. The Company pays a fee at an annual rate of
0.25% of the unused amount. The line of credit contains covenants with which the
Company is in compliance. There is $2.5 million outstanding under this line of
credit at June 30, 2000.
F-12
7. INCOME TAXES
The components of the provision for income taxes for continuing operations are
as follows:
2000 1999 1998
---- ---- ----
Current $ 439 $1,252 $ 836
Deferred (877) (825) 183
----- ------ ------
Income tax (benefit) expense $(438) $ 427 $1,019
===== ====== ======
The Company's income tax expense differs from the applicable federal rate of
34%. The reconciliation of differences is:
2000 1999 1998
---- ---- ----
Federal income taxed at statutory rates $(585) $ 370 $ 866
Interest on municipal bonds -- -- (15)
State taxes, net of federal benefit (38) 51 89
Goodwill amortization 7 5 --
Other, net 178 1 79
----- ----- ------
Income tax (benefit) expense $(438) $ 427 $1,019
===== ===== ======
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities are as follows:
2000 1999
---- ----
Deferred tax assets:
Bad debt reserve $ 688 $ 452
Inventory reserve 24 25
Other reserves 779 433
Vacation accrual 112 99
Goodwill amortization 483 323
Deferred tax liabilities:
Depreciation 109 (103)
Prepaid assets (331) (282)
OMI rights sale -- --
Other liabilities (45) (5)
------------------------
Net deferred tax assets $1,819 $ 942
========================
F-13
8. SHAREHOLDERS' EQUITY
The Company has 5,000,000 shares of $.01 par value Preferred Stock authorized
and issuable in one or more series as the Board of Directors may determine, none
of which are outstanding. The Company has 40,000,000 authorized shares of $.01
par value Common Stock. There are no restrictions on retained earnings.
In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company continues to elect to utilize APB Opinion No. 25 and related
interpretations in accounting for its stock option plans and its employee stock
purchase plan. If the Company had elected to recognize compensation cost based
on the fair value of the options granted and shares sold pursuant to the
purchase plan as prescribed by SFAS No. 123, consolidated net income and
earnings per share, including continued and discontinued operations, would have
been reduced to the pro forma amounts indicated in the table below for fiscal
years 2000, 1999, and 1998:
2000 1999 1998
---- ---- ----
Net income - as reported $562 $4,127 $7,151
Net income - pro forma ($716) $2,456 $5,829
Earnings per share - basic as reported $.05 $.34 $.60
Earnings per share - basic pro forma ($.06) $.20 $.49
Earnings per share - diluted as reported $.05 $.34 $.59
Earnings per share - diluted pro forma ($.06) $.20 $.48
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option-pricing model with the following assumptions for the
fiscal years shown:
2000 1999 1998
---- ---- ----
Expected dividend yield 0.0% 0.0% 0.0%
Expected stock price volatility 63% 67% 57%
Risk-free interest rate 6.20% 5.50% 6.00%
Expected life of options 5 years 5 years 5 years
The Black-Scholes option-pricing model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option pricing models require the input of highly
subjective assumptions. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models may not
necessarily provide a reliable single measure of the fair value of its employee
stock options. Using the foregoing assumptions, the weighted-average fair value
of each option granted during fiscal years 2000, 1999, and 1998 was $5.07,
$5.74, and $6.51, respectively.
The Company has four employee Stock Options Plans (1986, 1994, 1997 and 1999).
Options to purchase Common Stock of the Company are granted to employees at 100%
of fair market value on the date of grant and are generally exercisable at 20%
of the total grant at the end of each year. The options are cumulatively
exercisable and expire seven years after the date of grant.
F-14
The Company also has a director performance Stock Option Plan that reserved
300,000 shares of Common Stock for option grants. The options are granted with
exercise prices equal to market value on the date of the grant. The options
become exercisable after seven years and expire ten years after the date of the
grant. Certain acceleration provisions apply if the stock price increases
significantly prior to the end of seven years.
Stock option activity is summarized as follows:
[Enlarge/Download Table]
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
SHARES WEIGHTED WEIGHTED
AVAILABLE AVERAGE AVERAGE
FOR NUMBER PRICE NUMBER PRICE
GRANT OF SHARES PER SHARE OF SHARES PER SHARE
----- --------- --------- --------- ---------
Balance June 27, 1997 479,605 2,061,156 $ 10.59 678,282 $ 9.78
Granted (385,500) 385,500 11.75
Exercised -- (89,772) 6.95
Cancelled 114,283 (114,283) 10.97
Expired (31,900) --
---------- ----------
Balance July 3, 1998 176,488 2,242,601 10.91 915,331 10.51
Reserved for future grants 1,500,000 --
Granted (1,099,700) 1,099,700 9.53
Exercised -- (152,413) 6.29
Cancelled 303,661 (303,661) 11.23
Expired (40,150) --
---------- ----------
Balance July 2, 1999 840,299 2,886,227 10.60 938,566 11.24
Granted (33,000) 33,000 9.03
Exercised -- (49,038) 5.77
Cancelled 640,380 (640,380) 10.69
Expired (23,633) --
---------- ----------
Balance June 30, 2000 1,424,046 2,229,809 10.69 925,524 11.14
========== ==========
The following table summarizes information about the stock options outstanding
at June 30, 2000.
[Enlarge/Download Table]
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL PRICE NUMBER PRICE
EXERCISE PRICES OF SHARES LIFE PER SHARE OF SHARES PER SHARE
--------------- --------- ---- --------- --------- ---------
$ .76-8.25 487,981 4.0 yrs $ 7.65 310,187 $ 7.71
8.28-10.69 533,945 5.4 yrs 8.72 79,850 9.21
10.75-12.38 576,573 4.4 yrs 11.33 225,197 11.87
12.50-21.88 631,310 2.4 yrs 14.11 310,290 14.53
--------- ---------
.76-21.88 2,229,809 4.0 yrs 10.69 925,524 11.14
========= =========
F-15
9. EMPLOYEE BENEFIT PLANS
The Company has a qualified 401(k) Employee Savings Plan covering substantially
all employees of continued and discontinued operations. Company contributions
are required. The Company's contributions to the Plan, representing 401(k)
matching contributions only, to employees of continued and discontinued
operations, were $165, $195, and $146 in fiscal years 2000, 1999, and 1998,
respectively.
The Company has an Employee Stock Purchase Plan. There were 169,833 shares
available for purchase under the Plan at June 30, 2000.
10. RELATED PARTY TRANSACTIONS
On April 9, 1997, the Company entered into a guaranty of indebtedness of Mr.
Maurice R. Taylor, II, the Company's then Chairman and Chief Executive Officer
with US Bank. Such indebtedness permitted Mr. Taylor to continue to hold Company
stock. There was $675 and $700 of indebtedness under the guaranty on June 30,
2000 and July 2, 1999, respectively. On July 1, 2000, MEDgenesis assumed the
Company's guaranty and on July 24, 2000, MEDgenesis loaned Mr. Taylor funds
sufficient to pay off his debt to US Bank. MEDgenesis obtained a promissory note
due December 2001, a residential mortgage, and a pledge agreement from Mr.
Taylor. Mr. Taylor is charged market rate interest on the note and the Company's
guaranty has been extinguished.
On June 27, 1997, the Company entered into an agreement to sell its exclusive
rights to market and distribute certain Orphan Medical, Inc. products back to
Orphan Medical for cash, royalties, and Orphan Medical stock totaling $2.5
million. The Company estimated the net present value of these payments to be
$1.7 million, and as such recorded $1.7 million as Other Income in its 1997
financial statements. The resulting receivable balance, including imputed
interest, was paid in full as of July 2, 1999.
11. SIGNIFICANT CONCENTRATIONS
Within the Mail Order Business segment, two major payors with whom Chronimed has
contracts merged during calendar year 1999. As one payor, they represent 26%,
25%, and 21% of the Company's continuing operation revenue in fiscal years 2000,
1999, and 1998, respectively.
The Company has a national distributor who supplies pharmaceuticals for both the
Retail and the Mail Order segments. This supplier made up 79%, 69%, and 70% of
the Company's continuing operations inventory purchases for fiscal years 2000,
1999, and 1998, respectively. In the event that the Company was unable to
purchase pharmaceuticals through this distributor, the Company could purchase
the same inventory through other national pharmaceutical distributors.
F-16
The Company provides immunosuppressant drugs to patients who have had an organ
transplant. Two of these drugs, Sandimmune(R) and Neoral, are manufactured by
Novartis Pharmaceuticals Corporation. These two drugs accounted for 5%, 8%, and
12% of the Company's continuing operations revenue in fiscal years 2000, 1999,
and 1998, respectively.
12. BUSINESS SEGMENT INFORMATION
The Company has two reportable segments:
* MAIL ORDER - provides prescription drug and ancillary medical supplies to
patients with a wide variety of high-cost chronic conditions including
solid organ transplants, anemia due to end-stage renal failure, cancer,
cystic fibrosis, endometriosis, growth hormone deficiency, hemophilia,
Hepatitis B and C, immune deficiency disorders, infertility, multiple
sclerosis, neutropenia, respiratory syncytial virus ("RSV") and rheumatoid
arthritis. Chronimed has payor contracts with HMOs, major health insurers,
Medicare and Medicaid, and other managed health plans covering a
substantial population. Chronimed distributes these critical medications
directly to patients nationwide while ensuring competitive prices to
payors. Chronimed also coordinates its services with payors, physicians,
nursing services, and other members of a patient's healthcare team. In
addition, Chronimed works with its customers to develop therapy management
guidelines through ongoing monitoring and evaluation of patient
responsiveness and compliance to the treatment.
* RETAIL - represents the Company's retail pharmacy operation, StatScript
Pharmacy, and Clinical Partners' historical disease management business.
StatScript Pharmacy is the largest network of HIV/AIDS community-based
pharmacies in the country, with 32 pharmacies in 29 cities. StatScript
pharmacies are locally driven providers and are committed to the HIV/AIDS
patient. Key to the successful care of the HIV/AIDS patients is
StatScript's efforts with community resources, education of the patient,
clinical team communication, and complete patient tracking.
The Company's reportable segments are made up of business units that
offer different, but related, products and services to patients with chronic
health conditions. The reportable segments are managed separately by senior
executives who report directly to the Chief Executive Officer. The Company
evaluates performance based on profit or loss from operations before interest
and income taxes. The accounting policies of the reportable segments are the
same as those described in the summary of significant accounting policies.
F-17
The table below presents information by reportable segment.
Mail Order Retail Total
---------- ------ -----
For the Year Ended 6/30/00
Revenues $ 119,170 $ 106,717 $ 225,887
Income from operations (213) 5,205 4,992
Depreciation and amortization 1,486 2,598 4,084
Segment assets 33,575 35,408 68,983
For the Year Ended 7/2/99
Revenues $ 103,659 $ 64,965 $ 168,624
Income from operations 351 1,173 1,524
Depreciation and amortization 1,700 2,138 3,838
Segment assets 29,809 32,848 62,657
For the Year Ended 7/3/98
Revenues $ 81,937 $ 33,677 $ 115,614
Income from operations 308 857 1,165
Depreciation and amortization 1,200 1,149 2,349
Segment assets 25,238 23,659 48,897
The following table is a reconciliation of reportable segment information to the
Company's consolidated totals.
Fiscal
---------------------------------------
2000 1999 1998
---- ---- ----
Total consolidated revenue $225,887 $168,624 $115,614
================================================================================
Income from continuing operations
---------------------------------
Total for reportable segments $ 4,992 $ 1,524 $ 1,165
Unallocated amounts:
- Corporate G&A (1,017) (1,352) (120)
- Interest income (expense) (191) 419 1,453
- Other income -- 503 --
- Clinical Partners asset writedown (5,500) -- --
--------------------------------------------------------------------------------
Income before income taxes $ (1,716) $ 1,094 $ 2,498
================================================================================
Depreciation and amortization $ 4,084 $ 3,838 $ 2,349
================================================================================
Assets
------
Total for reportable segments $ 68,983 $ 62,657 $ 48,897
Corporate assets 3,612 4,261 10,115
--------------------------------------------------------------------------------
Total consolidated assets of continuing
operations $ 72,595 $ 66,918 $ 59,012
================================================================================
F-18
13. SUBSEQUENT EVENTS - UNAUDITED
CONTINUING OPERATIONS
Chronimed sold its Home Service Medical business on September 1, 2000 to
Express-Med, Inc. of New Albany, Ohio, for cash and a note receivable totaling
$7 million. Home Service Medical is a diabetic mail-order catalog business that
contributed $14.9 million in revenue to Chronimed's results for the fiscal year
ended June 30, 2000.
DISCONTINUED OPERATIONS
On September 1, 2000, MEDgenesis Inc. paid a license transfer fee of $475,000 to
Medisys PLC, a UK-based medical device company. The license transfer fee allowed
MEDgenesis to continue selling certain diabetes strips upon completion of the
spin off based on technology developed by a subsidiary of Medisys PLC.
F-19
CHRONIMED INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For Continuing Operations
[Enlarge/Download Table]
=========================================================================================================================
COL. A COL. B COL. C COL. D COL. E
-------------------------------------------------------------------------------------------------------------------------
Additions
Balance at Deductions -- Balance at
Beginning of Describe End of Period
Description Period
------------------------------
Charged to Charged to
Costs and Other Accounts
Expenses -- Describe
--------------------------------------------------------==============================-----------------------------------
Year ended June 30, 2000:
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts $1,158,000 $2,950,000 $ -- $2,343,000(1) $1,765,000
========== ========== ============ ============= ==========
Year ended July 2, 1999:
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts $1,201,000 $945,000 $ -- $988,000(1) $1,158,000
========== ======== ============ =========== ==========
Year ended July 3, 1998:
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts $1,049,000 $993,000 $ -- $ 841,000(1) $1,201,000
========== ======== ============ ============= ==========
(1) Uncollectable accounts written off, net of recoveries.
S-1
Dates Referenced Herein and Documents Incorporated by Reference
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