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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 2, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 0-19952
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CHRONIMED INC.
(Exact name of registrant as specified in its charter)
A MINNESOTA IRS EMPLOYER IDENTIFICATION
CORPORATION NO. 41-1515691
10900 RED CIRCLE DRIVE
MINNETONKA, MINNESOTA 55343
Telephone Number (612) 979-3600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value per share
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting and non-voting common equity of
Chronimed Inc. held by non-affiliates as of close of business on August 31,
1999, was approximately $89 million based on the closing price of $7.625 per
share reported on the Nasdaq Stock Market. The number of shares of Common Stock
outstanding as of August 31, 1999 is 12,090,263.
DOCUMENTS INCORPORATED BY REFERENCE:
None
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PART I
ITEM 1. BUSINESS
GENERAL
Chronimed Inc. ("Chronimed" or the "Company") was founded in 1985 as a
Minnesota corporation and has been publicly traded (Nasdaq: CHMD) since 1992.
During this time, Chronimed has become an 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. It also provides specialized disease management services
to specific populations of patients with selected chronic conditions.
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).
By focusing on select chronic conditions, the Company believes it is able
to improve the quality of care for people affected by these chronic conditions.
In addition, Chronimed perceives that the expertise it has developed in these
conditions makes it a valuable partner for institutions, foundations and
healthcare providers working with these patients. Also, the Company believes
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 do business with Chronimed
as a result of the Company's ability to improve care while minimizing overall
healthcare expenditures. Finally, Chronimed has spent many years establishing
relationships with the developers and manufacturers that produce the
prescription drugs and other products needed to manage chronic conditions. The
Company currently works directly with all of these constituents in a concerted
effort to improve clinical and cost-of-care outcomes -- and enhance the quality
of life for the chronically ill.
Chronimed provides patients with a convenient, competitively-priced source
of prescription drugs, medical products, counseling support, and a variety of
educational materials to help patients achieve maximum control over their
chronic conditions. Often, the greater the effort a patient makes to stabilize
or control his or her 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.
Chronimed obtains patients primarily through referrals from healthcare
providers, direct patient contacts, and contracts with managed care
organizations. The Company 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. According to
PriceWaterhouseCoopers, an estimated 87% of privately insured individuals in
the United States were enrolled in some type of managed care program during
1998, up from 48% in 1992. 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. As employers attempt to control their escalating healthcare
costs, they seek out Payors who have adopted various specialized managed care
techniques. As a result of the increasing role of managed care, coupled with
the Company's experience in managing specific patient groups, the increasing
majority of patient referrals come from 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
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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 who are targeting 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.
MERGERS, ACQUISITIONS, DIVESTITURES AND STRATEGIC PLANS
In July, 1996 Chronimed acquired StatScript Pharmacy, a Kansas City,
Missouri-based specialty retail pharmacy chain focusing on HIV/AIDS, for $12.5
million. At the time of the asset purchase, StatScript had nine retail
pharmacies in various cities around the country. As of July 2, 1999, the
Company had increased its StatScript presence to 29 retail pharmacies in
various cities around the country, with plans to open additional retail
pharmacies by June 2000.
In March 1998 the Company acquired DiaScreen Corporation, a
Minneapolis-based developer and manufacturer of blood and urine diagnostic
products used in institutional and in-home testing markets worldwide.
Consideration paid for the asset purchase was $1.9 million plus contingencies
based on future performance. At the time of the acquisition, DiaScreen was a
leading contract developer of dry reagent chemistry technologies and had
completed the development of a family of proprietary diagnostic products, some
of which were FDA approved, and others which were ready for FDA submission. On
June 24, 1998, Chronimed announced that it had received the final 510(k)
clearance by the Food & Drug Administration (FDA) needed to market DiaScreen's
proprietary urine chemistry testing strips, making the Company one of only three
businesses in the world to have a 10-parameter urine test strip. In addition,
DiaScreen's state-of-the-art manufacturing and laboratory facility enhanced
Chronimed's capabilities to develop, produce, and distribute a number of
diagnostic products for diabetes and other chronic conditions as well.
In June 1998, Chronimed acquired Clinical Partners, Inc., a specialty
HIV/AIDS case management company with significant data and information systems
capabilities. The Company paid $6.4 million in cash and stock for Clinical
Partners stock. When coupled with StatScript, this acquisition provided
Chronimed with the capability to develop and launch the country's first
integrated disease management program with a focus on HIV/AIDS.
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.
In November 1998, Chronimed sold its Publishing Division assets to John
Wiley & Sons, Inc., (NYSE: JWA and JWB), resulting in a $300,000 after-tax
gain. The Publishing Division, which consisted of approximately 80 book titles,
had become a leading independent publisher of trade books focusing on chronic
diseases, and health and wellness. Chronimed sought the sale of the Publishing
business because it no longer fit the Company's strategic direction.
In February 1999, Chronimed purchased the assets of Community Prescription
Center, a single retail pharmacy specializing in HIV/AIDS located in San Diego,
California. The business was acquired for $1.3 million and was integrated into
the Company's StatScript operations.
On April 27, 1999, Chronimed announced that it had engaged the investment
banking firm of Paine Webber to explore strategic alternatives to enhance
shareholder value. The alternatives may include a merger or sale of all or part
of the company. As of the date of this Report, no definitive agreements have
been rendered regarding any such transactions. In addition, the Company may
sever its relationship with PaineWebber at any time, and not proceed with any
alternatives or their exploration.
MARKET AND GROWTH STRATEGY
Chronimed's strategy is to continue expanding its diagnostic product
offerings, its pharmacy distribution operations, and to apply its comprehensive
chronic disease management model to other
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chronic conditions. The Company is building successful programs that can either
stand alone or operate as an integrated, disease-specific program. Chronimed
believes its programs offer benefits necessary to help its healthcare partners
improve care while managing costs.
The Company's growth strategy is to increase its distribution of
prescription drugs and proprietary diagnostic medical products by increasing
the number of patients served in its chronic disease specific programs. It also
focuses on increasing sales of proprietary and licensed products to new
patients and institutions by expanding sales of existing products and
developing or licensing new products. Finally, the Company is increasing its
special distribution programs with manufacturers and is 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 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.
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 clinically and technologically driven,
and therefore more proprietary-like, and less commodity-like, for both products
and services. The Company expects to fund its growth from operating cash flows
and line of credit borrowings through fiscal 2000.
Chronimed primarily serves four patient populations: people with diabetes,
people with HIV/AIDS, people who have had an organ transplant, and people with
complex conditions treated with injectable medications.
DIABETES. Chronimed has long served 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 study, 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 10 million are
believed to have been diagnosed according to a 1997 report published by the
American Diabetes Association.
Of persons diagnosed with diabetes, approximately 90 to 95 percent are
Type II and the remainder are Type I. A person with Type I diabetes, in which
the pancreas produces little or no insulin, 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. In addition, the January
1997 MEDICAL AND HEALTHCARE MARKETPLACE GUIDE estimates that 40% of people
diagnosed with Type II diabetes are using insulin injections to manage their
disease. Both Type I and Type II diabetics require ongoing education, self-care
and clinical monitoring to maintain glucose control. They both also 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 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.
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It is estimated that approximately one million individuals are
HIV-positive in the United States, of which management estimates that 350,000
people are receiving treatment and 500,000 are candidates for treatment. THE
NEW ENGLAND JOURNAL OF MEDICINE estimated the total cost of HIV/AIDS treatment
to be $6.7 billion per year (12/24/98). Management believes 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, management expects the number of patients seeking early
intervention oral medication therapy to increase to 55-70% of all HIV insured
individuals. 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 regimens. A 1997
study done by the Department of Veteran Affairs, and presented at the 12th
World AIDS Conference, found the average annual cost of combination drug
therapy was $10,000-$16,000 per patient per year, versus a cost of $100,000 per
patient per year to treat advanced AIDS in a hospital. 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 29
pharmacy locations in fiscal 1999, with plans to open additional pharmacies
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 195,500 solid organ transplants from 1988
through 1998, of which approximately 21,000 were performed in 1998. 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 amount spent 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 StatScript
pharmacy 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 to $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, 1999). 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
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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.
The Company believes that the Supreme II(R) 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 exclusive rights to market and
manufacture the Supreme test strips in defined territories; the Company's
production met all of its sales requirements in fiscal 1999.
In March 1998, Chronimed introduced the Select GT(TM) Blood Glucose
Testing System, a new blood glucose monitor with accessories for in-home use by
individuals with diabetes. The value-priced Select GT(TM) is being 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(TM) System expands
Chronimed's market opportunity into the consumer sector. Approximately 10% of
the Company's total revenues in the fiscal year ended July 2, 1999, were
derived from sales of the Supreme and Select GT(TM) technology. This compares
to 12% of total revenues for the fiscal year ended July 3, 1998, and 11% of
total revenues for the fiscal year ended June 27, 1997, for the same products.
Chronimed introduced the Assure(TM) Blood Glucose Monitoring System, a new
diabetes testing product utilizing electrochemical biosensor technology, at the
annual American Association of Diabetes Educators (AADE) meeting which took
place in August, 1998. The Company believes this new technology will allow
Chronimed to compete for retail business on a more competitive basis.
The Company is currently exploring new proprietary diagnostic products and
various generations of current products. Such products, if they are determined
to be economically feasible, will be distributed to new and existing markets.
DIASCREEN. 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. This test strip
provides 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, which management estimates 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
launched its product in the fall of calendar 1998 through its existing
worldwide distribution channels.
DISTRIBUTION AGREEMENT WITH CELL ROBOTICS. In June 1998, Chronimed
announced its intent to partner with Cell Robotics International, Inc. (OTC:
CRII), 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 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(TM) is a new device designed for virtually pain-free blood glucose
testing for use
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by healthcare professionals and consumers. Lasette(TM) 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 (up to $600,000) to facilitate the
development of the consumer home use model of the Lasette(TM), as well as
minimum purchases of product when production meets certain criteria. During the
fiscal year ended July 2, 1999, Chronimed acquired 75% of the stock ($450,000)
amount owed under this agreement. The Company believes it will be required to
pay, and has the resources to pay, the remaining 25% ($150,000) of this stock
obligation during fiscal year 2000.
Chronimed began shipping the institutional Lasette(TM) model, for use in
clinical settings, on November 4, 1998. Approximately one month later, the FDA
approved the institutional model for in-home use, provided the patient received
a prescription from their physician and received appropriate training. Also in
December 1998, the FDA gave approval to Cell Robotics' second-generation,
smaller consumer model for in-home use, the Lasette II(TM). Both Chronimed and
Cell Robotics believe the Lasette II(TM) should be ready for sale during fiscal
year 2000. Both products, the Lasette(TM) and the Lasette II(TM), will be sold
through Chronimed's existing national and international sales force
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.
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 2,700 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; 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 via toll-free telephone numbers and are shipped by Federal
Express or UPS to insure prompt delivery.
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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 new patient acquisitions at existing sites. The Company opened
six new sites, and acquired Fifth Avenue Pharmacy, in fiscal 1999, for a total
of 29 locations in 26 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, Denver, Fort Lauderdale, Houston, Indianapolis, Kansas City, Las Vegas,
Miami Beach, New York City, Philadelphia, Phoenix, Safety Harbor, Salt Lake
City, San Antonio, San Diego, San Francisco, Seattle, St. Louis, Tampa,
Washington, D.C., West Hollywood, and West Palm Beach. In late fiscal 1998, the
Company began to integrate the StatScript pharmacy operations with its Clinical
Partners subsidiary to offer the full spectrum of disease management services.
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 and clinical outcomes thereby 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
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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 plans to integrate its Clinical Partners operations with
StatScript Pharmacy to offer full-spectrum HIV/AIDS disease management
services. With StatScript and Clinical Partners working together, Chronimed's
goal is to 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 in the United States
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
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 $1.32 trillion in 2000 (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.
8
<PAGE>
* 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 outcomes for patients.
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 employs 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 5 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. The Company's current business plan
includes adding sales representatives to the Company's diagnostic products
business and managed care Payor sales effort during fiscal 2000.
The Company is actively pursuing relationships with international
distributors for diagnostic 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 2,700 brand name and generic
prescription drugs and medical products. When the Company receives a
prescription for a drug 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. For the fiscal year ended July 2, 1999, less than 10%
of the Company's sales were derived from sales of Sandimmune(R) and Neoral(R).
Conversely, these products accounted for approximately 10% and 13% of the
Company's total revenues in the fiscal years ended July 3, 1998 and June 27,
1997 respectively. 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.
9
<PAGE>
PRODUCTION DEPENDENCIES. Since July 1995, the Company has manufactured the
Supreme reagent strip in-house. Manufacturing of the Company's new Select GT,
Assure and DiaScreen products is 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 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 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.
10
<PAGE>
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, and manufacturers and
distributors of diabetes products. 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, many of the Company's insurance policies must be
renewed annually. Although the Company has not experienced difficulty in
obtaining insurance coverage in the past, there can be no assurance that it
will be able to do so in the future on acceptable terms or at all.
GOVERNMENT REGULATION
The Company's business is subject to substantial governmental regulation
including laws governing the dispensing of prescription drugs and laws
prohibiting the payment of remuneration for patient referrals. Because
sanctions may be imposed for violations of these laws, compliance is a
significant operational requirement for the Company. Management believes that
the Company is in substantial compliance with all existing statutes and
regulations materially affecting the conduct of its business.
In general, the Company's pharmacy operations are regulated by the
statutes and regulations of Minnesota, where it is licensed as a retail
pharmacy and wholesale distributor of pharmaceuticals, as well as of Arizona,
California, Colorado, the District of Columbia, Florida, Georgia, Illinois,
Indiana, Missouri, Nevada, New York, 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.
11
<PAGE>
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 retail
pharmacies.
As a healthcare company, Chronimed is subject to various federal laws that
regulate the relationship between providers of healthcare services and
physicians. These laws include the "fraud and abuse" provisions of the Social
Security Act, under which civil and criminal penalties can be imposed upon
persons who pay or receive remuneration in return for inducement of referrals
of patients who are eligible for reimbursement under the Medicare or Medicaid
programs. Violations of the law may result in civil and criminal penalties.
Civil penalties range from monetary fines that may be levied on a per violation
basis to temporary or permanent exclusion from these programs. In addition,
numerous states have laws or legislation pending prohibiting financial
arrangements among healthcare providers. Violations of these laws include civil
and criminal penalties, as well as the suspension or termination of a
provider's ability to continue to provide services in the state.
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 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
12
<PAGE>
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.
COMPLIANCE WITH ENVIRONMENTAL LAWS
The costs associated with the Company's compliance with Federal, state and
local environmental laws are minimal. For these reasons, the Company's
compliance with such laws does not have a material effect on its capital
expenditures, earnings or its competitive position in the marketplace.
INTELLECTUAL PROPERTY
While the Company believes that patent protection is important to its
business, it does not believe that the expiration or invalidation of any
particular patent would have a material adverse effect on its business. All
licenses held with respect to technology used by the Company are believed to be
fully enforceable. The loss of any one of several licenses held by the Company
would probably not have significant adverse effect on the Company.
SEGMENT INFORMATION
See Note 11 of Notes to Consolidated Financial Statements in Item 14 of
this Annual Report on Form 10-K for information regarding the Company's
segments.
SEASONALITY
The Company has experienced a significant seasonal pattern in its
operating results. Historically, the Company has had higher revenues in its
second fiscal quarter (ending December) than in its third fiscal quarter
(ending March). The Company believes the seasonality of its 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 overall business grows, the Company
expects this seasonal pattern will soften and that third quarter revenues will
be the same as or higher than second quarter revenues, as was the case this
fiscal year.
13
<PAGE>
EMPLOYEES
As of August 27, 1999, the Company employed approximately 375 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>
FUNCTIONS LOCATIONS SIZE (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, 2000
Clinical Partners business San Francisco, CA 4,100 Through July 31, 2001
office
Manufacturing and Eden Prairie, MN 18,000 Through August 31, 2002
product distribution Edina, MN 16,500 Through November 14, 2001
Specialty pharmacies and Arizona, California, Various up to Expire over periods
clinics Colorado, Florida, Georgia, 3,900 extending to April, 2005.
Illinois, Indiana, Minnesota,
Missouri, Nevada,
New York, Pennsylvania,
Texas, Utah, Washington,
Washington, D.C.
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
Chronimed has one legal matter to disclose, as follows:
CHRONIMED INC. v. BAYER CORPORATION, United States District Court, District of
Minnesota, No. 99CV369 (JRT/FLN), filed on March 5, 1999, the Company commenced
a declaratory judgment action in United States District Court, District of
Minnesota, seeking judicial determination that the technology used in the
leukocyte test pad of the Company's DiaScreen(R) 10-way urine test strip does
not infringe patents held by Bayer Diagnostics. Bayer filed an independent
lawsuit in South Bend, Indiana, claiming the Company infringes Bayer patents
related to its Multistix(R) 10 SG Leukocyte and specific gravity test pad
technologies and seeking injunctive relief, compensatory and statutory damages,
costs and fees in an unspecified amount. The South Bend case has been
transferred to Minnesota and the parties have agreed to consolidate the
actions. Chronimed has filed an Amended Complaint seeking a declaration of
non-infringement for both its leukocyte and specific gravity technologies. The
Amended Complaint also seeks invalidation of Bayer patents, alleges unfair
trade practices, and seeks unspecified damages. Bayer has answered the Amended
Complaint denying the Company's claims. The parties have exchanged pre-trial
discovery requests and the Court's scheduling order directs the parties to be
prepared for trial in July of 2001.
Bayer's claims for damages against the Company include compensation for the
claimed infringement of its patents, as well as a statutory trebling of those
damages if willful infringement is found. Bayer's pleadings do not specify
damage amounts. The Company is vigorously prosecuting this lawsuit and
defending itself against Bayer's claims. The Company believes that its products
will be found to be non-infringing. However, an adverse ruling could impair the
Company's presence in the urine diagnostic products market and monetary damages
would bear the possibility of material adverse impact upon the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
14
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER 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>
1999 1998 1997
--------------------------- --------------------------- ---------------------------
HIGH LOW CLOSE HIGH LOW CLOSE HIGH LOW CLOSE
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First Quarter .......... $ 13.25 $ 7.88 $ 9.75 $ 12.75 $ 7.56 $ 12.56 $ 20.88 $ 11.25 $ 13.06
Second Quarter ......... 13.38 8.63 12.94 13.50 10.25 11.63 16.63 12.88 13.63
Third Quarter .......... 14.00 4.88 6.13 14.63 10.25 13.75 15.38 7.00 7.75
Fourth Quarter ......... 8.50 4.75 8.28 15.25 10.38 12.56 11.00 6.88 7.56
</TABLE>
NUMBER OF SHAREHOLDERS OF RECORD
The number of shareholders of record of the Company's Common Stock as of
July 2, 1999 and July 3, 1998, was approximately 510 and 420, respectively. The
approximate number of beneficial owners of the Company's Common Stock was 7,000
and 9,000, respectively, as of the same dates.
DIVIDENDS
The Company has never declared or paid cash dividends on its Common or
Preferred Stock. The Company does not anticipate paying any cash dividends in
the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
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.
On June 23, 1998, the Company issued 42,000 shares as part of its acquisition
of Clinical Partners, Inc., a disease management company specializing in
HIV/AIDS. These securities were issued pursuant to Section 4(2) of the
Securities Act of 1933 as a transaction by the issuer not involving any public
offering.
15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------------------------------------
JULY 2, JULY 3, JUNE 27, JUNE 28, JUNE 30,
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
FINANCIAL RESULTS
Revenues ................................ $ 198,413 $ 140,655 $ 117,171 $ 90,512 $ 62,527
Income from operations .................. 5,844 10,270 8,876 6,973 1,054
Interest income ......................... 419 1,453 798 1,327 1,024
Other income ............................ 503 -- 1,700 -- --
Income tax expense ...................... 2,639 4,572 4,330 2,841 475
--------- --------- --------- --------- ---------
Net income .............................. $ 4,127 $ 7,151 $ 7,044 $ 5,459 $ 1,603
--------- --------- --------- --------- ---------
Basic earnings per share ................ $ .34 $ .60 $ .59 $ .45 $ .14
Diluted earnings per share .............. $ .34 $ .59 $ .56 $ .42 $ .13
Basic weighted-average shares ........... 12,096 11,955 12,019 12,221 11,685
Diluted weighted-average shares ......... 12,256 12,221 12,659 13,137 12,612
FINANCIAL POSITION
Working capital ......................... $ 37,267 $ 33,092 $ 33,821 $ 40,261 $ 31,124
Total assets ............................ 80,895 73,146 65,291 68,226 52,394
Long-term debt .......................... -- -- -- 350 --
Shareholders' equity .................... 66,487 62,319 53,360 57,162 47,570
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The fiscal years referenced herein are as follows:
FISCAL YEAR YEAR ENDED
----------- ------------------------
1999 July 2, 1999 (52 weeks)
1998 July 3, 1998 (53 weeks)
1997 June 27, 1997 (52 weeks)
INCOME AND EXPENSE ITEMS AS A PERCENTAGE OF REVENUE
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Revenues
Specialty Pharmacy Services ......... 51.8% 56.8% 56.6%
Disease Management .................. 32.7 23.9 16.9
Diagnostic Products ................. 15.5 19.3 26.5
----- ----- -----
100.0 100.0 100.0
Cost of revenues ..................... 77.3 72.1 70.7
----- ----- -----
Gross profit ......................... 22.7 27.9 29.3
----- ----- -----
Operating expenses
Selling and marketing ............... 4.6 5.8 5.8
Research and development ............ .4 .2 .4
General and administrative .......... 14.8 14.6 15.5
----- ----- -----
19.8 20.6 21.7
----- ----- -----
Income from operations ............... 2.9 7.3 7.6
Interest income ...................... .2 1.0 .7
Other income ......................... .3 -- 1.4
Income tax expense ................... 1.3 3.2 3.7
----- ----- -----
Net income ........................... 2.1% 5.1% 6.0%
</TABLE>
16
<PAGE>
BUSINESS
Chronimed Inc. is a leading integrated healthcare company specializing in
specialty pharmacy services, disease management, and diagnostic products for
people with chronic health conditions. The Company develops, manufactures,
markets, and distributes pharmaceuticals and medical diagnostic products. It
provides specialized patient management services nationwide 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 to improve clinical and cost-of-care outcomes.
RECAP OF 1999 RESULTS
Total revenues increased 41% in 1999 to $198.4 million, caused by strong
growth in the Specialty Pharmacy Services and Disease Management segments.
Gross profit as a percentage of revenue declined to 22.7% in 1999 against 27.9%
in 1998, although gross profit dollars increased 15% over the prior year to
$45.1 million. The decline in the gross profit percentage is a result of price
pressure in all segments plus the mix effect of significant revenue growth in
the profitable but lower-margin Specialty Pharmacy Services and Disease
Management segments. Operating expenses decreased to 19.8% of revenues in 1999,
compared to 20.6% of revenues in 1998, due primarily to efficiencies in selling
and marketing expenses. Income from operations decreased to $5.8 million, down
43% from the prior year of $10.3 million.
Income from operations decreased as a percentage of revenue to 2.9% in
1999 compared to 7.3% in 1998, caused by the decline in gross profit
percentage. Income tax rates remained the same in 1999 at 39%. Interest income
decreased 71% to $419,000 in 1999 compared to the prior year interest income of
$1.5 million, due primarily to a reduction in interest from the Orphan Medical,
Inc. receivable (see Note 9 of Notes to Consolidated Financial Statements). The
Company recognized a $503,000 gain on the sale of its Publishing business in
fiscal 1999 as Other Income in the financial statements. Fiscal 1999 net income
of $4.1 million and $.34 per diluted share compares to $7.2 million and $.59
per diluted share, respectively, for fiscal 1998.
REVENUES
The Company's revenues are derived from three segments: Specialty Pharmacy
Services, which includes a collection of niche 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.
1999 versus 1998. Total revenues for 1999 were up 41% to $198.4 million
from $140.7 million in 1998, driven by growth in the Specialty Pharmacy
Services and Disease Management businesses. By revenue source, 1999 compares to
1998 as follows:
FOURTH QUARTER TOTAL YEAR
-------------- ----------
Specialty Pharmacy Services ................ +20% +29%
Disease Management ......................... +103% +93%
Diagnostic Products (excluding Publishing) . +1% +19%
The Specialty Pharmacy Services business grew 20% quarter-on-quarter in
the fourth quarter and was up 29% for the year due primarily to continued
patient acquisition in the Injectables program. Organ Transplant and
Injectables are both expected to grow 20% or more in fiscal 2000 as a result of
new contracts and further penetration of existing contracts. The Disease
Management business grew 103% quarter-on-quarter in the fourth quarter and was
up 93% for the year due to continued growth in patients and stores, and
increased use of new HIV/AIDS drugs, at StatScript Pharmacy. The Diagnostic
Products business, excluding Publishing, showed 1% quarter-on-quarter growth in
the fourth quarter. For the year, Diagnostic Products revenue was up 19% due
primarily to revenue increases in the Select GT(TM), Assure(TM), urine and
lancet product lines. The Diagnostic Products segment is expected to grow
17
<PAGE>
between 15 and 20 percent in revenue for fiscal 2000 as its newer products take
hold in both the domestic and international markets. Overall, the Company
expects its revenue growth rate for 2000 to be approximately 30% based on
initiatives put into place in 1999 and the business acquisitions from 1998. The
Company believes that its supplier inputs and proprietary production rates are
stable and sustainable but may be subject to unforeseen shortfalls.
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 segments. Chronimed's two acquisitions late 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 QUARTER TOTAL YEAR
-------------- -----------
Specialty Pharmacy Services ................ +24% +20%
Disease Management ......................... +67% +70%
Diagnostic Products (excluding Publishing) . +26% -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 26% 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(TM) 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.
COST OF REVENUES AND GROSS PROFITS
1999 versus 1998. Total gross profit dollars increased $5.9 million, from
$39.2 million to $45.1 million. The gross profit dollar increase came from the
Disease Management and Specialty Pharmacy segments, offset by a decline in
Diagnostic Products. Gross profit as a percentage of revenue decreased from
27.9% to 22.7% as a result of price pressure and business mix in all segments.
The Company expects continued high revenue growth in 2000 in its lower-margin
Disease Management and Specialty Pharmacy Services segments. This lower margin
percentage growth is expected to be partially offset by growth in the
higher-margin Diagnostic Products business. The Company expects its 2000 gross
profits to be approximately 20 percent of revenue based on current projections
of business mix.
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(TM)
blood glucose systems in the Diagnostic Products business, offset by expected
declines in the lower margin Specialty Pharmacy Services and Disease
Management.
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 direct G&A expenses that
vary with business growth (customer service, billing, and pharmacy
fulfillment).
1999 versus 1998. Total operating expenses increased $10.3 million, or
36%, in 1999 due to business acquisitions late in fiscal 1998 (DiaScreen and
Clinical Partners), significant growth at the StatScript pharmacies, and
general business volume. Operating expenses as a percentage of revenue declined
from 20.6% in 1998 to 19.8% in 1999 due primarily to efficiencies in selling
and marketing, particularly in Specialty Pharmacy. The Company's business model
for operating expenses is to continue improving efficiency on greater revenue
volume.
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%
18
<PAGE>
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 write-off in 1997 of the $1.4 million HCI note receivable.
Selling and marketing expenses increased $1.3 million, or 19%, in 1998, caused
by people, advertising, and promotion investments in all major businesses. As a
percentage of revenue, selling and marketing expenses remained at 5.8% in 1998.
INTEREST INCOME
The decrease in interest income from $1.5 million in 1998 to $419,000 in
1999 is due to the decrease in interest from the Orphan Medical receivable,
which has been paid to the Company in full in 1999, and from a reduction in
investable funds used to support the Company's growth. The increase in interest
income from $798,000 in 1997 to $1.5 million in 1998 was due primarily to
$501,000 of interest accrued on the amount due from Orphan Medical in
connection with the sale of distribution rights.
OTHER INCOME
In November 1998, Chronimed sold its Publishing business to John Wiley and
Sons, a New York publisher, for $1.8 million. As a result of the sale, the
Company recognized a gain of $503,000, which was recorded as Other Income in
the financial statements.
INCOME TAXES
The Company's income tax rate in 1999 and 1998 was 39%. See Note 6 of
Notes to Consolidated Financial Statements for a reconciliation to the
Company's statutory rate.
19
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table presents the Company's results of operations for the
last 8 calendar quarters. This data is unaudited and includes, in the opinion
of the Company's management, all adjustments necessary to present fairly the
data in accordance with generally accepted accounting principles. Such
quarterly results are not necessarily indicative of future results of
operations.
The Company's results of operations for the fourth quarter ending July 2,
1999, include special charges of $800,000, or approximately four cents per
share, related to costs incurred in seeking a strategic partner, legal costs,
and information systems projects.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------
OCTOBER 2 JANUARY 1 APRIL 2 JULY 2
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
FISCAL 1999
Revenues ............................... $ 42,796 $ 48,680 $ 51,683 $ 55,254
Gross profit ........................... 11,383 12,172 10,697 10,861
Income (loss) from operations .......... 2,462 3,134 736 (488)
Net income (loss) ...................... 1,694 2,255 466 (288)
Net income (loss) per share
Basic ................................. $ .14 $ .19 $ .04 $ (.02)
Diluted ............................... $ .14 $ .18 $ .04 $ (.02)
<CAPTION>
QUARTER ENDED
--------------------------------------------------
SEPTEMBER 26 DECEMBER 26 MARCH 27 JULY 3
------------ ----------- -------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL 1998
Revenues ................................ $ 31,673 $ 34,772 $ 33,699 $ 40,512
Gross profit ............................ 8,682 10,478 9,304 10,759
Income (loss) from operations ........... 2,265 3,290 2,084 2,632
Net income (loss) ....................... 1,596 2,220 1,475 1,861
Net income (loss) per share
Basic .................................. $ .13 $ .19 $ .12 $ .16
Diluted ................................ $ .13 $ .18 $ .12 $ .15
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
As of July 2, 1999, the Company had $37.3 million of working capital.
During 1999, the Company generated $2.2 million of cash from operating
activities. The average days sales outstanding (DSO) of the Company's accounts
receivable worsened from 50 days at July 3, 1998 to 59 days at July 2, 1999 due
primarily to two managed care accounts that the Company fully expects to
collect in fiscal 2000. The average days inventory on hand improved from 32
days in 1998 to 20 days in 1999. Approximately $8.8 million of cash was
provided by the net sale of available-for-sale securities, the issuance of
Common Stock under employee stock option and purchase programs, and proceeds
from sales. Cash was used totaling $1.9 million for the acquisition of a
StatScript pharmacy (see Note 2 of Notes to Consolidated Financial Statements)
and earnout payments on the 1998 DiaScreen acquisition. Further, $6.8 million
was used for purchases of property and equipment, particularly for information
systems, facility improvements, and production equipment for the diagnostic
products business, and for the repurchase of Common Stock.
As of July 3, 1998, the Company had $33.1 million of working capital.
During 1998, the Company generated $5.3 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 $4.7 million of cash was provided by the net sale of
available-for-sale securities, the issuance of Common Stock under employee
stock option and purchase programs, and proceeds from sales. 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
20
<PAGE>
property and equipment, particularly for information systems, facility
improvements, and production equipment for the diagnostic products business.
The Company had no long-term debt as of year end 1999 and 1998.
Shareholders' equity as of year end 1999 and 1998 was $66.5 million and $62.3
million, respectively. The Company has a discretionary line of credit totaling
$15.0 million, with no balance outstanding as of July 2, 1999, and $3.3 million
of cash and cash equivalents, as of July 2, 1999. The Company believes that the
line of credit and cash provided by operating activities will allow it to meet
foreseeable cash requirements and provide the flexibility to fund future
growth.
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.
THE YEAR 2000 READINESS DISCLOSURE STATEMENT
BACKGROUND
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.
STATE OF READINESS
The Company created an internal team that has been 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 productivity and customer responsiveness. Most of these systems
projects have been undertaken in response to specific business needs and not as
a result of the Company's planned Year 2000 efforts. Nonetheless, the Company
has included all information systems and business functions in its assessment
of Year 2000 readiness. A brief assessment of Year 2000 readiness follows:
The Company has completed the conversion of its core information
technologies to Year 2000 compliant systems. With respect to the Company's
non-mission critical systems and business functions, the Company has been
evaluating readiness, testing systems, and communicating with vendors and
customers.
Communications with vendors and customers will continue through 1999. In
addition to compiling information related to the readiness of goods and
services provided to the Company, Chronimed has been informing customers that
all of its proprietary medical devices are Year 2000 compliant. The Company has
determined that internal systems will permit an uninterrupted flow of
pharmaceuticals and related services to its customers and is verifying that it
will continue to receive an uninterrupted flow of inventory and raw materials
from its major vendors.
The Company has been exchanging information with third party payors to
facilitate an uninterrupted electronic data interchange (EDI) and reimbursement
process. The Company has collected all necessary information and has been
testing the readiness of these EDI systems. The Company is also monitoring the
state of readiness of governmental payors. The Company anticipates that
definitive information from governmental payors will not be fully available
until the end of 1999. The Company is modeling its contingency plans to
accommodate the potential delay in receipt of funds from such payors.
COSTS TO ADDRESS YEAR 2000 ISSUES
The Company has implemented core systems designed to improve productivity
and customer responsiveness that are also Year 2000 compliant. The most
significant projects include the Company's integrated general ledger, accounts
payable and fixed assets system, which was implemented in 1997, and its
pharmacy services system, which was implemented in 1998. We do not view these
and other similar
21
<PAGE>
projects as part of the Company's Year 2000 costs because we did not accelerate
their replacement due to Year 2000 issues. These projects are capitalized as
property and equipment on the Company's balance sheet and are depreciated over
the estimated useful life of the system.
Because the Company has been active in implementing new systems as
described above, direct expenses related to specific Year 2000 modifications
for both information systems and business systems should not be material to the
financial statements. During the current calendar year, the Company has
incurred approximately $200,000 over and above its ongoing productivity
projects to specifically modify existing systems and applications for Year 2000
computing. The Company estimates that up to an additional $100,000 will be
incurred the rest of calendar 1999. Such costs have been or will be charged to
expense as incurred and are being funded through operating cash flows.
RISKS TO THE COMPANY
The Company believes that its greatest Year 2000 risk is related to
reimbursement from third-party payors, particularly state and federal
governments. Risk also exists relative to the flow of raw materials and
inventory from vendors. Interruption of the Company's business due to
infrastructure failure, in the form of power or telecommunications breakdowns,
is believed unlikely. However, the Company's contingency plan is addressing
short-term loss of these basic utilities. Minimal risks are associated with the
functioning of the Company's information technologies, financial systems,
physical plant and equipment, internal communications and human resources
functions.
CONTINGENCY PLANS
The principal focus of the Company's contingency plan involving
third-party payors will include the dedication of cash reserves or available
credit to accommodate delays in cash flow and the assignment of current and new
personnel to the processing of non-electronic reimbursement forms. Contingency
planning has begun with respect to the flow of raw materials and inventory, and
the Company is considering increasing inventory to overcome vendor delays. All
Company contingency plans are being reviewed and finalized in September 1999,
with ongoing updates and enhancements through year end.
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 with this
Annual Report on Form 10-K are included herein as Exhibit 99. Investors are
specifically referred to such cautionary statements for discussion of factors
which could affect the Company's operations and forward-looking statements
contained herein.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pursuant to the Company's investment policy, idle and excess funds are
invested in high grade, fixed income securities generally for no more than one
year and are classified as Available-for-Sale. Investments at July 3, 1998
consisted of debt securities with maturities of less than one year. As of July
2, 1999, investments consisted of equity securities of Cell Robotics
International, Inc., with whom the Company has a distribution and development
agreement for the Lasette Laser Lancing Device. The Company considers any net
unrealized gain or loss on these investments to be temporary and reflects such
gains or losses as a component of shareholders' equity.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary financial information required
to be filed under this Item are presented on pages F-1 through F-16 of this
Annual Report on Form 10-K, and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
22
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The executive officers of the Company and their ages as of August 31,
1999, are as follows:
NAME AGE POSITION
- ---- --- --------------------------------------
Maurice R. Taylor, II ......... 53 Chairman of the Board of Directors and
Chief Executive Officer
Henry F. Blissenbach, Pharm D . 57 President and Chief Operating Officer
Steven A. Crees ............... 45 Senior Vice President
Steven B. Russek .............. 52 Senior Vice President
Perry L. Anderson ............. 39 Vice President
Shawn L. Featherston .......... 46 Vice President
Gregory H. Keane .............. 44 Vice President, Treasurer
Patrick L. Taffe .............. 47 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. Prior to Chronimed, Mr. Taylor held various
management positions in companies whose principal activities were
manufacturing, distribution and international trade. Mr. Taylor is Chairman of
Linguistic Technologies, Inc., a privately-held company specializing in the
application and integration of speech recognition technology into the
healthcare market. He is Chairman of the Scripps/Whittier Institute for
Diabetes, a non-profit organization dedicated to research, education and
patient care in the field of diabetes. He is also a director of the Minnesota
Zoological Garden, a public-private partnership established by the Minnesota
legislature.
Dr. Blissenbach has served as President and Chief Operating Officer of the
Company since May 1997. He became a director of the Company in September 1995.
From 1992 to 1997, he served as President of Diversified Pharmaceutical
Services, Inc. (DPS), a United HealthCare subsidiary until 1994, then a
subsidiary of SmithKline Beecham Corp. DPS is a pharmacy benefit management
firm. Dr. Blissenbach also serves as a director of Ligand Pharmaceuticals Inc.,
a publicly-held biomedical development company.
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. Russek joined the Company as Senior Vice President in December 1998.
From 1991 to 1998, Mr. Russek was employed by Caremark, Inc., a division of
MedPartners, Inc., as Vice President of Pharmacy Services. Previous employment
included several years of management, operations, and pharmacy experience in
the healthcare industry. Mr. Russek is a former director of Pharmaceutical Care
Management Association.
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.
Mr. Featherston joined the Company in October 1998 as Vice President,
Human Resources. From 1993 to 1998, he was employed by Empi, Inc., a medical
products manufacturer, as Director and Vice President, Human Resources, and
Vice President, Sales Operations. Previous employment includes 20 years of
Human Resources experience in consulting and industry.
Mr. Keane joined the Company as controller in April 1996. In March 1999,
he was appointed as an officer and Vice President and Treasurer. From 1983 to
1996, Mr. Keane served in a number of financial management roles at National
Computer Systems, a publicly-held systems and services company based in
Minneapolis, Minnesota. Previous employment included financial management
experience in the software industry and public accounting experience.
23
<PAGE>
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.
Following is required information about the directors of the registrant:
NAME AND POSITIONS
WITH THE COMPANY AGE PRINCIPAL OCCUPATION
------------------ --- ----------------------------------------------
John Howell Bullion 47 Mr. Bullion is a co-founder of the Company and
Director has served as a director since 1985. He has
been Chief Executive Officer and a director of
Orphan Medical, Inc., a publicly-held
pharmaceutical development company, since its
formation in June 1994.
John H. Flittie 63 Mr. Flittie was elected as a director in
Director August 1998. He most recently served as
President and Chief Operating Office of
ReliaStar Financial Corporation, a NYSE-listed
financial services holding company, retiring
June 30, 1999. He is currently a director of
ReliaStar. He joined ReliaStar (then
Northwestern National Life) in 1985 as Senior
Vice President and Chief Financial Officer.
Mr. Flittie is also a director of Community
First Bankshares, Inc., a Nasdaq-listed
financial services company. Mr. Flittie is a
Fellow of the Society of Actuaries and on the
Advisory Board of the College of Business
Administration at Drake University. He is an
adjunct faculty member of the University of
St. Thomas, and is a self-employed consultant.
Charles V. Owens, Jr. 72 Mr. Owens has served as a director of the
Director Company since 1991. Since 1988, Mr. Owens has
served as a consultant to several medical
device and diagnostic firms in the United
States and Japan. From 1985 to 1988, he was
Chief Executive Officer of Genesis Labs, Inc.,
(which included DiaScreen Corporation as a
subsidiary) a diagnostics manufacturing
company. Before his employment with Genesis
Labs, Inc., Mr. Owens was an executive officer
with various medical device companies,
including Miles Laboratories, Inc. Mr. Owens
is a past director of St. Jude Medical, Inc.,
a medical device company, and was a director
of Genesis Labs, Inc., from which the Company
acquired the assets of DiaScreen Corporation
in March 1998.
Travers H. Wills 56 Mr. Wills was elected as a director in August
Director 1998. He most recently served as Chief
Operating Officer and Executive Vice President
of United HealthCare Corporation, retiring
July 1998. He joined United HealthCare
Corporation in 1992 as Senior Vice President
of Specialty Operations. Prior to 1992, Mr.
Wills served in various executive positions at
CIGNA.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers, directors, and certain shareholders to file
reports of ownership and changes in ownership of the Company's Common Stock
with the Securities and Exchange Commission. To the Company's knowledge, based
on a review of the copies of such reports furnished to the Company and written
representations that no other reports were required, all Section 16(a) filing
requirements were met during fiscal 1999.
24
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid for the Company's
fiscal year ended July 2, 1999, and for fiscal 1998 and 1997, where applicable,
to the Company's Chairman of the Board of Directors and Chief Executive
Officer, and the six other most highly paid executive officers (collectively,
"named executive officers").
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES ALL OTHER
-------------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY ($) BONUS($)(1) OPTIONS(#)(8) ($)(9)
- --------------------------- ----------- ---------- ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Maurice R. Taylor, II (2) 1999 325,800 50,000 116,800 4,900
CHAIRMAN OF THE BOARD 1998 304,500 123,000 -- 4,000
AND CHIEF EXECUTIVE OFFICER 1997 290,000 50,000 223,000 4,100
Henry F. Blissenbach (3) 1999 232,200 25,000 116,800 5,900
PRESIDENT AND CHIEF OPERATING 1998 200,000 65,000 -- 500
OFFICER 1997 33,000 -- 129,000 --
Steven A. Crees 1999 170,300 13,900 58,400 2,900
SENIOR VICE PRESIDENT 1998 157,500 40,000 -- 2,600
1997 149,000 32,000 56,600 3,500
Steven B. Russek (4) 1999 114,000 40,500 70,000 60,000
SENIOR VICE PRESIDENT 1998 -- -- -- --
1997 -- -- -- --
Perry L. Anderson (5) 1999 145,000 58,500 46,720 3,600
VICE PRESIDENT 1998 135,000 34,000 -- 3,000
1997 110,000 15,000 51,725 2,100
Patrick L. Taffe (6) 1999 145,000 25,000 46,720 3,600
VICE PRESIDENT 1998 130,000 33,000 -- 2,800
1997 112,800 20,500 60,000 --
Norman A. Cocke (7) 1999 196,800 16,850 31,540 2,100
SENIOR VICE PRESIDENT 1998 172,500 45,000 -- 2,800
1997 164,300 32,000 62,700 4,100
</TABLE>
- ------------------
(1) Bonus amounts were earned for the fiscal year shown but paid in the next
fiscal year.
(2) Mr. Taylor received no additional cash compensation for service as a
director.
(3) Dr. Blissenbach was hired as President and Chief Operating Officer in May
1997. He was not a participant in the fiscal 1997 bonus plan. Prior to his
hire date in May 1997, Dr. Blissenbach received $26,800 for his services as
director in fiscal 1997. In fiscal 1998 and going forward, Dr. Blissenbach
will receive no additional cash compensation for service as a director.
(4) Mr. Russek was hired as Senior Vice President in November 1998.
(5) Mr. Anderson was hired July 1996 and was promoted to Vice President in July
1997.
(6) Mr. Taffe was hired as Vice President in July 1996.
(7) Mr. Cocke ended his employment with Chronimed in March 1999. He served as
Senior Vice President, Chief Financial Officer, and Secretary. See Item 11
of this Annual Report on Form 10-K, Subsection "Employment and Severance
Agreements", for a discussion of Mr. Cocke's severance agreement.
(8) Upon shareholder approval of the Company's 1999 Stock Option Plan,
executive officers were granted options in November 1998, and then in June
1999 for fiscal 1999. (Executive officers were not granted options in
fiscal 1998 due to the lack of options available in the Company's
then-existing stock option plans.) Also, all non-qualified stock options
are transferable by each officer to his immediate family members and family
trusts.
(9) All other compensation consists of Company 401(k) contribution matches, and
relocation expenses in the amount of $60,000 for Mr. Russek.
25
<PAGE>
STOCK OPTIONS
The following tables summarize stock option grants and exercises during
fiscal 1999 to or by the named executive officers and the value of all options
held by the named executive officers at July 2, 1999.
Executive officers were not granted options in fiscal 1998 due to the lack
of options available in the Company's then-existing stock option plans. Upon
shareholder approval of the Company's 1999 Stock Option Plan in November 1998,
executives were granted fiscal 1998 options for service in fiscal 1998. In June
1999, executives were granted fiscal 1999 options.
Total options granted during fiscal 1999 are noted below.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------
NUMBER OF POTENTIAL REALIZABLE VALUE AT
SECURITIES PERCENT OF ASSUMED ANNUAL RATES OF STOCK
UNDERLYING TOTAL OPTIONS EXERCISE APPRECIATION FOR OPTION TERM
OPTIONS GRANTED TO PRICE EXPIRATION -----------------------------
NAME GRANTED (1) EMPLOYEES ($/SHARE) DATE 5% ($) 10% ($)
- ---- ----------- ------------- --------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Maurice R. Taylor, II (2) ..... 116,800 11.7% 10.75 11/17/05 511,155 1,191,209
Henry F. Blissenbach .......... 58,400 10.75 11/17/05 255,578 595,605
58,400 8.28 7/01/06 196,854 458,754
------- ------- ---------
116,800 11.7% 452,432 1,054,359
Steven A. Crees ............... 29,200 10.75 11/17/05 127,789 297,802
29,200 8.28 7/01/06 98,427 229,377
------- ------- ---------
58,400 5.8% 226,216 527,179
Steven B. Russek .............. 40,000 10.063 11/29/05 163,866 381,878
30,000 8.281 7/01/06 101,136 235,690
------- ------- ---------
70,000 7.0% 265,002 617,567
Perry L. Anderson ............. 23,360 10.75 11/17/05 102,231 238,242
23,360 8.28 7/01/06 78,742 183,502
------- ------- ---------
46,720 4.7% 180,973 421,743
Patrick L. Taffe .............. 23,360 10.75 11/17/05 102,231 238,242
23,360 8.28 7/01/06 78,742 183,502
------- ------- ---------
46,720 4.7% 180,973 421,743
Norman A. Cocke ............... 31,540 3.2% 10.75 11/17/05 138,029 321,667
</TABLE>
- ------------------
(1) The options were granted under the Company's 1994 and 1999 Stock Option
Plans. These options generally vest with respect to 20% of such shares on
the first year anniversary date and become exercisable with respect to an
additional 20% of the shares on each of the next four anniversary dates.
The options may become immediately exercisable upon certain
change-in-control events as described in the Company's 1994 and 1999 Stock
Option Plans. Mr. Russek received 10,000 options upon hiring with immediate
vesting; all other option grants to Mr. Russek follow the standard vesting
schedule.
(2) Mr. Taylor was granted an additional 100,000 options at an exercise price
of $9.25 per share as of July 26, 1999.
26
<PAGE>
AGGREGATED OPTION EXERCISES IN FISCAL 1999
AND OPTION VALUES AT JULY 2, 1999
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
JULY 2, 1999 JULY 2, 1999 (1)
SHARES ----------------- -----------------
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE (#) UNEXERCISABLE ($)
- ---- ------------ ------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Maurice R. Taylor, II ....... 0 0 274,400/399,400 43,971/65,958
Henry F. Blissenbach ........ 0 0 96,600/184,200 24,255/34,057
Steven A. Crees ............. 0 0 96,160/108,840 69,055/17,244
Steven B. Russek ............ 0 0 10,000/60,000 0/0
Perry L. Anderson ........... 0 0 23,690/74,755 8,677/13,017
Patrick L. Taffe ............ 0 0 16,000/82,720 5,748/17,244
Norman A. Cocke ............. 0 0 116,271/0 6,179/0
</TABLE>
- ------------------
(1) The value of unexercised in-the-money options was determined by multiplying
the number of shares subject to such options by the favorable difference
between the exercise price per share and $8.2810, the closing price per
share on July 2, 1999.
The Company's stock option plans generally provide that upon the
occurrence of certain "acceleration events," the options will become fully
vested. An acceleration event occurs (i) when a person, or group of persons
acting together, becomes the beneficial owner of 20 percent or more of the
Company's outstanding shares; (ii) when a change in a majority of the Board
occurs without the approval of at least 60% of the prior Board; or (iii) upon
the approval by shareholders of a sale of all or substantially all the assets
or of a liquidation or dissolution of the Company.
DIRECTOR COMPENSATION
For fiscal 1999, directors who were not employees of the Company received
an annual retainer of $20,000 plus fees of $1,000 for each board meeting
attended in person; $1,000 for each telephone board meeting attended; and $500
for each committee meeting attended whether in person or by telephone.
Committee chairmen received an additional $200 per meeting. In fiscal 1999,
directors were also reimbursed for out-of-pocket expenses incurred in attending
Board of Directors and committee meetings.
Pursuant to the Company's 1994 Stock Option Plan for Directors, each
non-employee director automatically receives an option to purchase 30,000
shares on the date of the director's initial election to the Board of
Directors. Each option has an exercise price equal to the fair market value of
the Company's Common Stock on the date of grant. The option vests on the
seventh anniversary of the date of grant unless vesting is accelerated. The
option will vest as to 5,000 shares if the Company's share price becomes 20
percent greater than the exercise price on or before the third anniversary of
the grant. The option will vest as to an additional 10,000 shares if the price
per share becomes 60 percent greater than the exercise price on or before the
fourth anniversary of the grant. The option will vest as to the final 15,000
shares if the price per share becomes 100 percent greater than the exercise
price on or before the fifth anniversary of the grant. Acceleration requires
the maintenance of share-price benchmarks for at least five trading days during
any consecutive 30-day period. Further, these options may become immediately
exercisable upon certain change-in-control events as described in the Company's
1994 Stock Option Plan for Directors. The options expire ten years after date
of grant.
In addition to the above, each non-employee director receives an annual
option to purchase 5,000 shares pursuant to the existing available Stock Option
Plan. The option vests on the seventh anniversary of the date of grant unless
vesting is accelerated. This accelerated vesting is similar to the vesting
schedule noted above for the initial option to purchase 30,000 shares. The
options expire ten years after date of grant.
27
<PAGE>
Based on the above-noted terms and the price of the Company's Common Stock
during fiscal 1999, the following is a chart reflecting the unexercised
non-employee director option grants and related vesting as of August 31, 1999.
<TABLE>
<CAPTION>
EXERCISE
OPTION PRICE # OPTIONS # OPTIONS
NAME GRANT DATE ($/SHARE) GRANTED (1) VESTED
- ---- ---------- --------- ----------- ------
<S> <C> <C> <C> <C>
John Howell Bullion ........... 9/29/94 12.500 30,000 15,000
11/13/96 14.625 5,000 0
12/3/97 11.750 5,000 1,000
11/18/98 10.750 5,000 0
John H. Flittie ............... 8/11/98 11.250 30,000 0
11/18/98 10.750 5,000 0
Charles V. Owens, Jr. ......... 9/29/94 12.500 30,000 15,000
11/13/96 14.625 5,000 0
12/3/97 11.750 5,000 1,000
11/18/98 10.750 5,000 0
Travers H. Wills .............. 8/11/98 11.250 30,000 0
11/18/98 10.750 5,000 0
</TABLE>
- ------------------
(1) All non-qualified options are transferable by each director to his
immediate family members and family trusts.
EMPLOYMENT AND SEVERANCE AGREEMENTS
The Company has an employment agreement with Maurice R. Taylor, II,
Chronimed's Chairman and Chief Executive Officer, under which he receives a
base salary of $325,800 in fiscal 2000. Base salary is based on corporation and
employee performance prior to each year. Mr. Taylor's employment agreement
expires on June 30, 2002, and includes automatic two year renewals subject to
termination provisions. It also includes a non-competition provision for up to
two years following termination of employment. Upon a termination without
cause, Mr. Taylor is entitled to receive (i) base salary payments for a period
of twelve months after such termination at the rate in effect prior to such
termination and (ii) a bonus payment equal to the average bonus payment for the
two most recent fiscal years and (iii) a pro rata share of other benefits as
specified in the contract and (iv) all unvested options held by Mr. Taylor
shall immediately vest. Upon termination due to change in control, if
termination occurs within two years subsequent to the change in control, Mr.
Taylor will receive payment of base salary equal to thirty six (36) months of
current annualized base salary, and the average of bonus compensation paid in
the three most recent fiscal years.
The Company has an employment agreement with Henry F. Blissenbach,
Chronimed's President and Chief Operating Officer, under which he receives a
base salary of $232,200 in fiscal 2000. Base salary is based on corporation and
employee performance prior to each year. The agreement provides for a
three-year term expiring June 30, 2002, with automatic two year renewals
subject to termination provisions. Dr. Blissenbach's employment agreement
includes a non-competition provision for up to two years following termination
of employment. Upon a termination without cause, Dr. Blissenbach is entitled to
receive (i) base salary payments for a period of twelve months after such
termination at the rate in effect prior to such termination and (ii) the
average of any incentive compensation paid or payable by the Company for the
most recent two fiscal years, plus (iii) all unvested options held by Dr.
Blissenbach shall immediately vest. Upon termination due to change in control,
if termination occurs within two years subsequent to the change in control, Dr.
Blissenbach will receive payment of base salary equal to thirty six (36) months
of current annualized base salary, and the average bonus compensation paid in
the three most recent fiscal years.
The Company has an employment agreement with Steven B. Russek, Chronimed's
Senior Vice President, Disease Management, under which he received a base
annual salary of $182,000 in fiscal 1999, starting December 1998. The agreement
began December 1, 1998 and expires on November 30, 2000. Under the agreement,
Mr. Russek receives an annualized base salary of $182,000, subject to periodic
review by the Compensation Committee based on Company and individual
performance. He also
28
<PAGE>
participates in the Company's incentive bonus and stock option plans. At
commencement of employment, thirty thousand (30,000) options were granted per
the agreement under the regular stock option plan, and an additional ten
thousand (10,000) were granted with immediate vesting as well as stock price
performance stipulations that, if not met, ensure that Mr. Russek would be
compensated in cash at a specified level. The agreement also provides an
initial loan of $50,000 to be repaid within one year and bearing interest per
the terms of a promissory note. The severance terms and conditions are such
that if the Company terminates Mr. Russek's employment without cause during the
two year agreement, he will receive severance pay in the form of his continuing
base salary until contract expiration.
The Company has a severance agreement with Norman A. Cocke, Chronimed's
former Chief Financial Officer, under which he will receive a monthly base
salary of $15,094 from March 15, 1999 through January 31, 2000, for a total of
$158,487. Under the agreement, Mr. Cocke also received a prorata bonus for
fiscal 1999 of $16,853, and the ability to exercise his vested options as of
March 15, 1999, until December 31, 1999.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors of the Company
consists of three non-employee directors. Mr. Owens is the committee chair, and
Drs. Weaver and Etzwiler were the other members until August, 1998 and October
1998, respectively. In August, 1998, Mr. Flittie and Mr. Wills became members
of the Compensation Committee, replacing Drs. Weaver and Etzwiler. Mr. Owens
and Dr. Weaver also served as a stock option subcommittee of the Board until
August, 1998, at which time Mr. Wills replaced Dr. Weaver.
Mr. Taylor, in addition to being a director of the Company, was also a
director of Orphan Medical, Inc. (OMI). Mr. Taylor resigned as a director of
OMI effective October 15, 1998. Mr. Bullion is a director of the Company and
OMI. The Company incorporated OMI in June 1994 to engage in the development of
pharmaceutical products. The Company subsequently declared a dividend of all of
the OMI Common Stock to Company shareholders. Mr. Taylor had served on the
Compensation Committee of the Board of OMI. Mr. Taylor and Mr. Bullion are the
Chief Executive Officers of the Company and OMI, respectively.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE
COMPENSATION
COMPENSATION COMMITTEE CHARTER. The purpose of the Compensation Committee
of the Board of Directors is to oversee compensation of directors, officers,
and key employees of the Company. The Committee's policy is to insure that
compensation programs contribute directly to the success of the Company,
including enhanced share value. The Company's Compensation Committee is
comprised of three outside directors.
EXECUTIVE COMPENSATION POLICIES AND PROGRAMS. The Company's executive
compensation programs are designed to attract and retain highly qualified
executives and to motivate them to maximize shareholder investment by achieving
strategic Company goals. There are three basic components to the Company's
executive compensation program: base pay, annual incentive bonus, and
long-term, equity-based incentive compensation in the form of stock options.
Each component is established in light of Company and individual performance,
compensation levels at comparable companies, equity among employees, and cost
effectiveness. In addition, employees are eligible to participate in the
Company's 401(k) plan and certain insurance plans, as well as the Company's
Employee Stock Purchase Plan.
BASE PAY. Base pay is designed to be competitive as compared to salary
levels for equivalent positions at comparable companies. An executive's
actual salary within this competitive framework will depend on the
individual's performance, responsibilities, experience, leadership, and
potential future contribution. Base pay is administered to remain
competitive with the market, yet allow for significant emphasis on
incentive bonus compensation in proportion to total annual cash
compensation.
ANNUAL INCENTIVE BONUS. In addition to base pay, each executive is
eligible to receive an annual cash bonus based on a mix of the Company's
and the executive's performance. Performance targets are intended to
motivate the Company's executives by providing bonus
29
<PAGE>
payments for the achievement of specific financial goals within the
Company's business plan. Bonuses were paid to all named executive officers
with respect to fiscal 1999 performance.
LONG-TERM, EQUITY-BASED INCENTIVE COMPENSATION. The long-term,
equity-based compensation program is tied directly to shareholder return.
Long-term incentive compensation consists of stock options that generally
do not fully vest until after five years and are exercisable only if an
executive is then an employee of the Company. Stock options are awarded
with an exercise price equal to the fair market value of the Common Stock
on the date of grant. Accordingly, an executive is rewarded only if Company
shareholders receive the benefit of appreciation in the price of the Common
Stock. Because long-term options vest over time, the Company periodically
grants new options to provide continuing incentives for future performance.
The size of periodic option grants is a function of the breadth of an
executive's scope of accountability, recent performance as determined by
the Committee, and other factors.
SAVINGS AND INVESTMENT PLAN; BENEFITS. The Company maintains a 401(k)
Savings Plan ("Savings Plan"), which is funded by elective salary deferrals
by employees. The Savings Plan covers executive officers and substantially
all employees meeting minimum eligibility requirements. The Savings Plan
requires that the Company match up to 40% of the first 5% of an employee's
pay and provides for additional discretionary contributions by the Company.
Through July 2, 1999, the Company had not made any additional discretionary
contributions to the Savings Plan. In addition, the Company provides
medical and other miscellaneous benefits to its officers, including a
diagnostic services plan that provides significant coverage for annual
physicals and a financial services plan that reimburses officers for
various financial and tax services.
ANNUAL REVIEWS. Each year the Committee reviews its executive compensation
policies and programs and determines what changes, if any, are appropriate for
the following year. In addition, the Committee reviews the performance of the
Chief Executive Officer and, with the assistance of the Chief Executive
Officer, the individual performance of the other executive officers. The
Committee makes recommendations to the Board of Directors for final approval of
all material compensation matters.
CHIEF EXECUTIVE OFFICER. Pursuant to the terms of Mr. Taylor's employment
agreement with the Company, effective July 1, 1999, he received a base salary
of $304,500 in fiscal 1998, a base salary of $325,800 in fiscal 1999, and he
will receive a base salary of $325,800 in fiscal 2000. Base salaries were
determined at the time of entering into the employment agreement when the
Committee considered compensation programs of comparable companies, Mr.
Taylor's individual performance and salary history, and the Company's
historical and planned performance. For fiscal 1999, Mr. Taylor earned a bonus
of $50,000 in recognition of his and Chronimed's performance against criteria
established by the Compensation Committee of the Board of Directors at the
beginning of the year. In fiscal 1998, Mr. Taylor was awarded a bonus of
$123,000. With respect to stock options, Mr. Taylor received options to
purchase 100,000 shares in July 1999 related to his performance in fiscal 1999.
He received options to purchase 116,800 shares in November 1998 related to his
performance in fiscal 1998.
TAX DEDUCTIBILITY OF EXECUTIVE COMPENSATION. Section 162(m) of the
Internal Revenue Code of 1986, as amended, should not affect the deductibility
of compensation paid to the Company's executive officers for the foreseeable
future. The majority of the options available for grant under the Company's
stock option plans will comply with Section 162(m), so that compensation
resulting from these stock options will not be counted toward the $1,000,000
limit on deductible compensation under Section 162(m). The Compensation
Committee has not formulated any policy with respect to qualifying other types
of compensation for deductibility under Section 162(m).
Members of the Compensation Committee: Charles V. Owens, Jr., Chairman
John H. Flittie
Travers H. Wills
30
<PAGE>
COMPARABLE STOCK PERFORMANCE
The graph below compares the cumulative total shareholder return on the
Company's Common Stock for the last five fiscal years with the cumulative total
return of the NASDAQ Total Return Index (U.S. Companies) and the NASDAQ Health
Services Stock Index for the period June 30, 1994 through June 30, 1999. The
graph and table assume the investment of $100 on June 30, 1994, in the
Company's Common Stock, the NASDAQ Total Return Index, and the NASDAQ Health
Services Stock Index. The cumulative return calculations were performed by the
Center for Research in Security Prices, University of Chicago.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURNS
[PLOT POINTS CHART]
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, JUNE 30, JUNE 28, JUNE 30, JUNE 30,
1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
CHRONIMED (1) .................... 100.0 106.5 158.1 72.6 110.8 66.7
NASDAQ Health Services Stock ..... 100.0 108.9 166.2 152.6 148.5 139.5
NASDAQ Total Return Index ........ 100.0 133.5 171.4 208.4 274.4 392.5
</TABLE>
- ------------------
(1) Share prices have been adjusted to reflect a three-for-two stock split in
the form of a stock dividend effective as of February 21, 1994.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows information concerning each person who to the
knowledge of the Company was the beneficial owner of more than 5% (i) of the
Company's Common Stock, (ii) each director of the Company, (iii) each of the
Company's named executive officers and (iv) all directors and executive
officers of the Company as a group, as of August 31, 1999. All persons have
sole or joint with spouse voting and investment power with respect to all
shares shown as beneficially owned by them.
31
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) OF CLASS
- ------------------------ ------------------------ --------
<S> <C> <C>
Maurice R. Taylor, II ................................................. 412,720 3.3%
Henry F. Blissenbach .................................................. 115,981 *
Steven A. Crees ....................................................... 137,951 1.1%
Steven B. Russek ...................................................... 10,000 *
Perry L. Anderson ..................................................... 26,214 *
Patrick L. Taffe ...................................................... 21,251 *
Norman A. Cocke ....................................................... 141,930 1.1%
John H. Bullion ....................................................... 199,125 1.6%
John H. Flittie ....................................................... 800 *
Charles V. Owens, Jr. ................................................. 52,185 *
Travers H. Wills ...................................................... 1,000 *
All current directors and executive officers as a group (12 persons) .. 998,764 7.9%
</TABLE>
- ------------------
* Less than 1%
(1) Includes the following options exercisable within 60 days to acquire shares
of Common Stock: Mr. Taylor, 291,200; Dr. Blissenbach, 96,600; Mr. Crees,
100,560; Mr. Russek, 10,000; Mr. Anderson, 23,690; Mr. Taffe, 20,000; Mr.
Cocke, 116,721; Mr. Bullion, 16,000; Mr. Owens, 16,000; and all current
directors and executive officers as a group, 603,220.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ORPHAN MEDICAL, INC.
The Company incorporated Orphan Medical, Inc. (OMI) in July 1994 and on
July 2, 1994, declared a dividend of all of the OMI Common Stock to Company
shareholders (the "spin-off"). Directors of the Company John Howell Bullion and
Dr. Lawrence C. Weaver (who resigned as a director of the Company in August
1998) are also directors of OMI. Mr. Taylor has resigned as a director of OMI
effective October 15, 1998. Mr. Taylor and Mr. Bullion are the Chief Executive
Officers of the Company and OMI, respectively. The following is a brief summary
of the material continuing arrangements between the Company and OMI. Although
the Company believes these arrangements with OMI are on commercially reasonable
terms, they were not the product of arm's-length negotiations.
In June 1994, the Company initially retained the rights to market and
distribute in the United States and its territories those products being
developed by OMI at the time of the spin-off. The products under development
are for "orphan" drug populations where the population in the United States
expected to benefit from the drug is limited. Chronimed determined that the
products for which it had initial rights could be more effectively distributed
by others. Accordingly, on June 27, 1997, Chronimed sold its rights to market
and distribute orphan drugs back to OMI (see Related Party Transactions noted
below). At that time, the Marketing and Distribution Agreement between
Chronimed and OMI was terminated, along with certain other agreements that
secured OMI's obligations under the marketing agreement.
Under the marketing agreement, OMI had the right to designate one
individual to hold a seat on the Company's Board of Directors, or
alternatively, to have a representative attend all Company Board meetings. The
Company had the right to designate two directors on OMI's Board or,
alternatively, the right to have a representative attend all of OMI's Board
meetings. With the termination of the marketing agreement effective June 27,
1997, these rights no longer exist. Going forward, Chronimed intends to have
Mr. Bullion continue to serve on its Board.
RELATED PARTY TRANSACTIONS
On April 9, 1997, the Company entered into a guarantee of indebtedness of
Mr. Maurice R. Taylor, II, Chronimed's Chairman and Chief Executive Officer.
Such indebtedness was intended to allow Mr. Taylor to continue to hold large
amounts of Company stock. There was $699,900 of indebtedness under the
guarantee as of August 31, 1999. The Company is charging Mr. Taylor an
arm's-length fee for this guarantee and has obtained security from Mr. Taylor
for this guarantee. Mr. Taylor has committed to a repayment program.
32
<PAGE>
On June 27, 1997, the Company entered into an agreement to sell its
exclusive rights to market and distribute certain Orphan Medical, Inc. products
back to Orphan Medical for cash, royalties, and Orphan Medical stock totaling
$2.5 million. The Company received final payment in fiscal 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS INCLUDED IN THIS REPORT:
PAGE
----
1. FINANCIAL STATEMENTS
Index to Financial Statements ........................................ F-1
Report of Independent Auditors ....................................... F-2
Consolidated Balance Sheets as of July 2, 1999 and July 3, 1998 ...... F-3
Consolidated Statements of Income for the years ended July 2, 1999,
July 3, 1998, and June 27, 1997 .................................... F-4
Consolidated Statements of Changes in Shareholders' Equity for years
ended July 2, 1999, July 3, 1998, and June 27, 1997 ................. F-5
Consolidated Statements of Cash Flows for the years ended July 2,
1999, July, 1998, and June 27, 1997 ................................. F-6
Consolidated Notes to Financial Statements ........................... F-7
2. FINANCIAL STATEMENT SCHEDULE
Schedule II -- Valuation and Qualifying Accounts ..................... S-1
Financial Statement schedules not included in this Report have been
omitted because they are not applicable or the required information
is shown in the Audited Consolidated Financial Statements or Notes
thereto.
(b) REPORTS ON FORM 8-K
The Company filed a current report on Form 8-K dated May 4, 1999. The
report covered the Company's fiscal 1999 third quarter earnings release and
the Company's announcement to explore strategic alternatives.
(c) EXHIBITS:
Exhibits designated by the symbol * are filed with this Annual Report on
Form 10-K. All exhibits not so designated are incorporated by reference to
a prior filing as indicated.
33
<PAGE>
Chronimed undertakes to furnish to any shareholder so requesting a copy of
any of the following exhibits upon payment to the Company of the reasonable
costs incurred by Company in furnishing any such exhibit.
EXHIBIT
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 (Reserved)
10.2 (Reserved)
10.3 Form of Incentive Stock Option Agreement (1)(2).
10.4 Form of Nonstatutory Stock Option Agreement (1)(2).
10.5 (Reserved)
10.6* Employment Agreement effective July 1, 1999, between the Company and
Maurice R. Taylor, II.
10.7 (Reserved)
10.8 (Reserved)
10.9 (Reserved)
10.10 (Reserved)
10.11 (Reserved)
10.12* Agreement and Amendments to Provide Specialty Pharmacy Services
between the Company and Prudential.
10.13 (Reserved)
10.14 (Reserved)
10.15 (Reserved)
10.16 (Reserved)
10.17* Employment Agreement effective July 1, 1999, between the Company and
Henry F. Blissenbach (2).
10.18* Employment Agreement dated November 11, 1998, between the Company and
Steven B. Russek (2).
10.19* Separation and Release Agreement effective March 15, 1999, between
the Company and Norman A. Cocke (2).
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 (Reserved)
10.26 (Reserved)
10.27 Chronimed Inc. 1997 Stock Option Plan (10).
10.28 Facility Lease Agreement with Red Circle L.L.P. dated November
1996 (8).
10.28a Facility Lease Agreement with Red Circle L.L.P. -- amendments in
April 1997, December 1997, and July 1998 (9).
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 (9).
10.30 Sale of Distribution Rights Agreement between the Company and Orphan
Medical, Inc. dated June 27, 1997 (8).
34
<PAGE>
EXHIBIT
NUMBER
- -------
10.31 Chronimed Inc. 1999 Stock Option Plan (9).
10.32 Acquisition Agreement -- DiaScreen Corporation, effective March 15,
1998 (9).
10.33 Acquisition Agreement -- Clinical Partners, Inc., effective June 23,
1998 (9).
21.1* List of Subsidiaries.
23.1* Consent of Ernst & Young LLP.
27* Financial Data Schedule
99* Cautionary Statements for Purposes of the "Safe Harbor" Provisions of
the Private Securities Litigation Reform Act.
- ------------------
(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.
(9) Incorporated by reference to the Company's 1998 Annual Report on Form 10-K
filed with The Commission on September 30, 1998, under File Number 0-19952.
(10) Incorporated by reference to the Company's quarterly report on Form 10-Q
filed with The Commission on September 26, 1996, under file number 0-19952.
35
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors ........................................... F-2
Consolidated Balance Sheets .............................................. F-3
Consolidated Statements of Income ........................................ F-4
Consolidated Statements of Changes in Shareholders' Equity ............... F-5
Consolidated Statements of Cash Flows .................................... F-6
Notes to Consolidated Financial Statements ............................... F-7
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Chronimed Inc.
We have audited the accompanying consolidated balance sheets of Chronimed
Inc. as of July 2, 1999 and July 3, 1998, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended July 2, 1999. Our audits also included the financial
statement schedule listed in Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on
our audits.
We conducted our audits in accordance with 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 2, 1999 and July 3, 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
July 2, 1999, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statements schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects, the information set forth therein.
August 6, 1999
F-2
<PAGE>
CHRONIMED INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JULY 2, JULY 3,
1999 1998
------------ -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ........................................ $ 3,312 $ 1,027
Available-for-sale securities .................................... -- 6,509
Accounts receivable (net of allowance of $1,230 and $1,280 at
July 2, 1999 and July 3, 1998, respectively) .................... 36,274 23,190
Income taxes receivable .......................................... -- 1,011
Inventory ........................................................ 9,786 10,918
Other current assets ............................................. 1,529 797
Deferred taxes ................................................... 774 275
--------- --------
Total current assets ............................................ 51,675 43,727
AVAILABLE-FOR-SALE SECURITIES ..................................... 610 --
PROPERTY AND EQUIPMENT
Property and equipment ........................................... 25,954 21,113
Allowance for depreciation ....................................... (13,745) (8,115)
--------- --------
12,209 12,998
GOODWILL, NET ..................................................... 16,242 16,259
DEFERRED TAXES AND OTHER ASSETS ................................... 159 162
--------- --------
Total assets .................................................... $ 80,895 $ 73,146
========= ========
LIABILITIES AND SHAREHOLDERS'EQUITY
CURRENT LIABILITIES
Accounts payable ................................................. $ 11,230 $ 6,832
Accrued expenses ................................................. 2,992 3,803
Income taxes ..................................................... 186 --
--------- --------
Total current liabilities ....................................... 14,408 10,635
DEFERRED TAXES .................................................... -- 192
SHAREHOLDERS' EQUITY
Preferred Stock .................................................. -- --
Common Stock, issued and outstanding shares -- 12,088 and
12,081, respectively ............................................ 121 121
Additional paid-in capital ....................................... 52,499 51,668
Retained earnings ................................................ 13,709 10,559
--------- --------
66,329 62,348
Accumulated other comprehensive income --
unrealized gain (loss) on available-for-sale securities ......... 158 (29)
--------- --------
Total shareholders' equity ...................................... 66,487 62,319
--------- --------
Total liabilities and shareholders' equity ....................... $ 80,895 $ 73,146
========= ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
CHRONIMED INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------------
JULY 2, 1999 JULY 3, 1998 JUNE 27, 1997
------------ ------------ -------------
<S> <C> <C> <C>
REVENUES ...................................... $ 198,413 $ 140,655 $ 117,171
COST OF REVENUES .............................. 153,300 101,432 82,829
--------- --------- ---------
Gross profit ................................. 45,113 39,223 34,342
OPERATING EXPENSES
Selling and marketing ........................ 9,064 8,153 6,852
Research and development ..................... 804 336 505
General and administrative ................... 28,434 19,442 16,236
Provision for uncollectable accounts ......... 967 1,022 1,873
--------- --------- ---------
Total operating expenses .................... 39,269 28,953 25,466
--------- --------- ---------
INCOME FROM OPERATIONS 5,844 10,270 8,876
Interest income .............................. 419 1,453 798
Other income ................................. 503 -- 1,700
--------- --------- ---------
INCOME BEFORE INCOME TAXES .................... 6,766 11,723 11,374
Income tax expense ........................... 2,639 4,572 4,330
--------- --------- ---------
NET INCOME .................................... $ 4,127 $ 7,151 $ 7,044
========= ========= =========
NET INCOME PER SHARE
Basic earnings per share ..................... $ .34 $ .60 $ .59
Basic weighted-average shares ................ 12,096 11,955 12,019
Diluted earnings per share ................... $ .34 $ .59 $ .56
Diluted weighted-average shares .............. 12,256 12,221 12,659
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
CHRONIMED INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
PAID-IN RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS INCOME TOTAL
-------- -------- --------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
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
Net income ........................................... -- -- -- 7,044 -- 7,044
Unrealized gain on available-for-sale securities ..... -- -- -- -- 3 3
--------
Subtotal -- Comprehensive Income .................... 7,047
------ ---- -------- -------- ---- --------
BALANCE JUNE 27, 1997 ................................. 11,878 118 49,838 3,408 (4) 53,360
Common stock issued for acquisition .................. 85 1 858 -- -- 859
Shares issued for employee stock purchase and
option plans ........................................ 118 2 820 -- -- 822
Tax benefit of stock option exercises ................ -- -- 152 -- -- 152
Net income ........................................... -- -- -- 7,151 -- 7,151
Unrealized loss on available-for-sale securities ..... -- -- -- -- (25) (25)
--------
Subtotal -- Comprehensive Income .................... 7,126
------ ---- -------- -------- ---- --------
BALANCE JULY 3, 1998 .................................. 12,081 121 51,668 10,559 (29) 62,319
Stock repurchase ..................................... (200) (2) (862) (977) -- (1,841)
Shares issued for employee stock purchase and
option plans ........................................ 207 2 1,437 -- -- 1,439
Tax benefit of stock option exercises ................ -- -- 256 -- -- 256
Net income ........................................... -- -- -- 4,127 -- 4,127
Unrealized gain on available-for-sale securities ..... -- -- -- -- 187 187
--------
Subtotal -- Comprehensive Income .................... 4,314
------ ---- -------- -------- ---- --------
BALANCE JULY 2, 1999 .................................. 12,088 $121 $ 52,499 $ 13,709 $158 $ 66,487
====== ==== ======== ======== ==== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
CHRONIMED INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------
JULY 2, JULY 3, JUNE 27,
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ............................................. $ 4,127 $ 7,151 $ 7,044
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ........................ 7,732 3,960 3,544
Deferred income taxes ................................ (704) 205 205
Income tax benefit of stock option plans ............. 256 152 1,920
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 ....................... (14,401) (2,275) (144)
Inventory ........................................... 1,132 (2,985) (2,382)
Accounts payable .................................... 4,398 (3,414) (706)
Accrued expenses .................................... (811) 4,019 (62)
Income taxes ........................................ 1,197 (2,055) (816)
Other assets ........................................ (716) 555 243
-------- -------- --------
Net cash provided by operating activities ......... 2,210 5,313 8,537
INVESTING ACTIVITIES
Acquisitions, net of cash acquired ..................... (1,931) (7,762) (9,234)
Proceeds from sale of OMI rights ....................... 1,317 133 250
Purchases of property and equipment .................... (4,995) (6,257) (4,373)
Purchases of available-for-sale securities ............. (450) (15,377) (9,085)
Sale and maturities of available-for-sale securities ... 6,536 19,117 20,682
-------- -------- --------
Net cash provided by (used in) investing
activities ....................................... 477 (10,146) (1,760)
FINANCING ACTIVITIES
Repurchase of Common Stock ............................. (1,841) -- (14,452)
Net proceeds from issuance of Common Stock ............. 1,439 822 1,279
-------- -------- --------
Net cash provided by (used in) financing
activities ....................................... (402) 822 (13,173)
-------- -------- --------
Increase (decrease) in cash and cash equivalents ....... 2,285 (4,011) (6,396)
CASH AND CASH EQUIVALENTS at beginning
of period .............................................. 1,027 5,038 11,434
-------- -------- --------
CASH AND CASH EQUIVALENTS at end
of period .............................................. $ 3,312 $ 1,027 $ 5,038
======== ======== ========
</TABLE>
SUPPLEMENTAL DISCLOSURES
* Income taxes paid in fiscal 1999, 1998, and 1997 were $1,897, $6,010, and
$1,918, 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.
F-6
<PAGE>
CHRONIMED INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
The fiscal years referenced herein are as follows:
FISCAL YEAR YEAR ENDED
----------- -------------------------
1999 .................................. July 2, 1999 (52 weeks)
1998 .................................. July 3, 1998 (53 weeks)
1997 .................................. June 27, 1997 (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. It
provides specialized patient management services nationwide for people with
long-term 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.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year presentations to
conform to current year presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Those assumptions and estimates are subject to constant
revision, and actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue is recognized upon the provision of services, shipment of
products, and at the time of purchase in the specialty pharmacies.
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.
F-7
<PAGE>
CHRONIMED INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS
Investments as of July 3, 1998 consist of debt securities with a remaining
maturity of more than 90 days at the date of purchase. In fiscal 1999, the
Company invested $450 in the common stock of Cell Robotics International, Inc.
(CRII) as part of a development and distribution agreement for the Lasette
Laser Lancing Device. Investments as of July 2, 1999 consist entirely of these
CRII equity securities. Management determines the appropriate classification of
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. Securities are classified as "available-for-sale" as of
July 2, 1999 and July 3, 1998. The Company considers the net unrealized gain
(loss) on these investments of $158 and ($29) at July 2, 1999 and July 3, 1998,
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 $5,783,
$2,683, and $2,369 in fiscal 1999, 1998, and 1997, 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 $1,949, $1,277, and $1,175 in fiscal 1999, 1998, and 1997,
respectively. Accumulated amortization was $5,079 and $3,130 as of fiscal year
end 1999 and 1998, 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.
INTERNAL USE SOFTWARE
In March, 1998, the AICPA issued Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed for or Obtained for
Internal Use". The SOP requires the capitalization of certain costs incurred in
connection with developing or obtaining software for internal use. The Company
already complies with the provisions of the SOP.
DERIVATIVES AND HEDGING
In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which requires the Company to recognize
all derivatives on the balance sheet at fair value effective February 1, 2000.
The Company does not anticipate that the adoption of this Statement will have a
significant effect on its results of operations or financial position.
F-8
<PAGE>
CHRONIMED INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES (CONTINUED)
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.
ACCUMULATED OTHER COMPREHENSIVE INCOME
As of February 1, 1998, the Company adopted Statement of Financial
Accounting Standard (SFAS) 130, "Reporting Comprehensive Income." SFAS 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this Statement had no impact on the
Company's net income or stockholders' equity. SFAS 130 requires the Company's
unrealized gains or losses on available-for-sale securities, which prior to
adoption were reported in retained earnings, to be separately classified as
other comprehensive income. Prior year financial statements have been
reclassified to conform to the current requirements.
PER SHARE DATA
Earnings per share are calculated in accordance with SFAS No. 128,
"Earnings Per Share."
The following table is a reconciliation of the earnings numerator and the
weighted-average shares denominator used in the calculations of basic and
diluted earnings per share for the last three fiscal years.
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
EARNINGS
Net income for basic and diluted earnings
per share ........................................... $ 4,127 $ 7,151 $ 7,044
-------- -------- --------
WEIGHTED AVERAGE SHARES
Basic weighted-average shares ........................ 12,096 11,955 12,019
Adjustments for dilutive securities:
Employee stock options, net of tax proceeds ......... 160 266 428
Warrants ............................................ -- -- 172
Convertible debt .................................... -- -- 40
-------- -------- --------
Dilutive potential common shares ..................... 160 266 640
-------- -------- --------
Diluted weighted-average shares ...................... 12,256 12,221 12,659
======== ======== ========
BASIC EARNINGS PER SHARE ............................... $ .34 $ .60 $ .59
======== ======== ========
DILUTED EARNINGS PER SHARE ............................. $ .34 $ .59 $ .56
======== ======== ========
</TABLE>
2. ACQUISITIONS
In February 1999, the Company acquired selected assets of Community
Prescription Center, Inc., an HIV/AIDS pharmacy located in San Diego,
California. The all-cash purchase price was $1.3 million, with the full amount
being assigned to goodwill. The goodwill is being amortized on a straight-line
basis over 12 years.
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.
No additional payments have been made as of July 2, 1999.
F-9
<PAGE>
CHRONIMED INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
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. As of July 2, 1999, $190 is being held in escrow to cover
certain potential liabilities.
On July 1, 1996, the Company acquired the assets of StatScript Management
Services, Inc. and its associated HIV/AIDS 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.
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 1998 for Community
Prescription Center and at the beginning of fiscal 1997 for Clinical Partners
and DiaScreen:
1999 1998 1997
--------- --------- ---------
Total revenues ................. $ 203,848 $ 149,933 $ 123,030
Net income ..................... $ 4,064 $ 7,076 $ 7,010
Basic earnings per share ....... $ .34 $ .59 $ .58
Diluted earnings per share ..... $ .33 $ .58 $ .55
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 1998 or 1997 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 July 2, 1999:
Equity Securities ......... $ 450 $160 $ -- $ 610
As of July 3, 1998:
Debt Securities ........... $6,538 $ -- $ 29 $6,509
As of July 2, 1999, the Company's available-for-sale securities included
equity securities of one company, Cell Robotics International, Inc., which
Chronimed intends to hold for one year or more. See Note 1 of Notes to
Consolidated Financial Statements, Investments, for additional information
regarding these securities. As of July 3, 1998, the Company's
available-for-sale securities were all debt securities with contractual
maturities of one year or less.
4. 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 six years as of July 2, 1999.
F-10
<PAGE>
CHRONIMED INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. OPERATING LEASES AND RENT EXPENSE (CONTINUED)
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 2, 1999, are approximately as follows:
FISCAL YEAR AMOUNT
----------- ------
2000 ....................................................... $1,906
2001 ....................................................... 1,681
2002 ....................................................... 1,215
2003 ....................................................... 895
2004 ....................................................... 834
Beyond ..................................................... 1,128
------
$7,659
======
Total rent expense was $2,178, $1,466, and $1,041 during fiscal 1999, 1998,
and 1997, respectively.
5. LONG-TERM DEBT AND CREDIT ARRANGEMENTS
The Company had no long-term debt as of July 2, 1999 and July 3, 1998,
respectively.
The Company has an unsecured discretionary line of credit totaling $15
million that terminates January 31, 2001. The Company pays a fee at an annual
rate of .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 2, 1999.
6. INCOME TAXES
The components of the provision for income taxes are as follows:
1999 1998 1997
------ ------ ------
Current ....................................... $3,343 $4,367 $4,125
Deferred ...................................... (704) 205 205
------ ------ ------
$2,639 $4,572 $4,330
====== ====== ======
The Company's income tax expense differs from the applicable federal rate
of 35%. The reconciliation of differences is:
1999 1998 1997
------ ------ ------
Federal statutory rate ........................ $2,368 $4,103 $3,980
Federal income taxed at lower statutory rate .. (68) (100) (113)
Interest on municipal bonds ................... -- (15) (36)
State taxes, net of federal benefit ........... 255 428 370
Goodwill amortization ......................... 84 77 76
Other, net .................................... -- 79 53
------ ------ ------
$2,639 $4,572 $4,330
====== ====== ======
F-11
<PAGE>
CHRONIMED INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
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:
1999 1998
------ ------
Deferred tax assets:
Bad debt reserve ................................. $ 481 $ 499
Inventory reserve ................................ 39 39
Other reserves ................................... 477 344
Vacation accrual ................................. 137 116
Goodwill amortization ............................ 329 132
Deferred tax liabilities:
Depreciation ..................................... (159) (324)
Prepaid assets ................................... (348) (209)
OMI rights sale .................................. -- (514)
Royalties ........................................ (150) --
Other liabilities ................................ (19) --
------ ------
Net deferred tax assets ........................... $ 787 $ 83
====== ======
7. 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 plan. If the Company had elected to recognize
compensation cost based on the fair value of the options granted and shares
sold pursuant to the purchase plan as prescribed by SFAS No. 123, net income
and earnings per share would have been reduced to the pro forma amounts
indicated in the table below for fiscal years 1999, 1998, and 1997:
1999 1998 1997
------- ------- -------
Net income -- as reported ................... $ 4,127 $ 7,151 $ 7,044
Net income -- pro forma ..................... $ 2,456 $ 5,829 $ 6,342
Earnings per share -- basic as reported ..... $ .34 $ .60 $ .59
Earnings per share -- basic pro forma ....... $ .20 $ .49 $ .53
Earnings per share -- diluted as reported ... $ .34 $ .59 $ .56
Earnings per share -- diluted pro forma ..... $ .20 $ .48 $ .50
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 1997, 1998, and 1999 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.
F-12
<PAGE>
CHRONIMED INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. SHAREHOLDERS' EQUITY (CONTINUED)
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:
1999 1998 1997
------- ------- -------
Expected divided yield ................ 0.0% 0.0% 0.0%
Expected stock price volatility ....... 67% 57% 69%
Risk-free interest rate ............... 5.50% 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 1999, 1998, and 1997 was $5.74,
$6.51, and $6.53, respectively.
The Company has four employee Stock Options Plans (1986, 1994, 1997 and
1999). Options to purchase Common Stock of the Company are granted to employees
at 100% of fair market value on the date of grant and are generally exercisable
at 20% of the total grant at the end of each year. The options are cumulatively
exercisable and expire seven years after the date of grant.
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.
F-13
<PAGE>
CHRONIMED INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. SHAREHOLDERS' EQUITY (CONTINUED)
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 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
Reserved for future grants ......... 1,500,000 --
Granted ............................ (1,099,700) 1,099,700 9.53
Exercised .......................... -- (152,413) 6.29
Cancelled .......................... 303,661 (303,661) 11.23
Expired ............................ (40,150) --
---------- ---------
Balance July 2, 1999 ................ 840,299 2,886,227 $ 10.60 938,566 $ 11.24
</TABLE>
The following table summarizes information about the stock options
outstanding at July 2, 1999.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- -----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL PRICE NUMBER PRICE
EXERCISE PRICES OF SHARES LIFE PER SHARE OF SHARES PER SHARE
- --------------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$ 3.92 - 8.28 1,118,161 5.8 yrs $ 7.88 281,685 $ 7.40
$ 8.31 - 12.38 1,024,486 5.0 yrs 11.02 322,391 11.28
$12.50 - 21.88 743,580 3.4 yrs 14.10 334,490 14.45
--------- -------
$ 3.92 - 21.88 2,886,227 4.9 yrs $ 10.60 938,566 $ 11.24
</TABLE>
8. 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 $195, $146, and $130 in fiscal years 1999, 1998, and 1997, respectively.
The Company has an Employee Stock Purchase Plan. There were 191,221 shares
available for purchase under the Plan at July 2, 1999.
9. 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 Company stock. There
was $700 of indebtedness under the guarantee on July 2, 1999 and July 3, 1998.
F-14
<PAGE>
CHRONIMED INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. RELATED PARTY TRANSACTIONS (CONTINUED)
On June 27, 1997, the Company entered into an agreement to sell its
exclusive rights to market and distribute certain Orphan Medical, Inc. products
back to Orphan Medical for cash, royalties, and Orphan Medical stock totaling
$2.5 million. The Company estimated the net present value of these payments to
be $1.7 million, and as such recorded $1.7 million as Other Income in its 1997
financial statements. The resulting receivable balance, including imputed
interest, has been paid in full as of July 2, 1999.
10. SIGNIFICANT CONCENTRATIONS
The Company manufactures the Supreme and Select blood glucose reagent
strips and distributes them through its direct sales force. These two products
accounted for 10%, 12%, and 11% of the Company's total revenue in fiscal years
1999, 1998, and 1997, respectively.
Within the Specialty Pharmacy Business segment, two major payors with whom
Chronimed has contracts merged during calendar year 1999. As one payor, they
now represent 21%, 17% and 10% of the Company's total revenue in fiscal years
1999, 1998, and 1997, respectively.
The Company has a national distributor who supplies pharmaceuticals for
both the Disease Management segment and the Specialty Pharmacy segment. This
supplier made up 69%, 70%, and 36% of the Company's total inventory purchases
for fiscal years 1999, 1998, and 1997, respectively. In the event that the
Company was unable to purchase pharmaceuticals through this distributor, the
Company could purchase the same inventory through other national pharmaceutical
distributors.
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 6%, 10%, and 13% of the Company's total revenue in fiscal years 1999, 1998,
and 1997, respectively.
11. BUSINESS SEGMENT INFORMATION
The Company has three reportable segments:
* DIAGNOSTIC PRODUCTS -- includes medical diagnostic products that
Chronimed has either developed and manufactures, owns outright, or
controls through exclusive license or distribution agreements.
Designed for either institutional use (long-term care facilities,
hospitals, and clinical settings) or consumer use (in-home
healthcare), these products are sold to a variety of customers,
including distributors, institutions, independent agents, HMOs,
durable medical equipment suppliers, and secondary retail chain
outlets.
* SPECIALTY PHARMACY SERVICES -- provides drug and medical product
delivery services for a wide variety of high-cost chronic conditions
including solid organ transplants, multiple sclerosis, hemophilia,
growth hormone deficiency, hepatitis B and C, diabetes, infertility,
and cancer. Chronimed has payor relationships and agreements with
HMOs, major health insurers, and other managed health plans covering a
substantial population. Chronimed provides timely distribution of
critical medications directly to patients nationwide, while ensuring
competitive prices to payors. Chronimed also coordinates its services
with payors, physicians, nursing services, and other members of a
patient's healthcare team. In addition, Chronimed will work with its
customers to develop patient and therapy management guidelines through
ongoing monitoring and evaluation of patient outcomes.
* DISEASE MANAGEMENT -- represents the integration of the Clinical
Partners and StatScript Pharmacy businesses. StatScript Pharmacy is
the largest network of HIV/AIDS community-based pharmacies in the
country, with 29 pharmacies in 26 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.
F-15
<PAGE>
CHRONIMED INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. BUSINESS SEGMENT INFORMATION (CONTINUED)
Clinical Partners provides HIV/AIDS-specific patient care through data
analysis, case management, and clinical protocol deployment.
The Company's reportable segments are made up of business units that offer
different, but related, products and services to patients with chronic health
conditions. The reportable segments are managed separately by senior executives
who report directly to the President and Chief Operating Officer. The Company
evaluates performance based on profit or loss from operations before interest
and income taxes. The accounting policies of the reportable segments are the
same as those described in the summary of significant accounting policies.
The table below presents information by reportable segment.
<TABLE>
<CAPTION>
SPECIALTY
DIAGNOSTIC PHARMACY DISEASE
PRODUCTS SERVICES MANAGEMENT TOTAL
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
For the Year Ended 7/2/99
Revenues ............................ $30,706 $102,742 $64,965 $198,413
Income from Operations .............. 5,910 164 711 6,785
Depreciation & Amortization ......... 4,144 1,502 2,086 7,732
Segment Assets ...................... 15,065 29,265 32,304 76,634
For the Year Ended 7/3/98
Revenues ............................ $27,080 $ 79,899 $33,676 $140,655
Income from Operations .............. 9,242 402 857 10,501
Depreciation & Amortization ......... 1,869 973 1,118 3,960
Segment Assets ...................... 15,504 24,013 23,514 63,031
For the Year Ended 6/27/97
Revenues ............................ $31,023 $ 66,371 $19,777 $117,171
Income from Operations .............. 9,503 220 430 10,153
Depreciation & Amortization ......... 1,918 615 1,011 3,544
Segment Assets ...................... 9,656 22,447 14,624 46,727
</TABLE>
The following table is a reconciliation of reportable segment information
to the Company's consolidated totals.
<TABLE>
<CAPTION>
FISCAL
------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Total Consolidated Revenue .......................... $198,413 $140,655 $117,171
======== ======== ========
INCOME FROM OPERATIONS:
Total for reportable segments ....................... $ 6,785 $ 10,501 $ 10,153
Unallocated amounts: ................................
- -- Corporate G&A .................................... 941 231 1,277
- -- Interest (Income) Expense ........................ (419) (1,453) (798)
- -- Other (Income) Expense ........................... (503) -- (1,700)
-------- -------- --------
Income before income taxes .......................... $ 6,766 $ 11,723 $ 11,374
======== ======== ========
Depreciation and Amortization ....................... $ 7,732 $ 3,960 $ 3,544
======== ======== ========
ASSETS:
Total for reportable segments ....................... $ 76,634 $ 63,031 $ 46,727
Corporate Assets .................................... 4,261 10,115 18,564
-------- -------- --------
Total Consolidated Assets ........................... $ 80,895 $ 73,146 $ 65,291
======== ======== ========
</TABLE>
F-16
<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.
By: /S/ MAURICE R. TAYLOR, II
----------------------------------
Maurice R. Taylor, II,
CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD OF DIRECTORS
Dated: September 23, 1999.
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ MAURICE R. TAYLOR, II Chief Executive Officer September 23, 1999
- ----------------------------------- (Principal Executive Officer
Maurice R. Taylor, II and Chairman of the Board
of Directors)
/s/ HENRY F. BLISSENBACH, PHARM. D. President September 23, 1999
- ----------------------------------- (Director)
Henry F. Blissenbach, Pharm. D.
/s/ GREGORY H. KEANE Vice President, Finance September 23, 1999
- ----------------------------------- and Treasurer
Gregory H. Keane (Principal Financial Officer)
/s/ JOHN HOWELL BULLION (Director) September 23, 1999
- -----------------------------------
John Howell Bullion
/s/ JOHN H. FLITTIE (Director) September 23, 1999
- -----------------------------------
John H. Flittie
/s/ CHARLES V. OWENS, JR. (Director) September 23, 1999
- -----------------------------------
Charles V. Owens, Jr.
/s/ TRAVERS H. WILLS (Director) September 23, 1999
- -----------------------------------
Travers H. Wills
</TABLE>
<PAGE>
SCHEDULE II
CHRONIMED INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE AT
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS (1) END OF PERIOD
- ----------- ------------ ---------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Year ended July 2, 1999:
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts .. $1,280,000 $ 967,000 $ -- $1,017,000 (1) $1,230,000
========== ========== ==== ============= ==========
Year ended July 3, 1998:
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts .. $1,120,000 $1,022,000 $ -- $ 862,000 (1) $1,280,000
========== ========== ==== ============= ==========
Year ended June 27, 1997:
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts .. $ 860,000 $1,873,000 $ -- $1,613,000 (1) $1,120,000
========== ========== ==== ============= ==========
</TABLE>
- ------------------
(1) Uncollectable accounts written off, net of recoveries.
S-1
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made effective as of the first day of July, 1999,
entered into by and between CHRONIMED INC, a Minnesota corporation (the
"Company") and MAURICE R. TAYLOR, II (the "Employee").
WHEREAS, the Company desires to employ the Employee as its Chairman and
Chief Executive Officer (CEO) in accordance with the following terms, conditions
and provisions; and
WHEREAS, the Employee desires to perform such services for the Company,
all in accordance with the following terms, conditions and provisions;
NOW THEREFORE, in consideration of the mutual covenants herein
contained, it is agreed as follows:
1. EMPLOYMENT AND DUTIES.
The Company hereby continues Employee's employment, and Employee hereby
accepts and agrees to serve the Company as the Company's Chairman and CEO,
consistent with the job description for this position, and with duties subject
to review and modification from time to time at the direction of the Company's
Board of Directors (the "Board"). The Employee shall remain a member of the
Company's Board of Directors, subject to election by the shareholders of the
Company. The Employee shall apply his best efforts and devote substantially all
of his time and attention to the Company's affairs.
2. TERM.
The term of this Agreement and Employee's employment under this
Agreement shall commence on July 1, 1999, and shall continue thereafter for a
period of three years. Upon the expiration of the original term of this
Agreement, this Agreement shall automatically renew for successive two-year
terms, subject to termination as provided in Section 7.
3. COMPENSATION.
The Company shall compensate the Employee for his services at the
following salary, bonus, and benefits:
A. Base Salary
The Employee shall be paid a base salary of $325,800
per year, payable on the Company's normal payroll cycle. This
base salary is the minimum salary during the term of this
Agreement, and may be increased from time to time at the
discretion of the Board of Directors. Employee shall receive
an annual performance review, and, contingent upon
satisfactory review results, shall be eligible for increase of
such base salary at the direction of the Board of Directors.
1
<PAGE>
B. Bonus.
The Employee shall continue to participate in a
Company Management Incentive Plan, as approved and amended by
the Board of Directors from time to time, and which is
designed to deliver an annual bonus consistent with current
levels established for this position by the Board of
Directors. Employee shall periodically meet with the Board of
Directors, to establish quantitative and qualitative
initiatives and objectives for the purpose of assessing the
amount of bonus to be paid to Employee at the end of the
associated bonus period.
C. Stock Options.
The Employee shall be eligible to participate in the
annual grant of the Company's Stock Option Plan, consistent
with its terms and conditions, and with amounts of options,
including exercise price and vesting provisions determined by
the Board of Directors from time to time. Provisions under
this item 3C, stock options, are also subject to the
provisions found in Section 7, under termination of Agreement.
D. Employee Benefits Plans.
The Employee shall be entitled to participate in any
and all Company employee benefit plans, in accordance with the
eligibility requirements and other terms and provisions of
such plan or plans.
E. Insurance.
The Employee agrees that the Company, at the
discretion of its Board of Directors, may apply for and
procure on its own behalf, life insurance on the life of the
Employee, for the purpose of protecting the Company against
loss caused by the death of the Employee (commonly referred to
as "Key" insurance). Employee agrees to cooperate and submit
to medical examination, and to execute or deliver any
documentation reasonably required by the Company's insurer in
order to effectuate such insurance.
4. VACATION AND TIME OFF.
The Employee shall be entitled to four weeks of paid vacation in each
year of employment under the terms of this Agreement, without reduction of
salary. Unused vacation time may be carried over to future years of employment,
consistent with Company policy affecting use of employee vacation time. In
addition, Employee shall be entitled to such additional time off from work,
without loss of compensation, for attendance at professional meetings,
conventions, approved "other business activities", as per Section 10, and
educational courses in accordance with the Company's general policies in this
regard, and as from time to time determined by its Board of Directors.
2
<PAGE>
5. EXPENSES.
The Company will reimburse Employee for reasonable expenses incurred by
the Employee in connection with the business of the Company, according to
policies promulgated from time to time by the Board of Directors, and upon
presentation by Employee of appropriate substantiation for such expenses.
Further, the Company will reimburse Employee for Employee's monthly dues for
country club or private club membership. Also, the Company will provide
reimbursement under its published policies for tax/financial planning assistance
and preparation, as well as supplemental medical examinations.
A. Automobile Allowance.
During the term of this Agreement, Employee shall
receive an automobile allowance of $800.00 per month.
6. DISABILITY.
Not withstanding any other provision of this Agreement, if employee is
totally disabled, as defined below, for an aggregate of 180 calendar days in any
one calendar year of employment, the company shall not be obligated to pay
employee the compensation provided in this contract for any period of total
disability during such year in excess of 120 days. In such event, Employee's
salary under Section 3 shall be prorated for such year of employment in the same
manner as if this Agreement had been terminated at the end of such 120th day.
The Company agrees that, while on disability leave of absence, and for
the duration of such disability, Employee may continue to receive Employer's
group insurance plan coverage by compliance with the provisions of the
Consolidated Omnibus Budget Reconciliation Act ("COBRA"), until the end of such
disability leave, or upon attainment of the age of 65, whichever is earlier.
For purposes of this Agreement, Employee shall be considered to be
totally disabled when he is considered to be as such by any insurance company
used by the Company to provide disability benefits for the Employee, and
Employee shall continue to be considered totally disabled until such insurance
company ceases to recognize him as totally disabled for purposes of disability
benefits. If no such disability policies are in effect for the benefit of the
Employee or for any reason an insurance company fails to make a determination of
the question of whether Employee is totally disabled, Employee shall be
considered to be totally disabled if, because of mental or physical illness or
other cause, he is unable to perform the majority of his usual duties on behalf
of the Company. The existence of a total disability of the Employee, the date it
commenced, and the date it ceases, shall be determined by the Board of Directors
and the Employee, under these circumstances. If the parties cannot agree on the
foregoing questions of disability, then any such determination shall be made
after examination of Employee by medical doctor selected by the Board of
Directors, and a medical doctor selected by the Employee. If the medical doctor
so selected cannot agree on the foregoing questions of disability, a third
medical doctor shall be selected by the two and the opinion of a majority of all
three shall be binding.
3
<PAGE>
7. TERMINATION.
This Agreement shall terminate upon the occurrence of any of the
following:
A. Mutual agreement, in writing, of the parties to terminate;
B. Employee's death. Under circumstance of Employee's death,
Company agrees to make termination payments to Employee's
designated beneficiaries, in the amount of one year of base
salary, and annual bonus payment for bonus payable in the
fiscal year in which Employee's death occurred. Additionally,
any unexercised, vested stock options which were available to
Employee immediately prior to date of death shall be
exercisable by beneficiaries in accordance with the Company's
stock option plan. In addition, Employee's designated
beneficiaries may, at their option, continue to pay and to
receive insurance coverage under the COBRA provisions, and
beyond, for a period of up to two years following death, or
upon attainment of age 65 of beneficiary, whichever is
earlier.
C. Upon the expiration of the initial or any renewal term of
this Agreement, following 120 days of written notice by one
party to the other indicating the party's intention not to
renew;
D. At the Company's option, if Employee shall be totally
disabled, as defined above for a continuous period in excess
of nine months. The Company's option to terminate in such
event shall be exercised upon at least 30 days written notice
to Employee;
E. Termination by the Company for cause.
For purposes of this provision of this Agreement,
cause shall be defined as:
1. Failure of the Employee to substantially
perform any duties reasonably required by
the Company that are consistent with
Employees position (except as a result of
any disabling injury for which Employee has
been receiving benefits under a short term
or long term disability program);and
2. The commission by Employee of any
criminal act, or act of fraud or dishonestly
by Employee related to or in connection with
his Employment by the Company; or
3. Employee breaches Employee's other
covenants contained in this Agreement.
F. Change of employment or termination without cause by the
Company.
4
<PAGE>
A Change in Employment shall be deemed to have
occurred if, without Employee's consent,
1. Employee's position, duties, or title are
materially and adversely changed without cause: or
2. Employee's salary or benefits are reduced without
cause, or
3. The location of performance of most of Employee's
duties is moved from the general geographic location
in which Employee performed such duties prior to the
move.
The effective date of a change in employment shall be
the date Employee elects, by written notice to the Company, to
treat such action as termination due to change in employment,
provided it occurs within 90 days of the date Employee is
notified of the change in employment. Failure to treat a
particular change in employment as a termination of employment
shall not preclude Employee from treating a subsequent change
of employment as a termination of employment.
G. Termination Payments.
In the event Employee's employment with the Company
is terminated without cause, or a change in employment occurs
and employee elects to treat the change in employment as a
termination of employment and so notifies the Company of such
election within 90 days following the change of employment
(with a date of notice to be deemed the effective date of
termination) or the geographic location changes as defined
above, or upon non-renewal of this agreement by the Company,
then:
(a) Employee shall receive payment equal to 12 months
of Employee's then current annualized salary; plus
the average of any bonus or incentive compensation
paid or payable for the most recent two fiscal years,
or other period generally used by the Company to
determine such bonus or incentive compensation , and
at Employee's election, may pay out such salary and
bonus or incentives over a period of one year
consistent with the Company's routine employee
payment schedules, or in a lump sum; and all unvested
stock options held by Employee shall immediately
vest.
(b) Employee shall be entitled to continue
participation in the healthcare coverage, life
insurance and general employee benefit plans of the
Company. The Company shall for two years following
the effective date of the termination under this
Section 7G, or until Employee becomes eligible for
such insurance coverages with another employer,
continue to provide such coverage for Employee and
his dependents to the same extent and cost the
Company is then providing for other employees with
comparable coverage during this two year period.
5
<PAGE>
(c) In the event of a termination of employment under
this Section 7G, the Company agrees that in the event
of a dispute by the executive over any terms or
provisions contained in this agreement, or
interpretation thereof, the Company will pay all
reasonable legal expenses incurred by Employee as a
result of Employee's efforts to resolve the dispute.
H. Termination due to change in control.
For purposes of this provision, a change in control
will be defined as follows:
(a) When any "person" as defined in Section 3(a)(9)
of the Securities Exchange Act as used in sections
13(d) and 14(d) thereof, including a "group" as
defined in Section 13(d) of the Securities 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 Securities Exchange Act, as amended from time to
time), of securities of the Company representing
greater than 50 (fifty) percent of the combined
voting power of the Company's then outstanding
securities; or
(b) When, subsequent to the effective date of this
agreement, the individuals who, at the beginning of
such period, constitute the Board ("Incumbent
Directors") cease for any reason other than death to
constitute at least a majority thereof; provided
however that a Director who was not a Director at the
beginning of this period will be deemed to have
satisfied the definition of "Incumbent Director" if
such Director was elected by, or with the approval of
at least 60% (sixty percent) of the Directors who
then qualified as Incumbent Directors; 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.
If during a two year period subsequent to a change in
control, Employee is terminated without cause, or Employee is
asked by the Board to assume a position, duties, or level of
responsibility which are unacceptable to the Employee, or
Employee is asked by the Board to relocate geographically to a
location which is unacceptable to the Employee, the then
controlling Company agrees to pay Employee base salary equal
to 36 months of Employee's then current annualized salary;
plus the average of any bonus or incentive
6
<PAGE>
compensation paid or payable for the most recent three
calendar years, in aggregate, and at Employee's election, may
be paid out consistent with Company's routine employment
payment schedule over a period of three years, or in a lump
sum. Additionally, unvested stock options will vest according
to the terms of the Company's Stock Option Plan in effect at
the time of the change in control, or as defined in Section
7G(a).
In the event of termination of this Agreement due to
change in control, Company agrees to provide for reasonable
expenses incurred on Employee's behalf in the event of a legal
action or dispute in connection with the change of control, or
termination of employment caused by such change in control.
8. POOLING CONTINGENCY.
In the event a possible acquirer ("Acquirer") notifies the Company's
Board of Directors (the "Board") in writing, in conjunction with the Acquirer's
proposal to merge with or purchase all or part of the Company, that the Acquirer
has determined that any element of Section 7C, 7F, 7G, or 7H would prevent the
Acquirer from applying pooling accounting to the acquisition or merger, and the
Board agrees with the Acquirer's assessment of the risk to pooling availability,
then the Board may strike the Section 7C, 7F, 7G or 7H that the Acquirer and the
Board deem to constitute a pooling risk. The Acquirer's written notice must
state that the Acquirer's public accounting firm has advised the Acquirer that
it may apply pooling accounting except solely for the existence or operation of
the Section(s) of this Agreement subject to deletion. If the Board strikes
Section 7F and the corresponding severance elements of Section 7G, then Section
11(e) of the parties' July 1, 1996 Employment Agreement shall be deemed to
remain in effect and become a part of this Agreement. In the event the Board
strikes Section 7H, or Section 7C and the corresponding severance element of
Section 7G, then the remainder of the Agreement shall remain in effect without
addition, modification, or reference to the July 1, 1996 Employment Agreement.
Any modification or deletion of Section 7 shall be contingent upon and deemed
effective as of the closing of the Acquirer's acquisition or merger.
9. COVENANT NOT TO COMPETE.
Employee hereby covenants and agrees that during the initial and any
renewal term of this Agreement, and for a period of one year following the
termination of this Agreement, Employee shall not be engaged within the United
States, either directly or indirectly, in any matter or capacity, whether as an
advisor, principal, agent, partner, officer, director, employee, member of an
association, or otherwise, in any business or activity, or own beneficially or
of record, five percent or more of the outstanding stock of any class of equity
securities in any corporation in competition with the business then being
conducted by the Company. If Employee should breach the foregoing covenant, the
Company will cease making payments described in the previous section regarding
Termination of Agreement, and any associated payments contained therein; and
remaining unexercised stock options shall immediately be cancelled and benefit
plan provisions described in the Termination Section 7 shall be immediately
discontinued.
Additionally, at the option of the Board of Directors, the Company may
choose to extend the covenant not to compete set forth herein for a period of up
to an additional twelve months,
7
<PAGE>
beyond the initial twelve month period already stipulated herein. In
consideration for such election, the Company agrees to make payment to the
Employee the annualized salary and bonus equal to that in effect during the
fiscal year at the time of termination.
During this additional period of extension and payment, Employee agrees
not to solicit, directly or indirectly, any current employee of the Company for
employment or engagement in any capacity outside of the Company, its
subsidiaries or affiliates.
10. CONFIDENTIALITY.
Employee will, in the course of his employment with the Company have
access to confidential and proprietary data or information belonging to the
Company. Employee will not at any time divulge or communicate to any person
(other than to a person bound by confidentiality obligations to the Company
similar to those contained in this Agreement) or use to the detriment of the
Company, or for the benefit of any other person such data or information. The
provisions of this section shall survive Employee's employment hereunder
regardless of the cause of termination of employment or this Agreement. The
phase "confidential or proprietary data or information" shall mean information
not generally available to the public, including, but not limited to, personnel
information, financial information, customer lists, supplier lists, trade
secrets, secret processes, computer data and programs, pricing, marketing and
advertising data. Employee acknowledges and agrees that any confidential or
proprietary information that Employee has already acquired was in fact received
in confidence in Employees fiduciary capacity with respect to the Company.
All written materials, records and documents made by Employer or coming
into Employee's possession during the term of employment concerning any product,
processes, information or services used, developed, investigated or considered
by the Company, or otherwise concerning the business or affairs of the Company,
shall be the sole property of the Company and upon termination of Employee's
employment for any reason, or upon request of the Board of Directors during
Employee's employment, Employee shall promptly deliver the same to the Company.
In addition, upon termination of Employee's employment for any reason, or upon
request of the Board of Directors during Employee's employment, Employee shall
deliver to the Company all of the property of the Company in Employee's
possession or under Employee's control, including, but not limited to, financial
statements, marketing and sales data, computers, and Company credit cards.
11. OTHER BUSINESS ACTIVITIES.
Employee shall not serve as an officer of another company, whether for
compensation or otherwise, requiring more than nominal duties by the Employee,
during the term of this contract without the express prior written consent of
the Company's Board of Directors. Employee may not serve as a Director of any
other organization without express prior written approval by the Company's Board
of Directors.
12. INVENTIONS AND PATENTS.
Employee agrees to assign all rights, ownership and related privileges
and benefits associated with inventions and patents to the Company. Employee
agrees that any inventions or patents obtained in association with ideas or
concepts initiated by Employee related to the
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<PAGE>
Company's business are deemed to be Company property. This includes but is not
limited to product ideas, changes or improvements; process ideas, changes or
improvements; pertinent intellectual property, or other pertinent information.
13. ARBITRATION/DISPUTE RESOLUTION.
The Company and the Employee agree that as a first option prior to any
legal action arising out of the dispute over provisions in this agreement,
parties may seek arbitration, and submit to authority of binding arbitration.
14. COOPERATION IN CLAIMS.
Both during employment and post employment, Employee agrees that in the
event of a legal action against the Company, or legal action initiated by the
Company against another party, in which Employee is deemed by the Company to be
a material witness or affiant, Employee agrees to make reasonable and best
efforts to cooperate with the Company in such matters. If Employee is no longer
employed, Company will reimburse Employee for time and expenses incurred as a
result of cooperation for this purpose.
15. INDEMNIFICATION.
The Company agrees to make its best efforts to indemnify and hold
harmless the Employee from liability incurred as a result of performance of
duties as an Officer and member of the Board of Directors. This includes but is
not limited to applicable statute, as well as efforts to secure coverage under
pertinent insurance policies.
16. NOTICES.
All notices, requests, demands and other communications
provided for by this Contract shall be in writing and shall be deemed
to have been given when mailed at any general or branch United States
Post Office enclosed in a certified postpaid envelope, return receipt
requested, and addressed to the address of the respective party stated
below or to such changed address as the party may have fixed by notice:
If to the Employee:
Maurice R. Taylor, II
550 E. Long Lake Road
Wayzata, MN 55391
If to the Company:
Chairman of The Board of Directors
Chronimed Inc.
10900 Red Circle Drive
Minnetonka, MN 55343
9
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Any notice of change of address shall only be effective, however, when
received.
17. SUCCESSORS AND ASSIGNS.
This Contract shall inure to the benefit of, and be binding upon, the
Company, its successors and assigns, including, without limitation, any
corporation which may acquire all or substantially all of the Company's assets
and business or into which the Company may be consolidated or merged, and the
Employee, his heirs, executors, administrators and legal representatives. The
Employee may assign his right to payment, and his obligations, under this
Contract.
18. APPLICABLE LAW.
This Contract shall be governed by the laws of the State of Minnesota.
19. OTHER AGREEMENTS
This Contract supersedes all prior understandings and agreements
between the parties. It may not be amended orally, but only by a writing signed
by the parties hereto.
20. NON-WAIVER.
No delay or failure by either party in exercising any right under this
Contract, and no partial or single exercise of that right, shall constitute a
waiver of that or any other right.
21. HEADINGS.
Headings in this Contract are for convenience only and shall not be
used to interpret or construe its provisions.
22. COUNTERPARTS.
This Contract may be executed in two or more counterparts, each of
which shall be deemed an original but all of which together shall constitute one
and the same instrument.
CHRONIMED INC.
By
---------------------------------
Its
--------------------------------
AND
--------------------------------
Its Chairman, Compensation Committee
EMPLOYEE
- -----------------------------------
Maurice R. Taylor, II
10
EXHIBIT 10.12
PHARMACY SERVICES AGREEMENT
This Pharmacy Services Agreement (hereinafter referred to as This Agreement)
made and entered into this October 5, 1994 by and between Chronimed Pharmacy
(hereinafter referred to as Pharmacy) and The Prudential Insurance Company of
America or its affiliates (hereinafter referred to as The Prudential).
WHEREAS, The Prudential desires to enter into an agreement with Pharmacy to
provide for the dispensing of Prescription Drugs for Covered Persons; and
WHEREAS, Pharmacy desires to perform the duties specified in This Agreement:
NOW, THEREFORE, it is mutually agreed, as follows:
ARTICLE I - DEFINITIONS
As used in This Agreement, each of the following terms (and the plural thereof,
when appropriate) shall have the meaning set forth herein, except where the
content makes it clear that such a meaning is not intended.
A. "Claims Processor" means the prescription claims processor with whom The
Prudential has an agreement to process prescription claims submitted by
Pharmacy.
B. "Covered Person" means any person covered by a Prudential Coverage Plan
which provides benefits for Prescription Drugs.
C. "Doctor" means a licensed practitioner of the healing arts acting within
the scope of the license.
D. "Electronic Data Submission" means submission of data to a Claims
Processor by Pharmacy by means of point-of-sale terminals or Pharmacy
system on a real time basis.
E. "Formulary" means a list of medications determined to be safe and
effective that is regularly reviewed and updated to reflect current
medical standards of drug therapy. When one or more equivalent drugs or
brands of drugs exist that reflect current medical standards of drug
therapy, the Formulary need not include more than one such drug or brand.
F. "Medical Director" means a Doctor who is retained by the Prudential to
coordinate and supervise the delivery of health care services for Covered
Persons.
<PAGE>
G. "Pharmacy" means a person or organization legally licensed and registered
to dispense drugs that has a signed contract with The Prudential to
provide pharmacy services to Covered Persons.
H. "Prescription Drug" means only: (1) a medical substance that, by law, can
be dispensed only by prescription; (2) a compound medication that includes
a substance described in (1); (3) injectable insulin and insulin syringes
on written prescription; (4) diaphragms or (5) syringes used for injection
of a medical substance as described in (1).
I. "Prudential Coverage Plan" means any self-funded group health benefit plan
that is provided by an employer and administered by The Prudential; a plan
of group health care coverage that is provided to one or more employers
(or to other groups) by The Prudential or its affiliates through group
health care insurance contacts; group health maintenance coverage
contracts; or other group service plan contracts.
J. "Quality Improvement" (QI) means the process designed to objectively and
systematically monitor and evaluate the quality and appropriateness of
health care, pursue opportunities to improve health care, and resolve
identified problems.
K. "Risk Management" (RM) means that part of the Quality Improvement program
involving the reduction and/or prevention of losses and injuries to
Covered Persons through identification analysis and evaluation of areas of
potential loss, plant safety and specific incidents (both reported and
unreported).
L. "Transaction" means Electronic Data Submission to a Claims Processor by
Pharmacy and the corresponding Claims Processor response.
M. "Transaction Charge" means the charge applicable to each Transaction.
N. "Utilization Management" (UM) means that part of the Quality Improvement
program that supports and assures a comprehensive effort to monitor
effective, efficient and timely utilization of health care services.
ARTICLE II - OBLIGATIONS AND RESPONSIBILITIES OF PHARMACY
Pharmacy is an independent contractor to The Prudential. As such, Pharmacy
hereby agrees that its obligations and responsibilities include the following:
A. Pharmacy will be responsible for verifying the Covered Person's
eligibility in accordance with the procedures specified in Attachment A
and providing Prescription Drugs to those Covered Persons in accordance
with the terms and conditions of the Prudential Coverage Plan as outlined
in the Prudential Claims Processing Manual.
2
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B. In accordance with applicable state laws and subject to Doctor's
authorization, Pharmacy will dispense bioequivalent generic drugs on
prescription whenever the generic drug is less expensive than the
brand-name equivalent. If said authorization is not indicated on the
prescription, it is hereby understood that Pharmacy will make every
reasonable effort to secure authorization.
ARTICLE III - LEGAL RELATIONSHIP AMONG MEDICAL DIRECTOR,
PHARMACY, DOCTORS, AND THE PRUDENTIAL
The relationships among Medical Director, Pharmacy, Doctors and The Prudential
are those of independent contractors. None of the provisions of This Agreement
are intended to create or to be construed as creating any agency, partnership,
joint venture or employee-employer relationship.
ARTICLE IV - GENERAL PROVISIONS
Pharmacy agrees to abide by the following:
A. The Prudential and Pharmacy agree to use systems of Utilization
Management, Risk Management, and Quality Improvement. Pharmacy agrees to
cooperate fully in the implementation and operation of such systems by The
Prudential, as it relates to Prescription Drugs.
B. Pharmacy shall maintain or cause to be maintained adequate medication
profiles relating to the dispensing of Prescription Drugs and monitor the
appropriateness of Prescription Drugs in terms of refill patterns,
possible interactions and related quality issues to Covered Persons that
may be known to Pharmacy. Pharmacy agrees to provide the Covered Person
with important information about the drugs dispensed. Pharmacy further
agrees to advise Covered Persons and/or the Doctor, as appropriate, of
potentially harmful drug interactions, drug allergies or other drug usage
problems. Pharmacy and The Prudential agree that all Covered Persons'
medication profiles shall be treated as confidential so as to comply with
all state and federal laws regarding the confidentiality of medical
records. The Prudential shall have the right to inspect, at all reasonable
times, those accounting and administrative records maintained by Pharmacy
regarding Pharmacy's obligations pursuant to this agreement and pertaining
to The Prudential or to Covered Persons, and to Pharmacy participation
hereunder. However, Pharmacy shall not be required to disclose the
medication profiles of any Covered Person without his or her written
consent to other than the Doctor, Medical Director or The Prudential where
such information is necessary to enable them to fulfill their legal or
contractual obligations.
C. Pharmacy shall maintain professional liability insurance pursuant to the
professional activities assumed by Pharmacy in This Agreement. The amount
of such insurance
3
<PAGE>
shall be mutually agreed to by Pharmacy and The Prudential is shown in
Attachment A of This Agreement. Pharmacy shall provide The Prudential with
evidence of such coverage within seven days from the effective date of
This Agreement and shall agree to keep such evidence and coverage current.
Pharmacy must give the Prudential fifteen (15) days advance notice
notification of termination of such coverage.
D. Pharmacy warrants that it is in compliance with all applicable local,
state and federal laws relating to the provision of Prescription Drugs and
the Pharmacy shall cause all of its employees to perform their duties in
accordance with all standards of professional ethics and practice as may
be applicable.
E. The Prudential and Pharmacy shall comply with all state and federal laws
and regulations regarding:
1. The privacy and confidentiality of Covered Person's health and
medical records;
and
2. Employment discrimination.
F. Nothing contained herein shall preclude Pharmacy from rendering service to
persons who are not Covered Persons, provided that such persons shall not
receive treatment at preferential times or in any other manner
preferential to Covered Persons or in conflict with the terms of This
Agreement. Pharmacy agrees not to differentiate or discriminate in the
treatment of Covered Persons as to the quality of services delivered
because of race, sex, age, religion, place of residence, or health status;
and to observe, protect, and promote the rights of Covered Persons.
G. The Prudential and Pharmacy agree that complaints received by The
Prudential concerning services rendered by Pharmacy will be resolved in
accordance with The Prudential's complaint resolution procedures. Pharmacy
agrees to cooperate with The Prudential in the resolution of Covered
Person complaints.
H. Pharmacy shall indemnify and hold The Prudential harmless from any and all
suits and claims as a result of professional services provided or not
provided by Pharmacy, its agents and employees in the dispensing of
Prescription Drugs to any Covered Person during the term of This
Agreement.
I. The Prudential shall indemnify and hold Pharmacy harmless from any and all
claims, lawsuits, settlements and liabilities incurred as a result of
actions taken or not taken by The Prudential in the administration of the
Prudential Coverage Plan.
J. Pharmacy agrees to permit The Prudential to bill any third-party payer,
who may have responsibility under any coordination of benefits provision
(C.O.B.), for covered Prescription Drugs provided to Covered Persons on
behalf of whom compensation has been paid to Pharmacy by The Prudential
and to execute any and all documents that reasonably may be needed or
appropriate for this purpose.
4
<PAGE>
K. This Agreement, together with any supplements, addenda, amendments,
modifications, or attachments, comprises the complete agreement between
Pharmacy and The Prudential. Neither of the parties has made any
representations nor warranties other than those set forth in This
Agreement and such attachments, supplements, addenda, amendments, or
modifications, if any.
L. In the event that any portion of This Agreement is found to be void or
illegal, the validity or enforceability of any other portion shall not be
affected.
M. The waiver by either party of a breach or violation of any provision of
This Agreement shall not operate as to be constructed to be a waiver of
any subsequent breach thereof.
N. The headings of the various Articles of This Agreement are inserted merely
for the purpose of convenience and do not, expressly, or by implication,
limit or define or extend the specific terms of the Articles so
designated.
O. All the rights and remedies hereunder will be cumulative and not
alternative, and This Agreement shall be construed and governed by the
laws of the State of New Jersey.
P. The Agreement may be executed in any number of counterparts, which, when
read together, shall constitute one instrument.
R. Pharmacy will waive and not submit claims for rebates, volume discounts,
incentives or any other considerations provided by pharmaceutical
manufacturers as a result of the dispensing of said pharmaceuticals to a
Covered Person. All such rebates, volume discounts, incentives or other
considerations shall be claimed by and the property of The Prudential.
ARTICLE V - COMPENSATION
Pharmacy compensation shall be subject to the following conditions:
A. Pharmacy shall receive its compensation from The Prudential and that
compensation shall be subject to the provisions in Attachment A. Pharmacy
shall be solely responsible for compensating any of its employees that
provide services under This Agreement.
B. Pharmacy will look solely to The Prudential for compensation of covered
health care services rendered to Covered Persons and, with the exception
of any copayment or charge required under the Prudential Coverage Plan,
will not assert any claim for compensation against Covered Persons for
covered health care services in the event of nonpayment by The Prudential
or as a result of any breaches of This Agreement.
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<PAGE>
C. Pharmacy agrees to assist Covered Persons with the processing of forms
required to pursue coordination of benefits with other health care plans
or any other permitted methods of third party recovery. Pharmacy further
agrees that, where duplicate coverage exists and the Prudential Coverage
Plan is known by Pharmacy to be the secondary coverage, Pharmacy shall so
notify The Prudential and seek payment from the other health care plan
before seeking payment from The Prudential.
D. If Pharmacy has collected a copayment or charge from Covered Person where
duplicate coverage exists and Pharmacy is subsequently reimbursed for the
service by another health care plan, Pharmacy shall refund or credit to
Covered Person the portion, if any, of the copayment or charge which
represents an overpayment to Pharmacy.
ARTICLE VI - ARBITRATION
If any dispute or controversy shall arise among the parties hereto with respect
to: the making of, construction of, the terms of, or interpretation of This
Agreement; or the rights of any party hereto; or with respect to any transaction
involved; the dispute or controversy shall be settled by arbitration before one
(1) arbitrator, selected from the panel of arbitrators of the American
Arbitration Association, in accordance with the commercial arbitration rules of
the American Arbitration Association. Any costs associated with such arbitration
proceeding shall be borne equally by the parties.
ARTICLE VII - TERM AND TERMINATION
Subject to the provisions set forth in this Article VII, the term of This
Agreement shall be for a period of twelve (12) months, commencing on Jan. 1,
1994 and continuing from year-to-year thereafter; provided, however, This
Agreement may be unilaterally terminated sooner by either party giving ninety
(90) days written notice mailed to the last known address of the other party,
prepaid, certified mail, return receipt requested.
Any breach of the provisions of This Agreement by either Pharmacy or The
Prudential may constitute grounds for immediate termination of This Agreement by
either party by giving thirty (30) days written notice.
Pharmacy shall provide written notification to The Prudential within 15 days of
any merger or acquisition of the pharmacies providing service under the terms of
This Agreement. A merger or acquisition of Pharmacy will not terminate This
Agreement. The Agreement will remain in full force and effect until the end of
the term, unless one party gives written notice of termination to the other
party as provided under first paragraph of This Article VII.
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<PAGE>
ARTICLE VIII - CHANGES IN THIS AGREEMENT
This Agreement, including any attachments, supplements, addenda, amendments or
modifications, may only be changed by a written document executed by both
parties.
ARTICLE IX - NOTICES
Any notices required to be given pursuant to the terms and provisions of This
Agreement shall be in writing and shall be sent by certified mail, return
receipt requested, prepaid to:
CHRONIMED PHARMACY
PHARMACY AT: THE PRUDENTIAL AT: 56 North Livingston Ave.
Roseland, N.J. 07068
Attention: Dennis Burton
- -------------------------------
13911 Ridgedale Drive, Ste. 250
- -------------------------------
Minnetonka, MN 55305
- -------------------------------
Either party may, at any time, designate any other address in place of those
given above by written notice to the other party.
IN WITNESS WHEREOF, the parties hereto have executed This Agreement.
PHARMACY: THE PRUDENTIAL: John Blechar, Director,
CHRONIMED PHARMACY Pharmacy
Network
Development
Dennis Burton, VP Pharmacy Svcs
- ------------------------------- ---------------------------------
By: /s/ Dennis Burton By: /s/ John Blechar
- ------------------------------- ------------------------------
Date: 10/6/94 Date: 10/5/94
- ------------------------------- ----------------------------
Witness: /s/ Nancy Decker Witness: /s/ [illegible]
- ------------------------------- -------------------------
7
<PAGE>
ATTACHMENT A
A. ELIGIBILITY VERIFICATION
1. Pharmacy shall verify a Covered Person's eligibility to receive
Prescription Drugs under the terms of This Agreement using the
following method.
On-line Point-of-Sale Method
Pharmacy agrees to use an on-line point-of-sale (POS) authorization
terminal or a host-to-host on-line link with The Prudential's Claims
Processor's system to verify eligibility of Covered Persons.
2. In the event the Pharmacy can not verify a person's eligibility
using the method described above, Pharmacy shall attempt to verify
eligibility by calling The Prudential's Member Services Department
or The Prudential's on-line telephone eligibility system.
3. Identification cards will be mailed by The Prudential to all Covered
Persons. These cards are to be used for identification purposes
only.
B. COMPENSATION
Pharmacy compensation shall be subject to the following conditions:
1. Pharmacy must collect the applicable copayment or charge from each
Covered Person at the time the prescription is dispensed. Pharmacy
shall not waive or discount the copayment or charge (e.g.,
prescription discount coupons), except when the Pharmacy's usual and
prevailing retail charge for the prescription is less than the
copayment. In these cases Pharmacy shall collect the usual and
prevailing retail charge in lieu of the copayment or charge. Each
thirty (30) day supply, or fraction thereof, up to a ninety (90) day
prescription for maintenance medications, as described in The
Prudential's Claims Processing Manual, or oral contraceptives or
injectible medications will be considered a separate prescription
with respect to copayments and utilization.
2. Pharmacy will be compensated for the dispensing performed by all
Pharmacy employees in accordance with the terms and provisions of
This Agreement.
a. For those Prescription Drugs not contained on The Prudential's
Maximum Allowable Cost (MAC) list or The Prudential's Generic
Drug Incentive Programs, The Prudential will compensate
Pharmacy the lesser of (1) and (2): (1) AWP minus
[CONFIDENTIAL TREATMENT] percent minus the applicable
copayment or charge; and
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<PAGE>
(2) the Pharmacy's Usual and Customary, advertised or posted
price minus the applicable copayment or charge.
For this purpose, Usual and Customary (U & C) shall mean the
lowest price charged to a cash customer including any
applicable discounts.
Average Wholesale Price (AWP) shall mean the current wholesale
cost of the dispensed medication as defined by First DataBank
(The Blue Book). AWP cost shall be based on unit cost of the
commonly-stocked commercially available package size in
Pharmacy, (e.g., 1000s, 500s, 100s, etc.). The Prudential will
have the right to audit such package sizes in Pharmacy as
provided in section 3.g.
b. For Prescription Drugs contained on The Prudential's MAC list
and in which the generic drug incentive programs do not apply,
The Prudential will compensate Pharmacy the lesser of (1) and
(2): (1) [CONFIDENTIAL TREATMENT]; and (2) the Pharmacy's
Usual and Customary, advertised or posted price minus the
applicable copayment or charge.
For this purpose, Usual and Customary (U & C) shall mean the
lowest price charged to a cash customer including any
applicable discounts.
Prescription drugs included in The Prudential's MAC Program are
listed in Appendix I. The Prudential's MAC Program is based on the
following conditions:
i. The Prescription Drug must be available from three (3)
or more sources rated as therapeutically equivalent ("A"
Rating) by the FDA as published in the current edition
of the Approved Drug Products With Therapeutic
Equivalence Evaluations.
ii. Reimbursement will be calculated based on the current
"Baseline Price" as defined by First DataBank (First
Alert). "Baseline Price" shall be updated monthly on the
15th of each month. "Baseline Price" shall be based on
the unit cost of the 500 package size. If a "Baseline
Price" is not available for the 500 package size, the
"Baseline Price" shall be based on the next smallest
commercially available package size with a "Baseline
Price" (e.g. 250s, 100s, etc.)
iii. The MAC list of Prescription Drugs shall be updated
semi-annually.
iv. Pharmacy shall not be bound to The Prudential's MAC
Program if the Doctor signifies "Brand Medically
Necessary" or similar designation on the prescription
and/or the Covered Person requests the brand-name
Prescription
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Drug. In such circumstances, Pharmacy will be reimbursed
according to Section A above. Pharmacy shall indicate
the Doctor's or the Covered Person's directive by
submitting the appropriate product selection code
designation in the claim transmission. Prudential
reserves the right to audit such directives on the
prescriptions according to the provisions outlined in
the Compensation section, subsection 3.g. of Attachment
A.
c. For Multi-Source Prescription Drugs (as defined below) for
which a "Baseline Price") is available by First DataBank,
Prudential may use one of the following generic drug incentive
programs.
Multi-Source Prescription Drugs to which these programs shall
apply include those pharmaceutically equivalent Prescription
Drugs for which three or more therapeutically equivalent
sources can be identified, except as follows:
[CONFIDENTIAL TREATMENT]
Prescription Drugs prohibited from substitution by state laws
and regulations. (Note: Pharmacy shall indicate Prescription
Drugs prohibited by law from substitution by using the
appropriate DAW/product selection code designation in the
claim transmission.
i. Differential Cost Generic Drug Incentive: For Covered
Persons whose benefit includes Prudential's Differential
Cost Generic Drug Incentive, when the Covered Person
and/or Doctor requests a brand-name Prescription Drug,
The Prudential will reimburse the Pharmacy the
[CONFIDENTIAL TREATMENT] Pharmacy will be responsible
for collecting the appropriate copayment which is an
amount equal to the sum of (a) an amount equal to the
difference between [CONFIDENTIAL TREATMENT].
ii. Dual Copayment Generic Drug Incentive: For Covered
Persons participating in Prudential's Dual Copayment
Generic Drug Incentive program, when the
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Covered Person and,/or Doctor requests a brand-name
Prescription Drug The Prudential will reimburse Pharmacy
[CONFIDENTIAL TREATMENT]. Pharmacy will be responsible
for collecting the brand-name copayment for the
brand-name Prescription Drug.
For Covered Persons participating in Prudential's Dual
Copayment Generic Drug Incentive Program when the
Covered Person and the Doctor accepts a generic
Prescription Drug, The Prudential will reimburse
pharmacy [CONFIDENTIAL TREATMENT]. Pharmacy will be
responsible for collecting the generic drug copayment
for the generic Prescription Drug.
iii. Brand-name Prescription Drugs shall be defined for both
of Prudential's Generic Drug Incentive programs as
Prescription Drugs with a Generic Product Indicator of
"2" and a Generic Indicator of "1" assigned by First
DataBank.
iv. Up to a [CONFIDENTIAL TREATMENT] day supply, or any
fraction thereof, of a maintenance medication or oral
contraceptive or injectible medication shall constitute
[CONFIDENTIAL TREATMENT].
3. The following procedures shall be used by Pharmacy for submitting
prescription claim data to The Prudential.
a. Pharmacy agrees to submit prescription claims through direct
transmission over a phone line or through an on-line
point-of-scale (POS) adjudication system using the format
approved by the National Council for Prescription Drug
Programs. Pharmacy will submit prescription claims within 35
days of the fill date. Pharmacy agrees to submit only the
information required.
Electronic Data Submission: Pharmacy shall be charged a
[CONFIDENTIAL TREATMENT] Charge associated with Transactions
utilizing Electronic Data Submission. Pharmacy shall receive
sixty (60) days written notification of any adjustment to the
Transaction Charge. Reimbursement checks issued to Pharmacy
using Electronic Data Submission will be issued in the net
amount of the claims after deduction by Claims Processor of
all applicable Transaction Charges.
b. The required information includes, patient's specific ID.
number, cardholder's name, patient's full name, patient's date
of birth, patient's sex, patient's relationship to cardholder,
pharmacy's name, pharmacy's address, pharmacy's NABP number,
date prescription written, date prescription filled,
prescription number, new/refill designation, quantity
dispensed, days supply dispensed, national drug code number,
prescribing Doctor's state license number DAW designation,
drug cost, dispensing fee, and balance after copayment or
charge.
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c. Pharmacy shall receive The Prudential Claims Processing Manual
after execution of This Agreement. Pharmacy shall follow all
procedures provided in this manual.
d. In the event of a conflict between the Prudential Claims
Processing Manual and information processed through the
on-line, point-of-sale (POS) adjudication system, the POS
System information shall supersede any and all information
contained in the manual, and the manual shall not apply.
e. Payments will be made to Pharmacy within [CONFIDENTIAL
TREATMENT] days after the completion of the processing cycle,
which occurs on the 15th and the last day of each month, for
complete claim information received from Pharmacy prior to
each processing cycle.
f. Pharmacy shall maintain records, signature log documentation
and reports for prescriptions filled under this Agreement for
a period of one (1) year from the date of service and
Prudential shall maintain eligibility records for Covered
Members for a period of one (1) year from date of service.
During normal working hours and upon written request, Pharmacy
and Prudential agree to allow the other party reasonable
access to such records required to be maintained, and also the
right to make photocopies of said documents.
C. LIABILITY INSURANCE
The minimum amount of professional liability insurance to be maintained by
Pharmacy pursuant to This Agreement is $[CONFIDENTIAL TREATMENT] per pharmacist
per occurrence and $[CONFIDENTIAL TREATMENT] aggregate annually.
12
<PAGE>
D. PHARMACY PROVIDER NETWORK
This agreement represents the pharmacy network in all contiguous states, Alaska,
and Puerto Rico. This agreement will not modify nor supersede the terms or
conditions of any other Prudential agreements contracted on a regional or local
basis.
The parties hereto have agreed to the above terms and conditions.
(PHARMACY NAME): THE PRUDENTIAL:
CHRONIMED PHARMACY
- -----------------------------------
NABP #* (see attached list)
---------------------------
By: /s/ Dennis Burton By: /s/ John Blechar
-------------------------------- -------------------------------
Date: 10/6/94 Date: 10/5/94
------------------------------ -----------------------------
Witness: /s/ Nancy Decker Witness:
--------------------------- --------------------------
* Attach list of NABP numbers if this contract covers more than one location.
13
<PAGE>
CHRONIMED Pharmacy
13911 Ridgedale Drive
Minnetonka, MN 55305
612-541-0239
License Number: 260310-4
DEA Number: BD2421066
NABP Number: 2419403
Tax Reporting I.D.: 41-1515691
CHRONIMED Pharmacy
393 E. Grand Ave., Suite I
So. San Francisco, CA 94080
415-615-9832
License Number: PHY37435
DEA Number: BC2989068
NABP Number: 05-45701
Tax Reporting I.D.: 41-1515691
CHRONIMED Pharmacy
1200 E. Hillcrest Street, Suite 101
Orlando, FL 32803
407-897-6634
License Number: PH0012371
DEA Number: BC3573614
NABP Number: 10-69966
Tax Reporting I.D.: 41-1515691
CHRONIMED Pharmacy
8912 Kirby Drive
Houston, TX 77054
713-667-2322
License Number: 15329
DEA Number: BC3570276
NABP Number: 45-88096
Tax Reporting I.D.: 41-1515691
14
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CHRONIMED, INC.
COMPENSATION REVISION ADDENDUM
JANUARY 6, 1997
* The Prudential Insurance Company of America (The Prudential) and
Chronimed, Inc. agree to incorporate the following Addendum to the
Pharmacy Services Agreement dated October 5, 1994 (the Agreement)
effective as of the last date signed below.
* The parties in the Agreement shall be changed from The Prudential
Insurance Company of America and Chronimed Pharmacy to The Prudential
Insurance Company of America and Chronimed, Inc.
* Subsection B, Compensation, of Attachment A of the Agreement, is modified
solely with respect to the products listed on Exhibit A, as follows:
a) Volume discounts from the current compensation of AWP [CONFIDENTIAL
TREATMENT] for injectables will be offered to each Prudential
location electing to implement the Chronimed self-administered
injectables program as follows:
* Implementation of the entire list of injectable products where
Chronimed is, to the extent permitted by state or federal law,
the sole preferred provider (as defined below) qualifies the
location for the lesser of (a) Usual and Customary, as defined
in the Agreement and (b) the following volume discounts:
AWP-[CONFIDENTIAL TREATMENT]% $[CONFIDENTIAL TREATMENT]/Covered Person/Quarter
AWP-[CONFIDENTIAL TREATMENT]% $[CONFIDENTIAL TREATMENT]/Covered Person/Quarter
AWP-[CONFIDENTIAL TREATMENT]% >[CONFIDENTIAL TREATMENT]/Covered Person/Quartcr
b) The volume discount is applicable subject to the following criteria.
If any or all of the following criteria are not met, the
compensation shall resort to the lesser of (a) Usual and Customary,
as defined in the Agreement, and (b) AWP [CONFIDENTIAL TREATMENT] %.
* Eligibility is verified and claims are submitted
electronically.
* Up to a [CONFIDENTIAL TREATMENT] day supply as determined
appropriate by Chronimed pharmacists is authorized for all
orders.
* Chronimed is designated as the sole preferred provider for the
attached list of core self-administered injectables, Exhibit
A.
15
<PAGE>
EXHIBIT A - MEDICATIONS LIST
Aerosols
[CONFIDENTIAL TREATMENT]
Anticoagulants
[CONFIDENTIAL TREATMENT]
Colony Stimulating Factors
[CONFIDENTIAL TREATMENT]
Erythropoietin
[CONFIDENTIAL TREATMENT]
Factor Drugs
[CONFIDENTIAL TREATMENT]
Fertility
[CONFIDENTIAL TREATMENT]
Gaucher's Disease
[CONFIDENTIAL TREATMENT]
Immune Serums
[CONFIDENTIAL TREATMENT]
Interferons
[CONFIDENTIAL TREATMENT]
Self-Injectables
[CONFIDENTIAL TREATMENT]
Transplants
[CONFIDENTIAL TREATMENT]
Growth Hormone
[CONFIDENTIAL TREATMENT]
* [CONFIDENTIAL TREATMENT] is not included in this program
* All [CONFIDENTIAL TREATMENT] drugs are included in this program
16
<PAGE>
EXHIBIT B
1. Human Growth Hormone
[CONFIDENTIAL TREATMENT]
2. Patient Blood Glucose Meters
and Test Strips for these Meters
PJG
Note: The Prudential may add to, change, or delete from this list by providing
30 days' written notice to Chronimed and as mutually agreed.
17
<PAGE>
PHARMACY SERVICES AGREEMENT AMENDMENT
This Pharmacy Services Agreement Amendment (the "Amendment") entered into by and
between The Prudential Insurance Company of America ("Prudential") and
Chronimed, Inc. ("Chronimed") is effective September 15, 1998.
WITNESSETH
WHEREAS, the parties entered into that certain Pharmacy Services Agreement dated
October 5, 1994 (the "Original Agreement"), as amended January 6, 1997 (the
"First Amendment") (the Original Agreement and the First Amendment are referred
to collectively as the "Agreement"); and
WHEREAS, the parties desire to amend the Agreement.
NOW, THEREFORE, in consideration of the mutual covenants, terms and conditions
herein contained, it is agreed by and between the parties hereto as follows:
1. Unless specifically identified and modified by the terms of this Amendment
and the Exhibits hereto, every term of the Agreement shall remain unmodified and
in full force and effect. In the event of any conflict between a term of the
Agreement and a term of this Amendment, the term provided in this Amendment
shall prevail.
2. Original Agreement, Attachment A, Subsection B, Compensation, Paragraph 2
shall be stricken in its entirety and replaced with Exhibits A and B.
3. Original Agreement, Attachment A, Subsection B, Compensation, Paragraph 3a.,
the second paragraph shall be stricken in its entirety.
4. Original Agreement, the "Chronimed Inc. Injectables Drug List" shall be
stricken in its entirety.
5. The First Amendment, third bullet, subsections a) through i) shall be
stricken in their entirety.
6. The First Amendment, fourth bullet shall be stricken in its entirety.
7. The First Amendment, fifth bullet shall be stricken in its entirety.
8. The First Amendment, the sixth bullet shall be stricken in its entirety and
replaced with the following:
Chronimed will provide as part of its services that initial prior
authorization for coverage of the Covered Services identified by
Prudential as requiring prior authorization. The Covered Services
identified by Prudential as requiring prior authorization and the covered
conditions for each Covered Service will be updated periodically by
Prudential and such updates will be provided to Chronimed for these
Covered Services. Any variances from the list of Covered Services
requiring prior authorization will require the physician requesting the
authorization to contact Prudential for a variance approval.
9. The First Amendment, Exhibits A and B shall be stricken in their entirety.
18
<PAGE>
10. The following provision shall be included in the Amendment: "Note: Pharmacy
shall indicate Prescription Drugs prohibited by law from substitution by using
the appropriate DAW/product selection code designation in the claim
transmission."
11. Capitalized terms used herein and not otherwise defined shall have the
meaning ascribed to them in the Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment by
their duly authorized officers, to become effective on the date and year first
above written.
CHRONIMED, INC.
By: Henry F. Blissenbach
-----------------------------------
Signature: /s/ Henry F. Blissenbach
----------------------------
Date: 1/18/99
---------------------------------
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
By: Daniel D. Cave
-----------------------------------
Signature: /s/ Daniel D. Cave
----------------------------
Date: 1/26/99
---------------------------------
19
<PAGE>
EXHIBIT A
COMPENSATION SCHEDULE
I. REIMBURSEMENT TERMS.
Except as otherwise set forth in Exhibit B, the Reimbursement Payment for each
Covered Services dispensed shall be based on ingredient cost ("Ingredient Cost")
defined as the lesser of:
A. AWP of the Brand Name Drug less [CONFIDENTIAL TREATMENT]%) plus a
professional dispensing fee of [CONFIDENTIAL TREATMENT]; or
B. AWP of Generic Drug less [CONFIDENTIAL TREATMENT]%) plus a professional
dispensing fee of [CONFIDENTIAL TREATMENT]; or
C. MAC for each Prescription Drug plus a professional dispensing fee of
[CONFIDENTIAL TREATMENT]; or
D. The lessor of the submitted ingredient cost plus a professional dispensing
fee of [CONFIDENTIAL TREATMENT] or U & C Retail Price.
In the event that the calculated U & C Retail Price, as defined below, falls
below the copayment or coinsurance, Pharmacy shall collect from the Covered
Person the U & C Retail Price in lieu of the copayment or coinsurance.
II. COMPENSATION: PAYOR.
The Reimbursement Payment per claim payable by Prudential or Self-Insurer, as
applicable, to Pharmacy, subject to the terms of this Agreement and the
applicable Coverage Plan, shall be equal to:
A. The Ingredient Cost
B. Minus any applicable copayment or coinsurance.
III. COMPENSATION: COVERED PERSON.
A. Pharmacy acknowledges that the copayment or coinsurance is an integral
part of the Prudential Coverage Plan and agrees that it will not waive or
discount the applicable copayment or coinsurance under any circumstance.
Pharmacy will not bill Covered Persons for amounts in excess of the
copayment or coinsurance provided for in the Prudential Coverage Plan.
B. In cases where the U & C Retail Price is less than the copayment or
coinsurance, Pharmacy agrees to charge the Covered Person the U & C Retail
Price. There shall be no additional compensation from the party
underwriting or offering the Prudential Coverage Plan or Self-Insurer, as
applicable, in such cases.
IV. MODIFICATION OF MAC.
20
<PAGE>
Prudential reserves the right to modify the MAC list at any time. Prudential
shall provide fifteen (15) days notice of any additions to the MAC list and of
any price decrease on any item on the MAC list. All other modifications to the
MAC list shall become effective immediately without notice to Pharmacy.
V. DEFINITIONS.
For purposes of this Attachment, the following terms shall have the following
definitions:
A. "AVERAGE WHOLESALE PRICE" or "AWP", as applicable, means the current average
wholesale price of a Prescription Drug listed in FIRST DATABANK (Blue Book), on
the day the claim is submitted for adjudication.
B. "BRAND NAME DRUG" means a Prescription Drug with a proprietary name assigned
to it by the manufacturer or distributor as indicated by FIRST DATABANK (Blue
Book).
C. "COVERED SERVICES" means the pharmaceutical or health care services,
treatments, and supplies for which a Covered Person is entitled to benefits
under the terms of the applicable Prudential Coverage Plan.
D. "GENERIC DRUG" means a Prescription Drug, whether identified by its chemical,
proprietary, or non- proprietary name, that is accepted by the FDA as
therapeutically equivalent and interchangeable with drugs having an identical
amount of the same active ingredient. Generic Drugs include, but are not limited
to, those products designated with an "A" rating, as published by the FDA in the
current edition "Approved drug products with therapeutic equivalence
evaluations" (Orange Book).
E. "MAXIMUM ALLOWABLE COST" or "MAC" means the maximum compensation level
established by Prudential for Generic Drugs for which there are more than one
manufacturer, as modified from time to time. The MAC list is incorporated herein
by reference.
F. "REIMBURSEMENT PAYMENT" means the amount by which the Ingredient Cost, as
defined in this Exhibit A, exceeds the amount of the copayment, coinsurance
and/or deductible.
G. "SELF-INSURER" means the party financially responsible for the cost of health
care services under a self-insured health benefit program and/or the party with
whom Prudential has contracted to provide administrative services for a
self-insured health benefit program.
H. "USUAL AND CUSTOMARY (U&C) RETAIL PRICE" means the cash price less all
applicable customer discounts which Pharmacy usually charges customers for
providing health care or pharmaceutical services.
21
<PAGE>
EXHIBIT B
<TABLE>
<CAPTION>
- ---------------------------------- ---------------------------------- -------------------------- -----------------------------------
PRODUCT/PROGRAM DISCOUNT DISPENSING FEE SPECIAL COMMENTS
- ---------------------------------- ---------------------------------- -------------------------- -----------------------------------
<S> <C> <C> <C>
Diabetes Care Program AWP [CONFIDENTIAL TREATMENT]% $[CONFIDENTIAL TREATMENT]
- ---------------------------------- ---------------------------------- -------------------------- -----------------------------------
[CONFIDENTIAL TREATMENT] AWP [CONFIDENTIAL TREATMENT]% $[CONFIDENTIAL TREATMENT] Restricted list of medications
Medications Only available when accompanied by
[CONFIDENTIAL TREATMENT]
- ---------------------------------- ---------------------------------- -------------------------- -----------------------------------
[CONFIDENTIAL TREATMENT] AWP [CONFIDENTIAL TREATMENT]% N/A Paper Claims
Medications - AWP [CONFIDENTIAL TREATMENT]% Electronic Claim
Participating Plan
- ---------------------------------- ---------------------------------- -------------------------- -----------------------------------
[CONFIDENTIAL TREATMENT] AWP [CONFIDENTIAL TREATMENT]% N/A Paper Claims
Medications - AWP [CONFIDENTIAL TREATMENT]% Electronic Claim
Preferred Plan
- ---------------------------------- ---------------------------------- -------------------------- -----------------------------------
[CONFIDENTIAL TREATMENT] AWP [CONFIDENTIAL TREATMENT]% None Paper Claims
Product - Participating Plan AWP [CONFIDENTIAL TREATMENT]% Electronic Claims
- ---------------------------------- ---------------------------------- -------------------------- -----------------------------------
[CONFIDENTIAL TREATMENT] AWP [CONFIDENTIAL TREATMENT]% None Paper Claims
Preferred Plan AWP [CONFIDENTIAL TREATMENT]% Electronic Claims
- ---------------------------------- ---------------------------------- -------------------------- -----------------------------------
[CONFIDENTIAL TREATMENT] AWP [CONFIDENTIAL TREATMENT]% N/A Paper Claims
and new products introduced with AWP [CONFIDENTIAL TREATMENT]% Electronic Claims
a fixed market price -
Participating Plan
- ---------------------------------- ---------------------------------- -------------------------- -----------------------------------
[CONFIDENTIAL TREATMENT] and AWP [CONFIDENTIAL TREATMENT]% N/A Paper Claims
new products introduced with a AWP [CONFIDENTIAL TREATMENT]% Electronic Claims
fixed market price -
Preferred Plan
- ---------------------------------- ---------------------------------- -------------------------- -----------------------------------
[CONFIDENTIAL TREATMENT] Pricing HDS Product Pricing according to N/A Currently $[CONFIDENTIAL TREATMENT]
[CONFIDENTIAL TREATMENT] on-line (Approximately AWP - [CONFIDENTIAL
program TREATMENT]%)
- ---------------------------------- ---------------------------------- -------------------------- -----------------------------------
</TABLE>
For purposes of this Exhibit B, the following terms shall have the following
definitions:
"Participation Plan" means a Prudential Coverage Plan that uses Chronimed as a
pharmacy vendor on a selected and limited basis. The Participating Plans are set
forth in Exhibit C.
"Preferred Plan" means a Prudential Coverage Plan that uses Chronimed as the
primary vendor of choice for a majority of the Covered Services. For purposes
herein, a Preferred Plan is not required to use Chronimed as the sole or
exclusive provider of Covered Services. The Preferred Plans are set forth in
Exhibit C.
22
<PAGE>
EXHIBIT C
PARTICIPATING AND PREFERRED PLANS
PREFERRED PLANS PARTICIPATING PLANS
--------------- -------------------
[CONFIDENTIAL TREATMENT] [CONFIDENTIAL TREATMENT]
23
<PAGE>
PHARMACY SERVICES AGREEMENT
THIRD AMENDMENT
This Pharmacy Services Agreement Third Amendment (the "Amendment") entered into
by and between The Prudential Insurance Company of America ("Prudential") and
Chronimed Inc. ("Chronimed") is effective June 15, 1999.
WITNESSETH
WHEREAS, the parties entered into that certain Pharmacy Services Agreement dated
October 5, 1994 (the "Original Agreement"), as amended January 6, 1997 (the
""97 Amendment"), and as further amended September 15, 1998 (the ""98
Amendment") (the Original Agreement, "97 Amendment and "98 Amendment referred to
collectively as the "Agreement" and
WHEREAS, the parties desire to amend the Agreement.
NOW, THEREFORE, in consideration of the mutual covenants, terms and conditions
herein contained, it is agreed by and between the parties hereto as follows:
1. Unless specifically identified and modified by the terms of this Amendment,
every term of the Agreement shall remain unmodified and in full force and
effect. In the event of any conflict between a term of the Agreement and a term
of this Amendment, the term provided in this Amendment shall prevail.
2. The "98 Amendment is modified, by the addition to Exhibit B, of the following
terms:
<TABLE>
<CAPTION>
- ----------------------------- ------------------------------- --------------------------- ----------------------------------
PRODUCT/PROGRAM DISCOUNT DISPENSING FEE SPECIAL COMMENTS
- ----------------------------- ------------------------------- --------------------------- ----------------------------------
<S> <C> <C> <C>
[CONFIDENTIAL TREATMENT] AWP [CONFIDENTIAL TREATMENT]% $[CONFIDENTIAL TREATMENT] Electronic Claim
- ----------------------------- ------------------------------- --------------------------- ----------------------------------
Medications AWP [CONFIDENTIAL TREATMENT]% $[CONFIDENTIAL TREATMENT] Paper Claim/COB
- ----------------------------- ------------------------------- --------------------------- ----------------------------------
[CONFIDENTIAL TREATMENT] AWP [CONFIDENTIAL TREATMENT]% $[CONFIDENTIAL TREATMENT] Only available when accompanying
Medications [CONFIDENTIAL TREATMENT]
- ----------------------------- ------------------------------- --------------------------- ----------------------------------
</TABLE>
Shipping charges included in [CONFIDENTIAL TREATMENT] medications pricing.
3. The "98 Amendment is modified, by the addition to Exhibit A, of the following
terms:
V. DEFINITIONS
I. "[CONFIDENTIAL TREATMENT] Medications" shall mean [CONFIDENTIAL
TREATMENT]
24
<PAGE>
J. "[CONFIDENTIAL TREATMENT] Medications" shall mean those medications to
be determined by the parties and documented within 30 days following
execution of the Third Amendment.
4. The Original Agreement is modified by the addition of the following language
to ARTICLE IV - GENERAL PROVISIONS:
S. Pharmacy shall offer [CONFIDENTIAL TREATMENT] to Covered Persons
receiving [CONFIDENTIAL TREATMENT] Medications from Pharmacy under this
Agreement. Pharmacy shall provide [CONFIDENTIAL TREATMENT] without cost to
Prudential or the Covered Person. [CONFIDENTIAL TREATMENT].
a) [CONFIDENTIAL TREATMENT]
b) [CONFIDENTIAL TREATMENT]
c) [CONFIDENTIAL TREATMENT]
d) [CONFIDENTIAL TREATMENT]
IN WITNESS WHEREOF, the parties hereto have executed this Amendment by
their duly authorized officers, to become effective on the date and year first
above written.
CHRONIMED INC.
By: /s/ Henry F. Blissenbach
-------------------------------
Its: Pres/COO
------------------------------
Date: 5-3-99
-----------------------------
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
By: PRUDENTIAL HEALTHCARE GROUP, INC. AS
------------------------------- MANAGER FOR THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA
Its: By: /s/ Daniel D. Cave
------------------------------ ----------------------------------
Name: Daniel D. Cave
--------------------------------
Date: Title: Vice President and President
----------------------------- -------------------------------
25
<PAGE>
CHRONIMED INC.
MEMO
To: Norm Cocke
From: Shawn Featherston
CC:
Date: March 1, 1999
Re: [CONFIDENTIAL TREATMENT] Transition
This will outline your transition and severance package [CONFIDENTIAL
TREATMENT].
TRANSITION
[CONFIDENTIAL TREATMENT] effective March 15, 1999. [CONFIDENTIAL TREATMENT]
It will be necessary for you to spend time with Greg Keane, Ken Guenthner, Hank
Blissenbach and Maury Taylor, in particular. This will help to ensure a smooth
transition. As part of this arrangement, [CONFIDENTIAL TREATMENT] with Greg,
Ken, Hank and Maury. These include but are not limited to office and real estate
leasing issues (the vacant space in the Red Circle building as an example),
completion of the minutes of the most recent Board of Directors meeting, any
Corporate Secretary functions, treasury functions, etc.
[CONFIDENTIAL TREATMENT] please spend time with Greg, Ken, Steve Ritter, Steve
Miller, then with Hank and Maury on a summary basis in completing the transition
process. We may also call upon your services in a consulting capacity from time
to time following March 15. If you have substantially completed your
transitionary activities prior to March 15. [CONFIDENTIAL TREATMENT].
As I mentioned, we have retained the services of Padilla Speer Beardsley in
helping us properly prepare an announcement relative to this situation. You will
have an opportunity to review the communication when ready. Given the nature of
this
Page 1
<PAGE>
communication, and the fact that it is material insider information, it is
critical that we cooperate in the timing of the announcement.
The next issue has to do with the severance package, and it is important to note
that this package is contingent upon executing the attached Separation and
Release Agreement.
SEVERANCE PACKAGE
1. You will receive [CONFIDENTIAL TREATMENT] through January 31, 2000.
2. You will receive [CONFIDENTIAL TREATMENT] for this fiscal year on the same
date as for all other participants.
3. You will continue to be eligible for coverage under the company's
insurance and benefit plans, with any employee share of the premium
contributions at the same rate as for full time regular employees, through
January 31, 2000, or at such time as you become eligible for coverage
under another employer's plans. After January 31, 2000, if you still have
coverage under Chronimed's plans, you will be offered the appropriate
benefit continuation options, per plan requirements.
4. You will receive payment for any earned but unused vacation on the next
normal payroll cycle following termination of employment.
5. In exchange for the availability of your consulting services, the company
agrees that your outstanding and vested stock options will remain active
through the period of consulting, which is through September 30, 1999.
Upon termination of this consulting arrangement, the provisions of the
stock option plan will apply, and you will have three months following
termination of the consulting services in which to exercise any
outstanding, vested options. This effectively carries the option period
through the end of 1999.
In exchange for this severance package, you agree to review and sign the
attached separation agreement and release, as will Chronimed. If you have any
other questions, please let me know.
Page 2
EXHIBIT 10.17
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made effective as of the first day of July, 1999,
entered into by and between CHRONIMED INC, a Minnesota corporation (the
"Company") and HENRY F. BLISSENBACH (the "Employee").
WHEREAS, the Company desires to employ the Employee as its President
and Chief Operating Officer (COO) in accordance with the following terms,
conditions and provisions; and
WHEREAS, the Employee desires to perform such services for the Company,
all in accordance with the following terms, conditions and provisions;
NOW THEREFORE, in consideration of the mutual covenants herein
contained, it is agreed as follows:
1. EMPLOYMENT AND DUTIES.
The Company hereby continues Employee's employment, and Employee hereby
accepts and agrees to serve the Company as the Company's President and COO,
consistent with the job description for this position, and with duties subject
to review and modification from time to time at the direction of the Company's
Board of Directors (the "Board"). The Employee shall remain a member of the
Company's Board of Directors, subject to election by the shareholders of the
Company. The Employee shall apply his best efforts and devote substantially all
of his time and attention to the Company's affairs.
2. TERM.
The term of this Agreement and Employee's employment under this
Agreement shall commence on July 1, 1999, and shall continue thereafter for a
period of two years. Upon the expiration of the original term of this Agreement,
this Agreement shall automatically renew for successive two-year terms, subject
to termination as provided in Section 7.
3. COMPENSATION.
The Company shall compensate the Employee for his services at the
following salary, bonus, and benefits:
A. Base Salary
The Employee shall be paid a base salary of $232,200
per year, payable on the Company's normal payroll cycle. This
base salary is the minimum salary during the term of this
Agreement, and may be increased from time to time at the
discretion of the Board of Directors. Employee shall receive
an annual
1
<PAGE>
performance review, and, contingent upon satisfactory review
results, shall be eligible for increase of such base salary at
the direction of the Board of Directors.
B. Bonus.
The Employee shall continue to participate in a
Company Management Incentive Plan, as approved and amended by
the Board of Directors from time to time, and which is
designed to deliver an annual bonus consistent with current
levels established for this position by the Board of
Directors. Employee shall periodically meet with the Board of
Directors, to establish quantitative and qualitative
initiatives and objectives for the purpose of assessing the
amount of bonus to be paid to Employee at the end of the
associated bonus period.
C. Stock Options.
The Employee shall be eligible to participate in the
annual grant of the Company's Stock Option Plan, consistent
with its terms and conditions, and with amounts of options,
including exercise price and vesting provisions determined by
the Board of Directors from time to time. Provisions under
this item 3C, stock options, are also subject to the
provisions found in Section 7, under termination of Agreement.
D. Employee Benefits Plans.
The Employee shall be entitled to participate in any
and all Company employee benefit plans, in accordance with the
eligibility requirements and other terms and provisions of
such plan or plans.
E. Insurance.
The Employee agrees that the Company, at the
discretion of its Board of Directors, may apply for and
procure on its own behalf, life insurance on the life of the
Employee, for the purpose of protecting the Company against
loss caused by the death of the Employee (commonly referred to
as "Key" insurance). Employee agrees to cooperate and submit
to medical examination, and to execute or deliver any
documentation reasonably required by the Company's insurer in
order to effectuate such insurance.
4. VACATION AND TIME OFF.
The Employee shall be entitled to four weeks of paid vacation in each
year of employment under the terms of this Agreement, without reduction of
salary. Unused vacation time may be carried over to future years of employment,
consistent with Company policy affecting use of employee vacation time. In
addition, Employee shall be entitled to such additional time off from work,
without loss of compensation, for attendance at professional meetings,
conventions, approved "other business activities", as per Section 10, and
educational
2
<PAGE>
courses in accordance with the Company's general policies in this regard, and as
from time to time determined by its Board of Directors.
5. EXPENSES.
The Company will reimburse Employee for reasonable expenses incurred by
the Employee in connection with the business of the Company, according to
policies promulgated from time to time by the Board of Directors, and upon
presentation by Employee of appropriate substantiation for such expenses.
Further, the Company will reimburse Employee for Employee's monthly dues for
country club or private club membership. Also, the Company will provide
reimbursement under its published policies for tax/financial planning assistance
and preparation, as well as supplemental medical examinations.
A. Automobile Allowance.
During the term of this Agreement, Employee shall
receive an automobile allowance of $600.00 per month.
6. DISABILITY.
Not withstanding any other provision of this Agreement, if employee is
totally disabled, as defined below, for an aggregate of 180 calendar days in any
one calendar year of employment, the company shall not be obligated to pay
employee the compensation provided in this contract for any period of total
disability during such year in excess of 120 days. In such event, Employee's
salary under Section 3 shall be prorated for such year of employment in the same
manner as if this Agreement had been terminated at the end of such 120th day.
The Company agrees that, while on disability leave of absence, and for
the duration of such disability, Employee may continue to receive Employer's
group insurance plan coverage by compliance with the provisions of the
Consolidated Omnibus Budget Reconciliation Act ("COBRA"), until the end of such
disability leave, or upon attainment of the age of 65, whichever is earlier.
For purposes of this Agreement, Employee shall be considered to be
totally disabled when he is considered to be as such by any insurance company
used by the Company to provide disability benefits for the Employee, and
Employee shall continue to be considered totally disabled until such insurance
company ceases to recognize him as totally disabled for purposes of disability
benefits. If no such disability policies are in effect for the benefit of the
Employee or for any reason an insurance company fails to make a determination of
the question of whether Employee is totally disabled, Employee shall be
considered to be totally disabled if, because of mental or physical illness or
other cause, he is unable to perform the majority of his usual duties on behalf
of the Company. The existence of a total disability of the Employee, the date it
commenced, and the date it ceases, shall be determined by the Board of Directors
and the Employee, under these circumstances. If the parties cannot agree on the
foregoing questions of disability, then any such determination shall be made
after examination of Employee by medical doctor selected by the Board of
Directors, and a medical doctor selected by the Employee. If the
3
<PAGE>
medical doctor so selected cannot agree on the foregoing questions of
disability, a third medical doctor shall be selected by the two and the opinion
of a majority of all three shall be binding.
7. TERMINATION.
This Agreement shall terminate upon the occurrence of any of the
following:
A. Mutual agreement, in writing, of the parties to terminate;
B. Employee's death. Under circumstance of Employee's death,
Company agrees to make termination payments to Employee's
designated beneficiaries, in the amount of one year of base
salary, and annual bonus payment for bonus payable in the
fiscal year in which Employee's death occurred. Additionally,
any unexercised, vested stock options which were available to
Employee immediately prior to date of death shall be
exercisable by beneficiaries in accordance with the Company's
stock option plan. In addition, Employee's designated
beneficiaries may, at their option, continue to pay and to
receive insurance coverage under the COBRA provisions, and
beyond, for a period of up to two years following death, or
upon attainment of age 65 of beneficiary, whichever is
earlier.
C. Upon the expiration of the initial or any renewal term of
this Agreement, following 120 days of written notice by one
party to the other indicating the party's intention not to
renew;
D. At the Company's option, if Employee shall be totally
disabled, as defined above for a continuous period in excess
of nine months. The Company's option to terminate in such
event shall be exercised upon at least 30 days written notice
to Employee;
E. Termination by the Company for cause.
For purposes of this provision of this Agreement,
cause shall be defined as:
1. Failure of the Employee to substantially perform
any duties reasonably required by the Company that
are consistent with Employees position (except as a
result of any disabling injury for which Employee has
been receiving benefits under a short term or long
term disability program);and
2. The commission by Employee of any criminal act, or
act of fraud or dishonestly by Employee related to or
in connection with his Employment by the Company; or
3. Employee breaches Employee's other covenants
contained in this Agreement.
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F. Change of employment or termination without cause by the
Company.
A Change in Employment shall be deemed to have
occurred if, without Employee's consent,
1. Employee's position, duties, or title are
materially and adversely changed without cause: or
2. Employee's salary or benefits are reduced without
cause, or
3. The location of performance of most of Employee's
duties is moved from the general geographic location
in which Employee performed such duties prior to the
move.
The effective date of a change in employment shall be
the date Employee elects, by written notice to the Company, to
treat such action as termination due to change in employment,
provided it occurs within 90 days of the date Employee is
notified of the change in employment. Failure to treat a
particular change in employment as a termination of employment
shall not preclude Employee from treating a subsequent change
of employment as a termination of employment.
G. Termination Payments.
In the event Employee's employment with the Company
is terminated without cause, or a change in employment occurs
and employee elects to treat the change in employment as a
termination of employment and so notifies the Company of such
election within 90 days following the change of employment
(with a date of notice to be deemed the effective date of
termination) or the geographic location changes as defined
above, or upon non-renewal of this agreement by the Company,
then:
(a) Employee shall receive payment equal to 12 months
of Employee's then current annualized salary; plus
the average of any bonus or incentive compensation
paid or payable for the most recent two fiscal years,
or other period generally used by the Company to
determine such bonus or incentive compensation , and
at Employee's election, may pay out such salary and
bonus or incentives over a period of one year
consistent with the Company's routine employee
payment schedules, or in a lump sum; and all unvested
stock options held by Employee shall immediately
vest.
(b) Employee shall be entitled to continue
participation in the healthcare coverage, life
insurance and general employee benefit plans of the
Company. The Company shall for two years following
the effective date of the termination under this
Section 7G, or until Employee becomes eligible for
such insurance
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coverages with another employer, continue to provide
such coverage for Employee and his dependents to the
same extent and cost the Company is then providing
for other employees with comparable coverage during
this two year period.
(c) In the event of a termination of employment under
this Section 7G, the Company agrees that in the event
of a dispute by the executive over any terms or
provisions contained in this agreement, or
interpretation thereof, the Company will pay all
reasonable legal expenses incurred by Employee as a
result of Employee's efforts to resolve the dispute.
H. Termination due to change in control.
For purposes of this provision, a change in control
will be defined as follows:
(a) When any "person" as defined in Section 3(a)(9)
of the Securities Exchange Act as used in sections
13(d) and 14(d) thereof, including a "group" as
defined in Section 13(d) of the Securities 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 Securities Exchange Act, as amended from time to
time), of securities of the Company representing
greater than 50 (fifty) percent of the combined
voting power of the Company's then outstanding
securities; or
(b) When, subsequent to the effective date of this
agreement, the individuals who, at the beginning of
such period, constitute the Board ("Incumbent
Directors") cease for any reason other than death to
constitute at least a majority thereof; provided
however that a Director who was not a Director at the
beginning of this period will be deemed to have
satisfied the definition of "Incumbent Director" if
such Director was elected by, or with the approval of
at least 60% (sixty percent) of the Directors who
then qualified as Incumbent Directors; 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.
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If during a two year period subsequent to a change in
control, Employee is terminated without cause, or Employee is
asked by the Board to assume a position, duties, or level of
responsibility which are unacceptable to the Employee, or
Employee is asked by the Board to relocate geographically to a
location which is unacceptable to the Employee, the then
controlling Company agrees to pay Employee base salary equal
to 36 months of Employee's then current annualized salary;
plus the average of any bonus or incentive compensation paid
or payable for the most recent three calendar years, in
aggregate, and at Employee's election, may be paid out
consistent with Company's routine employment payment schedule
over a period of three years, or in a lump sum. Additionally,
unvested stock options will vest according to the terms of the
Company's Stock Option Plan in effect at the time of the
change in control, or as defined in Section 7G(a).
In the event of termination of this Agreement due to
change in control, Company agrees to provide for reasonable
expenses incurred on Employee's behalf in the event of a legal
action or dispute in connection with the change of control, or
termination of employment caused by such change in control.
8. POOLING CONTINGENCY.
In the event a possible acquirer ("Acquirer") notifies the Company's
Board of Directors (the "Board") in writing, in conjunction with the Acquirer's
proposal to merge with or purchase all or part of the Company, that the Acquirer
has determined that Section 7H would prevent the Acquirer from applying pooling
accounting to the acquisition or merger, and the Board agrees with the
Acquirer's assessment of the risk to pooling availability, then the Board may
strike Section 7H and the remainder of the Agreement shall remain in effect. The
Acquirer's written notice must state that the Acquirer's public accounting firm
has advised the Acquirer that it may apply pooling accounting except solely for
the existence or operation of Section 7H of this Agreement. Any deletion of
Section 7H shall be contingent upon and deemed effective as of the closing of
the Acquirer's acquisition or merger.
9. COVENANT NOT TO COMPETE.
Employee hereby covenants and agrees that during the initial and any
renewal term of this Agreement, and for a period of one year following the
termination of this Agreement, Employee shall not be engaged within the United
States, either directly or indirectly, in any matter or capacity, whether as an
advisor, principal, agent, partner, officer, director, employee, member of an
association, or otherwise, in any business or activity, or own beneficially or
of record, five percent or more of the outstanding stock of any class of equity
securities in any corporation in competition with the business then being
conducted by the Company. If Employee should breach the foregoing covenant, the
Company will cease making payments described in the previous section regarding
Termination of Agreement, and any associated payments contained therein; and
remaining unexercised stock options shall immediately be cancelled and benefit
plan provisions described in the Termination Section 7 shall be immediately
discontinued.
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Additionally, at the option of the Board of Directors, the Company may
choose to extend the covenant not to compete set forth herein for a period of up
to an additional twelve months, beyond the initial twelve month period already
stipulated herein. In consideration for such election, the Company agrees to
make payment to the Employee the annualized salary and bonus equal to that in
effect during the fiscal year at the time of termination.
During this additional period of extension and payment, Employee agrees
not to solicit, directly or indirectly, any current employee of the Company for
employment or engagement in any capacity outside of the Company, its
subsidiaries or affiliates.
10. CONFIDENTIALITY.
Employee will, in the course of his employment with the Company have
access to confidential and proprietary data or information belonging to the
Company. Employee will not at any time divulge or communicate to any person
(other than to a person bound by confidentiality obligations to the Company
similar to those contained in this Agreement) or use to the detriment of the
Company, or for the benefit of any other person such data or information. The
provisions of this section shall survive Employee's employment hereunder
regardless of the cause of termination of employment or this Agreement. The
phase "confidential or proprietary data or information" shall mean information
not generally available to the public, including, but not limited to, personnel
information, financial information, customer lists, supplier lists, trade
secrets, secret processes, computer data and programs, pricing, marketing and
advertising data. Employee acknowledges and agrees that any confidential or
proprietary information that Employee has already acquired was in fact received
in confidence in Employees fiduciary capacity with respect to the Company.
All written materials, records and documents made by Employer or coming
into Employee's possession during the term of employment concerning any product,
processes, information or services used, developed, investigated or considered
by the Company, or otherwise concerning the business or affairs of the Company,
shall be the sole property of the Company and upon termination of Employee's
employment for any reason, or upon request of the Board of Directors during
Employee's employment, Employee shall promptly deliver the same to the Company.
In addition, upon termination of Employee's employment for any reason, or upon
request of the Board of Directors during Employee's employment, Employee shall
deliver to the Company all of the property of the Company in Employee's
possession or under Employee's control, including, but not limited to, financial
statements, marketing and sales data, computers, and Company credit cards.
11. OTHER BUSINESS ACTIVITIES.
Employee shall not serve as an officer of another company, whether for
compensation or otherwise, requiring more than nominal duties by the Employee,
during the term of this contract without the express prior written consent of
the Company's Board of Directors. Employee may not serve as a Director of any
other organization without express prior written approval by the Company's Board
of Directors.
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12. INVENTIONS AND PATENTS.
Employee agrees to assign all rights, ownership and related privileges
and benefits associated with inventions and patents to the Company. Employee
agrees that any inventions or patents obtained in association with ideas or
concepts initiated by Employee related to the Company's business are deemed to
be Company property. This includes but is not limited to product ideas, changes
or improvements; process ideas, changes or improvements; pertinent intellectual
property, or other pertinent information.
13. ARBITRATION/DISPUTE RESOLUTION.
The Company and the Employee agree that as a first option prior to any
legal action arising out of the dispute over provisions in this agreement,
parties may seek arbitration, and submit to authority of binding arbitration.
14. COOPERATION IN CLAIMS.
Both during employment and post employment, Employee agrees that in the
event of a legal action against the Company, or legal action initiated by the
Company against another party, in which Employee is deemed by the Company to be
a material witness or affiant, Employee agrees to make reasonable and best
efforts to cooperate with the Company in such matters. If Employee is no longer
employed, Company will reimburse Employee for time and expenses incurred as a
result of cooperation for this purpose.
15. INDEMNIFICATION.
The Company agrees to make its best efforts to indemnify and hold
harmless the Employee from liability incurred as a result of performance of
duties as an Officer and member of the Board of Directors. This includes but is
not limited to applicable statute, as well as efforts to secure coverage under
pertinent insurance policies.
16. NOTICES.
All notices, requests, demands and other communications
provided for by this Contract shall be in writing and shall be deemed
to have been given when mailed at any general or branch United States
Post Office enclosed in a certified postpaid envelope, return receipt
requested, and addressed to the address of the respective party stated
below or to such changed address as the party may have fixed by notice:
If to the Employee:
Henry F. Blissenbach
607 Pond View Drive
Mendota Heights, MN 55120
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If to the Company:
Chairman of The Board of Directors
Chronimed Inc.
10900 Red Circle Drive
Minnetonka, MN 55343
Any notice of change of address shall only be effective, however, when
received.
17. SUCCESSORS AND ASSIGNS.
This Contract shall inure to the benefit of, and be binding upon, the
Company, its successors and assigns, including, without limitation, any
corporation which may acquire all or substantially all of the Company's assets
and business or into which the Company may be consolidated or merged, and the
Employee, his heirs, executors, administrators and legal representatives. The
Employee may assign his right to payment, and his obligations, under this
Contract.
18. APPLICABLE LAW.
This Contract shall be governed by the laws of the State of Minnesota.
19. OTHER AGREEMENTS
This Contract supersedes all prior understandings and agreements
between the parties. It may not be amended orally, but only by a writing signed
by the parties hereto.
20. NON-WAIVER.
No delay or failure by either party in exercising any right under this
Contract, and no partial or single exercise of that right, shall constitute a
waiver of that or any other right.
21. HEADINGS.
Headings in this Contract are for convenience only and shall not be
used to interpret or construe its provisions.
22. COUNTERPARTS.
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This Contract may be executed in two or more counterparts, each of
which shall be deemed an original but all of which together shall constitute one
and the same instrument.
CHRONIMED INC.
By
---------------------------------
Its
--------------------------------
AND
--------------------------------
Its Chairman, Compensation Committee
EMPLOYEE
- -----------------------------------
Henry F. Blissenbach
11
EXHIBIT 10.18
EMPLOYMENT AGREEMENT
THIS AGREEMENT, dated November 11, 1998, is entered by and between
CHRONIMED INC., a Minnesota corporation (the "COMPANY"), and STEVEN RUSSEK (the
"EMPLOYEE").
1. ENGAGEMENT. The Company agrees to employ the Employee and the
Employee accepts such employment on the terms and conditions set forth in this
Agreement and, except to the extent superceded by this Agreement, subject to
those policies and procedures applying to the employees of the Company, as may
be amended from time to time. The Employee shall apply his best efforts and
devote substantially all of his time and attention to the Company's affairs.
Employee's title within the Company shall be Senior Vice President, Disease
Management. Employee shall perform those duties as may from time to time be
assigned to him consistent with the offices held by Employee.
2. COMPENSATION. As consideration for the covenants and agreements
herein and Employee's services rendered, the Company shall provide Employee the
following compensation:
A. BASE SALARY. The Employee shall be paid an annual base
salary of $182,000.00 for the first year of the term of this Agreement,
payable on the 15th and last day of each month by direct deposit to a
bank account designated by Employee. Employee's base salary during the
second year of this Agreement shall be established to the mutual
acceptance of the Company and Employee.
B. BONUS. The Employee shall participate in a Company
management incentive compensation plan, commencing with a plan
applicable to the Company's fiscal year beginning July 1, 1998, which
is designed to offer employee the potential for an annual bonus
targeted at 30% of base salary and up to 50% of base salary. Employee
shall meet with the Company's Chief Operating Officer upon commencement
of employment to establish qualitative initiatives and objectives for
the purpose of assessing the amount of bonus to be paid Employee at the
end of the bonus period.
C. LOAN. The Company shall loan Employee the sum of $50,000,
to be repaid within one year following the loan date and bearing
interest in accordance with a promissory note to be executed by
Employee consistent with these terms.
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D. STOCK OPTIONS. Employee shall be granted, or be eligible to
participate in, as the case may be, certain stock option plans, all as
follows:
(i) Employee shall be awarded, upon commencement of
his employment, a stock option grant of Thirty Thousand
(30,000) shares of the Company's common stock. The stock
option awarded shall vest over a period of five years and will
permit the Employee to purchase Company stock, for a period up
to seven years, at the closing market price of the Company's
stock on the date of commencement of Employee's employment.
Additional terms of the option grant are contained in the
Company's stock option plan presently in effect.
(ii) Employee shall be awarded, upon commencement of
his employment, an additional stock option grant of Ten
Thousand (10,000) shares of the Company's common stock. The
stock option awarded shall be immediately vested and will
permit the Employee to purchase Company stock, for a period of
seven years, at the closing market price of the Company's
stock on the date of commencement of Employee's employment. In
the event, as of market closing on the twelve month
anniversary of the disbursement to Employee of the loan under
Section 2.C., the value of the 10,000 shares of Company stock
subject to this option fails to equal or exceed $5.50 per
share greater than the option exercise price, and the options
have not been exercised and shares sold, the Company shall pay
to Employee a lump sum equal to (i) the sum of $5.50 per share
plus the per share exercise price, less (ii) the greater of
the exercise price or the per share closing price on the
twelve month anniversary of the award date. Such lump sum
payment shall be gross and shall then have normal withholding
taxes deducted. In the event the per share price, at the close
of market, equals or exceeds $5.50 per share greater than the
exercise price at any time during the twelve months following
the Section 2.C. loan disbursement date, other than during a
restricted period under Employer's Blackout Policy, the
Company shall have no obligation to guaranty an option price
or make payment to Employee under this Section 2.D.(ii). The
option granted under this Section 2.D.(ii) is provided to
enable Employee to satisfy in part the Section 2.C loan. The
stock option plans identified above shall be reduced to a
separate written agreement, consistent with these terms and to
be executed by the parties.
(iii) Employee shall be eligible to participate in
additional annual stock options consistent with option plans
made available to the
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management of the Company and pursuant to the Company's Board
of Director's discretion. The terms of future stock options,
including the number of shares available, exercise price, and
vesting provisions shall be determined pursuant to each option
agreement.
D. RELOCATION REIMBURSEMENT. The Company will reimburse
Employee for relocation expenses, up to an overall cap of $60,000, to
include necessary house hunting trips to the Twin Cities for Employee
and Employee's spouse, costs associated with the sale of Employee's
current home, the packing and shipment of Employee's household goods,
temporary living expenses (if required) for up to two months, closing
costs on the purchase of a new residence, and income tax liability
associated with relocation reimbursement.
E. EMPLOYEE BENEFIT PLANS, INSURANCE, AND TIME-OFF. During the
term of his employment, Employee shall be entitled to participate in
any employee benefit plan or plans established and maintained by the
Company for comparable employees, in accordance with the eligibility
requirements and other terms and provisions of such plan or plans.
Employee acknowledges and agrees that the Company is under no
obligation to Employee to establish or maintain any employee benefit
plan in which Employee may participate, and that the terms and
provisions of any employee benefit plan of the Company are matters
solely within the exclusive province of the Board of Directors.
Employee shall be entitled to receive health, life, and disability
insurance coverage on terms consistent with the Company's insurance
offerings to comparable employees. Employee shall receive vacation and
medical time-off pursuant to the Company's standard employee policies.
3. TERM AND TERMINATION. The term of this Agreement and Employee's
employment shall commence on December 1, 1998, and shall continue thereafter for
a period of two years. This Agreement shall earlier terminate upon the
occurrence of any of the following:
A. Written agreement of the parties to terminate;
B. Employee's death or Employee's eligibility for and receipt
of long-term disability benefits under a Company sponsored plan of
disability insurance;
C. Following 90 days written notice by one party to the other
indicating the party's intention to terminate; or
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D. Termination by the Company for Cause. Cause shall be
defined as (i) Employee's gross negligence or willful misconduct in the
performance of Employee's duties; (ii) the commission by Employee of
any criminal act, act of fraud or dishonesty by Employee related to, or
in connection with his employment by the Company, or conviction of a
crime for which a sentence of more than 90 days incarceration may be
imposed; or (iii) Employee's persistent failure to meet the reasonable
expectations of or duties consistent with the office held by Employee.
4. SEVERANCE. In the event the Company terminates this Agreement
pursuant to Section 3C, effective before the second anniversary following
commencement of Employee's employment, the Company shall continue to pay
Employee monthly severance payments in an amount equal to what Employee would
have received in salary (excluding bonus) as if Employee had remained employed
up to such second anniversary. Other than the severance payment identified
herein, the Company shall have no obligation past the date of termination to
provide Employee with employee benefits as identified in Section 2.E., except as
may be mandated by State or federal benefits contributions laws.
5. COVENANT NOT TO COMPETE. Employee hereby covenants and agrees that
during the term of this Agreement and until the later of (i) one year following
termination of this Agreement or any renewal thereof, or (ii) Employee's receipt
of the last of any severance payments to Employee under Section 4, Employee
shall not be engaged within the United States, either directly or indirectly, in
any manner or capacity, whether as an advisor, principal, agent, partner,
officer, director, employee, or otherwise, in any business or activity, or own
beneficially or of record five per cent (5%) or more of the outstanding stock of
any class of equity securities in any corporation, in competition with the
business then being conducted by the Company, its subsidiaries or affiliates,
which business includes but may not be limited to the manufacture and sale of
medical diagnostic products, the distribution of medications for treatment of
chronic illnesses, the management of chronic disease states, and all research,
analysis, and data services related to the foregoing. Further, Employee will not
for one year following termination of his employment directly or indirectly
attempt to hire away any then-current employee of the Company, its subsidiaries
or affiliates, or take any action to persuade any such employee to leave
employment with the Company, its subsidiaries or affiliates.
6. CONFIDENTIALITY. Employee will in the course of his employment with
the Company have access to confidential or proprietary data or information
belonging to the Company, its subsidiaries or affiliates. Employee will not at
any time divulge or communicate to any person (other than to a person bound by
confidentiality obligations to the Company similar to those contained in this
Agreement) or use to the detriment of the Company, its subsidiaries or
affiliates, or for the benefit of any other person Confidential or Proprietary
Data or Information. The provisions of this Section 6 shall survive Employees'
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employment hereunder regardless of the cause of termination of employment or
this Agreement and shall remain intact for a period of three (3) years following
termination for any reason. "Confidential or Proprietary Data or Information"
shall mean information Employee learns or develops during the course of
employment that derives economic value by being not generally or ascertainable
by others and includes, without limitation, financial information, customer
lists, supplier lists, trade secrets, secret processes, computer data and
programs, pricing, marketing, and advertising data, strategic or operational
plans, methods of research and testing, management systems and matters related
to sales and marketing techniques. Employee acknowledges and agrees that any
Confidential or Proprietary Data or Information that Employee has already
acquired was in fact received in confidence and in Employee's fiduciary capacity
with respect to the Company.
All written materials, records and documents made by Employee or coming
into Employee's possession during the term of employment concerning any product,
processes, information or services used, developed, investigated or considered
by the Company, its subsidiaries or affiliates, or otherwise concerning the
business or affairs of the Company, its subsidiaries or affiliates, shall be the
sole property of the Company and upon termination of Employee's employment for
any reason, or upon request of the Board of Directors during Employee's
employment, Employee shall promptly deliver the same to the Company. In
addition, upon termination of Employee's employment for any reason, or upon
request of the Board of Directors during Employee's employment, Employee shall
deliver to the Company all other property of the Company in Employee's
possession or under Employee's control including, but not limited to, financial
statements, marketing and sales data, computer hardware and software, and
Company credit cards.
Employee shall promptly disclose to the Company in writing all
inventions, discoveries, and works of authorship, whether or not eligible for
patent or copyright protection, which are conceived, made, discovered, written
or created by Employee alone or in collaboration with others during the term of
this Agreement and which relates in any way to the actual or anticipated
business of the Company, as defined in Section 5, or the Company's actual or
anticipated research and development. Employee assigns all rights to all such
inventions and works of authorship to the Company. Employee shall render any and
all assistance to the Company reasonably necessary in order for the Company to
perfect, protect, and use its rights to any such inventions and works of
authorship. This provision shall not apply to an invention, discovery or work of
authorship for which no equipment, supplies, facility or trade secret
information of the Company, its subsidiaries or affiliates was used and which
was developed entirely on the Employee's own time, and which (i) does not
reasonably relate to and compete with the business of the Company, its
subsidiaries or affiliates, or to any of their anticipated research or
development, or (ii) does not result from any work performed by the employee for
the Company, its subsidiaries or affiliates.
7. OTHER BUSINESS ACTIVITIES. Employee shall not serve as a director,
officer, employee, consultant, independent contractor or agent of another
company, whether for-
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profit, not-for-profit, charitable organization, foundation or otherwise, during
the term of this Agreement without the express prior written consent of the
Company's Board of Directors.
8. NOTICES. All notices, requests, demands and other communications
provided for by this Agreement shall be in writing and shall be deemed to have
been given when mailed at any general or branch United States Post Office
enclosed in a certified postpaid envelope, return receipt requested, and
addressed to the address of the respective party stated below or to such changed
address as the party may have fixed by notice:
If to the Employee:
Steven Russek
474 Pebble Beach Lane
Riverwoods, IL 60015
If to the Company:
Chronimed Inc.
10900 Red Circle Drive
Minnetonka, MN 55343
Attn: President
Any notice of change of address shall only be effective, however, when received.
9. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit
of, and be binding upon, the Company, its successors and assigns, including,
without limitation, any corporation which may acquire all or substantially all
of the Company's assets and business or into which the Company may be
consolidated or merged, and the Employee, his heirs, executors, administrators
and legal representatives. The Employee may not assign his rights or obligations
under this Agreement without the prior consent of the Company. The Company may
assign this Agreement to any entity acquiring substantially all the assets or
business of the Company or any subsidiary entity of the Company to which
Employee is assigned, by way of purchase, merger, or otherwise.
10. APPLICABLE LAW. This Agreement shall be governed by the laws of the
State of Minnesota.
11. OTHER AGREEMENTS. This Agreement supersedes all prior
understandings and agreements between the parties. It may not be amended orally,
but only by a writing signed by the parties hereto.
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12. NON-WAIVER. No delay or failure by either party in exercising any
right under this Agreement, and no partial or single exercise of that right,
shall constitute a waiver of that or any other right.
13. HEADINGS. Headings in this Agreement are for convenience only and
shall not be used to interpret or construe its provisions.
14. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
15. SEVERABILITY. If any provision of this Agreement is found to be
invalid, prohibited, or unenforceable, such provision shall be deemed modified
to the extent necessary to make it valid and enforceable or, if it cannot be
modified, then severed and the remainder of this Agreement shall remain in full
force and effect.
CHRONIMED INC. EMPLOYEE
By
---------------------------------- ------------------------------------
Steven Russek
Its
---------------------------------
7
EXHIBIT 10.19
SEPARATION AND RELEASE AGREEMENT
This Separation Agreement ("Agreement") is entered into by and between
Norman A. Cocke ("Cocke") and Chronimed, Inc. ("Chronimed").
WHEREAS, Cocke is a Chronimed employee who is hereby separating from
employment with Chronimed; and
WHEREAS, Cocke and Chronimed desire to fully and finally settle all
issues, differences and actual and potential claims between them, including, but
in no way limited to, any claim that might arise out of Cocke's employment with
Chronimed or his separation therefrom;
NOW, THEREFORE, in consideration of the mutual promises contained
herein, Cocke and Chronimed agree as follows:
1. Cocke represents, understands and agrees that his employment with
Chronimed is hereby terminated, with his last day of employment with Chronimed
to be March 15, 1999.
2. Chronimed agrees to provide Cocke the following payments and
benefits:
a) Chronimed will make payments and provide benefits to Cocke in
accordance with the March 1, 1999 Memorandum from Shawn Featherston to
Norm Cocke, attached hereto and made a part hereof.
b) Cocke agrees that he is not entitled to all of the payments and
benefits outlined in this paragraph 2 as a result of his employment
with Chronimed, but that the payments and benefits are being provided
as consideration for his acceptance and execution of this Agreement.
3. As an essential inducement to Chronimed to enter into this
Agreement, and as consideration for the foregoing promises of Chronimed, Cocke
hereby releases and discharges Chronimed, its officers, employees, agents,
assigns, insurers, representatives, counsel, administrators, successors,
shareholders, and/or directors from all liability for damages or claims of any
kind and agrees not to institute any claim for damages or otherwise, by charge
or otherwise, nor authorize any other party, governmental or otherwise, to
institute any claim via administrative or legal proceedings against Chronimed or
any claims including, but not limited to, any claims arising under or based upon
the Minnesota Human Rights Act, Minn. Stat. Sections 363.01 et seq.; Title VII
of the Civil Rights Act, 42 U.S.C. Sections 2000e et seq.; the Age
Discrimination in Employment Act,
1
<PAGE>
29 U.S.C. Sections 621 et seq.; the Americans With Disabilities Act, 42 U.S.C.
Sections 12101 et seq.; the Employee Retirement Income Security Act, 29 U.S.C.
1001, et seq.; the Consolidated Omnibus Budget Reconciliation Act, 29 U.S.C.
1181, et seq.; and any contract, quasi contract, or tort claims, whether
developed or undeveloped, arising from or related to Cocke's employment with
Chronimed, and / or the cessation of Cocke's employment with Chronimed.
Chronimed and Cocke agree that, by signing this Agreement, Cocke does not waive
any claims with respect to Chronimed's performance of its obligations under this
Agreement, nor does he waive any claims with respect to his continued
participation in Chronimed's employee benefits plans and programs in which he is
eligible to participate, including Chronimed's stock option plan, or any claims
with respect to his rights to indemnification and/or advancement of expenses as
specified in Section 12 below.
4. As an essential inducement to Cocke to enter into this Agreement,
and as consideration for the foregoing promises of Cocke, Chronimed hereby
releases and discharges Cocke from all liability for damages or claims of any
kind and agrees not to institute any claim for damages or otherwise, by charge
or otherwise, nor authorize any other party, governmental or otherwise, to
institute any claim via administrative or legal proceedings against Cocke, or
any claims arising under any contract, quasi contract, or tort claims, whether
developed or undeveloped, arising from or related to Cocke's employment with
Chronimed, and / or the cessation of Cocke's employment with Chronimed.
Chronimed and Cocke agree that, by signing this Agreement, Chronimed does not
waive any claims with respect to Cocke's performance of his obligations under
this Agreement.
5. Cocke is hereby informed of his right to rescind this Agreement as
far as it extends to potential claims under Minn. Stat. Section 363.01 et seq.
by written notice to Chronimed within fifteen (15) calendar days following his
execution of this Agreement. To be effective, such written notice must either be
delivered by hand or sent by certified mail, return receipt requested, addressed
to: Mr. Maurice R. Taylor II, Chronimed Inc., 10900 Red Circle Drive,
Minnetonka, Minnesota, 55343, delivered or postmarked within such fifteen (15)
day period. Cocke understands that Chronimed will have no obligations under this
Agreement in the event such notice is timely delivered and any payments made as
of that date by Chronimed, pursuant to Section 2 above, shall be immediately
repaid by Cocke to Chronimed.
6. Cocke is hereby informed of his right to revoke this Agreement as
far as it extends to potential claims under the Age Discrimination in Employment
Act, 29 U.S.C. Sections 621 et seq. by informing Chronimed of his intent to
revoke this Agreement within seven (7) calendar days following his execution of
this Agreement. This revocation must be in writing, must specifically revoke
this Agreement, and must be received by Chronimed prior to the 8th day following
the execution of this Agreement. Cocke understands that Chronimed will have no
obligations under this Agreement in the event
2
<PAGE>
such notice is timely delivered and any payments made as of that date by
Chronimed, pursuant to Section 2 above, shall be immediately repaid by Cocke to
Chronimed.
7. Cocke is also hereby informed that the terms of this Agreement shall
be open for acceptance by him for a period of twenty-one (21) days during which
time he may consider whether to accept or revoke this Agreement. To the extent
Cocke has taken less than 21 days to consider this Agreement, Cocke acknowledges
that he has had sufficient time to consider the Agreement and to consult with
counsel and that he does not desire additional time. In the event Cocke fails to
execute and return this Agreement to Chronimed within 21 days following the date
of execution by Chronimed, Cocke understands and agrees that the terms of this
Agreement will be void and unenforceable against either party.
8. The terms of this Agreement shall remain strictly confidential
between the parties hereto, and shall not be disclosed to third persons except
(i) to Cocke's wife, (ii) to Cocke's tax advisors and/or financial planners,
(iii) the parties' respective financial institutions, which will similarly be
bound by the obligation of confidentiality created herein, or (iv) as may be
required by law.
9. Cocke agrees that on or before March 15, 1999, he will return to
Chronimed any property of Chronimed in his possession or control.
10. Cocke agrees that he will make no statements, whether written or
oral, which are adverse to the best interests or are intended or likely to cause
disparagement of Chronimed, its subsidiaries, divisions, business, directors,
officers, employees, agents, or representatives. Chronimed agrees that it will
make no statements, whether written or oral, which are adverse to the best
interests or are intended or likely to cause disparagement of Cocke. Nothing in
this paragraph will be interpreted or construed to prevent or preclude Cocke or
Chronimed from giving testimony in response to questions asked pursuant to a
legally enforceable subpoena, deposition notice, or other legal process, during
any legal proceedings or arbitrations involving Cocke, Chronimed, or any of
Chronimed's affiliates or divisions or its or their directors, officers,
employees, or agents.
11. This Agreement shall not in any way be construed as an admission by
Chronimed that it has acted wrongfully with respect to Cocke or any other
person, or that Cocke has any rights whatsoever against Chronimed. Chronimed
specifically disclaims any liability to, or wrongful acts against, Cocke or any
other person, on the part of itself, its directors, its officers, its employees,
its representatives or its agents.
12. Notwithstanding Cocke's departure from employment with Chronimed,
with respect to events that occurred during his tenure as an employee or officer
of Chronimed, Cocke will be entitled, as a former employee or officer of
Chronimed, to the same rights that are afforded to other former employees and
officers of Chronimed, now or in the future, to indemnification and advancement
of expenses as provided in the charter
3
<PAGE>
documents of Chronimed and under applicable law, and to indemnification and a
legal defense to the extent provided by any applicable general liability and/or
director's and officers' liability insurance policies maintained by Chronimed.
Cocke acknowledges that his entitlement to indemnification and advancement of
expenses as provided in the charter documents of Chronimed and under applicable
law is contingent on the fact that, with respect to matters as to which Cocke
seeks indemnification or advancement of expenses as an employee or officer of
Chronimed, he acted in good faith, had no reasonable cause to believe that his
conduct was unlawful, and reasonably believed that his conduct was in and not
opposed to the best interests of Chronimed. The parties intend that the terms
used in the preceding sentence will have the same meaning as the same terms used
in Section 302A.521 of the Minnesota Statutes.
13. This Agreement contains the entire agreement of the parties with
respect to the subject matter hereof. Cocke hereby affirms that his rights to
payments or benefits from Chronimed are specified exclusively and completely in
this Agreement. Any modification of, or addition to, this Agreement must by in
writing, signed by Chronimed and Cocke.
14. This Agreement is personal to Cocke and may not be assigned by
Cocke without the written agreement of Chronimed. This Agreement will be binding
upon Chronimed's successors and assigns, including without limitation, a
purchaser of substantially all of the business assets of Chronimed.
15. This Agreement constitutes a contract enforceable against either
party and shall be construed and enforced in accordance with the laws of the
State of Minnesota. Nothing contained in this Agreement is intended to violate
any applicable law. If any part of this Agreement is construed to be in
violation of a state and / or federal law, then that part shall be null and
void, but the balance of the provisions of this Agreement shall remain in full
force and effect.
16. Cocke hereby affirms and acknowledges that he has read the
foregoing Agreement and that he has been advised to consult with an attorney
prior to signing this Agreement. Cocke agrees that the provisions set forth in
this Agreement are written in language understandable to him and further affirms
that he understands the meaning of the terms of this Agreement and their effect.
Cocke represents that he enters into this Agreement freely and voluntarily.
IN WITNESS WHEREOF, the parties have executed this Agreement by their
signatures below.
Dated:
------------------------ -------------------------------------
Norman A. Cocke
4
<PAGE>
Subscribed and sworn to before me
this ____ day of ______________, 1999.
- --------------------------------------
Notary Public
Dated: CHRONIMED INC.
------------------------
By
-----------------------------------
Its
----------------------------------
Subscribed and sworn to before me
this ____ day of ______________, 1999.
- --------------------------------------
Notary Public
5
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.
EXHIBIT 23.1
Consent of Ernst & Young LLP
We 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.
33-8718) pertaining to the Chronimed Inc. 1994 Stock Option Plan, the
Registration Statement (Form S-8 No. 33-83368) pertaining to various Director
Nonqualified Stock Option Plans, the Registration Statement (Form S-8 No.
33-81041) 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, the
Registration Statement (Form S-3 No. 333-35555) pertaining to the registration
of 42,553 shares of its common stock and the Registration Statement (Form S-8
No. 333-67649) pertaining to the Chronimed Inc. 1999 Stock Option Plan of our
report dated August 6, 1999, with respect to the consolidated financial
statements and schedule of Chronimed Inc. included in its Annual Report (Form
10-K) for the year ended July 2, 1999.
Minneapolis, Minnesota
September 24, 1999
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 or in the Company's Annual Report to
Shareholders or in future filings by the Company with the Securities and
Exchange Commission in the Company's annual report, quarterly reports, current
reports on Form 8-K, press releases and in oral statements made with the
approval of an authorized executive officer, the words or phrases "believe",
"expect", "intends", "estimates", "plans", "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. Although the
Company has attempted to list the important factors below, other factors may in
the future prove to be more important. Factors emerge from time to time and it
is not possible for management to predict all of such factors, nor can it assess
the impact of each such factor on the business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in forward-looking statements.
Changes in the Company's ownership status as a result of its current
endeavors in seeking a strategic partner.
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) organ transplant products manufactured by Novartis
Pharmaceuticals and several HIV/AIDS products manufactured by a few key
suppliers.
The Company's ability to maintain its on-going pricing and supply terms
with its pharmaceutical wholesale supplier, McKesson Corporation.
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.
<PAGE>
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, 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, to include one-time adjustments and charges related
to asset impairments and strategic transaction costs.
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. In addition, there is no assurance that the Company will be able to
successfully implement its growth strategies, or that these strategies will
result in growth of the Company's business.
Difficulties or delays in the development and marketing of the
Company's products, including, but not limited to, a failure to deliver new
proprietary products and technologies when anticipated or at the levels of
financial performance anticipated (e.g., the Lasette(TM) Laser Lancing device,
Select GT and Supreme enhancements, DiaScreen 10-way urine strip).
Occurrences affecting the Company's ability to realize cost and volume
efficiencies, particularly in its Specialty Pharmacy and Disease Management
businesses.
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
fiscal 1998 acquisitions of Dia-Screen Corporation and Clinical Partners, Inc.
<PAGE>
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 and to retain existing customers.
Adverse publicity and news coverage.
Inability to carry out marketing and sales plans.
Loss or retirement of key executives and significant turnover in the
general employee base as a result of the Company's current endeavors in seeking
a strategic partner.
Claims against the Company in excess of insurance coverage or
difficulty in renewing insurance at competitive rates.
A change in the status of the Company's loan guarantee with its
Chairman and Chief Executive Officer.
Changes in interest rates causing a reduction of interest income or an
increase in interest expense, or the unforeseen need for the Company to
liquidate its available-for-sale securities earlier than expected, potentially
resulting in permanent losses.
The Company's future success depends in part upon its proprietary
technology. Although the Company attempts to protect its proprietary technology
through patents, copyrights and trade secrets, it also believes that its future
success will depend upon product development, technological expertise, license
arrangements and distribution channels. There is no assurance that the Company
will be able to protect its technology, or that competitors will not be able to
develop similar technology independently. The Company may receive from third
parties, including some of its competitors, notices claiming infringement of
third-party patents or other proprietary rights. There is no assurance that the
Company would prevail in any litigation over third-party claims or that it would
be able to license any valid and infringed patents on commercially reasonable
terms. Furthermore, litigation, regardless of its outcomes, could result in
substantial cost to, and diversion of effort by, the Company. Any litigation or
successful infringement claims by third parties may materially and adversely
affect the Company's business, operating results and financial conditions.
Investors are cautioned not to place undue reliance on our forward-looking
statements as they speak only of the Company's opinions at the time the
statement was made. 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.
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<FISCAL-YEAR-END> JUL-02-1999
<PERIOD-START> JUL-04-1998
<PERIOD-END> JUL-02-1999
<CASH> 3,312,000
<SECURITIES> 0
<RECEIVABLES> 37,504,000
<ALLOWANCES> 1,230,000
<INVENTORY> 9,786,000
<CURRENT-ASSETS> 51,675,000
<PP&E> 25,954,000
<DEPRECIATION> 13,745,000
<TOTAL-ASSETS> 80,895,000
<CURRENT-LIABILITIES> 14,408,000
<BONDS> 0
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<COMMON> 121,000
<OTHER-SE> 66,366,000
<TOTAL-LIABILITY-AND-EQUITY> 80,895,000
<SALES> 198,413,000
<TOTAL-REVENUES> 198,413,000
<CGS> 153,300,000
<TOTAL-COSTS> 192,569,000
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<LOSS-PROVISION> 967,000
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<INCOME-PRETAX> 6,766,000
<INCOME-TAX> 2,639,000
<INCOME-CONTINUING> 4,127,000
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