SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
November 17, 1998
_________________________________
(Date of earliest event reported)
RITE AID CORPORATION
______________________________________________________
(Exact name of Registrant as specified in its charter)
Delaware 1-5742 23-1614034
-------------------------------------------------------------------------
(State of (Commission File No.) (IRS Employer
Incorporation) Identification No.)
30 Hunter Lane, Camp Hill, Pennsylvania 17011
_____________________________________________
(Address of principal executive offices, including zip code)
(717) 761-2633
_____________________________________________
(Registrant's telephone number, including area code)
_____________________________________________
(Former name or former address, if changed since last report)
ITEM 5. OTHER EVENTS.
On November 17, 1998, Rite Aid Corporation (the "Company") and
Eli Lilly and Company ("Lilly") announced that they had entered into a
Stock Purchase Agreement (the "Stock Purchase Agreement"), pursuant to
which the Company has agreed to acquire (the "PCS Acquisition") all of the
outstanding capital stock of PCS Holding Corporation ("PCS"), a wholly
owned subsidiary of Lilly. A copy of the Stock Purchase Agreement is
attached hereto as Exhibit 2.1 and is incorporated herein by reference.
The Company issued a press release on November 17, 1998 relating
to the PCS Acquisition, a copy of which is attached hereto as Exhibit 99.1
and is incorporated herein by reference. Exhibit 99.2 hereto includes
additional statements about the PCS Acquisition issued by the Company and
is hereby incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND
EXHIBITS.
(c) Exhibits
2.1 Stock Purchase Agreement, dated as of November 17,
1998, between the Company and Lilly.
99.1 Press Release, dated November 17, 1998.
99.2 Statements issued by the Company about the PCS
Acquisition.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
RITE AID CORPORATION
By: /s/ Elliot S. Gerson
----------------------------------
Name: Elliot S. Gerson
Title: Senior Vice President,
General Counsel and Secretary
Date: November 18, 1998
EXHIBIT INDEX
Exhibit
No. Exhibit
------- -------
2.1 Stock Purchase Agreement, dated as of November 17, 1998,
between the Company and Lilly.
99.1 Press Release, dated November 17, 1998.
99.2 Statements issued by the Company about the PCS
Acquisition.
Exhibit 2.1
-------------------------------------
STOCK PURCHASE AGREEMENT
between
RITE AID CORPORATION
and
ELI LILLY AND COMPANY
Dated as of November 17, 1998
-------------------------------------
Table of Contents
Page
----
ARTICLE I SALE AND PURCHASE OF SHARES; PURCHASE PRICE................. 1
Section 1.1. Company Shares....................................... 1
Section 1.2. Purchase Price....................................... 1
Section 1.3. Closing.............................................. 1
Section 1.4. Deliveries by the Seller............................. 1
Section 1.5. Deliveries by the Purchaser.......................... 2
Section 1.6. Intercompany Account Adjustment...................... 2
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE SELLER................ 3
Section 2.1. Organization and Authority of the Seller............. 3
Section 2.2. Organization and Authority of the Company and
Subsidiaries; Company Shares....................... 3
Section 2.3. Consents and Approvals; No Violations................ 4
Section 2.4. Financial Statements................................. 5
Section 2.5. No Undisclosed Liabilities........................... 5
Section 2.6. Absence of Certain Changes........................... 5
Section 2.7. Litigation........................................... 6
Section 2.8. Compliance with Applicable Law, Permits.............. 6
Section 2.9. Environmental Matters................................ 6
Section 2.10. Intellectual Property................................ 7
Section 2.11. Employee Benefit Plans............................... 9
Section 2.12. Taxes................................................ 11
Section 2.13. Material Contracts................................... 13
Section 2.14. Assets Necessary to Business......................... 15
Section 2.15. Title to Assets...................................... 16
Section 2.16. Labor Relations...................................... 16
Section 2.17. Insurance............................................ 16
Section 2.18. Products Liability................................... 17
Section 2.19. Compliance with the Consent Order.................... 17
Section 2.20. Year 2000............................................ 17
Section 2.21. Brokers.............................................. 18
Section 2.22. No Implied Representations........................... 18
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE PURCHASER............ 19
Section 3.1. Organization and Authority of the Purchaser.......... 19
Section 3.2. Consents and Approvals; No Violations................ 19
Section 3.3. Investment........................................... 20
Section 3.4. Brokers.............................................. 20
Section 3.5. No Implied Representations........................... 20
ARTICLE IV COVENANTS................................................... 20
Section 4.1. Conduct of the Business.............................. 20
Section 4.2. Access to Information................................ 22
Section 4.3. Reasonable Efforts................................... 23
Section 4.4. Further Assurances; No Hindrances.................... 23
Section 4.5. Employee Matters..................................... 23
Section 4.6. Transitional Matters................................. 25
Section 4.7. Guaranties........................................... 26
Section 4.8. Access to Records.................................... 26
Section 4.9. 1998 Audited Financial Statements.................... 27
Section 4.10. Intercompany Notes................................... 28
Section 4.11. Notice of Possible Breach............................ 28
Section 4.12. Supplemental Disclosure.............................. 28
Section 4.13. Notices of Certain Events............................ 28
Section 4.14. Confidentiality...................................... 29
Section 4.15. Insurance............................................ 29
Section 4.16. Non-Solicitation of Employees........................ 29
Section 4.17. Non-Competition...................................... 30
Section 4.18. McKesson Agreements.................................. 30
Section 4.19. Class B Stock Redemption............................. 30
Section 4.20. Designated Agreements................................ 31
ARTICLE V CONDITIONS.................................................. 31
Section 5.1. Conditions to Each Party's Obligations............... 31
Section 5.2. Conditions to Obligations of the Purchaser........... 31
Section 5.3. Conditions to Obligations of the Seller.............. 32
ARTICLE VI TERMINATION AND AMENDMENT................................... 32
Section 6.1. Termination.......................................... 32
Section 6.2. Effect of Termination................................ 33
Section 6.3. Amendment............................................ 34
Section 6.4. Extension; Waiver.................................... 35
ARTICLE VII SURVIVAL; INDEMNIFICATION.................................. 35
Section 7.1. Survival Periods..................................... 35
Section 7.2. Indemnification...................................... 35
Section 7.3. Claims............................................... 37
Section 7.4. Exclusive Remedy..................................... 38
Section 7.5. Tax Adjustment....................................... 38
Section 7.6. Special Indemnities.................................. 38
ARTICLE VIII TAX MATTERS............................................... 39
Section 8.1. Seller Tax Indemnity................................. 39
Section 8.2. Allocation of Taxes and Preparation
of Tax Returns..................................... 39
Section 8.3. Retention of Records................................. 40
Section 8.4. Notice; Cooperation.................................. 41
Section 8.5. Refunds.............................................. 41
Section 8.6. Sales and Other Tax.................................. 41
Section 8.7. Certain Contest Rights............................... 41
Section 8.8. No Section 338(h)(10) Election....................... 42
Section 8.9. Exclusivity.......................................... 42
ARTICLE IX MISCELLANEOUS............................................... 43
Section 9.1. Notices.............................................. 43
Section 9.2. Headings............................................. 44
Section 9.3. Counterparts......................................... 44
Section 9.4. Entire Agreement; Assignment......................... 44
Section 9.5. Governing Law........................................ 45
Section 9.6. Specific Performance................................. 45
Section 9.7. Publicity............................................ 45
Section 9.8. Binding Nature; No Third Party Beneficiaries......... 45
Section 9.9. Severability......................................... 45
Section 9.10. Interpretation....................................... 45
Section 9.11. Payment of Expenses.................................. 45
INDEX OF DEFINED TERMS
1998 Financial Statements............................................ 27
Acquired Business.................................................... 30
Asserted Tax Liability............................................... 41
Audits............................................................... 11
Business............................................................. 1
Class B Stock........................................................ 5
Closing.............................................................. 1
Closing Date......................................................... 1
Code................................................................. 10
comfort.............................................................. 27
Company.............................................................. 1
Company Shares....................................................... 1
Confidential Information............................................. 29
Confidentiality Agreement............................................ 22
Contracts............................................................ 13
Deconsolidation Date................................................. 39
Designated Agreements................................................ 31
Designated Amendments................................................ 31
Disclosure Schedule.................................................. 3
Employee Plans....................................................... 9
Environmental Law.................................................... 7
ERISA................................................................ 9
ERISA Affiliate...................................................... 10
Ernst & Young........................................................ 27
excess parachute payments............................................ 12
FIRPTA Certificate................................................... 2
GAAP................................................................. 3
Governmental Entity.................................................. 3
Hazardous Substance.................................................. 7
HSR Act.............................................................. 4
including............................................................ 45
Indemnified Parties.................................................. 37
Indemnifying Parties................................................. 37
Intellectual Property................................................ 9
Intercompany Note.................................................... 28
knowledge............................................................ 45
Law.................................................................. 3
Leased Properties.................................................... 16
License Agreements................................................... 7
Liens................................................................ 4
Material Adverse Effect.............................................. 3
McKesson Agreements.................................................. 15
October Balance Sheet................................................ 5
October Pro Forma Balance Sheet...................................... 5
Option Exercise Deductions........................................... 40
pension plan......................................................... 10
Permitted Investment................................................. 30
Permitted Liens...................................................... 16
prohibited transactions.............................................. 10
Proprietary Software................................................. 7
Purchase Price....................................................... 1
Purchaser............................................................ 1
Purchaser Basket..................................................... 36
Purchaser Damages.................................................... 35
Purchaser Indemnitees................................................ 35
Quarterly Financial Statements....................................... 27
Recalls.............................................................. 17
Recipient............................................................ 41
representatives...................................................... 19,20
Restricted Business.................................................. 30
Retained Names....................................................... 26
Retirement Plans..................................................... 24
Savings Plan......................................................... 24
Seller............................................................... 1
Seller Basket........................................................ 37
Seller Damages....................................................... 36
Seller Indemnitees................................................... 36
single employer...................................................... 10
Software............................................................. 9
Specified Agreement.................................................. 26
Straddle Period...................................................... 39
subsidiary........................................................... 4
Tax.................................................................. 13
Tax Authority........................................................ 13
Tax Benefit.......................................................... 38
Tax Claim Notice..................................................... 41
Tax Cost............................................................. 38
Tax Indemnification Agreements....................................... 12
Tax Law.............................................................. 13
Tax Period........................................................... 13
Tax Records.......................................................... 40
Tax Return........................................................... 13
Taxes................................................................ 13
Trade Secrets........................................................ 9
Transitional Services Agreement...................................... 25
Unaudited Financial Statements....................................... 5
without limitation................................................... 45
STOCK PURCHASE AGREEMENT, dated as of November 17, 1998, between
Rite Aid Corporation, a Delaware corporation (the "Purchaser"), and Eli
Lilly and Company, an Indiana corporation (the "Seller").
WHEREAS, PCS Holding Corporation, a Delaware corporation and a
wholly owned subsidiary of the Seller (the "Company"), provides
computer-based prescription drug claims processing, pharmacy benefit
administration and management services, mail order pharmacy services, data
management and disease-management services to health plan sponsors (as
provided by the Company and its subsidiaries, the "Business"); and
WHEREAS, the Purchaser has agreed to acquire from the Seller, and
the Seller has agreed to sell to the Purchaser, all of the outstanding
shares of Class A Common Stock, par value $1.00 per share (the "Company
Shares"), of the Company on the terms and subject to the conditions set
forth herein; and
NOW, THEREFORE, the parties agree as follows:
ARTICLE I
SALE AND PURCHASE OF SHARES; PURCHASE PRICE
Section 1.1. Company Shares. Upon the terms and subject to the
conditions of this Agreement, at the Closing (as defined below), the Seller
shall sell and deliver to the Purchaser and the Purchaser shall purchase
and acquire the Company Shares.
Section 1.2. Purchase Price. In consideration for the sale and
delivery of the Company Shares, at the Closing, the Purchaser shall pay to
the Seller $1.5 billion in cash (the "Purchase Price").
Section 1.3. Closing. Upon the terms and subject to the conditions
of this Agreement, the closing of the transactions contemplated by this
Agreement (the "Closing") will take place on the later of (i) January 29,
1999 or (ii) the first day meeting the following criteria: (x) it is the
last business day of a calendar month and (y) it is or follows the second
business day following the satisfaction or waiver of the conditions (other
than conditions which by their nature are to be satisfied at closing, but
subject to such conditions) set forth in Article V hereof, at 10:00 a.m.,
New York City time, at the offices of Dewey Ballantine LLP, 1301 Avenue of
the Americas, New York, New York, or at such other time or at such other
place as shall be agreed upon by the parties. The date on which the Closing
occurs is hereinafter referred to as the "Closing Date."
Section 1.4. Deliveries by the Seller. At the Closing, the Seller
shall deliver or cause to be delivered to the Purchaser the following:
(a) Certificates for all of the outstanding Company Shares,
duly endorsed in blank, or accompanied by stock powers duly executed in
blank, with any necessary stock transfer tax stamps attached or provided
for;
(b) the Transitional Services Agreement (as hereinafter
defined), duly executed by the Seller;
(c) the resignations of all members of the Board of Directors
of the Company and its subsidiaries and those members of the Board of
Directors of any subsidiary that is not wholly owned by the Company that
are employees or directors of the Seller or the Company or are designees of
the Seller or the Company;
(d) the stock books, stock ledgers, minute books and
corporate seals of the Company and the subsidiaries;
(e) a certificate of non-foreign status as provided in
Section 1445(b)(2) of the Code (as hereinafter defined) and Treasury
Regulation 1.1445-2(b) (the "FIRPTA Certificate"); and
(f) such other duly executed documents and certificates as
may be required to be delivered by the Seller pursuant to the terms of this
Agreement.
Section 1.5. Deliveries by the Purchaser. At the Closing, the
Purchaser shall deliver or cause to be delivered to the Seller the
following:
(a) the Purchase Price and the Adjustment (as hereinafter
defined) if any, in immediately available funds by wire transfer to an
account specified by the Seller prior to the Closing Date;
(b) the Transitional Services Agreement, duly executed by the
Purchaser; and
(c) such other duly executed documents and certificates as
may be required to be delivered by the Purchaser pursuant to the terms of
this Agreement.
Section 1.6. Intercompany Account Adjustment. At the Closing, the
following intercompany account adjustment (the "Adjustment") shall be made:
(a) In the event, as of the Closing Date, the Seller owes to
the Company or any of its subsidiaries pursuant to the Intercompany Notes
(as defined in Section 4.10 of this Agreement) a net amount of $100 million
or greater, then $100 million of such amount shall be cancelled and deemed
repaid by the Seller and Seller shall have no further liability or
obligation with respect to such $100 million and the remaining outstanding
balance of the Intercompany Notes, if any, will be paid in full;
(b) In the event the Seller owes to the Company or any of its
subsidiaries pursuant to the Intercompany Notes a net amount of less than
$100 million, then (i) such amount shall be cancelled and deemed repaid by
the Seller and Seller shall have no further liability or obligation with
respect to such amount and (ii) the Purchaser shall pay to the Seller an
amount equal to (x) $100 million less (y) such amount cancelled pursuant to
clause (i), provided, however, that in the event the Company or any of its
subsidiaries owes the Seller pursuant to the Intercompany Notes a net
amount, the Purchaser shall pay to the Seller $100 million plus such net
amount owed to the Seller.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE SELLER
Except as set forth in the applicable section of the disclosure
schedule being delivered by the Seller to the Purchaser (the "Disclosure
Schedule"), the Seller represents and warrants to the Purchaser as follows:
Section 2.1. Organization and Authority of the Seller. The Seller
is a corporation duly organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation and has all
necessary corporate power and authority to execute and deliver this
Agreement, to perform its obligations under this Agreement and to
consummate the transactions contemplated by this Agreement. The execution
and delivery of this Agreement by the Seller and the consummation by the
Seller of the transactions contemplated by this Agreement have been duly
authorized by all necessary corporate action on the part of Seller and no
other corporate actions or proceedings on the part of the Seller are
necessary to authorize this Agreement or for the Seller to consummate the
transactions contemplated by this Agreement. This Agreement has been duly
and validly executed and delivered by Seller and constitutes a legal, valid
and binding obligation of the Seller, enforceable against the Seller in
accordance with its terms.
Section 2.2. Organization and Authority of the Company and
Subsidiaries; Company Shares.
(a) Each of the Company and its subsidiaries is a corporation
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its organization and has all requisite corporate power and
authority to own, lease or operate its properties and assets and to carry
on its business as now being conducted. Each of the Company and its
subsidiaries is duly qualified to do business and in good standing and is
duly licensed, authorized or qualified to transact business in each
jurisdiction in which the property owned, leased or operated by it or the
nature of the business conducted by it makes such qualification or
licensing necessary, except in such jurisdictions where the failure to be
so duly qualified or licensed and in good standing would not be reasonably
likely to have a Material Adverse Effect. "Material Adverse Effect" means a
change or effect on the Business that is materially adverse to the
business, financial condition or results of operations of the Business
taken as a whole, but shall not include any changes or effects (x) relating
to or resulting from general economic, political or market conditions,
including (i) changes after the date of this Agreement in any statute, law,
ordinance, regulation, rule, code, order or other requirement or rule of
law (each, a "Law") or in the interpretation of any Law by any court of
competent jurisdiction or any governmental, regulatory or administrative
authority, agency or commission (a "Governmental Entity") and (ii) changes
in generally accepted accounting principles ("GAAP"), (y) resulting from
the execution or announcement of this Agreement or compliance with the
terms hereof or (z) generally affecting the industry in which the Company
operates. A "subsidiary" of an entity means any entity in which the
specified entity directly or indirectly owns at least a majority of the
outstanding stock or other equity or general voting interest.
(b) The Company Shares constitute all the outstanding shares
of capital stock of the Company. Section 2.2(b) of the Disclosure Schedule
lists each subsidiary of the Company. All of the issued and outstanding
shares of capital stock or other equity interests of each such subsidiary
are owned, directly or indirectly, by the Company. The Company Shares and
all of the issued and outstanding shares of capital stock or other equity
interests of such subsidiaries are duly authorized, validly issued, fully
paid and nonassessable and free of preemptive rights. There are no options,
warrants, rights or agreements obligating the Company or any subsidiary to
issue or sell any shares of capital stock or other equity interests of the
Company or any of its subsidiaries, or any security convertible into or
exchangeable for any such shares of capital stock or other equity interests
of the Company or any of its subsidiaries. Except for the capital stock of
its subsidiaries, the Company does not own, directly or indirectly, any
capital stock or other equity interest in any entity.
(c) The Seller has good and valid title to the Company
Shares, free and clear of any security interests, pledges, mortgages,
liens, encumbrances, charges, options or any other adverse claims,
restrictions or third party rights of any kind whatsoever ("Liens") and, at
the Closing, the Seller will deliver such shares to the Purchaser, free and
clear of any Liens.
(d) The Seller has heretofore made available to the Purchaser
true and complete copies of the certificate of incorporation and bylaws of
each of the Company and its subsidiaries.
Section 2.3. Consents and Approvals; No Violations.
(a) No filing or registration with, and no permit,
authorization, certificate, waiver, license, consent or approval of, any
Governmental Entity is necessary for execution, delivery or performance by
the Seller of this Agreement, except (x) for the applicable requirements of
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), or (y) as a result of facts or circumstances particular to the
Purchaser.
(b) Neither the execution and delivery of this Agreement by
the Seller nor the consummation by the Seller of the transactions
contemplated by this Agreement nor compliance by the Seller with any of the
provisions hereof will (i) conflict with or result in any breach of any
provision of the certificate of incorporation or by-laws (or similar
organizational document) of the Company, any subsidiary of the Company, or
the Seller, (ii) require the consent or waiver of any person (other than a
Governmental Entity) or result in a violation or breach of, or constitute
(with or without due notice or lapse of time or both) a default (or give
rise to any right of termination, cancellation, modification or
acceleration) (whether after the giving of notice or the passage of time or
both) or result in the imposition of or the creation of any Lien upon any
of the assets or properties of the Company or any of its subsidiaries
pursuant to or under, any of the terms, conditions or provisions of any
note, lease, license, contract or agreement to which the Company, any
subsidiary of the Company, or the Seller is a party or by which the
Company, any subsidiary of the Company, or the Seller, or any of their
respective assets, is bound or (iii) violate any order, writ, injunction,
decree, statute, treaty, rule or regulation applicable to the Company, any
subsidiary of the Company, or the Seller, except in the case of (ii) or
(iii), for violations, breaches or defaults which, or consents or waivers
the absence of which would not be reasonably likely to have a Material
Adverse Effect or which would not prevent or materially delay the
consummation of the transactions contemplated by this Agreement.
Section 2.4. Financial Statements. Section 2.4(a) of the
Disclosure Schedule sets forth true and complete copies of the Company's
unaudited consolidated balance sheet, income statement and statement of
cash flows as of and for the ten month period ended October 31, 1998 (the
"Unaudited Financial Statements"). The balance sheet dated October 31, 1998
is sometimes referred to as the "October Balance Sheet." The Unaudited
Financial Statements were derived from the books and records of the Company
and prepared in accordance with the basis of presentation set forth in such
section of the Disclosure Schedule and, except as set forth in the notes
thereto, in accordance with GAAP. The Unaudited Financial Statements fairly
present in all material respects the consolidated financial position of the
Company and its consolidated subsidiaries as of the date thereof and the
consolidated results of operations and consolidated cash flows of the
Company and its consolidated subsidiaries for the period then ended.
Section 2.4(b) of the Disclosure Schedule sets forth the balance sheet of
the Company and its subsidiaries as of October 31, 1998, giving pro forma
effect to the redemption of the Company's Class B Common Stock, par value
$0.01 per share (the "Class B Stock") and the special dividend on the Class
B Stock as contemplated by the Agreement (the "October Pro Forma Balance
Sheet"). The October Pro Forma Balance Sheet fairly presents in all
material respects the consolidated financial position of the Company and
its consolidated subsidiaries as of October 31, 1998 on a pro forma basis,
taking into account the effect of the redemption of the Class B Stock and
the special dividend on the Class B Stock.
Section 2.5. No Undisclosed Liabilities. As of the date of this
Agreement, there are no liabilities, debts, obligations or claims against
the Company or its subsidiaries or otherwise relating to or arising in
connection with the Business of a type required to be reflected on a
balance sheet prepared in accordance with GAAP, except (a) liabilities,
debts, obligations or claims reflected or reserved in the October Balance
Sheet, (b) liabilities, debts, obligations or claims incurred after the
date of the October Balance Sheet in the ordinary course of business
consistent with past practice or (c) liabilities, debts, obligations or
claims which would not be reasonably likely to have a Material Adverse
Effect.
Section 2.6. Absence of Certain Changes. As of the date of this
Agreement, since October 31, 1998 (i) the Business has been conducted in
the ordinary course of business, (ii) neither the Company nor any
subsidiary has taken any of the actions set forth in Section 4.1(y) hereof
(other than the redemption of the Class B Stock and the declaration of a
special dividend with respect to the Class B Stock, in accordance with its
terms and the termination of those agreements relating to the Class B
Stock) and (iii) the Business has not suffered a Material Adverse Effect.
Section 2.7. Litigation. As of the date of this Agreement, except
as would not be reasonably likely to have a Material Adverse Effect, there
is no suit, claim, action, proceeding or, to the knowledge of the Seller,
investigation pending against the Company or any of its subsidiaries before
or by any Governmental Entity or non-governmental body or by any third
party or, to the knowledge of the Seller, threatened against the Company or
any of its subsidiaries, and neither the Company nor any of its
subsidiaries is subject to any outstanding order of any Governmental
Entity. As of the date of this Agreement, there are no pending or, to the
knowledge of the Seller, threatened actions which would prevent or delay
the Seller from consummating the transactions contemplated hereby.
Section 2.8. Compliance with Applicable Law, Permits. Except as
would not be reasonably likely to have a Material Adverse Effect, (a) the
Company and its subsidiaries possess all permits, licenses, variances,
exemptions, orders, approvals and authorizations of all Governmental
Entities and all consents and waivers of any other persons (other than
Governmental Entities) necessary for the Company and its subsidiaries to
own, lease or otherwise hold the assets of the Business and to carry on the
Business as currently conducted and (b) the Business is being conducted in
compliance with all laws, regulations, and ordinances of all Governmental
Entities including (i) laws regarding the provision of insurance, third
party administration and primary health care services and (ii) the
Prescription Drug Marketing Act, the Federal Controlled Substances Act of
1970, the Food, Drug and Cosmetic Act and any state Pharmacy Practice Acts,
Controlled Substances Acts, Dangerous Drug Acts and Food, Drug and Cosmetic
Acts. This Section 2.8 does not relate to matters with respect to (x)
environmental matters, which are the subject of Section 2.9, (y) benefits
and employment matters, which are the subject of Section 2.11 and (z)
Taxes, which are the subject of Section 2.12.
Section 2.9. Environmental Matters.
(a) Except as would not be reasonably likely to have a
Material Adverse Effect, (i) the Company and its subsidiaries are in
compliance with all applicable Environmental Laws (as defined below) (which
compliance includes, without limitation, the possession by the Company and
its subsidiaries of all permits and other government authorizations
required under applicable Environmental Laws, and compliance with the terms
and conditions thereof), (ii) no Hazardous Substances (as defined below)
have been disposed on or released onto, under or adjacent to any of the
properties currently owned, leased or operated by the Company or its
subsidiaries (including soils, groundwater, surface water, buildings or
other structures), (iii) as of the date hereof, none of the Company, any of
its subsidiaries or the Seller or, to the knowledge of the Seller, any
person whose liability under any Environmental Law the Company has or may
have retained or assumed either contractually or by operation of law, has
received any written notice, demand, letter or claim alleging that the
Company or any subsidiary or any such person is in violation of or liable
under any Environmental Law, (iv) as of the date hereof, none of the
Company, any of its subsidiaries or the Seller has received any written
notice, demand, letter or claim alleging the potential responsibility of
the Company or any subsidiary for off-site disposal of any Hazardous
Substance pursuant to the Federal Comprehensive Environmental Response,
Compensation and Liability Act or any other Environmental Law and (v) as of
the date hereof, there are no past or present actions, activities,
circumstances, conditions, events or incidents which would be reasonably
likely to form the basis of any notice, demand, letter or claim under
Sections 2.9(a)(iii) or 2.9(a)(iv).
(b) "Environmental Law" means any national, regional,
federal, state, municipal or local law, regulation, order, judgment or
decree issued or promulgated by any Governmental Entity currently in effect
relating to the protection of human health or the indoor and outdoor
environment (including, without limitation, natural resources) or the
exposure of persons to any Hazardous Substances.
(c) "Hazardous Substance" means any pollutant, contaminant,
hazardous waste, hazardous substance, chemical oil, substance that is
regulated pursuant to any Environmental Law, including without limitation
any petroleum product, by-product or additive, asbestos,
asbestos-containing material, medical waste, chloroflourocarbon,
hydrochloroflourocarbon or polychlorinated biphenyls.
Section 2.10. Intellectual Property.
(a) Section 2.10(a) of the Disclosure Schedule sets forth, as
of the date of this Agreement, for all Intellectual Property, as defined
hereinafter, owned by the Company or any of its subsidiaries: a complete
and accurate list, as of the date of this Agreement, of all U.S. and
foreign (i) patents and patent applications,; (ii) trademark and
servicemark registrations (including Internet domain
registrations),trademark and servicemark applications, and material
unregistered servicemarks and trademarks; (iii) copyright registrations and
copyright applications.
(b) Section 2.10(b) of the Disclosure Schedule lists, as of
the date of this Agreement, all contracts for material Software, as defined
hereinafter, which is licensed, leased or otherwise used by the Company or
any of its subsidiaries and all Software which is owned by the Company or
its subsidiaries ("Proprietary Software"), and identifies which Software is
owned, licensed, leased, or otherwise used, as the case may be.
(c) Section 2.10(c) of the Disclosure Schedule sets forth a
complete and accurate list, as of the date of this Agreement, of all
agreements granting or obtaining any right to use or practice any rights
under any Intellectual Property, to which the Company or any of its
subsidiaries is a party or otherwise bound, as licensee or licensor
thereunder, including license agreements, settlement agreements, and
covenants not to sue (collectively, the "License Agreements").
(d) Except as would not have a Material Adverse Effect:
(i) the Company or its subsidiaries own or have the right to
use all Intellectual Property as defined hereinafter, free and
clear of all liens,
(ii) any Intellectual Property owned or, to the Knowledge of
the Seller, used, by the Company or its subsidiaries is valid and
subsisting in full force and effect and has not been cancelled,
expired or abandoned,
(iii) the Seller has not received written notice from any
third party regarding any actual or potential infringement by the
Company or any of its subsidiaries of any intellectual property of
such third party and the Seller has no Knowledge of any legitimate
basis for such a claim against the Company or any of its
subsidiaries.
(iv) the Seller has not received written notice from any
third party regarding any assertion or claim challenging the
validity of any Intellectual Property owned by the Company or any
of its subsidiaries and the Seller has no Knowledge of any
legitimate basis for such a claim,
(v) neither the Company nor any of its subsidiaries have
licensed or sublicensed its rights in any Intellectual Property,
or received or been granted any such rights, other than pursuant
to the License Agreements,
(vi) to the Knowledge of Seller no third party is
misappropriating, infringing, diluting or violating any
Intellectual Property owned by the Company or any of its
subsidiaries,
(vii) the License Agreements are valid and binding
obligations of the Company or its subsidiaries and, to the
Knowledge of Seller, the other party thereto, enforceable in
accordance with their terms, and there exists no event or
condition which will result in a violation or breach of, or
constitute a default by the Company or its subsidiaries or, to the
Knowledge of Seller, the other party thereto, under any such
License Agreement,
(viii) the Company and each of its subsidiaries takes
reasonable measures to protect the confidentiality of Trade
Secrets (as defined herein) including requiring third parties
having access thereto to execute written non-disclosure
agreements. No Trade Secret of the Company or any of its
subsidiaries has been disclosed or authorized to be disclosed to
any third party other than pursuant to a non-disclosure agreement
that adequately protects the Company and the applicable
subsidiary's proprietary interests in and to such Trade Secrets,
(ix) the consummation of the transaction contemplated hereby
will not result in the loss or impairment of the Company or any of
its subsidiaries' rights to own or use any of the Intellectual
Property, nor will require the consent of any third party in
respect of any Intellectual Property, and
(x) all Proprietary Software set forth in Section 2.10(b) of
Disclosure Schedule, was either developed (a) by employees of the
Company or any of its subsidiaries within the scope of their
employment; or (b) by independent contractors who have assigned
their rights to the Company or any of its subsidiaries pursuant to
written agreement.
(e) As used herein, the term "Intellectual Property" means
all trademarks, service marks, trade names, Internet domain names, designs,
logos, slogans and general intangibles of like nature, together with
goodwill, registrations and affiliations relating to the foregoing;
registered and unregistered patents, copyrights (including registrations
and applications of any of the foregoing); Software; confidential
information, technology, know-how, inventions, processes, formulae,
algorithms, models and methodologies (such confidential items, collectively
"Trade Secrets") used in the Business as conducted as of the Closing Date
and any licenses to use any of the foregoing. "Software" means any and all
(i) computer programs, including any and all software implementation of
algorithms, models and methodologies whether in source code or object code,
(ii) databases and computations, including any and all data and collections
of data but excluding individual customer data, (iii) all documentation,
including user manuals and training materials, relating to any of the
foregoing, and (iv) the content and information contained in any Web site.
As used in this Section 2.10, and notwithstanding Section 9.10(b), the term
"Knowledge of Seller" with respect to the Seller shall mean the knowledge
of the persons set forth in Section 2.10(e) of the Disclosure Schedule.
Section 2.11. Employee Benefit Plans.
(a) Section 2.11 of the Disclosure Schedule contains a
complete list of all employee benefit plans (as defined in Section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA")),
all employment and severance agreements, and all bonus, stock option, stock
purchase, incentive, deferred compensation, supplemental retirement,
severance and other similar employee benefit plans, programs, policies and
agreements, in each case that is sponsored, maintained, contributed to or
required to be contributed to by the Company or any of its subsidiaries, or
to which the Company or any of its subsidiaries is a party for the benefit
of any current or former employee of the Company or any of its subsidiaries
(together, the "Employee Plans"). Except as set forth on Section 2.11 of
the Disclosure Schedule, none of the Employee Plans is sponsored,
maintained, contributed to or required to be contributed to by the Seller
or any of its subsidiaries (other than the Company and its subsidiaries)
and no current employee of the Seller or any of its subsidiaries (other
than the Company and its subsidiaries) participates or is eligible to
participate in such Employee Plans.
(b) The Seller has delivered or made available to the
Purchaser accurate and complete copies of the following with respect to the
Employee Plans, to the extent applicable as of the date of this Agreement:
(i) all plan documents and all amendments thereto, (ii) summary plan
descriptions and summaries of material modifications, (iii) trust
documents, insurance contracts and other funding instruments, (iv) the two
most recently prepared financial statements and actuarial reports, (v) the
two most recently filed annual reports and (vi) determination letters
received from the Internal Revenue Service.
(c) All Employee Plans have been administered and operated in
compliance with the requirements of ERISA, the Internal Revenue Code of
1986, as amended (the "Code") and all other applicable Laws, except as
would not be reasonably likely to have a Material Adverse Effect. Each
Employee Plan that is intended to be qualified under Section 401(a) of the
Code has received a determination letter from the Internal Revenue Service
stating that it is so qualified, and, as of the date of this Agreement,
such determination letter has not been revoked. There have been no
"prohibited transactions" within the meaning of Section 4975 of the Code or
Section 406 of ERISA involving any of the Employee Plans that could subject
the Company or any of its subsidiaries to any penalties or taxes that would
be reasonably likely to have a Material Adverse Effect.
(d) Each Employee Plan that is subject to the minimum funding
requirements of Section 412 of the Code is in compliance with such
requirements, and no Employee Plan has a minimum funding variance or waiver
under Section 412(d) of the Code. Neither the Company, its subsidiaries,
nor any trade or business, that together with the Company or any of its
subsidiaries, would be deemed a "single employer" under Section 4001(b) of
ERISA (an "ERISA Affiliate") has any liability under Title IV of ERISA
(other than for the payment of premiums to the Pension Benefit Guaranty
Corporation), except as would not be reasonably likely to have a Material
Adverse Effect. Neither the Company nor any of its subsidiaries
participates in any multiemployer plan (as defined in Section 3(37) of
ERISA), nor has the Company, its subsidiaries or any ERISA Affiliate
incurred any withdrawal liability to a multiemployer plan that has not been
satisfied in full, except as would not be reasonably likely to have a
Material Adverse Effect.
(e) As of the date of this Agreement, no actual or, to the
knowledge of the Seller, threatened disputes, lawsuits, claims (other than
routine claims for benefits), or to the knowledge of the Seller,
investigations or audits by any person or Governmental Entity have been
filed or are pending with respect to the Employee Plans or the Company or
any of its subsidiaries in connection with any Employee Plan or the
fiduciaries or administrators thereof.
(f) The execution of this Agreement and the consummation of
the transactions contemplated hereunder will not constitute an event under
any Employee Plan that will cause any payment, benefit, acceleration,
vesting, distribution, or obligation to fund benefits with respect to any
current or former employee of the Company or any of its subsidiaries.
(g) Except as set forth on Section 2.11 of the Disclosure
Schedule, no Employee Plan provides medical, surgical, hospitalization,
death or similar benefits (whether or not insured) for employees or former
employees of the Company or any subsidiary for periods extending beyond
their retirement or other termination of service, other than (i) coverage
mandated by applicable law, (ii) death benefits under any "pension plan" or
(iii) benefits the full cost of which is borne by the current or former
employee (or his beneficiary).
Section 2.12. Taxes.
(a) Except as set forth in Section 2.12(a) of the Disclosure
Schedule:
(i) Giving effect to all extensions obtained, each of the
Company and its subsidiaries has (x) duly and timely filed (or
there has been filed on its behalf) with the appropriate
Governmental Entities all Tax Returns required to be filed by it,
and all such Tax Returns are true, correct and complete in all
material respects and (y) timely paid (or accrued on the Company's
books) or there has been paid on its behalf all Taxes (other than
Taxes in respect of 1998) due or claimed to be due from it by any
Tax Authority;
(ii) The Company and its subsidiaries have complied in all
material respects with all applicable Tax Laws relating to the
payment and withholding of Taxes (including, without limitation,
withholding of Taxes pursuant to sections 1441 and 1442 of the
Code (or similar provisions under any foreign laws) and employment
withholding Taxes) and have, within the time and manner prescribed
by law, withheld and paid over to the proper Governmental Entities
all amounts required to be withheld and paid over under all
applicable Tax Laws;
(iii) As of the date of this Agreement, there are no Liens
for Taxes upon the assets or properties of the Company or its
subsidiaries except for statutory Liens for current Taxes not yet
due;
(iv) As of the date of this Agreement, none of the Company or
any of its subsidiaries has requested any extension of time within
which to file any Tax Return in respect of any taxable year which
has not since been filed, and no outstanding waivers or comparable
consents regarding the application of the statute of limitations
with respect to any Taxes or Tax Returns has been given by or on
behalf of the Company or any of its subsidiaries;
(v) As of the date of this Agreement, no federal, state,
local or foreign audits, review, or other administrative
proceedings or court proceedings ("Audits") exist or have been
initiated with regard to any Taxes or Tax Returns of the Company
or any of its subsidiaries, and none of the Company or any of its
subsidiaries has received any notice of such an Audit;
(vi) As of the date of this Agreement, all Tax deficiencies
which have been claimed, proposed or asserted against the Company
or its subsidiaries have been fully paid, finally settled or
properly accrued on the Company's books;
(vii) None of the Company or any of its subsidiaries is
required to include in income any adjustment pursuant to Section
481(a) of the Code, by reason of any voluntary or involuntary
change in accounting method (nor, as of the date of this
Agreement, has any Tax Authority proposed in writing any such
adjustment or change of accounting method);
(viii) No power of attorney has been granted by or with
respect to the Company or any of its subsidiaries with respect to
any matter relating to Taxes;
(ix) None of the Company or any of its subsidiaries has filed
a consent pursuant to Section 341(f) of the Code (or any
predecessor provision) or agreed to have Section 341(f)(2) of the
Code apply to any disposition of a subsection (f) asset (as such
term is defined in Section 341(f)(4) of the Code) owned by the
Company or any of its subsidiaries;
(x) Since the date of the October Balance Sheet, none of the
Company or any of its subsidiaries has incurred any liability for
Taxes other than in the ordinary course of business; and
(xi) None of the Company or any of its subsidiaries is a
party to any agreement, contract or arrangement that could result,
separately or in the aggregate, in the payment of any "excess
parachute payments" within the meaning of Section 280G of the
Code, or in payments that will not be deductible by operation of
Section 162(m) of the Code.
(xii) None of the Company or any of its subsidiaries has
requested or received a ruling or determination from any Tax
Authority or signed a closing or other agreement with any Tax
Authority which would be reasonably likely to have a Material
Adverse Effect.
(xiii) The Federal Income Tax Returns of the Company and its
subsidiaries for the Tax Periods ending before January 1, 1994
have been examined by the appropriate Governmental Entity (or the
applicable statue of limitations for the assessment of such taxes
has expired).
(b) Each Subsidiary of the Company is a United States Person
(as defined in Section 7701(a)(30) of the Code).
(c) Except as set forth in Section 2.12(c) of the Disclosure
Schedule, none of the Company or any of its subsidiaries is a party to, is
bound by, or has any obligation under, any Tax sharing agreement, Tax
indemnification agreement or similar contract or arrangement (collectively,
"Tax Indemnification Agreements"). Any such Tax Indemnification Agreement
set forth on Schedule 2.12(c) will terminate as of the Closing Date and be
of no further force or effect for any Tax Period after the Closing Date. As
of the date of this Agreement, none of the Company or any of its
subsidiaries is aware of any potential liability or obligation to any
person as a result of, or pursuant to, any such Tax Indemnification
Agreement.
(d) The Company and its subsidiaries have previously
delivered or made available to the Purchaser complete and accurate copies
of each of (i) all audit reports, letter rulings, technical advice
memoranda and similar documents issued by a Governmental Entity relating to
the United States federal, state, local or foreign Taxes due from or with
respect to the Company and its subsidiaries, (ii) the United States federal
income Tax Returns, and those state, local and foreign income Tax Returns
filed by the Company and its subsidiaries and (iii) any closing agreements
entered into by the Company or any of its subsidiaries with any Tax
Authority, in each case, existing on the date hereof. The Seller will, or
will cause the Company to, deliver to Purchaser all materials with respect
to the foregoing for all matters arising after the date hereof.
(e) "Tax" or "Taxes" means all taxes, charges, levies, fees,
or other assessments imposed by any federal, state, local or foreign Tax
Authority, including, but not limited to, any income, gross income, gross
receipts, profits, capital stock, franchise, business, withholding payroll,
social security, workers compensation, unemployment, disability, property,
ad valorem, stamp, excise, occupation, service, sales, use, license, lease,
transfer, import, export, value added, goods and services, alternative
minimum, estimated or other similar tax (including any fee, assessment, or
other charge in the nature of or in lieu of any tax), and any interest,
penalties, additions to tax, or additional amounts in respect of the
foregoing.
(f) "Tax Authority" means, with respect to any Tax, the
Governmental Entity that imposes such Tax and the agency (if any) charged
with the collection or administration of such Tax for such entity.
(g) "Tax Law" means the law (including any applicable
regulations or any administrative pronouncement) of any Governmental Entity
relating to any Tax.
(h) "Tax Period" means, with respect to any Tax, the period
for which the Tax is reported as provided under the applicable Tax Law.
(i) "Tax Return" means any report of Taxes due, any claims
for refund of Taxes paid, any information return with respect to Taxes or
any other similar report, statement, declaration, or document required to
be filed under applicable Tax Law, including any attachments, exhibits or
other materials submitted with any of the foregoing and including any
amendments or supplements to any of the foregoing.
Section 2.13. Material Contracts.
(a) Section 2.13(a) of the Disclosure Schedule lists the
following notes, leases, licenses, contracts or agreements ("Contracts") to
which the Company or any subsidiary, as of the date of this Agreement, is a
party or is bound:
(i) each mortgage, indenture, note, installment obligation or
other instrument, contract, agreement or arrangement relating to
the borrowing of money by the Company or any of its subsidiaries
in an amount exceeding $10 million;
(ii) any guaranty, direct or indirect, by the Company or any
subsidiary of any obligation for borrowed money (A) in an amount
exceeding $10 million of any person or entity or (B) in any amount
of Seller or any subsidiary of Seller, in either case, excluding
endorsements made for collection in the ordinary course of
business;
(iii) any obligation to sell or to register the sale of any
of the shares of capital stock or other securities of the Company
or any of its subsidiaries;
(iv) any obligation to make payments, contingent or
otherwise, arising out of the prior acquisition or disposition of
a business;
(v) each contract that limits the freedom of the Company or
any subsidiary to compete in its lines of business as presently
conducted or with any person or in any geographical area or
otherwise to conduct its business as presently conducted;
(vi) each collective bargaining or union contract;
(vii) each contract for the purchase of capital equipment,
materials or supplies, except those contracts terminable without
material penalty on 60 or fewer days' notice and those involving
the receipt or payment of less than $500,000 per year;
(viii) each contract for the acquisition or disposition of
material assets, other than in the ordinary course of business;
(ix) each contract relating to the leasing of or other
arrangement for use of material real or personal property;
(x) each contract with any manufacturer of pharmaceuticals
involving the annual payment by the manufacturer of at least $1
million;
(xi) each of the top 50 contracts measured by membership (as
calculated in accordance with industry practices) with any
insurance company, health maintenance organization or other
customer;
(xii) each contract between the Company or its subsidiaries,
on the one hand, and the Seller and its subsidiaries (other than
the Company or its subsidiaries) or the other hand;
(xiii) each other contract which is material to the Business;
(xiv) any employment agreement with any employee;
(xv) any contract with a term in excess of one year from the
date hereof which is not otherwise terminable upon 60 days advance
notice without cause and without financial penalty and which
involves the payment or receipt of an amount (in one or a series
of transactions) in excess of $1 million;
(xvi) any limited partnership, joint venture or other
unincorporated business organization or similar arrangement or
agreement;
(b) Except as would not be reasonably likely to have a
Material Adverse Effect, (x) as of the date of this Agreement, neither the
Company nor any subsidiary is (and to the knowledge of the Seller as of the
date of this Agreement, no other party is), in breach or default under the
Contracts and no event has occurred under the Contracts which would
constitute (with or without due notice or lapse of time or both) a breach
or default by the Company or any of its subsidiaries or, to the knowledge
of the Company, by any other party thereto (or give rise to any right of
termination, cancellation, modification or acceleration against the Company
or any of its subsidiaries, or, to the knowledge of the Company, any other
party thereto) under the Contracts and (y) each Contract is a valid and
binding obligation of the Company or its subsidiary and, to the knowledge
of the Seller as of the date of this Agreement, the other party thereto,
enforceable against such persons in accordance with its terms.
(c) From January 1, 1998 until the date of this Agreement, no
customer of the Company which accounted for 1,000,000 or more members
(determined on a basis consistent with past practices of the Business)
during the year ended December 31, 1997, has cancelled or otherwise
terminated its business relationships with the Company or its subsidiaries.
None of the Seller, the Company or any of its subsidiaries has received
written notice, or to the knowledge of the Seller, other communication of
any actual or alleged breach of or default under or threatened
cancellation, termination or acceleration of such contracts, and, to the
knowledge of the Seller, no event has occurred or circumstances exist that
would give the Company or any other person party to such contracts the
right to exercise any remedy under or to cancel or terminate any such
contract.
(d) Section 2.13(d) of the Disclosure Schedule sets forth all
agreements currently in effect between the Seller or the Company and
McKesson Corporation ("McKesson") relating to the Business (the "McKesson
Agreements") pursuant to which the Seller has any right to indemnification
or pursuant to which the Company has any rights or obligations. Each of the
McKesson Agreements constitutes a valid and binding agreement of the
Seller, enforceable against the Seller in accordance with its terms,
subject to limitations imposed by bankruptcy, fraudulent conveyance,
insolvency, reorganization, moratorium and other laws relating to or
affecting creditors' rights generally and general equitable principles. To
the knowledge of the Seller, each of the McKesson Agreements constitutes a
valid and binding agreement of McKesson enforceable against McKesson in
accordance with its terms, subject to limitations imposed by bankruptcy,
fraudulent conveyance, insolvency, reorganization, moratorium and other
laws relating to or affecting creditors' rights generally and general
equitable principles.
Section 2.14. Assets Necessary to Business. The assets,
properties, contracts and rights of the Company and its subsidiaries
include all of the assets, properties, contracts and rights necessary for
the conduct of the Business in the manner as it is currently conducted
(other than those assets, properties and rights to be provided pursuant to
the Transitional Services Agreement), except where the failure to have such
assets, properties and rights would not be reasonably likely to have a
Material Adverse Effect.
Section 2.15. Title to Assets. Each of the Company and its
subsidiaries has good and valid title (or in the case of real property
owned by the Company or its subsidiaries, good and marketable title) to all
of its material assets, properties and rights, free and clear of all Liens,
other than as set forth in the October Balance Sheet and other than (i)
mechanics', carriers', workmen's, repairmen's or other like Liens arising
or incurred in the ordinary course of business, (ii) Liens arising under
original purchase price conditional sales contracts and equipment leases
with third parties entered into in the ordinary course of business, (iii)
Liens for Taxes that are (A) not due and payable or (B) being contested in
good faith and are properly reserved for in accordance with GAAP and are
set forth on the October Balance Sheet and (v) such other Liens as would
not be reasonably likely to have a Material Adverse Effect ("Permitted
Liens"). Section 2.15 of the Disclosure Schedule sets forth a list of all
real property owned by the Company or its subsidiaries as of the date of
this Agreement and the leases relating to the assets of the Business
constituting leasehold interests in real property, and improvements and
appurtenances thereto (the "Leased Properties"). The leases relating to the
Leased Properties as of the date of this Agreement, are in full force and
effect, and constitute the legal, valid and binding obligation of the
Company or its subsidiaries, and to the knowledge of Seller the other party
thereto, subject to limitations imposed by bankruptcy, fraudulent
conveyance, insolvency, reorganization, moratorium and other laws relating
to or affecting creditors' rights generally and general equitable
principles. There exists no defaults or conditions which with the giving of
notice or the passage of time, or both, would constitute a default by the
Company or its subsidiaries or to the knowledge of Seller, as of the date
of this Agreement, the other party thereto with respect to the leases for
the Leased Properties except for such defaults or conditions which would
not be reasonably likely to have a Material Adverse Effect.
Section 2.16. Labor Relations. Except for occurrences that would
not be reasonably likely to have a Material Adverse Effect, (a) the Company
and its subsidiaries are in compliance with all applicable laws respecting
employment and employment practices, terms and conditions of employment and
wages and hours; (b) as of the date of this Agreement, none of the Seller,
the Company or any of its subsidiaries have received written notice of any
charge or complaint against the Company nor any of its subsidiaries pending
before the Equal Employment Opportunity Commission, the National Labor
Relations Board, or any other Government Entity regarding an unlawful
employment practice; (c) as of the date of this Agreement, none of the
Company or any of its subsidiaries are party to any collective bargaining
agreement and there is no labor strike, slowdown or stoppage actually
pending or, to the knowledge of the Seller, threatened against or affecting
the Company or its subsidiaries; (d) as of the date of this Agreement, none
of the Seller, the Company or any of its subsidiaries have received written
notice that any representation petition respecting the employees of the
Company or its subsidiaries has been filed with the National Labor
Relations Board; and (e) the Company and its subsidiaries are and have been
in substantial compliance with all notice and other requirements under the
Worker Adjustment and Retaining Notification Act of 1988 or similar state
statute.
Section 2.17. Insurance. Section 2.17 of the Disclosure Schedule
sets forth all material insurance policies maintained by the Company or any
of its subsidiaries for the benefit of or in connection with the Company or
the Business. Except as set forth on Section 2.17 of the Disclosure
Schedule, none of the material insurance policies maintained by the Company
or any of its subsidiaries for the benefit of or in connection with the
Company or the Business will lapse or become subject to termination by the
insurer as a result of the transactions contemplated by this Agreement.
Section 2.18. Products Liability. As of the date of this
Agreement, except as would not be reasonably likely to have a Material
Adverse Effect, (i) there is no claim, action, suit, inquiry, hearing,
proceeding, or investigation of a civil, criminal or administrative nature
by or before any Governmental Entity against the Company or its
subsidiaries which is pending or to the knowledge of the Seller,
threatened, relating to or resulting from an alleged defect in design,
manufacture, materials or workmanship of any product manufactured,
distributed, or sold by or behalf of the Company or its subsidiaries, or
any alleged failure to warn, or from any alleged breach of express or
implied warranties or representations; and (ii) there has not been any
product recall or post-sale warning (collectively, "Recalls") by the
Company or its subsidiaries concerning any products relating to the
Business of the Company or its subsidiaries which were distributed, or sold
by the Company and its subsidiaries, or to the knowledge of the Seller any
investigation or consideration of or decision made by any person concerning
whether to undertake or not to undertake any Recalls.
Section 2.19. Compliance with the Consent Order. At all times
since July 28, 1995, the Seller has complied in all material respects and
has caused the Company to comply in all material respects with the Consent
Order between the Seller and the Federal Trade Commission (the "Consent
Order").
Section 2.20. Year 2000. (a) As used herein, "Year 2000 Compliant"
or "Year 2000 Compliance" means: (i) the application system functions
correctly without abnormal ends after December 31, 1999; (ii) all date
related calculations are correct in the multi-century scenario and after
December 31, 1999 (including age calculations, duration calculations,
scheduling calculations, etc.); (iii) all manipulations and comparisons of
date-related data must produce correct results for all valid date values
within the scope of the application; (iv) there must be no century
ambiguity; (v) all reports and displays are sorted correctly in the
multi-century scenario; and (vi) leap years must be accounted for and
correctly identified; i.e., 2000 must be recognized as a leap year.
(b) The Company and its subsidiaries have undertaken a
program with the goal of becoming Year 2000 Compliant as set forth in the
"Y2K Readiness Plan" provided to the Purchaser. The Purchaser acknowledges
that to the extent the particulars of the Y2K Readiness Plan are
inconsistent with this Section 2.20, the Y2K Readiness Plan shall govern.
(c) The Company and its subsidiaries reasonably believe that
approximately eighty-five percent of their "core systems" (e.g., Recap and
online claims processing applications) shall be Year 2000 Compliant by
December 31, 1998. The Company and its subsidiaries reasonably expect all
core systems to be Year 2000 Compliant by June 30, 1999.
(d) The Company and its subsidiaries reasonably believe that
their "back-office systems" (e.g., human resources, accounting and
reporting systems) shall be Year 2000 Compliant by June 30, 1999.
(e) The Company and its subsidiaries reasonably believe that
their "desktop" systems (e.g., user system and stand-alone applications)
shall be Year 2000 Compliant by June 30, 1999.
(f) The Company, on behalf of itself and its subsidiaries,
has completed an initial round of communications with its material vendors
and service providers and all customers to determine the extent to which
the products or services they provide to the Company or its subsidiaries,
or the systems they use to interchange data with the Company or its
subsidiaries, are Year 2000 Compliant. The Company is engaged in analysis
of the responses and follow-up calls and/or visits, as it reasonably deems
necessary.
(g) The Company is currently developing a Year 2000
contingency plan for itself and its subsidiaries. The Company currently
expects to build upon its Business Contingency Plan and current disaster
recovery plans, which have been provided to the Purchaser. New plans are
currently expected to be developed or current plans modified by mid-1999 to
include Year 2000 specific issues. End-to-end Year 2000 testing is
currently expected to be completed by June 30, 1999.
(h) If the Company and its subsidiaries continue to execute
the Y2K Readiness Plan in a timely manner, the Seller, based on information
provided to it by the Company, and the Company expect that there would not
be a Material Adverse Effect on the business operations of the Company and
its subsidiaries resulting from activities within the direct control of the
Company and its subsidiaries. Due to the general uncertainty of the Year
2000 problem, neither the Seller nor the Company makes any representation
or warranty that the expectations expressed herein will be realized or will
not be changed, or that the consequences of failure to achieve Year 2000
Compliance will not have a Material Adverse Effect.
Section 2.21. Brokers. No broker, investment banker, financial
advisor or other person, other than Merrill Lynch, Pierce, Fenner & Smith
Incorporated, the fees and expenses of which will be paid by the Seller, is
entitled to any broker's, finder's, financial advisor's or other similar
fee or commission in connection with the transactions contemplated by this
Agreement based upon arrangements made by or on behalf of the Seller or any
subsidiary.
Section 2.22. No Implied Representations. The Seller acknowledges
that the Purchaser is not making any representations or warranties other
than as explicitly set forth in this Agreement. The Seller agrees that it
shall not assert any claims against or seek any damages or other remedies
(including pursuant to any implied warranties or similar rights, which the
Seller expressly and irrevocably waives and agrees not to seek to enforce)
from the Purchaser or any of its officers, directors, affiliates,
stockholders, agents, advisors or representatives (collectively,
"representatives") for any matters contemplated hereby except for fraud or
as explicitly set forth herein.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser represents and warrants to the Seller as follows:
Section 3.1. Organization and Authority of the Purchaser. The
Purchaser is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has
all necessary corporate power and authority to execute and deliver this
Agreement, to perform its obligations under this Agreement and to
consummate the transactions contemplated by this Agreement. The execution
and delivery of this Agreement by the Purchaser and the consummation by the
Purchaser of the transactions contemplated by this Agreement have been duly
authorized by all necessary corporate actions on the part of Purchaser and
no other corporate actions or proceedings on the part of the Purchaser are
necessary to authorize this Agreement or for the Purchaser to consummate
the transactions contemplated by this Agreement. This Agreement has been
duly and validly executed and delivered by Purchaser and constitutes a
legal, valid and binding obligation of the Purchaser, enforceable against
the Purchaser in accordance with its terms.
Section 3.2. Consents and Approvals; No Violations.
(a) No filing or registration with, and no permit,
authorization, certificate, waiver, license, consent or approval of, any
Governmental Entity is required in connection with the execution, delivery
and performance of this Agreement by the Purchaser or the consummation by
the Purchaser of the transactions contemplated hereby except (x) for the
applicable requirements of the HSR Act or (y) as a result of facts or
circumstances particular to the Seller. No consent or waiver of any person
(other than a Governmental Entity) is required in connection with the
execution, delivery and performance of this Agreement by Purchaser or the
consummation by the Purchaser of the transactions contemplated hereby.
(b) Neither the execution and delivery of this Agreement by
the Purchaser nor the consummation by the Purchaser of the transactions
contemplated by this Agreement nor compliance by the Purchaser with any of
the provisions hereof will (i) conflict with or result in any breach of any
provision of the certificate of incorporation or by-laws (or similar
organizational document) of the Purchaser, (ii) result in a violation or
breach of, or constitute (with or without due notice or lapse of time or
both) a default (or give rise to any right of termination, cancellation,
modification or acceleration) (whether after the giving of notice or the
passage of time or both) under, any of the terms, conditions or provisions
of any note, lease, license, contract or agreement to which the Purchaser
is a party or by which the Purchaser, or its assets, is bound or (iii)
violate any order, writ, injunction, decree, statute, treaty, rule or
regulation applicable to the Purchaser, except in the case of (ii) or
(iii), for violations, breaches or defaults which would not have a material
adverse effect on the Purchaser or which would not prevent or materially
delay the consummation of the transactions contemplated by this Agreement.
Section 3.3. Investment. The Purchaser is acquiring the Company
Shares solely for the purpose of investment and not with a view to any
resale or distribution thereof.
Section 3.4. Brokers. No broker, investment banker, financial
advisor or other person, other than those the fees and expenses of which
will be paid by the Purchaser, is entitled to any broker's, finder's,
financial advisor's or other similar fee or commission in connection with
the transactions contemplated by this Agreement based upon arrangements
made by or on behalf of the Purchaser or any subsidiary.
Section 3.5. No Implied Representations. The Purchaser
acknowledges that the Seller is not making any representations or
warranties regarding the Business other than as explicitly set forth in
this Agreement. The Purchaser agrees that it shall not assert any claims
against or seek any damages or other remedies (including pursuant to any
implied warranties or similar rights, which the Purchaser expressly and
irrevocably waives and agrees not to seek to enforce) from the Seller or
any of its representatives) for any matters relating to the Business or the
other matters contemplated hereby except for fraud or as explicitly set
forth herein.
ARTICLE IV
COVENANTS
Section 4.1. Conduct of the Business.
(a) During the period from the date hereof to the Closing
Date, the Seller shall, except as otherwise expressly provided in this
Agreement, cause the Company to operate only in the ordinary course of
business consistent with past practice. The Seller shall, and shall cause
the Company to, use all reasonable efforts to preserve intact the present
organization of the Business, keep available the services of the present
officers and employees of the Company and preserve the Company's
relationships with customers, suppliers, and others having significant
business dealings with the Business.
(b) Without limiting the generality of the foregoing, and
except as set forth in Section 4.1 of the Disclosure Schedule or as
otherwise expressly provided in this Agreement, from the date of this
Agreement to the Closing Date, the Seller shall cause the Company and each
of its subsidiaries not to, without the written consent of the Purchaser
(which consent shall not be unreasonably withheld or delayed):
(i) amend or propose to amend its certificate of
incorporation or by-laws (or other similar organizational
documents) or alter through merger, liquidation, reorganization,
restructuring or in any other fashion, the corporate structure or
ownership of the Company or any of its subsidiaries;
(ii) issue, sell or agree or commit to issue, sell or deliver
(whether through the issuance or granting of options, warrants,
commitments, subscriptions, rights to purchase or otherwise),
pledge or otherwise encumber any shares of capital stock of the
Company or any subsidiary, or any securities convertible into, or
exchangeable for, any such shares or amend the terms of any such
securities or agreements outstanding on the date hereof;
(iii) (A) declare, set aside, make or pay any dividend or
other distribution in respect of its capital stock, or (B) redeem,
repurchase or otherwise acquire any of its securities or split,
combine or reclassify any shares of its capital stock;
(iv) (A) transfer, sell, lease, license or dispose of any
material assets or rights, unless in the ordinary course of
business consistent with past practice; or (B) acquire or agree to
acquire, by merging or consolidating with, by purchasing an equity
interest in or a portion of the assets of or by any other manner
any business or any corporation, partnership, association or other
business organization or division thereof or otherwise acquire or
agree to acquire any assets of any other person (other than the
purchase of assets in the ordinary course of business and
consistent with past practices);
(v) other than in the ordinary course of business and other
than transactions with wholly-owned subsidiaries, (A) incur,
assume, discharge, cancel or prepay any material indebtedness or
other obligation or issue or sell any debt securities or rights to
acquire any debt securities, (B) assume, guarantee, endorse or
otherwise become liable (whether directly, contingently or
otherwise) for the obligations of any other person, (C) make any
loans, advances or capital contributions to, or investments in,
any other person; (D) change the Company's practices with respect
to the timing of payments or collections; (E) pledge or otherwise
encumber shares of capital stock of the Company and its
subsidiaries; or (F) mortgage or pledge any of the assets or
permit to exist any Lien (other than Permitted Liens) thereupon;
(vi) enter into, adopt, amend or terminate any employee
benefit plan, or increase in any material respect the compensation
or fringe benefits of any officer or employee of the Company or
pay any benefit not required by any existing plan, except in the
ordinary course of business or as required by applicable law or
existing contractual arrangements;
(vii) enter into any employment or severance agreement with
any employee, adopt or enter into any collective bargaining
agreement;
(viii) enter into, amend, assign or terminate any Contract,
except in the ordinary course of business and consistent with past
practices;
(ix) engage in any transactions with the Seller or its
subsidiaries (other than the Company and its subsidiaries) other
than in the ordinary course of business and consistent with past
practices and on a basis no less favorable than would at the time
be obtainable for a comparable transaction in arm's-length dealing
with an unrelated third party;
(x) settle or compromise any material litigation of the
Company or any of its subsidiaries (whether or not commenced prior
to the date of this Agreement) or settle, pay or compromise any
claims, liabilities or obligations not required to be paid,
individually in an amount in excess of $1 million;
(xi) change or agree to change any accounting method or
policy other than as required by GAAP or by Law;
(xii) change, or agree to change, any business policies which
relate to advertising, pricing, personnel, labor relations, sales,
returns, or product acquisitions, in each case in a manner which
would have a Material Adverse Effect;
(xiii) make any material Tax election, or settle or
compromise any material Tax liability, fail to file any material
Tax Return required to be filed or fail to pay or withhold any
material amount of Taxes required to be paid or withheld; or
(xiv) take, or agree in writing or otherwise to take, any of
the foregoing actions.
Section 4.2. Access to Information. Upon reasonable notice, and
subject to applicable law and any applicable contractual restrictions, the
Seller shall, and shall cause the Company to, afford to the officers,
employees, accountants, counsel and other representatives of the Purchaser
reasonable access during normal business hours to all of the Company's
offices, facilities, properties, books and records relating to the
Business, and the Seller shall furnish promptly to the Purchaser all
information concerning the business, properties and personnel of the
Business as the Purchaser may reasonably request. All such information
shall be kept confidential pursuant to the Confidentiality Agreement dated
July 21, 1998 between the Purchaser and the Seller (the "Confidentiality
Agreement"). In addition, the Seller shall use its reasonable efforts to
cause the Company's independent public accountants to make available or
provide to the Purchaser, its independent public accountants, its attorneys
and its financing sources and the independent public accountants and
attorneys of the Purchaser's financing sources, upon reasonable notice by
the Purchaser, during regular business hours, reasonable access to their
personnel, work papers and such other reasonably requested documentation
relating to their work papers and to their reports on the books and records
of the Company; provided that if the Company's independent public
accountants shall so request, the Purchaser shall agree with the Company's
independent public accountants that it will not acquire any rights as a
result of such access that it would not otherwise have had, that the
Company's independent public accountants would not assume any duties or
obligations in connection with such access and that the Purchaser will
indemnify and hold harmless the Company's independent public accountants to
the extent such claim arises as a direct result of the Company's
independent public accountants' permitting the Purchaser and its
representatives access to its working papers in connection with the
transaction contemplated by this Agreement.
Section 4.3. Reasonable Efforts.
(a) Upon the terms and subject to the conditions of this
Agreement, each of the parties hereto shall use its reasonable efforts to
take, or cause to be taken, all actions, and to do, or cause to be done,
all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated
by this Agreement as promptly as practicable including (i) the preparation
and filing of all forms, registrations and notices required to be filed to
consummate the transactions contemplated by this Agreement and the taking
of such actions as are necessary to obtain any requisite approvals,
consents, orders, exemptions or waivers by any Governmental Entity,
including making the filings pursuant to the HSR Act within 10 business
days of the date hereof, and (ii) using its reasonable efforts to cause the
satisfaction of all conditions to Closing. Each party shall promptly
consult with the other with respect to, provide any necessary information
with respect to and provide the other (or its counsel) copies of, all
filings made by such party with any Governmental Entity or any other
information supplied by such party to a Governmental Entity in connection
with this Agreement and the transactions contemplated by this Agreement. If
in connection with obtaining any permit, authorization, certificate,
waiver, license, consent, or approval of any Governmental Entity necessary
for the execution, delivery and performance of this Agreement and the
transactions contemplated hereby, any Governmental Entity requires that the
Specified Agreement (as hereinafter defined) be amended, supplemented or
terminated, the Purchaser and the Seller will terminate the Specified
Agreement.
(b) Each party hereto shall promptly inform the others of any
communication from any Government Entity regarding any of the transactions
contemplated by this Agreement. If any party or affiliate thereof receives
a request for additional information or documentary material from any such
Government Entity with respect to the transactions contemplated by this
Agreement, then such party will endeavor in good faith to make, or cause to
be made, as soon as reasonably practicable and after consultation with the
other party, an appropriate response in compliance with such request.
Section 4.4. Further Assurances; No Hindrances. From time to time
after the Closing, without additional consideration, each of the Seller and
the Purchaser will execute and deliver such further instruments and take
such other action as may be necessary to make effective the transactions
contemplated by this Agreement. Upon the terms and subject to the
conditions of this Agreement, each of the parties hereto shall use its
reasonable efforts (i) to cause all conditions precedent to its obligations
to consummate the transactions contemplated hereby to be satisfied and (ii)
not to take, or cause to be taken, any actions to hinder or delay the
consummation of the transactions contemplated hereby.
Section 4.5. Employee Matters.
(a) For a period of one year after the Closing Date, the
Purchaser shall, or shall cause the Company and its subsidiaries to,
provide each current and former employee of the Company and its
subsidiaries with benefits (including pension and welfare benefits) that
are substantially comparable to the benefits provided under the benefit
plans applicable to such persons as in effect immediately prior to the
Closing. To the extent that service is relevant for eligibility, vesting or
benefit calculations or allowances (including entitlement to vacation and
sick days) under any benefit plan or arrangement covering current or former
employees of the Company or its subsidiaries, such plan or arrangement
shall credit such employees for service credited for comparable purposes
prior to the Closing Date, provided, however, that such service shall not
be recognized to the extent that such service would result in a duplication
of benefits. Subject to the foregoing, nothing in this Section 4.5(a) shall
be construed to restrict the right of the Company or its subsidiaries to
terminate or modify such benefit plans.
(b) For a period of one year following the Closing Date, the
Purchaser shall ensure that each employee of the Company and its
subsidiaries shall continue to be paid base salary at no lower a rate than
in effect immediately prior to the Closing, provided, however, that the
Purchaser may make appropriate adjustments to such salary in individual
cases based on merit and performance in a manner consistent with the
treatment of other similarly situated employees of the Purchaser and its
subsidiaries.
(c) For a period of one year following the Closing Date, the
Purchaser shall, or shall cause the Company or its subsidiaries to,
maintain severance policies, programs and arrangements that are no less
favorable to the employees than the policies, programs and arrangements in
effect immediately prior to the Closing.
(d) The Seller shall cause the trustee of the master trust
(the "Master Trust") in which the PCS Retirement Plan (the "Retirement
Plan") participates, as of the Master Trust's valuation date coincident
with or next following the Closing Date (the "Valuation Date"), to value,
in a manner consistent with the Master Trust's normal method of accounting
for separate plans, the Retirement Plan's allocable share of the assets of
the Master Trust (in the aggregate, the "Retirement Plan Asset Value"). As
soon as practicable after the determination of the Retirement Plan Asset
Value, the Seller shall cause the trustee of the Master Trust to transfer
to a successor trustee designated by Purchaser (and that is exempt from
taxation pursuant to Section 501(a) of the Code) an amount in cash, or
other assets of the Master Trust allocated to the Retirement Plan
reasonably acceptable to the Purchaser, equal to the Retirement Plan Asset
Value. The amount of such transfer shall be increased, in the case of
assets valued as of the Valuation Date and transferred in cash, by earnings
credited at the prime rate (as reported in The Wall Street Journal on the
Valuation Date) from the Valuation Date to the date of transfer. Other
assets of the Master Trust shall be transferred in kind, to the extent
acceptable to the Purchaser. The amount of such transfer shall be reduced
by benefit payments to employees or their beneficiaries made in accordance
with the provisions of the Retirement Plan during the interim period, and
by administrative expenses allocated to the Retirement Plan under the
Master Trust, during the interim period, on a basis consistent with past
practice. The Seller shall cause the Trustee of the separate master trust
holding assets of TCS Employee Savings Plan (the "Savings Plan") to
transfer the account balances of all participants and beneficiaries of the
Savings Plan to a successor trust (and that is exempt from taxation
pursuant to Section 501(a) of the Code) at such time following the Closing
Date as may be mutually agreed between the Seller and the Purchaser, but in
no event later than 60 days following the Closing Date.
(e) If the Purchaser offers employment to employees of the
Company listed on a schedule previously delivered by the Seller to the
Purchaser and agreed to by the Purchaser, and such offer is accepted by one
or more of such employees and such employee is employed by the Company as
of the Closing Date, then the Purchaser and the Seller shall each be
responsible for 50% of the cost of the Seller employee benefits set forth
on such schedule for such employees who so accept, provided that in no
event shall the Seller be responsible for an amount with respect to any
such employee in excess of 50% of the amount set forth with respect to such
employee on such schedule. The Purchaser shall notify the Seller promptly
following the acceptance by any such employee of any such offer, with such
notice specifying the precise dollar amount of the benefits offered to and
accepted by such employee, and the Purchaser shall as promptly as
practicable following dispatch of such notice (but in no event prior to the
Closing Date) pay to the Seller the amount contemplated in the immediately
preceding sentence. Notwithstanding the foregoing, with respect to several
such employees, it is contemplated that in lieu of offering the Seller
employee benefits set forth on such schedule, such employees will be
offered employee benefits by the Purchaser in the amounts set forth on such
schedule. In such event, the Seller will reimburse the Purchaser for up to
50% of the cost of such benefits for such employees who accept such offer
and are employed by the Company as of the Closing Date, but in no event, in
excess of 50% of the amount of such benefit as set forth on such schedule.
The Purchaser shall notify the Seller promptly following any acceptance of
such offer, with such notice specifying the precise dollar amount of the
benefits offered to such employee and accepted by such employee, and the
Seller shall as promptly as practicable following receipt of such notice
(but in no event prior to the Closing Date) pay to the Purchaser the amount
contemplated in the immediately preceding sentence.
(f) The Purchaser acknowledges that it values and desires to
have continued following the Closing Date the skills and services of the
employees of the Company and its subsidiaries, and currently intends to
maintain all such employees following the Closing Date; provided, however,
that this Section 4.5 shall not be construed to create any right to
employment or to limit the ability of the Purchaser or any of its
affiliates to terminate the employment of any of such employees at any
time.
Section 4.6. Transitional Matters.
(a) Following the Closing Date, the Seller and its
subsidiaries shall provide, or cause to be provided, to the Purchaser, as
requested by the Purchaser, certain services which are currently provided
by the Seller and its subsidiaries to the Company, all as to be more fully
set forth in a transitional services agreement (the "Transitional Services
Agreement") to be entered into by the Seller and the Purchaser as of the
Closing Date. The Transitional Services Agreement will be in form and
substance reasonably acceptable to the Purchaser and the Seller, and will
provide, in general, for the Seller to provide to the Company the same
services as it provides to the Company and its subsidiaries as of the
Closing Date, at fully allocated cost, such services to be provided for up
to 12 months following the Closing Date and such services as are set forth
on Section 4.6(a)(i) of the Disclosure Schedule; provided, that after the
Closing Date the Seller may upon four months notice terminate any service
(i) if the Seller is taking action to terminate such service for its
subsidiaries in general (and not the Company specifically) following the
Closing Date or (ii) set forth on Section 4.6(a)(ii) of the Disclosure
Schedule.
(b) Notwithstanding anything herein to the contrary, the
Purchaser is not acquiring, directly or indirectly, any rights to the
Seller's name or any other corporate name of the Seller or its subsidiaries
or any derivation thereof (other than the Company and its subsidiaries)
(collectively, the "Retained Names"), provided that the Purchaser may use
existing stationery, purchase order forms or other similar paper goods or
supplies which contain the Retained Names for up to 90 days after the
Closing Date, but shall thereafter cease any use of the Retained Names;
provided the Purchaser uses commercially reasonable efforts to cease using
such items as promptly as practicable following the Closing Date.
(c) Promptly following the date hereof, the Purchaser and the
Seller shall negotiate in good faith the Transitional Services Agreement.
(d) The parties acknowledge that they have as of the date
hereof, executed an agreement attached hereto as Schedule 4.6 (the
"Specified Agreement"). Following the date hereof, the Purchaser and the
Seller shall enter into those amendments, if any, to the Specified
Agreement as shall be mutually agreeable in good faith. Subject to the last
sentence of Section 4.3(a) hereof, the Specified Agreement shall be
effective as of the Closing Date.
Section 4.7. Guaranties. The Purchaser shall use its reasonable
efforts to cause the Seller and its affiliates to be released, as of the
Closing, from all guaranties, guarantee obligations and indemnities
relating to obligations of the Company and its subsidiaries or otherwise
relating to or for the benefit of the Business including pursuant to the
guaranties, guarantee obligations and indemnities set forth in Section 4.7
of the Disclosure Schedule. The Purchaser shall indemnify the Seller and
its affiliates for any costs, expenses or losses incurred in respect of
such guaranties, guarantee obligations and indemnities, without regard to
any limits on indemnification set forth in Article VII hereof.
Section 4.8. Access to Records. The Purchaser agrees that it shall
preserve and keep all books and records in respect of the Business that
relate to periods prior to the Closing, or to matters for which the Seller
may be required to provide indemnification hereunder, for a period of six
years from the Closing Date (or any longer period required by applicable
law or until the final resolution of any matters for which the Seller may
be required to provide indemnification hereunder), and shall give the
Seller reasonable access to such books and records during normal business
hours.
(b) Subject to applicable law and any applicable contractual
restrictions, if following the Closing a party hereto (or its subsidiaries)
is in possession of any information relating to the Business which the
other party requires in order to prepare documents required to be filed
with Governmental Entities or its financial statements, such party shall
furnish such information to the other party as soon as reasonably
practicable following a written request for such information.
Section 4.9. 1998 Audited Financial Statements.
(a) As promptly as practicable, but in no event later than
January 31, 1999, the Seller shall cause the Company to prepare and deliver
to the Purchaser the 1998 Financial Statements. For purposes of this
Agreement, the term "1998 Financial Statements" shall mean the audited
consolidated balance sheet of the Company and its consolidated subsidiaries
as of December 31, 1998 and the related consolidated statements of income,
stockholders' equity and cash flows for the fiscal year then ended
(including the notes thereto), together with the unqualified report thereon
of Ernst & Young LLP ("Ernst & Young"). In the event the Closing Date shall
not have occurred by May 14, 1999, the Seller shall cause the Company to
prepare and deliver to the Purchaser an unaudited consolidated balance
sheet of the Company and its consolidated subsidiaries as of March 31, 1999
and the related consolidated statements of income and stockholders' equity
for the fiscal quarter then ended (the "Quarterly Financial Statements")
and (if requested by Purchaser) an audited consolidated balance sheet of
the Company and its consolidated subsidiaries for the calendar year ended
December 31,1997 and the related consolidated statements of income,
stockholders' equity and cash flows for the year then ended (the "1997
Financial Statements"). The Purchaser shall be responsible for all fees and
expenses in connection with the preparation of the 1998 Financial
Statements, the Quarterly Financial Statements and the 1997 Financial
Statements, including the fees and expenses of Ernst & Young. The 1997
Financial Statements, 1998 Financial Statements and the Quarterly Financial
Statements will present fairly in all material respects the consolidated
financial position as of December 31, 1997, December 31, 1998 and March 31,
1999, respectively, and results of operations for the years ended December
31, 1997 and December 31, 1998 and for the quarter ended March 31, 1999,
respectively, in each case of the Company and its subsidiaries and will be
in conformity with GAAP, except that the Quarterly Financial Statements
will not contain footnotes or year-end accruals.
(b) The Seller shall request that at the sole cost and
expense of the Purchaser, Ernst & Young provide and allow the filing of
such consents and other documentation as may be required or customary for
the inclusion of any financial statements or information of the Company
prepared either at the request of the Purchaser or the Seller so as to
allow for the use of such financial statements or information in public or
private financing documents or other documents filed with the Securities
and Exchange Commission, whether before or after the Closing. In addition,
the Seller and the Company shall request that at the sole cost and expense
of the Purchaser Ernst & Young provide "comfort" letters and updates
thereof addressed to each of the underwriters in any underwritten offering,
such letters to be in customary form and covering the matters of the type
customarily covered in "comfort" letters in connection with the offerings
of securities and such other matters are reasonably requested by the
underwriters.
Section 4.10. Intercompany Notes. Pursuant to the Seller's cash
management program, the Company or its subsidiaries may from time to time
make loans to the Seller or the Seller may from time to time make loans to
the Company or its subsidiaries. These loans are evidenced by intercompany
notes (the "Intercompany Notes"). Subject to any adjustments to be made
pursuant to Section 1.6 hereof, Intercompany Notes shall be paid in full at
the Closing or as promptly as practicable thereafter but in no event later
than 10 business days after the Closing Date.
Section 4.11. Notice of Possible Breach. Prior to the Closing, if
any party to this Agreement shall become aware of any fact, event or
circumstance that would constitute a breach of this Agreement by the other
party or that would result in the failure to satisfy any condition set
forth in Article V, such party shall promptly notify the other party
thereof in writing. The parties shall thereupon provide reasonable
cooperation to cure or remedy such breaches or satisfy such closing
conditions.
Section 4.12. Supplemental Disclosure. From time to time prior to
the Closing, the Seller will, and will cause the Company to, promptly
following its becoming aware thereof supplement or amend the Disclosure
Schedule with respect to any matter hereafter arising or discovered which,
if known, existing or occurring at the date of this Agreement, would have
been required to be set forth or described in the Disclosure Schedule. Any
supplement or amendment of the Disclosure Schedule made pursuant to this
Section 4.12 shall not be deemed to cure any breach or inaccuracy of any
representation or warranty made in this Agreement.
Section 4.13. Notices of Certain Events. The Seller shall, and
shall cause the Company to, notify the Purchaser in writing and the
Purchaser shall notify the Seller in writing of:
(a) any notice or other communication received by the Seller,
the Company or the Purchaser, as the case may be, from any person alleging
that the consent of such person is or may be required in connection with
the transactions contemplated by this Agreement;
(b) any notice or other communication from any Governmental
Entity received by the Seller, the Company or the Purchaser, as the case
may be, that relates to the transactions contemplated by this Agreement or
that is materially significant to the Business; and
(c) any actions, suits, claims, investigations or proceedings
commenced or, to the Seller's or the Purchaser's, as the case may be,
knowledge threatened against, relating to or involving or otherwise
affecting the Seller, the Company or the Purchaser, as the case may be,
that relate to the consummation of the transactions contemplated by this
Agreement.
The Purchaser shall keep the Seller reasonably informed, at the Seller's
request, of the progress of its financing activities between the date of
this Agreement and the Closing Date.
Section 4.14. Confidentiality. From the Closing Date until the
fifth anniversary of the Closing Date, the Seller will not, and will not
permit its subsidiaries or any of their respective affiliates to, disclose
to any person without the prior written consent of the Purchaser any
confidential or non-public information relating to or concerning the
Business (the "Confidential Information"), unless (i) disclosure is
required to be made under applicable law or (ii) such information is or
becomes generally available (a) to the public other than as a result of
disclosure by the Seller in violation of this Section 4.14 or (b) to the
Seller on a non-confidential basis from a source, other than the Company or
the Purchaser, which to the knowledge of the Seller, is not prohibited from
disclosing the confidential information by contractual, legal or fiduciary
obligation. The Seller shall, and shall cause the Company to, notify the
Purchaser promptly after receipt by the Seller or the Company of or any
request for such information.
Section 4.15. Insurance. The Seller shall cause the Company to
keep, or cause to be kept, all material insurance policies maintained by
the Company for the benefit of the Business, or suitable replacements
therefor (which may include policies containing terms equal or more
favorable than the policies that they are replacing), in full force and
effect up to the Closing. To the extent the Seller or any of its
subsidiaries receives, whether before or after the Closing Date, any
proceeds from any insurance policy with respect to the Business, the Seller
shall or shall cause its subsidiary to pay over to the Company such
proceeds as promptly as practicable.
Section 4.16. Non-Solicitation of Employees.
(a) Except with respect to those people set forth on Section
4.16 of the Disclosure Schedule, from and after the date hereof, the Seller
shall not, without the prior written approval of the Purchaser, for a
period of two years from the Closing Date, directly or indirectly, solicit,
encourage, entice or induce any person who is an employee of the Company or
any of its subsidiaries at the date hereof or who becomes an employee of
the Company or any of its subsidiaries after the date hereof but prior to
the Closing Date, to terminate his or her employment with the Company or
any of its subsidiaries, or hire or employ any person who is an employee of
the Company or any of its subsidiaries at the date hereof or who becomes an
employee of the Company or any of its subsidiaries after the date hereof
but prior to the Closing Date; provided that the foregoing shall not apply
to persons who approach the Seller or any of its subsidiaries for the
purposes of employment or who are hired as a result of the use of an
independent employment agency where contact between such person and the
independent employment agency was initiated by such person or as a result
of the use of a general solicitation (such as an advertisement) not
specifically directed to employees of the Company.
(b) If it is ever held that the restriction placed on any
party to this Agreement by this Section 4.16 is too onerous and is not
necessary for the protection of the other party or parties hereto, each
party to this Agreement agrees that any court of competent jurisdiction may
impose lesser restrictions which such court may consider to be necessary or
appropriate to properly protect the other party or parties hereto.
Section 4.17. Non-Competition. Except as set forth in Schedule
4.17 to the Disclosure Schedule, without the prior written consent of the
Purchaser, neither the Seller nor any of its subsidiaries shall, except in
the case of a Permitted Investment (as hereinafter defined), directly or
indirectly, engage in or participate in (or become a partner, co-venturer
or shareholder in or otherwise participate in the management or operation
of any venture or enterprise of any kind that engages in) (i) the business
of providing pharmacy benefit management services as the Company conducts
such business as of the Closing Date for a period of five years following
the Closing Date or (ii) the business of providing mail order pharmacy
services as the Company conducts such business as of the Closing Date for a
period of three years following the Closing Date (the "Restricted
Business"); provided that the Seller or any of its subsidiaries may,
directly or indirectly, (x) own in the aggregate up to 5% of any
outstanding class of equity securities of any entity engaged in the
Restricted Business or any portion thereof, the equity securities of which
are traded on a national or regional stock exchange, or in the national
over-the-counter market, or (y) own or acquire ownership of any entity
engaged in the Restricted Business or portion thereof, provided that the
Seller divests itself of the portion of such business engaged in the
Restricted Business within one year following the time of such acquisition.
In the event the Seller must divest itself of a Restricted Business
pursuant to clause (y) of the immediately preceding sentence, the Seller
shall, prior to offering such Restricted Business to any other party, offer
the Purchaser the right to purchase such Restricted Business, and negotiate
in good faith with the Purchaser for not less than 30 days with respect to
the purchase of such Restricted Business. As used herein, a "Permitted
Investment" shall mean (a) the Seller's merger or combination with or
acquisition of a person (or all or any portion of its equity interests) or
business (the "Acquired Business") engaged in the Restricted Business, if
that portion of the Acquired Business engaged in the Restricted Business
generated less than $10 million in net income or accounted for less than
10% of the net income, revenues or assets of the Acquired Business during
the most recently completed fiscal year preceding such merger, combination
or acquisition. If it is ever held that the restriction placed on any party
to this Agreement by this Section 4.17 is too onerous and is not necessary
for the protection of the other party or parties hereto, each party to this
Agreement agrees that any court of competent jurisdiction may impose lesser
restrictions which such court may consider to be necessary or appropriate
to properly protect the other party or parties hereto.
Section 4.18. McKesson Agreements. In the event that the Purchaser
would suffer Purchaser Damages (as hereinafter defined) for which the
Seller has a right to indemnification by McKesson pursuant to the McKesson
Agreements, the Seller will take such action as may be reasonably requested
by the Purchaser and is permitted by the applicable McKesson Agreements to
enforce the Seller's rights against McKesson and make the benefits of such
indemnity available to the Purchaser.
Section 4.19. Class B Stock Redemption. At or prior to the date
hereof, the Seller shall make a capital contribution to the Company in an
amount equal to the amount paid or payable by the Company to redeem and pay
a special dividend on, and all other amounts due to the holder in
connection with the redemption of, all outstanding shares of Class B Stock
and the Company has no obligation to the Seller in connection therewith or
as a result thereof.
Section 4.20. Designated Agreements. The Seller shall cause that
certain TCP Agreement with Re:Solve500, dated January 1, 1997, between Eli
Lilly and Company and PCS Health Systems, Inc. and that certain Business
Agreement, dated June 21, 1996, between PCS Health Systems, Inc. and Eli
Lilly and Company (the "Designated Agreements") to remain in full force and
effect through and until the Closing Date to the extent it is lawfully
permitted to do so. The Purchaser hereby consents to the entering into by
the Company of the amendments to the Designated Agreements contemplated by
a schedule delivered by the Seller to the Purchaser and agreed to by the
Purchaser (the "Designated Amendments"). If the Designated Amendments have
not been effected prior to the Closing Date, or if the Designated
Agreements are not in full force and effect as of the Closing Date, the
Purchaser and the Seller shall cause agreements substantially identical to
the Designated Agreements, as amended by the Designated Amendments, to be
entered into as of the Closing Date to the extent they are lawfully
permitted to do so.
ARTICLE V
CONDITIONS
Section 5.1. Conditions to Each Party's Obligations. The
respective obligation of each party to effect the transactions contemplated
by this Agreement shall be subject to the satisfaction of each of the
following conditions, unless waived in writing by each of the parties
hereto:
(a) No statute, rule, regulation, order, decree, temporary
restraining order or injunction shall have been enacted, entered,
promulgated or enforced by a United States Governmental Entity which
prohibits or materially restricts the consummation of the transactions
contemplated by this Agreement and shall be in effect.
(b) Any applicable waiting period under the HSR Act with
respect to the transactions contemplated by this Agreement shall have
expired or been terminated and all other material authorizations, consents,
approvals, or clearances of any Governmental Entity necessary for the
consummation of the transactions contemplated by this Agreement shall have
been obtained.
Section 5.2. Conditions to Obligations of the Purchaser. The
obligation of the Purchaser to effect the transactions contemplated by this
Agreement is further subject to the satisfaction of each of the following
conditions, unless waived in writing by the Purchaser:
(a) The representations and warranties of the Seller
contained in this Agreement shall have been true and correct when made and
shall be true and correct as of the Closing, with the same force and effect
as if made at the Closing, except (x) that representations and warranties
which are made as of a specific date need only be true as of such date or
(y) where the failure of such representations and warranties to be true and
correct would not have a Material Adverse Effect (provided, however, that
if any portion of any representation or warranty is already qualified by
materiality, Material Adverse Effect or similar qualifiers, for purposes of
determining whether this Section 5.2(a) has been satisfied with respect to
such portion of such representation or warranty, such portion of such
representation or warranty as so qualified must be true and correct in all
respects and the representations and warranties contained in Sections 2.1,
2.2(a), 2.2(b) (except the last sentence thereof), 2.2(c), 2.3(b)(i), the
first sentence of 2.13(c) and 2.19 shall be true and correct in all
respects).
(b) The Seller shall have performed and complied in all
material respects with all covenants and agreements required to be
performed or complied with by it under this Agreement at or prior to the
Closing.
(c) The Purchaser shall have received a certificate of an
executive officer of the Seller to the effect that the conditions set forth
in Sections 5.2(a) and 5.2(b) above have been satisfied.
(d) The Purchaser shall have received the FIRPTA Certificate
from the Seller, provided, however, that if the Seller fails to deliver
such certificate, the Closing shall nevertheless take place, but the
Purchaser shall withhold the amount of Taxes required to be withheld in the
Purchaser's good faith judgment pursuant to Section 1445 of the Code.
Section 5.3. Conditions to Obligations of the Seller. The
obligation of the Seller to effect the transactions contemplated by this
Agreement are further subject to the satisfaction of each of the following
conditions, unless waived in writing by the Seller:
(a) The representations and warranties of the Purchaser in
this Agreement shall be true and correct in all material respects as of the
date hereof and at and as of the Closing with the same effect as though
such representations and warranties had been made at and as of such time,
other than representations and warranties that speak as of a specific date
or time (which need only be true and correct in all material respects as of
such date or time).
(b) The Purchaser shall have performed and complied in all
material respects with all covenants and agreements required to be
performed or complied with by it under this Agreement at or prior to the
Closing.
(c) The Seller shall have received from an executive officer
of the Purchaser a certificate, to the effect that the conditions set forth
in Sections 5.3(a) and 5.3(b) above have been satisfied.
ARTICLE VI
TERMINATION AND AMENDMENT
Section 6.1. Termination. This Agreement may be terminated at any
time prior to the Closing by:
(a) Mutual written consent of the Seller and the Purchaser.
(b) Either the Seller or the Purchaser if the Closing shall
not have occurred on or before July 31, 1999 (unless the failure to
consummate the Closing by such date shall be due to the action or failure
to act of the party seeking to terminate this Agreement).
(c) Either the Seller or the Purchaser if any United States
court of competent jurisdiction or other competent United States
Governmental Entity shall have issued an order, decree or injunction or
taken any other action permanently restraining, enjoining or otherwise
prohibiting the transactions contemplated by this Agreement and such order,
decree or injunction or other action shall have become final and
nonappealable.
(d) Either the Purchaser or the Seller if there shall have
been a material breach by the other of any of its representations,
warranties, covenants or agreements contained in this Agreement, which if
not cured would cause the conditions set forth in Section 5.2(a), 5.2(b) or
5.2(c) or Section 5.3, as the case may be, not to be satisfied, provided,
however, that as a condition to the right of the party to elect to
terminate this Agreement pursuant to the immediately preceding clause, such
party shall first provide 30 days prior notice to the other party
specifying in reasonable detail the nature of the condition that such party
has concluded will not be satisfied, and the other party shall be entitled
during such 30-day period to commence any actions it may elect consistent
with the terms of this Agreement to provide reasonable assurance to the
first party that such condition will be satisfied prior to July 31, 1999
and provided, further, that if such condition can be satisfied by the other
party through the exercise of its best efforts and for so long as that
party continues to use such best efforts, the first party may not terminate
this Agreement under this Section 6.1(d) prior to July 31, 1999.
Section 6.2. Effect of Termination.
(a) In the event of the termination of this Agreement
pursuant to Section 6.1 hereof, this Agreement shall forthwith become void
and have no effect, without any liability on the part of any party hereto
or its affiliates, directors, officers or stockholders to any other party
to this Agreement, except that the provisions of Sections 6.2(b), 9.7 and
9.11 and the Confidentiality Agreement shall remain in effect
notwithstanding such termination. Nothing contained in this Section 6.2
shall relieve any party from liability for any breach of this Agreement,
except as set forth in Section 6.2(b) hereof.
(b) In the event that this Agreement is terminated, other
than as a result of the failure to satisfy the conditions set forth in
Section 5.2(a), 5.2(b) or 5.2(c), the Purchaser shall pay to the Seller,
within one business day of such termination, a termination fee equal to $50
million (the "Termination Fee") in immediately available funds; provided,
however, that the Purchaser shall not be obligated to pay the Termination
Fee if this Agreement is terminated pursuant to Section 6.1(b) and:
(A) any Government Entity has initiated and is pursuing
proceedings to prohibit or materially restrict consummation
of the transactions contemplated by this Agreement unless the
Purchaser or the Company agrees to take one or more of the
following actions:
(x) the Purchaser agrees to divest or hold separate any of
its retail pharmacy stores,
(y) the Purchaser agrees to take or commit to take any
action that would materially affect its ability to
conduct its business (other than its pharmacy benefit
management business) in the manner in which the
Purchaser's business is being conducted as of the date
hereof, or
(z) the Purchaser or the Company, as the case may be, agrees
to take or commit to take any action that would
materially and adversely affect the ability of the
Purchaser to conduct the Business in the manner in which
the Business is being conducted as of the date hereof;
or
(B) a court of competent jurisdiction has entered an order or
decree requiring one or more of the actions set forth above
in Section 6.2(b)(ii)(A)(x), (y) and (z).
The Termination Fee payable pursuant to this Section 6.2(b) shall be the
Seller's sole and exclusive remedy, and the Purchaser shall have no
liability whatsoever if this Agreement is terminated under the
circumstances provided in this Section 6.2(b) (including, without
limitation, liability for actual, direct, indirect, consequential
(including lost profits), punitive, exemplary or special damages), other
than the obligation to pay any Termination Fee required to be paid pursuant
to this Section 6.2(b); provided, however, that if the Purchaser fails to
pay the fee contemplated by this Section 6.2(b), the prevailing party in
any action, including the filing of any lawsuit or other legal action to
collect such payment shall receive from the non-prevailing party in such
action its costs and expenses (including legal fees and expenses) in
connection with such action. In the event that the Purchaser fails to pay
such fee and the Seller has prevailed in any such legal action to collect
such payment the Purchaser shall pay interest on any unpaid amount, at the
rate published from time to time by The Wall Street Journal as the prime
rate, from the date such amount was required to be paid until the date such
payment is made. The parties to this Agreement agree that the agreement
contained in this Section 6.2(b) is an integral part of the transactions
contemplated by this Agreement, that any such fee constitutes liquidated
damages and not a penalty and that the Seller is relinquishing any rights
it may otherwise have to specific performance of the transactions herein
contemplated in the event this Agreement is terminated prior to the Closing
(other than obligations in respect thereof which pursuant to the terms
hereof are to survive the termination hereof).
Section 6.3. Amendment. This Agreement may be amended or modified
at any time by the parties hereto, but only by an instrument in writing
signed on behalf of each of the parties hereto.
Section 6.4. Extension; Waiver. At any time prior to the Closing,
the parties hereto may (i) extend the time for the performance of any of
the obligations or other acts of the other parties hereto, (ii) waive any
inaccuracies in the representations and warranties contained herein or in
any document delivered pursuant hereto and (iii) waive compliance with any
of the agreements or conditions contained herein. Any agreement on the part
of a party hereto to any such extension or waiver shall be valid only if
set forth in a written instrument signed on behalf of such party. Neither
the failure or the delay on the part of any party to exercise any right,
remedy, power or privilege under this Agreement shall operate as a waiver
thereof.
ARTICLE VII
SURVIVAL; INDEMNIFICATION
Section 7.1. Survival Periods. All representations and warranties
of the parties contained in this Agreement, the Disclosure Schedules or any
certificate delivered in connection herewith shall survive the Closing and
continue for a period of 18 months following the Closing Date and, if
notice of a claim (setting forth in reasonable detail the facts,
circumstances and basis of the claim) is provided by such date, such claim
shall survive until the final resolution thereof, provided that the
representations and warranties in Sections 2.1, 2.2, 2.19, and 3.1 shall
survive without limit and without regard to any limitation set forth in
Section 7.2; and provided, further, that the representations set forth in
Sections 2.9, 2.11 and 2.12 shall survive until ninety days following the
expiration of the applicable statute of limitations including any
extensions thereof. In addition, the right to indemnification, payment of
damages or other remedy shall survive and shall be unaffected by (and shall
not be deemed waived by) any investigation, audit, appraisal or inspection
(actual or constructive) at any time made by or on behalf of (a) the
Purchaser in the case of the Seller's indemnification of the Purchaser, and
(b) the Seller, in the case of the Purchaser's indemnification of the
Seller.
Section 7.2. Indemnification. Subject to the other provisions of
this Article VII, from and after the Closing:
(a) The Seller shall indemnify, defend and hold harmless the
Purchaser and its representatives, officers, directors, employees, agents,
advisors and affiliates (collectively, the "Purchaser Indemnitees") from
and against any judgments, fines, penalties, losses, claims, liabilities,
damages, demands, complaints, actions or causes of action, suits,
proceedings, investigations, arbitrations, assessments, and any interest
thereon and any costs and expenses (including reasonable attorneys' fees in
connection therewith), net of any insurance proceeds and, as provided in
Section 7.5, Tax Benefits (such net amounts being referred to herein as,
"Purchaser Damages") that arise out of any breach or inaccuracy of any
representation or warranty or any breach of any covenant or agreement made
by the Seller in this Agreement or in any certificate furnished to the
Purchaser in accordance with this Agreement or in connection with the
transactions contemplated by this Agreement, provided, however, with
respect to a breach under Section 2.12 hereof, Purchaser Damages shall not
include any Purchaser Damages which result from the Company or any of its
subsidiaries not having tax attributes (including basis in assets, net
operating losses or credits) which are reflected on the Tax Returns of the
Company or its subsidiaries. For purposes of determining whether any breach
has occurred with respect to or in connection with a claim for
indemnification or measuring Purchaser Damages hereunder, any requirement
or qualification in any representation, warranty, covenant or agreement of
the Seller contained in this Agreement that an event or fact be material or
have a Material Adverse Effect or similar language, shall be ignored and
all representations, warranties, covenants and agreements shall be deemed
to have been made without any qualification by materiality, Material
Adverse Effect, or similar language.
(b) Notwithstanding any provision to the contrary contained
in this Section 7.2, the Seller shall not be obligated to indemnify the
Purchaser and its representatives for any Purchaser Damages relating to the
breach of a representation or warranty pursuant to Section 7.2(a) (i) as to
any individual item of Purchaser Damages or related series of items of
Purchaser Damages, to the extent such Purchaser Damages are less than
$25,000 and (ii) unless and until the dollar amount of all Purchaser
Damages (by reason of or resulting from the matters set forth in Section
7.2(a) (other than Purchaser Damages by reason of or resulting from
breaches of representations or warranties contained in Sections 2.1, 2.2,
2.3 and 2.19 hereof as to which the Purchaser Basket (as defined below)
will not apply and other than Purchaser Damages excluded pursuant to clause
(i) above) shall equal in the aggregate $40 million (the "Purchaser
Basket") and then only for the excess over such amount.
(c) The Purchaser shall indemnify, defend and hold harmless
the Seller and its representatives, officers, directors, employees, agents,
advisors and affiliates (collectively, the "Seller Indemnitees") from and
against any judgments, fines, penalties, losses, claims, liabilities,
damages, demands, complaints, actions or causes of action, suits,
proceedings, investigations, arbitrations, assessments, and any interest
thereon and any costs and expenses (including reasonable attorneys' fees in
connection herewith) net of any insurance proceeds and, as provided in
Section 7.5, Tax Benefits (such net amounts being referred to herein as
"Seller Damages") that arise out of any breach or inaccuracy of any
representation or warranty or any breach of any covenant or agreement made
by the Purchaser in this Agreement or in any certificate furnished to the
Seller in accordance with this Agreement or in connection with the
transactions contemplated by this Agreement or the conduct of the Business
following the Closing Date (other than as the result of a breach of any
covenant, agreement, representation or warranty to which the Seller is
required to provide indemnification pursuant to this Section 7.2). For
purposes of determining whether any breach has occurred with respect to or
in connection with a claim for indemnification or measuring Seller Damages
hereunder, any requirement or qualification in any representation,
warranty, covenant or agreement of the Purchaser contained in this
Agreement that an event or fact be material or have a Material Adverse
Effect or similar language, shall be ignored and all representations,
warranties, covenants and agreements shall be deemed to have been made
without any qualification by materiality, Material Adverse Effect, or
similar language.
(d) Notwithstanding any provision to the contrary contained
in this Agreement, the Purchaser shall not be obligated to indemnify the
Seller and its representatives for any Seller Damages relating to the
breach of a representation or warranty pursuant to Section 7.2(c) (i) as to
any individual item of Seller Damages or related series of items of Seller
Damages, to the extent such Seller Damages are less than $25,000 and (ii)
unless and until the dollar amount of all Seller Damages (by reason of or
resulting from the matters set forth in Section 7.2(c) (other than Seller
Damages by reason of or resulting from breaches of representations or
warranties contained in Sections 3.1 and 3.2 hereof, as to which the Seller
Basket (as defined below) will not apply) and other than Seller Damages
excluded pursuant to clause (i) above) shall equal in the aggregate $40
million (the "Seller Basket") and then only for the excess over such
amount.
(e) Subject to Section 7.6 but otherwise notwithstanding any
provision to the contrary contained in this Agreement, the maximum
aggregate amount of Purchaser Damages or Seller Damages, as the case may
be, relating to breaches of representations or warranties payable pursuant
to Section 7.2(a) by the Purchaser or Section 7.2(c) by the Seller, as the
case may be, shall not exceed $1 billion. No party shall be liable for any
consequential, incidental or punitive damages.
Section 7.3. Claims.
(a) The persons to whom indemnification is provided hereunder
are referred to herein as the "Indemnified Parties" and the persons
providing indemnification are referred to as the "Indemnifying Parties."
(b) If an Indemnified Party intends to seek indemnification
pursuant to this Article VII, such Indemnified Party shall promptly notify
the Indemnifying Party in writing of such claim. The Indemnified Party will
provide the Indemnifying Party with prompt written notice of any third
party claim in respect of which indemnification is sought. The failure to
provide either such notice will not affect any rights hereunder except to
the extent the Indemnifying Party is materially prejudiced thereby. Any
such notice shall set forth in reasonable detail the facts, circumstances
and basis of the claim.
(c) If such claim involves a claim by a third party against
the Indemnified Party, the Indemnifying Party may assume, through counsel
of its own choosing (so long as reasonably acceptable to the Indemnified
Party) and at its own expense, the defense thereof, and the Indemnified
Party shall cooperate with it in connection therewith (including by
furnishing such information as the Indemnifying Party may reasonably
request), provided, that the Indemnified Party may participate in such
defense through counsel chosen by it, at its own expense. So long as the
Indemnifying Party is contesting any such claim in good faith, the
Indemnified Party shall not pay or settle, or admit any liability with
respect to, any such claim without the Indemnifying Party's consent. The
Indemnifying Party will not without the Indemnified Party's prior written
consent settle or compromise any claim or consent to entry of any judgment
which does not include as an unconditional term thereof the giving by the
claimant or the plaintiff to the Indemnified Party of a release from all
liability in respect of such claim. The Indemnifying Party shall not,
without the prior written consent of the Indemnified Party (which consent
shall not be unreasonably withheld), take any measure or step in connection
with any settlement or compromise that imposes an unreasonable material
burden or encumbrance upon the operation or conduct of the Business. If the
Indemnifying Party is not contesting such claim in good faith, then the
Indemnified Party may, upon at least 10 days' notice to the Indemnifying
Party (unless the Indemnifying Party shall assume such settlement or
defense within such 10 day period), conduct and control, through counsel of
its own choosing and at the expense of the Indemnifying Party, the
settlement or defense thereof, and the Indemnifying Party shall cooperate
with it in connection therewith. The failure of the Indemnified Party to
participate in, conduct or control such defense shall not relieve the
Indemnifying Party of any obligation it may have hereunder.
Section 7.4. Exclusive Remedy. Following the Closing, the
provisions of this Article VII shall be the exclusive remedy for the
matters covered hereby, provided that nothing herein shall relieve any
party from any liability for fraud. The Purchaser and the Seller agree that
no party is entitled to be paid twice for the same matter or obligation
notwithstanding any other provision in this Agreement.
Section 7.5. Tax Adjustment. Any indemnity payment made pursuant
to this Article VII and Article VIII shall be decreased by the amount, if
any, of the Indemnified Party's Tax Benefit (as defined below) actually
realized, and increased by the amount, if any, of the Indemnified Party's
Tax Cost (as defined below) actually realized. The amount of the
Indemnified Party's "Tax Benefit" shall be equal to the amount of the
reduction in Taxes realized as a result of the deduction resulting from the
indemnified loss. The amount of the Indemnified Party's "Tax Cost" shall be
equal to the amount of the increase in Taxes realized as a result of any
income resulting from the receipt of the indemnity payment. Notwithstanding
the foregoing, if such Tax Benefit or Tax Cost increases or decreases an
operating loss of the Indemnified Party, the Indemnified Party will not be
treated as having received a Tax Benefit or incurred a Tax Cost until the
time such operating loss has been applied against income for Tax purposes.
Moreover, if the Indemnified Party's Tax position with respect to the
payment of a loss or the receipt of an indemnity payment is ultimately
disallowed by any Tax Authority (as finally determined), the Indemnified
Party shall be entitled to an additional indemnity payment or will refund a
portion of the indemnity payment to reflect this final determination. To
the extent permitted by law, the parties will treat all indemnity payments
under this Agreement as adjustments to the purchase price and liabilities
for indemnified losses as having been in existence as of the Closing Date.
Section 7.6. Special Indemnities. Without regard to any limitation
set forth in this Article VII, the Seller agrees to indemnify, defend, and
hold harmless the Purchaser Indemnitees from, and against all Purchaser
Damages asserted against, imposed upon or incurred by the Purchaser
Indemnities relating directly or indirectly to (i) the Class B Stock or
(ii) the 4 1/2% Exchangeable Subordinated Debentures Due 2004 of McKesson
Corporation ("Armor All Bonds") issued pursuant to an Indenture dated as of
March 24, 1994 between McKesson Corporation and the First National Bank of
Chicago, as Trustee (the "Armor All Indenture"), so long as the Company is
in compliance with its obligations to perform and abide by all of its
covenants, obligations and agreements under the Armor All Indenture other
than the obligation to pay when due any principal, interest or other
amounts owing thereunder or under the Armor All Bonds.
ARTICLE VIII
TAX MATTERS
The following provisions shall govern the allocation of
responsibility as between the Purchaser and the Seller for certain Tax
matters following the Closing Date.
Section 8.1. Seller Tax Indemnity.
(a) The Seller shall be solely responsible for, and shall
indemnify the Purchaser and the Company and hold them harmless from and
against, any liability for (1) Taxes imposed on or attributable to the
Company or any of its subsidiaries for Tax Periods ending on or before the
later of (i) October 15, 1997 or (ii) the last day the Company and its
subsidiaries were members of the Seller's consolidated group (the
"Deconsolidation Date"); (2) all Taxes imposed on the Company or any of its
subsidiaries under Treasury Regulation Section 1.1502-6 (or any comparable
provision of state, local or foreign law) relating to or attributable to
any Tax Period or portion thereof ending on or before the Deconsolidation
Date; (3) all Taxes imposed on or attributable to the Company or any of its
subsidiaries for any Tax Period beginning on or before and ending after the
Deconsolidation Date (a "Straddle Period"), but only with respect to the
portion of the Straddle Period ending on the close of the Deconsolidation
Date and calculated in the manner set forth in Section 8.2(c).
(b) Any indemnification payable under this Section 8.1 shall
be subject to Section 7.5 of this Agreement..
Section 8.2. Allocation of Taxes and Preparation of Tax Returns.
(a) Tax Periods Ending on or before the Closing Date. The
Seller will cause the Company to file (or cause to be filed) all Tax
Returns required to be filed of the Company and each of its subsidiaries
for Tax Periods ending on or before the Closing Date, provided the date
that such Tax Returns are required to be filed occurs prior to the Closing
Date. For Tax Periods ending on or prior to the Deconsolidation Date, the
Seller may, to the extent permissible or required under applicable Law,
include (or cause to be included) the results of operations of the Company
and any of its subsidiaries in the Seller's consolidated and other combined
Tax Returns filed by the Seller. To the extent not already paid, the Seller
will pay all Taxes due of the Company or any of its subsidiaries with
respect to Tax Returns attributable to Tax Periods ending on or before the
Deconsolidation Date. The Seller will prepare (or cause to be prepared)
such Tax Returns in a manner that is consistent with practices followed in
prior Tax Periods with respect to similar Tax Returns, except for changes
required by Law. To the extent not already filed, for any material Tax
Return of the Company or any of its subsidiaries for Tax Periods after the
Deconsolidation Date (which are the responsibility of the Seller), the
Seller shall consult (or shall cause the Company or any of its subsidiaries
to consult) with the Purchaser with respect to any such Tax Returns, shall
provide (or shall cause the Company or its subsidiaries to provide) copies
of such Tax Returns to the Purchaser, and shall not file (or cause the
Company or any of its subsidiaries to file) such Tax Returns without the
consent of the Purchaser.
(b) (i) Tax Periods Beginning Before and Ending after the
Closing Date. The Purchaser will file (or cause to be filed) any Tax
Returns of the Company for Tax Periods which begin before the Closing Date
and end after the Closing Date. (ii) Provided the Seller informs the
Company and provides sufficient information with respect to the exercise by
Company employees of options to purchase Seller's stock, the Purchaser
shall claim or cause to be claimed on any Tax Returns any and all
deductions to which the Company is entitled under applicable Law for
compensation attributable to the exercise by Company employees of options
to purchase Seller stock (the "Option Exercise Deductions").
Notwithstanding any provision to the contrary in this Agreement, to the
extent that the Purchaser realizes a tax benefit attributable to any Option
Exercise Deductions, the Purchaser shall pay to the Seller an amount equal
to such tax benefit within 60 days following the filing of the Tax Return
upon which such tax benefit is reported. For purposes of this Section
8.2(b), (A) the amount of the tax benefit shall be equal to the actual
reduction, if any, of Purchaser's Taxes attributable to the Option Exercise
Dedcutions that is reflected on the Tax Return which such tax benefit is
reported and (B) where the Seller has other losses, deductions or similar
items available to it, the Option Exercise Deductions shall be treated as
the last items utilized to produce a tax benefit. In the event that any
such Option Exercise Deductions are ultimately disallowed under applicable
Tax Law, the Seller shall reimburse the Purchaser in the amount of the tax
benefit thereby disallowed, promptly after receiving from the Purchaser
notice of such final disallowance. The Seller shall be solely responsible
for withholding tax with respect to the exercise by Company employees of
options to purchase Seller's stock.
(c) For purposes of determining the amount of Taxes which
relate to a Straddle Period, the Deconsolidation Date shall be treated as
the last day of a Tax Period and the portion of any such Tax that is
allocable to the Tax Period that is so deemed to end on and include the
Deconsolidation Date: (i) in the case of Taxes that are either (x) based
upon or related to income or receipts or (y) imposed in connection with any
sale or other transfer or assignment of property (whether real or personal,
tangible or intangible), shall be deemed equal to the amount which would be
payable if the period for which such Tax is assessed ended on and included
the Deconsolidation Date, and (ii) in the cases of Taxes other than Taxes
described in clause (i) hereof, shall be computed on a per diem basis.
Section 8.3. Retention of Records. Each of the Purchaser and the
Seller shall retain all Tax Records for all open periods or portions
thereof ending on or before the Closing Date. In particular, the Seller and
the Purchaser shall retain (or cause to be retained) all Tax Returns,
schedules and work papers, and all material records and other documents
relating thereto with respect to the operations of the Company or any of
its subsidiaries prior to the Closing Date, until six months following the
expiration of the statute of limitations (and any extensions thereof) of
the respective Tax Periods. "Tax Records" means any Tax Return, Tax Return
workpapers, documentation relating to any Audit, and any other books of
account or records (whether on paper, computer disk or any other medium)
required to be maintained under the applicable Tax Law or under any record
retention agreement with any Tax Authority.
Section 8.4. Notice; Cooperation. Each party (the Purchaser and
the Seller) shall promptly provide written notice to the other party upon
receiving notice from a Tax Authority that additional Tax liabilities may
exist, or that any Tax Records have been requested by any Tax Authority.
The Purchaser and the Seller covenant and agree that subsequent to the
Closing, upon reasonable notice and during normal business hours, they and
their affiliates will (i) give the other party and its representatives
information, books and records relevant to the Company or any of its
subsidiaries, to the extent necessary to enable the other party to prepare
its Tax Returns, and (ii) provide the other party or its affiliates with
such information, books and records as may reasonably be requested in
connection with any Tax Return, inquiry, election, audit or other
examination by any Tax Authority, or judicial or administrative proceedings
relating to liability for Taxes. The Seller and the Purchaser also shall
make available to each other, as reasonably requested, and at the expense
of the requesting party, knowledgeable employees or advisors of the party
or its affiliates of which the request is made and personnel responsible
for preparing and maintaining information, books, records and documents in
connection with Tax filings, audits, disputes or litigation.
Section 8.5. Refunds. Any refunds or credits of Taxes of the
Company or any of its subsidiaries relating to Tax Periods ending on or
before the Deconsolidation Date shall be for the account of the Seller,
except for refunds or credits arising as a result of a carryback of any
loss, credit or similar item attributable to a Tax Period beginning after
the Deconsolidation Date to a Tax Period ending on before the
Deconsolidation Date, which credits or refunds shall be for the account of
the Purchaser. Any refunds or credits of Taxes of the Company or any of its
subsidiaries relating to any Straddle Period shall be equitably apportioned
between the Seller and the Purchaser in a manner consistent with Section
8.2(c).
Section 8.6. Sales and Other Tax. Notwithstanding any other
provision of this Agreement, all transfer, documentary, recording,
notarial, sales, use, registration, stamp and other similar taxes, fees and
expenses (including, but not limited to, all applicable stock transfer,
real estate transfer or gains Taxes and including any penalties, interest
and additions to such tax) incurred in connection with this Agreement and
the transactions contemplated hereby shall be borne by the Purchaser,
regardless of which party is obligated to pay such tax under applicable
law. The Purchaser and the Seller shall cooperate in timely making and
filing all Tax Returns as may be required to comply with the provisions of
laws relating to such Taxes.
Section 8.7. Certain Contest Rights.
(a) Promptly after the receipt by the Purchaser or its
affiliates or the Seller or any of its affiliates, as the case may be (the
"Recipient") of a written notice of any demand, claim or circumstance
which, after the lapse of time, would or might give rise to a claim or the
commencement (or threatened commencement) of any action, proceeding or
investigation with respect to which indemnity may be sought under this
Article VIII (an "Asserted Tax Liability"), the Recipient shall promptly
give notice thereof to the Seller (the "Tax Claim Notice"). The Tax Claim
Notice shall contain factual information (to the extent known to the
Recipient) describing the Asserted Tax Liability in reasonable detail and
shall include copies of any notice or other document received from any Tax
Authority with respect to any such Asserted Tax Liability. If the Purchaser
fails to give the Seller notice of an Asserted Tax Liability as required by
this Section 8.7(a), and if such failure to give notice results in a
detriment to the Seller, then any amount which the Seller is otherwise
required to pay the Purchaser pursuant to Section 8.1 with respect to the
Asserted Tax Liability shall be reduced by the amount of such detriment.
(b) The Seller may elect to direct, through counsel of its
own choosing and at its own expense, the compromise or contest, either
administratively or in the courts, of any Asserted Tax Liability other than
an Asserted Tax Liability relating to Straddle Periods which shall be
jointly controlled. If the Seller elects to direct the compromise or
contest of such Asserted Tax Liability, it shall within 30 calendar days
(or sooner, if the nature of the Asserted Tax Liability so requires) notify
the Purchaser of its intent to do so, and the Purchaser shall cooperate and
shall cause its Affiliates to cooperate at the Seller's expense, in the
compromise or contest of such Asserted Tax Liability and Seller shall
cooperate with, consult with and inform the Purchaser with respect to all
material developments with respect to any such compromise or contest. The
Seller may not enter into on behalf of the Purchaser a settlement agreement
with respect to any Asserted Tax Liability without the written consent of
the Purchaser, which consent shall not be unreasonably withheld. If the
Seller elects not to direct the compromise or contest of an Asserted Tax
Liability or fails to notify the Purchaser of its election as herein
provided, then the Purchaser may pay, compromise, or contest such Asserted
Tax Liability. The Purchaser's settlement or compromise of an Asserted Tax
Liability will not affect the Seller's indemnity obligation pursuant to
Section 8.1; provided, however, that the Seller will not be obligated to
indemnify the Purchaser for expenses (including, but not limited to, legal
fees) incurred by the Purchaser in connection with the compromise or
contest of an Asserted Tax Liability for which the Seller has acknowledged
its indemnity obligation under Section 8.1. In any event, each of the
Purchaser and the Seller may participate, at its own expense, in the
contest of such Asserted Tax Liability. If the Seller chooses to direct the
compromise or contest of such Asserted Tax Liability, then the Purchaser
shall promptly empower (by Power of Attorney and such other documentation
as may be appropriate) such representative of the Seller as the Seller may
designate to represent the Purchaser in any audit, claim for refund, or
administrative or judicial proceeding, insofar as such audit, claim for
refund or proceeding involves an Asserted Tax Liability for which the
Seller would be liable under Section 8.1.
Section 8.8. No Section 338(h)(10) Election. The Purchaser and the
Seller agree that no election under section 338(h)(10) of the Code shall be
made in connection with this purchase and sale of the Company Shares.
Section 8.9. Exclusivity. Except as expressly provided otherwise
in Article VII, this Article VIII shall be the sole provision governing Tax
matters and Tax indemnities pursuant to this Agreement.
ARTICLE IX
MISCELLANEOUS
Section 9.1. Notices. All notices and other communications
hereunder shall be in writing and shall be effective upon receipt. Notice
shall be given (i) by personal delivery to the appropriate address as set
forth below (or at such other address for the party as shall be specified
by like notice), (ii) by reliable overnight courier service to the
appropriate address as set forth below (or at such other address for party
as shall be specified by like notice), or (iii) by facsimile transmission
to the appropriate facsimile number set forth below (or at such other
facsimile number for party as shall be specified by like notice) with
follow-up copy by reliable overnight courier service that next business
day:
(a) if to the Purchaser, to:
Rite Aid Corporation
30 Hunter Lane
Camp Hill, PA 17011
Attention: General Counsel
Telecopy: (717) 760-7867
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
Telecopy: (212) 735-2000
Attention: Morris J. Kramer, Esq.
(b) if to the Seller to:
Eli Lilly and Company
Lilly Corporate Center
Indianapolis, Indiana 46285
Telecopy: (317) 276-5996
Attention: Charles E. Schalliol
with copies to:
Eli Lilly and Company
Lilly Corporate Center
Indianapolis, Indiana 46285
Telecopy: (317) 276-5996
Attention: G. William Miller, Esq.
Dewey Ballantine LLP
1301 Avenue of the Americas
New York, New York 10019
Telecopy: (212) 259-6333
Attention: Bernard E. Kury, Esq.
Section 9.2. Headings. The headings herein are inserted for
convenience only and are not intended to be part of or to affect the
meaning or interpretation of this Agreement.
Section 9.3. Counterparts. This Agreement may be executed in two
or more counterparts, all of which shall be considered one and the same
instrument.
Section 9.4. Entire Agreement; Assignment.
(a) This Agreement and the Transitional Services Agreement
the documents and certificates delivered in connection herewith constitute
the entire agreement among the parties hereto with respect to the subject
matter hereof, and supersedes all prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter
hereof, other than the Confidentiality Agreement.
(b) This Agreement shall not be assigned by a party hereto by
operation of law or otherwise; provided, that the Purchaser may assign its
rights and obligations hereunder to any wholly owned subsidiary of the
Purchaser, but no such assignment shall relieve the Purchaser of its
obligations hereunder if such assignee does not perform such obligations.
Section 9.5. Governing Law. This agreement shall be governed and
construed in accordance with the laws of the State of New York, without
regard to any applicable conflicts of law principles. The parties hereto
expressly and irrevocably (i) consent to the exclusive jurisdiction of the
federal courts sitting in the City of New York, County of New York, (ii)
agree not to bring any action related to this agreement or the transactions
contemplated hereby in any other court (except to enforce the judgment of
such courts), (iii) agree not to object to venue in such courts or to claim
that such forum is inconvenient and (iv) agree that notice or the service
of process in any proceeding shall be properly served or delivered if
delivered in the manner contemplated by Section 9.1 hereof. Final judgment
by such courts shall be conclusive and may be enforced in any manner
permitted by law. In addition, each of the parties hereto waives any right
to trial by jury with respect to any claim or proceeding related to or
arising out of this agreement or any of the transactions contemplated
hereby.
Section 9.6. Specific Performance. Whether at or prior to or
following the Closing, the Purchaser shall be entitled to specific
performance of the terms hereof, in addition to any other remedy at law or
equity. At or prior to the Closing, the Seller shall not be entitled to
specific performance of any of the terms hereof except as specifically set
forth in Section 6.2(b) and except in respect of Section 9.7 and the
Confidentiality Agreement. Following the Closing, the Seller shall be
entitled to specific performance of the terms hereof, in addition to any
other remedy at law or equity.
Section 9.7. Publicity. No party hereto shall issue any press
release with respect to the transactions contemplated by this Agreement
without prior written notice to the other party hereto and only after
giving the other party hereto a reasonable opportunity to consult with
respect to the content thereof.
Section 9.8. Binding Nature; No Third Party Beneficiaries. This
Agreement shall be binding upon and inure solely to the benefit of each
party hereto and their permitted successors and assigns, and nothing in
this Agreement, express or implied, is intended to or shall confer upon any
other person or persons any rights, benefits or remedies of any nature
whatsoever under or by reason of this Agreement.
Section 9.9. Severability. This Agreement shall be deemed
severable and the invalidity or unenforceability of any term or provision
of this Agreement shall not affect the validity or enforceability of this
Agreement or of any other term hereof, which shall remain in full force and
effect.
Section 9.10. Interpretation. As used in this Agreement, (a)
"including" (or similar terms) shall be deemed followed by "without
limitation" and shall not be deemed to be limited to matters of a similar
nature to those enumerated, and (b) except as set forth in Section 2.10
hereof, "knowledge" (or similar terms) with respect to the Seller shall
mean the knowledge of the persons set forth in Section 9.10(b) of the
Disclosure Schedule.
Section 9.11. Payment of Expenses. Except as otherwise expressly
set forth in this Agreement, whether or not the transactions contemplated
by this Agreement shall be consummated, each party hereto shall pay its own
expenses incident to preparing for, entering into and carrying out this
Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first written above.
RITE AID CORPORATION
By: /s/ Elliot S. Gerson
______________________________
Name: Elliot S. Gerson
Title: Senior Vice President
ELI LILLY AND COMPANY
By: /s/ Charles E. Schalliol
______________________________
Name: Charles E. Schalliol
Title: Executive Director
Exhibit 99.1
FOR IMMEDIATE RELEASE
Contacts for Rite Aid: Contacts for Lilly:
Media: Media:
Name: Suzanne Mead Name: Edward A. West
Phone: (717) 975-5887 Phone: (317) 276-3655
Investors:
Name: Frank Bergonzi
Phone: (717) 975-5750
RITE AID TO ACQUIRE LILLY'S PCS HEALTH SYSTEMS
PHARMACY BENEFITS MANAGEMENT SUBSIDIARY
CAMP HILL, Pa. and INDIANAPOLIS, Ind. (November 17, 1998) - Rite Aid Corp.
[NYSE, PSE: RAD] and Eli Lilly and Company [NYSE: LLY] today announced that
they signed a definitive agreement under which Rite Aid will acquire the
equity of Lilly's PCS subsidiary. Rite Aid will pay Lilly $1.5 billion in
cash and, in addition, Lilly will retain $100 million of cash from PCS. The
transaction will be accounted for as a purchase and is anticipated to be
accretive to Rite Aid's earnings in the first full year of operation.
The combination brings together two leading companies engaged in enhancing
the quality of pharmacy care and in the management and containment of
health care costs: Rite Aid, one of the best performing retail chains in
terms of managing pharmaceutical costs for employers, health plans and
their members, and PCS, one of the leading pharmacy benefits managers (PBM)
for employers, health plans and their members in the United States. Rite
Aid operates approximately 3,900 pharmacies in 30 states in the eastern,
southern and western United States, and the District of Columbia, filling
over 225 million prescriptions each year accounting for over $6 billion in
prescription drug sales. PCS manages nearly 300 million prescriptions each
year, serves more than 1,200 health plan sponsors, assists more than 50
million plan members with their pharmaceutical needs, and accounts for
approximately $10 billion in drug expenditures. The combined company will
be one of the leading companies in ensuring appropriate drug utilization
and management, and drug safety.
The purchase, which is anticipated to close in the first quarter of 1999,
is expected to be financed with a sufficient amount of common equity and
equity-linked securities to allow Rite Aid to maintain its credit rating
and its strategic and financial flexibility. A bank commitment for $1.5
billion is in place to provide back-up interim financing with respect to
the timing of the equity sale.
Martin Grass, Rite Aid's chairman and chief executive officer, said, "This
combination advances Rite Aid's status as one of the best-positioned,
strongest-performing health services companies in the United States. The
acquisition of PCS is a unique opportunity to acquire one of the country's
leading pharmacy benefits managers. This combination, together with Eagle
Managed Care, our PBM, will enable Rite Aid to compete more vigorously and
to be a leader in providing innovative solutions to employers, health plans
and their members. Our proven technology and record of superior execution
have been particularly attractive to health plans, employers and their
members, and has enabled Rite Aid to provide them with high quality
pharmacy care and to control their health care costs better than any retail
pharmacy provider."
"PCS' president and chief executive officer, Jean-Pierre Millon, along with
his successful management team, will remain at PCS and continue to lead the
subsidiary. PCS will continue to be headquartered in Scottsdale, Arizona,"
said Grass.
"In the rapidly changing health care marketplace, employers and their
health plans covering more than 190 million members will continue to turn
to PBMs to manage their pharmaceutical needs. Rite Aid and PCS' combined
expertise and best practices will help to further enhance the quality of
care for health plan members and better control health care costs for
employers and their health plans," continued Grass.
"In an era when such drug utilization issues as non-compliance with
prescribed drug therapy is estimated to cost society at least $75 billion
annually in avoidable health care expenditures and when patients with
chronic disease states can truly benefit from enhanced pharmaceutical care,
both Rite Aid and PCS have demonstrated the ability to simultaneously
enhance the quality of pharmacy care and reduce health care costs. This
acquisition will enable us to do more of both and do it better. The
management of Rite Aid and PCS share a vision of the pharmacy playing a
more central role in improving patient health and well-being and in
bringing new services to employers and their health plans. No health care
provider is more accessible to the public than community pharmacists,"
concluded Grass.
Sidney Taurel, Lilly's president, chief executive officer and chairman of
the board designate, said, "By taking advantage of this opportunity, Lilly
will be able to enhance its focus on pharmaceutical innovation and the
realization of optimal demand for Lilly products in the marketplace. While
we are very comfortable with our ownership of PCS, particularly given its
growth into a successful business and its growth in profitability, we found
Rite Aid's offer attractive because of its value to Lilly and the many
synergistic opportunities for success PCS will have when combined with Rite
Aid."
Taurel added, "Our experience has been that certain businesses can benefit
from new ownership arrangements that provide them with fresh opportunities
to grow their capabilities and implement their strategies especially in
rapidly changing markets. We view today's announcement as being very
similar to the creation of DowElanco in 1989 and Guidant in 1994 - two
moves that enabled businesses formerly owned by Lilly to continue to thrive
while Lilly increased its focus on bringing new pharmaceutical products to
market."
The sale of PCS will result in a gain for Lilly of approximately $165
million to $185 million over the current carrying value of PCS, including
certain costs of the transaction.
Jean-Pierre Millon, PCS' president and chief executive officer, said,
"We've built strong positive momentum at PCS with new, innovative health
management programs for patients and health plans. We've proven that PCS
can prosper on its own merits. In an ever-changing health care environment,
PCS has helped payers and patients find the best possible choices in
pharmaceutical utilization management. We believe that combining with Rite
Aid will put us in closer contact with health plan members -- the consumers
of health care. This will foster new opportunities for us to accelerate our
pharmacy-based patient care programs, improve the well-being of health plan
members and provide additional value to employers and their health plans."
The transaction is conditioned on, among other things, the expiration of
the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976.
Goldman, Sachs & Co. acted as financial advisor to Rite Aid. Merrill Lynch
& Co., Inc. acted as financial advisor to Lilly.
Lilly is a global research-based pharmaceutical corporation headquartered
in Indianapolis, Ind., that is dedicated to creating and delivering
innovative pharmaceutical-based health care solutions which enable people
to live longer, healthier and more active lives.
PCS Health Systems, Inc., based in Scottsdale, AZ, is a leading
information-driven health solutions company that manages nearly 300 million
prescriptions each year representing approximately $10 billion in drug
expenditures. Using its superior information resources, advanced technology
and clinical expertise, PCS provides managed pharmaceutical-related
programs and services that can directly and positively improve the health
of patients, and help reduce health care costs.
Rite Aid is one of the nation's largest drugstore chains with annual
revenues of more than $12 billion and approximately 3,900 stores in 30
states and the District of Columbia. The Camp Hill-based company fills over
225 million prescriptions each year accounting for more than $6 billion in
drug expenditures and is the leading drugstore chain in several regions,
including the mid-Atlantic and the Pacific coast, and in five of the
nation's nine most populous states (CA, NY, PA, MI, NJ). This year, it was
recognized in Business Week's list of the 50 top-performing companies and
named by Fortune magazine as one of "America's Most Admired Companies."
General information about Rite Aid, including the annual report, corporate
background and press releases, is available through the company's Web site
at www.RiteAid.com.
Certain statements contained in this release, which are not historical
facts, are forward-looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements address activities or events that the companies
expect will or may occur in the future. The companies caution that a number
of important factors could cause actual results to differ materially from
those expressed in any forward-looking statements, whether written or oral,
made by or on behalf of the companies. Such factors include, but are not
limited to, competitive pricing pressures, third party prescription
reimbursement levels, continued consolidation of the drugstore industry,
consumer preferences, regulatory changes governing pharmacy practices,
general economic conditions, inflation, merchandise supply constraints,
interest rate movements, access to capital, availability of real estate,
construction and start-up of drugstore and distribution center facilities,
and the effects of technological difficulties including successful
completion of Year 2000 conversion activities. Consequently, all of the
forward-looking statements made are qualified by these and other factors,
risks and uncertainties. Investors are also directed to consider other
risks and uncertainties discussed in documents filed by the companies with
the Securities and Exchange Commission.
Note to Editors: Today's news release, along with other news about Rite Aid
is available on the Internet at http://www.RiteAid.com.
# # #
Exhibit 99.2
RITE AID
Res. #10832856
Moderator: Kate O'Sullivan
11/17/98 8:00 a.m. MT
RITE AID
NOVEMBER 17, 1998
8:00 A.M. MST
Operator: Good morning, everyone, and welcome to the Rite AID/PCS
analysts teleconference. This call is intended for
investors and analysts only. If there are any members of
the press on this call, we ask that you please disconnect
now.
With us today is Mr. Martin Grass, chairman and chief
executive officer of Rite Aid; Mr. Frank Bergonzi,
executive vice president and chief financial officer of
Rite Aid; and Mr. Jean Pierre Millon, president and chief
executive officer of PCS Health Systems.
Time permitting, we will be taking questions. You may
place yourself in the queue simply by pressing the digit
one followed by the four on your touch-tone telephone. If
your question has already been answered, you may remove
yourself from the queue by pressing the one followed by
the three on your telephone. Now I would like to turn the
call over to Mr. Grass. Please go ahead, sir.
Martin Grass: Thank you. Before I start, Frank Bergonzi will read the
SEC language before the conference call.
Frank Bergonzi: Thank you, Martin. Certain statements contained in this
presentation which are not historical facts are forward-
looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform
Act of 1995. These forward-looking statements address
activities or events that the company expects will or may
occur in the future. The company cautions that a number
of important factors could cause actual results to differ
materially from those expressed in any forward- looking
statements, whether written or oral made by or on behalf
of the company.
Such factors include, but are not limited to, competitive
pricing pressures, third-party prescription reimbursement
levels, continued consolidation of the drug store
industry, consumer preferences, regulatory changes
governing pharmacy practices, general economic
conditions, inflation, merchandise supply constraints,
interest rate movements, access to capital, available
real estate, construction start-up of drug stores and
distribution center facilities and the effects of
technology difficulties, including successful completion
of year 2000 conversion activities.
Consequently, all of the forward-looking statements made
are qualified by these and other factors, risks and
uncertainties. Investors are also directed to consider
other risks and uncertainties discussed in documents
filed by the company with the Securities and Exchange
Commission.
With that out of the way, I would like to turn the call
back to Martin Grass, chairman and CEO of Rite-Aid, to
announce today's events.
M. Grass: Thank you. Good morning. With me, obviously you just
heard Frank Bergonzi, our executive vice president and
chief financial officer, and on the phone from
Scottsdale, Arizona, J.P. Millon, the president and chief
executive officer of PCS Health Systems.
It's with great pleasure that I announce to you today
that Rite Aid reached last evening a definitive agreement
to acquire the equity of PCS Health Systems, a subsidiary
of Eli Lilly and Company. Rite Aid will pay Lilly $1.5
billion in cash. The transaction will be accounted for as
a purchase and it is anticipated to be accretive to Rite
Aid's earnings in the first full year of operation. We
expect first full year synergies of $80 to $100 million
and I expect this transaction to close in the first
quarter of 1999.
This combination advances Rite Aid's status as one of the
best-positioned, lowest-cost pharmacy providers in the
United States with PCS, one of the leading pharmacy
benefit managers in the country. This combination will
enable us to compete more vigorously and to be a leader
in providing innovative solutions to employers, health
plans and their members.
Let me review the terms. The purchase, which is
anticipated to close in the first quarter of 1999, is
expected to be financed with a sufficient amount of
common equity and equity-linked securities to allow Rite
Aid to maintain its credit rating and strategic and
financial flexibility. A bank commitment through J.P.
Morgan for $1.5 billion is in place to provide backup,
interim financing with respect to the timing of the
equity sale.
As I mentioned, the transaction will be accounted for as
a purchase and is anticipated to be accretive to
Rite-Aid's earnings in the first full year of operation
of somewhere between 1 to 3 cents per share, increasing
in the second year to somewhere between 5 to 8 cents per
share. The transaction is conditioned on, among other
things, the expiration of the waiting period under the
Hart-Scott-Rodino Antitrust Act.
Rite Aid and PCS are certainly not strangers to each
other. I'm proud to say that Rite Aid is the lowest cost
provider of any pharmacy chain in the PCS network,
consistently delivering superior value to PCS's customers
and plan members in terms of high generic utilization
rate and other forms of therapeutic cost savings.
In fact, Rite Aid is one of the best performing retail
chains in terms of managing pharmaceutical costs for
employers, health plans and their members and our proven
technology and record of superior pharmacy execution have
been particularly attractive to health plans, employers
and their members and has enabled Rite Aid to provide
them with high quality pharmacy care and to control their
health care costs better than any other retail pharmacy
provider.
Through Eagle Managed Care, which has about 450 clients
and about 4 million covered lives, we have a good feel
for the PBM business and the opportunities it represents
and we also realize that to be a successful player in the
pharmacy benefits market we need the expertise, the
capabilities and the national coverage and presence that
PCS provides. We intend to merge Eagle into PCS once this
transaction is completed.
PCS's statistics are equally impressive and we intend to
build on that success. PCS manages approximately 300
million prescriptions each year, serves more than 1200
health plan sponsors, assists over 50 million plan
members with their pharmaceutical needs and accounts for
more than $10 billion in annual drug expenditures.
This combination, a natural fit, has several advantages
to both companies. For Rite Aid, PCS will offer us new,
innovative health management programs for patients and
health plans. PCS has helped payers and patients find the
best possible choices in pharmaceutical utilization
management. In fact, we hope Rite Aid's experience and
the synergies that the two organizations can establish
will help improve the performance of all pharmacies in
PCS's network.
For PCS, the combination will put them in closer contact
with the members of health plans to better meet their
needs while accelerating pharmacy-based patient care
programs and improving the well-being of health plan
members.
Simply put, in an era when such drug utilization issues
as non-compliance with prescribed drug therapy is
expected to cost society at least $75 billion annually in
avoidable health care expenditures and when patients with
chronic disease states can truly benefit from enhanced
pharmaceutical care, both Rite Aid and PCS have
demonstrated the ability to simultaneously enhance the
quality of pharmacy care and reduce health care costs.
The combined company will be one of the leading entities
in the United States in ensuring appropriate drug
utilization and drug safety.
In the rapidly changing health care market place,
employers and their health plans, covering more than 190
million members, will continue to turn to pharmacy
benefit management companies to manage their
pharmaceutical needs. Every major drug chain in America
is already in this business, although none of us have
critical mass to be a major player.
Rite Aid and PCS's combined expertise and best practices
will help to further enhance the quality of care for
health plan members and better control health care costs
for employers and their health plans.
Finally, we are pleased that PCS's president and chief
executive officer, J.P. Millon, along with his successful
management team, will remain at PCS and will continue to
lead the subsidiary. Rite Aid will operate PCS as an
independent entity and will keep PCS's other operations
open and operational.
PCS will continue to be headquartered in Scottsdale,
Arizona, and will retain its well-known, valuable brand
name. In addition, we will operate the PCS mail-order
facility in Texas along with the clinical group in
Minneapolis.
We're very excited about this combination. We look
forward to discussing this with you over the next few
days and the next few weeks. At this time, we'd be
pleased to take any questions. I'll now turn it over to
the operator.
