<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED)
JANUARY 22, 1999
001-06351
(Commission File Number)
__________________
ELI LILLY AND COMPANY
(Exact name of registrant as specified in its charter)
INDIANA 35-0470950
(Jurisdiction of Incorporation) (IRS Employer
Identification Number)
LILLY CORPORATE CENTER, INDIANAPOLIS, INDIANA 46285
(Address of registrant's principal executive office)
317-276-2000
(Registrant's telephone number)
__________________
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On January 22, 1999, Eli Lilly and Company (the "Company") consummated the sale
(the "Transaction") of all of the outstanding capital stock of its wholly-owned
subsidiary, PCS Holding Corporation, a Delaware corporation ("PCS"), to Rite Aid
Corporation, a Delaware corporation ("Rite Aid"). PCS is a pharmacy benefits
manager for employers, health plans and their members in the United States.
The purchase price was $1.5 billion in cash plus approximately $100 million in
cash to be retained by the Company from PCS. The purchase price was determined
based on arms-length negotiations between the parties. No material relationship
existed between the Company and Rite Aid or any of its affiliates, any director
or officer of the Company or any associate of any such director or officer prior
to the sale.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Business Acquired.
Not applicable.
<PAGE>
(b) Pro Forma Financial Information.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
------------------------------------------------------
The following unaudited pro forma consolidated financial information of the
Company has been prepared to reflect the Transaction as if the Transaction had
been consummated at earlier dates as discussed herein.
The unaudited pro forma consolidated statement of income and related earnings
per share data for the year ended December 31, 1998 are based on the Company's
historical results from continuing operations adjusted to reflect the impact of
the Transaction as if it had occurred on January 1, 1998.
The unaudited pro forma consolidated balance sheet at December 31, 1998 reflects
the impact of (i) exclusion of the respective PCS balances; (ii) recognition of
the estimated net gain from the disposition of PCS; and (iii) the receipt of the
cash proceeds from the sale.
The unaudited pro forma consolidated financial information is not necessarily
indicative of the Company's consolidated financial position or consolidated
results of operations had the Transaction reflected therein actually been
consummated on the assumed dates, nor is it necessarily indicative of the
Company's consolidated financial position or consolidated results of operations
for any future period.
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(In millions, except per-share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
--------------------------------------------------
HISTORICAL ADJUSTMENTS(1) PRO FORMA
-------------- --------------- -------------
<S> <C> <C> <C>
Net sales $ 9,236.8 $ - $9,236.8
Cost of sales 2,015.1 - 2,015.1
Research and development 1,738.9 - 1,738.9
Marketing and administrative 2,658.3 - 2,658.3
Acquired in-process technology 127.5 - 127.5
Interest expense 181.3 - 181.3
Other income - net (149.3) - (149.3)
------------ ----------- -----------
6,571.8 - 6,571.8
------------ ----------- -----------
Income from continuing operations before
income tax and extraordinary item 2,665.0 - 2,665.0
Income taxes 568.7 - 568.7
------------ ----------- -----------
Income from continuing operations before
extraordinary item $ 2,096.3 $ - $2,096.3
============ =========== ===========
Earnings per share - basic:
- --------------------------
Income from continuing operations before
extraordinary item $ 1.91 $ 1.91
============ ===========
Earnings per share - diluted:
- ----------------------------
Income from continuing operations before
extraordinary item $ 1.87 $ 1.87
============ ===========
Weighted average shares - basic (thousands) 1,095,834
Weighted average shares - diluted (thousands) 1,121,486
</TABLE>
See notes to unaudited pro forma consolidated financial information.
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(In millions)
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------------------------------------
HISTORICAL ADJUSTMENTS(2) PRO FORMA
---------------- ------------------ ----------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,495.7 $ 1,340.6 (3) $ 2,836.3
Short-term investments 101.4 - 101.4
Accounts receivable, net 1,967.9 (492.4) 1,475.5
Other receivables 275.8 (0.6) 275.2
Inventories 999.9 (16.7) 983.2
Deferred income taxes 332.7 (14.0) 318.7
Prepaid expenses 233.4 (19.0) (4) 214.4
------------ ----------- -----------
Total current assets 5,406.8 797.9 6,204.7
OTHER ASSETS
Prepaid retirement 612.3 - 612.3
Investments 204.0 - 204.0
Goodwill and intangibles, net 1,517.9 (1,397.4) 120.5
Sundry 758.2 (30.8) 727.4
Property and equipment, net 4,096.3 (69.7) 4,026.6
------------ ----------- -----------
$12,595.5 $ (700.0) $11,895.5
============ =========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $ 181.4 $ - $ 181.4
Accounts payable 1,186.0 (782.8) 403.2
Employee compensation 704.0 (39.5) 664.5
Dividends payable 252.9 - 252.9
Income taxes payable 1,290.2 (1.0) 1,289.2
Other liabilities 992.7 (27.3) (4) 965.4
------------ ----------- -----------
Total current liabilities 4,607.2 (850.6) 3,756.6
OTHER LIABILITIES
Long-term debt 2,185.5 - 2,185.5
Deferred income taxes 247.9 (1.3) 246.6
Retiree medical benefit obligation 114.7 - 114.7
Other noncurrent liabilities 1,010.6 (13.1) 997.5
SHAREHOLDERS' EQUITY
Common stock 686.5 - 686.5
Retained earnings 4,228.8 165.0 (5) 4,393.8
Deferred costs - ESOP (146.9) - (146.9)
Accumulated other comprehensive income (229.8) - (229.8)
------------ ----------- -----------
4,538.6 165.0 4,703.6
Less cost of common stock in treasurary 109.0 - 109.0
------------ ----------- -----------
Total shareholders' equity 4,429.6 165.0 4,594.6
------------ ----------- -----------
$12,595.5 $ (700.0) $11,895.5
============ =========== ===========
</TABLE>
See notes to unaudited pro forma consolidated financial information.
<PAGE>
NOTES TO UNAUDITED PROFORMA CONSOLIDATED FINANCIAL INFORMATION
--------------------------------------------------------------
1. No pro forma adjustments are necessary as the historical income from
continuing operations before extraordinary item excludes the operating
results of PCS. The estimated interest earned during 1998, assuming the
excess cash from the Transaction is invested on January 1, 1998, is $41.7
million. This assumes a 5 percent interest rate and is net of applicable
income taxes. This is not reflected as a pro forma adjustment. The
estimated gain on the Transaction is discussed in (5) below.
2. Reflects adjustments to remove PCS' historical consolidated balance sheet
amounts.
3. Reflects the increase in cash received in the Transaction, less amounts
paid to settle up the intercompany accounts between the Company and PCS,
net of item (2) above.
4. Reflects the reduction in prepaid expenses and the increase in accrued
expenses recorded at the time of the Transaction, net of item (2) above.
5. Retained earnings are adjusted by the anticipated net gain resulting from
the Transaction. The income tax effect is expected to be immaterial.
<PAGE>
(c) Exhibits
Exhibit
Number Title
- -------- -----
2.1 Stock Purchase Agreement, dated November 17, 1998, as amended January 22,
1999, between the Company and Rite Aid.
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
ELI LILLY AND COMPANY
By: /s/ Charles E. Golden
--------------------------------------------
Charles E. Golden
Executive Vice President
and Chief Financial Officer
Date: February 8, 1999
<PAGE>
EXHIBIT INDEX
Exhibit
Number
- -------
2.1 Stock Purchase Agreement, dated November 17, 1998, as amended January 22,
1999, between the Company and Rite Aid.
<PAGE>
EXHIBIT 2.1
CONFORMED COPY
-------------------------------------
STOCK PURCHASE AGREEMENT
between
RITE AID CORPORATION
and
ELI LILLY AND COMPANY
Dated as of November 17, 1998,
as amended January 22, 1999
-------------------------------------
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I SALE AND PURCHASE OF SHARES; PURCHASE PRICE.................................................... 1
Section 1.1. Company Shares............................................................ 1
Section 1.2. Purchase Price............................................................ 1
Section 1.3. Closing................................................................... 1
Section 1.4. Deliveries by the Seller.................................................. 1
Section 1.5. Deliveries by the Purchaser............................................... 2
Section 1.6. Intercompany Account Adjustment........................................... 2
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE SELLER.................................................. 3
Section 2.1. Organization and Authority of the Seller.................................. 3
Section 2.2. Organization and Authority of the Company and Subsidiaries; Company Shares. 3
Section 2.3. Consents and Approvals; No Violations...................................... 4
Section 2.4. Financial Statements....................................................... 5
Section 2.5. No Undisclosed Liabilities................................................. 5
Section 2.6. Absence of Certain Changes................................................. 6
Section 2.7. Litigation................................................................. 6
Section 2.8. Compliance with Applicable Law, Permits.................................... 6
Section 2.9. Environmental Matters...................................................... 7
Section 2.10. Intellectual Property...................................................... 7
Section 2.11. Employee Benefit Plans..................................................... 9
Section 2.12. Taxes...................................................................... 11
Section 2.13. Material Contracts......................................................... 14
Section 2.14. Assets Necessary to Business............................................... 16
Section 2.15. Title to Assets............................................................ 16
Section 2.16. Labor Relations............................................................ 17
Section 2.17. Insurance.................................................................. 17
Section 2.18. Products Liability......................................................... 17
Section 2.19. Compliance with the Consent Order.......................................... 18
Section 2.20. Year 2000.................................................................. 18
Section 2.21. Brokers.................................................................... 19
Section 2.22. No Implied Representations................................................. 19
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE PURCHASER............................................... 19
Section 3.1. Organization and Authority of the Purchaser................................ 19
Section 3.2. Consents and Approvals; No Violations...................................... 20
Section 3.3. Investment................................................................. 20
Section 3.4. Brokers.................................................................... 20
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Section 3.5. No implied Representation.................................................. 20
ARTICLE IV COVENANTS...................................................................................... 20
Section 4.1. Conduct of the Business.................................................... 20
Section 4.2. Access to Information...................................................... 22
Section 4.3. Reasonable Efforts......................................................... 23
Section 4.4. Further Assurances; No Hindrances.......................................... 23
Section 4.5. Employee Matters........................................................... 23
Section 4.6. Transitional Matters....................................................... 25
Section 4.7. Guaranties................................................................. 26
Section 4.8. Access to Records.......................................................... 26
Section 4.9. 1998 Audited Financial Statements.......................................... 27
Section 4.10. Intercompany Notes......................................................... 28
Section 4.11. Notice of Possible Breach.................................................. 28
Section 4.12. Supplemental Disclosure.................................................... 28
Section 4.13. Notices of Certain Events.................................................. 28
Section 4.14. Confidentiality............................................................ 29
Section 4.15. Insurance.................................................................. 29
Section 4.16. Non-Solicitation of Employees.............................................. 29
Section 4.17. Non-Competition............................................................ 30
Section 4.18. McKesson Agreements........................................................ 30
Section 4.19. Class B Stock Redemption................................................... 30
Section 4.20. Designated Agreements...................................................... 31
ARTICLE V CONDITIONS...................................................................................... 31
Section 5.1. Conditions to Each Party's Obligations..................................... 31
Section 5.2. Conditions to Obligations of the Purchaser................................. 31
Section 5.3. Conditions to Obligations of the Seller.................................... 32
ARTICLE VI TERMINATION AND AMENDMENT...................................................................... 32
Section 6.1. Termination................................................................ 32
Section 6.2. Effect of Termination...................................................... 33
Section 6.3. Amendment.................................................................. 34
Section 6.4. Extension; Waiver.......................................................... 35
ARTICLE VII SURVIVAL; INDEMNIFICATION..................................................................... 35
Section 7.1. Survival Periods........................................................... 35
Section 7.2. Indemnification............................................................ 35
Section 7.3. Claims..................................................................... 37
Section 7.4. Exclusive Remedy........................................................... 38
Section 7.5. Tax Adjustment............................................................. 38
Section 7.6. Special Indemnities........................................................ 38
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
ARTICLE VIII TAX MATTERS.................................................................................. 39
Section 8.1. Seller Tax Indemnity....................................................... 39
Section 8.2. Allocation of Taxes and Preparation of Tax Returns......................... 39
Section 8.3. Retention of Records....................................................... 40
Section 8.4. Notice; Cooperation........................................................ 41
Section 8.5. Refunds.................................................................... 41
Section 8.6. Sales and Other Tax........................................................ 41
Section 8.7. Certain Contest Rights..................................................... 41
Section 8.8. No Section 338(h)(10) Election............................................. 42
Section 8.9. Exclusivity................................................................ 42
ARTICLE IX MISCELLANEOUS................................................................................ 43
Section 9.1. Notices.................................................................. 43
Section 9.2. Headings................................................................. 44
Section 9.3. Counterparts............................................................. 44
Section 9.4. Entire Agreement; Assignment............................................. 44
Section 9.5. Governing Law............................................................ 45
Section 9.6. Specific Performance..................................................... 45
Section 9.7. Publicity................................................................ 45
Section 9.8. Binding Nature; No Third Party Beneficiaries............................. 45
Section 9.9. Severability............................................................. 45
Section 9.10. Interpretation........................................................... 45
Section 9.11. Payment of Expenses...................................................... 45
</TABLE>
iii
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<S> <C>
1998 Financial Statements............................................................................... 27
Acquired Business....................................................................................... 30
Asserted Tax Liability.................................................................................. 41
Audits.................................................................................................. 11
Business................................................................................................ 1
Class B Stock........................................................................................... 5
Closing................................................................................................. 1
Closing Date............................................................................................ 1
Code.................................................................................................... 10
comfort................................................................................................. 27
Company................................................................................................. 1
Company Shares.......................................................................................... 1
Confidential Information................................................................................ 29
Confidentiality Agreement............................................................................... 22
Contracts............................................................................................... 13
Deconsolidation Date.................................................................................... 39
Designated Agreements................................................................................... 31
Designated Amendments................................................................................... 31
Disclosure Schedule..................................................................................... 3
Employee Plans.......................................................................................... 9
Environmental Law....................................................................................... 7
ERISA................................................................................................... 9
ERISA Affiliate......................................................................................... 10
Ernst & Young........................................................................................... 27
excess parachute payments............................................................................... 12
FIRPTA Certificate...................................................................................... 2
GAAP.................................................................................................... 3
Governmental Entity..................................................................................... 3
Hazardous Substance..................................................................................... 7
HSR Act................................................................................................. 4
including............................................................................................... 45
Indemnified Parties..................................................................................... 37
Indemnifying Parties.................................................................................... 37
Intellectual Property................................................................................... 9
Intercompany Note....................................................................................... 28
knowledge............................................................................................... 45
Law..................................................................................................... 3
Leased Properties....................................................................................... 16
License Agreements...................................................................................... 7
Liens................................................................................................... 4
Material Adverse Effect................................................................................. 3
McKesson Agreements..................................................................................... 15
October Balance Sheet................................................................................... 5
October Pro Forma Balance Sheet......................................................................... 5
</TABLE>
iv
<PAGE>
<TABLE>
<S> <C>
Option Exercise Deductions.............................................................................. 40
Pension plan............................................................................................ 10
Permitted Investment.................................................................................... 30
Permitted Liens......................................................................................... 16
Prohibited transactions................................................................................. 10
Proprietary Software.................................................................................... 7
Purchase Price.......................................................................................... 1
Purchaser............................................................................................... 1
Purchaser Basket........................................................................................ 36
Purchaser Damages....................................................................................... 35
Purchaser Indemnitees................................................................................... 35
Quarterly Financial Statements.......................................................................... 27
Recalls................................................................................................. 17
Recipient............................................................................................... 41
representatives......................................................................................... 19, 20
Restricted Business..................................................................................... 30
Retained Names.......................................................................................... 26
Retirement Plans........................................................................................ 24
Savings Plan............................................................................................ 24
Seller.................................................................................................. 1
Seller Basket........................................................................................... 37
Seller Damages.......................................................................................... 36
Seller Indemnitees...................................................................................... 36
single employer......................................................................................... 10
Software................................................................................................ 9
Specified Agreement..................................................................................... 26
Straddle Period......................................................................................... 39
Subsidiary.............................................................................................. 4
Tax..................................................................................................... 13
Tax Authority........................................................................................... 13
Tax Benefit............................................................................................. 38
Tax Claim Notice........................................................................................ 41
Tax Cost................................................................................................ 38
Tax Indemnification Agreements.......................................................................... 12
Tax Law................................................................................................. 13
Tax Period.............................................................................................. 13
Tax Records............................................................................................. 40
Tax Return.............................................................................................. 13
Taxes................................................................................................... 13
Trade Secrets........................................................................................... 9
Transitional Services Agreement......................................................................... 25
Unaudited Financial Statements.......................................................................... 5
Without limitation...................................................................................... 45
</TABLE>
v
<PAGE>
STOCK PURCHASE AGREEMENT, dated as of November 17, 1998, between Rite Aid
Corporation, a Delaware corporation (the "Purchaser"), and Eli Lilly and
Company, an Indiana corporation (the "Seller").
WHEREAS, PCS Holding Corporation, a Delaware corporation and a wholly owned
subsidiary of the Seller (the "Company"), provides computer-based prescription
drug claims processing, pharmacy benefit administration and management services,
mail order pharmacy services, data management and disease-management services to
health plan sponsors (as provided by the Company and its subsidiaries, the
"Business"); and
WHEREAS, the Purchaser has agreed to acquire from the Seller, and the
Seller has agreed to sell to the Purchaser, all of the outstanding shares of
Class A Common Stock, par value $1.00 per share (the "Company Shares"), of the
Company on the terms and subject to the conditions set forth herein; and
NOW, THEREFORE, the parties agree as follows:
ARTICLE I
SALE AND PURCHASE OF SHARES; PURCHASE PRICE
Section 1.1. Company Shares. Upon the terms and subject to the conditions
--------------
of this Agreement, at the Closing (as defined below), the Seller shall sell and
deliver to the Purchaser and the Purchaser shall purchase and acquire the
Company Shares.
Section 1.2. Purchase Price. In consideration for the sale and delivery
--------------
of the Company Shares, at the Closing, the Purchaser shall pay to the Seller
$1.5 billion in cash (the "Purchase Price").
Section 1.3. Closing. Upon the terms and subject to the conditions of
-------
this Agreement, the closing of the transactions contemplated by this Agreement
(the "Closing") will take place on January 22, 1999 at 10:00 a.m., New York City
time, at the offices of Dewey Ballantine LLP, 1301 Avenue of the Americas, New
York, New York, or at such other time or at such other place as shall be agreed
upon by the parties. The date on which the Closing occurs is hereinafter
referred to as the "Closing Date."
Section 1.4. Deliveries by the Seller. At the Closing, the Seller shall
------------------------
deliver or cause to be delivered to the Purchaser following:
(a) Certificates for all of the outstanding Company Shares, duly
endorsed in blank, or accompanied by stock powers duly executed in blank, with
any necessary stock transfer tax stamps attached or provided for;
(b) the Transitional Services Agreement (as hereinafter defined),
duly executed by the Seller;
(c) the resignations of all members of the Board of Directors of the
Company and its subsidiaries and those members of the Board of Directors of any
<PAGE>
subsidiary that is not wholly owned by the Company that are employees or
directors of the Seller or the Company or are designees of the Seller or the
Company;
(d) the stock books, stock ledgers, minute books and corporate seals
of the Company and the subsidiaries;
(e) a certificate of non-foreign status as provided in Section
1445(b)(2) of the Code (as hereinafter defined) and Treasury Regulation 1.1445-
2(b) (the "FIRPTA Certificate"); and
(f) such other duly executed documents and certificates as may be
required to be delivered by the Seller pursuant to the terms of this Agreement.
Section 1.5. Deliveries by the Purchaser. At the Closing, the Purchaser
---------------------------
shall deliver or cause to be delivered to the Seller the following:
(a) the Purchase Price and the Adjustment (as hereinafter defined) if
any, in immediately available funds by wire transfer to an account specified by
the Seller prior to the Closing Date;
(b) the Transitional Services Agreement, duly executed by the
Purchaser; and
(c) such other duly executed documents and certificates as may be
required to be delivered by the Purchaser pursuant to the terms of this
Agreement.
Section 1.6. Intercompany Account Adjustment. At the Closing, the
-------------------------------
following intercompany account adjustment (the "Adjustment") shall be made:
(a) In the event, as of the Closing Date, the Seller owes to the
Company or any of its subsidiaries pursuant to the Intercompany Notes (as
defined in Section 4.10 of this Agreement) a net amount of $100 million or
greater, then $100 million of such amount shall be cancelled and deemed repaid
by the Seller and Seller shall have no further liability or obligation with
respect to such $100 million and the remaining outstanding balance of the
Intercompany Notes, if any, will be paid in full;
(b) In the event the Seller owes to the Company or any of its
subsidiaries pursuant to the Intercompany Notes a net amount of less than $100
million, then (i) such amount shall be cancelled and deemed repaid by the Seller
and Seller shall have no further liability or obligation with respect to such
amount and (ii) the Purchaser shall pay to the Seller an amount equal to (x)
$100 million less (y) such amount cancelled pursuant to clause (i), provided,
however, that in the event the Company or any of its subsidiaries owes the
Seller pursuant to the Intercompany Notes a net amount, the Purchaser shall pay
to the Seller $100 million plus such net amount owed to the Seller.
2
<PAGE>
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE SELLER
Except as set forth in the applicable section of the disclosure schedule
being delivered by the Seller to the Purchaser (the "Disclosure Schedule"), the
Seller represents and warrants to the Purchaser as follows:
Section 2.1. Organization and Authority of the Seller. The Seller is a
----------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation and has all necessary corporate power
and authority to execute and deliver this Agreement, to perform its obligations
under this Agreement and to consummate the transactions contemplated by this
Agreement. The execution and delivery of this Agreement by the Seller and the
consummation by the Seller of the transactions contemplated by this Agreement
have been duly authorized by all necessary corporate action on the part of
Seller and no other corporate actions or proceedings on the part of the Seller
are necessary to authorize this Agreement or for the Seller to consummate the
transactions contemplated by this Agreement. This Agreement has been duly and
validly executed and delivered by Seller and constitutes a legal, valid and
binding obligation of the Seller, enforceable against the Seller in accordance
with its terms.
Section 2.2. Organization and Authority of the Company and Subsidiaries;
-----------------------------------------------------------
Company Shares.
- --------------
(a) Each of the Company and its subsidiaries is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization and has all requisite corporate power and
authority to own, lease or operate its properties and assets and to carry on its
business as now being conducted. Each of the Company and its subsidiaries is
duly qualified to do business and in good standing and is duly licensed,
authorized or qualified to transact business in each jurisdiction in which the
property owned, leased or operated by it or the nature of the business conducted
by it makes such qualification or licensing necessary, except in such
jurisdictions where the failure to be so duly qualified or licensed and in good
standing would not be reasonably likely to have a Material Adverse Effect.
"Material Adverse Effect" means a change or effect on the Business that is
materially adverse to the business, financial condition or results of operations
of the Business taken as a whole, but shall not include any changes or effects
(x) relating to or resulting from general economic, political or market
conditions, including (i) changes after the date of this Agreement in any
statute, law, ordinance, regulation, rule, code, order or other requirement or
rule of law (each, a "Law") or in the interpretation of any Law by any court of
competent jurisdiction or any governmental, regulatory or administrative
authority, agency or commission (a "Governmental Entity") and (ii) changes in
generally accepted accounting principles ("GAAP"), (y) resulting from the
execution or announcement of this Agreement or compliance with the terms hereof
or (z) generally affecting the industry in which the Company operates. A
"subsidiary" of an entity means any entity in which the specified entity
directly or indirectly owns at least a majority of the outstanding stock or
other equity or general voting interest.
3
<PAGE>
(b) The Company Shares constitute all the outstanding shares of
capital stock of the Company. Section 2.2(b) of the Disclosure Schedule lists
each subsidiary of the Company. All of the issued and outstanding shares of
capital stock or other equity interests of each such subsidiary are owned,
directly or indirectly, by the Company. The Company Shares and all of the issued
and outstanding shares of capital stock or other equity interests of such
subsidiaries are duly authorized, validly issued, fully paid and nonassessable
and free of preemptive rights. There are no options, warrants, rights or
agreements obligating the Company or any subsidiary to issue or sell any shares
of capital stock or other equity interests of the Company or any of its
subsidiaries, or any security convertible into or exchangeable for any such
shares of capital stock or other equity interests of the Company or any of its
subsidiaries. Except for the capital stock of its subsidiaries, the Company does
not own, directly or indirectly, any capital stock or other equity interest in
any entity.
(c) The Seller has good and valid title to the Company Shares, free
and clear of any security interests, pledges, mortgages, liens, encumbrances,
charges, options or any other adverse claims, restrictions or third party rights
of any kind whatsoever ("Liens") and, at the Closing, the Seller will deliver
such shares to the Purchaser, free and clear of any Liens.
(d) The Seller has heretofore made available to the Purchaser true
and complete copies of the certificate of incorporation and bylaws of each of
the Company and its subsidiaries.
Section 2.3. Consents and Approvals; No Violations.
-------------------------------------
(a) No filing or registration with, and no permit, authorization,
certificate, waiver, license, consent or approval of, any Governmental Entity is
necessary for execution, delivery or performance by the Seller of this
Agreement, except (x) for the applicable requirements of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), or (y) as a
result of facts or circumstances particular to the Purchaser.
(b) Neither the execution and delivery of this Agreement by the
Seller nor the consummation by the Seller of the transactions contemplated by
this Agreement nor compliance by the Seller with any of the provisions hereof
will (i) conflict with or result in any breach of any provision of the
certificate of incorporation or by-laws (or similar organizational document) of
the Company, any subsidiary of the Company, or the Seller, (ii) require the
consent or waiver of any person (other than a Governmental Entity) or result in
a violation or breach of, or constitute (with or without due notice or lapse of
time or both) a default (or give rise to any right of termination, cancellation,
modification or acceleration) (whether after the giving of notice or the passage
of time or both) or result in the imposition of or the creation of any Lien upon
any of the assets or properties of the Company or any of its subsidiaries
pursuant to or under, any of the terms, conditions or provisions of any note,
lease, license, contract or agreement to which the Company, any subsidiary of
the Company, or the Seller is a party or by which the Company, any subsidiary of
the Company, or the Seller, or any of their respective assets, is bound or
4
<PAGE>
(iii) violate any order, writ, injunction, decree, statute, treaty, rule or
regulation applicable to the Company, any subsidiary of the Company, or the
Seller, except in the case of (ii) or (iii), for violations, breaches or
defaults which, or consents or waivers the absence of which would not be
reasonably likely to have a Material Adverse Effect or which would not prevent
or materially delay the consummation of the transactions contemplated by this
Agreement.
Section 2.4. Financial Statements. Section 2.4(a) of the Disclosure
--------------------
Schedule sets forth true and complete copies of the Company's unaudited
consolidated balance sheet, income statement and statement of cash flows as of
and for the ten month period ended October 31, 1998 (the "Unaudited Financial
Statements"). The balance sheet dated October 31, 1998 is sometimes referred to
as the "October Balance Sheet." The Unaudited Financial Statements were derived
from the books and records of the Company and prepared in accordance with the
basis of presentation set forth in such section of the Disclosure Schedule and,
except as set forth in the notes thereto, in accordance with GAAP. The Unaudited
Financial Statements fairly present in all material respects the consolidated
financial position of the Company and its consolidated subsidiaries as of the
date thereof and the consolidated results of operations and consolidated cash
flows of the Company and its consolidated subsidiaries for the period then
ended. Section 2.4(b) of the Disclosure Schedule sets forth the balance sheet of
the Company and its subsidiaries as of October 31, 1998, giving pro forma effect
--- -----
to the redemption of the Company's Class B Common Stock, par value $0.01 per
share (the "Class B Stock") and the special dividend on the Class B Stock as
contemplated by the Agreement (the "October Pro Forma Balance Sheet"). The
October Pro Forma Balance Sheet fairly presents in all material respects the
consolidated financial position of the Company and its consolidated subsidiaries
as of October 31, 1998 on a pro forma basis, taking into account the effect of
the redemption of the Class B Stock and the special dividend on the Class B
Stock.
Section 2.5. No Undisclosed Liabilities. As of the date of this
--------------------------
Agreement, there are no liabilities, debts, obligations or claims against the
Company or its subsidiaries or otherwise relating to or arising in connection
with the Business of a type required to be reflected on a balance sheet prepared
in accordance with GAAP, except (a) liabilities, debts, obligations or claims
reflected or reserved in the October Balance Sheet, (b) liabilities, debts,
obligations or claims incurred after the date of the October Balance Sheet in
the ordinary course of business consistent with past practice or (c)
liabilities, debts, obligations or claims which would not be reasonably likely
to have a Material Adverse Effect.
Section 2.6. Absence of Certain Changes. As of the date of this
--------------------------
Agreement, since October 31, 1998 (i) the Business has been conducted in the
ordinary course of business, (ii) neither the Company nor any subsidiary has
taken any of the actions set forth in Section 4.1(y) hereof (other than the
redemption of the Class B Stock and the declaration of a special dividend with
respect to the Class B Stock, in accordance with its terms and the termination
of those agreements relating to the Class B Stock) and (iii) the Business has
not suffered a Material Adverse Effect.
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Section 2.7. Litigation. As of the date of this Agreement, except as
----------
would not be reasonably likely to have a Material Adverse Effect, there is no
suit, claim, action, proceeding or, to the knowledge of the Seller,
investigation pending against the Company or any of its subsidiaries before or
by any Governmental Entity or non-governmental body or by any third party or, to
the knowledge of the Seller, threatened against the Company or any of its
subsidiaries, and neither the Company nor any of its subsidiaries is subject to
any outstanding order of any Governmental Entity. As of the date of this
Agreement, there are no pending or, to the knowledge of the Seller, threatened
actions which would prevent or delay the Seller from consummating the
transactions contemplated hereby.
Section 2.8. Compliance with Applicable Law, Permits. Except as would not
---------------------------------------
be reasonably likely to have a Material Adverse Effect, (a) the Company and its
subsidiaries possess all permits, licenses, variances, exemptions, orders,
approvals and authorizations of all Governmental Entities and all consents and
waivers of any other persons (other than Governmental Entities) necessary for
the Company and its subsidiaries to own, lease or otherwise hold the assets of
the Business and to carry on the Business as currently conducted and (b) the
Business is being conducted in compliance with all laws, regulations, and
ordinances of all Governmental Entities including (i) laws regarding the
provision of insurance, third party administration and primary health care
services and (ii) the Prescription Drug Marketing Act, the Federal Controlled
Substances Act of 1970, the Food, Drug and Cosmetic Act and any state Pharmacy
Practice Acts, Controlled Substances Acts, Dangerous Drug Acts and Food, Drug
and Cosmetic Acts. This Section 2.8 does not relate to matters with respect to
(x) environmental matters, which are the subject of Section 2.9, (y) benefits
and employment matters, which are the subject of Section 2.11 and (z) Taxes,
which are the subject of Section 2.12.
Section 2.9. Environmental Matters.
---------------------
(a) Except as would not be reasonably likely to have a Material
Adverse Effect, (i) the Company and its subsidiaries are in compliance with all
applicable Environmental Laws (as defined below) (which compliance includes,
without limitation, the possession by the Company and its subsidiaries of all
permits and other government authorizations required under applicable
Environmental Laws, and compliance with the terms and conditions thereof), (ii)
no Hazardous Substances (as defined below) have been disposed on or released
onto, under or adjacent to any of the properties currently owned, leased or
operated by the Company or its subsidiaries (including soils, groundwater,
surface water, buildings or other structures), (iii) as of the date hereof, none
of the Company, any of its subsidiaries or the Seller or, to the knowledge of
the Seller, any person whose liability under any Environmental Law the Company
has or may have retained or assumed either contractually or by operation of law,
has received any written notice, demand, letter or claim alleging that the
Company or any subsidiary or any such person is in violation of or liable under
any Environmental Law, (iv) as of the date hereof, none of the Company, any of
its subsidiaries or the Seller has received any written notice, demand, letter
or claim alleging the potential responsibility of the Company or any subsidiary
for off-site disposal of any Hazardous Substance pursuant to the Federal
Comprehensive Environmental Response, Compensation and Liability Act or
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<PAGE>
any other Environmental Law and (v) as of the date hereof, there are no past or
present actions, activities, circumstances, conditions, events or incidents
which would be reasonably likely to form the basis of any notice, demand, letter
or claim under Sections 2.9(a)(iii) or 2.9(a)(iv).
(b) "Environmental Law" means any national, regional, federal, state,
municipal or local law, regulation, order, judgment or decree issued or
promulgated by any Governmental Entity currently in effect relating to the
protection of human health or the indoor and outdoor environment (including,
without limitation, natural resources) or the exposure of persons to any
Hazardous Substances.
(c) "Hazardous Substance" means any pollutant, contaminant, hazardous
waste, hazardous substance, chemical oil, substance that is regulated pursuant
to any Environmental Law, including without limitation any petroleum product,
by-product or additive, asbestos, asbestos-containing material, medical waste,
chloroflourocarbon, hydrochloroflourocarbon or polychlorinated biphenyls.
Section 2.10. Intellectual Property.
---------------------
(a) Section 2.10(a) of the Disclosure Schedule sets forth, as of the
date of this Agreement, for all Intellectual Property, as defined hereinafter,
owned by the Company or any of its subsidiaries: a complete and accurate list,
as of the date of this Agreement, of all U.S. and foreign (i) patents and patent
applications,; (ii) trademark and servicemark registrations (including Internet
domain registrations),trademark and servicemark applications, and material
unregistered servicemarks and trademarks; (iii) copyright registrations and
copyright applications.
(b) Section 2.10(b) of the Disclosure Schedule lists, as of the date
of this Agreement, all contracts for material Software, as defined hereinafter,
which is licensed, leased or otherwise used by the Company or any of its
subsidiaries and all Software which is owned by the Company or its subsidiaries
("Proprietary Software"), and identifies which Software is owned, licensed,
leased, or otherwise used, as the case may be.
(c) Section 2.10(c) of the Disclosure Schedule sets forth a complete
and accurate list, as of the date of this Agreement, of all agreements granting
or obtaining any right to use or practice any rights under any Intellectual
Property, to which the Company or any of its subsidiaries is a party or
otherwise bound, as licensee or licensor thereunder, including license
agreements, settlement agreements, and covenants not to sue (collectively, the
"License Agreements").
(d) Except as would not have a Material Adverse Effect:
(i) the Company or its subsidiaries own or have the right to use
all Intellectual Property as defined hereinafter, free and clear of all
liens,
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<PAGE>
(ii) any Intellectual Property owned or, to the Knowledge of
the Seller, used, by the Company or its subsidiaries is valid and
subsisting in full force and effect and has not been cancelled, expired or
abandoned,
(iii) the Seller has not received written notice from any third
party regarding any actual or potential infringement by the Company or any
of its subsidiaries of any intellectual property of such third party and
the Seller has no Knowledge of any legitimate basis for such a claim
against the Company or any of its subsidiaries.
(iv) the Seller has not received written notice from any third
party regarding any assertion or claim challenging the validity of any
Intellectual Property owned by the Company or any of its subsidiaries and
the Seller has no Knowledge of any legitimate basis for such a claim,
(v) neither the Company nor any of its subsidiaries have
licensed or sublicensed its rights in any Intellectual Property, or
received or been granted any such rights, other than pursuant to the
License Agreements,
(vi) to the Knowledge of Seller no third party is
misappropriating, infringing, diluting or violating any Intellectual
Property owned by the Company or any of its subsidiaries,
(vii) the License Agreements are valid and binding obligations
of the Company or its subsidiaries and, to the Knowledge of Seller, the
other party thereto, enforceable in accordance with their terms, and there
exists no event or condition which will result in a violation or breach of,
or constitute a default by the Company or its subsidiaries or, to the
Knowledge of Seller, the other party thereto, under any such License
Agreement,
(viii) the Company and each of its subsidiaries takes reasonable
measures to protect the confidentiality of Trade Secrets (as defined
herein) including requiring third parties having access thereto to execute
written non-disclosure agreements. No Trade Secret of the Company or any of
its subsidiaries has been disclosed or authorized to be disclosed to any
third party other than pursuant to a non-disclosure agreement that
adequately protects the Company and the applicable subsidiary's proprietary
interests in and to such Trade Secrets,
(ix) the consummation of the transaction contemplated hereby
will not result in the loss or impairment of the Company or any of its
subsidiaries' rights to own or use any of the Intellectual Property, nor
will require the consent of any third party in respect of any Intellectual
Property, and
(x) all Proprietary Software set forth in Section 2.10(b) of
Disclosure Schedule, was either developed (a) by employees of the Company
or any of its subsidiaries within the scope of their employment; or (b) by
independent contractors who have assigned their rights to the Company or
any of its subsidiaries pursuant to written agreement.
8
<PAGE>
(e) As used herein, the term "Intellectual Property" means all
trademarks, service marks, trade names, Internet domain names, designs, logos,
slogans and general intangibles of like nature, together with goodwill,
registrations and affiliations relating to the foregoing; registered and
unregistered patents, copyrights (including registrations and applications of
any of the foregoing); Software; confidential information, technology, know-how,
inventions, processes, formulae, algorithms, models and methodologies (such
confidential items, collectively "Trade Secrets") used in the Business as
conducted as of the Closing Date and any licenses to use any of the foregoing.
"Software" means any and all (i) computer programs, including any and all
software implementation of algorithms, models and methodologies whether in
source code or object code, (ii) databases and computations, including any and
all data and collections of data but excluding individual customer data, (iii)
all documentation, including user manuals and training materials, relating to
any of the foregoing, and (iv) the content and information contained in any Web
site. As used in this Section 2.10, and notwithstanding Section 9.10(b), the
term "Knowledge of Seller" with respect to the Seller shall mean the knowledge
of the persons set forth in Section 2.10(e) of the Disclosure Schedule.
Section 2.11. Employee Benefit Plans.
----------------------
(a) Section 2.11 of the Disclosure Schedule contains a complete list
of all employee benefit plans (as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")), all employment
and severance agreements, and all bonus, stock option, stock purchase,
incentive, deferred compensation, supplemental retirement, severance and other
similar employee benefit plans, programs, policies and agreements, in each case
that is sponsored, maintained, contributed to or required to be contributed to
by the Company or any of its subsidiaries, or to which the Company or any of its
subsidiaries is a party for the benefit of any current or former employee of the
Company or any of its subsidiaries (together, the "Employee Plans"). Except as
set forth on Section 2.11 of the Disclosure Schedule, none of the Employee Plans
is sponsored, maintained, contributed to or required to be contributed to by the
Seller or any of its subsidiaries (other than the Company and its subsidiaries)
and no current employee of the Seller or any of its subsidiaries (other than the
Company and its subsidiaries) participates or is eligible to participate in such
Employee Plans.
(b) The Seller has delivered or made available to the Purchaser
accurate and complete copies of the following with respect to the Employee
Plans, to the extent applicable as of the date of this Agreement: (i) all plan
documents and all amendments thereto, (ii) summary plan descriptions and
summaries of material modifications, (iii) trust documents, insurance contracts
and other funding instruments, (iv) the two most recently prepared financial
statements and actuarial reports, (v) the two most recently filed annual reports
and (vi) determination letters received from the Internal Revenue Service.
(c) All Employee Plans have been administered and operated in
compliance with the requirements of ERISA, the Internal Revenue Code of 1986, as
amended (the "Code") and all other applicable Laws, except as would not be
reasonably likely to have a Material Adverse Effect. Each Employee Plan that is
intended to be
9
<PAGE>
qualified under Section 401(a) of the Code has received a determination letter
from the Internal Revenue Service stating that it is so qualified, and, as of
the date of this Agreement, such determination letter has not been revoked.
There have been no "prohibited transactions" within the meaning of Section 4975
of the Code or Section 406 of ERISA involving any of the Employee Plans that
could subject the Company or any of its subsidiaries to any penalties or taxes
that would be reasonably likely to have a Material Adverse Effect.
(d) Each Employee Plan that is subject to the minimum funding
requirements of Section 412 of the Code is in compliance with such requirements,
and no Employee Plan has a minimum funding variance or waiver under Section
412(d) of the Code. Neither the Company, its subsidiaries, nor any trade or
business, that together with the Company or any of its subsidiaries, would be
deemed a "single employer" under Section 4001(b) of ERISA (an "ERISA Affiliate")
has any liability under Title IV of ERISA (other than for the payment of
premiums to the Pension Benefit Guaranty Corporation), except as would not be
reasonably likely to have a Material Adverse Effect. Neither the Company nor any
of its subsidiaries participates in any multiemployer plan (as defined in
Section 3(37) of ERISA), nor has the Company, its subsidiaries or any ERISA
Affiliate incurred any withdrawal liability to a multiemployer plan that has not
been satisfied in full, except as would not be reasonably likely to have a
Material Adverse Effect.
(e) As of the date of this Agreement, no actual or, to the knowledge
of the Seller, threatened disputes, lawsuits, claims (other than routine claims
for benefits), or to the knowledge of the Seller, investigations or audits by
any person or Governmental Entity have been filed or are pending with respect to
the Employee Plans or the Company or any of its subsidiaries in connection with
any Employee Plan or the fiduciaries or administrators thereof.
(f) The execution of this Agreement and the consummation of the
transactions contemplated hereunder will not constitute an event under any
Employee Plan that will cause any payment, benefit, acceleration, vesting,
distribution, or obligation to fund benefits with respect to any current or
former employee of the Company or any of its subsidiaries.
(g) Except as set forth on Section 2.11 of the Disclosure Schedule,
no Employee Plan provides medical, surgical, hospitalization, death or similar
benefits (whether or not insured) for employees or former employees of the
Company or any subsidiary for periods extending beyond their retirement or other
termination of service, other than (i) coverage mandated by applicable law, (ii)
death benefits under any "pension plan" or (iii) benefits the full cost of which
is borne by the current or former employee (or his beneficiary).
Section 2.12. Taxes.
-----
10
<PAGE>
(a) Except as set forth in Section 2.12(a) of the Disclosure
Schedule:
(i) Giving effect to all extensions obtained, each of the
Company and its subsidiaries has (x) duly and timely filed (or there has
been filed on its behalf) with the appropriate Governmental Entities all
Tax Returns required to be filed by it, and all such Tax Returns are true,
correct and complete in all material respects and (y) timely paid (or
accrued on the Company's books) or there has been paid on its behalf all
Taxes (other than Taxes in respect of 1998) due or claimed to be due from
it by any Tax Authority;
(ii) The Company and its subsidiaries have complied in all
material respects with all applicable Tax Laws relating to the payment and
withholding of Taxes (including, without limitation, withholding of Taxes
pursuant to sections 1441 and 1442 of the Code (or similar provisions under
any foreign laws) and employment withholding Taxes) and have, within the
time and manner prescribed by law, withheld and paid over to the proper
Governmental Entities all amounts required to be withheld and paid over
under all applicable Tax Laws;
(iii) As of the date of this Agreement, there are no Liens for
Taxes upon the assets or properties of the Company or its subsidiaries
except for statutory Liens for current Taxes not yet due;
(iv) As of the date of this Agreement, none of the Company or
any of its subsidiaries has requested any extension of time within which to
file any Tax Return in respect of any taxable year which has not since been
filed, and no outstanding waivers or comparable consents regarding the
application of the statute of limitations with respect to any Taxes or Tax
Returns has been given by or on behalf of the Company or any of its
subsidiaries;
(v) As of the date of this Agreement, no federal, state, local
or foreign audits, review, or other administrative proceedings or court
proceedings ("Audits") exist or have been initiated with regard to any
Taxes or Tax Returns of the Company or any of its subsidiaries, and none of
the Company or any of its subsidiaries has received any notice of such an
Audit;
(vi) As of the date of this Agreement, all Tax deficiencies
which have been claimed, proposed or asserted against the Company or its
subsidiaries have been fully paid, finally settled or properly accrued on
the Company's books;
(vii) None of the Company or any of its subsidiaries is required
to include in income any adjustment pursuant to Section 481(a) of the Code,
by reason of any voluntary or involuntary change in accounting method (nor,
as of the date of this Agreement, has any Tax Authority proposed in writing
any such adjustment or change of accounting method);
(viii) No power of attorney has been granted by or with respect
to the Company or any of its subsidiaries with respect to any matter
relating to Taxes;
11
<PAGE>
(ix) None of the Company or any of its subsidiaries has filed
a consent pursuant to Section 341(f) of the Code (or any predecessor
provision) or agreed to have Section 341(f)(2) of the Code apply to any
disposition of a subsection (f) asset (as such term is defined in Section
341(f)(4) of the Code) owned by the Company or any of its subsidiaries;
(x) Since the date of the October Balance Sheet, none of the
Company or any of its subsidiaries has incurred any liability for Taxes
other than in the ordinary course of business; and
(xi) None of the Company or any of its subsidiaries is a party
to any agreement, contract or arrangement that could result, separately or
in the aggregate, in the payment of any "excess parachute payments" within
the meaning of Section 280G of the Code, or in payments that will not be
deductible by operation of Section 162(m) of the Code.
(xii) None of the Company or any of its subsidiaries has
requested or received a ruling or determination from any Tax Authority or
signed a closing or other agreement with any Tax Authority which would be
reasonably likely to have a Material Adverse Effect.
(xiii) The Federal income Tax Returns of the Company and its
subsidiaries for the Tax Periods ending before January 1, 1994 have been
examined by the appropriate Governmental Entity (or the applicable statue
of limitations for the assessment of such taxes has expired).
(b) Each Subsidiary of the Company is a United States Person (as
defined in Section 7701(a)(30) of the Code).
(c) Except as set forth in Section 2.12(c) of the Disclosure
Schedule, none of the Company or any of its subsidiaries is a party to, is bound
by, or has any obligation under, any Tax sharing agreement, Tax indemnification
agreement or similar contract or arrangement (collectively, "Tax Indemnification
Agreements"). Any such Tax Indemnification Agreement set forth on Schedule
2.12(c) will terminate as of the Closing Date and be of no further force or
effect for any Tax Period after the Closing Date. As of the date of this
Agreement, none of the Company or any of its subsidiaries is aware of any
potential liability or obligation to any person as a result of, or pursuant to,
any such Tax Indemnification Agreement.
(d) The Company and its subsidiaries have previously delivered or
made available to the Purchaser complete and accurate copies of each of (i) all
audit reports, letter rulings, technical advice memoranda and similar documents
issued by a Governmental Entity relating to the United States federal, state,
local or foreign Taxes due from or with respect to the Company and its
subsidiaries, (ii) the United States federal income Tax Returns, and those
state, local and foreign income Tax Returns filed by the Company and its
subsidiaries and (iii) any closing agreements entered into by the Company or any
of its subsidiaries with any Tax Authority, in each case, existing on the
12
<PAGE>
date hereof. The Seller will, or will cause the Company to, deliver to Purchaser
all materials with respect to the foregoing for all matters arising after the
date hereof.
(e) "Tax" or "Taxes" means all taxes, charges, levies, fees, or other
assessments imposed by any federal, state, local or foreign Tax Authority,
including, but not limited to, any income, gross income, gross receipts,
profits, capital stock, franchise, business, withholding payroll, social
security, workers compensation, unemployment, disability, property, ad valorem,
stamp, excise, occupation, service, sales, use, license, lease, transfer,
import, export, value added, goods and services, alternative minimum, estimated
or other similar tax (including any fee, assessment, or other charge in the
nature of or in lieu of any tax), and any interest, penalties, additions to tax,
or additional amounts in respect of the foregoing.
(f) "Tax Authority" means, with respect to any Tax, the Governmental
Entity that imposes such Tax and the agency (if any) charged with the collection
or administration of such Tax for such entity.
(g) "Tax Law" means the law (including any applicable regulations or
any administrative pronouncement) of any Governmental Entity relating to any
Tax.
(h) "Tax Period" means, with respect to any Tax, the period for which
the Tax is reported as provided under the applicable Tax Law.
(i) "Tax Return" means any report of Taxes due, any claims for refund
of Taxes paid, any information return with respect to Taxes or any other similar
report, statement, declaration, or document required to be filed under
applicable Tax Law, including any attachments, exhibits or other materials
submitted with any of the foregoing and including any amendments or supplements
to any of the foregoing.
Section 1.13. Material Contracts.
------------------
(a) Section 2.13(a) of the Disclosure Schedule lists the following
notes, leases, licenses, contracts or agreements ("Contracts") to which the
Company or any subsidiary, as of the date of this Agreement, is a party or is
bound:
(i) each mortgage, indenture, note, installment obligation or
other instrument, contract, agreement or arrangement relating to the
borrowing of money by the Company or any of its subsidiaries in an amount
exceeding $10 million;
(ii) any guaranty, direct or indirect, by the Company or any
subsidiary of any obligation for borrowed money (A) in an amount exceeding
$10 million of any person or entity or (B) in any amount of Seller or any
subsidiary of Seller, in either case, excluding endorsements made for
collection in the ordinary course of business;
(iii) any obligation to sell or to register the sale of any of
the shares of capital stock or other securities of the Company or any of
its subsidiaries;
13
<PAGE>
(iv) any obligation to make payments, contingent or otherwise,
arising out of the prior acquisition or disposition of a business;
(v) each contract that limits the freedom of the Company or
any subsidiary to compete in its lines of business as presently conducted
or with any person or in any geographical area or otherwise to conduct its
business as presently conducted;
(vi) each collective bargaining or union contract;
(vii) each contract for the purchase of capital equipment,
materials or supplies, except those contracts terminable without material
penalty on 60 or fewer days' notice and those involving the receipt or
payment of less than $500,000 per year;
(viii) each contract for the acquisition or disposition of
material assets, other than in the ordinary course of business;
(ix) each contract relating to the leasing of or other
arrangement for use of material real or personal property;
(x) each contract with any manufacturer of pharmaceuticals
involving the annual payment by the manufacturer of at least $1 million;
(xi) each of the top 50 contracts measured by membership (as
calculated in accordance with industry practices) with any insurance
company, health maintenance organization or other customer;
(xii) each contract between the Company or its subsidiaries, on
the one hand, and the Seller and its subsidiaries (other than the Company
or its subsidiaries) or the other hand; (xiii) each other contract which is
material to the Business;
(xiv) any employment agreement with any employee;
(xv) any contract with a term in excess of one year from the
date hereof which is not otherwise terminable upon 60 days advance notice
without cause and without financial penalty and which involves the payment
or receipt of an amount (in one or a series of transactions) in excess of
$1 million;
(xvi) any limited partnership, joint venture or other
unincorporated business organization or similar arrangement or agreement;
(b) Except as would not be reasonably likely to have a Material
Adverse Effect, (x) as of the date of this Agreement, neither the Company nor
any subsidiary is (and to the knowledge of the Seller as of the date of this
Agreement, no other party is), in breach or default under the Contracts and no
event has occurred under the Contracts
14
<PAGE>
which would constitute (with or without due notice or lapse of time or both) a
breach or default by the Company or any of its subsidiaries or, to the knowledge
of the Company, by any other party thereto (or give rise to any right of
termination, cancellation, modification or acceleration against the Company or
any of its subsidiaries, or, to the knowledge of the Company, any other party
thereto) under the Contracts and (y) each Contract is a valid and binding
obligation of the Company or its subsidiary and, to the knowledge of the Seller
as of the date of this Agreement, the other party thereto, enforceable against
such persons in accordance with its terms.
(c) From January 1, 1998 until the date of this Agreement, no
customer of the Company which accounted for 1,000,000 or more members
(determined on a basis consistent with past practices of the Business) during
the year ended December 31, 1997, has cancelled or otherwise terminated its
business relationships with the Company or its subsidiaries. None of the Seller,
the Company or any of its subsidiaries has received written notice, or to the
knowledge of the Seller, other communication of any actual or alleged breach of
or default under or threatened cancellation, termination or acceleration of such
contracts, and, to the knowledge of the Seller, no event has occurred or
circumstances exist that would give the Company or any other person party to
such contracts the right to exercise any remedy under or to cancel or terminate
any such contract.
(d) Section 2.13(d) of the Disclosure Schedule sets forth all
agreements currently in effect between the Seller or the Company and McKesson
Corporation ("McKesson") relating to the Business (the "McKesson Agreements")
pursuant to which the Seller has any right to indemnification or pursuant to
which the Company has any rights or obligations. Each of the McKesson Agreements
constitutes a valid and binding agreement of the Seller, enforceable against the
Seller in accordance with its terms, subject to limitations imposed by
bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium and
other laws relating to or affecting creditors' rights generally and general
equitable principles. To the knowledge of the Seller, each of the McKesson
Agreements constitutes a valid and binding agreement of McKesson enforceable
against McKesson in accordance with its terms, subject to limitations imposed by
bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium and
other laws relating to or affecting creditors' rights generally and general
equitable principles.
Section 2.14. Assets Necessary to Business. The assets, properties,
----------------------------
contracts and rights of the Company and its subsidiaries include all of the
assets, properties, contracts and rights necessary for the conduct of the
Business in the manner as it is currently conducted (other than those assets,
properties and rights to be provided pursuant to the Transitional Services
Agreement), except where the failure to have such assets, properties and rights
would not be reasonably likely to have a Material Adverse Effect.
Section 2.15. Title to Assets. Each of the Company and its subsidiaries
---------------
has good and valid title (or in the case of real property owned by the Company
or its subsidiaries, good and marketable title) to all of its material assets,
properties and rights, free and clear of all Liens, other than as set forth in
the October Balance Sheet and other than (i)
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mechanics', carriers', workmen's, repairmen's or other like Liens arising or
incurred in the ordinary course of business, (ii) Liens arising under original
purchase price conditional sales contracts and equipment leases with third
parties entered into in the ordinary course of business, (iii) Liens for Taxes
that are (A) not due and payable or (B) being contested in good faith and are
properly reserved for in accordance with GAAP and are set forth on the October
Balance Sheet and (v) such other Liens as would not be reasonably likely to have
a Material Adverse Effect ("Permitted Liens"). Section 2.15 of the Disclosure
Schedule sets forth a list of all real property owned by the Company or its
subsidiaries as of the date of this Agreement and the leases relating to the
assets of the Business constituting leasehold interests in real property, and
improvements and appurtenances thereto (the "Leased Properties"). The leases
relating to the Leased Properties as of the date of this Agreement, are in full
force and effect, and constitute the legal, valid and binding obligation of the
Company or its subsidiaries, and to the knowledge of Seller the other party
thereto, subject to limitations imposed by bankruptcy, fraudulent conveyance,
insolvency, reorganization, moratorium and other laws relating to or affecting
creditors' rights generally and general equitable principles. There exists no
defaults or conditions which with the giving of notice or the passage of time,
or both, would constitute a default by the Company or its subsidiaries or to the
knowledge of Seller, as of the date of this Agreement, the other party thereto
with respect to the leases for the Leased Properties except for such defaults or
conditions which would not be reasonably likely to have a Material Adverse
Effect.
Section 2.16. Labor Relations. Except for occurrences that would not be
---------------
reasonably likely to have a Material Adverse Effect, (a) the Company and its
subsidiaries are in compliance with all applicable laws respecting employment
and employment practices, terms and conditions of employment and wages and
hours; (b) as of the date of this Agreement, none of the Seller, the Company or
any of its subsidiaries have received written notice of any charge or complaint
against the Company nor any of its subsidiaries pending before the Equal
Employment Opportunity Commission, the National Labor Relations Board, or any
other Government Entity regarding an unlawful employment practice; (c) as of the
date of this Agreement, none of the Company or any of its subsidiaries are party
to any collective bargaining agreement and there is no labor strike, slowdown or
stoppage actually pending or, to the knowledge of the Seller, threatened against
or affecting the Company or its subsidiaries; (d) as of the date of this
Agreement, none of the Seller, the Company or any of its subsidiaries have
received written notice that any representation petition respecting the
employees of the Company or its subsidiaries has been filed with the National
Labor Relations Board; and (e) the Company and its subsidiaries are and have
been in substantial compliance with all notice and other requirements under the
Worker Adjustment and Retaining Notification Act of 1988 or similar state
statute.
Section 2.17. Insurance. Section 2.17 of the Disclosure Schedule sets
---------
forth all material insurance policies maintained by the Company or any of its
subsidiaries for the benefit of or in connection with the Company or the
Business. Except as set forth on Section 2.17 of the Disclosure Schedule, none
of the material insurance policies maintained by the Company or any of its
subsidiaries for the benefit of or in connection
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with the Company or the Business will lapse or become subject to termination by
the insurer as a result of the transactions contemplated by this Agreement.
Section 2.18. Products Liability. As of the date of this Agreement, except
------------------
as would not be reasonably likely to have a Material Adverse Effect, (i) there
is no claim, action, suit, inquiry, hearing, proceeding, or investigation of a
civil, criminal or administrative nature by or before any Governmental Entity
against the Company or its subsidiaries which is pending or to the knowledge of
the Seller, threatened, relating to or resulting from an alleged defect in
design, manufacture, materials or workmanship of any product manufactured,
distributed, or sold by or behalf of the Company or its subsidiaries, or any
alleged failure to warn, or from any alleged breach of express or implied
warranties or representations; and (ii) there has not been any product recall or
post-sale warning (collectively, "Recalls") by the Company or its subsidiaries
concerning any products relating to the Business of the Company or its
subsidiaries which were distributed, or sold by the Company and its
subsidiaries, or to the knowledge of the Seller any investigation or
consideration of or decision made by any person concerning whether to undertake
or not to undertake any Recalls.
Section 2.19. Compliance with the Consent Order. At all times since July
---------------------------------
28, 1995, the Seller has complied in all material respects and has caused the
Company to comply in all material respects with the Consent Order between the
Seller and the Federal Trade Commission (the "Consent Order").
Section 2.20. Year 2000. (a) As used herein, "Year 2000 Compliant" or
---------
"Year 2000 Compliance" means: (i) the application system functions correctly
without abnormal ends after December 31, 1999; (ii) all date related
calculations are correct in the multi-century scenario and after December 31,
1999 (including age calculations, duration calculations, scheduling
calculations, etc.); (iii) all manipulations and comparisons of date-related
data must produce correct results for all valid date values within the scope of
the application; (iv) there must be no century ambiguity; (v) all reports and
displays are sorted correctly in the multi-century scenario; and (vi) leap years
must be accounted for and correctly identified; i.e., 2000 must be recognized as
a leap year.
(b) The Company and its subsidiaries have undertaken a program with
the goal of becoming Year 2000 Compliant as set forth in the "Y2K Readiness
Plan" provided to the Purchaser. The Purchaser acknowledges that to the extent
the particulars of the Y2K Readiness Plan are inconsistent with this Section
2.20, the Y2K Readiness Plan shall govern.
(c) The Company and its subsidiaries reasonably believe that
approximately eighty-five percent of their "core systems" (e.g., Recap and
online claims processing applications) shall be Year 2000 Compliant by December
31, 1998. The Company and its subsidiaries reasonably expect all core systems to
be Year 2000 Compliant by June 30, 1999.
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(d) The Company and its subsidiaries reasonably believe that their
"back-office systems" (e.g., human resources, accounting and reporting systems)
shall be Year 2000 Compliant by June 30, 1999.
(e) The Company and its subsidiaries reasonably believe that their
"desktop" systems (e.g., user system and stand-alone applications) shall be Year
2000 Compliant by June 30, 1999.
(f) The Company, on behalf of itself and its subsidiaries, has
completed an initial round of communications with its material vendors and
service providers and all customers to determine the extent to which the
products or services they provide to the Company or its subsidiaries, or the
systems they use to interchange data with the Company or its subsidiaries, are
Year 2000 Compliant. The Company is engaged in analysis of the responses and
follow-up calls and/or visits, as it reasonably deems necessary.
(g) The Company is currently developing a Year 2000 contingency plan
for itself and its subsidiaries. The Company currently expects to build upon its
Business Contingency Plan and current disaster recovery plans, which have been
provided to the Purchaser. New plans are currently expected to be developed or
current plans modified by mid-1999 to include Year 2000 specific issues. End-to-
end Year 2000 testing is currently expected to be completed by June 30, 1999.
(h) If the Company and its subsidiaries continue to execute the Y2K
Readiness Plan in a timely manner, the Seller, based on information provided to
it by the Company, and the Company expect that there would not be a Material
Adverse Effect on the business operations of the Company and its subsidiaries
resulting from activities within the direct control of the Company and its
subsidiaries. Due to the general uncertainty of the Year 2000 problem, neither
the Seller nor the Company makes any representation or warranty that the
expectations expressed herein will be realized or will not be changed, or that
the consequences of failure to achieve Year 2000 Compliance will not have a
Material Adverse Effect.
Section 2.21. Brokers. No broker, investment banker, financial advisor or
-------
other person, other than Merrill Lynch, Pierce, Fenner & Smith Incorporated, the
fees and expenses of which will be paid by the Seller, is entitled to any
broker's, finder's, financial advisor's or other similar fee or commission in
connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of the Seller or any subsidiary.
Section 2.22. No Implied Representations. The Seller acknowledges that the
--------------------------
Purchaser is not making any representations or warranties other than as
explicitly set forth in this Agreement. The Seller agrees that it shall not
assert any claims against or seek any damages or other remedies (including
pursuant to any implied warranties or similar rights, which the Seller expressly
and irrevocably waives and agrees not to seek to enforce) from the Purchaser or
any of its officers, directors, affiliates, stockholders,
18
<PAGE>
agents, advisors or representatives (collectively, "representatives") for any
matters contemplated hereby except for fraud or as explicitly set forth herein.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser represents and warrants to the Seller as follows:
Section 3.1. Organization and Authority of the Purchaser. The Purchaser
-------------------------------------------
is a corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation and has all necessary corporate
power and authority to execute and deliver this Agreement, to perform its
obligations under this Agreement and to consummate the transactions contemplated
by this Agreement. The execution and delivery of this Agreement by the Purchaser
and the consummation by the Purchaser of the transactions contemplated by this
Agreement have been duly authorized by all necessary corporate actions on the
part of Purchaser and no other corporate actions or proceedings on the part of
the Purchaser are necessary to authorize this Agreement or for the Purchaser to
consummate the transactions contemplated by this Agreement. This Agreement has
been duly and validly executed and delivered by Purchaser and constitutes a
legal, valid and binding obligation of the Purchaser, enforceable against the
Purchaser in accordance with its terms.
Section 3.2. Consents and Approvals; No Violations.
-------------------------------------
(a) No filing or registration with, and no permit, authorization,
certificate, waiver, license, consent or approval of, any Governmental Entity is
required in connection with the execution, delivery and performance of this
Agreement by the Purchaser or the consummation by the Purchaser of the
transactions contemplated hereby except (x) for the applicable requirements of
the HSR Act or (y) as a result of facts or circumstances particular to the
Seller. No consent or waiver of any person (other than a Governmental Entity) is
required in connection with the execution, delivery and performance of this
Agreement by Purchaser or the consummation by the Purchaser of the transactions
contemplated hereby.
(b) Neither the execution and delivery of this Agreement by the
Purchaser nor the consummation by the Purchaser of the transactions contemplated
by this Agreement nor compliance by the Purchaser with any of the provisions
hereof will (i) conflict with or result in any breach of any provision of the
certificate of incorporation or by-laws (or similar organizational document) of
the Purchaser, (ii) result in a violation or breach of, or constitute (with or
without due notice or lapse of time or both) a default (or give rise to any
right of termination, cancellation, modification or acceleration) (whether after
the giving of notice or the passage of time or both) under, any of the terms,
conditions or provisions of any note, lease, license, contract or agreement to
which the Purchaser is a party or by which the Purchaser, or its assets, is
bound or (iii) violate any order, writ, injunction, decree, statute, treaty,
rule or regulation applicable to the Purchaser, except in the case of (ii) or
(iii), for violations, breaches or defaults which
19
<PAGE>
would not have a material adverse effect on the Purchaser or which would not
prevent or materially delay the consummation of the transactions contemplated by
this Agreement.
Section 3.3. Investment. The Purchaser is acquiring the Company Shares
----------
solely for the purpose of investment and not with a view to any resale or
distribution thereof.
Section 3.4. Brokers. No broker, investment banker, financial advisor or
-------
other person, other than those the fees and expenses of which will be paid by
the Purchaser, is entitled to any broker's, finder's, financial advisor's or
other similar fee or commission in connection with the transactions contemplated
by this Agreement based upon arrangements made by or on behalf of the Purchaser
or any subsidiary.
Section 3.5. No Implied Representations. The Purchaser acknowledges that
--------------------------
the Seller is not making any representations or warranties regarding the
Business other than as explicitly set forth in this Agreement. The Purchaser
agrees that it shall not assert any claims against or seek any damages or other
remedies (including pursuant to any implied warranties or similar rights, which
the Purchaser expressly and irrevocably waives and agrees not to seek to
enforce) from the Seller or any of its representatives) for any matters relating
to the Business or the other matters contemplated hereby except for fraud or as
explicitly set forth herein.
ARTICLE IV
COVENANTS
Section 4.1. Conduct of the Business.
-----------------------
(a) During the period from the date hereof to the Closing Date, the
Seller shall, except as otherwise expressly provided in this Agreement, cause
the Company to operate only in the ordinary course of business consistent with
past practice. The Seller shall, and shall cause the Company to, use all
reasonable efforts to preserve intact the present organization of the Business,
keep available the services of the present officers and employees of the Company
and preserve the Company's relationships with customers, suppliers, and others
having significant business dealings with the Business.
(b) Without limiting the generality of the foregoing, and except as
set forth in Section 4.1 of the Disclosure Schedule or as otherwise expressly
provided in this Agreement, from the date of this Agreement to the Closing Date,
the Seller shall cause the Company and each of its subsidiaries not to, without
the written consent of the Purchaser (which consent shall not be unreasonably
withheld or delayed):
(i) amend or propose to amend its certificate of incorporation
or by-laws (or other similar organizational documents) or alter through
merger, liquidation, reorganization, restructuring or in any other fashion,
the corporate structure or ownership of the Company or any of its
subsidiaries;
(ii) issue, sell or agree or commit to issue, sell or deliver
(whether through the issuance or granting of options, warrants,
commitments,
20
<PAGE>
subscriptions, rights to purchase or otherwise), pledge or otherwise encumber
any shares of capital stock of the Company or any subsidiary, or any securities
convertible into, or exchangeable for, any such shares or amend the terms of any
such securities or agreements outstanding on the date hereof;
(iii) (A) declare, set aside, make or pay any dividend or other
distribution in respect of its capital stock, or (B) redeem, repurchase or
otherwise acquire any of its securities or split, combine or reclassify any
shares of its capital stock;
(iv) (A) transfer, sell, lease, license or dispose of any material assets
or rights, unless in the ordinary course of business consistent with past
practice; or (B) acquire or agree to acquire, by merging or consolidating with,
by purchasing an equity interest in or a portion of the assets of or by any
other manner any business or any corporation, partnership, association or other
business organization or division thereof or otherwise acquire or agree to
acquire any assets of any other person (other than the purchase of assets in the
ordinary course of business and consistent with past practices);
(v) other than in the ordinary course of business and other than
transactions with wholly-owned subsidiaries, (A) incur, assume, discharge,
cancel or prepay any material indebtedness or other obligation or issue or sell
any debt securities or rights to acquire any debt securities, (B) assume,
guarantee, endorse or otherwise become liable (whether directly, contingently or
otherwise) for the obligations of any other person, (C) make any loans, advances
or capital contributions to, or investments in, any other person; (D) change the
Company's practices with respect to the timing of payments or collections; (E)
pledge or otherwise encumber shares of capital stock of the Company and its
subsidiaries; or (F) mortgage or pledge any of the assets or permit to exist any
Lien (other than Permitted Liens) thereupon;
(vi) enter into, adopt, amend or terminate any employee benefit plan, or
increase in any material respect the compensation or fringe benefits of any
officer or employee of the Company or pay any benefit not required by any
existing plan, except in the ordinary course of business or as required by
applicable law or existing contractual arrangements;
(vii) enter into any employment or severance agreement with any employee,
adopt or enter into any collective bargaining agreement;
(viii) enter into, amend, assign or terminate any Contract, except in the
ordinary course of business and consistent with past practices;
(ix) engage in any transactions with the Seller or its subsidiaries
(other than the Company and its subsidiaries) other than in the ordinary course
of business and consistent with past practices and on a basis no less favorable
than
21
<PAGE>
would at the time be obtainable for a comparable transaction in arm's-
length dealing with an unrelated third party;
(x) settle or compromise any material litigation of the Company or
any of its subsidiaries (whether or not commenced prior to the date of this
Agreement) or settle, pay or compromise any claims, liabilities or
obligations not required to be paid, individually in an amount in excess of
$1 million;
(xi) change or agree to change any accounting method or policy other
than as required by GAAP or by Law;
(xii) change, or agree to change, any business policies which relate
to advertising, pricing, personnel, labor relations, sales, returns, or
product acquisitions, in each case in a manner which would have a Material
Adverse Effect;
(xiii) make any material Tax election, or settle or compromise any
material Tax liability, fail to file any material Tax Return required to be
filed or fail to pay or withhold any material amount of Taxes required to
be paid or withheld; or
(xiv) take, or agree in writing or otherwise to take, any of the
foregoing actions.
Section 4.2. Access to Information. Upon reasonable notice, and subject to
---------------------
applicable law and any applicable contractual restrictions, the Seller shall,
and shall cause the Company to, afford to the officers, employees, accountants,
counsel and other representatives of the Purchaser reasonable access during
normal business hours to all of the Company's offices, facilities, properties,
books and records relating to the Business, and the Seller shall furnish
promptly to the Purchaser all information concerning the business, properties
and personnel of the Business as the Purchaser may reasonably request. All such
information shall be kept confidential pursuant to the Confidentiality Agreement
dated July 21, 1998 between the Purchaser and the Seller (the "Confidentiality
Agreement"). In addition, the Seller shall use its reasonable efforts to cause
the Company's independent public accountants to make available or provide to the
Purchaser, its independent public accountants, its attorneys and its financing
sources and the independent public accountants and attorneys of the Purchaser's
financing sources, upon reasonable notice by the Purchaser, during regular
business hours, reasonable access to their personnel, work papers and such other
reasonably requested documentation relating to their work papers and to their
reports on the books and records of the Company; provided that if the Company's
independent public accountants shall so request, the Purchaser shall agree with
the Company's independent public accountants that it will not acquire any rights
as a result of such access that it would not otherwise have had, that the
Company's independent public accountants would not assume any duties or
obligations in connection with such access and that the Purchaser will indemnify
and hold harmless the Company's independent public accountants to the extent
such claim arises as a direct result of the Company's independent public
accountants'
22
<PAGE>
permitting the Purchaser and its representatives access to its working papers in
connection with the transaction contemplated by this Agreement.
Section 4.3. Reasonable Efforts.
------------------
(a) Upon the terms and subject to the conditions of this Agreement,
each of the parties hereto shall use its reasonable efforts to take, or cause to
be taken, all actions, and to do, or cause to be done, all things necessary,
proper or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement as promptly as
practicable including (i) the preparation and filing of all forms, registrations
and notices required to be filed to consummate the transactions contemplated by
this Agreement and the taking of such actions as are necessary to obtain any
requisite approvals, consents, orders, exemptions or waivers by any Governmental
Entity, including making the filings pursuant to the HSR Act within 10 business
days of the date hereof, and (ii) using its reasonable efforts to cause the
satisfaction of all conditions to Closing. Each party shall promptly consult
with the other with respect to, provide any necessary information with respect
to and provide the other (or its counsel) copies of, all filings made by such
party with any Governmental Entity or any other information supplied by such
party to a Governmental Entity in connection with this Agreement and the
transactions contemplated by this Agreement. If in connection with obtaining any
permit, authorization, certificate, waiver, license, consent, or approval of any
Governmental Entity necessary for the execution, delivery and performance of
this Agreement and the transactions contemplated hereby, any Governmental Entity
requires that the Specified Agreement (as hereinafter defined) be amended,
supplemented or terminated, the Purchaser and the Seller will terminate the
Specified Agreement.
(b) Each party hereto shall promptly inform the others of any
communication from any Government Entity regarding any of the transactions
contemplated by this Agreement. If any party or affiliate thereof receives a
request for additional information or documentary material from any such
Government Entity with respect to the transactions contemplated by this
Agreement, then such party will endeavor in good faith to make, or cause to be
made, as soon as reasonably practicable and after consultation with the other
party, an appropriate response in compliance with such request.
Section 4.4. Further Assurances; No Hindrances. From time to time after
---------------------------------
the Closing, without additional consideration, each of the Seller and the
Purchaser will execute and deliver such further instruments and take such other
action as may be necessary to make effective the transactions contemplated by
this Agreement. Upon the terms and subject to the conditions of this Agreement,
each of the parties hereto shall use its reasonable efforts (i) to cause all
conditions precedent to its obligations to consummate the transactions
contemplated hereby to be satisfied and (ii) not to take, or cause to be taken,
any actions to hinder or delay the consummation of the transactions contemplated
hereby.
Section 4.5. Employee Matters.
----------------
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(a) For a period of one year after the Closing Date, the Purchaser
shall, or shall cause the Company and its subsidiaries to, provide each current
and former employee of the Company and its subsidiaries with benefits (including
pension and welfare benefits) that are substantially comparable to the benefits
provided under the benefit plans applicable to such persons as in effect
immediately prior to the Closing. To the extent that service is relevant for
eligibility, vesting or benefit calculations or allowances (including
entitlement to vacation and sick days) under any benefit plan or arrangement
covering current or former employees of the Company or its subsidiaries, such
plan or arrangement shall credit such employees for service credited for
comparable purposes prior to the Closing Date, provided, however, that such
-------- -------
service shall not be recognized to the extent that such service would result in
a duplication of benefits. Subject to the foregoing, nothing in this Section
4.5(a) shall be construed to restrict the right of the Company or its
subsidiaries to terminate or modify such benefit plans.
(b) For a period of one year following the Closing Date, the
Purchaser shall ensure that each employee of the Company and its subsidiaries
shall continue to be paid base salary at no lower a rate than in effect
immediately prior to the Closing, provided, however, that the Purchaser may make
appropriate adjustments to such salary in individual cases based on merit and
performance in a manner consistent with the treatment of other similarly
situated employees of the Purchaser and its subsidiaries.
(c) For a period of one year following the Closing Date, the
Purchaser shall, or shall cause the Company or its subsidiaries to, maintain
severance policies, programs and arrangements that are no less favorable to the
employees than the policies, programs and arrangements in effect immediately
prior to the Closing.
(d) The Seller shall cause the trustee of the master trust (the
"Master Trust") in which the PCS Retirement Plan (the "Retirement Plan")
participates, as of the Master Trust's valuation date coincident with or next
following the Closing Date (the "Valuation Date"), to value, in a manner
consistent with the Master Trust's normal method of accounting for separate
plans, the Retirement Plan's allocable share of the assets of the Master Trust
(in the aggregate, the "Retirement Plan Asset Value"). As soon as practicable
after the determination of the Retirement Plan Asset Value, the Seller shall
cause the trustee of the Master Trust to transfer to a successor trustee
designated by Purchaser (and that is exempt from taxation pursuant to Section
501(a) of the Code) an amount in cash, or other assets of the Master Trust
allocated to the Retirement Plan reasonably acceptable to the Purchaser, equal
to the Retirement Plan Asset Value. The amount of such transfer shall be
increased, in the case of assets valued as of the Valuation Date and transferred
in cash, by earnings credited at the prime rate (as reported in The Wall Street
---------------
Journal on the Valuation Date) from the Valuation Date to the date of transfer.
- -------
Other assets of the Master Trust shall be transferred in kind, to the extent
acceptable to the Purchaser. The amount of such transfer shall be reduced by
benefit payments to employees or their beneficiaries made in accordance with the
provisions of the Retirement Plan during the interim period, and by
administrative expenses allocated to the Retirement Plan under the Master Trust,
during the interim period, on a basis consistent with past practice. The Seller
shall cause the Trustee of the separate master trust holding assets of TCS
Employee Savings Plan (the "Savings Plan") to transfer the
24
<PAGE>
account balances of all participants and beneficiaries of the Savings Plan to a
successor trust (and that is exempt from taxation pursuant to Section 501(a) of
the Code) at such time following the Closing Date as may be mutually agreed
between the Seller and the Purchaser, but in no event later than 60 days
following the Closing Date.
(e) If the Purchaser offers employment to employees of the Company
listed on a schedule previously delivered by the Seller to the Purchaser and
agreed to by the Purchaser, and such offer is accepted by one or more of such
employees and such employee is employed by the Company as of the Closing Date,
then the Purchaser and the Seller shall each be responsible for 50% of the cost
of the Seller employee benefits set forth on such schedule for such employees
who so accept, provided that in no event shall the Seller be responsible for an
amount with respect to any such employee in excess of 50% of the amount set
forth with respect to such employee on such schedule. The Purchaser shall notify
the Seller promptly following the acceptance by any such employee of any such
offer, with such notice specifying the precise dollar amount of the benefits
offered to and accepted by such employee, and the Purchaser shall as promptly as
practicable following dispatch of such notice (but in no event prior to the
Closing Date) pay to the Seller the amount contemplated in the immediately
preceding sentence. Notwithstanding the foregoing, with respect to several such
employees, it is contemplated that in lieu of offering the Seller employee
benefits set forth on such schedule, such employees will be offered employee
benefits by the Purchaser in the amounts set forth on such schedule. In such
event, the Seller will reimburse the Purchaser for up to 50% of the cost of such
benefits for such employees who accept such offer and are employed by the
Company as of the Closing Date, but in no event, in excess of 50% of the amount
of such benefit as set forth on such schedule. The Purchaser shall notify the
Seller promptly following any acceptance of such offer, with such notice
specifying the precise dollar amount of the benefits offered to such employee
and accepted by such employee, and the Seller shall as promptly as practicable
following receipt of such notice (but in no event prior to the Closing Date) pay
to the Purchaser the amount contemplated in the immediately preceding sentence.
(f) The Purchaser acknowledges that it values and desires to have
continued following the Closing Date the skills and services of the employees of
the Company and its subsidiaries, and currently intends to maintain all such
employees following the Closing Date; provided, however, that this Section 4.5
-------- -------
shall not be construed to create any right to employment or to limit the ability
of the Purchaser or any of its affiliates to terminate the employment of any of
such employees at any time.
Section 4.6. Transitional Matters.
--------------------
(a) Following the Closing Date, the Seller and its subsidiaries shall
provide, or cause to be provided, to the Purchaser, as requested by the
Purchaser, certain services which are currently provided by the Seller and its
subsidiaries to the Company, all as to be more fully set forth in a transitional
services agreement (the "Transitional Services Agreement") to be entered into by
the Seller and the Purchaser as of the Closing Date. The Transitional Services
Agreement will be in form and substance reasonably acceptable to the Purchaser
and the Seller, and will provide, in general, for the Seller to
25
<PAGE>
provide to the Company the same services as it provides to the Company and its
subsidiaries as of the Closing Date, at fully allocated cost, such services to
be provided for up to 12 months following the Closing Date and such services as
are set forth on Section 4.6(a)(i) of the Disclosure Schedule; provided, that
--------
after the Closing Date the Seller may upon four months notice terminate any
service (i) if the Seller is taking action to terminate such service for its
subsidiaries in general (and not the Company specifically) following the Closing
Date or (ii) set forth on Section 4.6(a)(ii) of the Disclosure Schedule.
(b) Notwithstanding anything herein to the contrary, the Purchaser is
not acquiring, directly or indirectly, any rights to the Seller's name or any
other corporate name of the Seller or its subsidiaries or any derivation thereof
(other than the Company and its subsidiaries) (collectively, the "Retained
Names"), provided that the Purchaser may use existing stationery, purchase order
forms or other similar paper goods or supplies which contain the Retained Names
for up to 90 days after the Closing Date, but shall thereafter cease any use of
the Retained Names; provided the Purchaser uses commercially reasonable efforts
to cease using such items as promptly as practicable following the Closing Date.
(c) Promptly following the date hereof, the Purchaser and the Seller
shall negotiate in good faith the Transitional Services Agreement.
(d) The parties acknowledge that they have as of the date hereof,
executed an agreement attached hereto as Schedule 4.6 (the "Specified
Agreement"). Following the date hereof, the Purchaser and the Seller shall enter
into those amendments, if any, to the Specified Agreement as shall be mutually
agreeable in good faith. Subject to the last sentence of Section 4.3(a) hereof,
the Specified Agreement shall be effective as of the Closing Date.
Section 4.7. Guaranties. The Purchaser shall use its reasonable efforts to
----------
cause the Seller and its affiliates to be released, as of the Closing, from all
guaranties, guarantee obligations and indemnities relating to obligations of the
Company and its subsidiaries or otherwise relating to or for the benefit of the
Business including pursuant to the guaranties, guarantee obligations and
indemnities set forth in Section 4.7 of the Disclosure Schedule. The Purchaser
shall indemnify the Seller and its affiliates for any costs, expenses or losses
incurred in respect of such guaranties, guarantee obligations and indemnities,
without regard to any limits on indemnification set forth in Article VII hereof.
Section 4.8. Access to Records. (a) The Purchaser agrees that it shall
-----------------
preserve and keep all books and records in respect of the Business that relate
to periods prior to the Closing, or to matters for which the Seller may be
required to provide indemnification hereunder, for a period of six years from
the Closing Date (or any longer period required by applicable law or until the
final resolution of any matters for which the Seller may be required to provide
indemnification hereunder), and shall give the Seller reasonable access to such
books and records during normal business hours.
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<PAGE>
(b) Subject to applicable law and any applicable contractual
restrictions, if following the Closing a party hereto (or its subsidiaries) is
in possession of any information relating to the Business which the other party
requires in order to prepare documents required to be filed with Governmental
Entities or its financial statements, such party shall furnish such information
to the other party as soon as reasonably practicable following a written request
for such information.
Section 4.9. 1998 Audited Financial Statements.
---------------------------------
(a) As promptly as practicable, but in no event later than January
31, 1999, the Seller shall cause the Company to prepare and deliver to the
Purchaser the 1998 Financial Statements. For purposes of this Agreement, the
term "1998 Financial Statements" shall mean the audited consolidated balance
sheet of the Company and its consolidated subsidiaries as of December 31, 1998
and the related consolidated statements of income, stockholders' equity and cash
flows for the fiscal year then ended (including the notes thereto), together
with the unqualified report thereon of Ernst & Young LLP ("Ernst & Young"). In
the event the Closing Date shall not have occurred by May 14, 1999, the Seller
shall cause the Company to prepare and deliver to the Purchaser an unaudited
consolidated balance sheet of the Company and its consolidated subsidiaries as
of March 31, 1999 and the related consolidated statements of income and
stockholders' equity for the fiscal quarter then ended (the "Quarterly Financial
Statements") and (if requested by Purchaser) an audited consolidated balance
sheet of the Company and its consolidated subsidiaries for the calendar year
ended December 31,1997 and the related consolidated statements of income,
stockholders' equity and cash flows for the year then ended (the "1997 Financial
Statements"). The Purchaser shall be responsible for all fees and expenses in
connection with the preparation of the 1998 Financial Statements, the Quarterly
Financial Statements and the 1997 Financial Statements, including the fees and
expenses of Ernst & Young. The 1997 Financial Statements, 1998 Financial
Statements and the Quarterly Financial Statements will present fairly in all
material respects the consolidated financial position as of December 31, 1997,
December 31, 1998 and March 31, 1999, respectively, and results of operations
for the years ended December 31, 1997 and December 31, 1998 and for the quarter
ended March 31, 1999, respectively, in each case of the Company and its
subsidiaries and will be in conformity with GAAP, except that the Quarterly
Financial Statements will not contain footnotes or year-end accruals.
(b) The Seller shall request that at the sole cost and expense of the
Purchaser, Ernst & Young provide and allow the filing of such consents and other
documentation as may be required or customary for the inclusion of any financial
statements or information of the Company prepared either at the request of the
Purchaser or the Seller so as to allow for the use of such financial statements
or information in public or private financing documents or other documents filed
with the Securities and Exchange Commission, whether before or after the
Closing. In addition, the Seller and the Company shall request that at the sole
cost and expense of the Purchaser Ernst & Young provide "comfort" letters and
updates thereof addressed to each of the underwriters in any underwritten
offering, such letters to be in customary form and covering the matters of the
type customarily covered in "comfort" letters in connection
27
<PAGE>
with the offerings of securities and such other matters are reasonably requested
by the underwriters.
Section 4.10. Intercompany Notes. Pursuant to the Seller's cash management
------------------
program, the Company or its subsidiaries may from time to time make loans to the
Seller or the Seller may from time to time make loans to the Company or its
subsidiaries. These loans are evidenced by intercompany notes (the "Intercompany
Notes"). Subject to any adjustments to be made pursuant to Section 1.6 hereof,
Intercompany Notes shall be paid in full at the Closing or as promptly as
practicable thereafter but in no event later than 10 business days after the
Closing Date.
Section 4.11. Notice of Possible Breach. Prior to the Closing, if any
-------------------------
party to this Agreement shall become aware of any fact, event or circumstance
that would constitute a breach of this Agreement by the other party or that
would result in the failure to satisfy any condition set forth in Article V,
such party shall promptly notify the other party thereof in writing. The parties
shall thereupon provide reasonable cooperation to cure or remedy such breaches
or satisfy such closing conditions.
Section 4.12. Supplemental Disclosure. From time to time prior to the
-----------------------
Closing, the Seller will, and will cause the Company to, promptly following its
becoming aware thereof supplement or amend the Disclosure Schedule with respect
to any matter hereafter arising or discovered which, if known, existing or
occurring at the date of this Agreement, would have been required to be set
forth or described in the Disclosure Schedule. Any supplement or amendment of
the Disclosure Schedule made pursuant to this Section 4.12 shall not be deemed
to cure any breach or inaccuracy of any representation or warranty made in this
Agreement.
Section 4.13. Notices of Certain Events. The Seller shall, and shall cause
-------------------------
the Company to, notify the Purchaser in writing and the Purchaser shall notify
the Seller in writing of:
(a) any notice or other communication received by the Seller, the
Company or the Purchaser, as the case may be, from any person alleging that the
consent of such person is or may be required in connection with the transactions
contemplated by this Agreement;
(b) any notice or other communication from any Governmental Entity
received by the Seller, the Company or the Purchaser, as the case may be, that
relates to the transactions contemplated by this Agreement or that is materially
significant to the Business; and
(c) any actions, suits, claims, investigations or proceedings
commenced or, to the Seller's or the Purchaser's, as the case may be, knowledge
threatened against, relating to or involving or otherwise affecting the Seller,
the Company or the Purchaser, as the case may be, that relate to the
consummation of the transactions contemplated by this Agreement.
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<PAGE>
The Purchaser shall keep the Seller reasonably informed, at the Seller's
request, of the progress of its financing activities between the date of this
Agreement and the Closing Date.
Section 4.14. Confidentiality. From the Closing Date until the fifth
---------------
anniversary of the Closing Date, the Seller will not, and will not permit its
subsidiaries or any of their respective affiliates to, disclose to any person
without the prior written consent of the Purchaser any confidential or non-
public information relating to or concerning the Business (the "Confidential
Information"), unless (i) disclosure is required to be made under applicable law
or (ii) such information is or becomes generally available (a) to the public
other than as a result of disclosure by the Seller in violation of this Section
4.14 or (b) to the Seller on a non-confidential basis from a source, other than
the Company or the Purchaser, which to the knowledge of the Seller, is not
prohibited from disclosing the confidential information by contractual, legal or
fiduciary obligation. The Seller shall, and shall cause the Company to, notify
the Purchaser promptly after receipt by the Seller or the Company of or any
request for such information.
Section 4.15. Insurance. The Seller shall cause the Company to keep, or
---------
cause to be kept, all material insurance policies maintained by the Company for
the benefit of the Business, or suitable replacements therefor (which may
include policies containing terms equal or more favorable than the policies that
they are replacing), in full force and effect up to the Closing. To the extent
the Seller or any of its subsidiaries receives, whether before or after the
Closing Date, any proceeds from any insurance policy with respect to the
Business, the Seller shall or shall cause its subsidiary to pay over to the
Company such proceeds as promptly as practicable.
Section 4.16. Non-Solicitation of Employees.
-----------------------------
(a) Except with respect to those people set forth on Section 4.16 of
the Disclosure Schedule, from and after the date hereof, the Seller shall not,
without the prior written approval of the Purchaser, for a period of two years
from the Closing Date, directly or indirectly, solicit, encourage, entice or
induce any person who is an employee of the Company or any of its subsidiaries
at the date hereof or who becomes an employee of the Company or any of its
subsidiaries after the date hereof but prior to the Closing Date, to terminate
his or her employment with the Company or any of its subsidiaries, or hire or
employ any person who is an employee of the Company or any of its subsidiaries
at the date hereof or who becomes an employee of the Company or any of its
subsidiaries after the date hereof but prior to the Closing Date; provided that
the foregoing shall not apply to persons who approach the Seller or any of its
subsidiaries for the purposes of employment or who are hired as a result of the
use of an independent employment agency where contact between such person and
the independent employment agency was initiated by such person or as a result of
the use of a general solicitation (such as an advertisement) not specifically
directed to employees of the Company.
(b) If it is ever held that the restriction placed on any party to
this Agreement by this Section 4.16 is too onerous and is not necessary for the
protection of the other party or parties hereto, each party to this Agreement
agrees that any court of
29
<PAGE>
competent jurisdiction may impose lesser restrictions which such court may
consider to be necessary or appropriate to properly protect the other party or
parties hereto.
Section 4.17. Non-Competition. Except as set forth in Schedule 4.17 to the
---------------
Disclosure Schedule, without the prior written consent of the Purchaser, neither
the Seller nor any of its subsidiaries shall, except in the case of a Permitted
Investment (as hereinafter defined), directly or indirectly, engage in or
participate in (or become a partner, co-venturer or shareholder in or otherwise
participate in the management or operation of any venture or enterprise of any
kind that engages in) (i) the business of providing pharmacy benefit management
services as the Company conducts such business as of the Closing Date for a
period of five years following the Closing Date or (ii) the business of
providing mail order pharmacy services as the Company conducts such business as
of the Closing Date for a period of three years following the Closing Date (the
"Restricted Business"); provided that the Seller or any of its subsidiaries may,
directly or indirectly, (x) own in the aggregate up to 5% of any outstanding
class of equity securities of any entity engaged in the Restricted Business or
any portion thereof, the equity securities of which are traded on a national or
regional stock exchange, or in the national o ver-the-counter market, or (y) own
or acquire ownership of any entity engaged in the Restricted Business or portion
thereof, provided that the Seller divests itself of the portion of such business
engaged in the Restricted Business within one year following the time of such
acquisition. In the event the Seller must divest itself of a Restricted Business
pursuant to clause (y) of the immediately preceding sentence, the Seller shall,
prior to offering such Restricted Business to any other party, offer the
Purchaser the right to purchase such Restricted Business, and negotiate in good
faith with the Purchaser for not less than 30 days with respect to the purchase
of such Restricted Business. As used herein, a "Permitted Investment" shall mean
(a) the Seller's merger or combination with or acquisition of a person (or all
or any portion of its equity interests) or business (the "Acquired Business")
engaged in the Restricted Business, if that portion of the Acquired Business
engaged in the Restricted Business generated less than $10 million in net income
or accounted for less than 10% of the net income, revenues or assets of the
Acquired Business during the most recently completed fiscal year preceding such
merger, combination or acquisition. If it is ever held that the restriction
placed on any party to this Agreement by this Section 4.17 is too onerous and is
not necessary for the protection of the other party or parties hereto, each
party to this Agreement agrees that any court of competent jurisdiction may
impose lesser restrictions which such court may consider to be necessary or
appropriate to properly protect the other party or parties hereto.
Section 4.18. McKesson Agreements. In the event that the Purchaser would
-------------------
suffer Purchaser Damages (as hereinafter defined) for which the Seller has a
right to indemnification by McKesson pursuant to the McKesson Agreements, the
Seller will take such action as may be reasonably requested by the Purchaser and
is permitted by the applicable McKesson Agreements to enforce the Seller's
rights against McKesson and make the benefits of such indemnity available to the
Purchaser.
Section 4.19. Class B Stock Redemption. At or prior to the date hereof,
------------------------
the Seller shall make a capital contribution to the Company in an amount equal
to the amount
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<PAGE>
paid or payable by the Company to redeem and pay a special dividend on, and all
other amounts due to the holder in connection with the redemption of, all
outstanding shares of Class B Stock and the Company has no obligation to the
Seller in connection therewith or as a result thereof.
Section 4.20. Designated Agreements. The Seller shall cause that certain
---------------------
TCP Agreement with Re:Solve500, dated January 1, 1997, between Eli Lilly and
Company and PCS Health Systems, Inc. and that certain Business Agreement, dated
June 21, 1996, between PCS Health Systems, Inc. and Eli Lilly and Company (the
"Designated Agreements") to remain in full force and effect through and until
the Closing Date to the extent it is lawfully permitted to do so. The Purchaser
hereby consents to the entering into by the Company of the amendments to the
Designated Agreements contemplated by a schedule delivered by the Seller to the
Purchaser and agreed to by the Purchaser (the "Designated Amendments"). If the
Designated Amendments have not been effected prior to the Closing Date, or if
the Designated Agreements are not in full force and effect as of the Closing
Date, the Purchaser and the Seller shall cause agreements substantially
identical to the Designated Agreements, as amended by the Designated Amendments,
to be entered into as of the Closing Date to the extent they are lawfully
permitted to do so.
ARTICLE V
CONDITIONS
Section 5.1. Conditions to Each Party's Obligations. The respective
--------------------------------------
obligation of each party to effect the transactions contemplated by this
Agreement shall be subject to the satisfaction of each of the following
conditions, unless waived in writing by each of the parties hereto:
(a) No statute, rule, regulation, order, decree, temporary
restraining order or injunction shall have been enacted, entered, promulgated or
enforced by a United States Governmental Entity which prohibits or materially
restricts the consummation of the transactions contemplated by this Agreement
and shall be in effect.
(b) Any applicable waiting period under the HSR Act with respect to
the transactions contemplated by this Agreement shall have expired or been
terminated and all other material authorizations, consents, approvals, or
clearances of any Governmental Entity necessary for the consummation of the
transactions contemplated by this Agreement shall have been obtained.
Section 5.2. Conditions to Obligations of the Purchaser. The obligation
------------------------------------------
of the Purchaser to effect the transactions contemplated by this Agreement is
further subject to the satisfaction of each of the following conditions, unless
waived in writing by the Purchaser:
(a) The representations and warranties of the Seller contained in
this Agreement shall have been true and correct when made and shall be true and
correct as of the Closing, with the same force and effect as if made at the
Closing, except (x) that representations and warranties which are made as of a
specific date need only be true as
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<PAGE>
of such date or (y) where the failure of such representations and warranties to
be true and correct would not have a Material Adverse Effect (provided, however,
-------- -------
that if any portion of any representation or warranty is already qualified by
materiality, Material Adverse Effect or similar qualifiers, for purposes of
determining whether this Section 5.2(a) has been satisfied with respect to such
portion of such representation or warranty, such portion of such representation
or warranty as so qualified must be true and correct in all respects and the
representations and warranties contained in Sections 2.1, 2.2(a), 2.2(b) (except
the last sentence thereof), 2.2(c), 2.3(b)(i), the first sentence of 2.13(c) and
2.19 shall be true and correct in all respects).
(b) The Seller shall have performed and complied in all material
respects with all covenants and agreements required to be performed or complied
with by it under this Agreement at or prior to the Closing.
(c) The Purchaser shall have received a certificate of an executive
officer of the Seller to the effect that the conditions set forth in Sections
5.2(a) and 5.2(b) above have been satisfied.
(d) The Purchaser shall have received the FIRPTA Certificate from the
Seller, provided, however, that if the Seller fails to deliver such certificate,
the Closing shall nevertheless take place, but the Purchaser shall withhold the
amount of Taxes required to be withheld in the Purchaser's good faith judgment
pursuant to Section 1445 of the Code.
Section 5.3. Conditions to Obligations of the Seller. The obligation of
---------------------------------------
the Seller to effect the transactions contemplated by this Agreement are further
subject to the satisfaction of each of the following conditions, unless waived
in writing by the Seller:
(a) The representations and warranties of the Purchaser in this
Agreement shall be true and correct in all material respects as of the date
hereof and at and as of the Closing with the same effect as though such
representations and warranties had been made at and as of such time, other than
representations and warranties that speak as of a specific date or time (which
need only be true and correct in all material respects as of such date or time).
(b) The Purchaser shall have performed and complied in all material
respects with all covenants and agreements required to be performed or complied
with by it under this Agreement at or prior to the Closing.
(c) The Seller shall have received from an executive officer of the
Purchaser a certificate, to the effect that the conditions set forth in Sections
5.3(a) and 5.3(b) above have been satisfied.
ARTICLE VI
TERMINATION AND AMENDMENT
Section 6.1. Termination. This Agreement may be terminated at any time
-----------
prior to the Closing by:
32
<PAGE>
(a) Mutual written consent of the Seller and the Purchaser.
(b) Either the Seller or the Purchaser if the Closing shall not have
occurred on or before July 31, 1999 (unless the failure to consummate the
Closing by such date shall be due to the action or failure to act of the party
seeking to terminate this Agreement).
(c) Either the Seller or the Purchaser if any United States court of
competent jurisdiction or other competent United States Governmental Entity
shall have issued an order, decree or injunction or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree or injunction or other
action shall have become final and nonappealable.
(d) Either the Purchaser or the Seller if there shall have been a
material breach by the other of any of its representations, warranties,
covenants or agreements contained in this Agreement, which if not cured would
cause the conditions set forth in Section 5.2(a), 5.2(b) or 5.2(c) or Section
5.3, as the case may be, not to be satisfied, provided, however, that as a
condition to the right of the party to elect to terminate this Agreement
pursuant to the immediately preceding clause, such party shall first provide 30
days prior notice to the other party specifying in reasonable detail the nature
of the condition that such party has concluded will not be satisfied, and the
other party shall be entitled during such 30-day period to commence any actions
it may elect consistent with the terms of this Agreement to provide reasonable
assurance to the first party that such condition will be satisfied prior to July
31, 1999 and provided, further, that if such condition can be satisfied by the
other party through the exercise of its best efforts and for so long as that
party continues to use such best efforts, the first party may not terminate this
Agreement under this Section 6.1(d) prior to July 31, 1999.
Section 6.2. Effect of Termination.
---------------------
(a) In the event of the termination of this Agreement pursuant to
Section 6.1 hereof, this Agreement shall forthwith become void and have no
effect, without any liability on the part of any party hereto or its affiliates,
directors, officers or stockholders to any other party to this Agreement, except
that the provisions of Sections 6.2(b), 9.7 and 9.11 and the Confidentiality
Agreement shall remain in effect notwithstanding such termination. Nothing
contained in this Section 6.2 shall relieve any party from liability for any
breach of this Agreement, except as set forth in Section 6.2(b) hereof.
(b) In the event that this Agreement is terminated, other than as a
result of the failure to satisfy the conditions set forth in Section 5.2(a),
5.2(b) or 5.2(c), the Purchaser shall pay to the Seller, within one business day
of such termination, a termination fee equal to $50 million (the "Termination
Fee") in immediately available funds; provided, however, that the Purchaser
-------- -------
shall not be obligated to pay the Termination Fee if this Agreement is
terminated pursuant to Section 6.1(b) and:
33
<PAGE>
(A) any Government Entity has initiated and is pursuing proceedings to
prohibit or materially restrict consummation of the transactions
contemplated by this Agreement unless the Purchaser or the Company
agrees to take one or more of the following actions:
(x) the Purchaser agrees to divest or hold separate any of its retail
pharmacy stores,
(y) the Purchaser agrees to take or commit to take any action that
would materially affect its ability to conduct its business
(other than its pharmacy benefit management business) in the
manner in which the Purchaser's business is being conducted as of
the date hereof, or
(z) the Purchaser or the Company, as the case may be, agrees to take
or commit to take any action that would materially and adversely
affect the ability of the Purchaser to conduct the Business in
the manner in which the Business is being conducted as of the
date hereof; or
(B) a court of competent jurisdiction has entered an order or decree
requiring one or more of the actions set forth above in Section
6.2(b)(ii)(A)(x), (y) and (z).
The Termination Fee payable pursuant to this Section 6.2(b) shall be the
Seller's sole and exclusive remedy, and the Purchaser shall have no liability
whatsoever if this Agreement is terminated under the circumstances provided in
this Section 6.2(b) (including, without limitation, liability for actual,
direct, indirect, consequential (including lost profits), punitive, exemplary or
special damages), other than the obligation to pay any Termination Fee required
to be paid pursuant to this Section 6.2(b); provided, however, that if the
-------- -------
Purchaser fails to pay the fee contemplated by this Section 6.2(b), the
prevailing party in any action, including the filing of any lawsuit or other
legal action to collect such payment shall receive from the non-prevailing party
in such action its costs and expenses (including legal fees and expenses) in
connection with such action. In the event that the Purchaser fails to pay such
fee and the Seller has prevailed in any such legal action to collect such
payment the Purchaser shall pay interest on any unpaid amount, at the rate
published from time to time by The Wall Street Journal as the prime rate, from
-----------------------
the date such amount was required to be paid until the date such payment is
made. The parties to this Agreement agree that the agreement contained in this
Section 6.2(b) is an integral part of the transactions contemplated by this
Agreement, that any such fee constitutes liquidated damages and not a penalty
and that the Seller is relinquishing any rights it may otherwise have to
specific performance of the transactions herein contemplated in the event this
Agreement is terminated prior to the Closing (other than obligations in respect
thereof which pursuant to the terms hereof are to survive the termination
hereof).
Section 6.3. Amendment. This Agreement may be amended or modified at any
---------
time by the parties hereto, but only by an instrument in writing signed on
behalf of each of the parties hereto.
34
<PAGE>
Section 6.4. Extension; Waiver. At any time prior to the Closing, the
-----------------
parties hereto may (i) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (ii) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant hereto and (iii) waive compliance with any of the
agreements or conditions contained herein. Any agreement on the part of a party
hereto to any such extension or waiver shall be valid only if set forth in a
written instrument signed on behalf of such party. Neither the failure or the
delay on the part of any party to exercise any right, remedy, power or privilege
under this Agreement shall operate as a waiver thereof.
ARTICLE VII
SURVIVAL; INDEMNIFICATION
Section 7.1. Survival Periods. All representations and warranties of the
----------------
parties contained in this Agreement, the Disclosure Schedules or any certificate
delivered in connection herewith shall survive the Closing and continue for a
period of 18 months following the Closing Date and, if notice of a claim
(setting forth in reasonable detail the facts, circumstances and basis of the
claim) is provided by such date, such claim shall survive until the final
resolution thereof, provided that the representations and warranties in Sections
2.1, 2.2, 2.19, and 3.1 shall survive without limit and without regard to any
limitation set forth in Section 7.2; and provided, further, that the
-------- -------
representations set forth in Sections 2.9, 2.11 and 2.12 shall survive until
ninety days following the expiration of the applicable statute of limitations
including any extensions thereof. In addition, the right to indemnification,
payment of damages or other remedy shall survive and shall be unaffected by (and
shall not be deemed waived by) any investigation, audit, appraisal or inspection
(actual or constructive) at any time made by or on behalf of (a) the Purchaser
in the case of the Seller's indemnification of the Purchaser, and (b) the
Seller, in the case of the Purchaser's indemnification of the Seller.
Section 7.2. Indemnification. Subject to the other provisions of this
---------------
Article VII, from and after the Closing:
(a) The Seller shall indemnify, defend and hold harmless the
Purchaser and its representatives, officers, directors, employees, agents,
advisors and affiliates (collectively, the "Purchaser Indemnitees") from and
against any judgments, fines, penalties, losses, claims, liabilities, damages,
demands, complaints, actions or causes of action, suits, proceedings,
investigations, arbitrations, assessments, and any interest thereon and any
costs and expenses (including reasonable attorneys' fees in connection
therewith), net of any insurance proceeds and, as provided in Section 7.5, Tax
Benefits (such net amounts being referred to herein as, "Purchaser Damages")
that arise out of any breach or inaccuracy of any representation or warranty or
any breach of any covenant or agreement made by the Seller in this Agreement or
in any certificate furnished to the Purchaser in accordance with this Agreement
or in connection with the transactions contemplated by this Agreement, provided,
--------
however, with respect to a breach under Section 2.12 hereof, Purchaser Damages
- -------
shall not include any Purchaser Damages which result from the Company or any of
its subsidiaries not having tax attributes (including basis in assets, net
operating losses or credits) which are reflected on the Tax Returns of
35
<PAGE>
the Company or its subsidiaries. For purposes of determining whether any breach
has occurred with respect to or in connection with a claim for indemnification
or measuring Purchaser Damages hereunder, any requirement or qualification in
any representation, warranty, covenant or agreement of the Seller contained in
this Agreement that an event or fact be material or have a Material Adverse
Effect or similar language, shall be ignored and all representations,
warranties, covenants and agreements shall be deemed to have been made without
any qualification by materiality, Material Adverse Effect, or similar language.
(b) Notwithstanding any provision to the contrary contained in this
Section 7.2, the Seller shall not be obligated to indemnify the Purchaser and
its representatives for any Purchaser Damages relating to the breach of a
representation or warranty pursuant to Section 7.2(a) (i) as to any individual
item of Purchaser Damages or related series of items of Purchaser Damages, to
the extent such Purchaser Damages are less than $25,000 and (ii) unless and
until the dollar amount of all Purchaser Damages (by reason of or resulting from
the matters set forth in Section 7.2(a) (other than Purchaser Damages by reason
of or resulting from breaches of representations or warranties contained in
Sections 2.1, 2.2, 2.3 and 2.19 hereof as to which the Purchaser Basket (as
defined below) will not apply and other than Purchaser Damages excluded pursuant
to clause (i) above) shall equal in the aggregate $40 million (the "Purchaser
Basket") and then only for the excess over such amount.
(c) The Purchaser shall indemnify, defend and hold harmless the
Seller and its representatives, officers, directors, employees, agents, advisors
and affiliates (collectively, the "Seller Indemnitees") from and against any
judgments, fines, penalties, losses, claims, liabilities, damages, demands,
complaints, actions or causes of action, suits, proceedings, investigations,
arbitrations, assessments, and any interest thereon and any costs and expenses
(including reasonable attorneys' fees in connection herewith) net of any
insurance proceeds and, as provided in Section 7.5, Tax Benefits (such net
amounts being referred to herein as "Seller Damages") that arise out of any
breach or inaccuracy of any representation or warranty or any breach of any
covenant or agreement made by the Purchaser in this Agreement or in any
certificate furnished to the Seller in accordance with this Agreement or in
connection with the transactions contemplated by this Agreement or the conduct
of the Business following the Closing Date (other than as the result of a breach
of any covenant, agreement, representation or warranty to which the Seller is
required to provide indemnification pursuant to this Section 7.2). For purposes
of determining whether any breach has occurred with respect to or in connection
with a claim for indemnification or measuring Seller Damages hereunder, any
requirement or qualification in any representation, warranty, covenant or
agreement of the Purchaser contained in this Agreement that an event or fact be
material or have a Material Adverse Effect or similar language, shall be ignored
and all representations, warranties, covenants and agreements shall be deemed to
have been made without any qualification by materiality, Material Adverse
Effect, or similar language.
(d) Notwithstanding any provision to the contrary contained in this
Agreement, the Purchaser shall not be obligated to indemnify the Seller and its
representatives for any Seller Damages relating to the breach of a
representation or
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warranty pursuant to Section 7.2(c) (i) as to any individual item of Seller
Damages or related series of items of Seller Damages, to the extent such Seller
Damages are less than $25,000 and (ii) unless and until the dollar amount of all
Seller Damages (by reason of or resulting from the matters set forth in Section
7.2(c) (other than Seller Damages by reason of or resulting from breaches of
representations or warranties contained in Sections 3.1 and 3.2 hereof, as to
which the Seller Basket (as defined below) will not apply) and other than Seller
Damages excluded pursuant to clause (i) above) shall equal in the aggregate $40
million (the "Seller Basket") and then only for the excess over such amount.
(e) Subject to Section 7.6 but otherwise notwithstanding any
provision to the contrary contained in this Agreement, the maximum aggregate
amount of Purchaser Damages or Seller Damages, as the case may be, relating to
breaches of representations or warranties payable pursuant to Section 7.2(a) by
the Purchaser or Section 7.2(c) by the Seller, as the case may be, shall not
exceed $1 billion. No party shall be liable for any consequential, incidental or
punitive damages.
Section 7.3. Claims.
------
(a) The persons to whom indemnification is provided hereunder are
referred to herein as the "Indemnified Parties" and the persons providing
indemnification are referred to as the "Indemnifying Parties."
(b) If an Indemnified Party intends to seek indemnification pursuant
to this Article VII, such Indemnified Party shall promptly notify the
Indemnifying Party in writing of such claim. The Indemnified Party will provide
the Indemnifying Party with prompt written notice of any third party claim in
respect of which indemnification is sought. The failure to provide either such
notice will not affect any rights hereunder except to the extent the
Indemnifying Party is materially prejudiced thereby. Any such notice shall set
forth in reasonable detail the facts, circumstances and basis of the claim.
(c) If such claim involves a claim by a third party against the
Indemnified Party, the Indemnifying Party may assume, through counsel of its own
choosing (so long as reasonably acceptable to the Indemnified Party) and at its
own expense, the defense thereof, and the Indemnified Party shall cooperate with
it in connection therewith (including by furnishing such information as the
Indemnifying Party may reasonably request), provided, that the Indemnified Party
may participate in such defense through counsel chosen by it, at its own
expense. So long as the Indemnifying Party is contesting any such claim in good
faith, the Indemnified Party shall not pay or settle, or admit any liability
with respect to, any such claim without the Indemnifying Party's consent. The
Indemnifying Party will not without the Indemnified Party's prior written
consent settle or compromise any claim or consent to entry of any judgment which
does not include as an unconditional term thereof the giving by the claimant or
the plaintiff to the Indemnified Party of a release from all liability in
respect of such claim. The Indemnifying Party shall not, without the prior
written consent of the Indemnified Party (which consent shall not be
unreasonably withheld), take any measure or step in connection with any
settlement or compromise that imposes an unreasonable material
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burden or encumbrance upon the operation or conduct of the Business. If the
Indemnifying Party is not contesting such claim in good faith, then the
Indemnified Party may, upon at least 10 days' notice to the Indemnifying Party
(unless the Indemnifying Party shall assume such settlement or defense within
such 10 day period), conduct and control, through counsel of its own choosing
and at the expense of the Indemnifying Party, the settlement or defense thereof,
and the Indemnifying Party shall cooperate with it in connection therewith. The
failure of the Indemnified Party to participate in, conduct or control such
defense shall not relieve the Indemnifying Party of any obligation it may have
hereunder.
Section 7.4. Exclusive Remedy. Following the Closing, the provisions of
----------------
this Article VII shall be the exclusive remedy for the matters covered hereby,
provided that nothing herein shall relieve any party from any liability for
fraud. The Purchaser and the Seller agree that no party is entitled to be paid
twice for the same matter or obligation notwithstanding any other provision in
this Agreement.
Section 7.5. Tax Adjustment. Any indemnity payment made pursuant to this
--------------
Article VII and Article VIII shall be decreased by the amount, if any, of the
Indemnified Party's Tax Benefit (as defined below) actually realized, and
increased by the amount, if any, of the Indemnified Party's Tax Cost (as defined
below) actually realized. The amount of the Indemnified Party's "Tax Benefit"
shall be equal to the amount of the reduction in Taxes realized as a result of
the deduction resulting from the indemnified loss. The amount of the Indemnified
Party's "Tax Cost" shall be equal to the amount of the increase in Taxes
realized as a result of any income resulting from the receipt of the indemnity
payment. Notwithstanding the foregoing, if such Tax Benefit or Tax Cost
increases or decreases an operating loss of the Indemnified Party, the
Indemnified Party will not be treated as having received a Tax Benefit or
incurred a Tax Cost until the time such operating loss has been applied against
income for Tax purposes. Moreover, if the Indemnified Party's Tax position with
respect to the payment of a loss or the receipt of an indemnity payment is
ultimately disallowed by any Tax Authority (as finally determined), the
Indemnified Party shall be entitled to an additional indemnity payment or will
refund a portion of the indemnity payment to reflect this final determination.
To the extent permitted by law, the parties will treat all indemnity payments
under this Agreement as adjustments to the purchase price and liabilities for
indemnified losses as having been in existence as of the Closing Date.
Section 7.6. Special Indemnities. Without regard to any limitation set
-------------------
forth in this Article VII, the Seller agrees to indemnify, defend, and hold
harmless the Purchaser Indemnitees from, and against all Purchaser Damages
asserted against, imposed upon or incurred by the Purchaser Indemnities relating
directly or indirectly to (i) the Class B Stock or (ii) the 4 1/2% Exchangeable
Subordinated Debentures Due 2004 of McKesson Corporation ("Armor All Bonds")
issued pursuant to an Indenture dated as of March 24, 1994 between McKesson
Corporation and the First National Bank of Chicago, as Trustee (the "Armor All
Indenture"), so long as the Company is in compliance with its obligations to
perform and abide by all of its covenants, obligations and agreements under the
Armor All Indenture other than the obligation to pay when due any principal,
interest or other amounts owing thereunder or under the Armor All Bonds.
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ARTICLE VIII
TAX MATTERS
The following provisions shall govern the allocation of responsibility as
between the Purchaser and the Seller for certain Tax matters following the
Closing Date.
Section 8.1. Seller Tax Indemnity.
--------------------
(a) The Seller shall be solely responsible for, and shall indemnify
the Purchaser and the Company and hold them harmless from and against, any
liability for (1) Taxes imposed on or attributable to the Company or any of its
subsidiaries for Tax Periods ending on or before the later of (i) October 15,
1997 or (ii) the last day the Company and its subsidiaries were members of the
Seller's consolidated group (the "Deconsolidation Date"); (2) all Taxes imposed
on the Company or any of its subsidiaries under Treasury Regulation Section
1.1502-6 (or any comparable provision of state, local or foreign law) relating
to or attributable to any Tax Period or portion thereof ending on or before the
Deconsolidation Date; (3) all Taxes imposed on or attributable to the Company or
any of its subsidiaries for any Tax Period beginning on or before and ending
after the Deconsolidation Date (a "Straddle Period"), but only with respect to
the portion of the Straddle Period ending on the close of the Deconsolidation
Date and calculated in the manner set forth in Section 8.2(c).
(b) Any indemnification payable under this Section 8.1 shall be
subject to Section 7.5 of this Agreement..
Section 8.2. Allocation of Taxes and Preparation of Tax Returns.
--------------------------------------------------
(a) Tax Periods Ending on or before the Closing Date. The Seller will
cause the Company to file (or cause to be filed) all Tax Returns required to be
filed of the Company and each of its subsidiaries for Tax Periods ending on or
before the Closing Date, provided the date that such Tax Returns are required to
be filed occurs prior to the Closing Date. For Tax Periods ending on or prior to
the Deconsolidation Date, the Seller may, to the extent permissible or required
under applicable Law, include (or cause to be included) the results of
operations of the Company and any of its subsidiaries in the Seller's
consolidated and other combined Tax Returns filed by the Seller. To the extent
not already paid, the Seller will pay all Taxes due of the Company or any of its
subsidiaries with respect to Tax Returns attributable to Tax Periods ending on
or before the Deconsolidation Date. The Seller will prepare (or cause to be
prepared) such Tax Returns in a manner that is consistent with practices
followed in prior Tax Periods with respect to similar Tax Returns, except for
changes required by Law. To the extent not already filed, for any material Tax
Return of the Company or any of its subsidiaries for Tax Periods after the
Deconsolidation Date (which are the responsibility of the Seller), the Seller
shall consult (or shall cause the Company or any of its subsidiaries to consult)
with the Purchaser with respect to any such Tax Returns, shall provide (or shall
cause the Company or its subsidiaries to provide) copies of such Tax Returns to
the Purchaser, and shall not file (or cause the Company or any of its
subsidiaries to file) such Tax Returns without the consent of the Purchaser.
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(b) (i) Tax Periods Beginning Before and Ending after the Closing
Date. The Purchaser will file (or cause to be filed) any Tax Returns of the
Company for Tax Periods which begin before the Closing Date and end after the
Closing Date. (ii) Provided the Seller informs the Company and provides
sufficient information with respect to the exercise by Company employees of
options to purchase Seller's stock, the Purchaser shall claim or cause to be
claimed on any Tax Returns any and all deductions to which the Company is
entitled under applicable Law for compensation attributable to the exercise by
Company employees of options to purchase Seller stock (the "Option Exercise
Deductions"). Notwithstanding any provision to the contrary in this Agreement,
to the extent that the Purchaser realizes a tax benefit attributable to any
Option Exercise Deductions, the Purchaser shall pay to the Seller an amount
equal to such tax benefit within 60 days following the filing of the Tax Return
upon which such tax benefit is reported. For purposes of this Section 8.2(b),
(A) the amount of the tax benefit shall be equal to the actual reduction, if
any, of Purchaser's Taxes attributable to the Option Exercise Deductions that is
reflected on the Tax Return which such tax benefit is reported and (B) where the
Seller has other losses, deductions or similar items available to it, the Option
Exercise Deductions shall be treated as the last items utilized to produce a tax
benefit. In the event that any such Option Exercise Deductions are ultimately
disallowed under applicable Tax Law, the Seller shall reimburse the Purchaser in
the amount of the tax benefit thereby disallowed, promptly after receiving from
the Purchaser notice of such final disallowance. The Seller shall be solely
responsible for withholding tax with respect to the exercise by Company
employees of options to purchase Seller's stock.
(c) For purposes of determining the amount of Taxes which relate to a
Straddle Period, the Deconsolidation Date shall be treated as the last day of a
Tax Period and the portion of any such Tax that is allocable to the Tax Period
that is so deemed to end on and include the Deconsolidation Date: (i) in the
case of Taxes that are either (x) based upon or related to income or receipts or
(y) imposed in connection with any sale or other transfer or assignment of
property (whether real or personal, tangible or intangible), shall be deemed
equal to the amount which would be payable if the period for which such Tax is
assessed ended on and included the Deconsolidation Date, and (ii) in the cases
of Taxes other than Taxes described in clause (i) hereof, shall be computed on a
per diem basis.
Section 8.3. Retention of Records. Each of the Purchaser and the Seller
--------------------
shall retain all Tax Records for all open periods or portions thereof ending on
or before the Closing Date. In particular, the Seller and the Purchaser shall
retain (or cause to be retained) all Tax Returns, schedules and work papers, and
all material records and other documents relating thereto with respect to the
operations of the Company or any of its subsidiaries prior to the Closing Date,
until six months following the expiration of the statute of limitations (and any
extensions thereof) of the respective Tax Periods. "Tax Records" means any Tax
Return, Tax Return workpapers, documentation relating to any Audit, and any
other books of account or records (whether on paper, computer disk or any other
medium) required to be maintained under the applicable Tax Law or under any
record retention agreement with any Tax Authority.
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Section 8.4. Notice; Cooperation. Each party (the Purchaser and the
-------------------
Seller) shall promptly provide written notice to the other party upon receiving
notice from a Tax Authority that additional Tax liabilities may exist, or that
any Tax Records have been requested by any Tax Authority. The Purchaser and the
Seller covenant and agree that subsequent to the Closing, upon reasonable notice
and during normal business hours, they and their affiliates will (i) give the
other party and its representatives information, books and records relevant to
the Company or any of its subsidiaries, to the extent necessary to enable the
other party to prepare its Tax Returns, and (ii) provide the other party or its
affiliates with such information, books and records as may reasonably be
requested in connection with any Tax Return, inquiry, election, audit or other
examination by any Tax Authority, or judicial or administrative proceedings
relating to liability for Taxes. The Seller and the Purchaser also shall make
available to each other, as reasonably requested, and at the expense of the
requesting party, knowledgeable employees or advisors of the party or its
affiliates of which the request is made and personnel responsible for preparing
and maintaining information, books, records and documents in connection with Tax
filings, audits, disputes or litigation.
Section 8.5. Refunds. Any refunds or credits of Taxes of the Company or
-------
any of its subsidiaries relating to Tax Periods ending on or before the
Deconsolidation Date shall be for the account of the Seller, except for refunds
or credits arising as a result of a carryback of any loss, credit or similar
item attributable to a Tax Period beginning after the Deconsolidation Date to a
Tax Period ending on before the Deconsolidation Date, which credits or refunds
shall be for the account of the Purchaser. Any refunds or credits of Taxes of
the Company or any of its subsidiaries relating to any Straddle Period shall be
equitably apportioned between the Seller and the Purchaser in a manner
consistent with Section 8.2(c).
Section 8.6. Sales and Other Tax. Notwithstanding any other provision of
-------------------
this Agreement, all transfer, documentary, recording, notarial, sales, use,
registration, stamp and other similar taxes, fees and expenses (including, but
not limited to, all applicable stock transfer, real estate transfer or gains
Taxes and including any penalties, interest and additions to such tax) incurred
in connection with this Agreement and the transactions contemplated hereby shall
be borne by the Purchaser, regardless of which party is obligated to pay such
tax under applicable law. The Purchaser and the Seller shall cooperate in timely
making and filing all Tax Returns as may be required to comply with the
provisions of laws relating to such Taxes.
Section 8.7. Certain Contest Rights.
----------------------
(a) Promptly after the receipt by the Purchaser or its affiliates or the
Seller or any of its affiliates, as the case may be (the "Recipient") of a
written notice of any demand, claim or circumstance which, after the lapse of
time, would or might give rise to a claim or the commencement (or threatened
commencement) of any action, proceeding or investigation with respect to which
indemnity may be sought under this Article VIII (an "Asserted Tax Liability"),
the Recipient shall promptly give notice thereof to the Seller (the "Tax Claim
Notice"). The Tax Claim Notice shall contain factual information (to the extent
known to the Recipient) describing the Asserted Tax Liability in reasonable
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detail and shall include copies of any notice or other document received from
any Tax Authority with respect to any such Asserted Tax Liability. If the
Purchaser fails to give the Seller notice of an Asserted Tax Liability as
required by this Section 8.7(a), and if such failure to give notice results in a
detriment to the Seller, then any amount which the Seller is otherwise required
to pay the Purchaser pursuant to Section 8.1 with respect to the Asserted Tax
Liability shall be reduced by the amount of such detriment.
(b) The Seller may elect to direct, through counsel of its own choosing
and at its own expense, the compromise or contest, either administratively or in
the courts, of any Asserted Tax Liability other than an Asserted Tax Liability
relating to Straddle Periods which shall be jointly controlled. If the Seller
elects to direct the compromise or contest of such Asserted Tax Liability, it
shall within 30 calendar days (or sooner, if the nature of the Asserted Tax
Liability so requires) notify the Purchaser of its intent to do so, and the
Purchaser shall cooperate and shall cause its Affiliates to cooperate at the
Seller's expense, in the compromise or contest of such Asserted Tax Liability
and Seller shall cooperate with, consult with and inform the Purchaser with
respect to all material developments with respect to any such compromise or
contest. The Seller may not enter into on behalf of the Purchaser a settlement
agreement with respect to any Asserted Tax Liability without the written consent
of the Purchaser, which consent shall not be unreasonably withheld. If the
Seller elects not to direct the compromise or contest of an Asserted Tax
Liability or fails to notify the Purchaser of its election as herein provided,
then the Purchaser may pay, compromise, or contest such Asserted Tax Liability.
The Purchaser's settlement or compromise of an Asserted Tax Liability will not
affect the Seller's indemnity obligation pursuant to Section 8.1; provided,
however, that the Seller will not be obligated to indemnify the Purchaser for
expenses (including, but not limited to, legal fees) incurred by the Purchaser
in connection with the compromise or contest of an Asserted Tax Liability for
which the Seller has acknowledged its indemnity obligation under Section 8.1. In
any event, each of the Purchaser and the Seller may participate, at its own
expense, in the contest of such Asserted Tax Liability. If the Seller chooses to
direct the compromise or contest of such Asserted Tax Liability, then the
Purchaser shall promptly empower (by Power of Attorney and such other
documentation as may be appropriate) such representative of the Seller as the
Seller may designate to represent the Purchaser in any audit, claim for refund,
or administrative or judicial proceeding, insofar as such audit, claim for
refund or proceeding involves an Asserted Tax Liability for which the Seller
would be liable under Section 8.1.
Section 8.8. No Section 338(h)(10) Election. The Purchaser and the Seller
------------------------------
agree that no election under section 338(h)(10) of the Code shall be made
in connection with this purchase and sale of the Company Shares.
Section 8.9. Exclusivity. Except as expressly provided otherwise in
-----------
Article VII, this Article VIII shall be the sole provision governing Tax matters
and Tax indemnities pursuant to this Agreement.
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ARTICLE IX
MISCELLANEOUS
Section 9.1. Notices. All notices and other communications hereunder shall
-------
be in writing and shall be effective upon receipt. Notice shall be given (i) by
personal delivery to the appropriate address as set forth below (or at such
other address for the party as shall be specified by like notice), (ii) by
reliable overnight courier service to the appropriate address as set forth below
(or at such other address for party as shall be specified by like notice), or
(iii) by facsimile transmission to the appropriate facsimile number set forth
below (or at such other facsimile number for party as shall be specified by like
notice) with follow-up copy by reliable overnight courier service that next
business day:
(a) if to the Purchaser, to:
Rite Aid Corporation
30 Hunter Lane
Camp Hill, PA 17011
Attention: General Counsel
Telecopy: (717) 760-7867
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
Telecopy: (212) 735-2000
Attention: Morris J. Kramer, Esq.
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(b) if to the Seller to:
Eli Lilly and Company
Lilly Corporate Center
Indianapolis, Indiana 46285
Telecopy: (317) 276-5996
Attention: Charles E. Schalliol
with copies to:
Eli Lilly and Company
Lilly Corporate Center
Indianapolis, Indiana 46285
Telecopy: (317) 276-5996
Attention: G. William Miller, Esq.
Dewey Ballantine LLP
1301 Avenue of the Americas
New York, New York 10019
Telecopy: (212) 259-6333
Attention: Bernard E. Kury, Esq.
Section 9.2. Headings. The headings herein are inserted for convenience
--------
only and are not to be part of or to affect the meaning or interpretation of
this Agreement.
Section 9.3. Counterparts. This Agreement may be executed in two or more
------------
counterparts, all of which shall be considered one and the same instrument.
Section 9.4. Entire Agreement; Assignment.
----------------------------
(a) This Agreement and the Transitional Services Agreement the
documents and certificates delivered in connection herewith constitute the
entire agreement among the parties hereto with respect to the subject matter
hereof, and supersedes all prior agreements and understandings, both written and
oral, among the parties with respect to the subject matter hereof, other than
the Confidentiality Agreement.
(b) This Agreement shall not be assigned by a party hereto by operation
of law or otherwise; provided, that the Purchaser may assign its rights and
obligations hereunder to any wholly owned subsidiary of the Purchaser, but no
such assignment shall relieve the Purchaser of its obligations hereunder if such
assignee does not perform such obligations.
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Section 9.5. Governing Law. This agreement shall be governed and construed
-------------
in accordance with the laws of the State of New York, without regard to any
applicable conflicts of law principles. The parties hereto expressly and
irrevocably (i) consent to the exclusive jurisdiction of the federal courts
sitting in the City of New York, County of New York, (ii) agree not to bring any
action related to this agreement or the transactions contemplated hereby in any
other court (except to enforce the judgment of such courts), (iii) agree not to
object to venue in such courts or to claim that such forum is inconvenient and
(iv) agree that notice or the service of process in any proceeding shall be
properly served or delivered if delivered in the manner contemplated by Section
9.1 hereof. Final judgment by such courts shall be conclusive and may be
enforced in any manner permitted by law. In addition, each of the parties hereto
waives any right to trial by jury with respect to any claim or proceeding
related to or arising out of this agreement or any of the transactions
contemplated hereby.
Section 9.6. Specific Performance. Whether at or prior to or following the
--------------------
Closing, the Purchaser shall be entitled to specific performance of the terms
hereof, in addition to any other remedy at law or equity. At or prior to the
Closing, the Seller shall not be entitled to specific performance of any of the
terms hereof except as specifically set forth in Section 6.2(b) and except in
respect of Section 9.7 and the Confidentiality Agreement. Following the Closing,
the Seller shall be entitled to specific performance of the terms hereof, in
addition to any other remedy at law or equity.
Section 9.7. Publicity. No party hereto shall issue any press release
---------
with respect to the transactions contemplated by this Agreement without prior
written notice to the other party hereto and only after giving the other party
hereto a reasonable opportunity to consult with respect to the content thereof.
Section 9.8. Binding Nature; No Third Party Beneficiaries. This Agreement
--------------------------------------------
shall be binding upon and inure solely to the benefit of each party hereto and
their permitted successors and assigns, and nothing in this Agreement, express
or implied, is intended to or shall confer upon any other person or persons any
rights, benefits or remedies of any nature whatsoever under or by reason of this
Agreement.
Section 9.9. Severability. This Agreement shall be deemed severable and
------------
the invalidity or unenforceability of any term or provision of this Agreement
shall not affect the validity or enforceability of this Agreement or of any
other term hereof, which shall remain in full force and effect.
Section 9.10. Interpretation. As used in this Agreement, (a) "including"
--------------
(or similar terms) shall be deemed followed by "without limitation" and shall
not be deemed to be limited to matters of a similar nature to those enumerated,
and (b) except as set forth in Section 2.10 hereof, "knowledge" (or similar
terms) with respect to the Seller shall mean the knowledge of the persons set
forth in Section 9.10(b) of the Disclosure Schedule.
Section 9.11. Payment of Expenses. Except as otherwise expressly set forth
-------------------
in this Agreement, whether or not the transactions contemplated by this
Agreement shall be
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consummated, each party hereto shall pay its own expenses incident to preparing
for, entering into and carrying out this Agreement.
46
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IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first written above.
RITE AID CORPORATION
By: /s/ Elliot S. Gerson
--------------------
Elliot S. Gerson
Senior Vice President
ELI LILLY AND COMPANY
By: /s/ Charles E. Golden
---------------------
Charles E. Golden
Executive Vice President and
Chief Financial Officer
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[Exhibits and Schedules Intentionally Omitted]
48
