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
July 3, 1998 0-19952
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CHRONIMED INC.
(EXACT NAME OF REGISTRANT AS
SPECIFIED IN ITS CHARTER)
Minnesota 41-1515691
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(State or Other Jurisdiction of (I.R.S.Employer
Incorporation or Organization) Identification No.)
10900 Red Circle Drive, Minnetonka, Minnesota 55343
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code:
(612) 979-3600
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __X__ No ____.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of voting stock of Chronimed Inc. held by
non-affiliates as of close of business on September 4, 1998, was approximately
$93 million based on the closing price of $8.375 per share reported on the
NASDAQ Stock Market. The number of shares of Common Stock outstanding as of
September 4, 1998 is 12,092,395.
Portions of the registrant's 1998 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 18, 1998, to be filed with the Commission are
incorporated by reference in Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
Chronimed Inc. ("Chronimed" or the "Company") is a leading integrated
healthcare company specializing in diagnostic products, specialty pharmacy
services, and disease management for people with chronic health conditions. The
Company develops, manufactures, markets and distributes pharmaceuticals, medical
diagnostic products and educational materials by mail and retail pharmacy, and
also provides specialized disease management services to specific populations of
patients with selected 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
healthcare costs; the developers and manufacturers that produce the prescription
drugs and other products needed to manage chronic conditions; and the
institutions, foundations and healthcare providers working with these patients.
Chronimed works directly with all of these constituents in a concerted effort to
improve clinical and cost-of-care outcomes - and enhance the quality of life for
the chronically ill.
The patient populations for which the Company believes its services are
most effective include patients who:
* Require a high-cost regimen of maintenance prescription drugs or other
medical products over the course of their lives (typically long-term
and life-long therapies);
* Require treatment by healthcare specialists; and
* Require a significant amount of self-management and ongoing education
(where patient compliance is critical for improving clinical and
financial outcomes).
The Company is currently serving four such populations in the main: patients
with diabetes, patients with HIV/AIDS, patients who have had an organ
transplant, and patients with complex diseases treated with injectable
medications.
To increase its efforts in addressing the needs of HIV/AIDS patients,
in July 1996, Chronimed acquired StatScript Management Services, Inc., the
operator of specialty HIV/AIDS pharmacies. To further expand its capabilities in
the area of full-spectrum disease management programs, in June 1998, Chronimed
acquired Clinical Partners, Inc., a medical case management company specializing
in HIV/AIDS. By integrating these two wholly-owned subsidiaries, the Company can
expand beyond product and services delivery, support its managed care customers
with decision support tools and enhance patient care, lower costs, and
facilitate case management
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services for a fee and risk-sharing arrangements. Chronimed intends to be the
leading HIV/AIDS disease management company in the country. The Company is
investigating programs for a variety of other chronic conditions and plans to
apply its disease management business model to other selected chronic conditions
in the future.
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. The Company believes
that by educating patients and increasing patient compliance, as well as
increasing provider support and intervention, clinical outcomes can be favorably
improved, thus decreasing long-term financial costs of care.
The Company obtains patients primarily through referrals from
healthcare providers, direct patient contacts, and contracts with managed care
organizations. As employers have attempted to control their escalating
healthcare costs, Payors have increasingly adopted various specialized managed
care techniques in order to limit the costs of healthcare. The specialty managed
care industry was 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 1997, an estimated 85% of privately
insured individuals in the United States were enrolled in some type of managed
care program, up from 48% in 1992 (according to KPMG Peat Marwick). Chronimed
seeks to adapt managed 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, the increasing majority of patient referrals
come from the Company's Payor programs.
The Company has developed relationships with certain treatment centers,
foundations and medical associations that specialize in the treatment or support
of patients with chronic conditions. These relationships provide the Company
with access to a large number of individuals with chronic conditions and to the
healthcare 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.
Chronimed continues to emphasize the development and licensing of
proprietary diagnostic products suitable for distribution through its system.
Pursuant to a variety of exclusive distribution agreements, the Company
continues to market diagnostic products including blood glucose monitoring
systems, lancets, and infusion sets. In February 1998, the Company launched the
Select GT(TM) Blood Glucose Testing System, an in-home consumer-use version of
its Supreme II(R) Blood Glucose Monitoring System used in long-term care
facilities.
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In March 1998, Chronimed acquired DiaScreen Corporation, a leading dry
reagent chemistry technology company, which broadened the Company's proprietary
product offerings to include both blood and urine diagnostic testing. Chronimed
subsequently received FDA clearance to market its proprietary DiaScreen(R) brand
10-parameter urine test strip that detects chronic health conditions such as
kidney and liver disease, hepatitis, and diabetes. The 10-parameter urine test
strip is the most widely used urine screening test in the world.
In June 1998, Chronimed signed a development and distribution agreement
with Cell Robotics, an Albuquerque, New Mexico-based manufacturer of scientific
and medical laser devices. Chronimed has exclusive worldwide rights to the
FDA-approved Lasette(TM) laser technology products, which represent a new and
improved technology for collecting capillary blood from fingertips.
MARKET AND GROWTH STRATEGY
Chronimed's strategy is to continue expanding its diagnostic product
offerings, extensive pharmacy distribution operations, and apply its
comprehensive chronic disease management model to other chronic conditions. The
Company is building a franchise of successful activities that can either stand
alone or operate as an integrated, disease-specific program. Chronimed believes
it has all of the components necessary to help its healthcare partners manage
costs and improve care. Going forward, the Company intends to keep pace with the
evolving trends in healthcare and respond with enhanced offerings, capabilities,
and solutions. Chronimed believes it is becoming more technologically and
clinically driven, as well as less commodity-like and more proprietary-like for
both products and services. The Company intends to control its destiny by being
less subject to outside suppliers and more decidedly competent in the
technologies and processes it embraces.
The Company plans to further increase its distribution of prescription
drugs and proprietary diagnostic medical products by increasing the number of
patients served through its 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. Chronimed anticipates
that it will increasingly add to the range and depth
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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.
Chronimed serves primarily four patient populations: patients with
diabetes, patients with HIV/AIDS, patients who have had an organ transplant, and
patients with complex conditions treated with 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 5
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. Both
Type I and Type II diabetics need the appropriate products to monitor their
glucose levels on a daily basis. Chronimed serves diabetics with blood glucose
control systems and supplies through a number of distribution channels.
HIV/AIDS. Chronimed began to serve patients with HIV/AIDS through its
mail-order pharmacy in 1994. The Company increased its commitment to HIV/AIDS
patients with the July 1996 acquisition of the StatScript specialty pharmacies.
With the June 1998 acquisition of Clinical Partners, Chronimed launched its
first integrated disease management program with a focus on HIV/AIDS. 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. It is estimated that approximately one million individuals are
HIV-positive in the United States. In 1998, 350,000 people are receiving
treatment; 500,000 are candidates for treatment. Total healthcare expenditures
for HIV in the U.S.
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will be approximately $5 billion in 1998. The total HIV medication market in the
U.S. has doubled in the last two years to about $3 billion or 4.3% of all U.S.
drug expenditures. Compared to prior years, these trends reflect a reallocation
of HIV/AIDS spending away from inpatient hospital, subacute and hospice services
to pharmaceutical therapies. This shift occurred after the introduction of the
new class of protease inhibitor therapies and reflects the growing clinical
acceptance of combination therapy (vs. AZT monotherapy) as the preferred method
of fighting HIV infection. Over the next five years, the number of patients
seeking early intervention oral medication therapy is expected to increase to
55-70% of all HIV insured individuals, with the possibility of 700,000 patients
in treatment in the year 2002. 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
healthcare costs. Chronimed's strategy for taking advantage of this environment
has been to grow its StatScript pharmacy outlets and expand its Clinical
Partners operations. The original chain of nine StatScript pharmacies acquired
by the Company in July 1996 has expanded to 22 store locations in fiscal 1998,
with plans to open additional stores through fiscal 2000. The Company's Clinical
Partners operation currently has four Health Resource Centers, with plans to
expand operations in the future.
ORGAN TRANSPLANT. Since 1990, the Company has served patients who have
had solid organ and bone marrow transplants. According to national
transplantation data, there were approximately 173,000 solid organ transplants
from 1988 through 1997, of which approximately 20,000 were performed in 1997.
There are approximately 270 transplant centers in the United States. Transplant
patients typically require about $10,000 of prescription drugs during the first
year following transplantation and about $8,000 of such drugs per year
thereafter. The total spend on immunosuppressant drugs in 1996 was estimated at
approximately $212 million (United Network for Organ Sharing, Transplant
Awareness Inc.). Chronimed serves its organ transplant patients primarily
through a centralized mail order pharmacy and also through local pharmacies
co-located with StatScript sites.
INJECTABLE MEDICATIONS. In late 1994, the Company began serving the
patients with chronic conditions treated with injectable medications through a
pilot program with Prudential Pharmacy Management. Subsequent to the fiscal 1995
year end, Prudential permitted the Company to offer the injectables program to
its entire HMO network. The Company has also begun servicing patients under
similar contracts with other Payors, large and small. Many conditions may be
treated with 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. Chronimed estimates the annual cost
of injectable medications alone is $7-10 billion in the U.S. With approximately
350 biotech drugs in development (tripling since 1989), the number of new
biotech drugs is expected to increase 20% by the year 2000 (PhRMA,
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1998). Chronimed serves its injectables patients with drugs sourced from its
centralized mail order pharmacy.
The Company is currently considering expanded disease management
programs for patients who it is currently serving, in addition to HIV/AIDS
patients. The Company has not yet incurred significant costs in pursuit of these
expanded programs.
PROPRIETARY DIAGNOSTIC PRODUCTS
Proprietary diagnostic products represent a vital component of the
Company's strategy. 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.
Chronimed's proprietary products consist of medical diagnostic products that the
Company has either developed and manufactures, owns outright, or controls
through exclusive license or distribution agreements. Designed for either
institutional (long-term care facilities, hospitals, and clinical settings) or
consumer (in-home healthcare) use, these products are sold to a variety of
customers, including distributors, institutions, independent agents, HMOs,
durable medical equipment suppliers, and secondary retail chain outlets.
Alternatively, they can be channeled into Chronimed's other business segments.
Chronimed develops, manufactures and distributes a broad range of
diabetes products, such as blood glucose monitors, test strips, infusion sets,
lancing devices, infusion devices and accessories, including the Supreme II(R)
blood glucose monitor and Supreme reagent strips. 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. Exclusive 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 to two years. Approximately 12%
of the Company's total revenues in the fiscal year ended July 3, 1998, and 11%
in each of the fiscal years ended June 27, 1997 and June 28, 1996, respectively,
were derived from sales of the Supreme technology.
The Company believes that the Supreme II blood glucose monitor is
well-suited for use in healthcare 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 1998.
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In March 1998, Chronimed introduced the Select GT(TM) Blood Glucose
Testing System, a new blood glucose monitor and accessories for in-home use by
individuals with diabetes. The value-priced Select GT will be sold through
several retail distribution channels, including medical products and mail-order
distributors, as well as wholesalers, retailers, and other private-labelers. The
Company's goal is to produce easy-to-use diabetes products that provide fast and
accurate glucose test results. The new Select GT System expands Chronimed's
market opportunity into the consumer sector.
The Company anticipates the introduction of the Assure(TM) Blood
Glucose Monitoring System, a new diabetes testing product utilizing
electrochemical biosensor technology, as well as other new proprietary
diagnostic products in fiscal 1999. Such products will be distributed to new and
existing markets.
ACQUISITION OF DIASCREEN CORPORATION. In March 1998, Chronimed acquired
DiaScreen Corporation, a Minneapolis-based developer and manufacturer of blood
and urine diagnostic products (human and veterinary) used in institutional and
in-home testing markets worldwide. DiaScreen is a leading contract developer of
dry reagent chemistry technologies and has completed the development of a family
of proprietary diagnostic products, some of which are FDA approved, and others
are ready for FDA submission. This acquisition added to Chronimed's diagnostic
product portfolio a number of blood and urine chemistry tests and another
proprietary glucose testing system for use in diagnosing and monitoring
diabetes. With DiaScreen's state-of-the-art manufacturing and laboratory
facility, Chronimed has enhanced capabilities to develop, produce, and
distribute a number of diagnostic products for diabetes and other chronic
conditions as well. Currently, the U.S. blood glucose and urine diagnostics
market is estimated to be more than $2 billion.
In June 1998, Chronimed received FDA clearance to market the
proprietary DiaScreen(R) brand 10-parameter urine test strip, which screens for
a variety of chronic health conditions. The urine chemistry test strip changes
color as it screens for leukocytes, glucose, ketone, blood, nitrite, bilirubin,
urobilinogen, protein and levels of pH and specific gravity - providing evidence
of chronic health conditions such as kidney and liver disease, hepatitis, and
diabetes, among others.
Chronimed participates in the global dry reagent urine chemistry
screening market, estimated to be $250 million per year. The 10-parameter urine
test strip is a widely used urine screening test, and generates a major portion
of urine diagnostic revenues worldwide. Chronimed expects to launch its product
in the fall of calendar 1998 through its existing worldwide distribution
channels and enter the international urine diagnostic market.
DISTRIBUTION AGREEMENT WITH CELL ROBOTICS. In June 1998, Chronimed
announced its intent to partner with Cell Robotics International, Inc., an
Albuquerque, New Mexico-based manufacturer of scientific and medical laser
devices. The Company's development and distribution agreement with Cell Robotics
grants Chronimed exclusive worldwide rights to
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market and sell the Lasette(TM) laser finger perforator system and all future
generation products developed using Lasette(TM) laser technologies, as well as
worldwide manufacturing rights of the disposable components. The
patent-protected Lasette is a new device designed for virtually pain-free blood
glucose testing for use by healthcare professionals and consumers. Lasette
offers a significant change from the pain of blood sampling with steel lancets
or needles since the invention of the blood glucose meter 20 years ago.
Terms of the development and distribution agreement include Chronimed's
staged purchase of Cell Robotics stock to facilitate the development of the
consumer home use model of the Lasette, as well as minimum purchases of product
when production meets certain criteria. The current institutional Lasette model
for use in clinical settings, as well as the planned second-generation, smaller
consumer model for in-home use, will be sold through Chronimed's existing
national and international sales force.
PUBLISHING. Chronimed Publishing, a division of the Company, publishes
or distributes more than 80 books and educational pamphlets for patients,
families and caregivers of patients with chronic illnesses. It emphasizes
healthcare themes including nutrition, stress management and the physical,
psychological and sociological needs of patients with chronic conditions. These
educational materials assist chronically-ill individuals to care for themselves,
provide the Company with favorable recognition from and access to healthcare
providers, and assist the Company in the development of patient databases.
Chronimed believes it is one of the largest publishers of diabetes-related
materials and nutrition information in the United States. Among others, 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. Although this has
been a profitable business unit for Chronimed, the Company intends to sell
Chronimed Publishing in fiscal 1999, as it no longer fits well in the Company's
strategic plan for future growth. However, the Company retains its rights to
sell patient education materials with its product and service offerings.
SPECIALTY PHARMACY SERVICES
Chronimed provides drug and medical product delivery services for a
wide variety of high-cost chronic conditions including diabetes, HIV/AIDS, solid
organ transplants, multiple sclerosis, hemophilia, growth hormone deficiency,
hepatitis B and C, infertility, and cancer. These patients are often underserved
by traditional drug distribution systems.
Chronimed has Payor relationships and agreements with HMOs, major
health insurers, government agencies, and other managed health plans covering a
significant population. As part of these contracts, the Company offers
customized programs designed to maximize care and control costs for specific
chronic diseases that require high-cost medications and have low-utilization
rates. The Company's value-added services include reliable information from
highly trained registered pharmacists and internally certified patient
specialists; easy enrollment; patient confidentiality; complete insurance
billing; compliance monitoring; educational materials; refill reminder program;
24-hour pharmacist availability; drug utilization and cost-savings reports for
payors; and timely shipments to patients' homes, workplaces, physicians'
offices, or treatment facilities.
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Chronimed provides timely distribution of critical medications directly
to patients nationwide, while ensuring competitive prices to Payors. These drug
therapies are quite expensive ($3,000 - $150,000 per patient per year), often
need refrigerated packaging, may require overnight delivery, and are usually
part of a complex regimen - all reasons why these medications are not routinely
stocked in retail pharmacies. The Company also coordinates its services with
Payors, physicians, nursing services, and other members of a patient's
healthcare team. In addition, the Company will work with its healthcare partners
to develop patient and therapy management guidelines through ongoing monitoring
and evaluation of patient outcomes. Because of these services, Chronimed can
serve large volumes of patients and produce quality outcomes at lower cost.
CENTRALIZED PHARMACY DISTRIBUTION
The Company stocks approximately 2700 brand name and generic
prescription drugs and other medical products. Diabetes-related products include
durable equipment such as blood glucose monitors, and consumables such as
insulin, syringes, reagent strips, infusion sets, and lancets.
The Company distributes prescription drugs and diagnostic medical
products through its centralized pharmacy mail-order system to the patients it
serves. The Company believes that it can distribute these products with
considerably higher levels of service at a competitive cost (in comparison to
local and national retail pharmacies). This 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 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 that
can be used to place orders.
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The majority of the Company's centralized pharmacy services revenue is
from injectable drugs and from immunosuppressive drug sales to patients who have
had a solid organ or bone marrow transplant. These patients may have standard
indemnity coverage, Medicare or Medicaid from most states or pharmacy benefits
defined by their managed care health plans.
HOME SERVICE MEDICAL. The Company also derives significant pharmacy
mail-order services revenues from its Home Service Medical subsidiary, a direct
marketing business offering a full line of medical supplies and prescription
drugs direct to consumers, particularly with diabetics. Home Service Medical
services more than 12,000 diabetic and other patients with chronic conditions 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.
LOCALIZED COMMUNITY PHARMACIES
STATSCRIPT PHARMACY. In July 1996, Chronimed acquired the assets of
StatScript Management Services, Inc., and its associated nine specialty
pharmacies. This acquisition gave Chronimed a significant presence in the
HIV/AIDS pharmacy marketplace from which to grow revenues and profits. The
StatScript Pharmacy chain is the market leader in providing local, specialty
pharmacy services and prescription drugs to people with HIV/AIDS. Chronimed's
revenue growth in this business comes from the continued rollout of the
combination drug therapies of protease inhibitors, nucleoside analogs, and
non-nucleoside reverse transcriptase inhibitors; well-placed new pharmacy
openings; and increased patient intake at existing sites. The Company opened six
new sites in fiscal 1998, for a total of 22 locations in 20 cities. StatScript
pharmacies are located within patient communities and are committed to the
HIV/AIDS patient through community resources, patient education, clinical team
communication, and complete patient tracking. It is the largest network of
HIV/AIDS community-based specialty pharmacies in the country, with plans for
continued growth nationwide.
In addition to HIV/AIDS medications, in fiscal 1998 the Company began
the distribution of organ transplant drugs through its localized StatScript
Pharmacies in order to better meet the needs of its patients. Sometimes
transplant medications require same-day delivery; therefore, distribution
through the local StatScript pharmacy offers the logical solution for rapid and
timely delivery.
StatScript Pharmacy is headquartered in Kansas City, Missouri, and
currently has pharmacies in Atlanta, Austin, Chicago, Clearwater, Coral Gables,
Dallas, Fort Lauderdale, Houston, Indianapolis, Kansas City, Miami Beach,
Philadelphia, Phoenix, Salt Lake City, San Francisco, Seattle, St. Louis, Tampa,
Washington, D.C., and West Palm Beach. In late fiscal 1998, the Company began to
integrate the StatScript pharmacy operations with its Clinical Partners
subsidiary to offer full spectrum disease management services.
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DISEASE MANAGEMENT
With the June 1998 acquisition of Clinical Partners Inc., Chronimed
launched its first integrated disease management program with a focus on
patients with HIV/AIDS. The goal of disease management is to improve the quality
of patient care, improving clinical outcomes and thus reducing overall financial
costs. The Company believes that with appropriate diagnosis, drug therapy,
monitoring, case management, and aggressive intervention, costly complications
can be delayed or avoided, the severity of chronic diseases can be reduced, and
total costs decreased. Healthcare Payors, especially managed care organizations,
strive for these results and value partners who can deliver this. For managing
patients with high-risk, high-cost chronic conditions, Chronimed has already
attained certain levels of expertise and competency in the disease states of
diabetes, HIV/AIDS, and organ transplants.
Clinical Partners, now a wholly owned subsidiary of Chronimed, is a
specialty HIV/AIDS medical case management company that contracts with managed
care organizations to provide disease-specific patient care through a proven,
comprehensive system of data analysis, case management, and clinical protocol
deployment. Clinical Partners also provides critical and extensive data analysis
and clinical outcomes studies to payors, providers, and a number of large
pharmaceutical companies. It has Health Resource Centers in San Francisco, Los
Angeles (West Hollywood), Dallas, and Houston, with plans to expand across the
country. Clinical Partners' clinical protocols and guidelines were developed by
acknowledged clinicians in the field of HIV/AIDS.
The Company will integrate its StatScript Pharmacy operations with
Clinical Partners to offer full-spectrum HIV/AIDS disease management services.
With StatScript and Clinical Partners working together, Chronimed will expand
beyond product and services delivery, enabling the Company to support its
managed care customers and providers of care with decision tools that enhance
patient care, lower costs, and facilitate case management services. The Company
plans to apply its chronic disease management business model to other selected
chronic conditions in the future.
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 patient assistance programs and distribute
their products. The Company serves as the exclusive U.S. distributor of
Cystagon, a drug manufactured by Mylan Pharmaceuticals, Inc. Cystagon is
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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.
PAYOR PROGRAMS
Healthcare costs have increased significantly in the United States in
recent years. According to the Health Care Financing Administration, national
health expenditures are expected to reach $1.25 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. Chronimed
has built payor programs into its Specialty Pharmacy Services and Disease
Management business areas.
Chronimed offers Payors the following services through its Payor
programs:
* Cost savings through distribution of specialty 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 healthcare providers in early identification of patients
whose treatment outcomes may be improved by more support or assistance
in managing their chronic condition.
* Patient counseling by pharmacists. By focusing on the needs of
specific patient populations, the Company's pharmacists become expert
in the requirements and treatment patterns for the identified patient
populations.
* 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.
* In the case of HIV/AIDS, integration of StatScript Pharmacy and
Clinical Partners to influence activities of physicians, pharmacists,
hospitals, and laboratories to effect favorable outcome for patients.
13
<PAGE>
SALES AND MARKETING ACTIVITIES
Historically, the Company has obtained patients primarily through
referrals from healthcare providers and direct patient contacts. It continues to
do so. However, as a result of Payors' increasing reliance upon managed care
techniques to control their escalating healthcare costs, the Company's patient
referrals are increasingly coming through its Payor contracts. 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. Chronimed
believes that the establishment of working relationships with payors, healthcare
providers, treatment centers, foundations and associations is an important
element of its overall sales and marketing strategy.
Sales activities are generally carried out through direct sales calls
on Payors, case managers, healthcare 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 35 sales
representatives who sell certain of the Company's diagnostic products to the
retail market, to healthcare institutions (primarily long-term care facilities)
and to international customers; approximately 10 sales representatives who
promote the use of the Company's prescription products, and disease management
programs to Payors and the approximately 270 largest transplant centers 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 diagnostic products
business and managed care Payor sales effort.
14
<PAGE>
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 2700 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 10%, 13% and 19% of the Company's total
revenues in the fiscal years ended July 3, 1998, 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.
The Company believes that a significant portion of its anticipated
future growth will be in connection with the expansion of its HIV/AIDS disease
management 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 ongoing arrangements with the manufacturers of
various products and their ability to satisfy the Company's requirements and
pricing and product criteria.
PRODUCTION DEPENDENCIES. Since July 1995, the Company has manufactured
the Supreme reagent strip in-house. Manufacturing of the Company's new Select GT
and DiaScreen products are also controlled in-house. Certain materials used in
these respective manufacturing processes are only available from one or a
limited number of vendors. The Company's ability to manufacture the above named
products will be dependent on its ability to maintain adequate supplies of
materials from its vendors.
In June 1998 Chronimed signed an exclusive development and
distribution agreement with Cell Robotics International, Inc., a manufacturer of
scientific and medical laser devices. The agreement with Cell Robotics grants
Chronimed exclusive worldwide rights to market and
15
<PAGE>
sell the Lasette(TM) laser finger perforator system and all future generation
products developed using Lasette(TM) laser technologies, as well as worldwide
manufacturing rights of the disposable components. The Company's ability to
market the existing institutional model and the proposed consumer home use model
of the Lasette is dependent on Cell Robotics' development and manufacturing
capabilities. Chronimed has agreed to minimum purchases of product when Cell
Robotics' production meets certain criteria.
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 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
16
<PAGE>
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.
In fiscal 1998, Chronimed implemented a new customized,
state-of-the-art pharmacy management information system in several business
units, which allows for daily electronic distribution of financial reports and
key performance measures directly to each manager's desktop.
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. HMOs are increasingly undertaking their
own in-house disease state management programs. Many of these companies have
substantially greater resources than the Company. Moreover, the healthcare
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, price, and outcomes
impact. 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 and diagnostic products, educational materials, pharmacy services and
disease management programs to specific populations of patients with chronic
conditions.
LIABILITY INSURANCE
Providing healthcare services and products entails an inherent risk of
liability. In recent years, participants in the healthcare industry have become
subject to an increasing number of lawsuits, many of which involve large claims
and significant defense costs. The Company may from time to time be subject to
such suits as a result of the nature of its business. The Company maintains
general liability insurance, including professional and product liability, in an
amount deemed adequate by management. The Company is further insured for product
liability under 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
17
<PAGE>
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,
the District of Columbia, Florida, Georgia, Illinois, Indiana, Missouri,
Pennsylvania, Texas, Utah, and Washington state, 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
30 days and, if that is impossible, to inform the consumer of his or her right
to a refund. The Company believes that it is in substantial compliance with the
above requirements. Substantially all of the Company's products are shipped by
commercial delivery services, with the exception of the StatScript pharmacies.
18
<PAGE>
As a healthcare company, Chronimed is subject to various federal laws
that regulate the relationship between providers of healthcare services and
physicians. These laws include the "fraud and abuse" provisions of the Social
Security Act, under which civil and criminal penalties can be imposed upon
persons who pay or receive remuneration in return for inducement of referrals of
patients who are eligible for reimbursement under the Medicare or Medicaid
programs. Violations of the law may result in civil and criminal penalties.
Civil penalties range from monetary fines that may be levied on a per violation
basis to temporary or permanent exclusion from these programs. In addition,
numerous states have laws or legislation pending prohibiting financial
arrangements among healthcare providers. Violations of these laws include civil
and criminal penalties, as well as the suspension or termination of a provider's
ability to continue to provide services in the state.
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
healthcare 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
healthcare providers and practitioners. "Safe harbor" regulations define a
narrow scope of practices that will be exempted from prosecution or other
enforcement action under the illegal remuneration provisions 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 healthcare providers who may be in a position to
refer patients to the Company, the Company believes it has exercised care in an
effort to structure such arrangements to comply with existing federal and state
laws.
The Company's 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
19
<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
healthcare industry in the United States to fundamental change. A variety of new
approaches have been proposed, including mandated basic healthcare benefits,
controls on healthcare spending through limitations on the growth of private
health insurance premiums and Medicare and Medicaid spending, and the creation
of large purchasing groups. In addition, some of the states in which the Company
operates have adopted or are considering various healthcare reform proposals.
The Company anticipates that Congress and state legislatures will continue to
review and assess alternative healthcare delivery systems and payment methods
and that public debate of these issues will likely continue in the future.
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 -- healthcare
services. A description of the Company's business areas and related revenues can
be found in the Company's 1998 Annual Report to Shareholders.
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<PAGE>
SEASONALITY
The Company has experienced a significant seasonal pattern in its
operating results. Historically, the Company has had higher revenues in its
second fiscal quarter (ending December) than in its third fiscal quarter (ending
March). The Company believes the seasonality of its 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 August 31, 1998, the Company employed approximately 330
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, including Minnetonka, MN 62,000 Through March 31, 2005
customer service and
distribution
StatScript business office Kansas City, MO 4,000 Through October 31, 1999
Clinical Partners business San Francisco, CA 5,300 Through July 31, 1999
office
Manufacturing and product Eden Prairie, MN 18,000 Through August 31, 2002
distribution Edina, MN 16,500 Through June 30, 1999
Specialty pharmacies and Arizona, California, Various up to Expire over periods extending to
clinics Colorado, Florida, 3,900 December, 2002.
Georgia, Illinois,
Indiana, Minnesota,
Missouri,
Pennsylvania, Texas,
Utah, Washington,
Washington, D.C.
</TABLE>
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<PAGE>
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 4A EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages as of August 31,
1998, are as follows:
Name Age Position
- --------------------- --- ---------------------
Maurice R. Taylor, II 52 Chairman of the Board of Directors
and Chief Executive Officer
Henry F. Blissenbach, Pharm D 56 President and Chief Operating Officer
Norman A. Cocke 53 Senior Vice President, Chief Financial
Officer, and Secretary
Steven A. Crees 44 Senior Vice President
Patrick L. Taffe 46 Vice President
Perry L. Anderson 38 Vice President
Mr. Taylor, a cofounder of the Company, has served since 1985 as Chief
Executive Officer and a director of the Company and since June 1994 as Chairman
of the Board of Directors. 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 United HealthCare until May 1994, then a
subsidiary of SmithKline Beecham Corporation.
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<PAGE>
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 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, 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.
1998 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
12 of the Chronimed Inc. 1998 Annual Report to Shareholders is incorporated
herein by reference.
23
<PAGE>
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 13 through
17 of the Chronimed Inc. 1998 Annual Report to Shareholders is incorporated
herein by reference.
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 1998 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 1998 Annual Meeting of Shareholders to be filed with the Securities and
Exchange Commission, which information is incorporated herein by reference.
24
<PAGE>
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 1998 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 1998 Annual Meeting of Shareholders to be filed with the Securities and
Exchange Commission, which information is incorporated herein by reference.
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 31 of this
Annual Report on Form 10-K.
(b) The registrant filed a Current Report on Form 8-K on July 9, 1998.
(c) See Exhibit Index on pages 26 and 27 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 1998 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.
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<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.(6)
3.2 Bylaws of the Company, as amended.(7)
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.(8)
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 (Reserved)
10.7 (Reserved)
10.8 (Reserved)
10.9 (Reserved)
10.10 Agreement to Provide Diabetes Services and Products dated December 7,
1990, between the Company and Group Health, Inc.(1)
10.11 (Reserved)
10.12 (Reserved)
10.13 (Reserved)
10.14 (Reserved)
10.15 Revolving Line of Credit Agreement amended February 8, 1996, between
the Company and National City Bank of Minneapolis.
10.16 Employment Contract effective April 27, 1997 between the Company and
Henry F. Blissenbach.(8)
10.17 (Reserved)
10.18 (Reserved)
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<PAGE>
10.19 (Reserved)
10.20 Lease dated July 27, 1994, between the Company and Jorandcor,
Inc.(4)
10.21 (Reserved)
10.22 Chronimed Inc. 1994 Stock Option Plan.(3)
10.23 Chronimed Inc. 1994 Stock Option Plan for Directors.(3)
10.24 Pharmacy Participation Agreement with Aetna Health Management, Inc.(5)
10.25 Agreement and Plan of Reorganization - British American Medical,
effective as of August 1, 1995.(5)
10.26 Acquisition Agreement - StatScript, effective as of July 1, 1996.(4)
10.27 Chronimed Inc. 1997 Stock Option Plan.
10.28 Facility Lease Agreement with Red Circle L.L.P. dated November 1996.(8)
10.28a Facility Lease Agreement with Red Circle L.L.P. - amendments in April
1997, December 1997, and July 1998.
10.29 Loan Guarantee Agreement between the Company and Maurice R. Taylor, II,
dated April 9, 1997.(8)
10.29a Amendment to Loan Guarantee Agreement between the Company and Maurice
R. Taylor, II, dated August 26, 1998.
10.30 Sale of Distribution Rights Agreement between the Company and Orphan
Medical, Inc. dated June 27, 1997.(8)
10.31 Chronimed Inc. 1999 Stock Option Plan.
10.32 Acquisition Agreement - Dia-Screen Corporation, effective March 15,
1998.
10.33 Acquisition Agreement - Clinical Partners, Inc., effective June 23,
1998.
11.1 Computation of Earnings Per Share.
13.1 1998 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.
- ---------
27
<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 quarterly report on Form
10-Q filed with The Commission on January 31, 1995, under file number
0-19952.
(4) Incorporated by reference to the Company's report on Form 8-K with The
Commission on July 10, 1996, under file number 0-19952.
(5) Incorporated by reference to the Company's 1995 Annual Report on Form
10-K filed with The Commission on September 28, 1995, under file number
0-19952.
(6) Incorporated by reference to the Company's quarterly report on Form
10-Q filed with the Commission on February 6, 1998, under file number
0-19952.
(7) Incorporated by reference to the Company's quarterly report on Form
10-Q filed with The Commission on May 5, 1998, under file number
0-19952.
(8) Incorporated by reference to the Company's 1997 Annual Report on Form
10-K filed with The Commission on September 25, 1997, under file number
0-19952.
28
<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 23, 1998
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 23, 1998
- --------------------------------------------
Maurice R. Taylor, II - Chief Executive Officer
(Principal Executive Officer and
Chairman of the Board of Directors)
/s/ Henry F. Blissenbach, Pharm. D. September 23, 1998
- --------------------------------------------
Henry F. Blissenbach, Pharm. D. - President
(Director)
/s/ Norman A. Cocke September 23, 1998
- --------------------------------------------
Norman A. Cocke - Senior Vice President,
Chief Financial Officer and Secretary
(Principal Financial Officer and
Principal Accounting Officer)
/s/ John Howell Bullion September 23, 1998
- --------------------------------------------
John Howell Bullion (Director)
/s/ Donnell D. Etzwiler September 23, 1998
- --------------------------------------------
Donnell D. Etzwiler (Director)
/s/ John H. Flittie September 23, 1998
- --------------------------------------------
John H. Flittie (Director)
29
<PAGE>
/s/ Charles V. Owens, Jr. September 23, 1998
- --------------------------------------------
Charles V. Owens, Jr. (Director)
/s/ Travers H. Wills September 23, 1998
- --------------------------------------------
Travers H. Wills (Director)
30
<PAGE>
INDEX TO EXHIBITS FILED WITH THIS REPORT
See pages 26 and 27 of this Report for a list of all exhibits that are
part of the Report.
Exhibit No. 10.28a Facility Lease Agreement with Red Circle L.L.P.,
Amendments in April 1997, December 1997, and July 1998.
Exhibit No. 10.29a Amendment to Loan Guarantee Agreement between the
Company and Maurice R. Taylor, II, dated August 26,
1998.
Exhibit No. 10.31 Chronimed Inc. 1999 Stock Option Plan.
Exhibit No. 10.32 Acquisition Agreement - Dia-Screen Corporation,
effective March 15, 1998.
Exhibit No. 10.33 Acquisition Agreement - Clinical Partners, Inc.,
effective June 23, 1998.
Exhibit No. 13.1 Portions of the 1998 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 No. 99 Cautionary Statements for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform
Act.
<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 July 3, 1998:
Pages in
Annual Report
-------------
Audited Financial Statements:
Consolidated Balance Sheets--July 3, 1998 and June 27, 1997 ............18
Consolidated Statements of Income--Years Ended July 3, 1998,
June 27, 1997 and June 28, 1996 .......................................19
Consolidated Statements of Shareholders' Equity--Years Ended
July 3, 1998, June 27, 1997 and June 28, 1996 .......................21
Consolidated Statements of Cash Flows--Years Ended July 3, 1998,
June 27, 1997, and June 28, 1996 ....................................20
Notes to Financial Statements ...........................................22-30
Report of Independent Auditors ..........................................31
The following financial statement schedules should be read in conjunction
with the financial statements referred to above.
Financial Statement Schedules:
Years Ended July 3, 1998, June 27, 1997, and June 28, 1996
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.
F-1
<PAGE>
CHRONIMED INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
=================================================================================================================================
COL. A COL. B COL. C COL. D COL. E
- ---------------------------------------------------------------------------------------------------------------------------------
Additions
Balance at
Beginning of Deductions -- Balance at
Description Period Describe End of Period
----------------------------
Charged to Charged to
Costs and Other
Expenses Accounts --
Describe
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended July 3, 1998:
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts $1,120,000 $1,021,557 $ -- $861,557(1) $1,280,000
========== ========== ============ =========== ==========
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
======== ========== ============ =========== ========
</TABLE>
(1) Uncollectable accounts written off, net of recoveries.
F-2
EXHIBIT 10.28a
LEASE AMENDMENT
THIS, AMENDMENT is made the 22nd day of July, 1998, between Red Circle LLP,
hereinafter called "Landlord" and Chronimed, Inc., hereinafter called "Tenant".
Whereas, by Lease dated November 22, 1996, and Amendment No. 1 dated April 23,
1997 and Amendment No. 2 executed December 15, 1997, Landlord leased to Tenant
the real property together with the building and improvements then erected
thereon, located at Terrace Center, 10900 Red Circle Drive, Suite 300, in the
City of Minnetonka, in the State of Minnesota, 55305, all as more particularly
described in said Lease.
Therefore, in consideration of the mutual covenants herein contained, and other
good and valuable consideration, it is covenanted and agreed between the parties
that the aforesaid Lease be modified and amended as follows:
LEASE EXTENSION
The lease term will be extended through March 31, 2005.
LEASED PREMISES EXPANSION
The Leased Premises shall be revised to include an additional 14,617 square feet
of space, for a total square footage of 38,740, which additional space is shown
on the attached plan (Exhibit "A"). The expansion space shall become part of the
Leased Premises on September 1, 1998 when Base Rent and Additional Rent shall
commence.
RENT
The annual Base Rent as outlined in Section 2 of the Lease shall be revised to
the following schedule:
- ------------------------- -------------------------- ---------------------------
TERM ANNUAL BASE RENT MONTHLY BASE RENT
- ------------------------- -------------------------- ---------------------------
- ------------------------- -------------------------- ---------------------------
9/1/98 - 8/31/2000 $332,942.00 $27,745.16
- ------------------------- -------------------------- ---------------------------
9/1/00 - 3/31/02 $340,250.00 $28,354.16
- ------------------------- -------------------------- ---------------------------
4/1/02 - 8/31/02 $373,787.00 $31,148.92
- ------------------------- -------------------------- ---------------------------
9/1/02 - 3/31/05 $381,096.00 $31,758.00
- ------------------------- -------------------------- ---------------------------
ADDITIONAL RENT
The Tenant's proportionate share for allocation purposes as called for in
Section 7 of the Lease shall be revised to 39.07% (38,740/99, 150).
<PAGE>
PAYMENTS TO TENANT
Landlord agrees to pay to Tenant an aggregate amount of $232,000.00 upon the
mutual execution of this Amendment. Such amount must be paid prior to this
Amendment being enforceable. Tenant acknowledges that it accepts the space in an
"as-is" condition including the carpet, ceiling, plumbing, HVAC system, lights,
walls, electrical services and outlets. It is acknowledged that the figure of
$232,000.00 is constituted by three conceptually different and separate amounts.
The first of these is $110,000.00, which offsets remaining rent and leasehold
improvement amortization at the Tenant's former office at 13911 Ridgedale Drive
in Minnetonka. The second is $50,000.00, which offsets twelve forward month's
estimated real estate: service fees to be paid to United Properties for ongoing
consultative real estate services. The third is $72,000.00, which is a tenant
improvement allowance to allow Tenant to improve the space to facilitate
occupancy.
PARKING
Tenant shall have the right to use 3.3 stalls per 1,000 square feet of
additional space leased in this Amendment or approximately 48 additional stalls.
This Amendment shall supersede and contrary or conflicting information contained
in the original Lease as stated above. All other terms and conditions shall
remain in full force and effect
<PAGE>
AMENDMENT #2 TO LEASE
BETWEEN
RED CIRCLE L.L.C. AND
CHRONIMED, INC.
Red Circle L.L.C. (as Landlord)and Chronimed, Inc. (as Tenant) entered into a
Lease for Suite 300 at 10900 Red Circle Drive, Minnetonka; MN, dated November
22, 1996, and further mended by an unnumbered Amendment dated April 25, 1997,
which deals with the Lease for the storeroom. That unnumbered amendment is
hereby called Amendment number one.
Whereas, Landlord and Tenant hereby wish to amend the Lease.
Therefore in consideration of the mutual covenants, promises and agreements
contained in the LEASE, the parties agree as follows:
Paragraphs 33, Additional Space, and 34, Right to Expand, are hereby deleted in
their entirety, and are of no further effect.
This Amendment is contingent upon the execution of a new Lease by Chronimed for
approximate square feet of additional space in the subject Building.
The signatories below warrant that they are duly authorized to enter into this
Amendment #2 to LEASE:
IN WITNESS WHEREOF, the parties hereto have caused this Amendment #2 to Lease to
be executed:
LANDLORD TENANT
RED CIRCLE L.L.C. CHRONIMED, INC.
Samuel S. Marfield Norman A. Cocke
Its General Partner Its Senior Vice President and Chief
Financial Officer
Date ________________________ Date _______________________________
<PAGE>
AGREEMENT
CHRONIMED WANTS MBY TO USE THE SAME CARPET CHRONIMED IS USING IN CHRONIMED'S
CURRENT SPACE FOR THE 14,000 SQUARE FOOT VACANCY IN THE LOWER FLOOR OF THE
CHRONIMED BUILDING.
THE COST OF THE CARPET MBY HAD PLANNED TO USE WAS $19,550. THE
UPGRADED CARPET COST IS $24,718. THIS AN ADDITIONAL COST OF $5,168.
MBY AGREES TO INSTALL THE UPGRADED CARPET. CHRONIMED AGREES TO PAY 50% OF THE
ADDITIONAL COST NOW, WHICH IS $2,584.
(NORM: PLEASE CONSIDER THIS AGREEMENT AS YOUR INVOICE.)
IF CHRONIMED LEASES THE VACANCY AFTER A TWO (2) YEAR LEASE IS OVER WITH ANOTHER
TENANT, CHRONIMED WILL PAY MBY $10,000 FOR THE CARPET OR GIVE MBY A CREDIT OF
THIS AMOUNT AGAINST A LEASE NEGOTIATION.
NORMAL WEAR AND TEAR IS ACCEPTABLE TO CHRONIMED AT THE END OF THIS 2 YEAR LEASE.
CHRONIMED: MBY COMPANIES FOR
RED CIRCLE LLP
By Norm Cocke By Sam Marfield
Its SVP & CFO Its General Partner
Date __________________________ Date _________________________
<PAGE>
LEASE AMENDMENT
This Amendment is made the 23rd day of April, 1997 between Red Circle LLP, a
Minnesota Partnership, hereinafter called "Landlord", and Chronimed, Inc., a
Minnesota Corporation, hereinafter called "Tenant".
Whereas, by Lease dated November 22, 1996, Landlord leased to Tenant the real
property together with the building and improvements then erected thereon,
located at 10900 Red Circle Drive, Suite 300, in the City of Minnetonka, State
of Minnesota, all as more particularly described in said Lease.
Therefore, in consideration of the mutual covenants herein contained and other
good and valuable consideration, it is covenanted and agreed between the parties
that the aforesaid Lease be modified and amended as follows:
ADDITIONAL LEASED SPACE
Effective June 1, 1997, 502 sq.ft. of storage area will be added to Tenant's
leased premises and will be taken as built. The storage area is identified as
Area E as represented in the original Lease in Exhibit "A" and "B" space plans.
LEASED PREMISES
Square footage of the leased premises shall be changed from 23,621 sq.ft. to
24,123 sq.ft.
BASE RENT
Effective June 1, 1997, Base Rent shall be $16,173.34 per month.
ADDITIONAL PARKING STALLS/PICNIC AREA
Landlord will construct additional parking area, including picnic area, as
detailed on the attached plan prepared by The Design Partnership and referred to
as Exhibit "A" of this Lease Amendment. Landlord agrees to provide the parking
and picnic area under the same terms and conditions as contained in the original
Lease under Paragraph 5, Parking and Common Areas. Landlord has estimated the
cost of the additional parking to be $123,845.00. Upon completion of the
additional parking stalls and picnic area, Landlord will provide Tenant with a
copy of all invoices covering all construction costs involved in creating
additional parking stalls plus a 10% overhead fee.
Tenant has agreed to construct and pay for all tenant improvements as detailed
in Exhibit "C" of the original Lease as Landlord improvements. In exchange for
Tenant completing all tenant improvements, Landlord will apply a credit of
$103,386 to the cost of constructing the parking lot addition. Any net
difference between the credit for tenant improvements and the cost of
constructing the additional parking lot and picnic area, will be paid by Tenant
to Landlord within 30 days of invoice by Landlord.
<PAGE>
Lease Amendment
Red Circle LLP - Chronimed, Inc.
April 23, 1997
Page 2
This Amendment shall supersede any contrary or conflicting information contained
in the original Lease between Landlord and Tenant dated November 22, 1996. All
other terms and conditions of the original Lease shall remain in full force and
effective.
RED CIRCLE LLP CHRONIMED, INC.
By By
Its Its
Date Date
EXHIBIT 10.29a
AMENDMENT
TO
COMBINATION INDEMNIFICATION
AND
SECURITY AGREEMENT
THIS AMENDMENT modifies the April 9, 1997 Combination Indemnification
and Security Agreement ("Agreement") between CHRONIMED INC. ("Chronimed") and
MAURICE R. TAYLOR ("Taylor").
1. Except as specifically modified herein, the Agreement remains in
full force and effect according to its terms. In the event of contradiction
between the terms of this Amendment and the Agreement, the terms of the
Agreement will prevail.
2. So long as Chronimed retains any obligation to guaranty any of the
indebtedness defined under and subject to the terms of the Agreement, Chronimed
may in its discretion maintain and fund a "key man" policy of life insurance on
Taylor's life, in an amount deemed appropriate by Chronimed, for the benefit of
Chronimed and for the purpose of satisfying any liabilities which may accrue to
Chronimed under the Agreement in the event of Taylor's death. Taylor shall
submit to any reasonable physical examination(s) as may be required under such
insurance policy.
3. In addition to the financial statement required of Taylor under the
Agreement, Taylor shall provide Chronimed, upon execution of this Amendment and
thereafter annually or upon any material change in Taylor's personal financial
condition, until Chronimed's obligations under the Agreement are terminated, a
verified personal financial statement.
CHRONIMED INC. MAURICE R. TAYLOR
By: /s/ Norman A. Cocke /s/ Maurice R. Taylor
Its: Chief Financial Officer
Date: August 26, 1998 Date: August 26, 1998
EXHIBIT 10.31
CHRONIMED INC.
1999 STOCK OPTION PLAN
Article I. Establishment and Purpose
1.1 Establishment. Chronimed, Inc., a Minnesota Corporation
("Company"), hereby establishes a stock option plan for employees and others
providing services to the Company, as described herein, which shall be known as
the "1999 STOCK OPTION PLAN" ("Plan"). The Plan permits the granting of
Nonstatutory Stock Options and Incentive Stock Options.
1.2 Purpose. The purposes of this Plan are to enhance shareholder
investment by attracting, retaining, and motivating employees and consultants of
the Company and to encourage stock ownership by such employees and consultants
by providing them with a means to acquire a proprietary interest in the
Company's success.
Article II. Definitions
2.1 Definitions. Unless the context clearly requires otherwise, the
following terms shall have the respective meanings set forth below, and when
said meaning is intended, the term shall be capitalized.
(a) "Board" means the Board of Directors of the Company.
(b) "Code" means the Internal Revenue Code of 1986, as amended.
(c) "Committee" shall mean the Committee, as specified in Article
IV hereof, appointed by the Board to administer the Plan, or
the Board if no Committee is appointed.
(d) "Company" means Chronimed Inc., a Minnesota corporation
(including any and all subsidiaries).
(e) "Consultant" means any person or entity, including an officer or
director of the Company who provides consulting or advisory
services (other than as an Employee) to the Company.
(f) "Date of Exercise" means the date the Company receives notice
by an Optionee of the exercise of an Option pursuant to Section
8.1 of this Plan. Such notice shall indicate the number of shares
of Stock as to which the Optionee intends to exercise an Option.
(g) "Employee" means any person, including an officer or director of
the Company, who is employed by the Company.
(h) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
1
<PAGE>
(i) "Exercise Price" means the amount for which one share of Stock
may be purchased upon exercise of an Option, as specified in the
applicable Option Agreement.
(j) "Fair Market Value" means the closing price of the Stock as
reported by NASDAQ on the applicable day, or if there has been no
sale on that date, on the last preceding date on which a sale
occurred, or such other value of the Stock as shall be specified
by the Committee.
(k) "Incentive Stock Option" means an Option granted under this Plan
which is designated as an Incentive Stock Option and is intended
to qualify as an "incentive stock option" within the meaning of
Section 422 of the Code.
(l) "Nonstatutory Option" means an Option granted under this Plan
which is not intended to qualify as an incentive stock option
within the meaning of Section 422 of the Code. Except as
otherwise specified herein, Nonstatutory Options may be granted
at such times and subject to such restrictions as the Board shall
determine without conforming to the statutory rules of Section
422 of the Code applicable to incentive stock options.
(m) "Option" means the right, granted under this Plan, to purchase
Stock of the Company at the Exercise Price for a specified period
of time. For purposes of this Plan, an Option may be either an
Incentive Stock Option or a Nonstatutory Option.
(n) "Optionee" means a person to whom an Option has been granted
under the Plan.
(o) "Parent Corporation" shall have the meaning set forth in Section
424(e) of the Code with the Company being treated as the employer
corporation for purposes of this definition.
(p) "Subsidiary Corporation" shall have the meaning set forth in
Section 424(f) of the Code with the Company being treated as the
employer corporation for purposes of this definition.
(q) "Significant Shareholder" means an individual who, within the
meaning of Section 422(b)(6)of the Code, owns Stock possessing
more than ten percent of the total combined voting power of all
classes of stock of the Company or of any Parent Corporation or
Subsidiary Corporation of the Company. In determining whether an
individual is a Significant Shareholder, an individual shall be
treated as owning Stock owned by certain relatives of the
individual and certain Stock owned by corporations in which the
individual is a shareholder, partnerships in which the individual
is a partner, and estates or trusts of which the individual is a
beneficiary, all as provided in Section 424(d) of the Code.
2
<PAGE>
(r) "Stock" means the common stock of the Company.
2.2 Gender and Number. Except when otherwise indicated by the
context, any masculine terminology when used in this Plan also shall include the
feminine gender, and the definition of any term herein in the singular also
shall include the plural.
2.3 Severability. In the event any provision of the Plan shall be
held illegal or invalid for any reason, the illegality or invalidity shall not
affect the remaining parts of the Plan, and the Plan shall be construed and
enforced as if the illegal or invalid provision had not been included.
Article III. Eligibility and Participation
3.1 Eligibility. All Employees are eligible to participate in this
Plan and receive Incentive Stock Options and/or Nonstatutory Options hereunder.
All Consultants are eligible to participate in this Plan and receive
Nonstatutory Options hereunder.
3.2 Actual Participation. Subject to the provisions of the Plan, the
Committee may, from time to time, select from all Employees and Consultants
those to whom Options shall be granted and shall determine the nature of and
number of shares of Stock subject to each such Option.
Article IV. Administration
4.1 The Committee. The Plan shall be administered by the Committee.
If the entire Board of Directors is not serving as the Committee, the Committee
appointed by the Board shall consist of two or more directors of the Company, 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. Within the
limitations of this Section 4.1, any reference in the Plan to the Committee
shall include such secondary committee.
4.2 Authority of the Committee. The Committee shall have full power
except as limited by law or by the Articles of Incorporation or Bylaws of the
Company, and subject to the provisions herein, to determine the size and types
of Options; to determine the terms and conditions of such Options in a manner
consistent with the Plan; to construe and interpret the Plan and any agreement
or instrument entered into under the Plan; to establish, amend, or waive rules
and regulations for the Plan's administration; and (subject to the provisions of
Article XII herein) to amend the terms and conditions of any outstanding Option
to the extent such terms and conditions are within the discretion of the
Committee as provided in the Plan. Further, the Committee shall make all other
determinations which may be necessary or advisable for the administration of the
Plan. As permitted by law, the Committee may delegate its authorities as
identified hereunder.
4.3 Decisions Binding. All determinations and decisions made by the
Committee pursuant to the provisions of the Plan and all related orders or
resolutions of the Board of Directors shall be final, conclusive, and binding on
all persons, including the Company, its shareholders, Employees, Consultants,
Optionees, and their respective successors.
3
<PAGE>
Article V. Stock Subject to the Plan
5.1 Number. Subject to adjustment as provided in Section 5.3 below,
the total number of shares of Stock hereby made available for grant and reserved
for issuance under the Plan shall be 1,500,000. The aggregate number of shares
of Stock available under this Plan shall be subject to adjustment as provided in
Section 5.3 below. The total number of shares of Stock may be authorized but
unissued shares of Stock, or shares acquired by purchase as directed by the
Board from time to time in its discretion, to be used for issuance upon exercise
of Options granted hereunder.
5.2 Lapsed Options. If an Option shall expire or terminate for any
reason without having been exercised in full, the unpurchased shares of Stock
subject thereto shall (unless the Plan shall have terminated) become available
for other Options under the Plan.
5.3 Adjustment in Capitalization. In the event of any change in the
outstanding shares of Stock by reason of a stock dividend or split,
recapitalization, reclassification, or other similar corporate change, the
aggregate number of shares of Stock set forth in Sections 5.1 and 7.1 below
shall be appropriately adjusted by the Committee, whose determination shall be
conclusive; provided, however, that fractional shares shall be rounded to the
nearest whole share. In any such case, the number and kind of shares that are
subject to any Option (including any Option outstanding after termination of
employment) and the Exercise Price per share shall be proportionately and
appropriately adjusted without any change in the aggregate Exercise Price to be
paid therefor upon exercise of the Option.
Article VI. Duration of the Plan
6.1 Duration of the Plan. Subject to shareholder approval, the Plan
shall be in effect for ten years from the date of its adoption by the Committee.
Any Options outstanding at the end of said period shall remain in effect in
accordance with their terms. The Plan shall terminate before the end of said
period if all Stock subject to it has been purchased pursuant to the exercise of
Options granted under the Plan.
Article VII. Terms of Stock Options
7.1 Grant of Options. Subject to Section 5.1, Options may be granted
to Employees or Consultants at any time and from time to time as determined by
the Committee; provided, however, that Consultants may receive only Nonstatutory
Options, and may not receive Incentive Stock Options. The Committee shall have
complete discretion in determining the recipient of options among the Employees
or Consultants, the number of shares of Stock subject to an Option and the
number of Options granted to each Optionee. In making such determinations, the
Committee may take into account the nature of services rendered by such
Employees or Consultants, their present and potential contributions to the
Company, and such other factors as the Committee in its discretion shall deem
relevant. The Committee also shall determine whether an Option is to be an
Incentive Stock Option or a Nonstatutory Option.
4
<PAGE>
The aggregate Fair Market Value (determined at the date of grant) of
shares of Stock with respect to which Incentive Stock Options are exercisable
for the first time by the Optionee during any calendar year under all plans of
the Company under which Incentive Stock Options may be granted (and all such
plans of any Parent Corporations and any Subsidiary Corporations of the Company)
shall not exceed $100,000.
The preceding paragraph shall not be deemed to prevent the grant of
Options in excess of the maximums established by the preceding paragraph and any
such excess will be treated as a Nonstatutory Option; provided, however, no
Optionee may be granted Options in any fiscal year to purchase an aggregate
number of shares of Stock in excess of 250,000 shares per Optionee, subject to
adjustment under Section 5.3 above.
The Committee is expressly given the authority to issue amended Options
with respect to shares of Stock subject to an Option previously granted
hereunder. An amended Option amends the terms of an Option previously granted
and thereby supersedes the previous Option.
No Options granted under the Plan may be exercisable before the
approval of the Plan by the shareholders of the Company pursuant to the Bylaws
of the Company ("Shareholder Approval"). The granting and vesting of an Option
under the Plan by the Committee and the exercise of such Option by the Optionee
shall be subject to Shareholder Approval at the 1998 Annual Meeting of the
Company. If Shareholder Approval of the Plan does not occur at the 1998 Annual
Meeting of the Company any Option or Options held by any Optionee under the Plan
shall terminate immediately and shall be unexercisable.
7.2 No Tandem Options. Where an Option granted under this Plan is
intended to be an Incentive Stock Option, the Option shall not contain terms
pursuant to which the exercise of the Option would affect the Optionee's right
to exercise another Option, or vice versa, such that the Option intended to be
an Incentive Stock Option would be deemed a tandem stock option within the
meaning of the regulations under Section 422 of the Code.
7.3 Option Agreement. As determined by the Committee on the date of
grant, each Option shall be evidenced by an Option agreement (the "Option
Agreement") that includes the nontransferability provisions of Section 10.2
hereof and specifies: whether the Option is an Incentive Stock Option or a
Nonstatutory Option; the Exercise Price; the duration of the Option; the number
of shares of Stock to which the Option applies; any vesting or serial exercise
restrictions which the Committee may impose; and any other terms or conditions
which the Committee may impose. The Committee may require an Optionee to sign
the Option Agreement.
All Option Agreements shall incorporate the provisions of this Plan by
reference, with certain provisions to apply depending upon whether the Option
Agreement applies to an Incentive Stock Option or to a Nonstatutory Option.
7.4 Exercise Price. No Incentive Stock Option granted pursuant to
this Plan shall have an Exercise Price that is less than the Fair Market Value
of Stock on the date the Option is granted. Incentive Stock Options granted to
Significant Shareholders shall have an Exercise Price of not less than 110
percent of the Fair Market Value of Stock on the date of grant. The Exercise
Price for Nonstatutory Options shall be equal to the Fair Market Value of Stock
on the
5
<PAGE>
date the Option is granted and shall not be subject to the restrictions
applicable to Incentive Stock Options.
7.5 Term of Options. Each Option shall expire at such time as the
Committee shall determine when it is granted, provided however that no Option
shall be exercisable later than the tenth anniversary date of its grant. By its
terms, an Incentive Stock Option granted to a Significant Shareholder shall not
be exercisable after five years from the date of grant.
7.6 Exercise of Options. Options granted under the Plan shall be
exercisable at such times and be subject to such restrictions and conditions as
the Committee shall in each instance approve, which need not be the same for all
Optionees.
7.7 Payment. Payment for all shares of Stock shall be made at the
time that an Option, or any part thereof, is exercised, and no shares shall be
issued until full payment therefor has been made. Payment shall be made in cash,
cash equivalents, or other form acceptable to the Committee, including without
limitation, in Stock having a Fair Market Value at the time of the exercise
equal to the Exercise Price; provided, however, in the case of an Incentive
Stock Option, that said other form of payment does not prevent the Option from
qualifying for treatment as an "incentive stock option" within the meaning of
the Code. In addition, the Company may establish a cashless exercise program in
accordance with Federal Reserve Board Regulation T.
Article VIII. Written Notice, Issuance of
Stock Certificates, Shareholder Privileges
8.1 Written Notice. An Optionee wishing to exercise an Option shall
give written notice to the Chief Financial Officer of the Company, in the form
and manner prescribed by the Committee. Except for approved "cashless
exercises," full payment for the shares exercised pursuant to the Option must
accompany the written notice.
8.2 Issuance of Stock Certificates. As soon as practicable after the
receipt of written notice and payment, the Company shall deliver to the Optionee
or to a nominee of the Optionee a certificate or certificates for the requisite
number of shares of Stock. Such certificate may bear a legend restricting
transfer if required under Article XVI below.
8.3 Rights of a Shareholder. An Optionee or any other person entitled
to exercise an Option under this Plan shall not have dividend rights, voting
rights or other rights or privileges of a shareholder with respect to any Stock
covered by an Option until the date of issuance of a stock certificate for such
Stock. No adjustment shall be made for cash dividends or other rights for which
the record date is prior to such date of issuance, except as expressly provided
in the Plan.
Article IX. Termination of Employment
9.1 Death. Unless otherwise determined by the Committee, if an
Optionee's employment in the case of an Employee, or provision of services as a
Consultant, in the case of a Consultant, terminates by reason of death, the
Option may thereafter be exercised at any time prior to the expiration date of
the Option or within 12 months after the date of such death, whichever period is
the shorter, by the person or persons entitled to do so under the Optionee's
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will or, if the Optionee shall fail to make a testamentary disposition of an
Option or shall die intestate, the Optionee's legal representative or
representatives. The Option shall be exercisable only to the extent that such
Option was exercisable as of the date of death.
9.2 Termination Other Than For Cause Or Due to Death. Unless
otherwise determined by the Committee, in the event of an Optionee's termination
of employment, in the case of an Employee (except when an Employee becomes a
Consultant), or termination of the provision of services as a Consultant, in the
case of a Consultant, other than by reason of death or for cause (as defined in
Section 9.3 below), the Optionee may exercise such portion of his Option as was
exercisable by the Optionee at the date of such termination (the "Termination
Date") at any time within three (3) months after the Termination Date; provided,
however, when the termination occurs due to disability, as defined in the Code,
such Optionee may exercise such portion of any Option as was exercisable by such
Optionee on Optionee's Termination Date within one year after such Termination
Date. In any event, the Option cannot be exercised after the expiration of the
term of the Option. Options not exercised within the applicable period specified
above shall terminate.
In the case of an Employee, a change of duties or position within the
Company or an assignment of employment in a Subsidiary Corporation or Parent
Corporation of the Company, if any, or from such a corporation to the Company,
shall not be considered a termination of employment for purposes of this Plan.
The Option Agreements may contain such provisions as the Committee shall approve
with reference to the effect of approved leaves of absence upon termination of
employment.
9.3 Termination for Cause. In the event of an Optionee's termination
of employment, in the case of an Employee, or termination of the provision of
services as a Consultant in the case of a Consultant, which termination is by
the Company for cause (as defined below), any Option or Options held by such
Optionee under the Plan, to the extent not exercised before such termination,
shall terminate immediately.
The term "cause" means: (i) Optionee's conviction of a felony which
would materially damage the reputation of the Company, (ii) material
misappropriation by Optionee of the Company's property or other material acts of
dishonesty by Optionee against the Company or (iii) Optionee's gross negligence
or willful misconduct in the performance of Optionee's duties, which has a
material adverse effect on the Company.
Article X. Rights of Optionees
10.1 Service. Nothing in this Plan shall interfere with or limit in
any way the right of the Company to terminate any Employee's employment, or any
Consultant's services, at any time, nor confer upon any Employee any right to
continue in the employ of the Company, or upon any Consultant any right to
continue to provide services to the Company.
10.2 Restrictions on Transfer. Except as otherwise provided by this
Section 10.2, all Options granted under this Plan shall be nontransferable by
the Optionee, other than by will or the laws of descent and distribution, and
shall be exercisable during the Optionee's lifetime only by the Optionee. The
Committee may, in its sole discretion and with the consent of the Optionee: (i)
grant Nonstatutory Options which are transferable within the restrictions of
this
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Section 10.2, (ii) amend a then existing Nonstatutory Option to allow for
transferability of such Option within the restrictions of this Section 10.2 or
(iii) amend a then existing Incentive Stock Option (whereby such Option will
become a Nonstatutory Option) to allow for transferability of such Option within
the restrictions of this Section 10.2 (collectively, the "Transferable
Options").
The Committee may, in its sole discretion, authorize all or a portion
of the Transferable Options to be on terms which permit transfer of such Option
by the initial Optionee of such Option (the "Initial Optionee") to (i) the
spouse, children, step-children, grandchildren, step-grandchildren, siblings or
parents of the Initial Optionee ("Immediate Family Members"), (ii) a trust or
trusts for the exclusive benefit of such Immediate Family Members, (iii) a
partnership or other entity in which such Immediate Family Members are the only
partners or equity owners (iv) a former spouse of the Initial Optionee pursuant
to a qualified domestic relations order (collectively, a "Permitted
Transferee"), provided that:
(1) there may be no consideration for any such transfer;
(2) the stock option agreement pursuant to which such Options are
granted, or any amendment thereto, must be approved by the
Committee, and must expressly provide for transferability in a
manner consistent with this Section 10.2;
(3) any option or portion thereof transferred by an Initial Optionee
to a Permitted Transferee may be exercised by the Permitted
Transferee only to the same extent as the Initial Optionee would
have been entitled to exercise it, and shall remain subject to
all of the terms and conditions that would have applied to such
Option under the provisions of the Plan and option agreement, if
the Initial Optionee had not transferred such option or portion
thereof to the Permitted Transferred;
(4) subsequent transfers of transferred Options (including sale,
assignment, pledge or other transfer) shall be prohibited except
by will or the laws of descent and distribution;
(5) the Initial Optionee shall remain subject to applicable
withholding taxes upon exercise of options transferred to a
Permitted Transferee;
(6) the Company shall have no obligation to notify the Permitted
Transferee of the expiration or early termination of any option;
(7) the Committee may, in its sole discretion, require as a
condition to the transfer of an option, that the Permitted
Transferee execute an agreement under which the Permitted
Transferee would become a party to the applicable option
agreement and agree that in the event the Company merges into or
consolidates with another entity, the Company sells all or a
substantial part of its assets, or the Company's common stock is
subject to a tender or exchange offer, the Permitted Transferee
will consent to the transfer or assumption of the option, or
accept a new option in substitution therefor, if the Company
requests the Permitted Transferee to do so; and
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(8) such transfer shall not be effective unless and until the
Initial Optionee has furnished the Committee written notice of
the transfer, copies of all requested documents evidencing the
transfer, and such other agreements as may be required by the
Committee.
Article XI. Optionee-Employee's
Transfer or Leave of Absence
11.1 Optionee-Employee's Transfer or Leave of Absence. For Plan
purposes:
(a) A transfer of an Optionee who is an Employee from the Company to
a Subsidiary Corporation or Parent Corporation, or from one such
corporation to another, or
(b) a leave of absence for such an Optionee (i) which is duly
authorized in writing by the Company, and (ii) if the Optionee
holds an Incentive Stock Option, which qualifies under the
applicable regulations under the Code which apply in the case of
incentive stock options,
shall not be deemed a termination of employment. However, under no circumstances
may an Optionee exercise an Option during any leave of absence, unless
authorized by the Committee.
Article XII. Amendment,
Modification, and Termination of the Plan
12.1 Amendment, Modification, and Termination of the Plan. The Board
may at any time terminate, and from time to time may amend or modify the Plan,
provided, however, that no such action of the Board, without approval of the
shareholders, may:
(a) increase the total amount of Stock that may be purchased through
Options granted under the Plan, except as provided in Section 5.1
above; or
(b) change the class of Employees or Consultants eligible to receive
Options; or
(c) change the provisions of Section 7.1 above to allow an Optionee
to be granted Options in any fiscal year to purchase an aggregate
number of shares of Stock in excess of 250,000 shares per
Optionee, subject to adjustment under Section 5.3 above.
12.2 Options Previously Granted. No amendment, modification, or
termination of the Plan shall in any manner adversely affect any outstanding
Option under the Plan without the consent of the Optionee holding the Option.
Article XIII. Merger, Consolidation or Acceleration Event
13.1 Merger, Consolidation.
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(a) Subject to any required action by the shareholders, if the
Company shall be the surviving corporation in any merger or
consolidation, any Option granted hereunder shall pertain to and
apply to the securities to which a holder of the number of shares
of Stock subject to the Option would have been entitled in such
merger or consolidation.
(b) A dissolution or a liquidation of the Company or a merger and
consolidation in which the Company is not the surviving
corporation shall cause every Option outstanding hereunder to
terminate as of the effective date of such dissolution,
liquidation, merger or consolidation. However, unless the
Optionee is offered a firm commitment whereby the resulting or
surviving corporation in a merger or consolidation will tender to
the Optionee an option (the "Substitute Option") to purchase its
shares on terms and conditions as to number of shares,
exercisability and otherwise, which will substantially preserve
to the Optionee the rights and benefits of the Option outstanding
hereunder granted by the Company, then the Optionee shall have
the right immediately prior to such merger, or consolidation to
exercise any unexercised Options whether or not then exercisable,
subject to the provisions of this Plan. The Board shall have
absolute and uncontrolled discretion to determine whether the
Optionee has been offered a firm commitment and whether the
tendered Substitute Option will substantially preserve to the
Optionee the rights and benefits of the Option outstanding
hereunder. In any event, any Substitute Option for an Incentive
Stock Option shall comply with the requirements of Code Section
424(a).
13.2 Impact of Acceleration Event. Subject to Shareholder Approval of
the Plan, Options granted hereunder will become fully exercisable and vested in
the event of a "Acceleration Event" as defined in Section 13.3 or a "Potential
Acceleration Event" as defined in Section 13.4.
13.3 Definition of "Acceleration Event." For purposes of Section 13.2,
an "Acceleration Event" means the happening of any of the following:
(a) When any "person" as defined in Section 3(a) (9) of the Exchange
Act and as used in Sections 13(d) and 14(d) thereof, including a
"group" as defined in Section 13(d) of the Exchange Act, but
excluding the Company or any subsidiary or parent or any employee
benefit plan sponsored or maintained by the Company or any
subsidiary or parent (including any trustee of such plan acting
as trustee), directly or indirectly, becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act, as
amended from time to time), of securities of the Company
representing 20 percent or more of the combined voting power of
the Company's then outstanding securities;
(b) When, during any period of 24 consecutive months during the
existence of the Plan, the individuals who, at the beginning of
such period, constitute the Board ("Incumbent Directors") cease
for any reason other
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than death to constitute at least a majority thereof; provided,
however, that a Director who was not a Director at the beginning
of such 24-month period will be deemed to have satisfied such
24-month requirement (and be an Incumbent Director) if such
Director was elected by, or on the recommendation or, or with the
approval of, at least 60% of the Directors who then qualified as
Incumbent Directors either actually (because they were Directors
at the beginning of such 24-month period) or by prior operation
of this Section 13.3(b); or
(c) The approval by the shareholders of any sale, lease, exchange, or
other transfer (in one transaction or a series of related
transactions) of all or substantially all of the assets of the
Company or the adoption of any plan or proposal for the
liquidation or dissolution of the Company.
13.4 Definition of "Potential Acceleration Event." For purposes of
Section 13.2, a "Potential Acceleration Event" means the approval by the Board
of an agreement by the Company the consummation of which would result in an
Acceleration Event of the Company as defined in Section 13.3.
Article XIV. Securities Registration
In the event that the Company shall deem it necessary or desirable to
register under the Securities Act of 1933, as amended, or any other applicable
statute, any Options or any Stock with respect to which an Option may be or
shall have been granted or exercised, or to qualify any such Options or Stock
under the Securities Act of 1933, as amended, or any other statute, then the
Optionee shall cooperate with the Company and take such action as is necessary
to permit registration or qualification of such Options or Stock.
Unless the Company has determined that the following representation is
unnecessary, each person exercising an Option under the Plan may be required by
the Company, as a condition to the issuance of the shares pursuant to exercise
of the Option, to make a representation in writing (a) that he or she is
acquiring such shares for his or her own account for investment and not with a
view to, or for sale in connection with, the distribution of any part thereof,
(b) that before any transfer in connection with the resale of such shares, he or
she will obtain the written opinion of counsel for the Company, or other counsel
acceptable to the Company, that such shares may be transferred. The Company may
also require that the certificates representing such shares contain legends
reflecting the foregoing. The Company will only require the foregoing investment
representation from an Optionee, inscription of a legend on the Optionee's share
certificate and placement of a stop order with the Company's transfer agent if a
registration statement is not in effect with respect to the shares issued
pursuant to the Plan at the time the Optionee exercises the Option.
Article XV. Tax Withholding
15.1 Tax Withholding. The Company shall have the power and the right
to deduct or withhold, or require an Optionee to remit to the Company, an amount
sufficient to satisfy Federal, state, and local taxes (including the Optionee's
FICA obligation) required by law to be
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withheld with respect to any grant, exercise, or payment made under or as a
result of the Plan. The Company shall not be required to issue any Stock under
the Plan until such obligations are satisfied.
15.2 Share Withholding. With respect to withholding required upon the
exercise of Options, or upon any other taxable event hereunder, Optionees may
elect, subject to the approval of the Committee and compliance with applicable
laws and regulation, to satisfy the withholding requirement, in whole or in
part, by having the Company withhold shares having a Fair Market Value, on the
date the tax is to be determined, equal to the minimum marginal tax which could
be imposed on the transaction.
Article XVI. Indemnification
16.1 Indemnification. To the extent permitted by law, each person who
is or shall have been a member of the Committee or of the Board shall be
indemnified and held harmless by the Company against and from any loss, cost,
liability, or expense that may be imposed upon or reasonably incurred by him or
her in connection with or resulting from any claim, action, suit, or proceeding
to which he or she may be a party or in which he or she may be involved by
reason of any action taken or failure to act under the Plan and against and from
any and all amounts paid by him or her in settlement thereof, with the Company's
approval, or paid by him or her in satisfaction of judgment in any such action,
suit, or proceeding against him or her, provided he or she shall give the
Company an opportunity, at its own expense, to handle and defend the same before
he or she undertakes to handle and defend it on his or her own behalf. The
foregoing right of indemnification shall not be exclusive of any other rights of
indemnification to which such persons may be entitled under the Company's
articles of incorporation or bylaws, as a matter of law, or otherwise, or any
power that the Company may have to indemnify them or hold them harmless.
Article XVII. Requirements of Law
17.1 Requirements of Law. The granting of Options and the issuance of
shares of Stock upon the exercise of an Option shall be subject to all
applicable laws, rules, and regulations, and to such approvals by any
governmental agencies or national securities exchanges as may be required.
17.2 Governing Law. To the extent not preempted by federal law, the
Plan, and all agreements hereunder, shall be construed in accordance with and
governed by the laws of the State of Minnesota.
17.3 Compliance with the Code. Incentive Stock Options granted
hereunder are intended to qualify as "incentive stock options" under Code
Section 422. If any provision of this Plan is susceptible to more than one
interpretation, such interpretation shall be given thereto as is consistent with
Incentive Stock Options granted under this Plan being treated as incentive stock
options under the Code.
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Article XVIII. Effective Date of Plan
18.1 Effective Date. Subject to Shareholder Approval of the Plan, the
Plan shall be effective as of August 11, 1998, the date of its adoption by the
Board.
Article XIX. No Obligation to Exercise Option
19.1 No Obligation to Exercise. The granting of an Option shall impose
no obligation upon the holder thereof to exercise such Option.
13
EXHIBIT 10.32
ASSET PURCHASE AGREEMENT
AGREEMENT (hereinafter, together with the Exhibits annexed hereto, the
"Agreement"), made and entered into as of the 13th day of January, 1998, by and
among CHRONIMED INC., a Minnesota corporation ("Purchaser"), and DIA-SCREEN
CORPORATION, a Minnesota corporation ("Seller").
RECITALS:
1. Seller is in the business of developing, manufacturing and marketing
dry reagent diagnostic products which monitor a variety of chemistries found in
the body, including urine diagnostic and blood glucose monitoring products.
2. Purchaser desires to purchase and acquire certain assets and
business of Seller, and Seller is willing to sell said assets and business to
Purchaser, upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the purchase and sale of the assets
and of the premises and the mutual promises, covenants and conditions
hereinafter set forth, Seller and Purchaser hereby agree as follows:
ARTICLE I
DEFINITIONS
As used herein, the following terms shall have the meanings set forth
below, and where said meanings are intended, said terms shall be capitalized:
1.1 "ASSETS" shall mean all of the assets, properties and rights of
Seller, including but not limited to Inventory, Equipment, Acquired Contracts,
Permits and Approvals, Books and Records, Intellectual Property Rights,
Receivables having a cumulative value less than or equal to $30,000.00, and
Goodwill, excluding only the Excluded Assets.
1.2 "ACQUIRED CONTRACTS" shall mean those Contracts of Seller, as
defined herein, which Purchaser elects to assume. Acquired Contracts shall be
identified with specificity prior to Closing on Exhibit C-2, attached hereto and
to be acknowledged in final form by the parties in advance of Closing.
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1.3 "BLOOD GLUCOSE PRODUCTS" shall mean Seller's existing products,
products in development, and technologies pertaining to monitoring blood
glucose, including blood glucose test strip(s) and meter(s), and more fully
described in Exhibit A hereto.
1.4 "BOOKS AND RECORDS" shall mean all of Seller's books and records
relating to the Assets or the Business including without limitation, lists of
customers and suppliers, and records with respect to pricing, volume, payment
history, cost, inventory, machinery and equipment, mailing lists, distribution
and customer lists, sales, purchasing and materials, manuals, and including any
such records which are maintained on computer.
1.5 "BUSINESS" shall mean Seller's business as described in Recital 1
above, as well as any other business in which Seller is engaged.
1.6 "CLOSING DATE" shall mean the date on which the Closing hereunder
is held. The Closing shall be held subject to the occurrence of the conditions
identified in Articles X and XI herein, at 10:00 a.m., then current Minneapolis
time, on the business day next following the Validation Date of Seller's
leukocyte urine chemistry reagent product, or at such other time or date as the
parties may mutually agree upon in writing, unless delayed by a party for
failure to satisfy conditions precedent to said party's obligations hereunder,
in which case Closing shall be held as soon as practicable after such conditions
are satisfied.
1.7 "CONTRACTS" shall mean all of Seller's right, title and interest in
and to all leases, contracts, agreements, commitments, understandings, and
orders (including but not limited to any licenses that Seller holds) which
relate to the Assets or the Business, all of which are listed on Exhibit C-1
attached hereto. An updated version of Exhibit C-1 shall be delivered at the
Closing listing the Contracts as of the Closing Date, with Purchaser to have the
opportunity to identify and assume any newly identified Contracts as Acquired
Contracts.
1.8 "EQUIPMENT" means all of Seller's tangible assets, other than the
Inventory, including but not limited to furniture, machinery, equipment,
tooling, computers and the software utilized therewith (including the source
code for the same where available to Seller), and vehicles, specifically
including but not limited to the items listed on Exhibit D.
1.9 "EXCLUDED ASSETS" shall mean only Seller's Receivables exceeding a
cumulative value of Thirty Thousand Dollars ($30,000.00), determined as of the
Closing Date, and any assets specifically listed on Exhibit E attached hereto.
1.10 "GOODWILL" shall mean all goodwill and business of Seller.
1.11 "INTELLECTUAL PROPERTY RIGHTS" shall mean all of Seller's patents,
trademarks, service marks, trade names, trademark, service mark and trade name
registrations, brand names, copyrights and copyright registrations, all pending
applications for any of the foregoing, and any other proprietary rights,
inventions, trade secrets, or know-how or processes used in the operation of
Seller's business, or owned by Seller, and any licenses granted by or to Seller,
and any other
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contracts, agreements, commitments or understandings to which it is a party,
which relate, in whole or in part, to Intellectual Property Rights, all as
identified in Exhibit F hereto.
1.12 "INTERIM STATEMENTS" shall mean the unaudited balance sheet of
Seller as of November 30, 1997, and related unaudited statements of income and
retained earnings of Seller for the fiscal period ending on said date, prepared
by Seller, copies of which have been provided to Purchaser.
1.13 "INVENTORY" shall mean all of Seller's inventory and supplies,
including raw materials, work in process and finished inventory, identified by
category in Exhibit G hereto.
1.14 "LEASED PREMISES" shall mean the premises leased by Seller located
at 5182 West 76th Street, Minneapolis, Minnesota 55439, which premises
constitute the only real property used or occupied by Seller.
1.15 "LIABILITIES AND OBLIGATIONS" shall mean any indebtedness, claim,
obligation or liability of any kind or nature whatsoever, whether absolute or
contingent, liquidated or unliquidated, due or to become due, accrued or not
accrued, or otherwise.
1.16 "NET REVENUES" shall mean gross sales minus any discounts,
rebates, allowances or returns.
1.17 "PERMITS AND APPROVALS" shall mean all licenses, permits,
franchises, approvals and authorizations by governmental authorities or third
parties, actual or issuance pending, held by Seller.
1.18 "PROCESS VALIDATION" shall mean the successful completion of the
testing and development process related to the leukocyte reagent component of
Seller's Urine Chemistry Products, as identified in Exhibit H hereto.
1.19 "RECEIVABLES" shall mean Seller's accounts receivable arising from
sales of merchandise or services to customers in the ordinary course of Seller's
business net of any allowance for bad debt.
1.20 "SELLER STATEMENTS" shall mean the unaudited balance sheets of
Seller as of December 31, 1995 and December 31, 1996, and statements of income
and retained earnings of the Seller for the fiscal years ending on said dates,
prepared by Seller, copies of which have been provided to Purchaser.
1.21 "URINE CHEMISTRY AND BUN PRODUCTS" shall mean Seller's existing
products, products in development, and technologies pertaining to urine
chemistry measurement and monitoring, including but not limited to the "10 TEST
URINE STRIP", including blood urea nitrogen and urine controls, all as more
fully described in Exhibit B attached hereto.
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1.22 "VALIDATION DATE" shall mean the date upon which the parties agree
that successful Process Validation has been achieved for the leukocyte reagent
component of Seller's Urine Chemistry Products, as dictated by the criteria
identified in Exhibit G hereto.
ARTICLE II
PURCHASE AND SALE
2.1 PURCHASE PRICE On the Closing Date, subject to the terms and
conditions set forth in this Agreement, Seller agrees to sell and convey to
Purchaser, and Purchaser agrees to purchase, the Assets, for an amount (the
"Purchase Price") equal to:
(a) $1,800,000 (the "Fixed Payment") as may be adjusted
pursuant to Section 2.6(a) herein; plus
(b) if and only to the extent earned, the Royalty Payments as
provided in Section 2.2 below.
After the Closing, Purchaser shall prepare, in accordance with
applicable Internal Revenue Services requirements, an allocation of the Purchase
Price among the Assets. Each of the parties hereto agrees to report this
transaction consistently with said allocation, specifically including for income
tax purposes.
2.2 ROYALTY PAYMENTS Purchaser shall pay to Seller, to the extent
earned, royalties on Net Revenues derived from Purchaser's sales of Urine
Chemistry and BUN Products, pursuant to the terms and schedules herein. The
parties agree that all payments earned and paid pursuant to this Section 2.2
constitute a substantial aspect of the transaction and shall qualify and be
treated as royalties under the definition provided in IRC ss. 61(e)(6) and
ss.1253. Net Revenues shall be determined on an accrual basis consistent with
Purchaser's customary accounting practices. Seller acknowledges and agrees that
Purchaser shall be free to run its business and the business acquired from
Seller in Purchaser's sole discretion, that Purchaser makes no warranty
regarding Purchaser's achievement of anticipated sales of Urine Chemistry and
BUN Products, and that Seller shall have no right to make any claims for
royalties on the grounds that if different actions had been taken by Purchaser
more Net Revenues would have been earned.
2.2.1 ANNUAL ROYALTY PERIODS Royalty accruals and Purchaser's payment
obligations shall be established on an annual basis. The first annual royalty
period shall commence on the first accounting day of the earliest to occur of:
(i) the first accounting month that begins nine months after
the Closing Date, or
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(ii) the first accounting month beginning after the date of
FDA approval of the 10 Test Urine Strip, or
(iii) the first accounting month beginning after the date of
Purchaser's first commercial shipment of the 10 Test Urine Strip.
All royalty payments earned during a royalty period year and payable to
Seller shall be paid within 45 days following the end of the applicable royalty
period. The following terms shall dictate royalty payments earned and payable
for any annual royalty periods:
(a) ROYALTY YEAR ONE Purchaser shall pay to Seller royalties on Net
Revenues derived from the sale of Urine Chemistry and BUN Products during the
first annual royalty period at a rate of 43.75%. Seller shall earn and Purchaser
shall become obligated to pay royalties only upon Purchaser's achievement of
sales of Urine Chemistry and BUN Products exceeding $1,000,000 in Net Revenues
during the first annual royalty period. The maximum total royalties payable by
Purchaser to Seller against Net Revenues earned during the first annual royalty
period shall be $875,000, regardless of the actual, total volume of sales during
that period. In the event Purchaser's sales of Urine Chemistry and BUN Products
during the first annual royalty period shall exceed $2,000,000 in Net Revenues,
Seller shall be credited with all Net Revenues exceeding $2,000,000 (generally,
as identified throughout this Section 2.2.1, the "Carryover Net Revenues"). Any
Carryover Net Revenues so credited shall be added to Purchaser's Net Revenues
earned during the second annual royalty period for purposes of determining
Seller's royalties earned and payable, subject to the caps identified below,
following the end of that second annual period. In calculating Net Revenues for
the first accounting month of the first annual royalty period, there shall be
included, in addition to Net Revenues for such month, the Net Revenues derived
from the sale of Urine Chemistry and BUN Products during the period from the
date which triggered the commencement of the royalty payment obligation to the
first day of such first accounting month.
(b) ROYALTY YEAR TWO Purchaser shall pay to Seller royalties on Net
Revenues derived from the sale of Urine Chemistry and BUN Products during the
second annual royalty period, plus any credited Carryover Net Revenues, at a
rate of 17.5%. Seller shall earn and Purchaser shall become obligated to pay
royalties only upon Purchaser's Net Revenues on sales of Urine Chemistry and BUN
Products during the second annual royalty period, plus any Carryover Net
Revenues, exceeding $2,500,000. The maximum total royalties payable by Purchaser
to Seller against Net Revenues earned during the second annual royalty period,
plus any Carryover Net Revenues, shall be $875,000, regardless of the actual,
total volume of sales during that second annual period. In the event Purchaser's
Net Revenues earned on sales of Urine Chemistry and BUN Products during the
second annual royalty period, plus any Carryover Net Revenues, shall exceed
$5,000,000, Seller shall be credited with all Net Revenues plus Carryover Net
Revenues exceeding $5,000,000 and up to $6,000,000 as Carryover Net Revenues.
Any Carryover Net Revenues so credited shall be added to Purchaser's Net
Revenues earned during
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the third annual royalty period for purposes of determining Seller's royalties
earned and payable, subject to the caps identified below, following the end of
that third annual period.
(c) ROYALTY YEAR THREE Purchaser shall pay to Seller royalties on Net
Revenues derived from the sale of Urine Chemistry and BUN Products during the
third annual royalty period, plus any credited Carryover Net Revenues, at a rate
of 10.0%. Seller shall earn and Purchaser shall become obligated to pay
royalties only upon Purchaser's Net Revenues on sales of Urine Chemistry and BUN
Products during the third annual royalty period, plus any Carryover Net
Revenues, exceeding $2,875,000. The maximum total royalties payable by Purchaser
to Seller against Net Revenues earned during the third annual royalty period,
plus any Carryover Net Revenues, shall be $575,000, regardless of the actual,
total volume of sales during that third annual period. In the event Purchaser's
Net Revenues earned on sales of Urine Chemistry and BUN Products during the
third annual royalty period, plus any Carryover Net Revenues, shall exceed
$5,750,000, Seller shall be credited with all Net Revenues plus Carryover Net
Revenues exceeding $5,750,000 and up to $6,900,000 as Carryover Net Revenues.
Any Carryover Net Revenues so credited shall be added to Purchaser's Net
Revenues earned during the fourth annual royalty period for purposes of
determining Seller's royalties earned and payable, subject to the caps
identified below, following the end of that fourth annual period.
(d) ROYALTY YEAR FOUR Purchaser shall pay to Seller royalties on Net
Revenues derived from the sale of Urine Chemistry and BUN Products during the
fourth annual royalty period, plus any credited Carryover Net Revenues, at a
rate of 7.50%. Seller shall earn and Purchaser shall become obligated to pay
royalties only upon Purchaser's Net Revenues on sales of Urine Chemistry and BUN
Products during the fourth annual royalty period, plus any Carryover Net
Revenues, exceeding $3,333,333. The maximum total royalties payable by Purchaser
to Seller against Net Revenues earned during the fourth annual royalty period,
plus any Carryover Net Revenues, shall be $500,000, regardless of the actual,
total volume of sales during that fourth annual period. In the event Purchaser's
Net Revenues earned on sales of Urine Chemistry and BUN Products during the
fourth annual royalty period, plus any Carryover Net Revenues, shall exceed
$6,666,667, Seller shall be credited with all Net Revenues plus Carryover Net
Revenues exceeding $6,666,667 and up to $8,000,000 as Carryover Net Revenues.
Any Carryover Net Revenues so credited shall be added to Purchaser's Net
Revenues earned during the fifth annual royalty period for purposes of
determining Seller's royalties earned and payable, subject to the caps
identified below, following the end of that fifth annual period.
(e) ROYALTY YEAR FIVE Purchaser shall pay to Seller royalties on Net
Revenues derived from the sale of Urine Chemistry and BUN Products during the
fifth annual royalty period, plus any credited Carryover Net Revenues, at a rate
of 5.0%. Seller shall earn and Purchaser shall become obligated to pay royalties
only upon Purchaser's Net Revenues on sales of Urine Chemistry and BUN Products
during the fifth annual royalty period, plus any Carryover Net Revenues,
exceeding $3,800,000. The maximum total royalties payable by Purchaser to Seller
against Net Revenues earned during the fifth annual royalty period, plus any
Carryover Net Revenues, shall be $380,000, regardless of the actual, total
volume of sales during the fifth annual period. Purchaser shall have no
obligation to pay Seller royalties on Net Revenues earned
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in the fifth annual period, plus any Carryover Net Revenues, exceeding
$7,600,000 and Purchaser's royalty payment obligations shall terminate upon
payment of royalties earned in and due following the fifth annual royalty
period.
(f) TIMING OF REVENUES. Purchaser shall make all sales Urine Chemistry
and BUN Products in the normal course of business and shall not take any action
which would defer or delay recognition of any Net Revenues from one royalty year
to the next.
(g) BEST EFFORTS. Purchaser agrees that it will use its commercially
reasonable best efforts to market and sell the Urine Chemistry and BUN Products
and, if it retains them pursuant to Section 2.3.1, the Blood Glucose Products
throughout the respective periods during which royalties on sales are payable to
the Seller.
(h) MODIFICATIONS AND IMPROVEMENTS. For purposes of calculating sales
on which royalty payments are due to the Seller, Purchaser shall pay to Seller
royalties on new or modified urine chemistry and BUN products to the extent the
Urine Chemistry and BUN Products, as conveyed herein, constitute any part of the
new or modified products. In the event Purchaser shall develop and sell urine
chemistry products incorporating test elements not presently existing or under
development by Seller or Purchaser, Purchaser shall pay to Seller royalties on
the Net Revenues derived from sales of such new or modified products only in
amounts relative to the extent that any of the 10 Test Urine Strip elements
comprise a part of the sales value of any new or modified urine chemistry test
strip.
2.2.2 CALCULATIONS AND PAYMENT FOR EACH YEAR; DISPUTE RESOLUTION The
calculation of the Net Revenues and other calculations required for royalty
payments shall be made by Purchaser and submitted to Seller in report form no
later than forty-five (45) days after the end of the subject annual royalty
period. Payment of royalties due, if any, shall be made contemporaneous with
each Net Revenue and royalties calculation report, in accordance with the
foregoing provisions.
Following the receipt of the report for each annual royalty period,
Seller shall have thirty (30) days in which to review the report and to object
to any matters shown in the report. If Seller does not make any objection in
writing within said 30-day period, the report and royalty payment for that
annual royalty period shall be deemed final and accepted by Seller without
further claim.
If Seller delivers written notice of objection within the 30-day
period, then Seller and Purchaser shall first negotiate for a period of up to
thirty (30) days in an effort to resolve their differences. If the parties are
unable to agree, the parties shall designate as arbiter a mutually acceptable
firm of independent certified public accountants, which firm shall not
ordinarily provide services for either of Purchaser or Seller. Said firm shall
review the disputed items in the determination of Net Revenues for the annual
royalty period at issue, and shall make its determination as to Net Revenues for
that period. The determination made by said firm shall be final for all purposes
under this Agreement. Said firm shall use its best efforts to have its report
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completed within forty-five (45) days after the matter is submitted to the firm
for determination. In the event the arbiter determines Net Revenues for the
period in dispute to vary 5% or less over Purchaser's originally reported Net
Revenue figure, Seller shall pay the arbiter firm expenses generated in
resolving the dispute. If the arbiter determines Net Revenues for the period in
dispute to be greater than 5% over Purchaser's reported Net Revenue figure,
Purchaser shall pay the expenses of the arbiter firm.
2.3 BLOOD GLUCOSE PRODUCTS Seller hereby sells all of Seller's rights,
title, and interest in the Blood Glucose Products to Purchaser subject to
Purchaser's right of acceptance as stated below. Within 60 days following
Closing, Purchaser shall notify Seller of Purchaser's election whether to
retain, or convey back to Seller, ownership of the Blood Glucose Products.
During the period from the Closing Date through the date on which Purchaser
gives such notice, Purchaser will sell to Seller Blood Glucose Products at the
rate of Purchaser's cost of production plus 35%, the elements constituting cost
of production to be defined according to generally accepted accounting
principals and agreed upon by the parties prior to Closing, and Seller shall
have the right to market such Product.
2.3.1 PURCHASER'S RETENTION OF RIGHTS In the event Purchaser notifies
Seller of Purchaser's intention to retain the Blood Glucose Products Purchaser
shall, for a period of three years following Purchaser's first shipment of an
FDA approved blood glucose meter, pay to Seller royalties of 20% of Net Revenues
derived from sales of Blood Glucose Products. Blood Glucose Products royalties
shall not be subject to minimum revenue thresholds or royalty caps, however,
Purchaser shall be entitled to subtract from royalties earned and due
Purchaser's costs of product research and development and any costs necessary to
obtain any required FDA product approvals. Purchaser's royalty payment
obligation shall not accrue until accumulated royalties shall have fully off-set
Purchaser's reasonable research and development costs as agreed in writing in
advance by Purchaser and Seller. Purchaser shall report Blood Glucose Products
Net Revenues and make royalty payments due to Seller pursuant to the procedures
established in Section 2.2.2. The Section 2.2.2 dispute resolution and royalty
finalization procedures shall also apply to Blood Glucose Product royalty
payment.
2.3.2 PURCHASER'S RETURN OF RIGHTS In the event Purchaser notifies
Seller of Purchaser's intention to waive and return to Seller all rights in the
Blood Glucose Products, Purchaser shall convey and Seller shall receive, without
further act or payment, all right, title and interest in the Blood Glucose
Products. If Seller, within a period of 2 years following such reconveyance,
elects either to market and sell the Blood Glucose Products or conveys to any
other party such rights, Seller grants to Purchaser and Purchaser shall have the
first option to negotiate in good faith the contract manufacturing rights for
production of the Blood Glucose Products on Seller's or any third party's
behalf. Purchaser agrees that if requested by Seller, during such 2 year period,
it will manufacture Blood Glucose Products for Seller during the first year at a
price of Purchaser's cost of production plus 35%, and during the second year at
a price of Purchaser's cost of production plus 50%.
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2.4 LIABILITIES Purchaser shall not assume or become liable for any
Liabilities and Obligations of Seller, except only for liabilities arising under
the Acquired Contracts and only with respect to actions and transactions
occurring under the Acquired Contracts from and after the Closing Date.
Without limiting the generality of the foregoing, it is specifically
understood and agreed as follows:
(a) Purchaser is offering employment to the employees of
Seller identified in Exhibit X hereto. Persons accepting employment
with Purchaser shall be given credit for the period of their employment
by Seller in determining eligibility for all Purchaser's employee
benefit and similar programs which have any waiting, vesting or similar
requirement. Such persons employed by Purchaser shall be deemed to have
elected participation in such programs as of January 1, 1998. Seller
shall be responsible for any and all Liabilities and Obligations owed
to its employees, including but not limited to any termination
payments, accrued vacation pay, unpaid wages, including those accruing
to Seller through the Closing Date. All such obligations of Seller to
employees shall be satisfied, or arrangements for the satisfaction
thereof acceptable to Purchaser shall be made, on or before the Closing
Date.
(b) Purchaser assumes no liability with respect to any
qualified benefits, retirement, deferred compensation, profit sharing,
stock purchase or stock option plans maintained by Seller on behalf of
its employees ("SELLER'S PLANS"). In the event Seller or employees of
Seller who may become employed by Purchaser elect to participate in
Purchaser's employee benefits, retirement, profit sharing or stock
option purchase plans following Closing, Seller or its employees shall
bear the expense of liquidating any of Seller's Plans, if liquidated by
Seller, and reinvesting or rolling-over any individual contributions to
the Seller's Plan into plans maintained by Purchaser.
(c) Purchaser has no obligation with respect to Seller's
obligations to customers which are first to be performed before the
Closing Date or which arise from products shipped before the Closing
Date or from finished goods acquired by Purchaser from Seller,
including any claims for failure to perform, for breach of warranty, or
for product liability. Seller shall satisfy all such obligations at its
expense. If Seller does not satisfy such obligations promptly,
Purchaser shall have the right to satisfy such obligations and charge
the amount required to satisfy such obligations to Seller.
(d) All Liabilities and Obligations that Seller has to
suppliers or creditors shall be promptly paid and satisfied by Seller,
or adequate provision
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made therefore, at or before Closing, so as to avoid any adverse impact
upon the Business and Assets in the hands of Purchaser.
2.5 INDEMNIFICATION AGAINST NON-ASSUMED LIABILITIES Excepting solely
the Purchaser's liabilities under the Acquired Contracts, Seller shall
indemnify, defend, save and hold Purchaser harmless from and against all claims,
demands, losses, expenses, and liabilities, including but not limited to
reasonable attorneys' fees, arising in any fashion out of any non-assumed
Liabilities and Obligations of Seller.
2.6 PAYMENTS The Purchase Price shall be paid as follows:
(a) By payment of $1,800,000 of the Fixed Payment at Closing,
as may be adjusted by the following:
(i) Purchaser has lent Seller certain amounts
pursuant to a $250,000.00 Promissory Note dated October 15,
1997. To the extent any amounts, including accrued interest,
remain unpaid under said Promissory Note, said amounts shall
be applied and credited against the $1,800,000 due at Closing.
(ii) Seller has assigned and Purchaser has assumed
certain personal property capital leases, identified as
Acquired Contracts in Exhibit C-2. The Fixed Payment payable
at Closing shall also be reduced in an amount equal to the net
present value, discounted at 10%, of the personal property
capital leases assumed by Purchaser.
(b) By payment of the royalty payments if, as and when
provided in Sections 2.2 and 2.3.
The payment at Closing shall be made in the form of a cashiers or
certified check or by wire transfer of immediately available funds.
All payments made hereunder are subject to the terms and conditions
herein set forth, and will be made by Purchaser in reliance upon the
representations, warranties, covenants and agreements contained herein.
2.7 RECEIVABLES Seller has engaged in, and will continue to engage in,
the practice of selling or factoring its Receivables. To the extent that any
Receivables have been sold or factored in part or in whole prior to the Closing
Date, Purchaser shall not acquire the factored portion of any Receivables and
shall have no interest therein. If Seller has Receivables as of the Closing Date
which have not been sold or factored in part or in whole (the "NON-FACTORED
RECEIVABLES"), Purchaser shall be entitled to the first $30,000 collected on the
Non-factored Receivables and Seller shall be entitled to keep and retain any
amounts in excess of $30,000
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collected on the Non-factored Receivables. Seller's Receivables, and the
Non-factored Receivables, are identified in Exhibit I hereto.
Seller shall assign and Purchaser shall assume at Closing all rights to
the Non-factored Receivables. Seller shall notify all Non-factored Receivables
accounts directing further payment to Purchaser. Purchaser shall have the sole
right, consistent with prudent business practices, to collect the Non-factored
Receivables until Purchaser has collected $30,000. If Purchaser shall collect
any amounts in excess of $30,000 from the Non-factored Receivables, Purchaser
shall remit to Seller such excess collected sums. If Seller wishes to engage in
further collection efforts with respect to any Unfactored Receivables which
remain uncollected after the earlier of Purchaser's collection of $30,000 or one
year following the Date of Closing, Purchaser shall assign such Non-factored
Receivables to Seller, without recourse, and Seller shall be free to pursue
collection on its own behalf and at its own expense subject only to the
requirement that Seller not unduly interfere with Purchaser's relationships with
any ongoing customer's Business.
2.8 WARRANTY OBLIGATIONS Copies of Seller's standard warranties (the
"Standard Warranties") for its products, including copies of prior versions of
the warranties which may be still in effect for some products, are attached
hereto as Exhibit J. Seller represents that the time period for Seller's
standard warranties in no event exceeded two (2) years from the date the
products were sold.
Purchaser, at the expense of Seller, shall satisfy Seller's warranty
obligations for products sold by Seller to customers in the ordinary course of
business by Seller prior to the Closing Date, and for finished goods Inventory
acquired by Purchaser from Seller, but Purchaser's agreement to satisfy such
warranty obligations is expressly subject to and limited by the following
agreements and understandings:
(a) Purchaser's obligations are limited to, and in no event
shall exceed in any respect the obligations expressly set forth in the
standard warranties; and
(b) Purchaser shall have no obligation with respect to any
product more than three (3) years after the date on which such product
was sold by Seller; and
(c) In no event shall Purchaser have any obligation beyond
either repairing or replacing the defective product or refunding the
purchase price paid by Seller's customer to Seller in the ordinary
course of business therefor.
Seller shall provide to Purchaser information regarding its product
coding and any other appropriate assistance to enable Purchaser to determine
when products meet the timing requirements set forth in this section.
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Purchaser shall report all warranty fulfillment expenses incurred by
Purchaser in Purchaser's annual royalty report to Seller, as identified in
Section 2.2.2. Purchaser shall be entitled to off-set any royalties due Seller
by warranty fulfillment expenses incurred by Purchaser provided that such
expenses shall not exceed the reasonable costs of replacing the defective
product plus shipping costs.
This Section shall not create any obligations of Purchaser to any third
parties, including but not limited to customers of Seller, except that Purchaser
will be responsible for warranty service that Purchaser actually provides to
such customers in accordance with Purchaser's standard terms and conditions for
warranty service, as they may change.
2.9 PRODUCT LIABILITY, INSURANCE Seller is responsible for (and as
provided in Section 2.5 is indemnifying Purchaser against) all product
liability, all liability for injuries to persons or property, and all other
Liabilities and Obligations with respect to products manufactured by Seller
before the Closing Date, specifically including finished goods Inventory
acquired by Purchaser from Seller ("ACQUIRED INVENTORY"); provided, however,
that Seller is not responsible in the case of Acquired Inventory to the extent
the liability is due to a failure by Purchaser to store such Acquired Inventory
in a reasonably prudent manner or to monitor the status of such Acquired
Inventory in accordance with good manufacturing practices. As additional support
for said obligation, but not in limitation thereof, for a period of not less
than three or more years after Closing, Seller shall maintain product liability
insurance with respect to all such products which insurance satisfies the
requirements of Exhibit K attached hereto. Purchaser shall be added as an
additional named insured in accordance with the specifications set forth on
Exhibit K.
In order to assist both parties to determine respective responsibility
for a product which gives rise to a claim by a third person, (a) Seller shall
provide to Purchaser detailed information regarding the dating and coding used
by Seller to identify products sold by Seller and such other information as
Purchaser may reasonably request, and (b) Purchaser shall utilize a dating and
coding system to identify products manufactured and sold after Closing by
Purchaser which coding system shall be distinguishable from that utilized by
Seller, and also shall provide such information as Seller may reasonably
request.
2.10 PRORATIONS Seller and Purchaser agree to the following prorations
and allocation of costs in connection with this Agreement and the transactions
contemplated hereby:
(a) All operating costs of the Assets and the Business related
thereto, such as but not limited to utilities, rent and other charges under
leases, shall be allocated between Seller and Purchaser based upon the Closing
Date, such that Seller shall pay that portion of the operating costs pertaining
to that period of time up to the Closing Date, and Purchaser shall pay that
portion of the operating costs on and after the actual Closing Date.
(b) All salary or wages, vacation pay, and other unpaid
employee benefits shall be paid by Seller in accordance with Section 2.4(a).
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2.11 PERSONAL PROPERTY LEASES Except as identified as Acquired
Contracts in Exhibit C-2, Purchaser assumes no personal property leases of
Seller and Seller indemnifies Purchaser, pursuant to Section 2.5, with respect
to any unassumed personal property leases.
ARTICLE III
DELIVERIES BY SELLER
3.1 SELLER'S DELIVERIES On the Closing Date, subject to the terms and
conditions set forth in this Agreement, Seller shall make the following
deliveries:
(a) Bill of Sale, assignments, certificates of title, and
other instruments of conveyance reasonably requested by Purchaser;
(b) Assignment and Assumption Agreement for Acquired
Contracts, in the form appearing as Exhibit W hereto;
(c) Assignments of Intellectual Property Rights;
(d) A current certified search showing all financing
statements, and federal and state tax liens, on file against the
Assets, together with appropriate releases or termination statements
for any security interests or liens against the Assets;
(e) All Agreements duly executed by Seller and John Murray,
Robert Moyer and Troy Koopman, attached as Exhibit N hereto;
(f) The Consulting or Employment Agreements duly executed by
John Murray, Robert Moyer, and Troy Koopman, attached as Exhibit S
hereto; and
(g) All other items or documents necessary or appropriate
hereunder.
3.2 PURCHASER'S DELIVERIES On the Closing Date, subject to the terms
and conditions set forth in this Agreement, Purchaser shall make the following
deliveries:
(a) Payment of the amount Fixed Payment payable at Closing;
(b) Assignment and Assumption Agreement duly executed on
behalf of Purchaser, Exhibit W;
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(c) The Agreements referenced in Section 3.1(e) and 3.1(f)
duly executed by Purchaser; and
(d) All other items or documents necessary or appropriate
hereunder.
ARTICLE IV
CLOSING
The Closing hereunder shall take place at the offices of Gray, Plant,
Mooty, Mooty & Bennett, P.A., on the Closing Date, or at such other place as may
be mutually agreed upon in writing by Purchaser and Seller.
ARTICLE V
INVESTIGATION
From and after the date hereof and through the Closing Date, Seller
shall afford to the officers and representatives of Purchaser full access to the
Assets, properties and records of Seller in order that Purchaser may have full
opportunity to make such investigation at reasonable times as it shall desire of
the Assets, business and affairs of Seller, and Seller shall provide to
Purchaser reasonable assistance in the conduct of said investigation by
Purchaser.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
OF THE SELLER
Seller represents and warrants to Purchaser that, except as
specifically set forth on Exhibit L hereto, entitled Representations and
Warranties: Exceptions and Disclosures, the following statements are true and
correct as of the date of this Agreement and will be true and correct on the
Closing Date as if made on said Date:
6.1 SELLER'S ORGANIZATION
(a) Seller is a corporation duly organized and existing and in
good standing under the laws of the state of Minnesota and is entitled
to own or lease
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its properties and to carry on its business as and in the places where
such properties are now owned, leased or operated, or such business is
now conducted. Subject to obtaining shareholder approval of the sale of
its assets contemplated by this Agreement, Seller has full power and
authority to sell, convey, assign, transfer and deliver the Assets as
herein provided, and all corporate and other proceedings necessary to
be taken by Seller in connection with the transactions provided for by
this Agreement and necessary to make the same effective have been duly
and validly taken, and this Agreement has been duly and validly
executed and delivered by Seller and constitutes a valid and binding
obligation of Seller enforceable in accordance with its terms.
(b) Seller is qualified to do business as a foreign
corporation in all jurisdictions in which the nature of Seller's
business, the location of its assets or other factors require it to be
so qualified.
(c) The shareholders of Seller are listed on Exhibit M. No
other persons or entities hold stock or other equity interests in
Seller. Seller does not have any subsidiaries, nor does it have any
equity interest in any corporation, partnership, limited liability
company, or other business entity.
(d) Seller was formerly named Genesis Labs, Inc. In 1993,
Seller merged with Dia-Screen Corporation (the "Predecessor"). In 1996,
Seller changed its name to its present name. The assets of Seller
include all of the previous material assets of Genesis Labs, Inc. and
Predecessor, except for such assets which have been disposed of or sold
in the ordinary course of business.
6.2 TITLE Except as set forth on Exhibit L, Seller has good and
marketable title to the Assets, free and clear of any mortgages, liens, security
interests, pledges, easements or encumbrances of any kind or nature whatsoever.
At the Closing, Seller will convey good and marketable title to the Assets to be
sold hereunder, free and clear of any and all mortgages, liens, security
interests, pledges, easements, or encumbrances of any kind or nature whatsoever.
6.3 FINANCIAL STATEMENTS The Seller Statements are materially true,
complete and correct and have been prepared in accordance with generally
accepted accounting principles consistently followed throughout the periods
indicated, with exception of the absence of footnotes. The Seller Statements
fairly present the financial condition and assets and liabilities (whether
accrued, absolute, contingent or otherwise) of Seller as of the dates indicated
and the results of operation of Seller for the periods then ended.
6.4 INTERIM STATEMENTS The Interim Statements are materially true,
complete and correct and have been prepared in accordance with generally
accepted accounting principles, consistently followed (subject, however, to
normal year-end adjustments none of which will be materially adverse, and to the
absence of footnotes). The Interim Statements fairly and
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accurately present the financial condition and assets and liabilities (whether
accrued, absolute, contingent or otherwise) of Seller as of the dates indicated
and the results of operations of Seller for the periods then ended.
6.5 LIABILITIES Except as and to the extent reflected or reserved
against in the Interim Statements, or otherwise disclosed herein, Seller had, as
of the date of such Statements, no Liabilities or Obligations. As of the date of
this Agreement, Seller is not subject to and does not have any Liabilities and
Obligations, except as disclosed in the Interim Statements, and except for such
Liabilities and Obligations as have arisen in the ordinary course of business of
Seller since the date of said Interim Statements, none of which newly arisen
Liabilities and Obligations have a material adverse effect upon the Assets, or
Seller, its organization, business, properties or financial condition.
6.6 OTHER OPERATIONS Seller does not have any business, division, other
operations, subsidiaries, affiliates or controlled corporations or entities
other than the Business and Assets conveyed herein. During the past four years,
Seller and any subsidiaries, affiliates or controlled entities of Seller have
not sold, transferred or otherwise disposed of any company, business, division
or operation, providing products or services which compete with the services
provided by Seller.
6.7 NON-BREACH The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby by Seller will not (a)
result in a breach of any of the terms or conditions of, or constitute a default
under, any mortgage, note, bond, indenture, agreement, license or other
instrument or obligation (including any "Contracts") to which Seller is now a
party or by which it, on any of its properties or assets may be bound or
affected, or (b) violate any order, writ, injunction or decree of any court,
administrative agency or governmental body.
6.8 CONTRACTS Except as listed in Exhibit C-1, Seller is not a party to
any written or oral:
(i) contract, agreement, commitment or understanding for the
provision of goods, and/or services;
(ii) contract, agreement, commitment or understanding for the
employment of any officer, consultant, director or employee;
(iii) contract, agreement, commitment or understanding with
any labor union;
(iv) contract, agreement, commitment or understanding for the
purchase of any materials, supplies or equipment or for the
manufacturing of products;
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(v) contract, agreement, commitment or understanding from
suppliers of products or services;
(vi) license or franchise contract, agreement, commitment or
understanding, either as licenser or licensee or franchiser or
franchisee, including any related to intellectual property, or
distributor, dealership or sales agency contract, agreement or
understanding;
(vii) lease for real or personal property under which Seller
is a lessor or lessee, or contract, commitment, agreement or
understanding to purchase or sell real property or a material amount of
personal property;
(viii) pension, profit-sharing, bonus, deferred compensation,
retirement or stock option or stock purchase plan in effect with
respect to employees or others;
(ix) contract, agreement, commitment or understanding granting
to any person the right to use any property or property right of
Seller, including any trademark or patent licensing agreement, contract
or understanding;
(x) plan, contract, agreement, commitment or understanding
providing for insurance for any officer, director or employee or member
of their families;
(xi) construction contract;
(xii) contract, agreement, commitment or understanding
containing covenants by Seller not to compete in any line of business
or with any person;
(xiii) joint venture contract, agreement, commitment or
understanding or partnership or arrangement or other agreement
involving a sharing of profits; or
(xiv) contract, agreement, commitment or understanding
relating to the borrowing or lending of money by Seller, providing for
letters of credit delivered or to be delivered (including but not
limited to letters of credit delivered to providers), or providing for
any mortgage, lien or security interest upon any of the Assets; or
(xv) any guaranties or indemnification's by Seller, except for
Seller's obligations resulting from the endorsement of checks deposited
for collection;
(xvi) any contract, agreement, commitment or understanding
calling for payments by Seller in excess of $1,000;
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(xvii) other material contract, agreement, commitment or
understanding.
Seller has provided to Purchaser true, current, correct and complete
copies (or accurate written descriptions in the case of oral Contracts) of all
of the Contracts.
Seller has performed all obligations required to be performed by it to
date under, and Seller and each other party to each Contract is not in default
under each of the Contracts, and there are no facts which, with notice and/or
the passage of time would constitute a default in any material respect. Each of
the Contracts is in full force and effect. Upon request of Purchaser, Seller
shall assign to Purchaser any or all of the Contracts. Except as stated on
Exhibit C-1, each of said Contracts is assignable without consent.
6.9 INVENTORY; RECEIVABLES The Inventory reflected on the Interim
Statement is valued at the lower of cost or market, except as disclosed to
Purchaser, and has not been written down since the date of the Interim
Statements. The cost of all such inventory has been determined on the basis of
consistent accounting practices for at least eighteen months preceeding this
Agreement.
The items of Inventory which will be sold to Purchaser hereunder will
be in good condition and not obsolete, and will be of a quality and quantity
usable by Seller in the ordinary course of its business.
All of the Receivables represent actual sales made by Seller in the
ordinary course of its business, and the amount thereof and the reserve therefor
reflected on the Seller Statements and the Interim Statements are in accordance
with generally accepted accounting principles. None of the obligors under the
Receivables of Seller have refused to pay, or given notice that it will refuse
to pay, the full amount or any portion thereof, except as may be reflected in
customary accounting reserves. Certain of the Receivables have been factored as
noted in Section 2.7 of this Agreement.
6.10 EQUIPMENT Except as may be set forth on Exhibit D, all items
included in the Equipment are located on the Leased Premises, and are in good
condition and repair, ordinary wear and tear excepted.
6.11 REAL ESTATE; LEASED PREMISES Seller does not own, and Seller, as
well as the Predecessor, has never owned, any real property.
Seller does not lease or otherwise use or occupy any real property
other than the Leased Premises. The Leased Premises are in good condition,
normal wear and tear excepted. The heating, air conditioning, plumbing and
electrical systems serving the Leased Premises are in good operating order,
ordinary wear and tear excepted, and there is no material defect or wear and
tear to the Leased Premises, or any other material deterioration, or damage,
which prohibit or impair the continued use of the Leased Premises, or would
require any material expenditure for repair or replacement. Seller has not
received notice that the Leased Premises or the building in
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which they are located do not comply with municipal, state and federal statutes,
ordinances, rules and regulations applicable to the construction of the
buildings and their actual use.
To the best of Seller's knowledge there are not: (i) any transformers,
capacitors or other appliances in use or stored in the Leased Premises which
contain PCB's; (ii) any urea-formaldehyde insulation or any asbestos in the
Leased Premises; or (iii) any hazardous substance or hazardous waste
(hereinafter a "Hazardous Substance"), as defined in the Comprehensive
Environmental Response Compensation and Liability Act of 1980 ("CERCLA"), or the
Resource Conservation and Recovery Act of 1976 ("RCRA") or any other applicable
federal, state or local environmental laws, statutes or regulations or as
defined in 42 U.S.C. 3251, as amended, located anywhere in the Leased Premises,
except for Hazardous Substances which are stored and disposed of in compliance
with applicable law. No activity has been conducted by Seller at the Leased
Premises or adjoining properties which has given rise to, or may give rise to,
any liability or obligation under any applicable federal, state or local
environmental protection, health, safety, or similar law, whether statutory or
common law, except as disclosed in Exhibit T.
Seller has not engaged in the business of generating, transporting,
storing, treating or disposing of Hazardous Substances in or about the Leased
Premises, except as disclosed in Exhibit T. To the best of Seller's knowledge,
the Leased Premises have not been used for the storing or disposal of waste or
for storing or disposal of Hazardous Substances prior to or during the period
that Seller has been a tenant of the Leased Premises, except as disclosed in
Exhibit T.
6.12 ASSETS COMPLETE The Assets which will be sold by Seller and
acquired by Purchaser at Closing include all Assets used in or necessary for the
operation of the Business, including but not limited to all tangible property
presently located at the Leased Premises, and excluding title to assets leased
under personal property leases, disclosed as Contracts hereunder, and
non-material items of personal property owned by employees. Seller does not
lease or otherwise use any property owned by third parties in its operations,
except as may occur under leases disclosed as Contracts hereunder. Since
December 31, 1996 no assets of any kind used by the Seller have been removed,
transferred or disposed of except for sales of inventory and utilization of
supplies in the ordinary course of business of Seller.
6.13 LITIGATION Except as disclosed in Exhibit U, there are no claims,
actions, suits, proceedings or investigations (whether or not purportedly on
behalf of Seller) pending or threatened against or affecting Seller or the
Assets, at law or in equity or admiralty or before or by any federal, state,
municipal or other governmental department, commission, board, agency or
instrumentality, domestic or foreign, nor has any such action, suit, proceeding
or investigation been pending during the 12-month period preceding the date
hereof. There are no facts or circumstances which might give rise to or
constitute the basis for any such claim, action, suit, proceeding or
investigation. Seller is not operating under or subject to, or in default with
respect to, any order, writ, injunction or decree of any court or federal,
state, municipal or other governmental department, commission, board, agency or
instrumentality, domestic or foreign.
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6.14 COMPLIANCE WITH LAWS Seller has complied with, and the Assets
comply with, all applicable laws, regulations and orders applicable to Seller or
the Assets, including without limitation the Food, Drug and Cosmetic Act,
CERCLA, RCRA, the Occupational Safety & Health Act, the Clean Air Act, the Clean
Water Act, the Toxic Substances Control Act, the Safe Drinking Water Act, and
the Refuse Act, and the present uses by Seller of the Assets do not violate any
such laws, regulations and orders.
6.15 INTELLECTUAL PROPERTY Exhibit F lists all patents, trademarks,
service marks, trade names, trademark, service mark and trade name
registrations, brand names, copyrights and copyright registrations, all pending
applications for any of the foregoing, and any other proprietary rights,
inventions, trade secrets, or know-how or processes (hereinafter the foregoing
are collectively referred to as "Intellectual Property") used in the operation
of Seller's business, or owned by Seller, and any licenses granted by or to
Seller, and any other contracts, agreements, commitments or understandings to
which it is a party, which relate, in whole or in part, to Intellectual
Property. Said Exhibit F further includes a brief description of the filing,
registration or issuance dates of any such Intellectual Property. Seller owns or
is licensed to use, under licenses disclosed herein, all Intellectual Property
used by it in the conduct of its business as currently conducted or planned to
be conducted, and, except as may exist under licenses disclosed herein, no other
person, including but not limited to any shareholder of Seller, owns or has any
interest in any such Intellectual Property. The use by Seller of any such
Intellectual Property, and the conduct by Seller of its business, does not
infringe on the rights of any third party, and no claim has been asserted to
such effect or otherwise affecting any Intellectual Property of Seller. To the
best of Seller's knowledge, no other party is infringing upon any Intellectual
Property of Seller. The Intellectual Property to be assigned, transferred and
conveyed to Purchaser hereunder constitutes all the Intellectual Property used
or owned by Seller in the conduct of its business, or in connection with the
Assets.
Except as set forth on Exhibit L, Seller has taken all steps reasonably
necessary to protect, and to maintain the confidentiality of, its confidential
information and trade secrets, including, but not limited to, having its
employees and consultants enter into confidentiality agreements. The
confidentiality agreements presently in existence for the benefit of Seller are
listed on Exhibit N. All such agreements may and will be assigned to Purchaser
at the Closing hereunder except as such agreements relate to the Blood Glucose
Products if such Products are returned to the Seller in accordance with Section
2.3.2 of this Agreement.
6.16 LABOR CONTROVERSIES There are no disputes or controversies pending
or to the best knowledge of Seller, threatened, between Seller and (i) any union
or (ii) any of Seller's employees. Seller is not currently subject to (i) any
threats of strikes or work stoppages, or (ii) any organizational efforts or
demands for collective bargaining or any union organization. Seller is in
substantial compliance with applicable labor laws. Seller is not party to any
collective bargaining agreements.
6.17 PENSION AND PROFIT SHARING PLANS; BENEFITS Seller has no pension
or profit sharing plans which cover any of its employees, except as referenced
on Exhibit C-1. All
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contributions required to be made or accrued prior to the Closing Date to any
such plans shall have been paid or adequate provision made therefor.
Exhibit C-1 contains a complete list of all employee benefits provided
by Seller to its employees including but not limited to any disability, medical,
dental, workers compensation, health insurance, life insurance, vacation,
benefits plans, incentive plans, fringe benefit plans and any other material
plans, programs, agreements or arrangements which provide benefits to any
current or former employee of Seller.
All the accrued or reasonably anticipated obligations of Seller,
whether arising by operation of law, by contract or by past custom, for payments
by it to trust or other funds, or to any governmental agency with respect to
unemployment compensation benefits or social security benefits, or to employees
for accrued vacation benefits, holiday pay, bonuses, other forms of compensation
or any other benefits for employees of Seller shall have been paid prior to
Closing or, if due after Closing, shall be paid when due under applicable laws,
regulations, or provisions of benefit plans or policies as the case may be. In
no event shall Purchaser assume or be responsible for past or future obligations
of Seller to any employee, including any obligations to pay salary, benefits,
severance pay, vacation pay or other benefits to any employee, regardless of
whether such employees are hired by Purchaser.
6.18 CHANGES IN SUPPLIERS AND CUSTOMERS Except as to matters related to
Chung Do Pharmaceutical Co., Ltd., the resolution of which is pursuant to
Section 10.2 as a condition to closing the transaction contemplated by this
Agreement, Seller is not aware of any facts which indicate that any of the
significant customers of Seller intends to cease being a customer of Seller (or
intends to not continue as customer with Purchaser after the Closing hereunder),
nor is Seller aware of any facts which indicate that any supplier or provider of
services to Seller intends to cease doing business with Seller, or to not do
business with Purchaser after the Closing hereunder, whether as a result of the
transactions contemplated hereby or otherwise.
6.19 CONDUCT OF BUSINESS Except as disclosed in Exhibit L, since
December 31, 1996 and until the Closing Date, Seller has not and will not have:
(i) incurred any Liabilities or Obligations (absolute or
contingent), except for Liabilities and Obligations disclosed in the
Interim Statements, or in the Exhibits annexed hereto, and except for
such Liabilities and Obligations as have arisen in the ordinary course
of business of Seller since the date of the Interim Statements, none of
which newly arisen Liabilities and Obligations have a material adverse
effect upon Seller, the Assets, or Seller's organization, business,
properties, or financial condition;
(ii) mortgaged, pledged or subjected to any lien, charge or
other encumbrance, any of the Assets, tangible or intangible;
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(iii) sold or transferred any assets included in the Assets,
other than sales of inventory or utilization of supplies in the
ordinary course of business;
(iv) sold, assigned or transferred any Intellectual Property,
or other intangible assets of Seller or relating to the Assets or
Seller's business, or included in the Assets;
(v) suffered any extraordinary losses or waived any rights of
substantial value relating to Seller's business or the Assets;
(vi) suffered any damage, destruction or loss to any Assets,
whether or not covered by insurance;
(vii) entered into any transaction involving or relating to
Seller's business or the Assets other than in the ordinary course of
business;
(viii) except in the normal course of business, increased the
compensation payable, or to become payable by Seller to any of its
employees including, but not limited to, any bonus payment or deferred
compensation;
(ix) made or suffered any amendment or termination of any
Contracts (including licenses);
(x) increased any benefits to employees of Seller under
pension, insurance or other employee benefit programs;
(xi) changed its methods of accounting in any respect;
(xii) except as disclosed to Purchaser, failed to pay its
payables or other obligations or liabilities when due in the ordinary
course of business;
(xiii) acquired a significant portion of the assets or stock
of any person or business entity;
(xiv) suffered a termination of, or amended, any license or
permit.
(xv) paid any dividends or distributions to or made any other
payments or transfers of money or property to any shareholders of
Seller or persons or entities related to or affiliated with or
controlled by any of such shareholder, except for the payment of normal
salary (not bonuses) in the ordinary course of business.
6.20 TAXES, TAX RETURNS Except as to the filing of tax returns for
1996, Seller has duly and timely filed all federal, state and local tax returns
and reports required to be filed by it,
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and has paid all taxes (including all interest, penalties, assessments and
deficiencies) due or claimed to be due under such duly filed tax returns or has
made provision therefor. Seller is not delinquent, and there are no material,
asserted or assessed deficiencies that have not been settled, with respect to
the payment of any income, sales, use and withholding taxes or other taxes.
There are no alleged material tax deficiencies proposed or discussed by the IRS
or other appropriate tax authority (whether or not such matters have been
settled) that are likely to be proposed or asserted against Purchaser or the
Assets if Purchaser continues to operate Seller's business after the Closing in
substantially the same manner as it has been operated by Seller. To the best
knowledge of Seller and Shareholders, no tax returns of Seller filed or required
to be filed are being examined, nor has any action, audit, proceeding or
investigation been threatened, by the Internal Revenue Service or other
appropriate taxing authority.
6.21 EMPLOYEES Seller is not aware that any employees of Seller intend
to cease their employment with Seller, or to not accept employment or consulting
arrangements with Purchaser if offered, whether as a result of the transactions
contemplated hereby or otherwise.
6.22 LICENSES AND PERMITS All licenses, permits, franchises, approvals
and governmental authorizations required for Seller, the Business, the Assets,
or their operations, are listed on Exhibit O. No other licenses, permits,
franchises, approvals or other governmental authorizations are required for
Seller, its business, the Assets or their operations as heretofore conducted by
Seller. True, current, correct and complete copies of such licenses, permits,
franchises, approvals, and governmental authorizations have been delivered by
Seller to Purchaser. Seller has performed in all material respects all
obligations required to be performed by it to date under, and is not in default
under, any such licenses, permits, franchises, approvals, or governmental
authorizations or the laws, regulations and requirements of the licensing and
permit authorities. All such licenses, permits, franchises, approvals, and
governmental authorizations are in full force and effect. Except as required to
continue its business in Blood Glucose Products if returned by Purchaser
pursuant to Section 2.3.2, as set forth on Exhibit L, all such licenses,
permits, franchises, approvals, and governmental authorizations will be assigned
to Purchaser at the Closing.
6.23 CUSTOMERS Exhibit P lists all material customers of Seller and all
former customers who, during the time period since January 1, 1995, previously
constituted material customers.
6.24 SUPPLIERS Exhibit P attached hereto lists all material suppliers
of products or services to Seller.
6.25 PERFORMANCE FOR CUSTOMERS Except as listed on Exhibit L, Seller
presently is in compliance in all material respects with all contracts with
customers which presently are in effect. Since January 1, 1995, except as set
forth on Exhibit L, (i) Seller has complied in all material respects with all
contracts with customers, and (ii) there have been no material claims by or
disputes with customers.
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6.26 PRODUCTS AND WARRANTIES; INSURANCE Set forth on Exhibit J is a
description or reference to all warranties made by Seller with respect to
products sold by Seller during the last three (3) years. During the past three
(3) years, Seller has maintained quality control and quality standards with
respect to the products manufactured and sold by Seller consistent with industry
standards and governmental (including FDA) requirements, and has not adversely
altered the quality of such products in any material respect. Except as listed
on Exhibit L, there have been no material departures by Seller or by products
sold by Seller from such standard warranties in the last three (3) years.
Seller has fully and accurately disclosed its information relating to
returns or other claims (whether due to warranties or otherwise) of products to
Seller during the past three years.
Exhibit L details the product liability claims which have been made
during the past four (4) years against Seller with respect to products sold by
Seller, or with respect to predecessor products to the products sold by Seller.
Said Exhibit L includes, without limitation, brief descriptions of the basis of
any such claims, the outcome of the claim, including any amounts that had to be
paid with respect thereto, and whether such claim was covered by insurance
carried by Seller.
6.27 STATUS OF PRODUCTS AND APPROVALS Exhibit Q attached hereto lists
all the products which are currently being marketed by Seller as well as all
products which are currently under development by Seller. Said Exhibit Q further
specifies those products which have, and those products which require or which
might require, registration with or approval by the FDA (hereinafter "FDA
Approval"). In the case of each such product which has FDA Approval, said FDA
Approval is currently in full force and effect, and there is no basis for any
adverse change in or withdrawal of such FDA Approval.
In the case of those products which require or might require FDA
Approval, where such Approval has not yet been obtained, said Exhibit Q
specifies the expected schedule for obtaining said Approval. Except as listed on
said Exhibit Q, there are no reasons to believe that the said Approvals will not
be received substantially within such time frame.
In the case of those products still under development, except as set
forth on Exhibit Q, there are no material reasons to conclude that such products
would not be viable in the United States and any other markets for which they
are targeted.
Exhibit Q also sets forth comparable information to that required above
with respect to other countries where products are being marketed or are planned
to be marketed, including providing information regarding any governmental
approvals which exist and the status of any approvals which are being sought.
6.28 MATERIAL CHANGE Since the date of the most recent Seller Statement
there has been no material change in the condition, financial or otherwise, of
Seller, Seller's business, or
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the Assets from that shown in said Statement, except changes occurring in the
ordinary course of business, which changes have not materially adversely
affected the Assets, or Seller's organization, business, properties or financial
condition.
No statute, order, judgment, writ, injunction, decree, permit, rule or
regulation of any court or governmental or regulatory body has been adopted or
entered, or is proposed to be adopted or entered, which may materially and
adversely affect Seller, the Assets or the business of Seller. There has been no
event or occurrence affecting Seller, the Assets, or the business of Seller
which may have a material adverse effect upon Seller's business, prospects or
Assets.
6.29 DISCLOSURE No representation or warranty made by Seller herein or
in any agreements, certificates or documents delivered in connection with this
Agreement contains any untrue statement of a material fact or omits to state a
material fact necessary to make such representation or warranty not misleading.
ARTICLE VII
REPRESENTATIONS AND WARRANTIES BY PURCHASER
Purchaser represents and warrants to Seller that the following
statements are true and correct as of the date of this Agreement and will be
true and correct on the Closing Date as if made on said date:
7.1 ORGANIZATION AND STANDING Purchaser is a corporation duly
organized, existing and in good standing under the laws of the state of
Minnesota.
7.2 NO CONFLICT The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby will not (a) result in a
breach of any of the terms or conditions of, or constitute a default under, any
mortgage, note, bond, indenture, agreement, license or other instrument or
obligation to which Purchaser is a party or by which it or any of its properties
or assets may be bound or affected, or (b) violate any order, writ, injunction
or decree of any court, administrative agency or governmental body, or (c)
conflict with or result in the breach of the terms, conditions or provisions of
the Articles of Incorporation or By-Laws of the Purchaser.
7.3 AUTHORITY Purchaser has full power and authority to enter into this
Agreement and to carry out the transactions contemplated hereby, and all
corporate and other proceedings required to be taken by Purchaser in connection
with this Agreement and the transactions contemplated hereby and necessary to
make the same effective have been duly and validly taken. This Agreement
constitutes a valid and binding obligation of Purchaser and is enforceable in
accordance with its terms.
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ARTICLE VIII
COVENANTS OF THE SELLER
8.1 ACTIONS Seller will not take or permit to be taken any action or do
or permit to be done anything in the conduct of its business or otherwise, which
would be contrary to or in breach of any of the terms, conditions or provisions
of this Agreement, or which would cause any of the representations and
warranties of Seller to be untrue as of the Closing Date or any time thereafter.
8.2 FEES Seller shall pay all fees and disbursements of counsel and
accountants for Seller arising in connection with this Agreement and the
transactions contemplated hereby.
8.3 FURTHER ASSURANCES On the Closing Date, and from time to time
thereafter, at the request of Purchaser, Seller will execute and deliver to
Purchaser all such assignments, endorsements and other documents, and take such
other action as Purchaser may reasonably request in order more effectively to
transfer and assign to Purchaser the Assets transferred to Purchaser pursuant to
this Agreement, to confirm the title of Purchaser thereto and to assist
Purchaser in exercising its rights with respect thereto and under this
Agreement.
8.4 CONSENTS Seller has obtained, or by the Closing Date will obtain,
all consents which are required in connection with the assignment of any
Contracts or other arrangements to Purchaser pursuant to this Agreement, and any
other consents or approvals which are required in connection with the closing of
this Agreement and the consummation of the transactions contemplated hereby.
8.5 DATA TRANSFER Prior to the Closing Date, Seller shall cooperate
with Purchaser in arranging for Seller's data relating to the Assets and the
Business to be immediately transferred to Purchaser's computer system at the
time of the Closing. This will include using its best efforts, in consultation
with Purchaser's MIS personnel, to have such data formatted in such a way that
it will effectively transfer to Purchaser's system and to have tapes or other
media ready to transfer to Purchaser at the date of the Closing. After the
Closing, Seller shall continue to cooperate, on a reasonable basis, with
Purchaser in arranging for the transfer of data to Purchaser in a method that is
efficient and compatible with Purchaser's computer system, to the extent
reasonably feasible.
ARTICLE IX
NO BROKERS OR FINDERS
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Seller and Purchaser represent and warrant to each other that each did
not directly or indirectly engage any person, corporation or partnership to
bring about the consummation of the transactions contemplated herein, and, that
no person, corporation or partnership is entitled to a broker's commission,
finder's fee or any similar compensation upon the consummation of the
transactions contemplated herein. If this representation and warranty is
breached by either Seller or Purchaser, the breaching party shall indemnify and
hold harmless the other party from any and all claims, demands, liabilities and
obligations (and any and all expenses and costs incurred in connection with or
in defending against the same), which may arise due to any third party's claim
as a broker or finder.
ARTICLE X
CONDITIONS PRECEDENT TO OBLIGATIONS
OF PURCHASER
The obligations of Purchaser hereunder are subject to the conditions
that, on or before the Closing Date:
10.1 LEUKOCYTE VALIDATION The leukocyte reagent component of Seller's
Urine Chemistry Product shall have achieved Process Validation on or before
January 15, 1998. In the event Process Validation shall not have been achieved
on or before January 15, 1998, Purchaser shall have the sole discretion to:
(a) waive such condition precedent and proceed with Closing;
(b) postpone Closing to a date and time determined by
Purchaser, with reservation of right to further exercise at that time
any of the alternatives identified in this Section 10.1; or
(c) terminate this Agreement.
10.2 CHUNG DO RELEASE Seller shall obtain and deliver to Purchaser, as
a condition to Closing and the several obligations of the parties created
herein, a comprehensive waiver and release of claims executed by Chung Do
Pharmaceutical Co., Ltd. of Jinhae City Republic of Korea, for the benefit of
Seller, Purchaser, their agents and employees, and in a form reasonably
acceptable to Purchaser.
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10.3 REPRESENTATIONS AND WARRANTIES TRUE AT CLOSING The representations
and warranties of Seller contained in this Agreement or in any certificate or
document delivered pursuant to the provisions hereof or in connection with the
transactions contemplated hereby shall be true on and as of the Closing Date as
though such representations and warranties were made at and as of such date.
10.4 COMPLIANCE WITH THE AGREEMENT Seller shall have performed and
complied with all agreements and conditions required by this Agreement to be
performed or complied with by it prior to or at the Closing Date.
10.5 CERTIFICATE Seller shall deliver to Purchaser a certificate of an
officer of Seller dated the Closing Date, certifying in such detail as Purchaser
may request to the fulfillment of the conditions specified in Sections 10.2 and
10.3.
10.6 DELIVERIES The documents required under Article III hereof shall
be tendered by Seller for delivery to Purchaser at the Closing.
10.7 OPINION OF SELLER'S COUNSEL Purchaser shall have received an
opinion of counsel to Seller, dated the Closing Date, substantially in the form
of Exhibit R hereto.
10.8 INJUNCTION On the Closing Date, there shall be no effective
injunction, writ, preliminary restraining order or any order of any nature
issued by a court of competent jurisdiction directing that the transactions
provided for herein or any of them not be consummated as herein provided.
10.9 CASUALTY Prior to the Closing Date, the business and the Assets of
Seller, or any portion thereof, shall not have been adversely affected in any
material way as a result of any fire, accident, flood or other casualty or act
of God or the public enemy.
10.10 ADVERSE DEVELOPMENT There shall have been no developments in the
business of Seller, or in the Assets, between the date of the Interim Statements
and the Closing Date which would have a materially adverse effect on Seller's
business or the Assets.
10.11 AGREEMENTS WITH CERTAIN OFFICERS AND EMPLOYEES The Agreements
attached hereto as Exhibit S shall have been executed and delivered by Seller
and Messrs. Murray, Moyer, and Koopman to Purchaser.
10.12 OTHER EMPLOYEES Purchaser shall have received assurances
satisfactory to Purchaser that a satisfactory number of the employees other than
the Shareholders who Purchaser wishes to hire will accept employment with
Purchaser as of the Closing Date.
10.13 ASSIGNMENTS All required consents to Assignments for all material
Contracts and for the lease for the Leased Premises shall have been received.
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10.14 INVESTIGATIONS Purchaser shall be satisfied, in its sole
discretion, with the results of its legal, accounting, business, environmental
and other due diligence review of Seller's business and the Assets.
10.15 APPROVAL The Board of Directors of Purchaser shall have approved
this Agreement and the transactions contemplated hereby.
ARTICLE XI
CONDITIONS PRECEDENT TO THE OBLIGATIONS
OF SELLER
The obligations of the Seller hereunder are subject to the conditions
that, on or before the Closing Date:
11.1 REPRESENTATIONS AND WARRANTIES TRUE AT CLOSING The representations
and warranties of Purchaser contained in this Agreement or in any certificate or
document delivered pursuant to the provisions hereof or in connection with the
transactions contemplated hereby, shall be true on and as of the Closing Date as
though such representations and warranties were made at and as of such date.
11.2 PURCHASER'S COMPLIANCE WITH THE AGREEMENT Purchaser shall have
performed and complied with all agreements and conditions required by this
Agreement to be performed or complied with by it prior to or at the Closing
Date.
11.3 OFFICERS' CERTIFICATE Purchaser shall deliver to the Seller a
certificate of an officer or authorized signer of Purchaser, dated the Closing
Date, certifying in such detail as the Seller may request to the fulfillment of
the conditions specified in Sections 11.1 and 11.2.
11.4 INJUNCTION There shall be no effective injunction, restraining
order or order of any nature issued by a court of competent jurisdiction which
shall direct that this Agreement, or any of the transactions provided for
herein, not be consummated as herein provided.
11.5 AGREEMENTS WITH CERTAIN OFFICERS AND EMPLOYEES Purchaser shall
have executed and delivered the Agreements appearing in Exhibit S.
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11.6 APPROVAL The Board of Directors and Shareholders of Seller shall
have approved this Agreement and the transactions contemplated hereby.
11.7 OPINION OF PURCHASER'S COUNSEL Seller shall have received an
opinion of counsel to Purchaser dated the Closing Date, substantially in the
form of Exhibit V hereto.
11.8 ASSUMPTIONS BY PURCHASER Purchaser shall assume the obligations of
Seller identified in and pursuant to the agreement listed on Exhibit W hereto.
ARTICLE XII
INDEMNIFICATION
12.1 SELLER'S INDEMNIFICATION OF BUYER Seller hereby agrees that,
notwithstanding the Closing and the delivery of instruments of conveyance,
Seller will indemnify, defend, save and hold Purchaser and its stockholders,
directors, employees, agents and affiliates (collectively "Indemnified Persons
of Seller") harmless from and against any and all liabilities, losses, damages,
claims, deficiencies, costs and expenses (including, without limitation,
reasonable attorney fees and other costs and expenses incident to any suit,
action or proceeding) arising out of or resulting from and will pay to Purchaser
the amount of damages suffered thereby together with any amount which it may pay
or become obligated to pay (collectively "Buyer's Damages") on account of:
(a) the breach or inaccuracy of any warranty or representation
by Seller herein or any misstatement of a fact or facts herein made by
Seller;
(b) the failure by Seller to state or disclose a material fact
herein necessary in order to make the facts herein stated or disclosed
not misleading;
(c) any failure of Seller to perform or observe any term,
provision, covenant or condition hereunder on the part of it to be
performed or observed; or
(d) any act performed, transaction entered into, or state of
facts suffered to exist by Seller in violation of the terms of this
Agreement.
In the event of any claim by an Indemnified Person of Seller under this
Article XII, such Person shall be entitled to exercise all remedies provided by
law and/or equity with respect thereto; in addition upon delivery of written
notice of a claim hereunder specifying the claim in
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<PAGE>
reasonable detail, Purchaser shall be entitled to escrow with an independent
third party the amount of such claim by deducting the amount of such claim from
any amounts due Seller until such claim is resolved.
12.2 PURCHASER'S INDEMNIFICATION OF SELLER Purchaser hereby agrees
that, notwithstanding the Closing and the delivery of instruments of conveyance,
Purchaser will indemnify, defend, save and hold Seller and its stockholders,
directors, employees, agents and affiliates (collectively "Indemnified Persons
of Purchaser") harmless from and against any and all liabilities, losses,
damages, claims, deficiencies, costs and expenses (including, without
limitation, reasonable attorney fees and other costs and expenses incident to
any suit, action or proceeding) arising out of or resulting from and will pay to
Seller the amount of damages suffered thereby together with any amount which it
may pay or become obligated to pay (collectively, "Seller's Damages") on account
of:
(a) the breach or inaccuracy of any warranty or representation
by Purchaser herein or any misstatement of a fact or facts herein made
by Purchaser;
(b) the failure by Purchaser to state or disclose a material
fact herein necessary in order to make the facts herein stated or
disclosed not misleading;
(c) any failure of Purchaser to perform or observe any term,
provision, covenant or condition hereunder on the part of it to be
performed or observed; or
(d) any act performed, transaction entered into, or state of
facts suffered to exist by Purchaser in violation of the terms of this
Agreement.
In the event of any claim by an Indemnified Person of Purchaser under
this Article XII, such Person shall be entitled to exercise all remedies
provided by law and/or equity with respect thereto.
12.3 LIMITATION ON AMOUNTS. Seller shall have no liability (for
indemnification or otherwise) with respect to the matters described in clauses
(a), (b), (c) and (d) of Section 12.1 until the total of all Purchaser's Damages
with respect to such matters exceeds $25,000. Purchaser shall have no liability
(for indemnification or otherwise) with respect to the matters described in
clauses (a), (b), (c) and (d) of Section 12.2 until the total of all Seller's
Damages with respect to such matters exceeds $25,000.
12.4 PROCEDURE FOR INDEMNIFICATION - THIRD PARTY CLAIMS.
(a) Promptly after receipt by an indemnified party under
Section 12.1 or 12.2 of notice of the commencement of any proceeding
against it, such indemnified party will, if a claim is to be made
against an indemnifying party under such Section, give notice to
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the indemnifying party of the commencement of such claim, but the
failure to notify the indemnifying party will not relieve the
indemnifying party of any liability that it may have to any indemnified
party, except to the extent that the indemnifying party demonstrates
that the defense of such action is prejudiced by the indemnifying
party's failure to give such notice.
(b) If any proceeding referred to in Section 12.4(a) is
brought against an indemnified party and it gives notice to the
indemnifying party of the commencement of such proceeding, the
indemnifying party will be entitled to participate in such proceeding
and, to the extent that it wishes (unless the indemnifying party is
also a party to such proceeding and the indemnified party determines in
good faith that joint representation would be inappropriate), to assume
the defense of such proceeding with counsel satisfactory to the
indemnified party and, after notice from the indemnifying party to the
indemnified party of its election to assume the defense of such
proceeding, the indemnifying party will not, as long as it diligently
conducts such defense, be liable to the indemnified party under this
Section 12 for any fees of other counsel or any other expenses with
respect to the defense of such proceeding, in each case subsequently
incurred by the indemnified party in connection with the defense of
such proceeding, other than reasonable costs of investigation. If the
indemnifying party assumes the defense of a proceeding, (i) it will be
conclusively established for purposes of this Agreement that the claims
made in that proceeding are within the scope of and subject to
indemnification; (ii) no compromise or settlement or such claims may be
effected by the indemnifying party without the indemnified party's
consent unless the sole relief provided is monetary damages that are
paid in full by the indemnifying party; and (iii) the indemnified party
will have no liability with respect to any compromise or settlement of
such claims effected without its consent. If notice is given to an
indemnifying party of the commencement of any proceeding and the
indemnifying party does not, within ten days after the indemnified
party's notice is given, give notice to the indemnified party of its
election to assume the defense of such proceeding, the indemnifying
party will be bound by any determination made in such proceeding or any
compromise or settlement effected by the indemnified party.
12.5 NOTICE PRIOR TO CLOSING. No party hereto shall be deemed to have
breached any representation, warranty, or covenant if (i) the other party hereto
has been notified prior to the Closing of the breach of, or inaccuracy in, or of
any facts or circumstances constituting or resulting in the breach of or
inaccuracy in, such representation, warrant or covenant, and (ii) such other
party has permitted the Closing to occur and, for purposes of this Agreement, is
thereby deemed to have waived such breach or inaccuracy; provided, however, that
a disclosure pursuant to this Section 12.5 shall not prejudice the rights of the
parties pursuant to Article X or XI hereof not to consummate the transactions
contemplated by this Agreement.
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ARTICLE XIII
NATURE AND SURVIVAL OF REPRESENTATIONS
All statements contained in any documents, certificates or other
instruments delivered by or on behalf of Seller or Purchaser pursuant to this
Agreement or in connection with the transactions contemplated hereby shall be
deemed representations and warranties by Seller or Purchaser hereunder. All
representations and warranties and agreements made by Seller or Purchaser in
this Agreement or in any documents, certificates, or other instruments delivered
pursuant hereto shall survive the Closing hereunder (and any investigation at
any time made by or on behalf of Seller or Purchaser).
ARTICLE XIV
NOTICES
All notices, requests, demands, and other communications hereunder
shall be in writing and shall be deemed to have been duly given if delivered or
mailed first-class postage prepaid:
(a) To the Seller:
Dia-Screen Corporation
5182 W. 76th Street
Minneapolis, MN 55439
with a copy thereof to:
John A. Murray
2735 White Oak Circle
Orono, MN 55356
and a copy to:
Timothy M. Heaney
Fredrikson & Byron, P.A.
1100 International Centre
900 Second Avenue South
Minneapolis, MN 55402
(b) To Purchaser:
33
<PAGE>
Chronimed Inc.
Suite 250, Ridgedale Office Center
13911 Ridgedale Drive
Minnetonka, MN 55305
Attention: Maurice R. Taylor
Chief Executive Officer
with a copy thereof to:
John E. Brower
Gray, Plant, Mooty, Mooty & Bennett, P.A.
3400 City Center
33 South Sixth Street
Minneapolis, MN 55402
or to such other address or to such other person as Purchaser or Seller shall
have last designated by notice to the other.
ARTICLE XV
MODIFICATION
With the exception of the provisions of paragraph 15 of the letter of
intent between the parties hereto dated October 15, 1997 which continues in full
force and effect and which shall survive any termination of this Agreement if
the transaction contemplated by this Agreement is not consummated, this
Agreement supersedes all prior agreements or understandings between the parties
with respect to its subject matter hereof, and contains the entire agreement
between the parties hereto with respect to the transactions contemplated herein
and shall not be modified or amended except by an instrument in writing signed
by or on behalf of the parties hereto.
ARTICLE XVI
EXPENSES
34
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Whether or not the transactions contemplated hereby are consummated,
each of the parties hereto shall pay its own expenses incurred in connection
with the authorization, preparation, execution or performance of this Agreement
and all transactions contemplated hereby, including without limitation all fees
and expenses of agents, representatives, counsel and accountants.
ARTICLE XVII
ASSIGNMENT; NO THIRD PARTY RIGHTS
This Agreement shall not be assignable by any party hereto without the
prior written consent of the other party, except that Purchaser may assign any
of its rights under this Agreement to any subsidiary or affiliate of Purchaser.
This Agreement will be binding upon and inure to the benefit of the parties
hereto and their successors and permitted assigns. Nothing expressed or referred
to in this Agreement will give any person or entity other than the parties to
this Agreement any legal or equitable right, remedy or claim under or with
respect to this Agreement.
ARTICLE XVIII
MINNESOTA LAW TO GOVERN
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of Minnesota.
ARTICLE XIX
WAIVER
The rights and remedies of the parties to this Agreement are
cumulative. All waivers by any party of their rights or remedies under this
Agreement must be in writing to be effective. Neither the failure to exercise,
nor any delay in the exercise of, any right or remedy under this Agreement will
operate as a waiver of such right or remedy, and no single or partial exercise
of any right or remedy will preclude any other or further exercise of such right
or remedy.
35
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ARTICLE XX
COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original but all of which together shall constitute one
and the same instrument.
ARTICLE XXI
HEADINGS
The headings in this Agreement are for convenience of reference only
and shall not be deemed to alter or affect any provision thereof. Reference to
numbered "articles," "sections," "paragraphs" and "subparagraphs," and to
lettered "Exhibits" refer to articles, sections, paragraphs and subparagraphs of
this Agreement and Exhibits annexed thereto.
ARTICLE XXII
ACCESS TO BOOKS AND RECORDS
Under the terms of this Agreement, Purchaser is receiving some of the
books and records which relate to Seller's business relating to the Assets,
while Seller is retaining other records. Each party agrees that for a period of
three (3) years from the Closing Date, said party shall preserve any books and
records relating to the Assets and the related business, and that during such
period it will afford to the other party access to all such books and records at
reasonable business hours and upon reasonable notice. After the termination of
said three-year period each party shall be free to dispose of any such records
in such form as it pleases, unless the other party has requested said records.
If the other party has made such a request, the party receiving the request
either shall give to the requesting party the originals or copies of such
records, or may retain such records subject to the requesting party's continuing
right to inspect the same.
ARTICLE XXIII
CHANGE OF NAME
36
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At any time on or after Closing, upon request of Purchaser, Seller
shall change its corporate name to a name that does not bear any similarity to
Seller's present name, and which does not include either of the words "Dia" or
"Screen" or variants thereof.
ARTICLE XXIV
PUBLIC ANNOUNCEMENTS
The parties agree that prior to the Closing Date, any and all public
communications concerning this Agreement and the purchase and sale of the Assets
by Purchaser, and the timing, manner and content of such disclosures, shall be
subject to the mutual agreement of Seller and Purchaser, except that it is
understood that Purchaser, after first advising Seller, shall be permitted to
make such announcements as are required by law or the NASDAQ NMS, or which are
deemed advisable by Purchaser.
ARTICLE XXV
TERMINATION
25.1 TERMINATION EVENTS. This Agreement may, by notice given prior to
or at the Closing, be terminated:
(a) by either Purchaser or Seller if a material breach of any
provision of this Agreement has been committed by the other party and
such breach has not been waived;
(b) (i) by Purchaser if any of the conditions in Article X has
not been satisfied as of the Closing Date or if satisfaction of such a
condition is or becomes impossible (other than through failure of
Purchaser to comply with its obligations under this Agreement) and
Purchaser has not waived such condition on or before the Closing Date;
or (ii) by Seller, if any of the conditions in Article XI has not been
satisfied of the Closing Date or if satisfaction of such a condition is
or becomes impossible (other than through the failure of Seller to
comply with their obligations under this Agreement) and Seller has not
waived such condition on or before the Closing Date;
(c) by mutual consent of Purchaser and Seller; or
37
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(d) by either Purchaser or Seller if the Closing has not
occurred (other than through the failure of any party seeking to
terminate this Agreement to comply fully with its obligations under
this Agreement) on or before March 31, 1998, or such later date as the
parties may agree upon.
25.2 EFFECT OF TERMINATION. Each party's right of termination under
Section 25.1 is in addition to any other rights it may have under this Agreement
or otherwise, and the exercise of a right of termination will not be an election
of remedies. If this Agreement is terminated pursuant to Section 25.1, all
further obligations of the parties under this Agreement will terminate, except
that the obligations in Articles XV and XVI and Section 25.3 will survive;
provided, however, that if this Agreement is terminated by a party because of
the breach of the Agreement by the other party or because one or more of the
conditions to the terminating party's obligations under this Agreement is not
satisfied as a result of the other party's failure to comply with its
obligations under this Agreement, the terminating party's right to pursue all
legal remedies will survive such termination unimpaired.
25.3 CONFIDENTIALITY. If the transactions contemplated by this
Agreement are not consummated for any reason, each party will return to the
other all written materials, and copies of such materials, provided to it by
such other party. In such event, the Confidentiality Agreement of the parties
dated October 15, 1997 shall remain in full force and effect and shall survive
the termination of this Agreement.
ARTICLE XXVI
ARBITRATION
26. ARBITRATION. Any dispute arising out of or relating to this
Agreement or the alleged breach of it, or the making of this Agreement,
including claims of fraud in the inducement, or any dispute arising from the
employment relationship for its termination, including any claim of
discrimination, shall be discussed between the disputing parties in a good faith
effort to arrive at a mutual settlement of any such controversy. If,
notwithstanding, such dispute cannot be resolved, such dispute shall be settled
by binding arbitration. Judgment upon the award rendered by the arbitrator may
be entered in any court having jurisdiction thereof. The arbitrator shall be a
retired state or federal judge or an attorney who has practiced business
litigation for at least 10 years. If the parties cannot agree on an arbitrator
within 20 days, any party may request that the chief judge of the District Court
for Hennepin County, Minnesota, select an arbitrator. Arbitration will be
conducted pursuant to the provisions of this Agreement, and the commercial
arbitration rules of the American Arbitration Association, unless such rules are
inconsistent with the provisions of this Agreement, but without submission of
the dispute to such Association. Limited civil discovery shall be permitted for
the production of documents and taking of depositions. Unresolved discovery
disputes may be brought to the attention of the arbitrator who may dispose of
such
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dispute. Except as provided below with respect to injunctions, the arbitrator
shall have the authority to award any remedy or relief that a court of this
state could order or grant; provided, however, that punitive or exemplary
damages shall not be awarded. The arbitrator may award to the prevailing party,
if any, as determined by the arbitrator, all of its costs and fees, including
the arbitrator's fees. Unless otherwise agreed by the parties, the place of any
arbitration proceedings shall be Hennepin County, Minnesota.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the date first above written.
PURCHASER:
CHRONIMED INC.
BY: /s/ Steven A. Crees
------------------------------------
ITS: Senior Vice President
SELLER:
DIA-SCREEN CORPORATION
BY: /s/ John A. Murray
------------------------------------
ITS: President and Executive Officer
39
EXHIBIT 10.33
EXECUTION COPY
AGREEMENT AND PLAN OF MERGER
by and among
CHRONIMED INC.
as "Purchaser"
RED CIRCLE VENTURES, INC.
as "Newco"
and
CLINICAL PARTNERS, INC.
as "Company"
June 15, 1998
<PAGE>
AGREEMENT AND PLAN OF MERGER
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1. PLAN OF MERGER......................................................................1
1.1 Actions to be Taken..........................................................1
1.2 Common Stock of Surviving Corporation........................................2
1.3 Definitions..................................................................2
1.4 Cancellation or Conversion of Company Stock..................................5
1.5 Cancellation or Conversion of Company Preferred Stock........................7
1.6 Options......................................................................8
1.7 Certain Adjustments..........................................................8
1.8 Other Payments..............................................................10
1.9 Further Assurances..........................................................10
1.10 Agent.......................................................................11
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY......................................11
2.1 Organization and Qualifications of the Company..............................11
2.2 Capital Stock of the Company: Beneficial Ownership.........................11
2.3 Subsidiaries; OCC...........................................................14
2.4 Authority of the Company....................................................15
2.5 Financial Statements and Liabilities........................................16
2.6 Real Estate.................................................................17
2.7 Leased Tangible Personal Property...........................................17
2.8 Assets......................................................................18
2.9 Taxes.......................................................................18
2.10 Collectibility of Accounts Receivable.......................................19
2.11 Absence of Certain Changes..................................................20
2.12 Ordinary Course.............................................................22
2.13 Banking Relations...........................................................22
2.14 Intellectual Property.......................................................22
2.15 Software and Database.......................................................24
2.16 Contracts...................................................................24
2.17 Litigation..................................................................26
2.18 Compliance with Applicable Laws; Environmental Matters......................26
2.19 Insurance...................................................................27
2.20 Powers of Attorney..........................................................27
2.21 Finder's Fee................................................................28
2.22 Burdensome Agreements.......................................................28
2.23 Corporate Records; Copies of Documents......................................28
2.24 Transactions with Interested Persons........................................28
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
2.25 ERISA and Employment Matters................................................28
2.26 List of Directors and Officers..............................................30
2.27 Employees; Labor Matters....................................................31
2.28 Transfer of Shares..........................................................31
2.29 Stock Repurchase............................................................31
2.30 Industrial Revenue Bonds....................................................31
2.31 Services and Warranties.....................................................31
2.32 Authority Relative to Agreements; Enforceability; Company
Shareholder Agreement.......................................................32
2.33 Disclosure..................................................................32
SECTION 3. COVENANTS OF THE COMPANY..........................................................32
3.1 Making of Covenants and Agreements..........................................32
3.2 Conduct of Business.........................................................32
3.3 Authorization from Others...................................................34
3.4 Notice of Default...........................................................34
3.5 Consummation of Agreement...................................................34
3.6 Cooperation of the Company..................................................35
3.7 No Negotiations; Notification of Takeover Proposal and Other Matters........35
3.8 Confidentiality; No Trading.................................................35
3.9 Escrow Agreement............................................................36
3.10 Access to Records and Properties............................................36
3.11 Note........................................................................36
3.12 Shareholder Meeting; Alternative; Notices...................................36
3.13 Notification Regarding Dissenters' Shares...................................37
SECTION 4. REPRESENTATIONS AND WARRANTIES OF PURCHASER
AND NEWCO.........................................................................37
4.1 Organization of Purchaser...................................................37
4.2 Authority of Purchaser......................................................37
4.3 Litigation..................................................................38
4.4 Finder's Fee................................................................38
4.5 Company Representations.....................................................38
SECTION 5. COVENANTS OF PURCHASER............................................................38
5.1 Making of Covenants and Agreement...........................................38
5.2 Cooperation of Purchaser....................................................38
5.3 Confidentiality.............................................................38
5.4 Escrow Agreement............................................................39
5.5 Employment Agreements.......................................................39
5.6 Authorization from Others...................................................39
5.7 Notice of Default...........................................................39
5.8 Consummation of Agreement...................................................39
SECTION 6. CONDITIONS........................................................................39
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C>
6.1 Conditions to the Obligations of Purchaser..................................39
6.2 Conditions to Obligations of the Stockholders...............................42
SECTION 7. CLOSING; CLOSING DATE.............................................................42
SECTION 8. TERMINATION.......................................................................43
8.1 Termination and Abandonment.................................................43
8.2 Termination Procedures......................................................43
8.3 Liability Upon Termination..................................................44
8.4 Effect of Termination.......................................................44
8.5 Right to Proceed............................................................44
8.6 Waiver......................................................................44
SECTION 9. INDEMNIFICATION...................................................................45
9.1 Survival of Warranties......................................................45
9.2 Indemnification by the Company and Through Escrow...........................45
9.3 Procedure for Claims........................................................46
9.4 Limitation on Indemnification...............................................46
9.5 Indemnification by Purchaser................................................46
9.6 Procedure for Claims........................................................47
9.7 Limitation on Indemnification...............................................47
9.8 Notice; Defense of Claims...................................................47
9.9 Exclusive Remedy............................................................49
9.10 Determination of Amount of Claim............................................49
SECTION 10. MISCELLANEOUS....................................................................49
10.1 Fees and Expenses...........................................................49
10.2 Governing Law...............................................................49
10.3 Notices.....................................................................49
10.4 Entire Agreement............................................................50
10.5 Assignability; Binding Effect...............................................50
10.6 Captions and Gender.........................................................51
10.7 Execution in Counterparts...................................................51
10.8 Amendments..................................................................51
10.9 Publicity and Disclosures...................................................51
10.10 No Third Party Rights.......................................................51
10.11 Consent to Jurisdiction.....................................................52
10.12 Schedules and Exhibits......................................................52
10.13 Arbitration.................................................................52
10.14 Section 338 Election........................................................53
10.15 No Amendment to Limit Indemnification.......................................53
</TABLE>
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<PAGE>
EXECUTION COPY
AGREEMENT AND PLAN OF MERGER
AGREEMENT, (hereinafter, together with the Exhibits annexed hereto the
"Agreement") made and entered into as of the 15th day of June, 1998, by and
among CHRONIMED INC., a Minnesota corporation ("Purchaser"), Red Circle
Ventures, Inc., a Delaware corporation and a wholly-owned subsidiary of
Purchaser ("Newco"), and CLINICAL PARTNERS, INC., a Delaware corporation, (the
"Company").
RECITALS
The Boards of Directors of Purchaser and Newco and the Board of
Directors of the Company, deeming it advisable for the mutual benefit of
Purchaser, Newco and the Company and their respective stockholders that
Purchaser acquire the Company by the merger of the Company and Newco under the
terms and conditions hereinafter set forth (the "Merger"), have approved this
Agreement and Plan of Merger (the "Agreement").
NOW, THEREFORE, in consideration of mutual covenants, agreements,
representations and warranties herein contained, the parties hereby agree that
the Company and Newco shall be merged and that the terms and conditions of the
Merger and the mode of carrying the same into effect shall be as follows:
SECTION 1. PLAN OF MERGER.
1.1 Actions to be Taken. Upon performance of all of the covenants and
obligations of the parties contained herein and upon fulfillment (or waiver) of
all of the conditions to the obligations of the parties contained herein, at the
Effective Time of the Merger (as hereinafter defined) and pursuant to the
General Corporation Law of the State of Delaware (the "GCL"), the following
shall occur:
(a) Newco shall be merged with and into the Company, which
shall be the surviving corporation (the "Surviving Corporation"). The separate
existence and corporate organization of Newco shall cease at the Effective Time
of the Merger, and thereupon the Company and Newco shall be a single
corporation, the name of which shall be Clinical Partners, Inc. The Company, as
the Surviving Corporation, shall succeed, insofar as permitted by law, to all of
the rights, assets, liabilities and obligations of Newco in accordance with the
GCL.
(b) The Certificate of Incorporation of the Company shall be
and remain the certificate of incorporation of the Surviving Corporation until
amended as provided by law.
(c) The By-Laws of the Company shall be and remain the by-laws
of the Surviving Corporation until amended as provided by law.
<PAGE>
(d) Until changed in accordance with the articles of
incorporation and by-laws of the Surviving Corporation, Maurice R. Taylor, II,
Henry F. Blissenbach, and Norman A. Cocke shall be the directors of the
Surviving Corporation.
(e) Until changed in accordance with the articles of
incorporation and by-laws of the Surviving Corporation, the following persons
shall be the officers of the Surviving Corporation:
Name Office
---- ------
Maurice R. Taylor, II Chairman
Henry F. Blissenbach President
Richard Daly Vice President
Vice President, Chief Financial Officer
Norman A. Cocke and Secretary
Kenneth S. Guenthner Assistant Secretary
(f) As soon as practicable after the terms and conditions of
this Agreement have been satisfied, and upon consummation of the closing
referred to in Article VII hereof (the "Closing"), articles of merger consistent
with this Agreement in the form prescribed by, and properly executed in
accordance with the GCL, in form and substance satisfactory to the parties
hereto and providing for immediate effectiveness of the Merger (the "Articles of
Merger"), shall be filed with the Secretary of State of the State of Delaware.
The Merger shall become effective on the date and at the time on which the
Articles of Merger are properly filed with such Secretary of State pursuant to
the GCL. As used in this Agreement, the "Effective Time of the Merger" shall
mean such date and time.
1.2 Common Stock of Surviving Corporation. Following the Effective Time
of the Merger, each of the issued and outstanding shares of common stock of
Newco shall, by virtue of the Merger and without any action on the part of
Purchaser be converted into outstanding shares of common stock of the Surviving
Corporation. Each share shall be fully paid and non-assessable.
1.3 Definitions. For purposes of this Agreement, the following terms
shall have the following meanings:
(a) The term "Company Common Stock" shall mean the Company's
common stock of $.01 par value per share.
(b) The term "Company Preferred Stock" shall mean all of the
Company's Preferred Stock of $.01 par value per share, which has been issued in
five series, designated A through E.
(c) The term "Common Stockholder" shall mean a holder of the
Company Common Stock.
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<PAGE>
(d) The term "Preferred Stockholder" shall mean a holder of
the Company Preferred Stock.
(e) The term "Stockholder" shall mean either a Common
Stockholder a Preferred Stockholder and the term Stockholders shall refer to all
of the holders of stock of the Company.
(f) The term "Number of Outstanding Common Shares" shall be
the number of issued and outstanding shares of the Company Common Stock at the
Effective Time of the Merger, (determined after giving effect to actions
specified in the Shareholder Agreement between the Company and certain of its
shareholders dated of even date herewith and entered into in connection with
this Agreement (the "Company Shareholder Agreement")).
(g) The term "Number of Outstanding Preferred Shares" shall be
the number of issued and outstanding shares of the Company Preferred Stock at
the Effective Time of the Merger, (determined after giving effect to actions
specified in the Company Shareholder Agreement).
(h) The term "Preference Share" shall, for each outstanding
share of Company Preferred Stock, be the number, expressed as a decimal,
obtained by dividing the Preference Per Share for such share of Company
Preferred Stock by the Preference Amount.
(i) The term "Residual Share" shall, for each outstanding
share of Company Common Stock, be the number, expressed as a decimal, obtained
by dividing one (1) by the Number of Outstanding Common-Equivalent Shares, and
for each outstanding share of Company Preferred Stock, be the number, expressed
as a decimal, obtained by dividing the number of shares of Company Common Stock
into which such share of Company Preferred Stock is convertible at the Effective
Time of the Merger under the terms of the Company's Restated Certificate of
Incorporation by the Number of Outstanding Common-Equivalent Shares.
(j) The term "Payment Per Common Share" shall, for each
outstanding share of Company Common Stock, be equal to the Residual Share for
such share of Company Common Stock multiplied by the Residual Amount.
(k) The term "Payment Per Preferred Share" shall, for each
outstanding share of Company Preferred Stock, be equal to the sum of (i) the
Preference Share for such share of Company Preferred Stock multiplied by the
Preference Amount, plus (ii) the Residual Share for such share of Company
Preferred Stock multiplied by the Residual Amount.
(l) The term "Escrow Share" shall, for each outstanding
share of Company Common Stock, be the number, expressed as a decimal, obtained
by dividing the Payment Per Common Share for such share of Company Common Stock
by the amount of the Total Payment, and for each outstanding share of Company
Preferred Stock, be the number, expressed as a decimal, obtained by dividing the
Payment Per Preferred Share for such share of Company Preferred Stock by the
amount of the Total Payment.
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(m) The term "Escrow Amount Per Common Share" shall, for each
outstanding share of Company Common Stock, be equal to the amount of the Escrow
Payment multiplied by a fraction, the numerator of which is the Payment Per
Common Share for such share of Company Common Stock, and the denominator of
which is the amount of the Total Payment.
(n) The term "Escrow Amount Per Preferred Share" shall, for
each outstanding share of Company Preferred Stock, be equal to the amount of the
Escrow Payment multiplied by a fraction, the numerator of which is the Payment
Per Preferred Share for such share of Company Preferred Stock, and the
denominator of which is the amount of the Total Payment.
(o) The term "Total Payment" means the sum of the Closing
Payment plus the Escrow Payment.
(p) The term "Closing Payment" shall mean $5,300,000, as such
amount is reduced pursuant to Section 1.7, which amount (as thus reduced) will
be paid by Purchaser at Closing for distribution to the holders of outstanding
shares of Company Common Stock and Company Preferred Stock.
(q) The term "Preference Amount" shall mean the sum of (i) the
number of issued and outstanding shares of Series A Preferred Stock at the
Effective Time of the Merger (determined after giving effect to the actions
specified in the Company Shareholder Agreement) multiplied by $.82, plus (ii)
the number of issued and outstanding shares of Series B Preferred Stock at the
Effective Time of Merger (determined after giving effect to the actions
specified in the Company Shareholder Agreement) multiplied by $1.54, plus (iii)
the number of issued and outstanding shares of Series C Preferred Stock at the
Effective Time of the Merger (determined after giving effect to the actions
specified in the Company Shareholder Agreement) multiplied by $2.03, plus (iv)
the number of issued and outstanding shares of Series D Preferred Stock at the
Effective Time of the Merger (determined after giving effect to the actions
specified in the Company Shareholder Agreement) multiplied by $1.65, plus (v)
the number of issued and outstanding shares of Series E Preferred Stock at the
Effective Time of the Merger (determined after giving effect to the actions
specified in the Company Shareholder Agreement) multiplied by $3.33; provided
that the Preference Amount shall not exceed the Total Payment.
(r) The term "Residual Amount" shall mean the amount by which
the Total Payment exceeds the Preference Amount.
(s) The term "Number of Outstanding Common-Equivalent Shares"
shall be the sum of (i) the Number of Outstanding Common Shares, plus (ii) the
aggregate number of shares of Company Common Stock into which the Company
Preferred Stock issued and outstanding at the Effective Time of the Merger
(determined after giving effect to the actions specified in the Company
Shareholder Agreement) is convertible at the Effective Time of the Merger under
the terms of the Company's Restated Certificate of Incorporation.
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(t) The term "Escrow Payment" shall mean $700,000, which is
the amount which will be paid by Purchaser at Closing to Harris Trust and
Savings Bank of Chicago (the "Escrow Agent") to be held in an escrow account
(the "Escrow Fund") in accordance with the terms of the Escrow Agreement (the
"Escrow Agreement") to be entered into between Purchaser, the Agent and the
Escrow Agent in substantially the form attached hereto as Schedule 1.3(t) with
such changes therein as may be requested by Escrow Agent and agreed to by
Purchaser and the Company.
(u) The term "Escrow Distributions" shall mean payments, if
and to the extent made, which are made out of the Escrow Fund for distribution
to the former Stockholders of the Company; provided, however, that if any
Dissenting Common Shares or any Dissenting Preferred Shares receive payments
pursuant to the Appraisal Laws, as defined below, Purchaser shall be entitled to
receive that portion of the distributions from the Escrow Fund which such Shares
would have received had they not become Dissenting Common Shares or Dissenting
Preferred Shares.
(v) The term "Preference Per Share" shall mean $.82 in the
case of shares of the Company's Series A Preferred Stock, $1.54 in the case of
shares of the Company's Series B Preferred Stock, $2.03 in the case of shares of
the Company's Series C Preferred Stock, $1.65 in the case of shares of the
Company's Series D Preferred Stock, and $3.33 in the case of shares of the
Company's Series E Preferred Stock.
(w) The term "Agent" shall mean Sierra Ventures Management
Company, Inc., the entity which the Shareholders have appointed to act as their
Agent in connection with this Agreement and the Escrow Agreement pursuant to
Section 1.10 hereof.
1.4 Cancellation or Conversion of Company Common Stock. As of the
Effective Time of the Merger, by virtue of the Merger and without any action on
the part of any shareholder of the Company:
(a) Treasury Shares. Any share of the Company Common Stock
held in the treasury of the Company, shall be canceled and retired. No cash,
securities or other consideration shall be paid or delivered in exchange for
such Company Common Stock under this Agreement.
(b) Conversion. Except as provided herein with respect to
Dissenting Shares (as hereinafter defined) and shares canceled pursuant to
Section 1.4(a) hereof, at the Effective Time of the Merger, each share of
Company Common Stock which is issued and outstanding shall be converted into the
right to receive cash payments as follows:
(i) An amount equal to the remainder of (x) the
Payment Per Common Share for such share of Company Common Stock, minus
(y) the Escrow Amount Per Common Share for such share of Company Common
Stock. This amount will be paid upon surrender of stock certificates,
as provided in Section 1.4(c) below. In the case of stock certificates
surrendered at the Closing, payment shall be made at the Effective Time
of the Merger, and in the case of stock
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certificates surrendered after the Closing, payment shall be made
within three (3) business days after receipt of the stock certificates.
(ii) From each Escrow Distribution, if any, which is
made, an amount equal to the Escrow Share for such share of Company
Common Stock multiplied by the Escrow Distribution, with payment to be
subject to the requirements of Section 1.4(c).
(Hereinafter the foregoing cash payments are sometimes collectively
referred to as the "Common Cash Conversion Amounts".)
(c) Surrender of Certificates. After the Effective Time of the
Merger, each holder of an outstanding certificate or certificates theretofore
representing shares of Company Common Stock converted pursuant to Section 1.4(b)
hereof ("Company Common Stock Certificates"), upon surrender thereof to
Purchaser as provided herein, shall be entitled to receive in exchange therefor
the amounts provided in Section 1.4(b), without interest.
Until so surrendered, each outstanding Company Common Stock
Certificate shall be deemed for all purposes to represent the Cash Conversion
Amounts for the shares represented by the Certificate.
To surrender a certificate, a holder must deliver the
certificate (or an Affidavit and Indemnity with respect to Lost, Stolen or
Destroyed Stock Certificates in the form attached as Schedule 1.4(c)-1) to the
Escrow Agent, who will receive certain of the payments made by Purchaser at
Closing and then distribute such payments to the Stockholders as otherwise
specified herein (in such capacity, the Escrow Agent is referred to as the
"Paying Agent" herein), and with any certificate must deliver a transfer letter
in the form attached as Schedule 1.4(c)-2 under which such holder will warrant
good and marketable title thereto, free and clear of all claims, liens, security
interests, restrictions and encumbrances. Upon such surrender and exchange of
such Company Common Stock Certificates there shall be paid to the record holders
thereof the Common Cash Conversion Amount for the shares of Company Common
Stock, except that the amounts of any Escrow Distribution shall be paid when and
if to the extent that Escrow Distributions are made.
Whether or not a Company Common Stock Certificate is
surrendered, from and after the Effective Time of the Merger, such Certificate
shall under no circumstances evidence, represent or otherwise constitute any
stock or other interest whatsoever in the Company, the Surviving Corporation or
any other person, firm or corporation.
(d) Dissenters. The shares of Company Common Stock held by
those shareholders of the Company who have timely and properly exercised their
dissenters' rights in accordance with the provisions of the GCL applicable to
dissenters' rights (the "Appraisal Laws") within the applicable time period are
referred to herein as "Dissenting Common Shares". Each Dissenting Common Share
shall not be converted into or represent a right to receive the Cash Conversion
Amounts in the Merger, but the holder thereof shall be entitled only to such
rights as are granted by the Appraisal Laws. Each holder of Dissenting Common
Shares who
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becomes entitled to payment for his Company Common Stock pursuant to the
provisions of the Appraisal Laws shall receive payment therefor from the
Surviving Corporation from funds provided by Purchaser (but only after the
amount thereof shall have been agreed upon or finally determined pursuant to
such provisions). If any holder of Dissenting Common Shares shall effectively
withdraw or lose his dissenters' rights under the Appraisal Laws, such
Dissenting Common Shares shall be converted into the right to receive the Common
Cash Conversion Amounts in accordance with the provisions hereof.
1.5 Cancellation or Conversion of Company Preferred Stock. As of the
Effective Time of the Merger, by virtue of the Merger and without any action on
the part of any shareholder:
(a) Treasury Shares. Any shares of the Company Preferred Stock
held in the treasury of the Company, shall be canceled and retired. No cash,
securities, or other consideration shall be paid or delivered in exchange for
such Company Preferred Stock under this Agreement.
(b) Conversion. Except as provided herein with respect to
Dissenting Preferred Shares (as hereinafter defined) and shares canceled
pursuant to Section 1.5(a) hereof, at the Effective Time of the Merger, each
share of Company Preferred Stock which is issued and outstanding shall be
converted into the right to receive cash payments as follows:
(i) An amount equal to the remainder of (x) the
Payment Per Preferred Share for such share of Company Preferred Stock,
minus (y) the Escrow Amount Per Preferred Share for such share of
Company Preferred Stock. This amount will be paid upon surrender of
stock certificates as provided in Section 1.5(c) below. In the case of
stock certificates surrendered at the Closing, payment shall be made at
the Effective Time of the Merger, and in the case of stock certificates
surrendered after the Closing, payment shall be made within three (3)
business days after receipt of the stock certificates.
(ii) From each Escrow Distribution, if any, which is
made, an amount equal to the Escrow Share for such share of Company
Preferred Stock multiplied by the Escrow Distribution, with payment to
be subject to the requirements of Section 1.5(c).
(Hereinafter the foregoing cash payments are sometimes collectively
referred to as the "Preferred Cash Conversion Amounts".)
(c) Surrender of Shares. After the Effective Time of the
Merger, each holder of an outstanding certificate or certificates theretofore
representing shares of Company Preferred Stock ("Preferred Stock Certificates"),
upon surrender thereof to Purchaser, shall be entitled to receive in exchange
therefor the Preferred Cash Conversion Amounts.
Until so surrendered, each outstanding Preferred Stock
Certificate shall be deemed for all purposes to represent the Preferred Cash
Conversion Amounts for the shares represented by the certificate.
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To surrender a certificate, holder must deliver the
certificate (or an Affidavit and Indemnity with respect to Lost, Stolen or
Destroyed Stock Certificates in the form attached as Schedule 1.4(c)-1) to
Paying Agent, and with any certificate must deliver a transfer letter in the
form attached as Schedule 1.4(c)-2 under which such holder will warrant good and
marketable title thereto, free and clear of all claims, liens, security
interests, restrictions and encumbrances, with such signature guarantees and
such other documents as may be reasonably required by Purchaser. Upon such
surrender and exchange of such Company Preferred Stock Certificates, there shall
be paid to the recordholders thereof the Preferred Cash Conversion Amounts for
the Shares of Company Preferred Stock, except that the amounts of any Escrow
Distribution shall be paid when, if and to the extent that the Escrow
Distributions are made.
Whether or not a Preferred Stock Certificate is surrendered,
from and after the Effective Time of the Merger such Certificate shall under no
circumstances evidence, represent or otherwise constitute any stock or other
interest whatsoever in the Company, the Surviving Corporation or any other
person, firm or corporation.
(d) Dissenters. The shares of Company Preferred Stock held by
those shareholders of the Company who have timely and properly exercised their
dissenters' rights in accordance with the Appraisal Laws within the applicable
time period are referred to herein as "Dissenting Preferred Shares". Each
Dissenting Preferred Share shall not be converted into or represent a right to
receive the Preferred Cash Conversion Amounts in the Merger, but the holder
thereof shall be entitled only to such rights as are granted by the Appraisal
Laws. Each holder of Dissenting Preferred Shares who becomes entitled to payment
for his Company Preferred Stock pursuant to the provisions of the Appraisal Laws
shall receive payment therefor from the Surviving Corporation from funds
provided by Purchaser (but only after the amount thereof shall have been agreed
upon or finally determined pursuant to such provisions). If any holder of
Dissenting Preferred Shares shall effectively withdraw or lose his dissenters'
rights under the Appraisal Laws, such Dissenting Preferred Shares shall be
converted into the right to receive the Preferred Cash Conversion Amount in
accordance with the provisions hereof.
1.6 Options. Prior to the Effective Time of the Merger, all options,
warrants, or other rights to purchase or acquire shares of Company Common Stock
or shares of Company Preferred Stock (hereinafter collectively "Options") which
are outstanding and unexercised shall be canceled at no cost or expense to the
Company and without issuing any shares therefor, so that at the Effective Time
of the Merger there shall be no outstanding and unexercised outstanding Options
with respect to either Company Common Stock or Company Preferred Stock.
1.7 Certain Adjustments. The $5,300,000 referred to in Section 1.3(p)
is subject to reduction in accordance with the following provisions, to arrive
at the amount of the Closing Payment:
(a) Payoff of Investor Loans. The Company is presently
indebted to Sierra Ventures III, Schroders Incorporated, Schroder Ventures
Limited Partnership, Schroder Ventures US Trust, Innovent Capital Limited
Partnership, Rovent Limited Partnership, and Advent
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International Investors Limited Partnership in the aggregate principal amount of
$848,155.27 plus accrued interest in the amount of $123,457.73 (the "Investor
Loans").
The holders of the Investor Loans have agreed that said Loans
can be repaid in full by the payment of $971,613 by Purchaser at the Effective
Time of Merger. At the Effective Time of Merger, Purchaser shall pay said amount
in full satisfaction of the Investor Loans. The amount of such payment shall
reduce, dollar-for-dollar, the $5,300,000.
(b) Adjustments for Debt. The $5,300,000 shall be reduced at
the Closing if the Company or any of the Three Subsidiaries have any outstanding
indebtedness, including accrued interest and any prepayment penalties, (but
excluding any intercompany indebtedness among the Company and the Three
Subsidiaries and excluding the Investor Loans) for borrowed money on the Closing
Date (the "Closing Debt"); provided, however, that indebtedness, if any, to
Silicon Valley Bank in an amount up to $300,000, including accrued interest,
shall not be counted for these purposes. If any Closing Debt exists as of the
Closing Date, such amount shall reduce, dollar-for-dollar, the $5,300,000.
(i) Immediately after the close of business on the
business day immediately preceding the Closing Date, Purchaser and the
Company shall prepare a statement setting forth the Company's estimated
Closing Debt, determined in accordance with generally accepted
accounting principles consistently applied.
(ii) No later than 30 days following the Closing,
Purchaser shall prepare and deliver to the Agent a statement setting
forth the Company's actual Closing Debt (the "Final Adjustment
Statement"). Subject to (c) below, within 10 days following the
delivery of such Final Adjustment Statement to the Agent, the Purchaser
shall pay the amount, if any, by which the actual Closing Debt was less
than the estimated Closing Debt, or the Purchaser shall be paid from
the Escrow Fund the amount, if any, by which the actual Closing Debt
was greater than the estimated Closing Debt. Where an additional
payment is due from the Purchaser, the payment shall be made to the
Common Stockholders and Preferred Stockholders (other than dissenting
Stockholder) on a proportionate basis.
(iii) In the event the Agent objects to the final
determination of Closing Debt, it shall notify Purchaser in writing of
such objection within the 10 day period following the delivery thereof,
stating in such written objection the reasons therefor and setting
forth the Agent's calculation of the Company's actual Closing Debt.
Upon receipt by Purchaser of such written objection, the parties shall
attempt to resolve the disagreement through negotiation. If Purchaser
and the Agent cannot resolve such disagreement within 30 days following
the end of the foregoing 10 day period, the parties shall submit the
matter for resolution to a nationally recognized firm of independent
certified public accountants not affiliated with either party, with the
costs thereof to be shared equally by the parties. Such accounting firm
shall deliver a statement setting forth its own calculation of the
Closing Debt, to the parties within 30 days of the submission of the
matter to such firm. Any payment shown to be due by a party on the
statement of
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such accounting firm shall be paid to the other party promptly but in
no event later than five days following the delivery of such statement
to the parties, with any payment due to Purchaser to be paid from the
Escrow Fund.
(c) Adjustment for Expenses. At the Effective Time of Merger,
all accounting, legal, investment banking and other professional fees and
expenses of the Company arising in connection with the negotiation and
consummation of this Agreement and the transactions contemplated hereby (the
"Company Expenses") which have not previously been paid by the Company shall be
paid by Purchaser so that all such Expenses shall be satisfied in full. The
amount shall include, but not be limited to all amounts due to agents or
representatives of the Company, including but not limited to its attorneys and
accountants and to Paine, Webber.
The amount of such Company Expenses paid at Closing, plus the
amount of any such Expenses which have been paid by the Company prior to
Closing, shall reduce dollar-for-dollar, the $5,300,000. The Company represents
and warrants that prior to Closing it will provide (i) a statement setting forth
the total of Company Expenses which have been paid by the Company prior to
Closing, (ii) a statement of all Company Expenses to be paid at Closing,
together with the invoices from the professionals charging such Expenses, and
confirmations from such professionals that payment of said invoices will fully
satisfy all obligations of the Company to them for Expenses. The Company further
represents and warrants that once the Company Expenses shown as due at Closing
on the statement are paid, no other Company Expenses will at any time be due and
payable from the Company.
(d) Adjustment for Dissenters. If any Stockholders exercise
their rights under the Appraisal Laws then there shall be withheld from the
Closing Payment, as appropriate, the amounts which such dissenting Stockholders
would have received therefrom, and Purchaser shall retain said amounts.
Consistent with the foregoing, to the extent there are any
Escrow Distributions, the amounts which would otherwise have been paid to such
dissenting Stockholders had they not exercised their rights under the Appraisal
Laws, shall be paid to Purchaser.
1.8 Other Payments. At the Effective Time of Merger, Purchase shall pay
$700,000 to the Escrow Agent pursuant to the Escrow Agreement, and shall pay the
Closing Payment to the Paying Agent. In addition, at the Effective Time of the
Merger, the Purchaser shall repay the Company's indebtedness to Silicon Valley
Bank in an amount not to exceed $300,000.
1.9 Further Assurances. From time to time, on and after the Effective
Time of the Merger, as and when requested by Purchaser or its successors or
assigns, the proper officers and directors of the Company immediately before the
Effective Time of the Merger, the officers and directors of the Surviving
Corporation at the time of the request, or other proper officers or directors,
shall, at Purchaser's expense, and for and on behalf and in the name of the
Company, or otherwise, execute and deliver all such deeds, bills of sale,
assignments and other instruments and shall take or cause to be taken such
further or other reasonable actions as Purchaser or their respective successors
or assigns may deem necessary or desirable in order to confirm or record or
otherwise transfer to the Surviving Corporation title to and possession of all
the properties,
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rights, privileges, powers, franchises and immunities of the Company and
otherwise to carry out fully the provisions and purposes of this Agreement.
1.10 Agent. Sierra Ventures Management Company, Inc. is hereby
designated as the Agent ("Agent") of the Stockholders to, from and after the
Effective Time of Merger represent, act for and on behalf of the Stockholders on
all matters arising under or relating to this Agreement or the Escrow Agreement.
In this connection, the Agent is hereby authorized to enter into agreements,
execute waivers, grant consents, enter into settlements and take all other
actions to represent the interests of the Stockholders under and in connection
with this Agreement and the Escrow Agreement. All such actions of the Agent
shall be binding upon and enforceable against the Stockholders and shall be
binding and enforceable under the Escrow Agreement.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
As used herein, the "Disclosure Letter" shall mean the Disclosure
Letter delivered by the Company to Purchaser. The Disclosure Letter shall
specifically refer to the warranty or warranties to which exceptions or matters
disclosed therein relate. To avoid repetitive listings, where exceptions or
matters are required to be listed by more than one section thereunder, they can
be listed in subsequent sections by cross-reference. In addition, if the
Disclosure Letter sets forth an exception with respect to a particular
representation or warranty, said exception shall be considered to be taken even
if the language of the Agreement itself does not contain the language "except as
set forth in the Disclosure Letter" or similar language.
Except for exceptions set forth in the Disclosure Letter, the Company
hereby makes to Purchaser the representations and warranties contained in this
Section 2 as of the date hereof and, except only as otherwise specifically
provided herein, as of the Closing Date as if made and agreed on said Date.
The representations and warranties are as follows:
2.1 Organization and Qualifications of the Company. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware with full corporate power and authority to own or lease
its properties and to conduct its business in the manner and in the places where
such properties are owned or leased or such business is currently conducted or
proposed to be conducted. The copies of the Company's Certificate of
Incorporation as amended to date, certified by the Delaware Secretary of State,
and of the Company's by-laws, as amended to date, certified by the Company's
Secretary, and heretofore delivered to Purchaser's counsel, are complete and
correct, and no amendments thereto are pending. The Company is not in violation
of any term of its Certificate of Incorporation or by-laws. The Company is duly
qualified to do business as a foreign corporation in California and Texas and it
is not required to be licensed or qualified to conduct its business or own its
property in any other jurisdiction.
2.2 Capital Stock of the Company: Beneficial Ownership.
(a) The authorized capital stock of the Company consists of:
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(i) 10,000,000 shares of Common Stock, par value $.01
per share, of which, as of the date hereof, 826,430 shares are duly and
validly issued, outstanding, fully paid and non-assessable and
9,173,570 shares are authorized but unissued; and
(ii) 4,552,046 shares of Preferred Stock, par value
$.01 per share, of which, as of the date hereof, 4,263,864 shares are
duly and validly issued, outstanding, fully paid and non-assessable and
288,182 shares are authorized but unissued.
Said shares of the Preferred Stock have been designated as
five different series as follows:
(i) 1,048,183 shares have been designated Series A
Preferred Stock, all of which are issued and outstanding; (ii) 555,194
shares have been designated Series B Preferred Stock, all of which are
issued and outstanding;
(iii) 1,039,400 shares have been designated Series C
Preferred Stock, all of which are issued and outstanding;
(iv) 1,729,088 shares have been designated Series D
Preferred Stock, 1,440,906 of which are issued and outstanding and
288,182 of which are authorized and unissued (144,091 of which were
subject to certain warrants which expired prior to the date hereof);
and
(v) 180,181 shares have been designated Series E
Preferred Stock, all of which are issued and outstanding.
The rights, privileges and preferences of the Preferred Stock are as stated in
the Company's Restated Certificate of Incorporation.
(b) After giving effect to the Company Shareholder Agreement,
at the Effective Time of the Merger the authorized capital stock of the Company
will consist of:
(i) 10,000,000 shares of Common Stock, par value $.01
per share, of which, at such time, 2,952,754 shares will be duly and
validly issued, outstanding, fully paid and non-assessable and
7,047,246 shares will be authorized but unissued; and
(ii) 4,552,045 shares of Preferred Stock, par value
$.01 per share, of which, at such time, 2,168,230 shares will be duly
and validly issued, outstanding, fully paid and non-assessable,
2,095,634 shares will have been converted into shares of Common Stock
and 288,182 shares will be authorized but unissued.
Said shares of the Preferred Stock have been designated as
five different series as follows:
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(i) 1,048,183 shares have been designated Series A
Preferred Stock, 535,056 of which will be issued and outstanding and
513,127 of which will have been converted into shares of Common Stock;
(ii) 555,194 shares have been designated Series B
Preferred Stock, 281,971 of which will be issued and outstanding and
273,223 of which will have been converted into shares of Common Stock;
(iii) 1,039,400 shares have been designated Series C
Preferred Stock, 527,889 of which will be issued and outstanding, and
511,511 of which will be converted into shares of Common Stock;
(iv) 1,729,088 shares have been designated Series D
Preferred Stock, 731,805 of which will be issued and outstanding,
709,101 of which will be converted into shares of Common Stock and
282,182 of which are authorized and unissued (144,091 of which were
subject to certain warrants which expired prior to the date hereof);
and
(v) 180,181 shares have been designated Series E
Preferred Stock, 91,509 of which will be issued and outstanding, and
88,672 of which will be converted into shares of Common Stock.
(c) On the Closing Date there will be no outstanding options,
warrants, rights, commitments, preemptive rights or agreements of any kind for
the issuance or sale of, or outstanding securities convertible into, any
additional shares of capital stock of any class of the Company. There now are no
outstanding options, warrants, rights, commitments, preemptive rights or
agreements of any kind for the issuance or sale of, or outstanding securities
convertible into, any additional shares of capital stock of any class of the
Company, except for the following (the "Outstanding Options"):
(i) the conversion privileges of the Preferred Stock;
(ii) the rights to purchase securities provided in
Section 8.4 of the Stock Purchase Agreement dated January 15, 1991
between the Company and certain investors, as amended as of August 2,
1991, and as further amended by Section 8 of the Purchase Agreement
between the Company and certain investors dated August 3, 1993;
(iii) options to purchase an aggregate of 925,750
shares of the Common Stock granted under the Company's 1989 Stock
Option Plan, as amended; and
(iv) warrants to purchase an aggregate of 86,334
shares of Common Stock held by the holders of shares of Series E
Preferred Stock, and warrants to purchase an aggregate of 37,018 shares
of Common Stock held by Silicon Valley Bank.
(d) None of the Company's capital stock has been issued in
violation of any federal or state law. Except as set forth in the Disclosure
Letter, there are no voting trusts, voting agreements, proxies or other
agreements, instruments or undertakings with respect to the voting
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of the Company Shares to which the Company or, to the best of the Company's
knowledge, any of the Stockholders is a party.
(e) The Stockholders listed on Schedule 1 attached hereto
together own all of the issued and outstanding shares of preferred stock of the
Company (each, a "Preferred Stockholder", and, collectively, the "Preferred
Stockholders"). The Stockholders listed on Schedule 2 attached hereto together
own all of the issued and outstanding shares of common stock of the Company
(each, a "Common Stockholder", and, collectively, the "Common Stockholders"; the
Preferred Stockholders and the Common Stockholders are sometimes collectively
referred to herein as the "Stockholders" and individually as a "Stockholder").
Because of the number of shares that they and their affiliates own, certain
Stockholders are designated as "Principal Stockholders" under this Agreement,
while those Stockholders who are not Principal Stockholders are sometimes
referred to as "Other Stockholders". Those Stockholders who are Principal
Stockholders are designated on Schedules 1 and 2. Except as set forth in the
Disclosure Letter, each of the Stockholders owns of record the Company Shares
set forth opposite such Stockholder's name on Schedules 1 and 2.
2.3 Subsidiaries; OCC. Except for the three subsidiaries referenced
below (the "Three Subsidiaries"), the Company does not have any subsidiaries.
Except for the shares of stock in the Three Subsidiaries, the Company does not
own any securities issued by any other business organization or governmental
authority, except United States, state, and municipal government securities,
bank certificates of deposit, or money market accounts acquired as investments
in the ordinary course of its business, and the Company does not own or have any
direct or indirect ownership interest in or control over any other corporation,
partnership, joint venture, or entity of any kind.
The Three Subsidiaries are listed below, together with a description of
the authorized and, in the case of ViraTrac, Inc., outstanding stock of each
Subsidiary. For each of the Three Subsidiaries, all of the issued and
outstanding shares of Stock of such Subsidiary are owned by the Company, and
there are no outstanding options, warrants, rights, commitments, preemptive
rights or agreements of any kind for the issuance or sale of, or outstanding
securities convertible into, any additional shares of Stock of any class of any
such Subsidiary. The Three Subsidiaries are:
(a) ViraTrac, Inc., whose authorized capital stock consists of
2,000,000 shares of common stock, par value $.01 per share, of which, as of the
date hereof, 12,000 shares are duly and validly issued, outstanding, fully paid
and non-assessable.
(b) Clinical Services, Inc., whose authorized capital stock
consists of 1,000 shares of common stock, par value $.10 per share.
(c) Claims Services, Inc., whose authorized capital stock
consists of 1,000 shares of common stock, par value $.10 per share.
Each of the Three Subsidiaries is duly organized, validly existing and in good
standing under the laws of the State of Delaware with full corporate power and
authority to own or lease its
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properties and to conduct its business in the manner and the places where such
properties are owned or leased or such business is currently conducted or
proposed to be conducted. The copies of each Subsidiary's Certificate of
Incorporation as amended to date, certified by the Delaware Secretary of State,
and of ViraTrac, Inc.'s by-laws as amended to date, certified by ViraTrac,
Inc.'s Secretary, and heretofore delivered to Purchaser's counsel, are complete
and correct and no amendments thereto are pending. Each of the Three
Subsidiaries is not in violation of any of the terms of its Certificate of
Incorporation or by-laws. Each of the Three Subsidiaries is duly qualified to do
business as a foreign corporation in the jurisdictions listed for such
Subsidiary in the Disclosure Letter, and is not required to be licensed or
qualified to conduct its business or its property in any other jurisdiction.
(Hereinafter the Company and the Three Subsidiaries are sometimes
collectively referred to as the "Company Group").
ViraTrac, Inc. is party to certain contracts, but except for said
contracts does not own any assets or have any Liabilities. ViraTrac, Inc. has no
employees.
Each of Clinical Services, Inc. and Claim Services, Inc. has not
conducted any business since December 31, 1993, and does not have any assets.
Each of Clinical Services, Inc. and Claim Services, Inc. is not subject to and
does not have any indebtedness, claim, obligation, or liability of any kind or
nature whatsoever, whether absolute or contingent, with liquidated or
unliquidated, known or unknown, due or to become due, accrued or unaccrued, or
otherwise (hereinafter collectively "Liabilities.")
The Disclosure Letter describes in reasonable detail the Company's
arrangements with OCC Comprehensive Care Inc., a Canada corporation("OCC"). As
reflected in the Disclosure Letter, the Company has proposed a settlement
agreement to terminate its relationship with and any Liabilities arising out of
its relationship with OCC. As part of such settlement agreement the Company
would forgive a receivable (the "OCC Receivable") owed to the Company in the
amount of $45,000. The Company is not subject to and will not become subject to
any Liabilities arising out of the OCC relationship as it presently exists;
provided, however, that it is understood that to the extent the Company ever
collects any amount of the OCC Receivable, the amount thus collected shall be a
credit, dollar-for-dollar, against the amount of any claims made under this
representation relating to OCC.
2.4 Authority of the Company. The Company has full right, authority and
power to enter into this Agreement and each agreement, document and instrument
to be executed and delivered by the Company pursuant to this Agreement and to
carry out the transactions contemplated hereby or thereby. The execution,
delivery and performance by the Company of this Agreement and each such other
agreement, document and instrument have been duly authorized by all necessary
action of the Board of Directors of the Company and, subject to the approval of
this Agreement and the transactions contemplated hereby by the Stockholders in
accordance with Delaware Law and the Restated Certificate of Incorporation and
by-laws of the Company ("Stockholder Approval"), no other action on the part of
the Company or the Stockholders is required in connection therewith. This
Agreement and each agreement,
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document and instrument executed and delivered by the Company pursuant to this
Agreement constitutes, or when executed and delivered will constitute, valid and
binding obligations of the Company enforceable in accordance with their terms.
The execution, delivery and performance by the Company of this Agreement and
each such agreement, document and instrument:
(a) does not and will not violate any provision of the
Certificate of Incorporation or by-laws of the Company;
(b) does not and will not violate any laws of the United
States, or any state or other jurisdiction applicable to the Company or require
the Company to obtain any approval, consent or waiver of, or make any filing
with, any person or entity (governmental or otherwise) that has not been
obtained or made (other than Stockholder Approval); and
(c) does not and will not result in a breach of, constitute a
default under, accelerate any obligation under, or give rise to a right of
termination of any indenture or loan or credit agreement or any other material
agreement, contract, instrument, mortgage, lien, lease, permit, authorization,
order, writ, judgment, injunction, decree, determination or arbitration award to
which the Company is a party or by which the property of the Company is bound or
affected, or result in the creation or imposition of any mortgage, pledge, lien,
security interest or other charge or encumbrance on any of the Company's assets
or the Company Shares.
2.5 Financial Statements and Liabilities.
(a) The Company has delivered to Purchaser the balance sheets
of the Company as of December 31, 1996 and December 31, 1997 (respectively, the
"1996 Balance Sheet" and the "1997 Balance Sheet") and the consolidated
statements of income and retained earnings of the Company for the fiscal years
ending on said dates, audited and certified by Arthur Andersen LLP, certified
public accountants (the "Annual Statements"), and the consolidated Balance Sheet
of the Company as of April 30, 1998, (the "Interim Balance Sheet") and the
consolidated statements of income and retained earnings of the Company for the
fiscal period ending on said date, compiled by the Company (the "Interim
Statements").
The Annual Statements are in accordance with the books and
records of the Company in all material respects, and have been prepared in
accordance with generally accepted accounting principles consistently applied.
The Annual Statements fairly present, the financial position and assets and
liabilities of the Company as of the dates indicated, and the results of
operations and changes in financial condition of the Company for the periods
then ended.
The Interim Statements are in accordance with the books and
records of the Company in all material respects, and have been prepared in
accordance with generally accepted accounting principles consistently applied,
subject, however, to normal year-end adjustments (none of which will be
material) and to the absence of footnotes. The Interim Statements fairly present
the financial position and assets and liabilities of the Company as of the dates
indicated and the results of operations and changes in financial condition of
the Company for the period then ended.
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(b) As of the date of this Agreement, each of the Company and
ViraTrac, Inc. is not subject to and does not have, and as of the Closing Date,
each of the Company and ViraTrac, Inc. will not be subject to and will not have
any material Liabilities, except (i) as disclosed in the Interim Balance Sheet,
(ii) for such Liabilities that have arisen in the ordinary course of business of
the Company since the date of said Interim Balance Sheet, none of which newly
arisen Liabilities have a material adverse affect upon the Company, its assets,
business, or financial condition, and (iii) as specifically disclosed in this
Agreement or in the Disclosure Letter.
(c) Correct and complete copies of the promissory notes and
all other agreements relating to the Investor Loans have been provided to
Purchaser.
2.6 Real Estate. Each of the Company Group does not own or have title
to any real estate, and has never owned or had title to any real estate. Each of
the Three Subsidiaries has never leased any real estate.
The Company does not lease any real estate other than pursuant to four
real estate leases (the "Leases"), one for its offices in San Francisco,
California, one for offices in Los Angeles, California, one for offices in
Dallas, Texas, and one for offices in Houston, Texas, each of which Leases is
listed on the Disclosure Letter. A true and correct copy of each of the Leases
has been delivered to Purchaser. Other than pursuant to the Leases, the Company
has not leased any other real estate during the past three years. The Company
and, to the best knowledge of the Company, the other party thereto, is not in
default under each of the Leases, and there is no fact (to the best knowledge of
the Company in the case of facts relating to the other party thereto) which,
with notice and/or the passage of time, would constitute such a default. The
Company does not know of any significant expenditures that the Company would be
required to make or plans to make within one year from the date hereof with
respect to the offices leased by the Company or the air conditioning, plumbing
and electrical systems of such offices. The Company has not received notice that
the offices or the buildings in which it is located does not comply with
municipal, state and federal statutes, ordinances, rules and regulations
applicable to the construction of the buildings and its actual use. The Company
does not know of any noncompliance by the buildings with said statutes,
ordinances, rules and regulations which could reasonably be expected to result
in a material liability of, or a material expenditure by, the Company. No
consent is required under the Leases in connection with the transactions
contemplated by this Agreement.
2.7 Leased Tangible Personal Property. ViraTrac, Inc. does not lease
any personal property. The Company does not lease any personal property other
than pursuant to (i) leases in the ordinary course of business which expire on
not more than 30 days notice by the Company without payment of any penalty or
termination payment, and (ii) leases ("Personal Property Leases") which are
listed on the Disclosure Letter, true and correct copies of which have been made
available (including providing a copy thereof to be retained by Purchaser) to
Purchaser. Each of the Company and, to the best knowledge of the Company, the
other parties thereto is not in material default under any of the Personal
Property Leases, and there is no fact (to the best knowledge of the Company in
the case of facts relating to the other party thereto) which, with
17
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notice and/or passage of time, would constitute such a default. No consent is
required under the Personal Property Leases in connection with the transactions
contemplated by this Agreement.
2.8 Assets. To the best knowledge of the Company, all material items of
the equipment, furniture, computers, and other tangible personal property (other
than inventory) owned, leased or used by the Company is in good condition,
normal wear and tear excepted, and is in good operating order. The Disclosure
Letter attached hereto lists all furniture, equipment, and other tangible
personal property of the Company or ViraTrac, Inc. (other than inventory and
supplies) having an original cost of $5,000 or more. The Disclosure Letter also
lists all equipment, furniture, computers and other tangible personal property
which (i) is used by the Company or which is located on the Company's premises
and (ii) which is not owned by the Company, except for items leased under Leases
elsewhere disclosed herein and except for immaterial personal property of
employees. Except for sales of inventory and other dispositions of assets in the
ordinary course of business, since December 31, 1997, no material tangible
assets have been transferred from the Company, whether by sale, dividend or
otherwise.
2.9 Taxes.
(a) The Company has paid or caused to be paid all federal,
state, local, foreign, and other taxes, including, without limitation, income
taxes, estimated taxes, alternative minimum taxes, excise taxes, sales taxes,
use taxes, value-added taxes, gross receipts taxes, franchise taxes, capital
stock taxes, employment and payroll-related taxes, withholding taxes, stamp
taxes, transfer taxes, windfall profit taxes, environmental taxes and property
taxes, whether or not measured in whole or in part by net income, and all
deficiencies, or other additions to tax, interest, fines and penalties owed by
it (collectively, "Taxes"), required to be paid by it or its subsidiaries
through the date hereof whether disputed or not, and will pay all Taxes required
to be paid by it or its subsidiaries through the Closing Date.
(b) The Company has in accordance with applicable law filed
all federal, state, local and foreign tax returns required to be filed by it or
its subsidiaries through the date hereof, except that the Company's income tax
returns for its taxable years ended December 31, 1997 and December 31, 1996,
have been prepared and signed by Arthur Andersen LLP as tax preparer and are
ready to be filed by Purchaser promptly after the Closing of this Agreement. All
such returns correctly and accurately set forth the amount of any Taxes or
losses relating to the applicable period. No returns have been audited or
currently are the subject of an audit. For each taxable period of the Company
ended on or after December 31, 1989, the Company has delivered to Purchaser
correct and complete copies of all federal, state, local and foreign income tax
returns, examination reports and statements of deficiencies assessed against or
agreed to by the Company or its subsidiaries.
(c) Neither the Internal Revenue Service (the "IRS") nor any
other governmental authority is now asserting or, to the best knowledge of the
Company, threatening to assert against the Company or its subsidiaries any
deficiency or claim for additional Taxes, or claim to reduce reported losses. No
claim has ever been made by an authority in a jurisdiction where the Company or
any subsidiary does not file reports and returns that the Company or such
18
<PAGE>
subsidiary is or may be subject to taxation by that jurisdiction. There are no
security interests on any of the assets of the Company that arose in connection
with any failure (or alleged failure) to pay any Taxes. The Company and each of
its subsidiaries has never entered into a closing agreement pursuant to Section
7121 of the Internal Revenue Code of 1986, as amended (the "Code").
(d) Except as set forth in the Disclosure Letter, there has
not been any audit of any tax return filed by the Company or any of its
subsidiaries, no such audit is in progress, and the Company has not been
notified by any tax authority that any such audit is contemplated or pending.
Except as set forth in Disclosure Letter, no extension of time with respect to
any date on which a tax return was or is to be filed by the Company or any of
its subsidiaries is in force, and no waiver or agreement by the Company or any
of its subsidiaries is in force for the extension of time for the assessment or
payment of any Taxes.
(e) The Company has never been (and has never had any
liability for unpaid Taxes because it once was) a member of an "affiliated
group" (as defined in Section 1504(a) of the Code). Except as set forth in the
Disclosure Letter, the Company has never filed, and has never been required to
file, a consolidated, combined or unitary tax return with any other entity.
Except as set forth in the Disclosure Letter, the Company does not own and has
never owned a direct or indirect interest in any trust, partnership, corporation
or other entity. The Company is not a party to any tax sharing agreement.
(f) As of December 31, 1997, the Company had an aggregate net
operating loss for Federal income tax purposes totaling $5,548,468. The
Disclosure Letter accurately states the years in which said net operating losses
arose and the amounts of net operating losses for each of said years. The
Company has provided its stock book to Purchaser. Said stock book completely and
accurately reflects the current ownership of stock of the Company and all
changes of ownership of stock in the Company which have taken place since the
Company's inception. In the case of both prior and current owners, the
beneficial owners of the stock of the Company are the same as the record owners
as shown in said stock book.
(g) For purposes of this Agreement, all references to Sections
of the Code shall include any predecessor provisions to such Sections and any
similar provisions of federal, state, local or foreign law.
(h) The Interim Balance Sheet includes adequate provision for
(i) all Tax Liabilities incurred or accrued as of the date of said Balance
Sheet, and (ii) any and all Tax Liabilities which may hereafter be assessed or
imposed on the Company or any of its subsidiaries with respect to time periods
ending on or before said date.
(i) The Company has not made an election under Section 341(f)
of the Code, and does not have any other tax elections, federal or state, in
effect except as set forth on the Disclosure Letter.
2.10 Collectibility of Accounts Receivable. All of the accounts
receivable of the Company and ViraTrac, Inc. set forth on the receivables run of
the Company as of the date
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<PAGE>
specified in the Disclosure Letter, which has been provided to Purchaser, less
the reserve for bad debts set forth on the Interim Balance Sheet, are valid and
enforceable claims, fully collectible and subject to no setoff or counterclaim.
Each of the Company and ViraTrac, Inc. has no accounts or loans receivable from
any person, firm or corporation which is affiliated with the Company or from any
director, officer or employee of the Company, except as disclosed in the
Disclosure Letter, and all accounts and loans receivable from any such person,
firm or corporation shall be paid in cash prior to the Closing.
2.11 Absence of Certain Changes. Except as disclosed in the Disclosure
Letter and except to the extent reflected in the Interim Statements, since
December 31, 1997 there has not been:
(a) any change in the financial condition, properties, assets,
liabilities, business or operations of the Company or ViraTrac, Inc., which
change by itself or in conjunction with all other such changes, whether or not
arising in the ordinary course of business, has been materially adverse with
respect to the Company or ViraTrac, Inc.;
(b) any contingent liability incurred by the Company or
ViraTrac, Inc. as guarantor or otherwise with respect to the obligations of
others or any cancellation of any material debt or claim owing to, or waiver of
any material right of, the Company or ViraTrac, Inc.;
(c) any mortgage, encumbrance or lien placed on any of the
properties of the Company or ViraTrac, Inc.;
(d) any material obligation or liability of any nature,
whether accrued, absolute, contingent or otherwise, asserted or unasserted,
known or unknown (including, without limitation, liabilities for Taxes due or to
become due or contingent or potential liabilities relating to products or
services provided by the Company or ViraTrac, Inc. or the conduct of the
business of the Company or ViraTrac, Inc. since December 31, 1997 regardless of
whether claims in respect thereof have been asserted), incurred by the Company
or ViraTrac, Inc. other than obligations and liabilities incurred in the
ordinary course of business consistent with the terms of this Agreement (it
being understood that product or service liability claims that could reasonably
be expected to result in a material liability shall not be deemed to be incurred
in the ordinary course of business);
(e) any purchase, sale or other disposition, or any agreement
or other arrangement for the purchase, sale or other disposition, of any of the
properties or assets of the Company or ViraTrac, Inc. other than in the ordinary
course of business;
(f) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the properties, assets or business
of the Company or ViraTrac, Inc.;
(g) any declaration, setting aside or payment of any dividend
by the Company, or the making of any other distribution in respect of the
capital stock of the Company, or any
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direct or indirect redemption, purchase or other acquisition by the Company of
its own capital stock;
(h) any labor trouble or dispute or claim of unfair labor
practices involving the Company or any attempt or threat of an attempt by a
labor union to organize the Company's employees; any change in the compensation
payable or to become payable by the Company to any of its officers, employees,
agents or independent contractors other than normal merit increases in
accordance with its usual practices; or any bonus payment or arrangement made to
or with any of such officers, employees, agents or independent contractors;
(i) any change with respect to the officers or management of
the Company;
(j) any payment or discharge of a material lien or liability
of the Company or ViraTrac, Inc.;
(k) any obligation or liability incurred by the Company to any
of its officers, directors, stockholders or employees, or any loans or advances
made by the Company to any of its officers, directors, stockholders or
employees, except normal compensation and expense allowances payable to officers
or employees;
(l) any change in accounting methods or practices, credit
practices or collection policies used by the Company;
(m) any material amendment or termination of any material
contract, lease or license to which the Company or ViraTrac, Inc. is a party or
by which it may be bound, other than in the ordinary course of business;
(n) any acquisition by the Company or ViraTrac, Inc. of the
assets or capital stock of another business entity;
(o) any termination of any permit or license issued to the
Company or ViraTrac, Inc. or to any of its employees or agents;
(p) to the best knowledge of the Company, any order, judgment,
writ, injunction, or decree of any court or any governmental or regulatory body
adopted or entered or proposed to be adopted or entered which could reasonably
be expected to materially and adversely affect the property or business of the
Company or ViraTrac, Inc.;
(q) any statute, permit, rule or regulation which Company
management is actually dealing with and which management expects would
materially and adversely affect the property or business of the Company or
ViraTrac, Inc.;
(r) any event or occurrence affecting the Company or ViraTrac,
Inc., which could reasonably be expected to cause an adverse change in any
material respect affecting the Company's sales, profitability or financial
condition or to otherwise adversely affect the
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Company which Company management is actively dealing with and which management
expects would materially and adversely affect the property or business of the
Company;
(s) any contracts entered into with or (except for payment of
compensation in accordance with past practices and as disclosed to Purchaser),
any payments or transfers of property to any shareholder of the Company, any
relatives of any shareholder, or any corporation, partnerships, limited
liability companies or other business entities controlled by any shareholder or
in which any shareholder has any significant equity interest;
(t) any other transaction entered into by the Company or
ViraTrac, Inc. other than transactions in the ordinary course of business; or
(u) any agreement or understanding whether in writing or
otherwise, for the Company to take any of the actions specified in paragraphs
(a) through (t) above.
2.12 Ordinary Course. Since December 31, 1997, except to the extent
reflected in the Interim Statements, each of the Company or ViraTrac, Inc. has
conducted its business only in the ordinary course and consistently with its
prior practices.
2.13 Banking Relations. All of the arrangements which the Company or
ViraTrac, Inc. has with any banking or financial institution are completely and
accurately described in the Disclosure Letter, indicating with respect to each
of such arrangements the type of arrangement maintained (such as checking
account, borrowing arrangements, safe deposit box, etc.) and the person or
persons authorized in respect thereof.
2.14 Intellectual Property.
(a) As used in this Section 2.14, "Intellectual Property"
means patents, patent rights, patent applications, trademarks, trademark
applications, service marks, service mark applications, trade names, trade
secrets, copyrights and other proprietary rights. No proceedings have been
instituted, or are pending or, to the best knowledge of the Company, threatened,
which challenge the rights of the Company or ViraTrac, Inc. to the Intellectual
Property owned or used by it or ViraTrac, Inc., and, to the best knowledge of
the Company, there are no claims or demands of any other person challenging the
ownership of any such Intellectual Property owned by the Company or ViraTrac,
Inc., or challenging the use by the Company or ViraTrac, Inc. of any such
Intellectual Property in the manner in which it is currently being used by the
Company or ViraTrac, Inc., as applicable.
(b) Each of the Company and ViraTrac, Inc. does not or own or
use in its business any patents, patent rights, patent applications or own any
registered copyrights or applications for registered copyrights. The Disclosure
Letter lists the registered trademarks, registered service marks and
applications for the same which are owned by the Company and also lists all
material trade names, unregistered trademarks and unregistered service marks
owned by the Company. Except as set forth in the Disclosure Letter, each of the
Company and ViraTrac, Inc. does not license or otherwise use in its business
trademarks, service marks or trade names of any other person. All of such
trademark and service mark registrations and
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applications have been duly registered in, filed in or issued by the United
States Patent and Trademark Office, or the corresponding offices of other
jurisdictions as identified on the Disclosure Letter, and have been properly
maintained and renewed in accordance with all applicable provisions of law and
administrative regulations of the United States and each such jurisdiction. All
other items of Intellectual Property which are material to the business or
operations of the Company or ViraTrac, Inc., are listed in the Disclosure
Letter. Each of the Company and ViraTrac, Inc. has the right, and the
consummation of the transactions contemplated hereby will not affect the right
each has, to use all Intellectual Property currently used in its business in the
manner in which it currently uses such Intellectual Property, including without
limitation all trademarks, service marks, trade names, customer lists, designs,
manufacturing and other processes, computer software, systems, data
compilations, research results and other information required for or incident to
its business as presently conducted.
(c) All licenses or other agreements under which the Company
or ViraTrac, Inc. is granted rights in Intellectual Property are listed in the
Disclosure Letter. All said licenses or other agreements are in full force and
effect, and there is no material default by any party thereto. To the best
knowledge of the Company, the licensors under said licenses and other agreements
have and had all requisite power and authority to grant the rights purported to
be conferred thereby. True and complete copies of all such licenses or other
agreements, and any amendments thereto, have been delivered to Purchaser.
(d) All licenses or other agreements under which the Company
or ViraTrac, Inc. has granted rights to others in Intellectual Property owned or
licensed by the Company or ViraTrac, Inc. are listed in the Disclosure Letter.
All of said licenses or other agreements are in full force and effect, and there
is no material default by any party thereto. True and complete copies of all
such licenses or other agreements, and any amendments thereto, have been
provided to Purchaser.
(e) The Company has required all professional and technical
employees and other employees and consultants having access to valuable
non-public information of the Company or ViraTrac, Inc. to execute agreements
under which such employees and consultants are required to convey to the Company
or ViraTrac, Inc. ownership of all inventions, copyrights and developments
conceived or created by them in the course of their employment and to maintain
the confidentiality of all such information of the Company or ViraTrac, Inc.
Each of the Company and ViraTrac, Inc. has not made any such valuable,
non-public information of the Company or ViraTrac, Inc. available to any person
other than employees of the Company except pursuant to written agreements
requiring the recipients to maintain the confidentiality of such information and
appropriately restricting the use thereof. The Company has no knowledge of any
infringement by others of any Intellectual Property rights of the Company or
ViraTrac, Inc..
(f) The present business, activities and products of the
Company or ViraTrac, Inc. do not infringe any Intellectual Property of any other
person in any manner that cannot be cured in all material respects by (i) making
modifications to the Company's method of conducting its business that do not
have a material adverse affect on the Company, or (ii) obtaining a license from
such person to use such Intellectual Property at a cost to the Company
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that is not material. No proceeding charging the Company and ViraTrac, Inc. with
infringement of any adversely held Intellectual Property or any opposition to
registration has been filed or is threatened to be filed. Each of the Company
and ViraTrac, Inc. is not making unauthorized use of any confidential
information or trade secrets of any person received by the Company or ViraTrac,
Inc. under an agreement limiting the Company's or ViraTrac's use of such
information, including without limitation, any former employer of any past or
present employee of the Company. To the best knowledge of the Company, the
activities of its employees on behalf of the Company do not violate any
agreements or arrangements with any persons other than the Company related to
confidential information or trade secrets of such persons or restricting any
such employee's ability to engage in business activities of any nature. To the
best of Company's knowledge, the persons or entities who are party to
confidentiality agreements protecting confidential information or trade secrets
of the Company are in compliance with such agreements. Copies of all
confidentiality agreements to which the Company or ViraTrac, Inc. is a party,
both those which protect confidential information or trade secrets of the
Company or ViraTrac, Inc., and those which protect the confidential information
or trade secrets of other parties, are properly filed in the Company's files, so
that a person dealing with the matter or relationship giving rise to the
confidentiality agreement will locate a copy of such agreement in the file or
files relating to such matter or relationship.
2.15 Software and Database. The Disclosure Letter lists:
(a) All software programs or databases owned by third parties
currently used by the Company or ViraTrac, Inc.;
(b) All software programs or databases currently used by the
Company or ViraTrac, Inc. which the Company or ViraTrac, Inc. either owns or has
the exclusive right to use or which were developed by the Company or ViraTrac,
Inc.;
(c) All individuals or companies, whether or not employees,
who have, since the inception of the Company, provided to the Company or
ViraTrac, Inc. material software or database services for software or databases
currently used by the Company or ViraTrac, Inc., together with any agreements
that the Company or ViraTrac, Inc. has with such individuals or companies. For
these purposes, (i) such services include, but are not limited to, design of or
modifications to the software or database, writing code for the database or
software or designing interfaces for the database or software; and (ii) such
services will not be considered material if they are rendered with respect to
software or databases that are not material to the Company's operations or
business and if the software and databases can be replicated by the Company
without substantial cost or delay.
2.16 Contracts.
(a) The Disclosure Letter attached hereto lists, and the
Company has made available (including providing a copy as requested) to
Purchaser, true and complete copies of, all of the following contracts or other
obligations to which either the Company or ViraTrac, Inc. is a party or by which
either is bound:
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(i) Employment agreements and any other contracts
with or loans by the Company or ViraTrac, Inc. to any of the Company's
or ViraTrac, Inc.'s shareholders, officers, directors, employees,
consultants, salesmen, distributors or sales representatives;
(ii) Any employee benefit plan made available by the
Company to any of its employees;
(iii) Any collective bargaining agreement;
(iv) Any contracts with customers, including those
which have been completed by the Company or ViraTrac, Inc. within the
past two years, which impose any material liabilities upon, or
reasonably could be expected to result in any material liabilities
against, the Company or ViraTrac, Inc..
(v) Any deeds of trust, mortgages, conditional sales
contracts, security agreements, pledge agreements, trust receipts, or
any other agreements or arrangements whereby any assets of the Company
or ViraTrac, Inc. are subject to a lien, encumbrance, charge or other
restriction;
(vi) Any loan agreements, letters of credit or lines
of credit;
(vii) Any contracts expressly restricting the Company
or ViraTrac, Inc. from doing business in any areas and any contracts,
including without limitation contracts with suppliers, which limit,
restrict or transfer rights to any technology utilized or developed by
the Company or ViraTrac, Inc. or which establish rights of a supplier
or customer to a particular product marketed or being developed by the
Company or ViraTrac, Inc., excluding the license implied in any sale of
product;
(viii) Other than purchase orders issued in the
ordinary course of business, any contracts calling for aggregate
payments by the Company or ViraTrac, Inc. in excess of $10,000 and
which are not terminable without cost or liability on notice of 90 days
or less;
(ix) Any joint venture, partnership, limited
liability company or limited partnership agreement involving the
Company or ViraTrac, Inc.;
(x) Any guarantees by the Company or ViraTrac, Inc.
of the obligations of any other party except those resulting from the
endorsement of customer checks deposited by the Company for collection;
(xi) The Company Shareholder Agreement;
(xii) Any other contracts which could reasonably be
expected to have a material adverse impact on the Company's or
ViraTrac, Inc.'s assets, results of operations or financial condition;
and
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(xiii) Any commitments to enter into any of the types
of contracts and obligations referred to in this Section 2.16.
Each of the Company and ViraTrac, Inc. has not received notice
of any material default under any such contracts, obligations or commitments, is
not in material default under any such contracts, obligations or commitments,
and there are no facts (to the best knowledge of the Company in the case of
facts relating to the other party thereto) which, with notice and/or the passage
of time, would constitute such a default. To the best knowledge of the Company,
no other party to such contracts, obligations or commitments is in material
default and there are no facts which, with notice and/or the passage of time,
would constitute such a default. No consent is required under the contracts,
obligations and commitments referred to in this Section in connection with the
transactions contemplated by this Agreement.
(b) Proposals and Prospects. The Disclosure Letter attached
hereto lists, and the Company has previously delivered to Purchaser, true and
complete copies of all outstanding proposals to perform services for customers
by the Company or ViraTrac, Inc.
2.17 Litigation. There are no legal, administrative, arbitration or
other proceedings or claims pending or, to the best knowledge of the Company,
threatened against the Company or any subsidiary, nor is the Company or any
subsidiary subject to any existing judgments. To the best knowledge of the
Company, there is no reasonable basis for any such proceeding or claim against
the Company or any subsidiary which could reasonably be expected to result in a
material liability. Each of the Company and ViraTrac, Inc. is not operating
under or subject to, or in default with respect to, any order, writ, injunction
or decree of any court or federal, state, municipal or other governmental
department, commission, board, agency or instrumentality, domestic or foreign.
2.18 Compliance with Applicable Laws; Environmental Matters.
(a) Laws. Each of the Company and ViraTrac, Inc., and its
operations and assets, are in compliance in all material respects, with all
federal, state, county, and municipal laws, ordinances, regulations, rules,
reporting requirements, judgments, orders, decrees and requirements of common
law applicable to the conduct and business of the Company or ViraTrac, Inc. and
to the assets owned, used or occupied by it (collectively referred to
hereinafter as the "General Laws"), including without limitation all applicable
federal, state, county and municipal laws, ordinances, regulations, rules,
reporting requirements, judgments, orders, decrees and requirements of common
law concerning or relating to the protection of health and the environment
(collectively referred to hereinafter as the "Environmental Laws"). Each of the
Company and ViraTrac, Inc. has not received any notice of violation, citation,
complaint, request for information, order, directive, compliance schedule or
other similar enforcement order, or any other notice from any administrative or
governmental agency or entity, indicating that either the Company or ViraTrac,
Inc. were not or currently are not in compliance in all material respects with
all Environmental Laws and General Laws, and to the best knowledge of the
Company, no such item is threatened.
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(b) Environmental Laws. All businesses and operations of the
Company and ViraTrac, Inc. are in compliance in all material respects with any:
(i) judgments, orders, decrees, awards or directives, of any court, arbitrator
or administrative or governmental agency or entity binding the Company or
ViraTrac, Inc. and concerning compliance with the Environmental Laws; and (ii)
consent decrees, administrative orders, settlement agreements or other
settlement documents entered into by the Company or ViraTrac, Inc. with any
administrative or governmental agency or entity concerning compliance with the
Environmental Laws.
(c) Hazardous Materials. As used herein the "Company Real
Property" means real property now or previously operated, used or leased by, to
or for the Company, but only the portion thereof, actually operated, used or
leased by, to or for the Company, including without limitation, the real
property subject to the Leases. No materials designated as hazardous substances,
wastes, hazardous materials, pollutants or contaminants under any Environmental
Laws (collectively, "Hazardous Materials") stored, used or generated by the
Company or any subsidiary have been treated, stored, transported or disposed of
in violation of any Environmental Laws; and all Hazardous Materials which have
been utilized in the business or operation of the Company or any subsidiary or
which have been removed, released, discharged or emitted by the Company or any
subsidiary from the Company Real Property were and are documented, transported
and disposed of in compliance with all Environmental Laws in all material
respects. The Company does not know of Hazardous Materials in the Company Real
Property which have harmed or could reasonably be expected to harm persons.
(d) Licenses and Permits. The Disclosure Letter lists material
permits, licenses and other authorizations issued by administrative or
governmental agencies or entities under the General Laws and the Environmental
Laws or otherwise required for the conduct of the Company's or ViraTrac, Inc.'s
business as presently conducted which are held by the Company or, with respect
to the Company's or ViraTrac, Inc., as applicable business or assets, by its
employees or agents ("Licenses and Permits"). The Licenses and Permits include
all such permits which are necessary to the Company's and ViraTrac, Inc.'s
business and operations as presently conducted and each of the Company and
ViraTrac, Inc. is and has been in compliance in all material respects with the
terms and conditions of the Licenses and Permits. Under the General Laws and the
Environmental Laws and the Licenses and Permits, the consummation of the
transactions contemplated by this Agreement do not and will not: (i) affect the
validity of the Licenses and Permits; or (ii) require the consent of any
governmental authority or third party.
2.19 Insurance. The physical properties and assets of the Company and
ViraTrac, Inc. are insured to the extent disclosed in the Disclosure Letter
attached hereto and all such insurance policies and arrangements are disclosed
in said Letter. Said insurance policies and arrangements are in full force and
effect, all premiums with respect thereto are currently paid, and the Company is
in compliance in all material respects with the terms thereof. Said insurance is
sufficient for compliance by the Company with all requirements of law and all
agreements and leases to which the Company and ViraTrac, Inc. is a party.
2.20 Powers of Attorney. Each of the Company and ViraTrac, Inc. does
not have any outstanding power of attorney.
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2.21 Finder's Fee. Each of the Company and its subsidiaries has not
incurred or become liable for any broker's commission or finder's fee relating
to or in connection with the transactions contemplated by this Agreement, except
that Paine Webber is entitled to a fee for which the Stockholders are
responsible. Except as provided in Section 1.7, such fee shall not be charged to
or paid by the Company or Purchaser.
2.22 Burdensome Agreements. Except as disclosed in the Disclosure
Letter, each of the Company and ViraTrac, Inc. is not subject to or bound by any
agreement, judgment, decree or order which Company's management expects to
materially and adversely affect the Company's or ViraTrac, Inc.'s business
prospects, condition, financial or otherwise, or assets.
2.23 Corporate Records; Copies of Documents. The corporate record books
of each of the Company and Group accurately record all corporate action taken by
its stockholders and board of directors and committees. The copies of the
corporate records and stock records of each of the Company and ViraTrac, Inc.,
as delivered to Purchaser for review, are true and complete copies of the
originals of such documents. The Company has made available to Purchaser and its
counsel true and correct copies of all documents referred to in this Section or
in the Disclosure Letter delivered to Purchaser pursuant to this Agreement. The
Company has not yet delivered to Purchaser copies of the corporate records and
stock records for Clinical Services, Inc. or Claims Services, Inc., but it
seeking to obtain such records and will deliver them as soon as they are
obtained.
2.24 Transactions with Interested Persons. Except as set forth in the
Disclosure Letter, neither the Company, nor ViraTrac, Inc. nor, to the best
knowledge of the Company, any officer, supervisory employee or director of the
Company or ViraTrac, Inc. or any of their respective spouses or family members,
owns directly or indirectly on an individual or joint basis any material
interest in, or serves individually as, or as an officer or director or in
another similar capacity of, any competitor or supplier of the Company or
ViraTrac, Inc., or any organization which has a material contract or arrangement
with the Company or ViraTrac, Inc. There are no agreements or arrangements not
contained herein or disclosed in the Disclosure Letter, to which any Stockholder
is a party relating to the business of the Company or to any Stockholder's
rights and obligations as a stockholder, director or officer of the Company.
2.25 ERISA and Employment Matters.
(a) Except as set forth in the Disclosure Letter, no employee
of the Company has a written or oral agreement (or an assurance pursuant to any
employee manual) which would preclude the Company from terminating such
employee's employment at any time with no obligation of the Company to make any
payment except wages and accrued benefits to the date of termination. The
Company does not have any policy, practice, plan, or program of paying severance
pay or any form of severance compensation in connection with the termination of
employment. The Company has not engaged in any discriminatory hiring or
employment practices in violation of applicable law nor have any employment
discrimination complaints been filed against the Company with any state or
federal agency. The Company has not been threatened by any former employee with
any suit alleging wrongful termination or other claim
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against the Company and there are no grounds for such a suit which could
reasonably be expected to result in material liability.
The Company has made available (including providing a copy
thereof to be retained by Purchaser) to Purchaser (i) all employment manuals
utilized by the Company within the past three (3) years, (ii) copies of any
determination letters received by the Company from the Internal Revenue Service
or any other governmental authority with respect to any employee benefit plan,
together with a copy of the most recent submission for a determination letter by
the Company for each employee benefit plan maintained by the Company, (iii)
copies of any summary plan descriptions or summaries of material modifications
relating to any employee benefit plan (as defined in Section 3(3) of ERISA) that
have been prepared or distributed in the past three (3) years.
(b) There are no present or former Company employees,
directors or independent contractors entitled to (i) pension benefits that are
"unfunded" as defined under ERISA or (ii) any pension benefit or welfare benefit
to be paid after termination of employment other than liabilities for benefits
under the plan and pursuant to the Company's 401(k) Plan (the "Plan") or as
otherwise required by law. Except with respect to continuation coverage under
group health plans pursuant to Section 4980B of the Internal Revenue Code of
1986, as amended (the "Code") or state law, and except with respect to
continuation coverage under group life insurance plans pursuant to state law, no
other welfare benefits (whether or not pursuant to any plan or benefit
arrangement that is subject to the Employee Retirement Income and Security Act
("ERISA")) whatsoever are payable to any present or former Company employees
after termination of employment or to any present or former directors or
independent contractors after cessation of service to the Company (including,
but not limited to, any post-retirement medical or death benefits, any severance
benefits or any disability benefits).
(c) There are no arrangements or contracts with any director,
officer, employee or independent contractor of the Company that require any
deferred compensation, retirement or welfare benefits to be paid or provided
following termination of services, except as may occur under the Plan.
(d) Each "employee welfare benefit plan" (as defined in
Section 3(1) of ERISA) of the Company is either funded through insurance or is
unfunded for purposes of ERISA. There are no reserves, assets, surplus or
prepaid premiums under any such plan, the Company is not in material default
under any such plan, and all such plans are in compliance in all material
respects with all applicable laws (including, but not limited to, ERISA, the
Code, the Age Discrimination in Employment Act of 1967, the Americans with
Disabilities Act, and the Health Insurance Portability and Accountability Act of
1996) since such laws became effective in respect to such plans.
(e) Each of any "employee welfare benefit plan" (as defined
above) maintained by the Company, any fiduciary thereof and the Company is not
subject to any liability (other than liabilities for benefits under the plan and
normal liabilities and expenses
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associated with maintenance of such plan or arrangement as an ongoing benefit
plan or arrangement) under ERISA or the Code or any other applicable law.
(f) The Plan, any fiduciary thereof and the Company are not
subject to any liability (other than liabilities for benefits under the Plan and
normal liabilities and expenses associated with maintenance of such plan or
arrangement as an ongoing benefit plan or arrangement) under ERISA or the Code
or any other applicable law. The Plan has been administered in compliance in all
material respects with its terms and with the applicable provisions of ERISA,
the Code and all other federal, state and other applicable laws, rules and
regulations (including, without limitation, any funding, filing, terminating,
reporting, disclosure and fiduciary obligations and any prohibited transaction
restrictions). The Plan meets the requirements of the Code and ERISA in all
material respects, and has from its inception satisfied such requirements in all
material respects.
(g) Except for the Plan and any other employee benefit plans
identified in the Disclosure Letter, the Company neither maintains, nor has it
ever maintained or ever been obligated to contribute to, (i) a multiemployer
plan within the meaning of Section 3(37) of ERISA, or (ii) any defined benefit
pension plan, or at any time after December 31, 1994, any other employee benefit
plan within the meaning of Section 3(3) of ERISA.
(h) There are no inquiries and there are no, and, since
December 31, 1994, have been no, proceedings, claims or suits pending or, to the
best of the Company's knowledge, threatened by any governmental agency or
authority or by any participant or beneficiary against the Company, the Plan or
any other employee benefit plan maintained by the Company, or any fiduciary of
the Plan or of any other employee benefit plan maintained by the Company, with
respect to the operation of the Plan or such other benefit plans, other than
routine claims for benefits.
(i) The consummation of the transactions contemplated by this
Agreement will not, alone or together with any other event, (i) entitle any
employee of the Company to a bonus, severance pay or any other payment, or (ii)
accelerate the time of payment or vesting, or increase the amount of,
compensation due to any such employee.
(j) The Company has no obligation for (i) any long-term
disability benefits to or for any of the Company's employees who become disabled
prior to the Closing Date (including any individual who is disabled but has not
satisfied any applicable waiting period) and (ii) any life insurance benefits
promised, due and/or payable to or for any of the Company's employees who die
prior to the Closing Date, other than through life insurance policies or
disability policies disclosed in the Disclosure Letter.
2.26 List of Directors and Officers. The Disclosure Letter contains a
true and complete list of all current directors and officers of the Company and
ViraTrac, Inc. In addition, the Disclosure Letter contains a list of all
employees and consultants of the Company as of the date specified therein, and
of all employees and consultants who have received compensation from the Company
for the fiscal year ended December 31, 1997. In each case the Disclosure Letter
includes the current job title and current annual base compensation of each such
individual.
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2.27 Employees; Labor Matters.
(a) The Company employs a total of approximately 25 full-time
employees and no part-time employees and generally enjoys good employer-employee
relationships. The Company is not delinquent in payments to any of its employees
for any wages, salaries, commissions, bonuses, or other direct compensation for
any services performed for it to the date hereof or amounts required to be
reimbursed to such employees.
(b) The Company is in compliance in all material respects with
all applicable laws and regulations respecting labor, employment, fair
employment practices, work place safety and health, terms and conditions of
employment, and wages and hours. There are no charges of employment
discrimination or unfair labor practices, nor are there any strikes, slowdowns,
stoppages of work, or any other concerted interference with normal operations
existing, pending, or, to the Company's knowledge, threatened against or
involving the Company. No question concerning representation exists respecting
any group of employees of the Company. There are no grievances, complaints, or
charges that have been filed against the Company under any dispute resolution
procedure (including, but not limited to, any proceedings under any dispute
resolution procedure under any collective bargaining agreement) that are
outstanding, or that were outstanding during the preceding two years, and no
arbitration or similar proceeding is pending and no claim therefor has been
asserted. No collective bargaining agreement is in effect or is currently being
or is about to be negotiated by the Company. The Company has not received
information to indicate that any of its employment policies or practices is
currently being audited or investigated by any federal, state, or local
government agency.
(c) To the best knowledge of the Company, each employee of the
Company is not a party to any non-competition, trade secret or confidentiality
agreement with any party other than the Company.
2.28 Transfer of Shares. No holder of stock of the Company has at any
time transferred any of such stock to any employee of the Company, which
transfer constituted or could be viewed as compensation for services rendered to
the Company by said employee.
2.29 Stock Repurchase. Except as set forth in its Disclosure Letter,
the Company has not redeemed or repurchased any of its capital stock.
2.30 Industrial Revenue Bonds. Each of the Company and ViraTrac, Inc.
is not indebted under any industrial revenue bonds.
2.31 Services and Warranties. The Disclosure Letter describes or
specifically references all warranties or other commitments that may give rise
to claims against the Company or ViraTrac, Inc. (collectively "Commitments")
made by the Company or ViraTrac, Inc. with respect to services provided by the
Company or ViraTrac, Inc. during the last three (3) years. Except for experience
consistent with the Company's or ViraTrac, Inc.'s past experience and disclosed
or reserved against in the Annual Statements and the Interim Statements, all
services provided by the Company and ViraTrac, Inc. during the last three (3)
years complied in all material respects with the Commitments applicable thereto
and with all requirements in the
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agreements applicable to such services. Except as listed on the Disclosure
Letter, there has been no breach or departure in any respect by the Company or
ViraTrac, Inc. from its Commitments in connection with the services by the
Company or ViraTrac, Inc. in the last three (3) years that could reasonably be
expected to result in material liability.
Except as set forth in the Disclosure Letter, there are no claims
against the Company or ViraTrac, Inc. of any kind with respect to the services
it has provided that are pending or, to the Company's knowledge threatened, and
no such claims were outstanding during the two years preceding the date hereof.
No services were provided in a manner that will result in any claim against the
Company or ViraTrac, Inc. that could reasonably be expected to result in
material liability.
2.32 Authority Relative to Agreements; Enforceability; Company
Shareholder Agreement. Common Stockholders owning a majority of the shares of
the Company Common Stock, and Preferred Stockholders owning a majority of the
shares of the Company Preferred Stock, on the applicable record date will have
the power to approve the Merger on behalf of the Company. The Principal
Stockholders will vote their shares of stock in favor of the Merger.
In the Company Shareholder Agreement, the Principal Stockholders have
agreed to vote their shares in favor of the Merger and have agreed that
Purchaser is a third-party beneficiary of such voting agreement.
2.33 Disclosure. The representations, warranties and statements
contained in this Agreement and in the agreements, certificates, exhibits,
documents and schedules delivered by the Company or the Stockholders pursuant to
this Agreement to Purchaser do not contain any untrue statement of a material
fact, and, when taken together, do not omit to state a material fact required to
be stated therein or necessary in order to make such representations, warranties
or statements not misleading in light of the circumstances under which they were
made. There are no facts directly affecting the Company or ViraTrac, Inc. which
the Company's management is actively dealing with and which management expects
would have a material adverse affect on the business, properties, prospects,
operations or condition of the Company which have not been specifically
disclosed herein or in the Disclosure Letter, other than general conditions
affecting the industries in which the Company operates.
SECTION 3. COVENANTS OF THE COMPANY.
3.1 Making of Covenants and Agreements. The Company hereby makes the
covenants and agreements set forth in this Section 3.
3.2 Conduct of Business. Between the date of this Agreement and the
Closing Date, each of the Company and the Three Subsidiaries will:
(a) conduct its business only in the ordinary course and
refrain from changing or introducing any method of management or operations
except in the ordinary course of business and consistent with prior practices;
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(b) refrain from making any purchase, sale or disposition of
any asset or property other than in the ordinary course of business and from
mortgaging, pledging, subjecting to a lien or otherwise encumbering any of its
properties or assets;
(c) refrain from incurring any contingent liability as a
guarantor or otherwise with respect to the obligations of others, and from
incurring any other obligations or liabilities except in the ordinary course of
business;
(d) refrain from making any change or incurring any obligation
to make a change in its Certificate of Incorporation, by-laws or authorized or
issued capital stock, except pursuant to the Company Shareholder Agreement;
(e) refrain from declaring, setting aside or paying any
dividend or other transfer of property to any Stockholder (other than payment of
regular compensation -- not bonuses -- to Stockholders who are employees of the
Company or repayment of the Investor Loans as provided herein), making any other
distribution in respect of its capital stock, or making any direct or indirect
redemption, purchase or other acquisition of its capital stock;
(f) refrain from making any change in the compensation payable
or to become payable to any of its officers, employees, agents or independent
contractors except for normal merit increases (not bonuses) in the ordinary
course of business and consistent with past practices;
(g) except as provided herein for the Investor Loans, refrain
from prepaying any loans (if any) from its stockholders, officers or directors
or making any change in its borrowing arrangements;
(h) use its reasonable best efforts to prevent any change with
respect to its management and supervisory personnel and banking arrangements;
(i) use its reasonable best efforts to keep intact its
business organization, to keep available its present officers and employees and
to preserve the goodwill of all suppliers, customers, independent contractors
and others having business relations with it;
(j) have in effect and maintain at all times all insurance of
the kind, in the amount and with the insurers set forth in the Disclosure Letter
or equivalent insurance with any substitute insurers approved in writing by
Purchaser;
(k) refrain from entering into any contract or agreement
relating to capital expenditures or with respect to the construction of tenant
improvements with respect to any Leased Real Property;
(l) use reasonable best efforts to fully and correctly perform
its obligations under its agreements with customers, and maintain good
relationships with its customers, [and continue to pursue new customers as it
has in the past subject to the limitation regarding material contracts set forth
below.
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(m) refrain from entering into or making any change in the
Plan, except as required to conform to applicable law, or materially amend or
terminate any other existing employee benefit plan, or adopt any new employee
benefit plan;
(n) not acquire control or ownership of any other corporation,
association, joint venture, partnership, limited liability company, business
trust or other business entity, or acquire control or ownership of all or a
substantial portion of the assets of the foregoing, or enter into any agreement
providing for any of the foregoing;
(o) except in the ordinary course of business, not enter into
or agree to enter into any transaction, or voluntarily incur or discharge any
obligation or liability, material to the business of the Company or any of the
Three Subsidiaries;
(p) except pursuant to the Company Shareholder Agreement and
except for repayment of the Investor Loans as provided herein, not enter into
any contracts with and not make (except for payment of normal compensation --
not bonuses -- in accordance with past practices and as disclosed in the
Disclosure Letter), any payments or transfer property to any shareholder of the
Company, relatives of any shareholder, or any corporation, partnerships, limited
liability companies or, except in the ordinary course of business, other
business entities controlled by any shareholder or in which any shareholder has
any significant equity interest;
(q) not enter into any material licensing arrangement or other
material contract;
(r) not settle any pending litigation in a manner that is
materially adverse to the Company Group or commence any material litigation; and
(s) not take any action which will prevent any of its
warranties and representations herein from being true in all material respects
as of the Closing Date.
3.3 Authorization from Others. Prior to the Closing Date, the Company
will use its best reasonable efforts to obtain all authorizations, consents and
permits of others required to permit the consummation by the Company of the
transactions contemplated by this Agreement.
3.4 Notice of Default. Promptly upon the occurrence of, or promptly
upon the Company becoming aware of the impending or threatened occurrence of,
any event which would cause or constitute a breach or default, or would have
caused or constituted a breach or default had such event occurred or been known
to the Company prior to the date hereof, of any of the representations,
warranties or covenants of the Company contained in or referred to in this
Agreement or in the Disclosure Letter or any Schedule or Exhibit referred to in
this Agreement, the Company shall give detailed written notice thereof to
Purchaser, and the Company shall use its reasonable best efforts to prevent or
promptly remedy the same.
3.5 Consummation of Agreement. The Company shall use its reasonable
best efforts to perform and fulfill all conditions and obligations on its part
to be performed and fulfilled under this Agreement, to the end that the
transactions contemplated by this Agreement shall be
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fully carried out. To this end, the Company will use reasonable best efforts to
obtain prior to the Closing all necessary authorizations or approvals of its
stockholders.
3.6 Cooperation of the Company. The Company shall cooperate with all
reasonable requests of Purchaser and Purchaser's counsel in connection with the
consummation of the transactions contemplated hereby.
3.7 No Negotiations; Notification of Takeover Proposal and Other
Matters. The Company shall promptly advise Purchaser orally and in writing of
any "takeover proposal" or of any proposal, or inquiry reasonably likely to
result in a proposal, which the Company has reason to believe is or may lead to
any "takeover proposal". For purposes of this Agreement, the term "takeover
proposal" shall mean any proposal for a merger or other business combination
involving the Company, or for the acquisition of a substantial equity interest
in the Company, a substantial portion of the assets of the Company or a product
line or line of business of the Company, other than as contemplated by this
Agreement. The Company shall promptly advise Purchaser orally and in writing of
the receipt by the Company of any notification submitted to the Company of any
purchase or proposed purchase of any securities of the Company by any person.
The Company shall not, directly or indirectly, whether through its
officers, directors, Stockholders, agents, representatives, or otherwise, engage
in any discussions or negotiations with, or provide any information to, any
person or entity making, proposing to make or believed to be contemplating a
takeover proposal to the Company.
3.8 Confidentiality; No Trading. The Company agrees that each of the
Company, the Three Subsidiaries and their officers, directors, Stockholders, and
representatives will hold in strict confidence, and will not use, any
confidential or proprietary data or information obtained from Purchaser with
respect to its business or financial condition except for the purpose of
evaluating, negotiating and completing the transaction contemplated hereby.
Information generally known in Purchaser's industry or which has been disclosed
to the Company by third parties which have a right to do so shall not be deemed
confidential or proprietary information for purposes of this Agreement. If the
transaction contemplated by this Agreement is not consummated, the Company will
return to Purchaser (or certify that they have destroyed) all copies of such
data and information, including but not limited to financial information,
customer lists, business and corporate records, worksheets, test reports, tax
returns, lists, memoranda, and other documents prepared by or made available to
the Company in connection with the transaction.
The Company and the Three Subsidiaries will abide by and the Company
will instruct its employees, Stockholders, agents and representatives to abide
by, applicable securities and insider trading laws which may restrict persons
with material non-public information about Purchaser, or any matters involving
or affecting the transactions addressed herein, from purchasing or selling
securities of Purchaser or from communicating such information to any other
person under circumstances in which it is reasonably foreseeable that such
person is likely to purchase or sell securities.
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3.9 Escrow Agreement. The Company shall execute and deliver the Escrow
Agreement, substantially in the form attached hereto as Schedule 1.3(t).
3.10 Access to Records and Properties. Prior to the Closing, the
Company shall permit the Purchaser and its authorized representatives to have
full access, at reasonable times and upon reasonable notice, to all properties,
assets, records, contracts and documents of the Company and its subsidiaries, to
all representatives and consultants to the Company, and, to the extent agreed
upon by Purchaser and the Company, to customers of the Company and ViraTrac,
Inc., and furnish to the Purchaser or its authorized representatives such
financial and other information with respect to the business or properties,
assets, books, records of the Company and its subsidiaries as the Purchaser may
from time to time reasonably request. The Company will cause its representatives
and independent public accountants to provide, Purchaser and its employees,
agents and representatives full access to, and complete information concerning,
all aspects of the businesses of the Company and ViraTrac, Inc., including their
respective books, records (including tax returns filed or in preparation),
projections, personnel and premises, and any documents (including any documents
filed on a confidential basis) included in any report filed with any
governmental agency, but excluding the audit work papers and other records of
its independent public accountants.
3.11 Note. Immediately subsequent to the Effective Time of the Merger,
the Company shall transfer, distribute to the Stockholders, or otherwise dispose
of or forgive, the promissory note evidencing amounts owed to the Company by
Richard Daly, so that after the Closing said note shall not be held by the
Company.
3.12 Shareholder Meeting; Alternative; Notices. The Company shall call
a special meeting of its Stockholders to be held as soon as practicable for the
purpose of voting upon the transactions contemplated by this Agreement. In
connection with calling such meeting, the Company shall provide disclosure
materials which fully and fairly describe this Agreement and the transactions
and payments to be made under or in connection with this Agreement, and which
make all other required disclosures, so that all Stockholders can make a fully
informed decision when they vote upon the transactions contemplated by this
Agreement. The Company shall afford to Purchaser the opportunity to review and
comment upon said disclosure materials before they are sent to the Stockholders.
In the alternative, the Company, in accordance with the GCL, may seek
to obtain written consent from its Stockholders approving the transactions
contemplated by this Agreement in lieu of holding a shareholders meeting.
Provided that such written consent is obtained from Stockholders holding not
less than 98% of the issued and outstanding shares of the Company Preferred
Stock at the time the written consent is executed, and from holders of not less
than 97% of the issued and outstanding shares of Company Common Stock at the
time the written consent is executed, the Company may specify that the Closing
will be held (subject to the other conditions and requirements of this
Agreement) promptly after such consents have been obtained, as provided in
Section 7.
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The Company is responsible to prepare, in a form which complies with
all applicable requirements, including those of the GCL, any notices to
Stockholders which are required in connection with the actions described in this
Section, including but not limited to any notice of a written consent by the
Stockholders if a written consent is obtained and any notice of any appraisal
rights. Such notices will be sent before Closing if feasible. However, if this
is not feasible, the Company shall advise Purchaser of when such notices should
be sent and to whom they should be sent and in what manner, it being understood
that Purchaser shall have the responsibility solely to comply with such
instructions and shall have no responsibility for the content of such notices
and their compliance with applicable requirements.
3.13 Notification Regarding Dissenters' Shares. The Company shall give
Purchaser (i) prompt notice of any notice of intent to demand fair value for any
shares of Company Common Stock or Company Preferred Stock, withdrawals of such
notices, and any other instruments served pursuant to the Appraisal Laws and
received by the Company, and (ii) the opportunity to direct any negotiations and
proceedings with respect to demands for fair value for shares of Company Common
Stock or Company Preferred Stock under the Appraisal Laws. The Company shall
not, without the prior written consent of Purchaser, voluntarily make any
payment with respect to any demands for fair value of shares of Company Common
Stock or Company Preferred Stock or offer to settle or settle any such demands.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF PURCHASER AND NEWCO.
4.1 Organization of Purchaser. Each of Purchaser and Newco is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Minnesota and Delaware, respectively, with full corporate power
and authority to own or lease its properties and to conduct its business in the
manner and in the places where such properties are owned or leased or such
business is conducted by it.
4.2 Authority of Purchaser. Each of Purchaser and Newco has full right,
authority and power to enter into this Agreement and each agreement, document
and instrument to be executed and delivered by Purchaser and Newco pursuant to
this Agreement, and to carry out the transactions contemplated hereby. The
execution, delivery and performance by Purchaser and Newco of this Agreement and
each such other agreement, document and instrument have been duly authorized by
all necessary corporate action of Purchaser and Newco and no other action on the
part of Purchaser and Newco is required in connection therewith. This Agreement
and each other agreement, document and instrument executed and delivered by
Purchaser and Newco pursuant to this Agreement constitute, or when executed and
delivered will constitute, valid and binding obligations of and Purchaser and
Newco enforceable in accordance with their terms. The execution, delivery and
performance by Purchaser and Newco of this Agreement and each such agreement,
document and instrument:
(a) do not and will not violate any provision of the Articles
of Incorporation or Certificate of Incorporation or by-laws of Purchaser or
Newco;
(b) do not and will not violate any laws, rules, or
regulations of the United States or of any state or any other jurisdiction
applicable to Purchaser or Newco or require
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Purchaser or Newco to obtain any approval, consent, or waiver of, or make any
filing with, any person or entity (governmental or otherwise) which has not been
obtained or made; and
(c) do not and will not result in a breach of, constitute a
default under, accelerate any obligation under, or give rise to a right of
termination of any indenture, loan, or credit agreement, or any other agreement,
mortgage, lease, permit, order, judgment, or decree to which Purchaser or Newco
is a party and which is material to the business and financial condition of
Purchaser or Newco and its affiliated organizations on a consolidated basis.
4.3 Litigation. There is no litigation pending or, to its knowledge,
threatened against Purchaser or Newco which would prevent or hinder the
consummation of the transactions contemplated by this Agreement.
4.4 Finder's Fee. Each of Purchaser and Newco has not incurred or
become liable for any broker's commission or finder's fee relating to or in
connection with the transactions contemplated by this Agreement, except for a
fee payable to Greene Holcomb & Company for which Purchaser is solely
responsible.
4.5 Company Representations. No representation or warranty is being
made by the Company except as expressly set forth in this Agreement, and neither
the Purchaser nor Newco is relying upon any information or documents made
available by or on behalf of the Company except as expressly covered by a
representation or warranty set forth in this Agreement. Without limiting the
generality of the foregoing, the Company makes no representation or warranty
with respect to, and neither the Purchaser nor Newco is relying upon, any
projections, estimates or budgets delivered or made available by or on behalf of
the Company.
SECTION 5. COVENANTS OF PURCHASER.
5.1 Making of Covenants and Agreement. Purchaser hereby makes the
covenants and agreements set forth in this Section 5.
5.2 Cooperation of Purchaser. Purchaser shall cooperate with all
reasonable requests of the Company and its counsel in connection with the
consummation of the transactions contemplated hereby.
5.3 Confidentiality. Purchaser agrees that, unless and until the
Closing has been consummated, Purchaser and its officers, directors, and
representatives will hold in strict confidence, and will not use any
confidential or proprietary data or information obtained from the Company with
respect to the business or financial condition of the Company except for the
purpose of evaluating, negotiating and completing the transaction contemplated
hereby. Information generally known in the industries of the Company or which
has been disclosed to Purchaser by third parties which have a right to do so
shall not be deemed confidential or proprietary information for purposes of this
agreement. If the transaction contemplated by this Agreement is not consummated,
Purchaser will return to the Company (or certify that it has destroyed) all
copies of such data and information, including but not limited to financial
information, customer lists, business and corporate records, worksheets, test
reports, tax returns,
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lists, memoranda, and other documents prepared by or made available to Purchaser
in connection with the transaction.
5.4 Escrow Agreement. Purchaser shall execute and deliver the Escrow
Agreement, substantially in the form attached hereto as Schedule 1.3(t).
5.5 Employment Agreements. Purchaser shall execute and deliver the
Employment Agreements in the form provided in Schedule 6.1(c) and issue shares
of Purchaser's Common Stock pursuant to such Employment Agreements and grant
options to employees, in each case as described on Schedule 5.5 hereof.
5.6 Authorization from Others. Prior to the Closing Date, Purchaser
will use its reasonable best efforts to obtain all authorizations, consents and
permits of others required to permit the consummation by Purchaser and Newco of
the transactions contemplated by this Agreement.
5.7 Notice of Default. Promptly upon the occurrence of, or promptly
upon Purchaser becoming aware of the impending or threatened occurrence of, any
event that would cause or constitute a breach or default, or would have caused
or constituted a breach or default had such event occurred or been known to
Purchaser prior to the date hereof, of any of the representations, warranties or
covenants of Purchaser or Newco contained in or referred to in this Agreement or
any Schedule or Exhibit referred to in this Agreement, Purchaser shall give
detailed written notice thereof to the Company, and Purchaser shall use its
reasonable best efforts to prevent or promptly remedy the same.
5.8 Consummation of Agreement. Purchaser and Newco shall use their
reasonable best efforts to perform and fulfill all conditions and obligations on
the part of either to be performed and fulfilled under this Agreement, to the
end that the transactions contemplated by this Agreement shall be fully carried
out.
SECTION 6. CONDITIONS.
6.1 Conditions to the Obligations of Purchaser. The obligation of
Purchaser to consummate this Agreement and the transactions contemplated hereby
are subject to the fulfillment, prior to or at the Closing, of the following
conditions precedent:
(a) Representations; Warranties; Covenants. Each of the
representations and warranties of the Company contained in Section 2 shall be
true and correct in all material respects as of the Closing Date as though made
on and as of the Closing; and the Company shall, on or before the Closing, have
performed in all material respects all of its obligations hereunder which by the
terms hereof are to be performed on or before the Closing.
(b) No Material Change. There shall have been no material
adverse change in the financial condition, prospects, properties, assets,
liabilities, business or operations of the Company since the date hereof,
whether or not in the ordinary course of business.
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(c) Certificate from Officer. The Company shall have delivered
to Purchaser a certificate of the Company's President dated as of the Closing to
the effect that the statements with respect to the Company set forth in
paragraph (a) and (b) above in this Section 6.1 are true and correct.
(d) Escrow Agreement.Each of the Company, the Agent and the
Escrow Agent shall have executed and delivered the Escrow Agreement,
substantially in the form attached hereto as Schedule 1.3(t).
(e) Employment Agreements; Employees. Each of the employees
referenced on Schedule 6.1(e) shall have executed and delivered an Employment
Agreement, substantially in the form provided in Schedule 6.1(e) (the
"Employment Agreements"), and Purchaser shall have received indications
satisfactory to Purchaser that the employees of the Company listed on Schedule
6.1(e), intend to continue their employment with the Company after the closing
of this Agreement.
(f) Opinion of Counsel. On the Closing Date, Purchaser shall
have received from Van Wert & Zimmer, P.C., counsel for the Company, an opinion
as of said date, in the form attached hereto as Schedule 6.1(f).
(g) No Litigation. There shall have been no determination by
Purchaser, acting in good faith, that the consummation of the transactions
contemplated by this Agreement has become inadvisable or impracticable by reason
of the institution or threat by any person or any federal, state or other
governmental authority of litigation, proceedings or other action against
Purchaser, the Company or any Stockholder.
(h) Consents. The Company shall have made all filings with and
notifications of governmental authorities, regulatory agencies and other
entities required to be made by the Company in connection with the execution and
delivery of this Agreement, and the performance of the transactions contemplated
hereby; and the Company and Purchaser shall have received all authorizations,
waivers, consents and permits, in form and substance reasonably satisfactory to
Purchaser, from all third parties, including, without limitation, applicable
governmental authorities, regulatory agencies, lessors, lenders and contract
parties, required to permit the continuation of the business of the Company and
the consummation of the transactions contemplated by this Agreement, and to
avoid a breach, default, termination, acceleration or modification of any
indenture, loan or credit agreement or any other agreement, contract,
instrument, mortgage, lien, lease, permit, authorization, order, writ, judgment,
injunction, decree, determination or arbitration award as a result of, or in
connection with, the execution and performance of this Agreement.
(i) Customers. No significant customer of the Company shall
have terminated or have given notice of termination of its agreement or
agreements with the Company.
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(j) Resignations. The Company shall have delivered to
Purchaser the resignations of all of the Directors of the Company and of such
officers of the Company as may be requested by Purchaser, such resignations to
be effective at the Closing.
(k) No Monetary Claims. The Company shall have delivered to
Purchaser written representations signed by each of the Principal Stockholders
and by each Director of the Company that they have no monetary claims against
the Company, provided that such representations shall not apply to: (i) the
rights of any Principal Stockholder under the Escrow Agreement, (ii) the rights
of Richard Daly under Sections 14 and 15 of the Company Shareholder Agreement,
(iii) the Investor Loans, and (iv) in the case of officers and Directors, rights
to indemnification from the Company pursuant to its Certificate of Incorporation
and by-laws, and rights pursuant to Section 10.15 hereof.
(l) Nonsolicitation and Confidentiality. Each Principal
Stockholder shall have delivered its agreement that such Principal Stockholder
and any investment fund under common control with such Principal Shareholder (it
being understood that such agreement shall not apply to any portfolio company or
other entity in which a Principal Shareholder or any investment fund under
common control with such Principal Shareholder has made an investment):
(i) will not for two years after Closing hire,
solicit, or induce to leave the employment of the Company or any
affiliate or successor to the Company, any person employed by the
Company as of the date hereof, or cause or induce any person engaged by
the Company as a consultant as of the date hereof to cease to provide
services to the Company or to materially reduce the amount or level of
services that such consultant provides to the Company or any affiliate
or successor, and it and its officers will not recommend for employment
any person employed by the Company as of the date hereof to any third
party, including portfolio companies or entities in which they have
invested, or encourage any third parties to hire such persons.
(ii) will hold in strict confidence and will not use,
except as may be directed by Purchaser any confidential or proprietary
data or information of the Company; provided that the obligations under
this paragraph shall not apply to any data or information which (i) is
or becomes public knowledge or generally known in the Company's
industry, (ii) is disclosed to the Principal Stockholder or an
investment fund under common control with such Principal Shareholder by
a third party who is not under an obligation of confidentiality with
respect to such information to or for the benefit of the Company, or
(iii) is required to be disclosed by law.
(m) Approvals. The approval of the shareholders of the Company
shall have been obtained.
(n) Dissenting Shares. As of the Closing Date, no more than
three percent (3%) of the issued and outstanding shares of Company Common Stock
shall be eligible for treatment as Dissenting Shares hereunder, and no more than
two percent (2%) of the issued and
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outstanding shares the Company Preferred Stock shall be eligible for treatment
as Dissenting Shares hereunder.
6.2 Conditions to Obligations of the Stockholders. The obligation of
the Stockholders to consummate this Agreement and the transactions contemplated
hereby is subject to the fulfillment, prior to or at the Closing, of the
following conditions precedent:
(a) Representations; Warranties; Covenants. Each of the
representations and warranties of Purchaser contained in Section 5 shall be true
and correct in all material respects as though made on and as of the Closing;
Purchaser shall, on or before the Closing, have performed in all material
respects all of its obligations hereunder which by the terms hereof are to be
performed on or before the Closing; and Purchaser shall have delivered to the
Company and the Stockholders a certificate of the President of Purchaser dated
on the Closing to such effect.
(b) Escrow Agreement. Purchaser and the Escrow Agent shall
have executed and delivered the Escrow Agreement, substantially in the form
attached hereto as Schedule 1.3(t).
(c) Employment Agreements. Purchaser shall have executed and
delivered the Employment Agreements (and issued shares of Common Stock of
Purchaser as provided in the Employment Agreements) and granted options,
substantially as provided in Schedule 5.5.
(d) Opinion of Counsel. On the Closing Date, the Company shall
have received from Gray, Plant, Mooty, Mooty & Bennett, P.A., counsel for
Purchaser, an opinion as of said date, in the form attached hereto as Schedule
6.2(d).
(e) No Litigation. There shall have been no determination by
the Company, acting in good faith, that the consummation of the transactions
contemplated by this Agreement has become inadvisable or impracticable by reason
of the institution or threat by any person or any federal, state or other
governmental authority of litigation, proceedings or other action against
Purchaser, the Company or any Stockholder.
(f) Approvals. The approval of the shareholders of the Company
shall have been obtained.
SECTION 7. CLOSING; CLOSING DATE.
Unless this Agreement shall have been terminated and the Merger herein
contemplated shall have been abandoned pursuant to a provision of Section 8
hereof and subject to compliance with the conditions hereto, a closing (the
"Closing") will be held on the business day specified by the Company (i) which
is at least three (3) business days after the Company has notified Purchaser
that it has obtained the required Stockholders approval through a shareholders
meeting or by written consent as specified in Section 3.12, and which is at
least one (1) business day before the date specified by Section 8.1(d) hereof as
it may be extended pursuant to the terms thereof, or on such other date which is
mutually acceptable to Purchaser and the Company at the offices of the Company's
counsel, commencing at 10:00 A.M. At such time and place, the
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documents referred to in Section 6 hereof will be exchanged by the parties and,
immediately thereafter, the Articles of Merger will be filed by Newco and the
Company with the Secretary of the State of Delaware; provided, however, that if
any of the conditions provided for in Section 6 hereof shall not have been met
or waived by the date on which the Closing is otherwise scheduled, then, subject
to Section 8.1(d) hereof, the party to this Agreement which is unable to meet
such condition or conditions shall be entitled (provided that such party is
acting in good faith) to postpone the Closing for a reasonable period of time by
notice to the other parties until such condition or conditions shall have been
met (which such notifying party will seek to cause to happen at the earliest
practicable date) or waived. The date on which the Closing occurs is herein
referred to as the Closing Date.
SECTION 8. TERMINATION.
8.1 Termination and Abandonment. This Agreement may be terminated and
the Merger may be abandoned before the Effective Time of the Merger,
notwithstanding any approval and adoption of this Agreement by the shareholders
of the Company or Newco:
(a) by the mutual consent of the Board of Directors of
Purchaser and the Company; or
(b) by Purchaser or the Company, if the shareholders of the
Company fail to approve the Merger at the meeting of such shareholders called to
vote upon the Merger; or
(c) by Purchaser if there has been a material
misrepresentation or material breach on the part of the Company in the
representations, warranties or covenants of the Company set forth herein, or if
there has been any material failure on the part of the Company to comply with
its obligations hereunder, or by the Company if there has been a material
misrepresentation or material breach on the part of Purchaser or Newco in the
representations, warranties or covenants of Purchaser or Newco set forth herein,
or if there has been any material failure on the part of Purchaser or Newco to
comply with their obligations hereunder; or
(d) by the Board of Directors of either the Company or
Purchaser, at its discretion, if the Merger is not effective by June 30, 1998,
except that: (i) this date is conditioned upon the Company having either held
the Shareholder meeting to approve the transactions contemplated by this
Agreement or obtained the written consent to approve the transactions
contemplated by this Agreement as contemplated in Section 3.12 hereof, at least
three (3) days in advance of June 30, 1998, and if the Company has not either
held the Shareholder meeting (irrespective of the outcome) or obtained the
written consent to approve the transactions contemplated by this Agreement,
then, at Purchaser's option, said date may be extended to a date four (4)
business days after the date on which the Company has satisfied such
requirement, and (ii) if one party's breach of this Agreement has caused a delay
in the consummation of the Merger the other party shall have the option to
extend this date to a date up to ten (10) days after the date on which the other
party is notified of the breach.
8.2 Termination Procedures. The power of termination provided for by
this Section 8 may be exercised for Purchaser or the Company only by its
respective President and will be
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effective only after written notice thereof, signed on behalf of the party for
which it is given by its President or Vice-President or other duly authorized
officer, in the case of Purchaser, or its President in the case of the Company,
shall have been given to the other. If this Agreement is terminated in
accordance with this Section 8, then the Merger shall be abandoned without
further action by the Company, Purchaser and Newco.
8.3 Liability Upon Termination. In the event of termination and
abandonment of the Merger pursuant to this Article VIII, no party hereto shall
have any liability or further obligation to any other party hereto, except a
party that is in material breach of its representations, warranties or covenants
hereunder shall be liable for damages incurred by the other parties hereto to
the extent that such damages are proximately caused by such breach if such
breach was willful or deliberate (a "Deliberate Breach"), but in the absence of
a Deliberate Breach, the liability of the responsible party to the other party
shall be limited to out-of-pocket expenses incurred by the other party in
connection with negotiating, preparing and entering into this Agreement and
carrying out the transactions contemplated hereby.
8.4 Effect of Termination. All obligations of the parties hereunder
shall cease upon any termination pursuant to Section 8.1, provided, however,
that (a) the provisions of this Section 8, Section 3.8, Section 5.3, Section
10.1, Section 10.2 and Section 10.11 hereof shall survive any termination of
this Agreement; (b) any party's liability for a material breach of its
representations, warranties, or covenants hereunder shall be as provided in
Section 8.3, and (c) any party may proceed as further set forth in Section 8.5
below.
8.5 Right to Proceed. Anything in this Agreement to the contrary
notwithstanding, if any of the conditions specified in Section 6.1 hereof have
not been fulfilled, Purchaser shall have the right to proceed with the
transactions contemplated hereby without waiving any of its rights hereunder,
and if any of the conditions specified in Section 6.2 hereof have not been
fulfilled, the Stockholders shall have the right to proceed with the
transactions contemplated hereby without waiving any of their rights hereunder.
8.6 Waiver. The Company may extend the time for the performance of any
of the obligations or other acts of Purchaser hereunder, waive any inaccuracies
in the representations and warranties of Purchaser contained herein or in any
document delivered pursuant hereto, or waive compliance by Purchaser with any of
the agreements or conditions contained herein. Any such extension or waiver
shall be valid if set forth in an instrument in writing signed by the Company.
Purchaser may extend the time for the performance of any of the obligations or
other acts of the Company hereunder, waive any inaccuracies in the
representations and warranties of the Company contained herein or in any
document delivered pursuant hereto, or waive compliance by the Company with any
of the agreements or conditions contained herein. Any such extension or waiver
shall be valid if set forth in an instrument in writing signed by Purchaser.
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SECTION 9. INDEMNIFICATION.
9.1 Survival of Warranties.
(a) Each of the representations, warranties, agreements,
covenants and obligations herein or in any Schedule, Exhibit, certificate,
agreement, document, or financial statement delivered by any party to the other
party incident to the transactions contemplated hereby are material, shall be
deemed to have been relied upon by the other party and shall survive the Closing
regardless of any investigation and shall not merge in the performance of any
obligation by either party hereto; provided that such representations of
warranties shall expire on the date indemnification obligations expire pursuant
to this Section 9.
(b) If any representation, warranty, covenant, or agreement of
any party in this Agreement or any Schedule, Exhibit, certificate, agreement,
document, or statement delivered pursuant hereto is qualified by materiality,
material adverse effect, or words of similar import (collectively, "Materiality
Conditions"), then such representation, warranty, covenant or agreement shall
not be considered breached until such Materiality Condition has been satisfied.
However, once the Materiality Conditions have been satisfied, so that a claim
can be made, the amount of any claim for indemnification under this Section 9
arising out of the same circumstances which gave rise to such breach shall be
determined without regard to such Materiality Conditions.
9.2 Indemnification by the Company and Through Escrow. Subject to the
limitations set forth below, the Company hereby agree that, notwithstanding the
Closing, the delivery of instruments of conveyance, and regardless of any
investigation at any time made by or on behalf of any party hereto, the Company
will save, indemnify and hold Purchaser, its directors, officers, employees and
agents and, after Closing, the Surviving Corporation, (hereinafter,
collectively, "the Indemnitees") harmless from and against any and all
liabilities, losses, damages, claims, deficiencies, costs and expenses
(including, without limitation, reasonable attorney fees and other costs and
expenses incident to any suit, action or proceeding) arising out of or resulting
from, and will pay to the Indemnitees the amount of damages suffered thereby
together with any amount which they or any of them may pay or become obligated
to pay on account of:
(a) the breach or inaccuracy of any warranty or representation
by the Company herein; and
(b) any breach or failure to perform by the Company of any
material term, provision, covenant or condition hereunder.
If the Closing hereunder is held, the Company, its officers, directors
and Stockholders, and the Surviving Corporation will have no liability with
respect to indemnification claims by the Indemnitees pursuant to this Section 9.
Rather all claims will be satisfied from the Escrow Fund in accordance with the
Escrow Agreement, and any amounts distributed to Stockholders from the Escrow
Fund in accordance with its terms will no longer be available to satisfy
claims.
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9.3 Procedure for Claims. Wherever the Indemnitees, or any of them,
have a claim for indemnification, they shall deliver notice of such claim to the
Agent specifying the claim and describing it in reasonable detail.
9.4 Limitation on Indemnification. The indemnification obligations of
the Company are subject to each of the following limitations, understandings or
qualifications:
(a) Each of the representations and warranties made by the
Company in this Agreement shall survive for a period of fifteen (15) months
after the Closing Date. After the expiration date of any representations and
warranties no claim for indemnification based on such representations and
warranties may be asserted by the Indemnitees, except that claims first asserted
in writing with reasonable detail before the expiration date may be pursued
until they are finally resolved.
(b) Provided that there has been, with respect to the claim in
question, no knowing and intentional (i) misrepresentation of a material fact,
(ii) omission of facts or information necessary to make a representation or
warranty not materially misleading, or (iii) breach or failure to perform any
material term, provision, covenant or condition hereunder, no individual claim
by Indemnitees for Indemnification under Section 9.2 can be made unless and
until the amount of damages incurred by the Indemnitees for such individual
claim exceeds $10,000, and then only to the extent that the amount of such
damages exceeds $10,000; provided, however, that such deductible shall not
apply, and Purchaser shall be entitled to recover the first dollar of, any claim
by Purchaser under Section 1.6 (relating to Options) or Section 1.7 hereof
(relating to adjustments to the amount to be paid at Closing). For purposes of
this subsection, if more than one claim arises from the same matter, all such
claims shall be considered one individual claim.
(c) The aggregate amount of claims by Indemnitees for
indemnification under Section 9.2 shall not exceed the amount of the Escrow
Fund, and shall be subject to the limitations of the Escrow Agreement.
9.5 Indemnification by Purchaser. Subject to the limitations set forth
below, Purchaser hereby agrees that, notwithstanding the Closing, the delivery
of instruments of conveyance, and regardless of any investigation at any time
made by or on behalf of any party hereto or of any information any party hereto
may have in respect thereof, it will indemnify and hold the Company but only up
until Closing, harmless from and against any and all liabilities, losses,
damages, claims, deficiencies, costs and expenses (including, without
limitation, reasonable attorney fees and other costs and expenses incident to
any suit, action or proceeding) arising out of or resulting from and will pay to
the Indemnitees the amount of damages suffered thereby together with any amount
which they or any of them may pay or become obligated to pay on account of:
(a) the breach or inaccuracy of any warranty or representation
by Purchaser herein;
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(b) any breach or failure to perform by Purchaser of any
material term, provision, or covenant or condition hereunder;
If the Closing hereunder is held, the Company shall no longer benefit
from the foregoing indemnification.
9.6 Procedure for Claims. Wherever the Company has a claim for
indemnification, it shall deliver notice of such claim to Purchaser specifying
the claim and describing it in reasonable detail.
9.7 Limitation on Indemnification. The indemnification obligations of
Purchaser are subject to each of the following limitations, understandings or
qualifications:
(a) Each of the representations and warranties made by the
Purchaser in this Agreement shall survive for a period of fifteen (15) months
after the Closing Date. After the expiration date of any representations and
warranties no claim for indemnification based on such representations and
warranties may be asserted by the Indemnitees, except that claims first asserted
in writing with reasonable detail before the expiration date may be pursued
until they are finally resolved.
(b) Provided that there has been no knowing and intentional
(i) misrepresentation of a material fact, (ii) omission of facts or information
necessary to make a representation or warranty not materially misleading, or
(iii) breach or failure to perform any material term, provision, covenant or
condition hereunder, no individual claim by Indemnitees for Indemnification
under Section 9.2 can be made unless and until the amount of damages incurred by
the Indemnitees for such individual claim exceeds $10,000, and then only to the
extent that the amount of such damages exceeds $10,000. For purposes of this
subsection, if more than one claim arises from the same matter, all such claims
shall be considered one individual claim.
(c) The aggregate amount of claims by Indemnitees for
indemnification under Section 9.5 shall not exceed $700,000, less the dollar
amount of any distributions which have been made to the Representative from the
Escrow Fund before the time the claim is first made by Indemnitees.
9.8 Notice; Defense of Claims.
(a) The party which is entitled to indemnification hereunder
(for purposes of this Section 9.8, the "Indemnified Party") may make claims for
indemnification hereunder by giving written notice thereof to the party required
to indemnify (for purposes of this Section 9.8, the "Indemnifying Party") within
the period in which indemnification claims can be made hereunder. If
indemnification is sought for a claim or liability asserted by a third party,
the Indemnified Party shall also give written notice thereof to the Indemnifying
Party promptly after it receives notice of the claim or liability being
asserted, but the failure to do so, or any delay in doing so, shall not relieve
the Indemnifying Party from any liability, unless, and then only to the extent
that, the rights and remedies of the Indemnifying Party are prejudiced as a
result of the
47
<PAGE>
failure to give, or delay in giving, such notice. Such notice shall summarize
the bases for the claim for indemnification and any claim or liability being
asserted by a third party. Within 30 days after receiving such notice, the
Indemnifying Party shall give written notice to the Indemnified Party stating
whether it disputes the claim for indemnification and whether it will defend
against any third party claim or liability at its own cost and expense.
(b) If the Indemnifying Party gives notice of its intent to
dispute and defend a third-party claim or liability or litigation resulting
therefrom within such period, the Indemnifying Party shall be entitled to direct
the defense against such third party claim or litigation with counsel selected
by it (subject to the consent of the Indemnified Party, which consent shall not
be unreasonably withheld) as long as the Indemnifying Party is conducting a good
faith and diligent defense. So long as the Indemnifying Party has assumed and is
conducting the defense of the third-party claim or any litigation resulting
therefrom as described above, the Indemnifying Party shall not, in the defense
of such third-party claim or any litigation resulting therefrom, consent to
entry of any judgment or enter into any settlement or compromise except with the
written consent of the Indemnified Party (which consent shall not be withheld
unreasonably) unless the judgment or proposed settlement (i) involves only the
payment of money damages by the Indemnifying Party (which in the case of a claim
made under Section 9.2 is in an amount that may be satisfied through the Escrow
Fund), (ii) fully releases the Indemnified Party from all Liabilities in respect
of such claim or litigation, and (iii) does not impose an injunction or other
equitable relief upon the Indemnified Party; and the Indemnified Party will not
consent to the entry of any judgment or enter into any settlement with respect
to the third-party claim or any litigation resulting therefrom without the prior
written consent of the Indemnifying Party (which consent shall not be withheld
unreasonably). The Indemnified Party shall at all times have the right to fully
participate in the defense of a third party claim or liability at its own
expense directly or through counsel; provided, however, that if the named
parties to the action or proceeding include both the Indemnifying Party and the
Indemnified Party and the Indemnified Party is advised that representation of
both parties by the same counsel would be inappropriate under applicable
standards of professional conduct, the Indemnified Party may engage separate
counsel at the expense of the Indemnifying Party.
(c) If the Indemnifying Party shall not give notice of its
intent to dispute and defend a third party claim or liability or litigation
resulting therefrom after receipt of notice from the Indemnified Party, or if
such good faith and diligent defense is not being or ceases to be conducted by
the Indemnifying Party, the Indemnified Party shall have the right, at the
expense of the Indemnifying Party, to undertake the defense of such claim or
liability in such manner as it deems appropriate (with counsel selected by the
Indemnified Party), and to compromise or settle such claim or litigation on such
terms as it may deem appropriate, exercising reasonable business judgment, and
the Indemnifying Party will remain responsible for such third-party claim or
liability or litigation resulting therefrom to the extent provided in this
Section 9.
(d) If the third party claim or liability is one that by its
nature cannot be defended solely by the Indemnifying Party, the Indemnified
Party shall make available such information and assistance in connection
therewith as the Indemnifying Party may reasonably
48
<PAGE>
request and shall cooperate with the Indemnifying Party in such defense at the
expense of the Indemnifying Party.
9.9 Exclusive Remedy. The provisions of this Section 9 set forth the
exclusive remedies for a breach of this Agreement (or any representation,
warranty, term, provision, covenant or condition hereunder) and shall be in lieu
of all other indemnification, contribution, liability and other remedies which
may be available by statute, at common law or otherwise, and to the maximum
extent permitted by law, the parties hereby irrevocably and unconditionally
waive all other remedies for breach of this Agreement; provided, however, that
either party may seek specific performance of this Agreement.
9.10 Determination of Amount of Claim. The parties shall make
appropriate adjustments for insurance coverage from insurance policies
maintained and paid for the Company in the ordinary course of business prior to
the Closing Date in determining the amount of liabilities, losses, damages,
claims, deficiencies, costs and expenses incurred by a party in connection with
any matter that is subject to a claim for indemnification under this Section 9.
SECTION 10. MISCELLANEOUS.
10.1 Fees and Expenses. Each of the parties will bear its own expenses
for accounting, legal, investment banking and other professional fees and
expenses in connection with the negotiation and the consummation of this
Agreement and the transactions contemplated hereby, and no such expenses of the
Company or the Stockholders relating to the negotiation and consummation of this
Agreement and the transactions contemplated hereby shall be charged to or paid
by the Company or Purchaser. The foregoing shall not limit, however, any party's
right to include expenses in any claim for damages against any other party who
breaches any legally binding provision of this Agreement.
10.2 Governing Law. This Agreement shall be construed under and
governed by the internal laws of the State of Minnesota without regard to its
conflict of laws provisions.
10.3 Notices. Any notice, request, demand or other communication
required or permitted hereunder shall be in writing and shall be deemed to have
been given if delivered or sent by facsimile transmission, upon receipt, or if
sent by registered or certified mail, upon the sooner of the date on which
receipt is acknowledged or the expiration of three days after deposit in United
States post office facilities properly addressed with postage prepaid. All
notices to a party will be sent to the addresses set forth below or to such
other address or person as such party may designate by notice to each other
party hereunder, provided, however, that no notices need to be sent to the
Company after the Effective Time of the Merger:
TO PURCHASER: Chronimed, Inc.
10900 Red Circle Drive
Minnetonka, MN 55343
Attn: President
Facsimile: (612) 979-3969
49
<PAGE>
With a copy to: Chronimed, Inc.
10900 Red Circle Drive
Minnetonka, MN 55343
Attn: General Counsel
Facsimile: (612) 979-3969
TO COMPANY: Mr. Richard Daly
Clinical Partners
1390 Market Street, Suite 310
San Francisco, CA 94102
With a copy to: Mr. Stephen Conlin
Van Wert & Zimmer, P.C.
One Militia Drive
Lexington, MA 02173
TO THE STOCKHOLDERS: Sierra Ventures Management Company, Inc.,
as Agent for the Stockholders
3000 Sand Hill Road
Building Four, Suite 210
Menlo Park, CA 94025
With a copy to: Mr. Stephen Conlin
Van Wert & Zimmer
One Militia Drive
Lexington, MA 02173
Any notice given hereunder may be given on behalf of any party by his counsel or
other authorized representatives.
10.4 Entire Agreement. This Agreement, including the Disclosure Letter,
the Schedules and Exhibits referred to herein and the other writings
specifically identified herein or contemplated hereby, is complete, reflects the
entire agreement of the parties with respect to its subject matter, and
supersedes all previous written or oral negotiations, commitments and writings,
including, without limitation, the Letter of Intent, dated April 6, 1998,
between the parties hereto in respect of the transactions contemplated herein,
which Letter of Intent shall be completely superseded by the representations,
warranties, and covenants of the parties and the other terms and conditions
contained herein.
10.5 Assignability; Binding Effect. This Agreement shall only be
assignable by Purchaser to a corporation or partnership controlling, controlled
by or under common control with Purchaser upon written notice to the Company,
and such assignment shall not relieve Purchaser of any liability hereunder. This
Agreement may not be assigned by the Company without the prior written consent
of Purchaser. This Agreement shall be binding upon and
50
<PAGE>
enforceable by, and shall inure to the benefit of, the parties hereto and their
respective successors and permitted assigns.
10.6 Captions and Gender. The captions in this Agreement are for
convenience of reference only and shall not affect the construction or
interpretation of any term or provision hereof. The use in this Agreement of the
masculine pronoun in reference to a party hereto shall be deemed to include the
feminine or neuter, as the context may require.
10.7 Execution in Counterparts. For the convenience of the parties and
to facilitate execution, this Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same document.
10.8 Amendments. This Agreement may not be amended or modified, nor may
compliance with any condition or covenant set forth herein be waived, except by
a writing duly and validly executed by each party hereto, or in the case of a
waiver, the party waiving compliance.
10.9 Publicity and Disclosures. Purchaser will issue a press release
relating this Agreement promptly after its execution. Except where Purchaser
reasonably concludes that such press release must be issued with no further
delay Purchaser shall endeavor to provide the Company with opportunity to
comment upon such press release, but Purchaser shall make the final
determination of what must be included in such press release. Except as and to
the extent required by law, and except for such press release, without the prior
written consent of the other party, neither Purchaser, nor the Company shall,
and each shall direct its representatives not to, directly or indirectly, make
any public comment, statement, or communication with respect to the transactions
between the parties or any of the terms, conditions, or other aspects of the
transactions contemplated herein or any confidential information, except (i) to
such of their respective representatives as need to know such information for
the purpose of evaluating or otherwise effecting the transactions contemplated
herein, or (ii) to the employees of the Company in connection with the Closing.
If a party is required by law to make any such disclosure, it shall first
provide to the other party the content of the proposed disclosure, the reasons
that such disclosure is required by law, and the time and place that such
disclosure will be made.
Except as otherwise required by law or the rules of the National
Association of Securities Dealers, Inc., and except for Purchaser's press
release, so long as this Agreement is in effect, neither Purchaser nor the
Company shall issue or cause the publication of any press release with respect
to the transactions contemplated by this Agreement without the consent of the
other party, which consent shall not be unreasonably withheld or delayed.
10.10 No Third Party Rights. Except as otherwise provided in this
Agreement, nothing herein expressed or implied is intended, nor shall be
construed, to confer upon or give any person, firm or corporation, other than
Purchaser and the Company and their respective security holders, any rights or
remedies under or by reason of this Agreement.
51
<PAGE>
10.11 Consent to Jurisdiction. Each of the parties hereby consents to
personal jurisdiction, service of process and venue in the federal or state
courts of Minnesota for any claim, suit or proceeding arising under this
Agreement, or in the case of a third party claim subject to indemnification
hereunder, in the court where such claim is brought.
10.12 Schedules and Exhibits. This Agreement shall be deemed to have
incorporated by reference the Disclosure Letter and all Schedules and Exhibits
referred to herein to the same extent as if such Schedules and Exhibits were
fully set forth herein.
10.13 Arbitration. Any dispute, controversy or claim arising out of or
in connection with, or relating to, this Agreement or any breach or alleged
breach hereof, including without limitation any claim for indemnification under
Section 9 hereof, shall be submitted to and settled by arbitration in San
Francisco, California, pursuant to the rules for expedited arbitration then in
effect of the American Arbitration Association (or at any other place or under
any other form of arbitration mutually acceptable to the parties so involved).
Such proceedings may be initiated by written notice given by either party to the
other. Such proceedings shall be conducted before a single arbitrator who will
be selected in accordance with the procedures then in effect of the American
Arbitration Association, unless the Agent gives notice that it wishes for the
proceedings to be before three arbitrators in accordance with the requirements
set forth below, in which case the provisions set forth below regarding
arbitration before three arbitrators shall apply.
The arbitrator (or board of arbitrators so constituted if three
arbitrators are utilized) shall forthwith upon its appointment hear the parties
and their witnesses and resolve the issue presented. The arbitration hearings
shall commence not more than sixty (60) days following the date of the
appointment of the arbitrator (or third arbitrator, if applicable) unless
extended by mutual agreement of the parties in interest or by the arbitrator(s).
The arbitrator(s) shall have complete discretion to establish the time and place
of the arbitration within San Francisco, California. The arbitrator(s) shall in
writing notify all interested parties of their determinations in the arbitration
proceedings. Any determination by the arbitrator or a majority of the
arbitrators, as applicable, shall be final and binding upon all interested
parties and a judgment thereon may be entered in the highest court of the forum,
state or federal, having jurisdiction. Compensation of the arbitrator(s) and all
other costs of the arbitration (collectively "Arbitration Costs") shall be paid
by the non-prevailing party, as determined by the arbitrator(s). If any party
shall fail, neglect or refuse to appear at the hearing established by the
arbitrator(s), the arbitrator(s) may act in the absence of such party. If the
Closing hereunder is held, any and all awards or determinations of the
arbitrator(s) made against the Company shall be satisfied solely from the Escrow
Fund in accordance with the Escrow Agreement, except for two-thirds of any
Arbitration Costs assessed against the Agent in cases where the Agent has
exercised its right to utilize three arbitrators as provided below.
At its option, either when the Agent is commencing arbitration
proceedings or when arbitration proceedings are commenced against the Agent, the
Agent may elect to have the arbitration proceedings conducted before a board of
three arbitrators rather than before a single arbitrator, but subject to the
requirement that in order to exercise such right, the Agent must post
52
<PAGE>
funds sufficient in amount to pay two-thirds of the Arbitration Costs in the
event that Purchaser is the prevailing party, with such amount not to be paid
from the Escrow Fund. If the Agent desires to exercise its rights to have a
board of three arbitrators, then if the Agent commences the arbitration
proceedings, in the Agent's notice of arbitration (and as an essential part
thereof) the Agent shall designate the name and address of an arbitrator willing
to act and state that a board of three arbitrators is required. If Purchaser
commences the arbitration, then, in a notice responding to Purchaser's notice of
arbitration, to be delivered within ten (10) days after the receipt of notice
from Purchaser, the Agent shall indicate that it wishes to have the arbitration
conducted before a board of three arbitrators and shall designate the name and
address of an arbitrator willing to act. In the event the Agent fails to deliver
such notice within ten (10) days after the receipt of notice from Purchaser, the
arbitration proceeding shall be conducted before a single arbitrator. In each
case, the Agent also must deposit with the Escrow Agent to be held in a separate
fund by the Escrow Agent two-thirds of the estimated Arbitration Costs to be
available in the event the Purchaser is the prevailing party in the arbitration.
Within twenty (20) days after receipt of a notice from the Agent that a board of
three arbitrators is required, Purchaser shall designate the name and address of
a second arbitrator willing to act, and within ten (10) days thereafter the two
arbitrators so appointed shall appoint a third arbitrator, or failing action
within such period by any party or the arbitrators, any unappointed arbitrator
or arbitrators shall be appointed by the American Arbitrator Association upon
application of any party or arbitrator. The board of arbitrators as so
constituted shall then hear the arbitration as provided above. If the Purchaser
prevails in the arbitration, then one-third of any Arbitration Costs assessed
against the Agent shall be satisfied from the Escrow Fund and the balance of
two-thirds shall be satisfied by the funds posted by the Agent as a condition to
requiring a three arbitrator process.
10.14 Section 338 Election. The parties acknowledge that Purchaser
intends to make an election under Section 338 of the Internal Revenue Code
following consummation of this Agreement and intends to apply the net operating
losses the Company has against income generated as a result of Section 338
Election.
10.15 No Amendment to Limit Indemnification. Following the Effective
Time of Merger, the Company shall not amend its Certificate of Incorporation or
by-laws in a way that reduces the indemnification now provided to its present
officers and Directors thereunder.
IN WITNESS WHEREOF the parties hereto have caused this Agreement to be
executed as of the date set forth above by their duly authorized
representatives.
PURCHASER:
CHRONIMED INC.
By /s/ Henry F. Blissenbach
Name: Henry F. Blissenbach
Title: President/COO
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<PAGE>
COMPANY:
CLINICAL PARTNERS, INC.
By: /s/ R. Daly
Name: R. Daly
Title: President
NEWCO:
RED CIRCLE VENTURES, INC.
By: Henry F. Blissenbach
Name: Henry F. Blissenbach
Title: President/COO
54
EXHIBIT 13.1
11
FINANCIAL INFORMATION
SELECTED FINANCIAL DATA .................................................... 12
MANAGEMENT'S DISCUSSION AND ANALYSIS ....................................... 13
CONSOLIDATED BALANCE SHEETS ................................................ 18
CONSOLIDATED STATEMENTS OF INCOME .......................................... 19
CONSOLIDATED STATEMENTS OF CASH FLOWS ...................................... 20
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY ................. 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ................................. 22
REPORT OF INDEPENDENT AUDITORS ............................................. 31
MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS ... 31
BOARD OF DIRECTORS ......................................................... 32
CORPORATE OFFICERS ......................................................... 33
CORPORATE AND SHAREHOLDER INFORMATION ...................................... 34
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) ................................ 35
<PAGE>
12
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended
----------------------------------------------------------------------------------
July 3, June 27, June 28, June 30, July 1, July 2,
FINANCIAL RESULTS 1998 1997 1996 1995 1994 1993
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 140,655 $ 117,171 $ 90,512 $ 62,527 $ 49,027 $ 31,202
Income from operations 10,270 8,876 6,973 1,054 1,748 863
Interest income 1,453 798 1,327 1,024 426 329
Other income -- 1,700 -- -- -- --
Income taxes (4,572) (4,330) (2,841) (475) (172) (33)
----------------------------------------------------------------------------------
Net income $ 7,151 $ 7,044 $ 5,459 $ 1,603 $ 2,002 $ 1,159
==================================================================================
Basic earnings per share $ .60 $ .59 $ .45 $ .14 $ .20 $ .12
Diluted earnings per share $ .59 $ .56 $ .42 $ .13 $ .18 $ .12
Basic weighted-average shares 11,955 12,019 12,221 11,685 10,058 9,288
Diluted weighted-average shares 12,221 12,659 13,137 12,612 11,258 9,886
FINANCIAL POSITION
Working capital $ 33,092 $ 33,821 $ 40,261 $ 31,124 $ 26,905 $ 13,727
Total assets 73,146 65,291 68,226 52,394 53,196 18,462
Long-term debt -- -- 350 -- -- 79
Shareholders' equity 62,319 53,360 57,162 47,570 42,949 16,778
</TABLE>
<PAGE>
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The fiscal years referenced herein are as follows:
FISCAL YEAR YEAR ENDED
1998 July 3, 1998 (53 weeks)
1997 June 27, 1997 (52 weeks)
1996 June 28, 1996 (52 weeks)
INCOME AND EXPENSE ITEMS AS A PERCENTAGE OF REVENUE
FISCAL
------------------------------------
1998 1997 1996
------------------------------------
Revenues
Specialty Pharmacy Services 56.8% 56.6% 65.6%
Disease Management 23.9 16.9 0.0
Diagnostic Products 19.3 26.5 34.4
------------------------------------
100.0 100.0 100.0
Cost of revenues 72.1 70.7 72.0
------------------------------------
Gross profit 27.9 29.3 28.0
Operating expenses
Selling and marketing 5.8 5.8 7.0
Research and development .2 .4 .5
General and administrative 14.6 15.5 12.8
------------------------------------
20.6 21.7 20.3
------------------------------------
Income from operations 7.3 7.6 7.7
Interest income 1.0 .7 1.5
Other income -- 1.4 --
Income tax expense (3.2) (3.7) (3.2)
------------------------------------
Net income 5.1% 6.0% 6.0%
BUSINESS
Chronimed Inc. is a leading integrated healthcare company specializing in
diagnostic products, specialty pharmacy services, and disease management for
people with chronic health conditions. The Company develops, manufactures,
markets, and distributes pharmaceuticals and medical diagnostic products, and
provides specialized patient management services for people with chronic
conditions such as HIV/AIDS, diabetes, organ transplants, and diseases treated
with injectable medications. Chronimed works directly with patients, providers,
and payors in a concerted effort to improve clinical and cost-of-care outcomes,
and to enhance the quality of life for the chronically ill.
RECAP OF 1998 RESULTS
Total revenues increased 20% in 1998 to $140.7 million, caused by strong growth
in the Specialty Pharmacy Services and Disease Management businesses. Gross
profit as a percentage of revenue declined to 27.9% in 1998 against 29.3% in
1997, although gross profit dollars increased 14% over the prior year to $39.2
million. The decline in the gross profit percentage is a result of the mix
effect of significant revenue growth in our profitable but lower-margin
Specialty Pharmacy Services business. Operating expenses decreased to 20.6% of
revenues in 1998, compared to 21.7% of revenues in 1997, due primarily to
reductions in general and administrative expenses. Income from operations
increased to $10.3 million, up 16% over the prior year of $8.9 million.
<PAGE>
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Income from operations decreased slightly as a percentage of revenue to 7.3% in
1998 compared to 7.6% in 1997, caused by the decline in gross profit percentage.
Income tax rates are slightly higher in 1998 at 39% compared to 38% in 1997.
Interest income increased 82% to $1.5 million in 1998 compared to the prior year
interest income of $798,000, due primarily to accrued interest on the amount due
from Orphan Medical, Inc. (see Note 11 of Notes to Consolidated Financial
Statements for further discussion). Fiscal 1998 net income of $7.2 million and
$.59 per share compares favorably to $7.0 million and $.56 per share,
respectively, for fiscal 1997. After adjusting for the one-time gain on the
Company's sale of its orphan drug distribution rights to Orphan Medical, Inc.,
fiscal 1997 net income was $6.0 million and $.47 per share.
REVENUES
The Company's revenues are derived from three sources: Specialty Pharmacy
Services, which includes a collection of conceptually similar specialty pharmacy
businesses focusing on identifiable chronic conditions, principally the
Injectables program with managed care, the Organ Transplant pharmacy program,
and the mail order diabetes services business of Home Service Medical; Disease
Management, which includes the integration of StatScript Pharmacy and Clinical
Partners in serving HIV/AIDS patients; and Diagnostic Products, which includes
the development, manufacturing, and distribution of proprietary blood and urine
diagnostic products and accessories.
1998 VERSUS 1997 Total revenues for 1998 were up 20% to $140.7 million from
$117.2 million in 1997, driven by growth in the Specialty Pharmacy Services and
Disease Management businesses. Chronimed's two acquisitions later in the fiscal
year--Clinical Partners (Disease Management) in June 1998 and DiaScreen
(Diagnostic Products) in March 1998--did not contribute materially to the
revenue growth. By revenue source, 1998 compares to 1997 as follows:
FOURTH TOTAL
QUARTER YEAR
-------------------
Specialty Pharmacy Services +24% +20%
Disease Management +67% +70%
Diagnostic Products +29% -13%
The Specialty Pharmacy Services business grew 24% quarter-on-quarter in the
fourth quarter and was up 20% for the year due primarily to continued patient
acquisition in the Injectables program and in Organ Transplant. The Disease
Management business grew 67% quarter-on-quarter in the fourth quarter and was up
70% for the year due to continued growth in patients and stores, and increased
use of protease inhibitor drugs, at StatScript Pharmacy. The Diagnostic Products
business showed 29% quarter-on-quarter growth in the fourth quarter due mostly
to continued performance of the Supreme blood glucose system in the long-term
care market and the impact of the new Select GT blood glucose testing system for
the consumer market. For the year, Diagnostic Products revenue was down 13%
because of the effect of a third-party product discontinued in fiscal 1997.
Overall, the Company expects its revenue growth rate for 1999 to be 30% or
higher based on initiatives put into place in 1998 and the business acquisitions
mentioned above. The Company believes that its supplier inputs and proprietary
production rates are stable and sustainable but may be subject to unforeseen
shortfalls.
1997 VERSUS 1996 Total revenues increased to $117.2 million from $90.5 million,
up 29% year to year based on growth in the Specialty Pharmacy Services and
Disease Management businesses. Chronimed acquired the assets of StatScript
Pharmacy in July 1996, which delivered significant year-on-year growth in 1997.
By revenue source, 1997 compares to 1996 as follows:
Fourth Total
Quarter Year
-------------------
Specialty Pharmacy Services +14% +12%
Disease Management N/A N/A
Diagnostic Products -33% - 1%
The Specialty Pharmacy Services business grew 14% quarter-on-quarter in the
fourth quarter and was up 12% for the year due mainly to significantly higher
patient acquisition rates in the Injectables program, offset by the loss of a
diabetes services contract. The Disease Management business was created in
fiscal 1997 with the purchase of StatScript Pharmacy, which contributed $19.8
million in revenue for the year. Revenue in the Diagnostic Products business was
down for the quarter and year due to the discontinuance of a third-party
product.
<PAGE>
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GROSS PROFITS
1998 VERSUS 1997 Total gross profit dollars increased from $34.3 million to
$39.2 million, with most of the increase coming from StatScript Pharmacy and the
Injectables program. Gross profit as a percentage of revenue decreased from
29.3% to 27.9%, with improvements coming from the Supreme and Select GT blood
glucose systems in the Diagnostic Products business, offset by expected declines
in Specialty Pharmacy Services and Disease Management. The Company expects
continued high revenue growth in 1999 but at lower gross profit percentages in
its Specialty Pharmacy Services business due to continuing price pressure from
managed care organizations. This percentage decline is expected to be partially
offset by growth in the higher-margin Diagnostic Products business.
1997 VERSUS 1996 Total gross profit dollars increased from $25.4 million in
1996 to $34.3 million in 1997, with more than half of the dollar increase coming
from the StatScript Pharmacy acquisition. Gross profit as a percentage of
revenue improved from 28.0% to 29.3%. The gross profit percentage improvement is
primarily a result of increased sales of the Supreme blood glucose system and
other higher-margin diagnostic products. Improvements in the Specialty Pharmacy
Services business, particularly in the Injectables program and in Home Service
Medical, also contributed to the gross profit percentage increase.
OPERATING EXPENSES
The Company's operating expenses include selling and marketing, research and
development, and general and administrative (G&A) expenses. The Company's G&A
expenses include both core G&A expenses (corporate and division management,
information systems, accounting, human resources, and the like) and direct G&A
expenses that vary with business growth (customer service, billing, pharmacy
fulfillment, and the like).
1998 VERSUS 1997 Total operating expenses increased $3.5 million, or 14%, in
1998 due primarily to added volume in the business. Operating expenses as a
percentage of revenue declined from 21.7% in 1997 to 20.6% in 1998 due primarily
to reductions in G&A expenses, most notably improvements in bad debt performance
and a favorable comparison caused by the one-time writeoff in 1997 of the $1.4
million HCI note receivable. Selling and marketing expenses increased $1.3
million, or 19%, in 1998, caused by important investments in all major
businesses. As a percentage of revenue, selling and marketing expenses remained
at 5.8% in 1998.
1997 VERSUS 1996 Total operating expenses increased $7.1 million, or 39%, in
1997, including the one-time write off of the $1.4 million HCI note receivable.
The remainder of the increase came from G&A expenditures for new management, new
information systems, and facilities to support the Company's growth in 1997.
Selling and marketing expenses increased $504,000, or 8%, in 1997, with modest
expenditures to build the Injectables program while controlling expenses in the
Diagnostic Products business. As a percentage of revenue, selling and marketing
expenses declined from 7.0% in 1996 to 5.8% in 1997.
INTEREST INCOME
The increase in interest income from $798,000 in 1997 to almost $1.5 million in
1998 is due primarily to $501,000 of interest accrued on the amount due from
Orphan Medical, Inc. in connection with the sale of distribution rights. The
decrease in interest income from $1.3 million in 1996 to $798,000 in 1997 is due
primarily to a reduction in investable funds from the Company's repurchase of
one million shares of Common Stock and its acquisition of StatScript Pharmacy
during fiscal 1997.
OTHER INCOME
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 altogether valued at $2.5 million.
Chronimed estimated the net present value of these expected payments to be $1.7
million and recorded this amount as Other Income in 1997. Interest on the unpaid
balance has been recorded as interest income starting in fiscal 1998.
<PAGE>
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INCOME TAXES
The Company's income tax rate increased to 39% in 1998 from 38% in 1997 as the
amount of municipal bond interest income receiving favorable tax treatment has
dropped to an immaterial level. See Note 7 of Notes to Consolidated Financial
Statements for a reconciliation to the Company's statutory rate.
LIQUIDITY AND CAPITAL RESOURCES
As of July 3, 1998, the Company had $33.1 million of working capital. During
1998, the Company generated $5.4 million of cash from operating activities. The
average days sales outstanding (DSO) of the Company's accounts receivable
improved from 58 days at June 27, 1997 to 50 days at July 3, 1998. Approximately
$4.6 million of cash was provided by the net sale of available-for-sale
securities and the issuance of Common Stock under employee stock option and
purchase programs. Cash was used totaling $7.8 million for the acquisitions of
DiaScreen and Clinical Partners (see Note 2 of Notes to Consolidated Financial
Statements). Further, $6.3 million was used for purchases of property and
equipment, particularly for information systems, facility improvements, and
production equipment for the diagnostic products business. The Company expects a
similar level of capital expenditures to be required for business growth in
fiscal 1999.
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
Company's average DSO improved from 67 days at June 28, 1996 to 58 days at June
27, 1997. Approximately $12.9 million of cash was provided by the net sale of
available-for-sale securities and the issuance of Common Stock under employee
stock option and purchase programs. Cash was used totaling $9.2 million for the
acquisition of StatScript Pharmacy (see Note 2 of Notes to Consolidated
Financial Statements). Also, $4.4 million was used for purchases of property and
equipment.
The Company had no long-term debt as of year end 1998 and 1997. Shareholders'
equity as of year end 1998 and 1997 was $62.3 million and $53.4 million,
respectively. The Company has a discretionary line of credit totaling $15.0
million, with no balance outstanding, and $7.5 million of cash and
available-for-sale securities, as of July 3, 1998. The Company believes that
available-for-sale securities, the line of credit, and cash provided by
operating activities will allow it to meet foreseeable cash requirements and
provide the flexibility to fund future growth.
NEW ACCOUNTING STANDARDS
Certain accounting standards have been issued which the Company is not yet
required to adopt. See Notes to Consolidated Financial Statements for a
discussion of the applicable standards.
IMPACT OF YEAR 2000
The Company has assessed and continues to assess the impact of the Year 2000
issue on its reporting systems and operations. The Year 2000 issue exists
because many computer systems and applications currently use two-digit data
fields to designate a year. As the century date occurs, date sensitive systems
might recognize the year 2000 as 1900 or not at all. This inability to recognize
or properly treat the year 2000 may cause the Company's systems, or the systems
used by the Company's suppliers, payors, or other constituencies, to process
critical financial and operational information incorrectly.
The Company has created an internal team that is assessing Year 2000 readiness
and taking actions as necessary. The Company's primary strategy is and has been
to replace its older, inefficient systems with current technology to improve
customer responsiveness and employee productivity. To improve financial
efficiency, in February 1997, the Company implemented general ledger, accounts
payable, and fixed assets software; this software is Year 2000 compliant. The
Company is also implementing a pharmacy services system to improve operational
efficiency; this software is also Year 2000 compliant. Because the Company has
been active in implementing new systems, direct expenses related to specific
Year 2000 modifications should not be material to the financial statements.
Other operational systems focused on productivity improvements are being
evaluated with the intent to implement prior to the Year 2000.
<PAGE>
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
During the current calendar year, the Company has incurred approximately $50,000
over and above its ongoing software productivity projects to specifically modify
existing computer systems and applications for Year 2000 computing. The Company
estimates that up to $250,000 over and above its ongoing software productivity
projects will be incurred in each of calendar 1998 and 1999. Such costs have
been or will be charged to expense as incurred and are being funded through
operating cash flows.
The Company presently believes that with modifications to existing systems and
conversions to new systems, the Year 2000 issue will not pose significant
operational problems. However, there can be no assurance that all Year 2000
issues will be identified and resolved in a timely manner, particularly those
issues involving payors' systems and other systems outside of the Company's
control. If the Company's remediation plan is not successful, or if these
outside systems should fail, there could be a significant disruption of the
Company's ability to transact business with its customers and suppliers.
OUTLOOK
Statements contained in this annual report, other than historical or current
facts, constitute "forward looking" statements as defined in the Private
Securities Litigation Reform Act of 1995. These statements reflect management's
current views of future events and financial performance that involve a number
of risks and uncertainties 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 July 3, 1998 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.
<PAGE>
18
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS JULY 3, JUNE 27,
1998 1997
--------------------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 1,027 $ 5,038
Available-for-sale securities 6,509 10,274
Accounts receivable (net of allowance of $1,280 and
$1,120 at July 3, 1998 and June 27, 1997, respectively) 23,190 20,372
Income taxes receivable 1,011 294
Inventory 10,918 7,858
Other current assets 797 274
Deferred taxes 275 965
--------------------------
Total current assets 43,727 45,075
Property and equipment
Property and equipment 21,113 12,916
Allowance for depreciation (8,115) (5,466)
--------------------------
12,998 7,450
Goodwill, net 16,259 11,639
Other assets, net 162 1,127
--------------------------
Total assets $ 73,146 $ 65,291
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 6,832 $ 5,376
Accounts payable-acquisition -- 2,250
Accrued expenses 3,803 1,940
Income taxes payable -- 1,338
Short-term debt -- 350
--------------------------
Total current liabilities 10,635 11,254
Deferred taxes 192 677
Shareholders' equity
Preferred Stock -- --
Common Stock, issued and outstanding shares -
12,081 and 11,878, respectively 121 118
Additional paid-in capital 51,668 49,838
Retained earnings 10,559 3,408
--------------------------
62,348 53,364
Unrealized (loss) on available-for-sale securities (29) (4)
--------------------------
Total shareholders' equity 62,319 53,360
--------------------------
Total liabilities and shareholders' equity $ 73,146 $ 65,291
==========================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
19
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------
JULY 3, JUNE 27, JUNE 28,
1998 1997 1996
------------------------------------------
<S> <C> <C> <C>
REVENUES $ 140,655 $ 117,171 $ 90,512
COST OF REVENUES 101,432 82,829 65,153
------------------------------------------
Gross profit 39,223 34,342 25,359
OPERATING EXPENSES
Selling and marketing 8,153 6,852 6,348
Research and development 336 505 437
General and administrative 19,442 16,236 10,501
Provision for uncollectable accounts 1,022 1,873 1,100
------------------------------------------
Total operating expenses 28,953 25,466 18,386
------------------------------------------
INCOME FROM OPERATIONS 10,270 8,876 6,973
Interest income 1,453 798 1,327
Other income -- 1,700 --
------------------------------------------
INCOME BEFORE INCOME TAXES 11,723 11,374 8,300
Income tax expense (4,572) (4,330) (2,841)
------------------------------------------
NET INCOME $ 7,151 $ 7,044 $ 5,459
==========================================
NET INCOME PER SHARE
Basic earnings per share $ .60 $ .59 $ .45
Basic weighted-average shares 11,955 12,019 12,221
Diluted earnings per share $ .59 $ .56 $ .42
Diluted weighted-average shares 12,221 12,659 13,137
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
20
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------
JULY 3, JUNE 27, JUNE 28,
1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 7,151 $ 7,044 $ 5,459
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,960 3,544 1,812
Deferred income taxes 205 205 367
Income tax benefit of stock option plans 152 1,920 1,773
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 (2,142) (144) (4,825)
Income taxes receivable (717) (245) 1,349
Inventory (2,985) (2,382) (612)
Accounts payable (1,128) (706) 1,220
Accrued expenses 1,733 (62) 2,722
Income taxes payable (1,338) (571) 571
Other assets 555 243 (246)
---------------------------------------
Net cash provided by operating activities 5,446 8,537 9,590
INVESTING ACTIVITIES
Acquisitions, net of cash acquired (7,762) (9,234) (84)
Proceeds from sale of OMI rights -- 250 --
Purchases of property and equipment (6,257) (4,373) (3,415)
Purchase of available-for-sale securities (15,377) (9,085) (16,634)
Sale and maturities of available-for-sale securities 19,117 20,682 17,879
---------------------------------------
Net cash (used in) investing activities (10,279) (1,760) (2,254)
FINANCING ACTIVITIES
Repurchase of Common Stock -- (14,452) --
Net proceeds from issuance of Common Stock 822 1,279 1,895
---------------------------------------
Net cash provided by (used in) financing activities 822 (13,173) 1,895
---------------------------------------
(Decrease) increase in cash and cash equivalents (4,011) (6,396) 9,231
Cash and cash equivalents at beginning of period 5,038 11,434 2,203
---------------------------------------
Cash and cash equivalents at end of period $ 1,027 $ 5,038 $ 11,434
=======================================
</TABLE>
SUPPLEMENTAL DISCLOSURES:
* Income taxes paid in fiscal 1998, 1997, and 1996 were $6,010, $1,918, and
$164, respectively.
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
* The Company acquired the stock of Clinical Partners, Inc. in June, 1998. The
acquisition was financed by cash, and the issuance of 42,000 shares of
Common Stock.
* The Company acquired the stock of British American Medical in August, 1995.
The acquisition was financed by the issuance of 42,716 shares of Common
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, and incurred an additional $200 of debt based
on a revenue earnout provision in the agreement. In August, 1997, the
Company converted the remaining $350 debt by issuing 42,553 shares of Common
Stock.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
21
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS) ON
COMMON STOCK ADDITIONAL AVAILABLE-
---------------------- PAID-IN RETAINED FOR-SALE
SHARES AMOUNT CAPITAL EARNINGS SECURITIES TOTAL
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance June 30, 1995 11,903 $ 119 $ 45,357 $ 2,016 $ 77 $ 47,569
Common stock
issued for
acquisition 43 -- 549 -- -- 549
Shares issued for
employee stock
purchase and
option plans 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
Shares issued for
employee stock
purchase and
option plans 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
Common stock issued
for acquisition 85 1 858 -- -- 859
Shares issued for
employee stock
purchase and
option plans 118 2 820 -- -- 822
Tax benefit of stock
option exercises -- -- 152 -- -- 152
Unrealized loss on
available-for-sale
securities -- -- -- -- (25) (25)
Net income -- -- -- 7,151 -- 7,151
----------------------------------------------------------------------------
Balance July 3, 1998 12,081 $ 121 $ 51,668 $ 10,559 $ (29) $ 62,319
============================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
The fiscal years referenced herein are as follows:
FISCAL YEAR YEAR ENDED
1998 July 3, 1998 (53 weeks)
1997 June 27, 1997 (52 weeks)
1996 June 28, 1996 (52 weeks)
[1] ACCOUNTING POLICIES
BUSINESS
Chronimed Inc. is a leading integrated healthcare company specializing in
diagnostic products, specialty pharmacy services, and disease management for
people with chronic health conditions. The Company develops, manufactures,
markets, and distributes pharmaceuticals and medical diagnostic products, and
provides specialized patient management services for people with chronic
conditions such as HIV/AIDS, diabetes, organ transplants, and diseases treated
with injectable medications.
FISCAL YEAR
The Company uses a four-week, four-week, five-week (4-4-5) quarterly accounting
cycle with the fiscal year ending on the Friday closest to June 30.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All intercompany accounts and transactions
between consolidated entities have been eliminated.
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
Revenue is recognized upon the provision of services, shipment of products, and
at the time of purchase in the specialty pharmacies.
STOCK-BASED COMPENSATION
The Company has adopted the disclosure only provisions of Statement of Financial
Accounting Standards No. 123 (SFAS No. 123), "Accounting for Stock-Based
Compensation," but applies Accounting Principles Board Opinion No. 25 (APB 25)
and related interpretations in accounting for its stock plans. Under APB 25,
when the exercise price of an employee stock option equals the market price of
the underlying stock on the date of grant, no compensation expense is
recognized. Disclosure of the impact of SFAS No. 123, as if adopted, can be
found in Note 8 to the Consolidated Financial Statements.
CASH AND CASH EQUIVALENTS
The Company considers all investments with an original maturity of 90 days or
less when purchased to be cash equivalents. Cash equivalents are available for
sale, are carried at cost which approximates fair market value, and consist
principally of corporate commercial paper.
INVESTMENTS
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.
<PAGE>
23
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 July 3, 1998 and June 27, 1997. The Company considers
the net unrealized loss on these investments of $29 and $4 at July 3, 1998 and
June 27, 1997, 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
collectability of specific accounts and the aging of the accounts receivable.
INVENTORIES
Inventories consist primarily of goods held for resale, and are carried at the
lower of cost or market determined under the average cost method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation on property and
equipment is computed using the straight-line method. Depreciation occurs over
estimated useful lives of one to seven years. Depreciation expense was $2,683,
$2,369, and $1,468 in fiscal 1998, 1997, and 1996, respectively.
GOODWILL
Goodwill is amortized on a straight-line basis over two to twenty years. The
Company periodically evaluates its goodwill for impairment by comparison of the
carrying value against anticipated business performance. Amortization expense
was $1,277, $1,175, and $344, in fiscal 1998, 1997, and 1996, respectively.
Accumulated amortization was $3,130 and $1,865 as of fiscal year end 1998 and
1997, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates its long-lived assets for impairment losses when
indicators of impairment are present by comparing the undiscounted cash flows to
the assets' carrying amount. An impairment loss is recorded if necessary.
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
In 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128,
Earning per Share. SFAS No. 128 replaced the previously reported primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants, and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where necessary, restated to conform to the SFAS No.
128 requirements.
<PAGE>
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table is a reconciliation of the earnings numerator and the
weighted-average shares denominator used in the calculations of basic and
diluted earnings per share for the last three fiscal years:
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------
<S> <C> <C> <C>
EARNINGS
Net income for basic and diluted earnings per share $7,151 $7,044 $5,459
-----------------------------------
WEIGHTED AVERAGE SHARES
Basic weighted-average shares 11,955 12,019 12,221
Adjustments for dilutive securities:
Employee stock options, net of tax proceeds 266 428 678
Warrants -- 172 199
Convertible debt -- 40 39
-----------------------------------
Dilutive potential common shares 266 640 916
-----------------------------------
Diluted weighted-average shares 12,221 12,659 13,137
===================================
BASIC EARNINGS PER SHARE $ .60 $ .59 $ .45
===================================
DILUTED EARNINGS PER SHARE $ .59 $ .56 $ .42
===================================
</TABLE>
SEGMENT DISCLOSURES
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, which
requires disclosure of certain information about a company's internal operating
segments. Compliance with SFAS No. 131 is not required for the Company until
fiscal 1999. The Statement will have no effect on the Company's basic financial
statements, but will require additional disclosures.
[2] ACQUISITIONS
During fiscal 1998, the Company made two acquisitions. In March 1998, the
Company acquired the assets of DiaScreen Corporation, a medical diagnostic
products company, for $1.9 million in cash. The excess purchase price over book
value of the net assets acquired was $400 of which $230 was allocated to
property and equipment and is being depreciated over five years and $170 was
allocated to goodwill and is being amortized on a straight-line basis over seven
years. The purchase agreement provides for additional payments up to a maximum
of $3.2 million if certain product revenue levels are met or exceeded.
In June 1998, the Company acquired the stock of Clinical Partners, Inc., a case
management services company, in a merger transaction. The net purchase price was
$6.4 million and consisted of cash and stock of the Company (42,000 shares at
$12.125 per share.) The excess purchase price over book value of the net assets
acquired was $5.7 million, of which $5.2 million was allocated to goodwill and
is being amortized on a straight-line basis over 12 years, and $500 was
allocated to non-compete agreements and is being amortized over two and three
years. $700 of the purchase price is being held in escrow to cover certain
potential liabilities to be resolved in one year or less.
On July 1, 1996, the Company acquired the assets of StatScript Management
Services, Inc. and its associated specialty pharmacies. The initial all-cash
purchase price was $10.25 million, with an additional $2.25 million cash payment
in September 1997 based on revenue performance achieved through fiscal 1997. The
excess purchase price over book value of the net assets acquired was $11.5
million, and has been assigned to goodwill. The goodwill is being amortized on a
straight-line basis over 12 years.
<PAGE>
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
All acquisitions described above were accounted for as purchases and,
accordingly, operating results of these businesses subsequent to the date of
acquisition were included in the Company's consolidated financial statements.
The following is a summary of pro forma operating results as if the acquisitions
had taken place at the beginning of fiscal 1997 for Clinical Partners and
DiaScreen and at the beginning of fiscal 1996 for StatScript:
1998 1997 1996
---------------------------------------
Total revenues $145,040 $123,030 $103,370
Net income $6,800 $7,010 $5,240
Basic earnings per share $ .57 $ .58 $ .43
Diluted earnings per share $ .56 $ .55 $ .40
The pro forma information is provided for informational purposes only. It is
based on historical information and does not purport to be indicative of the
results that would have occurred had the acquisitions been made at the beginning
of fiscal 1997 or 1996 as described above, or of future results, as significant
changes to their operations, products, and cost and expense structures have
taken place since acquisition.
[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 27, 1997:
Municipal bonds $ 818 $ -- $ -- $ 818
U.S. Government securities 9,460 23 27 9,456
-----------------------------------------------
$10,278 $ 23 $ 27 $10,274
===============================================
As of July 3, 1998:
U.S. Government securities $ 6,538 $ -- $ 29 $ 6,509
===============================================
All of the Company's available-for-sale securities have contractual maturities
of one year or less.
[4] NOTE RECEIVABLE
The Company had a 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 and
accrued interest totalling $1.4 million to general and administrative expenses,
concluding that the note was not likely to be collectable given the
yet-to-be-solved technical challenges facing the underlying project and the
financial status of HCI.
<PAGE>
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
[5] OPERATING LEASES AND RENT EXPENSE
The Company leases its office space, distribution facilities, and retail
locations under operating lease agreements. The remaining lease terms range from
one to seven years as of July 3, 1998.
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 July 3, 1998, are approximately as follows:
AMOUNT
----------
Fiscal year:
1999 $1,961
2000 1,401
2001 1,076
2002 951
2003 723
Beyond 1,116
----------
$7,228
==========
Total rent expense was $1,466, $1,041, and $692, during fiscal 1998, 1997, and
1996, respectively.
[6] LONG-TERM DEBT AND CREDIT ARRANGEMENTS
The Company incurred debt arising from its acquisition of British American
Medical, Inc. in August, 1995. The $350 of short-term debt as of June 27, 1997
was converted to 42,553 shares of Common Stock on August 14, 1997 pursuant to an
agreement with British American Medical, Inc.
The Company has an unsecured discretionary line of credit totaling $15
million that terminates January 31, 2001. The Company pays a fee at an annual
rate of .25% of the unused amount. The line of credit contains covenants with
which the Company is in compliance. There is no balance outstanding under this
line of credit at July 3, 1998.
<PAGE>
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
[7] INCOME TAXES
The components of the provision for income taxes are as follows:
1998 1997 1996
--------------------------------------
Current $4,367 $4,125 $2,474
Deferred 205 205 367
--------------------------------------
$4,572 $4,330 $2,841
======================================
The Company's income tax expense differs from the applicable federal rate of 35%
in 1998 and 34% in 1997 and 1996, respectively. The reconciliation of
differences is:
1998 1997 1996
--------------------------------------
Federal statutory rate $4,103 $3,867 $2,822
Interest on municipal bonds (15) (36) (306)
State taxes, net of federal benefit 428 376 334
Goodwill amortization 77 76 4
Other, net (21) 47 (13)
--------------------------------------
$4,572 $4,330 $2,841
======================================
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities are as follows:
1998 1997
-----------------------
Deferred tax assets:
Bad debt reserve $499 $425
Inventory reserve 39 38
Other reserves 344 461
Vacation accrual 116 124
Goodwill amortization 132 58
Deferred tax liabilities:
Depreciation (324) (184)
Prepaid assets (209) (83)
OMI rights sale (514) (551)
-----------------------
Net deferred tax assets $83 $288
=======================
<PAGE>
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
[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. 40,000,000 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 employee 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 1998, 1997, and 1996:
1998 1997 1996
-----------------------------------
Net income - as reported $7,151 $7,044 $5,459
Net income - pro forma $5,829 $6,342 $5,044
Earnings per share - basic as reported $ .60 $ .59 $ .45
Earnings per share - basic pro forma $ .49 $ .53 $ .41
Earnings per share - diluted as reported $ .59 $ .56 $ .42
Earnings per share - diluted pro forma $ .48 $ .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, 1997, and 1998 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 for the
fiscal years shown:
1998 1997 1996
-----------------------------------
Expected dividend yield 0.0% 0.0% 0.0%
Expected stock price volatility 57% 69% 69%
Risk-free interest rate 6.00% 6.00% 6.00%
Expected life of options 5 years 5 years 5 years
The Black-Scholes option-pricing model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option pricing models require the input of highly
subjective assumptions. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models may not
necessarily provide a reliable single measure of the fair value of its employee
stock options. Using the foregoing assumptions, the weighted-average fair value
of each option granted during fiscal years 1998, 1997, and 1996 was $6.51,
$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.
<PAGE>
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 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
Granted (385,500) 385,500 11.75
Exercised -- (89,772) 6.95
Cancelled 114,283 (114,283) 10.97
Expired (31,900) --
---------------------------
Balance July 3, 1998 176,488 2,242,601 $10.91 915,331 $10.51
=================================================================
</TABLE>
The following table summarizes information about the stock options outstanding
at July 3, 1998:
<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>
$3.08-$9.88 913,414 4.7 yrs $ 7.55 397,010 $ 7.20
$10.13-$21.88 1,329,187 4.6 13.24 518,321 13.05
$3.08-$21.88 2,242,601 4.7 yrs $10.91 915,331 $10.51
======================================================================================================
</TABLE>
<PAGE>
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
[9] WARRANTS
In conjunction with the Company's initial public offering, warrants were issued
to underwriters for 352,500 shares of Common Stock with an exercise price of
$4.80 per share, 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.
[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 $146, $130,
and $50 in fiscal years 1998, 1997, and 1996, respectively.
The Company has an Employee Stock Purchase Plan. There were 233,133 shares
available for purchase under the Plan at July 3, 1998.
[11] 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 $700 of indebtedness under the guarantee on July 3, 1998.
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 estimated the net present value of these payments to be
$1.7 million, and as such recorded $1.7 million as Other Income in its 1997
financial statements. The receivable balance outstanding as of July 3, 1998
totals $1.38 million, all of which is classified as Accounts Receivable because
the Company expects to receive the full amount within its current operating
cycle. On June 30, 1998, the Company received 61,878 shares of Orphan Medical
stock that the Company intends to sell as soon as the shares are registered.
Once sold, the Company will reduce the receivable balance by the proceeds
received. Orphan Medical, Inc. was created in July 1994 as a spin-off from
Chronimed Inc.
[12] SIGNIFICANT CONCENTRATIONS
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 10%, 13%,
and 19% of the Company's total revenue in fiscal years 1998, 1997, and 1996,
respectively.
The Company manufactures the Supreme and Select blood glucose reagent strips and
distributes them through its direct sales force. These two products accounted
for 12%, 11%, and 11% of the Company's total revenue in fiscal years 1998, 1997,
and 1996, respectively.
<PAGE>
31
REPORT OF INDEPENDENT AUDITORS
Chronimed Inc. Board of Directors:
We have audited the accompanying consolidated balance sheets of Chronimed Inc.
as of July 3, 1998 and June 27, 1997, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the three years in the
period ended July 3, 1998. 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
July 3, 1998 and June 27, 1997, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended July 3, 1998,
in conformity with generally accepted accounting principles.
Minneapolis, Minnesota
August 10, 1998
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 on the Nasdaq
Stock Market under the symbol "CHMD". The following table sets forth the range
of high, low, and close transaction prices as reported by Nasdaq.
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ----------------------- ------------------------
HIGH LOW CLOSE HIGH LOW CLOSE HIGH LOW CLOSE
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First Quarter $12.75 $7.56 $12.56 $20.88 $11.25 $13.06 $17.38 $10.63 $13.00
Second Quarter 13.50 10.25 11.63 16.63 12.88 13.63 15.63 13.13 14.75
Third Quarter 14.63 10.25 13.75 15.38 7.00 7.75 23.25 13.25 20.12
Fourth Quarter 15.25 10.38 12.56 11.00 6.88 7.56 25.13 16.63 18.38
</TABLE>
NUMBER OF SHAREHOLDERS OF RECORD
The number of shareholders of record of the Company's Common Stock as of July 3,
1998 and June 27, 1997 was approximately 420 and 470, respectively. The
approximate number of beneficial owners of the Company's Common Stock was 9,000
and 7,700, respectively, as of the same date.
DIVIDENDS
The Company has never declared or paid cash dividends on its Common or Preferred
Stock. The Company does not anticipate paying any cash dividends in the
foreseeable future.
<PAGE>
32
BOARD OF DIRECTORS
[PHOTO]
Board of Directors: (left to right)
(seated) Donnell D. Etzwiler, M.D., Maurice R. Taylor, II,
Lawrence C. Weaver, Ph.D.
(standing) John Howell Bullion, Charles V. Owens, Jr., and
Henry F. Blissenbach, Pharm. D.
<TABLE>
<S> <C> <C>
BOARD OF DIRECTORS DONNELL D. ETZWILER, MD BOARD COMMITTEES
Founder and President Emeritus
MAURICE R. TAYLOR, II International Diabetes Center COMPENSATION COMMITTEE
Chairman of the Board and Charles V. Owens, Jr., Chair
Chief Executive Officer CHARLES V. OWENS, JR., RETIRED Donnell D. Etzwiler
Former Executive Vice President of Lawrence C. Weaver
HENRY F. BLISSENBACH, International Operations
PHARMD Miles Laboratories, Inc. AUDIT COMMITTEE
President and John Howell Bullion, Chair
Chief Operating Officer LAWRENCE C. WEAVER, PHD Charles V. Owens, Jr.
Dean Emeritus Lawrence C. Weaver
JOHN HOWELL BULLION College of Pharmacy,
Chief Executive Officer University of Minnesota
Orphan Medical, Inc.
</TABLE>
<PAGE>
33
CORPORATE OFFICERS
[PHOTO]
Corporate Officers: (left to right)
(seated) Henry F. Blissenbach, Pharm. D., Maurice R. Taylor, II
(standing) Steven A. Crees, Patrick L. Taffe, Perry L. Anderson,
and Norman A. Cocke
MAURICE R. TAYLOR, II PERRY L. ANDERSON STEVEN A. CREES
Chairman of the Board and Vice President Senior Vice President
Chief Executive Officer StatScript Pharmacy Diagnostic Products
HENRY F. BLISSENBACH, NORMAN A. COCKE PATRICK L. TAFFE
PharmD Senior Vice President, Vice President
President and Chief Financial Officer, Information Systems
Chief Operating Officer and Secretary
<PAGE>
34
CORPORATE AND SHAREHOLDER INFORMATION
<TABLE>
<S> <C> <C>
CORPORATE TRANSFER AGENT ANNUAL MEETING
HEADQUARTERS AND REGISTRAR
The Annual Meeting of
CHRONIMED INC. Shareholder inquiries Chronimed shareholders
10900 Red Circle Drive relating to shareholder will be held Wednesday,
Minnetonka, Minnesota 55343 records, stock transfers, November 18, 1998, at
612/979-3600 change of ownership, or 3:30 p.m. Central Time
Fax: 612/979-3969 change of address should be at the Lutheran
www.chronimed.com directed to the Company's Brotherhood Auditorium,
transfer agent and 625 Fourth Avenue South,
registrar: Minneapolis, Minnesota.
AUDITORS The Notice of Annual
Norwest Bank Minnesota, N.A. Meeting and Proxy
ERNST & YOUNG LLP Shareowner Services Statement are mailed to
Minneapolis, Minnesota 161 N. Concord Exchange shareholders with the
South St. Paul, Minnesota 55075 Annual Report. All
612/450-4064 shareholders and other
GENERAL COUNSEL 800/468-9716 interested parties are
invited to attend.
GRAY, PLANT, MOOTY, MOOTY,
& BENNETT, P.A. FORM 10-K
Minneapolis, Minnesota
Copies of the Company's
Annual Report on Form 10-K
STOCK EXCHANGE filed with the Securities
LISTING and Exchange Commission may
be obtained free of charge
Common stock of Chronimed by writing to Investor
Inc. is traded on the Nasdaq Relations at the Corporate
National Market System under Headquarters address.
the symbol CHMD.
INVESTOR INQUIRIES
INTERNET HOME PAGE
Shareholders, securities
Financial information and analysts, and investors
product and company news are seeking additional
also available via the information about Chronimed
Internet. Chronimed's home may contact Investor
page address is Relations at 612/979-3600.
www.chronimed.com
</TABLE>
<PAGE>
35
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------
SEPTEMBER 26 DECEMBER 26 MARCH 27 JULY 3
------------------------------------------------------------
<S> <C> <C> <C> <C>
FISCAL 1998
Revenues $31,673 $34,772 $33,699 $40,512
Gross profit 8,682 10,478 9,304 10,759
Income from operations 2,265 3,290 2,084 2,632
Net income 1,596 2,220 1,475 1,861
Net income per share
Basic $ .13 $ .19 $ .12 $ .16
Diluted $ .13 $ .18 $ .12 $ .15
<CAPTION>
QUARTER ENDED
------------------------------------------------------------
SEPTEMBER 27 DECEMBER 29 MARCH 28 JUNE 27
------------------------------------------------------------
FISCAL 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(1)
Net income per share
Basic $ .10 $ .15 $ .10 $ .25
Diluted $ .09 $ .14 $ .10 $ .24
</TABLE>
1. Net income includes a gain on sale of the OMI distribution rights, net of
taxes, of $1,040 or $.09 per share (see Note 11 of Notes to Consolidated
Financial Statements for additional information).
CHRONIMED INC.
EXHIBIT 21.1
SUBSIDIARIES
Home Direct Medical Services, Inc., incorporated in the state of Minnesota,
doing business as Home Service Medical.
Chronimed Holdings, Inc., incorporated in the State of Minnesota, doing business
as StatScript Pharmacy.
Clinical Partners, Inc., incorporated in the State of Delaware, doing business
as Clinical Partners.
CHRONIMED INC.
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 August 10, 1998 included in the 1998
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 taken 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. 33-83368) pertaining to various Director Nonqualified Stock Option Plans,
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 August 10, 1998, with
respect to the consolidated financial statements of Chronimed Inc. incorporated
by reference in its Annual Report (Form 10-K) for the year ended July 3, 1998
and the related financial statement schedule included herein, filed with the
Securities and Exchange Commission.
Ernst & Young LLP
Minneapolis, Minnesota
September 23, 1998
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.
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.
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.
<PAGE>
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 fund its
growth.
Difficulties or delays in the development, production, marketing, or
delivery of the Company's proprietary Supreme and Select GT blood glucose
systems, its DiaScreen urine diagnostic products, and any other related testing
and diagnostic products.
Occurrences affecting the Company's ability to realize cost and volume
efficiencies, particularly in its injectables contract 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.
Adverse actions of the Food and Drug Administration, including delays
in diagnostic product approvals, production stoppages, and such other actions
that impact the Company's ability to generate revenues and profits.
Difficulties in realizing the expected revenues and profits from the
1998 acquisitions of Dia-Screen Corporation and Clinical Partners, Inc.
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 use by existing customers.
Adverse publicity and news coverage.
Inability to carry out marketing and sales plans.
Loss or retirement of key executives.
<PAGE>
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> 12-MOS
<FISCAL-YEAR-END> JUL-03-1998
<PERIOD-START> JUN-28-1997
<PERIOD-END> JUL-03-1998
<CASH> 1,027,000
<SECURITIES> 6,509,000
<RECEIVABLES> 25,481,000
<ALLOWANCES> 1,280,000
<INVENTORY> 10,918,000
<CURRENT-ASSETS> 43,727,000
<PP&E> 21,113,000
<DEPRECIATION> 8,115,000
<TOTAL-ASSETS> 73,146,000
<CURRENT-LIABILITIES> 10,635,000
<BONDS> 0
0
0
<COMMON> 121,000
<OTHER-SE> 62,198,000
<TOTAL-LIABILITY-AND-EQUITY> 73,146,000
<SALES> 140,655,000
<TOTAL-REVENUES> 140,655,000
<CGS> 101,432,000
<TOTAL-COSTS> 130,385,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,022,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 11,723,000
<INCOME-TAX> 4,572,000
<INCOME-CONTINUING> 7,151,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,151,000
<EPS-PRIMARY> .60
<EPS-DILUTED> .59
</TABLE>
