CHRONIMED INC, DEF 14A, 1998-10-08

CHRONIMED INC
DEF 14A, 1998-10-08
CATALOG & MAIL-ORDER HOUSES

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SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. )

Filed by the registrant [X]

Filed by a party other than the registrant [ ]

Check the appropriate box:
[ ] Preliminary proxy statement
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))

CHRONIMED, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

[ ] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

(1) Title of each class of securities to which transaction applies:

(2) Aggregate number of securities to which transactions applies:

(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11. (Set forth the amount on which the
filing fee is calculated and state how it was determined.)

(4) Proposed maximum aggregate value of transaction:

(5) Total fee paid:

[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.

(1) Amount previously paid:

(2) Form, Schedule or Registration Statement No.:

(3) Filing party:

(4) Date filed:

<PAGE>

[LOGO] CHRONIMED

10900 RED CIRCLE DRIVE
MINNETONKA, MINNESOTA 55343

--------------------

To Our Shareholders:

You are cordially invited to attend the 1998 Annual Meeting of Shareholders,
which will be at the Lutheran Brotherhood Auditorium, 625 Fourth Avenue South,
Minneapolis, Minnesota on Wednesday, November 18, 1998, at 3:30 p.m. Central
Standard Time.

At the Annual Meeting, shareholders will elect directors of the Company and
transact such other items of business as are listed in the Notice of Annual
Meeting and more fully described in the Proxy Statement. The Board of Directors
and Management hope that you will be able to attend the meeting in person.

The formal Notice of Annual Meeting and the Proxy Statement follow. It is
important that your shares be represented and voted at the meeting, regardless
of the size of your holdings. Accordingly, please mark, sign, and date the
enclosed proxy and return it promptly in the enclosed envelope to ensure that
your shares will be represented. If you do attend the Annual Meeting, you may,
of course, withdraw your proxy should you wish to vote in person.

Sincerely yours,

Maurice R. Taylor, II
CHAIRMAN OF THE BOARD OF DIRECTORS
AND CHIEF EXECUTIVE OFFICER

October 9, 1998

<PAGE>

CHRONIMED INC.

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
NOVEMBER 18, 1998

TO THE SHAREHOLDERS OF CHRONIMED INC.:

Notice is hereby given to the holders of common shares of Chronimed
Inc. that the Annual Meeting of Shareholders of the Company will be held at the
Lutheran Brotherhood Auditorium, 625 Fourth Avenue South, Minneapolis,
Minnesota, on Wednesday, November 18, 1998, at 3:30 p.m. Central Standard Time,
or at any adjournments thereof, to consider and act upon the following matters:

1. To elect two directors to serve for terms of three years.

2. To approve the Chronimed Inc. 1999 Stock Option Plan.

3. To ratify the appointment of Ernst & Young LLP as independent
auditors for the current fiscal year.

4. To transact such other business as may properly come before
the meeting or any adjournments thereof.

The Board of Directors has fixed the close of business on October 5,
1998, as the record date for the determination of shareholders entitled to
notice of, and to vote at, the meeting or any adjournments thereof.

YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING. EVEN IF YOU PLAN TO
ATTEND THE MEETING, WE URGE YOU TO SIGN, DATE, AND RETURN THE PROXY AT ONCE IN
THE ENCLOSED ENVELOPE.

BY ORDER OF THE BOARD OF DIRECTORS

Norman A. Cocke
SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND
SECRETARY

October 9, 1998

<PAGE>

CHRONIMED INC.

ANNUAL MEETING OF SHAREHOLDERS
NOVEMBER 18, 1998

----------------------------

PROXY STATEMENT

----------------------------

GENERAL

The Annual Meeting of Shareholders of Chronimed Inc. ("Company") will
be held on Wednesday, November 18, 1998, at 3:30 p.m., Central Standard Time, at
the Lutheran Brotherhood Auditorium, 625 Fourth Avenue South, Minneapolis,
Minnesota, for the purposes set forth in the Notice of Annual Meeting of
Shareholders. This Proxy Statement, accompanying form of proxy, and Chronimed
Inc. annual report are first being mailed to shareholders on or about October 9,
1998.

The only matters the Board of Directors knows will be presented are
those stated in Items 1, 2, 3 and 4 of the notice. THE BOARD OF DIRECTORS
RECOMMENDS THAT SHAREHOLDERS VOTE IN FAVOR OF ITEMS 1, 2, 3 AND 4. Should any
other matter properly come before the meeting, it is intended that the persons
named in the enclosed proxy will have authority to vote such proxy in accordance
with their judgment on such matter.

OUTSTANDING SHARES AND VOTING RIGHTS

The enclosed proxy is solicited on behalf of the Board of Directors for
use at the Annual Meeting. Such solicitation is being made by mail and may also
be made by directors, officers, and regular employees of the Company personally
or by telephone. Any proxy given pursuant to such solicitation may be revoked by
the shareholder at any time prior to the voting thereof by so notifying the
Company in writing or by appearing in person at the meeting. Subject to any such
revocation, all shares represented by properly executed proxies that are
received prior to the meeting will be voted in accordance with the directions on
the proxy. If no direction is made, the proxy will be voted (i) FOR the election
of the Board of Directors' nominees named in this Proxy Statement for the
respective terms described in this Proxy Statement, (ii) FOR approval of the
Chronimed Inc. 1999 Stock Option Plan, (iii) FOR ratification of the appointment
of Ernst & Young LLP as the independent auditors of the Company for the current
fiscal year, and (iv) in the Proxy's discretion on such other business as may
come before the Annual Meeting. So far as the management of the Company is
aware, no matters other than those described in this Proxy Statement will be
acted upon at the Annual Meeting.

Each shareholder will be entitled to cast one vote in person or by
proxy for each share of Common Stock held by the shareholder. Only shareholders
of record at the close of business on October 5, 1998, will be entitled to vote
at the meeting. Common Stock, $.01 par value per share, of which there were
12,107,382 shares outstanding on the record date, constitutes the only class of
outstanding voting securities issued by the Company. Each share is entitled to
cast one vote on each proposal before the meeting.

Votes cast by proxy or in person at the Annual Meeting will be
tabulated by the election inspectors appointed for the meeting and will
determine whether or not a quorum is present. The election inspectors will treat
abstentions as shares that are present and entitled to vote for purposes of
determining the presence of a quorum but as unvoted for purposes of determining
the approval of any particular matter submitted to the shareholders for a vote.
If a broker indicates on the form of proxy that the broker does not have
discretionary authority as to certain shares to vote on a particular matter,
those shares will be considered to be present for the

<PAGE>

purpose of determining whether a quorum is present, but will not be considered
as present and entitled to vote with respect to that particular matter.

All of the expenses involved in preparing, assembling, and mailing this
Proxy Statement and the material enclosed herewith will be paid by the Company.
The Company may reimburse banks, brokerage firms, and other custodians,
nominees, and fiduciaries for reasonable expenses incurred by them in sending
proxy material to beneficial owners of stock.

PROPOSAL 1:
ELECTION OF DIRECTORS

As approved by the shareholders at the December 3, 1997 Annual Meeting,
the Company amended its Articles of Incorporation and Bylaws to divide the Board
of Directors into classes to allow for staggered terms of office, with one class
of directors elected each year and each director serving for a term of three
years. Upon their initial election at last year's Annual Meeting, the Class I
directors were to hold office for a term expiring at the November 18, 1998
Annual Meeting of shareholders. Similarly, the Class II directors will hold
office for a term expiring at the 1999 Annual Meeting of shareholders, and the
Class III directors will hold office for a term expiring at the 2000 Annual
Meeting of shareholders.

Commencing with the November 18, 1998 Annual Meeting of shareholders,
the shareholders will elect only one class of directors each year, with each
director so elected to hold office for a term expiring at the third annual
meeting of shareholders following their election. This same procedure will be
repeated each year, with the result that approximately one-third of the whole
Board of Directors will be elected each year.

Shares represented by proxy will be voted, if authority to do so is not
withheld, for the election of the two nominees named below, unless one or more
of such nominees should become unavailable for service by reason of death or
other unexpected occurrence, in which event such shares may be voted for the
election of such substitute nominee as the Board of Directors may propose. The
affirmative vote of the holders of a majority of the shares of Common Stock,
present or represented at the meeting and entitled to vote on Proposal 1, is
required to approve Proposal 1. For this purpose, a shareholder (including a
broker) who does not give authority to a proxy to vote, or withholds authority
to vote, on the election of directors shall not be considered present and
entitled to vote on the election of directors.

NOMINEES FOR DIRECTOR

CLASS I DIRECTORS
(THREE YEAR TERM)

John H. Flittie
Travers H. Wills

Set forth below is information regarding the two nominees and the
existing directors not currently up for election, including information
furnished by them as to their principal occupations for the last five years,
certain other directorships held by them, and their ages as of the date hereof.
The following table also sets forth the Common Stock ownership of each of the
Company's directors. Unless otherwise indicated, all persons have sole or joint
with spouse voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by them. Nominees may be contacted at the
headquarters of the Company.

<PAGE>

John H. Flittie 62 Mr. Flittie was appointed as a director 800 *
DIRECTOR in August 1998. He is President, Chief
Operating Officer, and a director of
ReliaStar Financial Corporation, a
financial services holding company. He
joined ReliaStar (then Northwestern
National Life) in 1985 as Senior Vice
President and Chief Financial Officer.
Mr. Flittie is a Fellow of the Society of
Actuaries and on the Advisory Board of
the College of Business Administration at
Drake University.

Travers H. Wills 55 Mr. Wills was appointed as a director in 1,000 *
DIRECTOR August 1998. He most recently served as
Chief Operating Officer and Executive
Vice President of United HealthCare
Corporation, retiring July 1998. He
joined United HealthCare Corporation in
1992 as Senior Vice President of
Specialty Operations. Prior to 1992, Mr.
Wills served in various executive
positions at CIGNA.

EXISTING DIRECTORS (Not Currently up for Election)

Maurice R. Taylor, II (3) 52 Mr. Taylor, a co-founder of the Company, 613,132 4.8%
CHAIRMAN OF THE BOARD OF has served since 1985 as Chief Executive
DIRECTORS AND CHIEF Officer and a director of the Company and
EXECUTIVE OFFICER since June 1994 as Chairman. He served
as President from 1985 through April
1997, until the hiring of Dr.
Blissenbach. Prior to Chronimed, Mr.
Taylor held various management positions
in companies whose principal activities
were manufacturing, distribution and
international trade. Mr. Taylor is a
director of Orphan Medical, Inc., a
publicly-held pharmaceutical development
company and formerly a division of the
Company. Mr. Taylor is Chairman of
Linguistic Technologies, Inc., a
privately-held company specializing in
the application
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
NUMBER OF
SHARES OF COMMON
STOCK OWNED
NAME AND BENEFICIALLY AS OF PERCENT OF
POSITIONS WITH THE COMPANY AGE PRINCIPAL OCCUPATION SEPT. 30, 1998(1) CLASS
- -------------------------- --- -------------------- ----------------- -----
<S> <C> <C> <C>
and integration of speech recognition
technology into the healthcare market.
He is Chairman of the Whittier Institute
for Diabetes, a non-profit organization
dedicated to research, education and
patient care in the field of diabetes.
He is also a director of the Minnesota
Zoological Garden, a public-private
partnership established by the Minnesota
legislature.

Henry F. Blissenbach, 56 Dr. Blissenbach has served as President 83,091 *
Pharm.D (2) and Chief Operating Officer of the
DIRECTOR, PRESIDENT AND Company since May 1997. He became a
CHIEF OPERATING OFFICER director of the Company in September
1995. From 1992 to 1997, he served as
President of Diversified Pharmaceutical
Services, Inc. (DPS), a United HealthCare
subsidiary until 1994, then a subsidiary
of SmithKline Beecham Corp. DPS is a
pharmacy benefit management firm. Dr.
Blissenbach also serves as a director of
Ligand Pharmaceuticals Inc., a
privately-held biomedical development
company.

John Howell Bullion (3) 46 Mr. Bullion is a co-founder of the 229,125 1.8%
DIRECTOR Company and has served as a director
since 1985. He has been Chief Executive
Officer and a director of Orphan Medical,
Inc., a publicly-held pharmaceutical
development company, since its formation
in June 1994. Since September 1993, Mr.
Bullion has also served as President of
Bluestem Partners, Ltd., which invests in
and provides management services to
developing businesses.

Charles V. Owens, Jr. (2) 71 Mr. Owens has served as a director of 52,185 *
DIRECTOR the Company since 1991. Since 1988, Mr.
Owens has served as a consultant to
several medical device and diagnostic
firms in the United States and Japan.
From 1985 to 1988, he was Chief Executive
Officer of Genesis Labs, Inc., (which
included DiaScreen
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
NUMBER OF
SHARES OF COMMON
STOCK OWNED
NAME AND BENEFICIALLY AS OF PERCENT OF
POSITIONS WITH THE COMPANY AGE PRINCIPAL OCCUPATION SEPT. 30, 1998(1) CLASS
- -------------------------- --- -------------------- ----------------- -----
<S> <C> <C> <C>
Corporation as a subsidiary) a
diagnostics manufacturing company.
Before his employment with Genesis Labs,
Inc., Mr. Owens was an executive officer
with various medical device companies,
including Miles Laboratories, Inc. Mr.
Owens is a past director of St. Jude
Medical, Inc., a medical device company,
and was a director of Genesis Labs,
Inc., from which the Company acquired
the assets of DiaScreen Corporation in
March 1998.
</TABLE>

- -----------------
*Less than 1%

(1) Includes the following options exercisable within 60 days to acquire
shares of Common Stock: Mr. Taylor, 234,000; Dr. Blissenbach, 80,800;
Mr. Bullion, 76,000; and Mr. Owens, 16,000.
(2) Class II Directors - will be up for shareholder election at the 1999
Annual Meeting of shareholders.
(3) Class III Directors - will be up for shareholder election at the 2000
Annual Meeting of shareholders.

<PAGE>

COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS

Messrs. Bullion, Owens and Flittie (starting August 1998) are the
current members of the Audit Committee of the Board of Directors. During fiscal
1998, the Committee met five times. The Audit Committee represents the Board in
discharging its responsibilities relating to the accounting, reporting, and
financial control practices of the Company. The Committee has general
responsibility for review with management of the financial controls, accounting,
and audit and reporting activities of the Company. The Committee annually
reviews the qualifications and objectivity of the Company's independent
auditors, makes recommendations to the Board as to their selection, reviews the
scope, fees, and results of their audit, and reviews their management comment
letters.

Messrs. Owens, Flittie (starting August 1998) and Wills (starting
August 1998) are the current members of the Compensation Committee, which
oversees compensation for directors, officers and key employees of the Company.
During fiscal 1998, the Compensation Committee met five times.

During fiscal 1998, the Board of Directors met ten times, including
three telephone board meetings. Each director attended 75% or more of the
meetings of the Board of Directors and its committees on which he served during
the times of his appointment. The Board of Directors does not have a standing
nominating committee.

DIRECTOR COMPENSATION

For fiscal 1998, directors who were not employees of the Company
received an annual retainer of $20,000 plus fees of $1,000 for each board
meeting attended in person; $500 for each telephone board meeting attended; and
$500 for each committee meeting attended whether in person or by telephone.
Committee chairmen received an additional $200 per meeting. In fiscal 1998,
directors were also reimbursed for out-of-pocket expenses incurred in attending
Board of Directors and committee meetings.

Pursuant to the Company's 1994 Stock Option Plan for Directors, each
non-employee director automatically receives an option to purchase 30,000 shares
on the date of the director's initial election to the Board of Directors. Each
option has an exercise price equal to the fair market value of the Company's
Common Stock on the date of grant. The option vests on the seventh anniversary
of the date of grant unless vesting is accelerated. The option will vest as to
5,000 shares if the Company's share price becomes 20 percent greater than the
exercise price on or before the third anniversary of the grant. The option will
vest as to an additional 10,000 shares if the price per share becomes 60 percent
greater than the exercise price on or before the fourth anniversary of the
grant. The option will vest as to the final 15,000 shares if the price per share
becomes 100 percent greater than the exercise price on or before the fifth
anniversary of the grant. Acceleration requires the maintenance of share-price
benchmarks for at least five trading days during any consecutive 30-day period.
Further, these options may become immediately exercisable upon certain
change-in-control events as described in the Company's 1994 Stock Option Plan
for Directors. The options expire ten years after date of grant.

In addition to the above, at the beginning of each fiscal year, each
non-employee director receives an option to purchase 5,000 shares pursuant to
the existing available Stock Option Plan. The option vests on the seventh
anniversary of the date of grant unless vesting is accelerated. This accelerated
vesting is similar to the vesting schedule noted above for the initial option to
purchase 30,000 shares. The options expire ten years after date of grant.

<PAGE>

Based on the above-noted terms and the price of the Company's Common
Stock during fiscal 1998, the following is a chart reflecting non-employee
director option grants and related vesting as of September 30, 1998:

<TABLE>
<CAPTION>
Option Grant Exercise Price # Options # Options
Name Date ($/Share) Granted (1) Vested
- ---- ---- --------- ----------- ------
<S> <C> <C> <C> <C>
John Howell Bullion 10/25/93 9.333 60,000 60,000
9/29/94 12.500 30,000 15,000
11/13/96 14.625 5,000 0
12/3/97 11.750 5,000 1,000

Donnell D. Etzwiler (2) 10/13/92 3.083 30,000 30,000
9/29/94 12.500 30,000 15,000
11/13/96 14.625 5,000 0
12/3/97 11.750 5,000 1,000

Charles V. Owens, Jr. 9/29/94 12.500 30,000 15,000
11/13/96 14.625 5,000 0
12/3/97 11.750 5,000 1,000

Lawrence C. Weaver (3) 10/13/92 3.083 30,000 30,000
9/29/94 12.500 30,000 15,000
11/13/96 14.625 5,000 0
12/3/97 11.750 5,000 1,000

Travers H. Wills 8/11/98 11.250 30,000 0

John H. Flittie 8/11/98 11.250 30,000 0

</TABLE>

(1) All non-qualified options are transferable by each director to his
immediate family members and family trusts.
(2) Dr. Etzwiler will resign as a director in October 1998.
(3) Dr. Weaver resigned as a director in August 1998.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee of the Board of Directors of the Company
consists of three non-employee directors. Mr. Owens is the committee chair, and
Drs. Weaver and Etzwiler were the other members until August, 1998 and October
1998, respectively. In August, 1998, Mr. Flittie and Mr. Wills became members of
the Compensation Committee, replacing Drs. Weaver and Etzwiler. Mr. Owens and
Dr. Weaver also served as a stock option subcommittee of the Board until August,
1998, at which time Mr. Wills replaced Dr. Weaver.

Mr. Taylor and Mr. Bullion, in addition to being directors of the
Company, are also directors of Orphan Medical, Inc. (OMI). However, Mr. Taylor
has resigned as a director of OMI effective October 10, 1998. The Company
incorporated OMI in June 1994 to engage in the development of pharmaceutical
products. The Company subsequently declared a dividend of all of the OMI Common
Stock to Company shareholders. Mr. Taylor serves on the Compensation Committee
of the Board of OMI. Mr. Taylor and Mr. Bullion are the Chief Executive Officers
of the Company and OMI, respectively. William B. Adams, Chair of OMI, was Chair
of the Company from 1985 to June 1994. See "Certain Transactions" for a
description of continuing business arrangements between the Company and OMI.

<PAGE>

EXECUTIVE COMPENSATION

REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE
COMPENSATION

COMPENSATION COMMITTEE CHARTER. The purpose of the Compensation
Committee of the Board of Directors is to oversee compensation of directors,
officers, and key employees of the Company. The Committee's policy is to insure
that compensation programs contribute directly to the success of the Company,
including enhanced share value. The Company's Compensation Committee comprises
three outside directors.

EXECUTIVE COMPENSATION POLICIES AND PROGRAMS. The Company's executive
compensation programs are designed to attract and retain highly qualified
executives and to motivate them to maximize shareholder investment by achieving
strategic Company goals. There are three basic components to the Company's
executive compensation program: base pay, annual incentive bonus, and long-term,
equity-based incentive compensation in the form of stock options. Each component
is established in light of Company and individual performance, compensation
levels at comparable companies, equity among employees, and cost effectiveness.
In addition, employees are eligible to participate in the Company's 401(k) plan
and certain insurance plans. With the exception of Maurice R. Taylor, II,
Chairman of the Board of Directors and Chief Executive Officer of the Company,
employees are also eligible to participate in the Company's Employee Stock
Purchase Plan.

BASE PAY. Base pay is designed to be competitive as compared
to salary levels for equivalent positions at comparable companies. An
executive's actual salary within this competitive framework will depend
on the individual's performance, responsibilities, experience,
leadership, and potential future contribution. Base pay is determined
in a way that allows a significant percentage of compensation to be
earned through incentive programs. The more senior the executive, the
larger the percentage of compensation payable through incentive
programs.

ANNUAL INCENTIVE BONUS. In addition to base pay, each
executive is eligible to receive an annual cash bonus based on a mix of
the Company's and the executive's performance. Performance targets are
intended to motivate the Company's executives by providing bonus
payments for the achievement of specific financial goals within the
Company's business plan. Bonuses were paid to all named executive
officers with respect to fiscal 1998 performance.

LONG-TERM, EQUITY-BASED INCENTIVE COMPENSATION. The long-term,
equity-based compensation program is tied directly to shareholder
return. Long-term incentive compensation consists of stock options that
generally do not fully vest until after five years and are exercisable
only if an executive is then an employee of the Company. Stock options
are awarded with an exercise price equal to the fair market value of
the Common Stock on the date of grant. Accordingly, an executive is
rewarded only if Company shareholders receive the benefit of
appreciation in the price of the Common Stock. Because long-term
options vest over time, the Company periodically grants new options to
provide continuing incentives for future performance. The size of
periodic option grants is a function of the breadth of an executive's
scope of accountability, recent performance as determined by the
Committee, and other factors.

SAVINGS AND INVESTMENT PLAN; BENEFITS. The Company maintains a
401(k) Savings Plan ("Savings Plan"), which is funded by elective
salary deferrals by employees. The Savings Plan covers executive
officers and substantially all employees meeting minimum eligibility
requirements. The Savings Plan requires that the Company match up to
40% of the first 5% of an employee's pay and provides for additional
discretionary contributions by the Company. Through July 3, 1998, the
Company had not made any additional discretionary contributions to the
Savings Plan. In addition, the Company provides medical and other
miscellaneous benefits to its officers, including a diagnostic services
plan that provides

<PAGE>

significant coverage for annual physicals and a financial services plan
that reimburses officers for various financial and tax services.

ANNUAL REVIEWS. Each year the Committee reviews its executive
compensation policies and programs and determines what changes, if any, are
appropriate for the following year. In addition, the Committee reviews the
performance of the Chief Executive Officer and, with the assistance of the Chief
Executive Officer, the individual performance of the other executive officers.
The Committee makes recommendations to the Board of Directors for final approval
of all material compensation matters.

CHIEF EXECUTIVE OFFICER. Pursuant to the terms of Mr. Taylor's
three-year employment agreement with the Company, effective July 1, 1996, he
received a base salary of $290,000 in fiscal 1997 and a base salary of $304,500
in fiscal 1998. He will receive a base salary of $325,800 in fiscal 1999. Base
salaries were determined at the time of entering into the employment agreement,
when the Committee considered compensation programs of comparable companies, Mr.
Taylor's individual performance and salary history, and the Company's historical
and planned performance. For fiscal 1998, Mr. Taylor earned a bonus of $123,000
in recognition of his and Chronimed's performance against criteria established
by the Compensation Committee of the Board of Directors at the beginning of the
year. In fiscal 1998, Mr. Taylor, along with all Chronimed officers, was not
granted options to purchase Chronimed Common Stock due to the lack of options
available in the existing stock option plans. Proposal 2 in this proxy
statement, which requests shareholder approval of the 1999 Stock Option Plan,
will make additional shares available for grants to executive officers and
managers, which grants will take place in November 1998 assuming shareholder
approval of Proposal 2. For Mr. Taylor's upcoming option grants in November
1998, the Compensation Committee intends to establish a vesting schedule based
on the performance of Chronimed's stock price. This vesting approach will be
similar to the 1994 Stock Option Plan for Directors, which is described on page
four of this Proxy Statement. The granting of performance-based options is
designed to encourage Mr. Taylor to enhance the future value of the Company and,
hence, the price of the Common Stock and the investment of shareholders.
Deferred vesting also creates an incentive for Mr. Taylor to remain with the
Company.

TAX DEDUCTIBILITY OF EXECUTIVE COMPENSATION. Section 162(m) of the
Internal Revenue Code of 1986, as amended, should not affect the deductibility
of compensation paid to the Company's executive officers for the foreseeable
future. The majority of the options available for grant under the Company's
stock option plans will comply with Section 162(m), so that compensation
resulting from these stock options will not be counted toward the $1,000,000
limit on deductible compensation under Section 162(m). The Compensation
Committee has not formulated any policy with respect to qualifying other types
of compensation for deductibility under Section 162(m).

Members of the Compensation Committee: Charles V. Owens, Jr., Chairman
John H. Flittie
Travers H. Wills

<PAGE>

SUMMARY COMPENSATION TABLE

The following table sets forth the compensation paid for the Company's
fiscal year ended July 3, 1998, and for fiscal 1997 and 1996, where applicable,
to the Company's Chairman of the Board of Directors and Chief Executive Officer,
and the five other most highly paid executive officers (collectively, "named
executive officers").

<TABLE>
<CAPTION>
Long-Term
Compensation Awards
-------------------
Annual Compensation Securities All
---------------------- Underlying Other(7)
Name and Principal Position Fiscal Year Salary($) Bonus($)(1) Options(#)(6) Compensation
- --------------------------- ----------- --------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Maurice R. Taylor, II(2) 1998 $304,500 $123,000 -- $4,000
CHAIRMAN OF THE BOARD AND 1997 290,000 50,000 223,000 4,100
CHIEF EXECUTIVE OFFICER ............ 1996 260,000 200,000 84,000 4,400

Henry F. Blissenbach(3) 1998 200,000 65,000 -- 500
PRESIDENT AND CHIEF OPERATING 1997 33,000 -- 129,000 --
OFFICER ............................ 1996 -- -- -- --

Norman A. Cocke 1998 172,500 45,000 -- 2,800
SENIOR VICE PRESIDENT, CHIEF 1997 164,300 32,000 62,700 4,100
FINANCIAL OFFICER AND SECRETARY .... 1996 155,500 90,000 25,000 3,500

Steven A. Crees 1998 157,500 40,000 -- 2,600
SENIOR VICE PRESIDENT .............. 1997 149,000 32,000 56,600 3,500
1996 130,000 100,000 22,000 2,000

Patrick L. Taffe(4) 1998 130,000 33,000 -- 2,800
VICE PRESIDENT ..................... 1997 112,800 20,500 60,000 --
1996 -- -- -- --

Perry L. Anderson(5) 1998 135,000 34,000 -- 3,000
VICE PRESIDENT ..................... 1997 110,000 15,000 51,725 2,100
1996 -- -- -- --
</TABLE>

- -----------------------------
(1) Bonus amounts were earned for the fiscal year shown but paid in the
next fiscal year.

(2) Mr. Taylor received no additional cash compensation for service as a
director.

(3) Dr. Blissenbach was hired as President and Chief Operating Officer in
May 1997. He was not a participant in the fiscal 1997 bonus plan. Prior
to his hire date in May 1997, Dr. Blissenbach received $26,800 for his
services as director in Fiscal 1997. In fiscal 1998 and going forward,
Dr. Blissenbach will receive no additional cash compensation for
service as a director.

(4) Mr. Taffe was hired as Vice President in July 1996.

(5) Mr. Anderson was hired July 1996 and was promoted to Vice President in
July 1997.

(6) Executive officers were not granted options in fiscal 1998 due to the
lack of options available in the Company's existing stock option plans.
Pending shareholder approval of the Company's 1999 Stock Option Plan,
executive officers would be granted options in November 1998. Also, all
non-qualified stock options are transferable by each officer to his
immediate family members and family trusts.

(7) All other compensation consists of Company 401(k) contribution matches
and long-term disability insurance paid on behalf of the officers
(discontinued in fiscal 1997).

<PAGE>

STOCK OPTIONS

The following summarizes stock option grants and exercises during
fiscal 1998 to or by the named executive officers and the value of all options
held by the named executive officers at July 3, 1998.

OPTION GRANTS IN FISCAL 1998

Executive officers were not granted options in fiscal 1998 due to the
lack of options available in the Company's existing stock option plans. Pending
shareholder approval of the Company's 1999 Stock Option Plan, executive officers
would be granted options in November 1998.

AGGREGATED OPTION EXERCISES IN FISCAL 1998
AND OPTION VALUES AT JULY 3, 1998

<TABLE>
<CAPTION>
Number of
Securities
Underlying
Unexercised Value of Unexercised
Options at In-The-Money Options(1)
July 3, 1998 at July 3, 1998
---------------------------------------
Shares
Acquired on Value Exercisable/ Exercisable/
Name Exercise(#) Realized($) Unexercisable(#) Unexercisable($)
- ---- -------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maurice R. Taylor, II ........... 0 0 229,800/327,200 170,263/626,113
Henry F. Blissenbach ............ 0 0 80,800/83,200 294,625/316,000
Norman A. Cocke ................. 0 0 101,131/85,360 129,877/207,125
Steven A. Crees ................. 0 0 74,840/71,760 283,972/232,900
Patrick L. Taffe ................ 0 0 12,000/48,000 40,000/160,000
Perry L. Anderson ............... 0 0 13,345/38,380 35,787/143,146

</TABLE>

- -----------------------------

(1) The value of unexercised in-the-money options was determined by
multiplying the number of shares subject to such options by the
favorable difference between the exercise price per share and $12.5625,
the closing price per share on July 3, 1998.

The Company's stock option plans generally provide that upon the
occurrence of certain "acceleration events," the options will become fully
vested. An acceleration event occurs (i) when a person, or group of persons
acting together, becomes the beneficial owner of 20 percent or more of the
Company's outstanding shares; (ii) when a change in a majority of the Board
occurs without the approval of at least 60% of the prior Board; or (iii) upon
the approval by shareholders of a sale of all or substantially all the assets or
of a liquidation or dissolution of the Company.

EMPLOYMENT AGREEMENTS

The Company has an employment agreement with Maurice R. Taylor, II,
Chronimed's Chairman and Chief Executive Officer, under which he received a base
salary of $260,000 in fiscal 1996, $290,000 in fiscal 1997, and $304,500 in
fiscal 1998. Base salary is based on corporation and employee performance prior
to each year. For fiscal 1999, Mr. Taylor's salary has been set at $325,800. Mr.
Taylor's employment agreement expires on June 30, 1999, and includes a
non-competition provision for up to two years following termination of
employment. Upon a termination without cause, Mr. Taylor is entitled to receive
(i) base salary payments for a period of twelve months after such termination at
the rate in effect prior to such termination and (ii) a pro

<PAGE>

rata share of the bonus that would have been payable for the bonus period that
includes the termination date and (iii) a pro rata share of other benefits as
specified in the contract.

The Company has an employment agreement with Henry F. Blissenbach,
Chronimed's President and Chief Operating Officer, under which he received a
base salary of $200,000 in fiscal 1998. Base salary is based on corporation and
employee performance prior to each year. The agreement provides for a three-year
term expiring April 30, 2000, with automatic one year renewals subject to
termination provisions. Dr. Blissenbach's employment agreement includes a
non-competition provision for one year following termination of employment. Upon
a termination without cause, Dr. Blissenbach is entitled to receive (i) base
salary payments for a period of twelve months after such termination at the rate
in effect prior to such termination and (ii) the average of any incentive
compensation paid or payable by the Company for the most recent two years plus
(iii) all unvested options held by Dr. Blissenbach shall immediately vest.

<PAGE>

SHAREHOLDER RETURN COMPARISON

Shown below is a line graph comparing the yearly dollar change in the
cumulative total shareholder return on the Company's Common Stock as against the
cumulative total return of the NASDAQ Total Return Index (U.S. Companies) and
the NASDAQ Health Services Stock Index for the period June 30, 1993 through June
30, 1998. The graph and table assume the investment of $100 on June 30, 1993, in
the Company's Common Stock, the NASDAQ Total Return Index, and the NASDAQ Health
Services Stock Index. The cumulative return calculations were performed by CRSP.

COMPARISON OF CUMULATIVE RETURN

[PLOT POINTS CHART]

<TABLE>
<CAPTION>
June 30, June 30, June 30, June 30, June 28, June 30,
1993 1994 1995 1996 1997 1998
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CHRONIMED(1) ............................ 100.0 205.1 218.3 324.1 148.8 227.0
NASDAQ Total Return Index ............... 100.0 101.0 134.8 173.1 210.5 277.9
NASDAQ Health Services Stock Index ...... 100.0 113.5 123.7 189.2 173.7 169.4

</TABLE>

- -----------------------------

(1) Share prices have been adjusted to reflect a three-for-two stock split
in the form of a stock dividend effective as of February 21, 1994.

<PAGE>

OWNERSHIP OF CHRONIMED COMMON STOCK BY CERTAIN BENEFICIAL OWNERS AND
EXECUTIVE OFFICERS

The following table shows information concerning each person who to the
knowledge of the Company was the beneficial owner of more than 5% of the
Company's Common Stock and the number of shares of Common Stock beneficially
owned by the Company's named executive officers and directors and executive
officers as a group, as of September 30, 1998. All persons have sole or joint
with spouse voting and investment power with respect to all shares shown as
beneficially owned by them.

Amount and Nature Percent
Name of Beneficial Owner of Beneficial Ownership(1) of Class
------------------------ -------------------------- --------

Maurice R. Taylor, II ................... 613,132 4.8%

Henry F. Blissenbach .................... 83,091 *

Norman A. Cocke ......................... 127,480 *

Steven A. Crees ......................... 113,231 *

Patrick L. Taffe ........................ 8,784 *

Perry L. Anderson ....................... 14,978 *

All directors and executive officers
as a group (11 persons) ................ 1,366,156 10.7%

- --------------------------

* Less than 1%

(1) Includes the following options exercisable within 60 days to acquire
shares of Common Stock: Mr. Taylor, 234,000; Mr. Anderson, 13,345; Dr.
Blissenbach, 80,800; Mr. Cocke, 102,271; Mr. Crees, 85,840; Mr. Taffe,
8,000; and all directors and executive officers as a group, 662,256.

SECTION 16(a) REPORTING

Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers, directors, and certain shareholders to file reports of
ownership and changes in ownership of the Company's Common Stock with the
Securities and Exchange Commission. To the Company's knowledge, based on a
review of the copies of such reports furnished to the Company and written
representations that no other reports were required, during fiscal 1998, all
Section 16(a) filing requirements were met.

CERTAIN TRANSACTIONS

ORPHAN MEDICAL, INC.

The Company incorporated Orphan Medical, Inc. (OMI) in July 1994 and on
July 2, 1994, declared a dividend of all of the OMI Common Stock to Company
shareholders (the "spin-off"). Directors of the Company John Howell Bullion and
Dr. Lawrence C. Weaver (resigned as a director of the Company in August 1998)
are also directors of OMI. Mr. Taylor has resigned as a director of OMI
effective October 10, 1998. Mr. Taylor and Mr. Bullion are the Chief Executive
Officers of the Company and OMI, respectively. The following is a brief summary
of the material continuing arrangements between the Company and OMI.

<PAGE>

Although the Company believes these arrangements with OMI are on commercially
reasonable terms, they were not the product of arms-length negotiations.

In June 1994, the Company initially retained the rights to market 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. Chronimed has determined that the products
for which it had initial rights can be more effectively distributed by others.
Accordingly, on June 27, 1997, Chronimed sold its rights to market and
distribute orphan drugs back to OMI (see Related Party Transactions noted
below). At that time, the Marketing and Distribution Agreement between Chronimed
and OMI was terminated, along with certain other agreements that secured OMI's
obligations under the marketing agreement.

Under the marketing agreement, OMI had the right to designate one
individual to hold a seat on the Company's Board of Directors, or alternatively,
to have a representative present at all Company Board meetings. The Company had
the right to designate two directors on OMI's Board or, alternatively, the right
to have a representative attend all of OMI's Board meetings. With the
termination of the marketing agreement effective June 27, 1997, these rights no
longer exist. Going forward, Chronimed intends to have Mr. Bullion continue to
serve on its Board.

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 permits Mr. Taylor to continue to hold large amounts of
Company stock. There was $699,900 of indebtedness under the guarantee as of
August 31, 1998. The Company is charging Mr. Taylor an arm's-length fee for this
guarantee and has obtained security from Mr. Taylor for this guarantee.

On June 27, 1997, the Company entered into an agreement to sell its
exclusive rights to market and distribute certain Orphan Medical, Inc. products
back to Orphan Medical for cash, royalties, and Orphan Medical stock totaling
$2.5 million. As of August 31, 1998, the Company has received $1.4 million in
payments with the remaining balance of $1.1 million expected to be paid by June
1999.

PROPOSAL 2:
APPROVAL OF THE 1999 STOCK OPTION PLAN

BACKGROUND AND PURPOSE

Because of the limited number of shares remaining under the Company's
current option plans for Company employees and consultants, the Board of
Directors adopted on August 11, 1998, subject to shareholder approval, the 1999
Stock Option Plan ("1999 Plan"). The purpose of the 1999 Plan is to provide a
means to attract and retain competent personnel and to provide to participating
officers, directors, employees, consultants and advisors a long-term incentive
for high levels of performance and for significant efforts to improve the
financial performance of the Company and its subsidiaries. The Board believes
that it is in the Company's and its shareholders' best interest to provide to
such persons, through the granting of stock options, an opportunity to
participate in the appreciation and value of the Common Stock of the Company.
The 1999 Plan provides for the grant of either incentive or nonstatutory
options. The following description of the primary features of the 1999 Plan is
qualified in all respects by reference to the full text of the 1999 Plan.

ELIGIBILITY AND ADMINISTRATION

Employees, consultants and advisors of the Company and its
subsidiaries, including officers and directors, are eligible to receive options
granted under the 1999 Plan. The 1999 Plan authorizes the granting of

<PAGE>

options to purchase up to 1,500,000 shares of Common Stock. The shares subject
to the options will generally be made available from authorized but unissued
shares.

The 1999 Plan will be administered by the Board of Directors or a
committee ("Committee") of the Board of Directors consisting of two or more
directors, as selected by the Board. The Board may also authorize one or more
officers or directors of the Company to administer the plan, acting as a
secondary committee within guidelines established from time to time by the
Board. The Committee has full authority to award options under the 1999 Plan, to
establish the terms of the option agreements, and to take all other action
deemed appropriate for administration of the Plan.

INCENTIVE AND NONSTATUTORY OPTIONS

The 1999 Plan provides both for incentive stock options ("Incentive
Options") specifically tailored to the provisions of the Internal Revenue Code
("Code") and for options not qualifying as Incentive Options ("Nonstatutory
Options"). Options are designated as Incentive Options or Nonstatutory Options
by the Committee when granted. The use of the term "option" means either
Incentive Options and Nonstatutory Options.

To obtain certain tax benefits, the 1999 Plan establishes special rules
for Incentive Options, including the requirement that Incentive Options may be
granted to an individual only for shares having a maximum aggregate fair market
value not exceeding $100,000 (valued at the time of grant) for any year in which
such shares first become available for purchase through the exercise of such
Incentive Options. The option price per share for Incentive Options must not be
less than the fair market value per share of the Common Stock on the date of
grant.

Some restrictions also apply to Nonstatutory Options granted under the
1999 Plan as a result of the application of tax rules limiting the deductibility
of certain compensation paid to "named executive officers." These rules are
discussed more fully below in the section entitled Federal Income Tax
Consequences. No participant in the Plan may be granted options under the Plan
in any fiscal year to purchase a number of shares of Common Stock in excess of
250,000 shares.

TERMS AND CONDITIONS OF OPTIONS

Except as described above, the 1999 Plan generally does not specify the
terms and conditions of options to be granted under the Plan. Historically, many
options granted by the Company generally become exercisable in five cumulative
annual installments of twenty percent of the total number of shares covered by
the option and are awarded with an exercise price equal to the fair market value
of the Common Stock on the date of grant. Under the 1999 Plan, as under the
current option plans, no option may be exercised later than 10 years from the
date of the grant. Payment for shares purchased upon the exercise of an option
must be made in cash, in shares of outstanding Common Stock, or in a combination
of cash and shares or other consideration acceptable to the Committee.

Incentive Options granted under the 1999 Plan are nontransferable by
the option holder, other than by will or the laws of descent and distribution.
The Committee may, in its sole discretion and with the consent of the option
holder, grant Nonstatutory Options under the 1999 Plan which are transferable to
immediate family members, to a trust for the benefit of immediate family members
or to a former spouse under a qualified domestic relations order. If an option
holder's employment is terminated for cause, as defined in the 1999 Plan, any
options shall terminate immediately. Unless otherwise determined by the
Committee, if an option holder ceases to be employed or retained as a consultant
or advisor by the Company for any other reason, except for death or disability,
the option may be exercised, subject to the expiration date of the option, for
three months after such termination, but only to the extent it was exercisable
on the date of termination. If an option holder's employment or consulting
relationship is terminated because of death or disability, the option may be
exercised (subject to the expiration date of the option) for up to one year
after such termination, but only to the extent it was exercisable on the date of
death or disability.

<PAGE>

MODIFICATION AND TERMINATION

The 1999 Plan provides for adjustment in the number and class of shares
subject to the 1999 Plan and to the option rights and the exercise prices of
such option rights granted thereunder, in the event of stock dividends, stock
splits, reverse stock splits, recapitalization, reorganization, certain mergers,
consolidation, acquisition, or other changes in the capital structure of the
Company.

The 1999 Plan will terminate on August 11, 2008. In addition, the Board
of Directors may, at any time, terminate the 1999 Plan or amend it except with
respect to certain matters for which shareholder approval is required under the
Code or Securities and Exchange Commission rules applicable to the 1999 Plan.
Under such rules, any amendment that would materially increase the cost of the
1999 Plan to the Company or the benefits to eligible participants would require
shareholder approval. No amendment or termination of the 1999 Plan by the Board
of Directors may adversely affect any option previously granted under the 1999
Plan without the consent of the option holder.

MERGER, CONSOLIDATION AND CHANGE IN CONTROL

The 1999 Plan provides that in the event of a Company dissolution or
liquidation or a merger or consolidation in which the Company is not the
surviving Corporation, the options will terminate. In the event of such a merger
or consolidation, the option holder must be offered either a substitute option
with terms and conditions which will substantially retain the optionee's rights
or the right to fully exercise the option prior to the merger or consolidation.
The 1999 Plan further provides that upon the occurrence of certain "acceleration
events" the options will become fully vested. An acceleration event occurs (i)
when a person, or group of persons acting together, becomes the beneficial owner
of 20 percent or more of the Company's outstanding shares; (ii) when a change in
a majority of the Board occurs without the approval of at least 60% of the prior
Board; or (iii) upon the approval by shareholders of a sale of all or
substantially all the assets or of a liquidation or dissolution of the Company.

FEDERAL INCOME TAX CONSEQUENCES

The following is a brief summary of the principal federal income tax
consequences under current federal income tax laws relating to awards under the
1999 Plan. This summary is not intended to be exhaustive and, among other
things, does not describe state or local tax consequences.

In general, an option holder will be subject to tax at the time a
Nonstatutory Option is exercised (but not at the time of grant), and he or she
will include in ordinary income in the taxable year in which he or she exercises
a Nonstatutory Option an amount equal to the difference between the exercise
price and the fair market value of the shares acquired on the date of exercise,
and the Company will generally be entitled to deduct such amount for federal
income tax purposes except as such deductions may be limited by the Code, as
described below. Upon disposition of shares, the appreciation (or depreciation)
after the date of exercise will be treated by the optionee as either short-term
or long-term capital gain or loss depending on whether the shares have been held
for the then-required holding period.

In general, an option holder will not be subject to tax at the time an
Incentive Option is granted or exercised. Upon disposition of the shares
acquired upon exercise of an Incentive Option, long-term capital gain or loss
will be recognized in an amount equal to the difference between the disposition
price and the exercise price, provided that the optionee has not disposed of the
shares within two years of the date of grant or within one year from the date of
exercise. If the optionee disposes of the shares without satisfying both holding
period requirements (a "Disqualifying Disposition"), the optionee will recognize
ordinary income at the time of such Disqualifying Disposition to the extent of
the difference between the exercise price and the lesser of the fair market
value of the share on the date the Incentive Option was exercised or the date of
sale. Any remaining gain or loss is treated as short-term or long-term capital
gain or loss depending upon how long the shares have been held. The Company is
not entitled to a tax deduction upon either the exercise of an

<PAGE>

Incentive Option or upon disposition of the shares acquired pursuant to such
exercise, except to the extent that the optionee recognizes ordinary income in a
Disqualifying Disposition and then only to the extent that such deduction is not
limited by the Code.

If the optionee pays the exercise price, in full or in part, with
previously acquired shares, the exchange will not affect the tax treatment of
the exercise. However, if such exercise is effected using shares previously
acquired through the exercise of an Incentive Option, the exchange of the
previously acquired shares will be considered a disposition of such shares for
the purpose of determining whether a Disqualifying Disposition has occurred.

The federal income tax deduction that the Company may take for
otherwise deductible compensation payable to executive officers who, on the last
day of the fiscal year, are treated as "named executive officers" in the
Company's Proxy Statement for such year will be limited by the Code to
$1,000,000. Under the Code, the deduction limit on compensation will apply to
all compensation, except compensation deemed under the Code to be
"performance-based" and certain compensation related to retirement and other
employee benefit plans. The determination of whether compensation related to the
1999 Plan is performance-based for purposes of the Code will be dependent upon a
number of factors, including shareholder approval of the 1999 Plan, and the
exercise price at which options are granted. The Code also prescribes certain
limitations and procedural requirements in order for compensation to qualify as
performance-based, including rules which require that in the case of
compensation paid in the form of stock options, the option price be not less
than the fair market value of the stock at date of grant and that the plan under
which the options are granted states the maximum number of shares with respect
to which options may be granted during a specified period to any employee.
Although the Company has structured the 1999 Plan to satisfy the requirements of
the Code with regard to its "performance-based" criteria, there is no assurance
that awards thereunder will satisfy such requirements, and accordingly, the
Company may be limited in the deductions it may take with respect to awards
under the 1999 Plan.

APPROVAL OF THE 1999 PLAN

Approval of the 1999 Plan requires the favorable vote of a majority of
the shares present or represented and entitled to vote at the Annual Meeting.
Unless otherwise instructed by the shareholder, the shares represented by the
enclosed proxy will be voted for approval of the 1999 Plan.

THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" APPROVAL
OF THE 1999 STOCK OPTION PLAN.

PROPOSAL 3:
APPOINTMENT OF INDEPENDENT AUDITORS

Based on the recommendation of the Audit Committee, the Board of
Directors has unanimously voted to retain Ernst & Young LLP to serve as
independent auditors for the Company for fiscal year 1999 and is submitting its
appointment of such firm to the shareholders for ratification. Ernst & Young LLP
has served as the Company's independent auditors since the Company's inception.
If the appointment is not ratified, the Board of Directors will reconsider its
selection. Ernst & Young LLP will have a representative at the meeting who will
have an opportunity to make a statement if he or she so desires and who will be
available to answer appropriate questions. The affirmative vote of a majority of
the voting power of the shares of Common Stock, present or represented at the
meeting and entitled to vote on Proposal 3, is required to approve Proposal 3.
Unless otherwise instructed, shares represented by proxy will be voted for
ratification of the appointment of Ernst & Young LLP.

<PAGE>

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE
"FOR" RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP AS INDEPENDENT
AUDITORS FOR THE CURRENT FISCAL YEAR.

SHAREHOLDER PROPOSALS

Any proposal by a shareholder intended to be presented at the 1999
Annual Meeting of Shareholders must be received at the Company's offices no
later than June 10, 1999.

ANNUAL REPORT

The Company's Annual Report to shareholders for fiscal year 1998 is
being mailed with this Proxy Statement to shareholders entitled to notice of the
Annual Meeting.

The Company will furnish without charge to each person whose proxy is
being solicited, upon the written request of any such person, a copy of the
Company's Annual Report on Form 10-K for fiscal year 1998, as filed with the
Securities and Exchange Commission, including financial statements and
schedules. Requests for copies of such Annual Report on Form 10-K should be
directed to Investor Relations at the address below.

Any statements contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes hereof to the extent
that a statement contained herein (or in any other subsequently filed document
that also is incorporated by reference herein) modifies or supersedes such
statement. Any statement so modified or superseded shall be deemed to constitute
a part hereof except as so modified or superseded.

OTHER MATTERS

Please vote, sign and return promptly the enclosed proxy in the
envelope provided. The signing of a proxy will not prevent you from attending
the meeting and voting in person.

By Order of the Board of Directors

Norman A. Cocke
SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER
AND SECRETARY

Chronimed Inc.
10900 Red Circle Drive
Minnetonka, MN 55343

October 9, 1998

<PAGE>

PROXY CHRONIMED INC.

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE IN FAVOR OF
PROPOSALS 1, 2, 3 AND 4

The undersigned, having duly received the Notice of Annual Meeting and the
Proxy Statement dated October 9, 1998, hereby appoints the Chairman and Chief
Executive Officer, Maurice R. Taylor, II, and the Senior Vice President, Chief
Financial Officer and Secretary, Norman A. Cocke, as proxies (each with the
power to act alone and with the power of substitution and revocation), to
represent the undersigned and to vote, as designated below, all common shares of
Chronimed Inc. held of record by the undersigned on October 5, 1998, at the
Annual Meeting of Shareholders to be held on Wednesday, November 18, 1998, at
the Lutheran Brotherhood Auditorium, 625 Fourth Avenue South, Minneapolis,
Minnesota, at 3:30 p.m. Central Standard Time, and at any adjournment thereof.

1. PROPOSAL TO ELECT TWO DIRECTORS FOR A TERM OF THREE YEARS.

[ ] FOR all nominees listed below [ ] WITHHOLD AUTHORITY
(EXCEPT AS MARKED TO THE TO VOTE FOR ALL NOMINEES
CONTRARY BELOW) LISTED BELOW:

CLASS I
(THREE YEAR TERM)

John H. Flittie
Travers H. Wills

INSTRUCTION: To withhold authority to vote for an individual nominee or
nominees, write the person's name on the line below.

----------------------------------------------------------------------------

2. PROPOSAL TO APPROVE THE CHRONIMED INC. 1999 STOCK OPTION PLAN.
[ ] FOR [ ] AGAINST [ ] ABSTAIN

3. PROPOSAL TO RATIFY THE APPOINTMENT OF ERNST & YOUNG LLP AS THE INDEPENDENT
AUDITORS FOR THE 1999 FISCAL YEAR.
[ ] FOR [ ] AGAINST [ ] ABSTAIN

(CONTINUED ON OTHER SIDE)

<PAGE>

(CONTINUED FROM OTHER SIDE)

4. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING.
[ ] FOR [ ] AGAINST [ ] ABSTAIN

This Proxy, when properly executed, will be voted in the manner directed on
the Proxy by the undersigned shareholder. IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED FOR ELECTION OF EACH OF THE NOMINEES TO THE BOARD LISTED IN
PROPOSAL 1 AND FOR PROPOSALS 2, 3 AND 4.

Please sign exactly as the name appears on this card. When shares are held
by joint tenants, both should sign. If signing as attorney, executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by president or other authorized
officer. If a partnership, please sign in partnership name by an authorized
person.

--------------------------------------
(Signature)

--------------------------------------
(Signature if held jointly)

Dated: , 1998
--------------------------

PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
BUSINESS REPLY ENVELOPE.