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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 14D-9
SOLICITATION/RECOMMENDATION STATEMENT
PURSUANT TO SECTION 14(D)(4) OF THE
SECURITIES EXCHANGE ACT OF 1934
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MCKESSON CORPORATION
(Name of Subject Company)
MCKESSON CORPORATION
(Name of Person(s) Filing Statement)
COMMON STOCK, PAR VALUE $2.00 PER SHARE
(Title of Class of Securities)
581556 10 7
(CUSIP Number of Class of Securities)
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IVAN D. MEYERSON, ESQ.
VICE PRESIDENT AND GENERAL COUNSEL
MCKESSON CORPORATION
MCKESSON PLAZA
ONE POST STREET
SAN FRANCISCO, CALIFORNIA 94104
(415) 983-8300
(Name and address and telephone number of person
authorized to receive notice and communications on
behalf of the person(s) filing statement)
With a copy to:
PETER ALLAN ATKINS, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM
919 THIRD AVENUE
NEW YORK, NEW YORK 10022
(212) 735-3000
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ITEM 1. SECURITY AND SUBJECT COMPANY.
The name of the subject company is McKesson Corporation, a Delaware
corporation (the "Company"), and the address of the principal executive offices
of the Company is McKesson Plaza, One Post Street, San Francisco, California
94104. The title of the class of equity securities to which this statement
relates is the common stock, par value $2.00 per share, of the Company,
including all associated preferred stock purchase rights (the "Shares").
ITEM 2. TENDER OFFER OF THE BIDDER.
This statement relates to a tender offer (the "Offer") by ECO Acquisition
Corporation, a Delaware corporation (the "Purchaser") and a wholly-owned
subsidiary of Eli Lilly and Company, an Indiana corporation ("Parent"),
disclosed in a Tender Offer Statement on Schedule 14D-1 (the "Schedule 14D-1"),
dated July 15, 1994, for all outstanding Shares for a per Share consideration
of $76.00 net in cash to the seller, upon the terms and subject to the
conditions set forth in the Agreement and Plan of Merger, dated as of July 10,
1994 (the "Merger Agreement"), among Parent, the Purchaser and the Company.
Pursuant to the provisions of the Reorganization and Distribution Agreement,
dated as of July 10, 1994 (the "Distribution Agreement"), among the Company and
certain of its affiliates, prior to the consummation of the Offer, the Company
intends to (i) transfer certain of the businesses of the Company and its
subsidiaries, other than assets related to the PCS business (as defined below)
to SP Ventures, Inc., a Delaware corporation and a wholly-owned subsidiary of
the Company ("New McKesson"), and (ii) declare a dividend (conditioned upon
consummation of the Offer) of one share of common stock, par value $.01 per
share, of New McKesson (the "New McKesson Shares"), for each Share held of
record as of a date determined by the Board. The transactions referred to in
clauses (i) and (ii) of the previous sentence are hereinafter referred to
collectively as the "Spin-Off". After giving effect to the foregoing
transactions, the assets of the Company will consist of the pharmaceutical
benefits management business of the Company (the "PCS business") as conducted
primarily by PCS Health Systems, Inc., a Delaware corporation and a wholly-
owned subsidiary of the Company ("PCS"), and Clinical Pharmaceuticals, Inc., a
Delaware corporation and a wholly-owned subsidiary of the Company ("CPA").
The Merger Agreement also provides that (i) Parent will cause the Purchaser
to contribute to the Company, simultaneously with the consummation of the
Offer, a cash amount in immediately available funds of $600 million (subject to
certain adjustments set forth in the Merger Agreement), which amount will be
transferred to New McKesson and (ii) following completion of the Offer and the
approval and adoption of the Merger Agreement in accordance with the provisions
of applicable law, and the satisfaction or waiver of the other conditions to
the Merger, the Purchaser will be merged (the "Merger") with and into the
Company.
Based on the information in the Schedule 14D-1, the principal executive
offices of the Purchaser and Parent are located at Lilly Corporate Center,
Indianapolis, Indiana 46285.
ITEM 3. IDENTITY AND BACKGROUND.
(a) The name and address of the Company, which is the person filing this
statement, are set forth in Item 1 above.
(b) Certain contracts, agreements, arrangements or understandings between the
Company or its affiliates and (i) the Company, its executive officers,
directors or affiliates or (ii) the Purchaser, its executive officers,
directors or affiliates are described at pages 17 through 23 of the Company's
Proxy Statement, dated June 14, 1994, relating to the Company's 1994 Annual
Meeting of Stockholders (the "1994 Proxy Statement"). Copies of such pages are
filed as Exhibit 1 hereto and are incorporated herein by reference. As of the
date hereof, except as described below or as set forth in either Schedule I to
this Statement or pages 17 through 23 of the 1994 Proxy Statement (each of
which is incorporated herein by reference), there exists no material contract,
agreement, arrangement or understanding and no actual or potential conflict of
interest between the Company
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or its affiliates and (i) the Company's executive officers, directors or
affiliates, or (ii) Purchaser or Purchaser's executive officers, directors or
affiliates.
EMPLOYMENT AGREEMENTS
The Company has previously entered into employment agreements (the
"Employment Agreements") with Alan Seelenfreund, Chairman and Chief Executive
Officer of the Company, David E. McDowell, President and Chief Operating
Officer, Robert C. Johnson, Vice President-Government Relations and Chairman of
PCS, David L. Mahoney, Vice President-Strategic Planning, Charles A. Norris,
Vice President, and President of McKesson Water Products Company, and five
other executive officers of the Company. The agreements with Messrs.
Seelenfreund, Mahoney and Norris and the other five executive officers expire
on October 31, 1994. The agreements with Messrs. McDowell and Johnson expire on
January 13, 1995 and January 14, 1995, respectively. Upon certain types of
termination of the executive officer's employment by the Company (other than
for cause), the Company must continue the executive officer's base salary,
including certain benefits, without increase, for the remainder of the term of
such Employment Agreement. In the event of death or disability of the executive
officer, the Employment Agreements generally provide for continued payment of
the executive officer's compensation to the executive officer's spouse or other
designee for six months following the executive officer's death, and for the
continuous payment of such compensation to the executive officer for twelve
months in the event of the executive officer's disability. The Employment
Agreements contain non-competition covenants prohibiting the executive officers
from competing with the Company during the course of their employment and from
selling or using, without authorization, proprietary or confidential
information obtained in the course of employment. Upon the Spin-Off, pursuant
to the contemplated transactions, New McKesson has agreed to assume the
Employment Agreements (other than the agreement with Mr. Johnson) with the
consent of the executives, if necessary, and has also agreed to indemnify the
Company for any liabilities relating to such agreements.
EXECUTIVE SEVERANCE POLICY
On September 29, 1993, the Compensation Committee (the "Compensation
Committee") of the Company's Board of Directors (the "Board") adopted an
"Executive Severance Policy" (such policy, as amended from time to time, being
referred to as the "Policy"). The Policy applies in the event an executive
officer is terminated by the Company for any reason other than for cause at any
time other than within two years following a change in control of the Company
(as defined in the Policy). Payment of benefits under the Policy is based on
the executive officer's tenure and position with the Company. In the case of
Messrs. Seelenfreund and McDowell such benefit is equal to 18 months pay
(defined as the base salary rate in effect at the time of termination and
target bonus) plus one month's pay per year of service, up to a maximum of 36
months. For the other executive officers, the benefit is equal to 12 months'
pay plus one month's pay per year of service, up to a maximum of 24 months.
Such benefits would be reduced or eliminated by any income the executive
officer receives from subsequent employers during the severance payment period
and discontinued in the event the executive officer is employed by a
competitor. Executive officers who are age 55 or older and have 15 or more
years of service with the Company at the time of such involuntary termination
are granted "approved retirement" for purposes of the Company's 1984 Executive
Benefit Retirement Plan and the 1988 Executive Survivor Benefits Plan. The
Policy also provides that, upon such involuntary termination, awards under the
Company's Long-Term Incentive Plan are pro-rated for all cycles then in
progress. The transactions contemplated by the Merger Agreement and the
Distribution Agreement will not constitute a change in control of the Company
for purposes of the Policy. Upon the Spin-Off, pursuant to the contemplated
transactions, New McKesson has agreed to assume the Policy for its executive
officers.
TERMINATION AGREEMENTS
The Company currently is a party to termination agreements with the following
executive officers (such agreements, as amended from time to time, being
referred to as the "Termination Agreements"): Messrs. Seelenfreund, Armstrong,
Hawkins, Mahoney, Meyerson, McDowell, Norris, Scholz and Smith and Ms.
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Miller. The Termination Agreements provide for the payment of certain severance
and other benefits to executive officers who are terminated within two years of
a change in control of the Company (as defined in the Termination Agreements).
Specifically, if following a change in control, the executive officer is
terminated by the Company for any reason, other than for cause (as defined in
the Termination Agreements), or if such executive officer terminates his or her
employment for good reason (as defined in the Termination Agreements), then the
Company will pay to the executive officer as severance pay in cash an amount
equal to 2.99 times his or her "base amount" (as that term is defined in
Section 280G of the Internal Revenue Code of 1986, as amended, and hereafter
referred to as the "Code") less any amount which constitutes a "parachute
payment" (as defined in Section 280G of the Code). The Termination Agreements
operate independently of the Employment Agreements and the Policy and continue
through December 31 of each year. They are automatically extended in one-year
increments until terminated by the Compensation Committee (or by the Board in
the case of Mr. Seelenfreund's agreement) and if not previously terminated
shall continue in effect for a period of two years following any change in
control. The Termination Agreements were amended effective as of March 30, 1994
to revise the change in control definition in certain respects. The
transactions contemplated by the Merger Agreement and the Distribution
Agreement will not constitute a change in control for purposes of the
Termination Agreements. Upon the Spin-Off, pursuant to such transactions, New
McKesson has agreed to assume each of the Termination Agreements with the
consent of the executives, if necessary, and has agreed to indemnify the
Company for any liabilities relating to such agreements. The description of the
Amendment to the Termination Agreements referred to above does not purport to
be complete and is qualified in its entirety by reference to the form of the
Amendment to Termination Agreement which is attached hereto in Exhibit 2 and
incorporated herein by reference.
STOCK OPTIONS AND STOCK AWARDS
The Company maintains the 1978 Stock Option Plan, as amended (the "Option
Plan") which provides for grants of stock options ("Options") to certain key
employees and non-employee directors of the Company. The aggregate number of
authorized Shares available pursuant to the Option Plan is 8,400,000.
The Option Plan provides for the granting of non-qualified options or options
qualifying as incentive stock options under Section 422 of the Code. The
exercise price of the Shares covered by each Option may not be less than 100%
of the fair market value of such shares on the date the Option is granted. In
the fiscal year ended March 31, 1994, approximately 425 key employees received
Options. The Option Plan also provides that each non-employee director who is
elected to the Board for the first time at any special or annual meeting of
stockholders of the Company is to receive, on such date, an Option to purchase
5,000 Shares, which is immediately exercisable in full but expires in five
equal annual installments on each anniversary of the date of grant. On the date
of each subsequent annual meeting, each continuing non-employee director
automatically receives an Option to purchase an additional 1,000 Shares, which
is also immediately exercisable in full. The Option Plan provides that
outstanding Options become exercisable immediately upon the occurrence of a
change in control of the Company (as defined in the Option Plan).
For purposes of the Option Plan, the transactions contemplated by the Merger
Agreement and the Distribution Agreement will not constitute a change in
control. In connection with such transactions, all outstanding Options will be
equitably adjusted pursuant to applicable provisions of the Option Plan.
Specifically, at the time of the Spin-Off, all Options to acquire Shares which
are outstanding at such time and which are held by any employee or former
employee of the Company or any of its subsidiaries (other than an employee who,
in connection with the Spin-Off, will become an employee of New McKesson (a
"New McKesson Employee")), will be equitably adjusted by increasing the number
of Shares covered by such Options and decreasing the per Share exercise price
of such Options to compensate for the value being distributed to Company
shareholders in the Spin-Off. The number of Shares relating to such Options
after the adjustment will equal the product of (A) the number of Shares
relating to such Options prior to the adjustment and (B) the Company Conversion
Factor (as hereinafter defined), rounded downward to the nearest whole share,
and the exercise price per share of such Options will equal the quotient
obtained by dividing (x) the exercise price per share of such Options prior to
such adjustment by (y) the Company
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Conversion Factor, which quotient will be rounded up or down to the nearest
cent. The "Company Conversion Factor" means an amount equal to the quotient
obtained by dividing (1) the sum of (A) the cash consideration payable per
Share pursuant to the Merger (the "Cash Consideration"), plus (B) the per share
fair market value of New McKesson Shares, determined based on the average
closing price of New McKesson Shares over the ten-consecutive-day trading
period immediately following the Distribution Date (such per share fair market
value being referred to as the "New McKesson Value"), by (2) the Cash
Consideration. At the time of the Merger, all such Options which are then
exercisable will be entitled to receive from the Company, for each Share
subject to such Option, an amount in cash equal to the difference between
$76.00 per share, or any higher price paid per Share in the Offer, and the
exercise price of such Option (the "Spread"), less all applicable withholding
taxes. At the time of the Merger, all such Options which are then non-
exercisable will be entitled to receive, in exchange for the cancellation of
such Options, that number of restricted common shares of Parent ("Parent
Restricted Shares"), rounded up or down to the nearest whole share, with an
aggregate value (based on the average of the high and low price of Parent
Common Stock (the "Parent Stock Price") on the date of consummation of the
Merger) equal to the aggregate Spread in the cancelled Options. The Parent
Restricted Shares will be subject to certain restrictions on transfer during a
three-year restricted period, during which time such restrictions will lapse
with respect to one-third of the Parent Restricted Shares on each anniversary
of the grant, and during which time such shares will be forfeited by the
employee in the event of such employee's voluntary termination of employment
(other than for "good reason" as defined in the Termination Agreements) and
will be released from all restrictions upon the employee's death, disability,
retirement, involuntary termination or voluntary termination which constitutes
"good reason." In the event that the Parent Stock Price on the date the
restrictions lapse is less than such price on the date of grant, the employee
will become entitled to receive an additional payment from Parent or the
Company (in cash or additional shares of Parent common stock at Parent's
option) equal to such difference (less all applicable withholding taxes).
All exercisable Options held by New McKesson Employees will, at the time of
the Spin-Off, be split into two separately exercisable options, one for Shares
and one for New McKesson Shares. The number of shares underlying each of these
options will be equal to the number of Shares underlying the exercisable
Options (prior to the split) and the exercise price per share of the
exercisable Option (prior to the split) shall be allocated between the two
Options. The exercise price per share of the Option which, after conversion,
relates to Shares will be equal to the quotient obtained by dividing (w) the
exercise price per share of the Option prior to conversion (the "Pre-Conversion
Exercise Price") by (x) the Company Conversion Factor, and the exercise price
per share of the Option which, after conversion, relates to New McKesson Shares
will be equal to the quotient determined by dividing (y) the Pre-Conversion
Exercise Price by (z) the New McKesson Conversion Factor (as hereinafter
defined) (in each case the exercise price will be rounded up or down to the
nearest cent). The "New McKesson Conversion Factor" means an amount equal to
the quotient obtained by dividing (1) the sum of (A) the Cash Consideration
plus (B) the New McKesson Value, by (2) the New McKesson Value. At the time of
the Merger, the Option to purchase Shares will be cancelled in exchange for an
amount of cash equal to the Spread (after taking into account the equitable
adjustment described above), less all applicable withholding taxes. All non-
exercisable Options held by New McKesson Employees will, at the time of the
Spin-Off, be converted solely into an option to acquire a number of New
McKesson Shares (such number being equal to the number of Shares covered by the
original Option multiplied by the New McKesson Conversion Factor and rounded
down to the nearest share). The exercise price per share of the converted
option will equal the exercise price per share of the original Option divided
by the New McKesson Conversion Factor (such quotient to be rounded up or down
to the nearest cent). With respect to both exercisable and non-exercisable
options of New McKesson Employees, the converted options will otherwise remain
subject to the same terms and conditions of the original Options. All
outstanding Options held by non-employee directors of the Company will be
treated in the same manner as exercisable options held by New McKesson
Employees. All Options to acquire New McKesson Shares resulting from the
aforementioned adjustments (as well as New McKesson Shares issued in respect of
Restricted Shares, as more fully described below) shall be issued under a "New
McKesson Stock Plan" which shall be established prior to the Spin-Off and
approved by the Company as New McKesson's sole shareholder.
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Set forth below is a table indicating the treatment in the transaction of
currently outstanding stock options held by executive officers and non-employee
directors of the Company. For purposes of the table, it has been assumed that
outstanding options will not be exercised. Further, the information in row 1 of
the right hand portion of the table assumes a Company Conversion Factor of
approximately 1.30, and a New McKesson Conversion Factor of approximately 4.30,
and row 2 of such portion assumes a Company Conversion Factor of approximately
1.43 and a New McKesson Conversion Factor of approximately 3.30.
<TABLE>
<CAPTION>
OUTSTANDING COMPANY OPTIONS OUTSTANDING OPTIONS
IMMEDIATELY PRIOR TO SPIN-OFF IMMEDIATELY PRIOR TO MERGER
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EXERCISABLE EXERCISABLE NEW UNEXERCISABLE NEW
EXERCISABLE OPTIONS/ UNEXERCISABLE OPTIONS/ COMPANY OPTIONS/ MCKESSON OPTIONS/ MCKESSON OPTIONS/
AVERAGE EXERCISE PRICE AVERAGE EXERCISE PRICE AVERAGE EXERCISE PRICE AVERAGE EXERCISE PRICE AVERAGE EXERCISE PRICE
---------------------- ---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C>
NON-EMPLOYEE DIRECTORS
Friedman 4,000/$37.94 -- 1. 4,000/$29.12 4,000/$ 8.82 --
2. 4,000/$26.45 4,000/$11.49 --
Harvey 4,000/$36.78 -- 1. 4,000/$28.24 4,000/$ 8.54 --
2. 4,000/$25.64 4,000/$11.14 --
Keller 4,000/$36.78 -- 1. 4,000/$28.24 4,000/$ 8.54 --
2. 4,000/$25.64 4,000/$11.14 --
Luttgens 4,000/$36.78 -- 1. 4,000/$28.24 4,000/$ 8.54 --
2. 4,000/$25.64 4,000/$11.14 --
Pietruski 4,000/$36.78 -- 1. 4,000/$28.24 4,000/$ 8.54 --
2. 4,000/$25.64 4,000/$11.14 --
Shaw 4,000/$37.94 -- 1. 4,000/$29.12 4,000/$ 8.82 --
2. 4,000/$26.45 4,000/$11.49 --
Waterman 4,000/$36.81 -- 1. 4,000/$28.26 4,000/$ 8.55 --
2. 4,000/$25.66 4,000/$11.15 --
EXECUTIVE OFFICERS
Armstrong 26,000/$33.55 34,500/$45.46 1. 26,000/$25.75 26,000/$ 7.80 148,500/$10.56
2. 26,000/$23.39 26,000/$10.16 113,955/$13.76
d'Alessio 19,400/$33.35 14,000/$42.64 1. 19,400/$25.60 19,400/$ 7.75 60,261/$ 9.91
2. 19,400/$23.25 19,400/$10.10 46,242/$12.91
Hawkins 17,625/$34.32 18,375/$43.61 1. 17,625/$26.34 17,625/$ 7.98 79,092/$10.13
2. 17,625/$23.93 17,625/$10.39 60,693/$13.20
Johnson* 22,500/$37.37 40,500/$44.78 1. 29,309/$28.69 -- --
2. 32,269/$26.06 -- --
Krasnansky 28,125/$28.04 11,875/$43.25 1. 28,125/$21.53 28,125/$ 6.51 51,114/$10.05
2. 28,125/$19.55 28,125/$ 8.49 39,223/$13.09
Mahoney 15,750/$35.92 50,250/$49.57 1. 15,750/$27.58 15,750/$ 8.34 216,293/$11.52
2. 15,750/$25.04 15,750/$10.88 165,977/$15.01
McDowell 45,000/$37.11 105,000/$44.58 1. 45,000/$28.49 45,000/$ 8.62 451,957/$10.36
2. 45,000/$25.87 45,000/$11.24 346,818/$13.50
Meyerson 34,750/$33.89 25,750/$42.41 1. 34,750/$26.02 34,750/$ 7.87 110,837/$ 9.85
2. 34,750/$23.63 34,750/$10.26 85,053/$12.84
Miller 19,150/$35.06 15,300/$42.46 1. 19,150/$26.92 19,150/$ 8.14 65,857/$ 9.86
2. 19,150/$24.44 19,150/$10.62 50,536/$12.85
Norris 27,750/$34.31 30,750/$44.73 1. 27,750/$26.34 27,750/$ 7.97 132,359/$10.39
2. 27,750/$23.92 27,750/$10.39 101,568/$13.54
Scholz 34,250/$29.54 22,750/$43.10 1. 34,250/$22.68 34,250/$ 6.86 97,924/$10.01
2. 34,250/$20.60 34,250/$ 8.94 75,144/$13.05
Seelenfreund 132,500/$35.30 151,500/$44.17 1. 132,500/$27.10 132,500/$ 8.20 652,109/$10.26
2. 132,500/$24.61 132,500/$10.69 500,409/$13.37
Smith -- 20,000/$58.50 1. -- -- 86,087/$13.59
2. -- -- 66,061/$17.71
</TABLE>
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* Mr. Johnson will not be a New McKesson Employee. He will receive Parent
Restricted Shares in respect of his unexercisable Company options.
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The Company also maintains the 1973 Stock Purchase Plan, as amended (the
"1973 Plan"), whereby certain executive officers are eligible to purchase
Shares by paying a portion of the purchase price of such Shares (the "Purchase
Price") to the Company in cash and providing a promissory note for the
remaining balance of such Purchase Price. As a condition of each such purchase,
each participant agrees to pledge and deposit the purchased Shares with the
Company and grants to the Company a security interest in such Shares in order
to secure full payment of the principal of, and interest on, the Purchase Price
owed to the Company. Pursuant to certain of the purchase agreements entered
into pursuant to the 1973 Plan, the making of the Offer would cause the Company
to release the Shares from the foregoing restrictions and deliver such shares
to the participant. It is contemplated that the Company will seek the
participants' agreement to apply the cash proceeds received pursuant to the
transactions in respect of the purchased Shares to the repayment of the
principal of, and the interest on, the Purchase Price owed to the Company.
In addition to the Option Plan and 1973 Plan, the Company maintains the 1988
Restricted Stock Plan, as amended (the "Restricted Stock Plan"), which provides
grants of Shares to certain key employees and executive officers of the
Company. The aggregate number of authorized Shares available for future awards
pursuant to the Restricted Stock Plan is 278,133 Shares.
Shares granted pursuant to the Restricted Stock Plan contain certain
restrictions and conditions as determined by the Compensation Committee (the
"Restricted Shares"). Until these restrictions imposed on the Restricted Shares
lapse, such Restricted Shares may not be sold, assigned, transferred, or
otherwise disposed of, and such Restricted Shares will be forfeited by the
participant if such participant's continuous employment with the Company or any
subsidiary terminates for any reason. In the event of a change in control (as
defined in the Restricted Stock Plan), all restrictions on outstanding
Restricted Share grants immediately lapse.
The transactions contemplated by the Merger Agreement and the Distribution
Agreement will not constitute a change in control for purposes of the
Restricted Stock Plan. In connection with such transactions, and pursuant to
the equitable adjustment provisions of the Restricted Stock Plan, awards of
Restricted Shares shall be treated as follows: New McKesson Shares issued with
respect to Restricted Shares held by New McKesson Employees at the time of the
Spin-Off will be restricted in the same manner as the Restricted Shares. At the
time of the Merger, an amount equal to the cash otherwise payable in respect of
such Restricted Shares pursuant to the Merger will be transferred by the
Company to, and retained by, New McKesson. Payment of such amount by New
McKesson (together with interest at the rate in effect under the Company's
Deferred Compensation Administration Plan (II)) will be deferred until the time
when restrictions on the respective Restricted Shares would have lapsed, and
such payment will be subject to the conditions otherwise applicable with
respect to the lapsing of restrictions on the Restricted Shares.
At the time of the Spin-Off, New McKesson Shares issued with respect to
Restricted Shares held by any employee or former employee of the Company or any
of its subsidiaries (other than New McKesson Employees) will be restricted in
the same manner as the Restricted Shares. On the day following the consummation
of the Offer, Restricted Shares issued to such employees under the Restricted
Stock Plan will be returned to the Company and the New McKesson Shares issued
in respect of the Restricted Shares will be returned to New McKesson. In
return, each such employee will receive, within ten days after the Merger, that
number of Parent Restricted Shares, rounded up or down to the nearest whole
share, equal to the quotient obtained by dividing (A) the sum of (1) the amount
of cash which would have been payable in respect of such Restricted Shares had
such Restricted Shares been outstanding immediately prior to the Merger (the
"Restricted Share Cash Consideration") plus (2) the product of (x) the number
of New McKesson Shares issued to such employee in the Spin-Off in respect of
such Restricted Shares (the "New McKesson Restricted Shares") and (y) the New
McKesson Value, by (B) the Parent Stock Price on the date of consummation of
the Merger. However, in the case of any such employee who is an executive
officer of the Company and subject to the reporting requirements of Section 16
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), then
in lieu of returning the New McKesson Shares on the day following the
consummation of the Offer, such shares will be returned six months and one day
following such day and
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such employee will receive, (A) within ten days after the Merger, that number
of Parent Restricted Shares, rounded up or down to the nearest whole share,
equal to the quotient obtained by dividing (1) the Restricted Share Cash
Consideration by (2) the Parent Stock Price on the date of consummation, of the
Merger, and (B) within ten days after the end of the six month and one day
period, that number of Parent Restricted Shares, rounded up or down to the
nearest whole share, equal to the quotient obtained by dividing (3) the product
of (x) the number of New McKesson Restricted Shares issued to such employee and
(y) the average of the high and low prices of New McKesson Common Stock on the
last day of the six month and one day period, by (4) the Parent Stock Price on
the last day of the six month and one day period. Parent Restricted Shares
issued in respect of the Restricted Shares and New McKesson Restricted Shares
will be subject to the same terms and conditions as the Parent Restricted
Shares issued in respect of non-exercisable Options, as discussed above.
The following executive officers are participants in the Restricted Stock
Plan: William A. Armstrong--500 Restricted Shares; Robert C. Johnson--1,600
Restricted Shares; Marvin L. Krasnansky--1,500 Restricted Shares; David L.
Mahoney--2,500 Restricted Shares; David E. McDowell--5,000 Restricted Shares;
Ivan D. Meyerson--2,000 Restricted Shares; Nancy A. Miller--1,100 Restricted
Shares; Charles A. Norris--2,000 Restricted Shares; Garret A. Scholz--1,500
Restricted Shares; Alan Seelenfreund--8,200 Restricted Shares; and James H.
Smith--5,000 Restricted Shares.
PROFIT-SHARING INVESTMENT PLAN
Pursuant to the contemplated transactions, the Company's Profit-Sharing
Investment Plan, as amended (the "PSIP"), will receive, in respect of each
Share held by the PSIP (including each Share issued upon any conversion of the
shares of Series B ESOP Convertible Preferred Stock (the "Series B Preferred
Stock") prior to the record date for the Spin-Off (the "Spin-Off Record
Date")), one New McKesson Share in the Spin-Off and cash either in the Offer or
in the Merger. If the shares of Series B Preferred Stock held by the PSIP are
not converted into Shares prior to the Spin-Off Record Date, the conversion
price with respect to such shares will be adjusted downward to reflect the
Spin-Off; in the Merger, the shares of Series B Preferred Stock will be deemed
to have been converted into Shares and thus will be entitled to receive the
Cash Consideration with respect to each of the underlying Shares.
After consummation of the contemplated transactions, cash received by the
PSIP with respect to Shares (and shares of Series B Preferred Stock) which have
been allocated to participants' accounts will be invested in a diversified
portfolio of investments (other than New McKesson Shares). However, cash
received by the PSIP with respect to Shares (and shares of Series B Preferred
Stock) which have not been allocated to participants' accounts will be
reinvested in New McKesson Shares. It is currently contemplated that the PSIP
trustee will acquire New McKesson Shares in market transactions over a period
of time following the Merger. After giving effect to such reinvestments, it is
expected that the PSIP will hold a significant equity interest in New McKesson.
The level of the PSIP's ownership of New McKesson Shares will depend upon the
prices at which the PSIP acquires New McKesson Shares in the market following
the Spin-Off. However, New McKesson plans to take appropriate action
(including, but not limited to, offering newly-issued New McKesson Shares to
the PSIP trustee and directing the trustee to acquire such shares at the then
prevailing market price in lieu of acquiring shares on the open market) to
ensure that the PSIP's equity interest in New McKesson, when combined with
beneficial ownership of officers and directors of New McKesson, does not exceed
40% of the outstanding New McKesson Shares on a fully-diluted basis following
the Spin-Off.
INDEMNIFICATION
Pursuant to Section 145 of the Delaware General Corporation Law ("DGCL"),
corporations incorporated under the laws of the State of Delaware are permitted
to indemnify their current and former directors, officers, employees and agents
under certain circumstances against certain liabilities and expenses incurred
by them by reason of their serving in such capacities, if such persons acted in
good faith and in a
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manner they reasonably believed to be in or not opposed to the best interests
of the corporations, and with respect to any criminal action or proceeding, had
no reason to believe their conduct was unlawful.
The Company's Restated Certificate of Incorporation (the "Charter") provides,
among other things, that the Company shall indemnify (i) its directors to the
fullest extent permitted by the laws of the State of Delaware now or hereafter
in force, including but not limited to, the advancement of expenses under the
procedures provided by such laws, (ii) all of its officers to the same extent
as it shall indemnify its directors, and (iii) its officers who are not
directors to such further extent or shall be authorized by the Board and
consistent with the law.
Pursuant to the provisions of the Distribution Agreement, prior to the
consummation of the Offer, New McKesson has agreed to use its best efforts, and
the Company has agreed to cooperate with New McKesson, to obtain, at New
McKesson's expense, directors' and officers' liability insurance, in amounts
and upon terms reasonably satisfactory to New McKesson, in respect of the
service of directors, officers, employees and agents of the Company and its
subsidiaries with the Company and its subsidiaries prior to the Distribution.
In the event that such insurance cannot be obtained by New McKesson on
commercially reasonable terms, then the Company shall, at New McKesson's
request and expense, use its best efforts to maintain or obtain such insurance,
in such amounts and having such terms as New McKesson may reasonably direct,
and New McKesson shall reimburse the Company for all out-of-pocket costs
incurred by the Company in connection with obtaining and maintaining such
insurance on behalf of New McKesson's directors and officers.
EXISTING BUSINESS RELATIONSHIPS BETWEEN PARENT AND THE COMPANY
In the ordinary course of business, the Company has acted for Parent as a
wholesale distributor of its pharmaceutical products. From April 1, 1991
through June 30, 1994, Parent's net sales to the Company have totalled
approximately $1.89 billion. In addition, Parent has entered into an agreement
with CPA, under which Parent will pay rebates to CPA based on reimbursements by
CPA with respect to certain of Parent's drugs. In return, CPA has made these
drugs available to patients for whom it manages a prescription drug benefit. As
of June 30, 1994, no payments had been made by Parent under this agreement.
Parent's Lilly Health Plan, a self-funded employee medical plan, has contracted
with PCS for prescription claims administration services. Since the inception
of this arrangement in January 1994 through June 30, 1994, claims of
approximately $5.8 million have been processed, and administration fees have
totalled approximately $187,000. Finally, since 1992, Parent has contracted
with Technology Assessment Group ("TAG"), a partnership in which the Company
has a minority ownership interest, for consulting services in the area of
health economics. Total payments to TAG under those arrangements through June
30, 1994 have been approximately $260,000.
THE MERGER AGREEMENT
The following summary of the Merger Agreement does not purport to be complete
and is qualified in its entirety by reference to the text of the Merger
Agreement, a copy of which is filed as Exhibit 3 hereto and incorporated herein
by reference.
General Terms of the Offer. As noted above, the Purchaser is offering to
purchase all outstanding Shares at a per Share price of not less than $76.00
net in cash, upon the terms and subject to the conditions set forth in the
Merger Agreement. The Purchaser has agreed to accept for payment and pay for
all Shares tendered pursuant to the Offer as soon as practicable following the
Spin-Off Record Date and to extend the Offer until the first business day
following the Spin-Off Record Date. The obligation of the Purchaser to accept
for payment and pay for Shares tendered pursuant to the Offer is subject to the
satisfaction of certain conditions (as described below). The Purchaser has
agreed that, without the written consent of the Company, no amendment to the
Offer may be made which changes the form of consideration to be paid or
decreases the price per Share or the number of Shares sought in the Offer or
which imposes conditions to the Offer in addition to those conditions set forth
in the Merger Agreement or broadens the scope of such conditions, and no other
amendment may be made in the terms or conditions of the Offer which is adverse
to holders of Shares.
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Cash Contribution by Parent. The Merger Agreement provides that Parent will
cause the Purchaser to contribute to the Company, simultaneously with the
consummation of the Offer, a cash amount in immediately available funds of
approximately $600 million, which amount will be included in the assets
transferred to New McKesson; provided that such amount shall be subject to
adjustment to reflect the exercise of certain Company employee options and the
conversion or redemption of certain of the shares of the Company's outstanding
preferred stock.
General Terms of the Merger. The Merger Agreement provides for the making of
the Offer and further provides that, following completion of the Offer and the
approval and adoption of the Merger Agreement in accordance with the provisions
of applicable law, and the satisfaction or waiver of the other conditions to
the Merger, the Merger will occur. Following the Merger, the Company shall
continue as the surviving corporation (the "Surviving Corporation") and the
separate corporate existence of the Purchaser shall cease. In the Merger, each
Share issued and outstanding immediately prior to the effective time of the
Merger (the "Effective Time") (other than Shares held by Parent or any
subsidiary of Parent, Shares held in the treasury of the Company or held by any
subsidiary of the Company (other than a subsidiary included within the PCS
business), and other than Dissenting Shares (as hereafter defined)), including,
without limitation, shares of restricted stock issued to employees and former
employees of the Company and its subsidiaries, shall, by virtue of the Merger
and without any action on the part of the holder thereof, be converted into the
right to receive $76.00 in cash, or any higher price paid per Share in the
Offer (the "Merger Consideration"), payable to the holder thereof, without
interest thereon, upon the surrender of the certificate formerly representing
such Share (except as provided in Section 2.10(c) of the Merger Agreement with
respect to certain employee-held stock).
Conditions to the Offer. As discussed above, the Offer is being made pursuant
to the terms and conditions of the Merger Agreement. Notwithstanding any other
provision of the Offer, the Purchaser shall not be required to purchase any
Shares tendered, and may terminate the Offer, if (i) immediately prior to the
expiration of the Offer (as extended in accordance with the terms of the
Offer), (A) any applicable waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), shall not have expired or
been terminated, (B) the record date for the distribution of the New McKesson
Shares to stockholders of the Company pursuant to the Distribution Agreement
shall not have been set by the Board, or (C) the number of Shares validly
tendered and not withdrawn which, when added to the Shares then beneficially
owned by the Parent and its affiliates, does not constitute a majority of the
Shares outstanding and representing a majority of the voting power of the
Shares outstanding on a fully diluted basis on the date of purchase, or (ii) on
or after July 10, 1994 and prior to the acceptance for payment of Shares, any
of the following events shall occur: (a) any of the representations or
warranties of the Company contained in the Merger Agreement shall not have been
true and correct at the date when made or (except for those representations and
warranties made as of a particular date which need only be true and correct as
of such date) shall cease to be true and correct at any time prior to
consummation of the Offer, except where the failure to be so true and correct
would not, individually or in the aggregate, have a Material Adverse Effect (as
defined in the Merger Agreement); provided that, if any such failure to be so
true and correct is curable by the Company through the exercise of its best
efforts and for so long as the Company continues to use such best efforts, the
Purchaser may not terminate the Offer under this subsection (a); or (b) the
Company shall have breached any of its covenants or agreements contained in the
Merger Agreement, except for any such breaches that, individually or in the
aggregate, would not have a Material Adverse Effect; provided that, if any such
breach is curable by the Company through the exercise of its best efforts and
for so long as the Company continues to use such best efforts, the Purchaser
may not terminate the Offer under this subsection (b); or (c) there shall be
any statute, rule, regulation, decree, order or injunction promulgated,
enacted, entered or enforced, or any legal or administrative proceeding
initiated by any United States federal or state government, governmental
authority or court which would (i) prohibit the Purchaser from consummating the
Offer, the Merger or the Spin-Off, (ii) impose any material adverse limitation
on the ability of Parent to exercise full rights of ownership of the Shares or
to control the PCS business, or (iii) have a Material Adverse Effect (provided
that the provisions of this clause (iii) shall only apply in the event of any
statute, rule,
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regulation, decree, order or injunction (A) which is enacted or entered into
following the date of the Merger Agreement and (B) the substantive provisions
of which were initially proposed for enactment following the date of the Merger
Agreement); or (d) there shall have been any damage or destruction affecting
the facilities or properties (tangible or intangible) owned or used by the PCS
business, which would result in a Material Adverse Effect; provided that, if
any such damage or destruction is curable by the Company through the exercise
of its best efforts and for so long as the Company continues to use such best
efforts, the Purchaser may not terminate the Offer under this subsection (d);
or (e) there shall have occurred (i) any general suspension of trading in
securities on the New York Stock Exchange, Inc., (ii) a declaration of a
banking moratorium or any suspension of payments in respect of banks in the
United States, or (iii) a commencement of a war or armed hostilities involving
the United States, which in the case of any of the foregoing clauses (i), (ii)
or (iii) would have a Material Adverse Effect; or (f) any person, entity or
"group" (as that term is used in Section 13(d)(3) of the Exchange Act) has
become the beneficial owner (as that term is defined in Rule 13d-3 promulgated
under the Exchange Act) of more than thirty percent (30%) of the Shares
outstanding on a fully diluted basis, or has been granted any option or right,
conditional or otherwise, to acquire or vote more than thirty percent (30%) of
the Shares; or (g) the Merger Agreement shall have been terminated in
accordance with its terms. The foregoing conditions are for the sole benefit of
the Purchaser and may be asserted by the Purchaser regardless of the
circumstances giving rise to such conditions, or may be waived by the Purchaser
in whole or in part at any time and from time to time in its sole discretion;
provided that the conditions set forth in clauses (i)(A), (B) and (C) or
(ii)(g) above may be waived or modified only by mutual consent of the Purchaser
and the Company.
General Conditions to the Merger. The respective obligation of each party to
effect the Merger is subject to the satisfaction at or prior to the Effective
Time of the following conditions: (i) the Merger Agreement shall have been
adopted by the affirmative vote of the stockholders of the Company by the
requisite vote in accordance with applicable law, if required by applicable
law; (ii) no statute, rule, regulation, order, decree, or injunction shall have
been enacted, entered, promulgated or enforced by any court or governmental
authority which prohibits or restricts the consummation of the Merger; (iii)
any waiting period applicable to the Merger under the HSR Act shall have
terminated or expired; (iv) the Spin-Off shall have been consummated in all
material respects; and (v) the Offer shall not have been terminated in
accordance with its terms prior to the purchase of any Shares.
Parent's and the Purchaser's Conditions to the Merger. The obligations of
Parent and the Purchaser to effect the Merger are further subject to the
satisfaction at or prior to the Effective Time of the following conditions: (i)
the representations and warranties of the Company contained in the Merger
Agreement shall be true and correct in all material respects at and as of the
Effective Time as if made at and as of such time; and (ii) the Company shall
have performed in all material respects each of its obligations under the
Merger Agreement required to be performed by it at or prior to the Effective
Time pursuant to the terms of the Merger Agreement. The conditions set forth
above shall cease to be conditions to the obligations of the parties if the
Purchaser shall have accepted for payment and paid for shares validly tendered
pursuant to the Offer, provided that the terms of this exception will be deemed
satisfied if the Purchaser fails to accept for payment any Shares pursuant to
the Offer in violation of the terms thereof.
The Company's Conditions to the Merger. The obligation of the Company to
effect the Merger is further subject to the satisfaction at or prior to the
Effective Time of the following conditions: (i) the representations and
warranties of Parent and the Purchaser contained in the Merger Agreement shall
be true and correct in all material respects at and as of the Effective Time as
if made at and as of such time; and (ii) each of Parent and the Purchaser shall
have performed in all material respects its obligations under the Merger
Agreement required to be performed by it at or prior to the Effective Time
pursuant to terms of the Merger Agreement.
Dissenting Shares. Shares which are issued and outstanding immediately prior
to the Effective Time and which are held by stockholders who have not voted
such shares in favor of the Merger and shall have delivered a written demand
for appraisal of such Shares in the manner provided in the Delaware General
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Corporation Law (the "DGCL") shall not be converted into or be exchangeable for
the right to receive the Merger Consideration, unless and until such holder
shall have failed to perfect or shall have effectively withdrawn or lost such
holder's right to appraisal and payment under the DGCL. If such holder shall
have so failed to perfect or shall have effectively withdrawn or lost such
right, such holder's Shares shall thereupon be deemed to have been converted
into and to have become exchangeable for, at the Effective Time, the right to
receive the Merger Consideration, without any interest thereon.
Redemption of Series A Convertible Preferred Stock. Under the Merger
Agreement, the Company shall give notice to all holders of the Series A
Convertible Preferred Stock (as defined in Section 4.2 of the Merger Agreement)
that, on a date, as designated by the Company, prior to the Record Date, all
shares of Series A Convertible Preferred Stock will be called for redemption,
in accordance with Article Four, I. 4 of the Charter, at the price provided for
therein.
Conversion of Series B Preferred Stock. The shares of Series B Preferred
Stock issued and outstanding immediately prior to the Effective Time shall,
pursuant to the provisions of the Charter, be converted into the right to
receive the amount of cash that would have been receivable by a holder of the
aggregate number of Shares into which such shares of Series B Preferred Stock
could have been converted immediately prior to the Effective Time (taking into
account for this purpose the adjustment to the conversion price of such shares
of Series B Preferred Stock required by the Charter to reflect the Spin-Off).
The Company shall use its best efforts to enter into an agreement with the
trustee of the PSIP, pursuant to which the trustee would cause all shares of
Series B Preferred Stock held by the PSIP to convert into Shares on or prior to
the Spin-Off Record Date; provided that in using such best efforts, the Company
shall not be obligated to take any actions which would be adverse to the
Company or pay any amounts in connection with seeking such agreement.
Employee Benefits for Employees of the PCS Business. Pursuant to the Merger
Agreement, Parent agrees that: (i) for a period of three years following the
Effective Time, Parent would cause the Surviving Corporation and its successors
to provide the employees of the Company and its subsidiaries remaining with the
PCS business and former employees of the PCS business (collectively, the
"Retained Employees") with employee benefits, programs, policies and
arrangements which in the aggregate are no less favorable than those provided
by the Company to such Retained Employees immediately prior to the date
thereof. With respect to such benefits, programs, policies and arrangements,
service accrued by such Retained Employees during employment with the Company
and its subsidiaries prior to the Effective Time shall be preserved and
maintained for all purposes except to the extent that benefits may be
duplicated; (ii) as soon as practicable following the Effective Time, New
McKesson would take all action necessary and appropriate to cause the assets
and liabilities of the Company Retirement Plan (the "Retirement Plan")
attributable to Retained Employees (other than former employees of the PCS
business) to be transferred, in compliance with Section 414(l) of the Code and
the Treasury Regulations applicable thereto and on terms reasonably
satisfactory to Parent and the Surviving Corporation, to a comparable defined
benefit pension plan sponsored by Parent, the Purchaser or the Surviving
Corporation in which such employees are eligible to participate; and (iii) the
Company and New McKesson would take all action necessary and appropriate to
cause the PSIP to be assumed by New McKesson, effective as of the Effective
Time. In connection with the actions contemplated by clause (iii) above, all of
the indebtedness of the Company (and guarantees made by the Company of
indebtedness of the trust established under the PSIP) relating to the
unallocated Shares and unallocated shares of Series B Preferred Stock held by
the PSIP shall be assumed by New McKesson, effective as of the Effective Time.
As soon as practicable after the Effective Time, New McKesson shall take all
action necessary and appropriate to cause the account balances under the PSIP
of Retained Employees (other than former employees of the PCS business) to be
transferred to a defined contribution plan sponsored by Parent, the Purchaser
or the Surviving Corporation in which such Retained Employees are eligible to
participate.
Board Designation Rights of Parent. In the event that the Purchaser acquires
at least a majority of the Shares outstanding on a fully diluted basis pursuant
to the Offer, Parent shall be entitled to designate for appointment or election
to the Company's Board of Directors, upon written notice to the Company, such
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number of persons so that the designees of the Parent (the "Designated
Directors") constitute a majority of the Company's Board of Directors. Prior to
consummation of the Offer, the Board of Directors of the Company will either
adopt an amendment to the Company's By-Laws to provide in effect that upon the
request of Parent following the acquisition by the Purchaser of a majority of
the Shares outstanding on a fully diluted basis pursuant to the Offer, the
number of members of the Company's Board of Directors shall be increased to the
extent necessary to provide the persons designated by Parent with a majority of
the positions on the Board, or will obtain the resignation of such number of
directors as is necessary to enable such number of Parent designees to be so
elected. In connection therewith, Parent and the Purchaser will provide to the
Company in writing, and be solely responsible for, any information with respect
to such companies and their nominees, officers, directors and affiliates
required by such Section and Rule. Notwithstanding the foregoing rights, the
parties hereto shall use their respective best efforts to ensure that at least
three of the members of the Company's Board of Directors shall, at all times
prior to the Effective Time be, Continuing Directors (as defined in Section 8.4
of the Merger Agreement). See "SCHEDULE I--
Additional Information in Connection with Section 14(f) of the Securities
Exchange Act of 1934 and Rule 14-f thereunder."
Shareholder Approval of the Merger. The Merger Agreement provides that if
required by applicable law in order to consummate the Merger, the Company,
acting through the Board, shall, in accordance with applicable law, its Charter
and By-Laws and the rules and regulations of the New York Stock Exchange: (i)
duly call, give notice of, convene and hold a special meeting of its
stockholders as soon as practicable following the consummation of the Offer for
the purpose of considering and taking action upon the Merger Agreement; (ii)
subject to its fiduciary duties under applicable laws as advised by counsel,
include in the proxy materials to be distributed, if necessary, to the
Company's stockholders in connection with the Merger (the "Proxy Statement")
the recommendation of its Board of Directors referred to in Item 4(a) of this
Schedule 14D-9; and (iii) use its best efforts to (a) obtain and furnish the
information required to be included by it in the Proxy Statement, and, after
consultation with Parent, respond promptly to any comments made by the
Securities and Exchange Commission (the "SEC") with respect to the Proxy
Statement and any preliminary version thereof and cause the Proxy Statement to
be mailed to its stockholders following the consummation of the Offer and (b)
obtain the necessary approvals of this Agreement by its stockholders. Parent
will provide the Company with the information concerning Parent and the
Purchaser required to be included in the Proxy Statement and will vote, or
cause to be voted, all Shares owned by it or its subsidiaries in favor of
approval and adoption of this Agreement.
Pre-Closing Restrictions on the Conduct of the Company's Business. Except as
contemplated by the Merger Agreement or the Ancillary Agreements (as defined in
the Merger Agreement), during the period from the date of the Merger Agreement
to the consummation of the Offer and, in the event that Parent has properly
exercised its Board designation rights (described above), until Parent's
designees shall constitute in their entirety a majority of the Company's Board
of Directors, the Company and its subsidiaries will each conduct the operations
of the PCS business according to its ordinary course of business, consistent
with past practice, and will conduct the operations of all businesses other
than the PCS business in such a manner that would not have a Material Adverse
Effect (as defined in the Merger Agreement) and, with respect to the PCS
business, will use its commercially reasonable efforts to (i) preserve intact
its business organization, (ii) maintain its material rights and franchises,
(iii) keep available the services of its officers and key employees, and (iv)
keep in full force and effect insurance comparable in amount and scope of
coverage to that maintained as of the date hereof. In addition to the foregoing
restrictions, and except as otherwise contemplated by this Agreement or the
Ancillary Agreements, prior to the time specified in the preceding sentence,
neither the Company nor any of its subsidiaries will, without the prior written
consent of Parent:
(a) except for New McKesson and its subsidiaries, amend its charter or
by-laws;
(b) subject to certain exceptions, authorize for issuance, issue, sell,
deliver or agree or commit to issue, sell or deliver (whether through the
issuance or granting of options, warrants, commitments, subscriptions,
rights to purchase or otherwise) any stock of any class or any other
securities or amend
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any of the terms of any such securities or agreements (other than such
securities or agreements of any subsidiary other than any of the Retained
Subsidiaries, or amendments of the Distribution Agreement as permitted
thereunder) outstanding on the date hereof;
(c) other than with respect to any subsidiary which is not a Retained
Subsidiary, split, combine or reclassify any shares of its capital stock,
declare, set aside or pay any dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its
capital stock or redeem or otherwise acquire any of its securities or any
securities of its subsidiaries; provided that the Company may declare and
pay to holders of (i) Shares regular quarterly dividends of not more than
$.42 per Share on the dividend declaration and payment dates normally
applicable to the Shares and (ii) preferred stock of the Company any
dividends required to be paid thereon in accordance with the express
provisions thereof;
(d) except for New McKesson or any of its subsidiaries (i) incur, assume
or prepay any long-term debt or, except in the ordinary course of business
under existing lines of credit, incur, assume, or prepay any material
short-term debt; (ii) assume, guarantee, endorse or otherwise become liable
or responsible (whether directly, contingently or otherwise) for any
material obligations of any other person except wholly owned subsidiaries
of the Company in the ordinary course of business and consistent with past
practices; (iii) make any material loans, advances or capital contributions
to, or investments in, any other person (other than loans or advances to
subsidiaries and customary loans or advances to employees in accordance
with past practices); (iv) change the PCS business' practices with respect
to the timing of payments or collections; (v) pledge or otherwise encumber
shares of capital stock of the Company or any of its subsidiaries (other
than that of New McKesson and its subsidiaries); or (vi) mortgage or pledge
any of the assets, tangible or intangible, of the PCS business, or create
or permit to exist any material lien thereupon, other than in the ordinary
course of business consistent with past practices;
(e) except as disclosed in the Merger Agreement and except for
arrangements with new or existing Retained Employees entered into in the
ordinary course of business consistent with past practices, enter into,
adopt or materially amend any bonus, profit sharing, compensation,
severance, termination, stock option, stock appreciation right, restricted
stock, performance unit, pension, retirement, deferred compensation,
employment, severance or other employee benefit agreements, trusts, plans,
funds or other arrangements of or for the benefit or welfare of any
Retained Employee (or any other person for whom the PCS business will have
liability), or (except for normal increases in the ordinary course of
business that are consistent with past practices) increase in any manner
the compensation or fringe benefits of any Retained Employee (or any other
person for whom the PCS business will have liability) or pay any benefit
not required by any existing plan and arrangement (including, without
limitation, the granting of stock options, stock appreciation rights,
shares of restricted stock or performance units) or enter into any
contract, agreement, commitment or arrangement to do any of the foregoing;
(f) transfer, sell, lease, license or dispose of any assets relating to
the PCS business outside the ordinary course of business or any assets
which are material, in the aggregate, to the PCS business or enter into any
material commitment or transaction with respect to the PCS business outside
the ordinary course of business;
(g) 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
practice), in each case where such action would, individually be material
to the PCS business;
(h) except as may be required by law, take any action to terminate or
materially amend any of its employee benefit plans with respect to or for
the benefit of Retained Employees or any other person for whom the PCS
business will have liability;
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(i) materially modify, amend or terminate (except pursuant to the terms
thereof) any of the material contracts of the PCS business or waive any
material rights or claims of the PCS business, except in the ordinary
course of business;
(j) effect any material change in any of its methods of accounting in
effect as of March 31, 1994, except as may be required by law or generally
accepted accounting principles;
(k) enter into any material arrangement, agreement or contract with any
third party (other than customers in the ordinary course of business
consistent with past practices) which provides for an exclusive arrangement
with that third party; and
(l) take, or agree in writing or otherwise to take, any of the foregoing
actions.
Notwithstanding any of the foregoing and in addition to any other rights of
the Company and its subsidiaries, the Company and its subsidiaries shall have
the right to take any of the actions prohibited under clauses (a) and (d)
through (l) above if such actions would not, either individually or in the
aggregate, adversely impact the PCS business or the consummation of any of the
material transactions contemplated pursuant to the Merger Agreement.
Restrictions on the Company With Respect to Certain Third Parties. The Merger
Agreement provides that the Company and its officers, directors, employees,
representatives and agents shall immediately cease any existing discussions or
negotiations with any parties conducted heretofore with respect to any
Acquisition Proposal (as defined below). The Company and its subsidiaries will
not, and will use their best efforts to cause their respective officers,
directors, employees and investment bankers, attorneys, accountants or other
agents retained by the Company or any of its subsidiaries not to, (i) initiate
or solicit, directly or indirectly, any inquiries or the making of any
Acquisition Proposal, or (ii) except as permitted below, engage in negotiations
or discussions with, or furnish any information or data to any third party
relating to an Acquisition Proposal (other than the transactions contemplated
by the Merger Agreement and by the Ancillary Agreements). Notwithstanding the
foregoing provisions, the Company and the Board (i) may furnish information to,
and participate in discussions or negotiations (including, as a part thereof,
making any counterproposal) with, any third party which submits a written
Acquisition Proposal to the Company if the Board determines in good faith,
based upon the advice of counsel, that the failure to furnish such information
or participate in such discussions or negotiations may reasonably constitute a
breach of the Board's fiduciary duties under applicable law, and (ii) shall be
permitted to (A) take and disclose to the Company's stockholders a position
with respect to the Offer, the Merger or the Spin-Off or another tender or
exchange offer by a third party, or amend or withdraw such position, pursuant
to Rules 14d-9 and 14e-2 of the Exchange Act or (B) make disclosure to the
Company's stockholders, in each case either with respect to or as a result of
an Acquisition Proposal, or if the Company's Board of Directors determines in
good faith, based upon the advice of counsel, that the failure to take such
action may reasonably constitute a breach of the Board's fiduciary duties
under, or otherwise violate, applicable law; provided that the Company shall
not enter into any acquisition agreement with respect to any Acquisition
Proposal prior to the termination of the Merger Agreement and shall not enter
into any other agreements with respect to an Acquisition Proposal except
concurrently with or after such termination unless, and only to the extent
that, such other agreements would facilitate the process of providing
information to, or conducting discussions or negotiations with, the party
submitting such an Acquisition Proposal, such as confidentiality and standstill
agreements. The Company shall promptly provide Parent with a copy of any
written Acquisition Proposal received and inform Parent on a reasonable basis
of the status and content of any discussions with such a third party (provided
that the Company shall not be obligated to so provide such information or
advise Parent if the Board determines in good faith, based upon the advice of
counsel, that such action may reasonably constitute a breach of its fiduciary
duties under applicable law). In no event shall the Company provide non-public
information regarding the PCS business to any third party making an Acquisition
Proposal unless such party enters into a confidentiality agreement containing
provisions designed to reasonably protect the confidentiality of such
information. In the event that following the date hereof the Company enters
into a confidentiality agreement with any third party which does not include
terms and conditions which are substantially similar to the "standstill"
provisions of the confidentiality agreement between the Company and Parent (the
terms of which are summarized below), then
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Parent and its affiliates shall be released from their obligations under such
standstill provisions to the same extent as such third party.
The term "Acquisition Proposal" means any bona fide proposal made by a third
party to acquire (i) beneficial ownership (as defined under Rule 13(d) of the
Exchange Act) of a majority equity interest in either the Company or the PCS
business pursuant to a merger, consolidation or other business combination,
sale of shares of capital stock, tender offer or exchange offer or similar
transaction involving either the Company or the PCS business, including,
without limitation, any single or multi-step transaction or series of related
transactions which is structured in good faith to permit such third party to
acquire beneficial ownership of a majority or greater equity interest in either
the Company or the PCS business or (ii) all or substantially all of the
business or assets of either the Company or of the PCS business (other than the
transactions contemplated by the Merger Agreement and the Ancillary
Agreements); provided, however, that the term "Acquisition Proposal" shall not
include any transactions which relate solely to the businesses to be owned by
New McKesson and its subsidiaries following the Spin-Off and which do not have
a material adverse effect on the consummation of the Offer, the Merger, the
Spin-Off or the transactions contemplated hereby.
Representations and Warranties. Each of the Company on the one hand, and
Parent and Purchaser on the other hand, have made certain customary
representations and warranties to the other in the Merger Agreement, including,
without limitation, representations by the Company as to certain changes
concerning its business, undisclosed liabilities, litigation and compliance
with law, employee benefit plans, rights to assets, intellectual property,
computer software, certain contracts and arrangements, and taxes.
Best Efforts Obligation of the Parties. The Merger Agreement provides that,
subject to the terms and conditions provided therein, each of the parties
agrees (a) to promptly make their respective filings and thereafter make any
other required submissions under the HSR Act with respect to the Offer, Merger
and Ancillary Agreements, and (b) to use its best efforts to take, or cause to
be taken, all action 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 the Merger Agreement and the
Ancillary Agreements. The parties also agreed that if any administrative,
judicial or legislative action or preceeding is instituted (or threatened to be
instituted) challenging the Offer, the Spin-Off, the Merger or any other
transactions contemplated by the Merger Agreement or the Ancillary Agreements
as violative of any Antitrust Law (as defined in the Merger Agreement), such
parties will cooperate and use their respective best efforts to contest and
resist vigorously any such action or proceeding, and have vacated, lifted,
reversed or overturned any decree, judgement, injunction or other order
(whether temporary, preliminary or permanent) (any such decree, judgement,
injunction or other order is hereafter referred to as an "Order") that is in
effect and that restricts, prevents or prohibits consummation of the Offer, the
Spin-Off, the Merger or any other transactions contemplated by this Agreement
or the Ancillary Agreements, including, without limitation, by vigorously
pursuing all available avenues of administrative and judicial appeal and all
available legislative actions. In addition, Parent and the Purchaser consented
to use their respective best efforts to take such action, including, without
limitation (but subject to the provisions of the succeeding sentence and other
exceptions) agreeing to hold separate or to divest any of their businesses,
product lines, or assets or any of their affiliates or, following the
consummation of the Offer or the Effective Time, the businesses, product lines,
or assets of the Company or any of the Retained Subsidiaries, as may be
required (a) by the applicable governmental or regulatory authority or (b) by
any domestic or foreign court or other tribunal. Notwithstanding the foregoing,
(i) neither Parent nor any of its subsidiaries or affiliates will be required
to agree to divest (A) any of their respective businesses, product lines or
assets, if the fair market value of any such businesses, product lines or
assets is, as of the date in question, in excess of $10 million or (B)
following the consummation of the Offer or the Effective Time, any of the
businesses, product lines or assets of the Company or any of the PCS business
and (ii) neither parent nor any of its subsidiaries or affiliates will be
required to take or agree to take any action or agree to any limitation which
would materially impair Parent's ability to exercise control over or manage
business and affairs of the PCS business or materially impair Parent's ability
to obtain the other benefits provided by the Merger Agreement in order to
obtain termination of waiting period under the HSR Act.
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Rights. Pursuant to the Merger Agreement, the Company has agreed to amend the
Rights Agreement as necessary (i) to prevent the transactions contemplated
hereby (including, without limitation, the announcement of the Offer, the
consummation of the Offer and the Merger) from resulting in the occurrence of a
Distribution Date (as defined in the Rights Agreement) or being deemed to be a
Triggering Event or Section 13 Event (each as defined in the Rights Agreement)
and (ii) to provide that neither Parent nor the Purchaser shall be deemed to be
an Acquiring Person (as defined in the Rights Agreement) or be declared an
Adverse Person (as defined in the Rights Agreement) by reason of such
transactions.
Termination. The Merger Agreement may be terminated: (a) by mutual written
consent of Parent, the Purchaser and the Company; (b) by either Parent and the
Purchaser, on the one hand, or the Company, on the other hand, if the Offer
shall expire or have been terminated in accordance with its terms without any
Shares being purchased thereunder, or the Purchaser shall not have accepted for
payment or paid for Shares validly tendered pursuant to the Offer prior to
December 31, 1994; (c) by Parent and the Purchaser, on the one hand, or the
Company, on the other hand, if any court of competent jurisdiction in the
Untied States or other United States governmental body shall have issued an
order, decree or ruling or taken any other action restraining, enjoining or
otherwise prohibiting the Merger and such order, decree, ruling or other action
shall have become final and nonappealable; (d) by the Company, if prior to the
purchase of Shares pursuant to the Offer, either (i) a third party shall have
made an Acquisition Proposal and the Board of Directors of the Company
determines in good faith, based upon the advice of counsel, that the failure to
pursue such Acquisition Proposal may reasonably constitute a breach of its
fiduciary duties under applicable law, or (ii) other than in response to an
Acquisition Proposal, the Board determines in good faith, based upon the advice
of counsel, that the failure to so terminate the Merger Agreement would present
a substantial likelihood of a breach of its fiduciary duties under applicable
law and the Company notifies Parent of such determination of the Board at least
30 days prior to the date of any termination; or (e) by Parent and the
Purchaser prior to the purchase of Shares pursuant to the Offer, if the Company
or its Board of Directors shall have (i) withdrawn (including by amendment of
the Schedule 14D-9) its recommendation to the Company's stockholders of the
Offer, the Merger Agreement or the Merger or shall have recommended to the
Company's stockholders that they accept the terms of a Third Party Acquisition
(as defined below), or (ii) a Third Party Acquisition shall have occurred.
Termination Fees. Pursuant to the Merger Agreement, (a) if the Company
terminates the Merger Agreement as described in clause (d)(i) of the preceding
paragraph, the Company will, simultaneously with such termination, pay to
Parent a fee, in cash, of $100 million; (b) if Parent terminates the Merger
Agreement as described in clause (e) of the preceding paragraph and, prior to
such termination or within nine months thereafter, a Third Party Acquisition is
consummated involving any entity or group (other than Parent and the Purchaser
or any affiliate thereof) which is a Higher Offer (as defined below), then the
Company will, on the date of such termination or consummation, pay to Parent a
fee, in cash, of $100 million; (c) if the Company terminates the Merger
Agreement for any reason other than the bases for terminating the Merger
Agreement as described in clauses (a), (d)(i) or (e) of the preceding paragraph
(unless Parent or the Purchaser shall at the time of such termination be in
material breach, other than breach which is curable and which Parent and the
Purchaser are using their best efforts to cure), and prior to or within nine
months after the date of such termination a Third Party Acquisition is
consummated involving any entity or group (other than Parent and the Purchaser
or any affiliate thereof) which is a Higher Offer, then the Company will, on
the date of such termination or consummation, pay to Parent a fee, in cash, of
$100 million; (d) if the Company terminates the Merger Agreement as described
in clause (d)(ii) of the preceding paragraph (unless Parent or the Purchaser
shall at the time of such termination be in material breach, other than a
breach which is curable and which Parent and the Purchaser are using their best
efforts to cure), the Company will, simultaneously with such termination, pay
to Parent a fee, in cash, of $40 million.
"Third Party Acquisition" means the occurrence of any of the following
events: (i) the acquisition of the Company by merger or otherwise by any person
(which includes a "person" as such term is defined in Section 13(d)(3) of the
Exchange Act) or entity other than Parent, the Purchaser or any affiliate
thereof (a "Third
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Party"); (ii) the acquisition by a Third Party of more than 50% of the total
assets of the Company and its subsidiaries, taken as a whole, or of 50% or more
of the total assets of the Retained Business; or (iii) the acquisition by a
Third Party of 50% or more of the outstanding Shares, or 50% or more of the
equity interest in, or the voting power with respect to the election of
directors of, the PCS business.
"Higher Offer" means any Third Party Acquisition which reflects a higher
value for the PCS business then the value being provided by Parent pursuant to
the Offer, the Merger and the Additional Agreements (as defined in the Merger
Agreement). In valuing such a Third Party Acquisition, due regard shall be
given to the value to the Company or its stockholders of any additional
arrangements involved in such Third Party Acquisition.
Pursuant to the Merger Agreement, in the event of the termination and
abandonment of the Merger Agreement, the Merger Agreement will become void and
have no effect, without any liability on the part of any party or its
directors, officers or stockholders, other than certain provisions of the
Merger Agreement, including the provisions relating to the termination fee,
other fees and expenses and confidentiality of information, provided, that a
party will not be relieved from liability for any willful breach of the Merger
Agreement.
Effect of Payment of Termination Fee. Notwithstanding anything to the
contrary contained in the Merger Agreement, upon payment by the Company of the
fees and expenses referred to in Section 8.3 of the Merger Agreement, the
Company shall be released from all liability thereunder, including any
liability for any claims by Parent, the Purchaser or any of their affiliates
based upon or arising out of any breach of the Merger Agreement or any
Ancillary Agreement. In no event shall the Company be required to pay more than
one fee pursuant to Section 8.3 of the Merger Agreement, provided that if the
Company shall pay the $40 million fee contemplated by Section 8.3(d) of the
Merger Agreement and a $100 million fee shall otherwise become payable pursuant
to Section 8.3 of the Merger Agreement, the Company shall pay Parent at that
time $60 million.
General Fees and Expenses. Except as specifically provided in the termination
fee provisions of the Merger Agreement and except as otherwise specifically
provided in the Distribution Agreement, each party shall bear its own costs and
expenses in connection with this Agreement and the transactions contemplated by
the Merger Agreement.
Amendments to the Merger Agreement. The provisions of the Merger Agreement
may be amended by action taken by the Company, Parent and the Purchaser at any
time before or after adoption of the Merger by the stockholders of the Company,
if any; provided that (x) in the event that any of Parent's designees
constitute in their entirety a majority of the Board, no amendment shall be
made which decreases the cash price per Share or which adversely affects the
rights of the Company's stockholders hereunder without the approval of a
majority of the Continuing Directors (as hereafter defined) if at the time
there shall be any Continuing Directors and (b) after the date of adoption of
the Merger by the stockholders of the Company, no amendment shall be made which
decreases the cash price per Share or which adversely affects the rights of the
Company's stockholders hereunder without the approval of such stockholders. The
term "Continuing Director" means (a) any member of the Board as of the date
hereof, (b) any member of the Board who is unaffiliated with, and not a
Designated Director or other nominee of, Parent or the Purchaser or their
respective subsidiaries, and (c) any successor of a Continuing Director who is
(i) unaffiliated with, and not a Designated Director or other nominee of,
Parent or the Purchaser or their respective subsidiaries and (ii) recommended
to succeed a Continuing Director by a majority of the Continuing Directors then
on the Board.
THE DISTRIBUTION AGREEMENT
The following summary of the Distribution Agreement does not purport to be
complete and is qualified in its entirety by reference to the text of the
Distribution Agreement, a copy of which is filed as Exhibit 4 hereto and
incorporated herein by reference.
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The Spin-Off. The Distribution Agreement provides that prior to the
consummation of the Offer, the Company will (i) transfer certain of the
businesses of the Company and its subsidiaries, other than assets related to
the PCS business, to New McKesson and (ii) declare a dividend (conditioned upon
consummation of the Offer) of one New McKesson Share for each Share held of
record as of such date. After giving effect to the foregoing transactions, the
assets of the Company will consist primarily of the PCS business. New McKesson
will own and operate all businesses of the Company and its subsidiaries other
than the PCS business, including, without limitation, the pharmaceutical and
health care products distribution business, the water products business and the
Armor All business conducted by the Company and its subsidiaries as of the date
of the Spin-Off.
Declaration of the Record Date and the Distribution Date. The Distribution
Agreement provides that the Board shall in its sole discretion establish the
record date (the "Record Date") for determining the holders of Shares entitled
to participate in the Spin-Off and the date of the distribution (the
"Distribution Date") of the New McKesson Shares to such holder. The Offer is
conditioned upon, among other things, the Record Date for the Spin-Off having
occurred and the Merger is conditioned upon, among other things, the Spin-Off
having been consummated. In addition, the Spin-Off is conditioned upon Shares
having been accepted for purchase pursuant to the Offer. In the Merger
Agreement, the Company has agreed to establish the Record Date and the
Distribution Date at the earliest practicable dates; provided that the
foregoing obligation is subject to the Board's discretion and to the
satisfaction of each of the following conditions: (i) the Purchaser shall have
consummated the Offer pursuant to the terms and conditions of the Offer, (ii)
the Form 10 (or the registration statement if otherwise required) shall have
been declared effective by the SEC and (iii) the New McKesson Shares shall have
been accepted for listing or quotation either on the New York Stock Exchange or
any other national securities exchange as selected by New McKesson in its sole
discretion. THE COMPANY INTENDS TO DISTRIBUTE TO HOLDERS OF SHARES AN
INFORMATION STATEMENT WITH RESPECT TO NEW MCKESSON AND THE NEW MCKESSON SHARES.
SUCH INFORMATION STATEMENT WILL CONTAIN IMPORTANT INFORMATION RELATING TO NEW
MCKESSON AND THE NEW MCKESSON SHARES AND STOCKHOLDERS OF THE COMPANY ARE
ENCOURAGED TO READ SUCH INFORMATION STATEMENT CAREFULLY.
New McKesson Shares. New McKesson will issue to the Company,
contemporaneously with the transfer of the Company assets and assumption of
Company liabilities contemplated in the Distribution Agreement, the number of
New McKesson Shares equal to the number of shares of Company Common Stock
outstanding on the Record Date (excluding shares of Company Common Stock held
by the Company in its treasury or held by certain affiliates of the Company).
Following the Record Date, the Company shall, subject to certain conditions in
the Distribution Agreement, deliver to the distribution agent to be appointed
by the Company to distribute the New McKesson Shares pursuant to such
distribution (the "Agent"), one or more share certificates representing all of
the outstanding New McKesson Shares. The New McKesson Shares will include all
associated preferred stock purchase rights to be issued pursuant to a right
agreement to be entered into between New McKesson and a rights agent to be
selected by New McKesson. Pursuant to the Distribution Agreement, prior to the
Distribution Date, the Company and New McKesson will prepare, and New McKesson
will file and seek to make effective, an application to permit listing of the
New McKesson Shares either on the New York Stock Exchange or any other national
securities exchange as selected by New McKesson in its sole discretion. The
Company expects that on or prior to the Distribution Date the New McKesson
Shares will be listed for trading on the New York Stock Exchange and the
Pacific Stock Exchange.
Indemnification. Following the Spin-Off, New McKesson has agreed to
indemnify, defend and hold harmless the Company, Purchaser and Parent and each
of their respective directors, officers, employees, representatives, advisors,
agents and affiliates (collectively, the "Parent Indemnitees") from and against
all losses, liabilities, claims, damages, obligations, payments, costs and
expenses of the Parent Indemnitees arising out of or resulting from, directly
or indirectly, (i) any breach of any representation or warranty contained in
Article IV or in Section 9.11 of the Merger Agreement (without giving effect to
any materiality qualifications set forth therein), (ii) any breach by the
Company of the covenants and agreements set forth in the Merger Agreement, and
(iii) certain liabilities attributable to the businesses of New McKesson. New
McKesson has
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also agreed to indemnify the Parent Indemnitees for certain employee-related
and other miscellaneous liabilities. New McKesson's obligations to indemnify
Parent Indemnitees pursuant to the foregoing provisions are subject to the
following limitations: (w) no indemnification shall be made by New McKesson
pursuant to clause (i) above unless the aggregate amount of losses incurred by
the Parent Indemnitees exceeds $10,000,000, and, in such event, indemnification
shall be made by New McKesson only to the extent that the aggregate amount of
such Indemnifiable Losses exceeds $10,000,000; (x) in no event shall New
McKesson's aggregate obligation to indemnify the Parent Indemnitees pursuant to
such clauses (i) and (ii) above exceed $200,000,000 (except that the foregoing
limitation shall not apply to any Indemnifiable Losses arising out of any
willful breach of the covenants and agreements set forth in the Merger
Agreement); (y) New McKesson shall be obligated to indemnify the Parent
Indemnitees only for those Indemnifiable Losses under clauses (i) or (ii) above
as to which the Parent Indemnitees have given New McKesson written notice
thereof on or prior to nine months after the consummation of the Offer; and (z)
the amount of any indemnifiable claim shall be reduced by (A) any amount
received by a Parent Indemnitee with respect thereto under any insurance
coverage (net of any costs of such coverage incurred by such Parent Indemnitee)
or from any other party alleged to be responsible therefor and (B) the amount
of any tax benefit relating to any indemnifiable claim.
Additionally, following the Spin-Off, the Company has agreed to indemnify,
defend and hold harmless New McKesson and each of its directors, officers,
employees, representatives, advisors, agents and affiliates (collectively, the
"New McKesson Indemnitees") from and against all losses, liabilities, claims,
damages, obligations, payments, costs and expenses of the New McKesson
Indemnitees arising out of or resulting from, directly or indirectly, (i) any
breach of any representation or warranty contained in Article V of the Merger
Agreement (without giving effect to any materiality qualifications set forth
therein), (ii) any breach by Parent or the Purchaser of the covenants and
agreements set forth in the Merger Agreement, and (iii) certain liabilities
attributable to the PCS business. The Company's obligations to indemnify the
New McKesson Indemnitees are subject to limitations similar to those of New
McKesson with respect to indemnification of the Parent Indemnitees as described
in the preceding paragraph.
Net Working Capital Adjustment. Pursuant to the Distribution Agreement, in
connection with the Spin-Off, New McKesson, on the one hand, and the PCS
business, on the other hand, will settle all intercompany accounts. In
connection with such settlements, such parties will calculate the amount of
Negative Net Working Capital (as defined in the Distribution Agreement) held in
the PCS business at the time of the Spin-Off. In the event that the Negative
Net Working Capital as of the close of business on the date of consummation of
the Offer (i) is greater than $70,000,000, then New McKesson shall pay the
Company a cash amount equal to the amount by which the Negative Net Working
Capital is greater than $70,000,000 or (ii) is less than $70,000,000, then the
Company shall pay New McKesson a cash amount equal to the amount by which the
Negative Net Working Capital is less than $70,000,000.
Transfer of Company Indebtedness to New McKesson. On or prior to consummation
of the Offer, subject to obtaining any required consents or approvals, New
McKesson will assume the debt obligations of the Company. If consent to the
assumption by New McKesson of any of the Company's non-public debt obligations
is not received, the Company will redeem, defease or otherwise prepay such
indebtedness. New McKesson will execute supplemental indentures or other
document satisfactory in form to any applicable trustee pursuant to which it
shall expressly assume the payment, performance and observance, jointly and
severally with the Company, of the obligations of the Company under the
Company's 4.50% Exchangeable Subordinated Debentures due 2004, 8 5/8% Notes due
1998 and 8.75% Notes due 1997 (collectively, the "Public Indebtedness").
Notwithstanding the assumption by New McKesson of such Public Indebtedness, the
Company will not be released from, and will remain a party to, and will be
jointly and severally liable with New McKesson under, such Public Indebtedness,
until such time as any consent required to effect such release shall have been
obtained. As between New McKesson and the Company, New McKesson will have the
primary obligation to perform obligations under the Public Indebtedness. New
McKesson has agreed to indemnify the Company and its affiliates for any losses
incurred with respect to any such Public Indebtedness. Promptly following the
Effective Time (unless required to do so prior thereto) New McKesson and the
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Company will use their best efforts to do or cause to be done all things
necessary under the terms of the agreements governing such Public Indebtedness
and the provisions of applicable law (including, without limitation, preparing
and filing with the SEC any required registration statements, consent
solicitation or exchange offer documentation and other relevant materials,
mailing to the holders of such Public Indebtedness all relevant consent and
other materials, entering into any required supplemental indentures and, on the
part of New McKesson, offering to pay and paying any reasonable fees to the
holders of such Public Indebtedness in connection with such solicitation or
offer), which may be appropriate or required in order to effect the release of
the Company from all obligations and liabilities under such Public
Indebtedness. New McKesson will bear all costs incurred in connection with
seeking to effect such release of the Company from such obligations and
liabilities, including, without limitation, the reasonable, documented out-of-
pocket expenses of the Company relating thereto and to complying with its
public filing requirements applicable to such Public Indebtedness.
Directors and Officers of New McKesson. New McKesson and the Company shall
take all actions which may be required to elect or otherwise appoint, as of the
Distribution Date, those individuals that the Board (as in effect prior to the
consummation of the Offer) may designate as directors of New McKesson. It is
expected that the executive officers of the Company as of the date hereof shall
be the executive officers of New McKesson. Those employees of the Company who
are employed by the Company and its subsidiaries (other than the PCS business)
immediately prior to the Distribution Date shall become employees of New
McKesson in the same capacities.
Amendments of Distribution Agreement. While neither Parent nor the Purchaser
is a party to the Distribution Agreement, the parties thereto have agreed not
to amend the Distribution Agreement or any of the other agreements entered into
or to be entered into in connection with the Distribution Agreement if such
amendment would adversely affect the Retained Business or New McKesson's
performance of its obligations under such agreement without the prior written
consent of Parent.
THE TAX SHARING AGREEMENT
Pursuant to the Tax Sharing Agreement dated as of July 10, 1994, among the
Company, New McKesson, Parent and the Purchaser (the "Tax Sharing Agreement"),
New McKesson generally has agreed, among other things, to file all tax returns
with respect to, and pay all taxes (including all taxes based upon or measured
by net income, and all other taxes) imposed upon, the Company and its
subsidiaries for all taxable periods or portions thereof ending on or before
the Distribution Date, including any taxes incurred in connection with the
creation and distribution of New McKesson. New McKesson also will pay all taxes
for New McKesson and any future subsidiaries of New McKesson for taxable
periods beginning after the Distribution Date. Parent will generally pay all
taxes for the Company for all periods beginning after the Distribution Date.
The Tax Sharing Agreement becomes effective only upon the consummation of the
Offer.
The foregoing summary of the Tax Sharing Agreement does not purport to be
complete and is qualified in its entirety by reference to the text of the Tax
Sharing Agreement, a copy of which is filed as Exhibit 5 hereto and is
incorporated herein by reference.
THE HDS SERVICES AGREEMENT
Pursuant to the HDS Services Agreement, dated as of July 10, 1994, among
Parent, PCS, and Healthcare Delivery Systems. Inc., a Delaware corporation
("HDS"), (the "HDS Services Agreement"), HDS has agreed to provide certain
services, including drug sampling and other promotional programs, financial
assistance programs for patients, reimbursement support and patient advocacy
programs, clinical trial support services, and product hot-line programs (the
"HDS Services"), to Parent or PCS on terms as favorable as the best terms
offered to HDS's other customers. In consideration for this arrangement, PCS
has agreed, among other things, to (i) provide HDS with the PCS Capabilities
(as hereinafter defined), (ii) use its best efforts to assign to HDS all
existing agreements entered into by PCS relating to providing the HDS Services,
(iii) make
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available to HDS PCS Data Processing Capabilities (as hereinafter defined),
(iv) provide HDS with access to the PCS Data Transmission Capabilities (as
hereinafter defined) and (v) create and maintain a service unit whose primary
responsibility will be to service HDS. In addition, PCS and Parent have agreed,
subject to certain limited exceptions, that for a period of three years from
the date of the agreement, no person or entity other than HDS, would be
permitted to use the PCS Capabilities to provide any of the HDS Services. The
HDS Services Agreement also contemplates that Parent will diligently
investigate the HDS Services and consider in good faith using HDS as the
provider of such services when it is appropriate to do so in light of the
business needs and requirements of Parent, and the relative costs of such
services.
The HDS Services Agreement has a five year term and is terminable by Parent
upon a change of control of HDS or New McKesson. In addition, the agreement
provides Parent with a right of first refusal if HDS or New McKesson decides to
sell all or part of HDS's business. The HDS Services Agreement becomes
effective only upon consummation of the Offer.
"PCS Capabilities" is defined to include PCS Data Processing Capabilities,
PCS Data Transmission Capabilities, and other support services made available
to PCS customers. "PCS Data Processing Capabilities" include programming, data
processing, and related auxiliary support for data processing. "PCS Data
Transmission Capabilities" is defined to include switching, data transmission,
and telecommunication capabilities of PCS.
The foregoing summary of the HDS Services Agreement does not purport to be
complete and is qualified in its entirety by reference to the text of the HDS
Services Agreement, a copy of which is filed as Exhibit 8 hereto and is
incorporated herein by reference.
THE MCKESSON SERVICES AGREEMENT
Pursuant to the McKesson Services Agreement dated as of July 10, 1994,
between PCS and New McKesson (the "McKesson Services Agreement"), PCS has
agreed, among other things, to (i) allow, subject to specific limitations,
certain affiliated pharmacies of New McKesson, consistent with existing
practices, to participate in its Restricted and Unrestricted Networks (as
hereinafter defined), (ii) consider in good faith providing New McKesson with
PCS data regarding pharmacies, (iii) maintain and provide to New McKesson a
database of information relating to the participation by New McKesson stores in
the PCS Provider Networks (as defined in the McKesson Services Agreement), (iv)
create and maintain a service unit whose primary responsibility will be to
service HDS and (v) provide to New McKesson PCS's mail order pharmacy program
for all maintenance drug dispensing requirements associated with New McKesson's
managed care and HDS, programs. In consideration of these services, New
McKesson has agreed that if it contracts with its customers to provide managed
pharmacy benefits to third parties, it will only provide such benefits through
PCS. A "Restricted Network" is defined as a pharmacy network which is available
to a limited number or a percentage of pharmacies in a particular geographic
area. An "Unrestricted Network" is defined as a pharmacy network which is
available to all pharmacies which agree to meet the network's requirements.
The McKesson Services Agreement has a five year term and is terminable by PCS
upon any change of control of McKesson. The McKesson Services Agreement becomes
effective only upon consummation of the Offer.
The foregoing summary of the McKesson Services Agreement does not purport to
be complete and is qualified in its entirety by reference to the text of the
McKesson Services Agreement, a copy of which is filed as Exhibit 9 hereto and
is incorporated herein by reference.
THE MEMORANDUM OF UNDERSTANDING
Pursuant to the Memorandum of Understanding dated as of June 10, 1994, New
McKesson and Parent have agreed to explore a strategic relationship between New
McKesson and Parent. Parent and New McKesson intend to investigate the
feasibility of (i) developing and marketing a full line of generic products
21
<PAGE>
and (ii) developing programs relating to disease therapies involving Parent's
programs which promote and monitor patient compliance with drug therapy.
The Memorandum of Understanding also contemplates (i) a wholesaling and
distribution alliance between PCS, Parent and New McKesson, (ii) the
possibility of closing certain of Parent's distribution centers and using New
McKesson to handle physical distribution of Parent's products to wholesalers,
(iii) the possibility of using New McKesson's services to more efficiently
process Parent's third-party shipments and to distribute Parent's potential
disease management product package to point of use, and (iv) the development of
an incentive program for marketing Parent products to certain hospitals. The
Memorandum of Understanding becomes effective only upon consummation of the
Offer.
The foregoing summary of the Memorandum of Understanding does not purport to
be complete and is qualified in its entirety by reference to the text of the
Memorandum of Understanding, a copy of which is filed as Exhibit 6 hereto and
is incorporated herein by reference.
THE NON-COMPETITION AGREEMENT
Pursuant to a Non-Competition Agreement, dated as of July 10, 1994 (the "Non-
Competition Agreement"), between the Company, New McKesson, the Purchaser and
Parent, New McKesson agreed that from and after the date the Purchaser
consummates the Offer until the fifth anniversary thereof that it will not (nor
will it permit any other entity in which it holds an interest giving it
effective control to) engage in any activity in competition in any material
respect with the PCS business or certain other activities, anywhere in the
world except for Mexico; provided that the activities contemplated by the
McKesson Services Agreement and the HDS Services Agreement will not be deemed
to be activities in competition with the PCS business or otherwise subject to
the restrictions of the Non-Competition Agreement.
The foregoing summary of the Non-Competition Agreement does not purport to be
complete and is qualified in its entirety by reference to the text of the Non-
Competition Agreement, a copy of which is filed as Exhibit 7 hereto and is
incorporated herein by reference. The Non-Competition Agreement becomes
effective only upon consummation of the Offer.
THE CONFIDENTIALITY AGREEMENT
On June 8, 1994, the Company and Parent entered into a confidentiality
agreement (the "Confidentiality Agreement") pursuant to which the Company
agreed to supply certain information to Parent and its affiliates, and Parent
agreed to treat, and to cause its affiliates to treat, such information as
confidential. In addition, Parent agreed to abide by certain "standstill"
restrictions for a three-year period. The Merger Agreement provides that the
Confidentiality Agreement shall terminate in its entirety following
consummation of the Offer.
The foregoing summary of the Confidentiality Agreement does not purport to be
complete and is qualified in its entirety by reference to the text of the
Confidentiality Agreement, a copy of which is filed as Exhibit 10 hereto and is
incorporated herein by reference.
ITEM 4. THE SOLICITATION OR RECOMMENDATION
(A) RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors has unanimously (i) approved the Merger Agreement, the
Ancillary Agreements and the transactions contemplated thereby, (ii) determined
that the Offer, the Merger and the Spin-Off are fair to and in the best
interests of the stockholders of the Company and (iii) determined to recommend
acceptance of the Offer and approval and adoption of the Merger Agreement by
the stockholders of the Company.
22
<PAGE>
(B) BACKGROUND; REASONS FOR THE RECOMMENDATION
Over approximately the last year, the Company has reviewed the prospects of
the pharmaceutical benefits management ("PBM") industry, the position of the
PCS business within that industry and the strategic opportunities available to
the PCS business. Over such period, the Company has considered various possible
transactions involving the PCS business, including strategic alliances, joint
ventures and a sale, by means of various structures, of all or a partial
interest in the PCS business.
In August 1993, the Company's senior management began actively exploring the
potential strategic opportunities available to the Company with respect to the
PCS business in light of the changing healthcare environment, the increasingly
competitive PBM and pharmaceutical industries and the financial condition,
growth opportunities and prospects of the PCS business. The Company was aware
that various other companies had entered into, and believed that certain other
companies were considering, a variety of strategic transactions to strengthen
their positions in the PBM and pharmaceutical industries in recognition of the
changes in the PBM and pharmaceutical industries and the prospects for further
change in those industries. Such other transactions included joint ventures,
joint marketing arrangements, acquisitions of other companies in the same or
related fields and consolidations with other companies.
In October 1993, Parent contacted the Company to determine if the Company
wished to discuss possible alliances in broad terms, including the possibility
of Parent's taking a minority equity position in the Company or the PCS
business. At that time, the Company indicated that it would not be an
appropriate time for the Company to engage in such discussions.
Since December, 1993, the Company has had discussions with various parties in
which it explored a number of possible strategic transactions, including
strategic alliances, joint ventures and the sale of all or a partial interest
in the PCS business. In particular, the Company and two parties held joint
discussions concerning a possible joint venture transaction involving the PCS
business in which the Company would retain a minority interest. In March 1994,
the Company engaged Morgan Stanley & Co. Incorporated ("Morgan Stanley") to act
as financial advisor to the Company in connection with the possible joint
venture arrangement. The Company and such other parties did not reach agreement
as to the terms of such a possible transaction and discussions ended in May
1994.
In early May, Parent contacted the Company to express an interest in a
strategic alliance between Parent and the Company, and proposed purchasing a
minority equity interest in the PCS business to be followed by additional
equity investments based upon the performance of the PCS business. The Company
advised Parent that it was not interested in pursuing such proposal and that
the Company would not pursue further discussions at that time .
On May 23, 1994, the Company received a letter from Parent in which, among
other things, Parent expressed an interest in exploring a possible acquisition
of the PCS business. Following receipt of the May 23 letter, the Company and
Parent, and their respective advisors, had a number of discussions, primarily
to clarify Parent's position concerning the terms of a possible transaction.
At meetings held on May 23 and May 31, the Board of Directors of the Company
met to review various possible strategic alternatives available to the Company
with respect to its PCS business, including, without limitation, a sale, by
means of different possible transaction structures, of all or a part of its
interest in the PCS business. Among other things, the Board reviewed the
inquiry received from Parent.
Following an extensive review of its alternatives, and following the advice
of Morgan Stanley, the Company's legal advisors and the Company's senior
management, the Board of Directors decided at its May 31, 1994 meeting that,
although it was making no determination as to whether to seek to sell the PCS
business, it would be in the best interests of the Company and its stockholders
for the Company's management and advisors to solicit indications of interest
with respect to the PCS business from various third parties, including Parent.
The Board of Directors instructed management and the Company's advisors to
contact potential
23
<PAGE>
interested parties and to prepare and furnish to such persons financial and
other information regarding the PCS business provided that such parties entered
into appropriate confidentiality agreements with the Company. In connection
with this process, the Company's management and Morgan Stanley contacted
various parties, including Parent, to ascertain their interest in exploring the
possible acquisition of the PCS business.
The Company and Parent entered into the Confidentiality Agreement on June 8,
1994 and the Company subsequently provided various financial and other
information regarding the PCS business to Parent. Following Parent's review of
certain financial and other information regarding the PCS business and other
due diligence, and various discussions between the Company and Parent and their
respective financial and legal advisors, on June 21, 1994, Alan Seelenfreund,
Chairman and Chief Executive Officer, and David L. Mahoney, Vice President--
Strategic Planning, of the Company met with Randall L. Tobias, Chairman of the
Board and Chief Executive Officer, and James M. Cornelius, Vice President--
Finance and Chief Financial Officer, of Parent to discuss the terms of a
possible sale of the PCS business. Following such meeting, the parties agreed
to instruct their management and advisors to seek to negotiate a mutually
acceptable agreement concerning a sale of the PCS business.
Throughout the remainder of June and early July 1994, the Company and Parent
and their respective legal and financial advisors negotiated the terms of a
possible transaction.
At an informal meeting of the Company's Board of Directors on June 22, 1994,
management reviewed the progress of discussions with various parties, including
Parent. At meetings held on July 8 and July 10, 1994, the Board of Directors
met and engaged in an extensive review with the Company's management and
financial and legal advisors with respect to the various financial, legal and
other aspects of the proposed transaction with Parent. Following this review,
at the July 10, 1994 meeting, the Board of Directors unanimously (i) approved
the Merger Agreement, the Ancillary Agreements and the transactions
contemplated thereby, (ii) determined that the Offer, the Merger and the Spin-
Off are fair to the stockholders of the Company and are in the best interests
of the stockholders of the Company, and (iii) determined to recommend
acceptance of the Offer and approval and adoption of the Merger Agreement by
the stockholders of the Company. The Board of Directors also approved the
transactions contemplated by the Merger Agreement and the Ancillary Agreements
in order to exempt such transactions from the restrictions of Section 203 of
the DGCL as well as the restrictions set forth in the Company's Restated
Certificate of Incorporation. Later that day, the parties thereto executed and
delivered the Merger Agreement and the Ancillary Agreements.
A letter to the Company's stockholders communicating the Board of Directors'
recommendation and a press release announcing the Merger Agreement, the
Ancillary Agreements and the transactions contemplated thereby are filed
herewith as Exhibits 12 and 13, respectively, and are incorporated herein by
reference.
In reaching its conclusions and recommendations described above, the Board of
Directors considered a number of factors, including, without limitation, the
following:
(i) The cash price to be paid to the stockholders of the Company in
connection with the Offer and the Merger, taken together with the
shares of New McKesson stock to be received pursuant to the Spin-Off,
represent a substantial premium over the recent market prices for
shares of common stock of the Company.
(ii) The Company's view that the proposed transaction offers attractive
terms relative to market prices and financial data relating to other
companies engaged in the same or similar businesses as the Company and
the PCS business and relative to the consideration paid in comparable
acquisition transactions (including, without limitation, the relative
values of recent public acquisitions of entities in the PBM business).
24
<PAGE>
(iii) Management of the Company and the Company's advisors have solicited
other third parties concerning their interest in the PCS business and
have pursued discussions with certain of those parties concerning a
number of possible transactions. The terms of the proposed
transaction are more favorable to the Company's stockholders than
those of any other indications of interest received for the PCS
business.
(iv) The Company has been advised by Morgan Stanley that, taken together,
the Spin-Off and the consideration to be received by the holders of
Shares in the Offer and the Merger are fair from a financial point of
view to such holders. A copy of the opinion of Morgan Stanley is
attached hereto as Schedule III and filed as Exhibit 11 and is
incorporated herein by reference. STOCKHOLDERS ARE URGED TO READ THE
OPINION OF MORGAN STANLEY CAREFULLY IN ITS ENTIRETY.
(v) The impact of the following financial considerations on the Board's
evaluation of the proposed transaction: (i) the historical and
prospective business of the PCS business and the Company, including,
among other things, (A) the current financial condition, assets,
liabilities, business and operations of the PCS business and the
Company, along with the general prospects related thereto, (B) the
current state of the industries in which the PCS business and the
Company operate and (C) the views of management with respect to the
foregoing, (ii) the exploration of possible alternatives for
maximizing stockholder value with respect to the PCS business, and
(iii) the benefits expected to result from the disposition of the PCS
business and from the Spin-Off.
(vi) The benefits to the Company of the ongoing relationship that the
Company will have with PCS, and access to certain PCS capabilities and
services, pursuant to certain of the Ancillary Agreements.
(vii) The fact that the Spin-Off provides an opportunity for the Company's
stockholders to participate in the equity of New McKesson, which will
own and operate certain of the businesses of the Company and its
subsidiaries (other than the PCS business), including, without
limitation, the pharmaceutical and health care products distribution
business, the water products business and the Company's investment in
the Armor All business.
(viii) The Company's view that the proposed transaction will provide New
McKesson with significant financial resources to pursue new business
opportunities and the expansion of current lines of business.
(ix) The Company's view that the PCS business is subject to changing
competitive conditions arising from changes in the pharmaceutical and
healthcare industries, including those that may arise from current
governmental and private health care reform initiatives.
(x) The Company's view that the tax structure of the proposed transaction
is considered advantageous for the Company, New McKesson and the
Company's stockholders.
(xi) The terms and conditions of the transaction agreements (including the
Merger Agreement, the Reorganization and Distribution Agreement, the
Tax Sharing Agreement, the HDS Services Agreement, the McKesson
Services Agreement, the Memorandum of Understanding, the Non-
Competition Agreement and the other arrangements contemplated
thereby) include representations, warranties, covenants, conditions
and indemnification obligations which were considered on the whole by
the Company to be advantageous to the Company.
(xii) The fact that the Merger Agreement has been structured so that the
Board of Directors may consider any written competing offer for the
PCS business or the Company if the Board determines in good faith,
based upon advice of counsel, that the failure to pursue such other
offer may reasonably constitute a breach of its fiduciary duties
under applicable law (although the Company would be required to pay a
termination fee to Parent in the event that the Company terminated
the Merger Agreement in order to enter into such other competing
transaction).
The Board did not assign relative weights to the factors or determine that
any factor was of particular importance. Rather, the Board viewed its position
and recommendations as being based on the totality of the information presented
to and considered by it.
25
<PAGE>
ITEM 5. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.
The Company entered into a letter agreement (the "Advisory Agreement") with
Morgan Stanley dated June 8, 1994, pursuant to which Morgan Stanley agreed to
advise and assist the Company, as independent financial advisor, in connection
with a potential transaction (the "Transaction") involving PCS, including
financial advice and assistance with respect to defining objectives, performing
valuation analyses, and structuring, planning and negotiating the various
aspects of the Transaction. The Company and Morgan Stanley had previously
entered into a similar agreement in March 1994 relating to a possible joint
venture transaction (referred to above in Item 4(b)) which was not consummated.
Pursuant to the Advisory Agreement, the Company agreed that in the event that
the Transaction is not completed, the Company would pay Morgan Stanley for its
time and effort expended with regard to the potential Transaction (which was
estimated in the Advisory Agreement to likely be between $200,000 and
$500,000). In the event that a Transaction is completed, the Company will pay
Morgan Stanley a fee which is expected to equal approximately $12 million,
representing the product of the value of the consideration paid with respect to
the Transaction multiplied by a specified variable percentage amount. In
addition, the Company also has agreed to (i) reimburse Morgan Stanley for its
reasonable out-of-pocket expenses, including the reasonable fees and expenses
of legal counsel, incurred in connection with the Advisory Agreement and (ii)
indemnify Morgan Stanley against certain liabilities, including liabilities
under the federal securities laws.
Morgan Stanley has provided certain investment banking services to the
Company from time to time for which it has received customary compensation.
Morgan Stanley has also in the past provided, and are currently providing,
financial advisory and financing services to Parent unrelated to the foregoing
proposed transactions, and have received, and will receive, fees for the
rendering of such services. In the ordinary course of its business, Morgan
Stanley may from time to time effect transactions and hold positions in
securities of the Company and Parent.
Except as disclosed herein, neither the Company nor any person acting on its
behalf currently intends to employ, retain or compensate any other person to
make solicitations or recommendations to security holders on its behalf
concerning the Spin-Off, the Offer or the Merger.
ITEM 6. RECENT TRANSACTIONS AND INTENT WITH RESPECT TO SECURITIES.
(a) Except as set forth in Schedule II hereto, no transactions in the Shares
have been effected during the past 60 days by the Company or, to the best of
the Company's knowledge, by any executive officer, director, affiliate or
subsidiary of the Company.
(b) To the best of the Company's knowledge, except for Shares the sale of
which may trigger liability for the holder(s) under Section 16(b) of the
Exchange Act, each executive officer, director and affiliate of the Company
currently intends to tender all Shares over which he or she has sole
dispositive power to the Purchaser.
ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY THE SUBJECT COMPANY.
(a) The Company has been engaged in discussions with third parties regarding
certain possible transactions involving the Company and in connection with such
discussions has entered into confidentiality and standstill agreements. See
Item 4(b) above.
Except as set forth above or in Items 3(b) and 4(b), the Company is not
engaged in any negotiation in response to the Offer which relates to or would
result in (i) an extraordinary transaction, such as a merger or reorganization,
involving the Company or any subsidiary of the Company; (ii) a purchase, sale
or transfer of a material amount of assets by the Company or any subsidiary of
the Company; (iii) a tender offer for or other acquisition of securities by or
of the Company; or (iv) any material change in the present capitalization or
dividend policy of the Company.
26
<PAGE>
(b) Except as described above or in Items 3(b) or 4(b) above, there are no
transactions, Board resolutions, agreements in principle or signed contracts in
response to the Offer that relate to or would result in one or more of the
events referred to in Item 7(a) above.
ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED.
The Information Statement attached as Schedule I hereto is being furnished in
connection with the possible designation by the Purchaser, pursuant to the
Merger Agreement, of certain persons to be appointed to the Board other than at
a meeting of the Company's stockholders.
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
Exhibit 1. Pages 17 through 23 of McKesson Corporation's Proxy Statement dated
June 14, 1994, relating to its 1994 Annual Meeting of Stockholders
Exhibit 2. Form of Amendment to Termination Agreement
Exhibit 3. Agreement and Plan of Merger, dated as of July 10, 1994 among ECO
Acquisition Corporation, Eli Lilly & Company and McKesson
Corporation
Exhibit 4. Reorganization and Distribution Agreement dated July 10, 1994 among
McKesson Corporation and certain of its affiliates
Exhibit 5. Tax Sharing Agreement dated as of July 10, 1994, among SP Ventures,
Inc., ECO Acquisition Corporation, Eli Lilly & Company and McKesson
Corporation
Exhibit 6. Memorandum of Understanding dated as of July 10, 1994 between SP
Ventures, Inc. and Eli Lilly & Company
Exhibit 7. Non-Competition Agreement dated as of July 10, 1994, between
McKesson Corporation, SP Ventures, Inc., ECO Acquisition Corporation
and Eli Lilly & Company
Exhibit 8. HDS Services Agreement dated as of July 10, 1994 among Eli Lilly &
Company, PCS Health Systems, Inc. and Healthcare Delivery Systems.
Inc.
Exhibit 9. McKesson Services Agreement dated as of July 10, 1994 among PCS
Health Systems, Inc. and SP Ventures, Inc.
Exhibit 10. Confidentiality Agreement dated June 8, 1994 between McKesson
Corporation and Eli Lilly & Company
Exhibit 11. Opinion of Morgan Stanley & Co. Incorporated dated July 10, 1994*
Exhibit 12. Form of Letter to Stockholders of McKesson Corporation dated July
15, 1994*
Exhibit 13. Press Release issued by the Company on July 11, 1994
- --------
* Included in copies mailed to stockholders.
27
<PAGE>
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
Dated: July 15, 1994 McKESSON CORPORATION
By: /s/ Garret A. Scholz
---------------------------------
Name:
Title:
28
<PAGE>
SCHEDULE I
MCKESSON CORPORATION
MCKESSON PLAZA
ONE POST STREET
SAN FRANCISCO, CALIFORNIA 94104
INFORMATION STATEMENT PURSUANT TO
SECTION 14(F) OF THE SECURITIES
EXCHANGE ACT OF 1934 AND RULE 14F-1 THEREUNDER
----------------
This Information Statement ("Information Statement") is being mailed on or
about July 15, 1994, as a part of the Company's Solicitation/Recommendation
Statement on Schedule 14D-9 (the "Schedule 14D-9") to the holders of record of
Common Stock, Series A Preferred Stock, and Series B Preferred Stock at the
close of business on or about July 15, 1994. You are receiving this
Information Statement in connection with the possible election of persons
designated by Parent to a majority of the seats on the Board of Directors of
the Company.
The Merger Agreement provides that in the event the Purchaser acquires at
least a majority of the Shares on a fully diluted basis pursuant to the Offer,
Parent shall be entitled to designate for appointment or election to the Board
upon written notice to the Company, such number of persons so that the
designees of the Parent (the "Parent Designees") constitute a majority of the
Board. Prior to consummation of the Offer, the Board of Directors of the
Company will either adopt an amendment to the Company's By-Laws to provide in
effect that upon the request of Parent following the acquisition by the
Purchaser of a majority of the Shares outstanding on a fully diluted basis
pursuant to the Offer, the number of members of the Company's Board of
Directors shall be increased to the extent necessary to provide the persons
designated by Parent (the "Parent Designees") pursuant to Section 1.4 of the
Merger Agreement with a majority of the positions on the Board of Directors,
or will obtain the resignation of such number of directors as is necessary to
enable such number of Parent Designees to be so elected. Notwithstanding the
foregoing, the parties have agreed to use their respective best efforts to
ensure that at least three of the members of the Company's Board of Directors
shall, at all times prior to the Effective Time be, Continuing Directors.
The following information is based on the Company's Proxy Statement dated as
of June 14, 1994, and, except as indicated, such information is given as of
such date.
You are urged to read this Information Statement carefully. You are not,
however, required to take any action. Capitalized terms used herein and not
otherwise defined herein shall have the meaning set forth in the Schedule 14D-
9.
The information contained in this Information Statement concerning Parent
has been furnished to the Company by Parent, and the Company assumes no
responsibility for the accuracy or completeness of such information.
INFORMATION WITH RESPECT TO THE COMPANY
VOTING SECURITIES
As of July 1, 1994, there were 40,716,310 shares of Common Stock, 128,575
shares of Series A Preferred Stock, and 2,737,633 shares of Series B Preferred
Stock issued and outstanding and entitled to vote. Each share of Common Stock
and Series A Preferred Stock entitles the holder to one vote. Each share of
Series B Preferred Stock entitles the holder to that number of votes equal to
the number of shares of Common Stock into which such share of Series B
Preferred Stock could be converted into on the record date for determining the
stockholders entitled to vote, rounded to the nearest one-hundredth of a vote.
The Board of Directors currently consists of nine members and there are
currently no vacancies on the Board of Directors. Each director holds office
until such director's successor is elected and qualified or until such
director's earlier resignation or removal.
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The table below lists as of June 1, 1994, unless otherwise indicated,
information as to the only persons believed by the Company to be beneficial
owners of more than five percent of any class of its voting securities.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENT
TITLE OF NAME AND ADDRESS OF BENEFICIAL OF
CLASS BENEFICIAL OWNER OWNERSHIP CLASS
- ------------- ---------------------------------------- --------------- -------
<S> <C> <C> <C>
Common FMR Corp. 4,758,005(1) 11.82
82 Devonshire Street
Boston, MA 02109
Common The Chase Manhattan Bank, N.A., 4,236,561(2) 10.41
as Trustee for the McKesson Corporation
Series B Pre- Profit-Sharing Investment Plan 2,741,538(3) 100.00
ferred
1 Chase Manhattan Plaza
New York, NY 10081
</TABLE>
- --------
(1) This information is based on an amendment dated February 10, 1994, to a
Schedule 13G filed with the Securities and Exchange Commission reporting
that, as of January 31, 1994, FMR Corp., a parent holding company, had sole
voting power with respect to 41,747 shares and sole dispositive power with
respect to 4,758,005 shares. Included in that number are 4,683,858 shares
beneficially owned by Fidelity Management & Research Company, a wholly-
owned subsidiary of FMR Corp. and a registered investment advisor to
several investment companies, including Fidelity Magellan Fund, whose
ownership interest amounted to 3,618,035 shares or 8.99% of the outstanding
Common Stock at January 31, 1994.
(2) These shares are held in trust for the benefit of participants in the
Company's Profit-Sharing Investment Plan (PSIP) for which The Chase
Manhattan Bank, N.A. is the Trustee. Shares that have been allocated to the
individual accounts of participants in the PSIP are voted by the Trustee as
instructed by PSIP participants. Shares allocated to participants' PAYSOP
accounts for which no voting instructions are received will not be voted.
All other shares for which no voting instructions are received from
participants and unallocated shares of Common Stock and Series B Preferred
Stock held in the leveraged employee stock ownership plan (the "Leveraged
ESOP") established as part of the PSIP, will be voted by the Trustee in the
same proportion as shares as to which voting instructions are received.
(3) These shares of Series B Preferred Stock may only be held in the PSIP Trust
and must be converted into Common Stock prior to any distribution or sale
out of the Trust.
I-2
<PAGE>
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The table below shows the beneficial ownership of shares of the Company's
Common Stock and Series B Preferred Stock as of June 1, 1994, by each director,
each executive named in the Summary Compensation Table, and by all directors
and executive officers as a group.
<TABLE>
<CAPTION>
TOTAL NUMBER OF SHARES
NAME BENEFICIALLY OWNED(1)
---- -----------------------------------
<S> <C>
Tully M. Friedman................... 8,085 Common(2)(3)(4)
James R. Harvey..................... 6,042 Common(3)(5)
George M. Keller.................... 8,406 Common(3)(4)(5)
Leslie L. Luttgens.................. 8,474 Common(2)(3)(4)
David E. McDowell................... 60,380 Common(3)(6)
33 Series B Preferred(6)
John M. Pietruski................... 7,000 Common(3)
Alan Seelenfreund................... 184,307 Common(3)(6)
99 Series B Preferred(6)
Jane E. Shaw........................ 5,704 Common(3)(4)(5)(7)
Robert H. Waterman, Jr.............. 5,000 Common(3)
Robert C. Johnson................... 27,032 Common(3)(6)
75 Series B Preferred(6)
David L. Mahoney.................... 19,581 Common(3)(6)
53 Series B Preferred(6)
Charles A. Norris................... 35,164 Common(3)(6)(7)
53 Series B Preferred(6)
All Directors and Executive Officers
as a group (20 persons)............ 644,019 Common(2)(3)(4)(5)(6)(7)(8)
1,006 Series B Preferred(6)
</TABLE>
- --------
(1) Represents shares held as of June 1, 1994, directly and with sole voting
and investment power (or with voting and investment power shared with a
spouse) unless otherwise indicated. The number of shares of Common Stock
and Series B Preferred Stock owned by each director or executive officer
represents less than 1% of the outstanding shares of each such class. All
directors and executive officers as a group own 1.58% of the outstanding
shares of Common Stock and less than 1% of the outstanding shares of Series
B Preferred Stock.
(2) Includes shares held in revocable trusts established by and for the benefit
of the following directors who are the sole Trustees of such trusts: Mr.
Friedman, 4,000 and Mrs. Luttgens, 50.
(3) Includes shares that may be acquired within 60 days after June 1, 1994
through the exercise of stock options granted under the Company's stock
option plan as follows: Mr. Friedman, 4,000; Mr. Harvey, 4,000; Mr. Keller,
4,000; Mrs. Luttgens, 4,000; Mr. McDowell, 45,000; Mr. Pietruski, 4,000;
Mr. Seelenfreund, 135,000; Dr. Shaw, 4,000; Mr. Waterman, 4,000; Mr.
Johnson, 22,500; Mr. Mahoney, 16,375; Mr. Norris, 27,750; all directors and
executive officers as a group, 453,925.
(4) Includes shares credited to bookkeeping accounts maintained by the Company
on behalf of the following named nonemployee directors who participate in
the Directors' Deferred Compensation Plan and as to which shares such
director has no voting or investment power until the shares are
distributed: Mr. Friedman, 85 shares; Mr. Keller, 2,806 shares; Mrs.
Luttgens, 4,424 shares; Dr. Shaw, 689 shares and those directors as a
group, 8,004 shares.
(5) Includes shares held by family trusts as to which each of the following
named directors, executive officers or those persons as a group and their
respective spouses have shared voting and investment power: Mr. Harvey,
2,042 shares; Mr. Keller, 1,600 shares; Dr. Shaw, 1,000 shares and all
directors and executive officers as a group, 20,550 shares.
(6) Includes shares of Common Stock and Series B Preferred Stock held under the
Company's Profit-Sharing Investment Plan and as to which the participant
has sole voting but no investment power, as follows: Mr. McDowell, 380 and
33; Mr. Seelenfreund, 7,875 and 99; Mr. Johnson, 932 and 75; Mr. Mahoney,
706 and 53; Mr. Norris, 856 and 53; and all directors and executive
officers as a group, 35,991 and 1,006.
(7) Includes 558 shares purchased by Mr. Norris and 15 shares purchased by Dr.
Shaw's family trust through quarterly reinvestment of dividends under the
Company's Automatic Dividend Reinvestment Plan.
(8) Includes 540 shares held by a member of the group as custodian for his
minor children.
I-3
<PAGE>
CERTAIN LITIGATION
No director, officer, or affiliate of the Company, nor any owner of record or
beneficial owner of more than five percent of any class of voting securities of
the Company, nor any associate of any such director, officer, affiliate of the
Company, or security holder as of March 31, 1994, was involved in any material
litigation as an adverse party to the Company or any of its subsidiaries or had
a material interest in a proceeding adverse to the Company or any of its
subsidiaries.
DIRECTORS AND OFFICERS
LESLIE L. LUTTGENS
Civic and Community Leader
Mrs. Luttgens, age 71, is a leader of community and national civic, public
service, and cultural activities. She is a director of Pacific Gas and Electric
Company and of The Rosenberg Foundation. Mrs. Luttgens has been a director of
the Company since 1978 and is a member of the Audit, Compensation, and
Executive Committees and Chairman of the Public Policy Committee of the Board.
Her three year directorship term would have expired at this year's annual
meeting.
DAVID E. MCDOWELL
President and Chief Operating Officer
Mr. McDowell, age 51, has been President and Chief Operating Officer and a
Director of the Company since January 1992. For nearly 30 years prior to that
time he was associated with International Business Machines Corporation (IBM)
where he progressed through a variety of areas and responsibilities. In 1989 he
was named a corporate officer of IBM. He served as President of IBM's National
Service Division from July 1987 until November 1990 and as Vice President and
General Manager, Quality and Chief Information Officer of IBM from November
1990 until January 1992. Mr. McDowell also serves as Chairman of the Board and
a director of Armor All Products Corporation, a publicly owned subsidiary of
McKesson. Mr. McDowell is a member of the Executive and Public Policy
Committees of the Board. His three year directorship term would have expired at
this year's annual meeting.
ROBERT H. WATERMAN, JR.
Founder and President, The Waterman Group, Inc.
Mr. Waterman, age 57, is the founder and President of The Waterman Group,
Inc., a management research and publishing firm established in 1986. For the 21
years prior to 1986, he was a Senior Director at McKinsey & Company, Inc. Mr.
Waterman has authored several books and writings on business management. He is
a director of Boise Cascade Corporation and AES Corporation and is Vice
Chairman and a director of the ASK Group, Inc. Mr. Waterman has been a director
of the Company since 1990 and is a member of the Audit and Public Policy
Committees of the Board. His three year directorship term would have expired at
this year's annual meeting.
JAMES R. HARVEY
Chairman of the Board, Transamerica Corporation
Mr. Harvey, age 59, has been Chairman of the Board of Directors of
Transamerica Corporation, a financial and insurance services company, since
1983 and was Chief Executive Officer from 1981 to 1991. He is a director of
AirTouch Communications and The Charles Schwab Corporation. He is also Vice
Chairman of the National Park Foundation, Chairman of the Presidio Council, and
a Trustee of The Nature Conservancy. Mr. Harvey has been a director of the
Company since 1987 and is a member of the Compensation and Executive Committees
and Chairman of the Finance Committee of the Board. His three year directorship
term expires at the annual meeting in 1995.
I-4
<PAGE>
ALAN SEELENFREUND
Chairman and Chief Executive Officer
Mr. Seelenfreund, age 57, has been Chairman of the Board and Chief Executive
Officer of the Company since November 1989. He previously served as Executive
Vice President from November 1986 to November 1989; as Chief Financial Officer
from April 1984 to April 1990; and has held various other senior financial
positions since joining the Company in 1975. Mr. Seelenfreund is a director of
Pacific Gas and Electric Company and Armor All Products Corporation, a publicly
owned subsidiary of McKesson. Mr. Seelenfreund has been a director of the
Company since 1988 and is a member of the Finance Committee and Chairman of the
Executive Committee of the Board. His three year directorship term expires at
the annual meeting in 1995.
JANE E. SHAW
President and Chief Operating Officer, ALZA Corporation
Dr. Shaw, age 55, has been President and Chief Operating Officer of ALZA
Corporation, a pharmaceutical research, manufacturing and marketing firm since
1987 and a member of ALZA's Board since 1989. Previously, Dr. Shaw was
Executive Vice President of ALZA, President of ALZA's Research Division and has
held various other positions since joining ALZA as a Research Scientist in
1970. She is also a director of Intel Corporation. Dr. Shaw has been a director
of the Company since 1992 and is a member of the Audit and Public Policy
Committees of the Board. Her three year directorship term expires at the annual
meeting in 1995.
TULLY M. FRIEDMAN
Managing Partner, Hellman & Friedman
Mr. Friedman, age 52, is a Managing Partner of Hellman & Friedman, a private
investment firm formed in 1984. Prior to forming Hellman & Friedman, he was a
Managing Director and General Partner of Salomon Brothers Inc. He is a director
of Mattel, Inc., Levi Strauss Associates, Inc., General Cellular Corporation,
American President Companies, Ltd. and a member of the Advisory Committee for
Falcon Holding Group L.P. He is also a member of the Executive Committee and a
trustee of the American Enterprise Institute, a member of the Presidio Advisory
Council and a director of the Stanford Management Company. Mr. Friedman has
been a director of the Company since 1992 and is a member of the Compensation
and Finance Committees of the Board. His three year directorship term expires
at the annual meeting in 1996.
GEORGE M. KELLER
Chairman and Chief Executive Officer, Retired, Chevron Corporation
Mr. Keller, age 70, served as Chairman of the Board of SRI International from
January 1990 until December 1993. He continues as Chairman of the Executive
Committee. In December 1988, he retired as Chairman and Chief Executive Officer
of Chevron Corporation with which company he had been associated in various
executive positions since 1948. He is also a director of First Interstate
Bancorp, First Interstate Bank of California, The Boeing Company, The Chronicle
Publishing Company, and Metropolitan Life Insurance Company. Mr. Keller has
been a director of the Company since 1987 and is a member of the Executive and
Finance Committees and Chairman of the Compensation Committee of the Board. His
three year directorship term expires at the annual meeting in 1996.
JOHN M. PIETRUSKI
Chairman of the Board, Texas Biotechnology Corporation; Chairman and Chief
Executive Officer, Retired, Sterling Drug Inc.
Mr. Pietruski, age 61, is Chairman of the Board of Texas Biotechnology
Corporation, a publicly held pharmaceutical research company. In September
1988, Mr. Pietruski retired as Chairman and Chief Executive Officer of Sterling
Drug Inc. with which company he had been associated in various executive
I-5
<PAGE>
positions since 1977. He is a director of General Public Utilities Corporation,
Hershey Foods Corporation, and Lincoln National Corporation. Mr. Pietruski has
been a director of the Company since 1990 and is a member of the Compensation
and Executive Committees and Chairman of the Audit Committee of the Board. His
three year directorship term expires at the annual meeting in 1996.
EXECUTIVE OFFICERS
The following table sets forth information concerning the executive officers
of the Company as of June 1, 1994. The number of years of service with the
Company includes service with predecessor and acquired companies.
There are no family relationships between any of the executive officers or
directors of the Company. The executive officers are chosen annually to serve
until the first meeting of the Board of Directors following the next annual
meeting of stockholders and until their successors are elected and have
qualified, or until death, resignation or removal, whichever is sooner.
<TABLE>
<CAPTION>
POSITION WITH THE COMPANY
NAME AGE AND BUSINESS EXPERIENCE
---- --- -------------------------
<S> <C> <C>
Alan Seelenfreund 57 Chairman of the Board and Chief Executive Officer
since November 1989 and a Director since July 1988;
Executive Vice President from November 1986 to
November 1989; and Chief Financial Officer from
April 1984 to April 1990. Service with the Company--
19 years
David E. McDowell 51 President and Chief Operating Officer and a Director
since January 1992; Vice President and General
Manager, Quality and Chief Information Officer, IBM
Corporation from November 1990 to January 1992;
President of IBM's National Service Division from
July 1987 to August 1990 and Assistant General
Manager from January to July 1987. Service with the
Company--2.5 years.
William A. Armstrong 53 Vice President Human Resources and Administration
since April 1993; Vice President Administration from
July 1991 to April 1993; Executive Assistant to the
Office of the Chief Executive from 1990 to April
1992; Staff Vice President, Management Development
from 1988 to 1990. Service with the Company--22
years.
Jon W. d'Alessio 47 Treasurer since January 1992; Staff Vice President
and Chief Information Officer from 1990 to November
1991; Staff Vice President, Operations Planning and
Information Technology from 1988 to 1990. Service
with the Company--16 years.
Richard H. Hawkins 44 Vice President since April 1993; Controller since
April 1990 and Chief Financial Officer of McKesson
Drug Company since September 1993; Vice President
Finance of the McKesson Distribution Group from
February 1991 to April 1993; Assistant Corporate
Controller from June 1984 to April 1990. Service
with the Company--10 years.
Robert C. Johnson 58 Vice President, Government Relations since September
1992; Chairman (since April 1990), Chief Executive
Officer (from April 1990 until February 1994) and
President (from November 1990 until May 1993) of PCS
Health Systems, Inc., a wholly-owned subsidiary of
the Company. Executive Vice President, California
Pharmacists Association from 1969 until 1990.
Service with the Company--4 years.
</TABLE>
I-6
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH THE COMPANY
NAME AGE AND BUSINESS EXPERIENCE
---- --- -------------------------
<S> <C> <C>
Marvin L. Krasnansky 64 Vice President Corporate Relations since 1979.
Service with the Company--15 years.
David L. Mahoney 39 Vice President Strategic Planning since July 1990.
Principal at McKinsey & Company, Inc. (an
international management consulting firm) from 1987
to July 1990. Service with the Company--4 years.
Ivan D. Meyerson 49 Vice President and General Counsel since January
1987. Service with the Company--16 years.
Nancy A. Miller 50 Vice President and Corporate Secretary since
December 1989; Staff Vice President and Corporate
Secretary from November 1986 to December 1989.
Service with the Company--16 years.
Charles A. Norris 49 Vice President since April 1993 and President of
McKesson Water Products Company since May 1990.
President of Deer Park Water Company (a bottled
drinking water firm) from 1981 until May 1990.
Service with the Company--4 years.
Garret A. Scholz 54 Vice President Finance since April 1990; Vice
President and Treasurer from November 1984 to April
1990. Service with the Company--21 years.
James H. Smith 50 Vice President and President of McKesson Drug
Company since February 1994. Senior Vice President
of Avnet, Inc. (a distributor of electrical and
computer components) from 1990 until February 1994;
Executive Vice President of the Hamilton Hallmark
Division from 1990 until February 1994 and Vice
President of the Hamilton Avnet Division from 1986
to 1990. Service with the Company--4 months.
</TABLE>
TRANSACTION WITH MANAGEMENT AND OTHERS
Except for the Merger Agreement and the Ancillary Agreements (as defined in
the Merger Agreement), there have been no transactions or series of
transactions since April 1, 1993, to which the Company or any of its
subsidiaries was or is to be a party, in which the amount involved exceeds
$60,000 and in which any of the individuals named above had or will have a
direct or indirect material interest.
CERTAIN BUSINESS RELATIONSHIPS
The Company and its subsidiaries also have transactions in the ordinary
course of business with unaffiliated corporations of which certain nonemployee
directors of the Company are directors and/or executive officers. The Company
does not consider the amounts involved in such transactions to be material in
relation to the businesses of such other corporations or the interests of the
directors involved. The Company anticipates that similar transactions will
occur in fiscal year 1995.
BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
The Board of Directors has the responsibility for establishing broad
corporate policies and for the overall performance of the Company, although it
is not involved in day-to-day operating management. Members of the Board are
kept informed of the Company's business by various reports and documents sent
to them on a regular basis, as well as by operating and financial reports made
at Board meetings by the Chief Executive Officer, the Chief Operating Officer
and other executive officers.
I-7
<PAGE>
Attendance at Meetings
The Board of Directors held seven meetings during the year ended March 31,
1994. Attendance at Board and Committee meetings combined averaged 97%. Each
director attended more than 75% of the combined total meetings of the Board and
Committees of the Board on which the director served at any time during the
year. Each director who is not an employee of the Company currently receives an
annual retainer of $24,000 ($22,000 prior to January 1, 1994); a stipend of
$1,000 for each Board or Executive Committee meeting attended; a stipend of
$850 ($1,000 for the Chairman) for each other committee meeting attended; and
is reimbursed for all expenses incurred in attending such meetings. Directors
who are employees of the Company receive no additional compensation for their
services as members of the Board or any Board committee.
Certain Committees of the Board
To assist in the discharge of its responsibilities, the Board has designated
several standing committees including an Audit Committee, a Compensation
Committee and an Executive Committee. The members of each standing committee
are elected by the Board of Directors at its organizational meeting following
the annual stockholders' meeting, each for a term of one year or until his or
her successor is elected.
The Audit Committee, comprised of four directors who are neither officers nor
employees of the Company, held three meetings during the year ended March 31,
1994. The Audit Committee recommends to the Board the retention or discharge of
the Company's independent auditors; reviews the engagement of the independent
auditors including the scope, extent and procedures of the audit and fees to be
paid therefor; reviews, in consultation with the independent auditors, the
audit results and their auditor's report and related management letter, if any;
reviews the independence of the independent auditors and, in this connection,
reviews the engagement of the independent auditors for services of a non-audit
nature; reviews and approves the audited financial statements and recommends to
the Board their inclusion in the Company's annual report on Form 10-K to the
Securities and Exchange Commission and in the Appendix to this Proxy Statement;
reviews the condensed financial data (derived from the audited financial
statements) included in the annual report to stockholders; consults with the
independent auditors, the internal auditors and management (together or
separately) on the adequacy of internal accounting controls and reviews the
results thereof; reviews, on a continuing basis, the procedures designed to
implement the corporate code of conduct and compliance therewith; directs and
supervises investigations into matters within the scope of the Committee's
duties; and performs such other functions as may be necessary in the efficient
discharge of its duties.
The Compensation Committee, comprised of five directors who are neither
officers nor employees of the Company, held seven meetings during the year
ended March 31, 1994. The Compensation Committee administers the Company's 1989
Management Incentive Plan, the Long-Term Incentive Plan, the Deferred
Compensation Administration Plan II, the Deferred Compensation Administration
Plan and the Management Deferred Compensation Plan and all stock option, stock
purchase or restricted stock plans; reviews the administration of all other
incentive plans within the Company; approves the selection of trustees and
investment advisors and managers and establishes the overall investment
policies with respect to the funds incident to the Company's retirement
program; reviews and makes recommendations to the Board with respect to salary
and other terms and conditions of employment and changes therein of the Chief
Executive Officer and approves salaries and other terms and conditions of
employment and changes therein of the other executive officers and key
management employees of the Company above specified salary grades; and examines
and makes recommendations to the Board regarding the Company's overall
compensation program for managerial level employees.
The Executive Committee, comprised of six directors, a majority of whom are
neither officers nor employees of the Company, held one meeting during the year
ended March 31, 1994. Subject to any restrictions that the Board may from time
to time impose, the Committee is authorized to exercise all of the powers of
the Board when it is not in session, except the power to declare dividends,
elect directors, amend
I-8
<PAGE>
the By-Laws, issue stock or recommend to stockholders any action requiring
their approval. The Committee also considers and makes recommendations to the
Board regarding the size and composition of the Board; recommends and nominates
candidates to fill Board vacancies that occur; and recommends to the Board the
director nominees for whom the Board will solicit proxies. The Committee will
consider nominees recommended by stockholders. Any stockholder who wishes to
recommend a nominee should write to the Vice President and Corporate Secretary,
McKesson Corporation, One Post Street, San Francisco, CA 94104, stating in
detail the qualifications of the proposed nominee for consideration by the
Committee.
EXECUTIVE OFFICER COMPENSATION
The following table sets forth the compensation for services in all
capacities to the Company and its subsidiaries for the three fiscal years ended
March 31, 1992, 1993 and 1994 of those persons who were as of March 31, 1994,
the Chief Executive Officer and the other four most highly compensated
executive officers of the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------ ------------------------------
AWARDS PAYOUTS
--------------------- --------
OTHER ANNUAL RESTRICTED SECURITIES ALL OTHER
NAME AND COMPENSA- STOCK UNDERLYING LTIP COMPENSA-
PRINCIPAL SALARY BONUS TION AWARD(S) OPTIONS/ PAYOUTS TION
POSITION YEAR ($) ($) ($)(1)(2) ($)(3) SARS (#) ($) ($)(1)(4)
- ------------ ---- -------- -------- ------------ ---------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Alan
Seelenfreund 1994 $575,000 $775,000 $ -- $ 0 40,000 $140,800 $102,145
Chairman and
Chief 1993 500,000 550,000 -- 0 130,000 51,000 68,410
Executive
Officer 1992 483,333 250,000 -- 95,175 40,000 45,120 --
David E. Mc-
Dowell(5) 1994 450,000 550,000 81,320(6) 0 30,000 61,600 48,829
President
and Chief 1993 400,000 375,000 229,016(7) 0 80,000 17,500 3,528
Operating
Officer 1992 89,744 50,000 -- 168,750 40,000 -- --
Robert C.
Johnson(5) 1994 290,000 160,000 -- 0 10,000 48,400 27,962
Vice Presi-
dent Gov-
ernment 1993 275,000 201,200 -- 0 40,000 38,800 21,884
Relations
and Chair-
man,
PCS Health
Systems,
Inc.
David L. Ma-
honey 1994 225,000 275,000 -- 0 30,000 35,200 30,086
Vice Presi-
dent Stra-
tegic 1993 210,000 160,000 -- 0 24,000 15,000 20,075
Planning 1992 210,000 80,000 -- 17,625 6,000 9,400 --
Charles A.
Norris(5) 1994 222,000 175,000 -- 0 10,000 35,200 23,729
Vice Presi-
dent and
President,
McKesson
Water
Products
Company
</TABLE>
- --------
(1) Pursuant to transition provisions issued by the Securities and Exchange
Commission, information regarding "Other Annual Compensation" and "All
Other Compensation" is not presented for FY 1992.
(2) Except as noted in the footnotes below, the dollar value of perquisites and
other personal benefits for each named executive officer during FY 1994 was
less than established reporting thresholds.
(3) No restricted stock awards were made in FY 1993 or FY 1994 to any named
executive officer. As a result of awards made in prior years, as of March
31, 1994 (based upon the fair market value stock price of $59.50) the
aggregate number and market value of shares of restricted stock held by
each of the named executive officers were as follows: Mr. Seelenfreund
(8,200; $487,900), Mr. McDowell (5,000; $297,500), Mr. Johnson (1,600;
$95,200), Mr. Mahoney (2,500; $148,750) and Mr. Norris (3,000; $178,500).
Dividends are paid on restricted Common Stock at the same rate and at the
same time as on the Common Stock. The restrictions imposed on restricted
stock awards lapse on the fourth anniversary of the date of grant, except
that the restrictions on 4,000 shares awarded to Mr. Norris at the time he
joined the Company in 1990 lapse in increments of 25% per year. The 1988
Restricted Stock Plan provides that, in the event of a change in control of
the Company (as defined in the plan), all restrictions on outstanding
restricted stock grants shall immediately lapse.
(4) For FY 1994, includes the aggregate value of (i) the Company's stock
contributions under the Profit-Sharing Investment Plan (PSIP), a plan
designed to qualify as an employee stock ownership plan under the Internal
Revenue Code (the "Code"), allocated to the accounts of the named executive
officers, as follows: Mr. Seelenfreund, $18,701; Mr. McDowell, $19,900; Mr.
Johnson, $18,097; Mr. Mahoney, $17,851 and Mr. Norris, $17,773; (ii)
employer matching contributions under the Supplemental PSIP, an unfunded,
nonqualified plan established because of limitations on annual
contributions to the PSIP contained in the Code, as follows: Mr.
Seelenfreund, $45,331; Mr. McDowell, $28,261; Mr. Johnson, $6,141; Mr.
Mahoney, $10,383 and Mr. Norris, $5,956; and (iii) above-market interest
accrued on deferred compensation for the following executive officers: Mr.
Seelenfreund, $38,113; Mr. McDowell, $678; Mr. Johnson, $3,724 and Mr.
Mahoney, $1,852.
I-9
<PAGE>
(5) Mr. McDowell joined the Company on January 13, 1992; Mr. Johnson became an
executive officer on September 30, 1992 and Mr. Norris became an executive
officer of the Company on April 28, 1993.
(6) Includes an annual housing assistance payment in the amount of $60,000 and
imputed interest on the housing assistance loan in the amount of $21,320.
(7) Includes an annual housing assistance payment in the amount of $60,000;
imputed interest on the housing assistance loan in the amount of $22,111;
reimbursement for housing relocation expenses in the amount of $89,027 and
$21,176 to mitigate potential additional taxes payable by Mr. McDowell for
relocation expenses.
OPTION/SAR GRANTS IN THE LAST FISCAL YEAR
<TABLE>
<CAPTION>
GRANT DATE
INDIVIDUAL GRANTS(1) VALUE
---------------------------------------------------------------------------- ----------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE OR GRANT DATE
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION PRESENT
NAME GRANTED (#)(1) FISCAL YEAR ($/SH)(2) DATE VALUE(3)
----------------- -------------- ------------ ----------- ---------------- ----------
<C> <S> <C> <C> <C> <C>
Alan Seelenfreund 40,000 4.8% $56.625 January 26, 2004 $514,155
David E. McDowell 30,000 3.6% 56.625 January 26, 2004 385,616
Robert C. Johnson 10,000 1.2% 56.625 January 26, 2004 128,539
David L. Mahoney 30,000 3.6% 56.625 January 26, 2004 385,616
Charles A. Norris 10,000 1.2% 56.625 January 26, 2004 128,539
</TABLE>
- --------
(1) Individual grants become exercisable in installments of 25% per year on
each of the first through fourth anniversaries of the grant date. No
options have been granted with SARs since 1986, and no freestanding SARs
have ever been granted. Upon the occurrence of a change in control of the
Company (as defined in the 1978 Stock Option Plan) all options granted by
the Company become immediately exercisable.
(2) All options were granted at 100% fair market value. Optionees may satisfy
the exercise price by submitting currently owned shares and/or cash. Income
tax withholding obligations may be satisfied by electing to have the
Company withhold shares otherwise issuable under the option with a fair
market value equal to such obligations.
(3) In accordance with Securities and Exchange Commission rules, the Black-
Scholes option pricing model was chosen to estimate the grant date present
value of 22.7% for the options set forth in this table. The assumptions
used in calculating the reported value included: stock volatility, 23.65%;
interest rate, 4.73%; annual dividend, $1.68; exercise period, 10 years;
vesting, 25% per year; exercise period at retirement, 36 months; grant
frequency, annually. The Company does not believe that the Black-Scholes
model, or any other model can accurately determine the value of an option.
Accordingly, there is no assurance that the value, if any, realized by an
executive, will be at or near the value estimated by the Black-Scholes
model. Future compensation resulting from option grants is based solely on
the performance of the Company's stock price.
AGGREGATED OPTION/SAR EXERCISES IN THE LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES(1)
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS/SARS AT IN THE MONEY OPTIONS/SARS
ACQUIRED VALUE MARCH 31, 1994 (#) AT MARCH 31, 1994(3)
ON EXERCISE REALIZED ------------------------- -------------------------
NAME (#) ($)(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
--------- ----------- -------- ----------- ------------- ----------- -------------
<C> <S> <C> <C> <C> <C> <C> <C>
Alan
Seelenfreund 11,300 $402,563 122,500 161,500 $2,930,156 $2,599,375
David E. McDow-
ell -- -- 40,000 110,000 869,375 1,704,375
Robert C. John-
son -- -- 20,000 43,000 428,813 665,063
David L. Mahoney -- -- 13,500 52,500 309,281 561,094
Charles A.
Norris -- -- 22,250 36,250 548,656 604,719
</TABLE>
- --------
(1) All options were granted at 100% fair market value. Optionees may satisfy
the exercise price by submitting currently owned shares and/or cash. Income
tax withholding obligations may be satisfied by electing to have the
Company withhold shares otherwise issuable under the option with a fair
market value equal to such obligations.
(2) Fair market value of securities underlying options or SARs on the date of
exercise minus the exercise price.
(3) Calculated based upon the March 31, 1994 fair market value share price of
$59.50 less the share price to be paid upon exercise. There is no guarantee
that if and when these options are exercised they will have this value.
I-10
<PAGE>
LONG-TERM INCENTIVE PLAN AWARDS IN THE LAST FISCAL YEAR
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS UNDER
PERFORMANCE OR NON-STOCK PRICE-BASED PLANS(1)
OTHER PERIOD -------------------------------------
UNTIL MATURATION THRESHOLD TARGET MAXIMUM
NAME OR PAYOUT ($) ($) ($)
---- ---------------- --------- -------- --------
<S> <C> <C> <C> <C>
Alan Seelenfreund Four years $19,550 $230,000 $345,000
David E. McDowell Four years 13,388 157,500 236,250
Robert C. Johnson Four years 4,930 58,000 87,000
David L. Mahoney Four years 3,825 45,000 67,500
Charles A. Norris Four years 3,774 44,400 66,600
</TABLE>
- --------
(1) The table above represents potential payouts of cash awards, if earned,
upon completion of the four-year incentive period ending March 31, 1997.
These awards are tied to after-tax growth in annual earnings per share
(EPS) and return on average stockholder equity (ROE). 50% of potential
target awards are based upon achieving the EPS objective and 50% upon
achieving the objective for ROE. 50% of target amounts will be earned if
100% of the EPS growth target is achieved; threshold amounts are earned at
52% of target, and maximum amounts at 129% of target. Additionally, 50% of
target amounts will be earned if 100% of the ROE growth target is achieved;
threshold amounts are earned at 84% of target, and maximum amounts at 116%
of target. Awards, if earned, will be paid in cash at the end of the
performance cycle.
EMPLOYMENT AGREEMENTS
For a description of the Company's Employment Agreements, see "Employment
Agreements" under Item 3 of the attached 14D-9.
EXECUTIVE SEVERANCE POLICY
For a description of the Company's Executive Severance Policy, see "Executive
Severance Policy" under Item 3 of the attached 14D-9.
AMENDED TERMINATION AGREEMENTS
For a description of the Company's Amended Termination Agreements, see
"Termination Agreements" under Item 3 of the attached 14D-9.
PENSION BENEFITS
The table below illustrates the estimated combined annual benefits payable
upon retirement at age 65 under the Company's qualified retirement plan and the
supplemental Executive Benefit Retirement Plan (EBRP) in the specified
compensation and years-of-service classifications. The benefits are computed as
single life annuity amounts.
<TABLE>
<CAPTION>
FIVE YEAR YEARS OF SERVICE
AVERAGE -----------------------------------
COMPENSATION 15 20 25 30
------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
$ 400,000 $186,200 $221,600 $240,000 $240,000
600,000 279,300 332,400 360,000 360,000
800,000 372,400 443,200 480,000 480,000
1,000,000 465,500 554,000 600,000 600,000
1,200,000 558,600 664,800 720,000 720,000
1,400,000 651,700 775,600 840,000 840,000
</TABLE>
The compensation covered under the plans whose benefits are summarized in the
above table includes the base salary and annual bonus amounts reported in the
Summary Compensation Table.
The estimated credited years of service at March 31, 1994 for each of the
executive officers named in the Summary Compensation Table are as follows: Mr.
Seelenfreund, 19; Mr. McDowell, 2; Mr. Johnson, 4; Mr. Mahoney, 4, and Mr.
Norris, 4.
I-11
<PAGE>
The benefit under the EBRP is a percentage of final average pay based on
years of service or is determined by the Board of Directors. The maximum
benefit is 60% of final average pay. The total paid under the EBRP is not
reduced by Social Security benefits but is reduced by those benefits payable on
a single life basis under the Company's qualified retirement plan.
INDEBTEDNESS OF EXECUTIVE OFFICERS
Under the 1973 Stock Purchase Plan, loans bearing interest at the rate of
6.75% have been made to key employees of the Company and its subsidiaries for
the purchase of shares of the Company's Common Stock at 100% of the fair market
value on the date of purchase. During FY 1994, loans were made to two executive
officers to purchase an aggregate of 8,500 shares of the Company's Common Stock
at an average price of $47.68 per share under this Plan. The maturity dates on
such loans are August 4, 2003 and August 27, 2003, respectively.
The table below shows as to each director or executive officer who was
indebted to the Company in an amount exceeding $60,000 at any time during the
period April 1, 1993 through May 15, 1994, (i) the largest aggregate amount of
indebtedness outstanding during such period, and (ii) the amount of
indebtedness outstanding at May 15, 1994. All indebtedness shown in the case of
Mr. Hawkins, and $95,103 of the amount shown in the case of Mr. Johnson
resulted from loans under the 1973 Stock Purchase Plan. The remaining
indebtedness shown for Mr. Johnson and all of the amounts shown for Messrs.
Armstrong, McDowell and Smith relate to secured loans given to assist those
named executives with housing relocation from other areas upon joining the
Company (see page 17 under the heading "Employment Agreements" for further
information concerning Mr. McDowell's loan). Such loans are without interest so
long as the individuals remain in the employ of the Company or are under an
employment contract and thereafter at a market rate. Under the provisions of
Mr. Johnson's loan, in lieu of interest, the Company will share in any
appreciation in the value of the property securing the loan at maturity. Under
the provisions of Mr. Smith's loan, the Company has agreed to waive repayment
of the principal amount of $100,000 for each full fiscal year prior to maturity
during which McKesson Drug Company achieves its specified goal for profit
before tax and to forgive the principal amount of the loan in the event of a
change in control of the Company (as defined in the Note) and the actual or
constructive termination of Mr. Smith's employment within two years of such
change.
<TABLE>
<CAPTION>
LARGEST AGGREGATE AMOUNT OF
AMOUNT OF INDEBTEDNESS AT
INDEBTEDNESS MAY 15, 1994
----------------- ---------------
<S> <C> <C>
William A. Armstrong $ 95,000 $ 95,000
Richard H. Hawkins 277,359 273,319
Robert C. Johnson 501,423 499,539
David E. McDowell 600,000 600,000
James H. Smith 400,000 400,000
</TABLE>
SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended requires the
Company's Directors, its executive officers and persons who own more than ten
percent of the Company's Common Stock to file reports of ownership of the
Company's Common Stock and any subsequent changes in that ownership with the
Securities and Exchange Commission, the New York Stock Exchange, and the
Company. Based on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Form 5 reports
were required to be filed for those persons, the Company believes that, during
its 1994 fiscal year, all such filing requirements were satisfied.
I-12
<PAGE>
INFORMATION WITH RESPECT TO PARENT
PARENT DESIGNEES
Set forth below are the names, ages, present principal occupations, five year
employment history and other directorships held in public companies of the
Parent Designees. No information is provided in the right hand column where the
individual has occupied the position indicated in the third column for the past
five years.
<TABLE>
<CAPTION>
POSITIONS AND OFFICES PRINCIPAL OCCUPATION AND
HELD WITH PARENT BUSINESS EXPERIENCE
NAME AGE (YEAR ELECTED) (PAST FIVE YEARS)
---- --- --------------------- ------------------------
<S> <C> <C> <C>
James M. Cornelius 50 Vice President and Chief Director of CompusServe
Financial Officer (1983); Incorporated
Director (1986)
Mitchell E. Daniels, Jr. 44 President, North American President and Chief Executive
Pharmaceutical Operations, Officer of the Hudson Institute
Pharmaceutical Division and of counsel to Baker and
(1993) Daniels (1987-1990); Director of
Acordia, Inc., IPALCO
Enterprises, Inc., Indianapolis
Power and Light Company, and NBD
Bank, N.A.
Ronald W. Dollens 47 President Medical Devices Vice President, Medical Devices
and Diagnostics Division and Diagnostics Division (1990);
(1991) President and Chief Executive
Officer of Advanced
Cardiovascular Systems, Inc., a
subsidiary of Parent (1988)
Michael L. Eagle 46 Vice President, Vice President, Pharmaceutical
Manufacturing (January Manufacturing Operations
1994) Division (1993); Vice President,
Medical Devices and Diagnostics
Division (1991); President and
Chief Executive Officer of IVAC
Corporation, a subsidiary of
Parent (1988)
Pedro P. Granadillo 46 Vice President, Human Vice President, Pharmaceutical
Resources (1993) Manufacturing Division (1992);
Executive Director, Production
Operations and Manufacturing
Strategy Development (1989);
Director of Manufacturing
Strategy Development (1987)
J.B. King 64 Vice President and General Director of Indianapolis Water
Counsel (1987) Company and; Bank One,
Indianapolis, N.A.
Stephen A. Stitle 48 Vice President, Corporate Vice President, Human Resources
Affairs (1993); Director (1988-1993); Director of
(1991) National City Corporation and
National City Bank, Indiana
Sidney Taurel 45 Executive Vice President President, Eli Lilly
and President, International Corporation (1986-
Pharmaceutical Division 1991); Executive Vice President,
(1993); Director (1991) Pharmaceutical Division (1991-
1993)
</TABLE>
I-13
<PAGE>
<TABLE>
<CAPTION>
POSITIONS AND OFFICES PRINCIPAL OCCUPATION AND
HELD WITH PARENT BUSINESS EXPERIENCE
NAME AGE (YEAR ELECTED) (PAST FIVE YEARS)
---- --- --------------------- ------------------------
<S> <C> <C> <C>
Randall L. Tobias 51 Chairman of the Board and Vice Chairman of the Board of
Chief Executive Officer; American Telephone and Telegraph
Director (1986) Company (1986-1993); Chairman
and Chief Executive Officer of
AT&T International (an AT&T
subsidiary) (1991-1993);
Director of Kimberly- Clark
Corporation, Knight-Ridder, Inc.
and Phillips Petroleum Company
August M. Watanabe, M.D. 52 Vice President and Vice President of Lilly Research
President, Lilly Research Laboratories and Group Vice
Laboratories (1994); President of Lilly Research
Director (1994) Laboratories (1990-1994);
faculty member of the Indiana
School of Medicine (1972-1990);
Chairman of the Department of
Medicine (1983-1990)
</TABLE>
SECURITY OWNERSHIP OF NOMINATED DIRECTORS
No Parent Designee directly or beneficially owns shares of Common Stock,
Series A Preferred Stock, or Series B Preferred Stock of the Company.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There has been no transactions or series of transactions, since April 1,
1994, to which the Company or any of its subsidiaries was or is to be a party
in which the amount involved exceeds $60,000 and in which any of the Parent
Designees had or will have a direct or indirect material interest. Nor has any
Parent Designee been indebted to the Company or its subsidiaries in an amount
in excess of $60,000 or been involved in a material business relationship with
the Company or its subsidiaries.
I-14
<PAGE>
SCHEDULE II
CERTAIN TRANSACTIONS IN SHARES OF COMMON STOCK OF
MCKESSON CORPORATION EFFECTED DURING THE PAST 60 DAYS
There have been no transactions in the Shares during the past 60 days by the
Company or, to the best of the Company's knowledge, by any executive officer,
director, affiliate or subsidiary of the Company, except that the following
stock options have been exercised by members of the Company's Board of
Directors:
<TABLE>
<CAPTION>
PARTY DATE NUMBER OF PRICE
EFFECTING OF SHARES PER
TRANSACTION TRANSACTION PURCHASED SHARE
----------- ----------- --------- -------
<S> <C> <C> <C>
John Pietruski............................. 7/6/94 1,000 $32.875
James Harvey............................... 7/6/94 1,000 35.00
Jane Shaw.................................. 7/6/94 1,000 36.125
Robert Waterman............................ 7/5/94 1,000 32.875
George Keller.............................. 7/5/94 1,000 35.00
Tully Friedman............................. 6/30/94 1,000 36.125
</TABLE>
<PAGE>
EXHIBIT 5
MORGAN STANLEY
MORGAN STANLEY & CO.
INCORPORATED
1251 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
(212) 703-4000
JULY 10, 1994
Board of Directors
McKesson Corporation
One Post Street
San Francisco, CA 94104
Members of the Board:
We understand that McKesson Corporation ("McKesson"), PCS Health Systems,
Inc. ("PCS"), an indirect wholly-owned subsidiary of McKesson, SP Ventures,
Inc. ("Spinco"), a wholly-owned subsidiary of McKesson, and certain other
parties, have entered into a Reorganization and Distribution Agreement (the
"Distribution Agreement"), dated as of the date hereof, which provides, among
other things, for the contribution of certain businesses of McKesson and its
subsidiaries to Spinco, and the distribution (the "Spin-Off") of all of the
issued and outstanding shares of Spinco Common Stock to the holders of McKesson
Common Stock (the "Shares"). The terms and conditions of the Spin-Off are more
fully set forth in the Distribution Agreement. We also understand that
McKesson, Eli Lilly and Company ("Lilly") and ECO Acquisition Corporation
("Acquisition Sub"), a wholly-owned subsidiary of Lilly, have entered into an
Agreement and Plan of Merger (the "Merger Agreement"), dated as of the date
hereof, which provides, among other things, for (i) the commencement by
Acquisition Sub of a tender offer to purchase for cash (the "Offer") any and
all of the Shares at a price of not less than $76.00 per Share; (ii) the
contribution by Acquisition Sub to McKesson, and the transfer by McKesson to
Spinco, concurrently with the consummation of the Offer, of a cash amount
approximately equal to $632 million, subject to certain adjustments, (the
"Spinco Cash Amount"); and (iii) the subsequent merger (the "Merger") of
Acquisition Sub with and into McKesson. Pursuant to the Merger, McKesson will
become a wholly-owned subsidiary of Lilly and each Share issued and outstanding
immediately prior to the Effective Time (other than Shares held by Lilly or any
subsidiary of Lilly, Shares held in the treasury or by a subsidiary of McKesson
and dissenting Shares), shall be converted into the right to receive $76.00 in
cash, or any higher price paid per Share in the Offer. The terms and conditions
of the Offer and the Merger are more fully set forth in the Merger Agreement.
We also understand that McKesson, Spinco and certain other parties have entered
into the Tax Sharing Agreement, the HDS Services Agreement, the McKesson
Services Agreement, the Non-Competition Agreement and the Memorandum of
Understanding (collectively the "Ancillary Agreements").
You have asked for our opinion as to whether, taken together, the Spin-Off
and the consideration to be received by the holders of Shares in the Offer and
the Merger are fair from a financial point of view to such holders.
For purposes of the opinion set forth herein, we have:
(i) analyzed certain publicly available financial statements and other
information of McKesson;
(ii) analyzed certain internal financial statements and other financial
and operating data concerning the businesses of Spinco prepared by the
management of McKesson;
(iii) analyzed certain financial projections related to the businesses of
Spinco prepared by the management of McKesson;
<PAGE>
(iv) analyzed certain internal financial statements and other financial
and operating data concerning PCS prepared by the management of PCS;
(v) analyzed certain financial projections of PCS prepared by the
management of PCS;
(vi) discussed the past and current operations and financial condition
and the prospects of PCS with senior executives of McKesson and PCS;
(vii) reviewed the reported prices and trading activity for the Shares;
(viii) compared the financial performance of McKesson and the prices and
trading activity of the Shares with that of certain other comparable
publicly-traded companies and their securities;
(ix) reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
(x) participated in discussions and negotiations among representatives of
McKesson, Lilly and their financial and legal advisors;
(xi) participated in a process involving solicitation of interest from,
and discussions and negotiations with, certain parties other than Lilly
with respect to PCS;
(xii) reviewed the Merger Agreement, the Distribution Agreement and the
Ancillary Agreements; and
(xiii) performed such other analyses as we have deemed appropriate.
We have assumed and relied upon without independent verification the accuracy
and completeness of the information reviewed by us for the purposes of this
opinion. With respect to the financial projections, we have assumed that they
have been reasonably prepared on bases reflecting the best currently available
estimates and judgments of the future financial performance of Spinco and PCS.
We have relied upon your counsel's analysis of the tax consequences of the
Spin-Off, the Offer and the Merger. We have also relied upon the view of the
management of McKesson with respect to the appropriateness of the Spinco Cash
Amount in light of Spinco's cash needs and strategic objectives, which view we
believe properly is a view to be determined by management. Our opinion is
necessarily based on economic, market and other conditions as in effect on, and
the information made available to us as of, the date hereof.
We have acted as financial advisor to the Board of Directors of McKesson in
connection with this transaction and will receive a fee for our services. In
the past, Morgan Stanley & Co. Incorporated and its affiliates have provided
financial advisory and financing services for McKesson and have received fees
for the rendering of these services. We have also in the past provided, and are
currently providing, financial advisory and financing services to Lilly
unrelated to the foregoing and have received, and will receive, fees for the
rendering of these services.
It is understood that this letter is for the information of the Board of
Directors of McKesson only and may not be used for any other purpose, other
than inclusion in disclosure documents relating to the Spin-Off, Offer and
Merger, without our prior written consent.
Based on the foregoing, we are of the opinion on the date hereof that, taken
together, the Spin-Off and the consideration to be received by the holders of
Shares in the Offer and the Merger are fair from a financial point of view to
such holders.
Very truly yours,
Morgan Stanley & Co. Incorporated
By: /s/ R. Bradford Evans
---------------------------------
R. Bradford Evans
Managing Director
<PAGE>
EXHIBIT 99.1
EMPLOYMENT AGREEMENTS
The Corporation has entered into employment agreements with each of the named
executive officers. The agreements with Messrs. Seelenfreund, Mahoney and
Norris will expire on October 31, 1994. The agreements with Messrs. McDowell
and Johnson expire on January 13, 1995 and January 14, 1995, respectively.
All of the foregoing agreements provide for annual salaries at the rates in
effect as of the date of the commencement of the agreements or such higher
salaries as may be from time to time approved by the Board (or the Compensation
Committee of the Board), plus such incentive compensation as may be voted to
such executive officers yearly by the Board (or the Compensation Committee of
the Board), and other group and key executive benefits. Mr. McDowell's
agreement also provides for an annual housing assistance payment by the
Corporation of $60,000, which amount is equal to 1/10th of the original
principal amount of the housing loan made to him and discussed under
"Indebtedness of Executive Officers" on page 19.
In the event of the death or disability of an executive, the employment
agreements described above generally provide for continued payment of the
executive's compensation to the executive's spouse or other designee for six
months following an executive's death, and for the continuous payment of such
compensation to the executive for twelve months in the event of the executive's
disability (and, in the case of Mr. Johnson, such payments will continue for
six months; provided, however, that if he is totally disabled for a continuous
period exceeding six months, Mr. Johnson will be paid $10,000 a month for the
remainder of his disability or until he reaches age 65, whichever occurs
first).
EXECUTIVE SEVERANCE POLICY AND CHANGE IN CONTROL ARRANGEMENTS
On September 29, 1993, the Compensation Committee of the Board of Directors
determined that existing executive employment agreements, including those with
the named executive officers, should be allowed to expire. In lieu of renewing
such agreements, the Committee implemented an Executive Severance Policy that
would apply in the event an executive officer is terminated by the Corporation
for reasons other than for cause and not related to a change in control. The
Committee also determined that the existing termination agreements with
executive officers, which apply in the event of a change in control, would be
amended to continue in force and stand alone from the expiring employment
agreements.
1
<PAGE>
Payment of benefits under the Executive Severance Policy is based on the
executive officer's tenure and level within the Corporation. In the case of the
Chairman and Chief Executive Officer and the President and Chief Operating
Officer such benefit is equal to 18 months pay (defined as the base salary rate
in effect at the time of termination and target bonus) plus one month's pay per
year of service, up to a maximum of 36 months. For the other executive
officers, the benefit is equal to 12 months' pay plus one month's pay per year
of service, up to a maximum of 24 months. Such benefits would be reduced or
eliminated by any income the executive receives from subsequent employers
during the severance payment period and discontinued in the event the executive
is employed by a competitor. Eligibility for employee benefits ceases on the
termination date. Executives who are age 55 or more and have 15 or more years
of service with the Corporation at the time of such involuntary termination are
granted "approved retirement" for purposes of the Corporation's 1984 Executive
Benefit Retirement Plan and the 1988 Executive Survivor Benefits Plan. Awards
under the Corporation's Long-Term Incentive Plan are pro-rated for all cycles
then in progress at the time the executive terminates and are based on actual
corporate performance. Vesting of stock options and lapse of restrictions on
restricted stock awards will cease as of the date of termination. No severance
benefits will be paid beyond age 62.
The Corporation has also entered into amended termination agreements with
certain executive officers, including Messrs. Seelenfreund, McDowell, Mahoney
and Norris. The agreements, which operate independently of any employment
agreement, continue through December 31 of each year, and are automatically
extended in one-year increments until terminated by the Compensation Committee
(or by the Board of Directors in the case of Mr. Seelenfreund's agreement). The
agreements are automatically extended for a period of two years following any
change in control.
The agreements provide that covered executive officers are entitled to
certain severance benefits following a change in control of the Corporation and
the actual or constructive termination of the executive's employment within two
years of such change. If, following a change in control, the executive is
terminated by the Corporation for any reason, other than for cause (as defined
in the agreements), or if such executive officer terminates his or her
employment for good reason (as that term is defined in the agreements), then
the Corporation shall pay to the executive as severance pay in a cash lump sum
an amount equal to 2.99 times his or her "base amount" (as that term is defined
in the agreements), subject to adjustment. The Corporation also continues the
executive's coverage in the health and welfare benefit plans in which he or she
was a participant as of the date of termination of employment, and the
executive continues to accrue benefits under the 1984 Executive Benefit
Retirement Plan, in both such cases for the period of time with respect to
which the executive would be entitled to payments under the Corporation's
Executive Severance Policy (as described above) if the executive's termination
of employment had been covered by such policy. In addition, if the executive is
age 55 or more and has 15 or more years of service (as determined under such
plan on the date of executive's termination of employment), then such
termination shall automatically be deemed to be an "approved retirement" under
the terms of the 1984 Executive Benefit Retirement Plan. The amount of
severance benefits paid shall be no higher than the amount that is not subject
to disallowance of deduction under Section 280G of the Internal Revenue Code.
For purposes of the amended termination agreements and as used elsewhere in
this proxy statement, a "change in control" is generally deemed to occur if:
(i) any "person" (as defined in the Securities Exchange Act of 1934, as
amended) other than the Corporation or one of its employee benefit plans,
acquires securities representing 30% or more of the combined voting power of
the Corporation's then outstanding securities; (ii) during any period of not
more than two consecutive years, individuals who at the beginning of such
period constitute the Board of Directors of the Corporation and any new
director whose election by the Board of Directors or nomination for election by
the Corporation's stockholders was approved by a vote of at least two-thirds (
2/3) of the directors then still in office who either were directors at the
beginning of the period or whose election or
2
<PAGE>
nomination for election was previously so approved, cease for any reason to
constitute a majority thereof; (iii) the stockholders of the Corporation
approve a merger or consolidation of the Corporation with any other
corporation, other than (a) a merger or consolidation which would result in the
voting securities of the Corporation outstanding immediately prior thereto
continuing to represent, in combination with the ownership of any trustee or
other fiduciary holding securities under an employee benefit plan of the
Corporation, at least 50% of the combined voting power of the voting securities
of the Corporation or such surviving entity outstanding immediately after such
merger or consolidation, or (b) a merger or consolidation effected to implement
a recapitalization of the Corporation in which no person acquires more than 50%
of the combined voting power of the Corporation's then outstanding securities;
or (iv) the stockholders approve a plan of complete liquidation of the
Corporation or an agreement for the sale or disposition by the Corporation of
all or substantially all of its assets.
PENSION BENEFITS
The table below illustrates the estimated combined annual benefits payable
upon retirement at age 65 under the Corporation's qualified retirement plan and
the supplemental Executive Benefit Retirement Plan (EBRP) in the specified
compensation and years-of-service classifications. The benefits are computed as
single life annuity amounts.
<TABLE>
<CAPTION>
FIVE YEAR YEARS OF SERVICE
AVERAGE -----------------------------------
COMPENSATION 15 20 25 30
------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
$ 400,000 $186,200 $221,600 $240,000 $240,000
$ 600,000 $279,300 $332,400 $360,000 $360,000
$ 800,000 $372,400 $443,200 $480,000 $480,000
$1,000,000 $465,500 $554,000 $600,000 $600,000
$1,200,000 $558,600 $664,800 $720,000 $720,000
$1,400,000 $651,700 $775,600 $840,000 $840,000
</TABLE>
The compensation covered under the plans whose benefits are summarized in the
above table includes the base salary and annual bonus amounts reported in the
Summary Compensation Table.
The estimated credited years of service at March 31, 1994 for each of the
executive officers named in the Summary Compensation Table are as follows: Mr.
Seelenfreund, 19; Mr. McDowell, 2; Mr. Johnson, 4; Mr. Mahoney, 4, and Mr.
Norris, 4.
The benefit under the EBRP is a percentage of final average pay based on
years of service or is determined by the Board of Directors. The maximum
benefit is 60% of final average pay. The total paid under the EBRP is not
reduced by Social Security benefits but is reduced by those benefits payable on
a single life basis under the Corporation's qualified retirement plan.
CERTAIN TRANSACTIONS
The Corporation and its subsidiaries also have transactions in the ordinary
course of business with unaffiliated corporations of which certain of the
Corporation's nonemployee directors are directors and/or executive officers.
The Corporation does not consider the amounts involved in such transactions to
be material in relation to the businesses of such other corporations or the
interests of the directors involved. The Corporation anticipates that similar
transactions will occur in FY 1995.
INDEBTEDNESS OF EXECUTIVE OFFICERS
Under the 1973 Stock Purchase Plan, loans bearing interest at the rate of
6.75% have been made to key employees of the Corporation and its subsidiaries
for the purchase of shares of the Corporation's Common Stock at 100% of the
fair market value on the date of purchase. During FY
3
<PAGE>
1994, loans were made to two executive officers to purchase an aggregate of
8,500 shares of the Corporation's Common Stock at an average price of $47.68
per share under this Plan. The maturity dates on such loans are August 4, 2003
and August 27, 2003, respectively.
The table below shows as to each director or executive officer who was
indebted to the Corporation in an amount exceeding $60,000 at any time during
the period April 1, 1993 through May 15, 1994, (i) the largest aggregate amount
of indebtedness outstanding during such period, and (ii) the amount of
indebtedness outstanding at May 15, 1994. All indebtedness shown in the case of
Mr. Hawkins, and $95,103 of the amount shown in the case of Mr. Johnson
resulted from loans under the 1973 Stock Purchase Plan. The remaining
indebtedness shown for Mr. Johnson and all of the amounts shown for Messrs.
Armstrong, McDowell and Smith relate to secured loans given to assist those
named executives with housing relocation from other areas upon joining the
Corporation (see page 17 under the heading "Employment Agreements" for further
information concerning Mr. McDowell's loan). Such loans are without interest so
long as the individuals remain in the employ of the Corporation or are under an
employment contract and thereafter at a market rate. Under the provisions of
Mr. Johnson's loan, in lieu of interest, the Corporation will share in any
appreciation in the value of the property securing the loan at maturity. Under
the provisions of Mr. Smith's loan, the Corporation has agreed to waive
repayment of the principal amount of $100,000 for each full fiscal year prior
to maturity during which McKesson Drug Company achieves its specified goal for
profit before tax and to forgive the principal amount of the loan in the event
of a change in control of the Corporation (as defined in the Note) and the
actual or constructive termination of Mr. Smith's employment within two years
of such change.
<TABLE>
<CAPTION>
LARGEST AGGREGATE AMOUNT OF
AMOUNT OF INDEBTEDNESS AT
INDEBTEDNESS MAY 15, 1994
----------------- ---------------
<S> <C> <C>
William A. Armstrong $ 95,000 $ 95,000
Richard H. Hawkins 277,359 273,319
Robert C. Johnson 501,423 499,539
David E. McDowell 600,000 600,000
James H. Smith 400,000 400,000
</TABLE>
AMENDMENTS TO THE 1978 STOCK OPTION PLAN (PROXY ITEM NO. 2)
Background and Purpose
The 1978 Stock Option Plan (the "1978 Plan") was approved by the stockholders
of the Corporation in 1978. The Board of Directors believes that the granting
of stock options has been of substantial value in enabling the Corporation to
attract and retain key employees and directors of outstanding ability by
providing them an opportunity to acquire a proprietary interest in the
Corporation. In view of the Corporation's policy to provide stock options as
additional incentive to a broad category of key employees and nonemployee
directors, whose continued efforts are essential to the future growth and
earnings of the Corporation, the Board of Directors believes that it is
essential that an adequate supply of Common Stock be available for future stock
option grants. Increases in the aggregate number of shares of Common Stock
available for options under the 1978 Plan were approved by the Corporation's
stockholders in 1983, 1986 and 1991, bringing the number of shares available
for option under the 1978 Plan to the present amount of 8,400,000. As of June
1, 1994, 655,572 shares remained available for granting of future stock
options.
Beginning in 1994, the Internal Revenue Code contains new rules regarding the
federal income tax deductibility of compensation paid to the Corporation's
Chief Executive Officer and to each of the other four most highly-compensated
executive officers. The general rule is that annual compensation paid to any of
these specified executives will be deductible only to the extent that it does
not exceed $1,000,000. However, the Corporation can preserve the deductibility
of certain compensation in
4
<PAGE>
excess of $1,000,000 if it complies with conditions imposed by the new rules,
including the establishment of a maximum number of shares with respect to which
options may be granted to any one employee during any one year. Currently the
1978 Plan does not contain any such maximum number of shares.
Accordingly, on March 30, 1994, the Board of Directors unanimously adopted,
subject to stockholder approval, amendments to the 1978 Plan to (i) increase by
3,000,000 the maximum number of shares of Common Stock that may be optioned
thereunder to a total of 11,400,000 shares; and (ii) establish 300,000 as the
maximum number of shares with respect to which options may be granted to any
one employee during any one year.
The full text of the proposed plan amendments is annexed as Exhibit A to this
proxy statement. A description of the 1978 Plan as currently in effect follows.
Description of the Plan
The 1978 Plan provides for the granting of nonqualified options or options
qualifying as incentive stock options ("ISOs") under Section 422A of the
Internal Revenue Code, as amended, to purchase an aggregate of not more than
8,400,000 shares of Common Stock of the Corporation. Shares subject to options
which for any reason (except surrender for shares of stock) cease to be
exercisable continue to be available for subsequent options under the 1978
Plan. The exercise price of the stock covered by each option may not be less
than 100% of the fair market value of such stock on the date the option is
granted. Shares issued upon exercise of options may be authorized but unissued
stock or authorized and issued stock reacquired by the Corporation and held in
treasury.
The 1978 Plan is administered by the Compensation Committee of the Board (the
"Committee"), whose members are not eligible to receive options under the 1978
Plan, except for the options automatically granted to nonemployee directors as
described below. The Committee may grant options from time to time to key
employees and designate the numbers of shares for which an option will be
granted. At present, the Corporation has approximately 12,600 employees. The
actual number of employees who will receive options is not determinable because
the determination of which employees are key employees who actually will
receive options is made by the Committee. However, in the fiscal year ended
March 31, 1994, approximately 425 key employees received stock options. The
Committee has the full power to construe and interpret the 1978 Plan and to
establish, amend or rescind rules and regulations for its administration.
The 1978 Plan provides that each nonemployee director who is elected to the
Board for the first time at any special or annual meeting of stockholders is to
receive, on such date, an option to purchase 5,000 shares of Common Stock,
which is immediately exercisable in full but expires in five equal annual
installments on each anniversary of the date of grant. On the date of each
subsequent annual meeting, each continuing nonemployee director automatically
receives an option to purchase an additional 1,000 shares, which is also
immediately exercisable in full. Subject to the above mentioned expiration
provisions, the term of each option is five years. All options granted to
nonemployee directors are nonqualified options, and no such options include
stock appreciation rights.
The maximum term of each option, except for options granted to nonemployee
directors, may be for such period of time as the Committee may determine, but
not more than ten years and three months from the date it is granted. In
consideration of the granting of options under the 1978 Plan, an optionee must
enter into a written Stock Option Agreement (the "Agreement") containing such
terms, provisions and conditions determined by the Committee to be consistent
with the 1978 Plan. An optionee, other than a nonemployee director, must remain
in the continuous employ of the Corporation and/or one of its affiliates for a
period of at least twelve months from the date on which
5
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the option is granted in order to first become eligible to exercise such
option. Thereafter, options granted as installment options become exercisable
in four equal annual installments beginning one year after the grant date, and
options granted as noninstallment options become fully exercisable at any time
after four years from the date of grant. Any portion of an option not exercised
as it becomes available shall accumulate and may thereafter be exercised by the
optionee at any time during the option term. Options are generally exercisable
for up to three months following termination of employment. The post-
termination exercise period is generally extended to three years, but in no
event beyond the original option period, if the termination is due to
retirement, death or long-term disability. Options under the 1978 Plan which
qualify as ISOs must be exercised in the chronological order of dates of grant.
In the event of a capital adjustment resulting from a merger, consolidation,
reorganization, recapitalization, reincorporation, stock split or stock
dividend (in excess of 2%), the number of shares of Common Stock under option
and the option price per share will be appropriately adjusted.
The Committee has the right to provide in any Agreement for a stock
appreciation right ("SAR") in connection with options granted under the 1978
Plan. An SAR is subject to the same terms and conditions as the related option,
and is exercisable only to the extent the option is exercisable. An SAR
entitles the optionee to surrender (during an authorized surrender period) to
the Committee, unexercised, the related option, or any portion thereof, and to
receive a payment in consideration therefor of an amount equal to the
difference obtained by subtracting the option price from the fair market value
of the Corporation's Common Stock on the date of surrender. Such payment may be
made in shares of the Corporation's Common Stock valued at fair market value on
the date of surrender or in cash, or partly in such shares and partly in cash.
Acceptance of such surrenders and the manner of payment therefor is at the sole
discretion of the Committee. If an option is surrendered for cash, the shares
covered by the surrendered option are thereafter available for grant under the
1978 Plan.
The 1978 Plan provides that the Committee, in its sole discretion, may permit
an optionee to pay the purchase price upon exercise of any option, in whole or
in part, by tendering to the Corporation shares of the Corporation's Common
stock owned by the optionee for at least six months prior to the option
exercise, and having an aggregate fair market value equal to the option price
of the new shares being acquired. In addition, optionees may use stock to
satisfy any withholding tax obligation upon exercise of a nonqualified stock
option.
The 1978 Plan provides that outstanding options become immediately
exercisable upon the occurrence of certain changes in control of the
Corporation, and for the forfeiture of options granted on or after October 27,
1993, by employees under certain circumstances.
The Board of Directors may at any time amend, suspend, or terminate the 1978
Plan, but may not adversely affect options already granted or, without
stockholder approval, increase the maximum number of shares subject to the 1978
Plan (except for adjustments for recapitalization, stock dividends and other
change in the corporate structure), or change the designation or class of
employees eligible to receive options thereunder.
Federal Tax Consequences
Nonqualified Stock Options. No taxable income results to an optionee upon the
grant of nonqualified stock options. Upon exercise, generally an optionee will
have reportable ordinary income in an amount equal to the difference between
the option price and the fair market value of the shares on the date of
exercise, and such amount will be deductible by the Corporation for federal
income tax purposes. The ordinary income upon exercise of the option will be
subject to applicable withholding taxes. Generally, any profit or loss on the
subsequent disposition of such shares will be short-term or long-term capital
gain or loss, depending upon the holding period for the shares.
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Incentive Stock Options. No taxable income results to an optionee upon either
the grant or exercise of an incentive stock option, and the optionee generally
will be taxed at capital gain rates when and if the stock received on exercise
of the option is sold after certain holding period requirements are met. Long-
term capital gains rates will apply to the optionee's full gain at the time of
the sale of the stock, provided that: (1) no disposition of the stock is made
within either two years from the date of grant of the option or one year after
exercise of the option, and (ii) the option is exercised no later than three
months after termination of employment (one year in the event of disability).
A sale, exchange, gift or other transfer of legal title of stock acquired
pursuant to an incentive stock option within two years from the date of grant
or within one year after exercise constitutes a disqualifying disposition. A
disqualifying disposition involving a sale or exchange produces taxable income
to the optionee, and an income tax deduction to the Corporation, in an amount
equal to the lesser of (i) the fair market value of the stock on the date of
exercise minus the option price; or (ii) the amount realized on disposition
minus the option price. A disqualifying disposition as a result of a gift
produces taxable income to the optionee and a deduction to the Corporation in
an amount equal to the difference between the option price and the fair market
value of the stock on the date of exercise.
The spread on the date of exercise between the fair market value and the
option price of stock acquired through the exercise of an incentive stock
option generally is an adjustment item for purposes of the alternative minimum
tax, unless a disqualifying disposition is made within the same taxable year of
the exercise.
Certain Information
On June 1, 1994 the reported closing sale price of the Corporation's Common
Stock on the New York Stock Exchange composite tape was $81.75 per share.
Options granted during the fiscal year ended March 31, 1994 to the five named
executive officers appear in the Stock Option Grants table on page 16. Options
were granted to all current executive officers as a group (including the named
executive officers) for 178,000 shares, to all current directors who are not
executive officers for 7,000 shares, and to all employees (other than executive
officers) for 643,675 shares.
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EXHIBIT 99.2
AMENDMENT TO TERMINATION AGREEMENT
----------------------------------
Agreement, dated as of March 30, 1994, by and between McKesson Corporation, a
Delaware corporation (the "Company"), and ___________ (the "Executive").
WHEREAS, the Company and the Executive have entered into an Amended
Termination Agreement dated as of February 1, 1994 (the "Termination
Agreement"); and
WHEREAS, the Company and the Executive wish to amend the Termination
Agreement in certain respects:
NOW, THEREFORE, for good and valid consideration, the receipt of
which is hereby acknowledged, the Termination Agreement is hereby amended,
effective as of March 30, 1994, by adding the following flush language at the
end of Section 3 thereof:
"Notwithstanding the foregoing, no Change in Control shall be deemed to
have occurred if there is consummated any transaction or series of
integrated transactions immediately following which, in the judgement of
the Compensation Committee of the Board, the holders of the Company's
Common Stock immediately prior to such transaction or series of
transactions continue to have the same proportionate ownership in an
entity which owns all or substantially all of the assets of the Company
immediately prior to such transaction or series of transactions."
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the 30th day of March, 1994.
MCKESSON CORPORATION
By: ____________________________
________________________________
THE EXECUTIVE
<PAGE>
EXHIBIT 99.3
AGREEMENT AND PLAN OF MERGER
DATED AS OF JULY 10, 1994
BY AND AMONG
MCKESSON CORPORATION,
ELI LILLY AND COMPANY
AND
ECO ACQUISITION CORPORATION
<PAGE>
TABLE OF CONTENTS
<TABLE>
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ARTICLE I THE OFFER...................................................... 1
Section 1.1. The Offer.............................................. 1
Section 1.2. Company Actions........................................ 2
Section 1.3. Stockholder Lists...................................... 3
Section 1.4. Composition of the Board of Directors.................. 3
ARTICLE II THE MERGER.................................................... 3
Section 2.1. The Merger............................................. 3
Section 2.2. Effective Time......................................... 3
Section 2.3. Effects of the Merger.................................. 3
Section 2.4. Certificate of Incorporation and By-Laws............... 3
Section 2.5. Directors.............................................. 3
Section 2.6. Officers............................................... 4
Section 2.7. Conversion of Shares................................... 4
Section 2.8. Convertible Securities................................. 4
Section 2.9. Conversion of the Purchaser's Common Stock............. 5
Section 2.10. Stock Options and Stock Awards......................... 5
Section 2.11. Stockholders' Meeting.................................. 6
Section 2.12. Filing of Certificate of Merger........................ 7
Section 2.13. Spinco Cash Payment.................................... 7
ARTICLE III DISSENTING SHARES; EXCHANGE OF SHARES........................ 7
Section 3.1. Dissenting Shares...................................... 7
Section 3.2. Exchange of Shares..................................... 8
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY................. 8
Section 4.1. Organization........................................... 8
Section 4.2. Capitalization......................................... 9
Section 4.3. Authority Relative to this Agreement................... 9
Section 4.4. Consents and Approvals; No Violations.................. 10
Section 4.5. Absence of Certain Changes............................. 11
Section 4.6. No Undisclosed Liabilities............................. 11
Section 4.7. Reports................................................ 11
Section 4.8. Schedule 14D-9; Offer Documents; Form 10; Information
Statement............................................. 12
Section 4.9. No Default............................................. 12
Section 4.10. Litigation; Compliance with Law........................ 12
Section 4.11. Employee Benefit Plans; ERISA.......................... 13
Section 4.12. Assets; Title to Real Property......................... 14
Section 4.13. Intellectual Property.................................. 15
Section 4.14. Computer Software...................................... 15
Section 4.15. Certain Contracts and Arrangements..................... 15
Section 4.16. Taxes.................................................. 15
Section 4.17. Certain Fees........................................... 16
Section 4.18. No Additional Approvals Necessary...................... 16
ARTICLE V REPRESENTATIONS AND WARRANTIES OF PARENT AND
THE PURCHASER................................................. 16
Section 5.1. Organization........................................... 16
Section 5.2. Authority Relative to this Agreement................... 16
Section 5.3. Consents and Approvals; No Violations.................. 17
</TABLE>
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Section 5.4. Schedule 14D-9; Offer Documents; Proxy Statement; Form
10;
Information Statement................................. 17
Section 5.5. Sufficient Funds....................................... 17
Section 5.6. Beneficial Ownership of Shares......................... 18
ARTICLE VI COVENANTS..................................................... 18
Section 6.1. Conduct of Business of the Company..................... 18
Section 6.2. Acquisition Proposals.................................. 19
Section 6.3. Access to Information.................................. 21
Section 6.4. Best Efforts........................................... 21
Section 6.5. Consents............................................... 21
Section 6.6. HSR Filings............................................ 21
Section 6.7. Public Announcements................................... 23
Section 6.8. Employee Agreements.................................... 23
Section 6.9. Employee Benefits...................................... 23
Section 6.10. Ancillary Agreements; Spin-Off......................... 24
Section 6.11. Retained Business Financial Statements................. 24
Section 6.12. Pre-Closing Consultation............................... 25
ARTICLE VII CONDITIONS TO CONSUMMATION OF THE MERGER..................... 25
Section 7.1. Conditions to Each Party's Obligation to Effect the
Merger................................................ 25
Section 7.2. Conditions to the Obligation of the Company to Effect
the Merger............................................ 25
Section 7.3. Conditions to Obligations of Parent and the Purchaser
to Effect the Merger.................................. 25
Section 7.4. Exception.............................................. 26
ARTICLE VIII TERMINATION; AMENDMENT; WAIVER.............................. 26
Section 8.1. Termination............................................ 26
Section 8.2. Effect of Termination.................................. 26
Section 8.3. Fees and Expenses...................................... 27
Section 8.4. Amendment.............................................. 28
Section 8.5. Extension; Waiver...................................... 28
ARTICLE IX MISCELLANEOUS................................................. 29
Section 9.1. Survival............................................... 29
Section 9.2. Entire Agreement....................................... 29
Section 9.3. Governing Law.......................................... 29
Section 9.4. Notices................................................ 29
Section 9.5. Successors and Assigns; No Third Party Beneficiaries... 30
Section 9.6. Counterparts........................................... 30
Section 9.7. Interpretation......................................... 30
Section 9.8. Schedules.............................................. 30
Section 9.9. Legal Enforceability................................... 30
Section 9.10. Specific Performance................................... 30
Section 9.11. Brokerage Fees and Commissions......................... 30
</TABLE>
<TABLE>
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Exhibit A Form of Tax Sharing Agreement--omitted
Exhibit B Form of HDS Services Agreement--omitted
Exhibit C Form of McKesson Services Agreement--omitted
Exhibit D Form of Memorandum of Understanding--omitted
Exhibit E Form of Non-Competition Agreement--omitted
Exhibit F Conditions of the Offer......................................... F-1
</TABLE>
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AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of July 10, 1994, among McKesson
Corporation, a Delaware corporation (the "Company"), Eli Lilly and Company, an
Indiana corporation ("Parent"), and ECO Acquisition Corporation, a Delaware
corporation and a wholly-owned subsidiary of Parent (the "Purchaser").
WHEREAS, the Boards of Directors of the Company, Parent and the Purchaser
deem it advisable and in the best interests of their respective stockholders
that Parent acquire certain businesses of the Company pursuant to the terms and
conditions set forth in this Agreement;
WHEREAS, as provided herein, and in the Distribution Agreement (as defined
below), the Company will transfer certain businesses to SP Ventures, Inc., a
Delaware corporation and a wholly-owned subsidiary of the Company ("Spinco"),
and distribute to the Company's stockholders (the "Spin-Off") all of the issued
and outstanding shares of common stock, par value $.01 per share, of Spinco;
and
WHEREAS, as set forth in Section 6.10 hereof, as a condition to and in
consideration of the transactions contemplated hereby, the Company, Spinco and
certain other parties are entering or will enter into (a) a Reorganization and
Distribution Agreement dated as of the date hereof (the "Distribution
Agreement"), (b) a Tax Sharing Agreement in the form attached hereto as Exhibit
A (the "Tax Sharing Agreement"), and (c) a HDS Services Agreement, among
Parent, PCS Health Systems, Inc., a Delaware corporation ("PCS"), and
Healthcare Delivery Systems, Inc., a Delaware corporation ("HDS"), in the form
attached hereto as Exhibit B, a McKesson Services Agreement, between PCS and
Spinco, in the form attached hereto as Exhibit C, a Memorandum of Understanding
between Parent and Spinco, in the form attached hereto as Exhibit D (the
"Memorandum of Understanding"), and a Non-Competition Agreement between Parent
and Spinco, in the form attached hereto as Exhibit E (the agreements referred
to in this paragraph (c), hereafter collectively referred to as the "Additional
Agreements" and, together with the Distribution Agreement and the Tax Sharing
Agreement, hereafter collectively referred to as the "Ancillary Agreements");
NOW, THEREFORE, in consideration of the foregoing and the Ancillary
Agreements and the respective representations, warranties, covenants and
agreements set forth herein and therein, the parties hereto agree as follows:
ARTICLE I
THE OFFER
Section 1.1. The Offer. (a) Subject to this Agreement not having been
terminated in accordance with the provisions of Section 8.1 hereof, the
Purchaser shall, and Parent shall cause Purchaser to, as promptly as
practicable, but in no event later than five business days from the date of the
public announcement of the terms of this Agreement, commence an offer to
purchase for cash (the "Offer") any and all of the Company's outstanding shares
of common stock, par value $2.00 per share (the "Shares"), and all preferred
stock purchase rights associated therewith, subject to the conditions set forth
in Exhibit F attached hereto, at a price of not less than $76.00 per Share, net
to the seller in cash. The Purchaser shall, and Parent shall cause the
Purchaser to, (i) subject only to the conditions set forth in Exhibit F hereto,
accept for payment and pay for all Shares tendered pursuant to the terms of the
Offer as promptly as practicable following the record date (the "Record Date")
of the Spin-Off, and (ii) subject only to the conditions set forth in
paragraphs (ii)(a) through (g) of Exhibit F hereto, extend the period of time
the Offer is open until the first business day following the Record Date.
Subject to the provisions set forth herein and in Article III of the
Distribution Agreement, including, without limitation, Section 3.2 thereof, the
Company's Board of Directors shall establish such Record Date and the
Distribution Date (as defined in the Distribution Agreement) at the earliest
reasonably practicable dates. Parent will not, nor will it permit any of its
affiliates to, tender into the Offer any Shares beneficially owned by it, nor,
subject to the preceding sentence of this Section 1.1, will Parent
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<PAGE>
or Purchaser extend the expiration date of the Offer beyond the twentieth
business day following commencement thereof without the prior written consent
of the Company unless one or more of the conditions set forth in Exhibit F
hereto shall not be satisfied or unless Parent reasonably determines, with the
prior approval of the Company (such approval not to be unreasonably withheld or
delayed) that such extension is necessary to comply with any legal or
regulatory requirements relating to the Offer. The Purchaser expressly reserves
the right to amend the terms or conditions of the Offer, provided that no
amendment may be made which changes the form of consideration to be paid or
decreases the price per Share or the number of Shares sought in the Offer or
which imposes conditions to the Offer in addition to those set forth in Exhibit
F hereto or broadens the scope of such conditions, and no other amendment may
be made in the terms or conditions of the Offer which is adverse to the holders
of Shares. The Company agrees that no Shares held by the Company or any
subsidiary of the Company will be tendered pursuant to the Offer.
Notwithstanding anything to the contrary contained in this Agreement, Parent
and the Purchaser shall not be required to commence the Offer in any foreign
country where the commencement of the Offer, in Parent's reasonable opinion,
would violate the applicable law of such jurisdiction.
(b) On the date of the commencement of the Offer, the Purchaser shall file
with the Securities and Exchange Commission (the "SEC") a Tender Offer
Statement on Schedule 14D-1 with respect to the Offer which will contain an
offer to purchase and form of the related letter of transmittal (together with
any supplements or amendments thereto, the "Offer Documents"). The Company and
its counsel shall be given a reasonable opportunity to review and comment on
the Offer Documents prior to the filing of such Offer Documents with the SEC.
The Purchaser agrees to provide the Company and its counsel in writing with any
comments the Purchaser and its counsel may receive from the SEC or its staff
with respect to the Offer Documents promptly after the receipt thereof.
Section 1.2. Company Actions. (a) The Company hereby consents to the Offer
and represents that its Board of Directors (at a meeting duly called and held)
has unanimously (i) determined as of the date hereof that the Offer, the Merger
(as hereafter defined) and the Spin-Off are fair to the stockholders of the
Company and are in the best interests of the stockholders of the Company and
(ii) resolved to recommend acceptance of the Offer and approval and adoption of
this Agreement by the stockholders of the Company. The Company further
represents that Morgan Stanley & Co. Incorporated has delivered to the Board of
Directors of the Company its opinion that, taken together, the Spin-Off and the
consideration to be received by the holders of Shares in the Offer and the
Merger are fair from a financial point of view to such holders. The Company
hereby agrees to file a Solicitation/Recommendation Statement on Schedule 14D-9
(the "Schedule 14D-9") containing such recommendations with the SEC (and the
information required by Section 14(f) of the Exchange Act if Parent shall have
furnished such information to the Company in a timely manner) and to mail such
Schedule 14D-9 to the stockholders of the Company no later than 10 business
days following the commencement of the Offer. The Company agrees to provide
Parent and its counsel in writing with any comments the Company may receive
from the SEC or its staff with respect to such Schedule 14D-9 promptly after
receipt thereof.
(b) The Company will, within ten days following announcement of the Offer,
amend the Rights Agreement, dated as of May 7, 1986 (the "Rights Agreement"),
between the Company and Shareholder Services Trust Company (presently First
Chicago Trust Company of New York), as amended and restated, as necessary (i)
to prevent this Agreement or the consummation of any of the transactions
contemplated hereby or by the Distribution Agreement, including without
limitation, the publication or other announcement of the Offer and the
consummation of the Offer and the Merger, from resulting in the distribution of
separate rights certificates or the occurrence of a Distribution Date (as
defined therein) or being deemed to be a Triggering Event (as defined therein)
or a Section 13 Event (as defined therein) and (ii) to provide that neither
Parent nor the Purchaser shall be deemed to be an Acquiring Person (as defined
in the Rights Agreement) or be declared an Adverse Person (as defined in the
Rights Agreement) by reason of the transactions expressly provided for in this
Agreement.
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Section 1.3. Stockholder Lists. In connection with the Offer, the Company
will promptly furnish the Purchaser with mailing labels, security position
listings and any available listing or computer file containing the names and
addresses of the record holders of the Shares as of a recent date and shall
furnish the Purchaser with such information and assistance as the Purchaser or
its agents may reasonably request in communicating the Offer to the record and
beneficial holders of Shares.
Section 1.4. Composition of the Board of Directors. In the event that the
Purchaser acquires at least a majority of the Shares outstanding on a fully
diluted basis pursuant to the Offer, Parent shall be entitled to designate for
appointment or election to the Company's Board of Directors, upon written
notice to the Company, such number of persons so that the designees of the
Parent constitute a majority of the Company's Board of Directors. Prior to
consummation of the Offer, the Board of Directors of the Company will either
adopt an amendment to the Company's By-Laws to provide in effect that upon the
request of Parent following the acquisition by the Purchaser of a majority of
the Shares outstanding on a fully diluted basis pursuant to the Offer, the
number of members of the Company's Board of Directors shall be increased to the
extent necessary to provide the persons designated by Parent pursuant to this
Section 1.4 with a majority of the positions on the Board of Directors, or will
obtain the resignation of such number of directors as is necessary to enable
such number of Parent designees to be so elected. In connection therewith, the
Company will mail to the stockholders of the Company the information required
by Section 14(f) of the Exchange Act and Rule 14f-1 thereunder unless such
information has previously been provided to such stockholders in the Schedule
14D-9. Parent and the Purchaser will provide to the Company in writing, and be
solely responsible for, any information with respect to such companies and
their nominees, officers, directors and affiliates required by such Section and
Rule. Notwithstanding the provisions of this Section 1.4, the parties hereto
shall use their respective best efforts to ensure that at least three of the
members of the Company's Board of Directors shall, at all times prior to the
Effective Time (as defined in Section 2.2 hereof) be, Continuing Directors (as
defined in Section 8.4 hereof).
ARTICLE II
THE MERGER
Section 2.1. The Merger. Upon the terms and subject to the conditions hereof,
and in accordance with the Delaware General Corporation Law (the "DGCL"), the
Purchaser shall be merged (the "Merger") with and into the Company as soon as
practicable following the satisfaction or waiver of the conditions set forth in
Article VII hereof or on such other date as the parties hereto may agree (such
agreement to require the approval of a majority of the Continuing Directors if
at the time there shall be any Continuing Directors). Following the Merger the
Company shall continue as the surviving corporation (the "Surviving
Corporation") and the separate corporate existence of the Purchaser shall
cease.
Section 2.2. Effective Time. The Merger shall be consummated by filing with
the Delaware Secretary of State a certificate of merger or, if applicable, a
certificate of ownership and merger, executed in accordance with the relevant
provisions of the DGCL (the time the Merger becomes effective being the
"Effective Time").
Section 2.3. Effects of the Merger. The Merger shall have the effects set
forth in the DGCL. As of the Effective Time the Company shall be a wholly-owned
subsidiary of Parent.
Section 2.4. Certificate of Incorporation and By-Laws. The Certificate of
Incorporation and By-Laws of the Purchaser as in effect at the Effective Time
shall be the Certificate of Incorporation and By-Laws of the Surviving
Corporation, provided that Article First of the Certificate of Incorporation of
the Surviving Corporation shall be amended to read in its entirety as follows:
"FIRST: The name of the Corporation is PCS Holding Corporation."
Section 2.5. Directors. The directors of the Purchaser at the Effective Time
shall be the initial directors of the Surviving Corporation and will hold
office from the Effective Time until their respective
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successors are duly elected or appointed and qualify in the manner provided in
the Certificate of Incorporation and By-Laws of the Surviving Corporation, or
as otherwise provided by law.
Section 2.6. Officers. The officers of the Purchaser at the Effective Time
shall be the initial officers of the Surviving Corporation and will hold office
from the Effective Time until their respective successors are duly elected or
appointed and qualify in the manner provided in the Certificate of
Incorporation and By-Laws of the Surviving Corporation, or as otherwise
provided by law.
Section 2.7. Conversion of Shares. (a) At the Effective Time:
(i) Each Share issued and outstanding immediately prior to the Effective
Time (other than Shares held by Parent or any subsidiary of Parent, Shares
held in the treasury of the Company or held by any subsidiary of the
Company (other than a Retained Subsidiary), and other than Dissenting
Shares (as hereafter defined)), including, without limitation, shares of
restricted stock issued to employees and former employees of the Company
and its subsidiaries (such restricted stock held by employees who, in
connection with the Spin-Off, become employees of Spinco shall remain
outstanding until converted pursuant to this Section 2.7), shall, by virtue
of the Merger and without any action on the part of the holder thereof, be
converted into the right to receive $76.00 in cash, or any higher price
paid per Share in the Offer (the "Merger Price"), payable to the holder
thereof, without interest thereon, upon the surrender of the certificate
formerly representing such Share (except as provided in Section 2.10(c)
hereof).
(ii) Each Share held in the treasury of the Company or held by any
subsidiary of the Company (other than a Retained Subsidiary) and each Share
held by Parent or any subsidiary of Parent immediately prior to the
Effective Time shall, by virtue of the Merger and without any action on the
part of the holder thereof, be cancelled and retired and cease to exist.
(b) Each Share held by any Retained Subsidiary shall, by virtue of the Merger
and without any action on the part of the holder thereof, be converted into and
exchangeable for a number of fully paid and nonassessable shares of common
stock of the Surviving Corporation equal to the same percentage of the total
number of issued and outstanding shares of Surviving Corporation common stock
immediately following the Effective Time as the Shares owned by such Retained
Subsidiary bore to the total number of issued and outstanding Shares
immediately prior to the Effective Time.
Section 2.8. Convertible Securities.
(a) The Company shall give notice to all holders of the Series A Convertible
Preferred Stock (as defined in Section 4.2 hereof) that, on a date, as
designated by the Company, prior to the Effective Time (the "Redemption Date"),
all shares of Series A Convertible Preferred Stock will be called for
redemption, in accordance with Article Four, I. 4 of the Company's Restated
Certificate of Incorporation, at the price provided for therein.
(b) The shares of Series B ESOP Preferred Stock (as defined in Section 4.2
hereof) issued and outstanding immediately prior to the Effective Time shall,
pursuant to the Certificate of Designation, Preferences and Rights of such
Series B ESOP Preferred Stock (the "Certificate"), by virtue of the Merger and
without any action on the part of the holder thereof, be converted into the
right to receive the amount of cash that would have been receivable by a holder
of the aggregate number of Shares into which such shares of Series B ESOP
Preferred Stock could have been converted immediately prior to the Effective
Time (taking into account for this purpose the adjustment to the conversion
price of such shares of Series B ESOP Preferred Stock required by the
Certificate to reflect the Spin-Off). The Company shall use its best efforts to
enter into an agreement with the trustee (the "Trustee") of the PSIP (as
defined in Section 6.9(c) hereof) pursuant to which the Trustee would cause all
shares of Series B ESOP Preferred Stock held by the PSIP to convert into Shares
on or prior to the Record Date (as such term is defined in the Distribution
Agreement); provided that in using such best efforts, the Company shall not be
obligated to take any actions which would be adverse to the Company or pay any
amounts in connection with seeking such agreement.
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Section 2.9. Conversion of the Purchaser's Common Stock. Each share of common
stock, par value $.01 per share, of the Purchaser issued and outstanding
immediately prior to the Effective Time shall, by virtue of the Merger and
without any action on the part of the holder thereof, be converted into and
exchangeable for one share of common stock of the Surviving Corporation.
Section 2.10. Stock Options and Stock Awards. (a) (i) Exercisable
Options. All options to acquire Shares ("Stock Options") which are outstanding
and exercisable immediately prior to the Effective Time and which are held by
any employee or former employee or director or former director of the Company
or any of its subsidiaries, after taking into account the adjustments and
conversions to such Stock Options and the other matters set forth in Section
8.2(c) of the Distribution Agreement, shall be cancelled as of the Effective
Time and the holder thereof shall be entitled to receive from the Company at
the Effective Time, for each Share subject to such Stock Option, an amount in
cash equal to the difference between the Merger Price and the exercise price
per share of such Stock Option, less all applicable withholding taxes.
(ii) Non-Exercisable Options. All Stock Options which are outstanding but
not exercisable immediately prior to the Effective Time and which are held
by any Retained Employee (as defined in Section 6.9 hereof), after taking
into account the adjustments and conversions to such Stock Options and the
other matters set forth in Section 8.2(c) of the Distribution Agreement,
shall, pursuant to the equitable adjustment provisions of the applicable
Company stock option plan under which such Stock Options were granted, be
cancelled as of the Effective Time in exchange for the issuance by Parent,
within ten days after the Effective Time, to such Retained Employee of that
number of shares of common stock of Parent ("Parent Common Stock"), rounded
up or down to the nearest whole share, equal to the quotient obtained by
dividing (A) the product of (1) the difference between the Merger Price and
the exercise price per share of such Stock Options held by such Retained
Employee and (2) the number of Shares subject to such Stock Options, by (B)
the average of the high and low prices per share of Parent Common Stock on
the New York Stock Exchange (the "Parent Stock Price") on the date of
consummation of the Merger. The shares of Parent Common Stock so issued
shall be subject to restrictions on transfer during the restricted period
set forth below, and any shares of Parent Common Stock then subject to such
restrictions shall be forfeited in the event such Retained Employee
voluntarily terminates his or her employment with the Surviving Corporation
or the Parent (or any affiliate thereof) during such restricted period,
other than any termination on the basis of "good reason" (as used in the
various executive severance agreements currently in effect with executives
of the Company). The restricted period shall commence as of the Effective
Time and shall terminate on the third anniversary thereof; provided, that
restrictions on one-third of the shares of Parent Common Stock so issued
shall lapse on each of the first and second anniversaries of the Effective
Time (unless the Company and any holder of such shares otherwise mutually
agree); and further provided, that all such restrictions shall lapse in the
event of the Retained Employee's death, disability, retirement, involuntary
termination of employment or voluntary termination of employment for good
reason (as defined above) during the restricted period. During the
restricted period, each such Retained Employee shall otherwise be entitled
to all of the rights of a shareholder of Parent, including the right to
vote such shares of Parent Common Stock and the right to receive dividends
thereon. If on the date that the restrictions lapse on any shares of Parent
Common Stock issued to a Retained Employee hereunder, the Parent Stock
Price is less than the Parent Stock Price on the date of consummation of
the Merger, Parent shall pay or shall cause the Surviving Corporation to
pay to such Retained Employee (or to such Retained Employee's estate or
beneficiary, if applicable), within ten days after such restrictions lapse,
in cash or, at Parent's option, in additional shares of Parent Common Stock
(valued based on the Parent Stock Price on the date such restrictions
lapse), an additional amount, less all applicable withholding taxes, such
that the sum of (A) the value (as of such date) of the shares of Parent
Common Stock the restrictions on which lapse on such date plus (B) the
value (as of such date) of the payment made pursuant to this sentence shall
be equal to the product of (1) the number of shares of Parent Common Stock
the restrictions on which lapse on such date and (2) the Parent Stock Price
on the date of consummation of the Merger.
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(b) The Company shall use its best efforts to ensure that neither the Company
nor any of its subsidiaries is or will be bound by any options, warrants,
rights or agreements which would entitle any person, other than Parent, the
Company or their subsidiaries, to beneficially own, or receive any payments in
respect of, any capital stock of the Company or the Surviving Corporation
(other than as provided in this Agreement or in the Ancillary Agreements).
(c)(i) Pursuant to the equitable adjustment provisions of the Company's 1988
Restricted Stock Plan, as amended (the "1988 Plan"), cash otherwise payable
hereunder in respect of Shares granted to a Spinco Employee (as defined in the
Distribution Agreement) under the 1988 Plan, with respect to which the
restrictions have not lapsed as of the Effective Time shall be transferred by
the Company to, and retained by, Spinco and shall be payable to such Spinco
Employee, subject to the conditions otherwise applicable with respect to the
lapsing of restrictions on such Shares, at such time or times when such
restrictions would otherwise have lapsed, together with interest thereon from
the Effective Time through the date of payment at the rate in effect from time
to time under the Company's Deferred Compensation Administration Plan II (DCAP
II) (or any successor plan thereto); provided, however, that each such Spinco
Employee shall have the right to elect to defer receipt of any amount otherwise
payable after December 31, 1995, under such terms and conditions as Spinco may
provide.
(ii) Pursuant to the equitable adjustment provisions of the 1988 Plan, Shares
granted to Retained Employees under the 1988 Plan with respect to which the
restrictions have not lapsed as of the Offer Purchase Date (as defined in the
Distribution Agreement) shall be returned to the Company on the day following
the Offer Purchase Date, and restricted shares of Spinco Common Stock (as
defined in the Distribution Agreement) issued to Retained Employees in the
Spin-Off under the Spinco Stock Plan (as defined in the Distribution Agreement)
in respect of such Shares shall be returned to Spinco on such day. In
consideration of the actions described in the preceding sentence, Parent shall
issue to each such Retained Employee, within ten days after the Effective Time,
a number of shares of Parent Common Stock, rounded up or down to the nearest
whole share, equal to the quotient obtained by dividing (A) the sum of (1) the
amount of cash which would have been payable to such Retained Employee
hereunder in respect of such Shares had such Shares been outstanding
immediately prior to the Effective Time (the "Cash Consideration") plus (2) the
product of (x) the number of shares of Spinco Common Stock issued to such
Retained Employee in the Spin-Off in respect of such Shares (the "Spinco
Restricted Shares") and (y) the Spinco Value (as defined in the Distribution
Agreement), by (B) the Parent Stock Price on the date of consummation of the
Merger. Notwithstanding the foregoing, in the case of any Retained Employee who
is, with respect to the Company, subject to the reporting requirements of
Section 16 of the Exchange Act, the Spinco Restricted Shares described herein
shall not be returned to Spinco on the day following the Offer Purchase Date
(but shall remain outstanding for a period of six months and a day thereafter
(the "Post-Offer Period"), at which time such Spinco Restricted Shares shall be
returned to Spinco), and Parent shall issue to each such Retained Employee (A)
within ten days after the Effective Time, a number of whole shares of Parent
Common Stock, rounded up or down to the nearest whole share, equal to the
quotient obtained by dividing (1) the Cash Consideration by (2) the Parent
Stock Price on the date of consummation of the Merger, and (B) within ten days
after the end of the Post-Offer Period, a number of whole shares of Parent
Common Stock, rounded up or down to the nearest whole share, equal to the
quotient obtained by dividing (3) the product of (x) the Spinco Restricted
Shares of such Retained Employee and (y) the average of the high and low prices
of Spinco Common Stock on the last day of the Post-Offer Period, by (4) the
Parent Stock Price on the last day of the Post-Offer Period. The shares of
Parent Common Stock issued hereunder shall be subject to the same terms and
conditions as the shares of Parent Common Stock issued to Retained Employees
pursuant to Section 2.10(a)(ii) hereof.
Section 2.11. Stockholders' Meeting. If required by applicable law in order
to consummate the Merger, the Company, acting through its Board of Directors,
shall, in accordance with applicable law, its Restated Certificate of
Incorporation and By-Laws and the rules and regulations of the New York Stock
Exchange:
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(a) duly call, give notice of, convene and hold a special meeting of its
stockholders as soon as practicable following the consummation of the Offer
for the purpose of considering and taking action upon this Agreement;
(b) subject to its fiduciary duties under applicable laws as advised by
counsel, include in the Proxy Statement (as defined in Section 5.4 hereof)
the recommendation of its Board of Directors referred to in Section 1.2
hereof; and
(c) use its best efforts to (i) obtain and furnish the information
required to be included by it in the Proxy Statement, and, after
consultation with Parent, respond promptly to any comments made by the SEC
with respect to the Proxy Statement and any preliminary version thereof and
cause the Proxy Statement to be mailed to its stockholders following the
consummation of the Offer and (ii) obtain the necessary approvals of this
Agreement by its stockholders.
Parent will provide the Company with the information concerning Parent and
the Purchaser required to be included in the Proxy Statement and will vote, or
cause to be voted, all Shares owned by it or its subsidiaries in favor of
approval and adoption of this Agreement.
Section 2.12. Filing of Certificate of Merger. Upon the terms and subject to
the conditions hereof, as soon as practicable following the satisfaction or
waiver of the conditions set forth in Article VII hereof, the Company shall
execute and file a certificate of merger or, if applicable, a certificate of
ownership and merger, in the manner required by the DGCL and the parties hereto
shall take all such other and further actions as may be required by law to make
the Merger effective. Prior to the filings referred to in this Section 2.12, a
closing will be held at the offices of Skadden, Arps, Slate, Meagher & Flom,
919 Third Avenue, New York, New York (or such other place as the parties may
agree), for the purpose of confirming all of the foregoing.
Section 2.13. Spinco Cash Payment. The Purchaser shall, and Parent shall
cause the Purchaser to, contribute to the Company, simultaneously with the
consummation of the Offer (except that the amount referred to in paragraph
(a)(ii) below shall be contributed by the Purchaser to the Company immediately
prior to the Effective Time and immediately transferred to Spinco by the
Company as an adjustment to the Company Assets being transferred to Spinco), a
cash amount (the "Spinco Cash Amount") in immediately available funds equal to
(a) the sum of (i) $4,000,000,000, plus (ii) an amount equal to the aggregate
exercise price received by the Company by reason of the exercise of any
outstanding Stock Options following the consummation of the Offer but prior to
the Effective Time, plus (iii) the amount of cash, if any, paid to the Company
from the sale by the Company of the capital stock of Spinco pursuant to Section
2.5 of the Distribution Agreement and not otherwise transferred to Spinco
pursuant to Article II of the Distribution Agreement (provided that in no event
shall the amount referred to in this clause (iii) exceed $10,000,000), minus
(b) the sum of (i) the amount paid or payable in the Offer and the Merger with
respect to the Shares and the shares of Series B ESOP Preferred Stock (as
defined in Section 4.2 hereof), (ii) the amount paid or payable with respect to
Section 2.10(a)(i) hereof and (iii) in the event that the Series A Convertible
Preferred Stock is not redeemed on or prior to the Offer Purchase Date, the
amount payable by the Company with respect to the redemption thereof. In the
event that any cash amount with respect to the matter set forth in clause
(a)(iii) above is received by the Company after the consummation of the Offer,
the Company shall transfer to Spinco such amount promptly following receipt
thereof. Such Spinco Cash Amount shall constitute part of the Company Assets to
be transferred to Spinco pursuant to the Distribution Agreement.
ARTICLE III
DISSENTING SHARES; EXCHANGE OF SHARES
Section 3.1. Dissenting Shares. Notwithstanding anything in this Agreement to
the contrary, Shares which are issued and outstanding immediately prior to the
Effective Time and which are held by stockholders who have not voted such
Shares in favor of the Merger and shall have delivered a written demand for
appraisal of such Shares in the manner provided in the DGCL (the "Dissenting
Shares") shall not be
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converted into or be exchangeable for the right to receive the consideration
provided in Section 2.7 of this Agreement, unless and until such holder shall
have failed to perfect or shall have effectively withdrawn or lost such
holder's right to appraisal and payment under the DGCL. If such holder shall
have so failed to perfect or shall have effectively withdrawn or lost such
right, such holder's Shares shall thereupon be deemed to have been converted
into and to have become exchangeable for, at the Effective Time, the right to
receive the consideration provided for in Section 2.7(a) of this Agreement,
without any interest thereon.
Section 3.2. Exchange of Shares. (a) Prior to the Effective Time, Parent
shall designate a bank or trust company to act as exchange agent in the Merger
(the "Exchange Agent"). Immediately prior to the Effective Time, Parent will
take all steps necessary to enable and cause the Company to deposit with the
Exchange Agent the funds necessary to make the payments contemplated by Section
2.7 on a timely basis.
(b) Promptly after the Effective Time, the Exchange Agent shall mail to each
record holder, as of the Effective Time, of an outstanding certificate or
certificates which immediately prior to the Effective Time represented Shares
(the "Certificates") a form letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates
shall pass, only upon proper delivery of the Certificates to the Exchange
Agent) and instructions for use in effecting the surrender of the Certificates
for payment therefor. Upon surrender to the Exchange Agent of a Certificate,
together with such letter of transmittal duly executed, and any other required
documents, the holder of such Certificate shall be entitled to receive in
exchange therefor the consideration set forth in Section 2.7(a) hereof, and
such Certificate shall forthwith be cancelled. No interest will be paid or
accrued on the cash payable upon the surrender of the Certificates. If payment
is to be made to a person other than the person in whose name the Certificate
surrendered is registered, it shall be a condition of payment that the
Certificate so surrendered shall be properly endorsed or otherwise in proper
form for transfer and that the person requesting such payment shall pay any
transfer or other taxes required by reason of the payment to a person other
than the registered holder of the Certificate surrendered or establish to the
satisfaction of the Surviving Corporation that such tax has been paid or is not
applicable. Until surrendered in accordance with the provisions of this Section
3.2, each Certificate (other than Certificates representing Shares held by
Parent or any subsidiary of Parent, Shares held in the treasury of the Company
or held by any subsidiary of the Company and Dissenting Shares) shall represent
for all purposes only the right to receive the consideration set forth in
Section 2.7(a) hereof, without any interest thereon.
(c) After the Effective Time there shall be no transfers on the stock
transfer books of the Surviving Corporation of the Shares which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to the Surviving Corporation, they shall be
cancelled and exchanged for the consideration provided in Article II hereof in
accordance with the procedures set forth in this Article III.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and the Purchaser as follows:
Section 4.1. Organization. Each of the Company and its subsidiaries that will
be owned, directly or indirectly, by the Company following the Spin-Off (the
"Retained Subsidiaries") is a corporation duly organized, validly existing and
in good standing under the laws of the jurisdiction of its incorporation and
has all requisite corporate power and authority to own, lease and operate its
properties and to carry on its business as now being conducted, except in the
case of subsidiaries which are not Retained Subsidiaries where the failure to
be so existing and in good standing or to have such power and authority would
not in the aggregate have a Material Adverse Effect (as defined below). For
purposes of this Agreement, (a) the term "Material Adverse Effect" shall mean a
material adverse effect on the business, results of operations or financial
condition of the businesses that will be retained by the Company and the
Retained Subsidiaries
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following the Spin-Off taken as a whole, and (b) the term "Retained Business"
shall mean such businesses to be retained by the Company and the Retained
Subsidiaries following the Spin-Off. Each of the Company and the Retained
Subsidiaries is duly qualified or licensed and in good standing to do 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 in the aggregate have
a Material Adverse Effect. The Company has heretofore delivered or made
available to Parent accurate and complete copies of the Certificate of
Incorporation and By-Laws (or other similar organizational documents in the
event of any entity other than a corporation), as currently in effect of the
Company and each of the Retained Subsidiaries.
Section 4.2. Capitalization. As of July 1, 1994, the authorized capital stock
of the Company consisted of (a) 120,000,000 Shares, of which 40,716,310 Shares
were issued and outstanding, (b) 6,000,000 shares of Cumulative Preferred
Stock, par value $35.00 per share ("Cumulative Preferred Stock"), of which
244,034 shares were designated as Cumulative Preferred Stock, Series A
(Convertible) ("Series A Convertible Preferred Stock"), of which 128,575 shares
were issued and outstanding, and (c) 10,000,000 shares of Series Preferred
Stock, par value $1.00 per share ("Series Preferred Stock"), of which (i)
600,000 shares were designated as Series A Junior Participating Preferred Stock
of which no shares were issued and outstanding, and (ii) 3,000,000 shares were
designated as Series B ESOP Convertible Preferred Stock ("Series B ESOP
Preferred Stock"), of which 2,737,633 were issued and outstanding. All of the
issued and outstanding Shares, Cumulative Preferred Stock and Series Preferred
Stock are validly issued, fully paid and non-assessable and free of preemptive
rights. As of July 1, 1994, 3,111,751 Shares were issuable upon the exercise of
outstanding vested and non-vested Employee Options. Since July 1, 1994, the
Company has not issued any shares of its capital stock except upon exercise of
Employee Options or the conversion of Series A Convertible Preferred Stock or
Series B ESOP Preferred Stock. Except as set forth above and as otherwise
provided for in this Agreement, there are not now, and at the Effective Time
there will not be, any shares of capital stock of the Company issued or
outstanding or any subscriptions, options, warrants, calls, rights, convertible
securities or other agreements or commitments of any character obligating the
Company to issue, transfer or sell any of its securities other than Shares
issuable upon conversion of the Series A Convertible Cumulative Preferred Stock
or the Series B ESOP Preferred Stock and other than the Rights (as defined in
the Rights Agreement). Except as permitted by this Agreement, following the
Merger, the Company will have no obligation to issue, transfer or sell any
shares of its capital stock pursuant to any employee benefit plan or otherwise.
All of the outstanding shares of capital stock of each of the Retained
Subsidiaries have been validly issued and are fully paid and non-assessable and
are owned by either the Company or another of the Retained Subsidiaries free
and clear of all liens, charges, claims or encumbrances. There are not now, and
at the Effective Time there will not be, any outstanding subscriptions,
options, warrants, calls, rights, convertible securities or other agreements or
commitments of any character relating to the issued or unissued capital stock
or other securities of any of the Retained Subsidiaries, or otherwise
obligating the Company or any such subsidiary to issue, transfer or sell any
such securities. There are not now, and at the Effective Time there will not
be, any voting trusts or other agreements or understandings to which the
Company or any of the Retained Subsidiaries is a party or is bound with respect
to the voting of the capital stock of the Company or any of the Retained
Subsidiaries.
Section 4.3. Authority Relative to this Agreement. Each of the Company and
each Company subsidiary which is a party to any of the Ancillary Agreements
(each such subsidiary, a "Contracting Subsidiary") has full corporate power and
authority to execute and deliver this Agreement and the Ancillary Agreements
and to consummate the transactions contemplated hereby and thereby (but only to
the extent it is a party thereto). The execution and delivery of this Agreement
by the Company and of the Ancillary Agreements by the Company and each
Contracting Subsidiary (to the extent it is a party thereto) and the
consummation of the transactions contemplated hereby and thereby have been, or
with respect to Contracting Subsidiaries will be prior to the Record Date, duly
and validly authorized by the Boards of Directors of the Company and each
Contracting Subsidiary (to the extent it is a party thereto) and no other
corporate proceedings on the part of the Company or each Contracting Subsidiary
(to the extent it is a party thereto),
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including, without limitation, any approval by the stockholders of the Company,
are, or with respect to Contracting Subsidiaries will be prior to the Record
Date, necessary to authorize this Agreement or the Ancillary Agreements or to
consummate the transactions contemplated hereby or thereby (other than (a) with
respect to the Merger, the approval and adoption of this Agreement by the
holders, including Parent and its affiliates, of the requisite number of the
outstanding Shares, (b) actions with respect to increasing the size of the
Company's Board of Directors to enable designees of Parent to be elected or
appointed as provided in Section 1.4 hereof and (c) actions to be taken by the
Boards of Directors of the Company and certain Contracting Subsidiaries
specified therein in connection with the matters contemplated by the
Distribution Agreement, which actions described in clause (c) above will be
(subject to Section 3.2 of the Distribution Agreement) duly and validly taken
prior to any purchase of Shares pursuant to the Offer). This Agreement has
been, and each of the Ancillary Agreements have been or will prior to the
Record Date be, duly and validly executed and delivered by the Company and each
Contracting Subsidiary (to the extent it is a party thereto) and (except for
the Memorandum of Understanding) constitute or (to the extent such agreement is
not being entered into as of the date hereof) will constitute a valid and
binding agreement of the Company and each Contracting Subsidiary (to the extent
it is a party thereto), enforceable against the Company and each Contracting
Subsidiary (to the extent it is a party thereto) in accordance with its terms,
except to the extent that enforcement thereof may be limited by (a) bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance or other similar
laws, now or hereafter in effect, relating to creditors' rights generally and
(b) general principles of equity (regardless of whether enforceability is
considered in a proceeding at law or in equity). The affirmative vote of the
holders of a majority of the Shares is the only vote of the holders of any
class or series of Company capital stock necessary to approve the Merger.
Neither the Offer, the Merger or the Spin-Off, individually or taken together,
is a transaction that constitutes a change in control under any of the
Company's stock option or restricted stock plans or any other benefit plan in
which any Retained Employee participates.
Section 4.4. Consents and Approvals; No Violations. Except for any applicable
requirements of the Securities Exchange Act of 1934, as amended, and all rules
and regulations thereunder (the "Exchange Act"), the Securities Act of 1933 and
all rules and regulations thereunder (the "Securities Act"), and the Hart-
Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"),
the filing and recordation of a certificate of merger, or a certificate of
ownership and merger, as required by the DGCL, such filings and approvals as
may be required under the "takeover" or "blue sky" laws of various states, and
as disclosed in Section 4.4 of the disclosure schedule delivered by the Company
to Parent on or prior to the date hereof (the "Disclosure Schedule") or as
contemplated by this Agreement and the Ancillary Agreements, neither the
execution and delivery of this Agreement or the Ancillary Agreements by the
Company or any Contracting Subsidiary (to the extent it is a party thereto) nor
the consummation by the Company or any Contracting Subsidiary (to the extent it
is a party thereto) of the transactions contemplated hereby or thereby will (i)
conflict with or result in any breach of any provision of the certificate of
incorporation or By-Laws of the Company or any Contracting Subsidiary, (ii)
require on the part of the Company or any Contracting Subsidiary any filing
with, or the obtaining of any permit, authorization, consent or approval of,
any governmental or regulatory authority or any third party, (iii) 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, amendment,
cancellation, acceleration or payment, or to the creation of a lien or
encumbrance) under any of the terms, conditions or provisions of any note,
mortgage, indenture, other evidence of indebtedness, guarantee, license,
agreement or other contract, instrument or obligation to which the Company, any
Contracting Subsidiary or any of their respective subsidiaries is a party or by
which any of them or any of their properties or assets may be bound or (iv) as
of the date hereof, violate any order, writ, injunction, decree, statute, rule
or regulation applicable to the Company or any Contracting Subsidiary, any of
their respective subsidiaries or any of their properties or assets, except for
such requirements, defaults, rights or violations under clauses (ii), (iii) and
(iv) above (x) which would not in the aggregate have a Material Adverse Effect
and would not have a material adverse effect on the ability of the Company or
any Contracting Subsidiary to consummate the transactions contemplated by this
Agreement, or (y) which become applicable as a result of the business or
activities in which Parent or the Purchaser is or proposes to be engaged (other
than the
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business or activities of the Retained Business to be acquired by the
Purchaser, considered independently of the ownership thereof by Parent and the
Purchaser) or as a result of other facts or circumstances specific to Parent or
the Purchaser.
Section 4.5. Absence of Certain Changes. Except (a) as set forth in Section
4.5 of the Disclosure Schedule, (b) as set forth in the Company's Annual Report
on Form 10-K for the year ended March 31, 1994 (the "Form 10-K") or any other
document filed prior to the date hereof pursuant to Section 13(a) or 15(d) of
the Exchange Act, or (c) as contemplated by this Agreement or any of the
Ancillary Agreements, from April 1, 1994 until the date hereof, neither the
Company nor any of its subsidiaries has taken any of the prohibited actions set
forth in Section 6.1 hereof or suffered any changes that, either individually
or in the aggregate, would result in a Material Adverse Effect or conducted its
business or operations in any material respect other than in the ordinary and
usual course of business, consistent with past practices.
Section 4.6. No Undisclosed Liabilities. Except (a) for liabilities and
obligations incurred in the ordinary and usual course of business consistent
with past practice since April 1, 1994, (b) for liabilities and obligations
incurred in connection with the Offer, the Merger and the Spin-Off and (c) as
set forth in Section 4.6 of the Disclosure Schedule, from April 1, 1994 until
the date hereof neither the Company nor any of its subsidiaries has incurred
any liabilities or obligations that, individually or in the aggregate, would
have a Material Adverse Effect and that would be required to be reflected or
reserved against in a consolidated balance sheet of the Company and its
subsidiaries prepared in accordance with generally accepted accounting
principles as applied in preparing the consolidated balance sheet of the
Company and its subsidiaries as of March 31, 1994 contained in the Form 10-K.
Section 4.7. Reports. (a) The Company has filed all reports, forms,
statements and other documents required to be filed with the SEC pursuant to
the Exchange Act since April 1, 1991 (collectively, the "Company SEC
Documents"). With respect to the Retained Business, none of the Company SEC
Documents, as of their respective filing dates, contained or will contain any
untrue statement of a material fact or omitted or will omit to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading, except where any such statement or omission would not have a
Material Adverse Effect. Each of the consolidated balance sheets (including the
related notes) included in the Company SEC Documents filed prior to or after
the date of this Agreement (but prior to the date on which the Offer is
consummated, and excluding the Company SEC Documents described in Section 4.8
hereof) fairly presents or will fairly present in all material respects the
consolidated financial position of the Company and its subsidiaries as of the
respective dates thereof, and the other related statements (including the
related notes) included therein fairly present or will fairly present in all
material respects the results of operations and the cash flows of the Company
and its subsidiaries for the respective periods or as of the respective dates
set forth therein, except in the case of any such balance sheets (including the
related notes) or related statements (including the related notes) where the
failure to so fairly present such financial position, results of operations or
cash flows would not have a Material Adverse Effect. Each of the financial
statements (including the related notes) included in the Company SEC Documents
filed prior to or after the date of this Agreement (but prior to the date on
which the Offer is consummated, and excluding the Company SEC Documents
described in Section 4.8 hereof) has been prepared or will be prepared in all
material respects in accordance with generally accepted accounting principles
consistently applied during the periods involved, except (a) as otherwise noted
therein or (b) to the extent required by changes in generally accepted
accounting principles.
(b) Except as and to the extent set forth in Section 4.7(b) of the Disclosure
Schedule, (i) each of the consolidated balance sheets (including the related
notes) included in the financial statements of the Retained Business attached
as Exhibit A to Section 4.7(b) of the Disclosure Schedule (the "Prescription
Financial Statements") fairly presents in all material respects the
consolidated financial position of the Retained Business as of the respective
dates thereof, and (ii) the other related statements (including the related
notes) included therein fairly present in all material respects the results of
operations and the cash flows of the Retained Business for the respective
periods or as of the respective dates set forth therein. The Prescription
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Financial Statements have been prepared in all material respects in accordance
with generally accepted accounting principles consistently applied during the
periods involved, except as otherwise disclosed therein or in the notes
thereto.
Section 4.8. Schedule 14D-9; Offer Documents; Form 10; Information
Statement. None of the information included in the Schedule 14D-9 or the Form
10 or the Information Statement (as those terms are defined in the Distribution
Agreement), or supplied by the Company for inclusion in the Offer Documents,
including any amendments thereto, will be false or misleading with respect to
any material fact or will omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. Except for information
supplied by Parent in writing for inclusion therein, the Schedule 14D-9, the
Form 10 and the Information Statement, including any amendments thereto, will
comply in all material respects with the Exchange Act.
Section 4.9. No Default. Except as set forth in Section 4.9 of the Disclosure
Schedule, neither the Company nor any of its subsidiaries is in default or
violation (and no event has occurred which with notice or the lapse of time or
both would constitute a default or violation) of any term, condition or
provision of (i) its charter or its by-laws, (ii) any note, mortgage,
indenture, other evidence of indebtedness, guarantee, license, agreement or
other contract, instrument or contractual obligation to which the Company or
any of its subsidiaries is now a party or by which they or any of their
properties or assets may be bound, or (iii) any order, writ, injunction,
decree, statute, rule or regulation applicable to the Company or any of its
subsidiaries, except for defaults or violations under clauses (i) (with respect
to Company subsidiaries other than the Retained Subsidiaries), (ii) and (iii)
above (x) which in the aggregate would not have a Material Adverse Effect and
would not have a material adverse effect on the ability of the Company or
Spinco to consummate the transactions contemplated by this Agreement or (y)
which become applicable as a result of the business or activities in which
Parent or the Purchaser is or proposes to be engaged (other than the business
or activities of the Retained Business to be acquired by the Purchaser,
considered independently of the ownership thereof by Parent and the Purchaser)
or as a result of any other facts or circumstances specific to Parent or the
Purchaser.
Section 4.10. Litigation; Compliance with Law. (a) Except as set forth in
Section 4.10 of the Disclosure Schedule or as disclosed in the Company SEC
Documents, as of the date hereof (except as provided in the following
sentence), there are no actions, suits, proceedings or, to the best knowledge
of the Company, investigations, pending or, to the best knowledge of the
Company, threatened, involving the Company or any of its subsidiaries, by or
before any court, governmental or regulatory authority or by any third party
which, either individually or in the aggregate, would reasonably be expected to
have a Material Adverse Effect. For purposes of indemnification for breach of
this Section 4.10 under Section 5.2 of the Distribution Agreement, but not for
determining whether or not the conditions to the Offer or the Merger have been
satisfied, the Company represents and warrants that the foregoing
representation and warranty shall be true and correct following the date hereof
with respect to actions, suits, proceedings and investigations unrelated to and
not arising from this Agreement or the Ancillary Agreements or the transactions
contemplated hereby or thereby, including, without limitation, the Offer, the
Merger and the Spin-Off, or the public disclosure of any of the foregoing.
(b) Except for those matters which in the aggregate would not have a Material
Adverse Effect and those matters set forth in Section 4.10 of the Disclosure
Schedule, (i) the Retained Business is not being, and has not in the last three
years been, conducted in violation of any applicable law, ordinance, rule,
regulation, decree or order of any court or governmental entity (including,
without limitation, (A) laws regarding the provision of insurance, third party
administration and primary health care services, (B) 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 Substance
Acts, Dangerous Drugs Acts and Food, Drug and Cosmetic Acts, (C) Environmental
Laws (as defined below), (D) the Foreign Corrupt Practices Act of 1977 and any
other laws regarding use of funds for political activity or commercial bribery,
and (E) ERISA and Labor Laws (as defined below)); (ii) the Retained Business
has not made, caused or contributed to any
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material release of any hazardous or toxic waste, substance or constituent,
into the environment, and, to the Company's knowledge (such limitation of this
representation to the Company's knowledge to be considered for purposes of
determining whether or not the conditions to the Offer or the Merger have been
satisfied, but not for purposes of indemnification for breach of this Section
4.10 under Section 5.2 of the Distribution Agreement), there are no hazardous
wastes or toxic substances in, on, over or under the real property owned by the
Retained Business; and (iii) the Retained Business is not subject to any
compliance agreement or settlement agreement from an alleged violation of any
Environmental Laws. Except for those matters which in the aggregate would not
have a Material Adverse Effect, (i) the Retained Business is not engaged in any
unfair labor practice, (ii) there is no labor strike or stoppage pending
against or affecting the Retained Business, and (iii) the Company has not
received notice of any pending petition for certification before the National
Labor Relations Board with respect to any Retained Employees (as defined in
Section 6.9 hereof) who are not currently organized. Except as set forth in
Section 4.10 of the Disclosure Schedule, as of the date hereof, neither the
Company nor any of its subsidiaries is subject to any continuing order of,
consent decree, settlement agreement or other similar agreement with, or, to
the knowledge of the Company, continuing investigation by, any governmental
entity, or any judgment, order, writ, injunction, decree or award of any
governmental entity or arbitrator, including, without limitation, cease-and-
desist or other orders, except as disclosed in the Company SEC Documents filed
prior to the date of this Agreement and except for any such order, consent
decree, settlement agreement or other similar agreement, or investigation,
judgment, order, writ, injunction, decree or award, which in the aggregate
would not have a Material Adverse Effect. Except as set forth in Section 4.10
of the Disclosure Schedule, the Retained Business is in possession of all
franchises, grants, authorizations, licenses, permits, easements, variances,
exemptions, consents, certificates, approvals and orders necessary to own,
lease and operate its properties and to carry on its business as it is being
conducted as of the date hereof (collectively, the "Company Permits"), and, to
the knowledge of the Company, there is no action, proceeding or investigation
pending or threatened regarding suspension or cancellation of any of the
Company Permits, except in each case where the failure to possess, or the
suspension or cancellation of, such Company Permits would not constitute a
Material Adverse Effect. For purposes of this Agreement, "Environmental Laws"
means all applicable laws, rules and regulations relating to pollution or the
protection of the environment, including, without limitation, the Resource
Conservation and Recovery Act, the Clean Air Act, the Federal Water Pollution
Control Act, the Toxic Substances Control Act and the Comprehensive
Environmental Response, Compensation and Liability Act); and "Labor Laws" mean
all applicable laws respecting employment practices, terms and conditions of
employment and wages and hours.
Section 4.11. Employee Benefit Plans; ERISA. (a) Section 4.11(a) of the
Disclosure Schedule lists each "employee benefit plan" (as defined in Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")), and all other material employee benefit, bonus, incentive, stock
option (or other equity-based), severance, change in control and fringe benefit
plans (other than any employment or personnel policy, practice or procedure not
subject to ERISA) maintained for the benefit of, or contributed to by the
Company or its subsidiaries or any trade or business, whether or not
incorporated (an "ERISA Affiliate"), that would be deemed a "single employer"
within the meaning of Section 4001 of ERISA, for the benefit of any employee or
former employee of the Company or any of its subsidiaries (the "Plans"). The
Company has made available to the Purchaser copies of each of the Plans,
including all amendments to date.
(b) Except for those matters which, either individually or in the aggregate,
would not result in a Material Adverse Effect and except for those matters set
forth in Section 4.11(b) of the Disclosure Schedule, (i) each of the Plans is,
and has been, operated in accordance with its terms and in substantial
compliance (including the making of governmental filings) with all applicable
laws, including, without limitation, ERISA and the applicable provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), (ii) each of the Plans
intended to be "qualified" within the meaning of Section 401(a) of the Code has
been determined by the Internal Revenue Service (the "IRS") to be so qualified
and is not under audit by the IRS or the Department of Labor and the Company
knows of no fact or set of circumstances that would adversely affect such
qualification prior to the Effective Time, (iii) none of the Plans is subject
to Title IV of ERISA, (iv) no
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"reportable event", as such term is defined in Section 4043(b) of ERISA (for
which the 30-day notice requirement to the PBGC has not been waived), has
occurred with respect to any Plan, and (v) there are no pending or, to the best
knowledge of Company, threatened claims (other than routine claims for
benefits) by, on behalf of or against any of the Plans or any trusts related
thereto.
(c) Except as set forth in Section 4.11(c) of the Disclosure Schedule, no
Plan provides benefits, including without limitation death or medical benefits
(whether or not insured), with respect to any employees of the Company or any
of its subsidiaries beyond their retirement or other termination of service
(other than (i) coverage mandated by applicable law, or (ii) benefits the full
cost of which is borne by the current or former employee (or his or her
beneficiary)), and none of the Company or its subsidiaries is contractually
obligated to provide any person with such benefits upon retirement or
termination of employment.
(d) Except as set forth in Section 4.11(d) of the Disclosure Schedule, and
except for those matters which, either individually or in the aggregate, would
not result in a Material Adverse Effect, (i) no Plan has incurred an
"Accumulated Funding Deficiency" (as defined in Section 302 of ERISA or Section
412 of the Code), whether or not waived, (ii) the Company has not incurred any
liability to the Pension Benefit Guaranty Corporation ("PBGC"), except for
required premium payments, which payments have been made when due, (iii) the
Company has not ceased operations at any facility or withdrawn from any Plan in
a manner which could subject it to liability under Section 4062, 4063 or 4064
of ERISA, and, to the best of the Company's knowledge, no events have occurred
which might give rise to any liability of the Company to the PBGC under Title
IV of ERISA or which could reasonably be anticipated to result in any claims
being made against Buyer by the PBGC, and (iv) the Company has not incurred any
withdrawal liability (including any contingent or secondary withdrawal
liability) within the meaning of Section 4201 and 4204 of ERISA to any
multiemployer plan (within the meaning of Section 3(37) of ERISA).
(e) The Company has made available to Parent (i) copies of all employment
agreements with officers and key employees of the Retained Business; (ii)
copies of all severance agreements, programs and policies of the Retained
Business with or relating to its officers and key employees; and (iii) copies
of all plans, programs, agreements and other arrangements of the Retained
Business with or relating to its officers and key employees which contain
change in control provisions. Except as set forth on Section 4.11(e) of the
Disclosure Schedule, no officer or key employee of the Retained Business has
executed a non-competition agreement with the Retained Business.
Section 4.12. Assets; Title to Real Property. (a) Except as set forth in
Section 4.12(a) of the Disclosure Schedule and except for those services to be
provided pursuant to the Ancillary Agreements, upon consummation of the Spin-
Off, the Company and the Retained Subsidiaries will have all assets, rights and
contracts necessary to permit the Company and the Retained Subsidiaries to
conduct the Retained Business as it is currently being conducted, except where
the failure to have such assets, rights and contracts would not have a Material
Adverse Effect.
(b) Section 4.12 of the Disclosure Schedule identifies all real property
owned by the Company or its subsidiaries and used primarily by the Retained
Business. The Company has, either directly or through its subsidiaries, (x)
good and valid title to, free and clear of all mortgages, pledges, security
interests, liens, charges, options, easements, rights-of-way or other
encumbrances of any nature whatsoever (collectively, "Liens") other than
Permitted Liens (as defined below), or (y) rights by lease or other agreement
to use, all real property used by the Retained Business, except where the
failure to have such title or rights would not have a Material Adverse Effect.
The term "Permitted Liens" shall mean (i) Liens for water, sewage and similar
charges and current taxes not yet due and payable or being contested in good
faith, (ii) mechanics', carriers', workers', repairers', materialmen's,
warehousemen's and other similar Liens arising or incurred in the ordinary
course of business, (iii) such other Liens as would not in the aggregate have a
Material Adverse Effect and (iv) Liens arising or resulting from any action
taken by Parent or the Purchaser. All real property leases of property used in
the Retained Business, under which the Company or any subsidiary is a lessee or
lessor, are valid, binding and enforceable in all material respects in
accordance with their terms and, to the best knowledge of the Company, there
are no existing material defaults thereunder.
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Section 4.13. Intellectual Property. Except as set forth in Section 4.13 of
the Disclosure Schedule or as disclosed in the Company SEC Documents, there are
no pending or threatened claims of which the Company or its subsidiaries have
been given written notice, by any person against their use of any material
trademarks, trade names, service marks, service names, mark registrations,
logos, assumed names and copyright registrations, patents and all applications
therefor which are owned by the Company or its subsidiaries and used in the
operation of the Retained Business as currently conducted (collectively, the
"Intellectual Property"). The Company and the Retained Subsidiaries have, or
prior to the Spin-Off will have, such ownership of or such rights by license,
lease or other agreement to the Intellectual Property as are necessary to
permit them to conduct the Retained Business as currently conducted, except as
set forth in Section 4.13 of the Disclosure Schedule or otherwise where the
failure to have such ownership or rights would not, either individually or in
the aggregate, result in a Material Adverse Effect. No Intellectual Property,
and no services or products sold by the Retained Business, conflict with or
infringe upon, in any material respect, any proprietary rights of others. To
the Company's knowledge, no person is infringing on or violating, in any
material respect, any of the rights of the Company and its subsidiaries to any
of the Intellectual Property.
Section 4.14. Computer Software. The Company and the Retained Subsidiaries
have, or prior to the Spin-Off will have, such title or such rights by license,
lease or other agreement to the computer software programs (other than off-the-
shelf software) which are owned, licensed, leased or otherwise used by the
Company and the Retained Subsidiaries and which are material to the conduct of
the Retained Business as currently conducted, as are necessary to permit the
conduct of the Retained Business as currently conducted, except where the
failure to have such title or rights would not, either individually or in the
aggregate, result in a Material Adverse Effect.
Section 4.15. Certain Contracts and Arrangements. Except as set forth in
Section 4.15 of the Disclosure Schedule, all agreements to which the Company or
its subsidiaries are parties relating to the Retained Business are valid,
binding and enforceable in all respects in accordance with their terms and
neither the Company nor any of its subsidiaries is in default under any of such
agreements, other than such failures to be valid, binding and enforceable or
such defaults, if any, which would not have a Material Adverse Effect. Except
as set forth in Section 4.15 of the Disclosure Schedule, during the twelve
months immediately prior to the date hereof, no Significant Customer has
cancelled or otherwise terminated its business relationships with the Retained
Business. For purposes hereof, the term "Significant Customer" shall mean any
customer of the Company's pharmaceutical management business which accounted
for 50,000 or more members (determined on a consistent basis with the past
practices of the Retained Business) during the year ended March 31, 1994. The
Company has made available to Parent all material non-competition agreements or
material agreements that restrict the geographic area in which the Retained
Business may conduct business.
Section 4.16. Taxes. Except as otherwise disclosed in Section 4.16 of the
Disclosure Schedule and except for those matters which, either individually or
in the aggregate, would not result in a Material Adverse Effect:
(a) The Company and each of its subsidiaries have filed (or have had filed
on their behalf) or will file or cause to be filed, all income Tax Returns
required by applicable law to be filed by any of them prior to the
consummation of the Offer, and all such Tax Returns and amendments thereto
are or will be true, complete and correct.
(b) The Company and each of its subsidiaries have paid (or have had paid
on their behalf), or where payment is not yet due, have established (or
have had established on their behalf and for their sole benefit and
recourse), or will establish or cause to be established before the
consummation of the Offer, an adequate accrual for the payment of all Taxes
due with respect to any period ending prior to or as of the expiration of
the Offer.
(c) There are no Liens for any Taxes upon the assets of the Company or any
of its subsidiaries used primarily in the Retained Business.
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(d) No Audit is pending with respect to any Taxes due from the Company or any
subsidiary. There are no outstanding waivers extending the statutory period of
limitation relating to the payment of Taxes due from the Company or any
subsidiary for any taxable period ending prior to the expiration of the Offer
which are expected to be outstanding as of the expiration of the Offer.
(e) Neither the Company nor any subsidiary is a party to, is bound by, or has
any obligation under, a tax sharing contract, other than the Tax Sharing
Agreement.
(f) Neither the Company nor any of its subsidiaries has made an election
under Section 341(f) of the Code.
(g) For purposes of this Section 4.16, capitalized terms have the following
meaning:
(i) "Audit" shall mean any audit, assessment of Taxes, other examination
by the Internal Revenue Service or any other domestic or foreign
governmental authority responsible for the administration of any Taxes,
proceeding or appeal of such proceeding relating to Taxes.
(ii) "Taxes" shall mean all Federal, state, local and foreign taxes, and
other assessments of a similar nature (whether imposed directly or through
withholding), including any interest, additions to tax, or penalties
applicable thereto.
(iii) "Tax Returns" shall mean all Federal, state, local and foreign tax
returns, declarations, statements, reports, schedules, forms and
information returns and any amended Tax Return relating to Taxes.
Section 4.17. Certain Fees. Except as set forth in Section 4.17 of the
Disclosure Schedule, neither the Company nor any subsidiary has employed any
financial advisor or finder or incurred any liability for any financial
advisory or finders' fees in connection with this Agreement or the Ancillary
Agreements or the transactions contemplated hereby or thereby.
Section 4.18. No Additional Approvals Necessary. Assuming the accuracy of the
representation and warranty set forth in Section 5.6 hereof, the Board of
Directors of the Company has taken all actions necessary under the Company's
Restated Certificate of Incorporation and the DGCL, including approving the
transactions contemplated in this Agreement, to ensure that neither Section 203
of the DGCL nor the provisions of Article Eight of the Company's Restated
Certificate of Incorporation will, prior to any termination of this Agreement,
apply to this Agreement, the Offer, the Merger or the transactions contemplated
hereby. As of the date hereof, neither Parent nor the Purchaser is a "Non-
Approved Person", as such term is defined and used in Article Seven of the
Company's Restated Certificate of Incorporation.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PARENT AND THE PURCHASER
Parent and the Purchaser represent and warrant to the Company as follows:
Section 5.1. Organization. Each of Parent and the Purchaser is a corporation
duly organized, validly existing and in good standing under the laws of the
state of its incorporation and has all requisite corporate power and authority
to own, lease and operate its properties and to carry on its business as now
being conducted. Each of Parent and the Purchaser has heretofore delivered to
the Company an accurate and complete copy of its charter and by-laws, as
currently in effect. Since the date of its incorporation, the Purchaser has not
engaged in any activities other than in connection with or as contemplated by
this Agreement or in connection with arranging any financing required to
consummate the transactions contemplated hereby.
Section 5.2. Authority Relative to this Agreement. Each of Parent and the
Purchaser has full corporate power and authority to execute and deliver this
Agreement and the Ancillary Agreements (to the extent it is
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a party thereto) and to consummate the transactions contemplated hereby and
thereby. The execution and delivery of this Agreement and the Ancillary
Agreements (to the extent it is a party thereto) and the consummation of the
transactions contemplated hereby and thereby have been duly and validly
authorized by the Boards of Directors of the Purchaser and Parent and by Parent
as the sole stockholder of the Purchaser and no other corporate or other
proceedings on the part of Parent, the Purchaser or any of their affiliates are
necessary to authorize this Agreement or the Ancillary Agreements (to the
extent it is a party thereto) or to consummate the transactions so
contemplated. This Agreement has been, and each of the Ancillary Agreements
have been, or will prior to the Record Date be, duly and validly executed and
delivered by each of Parent and the Purchaser (to the extent it is a party
thereto) and (except for the Memorandum of Understanding) constitute or (to the
extent such agreement is not being entered into as of the date hereof) will
constitute valid and binding agreements of each of Parent and the Purchaser,
enforceable against each of Parent and the Purchaser in accordance with their
respective terms, except to the extent that enforcement thereof may be limited
by (a) bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance or other similar laws, now or hereafter in effect, relating to
creditors' rights generally and (b) general principles of equity (regardless of
whether enforceability is considered in a proceeding at law or in equity).
Section 5.3. Consents and Approvals; No Violations. Except for applicable
requirements of the Exchange Act, the HSR Act, the filing and recordation of a
certificate of merger, or a certificate of ownership and merger, as required by
the DGCL, such filings and approvals as may be required under the "takeover" or
"blue sky" laws of various states, and as contemplated by this Agreement and
the Ancillary Agreements, neither the execution and delivery of this Agreement
or the Ancillary Agreements by Parent or the Purchaser (to the extent it is a
party thereto) nor the consummation by Parent or the Purchaser of the
transactions contemplated hereby or thereby will (i) conflict with or result in
any breach of any provision of the charter or by-laws of Parent or the
Purchaser, (ii) require on the part of Parent or the Purchaser any filing with,
or the obtaining of any permit, authorization, consent or approval of, any
governmental or regulatory authority or any third party, (iii) 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, amendment,
cancellation, acceleration or payment, or to the creation of a lien or
encumbrance) under any of the terms, conditions or provisions of any note,
mortgage, indenture, other evidence of indebtedness, guarantee, license,
agreement or other contract, instrument or contractual obligation to which
Parent, the Purchaser or any of their respective subsidiaries is a party or by
which any of them or any of their properties or assets may be bound, or (iv)
violate any order, writ, injunction, decree, statute, rule or regulation
applicable to Parent, the Purchaser, any of their subsidiaries or any of their
properties or assets, except for such requirements, defaults, rights or
violations under clauses (ii), (iii) and (iv) above which would not in the
aggregate have a material adverse effect on the business, results of operations
or financial condition of Parent and its subsidiaries taken as a whole and
would not have a material adverse effect on the ability of Parent or the
Purchaser to consummate the transactions contemplated by this Agreement.
Section 5.4. Schedule 14D-9; Offer Documents; Proxy Statement; Form 10;
Information Statement. None of the information included in the Offer Documents
and none of the information (other than information supplied by Spinco in
writing for inclusion therein) included in the proxy materials to be
distributed, if necessary, to the Company's stockholders in connection with the
Merger (the "Proxy Statement"), or supplied by Parent or the Purchaser for
inclusion in the Schedule 14D-9, the Form 10 or the Information Statement,
including any amendments thereto, will be false or misleading with respect to
any material fact or will omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. Except for information
supplied by the Company in writing for inclusion in the Offer Documents and
except for information supplied by Spinco in writing for inclusion in any Proxy
Statement, the Offer Documents and the Proxy Statement, if any, will comply in
all material respects with the Exchange Act.
Section 5.5. Sufficient Funds. Parent and the Purchaser have, or will have
prior to the satisfaction of the conditions to the Offer set forth in Exhibit F
hereto, sufficient funds available to purchase all Shares on a
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fully diluted basis at the Offer Price and the Merger Price and to perform the
obligations set forth in Section 2.13 hereof.
Section 5.6. Beneficial Ownership of Shares. None of Parent, the Purchaser or
any of their respective "affiliates" or "associates" (as those terms are
defined in Rule 12b-2 of the General Rules and Regulations under the Exchange
Act) "beneficially owns" (as that term is defined in Rule 13d-3(a) under the
Exchange Act) more than 1% of the outstanding Shares or any securities
convertible into or exchangeable for Shares.
ARTICLE VI
COVENANTS
Section 6.1. Conduct of Business of the Company. Except as contemplated by
this Agreement or the Ancillary Agreements, during the period from the date of
this Agreement to the consummation of the Offer and, if Parent has made a
prompt request therefor pursuant to Section 1.4 hereof, until its Designated
Directors (as defined in Section 8.4 hereof) shall constitute in their entirety
a majority of the Company's Board of Directors, the Company and its
subsidiaries will each conduct the operations of the Retained Business
according to its ordinary course of business, consistent with past practice,
and will conduct the operations of all businesses other than the Retained
Business in such a manner that would not have a Material Adverse Effect and,
with respect to the Retained Business, will use its commercially reasonable
efforts to (i) preserve intact its business organization, (ii) maintain its
material rights and franchises, (iii) keep available the services of its
officers and key employees, and (iv) keep in full force and effect insurance
comparable in amount and scope of coverage to that maintained as of the date
hereof. Without limiting the generality of and in addition to the foregoing,
and except as otherwise contemplated by this Agreement or the Ancillary
Agreements, prior to the time specified in the preceding sentence, neither the
Company nor any of its subsidiaries will, without the prior written consent of
Parent:
(a) except for Spinco and its subsidiaries, amend its charter or by-laws;
(b) authorize for issuance, issue, sell, deliver or agree or commit to issue,
sell or deliver (whether through the issuance or granting of options, warrants,
commitments, subscriptions, rights to purchase or otherwise) any stock of any
class or any other securities (except (i) by the Company in connection with
employee options or upon the conversion of the Series A Convertible Preferred
Stock or Series B ESOP Preferred Stock in accordance with their respective
terms as in effect on the date of this Agreement, (ii) by Armor All Products
Corporation upon conversion of the Company's 4 1/2% Exchangeable Subordinated
Debentures Due 2004, in accordance with the terms of the Indenture, dated as of
March 14, 1994, between the Company and The First National Bank of Chicago, as
Trustee (iii) by Spinco and its subsidiaries as contemplated by the
Distribution Agreement or (iv) by any subsidiary other than any of the Retained
Subsidiaries) or amend any of the terms of any such securities or agreements
(other than such securities or agreements of any subsidiary other than any of
the Retained Subsidiaries, or amendments of the Distribution Agreement as
permitted thereunder) outstanding on the date hereof;
(c) other than with respect to any subsidiary which is not a Retained
Subsidiary, split, combine or reclassify any shares of its capital stock,
declare, set aside or pay any dividend or other distribution (whether in cash,
stock or property or any combination thereof) in respect of its capital stock
or redeem or otherwise acquire any of its securities or any securities of its
subsidiaries; provided that the Company may declare and pay to holders of (i)
Shares regular quarterly dividends of not more than $.42 per Share on the
dividend declaration and payment dates normally applicable to the Shares and
(ii) preferred stock of the Company any dividends required to be paid thereon
in accordance with the express provisions thereof;
(d) except for Spinco or any of its subsidiaries (i) incur, assume or prepay
any long-term debt or, except in the ordinary course of business under existing
lines of credit, incur, assume, or prepay any material short-term debt; (ii)
assume, guarantee, endorse or otherwise become liable or responsible (whether
directly, contingently or otherwise) for any material obligations of any other
person except wholly owned subsidiaries
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of the Company in the ordinary course of business and consistent with past
practices; (iii) make any material loans, advances or capital contributions to,
or investments in, any other person (other than loans or advances to
subsidiaries and customary loans or advances to employees in accordance with
past practices); (iv) change the Retained Business' practices with respect to
the timing of payments or collections; (v) pledge or otherwise encumber shares
of capital stock of the Company or any of its subsidiaries (other than that of
Spinco and its subsidiaries); or (vi) mortgage or pledge any of the assets,
tangible or intangible, of the Retained Business, or create or permit to exist
any material Lien thereupon, other than in the ordinary course of business
consistent with past practices;
(e) except as disclosed herein and except for arrangements with new or
existing Retained Employees entered into in the ordinary course of business
consistent with past practices, enter into, adopt or materially amend any
bonus, profit sharing, compensation, severance, termination, stock option,
stock appreciation right, restricted stock, performance unit, pension,
retirement, deferred compensation, employment, severance or other employee
benefit agreements, trusts, plans, funds or other arrangements of or for the
benefit or welfare of any Retained Employee (as hereafter defined) (or any
other person for whom the Retained Business will have liability), or (except
for normal increases in the ordinary course of business that are consistent
with past practices) increase in any manner the compensation or fringe benefits
of any Retained Employee (or any other person for whom the Retained Business
will have liability) or pay any benefit not required by any existing plan and
arrangement (including, without limitation, the granting of stock options,
stock appreciation rights, shares of restricted stock or performance units) or
enter into any contract, agreement, commitment or arrangement to do any of the
foregoing;
(f) transfer, sell, lease, license or dispose of any assets relating to the
Retained Business outside the ordinary course of business or any assets which
are material, in the aggregate, to the Retained Business or enter into any
material commitment or transaction with respect to the Retained Business
outside the ordinary course of business;
(g) 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 practice), in each
case where such action would, individually be material to the Retained
Business;
(h) except as may be required by law, take any action to terminate or
materially amend any of its employee benefit plans with respect to or for the
benefit of Retained Employees or any other person for whom the Retained
Business will have liability;
(i) materially modify, amend or terminate (except pursuant to the terms
thereof) any of the material contracts of the Retained Business or waive any
material rights or claims of the Retained Business, except in the ordinary
course of business;
(j) effect any material change in any of its methods of accounting in effect
as of March 31, 1994, except as may be required by law or generally accepted
accounting principles;
(k) enter into any material arrangement, agreement or contract with any third
party (other than customers in the ordinary course of business consistent with
past practices) which provides for an exclusive arrangement with that third
party; and
(l) take, or agree in writing or otherwise to take, any of the foregoing
actions.
Notwithstanding any of the foregoing and in addition to any other rights of the
Company and its subsidiaries, the Company and its subsidiaries shall have the
right to take any of the actions prohibited under clauses (a) and (d)--(l) of
this Section 6.1 if such actions would not, either individually or in the
aggregate, adversely impact the Retained Business or the consummation of any of
the material transactions contemplated pursuant to this Agreement.
Section 6.2. Acquisition Proposals. (a) The Company and its officers,
directors, employees, representatives and agents shall immediately cease any
existing discussions or negotiations with any parties
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conducted heretofore with respect to any Acquisition Proposal (as hereafter
defined). The Company and its subsidiaries will not, and will use their best
efforts to cause their respective officers, directors, employees and investment
bankers, attorneys, accountants or other agents retained by the Company or any
of its subsidiaries not to, (i) initiate or solicit, directly or indirectly,
any inquiries or the making of any Acquisition Proposal, or (ii) except as
permitted below, engage in negotiations or discussions with, or furnish any
information or data to any third party relating to an Acquisition Proposal
(other than the transactions contemplated hereby and by the Ancillary
Agreements). Notwithstanding anything to the contrary contained in this Section
6.2 or in any other provision of this Agreement, the Company and the Board of
Directors of the Company (i) may furnish information to, and participate in
discussions or negotiations (including, as a part thereof, making any
counterproposal) with, any third party which submits a written Acquisition
Proposal to the Company if the Company's Board of Directors determines in good
faith, based upon the advice of counsel, that the failure to furnish such
information or participate in such discussions or negotiations may reasonably
constitute a breach of the Board's fiduciary duties under applicable law, and
(ii) shall be permitted to (A) take and disclose to the Company's stockholders
a position with respect to the Offer, the Merger or the Spin-Off or another
tender or exchange offer by a third party, or amend or withdraw such position,
pursuant to Rules 14d-9 and 14e-2 of the Exchange Act or (B) make disclosure to
the Company's stockholders, in each case either with respect to or as a result
of an Acquisition Proposal, or if the Company's Board of Directors determines
in good faith, based upon the advice of counsel, that the failure to take such
action may reasonably constitute a breach of the Board's fiduciary duties
under, or otherwise violate, applicable law; provided that the Company shall
not enter into any acquisition agreement with respect to any Acquisition
Proposal except concurrently with or after the termination of this Agreement
and shall not enter into any other agreements with respect to an Acquisition
Proposal except concurrently with or after such termination unless, and only to
the extent that, such other agreements would facilitate the process of
providing information to, or conducting discussions or negotiations with, the
party submitting such an Acquisition Proposal, such as confidentiality and
standstill agreements. The Company shall promptly provide Parent with a copy of
any written Acquisition Proposal received and inform Parent on a reasonable
basis of the status and content of any discussions with such a third party
(provided that the Company shall not be obligated to so provide such
information or advise Parent if the Company's Board of Directors determines in
good faith, based upon the advice of counsel, that such action may reasonably
constitute a breach of its fiduciary duties under applicable law). In no event
shall the Company provide non-public information regarding the Retained
Business to any third party making an Acquisition Proposal unless such party
enters into a confidentiality agreement containing provisions designed to
reasonably protect the confidentiality of such information. In the event that
following the date hereof the Company enters into a confidentiality agreement
with any third party which does not include terms and conditions which are
substantially similar to the provisions of Section 7 (the "Standstill
Provisions") of the letter agreement, dated as of June 8, 1994, between the
Company and Parent (the "Confidentiality Agreement"), then Parent and its
affiliates shall be released from their obligations under such Standstill
Provisions to the same extent as such third party.
(b) For purposes of this Agreement, the term "Acquisition Proposal" shall
mean any bona fide proposal made by a third party to acquire (i) beneficial
ownership (as defined under Rule 13(d) of the Exchange Act) of a majority
equity interest in either the Company or the Retained Business pursuant to a
merger, consolidation or other business combination, sale of shares of capital
stock, tender offer or exchange offer or similar transaction involving either
the Company or the Retained Business, including, without limitation, any single
or multi-step transaction or series of related transactions which is structured
in good faith to permit such third party to acquire beneficial ownership of a
majority or greater equity interest in either the Company or the Retained
Business or (ii) all or substantially all of the business or assets of either
the Company or of the Retained Business (other than the transactions
contemplated by this Agreement and the Ancillary Agreements); provided,
however, that the term "Acquisition Proposal" shall not include any
transactions which relate solely to the businesses to be owned by Spinco and
its subsidiaries following the Spin-Off and which do not have a material
adverse effect on the consummation of the Offer, the Merger, the Spin-Off or
the transactions contemplated hereby.
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Section 6.3. Access to Information.
(a) Between the date of this Agreement and the Effective Time, during normal
business hours, the Company will give Parent and its authorized representatives
reasonable access to all offices and other facilities and to all books and
records of it and its subsidiaries relating to the Retained Business, will
permit Parent to make such inspections as it may reasonably require and will
cause its officers and those of its subsidiaries to furnish Parent with (i)
such financial and operating data and other information with respect to the
Retained Business as Parent may from time to time reasonably request, or (ii)
any other financial and operating data which materially impacts the Retained
Business. Parent and its authorized representatives will conduct all such
inspections in a manner which will minimize any disruptions of the business and
operations of the Company and its subsidiaries.
(b) Parent, the Purchaser and the Company agree that the provisions of the
Confidentiality Agreement shall remain binding and in full force and effect
(subject, however, to the provisions of Section 6.2(a) hereof) and that the
terms of the Confidentiality Agreement are incorporated herein by reference.
Section 6.4. Best Efforts. Subject to the terms and conditions herein
provided and without limitation to the provisions of Section 6.6 hereof, each
of the parties hereto agrees to use its best efforts to take, or cause to be
taken, all action, 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 and the Ancillary
Agreements (including, without limitation, cooperating in the preparation and
filing of the Offer Documents, the Schedule 14D-9, the Proxy Statement, the
Form 10 and the Information Statement and any amendments to any thereof, and
executing any additional instruments necessary to consummate the transactions
contemplated hereby). In case at any time after the Effective Time any further
action is necessary to carry out the purposes of this Agreement, the proper
officers and directors of each party hereto shall use their best efforts to
take all such necessary action.
Section 6.5. Consents. Each of the Company, Parent and the Purchaser shall
cooperate, and use their respective best efforts, in as timely a manner as is
reasonably practicable, to make all filings and obtain all licenses, permits,
consents, approvals, authorizations, qualifications and orders of governmental
authorities and other third parties necessary to consummate the transactions
contemplated by this Agreement and the Ancillary Agreements. Each of the
parties hereto will furnish to the other party such necessary information and
reasonable assistance as such other persons may reasonably request in
connection with the foregoing and will provide the other party with 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 hereby.
Section 6.6. HSR Filings. (a) In addition to and without limiting the
agreements of Parent and the Purchaser contained in Section 6.5 hereof, Parent,
the Purchaser and the Company will (i) take promptly all actions necessary to
make the filings required of Parent, the Purchaser or any of their affiliates
under the HSR Act, (ii) comply at the earliest practicable date with any
request for additional information or documentary material received by Parent,
the Purchaser or any of their affiliates from the Federal Trade Commission or
the Antitrust Division of the Department of Justice pursuant to the HSR Act and
(iii) cooperate with the Company in connection with any filing of the Company
under the HSR Act and in connection with resolving any investigation or other
inquiry concerning the transactions contemplated by this Agreement or the
Ancillary Agreements commenced by either the Federal Trade Commission or the
Antitrust Division of the Department of Justice or state attorneys general.
(b) In furtherance and not in limitation of the covenants of Parent and the
Purchaser contained in Sections 6.5 and Section 6.6(a) hereof, Parent, the
Purchaser and the Company shall each use their best efforts to resolve such
objections, if any, as may be asserted with respect to the Offer, the Spin-Off,
the Merger or any other transactions contemplated by this Agreement or the
Ancillary Agreements under any Antitrust Law (as hereafter defined). If any
administrative, judicial or legislative action or proceeding is instituted (or
threatened to be instituted) challenging the Offer, the Spin-Off, the Merger or
any other transactions
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contemplated by this Agreement or the Ancillary Agreements as violative of any
Antitrust Law, Parent, the Purchaser and the Company shall each cooperate and
use its best efforts vigorously to contest and resist any such action or
proceeding, and to have vacated, lifted, reversed or overturned any decree,
judgment, injunction or other order (whether temporary, preliminary or
permanent) (any such decree, judgment, injunction or other order is hereafter
referred to as an "Order") that is in effect and that restricts, prevents or
prohibits consummation of the Offer, the Spin-Off, the Merger or any other
transactions contemplated by this Agreement or the Ancillary Agreements,
including, without limitation, by vigorously pursuing all available avenues of
administrative and judicial appeal and all available legislative actions.
Parent and the Purchaser shall each also use its best efforts to take such
action, including, without limitation (but subject to the provisions of
paragraph (c) below), agreeing to hold separate or to divest any of the
businesses, product lines, or assets of Parent or the Purchaser or any of their
affiliates or, following the consummation of the Offer or the Effective Time,
of the Company or any of the Retained Subsidiaries, as may be required (a) by
the applicable governmental or regulatory authority (including without
limitation the Federal Trade Commission, the Antitrust Division of the
Department of Justice or any state attorney general) in order to resolve such
objections as such governmental or regulatory authority may have to such
transactions under such Antitrust Law, or (b) by any domestic or foreign court
or other tribunal, in any action or proceeding brought by a private party or
governmental or regulatory authority challenging such transactions as violative
of any Antitrust Law, in order to avoid the entry of, or to effect the
dissolution, vacating, lifting or reversal of, any Order that has the effect of
restricting, preventing or prohibiting the consummation of any such
transactions. The entry by a court or other tribunal, in any action or
proceeding brought by a private party or governmental or regulatory authority
challenging the transactions contemplated hereby as violative of any Antitrust
Law, of an Order permitting such transactions, but requiring that any of the
businesses, product lines or assets of any of Parent, the Purchaser or any of
their affiliates or, following the consummation of the Offer or the Effective
Time, of the Company or any of the Retained Subsidiaries be divested or held
separate by Parent and the Purchaser, or that would otherwise limit Parent's
and the Purchaser's freedom of action with respect to, or their ability to
retain, the Company, any Retained Subsidiary or any businesses, product lines
or assets thereof or any of Parent's or the Purchaser's or their respective
affiliates' other businesses, product lines or assets, shall not be deemed a
failure to satisfy any of the conditions specified in Article VII hereof
(subject however to the provisions of paragraph (c) below). Notwithstanding the
foregoing, the Company shall not be required to divest or hold separate or
otherwise take or commit to take any action that, prior to the Effective Time,
limits its freedom of action with respect to, or its ability to retain, its
subsidiaries or any of their respective businesses, product lines or assets.
(c) Notwithstanding anything to the contrary contained in this Section 6.6 or
in Sections 6.4 or 6.5 hereof, (i) neither Parent nor any of its subsidiaries
or affiliates shall be required to agree to divest (A) any of their respective
businesses, product lines or assets, if the fair market value of any such
businesses, product lines or assets is, as of the date in question, in excess
of $10 million (after taking into account the present and future prospects
thereof) or (B) following the consummation of the Offer or the Effective Time,
any of the businesses, product lines or assets of the Company or any of the
Retained Subsidiaries; and (ii) neither Parent nor any of its subsidiaries or
affiliates shall be required to take or agree to take any action or agree to
any limitation which would materially impair Parent's ability to exercise
control over or manage the business and affairs of the Retained Business or
materially impair Parent's ability to obtain the other benefits provided by
this Agreement in order to obtain termination of the waiting period under the
HSR Act.
(d) Each of the Company, Parent and the Purchaser shall promptly inform the
other party of any material communication received by such party from the
Federal Trade Commission, the Antitrust Division of the Department of Justice
or any other governmental or regulatory authority regarding any of the
transactions contemplated hereby. Parent and the Purchaser will advise the
Company promptly in respect of any understandings, undertakings or agreements
(oral or written) which Parent or the Purchaser proposes to make or enter into
with the Federal Trade Commission, the Antitrust Division of the Department of
Justice or any other governmental or regulatory authority in connection with
the transactions contemplated hereby.
(e) "Antitrust Law" means the Sherman Act, as amended, the Clayton Act, as
amended, the HSR Act, the Federal Trade Commission Act, as amended, and all
other federal, state and foreign statutes, rules,
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regulations, orders, decrees, administrative and judicial doctrines, and other
laws that are designed or intended to prohibit, restrict or regulate actions
having the purpose or effect of monopolization or restraint of trade.
Section 6.7. Public Announcements. Parent, the Purchaser and the Company will
consult with each other before issuing any press release or otherwise making
any public statements with respect to the Offer or the Merger and shall not
issue any such press release or make any such public statement prior to such
consultation, except as may be required by law or by obligations pursuant to
any listing agreement with any securities exchange.
Section 6.8. Employee Agreements. Prior to the Spin-Off, the Company shall
use its best efforts to, and shall use its best efforts to cause its
subsidiaries to, assign to Spinco or its subsidiaries or terminate all
employment agreements with officers of the Company who are not Retained
Employees (the "Employment Agreements") and all severance agreements with
officers of the Company who are not Retained Employees (the "Severance
Agreements"). The parties hereto acknowledge and agree that, whether or not
such Employment Agreements and Severance Agreements are so assigned or
terminated, all liabilities and obligations under or arising from such
Employment Agreements and Severance Agreements shall be deemed to be "Company
Liabilities", as such term is defined in the Distribution Agreement, with
respect to which Spinco shall indemnify the Company and Parent as provided
therein. Parent acknowledges and agrees that the employment agreements and
severance agreements with the Retained Employees (as defined in Section 6.9
below) set forth in Section 6.8 of the Disclosure Schedule will be binding and
enforceable obligations of the Surviving Corporation, except as the parties
thereto may otherwise agree. The parties hereto acknowledge and agree that all
liabilities and obligations under or arising from such agreements with the
Retained Employees from and after the consummation of the Offer shall be deemed
to be "Prescription Liabilities" as such term is defined in the Distribution
Agreement, with respect to which the Company shall indemnify Spinco as provided
therein.
Section 6.9. Employee Benefits. Parent hereby agrees as follows:
(a) For a period of three years following the Effective Time, Parent shall
cause the Surviving Corporation and its successors to provide the employees of
the Company and its subsidiaries remaining with the Company and the Retained
Subsidiaries following the Spin-Off and former employees of the Retained
Business (collectively, the "Retained Employees") with employee benefits,
programs, policies and arrangements which in the aggregate are no less
favorable than those provided by the Company to such Retained Employees
immediately prior to the date hereof. With respect to such benefits, programs,
policies and arrangements, service accrued by such Retained Employees during
employment with the Company and its subsidiaries prior to the Effective Time
shall be preserved and maintained for all purposes except to the extent that
benefits may be duplicated.
(b) As soon as practicable following the Effective Time, Spinco shall take
all action necessary and appropriate to cause the assets and liabilities of the
Company Retirement Plan (the "Retirement Plan") attributable to Retained
Employees (other than former employees of the Retained Business) to be
transferred, in compliance with Section 414(l) of the Code and the Treasury
Regulations applicable thereto and on terms reasonably satisfactory to Parent
and the Surviving Corporation, to a comparable defined benefit pension plan
sponsored by Parent, the Purchaser or the Surviving Corporation (the "Parent DB
Plan") in which such employees are eligible to participate. Following such
transfer, Parent, the Purchaser, the Surviving Corporation and the Parent DB
Plan (or any successor thereto) shall be solely responsible for all liabilities
under the Retirement Plan relating to such Retained Employees.
(c) The Company and Spinco shall take all action necessary and appropriate to
cause the Profit Sharing and Investment Plan, as amended (the "PSIP"), to be
assumed by Spinco, effective as of the Effective Time. In connection therewith,
all of the indebtedness of the Company (and guarantees made by the Company of
indebtedness of the trust established under the PSIP) relating to the
unallocated Shares and unallocated shares of Series B ESOP Preferred Stock held
by the PSIP shall be assumed by Spinco, effective as of the Effective Time. As
soon as practicable after the Effective Time, Spinco shall take all action
necessary and
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appropriate to cause the account balances under the PSIP of Retained Employees
(other than former employees of the Retained Business) to be transferred to a
defined contribution plan sponsored by Parent, the Purchaser or the Surviving
Corporation (the "Parent DC Plan") in which such Retained Employees are
eligible to participate. Following such transfer, Parent, the Purchaser, the
Surviving Corporation and the Parent DC Plan (or any successor thereto) shall
be solely responsible for all liabilities under the PSIP relating to such
Retained Employees.
Section 6.10. Ancillary Agreements; Spin-Off. (a) Simultaneously with the
execution hereof, the Company and certain of its subsidiaries are entering into
the Distribution Agreement and each of the Additional Agreements. Immediately
prior to the Record Date, the Company, Spinco and certain other parties will
enter into the Tax Sharing Agreement. The parties thereto may hereafter amend
any of the Ancillary Agreements, provided that no such amendment to the
Distribution Agreement or any of the Additional Agreements may be made which
adversely affects the Retained Business or Spinco's performance of its
obligations under such Agreement without the prior written consent of Parent.
Subject to Section 3.2 of the Distribution Agreement, the Company shall use its
best efforts to consummate as promptly as reasonably practicable the
transactions provided for in the Distribution Agreement, including, without
limitation, the Spin-Off.
(b) From and after the Effective Time, Parent shall cause the Surviving
Corporation to perform any and all agreements and obligations of the Company
set forth in the Ancillary Agreements and in the other agreements contemplated
thereby.
(c) Parent and the Purchaser accept and agree that the form of certificate of
incorporation and by-laws of Spinco adopted in contemplation of the Spin-Off
shall be as agreed to by the Company and Spinco in their sole discretion,
provided that nothing in the charter and by-laws (to the extent such charter
and by-laws differ materially from the provisions of the Restated Certificate
of Incorporation and By-Laws of the Company as in effect as of the date hereof)
shall adversely affect Spinco's performance of its obligations under the
Ancillary Agreements.
(d) If, for any reason, any shares of common stock of Spinco distributed in
the Spin-Off are received by Parent or the Purchaser or any of their
subsidiaries with respect to Shares acquired by the Purchaser in the Offer or
otherwise, then Parent or the Purchaser shall convey, on behalf of the Company,
such shares of Spinco to the stockholders of the Company who would have
otherwise received such shares of Spinco pursuant to the Distribution
Agreement.
(e) If the Company reasonably determines that the Spin-Off may not be
effected without registering the shares of common stock of Spinco to be
distributed in the Spin-Off pursuant to the Securities Act, the Company, Parent
and the Purchaser, as promptly as practicable, shall use their respective best
efforts to cause the shares of Spinco to be registered pursuant to the
Securities Act and thereafter effect the Spin-Off in accordance with the terms
of the Distribution Agreement including, without limitation, by preparing and
filing on an appropriate form a registration statement under the Securities Act
covering the shares of Spinco and using their respective best efforts to cause
such registration statement to be declared effective and preparing and making
such other filings as may be required under applicable state securities laws.
(f) Parent shall, and shall cause the Surviving Corporation to, treat the
Spin-Off for purposes of all federal and state taxes as an integrated
transaction with the Offer and the Merger and thus report the Spin-Off as a
constructive redemption of a number of Shares equal in value to the value of
Spinco at the time of the Spin-Off.
Section 6.11. Retained Business Financial Statements. The parties hereto
acknowledge that Deloitte & Touche is currently auditing a balance sheet,
income statement and statement of cash flows of the Retained Business as of and
for each of the three fiscal years ended March 31, 1992, March 31, 1993 and
March 31, 1994 (the "Retained Business Financial Statements"). The Company
hereby agrees to use its best efforts to take, or cause to be taken, all
action, and to do, or cause to be done, all things necessary, proper or
advisable to assist and otherwise cause Deloitte & Touche to complete the audit
of the Retained Business Financial Statements as promptly as reasonably
practicable. The Company will pay Deloitte & Touche's fees and
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expenses for auditing the Retained Business Financial Statements. The Company
also agrees to provide to Parent as promptly as reasonably practicable such
quarterly unaudited financial information relating to the Retained Business and
covering periods following the date hereof as may be prepared by the Company in
the ordinary course.
Section 6.12. Pre-Closing Consultation. Following the date hereof and prior
to the Effective Time, the Company shall designate a senior officer of the
Company (the "Company Representative") to consult with an officer of Parent
designated by Parent (the "Parent Representative") with respect to major
business decisions to be made concerning the operation of the Retained
Business. Such consultation shall be made on as frequent a basis as may be
reasonably requested by Parent. The parties hereto acknowledge and agree that
the agreements set forth in this Section 6.12 shall be subject to any
restrictions or limitations under applicable law.
ARTICLE VII
CONDITIONS TO CONSUMMATION OF THE MERGER
Section 7.1. Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each party to effect the Merger is subject to the
satisfaction at or prior to the Effective Time of the following conditions:
(a) This Agreement shall have been adopted by the affirmative vote of the
stockholders of the Company by the requisite vote in accordance with applicable
law, if required by applicable law;
(b) No statute, rule, regulation, order, decree, or injunction shall have
been enacted, entered, promulgated or enforced by any court or governmental
authority which prohibits or restricts the consummation of the Merger;
(c) Any waiting period applicable to the Merger under the HSR Act shall have
terminated or expired;
(d) The Spin-Off shall have been consummated in all material respects; and
(e) The Offer shall not have been terminated in accordance with its terms
prior to the purchase of any Shares.
Section 7.2. Conditions to the Obligation of the Company to Effect the
Merger. The obligation of the Company to effect the Merger is further subject
to the satisfaction at or prior to the Effective Time of the following
conditions:
(a) The representations and warranties of Parent and the Purchaser contained
in this Agreement shall be true and correct in all material respects at and as
of the Effective Time as if made at and as of such time; and
(b) Each of Parent and the Purchaser shall have performed in all material
respects its obligations under this Agreement required to be performed by it at
or prior to the Effective Time pursuant to the terms hereof.
Parent and the Purchaser will furnish the Company with such certificates and
other documents to evidence the fulfillment of the conditions set forth in this
Section 7.2 as the Company may reasonably request.
Section 7.3. Conditions to Obligations of Parent and the Purchaser to Effect
the Merger. The obligations of Parent and the Purchaser to effect the Merger
are further subject to the satisfaction at or prior to the Effective Time of
the following conditions:
(a) The representations and warranties of the Company contained in this
Agreement shall be true and correct in all material respects at and as of the
Effective Time as if made at and as such time; and
(b) The Company shall have performed in all material respects each of its
obligations under this Agreement required to be performed by it at or prior to
the Effective Time pursuant to the terms hereof.
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The Company will furnish Parent and the Purchaser with such certificates and
other documents to evidence the fulfillment of the conditions set forth in this
Section 7.3 as Parent or the Purchaser may reasonably request.
Section 7.4. Exception. The conditions set forth in Section 7.3 hereof shall
cease to be conditions to the obligations of the parties if the Purchaser shall
have accepted for payment and paid for Shares validly tendered pursuant to the
Offer, provided that the terms of this exception will be deemed satisfied if
the Purchaser fails to accept for payment any Shares pursuant to the Offer in
violation of the terms thereof.
ARTICLE VIII
TERMINATION; AMENDMENT; WAIVER
Section 8.1. Termination. This Agreement may be terminated and the Merger
contemplated hereby may be abandoned at any time notwithstanding approval
thereof by the stockholders of the Company, but prior to the Effective Time:
(a) by mutual written consent of Parent, the Purchaser and the Company;
(b) by either Parent, on the one hand, or the Company, on the other hand, if
the Offer shall expire or have been terminated in accordance with its terms
without any Shares being purchased thereunder, or the Purchaser shall not have
accepted for payment or paid for Shares validly tendered pursuant to the Offer
prior to December 31, 1994;
(c) by Parent, on the one hand, or the Company, on the other hand, if any
court of competent jurisdiction in the United States or other United States
governmental body shall have issued an order, decree or ruling or taken any
other action restraining, enjoining or otherwise prohibiting the Merger and
such order, decree, ruling or other action shall have become final and
nonappealable;
(d) by the Company if, prior to the purchase of Shares pursuant to the Offer,
(i) a third party shall have made an Acquisition Proposal and the Board of
Directors of the Company determines in good faith, based upon the advice of
counsel, that the failure to pursue such Acquisition Proposal may reasonably
constitute a breach of its fiduciary duties under applicable law (provided that
such termination under this Section 8.1(d) shall not be effective until payment
of the fee required by Section 8.3(a) hereof), or (ii)(A) other than in
response to an Acquisition Proposal, the Board of Directors of the Company
determines in good faith, based upon the advice of counsel, that the failure to
so terminate this Agreement would present a substantial likelihood of a breach
of its fiduciary duties under applicable law and (B) the Company notifies
Parent of such determination of its Board of Directors at least 30 days prior
to the date of any such termination (provided that such termination shall not
be effective until payment of the fee referred to in Section 8.3(d) hereof); or
(e) by Parent prior to the purchase of Shares pursuant to the Offer, if the
Company or its Board of Directors shall have (i) withdrawn (including by
amendment of the Schedule 14D-9) its recommendation to the Company's
stockholders of the Offer, this Agreement or the Merger or shall have
recommended to the Company's stockholders that they accept the terms of a Third
Party Acquisition (as defined below), or (ii) a Third Party Acquisition shall
have occurred (provided that any termination under clauses (i) or (ii) of this
Section 8.1(e) shall not relieve the Company of its fee obligations under
Section 8.3(b) hereof).
Notwithstanding anything to the contrary contained in this Section 8.1, in the
event that the Designated Directors (as defined in Section 8.4 hereof)
constitute in their entirety a majority of the Company's Board of Directors,
the Company shall not be permitted to terminate, or consent to the termination
of, this Agreement without the approval of a majority of the Continuing
Directors (as defined in Section 8.4 hereof) if at the time thereof there shall
be any Continuing Directors.
Section 8.2. Effect of Termination. In the event of the termination and
abandonment of this Agreement pursuant to Section 8.1 hereof, this Agreement
shall forthwith become void and have no effect,
26
<PAGE>
without any liability on the part of any party or its directors, officers or
shareholders, other than the provisions of Sections 6.3(b), 8.3, 9.3 and 9.11
hereof. Nothing contained in this Section 8.2 shall relieve any party from
liability for any willful breach of this Agreement.
Section 8.3. Fees and Expenses. (a) If the Company terminates this Agreement
pursuant to Section 8.1(d)(i) hereof, the Company shall, simultaneously with
such termination, pay to Parent a fee, in cash, of $100 million.
(b) If Parent terminates this Agreement pursuant to Section 8.1(e) hereof and
prior to such termination or within nine months thereafter, a Third Party
Acquisition is consummated involving any entity or group (other than Parent and
the Purchaser or any affiliate thereof) which is a Higher Offer (as defined
below), then the Company shall, on the date of such termination or consummation
(whichever is later) or, if later, the date of the determination contemplated
pursuant to Section 8.3(e) hereof, pay to Parent a fee, in cash, of $100
million.
(c) If the Company or Parent terminates this Agreement for any reason other
than the bases for terminating this Agreement under Sections 8.1(a), (d)(i) or
(e) hereof (unless Parent or the Purchaser shall at the time of such
termination be in material breach, other than a breach which is curable, and
which Parent and the Purchaser are using their best efforts to cure) and prior
to or within nine months after the date of such termination a Third Party
Acquisition is consummated involving any entity or group (other than Parent and
the Purchaser or any affiliate thereof) which is a Higher Offer, then the
Company shall, on the date of such termination or consummation (whichever is
later) or, if later, the date of the determination contemplated pursuant to
Section 8.3(e) hereof, pay to Parent a fee, in cash, of $100 million (subject
to the proviso in the last sentence of Section 8.3(g)).
(d) If the Company terminates this Agreement pursuant to Section 8.1(d)(ii)
hereof (unless Parent or the Purchaser shall at the time of such termination be
in material breach, other than a breach which is curable, and which Parent and
the Purchaser are using their best efforts to cure) the Company shall,
simultaneously with such termination, pay to Parent a fee, in cash, of $40
million.
(e) As used herein, the term "Third Party Acquisition" means the occurrence
of any of the following events (i) the acquisition of the Company by merger or
otherwise by any person (which includes a "person" as such term is defined in
Section 13(d)(3) of the Exchange Act) or entity other than Parent, the
Purchaser or any affiliate thereof (a "Third Party"); (ii) the acquisition by a
Third Party of more than 50% of the total assets of the Company and its
subsidiaries, taken as a whole, or of 50% or more of the total assets of the
Retained Business; or (iii) the acquisition by a Third Party of 50% or more of
the outstanding Shares, or 50% or more of the equity interest in, or the voting
power with respect to the election of directors of, the Retained Business. As
used herein, the term "Higher Offer" means any Third Party Acquisition which
reflects a higher value for the Retained Business than the value being provided
by Parent pursuant to the Offer, the Merger and the Additional Agreements. In
valuing such a Third Party Acquisition, due regard shall be given to the value
to the Company or its stockholders of any additional arrangements involved in
such Third Party Acquisition. In the first instance, such determination shall
be made by the Company's Board of Directors prior to consummation of such Third
Party Acquisition, and written notice of such determination shall be provided
promptly to Parent. In the event that Parent objects to the Company's
determination as to whether a Third Party Acquisition is a Higher Offer, Parent
shall so notify the Company in writing within 20 days of receipt of such
notice. If the parties are unable to resolve such dispute within 20 days of the
Company's receipt of such notice from Parent, the financial advisors of each of
the Company and Parent shall jointly select a third, independent and
nationally-recognized investment banking firm (the "IB"). The IB shall
thereupon determine as promptly as practicable whether or not the Third Party
Acquisition constitutes a Higher Offer, taking into account all relevant facts
and circumstances. The parties hereto agree to cooperate with the IB
(including, without limitation, providing the IB with full access to all such
information which the IB deems relevant and which the IB agrees to keep
confidential) to the extent reasonably requested by the IB. The fees and
expenses incurred by the IB shall be shared equally by the Company and Parent.
The determination of the IB shall be final and binding upon the parties hereto.
In the event that the IB determines that the Third
27
<PAGE>
Party Acquisition constitutes a Higher Offer, the Company shall pay to Parent
the $100 million cash fee referred to above within five business days following
the date of such determination.
(f) Except as specifically provided in this Section 8.3 and except as
otherwise specifically provided in the Distribution Agreement, each party shall
bear its own costs and expenses in connection with this Agreement and the
transactions contemplated hereby.
(g) Notwithstanding anything to the contrary contained in this Agreement,
upon payment by the Company of the fees and expenses referred to in this
Section 8.3, the Company shall be released from all liability hereunder,
including any liability for any claims by Parent, the Purchaser or any of their
affiliates based upon or arising out of any breach of this Agreement or any
Ancillary Agreement. In no event shall the Company be required to pay more than
one fee pursuant to this Section 8.3, provided that if the Company shall have
paid the $40 million fee contemplated by Section 8.3(d) hereof and a $100
million fee shall otherwise become payable pursuant to this Section 8.3, the
Company shall pay Parent at that time $60 million.
Section 8.4. Amendment. This Agreement may be amended by action taken by the
Company, Parent and the Purchaser at any time before or after adoption of the
Merger by the stockholders of the Company, if any; provided that (x) in the
event that any persons designated by Parent pursuant to Section 1.4 hereof
(such directors are hereinafter referred to as the "Designated Directors")
constitute in their entirety a majority of the Company's Board of Directors, no
amendment shall be made which decreases the cash price per Share or which
adversely affects the rights of the Company's stockholders hereunder without
the approval of a majority of the Continuing Directors (as hereafter defined)
if at the time there shall be any Continuing Directors and (b) after the date
of adoption of the Merger by the stockholders of the Company, no amendment
shall be made which decreases the cash price per Share or which adversely
affects the rights of the Company's stockholders hereunder without the approval
of such stockholders. This Agreement may not be amended except by an instrument
in writing signed on behalf of the parties. For purposes hereof, the term
"Continuing Director" shall mean (a) any member of the Board of Directors of
the Company as of the date hereof, (b) any member of the Board of Directors of
the Company who is unaffiliated with, and not a Designated Director or other
nominee of, Parent or the Purchaser or their respective subsidiaries, and (c)
any successor of a Continuing Director who is (i) unaffiliated with, and not a
Designated Director or other nominee of, Parent or the Purchaser or their
respective subsidiaries and (ii) recommended to succeed a Continuing Director
by a majority of the Continuing Directors then on the Board of Directors.
Section 8.5. Extension; Waiver. At any time prior to the Effective Time, the
parties may (a) extend the time for the performance of any of the obligations
or other acts of the other parties hereto, (b) waive any inaccuracies in the
representations and warranties of the other parties contained herein or in any
document, certificate or writing delivered pursuant hereto or (c) waive
compliance with any of the agreements or conditions of the other parties hereto
contained herein; provided that (x) in the event that any Designated Directors
constitute in their entirety a majority of the Company's Board of Directors, no
extensions or waivers shall be made which adversely affect the rights of the
Company's stockholders hereunder without the approval of a majority of the
Continuing Directors if at the time there shall be any Continuing Directors and
(y) after the date of adoption of the Merger by the stockholders of the
Company, no extensions or waivers shall be made which adversely affect the
rights of the Company's stockholders hereunder without the approval of such
stockholders. Any agreement on the part of any party to any such extension or
waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party.
28
<PAGE>
ARTICLE IX
MISCELLANEOUS
Section 9.1. Survival. Except as otherwise expressly set forth in the
Distribution Agreement, the representations, warranties, covenants and
agreements made herein shall not survive beyond the Effective Time; provided
that the covenants and agreements contained in Sections 2.7, 2.8, 2.10, 3.1,
3.2, 6.3(b), 6.4, 6.5, 6.6, 6.8, 6.9, 6.10, 8.2, 8.3, 8.4, 8.5, 9.3, 9.5 and
9.11 hereof shall survive beyond the Effective Time without limitation.
Section 9.2. Entire Agreement. Except for the provisions of the
Confidentiality Agreement which shall continue in full force and effect, this
Agreement (including the schedules and exhibits and the agreements and other
documents referred to herein, including, without limitation, the Ancillary
Agreements) constitutes the entire agreement among the parties with respect to
the subject matter hereof and supersedes all other prior negotiations,
commitments, agreements and understandings, both written and oral, between the
parties or any of them with respect to the subject matter hereof.
Section 9.3. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware (regardless of the laws
that might otherwise govern under applicable principles of conflicts law) as to
all matters, including, without limitation, matters of validity, construction,
effect, performance and remedies.
Section 9.4. Notices. All notices and other communications hereunder shall be
in writing and shall be deemed given upon (a) transmitter's confirmation of a
receipt of a facsimile transmission, (b) confirmed delivery by a standard
overnight carrier or when delivered by hand or (c) the expiration of five
business days after the day when mailed by certified or registered mail,
postage prepaid, addressed at the following addresses (or at such other address
for a party as shall be specified by like notice):
(a) If to the Company, to:
McKesson Corporation
One Post Street
San Francisco, California 94104
Telephone: (415) 983-8300
Telecopy No.: (415) 983-8826
Attention: Ivan D. Meyerson, Esq.
with a copy to:
Skadden, Arps, Slate, Meagher & Flom
919 Third Avenue
New York, New York 10022
Telephone: (212) 735-3000
Telecopy No.: (212) 735-2001
Attention: Peter Allan Atkins, Esq.
(b) If to Parent or the Purchaser, to:
Eli Lilly and Company
Lilly Corporate Center
Indianapolis, Indiana 46285
Telephone: (317) 276-2000
Telecopy No.: (317) 276-9152
Attention: General Counsel
29
<PAGE>
with a copy to:
Dewey Ballantine
1301 Avenue of the Americas
New York, New York 10019
Telephone: (212) 259-8000
Telecopy No.: (212) 259-6333
Attention: Bernard E. Kury, Esq.
Section 9.5. Successors and Assigns; No Third Party Beneficiaries. This
Agreement and all of the provisions hereof shall be binding upon and inure to
the benefit of the parties and their respective successors and permitted
assigns, but neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by either party (whether by operation
of law or otherwise) without the prior written consent of the other party;
provided that Parent may assign its rights and obligations or those of the
Purchaser to Parent or any subsidiary of Parent, but no such assignment shall
relieve Parent or the Purchaser, as the case may be, of its obligations
hereunder. This Agreement shall be binding upon and inure solely to the benefit
of each party hereto, and except for Sections 2.7, 2.8, 2.10, 6.8 and 6.10
hereof nothing in this Agreement, express or implied, is intended to or shall
confer upon any other person any rights, benefits or remedies of any nature
whatsoever under or by reason of this Agreement.
Section 9.6. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same instrument.
Section 9.7. Interpretation. The descriptive headings herein are inserted for
convenience of reference only and are not intended to be part of or to affect
the meaning or interpretation of this Agreement. As used in this Agreement, the
term "person" shall mean and include an individual, a partnership, a joint
venture, a corporation, a trust, an unincorporated organization and a
government or any department or agency thereof.
Section 9.8. Schedules. The Disclosure Schedule shall be construed with and
as an integral part of this Agreement to the same extent as if the same had
been set forth verbatim herein.
Section 9.9. Legal Enforceability. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
affecting the validity or enforceability of the remaining provisions hereof.
Any such prohibition or unenforceability in any jurisdiction shall not
invalidate or render unenforceable such provision in any other jurisdiction. If
any provision of this Agreement is so broad as to be unenforceable, the
provision shall be interpreted to be only so broad as is enforceable.
Section 9.10. Specific Performance. Each of the parties hereto acknowledges
and agrees that in the event of any breach of this Agreement, each non-
breaching party would be irreparably and immediately harmed and could not be
made whole by monetary damages. It is accordingly agreed that the parties
hereto (a) will waive, in any action for specific performance, the defense of
adequacy of a remedy at law and (b) shall be entitled, in addition to any other
remedy to which they may be entitled at law or in equity, to compel specific
performance of this Agreement in any action instituted in any state or federal
court sitting in Wilmington, Delaware. The parties hereto consent to personal
jurisdiction in any such action brought in any state or federal court sitting
in Wilmington, Delaware and to service of process upon it in the manner set
forth in Section 9.4 hereof.
Section 9.11. Brokerage Fees and Commissions. Except as previously disclosed
in writing, the Company hereby represents and warrants to Parent with respect
to the Company, and Parent hereby represents and warrants to the Company with
respect to Parent and the Purchaser, that no person or entity is entitled to
receive from the Company or Parent and the Purchaser, respectively, any
investment banking, brokerage or finder's fee or fees for financial consulting
or advisory services in connection with this Agreement or any of the
transactions contemplated hereby.
30
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized, all as of the
day and year first above written.
MCKESSON CORPORATION
/s/ Garret Scholz
By:
--------------------------
Name: Garret Scholz
Title: Vice President-Finance
Attest:
/s/ Arthur Chong
- -------------------------
ELI LILLY AND COMPANY
/s/ Randall L. Tobias
By:
--------------------------
Name: Randall L. Tobias
Title: Chairman and Chief
Executive Officer
Attest:
/s/ Daniel P. Carmichael
- -------------------------
ECO ACQUISITION CORPORATION
/s/ Charles E. Schalliol
By:
--------------------------
Name: Charles E. Schalliol
Title: President
Attest:
/s/ Daniel P. Carmichael
- -------------------------
31
<PAGE>
EXHIBIT F
CONDITIONS OF THE OFFER
Notwithstanding any other provision of the Offer, the Purchaser shall not be
required to purchase any Shares tendered, and may terminate the Offer, if (i)
immediately prior to the expiration of the Offer (as extended in accordance
with the terms of the Offer), (A) any applicable waiting period under the HSR
Act shall not have expired or been terminated, (B) the record date for the
distribution of shares of Spinco Common Stock to stockholders of the Company
pursuant to the Distribution Agreement shall not have been set by the Company's
Board of Directors, or (C) the number of Shares validly tendered and not
withdrawn which, when added to the Shares then beneficially owned by the Parent
and its affiliates, does not constitute a majority of the Shares outstanding
and representing a majority of the voting power of the Shares outstanding on a
fully diluted basis on the date of purchase, or (ii) on or after July 10, 1994
and prior to the acceptance for payment of Shares, any of the following events
shall occur:
(a) any of the representations or warranties of the Company contained in
the Merger Agreement shall not have been true and correct at the date when
made or (except for those representations and warranties made as of a
particular date which need only be true and correct as of such date) shall
cease to be true and correct at any time prior to consummation of the
Offer, except where the failure to be so true and correct would not,
individually or in the aggregate, have a Material Adverse Effect; provided
that, if any such failure to be so true and correct is curable by the
Company through the exercise of its best efforts and for so long as the
Company continues to use such best efforts, the Purchaser may not terminate
the Offer under this subsection (a); or
(b) the Company shall have breached any of its covenants or agreements
contained in the Merger Agreement, except for any such breaches that,
individually or in the aggregate, would not have a Material Adverse Effect;
provided that, if any such breach is curable by the Company through the
exercise of its best efforts and for so long as the Company continues to
use such best efforts, the Purchaser may not terminate the Offer under this
subsection (b); or
(c) there shall be any statute, rule regulation, decree, order or
injunction promulgated, enacted, entered or enforced, or any legal or
administrative proceeding initiated by any United States federal or state
government, governmental authority or court which would (i) prohibit the
Purchaser from consummating the Offer, the Merger or the Spin-Off, (ii)
impose any material adverse limitation on the ability of Parent to exercise
full rights of ownership of the Shares or to control the Retained Business,
or (iii) have a Material Adverse Effect (provided that the provisions of
this clause (iii) shall only apply in the event of any statute, rule,
regulation, decree, order or injunction (A) which is enacted or entered
into following the date of the Merger Agreement and (B) the substantive
provisions of which were initially proposed for enactment following the
date of the Merger Agreement); or
(d) there shall have been any damage or destruction affecting the
facilities or properties (tangible or intangible) owned or used by the
Retained Business, which would result in a Material Adverse Effect;
provided that, if any such damage or destruction is curable by the Company
through the exercise of its best efforts and for so long as the Company
continues to use such best efforts, the Purchaser may not terminate the
Offer under this subsection (d); or
(e) there shall have occurred (i) any general suspension of trading in
securities on the New York Stock Exchange, Inc., (ii) a declaration of a
banking moratorium or any suspension of payments in respect of banks in the
United States, or (iii) a commencement of a war or armed hostilities
involving the United States, which in the case of any of the foregoing
clauses (i), (ii) or (iii) would have a Material Adverse Effect; or
(f) any person, entity or "group" (as that term is used in Section
13(d)(3) of the Exchange Act) has become the beneficial owner (as that term
is defined in Rule 13d-3 promulgated under the Exchange Act) of more than
thirty percent (30%) of the Shares outstanding on a fully diluted basis, or
has been
F-1
<PAGE>
granted any option or right, conditional or otherwise, to acquire or vote
more than thirty percent (30%) of the Shares; or
(g) the Merger Agreement shall have been terminated in accordance with
its terms.
The foregoing conditions are for the sole benefit of the Purchaser and may be
asserted by the Purchaser regardless of the circumstances giving rise to such
conditions, or may be waived by the Purchaser in whole or in part at any time
and from time to time in its sole discretion; provided that the conditions set
forth in clauses (i)(A), (B) and (C) or (ii)(g) above may be waived or modified
only by mutual consent of the Purchaser and the Company.
F-2
<PAGE>
EXHIBIT 99.4
REORGANIZATION AND
DISTRIBUTION AGREEMENT
dated as of July 10, 1994
by and among
MCKESSON CORPORATION,
MCKESSON CORPORATION,
CLINICAL PHARMACEUTICALS, INC.,
PCS HEALTH SYSTEMS, INC.,
and
SP VENTURES, INC.,
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
ARTICLE I DEFINITIONS....................................... 3
Section 1.1. General...................................... 3
Section 1.2. References to Time........................... 15
ARTICLE II THE REORGANIZATION AND RELATED TRANSACTIONS....... 16
Section 2.1. Transfers of Assets.......................... 16
Section 2.2. Method of Transfer........................... 19
Section 2.3. Issuance of Spinco Stock to the Company...... 20
Section 2.4. Transfer of Company Indebtedness to Spinco... 21
Section 2.5. Preferred Stock Purchase Agreement........... 26
ARTICLE III THE DISTRIBUTION.................................. 27
Section 3.1. Cooperation Prior to the Distribution........ 27
Section 3.2. The Distribution............................. 29
Section 3.3. Company Approval of Certain Spinco Actions... 31
Section 3.4. Termination of Certain Claims................ 32
ARTICLE IV INTERCOMPANY BUSINESS RELATIONSHIPS............... 32
Section 4.1. Settlement of Intercompany Accounts;
Net Working Capital Adjustment............... 32
Section 4.2. Ongoing or Transition Services............... 40
Section 4.3. Shared Assets................................ 41
Section 4.4. Other Intercompany Arrangements.............. 42
Section 4.5. Settlements for Cash Collections and
Disbursements................................ 43
ARTICLE V SURVIVAL AND INDEMNIFICATION...................... 44
Section 5.1. Survival of Agreements....................... 44
Section 5.2. Spinco's Agreement to Indemnify.............. 46
Section 5.3. The Company's Agreement to Indemnify......... 49
Section 5.4. Procedure for Indemnification................ 53
Section 5.5. Pending Litigation........................... 57
Section 5.6. Construction of Agreements................... 58
ARTICLE VI CERTAIN ADDITIONAL MATTERS........................ 59
Section 6.1. No Representations or Warranties;
Exceptions................................... 59
Section 6.2. Further Assurances; Subsequent Transfers..... 62
i
<PAGE>
Page
----
Section 6.3. The Spinco Board............................. 66
Section 6.4. Liability Insurance.......................... 66
Section 6.5. Use of Names................................. 67
ARTICLE VII ACCESS TO INFORMATION AND SERVICES................ 68
Section 7.1. Provision of Corporate Records............... 68
Section 7.2. Access to Information........................ 69
Section 7.3. Production of Witnesses...................... 70
Section 7.4. Retention of Records......................... 70
Section 7.5. Confidentiality.............................. 71
ARTICLE VIII EMPLOYEE BENEFITS; LABOR MATTERS.................. 72
Section 8.1. Officers and Employees....................... 72
Section 8.2. Employee Benefits............................ 73
Section 8.3. Other Liabilities and Obligations............ 81
Section 8.4. Preservation of Rights to Amend or
Terminate Plans.............................. 81
Section 8.5. Reimbursement; Indemnification............... 82
ARTICLE IX INSURANCE......................................... 83
Section 9.1. General...................................... 83
Section 9.2. Certain Insured Claims....................... 83
ARTICLE X CONDITIONS; TERMINATION; AMENDMENTS; WAIVERS...... 84
Section 10.1. Condition to Obligations..................... 84
Section 10.2. Termination.................................. 85
Section 10.3. Amendments; Waivers.......................... 85
ARTICLE XI MISCELLANEOUS..................................... 86
Section 11.1. Survival..................................... 86
Section 11.2. Entire Agreement............................. 87
Section 11.3. Fees and Expenses............................ 88
Section 11.4. Governing Law................................ 89
Section 11.5. Notices...................................... 90
Section 11.6. Successors and Assigns; No Third Party
Beneficiaries................................ 91
Section 11.7. Counterparts................................. 92
Section 11.8. Interpretation............................... 92
Section 11.9. Schedules.................................... 93
Section 11.10. Legal Enforceability......................... 93
Section 11.11. Specific Performance......................... 93
ii
<PAGE>
REORGANIZATION AND
DISTRIBUTION AGREEMENT
----------------------
REORGANIZATION AND DISTRIBUTION AGREEMENT, dated as of July 10, 1994, by
and among McKesson Corporation, a Delaware corporation (the "Company"), McKesson
Corporation, a Maryland corporation and a wholly-owned subsidiary of the Company
("Maryland"), Clinical Pharmaceuticals, Inc., a Delaware corporation and a
wholly-owned subsidiary of the Company ("CPA"), PCS Health Systems, Inc., a
Delaware corporation and a wholly-owned subsidiary of Maryland ("Prescription"),
and SP Ventures, Inc., a Delaware corporation and a wholly-owned subsidiary of
the Company ("Spinco").
WHEREAS, the Board of Directors of the Company has determined to cause the
transfer to Spinco of all of the Company Business (as hereafter defined), the
assumption by Spinco of the Company Liabilities (as hereafter defined), and the
issuance to the Company of shares of Spinco Common Stock (as hereafter defined);
WHEREAS, Spinco is willing to accept such transfer of the Company Business,
issue such shares of Spinco Common Stock to the Company and assume such Company
Liabilities;
<PAGE>
WHEREAS, prior to the transfer by the Company to Spinco of the Company
Business and the Company Liabilities, Maryland intends to distribute all of its
assets and liabilities constituting part of the Company Business and part of the
Company Liabilities, respectively, to the Company;
WHEREAS, the Company intends to cause the distribution of all of its shares
of Spinco Common Stock to the holders of the Company Common Stock (as hereafter
defined) on the Record Date (as hereafter defined);
WHEREAS, the Company and Spinco have determined that it is desirable to set
forth the principal corporate transactions required to effect such transfer and
distribution and to set forth other agreements that will govern certain other
matters prior to or following such distribution;
WHEREAS, the Company has entered into an Agreement and Plan of Merger,
dated as of the date hereof (the "Merger Agreement"), with Eli Lilly and
Company, an Indiana corporation ("Parent"), and ECO Acquisition Corporation, a
Delaware corporation and a wholly-owned subsidiary of Parent (the "Purchaser"),
providing for the Offer and the Merger (each as hereafter defined), as a result
of which the Company, as the corporation surviving the
2
<PAGE>
Merger, will become a wholly-owned subsidiary of Parent; and
WHEREAS, in order to induce the parties to enter into this Agreement and in
consideration of the Company's willingness to enter into the Merger Agreement,
the parties hereto and certain other parties are entering or will enter into the
Tax Sharing Agreement and the Services Agreements (as hereafter defined)
providing for certain ongoing relationships among the parties;
NOW, THEREFORE, in consideration of the foregoing and the agreements,
provisions and covenants contained herein, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
-----------
Section 1.1. General. As used in this Agreement, the following terms
-------
shall have the following meanings (such meanings to be equally applicable to
both the singular and plural forms of the terms defined):
"Action" means any action, claim, suit, arbitration, inquiry, proceeding or
------
investigation by or before any court, any governmental or other regulatory or
administrative agency or commission or any arbitration tribunal.
3
<PAGE>
"Affiliate" shall have the same meaning as specified in Rule 12b-2 of the
---------
General Rules and Regulations under the Exchange Act; provided that the Company
--------
and Spinco and their respective subsidiaries (after giving effect to the
Reorganization) shall not be deemed to be Affiliates of each other for purposes
of this Agreement.
"Agent" means the distribution agent appointed by the Company to distribute
-----
shares of the Spinco Common Stock pursuant to the Distribution.
"Armor All Indenture" means the Indenture dated as of March 14, 1994
-------------------
between the Company and The First National Bank of Chicago, as trustee, as
amended or supplemented from time to time.
"Asset" means, with respect to any party, except as otherwise provided
-----
herein, any and all of such party's and its subsidiaries' right, title and
interest in and to all of the rights, properties, assets, claims, contracts and
businesses of every kind, character and description, whether real, personal
or mixed, whether accrued, contingent or otherwise, and wherever located, owned
or used primarily by such party and its subsidiaries, including, without
limitation, the following: (i) all cash, cash equivalents, notes and accounts
receivable
4
<PAGE>
(whether current or non-current); (ii) all certificates of deposit, banker's
acceptances and other investment securities; (iii) all registered and
unregistered trademarks, service marks, service names, trade styles and trade
names (including, without limitation, trade dress and other names, marks and
slogans) and all associated goodwill; all statutory, common law and registered
copyrights; all patents; all applications for any of the foregoing together with
all rights to use all of the foregoing and all other rights in, to, and under
the foregoing; all know-how, inventions, discoveries, improvements, processes,
formulae (secret or otherwise), specifications, trade secrets, whether
patentable or not, licenses and other similar agreements, confidential
information, and all drawings, records, books or other indicia, however
evidenced, of the foregoing; (iv) all rights existing under leases, contracts,
licenses, distribution arrangements, sales and purchase agreements, other
agreements and business arrangements; (v) all real estate and all plants,
buildings and other improvements thereon; (vi) all leasehold improvements and
all machinery, equipment (including all transportation and office equipment),
fixtures, trade fixtures and furniture; (vii) all office supplies, production
supplies, spare parts,
5
<PAGE>
other miscellaneous supplies and other tangible property of any kind; (viii) all
raw materials, work-in-process, finished goods, consigned goods and other
inventories; (ix) all computer hardware, software, computer programs and systems
and documentation relating thereto; all databases and reference and resource
materials; (x) all prepayments or prepaid expenses; (xi) all claims, causes of
action, choices in action, rights of recovery and rights of set-off of any kind;
(xii) the right to receive mail, accounts receivable payments and other
communications; (xiii) all customer lists and records pertaining to customers
and accounts, personnel records, all lists and records pertaining to suppliers
and agents, and all books, ledgers, files and business records of every kind;
(xiv) all advertising materials and all other printed or written materials; (xv)
all permits, licenses, approvals and authorizations of governmental authorities
or third parties relating to the ownership, possession or operation of the
Assets; (xvi) all capital stock, partnership interests and other equity or
ownership interests or rights, directly or indirectly, in any subsidiary or
other entity; (xvii) all goodwill as a going concern and all other intangible
properties; and (xviii) all employee contracts, including, without limitation,
the right
6
<PAGE>
thereunder to restrict the employee from competing in certain respects.
"Casualty Program" means collectively, the series of programs pursuant to
----------------
which various insurance carriers provide insurance coverage to the Company and
its subsidiaries in respect of claims or occurrences relating to workers'
compensation liability, general liability, products liability, automobile
liability and employer's liability for all periods up to the Distribution Date.
"Code" means the Internal Revenue Code of 1986, as amended.
----
"Company Assets" shall have the same meaning as defined in Section 2.1(a).
--------------
"Company Business" means all present businesses of the Company and its
----------------
subsidiaries other than the Prescription Business, including, without
limitation, the pharmaceutical and health care products distribution business,
the water products business and the Armor All business, as conducted by the
Company and its subsidiaries as of the Offer Purchase Date and all former
businesses of the Company and its subsidiaries.
"Company Common Stock" means the common stock of the Company, par value
--------------------
$2.00 per share.
7
<PAGE>
"Company Liabilities" means all of the Liabilities of the Company and all
-------------------
of its subsidiaries, other than the Prescription Liabilities.
"Company Indebtedness" shall have the same meaning as defined in Section
--------------------
2.4(c) hereof.
"Disclosure Schedule" means the disclosure schedule dated as of the date
-------------------
hereof and attached hereto.
"Distribution" means the distribution of the shares of Spinco Common Stock
------------
owned by the Company to holders of Company Common Stock.
"Distribution Date" means the date as of which the Distribution shall be
-----------------
effected as determined by the Board of Directors of the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
------------
"Form 10" means the registration statement on Form 10 to be filed by Spinco
-------
with the SEC to effect the registration of the Spinco Common Stock pursuant to
the Exchange Act.
"IMS" means Integrated Medical Systems, Inc., a Colorado corporation.
---
"Indemnifiable Losses" means, with respect to any claim by an Indemnitee
--------------------
for indemnification pursuant to Article V, VI, VIII or IX hereof, any and all
losses,
8
<PAGE>
Liabilities, claims, damages, obligations, payments, costs and expenses
(including, without limitation, the costs and expenses of any and all Actions,
demands, assessments, judgments, settlements and compromises relating thereto
and reasonable attorneys' fees and expenses in connection therewith) suffered by
such Indemnitee with respect to such claim.
"Indemnifying Party" means any party who is required to indemnify any other
------------------
person pursuant to Article V, VI, VIII or IX hereof.
"Indemnitee" means any party who is entitled to receive indemnification
----------
from an Indemnifying Person pursuant to Article V, VI, VIII or IX hereof.
"Indemnity Payment" means the amount an Indemnifying Party is required to
-----------------
pay an Indemnitee pursuant to Article V, VI, VIII or IX hereof.
"Information Statement" means the information statement to be sent to the
---------------------
holders of the Company's equity securities in connection with the Distribution.
"Liabilities" means, with respect to any party, except as otherwise
-----------
provided herein, any and all liabilities and obligations of such party, whether
accrued, contingent or reflected on a balance sheet (or in the notes thereto),
including, without limitation, those
9
<PAGE>
arising under any law, rule, regulation, Action, order or consent decree of any
governmental entity or any judgment of any court of any kind or any award of any
arbitrator of any kind, and those arising under any contract, commitment or
undertaking.
"Lien" means any mortgage, pledge, lien, encumbrance, charge, adverse claim
----
(whether pending or, to the knowledge of the person against whom the adverse
claim is being asserted, threatened) or restriction of any kind affecting title
or resulting in an encumbrance against property, real or personal, tangible or
intangible, or a security interest of any kind, including, without limitation,
any conditional sale or other title retention agreement, any third party option
or other agreement to sell and any filing of or agreement to give, any financing
statement under the Uniform Commercial Code (or equivalent statute) of any
jurisdiction (other than a financing statement which is filed or given solely to
protect the interest of a lessor).
"Merger" shall have the meaning set forth in the Merger Agreement.
------
"Merger Agreement" shall have the meaning set forth in the introductory
----------------
section of this Agreement.
"NYSE" means the New York Stock Exchange, Inc.
----
10
<PAGE>
"Offer" shall have the meaning set forth in the Merger Agreement.
-----
"Offer Purchase Date" means the date on which the Purchaser accepts for
-------------------
payment and pays for Shares tendered pursuant to the Offer.
"Prescription Assets" means (a) all of the capital stock of Maryland,
-------------------
Prescription, CPA and IMS, and (b) except as provided in the following sentence,
the Assets owned by Prescription and CPA, including, without limitation (i) the
Assets reflected on the Prescription Balance Sheet, except for Assets disposed
of since the date of the Prescription Balance Sheet, (ii) the TAG Retainer
Agreement, (iii) the Prescription Names and Prescription Proprietary Name
Rights, (iv) the Prescription Actions (to the extent such actions constitute
Assets), (v) any Assets set forth on Section 1.1.1 of the Disclosure Schedule
and (vi) to the extent not sold by the Company prior to the Offer Purchase Date,
any shares of Spinco Preferred Stock to be sold by the Company pursuant to
Section 2.5 hereof. The Prescription Assets shall not include the Assets set
forth in Section 1.1.2 of the Disclosure Schedule.
"Prescription Balance Sheet" means the consolidated balance sheet
--------------------------
(including the related notes) of the
11
<PAGE>
Prescription Business as of March 31, 1994 included in the financial statements
attached to Section 4.7(b) of the Disclosure Schedule to the Merger Agreement.
"Prescription Business" means the pharmaceutical benefits management
---------------------
business as conducted by Prescription and CPA as of the Offer Purchase Date.
"Prescription Employees" means the employees of Prescription and CPA as of
----------------------
the Offer Purchase Date. In the event any person shall have been employed by
Prescription or CPA as well as by the Company or any of its other subsidiaries,
such person shall be considered a Prescription Employee if at the Offer Purchase
Date such person's primary employment shall be with Prescription or CPA.
"Prescription Liabilities" means (a) all of the Liabilities of Prescription
------------------------
and CPA to parties other than the Company and its subsidiaries relating to or
arising out of the Prescription Assets and the conduct of the Prescription
Business, including, without limitation, those reflected or reserved against in
the Prescription Balance Sheet and those arising after the date thereof; (b) the
Liabilities of Prescription and CPA to the Company and its subsidiaries
reflected on Schedule 1.1.3 hereto; (c) the Liabilities of the Company and its
subsid-
12
<PAGE>
iaries, including, without limitation, Prescription and CPA, in respect of
Prescription Employees (but not in respect of retirees or other persons who, as
of the Offer Purchase Date, were no longer employees of Prescription or CPA);
and (d) the Prescription Actions (to the extent such actions constitute
Liabilities).
"Private Indebtedness" shall have the same meaning as defined in Section
--------------------
2.4(a) hereof.
"Public Indebtedness" shall have the same meaning as defined in Section
-------------------
2.4(c) hereof.
"Public Indentures" shall mean the Armor All Indenture and the
------------------
Unlimited Indenture.
"Record Date" means the date determined by the Board of Directors of the
-----------
Company as the record date for the Distribution.
"Reorganization" means collectively, the transactions contemplated pursuant
--------------
to the provisions of Article II hereof.
"SEC" means the Securities and Exchange Commission.
---
"Securities Act" means the Securities Act of 1933, as amended.
--------------
"Services Agreements" means the HDS Services Agreement, the McKesson
-------------------
Services Agreement and the Memo-
13
<PAGE>
randum of Understanding, each dated as of the date hereof, among Parent, the
Company, Spinco and Healthcare Delivery Systems, Inc.
"Spinco Common Stock" means the common stock, par value $0.01 per share, of
-------------------
Spinco, together with the associated preferred stock purchase rights to be
issued pursuant to a rights agreement to be entered into between Spinco and a
rights agent to be selected by Spinco
"Spinco Employees" shall mean those employees of the Company or its
----------------
subsidiaries who are employed in the Company Business immediately prior to the
Offer Purchase Date and all former employees of the Company or its subsidiaries
who, immediately prior to the termination of their employment, were employed in
the Company Business.
"Spinco Preferred Stock" means the series of shares of Preferred Stock, par
----------------------
value $.01 per share, of Spinco which may be authorized and issued by Spinco as
contemplated hereby, having such powers, designations, preferences and relative,
participating, optional or other special rights, and qualifications or
restrictions, as are agreed to by Spinco and the Company.
"Spinco PSIP" means the Profit Sharing Investment Plan of Spinco.
-----------
14
<PAGE>
"TAG Retainer Agreement" shall mean the Retainer Agreement, dated as of
----------------------
December 30, 1993 and effective as of January 3, 1994, by and among the Company,
Technology Assessment Group, a California general partnership, Sheila Fifer and
Peter Mazonson.
"Tax Sharing Agreement" means the Tax Sharing Agreement, in the form of
---------------------
Exhibit A to the Merger Agreement, pursuant to which the Company and Spinco have
provided for certain tax matters, including, without limitation,
indemnification, allocation of tax benefits and filing of tax returns.
"Third Party Claim" shall have the same meaning as specified in Section
-----------------
5.3(a).
"Unlimited Indenture" means the Indenture dated as of September 1, 1990
-------------------
between the Company and Chemical Bank, as trustee, as amended or supplemented
from time to time.
Section 1.2. References to Time. All references in this Agreement to
------------------
times of the day shall be to New York City time.
15
<PAGE>
ARTICLE II
THE REORGANIZATION AND RELATED TRANSACTIONS
-------------------------------------------
Section 2.1. Transfers of Assets.
-------------------
(a) Subject to the terms and conditions of this Agreement, prior to
the Distribution Date:
(i) Maryland shall distribute by dividend to the Company (or, at
the election of Maryland and the Company, Maryland shall otherwise transfer
and deliver to the Company), all of its right, title and interest in and to
all of its Assets other than the Prescription Assets; and the Company shall
assume, pay, perform and discharge, or cause to be assumed, paid, performed
and discharged, in due course, all of Maryland's Company Liabilities; and
(ii) the Company shall contribute to Spinco all of its right,
title and interest in and to all of its Assets (including, without
limitation, the Assets previously transferred to the Company from Maryland
pursuant to clause (i) above) other than (A) the Prescription Assets, (B)
the capital stock of Spinco, and (C) the rights of the Company under this
Agreement (all such Assets to be so contributed to Spinco are hereinafter
collectively re-
16
<PAGE>
ferred to as the "Company Assets"); and Spinco shall assume, pay, perform
and discharge, or cause to be assumed, paid, performed and discharged, in
due course, all of the Company Liabilities (including, without limitation,
the Company Liabilities of Maryland previously assumed by the Company
pursuant to clause (i) above). "Company Assets" shall include, without
limitation (A) all shares of capital stock, partnership interests and other
equity or ownership interests or ownership rights in all subsidiaries and
other entities owned directly or indirectly by the Company or Maryland
(including, without limitation, the general partnership interest in
Technology Assessment Group, a California general partnership, held by
McKesson Outcomes Research Corporation, a Delaware corporation, but
excluding all shares of capital stock of Maryland, Prescription, CPA,
Spinco and IMS), and all rights to Assets held by such subsidiaries and
entities, (B) except as provided in Section 4.1 hereof, all cash and cash
equivalents held by the Company or any of its subsidiaries, including,
without limitation, the Spinco Cash Amount (as defined in the Merger
Agreement), (C) any shares of Spinco Common Stock distributed in
17
<PAGE>
the Spin-Off in respect of Shares owned by the Company or its subsidiaries;
(D) the Company Names and Company Proprietary Names, and (E) the Company
Actions (to the extent such actions constitute Assets). Subject to the
terms and conditions set forth in this Agreement, the Company shall, or
shall cause Prescription or CPA to, assume, pay, perform and discharge in
due course all Prescription Liabilities.
(b) Subject to the provisions of Section 6.2 hereof and except with
respect to the Company Indebtedness as provided in Section 2.4 hereof, to the
extent that any such contributions and transfers shall not have been so
consummated prior to the Offer Purchase Date, the parties shall cooperate to
effect such consummation as promptly thereafter as shall be practicable, and as
between the Company and Spinco, as of the Offer Purchase Date, the Company shall
be deemed to have contributed to Spinco, and Spinco shall have and be deemed to
have obtained, complete and sole beneficial ownership over all of the Company
Assets, together with all of the Company's rights, powers and privileges
incident thereto, and Spinco shall be deemed to have assumed in accordance with
the terms of this Agreement all of the Company Liabili-
18
<PAGE>
ties and all of the Company's duties, obligations and responsibilities incident
thereto, whether or not all instruments of transfer and assumption shall have
been executed and delivered.
Section 2.2. Method of Transfer. The parties hereto agree that (a)
------------------
the contribution and transfer of the Company Assets contemplated pursuant to
Section 2.1 hereof shall be effected by delivery by Maryland to the Company, and
by the Company to Spinco, as the case may be, of (i) with respect to those
Company Assets which are evidenced by capital stock certificates or similar
instruments, certificates duly endorsed in blank or accompanied by stock powers
or other instruments of assignment executed in blank and (ii) with respect to
all other Company Assets, such good and sufficient instruments of contribution,
transfer and delivery, in form and substance reasonably satisfactory to the
Company, Maryland, Parent and Spinco, as shall be necessary to vest in Spinco
all of the right, title and interest of the Company and Maryland in and to such
Company Assets, and (b) the assumption of the Company Liabilities contemplated
pursuant to Section 2.1 hereof shall be effected by delivery by the Company to
Maryland, and by Spinco to the Company, as the case may be, of such good and
sufficient
19
<PAGE>
instruments of assumption, in form and substance reasonably satisfactory to the
Company, Maryland, Parent and Spinco, as shall be necessary for the assumption
by Spinco of the Company Liabilities.
Section 2.3. Issuance of Spinco Stock to the Company. Spinco agrees
---------------------------------------
to issue to the Company, contemporaneously with the transfer of Company Assets
and assumption of Company Liabilities contemplated herein, the number of shares
of Spinco Common Stock equal to the number of shares of Company Common Stock
outstanding on the Record Date (excluding shares of Company Common Stock held by
the Company in its treasury or, subject to applicable law, held by any
subsidiary of the Company). In addition, Spinco agrees to issue to the Company
on or prior to the Record Date such additional shares of Spinco Common Stock as
may be required in order for the Company to fulfill its obligations pursuant to
Section 3.2 hereof. Spinco further agrees that if, prior to the Record Date,
the Company elects to enter into the Preferred Stock Purchase Agreement (as
defined herein), Spinco shall authorize and issue to the Company,
contemporaneously with the transfer of Company Assets and assumption of Company
Liabilities contemplated herein, 1,000 shares of Spinco Preferred Stock.
20
<PAGE>
Section 2.4. Transfer of Company Indebtedness to Spinco.
------------------------------------------
(a) On or prior to the Offer Purchase Date, Spinco shall assume and
agree to pay, perform and discharge, pursuant to the terms of, and shall perform
and abide by all other obligations, covenants and agreements applicable to the
Company under (but, as set forth in Section 2.4(b) hereof, in each case subject
to the obtaining of any required consents or approvals), each of the debt
obligations of the Company and its subsidiaries set forth in Section 2.4(a) of
the Disclosure Schedule (the "Private Indebtedness").
(b) Each of the parties hereto shall use its best efforts to obtain
any consent or approval required from the holders of the Private Indebtedness or
otherwise to cause the assumption by Spinco of all Private Indebtedness pursuant
to paragraph (a) above and the release of the Company or Maryland (as the case
may be) from all obligations and liabilities thereunder. In the event that, on
or prior to the Offer Purchase Date, the parties are unable to obtain any
required consent or approval in connection with such assumption of Private
Indebtedness, the Company shall, on or prior to the Offer
21
<PAGE>
Purchase Date, prepay, redeem, purchase or defease in full all such Private
Indebtedness.
(c) On or prior to the Offer Purchase Date, Spinco shall execute a
supplemental indenture or other document satisfactory in form to any applicable
trustee pursuant to which it shall expressly assume the due and punctual
payment, performance and observance, pursuant to the terms thereof, jointly and
severally with the Company, of all of the obligations, covenants, conditions and
agreements contained in each of the debt obligations of the Company set forth in
Section 2.4(c) of the Disclosure Schedule and the related indentures and other
ancillary agreements related thereto (the "Public Indebtedness" and,
collectively with the Private Indebtedness, the "Company Indebtedness").
Notwithstanding the assumption by Spinco of such Public Indebtedness, the
Company will not be released from, and will remain a party to, and will be
jointly and severally liable with Spinco under, such Public Indebtedness, until
such time as any consent required to effect such release shall have been
obtained. As between Spinco and the Company, (i) Spinco shall (A) pay to the
holders of such Public Indebtedness, in accordance with the terms thereof, all
principal, interest and other amounts owing to the holders of such
22
<PAGE>
Public Indebtedness, (B) deposit with the Exchange Agent (as such term is
defined in the Armor All Indenture) from time to time additional Exchange
Property as required under Section 15.5 of the Armor All Indenture, and (C) pay,
reimburse and indemnify the trustee for its reasonable services, expenses,
disbursements, advances, losses, liabilities or expenses as provided in Section
8.6 of the Armor All Indenture and Section 6.6 of the Unlimited Indenture, and
(ii) each of Spinco and the Company shall perform and abide by all other
obligations, covenants, conditions and agreements applicable to it thereunder
and under the Public Indentures. With respect to such Public Indebtedness,
neither the Company nor Spinco shall seek or agree to any amendments, consents
or waivers or execute any supplemental indentures with respect thereto, without
the prior written consent of the other party (which consent shall not be
unreasonably withheld). The Company and Spinco shall take such action and
execute such agreements, documents or instruments, as the other party may
reasonably request, in connection with the fulfillment of any such party's
obligations under the Public Indebtedness. Promptly upon receipt by the Company
or Spinco or any of their representatives of any notices, demands or other
communications from or on
23
<PAGE>
behalf of the holders of the Public Indebtedness (or any trustee thereunder),
such party shall deliver copies of such communications to the other party.
(d) Spinco agrees to indemnify, defend and hold harmless the Company
and each of its directors, officers, employees, representatives, advisors,
agents, and Affiliates, in accordance with the indemnification provisions of
Article V hereof, from and against any and all Indemnifiable Losses of the
Company or any of such other parties arising out of or resulting from any
failure by Spinco to pay when due any principal, interest or other amounts owing
under the Public Indebtedness or any failure by Spinco to perform and abide by
all other obligations, covenants, conditions and agreements applicable to it
under such Public Indebtedness. The Company agrees to indemnify, defend and
hold harmless Spinco and each of its directors, officers, employees,
representatives, advisors, agents and Affiliates, in accordance with the
indemnification provisions of Article V hereof, from and against any and all
Indemnifiable Losses of Spinco or any of such other parties arising out of or
resulting from any failure by the Company to perform and abide by all
obligations, covenants, conditions and agreements applicable to it under the
Public Indebtedness
24
<PAGE>
(other than the obligations to pay when due any principal, interest or other
amounts owing thereunder or under the Public Indentures).
(e) The Company and Spinco agree, promptly following consummation of
the Merger (unless required to do so prior to the Offer Purchase Date, in which
case the following actions shall be taken prior to the Offer Purchase Date), to
use their respective best 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 the
terms of the agreements governing the Public Indebtedness and the provisions of
applicable law (including, without limitation, preparing and filing with the SEC
any required registration statements, consent solicitation or exchange offer
documentation and other relevant materials, mailing to the holders of the Public
Indebtedness all relevant consent and other materials, entering into any
required supplemental indentures and, on the part of Spinco, offering to pay and
paying any reasonable fees to the holders of such Public Indebtedness in
connection with such solicitation or offer), which may be appropriate or
required in order to effect the release of the Company from all obligations and
liabilities under the Public Indebtedness. Spinco shall
25
<PAGE>
bear all costs incurred in connection with seeking to effect such release of the
Company from such obligations and liabilities, including, without limitation,
the reasonable, documented out-of-pocket expenses of the Company relating
thereto and to complying with its public filing requirements applicable to the
Public Indebtedness prior to any such release.
Section 2.5. Preferred Stock Purchase Agreement. Prior to the Offer
----------------------------------
Purchase Date, the Company may, in its sole discretion, enter into a Preferred
Stock Purchase Agreement with the Spinco PSIP or another third party (provided
that such other party shall be reasonably satisfactory to Parent) (the
"Preferred Stock Purchase Agreement"), pursuant to which, as contemplated by
Section 2.13 of the Merger Agreement, the Spinco PSIP or such other person will
acquire and pay for, prior to the Effective Time, and the Company will sell,
upon the terms and subject to the conditions of the Preferred Stock Purchase
Agreement, all of the shares of Spinco Preferred Stock held by the Company.
26
<PAGE>
ARTICLE III
THE DISTRIBUTION
----------------
Section 3.1. Cooperation Prior to the Distribution. As promptly as
-------------------------------------
practicable after the date hereof and prior to the Distribution Date:
(a) The Company and Spinco shall prepare, and the Company shall file
with the SEC and mail to the holders of the equity securities of the Company,
the Information Statement, which shall set forth appropriate disclosure
concerning Spinco and its subsidiaries, the Company Business, the Distribution
and certain other matters. The Company and Spinco shall also prepare, and
Spinco shall file with the SEC, the Form 10 which shall include or incorporate
by reference the Information Statement. The Company and Spinco shall use
reasonable efforts to cause the Form 10 to be declared effective under the
Exchange Act or, if the Company reasonably determines that the Distribution may
not be effected without registering the Spinco Common Stock pursuant to the
Securities Act, the Company shall use its best efforts to cause the Spinco
Common Stock to be registered pursuant to the Securities Act and thereafter
effect the Distribution in accordance with the terms of this Agreement,
including, without limitation, by preparing and
27
<PAGE>
filing on an appropriate form a registration statement under the Securities Act
covering the Spinco Common Stock and using its best efforts to cause such
registration statement to be declared effective.
(b) The Company and Spinco shall cooperate in preparing, filing with
the SEC and causing to become effective any registration statements or
amendments thereto which are appropriate to reflect the establishment of, or
amendments to, any employee benefit and other plans contemplated by this
Agreement.
(c) The Company and Spinco shall take all such action as may be
necessary or appropriate under state securities or "Blue Sky" laws in connection
with the transactions contemplated by this Agreement.
(d) The Company and Spinco shall prepare, and Spinco shall file and
seek to make effective, an application to permit listing of the Spinco Common
Stock either on the NYSE or any other national securities exchange as selected
by Spinco in its sole discretion.
(e) In addition to the actions specifically provided for elsewhere in
this Agreement, each of the parties hereto shall use its best efforts to take,
or cause to be taken, all actions, and to do, or cause to be done, all things,
reasonably necessary, proper or advis-
28
<PAGE>
able under applicable laws, regulations and agreements to consummate and make
effective the transactions contemplated by this Agreement, including, without
limitation, using its best efforts to obtain the consents and approvals, to
enter into any amendatory agreements and to make the filings and applications
necessary or desirable to have been obtained, entered into or made in order to
consummate the transactions contemplated by this Agreement.
Section 3.2. The Distribution.
----------------
(a) The Company's Board of Directors (or any duly appointed committee
thereof) shall in its sole discretion establish the Record Date and the
Distribution Date and any appropriate procedures in connection with the
Distribution (subject in each case to the provisions of applicable law);
provided that in no event shall the Distribution occur prior to such time as (i)
- --------
the Purchaser shall have purchased shares of Company Common Stock pursuant to
the terms and conditions of the Offer as set forth in the Merger Agreement, (ii)
the Form 10 (or the registration statement referred to in Section 3.1(a) hereof)
shall have been declared effective by the SEC and (iii) the Spinco Common Stock
shall have been accepted
29
<PAGE>
for listing or quotation in accordance with Section 3.1(d) hereof.
(b) Subject to Section 10.1 hereof, following the Record Date and the
consummation of the Offer but prior to the Distribution Date, the Company shall
deliver to the Agent one or more share certificates representing all of the
outstanding shares of Spinco Common Stock to be distributed in the Distribution
and shall instruct the Agent, subject to Section 8.2(d) hereof, to distribute on
the Distribution Date, one share of Spinco Common Stock for each share of
Company Common Stock held to holders of record of Company Common Stock on the
Record Date. Spinco agrees to provide all share certificates that the Agent
shall require in order to effect the Distribution. All shares of Spinco Common
Stock issued in the Distribution shall be duly authorized, validly issued, fully
paid, non-assessable and free of preemptive rights.
(c) Immediately upon consummation of the Distribution, the Company
shall not hold or beneficially own directly or indirectly any shares of Spinco
Common Stock.
30
<PAGE>
Section 3.3. Company Approval of Certain Spinco Actions. Unless
------------------------------------------
otherwise provided in this Agreement, the Company and Maryland shall cooperate
with Spinco and its subsidiaries in effecting, and if so requested by Spinco the
Company shall, as the sole stockholder of Spinco, ratify any actions that are
reasonably necessary or desirable to be taken by Spinco to effectuate the
transactions contemplated by this Agreement in a manner consistent with the
terms of this Agreement, including, without limitation, the following: (a) the
preparation and approval of the Certificate of Incorporation and By-laws of
Spinco to be in effect at the Distribution Date; (b) the election or appointment
of directors and officers of Spinco to serve in such capacities following the
Distribution Date; (c) the adoption, preparation and implementation of
appropriate plans, agreements and arrangements for Spinco Employees and Spinco
non-employee directors (including, without limitation, plans, agreements or
arrangements pursuant to which securities of Spinco would be acquired by Spinco
Employees and plans required to implement the matters referred to in Section 8.2
hereof); (d) the registration under applicable securities laws of any securities
of Spinco issued or distributed pursuant to Section 3.2 hereof; and (e) the
31
<PAGE>
adoption of a shareholder rights plan pursuant to which holders of Spinco Common
Stock would receive as a dividend a right entitling certain such holders, under
certain circumstances, to purchase additional Spinco Common Stock or stock in an
entity which acquires Spinco.
Section 3.4. Termination of Certain Claims. Following the Offer
-----------------------------
Purchase Date, Spinco shall have no claims against the Company based on any
breach by the Company or its Affiliates of any obligations under this Agreement
that occurred prior to the Offer Purchase Date, all of such claims being hereby
irrevocably waived and terminated as of the Offer Purchase Date; provided that
the foregoing shall not limit the Company's liability for any breach by the
Company or its Affiliates of any obligations under this Agreement that occurs
following the Offer Purchase Date, including, without limitation, the Company's
obligation to indemnify Spinco as set forth herein.
ARTICLE IV
INTERCOMPANY BUSINESS RELATIONSHIPS
-----------------------------------
Section 4.1. Settlement of Intercompany Accounts; Net Working Capital
--------------------------------------------------------
Adjustment.
- ----------
(a) Except as expressly provided for in this Article IV, all
intercompany receivables, payables,
32
<PAGE>
loans, cash overdrafts and other accounts in existence as of the Offer Purchase
Date between Prescription, CPA and their subsidiaries, on the one hand, and the
Company and its subsidiaries (other than Prescription, CPA and their
subsidiaries), on the other hand, under the Company's cash management program or
otherwise (other than accounts, if any, relating to intercompany contractual or
other obligations which are contemplated to survive the Distribution pursuant to
Section 4.2 or 4.4 hereof), shall be cancelled and settled in full pursuant to
the provisions of this Section 4.1. Following the date hereof, all such
intercompany transactions shall be conducted in a manner consistent with past
practice.
(b) In the event that the Negative Net Working Capital (as defined in
paragraph (e) below) as of the close of business on the Offer Purchase Date (i)
is greater than $70,000,000, then Spinco shall pay the Company a cash amount
equal to the amount by which the Negative Net Working Capital is greater than
$70,000,000 or (ii) is less than $70,000,000, then the Company shall pay Spinco
a cash amount equal to the amount by which the Negative Net Working Capital is
less than $70,000,000. Such payment shall be made within ten business days
after delivery of the Final Statement (as defined in paragraph
33
<PAGE>
(d) below) by wire transfer in immediately available funds of the amount of such
difference as determined pursuant to the preceding sentence, together with
interest thereon from the Offer Purchase Date to the date of payment calculated
based on the thirty-day AA composite commercial paper rate (as last published by
the Federal Reserve prior to the Offer Purchase Date).
(c) Within 60 days after the Offer Purchase Date, Spinco shall prepare
and deliver to the Company a statement (the "Working Capital Statement") setting
forth the Negative Net Working Capital as of the Offer Purchase Date, which
Working Capital Statement shall, except as otherwise set forth herein, be
prepared on a basis consistent with the prior practices and methods employed by
the Prescription Business in the preparation of the Prescription Financial
Statements (as defined in Section 4.7(b) of the Merger Agreement). Following
the Offer Purchase Date, each of the Company and Spinco shall give the other
party and any independent auditors of such other party full access at all
reasonable times to the properties, books, records and personnel of the
Prescription Business relating to periods prior to the Offer Purchase Date for
purposes of preparing and reviewing the Working Capital Statement and
determining the
34
<PAGE>
amount of Negative Net Working Capital. The Company shall have 30 days
following delivery to the Company of the Working Capital Statement during which
to notify Spinco of any dispute of any item contained in the Working Capital
Statement, which notice shall set forth in reasonable detail the basis for such
dispute. If the Company fails to notify Spinco of any such dispute within such
30-day period, the Working Capital Statement shall be deemed to be the "Final
Statement". In the event that the Company shall so notify Spinco of any
dispute, the Company and Spinco shall cooperate in good faith to resolve such
dispute as promptly as practicable.
(d) If the Company and Spinco are unable to resolve any such dispute
within 30 days of the Company's delivery of such notice, such dispute shall be
resolved by a "big six" independent accounting firm, jointly selected by the
parties. If Spinco and the Company cannot agree on such accounting firm to be
retained, Spinco and the Company shall each submit the name of a "big six"
independent accounting firm that does not at the time and has not in the prior
two years provided services to Spinco, the Company, the Purchaser or Parent, and
the firm shall be selected by lot from these two firms. The independent
accounting firm so retained (the
35
<PAGE>
"Independent Accounting Firm") shall make its determination as promptly as
practicable and such determination shall be final and binding on the parties and
shall be deemed a final arbitration award that is enforceable pursuant to all
terms of the Federal Arbitration Act, 9 U.S.C. (S)(S) 1 et seq. The expenses
-- ---
relating to the engagement of the Independent Accounting Firm shall be shared
equally by the Company and Spinco. The Working Capital Statement, as may be
modified by resolution of any disputes by the Company and Spinco or by the
Independent Accounting Firm pursuant hereto, shall be the "Final Statement".
(e) For purposes of this Section 4.1, (i) the term "Negative Net
Working Capital" shall mean the sum of (x) the aggregate amount of the Adjusted
Current Liabilities, minus (y) the aggregate amount of the Adjusted Current
Assets (as such amounts are set forth in the Final Statement); (ii) the term
"Adjusted Current Assets" shall mean the receivables of the Prescription
Business as of the Offer Purchase Date (as reduced to reflect all allowances or
reserves for doubtful accounts set forth on the Prescription Financial
Statements); and (iii) the term "Adjusted Current Liabilities" shall mean the
following current liabilities of the Prescription
36
<PAGE>
Business as of the Offer Purchase Date: (A) all drafts payable, (B) all claims
payable and (C) all deposits placed by third parties with the Prescription
Business (except for credit deposits, which shall be separately provided for in
the Credit Deposit Receivable (as defined in paragraph (g) below)). The parties
agree that no claim for indemnification under this Agreement may be made by any
party hereto with respect to any matters or categories of items relating to or
reflected in the Negative Net Working Capital adjustment covered by this Section
4.1.
(f) For illustrative purposes, set forth below is an example of the
calculations described in Section 4.1 (b) hereof, which sets forth how such
amounts would be calculated if March 31, 1994 were the applicable Offer Purchase
Date:
<TABLE>
<CAPTION>
March 31, 1994 Sample Working Capital Statement
-----------------------------------------------
(numbers in thousands)
Adjusted Current Liabilities
- ----------------------------
<S> <C>
Drafts payable $ 48,918
Claims payable 250,390
Deposits (ex credit deposits) 16,385
--------
Subtotal $315,693
Adjusted Current Assets
- --------------------------------
Receivables (on a net basis) $292,192
Negative Net Working Capital
- --------------------------------
Total $ 23,501
</TABLE>
37
<PAGE>
<TABLE>
<S> <C>
Amount Due Spinco (Parent)
- --------------------------------
Amount per (S)4.1(b) 70,000
Negative Net Working Capital 23,501
--------
Amount Due Spinco (Parent) $ 46,499
</TABLE>
(g) The parties hereto acknowledge and agree that the Prescription
Business shall have reflected on its books as of the Offer Purchase Date a
receivable owing from Spinco (the "Employee Benefit Receivable"), which shall be
equal to the sum of (i) the Present Value (as defined below) of the aggregate
fair market value as of the Record Date of all Stock Options (as defined in the
Merger Agreement) (net of any exercise price thereof) which are (a) outstanding
on the date hereof, (b) not exercisable immediately prior to the Record Date and
(c) held by any Retained Employee (as defined in Section 6.9 of the Merger
Agreement); (ii) the Present Value of the aggregate fair market value (the
"Restricted Share Value") as of the Record Date of all Shares (as defined in the
Merger Agreement) granted under the 1988 Plan (as defined in the Merger
Agreement) (a) which are outstanding on the date hereof, (b) the restrictions on
which have not lapsed on or prior to the Offer Purchase Date and (c) which are
held by any Retained Employee; and (iii) the Present Value of the 1.45% tax on
Medicare
38
<PAGE>
hospital insurance imposed by FICA with respect to the Stock Options referred to
in clause (i) above and the Restricted Share Value; provided that the amounts
--------
set forth in clauses (i), (ii) and (iii) above shall be reduced by the Present
Value of the tax benefits to be realized by the Company following the Offer
Purchase Date with respect to the amounts set forth in clauses (i), (ii) and
(iii) above; provided further that all determinations of fair market value
-------- -------
pursuant to this Section 4.1(g) shall be reasonably made by the Company's Board
of Directors based on consultation with its financial advisor; provided further
-------- -------
that in calculating any amount with respect to the Stock Options referred to in
clause (i) above, such calculation shall assume the exercise of one-third of
such options at the end of each year of the three-year period immediately
following the Offer Purchase Date. For purposes hereof, the term "Present
Value" shall refer to the present value of a particular item, calculated on the
basis of an annual discount rate of 6.00%. The parties hereto acknowledge and
agree that the Prescription Business shall also have reflected on its books as
of the Offer Purchase Date a receivable owing from Spinco (the "Credit Deposit
Receivable"), which shall be equal to all credit deposits of the Prescription
Business as of
39
<PAGE>
the last business day of the month ending immediately prior to the Offer
Purchase Date. Spinco shall pay to the Company immediately following the
Distribution Date a cash amount equal to the aggregate amount of the Employee
Benefit Receivable and the Credit Deposit Receivable.0
Section 4.2. Ongoing or Transition Services. Following the Offer
------------------------------
Purchase Date, Spinco will continue to provide to the Company and its
Subsidiaries any or all data processing, financial, tax, accounting, legal,
insurance, banking, cash management (including the Company's cash management
program), personnel, employee benefits, communications and similar staff and
services (collectively, "Services") currently being provided by the Company and
its subsidiaries (other than Spinco and its subsidiaries), on the one hand, to
the Prescription Business, as the Company shall request, except that the Company
shall have the right to not accept or to terminate any Services at any time upon
30 days prior written notice to Spinco. Such Services shall be provided at cost
bases consistent with those costs included in the fiscal 1994 income statement
included in Section 4.7(b) of the Disclosure Schedule to the Merger Agreement.
Spinco will provide the Services for a period of up to one year following the
Offer Purchase Date (subject to
40
<PAGE>
the Company's right to terminate any Services at any time upon 30 days prior
written notice to Spinco). At the request of Spinco, the Company will enter
into an agreement satisfactory to Spinco, the Company and Parent with respect to
the provision of any Services that the Company may request.
Section 4.3. Shared Assets. Subject to the provisions of the
-------------
Services Agreements, any Assets, operations or personnel which are being used in
both the regular course of the Company Business and the Prescription Business
shall be shared as set forth herein but shall be deemed Company Assets and
transferred in accordance with this Agreement. Subject to the provisions of the
Services Agreements, Spinco shall continue to provide such Assets, operations or
personnel to the Company or its subsidiaries for use in its business to
substantially the same extent as used therein prior to the Offer Purchase Date
and at the same cost charged prior to the Offer Purchase Date; to the extent
that the use of any such Assets, operations or personnel is discontinued after
the Offer Purchase Date, the charges therefor shall also be discontinued. Each
of the Company and Spinco will use its best efforts, and will cooperate fully
with the other, to reduce the need for dual use of such As-
41
<PAGE>
sets, operations or personnel and in no event will either party be required to
provide the same to the other after the first anniversary of the Offer Purchase
Date. To the extent that Spinco transfers to a third party any of the Assets,
operations or personnel shared with the Company or its subsidiaries pursuant to
the provisions hereof, Spinco will cause the transferee of such Assets,
operations or personnel to specifically assume its obligations under this
Section 4.3 with respect to such Assets, operations or personnel and will use
its best efforts to cause such transferee to fulfill such obligations, but no
such assumption shall relieve Spinco of any such obligations. The Company
agrees that such transferee may exercise all of Spinco's rights hereunder with
respect to such Assets, operations or personnel.
Section 4.4. Other Intercompany Arrangements. In addition to the
-------------------------------
Services Agreements, to the extent that the Company Business and the
Prescription Business are now providing or selling to the other any services or
products in the ordinary course of business, pursuant to any agreement or
understanding whatsoever, then, except as set forth in Section 4.4 of the
Disclosure Schedule, such agreement or understanding shall not be deemed
altered, amended or terminated as a result of this Agree-
42
<PAGE>
ment or the consummation of the transactions contemplated hereby.
Section 4.5. Settlements for Cash Collections and
------------------------------------
Disbursements.
- -------------
(a) For each calendar month commencing with the month in which the
Offer Purchase Date occurs and, unless sooner terminated by agreement of the
parties, continuing for a period of one year thereafter, (i) the Company shall
prepare, and Spinco shall fully cooperate in preparing, a statement of
transactions which shall reflect a complete analysis of any cash collections and
cash disbursements by the Company and its subsidiaries on behalf of Spinco and
its subsidiaries (including those relating to the Company Business) during the
relevant month (provided that, with respect to the first such monthly period
such statement shall not reflect any cash collections or disbursements occurring
prior to the Offer Purchase Date) and (ii) Spinco shall prepare, and the Company
shall fully cooperate in preparing, a statement of transactions which shall
reflect a complete analysis of any cash collections and cash disbursements by
Spinco and its subsidiaries on behalf of the Company and its subsidiaries during
the relevant month (including those relating to the Prescription Business).
43
<PAGE>
(b) Not later than twenty business days following delivery of such
statements, Spinco shall pay to the Company or the Company shall pay to Spinco,
as the case may be, in cash an amount necessary to eliminate the account balance
as reflected in each such statement. Payments made pursuant to this Section 4.4
shall not, for any purposes of this Agreement, constitute Indemnifiable Losses
or be set off against any other payments to be made, Liabilities asserted or
claims made pursuant to this Agreement, including but not limited to Section 5.4
hereof, unless the Company and Spinco otherwise agree in writing.
ARTICLE V
SURVIVAL AND INDEMNIFICATION
----------------------------
Section 5.1. Survival of Agreements. The obligations under this
----------------------
Article V of each of Spinco and its subsidiaries, on the one hand, and the
Company and its subsidiaries, on the other hand, shall survive the sale or other
transfer by it of any Assets or businesses or the assignment by it of any
Liabilities. To the extent that the Company or its subsidiaries transfers
directly or indirectly to any other person all or substantially all of the
Prescription Assets or the Prescription Business or assigns any of the
Prescription
44
<PAGE>
Liabilities (except for such amounts of the Prescription Liabilities which are
not material individually or in the aggregate), the Company will cause the
transferee of such Prescription Assets or Prescription Business to assume
specifically its obligations under this Agreement with respect thereto and will
cause such transferee to fulfill its obligations related to such Prescription
Liabilities. Such assumption will not relieve the Company of its obligations in
respect thereof. To the extent that Spinco or its subsidiaries transfers
directly or indirectly to any other person all or substantially all of the
Company Assets or the Company Business or assigns any of the Company Liabilities
(except for such amounts of the Company Liabilities which are not material
individually or in the aggregate), Spinco will cause the transferee of such
Company Assets or Company Business to assume specifically its obligations under
this Agreement with respect thereto and will cause such transferee to fulfill
its obligations related to such Company Liabilities. Such assumption will not
relieve Spinco of its obligations in respect thereof. Spinco, on the one hand,
and the Company, on the other hand, agree that such transferee may exercise all
of Spinco's or the Company's
45
<PAGE>
rights hereunder, as the case may be, with respect to such Assets or businesses.
Section 5.2. Spinco's Agreement to Indemnify.
-------------------------------
(a) In addition to any indemnification required by Sections 6.2 or
8.5 hereof, subject to the terms and conditions set forth herein, from and after
the Offer Purchase Date, Spinco shall indemnify, defend and hold harmless the
Company, the Purchaser and Parent and each of their respective directors,
officers, employees, representatives, advisors, agents and Affiliates
(collectively, the "Parent Indemnities") from and against any and all
Indemnifiable Losses of the Parent Indemnities arising out of or resulting from,
directly or indirectly (i) any breach of any representation or warranty
contained in Article IV or in Section 9.11 of the Merger Agreement (without
giving effect to any materiality qualifications set forth therein), (ii) any
breach by the Company of the covenants and agreements set forth in the Merger
Agreement, and (iii) all Company Liabilities.
(b) Spinco's obligations to indemnify Parent Indemnities pursuant to
Section 5.2(a) hereof are subject to the following limitations:
46
<PAGE>
(i) No indemnification shall be made by Spinco pursuant to
Section 5.2(a)(i) hereof unless the aggregate amount of Indemnifiable
Losses incurred by the Parent Indemnities exceeds $10,000,000, and, in such
event, indemnification pursuant to Section 5.2(a)(i) shall be made by
Spinco only to the extent that the aggregate amount of such Indemnifiable
Losses exceeds $10,000,000;
(ii) In no event shall Spinco's aggregate obligation to indemnify
the Parent Indemnities pursuant to Sections 5.2(a)(i) and (ii) exceed
$200,000,000 (except that the foregoing limitation shall not apply to any
Indemnifiable Losses arising out of any willful breach of the covenants and
agreements set forth in the Merger Agreement);
(iii) Spinco shall be obligated to indemnify the Parent
Indemnities only for those Indemnifiable Losses under clauses (i) or (ii)
of Section 5.2(a) hereof as to which the Parent Indemnities have given
Spinco written notice thereof on or prior to nine months after the Offer
Purchase Date. Any written notice delivered by a Parent Indemnitee to
Spinco with respect to Indemnifiable Losses shall set forth with as much
specificity as
47
<PAGE>
is reasonably practicable the basis of the claim and, to the extent
reasonably practicable, a reasonable estimate of the amount thereof.
(iv) The amount of any Indemnifiable Losses shall be reduced by
any amount received by a Parent Indemnitee with respect thereto under any
insurance coverage (net of any costs of such coverage incurred by such
Parent Indemnitee) or from any other party alleged to be responsible
therefor. The Parent Indemnitee shall use reasonable efforts to collect
any amounts available under such insurance coverage and from such other
party alleged to have responsibility (the expenses of such efforts to be
deemed to be Indemnifiable Losses). If a Parent Indemnitee receives an
amount under insurance coverage or from such other party with respect to
Indemnifiable Losses at any time subsequent to any indemnification provided
pursuant to this Article V, then such Parent Indemnitee shall promptly
reimburse Spinco for any payment made or expense incurred by it in
connection with providing such indemnification up to such amount received
by the Parent Indemnitee (net of any costs of such coverage or of obtaining
48
<PAGE>
such amount from another party incurred by such Parent Indemnitee);
(v) A Parent Indemnitee shall pay to Spinco the amount of any
tax benefit relating to any Indemnifiable Losses hereunder promptly after
such tax benefit is actually realized; provided that in the event that such
--------
tax benefit of the Parent Indemnitee is subsequently disallowed, Spinco
shall pay to such Parent Indemnitee the amounts that were paid to it
originally as a result of such tax matter.
Section 5.3. The Company's Agreement to Indemnify.
------------------------------------
(a) In addition to any indemnification required by Sections 6.2 or
8.5 hereof, subject to the terms and conditions set forth herein, from and after
the Offer Purchase Date, the Company shall indemnify, defend and hold harmless
Spinco and each of its directors, officers, employees, representatives,
advisors, agents and Affiliates (collectively, the "Spinco Indemnities") from
and against any and all Indemnifiable Losses of the Spinco Indemnities arising
out of or resulting from, directly or indirectly (i) any breach by Parent or the
Purchaser of any representation or warranty contained in Article V of the Merger
Agreement (without giving effect
49
<PAGE>
to any materiality qualifications set forth therein), (ii) any breach by Parent
or the Purchaser of the covenants and agreements set forth in the Merger
Agreement, and (iii) all Prescription Liabilities. Notwithstanding the
foregoing and anything to the contrary in this Agreement or any other agreement
to be entered into pursuant to this Agreement, the Company shall not be required
to indemnify, defend and hold harmless any person specified in this Section
5.3(a) from and against any Indemnifiable Loss resulting from any claims that
the statements included in the Information Statement, the Form 10 or in any
registration statement filed pursuant to Section 3.1 or Section 3.3 hereof (in
each case other than statements or omissions made in reliance upon and in
conformity with information furnished in writing by Parent, the Purchaser or
their Affiliates, representatives or advisors expressly for use therein) are
false or misleading with respect to any material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(b) The Company's obligations to indemnify Spinco Indemnities pursuant
to Section 5.3(a) hereof are subject to the following limitations:
50
<PAGE>
(i) No indemnification shall be made by the Company pursuant to
Section 5.3(a)(i) hereof unless the aggregate amount of Indemnifiable
Losses incurred by the Spinco Indemnities exceeds $10,000,000, and, in such
event, indemnification pursuant to Section 5.3(a)(i) hereof shall be made
by the Company only to the extent that the aggregate amount of such
Indemnifiable Losses exceeds $10,000,000;
(ii) In no event shall the Company's aggregate obligation to
indemnify the Spinco Indemnities pursuant to Sections 5.3(a)(i) and (ii)
hereof exceed $200,000,000 (except that the foregoing limitation shall not
apply to any Indemnifiable Losses arising out of any willful breach of such
covenants and agreements set forth in the Merger Agreement);
(iii) The Company shall be obligated to indemnify the Spinco
Indemnities only for those Indemnifiable Losses under clauses (i) or (ii)
of Section 5.3(a) hereof as to which the Spinco Indemnities have given the
Company written notice thereof on or prior to nine months after the Offer
Purchase Date. Any written notice delivered by a Spinco
51
<PAGE>
Indemnitee to the Company with respect to Indemnifiable Losses shall set
forth with as much specificity as is reasonably practicable the basis of
the claim and, to the extent reasonably practicable, a reasonable estimate
of the amount thereof.
(iv) The amount of any Indemnifiable Losses shall be reduced by
any amount received by a Spinco Indemnitee with respect thereto under any
insurance coverage (net of any costs of such coverage incurred by such
Spinco Indemnitee) or from any other party alleged to be responsible
therefor. The Spinco Indemnitee shall use reasonable efforts to collect
any amounts available under such insurance coverage and from such other
party alleged to have responsibility (the expense of such efforts to be
deemed to be Indemnifiable Losses). If a Spinco Indemnitee receives an
amount under insurance coverage or from such other party with respect to
Indemnifiable Losses at any time subsequent to any indemnification provided
by the Company pursuant to this Article V, then such Spinco Indemnitee
shall promptly reimburse the Company for any payment made or expense
incurred by it in connection with providing such indemnification up to such
amount received
52
<PAGE>
by the Spinco Indemnitee (net of any costs of such coverage or of obtaining
such amount from another party incurred by such Spinco Indemnitee);
(v) A Spinco Indemnitee shall pay to the Company the amount of
any tax benefit relating to any Indemnifiable Losses hereunder promptly
after such tax benefit is actually realized; provided that in the event
--------
that such tax benefit of the Spinco Indemnitee is subsequently disallowed,
the Company shall pay to such Spinco Indemnitee the amounts that were paid
to it originally as a result of such tax matters.
Section 5.4. Procedure for Indemnification.
-----------------------------
(a) If a Parent Indemnitee or a Spinco Indemnitee (either, an
"Indemnitee") shall receive notice of the assertion by a person who is not a
party to this Agreement of any claim or of the commencement by any such person
of any Action (a "Third Party Claim") with respect to which Spinco or the
Company, as the case may be, is obligated to provide indemnification (an
"Indemnifying Party"), such Indemnitee shall give such Indemnifying Party prompt
notice thereof after becoming aware of such Third Party Claim; provided that the
--------
failure of any Indemnitee to give notice as provided in this Section 5.4
53
<PAGE>
shall not relieve the related Indemnifying Party of its obligations under this
Article V, except to the extent that such Indemnifying Party is actually
prejudiced by such failure to give notice. Such notice shall describe the Third
Party Claim in reasonable detail, and, if practicable, shall indicate the
estimated amount of the Indemnifiable Loss that has been or may be sustained by
such Indemnitee.
(b) An Indemnifying Party may elect to defend, compromise and settle,
at such Indemnifying Party's own expense and by such Indemnifying Party's own
counsel, any Third Party Claim. If an Indemnifying Party elects to defend a
Third Party Claim, it shall, within 15 days of notice of such Third Party Claim
(or sooner, if the nature of such Third Party Claim so requires), notify the
related Indemnitee of its intent to do so, and such Indemnitee shall cooperate
in the defense of such Third Party Claim. Such Indemnifying Party shall pay
such Indemnitee's actual reasonable out-of-pocket expenses incurred in
connection with such cooperation. After notice from an Indemnifying Party to an
Indemnitee of its election to assume the defense of a Third Party Claim, such
Indemnifying Party shall not be liable to such Indemnitee under this Article V
for any legal or other
54
<PAGE>
expenses subsequently incurred by such Indemnitee in connection with the defense
thereof; provided that (i) if, under applicable standards of professional
--------
conduct (as advised by counsel to the Indemnifying Party), a conflict on any
significant issue between such Indemnitee and such Indemnifying Party or between
any two or more Indemnities exists in respect of such claim, in that event the
Indemnifying Party shall pay the reasonable fees and expenses of one such
additional counsel as may be required to be retained in order to resolve such
conflict. If an Indemnifying Party elects not to defend against a Third Party
Claim, or fails to notify an Indemnitee of its election as provided in this
Section 5.4, such Indemnitee may defend, compromise and settle such Third Party
Claim. Notwithstanding the foregoing, (i) neither an Indemnifying Party nor an
Indemnitee, as the party controlling the defense of a Third Party Claim, may
compromise or settle any claim or consent to the entry of any judgment for other
than monetary damages without the prior written consent of the other; provided
--------
that (upon reasonable notice thereof) consent to compromise or settlement or the
entry of a judgment shall not be unreasonably withheld or delayed, and (ii) no
Indemnifying Party shall consent to the entry of any judgment or enter
55
<PAGE>
into any compromise or settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such Indemnitee and all
other Spinco Indemnities or Parent Indemnities, as the case may be, subject to
such Third Party Claim of a full and final release from all liability in respect
to such claim or litigation.
(c) Any claim on account of an Indemnifiable Loss which does not
result from a Third Party Claim shall be asserted by written notice given by the
related Indemnitee to the related Indemnifying Party. Such Indemnifying Party
shall have a period of 30 days within which to respond thereto. If such
Indemnifying Party does not respond within such 30 days' period, such
Indemnifying Party shall be deemed to have accepted responsibility to make
payment, subject to the provisions of this Section 5.4, and shall have no
further right to contest the validity of such claim. If such Indemnifying Party
does respond within such 30 days' period and rejects such claim in whole or in
part, such Indemnitee shall be free to pursue such remedies as may be available
to such party under applicable law.
56
<PAGE>
Section 5.5. Pending Litigation. Following the Offer Purchase Date,
------------------
(a) the Company shall have exclusive authority and control over the
investigation, prosecution, defense and appeal of all pending Actions relating
primarily to the Prescription Business, the Prescription Assets or the
Prescription Liabilities (each, a "Prescription Action"), and may settle or
compromise, or consent to the entry of any judgment with respect to, any such
Action without the consent of Spinco, and (b) Spinco shall have exclusive
authority and control over the investigation, prosecution, defense and appeal of
all pending Actions relating primarily to the Company Business, the Company
Assets or the Company Liabilities (each, a "Company Action"), and may settle or
compromise, or consent to the entry of any judgment with respect to, any such
Action without the consent of the Company; provided that neither the Company nor
--------
Spinco (nor any of their respective subsidiaries) may settle or compromise, or
consent to the entry of any judgment with respect to, any such Action without
the prior written consent of the other party if such settlement, compromise or
consent to such judgment (i) includes any form of injunctive relief binding upon
such other party or (ii) does not include as an unconditional term thereof the
giving by the claimant
57
<PAGE>
or plaintiff to such other party (and any related party of such other party
subject to such Action) of a full and final release from all liability in
respect to such claim or litigation. Each of the Company and Spinco shall
indemnify, defend and hold harmless the other party, and Spinco shall indemnify
and hold harmless Parent and Purchaser, in the manner provided in this Article
V, and each of such Indemnitee's directors, officers, employees,
representatives, advisors, agents and Affiliates from and against all
Indemnifiable Losses arising out of or resulting from each such Action over
which such indemnifying party has authority and control.
Section 5.6. Construction of Agreements. Notwithstanding any other
--------------------------
provision in this Agreement to the contrary, in the event and to the extent that
there shall be a conflict between the provisions of this Article V and the
provisions of any other part of this Agreement or any exhibit or schedule hereto
(other than the Tax Sharing Agreement), the provisions of this Article V shall
control, and in the event and to the extent that there shall be a conflict
between the provisions of this Agreement and the provisions of the Tax Sharing
Agreement, the provisions of the Tax Sharing Agreement shall control.
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ARTICLE VI
CERTAIN ADDITIONAL MATTERS
--------------------------
Section 6.1. No Representations or Warranties; Exceptions.
--------------------------------------------
(a) It is the explicit intent of each party hereto and of Parent and
the Purchaser that no party to this Agreement or to the Merger Agreement is
making any representation or warranty whatsoever, express or implied, in this
Agreement, the Merger Agreement or the Ancillary Agreements (as defined in the
Merger Agreement) or in any other agreement contemplated hereby or thereby,
except those representations and warranties expressly set forth in Articles IV
and V of the Merger Agreement and in this Section 6.1. Parent, the Purchaser,
the Company and Spinco agree, to the fullest extent permitted by law, that none
of them or any of their directors, officers, employees, affiliates, controlling
persons, agents or representatives shall have any liability or responsibility
whatsoever to any such other entity or such other entity's directors, officers,
employees, affiliates, controlling persons, agents or representatives on any
basis (including, without limitation, in contract or tort, under federal or
state securities laws or otherwise) based upon any information provided or made
59
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available, or statements made, to any such other entity or such other entity's
directors, officers, employees, affiliates, controlling persons, agents or
representatives (or any omissions therefrom), including, without limitation, in
respect of the specific representations and warranties set forth in this
Agreement and the Merger Agreement and the covenants and agreements set forth in
the Merger Agreement, except (i) as and only to the extent expressly set forth
herein and in the Merger Agreement with respect to such representations and
warranties, and as set forth herein or in the Merger Agreement with respect to
such covenants and agreements, and rights to indemnification and subject to the
limitations and restrictions contained herein and therein, and (ii) with respect
to breaches of the covenants and agreements set forth in this Agreement.
(b) Without limiting the generality of the foregoing, it is
understood and agreed (a) that neither the Company nor any of its subsidiaries
is, in this Agreement or in any other agreement or document contemplated by this
Agreement, representing or warranting in any way as to the value or freedom from
encumbrance of, or any other matter concerning, any Company Assets, (b) that the
Company Assets are being transferred "as is,
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where is" and (c) that, subject to the obligations of the Company set forth in
Sections 2.1(b) and 6.2 hereof, Spinco shall bear the risk that any conveyances
of Company Assets might be insufficient or that Spinco's or any of its
subsidiaries' title to any Company Assets shall be other than good and
marketable and free from encumbrances. Similarly, it is understood and agreed
that neither the Company nor any of its subsidiaries is, in this Agreement or in
any other agreement or document contemplated by this Agreement, representing or
warranting to Spinco in any way that the obtaining of the consents and
approvals, the execution and delivery of any amendatory agreements and the
making of the filings and applications contemplated by this Agreement shall
satisfy the provisions of all applicable agreements or the requirements of all
applicable laws or judgments.
(c) Spinco represents and warrants to the Company that, except as set
forth in Section 6.1(c) of the Disclosure Schedule, neither the Company nor any
of its subsidiaries (other than Spinco and its subsidiaries) is, or will on the
Offer Purchase Date be, liable directly or indirectly, as borrower, surety,
guarantor or otherwise, with respect to (and that none of the Prescription
Assets shall be bound by or subject to) any
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indebtedness for borrowed money or capitalized lease obligation other than the
Private Indebtedness and the Public Indebtedness.
Section 6.2. Further Assurances; Subsequent
------------------------------
Transfers.
- ---------
(a) To the extent that any of the transfers, distributions and
deliveries required to be made pursuant to Article II shall not have been so
consummated prior to the Distribution Date, the parties shall cooperate and use
their best efforts at Spinco's reasonable expense to effect such consummation as
promptly thereafter as reasonably practicable. Each of the parties hereto will
execute and deliver such further instruments of transfer and distribution and
will take such other actions as Spinco or any of its subsidiaries may reasonably
request in order to effectuate the purposes of this Agreement and to carry out
the terms hereof. Without limiting the generality of the foregoing, at any time
and from time to time after the Distribution Date, at the request and reasonable
expense of Spinco or any of its subsidiaries, the Company and its subsidiaries
will execute and deliver such other instruments of transfer and distribution,
and take such action as Spinco or any of its subsidiaries may reasonably deem
necessary or
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desirable in order to more effectively transfer, convey and assign to Spinco or
any of its subsidiaries and to confirm Spinco's or any of its subsidiaries, as
the case may be, right, title to or interest in, all of the Company Assets
transferred pursuant to this Agreement, to put Spinco and its subsidiaries in
actual possession and operating control thereof and to permit Spinco and its
subsidiaries to exercise all rights with respect thereto (including, without
limitation, rights under contracts and other arrangements as to which the
consent of any third party to the transfer thereof shall not have previously
been obtained) and to properly assume and discharge the related Company
Liabilities.
(b) Except to the extent otherwise expressly provided for in Section
2.4 hereof, each of the Company and its subsidiaries will use its best efforts,
at Spinco's expense, to obtain any consents required to transfer and assign to
Spinco all agreements, leases, licenses and other rights of any nature
whatsoever relating to the Company Assets. In the event and to the extent that
the Company or any of its subsidiaries is unable to obtain any such required
consents, (i) such entity (or any subsidiary that is a party thereto, as the
case may be) shall continue to be bound thereby and (ii) Spinco
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shall pay, perform and discharge fully all the obligations of such entity (or
any subsidiary that is a party thereto, as the case may be) thereunder from and
after the Distribution Date and indemnify such entity (or any subsidiary that is
a party thereto, as the case may be) for all Indemnifiable Losses arising out of
such performance by Spinco. The Company or such subsidiary, as the case may be,
shall, without further consideration therefor, pay, assign and remit to Spinco
promptly all monies, rights and other consideration received in respect of such
performance. The Company or such subsidiary shall exercise or exploit its
rights and options under all such agreements, leases, licenses and other rights
and commitments referred to in this Section 6.2(b) only as reasonably directed
by Spinco and at Spinco's expense. If and when any such consent shall be
obtained or such agreement, lease, license or other right shall otherwise become
assignable, the Company or such subsidiary, as the case may be, shall promptly
assign all its rights and obligations thereunder to Spinco without payment of
further consideration and Spinco shall, without the payment of any further
consideration therefor, assume such rights and obligations.
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(c) In the event that, subsequent to the Offer Purchase Date, the
Company or its subsidiaries shall either (i) receive written notice from Spinco
or any of its subsidiaries that certain specified Assets of the Company or its
subsidiaries which properly constitute Company Assets were not transferred to
Spinco on or prior to the Offer Purchase Date or (ii) determine that certain
Assets of the Company or its subsidiaries which constitute Company Assets were
not transferred to Spinco on or prior to the Distribution Date, then as promptly
as practicable thereafter, the Company shall, and shall cause its subsidiaries
to, take all steps reasonably necessary to transfer and deliver any and all of
such Assets to Spinco or its subsidiaries at Spinco's reasonable expense but
without the payment by Spinco of any consideration therefor. In the event that,
subsequent to the Offer Purchase Date, Spinco or its subsidiaries shall either
(i) receive written notice from the Company or any of its subsidiaries that
certain specified Assets were transferred to Spinco or its subsidiaries which
properly constitute Prescription Assets, or (ii) determine that certain Assets
of Spinco or its subsidiaries which constitute Prescription Assets were
transferred to Spinco, then as promptly as practicable thereafter, Spinco shall,
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and shall cause its subsidiaries to, take all steps reasonably necessary to
transfer and deliver any and all of such Assets to the Company or its
subsidiaries at Spinco's reasonable expense without the payment by the Company
of any consideration therefor.
Section 6.3. The Spinco Board. Spinco and the Company shall take all
----------------
actions which may be required to elect or otherwise appoint, on or prior to the
Distribution Date, those individuals that the Board of Directors of the Company
(as in effect prior to the consummation of the Offer) may designate as directors
of Spinco.
Section 6.4. Liability Insurance. Prior to the Offer Purchase Date,
-------------------
Spinco shall use its best efforts, and the Company shall cooperate with Spinco,
to obtain, at Spinco's expense, directors' and officers' liability insurance, in
amounts and upon terms reasonably satisfactory to Spinco, in respect of the
service of directors, officers, employees and agents of the Company and its
subsidiaries with the Company and its subsidiaries prior to the Distribution.
In the event that such insurance cannot be obtained by Spinco on commercially
reasonable terms, then the Company shall, at Spinco's request and expense, use
its best efforts to maintain or obtain such insurance, in such amounts and
having such
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terms as Spinco may reasonably direct, and Spinco shall reimburse the Company
for all out-of-pocket costs incurred by the Company in connection with obtaining
and maintaining such insurance on behalf of Spinco's directors and officers.
Section 6.5. Use of Names. Following the Offer Purchase Date, the
------------
Company and its subsidiaries shall have the sole and exclusive ownership of and
right to use, as between the Company and its subsidiaries, on the one hand, and
Spinco and its subsidiaries, on the other hand, each of the names used in the
Prescription Business and set forth on Section 6.5 of the Disclosure Schedule
(the "Prescription Names"), and each of the trade marks, trade names, service
marks and other proprietary rights related to such Prescription Names as set
forth on Section 6.5 of the Disclosure Schedule (the "Prescription Proprietary
Name Rights"). Following the Offer Purchase Date, Spinco and its subsidiaries
shall have the sole and exclusive ownership of and right to use, as between
Spinco and its subsidiaries, on the one hand, and the Company and its
subsidiaries, on the other hand, all names used by the Company and its
subsidiaries as of such date other than the Prescription Names (the "Company
Names"), and all other trade marks, trade names,
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service marks and other proprietary rights owned or used by the Company and its
subsidiaries as of such date other than the Prescription Proprietary Name Rights
(the "Company Proprietary Name Rights"). Following the Offer Purchase Date, the
Company shall, and shall cause its subsidiaries and other Affiliates to, take
all action necessary to cease using, and change as promptly as practicable
(including by amending any charter documents), any corporate or other names
which are the same as or confusingly similar to any of the Company Names or any
of the Company Proprietary Name Rights.
ARTICLE VII
ACCESS TO INFORMATION AND SERVICES
----------------------------------
Section 7.1. Provision of Corporate Records. Except as provided in
------------------------------
the following sentence, on the Offer Purchase Date, the Company shall deliver to
Spinco all corporate books and records which are corporate records of the
Company, Spinco or their subsidiaries which relate primarily to the Company
Assets, the Company Business or the Company Liabilities, including, without
limitation, original corporate minute books, stock ledgers and certificates and
corporate seals of each corporation the capital stock of which is included in
the
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<PAGE>
Company Assets, and all active agreements, active litigation files and
government filings. Notwithstanding the foregoing, the Company shall have the
right to retain the original corporate minute books, stock ledgers and
certificates and corporate seals of each of the Company, Maryland, Prescription
and CPA, provided that it provides Spinco with copies of, and reasonable access
to, such materials after the Offer Purchase Date. Also on the Offer Purchase
Date, the Company shall provide to Spinco lists of trademarks, patents,
copyrights and other intellectual property set forth in clause (iii) of the
definition of "Assets" herein included in the Company Assets.
Section 7.2. Access to Information. From and after the Offer
---------------------
Purchase Date (i) Spinco shall afford to the Company and its authorized
accountants, counsel and other designated representatives reasonable access
(including, without limitation, using reasonable efforts to give access to
persons or firms possessing Information (as defined below)) and duplicating
rights during normal business hours to all records, books, contracts,
instruments, computer data and other data and information (collectively,
"Information") within Spinco's possession relating to the Prescription Assets,
the Prescription Business and the Prescription Liabilities, insofar as
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such access is reasonably required by the Company, and (ii) the Company shall
afford to Spinco and its authorized accountants, counsel and other designated
representatives reasonable access (including, without limitation, using
reasonable efforts to give access to persons or firms possessing Information)
and duplicating rights during normal business hours to all Information within
the Company's possession relating to the Company Assets, the Company Business
and the Company Liabilities. Information may be requested under this Article
VII for, without limitation, audit, accounting, claims, litigation and tax
purposes, as well as for purposes of fulfilling disclosure and reporting
obligations.
Section 7.3. Production of Witnesses. From and after the Offer
-----------------------
Purchase Date, each party shall use reasonable efforts to make available to the
other party, upon written request, its officers, directors, employees and agents
as witnesses to the extent that any such person may reasonably be required in
connection with any legal, administrative or other proceedings in which the
requesting party may from time to time be involved.
Section 7.4. Retention of Records. Except as otherwise required by
--------------------
law or agreed to in writing, Spinco and the Company shall each retain, for a
period of at
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least seven years following the Offer Purchase Date, all significant Information
relating to (i) in the case of the Company, the Prescription Business and (ii)
in the case of Spinco, the Company Business. Notwithstanding the foregoing,
either Spinco or the Company may destroy or otherwise dispose of any of such
Information at any time, provided that, prior to such destruction or disposal,
(a) Spinco or the Company, as the case may be, shall provide no less than 90 or
more than 120 days' prior written notice to the other party, specifying the
Information proposed to be destroyed or disposed of and (b) if the other party
shall request in writing prior to the scheduled date for such destruction or
disposal that any of the Information proposed to be destroyed or disposed of be
delivered to the other party, Spinco or the Company, as the case may be, shall
promptly arrange for the delivery of such of the Information as was requested,
at the expense of the other party.
Section 7.5. Confidentiality. Each party shall hold, and shall cause
---------------
its officers, employees, agents, consultants and advisors to hold, in strict
confidence, unless compelled to disclose by judicial or administrative process
or, in the opinion of its counsel, by other requirements of law, all non-public
Information
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<PAGE>
concerning the other party furnished it by such other party or its
representatives pursuant to this Agreement (except to the extent that such
Information can be shown to have been (a) available to such party on a non-
confidential basis prior to its disclosure by the other party, (b) in the public
domain through no fault of such party or (c) later lawfully acquired from other
sources by the party to which it was furnished), and each party shall not
release or disclose such Information to any other person, except its auditors,
attorneys, financial advisors, bankers and other consultants and advisors who
agree to be bound by the provisions of this Section 7.5. Each party shall be
deemed to have satisfied its obligation to hold confidential Information
concerning or supplied by the other party if it exercises the same care as it
takes to preserve confidentiality for its own similar confidential Information.
ARTICLE VIII
EMPLOYEE BENEFITS; LABOR MATTERS
--------------------------------
Section 8.1. Officers and Employees. The executive officers of the
----------------------
Company as of the date hereof shall be the executive officers of Spinco. Those
Spinco Employees of the Company who are employed in the Company
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<PAGE>
Business immediately prior to the Offer Purchase Date shall become employees of
Spinco in the same capacities.
Section 8.2. Employee Benefits.
-----------------
(a) Except as provided in paragraph (b) of this Section 8.2,
effective as of the Offer Purchase Date, Spinco shall assume each of the
Company's funded "employee pension benefit plans" (as defined in Section 3(2) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), and
each employment and severance agreement which the Company entered into, prior to
the Distribution, with Spinco Employees. The Company and Spinco shall at
Spinco's reasonable expense take all such action as may be necessary or
appropriate in order to establish Spinco as successor to the Company as to all
rights, duties, liabilities, and obligations under or with respect to each of
such plans, including, but not limited to, the Company's rights, duties,
liabilities and obligations under or with respect to any and all annuity or
insurance contracts which form a part of such plans, together with the assets
relating thereto; provided that the provisions of Section 6.9(b) of the Merger
--------
Agreement shall apply following the transfer described therein. Spinco shall
succeed the Company as the sponsor of all employee benefit plans not
specifically identified on
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Section 8.2 of the Disclosure Schedule and agrees to indemnify and hold the
Company harmless from and against all direct and indirect liabilities, claims,
damages, obligations, payments, costs and expenses assessed against, resulting
to, imposed upon or incurred by the Company, directly or indirectly, with
respect to such employee benefit plans (other than any such liabilities, claims,
damages, obligations, payments, costs and expenses relating to Prescription
Employees; such liabilities, claims, damages, obligations, payments, costs and
expenses shall be treated as Prescription Liabilities hereunder).
(b) Profit Sharing Investment Plan. Effective as of the Effective
------------------------------
Time (as defined in the Merger Agreement), Spinco shall assume the Company's
Profit Sharing Investment Plan, as amended (the "PSIP") in accordance with the
terms of Section 6.9(c) of the Merger Agreement. The Company and Spinco shall
at Spinco's expense take all such action as may be necessary or appropriate to
cause Spinco to assume sponsorship and to establish Spinco as successor to the
Company as to all rights, duties, liabilities, and obligations under or with
respect to the PSIP; provided that the provisions of Section 6.9(c) of the
--------
Merger Agreement shall apply fol-
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<PAGE>
lowing the transfer described therein. In connection with the aforementioned
assumption, all of the indebtedness of the Company (and guarantees made by the
Company of the indebtedness of the trust established under the PSIP) relating to
the unallocated shares of Company Common Stock and Company Convertible Preferred
Stock held by the PSIP shall be assumed by Spinco, effective as of the Effective
Time.
(c) Employee and Director Stock Options. Effective as of the Offer
-----------------------------------
Purchase Date, Spinco shall adopt (and the Company, as sole shareholder of
Spinco, shall approve) a stock option and restricted stock plan (the "Spinco
Stock Plan") for the benefit of employees of Spinco (including Spinco Employees)
and non-employee directors of Spinco (including those non-employee directors of
the Company who, following the Distribution, will become non-employee directors
of Spinco ("Non-Employee Directors")), which plan shall qualify under Rule 16b-3
promulgated under the Exchange Act. Options to acquire Company Common Stock
which have been granted to Spinco Employees, Non-Employee Directors and
employees and former employees of the Company (other than Spinco Employees)
pursuant to any stock option plan of the Company and which are outstanding
immediately prior to the Dis-
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tribution ("Company Options") shall, pursuant to the equitable adjustment
provisions of the applicable plan under which such options were granted and
effective as of the Distribution Date, be treated as follows:
(i) Exercisable Options of Spinco Employees; Non-Employee
--------------------------------------- ------------
Director Options. That portion of each Company Option held by a Spinco
----------------
Employee (the "Spinco Employee Option") which is exercisable immediately
prior to the Offer Purchase Date (the "Exercisable Option"), as well as all
such Company Options granted or awarded to Non-Employee Directors (the
"Director Options"), shall be converted into two separately exercisable
options: a Company Option for the number of shares of Company Common Stock
relating to the Exercisable Option or Director Option, as the case may be,
and an option under the Spinco Stock Plan to acquire shares of Spinco
Common Stock (a "Spinco Option") equal in number to the number of shares of
Company Common Stock relating to the Exercisable Option or Director Option,
as the case may be. The exercise price per share of the Exercisable
Options and Director Options which, after conversion, relates to Company
Common Stock shall be equal to the quotient obtained
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by dividing (w) the exercise price per share of the Exercisable Option and
Director Options prior to conversion (the "Pre-Conversion Exercise Price")
by (x) the Company Conversion Factor (as hereinafter defined), and the
exercise price per share of the Exercisable Option and Director Options
which, after conversion, relates to Spinco Common Stock shall be equal to
the quotient determined by dividing (y) the Pre-Conversion Exercise Price
by (z) the Spinco Conversion Factor (as hereinafter defined); in each case
the resulting exercise price per share shall be rounded up or down to the
nearest cent. The "Company Conversion Factor" shall mean an amount equal
to the quotient obtained by dividing (1) the sum of (A) the cash
consideration payable per share of Company Common Stock pursuant to the
Merger (the "Cash Consideration"), plus (B) the per share fair market value
of Spinco Common Stock, determined based on the average closing price of
Spinco Common Stock over the ten-consecutive-day trading period immediately
following the Distribution Date (such per share fair market value being
referred to as the "Spinco Value"), by (2) the Cash Consideration. The
"Spinco Conversion Factor" shall mean an amount
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equal to the quotient obtained by dividing (1) the sum of (A) the Cash
Consideration plus (B) the Spinco Value, by (2) the Spinco Value. Each
such Exercisable Option and Director Option (as so converted) shall
otherwise be subject to the same terms and conditions as such Exercisable
Option and Director Option (prior to such conversion), except that the
portion of any Exercisable Option or Director Option which, after
conversion, relates to Company Common Stock (other than any such portion
held by a person who is, with respect to the Company, subject to the
reporting requirements of Section 16 of the Exchange Act) shall not
terminate by reason of the failure of such Spinco Employee or Non-Employee
Director, as the case may be, to continue in the employ or as a director of
the Company following the Distribution Date.
(ii) Non-Exercisable Options of Spinco Employees. That portion
-------------------------------------------
of each Spinco Employee Option which is not exercisable immediately prior
to the Offer Purchase Date (the "Non-Exercisable Option") shall be
converted into a Spinco Option whereby (A) the number of shares of Spinco
Common Stock covered by the Spinco Option will be
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determined by multiplying (1) the number of shares of Company Common Stock
covered by the Non-Exercisable Option by (2) the Spinco Conversion Factor
(which product shall be rounded downward to the nearest whole share), and
(B) the exercise price of the Spinco Option shall be determined by dividing
(1) the exercise price per share of the Non-Exercisable Option prior to
conversion by (2) the Spinco Conversion Factor (which quotient shall be
rounded up or down to the nearest cent). Such Spinco Option shall become
vested and exercisable at the time when the Non-Exercisable Option was to
become vested and exercisable according to its terms and shall otherwise be
subject to the same terms and conditions as the Non-Exercisable Option
(prior to conversion).
(iii) Options of Other Employees. All Company Options granted
--------------------------
or awarded to employees or former employees of the Company (other than
Spinco Employees) shall be equitably adjusted as of the Distribution Date.
The number of shares of Company Common Stock relating to such Company
Options after such adjustment shall equal the product of (A) the number of
shares of Company Common Stock relating to such Company Options prior to
such
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adjustment and (B) the Company Conversion Factor, which product shall be
rounded downward to the nearest whole share, and the exercise price per
share of such Company Options shall equal the quotient obtained by dividing
(x) the exercise price per share of such Company Options prior to such
adjustment by (y) the Company Conversion Factor, which quotient shall be
rounded up or down to the nearest cent. All such Company Options (as so
adjusted) shall otherwise be subject to the same terms and conditions were
in effect with respect to such Company Options (prior to such adjustment).
(d) Restricted Stock. Pursuant to the equitable adjustment provisions
----------------
of the Company's 1988 Restricted Stock Plan, as amended (the "1988 Plan"), all
shares of Spinco Common Stock issuable in the Distribution in respect of shares
of Company Common Stock granted under the 1988 Plan, the restrictions on which
have not lapsed as of the Offer Purchase Date, shall be granted under the Spinco
Stock Plan and thereafter be subject to the same restrictions and other terms
and conditions as the shares of Company Common Stock in respect of which such
shares of Spinco Common Stock were distributed (including, but not limited to,
the date on
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which such restrictions shall lapse). Spinco shall be solely responsible for
satisfaction of the obligations referred to in Section 2.10(c)(1) of the Merger
Agreement and Parent and the Company shall each be responsible for satisfaction
of the obligations referred to in Section 2.10(c)(2) of the Merger Agreement.
Section 8.3. Other Liabilities and Obligations. As of the Offer
---------------------------------
Purchase Date, with respect to claims relating to any employee liability or
obligation not otherwise provided for in this Agreement, including, without
limitation, earned salary, wages or other compensation and accrued holiday,
vacation, health, dental or retirement benefits, (a) Spinco shall assume and be
solely responsible for all liabilities and obligations whatsoever of the Company
Business for such claims made by Spinco Employees and (b) the Company shall
assume and be solely responsible for all liabilities and obligations whatsoever
of the Prescription Business for claims made by all Prescription Employees.
Section 8.4. Preservation of Rights to Amend or Terminate Plans. No
--------------------------------------------------
provision of this Agreement, shall be construed as a limitation on the right of
the Company or Spinco to amend any plan or terminate its participation therein
which the Company or Spinco would
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otherwise have under the terms of such plan or otherwise, and no provision of
this Agreement shall be construed to create a right in any employee or
beneficiary of such employee under a plan that such employee or beneficiary
would not otherwise have under the terms of such plan itself.
Section 8.5. Reimbursement; Indemnification. Spinco and the Company
------------------------------
acknowledge that the Company, on the one hand, and Spinco, on the other hand,
may incur costs and expenses (including, without limitation, contributions to
plans and the payment of insurance premiums) pursuant to any of the employee
benefit or compensation plans, programs or arrangements which are, as set forth
in this Agreement, the responsibility of the other party. Accordingly, the
Company and Spinco agree to reimburse each other, as soon as practicable but in
any event within 30 days of receipt from the other party of appropriate
verification, for all such costs and expenses reduced by the amount of any tax
reduction or recovery of tax benefit realized by the Company or Spinco, as the
case may be, in respect of the corresponding payment made by it. All
Liabilities retained, assumed or indemnified by Spinco pursuant to this Article
VIII shall in each case be deemed to be Company Liabilities, and all Liabil-
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ities retained, assumed or indemnified by the Company pursuant to this Article
VIII shall in each case be deemed to be Prescription Liabilities, and, in each
case, shall be subject to the indemnification provisions set forth in Article V
hereof (other than the provisions of Sections 5.2(b) and 5.3(b) hereof).
ARTICLE IX
INSURANCE
---------
Section 9.1. General. Except as otherwise agreed in writing between
-------
the parties, the Company shall maintain until the Offer Purchase Date all
policies of liability, fire, extended coverage, fidelity, fiduciary, workers'
compensation and other forms of insurance in effect as of the date hereof
insuring the products, properties, Assets and operations contemplated to be
transferred to Spinco and its subsidiaries.
Section 9.2. Certain Insured Claims. The Company shall (a) use
----------------------
reasonable efforts, at Spinco's reasonable expense, to continue to maintain and
renew for the benefit of Spinco and its subsidiaries the insurance policies
under the Casualty Program with respect to claims having an occurrence date (as
the term "occurrence date" is customarily defined) prior to the Offer Purchase
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<PAGE>
Date, relating to, or arising out of the conduct of, the Company Business, the
Company Assets or the Company Liabilities, and (b) use reasonable efforts and
cooperate with Spinco, at Spinco's reasonable expense, to obtain coverage,
recoveries and other benefits under such policies for the benefit of Spinco and
its subsidiaries, including, without limitation, by pursuing litigation to
obtain such coverage, recoveries and other benefits. The Company will reimburse
Spinco and its subsidiaries for any recovery obtained by it pursuant to such
claims. The Company shall make available to Spinco such of its employees as
Spinco may reasonably request as witnesses or deponents in connection with the
Spinco's defense of claims.
ARTICLE X
CONDITIONS; TERMINATION; AMENDMENTS; WAIVERS
-------------------------------------------------
Section 10.1. Condition to Obligations. With the exception of the
------------------------
transfer of Company Assets and Company Liabilities contemplated in Section 2.1
hereof, the respective obligations of each party hereto to consummate the
Distribution and to perform all other obligations set forth herein is subject to
the satisfaction of the condition that, following the Record Date, the Pur-
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chaser shall have purchased shares of Company Common Stock pursuant to the terms
and conditions of the Offer as set forth in the Merger Agreement.
Section 10.2. Termination. This Agreement may be terminated and the
-----------
Distribution abandoned at any time prior to the date the Distribution is
declared by the Board of Directors of the Company by and in the sole discretion
of the Company without the approval of Spinco or of the Company's stockholders.
In the event of such termination, no party shall have any liability of any kind
to any other party.
Section 10.3. Amendments; Waivers. This Agreement may be amended,
-------------------
modified or supplemented only by written agreement of the parties; provided that
--------
no such amendment, modification or supplement may be made which adversely
affects the Prescription Business or Spinco's or the Company's performance of
its obligations hereunder or under the Merger Agreement or the Ancillary
Agreements without the prior written consent of Parent.
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ARTICLE XI
MISCELLANEOUS
-------------
Section 11.1. Survival. The representations and warranties made in
--------
Section 6.1 of this Agreement, the representations and warranties of the
Company, Parent and the Purchaser made in Articles IV and V and Section 9.11 of
the Merger Agreement, and their respective covenants and agreements in the
Merger Agreement that were to be performed prior to the Offer Purchase Date,
shall survive for a period of nine months from the Offer Purchase Date, but
shall not survive any termination of this Agreement. The parties intend to
shorten the statute of limitations and agree that no claims or causes of action
may be brought against the Company, Maryland, Spinco, Parent or the Purchaser or
any of their directors, officers, employees, affiliates, controlling persons,
agents or representatives based upon, directly or indirectly, any of the
representations and warranties contained in this Agreement or the Merger
Agreement or any of such covenants and agreements in the Merger Agreement after
nine months following the Offer Purchase Date (other than causes of actions
commenced after such nine month period to seek recourse for claims asserted
during such nine month period that are not resolved by the parties), and
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the parties agree that, except as provided below and for claims asserted
pursuant to Article V of this Agreement, the parties each waive and release all
other claims and causes of action, that may be asserted or brought against the
Company, Maryland, Spinco, Parent or the Purchaser or any of their directors,
officers, employees, affiliates, controlling persons, agents or representatives
directly or indirectly based upon or arising under this Agreement or the Merger
Agreement, or the transactions contemplated hereby or thereby. This Section
11.1 shall not limit any covenant or agreement of the parties in this Agreement,
the Merger Agreement or the Ancillary Agreements which contemplates performance
after the Distribution (including, without limitation, the covenants and
agreements set forth in Sections 2.1(b) and 6.2 hereof), except for the
covenants and agreements in the Merger Agreement to the extent of their
performance prior to the Offer Purchase Date.
Section 11.2. Entire Agreement. Except for the provisions of the
----------------
Confidentiality Agreement which shall continue in full force and effect, this
Agreement (including the schedules and exhibits and the agreements and other
documents referred to herein, including, without limitation, the Merger
Agreement, the Tax Sharing
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Agreement and the Additional Agreements, as each such term is defined in the
Merger Agreement) constitutes the entire agreement among the parties with
respect to the subject matter hereof and supersedes all other prior
negotiations, commitments, agreements and understandings, both written and oral,
between the parties or any of them with respect to the subject matter hereof.
Section 11.3. Fees and Expenses. Except as otherwise provided in
-----------------
this Agreement, the Merger Agreement or the other Ancillary Agreements, all
costs and expenses incurred by the Company and its subsidiaries and by Spinco in
connection with entering into this Agreement, the Merger Agreement and the other
Ancillary Agreements and consummating such party's obligations hereunder and
thereunder including, without limitation, investment banking, legal, accounting,
audit and printing costs and expenses, shall be paid by Spinco, upon the
submission to Spinco of appropriate documentation detailing such costs and
expenses, provided that all costs and expenses incurred by Parent and the
Purchaser in connection with the preparation, execution and delivery of this
Agreement, the Merger Agreement and the other Ancillary Agreements contemplated
hereby and the consummation of the Offer and the Merger, including, without
limitation, investment
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banking, legal, accounting, audit and printing costs and expenses shall not be
considered to be expenses of the Company and shall be paid by Parent or
Purchaser, as the case may be, incurring such cost. In the event of any Action
relating to this Agreement, the Merger Agreement or any of the other Ancillary
Agreements or the consummation of the transactions contemplated hereby or
thereby, Spinco shall bear the Company's expenses incurred in defending such
Action, and the cost of any settlement or compromise relating to such Action to
which it may agree; provided that Parent and the Purchaser shall pay any
--------
expenses incurred by them in defending such Action if named as parties thereto,
and shall pay that portion of any cost of any settlement or compromise which
Parent and the Purchaser agree is reasonably attributable to their wrongful
conduct.
Section 11.4. Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of Delaware (regardless of
the laws that might otherwise govern under applicable principles of conflicts
law) as to all matters, including, without limitation, matters of validity,
construction, effect, performance and remedies.
89
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Section 11.5. Notices. Commencing as of the Offer Purchase Date, all
-------
notices and other communications hereunder shall be in writing and shall be
deemed given upon (a) transmitter's confirmation of a receipt of a facsimile
transmission, (b) confirmed delivery by a standard overnight carrier or when
delivered by hand or (c) the expiration of five business days after the day when
mailed by certified or registered mail, postage prepaid, addressed at the
following addresses (or at such other address for a party as shall be specified
by like notice):
(a) If to the Company, Maryland,
Prescription or CPA, to:
PCS Health Systems, Inc.
9501 East Shea Boulevard
Scottsdale, Arizona 85260
Telephone: (602) 391-4600
Telecopy No.:
Attention: General Counsel
with a copy to:
Eli Lilly and Company
Lilly Corporate Center
Indianapolis, Indiana 46285
Telephone: (317) 276-2000
Telecopy No.: (317) 276-3861
Attention: General Counsel
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(b) If to Spinco, to:
McKesson Corporation
One Post Street
San Francisco, California 94104
Telephone: (415) 983-8300
Telecopy No.: (415) 983-8826
Attention: Ivan D. Meyerson, Esq.
with a copy to:
Skadden, Arps, Slate, Meagher
& Flom
919 Third Avenue
New York, New York 10022
Telephone: (212) 735-3000
Telecopy No.: (212) 735-2000
Attention: Peter A. Atkins, Esq.
Section 11.6. Successors and Assigns; No Third Party Beneficiaries.
----------------------------------------------------
This Agreement and all of the provisions hereof shall be binding upon and inure
to the benefit of the parties and their respective successors and permitted
assigns, but neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by either party (whether by operation of
law or otherwise) without the prior written consent of the other party, except
that any party shall have the right, without the consent of any other party
hereto, to assign all or a portion of its rights, interests and obligations
hereunder to one or more direct or indirect subsidiaries, but no such assignment
of obligation shall relieve the
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assigning party from its responsibility therefor. This Agreement shall be
binding upon and inure solely to the benefit of each party hereto, and, except
for 8.1, 8.2 and 8.3 hereof, nothing in this Agreement, express or implied, is
intended to or shall confer upon any other person any rights, benefits or
remedies of any nature whatsoever under or by reason of this Agreement;
provided, however, that the Indemnities are intended to be third party
beneficiaries of the provisions of Article V hereof, and shall have the right to
enforce such provisions as if they were parties hereto.
Section 11.7. Counterparts. This Agreement may be executed in two or
------------
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Section 11.8. Interpretation. The descriptive headings herein are
--------------
inserted for convenience of reference only and are not intended to be part of or
to affect the meaning or interpretation of this Agreement. As used in this
Agreement, the term "person" shall mean and include an individual, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization and a government or any department or agency thereof.
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<PAGE>
Section 11.9. Schedules. The Disclosure Schedule shall be construed
---------
with and as an integral part of this Agreement to the same extent as if the same
had been set forth verbatim herein.
Section 11.10. Legal Enforceability. Any provision of this Agreement
--------------------
which is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without affecting the validity or enforceability of the
remaining provisions hereof. Any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction. If any provision of this Agreement is so broad as to be
unenforceable, the provision shall be interpreted to be only so broad as is
enforceable.
Section 11.11. Specific Performance. Each of the parties hereto
--------------------
acknowledges and agrees that in the event of any breach of this Agreement, each
non-breaching party would be irreparably and immediately harmed and could not be
made whole by monetary damages. It is accordingly agreed that the parties
hereto (a) will waive, in any action for specific performance, the defense of
adequacy of a remedy at law and (b) shall be
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entitled, in addition to any other remedy to which they may be entitled at law
or in equity, to compel specific performance of this Agreement in any action
instituted in any state or federal court sitting in Wilmington, Delaware. The
parties hereto consent to personal jurisdiction in any such action brought in
any state or federal court sitting in Wilmington, Delaware and to service of
process upon it in the manner set forth in Section 11.5 hereof.
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<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Agreement to
be executed on its behalf by its officers thereunto duly authorized, all as of
the day and year first above written.
MCKESSON CORPORATION
By: /s/ Garrett Scholz
______________________________
Name:
Title:
MCKESSON CORPORATION
By: /s/ Garret Scholz
______________________________
Name:
Title:
CLINICAL PHARMACEUTICALS, INC.
By: /s/ Nancy A. Miller
______________________________
Name:
Title:
PCS HEALTH SYSTEMS, INC.
By: /s/ Arthur Chong
______________________________
Name:
Title:
SP VENTURES, INC.
By: /s/ Arthur Chong
______________________________
Name:
Title:
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<PAGE>
In consideration of the benefits conferred on the Company, Parent and
the Purchaser, pursuant to this Agreement, the Merger Agreement and the
Ancillary Agreements, Parent, effective only upon consummation of the Offer (a)
does hereby irrevocably and unconditionally guarantee, the performance by the
Company of its obligations (subject to the terms and conditions of such
obligations) with respect to all Prescription Liabilities and the obligations of
the Company under the Distribution Agreement, the Merger Agreement and the
Ancillary Agreement to be performed after the Offer Purchase Date, and (b)
agrees to be bound by and comply with the provisions of Sections 6.1 and 11.1 of
this Agreement, subject to the terms and conditions contained therein. The
foregoing agreements of Parent shall be null and void and of no force and effect
if the Offer expires without any Shares being purchased thereunder.
ELI LILLY AND COMPANY
By: /s/ Randall L. Tobias
---------------------
Name:
Title:
96
<PAGE>
EXHIBIT 99.5
TAX SHARING AGREEMENT
TAX SHARING AGREEMENT ("the Agreement") dated as of July 10, 1994
among McKesson Corporation, a Delaware corporation (the "Company"), SP Ventures,
Inc., a Delaware corporation and a wholly owned subsidiary of the Company
("NewCo"), Eli Lilly and Company, an Indiana corporation ("Buyer"), and ECO
Acquisition Corporation, a Delaware corporation and wholly owned subsidiary of
Buyer ("Mergersub").
WHEREAS, in connection with the restructuring of the Company, the
Company and certain subsidiaries of the Company have agreed to assign and
transfer (the "Transfer") to NewCo the Company Assets, as defined in the
Reorganization and Distribution Agreement dated as of July 10, 1994 (the
"Reorganization Agreement"), in the manner set forth in the Reorganization
Agreement, including, without limitation, all of the capital stock of the
subsidiaries of the Company and of the subsidiaries of its wholly-owned
subsidiary Maryland (as defined in the Reorganization Agreement) (the
"Transferred Subsidiaries"), other than Maryland, Prescription (as defined in
the Reorganization Agreement), CPA (as defined in the Reorganization Agreement)
and NewCo (collectively, the Transferred Subsidiaries shall constitute the
"NewCo Subsidiaries") (together with NewCo and any future subsidiaries of NewCo,
the "NewCo Group"), in exchange for (i) shares of common stock of NewCo (the
"NewCo Common Stock"), (ii) at the election of the Company, shares of preferred
stock of NewCo (the "NewCo Preferred Stock"), and (iii) the assumption of
certain liabilities of the Company by NewCo;
WHEREAS, the Company will agree to sell any NewCo Preferred Stock to a
NewCo employee stock ownership plan or to some other third party (the "Preferred
Stock Sale");
WHEREAS, the Company will retain its stock in all of its subsidiaries
other than the NewCo Subsidiaries (such retained subsidiaries, together with the
Company, the "Company Group") (the Company Group together with the NewCo Group
through the date on which the Old Company Group (as hereinafter defined)
terminates are collectively referred to as the "Old Company Group");
<PAGE>
WHEREAS, in accordance with the terms of an Agreement and Plan of
Merger dated as of July 10, 1994 (the "Merger Agreement"), Mergersub will
commence and consummate the Offer (as defined in the Merger Agreement) and the
Company will complete the Transfer;
WHEREAS, pursuant to the Merger Agreement, Mergersub will merge (the
"Merger") with and into the Company after certain conditions are satisfied (the
date when the Merger shall become effective the "Effective Date"), whereby each
share of common stock of the Company issued and outstanding immediately prior to
the Effective Date, other than 1 million Company shares held by Maryland (the
"Maryland Shares"), will be converted into the right to receive cash and, as a
result of such Merger, the Company, as the surviving corporation, will become
wholly owned by Buyer (the Company Group together with the Buyer and all other
subsidiaries of the Buyer, the "Buyer Group") except for the Company shares held
by Maryland;
WHEREAS, immediately after the consummation of the Offer, the Company
will distribute the shares of NewCo to the Company shareholders (the
"Distribution");
WHEREAS, prior to the Merger, the Company will issue new preferred
shares of the Company to Maryland in exchange for the Maryland Shares (the
"Recapitalization");
WHEREAS, upon the acquisition by Buyer of sufficient stock of the
Company (the "Affiliation Threshold") to satisfy the requirements of Section
1504(a)(2) of the Internal Revenue Code of 1986, as amended (the "Code") (the
"Group Termination Date"), the Old Company Group will terminate and the members
of the Company Group will become members of the Buyer Group;
WHEREAS, the parties hereto wish to provide for the payment of tax
liabilities and entitlement to refunds, allocate responsibility and provide for
cooperation in the filing of tax returns, provide for the realization and
payment of tax benefits arising out of the adjustments to the tax returns of the
parties and to provide for certain other matters;
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<PAGE>
1. Cooperation; Certain Definitions.
(a) Buyer and NewCo shall and shall cause the members of the Buyer
Group and the NewCo Group, respectively, to provide the requesting party with
such assistance and documents, without charge, as may be reasonably requested by
such party in connection with the preparation of any Tax Return (as hereinafter
defined) or any Information Return (as hereinafter defined), in connection with
the conduct of any audit or other examination, judicial or administrative
proceeding or determination relating to liability for or refunds or adjustments
with respect to Other Taxes (as defined in subsection (b) hereof) or Income
Taxes (as defined in subsection (b) hereof); any matter relating to Income
Taxes, Other Taxes or Information Returns of any member of the Old Company
Group, the Company Group, the NewCo Group or the Buyer Group; and any other
matter that is a subject of this Agreement. Such cooperation and assistance
shall be provided to the requesting party promptly upon its request. Such
cooperation and assistance shall include, without limitation the completion and
delivery to NewCo on or before 90 days after the close of the taxable year, of
any tax information request forms supplied by NewCo for any subsequent taxable
periods of the Old Company Group ending before or that include the Group
Termination Date, provided, however, that with respect to any Tax Returns for
estimated Income Taxes, such tax information request forms supplied by NewCo
will be completed and delivered to NewCo no later than five (5) business days
before such Tax Returns are due. The Buyer and the Company, on the one hand,
and NewCo, on the other hand, shall retain or cause to be retained all Tax
Returns, Information Returns, schedules and workpapers, and all material records
or other documents relating thereto, until the expiration of the statute of
limitations (including any waivers or extensions thereof) of the taxable years
to which such Tax Returns, Information Returns, and other documents relate or
until the expiration of any additional period that any party may reasonably
request in writing with respect to specifically designated material records or
documents. A party intending to destroy any material records or documents shall
provide the other party with advance notice and the opportunity to copy or take
possession of such records and documents. The parties hereto will notify each
other in writing of any
3
<PAGE>
waivers or extensions of the applicable statute of limitations that may affect
the period for which the foregoing records or other documents must be retained.
(b) For purposes of this Agreement: (i) the term "Income Taxes" shall
mean any and all taxes based upon or measured by net income, imposed by or
payable to the United States ("U.S."), or any state, county, local or foreign
government or any subdivision or agency thereof (including any U.S. possession),
and such term shall include any interest (whether paid or received), penalties
or additions to tax attributable thereto; (ii) the term "Other Taxes" shall mean
any and all taxes, levies or other like assessments, charges or fees, other than
Income Taxes, including, without limitation, any excise, real or personal
property, sales, use, license, real estate or personal property transfer, net
worth, stock transfer, payroll, and other governmental taxes and any withholding
obligation imposed by or payable to the U.S., or any state, county, local or
foreign government or subdivision or agency thereof, and any interest (whether
paid or received), penalties or additions to tax attributable thereto; (iii) the
term "Tax Return" shall mean any report, return, declaration or other
information or filing required to be supplied to any taxing authority or
jurisdiction with respect to the liability of any member of the Old Company
Group, the Company Group, the NewCo Group or the Buyer Group for Income Taxes or
Other Taxes, including, without limitation, any documents with respect to or
accompanying payments of estimated Income Taxes or Other Taxes, or with respect
to or accompanying requests for the extension of time in which to file any such
report, return, declaration or other document; and (iv) the term "Information
Return" shall mean any report, return, declaration or other information or
filing (other than a Tax Return) required to be supplied to any taxing authority
or jurisdiction.
2. Timing of Group Termination Date; Certain State and Local Matters.
With respect to the timing of the Group Termination Date, i.e., when for federal
income tax purposes the existence of the Old Company Group shall cease and the
members of the Company Group shall become members of the Buyer Group, the
parties shall follow the rule of Proposed Treasury Regulation Section 1.1502-
76(b)(1). Accordingly, the parties hereby agree that the
4
<PAGE>
existence of the Old Company Group shall terminate as of the close of the date
that Buyer satisfies the Affiliation Threshold and that the income of the Old
Company Group for that day shall be reported in the consolidated federal income
tax return filed by the Old Company Group. To the extent permissible under
applicable law, similar principles shall apply in the case of any state, local
or other jurisdiction in which the Old Company Group (or any members thereof)
join in the filing of any unitary, combined or similar Tax Return, and all
references to the Old Company Group and the Group Termination Date shall, when
appropriate, include a reference to (i) any state, local or other unitary or
combined group that includes members of the Old Company Group or (ii) the last
day on which any such group shall exist, respectively. To the extent
permissible under applicable law, all taxable income attributable to the
Transfer, the Distribution and the Preferred Stock Sale and all deductions for
compensation related to the cash out or exercise of any Company options or
Company restricted stock (the "Compensation Deductions") shall be reported on
the Tax Returns of the Old Company Group for the period that ends on the Group
Termination Date, provided, however, that to the extent that the Compensation
-------- -------
Deductions are not properly reportable on such Tax Returns of the Old Company
Group, Buyer shall claim such Compensation Deductions on the Tax Returns of the
Buyer Group if, in the opinion of Buyer's counsel, which counsel shall be
reasonably acceptable to NewCo, there is a reasonable basis to claim the
Compensation Deductions.
3. Filing of Income Tax Returns; Payment of Income Taxes.
(a) Taxable Periods Ending on or Before the Group Termination Date.
To the extent not filed before the Group Termination Date, NewCo shall, on
behalf of the Old Company Group, prepare and file or cause to be prepared and
filed all Tax Returns with respect to Income Taxes for the Old Company Group (or
any member thereof) for any taxable period ending on or before the Group
Termination Date. To the extent permissible under applicable law, (i) all such
Tax Returns shall be prepared and filed consistently with past practice and (ii)
NewCo shall file Tax Returns with respect to Income Taxes on the basis that the
relevant taxable periods terminate on
5
<PAGE>
the Group Termination Date. NewCo shall pay or cause to be paid all Income
Taxes shown to be due and payable by any member of the Old Company Group on such
Tax Returns.
(b) Taxable Periods Including but not Ending on the Group Termination
Date. The Buyer shall prepare and file or cause to be prepared and filed all
Tax Returns with respect to Income Taxes for the Company Group (or any member
thereof) for any taxable period that includes but does not end on the Group
Termination Date (a "Group Termination Date Period"), and shall pay or cause to
be paid all Income Taxes shown to be due and payable by any member of the
Company Group on such Tax Returns. NewCo shall prepare and file or cause to be
prepared and filed all Tax Returns with respect to Income Taxes for the NewCo
Group (or any member thereof) for any Group Termination Date Period, and shall
pay or cause to be paid all Income Taxes shown to be due and payable for any
member of the NewCo Group on such Tax Returns.
(c) Taxable Periods Beginning after the Group Termination Date. The
Buyer shall prepare and file or shall cause to be prepared and filed Tax Returns
with respect to Income Taxes for the Company Group for taxable periods beginning
after the Group Termination Date, and shall pay or cause to be paid all Income
Taxes shown to be due and payable by any member of the Buyer Group on such Tax
Returns. NewCo shall prepare and file or cause to be prepared and filed Tax
Returns with respect to Income Taxes for the NewCo Group for taxable periods
beginning after the Group Termination Date, and shall pay or cause to be paid
all Income Taxes shown to be due and payable by any member of the NewCo Group on
such Tax Returns.
4. Filing of Other Tax Returns; Payment of Other Taxes. To the
extent not filed before the Group Termination Date, the Buyer shall prepare and
file or cause to be prepared and filed all Tax Returns with respect to Other
Taxes of the Company Group for all taxable periods and shall pay all Other Taxes
shown to be due and payable by any member of the Company Group on such Tax
Returns. NewCo shall prepare and file or cause to be prepared and filed all Tax
Returns with respect to Other Taxes for the NewCo Group for all taxable periods
and shall pay all Other Taxes shown to be due and payable by any member of the
NewCo Group on such Tax Returns.
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<PAGE>
5. Filing of Information Returns. NewCo shall file all Information
Returns required to be filed by any member of the Old Company Group on or before
the Offer Consummation Date (as defined in Section 6(a)) and by any member of
the NewCo Group after the Offer Consummation Date, as well as any Information
Returns required to be filed by the Old Company Group (or any member thereof)
with respect to the information of the NewCo Group or the Merger. Except as
otherwise provided in the preceding sentence, the Buyer shall file all
Information Returns required to be filed by any member of the Company Group
after the Offer Consummation Date. Any party required to file any Information
Return pursuant to this Section 5 shall pay any fees or charges required in
connection with such filing and shall indemnify and hold the other party
harmless against any penalties, fees or other charges resulting from the failure
to pay such fees or charges or the failure to file such Information Returns in a
correct or timely fashion, unless such failure results from the failure of the
other party to provide correct information on a timely basis.
6. Indemnification for Taxes.
(a) Income Taxes. The NewCo Group shall pay, and shall indemnify and
hold the Buyer Group harmless against (i) all liabilities for Income Taxes
("Income Tax Liabilities") of any member of the Old Company Group for all
taxable periods or portions thereof of the Old Company Group ending on or before
the date on which the Offer is consummated (the "Offer Consummation Date"),
provided, however, that the NewCo Group shall not be required to indemnify the
Buyer Group for any Income Taxes that are incurred as a result of any action
taken by Buyer or the Buyer Group on or after the Offer Consummation Date; (ii)
all Income Tax Liabilities incurred, pursuant to Treas. Reg. (S) 1.1502-6, or
similar provisions, as a result of any member of the Old Company Group having
been a member of another group (other than the Buyer Group) filing a
consolidated federal (or other combined) income tax return; (iii) all Income Tax
Liabilities of any member of the Old Company Group arising from the Transfer,
the Distribution, the Recapitalization, and the Preferred Stock Sale regardless
of when recognized; and (iv) all Income Tax Liabilities of any member of the
NewCo Group. The Buyer Group shall pay, and shall indemnify and hold the NewCo
Group harmless against, all
7
<PAGE>
Income Tax Liabilities of (i) Buyer and its subsidiaries (other than the members
of the Company Group) for all taxable periods and (ii) subject to clauses (ii)
and (iii) of the preceding sentence, the Company Group (or any member thereof)
for all periods or portions thereof beginning after the Offer Consummation Date.
For purposes of this Agreement, Income Tax Liabilities for portions of taxable
periods ending on the Offer Consummation Date, or beginning after the Offer
Consummation Date, shall be the amount of Income Taxes that would have been
imposed on or with respect to the relevant group (or member(s) thereof) in the
relevant jurisdiction if the taxable year had ended on, or had begun after, as
the case may be, the Offer Consummation Date. Notwithstanding anything to the
contrary in this Agreement, to the extent that the Buyer Group realizes a Tax
Benefit (as defined in Section 12(d) hereof) attributable to the Compensation
Deductions, the Buyer Group shall pay the amount of such Tax Benefit to NewCo
promptly after such Tax Benefit is realized (as defined in Section 12(d)
hereof); provided, however, that in the event that such Tax Benefit is
subsequently disallowed, NewCo shall reimburse Buyer for the amount of the Tax
Benefit that was disallowed.
(b) Other Taxes. The Buyer Group shall pay, and shall indemnify and
hold the NewCo Group harmless against, all liabilities for all Other Taxes
attributable to the income, property or activities of any member of the Company
Group for all taxable periods or portions thereof beginning on or after the
Offer Consummation Date. The NewCo Group shall pay, and shall indemnify and
hold the Buyer Group harmless against (i) all liabilities for all Other Taxes
attributable to the income, property or activities of any member of the NewCo
Group for all taxable periods; (ii) all liabilities for all Other Taxes
attributable to the income, property or activities of any member of the Old
Company Group for any taxable period or portion thereof ending on or before the
Offer Consummation Date; (iii) payroll taxes related to the Compensation
Deductions; and (iv) all Other Taxes, if any, arising from the Transfer, the
Distribution, the Recapitalization, and the Preferred Stock Sale. For purposes
of this Section 6(b), the determination of the amount of Other Taxes for periods
or portions thereof that include the Offer Consummation Date shall be made, in
the case of Other Taxes other than property, ad valorem, and similar Other
-- -------
Taxes, based on the amount of
8
<PAGE>
Other Taxes that would be due if the relevant period had ended on the Offer
Consummation Date and, in the case of property, ad valorem, and similar Other
-- -------
Taxes by prorating (on a daily basis) the amount of Other Taxes due for the
entire period.
(c) To the extent that one party (the "Paying Party") owes money to
another party (the "Indemnified Party") pursuant to this Section 6, the Paying
Party shall pay the Indemnified Party, no later than 10 days prior to the due
date of the relevant Tax Return or estimated Tax Return or 10 days after the
Paying Party receives the Indemnified Party's calculations, whichever occurs
last, the amount for which the Paying Party is required to indemnify the
Indemnified Party under this Section 6. The Indemnified Party shall submit the
Indemnified Party's calculations of the amount required to be paid pursuant to
this Section 6, showing such calculations in sufficient detail so as to permit
the Paying Party to understand the calculations. The Paying Party shall have
the right to disagree with such calculations. Any dispute regarding such
calculations shall be resolved in accordance with Section 10 of this Agreement.
7. Section 338 Election. At the request of NewCo, Buyer shall cause
the Company, Maryland, and such subsidiaries as NewCo shall request to join in
the filing of an election under Section 338(h)(10) of the Code and any
comparable provision of state and local law on a timely basis in respect of the
acquisition by NewCo of the NewCo Subsidiaries.
8. Carryovers. In the event of the realization of any loss or credit
for tax purposes by a party for any taxable period beginning on or after the
Group Termination Date, the party realizing such loss or credit may, in its sole
discretion, to the extent permitted under applicable tax law, elect not to carry
back such loss or credit.
9. Refunds of Income Taxes or Other Taxes. The NewCo Group shall be
entitled to all refunds of Income Taxes and Other Taxes ("Refunds") attributable
to the NewCo Group, and the Buyer Group shall be entitled to all Refunds
attributable to the Buyer Group. The NewCo Group shall be entitled to all
Refunds attributable to the Old Company Group or any member thereof for any
9
<PAGE>
taxable period for which it is required to indemnify the Buyer Group for such
Income Taxes and Other Taxes, respectively, pursuant to this Agreement (a "Pre-
Closing Tax Period"). Notwithstanding the foregoing the Buyer Group shall be
entitled to Refunds attributable to the Old Company Group which result from the
carryback of a tax attribute by the Buyer Group from a taxable period for which
the Buyer Group is obligated to indemnity the NewCo Group pursuant to this
Agreement (a "Post-Closing Tax Period"), and the NewCo Group shall be entitled
to Refunds attributable to the Old Company Group which result from the carryback
of a tax attribute by the NewCo Group from a Post-Closing Tax Period. Refunds
for any period that includes but does not end on the Offer Consummation Date
shall be equitably apportioned between the Buyer Group and the NewCo Group in
accordance with the provisions of this Agreement governing such periods. A
party receiving a Refund to which another party is entitled pursuant to this
Agreement shall pay the amount to which such other party is entitled within five
(5) days after the receipt of the refund.
10. Disputes. If the parties disagree as to the amount of any
payment to be made under, or any other matter arising out of, this Agreement,
the parties shall attempt in good faith to resolve such dispute, and any agreed-
upon amount shall be paid to the appropriate party. If such dispute is not
resolved within 15 days thereafter, the parties shall jointly retain a
nationally recognized independent accounting firm (other than any such
accounting firm generally retained by any member of either the NewCo Group or
the Buyer Group) (the "Independent Accountants") to resolve the dispute. If and
to the extent that the dispute presents legal issues, the Independent
Accountants shall have the authority to consult a nationally recognized
independent law firm (the "Independent Lawyers") (other than any such law firm
generally retained by any of the NewCo Group or the Buyer Group). The fees of
the Independent Accountants and the Independent Lawyers shall be borne equally
by the NewCo Group and the Buyer Group, and the decision of such Independent
Accountants and Independent Lawyers shall be final and binding on all parties.
Following the decision of the Independent Accountants and/or the Independent
Lawyers, the parties shall each take or cause to be taken any action that is
necessary or appropriate to implement such decision of the Independent
Accountants and the Indepen-
10
<PAGE>
dent Lawyers, including, without limitation, the prompt payment of underpayments
or overpayments, with interest calculated on such overpayments and underpayments
at the rate specified under Section 6621(a)(2) of the Code for underpayments of
tax (the "Underpayment Rate") from the date such payment was due through the
date such underpayment or overpayment is paid or refunded.
11. Control of Proceedings. In the case of any audit, examination or
other proceeding ("Proceeding") with respect to Income Taxes or Other Taxes of
the Company Group or the Old Company Group for any taxable period for which
NewCo is or may be liable for such Income Taxes or Other Taxes pursuant to this
Agreement or that affects the Compensation Deductions, the Buyer or NewCo, as
the case may be, shall promptly inform the other party, and the Buyer shall
execute or cause to be executed any powers of attorney or other documents
necessary to enable NewCo to take all actions desired by NewCo with respect to
such Proceeding to the extent such Proceeding may affect the amount of Income
Taxes or Other Taxes for which NewCo is liable pursuant to this Agreement;
NewCo shall have the right to control any such Proceedings, and to initiate any
claim for refund, file any amended return or take any other action which it
deems appropriate with respect to such taxable years, provided, however, that
NewCo shall consult with Buyer with respect to any Proceeding that may affect
the Buyer Group and NewCo shall not enter into any final settlement or closing
agreement that may affect the Buyer Group without the consent of the Buyer
Group, which consent may not unreasonably be withheld. Where the Buyer
withholds its consent to any final settlement or closing agreement, the Buyer
shall continue or initiate further proceedings, at its own expense, and the
liability of NewCo shall not exceed the liability that would have resulted from
the proposed closing agreement or final settlement (including interest,
additions to tax and penalties which have accrued at that time).
12. Timing Adjustment.
(a) If an audit or other examination of any Income Tax Return of the
Old Company Group for any period for which NewCo is responsible pursuant to this
Agreement shall result (by settlement or otherwise) in any adjustment which (A)
decreases deductions, losses or
11
<PAGE>
tax credits or increases income, gains or recapture of tax credits for such
period, and (B) will permit the Buyer Group to increase deductions, losses or
tax credits which would otherwise (but for such adjustment) have been taken or
reported with respect to the Buyer Group for one or more taxable periods, NewCo
will notify Buyer (NewCo and Buyer, for purposes of this Section 12(d), shall be
deemed to include, where appropriate, the affiliated, unitary, combined or other
group of which such party is a member) and provide it with adequate information
so that it can reflect on the Income Tax Returns of the Buyer Group such
increases in deductions, losses or tax credits or decreases in income, gains, or
recapture of tax credits. With respect to such increases or decreases on Income
Tax Returns, the Buyer shall and shall cause the Buyer Group to, pay NewCo the
amounts of any Tax Benefits (as defined in subsection (d) of this Section 12)
which result therefrom, within ten days of the date such Tax Benefits are
realized.
(b) No later than 30 days after the date on which Buyer receives
notice from NewCo that a Tax Benefit may be available to the Buyer Group, Buyer
shall, and Buyer shall cause the Buyer Group to, as promptly as practicable,
take such steps (including, without limitation, the filing of amended returns or
claims for refunds where the amount of the Tax Benefit for any company in the
aggregate exceeds $25,000) necessary or appropriate to obtain such Tax Benefit.
Thereafter, Buyer shall, and shall cause the Buyer Group to, file all Income Tax
Returns to obtain at the earliest possible time such Tax Benefits to the maximum
extent available. Notwithstanding anything to the contrary in this Section 12,
Buyer may, at its election, pay the amount of any Tax Benefit to NewCo rather
than filing amended returns or otherwise reflecting adjustments or taking
positions on its Tax Returns. If such an election is made by the Buyer, the
Buyer will be treated as having realized a Tax Benefit at the time Buyer would
have realized a Tax Benefit if Buyer had chosen to file amended returns or
otherwise to reflect adjustments or to take positions on its Tax Returns;
provided, however, that Buyer shall pay to NewCo, no later than twenty (20) days
after Buyer receives notice from NewCo that a Tax Benefit may be available to
the Buyer Group, the amount of Tax Benefit that Buyer would have obtained if
Buyer had filed an amended Tax Return. Notwithstanding the foregoing, Buyer
shall not
12
<PAGE>
be required to take steps to obtain such Tax Benefit or to pay NewCo, if, in the
opinion of Buyer's counsel, which counsel shall be reasonably acceptable to
NewCo, there is not substantial authority to seek such Tax Benefit.
(c) Principles similar to those set out in subsections (a) and (b) of
this Section 12 shall also apply to adjustments resulting from examinations of
Income Tax Returns of the Buyer Group that make available Tax Benefits to the
NewCo Group for taxable periods ending on or before the Offer Consummation Date.
(d) For purposes of this Agreement, the term "Tax Benefits" means in
the case of separate state, local or other Income Tax Returns, the sum of the
amount by which the tax liability (after giving effect to any alternative
minimum or similar tax) of a corporation to the appropriate taxing authority is
reduced (including, without limitation, by deduction, entitlement to refund,
credit or otherwise, whether available in the current taxable year, as an
adjustment to taxable income in any other taxable year or as a carryforward or
carryback, as applicable) plus any interest from such government or jurisdiction
relating to such tax liability, and in the case of a consolidated federal Income
Tax Return or similar state, local or other Income Tax Return, the sum of the
amount by which the tax liability of the affiliated group (within the meaning of
Section 1504(a) of the Code) or other relevant group of corporations to the
appropriate government or jurisdiction is reduced (including, without
limitation, by deduction, entitlement to refund, credit or otherwise, whether
available in the current taxable year, as an adjustment to taxable income in any
other taxable year or as a carryforward or carryback, as applicable) plus any
interest from such government or jurisdiction relating to such tax liability.
For purposes of this Agreement, a Tax Benefit shall be deemed to have been
realized at the time any refund of Taxes is received or applied against other
Taxes due, or at the time of filing of an Income Tax Return (including any
relating to estimated Taxes) on which a loss, deduction or credit is applied in
reduction of Taxes which would otherwise be payable; provided, however, that,
where a party has other losses, deductions, credits or similar items available
to it, deductions, credits or items for which the other party would be entitled
to a
13
<PAGE>
payment under this Agreement shall be treated as the last items utilized to
produce a Tax Benefit. In accordance with the provisions of this subsection
(d), NewCo and Buyer agree that where a Tax Benefit may be realized that may
result in a payment to, or reduce a payment by, the other party hereto, each
party will as promptly as practicable take or cause its affiliate to take such
reasonable or appropriate steps (including, without limitation, the filing of an
amended return or claim for refund) to obtain at the earliest possible time any
such reasonably available Tax Benefit. In the event that after payment of a Tax
Benefit under this subsection (d), such Tax Benefit is reduced or eliminated
because of a final decree or agreement of a taxing authority or the carryback of
losses or credits, then the party to whom the Tax Benefit was paid shall pay to
the other party the amount by which the Tax Benefit was reduced or eliminated
plus interest on the amount returned at the Underpayment Rate from the date of
payment to the date of repayment.
13. Payments.
(a) Any payment required by this Agreement which is not made on or
before the date provided hereunder shall bear interest after such date at the
Underpayment Rate. In the case of any payment required hereunder to be made
"promptly", such payment shall be considered late for purposes of this Agreement
if not made twenty (20) days after notice that such payment is due is provided.
All payments made pursuant to this Agreement shall be made in immediately
available funds.
(b) All payments made pursuant to this Agreement shall be treated as
adjustments to the purchase price paid by Buyer or NewCo, as the case may be,
and the parties shall not file any Tax Returns or Information Returns
inconsistently with this position.
14. Termination of Prior Tax Sharing Agreements. This Agreement
shall take effect on the Offer Consummation Date, and shall replace all other
agreements, whether or not written, in respect of any Income Taxes or Other
Taxes between or among any members of the Old Company Group, or their respective
predecessors or successors, other than any such agreements made exclusively
between or among any members of the NewCo Group. All such replaced agreements
shall be cancelled as of the
14
<PAGE>
Offer Consummation Date and any rights or obligations existing thereunder
thereby shall be fully and finally settled without any payment by any party
thereto.
15. Notices. All notices, requests, demands and other communications
required or permitted under this Agreement will be made in the manner provided
in Section 9.5 of the Agreement and the Plan of Merger.
16. Entire Agreement; Amendments. This Agreement constitutes the
entire agreement of the parties concerning the subject matter hereof and
supersedes all prior agreements, whether or not written, concerning such subject
matter. This Agreement may not be amended except by an agreement in writing,
signed by the parties.
17. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware regardless of the laws that
might otherwise govern under applicable Delaware principles of conflicts of law.
18. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be an original and all of which shall
constitute together the same document.
19. Effective Date. This Agreement shall become effective only
upon the occurrence of the Offer Purchase Date (as defined in the Reorganization
and Distribution Agreement dated July 10, 1994, among SP Ventures, Inc. and
others), and shall terminate and be null and void and of no force and effect
upon any termination of the Merger Agreement.
15
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
MCKESSON CORPORATION
By: /s/ Garret Scholz
-------------------------
Name:
Title:
SP VENTURES, INC.
By: /s/ Arthur Chong
-------------------------
Name:
Title:
ELI LILLY AND COMPANY
By: /s/ Randall L. Tobias
-------------------------
Name:
Title:
ECO ACQUISITION CORPORATION
By: /s/ Charles E. Schalliol
-------------------------
Name:
Title:
16
<PAGE>
EXHIBIT 99.6
MEMORANDUM OF UNDERSTANDING
---------------------------
This Memorandum of Understanding dated as of July 10, 1994 describes a
number of business opportunities that the parties intend to discuss in
developing their business relationship after the acquisition by Eli Lilly and
Company, an Indiana corporation ("Buyer"), of the pharmacy benefit management
business of McKesson Corporation, a Delaware corporation, conducted by PCS
Health Systems, Inc., a Delaware corporation ("PCS"). It is the parties'
intention to form a strong strategic relationship between Buyer and SP Ventures,
Inc., a Delaware corporation to be renamed "McKesson Corporation" following the
acquisition ("McKesson"), that is consistent with Buyer's bias toward using
McKesson as the preferred provider of services that McKesson has to offer to
Buyer. This Memorandum of Understanding does not set forth any binding
obligations of the parties but is intended to describe those areas into which
their business relationship could be extended in the future if the parties
determine that it is mutually advantageous to do so. The parties intend to
initiate such discussions after execution of the definitive agreement pursuant
to which Buyer will acquire certain operations of PCS.
A. Generics Cooperation. McKesson and Buyer intend to investigate
--------------------
the feasibility of developing and marketing a full line of generic products
under a controlled label. Subject to legal review and compliance, the parties
intend to discuss establishing a joint venture entity for such purpose to be
formed at the appropriate time. Such discussions will consider and be subject
to existing agreements and commitments of Buyer and McKesson with respect to
generic products. In developing any generic strategies, the parties will
consider the role of PCS in including such generic products in its services, and
will consider utilizing McKesson as the preferred wholesaler for distribution of
generic products in PCS's programs.
B. Managed Care Support, Pharmacy Marketing and Compliance Programs.
----------------------------------------------------------------
Buyer and McKesson intend to investigate developing programs pursuant to which
those pharmacies that participate in McKesson's Value-Rite(R) program and
selected additional pharmacies that utilize McKesson as their distributor
("McKesson Stores") will offer
<PAGE>
services (for example, patient education) relating to disease therapies (for
example, diabetes therapies) involving Buyer's programs and promote and monitor
patient compliance with the drug therapy component of Buyer's programs for
disease therapies.
C. Wholesaler Distribution Issues.
------------------------------
1. PCS/Wholesaler Alliance. Buyer will consider McKesson first as
-----------------------
PCS's preferred wholesaler to the extent consistent with law, if PCS determines
to forge PCS/wholesaler alliances or other business arrangements (but excluding
normal wholesaler warehousing and distribution arrangements) involving
distribution of products by a wholesaler. (E.g., product supply for consignment
----
inventory offerings and services agreements with retail buying groups and
GPO's.)
2. Distribution of Buyer's Products. The parties intend to
--------------------------------
investigate the possibility of closing certain of Buyer's distribution centers
and using McKesson (i) to handle physical distribution of Buyer's products to
wholesalers, and/or (ii) subject to legal review and where feasible from a
business standpoint to be the sole distributor of Buyer's products.
3. Specialty Distribution of Buyer's Products. The parties intend to
------------------------------------------
investigate the possibility of using McKesson's services (i) to more efficiently
process Buyer's returned goods, (ii) to handle Buyer's third-party shipments and
(iii) to distribute Buyer's potential disease management product packages to
point of use.
4. Hospital Incentive Program. In connection with Buyer's hospital
--------------------------
products, the parties intend to investigate developing an incentive program for
hospital customers that do not have product contracts with Buyer or hospitals
where Buyer has not been successful in establishing a business relationship.
McKesson would market Buyer's products to specified accounts on an incentive
basis. Programs would be considered that would compensate McKesson for its
efforts by sharing incremental product sales margins.
2
<PAGE>
5. Chargeback System. The parties intend to investigate working
-----------------
together to develop an improved process to handle chargebacks.
6. DDD Sales Information. The parties intend to investigate in good
---------------------
faith the possibility of McKesson's supplying DDD-type sales information to
Buyer for an agreed-upon fee.
7. Effective Date. This Memorandum of Understanding shall become
--------------
effective only upon the occurrence of the Offer Purchase Date (as defined in the
Reorganization and Distribution Agreement, dated July 10, 1994, among McKesson
and others), and shall terminate and be null and void and of no force and effect
upon any termination of the Agreement and Plan of Merger, dated July 10, 1994,
among Buyer, McKesson Corporation and ECO Acquisition Corporation.
SP VENTURES, INC.
By: /s/ Arthur Chong
-------------------
Name:
Title:
ELI LILLY AND COMPANY
By: /s/ Randall L. Tobias
----------------------
Name:
Title:
3
<PAGE>
EXHIBIT 99.7
Non-Competition Agreement
-------------------------
This Agreement dated July 10, 1994, between McKesson Corporation, a
Delaware corporation ("McKesson"), SP Ventures, Inc., a Delaware corporation
("Spinco"), ECO Acquisition Corporation, a Delaware corporation ("Buyer"), and
Eli Lilly and Company, an Indiana corporation ("Parent"), WITNESSES:
Concurrently with this Agreement, McKesson, Buyer and Parent are
executing an Agreement and Plan of Merger ("Merger Agreement"), and McKesson,
Spinco and others are executing a Reorganization and Distribution Agreement
pursuant to which certain assets of McKesson will be transferred to Spinco. In
consideration thereof, Spinco hereby covenants and agrees with Buyer and Parent
that from and after the Offer Purchase Date (as defined in the Reorganization
and Distribution Agreement) and until the fifth anniversary thereof, it will not
(nor will it permit any other entity in which it holds an interest giving it
effective control to) engage anywhere in the world (except in Mexico) in any
activity in competition in any material respect with (i) the Prescription
Business (as defined in the Reorganization and Distribution Agreement) as such
is conducted on the Offer Purchase Date, (ii) any of the current or proposed
activities described in Exhibit A hereto, or (iii) any of the current or
proposed activities that are not described in Exhibit A hereto but are described
in the "Core PCS Capabilities" section (pages 9-15) of the PCS Health Systems,
Inc. ("PCS") Confidential Information dated June 1994; provided, however, that
-------- -------
any development activities described in such "Core PCS Capabilities" section of
the Confidential Information shall be deemed to be included in the foregoing
clause (iii) only if PCS, as of June 1994, had devoted substantial management or
other resources to such activities or had commenced software programming for
such activities. Notwithstanding the foregoing, the parties hereto acknowledge
and agree that any business or activities of Spinco or Healthcare Delivery
Systems, Inc. ("HDS"), respectively, which may be engaged in by Spinco or HDS,
respectively, following the Distribution, consistent with the McKesson Services
Agreement between Spinco and PCS and the HDS Services Agreement among PCS,
Parent and HDS, respectively, shall not be deemed to be activities in
competition with the
<PAGE>
Prescription Business or otherwise subject to the restrictions of the preceding
sentence. To the extent HDS has access to services and capabilities of
Integrated Medical Systems, Inc., including the Prescription Benefit Management
Services (as defined in the Network Sponsorship and Participation Agreement
between McKesson and IMS), HDS shall not permit that access to be used by others
in activities that, if conducted by HDS, would violate any of the covenants set
forth in this Agreement.
Any provision of this Agreement which is prohibited or unenforceable
in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent
of such prohibition or unenforceability without affecting the validity or
enforceability of the remaining provisions hereof. Any such prohibition or
unenforceabilty in any jurisdiction shall not invalidate or render unenforceable
such provision in any other jurisdiction. If any provision of this Agreement is
so broad as to be unenforceable, the provision shall be interpreted to be only
so broad as is enforceable.
2
<PAGE>
This Agreement shall become effective only upon the occurrence of the
Offer Purchase Date, and shall terminate and be null and void and of no force
and effect upon any termination of the Merger Agreement.
Unless otherwise defined, capitalized terms used herein shall have the
meanings ascribed to them in the Merger Agreement. This Agreement shall be
governed by and construed in accordance with the laws of the State of New York
(regardless of the laws that might otherwise govern under applicable principles
of conflicts of law) as to all matters, including, without limitation, matters
of validity, construction, effect, performance and remedies.
McKESSON CORPORATION
By /s/ Garret Scholz
-------------------------
SP VENTURES, INC.
By /s/ Arthur Chong
-------------------------
ECO ACQUISITION CORPORATION
By /s/ Charles E. Schalliol
-------------------------
ELI LILLY AND COMPANY
By /s/ Randall L. Tobias
-------------------------
3
<PAGE>
EXHIBIT A
NATIONAL ELECTRONIC INFORMATION CORPORATION - PCS was selected by the National
Electronic Information Corporation (NEIC), the largest consortium of leading
U.S. insurers, representing more than 80 million members, to operate its
Healthcare Information Network/SM /(HCIN), the first nationwide electronic data
interchange for health care. HCIN currently furnishes patient eligibility and
benefit coverage information to providers at the point of service in nine
states, and is moving to expand its service territory and add capabilities for
treatment authorizations, referrals, and claim inquiries;
INTEGRATED MEDICAL SYSTEMS - In January 1994, McKesson acquired a significant
minority interest in Integrated Medical Systems, Inc. (IMS), the nation's leader
in community medical information networks.
The IMS network currently links more than 10,000 physicians and other health
care providers including hospitals and laboratories with HMOs, PPOs and health
plan sponsors, more than any competitive system. IMS operates its networks in
36 communities, including 23 of the nation's 50 largest markets. Including
recently signed contracts, IMS now offers network services to more than 100
major hospitals that, combined with IMS's managed care and lab clients, have
relationships with more than 100,000 physicians.
Current development activity on the IMS/PCS network is focused on providing
physicians electronic access to clinical guidelines, formulary information, and
patient-specific information (e.g., compliance tracking), enabling the
consistent delivery of quality, cost-effective therapies. Targeting physicians
could increase the efficiency of the prescribing process, giving essential drug
information to physicians at the point of care and reducing the need for
inefficient intervention through physician telemarketing or pharmacy switches;
MANAGED INFUSION CARE (MIC) - With implementation of MIC, PCS will be able to
deliver a managed care system to its clients for their share of the rapidly-
growing $4 billion home infusion market. Managed Infusion Care will combine:
(1) PCS's historic expertise in managed prescription care program design and
management; (2) extensions
<PAGE>
of PCS's clinically-based pharmaceutical intervention (formularies and drug
utilization review); (3) implementation of on-line transaction processing
technology (RECAP(R)) in a new provider arena; and (4) leverage of PCS's network
development skills to create a cost-competitive network of managed infusion
providers.
MANAGED MAIL SERVICE - PCS has developed its own integrated managed prescription
mail service. This new program will create a PCS "private-label" mail service
for its customers incorporating comprehensive drug utilization review and
consistent formulary management across retail and mail settings. Orders will be
fulfilled by nationally recognized mail service companies, including Retired
Persons Service, Inc. (RPS), the administrator of the AARP Pharmacy Service, and
Express Pharmacy Services, a unit of Thrift Drug. This new capability went on-
line June 1 with initial clients being served by RPS; and
LABONE - In May 1994, PCS executed a joint marketing agreement with LabOne, Inc.
to develop the first nationwide electronically-linked system of laboratory
testing services. The managed lab program would offer PCS's clients substantial
savings for clinical laboratory testing services and provide the opportunity to
link appropriate drug therapy recommendations to specific test results using a
single point-of-service health "card."
2
<PAGE>
EXHIBIT 99.8
HDS SERVICES AGREEMENT
This Agreement, dated as of July 10, 1994, is among Eli Lilly and Company,
an Indiana corporation ("Lilly"), PCS Health Systems, Inc., a Delaware
corporation ("PCS"), and Healthcare Delivery Systems, Inc., a Delaware
corporation ("HDS").
Recitals
A. Lilly is acquiring certain operations of PCS pursuant to an Agreement and
Plan of Merger dated July 10, 1994 ("Merger Agreement").
B. Lilly, PCS and HDS desire to enter into an agreement pursuant to which PCS
will continue to provide certain services to HDS following closing of the
transaction contemplated by the Merger Agreement, and HDS will provide
certain services to Lilly or PCS.
NOW, THEREFORE, the parties agree as follows:
Section 1. Definitions.
-----------
1.1. "HDS Services" shall mean the following services offered
primarily to manufacturers:
(a) Drug sampling, coupon-for-drug, and other promotional programs
that employ both (i) electronic connectivity with retail pharmacies, mail order
providers or home infusion providers (collectively "Providers"); and (ii) drug
delivery by Providers.
(b) Financial assistance programs for patients, such as indigent
patient programs and assignment of benefits programs.
(c) Reimbursement support and patient advocacy programs.
(d) Phase IV (post marketing studies) programs employing Providers for
product delivery to study participants.
(e) Clinical trial support services, e.g., centralized data
- -
collection.
(f) Manufacturer-sponsored programs for managed delivery of biological
products, pharmaceutical products and medical devices requiring specialized
distribution ("Managed Delivery Programs").
<PAGE>
(g) Product hot-line programs and hot-line physician and patient
information programs.
(h) Monitoring of patient compliance in connection with Managed
Delivery Programs.
(i) Manufacturer-sponsored, drug-specific outcomes and
pharmacoeconomic research, case management and development of disease management
protocols.
1.2. "Specified Rates" shall mean PCS's best price for providing
comparable services (in terms of size and complexity) to any of PCS's customers
in effect from time to time. In the absence of such price, Specified Rates
shall mean the rates negotiated between PCS and HDS for the service, taking into
account PCS's historical profit margin and pricing methodologies for nonstandard
services. In no event shall PCS be obligated to provide a price that will
entitle MetLife or any other PCS customer to a price reduction. Pricing
arrangements and programs offered by PCS to its customers that involve the sale
of pharmaceutical products (e.g. mail order pharmacy) or are based upon the cost
of pharmaceutical products in whole or in part (e.g., disease state management
programs, capitation agreements, risk sharing and similar pricing arrangements)
shall not be subject to the best price requirement but shall be negotiated
individually.
1.3. "PCS Data Processing Capabilities" shall mean programming, data
processing and related auxiliary support for data processing existing at PCS
during the term of this Services Agreement.
1.4. "PCS Data Transmission Capabilities" shall mean switching, data
transmission and telecommunications capabilities of PCS, including without
limitation the RECAP(R) system, or its successors or derivatives, existing at
PCS during the term of this Services Agreement.
1.5. "PCS Capabilities" shall mean the PCS Data Processing
Capabilities, the PCS Data Transmission Capabilities, access to PCS Provider
Networks and other support services made available to PCS customers existing at
PCS during the term of this Services Agreement.
1.6. "PCS Provider Networks" shall mean the networks of pharmacies,
mail service providers, home infusion providers, and provider networks
associated with the Integrated Medical Systems, Inc., LabOne, Inc. and Health
Care Information Network transactions that have contracted with PCS for the
provision of PCS services and other provider networks that PCS may form during
the term of this Services Agreement.
2
<PAGE>
1.7. "Change of Control" shall mean any of the following enumerated
activities by an entity one of whose primary lines of business consists of the
sales of pharmaceutical products ("Pharmaceutical Company") or any part of whose
business consists of providing pharmacy benefit management services ("PBM") or
the parent corporation or a holding company or subsidiary of either a
Pharmaceutical Company or a PBM or by any person who has been employed as a
senior executive (other than senior executives of SP Ventures, Inc. to be
renamed as "McKesson Corporation"; hereinafter referred to as "McKesson") and
its subsidiaries) by a PBM or any entity controlled by such person (hereinafter
referred to as a "Covered Entity"):
(i) The acquisition by any Covered Entity or any group of persons
acting in concert, one of whose members is a Covered Entity of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Securities
Exchange Act of 1934) of thirty percent (30%) or more of either (i) the then
outstanding shares of common stock of McKesson or HDS (the "Outstanding Common
Stock") or (ii) the combined voting power of the then outstanding voting
securities of McKesson or HDS entitled to vote generally in the election of
directors (the "Outstanding Voting Securities"); provided, however, that for
-------- -------
purposes of this subsection (i), any acquisition by any employee benefit plan
(or related trust) sponsored or maintained by McKesson or HDS or any corporation
controlled by McKesson or HDS shall not constitute a Change of Control; provided
--------
further, however, that for purposes of this subsection (i), any redemption or
- ------- -------
repurchase by McKesson or HDS shall not constitute a Change of Control; or
(ii) Individuals who, as of the date hereof, constitute the Board of
Directors of McKesson or HDS (the "Incumbent Board") cease to constitute at
least a majority of the Board of Directors of McKesson or HDS, as applicable as
a result of an actual or threatened election contest with election or removal of
directors or other actual or threatened solicitation of proxies or consents by
or on behalf of a Covered Entity (including a settlement of any such actual or
threatened contest) or as a result of any agreement with a Covered Entity; or
(iii) Any Covered Entity consolidates with, or merges with or into,
McKesson or HDS, or McKesson or HDS merges into any Covered Entity; provided,
--------
however, that such actions shall not constitute a Change of Control if McKesson
- -------
or HDS is the surviving or continuing corporation; and (a) the shareholders of
McKesson or HDS immediately before the transaction own, on a pro forma basis, in
the aggregate a majority of the outstanding voting shares of the resulting
entity immediately after the transaction or (b) no other event which would
constitute a Change of Control has occurred; or
3
<PAGE>
(iv) Any sale, transfer, exchange or other disposition of all, or
substantially all, of the assets of McKesson or HDS to a Covered Entity in one
or more transactions; or
(v) Any acquisition by McKesson or HDS which required McKesson or HDS
to issue or transfer any securities to a Covered Entity, if the securities to be
issued or transferred have or will have upon issuance or transfer, voting power
equal to, or in excess of, thirty percent (30%) of the voting power outstanding
before the issuance or transfer of such securities; or
(vi) The sale, transfer, exchange or other disposition by McKesson or
HDS of substantially all of its United States operations to a Covered Entity; or
(vii) Any agreement or understanding by McKesson or HDS to do any of
the foregoing.
In addition to the foregoing, the adoption by McKesson or HDS of a
plan of complete liquidation or dissolution shall also constitute a Change of
Control.
Section 2. Buyer Access to HDS Services.
----------------------------
2.1. Terms for Services. To the extent permitted by law and HDS'
------------------
contractual obligations, at Lilly's or PCS's request, HDS shall provide any or
all of the HDS Services to Lilly or PCS as requested by Lilly or PCS on prices
and other terms that are as favorable as the best terms offered by HDS for
comparable services to any other HDS customer. HDS shall not add restrictions
to its agreements with third parties, except to the extent requested by such
third party, for the purpose of limiting the services it is obligated to provide
under this Section.
2.2. Study. Lilly shall participate in the HDS electronic sampling
-----
services study with Coopers & Lybrand and agrees to provide its proportionate
share of the funding for such study and associated costs, but not to exceed
$150,000.
2.3. Strategic Relationship. Consistent with the parties' intention
----------------------
to form a strong strategic relationship, and recognizing Lilly's bias toward
using HDS as the preferred provider of the HDS Services, Lilly shall diligently
investigate the HDS Services and consider in good faith using HDS as the
provider of such services, when it is appropriate to do so in light of the
business needs and requirements of Lilly, and the relative costs of such
services.
Section 3. HDS Access to PCS Capabilities.
------------------------------
3.1. PCS Capabilities Available to HDS. HDS shall have access to the
---------------------------------
PCS Capabilities. PCS shall provide the PCS
4
<PAGE>
Capabilities on a service parity comparable to that provided to PCS's internal
business units. HDS shall pay the Specified Rates for the PCS Capabilities
provided.
3.1.1 Existing Agreements. PCS will use its best efforts (excluding
-------------------
payment of money) to assign to HDS all existing agreements entered into by PCS
relating to providing the HDS Services, including the "Existing Agreements" set
forth in Exhibit A. HDS represents that none of these agreements relate to the
"Retained Businesses" as this term is used in the Merger Agreement.
3.1.2 Data Processing and Transmission Capabilities. PCS will make
---------------------------------------------
available to HDS such PCS Data Processing Capabilities as HDS may reasonably
require in providing the HDS Services at the Specified Rates. To the extent
permitted by law and PCS's contractual obligations, PCS will provide HDS with
access to the PCS Data Transmission Capabilities for transmitting HDS messages,
edits or data.
3.1.3 Access to Provider Networks for HDS Services. To the extent
--------------------------------------------
permitted by law and PCS's contractual obligations, PCS will permit HDS to
distribute drug products distributed as part of the HDS Services through the PCS
Provider Networks so long as HDS meets the requirements, if any, for utilization
of those networks. To the extent permitted by law and applicable agreements, at
the Specified Rates PCS shall also provide HDS with access to, and the right to
use, PCS lists of participants in PCS Provider Networks and, at HDS's request,
with copies of forms of standard agreements with such participants.
3.1.4 Clinical Services. To the extent permitted by law and PCS's
-----------------
contractual obligations, PCS will provide HDS with access to clinical expertise
of PCS at the Specified Rates. Requests for such access shall be reasonable in
frequency and shall not be so extensive as to interrupt the business of PCS.
3.1.5 Contract Restrictions. PCS agrees that it will not add
---------------------
restrictions to its agreements with third parties, except as requested by such
third party, for the purpose of limiting the services it is obligated to provide
to HDS under this Section 3.
3.1.6 HDS Services Unit. PCS shall create and maintain a services
-----------------
unit whose primary responsibility is to service HDS as a customer. This unit
may be the same services unit as provided in the McKesson Services Agreement of
even date herewith between Buyer and McKesson, provided that such unit is
adequately staffed to satisfy the requirements of both McKesson and HDS.
Section 4. Limitations on PCS's and Buyer's Use of the PCS
-----------------------------------------------
Capabilities.
- ------------
5
<PAGE>
4.1. Except for the permitted uses set forth in Section 4.2, Lilly
and PCS, for a period of three (3) years from the date of this Services
Agreement, shall not use, and shall not permit any person or entity other than
HDS to use, the PCS Capabilities to provide any of the HDS Services.
4.2. Notwithstanding anything in Section 4.1 to the contrary, Lilly
and PCS may use the PCS Capabilities:
4.2.1 to provide the HDS Services on behalf of PCS'S third party
payor customers (e.g., HMO's, insurance companies, self-insured employers) where
the HDS Services provided are incidental to other services provided by PCS and
are not provided primarily to enable such customers to duplicate the nature and
extent of HDS's business by using the PCS Capabilities;
4.2.2 to provide the HDS Services set forth in Section 1.1(i);
4.2.3 to provide the HDS Services set forth in Sections
1.1(b),(c),(d),(e),(g) and (h), only to the extent that the provision of such
HDS Services is incidental to providing services related to (i) disease state
management programs, capitation agreements, risk sharing and similar
arrangements; (ii) intervention programs to control pharmaceutical product
utilization; and/or (iii) programs related to therapeutic outcomes as a result
of pharmaceutical use and control interventions;
4.2.4 to provide the HDS Services on behalf of Lilly's own products
and services, or to any entity controlling, controlled by, or under common
control with, Lilly in connection with the products and services of such entity.
4.2.5 to provide the HDS Services to the following entities:
(i) any equity investor in PCS;
(ii) any research and/or development collaborator with Lilly;
provided, however, that Lilly and PCS can provide the
-------- -------
relevant HDS Services hereunder only with respect to the
products which are the subject of the collaboration and
only if meaningful research or development efforts
independent of HDS Services are being undertaken;
(iii) any person or entity to or from which Lilly has granted or
received a license to research, develop, manufacture,
market or promote any of Lilly's products or products
6
<PAGE>
of such person or entity; provided, however, that Lilly
-------- -------
and PCS can provide the relevant HDS Services hereunder
only with respect to such products and only if such
licensor or licensee, as applicable, is providing
meaningful services other than the HDS Services in
connection with the research, development, manufacture,
marketing, promoting, co-marketing or co-promoting of such
products.
Section 5. Term. The term of this Services Agreement shall be five
----
(5) years. This Services Agreement will automatically renew for successive
twelve (12) month terms unless either party gives the other party written notice
of termination not less than ninety (90) days prior to the end of the term or
any renewal term. If either party is in material default under this Services
Agreement and fails to correct the default within thirty (30) days after receipt
of written notice of default from the non-defaulting party, the non-defaulting
party may terminate this Services Agreement by giving written notice to the
defaulting party. Lilly shall have the right to terminate this Services
Agreement upon thirty (30) days' written notice to HDS upon any Change of
Control of HDS or McKesson.
Section 6. Increased Costs. In the event the provision of any of the
---------------
PCS Capabilities or other services under this Services Agreement results in an
increase in costs to PCS for additional personnel, computer and peripherals
capacity, software licenses, equipment or similar items or an increase in
processing or operating expenses, HDS shall reimburse PCS for the entire amount
of such expenses if incurred entirely for the benefit of HDS under this Services
Agreement or, if such expenses only partially benefit HDS, HDS shall pay its
share of such expenses in proportion to the extent of use; provided, however,
-------- -------
HDS shall not be responsible for such reimbursement to the extent such increased
costs are reflected in Specified Rates payable by HDS.
Section 7. Discontinued Services. Nothing in this Services Agreement
---------------------
shall require PCS to continue any service or PCS Capability to be provided under
this Services Agreement if such service or PCS Capability is no longer required
for the business of PCS. If PCS plans to discontinue any service or PCS
Capability, it will notify HDS of the proposed action in writing as soon as
feasible in advance of discontinuing the service or PCS Capability but in no
event later than other PCS customers are notified. HDS shall have the right to
obtain the service to be discontinued from a third party or agree to reimburse
PCS fully for all expenses that will be incurred by PCS to continue the service
for the sole benefit of HDS. If HDS agrees to such
7
<PAGE>
reimbursement, PCS will continue the service solely for the benefit of HDS.
Section 8. Confidentiality of Data. PCS shall own all physical
-----------------------
property, technology and software utilized by PCS in its performance under this
Agreement. HDS (or HDS's clients, as determined solely by contractual
arrangement between HDS and such clients) shall own all data generated or
accumulated by PCS in connection with its obligations under this Agreement
("Data"). Ownership rights shall include, but are not limited to, all rights
associated with publication, trade secrets, copyrights, trademarks, patents and
confidentiality. The parties acknowledge that nothing in this Section 8 shall
prohibit PCS from providing access of a patient, payor, provider or prescriber
to data on transactions involving such patient, payor, provider or prescriber.
Section 9. Right of First Offer. If HDS or McKesson decides to sell
--------------------
all or part of HDS's business, HDS will so notify Lilly in writing and provide
Lilly with a term sheet setting forth the terms and conditions on which McKesson
or HDS is willing to sell all or part of its business ("Terms"). Lilly will
have thirty (30) days to accept or negotiate acceptable Terms in writing. If
Lilly does not accept the Terms within such period, HDS shall have one hundred
and eighty days to complete such sale to a third party on the same Terms. If
the sale cannot be completed on the Terms in such period, any subsequent
proposed sale shall be subject to the provisions of this Section 9.
If the sale of all or part of the business of HDS constitutes a Change
of Control, PCS shall have the right to terminate this Agreement as provided in
Section 5.
Section 10. Limitations.
-----------
PCS shall not be required to perform any services to the extent such
services would result in the breach of any software license or other applicable
contract in existence on the date hereof. If PCS believes it is unable to
provide any services pursuant to the foregoing, PCS shall promptly notify HDS.
If requested by HDS, PCS shall use reasonable efforts to obtain the rights
necessary to provide such services, including obtaining any appropriate consents
from third parties. HDS shall be responsible for all additional costs and
expenses incurred by PCS in order to allow PCS to provide such services.
11. Payment for Services.
--------------------
Each party shall submit, on a monthly basis, an invoice for services
performed under this Agreement in the preceding month. Each invoice shall be
payable net thirty (30) days after the date of the invoice; however, in the
event any party in good
8
<PAGE>
faith questions any invoiced item, payment of that item shall be made only after
the satisfactory resolution of those questions. An interest charge of 1% per
month will accrue on all overdue amounts.
Section 12. Confidentiality.
---------------
12.1. In the course of performance of this Agreement, any party
("Receiving Party") may acquire information that another party ("Disclosing
Party") deems confidential, including trade secrets and unpublished technical
information and data to which the Disclosing Party (or companies affiliated with
the Disclosing Party) has proprietary rights. A party may also receive
information of a third party which the Disclosing Party is under an obligation
to maintain in confidence. The Disclosing Party shall clearly mark all
confidential information. All such information, when clearly marked as
confidential, is referred to hereinafter as "Disclosed Information".
12.2. The Receiving Party shall retain Disclosed Information in
strict confidence and shall not communicate it to others without the Disclosing
Party's prior written agreement. Notwithstanding the foregoing, Buyer and PCS
shall be allowed to disclose Disclosed Information to third parties as necessary
to perform the services, provided such third parties have undertaken
confidentiality obligations substantially similar to those set forth in this
Section 12.
12.3. Nothing in this Agreement shall prevent the communication to
other's of any disclosed Information which the Receiving Party can show was
known to it or its representatives prior to its receipt hereunder, was lawfully
received by the Receiving Party and its representatives other than directly or
indirectly from the Disclosing Party, became public knowledge through no fault
of the Receiving Party, is required by law to be disclosed.
12.4. Each party shall provide the other, at the other party's
request, written confirmation of its compliance with the confidentiality
obligations of this Agreement.
12.5. The provisions of this Section 12 shall survive termination of
this Agreement for a period of 3 years.
Section 13. Miscellaneous.
-------------
13.1. Notices. All notices required or permitted to
-------
be given under this Agreement shall be in writing and shall be sent by facsimile
transmission or mailed by registered or certified mail addressed to the party to
whom such notice is required or permitted to be given. All notices shall be
deemed to have been given when transmitted if given by facsimile and
9
<PAGE>
confirmation of receipt is received or, if mailed, five days after mailed as
evidenced by the postmark at the point of mailing.
All notices to Lilly shall be addressed as follows:
Eli Lilly and Company
Lilly Corporate Center
Indianapolis, IN 46285
Attention: General Counsel
Facsimile: 317-276-3861
All notices to PCS shall be addressed as follows:
PCS Health Systems Inc.
9501 East Shea Boulevard
Scottsdale, AZ 85260
Attention: President
Facsimile: 602-451-0964
All notices to HDS shall be addressed as follows:
Healthcare Delivery Systems, Inc.
One Post Street
San Francisco, CA 94104
Attention: David Mahoney
Facsimile: 415-983-8826
Any party may, by written notice to the other, designate a new address to which
notices to the party giving the notice shall thereafter be mailed.
13.2. Force Majeure. No party shall be liable for any delay or
-------------
failure of performance to the extent such delay or failure is caused by
circumstances beyond its reasonable control and that by the exercise of due
diligence it is unable to prevent, provided that the party claiming excuse uses
its best efforts to overcome the same.
13.3. Limitation of Liability. No party shall be liable to the other
-----------------------
party for indirect, consequential, incidental or special damages, including but
not limited to lost profits, arising from or relating to any breach of this
Agreement regardless of any notice of such damages.
13.4. Entirety of Agreement. This Agreement sets fort the entire
---------------------
agreement and understanding of the parties relating to the subject matter
contained herein and merges all prior discussions between them, and neither
party shall be bound by any representations other than as expressly stated in
this Agreement,
10
<PAGE>
or by a written amendment to this Agreement, signed by authorized
representatives of both parties.
13.5. Non-Waiver. The failure of any party in any one or more
----------
instances to insist upon strict performance of any of the terms and conditions
of this Agreement shall not be construed as a waiver or relinquishment, to any
extent, of the right to assert or rely upon any such terms or conditions on any
future occasion.
13.6. Disclaimer of Agency. This Agreement shall not constitute any
--------------------
party the legal representative or agent of another, nor shall any party have the
right or authority to assume, create, or incur any third party liability or
obligation of any kind, express or implied, against or in the name of or on
behalf of another party except as expressly set forth in this Agreement.
13.7. Severability. In the event any term of this Agreement is or
------------
becomes or is declared to be invalid or void by any court of competent
jurisdiction, such term or terms shall be null and void and shall be deemed
deleted from this Agreement, and all the remaining terms of the Agreement shall
remain in full force and effect.
13.8. Governing Law. The validity, performance and construction of
-------------
this Agreement shall be governed by the laws of the State-of Arizona.
13.9. Assignment. No party shall delegate duties of performance or
----------
assign, in whole or in part, rights or obligations under this Agreement without
the prior written consent of the other party, and any attempted delegation or
assignment without such written consent shall be of no force or effect. Subject
to the restrictions contained in the preceding sentence, this Agreement shall be
binding upon the successors and assigns of each of the parties.
13.10. Headings. The headings contained in this Agreement have been
--------
added for convenience only and shall not be construed as limiting.
13.11. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be an original and all of which shall
constitute together the same document.
13.12. Effective Date. This Agreement shall become effective only
--------------
upon the occurrence of the Offer Purchase Date (as defined in the Reorganization
and Distribution Agreement dated July 10, 1994, among SP Ventures, Inc. and
others), and shall terminate and be null and void and of no force and effect
upon any termination of the Merger Agreement.
11
<PAGE>
This Agreement is executed by the parties as of the date indicated above.
ELI LILLY AND COMPANY
By: /s/ Randall L. Tobias
----------------------
Title:
-------------------
PCS HEALTH SYSTEMS, INC.
By: /s/ Garret Scholz
----------------------
Title:
-------------------
HEALTHCARE DELIVERY SYSTEMS,
INC.
By: /s/ Arthur Chong
----------------------
Title:
-------------------
12
<PAGE>
Exhibit A
---------
I. Pharmacy Agreements
-------------------
1. Professional Services Network Pharmacy Agreements between PCS and
various pharmacies, executed on various dates
II. Distribution System Agreements
------------------------------
1. Distribution System Agreement between PCS and Berlex
Laboratories, Inc. dated August 2, 1993
2. Merchant Services Agreement between PCS and Hurley State Bank dated
October 1, 1993
3. Network Services Agreement between PCS and SPS Payment Systems, Inc.
dated October 1, 1993
4. Teaming Agreement between PCS and Pharmaceutical Marketing Services,
Inc.*
5. Distribution System Agreement between PCS and Genentech, Inc. dated
March 14, 1994
III. Patient Assistance Program Agreements
-------------------------------------
1. Agreement between PCS and American Cyanamid*
2. Agreement between PCS and Bristol Myers Squibb*
3. Agreement between PCS and Burroughs Wellcome dated April 1, 1994
4. Agreement between PCS and Park-Davis*
5. Agreement between PCS and Sandoz dated 1992
6. Agreement between PCS and Searle*
7. Agreement between PCS and Upjohn*
IV. Clinical Trial Support
----------------------
1. Clinical Trial Program Agreement for Lamictal between PCS and
Burroughs Wellcome*
- ----------------------
* indicates agreements that have not yet been signed
13
<PAGE>
2. Clinical Trial Program Agreement for Neurontin between PCS and Parke
Davis*
3. Clinical Trial Program Agreement for Cognex between PCS and Parke
Davis*
4. Clinical Trial Program Agreement for Imdur between PCS and Schering*
V. Coupon Programs
---------------
1. Coupon Promotion Agreement for Accupril between PCS and Park Davis*
VI. Sampling Programs
-----------------
1. Sampling Program Agreement for Accupril between PCS and Parke Davis*
2. Sampling Program Agreement between HDS and Upjohn*
3. Sampling Program Agreement between HDS and Rhone-Poulanc*
4. Consulting Agreement between HDS and Coopers & Lybrand*
VII. Patient Programs
----------------
1. Mepron Agreement between PCS and Burroughs Wellcome*
2. Zovirax Agreement between PCS and Burroughs Wellcome*
- -----------------------
* indicates agreements that have not yet been signed
14
<PAGE>
EXHIBIT 99.9
McKESSON SERVICES AGREEMENT
This Agreement, dated as of July 10, 1994, is between PCS Health
Systems, Inc., a Delaware corporation ("PCS"), and SP Ventures,Inc., a Delaware
corporation to be renamed "McKesson Corporation" ("McKesson").
A. Eli Lilly and Company is acquiring certain operations of PCS pursuant to an
Agreement and Plan of Merger dated July 10, 1994 ("Merger Agreement").
B. PCS and McKesson desire to enter into an agreement pursuant to which PCS
will continue to provide certain services to McKesson following closing of
the transactions contemplated by the Merger Agreement, and McKesson will
provide certain services to PCS.
NOW, THEREFORE, the parties agree as follows:
Section 1. Definitions.
1.1 "Unrestricted Network" shall mean a pharmacy network which is
--------------------
available to all pharmacies which agree to meet the network's requirements.
1.2 "Restricted Network" shall mean a pharmacy network which is
------------------
available to a limited number or a percentage of pharmacies in a particular
geographic area.
1.3 "McKesson Stores" shall mean those pharmacies that participate in
---------------
McKesson's Value-Rite(R) program and selected additional pharmacies that
utilize McKesson as their distributor.
1.4 "Specified Rates" shall mean PCS's best price for providing
---------------
comparable services (in terms of size and complexity) to any of PCS's customers
in effect from time to time. In the absence of such price, Specified Rates
shall mean the rates negotiated between PCS and McKesson for the service, taking
into account PCS's historical profit margin and pricing methodologies for
nonstandard services. In no event shall PCS be obligated to provide a price
that will entitle MetLife or any other PCS customer to a price reduction.
Pricing arrangements and programs offered by PCS to its customers that involve
the sale of pharmaceutical products (e.g. mail order pharmacy) or are based upon
the cost of pharmaceutical products in whole or in part (e.g., disease state
management programs, capitation agreements, risk sharing and similar pricing
arrangements) shall not be subject to the best price requirement but shall be
negotiated individually.
<PAGE>
1.5 "PCS Data Processing Capabilities" shall mean programming, data
processing and related auxiliary support for data processing existing at PCS
during the term of this Services Agreement.
1.6 "PCS Data Transmission Capabilities" shall mean switching, data
transmission and telecommunications capabilities of PCS, including without
limitation the RECAP(R) system, or its successors or derivatives, existing at
PCS during the term of this Services Agreement.
1.7 "PCS Capabilities" shall mean the PCS Data Processing
Capabilities, the PCS Data Transmission Capabilities, and access to PCS Provider
Networks and other support services made available to PCS customers existing at
PCS during the term of this Services Agreement.
1.8 "PCS Provider Networks" shall mean the networks of pharmacies,
mail service providers, home infusion providers, and provider networks
associated with the Integrated Medical Systems, Inc., LabOne, Inc. and Health
Care Information Network transactions that have contracted with PCS for the
provision of PCS services and other provider networks that PCS may form during
the term of this Services Agreement.
1.9 "Change of Control" shall mean any of the following enumerated
-----------------
activities by an entity one of whose primary lines of business consists of the
sales of pharmaceutical products ("Pharmaceutical Company") or any part of whose
business consists of providing pharmacy benefit management services ("PBM") or
the parent corporation or a holding company or subsidiary of either a
Pharmaceutical Company or a PBM or by any person who has been employed as a
senior executive (other than senior executives of McKesson and its subsidiaries)
by a PBM or any entity controlled by such person (hereinafter referred to as a
"Covered Entity"):
(i) The acquisition by any Covered Entity or any group of persons
acting in concert, one of whose members is a Covered Entity, of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Securities
Exchange Act of 1934) of thirty percent (30%) or more of either (i) the then
outstanding shares of common stock of McKesson (the "Outstanding Common Stock")
or (ii) the combined voting power of the then outstanding voting securities of
McKesson entitled to vote generally in the election of directors (the
"Outstanding Voting Securities"); provided, however, that for purposes of this
-------- -------
subsection (i), any acquisition by any employee benefit plan (or related trust)
sponsored or maintained by McKesson or any corporation controlled by McKesson
shall not constitute a Change of Control; provided, further, however, that for
-------- ------- -------
purposes of this
2
<PAGE>
subsection (i), any redemption or repurchase by McKesson shall not constitute a
Change of Control; or
(ii) Individuals who, as of the date hereof, constitute the Board of
Directors of McKesson (the "Incumbent Board") cease to constitute at least a
majority of the Board of Directors of Mckesson as a result of an actual or
threatened election contest with election or removal of directors or other
actual or threatened solicitation of proxies or consents by or on behalf of a
Covered Entity (including a settlement of any such actual or threatened contest)
or as a result of any agreement with a Covered Entity; or
(iii) Any Covered Entity consolidates with, or merges with or into,
McKesson, or McKesson merges into any Covered Entity; provided, however, that
-------- -------
such actions shall not constitute a Change of Control if McKesson is the
surviving or continuing corporation; and (a) the shareholders of McKesson
immediately before the transaction own, on a pro forma basis, in the aggregate a
majority of the outstanding voting shares of the resulting entity immediately
after the transaction or (b) no other event which would constitute a Change of
Control has occurred; or
(iv) Any sale, transfer, exchange or other disposition of all, or
substantially all, of the assets of McKesson to a Covered Entity in one or more
transactions; or
(v) Any acquisition by McKesson which required McKesson to issue or
transfer any securities to a Covered Entity, if the securities to be issued or
transferred have or will have upon issuance or transfer, voting power equal to,
or in excess of, thirty percent (30%) of the voting power outstanding before the
issuance or transfer or such securities; or
(vi) The sale, transfer, exchange or other disposition by McKesson of
substantially all of its United States operations to a Covered Entity; or
(vii) Any agreement or understanding by McKesson to do any of
the foregoing.
In addition to the foregoing, the adoption by McKesson of a plan of
complete liquidation or dissolution shall also constitute a Change of Control.
Section 2. Network Access for McKesson Stores.
-----------------------------------
2.1 Unrestricted Networks. PCS shall notify McKesson as soon as
---------------------
reasonably possible but in no event later than when other pharmacy chains are
notified, when PCS develops an Unrestricted Network, and PCS will allow certain
McKesson Stores
3
<PAGE>
which are specified by McKesson in its sole discretion to participate in the
network as a group (chain) when the group meets the Unrestricted Network
requirements. PCS shall not be required to include any McKesson Store in an
Unrestricted Network to the extent that the PCS customer objects to any such
McKesson Store; provided, that PCS shall use reasonable good faith efforts to
have the PCS customer accept such McKesson Store. McKesson may change the
stores which comprise the McKesson Stores on a network by network basis,
provided that such change does not materially adversely affect PCS or its
customer. Nothing in this Services Agreement shall obligate PCS to require that
its customers use a PCS created pharmacy network.
2.2 Restricted Networks. PCS shall notify McKesson as soon as
-------------------
reasonably possible when PCS develops a Restricted Network but in no event later
than when other pharmacy chains are notified, and will use reasonable good faith
efforts to include certain McKesson Stores which are specified by McKesson in
its sole discretion as a group (chain) in such network when the group meets the
requirements necessary to be included in the Restricted Network. In adding
pharmacies to a Restricted Network to meet access requirements, PCS shall notify
McKesson of void areas (areas not adequately serviced by pharmacies admitted to
the Restricted Network), and to the extent permitted by law, include certain
McKesson Stores which are specified by McKesson in its sole discretion in
filling any void areas on a preferential basis. PCS shall not be required to
include any McKesson Store in a network to the extent that the PCS customer
objects to any such McKesson Store; provided, that PCS shall use reasonable good
faith efforts to have the PCS customer accept any McKesson Store.
2.3 McKesson Store Compliance. Subject to compliance with applicable
-------------------------
legal requirements, PCS shall provide McKesson prior written notice of any
disciplinary action (up to and including removal from any network) that PCS
proposes to take against any McKesson Store in connection with any failure of
such McKesson Store to satisfy its obligations to PCS. The parties shall
cooperate to cause the McKesson Store to comply with the applicable requirements
prior to taking any disciplinary action. If such McKesson Store is not in
compliance within thirty (30) days of such notice, disciplinary action may be
taken by PCS.
Section 3. Pharmacy Data.
-------------
3.1 All Pharmacy Data. Subject to applicable laws and contractual
-----------------
restrictions, PCS shall consider in good faith providing McKesson with PCS data
regarding pharmacies. PCS shall not be obligated to provide any such data if in
the sole discretion of PCS making such data available to McKesson would be
contrary to the business interests of PCS. If PCS determines to provide any
such data to McKesson, patient names and PCS customer identification shall not
be provided. McKesson shall maintain
4
<PAGE>
such data in confidence, use it only for its own purposes, shall not use such
information to disadvantage PCS in the marketplace, and not make such data
available to any third party. McKesson shall pay PCS at the Specified Rates for
such services.
3.2 McKesson Pharmacy Data. PCS shall maintain for and provide to
----------------------
McKesson a database of information relating to the participation by McKesson
Stores in PCS Provider Networks. Such information shall include lists and
directories of McKesson Stores and information generated through use of
GeoAccess or other GIS programs as long as such information can be obtained
utilizing the PCS Capabilities. Reports of such information shall be provided
to McKesson no more frequently than reports of similar information are generated
for PCS's own use. Subject to applicable laws and contractual restrictions
between PCS and its customers, there shall be no restriction on PCS's access to
such information. McKesson shall maintain such information in confidence, use
such information only for its own purposes and shall not use such information in
a manner likely to disadvantage PCS in the market place and shall not make such
data available to any third party except to McKesson Stores. McKesson shall pay
PCS at the Specified Rates for such services.
3.3 Service Limitations. PCS agrees that it will not add
-------------------
restrictions to its agreements with third parties, except to the extent
requested by such party, for the purpose of limiting the services it is
obligated to provide to McKesson under this Section(3).
Section 4. Managed Care Support.
--------------------
4.1 Mail Order. At McKesson's request, PCS shall provide to McKesson
----------
at the Specified Rates PCS's mail order pharmacy program for all maintenance
drug dispensing requirements associated with McKesson's managed care and
Healthcare Delivery Systems, Inc. programs.
4.2 McKesson Services Unit. PCS shall create and maintain a services
----------------------
unit whose primary responsibility is to service McKesson as a customer and which
would provide to McKesson the following services: (i) consulting, training, and
education concerning the managed care industry and PCS's products and services;
and (ii) advice regarding industry events and trends affecting pharmacies. The
unit shall consist initially of one or two persons expert in managed pharmacy
care with additional persons to be added if the growth of the McKesson's
business so requires. The unit would be available during specified normal
business hours. Such services would be compensated at the Specified Rates.
4.3 PCS Services. McKesson agrees that if it contracts with
------------
customers to provide managed pharmacy benefits,
5
<PAGE>
McKesson will only provide such benefits through PCS. PCS agrees to establish
and maintain arrangements, directly or through McKesson as a third party
administrator or through one or more third party administrators selected by
McKesson, to provide such managed pharmacy benefit to such customers regardless
of size. PCS shall provide those services at the Specified Rates for similar
offerings for customers of similar size. In addition to the Specified Rates,
where agreed, a reasonable commission payable to McKesson shall be charged.
Nothing in this Section 4.3 shall preclude McKesson from facilitating or
arranging for the admission of its retail pharmacy customers into pharmacy
benefit management networks; for purposes of certainty, such facilitating or
arranging shall not involve the provision of pharmacy benefit management
services by McKesson.
Section 5. Switching Services. To support McKesson's value added
------------------
transaction services to pharmacies by enabling McKesson to route claims to the
appropriate settlement point, PCS shall provide to McKesson PCS's Data
Processing Capabilities and related claims routing (switching) services to the
extent requested by McKesson. McKesson shall pay the Specified Rates for such
services.
Section 6. Term. The term of this Services Agreement shall be five (5)
----
years. The Services Agreement will automatically renew for successive twelve
(12) month terms unless either party gives the other party written notice of
termination not less than ninety (90) days prior to the end of the term or any
renewal term. If either party is in material default under this Services
Agreement and fails to correct the default within thirty (30) days after receipt
of written notice of default from the non-defaulting party, the non-defaulting
party may terminate this Services Agreement by written notice to the defaulting
party. In addition, PCS shall have the right to terminate this Services
Agreement upon thirty (30) days' written notice to McKesson upon any Change of
Control of McKesson.
Section 7. Increased Costs. In the event the provision of any of the
---------------
services under this Services Agreement results in an increase in costs to PCS
for additional personnel, computer and peripherals capacity, software licenses,
equipment or similar items or an increase in processing or operating expenses,
McKesson shall reimburse PCS for the entire amount of such expenses if incurred
entirely for the benefit of McKesson under this Services Agreement or, if such
expenses only partially benefit McKesson, McKesson shall pay its share of such
expenses in proportion to the extent of use; provided, however, McKesson shall
-------- -------
not be responsible for such reimbursement to the extent such increased costs are
reflected in Specified Rates payable by McKesson.
6
<PAGE>
Section 8. Discontinued Services. Nothing in this Services Agreement
---------------------
shall require PCS to continue any service to be provided under this Services
Agreement if such service is no longer required for the business of PCS. If PCS
plans to discontinue any service, it will notify McKesson in writing as soon as
feasible in advance of discontinuing such service but in no event later than
other PCS customers are notified. McKesson shall have the right to obtain the
service to be discontinued from a third party or can agree to reimburse PCS
fully for all expenses that will be incurred by PCS to continue the service for
the sole benefit of McKesson. If McKesson agrees to such reimbursement, PCS
will continue the service solely for the benefit of McKesson.
Section 9. Limitations.
-----------
PCS shall not be required to perform any services to the extent such
services would result in the breach of any software license or other applicable
contract in existence on the date hereof. If PCS believes it is unable to
provide any services pursuant to the foregoing, PCS shall promptly notify
McKesson. If requested by McKesson, PCS as the case may be shall use reasonable
efforts to obtain the rights necessary to provide such services, including
obtaining any appropriate consents from third parties. McKesson shall be
responsible for all additional costs and expenses incurred by PCS in order to
allow PCS to provide such services.
Section 10. Payment for Services.
--------------------
Each party shall submit, on a monthly basis, an invoice for services
performed under this Services Agreement in the preceding month. Each invoice
shall be payable net thirty (30) days after the date of the invoice; however, in
the event any party in good faith questions any invoiced item, payment of that
item shall be made only after the satisfactory resolution of those questions.
An interest charge of 1% per month will accrue on all overdue amounts.
Section 11. Confidentiality.
---------------
11.1 In the course of performance of this Services Agreement, any
party ("Receiving Party") may acquire information that another party
("Disclosing Party") deems confidential, including trade secrets and unpublished
technical information and data to which the Disclosing Party (or companies
affiliated with the Disclosing Party) has proprietary rights. A party may also
receive information of a third party which the Disclosing Party is under an
obligation to maintain in confidence. The Disclosing Party shall clearly mark
all confidential information. All such information, when clearly marked as
confidential, is referred to hereinafter as "Disclosed Information".
7
<PAGE>
11.2 The Receiving Party shall retain Disclosed Information in strict
confidence and shall not communicate it to others without the Disclosing Party's
prior written agreement. Notwithstanding the foregoing, PCS and PCS shall be
allowed to disclose Disclosed Information to third parties as necessary to
perform the services, provided such third parties have undertaken
confidentiality obligations substantially similar to those set forth in this
Section 12.
11.3 Nothing in this Agreement shall prevent the communication to
others of any Disclosed Information which the Receiving Party can show was known
to it or its representatives prior to its receipt hereunder, was lawfully
received by the Receiving Party and its representatives other than directly or
indirectly from the Disclosing Party, became public knowledge through no fault
of the Receiving Party, is required by law to be disclosed.
11.4 The provisions of this Section 11 shall survive termination of
this Agreement for a period of 3 years.
Section 12. Miscellaneous.
-------------
12.1 Notices. All notices required or permitted to be given under
-------
this Agreement shall be in writing and shall be sent by facsimile transmission
or mailed by registered or certified mail addressed to the party to whom such
notice is required or permitted to be given. All notices shall be deemed to
have been given when transmitted if given by facsimile and confirmation of
receipt is received or, if mailed, five days after mailed as evidenced by the
postmark at the point of mailing.
All notices to PCS shall be addressed as follows:
PCS Health Systems, Inc.
9501 East Shea Boulevard
Scottsdale, AZ 85260
Attention: President
Facsimile: 602-451-0964
All notices to McKesson shall be addressed as follows:
SP Ventures, Inc.
One Post Street
San Francisco, CA 94104
Attention: David Mahoney
Facsimile: 415-983-8826
Any party may, by written notice to the other, designate a new address to which
notices to the party giving the notice shall thereafter be mailed.
8
<PAGE>
12.2 Force Majeure. No party shall be liable for any delay or
-------------
failure of performance to the extent such delay or failure is caused by
circumstances beyond its reasonable control and that by the exercise of due
diligence it is unable to prevent, provided that the party claiming excuse uses
its best efforts to overcome the same.
12.3 Limitation of Liability. No party shall be liable to the other
-----------------------
party for indirect, consequential, incidental or special damages, including but
not limited to lost profits, arising from or relating to any breach of this
Agreement, regardless of any notice of such damages.
12.4 Entirety of Agreement. This Agreement sets forth the entire
---------------------
agreement and understanding of the parties relating to the subject matter
contained herein and merges all prior discussions between them, and neither
party shall be bound by any representation other than as expressly stated in
this Agreement, or by a written amendment to this Agreement signed by authorized
representatives of both parties.
12.5 Non-Waiver. The failure of any party in any one or more
----------
instances to insist upon strict performance of any of the terms and conditions
of this Agreement shall not be construed as a waiver or relinquishment, to any
extent, of the right to assert or rely upon any such terms or conditions on any
future occasion.
12.6 Disclaimer of Agency. This Agreement shall not constitute any
--------------------
party the legal representative or agent of another, nor shall any party have the
right or authority to assume, create, or incur any third-party liability or
obligation of any kind, express or implied, against or in the name of or on
behalf of another party except as expressly set forth in this Agreement.
12.7 Severability. In the event any term of this Agreement is or
------------
becomes or is declared to be invalid or void by any court of competent
jurisdiction, such term or terms shall be null and void and shall be deemed
deleted from this Agreement, and all the remaining terms of the Agreement shall
remain in full force and effect.
12.8 Governing Law. The validity, performance and construction of
-------------
this Agreement shall be governed by the laws of the State of Arizona.
12.9 Assignment. No party shall delegate duties of performance or
----------
assign, in whole or in part, rights or obligations under this Agreement without
the prior written consent of the other party, and any attempted delegation or
assignment without such written consent shall be of no force or effect. Subject
to the restrictions contained in the preceding sentence, this
9
<PAGE>
Agreement shall be binding upon the successors and assigns of each of the
parties.
12.10 Headings. The headings contained in this Agreement have been
--------
added for convenience only and shall not be construed as limiting.
12.11 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be an original and all of which shall
constitute together the same document.
12.12 Effective Date. This Agreement shall become effective only
--------------
upon the occurrence of the Offer Purchase Date (as defined in the Reorganization
and Distribution Agreement, dated July 10, 1994, among McKesson and others), and
shall terminate and be null and void and of no force and effect upon any
termination of the Merger Agreement.
This Agreement is executed by the parties as of the date indicated above.
SP VENTURES, INC. PCS HEALTH SYSTEMS, INC.
By: /s/ Arthur Chong By: /s/ Garret Scholz
-------------------- --------------------
Title: Title:
----------------- -----------------
10
<PAGE>
EXHIBIT 99.10
June 8, 1994
Eli Lilly & Company
Lilly Corporate Center
Indianapolis, Indiana 46285
CONFIDENTIALITY AGREEMENT
-------------------------
Dear Sirs:
We understand that Eli Lilly & Company desires to engage in certain discussions
with McKesson Corporation ("McKesson") and PCS Health Systems, Inc., a wholly
owned subsidiary of McKesson (the "Company"), in order to evaluate a possible
transaction (the "Transaction") involving you, McKesson and the Company. You
have requested that we furnish you with certain information relating to McKesson
and the Company which is non-public, confidential or proprietary in nature. All
such information (whether documentary, computerized or oral) furnished after the
date hereof by McKesson or the Company or their respective directors, officers,
employees, affiliates, representatives (including, without limitation, financial
advisors, attorneys and accountants) or agents (collectively, "our
Representatives") to you or your directors, officers, employees, affiliates,
representatives (including, without limitation, financial advisors, attorneys
and accountants) or agents (collectively, "your Representatives") and all
analyses, compilations, forecasts, studies, summaries, notes, data and other
documents and materials in whatever form maintained, whether prepared by you,
your Representatives or others, which contain or reflect, or are generated from,
any such information or which reflect your or your Representatives' review of,
or your interest in, the Transaction is hereinafter referred to as the
"Information." The term Information will not, however, include information
which (i) is known to you or is or becomes publicly available other than as a
result of a disclosure by you or your Representatives or (ii) is or becomes
available to you on a nonconfidential basis from a source (other than McKesson,
the Company or our Representatives) which, to the best of your knowledge after
due inquiry, is not prohibited from disclosing such information to you by a
legal, contractual, fiduciary or other obligation to McKesson or the Company.
As a condition to, and in consideration of McKesson and the Company engaging in
further discussions with you and providing you with Information, you acknowledge
and agree as follows:
<PAGE>
1. You and your Representatives (i) will keep the Information confidential and
will not (except as required by applicable law, regulation or legal
process, and only after compliance with paragraph 3 below), without our
prior written consent, disclose any Information in any manner whatsoever,
and (ii) will not use any Information other than in connection with your
consideration of the Transaction. You further agree to disclose the
Information only to your Representatives (a) who need to know the
Information for the purpose of evaluating the Transaction, (b) who are
informed by you of the confidential nature of the Information and (c) who
agree to be bound by the terms of this agreement. You agree to cause your
Representatives to observe the terms of this agreement and will be
responsible for any breach of this agreement by any of your
Representatives. You may also disclose the Information to other persons
provided that (a) you obtain our prior written consent, (b) such person
executes a counterpart of this agreement prior to any such disclosure, and
(c) such person further agrees to such additional conditions and
restrictions as may be appropriate to the extent such person does or may
compete with you.
2. Except as may be required by law or as otherwise permitted by this
agreement, without the prior written consent of McKesson, you and your
Representatives will not disclose to any person any information regarding a
possible Transaction or any information relating in any way to the
Information, including, without limitation (i) that any investigations,
discussions or negotiations are taking or have taken place concerning a
possible Transaction, including the status thereof or the termination of
discussions or negotiations with McKesson or the Company, (ii) any of the
terms, conditions or other facts with respect to any such possible
Transaction or of your consideration of a possible Transaction or (iii)
that this agreement exists, that Information exists or has been requested
or made available or any opinion or view with respect to McKesson, the
Company or the Information. In this regard, McKesson has advised you of its
concern regarding the potential for harm to McKesson, the Company and their
employees that could result from disclosure of the foregoing or of
Information. The term "person" as used herein will be interpreted broadly
to include, without limitation, any corporation, company, entity,
partnership, partner, group, individual, potential joint bidder or co-
bidder or source of financing. Except as may be required by law or as
otherwise permitted by this agreement, McKesson, the Company and their
Representatives agree not to disclose to any person your identity with
respect to any consideration of a possible Transaction.
3. In the event that you or any of your Representatives are requested or
required (by oral questions, interrogatories, requests for information or
documents, subpoena, civil investigative demand, any informal or formal
investigation by any government or governmental agency or authority or
otherwise) to disclose any of the Information, you will notify McKesson
promptly in writing so that we may seek a protective order or other
appropriate remedy or, in our sole discretion, waive compliance with
2
<PAGE>
the terms of this agreement. You and your Representatives agree not to
oppose any action by McKesson to obtain a protective order or other
appropriate remedy. In the event that no such protective order or other
remedy is obtained, or that McKesson waives compliance with the terms of
this agreement, you and your Representatives will furnish only that portion
of the Information which you are advised by counsel is legally required and
will exercise your reasonable best efforts to obtain reliable assurance
that confidential treatment will be accorded the Information.
4. If you determine not to proceed with the Transaction, you will promptly
inform McKesson. You acknowledge and agree that McKesson and the Company
have made no decision to pursue any Transaction and you agree that McKesson
and the Company will have the right in their sole discretion, without
giving any reason therefor, at any time to terminate discussions with you
concerning a possible Transaction, to elect not to pursue any such
Transaction, or to pursue the Transaction without your involvement. You
and your Representatives agree, immediately upon a request from McKesson,
to return to McKesson all Information, and no copies, extracts or other
reproductions of the Information shall be retained by you or your
Representatives, except that one copy of such materials may be retained
(solely for the purposes of any subsequent dispute between the parties) in
the files of your outside attorneys, whose names will be provided to
McKesson and the Company. Any portion of the Information that consists
solely of analyses, compilations, forecasts, studies, summaries, notes,
data or other documents or materials prepared by you or your
Representatives, in lieu of being returned to McKesson, may be destroyed by
you, in which event one of your authorized officers shall provide
certification to McKesson that such materials have in fact been so
destroyed, except that one copy of such materials may be retained (solely
for the purposes of any subsequent dispute between the parties) in the
files of your outside attorneys, whose names will be provided to McKesson
and the Company. Any material retained by your outside attorneys pursuant
to this paragraph 4, and any oral Information, will continue to be subject
to the provisions of this agreement.
5. You and your Representatives acknowledge that none of McKesson, the
Company, nor their Representatives, nor any of their respective officers,
directors, employees, agents or controlling persons within the meaning of
Section 20 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), makes any express or implied representation or warranty as
to the accuracy or completeness of the Information. You and your
Representatives agree that no such person will have any liability to you or
any of your Representatives on any basis (including, without limitation, in
contract, tort, under federal or state securities laws or otherwise), and
neither you nor your Representatives will make any claims whatsoever
against such persons, with respect to or arising out of the Transaction,
whether as a result of this agreement, any other written or oral expression
with respect to the Transaction, your
3
<PAGE>
participation in evaluating the possible Transaction or the Procedures
therefor (as defined in paragraph 9 below), your review of the Company, the
use of the Information by you or your Representatives, any errors therein
or omissions from the Information, or otherwise. You and your
Representatives further agree that you are not entitled to rely on the
accuracy or completeness of the Information and that you will be entitled
to rely solely on such representations and warranties as may be included in
any definitive agreement with respect to the Transaction, subject to such
limitations and restrictions as may be contained therein.
6. You are aware, and you will advise your Representatives who are informed of
the matters that are the subject of this agreement, of the restrictions
imposed by the United States securities laws on the purchase or sale of
securities by any person who has received material, non-public information
from the issuer of such securities and on the communication of such
information to any other person.
7. You represent and warrant that as of the date hereof, neither you nor any
of your subsidiaries beneficially owns any securities of McKesson. You
agree that, for a period of three years from the date of this agreement,
whether or not McKesson shall continue to own any voting securities of the
Company, neither you nor any of your Representatives, on your behalf, will,
unless and until such shall hereafter have been specifically invited in
writing by McKesson: (i) acquire, offer to acquire, or agree to acquire,
directly or indirectly, by purchase or otherwise, any voting securities or
direct or indirect rights to acquire any voting securities of McKesson, the
Company or any subsidiary thereof or (other than in the ordinary course of
business) any assets of McKesson, the Company or any subsidiary or division
thereof, (ii) make, or in any way participate in, directly or indirectly,
any "solicitation" of "proxies" (as such terms are used in the rules of
the Securities and Exchange Commission) to vote, or seek to advise or
influence any person or entity with respect to the voting of, any voting
securities of McKesson or the Company, (iii) make any public announcement
with respect to, or submit a proposal for, or offer of (with or without
conditions) any merger, consolidation, business combination, tender or
exchange offer, restructuring, recapitalization or other extraordinary
transaction of or involving McKesson, the Company or any of their
subsidiaries or their securities or assets, (iv) form, join or in any way
participate in a "group" (as defined in Section 13(d)(3) of the Exchange
Act) in connection with any voting securities of McKesson or the Company,
(v) otherwise act, alone or in concert with others, to seek to control or
influence the management, Board of Directors or policies of McKesson or the
Company, or (vi) have any discussions or enter into any arrangements,
understandings or agreements (whether written or oral) with, or advise,
assist or encourage, any other persons in connection with any of the
foregoing. You and your Representatives, on your behalf, also agree
during such period not to make any proposal, statement or inquiry, or
disclose any intention, plan or arrangement, whether written or oral,
inconsistent with the foregoing, or request
4
<PAGE>
McKesson or any of its Representatives, directly or indirectly, to amend,
waive or terminate any provision of this paragraph. You will promptly
advise McKesson of any inquiry or proposal made to you with respect to any
of the foregoing, including the details thereof. The representation and
restrictions contained in this paragraph do not apply to any securities of
McKesson that may be owned solely for investment purposes by any employee
benefit plan which is presently maintained on behalf of your employees,
provided that said ownership does not exceed 1% of the total number of
outstanding shares of any class of voting securities of McKesson. The
representation and restrictions contained in this paragraph also will not
prevent your financial advisor from engaging in trading or brokerage
transactions in the ordinary course of its business as presently conducted,
provided that neither said advisor nor its affiliates will acquire
beneficial ownership of more than 1% of the total number of outstanding
shares of any class of voting securities of McKesson. Notwithstanding
anything to the contrary in this paragraph 7, in the event that (x) you
enter into a definitive agreement with McKesson with respect to the
Transaction and (y) prior to any termination of such definitive agreement,
any person publicly makes an unsolicited bona fide offer to acquire a
majority of McKesson's voting securities, then you shall have the right to
make a competing offer provided you agree to be bound by and comply with
any procedures and guidelines for the submission of any such offers that
McKesson may establish.
8. You agree that, for a period of two years from the date of this agreement,
you will not, directly or indirectly, solicit for employment or hire any
employee of McKesson or the Company or any subsidiary thereof with whom you
have had contact or who became known to you in connection with your
consideration of the Transaction; provided, however, that the foregoing
-------- -------
provision will not prevent you from employing any such person, other than
any McKesson or Company officer, who contacts you on his or her own
initiative without any direct or indirect solicitation by or encouragement
from you.
9. You acknowledge that if McKesson determines to pursue a Transaction, it may
establish procedures and guidelines (the "Procedures") for the submission
of proposals with respect to any Transaction with or involving the Company.
You and your Representatives agree to act in accordance with the Procedures
and to be bound by the terms and conditions that may be established
pursuant to the Procedures, including adhering to any timing conditions
that may be established relating to when proposals for such a Transaction
may be submitted. You acknowledge and agree that (a) McKesson and its
Representatives are free to conduct the process leading up to a possible
Transaction as McKesson and its Representatives, in their sole discretion,
determine (including, without limitation, by negotiating with any third
party and entering into a preliminary or definitive agreement without prior
notice to you or any other person), and (b) McKesson reserves the right, in
its sole discretion, to change the Procedures relating to its consideration
of the Transaction at any time
5
<PAGE>
without prior notice to you or any other person, to reject any and all
proposals made by you or any of your Representatives with regard to the
Transaction, and to terminate discussions and negotiations with you at any
time and for any reason.
10. You and your Representatives agree not to initiate or maintain contact
(except for those contacts made in the ordinary course of business) with
any officer, director, employee or agent of the Company except with the
express prior permission of McKesson or Morgan Stanley & Co. Incorporated
("Morgan"). It is understood that Morgan will arrange for appropriate
contacts for due diligence purposes. It is further understood that all (a)
communications regarding a possible transaction, (b) requests for
additional information, (c) requests for facility tours or management
meetings and (d) discussions or questions regarding Procedures, will be
submitted only to Morgan or certain designated McKesson employees.
11. (a) You agree that McKesson and the Company would be irreparably injured
by a breach of this agreement by you or your Representatives, that
monetary remedies would be inadequate to protect us against any actual
or threatened breach of this agreement by you or by your
Representatives, and, without prejudice to any other rights and
remedies otherwise available to us, you agree to the granting of
equitable relief, including injunctive relief and specific
performance, in our favor without proof of actual damages. You agree
to reimburse McKesson for its costs and expenses (including, without
limitation, reasonable legal fees and expenses) incurred to remedy any
and all breaches of this agreement.
(b) This agreement shall inure to the benefit of and be binding upon each
of you and McKesson and the respective successors and persons in
control of you, McKesson and the Company (including, without
limitation, any entity owning a significant portion of the assets of
McKesson which is distributed to stockholders by dividend or
otherwise), notwithstanding any sale or disposition by McKesson of all
or any portion of its interest in the Company. It is further agreed
that no failure or delay in exercising any right, power or privilege
hereunder will operate as a waiver thereof, nor will any single or
partial exercise thereof preclude any other or further exercise
thereof or the exercise of any right, power or privilege hereunder.
(c) This agreement will be governed by and construed in accordance with
the laws of the State of New York, without regard to the principles of
conflict of laws thereof.
(d) This agreement contains the entire agreement between you and us
concerning the subject matter hereof and supersedes all previous
agreements, written or oral, relating to the subject matter hereof.
No modifications of this
6
<PAGE>
agreement or waiver of the terms and conditions hereof will be binding
upon you or us, unless approved in writing by each of you and us.
(e) If any provision of this agreement shall, for any reason, be adjudged
by any court of competent jurisdiction to be invalid or unenforceable,
such judgment shall not affect, impair or invalidate the remainder of
this agreement but shall be confined in its operation to the provision
of this agreement directly involved in the controversy in which such
judgment shall have been rendered.
(f) This agreement may be executed in counterparts, each of which shall be
deemed to be an original, but both of which shall constitute the same
agreement. You warrant that the person who executes this agreement on
your behalf has full corporate authority to do so.
Please confirm your agreement with the foregoing by signing and returning to the
undersigned the duplicate copy of this letter enclosed herewith.
Very truly yours,
McKESSON CORPORATION
By: /s/ David L. Mahoney
-----------------------
Name: David L. Mahoney
Title: Vice President
Accepted and Agreed
as of the date first
written above:
Eli Lilly & Company
By: /s/ Sidney Taurel
-------------------------------
Name: Sidney Taurel
Title: Executive Vice President
7
<PAGE>
EXHIBIT 99.12
MCKESSON CORP.
One Post Street, San Francisco CA 94104-5296 Tel 415 983 8300
ALAN SEELENFREUND Chairman and Chief Executive Officer
[LOGO OF MCKESSON
APPEARS HERE]
July 15, 1994
DEAR STOCKHOLDERS:
I am pleased to inform you that on July 10, 1994, McKesson Corporation
entered into an Agreement and Plan of Merger providing for the acquisition by
Eli Lilly and Company of McKesson's pharmaceutical benefits management
business, which is primarily operated by PCS Health Systems, Inc. and Clinical
Pharmaceuticals, Inc., two subsidiaries of McKesson (the "PCS business"), for
$4 billion in cash.
As required by the Agreement and Plan of Merger, ECO Acquisition Corporation,
a subsidiary of Eli Lilly, has commenced today a cash tender offer (the
"Offer") to purchase all outstanding shares of McKesson Common Stock (the
"Shares") at a price of $76.00 net per Share. The Offer is conditioned upon,
among other things, satisfaction of the condition that there be validly
tendered and not withdrawn, prior to the expiration of the Offer, a number of
Shares that represent at least a majority of the total voting power of
McKesson. Following the purchase of Shares under the Offer and satisfaction of
certain other conditions, including such approval by McKesson stockholders as
may be required by law, McKesson and ECO Acquisition Corporation will merge
(the "Merger") and each Share not purchased in the Offer (other than Shares
held by stockholders who have perfected any appraisal rights available under
Delaware law and Shares held by Eli Lilly and certain other entities related to
Eli Lilly or McKesson) will be converted into the right to receive $76.00 in
cash or such higher price per Share as may be paid pursuant to the Offer,
without interest.
In addition, prior to the consummation of the Offer, McKesson will (i)
transfer the businesses of the Company and its subsidiaries other than the PCS
business to SP Ventures, Inc., a newly-formed corporation which was established
to hold all of the assets of the Company other than those related to the PCS
business ("New McKesson") and (ii) declare a dividend (conditioned upon
consummation of the Offer) of one share of common stock of New McKesson for
each Share held of record as of a date determined by McKesson's Board of
Directors (collectively, the "Spin-Off"). After giving effect to the Spin-Off
and the consummation of the Offer, the current businesses of McKesson (other
than its PCS business) will be continued through New McKesson. Of the $4
billion to be paid by Eli Lilly, Eli Lilly has agreed to contribute $600
million to McKesson, subject to certain adjustments, which amount will be
transferred to New McKesson to meet certain tax and transaction costs and for
the general corporate purposes of New McKesson.
THE BOARD OF DIRECTORS OF MCKESSON HAS UNANIMOUSLY APPROVED THE OFFER, THE
MERGER AND THE SPIN-OFF, DETERMINED THAT THE OFFER, THE MERGER AND THE SPIN-OFF
ARE FAIR TO THE STOCKHOLDERS OF MCKESSON AND ARE IN THE BEST INTERESTS OF THE
STOCKHOLDERS OF MCKESSON, AND RECOMMENDS ACCEPTANCE OF THE OFFER AND APPROVAL
AND ADOPTION OF THE MERGER AGREEMENT BY THE STOCKHOLDERS OF MCKESSON.
In arriving at its recommendation, the Board of Directors has given careful
consideration to a number of factors as described in the enclosed Schedule 14D-
9 filed with the Securities and Exchange Commission, including the opinion of
Morgan Stanley & Co. Incorporated, McKesson's financial advisor, that, taken
together, as of the date of its opinion, the Spin-Off and the consideration to
be received by the holders of Shares in the Offer and the Merger are fair from
a financial point of view to such holders. The Schedule 14D-9 contains other
important information relating to the Offer, and you are encouraged to read the
Schedule 14D-9 carefully.
<PAGE>
Accompanying this letter is the Offer to Purchase of ECO Acquisition
Corporation, a subsidiary of Eli Lilly, dated July 15, 1994, together with
related materials including the Letter of Transmittal to be used for tendering
your Shares. These documents set forth the terms and conditions of the Offer
and provide instructions as to how to tender your Shares. We urge you to read
the enclosed material carefully before making your decision with respect to
tendering your Shares.
On behalf of the Board of Directors and management of McKesson, we thank you
for your support.
Sincerely,
/s/ Alan Seelenfreund
Alan Seelenfreund
Chairman and
Chief Executive Officer
2
<PAGE>
EXHIBIT 99.13
[LETTERHEAD OF McKESSON CORP. APPEARS HERE]
Contact at McKesson: Marvin Krasnansky
(415) 983-8316
at PCS: Blair Jackson
(602) 391-4138
McKESSON AGREES TO SELL ITS PCS UNIT TO ELI LILLY
FOR $4 BILLION IN CASH UNDER CORPORATE RESTRUCTURING
For Each Share of McKesson, Shareholders Will Receive
$76 In Cash and One Share in a New McKesson
Holding All of McKesson Corp. Assets Other Than PCS
SAN FRANCISCO, Monday, July 11, 1994 -- McKesson Corp. announced today that it
has entered into a definitive agreement for a corporate restructuring pursuant
to which it will sell its PCS Health Systems, Inc. subsidiary to Eli Lilly and
Company for $4 billion in cash. PCS is the nation's largest provider of
prescription benefit management services.
Alan Seelenfreund, chairman and chief executive officer of McKesson, said
that McKesson's shareholders will receive $76 a share in cash, totaling $3.4
billion, and one share of stock in a new McKesson for each share of McKesson
Corp. they own through the spin-off of the new McKesson's shares to current
shareholders.
The new McKesson will use the balance of the amount paid by Lilly to pay
taxes and transaction costs and for general corporate purposes, Seelenfreund
said. The transaction, which has been approved by the boards of directors of
both companies, subject to various conditions including provisions of the
Hart-Scott-Rodino Act, is expected to close in 60 to 75 days.
The new McKesson will retain all of the company's assets except the PCS
business. These include the company's wholesale
<PAGE>
2
drug operations--McKesson Drug Co. in the U.S., Medis Health and
Pharmaceutical Services in Canada, and its interest in Nadro, S.A., in
Mexico--Millbrook Distribution Services, McKesson Water Products and its 57%
interest in Armor All Products Corp.
The agreement with Lilly also provides for the new McKesson to retain the
recently formed Healthcare Delivery Systems (HDS) division of PCS and
McKesson's 30% interest in the Technology Assessment Group (TAG). HDS works
with manufacturers to manage distribution of biotechnology and pharmaceutical
drugs that require special delivery systems. TAG is a leading consulting
organization specializing in medical and pharmaceutical outcomes research.
In discussing the transaction, Seelenfreund said that "the movement
toward more aggressive managed care and the recent acquisition of several
other prescription benefit managers by pharmaceutical manufacturers has made
the business much more competitive. PCS is now competing against companies
with substantially greater clinical resources, detail forces, physician
relationships, disease-state management protocols and significant R&D
budgets.
"In light of this changed environment and the offer from Lilly, we
believe that this transaction represents the best opportunity to maximize
shareholder value."
Seelenfreund noted that the transaction includes arrangements that will
continue to offer the benefits from McKesson's alliance with PCS to McKesson's
wholesale drug
<PAGE>
3
distribution customers. Seelenfreund stressed "the transaction will help to
realize the commitment of McKesson's management and directors to focusing on
shareholder value, achieving consistent, long-term earnings growth and
maintaining a strong financial structure that affords the company access to
capital markets on favorable terms. We continue to be optimistic about the
future prospects of the company."
Seelenfreund added, "While the new McKesson will be subject to some
corporate level taxes arising from the corporate restructuring, the amount of
taxes for this transaction is minimal. Shareholders are expected to be subject
to capital gains taxes on both cash and shares they receive."
Lilly is expected to commence a tender offer shortly for all outstanding
shares of McKesson Corp., which at the time of closing will hold only the
remaining assets of PCS, including McKesson's interest in Integrated Medical
Systems. The offer will remain open for a minimum of 20 business days and
should close shortly following completion of the spin-off, subject to the
satisfaction of various conditions to the offer, including expiration of the
waiting period under the provisions of Hart-Scott-Rodino, and the
effectiveness of the information statement relating to the spin-off to be
filed with the Securities and Exchange Commission.
Seelenfreund said that on completion of the transaction, the McKesson
Employee Stock Ownership Plan (ESOP) will have approximately $250 million
available for reinvestment in the
<PAGE>
4
shares of the new McKesson. It is expected that purchases will be made by the
ESOP trustee, the Chase Manhattan Bank, in market transactions or otherwise at
prevailing prices.
Looking to the future, Seelenfreund said: "The ongoing relationship
that McKesson will enjoy with PCS will enable us to continue to work closely
with them on involving retail pharmacists in delivering quality,
cost-effective prescription and other health care services for health plan
sponsors, pharmaceutical manufacturers and patients."
Under terms of the agreement, McKesson will continue to have access to
certain PCS capabilities and services. This will include:
* A continuation of the existing relationships between PCS and selected
McKesson customers;
* Information systems services and switching capabilities;
* Inclusion of McKesson's retail pharmacy customers in disease-state
management programs;
* Joint programs to provide high quality, cost-effective products and
services.
Seelefreund noted that McKesson is Lilly's largest customer, Lilly is
McKesson's second largest supplier and the companies represent two of the
nation's oldest health care organizations. In addition, he said, "In building
on this relationship for the future, we share a strong, historic commitment to
supporting the critical role played by pharmacists
<PAGE>
5
in the health care delivery system. That commitment will continue and be
strengthened in the years to come."
"The Lilly-McKesson relationship spans many decades and has consistently
played a crucial role in the delivery of health care products and services in
this country and abroad," said Randall L. Tobias, Lilly chairman and chief
executive officer. "Over the years, McKesson has clearly been one of our most
valued customers. We at Lilly are very excited about today's announcement and
are eagerly looking forward to developing future value-added strategic
alliances with McKesson."
Added Steve Geringer, president of PCS, "We believe that the affiliation
with Lilly will enable us to provide even higher value and increased levels of
service to health plan sponsors. We think that more than any other
pharmaceutical company, Lilly shares the vision and commitment of PCS to link
information management, medical research and clinically driven pharmaceutical
therapies to improve overall health care for our clients."
On completion of the transaction, McKesson's financial statements will be
restated to reflect PCS as a discontinued operation. Restated fiscal 1994
revenues were $12.25 billion, up 6% from $11.56 billion in fiscal 1993. As
originally reported, revenues in fiscal 1994 were $12.43 billion, up 6.5% from
$11.67 billion in the prior year. Restated fiscal 1994 net income before
special income items was $102 million, up 7.3% from $95.1 million. As
originally reported, net income before special income items in fiscal 1994 was
$132.6 million, an increase of
<PAGE>
6
16% from $114.7 million. Restated fully diluted earnings per share for fiscal
1994 were $2.22, an increase of 7.2% from $2.07. As originally reported,
fully diluted earnings per share were $2.92, a 16% increase from $2.51. (See
table attached).
Restating the results of McKesson's Health Care segment, the unit's fiscal
1994 revenues were $11.82 billion, up 6% from $11.15 billion in fiscal 1993.
As originally reported, including the results of PCS, fiscal 1994 revenues were
$12.0 billion, up 6.5% from $11.26 billion. Restated 1994 Health Care
operating profit was $187.1 million, down 1.9% from $190.7 million in the
prior year. Before restatement, the segment's fiscal 1994 operating profit was
$239.2 million, up 7.4% from the prior year's $222.8 million.
Seelenfreund said that it is anticipated that the quarterly dividend rate
on the new McKesson shares would be set at 25 cents a share, or $1.00 a year.
McKesson's current annual dividend is $1.68 a year.
<PAGE>
McKESSON CORPORATION
CONDENSED INCOME INFORMATION
(unaudited)
(in millions except per share amounts)
(Restated for PCS as Discontinued Operations)
<TABLE>
<CAPTION>
Year Ended March 31
-----------------------------
%
FY94 FY93 Chg.
--------- --------- ------
<S> <C> <C> <C>
Revenues $12,251.4 $11,555.7 6.0
Costs and expenses before special items 12,064.7 11,391.6 5.9
Special items 37.4(1) -
--------- ---------
Income before taxes on income 224.1 164.1 36.6
Taxes on income (88.6) (65.6)
--------- ---------
Income before minority interest 135.5 98.5 37.6
Minority interest (9.0) (3.4)
--------- ---------
Income before extraordinary item and
cumulative effect of accounting change
Before special items 102.0 95.1 7.3
Special items 24.5 -
--------- ---------
126.5 95.1 33.0
Discontinued operations 30.6 19.6
Extraordinary item - debt extinguishment (4.2) -
Cumulative effect of accounting change (16.7) -
Net income $ 136.2 $ 114.7 18.7
========= =========
Earnings per common share
Fully diluted
Continuing operations before extraordinary
item and cumulative effect of accounting
change
Before special items $ 2.22 $ 2.07 7.2
Special items 0.56 -
--------- ---------
2.78 2.07 34.3
Discontinued operations 0.70 0.44
Extraordinary item (0.10) -
Cumulative effect of accounting change (0.38) -
--------- ---------
Total $ 3.00 $ 2.51 19.5
========= =========
Primary
Continuing operations before extraordinary
item and cumulative effect of accounting
change
Before special items $ 2.33 $ 2.20 5.9
Special items 0.60 -
--------- ---------
2.93 2.20 33.2
Discontinued operations 0.75 0.49
Extraordinary item (0.10) -
Cumulative effect of accounting change (0.41) -
--------- ---------
Total $ 3.17 $ 2.69 17.8
========= =========
Shares on which earnings per common share were
based
Fully diluted 44.1 44.8
Primary 40.8 40.0
</TABLE>
(1) Includes gain on the sale and donation of Armor All stock of $55.1
million, partially offset by a contribution to the McKesson Foundation of
$4.3 million and a loss on the termination of interest rate swap
arrangements of $13.4 million.
<PAGE>
McKESSON CORPORATION
RESULTS BY BUSINESS SEGMENT
(unaudited)
(in millions)
(Restated for PCS as Discontinued Operations)
<TABLE>
<CAPTION>
Year Ended March 31
-------------------------------------
%
FY94 FY93 Change
---------- ---------- -------
<S> <C> <C> <C>
REVENUES
Health Care Services (1) $ 11,823.0 $ 11,148.9 6.0
Water 240.3 229.6 4.7
Armor All 182.3 168.4 8.3
Corporate 5.8 8.8
---------- ----------
Total $ 12,251.4 $ 11,555.7 6.0
========== ==========
OPERATING PROFIT
Health Care Services $ 187.1 $ 190.7 (1.9)
Water 37.0 30.4 21.7
Armor All 38.3 32.1 19.3
---------- ----------
Total 262.4 253.2 3.6
Interest - net (2) (40.1) (43.7)
Corporate and other (35.6) (45.4)
Special Items 37.4 -
---------- ----------
Income before taxes $ 224.1 $ 164.1 36.6
========== ==========
(1) Health Care Services Revenues
includes:
Sales to customers' warehouses $ 2,800.7 $ 2,607.2 7.4
International revenues 1,275.5 1,329.8 (4.1)
</TABLE>
(2) Interest expense is shown net of corporate interest income.
