UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number
June 27, 1997 0-19952
CHRONIMED INC.
(EXACT NAME OF REGISTRANT AS
SPECIFIED IN ITS CHARTER)
Minnesota 41-1515691
(State or Other Jurisdiction of (I.R.S.Employer
Incorporation or Organization) Identification No.)
13911 Ridgedale Drive, Minnetonka, Minnesota 55305
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code:
(612) 541-0239
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 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 (ss. 229.405) 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 ]
Aggregate market value of voting stock of registrant held by
non-affiliates as of close of business on September 5, 1997, was approximately
$128 million based on the closing price of $11.9375 per share reported on the
NASDAQ Stock Market. The number of shares of Common Stock outstanding as of
September 5, 1997 is 11,809,078.
Portions of the registrant's 1997 Annual Report to Shareholders are
incorporated by reference in Part II of this Form 10-K. Portions of the
registrant's definitive Proxy Statement for the Annual Meeting of Shareholders
to be held on November 12, 1997, to be filed with the Commission are
incorporated by reference in Part III of this Form 10-K.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Chronimed Inc. ("Chronimed" or the "Company") develops, markets and
distributes prescription drugs, medical products and educational materials by
mail and retail pharmacy to specific populations of patients with chronic
conditions. By focusing on specific chronic conditions, the Company believes it
is able to provide valuable services to: the patients affected by chronic
conditions; the insurance companies, health maintenance organizations, preferred
provider organizations, government agencies and other third-party payors
("Payors") that pay a large portion of the related health care costs; the
developers and manufacturers that produce the prescription drugs and other
products needed to manage chronic conditions; and the institutions, foundations
and health care providers working with these patients. The patient populations
for which the Company believes its services are most effective include patients
who:
* Require a costly regimen of maintenance prescription drugs or other
medical products over the course of their lives;
* Are treated by health care specialists; and
* Require a significant amount of self-management and on-going
education.
The Company is currently serving four such populations in the main: patients
with diabetes, patients who have had an organ transplant, patients with
HIV/AIDS, and patients who self-administer injectable medications. Starting July
1996, Chronimed increased its efforts in addressing the needs of HIV/AIDS
patients through the Company's acquisition of StatScript Management Services,
Inc., the operator of specialty HIV/AIDS pharmacies. The Company is
investigating programs for a variety of other chronic conditions.
Chronimed provides patients with a convenient, competitively-priced
source of prescription drugs, medical products, and a variety of educational
materials and counseling support to help patients achieve maximum control over
their chronic conditions. Often, the greater the effort a patient makes to
stabilize or control his or her chronic condition, the lower the incidence of
complications and the better the patient's quality of life.
Historically, the Company has obtained patients primarily through
referrals from health care providers and direct patient contacts. As employers
have attempted to control their escalating health care costs, Payors have
increasingly adopted various specialized managed care techniques in order to
limit the costs of health care. The specialty managed care industry has
developed principally in response to the demand from employers and Payors for
more effective control of cost increases in certain sectors, such as patients
with chronic conditions. In 1996, an estimated 80% of privately insured
individuals in the United States were enrolled in some type of managed care
program, up from 69% in 1995 (S. Bernstein & Company). Chronimed seeks to adapt
managed
<PAGE>
care techniques or to develop new techniques to manage the particular delivery
systems, cost structures, and utilization characteristics of patients with
chronic conditions. As a result of the increasing role of managed care, coupled
with the Company's experience in managing specific patient groups, patient
referrals are increasingly coming from the Company's Payor programs.
The Company has developed relationships with certain treatment centers,
foundations and associations which specialize in the treatment or support of
patients with chronic conditions. These relationships provide the Company with
access to a large number of individuals with chronic conditions and to the
health care providers treating these conditions.
Chronimed believes that its system is well-suited for developers and
manufacturers of pharmaceutical and medical products designed for small or
hard-to-identify patient populations. Chronimed provides these companies with
assistance in the design and rapid introduction of their products, a cost
effective means for distributing these products to specific patient populations,
and a method for monitoring the use of these products as well as outcomes.
Chronimed continues to emphasize the development and licensing of
proprietary products suitable for distribution through its system. The Company
expects to launch a retail version of its Supreme blood glucose monitoring
system in 1998 and introduce several new products. Pursuant to a variety of
exclusive distribution agreements, the Company continues to market
diabetes-related products including blood glucose monitoring systems, lancets,
infusion sets and, beginning in 1998, infusion pumps. The Company is no longer
pursuing development of the continuous membrane system for blood glucose
monitoring.
In July 1997, the Company and Orphan Medical, Inc. mutually agreed to
terminate the agreement under which the Company had the exclusive rights to
market and distribute certain Orphan Medical products. This agreement was
reached because it became apparent to both parties that the majority of Orphan
Medical's products require distribution to markets other than the managed care
and direct-to-patient channels maintained by the Company. The termination
agreement calls for Orphan Medical to pay cash, make royalty payments, and issue
common stock to the Company over an estimated 12-24 month period in amounts
totaling $2.5 million. Chronimed will maintain its distribution of Cystadane(TM)
and will be considered by OMI for distribution of any future OMI products as
appropriate.
MARKET AND GROWTH STRATEGY
The Company's strategy is to further develop and increase its
distribution of prescription drugs, medical products and educational materials
by increasing the number of patients served through its Payor programs;
increasing sales of proprietary and licensed products to new patients and
institutions by expanding sales of existing products and developing or licensing
new products; increasing special distribution programs with manufacturers; and
expanding its services to meet the special needs of persons with other chronic
conditions. The Company anticipates that it will increasingly add to the range
and depth of services to managed care payors in order to meet their demand for
improved patient outcomes, as defined by certain clinical indicators, cost of
care, and patient-reported satisfaction.
<PAGE>
Chronimed serves primarily four patient populations: patients with
diabetes, patients who have had an organ transplant, patients with HIV/AIDS, and
patients who self-administer injectable medications.
DIABETES. Chronimed has long served the needs of patients with
diabetes, a chronic disease in which the body's metabolism of glucose is
ineffective due to inadequate or complete lack of insulin production by the
pancreas. Many complications can arise from the damage that diabetes inflicts
upon the body's vascular and neural systems, including reduced vision or
blindness, stroke, heart disease, kidney failure, impotence and loss of
circulation in the limbs, possibly leading to amputation. In 1993, the National
Institutes of Health announced the results of a major multi-year research study,
the Diabetes Control and Complications Trial, which demonstrated that more
frequent monitoring of blood glucose levels and more frequent insulin
injections, along with a regimen of diet and exercise could reduce complications
of diabetes, such as blindness, loss of nerve sensation and amputation, by as
much as 60%. An estimated 16 million Americans have diabetes, yet only about 8
million have been diagnosed according to the latest diagnostic guidelines
published by the American Diabetes Association. Of persons diagnosed with
diabetes, approximately 80-90 percent are Type II and the remainder Type I. The
greatest need for diabetes products supplied by the Company is for Type I
diabetes in which the pancreas produces little or no insulin. A person with Type
I diabetes requires daily insulin injections for survival. The Company believes
that a person with Type I diabetes spends an average of about $1,000 a year on
required supplies. Type II patients often do not require insulin but do use some
of the same diabetes testing products and, like Type I patients, require ongoing
education, self-care and clinical monitoring to maintain glucose control.
ORGAN TRANSPLANT. Since 1990, the Company has served patients who have
had organ and bone marrow transplants. These patients face many long-term
physical, financial and psychological challenges due to the complicated drug
regimens they are required to maintain. According to a national transplantation
study, there were approximately 132,000 solid organ transplant operations from
1988 through 1995, of which approximately 20,000 were performed in 1995. There
are approximately 285 transplant centers in the United States. Transplant
patients typically require an average of at least $10,000 of prescription drugs
during the first year following transplantation and about $8,000 of such drugs
per year thereafter.
HIV/AIDS. Chronimed began to serve patients with HIV/AIDS through its
mail order pharmacy in 1994. With the July 1996 acquisition of the StatScript
specialty pharmacies, the Company has increased its commitment to HIV/AIDS
patients. Patients with AIDS, or acquired immune deficiency syndrome, have a
suppressed immune mechanism and a high mortality rate. The cause of the
suppression of the immune mechanism is HIV, or 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,
patients are unable to fight and overcome the onset of routine infections. These
patients face many long-term physical, financial and psychological challenges
due to the often debilitating nature of the disease. The Company's programs for
these patients are intended to assist them in gaining maximum control over their
disease in an effort to lower the incidence of complications and improve their
quality of life. Public spending on HIV/AIDS approached $4 billion in 1996, with
medications accounting
<PAGE>
for about three-quarters of total expenditures. Compared to prior years, this
indicates a reallocation of HIV/AIDS spending away from inpatient hospital,
subacute and hospice services to pharmaceutical therapies. This shift occurred
after the introduction of the new class of protease inhibitor therapies and
reflects the growing clinical acceptance of combination therapy (vs. AZT
monotherapy) as the preferred method of fighting HIV infection. HIV/AIDS
patients typically require more than $10,000 per year of prescription drugs, yet
overall costs of treating HIV/AIDS have declined due to reductions in
opportunistic infections and other high cost sequelae. It is estimated that, in
a population of HIV/AIDS patients, every $1 of increase in medication therapy
cost is offset by $2 - $3 in savings on total health care costs. The chain of
nine StatScript pharmacies acquired by the Company in July 1996 has expanded to
16 store locations with plans to open additional stores during fiscal 1998.
SELF-INJECTABLE MEDICATIONS. In late 1994, the Company began serving
the patients who self-administer injectable medications through a pilot program
with Prudential Pharmacy Management. Subsequent to the fiscal 1995 year end,
Prudential permitted the Company to offer the injectable program to its entire
HMO network. The Company has also begun servicing patients under similar
contracts with several large Payors. Many conditions may be treated with
self-administered injectable medications, including growth hormone deficiency,
hemophilia, cancer, hepatitis B and C, infertility and multiple sclerosis. The
Company's program for these patients cuts costs through reduced product
acquisition costs, efficient delivery systems and streamlined claims and billing
services. These cost savings can be passed on to Payors, making the Company's
program attractive to managed care groups. The Company estimates that the market
for self-administered injectable medications in the United States is
approximately $4.5 billion.
The Company is currently considering programs for patients with cancer,
cystic fibrosis, asthma, cardiology and other chronic conditions. The Company
has not generated material revenues from any of these programs.
MAIL SERVICES
In many cases, the Company provides prescription drugs and medical
products through mail order to the patients it serves. The Company believes that
it can distribute these products with considerably higher levels of service at a
competitive cost (in comparison to local and national retail pharmacies). This
is accomplished through economies of scale due to our high volume of relatively
less common products and efficient processing of specialty products unfamiliar
to many retail pharmacists; providing special order drugs at lower costs than
most non-mail order pharmacies due to the extra charges these pharmacies often
incur to obtain and stock drugs which they do not prescribe regularly; and
reducing misuse or abuse of prescription drugs. Patients benefit greatly from
the convenience of having products delivered directly to their homes and, in
many cases, from lower initial out-of-pocket costs for such items. Orders are
generally received by telephone and are shipped by Federal Express or UPS to
insure prompt delivery. The Company maintains toll-free telephone numbers which
can be used to place orders.
Much of the Company's mail services revenue is from self-injectable
drugs and from immunosuppressive drug sales to patients who have had a solid
organ or bone marrow transplant.
<PAGE>
These patients may have standard indemnity coverage, Medicare or Medicaid from
most states. The Company also derives significant mail services revenues from
its Home Service Medical subsidiary, which serves an estimated 10,000 patients
with Type I diabetes in the United States. These patients generally have either
standard indemnity or Blue Cross/Blue Shield coverage, which enables the Company
to accept assignment of benefits. The Company currently accepts assignment of
benefits from patients covered by over 4,000 Payors. Prior to shipping an order,
the Company verifies insurance eligibility and collects the patient's
co-payment.
PAYOR PROGRAMS
Health care costs have increased significantly in the United States in
recent years. According to the Health Care Financing Administration, national
health expenditures are expected to reach $1.25 trillion in 1998 (14.3% of GDP),
up from $949 billion in 1994 (13.7% of GDP). Employers bear a significant share
of this cost through payments for employee benefit plans. Public and private
employers have been driving the increased use of managed care in employee
benefit plans which has resulted in a slowing of the rate of increase in health
benefits costs in recent years. Between 1989 and 1996, for example, health
insurance costs for employees with family coverage enrolled in HMOs increased by
58%, compared to an increase of 68% for families in conventional insurance plans
(General Accounting Office Report to U.S. Senate, 1997). Such data illustrate
the potential of managed care programs to help control benefits costs, a force
Chronimed has recognized in the ongoing development of its Payor programs.
Chronimed offers Payors the following services through its Payor
programs:
* Cost savings through distribution of prescription drugs and
other products at a cost competitive with local and national retail and hospital
pharmacies.
* Review and monitoring of compliance with prescribed drug
regimens. By monitoring patient order patterns and drug use, the Company can
assist Payors and health care providers in early identification of patients
whose treatment outcomes may be improved by more support or assistance in
managing their chronic condition.
* Patient counseling by pharmacists. By focusing on the needs of
specific patient populations, the Company's pharmacists become expert in the
requirements and treatment patterns for the identified patient populations.
* Distribution of educational materials designed to help patients
achieve maximum control over their chronic conditions.
* Ability to communicate with specific patient populations
regarding new treatment techniques.
* Assistance in the development of approved lists of covered
prescription drugs and medical products, or formularies, as part of the design
of a health care plan for specific chronic conditions.
<PAGE>
In 1986, the Company signed its first Payor agreement with MedCenters
Health Care, Inc., a Minnesota non-profit corporation now known as
HealthPartners. The Company continues to service the needs of patients with
diabetes in this large health plan. In 1991, the Company signed an agreement
similar to the one with MedCenters Health One for serving patients in the Health
Insurance Plan of Greater New York (HIP). The HIP agreement was terminated on
September 1, 1997.
In 1993, the Company signed its first Payor agreement in the organ
transplant area with Travelers Health Network. Like the Payor programs for
diabetes patients, Payor programs for patients who have had an organ transplant
provide these patients with a convenient source of required pharmaceutical
products, as well as educational materials. Significant costs are often
associated with the treatment of organ rejection and other complications that
are likely to occur with patients who do not follow their prescribed drug
regimens. Therefore, an important element of the Company's Payor programs is the
Company's ability to monitor patient compliance with prescribed drug regimens
and to work with health care providers to assist them in providing continuity of
treatment and patient support following discharge from treatment centers.
Some Payors have established "Centers of Excellence" programs whereby
they require plan members who are seeking treatment for certain conditions, such
as solid organ and bone marrow transplantation, to obtain treatment at
designated treatment centers which have demonstrated expertise in the particular
treatment procedure. Many of the designated Centers of Excellence for organ
transplants are the same centers as those already being served by the Company's
sales force. The Company believes that its existing relationships with these
treatment centers, together with the increasing number of patients directed to
these centers, will increase the number of patients served by the Company.
The Company has also provided Payor programs for patients with
HIV/AIDS, cystic fibrosis, hemophilia, growth hormone deficiency and cancer.
These programs are similar, particularly in the emphasis on monitoring of
compliance with prescribed drug regimens and providing patient support, to
Chronimed's Payor programs for persons who have had an organ transplant. The
Company currently has contracts with numerous large payors to provide specialty
pharmacy services. These contracts are generally cancelable by either party upon
notice as provided in the contract.
MANUFACTURER DISTRIBUTION SERVICES
The Company offers specialized distribution programs for developers and
manufacturers of prescription drugs and medical products for small or hard to
identify patient populations. In 1994, Chronimed spun off Orphan Medical, Inc.,
then a division responsible for pharmaceutical development. The Company is
Orphan Medical's exclusive direct-to-patient distributor for Cystadane(TM),
indicated for patients with Homocystinuria. The Company has since signed
agreements with other manufacturers such as Centeon (Stimate (TM)), MGI Pharma
(Salagen (TM)), and the American Red Cross (AHF-M, a factor product for
Hemophilia) to administer valuable
<PAGE>
patient assistance programs and distribute their products. During fiscal 1995,
the Company was chosen as the exclusive distributor of Cystagon, a drug
manufactured by Mylan Pharmaceuticals, Inc. Cystagon is indicated for
Nephropathic Cystinosis, a rare genetic disorder. The Company believes these
programs are evidence of how the systems and relationships it has developed in
serving specific patient populations can be leveraged into new business
opportunities.
DISTRIBUTION AGREEMENT WITH ORPHAN MEDICAL, INC.
Orphan Medical, Inc. ("OMI"), was incorporated in 1994 as a successor
to the business previously conducted by the Orphan Medical Division of Chronimed
Inc. OMI was "spun-off" in 1994 through a dividend distribution of its common
stock to the Company's shareholders. The Company initially retained the rights
to sell and distribute in the United States and its territories those products
being developed by OMI at the time of the spin-off. The products under
development are for "orphan" drug populations, where the population in the
United States expected to benefit from the drug is limited.
On June 27, 1997, the Company and OMI mutually agreed to terminate the
agreement under which the Company had the exclusive rights to market and
distribute certain Orphan Medical products. This agreement was reached when it
became apparent to both parties that the majority of OMI products require
distribution to markets other than those generally serviced by the Company. For
example, Chronimed determined that two of the products for which it had initial
rights, Elliotts BO solution and Antizol-VetO , can be more effectively
distributed by a hospital distribution company and a distributor of veterinary
products, respectively.
In consideration for releasing it from the original Marketing and
Distribution Agreement, OMI has agreed to pay cash, make royalty payments and
issue common stock to Chronimed with an aggregate value of $2.5 million over an
estimated 12-24 month timeframe. Chronimed will maintain its distribution of
Cystadane (TM) and will be considered by OMI for distribution of any future OMI
products as appropriate.
PRODUCTS
The Company stocks approximately 3500 brand name and generic
prescription drugs and medical products. Diabetes-related products include
durable equipment such as blood glucose monitors, and consumables such as
insulin, syringes, reagent strips, infusion sets, lancets and urinalysis
products.
The Company provides immunosuppressive drugs, including Sandimmune(R),
and Neoral(R), primarily to patients who have had an organ transplant.
Approximately 13% and 19% of the Company's total revenues in the fiscal years
ended June 27, 1997 and June 28, 1996, respectively, were derived from sales of
Sandimmune(R) and Neoral(R). Immunosuppressants are drugs which inhibit a
person's natural immune system. Solid organ transplant patients require
immunosuppressive medication on a continuous basis for the rest of their lives
to avert organ rejection. The Company also provides other prescription and
non-prescription drugs that transplant patients may require to alleviate the
significant side effects of immunosuppressive therapy or to
<PAGE>
treat other illnesses. Additional drugs prescribed for organ transplant and
other patient populations served by the Company (at significant levels of sales
volume) include Cellcept(R), Prograf(R), Protropin(R), Neupogen(R), Intron(R)A,
Avonex(R), Betaseron(R), Humatrope(R), Fertinex(R), Procrit(R) and Lupron(R).
In order to better control the prices it pays for products and to
improve its gross margins on product sales, the Company continues to emphasize
the licensing and development of proprietary products suitable for distribution
through its specialized marketing and distribution system. Proprietary products
represent a vital component of the Company's sales and marketing strategy.
The Company presently distributes the Supreme II blood glucose monitor
and Supreme reagent strip, infusion sets, lancets and a safety lancing device.
The arrangements pursuant to which these products are distributed generally
require minimum annual purchases or payments to maintain the exclusive
distribution rights within specified territories. Distribution territories for
each of the Company's current agreements include North America and other markets
and are for terms ranging from the life of the applicable patents in the case of
the Supreme meter and reagent strip to two years for the lancing device.
Approximately 11% of the Company's total revenues in each of the fiscal years
ended June 27, 1997 and June 28, 1996, respectively, were derived from sales of
the Supreme reagent strip.
The Company believes that the Supreme II blood glucose monitor is
well-suited for use in health care facilities, particularly long-term care
facilities, where the same monitor is used to test the blood glucose levels of
more than one patient. The Company has the rights to market and manufacture the
Supreme test strips in defined territories; the Company's production met all of
its sales requirements in fiscal 1997.
The Company anticipates the introduction of new proprietary products
for diabetes in 1998. Such products will be distributed to new and existing
markets.
The Company formerly distributed under the Quick Check brand name a
line of generic reagent strips, including a strip for the Lifescan One Touch(R)
monitor, the most widely used blood glucose monitor. Lifescan, Inc., a
subsidiary of Johnson & Johnson, the maker of the monitor, commenced litigation
in 1993 against the Company's distributor, seeking an injunction and unspecified
damages for the distribution of the strip based on the claim that its use was
unsafe and violated Lifescan's patent with respect to the use of strips with the
monitor. Subsequently, Lifescan sued the manufacturer of the strip, Diagnostic
Solutions, Inc. (DSI). All parties to the litigation reached an out-of-court
settlement in December 1994. In January 1995, the manufacturer of the strip
placed a hold on its production while improvements were made to the
manufacturing process. Shipments did not resume until August 1995. The adverse
revenue impact to the Company in fiscal 1995 was approximately $4,000,000.
Revenues from the sale of this strip in fiscal 1995 were approximately
$5,870,000. Revenues from the sale of this strip were approximately $13,800,000
and 15% of total revenue in fiscal 1996.
In December 1996, at the request of FDA, a production hold was placed
on the Quick Check reagent strip manufactured by Diagnostic Solutions, Inc. Over
the ensuing few months, DSI
<PAGE>
attempted to resolve its production issues with FDA. By April 1997, this effort
was abandoned and the Company and DSI engaged in discussions anticipating that
the Company might want to acquire the manufacturing rights to the product. In
August 1997, the parties determined that this was not viable, and accordingly
the Company may consider other options. DSI currently owes the Company sums that
have been fully reserved in third quarter of fiscal 1997. Revenues from the sale
of the Quick Check strip in fiscal 1997 were approximately $8,300,000 and 7% of
total revenue.
RETAIL STATSCRIPT STORES AND DIABETES SERVICE CENTERS
The Company acquired the assets of StatScript Management Services, Inc.
and its associated nine specialty pharmacies on July 1, 1996 for an initial
$10,250,000 in cash, with a final earnout payment of $2,250,000 to be made in
September 1997. StatScript provides prescription drugs and specialty pharmacy
services to patients with HIV and AIDS. The acquisition of StatScript gives the
Company a significant presence in the HIV/AIDS pharmacy marketplace from which
to grow revenues and profits.
The Company operates three retail diabetes stores, two in Minnesota and
one in Utah. While the Company believes the continuation of its retail store
program supports its diabetes products distribution business, it does not expect
to significantly expand its retail diabetes operations.
PUBLISHING
The Company's publications feature health care themes including
nutrition, stress management and the physical, psychological and sociological
needs of patients with chronic conditions. The Company believes its magazine,
books and pamphlets are important to its overall strategy. These educational
materials assist individuals with chronic conditions to care for themselves,
provide the Company with favorable recognition from and access to health care
providers and assist the Company in the development of patient databases.
The Company currently publishes or distributes more than 80 books and
pamphlets. Chronimed's books have been translated into numerous languages and
are sold in more than 20 countries. Chronimed believes it is one of the largest
publishers of diabetes-related materials and nutrition information in the United
States.
The Company publishes for the American Dietetic Association, the
Juvenile Diabetes Foundation, the National Coalition for Cancer Survivorship,
Joslin Diabetes Center, and distributes for the International Diabetes Center.
SALES AND MARKETING ACTIVITIES
Historically, the Company has obtained patients primarily through
referrals from health
<PAGE>
care providers and direct patient contacts. As a result of Payors' increasing
reliance upon managed care techniques to control their escalating health care
costs, the Company's patient referrals are increasingly coming through its Payor
programs. As a result of this change, the Company has increased its marketing
activities directed at Payors and at companies that provide managed care
services to Payors. The Company also markets its prescription drugs, medical
products and services nationally to Payors, case managers and specific
populations of patients with chronic conditions. Chronimed believes that the
establishment of working relationships with health care providers, treatment
centers, foundations and associations is an important element of its sales and
marketing strategy.
Sales activities are generally carried out through direct sales calls
on Payors, case managers, health care providers and treatment centers;
direct-to-consumer marketing with fulfillment by mail; via the company's retail
stores; and direct sales to distributors. The Company has approximately 30 sales
representatives who sell certain of the Company's diabetes products to health
care institutions, primarily long-term care facilities, including one selling to
international customers; approximately 10 sales representatives who promote the
use of the Company's prescription products and systems to Payors and the
approximately 250 largest hospitals and specialty clinics in the United States;
and numerous independent sales representatives who promote the Company's
publications to the retail book trade. The Company's current business plan
includes adding sales representatives to the Company's diabetes products
business and managed care Payor sales effort.
The Company is actively pursuing relationships with international
distributors for diabetes product sales. All international sales transactions
are in United States dollars to mitigate foreign currency risk.
SUPPLIERS
The Company purchases prescription drugs and medical products directly
from manufacturers and from wholesalers. The availability and prices of products
distributed by the Company are subject to market conditions. When available, the
Company takes advantage of special discounts offered by suppliers. The Company
stocks approximately 3500 brand name and generic prescription drugs and medical
products. When the Company receives a prescription for a drug which it does not
have in inventory, it generally can obtain the required item from a wholesaler
by the next business day.
The Company currently purchases Sandimmune(R) and Neoral(R), the
primary immunosuppressive drugs used in the United States, from Novartis, the
manufacturer of Sandimmune(R) and Neoral(R), through the Company's usual
wholesaler. Sandimmune(R) and Neoral(R) are generally available from several
wholesale drug suppliers. Approximately 13% and 19% of the Company's total
revenues in the fiscal years ended June 27, 1997 and June 28, 1996,
respectively, were derived from sales of Sandimmune(R) and Neoral(R). If the
Company were unable to purchase Sandimmune(R) and Neoral(R), given that no
substitution is currently available, its revenues and profitability would be
materially and adversely affected.
<PAGE>
The Company believes that a significant portion of its anticipated future growth
will be in connection with the expansion of its HIV/AIDS business, its Payor
programs, increases in special distribution programs for manufacturers of
prescription drugs and other medical products and increased sales of existing or
new proprietary and licensed medical products. Growth in the specialty
distribution programs and proprietary and licensed product areas and, to a
lesser extent, in the Payor programs and HIV/AIDS areas, will be dependent on
Chronimed's ability to develop and maintain arrangements for the distribution of
specific products which may be available from only one or a limited number of
manufacturers. As a result, the Company's business in the future may be
dependent upon its on-going arrangements with the manufacturers of various
products and their ability to satisfy the Company's requirements and pricing and
product criteria.
At times, production of the Supreme reagent strip has been inadequate
to meet the Company's market demands, causing a significant order backlog for
these products. In an attempt to ensure adequate supplies of the Supreme reagent
strip in the future, the Company began manufacturing this product in-house in
July 1995. Certain materials used in this manufacturing process are only
available from one or a limited number of vendors. The Company's ability to
manufacture the Supreme reagent strip will be dependent on its ability to
maintain adequate supplies of materials from its vendors.
REIMBURSEMENT
The Company has developed a significant level of expertise in managing
the reimbursement process. Generally, the Company contacts the Payor before
delivering products to determine the patient's health plan coverage and the
portion of costs that the Payor will reimburse. The Company's reimbursement
specialists review issues such as lifetime limits, preexisting condition clauses
and the availability of special state programs. The Company accepts assignment
of benefits from over 4,000 Payors, which substantially eliminates the claims
submission process for many patients.
The Company services a significant number of patients covered by
Medicaid and special state programs which tend to pay claims more slowly than
private Payors. Collection from these sources can be more labor intensive than
collection from private Payors. These factors reduce the profitability of sales
to patients covered by Medicaid and special state programs in contrast to
patients with private Payor coverage.
Efforts by Payors to eliminate, contain or reduce costs through
coverage exclusions, lower reimbursement rates, greater claims scrutiny, claim
delays or denials and other similar measures could adversely affect the
Company's revenues, profitability and cash flow. In addition, the Company may be
required to maintain a licensed pharmacy in certain states in order to qualify
for reimbursement under state administered reimbursement plans. Certain Payors
set lifetime limits on the amount reimbursable to patients for medical costs.
Certain of the Company's patients may reach these limits because of the high
cost of their medical treatment and associated pharmaceutical regimens. To date,
the Company has not had significant experience with patients reaching lifetime
limits. Certain Payors may attempt to further control costs by selecting certain
firms to be their
<PAGE>
exclusive providers of pharmaceutical or other medical product benefits. If any
such arrangements were with the Company's competitors, the Company would be
unable to be reimbursed for purchases made by such patients.
INFORMATION SYSTEMS
The Company's operations include a fully-integrated computer system and
an automatic telephone call distribution system. The computer system provides
the Company's service representatives with all the on-line information needed to
service patients and other customers, including previous product purchase
histories, Payor billing and account balance information, inventory levels and
co-payment amounts for patients in Payor programs. The distribution sites are
on-line with inventory control, purchasing, shipping and receiving functions to
enhance order fulfillment. The telephone system has an automatic call
distribution capability which distributes incoming calls to the customer service
representatives. The Company is currently linked to key customers for
eligibility verification and electronic claims submission. The Company expects
the proportion of its business transactions conducted using electronic commerce
in some form will increase. The Company's ability to manage growth in revenues
is largely dependent upon its ability to continue to expand, upgrade and develop
its information systems.
COMPETITION
The distribution of prescription drugs, medical products and health
related publications are highly competitive businesses. The Company's principal
competitors consist of specialty mail-order pharmacies, home infusion companies,
local and national retail, hospital and mail service pharmacies, certain vendors
of disease state management services, manufacturers and distributors of diabetes
products, and a variety of publishers. Many of these companies have
substantially greater resources than the Company. Moreover, the health care
industry generally and the provider segment in particular has experienced and is
expected to continue to experience consolidation. This trend could produce
additional competitors having larger and substantially greater resources than
the Company. Competitive pressure could cause the Company to lose market share
or experience significant price erosion, which would have a material adverse
effect upon the Company's revenues and profitability. The Company competes on
the basis of service, convenience, product availability and price. Although
there are significant competitors in each of the Company's lines of business,
the Company believes that it currently has no single competitor offering the
same or a similar combination of prescription drugs, medical products and
educational materials and services to specific populations of patients with
chronic conditions.
LIABILITY INSURANCE
Providing health care services and products entails an inherent risk of
liability. In recent years, participants in the health care industry have become
subject to an increasing number of lawsuits, many of which involve large claims
and significant defense costs. The Company may from time to time be subject to
such suits as a result of the nature of its business. The Company maintains
general liability insurance, including professional and product liability, in an
amount deemed adequate by management. The Company is further insured for product
liability under
<PAGE>
various policies of drug manufacturers. There can be no assurance, however, that
claims in excess of the Company's insurance coverage will not arise. In
addition, the Company's insurance policies must be renewed annually. Although
the Company has not experienced difficulty in obtaining insurance coverage in
the past, there can be no assurance that it will be able to do so in the future
on acceptable terms or at all.
GOVERNMENT REGULATION
The Company's business is subject to substantial governmental
regulation including laws governing the dispensing of prescription drugs and
laws prohibiting the payment of remuneration for patient referrals. Because
sanctions may be imposed for violations of these laws, compliance is a
significant operational requirement for the Company. Management believes that
the Company is in substantial compliance with all existing statutes and
regulations materially affecting the conduct of its business.
In general, the Company's pharmacy operations are regulated by the
statutes and regulations of Minnesota, where it is licensed as a retail pharmacy
and wholesale distributor of pharmaceuticals, as well as of Arizona, California,
Florida, Illinois, Missouri, Texas, and Utah, where it is licensed as a retail
pharmacy. The licensure application process is underway in several other states
where the Company intends to open StatScript retail pharmacies. In addition, the
Company currently delivers prescription products from its licensed pharmacies to
patients in other states in which the Company does not operate a pharmacy. Many
of these states have laws or regulations requiring out-of-state pharmacies to be
licensed as a condition to the delivery of prescription products to patients in
such states. The Company believes that it is in substantial compliance with such
laws in substantially all relevant jurisdictions.
Various federal and state pharmacy associations and some boards of
pharmacy have attempted to promote laws or regulations directed at restricting
the activities of mail service pharmacies to the economic benefit of retail
pharmacies. In addition, a number of states have laws or regulations which, if
successfully enforced, would effectively limit some of the financial incentives
available to third-party payors that offer managed care prescription drug
programs. To the extent such laws or regulations are found to be applicable to
the Company, there is no assurance the Company could comply, and noncompliance
could adversely affect the Company's integrated pharmacy service programs.
In addition to state regulations of pharmacies and pharmacists, federal
statutes and regulations establish standards for the labeling, packaging,
advertising and adulteration of prescription drugs and the dispensing of
"controlled" substances and prescription drugs. To the extent the Company uses
the federal postal service, Federal Trade Commission and United States Postal
Service regulations require mail order sellers to engage in truthful
advertising, to stock a reasonable supply of drugs, to fill mail orders within
thirty days and, if that is impossible, to inform the consumer of his or her
right to a refund. The Company believes that it is in substantial compliance
with the above requirements. Substantially all of the Company's products are
shipped by commercial delivery services, with the exception of the StatScript
pharmacies.
<PAGE>
As a health care company, Chronimed is subject to various federal laws
that regulate the relationship between providers of health care services and
physicians. These laws include the "fraud and abuse" provisions of the Social
Security Act, under which civil and criminal penalties can be imposed upon
persons who pay or receive remuneration in return for inducement of referrals of
patients who are eligible for reimbursement under the Medicare or Medicaid
programs. Violations of the law may result in civil and criminal penalties.
Civil penalties range from monetary fines that may be levied on a per violation
basis to temporary or permanent exclusion from these programs. In addition,
numerous states have laws or legislation pending prohibiting financial
arrangements among health care 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.
The federal prohibitions on inducements for referrals are so broadly
drafted that they may create liability in connection with a wide variety of
business transactions that have been traditional or commonplace in the health
care industry. Courts, the Department of Health and Human Services ("HHS"), and
officials of the Office of Inspector General have construed broadly the fraud
and abuse provisions of the Social Security Act concerning illegal remuneration
arrangements and, in so doing, have created uncertainty as to the legality of
numerous types of business and financial relationships between health care
providers and practitioners. "Safe harbor" regulations define a narrow scope of
practices that will be exempted from prosecution or other enforcement action
under the illegal remuneration provisions of the fraud and abuse provisions of
the Social Security Act. Because of the narrow scope of the safe harbor
exemptions, these regulations do not eliminate this uncertainty. These
regulations may be followed by more aggressive enforcement of these provisions
with respect to relationships that do not fit within the specified safe harbor
rules. Similarly, state fraud and abuse laws, which vary from state to state,
are often vague and have rarely been interpreted by courts or regulatory
agencies.
Because of the potentially broad proscriptions contained in federal and
state laws, there can be no assurance that all of the Company's business
practices would be construed to comply with these laws in all respects. However,
in the situations where the Company purchases or provides services and products
or otherwise contracts with health care providers who may be in a position to
refer patients to the Company, the Company believes it has exercised care in an
effort to structure such arrangements to comply with existing federal and state
laws.
The Company's recent expansion of its proprietary and licensed product
activities subjects it to additional regulation by numerous governmental
authorities in the United States and other countries. The Federal Food, Drug and
Cosmetic Act ("FDC Act") governs the testing, manufacture, safety, efficacy,
labeling, storage, record keeping, approval, advertising and promotion of most
of the Company's proprietary and licensed products. Other federal regulations,
such as the Occupational Safety and Health Act, also affect the Company. Many
states have comparable laws. Product development and approval within this
regulatory framework takes a number of years and involves the expenditure of
substantial resources.
The FDC Act requires pre-market clearance or pre-market approval by the
FDA prior to commercialization of medical devices. Pursuant to the FDC Act, the
FDA regulates the
<PAGE>
manufacture, distribution and production of medical devices in the United
States. Medical devices are classified into class I, II or III on the basis of
the controls necessary to reasonably ensure their safety and effectiveness. The
safety and effectiveness can be assured for class I devices through general
controls (e.g., labeling, pre-market notification and adherence to GMP) and for
class II devices through the use of special controls (e.g., performance
standards, post-market surveillance, patient registries and FDA guidelines).
Generally, class III devices are those which must receive pre-market approval by
the FDA to ensure their safety and effectiveness (e.g., life-sustaining,
life-supporting and implantable devices or new devices which have been found not
to be substantially equivalent to legally marketed devices).
Before a new device can be introduced into the market, the manufacturer
generally must obtain FDA clearance through either a 510(k) pre-market
notification or a pre-market approval application ("PMA"). A 510(k) clearance
will be granted if the submitted data establish that the proposed device is
"substantially equivalent" to a legally marketed class I or II medical device,
or to a class III medical device for which the FDA has not called for PMAs. The
PMA process can be expensive, uncertain and lengthy, frequently requiring from
one to several years from the date the PMA is accepted. A number of devices for
which PMA approval has been sought by other companies have never been approved
for marketing. The review time is often significantly extended by the FDA, which
may require more information or clarification of information already provided in
the submission. Delays in, or the failure to receive, pre-market clearance or
approval of any diagnostic products submitted by the Company could have an
adverse impact on the Company.
Political, economic and regulatory influences are subjecting the health
care industry in the United States to fundamental change. A variety of new
approaches have been proposed, including mandated basic health care benefits,
controls on health care spending through limitations on the growth of private
health insurance premiums and Medicare and Medicaid spending, and the creation
of large purchasing groups. In addition, some of the states in which the Company
operates have adopted or are considering various health care reform proposals.
The Company anticipates that Congress and state legislatures will continue to
review and assess alternative health care delivery systems and payment methods
and that public debate of these issues will likely continue in the future.
Because of uncertainty regarding the ultimate features of reform initiatives and
their enactment and implementation, the Company cannot predict which, if any, of
such reform proposals will be adopted, when they may be adopted, or what impact
they may have on the Company.
SEGMENT INFORMATION
The Company operates in one major business segment -- health care
services. A description of the Company's business units and related revenues can
be found in the Company's 1997 Annual Report to Shareholders.
SEASONALITY
The Company has experienced a significant seasonal pattern in its
operating results. Historically, the Company has had higher revenues in its
second fiscal quarter (ending December)
<PAGE>
than in its third fiscal quarter (ending March). The Company believes the
seasonality of its revenues and earnings comes from the acceleration of
purchases of prescription drugs and medical products by individuals with
non-contracted indemnity insurance prior to the beginning of a new calendar year
(which is generally when Payors impose new deductible calculations). As the
incidence of non-contracted indemnity insurance declines, the Company believes
its revenues and earnings will become less seasonal.
EMPLOYEES
As of September 5, 1997, the Company employed approximately 290
full-time employees. None of the Company's employees is represented by a labor
union, and the Company believes that its employee relations are excellent.
ITEM 2. PROPERTIES
The Company believes that its properties provide a suitable work
environment for its employees and the necessary productive capacity to
manufacture and distribute its products and services. The Company currently
leases all of it properties. These properties are described below:
<TABLE>
<CAPTION>
SIZE
FUNCTIONS LOCATIONS (square feet) LEASE TERMS
<S> <C> <C> <C>
Corporate office Minnetonka, MN 13,000 Through November 1, 1998
StatScript business office Kansas City, MO 4,000 Through July 15, 1999
Manufacturing and Eden Prairie, MN 18,000 Through August 31, 2002
product distribution
Customer service and Minnetonka, MN 24,000 Through March 31, 2002
distribution
Retail and mail order Arizona, California, Various up to Expire over periods extending to
pharmacies Florida, Illinois, 4,000 June, 2000
Minnesota, Missouri,
Texas, Utah
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
ITEM 4A EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages as of September 5,
1997, are as follows:
Name Age Position
---- --- --------
Maurice R. Taylor, II 51 Chairman of the Board of Directors
and Chief Executive Officer
Henry F. Blissenbach, Pharm D 55 President and Chief Operating Officer
Norman A. Cocke 52 Senior Vice President, Chief Financial
Officer, and Secretary
Steven A. Crees 43 Senior Vice President
Patrick L. Taffe 45 Vice President
Perry L. Anderson 37 Vice President
Mr. Taylor, a cofounder of the Company, has served as Chief Executive
Officer and a director of the Company since 1985. He has been the Chairman of
the Board of Directors since June 1994. He served as President from 1985 through
April, 1997, upon the hiring of Dr. Blissenbach. From 1977 to 1984, Mr. Taylor
was Executive Vice President and Chief Operating Officer of Summit Gear, Inc., a
manufacturer of precision instruments for the aerospace industry. Before his
employment with Summit Gear, Inc., Mr. Taylor held various management positions
in companies whose principal activities were manufacturing, distribution and
international trade.
Dr. Blissenbach has served as President and Chief Operating Officer of
the Company since May, 1997. He has been a director since 1995. From 1992 to
1997, Dr. Blissenbach served as President of Diversified Pharmaceutical
Services, Inc. (DPS), a subsidiary of Smith Kline Beecham Corporation. Prior to
1992, he served as DPS's Vice President for Pharmacy Programs for United Health
Care Corporation. DPS is a pharmacy benefit management firm.
Mr. Cocke joined the Company in February 1995 as Senior Vice President,
Chief Financial Officer, and Secretary. From 1992 to 1994, he was Senior Vice
President and Chief Financial Officer of National Computer Systems, Inc., an
information systems and services company. From 1973 to 1991, he was employed by
NCR Corporation in a variety of capacities, most recently as Vice President,
Administration of the United States Group.
Mr. Crees joined the Company in January 1986 and was named a Vice
President in March 1987 and Senior Vice President in July 1994. From August 1982
to January 1986, he was a
<PAGE>
marketing representative for Baxter Travenol Corp., a health-care products
distribution company.
Mr. Taffe joined the Company in July 1996 as Vice President of
Information Systems. From 1992 to 1996, he was Vice President, Information
Systems and Operations with MedPower Information Systems, Inc., a business that
consults with companies implementing health care information systems and
processes. Previous employment included senior MIS positions with Carlson Travel
Group, and Damark and CVN Companies.
Mr. Anderson joined the Company as the divisional Vice President of
StatScript Pharmacy upon its acquisition in July 1996. Effective July 1, 1997 he
was appointed as an officer and Vice President. From 1992 to 1997, Mr. Anderson
was the Vice President, Operations, of StatScript Pharmacy. Previous employment
included several years of sales and management experience in the pharmaceutical
industry.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The information in the section titled "Market for the Registrant's
Common Stock and Related Shareholder Matters" on page 30 of the Chronimed Inc.
1997 Annual Report to Shareholders is incorporated herein by reference. On
August 14, 1996, the Company issued 25,349 shares in consideration for a payment
of a portion of the purchase of British American Medical, Inc., a medical
products distributor acquired by the Company in August 1995. On August 14, 1997,
the Company issued an additional 42,553 shares for the same purpose. These
securities were issued pursuant to Section 4 (2) of the Securities Act of 1933
as a transaction by the issuer not involving any public offering.
ITEM 6. SELECTED FINANCIAL DATA
The information in the section titled "Selected Financial Data" on page
13 of the Chronimed Inc. 1997 Annual Report to Shareholders is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information in the section titled "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 14 through
17 of the Chronimed Inc. 1997 Annual Report to Shareholders is incorporated
herein by reference.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Index to Financial Statements and Financial
Statement Schedules on page F-1 of this Report and to each of the items referred
to therein, which information is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
See Item 4A of Part I of this Report for information with respect to
executive officers of the Company. Pursuant to General Instruction G(3),
reference is made to the pertinent information contained in the Company's
definitive proxy statement for its 1997 Annual Meeting of Shareholders to be
filed with the Securities and Exchange Commission, which information is
incorporated herein, by reference.
ITEM 11. EXECUTIVE COMPENSATION
Pursuant to General Instruction G(3), reference is made to the
pertinent information contained in the Company's definitive proxy statement for
its 1997 Annual Meeting of Shareholders to be filed with the Securities and
Exchange Commission, which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to General Instruction G(3), reference is made to the
pertinent information contained in the Company's definitive proxy statement for
its 1997 Annual Meeting of Shareholders to be filed with the Securities and
Exchange Commission, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to General Instruction G(3), reference is made to the
pertinent information contained in the Company's definitive proxy statement for
its 1997 Annual Meeting of Shareholders to be filed with the Securities and
Exchange Commission, which information is incorporated herein by reference.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) For Financial Statements and Financial Statement Schedules filed as
a part of this Report, reference is made to "Index to Financial Statements and
Financial Statement Schedules" on page F-1 of this Report. For a list of
Exhibits filed as a part of this Report, see Exhibit Index on page 26 of this
Annual Report on Form 10-K.
(b) The registrant filed no report on Form 8-K during the last quarter
of the fiscal year ended June 27, 1997.
(c) See Exhibit Index on pages 22, 23, and 24 of this Annual Report on
Form 10-K.
(d) See page F-1 of this Report for Financial Statements and Financial
Statement Schedules.
* * *
Portions of the 1997 definitive Proxy Statement are incorporated herein
by reference as set forth in Items 10, 11, 12, and 13 of this Report. Only those
portions directly responsive to the Items of Form 10-K shall be deemed filed
with the Commission.
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT (FORM 10-K -- ITEM 14 (a) 3. AND ITEM 14 (c))
NUMBER
------
3.1 Articles of Incorporation of the Company, as amended.(1)
3.2 Bylaws of the Company.(1)
4.1 Specimen form of the Company's Common Stock certificate.(1)
4.2 Shareholder Rights Agreement between the Company and Norwest
Bank Minnesota, National Association dated December 18, 1996.
10.1 Diabetes Center, Inc. Stock Option Plan.(1)/(2)
10.2 Diabetes Center, Inc. Stock Option Plan of 1986.(1)/(2)
10.3 Form of Incentive Stock Option Agreement.(1)/(2)
10.4 Form of Nonstatutory Stock Option Agreement.(1)/(2)
10.5 Employment Agreement effective July 1, 1996, between the
Company and Maurice R. Taylor, II. (2)
10.6 Lease dated January 16, 1995, between Blum Associates, a
California limited partnership, and the Company.(7)
10.7 Lease dated October 17, 1990, between The Travelers Insurance
Company and the Company, as amended November 12, 1991.(1)
10.8 Publishing Agreement dated as of January 1, 1989, between the
Company and Park Nicollet Medical Foundation.(1)
10.9 Book and Pamphlet License Agreement dated as of July 1, 1989,
between the Company and Park Nicollet Medical Foundation.(1)
10.10 Agreement to Provide Diabetes Services and Products dated
December 7, 1990, between the Company and Group Health,
Inc.(1)
10.11 Agreement to Provide Diabetic Services dated May 1, 1991,
between the Company and Health Insurance Plan of Greater New
York.(1)
10.12 Referral Provider Agreement dated July 1, 1989, between the
Company and Med Centers Health Care, Inc.(1)
10.13 Agreement to Provide Specialty Pharmacy Services to The
Travelers Managed Care System dated March 3, 1993.(3)
10.14 Referral Provider Agreement between the Company and Medcenters
Managed Care, Inc. dated January 4, 1993.(3)
<PAGE>
10.15 Revolving Line of Credit Agreement amended February 8, 1996,
between the Company and National City Bank of Minneapolis.
10.16 Employment Contract
10.17 (Reserved)
10.18 Distribution Agreement between Diagnostic Solutions, Inc. and
Chronimed Inc. effective as of October 10, 1992.(4)
10.19 Distribution Agreement between Can-Am Care Corp. and Chronimed
Inc. effective as of October 19, 1992.(4)
10.20 Lease dated July 27, 1994, between the Company and Jorandcor,
Inc.(4)
10.21 Pharmacy Services Agreement with Prudential Insurance Company
of America.(5)
10.22 Chronimed Inc. 1994 Stock Option Plan.(5)
10.23 Chronimed Inc. 1994 Stock Option Plan for Directors.(5)
10.24 Pharmacy Participation Agreement with Aetna Health Management,
Inc. (7)
10.25 Agreement and Plan of Reorganization - British American
Medical, effective as of August 1, 1995. (7)
10.26 Acquisition Agreement - StatScript, effective as of July 1,
1996. (6)
10.27 Chronimed Inc. 1997 Stock Option Plan.
10.28 Facility Lease Agreement between the Company and Red Circle
L.L.P. dated November, 1996.
10.29 Loan Guarantee Agreement between the Company and Maurice R.
Taylor, II, dated April, 1997.
10.30 Sale of Distribution Rights Agreement between the Company and
Orphan Medical, Inc. Dated June 27, 1997.
11.1 Computation of Earnings Per Share.
13.1 1997 Annual Report to Shareholders (only those portions
expressly incorporated by reference herein shall be deemed
filed with the Commission).
21.1 List of Subsidiaries
23.1 Consent of Ernst & Young LLP
99 Cautionary Statements for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act (6)
- --------------------
<PAGE>
(1) Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 33-45644), as amended.
(2) Management contract or compensatory plan or arrangement.
(3) Incorporated by reference to the Company's 1993 Annual Report on Form
10-K filed with The Commission on September 30, 1993, under file number
0-19952.
(4) Incorporated by reference to the Company's 1994 Annual Report on Form
10-K filed with The Commission on September 29, 1994, under file number
0-19952.
(5) 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.
(6) Incorporated by reference to the Company's report on Form 8-K filed
with The Commission on July 10, 1996, under file number 0-19952.
(7) Incorporated by reference to the Company's 1995 Annual Report on Form
10-K filed with The Commission on September 28, 1995, under file number
0-19952.
<PAGE>
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 5, 1997
By /s/ Maurice R. Taylor, II
Maurice R. Taylor, II
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/ Maurice R. Taylor, II September 5, 1997
Maurice R. Taylor, II - Chief Executive Officer
(Principal Executive Officer and
Chairman of the Board of Directors)
/s/ Henry F. Blissenbach, Pharm. D. September 5, 1997
Henry F. Blissenbach, Pharm. D. - President
(Director)
/s/ Norman A. Cocke September 5, 1997
Norman A. Cocke - Senior Vice President,
Chief Financial Officer and Secretary
(Principal Financial Officer and
Principal Accounting Officer)
/s/ John Howell Bullion September 5, 1997
John Howell Bullion (Director)
/s/ Donnell D. Etzwiler, M.D. September 5, 1997
Donnell D. Etzwiler, M.D. (Director)
/s/ Charles V. Owens, Jr. September 5, 1997
Charles V. Owens, Jr. (Director)
/s/ Lawrence C. Weaver, Ph.D. September 5, 1997
Lawrence C. Weaver, Ph.D. (Director)
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
(FORM 10-K--ITEM 14(a)(1.) and (2.) and ITEM 14(d))
The following financial statements of Chronimed Inc. are incorporated in
Part II, Item 8, and Part IV, Item 14(a) of this Report by reference to the
Registrant's Annual Report to Shareholders for the year ended June 27, 1997:
Pages in
Annual Report
-------------
Audited Financial Statements:
Consolidated Balance Sheets -- June 27, 1997 and June 28, 1996........... 18
Consolidated Statements of Income--Years Ended June 27, 1997,
June 28, 1996 and June 30, 1995 ...................................... 19
Consolidated Statements of Shareholders' Equity--Years Ended
June 27, 1997, June 28, 1996, and June 30, 1995....................... 21
Consolidated Statements of Cash Flows--Years Ended June 27, 1997,
June 28, 1996, and June 30, 1995...................................... 20
Notes to Financial Statements............................................. 22-29
Report of Independent Auditors............................................ 30
The following financial statement schedules should be read in
conjunction with the financial statements referred to above.
Financial Statement Schedules:
Years Ended June 27, 1997, June 28, 1996, and June 30, 1995
Schedule Page
----
II Valuation and Qualifying Accounts and Reserves ...................... F-2
Financial statement schedules not included in this Report have been
omitted because they are not applicable or the required information is shown in
the financial statements or notes thereto.
<PAGE>
CHRONIMED INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
------ ------ ------ ------ ------
Balance at Additions Deductions Balance at
Description Beginning of -- Describe End of
Period Period
-------------------------------
Charged to Charged to Other
Costs and Accounts --
Expenses Describe
<S> <C> <C> <C> <C> <C>
Year ended June 27, 1997:
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts $860,000 $1,873,393 $ -- $1,613,393(1) $1,120,000
======== ========== ============ ============= ==========
Year ended June 28, 1996:
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts $725,000 $1,099,063 $ -- $ 964,063(1) $ 860,000
======== ========== ============ ============= ==========
Year ended June 30, 1995:
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts $675,000 $1,003,870 $ -- $ 953,870(1) $ 725,000
======== ========== ============ ============= ==========
</TABLE>
(1) Uncollectable accounts written off, net of recoveries.
<PAGE>
INDEX TO EXHIBITS FILED WITH THIS REPORT
See pages 22, 23, and 24 of this Report for a list of all exhibits that
are part of the Report.
Exhibit No. 4.2 Shareholder Rights Agreement
Exhibit No. 10.16 Employment Contract
Exhibit No. 10.28 Facility Lease Agreement
Exhibit No. 10.29 Loan Guarantee Agreement
Exhibit No. 10.30 Sale of Distribution Rights Agreement
Exhibit No. 11.1 Computation of Earnings Per Share
Exhibit No. 13.1 Portions of the 1997 Annual Report to Shareholders
Exhibit No. 21.1 List of Subsidiaries
Exhibit No. 23.1 Consent of Ernst & Young LLP
Exhibit No. 27 Financial Data Schedule
================================================================================
EXHIBIT 4.2
CHRONIMED INC.
AND
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
RIGHTS AGREEMENT
DATED AS OF DECEMBER 18, 1996
================================================================================
<PAGE>
TABLE OF CONTENTS
PAGE
----
Section 1. Certain Definitions 1
Section 2. Appointment of Rights Agent 5
Section 3. Issue of Right Certificates 6
Section 4. Form of Right Certificates 7
Section 5. Countersignature and Registration 8
Section 6. Transfer, Split Up, Combination and Exchange
of Right Certificates; Mutilated, Destroyed,
Lost or Stolen Right Certificates 9
Section 7. Exercise of Rights; Purchase Price;
Expiration Date of Rights 9
Section 8. Cancellation and Destruction of Right Certificates 11
Section 9. Availability of Preferred Shares 12
Section 10. Preferred Shares Record Date 13
Section 11. Adjustment of Purchase Price, Number
of Shares or Number of Rights 13
Section 12. Certificate of Adjusted Purchase Price or
Number of Shares 23
Section 13. Consolidation, Merger or Sale or Transfer
of Assets or Earning Power 23
Section 14. Fractional Rights and Fractional Shares 25
Section 15. Rights of Action 27
Section 16. Agreement of Right Holders 27
Section 17. Right Certificate Holder Not Deemed a Shareholder 28
<PAGE>
Section 18. Concerning the Rights Agent 28
Section 19. Merger or Consolidation or Change of
Name of Rights Agent 29
Section 20. Duties of Rights Agent 29
Section 21. Change of Rights Agent 31
Section 22. Issuance of New Right Certificates 32
Section 23. Redemption 33
Section 24. Exchang 34
Section 25. Notice of Certain Events 35
Section 26. Notices 36
Section 27. Supplements and Amendments 37
Section 28. Successors 37
Section 29. Benefits of this Agreement 37
Section 30. Severability 37
Section 31. Governing Law 38
Section 32. Counterparts 38
Section 33. Descriptive Headings 38
Signatures 39
Exhibit A -- Certificate of Designation of Series A Junior Participating
Preferred Stock
Exhibit B -- Form of Right Certificates
Exhibit C -- Summary of Rights to Purchase Preferred Shares
<PAGE>
RIGHTS AGREEMENT
AGREEMENT, dated as of December 18, 1996, between Chronimed Inc., a
Minnesota corporation (the "Company"), and Norwest Bank Minnesota, National
Association (the "Rights Agent").
The Board of Directors of the Company has authorized and declared a
dividend of one preferred share purchase right (a "Right") for each Common Share
of the Company outstanding at the Close of Business on December 31, 1996 (the
"Record Date"), each Right representing the right to purchase one one-thousandth
of a Preferred Share, upon the terms and subject to the conditions herein set
forth, and has further authorized and directed the issuance of one Right with
respect to each Common Share that shall become outstanding between the Record
Date and the earliest of the Distribution Date, the Redemption Date and the
Final Expiration Date (as such terms are hereinafter defined); provided,
however, that Rights may be issued with respect to Common Shares that shall
become outstanding after the Distribution Date and prior to the earlier of the
Redemption Date and the Final Expiration Date in accordance with the provisions
of Section 22 of this Agreement.
Accordingly, in consideration of the premises and the mutual agreements
herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement, the
following terms have the meanings indicated:
"Acquiring Person" shall mean any Person who or which,
together with all Affiliates and Associates of such Person, shall be
the Beneficial Owner of the Threshold Percentage or more of the Common
Shares then outstanding, other than pursuant to a Permitted Offer, but
shall not include any Exempt Person. Notwithstanding the foregoing, no
Person shall become an "Acquiring Person" as the result of an
acquisition of Common Shares by the Company which, by reducing the
number of shares outstanding, increases the proportionate number of
shares beneficially owned by such Person to the Threshold Percentage or
more of the Common Shares of the Company then outstanding; provided,
however, that if a Person shall become the Beneficial Owner of the
Threshold Percentage or more of the Common Shares of the Company then
outstanding by reason of share purchases by the Company and shall,
after such share purchases by the Company, increase the number of
Common Shares of the Company beneficially owned by such Person above
the number of Common Shares of the Company beneficially owned by such
Person at the time of the last such share purchase by the Company, then
such Person shall be deemed to be an "Acquiring Person."
<PAGE>
Notwithstanding the foregoing, if the Board of Directors of the Company
determines in good faith that a Person who would otherwise be an
"Acquiring Person", as defined pursuant to the foregoing provisions of
this paragraph, has become such inadvertently, and such Person divests
as promptly as practicable a sufficient number of Common Shares so that
such Person would no longer be an "Acquiring Person", as defined
pursuant to the foregoing provisions of this paragraph, then such
Person shall not be deemed to be an "Acquiring Person" for any purposes
of this Agreement.
"Affiliate" and "Associate" shall have the respective meanings ascribed
to such terms in Rule 12b-2 of the General Rules and Regulations under the
Exchange Act.
A Person shall be deemed the "Beneficial Owner" of and shall
be deemed to "beneficially own" any securities:
(i) which such Person or any of such Person's
Affiliates or Associates beneficially owns, directly or
indirectly, including without limitation securities with
respect to which such Person or any such Person's Affiliates
or Associates has "beneficial ownership" pursuant to Rule13d-3
of the General Rules and Regulations under the Exchange Act,
as in effect on the date of this Agreement;
(ii) which such Person or any of such Person's
Affiliates or Associates has (A) the right to acquire (whether
such right is exercisable immediately or only after the
passage of time) pursuant to any agreement, arrangement or
understanding (other than customary agreements with and
between underwriters and selling group members with respect to
a bona fide public offering of securities), or upon the
exercise of conversion rights, exchange rights, rights (other
than these Rights), warrants or options, or otherwise;
provided, however, that a Person shall not be deemed the
Beneficial Owner of, or to beneficially own, securities
tendered pursuant to a tender or exchange offer made by or on
behalf of such Person or any of such Person's Affiliates or
Associates until such tendered securities are accepted for
purchase or exchange; or (B) the right to vote pursuant to any
agreement, arrangement or understanding; provided, however,
that a Person shall not be deemed the Beneficial Owner of, or
to beneficially own, any security if the agreement,
arrangement or understanding to vote such security (1) arises
solely from a revocable proxy or consent given to such Person
in response to a public proxy or consent solicitation made
pursuant to, and in accordance with, the applicable rules and
regulations promulgated under the Exchange Act and (2) is not
also then reportable on Schedule 13D under the Exchange Act
(or any comparable or successor report); or
<PAGE>
(iii) which are beneficially owned, directly or
indirectly, by any other Person (or any Affiliate or Associate
thereof) with which such Person or any of such Person's
Affiliates or Associates has any agreement, arrangement or
understanding (other than customary agreements with and
between underwriters and selling group members with respect to
a bona fide public offering of securities) for the purpose of
acquiring, holding, voting (except to the extent contemplated
by the proviso to clause(ii)(B) above) or disposing of any
securities of the Company.
Notwithstanding anything in this definition of Beneficial Ownership to
the contrary, the phrase "then outstanding," when used with reference
to a Person's Beneficial Ownership of securities of the Company, shall
mean the number of such securities then issued and outstanding together
with the number of such securities not then actually issued and
outstanding which such Person would be deemed to own beneficially
hereunder.
"Business Day" shall mean any day other than a Saturday, a
Sunday or a day on which banking institutions in the State of Minnesota
are authorized or obligated by law or executive order to close.
"Close of Business" on any given date shall mean 5:00P.M.,
prevailing Minneapolis time, on such date; provided, however, that if
such date is not a Business Day, it shall mean 5:00P.M., prevailing
Minneapolis time, on the next succeeding Business Day.
"Common Shares," when used with reference to the Company,
shall mean the shares of Common Stock, par value $.01 per share, of the
Company. "Common Shares," when used with reference to any Person other
than the Company, shall mean the capital stock (or equity interest)
with the greatest voting power of such other Person or, if such other
Person is a Subsidiary of any other Person, the Person or Persons which
ultimately control such first mentioned Person.
"Continuing Director" shall mean (a)any member of the Board of
Directors of the Company, while such Person is a member of the Board of
Directors, who is not an Acquiring Person, or an Affiliate or Associate
of an Acquiring Person, or a representative of an Acquiring Person or
of any such Affiliate or Associate, and was a member of the Board of
Directors prior to the date of this Agreement, or (b)any Person who
subsequently becomes a member of the Board of Directors, while such
Person is a member of the Board of Directors, who is not an Acquiring
Person, or an Affiliate or Associate of an Acquiring Person or of such
Affiliate or Associate, if such Person's nomination for election
<PAGE>
or election to the Board of Directors is recommended or approved by a
majority of the Continuing Directors.
"Distribution Date" shall have the meaning set forth in
Section 3.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
"Exchange Date" shall have the meaning set forth in Section 7.
"Exempt Person" shall mean the Company, any Subsidiary of the
Company, any employee benefit plan of the Company or of any Subsidiary
of the Company, and any Person organized, appointed or established by
the Company for or pursuant to the terms of any such plan, and any
Person who or which, together with all Affiliates and Associates of
such Person, shall become the Beneficial Owner of the Threshold
Percentage or more of the then outstanding Common Shares as the result
of acquisitions of Common Shares directly from the Company; provided,
however, that if a Person shall become the Beneficial Owner of the
Threshold Percentage or more of the Common Shares of the Company then
outstanding by reason of acquisitions of Common Shares directly from
the Company and shall, after such share acquisitions from the Company,
increase the number of Common Shares of the Company beneficially owned
by such Person above the number of Common Shares of the Company
beneficially owned by such Person at the time of the last such share
acquisitions from the Company, then such Person shall be deemed to be
an "Acquiring Person".
"Final Expiration Date" shall have the meaning set forth in
Section7.
"Person" shall mean any individual, firm, corporation or other
entity, and shall include any successor (by merger or otherwise) of
such entity.
"Permitted Offer" shall mean a tender offer or an exchange
offer for all outstanding Common Shares of the Company at a price and
on terms determined, prior to the purchase of shares under such tender
or exchange offer, by a majority of the Continuing Directors, after
receiving advice from one or more investment banking firms, to be
(a)fair to shareholders of the Company (taking into account all factors
which such Continuing Directors deem relevant) and (b)otherwise in the
best interests of the Company, its shareholders, employees, customers,
suppliers and creditors and the communities in which the Company does
business, and which such Continuing Directors determine to recommend to
the shareholders of the Company.
<PAGE>
"Preferred Shares" shall mean shares of Series A Junior
Participating Preferred Stock, par value $.01, of the Company having
the rights and preferences set forth in the form of Certificate of
Designations attached to this Agreement as Exhibit A.
"Redemption Date" shall have the meaning set forth in
Section7.
"Section 11(a)(ii) Event" shall mean any event described in
Section 11(a)(ii).
"Section 13 Event" shall mean any event described in clauses
(w), (x), (y) or (z) of Section 13(a).
"Shares Acquisition Date" shall mean the first date of public
announcement (which, for purposes of this definition, shall include,
without limitation, a report filed pursuant to Section13(d) of the
Exchange Act) by the Company or any Person that such Person has become
an Acquiring Person.
"Subsidiary" of any Person shall mean any corporation or other
entity of which a majority of the voting power of the voting equity
securities or equity interest is owned, directly or indirectly, by such
Person.
"Threshold Percentage" shall mean 15%.
"Triggering Event" shall mean any Section11(a)(ii) Event or
any Section13 Event.
Section 2. Appointment of Rights Agent. The Company hereby appoints the
Rights Agent to act as agent for the Company and the holders of the Rights (who,
in accordance with Section 3, shall prior to the Distribution Date also be the
holders of the Common Shares) in accordance with the terms and conditions
hereof, and the Rights Agent hereby accepts such appointment. The Company may
from time to time appoint such co-Rights Agents as it may deem necessary or
desirable.
Section 3. Issue of Right Certificates.
(a) Until the earlier of (i)the Shares Acquisition Date or (ii)the
tenth day (or such later date as may be determined by action of the Board of
Directors prior to such time as any Person becomes an Acquiring Person) after
the date of the commencement by any Person (other than an Exempt Person) of, or
of the first public announcement of the intention of any Person (other than an
Exempt Person) to commence, a tender or exchange offer the consummation of which
would result in any Person becoming an Acquiring Person (the earlier of such
dates being referred to herein
<PAGE>
as the "Distribution Date"), (x) the Rights will be evidenced (subject to the
provisions of Section 3(b)) by the certificates for Common Shares registered in
the names of the holders thereof (which certificates shall also be deemed to be
Right Certificates) and not by separate Right Certificates, and (y) the right to
receive Right Certificates will be transferable only in connection with the
transfer of Common Shares. As soon as practicable after the Distribution Date,
the Company will prepare and execute, the Rights Agent will countersign, and the
Company will send or cause to be sent (and the Rights Agent will, if requested,
send) by first-class, postage-prepaid mail, to each record holder of Common
Shares as of the Close of Business on the Distribution Date, at the address of
such holder shown on the records of the Company, a Right Certificate, in
substantially the form of Exhibit B (a "Right Certificate"), evidencing one
Right for each Common Share so held. As of the Distribution Date, the Rights
will be evidenced solely by such Right Certificates.
(b) As soon as practicable after the Record Date, the Company will send
a copy of a Summary of Rights to Purchase Preferred Shares, in substantially the
form of Exhibit C (the "Summary of Rights"), by first-class, postage-prepaid
mail, to each record holder of Common Shares as of the Close of Business on the
Record Date, at the address of such holder shown on the records of the Company.
With respect to certificates for Common Shares outstanding as of the Close of
Business on the Record Date, until the Distribution Date, the Rights will be
evidenced by such certificates registered in the names of the holders thereof
together with a copy of the Summary of Rights. Until the Distribution Date (or
the earlier of the Redemption Date or the Final Expiration Date if occurring
prior to the Distribution Date), the surrender for transfer of any certificate
for Common Shares outstanding on the Record Date, with or without a copy of the
Summary of Rights attached thereto, shall also constitute the transfer of the
Rights associated with the Common Shares represented thereby.
(c) Certificates for Common Shares which become outstanding after the
Record Date but prior to the earliest of the Distribution Date, the Redemption
Date or the Final Expiration Date shall have impressed on, printed on, written
on or otherwise affixed to them the following legend:
This certificate also evidences and entitles the holder hereof to
certain rights as set forth in a Rights Agreement between Chronimed
Inc. and Norwest Bank Minnesota, National Association, dated as of
December 18, 1996 (the "Rights Agreement"), the terms of which are
hereby incorporated herein by reference and a copy of which is on file
at the principal executive offices of Chronimed Inc. Under certain
circumstances, as set forth in the Rights Agreement, such Rights will
be evidenced by separate certificates and will no longer be evidenced
by this certificate. Chronimed Inc. will mail to the holder of this
certificate a copy of the Rights Agreement without charge after receipt
of a written request therefor. Under certain circumstances, as set
forth in the Rights Agreement, Rights issued
<PAGE>
to any Person who becomes an Acquiring Person or an Associate or
Affiliate thereof (as defined in the Rights Agreement), or certain
transferees of such Person, may become null and void.
With respect to such certificates containing the foregoing legend, until the
Distribution Date, the Rights associated with the Common Shares represented by
such certificates shall be evidenced by such certificates alone, and the
surrender for transfer of any such certificate shall also constitute the
transfer of the Rights associated with the Common Shares represented thereby.
Section 4. Form of Right Certificates.
(a) The Right Certificates (and the forms of election to purchase
Preferred Shares and of assignment to be printed on the reverse thereof) shall
be substantially the same as Exhibit B and may have such marks of identification
or designation and such legends, summaries or endorsements printed thereon as
the Company may deem appropriate and as are not inconsistent with the provisions
of this Agreement, or as may be required to comply with any applicable law or
with any rule or regulation made pursuant thereto or with any rule or regulation
of any stock exchange or automated quotations system on which the Rights may
from time to time be listed, or to conform to usage. Subject to the provisions
of Section 11, the Right Certificates shall entitle the holders thereof to
purchase such number of one one-thousandths of a Preferred Share as shall be set
forth therein at the price per one one-thousandth of a Preferred Share set forth
therein (the "Purchase Price"), but the number of such one one-thousandths of a
Preferred Share and the Purchase Price shall be subject to adjustment as
provided herein.
(b) Any Rights Certificate issued pursuant to Section 3(a) or Section
22 hereof that represents Rights beneficially owned by: (i)an Acquiring Person
or any Associate or Affiliate of an Acquiring Person, (ii)a transferee of an
Acquiring Person (or of any such Associate or Affiliate) who becomes a
transferee after the Acquiring Person becomes such, or (iii)a transferee of an
Acquiring Person (or of any such Associate or Affiliate) who becomes a
transferee prior to or concurrently with the Acquiring Person becoming such and
receives such Rights pursuant to either (A)a transfer (whether or not for
consideration) from the Acquiring Person to holders of equity interests in such
Acquiring Person or to any Person with whom such Acquiring Person has any
continuing agreement, arrangement or understanding regarding the transferred
Rights or (B)a transfer which the Board of Directors of the Company has
determined is part of a plan, arrangement or understanding which has as a
primary purpose or effect the avoidance of Section7(e) hereof, and any Rights
Certificate issued pursuant to Section6 or Section11 hereof upon transfer,
exchange, replacement or adjustment of any other Rights Certificate referred to
in this sentence, shall contain (to the extent feasible) the following legend:
<PAGE>
The Rights represented by this Rights Certificate are or were
beneficially owned by a Person who was or became an Acquiring Person or
an Affiliate or Associate of an Acquiring Person (as such terms are
defined in the Rights Agreement). Accordingly, this Rights Certificate
and the Rights represented hereby may become null and void in the
circumstances specified in Section7(e) of such Agreement.
Section 5. Countersignature and Registration. The Right Certificates
shall be executed on behalf of the Company by its Chairman of the Board, its
President, any of its Vice Presidents or its Treasurer either manually or by
facsimile signature and shall be attested by the Secretary or an Assistant
Secretary of the Company, either manually or by facsimile signature. The Right
Certificates shall be manually countersigned by the Rights Agent for purposes of
authorization only and shall not be valid for any purpose unless countersigned.
In case any officer of the Company who shall have signed any of the Right
Certificates shall cease to be such officer of the Company before
countersignature by the Rights Agent and issuance and delivery by the Company,
such Right Certificates, nevertheless, may be countersigned by the Rights Agent
and issued and delivered by the Company with the same force and effect as though
the Person who signed such Right Certificates had not ceased to be such officer
of the Company; and any Right Certificate may be signed on behalf of the Company
by any Person who, at the actual date of the execution of such Right
Certificate, shall be a proper officer of the Company to sign such Right
Certificate, although at the date of the execution of this Rights Agreement any
such Person was not such an officer.
Following the Distribution Date, the Rights Agent will keep or cause to
be kept, at its principal office, books for registration and transfer of the
Right Certificates issued hereunder. Such books shall show the names and
addresses of the respective holders of the Right Certificates, the number of
Rights evidenced on its face by each of the Right Certificates and the date of
each of the Right Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of Right
Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates.
(a) Subject to the provisions of Section4(b), Section7(e) and
Section14, at any time after the Close of Business on the Distribution Date, and
at or prior to the Close of Business on the earlier of the Redemption Date or
the Final Expiration Date, any Right Certificate or Right Certificates may be
transferred, split up, combined or exchanged for another Right Certificate or
Right Certificates, entitling the registered holder to purchase a like number of
one one-thousandths of a Preferred Share (or, following a Triggering Event,
Common Shares, other securities, cash or other assets, as the case may be) as
the Right Certificate or Right Certificates surrendered then entitled such
holder to purchase. Any registered holder desiring to transfer, split up,
combine or exchange any Right Certificate or Right Certificates shall make such
request in
<PAGE>
writing delivered to the Rights Agent, and shall surrender the Right Certificate
or Right Certificates to be transferred, split up, combined or exchanged at the
principal office of the Rights Agent. Thereupon the Rights Agent shall, subject
to Section4(b), Section7(e), Section14 and Section24, countersign and deliver to
the Person entitled thereto a Right Certificate or Right Certificates, as the
case may be, as so requested. The Company may require payment of a sum
sufficient to cover any tax or governmental charge that may be imposed in
connection with any transfer, split up, combination or exchange of Right
Certificates.
(b) Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation of
a Right Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them, and, at the Company's request,
reimbursement to the Company and the Rights Agent of all reasonable expenses
incidental thereto, and upon surrender to the Rights Agent and cancellation of
the Right Certificate if mutilated, the Company will issue, execute and deliver
a new Right Certificate of like tenor to the Rights Agent for countersignature
and delivery to the registered holder in lieu of the Right Certificate so lost,
stolen, destroyed or mutilated.
Section 7. Exercise of Rights; Purchase Price; Expiration Date of
Rights.
(a) Subject to Section7(e), the registered holder of any Right
Certificate may exercise the Rights evidenced thereby (except as otherwise
provided herein) in whole or in part at any time after the Distribution Date
upon surrender of the Right Certificate, with the form of election to purchase
on the reverse side thereof duly executed, to the Rights Agent at the office or
offices of the Rights Agent designated for such purpose, together with payment
of the Purchase Price for each one one-thousandth of a Preferred Share as to
which the Rights are exercised, at or prior to the earliest of (i) the Close of
Business on December 18, 2006 (the "Final Expiration Date"), (ii) the time at
which the Rights are redeemed as provided in Section 23 (the "Redemption Date")
or (iii) the time at which such Rights are exchanged as provided in Section 24
(the "Exchange Date").
(b) The Purchase Price for each one one-thousandth of a Preferred Share
purchasable pursuant to the exercise of a Right shall initially be $120, shall
be subject to adjustment from time to time as provided in Sections 11 and 13 and
shall be payable in lawful money of the United States of America in accordance
with paragraph (c) below.
(c) Upon receipt of a Right Certificate representing exercisable
Rights, with the form of election to purchase duly executed, accompanied by
payment of the Purchase Price for the Preferred Shares (or other shares,
securities, cash or other assets, as the case may be) to be purchased and an
amount equal to any applicable transfer tax required to be paid by the holder of
such Right Certificate in accordance with Section 9
<PAGE>
by certified check, cashier's check or money order payable to the order of the
Company, the Rights Agent shall thereupon promptly (i) (A)requisition from any
transfer agent for the Preferred Shares (or make available, if the Rights Agent
is the transfer agent for such shares) certificates for the number of Preferred
Shares to be purchased and the Company hereby irrevocably authorizes its
transfer agent to comply with all such requests, or (B)if the Company shall have
elected to deposit with a depository agent the total number of Preferred Shares
issuable upon exercise of the Rights hereunder, requisition from the depository
agent depository receipts representing such number of one one-thousandths of a
Preferred Share as are to be purchased (in which case certificates for the
Preferred Shares represented by such receipts shall be deposited by the transfer
agent with the depository agent) and the Company hereby directs the depository
agent to comply with such request, (ii)when appropriate, requisition from the
Company the amount of cash to be paid in lieu of issuance of fractional shares
in accordance with Section 14, (iii)after receipt of such certificates or
depository receipts, cause the same to be delivered to or upon the order of the
registered holder of such Right Certificate, registered in such name or names as
may be designated by such holder, and (iv)when appropriate, after receipt,
deliver such cash to or upon the order of the registered holder of such Right
Certificate.
(d) In case the registered holder of any Right Certificate shall
exercise less than all of the Rights evidenced thereby, a new Right Certificate
evidencing Rights equivalent to the Rights remaining unexercised shall be issued
by the Rights Agent to the registered holder of such Right Certificate or to
such holder's duly authorized assigns, subject to the provisions of Section 14.
(e) Notwithstanding anything in this Agreement to the contrary, from
and after the first occurrence of a Section11(a)(ii) Event, any Rights
Beneficially Owned by (i)an Acquiring Person or an Associate or Affiliate of an
Acquiring Person, (ii) a transferee of an Acquiring Person (or of any such
Associate or Affiliate) who becomes a transferee after the Acquiring Person
becomes such, or (iii)a transferee of an Acquiring Person (or of any such
Associate or Affiliate) who becomes a transferee prior to or concurrently with
the Acquiring Person becoming such and receives such Rights pursuant to either
(A)a transfer (whether or not for consideration) from the Acquiring Person to
holders of equity interests in such Acquiring Person or to any Person with whom
the Acquiring Person has any continuing agreement, arrangement or understanding
regarding the transferred Rights or (B)a transfer which the Board of Directors
of the Company has determined is part of a plan, arrangement or understanding
which has as a primary purpose or effect the avoidance of this Section7(e),
shall become null and void without any further action and no holder of such
Rights shall have any rights whatsoever with respect to such Rights, whether
under any provision of this Agreement or otherwise. The Company shall use all
reasonable efforts to insure that the provisions of this Section7(e) and
Section4(b) hereof are complied with, but shall have no liability to any holder
of Rights Certificates or other Person as a
<PAGE>
result of its failure to make any determinations with respect to an Acquiring
Person or any of their respective Affiliates, Associates or transferees
hereunder.
(f) Notwithstanding anything in this Agreement to the contrary, neither
the Rights Agent nor the Company shall be obligated to undertake any action with
respect to a registered holder upon the occurrence of any purported exercise as
set forth in this Section unless such registered holder shall have (i)duly
completed and executed the form of election to purchase set forth on the reverse
side of the Right Certificate surrendered for such exercise and (ii)provided
such additional evidence of the identity of the Beneficial Owner (or former
Beneficial Owner) of such Right Certificate or Affiliates or Associates thereof
as the Company shall reasonably request.
Section 8. Cancellation and Destruction of Right Certificates. All
Right Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or to any of its
agents, be delivered to the Rights Agent for cancellation or in canceled form,
or, if surrendered to the Rights Agent, shall be canceled by it, and no Right
Certificates shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Rights Agreement. The Company shall deliver to the
Rights Agent for cancellation and retirement, and the Rights Agent shall so
cancel and retire, any other Right Certificate purchased or acquired by the
Company otherwise than upon the exercise thereof. The Rights Agent shall deliver
all canceled Right Certificates to the Company, or shall, at the written request
of the Company, and after any Securities and Exchange Commission required
retention period has elapsed, destroy such canceled Right Certificates, and in
such case shall deliver a certificate of destruction thereof to the Company.
Section 9. Availability of Preferred Shares.
(a) The Company covenants and agrees that it will cause to be reserved
and kept available out of its authorized and unissued Preferred Shares, the
number of Preferred Shares that will be sufficient to permit the exercise in
full of all outstanding Rights.
(b) At such time, if any, as the Preferred Shares issuable upon the
exercise of Rights may be listed on any national securities exchange, the
Company shall use its best efforts to cause, from and after such time as the
Rights become exercisable (but only to the extent that it is reasonably likely
that the Rights will be exercised), all shares reserved for such issuance to be
listed on such exchange upon official notice of issuance upon such exercise.
(c) The Company will prepare and file, as soon as practicable after the
Distribution Date, a registration statement under the Securities Act of 1933, as
amended (the "Act"), with respect to the Rights and the securities purchasable
upon exercise of
<PAGE>
the Rights on an appropriate form, and use its best efforts to cause such
registration statement to (i)become effective as soon as practicable after such
filing, and (ii)remain effective (with a prospectus at all times meeting the
requirements of the Act) until the earlier of (A)the date as of which the Rights
are no longer exercisable for such securities or (B)the Final Expiration Date.
The Company will also take such action as may be appropriate under, or to ensure
compliance with, the securities or "blue sky" laws of the various states in
connection with the exercisability of the Rights. The Company may temporarily
suspend, for a period of time not to exceed 90 days after the date the
registration statement is filed, the exercisability of the Rights in order to
permit the registration statement to become effective. Upon any such suspension,
the Company shall issue a public announcement stating that the exercisability of
the Rights has been temporarily suspended, as well as a public announcement at
such time as the suspension is no longer in effect. Notwithstanding any
provision of this Agreement to the contrary, the Rights shall not be exercisable
in any jurisdiction if the requisite qualification in such jurisdiction shall
not have been obtained or the exercise thereof is not permitted under applicable
law.
(d) The Company covenants and agrees that it will take all such action
as may be necessary to ensure that all Preferred Shares delivered upon exercise
of Rights shall, at the time of delivery of the certificates for such Preferred
Shares (subject to payment of the Purchase Price and any applicable transfer
taxes), be duly and validly authorized and issued and fully paid and
nonassessable shares.
(e) The Company further covenants and agrees that it will pay when due
and payable any and all federal and state transfer taxes and charges which may
be payable in respect of the issuance or delivery of the Right Certificates or
of any Preferred Shares upon the exercise of Rights. The Company shall not,
however, be required to pay any transfer tax which may be payable in respect of
any transfer or delivery of Right Certificates to a Person other than, or the
issuance or delivery of certificates or depository receipts for the Preferred
Shares in a name other than that of the registered holder of the Right
Certificate evidencing Rights surrendered for exercise, or to issue or to
deliver any certificates or depository receipts for Preferred Shares upon the
exercise of any Rights until any such tax shall have been paid (any such tax
being payable by the holder of such Right Certificate at the time of surrender)
or until it has been established to the Company's reasonable satisfaction that
no such tax is due.
Section 10. Preferred Shares Record Date. Each Person in whose name any
certificate for a number of one one-thousandths of a Preferred Share (or Common
Shares and/or other securities, as the case may be) is issued upon the exercise
of Rights shall for all purposes be deemed to have become the holder of record
of the Preferred Shares (or Common Shares and/or other securities, as the case
may be) represented thereby on, and such certificate shall be dated, the date
upon which the Right Certificate evidencing such Rights was duly surrendered and
payment of the Purchase Price (and
<PAGE>
any applicable transfer taxes) was made; provided, however, that if the date of
such surrender and payment is a date upon which the transfer books of the
Company for the Preferred Shares are closed, such Person shall be deemed to have
become the record holder of such shares on, and such certificate shall be dated,
the next succeeding Business Day on which such transfer books are open. Prior to
the exercise of the Rights evidenced thereby, the holder of a Right Certificate
shall not be entitled to any rights of a holder of Preferred Shares for which
the Rights shall be exercisable, including, without limitation, the right to
vote, to receive dividends or other distributions or to exercise any preemptive
rights, and shall not be entitled to receive any notice of any proceedings of
the Company, except as provided herein.
Section 11. Adjustment of Purchase Price, Number of Shares or Number of
Rights. The Purchase Price, the number and kind of shares covered by each Right
and the number of Rights outstanding are subject to adjustment from time to time
as provided in this Section 11:
(a)(i) In the event the Company shall at any time after the
date of this Agreement (A) declare a dividend on the Preferred Shares
payable in Preferred Shares, (B) subdivide the outstanding Preferred
Shares, (C) combine the outstanding Preferred Shares into a smaller
number of Preferred Shares or (D) issue any shares of its capital stock
in a reclassification of the Preferred Shares (including any such
reclassification in connection with a consolidation or merger in which
the Company is the continuing or surviving corporation), except as
otherwise provided in this Section 11(a) and Section 7(e), the Purchase
Price in effect at the time of the record date for such dividend or of
the effective date of such subdivision, combination or
reclassification, and the number and kind of shares of capital stock
issuable on such date, shall be proportionately adjusted so that the
holder of any Right exercised after such time shall be entitled to
receive the aggregate number and kind of shares of capital stock which,
if such Right had been exercised immediately prior to such date and at
a time when the Preferred Shares transfer books of the Company were
open, such holder would have owned upon such exercise and been entitled
to receive by virtue of such dividend, subdivision, combination or
reclassification; provided, however, that in no event shall the
consideration to be paid upon the exercise of one Right be less than
the aggregate par value of the shares of capital stock of the Company
issuable upon exercise of one Right. If an event occurs which would
require an adjustment under both Section 11(a)(i) and Section
11(a)(ii), the adjustment provided for in this Section 11(a)(i) shall
be in addition to, and shall be made prior to, any adjustment required
pursuant to Section 11(a)(ii).
(ii) Subject to Section 24 of this Agreement, in the event any
Person becomes an Acquiring Person, other than pursuant to any
transaction set forth in Section 13(a), then proper provision shall be
made so that each holder of a Right
<PAGE>
(except as otherwise provided below and in Section 7(e)) shall
thereafter have a right to receive, upon exercise thereof at the then
current Purchase Price in accordance with the terms of this Agreement
and in lieu of Preferred Shares, such number of Common Shares of the
Company as shall equal the result obtained by (x) multiplying the then
current Purchase Price by the number of one one-thousandths of a
Preferred Share for which a Right was exercisable immediately prior to
the first occurrence of a Section 11(a)(ii) Event and dividing that
product by (y) 50% of the then current per share market price of the
Company's Common Shares (determined pursuant to Section 11(d)) on the
date of the occurrence of such event (such number of shares being
referred to as the "Adjustment Shares"). In the event that any Person
shall become an Acquiring Person and the Rights shall then be
outstanding, the Company shall not take any action which would
eliminate or diminish the benefits intended to be afforded by the
Rights.
(iii) In the event that the number of Common Shares which are
authorized by the Company's Articles of Incorporation but not
outstanding or reserved for issuance for purposes other than upon
exercise of the Rights are not sufficient to permit the exercise in
full of the Rights in accordance with the foregoing subparagraph (ii)
of this Section 11(a), the Company shall (A)determine the value of the
Adjustment Shares issuable upon the exercise of a Right (the "Current
Value"), and (B)with respect to each Right (subject to Section 7(e)
hereof), make adequate provision to substitute for the Adjustment
Shares, upon the exercise of a Right and payment of the applicable
Purchase Price, (1)cash, (2)a reduction in the Purchase Price,
(3)Common Shares or other equity securities of the Company (including,
without limitations, shares, or units of shares, of preferred stock,
such as the Preferred Shares, which the Board has deemed to have
essentially the same value or economic rights as Common Shares (such
shares of preferred stock being referred to as "Common Share
Equivalents")), (4)debt securities of the Company, (5)other assets, or
(6)any combination of the foregoing, having an aggregate value equal to
the Current Value (less the amount of any reduction in the Purchase
Price), where such aggregate value has been determined by the Board
based upon the advice of a nationally recognized investment banking
firm selected by the Board; provided, however, that if the Company
shall not have made adequate provision to deliver value pursuant to
clause (B) above within thirty (30) days following the first occurrence
of a Section 11(a)(ii) Event, then the Company shall be obligated to
deliver, upon the surrender for exercise of a Right and without
requiring payment of the Purchase Price, Common Shares (to the extent
available) and then, if necessary, cash, which shares and/or cash have
an aggregate value equal to the Spread. For purposes of the preceding
sentence, the term "Spread" shall mean the excess of (i)the Current
Value over (ii)the Purchase Price. If the Board determines in good
faith that it is likely that sufficient additional Common Shares could
be authorized for issuance upon exercise in full of the Rights, the
thirty (30) day period set forth above may be extended to the
<PAGE>
extent necessary, but not more than ninety (90) days after the Section
11(a)(ii) Event, in order that the Company may seek shareholder
approval for the authorization of such additional shares (such thirty
(30) day period, as it may be extended, is herein called the
"Substitution Period"). To the extent that action is to be taken
pursuant to the first and/or third sentences of this Section
11(a)(iii), the Company (1)shall provide, subject to Section7(e)
hereof, that such action shall apply uniformly to all outstanding
Rights, and (2)may suspend the exercisability of the Rights until the
expiration of the Substitution Period in order to seek such shareholder
approval for such authorization of additional shares and/or to decide
the appropriate form of distribution to be made pursuant to such first
sentence and to determine the value thereof. In the event of any such
suspension, the Company shall issue a public announcement stating that
the exercisability of the Rights has been temporarily suspended, as
well as a public announcement at such time as the suspension is no
longer in effect. For purposes of this Section 11(a)(iii), the value of
each Adjustment Share shall be the "current per share market price" (as
determined pursuant to Section 11(d)(i)) per Common Share on the date
of the first occurrence of Section 11(a)(ii) Event and the per share or
per unit value of any Common Share Equivalent shall be deemed to equal
the "current market price" per Common Share on such date.
(b) In case the Company shall fix a record date for the
issuance of rights, options or warrants to all holders of Preferred
Shares entitling them to subscribe for or purchase Preferred Shares (or
shares having the same rights, privileges and preferences as the
Preferred Shares (such shares are herein called "preferred share
equivalents")) or securities convertible into Preferred Shares or
preferred share equivalents at a price per Preferred Share or preferred
share equivalent (or having a conversion price per share, if a security
convertible into Preferred Shares or preferred share equivalents) less
than the then current per share market price (as such term is defined
in Section 11(d)) of the Preferred Shares on such record date, the
Purchase Price to be in effect after such record date shall be
determined by multiplying the Purchase Price in effect immediately
prior to such record date by a fraction, the numerator of which shall
be the number of Preferred Shares outstanding on such record date plus
the number of Preferred Shares which the aggregate offering price of
the total number of Preferred Shares and/or preferred share equivalents
so to be offered (and/or the aggregate initial conversion price of the
convertible securities so to be offered) would purchase at such current
market price and the denominator of which shall be the number of
Preferred Shares outstanding on such record date plus the number of
additional Preferred Shares and/or preferred share equivalents to be
offered for subscription or purchase (or into which the convertible
securities so to be offered are initially convertible); provided,
however, that in no event shall the consideration to be paid upon the
exercise of one Right be less than the aggregate par value of the
shares of capital stock of the Company issuable upon exercise of
<PAGE>
one Right. In case such subscription price may be paid in a
consideration part or all of which shall be in a form other than cash,
the value of such consideration shall be determined in good faith by
the Board of Directors of the Company, whose determination shall be
described in a statement filed with the Rights Agent and shall be
binding on the Rights Agent and the holders of the Rights. Preferred
Shares held for the account of the Company shall not be deemed
outstanding for the purpose of any such computation. Such adjustment
shall be made successively whenever such a record date is fixed; and in
the event that such rights, options or warrants are not so issued, the
Purchase Price shall be adjusted to be the Purchase Price which would
then be in effect if such record date had not been fixed.
(c) In case the Company shall fix a record date for the making
of a distribution to all holders of the Preferred Shares (including any
such distribution made in connection with a consolidation or merger in
which the Company is the continuing or surviving corporation) of
evidences of indebtedness or assets (other than a regular quarterly
cash dividend or a dividend payable in Preferred Shares) or
subscription rights or warrants (excluding those referred to in Section
11(b)), the Purchase Price to be in effect after such record date shall
be determined by multiplying the Purchase Price in effect immediately
prior to such record date by a fraction, the numerator of which shall
be the then current per share market price of the Preferred Shares on
such record date, less the fair market value (as determined in good
faith by the Board of Directors of the Company, whose determination
shall be described in a statement filed with the Rights Agent) of the
portion of the assets or evidences of indebtedness so to be distributed
or of such subscription rights or warrants applicable to one Preferred
Share, and the denominator of which shall be such current per share
market price of the Preferred Shares; provided, however, that in no
event shall the consideration to be paid upon the exercise of one Right
be less than the aggregate par value of the shares of capital stock of
the Company to be issued upon exercise of one Right. Such adjustments
shall be made successively whenever such a record date is fixed; and in
the event that such distribution is not so made, the Purchase Price
shall again be adjusted to be the Purchase Price which would then be in
effect if such record date had not been fixed.
(d) (i) For the purpose of any computation hereunder, the
"current per share market price" of any security (a "Security" for the
purpose of this Section 11(d)(i)) on any date shall be deemed to be the
average of the daily closing prices per share of such Security for the
30 consecutive Trading Days immediately prior to such date; provided,
however, that in the event that the current per share market price of
the Security is determined during a period following the announcement
by the issuer of such Security of (A) a dividend or distribution on
such Security payable in shares of such Security or securities
convertible into
<PAGE>
such shares, or (B) any subdivision, combination or reclassification of
such Security and prior to the expiration of 30 Trading Days after the
ex-dividend date for such dividend or distribution, or the record date
for such subdivision, combination or reclassification, then, and in
each such case, the current per share market price shall be
appropriately adjusted to reflect the current market price per share
equivalent of such Security. The closing price for each day shall be
the last sale price, regular way, or, in case no such sale takes place
on such day, the average of the closing bid and asked prices, regular
way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or
admitted to trading on the New York Stock Exchange or, if the Security
is not listed or admitted to trading on the New York Stock Exchange, as
reported in the principal consolidated transaction reporting system
with respect to securities listed on the principal national securities
exchange on which the Security is listed or admitted to trading or, if
the Security is not listed or admitted to trading on any national
securities exchange, the last quoted price or, if not so quoted, the
average of the high bid and low asked prices in the over-the-counter
market, as reported by the National Association of Securities Dealers,
Inc. Automated Quotations System ("NASDAQ") or such other system then
in use, or, if on any such date the Security is not quoted by any such
organization, the average of the closing bid and asked prices as
furnished by a professional market maker making a market in the
Security selected by the Board of Directors of the Company. If on any
such day no market maker is making a market in the Common Shares, the
fair value of such share on such day as determined in good faith by the
Board of Directors of the Company shall be used in lieu of the closing
price for such day. The term "Trading Day" shall mean a day on which
the principal national securities exchange on which the Security is
listed or admitted to trading is open for the transaction of business
or, if the Security is not listed or admitted to trading on any
national securities exchange, a Business Day.
(ii) For the purpose of any computation hereunder, the
"current per share market price" of the Preferred Shares shall be
determined in accordance with the method set forth in Section 11(d)(i).
If the Preferred Shares are not publicly traded, the "current per share
market price" of the Preferred Shares shall be conclusively deemed to
be the current per share market price of the Common Shares as
determined pursuant to Section 11(d)(i) (appropriately adjusted to
reflect any stock split, stock dividend or similar transaction
occurring after the date hereof), multiplied by one thousand. If
neither the Common Shares nor the Preferred Shares are publicly held or
so listed or traded, "current per share market price" of the Preferred
Shares shall mean the fair value per share as determined in good faith
by the Board of Directors of the Company, whose determination shall be
described in a statement filed with the Rights Agent.
<PAGE>
(e) No adjustment in the Purchase Price shall be required
unless such adjustment would require an increase or decrease of at
least 1% in the Purchase Price; provided, however, that any adjustments
which by reason of this Section 11(e) are not required to be made shall
be carried forward and taken into account in any subsequent adjustment.
All calculations under this Section 11 shall be made to the nearest
cent or to the nearest one one-millionth of a Preferred Share or one
ten-thousandth of any other share or security as the case may be.
Notwithstanding the first sentence of this Section 11(e), any
adjustment required by this Section 11 shall be made no later than the
earlier of (i) three years from the date of the transaction which
requires such adjustment or (ii) the date of the expiration of the
right to exercise any Rights.
(f) If as a result of an adjustment made pursuant to Section
11(a) and 13(a), the holder of any Right thereafter exercised shall
become entitled to receive any shares of capital stock of the Company
other than Preferred Shares, thereafter the number of such other shares
so receivable upon exercise of any Right shall be subject to adjustment
from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Preferred Shares
contained in Section 11(a) through (c), inclusive, and the provisions
of Sections 7, 9, 10, 13 and 14 with respect to the Preferred Shares
shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to
any adjustment made to the Purchase Price hereunder shall evidence the
right to purchase, at the adjusted Purchase Price, the number of one
one-thousandths of a Preferred Share purchasable from time to time
hereunder upon exercise of the Rights, all subject to further
adjustment as provided herein.
(h) Unless the Company shall have exercised its election as
provided in Section 11(i) below, subject to the provisions of Sections
11(a) and 13, upon each adjustment of the Purchase Price as a result of
the calculations made in Sections 11(b) and (c), each Right outstanding
immediately prior to the making of such adjustment shall thereafter
evidence the right to purchase, at the adjusted Purchase Price, that
number of one one-thousandths of a Preferred Share (calculated to the
nearest one one-millionth of a Preferred Share) obtained by (i)
multiplying (x) the number of one one-thousandths of a share covered by
a Right immediately prior to this adjustment by (y) the Purchase Price
in effect immediately prior to such adjustment of the Purchase Price
and (ii) dividing the product so obtained by the Purchase Price in
effect immediately after such adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any
adjustment of the Purchase Price to adjust the number of Rights, in
substitution for any adjustment
<PAGE>
in the number of one one-thousandths of a Preferred Share purchasable
upon the exercise of a Right. Each of the Rights outstanding after such
adjustment of the number of Rights shall be exercisable for the number
of one one-thousandths of a Preferred Share for which a Right was
exercisable immediately prior to such adjustment. Each Right held of
record prior to such adjustment of the number of Rights shall become
that number of Rights (calculated to the nearest one ten-thousandth)
obtained by dividing the Purchase Price in effect immediately prior to
adjustment of the Purchase Price by the Purchase Price in effect
immediately after adjustment of the Purchase Price. The Company shall
make a public announcement of its election to adjust the number of
Rights, indicating the record date for the adjustment, and, if known at
the time, the amount of the adjustment to be made. This record date may
be the date on which the Purchase Price is adjusted or any day
thereafter, but, if the Right Certificates have been issued, shall be
at least ten days later than the date of the public announcement. If
Right Certificates have been issued, upon each adjustment of the number
of Rights pursuant to this Section 11(i), the Company shall, as
promptly as practicable, cause to be distributed to holders of record
of Right Certificates on such record date Right Certificates
evidencing, subject to Section 14, the additional Rights to which such
holders shall be entitled as a result of such adjustment, or, at the
option of the Company, shall cause to be distributed to such holders of
record in substitution and replacement for the Right Certificates held
by such holders prior to the date of adjustment, and upon surrender
thereof, if required by the Company, new Right Certificates evidencing
all the Rights to which such holders shall be entitled after such
adjustment. Right Certificates so to be distributed shall be issued,
executed and countersigned in the manner provided for herein, may bear,
at the option of the Company, the adjusted Purchase Price, and shall be
registered in the names of the holders of record of Right Certificates
on the record date specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase
Price or the number of one one-thousandths of a Preferred Share
issuable upon the exercise of the Rights, the Right Certificates
theretofore and thereafter issued may continue to express the Purchase
Price and the number of one one-thousandths of a Preferred Share which
were expressed in the initial Right Certificates issued hereunder.
(k) Before taking any action that would cause an adjustment
reducing the Purchase Price below one one-thousandth of the then par
value, if any, of the Preferred Shares issuable upon exercise of the
Rights, the Company shall take any corporate action which may, in the
opinion of its counsel, be necessary in order that the Company may
validly and legally issue fully paid and nonassessable Preferred Shares
at such adjusted Purchase Price.
<PAGE>
(l) In any case in which this Section 11 shall require that an
adjustment in the Purchase Price be made effective as of a record date
for a specified event, the Company may elect to defer until the
occurrence of such event the issuing to the holder of any Right
exercised after such record date of the Preferred Shares and other
capital stock or securities of the Company, if any, issuable upon such
exercise over and above the Preferred Shares and other capital stock or
securities of the Company, if any, issuable upon such exercise on the
basis of the Purchase Price in effect prior to such adjustment;
provided, however, that the Company shall deliver to such holder a due
bill or other appropriate instrument evidencing such holder's right to
receive such additional shares upon the occurrence of the event
requiring such adjustment.
(m) Anything in this Section 11 to the contrary
notwithstanding, the Company shall be entitled to make such reductions
in the Purchase Price, in addition to those adjustments expressly
required by this Section 11, as and to the extent that in their sole
discretion the Board of Directors of the Company shall determine to be
advisable in order that any (i)consolidation or subdivision of the
Preferred Shares, (ii)issuance wholly for cash of any Preferred Shares
at less than the current market price, (iii)issuance wholly for cash of
Preferred Shares or securities which by their terms are convertible
into or exchangeable for Preferred Shares, (iv)dividends on Preferred
Shares payable in Preferred Shares or (v)issuance of rights, options or
warrants referred to hereinabove in Section 11(b), hereafter made by
the Company to holders of its Preferred Shares shall not be taxable to
such shareholders.
(n) The Company covenants and agrees that it shall not, at any
time after the Distribution Date, (i) consolidate with any other Person
(other than a Subsidiary of the Company in a transaction which complies
with Section 11(o) hereof), (ii) merge with or into any other Person
(other than a Subsidiary of the Company in a transaction which complies
with Section 11(o) hereof), or (iii) sell or transfer (or permit any
Subsidiary to sell or transfer), in one transaction, or a series of
related transactions, assets or earning power aggregating more than 50%
of the assets or earning power of the Company and its Subsidiaries
(taken as a whole) to any other Person or Persons (other than the
Company and/or any of its subsidiaries in one or more transaction each
of which complies with Section 11(o) hereof), if (x) at the time of or
immediately after such consolidation, merger or sale there are any
rights, warrants or other instruments or securities outstanding or
agreements in effect which would substantially diminish or otherwise
eliminate the benefits intended to be afforded by the Rights or (y)
prior to, simultaneously with or immediately after such consolidation,
merger or sale, the shareholders of the Person who constitutes, or
would constitute, the "Principal Party" for purposes of Section 13(a)
hereof shall have received a distribution of Rights previously owned by
such Person or any of its Affiliates and Associates.
<PAGE>
(o) The Company covenants and agrees that, after the
Distribution Date, it will not, except as permitted by Section23, 24 or
27, take (or permit any Subsidiary of the Company to take) any action
if at the time such action is taken it is reasonably foreseeable that
such action will diminish substantially or otherwise eliminate the
benefits intended to be afforded by the Rights unless such action is
approved by a majority of the Continuing Directors.
(p) Anything in this Agreement or the Rights to the contrary
notwithstanding, in the event that at any time after the date of this
Agreement and prior to the Distribution Date, the Company shall (i)
declare or pay any dividend on the Common Shares payable in Common
Shares or (ii) effect a subdivision, combination or consolidation of
the Common Shares (by reclassification or otherwise than by payment of
dividends in Common Shares) into a greater or lesser number of Common
Shares, then in any such case (i) the number of one one-thousandths of
a Preferred Share purchasable after such event upon proper exercise of
each Right shall be determined by multiplying the number of one
one-thousandths of a Preferred Share so purchasable immediately prior
to such event by a fraction, the numerator of which is the number of
Common Shares outstanding immediately before such event and the
denominator of which is the number of Common Shares outstanding
immediately after such event, and (ii) each Common Share outstanding
immediately after such event shall have issued with respect to it that
number of Rights which each Common Share outstanding immediately prior
to such event had issued with respect to it. The adjustments provided
for in this Section 11(p) shall be made successively whenever such a
dividend is declared or paid or such a subdivision, combination or
consolidation is effected. If an event occurs which would require an
adjustment under Section11(a)(ii) and this Section11(p), the
adjustments provided for in this Section11(p) shall be in addition and
prior to any adjustment required pursuant to Section11(a)(ii).
Section 12. Certificate of Adjusted Purchase Price or Number of Shares.
Whenever an adjustment is made as provided in Sections 11 and 13, the Company
shall promptly (a) prepare a certificate setting forth such adjustment, and a
brief statement of the facts accounting for such adjustment, (b) file with the
Rights Agent and with each transfer agent for the Common Shares or the Preferred
Shares a copy of such certificate and (c) mail a brief summary thereof to each
holder of a Right Certificate in accordance with Section 25.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or
Earning Power.
<PAGE>
(a) In the event that, on or following the Shares Acquisition Date,
directly or indirectly,
(w) the Company shall consolidate with, or merge with and
into, any other Person (other than a Subsidiary of the Company in a
transaction which complies with Section 11(o)) and the Company shall
not be the continuing or surviving corporation of such consolidation or
merger,
(x) any Person (other than a Subsidiary of the Company in a
transaction which complies with Section 11(o)) shall consolidate with,
or merge with and into, the Company, the Company shall be the
continuing or surviving corporation of such consolidation or merger
and, in connection with such consolidation or merger, all or part of
the Common Shares shall be changed into or exchanged for stock or other
securities of any other Person or cash or any other property,
(y) the Company shall effect a statutory share exchange with
the outstanding Common Shares of the Company being exchanged for stock
or other securities of any other Person, cash or property, or
(z) the Company shall sell or otherwise transfer (or one or
more of its Subsidiaries shall sell or otherwise transfer), in one or
more transactions, assets or earning power aggregating 50% or more of
the assets or earning power of the Company and its Subsidiaries (taken
as a whole) to any other Person (other than the Company or one or more
of its wholly owned Subsidiaries in a transaction which complies with
Section 11(o)),
then, and in each such case, except as contemplated by Section 13(e), proper
provision shall be made so that (i) each holder of a Right (except as otherwise
provided in Section 7(e)) shall thereafter have the right to receive, upon the
exercise thereof at the then current Purchase Price, in accordance with the
terms of this Agreement and in lieu of Preferred Shares, such number of validly
authorized and issued, fully paid, nonassessable and freely tradeable Common
Shares of the Principal Party, not subject to any liens, encumbrances, rights of
first refusal or adverse claims, as shall be equal to the result obtained by
(x)multiplying the then current Purchase Price by the number of one
one-thousandths of a Preferred Share for which a Right is, immediately prior to
the first occurrence of a Section13 Event (or, if a Section 11(a)(ii) Event has
occurred prior to the first occurrence of a Section13 Event, multiplying the
number of such one one-thousandths of a shares for which a Right was exercisable
immediately prior to the first occurrence of the Section 11(a)(ii) Event by the
Purchase Price in effect immediately prior to the first occurrence), exercisable
and (y)dividing that product by 50% of the current per share market price of the
Common Shares of such Principal Party (determined pursuant to Section11(d)) on
the date of consummation of such Section13
<PAGE>
Event; (ii)such Principal Party shall thereafter be liable for, and shall
assume, by virtue of such merger, consolidation, statutory share exchange, sale
or transfer, all the obligations and duties of the Company pursuant to this
Agreement; (iii)the term "Company" shall thereafter be deemed to refer to such
Principal Party, it being specifically intended that the provisions of Section
11 shall apply only to such Principal Party following the first occurrence of a
Section 13 Event; and (iv)such Principal Party shall take such steps (including,
but not limited to, the reservation of a sufficient number of its Common Shares
to permit the exercise of all outstanding Rights) in connection with the
consummation of any such transaction as may be necessary to assure that the
provisions of this Agreement shall thereafter be applicable, as nearly as
reasonably may be, in relation to its Common Shares thereafter deliverable upon
the exercise of the Rights.
(b) "Principal Party" shall mean:
(i) in the case of any transaction described in clauses (w),
(x) or (y) of the first sentence of Section13(a), the Person that is
the issuer of any securities into which Common Shares of the Company
are converted in such merger, consolidation or exchange, or if no
securities are so issued, the Person that is the other party to such
merger, consolidation or exchange; and
(ii) in the case of any transaction described in clause(z) of
the first sentence of Section13(a), the Person that is the party
receiving the greatest portion of the assets or earning power
transferred pursuant to such transaction or transactions;
provided, however, that in any such case, (1)if the Common Shares of such Person
are not at such time or have not been continuously over the preceding 12-month
period registered under Section12 of the Exchange Act, and such Person is a
direct or indirect Subsidiary of another Person the Common Shares of which are
and have been so registered, "Principal Party" shall refer to such other Person,
and (2)in case such Person is a Subsidiary, directly or indirectly, of more than
one Person, the Common Shares of two or more of which are and have been so
registered, "Principal Party" shall refer to whichever of such Persons is the
issuer of the Common Shares having the greatest aggregate market value.
(c) The Company shall not consummate any Section13 Event unless the
Principal Party shall have a sufficient number of authorized, unreserved Common
Shares which have not been issued or are held in treasury to permit the exercise
in full of the Rights in accordance with this Section13 and unless prior thereto
the Company and such Principal Party shall have executed and delivered to the
Rights Agent a supplemental agreement providing for the terms set forth in
paragraphs (a) and (b) of this Section13 and further providing that, as soon as
practicable after the date of any Section13 Event, the Principal Party will:
<PAGE>
(i) prepare and file a registration statement under the Act,
with respect to the Rights and the securities purchasable upon exercise
of the Rights, on an appropriate form, and use its best efforts to
cause such registration statement to (A)become effective as soon as
practicable after such filing and (B)remain effective (with a
prospectus at all times meeting the requirements of the Act) until the
earlier of (1)the date as of which the Rights are no longer exercisable
for such securities or (2)the Final Expiration Date;
(ii) take such action as may be appropriate under, or to
ensure compliance with, the securities or "blue sky" laws of the
various states in connection with the exercisability of the Rights; and
(iii) deliver to holders of the Rights historical financial
statements for the Principal Party and each of its Affiliates which
comply in all respects with the requirements for registration on Form10
under the Exchange Act.
(d) The Company shall not enter into any transaction of the kind
referred to in this Section13 if at the time of such transaction there are any
rights, warrants, instruments or securities outstanding or any agreements or
arrangements which, as a result of the consummation of such transaction, would
substantially diminish or otherwise eliminate the benefits intended to be
afforded by the Rights. Without limiting the generality of the preceding
sentence, in case the Principal Party which is to be a party to a transaction of
the kind referred to in this Section13 has a provision in any of its authorized
securities or in its articles of incorporation or bylaws or other instrument
governing its corporate affairs, which provision would have the effect of
(i)causing such Principal Party to issue, in connection with, or as a
consequence of, the consummation of a transaction of the kind referred to in
this Section13, Common Shares of such Principal Party at less than the then
current per share market price (determined pursuant to Section11(d)) or
securities exercisable for or convertible into Common Shares of such Principal
Party at less than such then current market price (other than to holders of
Rights pursuant to this Section13) or (ii)providing for any special payment, tax
or similar provisions in connection with the issuance of Common Shares of such
Principal Party pursuant to the provisions of Section13; then, in such event,
the Company shall not consummate any such transaction unless prior thereto the
provision in question of such Principal Party shall have been canceled, waived
or amended so as to avoid any of the effects referred to in clauses (i) and (ii)
of this paragraph, or the authorized securities shall have been redeemed, so
that the applicable provision will have no effect in connection with, or as a
consequence of, the consummation of the proposed transaction.
(e) Notwithstanding anything in this Agreement to the contrary,
Section13 shall not be applicable to a transaction described in clauses (w), (x)
or (y) of Section13(a) if (i)such transaction is consummated with a Person or
Persons who acquired Common
<PAGE>
Shares pursuant to a Permitted Offer (or a wholly owned Subsidiary of any such
Person or Persons), (ii)the price per Common Share offered in such transaction
is not less than the price per Common Share paid to all holders of Common Shares
whose shares were purchased pursuant to such tender offer or exchange offer and
(iii)the form of consideration being offered to the remaining holders of Common
Shares pursuant to such transaction is the same as the form of consideration
paid pursuant to such tender offer or exchange offer. Upon consummation of any
such transaction contemplated by this Section13(e), all Rights hereunder shall
expire.
(f) The provisions of this Section13 shall similarly apply to
successive mergers, consolidations, statutory share exchanges or sale or other
transfers.
Section 14. Fractional Rights and Fractional Shares.
(a) The Company shall not be required to issue fractions of Rights or
to distribute Right Certificates which evidence fractional Rights. In lieu of
such fractional Rights, there shall be paid to the registered holders of the
Right Certificates with regard to which such fractional Rights would otherwise
be issuable an amount in cash equal to the same fraction of the current market
value of a whole Right. For the purposes of this Section 14(a), the current
market value of a whole Right shall be the closing price of the Rights for the
Trading Day immediately prior to the date on which such fractional Rights would
have been otherwise issuable. The closing price for any day shall be the last
sale price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the Rights are not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction reporting system
with respect to securities listed on the principal national securities exchange
on which the Rights are listed or admitted to trading or, if the Rights are not
listed or admitted to trading on any national securities exchange, the last
quoted price or, if not so quoted, the average of the high bid and low asked
prices in the over-the-counter market, as reported by NASDAQ or such other
system then in use or, if on any such date the Rights are not quoted by any such
organization, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in the Rights selected by the Board of
Directors of the Company. If on any such date no such market maker is making a
market in the Rights, the fair value of the Rights on such date as determined in
good faith by the Board of Directors of the Company shall be used.
(b) The Company shall not be required to issue fractions of Preferred
Shares (other than fractions which are integral multiples of one one-thousandth
of a Preferred Share) upon exercise of the Rights or to distribute certificates
which evidence fractional Preferred Shares (other than fractions which are
integral multiples of one one-
<PAGE>
thousandth of a Preferred Share). Fractions of Preferred Shares in integral
multiples of one one-thousandth of a Preferred Share may, at the election of the
Company, be evidenced by depository receipts pursuant to an appropriate
agreement between the Company and a depository selected by it; provided,
however, that if the Company issues depository receipts pursuant to any such
agreement, such agreement shall provide that the holders of such depository
receipts shall have all the rights, privileges and preferences to which they are
entitled as beneficial owners of the Preferred Shares represented by such
depository receipts. In lieu of fractional Preferred Shares that are not
integral multiples of one one-thousandth of a Preferred Share, the Company shall
pay to the registered holders of Right Certificates at the time such Rights are
exercised as herein provided an amount in cash equal to the same fraction of the
current market value of one Preferred Share. For the purposes of this Section
14(b), the current market value of a Preferred Share shall be the closing price
of a Preferred Share (as determined pursuant to Section 11(d)) for the Trading
Day immediately prior to the date of such exercise.
(c) The holder of a Right by the acceptance of the Right expressly
waives such holder's right to receive any fractional Rights or any fractional
shares upon exercise of a Right (except as provided above).
Section 15. Rights of Action. All rights of action in respect of this
Agreement, excepting the rights of action given to the Rights Agent under
Section 18, are vested in the respective registered holders of the Right
Certificates (and, prior to the Distribution Date, the registered holders of the
Common Shares); and any registered holder of any Right Certificate (or, prior to
the Distribution Date, of the Common Shares), without the consent of the Rights
Agent or of the holder of any other Right Certificate (or, prior to the
Distribution Date, of the Common Shares), may, in such holder's own behalf and
for such holder's own benefit, enforce, and may institute and maintain any suit,
action or proceeding against the Company to enforce, or otherwise act in respect
of, such holder's right to exercise the Rights evidenced by such Right
Certificate in the manner provided in such Right Certificate and in this
Agreement. Without limiting the foregoing or any remedies available to the
holders of Rights, it is specifically acknowledged that the holders of Rights
would not have an adequate remedy at law for any breach of this Agreement and
will be entitled to specific performance of the obligations under, and
injunctive relief against actual or threatened violations of the obligations of
any Person subject to, this Agreement.
Section 16. Agreement of Right Holders. Every holder of a Right, by
accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be
transferable only in connection with the transfer of the Common Shares;
<PAGE>
(b) after the Distribution Date, the Right Certificates are
transferable only on the registry books of the Rights Agent if
surrendered at the principal office of the Rights Agent, duly endorsed
or accompanied by a proper instrument of transfer; and
(c) subject to Section 6(a) and Section 7(f), the Company and
the Rights Agent may deem and treat the Person in whose name the Right
Certificate (or, prior to the Distribution Date, the associated Common
Shares certificate) is registered as the absolute owner thereof and of
the Rights evidenced thereby (notwithstanding any notations of
ownership or writing on the Right Certificates or the associated Common
Shares certificate made by anyone other than the Company or the Rights
Agent) for all purposes whatsoever, and neither the Company nor the
Rights Agent shall be affected by any notice to the contrary; and
(d) notwithstanding anything in this Agreement to the
contrary, neither the Company nor the Rights Agent shall have any
liability to any holder of a Right or other Person as a result of its
inability to perform any of its obligations under this Agreement by
reason of any preliminary or permanent injunction or other order,
decree or ruling issued by a court of competent jurisdiction or by a
governmental, regulatory or administrative agency or commission, or any
statute, rule, regulation or executive order promulgated or enacted by
any governmental authority, prohibiting or otherwise restraining
performance of such obligation; provided, however, the Company must use
its best efforts to have any such order, decree or ruling lifted or
otherwise overturned as soon as possible.
Section 17. Right Certificate Holder Not Deemed a Shareholder. No
holder, as such, of any Right Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the Preferred Shares or any
other securities of the Company which may at any time be issuable on the
exercise of the Rights represented thereby, nor shall anything contained herein
or in any Right Certificate be construed to confer upon the holder of any Right
Certificate, as such, any of the rights of a shareholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
shareholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
shareholders (except as provided in Section 25), or to receive dividends or
subscription rights, or otherwise, until the Right or Rights evidenced by such
Right Certificate shall have been exercised in accordance with the provisions of
this Agreement.
Section 18. Concerning the Rights Agent.
<PAGE>
(a) The Company agrees to pay to the Rights Agent reasonable
compensation for all services rendered by it hereunder and, from time to time,
on demand of the Rights Agent, its reasonable expenses and counsel fees and
other disbursements incurred in the administration and execution of this
Agreement and the exercise and performance of its duties hereunder. The Company
also agrees to indemnify the Rights Agent for, and to hold it harmless against,
any loss, liability, or expense, incurred without negligence, bad faith or
willful misconduct on the part of the Rights Agent, for anything done or omitted
by the Rights Agent in connection with the acceptance and administration of this
Agreement, including the costs and expenses of defending against any claim of
liability in the premises.
(b) The Rights Agent shall be protected and shall incur no liability
for, or in respect of any action taken, suffered or omitted by it in connection
with, its administration of this Agreement in reliance upon any Right
Certificate or certificate for the Preferred Shares (or for depository receipts
evidencing fractional interests in Preferred Shares) or Common Shares or for
other securities of the Company, instrument of assignment or transfer, power of
attorney, endorsement, affidavit, letter, notice, direction, consent,
certificate, statement, or other paper or document believed by it to be genuine
and to be signed, executed and, where necessary, verified or acknowledged, by
the proper Person or Persons, or otherwise upon the advice of counsel as set
forth in Section 20.
Section 19. Merger or Consolidation or Change of Name of Rights Agent.
(a) Any corporation into which the Rights Agent or any successor Rights
Agent may be merged or with which it may be consolidated, or any corporation
resulting from any merger or consolidation to which the Rights Agent or any
successor Rights Agent shall be a party, or any corporation succeeding to the
stock transfer or corporate trust business of the Rights Agent or any successor
Rights Agent, shall be the successor to the Rights Agent under this Agreement
without the execution or filing of any paper or any further act on the part of
any of the parties to this Agreement, provided that such corporation would be
eligible for appointment as a successor Rights Agent under the provisions of
Section 21. In case at the time such successor Rights Agent shall succeed to the
agency created by this Agreement any of the Right Certificates shall have been
countersigned but not delivered, any such successor Rights Agent may adopt the
countersignature of the predecessor Rights Agent and deliver such Right
Certificates so countersigned; and in case at that time any of the Right
Certificates shall not have been countersigned, any successor Rights Agent may
countersign such Right Certificates either in the name of the predecessor Rights
Agent or in the name of the successor Rights Agent; and in all such cases such
Right Certificates shall have the full force provided in the Right Certificates
and in this Agreement.
<PAGE>
(b) In case at any time the name of the Rights Agent shall be changed
and at such time any of the Right Certificates shall have been countersigned but
not delivered, the Rights Agent may adopt the countersignature under its prior
name and deliver Right Certificates so countersigned; and in case at that time
any of the Right Certificates shall not have been countersigned, the Rights
Agent may countersign such Right Certificates either in its prior name or in its
changed name; and in all such cases such Right Certificates shall have the full
force provided in the Right Certificates and in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Right Certificates,
by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may
be legal counsel for the Company), and the opinion of such counsel
shall be full and complete authorization and protection to the Rights
Agent as to any action taken or omitted by it in good faith and in
accordance with such opinion.
(b) Whenever in the performance of its duties under this
Agreement the Rights Agent shall deem it necessary or desirable that
any fact or matter be proved or established by the Company prior to
taking or suffering any action hereunder, such fact or matter (unless
other evidence in respect thereof be herein specifically prescribed)
may be deemed to be conclusively proved and established by a
certificate signed by any one of the Chairman of the Board, the
President, any Vice President, the Treasurer or the Secretary of the
Company and delivered to the Rights Agent; and such certificate shall
be full authorization to the Rights Agent for any action taken or
suffered in good faith by it under the provisions of this Agreement in
reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder to the Company
and any other Person only for its own negligence, bad faith or willful
misconduct.
(d) The Rights Agent shall not be liable for or by reason of
any of the statements of fact or recitals contained in this Agreement
or in the Right Certificates (except its countersignature thereof) or
be required to verify the same, but all such statements and recitals
are and shall be deemed to have been made by the Company only.
(e) The Rights Agent shall not be under any responsibility in
respect of the validity of this Agreement or the execution and delivery
of this Agreement (except the due execution of this Agreement by the
Rights Agent) or in respect of the validity or execution of any Right
Certificate (except its countersignature
<PAGE>
thereof); nor shall it be responsible for any breach by the Company of
any covenant or condition contained in this Agreement or in any Right
Certificate; nor shall it be responsible for any change in the
exercisability of the Rights (including the Rights becoming void
pursuant to Section 11(a)(ii)) or any adjustment in the terms of the
Rights (including the manner, method or amount thereof) provided for in
Section 3, 11, 13, 23 or 24, or the ascertaining of the existence of
facts that would require any such change or adjustment (except with
respect to the exercise of Rights evidenced by Right Certificates after
receipt of actual notice from the Company stating that a change or
adjustment is required and specifying the manner and amount thereof);
nor shall it by any act hereunder be deemed to make any representation
or warranty as to the authorization or reservation of any Preferred
Shares to be issued pursuant to this Agreement or any Right Certificate
or as to whether any Preferred Shares will, when issued, be validly
authorized and issued, fully paid and nonassessable.
(f) The Company agrees that it will perform, execute,
acknowledge and deliver or cause to be performed, executed,
acknowledged and delivered all such further and other acts, instruments
and assurances as may reasonably be required by the Rights Agent for
the carrying out or performing by the Rights Agent of the provisions of
this Agreement.
(g) The Rights Agent is hereby authorized and directed to
accept instructions with respect to the performance of its duties
hereunder from any one of the Chairman of the Board, the President, any
Vice President, the Secretary or the Treasurer of the Company, and to
apply to such officers for advice or instructions in connection with
its duties, and it shall not be liable for any action taken or suffered
to be taken by it in good faith in accordance with instructions of any
such officer or for any delay in acting while waiting for those
instructions.
(h) The Rights Agent and any shareholder, director, officer or
employee of the Rights Agent may buy, sell or deal in any of the Rights
or other securities of the Company or become pecuniarily interested in
any transaction in which the Company may be interested, or contract
with or lend money to the Company or otherwise act as fully and freely
as though it were not Rights Agent under this Agreement. Nothing herein
shall preclude the Rights Agent from acting in any other capacity for
the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the
rights or powers hereby vested in it or perform any duty hereunder
either itself or by or through its attorneys or agents, and the Rights
Agent shall not be answerable or accountable for any act, default,
neglect or misconduct of any such attorneys or agents or for any loss
to the Company resulting from any such act, default,
<PAGE>
neglect or misconduct, provided reasonable care was exercised in the
selection and continued employment thereof.
(j) No provision of this Agreement shall require the Rights
Agent to expend or risk its own funds or otherwise incur any financial
liability in the performance of any of its duties hereunder or in the
exercise of its rights if there shall be reasonable grounds for
believing that repayment of such funds or adequate indemnification
against such risk or liability is not reasonably assured to it.
Section 21. Change of Rights Agent. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon 30 days' notice in writing mailed to the Company and to each transfer agent
of the Common Shares and Preferred Shares by registered or certified mail, and
to the holders of the Right Certificates by first-class mail. The Company may
remove the Rights Agent or any successor Rights Agent upon 30 days' notice in
writing, mailed to the Rights Agent or successor Rights Agent, as the case may
be, and to each transfer agent of the Common Shares and Preferred Shares by
registered or certified mail, and to the holders of the Right Certificates by
first-class mail. If the Rights Agent shall resign or be removed or shall
otherwise become incapable of acting, the Company shall appoint a successor to
the Rights Agent. If the Company shall fail to make such appointment within a
period of 30 days after giving notice of such removal or after it has been
notified in writing of such resignation or incapacity by the resigning or
incapacitated Rights Agent or by the holder of a Right Certificate (who shall,
with such notice, submit such holder's Right Certificate for inspection by the
Company), then the registered holder of any Right Certificate may apply to any
court of competent jurisdiction for the appointment of a new Rights Agent. Any
successor Rights Agent, whether appointed by the Company or by such a court,
shall be (a)a corporation organized and doing business under the laws of the
United States or of the State of Minnesota or New York (or of any other state of
the United States so long as such corporation is authorized to do business as a
banking institution in the State of Minnesota or New York), in good standing,
having an office in the State of Minnesota or New York, which is authorized
under such laws to exercise corporate trust or stock transfer powers and is
subject to supervision or examination by federal or state authority and which
has or is a subsidiary of a corporation which has at the time of its appointment
as Rights Agent a combined capital and surplus of at least $100 million, or
(b)an affiliate of a corporation described in clause(a) of this sentence. After
appointment, the successor Rights Agent shall be vested with the same powers,
rights, duties and responsibilities as if it had been originally named as Rights
Agent without further act or deed; but the predecessor Rights Agent shall
deliver and transfer to the successor Rights Agent any property at the time held
by it hereunder, and execute and deliver any further assurance, conveyance, act
or deed necessary for the purpose. Not later than the effective date of any such
appointment the Company shall file notice thereof in writing with the
<PAGE>
predecessor Rights Agent and each transfer agent of the Common Shares and
Preferred Shares, and mail a notice thereof in writing to the registered holders
of the Right Certificates. Failure to give any notice provided for in this
Section 21, however, or any defect therein, shall not affect the legality or
validity of the resignation or removal of the Rights Agent or the appointment of
the successor Rights Agent, as the case may be.
Section 22. Issuance of New Right Certificates. Notwithstanding any of
the provisions of this Agreement or of the Rights to the contrary, the Company
may, at its option, issue new Right Certificates evidencing Rights in such form
as may be approved by its Board of Directors to reflect any adjustment or change
in the Purchase Price and the number or kind or class of shares or other
securities or property purchasable under the Right Certificates made in
accordance with the provisions of this Agreement. In addition, in connection
with the issuance or sale of Common Shares following the Distribution Date and
prior to the redemption or expiration of the Rights, the Company (a) shall, with
respect to Common Shares so issued or sold pursuant to the exercise of stock
options or under any employee plan or arrangement, granted or awarded as of the
Distribution Date, or upon the exercise, conversion or exchange of securities
hereinafter issued by the Company, and (b) may, in any other case, if deemed
necessary or appropriate by the Board of Directors of the Company, issue Rights
Certificates representing the appropriate number of rights in connection with
such issuance or sale; provided, however, that (i) no such Rights Certificate
shall be issued if, and to the extent that, the Company shall be advised by
counsel that such issuance would create a significant risk of material adverse
tax consequences to the Company or the Person to whom such Rights Certificate
would be issued, and (ii) no such Rights Certificate shall be issued if, and to
the extent that, appropriate adjustment shall otherwise have been made in lieu
of the issuance thereof.
Section 23. Redemption.
(a) At least a majority of the Continuing Directors may, at their
option, at any time prior to the earlier of (i) the Shares Acquisition Date or
(ii) the Final Expiration Date, redeem all but not less than all of the then
outstanding Rights at a redemption price of $.01 per Right, appropriately
adjusted to reflect any stock split, stock dividend or similar transaction
occurring after the date of this Agreement (such redemption price being
hereinafter referred to as the "Redemption Price"). The redemption of the Rights
by the Continuing Directors may be made effective at such time and on such basis
and with such conditions as the Continuing Directors in their sole discretion
may establish. The Company may, at its option, pay the Redemption Price in cash,
Common Shares (based on the "current market price", as defined in Section
11(d)(i), of the Common Shares at the time of the redemption) or any other form
of consideration deemed appropriate by a majority of the Continuing Directors;
provided, however, that if the Company elects to pay the Redemption Price in
Common Shares, the Company shall not
<PAGE>
be required to issue any fractional Common Shares, and the number of shares
issuable to each holder of Rights shall be rounded down to the next whole
number.
(b) Immediately upon the action of the Continuing Directors ordering
the redemption of the Rights pursuant to paragraph (a) of this Section 23, and
without any further action and without any notice, the right to exercise the
Rights will terminate and the only right thereafter of the holders of Rights
shall be to receive the Redemption Price. The Company shall promptly give public
notice of any such redemption; provided, however, that the failure to give, or
any defect in, any such notice shall not affect the validity of such redemption.
Within ten days after such action of the Board of Directors ordering the
redemption of the Rights, the Company shall mail a notice of redemption to all
the holders of the then outstanding Rights at their last addresses as they
appear upon the registry books of the Rights Agent or, prior to the Distribution
Date, on the registry books of the transfer agent for the Common Shares. Any
notice which is mailed in the manner herein provided shall be deemed given,
whether or not the holder receives the notice. Each such notice of redemption
will state the method by which the payment of the Redemption Price will be made.
Neither the Company nor any of its Affiliates or Associates may redeem, acquire
or purchase for value any Rights at any time in any manner other than that
specifically set forth in this Section 23 or in Section 24, and other than in
connection with the purchase of Common Shares prior to the Distribution Date.
Section 24. Exchange.
(a) At least a majority of the Continuing Directors may, at their
option, at any time after any Person becomes an Acquiring Person, exchange all
or part of the then outstanding and exercisable Rights (which shall not include
Rights that have become void pursuant to the provisions of Section 7(e)), for
Common Shares, with each Right to be exchanged for such number of Common Shares
as shall equal the result obtained by dividing (x) the Purchase Price by (y) the
current market price of the Common Shares (determined pursuant to Section 11(d)
(such number of shares being hereinafter referred to as the "Exchange Ratio").
The Exchange Ratio shall be appropriately adjusted to reflect any stock split,
stock dividend or similar transaction occurring after the date of this
Agreement. Notwithstanding the foregoing, the Continuing Directors shall not be
empowered to effect such exchange at any time after any Person (other than an
Exempt Person) together with all Affiliates and Associates of such Person,
becomes the Beneficial Owner of 50% or more of the Common Shares then
outstanding.
(b) Immediately upon the action of the Continuing Directors ordering
the exchange of any Rights pursuant to paragraph (a) of this Section 24 and
without any further action and without any notice, the right to exercise such
Rights shall terminate and the only right thereafter of a holder of such Rights
shall be to receive that number of Common Shares equal to the number of such
Rights held by such holder multiplied by
<PAGE>
the Exchange Ratio. The Company shall promptly give public notice of any such
exchange; provided, however, that the failure to give, or any defect in, such
notice shall not affect the validity of such exchange. The Company promptly
shall mail a notice of any such exchange to all of the holders of such Rights at
their last addresses as they appear upon the registry books of the Rights Agent.
Any notice which is mailed in the manner herein provided shall be deemed given,
whether or not the holder receives the notice. Each such notice of exchange will
state the method by which the exchange of the Common Shares for Rights will be
effected and, in the event of any partial exchange, the number of Rights which
will be exchanged. Any partial exchange shall be effected pro rata based on the
number of outstanding and exercisable Rights (other than Rights which have
become void pursuant to the provisions of Section 11(a)(ii)) held by each holder
of Rights.
(c) In the event that there shall not be sufficient Common Shares
authorized but unissued and unreserved to permit any exchange of Rights as
contemplated in accordance with this Section 24, the Company shall take all such
action as may be necessary to authorize additional Common Shares for issuance
upon exchange of the Rights. In the event the Company shall, after good faith
effort, be unable to take all such action as may be necessary to authorize such
additional Common Shares, the Company shall substitute, for each Common Share
that would otherwise be issuable upon exchange of a Right, a number of Preferred
Shares or fraction thereof such that the current per share market price of one
Preferred Share multiplied by such number or fraction is equal to the current
per share market price of one Common Share as of the date of issuance of such
Preferred Shares or fraction thereof.
(d) The Company shall not be required to issue fractions of Common
Shares or to distribute certificates which evidence fractional Common Shares. In
lieu of such fractional Common Shares, the Company shall pay to the registered
holders of the Right Certificates with regard to which such fractional Common
Shares would otherwise be issuable an amount in cash equal to the same fraction
of the current market value of a whole Common Share. For the purposes of this
paragraph (d), the current market value of a whole Common Share shall be the
closing price of a Common Share (as determined pursuant to the second sentence
of Section 11(d)(i)) for the Trading Day immediately prior to the date of
exchange pursuant to this Section 24.
Section 25. Notice of Certain Events.
(a) In case the Company shall propose (i) to pay any dividend payable
in stock of any class to the holders of its Preferred Shares or to make any
other distribution to the holders of its Preferred Shares (other than a regular
quarterly cash dividend), (ii) to offer to the holders of its Preferred Shares
rights or warrants to subscribe for or to purchase any additional Preferred
Shares or shares of stock of any class or any other securities, rights or
options, (iii) to effect any reclassification of its Preferred Shares
<PAGE>
(other than a reclassification involving only the subdivision of outstanding
Preferred Shares), (iv) to effect any consolidation or merger into or with, or
to effect any sale or other transfer (or to permit one or more of its
Subsidiaries to effect any sale or other transfer), in one or more transactions,
of 50% or more of the assets or earning power of the Company and its
Subsidiaries (taken as a whole) to, any other Person, (v)to effect any statutory
share exchange with the outstanding Common Shares of the Company being exchanged
for stock or other securities of any other corporation or cash or other
property, (vi) to effect the liquidation, dissolution or winding up of the
Company, or (vii) to declare or pay any dividend on the Common Shares payable in
Common Shares or to effect a subdivision, combination or consolidation of the
Common Shares (by reclassification or otherwise than by payment of dividends in
Common Shares), then, in each such case, the Company
<PAGE>
shall give to each holder of a Right Certificate, in accordance with Section 26,
a notice of such proposed action, which shall specify the record date for the
purposes of such stock dividend, or distribution of rights or warrants, or the
date on which such reclassification, consolidation, merger, sale, transfer,
liquidation, dissolution or winding up is to take place and the date of
participation therein by the holders of the Common Shares and/or Preferred
Shares, if any such date is to be fixed, and such notice shall be so given in
the case of any action covered by clause (i) or (ii) of this paragraph at least
ten days prior to the record date for determining holders of the Preferred
Shares for purposes of such action, and in the case of any such other action, at
least ten days prior to the date of the taking of such proposed action or the
date of participation therein by the holders of the Common Shares and/or
Preferred Shares, whichever shall be the earlier.
(b) In case the event set forth in Section 11(a)(ii) shall occur, then
the Company shall as soon as practicable thereafter give to each holder of a
Right Certificate, in accordance with Section 26, a notice of the occurrence of
such event, which notice shall describe such event and the consequences of such
event to holders of Rights under Section 11(a)(ii).
Section 26. Notices. Notices or demands authorized by this Agreement to
be given or made by the Rights Agent or by the holder of any Right Certificate
to or on the Company shall be sufficiently given or made if sent by first-class
mail, postage prepaid, addressed (until another address is filed in writing with
the Rights Agent) as follows:
Chronimed Inc.
13911 Ridgedale Drive
Suite 250
Minnetonka, MN 55305
Subject to the provisions of Section 21, any notice or demand authorized by this
Agreement to be given or made by the Company or by the holder of any Right
Certificate to or on the Rights Agent shall be sufficiently given or made if
sent by first-class mail, postage prepaid, addressed (until another address is
filed in writing with the Company) as follows:
Norwest Bank Minnesota, N.A.
Attention: Manager, Shareowner Services
161 North Concord Exchange Street
South St. Paul, MN 55075-1139
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Right Certificate shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the registry
books of the Company.
<PAGE>
Section 27. Supplements and Amendments. Prior to the Distribution Date
and subject to the penultimate sentence of this Section 27, the Company and the
Rights Agent shall, if the Company so directs, supplement or amend any
provisions of this Agreement without the approval of any holders of certificates
representing shares of Common Stock; provided, this Agreement may not be
supplemented or amended without the approval of a majority of the Continuing
Directors. From and after the Distribution Date, the Company and the Rights
Agent shall, if the Company so directs, supplement or amend this Agreement
without the approval of any holders of Rights Certificates in order (i) to cure
any ambiguity, (ii) to correct or supplement or amend any provision contained
herein which may be defective or inconsistent with any other provisions herein,
(iii) to shorten or lengthen any time period hereunder or (iv) to change or
supplement the provisions hereunder in any manner which the Company may deem
necessary or desirable and which shall not adversely affect the interests of the
holders of Rights Certificates (other than an Acquiring Person or an Affiliate
or Associate of an Acquiring Person); provided, this Agreement may not be
supplemented or amended without the approval of a majority of the Continuing
Directors. Upon delivery of a certificate from an appropriate officer of the
Company which states that the proposed supplement or amendment is in compliance
with the terms of this Section 27, the Rights Agent shall execute such
supplement or amendment. Prior to the Distribution Date, the interests of the
holders of Rights shall be deemed coincident with the interests of the holders
of Common Shares.
Section 28. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 29. Benefits of this Agreement. Nothing in this Agreement shall
be construed to give to any Person other than the Company, the Rights Agent and
the registered holders of the Right Certificates (and, prior to the Distribution
Date, the Common Shares) any legal or equitable right, remedy or claim under
this Agreement; but this Agreement shall be for the sole and exclusive benefit
of the Company, the Rights Agent and the registered holders of the Right
Certificates (and, prior to the Distribution Date, the Common Shares).
Section 30. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated.
Section 31. Governing Law. This Agreement and each Right Certificate
issued hereunder shall be deemed to be a contract made under the laws of the
State of
<PAGE>
Minnesota and for all purposes shall be governed by and construed in accordance
with the laws of such State applicable to contracts to be made and performed
entirely within such State.
Section 32. Counterparts. This Agreement may be executed in any number
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and all such counterparts shall together constitute but one
and the same instrument.
Section 33. Descriptive Headings. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions of this
Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, all as of the day and year first above written.
CHRONIMED INC.
By /w/ Norman A. Cocke
- ------------------------------------------------ Norman A. Cocke
Senior Vice President, Chief
Financial Officer and Secretary
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
By /s/ Susan J. Roeder
Its /s/ Assistant Vice President
<PAGE>
EXHIBIT A
CERTIFICATE OF DESIGNATION
OF
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
OF
CHRONIMED INC.
The undersigned hereby certifies that the Board of Directors of
Chronimed Inc. (the "Corporation"), a corporation organized and existing under
the Minnesota Business Corporation Act, duly adopted the following resolution on
December 18, 1996:
RESOLVED, that a series of preferred stock of the Corporation is hereby
created, and the designation and amount thereof and the relative rights and
preferences of the shares of such series, are as follows:
Section1. Designation and Amount. The shares of such series shall be
designated as "Series A Junior Participating Preferred Stock" (the "Preferred
Shares") and the number of shares constituting the Preferred Shares shall be
200,000. Such number of shares may be increased or decreased by resolution of
the Board of Directors and any necessary shareholder approval; provided,
however, that no decrease shall reduce the number of shares of Preferred Shares
to a number less than the number of shares then outstanding plus the number of
shares reserved for issuance upon the exercise of outstanding options, rights or
warrants or upon the conversion of any outstanding securities issued by the
Corporation convertible into Preferred Shares.
Section2. Dividends and Distributions.
(a) Subject to the rights of the holders of any shares of any series of
preferred stock (or any similar stock) ranking prior and superior to the
Preferred Shares with respect to dividends, the holders of Preferred Shares, in
preference to the holders of Common Stock, par value $0.01 per share (the
"Common Stock"), of the Corporation, and of any other junior stock, shall be
entitled to receive, when, as and if declared by the Board of Directors out of
funds legally available for the purpose, quarterly dividends payable in cash on
the first day of March, June, September and December in each year (each such
date being referred to herein as a "Quarterly Dividend Payment Date"),
commencing on the first Quarterly Dividend Payment Date after the first issuance
of a share or fraction of a share of Preferred Shares, in an amount per share
(rounded to the nearest cent) equal to the greater of (i) $0.01 or (ii) subject
to the provision for adjustment hereinafter set forth, 1,000 times the aggregate
per share amount of all cash dividends, and 1,000 times the aggregate per share
amount (payable in kind) of all
<PAGE>
noncash dividends or other distributions, other than a dividend payable in
shares of Common Stock or a subdivision of the outstanding shares of Common
Stock (by reclassification or otherwise), declared on the Common Stock since the
immediately preceding Quarterly Dividend Payment Date or, with respect to the
first Quarterly Dividend Payment Date, since the first issuance of any share or
fraction of a share of Preferred Shares. In the event the Corporation shall at
any time after December 31, 1996, declare or pay any dividend on the Common
Stock payable in shares of Common Stock, or effect a subdivision or combination
or consolidation of the outstanding shares of Common Stock (by reclassification
or otherwise) into a greater or lesser number of shares of Common Stock, then in
each such case the amount to which holders of shares of Preferred Shares were
entitled immediately prior to such event under clause (ii) of the preceding
sentence shall be adjusted by multiplying such amount by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(b) The Corporation shall declare a dividend or distribution on the
Preferred Shares as provided in paragraph (a) of this Section immediately after
it declares a dividend or distribution on the Common Stock (other than a
dividend payable in shares of Common Stock or a subdivision of the outstanding
Common Stock); provided that, in the event no dividend or distribution shall
have been declared on the Common Stock during the period between any Quarterly
Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a
dividend of $0.01 per share on the Preferred Shares shall nevertheless be
payable, out of funds legally available for such purpose, on such subsequent
Quarterly Dividend Payment Date.
(c) Dividends shall begin to accrue and be cumulative on outstanding
shares of Preferred Shares from their date of issue. Accrued but unpaid
dividends shall not bear interest. Dividends paid on the shares of Preferred
Shares in an amount less than the total amount of such dividends at the time
accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The Board of
Directors may fix a record date for the determination of holders of Preferred
Shares entitled to receive payment of a dividend or distribution declared
thereon, which record date shall be not more than 60 days prior to the date
fixed for the payment thereof.
Section 3. Voting Rights.
(a) Subject to the provision for adjustment hereinafter set forth, each
Preferred Share shall entitle the holder thereof to 1,000 votes on all matters
submitted to a vote of the shareholders of the Corporation. In the event the
Corporation shall at any time after December 31, 1996, declare or pay any
dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or
<PAGE>
consolidation of the outstanding shares of Common Stock (by reclassification or
otherwise) into a greater or lesser number of shares of Common Stock, then in
each such case the number of votes per share to which holders of shares of
Preferred Shares were entitled immediately prior to such event shall be adjusted
by multiplying such number by a fraction, the numerator of which is the number
of shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(b) Except as otherwise provided herein or by law, the holders of
Preferred Shares and the holders of Common Stock and any other capital stock of
the Corporation having general voting rights shall vote together as one class on
all matters submitted to a vote of shareholders of the Corporation.
(c) Except as set forth herein or required by law, holders of Preferred
Shares shall have no special voting rights and their consent shall not be
required (except to the extent they are entitled to vote with holders of Common
Stock as set forth herein) for taking any corporate action.
Section4. Certain Restrictions.
(a) Whenever quarterly dividends or other dividends or distributions
payable on the Preferred Shares as provided in Section2 are in arrears,
thereafter and until all accrued and unpaid dividends and distributions, whether
or not declared, on shares of Preferred Shares outstanding shall have been paid
in full, the Corporation shall not:
(i) declare or pay dividends, or make any other distributions,
on any shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Preferred Shares;
(ii) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the
Preferred Shares, except dividends paid ratably on the Preferred Shares
and all such parity stock on which dividends are payable or in arrears
in proportion to the total amounts to which the holders of all such
shares are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the
Preferred Shares; provided, however, that the Corporation may at any
time redeem, purchase or otherwise acquire shares of any such junior
stock in exchange for shares of any stock of the Corporation ranking
junior (either as to dividends or upon dissolution, liquidation or
winding up) to the Preferred Shares; or
<PAGE>
(iv) redeem or purchase or otherwise acquire for consideration
any Preferred Shares, or any stock ranking on a parity with the
Preferred Shares, except in accordance with a purchase offer made in
writing or by publication (as determined by the Board of Directors) to
all holders of such shares upon such terms as the Board of Directors,
after consideration of the respective annual dividend rates and other
relative rights and preferences of the respective series and classes,
shall determine in good faith will result in fair and equitable
treatment among the respective series or classes.
(b) The Corporation shall not permit any subsidiary of the Corporation
to purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (a) of this Section4,
purchase or otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any Preferred Shares purchased or
otherwise acquired by the Corporation in any manner whatsoever shall be retired
and canceled promptly after the acquisition thereof. All such shares shall upon
their cancellation become authorized but unissued shares of preferred stock and
may be reissued as part of a new series of preferred stock subject to the
conditions and restrictions on issuance set forth herein, in the Articles of
Incorporation, or in any other certificate of designation creating a series of
preferred stock or any similar stock or as otherwise required by law.
Section 6. Liquidation, Dissolution or Winding Up. Upon any
liquidation, dissolution or winding up of the Corporation, no distribution shall
be made (1) to the holders of shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Preferred
Shares unless, prior thereto, the holders of Preferred Shares shall have
received the greater of (i) $1,000 per share, plus an amount equal to accrued
and unpaid dividends and distributions thereon, whether or not declared, to the
date of such payment, or (ii) an aggregate amount per share, subject to the
provision for adjustment hereinafter set forth, equal to 1,000 times the
aggregate amount to be distributed per share to holders of Common Stock, or (2)
to the holders of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Preferred Shares, except
distributions made ratably on the Preferred Shares and all such parity stock in
proportion to the total amounts to which the holders of all such shares are
entitled upon such liquidation, dissolution or winding up. In the event the
Corporation shall at any time after December 31, 1996, declare or pay any
dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise) into a greater or lesser number of
shares of Common Stock, then in each such case the aggregate amount to which
holders of shares of Preferred Shares were entitled immediately prior to such
event under clause (1)(ii) of
<PAGE>
the preceding sentence shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
Section 7. Consolidation, Merger, etc. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each share of
Preferred Shares shall at the same time be similarly exchanged or changed into
an amount per share, subject to the provision for adjustment hereinafter set
forth, equal to 1,000 times the aggregate amount of stock, securities, cash
and/or any other property (payable in kind), as the case may be, into which or
for which each share of Common Stock is changed or exchanged. In the event the
Corporation shall at any time after December 31, 1996, declare or pay any
dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise) into a greater or lesser number of
shares of Common Stock, then in each such case the amount set forth in the
preceding sentence with respect to the exchange or change of shares of Preferred
Shares shall be adjusted by multiplying such amount by a fraction, the numerator
of which is the number of shares of Common Stock outstanding immediately after
such event and the denominator of which is the number of shares of Common Stock
that were outstanding immediately prior to such event.
Section 8. No Redemption. The Preferred Shares shall not be redeemable.
Section 9. Rank. The Preferred Shares shall rank, with respect to the
payment of dividends and the distribution of assets, junior to all series of any
other class of the Corporation's preferred stock.
Section 10. Fractional Shares. Preferred Shares may be issued in
fractions of a share which are integral multiples of one one-thousandth of a
share which shall entitle the holder, in proportion to such holder's fractional
shares, to receive dividends, participate in distributions and to have the
benefit of all other rights of holders of Preferred Shares.
Section 11. Amendment. The Articles of Incorporation of the Corporation
shall not be amended in any manner which would materially alter or change the
powers, preferences or rights of the Preferred Shares so as to affect them
adversely without the affirmative vote of the holders of at least two-thirds of
the outstanding shares of Preferred Shares, voting together as a single class.
<PAGE>
IN WITNESS WHEREOF, I have subscribed my name this 18th day of December
1996.
CHRONIMED INC.
By _________________________________
- ----------------------------------------------- Norman A. Cocke
Senior Vice President, Chief
Financial Officer and Secretary
<PAGE>
EXHIBIT B
FORM OF RIGHT CERTIFICATES
Certificate No. R-___ Rights
NOT EXERCISABLE AFTER DECEMBER 18, 2006 OR EARLIER IF REDEMPTION OR EXCHANGE
OCCURS. THE RIGHTS ARE SUBJECT TO REDEMPTION AT $.01 PER RIGHT (SUBJECT TO
ADJUSTMENT) AND TO EXCHANGE ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT.
UNDER CERTAIN CIRCUMSTANCES SET FORTH IN THE RIGHTS AGREEMENT, RIGHTS
BENEFICIALLY OWNED BY A PERSON WHO IS, WAS OR BECOMES AN ACQUIRING PERSON OR AN
AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE
RIGHTS AGREEMENT) AND SUBSEQUENT HOLDERS OF SUCH RIGHTS MAY BECOME NULL AND
VOID.
RIGHT CERTIFICATE
CHRONIMED INC.
This certifies that , or registered assigns, is the registered owner of
the number of Rights set forth above, each of which entitles the owner thereof,
subject to the terms, provisions and conditions of the Rights Agreement, dated
as of December 18, 1996 (the "Rights Agreement"), between Chronimed Inc., a
Minnesota corporation (the "Company"), and Norwest Bank Minnesota, National
Association (the "Rights Agent"), to purchase from the Company at any time after
the Distribution Date (as such term is defined in the Rights Agreement) and
prior to 5:00P.M., Minneapolis time, on December 18, 2006 at the office or
offices of the Rights Agent designated for such purpose, or of its successor as
Rights Agent, one one-thousandth of a fully paid non-assessable share of Series
A Junior Participating Preferred Stock, par value $.01 per share (the "Preferred
Shares"), of the Company, at a purchase price of $120 (the "Purchase Price"),
upon presentation and surrender of this Right Certificate with the Form of
Election to Purchase duly executed. The number of Rights evidenced by this Right
Certificate (and the number of one one-thousandths of a Preferred Share which
may be purchased upon exercise hereof) set forth above, and the Purchase Price
set forth above, are the number and Purchase Price as of December __, 1996,
based on the Preferred Shares as constituted at such date. As provided in the
Rights Agreement, the Purchase Price and the number of one one-thousandths of a
Preferred Share which may be purchased upon the exercise of the Rights evidenced
by this Right Certificate are subject to modification and adjustment upon the
happening of certain events.
<PAGE>
This Right Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Right Certificates. Copies of
the Rights Agreement are on file at the principal executive offices of the
Company and the above-mentioned office or offices of the Rights Agent and will
be mailed without charge by the Company or the Rights Agent to the holder of
this certificate promptly following receipt by the Company or the Rights Agent
of a written request therefor.
From and after the occurrence of a Section11(a)(ii) Event (as such term
is defined in the Rights Agreement), any Rights that are or were acquired or
beneficially owned by any Acquiring Person (or any Associate or Affiliate of
such Acquiring Person) (as such terms are defined in the Rights Agreement) shall
be void and any holder of such Rights shall thereafter have no right to exercise
such Rights under any provision of this Agreement.
This Right Certificate, with or without other Right Certificates, upon
surrender at the office or offices of the Rights Agent designated for such
purpose, may be exchanged for another Right Certificate or Right Certificates of
like tenor and date evidencing Rights entitling the holder to purchase a like
aggregate number of Preferred Shares as the Rights evidenced by the Right
Certificate or Right Certificates surrendered shall have entitled such holder to
purchase. If this Right Certificate shall be exercised in part, the holder shall
be entitled to receive upon surrender hereof another Right Certificate or Right
Certificates for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights evidenced
by this certificate (i) may, but are not required to, be redeemed by the Company
at a redemption price of $.01 per Right, subject to adjustment as provided in
the Rights Agreement, and (ii) may, but are not required to, be exchanged by the
Company in whole or in part for Common Shares.
No fractional Preferred Shares will be issued upon the exercise of any
Right or Rights evidenced hereby (other than fractions which are integral
multiples of one one-thousandth of a Preferred Share, which may, at the election
of the Company, be evidenced by depository receipts), but in lieu thereof a cash
payment will be made, as provided in the Rights Agreement.
No holder of this Right Certificate shall be entitled to vote or
receive dividends or be deemed for any purpose the holder of the Preferred
Shares or of any other securities of the Company which may at any time be
issuable on the exercise hereof, nor shall anything contained in the Rights
Agreement or herein be construed to
<PAGE>
confer upon the holder hereof, as such, any of the rights of a shareholder of
the Company or any right to vote for the election of directors or upon any
matter submitted to shareholders at any meeting thereof, or to give or withhold
consent to any corporate action, or to receive notice of meetings or other
actions affecting shareholders (except as provided in the Rights Agreement), or
to receive dividends or subscription rights, or otherwise, until the Right or
Rights evidenced by this Right Certificate shall have been exercised as provided
in the Rights Agreement.
This Right Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Rights Agent.
WITNESS the manual or facsimile signature of the proper officer of the
Company.
Dated: December 18, 1996
CHRONIMED INC.
By ___________________________
Countersigned for purposes
of authentication only:
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
By
Authorized Signature
<PAGE>
FORM OF REVERSE SIDE OF RIGHT CERTIFICATE
FORM OF ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer the Right Certificate.)
FOR VALUE RECEIVED, ____________ hereby sells, assigns and transfers
unto ______________________________ (PRINT NAME OF TRANSFEREE)
______________________________________ (PRINT ADDRESS OF TRANSFEREE) this Right
Certificate, together with all right, title and interest therein, and does
hereby irrevocably constitute and appoint _____________ Attorney, to transfer
the within Right Certificate on the books of the within-named Company, with full
power of substitution.
Please insert social security
number, taxpayer identification
number or other identifying number:
Dated:
________________________________
Signature
Signature Guaranteed:___________________________________________________________
The signature(s) should be guaranteed by an eligible guarantor
institution (banks, stockbrokers, savings and loan associations and credit
unions with membership in an approved signature guarantee medallion program),
pursuant to S.E.C. Rule 17Ad-15.
<PAGE>
FORM OF REVERSE SIDE OF RIGHT CERTIFICATE--CONTINUED
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to
exercise the Right Certificate.)
To: [Name]
The undersigned hereby irrevocably elects to exercise_________ Rights
represented by this Right Certificate to purchase the Preferred Shares issuable
upon the exercise of such Rights and requests that certificates for such
Preferred Shares be issued in the name of:
Please insert social security
number, taxpayer identification
number or other identifying number:
(Please print name and address)
If such number of Rights shall not be all the Rights evidenced by this Right
Certificate, a new Right Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to:
Please insert social security number,
taxpayer identification number
or other identifying number:
(Please print name and address)
Dated:
Signature
Signature Guaranteed:
The signature(s) should be guaranteed by an eligible guarantor
institution (banks, stockbrokers, savings and loan associations and credit
unions with membership in an approved signature guarantee medallion program),
pursuant to S.E.C. Rule 17Ad-15.
<PAGE>
EXHIBIT C
CHRONIMED INC.
SUMMARY OF RIGHTS TO PURCHASE
PREFERRED SHARES
On December 18, 1996, the Board of Directors of Chronimed Inc. (the
"Company"), declared a dividend of one preferred share purchase right (a
"Right") per share for each outstanding share of Common Stock, par value $.01
(the "Common Shares"), of the Company. The dividend is payable on December 31,
1996 (the "Record Date") to shareholders of record on that date.
Each Right entitles the registered holder to purchase from the Company
one one-thousandth of a share of Series A Junior Participating Preferred Stock,
par value $.01 (the "Preferred Shares"), of the Company at a price of $120 per
one-thousandth of a Preferred Share (the "Purchase Price"), subject to
adjustment. The description and terms of the Rights are set forth in a Rights
Agreement (the "Rights Agreement"), dated as of December 18, 1996, between the
Company and Norwest Bank Minnesota, National Association, as Rights Agent (the
"Rights Agent").
Initially, the Rights will be evidenced by the certificates
representing Common Shares then outstanding and no separate Right Certificates
will be distributed. The Rights will separate from the Common Shares, and a
Distribution Date for the Rights will occur upon the earlier of: (i) the first
date of public announcement that a Person or group of affiliated or associated
Persons has become an "Acquiring Person" (I.E., has become, subject to certain
exceptions, the beneficial owner of 15% or more of the outstanding Common
Shares) (except pursuant to a Permitted Offer, as hereinafter defined) and (ii)
the 10th day following the commencement or public announcement of a tender offer
or exchange offer, the consummation of which would result in a Person or group
of affiliated or associated Persons becoming, subject to certain exceptions, the
beneficial owner of 15% or more of the outstanding Common Shares (or such later
date as may be determined by the Board of Directors of the Company prior to a
Person or group of affiliated or associated Persons becoming an Acquiring
Person) (the earlier of such dates being called the "Distribution Date").
Until the Distribution Date, (i) the Rights will be evidenced by the
Common Share certificates and will be transferred with and only with the Common
Shares, (ii) new Common Share certificates issued after the Record Date upon
transfer or new issuance of the Common Shares will contain a notation
incorporating the Rights Agreement by reference, and (iii) the surrender for
transfer of any Common Share
<PAGE>
certificate, even without such notation or a copy of this Summary of Rights
attached thereto, will also constitute the transfer of the Rights associated
with the Common Shares represented by such certificate.
As promptly as practicable following the Distribution Date, separate
certificates evidencing the Rights ("Right Certificates") will be mailed to
holders of record of the Common Shares as of the close of business on the
Distribution Date, and such separate Right Certificates alone will evidence the
Rights.
The Rights are not exercisable until the Distribution Date. The Rights
will expire on December 18, 2006, unless extended or earlier redeemed or
exchanged by the Company as described below.
The Purchase Price payable and the number of Preferred Shares or other
securities or property issuable upon exercise of the Rights are subject to
adjustment from time to time to prevent dilution: (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the Preferred
Shares, (ii) upon the grant to holders of the Preferred Shares of certain
rights, options or warrants to subscribe for or purchase Preferred Shares or
convertible securities at less than the then current market price of the
Preferred Shares, or (iii) upon the distribution to holders of the Preferred
Shares of evidences of indebtedness or assets (excluding regular periodic cash
dividends or dividends payable in Preferred Shares) or of subscription rights or
warrants (other than those described in clause (ii) of this paragraph). With
certain exceptions, no adjustment in the Purchase Price will be required until
cumulative adjustments require an adjustment of at least 1% in the Purchase
Price.
No fraction of a Preferred Share (other than fractions in integral
multiples of one one-thousandth of a share) will be issued and, in lieu thereof,
an adjustment in cash will be made based on the closing price on the last
trading date prior to the date of exercise.
The number of outstanding Rights and the number of one one-thousandth
of a Preferred Share issuable upon exercise of each Right are also subject to
adjustment in the event of a stock split of the Common Shares or a stock
dividend on the Common Shares payable in Common Shares or subdivisions,
consolidations or combinations of the Common Shares occurring, in any such case,
prior to the Distribution Date.
Preferred Shares purchasable upon exercise of the Rights will not be
redeemable. Each Preferred Share will be entitled to a minimum preferential
quarterly dividend payment of $.01 per share but will be entitled to an
aggregate dividend of 1,000 times the dividend declared per Common Share. In the
event of liquidation, the holders of the Preferred Shares will be entitled to a
minimum preferential liquidation payment of $.01 per share but will be entitled
to an aggregate payment of 1,000 times the payment made per Common Share. Each
Preferred Share will have 1,000 votes, voting together with the Common Shares.
Finally, in the event of any merger,
<PAGE>
consolidation or other transaction in which Common Shares are exchanged, each
Preferred Share will be entitled to receive 1,000 times the amount received per
Common Share. These rights are subject to adjustment in the event of a stock
dividend on the Common Shares or a subdivision, combination or consolidation of
the Common Shares.
In the event that a person or group becomes an Acquiring Person (except
pursuant to a Permitted Offer (as defined below)), each holder of a Right, other
than the Acquiring Person or the affiliates, associates or transferees thereof
(whose Rights will thereafter be void), will thereafter have the right to
receive upon exercise thereof at the then current exercise price of the Right
that number of Common Shares having a market value of two times the exercise
price of the Right, subject to certain possible adjustments.
In the event that the Company is acquired in certain mergers or other
business combination transactions or 50% or more of the assets or earning power
of the Company and its subsidiaries (taken as a whole) are sold after a person
or group becomes an Acquiring Person (except pursuant to a Permitted Offer),
holders of the Rights will thereafter have the Right to receive, upon exercise
thereof at the then current exercise price of the Right, that number of Common
Shares of the acquiring company (or, in certain cases, one of its Affiliates)
having a market value of two times the exercise price of the Right.
A "Permitted Offer" is a tender offer or an exchange offer for all
outstanding Common Shares of the Company at a price and on terms determined by a
majority of the Board of Directors of the Company who are not officers of the
Company and who are not Acquiring Persons or affiliates or associates of an
Acquiring Person and after receiving advice from one or more investment banking
firms, to be (a) fair to shareholders (taking into account all factors which the
Board of Directors deems relevant) and (b) otherwise in the best interests of
the Company and its shareholders, employees, customers, suppliers and creditors
and the communities in which the Company does business, and which the Board of
Directors determines to recommend to the shareholders of the Company.
At any time after a Person becomes an Acquiring Person (subject to
certain exceptions), and prior to the acquisition by a Person of 50% or more of
the outstanding Common Shares, the Continuing Directors may exchange all or part
of the Rights for Common Shares at an exchange ratio per Right equal to the
result obtained by dividing the exercise price of a Right by the current per
share market price of the Common Shares, subject to adjustment.
At any time before a Person has become an Acquiring Person, the
Continuing Directors may redeem the Rights in whole, but not in part, at a price
of $.01 per Right (the "Redemption Price"), subject to adjustment. The
redemption of the Rights may be made effective at such time, on such basis and
with such conditions as such Continuing Directors may, in their sole discretion,
establish.
<PAGE>
A "Continuing Director" is a member of the Board of Directors who was a
member of the Board on December 18, 1996, or who subsequently became or becomes
a member of the Board of Directors with the recommendation or approval of a
majority of the Continuing Directors. Continuing Directors do not include any
Acquiring Person or affiliate or associate of an Acquiring Person.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of the Company, including without limitation, the right
to vote or to receive dividends.
A copy of the Rights Agreement has been filed with the Securities and
Exchange Commission as an Exhibit to a Registration Statement on Form 8-A dated
December 18, 1996. A copy of the Rights Agreement is available free of charge
from the Company by contacting the Secretary at Chronimed Inc., 13911
Ridgedale Drive, Suite 250, Minnetonka, MN 55305. This summary description of
the Rights does not purport to be complete and is qualified in its entirety by
reference to the Rights Agreement, which is hereby incorporated herein by
reference.
EXHIBIT 10.16
EMPLOYMENT CONTRACT
THIS CONTRACT, dated as of April ___, 1997, is entered by and between
CHRONIMED INC., a Minnesota corporation (the "COMPANY"), and HENRY F.
BLISSENBACH (the "EMPLOYEE").
WHEREAS, the Company desires to employ the Employee as its President
and Chief Operating Officer in accordance with the following terms, conditions
and provisions; and
WHEREAS, the Employee desires to perform such services for the Company,
all in accordance with the following terms, conditions and provisions;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, it is agreed as follows:
1. ENGAGEMENT. The Company agrees to engage the Employee and the
Employee agrees to serve the Company as President and Chief Operating Officer.
The Employee shall remain a member of the Company's Board of Directors subject
to election by the shareholders of the Company.
2. TERM. The term of this Contract and Employee's employment shall
commence on May 1, 1997 and shall continue thereafter for a period of three
years. Upon the expiration of the original term of this Contract, this Contract
shall automatically renew for successive one year terms, subject to termination
as provided in Section 10.
3. SERVICES. The Employee shall apply his best efforts and devote
substantially all of his time and attention to the Company's affairs. The
Employee shall perform those duties as may from time to time be assigned to him
by the Company's Chief Executive Officer or Board of Directors, consistent with
the offices held by Employee.
4. COMPENSATION. The Company shall pay the Employee for his services
the following salary, bonuses and benefits:
A. SALARY. The Employee shall be paid a base salary of
$200,000.00 per year, payable on the 15th and last days of each month
by direct deposit to a bank account designated by Employee. Employee
shall receive an annual performance review and, contingent upon
satisfactory review results, shall be eligible for increase of such
base salary.
B. BONUS. The Employee shall participate in a Company
management incentive plan, commencing July 1, 1997, which is designed
to
<PAGE>
deliver an annual bonus targeted at 40% of base salary and up to 60% of
base salary. Employee shall meet with the Company's Chief Executive
Officer, upon commencement of employment and thereafter at the
beginning of every Company fiscal year, to establish qualitative
initiatives and objectives for the purpose of assessing the amount of
bonus to be paid Employee at the end of the associated bonus period.
C. STOCK OPTIONS. Employee shall be granted, or be eligible to
participate in, as the case may be, the following stock option plans:
(i) Employee shall be awarded, upon commencement of his
employment, a stock option grant of 50,000 shares of the Company's
common stock. The stock option awarded shall be immediately vested
and will permit the Employee to purchase Company stock, for a
period of seven years, at the closing market price of the
Company's stock on the date of commencement of Employee's
employment. In the event, during the first sixth months following
commencement of Employee's employment, the total market value of
the 50,000 shares of Company stock subject to this option fails to
reach a price at least $200,000.00 greater than the option
exercise price, the Company shall pay to Employee on the six month
anniversary of his employment, a lump sum equal to the difference
between $200,000.00 and the highest point of gain in market price
over the exercise price during the preceding six months. Such
payment shall be net of any withholding taxes. The stock option
plan identified above shall be reduced to a separate written
agreement, consistent with these terms and to be executed by the
parties.
(ii) Employee shall be eligible to participate in additional
annual stock options consistent with option plans made available
to the executive officers of the Company and pursuant to the
Board's discretion. The terms of future stock options, including
the number of shares available, exercise price, and vesting
provisions shall be determined pursuant to each option agreement.
D. EMPLOYEE BENEFIT PLANS. During the term of his employment,
Employee shall be entitled to participate in any employee benefit plan
or plans established and maintained by the Company for its employees,
in accordance with the eligibility requirements and other terms and
provisions of such plan or plans. Employee acknowledges and agrees that
the Company is under no obligation to Employee to establish or maintain
any employee benefit plan in which Employee may participate, and that
the terms and provisions of any employee benefit plan of the Company
are matters solely within the exclusive province of the Board of
Directors.
<PAGE>
5. VACATION AND TIME OFF. Employee shall be entitled to four (4) weeks
of vacation in each year of employment under the terms of this Agreement without
reduction of salary. Unused vacation time may be carried over to future years of
employment consistent with Company policies affecting use of employee vacation
time. In addition, Employee shall be entitled to such additional time off from
work, without loss of compensation, for attendance at professional meetings,
conventions, approved "other business activities" as per section 13 and
educational courses in accordance with the Company's general policies in this
regard, as from time to time determined by its Board of Directors.
6. EXPENSES. The Company will reimburse Employee for reasonable
expenses incurred by Employee in connection with the business of the Company
according to policies promulgated from time to time by the Board of Directors
upon presentation by Employee of appropriate substantiation for such expenses.
The Company will further reimburse Employee for Employee's monthly dues to the
Wayzata Country Club in the event Employee becomes a member of that club.
7. MEDICAL AND DENTAL COVERAGE. Employee shall be entitled to medical
and dental coverage provided by the Company as offered to other employees of the
Company. Employee shall also be covered by a Diagnostic Services Plan, made
available to Company officers, which provides for annual physical exams beyond
those available under the company's routine employee medical plan.
8. INSURANCE. Employee agrees that the Company, in the discretion of
its Board of Directors, may apply for and procure on its own behalf, life
insurance on the life of Employee, for the purpose of protecting the Company
against loss caused by the death of the Employee. Employee agrees to submit to
medical examination and to execute or deliver any documentation reasonably
required by the Company's insurer in order to effectuate such insurance.
9. SICK LEAVE AND DISABILITY.
A. SICK LEAVE. Employee shall be entitled to ten (10) calendar
days of sick leave in each year of employment without loss of
compensation. Unused sick leave shall not be carried over to future
years of employment.
B. DISABILITY. Notwithstanding any other provision of this
Contract, if Employee is totally disabled, as defined below, for an
aggregate of 180 calendar days in any one calendar year of employment,
the Company shall not be obligated to pay Employee the compensation
provided in this Contract for any period of total disability during
such year in excess of 120 days. In such event, Employee's salary under
Section 4 shall be prorated for such year
<PAGE>
of employment in the same manner as if this Contract had been
terminated at the end of such 120th day.
For purposes of this Contract, Employee shall be considered to
be totally disabled when he is considered to be totally disabled by any
insurance company used by the Company to provide disability benefits
for the Employee, and Employee shall continue to be considered totally
disabled until such insurance company ceases to recognize him as
totally disabled for purposes of disability benefits. If no such
disability policies are in effect for the benefit of Employee, or if
for any reason an insurance company fails to make a determination of
the question of whether Employee is totally disabled, Employee shall be
considered to be totally disabled if, because of mental or physical
illness or other cause, he is unable to perform the majority of his
usual duties on behalf of the Company. the existence of a total
disability of the Employee, the date it commenced, and the date it
ceases, shall be determined by the Board of Directors and the Employee.
If, the parties cannot agree on the foregoing questions of disability,
then any such determination shall be made after examination of Employee
by a medical doctor selected by the Board of Directors and a medical
doctor selected by the Employee. If the medical doctors so selected
cannot agree on the foregoing questions of disability, a third medical
doctor shall be selected by the two and the opinion of a majority of
all three shall be binding.
10. TERMINATION. This Contract shall terminate upon the occurrence of
any of the following:
A. Written agreement of the parties to terminate;
B. Employee's death;
C. Upon the expiration of the initial or any renewal term of
this Contract, following 120 days written notice by one party to the
other indicating the party's intention not to renew;
D. At the Company's option, if Employee shall be totally
disabled, as defined above, for a continuous period in excess of nine
months. The Company's option to terminate in such event shall be
exercised upon at least thirty (30) days written notice to Employee;
E. Termination by the Company for Cause. Cause shall be
defined as (i) the failure of Employee to substantially perform any
duties reasonably required by the Company that are consistent with
Employee's position (except as the result of any disabling injury for
which Employee is then receiving benefits under a short-term or
long-term disability program); (ii)
<PAGE>
the commission by Employee of any criminal act, or act of fraud or
dishonesty by Employee related to, or in connection with his employment
by the Company;
F. Change of Employment or Termination Without Cause By The
Company. A Change in Employment shall be deemed to have occurred if,
without Employee's consent (i) Employee's position, duties, or title
are materially, adversely changed without Cause; or (ii) Employee's
salary or benefits are reduced without Cause, or (iii) the location of
performance of most of Employee's duties is moved from the general
geographic location in which Employee performed such duties prior to
the move. The effective date of a Change in Employment shall be the
date Employee elects, by written notice to the Company, to treat such
termination as a Change in Employment, provided it occurs within 90
days of the date Employee is notified of the change in Employment.
Failure to treat a particular Change in Employment as a termination of
employment shall not preclude Employee from treating a subsequent
Change in Employment as a termination of employment.
In the event Employee's employment with the Company is
terminated without Cause, or a Change in Employment occurs and employee
elects to treat the Change in Employment as a termination of employment
and so notifies the Company of such election within 90 days following
the Change of Employment (with the date of notice to be deemed the
effective date of termination) or the geographic location changes as
defined above, then:
(a) Employee shall receive payment equal to 12 months of (i)
Employee's then-current annualized salary; plus (ii) the average of any
bonus or incentive compensation paid or payable for the most recent two
calendar years, or other period generally used by the Company to
determine such bonus or incentive compensation, with such salary and
bonus or incentives to be paid over a period of one year consistent
with the Company's routine employee payment schedules; plus (iii) all
unvested options held by Employee shall immediately vest.
(b) Employee shall be entitled to continue participation in
the health care coverage, life insurance or employee benefit plans of
the Company. The Company shall, for two years following the effective
date of the termination without Cause or Change of Employment or until
Employee becomes eligible for such insurance coverages with another
employer, continue to provide health care coverage (or equivalent
premiums) for Employee and his dependents to the same extent and cost
the Company is then providing for other employees with comparable
coverage during this two year period.
<PAGE>
11. COVENANT NOT TO COMPETE. Employee hereby covenants and agrees that
during the initial and any renewal term of this Agreement, and for a period of
one year following the termination of this Contract, Employee shall not be
engaged within the United States, either directly or indirectly, in any manner
or capacity, whether as an advisor, principal, agent, partner, officer,
director, employee, member of an association, or otherwise, in any business or
activity, or own beneficially or of record five per cent (5%) or more of the
outstanding stock of any class of equity securities in any corporation, in
competition with the business then being conducted by the Company. If Employee
should breach the foregoing covenant, the Company will cease making payments
described in paragraph 10.F.(a), remaining unexercised stock options shall
immediately be canceled and benefit plan provisions described in paragraph
10.F.(b) shall be discontinued.
12. CONFIDENTIALITY. Employee will in the course of his employment with
the Company have access to confidential or proprietary data or information
belonging to the Company. Employee will not at any time divulge or communicate
to any person (other than to a person bound by confidentiality obligations to
the Company similar to those contained in this Contract) or use to the detriment
of the Company or for the benefit of any other person such data or information.
The provisions of this Section 12 shall survive Employees' employment hereunder
regardless of the cause of termination of employment or this Contract. The
phrase (confidential or proprietary data or information" shall mean information
not generally available to the public including, without limitation, personal
information, financial information, customer lists, supplier lists, trade
secrets, secret processes, computer data and programs, pricing, marketing and
advertising data. Employee acknowledges and agrees that any confidential or
proprietary data or information that Employee has already acquired was in fact
received in confidence and in Employee's fiduciary capacity with respect to the
Company.
All written materials, records and documents made by Employee or coming
into Employee's possession during the term of employment concerning any product,
processes, information or services used, developed, investigated or considered
by the Company, or otherwise concerning the business or affairs of the Company,
shall be the sole property of the Company and upon termination of Employee's
employment for any reason, or upon request of the Board of Directors during
Employee's employment, Employee shall promptly deliver the same to the Company.
In addition, upon termination of Employee's employment for any reason, or upon
request of the Board of Directors during Employee's employment, Employee shall
deliver to the Company all other property of the Company in Employee's
possession or under Employee's control including, but not limited to, financial
statements, marketing and sales data, and Company credit cards.
13. OTHER BUSINESS ACTIVITIES. Employee shall not serve as an officer
of another company, whether for compensation or otherwise, requiring more than
nominal duties by Employee, during the term of this Contract without the express
prior written consent of the Company's Board of Directors. Employee may serve a
director of other companies, or in similar capacity, provided such other
companies are not in competition with the Company
<PAGE>
and Employees duties do not interfere with the performance of his duties and
obligations to the Company.
14. NOTICES. All notices, requests, demands and other communications
provided for by this Contract shall be in writing and shall be deemed to have
been given when mailed at any general or branch United States Post Office
enclosed in a certified postpaid envelope, return receipt requested, and
addressed to the address of the respective party stated below or to such changed
address as the party may have fixed by notice:
If to the Employee:
Henry F. Blissenbach
607 Pond View Drive
Mendota Heights, MN 55120
If to the Company:
Chairman of The Board of Directors
Chronimed Inc.
Suite 250, Ridgedale Office Center
13911 Ridgedale Drive
Minnetonka, MN 55305
Any notice of change of address shall only be effective, however, when received.
15. SUCCESSORS AND ASSIGNS. This Contract shall inure to the benefit
of, and be binding upon, the Company, its successors and assigns, including,
without limitation, any corporation which may acquire all or substantially all
of the Company's assets and business or into which the Company may be
consolidated or merged, and the Employee, his heirs, executors, administrators
and legal representatives. The Employee may assign his right to payment, and his
obligations, under this Contract.
16. APPLICABLE LAW. This Contract shall be governed by the laws of the
State of Minnesota.
17. OTHER AGREEMENTS. This Contract supersedes all prior understandings
and agreements between the parties. It may not be amended orally, but only by a
writing signed by the parties hereto.
18. NON-WAIVER. No delay or failure by either party in exercising any
right under this Contract, and no partial or single exercise of that right,
shall constitute a waiver of that or any other right.
<PAGE>
19. HEADINGS. Headings in this Contract are for convenience only and
shall not be used to interpret or construe its provisions.
20. COUNTERPARTS. This Contract may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
CHRONIMED INC.
By____________________________
Its___________________________
EMPLOYEE
______________________________
Henry F. Blissenbach
EXHIBIT 10.28
MARFIELD, BELGARDE & YAFFE COMPANIES
MANAGED PROPERTIES
OFFICE BUILDING LEASE
This LEASE is made this ~day of November 1996, between Red Circle L.L.P. (as
LANDLORD) and Chronimed Inc. (as TENANT).
WITNESSETH:
In Consideration of the mutual Covenants, promises, and agreements herein
contained, the parties agree as follows:
1. DESCRIPTION OF THE PREMISES
TENANT hereby leases from LANDLORD Certain Premises (Leased Premises) within the
building (Building), identified as 1090O Red Circle Drive, Minnetonka, MN. The
Lease Premises is identified as Suite 300 and is more specifically designated in
Exhibit "A" and "B" which are made a part hereof. The Lease Premises is measured
from the outside of all demising exterior walls to the center of tenant division
and common area walls.
and the leased premises
TENANT agrees to accept the building/in "as is" Condition, not withstanding the
items specifically listed in Exhibit "C" and those improvements represented in
Exhibit "A" and "B".
The Leased Premises Contains:
Office, rest room, entry, truck dock and finished spaces 23,621 S.F.
For informational purposes only, the whole building consists approximately of
the following square footage sizes:
Chronimed 23,621
Summit main area 54,451
Summit storage 502
Summit total 55,953
Vacancy 18,120
Common area 2,890
Total 99,584
2. RENT
<PAGE>
TENANT Covenants to pay annual Base Rent for the Leased Premises of One Hundred
Ninety-One-Thousand Three Hundred Thirty and 10/100 Dollars ($191,330.10)
payable to the LANDLORD, or to any other entity designated by LANDLORD, without
further notice, in equal monthly installments, sublect to pro-ration in the case
of the first and last months of the Lease term, of Fifteen Thousand Nine Hundred
Forty-four 18/100 Dollars ($ 15,944. 18) on the first business day of each month
during the full term hereof. This was calculated by multiplying 23,621 sq. ft
times $8.10 per sq. ft. See Section 7 for TENANT'S Additional Rent obligations.
TENANT'S obligation to pay Base and Additional Rent is unconditional and
independent of any other provision of this Lease. TENANT agrees not to with hold
Base and Additional Rent for any reason. TENANT agrees to pay a ten percent
(10%) late charge fee each month on any sums due LANDLORD which are owing to the
LANDLORD by the tenth day of that month, if notified by LANDLORD, in writing
that the payment has not been received by the fifth of the month. month's Base
Rent is included with this Lease as Check #050007, dated 11/25/96, $36,888.36,
issued by
3. TERM OF LEASE
The Lease is five (5) years no (O) months commencing on the first day of April,
1997 and expiring on the last day of March, 2002. TENANT shall have the right of
access to the space to construct its leasehold improvements starting on February
1, 1 997.
4. USE OF PREMISES
TENANT agrees to use the Leased Premises for office, pharmacy and lab space and
no other purpose; subject to all local, state, and federal laws regulating such
use. Such use shall not cause excessive odors, humidity, noise or vibrations
which may iniure the building, cause harm to, or disrupt other tenants.
LANDLORD will use its best efforts to obtain all zoning approvals or waivers
needed from the City to allow TENANT to lawfully use the Leased Premises as
described above. If LANDLORD fails to obtain such approvals or waivers within
forty-five (45) days after the parties fully execute this Lease, the Lease will
automatically terminate, without further obligation on either party's part.
5. PARKING AND COMMON AREAS
The TENANT, its employees and invitees shall have the non-exclusive right to use
the common areas, driveways and parking lots along with the other tenants of the
Building and their employees and invitees. The use of common areas, and the
portion of the land set aside by LANDLORD for non-exclusive use of tenants, is
subject to such reasonable rules and regulations as the LANDLORD may impose from
time to time. No more than 3.3 parking spaces per 1 ,000
<PAGE>
square feet are to be occupied at any one time by the TENANT, its employees and
invitees. Overnight parking of vehicles is prohibited; except private vehicles
on a non-recurring basis, not longer than seven continuous days. LANDLORD
reserves the right to move or remove any vehicle remaining after seven days
during the snow removal season. The storage, at any time, of any property in the
common areas is prohibited.
TENANT will have no right to use the upper level parking area.
TENANT has the right, (at any time, by giving LANDLORD written notice specifying
the number of additional parking stalls desired) to require LANDLORD to Create
up to forty (40) parking stalls on the property in addition to those existing as
of the date of the Lease. Upon receiving the notice, LANDLORD will diIigently
undertake reasonable efforts to do all things necessary to Create the stalls,
including applying for all necessary City approvals. If LANDLORD Cannot, despite
reasonable efforts, obtain all such approvals, LANDLORD will have no obligation
to Create the stalls, notwithstanding anything herein to the Contrary. LANDLORD
will have no obligation to bring suit against the City to obtain any such
approval, and "reasonable efforts" shall not be Construed to require any such
suit. If LANDLORD can obtain approval for some but not all of the desired
stalls, LANDLORD will so notify TENANT, who will have the right, by notice given
within the following five (5) days, to Cancel its notice calling for additional
stalls, or accept the number of new stalls available, or appeal to the City of
Minnetonka.
The location of the stalls will be decided by mutual agreement among LANDLORD,
TENANT, and to the extent the law allows. LANDLORD will fund all expenses
(including, without limitation, city applications fees) incurred in creating the
stalls, but will be entitled to invoice TENANT for such expenses, starting on
completion of the stalls, amortized over the number of months remaining in the
current lease term, at the rate of 10% per annum, simple interest. This invoice
amortized amount will be treated as base rent, and TENANT will, on request,
execute a lease amendment reflecting the increase in monthly base rent to
include the amortized monthly installment.
LANDLORD shall have the right to construct additional parking at any time
Upon completion of the stalls, TENANT will have the right to occupy, at any one
time, stalls on the property (except the upper parking lot) equal in number to
80 plus the number of new stalls created pursuant to this provision. TENANT will
have no right, however, to require LANDLORD to designate any stalls, except all
stalls created in the area marked on Exhibit A & B as Parking Area for the
exclusive use of the TENANT.
Any default, while uncured, will suspend TENANT'S rights under this provision.
TENANT may exercise its right under this provision only once.
6. NET LEASE
<PAGE>
This is a "net" Lease, and LANDLORD shall not be required to provide any
services or do any acts in connection with the Leased Premises not specifically
set forth in this Lease. As hereinafter further described in this Lease, the
TENANT is responsible for and shall pay its utility charges, trash removal,
interior cleaning and maintenance, its proportionate share of real estate taxes
including installments of assessments and its proportionate share of the
Building's operating expenses.
7. ADDITIONAL RENT
The net rentable area of the building is 96,951 sq. ft. and accordingly, the
TENANT'S proportionate share for purposes of allocating real estate taxes,
assessments and operating expenses is 24.36 %.
8. REAL ESTATE TAXES
Real estate taxes include the following:
(a) all real estate taxes
(b) all installments of assessments, general or special, levied
against the property
9. OPERATING EXPENSES
Operating Expenses include the following:
(a) City water and sewer Charges, except where used by tenants in
substantial amounts for production and is therefore separately
metered, and the monitoring surveillance of the fire
protection system.
(b) Lawn Care, snow and litter removal, and the repair and
maintenance as reasonably required for: parking lots, drives,
sidewalks, landscaped areas, roof, H.V.A.C. systems, garage
doors and garage door openers, and exterior panes of exterior
windows and foyer glass.
(c) Electrical service for the trash room (if any) and mechanical
rooms and for exterior lighting, replacement of bulbs used for
exterior Iighting and trash removal from the common area trash
room serving the TENANT, if any.
(d) Insurance for fire and extended coverage, Ioss of rents and
business interruptions and general liability.
<PAGE>
(e) All other maintenance, replacement, repair and miscellaneous
operating expenses except structural maintenance and roof
replacement and that which is covered by manufacturer or
subcontractor warranties.
(f) Property management expenses of four percent of the Base Rents
and Additional Rents collected.
(g) Such other expenses incurred in operating the Building
generally, if of a type normally incurred in the operating of
similar buildings.
(h) Maintenance of vestibules and common areas.
Commencing with the operating expenses incurred and real estate taxes payable in
the year this Lease commences and each subsequent year during the Lease term.
TENANT will pay, in equal monthly installments, payable in advance on the first
day of each calendar month, its estimated monthly proportionate share of all
such real estate taxes and operating expenses. As the actual amount will not be
known at the beginning of each calendar year, LANDLORD shall make a reasonable
estimate, to the best of its knowledge, of what the amount will be for that
year, and TENANT will pay its estimated proportionate share each month. In no
way should LANDLORD'S estimate be construed as actual or as a guarantee.
After the actual real estate tax statement is received, LANDLORD shall have the
right to make adjustments for any difference between that which TENANT has paid
and that which it should have paid. TENANT shall then start paying its
proportionate share based upon the actual tax statement.
LANDLORD shall have the right to make adlustments periodically (at least
annually but no more than quarterly) to the operating expenses, and adjust
accordingly. When actual operating expenses have been compiled, a final year-end
adjustment wilI be made, and either a Charge or Credit will be issued. LANDLORD
agrees to exercise due care and diligence to obtain operating expenses, services
and supplies at Competitive and reasonable market costs with acceptable quality
and service standards.
TENANT may have been given projections for real estate taxes by LANDLORD OR
LANDLORD'S agents. LANDLORD, or its agent, does not warrant that these
projections are correct or that they even approximate the amounts shown. The
TENANT is encouraged to call the city assessor to verify the real estate tax
projections before executing the lease.
10. UTILITIES
TENANT is responsible and shall pay for all of its utility services. The TENANT
is separately metered for non-HVAC expenses of gas and electricity and will
contract with the utility companies for service requirements and billing. TENANT
is also responsible for its own telephone service.
<PAGE>
TENANT agrees and acknowledges that the Building is served by a single
integrated HVAC system. Accordingly, LANDLORD will furnish heating and cooling
to each tenant in the Building, and charge back its collective expense in so
doing as an Operating Expense (as to which TENANT is responsible for paying its
"proportionate share"), and will treat the HVAC system as a non-structural item
for purposes of Section 9(e).
TENANT has the right, at any time, by giving LANDLORD written notice specifying
the additional Cooling capacity desired, to require LANDLORD to increase the
cooling capacity of the HVAC system serving the Leased Premises to reasonable
degree beyond its capacity as of the commencement date of this Lease. LANDLORD
warrants that the capacity as of that commencement date will be at Ieast 1 ton
per approximately 470 square feet. Upon receiving the notice, LANDLORD will
diligently undertake reasonable efforts to increase the capacity accordingly.
LANDLORD will have no obligation to increase the Capacity to any unreasonable or
impossible extent. LANDLORD will fund all expenses incurred in increasing this
capacity, but will be entitled to invoice TENANT for such expenses, starting on
completion of the work, amortized over the number of months remaining in the
current lease term, at the rate of 10% per annum, simple interest. This invoiced
amortized amount will be treated as base rent, and TENANT will, on request,
execute a lease amendment reflecting the increase in monthly base rent to
include the amortized monthly installment.
Any default, while uncured, will suspend TENANT'S rights under this provision.
TENANT may exercise its right under this provision only once.
LANDLORD reserves the right to protect its property and interest with respect to
utilities in any way it sees fit should TENANT not pay utility charges.
In the event the TENANT uses water and sewer in substantial amounts or for
production purposes, the LANDLORD shall install at TENANT'S expense a water
meter to sub-meter said water, and shall Charge TENANT for said water and sewer
at rates as charged by the City. TENANT shall pay to the City any water
availabiiity charge (WAC) and sewer availability charge (SAC) charges due to its
high usage.
LANDLORD shall, under no circumstances, be liable for; a) physical loss arising
from any failure to furnish heating, cooling, water, electricity, telephone, or
any other utility; b) any consequential damages, regardless of the cause; or c)
any loss or damages of any kind not resulting from the LANDLORD'S willful
non-performance or grossly negligent performance of its duties hereunder.
11. INSURANCE
The TENANT shall maintain in full force and effect during the term hereof, a
policy of public liability insurance under which LANDLORD and TENANT are named
insured. The minimum limits of liability of such insurance shall be
$1,000,000.00 combined single Iimit for bodily
<PAGE>
injury and property damage, and in addition the TENANT shall carry a policy of
property insurance for fire and extended coverage including an all leasehold
improvements to the premises on a replacement cost value. TENANT agrees to
deliver a duplicate copy of said policy, or a certificate of insurance
evidencing such coverage, to LANDLORD. Such policy shall contain a provision
requiring ten (10) days written notice to the LANDLORD before cancellation of
the policy can be effected.
The LANDLORD shall carry and cause to be in full force and effect a fire and
extended coverage insurance policy on the Building and leasehold improvements;
but not on TENANT'S personal property, trade fixtures, contents or improvements
owned, or otherwise in possession of the TENANT, or any improvements to the
premises which improvement and contents are to be insured by the TENANT. Such
policy shall contain a provision that the policy shall not be canceled except
upon ten (10) days written notice to the TENANT.
Each insurance policy carried by either the LANDLORD or TENANT covering the
Lease Premises or its contents shall provide that the insured party has
relinquished all rights to recover against the other party for loss or damage
resulting from perils insured against by the policy. LANDLORD and TENANT each
hereby waive any claim based upon liability which may arise against the other so
far as the claim relates to loss or damage to the premises or contents which is
coverable by insurance or covered under the aforementioned insurance policies,
whether maintained, or not.
12. MAINTENANCE
The TENANT shall be wholly responsible for the maintenance and repair of the
interior of the Leased Premises, and will keep it in as good condition as when
turned over to tenant, reasonable wear and tear and damage by fire and the
elements excepted.
The TENANT agrees to keep the Leased Premises in a clean, orderly and sanitary
Condition and will neither do nor permit to be done therein anything which is in
violation of insurance polices on the building or that is contrary to law. The
TENANT will neither commit nor suffer waste to the Building or to the Leased
Premises.
The maintenance and repair obligations of the TENANT specifically extend to all
demising walls of the leased premises, interior doors, interior windows,
plumbing and electrical fixtures within the Leased Premises, except as these
obligations may be covered by manufacturer or Contractor warranties. The
LANDLORD agrees to Cooperate with and reasonably assist TENANT in pursuing such
warranties which are still in effect.
The LANDLORD shall at its own expense keep in good order, safe condition and
repair the structural integrity of the Building, except where repairs to the
structural parts are required due to the fault or negligence of the TENANT, its
employees or invitees, in which case the TENANT shall be responsible.
<PAGE>
13. APPEARANCE AND ACCESS
LANDLORD and TENANT mutualIy agree to keep the grounds, Building, Leased
Premises and common areas in a condition of good repair and appearance as their
respective responsibilities and rights may allow. LANDLORD shall provide general
access to TENANT and its invitees to the common areas except as reasonable
security requirements and temporary conditions may prevent, and shall make a
reasonable effort to keep the common areas well maintained and free of nuisance.
LANDLORD may establish form time to time and TENANT will abide by reasonable
rules for parking, security, handling of trash and like procedures.
TENANT agrees to keep all of its trash containers, palIets, dumpsters, refuse
and waste within its Leased Premises and not outside or ins common areas and
agrees not to litter any of the grounds or entries. TENANT is responsible for
the cost of the removal of its trash.
L~ TENANT to Initial
---
Window coverings, if desired by TENANT, are to be installed by TENANT at
TENANT'S expense and must be horizontal levelour type made of metal. TENANT
shall also provide and maintain fire extinguishers as required foCr its
particular use by the City.
TENANT'S bathroom is contiguous to the bathroom of an adjoining tenant and
LANDLORD will instalI a common hallway serving these bathrooms, TENANT agrees to
allow the adjoining tenant the use of its bathroom, and shall have the right to
use the adjoining tenant's bathroom. TENANT agrees to keep in good order,
cleanliness and repair the contiguous bathroom, as does the adjoining tenant.
TENANT agrees not to have or keep any animals, including dogs and/or cats,
within the Leased Premises.
14. LANDLORD'S RESPONSIBILITY
LANDLORD agrees that prior to the Commencement of the term hereof, at its sole
cost and expense, it will finish the Leased Premises substantially in accordance
with Exhibits "A" and "B". It is understood and agreed that minor changes from
any plans or specifications which may be necessary during construction of the
Leased Premises shall not affect or invalidate this Lease.
TENANT agrees that, upon occupancy hereof, it will inspect the Leased Premises
in order to ascertain the condition thereof; that any objections (except for
latent deficiencies not then discoverable) thereto not delivered in writing to
LANDLORD within 60 days after occupancy shalI be deemed waived; and that no
representations, either expressed or implied, have been made regarding the
quality or condition thereof except as specifically stated below:
<PAGE>
(a) The Leased Premises, at the time of initial occupancy, shall
comply with applicable building codes; and the Americans with
Disabilities Act.
(b) The Leased Premises will be completed substantially as agreed
to in this Lease; and
(c) The mechanical system serving the Leased Premises will have
been checked and found to be operating satisfactorily.
LANDLORD will be responsible for repair or replacement during
the first year of the lease, except normal maintenance
15. CONDEMNATION LOSS
Should all the Leased Premises to be taken in condemnation proceedings or by
exercise of any right of eminent domain, then this Lease shall automaTically
terminate as of the date the condemning authority or the authority exercising
its right of eminent domain takes possession of the Leased Premises. If, as a
result of a partial taking, the Leased Premises is no longer useable for the
purposes specified in of this Lease, then, in any such case, the TENANT or
LANDLORD may terminate this Lease as of the date the condemning authority or the
authority exercising its right of eminent domain takes possession of the
property. lf this Lease is not terminated, LANDLORD will immediately make all
repairs necessary to make the Leased Premises complete and tenable. The LANDLORD
shall be specifically entitled to all awards for condemnation, except in the
case of awards made specifically for loss or damage to TENANT'S property or
TENANT'S relocation expenses.
16. TENANT ASSIGNMENT
The TENANT shall not assign this Lease, and shall not sublet any part of the
Leased Premises without the prior written consent of the LANDLORD, provided
however, TENANT may assign the lease without LANDLORD'S prior consent to any
successor entity of the business created as the result of a merger or
consolidation. Said consent will not be unreasonably withheld or delayed. Any
such assignment or subletting will not release the TENANT from its
responsibilities under this Lease, unless expressly agreed to in writing by the
LANDLORD. TENANT shall pay LANDLORD'S reasonable attorneys fees for reviewing
the sublease.
If the TENANT shall be declared bankrupt, shall have a receiver appointed of its
property, shall make an assignment for the benefit of creditors, or its rights
hereunder shall be taken under execution; it shall be construed as an assignment
of this Lease within the meaning hereof, and the LANDLORD shall have the right
to terminate this Lease.
TENANT specifically reserves the right to assign the lease or to sub-lease to
any related corporate entity.
<PAGE>
17. DEFAULT BY TENANT
It is a Default for TENANT: (a) if Base Rent, Additional Rent, or any other sum
due by TENANT under this Lease shall be unpaid as of the date payment is
required; (b) if TENANT fails to perform any of the other terms, conditions,
covenants and obligations of this Lease to be observed or performed by the
TENANT for more than (10) days after LANDLORD gives TENANT written notice of
such Default ( it being agreed that a Default, other than failure to pay Base
Rent, Additional Rent or other sums due, which is of such character that the
cure thereof reasonably requires longer than (10) ten days, shall be deemed
cured within said period, if TENANT in good faith commences a cure within the
(10) ten day period and diligently undertakes to complete the cure with
reasonable dispatch); (c) if TENANT abandons the Leased Premises (it being
agreed that the Leased Premises shall be considered abandoned should TENANT fail
to openly conduct business from the aforementioned premises for a period of (7)
seven Calendar days after October 31, 1997) (d) if TENANT or guarantor knowingly
misrepresents any material fact in any written statement provided to the
LANDLORD or at its request, pursuant to or in connection with this Lease; or (e)
if TENANT, any guarantor, general partner, joint venture, or majority
shareholder becomes insolvent or the subject of a bankruptcy petition.
A Default gives LANDLORD the right (without further notice except as hereinafter
expressly provided) to: (a) immediately reenter the Leased Premises, change the
locks, and remove all persons and property; (b) at TENANT'S expense, store or
sell said property for TENANT'S account; (c) treat said property as abandoned
upon TENANT'S failure to remove it within (10) ten days of written demand to
remove; (d) make alterations and repairs; (e) without terminating the Lease,
relet all or part of the Leased Premises, at TENANT'S expense and for its
account, on such terms, for such rentals, and for such a term as LANDLORD in its
sole discretion deems advisable and/or (f) resort to any other remedy authorized
by this Lease or by statute, law or equity.
Whether or not LANDLORD reenters and/or relets the Leased Premises, TENANT will
remain liable, for all periods in which this Lease is in full force and not
terminated, for the Base Rent, Additional Rent and utilities due hereunder,
subject only to a credit for rental received from a substitute tenant over and
above expenses of reletting and other sums due hereunder. Additionally, whether
or not LANDLORD has already resorted to any other above-mentioned right,
LANDLORD may elect, by giving a written notice, to terminate the Lease effective
as of any date specified in the notice. No act, including the re-entering and/or
reletting, except the giving of such notice, shall be deemed a termination, or
acceptance of surrender of the Lease. Upon said effective date, TENANT will
comply with any surrender provisions.
TENANT will be liable for (a) all expenses and damages incurred by LANDLORD
resulting, whether before or after termination, from a Default, including
without limitation attorney's fees and brokers' fees to obtain a new tenant,
reclaiming possession and alteration or repair costs to obtain a new tenant and
(b) 10% interest on any sum due under the Lease, from the date due.
18. ALTERATIONS
<PAGE>
The TENANT shall not make any alterations to the Lease Premises without the
written consent of the LANDLORD, such consent not to be unreasonably withheld or
delayed. If the TENANT shall desire to make any such alterations, it shall
furnish plans and specifications of the work to be so performed together with a
construction statement Containing a complete breakdown of the cost of all labor
and material included therein, and together with an escrow of cash with Title
Services, Inc. in an amount equal to the estimated cost of all such work, if it
should exceed one thousand dollars ($1,0OO.OO). TENANT agrees to obtain a
building permit from the city for any alterations exceeding fifty dollars
($SO.OO) in cost. TENANT agrees that all such work shall be done in a good,
workmanlike manner, and in compliance with applicable building codes and all
applicable Iaws, including, without limitation, the American Disabilities Act,
that the structural integrity of the Building shall not be impaired, and that no
liens shall attach to the Building or Leased Premises by reason thereof. No such
alteration(s) shall change the office/finish area to storage/service area ratio
without LANDLORD'S permission.
The TENANT shall, before the expiration of the Lease, restore the Leased
Premises to its original condition unless the LANDLORD elects that all or a part
of the alterations may remain. Any such alterations shall become the property of
LANDLORD as soon as they are affixed to the Leased Premises and all right, title
and interest therein of the TENANT shall immediately cease unless otherwise
stated in writing. The TENANT however, shall remain the owner of any installed
trade fixtures and shall have the right to remove such trade fixtures at the
expiration of this Lease Agreement, so long as the Lease Premises and/or
Building is restored to its original conditions.
TENANT agrees that, if by reason of TENANT'S operations, the use to which TENANT
puts the space, or any alterations made by TENANT (whether or not approved
unconditionally by LANDLORD), applicable law, including, without limitation, the
American Disabilities Act, requires further alterations or modifications of the
lease premises or the building(s), that the TENANT will make such alterations or
modifications so as to promptly address such requirements; or, if TENANT fails
to do so, that TENANT will reimburse LANDLORD promptly for the cost of such
alterations or modifications as LANDLORD may make upon TENANT'S default
(LANDLORD having the right but not the obligation to make such alterations or
modifications under that circumstance); and that this provision shall survive
termination or expiration of the lease.
19. SIGNS
The LANDLORD shall allow TENANT, at its sole expense, to install one building
standard exterior entry sign at the TENANT'S front entry and lettering on the
entry door. LANDLORD shall install, at its sole expense, TENANT'S identification
on the lower monument sign. No other signage, including no soliciting or other
directional type signage, promotional material, or identification of any type
shall be placed in, on, or externally visible from, any entry, window, outer
door, or exterior surface without the written consent of LANDLORD. TENANT agrees
that no visitor parking or other parking sign age will be installed on any part
of the parking or
<PAGE>
common areas without the written consent of the LANDLORD. Exceptions to this are
security system signs not to exceed sixty (60) square inches in size.
20. ENTRY
LANDLORD, its agents, and its employees shall have the right to enter the
premises at all reasonable times subject to 24 hour notice and during normal
business hours, except in the case of an emergency (life or property threatened)
to inspect them, to make repairs, and to maintain the Building of which the
Leases Premises are part. During the one hundred and eighty (180) days prior to
the expiration of the term, the LANDLORD or its agents may exhibit the Leased
Premises during normal business hours, with appropriate advance notice of at
least 24 hours, to prospective tenant. LANDLORD shall also have the right of
entry as provided in Paragraph 1 7. Any non-emergency entry will be conducted in
a manner Consistent with federal and state laws governing the practice of
pharmacy and due protection of confidential medical information.
LANDLORD will have the specific right to enter the area identified as the
vestibule to service the elevator equipment and rest room. TENANT wilI provide
LANDLORD with the appropriate pass Card or key to this area.
21. SUBORDINATION
It is mutually agreed that this Lease shall be subordinate to any and all
mortgages, ground leases, or other securities, including any renewals,
modifications, consolidations, replacements and extensions thereof now or
hereafter recorded against the Leased Premises by the LANDLORD. TENANT'S right
to quiet possession of the Leased Premises shall not be disturbed if TENANT is
not in Default and so long as TENANT shall pay the Base and Additional Rents and
observe and perform all of the provisions of this Lease, unless this Lease is
otherwise terminated pursuant to its terms.
22. NOTICES
All notices, consents, demands and requests which may be or are required to be
given by either party of the other, shall be in writing, and sent by United
States registered or certified mail, with return receipt requested, addressed to
the TENANT at the street address set forth in Paragraph 1 with a copy sent by
United States registered or certified mail to: Chronimed, Inc., Attn: Vice
President of Operations 13911 Ridgedale Drive, Suite 250 Minnetonka, MN 55305 or
other such address as TENANT may direct in writing in the future and to the
LANDLORD in care of Marfield, Belgarde and Yaffe Companies, 7841 Wayzata
Boulevard, Minneapolis, Minnesota 55426 or to such other address as LANDLORD may
direct in writing in the future.
The date which said registered or certified mail is mailed by the LANDLORD or
TENANT shalI be conclusively deemed to be the date on which a notice, consent,
demand, or request is given or made.
<PAGE>
The above address of a party may be changed at any time or from time to time by
notice given by said party to the other party in the manner herein above
provided.
23. SHORT FORM LEASE
The parties hereto shall, at the option of either party, execute a short form of
Lease for recording purposes and, in such event, the terms thereof shall
constitute a part of this Lease as fully as though recited at length herein.
24. LANDLORD ASSIGNMENT
The LANDLORD may assign its right , title and interest in this Lease, and such
assignment shall then terminate all the LANDLORD'S obligations so long as the
LANDLORD is not in default when such assignment is made and the assignee assumes
the LANDLORD'S responsibilities thereafter.
25. OCCUPANCY
If the Leased Premises is not ready for occupancy on the Lease commencement
date, then the lease term shall commence on the date of TENANT'S possession but
still terminate on the date previously shown. LANDLORD( shall not be liable to
TENANT for any loss or damage resulting if the Leased Premises is not ready for
occupancy on the commencement date of this Lease. TENANT agrees to take
possession within ten (10) days after the Leased Premises is substantially ready
for occupancy and permission, or temporary permission, to occupy is granted by
the City. All TENANT'S obligations hereunder will commence on the first day
TENANT occupies any portion of the Leased Premises.
26. FIRE REPAIR
In the event of damage to the premises by fire, the elements or other casualty,
LANDLORD shall repair the damage with reasonable dispatch (with Base Rent to
abate in the meantime), unless any mortgagee or financial participant, who from
time to time might have an interest in on the demised premises, shall require
that the fire insurance proceeds to be used to reduce its interest or the
indebtedness on the premises.
If the damage renders the Leased Premises untenantable in part but TENANT
continues to occupy them in part, the Base and Additional Rent shall be reduced
in an equitable manner.
27. QUIET ENJOYMENT
<PAGE>
TENANT, upon payment of the Base and Additional Rent herein reserved and upon
performance of all of the terms, covenants and conditions of this Lease by it to
be kept and performed, shall at all times during the term hereof or during any
extension or renewal hereof, peaceably and quietly enjoy the Leased Premises
without any disturbance from LANDLORD or from any other person claiming through
LANDLORD. Upon expiration or sooner termination of the term hereof, TENANT shall
surrender the Leased Premises in good condition and repair, except for
reasonable wear and tear, Condemnation and casualty.
28. HOLDlNG OVER
If TENANT shall hold over the Leased Premises or any part thereof after the
expiration of the term hereof, or any extension thereof, such holding over shall
be construed only to be a tenancy from day to day subject to all of the
covenants, conditions and obligations hereof except that the Base Rent shall be
1 50% of the rent normally due. Nothing herein shall be construed to give TENANT
any rights to holdover and to continue in possession of the Leased Premises
after expiration of the term hereof.
29. DEPOSIT
TENANT has deposited with LANDLORD a security deposit equal to the amount of one
full month's Base Rent. Said sum shall be held by LANDLORD as security for the
faithful performance by TENANT of all the terms, covenants, and conditions of
this Lease to be kept and performed by TENANT. The deposit shall not bear
interest. If TENANT shall fully and faithfully perform every provision of this
Lease, the security deposit or any balance thereof shall be returned to TENANT
at the expiration of the Lease term. Said deposit was
made by check #_____, dated______________, for $_____________________________
30. RENEWAL
TENANT will have a right to renew the term of the Lease in accordance with this
section. Any such renewal will be on an "as-is" basis, subject to all the terms
of the Lease, except as to the amount of base rent (addressed below), as to
further renewal rights (of which there will be none), and as to any rent
concessions (of which there will be none).
If TENANT wishes to renew the Lease term for an additional five (5) years,
TENANT must (to preserve this right) give LANDLORD, no Iater than 210 days prior
to expiration date of the initial term, written notice of TENANT'S intent to
exercise the option contained in this section. The notice, to be affective, must
state the base rent TENANT proposes to pay, which rent must be fixed and fIat
throughout the renewal term and must be not less than the base rent payable
immediately prior to the expiration of the initial five (5) year term (excluding
any portion attributable to the amortized cost of any parking lot improvements
or HVAC cooling capacity improvements discussed elsewhere).
<PAGE>
Within ten (10) days after receiving that notice, LANDLORD will offer the Leased
Premises to Summit Medical Systems, Inc. ("Summit") pursuant to the expansion
option in Summit's lease. Summit's lease requires Summit to exercise its option,
if at all, within thirty (30) days after receiving LANDLORD'S offer. If Summit
exercises its option, LANDLORD will promptly notify TENANT and TENANT'S notice
under the previous paragraph will be null and void. If Summit fails to exercise
its option, LANDLORD will promptly give TENANT written notice of that fact and
the base rent LANDLORD proposes to charge during the renewal term.
If the parties' respective proposals for base rent differ, LANDLORD and TENANT
will negotiate in good faith the rent for the five (5) year renewal term. The
date TENANT receives the notice described in the last sentence of the previous
paragraph is hereinafter described as the Negotiation Starting Date. If the
parities have failed to agree on the rent within thirty (30) days after the
Negotiation Starting Date, either party may, within the following five (5) days
notify the other party of its intent to have a third party mediate their
disagreement. The mediator's expenses will be paid by the party calling for
mediation. If neither party makes a timely request for mediation, the parties'
negotiation period will end 45 days after the Negotiation Starting Date. If
either party makes a timely request for mediation, the parties' negotiation
period will end sixty (60) days after the Negotiation Starting Date.
31. EXECUTIVE COMMITTEE APPROVAL
TENANT will have the right to cancel the Lease, without further obligation on
either party's part, if its executive committee votes not to approve the Lease
and if TENANT so notifies LANDLORD in writing no later than five (5) days after
the date the last party executes this lease. Landlord will return all pre-paid
rent and/or security deposits made before Iease cancellation.
32. OTHER PROVISIONS
The invalidity or unenforceability of any provisions hereof shall not affect or
impair the validity of any other provision. The headings herein are inserted
only for convenience and reference and shall have no substantive import. Where
necessary, the singular imports the plural and vice versa, and masculine,
feminine and neuter pronouns and expressions are interchangeable. The Lease
shall bind and inure to the benefit of the LANDLORD and TENANT, their respective
heirs, administrators, legal representatives, successors and assigns.
During the term of the Lease, LANDLORD'S acceptance of an amount which is less
then the amount due at that time, will be deemed partial payment only, not
payment in fulI.
This Lease shall be governed by Minnesota Law.
One or more waivers of any provision by either party shall not be construed as a
waiver of subsequent breach of same. Failure to enforce or delay in enforcing
any right hereunder will not
<PAGE>
be construed as a waiver thereof. Each party expressly (a) consents to the
maintaining of any such action in any court of competent subject matter
jurisdiction, and (b) agrees that the mailing, with postage pre-paid, registered
or certified mail, of any complaint or other legal process to it, at the address
stated in this Lease for notices, as updated by subsequent written notice of a
new address.
TENANT and any guarantors agree to provide LANDLORD with a current financial
statement on or before (4) months after the end of their fiscal year. The
financial statement shall meet generally accepted accounting principles.
TENANT hereby agrees that in the event of a purchase of the Leased Premises by
another party, TENANT will sign a Lease Estoppel Agreement, stating that this
Lease agreement between TENANT and LANDLORD is in full force and effect and that
all covenants herein have been met. Any uncompleted covenants should be noted
and listed on the Lease Estoppel Agreement.
33. ADDlTIONAL SPACE
Exhibit "A" and "B" identifies a portion of the building as space "G" with
approximately 1680 sq. ft. which is not included in Summit Medical's obligated
expansion space. TENANT shall have the obligation to expand into said space,
during its lease term, or extended lease term, if any other tenant or Summit
Medical does not wish to lease said space during the terms of their leases. In
no event shall TENANT be required to take said space before Summit Medical is
obligated to expand or declines to expand into its expansion space which is on
the same floor and contiguous to the south. The terms of the lease on the
expansion space shall be the same as then exists in the TENANT'S lease and shall
remain a part of the lease. The space shall be taken "as is", but shall have an
acoustical ceiling and the same level of Iighting as TENANT'S Contiguous space,
and shall be accompanied by a certificate of occupancy from the City of
Minnetonka. LANDLORD shall provide a doorway to said expansion at its sole
expense.
34. RIGHT TO EXPAND
Right of First Offer . TENANT shall have a right of first offer ("ROFO
Right") on all available space in the building, subject to rights previously
granted to Summit Medical, Inc., as Iisted bn Exhibit "F".
A. Upon written request by TENANT ("TENANT'S ROFO Notice") LANDLORD
shall within ten (10) days thereafter give written notice to TENANT ("LANDLORD'S
ROFO Notice") stating: (1) any portion of the ROFO Space ("Subject ROFO Space")
which is, or will during the following twelve (12) months become available for
lease; (2) the estimated date of availability ("Target Delivery Date"); (3) the
market rate for the Subject ROFO Space (which shall be based on prevailing net
market rental rates and finish allowances for comparable space as reasonably
determined by LANDLORD and TENANT. (4) The TENANT finish allowance, the LANDLORD
will provide for subject space. Before or after TENANT'S ROFO Notice, if
LANDLORD desires to offer any portion of the ROFO Space for lease, LANDLORD
shall first deliver a LANDLORD'S ROFO Notice relating to the Subject ROFO Space.
TENANT shall
<PAGE>
notify LANDLORD within ten (10) days after LANDLORD'S ROFO Notice is given
whether it desires to exercise its right to lease the Subject ROFO Space.
B. If TENANT exercises the ROFO Right with respect to the Subject ROFO
Space, such space shall be added to and become part of the Leased Premises for
the remaining term of the Lease (including any Extension Terms) on all of the
terms and conditions of this Lease, except that:
1. The Subject ROFO Space shall be added to the Leased Premises
effective on the earlier of (the "Delivery Date"): (a) the date TENANT
occupies the Subject ROFO Space, or (b) the date on which LANDLORD
delivers the Subject ROFO Space to TENANT in the condition provided in
this Paragraph (which, without TENANT'S consent, shall not be before
the Target Delivery Date).
2. Effective on the Delivery Date, (a) the Base Net Rent for the
Subject ROFO Space shall be a payable at the Market Rate determined by
LANDLORD and TENANT as provided above; (b) TENANT'S proportionate
share of Operating Costs shall be adjusted appropriately to take into
account the area, in the Subject ROFO Space, and Operating Costs shall
thereafter be payable at the same rate per square foot as then payable
for the Initial Leased Premises and shall thereafter be subject to the
same adjustments as provided in this Lease; and (c) there shall be no
period of rent abatement or free rent with respect to the Subject ROFO
Space.
3. The Subject ROFO Space shall be delivered in an as is condition,
except that LANDLORD shall furnish the TENANT Finish Allowance
specified in LANDLORD'S ROF0 Notice, which shall be taken into account
by LANDLORD and TENANT in determining the Market Rate for the Subject
ROFO Space. The TENANT Finish Allowance shall be applied to TENANT
Finish Costs relating to the Subject ROFO Space. No refund or credit
shall be made for any unused portion of the TENANT Finish Allowance.
4. As of the Delivery Date, the term "Leased Premises" shall be deemed
to refer to and include the Subject ROFO Space, except as expressly
provided otherwise in this Lease.
5. Notwithstanding anything to the contrary contained in this Lease,
any ROFO Space added to the Leased Premises during the Iast three (3)
years of the Extension term, the LANDLORD, at it's sole discretion,
may require the TENANT to sign a lease for the ROFO for a term to be
specified, but in no case Ionger than three years from the date the
ROFO right is exercised; determination of the Market Rate shall take
into account the need to fully amortize any TENANT Finish Allowance,
leasehold improvements, leasing commissions, and other transaction
costs of LANDLORD over the remaining Extension Term.
If TENANT fails to timely exercise the ROFO Right, LANDLORD shall be
free to lease such space on any term (including any renewal or
extension of any such lease); provided,
<PAGE>
that if a lease or letter of intent is executed but expires or
terminates during the period the ROFO Right is in effect, then such
space shall again be subject to the ROFO Right as provided in this
Paragraph.
C. Tenant's right to exercise the ROFO Right with respect for any portion of the
ROFO Space is subject to the condition that, at the time that TENANT delivers
its written notice of exercise with respect to such portion of the ROFO Space,
TENANT is not in default under any of the terms or conditions of this Lease.
Further, the ROFO Right shall automatically terminate upon the earliest to occur
of (1) the expiration of termination of this Lease; (2) the termination of
TENANT'S right to possession of the Leased Premises; or (3) the assignment of
this Lease by TENANT or the sublease by TENANT of all or any part of the Leased
Premises.
D. Within ten (10) days after written request by LANDLORD, TENANT shall execute
and deliver an instrument in form reasonably satisfactory to LANDLORD confirming
any exercise or termination of the ROFO Right.
E. The ROFO Right shall only continue until March 31, 1998, and, unless
previously exercised, shall thereupon automatically terminate. Notwithstanding
anything to the contrary contained herein, the ROFO Right shall be subordinate
to (1) all leases, renewals, extensions or expansions under letters of intent or
rights or options in leases existing as of; the date of this Amendment or the
date TENANT'S ROFO notice was received by LANDLORD and (2) any renewals or
extensions of any leases for space in the Building existing as of the date of
this Amendment or the date TENANT'S ROFO notice was received by LANDLORD or
entered into after TENANT fails to exercise its ROFO Right, whether or not
pursuant to an option or right in such lease.
35. EXHIBITS AND ADDENDUMS
This instrument contains all of the agreements made between the parties and may
not be modified orally or in any manner other than by agreement in writing
signed by all parties to this Lease. The following exhibits and addendums are
attached and hereby made a part of this Lease:
_____ Exhibit "A & B" Building Floor Plan, Detailed Floor Plan or
Blueprint and LANDLORD Finishing Schedule
_____ Exhibit "C" LANDLORD'S Improvements
_____ Exhibit "D" TENANT'S and/or Guarantor(s)
Financial Statement Rider
_____ Exhibit "E" Material Use Rider
_____ Exhibit "F" Summit Medical's rights to expand/extend
The signatories below warrant that they are duly authorized to enter into this
Lease representing the parties hereto.
IN WITNESS WHEREOF, the parties heretq have Caused this Lease to be executed the
day and year first above written.
<PAGE>
LANDLORD TENANT
RED CIRCLE L.L.P. CHRONIMED INC.
By: By:
SAMUEL S MARFlEL LARRY E. NIEDERKOHR
Its General Partner Its Vice President of Operations
Date Date
<PAGE>
EXHIBIT "C"
LANDLORD IMPROVEMENTS
Upgrade
Existing rest rooms: paint the walls, clean the ceramic tile, repair as
needed and generally clean.
Remove large wash sinks in restrooms and replace with typical
Iavatories
Existing ceiling; replace tile (broken, mismatched Or dirty) and light
fixtures (defective or damaged), where needed. LANIDLORD may paint
tiIes tO match.
Hallway tO existing restrooms
New door at vestibule (area between restroOms and elavatOr)
Ceiling at 11' or current height throughout space.
Ceiling tile to match or painted to match design of existing
ceiling Ught fixtures to be similar to existing fixtures
Existing sprinkIer heads raised Or lOwered to correct height
(coordinated with TENANT work).
HVAC duct work raised or lowered to correct height and air diffusers to
match current space.
New men's and women's restroom
2 stalls, one handicap access in women's; one handIcap access
stall, one urinal in men's. Location to be determined Install
slop sink.
Install all windows marked as `existing' on Exhibit A & B attached
LANDLORD AGREES TO COORDINATE THE ABOVE WORK WITH TENANT'S REMODEL WORK IN ORDER
TO AVOID DUPLICATION OR WASTE OF EFFORT AND RESOURCES.
LANDLORD AGREES TO CREDIT TENANT WITH THE DIFFERENCE BETWEEN THE COST OF
PARABOLIC LIGHTS AND NORMAL FLOURESCENT LIGHTS IN THE AREA THAT DOES NOT HAVE
LIGHTS NOW.
<PAGE>
EXHIBIT "D"
FINANCIAL STATEMENT RIDER
I hereby Certify that the attached financial statements titled Chronimed Annual
Report 1996, Chronimed First Quarter Interim Report and Chronimed For 10-Q
quarter ending Seotember 27. 1996 dated _________________, is true and correct
and has been prepared with my knowledge using Generally Accepted Accounting
Principles. I have signed and dated that attached financial statement.
Signature
Norman A. Cocke
Name (Please Print)
CHRONIMED INC.
Company Name
Senior Vice President and Chief Financial Officer
Company Title
13911 Ridgedale Drive
Minnetonka. MN 55305
Address
(612)513-6518
Phone Number
Date
<PAGE>
EXHIBIT "E"
MATERIAL USE RIDER
The TENANT, its employees and/or invitees will not, without the LANDLORD'S prior
written consent , bring onto the Leased Premises, common area, or allow thereon,
any "hazardous substance" within the meaning of any federal or state statute,
within the meaning of the Minnesota Environmental Response and Liability Act, or
any successor statute, thereon or within 200 feet thereof any "hazardous
substance" except in amounts not requiring any Federal or State EPA permit and
only in amounts aooropriate to (and products required in) the normal practice of
pharmacy and pharmaceutical compounding or natural gas or petroleum product, or
refuel any vehicle thereon or within 200 feet thereof.
The LANDLORD may withhold or condition consent as it sees fit, in its absolute
discretion. Notwithstanding any termination of the Lease, the TENANT will
indemnify and hold the LANDLORD harmless from any cost, expense, or damage
resulting from a violation of this paragraph, and will, upon request from the
LANDLORD promptly remove, at its sole expense, any material so brought or
released in violation of this paragraph. The LANDLORD may, from time to time
inspect the Leased Premises to determine compliance with this paragraph, and
require the TENANT to certify to such compliance. A violation of this paragraph,
is a breach for which the LANDLORD need not provide notice or a period to cure,
and any contrary provision in this Lease is hereby modified to so provide.
EACH ITEM ON THE FOLLOWING CHECKLIST MUST BE ANSWERED.
1. Will any chemicals be used or stored on the premises? YES. If yes, list
all chemicals that are to be used or stored in the premises:
Various chemicals and chemical combinations will be stored in the facility.
These chemicals and chemical compounds represent products typically found in the
practice of pharmacy, and in relatively small quantities.
2. Will any materials be used or stored on the premises that appear on any
local, state or federal list of "HAZARDOUS SUBSTANCES"? YES. If yes,
list all items in the space provided.
Hazardous substances, stored in the facility, will be in amounts not requiring
any Federal or State EPA permit and only in amounts required for the practice of
pharmacy.
3. Do you have any permits to handle, use or store "HAZARDOUS SUBSTANCES"?
NO. If yes, attach copies of these permits to this exhibit.
Permits are not required for the quantities or amounts used in the practice of
pharmacy.
<PAGE>
4. Will any fIammable be used or stored on premises? YES. If yes, list
type, quantities and how the flammable will be stored.
Alcohol and other solvents are used in the practice of pharmacy and will be
stored in a fire resistant cabinet.
Exhibit "E"
Material Use Rider
Exhibit "E"
Material Use Rider
Page 2
I certify that the above information is true, complete and correct. Further, I
understand and agree that no substance other than those listed above and
approved by the LANDLORD may be used or stored on the premises and that any
additions to the above list must be approved in writing by the LANDLORD or its
authorized agent.
Larry Niederkohr
----------------
(Please Print)
Its Vice President of Operations
----------------------------
(Please Print)
<PAGE>
36. EXPANSION OPTIONS
TENANT shall have options to lease all or part of the space in the
Building not then included in the Leased Premises, as provided in this Section
36. LANDLORD agrees to offer to TENANT, some time between the beginning of the
fourth Lease Year and the end of the sixth Lease Year, all of the space in the
Building not included in the Leased Premises (provided LANDLORD need not offer
common area space unless it is otherwise offering, at that time, all of the
remainder of the space in the Building). LANDLORD need not offer all of such
space to TENANT at one time. LANDLORD agrees not to enter into any leases with
third parties for such space for a term (including extension ootions) in excess
of five years, except as provided below. Upon request by TEl'lANT, LANDLORD will
notify TENANT, with respect to any leases for such space, of the expiration
dates of such ieases so that TENANT will be able to anticipate when such space
will be available LANDLORD will offer all or a portion of such space to TENANT
by wriften notice to TENANT, identifying the anticipated date of delIvery.
TENANT will have until the later of 30 days after rece!pt of LANDLORD'5 notice
or the date 60 days prior to the beginning of the fourth Lease Year to accept
such space as part of the Leased Premises, which acceptance shail be in wnting.
If TENANT accepts LANDLORD's offer of any of the remaining space in the
Building, TENANT shall lease such space for a term equal to the greater of 5
years or the remaining term of this Lease at such time, upon the same terms and
conditions as contained in this Lease
If the term for the Leased Premises prior to the exercise of an
expansion option would expire prior to the expiration of the term with respect
to the space added by exencise of an expansion option, the term for the Leased
Premises prior to the exercise of an expansion option shall be automatically
extended to coincide with the term with respect to the expansion option space,
and the Base Rent per rentable square foot shall be computed on the same basis
as for the expansion option space. The rent and the term with respect to the
expansion option space will commence upon LANDLORD's delivery of exclusive
possession to TENANT after LANDLORD's completion of the tenant improvements
required by TENANT and delivery to TENANT of LANDLORD's architect's certificate
of completion and a certificate of occupancy by the City of Minnetonlta. If
TENANT accepts LANDLORD's offer with respect of any of the expansion option
space and LANDLORD is unable to deliver exclusive possession of such space to
TENANT in the condition required, together with the two required certificates,
on or before the date 180 days after LANDLORD's anticipated date of delivery set
forth in LANDLORD's offer, TENANT may terminate this Lease by giving 150 days'
prior wrirten notice to LANDLORD within 90 davs after the end of such 180-dav
period, in which event neither parry shall have any farther obligations under
this Lease, except for LANDLORD's obligation to return the seccrity deposit as
required herein and other obligations which expressly sur'vive the termination
or expiration of this Lease. If TENANT does not exercise its option as to any
portion of the expansion option space within the penod provided above or if
TENANT terminates its expansion option with respect to the Expansion Space
pursuant to Section 1 above, LANDLORD may offer such space to third parties for
any term desired by LANDLORD. If LANDLORD does not lease a portion of the
expansion option space
<PAGE>
(including the Expansion Space) not accepted by TENANT within 6 months after the
expiration of TENANT's period to exercise its option, LANDLORD shall again offer
such space to TENANT on the same terms and conditions set forth above. except
TENANT must exercise its option within 10 days after LANDLORD's offer. LANDLORD
shall also offer any portion of the expansion option space (including the
Expansion Space) not accepted by TENANT which LANDLORD leases to third parties
when such space again becomes available on the sarrie terms and conditions set
forth above. except TENANT must exercise its option within 10 days after
LANDLORD's offer. Notwithstanding az'ytriitig to the contrary contained in this
Section 36, the Base Rent for all of the Leased Poses will be computed based on
the Market Rate Rent, as defined in Section 38 below, if this Lease rernains in
existence (other than by reason of an extension pursuant to Section 37 below)
after the end of the fourteenthi~ase Year. If TENANT exercises any expansion
option,
37. E"';I'ENSION OPTIONS
TENANT has two (2) extension ootions to extend the Lease term for five
(5) years each, if TENANT notifies LANDLbRD in writing at least one hundred
twenty (120) days prior to the expiration of the Lease term, as the same may
have been previously extended. TENANT may not exercise its second extension
option for the second extension term if it has not exercised its first extension
option for the first extension term. If TENANT exercises any of its extension
options, this Lease will be in full force and effect during the Lease term, as
so extended, subiect to all of the terms and conditions of this Lease, except
that the inriual Base Rent will be the Market Rate Rent. Any exercise of any
such option applies to the entirety of the Leased Premises, and TENANT shall
have no right to exercise any such option as to only a part thereof. If TENANT
exercises one of its extension options pursuant to this Section 37 and LANDLORD
thereafter offers space to TENANT pursuant to Section 36 which TENANT accepts
prior to what would have been the expiration of the Lease term prior to TENANT's
extension under this Section 37, the extension pursuant to Section 36 shall
apply and TENANT'5 extension pursuant to this Section 37 shall be deemed
rescihded, provided such extension option pursuant to this Section 37 shall
remain available at the end of the Lease term, as so extended pursuant to
Section 36.
EXHIBIT 10.29
COMBINATION INDEMNIFICATION
AND SECURITY AGREEMENT
THIS AGREEMENT is made April ____, 1997, by and between MAURICE R.
TAYLOR ("TAYLOR"), and CHRONIMED Inc., a Minnesota corporation ("CHRONIMED").
WHEREAS, Taylor is an owner of a significant number of shares of
Chronimed stock, and Taylor is or may be subject to certain margin calls issued
by brokerage firms with which Taylor holds Chronimed stock on account, and
WHEREAS, without facilitation of short term financing for Taylor's
benefit, such margin call could result in Taylor's sale of a significant number
of shares of Chronimed stock, and
WHEREAS, any such sales of stock could have significant negative impact
on the market value of Chronimed stock, and
WHEREAS, FIRST BANK NATIONAL ASSOCIATION ("FIRST BANK") has agreed to
extend short-term financing to Taylor for the sole purpose of covering such
margin calls, conditioned upon First Bank's receipt of Chronimed's guaranty of
such financing, and
WHEREAS, Chronimed deems it to be in its own best interests to
facilitate such financing and issue First Bank its guaranty (the "Chronimed
Guaranty"), and
WHEREAS, Chronimed is willing to guaranty Taylor's indebtedness and
Taylor is willing to indemnify Chronimed on the terms set forth below.
It is therefore agreed:
1. GUARANTY.
Chronimed, at Taylor's request, shall guaranty Taylor's indebtedness to
First Bank under that certain Short Term Finance Facility (the "Principal
Indebtedness") to be entered by and among Taylor and First Bank, a copy of which
is attached hereto as Exhibit A. Chronimed's guaranty obligation shall be
limited strictly to and dictated by the terms of the Principal Indebtedness and
shall extend to no other indebtedness, undertaking, or extension of the
Principal Indebtedness existing between Taylor and First Bank or any other
lending institution.
2. INDEMNITY.
Taylor shall indemnify and hold Chronimed harmless against all
liability, loss, and expense, including reasonable attorneys' fees, incurred by
Chronimed by reason of its guaranty of the Principal Indebtedness, or in
defending or prosecuting any suit, action, or other proceeding
<PAGE>
brought in connection therewith, or in obtaining or attempting to obtain a
release from liability in respect thereof. Taylor covenants that he will
reimburse Chronimed for, or pay over to Chronimed, all sums of money which
Chronimed pays or becomes liable to pay by reason of any of the foregoing, and
will make such payments to Chronimed as soon as it becomes liable therefor,
whether or not the Chronimed shall have paid out such sums or any part thereof.
3. SECURITY.
In order to secure Chronimed against loss by reason of any breach of
the foregoing covenant of indemnity by Taylor, Taylor hereby grants to Chronimed
the following security interests:
(a) In the event the per share price of Chronimed common stock shall be
reduced to Five and 75/100 Dollars ($5.75) or less per share, as of the close of
any trading day as reported on the NASDAQ exchange, Taylor (and Taylor's spouse,
as the case may be) shall:
(i) pledge to Chronimed all Chronimed stock and any other securities
held by Taylor, other than any securities held in street name in brokerage
accounts (the "Taylor Securities"); and
(ii) convey to Chronimed an executed mortgage in that certain real
property owned by Taylor and his spouse described generally as 550 East Long
Lake Road, Wayzata, Minnesota, 55391 (the "Home Mortgage");
each as collateral for the performance of Taylor's obligations under the
Principal Indebtedness. This Agreement shall constitute a fully enforceable
security interest and pledge with respect to the Taylor Securities, without
requirement of further instrumentation or undertaking of the parties, contingent
only upon the occurrence of the market price condition stated herein. Taylor
agrees, in the event Chronimed shall elect to enforce its right to receive the
Home Mortgage, that Taylor (and Taylor's spouse) shall execute and deliver to
Chronimed, in recordable form, a real estate mortgage valid under the laws of
the State of Minnesota and securing Taylor's payment to Chronimed of any
indebtedness which may accrue to Chronimed under the Chronimed Guaranty.
In the event Taylor shall default under any of the terms of the
Principal Indebtedness, or First Bank shall take any steps in enforcement of its
rights against Chronimed under the terms of the Chronimed Guaranty, whether
First Bank shall have first sought recovery against Taylor or otherwise, Taylor
also specifically grants to Chronimed, in addition to Chronimed's right to
enforce the security interests identified in the Paragraph 3(a)(i) and 3(a)(ii):
(iii) a lien on and right of offset against any profits which Taylor
may incur by reason of Taylor's exercise of stock options in and subsequent sale
of Chronimed stock;
(iv) an ongoing right of offset, and authorization to enforce such
offset by voluntary garnishment or other legal process if required by law,
against any salary, bonus(es), financial
<PAGE>
compensation, or other moneys due Taylor by Chronimed, in amounts of up to 30%
of any such salary or other compensation per single payment event, and
(v) a right to require Taylor to make a good faith application for
procurement of a home equity loan, at commercially reasonable terms, with the
proceeds of such loan to be applied directly to any and all indebtedness of
Taylor or Chronimed under the Principal Indebtedness or the Chronimed Guaranty,
each until Chronimed's liability on the Chronimed Guaranty shall be discharged
in full and with prejudice. Each of the foregoing remedies shall be deemed
cumulative, not exclusive, and the enforcement in whole or in part of any single
remedy shall not be construed as a waiver or preclusion of Chronimed's right to
enforce any other remedy in part or in whole.
Chronimed shall have ongoing security interests in all the collateral
security given above until receipt of satisfactory evidence of the termination
of its liability on the Chronimed Guaranty. Taylor agrees to provide Chronimed
with a verified personal financial statement in conjunction with the execution
of this Agreement.
4. STATUTORY RIGHTS IN COLLATERAL.
If Taylor defaults under his covenant of indemnity, Chronimed shall
have, in addition to the rights enumerated above, any rights with respect to the
collateral security as may be afforded creditors or mortgagees under the Uniform
Commercial Code and the laws of the State of Minnesota on the date of this
agreement.
5. DEFENSE, COMPROMISE AND SETTLEMENT.
Chronimed may defend, adjust, settle, or compromise any claim, suit, or
judgment in respect of any obligation of Taylor, guaranteed by Chronimed, after
notice to Taylor and at Taylor's expense, unless Taylor desires to litigate such
claim, defend such suit, or appeal such judgment, and simultaneously therewith
deposits with Chronimed additional collateral security sufficient to pay any
judgment rendered, with interest, costs, and expenses. Chronimed's right to
indemnification under this agreement shall extend to any money paid by it in
settlement or compromise of any such claims, suits, and judgments in good faith,
after notice to Taylor.
6. LIABILITY AMONG PARTIES.
As between Taylor and Chronimed, the former shall be primarily liable
for the payment of all of his obligations guaranteed by Chronimed. Nothing in
this agreement shall be construed to waive, abridge, or diminish any right or
remedy which Chronimed might otherwise have against Taylor.
<PAGE>
7. EVIDENCE OF LIABILITY.
If Chronimed pays any sums of money by reason of its Guaranty, the
vouchers or other evidence showing such payment shall be prima facie evidence
against Taylor of the fact and amount of his liability to Chronimed hereunder.
9. COMMISSION.
In consideration of its becoming a guarantor on the obligations of
Taylor, Chronimed shall be entitled to receive a monthly commission of
three-quarters of 1 percent (0.75%) of the average amount of Taylor's
indebtedness under the Principal Indebtedness in each month with respect to
which Chronimed is a guarantor, payable to Chronimed on a quarterly basis
without demand.
10. MAINTENANCE OF ACCOUNT.
Taylor agrees that so long as Chronimed retains any liability on the
Chronimed Guaranty, Taylor shall not agree to nor permit any increase in the
limits of his margin loan accounts, with any brokerage firm, above or beyond
those loan limits as stated in his brokerage account statements dated March 31,
1997.
11. BINDING EFFECT.
This agreement shall be binding upon and inure to the benefit of the
parties and their legal representatives and successors, but it shall not inure
to the assigns of either party unless the other party gives written consent
thereto.
_________________________________ Date:________________________
Maurice R. Taylor
CHRONIMED INC.
By:_______________________________ Date:________________________
Its:______________________________
EXHIBIT 10.30
TERMINATION AGREEMENT
AGREEMENT, made and entered into as of the 27th day of June, 1997, by
and between Orphan Medical, Inc., a Minnesota corporation ("Orphan"), and
Chronimed, Inc., a Minnesota corporation ("Chronimed").
WHEREAS, Orphan and Chronimed are parties to each of the following
agreements (collectively referred to as the "Agreements") which were entered
into by them in connection with, and at the time of, the dividend distribution
by Chronimed to its shareholders of all of the then outstanding shares of
Orphan's common stock:
i. Marketing and Distribution Agreement, dated as of July 2,
1994, together with amendments thereto dated December 22, 1995
and June 3, 1996 (dealing with Antizol-Vet(TM) and Elliots
B(TM) Solution) (collectively, the "Distribution Agreement");
ii. Security Agreement, dated as of July 2, 1994 (the "Security
Agreement"); and
iii. Services Agreement, dated as of July 2, 1994 (the "Services
Agreement")
WHEREAS, Orphan wishes to terminate the Distribution Agreement and the
other Agreements so that Orphan can assume full responsibility for the
distribution and sale of its products, other than Cystadane; and
WHEREAS, Chronimed is willing to terminate the Distribution Agreement
and the other Agreements on the terms and for the consideration set forth in
this agreement;
NOW THEREFORE, in consideration of the premises, the respective
commitments and undertakings of Chronimed and Orphan set forth in this
agreement, and other good and valuable consideration, the receipt and adequacy
of which are hereby acknowledged, Orphan and Chronimed hereby agree as follows:
1. Termination of the Agreements. (a) Except as provided in section
1(b), effective as of the date of this agreement (the "Termination Date"), each
of the Agreements shall be terminated and shall be of no continuing force or
effect, and the rights and obligations of Orphan and Chronimed under each of the
Agreements shall become null and void. The cystadane agreement, dated October
11, 1996, between Orphan and Chronimed (the "Cystadane Agreement") shall not be
regarded as one of the Agreements and shall continue in full force and effect
after the Termination Date.
<PAGE>
(b) The confidentiality provisions set forth in section 6.3 of the
Distribution Agreement shall remain in full force and effect from and after the
Termination Date.
(c) On or before the Termination Date, Chronimed shall execute and
deliver to Orphan such termination statements and other documents as shall be
reasonably necessary to terminate all security interests which were granted to
Chronimed under the Security Agreement to secure the performance of Orphan under
the Distribution Agreement.
2. Termination Payments. In full and final consideration for
Chronimed's agreement to terminate the Agreements, Orphan agrees to make
termination payments to Chronimed in the aggregate amount of $2,500,000, which
payments shall be made in the following manner:
(a) Orphan shall make a cash payment of $250,000 to Chronimed on the
Termination Date;
(b) On March 31, 1998 and on the last day of each three (3)-month
period thereafter, Orphan shall issue and deliver to Chronimed that number of
unregistered shares of Orphan's common stock (the "Shares") as shall be equal to
one percent (1%) of the total outstanding shares of Orphan common stock
immediately prior to the date of issuance of the Shares; provided, however, that
Orphan's obligation to issue Shares to Chronimed shall terminate at such time as
(i) the aggregate cash payments made, or owing to, Chronimed pursuant to section
2(c), plus (ii) the net sales proceeds realized by Chronimed from the sale of
Shares sold by Chronimed (after payment of any brokerage commissions and fees,
other costs of sale and Chronimed Expenses (as defined in exhibit A)) within
ninety (90) days after the effective date for the registration statement
covering such Shares, plus (iii) the Market Value of Shares issued to Chronimed
pursuant to this section 2(b) which are not sold by Chronimed within ninety (90)
days after the effective date of any registration statement covering such
Shares, exceeds $2,250,000. For purposes of this section 2(b), the term "Market
Value" means the average last bid price for shares of Orphan common stock on the
NASDAQ over-the-counter market for the last five (5) market days in such ninety
(90) day period.
(c) Orphan shall make additional cash payments (the "Supplemental
Payments") to Chronimed equal to three percent (3%) of the net revenues (i.e.
gross sales revenues less allowances, discounts, bad debts, returns and customs
and excise taxes) received by Orphan from the sale or licensing of any of its
products (other than Cystadane) subsequent to the Termination Date; provided,
however, that the aggregate amount of Supplemental Payments shall not exceed (i)
$2,250,000, less (ii) the amounts determined pursuant to sections 2(b)(ii) and
2(b)(iii). Orphan shall make payment of
<PAGE>
Supplemental Payments to Chronimed in quarterly installments within thirty (30)
days after the end of each calendar quarter (commencing for the quarter ending
September 30, 1997) based on net revenues received by Orphan in such calendar
quarter (with net revenues for the period from the Termination Date through June
30, 1997 being included in the first calendar quarter). Each such Supplemental
Payment shall be accompanied by a report which substantiates the net revenues
and the determination of the Supplemental Payment. Until such time as Chronimed
has received aggregate payments of $2,500,000 under this agreement, Chronimed
and its representatives may, upon reasonable request and at its expense, review
and copy records of Orphan pertaining to the determination of the Supplemental
Payments.
(d) Notwithstanding the foregoing, Orphan reserves the right, at any
time, to make a cash payment to Chronimed equal to the then unpaid balance of
the $2,500,000 termination payment amount. Upon delivery of such payment to
Chronimed, Orphan shall have no further payment obligations under this section
2, and Chronimed shall endorse and deliver to Orphan, without further
consideration, any Shares then owned by Chronimed, other than Shares described
in section 2(b)(iii).
(e) In the event that shares of Orphan's common stock cease being
tradeable on a national or regional securities market for any reason, the unpaid
balance of the $2,500,000 termination amount shall be immediately due and
payable by Orphan or its successor to Chronimed in cash. Upon delivery of such
payment to Chronimed, Orphan shall have no further payment obligations under
this section 2, and Chronimed shall endorse and deliver to Orphan, without
further consideration, any Shares then owned by Chronimed, other than Shares
described in section 2(b)(iii).
3. Chronimed Commitments. Within ten (10) days after the sale of any
Shares by Chronimed, Chronimed shall deliver to Orphan a copy of a broker's sale
confirmation which evidences the net sales proceeds realized by Chronimed. In
the event that the aggregate amounts paid to, or realized by, Chronimed, as
determined pursuant to sections 2(a), 2(b)(ii), 2(b)(iii) or 2(c), exceed
$2,500,000, Chronimed shall refund such excess amount to Orphan, in cash, within
fifteen (15) days after such aggregate amount is first determinable.
4. Chronimed Representations. Chronimed represents and warrants to
Orphan as follows:
(a) The Shares being acquired by Chronimed pursuant to this agreement
are being acquired for Chronimed's own account and not with the view to, or for
resale in connection with, any distribution or public offering thereof within
the meaning of the federal Securities Act of 1933 (the "Securities Act").
Chronimed understands that at the time of their issuance the Shares will not be
registered under the Securities Act by reason of their contemplated issuance in
transactions exempt from the
<PAGE>
registration and prospectus delivery requirements of the Securities Act pursuant
to section4(2) thereof.
(b) This agreement has been duly authorized by the requisite corporate
action of Chronimed, has been duly executed and delivered by Chronimed, and is a
valid and binding obligation of Chronimed which is enforceable against Chronimed
in accordance with its terms.
(c) Chronimed has reviewed all of Orphan's filings with the Securities
and Exchange Commission and has taken all actions that it has determined to be
appropriate or necessary to assess the merits and risks of an investment in the
Shares.
(d) Chronimed understands that each certificate representing the Shares
shall initially be endorsed with the following legend:
"The Shares represented by this certificate may not be transferred
without (i) the opinion of counsel satisfactory to the issuer of such
Shares that such transfer may lawfully be made without registration or
qualification under the federal Securities Act of 1933, as amended, and
applicable state Shares laws; or (ii) such registration or
qualification."
5. Representations of Orphan. Orphan represents and warrants to
Chronimed as follows:
(a) This agreement has been duly authorized by the requisite corporate
action of Orphan, has been duly executed and delivered by Orphan, and is a valid
and binding obligation of Orphan which is enforceable against Orphan in
accordance with its terms.
(b) As of the date of this agreement, there are 6,063,588 shares of
Orphan's common stock issued and outstanding.
(c) When issued and delivered to Chronimed pursuant to this agreement,
the Shares shall be duly authorized, validly issued, fully paid and
nonassessable, and free and clear of any liens or security interests.
(d) Orphan is currently qualified to register shares of its capital
stock on Form S-3, pursuant to the federal Securities Act of 1933 and the
applicable regulations promulgated thereunder, and until such time as Chronimed
receives the aggregate payments pursuant to this agreement of $2,500,000, Orphan
shall make such filings and shall take such other actions as shall be necessary
for Orphan to continue to qualify for the use of Form S-3.
<PAGE>
(e) At the next regularly scheduled meeting of its Board of Directors,
Orphan shall reserve a sufficient number of shares of its authorized common
stock for issuance to Chronimed to satisfy its obligations under section 2(b) of
this agreement.
6. Registration Rights. Orphan shall cause the Shares to be registered
for subsequent sale by Chronimed in the manner contemplated by exhibit A to this
agreement.
7. Mutual Release.
(a) Orphan, acting for itself, its insurers, its successors and
assigns, and each of them, does hereby release and forever discharge Chronimed,
its officers, employees, agents, consultants, successors and assigns, and each
of them, from any and all liabilities, claims, demands and causes of action,
either in law or in equity, known or unknown, liquidated or unliquidated, which
have arisen or may arise out of or are in any way connected with any of the
Agreements, on account of any act, omission, event, occurrence, representation,
warranty, failure, default or breach, actual or asserted, of Chronimed, its
officers, employees, agents, consultants, or any of them on or prior to the date
of this instrument; provided, however, that this release does not affect the
obligations or commitments of Chronimed under this agreement.
(b) Chronimed, acting for itself, its insurers, its successors and
assigns, and each of them, does hereby release and forever discharge Orphan and
its officers, employees, agents, consultants, successors and assigns, and each
of them, from any and all liabilities, claims, demands and causes of action,
either in law or in equity, known or unknown, liquidated or unliquidated, which
have arisen or may arise out of or are in any way connected with any of the
Agreements, on account of any act omission, occurrence, representation,
warranty, failure, default or breach, actual or asserted, of Orphan and its
officers, employees, agents or consultants, or any of them, on or prior to the
date of this instrument; provided, however, that this release does not affect
(i) the obligations or commitments of Orphan under this agreement, or (ii) the
obligation of Orphan to make payment to Chronimed of any royalties payable to
Chronimed with respect to the sale of Antizol-Vet(TM) or Elliots B(TM) products.
8. Miscellaneous.
(a) Binding Effect. This agreement shall be binding on, and shall inure
to the benefit of, Orphan and Chronimed and their respective successors and
assigns.
(b) Entire Agreement. This agreement evidences the complete agreement
and understanding between Orphan and Chronimed with respect to the subject
matter hereof and supersedes and preempts any prior understandings,
<PAGE>
agreements or representation, by or between them, whether written or oral, which
related to the subject matter hereof in any way.
(c) Public Announcement. Any public announcement relative to the
matters set forth in this agreement shall be mutually acceptable to both Orphan
and Chronimed, and the parties agree to cooperate in coordinating the timing and
content of such announcement.
(d) Governing Law. This agreement shall be governed by and interpreted
in accordance with the internal law, not the law of conflicts, of the state of
Minnesota.
IN WITNESS WHEREOF, each of Orphan and Chronimed have caused this
agreement to be executed and delivered by a duly authorized representative as of
the date set forth in the first paragraph.
CHRONIMED, INC. ORPHAN
MEDICAL, INC.
By______________________________________ By_____________________________
<PAGE>
EXHIBITA
REGISTRATION RIGHTS PROVISIONS
1. Registration Commitment. As soon as reasonably practicable after
each issuance of Shares pursuant to this agreement, but not later than thirty
(30) days thereafter, Orphan shall prepare and file a registration statement
under the Securities Act covering such Shares on Form S-3 (or any successor form
subsequently promulgated by the Commission as a replacement for Form) if such
form is then available for use by Orphan.
2. Registration Procedures. In connection with the registration of
Shares under the Securities Act, Orphan will:
(a) prepare and file with the Securities and Exchange
Commission or any other federal agency at the time administering the
Securities Act (the "Commission") a registration statement with respect
to such Shares, and use its best efforts to cause such registration
statement to become effective and to remain effective for such period
as may be reasonably necessary to effect the sale of such Shares, not
to exceed nine (9) months;
(b) prepare and file with the Commission such amendments to
such registration statement and supplements to the prospectus contained
therein as may be necessary to keep such registration statement
effective for such period as may be reasonably necessary to effect the
sale of such Shares, not to exceed nine (9) months;
(c) furnish to Chronimed and to the underwriters, if any, of
the Shares being registered such reasonable number of copies of the
registration statement, preliminary prospectus, final prospectus and
such other documents as such underwriters may reasonably request in
order to facilitate the public offering of such Shares;
(d) use its best efforts to register or qualify the Shares
covered by such registration statement under such state securities or
blue sky laws of such jurisdictions as Chronimed may reasonably request
within twenty (20) days following the original filing of such
registration statement, except that Orphan shall not for any purpose be
required to execute a general consent to service of process or to
qualify to do business as a foreign corporation in any jurisdiction
wherein it is not so qualified;
<PAGE>
(e) notify Chronimed, promptly after it shall receive notice
thereof, of the time when such registration statement has become
effective or a supplement to any prospectus forming a part of such
registration statement has been filed;
(f) notify Chronimed promptly of any request by the Commission
for the amending or supplementing of such registration statement or
prospectus or for additional information;
(g) prepare and file with the Commission, promptly upon the
request of Chronimed, any amendments or supplements to such
registration statement or prospectus which, in the opinion of counsel
for Chronimed (and concurred in by counsel for Orphan), is required
under the Securities Act or the rules and regulations thereunder in
connection with the distribution of the Shares by Chronimed;
(h) prepare and promptly file with the Commission and promptly
notify Chronimed of the filing of such amendment or supplement to such
registration statement or prospectus as may be necessary to correct any
statements or omissions if, at the time when a prospectus relating to
such Shares is required to be delivered under the Securities Act, any
event shall have occurred as the result of which any such prospectus or
any other prospectus as then in effect would include an untrue
statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the
circumstances in which they were made, not misleading;
(i) advise Chronimed, promptly after it shall receive notice
or obtain knowledge thereof, of the issuance of any stop order by the
Commission suspending the effectiveness of such registration statement
or the initiation or threatening of any proceeding for that purpose and
promptly use its best efforts to prevent the issuance of any stop order
or to obtain its withdrawal if such stop order should be issued;
(j) not file any amendment or supplement to such registration
statement or prospectus to which Chronimed shall have reasonably
objected on the grounds that such amendment or supplement does not
comply in all material respects with the requirements of the Securities
Act or the rules and regulations thereunder, after having been
furnished with a copy thereof at least five business days prior to the
filing thereof, unless in the opinion of counsel for Orphan the filing
of such amendment or supplement is reasonably necessary to protect
Orphan from any liabilities under any applicable federal or state law
and such filing will not violate applicable law; and
<PAGE>
(k) at the request of Chronimed, furnishan opinion, dated the
closing date, of the counsel representing Orphan for the purposes of
such registration, addressed to the underwriters, if any, and to
Chronimed, covering such matters as such underwriters and Chronimed may
reasonably request.
3. Expenses. With respect to each inclusion of Shares in a registration
statement pursuant to section 1, Orphan shall bear the following fees, costs and
expenses: all registration, filing and NASD fees, printing expenses, fees and
disbursements of counsel and accountants for Orphan, all legal fees and
disbursements and other expenses of complying with state securities or blue sky
laws of any jurisdictions in which the Shares to be offered are to be registered
or qualified. Fees and disbursements of counsel and accountants for Chronimed,
underwriting discounts and commissions and transfer taxes for Chronimed and any
other expenses incurred by Chronimed not expressly included above shall be borne
by Chronimed (collectively, "Chronimed Expenses").
4. Indemnification.
(a) Orphan will indemnify and hold harmless Chronimed and any
underwriter (as defined in the Securities Act) for Chronimed, and each person,
if any, who controls Chronimed or such underwriter within the meaning of the
Securities Act, from and against any and all loss, damage, liability, cost and
expense to which Chronimed or any such underwriter or controlling person may
become subject under the Securities Act or otherwise, insofar as such losses,
damages, liabilities, costs or expenses are caused by any untrue statement or
alleged untrue statement of any material fact contained in such registration
statement, any prospectus contained therein or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances in which they were made,
not misleading; provided, however, that Orphan will not be liable in any such
case to the extent that any such loss, damage, liability, cost or expense arises
out of or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission so made in conformity with written information
furnished by Chronimed, such underwriter or such controlling person specifically
for use in the preparation thereof; provided, however, that the foregoing
indemnity, insofar as it relates to any untrue statement or omission or alleged
untrue statement or omission made in any preliminary prospectus but eliminated
or remedied in the prospectus shall not inure to the benefit of any underwriter
(or any employee, agent or affiliate of or any person controlling such
underwriter) with respect to any action or claim asserted by a person who
purchased any Shares from such underwriter unless such person was sent or given
a copy of the prospectus with or prior to the written confirmation of the sale
involved.
<PAGE>
(b) Chronimed will indemnify and hold harmless Orphan, any controlling
person and any underwriter from and against any and all loss, damage, liability,
cost or expense to which Orphan or any controlling person and/or any underwriter
may become subject under the Securities Act or otherwise, insofar as such
losses, damages, liabilities, costs or expenses are caused by any untrue or
alleged untrue statement of any material fact contained in such registration
statement, any prospectus contained therein or any amendment or supplement
thereto, or arise out of or are based upon the omission or the alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances in which they were
made, not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was so made in reliance upon and in strict conformity with written
information furnished by Chronimed specifically for use in the preparation
thereof.
(c) Promptly after receipt by an indemnified party pursuant to the
provisions of paragraph (a) or (b) of this section of notice of the commencement
of any action involving the subject matter of the foregoing indemnity
provisions, such indemnified party will, if a claim thereof is to be made
against the indemnifying party pursuant to the provisions of said paragraph (a)
or (b), promptly notify the indemnifying party of the commencement thereof; but
the omission to so notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than hereunder.
In case such action is brought against any indemnified party and it notifies the
indemnifying party of the commencement thereof, the indemnifying party shall
have the right to participate in, and, to the extent that it may wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party; provided, however,
if the defendants in any action include both the indemnified party and the
indemnifying party and there is a conflict of interest which would prevent
counsel for the indemnifying party from also representing the indemnified party,
the indemnified party or parties shall have the right to select separate counsel
to participate in the defense of such action on behalf of such indemnified party
or parties. After notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party will
not be liable to such indemnified party pursuant to the provisions of said
paragraph (a) or (b) for any legal or other expense subsequently incurred by
such indemnified party in connection with the defense thereof other than
reasonable costs of investigation, unless (i) the indemnified party shall have
employed counsel in accordance with the proviso of the preceding sentence, (ii)
the indemnifying party shall not have employed counsel satisfactory to the
indemnified party to
<PAGE>
represent the indemnified party within a reasonable time after the notice of the
commencement of the action, or (iii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party.
CHRONIMED INC.
EXHIBIT 11.1
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED
JUNE 30, JUNE 28, JUNE 27,
1995 1996 1997
------- ------- -------
Primary
Average shares outstanding ............... 11,685 12,221 12,019
Net effect of dilutive stock options
and warrants--based on the treasury
stock method using average market price 927 916 640
------- ------- -------
Total .............................. 12,612 13,137 12,659
======= ======= =======
Net income .................................. $ 1,603 $ 5,459 $ 7,044
======= ======= =======
Net income per share ........................ $ .13 $ .42 $ .56
======= ======= =======
Fully Diluted
Average shares outstanding ............... 11,685 12,221 12,019
Net effect of dilutive stock options
and warrants--based on the treasury
stock method using average market price 927 997 640
------- ------- -------
Total .............................. 12,612 13,218 12,659
======= ======= =======
Net income .................................. $ 1,603 $ 5,459 $ 7,044
======= ======= =======
Net income per share ........................ $ .13 $ .41 $ .56
======= ======= =======
CHRONIMED INC.
EXHIBIT 13.1
PORTIONS OF THE 1997 ANNUAL REPORT TO SHAREHOLDERS
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------------------------------
JUNE 27, JUNE 28, JUNE 30, JULY 1, JULY 2, JUNE 30,
FINANCIAL RESULTS 1997 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 117,171 $ 90,512 $ 62,527 $ 49,027 $ 31,202 $ 20,397
Operating income 8,876 6,973 1,054 1,748 863 484
Interest income 798 1,327 1,024 426 329 113
Interest expense - - - (1) (3) (127)
Other income 1,700 - - - - -
Income tax expense (4,330) (2,841) (475) (171) (30) (16)
--------- --------- --------- --------- --------- ---------
Net income $ 7,044 $ 5,459 $ 1,603 $ 2,002 $ 1,159 $ 454
========= ========= ========= ========= ========= =========
Net income per share $ .56 $ .42 $ .13 $ .18 $ .12 $ .07
========= ========= ========= ========= ========= =========
Weighted average number of
shares outstanding 12,659 13,137 12,612 11,258 9,898 6,797
FINANCIAL POSITION
Working capital $ 33,821 $ 40,261 $ 31,124 $ 26,905 $ 13,727 $ 14,037
Total assets 65,291 68,226 52,394 53,196 18,462 16,802
Current liabilities 11,254 10,396 4,824 10,247 1,605 1,930
Long-term debt and capital
lease obligations - 350 - - 79 12
Shareholders' equity 53,360 57,162 47,570 42,949 16,778 14,860
</TABLE>
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The fiscal years referenced herein are as follows: FISCAL YEAR YEAR ENDED
1997 June 27, 1997
1996 June 28, 1996
1995 June 30, 1995
INCOME AND EXPENSE ITEMS AS A PERCENTAGE OF REVENUE
PERIOD-TO-PERIOD
PERCENTAGE CHANGES
--------------------
FISCAL 1997 OVER 1996 OVER
1997 1996 1995 1996 1995
-------------------- --------- ---------
Revenues
Managed Care 19.8% 16.1% 13.4% 59% 74%
Proprietary Products 27.3 35.5 26.7 - 93
Health Professional Referral/
Patient Choice 52.9 48.4 59.9 42 17
---------------------
Total revenues 100.0 100.0 100.0 29 45
Cost of sales 70.7 72.0 75.1 27 39
---------------------
Gross profit 29.3 28.0 24.9 35 63
Operating expenses:
Selling and marketing 5.8 7.0 8.9 8 15
Research and development .4 .5 .5 * *
General and administrative 15.5 12.8 13.8 56 34
---------------------
21.7 20.3 23.2 39 27
---------------------
Income from operations 7.6 7.7 1.7 27 562
Interest income .7 1.5 1.6 (40) 30
Other income 1.4 -- -- * *
Income tax expense (3.7) (3.2) (.7) 52 498
---------------------
Net income 6.0% 6.0% 2.6% 29% 241%
*Not meaningful
RECAP OF 1997 RESULTS
Total revenues in 1997 were up 29% from the prior year to $117.2 million. Gross
profit as a percentage of revenue increased to 29.3% in 1997 against 28.0% in
1996, with gross profit dollars increasing 35% over the prior year to $34.3
million. Much of the revenue and gross profit dollar increases are a result of
the StatScript Pharmacy acquisition in July, 1996. Overall operating expenses
increased $7.1 million or 39% against the prior year, and increased as a
percentage of revenue from 20.3% in 1996 to 21.7% in 1997. Most of the dollar
and percentage increase in operating expenses is due to increased general and
administrative expenses, including the $1.4 million write off of the Company's
Health Craft International (HCI) note receivable in the third quarter of 1997.
The Company's income from operations increased to $8.9 million, 27% over the
prior year operating income of $7.0 million. Interest income declined $529,000,
or 40%, against the prior year interest income of $1.3 million, due primarily to
the Company's repurchase of one million shares of Common Stock and its
acquisition of StatScript Pharmacy during fiscal 1997. Other income reflects the
Company's sale of its orphan drug distribution rights to Orphan Medical, Inc.
(OMI) for $1.7 million in June, 1997. Net income of $7.0 million or
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
$.56 per share compares favorably to 1996 net income of $5.5 million or $.42 per
share. Inflation and changing prices had a minor impact on the Company's overall
revenue growth and operating income for 1997 and 1996.
REVENUES
The Company's revenues are derived from three principal sources: Managed
Care--revenues from customers who are part of a managed care network serviced by
the Company, consisting of the self-injectables program and the diabetes program
contract business; Proprietary Products--revenues generated mainly from
proprietary products, primarily the blood glucose reagent testing strips and
publishing; and Health Professional Referral/ Patient Choice--revenues from
referrals from healthcare providers or patients who choose to purchase from the
Company, primarily Specialty Pharmacy (organ transplant), Home Service Medical
(direct mail diabetes products), and starting July 1996, StatScript Pharmacy
(HIV/AIDS pharmacy).
1997 VERSUS 1996 Total revenues increased to $117.2 million from $90.5 million,
up 29% year to year. By revenue category, 1997 compares to 1996 as follows:
1997 1996 CHANGE
---- ---- ------
Managed Care $23.2 $14.6 59%
Proprietary Products 32.0 32.1 --
Patient Choice 62.0 43.8 42%
----------------
Total $117.2 $90.5 29%
The $8.6 million of Managed Care revenue growth was driven by the
self-injectables program, which grew $8.2 million, or 112%, over the prior year.
This growth was generated by continued patient acquisition in the
self-injectables programs within Prudential and Aetna/U.S. Healthcare.
Proprietary Products revenue is flat year to year due primarily to a key
supplier's hold on the production of the Quick Check blood glucose reagent strip
as of December, 1996. This hold, which is now a permanent discontinuance of
production, negatively impacted 1997 revenue by over $8 million. There was no
negative comparable impact in fiscal 1996. For Patient Choice, revenue grew
$18.2 million on the strength of the StatScript Pharmacy acquisition in July,
1996. StatScript delivered $19.8 million in revenue in 1997 while increasing its
number of stores from 9 to 15 as of fiscal year end. Revenue in the Specialty
Pharmacy segment of Patient Choice declined $2.3 million, or 7%, as the Company
elected to eliminate lower-margin business.
1996 VERSUS 1995 Total revenues increased to $90.5 million from $62.5 million,
up 45% year to year. By revenue category, 1996 compares to 1995 as follows:
1996 1995 CHANGE
---- ---- ------
Managed Care $14.6 $8.4 74%
Proprietary Products 32.1 16.7 93%
Patient Choice 43.8 37.4 17%
----------------
Total $90.5 $62.5 45%
Managed Care growth is a result of higher volumes in the self-injectables
program, which grew from $1.4 million in 1995 to $7.3 million in 1996. Growth in
Proprietary Products is from the sale of blood glucose testing reagent strips
that the Company markets under exclusive distribution agreements. The 1995
revenue for Proprietary Products was negatively impacted by approximately $4.0
million due to a production hold by the Quick Check blood glucose reagent strip
supplier. Revenues from Patient Choice increased due to strong sales to organ
transplant patients through the Specialty Pharmacy business. Also, the direct
mail diabetes products business--Home Service Medical--grew $540,000, or 8%, in
1996.
COST OF SALES AND GROSS PROFITS
1997 VERSUS 1996 Total gross profit increased from $25.4 million in 1996 to
$34.3 million in 1997, with gross profit percentage improving from 28.0% to
29.3%. The gross profit percentage improvement is primarily a result of
increased sales in the Proprietary Products business through the proprietary
diabetes products segment; specifically, the Company has replaced much of the
Quick
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Check product shortfall with sales of the Supreme and other related
higher-margin diabetes products. Improvements in the self-injectables program
and in Home Service Medical have also contributed to the increase in gross
profit percentage. The StatScript Pharmacy segment of Proprietary Products has
added more than half of the gross profit dollar increase.
1996 VERSUS 1995 The increase in cost of sales dollars during the year--up
39%--reflects the Company's 45% revenue growth. The Company's overall gross
profit percentage of 28.0% is significantly improved over the prior year
percentage of 24.9%. This improvement is a result of the sales mix of products
and an increase in internal production of blood glucose testing reagent strips,
which are sold at a favorable margin. Selected price increases also had a
favorable gross profit impact.
SELLING AND MARKETING EXPENSES
1997 VERSUS 1996 Selling and marketing expenses increased 8% or $504,000 in 1997
over the prior year, and declined as a percentage of revenue from 7.0% to 5.8%.
The Company increased its investment in the self-injectables program by
$370,000, while closely managing expenses in the proprietary diabetes products
segment as a result of the production hold on Quick Check. The Company intends
to increase its selling and marketing efforts in diabetes products in 1998 as it
rolls out new products and expands distribution.
1996 VERSUS 1995 Selling and marketing expenses increased 15% in 1996 over the
prior year, but declined as a percentage of revenue from 8.9% to 7.0%. The two
most significant growth areas are the Managed Care self-injectables program and
the Proprietary Product reagent strip business. In the self-injectables program,
the Company invested significantly in selling and marketing expenses to grow the
program beyond the pilot phase startup in 1995. In the reagent strip business,
the Company incurred expense growth in achieving the year to year revenue growth
of 108%. On the expense reduction side, the Company received a large expense
credit from a major supplier to help defray expenses incurred in converting
patients to a new drug in the Specialty Pharmacy line of the Patient Choice
business.
GENERAL AND ADMINISTRATIVE EXPENSES
1997 VERSUS 1996 General and administrative expenses (G&A), including the
provision for uncollectable accounts, increased $6.5 million or 56% in 1997 over
the prior year. G&A increased as a percentage of revenue from 12.8% to 15.5%.
G&A expenses for 1997 include a $1.4 million write off of the HCI note
receivable in the third quarter; excluding this write off, G&A as a percentage
of revenue was 14.3% for 1997. The increases in G&A reflect continuing
investments in management, information systems, and facilities to support the
Company's rapid growth. Also, the StatScript acquisition added almost $800,000
in goodwill amortization in 1997, all of it being recorded as G&A expense.
1996 VERSUS 1995 G&A expenses, including the provision for uncollectable
accounts, increased $2.9 million or 34% in 1996 over the prior year, but
declined as a percentage of revenue from 13.9% to 12.8%. The increase of $2.9
million in G&A spending is a result of increased customer service and
fulfillment costs related to increases in revenue, along with investments in
systems and people to support the rapid business growth. The decline in G&A
expense as a percentage of revenue is due to the benefits obtained from
reengineering a number of key processes and the leveraging impact of revenue
growth on fixed costs.
INTEREST INCOME
ALL YEARS Interest income in 1997, 1996 and 1995 was generated primarily from
the proceeds of the Company's sale of common stock in 1994, coupled with the
Company's positive operating cash flow. The increase in interest income in 1996
and 1995 is due to increases in average investable funds
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
and average yield. The decrease in interest income in 1997 is due primarily to
the Company's repurchase of one million shares of Common Stock and its
acquisition of StatScript Pharmacy during fiscal 1997.
OTHER INCOME
ALL YEARS In June 1997, Chronimed sold its exclusive rights to market and
distribute certain Orphan Medical, Inc. products back to Orphan Medical for
cash, royalties, and Orphan Medical common stock. Chronimed estimates the net
present value of these payments to be $1.7 million, and as such has recorded
$1.7 million as Other Income in its 1997 financial statements.
INCOME TAXES
The Company's income tax rate increased to approximately 38% in 1997 as the
amount of municipal bond interest income dropped significantly with respect to
income from operations. The Company expects its 1998 income tax rate to increase
to approximately 39% (Federal statutory at 34%, state at 5%) as a result of
further decreases in municipal bond interest income. The Company's income tax
rate was approximately 34% in 1996 due to favorable tax treatment on municipal
bond interest income, which was high in proportion to income from operations.
LIQUIDITY AND CAPITAL RESOURCES
As of June 27, 1997, the Company had $33.8 million of working capital. During
1997, the Company generated $8.5 million of cash from operating activities. The
average days sales outstanding (DSO) of the Company's accounts receivable
improved from 67 days at June 28, 1996 to 58 days at June 27, 1997. The decrease
reflects improved collection efforts, growth in revenue from payors which are
billed electronically, and increased sales to large institutions which pay
claims in a more timely manner. Cash was used primarily for the repurchase of
Common Stock ($14.5 million) and the acquisition of Statscript Pharmacy
($9.2 million). For the stock repurchase, the Company reduced retained earnings
by $10.5 million to reflect the proper accounting treatment of shareholders'
equity. Cash was provided from the exercise of stock options ($1.3 million) and
the net sale of available-for-sale securities ($11.6 million).
As of June 27, 1997, the Company had no long-term debt and
shareholders' equity of $53.4 million. The Company has a discretionary line of
credit totaling $15.0 million, with no balance outstanding as of June 27, 1997,
plus $15.3 million of cash and available-for-sale securities. In connection with
the StatScript acquisition, the Company will make a final revenue earnout
payment of $2.25 million on September 30, 1997. The Company believes that
available-for-sale securities, line of credit, and cash generated by operations
will allow it to meet foreseeable cash requirements and provide the flexibility
to fund future growth.
The Company has no material commitments for capital expenditures for
fiscal 1998.
OUTLOOK
Information contained in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations," other than historical information, should
be considered "forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. Such information reflects management's current
views of future events and financial performance that involve a number of risks
and uncertainties that could cause actual results to differ materially. The
cautionary statements filed by the Company as Exhibit 99 to a filing made with
the SEC on Form 10-K for the fiscal year ended June 27, 1997, are incorporated
herein by reference. Investors are specifically referred to such cautionary
statements for discussion of factors which could affect the Company's operations
and forward-looking statements contained herein.
17
<PAGE>
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS JUNE 27, JUNE 28,
1997 1996
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,038 $ 11,434
Available-for-sale securities 10,274 12,803
Accounts receivable (net of allowance of $1,120 and
$860 at June 27, 1997 and June 28, 1996, respectively) 20,372 19,843
Income taxes receivable 294 49
Inventory 7,858 5,476
Other current assets 274 560
Deferred taxes 965 811
-------- --------
Total current assets 45,075 50,975
Notes receivable - 1,375
Available-for-sale securities - 9,069
Property and equipment:
Property and equipment 12,916 8,542
Allowance for depreciation (5,466) (3,097)
-------- --------
7,450 5,445
Intangible assets, net 11,639 1,329
Other assets, net 1,127 33
-------- --------
Total assets $ 65,291 $ 68,226
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,149 $ 5,054
Accounts payable-acquisition 2,250 -
Accrued expenses 5,505 4,367
Income taxes payable - 571
Short-term debt 350 404
-------- --------
Total current liabilities 11,254 10,396
Long-term debt - 350
Deferred taxes 677 318
Shareholders' equity:
Preferred Stock - -
Common Stock, issued and outstanding shares -
11,878 and 12,454 respectively 118 124
Additional paid-in capital 49,838 49,569
Retained earnings 3,408 7,476
-------- --------
53,364 57,169
Unrealized (loss) on available-for-sale securities (4) (7)
-------- --------
Total shareholders' equity 53,360 57,162
-------- --------
Total liabilities and shareholders' equity $ 65,291 $ 68,226
======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
18
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED
-----------------------------------
JUNE 27, JUNE 28, JUNE 30,
1997 1996 1995
--------- --------- ---------
Revenues $ 117,171 $ 90,512 $ 62,527
Cost of sales 82,829 65,153 46,981
--------- --------- ---------
Gross profit 34,342 25,359 15,546
Operating expenses:
Selling and marketing 6,852 6,348 5,535
Research and development 505 437 293
General and administrative 16,236 10,501 7,661
Provision for uncollectable accounts 1,873 1,100 1,003
--------- --------- ---------
Total operating expenses 25,466 18,386 14,492
--------- --------- ---------
Income from operations 8,876 6,973 1,054
Interest income 798 1,327 1,024
Other income 1,700 -- --
--------- --------- ---------
Income before income taxes 11,374 8,300 2,078
Income tax expense (4,330) (2,841) (475)
--------- --------- ---------
Net income $ 7,044 $ 5,459 $ 1,603
========= ========= =========
Net income per share $ .56 $ .42 $ .13
========= ========= =========
Weighted average shares outstanding 12,659 13,137 12,612
========= ========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
19
<PAGE>
CONSOLIDATED STATEMENTS
OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------
JUNE 27, JUNE 28, JUNE 30,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 7,044 $ 5,459 $ 1,603
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,544 1,812 820
Deferred income taxes 205 367 (448)
Income tax benefit of stock option plans 1,920 1,773 1,268
Write off of HCI note 1,391 - -
Gain on sale of OMI rights (1,700) - -
Changes in operating assets and liabilities:
Accounts and notes receivable (144) (4,825) (2,073)
Income taxes receivable (245) 1,349 (1,399)
Inventory (2,382) (612) (1,210)
Accounts payable (1,906) 1,220 (181)
Accrued expenses 1,138 2,722 (160)
Income taxes payable (571) 571 -
Other assets 243 (246) (10)
-------- -------- --------
Net cash provided by (used in) operating activities 8,537 9,590 (1,790)
INVESTING ACTIVITIES
Acquisitions, net of cash purchased (9,234) (84) -
Proceeds from sale of OMI rights 250 - -
Purchases of property and equipment (4,373) (3,415) (2,824)
Purchase of available-for-sale securities (9,085) (16,634) (21,395)
Sale and maturities of available-for-sale securities 20,682 17,879 25,410
-------- -------- --------
Net cash (used in) provided by investing activities (1,760) (2,254) 1,191
FINANCING ACTIVITIES
Repurchase of Common Stock (14,452) - -
Net proceeds from sale of Common Stock 1,279 1,895 1,624
Principal payments on notes payable and capital
lease obligations - - (5,082)
-------- -------- --------
Net cash (used in) provided by financing activities (13,173) 1,895 (3,458)
-------- -------- --------
(Decrease) increase in cash and cash equivalents (6,396) 9,231 (4,057)
Cash and cash equivalents at beginning of period 11,434 2,203 6,260
-------- -------- --------
Cash and cash equivalents at end of period $ 5,038 $ 11,434 $ 2,203
======== ======== ========
</TABLE>
SUPPLEMENTAL DISCLOSURES:
* Income taxes paid in fiscal 1997, 1996 and 1995 were $1,918, $164, and
$1,425, respectively.
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
* The Company acquired the stock of British American Medical in August,
1995. The Company purchased $146 of cash, $361 of accounts receivable,
$352 of inventory, $24 of other assets, $25 of fixed assets and $850 of
intangible assets, and assumed accounts payable and accrued expenses of
$654. The acquisition was financed by the issuance of 42,716 shares of
Chronimed stock and $554 of debt to be converted to stock. In August,
1996, the Company converted $404 of this debt by issuing 25,349 shares
of Common Stock to British American Medical.
* The Company has accrued $2,250 for the final earnout payment from the
StatScript Pharmacy acquisition, to be paid September 30, 1997.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
20
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS) ON
ADDITIONAL INVESTMENTS
COMMON STOCK PAID-IN RETAINED AVAILABLE-
SHARES AMOUNT CAPITAL EARNINGS FOR-SALE TOTAL
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance July 1, 1994 11,422 $ 114 $ 42,471 $ 413 $ (49) $ 42,949
Exercise of
stock options 481 5 1,618 -- -- 1,623
Tax benefit of stock
option exercises -- -- 1,268 -- -- 1,268
Unrealized gain
on available-
for-sale securities -- -- -- -- 126 126
Net income -- -- -- 1,603 -- 1,603
-------- -------- -------- -------- -------- --------
Balance June 30, 1995 11,903 119 45,357 2,016 77 47,569
Common stock
issued for
acquisition 43 -- 549 -- -- 549
Exercise of
stock options 508 5 1,890 -- -- 1,895
Tax benefit of stock
option exercises -- -- 1,773 -- -- 1,773
Unrealized loss
on available-
for-sale securities -- -- -- -- (84) (84)
Net income -- -- -- 5,460 -- 5,460
-------- -------- -------- -------- -------- --------
Balance June 28, 1996 12,454 124 49,569 7,476 (7) 57,162
-------- -------- -------- -------- -------- --------
Stock repurchase (1,000) (10) (3,980) (10,462) -- (14,452)
Common stock issued
for acquisition 25 -- 404 -- -- 404
Exercise of
stock options 263 3 1,276 -- -- 1,279
Exercise of warrants 136 1 649 (650) -- --
Tax benefit of stock
option exercises -- -- 1,920 -- -- 1,920
Unrealized gain on
available-for-sale
securities -- -- -- -- 3 3
Net income -- -- -- 7,044 -- 7,044
-------- -------- -------- -------- -------- --------
Balance June 27, 1997 11,878 $ 118 $ 49,838 $ 3,408 $ (4) $ 53,360
======== ======== ======== ======== ======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
The fiscal years referenced herein are as follows: FISCAL YEAR YEAR ENDED
1997 June 27, 1997
1996 June 28, 1996
1995 June 30, 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Chronimed Inc. is a healthcare company specializing in the unique needs of
patients with chronic diseases. Chronimed develops, markets, and distributes
pharmaceuticals, general medical products, and patient education materials
directly to the individual and to the patients of managed care and case
management companies nationwide, along with institutions that serve these
patients.
FISCAL YEAR
The Company uses a four-week, four-week, five-week (4-4-5) quarterly accounting
cycle with the fiscal year ending on the Friday closest to June 30.
CONSOLIDATION POLICY
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Home Direct Medical Services, Inc., which was
incorporated in fiscal 1993, British American Medical, Inc., which was acquired
in a stock purchase in fiscal 1996, and Chronimed Holdings Inc., (the StatScript
Pharmacy) which was acquired July, 1996.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Those assumptions and estimates are subject to constant revisions, and actual
results could differ from those estimates.
REVENUE RECOGNITION
Sales are recognized upon shipment of products and at the time of purchase in
the retail stores.
STOCK-BASED COMPENSATION
In October, 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. The statement requires adoption of the new standard or footnote
disclosure for all transactions entered into during the fiscal years ended June
27, 1997 and June 28, 1996. As permitted by the statement, the Company has
elected to continue to account for stock options and awards to employees under
the provisions of Accounting Principles Board (APB) Opinion No. 25. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of grant over the amount
an employee must pay to acquire the stock. Disclosure of the impact of SFAS No.
123, as if adopted, can be found in Note 8 to the Consolidated Financial
Statements.
CASH EQUIVALENTS
The Company considers all investments with a maturity of 90 days or less when
purchased to be cash equivalents.
INVESTMENTS
The Company's investment policy is to invest idle and excess funds in high
grade, fixed income securities with maturities generally of no more than two
years. The major objective of investment activities is to protect capital value.
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
INVESTMENTS (CONTINUED)
Investments consist of debt securities with a remaining maturity of more than 90
days at the date of purchase. Management determines the appropriate
classification of debt securities at the time of purchase and reevaluates such
designation as of each balance sheet date. Debt securities are classified as
"available-for-sale" as of June 27, 1997 and June 28, 1996. The Company
considers the net unrealized loss on these investments of $4 and $7 at June 27,
1997 and June 28, 1996, respectively, to be temporary, and as such has recorded
it through shareholders' equity.
ACCOUNTS RECEIVABLE ALLOWANCE
The Company determines an allowance amount based upon an analysis of the
collectibility of specific accounts and the aging of the accounts receivable.
INVENTORIES
Inventories consist primarily of goods held for resale, and are carried at the
lower of cost or market determined under the average cost method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation on additions to property
and equipment is computed using the straight-line method. Depreciation occurs
over estimated useful lives of one to seven years. Depreciation expense was
$2,369, $1,468, and $709 in fiscal 1997, 1996, and 1995, respectively.
INTANGIBLE ASSETS
Intangible assets are amortized on a straight-line basis; goodwill is amortized
over five to twenty years and customer lists and technology rights are amortized
over two to five years. The Company periodically evaluates its goodwill for
impairment by comparison of the carrying value against anticipated business
performance. Amortization expense was $1,175, $344, and $111 in fiscal 1997,
1996, and 1995, respectively. Accumulated amortization was $1,865 and $698 as of
fiscal year end 1997 and 1996, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company has adopted SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets, which requires losses on impairment of long-lived assets used
in operations to be recorded when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amounts. The adoption had no impact on the financial
statements.
INCOME TAXES
The Company accounts for income taxes using the liability method. Deferred
income taxes are provided for temporary differences between financial reporting
and the tax basis of assets and liabilities.
PER SHARE DATA
Net income per share is based on the weighted average number of shares of common
stock and dilutive common stock equivalents outstanding during the year. Common
stock equivalents consist of options and warrants outstanding to purchase shares
of the Company's Common Stock.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings per Share, which is required to be adopted by the Company on April 25,
1998. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating basic earnings per share, the dilutive effect
of stock options will be excluded. The impact, compared to primary earnings per
share now reported, is not expected to be material.
SEGMENT INFORMATION
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. Compliance
with SFAS No. 131 is not required for the Company until fiscal 1999. The Company
has not yet determined the impact of the new standard on its financial
statements.
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(2) ACQUISITIONS
On July 1, 1997, the Company acquired the assets of StatScript Management
Services, Inc. and its associated specialty pharmacies (StatScript). The initial
all-cash purchase price was $10.25 million, with a potential $2.25 million
earnout based on revenue performance through fiscal 1997. The full $2.25 million
has been earned, and will be paid September 30, 1997. The StatScript acquisition
was accounted for as a purchase and, accordingly, operating results of this
business subsequent to the date of acquisition were included in the Company's
consolidated financial statements. The excess of purchase price over the book
value of the assets acquired is $11.5 million, and has been assigned to
goodwill. The goodwill is being amortized over 12 years. For fiscal year 1996,
proforma revenue, net income, and income per share for the Company including
StatScript for the full year would have been $103,367, $5,244, and $.40,
respectively.
(3) AVAILABLE-FOR-SALE SECURITIES
The amortized cost and estimated market value of available-for-sale securities
are as follows:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------- ------ ------ -------
As of June 28, 1996:
Municipal bonds $16,173 $ 39 $ 7 $16,205
U.S. Government securities 5,216 -- 75 5,140
Commercial paper 490 36 -- 527
------- ------ ------ -------
$21,879 $ 75 $ 82 $21,872
======= ====== ====== =======
As of June 27, 1997:
Municipal bonds $ 818 $ -- $ -- $ 818
U.S. Government securities 9,460 23 27 9,456
------- ------ ------ -------
$10,278 $ 23 $ 27 $10,274
======= ====== ====== =======
The amortized cost and estimated market value of available-for-sale securities
by contractual maturity are as follows:
1997 1996
------------------- -------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
------- ------- ------- -------
Due in one year or less $10,278 $10,274 $12,723 $12,803
Due after one year through
two years -- -- 9,156 9,069
------- ------- ------- -------
$10,278 $10,274 $21,879 $21,872
======= ======= ======= =======
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(4) NOTE RECEIVABLE
The Company had a $1,375 note receivable from Health Craft International, Inc.
(HCI) at June 28, 1996, the proceeds from which were being used to fund
development of a new product for diabetes. In March, 1997, the Company wrote off
the note totalling $1,391 to general and administrative expenses, concluding
that the note was not likely to be collectible given the yet-to-be-solved
technical challenges facing the underlying project and the financial status of
HCI.
(5) OPERATING LEASES AND RENT EXPENSE
The Company leases its office space, distribution facilities, and retail
locations under operating lease agreements. The remaining lease terms range from
one to five years as of June 27, 1997.
Future minimum lease payments, including current real estate taxes and
operating expenses, under the operating leases with lease terms in excess of one
year at June 27, 1997, are approximately as follows:
AMOUNT
Fiscal year: --------
1998 $1,037
1999 758
2000 502
2001 445
2002 411
------
$3,153
======
Total rent expense was $1,041, $692, and $566 during fiscal 1997, 1996, and
1995, respectively.
(6) LONG-TERM DEBT AND CREDIT ARRANGEMENTS
The Company incurred short and long-term debt arising from its acquisition of
British American Medical, Inc. in August, 1995. The $350 of short-term debt as
of June 27, 1997 has been converted to 42,553 shares of Common Stock as of
August 14, 1997 pursuant to an agreement with British American Medical, Inc.
Similarly, the $404 of short-term debt as of June 28, 1996 was converted to
25,349 shares of Common Stock on August 14, 1996.
The Company has a discretionary line of credit totalling $15 million.
There is no balance outstanding under this line of credit at June 27, 1997.
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(7) INCOME TAXES
Income tax expense for fiscal 1997, 1996 and 1995 is classified as:
1997 1996 1995
------ ------ ------
Current $4,125 $2,474 $ 347
Deferred 205 367 128
------ ------ ------
$4,330 $2,841 $ 475
====== ====== ======
The Company's income tax expense differs from the federal rate of 34%. The
reconciliation of differences is:
1997 1996 1995
------ ------ ------
Federal statutory rate $3,867 $2,822 $ 707
Interest on municipal bonds (36) (306) (312)
State taxes, net of federal benefit 376 334 80
Goodwill amortization 76 4 --
Other, net 47 (13) --
------ ------ ------
$4,330 $2,841 $ 475
====== ====== ======
Components of deferred tax assets and liabilities are:
1997 1996
------ ------
Deferred tax assets:
Alternative minimum tax credit $ -- $ 252
Bad debt reserve 425 326
Inventory reserve 38 27
Other reserves 461 291
Vacation accrual 124 90
Goodwill amortization 58 -
------ ------
Deferred tax liabilities:
Depreciation (184) (318)
Prepaid assets (83) (175)
OMI rights sale (551) --
------ ------
Net deferred tax assets $ 288 $ 493
====== ======
As of June 30, 1995, the Company had a net operating loss carryforward for tax
purposes of approximately $1,697 that gave rise to a deferred tax asset of $577,
which was fully utilized in fiscal 1996. This net operating loss carryforward
for tax purposes is principally the result of the exercise of non-qualified
stock options during the year, resulting in a deduction for tax purposes.
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(8) SHAREHOLDERS' EQUITY
The Company has 5,000,000 shares of $.01 par value Preferred Stock authorized
and issuable in one or more series as the Board of Directors may determine; none
is outstanding. 20,000,000 shares of $.01 par value Common Stock are authorized.
There are no restrictions on retained earnings.
In accordance with SFAS No. 123, Accounting for Stock-Based Compensation, the
Company continues to elect to utilize APB Opinion No. 25 and related
interpretations in accounting for its stock option plans and its empoyee stock
purchase plans. If the Company had elected to recognize compensation cost based
on the fair value of the options granted and shares sold pursuant to the
purchase plan as prescribed by SFAS No. 123, net income and earnings per share
would have been reduced to the pro forma amounts indicated in the table below
for fiscal years 1997 and 1996:
1997 1996
------ ------
Net income--as reported $7,044 $5,459
Net income--pro forma 6,342 5,044
Earnings per share--as reported $ .56 $ .42
Earnings per share--pro forma .50 .38
SFAS No. 123 is applicable only to options granted after June 30, 1995; as a
result, the pro forma effect on net income for fiscal 1996 and 1997 is not
representative of the pro forma effect on net income in future years because it
does not take into consideration pro forma compensation expense related to
grants made prior to June 30, 1995.
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option-pricing model with the following assumptions:
Expected dividend yield 0.0%
Expected stock price volatility 69%
Risk-free interest rate 6.00%
Expected life of options 5 years
The Black-Scholes option-pricing model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option pricing models require the input of highly
subjective assumptions. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models may not
necessarily provide a reliable single measure of the fair value of its employee
stock options. Using the foregoing assumptions, the weighted-average fair value
of the options granted during the fiscal years 1997 and 1996 were $6.53 and
$8.53, respectively.
The Company has three employee Stock Options Plans (1986, 1994, and 1997).
Options to purchase Common Stock of the Company are granted to employees at 100%
of fair market value on the date of grant and are generally exercisable at 20%
of the total grant at the end of each year. The options are cumulatively
exercisable and expire seven years after the date of grant.
The Company also has a director performance Stock Option Plan that reserved
300,000 shares of Common Stock for option grants. The options are granted with
exercise prices equal to market value on the date of the grant. The options
become exercisable after seven years. Certain acceleration provisions apply if
the stock price increases significantly prior to the end of seven years.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
SHARES WEIGHTED WEIGHTED
AVAILABLE AVERAGE AVERAGE
FOR NUMBER PRICE NUMBER PRICE
GRANT OF SHARES PER SHARE OF SHARES PER SHARE
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance July 1, 1994 215,960 1,674,291 $4.61 1,064,077 $3.77
Reserved for future grants 1,050,000 -- --
Granted (827,500) 852,500 11.71
Exercised -- (486,630) 3.51
Cancelled 108,832 (118,832) 6.74
-------- -------
Balance June 30, 1995 547,292 1,921,329 7.85 868,200 4.47
Granted (315,800) 315,800 13.20
Exercised -- (515,402) 3.80
Cancelled 49,068 (49,068) 9.51
Expired (3,750) -- --
-------- -------
Balance June 28, 1996 276,810 1,672,659 10.11 672,762 7.87
Reserved for future grants 1,000,000 --
Granted (949,075) 949,075 10.59
Exercised -- (268,398) 5.43
Cancelled 292,180 (292,180) 12.64
Expired (140,310) --
-------- -------
Balance June 27, 1997 479,605 2,061,156 10.59 678,282 9.78
======= ========= ===== ======= ====
</TABLE>
The following table summarizes information about the stock options outstanding
at June 27, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL PRICE NUMBER PRICE
RANGE OF EXERCISE PRICES OF SHARES LIFE PER SHARE OF SHARES PER SHARE
- ------------------------ --------- ---- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$2.67-$9.88 993,225 5.7 yrs $ 7.36 305,661 $ 6.71
$10.13-$21.88 1,067,931 4.9 13.58 372,621 12.30
--------- -------
$2.67-$21.88 2,061,156 5.3 yrs $10.59 678,282 $ 9.78
</TABLE>
(9) WARRANTS
In conjunction with the Company's initial public offering, warrants were issued
to the underwriters for 352,500 shares of Common Stock with an exercise price of
$4.80, which was 20% above the initial offering price. During fiscal 1994,
75,000 of these warrants were exercised. The remaining 277,500 warrants were
exercised in April, 1997.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(10) EMPLOYEE BENEFIT PLANS
The Company has a qualified 401(k) Employee Savings Plan covering substantially
all employees. Company contributions are required. The Company's contributions
to the Plan, representing 401(k) matching contributions only, were $130, $50,
and $16 in fiscal years 1997, 1996 and 1995, respectively.
The Company has an Employee Stock Purchase Plan. There were 259,275 shares
available for purchase under the Plan at June 27, 1997.
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosure of Fair Value of Financial Instruments, requires
disclosure of fair value information about financial instruments for which it is
practicable to estimate that value. The following methods and assumptions were
used by the Company in estimating its fair value disclosures for financial
instruments:
CASH AND CASH EQUIVALENTS The carrying amount reported in the balance sheet for
cash and cash equivalents approximates its fair value.
AVAILABLE-FOR-SALE SECURITIES The fair values for available-for-sale securities
are based on quoted market prices.
SHORT-TERM DEBT The carrying amount for the Company's short-term debt
approximates its fair value.
The carrying amounts and fair values of the Company's financial instruments at
June 27, 1997 are as follows:
CARRYING AMOUNT FAIR VALUE
Cash and cash equivalents $ 5,038 $ 5,038
Available-for-sale securities--Current 10,274 10,274
Short-term debt 350 350
(12) RELATED PARTY TRANSACTIONS
On April 9, 1997, the Company entered into a guarantee of indebtedness of Mr.
Maurice R. Taylor, II, Chronimed's Chairman and Chief Executive Officer. Such
indebtedness permitted Mr. Taylor to continue to hold large amounts of Company
stock. There was $355 of indebtedness under the guarantee on June 27, 1997.
On June 27, 1997, the Company entered into an agreement to sell its exclusive
rights to market and distribute certain Orphan Medical, Inc. products back to
Orphan Medical for cash, royalties, and Orphan Medical stock totalling $2.5
million. The Company has estimated the net present value of these payments to be
$1.7 million, and as such has recorded $1.7 million as Other Income in its 1997
financial statements. The receivable balance outstanding as of June 27, 1997
totals $1.45 million, of which $385 is classified as Accounts Receivable and the
remaining $1.065 million as Other Assets. Orphan Medical, Inc. was created in
July 1994 as a spin-off from Chronimed Inc.
(13) SIGNIFICANT SUPPLIER
The Company provides immunosuppressant drugs to patients who have had an organ
transplant. Two of these drugs, Sandimmune(R) and Neoral(R), are manufactured by
Novartis Pharmaceuticals Corporation. These two drugs accounted for 13%, 19%,
and 26% of the Company's total revenue in the fiscal years ended June 27, 1997,
June 28, 1996, and June 30, 1995, respectively.
29
<PAGE>
REPORT OF INDEPENDENT AUDITORS
We have audited the accompanying consolidated balance sheets of Chronimed Inc.
as of June 27, 1997 and June 28, 1996, and the related consolidated statements
of income, shareholders' equity and cash flows for each of the three years in
the period ended June 27, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Chronimed Inc.
at June 27, 1997 and June 28, 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 27, 1997, in conformity with generally accepted accounting principles.
Minneapolis, Minnesota
July 30, 1997
MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED SHAREHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock, $.01 par value per share, is traded in the
over-the-counter market and quoted on the NASDAQ Stock Market under the symbol
"CHMD". The following table sets forth the range of high and low transaction
prices as reported by NASDAQ. The prices represented are between dealers and do
not include retail mark-up, mark-down, or commission and do not necessarily
represent actual transactions.
1997 1996 1995
--------------- -------------- ---------------
HIGH LOW HIGH LOW HIGH LOW
------ ------ ------ ------ ------ -------
First Quarter $20.88 $11.25 $17.38 $10.63 $13.75 $ 8.75
Second Quarter 16.63 12.88 15.63 13.13 20.25 10.25
Third Quarter 15.38 7.00 23.25 13.25 20.25 9.88
Fourth Quarter 11.00 6.88 25.13 16.63 15.38 11.13
NUMBER OF SHAREHOLDERS OF RECORD
The number of shareholders of record of the Company's Common Stock as of July
21, 1997 is 474. The approximate number of beneficial owners of the Company's
Common Stock is 7,700 as of the same date.
DIVIDENDS
The Company has never declared or paid cash dividends on its Common Stock. The
Company does not anticipate paying any cash dividends in the foreseeable
future.
30
<PAGE>
BOARD OF DIRECTORS
[PHOTO]
Board of Directors:
(left to right)
(top) John Howell Bullion, Charles V. Owens, Jr.,
Henry F. Blissenbach,
Pharm. D.,
(bottom)
Donnell D. Etzwiler, M.D.,
Maurice R. Taylor, II,
and Lawrence C. Weaver, Ph.D.
BOARD OF DIRECTORS
MAURICE R. TAYLOR, II
Chairman of the Board and
Chief Executive Officer
HENRY F. BLISSENBACH,
PHARM. D.
President and
Chief Operating Officer
JOHN HOWELL BULLION
Chief Executive Officer
Orphan Medical, Inc.
DONNELL D. ETZWILER, M.D.
President and
Chief Medical Officer
International Diabetes Center
CHARLES V. OWENS, JR., RETIRED
Former Executive Vice President of International Operations
Miles Laboratories, Inc.
LAWRENCE C. WEAVER, PH.D.
Dean Emeritus
College of Pharmacy,
University of Minnesota
BOARD COMMITTEES
COMPENSATION COMMITTEE
Charles V. Owens, Jr., Chair
Donnell D. Etzwiler
Lawrence C. Weaver
AUDIT COMMITTEE
John Howell Bullion, Chair
Charles V. Owens, Jr.
Lawrence C. Weaver
CORPORATE OFFICERS
[PHOTO]
Corporate Officers:
(left to right)
(top) Steven A. Crees
Patrick L. Taffe
Perry L. Anderson
Norman A. Cocke
(bottom)
Henry F. Blissenbach,
Pharm. D., and
Maurice R. Taylor, II
MAURICE R. TAYLOR, II
Chairman of the Board and
Chief Executive Officer
HENRY F. BLISSENBACH,
PHARM. D.
President and
Chief Operating Officer
PERRY L. ANDERSON
Vice President
StatScript Pharmacy
NORMAN A. COCKE
Senior Vice President,
Chief Financial Officer
and Secretary
STEVEN A. CREES
Senior Vice President
General Medical Products
PATRICK L. TAFFE
Vice President
Information Systems
31
<PAGE>
CORPORATE AND SHAREHOLDER INFORMATION
CORPORATE HEADQUARTERS
Chronimed Inc.
13911 Ridgedale Dr.
Minnetonka, Minnesota 55305
AUDITORS
Ernst & Young LLP
Minneapolis, Minnesota
GENERAL COUNSEL
Gray, Plant, Mooty, Mooty,
& Bennett, P.A.
Minneapolis, Minnesota
TRANSFER AGENT
AND REGISTRAR
Shareholder inquiries relating to shareholder records, stock transfer, change of
ownership, or change of address should be directed to the Company's transfer
agent and registrar:
Norwest Bank Minnesota, N.A.
161 N. Concord Exchange
S. St. Paul, MN 55075
(612) 450-4064
(800) 468-9716
INVESTOR RELATIONS
Security analysts, portfolio managers, and others interested in the investment
community seeking information about Chronimed should contact Investor Relations
at (612)541-0239.
FORM 10-K
Copies of the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission may be obtained without charge by writing to Investor
Relations at the Corporate Headquarters address.
STOCK EXCHANGE LISTING
Common stock of Chronimed Inc. is traded on the NASDAQ National Market System
under the symbol "CHMD."
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THIRTEEN WEEKS ENDED
------------------------------------------------
SEPTEMBER 27 DECEMBER 29 MARCH 28 JUNE 27
YEAR ENDED JUNE 27, 1997
Revenues $28,506 $31,332 $27,098 $30,235
Gross profit 7,749 8,698 8,912 8,983
Income from operations 1,688 2,650 1,738 2,800
Net income 1,247 1,763 1,163 2,871
Net income per share $ .09 $ .14 $ .10 $ .24
THIRTEEN WEEKS ENDED
------------------------------------------------
SEPTEMBER 29 DECEMBER 29 MARCH 29 JUNE 28
YEAR ENDED JUNE 28, 1996
Revenues $18,526 $24,809 $22,560 $24,617
Gross profit 4,948 7,151 6,571 6,689
Income from operations 707 2,297 1,982 1,987
Net income 725 1,622 1,503 1,609
Net income per share $ .06 $ .12 $ .11 $.12
1. Net income includes a gain on sale of the OMI distribution rights, net of
taxes, of $1,040 or $.09 per share.
32
<PAGE>
Illustration: Warren Hanson
Photography: Thoen & Associates
<PAGE>
[LOGO]
CHRONIMED
13911 Ridgedale Drive
Minnetonka, Minnesota 55305
612/541-0239
Fax: 612/541-4969
www.chronimed.com
CHRONIMED INC.
EXHIBIT 21.1
SUBSIDIARIES
Home Direct Medical Services, Inc., incorporated in the state of Minnesota,
doing business as Home Service Medical.
British American Medical, Inc., incorporated in the state of California.
Chronimed Holdings, Inc., incorporated in the State of Minnesota, doing business
as StatScript Pharmacy.
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Chronimed Inc. of our report dated July 30, 1997 included in the 1997 Annual
Report to Shareholders of Chronimed Inc.
Our audits also included the financial statement schedule of Chronimed Inc.
listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above, when considered
in relation to the basic financial statements as a whole, presents fairly in all
material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-48820) pertaining to the Chronimed Inc. 1986 Stock Option
Plan, the Registration Statement (Form S-8 No. 33-87712) pertaining to the
Chronimed Inc. 1994 Stock Option Plan for Directors, the Registration Statement
(Form S-8 No. 33-87718) pertaining to the Chronimed Inc. 1994 Stock Option Plan,
the Registration Statement (Form S-8 No. 33-81041) pertaining to the Chronimed
Inc. Employee Stock Purchase Plan of 1995, the Registration Statement (Form S-8
No. 333-15949) pertaining to the Chronimed Inc. 1997 Stock Option Plan, the
Registration Statement (Form S-3 No. 333-23833) pertaining to the registration
of 68,065 shares of its common stock, and the Registration Statement (Form S-3
No. 333-35555) pertaining to the registration of 42,553 shares of its common
stock of our reports dated July 30, 1997, with respect to the consolidated
financial statements of Chronimed Inc. incorporated by reference in its Annual
Report (Form 10-K) for the year ended June 27, 1997 and the related financial
statement schedule included herein, filed with the securities and Exchange
Commission.
/s/ Ernst & Young LLP
Minneapolis Minnesota
September 19, 1997
EXHIBIT 99
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT
Chronimed Inc. (The "Company") desires to take advantage of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995 and is filing
this Exhibit to its Annual Report on Form 10-K in order to do so. When used in
this Annual Report on Form 10-K and in future filings by the Company with the
Securities and Exchange Commission in the Company's annual report, quarterly
reports, press releases and in oral statements made with the approval of an
authorized executive officer, the words or phrases "will likely result", "look
for", "may result", "will continue", "is anticipated", "expect", "project", or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. The Company cautions readers that the following
important factors, among others, could affect the Company's financial
performance and could cause the Company's actual results for future periods to
differ materially from any forward-looking statements made by, or on behalf of,
the Company:
The Company's ability to maintain its on-going arrangements with the
manufacturers of various products and their ability to satisfy the Company's
volume requirements and pricing and product criteria, particularly with the
Sandimmune (R) and Neoral (R) products manufactured by Novartis Pharmaceuticals
(formerly Sandoz, A. G. and Ciba-Geigy).
Changes in or unknown violations of various Federal, State, and Local
regulations governing: the dispensing of prescription drugs; the prohibiting of
payments for patient referrals; the labeling, packaging, advertising and
adulteration of prescription drugs; the dispensing of "controlled" substances
and prescription drugs; the "fraud and abuse" provisions of the Social Security
Act; and others not specifically mentioned.
The costs and other effects of legal and administrative cases and
proceedings; claims of customers, both current and former; settlements and
investigations; and changes in those items; developments or assertions by or
against the Company relating to distribution rights and licenses; adoption of
new, or changes in, accounting policies and practices and the application of
such policies and practices.
<PAGE>
The amount of, and rate of growth in, the Company's selling, general
and administrative expenses; and the impact of unusual items resulting from the
Company's ongoing evaluation of its business strategies, asset valuations and
organizational structures.
The effects of and changes in, trade, monetary and fiscal policies,
laws and regulations, other activities of government agencies, as previously
mentioned; changes in social and economic conditions, such as trade restrictions
or prohibitions, inflation and monetary fluctuations, import and other charges
or taxes; the ability or inability of the Company to obtain, or hedge against,
foreign currency, foreign exchange rates and fluctuations in those rates;
unstable governments and legal systems, and intergovernmental disputes.
The Company's ability to obtain competitive financing to funds its
growth.
Difficulties or delays in the production or delivery of the Company's
proprietary Supreme blood glucose reagent strip.
Difficulties or delays in the development and marketing of the
Company's products, including, but not limited to, a failure to deliver new
proprietary products and technologies when anticipated (Supreme II meter, Select
meter, and related diabetes programs).
Occurrences affecting the Company's ability to realize cost and volume
efficiencies, particularly in its Managed Care self-administered injectables
business.
Heightened competition, including specifically the intensification of
price competition; the entry of new competitors; and the introduction of new
products and services by new and existing competitors.
Termination of payor contracts or renegotiation at lower rates or less
favorable terms of payment.
Difficulties in realizing the expected revenues and profits from the
July, 1996 StatScript acquisition.
Adverse actions of governmental payors, including reduction of Medicare
and Medicaid allowables for products or services provided, and discontinuance of
or limitations on governmentally-funded programs.
Failure to obtain new customers, retain existing customers or withstand
reductions in force by existing customers.
Adverse publicity and news coverage.
Inability to carry out marketing and sales plans.
<PAGE>
Loss or retirement of key executives.
Claims against the Company in excess of insurance coverage or
difficulty in renewing insurance at competitive rates.
Changes in interest rates causing a reduction of interest income, or
the unforeseen need for the Company to liquidate its available-for-sale
securities prior to maturity, potentially resulting in permanent losses.
The Company does not undertake and specifically declines any obligations to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-27-1997
<PERIOD-START> JUN-28-1996
<PERIOD-END> JUN-27-1997
<CASH> 5,038,000
<SECURITIES> 10,274,000
<RECEIVABLES> 20,372,000
<ALLOWANCES> 1,120,000
<INVENTORY> 7,858,000
<CURRENT-ASSETS> 45,075,000
<PP&E> 12,916,000
<DEPRECIATION> 5,466,000
<TOTAL-ASSETS> 65,291,000
<CURRENT-LIABILITIES> 11,254,000
<BONDS> 0
0
0
<COMMON> 118,000
<OTHER-SE> 53,242,000
<TOTAL-LIABILITY-AND-EQUITY> 65,291,000
<SALES> 117,171,000
<TOTAL-REVENUES> 117,171,000
<CGS> 82,829,000
<TOTAL-COSTS> 108,295,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,873,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 11,374,000
<INCOME-TAX> 4,330,000
<INCOME-CONTINUING> 7,044,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,044,000
<EPS-PRIMARY> .56
<EPS-DILUTED> .56
</TABLE>
