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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 28, 2002
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER 0-19952
CHRONIMED INC.
(Exact name of registrant as specified in its charter)
A MINNESOTA CORPORATION IRS EMPLOYER IDENTIFICATION
NO. 41-1515691
10900 RED CIRCLE DRIVE
MINNETONKA, MINNESOTA 55343
TELEPHONE NUMBER (952) 979-3600
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.01 par value per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |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 September 3,
2002, was approximately $60 million based on the closing price of $4.93 per
share reported on the NASDAQ National Market System. The number of shares of
Common Stock outstanding as of September 3, 2002 was 12,352,501.
Portions of the registrant's definitive Proxy Statement for the Annual
Meeting of Shareholders to be held November 20, 2002, to be filed with the
Commission are incorporated by reference in Part III of the Form 10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
Chronimed Inc. is a distributor of prescription drugs for people with
certain chronic health conditions. We consider our business to be unique, and
refer to it as specialty pharmacy. We serve patients with highly specialized
pharmaceutical needs and help employers and third-party payors manage patient
care costs. Chronimed distributes pharmaceuticals and provides specialized
patient management services nationwide for people with chronic conditions
including HIV/AIDS, organ transplants, and diseases treated with biotech
injectable medications. We work directly with patients, physicians, healthcare
providers, insurance companies, health maintenance organizations, preferred
provider organizations, government agencies, and other third-party payors to
improve clinical and financial outcomes for patients with chronic, complex and
expensive pharmaceutical needs.
We operate in two business segments: Mail Order and Retail. We
distribute pharmaceuticals and related educational materials via Chronimed mail
service and through our nationwide StatScript retail pharmacy chain. See Note
12, Notes to Consolidated Financial Statements, Item 14 of this Annual report on
Form 10-K, for information regarding our segments.
Our specialty medications are quite expensive (ranging from $3,000 to
$150,000 per patient per year), often need refrigerated packaging, may require
overnight delivery, and are usually part of a complex regimen -- all reasons
these medications are not routinely stocked in standard retail pharmacies. By
applying our unique distribution and management techniques and coordinating with
our healthcare partners, we are able to improve the quality of care for people
afflicted by very expensive diseases and to help the healthcare reimbursement
system contain costs. We also work with our healthcare partners to develop
patient and therapy management guidelines through ongoing monitoring and
evaluation of patient outcomes.
Our services are most effective for patients who:
- - have illnesses that are generally not being served by traditional
pharmacies because their illnesses occur in less than one percent of
the nation's population;
- - require high-cost, complex medications that are not always available
through traditional retail pharmacies and the majority of which must be
taken for the rest of the patient's life;
- - require treatment by pharmacists with advanced knowledge about the
patient's disorder; and
- - require a significant amount of self-management and ongoing education
where patient compliance is critical for improving clinical and
financial outcomes.
Our key relationships are with:
- - Patients: For the patient, we provide a confidential, convenient,
competitively priced source of prescription drugs, counseling, and a
variety of educational materials to help the patient achieve maximum
control over his or her condition. Educating patients, improving
patient compliance, and increasing provider support and intervention
favorably affect clinical outcomes and decrease the long-term costs of
care. Our patient-specific, value-added services include counseling by
highly trained registered pharmacists and internally certified patient
specialists, confidentiality, the provision of educational materials,
compliance monitoring, insurance billing, refill reminders, 24-hour
pharmacist availability, automated reorder capabilities, and timely
shipments to patients' homes, workplaces, physicians' offices, and
treatment facilities.
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- - Healthcare Providers: We believe our expertise makes us a valuable
partner for healthcare providers working with patients experiencing
chronic health conditions. We have developed relationships with several
treatment centers, foundations, and medical associations that
specialize in the treatment or support of patients with chronic
conditions. Through these relationships, we are able to introduce our
services to a large number of individuals with chronic conditions and
the healthcare specialists treating them.
- - Pharmaceutical Developers and Manufacturers: We believe our system is
well suited for developers and manufacturers of pharmaceutical products
who are targeting small or hard-to-identify patient populations. We
have established relationships with developers and manufacturers of
prescription drugs necessary to manage various chronic conditions and
provide these companies with assistance in rapid product introduction,
a cost-effective means for distributing products to specific patient
populations, and a method for monitoring product use.
- - Payors: Managed care plays a significant role in the provision of
healthcare in the United States, and the majority of our patient
referrals come from contracted third-party payors and the government.
These payors benefit from our services because our experience in
managing specific patient groups allows us to improve patient care
while minimizing overall expenditures.
We work directly with all of these constituents in a concerted effort
to improve clinical and financial outcomes while enhancing the quality of life
for the chronically ill, in a manner consistent with our obligations to patient
confidentiality.
Chronimed was founded in 1985 as a Minnesota corporation and has been
publicly traded on the NASDAQ National Market since 1992.
In this Form 10-K, fiscal 2002, fiscal 2001, and fiscal 2000 refer to
our fiscal years ended June 28, 2002, June 29, 2001, and June 30, 2000.
BUSINESS STRATEGY
We believe that we have a competitive advantage because we possess both
mail and retail capabilities to serve our patients, physicians, and payors. Our
retail capability, branded as StatScript, is the largest specialty franchise
that serves patients with HIV/AIDS. We intend to leverage this position as the
leading provider of medications for patients with HIV/AIDS to grow both our
retail and mail businesses, and to deliver value add services to manufacturers.
We expect to do the same with our second largest disease franchise which serves
individuals who have received an organ transplant.
We will continue our growth in the biotech injectable business,
served mainly through our mail service. Currently, we distribute virtually all
products for all of the specialty disease categories. We intend to build on
this broad base through greater focus on those medications and disease
categories where we can leverage an already strong franchise or where our
service capabilities allow us to provide a competitive advantage to our
customers.
We are committed to being a low cost provider, and intend to increase
our technology capabilities as a key driver in lowering our operational
expenses. In addition, all of our facilities have the capability to handle more
business without adding considerable resources.
Due to the chronic nature of our patients' diseases and the high level
of drug spend per patient, our patients have a high annuity value to our
Company. We will continue to invest in building our customer service
capabilities in order to attract and retain these patients over their lifetime.
Also, we will be investigating opportunities to establish market presence in
select new disease specialty areas. We are also examining how we may serve key
programs and other standard pharmacies as their specialty pharmacy provider.
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We believe that acquisitions will play an important role in building
our business, particularly where the acquisition target can add depth in new or
underserved chronic disease categories and geographic markets. As our financial
position continues to improve, we will be seeking acquisition opportunities to
strengthen our position.
Our growth strategy is to expand our distribution of prescription drugs
by increasing the number of patients served. In addition, we plan to enhance our
programs with manufacturers and to expand our services to persons with other
types of chronic conditions. We anticipate that we will add to the range and
depth of services we provide in order to meet the demand for improved patient
outcomes, cost of care, and patient-reported satisfaction.
SPECIALTY PHARMACY MARKET
We serve three patient populations within the specialty pharmacy
industry: people with HIV/AIDS, people who have had an organ transplant, and
people with complex conditions treated with biotech injectable medications.
Descriptions of our current services to these populations follow.
BIOTECH INJECTABLE MEDICATIONS
We began distributing biotech injectable medications through our mail
order pharmacy in 1994. The biotech injectables we provide treat many chronic
conditions, including: cancer, endometriosis, growth hormone deficiency,
hemophilia, hepatitis B and C, immune deficiency disorders, infertility,
multiple sclerosis, neutropenia, rheumatoid arthritis, and respiratory syncytial
virus ("RSV"). Much of our injectable business revenue is derived from the
following six diseases:
Rheumatoid Arthritis
Rheumatoid arthritis ("RA") is caused by inflammation in the lining of
the joints or other internal organs. It typically affects many different joints.
It can be chronic and can be a disease of flares (active) and remissions (little
to no activity). RA is a systemic disease that affects the entire body and is
one of the most common forms of arthritis. Cells in the inflamed joint lining
(called the "synovium") release enzymes that invade and digest bone and
cartilage. The involved joint can lose its shape and alignment, resulting in
pain, stiffness, warmth, redness, swelling, and loss of movement.
According to the Arthritis Foundation, RA affects 2.1 million
Americans, mostly women. Onset usually occurs in middle-age, but is often
detected in people in their 20s and 30s. About 50,000 new cases of RA are
detected each year. Drug therapy for RA consists of drugs used to reduce
symptoms and inhibit the progression of structural damage. We supply patients
with all currently available products, including Enbrel(R), Remicade(R), and
Kineret(R).
Multiple Sclerosis
Multiple sclerosis ("MS") is a disease of the central nervous system in
which the protective layer surrounding nerve fibers is damaged or destroyed.
Once damaged, electrical nerve impulses are not properly conducted to and from
the brain, resulting in the various symptoms of MS. The Multiple Sclerosis
Association of America estimates that more than 350,000 people in the United
States have MS and that 10,000 new cases are diagnosed every year.
Therapy for MS includes use of drugs to lessen the severity or
frequency of attacks, to slow the increase of disability resulting from the
disease, and to treat the various resulting symptoms (muscle stiffness, fatigue,
and bladder problems). We supply patients with all currently available products,
including Avonex(R), Betaseron(R), Copaxone(R) and Rebif(R).
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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
Centers for Disease Control ("CDC"), as many as 4,000,000 Americans may be
infected with HCV, and 36,000 new infections occur each year. HCV is the leading
cause of liver transplantations in the United States and accounts for 8,000 to
10,000 deaths per year. The CDC also estimates that the annual cost associated
with treating HCV (excluding transplant costs) exceeds $600 million.
We sell injectable drugs used to treat HCV, including pegylated
interferon alfa (Peg-Intron(R)) or interferon alfa (Intron-A(R) with or without
ribavirin (Rebetron(R)) and (Rebetol(R)). Although the CDC reports that these
drugs are ineffective in about 60% of HCV infections, for the 40% of patients
who do respond, treatment usually requires many months of sustained therapy for
optimal effectiveness. Our programs for these patients reduce costs through
lower acquisition costs, efficient delivery of medication in temperature
controlled packaging, counseling, and management of side effects.
Growth Hormone Deficiency
The Human Growth Foundation estimates that 10,000 to 15,000 children in
the United States have growth failure due to growth hormone deficiency. Growth
hormone is a protein that is produced by the pituitary gland and is vital for
normal growth. Growth hormone deficiency may occur by itself or in combination
with one or more other pituitary hormone deficiencies.
Growth hormone deficiency is treated with injections of synthesized
growth hormone. Some children receive three or four injections a week, while
others receive daily injections. A prompt increase in growth rate usually occurs
after treatment starts and may be noticeable to the child and parent within
three to four months. This faster-than-normal growth rate slowly declines over
time, but continues to be greater than the rate that would occur without
treatment. We supply patients with all currently available products, including
Genotropin(TM), Humatrope(R), Norditropin(R), Nutropin Depot(R), Protropin(R),
and Saizen(R).
Cancer
Chemotherapeutic agents are used to treat a variety of cancers by
destroying rapidly growing cancer cells within the body. We offer most of the
medications used to treat the different forms of cancer. We distribute these
products to the patient's home for self-administration or to the physician's
office for administration in a clinical setting.
Drugs used to fight cancer also destroy the body's ability to produce
erythropoietin, resulting in a reduction in red blood cells. Low levels of red
blood cells cause a reduction in the amount of oxygen available in the body,
resulting in fatigue. We supply medications such as Epogen(R), Procrit(R) and
Aronesp(R) that increase the number of available red blood cells by
supplementing the body's natural production of erythropoietin.
White blood cells are responsible for helping the body fight
infections. The chemotherapeutic drugs used to fight cancer substantially reduce
the number of white blood cells in the patient's body leaving the patient
susceptible to common and serious opportunistic infections. We supply
medications such as sargramostim (Leukine(R)) and filgrastim (Neupogen(R)) to
stimulate production of white blood cells following chemotherapy treatments.
5
Respiratory Syncytial Virus
Respiratory syncytial virus ("RSV") is a serious lower respiratory
tract disease that primarily attacks infants. RSV is the most common cause of
pneumonia and bronchiolitis in infants and children. Approximately two-thirds of
infants are infected with RSV during the first year of life, and almost all have
been infected by age two. It has been estimated that, nationwide, approximately
300,000 children are at risk of RSV each year, and approximately 90,000
hospitalizations are due to RSV infections. We supply physicians, clinics, and
patients with currently available products, including Synagis(R), the primary
treatment for RSV infections.
ORGAN TRANSPLANT
We have served people with solid organ or bone marrow transplants since
1990. According to the United Network for Organ Sharing (UNOS), as of August
2002, approximately 150,000 people were living with transplanted organs. Our
experience has shown that transplant recipients typically require about $12,000
of prescription drugs during the first year following transplantation and about
$9,000 per year thereafter. We serve organ transplant patients through our
centralized mail-order pharmacy and through our community-based StatScript
retail pharmacies.
HIV/AIDS
We began to serve people with HIV/AIDS through our StatScript retail
pharmacies in 1996. Human immunodeficiency virus ("HIV") results in
immunosuppression by attacking and destroying T cells that coordinate much of
the network of normal immune responses. Without normal immune responses, people
with HIV are unable to fight and overcome routine infections leading to a
diagnosis of acquired immune deficiency syndrome ("AIDS"). People with HIV/AIDS
have a suppressed immune mechanism that requires treatment with complex
medication regimens. These patients face many long-term physical, financial,
social, and psychological challenges due to the often debilitating nature of the
disease. Our programs are intended to assist them in gaining maximum control
over their disease, to lower the incidence of complications, and to improve
their quality of life.
The CDC estimates that as many as 900,000 HIV positive individuals are
living in the United States, approximately 350,000 of whom are being treated.
Approximately 40,000 new infections occur annually in the U.S. Currently, the
average HIV/AIDS patient we serve requires approximately $12,000 of prescription
drugs per year
PRODUCT DISTRIBUTION
We distribute our products through mail order facilities located in
Minnesota, California, Texas, and Florida In addition, we distribute our
products through our nationwide proprietary retail chain, StatScript Pharmacy.
MAIL ORDER
We inventory approximately 3,500 brand name and generic prescription
drugs, which we distribute directly to the patients and physicians we serve
through our centralized pharmacy mail order system. We believe that we can
distribute these specialty products with considerably higher levels of service
at a competitive price in comparison to local and national retail pharmacies.
Cost savings are accomplished through our distribution of a high volume of
relatively less common products and efficient processing of specialty products
unfamiliar to many retail pharmacists. Patients benefit from the convenience of
having products delivered directly to their homes and, in many cases, at lower
initial out-of-pocket costs than they might obtain from other sources. We
maintain toll-free telephone numbers and automated and online capabilities for
patients to place orders, and we generally ship orders by FedEx or UPS to ensure
prompt delivery.
Our mail order revenue is derived from the sale of biotech injectable
medications and immunosuppressive drugs for organ transplant recipients.
Patients using the service may pay cash, have standard indemnity coverage,
Medicare or Medicaid, or a pharmacy benefit defined by their managed care health
plan.
6
In fiscal 2001, we expanded our mail order business through the
acquisition of The Transplant Pharmacy(R), which provides mail order
distribution of immunosuppressive drugs and transplant patient management
services, from SangStat Medical Corporation. We paid $1.8 million in cash for
the acquisition of the business and assets, which excluded inventory and
accounts receivable.
COMMUNITY-BASED RETAIL PHARMACIES
Our StatScript retail pharmacies give us a significant presence in the
retail marketplace, particularly in the HIV/AIDS disease market. The StatScript
pharmacy chain is the market leader in providing retail specialty pharmacy
services and prescription drugs to people with HIV/AIDS. Our revenue growth in
this business comes from the continued rollout of the combination drug therapies
of protease inhibitors and nucleoside, necleotide, and non-nucleoside reverse
transcriptase inhibitors. Revenue growth is also generated from strategic new
pharmacy acquisitions and openings, and increased patient intake at existing
sites.
StatScript pharmacies are located within patient communities and are
committed to the HIV/AIDS patient through community resources, clinical team
communication, patient education, and complete patient tracking. We believe
StatScript to be the largest network of HIV/AIDS community-based specialty
pharmacies in the country.
More recently, we have begun distributing organ transplant drugs
through our localized retail StatScript pharmacies in order to better meet the
needs of transplant patients and transplant centers. Transplant medications
sometimes require same-day delivery, and our local StatScript pharmacies offer
an efficient, practical solution to meet this need. We also have been using the
local presence of our StatScript pharmacies to distribute biotech injectable
medications, particularly for Hepatitis C and infertility.
As of June 28, 2002, StatScript has 27 pharmacies located in the
following cities: Atlanta, Boston, Chicago, Dallas, Ft. Lauderdale, Houston (two
locations), Indianapolis, Kansas City, Las Vegas, Los Angeles, Miami Beach,
Milwaukee, Minneapolis, Memphis, New York City, Orlando, Philadelphia, San
Diego, San Francisco, Seattle, St. Louis, St. Petersburg, Tampa, Washington,
D.C., West Hollywood, and West Palm Beach.
MANUFACTURER SERVICES
We provide several services for manufacturers:
Distribution
We combine our mail service and retail channels to offer specialized
distributor services to drug manufacturers. This service is best suited to
companies requiring secured tracking that have limited production capabilities
(resulting in limited product supplies) or for products that are intended for
use in small patient populations. We can also distribute drugs that are still in
clinical trials and coordinate data collection on adherence and side effect
incidence.
Data and Analysis
Our large, specialized patient base provides valuable data on
treatments, adherence, usage, and prescribing trends. This information is
provided to manufacturers as a fee-for-service product. All data is
de-identified to remove any element that could identify an individual patient.
Promotion
Due to our local presence and highly qualified pharmacists, we help
drug companies drive product usage and adoption. We only support products that
are clearly appropriate for our patients and follow clinical guidelines to
identify opportunities. Even with these rules, we can be very effective in
increasing market share for target products.
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Consultation
We work with drug manufacturers before and after their product is
launched. We focus on areas such as reimbursement, packaging, distribution,
marketing, promotion, and pricing. We represent the views of patients, payors,
and pharmacies to help manufacturers optimize their sales and marketing efforts.
PAYOR RELATIONSHIPS
Healthcare costs have increased significantly in the United States in
recent years and are expected to continue increasing in the near future.
According to the Health Care Financing Administration ("HCFA"), national health
expenditures are expected to reach $1.5 trillion in 2002, up from $990 billion
in 1995, or 14.7% of U.S. Gross Domestic Product. According to Partnership for
Solutions (a project of Johns Hopkins University and The Robert Wood Johnson
Foundation), health care costs for people with chronic conditions averaged in
excess of $6,000 per person in 2000, more than five times higher than for people
without such conditions. Employers bear a significant share of this cost through
payments for employee benefit plans. As a result, public and private employers
have been emphasizing managed care techniques in employee benefit plans in an
attempt to control rising health care costs.
Most managed care programs have plan design features that limit the
number of providers eligible to serve plan members. For example, most managed
care plans will not pay for services, or will require substantially higher
co-pays or deductibles, if a patient chooses to use a provider that is
considered "outside" the patient's plan network. The high costs of the specialty
medications we provide create a significant disincentive for recipient patients
to use "out-of-network" providers.
Payors often have difficulty quantifying and controlling the cost of
the medications used to treat chronic conditions. We help payors identify and
lower their costs by reducing product acquisition expenses, offering efficient
delivery systems, providing excellent patient care, and streamlining claims and
billing services. We have payor contracts with HMOs, major health insurers,
government agencies, and other managed health plans covering significant patient
populations. As part of these contracts, we offer payors customized programs
designed to maximize care and to manage high-cost medications and low patient
utilization rates. Specifically, we offer payors the following services:
- Distribution of specialty prescription drugs at a cost
competitive with, or lower than, local and national retail and
hospital pharmacies.
- Review and monitoring of compliance with prescribed drug
regimens. By monitoring patient order patterns and drug use,
we assist payors and healthcare providers in early
identification of patients whose treatment outcomes may be
improved by more support or assistance in managing their
chronic conditions.
- Disease expertise. By focusing on the needs of specific
patient populations, our pharmacists are experts in the
requirements and treatment patterns for the identified patient
populations.
- Distribution of educational materials designed to help
patients achieve maximum control over their chronic
conditions.
In fiscal year 2002, Aetna, Inc. and its affiliates ("Aetna") accounted
for approximately 26% of our revenue. We entered into a Specialty Pharmacy Mail
Service Vendor Agreement with Aetna effective May 1, 2000. Our Agreement has an
initial term of three years ending April 30, 2003, and renews on an annual basis
thereafter. Either party may terminate the Agreement on 90 days notice. Except
for Aetna, no private payor accounts for 10% or more of our revenue.
8
SALES AND MARKETING ACTIVITIES
To be successful in our business, we believe that we must both enter
into payor relationships on a national and regional basis and gain referrals
from healthcare providers at the local level. We use a multi-faceted sales and
marketing approach to support this strategy.
At the national and regional level, we employ a sales force that is
responsible for negotiating and signing "network provider" contracts with
healthcare payors. In exchange for network provider status, we offer our
products and services at discounted pricing.
At the local level, we use a marketing team and our StatScript pharmacy
personnel to build relationships with physicians, clinics, hospitals, transplant
centers, and support groups to secure additional patients. By marketing through
these various constituencies, we can improve care, facilitate existing patient
compliance, and achieve new patient referrals.
SUPPLIERS
We purchase prescription drugs and related products directly from
manufacturers and wholesalers. We inventory approximately 3,500 brand name and
generic prescription drugs and related products. We take advantage of special
discounts offered by suppliers when available. When we receive a prescription
for a drug that we do not have in inventory, we generally can obtain the
required item from a wholesaler the same day. The availability and prices of the
products we distribute are subject to market conditions. We regularly seek to
enhance our distribution contract opportunities with existing or new
manufacturers.
We use McKesson Corporation, a national distributor, to supply
pharmaceuticals for both the Retail and the Mail Order segments. This supplier
made up 92%, 85%, and 79% of our continuing operations inventory purchases for
fiscal years 2002, 2001, and 2000, respectively. We are aggressively pursuing
programs with manufacturers, wholesalers, and group purchasing organizations to
lower our drug acquisition costs.
REIMBURSEMENT
We have developed a significant level of expertise in managing the
reimbursement process. Generally, before delivering products to a patient, we
contact the appropriate payor to determine the patient's health plan coverage
and the portion of costs that the payor will reimburse. Our reimbursement
specialists review issues such as lifetime limits, pre-existing condition
clauses, and the availability of special state programs. We accept assignment of
benefits from more than 4,000 payors, which substantially eliminates the claims
submission process for many patients. These reimbursement services are a
significant value-add offering to our patients and payors, and help
differentiate us from our competition.
INFORMATION SYSTEMS
Our mail order operations include an automated call center and a fully
integrated information system. The information system provides our customer
service representatives with the necessary on-line information to service
patients, including product purchase histories, payor billing and account
balances, inventory levels, and co-payment amount requirements. Mail order
distribution sites are on-line with inventory control, purchasing, shipping, and
receiving functions. The telephone system has an automatic call distribution
capability utilizing the latest advances in skills-based call routing to
distribute incoming calls to customer service representatives. We are linked to
key customers for eligibility verification and electronic claims submission.
In fiscal 2001 we began an e-commerce initiative to create a commercial
presence on the Internet, including the sale of prescription medications, the
dissemination of disease-specific information, and the sale of health-related
products. Our initial emphasis was to Web-enable the prescription ordering and
fulfillment functions for our existing customers. We expect that the proportion
of our transactions conducted by electronic commerce will increase in the
future.
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We are in the process of selecting a new retail information and
operating system, expected to be implemented in fiscal year 2003. This new
system will include integrated pharmacy operations, billing, and accounts
receivable capabilities, and it will represent a significant enhancement from
the current system.
COMPETITION
The distribution of specialized prescription drugs is a highly
competitive business. We compete on the basis of service, convenience, product
availability, price, and outcomes impact. Some of our competitors are larger
than we are and have significantly greater financial resources. Despite the
presence of significant competitors in each of our lines of business, we believe
that only a very few competitors offer a similar combination of mail-order and
retail specialty pharmacy distribution focused on the disease states that we
manage.
LIABILITY INSURANCE
Providing healthcare services entails inherent risk. In recent years,
participants in the healthcare industry have become subject to an increasing
number of lawsuits, many of which involve large claims and significant defense
costs, and we may from time to time be subject to such suits. We maintain
general liability insurance, including professional liability coverage, in an
amount deemed adequate by management. We are further insured for product
liability under various policies held by drug manufacturers.
GOVERNMENT REGULATION
Our business is subject to substantial governmental regulation,
including laws governing the dispensing of prescription drugs and laws
prohibiting the payment of remuneration for patient referrals. Because sanctions
may be imposed for violations of these laws, compliance is a significant
operational requirement for us. We believe that we are in substantial compliance
with all existing statutes and regulations materially affecting the conduct of
our business, however, we are routinely subject to periodic audits regarding
compliance with these governmental regulations.
Our primary mail pharmacy is regulated under the laws of the State of
Minnesota. We are also regulated by the laws of each state in which we maintain
a retail or mail pharmacy. We also deliver prescription products from our
licensed pharmacies to patients in states in which we do not operate a pharmacy.
Many of these states have laws or regulations requiring out-of-state pharmacies
to be licensed as a condition to the delivery of prescription products to their
residents. We believe that we are in material compliance with these laws and
regulations in substantially all relevant jurisdictions.
Federal laws also establish standards for the labeling, packaging,
advertising, adulteration of prescription drugs, and the dispensing of
"controlled" substances and prescription drugs. The Federal Trade Commission and
United States Postal Service require mail service pharmacies to engage in
truthful advertising, stock a reasonable supply of drugs, fill mail orders
within 30 days and, if that is impossible, inform the consumer of his or her
right to a refund. We believe that we are in substantial compliance with these
requirements. Substantially all of our products are shipped by commercial
delivery services, with the exception of walk-in customers at our StatScript
retail pharmacies.
We are subject to various federal laws that regulate healthcare
services receiving governmental reimbursement. These laws include the "fraud and
abuse" provisions of the Social Security Act, which prohibit remuneration in
return for referrals of patients who are eligible for reimbursement under the
Medicare or Medicaid programs. Violations of the law may result in civil and
criminal penalties. Civil penalties range from monetary fines that may be levied
on a per violation basis to temporary or permanent exclusion from these
programs. In addition, numerous states have existing or pending laws prohibiting
financial arrangements among healthcare providers. Violations of these laws
include civil and criminal penalties, as well as the suspension or termination
of a provider's ability to continue to provide services in the state.
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The federal prohibitions on inducements for referrals are broadly
drafted, and the fraud and abuse provisions of the Social Security Act
concerning illegal remuneration arrangements have been broadly construed by
federal courts, the Department of Health and Human Services ("HHS"), and
officials of the Office of Inspector General. "Safe harbor" regulations define a
narrow scope of practices that will be exempted from prosecution or other
enforcement action under the illegal remuneration provisions, but due to the
narrow scope of the safe harbor exemptions, the legality of numerous types of
business and financial relationships between healthcare providers and
practitioners remains uncertain. Similarly, state fraud and abuse laws, which
vary from state to state, are often vague and rarely have been interpreted by
courts or regulatory agencies.
In situations where we purchase or provide services and products or
otherwise contract with healthcare providers who may be in a position to refer
patients to us, we believe we have exercised care in an effort to structure such
arrangements to comply with existing federal and state laws.
Political, economic, and regulatory influences are subjecting the
healthcare industry and prescription drug providers in the United States to
fundamental change. A variety of new approaches have been proposed, including
mandated basic healthcare benefits, controls on healthcare spending through
limitations on the growth of private health insurance premiums and Medicare and
Medicaid spending, and the creation of large purchasing groups. In addition,
some of the states in which we operate have adopted or are considering various
healthcare reform proposals. We anticipate that Congress and state legislatures
will continue to review and assess alternative healthcare delivery systems and
payment methods and that public debate of these issues will likely continue in
the future. Any of these developments could affect our ability to carry out our
business.
SEASONALITY
Historically we have had minimal seasonality in our business, although
we have had higher revenues in our second fiscal quarter (ending December) than
in our first, third, or fourth fiscal quarters. We believe the seasonality of
our revenues and earnings is a consequence of the acceleration of purchases of
prescription drugs by individuals with non-contracted indemnity insurance prior
to the beginning of a new calendar year (which is generally when payors impose
new deductible calculations) and the seasonal requirements of a limited number
of medications for certain disease specialties.
EMPLOYEES
As of September 3, 2002, we employed 346 full-time and 26 part-time
employees. None of our employees are represented by a labor union, and we
believe that our employee relations are excellent.
RECENT ACQUISITIONS
In February 2001, we acquired the four retail pharmacies of American
Prescription Providers, Inc. These pharmacies, which were located in New York
City, Miami Beach, Atlanta, and Philadelphia, were renamed and integrated into
our retail chain of StatScript pharmacies. We paid $16.0 million in cash for
substantially all of the four pharmacies' assets, excluding accounts receivable.
In April 2001, we acquired the Transplant Pharmacy business of SangStat
Medical Corporation, which provides mail order distribution of drugs and
transplant patient management services. We acquired substantially all the assets
of the Transplant Pharmacy business excluding inventory and accounts receivable
for $1.8 million cash.
In April 2001, we acquired the stock of Los Feliz Drugs, Inc. d/b/a
Oaks Pharmacy, a California corporation, which operated a pharmacy in a suburb
of Los Angeles. This pharmacy was integrated into our StatScript chain. We paid
$5.2 million in cash for the stock of this pharmacy, and the seller retained its
accounts receivable as of the transaction date.
11
RECENT DISPOSITIONS
In September, 2000, we sold our Home Service Medical ("HSM") subsidiary
to Express-Med, Inc. of New Albany, Ohio. HSM was a direct-to-consumer, mail
order catalog business that contributed $15.0 million in revenue to our total
results for the fiscal year ended June 30, 2000. We received $2.7 million in
cash and a $3.8 million note that was collected in June 2002 resulting in a gain
in fiscal 2002.
In January 2001, we sold the assets of our wholly owned diagnostic
products subsidiary, MEDgenesis Inc., to Medisys PLC of Suffolk, England. The
sale price of $39.975 million consisted of $30.475 million in cash and $9.5
million in Medisys common stock. In connection with this sale, we have
classified MEDgenesis as "discontinued operations" for financial reporting
purposes. As a result, all financial results concerning MEDgenesis have been
classified as discontinued operations.
RECENT STORE CLOSINGS
During fiscal 2002, we closed fourteen StatScript retail locations,
leaving 27 retail locations. Five of the StatScript stores were closed in the
fiscal 2002 second quarter and nine stores where closed during fiscal 2002
fourth quarter. These pharmacies were located in Austin, Chicago (two
locations), Columbus, Dallas, Denver, New Orleans, New York City, Phoenix,
Portland, Safety Harbor, Salt Lake City, San Antonio and Springfield.
In addition, the StatScript headquarters in Overland Park, Kansas, was
closed during the fiscal 2002, second quarter to consolidate operations at our
corporate headquarters in Minneapolis, Minnesota.
ITEM 2. PROPERTIES
We believe that our properties provide a suitable work environment for
employees and the necessary productive capacity to distribute our products and
services. We currently lease all of our properties. These properties are
described below.
FUNCTIONS LOCATIONS SIZE LEASE TERMS
--------- --------- ---- -----------
(SQUARE FEET)
Corporate office and Minnetonka, MN 62,000 Through March 31, 2005
mail order pharmacy,
including
customer service and
distribution
Retail and Mail Order California, Florida Various Expire over periods
specialty pharmacies Georgia, Illinois, up to extending to June,
Indiana, Massachusetts, 4,200 2010
Minnesota, Missouri,
Nevada, New York,
Pennsylvania,
Tennessee, Texas,
Washington,
Washington D.C.,
Wisconsin
12
ITEM 3. LEGAL PROCEEDINGS
On June 15, 2001, a putative class action lawsuit captioned Judith
Barclay v. Chronimed Inc., et. al. (01-CV-1092 DWF) was commenced in the United
States District Court for the District of Minnesota against us and certain of
our current and former officers. The Complaint alleges that we and individual
defendants violated Section 10(b) of the Securities Exchange Act of 1934 and
Rule 10(b)-5 promulgated thereunder, and that the individual defendants violated
Section 20(a) of the Exchange Act. Eight other lawsuits asserting claims
identical to the Barclay case were brought by other plaintiffs during the weeks
following the initial filing. The nine lawsuits have been consolidated into a
single case.
The Complaints allege in general terms that we made false and
misleading statements about our financial statements in violation of the
securities laws. The alleged violations arise out of the requirement to restate
previously issued financial statements. We issued public statements regarding
these matters on June 14, June 21, August 14, August 23, and September 25, 2001.
Each plaintiff seeks compensatory damages in an unstated amount, interest, fees,
expenses, and unspecified equitable relief. We are unable to reasonably quantify
the alleged damages on the basis of the general allegations of the Complaints.
We believe that the above claims are wholly without merit and will
vigorously defend against the lawsuits. We have retained the law firm of Dorsey
& Whitney LLP to represent us in the shareholder actions. An adverse ruling in
these actions in excess or outside of our insurance coverage could have a
material adverse impact on us. The lawsuit is in the discovery phase and is
scheduled for trial to commence in January, 2004.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
Our Common Stock, $.01 par value per share, is currently traded on the
NASDAQ National Market System. The following table sets forth the quarterly high
and low closing transaction prices as reported by NASDAQ for the years ended
June 29, 2001, and June 28, 2002:
HIGH LOW
---- ---
FISCAL YEAR 2001
First Quarter............................. $ 8.31 $ 6.62
Second Quarter............................ 12.12 6.00
Third Quarter............................. 15.00 10.25
Fourth Quarter............................ 13.94 4.09
FISCAL YEAR 2002
First Quarter............................. $ 5.35 $ 2.10
Second Quarter............................ 7.20 2.72
Third Quarter............................. 8.00 6.15
Fourth Quarter............................ 6.79 4.80
NUMBER OF SHAREHOLDERS OF RECORD
The number of shareholders of record of our Common Stock as of
September 3, 2002 was approximately 380. The number of beneficial owners of our
Common Stock was approximately 4,600 as of the same date.
DIVIDENDS
We have never declared or paid cash dividends on our Common Stock. We
do not anticipate paying cash dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
None.
14
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with Management's Discussion and Analysis of Financial Condition and Results of
Operations and our Consolidated Financial Statements and notes thereto included
elsewhere in this Annual Report on Form 10-K. The selected financial data as of
June 28, 2002, and June 29, 2001, and for each of the fiscal years in the three
year period ended June 28, 2002, have been derived from our audited financial
statements included elsewhere in this Annual Report on Form 10-K. The selected
financial data as of June 30, 2000, July 2, 1999, and July 3, 1998, and for the
two-year periods ended July 2, 1999, are derived from our audited financial
statements previously filed with the SEC. The information set forth below is not
necessarily indicative of the results of future operations.
FINANCIAL RESULTS JUNE 28, JUNE 29, JUNE 30, JULY 2, JULY 3,
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 2002 2001 2000 1999 1998
-------- -------- -------- ------- -------
Revenue .......................................... $ 397,437 $ 297,925 $ 222,497 $ 168,624 $ 115,614
Gross profit ..................................... 47,732 35,693 36,891 31,179 39,223
Bad debt expense ................................. 3,504 7,140 7,154 945 993
Income (loss) from continuing operations ......... 1,858 (5,774) (9,115) 173 1,046
Interest income (expense), net ................... 104 568 (191) 419 1,453
Other (loss) income .............................. 3,906 (1,837) -- 503 --
Income tax benefit (expense) ..................... (2,131) 2,585 3,398 (427) (1,019)
Net income (loss) from continuing operations ..... 3,737 (4,458) (5,908) 668 1,480
Income from discontinued operations, net of tax .. -- 15,235 1,840 3,459 5,671
--------- --------- --------- --------- ---------
Net income (loss) ................................ $ 3,737 $ 10,777 $ (4,068) $ 4,127 $ 7,151
========= ========= ========= ========= =========
Diluted earnings (loss) per share:
Income (loss) from continuing operations ......... $ 0.30 $ (0.37) $ (0.49) $ 0.06 $ 0.12
Income from discontinued operations .............. -- 1.25 0.15 0.28 0.47
--------- --------- --------- --------- ---------
Net income (loss) ................................ $ 0.30 $ 0.88 $ (0.34) $ 0.34 $ 0.59
========= ========= ========= ========= =========
Weighted average shares outstanding -- diluted ... 12,342 12,206 12,116 12,256 12,221
FINANCIAL POSITION
Working capital .................................. $ 43,850 $ 36,982 $ 36,393 $ 31,472 $ 26,147
Total assets ..................................... 99,495 98,993 78,430 78,542 71,280
Shareholder's equity ............................. 79,401 75,502 63,057 66,487 62,319
NOTES:
Fiscal 1999 results include a $0.5 million gain (pre-tax) on the
disposition of our publishing business, classified as other income.
Fiscal 2000 results include the following charges (pre-tax) to
operating expense:
- Write-down of $5.5 million investment in Clinical Partners, an
HIV case management business within the Retail segment.
- Expenses of $0.9 million related to the retention of an
investment banker in the review of corporate strategic
alternatives.
- Charges of $0.5 million relating to the contemplated spin-off
of MEDgenesis, Inc.
15
Fiscal 2001 results include the following gain and loss:
- A $13.8 million after-tax gain on the sale of MEDgenesis, Inc.
in January, 2001, included in discontinued operations.
- A loss on the sale of available-for-sale securities of $1.8
million (pre-tax).
Fiscal 2002 results include the following charge and benefit:
- Pre-tax charges of $3.6 million related to the StatScript
retail business for the costs of transferring the Kansas City
retail headquarters to Minneapolis, store closing costs, and
costs associated with the fiscal 2001 financial restatement.
- A $3.8 million pre-tax gain on the June 2002 collection of a
previously reserved note receivable from the buyer of Home
Service Medical (HSM), included in Other Income.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BUSINESS
We are a distributor of prescription drugs for people with certain
chronic health conditions. We consider our business to be unique and refer to it
as specialty pharmacy. We serve patients with highly specialized pharmaceutical
needs and help employers and third-party payors manage patient care costs. We
distribute pharmaceuticals and provide specialized patient management services
nationwide for people with chronic conditions including HIV/AIDS, organ
transplants, and diseases treated with biotech injectable medications. We work
directly with patients, physicians, healthcare providers, insurance companies,
health maintenance organizations, preferred provider organizations, government
agencies, and other third-party payors to improve clinical and financial
outcomes for patients with chronic, complex, and expensive pharmaceutical needs.
We are comprised of two operating segments - Mail Order and Retail. The
Mail Order segment includes the biotech injectables program, organ transplant
medications, and Home Service Medical (the Home Service Medical business was
sold as of September 1, 2000 - See Note 4, Notes to Consolidated Financial
Statements in Item 14 of this Annual Report on Form 10-K). The Retail segment
focuses on HIV/AIDS, organ transplant medications, and certain biotech
injectables through the StatScript specialty pharmacy stores.
During fiscal year 2001, we disposed of or shut down certain lines of
business (together, the "Disposed Businesses"). Within the Mail Order segment,
we sold the Home Service Medical ("HSM") business and closed the diabetes
service centers in the first quarter of fiscal 2001. Within the Retail segment,
the remaining Clinical Partners business ceased operations in the second quarter
of fiscal 2001.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared in accordance with
United States generally accepted accounting principles, which require us to make
estimates and assumptions (See Note 1, Notes to Consolidated Financial
Statements).
We believe the following critical accounting policies, among others,
affect our more significant judgments and estimates used in the preparation of
our consolidated financial statements.
16
Revenue Recognition
Revenue is recognized at the time prescriptions are dispensed by the
pharmacist and shipped to or picked up by the patient. We participate in various
third party provider networks and state Medicaid programs. Under a majority of
these networks, the amount to be paid for our products is determined (or
"adjudicated") through electronic connections with these networks at the time of
sale. However, for certain third-party providers and state Medicaid programs for
which there is no electronic adjudication process available at the time of sale,
we determine an appropriate estimate for expected payor discount. Revenue is
then reported at the estimated net realizable amount and adjusted in future
periods as final settlements are determined. Although management continually
monitors its assumptions used in estimating payor discounts, such subsequent
adjustments could be favorable or unfavorable to future periods.
Collectibility of Accounts Receivable
Accounts receivable consist primarily of amounts due from the Medicare
and Medicaid programs, other government programs, prescription benefits
managers, managed care health plans, commercial insurance companies and
individual patients. Estimated provisions for doubtful accounts are recorded to
the extent it is probable that a portion or all of a particular account will not
be collected.
In evaluating the collectibility of accounts receivable, we consider a
number of factors, including the age of the accounts, changes in collection
patterns, the composition of accounts by payor type, and general industry
conditions. Actual collections of accounts receivable in subsequent periods may
require changes in estimated provision for loss. Changes in these estimates are
charged or credited to the results of operations in the period of the change.
Goodwill
We have $30.2 million of goodwill on our balance sheet at June 28,
2002, related to acquisitions. The periodic assessment of the valuation of these
assets involves significant judgments and the use of estimates. We will also
review the carrying value of these assets whenever there are any events or
circumstances that indicate the potential for impairment. If an impairment is
determined, the carrying values of these assets will be reduced to fair value.
17
RESULTS OF OPERATIONS
INCOME AND EXPENSE ITEMS AS A PERCENTAGE OF REVENUE
FISCAL YEAR
-------------------------------
2002 2001 2000
---- ---- -----
Revenue
Mail Order ................................ 43.6% 51.5% 53.6%
Retail .................................... 56.4 48.5 46.4
----- ----- -----
100.0 100.0 100.0
Cost of revenue .................................. 88.0 88.0 83.4
----- ----- -----
Gross profit ..................................... 12.0 12.0 16.6
Operating expenses
Selling and marketing ..................... 0.8 1.1 2.0
General and administrative ................ 9.8 10.4 13.0
Bad debt expense .......................... 0.9 2.4 3.2
Other expenses - asset write down ......... -- -- 2.5
----- ----- -----
Total operating expenses ......................... 11.5 13.9 20.7
Income (loss) from operations .................... 0.5 (1.9) (4.1)
Interest income (expense), net ................... -- 0.2 --
Other income (loss) .............................. 1.0 (0.6) --
Income tax (expense) benefit ..................... (0.6) 0.8 1.5
----- ----- -----
Net income (loss) from continuing operations ..... 0.9 (1.5) (2.6)
Income from discontinued operations, net of tax .. -- 5.1 0.8
----- ----- -----
Net income (loss) ................................ 0.9% 3.6% (1.8)%
===== ===== =====
FISCAL 2002 COMPARED TO FISCAL 2001
CONTINUING OPERATIONS
Revenue
Total revenue for fiscal 2002 was up 33.4% to $397.4 million from
$297.9 million in fiscal 2001, reflecting strong existing business as well as
full year revenues from three acquisitions in the second half of fiscal 2001,
which, together will be referred to as the "Acquired Businesses". Our existing
business and the Acquired Businesses together will be referred to as the
"On-going Business". The Acquired Businesses include four retail pharmacies of
American Prescription Providers ("APP") (acquired in February, 2001) and a
single location pharmacy in Sherman Oaks, California ("Oaks") (acquired in
April, 2001) in the Retail segment, and the organ transplant pharmacy of
SangStat Medical ("SangStat") (acquired in April, 2001) in the Mail Order
segment. Overall, these three acquisitions contributed approximately $55.7
million or 54.6% of our $102.1 million year-over-year growth (excluding the
Disposed Businesses, as noted below). During fiscal year 2001, we disposed of or
shut down certain lines of business (together, the "Disposed Businesses").
Within the Mail Order segment, the HSM business was sold and the diabetes
service centers were closed in the first quarter of fiscal year 2001. Within the
Retail segment, the remaining Clinical Partners business ceased operation in the
second quarter of fiscal 2001. By revenue source, fiscal 2002 compares to fiscal
2001 as follows:
18
($ In Thousands) FISCAL YEAR
-----------------------
2002 2001 % CHANGE
---- ---- --------
Mail Order Segment
On-going Business ..... $173,202 $151,224 14.5 %
Disposed Businesses ... -- 2,237 (100.0)
-------- -------- ------
Total Mail Order .... 173,202 153,461 12.9 %
Retail Segment
On-going Business ..... 224,235 144,104 55.6 %
Disposed Businesses ... -- 360 (100.0)
-------- -------- ------
Total Retail ........ 224,235 144,464 55.2 %
-------- -------- ------
Total Company ................ $397,437 $297,925 33.4 %
======== ======== ======
The Mail Order segment revenue grew 12.9% year-over-year, despite the
September, 2000 sale of the segment's HSM business and the closure of its
diabetes service centers. Excluding these businesses in both years, the
year-over-year growth was 14.5%. This growth was due to several factors,
including the addition of new biotech injectable patients from several payors,
the April, 2001 SangStat acquisition, and price inflation. The SangStat
acquisition contributed approximately $8 million of the growth in
year-over-year revenue. Excluding the SangStat acquisition, the rate of revenue
growth slowed to approximately 9.4% in fiscal year 2002 compared to 45.9% in
fiscal year 2001, due to new patients from the contract with Aetna that became
effective July 15, 2000, unfavorable retention of organ transplant patients, and
product shortages for Enbrel and the Hepatitis-C drug Peg-Intron. Payor
reimbursements from Aetna represented 59.7% and 65.5% of our Mail Order revenues
for fiscal years 2002 and 2001, respectively. Except for Aetna, no other private
payor accounts for 10% or more of our revenues in fiscal years 2002 and 2001.
The Retail segment revenue grew 55.2% for the year due to continued
additions of new patients at existing stores and the full year benefit of the
acquisition of the APP and Oaks specialty pharmacies. The newly acquired stores
accounted for approximately $42.4 million of our growth in the On-going
Business, while same store revenue accounted for the remainder of the revenue
growth, with a 25.9% increase for the year. The same store growth was due to a
combination of increased anti-viral medication volume bolstered by increased
post-transplant drug sales. We plan to continue our expansion of retail product
offerings beyond our HIV/AIDS focus, to include post-transplant and Hepatitis C
medications. A single private payor represented approximately 6.1% and 7.0% of
our on-going Retail revenues for fiscal years 2002 and 2001, respectively.
Cost of Revenue and Gross Profit
Total gross profit dollars increased $12.0 million or 33.7%, from $35.7
million in fiscal 2001 to $47.7 million in fiscal 2002. Gross margins as a
percentage of revenue remained unchanged at 12.0% in fiscal 2001 and fiscal
2002.
Mail Order margins as a percentage of revenue increased slightly from
the year ago period due to a stabilization in pricing pressures in markets we
serve, improved purchasing programs, and a change in product mix toward higher
margin products. Aetna represented 37.4% and 35.1% of our Mail Order margins for
fiscal years 2002 and 2001, respectively.
Retail margins as a percentage of revenue decreased slightly from the
year ago period primarily due to the closing of selected geographic markets or
store locations and a large payor's decision to reduce reimbursement in the
middle of fiscal year 2001. A single private payor represented 10.0% and 13.6%
of our Retail margins for fiscal years 2002 and 2001, respectively.
19
We anticipate that payors will continue to exert downward pressure on
the prices we will be able to charge as payors continue to seek containment of
healthcare costs, which will negatively affect margins in the future. We are
working to offset this pricing pressure in a number of ways, including sales and
marketing efforts to direct more profitable medications into both the Retail and
Mail Order segments; enhanced programs with manufacturers, wholesalers, and
group purchasing organizations to reduce product costs; and a store-by-store
focus on payor and drug mix to improve gross margins.
Operating Expenses
Our operating expenses include selling and marketing, general and
administrative (G&A), and bad debt expenses. Our G&A expenses include both
corporate G&A expenses (corporate management, information systems, accounting,
human resources) and direct segment G&A expenses (division management, customer
service, billing, pharmacy fulfillment). Our business model for operating
expenses is to continue to improve efficiency on greater volume.
Selling and Marketing Expenses
The following chart shows the year-to-year comparisons of selling and
marketing expenses.
($ In Thousands) FISCAL YEAR
------------------------------
2002 2001 % CHANGE
---- ---- --------
On-going Business .......................................... $3,329 $2,776 19.9%
Disposed Businesses ........................................ -- 433 (100.0)
------ ------ ------
Total Company .............................................. $3,329 $3,209 3.7%
====== ====== ======
Our selling and marketing expenses increased $0.1 million, or 3.7% in
fiscal 2002. Our selling and marketing expenses for On-going Business increased
$0.6 million, or 19.9% in fiscal 2002, from $2.8 million to $3.3 million. These
marketing expenses for On-going Business represented 0.8% and 0.9% of revenues
for fiscal 2002 and fiscal 2001, respectively. This increase in expenses is
primarily due to head count additions and increased travel and promotion
activities.
We operate a consolidated selling and marketing organization serving
both the Mail Order and Retail segments. We believe this integrated approach
increases the effectiveness of our selling and marketing efforts.
General and Administrative Expenses
The following chart shows the year-to-year comparisons of general and
administrative expenses, excluding bad debt expense.
($ In Thousands) FISCAL YEAR
-----------------------------
2002 2001 % CHANGE
---- ---- --------
On-going Business ........................................ $39,041 $30,487 28.1%
Disposed Businesses ...................................... -- 631 (100.0)
------- ------- ------
Total Company ............................................ $39,041 $31,118 25.5%
======= ======= ======
Our general and administrative expenses increased $7.9 million, or
25.5% in fiscal 2002, due primarily to Retail store acquisitions in the latter
part of fiscal 2001 and higher lease and pharmacist operating costs in existing
specialty pharmacy stores. For our On-going Business, general and administrative
expenses increased $8.5 million, or 28.1% in fiscal 2002, from $30.5 million to
$39.0 million, and declined as a percentage of total revenue from 10.2% to 9.8%
reflecting our emphasis on operating leverage against increasing revenues. We
expect to see
20
continued operating leverage in this area in the future. Included in fiscal 2001
general and administrative expenses was $1.4 million of goodwill amortization
that was not expensed in fiscal 2002 as a result of our adoption of Statement
142 - See New Accounting Pronouncements included in this Item 7. In addition,
fiscal 2002 included charges of $3.6 million related to the StatScript retail
business for the costs of transferring the Kansas City retail headquarters to
Minneapolis, store closing costs, and costs associated with the fiscal 2001
financial restatement. Excluding these charges and the Disposed Businesses,
fiscal year 2002 and 2001 general and administrative expenses were $35.5 million
and $29.1 million, or 8.9% and 9.9% of revenues, respectively.
Bad Debt Expenses
Our bad debt expense decreased $3.6 million, or 50.9% in fiscal 2002.
Bad debt expenses represented 0.9% and 2.4% of revenues for fiscal 2002 and
fiscal 2001, respectively. This high rate of bad debt expense in 2001 was due
primarily to a higher write-off of receivables in the Retail Segment. The bad
debt experience in fiscal year 2002 reflects our consolidation of billing and
collection operations to our Minneapolis headquarters and related process
improvements. Fiscal 2002 results are representative of our expectation for
future bad debt expense of approximately 1% of revenue.
Interest Income
Interest income, net of interest expense, decreased $0.5 million, from
$0.6 million in fiscal 2001 to $0.1 million in fiscal 2002, reflecting our
invested asset levels and declining interest rate environment, net of short-term
borrowing costs on our line of credit. Included in interest income for fiscal
2002 and 2001 was $0.4 million and $0.3 million, respectively, of interest on a
note receivable with the buyer of our HSM business in September 2000. This note
has been paid in full and as a result will not be generating interest income in
fiscal 2003.
Other Income (Loss)
Other income of $3.9 million in fiscal 2002 reflects primarily a $3.8
million gain on the collection of a previously reserved note receivable due from
the buyer of our HSM business. The $1.8 million loss in fiscal 2001 reflects our
loss on sale of available-for-sale securities that had been received as
consideration in the sale of our MEDgenesis business.
Income Taxes
In fiscal 2002 and 2001 the income tax expense (benefit) was calculated
on rates of 36.3% and 36.7%, respectively. See Note 7, Notes to Consolidated
Financial Statements for the reconciliation to our statutory rate. Looking
forward, we expect our combined Federal and State tax rate to approximate 39.0%.
FISCAL 2001 COMPARED TO FISCAL 2000
CONTINUING OPERATIONS
Revenue
Total revenue for fiscal 2001 was up 33.9% to $297.9 million from
$222.5 million in fiscal 2000, reflecting strong existing business growth as
well as growth from three acquisitions in the second half of the year, which
together will be referred to as the "Acquired Businesses". The existing business
and the Acquired Businesses together will be referred to as the "On-going
Business". The Acquired Businesses include four retail pharmacies of American
Prescription Providers ("APP") (acquired in February, 2001) and a single
location pharmacy in Sherman Oaks, California ("Oaks") (acquired in April, 2001)
in the Retail segment, and the organ transplant pharmacy of SangStat Medical
("SangStat") (acquired in April, 2001) in the Mail Order segment. Overall, these
three acquisitions contributed
21
one-fourth ($22.9 million) of the Company's 45.1% ($91.9 million) year-on-year
growth (excluding the Disposed Businesses, as noted below). By revenue source,
fiscal 2001 compares to fiscal 2000 as follows:
($ In Thousands) FISCAL YEAR
----------------------------------
2001 2000 % CHANGE
---- ---- --------
Mail Order Segment
On-going Business .................................... $151,224 $102,286 47.8%
Disposed Businesses .................................. 2,237 16,884 (86.8)
-------- -------- ------
Total Mail Order ................................. 153,461 119,170 28.8%
Retail Segment
On-going Business .................................... 144,104 101,192 42.4%
Disposed Businesses .................................. 360 2,135 (83.1)
-------- -------- ------
Total Retail ..................................... 144,464 103,327 39.8%
-------- -------- ------
Total Company ............................................. $297,925 $222,497 33.9%
======== ======== ======
The Mail Order segment grew 28.8% year-on-year, despite the September
2000 sale of the HSM business and the closure of its diabetes service centers.
Excluding these businesses in both years, the year-on-year growth was 47.8%.
This growth was driven primarily by the addition of new patients from the
biotech injectables contract with Aetna that became effective July 15, 2000. The
SangStat acquisition in April 2001 strengthened our position in the transplant
market and contributed approximately $2 million in fourth quarter revenue.
The Retail segment grew 39.8% for the year due to continued additions
of new patients at existing stores and the acquisition of the APP and Oaks
specialty pharmacies. The newly acquired stores accounted for approximately one
half of the 42.4% fiscal year growth in the On-going Business, while same store
revenue accounted for the remainder of the revenue growth, with approximately a
22% increase for the year. The Retail segment faced significant reimbursement
pressure in fiscal 2001, which lowered the revenue growth rate and reduced gross
margins.
Cost of Revenue and Gross Profit
Total gross profit dollars decreased by $1.2 million from $36.9 million
in fiscal 2000 to $35.7 million in fiscal 2001. Gross margins as a percentage of
revenue declined 4.6 percentage points, from 16.6% in fiscal 2000 to 12.0% in
fiscal 2001. However, exclusive of the Disposed Businesses, higher revenue led
to a gross profit dollar increase of $4.6 million, from $30.2 million in fiscal
2000 to $34.8 million in 2001, while margins declined 3.1 percentage points,
from 14.9% to 11.8% in the respective years.
Mail Order margins as a percentage of sales declined slightly due to a
change in product mix toward lower margin products, a continuing supply shortage
of a high-margin product (beginning in January, 2001), and lower than average
reimbursement rates under our contract with Aetna.
Two primary factors contributed to a significant decline in Retail
margins. First, a large uncontracted payor significantly reduced its
reimbursement schedule, which caused an approximate two percentage point
decrease in the segment's margins. Second, continued pricing pressures from
other payors at existing stores lowered the overall segment margins by an
additional two percentage points.
Operating Expenses
Our operating expenses include selling and marketing, general and
administrative (G&A), and bad debt expenses. Our G&A expenses include both
corporate G&A expenses (corporate management, information systems, accounting,
human resources) and direct segment G&A expenses (division management, customer
service, billing, pharmacy fulfillment). Our business model for operating
expenses is to continue to improve efficiency on greater volume.
22
Selling and Marketing Expenses
The following chart shows the year-to-year comparisons of selling and
marketing expenses.
($ In Thousands) FISCAL YEAR
---------------------------------
2001 2000 % CHANGE
---- ---- --------
Mail Order Segment
On-going Business ..................................... $ 1,198 $ 991 20.9%
Disposed Businesses ................................... 433 1,804 (76.0)
------- ------- ------
Total Mail Order .................................. 1,631 2,795 (41.6)%
Retail Segment
On-going Business ..................................... 1,578 1,374 14.8 %
Disposed Businesses ................................... -- 286 (100.0)
------- ------- ------
Total Retail ...................................... 1,578 1,660 (4.9)%
------- ------- ------
Total Company .............................................. $ 3,209 $ 4,455 (27.9)%
======= ======= ======
Total Company selling and marketing expenses decreased almost $1.3
million, or 27.9% in fiscal 2001. Our selling and marketing expenses from
On-going Business actually increased $0.4 million in fiscal 2001, from $2.4
million to $2.8 million, as a result of increased labor, travel and marketing
promotion expenditures in both the Mail Order and Retail segments. The Disposed
Businesses accounted for a $1.7 million decrease in selling and marketing in
fiscal 2001.
Total Mail Order selling and marketing expenses decreased $1.2 million,
or 41.6% in fiscal 2001, due to the elimination of the Disposed Businesses.
Excluding the Disposed Businesses, selling and marketing expenses increased $0.2
million, or 20.9%, as costs remained essentially constant as a percentage of
revenue at 0.8%.
Total Retail selling and marketing expenses decreased $0.1 million, or
4.9% in 2001, again due to the elimination of the Disposed Businesses. Excluding
the Disposed Businesses, selling and marketing expenses increased $0.2 million
due to increased sales activity in support of new specialty pharmacies, and
declined as a percentage of revenue from 1.4% to 1.1%.
In the fourth quarter of fiscal 2001, we consolidated our selling and
marketing efforts into one organization serving both the Mail Order and Retail
segments. We believe this integrated approach increases the effectiveness of our
selling and marketing efforts.
General and Administrative Expenses
The following chart shows a breakdown of our corporate G&A and direct
segment G&A expenses, excluding bad debt expense.
($ In Thousands) FISCAL YEAR
---------------------------------
2001 2000 % CHANGE
---- ---- --------
Corporate .................................................. $ 9,633 $10,306 (6.5)%
Mail Order Segment
On-going Business ..................................... 5,251 3,804 38.0%
Disposed Businesses ................................... 244 1,423 (82.9)
------- ------- ------
Total Mail Order .................................. 5,495 5,227 5.1%
Retail Segment
On-going Business ..................................... 15,603 10,976 42.2%
Disposed Businesses ................................... 387 2,388 (83.8)
------- ------- ------
Total Retail ...................................... 15,990 13,364 19.6%
------- ------- ------
Total Company .............................................. $31,118 $28,897 7.7%
======= ======= ======
23
Total Company general and administrative expenses increased $2.2
million, or 7.7% in fiscal 2001, due primarily to Retail store acquisitions in
fiscal 2001 and higher operating costs in the specialty pharmacy stores. G&A
declined as a percentage of revenue from 13.0% to 10.4%. Excluding Disposed
Businesses, the increase was $5.4 million, or 21.5%, on comparable revenue
growth of 45.1%.
Corporate general and administrative expenses decreased by 6.5%, or
$0.7 million, and decreased as a percentage of revenue from 4.7% to 3.2%. The
decline is attributed primarily to the cost of our pursuit of strategic
alternatives in the first three quarters of fiscal 2000 ($0.9 million) and
certain costs incurred in the fourth quarter of fiscal 2000 related to the
contemplated spin-off of the MEDgenesis diagnostic products business ($0.5
million). We incurred no such related costs in fiscal 2001. Aside from these
items, corporate G&A expenses increased 9%, a favorable comparison against a
reported 33.9% increase in revenue.
Mail Order Segment general and administrative expense grew 5.1%, from
$5.2 million to $5.5 million. However, expenses associated with the Disposed
Businesses (primarily HSM) decreased by $1.2 million, offsetting a $1.4 million
increase in the On-going Business. The increase is attributable to increased
direct costs (customer service, billing, fulfillment) associated with the
revenue growth. As a percentage of on-going Mail Order revenue, on-going Mail
Order G&A expense decreased slightly from 3.7% to 3.5%.
Retail Segment general and administrative expenses increased 19.6%, or
$2.6 million. Expenses relating to the Disposed Businesses (primarily Clinical
Partners) decreased by $2.0 million, while expenses relating to the On-going
Businesses increased by $4.6 million, or 42.2%, from $11.0 million to $15.6
million. This expense growth was in line with revenue growth; as a percentage of
revenue, these expenses increased only slightly from 10.6% to 10.8%. The
absolute dollar growth of $4.6 million in the On-going Business is attributed to
the APP and Oaks acquisitions by the Retail segment during fiscal 2001 and
increasing labor and facility costs in the specialty pharmacy stores.
Bad Debt Expenses
($ In Thousands) FISCAL YEAR
---------------------------------
2001 2000 % CHANGE
---- ---- --------
Corporate .................................................. $ (119) $ 140 --
Mail Order Segment
On-going Business ..................................... 1,524 1,272 19.8%
Disposed Businesses ................................... 39 424 (90.8)
------- ------- -----
Total Mail Order .................................. 1,563 1,696 (7.8)%
Retail Segment
On-going Business ..................................... 5,693 5,124 11.1%
Disposed Businesses ................................... 3 194 (98.5)
------- ------- -----
Total Retail ...................................... 5,696 5,318 7.1%
------- ------- -----
Total Company .............................................. $ 7,140 $ 7,154 0.2%
======= ======= =====
Total Company bad debt expense remained nearly flat in fiscal 2001
compared to fiscal 2000, at $7.1 million. As a percent of revenue, bad debt
expense was 2.4% and 3.2% in the respective fiscal 2001 and 2000 periods.
Interest Income
The increase in interest income from an expense of $0.2 million in
fiscal 2000 to income of $0.6 million in fiscal 2001 is due primarily to $0.3
million of interest earned from the invested proceeds from the sale of
MEDgenesis in January, 2001, and $0.3 million of interest earned on a note
receivable from the buyer of our HSM business, sold in September 2000. The
MEDgenesis sale proceeds were later used to fund acquisitions in the third (APP)
and fourth quarters (Oaks and SangStat) of fiscal 2001.
24
Other Income (Loss)
The $1.8 million loss in fiscal 2001 reflects our loss on sale of
available-for-sale securities that had been received as consideration in the
sale of our MEDgenesis business. These securities were received in January, 2001
(third quarter of fiscal 2001), and then sold in both the third and fourth
quarters of fiscal 2001. All securities have been sold as of June 29, 2001.
Income Taxes
In fiscal 2000 and 2001 the income tax benefits on operating losses
were at approximately 37%. See Note 7, Notes to Consolidated Financial
Statements, for the reconciliation to our statutory rate.
LIQUIDITY AND CAPITAL RESOURCES
As of June 28, 2002, we had $43.9 million of working capital, compared
to $37.0 million as of June 29, 2001. During fiscal 2002, we generated $7.8
million of cash from operating activities. The average days sales outstanding
(DSO) of our accounts receivable improved from 52 days at June 29, 2001, to 44
days at June 28, 2002. Faster payment from our larger payors and active
collection efforts led to this improvement. Despite this improvement in DSO, we
used $4.1 million in cash to finance our receivable growth resulting from
increasing revenues. We expect our receivables to perform at or better than 44
days sales outstanding in fiscal 2003. The average days inventory on hand also
improved from 10 days at June 29, 2001, to 9 days at June 28, 2002. This
improvement resulted in a $0.5 million source of cash during fiscal 2002. We
expect our inventory to perform at or below 10 days on hand in fiscal 2003.
During fiscal 2002, we collected approximately $7.0 million in income tax
refunds resulting from prior years' tax losses.
Approximately $2.5 million of cash was provided by investing activities
during fiscal 2002, consisting of $3.8 million from the collection of a note
from the buyer of our HSM business, offset by $1.3 million cash used for the
purchases of property and equipment, primarily leasehold improvements for the
StatScript specialty pharmacies.
We had no long-term debt as of fiscal year end 2002 and 2001.
Shareholders' equity as of fiscal year end 2002 and 2001 was $79.4 million and
$75.5 million, respectively. Net tangible assets, an indicator of borrowing
capacity, as of years ended 2002 and 2001 were $49.2 million and $45.3 million,
respectively. As of June 28, 2002, we had a secured line of credit totaling $30
million. We are in compliance with the debt covenants of the line of credit as
of June 28, 2002. Under the terms of the agreement, the debt is secured by
receivables and inventory and bears interest at Prime Rate. The line of credit
expires in January, 2003. We are currently in the process of securing a new,
long-term line of credit agreement, which we expect to complete by December,
2002.
There were no short-term borrowings outstanding under our line of
credit at June 28, 2002. We believe that the line of credit and cash provided by
operating activities should allow us to meet foreseeable cash requirements and
provide the flexibility to fund future working capital growth. However, we would
need to seek additional debt or equity financing beyond our current $30 million
line of credit to fund any major business acquisitions or capital spending
projects. We are not currently planning any major capital projects beyond our
normal requirements of $2 to $3 million per year.
Our future contractual commitments consist entirely of payments due
under operating leases - See Note 5, Notes to Consolidated Financial Statements
in Item 14 of this Annual Report on Form 10-K.
25
RESTRICTED STOCK GRANTS
In August 2002, the Compensation Committee of the Board of Directors
approved restricted stock grants to our officers totaling 145,000 shares of
restricted common stock under our 2001 Stock Incentive Plan. These restricted
shares, valued at $682,950 based on our fair market value of $4.71 per common
share at the date of grant, will be recognized as compensation expense over the
four year vesting period of the grant, subject to an acceleration provision
based on increases in our stock price. Excluding the acceleration provision, the
expected financial impact of the stock grant will be approximately $106,000
annually, net of tax, or $0.01 per share.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement 141, "Business Combinations", which prohibits the use of the
pooling-of-interests method of accounting for business combinations, defines the
methodology to be used in measuring goodwill and other intangible assets, and
defines certain disclosure requirements for business combinations. Statement 141
became effective for all transactions initiated after June 30, 2001, and for all
purchase method transactions completed after June 30, 2001. Accordingly, we
adopted Statement 141 beginning July 1, 2001, resulting in no material effect to
the financial statements.
On that same date, the FASB also issued Statement 142, "Goodwill and
Other Intangible Assets". Under the new rules, goodwill (and intangible assets
deemed to have indefinite lives) is no longer being amortized but is subject to
annual impairment tests in accordance with the Statement. Other intangible
assets continue to be amortized over their useful lives. We applied the new
rules beginning in our first fiscal quarter of 2002 that began on June 30, 2001.
Application of the non-amortization provisions of the Statement resulted in a
decrease of approximately $2.3 million in amortization of existing goodwill and
an increase in after-tax net income of approximately $1.4 million ($0.12 per
share) in fiscal 2002. In fiscal 2001, goodwill amortization totaled $1.4
million, which would have amounted to after-tax net income of $0.9 million or
$0.07 per share. During fiscal 2002, we performed periodic impairment tests of
goodwill beginning June 30, 2001, resulting in no adjustments to the carrying
value of goodwill.
In October 2001, the FASB issued Statement 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". Statement 144, which replaces
Statement 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," requires long-lived assets to be measured
at the lower of carrying amount or fair value less the cost to sell. Statement
144 also broadens disposal transaction reporting related to discontinued
operations. The Statement is effective for financial statements issued for
fiscal years beginning after December 15, 2001. We will adopt Statement 144 in
fiscal 2003 and do not expect the adoption to have a material impact on our
financial statements.
In June 2002, the FASB issued Statement 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The Statement requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. Prior guidance required that a liability for an
exit cost be recognized at the date of an entity's commitment to an exit plan.
This Statement also establishes that fair value is the objective for initial
measurement of the liability. Statement 146 is effective for exit or disposal
activities that are initiated after December 31, 2002.
IMPACT OF INFLATION
Changes in prices charged by biopharmaceutical manufacturers for the
drugs we dispense, along with increasing labor costs, freight and supply costs
and other overhead expenses, affect our cost of revenue and general and
administrative expenses. Historically, we have been able to pass a portion of
the effect of such increases to the payor and patient pursuant to automatic
price adjustments made under our payor contracts. As a result, changes due to
inflation have not had significant adverse effects on our operations.
26
FORWARD-LOOKING STATEMENTS
Information contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations, other than historical or current
facts, should be considered forward-looking statements as defined in the Private
Securities Litigation Reform Act of 1995. These statements reflect management's
current views of future events and financial performance that involve a number
of risks and uncertainties. These factors include, but are not limited to, the
following: our ability to maintain satisfactory on-going arrangements with drug
manufacturers and wholesalers, and their ability to satisfy our volume, pricing,
and product requirements; decrease in demand for drugs we handle; changes in
Medicare or Medicaid; loss of relationships with payors (including Aetna or
other large contracts); negative cost containment trends or financial
difficulties by our payors; changes in or unknown violations of various federal,
state, and local regulations; costs and other effects of legal or administrative
proceedings; the adoption of new or changes to existing accounting policies and
practices and the application of such policies and practices; the amount and
rate of growth in our selling, general and administrative expenses; the
impairment of a significant amount of our goodwill; the effects of and changes
in, trade, monetary and fiscal policies, laws and regulations; other activities
of government agencies; our ability to obtain competitive financing to fund
operations and growth; continuing qualifications to list our securities on a
national stock exchange; developments in medical research affecting the
treatment or cure of conditions for which we distribute medications; the ability
of management and accounting controls to assure accurate and timely information;
computer system, software, or hardware failures or malfunctions; heightened
competition; and loss or retirement of key executives or changes in ownership.
We urge you to read the cautionary statement filed as Exhibit 99.1. This
cautionary statement discusses specific factors which could affect our
operations and forward-looking statements contained in this Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to interest rate risk primarily through our borrowing
activities under our line of credit discussed in Item 7 of this report. Our
short-term borrowings bear interest at variable rates based on the prime rate. A
10% increase in interest rates would not have a significant effect on our
interest expense based on fiscal 2002 borrowing levels. We do not use financial
instruments for trading or other speculative purposes and are not a party to any
leveraged financial instruments.
ITEM 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-23 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.
27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The discussions under the sections captioned "SECTION 16(a) BENEFICIAL
OWNERSHIP REPORTING COMPLIANCE", "PROPOSAL 1 - ELECTION OF DIRECTORS", "PROPOSAL
2 - APPOINTMENT OF INDEPENDENT AUDITORS", and "EXECUTIVE OFFICERS" to be
included in our definitive proxy statement to be filed with the Securities and
Exchange Commission and delivered to our 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 20, 2002 (the "2002 Proxy
Statement") are incorporated in this Form 10-K by reference in response to this
Item 10.
ITEM 11. EXECUTIVE COMPENSATION
The discussions under the sections captioned "DIRECTOR COMPENSATION"
and "EXECUTIVE COMPENSATION" but excluding the discussions included under the
subsections captioned "EXECUTIVE COMPENSATION - Report of the Compensation
Committee of the Board of Directors on Executive Compensation", "EXECUTIVE
COMPENSATION - Equity Compensation Plan Information", and "EXECUTIVE
COMPENSATION - Comparable Stock Performance" to be included in the 2002 Proxy
Statement are incorporated in this Form 10-K by reference in response to this
Item 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The discussions under the sections captioned "OWNERSHIP OF CHRONIMED
COMMON STOCK BY CERTAIN BENEFICIAL OWNERS AND EXECUTIVE OFFICERS" to be included
in the 2002 Proxy Statement are incorporated in this Form 10-K by reference in
response to this Item 12.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The discussion under the section captioned "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS" to be included in the 2002 Proxy Statement is incorporated
herein by reference in response to this Item 13.
28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
PAGE
(a) DOCUMENTS INCLUDED IN THIS REPORT
1. Financial Statements
Index to Financial Statements.................................................. F-1
Report of Independent Auditors................................................. F-2
Consolidated Balance Sheets as of June 28, 2002, and June 29, 2001............. F-3
Consolidated Statements of Operations for the years ended June 28, 2002,
June 29, 2001, and June 30, 2000 .............................................. F-4
Consolidated Statements of Shareholders' Equity for the years ended June 28, 2002,
June 29, 2001, and June 30, 2000 .............................................. F-5
Consolidated Statements of Cash Flows for the years ended June 28, 2002,
June 29, 2001, and June 30, 2000 .............................................. F-6
Notes to Consolidated Financial Statements..................................... F-8
2. Financial Statement Schedule
Schedule II -- Valuation and Qualifying Accounts and Reserves.................. 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.
We will furnish any shareholder a copy of any of the following exhibits
upon payment to us of the reasonable costs incurred by us in furnishing
any such exhibit.
Portions of the 2002 definitive Proxy Statement are incorporated herein
by reference as set forth in Items 10, 11, 12, and 13 of this Report.
Only those portions directly responsive to the Items of Form 10-K shall
be deemed filed with the Securities and Exchange Commission.
29
EXHIBIT
NUMBER DESCRIPTION
3.1 Articles of Incorporation of the Company, as amended. (6)
3.2 Bylaws of the Company, as amended. (7)
4.1 Specimen form of the Company's Common Stock certificate. (2)
4.2 Shareholder Rights Agreement between the Company and Wells
Fargo Bank, National Association (formerly Norwest Bank
Minnesota, N.A.) dated December 18, 1996.(5)
10.1* Form of Incentive Stock Option Agreement. (1)
10.2* Form of Nonstatutory Stock Option Agreement. (1)
10.3 Pharmacy Participation Agreement with Aetna Health Management,
Inc.(11)
10.4 Employment Agreement effective July 1, 2000, between the
Company and Henry F. Blissenbach.(1) (10)
10.5 Employment Agreement dated March 1, 2000, between the Company
and Gregory H. Keane. (1) (9)
10.6 Chronimed Inc. 1994 Stock Option Plan. (3)
10.7 Chronimed Inc. 1994 Stock Option Plan for Directors. (3)
10.8 Chronimed Inc. 1997 Stock Option Plan. (4)
10.9 Chronimed Inc. 1999 Stock Option Plan. (8)
10.10 Chronimed Inc. 2001 Stock Option Plan. (11)
10.11 Facility Lease Agreement with Red Circle L.L.P. dated November
1996. (5)
10.11a Amendments dated April 1997, December 1997, and July 1998 to
Facility Lease Agreement with Red Circle L.L.P. (8)
10.12 Separation and Release Agreement effective January 5, 2001,
between the Company and Maurice R. Taylor, II. (1) (12)
10.13 Promissory Note of Maurice R. Taylor, II, dated July 24, 2000.
(1) (12)
10.14 Asset Purchase Agreement dated December 1, 2000, between
Chronimed Inc. and Medisys PLC. (13) (Incorporated by
reference from Exhibit 2.1 to the Company's Form 8-K filed
December 18, 2000).
10.14a Amendment to Asset Purchase Agreement dated January 5, 2001,
between Chronimed Inc. and Medisys PLC. (14) (Incorporated by
reference to Exhibit 2.2 in the Company's Form 8-K filed
January 19, 2001).
10.15 Asset Purchase Agreement dated February 2, 2001, between
Chronimed Inc. and American Prescription Providers. (15)
10.16 Amended and Restated Credit Agreement dated as of January 17,
2002. (16)
30
EXHIBIT
NUMBER DESCRIPTION
21.1* List of Subsidiaries.
23.1* Consent of Ernst & Young LLP.
99.1* Cautionary Statements for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act.
99.2* Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Executive Officer).
99.3* Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Financial Officer).
- ------
(1) Management contract or compensatory plan or arrangement.
(2) Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 33-45644), as amended.
(3) Incorporated by reference to the Company's quarterly report on Form
10-Q filed with The Commission on January 31, 1995, under file number
0-19952.
(4) Incorporated by reference to the Company's quarterly report on Form
10-Q filed with The Commission on September 26, 1996, under file number
0-19952.
(5) Incorporated by reference to the Company's 1997 Annual Report on Form
10-K filed with The Commission on September 25, 1997, under file number
0-19952.
(6) Incorporated by reference to the Company's quarterly report on Form
10-Q filed with the Commission on February 6, 1998, under file number
0-19952.
(7) Incorporated by reference to the Company's quarterly report on Form
10-Q filed with The Commission on May 5, 1998, under file number
0-19952.
(8) Incorporated by reference to the Company's 1998 Annual Report on Form
10-K filed with The Commission on September 30, 1998, under file Number
0-19952.
(9) Incorporated by reference to the Company's quarterly report on Form
10-Q filed with The Commission on May 5, 2000, under file Number
0-19952.
(10) Incorporated by reference to the Company's 1998 Annual Report on Form
10-K filed with The Commission on September 27, 2000, under file Number
0-19952.
(11) Incorporated by reference from Exhibit A in the Company's Definitive
Proxy Statement filed with The Commission on Schedule 14A, October 13,
2000, under file Number 0-19952.
(12) Incorporated by reference from Exhibit 2.1 in the Company's Form 8-K
filed with The Commission December 18, 2000, under file Number 0-19952.
(13) Incorporated by reference from Exhibit 2.2 in the Company's Form 8-K
filed with The Commission January 19, 2001, under file Number 0-19952.
31
(14) Incorporated by reference to the Company's quarterly report on Form
10-Q filed with The Commission on May 14, 2001, under file Number
0-19952.
(15) Incorporated by reference to the Company's 2001 Annual Report on Form
10-K filed with The Commission on October 12, 2001, under file Number
0-19952.
(16) Incorporated by reference to the Company's quarterly report on Form
10-Q filed with The Commission on May 10, 2002, under file Number
0-19952.
32
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 19, 2002
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 19, 2002
- --------------------------------------------------
Henry F. Blissenbach - Chief Executive Officer
(Principal Executive Officer and Chairman of the
Board of Directors)
/s/ GREGORY H. KEANE September 19, 2002
- --------------------------------------------------
Gregory H. Keane - Vice President, Chief Financial
Officer and Treasurer (Principal Financial and
Accounting Officer)
/s/ THOMAS A. CUSICK September 19, 2002
- --------------------------------------------------
Thomas A. Cusick (Director)
/s/ JOHN H. FLITTIE September 19, 2002
- --------------------------------------------------
John H. Flittie (Director)
/s/ THOMAS F. HEANEY September 19, 2002
- --------------------------------------------------
Thomas F. Heaney (Director)
/s/ DAVID R. HUBERS September 19, 2002
- --------------------------------------------------
David R. Hubers (Director)
/s/ CHARLES V. OWENS, JR. September 19, 2002
- --------------------------------------------------
Charles V. Owens, Jr. (Director)
/s/ STUART A. SAMUELS September 19, 2002
- --------------------------------------------------
Stuart A. Samuels (Director)
33
CERTIFICATIONS
I, Henry F. Blissenbach, certify that:
1. I have reviewed this annual report on Form 10-K of Chronimed
Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of material fact or omit to state a material
fact necessary to make the statement made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report.
Date: September 19, 2002
/s/ HENRY F. BLISSENBACH
- -----------------------------------------------------
Henry F. Blissenbach
Chief Executive Officer
I, Gregory H. Keane, certify that:
1. I have reviewed this annual report on Form 10-K of Chronimed
Inc.;
2. Based on my knowledge, this annual report does not
contain any untrue statement of material fact or omit to state
a material fact necessary to make the statement made, in light
of the circumstances