-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ai4WDgV2l2OeO+VowL3dbRKV2JGb5onNfKCsOzFmT0ORNLTkdq9FK6nB04ByS3vZ UWBsNqHClBpx30U8v+zp8A== 0000929624-99-001285.txt : 19990715 0000929624-99-001285.hdr.sgml : 19990715 ACCESSION NUMBER: 0000929624-99-001285 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 30 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990714 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCKESSON HBOC INC CENTRAL INDEX KEY: 0000927653 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-DRUGS PROPRIETARIES & DRUGGISTS' SUNDRIES [5122] IRS NUMBER: 943207296 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-13252 FILM NUMBER: 99664531 BUSINESS ADDRESS: STREET 1: ONE POST ST STREET 2: MCKESSON PLAZA CITY: SAN FRANCISCO STATE: CA ZIP: 94104 BUSINESS PHONE: 4159838300 MAIL ADDRESS: STREET 1: ONE POST ST CITY: SAN FRANCISCO STATE: CA ZIP: 94104 FORMER COMPANY: FORMER CONFORMED NAME: MCKESSON CORP DATE OF NAME CHANGE: 19950209 FORMER COMPANY: FORMER CONFORMED NAME: SP VENTURES INC DATE OF NAME CHANGE: 19940728 10-K405 1 FORM 10-K405 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-K [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 1999 OR [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-13252 ---------------- McKESSON HBOC, INC. A Delaware Corporation I.R.S. Employer Identification Number 94-3207296 McKessonHBOC Plaza, One Post Street, San Francisco, CA 94104 Telephone--Area Code (415) 983-8300 Securities registered pursuant to Section 12(b) of the Act: (Name of Each Exchange on Which (Title of Each Class) Registered) Common Stock, $.01 par value New York Stock Exchange Pacific Exchange, Inc. Preferred Stock Purchase Rights New York Stock Exchange Pacific Exchange, Inc. Securities registered pursuant to Section 12 (g) of the Act: None. Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Aggregate market value of voting stock held by nonaffiliates of the Registrant at June 30, 1999: $8,335,183,427 Number of shares of common stock outstanding at June 30, 1999: 281,277,000 Documents Incorporated By Reference Portions of the Registrant's Proxy Statement for its Annual Meeting of Stockholders to be held on August 25, 1999 are incorporated by reference into Part III of this report. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TABLE OF CONTENTS
Item Page ---- ---- PART I 1. Business.......................................................... 3 2. Properties........................................................ 11 3. Legal Proceedings................................................. 11 4. Submission of Matters to a Vote of Security Holders............... 15 Executive Officers of the Registrant.............................. 16 PART II Market for the Registrant's Common Stock and Related Stockholder 5. Matters........................................................... 17 6. Selected Financial Data........................................... 17 Management's Discussion and Analysis of Financial Condition and 7. Results of Operations............................................. 17 7A. Quantitative and Qualitative Disclosures About Market Risk........ 17 8. Financial Statements and Supplementary Data....................... 17 Changes in and Disagreements with Accountants on Accounting and 9. Financial Disclosure.............................................. 17 PART III 10. Directors and Executive Officers of the Registrant................ 18 11. Executive Compensation............................................ 18 12. Security Ownership of Certain Beneficial Owners and Management.... 18 13. Certain Relationships and Related Transactions.................... 18 PART IV 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K... 18 Signatures........................................................
2 Item 1. Business (a) General Development of Business On January 12, 1999, the Company, formerly McKesson Corporation ("McKesson"), completed a merger with HBO & Company ("HBOC"), a leading health care information technology company, by exchanging 177 million shares of Company common stock for all of the issued and outstanding shares of common stock of HBOC (the "HBOC Transaction"). Each share of HBOC was exchanged for 0.37 of a share of Company common stock. The Company was renamed McKesson HBOC, Inc. ("McKessonHBOC," the "Company" or the "Registrant"). The merger was structured as a tax-free reorganization and was accounted for as a pooling of interests. The Company is a leading health care supply management company in North America. In addition, the Company provides software solutions, technological innovation and comprehensive services to the health care industry and, through its Water Products segment, processes and markets pure drinking water. The Company's mission is to be the world leader in health care supply management and health care information technologies across the entire continuum of health care, through the operation of market-leading businesses in pharmaceutical and medical-surgical distribution and information technology and services for health care providers and payors. Recent Acquisitions and Dispositions McKessonHBOC has undertaken numerous strategic initiatives in recent years to further focus the Company on its core health care businesses and enhance its competitive position. These include the following significant acquisitions and dispositions: Health Care Supply Management Segment Acquisitions . In November 1998, the Company acquired Red Line HealthCare Corporation ("RedLine"), a distributor of medical supplies and services to the extended-care industry, including long-term homecare supply, for approximately $233 million in cash. . In February 1997, the Company acquired General Medical, Inc. ("MGM"), a multi-market distributor of medical-surgical supplies to acute-care and alternate site markets, for approximately $775 million in cash and Company common stock. . In November 1996, the Company acquired FoxMeyer Corporation's pharmaceutical distribution business out of bankruptcy, for approximately $598 million in cash and payment or assumption of liabilities. Health Care Information Technologies Segment Acquisitions . In December 1998, the Company acquired Access Health, Inc. ("Access"), a provider of clinically based care management programs and health care information services, for approximately 34.4 million shares of HBOC common stock (equivalent to approximately 12.7 million shares of Company common stock after application of the exchange ratio of 0.37 shares of Company common stock for each share of HBOC common stock (the "Exchange Ratio")). . In October 1998, the Company acquired IMNET Systems, Inc. ("IMNET"), a provider of electronic information and document management solutions for the health care industry for approximately 9.6 million shares of HBOC common stock and 1.6 million HBOC stock options (equivalent to approximately 3.6 million shares of Company common stock and 0.6 million Company stock options after application of the Exchange Ratio). . In December 1997, the Company acquired HPR Inc. ("HPR"), a provider of clinical information systems for the managed care industry, for approximately 18.4 million shares of HBOC common stock (equivalent to approximately 6.8 million Company common shares after application of the Exchange Ratio). 3 . In June 1997, the Company acquired Enterprise Systems, Inc. ("ESi"), a developer of resource management solutions including materials management, operating room logistics, scheduling and financial management, for approximately 15.2 million shares of HBOC common stock (equivalent to approximately 5.6 million shares of Company common stock after application of the Exchange Ratio). . In June 1997, the Company acquired AMISYS Managed Care Systems, Inc. ("AMISYS"), a provider of managed care information systems for the payor market, for approximately 10.8 million shares of HBOC common stock (equivalent to approximately 4.0 million shares of Company common stock after application of the Exchange Ratio). . In December 1996, the Company acquired GMIS Inc., a provider of data quality tools and decision support software for the payor marketplace, for approximately 14.8 million shares of HBOC common stock (equivalent to approximately 5.5 million shares of Company common stock after application of the Exchange Ratio). . In August 1996, the Company acquired CyCare Systems, Inc., a provider of management software systems and electronic data interchange services for physician practices, for approximately 17.6 million shares of HBOC common stock (equivalent to approximately 6.5 million shares of Company common stock after application of the Exchange Ratio). Dispositions . In March 1997, the Company disposed of Millbrook Distribution Services Inc. ("Millbrook"), a non-health care business, for cash in an amount which, on an after-tax basis, approximated Millbrook's book value. . In December 1996, the Company disposed of its 55% equity interest in Armor All Products Corporation ("Armor All"), a non-health care business. (b) Financial Information About Industry Segments Financial information for the three years ended March 31, 1999 is included in Financial Note 18 to the consolidated financial statements, "Segments of Business," appearing on pages F-70 to F-72 to this Annual Report on Form 10-K. Matters Relating to Restatement of Financial Results In its April 22, 1999, press release the Company preliminarily reported consolidated net income (loss) of ($60.4) million and $96.8 million, or ($0.22) and $0.35 per diluted share in the quarters ended March 31, 1999 and 1998, respectively, and $237.1 million and $330.4 million, or $0.84 and $1.19 per diluted share in the fiscal years ended March 31, 1999 and 1998. On April 28, 1999, the Company announced that, during the course of its year-end financial audit process, the Company determined that certain software sales transactions (aggregating $26.2 million for the fourth quarter ended March 31, 1999 and $16.0 million in the prior quarters of the fiscal year) were improperly recorded because they were subject to contingencies and had been reversed. It also announced that the audit process was ongoing. The Audit Committee of the Company's Board of Directors subsequently initiated an investigation into this matter. On May 25, 1999, the Company announced that, as a result of information developed through its year-end internal and external audit process and Audit Committee review, additional instances of improper revenue recognition had been found, that further downward revision would be required of the results for the fiscal year ended March 31, 1999, as well as of quarterly results during the fiscal year, and that prior years' results of the Health Care Information Technology business unit (HBOC) could also require restatement. As a result of the findings of the investigation, the Company's consolidated financial statements, which give retroactive effect to the HBOC Transaction and other acquisitions completed by McKesson and HBOC in fiscal year 1999 accounted for under the pooling of interests method, reflect amounts for HBOC which have been restated from those previously reported by HBOC. 4 As a result of the restatement of previously reported amounts for HBOC, revised consolidated financial information for the Company is as follows (in millions, except per share amounts):
Three months ended Year ended March 31, March 31, ------------- ------------- 1999 1998 1999 1998 ------ ----- ------ ------ Preliminarily reported consolidated net income (loss)........................................... $(60.4) $96.8 $237.1 $330.4 Revised consolidated net income (loss)............ (61.2) 81.7 84.9 304.6 Preliminarily reported consolidated net income (loss) per diluted share......................... (0.22) 0.35 0.84 1.19 Revised consolidated net income (loss) per diluted share............................................ (0.22) 0.29 0.31 1.10
The impact of these restatements resulted in net reductions, from previously reported amounts, in the Health Care Information Technology segment as follows (in millions):
Three months ended Year ended March 31, March 31, --------------- ------------------ 1999 1998 1999 1998 ------- ------ -------- -------- Health Care Information Technology Preliminarily reported revenues........... $ 431.9 $393.1 $1,783.9 $1,477.3 Revised revenues.......................... 402.6 376.8 1,538.1 1,429.2 Preliminarily reported operating profit (loss)................................... (102.1) 99.4 221.8 269.3 Revised operating profit (loss) .......... (105.5) 74.3 (31.6) 227.0
See Financial Note 3 to the consolidated financial statements, "Restatement," appearing on pages F-40 to F-48 to this Annual Report on Form 10-K. Class Action Litigation and Government Investigations A description of certain class action and other litigation arising subsequent to the Company's announcements discussed above are described in Item 3, "Legal Proceedings" on pages 11 to 15 of this Annual Report on Form 10-K. The United States Attorney's Office for the Northern District of California and the San Francisco District Office of the United States Securities and Exchange Commission ("SEC") have also commenced investigations in connection with the matters relating to the restatement of previously reported amounts for HBOC described above. The SEC has advised the Company that its inquiry should not be construed as an indication by the SEC or its staff that any violations of law have occurred. Management Changes On June 21, 1999, the Company announced that its Board of Directors had appointed new executive management for the Company. John H. Hammergren and David L. Mahoney were appointed Co-Presidents and Co-Chief Executive Officers of the Company effective July 15, 1999 and Heidi E. Yodowitz, Senior Vice President and Controller, was appointed Acting Chief Financial Officer of the Company. The Company also announced the resignations of Mark A. Pulido, previously President and Chief Executive Officer, and Richard H. Hawkins, previously Executive Vice President and Chief Financial Officer, effective July 15, 1999. Additionally, the Company announced the removal of Charles W. McCall as Chairman of the Board of Directors and his dismissal as an employee of the Company. Alan Seelenfreund, a former Chairman and Chief Executive Officer of McKesson, was appointed Chairman of the Board. The Company also announced the dismissal of several executives of its Health Care Information Technology segment including its former president and chief executive officer. The Company appointed Graham O. King as the president of that segment. 5 (c) Narrative Description of Business (1) Description of Segments of Business The Company is organized under three operating segments, Health Care Supply Management, Health Care Information Technology and Water Products. Within the United States and Canada, the Health Care Supply Management segment is a leading wholesale distributor of ethical and proprietary drugs, medical- surgical supplies and health and beauty care products principally to chain and independent drug stores, hospitals, alternate care sites, food stores and mass merchandisers. The Health Care Information Technology segment delivers enterprise-wide patient care, clinical, financial, managed care, payor and strategic management software solutions, as well as networking technologies, electronic commerce, outsourcing and other services to health care organizations throughout the United States and certain foreign countries. The Water Products segment is engaged in the processing and sale of bottled drinking water to homes and businesses and packaged water through retail stores. The Company generated annual sales of $30.4 billion, $22.4 billion, and $16.9 billion in fiscal years 1999, 1998, and 1997, respectively: approximately $28.4 billion, 94%; $20.6 billion, 92%; and $15.4 billion, 91%; respectively, in the Health Care Supply Management segment: approximately $1.5 billion, 5%; $1.4 billion, 6%; and $1.1 billion, 7%; respectively, in the Health Care Information Technology segment: and approximately $0.4 billion, 1%; $0.3 billion, 2%; and $0.3 billion, 2%; respectively, in the Water Products segment. Health Care Supply Management Products and Markets Through its Health Care Supply Management segment, McKessonHBOC is a leading distributor of ethical and proprietary drugs, medical-surgical supplies and health and beauty care products in North America. The Company's Health Care Supply Management segment consists of its core U.S. pharmaceutical distribution business, its medical-surgical distribution and services business, its automated pharmacy systems and services, its sales, marketing and other support services to pharmaceutical manufacturers and includes the Company's international operations in Canada and Mexico (collectively, the "Supply Management Business"). Through its Pharmaceutical Group, the Supply Management Business provides domestic distribution of pharmaceuticals and health and beauty care products to independent and chain pharmacies, hospitals, alternate site health care facilities, food stores and mass merchandisers in all 50 states. The Medical Group offers a full range of medical-surgical supplies, equipment, pharmacy management services, logistics and management information support to hospitals, physicians' offices, long-term care, and homecare providers. Through the Automation Group, the Company manufactures and markets automated pharmacy systems and services to hospitals and retail pharmacies. The Pharmaceutical Group supplies pharmaceuticals and health care related products to three primary customer segments: retail chains (pharmacies, food stores, and mass merchandisers), retail independent pharmacies and institutional providers (including hospitals, alternate-site providers, and integrated health networks). These three customer categories represented approximately 38.5%, 28.7%, and 32.8%, respectively, of the Pharmaceutical Distribution Group's revenues in fiscal 1999. Operating under the tradenames Economost(TM) and Econolink(TM) and a number of related service marks, the Company promotes electronic order entry systems and a wide range of computerized merchandising and asset management services for pharmaceutical retailers and health care institutions. The Company has developed advanced marketing programs and information services directed at retail pharmacies. These initiatives include the Valu-Rite(TM), Valu-Rite/ CaremaxSM and HealthMart(TM) retail networks, the Omnilink(TM) centralized pharmacy technology platform, which offers retail network members connectivity with managed care organizations while promoting compliance with managed care plans. The Company's nationwide network of distribution centers utilizes the Acumax(R) Plus warehouse management system which provides real-time inventory statistics and tracks products from the receiving dock to shipping through scanned bar code information and radio frequency signals with accuracy levels above 99% to help ensure that the right product arrives at the right time and place for both the Company's customer and their patients. The Company believes that its financial strength, purchasing leverage, affiliation 6 networks, nationwide network of distribution centers, and advanced logistics and information technologies provide competitive advantages to its pharmaceutical distribution operations. This group also includes the MedManagement business unit, a provider of pharmacy and medication management consulting and related services to health care providers for the purpose of reducing total cost, and MedPath which primarily provides distribution of oncology medications to physicians' offices. The Medical Group offers a full range of medical-surgical supplies, equipment and related services across the continuum of health care providers: hospitals, physicians' offices, long-term care, and homecare. The Medical Group includes the operations of MGM, the nation's third largest distributor of medical-surgical supplies to hospitals (acute care) and the leading supplier of medical-surgical supplies to the full-range of alternate-site health care facilities, including physicians and clinics (primary care), long- term care and homecare sites (extended care); RedLine, a distributor of medical supplies and services to the extended-care market, including long-term homecare supply; and Hawk Medical Supply, a distributor of medical-surgical supplies. The Automation Group manufactures and markets automated pharmacy systems to hospitals and retail pharmacies through its McKesson Automated Healthcare ("MAH") and McKesson Automated Prescription Systems ("APS") units. Key products of MAH include the ROBOT-Rx(TM) system, a robotic pharmacy dispensing and utilization tracking system that enables hospitals to lower pharmacy costs while significantly improving the accuracy of pharmaceutical dispensing, AcuDose-Rx(TM) unit-based cabinets which automate the storage, dispensing and tracking of commonly used drugs in patient areas, and AcuScan-Rx(TM) which records, automates, and streamlines drug administration and medication information requirements through bar code scanning at the patient's bedside. APS manufactures a wide range of pharmaceutical dispensing and productivity products ranging from convenient table-top universal counters to advanced robotics systems. The Pharmaceutical Partners Group combines the Company's pharmaceutical services, in a single group that is focused on helping manufacturers meet their marketing goals. The Pharmaceutical Partners Group provides sales, marketing and other services to pharmaceutical manufacturers and biotechnology customers though Healthcare Delivery Systems ("HDS"), which provides marketing, distribution, and reimbursement services; McKessonHBOC BioServices, a provider of services in support of clinical trials and biomedical research; J. Knipper and Company, which provides sales and marketing services in the form of direct mail and fulfillment services; Kelly/Waldron and Co., which provides decision support, data analysis, sales and marketing services; Kelly/Waldron Technology Solutions, which provides full service sales force automation and business analytics; and Alliance Sales Partners, which provides integrated contract sales and marketing support services. Also included in the Supply Management Business is Zee Medical, Inc., a distributor of first-aid products and safety supplies to industrial and commercial customers. International operations include Medis Health and Pharmaceutical Services, Inc. ("Medis"), a wholly-owned subsidiary and the largest pharmaceutical distributor in Canada; and the Company's 23% equity interest in Nadro, S.A. de C.V., a leading pharmaceutical distributor in Mexico. Intellectual Property The principal trademarks and service marks of the Health Care Supply Management segment are: ECONOMOST(TM), ECONOLINK(TM), VALU-RITE(TM), Valu- Rite/CareMaxSM, OmniLink(TM), Health Mart(TM), ROBOT-Rx(TM), AcuDose-Rx(TM), AcuScan(TM), Baker Cells(TM), Baker Cassettes(TM), Baker Universal(TM), Autoscript(TM), and Pharmacy 2000(TM). The Company also owns other registered and unregistered trademarks and service marks and similar rights used by the Health Care Supply Management segment. All of the principal marks are registered in the United States and registration has been obtained or applied for in Canada with respect to such marks. The United States federal registrations of these trademarks and service marks have ten or twenty-year terms, depending on date of registration; the Canadian registrations have fifteen-year terms. All are subject to unlimited renewals. The Company believes this business has taken all necessary steps to preserve the registration and duration of its trademarks and service marks, although no assurance can be given that it will be able to successfully enforce or protect its rights thereunder in the event that they are subject to third-party infringement claims. The Company does not consider any particular patent, license, franchise or concession to be material to the business of the Health Care Supply Management segment. 7 Competition In every area of operations, the Company's distribution businesses face strong competition both in price and service from national, regional and local full-line, short-line and specialty wholesalers, service merchandisers, self- warehousing chains, and from manufacturers engaged in direct distribution. The Health Care Supply Management segment faces competition from various other service providers and from pharmaceutical and other health care manufacturers (as well as other potential customers of the Health Care Supply Management segment) which may from time to time decide to develop, for their own internal needs, supply management capabilities which are provided by the Health Care Supply Management segment and other competing service providers. Price, quality of service, and, in some cases, convenience to the customer are generally the principal competitive elements in the Health Care Supply Management segment. Health Care Information Technology Products and Markets The Company's Health Care Information Technology segment provides patient care, clinical, financial, managed care and strategic management software solutions for payors and providers in the health care industry. The segment also provides a full complement of network communications technologies, including wireless capabilities, as well as outsourcing services in which its staff manages and operates data centers, information systems, medical call centers, organizations and business offices of health care institutions of various sizes and structures. In addition, the segment offers a wide range of care management and electronic commerce services, including electronic medical claims and remittance advice services, and statement processing. The Health Care Information Technology segment markets its products and services to integrated delivery networks, hospitals, physicians' offices, home health providers, pharmacies, reference laboratories, managed care providers and payors. The segment also sells its products and services internationally through subsidiaries and/or distribution agreements in the United Kingdom, Canada, Ireland, Saudi Arabia, Kuwait, Australia, Puerto Rico and New Zealand. The Health Care Information Technology segment's product portfolio is organized into eight components: acute-care or hospital information systems ("HIS"), infrastructure, community health management, clinical management, practice management, access management, resource management and enterprise management. Hospital Information Systems. HIS applications automate the operation of individual departments and their respective functions within the in-patient environment. The Company's HIS systems include applications for patient care, laboratory, pharmacy, radiology, financial and management decision-making. Infrastructure. Infrastructure components include local, wide area and value-added networks, wireless technology, electronic data interchange (EDI) capabilities, an interface manager and a data repository. Other infrastructure applications include document and medical imaging as well as an enterprise master person index. Community Health Management. Community Health Management applications and services focus on managing the demand for health care services by predicting what care may be required, preventing illness and managing the care required as cost effectively as possible. Components of the Company's community health management strategy include care management services and medical call center management; data analysis to provide early identification of members with high-risk/high-cost diseases and health conditions; guidelines and standards to enable enterprises to improve care management processes; and computer telephony and Internet links to provide electronic connectivity between providers and consumers. Clinical Management. The segment's point-of-care applications are designed to allow physicians and other clinicians to document patient information, establish and manage guidelines or standards of care, enter and manage orders, and view all results and clinical information. 8 Practice Management. Practice management applications provide a comprehensive solution for medical groups and physician enterprises, whether they are independent or part of an integrated health network. With business office management as its cornerstone, the Company's practice management solution also includes risk management and managed care capabilities, clinical systems for managing patient care, and scheduling, as well as decision support, computer telephony, data quality analysis and electronic commerce. Access Management. Access management solutions include indexing applications that organize the vast amounts of information collected about a person throughout the enterprise, allowing patients to be tracked and information about them to be accessed wherever they go for care as well as scheduling systems that instantly register and schedule patients, and the resources needed to serve them, anywhere in the enterprise. Resource Management. Resource management applications help health care organizations better manage people, facilities, supplies, services and equipment by integrating materials management, accounts payable/general ledger, surgical services management and staff scheduling functions. Enterprise Management. Enterprise management applications focus on providing managers with the clinical, financial and other information necessary to contain costs while ensuring high-quality care, including utilization management, accounts receivable management and managed care contracting and member management applications. In addition to the segment's product offerings described above, the segment also provides the following services: Enterprise Services. Enterprise services include UNIX processing support, remote system monitoring and single-point issue resolution. In addition, the Health Care Information Technology segment's service path implementation methodology provides a flexible suite of implementation services that can include an enterprise project manager to assist in planning, installing and supporting multiple Company products. Other service areas include education, enterprise consulting, application-specific services, computer telephony and care management services. Connect Technology Group. The Connect Technology Group provides network installation and support, as well as a suite of information services that extend local area networks outside of the hospital to include payors, vendors, financial institutions and the Internet. Outsourcing Services Group. The Health Care Information Technology segment has been in the outsourcing business in the United States for more than 20 years and offers outsourcing services in the United Kingdom as well. Outsourcing services include managing hospital data processing operations (traditionally known as facilities management) as well as strategic management services in information systems planning, receivables management, revenue cycle outsourcing, business office administration and major system conversions. Electronic Commerce Group. The Health Care Information Technology segment's e-commerce capabilities in EDI service include claims processing, eligibility verification, remittance advice as well as statement printing. Research and Development The Health Care Information Technology segment's product development effort applies computer technology and installation methodologies to specific information processing needs of hospitals. Management believes a substantial and sustained commitment to such research and development ("R&D") is important to the long-term success of the business. Investment in software development, including both R&D expense as well as capitalized software, has increased as the Health Care Information Technology segment has addressed new software applications and enhanced existing products for installed systems. The Health Care Information Technology segment 9 expensed $114.7 million (7.5% of revenue) for R&D activities during fiscal 1999, as compared to $112.5 million (7.9% of revenue) and $103.0 million (9.1% of revenue) during 1998 and 1997, respectively. The Health Care Information Technology segment capitalized 31%, 26% and 23% of its R&D expenditures in 1999, 1998 and 1997, respectively. Information regarding R&D is included in Financial Note 2 to the consolidated financial statements, "Accounting Policies" appearing on pages F- 37 to F-40 of this Annual Report on Form 10-K. Intellectual Property The substantial majority of technical concepts and codes embodied in the Health Care Information Technology segment's computer programs and program documentation are not protected by patents or copyrights but constitute trade secrets that are proprietary to the Company. The principal trademarks and service marks of the Health Care Information Technology segment are: AMISYS(R), ASK-A-NURSE(R), Connect 2000(TM), Credentialer(R), CRMS(TM), Episode Profiler, ERS(R), HealthQuest(R), InterQual(R), ParagonSM, Patterns Profiler(TM), Pathways 2000(R) and TRENDSTAR(R). SMR(R) and Smart Medical Record(R) are used under license from HBOC Medical, Ltd. The Company also owns other registered and unregistered trademarks and service marks and similar rights used by the Health Care Information Technology segment. All of the principal trademarks and service marks are registered in the United States, in addition to certain other jurisdictions. The United States federal registrations of these trademarks have terms of ten or twenty years, depending on date of registration, and are subject to unlimited renewals. The Company believes this business has taken all necessary steps to preserve the registration and duration of its trademarks and service marks, although no assurance can be given that it will be able to successfully enforce or protect its rights thereunder in the event that they are subject to third-party infringement claims. The Company does not consider any particular patent, license, franchise or concession to be material to the business of the Health Care Information Technology segment. Competition The Company's Health Care Information Technology segment experiences substantial competition from many firms, including other computer services firms, consulting firms, shared service vendors, certain hospitals and hospital groups, and hardware vendors. Competition varies in size from small to large companies, in geographical coverage, and in scope and breadth of products and services offered. Water Products Products and Markets Water Products is a leading provider in the $4.2 billion bottled water industry in the United States. It is the largest U.S.-owned bottled water company and the third largest overall in the United States. Water Products is engaged in the processing and sales of bottled drinking water through direct delivery and retail channels. Under its Sparkletts, Alhambra, and Crystal brands it delivers to more than 690,000 homes and businesses throughout California, Nevada, the Southwest, Pacific Northwest, and Mid-Atlantic regions. Intellectual Property The principal trademarks and service marks of the Water Products segment are: SPARKLETTS(R), ALHAMBRA(R), and CRYSTAL(TM). The Company also owns other registered and unregistered trademarks and service marks used by the Water Products segment. All of the principal trademarks and service marks are registered in the United States, in addition to certain other jurisdictions. The United States federal registrations of these trademarks have terms of ten or twenty years, depending on date of registration, and are subject to unlimited renewals. The Company believes this business has taken all necessary steps to preserve the registration and duration of its trademarks and service marks, although no assurance can be given that it will be able to successfully enforce or protect its rights thereunder in the event that they are subject to third-party infringement 10 claims. The Company does not consider any particular patent, license, franchise or concession to be material to the business of the Water Products segment. Competition Although this business faces competition from several larger competitors, the competition is generally widely dispersed among many different entities. Principal among the large local competitors of the Water Products segment are: Arrowhead (California and Arizona), Poland Spring and Deer Park (Mid- Atlantic), and Ozarka/Oasis (Texas) (owned by Nestle); Hinckley & Schmitt (Arizona, Las Vegas, and Southern California), Cloister (Mid-Atlantic), and Sierra Springs (Northern California and Texas) (owned by Suntory International Corporation); Crystal Geyser (nationally distributed); Evian (nationally distributed and owned by Groupe Danone, S.A.), and private label brands. This operation faces significant competition in both price and service in all aspects of its business. (2) Other Information About the Business Customers--No material part of the business is dependent upon a single or a very few customers, the loss of any one of which could have a material adverse effect on the Company or any of its business segments. Environmental Legislation--The Company sold its chemical distribution operations in fiscal 1987. In connection with the disposition of those operations, the Company retained responsibility for certain environmental obligations and has entered into agreements with the Environmental Protection Agency and certain states pursuant to which it is or may be required to conduct environmental assessments and cleanups at several closed sites. These matters are described further in Item 3 "Legal Proceedings" on pages 11 to 15 of this report. Other than any capital expenditures which may be required in connection with those matters, the Company does not anticipate making substantial capital expenditures for environmental control facilities or to comply with environmental laws and regulations in the future. The amount of capital expenditures expended by the Company for environmental compliance was not material in fiscal 1999 and is not expected to be material in the next fiscal year. Employees--At March 31, 1999, the Company employed approximately 24,600 persons. (d) Financial Information About Foreign and Domestic Operations and Export Sales Information as to foreign operations is included in Financial Note 18 to the consolidated financial statements "Segments of Business" appearing on pages F- 70 to F-72 of this Annual Report on Form 10-K. Item 2. Properties Because of the nature of the Company's principal businesses, plant, warehousing, office and other facilities are operated in widely dispersed locations. The warehouses are typically owned or leased on a long-term basis. The Company considers its operating properties to be in satisfactory condition and adequate to meet its needs for the next several years without making capital expenditures materially higher than historical levels. Information as to material lease commitments is included in Financial Note 13 to the consolidated financial statements, "Lease Obligations" appearing on pages F-60 to F-61 of this Form 10-K Report. Item 3. Legal Proceedings On April 28, 1999, the Company announced that, during the course of its year-end financial audit process, the Company determined that software sales transactions (aggregating $26.2 million for the fourth quarter ended March 31, 1999 and $16.0 million in the prior quarters of the fiscal year) were improperly recorded because they were subject to contingencies and had been reversed. It also announced that the audit process was ongoing. The Audit Committee of the Company's Board of Directors subsequently initiated an investigation into this matter. On May 25, 1999, the Company announced that as a result of information developed through its continuing year-end 11 internal and external audit process and Audit Committee review, additional instances of improper revenue recognition had been found, that further downward revision would be required of the results for the fiscal year ended March 31, 1999, as well as quarterly results during the fiscal year, and that prior years' results of the Health Care Information Technology Business unit ("HBOC") could also require restatement. Since the Company's announcement on April 28, 1999, and as of July 6, 1999, fifty-three class action lawsuits, three derivative actions, and two individual actions have been filed against the Company, and certain current or former officers and directors of the Company (the "Defendants"). One of the actions also names as defendants Bear, Stearns & Company, Inc., and Arthur Andersen LLP. Fifty-three of the actions were filed in Federal Court (the "Federal Actions") alleging violations of the federal securities laws. Of these, fifty-two were filed in the United States District Court for the Northern District of California, and one was filed in the Northern District of Illinois. Of the fifty-two filed in the Northern District of California, fifty-one are class actions and one is a derivative action. The action filed in the Northern District of Illinois is a class action. The Company expects that the Federal Actions, with the exception of the derivative action, will be consolidated into a single action, and the Company will not be required to respond until after the filing of a consolidated complaint. The class actions are purportedly brought on behalf of a class of the Company's shareholders that varies according to the complaint, with July 16, 1996 being the earliest date for shareholders who purchased or acquired the Company's shares and May 25, 1999 being the latest date. In general, these actions allege that the Company and certain officers or directors made false and misleading statements concerning the Company's future prospects and financial results in violation of the federal securities laws. Plaintiffs seek damages in an unspecified amount. Plaintiffs also request pre-judgment and post-judgment interest, costs and attorneys fees. Five actions have also been filed in various state courts (the "State Actions"). Of these, two are derivative actions, one filed in the Chancery Court of the State of Delaware (Fine v. McCall, et. al.), and the other in California State Court in San Francisco (Mitchell v. McCall, et. al). Two individual actions have also been filed, one in California State Court in San Francisco (Yurick v. McKesson et. al.), and the other, for which a summons has issued but a complaint not yet filed, in the Court of Common Pleas, Chester County, Pennsylvania (Grant v. McKesson). One purported class action, on behalf of a class of shareholders of McKesson Corporation at the time of the merger with HBOC, has been filed in the Delaware Court of Chancery. The State Actions seek unspecified damages for alleged breaches of fiduciary duty and other causes of action arising out of the events that led to the Company's need to revise its financial statements. The Company is currently required to respond to the derivative action in Delaware by July 30, 1999 and the actions in California by July 26, 1999. The Company is not currently required to respond to the action filed in Pennsylvania. One additional Federal Action has been filed in the Northern District of Georgia, but that action names only two former officers, and does not name the Company; and one additional class action has been filed in the Delaware Court of Chancery against HBOC, Inc. and former officers and directors of a company acquired by HBOC in 1998, alleging breach of fiduciary duties by such parties in connection with such sale, and is brought on behalf of the shareholders of the acquired company. In addition, the United States Attorney's Office for the Northern District of California and the San Francisco District Office of the United States Securities and Exchange Commission ("SEC") have also commenced investigations in connection with the matters relating to the restatement of previously reported amounts for HBOC described above. The SEC has advised the Company that its inquiry should not be construed as an indication by the SEC or its staff that any violations of law have occurred. The Company does not believe it is feasible to predict or determine the outcome or resolution of these proceedings, or to estimate the amounts of, or potential range of, loss with respect to these proceedings. In addition, the timing of the final resolution of these proceedings is uncertain. The range of possible resolutions of these proceedings could include judgments against the Company or settlements that could require substantial payments by the Company which could have a material adverse impact on the Company's financial position, results of operations and cash flows. 12 The Company currently is a defendant in numerous civil antitrust actions filed since 1993 in federal and state courts by retail pharmacies. The federal cases have been coordinated for pretrial purposes in the United States District Court in the Northern District of Illinois and are known as MDL 997. MDL 997 consists of a consolidated class action (the "Federal Class Action") as well as approximately 109 additional actions brought by approximately 3,500 individual retail, chain and supermarket pharmacies (the "Individual Actions"). There are numerous other defendants in these actions including several pharmaceutical manufacturers and several other wholesale distributors. These cases allege, in essence, that the defendants have violated the Sherman Act by conspiring to fix the prices of brand name pharmaceuticals sold to plaintiffs at artificially high, and non-competitive levels, especially as compared with the prices charged to mail order pharmacies, managed care organizations and other institutional buyers. On January 19, 1999, the District Court entered its written opinion and judgment granting defendants' motion for a directed verdict. On July 13, 1999, the Seventh Circuit affirmed the District Court's judgement as to the dismissal of the claims against the wholesalers. The Individual Actions, which are still pending in the Northern District of Illinois for pre-trial purposes, will be remanded to their original transferor jurisdictions for trial. The wholesalers' motion for partial summary judgment that they should not be liable for any damages resulting from drugs sold prior to four years from the October 1997 amended complaints in those cases was granted. Most of the individual cases brought by chain stores have been settled. The currently pending state court antitrust cases against the Company are in California, Alabama, Mississippi and Tennessee. The state cases are based essentially on the same facts alleged in the Federal Class Action and Individual Actions and assert violations of state antitrust and/or unfair competition laws. The case in California (referred to as Coordinated Special Proceeding, Pharmaceutical Cases I, II & III) is pending in Superior Court for the State of California (San Francisco County). A class of retail pharmacies has been certified and the case is trailing MDL 997. In the Alabama case (Durrett, et al. v. The Upjohn Co. et al.), the Supreme Court has recently held that the Alabama state antitrust statute at issue does not reach the conduct alleged in the complaint. The case in Mississippi (Montgomery Drug Co. et al. v. The Upjohn Co. et al.) is pending in the Chancery Court of Prentiss County, Mississippi. The Chancery Court has held that the case may not be maintained as a class action. The Tennessee case, filed in Knoxville, is a class action on behalf of consumers who purchased brand-name drugs from retail stores in fourteen states. The claims, brought under Tennessee law, allege deceptive trade practices, conspiracy to fix prices, price discrimination, and fraudulent concealment. On July 6, 1998, the court conditionally certified the case as a multi-state class action. A motion to dismiss the complaint is pending on the grounds, among others, that (i) plaintiff class members are indirect purchasers and are not entitled to bring an action against the wholesalers and manufacturers and (ii) the state antitrust statues on which the class relied do not apply to interstate commerce. A motion is also pending for permission to file an interlocutory appeal from the order denying defendants' motion to vacate the order granting conditional class certification. In each of the cases, plaintiffs seek remedies in the form of injunctive relief and unquantified monetary damages, and attorneys fees and costs. Plaintiffs in the California cases also seek restitution. In addition, trebled damages are sought in the Federal Class Action, the Individual Actions, the California case and the Tennessee case and statutory penalties of $500 per violation are sought in the Mississippi and Alabama cases. The Company believes it has meritorious defenses to the allegations made against it and intends to vigorously defend itself in all of these actions. In addition, the Company has entered into a judgment sharing agreement with certain pharmaceutical manufacturer defendants, which provides generally that the Company (together with the other wholesale distributor defendants) will be held harmless by such pharmaceutical manufacturer defendants and will be indemnified against the costs of adverse judgments, if any, against the wholesaler and manufacturers in these or similar actions, in excess of $1 million in the aggregate per wholesale distributor defendant. In January 1997, the Company and twelve pharmaceutical manufacturers (the "Manufacturer Defendants") were named as defendants in the matter of FoxMeyer Health Corporation vs. McKesson, et. al. filed in the District Court in Dallas County, Texas ("the Texas Action"). Plaintiff (the parent corporation of FoxMeyer Drug Company and FoxMeyer Corporation collectively, "FoxMeyer Corporation") alleges that, among other things, the Company (i) defrauded Plaintiff, (ii) competed unfairly and tortiously interfered with FoxMeyer Corporation's business operations, and (iii) conspired with the Manufacturer Defendants, all in order to destroy FoxMeyer Corporation's 13 business, restrain trade and monopolize the marketplace, and allow the Company to purchase that business at a distressed price. Plaintiff seeks relief against all defendants in the form of compensatory damages of at least $400 million, punitive damages, attorneys fees and costs. The Company answered the complaint, denying the allegations, and removed the case to federal bankruptcy court in Dallas. In March 1997, the Company and the Manufacturer Defendants filed a complaint in intervention against FoxMeyer Health (now known as Avatex Corporation) in the action filed against Avatex by the FoxMeyer Unsecured Creditors Committee in the United States Bankruptcy Court for the District of Delaware. The complaint in intervention seeks declaratory relief and an order enjoining Avatex from pursuing the Texas Action. In November 1998, the Delaware court granted the Company's motion for summary judgment as to the first three counts asserted in the Texas Action on the ground of judicial estoppel. A renewed motion for summary judgment on the four remaining counts of Avatex's complaint in the Texas Action is pending before the Delaware court. In addition, the Company filed an amended complaint adding the Trustee and debtors as defendants. Based on the order granting summary judgment as to the first three counts, the Texas bankruptcy court dismissed those counts with prejudice and ordered the Texas Action remanded to state court. On November 30, 1998, the Company and the other Defendants filed a notice of appeal to the District Court from the remand ruling as well as the August, 1997 ruling denying defendants' motion to transfer the Texas Action to Delaware. In addition, the Company has filed a counterclaim and cross-claim against Avatex and Mssrs. Estrin, Butler and Massman in the Texas Action, asserting various claims of misrepresentation and breach of contract. The District Court upheld the remand order and denied as moot the appeal from the denying transfer. A cross-appeal by Avatex from the order dismissing the three counts with prejudice is still pending. The Company and several of the other defendants have appealed to the Court of Appeals the ruling upholding the order denying transfer. The Company has been named as a defendant, or has received from customers tenders of defense, in approximately forty pending cases alleging injury due to the diet drug combination of fenfluramine or dexfenfluramine and phentermine. All of the cases are pending in the state courts of Alabama, California, Idaho, Michigan, New Mexico and New York. The Company has tendered the cases to the manufacturers of the drugs and is currently defending the cases pending resolution of its negotiations with the manufacturers. Certain subsidiaries of the Company (i.e. MGM and RedLine, collectively, the "Subsidiaries") are defendants in approximately forty cases in which plaintiffs claim that they were injured due to exposure, over many years, to the latex proteins in gloves manufactured by numerous manufacturers and distributed by a number of distributors, including the Subsidiaries. Efforts to resolve tenders of defense to their suppliers are continuing. The Subsidiaries' insurers are providing coverage for these cases, subject to the applicable deductibles. There are six state court class actions in New York, Ohio, Oklahoma, Pennsylvania, South Carolina and Texas filed against MGM on behalf of all health care workers in those states who suffered accidental needle sticks that exposed them to potentially contaminated bodily fluids, arising from MGM's distribution of allegedly defective syringes. MGM's suppliers of the syringes are also named defendants in these actions. All cases except the Texas case are in the early stages of discovery. The Texas court held a class certification hearing on June 1, 1999, and stayed its ruling on certification pending a decision from the Texas Supreme Court on the issue of whether a products liability class action is proper where issues of comparative fault exist. These cases have been tendered to MGM's suppliers, their insurers, and to MGM's insurer. The Company has filed a declaratory relief action in California against its major supplier's insurer to obtain a determination of rights as an additional insured under the supplier's insurance policy. Salomon Smith Barney ("SSB") filed an action against McKesson and HBOC on December 9, 1998 in federal district court in New York City claiming entitlement to $50 million in fees in connection with the January 12, 1999 merger of the two companies. SSB has sued on the theories of breach of contract, quantum meruit and unjust enrichment; it has also sued HBOC for tortious interference with contract, tortious interference with business relations, and prima facie tort. It also seeks compensatory damages from HBOC for tortiously interfering with its contract and relations with McKesson. SSB also seeks a judgment requiring defendants to 14 indemnify SSB pursuant to the contracts. On May 12, 1999 defendants' motions to stay the action were denied; the Company's motion to dismiss was denied, and HBOC's motion to dismiss was partially granted as to some of the tort claims against it. On June 21, 1999, defendants filed their answer and counterclaims against SSB for violations of Section 10(b) of the Securities Exchange Act of 1934; breach of fiduciary duty; negligence; breach of contract; misappropriation of trade secrets; and rescission and restitution. Trial is scheduled for October 1999. Primarily as a result of the operation of its former chemical businesses, which were divested in fiscal 1987, the Company is involved in various matters pursuant to environmental laws and regulations: The Company has received claims and demands from governmental agencies relating to investigative and remedial action purportedly required to address environmental conditions alleged to exist at five sites where the Company (or entities acquired by the Company) formerly conducted operations; and the Company, by administrative order or otherwise, has agreed to take certain actions at those sites, including soil and groundwater remediation. The current estimate (determined by the Company's environmental staff, in consultation with outside environmental specialists and counsel) of the upper limit of the Company's range of reasonably possible remediation costs for these five sites is approximately $17 million, net of approximately $3.5 million which third parties have agreed to pay in settlement or which the Company expects, based either on agreements or nonrefundable contributions which are ongoing, to be contributed by third parties. The $17 million is expected to be paid out between April 1999 and March 2028 and is included in the Company's recorded environmental liabilities at March 31, 1999. In addition, the Company has been designated as a potentially responsible party (PRP) by the U.S. Environmental Protection Agency under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended (the "Superfund" law), for environmental assessment and cleanup costs as the result of the Company's alleged disposal of hazardous substances at 19 Superfund sites. With respect to each of these Superfund sites, numerous other PRP's have similarly been designated and, while the current state of the law potentially imposes joint and several liability upon PRPs, as a practical matter costs of these sites are typically shared with other PRPs. The Company's estimated liability at those 19 Superfund sites is approximately $2 million. The aggregate settlements and costs paid by the Company in Superfund matters to date has not been significant. The $2 million is included in the Company's recorded environmental liabilities at March 31, 1999. The potential costs to the Company related to environmental matters is uncertain due to such factors as: the unknown magnitude of possible pollution and cleanup costs; the complexity and evolving nature of governmental laws and regulations and their interpretations; the timing, varying costs and effectiveness of alternate cleanup technologies; the determination of the Company's liability in proportion to other PRPs; and the extent, if any, to which such costs are recoverable from insurance or other parties. Except as specifically stated above with respect to the litigation matters arising from the Company's restatement of previously reported amounts for HBOC, management believes, based on current knowledge and the advice of the Company's counsel, that the outcome of the litigation and governmental proceedings discussed in this Item 3 will not have a material adverse effect on the Company's financial position, results of operations or cash flows. Item 4. Submission of Matters to a Vote of Security Holders A special meeting of the Company's stockholders was held on January 12, 1999, to consider and vote upon a proposal to approve the merger agreement between McKesson and HBOC and the transactions contemplated by the Agreement, including the issuance of Company stock to effect the merger and the change of the Company's name to "McKesson HBOC, Inc." The proposal was approved by the following vote of the Company's stockholders:
Votes For Votes Against Votes Withheld --------- ------------- -------------- 75,956,677 3,357,587 460,719
15 Executive Officers of the Registrant The following table sets forth information concerning the executive officers of the Registrant as of July 14, 1999. The number of years of service with the Company includes service with predecessor companies (including McKesson). There are no family relationships between any of the executive officers or directors of the Registrant. The executive officers are chosen annually to serve until the first meeting of the Board of Directors following the next annual meeting of stockholders and until their successors are elected and have been qualified, or until death, resignation or removal, whichever is sooner.
Name Age Position with Registrant and Business Experience ---- --- ------------------------------------------------ John H. Hammergren............... 40 Co-President and Co-Chief Executive Officer effective July 15, 1999 and a director effective July 12, 1999. Formerly Executive Vice President, President and Chief Executive Officer, Supply Management Business (January- June 1999); Group President, McKesson Health Systems Group (1997-1999) and Vice President since 1996. President, Medical/Surgical Division, Kendall Healthcare Products Company (1993-1996). Service with the Company--3 years. David L. Mahoney................. 45 Co-President and Co-Chief Executive Officer effective July 15, 1999 and a director effective July 12, 1999. Formerly Executive Vice President, President and Chief Executive Officer, Pharmaceutical Services Business (January-June 1999); Vice President since 1990; Group President, Pharmaceutical Services and International Group (1997-1999); President, Pharmaceutical and Retail Services (1996-1997); President, Pharmaceutical Services Group (December 1995-August 1996); President, Health Care Delivery Systems, Inc., subsidiary (1994-1995). Service with the Company--9 years. Heidi E. Yodowitz................ 45 Acting Chief Financial Officer since June 18, 1999. Senior Vice President since January 1999 and Controller since 1996. Formerly Staff Vice President, Planning & Analysis (1995-1996); Assistant Controller (1990-1994). Service with the Company--9 years. Ivan D. Meyerson................. 54 Corporate Secretary since April 1, 1999 and Senior Vice President and General Counsel since January 1999; Vice President and General Counsel (1987-January 1999). Service with the Company--21 years.
16 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters (a) Market Information The principal market on which the Company's common stock is traded is the New York Stock Exchange. The Company's stock is also traded on the Pacific Exchange, Inc. High and low prices for the common stock by quarter are included in Financial Note 20 to the consolidated financial statements, "Quarterly Financial Information (Unaudited)," appearing on page F-77 of this Annual Report on Form 10-K. (b) Holders The number of record holders of the Company's common stock at June 30, 1999 was approximately 17,500. (c) Dividends Dividend information is included in Financial Note 20 to the consolidated financial statements, "Quarterly Financial Information (Unaudited)," appearing on page F-77 to this Annual Report on Form 10-K. (d) Other Information On August 3, 1998, the Company issued 2,022,711 shares of common stock to former shareholders of Hawk Medical Supply, Inc. ("Hawk"), a privately held company, in connection with the Company's acquisition of Hawk. The former shareholders of Hawk were limited in number and were either accredited investors or otherwise sophisticated investors. The shares were issued pursuant to the exemption from the registration requirements of the Securities Act of 1933, as amended (the "Act"), provided by Section 4(2) of the Act. On September 23, 1998, the Company issued 1,396,079 shares of common stock to the former shareholders of APS, a privately held company, in connection with the Company's acquisition of APS. The former shareholders of APS were limited in number and were either accredited investors or otherwise sophisticated investors. The shares were issued pursuant to the exemption from the registration requirements of the Act provided by Section 4(2) of the Act. Item 6. Selected Financial Data Selected financial data is presented in the Six-Year Highlights on pages F-2 to F-4 of this Annual Report on Form 10-K. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion and analysis of the Company's financial condition and results of operations is presented in the Financial Review on pages F-5 to F-28 of this Annual Report on Form 10-K. Item 7A. Quantitative and Qualitative Disclosures about Market Risk Information required by this item is included in the Financial Review on page F-23 of this Annual Report on Form 10-K. Item 8. Financial Statements and Supplementary Data Financial Statements and Supplementary Data appear on pages F-31 to F-77 of this Annual Report on Form 10-K. Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure None 17 PART III Item 10. Directors and Executive Officers of the Registrant Information with respect to Directors of the Company is incorporated by reference from the Company's 1999 Proxy Statement (the "Proxy Statement"). Certain information relating to Executive Officers of the Company appears page 16 of this Annual Report on Form 10-K. The information with respect to this item required by Item 405 of Regulation S-K is incorporated herein by reference from the Company's Proxy Statement. Item 11. Executive Compensation Information with respect to this item is incorporated herein by reference from the Company's Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management Information with respect to this item is incorporated herein by reference from the Company's Proxy Statement. Item 13. Certain Relationships and Related Transactions Information with respect to certain transactions with management is incorporated by reference from the Company's Proxy Statement. PART IV Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K (a) Financial Statements, Financial Statement Schedule and Exhibits
Page ---- (1) Consolidated Financial Statements and Independent Auditors' Reports: See "Index to Consolidated Financial Statements"............... F-1 (2) Supplementary Consolidated Financial Statement Schedule-- Valuation and Qualifying Accounts.............................. 21 Financial statements and schedules not included have been omitted because of the absence of conditions under which they are required or because the required information, where material, is shown in the financial statements, financial notes or supplementary financial information. (3) Exhibits: Exhibits submitted with this Annual Report on Form 10-K as filed with the SEC and those incorporated by reference to other filings are listed on the Exhibit Index........................ 22
(b) Reports on Form 8-K The following reports on Form 8-K were filed during the three months ended March 31, 1999: Form 8-K Date of Report: January 14, 1999 Date Filed: January 14, 1999 18 Item 2. Acquisition or disposition of assets The Registrant reported the completion of its acquisition of HBO & Company pursuant to the Agreement and Plan of Merger dated October 17, 1998, as amended. Item 5. Other events The Registrant reported the completion of certain actions, including the change of the Company's name from "McKesson Corporation" to "McKesson HBOC, Inc.," and amendment of the By-Laws pursuant to the terms of the Merger agreement. The Registrant also reported the resignation of each of Mary G.F. Bitterman, John M. Pietruski, David S. Pottruck and Robert H. Waterman, Jr. as a director of McKesson and of Alan Seelenfreund as Chairman of the Board of Directors, and, the election of Alfred C. Eckert III, Alton F. Irby III, Gerald E. Mayo and James V. Napier as Directors, and the election of Charles W. McCall to serve as Chairman of the Board of Directors. Form 8-K Date of Report: January 27, 1999 Date Filed: January 27, 1999 Item 5. Other events The Registrant filed certain information regarding the Company including a copy of the Registrant's press release of January 25, 1999 announcing its financial results for the third fiscal quarter ended December 31, 1998. The Registrant also filed certain consolidated financial information of HBOC for the quarter ended December 31, 1998 for purposes of satisfying the requirements of ASR 135 for the benefit of certain former shareholders of IMNET Systems, Inc. IMNET was acquired by HBOC in October 1998 in a transaction accounted for as a pooling of interests. 19 SIGNATURES Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. McKesson HBOC, Inc. Dated, July 14, 1999 /s/ Heidi E. Yodowitz By __________________________________ Heidi E. Yodowitz Senior Vice President and Controllerand Acting Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on July 14, 1999 by the following persons on behalf of the Registrant and in the capacities indicated: * - ------------------------------------- John H. Hammergren Co-President and Co-Chief Executive Officer Elect and Director (Principal Executive Officer) * - ------------------------------------- David L. Mahoney Co-President and Co-Chief Executive Officer Elect and Director (Principal Executive Officer) * - ------------------------------------- Heidi E. Yodowitz Senior Vice President and Controller and Acting Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) * - ------------------------------------- Alfred C. Eckert III, Director * - ------------------------------------- Tully M. Friedman, Director * - ------------------------------------- Alton F. Irby III, Director * - ------------------------------------- Christine Jacobs, Director * - ------------------------------------- Gerald E. Mayo, Director - ------------------------------------- Charles W. McCall, Director * - ------------------------------------- James V. Napier, Director * - ------------------------------------- David Pottruck, Director - ------------------------------------- Mark A Pulido, Director * - ------------------------------------- Carl E. Reichardt, Director * - ------------------------------------- Alan Seelenfreund, Director Chairman of the Board * - ------------------------------------- Jane E. Shaw, Director /s/ Ivan D. Meyerson - ------------------------------------- Ivan D. Meyerson *Attorney-in-Fact Dated: July 14, 1999 20 Schedule II McKESSON HBOC, INC.--SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENT SCHEDULE VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997 (in millions)
Column A Column B Column C Column D Column E -------- ------------ ---------------------- ------------- ---------- Additions ---------------------- Balance at Charged to Charged to Balance at Beginning of Costs and Other End of Description Period Expenses Accounts Deductions(1) Period(2) ----------- ------------ ---------- ---------- ------------- ---------- Amounts deducted from assets to which they apply: Year Ended March 31, 1999 Allowances for doubtful accounts receivable... $54.7 $87.3(3) $16.3 $(17.0) $141.3 Other reserves......... 29.8 11.1 -- (0.1) 40.8 ----- ----- ----- ------ ------ $84.5 $98.4 $16.3 $(17.1) $182.1 ===== ===== ===== ====== ====== Year Ended March 31, 1998 Allowances for doubtful accounts receivable... $38.4 $17.0 $ -- $ (0.7) $ 54.7 Other reserves......... 22.8 20.1 -- (13.1) 29.8 ----- ----- ----- ------ ------ $61.2 $37.1 $ -- $(13.8) $ 84.5 ===== ===== ===== ====== ====== Year Ended March 31, 1997 Allowances for doubtful accounts receivable... $35.9 $28.5(4) $ -- $(26.0) $ 38.4 Other reserves......... 15.2 18.6 -- (11.0) 22.8 ----- ----- ----- ------ ------ $51.1 $47.1 $ -- $(37.0) $ 61.2 ===== ===== ===== ====== ======
Notes: 1999 1998 1997 - ------ ------ ----- ----- (1)Deductions: Written off................................................ $ 17.1 $13.6 $37.0 Credited to other accounts................................. -- 0.2 -- ------ ----- ----- Total...................................................... $ 17.1 $13.8 $37.0 ====== ===== ===== (2)Amounts shown as deductions from: Current receivables........................................ $181.5 $83.7 $60.4 Notes receivable........................................... 0.6 0.8 0.8 ------ ----- ----- Total...................................................... $182.1 $84.5 $61.2 ====== ===== =====
(3) Includes charge of $70 million for receivable reserves for the Health Care Information Technology segment related to exposures for bad debts, disputed amounts and customer allowances. (4) Includes charges of $15.1 million for receivables related to management's reevaluation of the U.S. Health Care Supply Management business estimated exposures for bad debts, disputed amounts, customer allowances and rebates. 21 EXHIBIT INDEX
Exhibit Number Description ------- ----------- 2.1 Agreement and Plan of Merger, dated as of October 17, 1998, by and among McKesson Corporation ("McKesson"), McKesson Merger Sub, Inc. ("Merger Sub") and HBO & Company ("HBOC") (Exhibit 2.1 (1)). 2.2 Amendment Agreement to Agreement and Plan of Merger, dated as of November 9, 1998, by and among McKesson, Merger Sub and HBOC (Exhibit 2.2 (1)). 2.3 Second Amendment Agreement to that certain Agreement and Plan of Merger dated October 17, 1998, as amended by an Amendment Agreement dated as of November 9, 1998 (Exhibit 2.1 (2)). 3.1 Restated Certificate of Incorporation of the Company as filed with the office of the Delaware Secretary of State on July 30, 1998 (Exhibit 3.2 (3)). 3.2 Certificate of Amendment to the Restated Certificate of Incorporation of Registrant as filed with the office of the Delaware Secretary of State on January 12, 1999 (Exhibit 4.3 (4)). 3.3 Restated By-Laws of the Company, as amended through April 26, 1999. 3.4 Amendment to Restated By-Laws of the Company dated April 26, 1999. 4.1 Rights Agreement dated as of October 21, 1994 between McKesson and First Chicago Trust Company of New York, as Rights Agent (the "Rights Agreement") (Exhibit 4.1 (5)). 4.2 Amendment No. 1 to the Rights Agreement dated October 19, 1998 (Exhibit 99.1 (6)). 4.3 Indenture, dated as of March 11, 1997, by and between McKesson, as Issuer, and The First National Bank of Chicago, as Trustee (Exhibit 4.4 (7)). 4.4 Amended and Restated Declaration of Trust of McKesson Financing Trust, dated as of February 20, 1997, among McKesson, as Sponsor, The First National Bank of Chicago, as Institutional Trustee, First Chicago Delaware, Inc., as Delaware Trustee and William A. Armstrong, Ivan D. Meyerson and Nancy A. Miller, as Regular Trustees (Exhibit 4.2 (8)). 4.5 McKesson Corporation Preferred Securities Guarantee Agreement, dated as of February 20, 1997, between McKesson, as Guarantor, and The First National Bank of Chicago, as Preferred Guarantor (Exhibit 4.7 (9)). 4.6 Registrant agrees to furnish to the Commission upon request a copy of each instrument defining the rights of security holders with respect to issues of long-term debt of the Registrant, the authorized principal amount of which does not exceed 10% of the total assets of the Registrant. 10.1* Form of Employment Agreement, dated as of March 31, 1999, by and between the Company and certain designated Executive Officers. 10.2* Employment Agreement, dated as of March 31, 1999, by and between the Company and a former Executive Vice President who was also the President and Chief Executive Officer of the Company's Information Technology Business. 10.3* Amended and Restated Employment Agreement, dated March 26, 1999, by and between the Company and its former President and Chief Executive Officer. 10.4* Form of Termination Agreement by and between the Company and certain designated Corporate Officers (Exhibit 10.23 (10)). 10.5* McKesson HBOC, Inc. 1994 Stock Option and Restricted Stock Plan (as amended through January 27, 1999). 10.6* McKesson HBOC, Inc. 1997 Non-Employee Directors' Equity Compensation and Deferral Plan, as amended through January 27, 1999.
22
Exhibit Number Description ------- ----------- 10.7* McKesson HBOC, Inc. Supplemental PSIP. 10.8* McKesson HBOC, Inc. Deferred Compensation Administration Plan amended as of January 27, 1999. 10.9* McKesson HBOC, Inc. Deferred Compensation Administration Plan II, as amended effective January 27, 1999. 10.10* McKesson HBOC, Inc. 1994 Option Gain Deferral Plan, as amended effective January 27, 1999. 10.11* McKesson HBOC, Inc. Directors' Deferred Compensation Plan, as amended effective January 27, 1999. 10.12* McKesson HBOC, Inc. 1985 Executives' Elective Deferred Compensation Plan, amended as of January 27, 1999. 10.13* McKesson HBOC, Inc. Management Deferred Compensation Plan, amended as of January 27, 1999. 10.14* McKesson HBOC, Inc. 1984 Executive Benefit Retirement Plan, as amended through January 27, 1999. 10.15* McKesson HBOC, Inc. 1988 Executive Survivor Benefits Plan, as amended effective January 27, 1999. 10.16* McKesson HBOC, Inc. Executive Medical Plan Summary. 10.17* McKesson HBOC, Inc. Severance Policy for Executive Employees (as amended through January 27, 1999). 10.18* McKesson HBOC, Inc. 1989 Management Incentive Plan, as amended through January 27, 1999. 10.19* McKesson HBOC, Inc. Long-Term Incentive Plan, as amended through January 27, 1999. 10.20* McKesson HBOC, Inc. Stock Purchase Plan, as amended through January 27, 1999. 10.21* McKesson HBOC, Inc. 1999 Executive Stock Purchase Plan (Exhibit 99.1 (11)). 10.22* Form of Consulting Agreement, dated as of March 28, 1997, by and between McKesson and its former Chairman and retired Chief Executive Officer (Exhibit 10.32 (7)). 10.23* Amendment No. 1 to Consulting Agreement, entered into as of March 25, 1998, by and between McKesson and its Chairman and retired Chief Executive Officer (Exhibit 10.1(3)). 10.24* HBO & Company 1990 Executive Incentive Plan (Exhibit 4 (12) and Exhibit 4(a) (12)). 10.25* HBO & Company 1993 Stock Option Plan for Nonemployee Directors (Exhibit 4 (13)). 10.26* HBO & Company Omnibus Stock Incentive Plan (Exhibit 4 (14)). 10.27* McKesson HBOC, Inc. 1998 Employee Stock Purchase Plan (as amended and restated effective January 12, 1999 (Exhibit 99.25 (4)). 10.28* Statement of Terms and Conditions Applicable to Certain Stock Options Granted on January 27, 1999. 10.29 Credit Agreement dated as of November 10, 1998 among McKesson, Medis Health and Pharmaceutical Services Inc., an Ontario corporation and indirect wholly owned subsidiary of McKesson, Bank of America National Trust and Savings Association, as Agent, Bank of America Canada, as Canadian Administrative Agent, The Chase Manhattan Bank, as documentation agent, First Union National Bank, as documentation agent, The First National Bank of Chicago, as documentation agent, and the other financial institutions party thereto. 10.30 Stock Option Agreement, dated October 17, 1998, between McKesson and HBOC (Exhibit 99.1 (1)). 10.31 Stock Option Agreement, dated October 17, 1998, between HBOC and McKesson (Exhibit 99.2 (1)).
23
Exhibit Number Description ------- ----------- *** 21 List of Subsidiaries of the Company. 23.1 Consent of Deloitte & Touche LLP. 23.2 Consent of Arthur Andersen LLP. 24 Power of Attorney. 27.1 Financial Data Schedule. 27.2 Financial Data Schedule. 27.3 Financial Data Schedule. 99.1 Registration Rights Agreement dated as of June 22, 1998 by McKesson and the other undersigned parties thereto (Exhibit 10.1(15)). 99.2 Registration Rights Agreement dated as of August 27, 1998, by McKesson and the other undersigned parties thereto. 99.3 Annual Report on Form 11-K for HBO & Company Profit-Sharing and Savings Plan.
- -------- Footnotes to Exhibit Index: * Denotes management contract or compensatory plan, contract or arrangement. (1) Incorporated by reference to designated exhibit to Amendment No. 1 to McKesson's Form S-4 Registration Statement No. 333-67299 filed on November 27, 1998. (2) Incorporated by reference to designated exhibit to the Company's Current Report on Form 8-K dated January 14, 1999. (3) Incorporated by reference to designated exhibit to McKesson's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. (4) Incorporated by reference to designated exhibit to the Company's Form S-8 Registration Statement No. 333-70501 filed on January 12, 1999. (5) Incorporated by reference to designated exhibit to Amendment No. 3 to McKesson's Registration Statement on Form 10 filed on October 27, 1994. (6) Incorporated by reference to designated exhibit to McKesson's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. (7) Incorporated by reference to designated exhibit to McKesson's Annual Report on Form 10-K for the fiscal year ended March 31, 1997. (8) Incorporated by reference to designated exhibit to Amendment No. 1 to McKesson's Form S-3 Registration Statement No. 333-26433 filed on June 18, 1997. (9) Incorporated by reference to designated exhibit to McKesson's Form S-3 Registration Statement No. 333-26433 filed on May 2, 1997. (10) Incorporated by reference to designate exhibit to McKesson's Annual Report on Form 10-K for the fiscal year ended March 31, 1995. (11) Incorporated by reference to designated exhibit to the Company's Form S-8 Registration Statement No. 333-71917 filed on February 5, 1999. (12) Incorporated by reference to designated exhibits to HBOC's Form S-8 Registration Statement No. 33-82962 filed on August 1, 1994 and its Form S-8 Registration Statement No. 333-05759 filed on June 12, 1996. (13) Incorporated by reference to designated exhibit to HBOC's Form S-8 Registration Statement No. 33-67300 filed on August 12, 1993. (14) Incorporated by reference to designated exhibit to HBOC's Form S-8 Registration Statement No. 333-26885 filed on May 12, 1997. (15) Incorporated by reference to designated exhibit to McKesson's Form S-3 Registration Statement No. 333-66359 filed on October 30, 1998. 24 CONSOLIDATED FINANCIAL INFORMATION CONTENTS
Page ---- Six-Year Highlights....................................................... F-2 Financial Review.......................................................... F-5 Consolidated Financial Statements Independent Auditors' Report............................................ F-29 Report of Independent Public Accountants................................ F-30 Statements of Consolidated Income for the years ended March 31, 1999, 1998 and 1997.......................................................... F-31 Consolidated Balance Sheets, March 31, 1999, 1998 and 1997.............. F-32 Statements of Consolidated Stockholders' Equity for the years ended March 31, 1999, 1998 and 1997.......................................................... F-34 Statements of Consolidated Cash Flows for the years ended March 31, 1999, 1998 and 1997.................................................... F-36 Financial Notes......................................................... F-37
F-1 SIX-YEAR HIGHLIGHTS CONSOLIDATED OPERATIONS
Years Ended March 31 ----------------------------------------------------------------------------------- 1999 1998 1997(1) 1996 1995 1994 --------- --------- --------- --------- --------- --------- (dollars in millions except per share amounts) Revenues................. $30,382.3 $22,419.3 $16,914.3 $13,804.0 $12,948.5 $11,826.5 Percent change.......... 35.5 % 32.5% 22.5% 6.6 % 9.5 % 7.2 % Gross profit(2).......... 2,665.6 (2) 2,393.4 1,711.0 1,358.6 1,130.0 (2) 1,046.7 Percent of revenues..... 8.8 % 10.7% 10.1% 9.8 % 8.7 % 8.9 % Operating profit......... 356.3 (3) 632.5(4) 252.6(5) 199.7 (6) 128.2 (7) 240.7 Percent of revenues..... 1.2 % 2.8% 1.5% 1.4 % 1.0 % 2.0 % Operating profit excluding unusual items(8)................ 764.8 728.6 481.1 339.7 266.5 240.7 Percent of revenues..... 2.5 % 3.2% 2.8% 2.5 % 2.1 % 2.0 % EBIT(9)(21).............. 304.6 (3) 584.8(4) 209.8(5) 164.2 (6) 15.5 (10) 190.6 (11) Percent of revenues..... 1.0 % 2.6% 1.2% 1.2 % 0.1 % 1.6 % EBIT(9)(21) excluding unusual items(8)........ 713.1 680.9 438.3 304.2 228.2 204.0 Percent of revenues..... 2.3 % 3.0% 2.6% 2.2 % 1.8 % 1.7 % Interest expense-net of corporate interest income.................. 96.4 78.4 38.6 11.8 31.1 34.5 Income (loss) before income taxes............ 208.2 (3) 506.4(4) 171.2(5) 152.4 (6) $ (15.6)(10) 156.1 (11) Income taxes............. 117.1 195.6(12) 87.2 57.9 109.1 (13) 60.7 Effective tax rate....... 56.2 % 38.6% 50.9% 38.0 % -- 38.9 % Dividends on preferred securities of subsidiary trust, net of tax benefit................. 6.2 6.2 0.7 -- -- -- Income (loss) after taxes Continuing operations... 84.9 (3) 304.6(4) 83.3(5) 94.4 (6) (124.8)(10,13) 95.3 (11) Discontinued operations............. -- -- 128.8(14) 14.7 554.6 (15) 87.8 (16) Extraordinary item...... -- -- -- -- -- (4.1) Cumulative effect of accounting change...... -- -- -- -- -- (16.7) Net income............... 84.9 304.6 212.1 109.1 429.8 162.3 Percent change.......... (72.1)% 43.6% 94.4% (74.6)% 164.8 % 11.5 % Average stockholders' equity.................. 2,772.0 2,273.8 1,690.9 1,093.9 841.7 639.4 Return on equity(17).... 3.1 % 13.4% 12.5% 10.0 % 51.1 % 25.4 % Depreciation and amortization of intangibles............. 173.4 148.7 124.7 104.0 84.1 72.1 EBITA(18)(21)............ 346.6 619.7 234.2 184.3 27.9 200.5 Average committed capital(19)............. 3,026.8 2,230.7 1,541.7 843.5 972.2 917.3 Return on committed capital(20)............. 11.5 % 27.8% 15.2% 21.8 % 2.9 % 21.9 % Return on committed capital excluding unusual items(8,20)..... 24.9 % 32.1% 30.0% 38.4 % 24.7 % 23.3% Common dividends declared................ 84.9 62.0 52.1 45.5 57.2 67.5 Diluted earnings (loss) per common share Continuing operations... $ 0.31 $ 1.10 $ 0.32 $ 0.36 $ (0.56) $ 0.39 Discontinued operations............. -- -- 0.48 0.06 2.40 0.39 Extraordinary item...... -- -- -- -- (0.02) Cumulative effect of accounting change...... -- -- -- -- (0.07) Total................... 0.31 1.10 0.80 0.42 1.84 0.69
- -------- (1) Includes the results of the FoxMeyer Corporation pharmaceutical distribution business ("FoxMeyer") from the acquisition date of November 8, 1996 and of McKesson General Medical Corp. from the acquisition date of February 21, 1997. (2) Revenues less cost of sales; fiscal 1999 and 1995 include $1.2 million and $35.9 million, respectively, of Health Care Supply Management charges for restructuring, asset impairments and other operating items representing 0.004% and 0.3% of 1999 and 1995 revenues, respectively. (3) Includes $180.3 million of Health Care Supply Management, $215.6 million of Health Care Information Technology and $12.6 million of Water Products segment charges for transaction costs, costs associated with employee benefits, primarily related to the change of control provisions, employee severance, asset impairment write-downs, restructuring, integration and affiliation costs incurred, and system installation costs associated primarily with acquisitions, 1.3% of revenues in the aggregate, $293.9 million after-tax. (4) Includes $16.7 million of Health Care Supply Management segment charges for the terminated merger with AmeriSource Health Corporation ("AmeriSource") and $13.9 million in costs associated primarily with the integration and rationalization of recent acquisitions; and, $65.5 million of Health Care Information Technology segment acquisition charges related to the acquisitions of AMISYS Managed Care Systems, Inc., Enterprise Systems, Inc., HPR Inc. and National Health Enhancement Systems, Inc. and the merger of Access Health, Inc. and Informed Access Systems, Inc., 0.4% of revenues in the aggregate, $65.3 million after- tax. (footnotes continued on following page) F-2 (5) Includes Health Care Supply Management and Water Products segment charges of $98.8 million for restructuring, asset impairment and other operating items and $48.2 million for the write-off of purchased in-process technology related to the acquisition of Automated Healthcare, Inc. and, Health Care Information Technology segment charges of $81.5 million related to the acquisition of CyCare Systems, Inc., Management Software, Inc. and GMIS Inc. and the merger of Access Health, Inc. and Informed Access Systems Inc., 1.4% of revenues in the aggregate; $161.2 million after-tax. (6) Includes Health Care Information Technology segment charges of $116.4 million for asset write-offs, $19.0 million for acquisition-related severance and $4.6 million in product related write-offs, 1.0% of revenues in the aggregate, $84.2 million after-tax. (7) Includes $124.6 million of Health Care Supply Management and Water Products segment charges for restructuring, asset impairments and other operating items and, $13.7 million of Health Care Information Technology segment charges for acquisition-related activities and severance costs, 1.1% of revenues, in the aggregate. (8) Unusual items include those which management believes are either one-time occurrences and/or events which are not related to normal, on-going operations or represent charges that are in excess of normal/historical amounts. See Notes 2, 3, 4, 5, 6, 7, 10, 11, 12 and 13. (9) Income (loss) from continuing operations before interest expense-net of corporate interest income, taxes and dividends on preferred securities of subsidiary trust. (10) Includes $124.6 million of Health Care Supply Management and Water Products segment charges for restructuring, asset impairments and other operating items, $13.7 million of Health Care Information Technology segment charges for acquisition-related activities and severance costs, $74.3 million of Corporate expenses for compensation costs associated with the sale of the Company's pharmaceutical benefit management business ("PCS") and charges for restructuring, asset impairment and other operating items representing 1.6% of revenues in the aggregate, $138.8 million after-tax. (11) Includes a loss on the termination of interest rate swap arrangements of $13.4 million, $8.2 million after-tax. (12) Includes a $4.6 million favorable tax adjustment. (13) Includes $107.0 million of income tax expense related to the sale of PCS. (14) Includes gain on sale of Armor All Products Corporation ("Armor All") of $120.2 million after-tax. (15) Includes gain on sale of PCS of $576.7 million after-tax, write-down of the Company's investment in Millbrook Distribution Services, Inc. ("Millbrook") of $72.8 million after-tax, and $1.0 million of income after-tax from a donation of Armor All stock. (16) Includes $32.7 million after-tax relating to a gain on the sale and donation of Armor All stock. (17) Based on net income. (18) Earnings before interest expense-net of corporate interest income, income taxes and amortization of intangibles. (19) Capital employed less cash and cash equivalents, marketable securities and intangibles. (20) Earnings before interest expense-net of corporate interest income, income taxes and amortization of intangibles divided by average committed capital (capital employed less cash and cash equivalents, marketable securities and intangibles). (21) EBITA and EBIT are not intended to represent cash flow from operations, or alternatives to net income, each as defined by generally accepted accounting principles. In addition, the measures of EBITA and EBIT presented herein may not be comparable to other similarly titled measures used by other companies. The Company believes that EBITA and EBIT are standard measures commonly reported and widely used by analysts, investors and other interested parties operating in the Company's industries. Accordingly, this information has been disclosed herein to permit a more complete comparative analysis of the Company's operating performance relative to other companies in similar industries. F-3 SIX YEAR HIGHLIGHTS CONSOLIDATED FINANCIAL POSITION
Years Ended March 31 ------------------------------------------------------------- 1999 1998 1997(1) 1996 1995 1994 -------- -------- -------- -------- -------- -------- (in millions except per share amounts) ------------------------------------------------------------- Customer receivables.... $2,322.0 $1,802.8 $1,477.4 $ 810.4 $ 887.0 $ 794.7 Days of sales(2)....... 27.5 28.9 25.9 21.1 24.9 24.2 Inventories............. 3,529.0 2,608.7 2,277.5 1,332.4 1,092.9 907.9 Days of sales(2)....... 45.8 46.9 44.5 38.5 33.3 30.3 Drafts and accounts payable................ 3,579.7 2,206.8 2,125.3 1,410.6 1,422.8 1,268.1 Days of sales(2)....... 46.5 39.7 41.5 40.8 43.3 42.3 Current assets.......... 6,499.5 5,357.1 4,612.6 3,013.4 2,932.1 1,912.4 Current liabilities..... 4,800.1 3,127.0 3,078.3 1,939.8 1,819.6 1,533.6 Working capital......... 1,699.4 2,230.1 1,534.3 1,073.6 1,112.5 378.8 Percent of revenues(2)........... 5.6% 9.9% 9.1 % 7.8% 8.7% 3.2% Property, plant and equipment--net......... 694.0 593.1 489.3 459.7 432.0 419.0 Percent of revenues(2)........... 2.3% 2.6% 2.9 % 3.3% 3.4% 3.5% Capital expenditures... 250.7 219.1 128.0 102.2 98.5 83.3 Total assets............ 9,081.6 7,349.7 6,473.3 4,356.8 4,146.8 3,196.2 Total debt(3)........... 1,157.5 1,335.8 1,047.1 428.8 447.6 527.2 Trust convertible preferred securities... 195.6 195.4 194.8 -- -- -- Stockholders' equity.... 2,881.8 2,561.7 2,081.8 1,710.0 1,636.7 960.9 Capital employed(4)..... 4,234.9 4,092.9 3,323.7 2,138.5 2,084.3 1,488.1 Ratio of net debt to net capital employed(5)........... 22.4% 19.0% 16.4 % -- -- 28.8% Diluted shares.......... 289.8 282.1 265.2 243.8 231.1 228.4 Common shares outstanding at March 31..................... 280.6 271.0 259.0 246.1 224.5 213.1 Dividends per common share(6)............... 0.44 0.50 0.50 0.50 0.67 0.83 Cash distribution from the sale of PCS per common share........... -- -- -- -- 38.00(7) -- Book value per common share(8)............... 10.27 9.45 8.04 6.95 7.29 3.92 Market price High................... 96 1/4 61 3/4 34 1/8 27 13/16 54 5/8 34 1/4 Low.................... 52 1/4 31 1/2 20 9/16 18 5/8 15 1/16 19 5/16 At year end............ 66 57 3/4 32 25 5/8 20 3/16 29 3/4
- -------- (1) Includes the results of the FoxMeyer business from the acquisition date of November 8, 1996 and of McKesson General Medical Corp. from the acquisition date of February 21, 1997. (2) Based on year-end balances and sales or cost of sales assuming major acquisitions occurred at beginning of year. (3) Total debt includes all interest-bearing debt and capitalized lease obligations. (4) Capital employed consists of total debt, convertible preferred securities of subsidiary trust and stockholders' equity. (5) Ratio computed as net debt (total debt less cash and cash equivalents and marketable securities) to net capital employed (capital employed less cash and cash equivalents and marketable securities). (6) Dividends per common share amounts do not reflect the effects of poolings of interest transactions. (7) Received by stockholders directly from Eli Lilly and Company. (8) Stockholders' equity less preferred stock plus portion of ESOP notes and guarantee related to the Series B ESOP preferred stock divided by year-end common shares outstanding. F-4 FINANCIAL REVIEW GENERAL Management's discussion and analysis, referred to as the Financial Review, is intended to assist in the understanding and assessment of significant changes and trends related to the results of operations and financial condition of McKesson HBOC, Inc., together with its subsidiaries. This discussion and analysis should be read in conjunction with the Company's consolidated financial statements and accompanying Financial Notes. HBOC TRANSACTION On January 12, 1999, the Company, formerly McKesson Corporation ("McKesson"), completed a merger with HBO & Company ("HBOC"), a leading health care information technology company, by exchanging 177 million shares of Company common stock for all of the issued and outstanding shares of common stock of HBOC (the "HBOC Transaction"). Each share of HBOC was exchanged for 0.37 of a share of Company common stock. The Company was renamed McKesson HBOC, Inc. ("McKesson HBOC" or "the Company"). The merger was structured as a tax-free reorganization and was accounted for as a pooling of interests. The historical financial statements give retroactive effect to the HBOC Transaction and other acquisitions completed by McKesson and HBOC accounted for under the pooling of interests method. FACTORS AFFECTING FORWARD LOOKING STATEMENTS In addition to historical information, management's discussion and analysis includes certain forward-looking statements regarding events and financial trends which may affect the Company's future operating results and financial position. Such statements are subject to risks and uncertainties that could cause the Company's actual results and financial position to differ materially. Also, words such as "estimates", "expects", "anticipates", "plans", "believes" and similar expressions identify forward-looking statements involving risks and uncertainties. These include, but are not limited to: the resolution or outcome of the pending litigation and government investigations relating to the previously announced financial restatement (the "Pending Proceedings"); the Company's ability to successfully integrate and operate acquired businesses and the risks associated with such businesses, including the merger that created McKessonHBOC; the changing U.S. health care environment, including potential changes in private and governmental reimbursement for health care services, the method by which such services are delivered, legislation or regulations governing such services or mandated benefits, and changes in manufacturers' pricing or distribution policies; the ability of the Company's Health Care Information Technology business to retain existing customers and to attract new customers in light of rapid technological advances and changing business models, slowing of demand for software products because of Year 2000 concerns, and challenges in integrating the Company's software products; the effect of the Pending Proceedings on the Company's ability to manage its businesses and to attract and retain employees and management; and the Company's ability and the ability of the Company's vendors and customers to complete the necessary actions to achieve a Year 2000 conversion for computer systems and applications. These and other risks and uncertainties are described herein or in the Company's other public documents. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. BUSINESS SEGMENTS The Company conducts its operations through three operating business segments: Health Care Supply Management, Health Care Information Technology and Water Products. The Health Care Supply Management segment includes the Company's U.S. pharmaceutical, health care products and medical-surgical supplies distribution businesses. U.S. Health Care Supply Management operations also include marketing and other support services to pharmaceutical manufacturers, the manufacture and sale of automated pharmaceutical F-5 McKESSON HBOC, INC. FINANCIAL REVIEW--(Continued) dispensing systems for hospitals and retail pharmacists, consulting and outsourcing services to pharmacies, and distribution of first-aid products to industrial and commercial customers. Health Care Supply Management also includes the Company's international distribution operations (including operations in Canada and an equity interest in a Mexican distribution business). The Health Care Information Technology segment delivers enterprise-wide patient care, clinical, financial, managed care, payor and strategic management software solutions, as well as networking technologies, electronic commerce, outsourcing and other services to health care organizations throughout the U.S. and certain foreign countries. The Water Products segment is engaged in the processing, delivery and sale of bottled drinking water to homes and businesses and the sale of packaged water to retail stores. HBOC Restatements On April 28, 1999, the Company announced that during the course of its year- end audit process, the Company determined that certain software sales transactions at its Health Care Information Technology business were improperly recorded and had been reversed. The Audit Committee of the Company's Board of Directors subsequently initiated an investigation into such matters. As a result of the findings of the investigation and the year end internal and external audit process, the Company's consolidated financial statements reflect amounts for HBOC which have been restated from those previously reported by HBOC. The results of operations of HBOC have been restated for the quarters ended December 31, 1998, September 30, 1998 and June 30, 1998 and the fiscal years ended March 31, 1998 and 1997 to reflect corrections of accounting errors in the Company's Health Care Information Technology segment (formerly HBOC). See Financial Note 3 to the consolidated financial statements, and "Business--Matters Relating to Restatement of Financial Results". The operating results of the Company and its underlying business segments include business combinations that were accounted for as poolings of interests. Accordingly, all financial information gives retroactive effect to these business combinations as if all of the pooled companies operated as one entity for all periods presented. In addition, the Company and certain of its business segments also include businesses that were acquired and accounted for as purchases. The results of operations of purchased companies are included in the consolidated financial statements since their dates of acquisition. See Financial Note 4 to the consolidated financial statements. Acquisitions Fiscal Year 1999 Acquisitions In addition to the HBOC Transaction, the Company completed several acquisitions in fiscal 1999 in the Health Care Supply Management and Health Care Information Technology segments accounted for under the pooling of interests method as follows: In August 1998, the Company acquired Hawk Medical Supply, Inc., a distributor of medical-surgical supplies, for approximately 2 million shares of Company common stock. Also, in August 1998, the Company acquired J. Knipper and Company, a provider of direct mail, fulfillment and sales support services, including sample distribution to physician and pharmaceutical company sales representatives, for approximately 300,000 shares of Company common stock. In September 1998, the Company acquired Automated Prescription Systems, Inc., a manufacturer of automated prescription filling and dispensing systems, for approximately 1.4 million shares of Company common stock. F-6 McKESSON HBOC, INC. FINANCIAL REVIEW--(Continued) In October 1998, the Company acquired US Servis, Inc., a professional management company that provides outsourcing services for physician delivery systems and hospital business offices, for approximately 1.9 million shares of HBOC common stock (equivalent to approximately 700,000 shares of Company common stock after application of the exchange ratio of 0.37 shares of Company common stock for each share of HBOC common stock (the "Exchange Ratio")). In October 1998, the Company completed the acquisition of IMNET Systems, Inc., a leading provider of electronic information and document management solutions for the health care industry, for approximately 9.6 million shares of HBOC common stock and 1.6 million HBOC stock options (equivalent to approximately 3.6 million shares of Company common stock and 0.6 million Company stock options after application of the Exchange Ratio). In December 1998, the Company acquired Access Health, Inc., a provider of clinically based care management programs and health care information services, for approximately 34.4 million shares of HBOC common stock (equivalent to approximately 12.7 million shares of Company common stock after application of the Exchange Ratio). Also in fiscal 1999, the Company's Water Products segment completed the acquisitions of Ephrata Diamond Spring Water Company and Keystone National Water Company for an aggregate of approximately 0.5 million shares of Company common stock. In fiscal 1999, the Company completed the acquisitions of the following companies in its Health Care Supply Management segment, each accounted for under the purchase method of accounting: In September 1998, the Company acquired MedManagement LLC ("MedManagement"), a pharmacy management, purchasing, consulting and information services company, for approximately $38 million in cash. The acquisition was funded with short-term borrowings. The excess of the purchase price over the fair value of the net assets acquired of $41 million is being amortized on a straight-line basis over 40 years. In November 1998, the Company acquired RedLine Health Care Corporation ("RedLine") a distributor of medical supplies and services to the extended- care industry, including long-term-care and home-care sites for approximately $233 million in cash. The acquisition was funded with short-term borrowings. The excess of the purchase price over the fair value of the net assets acquired of $149 million is being amortized on a straight-line basis over 40 years. Fiscal Year 1998 Acquisitions In fiscal 1998, the Company's Canadian Health Care Supply Management business, Medis Health and Pharmaceutical Services Inc. ("Medis"), announced an agreement with Drug Trading Company, Limited ("Drug Trading") to acquire Drug Trading's retail customers over a transition period. This transition began in August 1997 and was substantially completed by the end of the fiscal year. The acquisition was funded with proceeds from operations and short-term borrowings. In fiscal 1998, the Company also made several smaller acquisitions in the Health Care Supply Management segment. In October 1997, the Company acquired in its Health Care Information Technology segment AT&T's UK Specialist Health Care Services Division ("ATT- UK"), a provider of software solutions and remote processing services for financial and payroll needs of health care providers in the United Kingdom for approximately $30 million in cash. The Company allocated $7.7 million of the purchase price to in-process research and development projects as determined by an independent appraisal of the business, which was expensed as of the acquisition date. F-7 McKESSON HBOC, INC. FINANCIAL REVIEW--(Continued) The Drug Trading and ATT-UK acquisitions were accounted for under the purchase method of accounting. In fiscal 1998, the Company completed the acquisitions of the following companies in its Health Care Information Technology segment, all accounted for as poolings of interests: In June 1997, the Company acquired AMISYS Managed Care Systems, Inc. ("AMISYS"), a provider of managed care information systems for the payor market, for approximately 10.8 million shares of HBOC common stock (equivalent to approximately 4.0 million shares of Company common stock after application of the Exchange Ratio). Also in June 1997, the Company completed the acquisition of Enterprise Systems, Inc ("ESi"), a developer of resource management solutions including materials management, operating room logistics, scheduling and financial management, for approximately 15.2 million shares of HBOC common stock (equivalent to approximately 5.6 million shares of Company common stock after application of the Exchange Ratio). In December 1997, the Company completed the acquisition of HPR, Inc. ("HPR"), a provider of clinical information systems for the managed care industry for approximately 18.4 million shares of HBOC common stock (equivalent to approximately 6.8 million shares of Company common stock after application of the Exchange Ratio). Also in December 1997, the Company acquired National Health Enhancement Systems, Inc., ("NHES"), a provider of health information technology solutions specializing in demand and disease management products, for approximately 3.6 million shares of HBOC common stock (equivalent to approximately 1.3 million shares of Company common stock after application of the Exchange Ratio). Fiscal Year 1997 Acquisitions In fiscal 1997, the Company completed the acquisitions of the following businesses in its Health Care Supply Management segment, all accounted for under the purchase method of accounting: In April 1996, the Company acquired Automated Healthcare, Inc. ("MAH") for $61.4 million in cash and the assumption of $3.2 million of employee stock incentives. MAH designs, manufactures, sells, and installs automated pharmaceutical dispensing equipment for use by health care institutions. Goodwill relating to the acquisition of approximately $13.4 million is being amortized on a straight-line basis over ten years. A one-time charge of $48.2 million was recorded to write-off the portion of the purchase price allocated to technology for which technological feasibility had not been established as of the acquisition date. Existing technology was valued at $0.4 million and is being amortized on a straight-line basis over three years. In November 1996, the Company acquired FoxMeyer Corporation's pharmaceutical distribution business ("FoxMeyer") for approximately $598 million, pursuant to an expedited auction process in the FoxMeyer Corporation bankruptcy proceeding in Wilmington, Delaware. The Company paid approximately $23 million in cash to the debtors, paid off approximately $500 million in secured debt, and assumed an additional $75 million in other liabilities. The Company utilized proceeds from commercial paper issuances and a note payable to a bank to fund the transaction. The note payable was repaid prior to March 31, 1997, with cash flow from operations and proceeds from divestitures (see "Divestitures" section below). The Company acquired assets consisting primarily of accounts receivable and inventories of $650 million, customer contracts, and property and equipment. At the time of the acquisition, FoxMeyer was receiving very little trade credit from suppliers. Normal trade credit was restored subsequent to the acquisition resulting in a reduction in the investment associated with the retained FoxMeyer customer base to approximately $400 million at March 31, 1997. The excess of the fair value of the net assets acquired over the purchase price, after reducing to zero the carrying value of long-term assets which were expected to be retained for use by the Company, was approximately $30 million (negative goodwill). Negative goodwill is being amortized on a straight-line basis over a five-year period. F-8 McKESSON HBOC, INC. FINANCIAL REVIEW--(Continued) In February 1997, the Company acquired General Medical Corp. ("MGM"), a supplier of medical-surgical supplies to the full range of alternate-site health care facilities, including physicians and clinics, long-term care and home-care sites, and the third largest distributor of medical-surgical supplies to hospitals, for approximately $775 million, including the issuance of 5.6 million shares of Company common stock and the assumption of approximately $428 million in debt. The excess of the purchase price over the fair value of the net assets acquired was approximately $600 million and is being amortized on a straight-line basis over 40 years. In fiscal 1997, the Company completed the acquisitions of the following businesses in its Health Care Information Technology segment, all accounted for as poolings of interests: In August 1996, the Company acquired CyCare Systems, Inc. ("CyCare"), a provider of physician practice management software systems and electronic commerce services for medical group practices, faculty practice plans and medical enterprises for approximately 17.6 million shares of HBOC common stock (equivalent to approximately 6.5 million shares of Company common stock after application of the Exchange Ratio). In September 1996, the Company acquired Management Software, Inc. ("MSI"), a provider of software solutions for the home care industry, for approximately 3.4 million shares of HBOC common stock (equivalent to approximately 1.3 million shares of Company common stock after application of the Exchange Ratio). In December 1996, the Company acquired GMIS Inc., a developer of data quality and decision support software for the payor marketplace for approximately 14.8 million shares of HBOC common stock (equivalent to approximately 5.5 million shares of Company common stock after application of the Exchange Ratio). Divestitures: In December 1996, the Company sold its 55% equity interest in Armor All Products Corporation ("Armor All") for $221.9 million in cash and recognized an after-tax gain of $120.2 million. In March 1997, the Company sold its service merchandising unit, Millbrook Distribution Services, Inc. ("Millbrook"). The after-tax cash proceeds on the sale approximated Millbrook's book value. The Armor All and Millbrook segments are classified as discontinued operations in fiscal 1997. In March 1997, the Company sold its Aqua-Vend vended water business ("Aqua- Vend"), a unit of the Water Products segment for cash. The after-tax proceeds on the sale approximated its book value, after giving effect to the $7.0 million pre-tax provision recorded in the third quarter of fiscal 1997 for the impairment of certain Aqua-Vend assets. F-9 McKESSON HBOC, INC. FINANCIAL REVIEW--(Continued) Financial Results The results of continuing operations include the following:
Years Ended March 31 ------------------------------------------------------- 1999 1998 1997 ------------------ ----------------- ------------------ Pre- Pre-tax After-tax tax After-tax Pre-tax After-tax ------- --------- ------ --------- ------- --------- (in millions) Income from Continuing Operations Before unusual items and dividends on convertible preferred securities of subsidiary trust..... $ 616.7 $ 385.0 $602.5 $371.5 $ 399.7 $ 245.2 Dividends on convertible preferred securities of subsidiary trust..... (6.2) (6.2) (0.7) ------- ------- ------ ------ ------- ------- Before unusual items.. 616.7 378.8 602.5 365.3 399.7 244.5 Unusual items Health Care Supply Management........... (180.3) (112.9) (30.6) (25.4) (140.0) (105.2) Health Care Information Technology........... (215.6) (172.9) (65.5) (39.9) (81.5) (51.7) Water Products........ (12.6) (8.1) (7.0) (4.3) Favorable tax adjustment........... 4.6 ------- ------- ------ ------ ------- ------- Income from Continuing Operations............. $ 208.2 $ 84.9 $506.4 $304.6 $ 171.2 $ 83.3 ======= ======= ====== ====== ======= =======
Fiscal 1999 Fiscal 1999 income from continuing operations before unusual items, after the previously discussed HBOC restatements, was $378.8 million, a 4% increase over the prior year's income from continuing operations before unusual items of $365.3 million. Fiscal 1999 results reflect revenue and operating margin growth and the positive impact of acquisitions in the Health Care Supply Management segment offset, in part, by a decline in Health Care Information Technology segment operating results. Fiscal 1998 Fiscal 1998 income from continuing operations before unusual items, after the previously discussed HBOC restatements, was $365.3 million, a 49% increase over the prior year's income from continuing operations before unusual items of $244.5 million. Fiscal 1998 results reflect internal growth, operating margin expansion and the full-year effect of acquisitions accounted for as purchases made late in the prior fiscal year. Fiscal 1997 Fiscal 1997 income from continuing operations before unusual items, after the previously discussed HBOC restatements, was $244.5 million, a 36% increase from the prior year's income from continuing operations before unusual items of $180.0 million. Fiscal 1997 results reflect significant growth in the Health Care Information Technology segment offset in part by the temporary dilutive effect of acquisitions and investments in strategic initiatives geared toward enhancing the Company's competitive position in the institutional and retail markets in the Health Care Supply Management segment. F-10 McKESSON HBOC, INC. FINANCIAL REVIEW--(Continued) Unusual Items In each of fiscal 1999, 1998 and 1997, the Company incurred charges, as restated for HBOC, for acquisition-related activities including transaction costs, employee benefit costs, severance, as well as costs for consolidation of facilities and administrative processes and certain operating charges. For the purposes of discussing the results of operations, these items are referred to as "unusual items" in the Financial Review. Charges associated with the Health Care Information Technology segment have been restated from amounts previously reported to correct previous overstatements of such amounts. The results of operations excluding "unusual items" are not intended to represent income from operations, or alternatives to net income, each as defined by generally accepted accounting principles. In addition, the charges included as "unusual items" presented herein may not be comparable to other similarly titled measures used by other companies. Management believes, however, that the discussion of the results of operations excluding such unusual items is the most informative representation of recurring, non-transactional operating results. Management believes that these items either represent one-time occurrences and/or events which are not related to normal, ongoing operations or represent charges that are in excess of normal/historical operating amounts. The unusual items in fiscal 1999, 1998 and 1997 are as follows:
Years Ended March 31, -------------------- 1999 1998 1997 ------ ------ ------ (in millions) Transaction costs..................................... $ 84.9 $ 16.0 $ 17.2 Costs associated with the terminated merger transaction with AmeriSource Health Corporation...... 16.7 Costs associated with employee benefits, primarily related to change in control provisions.............. 88.7 1.4 Employee severance.................................... 33.3 17.5 12.0 Restructuring and asset impairments................... 111.3 36.8 114.8 Other merger-related costs............................ 13.8 7.7 57.2 Acquisition-related integration costs incurred ....... 40.3 Other operating items................................. 36.2 27.3 ------ ------ ------ Total pre-tax......................................... $408.5 $ 96.1 $228.5 ====== ====== ====== Total after-tax....................................... $293.9 $ 65.3 $161.2 ====== ====== ======
Fiscal 1999 Unusual Items In fiscal 1999, the Company recorded pre-tax charges for unusual items of $180.3 million in the Health Care Supply Management segment, $215.6 million in the Health Care Information Technology segment and $12.6 million in the Water Products segment, $408.5 million in the aggregate. Following is a description of costs by type of expenditure in fiscal 1999: Transaction Costs Total unusual items include $84.9 million of transaction costs incurred in connection with the acquisitions described above, primarily consisting of professional fees such as investment banking, legal and accounting fees. This amount includes $6.6 million of transaction costs related to terminated transactions. Approximately $83.9 million of invoices were paid in fiscal 1999, with a balance of $1.0 million which will be paid in fiscal 2000. F-11 McKESSON HBOC, INC. FINANCIAL REVIEW--(Continued) Employee Benefits The Company incurred $88.7 million of employee benefit costs related to the acquisitions including $39.0 million for restricted stock and stock appreciation rights subject to change of control provisions, $37.0 million of long-term incentive and phantom stock awards subject to change of control provisions, $8.7 million of signing and retention bonuses, and $4.0 million of retirement and employee benefit plan costs. Of these amounts, $36.3 million were non-cash charges, primarily related to restricted stock, $44.1 million were paid in fiscal 1999, and the remaining $8.3 million will be paid in fiscal 2000. Severance Severance costs totaled $33.3 million, resulting from the consolidation of acquired company operating and corporate functions, the consolidation of existing U.S. Health Care pharmaceutical distribution centers, and other employee terminations. The severance charges relate to the termination of approximately 1,650 employees, primarily in distribution centers, administration and product functions. Severance of $9.1 million was paid in fiscal 1999. The remaining severance will be paid in fiscal 2000. Restructuring and Asset Impairments In fiscal 1999, the Health Care Supply Management segment identified six distribution centers for closure to be completed by the middle of fiscal 2000. The Company recorded a charge of $25.5 million related to such closures. Of this charge, $21.7 million was required to reduce the carrying value of facility assets to their estimated fair value less disposal costs, and $3.8 million was related to computer hardware and software which will no longer be used at such facilities. Fair value was determined based on sales of similar assets, appraisals, and/or other estimates such as discounting of estimated future cash flows. Considerable management judgment is necessary to estimate fair values; accordingly, actual results could vary significantly from such estimates. Also related to such closures, a charge of $17.2 million was recorded for other exit-related costs. These primarily consist of costs to prepare facilities for disposal, lease costs and property taxes required subsequent to termination of operations, as well as the write-off of costs related to duplicate assets from acquired companies that do not have future use by the Company. Of the above charges, $40.1 million were non-cash asset write-offs, $3.9 million was paid in fiscal 1999, and the remaining amounts will be paid in fiscal 2000. The Health Care Supply Management segment also wrote off $23.5 million of computer hardware and software which was abandoned as the result of an acquisition during the year. In connection with acquisitions made by the Health Care Information Technology segment and the merger with McKesson, duplicate facilities, products and internal systems were identified for elimination, resulting in charges of $22.2 million, relating principally to the write-off of capitalized costs, lease termination costs, and royalty agreements which were terminated at a cost of $12.0 million because products subject to minimum royalty payments to third parties were replaced with acquired products. In addition, following the HBOC Transaction, the Company evaluated the performance of a foreign business and elected to shut down its facility. Charges of $11.6 million were recorded, principally related to the write-down of goodwill to fair value based on estimated discounted cash flows. Revenues and net operating income for this foreign business were not significant in fiscal 1999. Certain investments became impaired during fiscal 1999 and were written down by $4.3 million to their net realizable values based primarily on estimated discounted cash flows, and other reserves of $4.1 million were recorded to cover customer and other claims arising out of the acquisitions. Substantially all of the above charges were non-cash asset write-offs. The Water Products segment identified and wrote off $2.5 million of computer equipment and inventory which were abandoned as the result of acquisitions during the year. In addition, management decided to close F-12 McKESSON HBOC, INC. FINANCIAL REVIEW--(Continued) down an acquired bottling facility during fiscal 2000 which was determined to be inefficient, and recorded $0.4 million of estimated costs required to prepare the facility for closure which are expected to be paid during fiscal 2000. Other Merger-related Costs The Health Care Information Technology segment incurred costs totaling $13.8 million in fiscal 1999 due to an acquired company which had receivables outstanding from HBOC competitors that became uncollectible and were written off after the merger with HBOC. Acquisition-related Integration Costs Acquisition-related integration costs of $40.3 million consist of $1.9 million incurred for salaries and benefits of integration and affiliation team members of the Company and $38.4 million of other direct costs associated with the integration and rationalization of recent acquisitions in the Health Care Supply Management, Health Care Information Technology and Water Products segments. Other Operating Items Other operating items of $36.2 million consist of losses resulting from the implementation of a contract administration system and expenses incurred for corrective actions associated with that system. Fiscal 1998 Unusual Items In fiscal 1998, the Company recorded pre-tax charges for unusual items of $30.6 million in the Health Care Supply Management segment and $65.5 million in the Health Care Information Technology segment, $96.1 million in the aggregate. Following is a description of costs by type of expenditure in fiscal 1998: Transaction Costs Total unusual items include $32.7 million of transaction costs incurred in connection with the acquisitions described above, primarily consisting of professional fees such as investment banking, legal and accounting fees. This amount includes $16.7 million of transaction costs related to the Company's termination of its proposed merger with AmeriSource Health Corporation. Substantially all related invoices were paid during fiscal 1998. Employee Benefits The Company incurred $1.4 million of employee benefit costs related to change of control provisions associated with the acquisition of NHES. Severance Severance costs totaled $17.5 million, resulting from the consolidation of acquired company operating and corporate functions, the consolidation of existing U.S. Health Care pharmaceutical distribution centers, and other employee terminations. The severance charge relates to the termination of approximately 600 employees primarily in distribution center and back office functions in the Health Care Supply Managment segment, and operating and corporate personnel in the Health Care Information Technology segment. Severance of $7.5 million was paid during fiscal 1998. The remaining severance was paid in fiscal 1999. Restructuring and Asset Impairments In fiscal 1998, the Health Care Supply Management segment recorded a $3.7 million loss on the sale of an investment, and a charge of $0.7 million associated with the closure of a facility in Canada. F-13 McKESSON HBOC, INC. FINANCIAL REVIEW--(Continued) In connection with acquisitions made by the Health Care Information Technology segment, duplicate products, facilities and internal systems were identified which resulted in charges of $22.4 million (all non-cash), consisting primarily of capitalized costs and intangible write-offs of $19.3 million related to discontinuance of duplicate product lines. Revenues and net income from the discontinued product lines were replaced by acquired product lines. In addition, a $10.0 million minority investment became impaired and was written off (all non-cash). Other Merger-related Costs In connection with the acquisition of ATT-UK by the Health Care Information Technology segment, a charge of $7.7 million was recorded to write off the portion of the purchase price allocated to purchased in-process technology for which feasibility had not been established as of the acquisition date. Fiscal 1997 Unusual Items In fiscal 1997, the Company recorded pre-tax charges for unusual items of $140.0 in the Health Care Supply Management segment, $81.5 million in the Health Care Information Technology segment and $7.0 million in the Water Products segment, $228.5 million in the aggregate. Following is a description of costs by type of expenditure in fiscal 1997: Transaction Costs Total unusual items include $17.2 million of transaction costs incurred in connection with the acquisitions described above, primarily consisting of professional fees such as investment banking, legal and accounting fees. Substantially all related invoices were paid during fiscal 1997. Severance Severance costs in the Health Care Information Technology segment totaled $12.0 million resulting from the consolidation of acquired company operating and corporate functions and other employee terminations. Severance of $8.8 million was paid during fiscal 1997, and the remaining severance was primarily paid in fiscal 1998. Restructuring and Asset Impairments The acquisition of the assets and operations of FoxMeyer by the Health Care Supply Management segment resulted in a significant increase in sales volume, a substantial change in the customer mix (primarily a large increase in institutional customers), and overlapping, duplicate and "similar purpose" assets. As a result of this acquisition, management reassessed the Company's operations, distribution center network and business strategies, including program offerings. As a result of this reassessment, management developed a plan to optimize the U.S. network configuration from the combined distribution centers of the Company and those acquired from FoxMeyer. At the same time, management approved a plan to rationalize the distribution network and eliminate certain facilities being used at its Canadian subsidiary. These plans have resulted in the closure of 15 distribution centers and the disposal of duplicate assets during fiscal 1997 and fiscal 1998. In connection with the plans discussed above, during fiscal 1997 the Company recorded charges of $10.1 million (primarily non-cash) to reduce the carrying value of certain of the Company's distribution facilities to their estimated fair value less disposal costs. Fair value was determined based on sales of similar assets, F-14 McKESSON HBOC, INC. FINANCIAL REVIEW--(Continued) appraisals, and/or other estimates such as discounting of estimated future cash flows. Considerable management judgment is necessary to estimate fair values, accordingly, actual results could vary significantly from such estimates. Subsequent to the acquisition of FoxMeyer, management reassessed strategies and program offerings for expanding certain customer markets in light of the larger and more diverse customer base, and identified certain of the Company's programs and investments that would no longer be pursued as originally contemplated. As a result, the Company recorded charges of $28.0 million (primarily non-cash) to write off costs incurred to develop systems and other product offerings for customers that would no longer be used or sold. In addition, management reevaluated its current systems capabilities and needs, in light of the resources acquired through FoxMeyer, and identified several systems that were duplicate or not providing benefits to the combined company. This resulted in a charge of $29.3 million (primarily non-cash) for the write- off of hardware and software systems that would no longer be used by the Company. In fiscal 1997, the Health Care Information Technology segment completed several acquisitions. In connection with these acquisitions, duplicate products were eliminated. The elimination of duplicate products resulted in charges of $22.8 million, consisting primarily of capitalized costs, and intangible write-offs, and reserves for customer settlements. Revenues and net income from the discontinued product lines were replaced by acquired product lines. In addition, a $12.3 million intangible representing a non-compete agreement of an acquired company and $5.3 million of other assets and investments were written off because they were determined to have no future value to the Company. Of the above charges, $32.7 million were non-cash asset write-offs, $3.0 million was paid in fiscal 1997 and the remaining amounts were paid in fiscal 1998. During fiscal 1997, management of the Water Products segment decided to exit from the vended water business. Offers received from potential buyers indicated that the net assets of this business were impaired. As a result, the Company recorded a charge of $7.0 million (non-cash) to reduce the carrying value to estimated fair value less disposal costs. The business was sold later in fiscal 1997 with no significant gain or loss recognized. Other Merger-related Costs The Health Care Supply Management segment recorded a charge of $48.2 million to write off the portion of the purchase price of the acquisition of MAH allocated to purchased in-process technology for which feasibility had not been established as of the acquisition date. The Health Care Information Technology segment recorded a charge of $8.6 million to write off the portion of the purchase price of an acquisition allocated to purchased in-process technology for which feasibility had not been established as of the acquisition date and $0.4 million of other charges. Other Operating Items Other operating items include $15.1 million of receivables reserves recorded by the Health Care Supply Management segment resulting from management's reevaluation of estimated exposures from bad debts, disputed amounts, customer allowances, and rebates. Also included are $2.8 million of costs incurred during a strike at a distribution center, $1.5 million for the termination of a marketing program and certain distributor relationships, and $5.0 million of other charges. In addition, the Health Care Information Technology segment recorded a charge of $2.9 million primarily related to an employee stock option grant of an acquired company that was variable until shareholder approval was received authorizing the shares that were granted. F-15 McKESSON HBOC, INC. FINANCIAL REVIEW--(Continued) Results of Operations The discussion of the financial results that follows focuses on the results of continuing operations excluding unusual items as management believes such discussion is the most informative representation of recurring, non- transactional related operating results. Health Care Supply Management The following table identifies significant performance indicators of the Health Care Supply Management segment:
1999 1998 1997 ------- ------- ------- (dollars in millions) Revenues Excluding sales to customers' warehouses Pharmaceutical distribution and services U.S. Health Care............................. $17,400 $14,418 $10,930 International................................ 1,953 1,639 1,513 ------- ------- ------- Total pharmaceutical......................... 19,353 16,057 12,443 Medical-Surgical distribution and services.... 2,292 1,879 182 ------- ------- ------- Subtotal..................................... 21,645 17,936 12,625 Sales to customers' warehouses................. 6,813 2,704 2,824 ------- ------- ------- Total........................................ $28,458 $20,640 $15,449 ======= ======= ======= Revenue growth Excluding sales to customers' warehouses Pharmaceutical distribution and services U.S. Health Care............................. 20.7% 31.9% 34.0% International................................ 19.1 8.4 (0.8) Total pharmaceutical......................... 20.5 29.0 28.5 Medical-Surgical distribution and services.... 22.0 N.M. N.M. Total excluding sales to customers' warehouses................................... 20.7 42.1 30.4 Total.......................................... 37.9 33.6 21.7 Operating profit................................ $ 521.9 $ 383.4 $ 234.1 Percentage change.............................. 36.1% 63.8% 11.8% Gross profit margin(1).......................... 7.4 7.4 6.5 Operating expense margin(1)..................... 5.0 5.3 4.6 Operating profit as a percent of revenues(1).... 2.4 2.1 1.9 Depreciation.................................... $ 51.8 $ 48.5 $ 41.6 Amortization of intangibles..................... 22.6 17.4 6.6 Capital expenditures............................ 97.2 82.1 46.3 Capital employed at year-end Committed capital(3) Operating working capital(2).................. $ 2,176 $ 2,061 $ 1,746 Other--net.................................... 71 80 (90) ------- ------- ------- Total........................................ 2,247 2,141 1,656 Intangibles.................................... 989 795 749 ------- ------- ------- Total........................................ $ 3,236 $ 2,936 $ 2,405 ======= ======= ======= Returns Committed capital(4)........................... 20.3% 19.8% 18.0% Total capital employed(5)...................... 14.4 13.4 15.0
- -------- (1) Excluding sales to customer's warehouses. (2) Receivables and inventories net of related payables. (3) Capital employed less cash and cash equivalents, marketable securities and goodwill and other intangibles. (4) Operating profit before amortization of intangibles divided by average committed capital. (5) Operating profit divided by average capital employed. F-16 McKESSON HBOC, INC. FINANCIAL REVIEW--(Continued) Over the most recent three fiscal years, the Health Care Supply Management segment has experienced strong revenue growth from internal growth and acquisitions. Operating margins have also improved from a combination of higher margin service offerings, improved product procurement profits and ongoing expense efficiencies which have more than offset continued pressure on selling margins to customers. The result, when combined with improved asset efficiency, is operating profit growth in excess of revenue growth and increasing returns on invested capital. Revenue growth in this segment, excluding sales to customers' warehouses, is as follows:
1999 1998 1997 ---- ---- ---- Pharmaceutical Distribution and Services Existing businesses...................................... 20.0% 13.4% 14.6% Acquisitions............................................. 0.5 15.6 13.9 ---- ---- ---- Total.................................................... 20.5% 29.0% 28.5% ==== ==== ==== Medical-Surgical Distribution and Services Existing businesses...................................... 14.5% Acquisitions............................................. 7.5 N.M N.M ---- Total.................................................... 22.0% ====
Internal growth in Health Care Supply Management has been primarily volume driven due to increasing sales to the retail chain and institutional customer segments. Sales to retail customers have benefited from the Company's service offerings and programs that focus on broad product selection, service levels, inventory carrying cost reductions, connectivity and automation technologies. Growth with institutional customers has benefited from the focus on reducing both product cost and internal labor and logistics costs for the customers. Services available include pharmaceutical distribution, medical-surgical supply distribution, pharmaceutical dispensing automation, pharmacy outsourcing, utilization reviews as well as the health care information services available from the Health Care Information Technology segment. These retail chain and institutional capabilities have resulted in the implementation of significant long-term contracts with major customers.
1999 1998 1997 ----- ----- ----- Customer Mix-- Pharmaceutical Distribution and Services Independents............ 28.7% 34.9% 38.1% Retail Chains........... 38.5 32.3 33.3 Institutions............ 32.8 32.8 28.6 ----- ----- ----- 100.0% 100.0% 100.0% ===== ===== =====
Operating margins expanded in the three years due to a change in business mix to higher margin businesses resulting from acquisitions in pharmaceutical services for manufacturers, retail and institutional automation and medical- surgical supply distribution. In addition, expanded profitability from product procurement, warehouse automation and efficiency improvements, and fixed cost leverage from volume growth contributed to the margin expansion. Sales to customers' warehouses are large volume sales of pharmaceuticals to major self-warehousing drugstore chains whereby the Company acts as an intermediary in the order and subsequent delivery of products directly from the manufacturer to the customers' warehouses. The growth in sales to customers' warehouses in fiscal 1999 was primarily the result of two significant contracts with retail chains which also provided new direct store sales growth. The Health Care Supply Management segment uses the last-in, first-out (LIFO) method of accounting for the majority of its inventories which results in cost of sales that more closely reflect replacement cost than other F-17 McKESSON HBOC, INC. FINANCIAL REVIEW--(Continued) accounting methods, thereby mitigating the effects of inflation and deflation on operating profit. The practice in the Health Care Supply Management distribution businesses is to pass published price changes from suppliers on to customers. Manufacturers generally provide the Company with price protection, which prevents inventory losses from manufacturer price decreases. Price declines on many generic pharmaceutical products in this segment in each of the fiscal years ending March 31, 1999, 1998, and 1997 moderated the effects of inflation in other product categories, which resulted in minimal overall price changes in those fiscal years. Fiscal 1999 capital expenditures include higher levels to support the growth in the automation and services businesses. The growth in fiscal 1998 capital expenditures reflects expansion of certain facilities in conjunction with the integration and rationalization of the FoxMeyer, MGM and Drug Trading businesses. The Health Care Supply Management segment requires a substantial investment in operating working capital (customer receivables and inventories net of related trade payables). Average capital employed increased in fiscal 1999, reflecting the MedManagement and RedLine acquisitions, capital spending and increased working capital to support the 19% growth from existing businesses. The increase in average capital employed in fiscal 1998 reflects the Drug Trading acquisition, capital spending related to the integration and rationalization of the FoxMeyer, MGM and Drug Trading businesses and growth in working capital to support the 14% revenue growth for existing businesses. Operating working capital is susceptible to large variations during the year as a result of inventory purchase patterns and seasonal demands. Inventory purchase activity is a function of sales activity, new customer build-up requirements and the desired level of investment inventory. Typically operating working capital is lower at March 31 than the average balance during the year. At March 31, 1999, vendor payables were unusually high relative to inventory both as a result of purchases made late in the fiscal year and the timing of vendor payments. As a result, average operating working capital levels in fiscal 2000 would be expected to be significantly higher than the March 31, 1999 balance. At March 31, 1998, vendor payables were relatively low due to a lower level of purchase activity at year end and revised payment terms with certain vendors in the medical-surgical distribution and services business. Health Care Information Technology Significant performance indicators of the Health Care Information Technology segment are as follows:
1999 1998 1997 ------ ------ ------ (dollars in millions) Revenues Software........................................... $ 345 $ 406 $ 321 Services........................................... 984 809 646 ------ ------ ------ Subtotal.......................................... 1,329 1,215 967 Hardware........................................... 209 214 162 ------ ------ ------ Total revenues.................................... $1,538 $1,429 $1,129 ====== ====== ====== Revenue Growth Software........................................... (15.0)% 26.5% Services........................................... 21.6 25.2 Subtotal.......................................... 9.4 25.6 Hardware........................................... (2.3) 32.1 Total............................................. 7.6 26.6 Operating profit.................................... $184.0 $292.5 $203.4 Percent change..................................... (37.1)% 43.8% Gross profit margin................................. 50.5 55.5 55.2 Operating expense margin............................ 38.5 35.0 37.2 Operating profit as a percent of revenues........... 12.0 20.5 18.0
F-18 McKESSON HBOC, INC. FINANCIAL REVIEW--(Continued)
1999 1998 1997 ----- ----- ----- Depreciation............................................ $46.4 $35.9 $28.6 Amortization of intangibles ............................ 18.4 17.4 17.6 Amortization of capitalized software.................... 25.9 21.3 16.6 Capital expenditures.................................... 79.2 76.9 41.2 Capital employed Committed capital(1)................................... $ 382 $ 383 $ 227 Intangibles............................................ 226 188 194 ----- ----- ----- Total................................................. $ 608 $ 571 $ 421 ===== ===== ===== Returns Committed capital(2)................................... 65.1% 126.8% 113.2% Total capital employed(3).............................. 38.0 68.2 52.2
- -------- (1) Capital employed less cash and cash equivalents, marketable securities and goodwill and other intangibles. (2) Operating profit before amortization of intangibles divided by average committed capital. (3) Operating profit divided by average capital employed. Health Care Information Technology revenues, after giving effect to the restatements, increased 8% to $1.5 billion in fiscal 1999 and 27% to $1.4 billion in fiscal 1998. The fiscal 1999 decline in software revenues of 15% reflects a general industry-wide slowdown in sales of health care information technology products and changes in accounting due to the adoption of Statement of Position 97-2, "Software Revenue Recognition", effective April 1, 1998. During fiscal 1999, the Health Care Information Technology segment experienced delays in current and potential customers' purchasing decisions with respect to its enterprise solutions. Management believes such delays are due to Year 2000 issues, technological innovations, increased competition, greater requirement for integration of products and general market conditions in the computer software industry. Services revenues increased, in part, as implementation activity increased for enterprise solutions and materials management products as a result of increased sales in fiscal 1998. Outsourcing growth was strong as a significant number of new outsourcing customers were added in fiscal 1999. In addition to general growth in services as a result of a growing business, services increased due to the full year impact of the purchase of ATT-UK. Hardware is sold as an accommodation to customers and at a significantly lower operating margin than software and services. Fiscal 1999 revenues from the sale of hardware reflect general price declines for hardware, a shift to less costly Microsoft Windows NT(TM) platforms and exceptionally strong prior year fourth quarter sales. The segment's fiscal 1998 software sales growth reflected continued demand for enterprise solutions, including strong home care, materials management and payor product sales as new sales channels were provided by acquisitions. Hardware sales of RISC-based processors increased in conjunction with software sales. In addition to general growth in services as a result of a growing business, services increased due to the inclusion of ATT-UK operations from the date of purchase. Health Care Information Technology segment operating profit before unusual items declined 37% to 184.0 million in fiscal 1999 reflecting the previously discussed decline in software sales, a lower mix of higher-margin software sales in fiscal 1999 compared to fiscal 1998 (22% vs. 28% as a percentage of total Health Care Information Technology revenues), bad debt provisions of $70 million, and a termination fee associated with a telecommunications contract. The bad debt provision was unusually high in the year and reflects, in part, inadequate staffing of and focus on receivables collections during a portion of the year, implementation issues associated with certain products and contingencies associated with litigation. F-19 McKESSON HBOC, INC. FINANCIAL REVIEW--(Continued) Health Care Information Technology segment operating profit before unusual items increased 44% to $292.5 million in fiscal 1998 reflecting sales volume increases, product mix shift to higher-margin software and service revenues, and operating expense efficiencies. The fiscal 1999 and 1998 capital expenditures reflect the acquisition and construction of the segment's new corporate office in Georgia and the purchase of an aircraft in 1998. The increase in capital employed in Health Care Information Technology in fiscal 1998 primarily reflected the growth in working capital to support the 27% growth in the business and increased capital spending as noted earlier. The return on committed capital and total capital employed in fiscal 1999 reflect the previously discussed decline in operating profit. Water Products Significant performance measures of the Water Products segment are as follows:
1999 1998 1997 ----- ----- ----- Revenues................................................ $ 354 $ 314 $ 302 Percent change........................................ 12.7% 4.0% 6.2% Operating profit........................................ $58.9 $52.7 $43.6 Percent change........................................ 11.8% 20.9% 4.8% Gross profit margin..................................... 75.3 76.2 77.9 Operating expense margin................................ 58.6 59.4 63.4 Operating profit as a percent of revenues............... 16.7 16.8 14.5 Depreciation............................................ $27.5 $23.9 $24.4 Amortization of intangibles............................. 1.0 0.2 0.2 Capital expenditures.................................... $51.5 $52.7 $36.6 Total capital employed.................................. 184 150 116 Return on total capital employed(1)..................... 33.0% 36.5% 32.7%
- -------- (1) Operating profit divided by average capital employed. Water Products revenues increased 13% in fiscal 1999 to $353.6 million, reflecting growth in both the direct-delivery business and packaged water sales to the retail trade. Water Products revenue increased 4% in fiscal 1998 to $313.6 million reflecting higher packaged water sales to the retail trade and moderate growth in the direct-delivery business. Water Products segment operating profit before unusual items increased 12% to $58.9 million in fiscal 1999 reflecting higher sales. Operating profit before unusual items increased 21% to $52.7 million in fiscal 1998 reflecting the 4% increase in revenues and productivity improvements. Fiscal 1999 and 1998 capital expenditures reflect expenditures for additional processing plants to support the expansion into new territories. The increases in capital employed in fiscal 1999 and 1998 reflect sales growth and the higher capital spending levels discussed in the prior paragraph. The decline in the return on capital in fiscal 1999 employed before unusual items was impacted by the higher levels of capital spending in fiscal 1999 and 1998. F-20 McKESSON HBOC, INC. FINANCIAL REVIEW--(Continued) International Operations International operations accounted for 6.8%, 7.6%, 9.2% and 6.0%, 3.7%, 7.9% of fiscal 1999, 1998 and 1997 consolidated revenues and operating profits before unusual items, respectively, and 5.5%, 5.9% and 4.0% of consolidated assets at March 31, 1999, 1998 and 1997, respectively. International operations are subject to certain opportunities and risks, including currency fluctuations. The Company monitors its operations and adopts strategies responsive to changes in the economic and political environment in each of the countries in which it operates. Consolidated Working Capital Operating working capital (receivables and inventories net of related payables) as a percent of revenues was 8.3%, 10.5% and 10.4% at March 31, 1999, 1998 and 1997, respectively. The calculation is based on year-end balances and assumes major purchase acquisitions occurred at the beginning of the year. The decline in the operating working capital ratio in fiscal 1999 is primarily due to the timing of vendor payments in the U.S. pharmaceutical and medical-surgical distribution businesses which offset the effect of operating working capital growth in the Health Care Information Technology segment. The increase in the operating working capital ratio in fiscal 1998 reflects revised payment terms with certain vendors in the medical-surgical distribution and services business and the timing of vendor payments in the U.S. pharmaceutical distribution business in the Health Care Supply Management segment and, growth in the Health Care Information Technology segment due primarily to an increase in receivables resulting from an increase in sales and timing of customer collections. CASH FLOW AND LIQUIDITY Cash and cash equivalents and marketable securities (primarily U.S. Treasury securities with maturities of one year or less) were $269 million, $683 million, and $600 million at March 31, 1999, 1998 and 1997, respectively. The decline in fiscal 1999 reflects the use of HBOC cash balances following the January 1999, merger to pay down short-term borrowings. Cash balances include $23 million, $77 million and $110 million at March 31, 1999, 1998 and 1997, respectively, from the sale of Armor All, which is restricted and held in trust as exchange property in connection with the Company's exchangeable debentures. Cash Flows from Operations for Capital Expenditures The following table summarizes the excess of cash flows from operations over capital expenditures:
Years Ended March 31 ------------------- 1999 1998 1997 ----- ----- ----- (in millions) (to be updated) Net cash provided by continuing operations: Income from continuing operations(1).................. $ 85 $ 305 $ 83 Depreciation.......................................... 131 114 100 Amortization of intangibles........................... 42 35 24 Amortization of capitalized software ................. 26 21 17 Other non-cash charges(1)............................. 370 195 193 Working capital changes............................... (338) (387) 1 ----- ----- ----- Total............................................... 316 283 418 ----- ----- ----- Capital expenditures.................................. (251) (219) (128) ----- ----- ----- Excess.............................................. $ 65 $ 64 $ 290 ===== ===== =====
- -------- (1) Includes previously discussed "Unusual Items". F-21 McKESSON HBOC, INC. FINANCIAL REVIEW--(Continued) Cash flows from continuing operations reflect the cash earnings of the Company's continuing businesses and the effects of the changes in working capital. The working capital increase in fiscal 1999 primarily reflects increases in receivables and inventories resulting from sales growth in all operating segments and timing of customer collections in the Health Care Supply Management and Health Care Information Technology segments. The working capital increase in fiscal 1998 primarily reflects sales growth and timing of customer collections in the Health Care Information Technology segment, revised payment terms with certain vendors in the medical-surgical distribution and services business and the timing of vendor payments in the U.S. pharmaceutical distribution business. Working capital changes in fiscal 1997 were favorably impacted by the previously discussed restoration of trade credit from suppliers of FoxMeyer related to purchases following the acquisition. Other Financing Activities In May 1998, the Company's Employee Stock Ownership Plan purchased approximately 1.3 million shares of newly issued Company stock from the Company at a market value of $78.125 per share. In February 1998, the Company issued fixed-rate unsubordinated debt totaling $300 million to finance internal growth. On March 1, 2005, $150 million of the debt matures, and the remaining $150 million is due on March 1, 2008. In October 1997, a subsidiary of the Company issued $125 million of fixed- rate debt which matures on November 1, 2002. Proceeds were used to pay down short-term borrowings of the Company's Canadian subsidiary, Medis. During fiscal 1997, the Company repurchased 6.8 million shares of its common stock for $156 million as part of a share repurchase program that was suspended in January 1997. In February 1997, the Company issued approximately 5.6 million shares of Company common stock in conjunction with the MGM acquisition. In fiscal 1997, the Company, through a wholly-owned subsidiary trust, issued $200 million of trust convertible preferred securities to fund internal growth. These securities are convertible into approximately 5.4 million shares of Company common stock, yield a 5% dividend and are callable by the Company beginning in March 2000 at 103.5% of par value. Also in fiscal 1997, the Company issued $525 million of fixed-rate debt to term-out the financing of the MGM acquisition including the refinancing of higher cost debt assumed in the acquisition. Credit Resources The Company currently has $1.8 billion of available credit under committed revolving credit lines: a $400 million five-year facility expiring in fiscal 2004, an $800 million 364-day facility expiring on November 9, 1999, and a $575 million facility expiring on October 29, 1999. $1.2 billion of these revolving credit facilities is primarily available to support commercial paper borrowings. In addition, the Company has committed revolving receivables sales facilities aggregating $750 million. At March 31, 1999, the Company had no commercial paper or revolving credit borrowings outstanding. As of June 30, 1999, the Company had $592 million of commercial paper borrowings outstanding, no outstanding borrowings under the revolving credit agreement and had fully utilized its accounts receivable sales facility. The Company's senior debt credit ratings from S&P, Duff & Phelps, and Moody's are currently BBB+, A-, and Baa1, and its commercial paper ratings are currently A-2, D-2, and P-2, respectively. The Company's senior debt ratings and one of its commercial paper ratings were lowered by the rating agencies to the above levels, and both the senior debt and commercial paper ratings were placed under review with negative implications, following the Company's June 21, 1999 announcement of senior management changes within the Company. F-22 McKESSON HBOC, INC. FINANCIAL REVIEW--(Continued) Management believes that the Company has adequate access to credit sources to meet its funding requirements. Funds necessary for future debt maturities and other cash requirements of the Company are expected to be met by existing cash balances, cash flow from operations, existing credit sources or other capital market transactions. Market Risk The Company's major risk exposure is changing interest rates, primarily in the United States. The Company manages interest rates through the use of a combination of fixed and floating rate debt. Interest rate swaps may be used to adjust interest rate exposures when appropriate, based upon market conditions. These contracts are entered into with major financial institutions thereby minimizing the risk of credit loss. If interest rates on existing variable-rate debt were to change 50 basis points, the Company believes that its results from operations and cash flows would not be materially affected. The Company conducts business in Canada, Mexico and the United Kingdom, and is subject to foreign currency exchange risk on cash flows related to sales, expenses, financing and investment transactions. If exchange rates on such currencies were to fluctuate 10%, the Company believes that its results from operations and cash flows would not be materially affected. Aggregate foreign exchange translation gains and losses included in net income, comprehensive income and in equity are discussed in Financial Note 2 on pages F-37 to F-40 of the accompanying consolidated financial statements. Capitalization The Company's capitalization was as follows:
March 31 ---------------------- 1999 1998 1997 ------ ------ ------ (in millions) Short-term borrowings.............................. $ 17 $ 94 $ 125 Term debt.......................................... 1,104 1,129 762 Exchangeable debt.................................. 37 113 160 ------ ------ ------ Total debt....................................... 1,158 1,336 1,047 Convertible preferred securities of subsidiary trust............................................. 196 195 195 Stockholders' equity............................... 2,882 2,562 2,082 ------ ------ ------ Total capitalization............................. $4,236 $4,093 $3,324 ====== ====== ====== Debt-to-capital ratio at March 31.................. 27.3% 32.6% 31.5% Net debt-to-capital ratio at March 31(1)........... 22.4% 19.1% 16.4% Average interest rates during year Total debt....................................... 6.3% 6.5% 5.9% Short-term borrowings............................ 5.6 5.6 5.7 Other debt....................................... 6.7 7.0 6.1
- -------- (1) Ratio computed as net debt (total debt less cash and cash equivalents and marketable securities) to net capital employed (capital employed less cash and cash equivalents and marketable securities). The increase in the net debt-to-capital ratio primarily reflects the increase in net debt to fund internal growth and acquisitions in each of the three years, and share repurchases in fiscal 1997. The Company entered into an accounts receivable sales program with a financial institution in March 1999, 1998 and 1997, providing for the sale by the Company of $400.0 million, $299.9 million and $147.4 million, F-23 McKESSON HBOC, INC. FINANCIAL REVIEW--(Continued) respectively, undivided interests in the Company's total trade accounts receivable. The program qualifies for sale treatment under Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". The sales were recorded at the estimated fair values of the receivables sold, reflecting discounts for the time value of money based on U.S. commercial paper rates and estimated loss provisions. Average diluted shares were 289.8 million in fiscal 1999, 282.1 million in fiscal 1998 and 265.2 million in fiscal 1997. Common stock outstanding increased to 280.6 million at March 31, 1999 from 271.0 million at March 31, 1998 and 259.0 million at March 31, 1997, due primarily to the issuance of common stock under employee benefit plans. Environmental Matters The Company's continuing operations do not require ongoing material expenditures to comply with federal, state and local environmental laws and regulations. However, in connection with the disposition of its chemical operations in fiscal 1987, the Company retained responsibility for certain environmental obligations. In addition, the Company is a party to a number of proceedings brought under the Comprehensive Environmental Response, Compensation and Liability Act (commonly known as "Superfund"), and other federal and state environmental statutes primarily involving sites associated with the operation of the Company's former chemical distribution businesses. There were no adjustments made to the reserves in fiscal 1999, 1998 and 1997. Management does not believe that changes in the remediation cost estimates in future periods, or the ultimate resolution of the Company's environmental matters, will have a material impact on the Company's consolidated financial position or results of operations. See Financial Note 19, "Other Commitments and Contingent Liabilities" on pages F-72 to F-77 of the accompanying consolidated financial statements. Income Taxes The tax rate on income from continuing operations (excluding unusual items) was 56.2% in fiscal 1999, 38.6% in fiscal 1998 and 50.9% in fiscal 1997. YEAR 2000 Background The "Year 2000 problem" refers to the fact that some computer hardware, software and embedded firmware are designed to read and store dates using only the last two digits of the year. The Company relies heavily on computer technologies to operate its business. In 1996, the Company conducted an initial assessment of its information technology to determine which Year 2000 related problems might cause processing errors or computer system failures. Based on the results of that initial analysis, the Company's executive management identified the Year 2000 problem as a top corporate priority and established a central office to provide enterprise-wide management of its Year 2000 project (the "Project"), which is currently estimated to have a total project cost of less than $45 million (see "Costs"). The following discussion of the implications of the Year 2000 problem for the Company contains numerous forward-looking statements based on inherently uncertain information. The cost of the Project and the date on which the Company plans to complete its internal Year 2000 modifications are based on the Company's best estimates, which were derived utilizing a number of assumptions of future events including the continued availability of internal and external resources, third party modifications and other factors. However, there can be no guarantee that these estimates will be achieved, and actual results could differ. Moreover, although the Company believes it will be able to make the necessary modifications in advance, there can be no guarantee that the failure to modify the systems would not have a material adverse effect on the Company. F-24 McKESSON HBOC, INC. FINANCIAL REVIEW--(Continued) In addition, the Company places a high degree of reliance on computer systems of third parties, such as customers, trade suppliers and computer hardware and commercial software suppliers. Although the Company is assessing the readiness of these third parties and preparing contingency plans, there can be no guarantee that the failure of these third parties to modify their systems in advance of December 31, 1999, would not have a material adverse effect on the Company. Readiness The Project is intended to ensure that all critical systems, devices and applications, as well as data exchanges with customers, trade suppliers, and other third parties ("Trading Partners") have been evaluated and will be suitable for continued use into and beyond the year 2000. In addition to areas normally associated with information technology ("IT"), the project also includes areas normally considered outside of IT, but which may have embedded microprocessors with potential Year 2000 problems. Examples of such non-IT areas include the 30,000 hand-held order entry devices the Company has provided its customers, and recently implemented bar-code scanning devices used in warehouse operations. Responsibility for implementation of the Project has been divided among fourteen business units (including the Company's Health Care Information Technology segment), each with its own IT resources. Each business unit operates under published corporate standards, and progress is monitored by the corporate Year 2000 central office. Responsibilities have been further subdivided into functional areas. General priorities have been defined, dependencies identified, preliminary delivery dates assigned, detailed project plans developed, and internal and external technical resources assigned or hired. In addition, internal management reporting requirements have been established. Plans, and progress against those plans, are reviewed by the Project's central project office and are reported to the Chief Information Officer, executive steering committee and the Company's Board of Directors. The Project now consists of hundreds of individual projects, varying in priority and resource requirements from large undertakings, such as replacing certain financial and electronic commerce (EDI) systems, to smaller projects, such as certification of telephony systems. Regardless of its size, each individual project generally progresses through the following seven phases, which are divided into two stages:
Stage One: Stage Two: ---------- ---------- Awareness (Phase 1) Examination and analysis (Phase 3) Assessment of risk (Phase 2) Modification and/or renovation (Phase 4) Data conversion (Phase 5) Acceptance testing (Phase 6) Redeployment back into production (Phase 7)
Prior to combining with McKesson in January 1999, HBOC had, since 1994, been pursuing its own Year 2000 compliance project. That compliance project has now been integrated into the Company's Project. Nevertheless, because the Health Care Information Technology segment is principally engaged in the sale and licensing of computer software and systems, the Year 2000 problem raises a different set of concerns from those of the Company's other businesses. For that reason, the Year 2000 readiness of the Health Care Information Technology business is discussed separately. Businesses Other than Health Care Information Technology The Company has completed Stage One for all identified projects. Because of the size of the Project at the Company, and variation in assessed risk, some individual projects have completed all phases while others are at various phases within Stage Two. Most of the Company's mission critical projects (i.e., those projects whose F-25 McKESSON HBOC, INC. FINANCIAL REVIEW--(Continued) failure to be completed would create a significant business disruption) are at Phase 6 or higher, have been installed or will be installed by July 31, 1999. A limited number of systems requiring extended migration, installation or conversion efforts will require work extending past July 31, 1999 but, in any case, the Company expects to complete all phases of all identified projects by September 30, 1999. In the third quarter of calendar year 1999, the Company will be conducting a rigorous final level of review called systems integration testing under post-Year 2000 conditions. The Company has conducted and plans to continue to conduct systems testing with Trading Partners during the remainder of calendar year 1999. In addition, to insure Year 2000 readiness with trade suppliers, the Company is participating in an industry effort organized by the National Wholesale Drug Association with special attention to critical suppliers such as manufacturers of branded pharmaceutical products. Since early 1997, the Company has required Year 2000 compliance statements from all suppliers of the Company's computer hardware and commercial software. As of March 31, 1999, approximately 90% of the computer hardware and purchased software used in the Company's Health Care Supply Management segment was certified by vendors as being compliant. Regardless of the compliance statements, all third party hardware and software will also be subjected to testing to reconfirm its Year 2000 readiness. Health Care Information Technology The Health Care Information Technology Year 2000 project team is addressing Year 2000 readiness of (i) the Health Care Information Technology's software products licensed to customers; (ii) third party software vendor business partners; and (iii) the segment's internal systems. The Company's assessment indicates that, with a few exceptions, products available for licensing and acquisition from the Health Care Information Technology segment were, as of March 31, 1999, Year 2000 compliant. The readiness effort has been conducted in the ordinary course of business regarding the development and enhancement of such software pursuant to software maintenance and support agreements. Substantially all of the identified projects involving Health Care Information Technology software products are at Phase 6 or higher. The Health Care Information Technology segment continues to monitor performance of Year 2000 compliant releases of Company software products in customer environments, and any deployment of maintenance releases to remediate any Year 2000 issues identified during and after deployment of Year 2000 releases of Company software products will be done in the ordinary course of business. The Health Care Information Technology project team is making ongoing inquiries with respect to the Year 2000 readiness of its software vendor business partners. While the Company's current assessment does not suggest it, there can be no guarantee that the failure of these third parties to modify their systems in advance of December 31, 1999 would not have a material adverse effect on the Company. The Health Care Information Technology project team has substantially completed its assessment efforts with respect to internal systems except for certain remote locations. The Company expects that remediation efforts with respect to all of the Health Care Information Technology's material internal systems will be completed by September 30, 1999, with the exception of the foregoing remote locations, as to which the assessment is ongoing. Costs The Company incurred costs of approximately $14 million in fiscal 1999 and $7 million in fiscal 1998, associated with modifications to the Company's existing systems to make them Year 2000 ready, related testing and outside consulting. The Company expects to incur costs of between $10 million and $20 million in fiscal F-26 McKESSON HBOC, INC. FINANCIAL REVIEW--(Continued) 2000 for a total project cost of less than $45 million. Such costs are being expensed as incurred. The costs associated with creating Year 2000-compliant versions of the Health Care Information Technology segment's software products have not been separately tracked, as the underlying activities were performed in the ordinary course of the segment's business. Year 2000 Project costs are difficult to estimate accurately and the project cost could change due to unanticipated technological difficulties, project vendor delays, project vendor cost overruns and the degree to which systems of newly acquired businesses are compliant. Risks Because of the range of possible issues and the large number of variables involved (including the Year 2000 readiness of any entities acquired by the Company), it is impossible to quantify the potential cost of problems should the Company's remediation efforts or the efforts of those with whom it does business not be successful. Such costs and any failure of such remediation efforts could result in a loss of business, damage to the Company's reputation, and legal liability. Consequently, any such costs or failures could have a material adverse effect on the Company. The Health Care Information Technology segment may experience an increase in warranty claims relating to (i) malfunctions in Company products which have not been upgraded, either because the Company has discontinued support for such products and has therefore not provided the necessary enhancement or because the customer has not installed an enhancement made available by the Company or (ii) malfunctions resulting from Year 2000 problems in third-party hardware or software used in connection with the operation of Company software products. Although such warranty claims are generally subject to contractual liability limitations, the Company is not able to accurately assess or estimate the possible impact of such claims. Finally, management believes that the costs of work by customers related to Year 2000 issues have caused some Health Care Information Technology customers and prospective customers to defer current projects or prospective decisions regarding the acquisition of new software. The Company believes that the most likely risks of serious Year 2000 business disruptions are external in nature, such as (i) disruptions in telecommunications, electric, or transportation services, (ii) failure of third party payors or insurers to provide timely reimbursement to the Company's customers and (iii) noncompliance of smaller trading partners. Of all the external risks, the Company believes the most reasonably likely worst case scenario would be a business disruption resulting from an extended and/or extensive communications failure. With its extensive use of technology, the Company is now dependent on data and voice communications to receive, process, track and bill customers orders, move funds, replenish product and complete other activities critical to the Company's business. Based on the Company's information regarding the readiness of its major communications carriers and the redundancy built into the Company's network architecture, as well as the Company's developing contingency plans, the Company expects that any such disruption would be likely to be localized and of short duration, and would therefore not be likely to have a material adverse effect on the Company. Contingency Plans Business disruptions in the form of floods, blizzards, hurricanes, earthquakes, and power failures are a normal part of the Company's contingency planning. In an effort to reduce the risks associated with the Year 2000 problems, the Company has established and is currently continuing to develop Year 2000 contingency plans that build upon existing disaster recovery and contingency plans. Examples of the Company's existing contingency plans include alternative electronic and manual means for placing and receiving orders, and alternative power supplies and communication lines. F-27 McKESSON HBOC, INC. FINANCIAL REVIEW--(Continued) The Company's contingency planning methodology attempts to identify, explore, and document every potential failure point, internal and external in each of the Company's businesses. Failure points are then prioritized based on likelihood and criticality. Contingency plans are then developed for each of the potential failure points deemed likely and/or critical. Included in the Company's contingency plan are preparations that need to be completed currently (such as printing special forms to be used in the event operations shift into contingency mode, identifying the triggers for shifting into contingency mode, and appointing and training resource response teams), identification of alternate processes to be used in the event of contingencies, as well as design of the process for exiting contingency mode. Contingency planning for possible Year 2000 disruptions will continue to be defined, improved, and implemented. NEW ACCOUNTING PRONOUNCEMENTS See Financial Note 2 "Significant Accounting Policies" on pages F-37 to F-40 of the accompanying consolidated financial statements. F-28 INDEPENDENT AUDITORS' REPORT The Stockholders and Board of Directors of McKesson HBOC, Inc: We have audited the accompanying consolidated balance sheets of McKesson HBOC, Inc. and subsidiaries (the "Company") as of March 31, 1999, 1998, and 1997, and the related statements of consolidated income, consolidated stockholders' equity and consolidated cash flows for the years then ended. Our audits also included the supplementary consolidated financial statement schedule listed in Item 14 (a). These consolidated financial statements and supplementary consolidated financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and supplementary consolidated financial statement schedule based on our audits. The consolidated financial statements and supplementary consolidated financial statement schedule give retroactive effect to the merger of McKesson Corporation and subsidiaries and HBO & Company and subsidiaries ("HBOC") on January 12, 1999, which has been accounted for as a pooling of interests as described in Note 1 to the consolidated financial statements. We did not audit the consolidated financial statements or supplementary consolidated financial statement schedule of HBOC as of and for the years ended March 31, 1998 and 1997, which statements reflect total assets of $1,698.9 million and $1,264.9 million as of March 31, 1998 and 1997, respectively, revenues of $1,429.2 and $1,129.4 million, and net income of $151.1 million and $77.0 million for the years ended March 31, 1998 and 1997, respectively. Those consolidated statements and supplementary consolidated financial statement schedule were audited by other auditors whose report (which expresses an unqualified opinion and includes an explanatory paragraph related to certain shareholder litigation) has been furnished to us, and our opinion, insofar as it relates to the amounts included for HBOC as of and for the years ended March 31, 1998 and 1997, is based solely on the report of such other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company at March 31, 1999, 1998, and 1997, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Also, in our opinion, based on our audits and the report of other auditors, such supplementary consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Financial Note 19 to the consolidated financial statements, the Company is involved in certain shareholder litigation related to HBOC. Deloitte & Touche LLP San Francisco, California July 12, 1999 F-29 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To McKesson HBOC, Inc.: We have audited the consolidated balance sheets of HBO & COMPANY (a Delaware corporation and a wholly-owned subsidiary of McKesson HBOC, Inc.) AND SUBSIDIARIES as of March 31, 1998 and 1997 and the related consolidated statements of income, stockholders' equity, and cash flows (not presented herein) for the years then ended. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of HBO & Company and subsidiaries as of March 31, 1998 and 1997 and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedule, valuation and qualifying accounts (not presented herein), is presented to comply with the Securities and Exchange Commission rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. As discussed in Note 10 to the consolidated financial statements, McKesson HBOC, Inc. is involved in certain shareholder litigation related to the Company. Arthur Andersen LLP Atlanta, Georgia July 12, 1999 F-30 McKESSON HBOC, INC. STATEMENTS OF CONSOLIDATED INCOME
Years Ended March 31, ---------------------------------------- 1999 1998 1997 ------------ ------------ ------------ (in millions except per share amounts) Revenues (Note 2).................... $ 30,382.3 $ 22,419.3 $ 16,914.3 ------------ ------------ ------------ Costs and Expenses (Note 5) Cost of sales...................... 27,716.7 20,025.9 15,203.3 Selling............................ 506.2 463.0 315.9 Distribution....................... 626.5 485.2 362.1 Research & development............. 114.7 112.5 103.0 Administrative..................... 1,086.0 717.4 697.8 Interest........................... 124.0 108.9 61.0 ------------ ------------ ------------ Total............................ 30,174.1 21,912.9 16,743.1 ------------ ------------ ------------ Income from Continuing Operations Before Taxes on Income and Dividends on Preferred Securities of Subsidiary Trust.................... 208.2 506.4 171.2 Income taxes (Note 16)............... 117.1 195.6 87.2 ------------ ------------ ------------ Income from Continuing Operations Before Dividends on Preferred Securities of Subsidiary Trust...... 91.1 310.8 84.0 Dividends on preferred securities of subsidiary trust, net of tax benefit of $4.1, $4.4 and $0.4 (Note 12).... (6.2) (6.2) (0.7) ------------ ------------ ------------ Income After Taxes Continuing operations.............. 84.9 304.6 83.3 Discontinued operations (Notes 4 and 10)........................... -- -- 8.6 Discontinued operations (Notes 4 and 10)--Gain on sale of Armor All stock............................. -- -- 120.2 ------------ ------------ ------------ Net Income........................... $ 84.9 $ 304.6 $ 212.1 ============ ============ ============ Earnings Per Common Share Diluted Continuing operations.............. $ 0.31 $ 1.10 $ 0.32 Discontinued operations............ -- -- 0.03 Discontinued operations--Gain on sale of Armor All stock........... -- -- 0.45 ------------ ------------ ------------ Total............................ $ 0.31 $ 1.10 $ 0.80 ============ ============ ============ Basic Continuing operations.............. $ 0.31 $ 1.14 $ 0.33 Discontinued operations............ -- -- 0.03 Discontinued operations--Gain on sale of Armor All stock........... -- -- 0.47 ------------ ------------ ------------ Total............................ $ 0.31 $ 1.14 $ 0.83 ============ ============ ============ Shares on Which Earnings Per Common Share Were Based Diluted............................ 289.8 282.1 265.2 Basic.............................. 275.2 266.2 253.9
See Financial Notes. F-31 McKESSON HBOC, INC. CONSOLIDATED BALANCE SHEETS
March 31 ---------------------------------- 1999 1998 1997 ---------- ---------- ---------- (in millions except par value) Assets Cash and cash equivalents (Note 2)........ $ 240.8 $ 566.3 $ 434.5 Marketable securities available for sale (Note 2)................................. 28.2 117.1 165.6 Receivables (Note 7)...................... 2,583.7 1,960.0 1,612.2 Inventories (Note 8)...................... 3,529.0 2,608.7 2,277.5 Prepaid expenses (Note 16)................ 117.8 105.0 122.8 ---------- ---------- ---------- Total current assets.................... 6,499.5 5,357.1 4,612.6 ---------- ---------- ---------- Property, plant and equipment, net (Note 9)....................................... 694.0 593.1 489.3 Capitalized software...................... 106.9 77.2 70.3 Notes receivable.......................... 73.4 34.5 29.1 Goodwill and other intangibles............ 1,228.4 973.8 934.1 Other assets (Notes 16 and 17)............ 479.4 314.0 337.9 ---------- ---------- ---------- Total assets............................ $ 9,081.6 $ 7,349.7 $ 6,473.3 ========== ========== ========== Liabilities Drafts payable............................ $ 425.5 $ 287.1 $ 211.0 Accounts payable--trade................... 3,154.2 1,919.7 1,914.3 Deferred revenue.......................... 408.6 282.1 201.2 Short-term borrowings..................... 16.7 93.8 125.4 Current portion of long-term debt (Note 11)...................................... 195.3 18.4 67.6 Salaries and wages........................ 101.2 100.1 88.9 Taxes (Note 16)........................... 95.2 43.4 55.5 Interest and dividends.................... 34.7 30.1 21.3 Other..................................... 368.7 352.3 393.1 ---------- ---------- ---------- Total current liabilities............... 4,800.1 3,127.0 3,078.3 ---------- ---------- ---------- Postretirement obligations and other noncurrent liabilities (Note 17).......... 258.6 242.0 264.3 Long-term debt (Note 11)................... 945.5 1,223.6 854.1 McKesson HBOC-obligated mandatorily redeemable convertible preferred securities of subsidiary grantor trust whose sole assets are junior subordinated convertible debentures of McKesson HBOC (Note 12)................................. 195.6 195.4 194.8 Other Commitments and Contingent Liabilities (Note 19)..................... Stockholders' Equity Common stock (400.0 shares authorized, 281.1, 271.2 and 260.2 issued as of March 31, 1999, 1998 and 1997, respectively; par value of $.01) (Note 15).................. 2.8 2.7 2.6 Additional paid-in capital................. 1,725.7 1,330.9 1,081.0 Other ..................................... (107.7) (59.1) (23.5) Retained earnings.......................... 1,465.0 1,462.5 1,219.2 Accumulated other comprehensive loss....... (57.7) (54.9) (50.9) ESOP notes and guarantees (Note 17)........ (115.5) (115.6) (118.3) Treasury shares, at cost (Note 15)......... (30.8) (4.8) (28.3) ---------- ---------- ---------- Stockholders' equity...................... 2,881.8 2,561.7 2,081.8 ---------- ---------- ---------- Total liabilities and stockholders' equity................................. $ 9,081.6 $ 7,349.7 $ 6,473.3 ========== ========== ==========
See Financial Notes. F-32 [This Page Intentionally Left Blank] F-33 McKESSON HBOC, INC. STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY Years Ended March 31, 1999, 1998 and 1997 (shares in thousands, dollars in millions)
Common Stock Additional -------------- Paid-in Shares Amount Capital ------- ------ ---------- Balances, March 31, 1996............................ 247,326 $2.5 $ 899.4 Issuance of shares under employee plans (Note 15)... 9,310 0.1 74.1 Purchase of shares.................................. ESOP note payments.................................. Translation adjustment.............................. Unrealized loss on marketable securities............ Additional minimum pension liability, net of tax of $16.7 (Note 17).................................... Public offering..................................... 1,879 24.5 Net income.......................................... Acquisitions........................................ 1,690 83.0 Other............................................... Cash dividends declared (Note 15)................... ------- ---- -------- Balances, March 31, 1997............................ 260,205 2.6 1,081.0 Issuance of shares under employee plans (Note 15)... 10,957 0.1 249.0 ESOP note payments.................................. Translation adjustment.............................. Additional minimum pension liability, net of tax of $(2.2) (Note 17)................................... Net income.......................................... Other............................................... 0.9 Cash dividends declared (Note 15) ------- ---- -------- Balances, March 31, 1998............................ 271,162 2.7 1,330.9 Issuance of shares under employee plans (Note 15)... 7,454 0.1 288.3 ESOP note payments.................................. Translation adjustment.............................. Additional minimum pension liability, net of tax of $(0.2) (Note 17)................................... Net income.......................................... Sale of shares to Employee Stock Ownership Plan..... 1,346 105.2 Other .............................................. 1,161 1.3 Cash dividends declared (Note 15)................... ------- ---- -------- Balances, March 31, 1999............................ 281,123 $2.8 $1,725.7 ======= ==== ========
See Financial Notes. F-34
Accumulated Treasury Other ESOP Notes --------------- Retained Comprehensive and Common Stockholders' Comprehensive Other Earnings Loss Guarantees Shares Amount Equity Income ----- -------- ------------- ---------- ------ ------- ------------- ------------- $ (15.8) $1,055.2 $(80.5) $(122.5) (1,204) $ (28.3) $1,710.0 (7.7) 2,868 66.0 132.5 (6,780) (155.7) (155.7) 4.2 4.2 5.1 5.1 $ 5.1 (1.1) (1.1) (1.1) 25.6 25.6 25.6 24.5 212.1 212.1 212.1 3,892 89.7 172.7 4.0 4.0 (52.1) (52.1) ------- -------- ------ ------- ------ ------- -------- ------ (23.5) 1,219.2 (50.9) (118.3) (1,224) (28.3) 2,081.8 $241.7 ====== (35.6) 1,045 23.5 237.0 2.7 2.7 (0.6) (0.6) (0.6) (3.4) (3.4) (3.4) 304.6 304.6 304.6 0.7 1.6 (62.0) (62.0) ------- -------- ------ ------- ------ ------- -------- ------ (59.1) 1,462.5 (54.9) (115.6) (179) (4.8) 2,561.7 $300.6 ====== (48.6) (360) (26.0) 213.8 0.1 0.1 (2.5) (2.5) (2.5) (0.3) (0.3) (0.3) 84.9 84.9 84.9 105.2 2.5 3.8 (84.9) (84.9) ------- -------- ------ ------- ------ ------- -------- ------ $(107.7) $1,465.0 $(57.7) $(115.5) (539) $ (30.8) $2,881.8 $ 82.1 ======= ======== ====== ======= ====== ======= ======== ======
F-35 McKESSON HBOC, INC. STATEMENTS OF CONSOLIDATED CASH FLOWS
Years Ended March 31 ---------------------------- 1999 1998 1997 -------- ------- --------- (in millions) Operating Activities Income from continuing operations............... $ 84.9 $ 304.6 $ 83.3 Adjustments to reconcile to net cash provided by operating activities: Depreciation.................................... 131.4 113.7 100.3 Amortization of intangibles and capitalized software ...................................... 67.9 56.3 41.0 Provision for bad debts......................... 87.3 17.0 28.5 Deferred taxes on income........................ (31.9) 45.3 (29.2) Other non-cash (Note 5)......................... 314.2 133.5 193.2 -------- ------- --------- Total......................................... 653.8 670.4 417.1 -------- ------- --------- Effects of changes in: Receivables..................................... (688.6) (233.1) (255.8) Inventories..................................... (895.5) (296.1) (335.1) Accounts and drafts payable..................... 1,277.1 53.3 550.8 Taxes........................................... (45.8) 100.2 0.5 Deferred revenue................................ 126.5 80.9 100.4 Other........................................... (112.0) (92.5) (59.3) -------- ------- --------- Total......................................... (338.3) (387.3) 1.5 -------- ------- --------- Net cash provided by continuing operations.... 315.5 283.1 418.6 Discontinued operations (Notes 4 and 10)........ 1.6 (2.4) 11.5 -------- ------- --------- Net cash provided by operating activities..... 317.1 280.7 430.1 -------- ------- --------- Investing Activities Purchases of marketable securities.............. (27.9) (118.3) (274.2) Maturities of marketable securities............. 117.9 183.9 344.4 Property acquisitions........................... (250.7) (219.1) (128.0) Properties sold................................. 29.0 21.3 7.2 Proceeds from sales of subsidiaries and investments (Note 4)........................... 3.2 1.8 300.8 Notes receivable issuances, net................. -- (13.8) -- Acquisitions of businesses, less cash and short- term investments acquired (Note 4)............. (302.7) (177.9) (1,226.9) Other........................................... (222.7) (132.6) (117.5) -------- ------- --------- Net cash used by investing activities......... (653.9) (454.7) (1,094.2) -------- ------- --------- Financing Activities (Notes 11, 12 and 15) Proceeds from issuance of debt.................. 82.7 449.0 1,127.1 Proceeds from issuance of trust convertible preferred securities, net of issuance costs.... -- -- 195.1 Repayment of debt............................... (200.6) (215.7) (555.1) Dividends paid on convertible preferred securities..................................... (10.0) (10.3) -- Capital stock transactions: Issuances....................................... 224.9 149.0 79.7 Share repurchases............................... -- (1.2) (157.9) ESOP note payments.............................. 0.1 2.6 4.2 Dividends paid.................................. (84.8) (59.5) (51.9) Other........................................... (1.0) (8.1) (6.2) -------- ------- --------- Net cash provided by financing activities..... 11.3 305.8 635.0 -------- ------- --------- Net Increase (Decrease) in Cash and Cash Equivalents.................................... (325.5) 131.8 (29.1) Cash and Cash Equivalents at beginning of year.. 566.3 434.5 463.6 -------- ------- --------- Cash and Cash Equivalents at end of year........ $ 240.8 $ 566.3 $ 434.5 ======== ======= =========
See Financial Notes. F-36 McKESSON HBOC, INC. FINANCIAL NOTES 1. HBOC Transaction On January 12, 1999, McKesson Corporation ("McKesson") completed a merger with HBO & Company ("HBOC"), a leading health care information technology company, by exchanging 177 million shares of McKesson common stock for all of the issued and outstanding shares of common stock of HBOC (the "HBOC Transaction"). Each share of HBOC stock was exchanged for 0.37 of a share of McKesson common stock. The merged company was renamed McKesson HBOC, Inc. ("McKessonHBOC" or the "Company"). The merger was structured as a tax-free reorganization and was accounted for as a pooling of interests. The historical financial statements give retroactive effect to the HBOC Transaction and other acquisitions completed by McKesson and HBOC in fiscal year 1999 accounted for under the pooling of interests method. Transaction costs related to such acquisitions have been included in the Statements of Consolidated Income. See Financial Note 4. 2. Significant Accounting Policies The consolidated financial statements of the Company include the financial statements of all majority-owned companies, except those classified as discontinued operations. All significant intercompany transactions and balances have been eliminated. Certain prior year amounts have been reclassified to conform to the current year presentation. The Company is organized under three operating segments, Health Care Supply Management, Health Care Information Technology, and Water Products. Within the United States and Canada, the Health Care Supply Management segment is a leading wholesale distributor of ethical and proprietary drugs, medical- surgical supplies and health and beauty care products principally to chain and independent drug stores, hospitals, alternate care sites, food stores and mass merchandisers. The Health Care Information Technology segment delivers enterprise-wide patient care, clinical, financial, managed care, payor and strategic management software solutions, as well as networking technologies, electronic commerce, outsourcing and other services to health care organizations throughout the United States and certain foreign countries. The Water Products segment is engaged in the processing and sale of bottled drinking water to homes and businesses and packaged water through retail stores. The preparation of financial statements in conformity with generally accepted accounting principles requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents include all highly liquid debt instruments purchased with a maturity of three months or less at the date of acquisition. Marketable Securities Available for Sale are carried at fair value and the net unrealized gains and losses, net of the related tax effect, computed in marking these securities to market have been reported within stockholders' equity. At March 31, 1999, the fair value approximated the amortized cost of these securities. The investments mature on various dates through fiscal 2000. Inventories are stated at the lower of cost or market. Inventories of the Health Care Supply Management and Water Products segments consist of merchandise held for resale with the majority of the cost of domestic inventories determined on the last-in first-out (LIFO) method and international inventories stated at average cost. Health Care Information Technology segment inventories consist of computer hardware with cost determined either by the specific identification or first-in, first-out (FIFO) method. F-37 MCKESSON HBOC, INC. FINANCIAL NOTES--(Continued) Property, Plant and Equipment is stated at cost and depreciated on the straight-line method at rates designed to distribute the cost of properties over estimated service lives ranging from one to 45 years. Capitalized Software primarily reflects costs of the Health Care Information Technology segment to develop software products once the project has reached the point of technological feasibility. Management monitors the net realizable value of all software development investments to ensure that the investment will be recovered through future sales. Completed projects are amortized after reaching the point of general availability using the straight-line method based on an estimated useful life of three years. The Company capitalized software development costs of $56.3 million, $41.8 million, and $33.7 million in fiscal 1999, 1998, and 1997, respectively. Amortization of capitalized software costs totaled $25.9 million, $21.3 million and $16.6 million in 1999, 1998, and 1997, respectively. Royalty fees of $39.0 million, $32.1 million and $30.8 million, were expensed in 1999, 1998 and 1997, respectively, for software provided by third-party business partners. Capitalized software of the Health Care Supply Management and Water Products segments, included in other assets, reflects costs related to internally developed or purchased software for projects with costs in excess of $250,000 that are capitalized and amortized on a straight-line basis over periods not exceeding seven years. Goodwill and Other Intangibles are amortized on a straight-line basis over periods estimated to be benefited, generally 3 to 40 years. Negative goodwill arising from the acquisition of the FoxMeyer business is being amortized over a five-year period (see Financial Note 4). Accumulated amortization balances netted against goodwill and other intangibles were $175.1 million, $133.1 million, and $101.0 million at March 31, 1999, 1998 and 1997, respectively. Long-lived Assets. The Company periodically assesses the recoverability of the cost of its long-lived assets, including goodwill, based on a review of projected undiscounted cash flows associated with these assets. These cash flows are prepared and reviewed by management in connection with the Company's annual long range planning process. See Financial Note 5 for charges the Company has recorded related to impairment of assets. Insurance Programs. Under the Company's insurance programs, coverage is obtained for catastrophic exposures as well as those risks required to be insured by law or contract. It is the policy of the Company to retain a significant portion of certain losses related primarily to workers' compensation, physical loss to property, business interruption resulting from such loss, and comprehensive general, product, and vehicle liability. Provisions for losses expected under these programs are recorded based upon the Company's estimates of the aggregate liability for claims incurred. Such estimates utilize certain actuarial assumptions followed in the insurance industry. Revenue Recognition. Revenues of the Health Care Supply Management and Water Products segments are recognized when products are shipped or services are provided to customers. Included in these revenues are large volume sales of pharmaceuticals to major self-warehousing drugstore chains whereby the Company acts as an intermediary in the order and subsequent delivery of products directly from the manufacturer to the customers' warehouses. These sales totaled $6.8 billion in 1999, $2.7 billion in 1998 and $2.8 billion in 1997. On April 1, 1998, the Company adopted Statement of Position (SOP) 97-2, "Software Revenue Recognition". Previously the Company utilized SOP 91-1, "Software Revenue Recognition". Revenues of the Health Care Information Technology segment include systems and services revenues. Information systems are marketed under equipment purchase and software license agreements as well as service agreements. One-time software and hardware revenue is generally recognized when the Company ensures that there is persuasive evidence that an arrangement exists, the fee is fixed and determinable, collectibility is probable and the software F-38 MCKESSON HBOC, INC. FINANCIAL NOTES--(Continued) or hardware, as applicable, has been shipped. The Company's contracts generally allow separate accounting treatment for the systems and services components of the agreement. The Company also licenses software using multiyear agreements under which revenue is recognized on a subscription basis over the term of the agreement. Implementation fees and outsourcing services are recognized as the work is performed. Revenue from software maintenance contracts sold together with licenses is deferred when the license agreement is executed and recognized ratably over the contract term. Maintenance and support agreements sold separately are marketed under annual and multiyear agreements and are recognized ratably over the period covered by the agreements. Electronic commerce and remote processing services are recognized monthly as the work is performed. Also included in revenues is interest income of $37.9 million, $37.6 million, and $28.6 million in fiscal 1999, 1998 and 1997, respectively. Income Taxes. The Company accounts for income taxes under the liability method in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". See Financial Note 16. Foreign Currency Translation. Assets and liabilities of the Company's foreign affiliates are translated at current exchange rates, while revenue and expenses are translated at average rates prevailing during the year. Translation adjustments related to the Company's foreign operations are reported as a component of stockholders' equity. Derivative Financial Instruments. The Company's policy generally is to use financial derivatives only to manage exposure to fluctuations in interest and foreign currency exchange rates. The Company has entered into interest rate and currency swap agreements to hedge certain interest and currency rate risks which are accounted for using the settlement basis of accounting. Premiums paid on interest rate and currency swap agreements are deferred and amortized to interest expense over the life of the underlying hedged instrument, or immediately if the underlying hedged instrument is settled. No gains or losses are recorded for movements in the swaps' values during the terms of the respective agreements. Employee Stock Options. The Company uses the intrinsic value method to account for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". See Financial Note 15 for the disclosures of pro forma earnings and earnings per share had the fair value method been used to account for stock-based employee compensation plans in accordance with SFAS No. 123, "Accounting for Stock- Based Compensation". New Accounting Pronouncements. In fiscal year 1999, the Company adopted SFAS No. 130 "Reporting Comprehensive Income", SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" and SFAS No. 132 "Employers' Disclosures about Pension and Other Postretirement Benefits". SFAS No. 130 requires an enterprise report, by major components and as a single total, the change in its net assets, during the period from non-owner sources. The components of comprehensive income are shown in the Statements of Consolidated Stockholders' Equity. SFAS No. 131 changes the way companies report segment information and requires segments to be determined and reported based on how management measures performance and makes decisions about allocating resources. See Financial Note 18. FAS No. 132 revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. This Statement standardizes the disclosure requirements for pensions and other postretirement benefits to the extent practicable, requires additional F-39 MCKESSON HBOC, INC. FINANCIAL NOTES--(Continued) information on changes in the benefit obligation and fair values of plan assets that will facilitate financial analysis and eliminates certain disclosures. Restatement of disclosures as of and for the years ended March 31, 1998 and 1997 has been made for comparative purposes. See Financial Note 17. In 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure these instruments at fair value. SFAS No. 133 is expected to be effective for the Company's fiscal year 2002. The Company is currently evaluating what impact, if any, SFAS No. 133 may have on its consolidated financial statements. 3. Restatement In April 1999, the Company discovered improper accounting practices (see Financial Note 19) at HBOC. The Audit Committee of the Company's Board of Directors initiated an investigation into such matters. As a result of the findings of the investigation, the Company's consolidated financial statements reflect amounts for HBOC (pre-merger) that are restated from those previously reported by HBOC (pre-merger) in its fiscal 1999 quarterly results and annual results for fiscal 1998 and 1997. Statements of income for the three-month period and year ended March 31, 1999, and the balance sheet at March 31, 1999, are not presented because the HBOC Transaction occurred on January 12, 1999, therefore, HBOC had not previously reported its results for these periods. Management has made all adjustments considered necessary as a result of the investigations into these improper accounting practices. In addition, the Company's consolidated financial statements give retroactive effect to the HBOC Transaction and other acquisitions completed by McKesson and HBOC in fiscal 1999 accounted for under the pooling of interests method. The following statements of income and balance sheets reconcile previously reported and restated financial information. The unaudited statements of income for the three-month periods ended June 30, 1998, September 30, 1998, and December 31, 1998, include all adjustments necessary for a fair presentation of the results of operations for such periods. F-40 McKESSON HBOC, INC. FINANCIAL NOTES--(Continued)
Statement of Income -------------------------------------------------------------------------------------------------- Year Ended March 31, 1998 -------------------------------------------------------------------------------------------------- (in millions, except per share amounts) Contingent HBO as Improper Revenues Effect of McKesson as Effect of McKesson Previously Application Improperly Pooling HBOC as Previously Pooling HBOC as Reported(1) of SOP 91-1 Recognized Other Transactions Restated Reported Transactions Restated ----------- ----------- ---------- ----- ------------ -------- ----------- ------------ --------- Revenues............. $1,303.9 $(39.7) $(19.0) $ 1.6 $206.9 $1,453.7 $20,857.3 $108.3 $22,419.3 Costs and Expenses Cost of sales....... 545.9 (5.6) 1.4 1.5 92.5 635.7 19,336.0 54.2 20,025.9 Selling, distribution and administration..... 471.2 (0.2) (0.3) 3.3 92.6 566.6 1,159.1 52.4 1,778.1 Interest............ 3.6 -- -- -- -- 3.6 102.5 2.8 108.9 -------- ------ ------ ----- ------ -------- --------- ------ --------- Total............... 1,020.7 (5.8) 1.1 4.8 185.1 1,205.9 20,597.6 109.4 21,912.9 -------- ------ ------ ----- ------ -------- --------- ------ --------- Income (Loss) Before Income Taxes and Dividends on Preferred Securities of Subsidiary Trust............... 283.2 (33.9) (20.1) (3.2) 21.8 247.8 259.7 (1.1) 506.4 Income taxes......... 113.2 (13.6) (8.0) (1.3) 6.3 96.6 98.6 0.4 195.6 Dividends on preferred securities of subsidiary trust............... -- -- -- -- -- -- (6.2) -- (6.2) -------- ------ ------ ----- ------ -------- --------- ------ --------- Net Income (Loss).... $ 170.0 $(20.3) $(12.1) $(1.9) $ 15.5 $ 151.2 $ 154.9 $ (1.5) $ 304.6 ======== ====== ====== ===== ====== ======== ========= ====== ========= Earnings (Loss) per Common Share Diluted............. $ 0.39 $ 1.59 $ 1.10 Basic............... 0.40 1.69 1.14 Shares on Which Earnings Per Common Share Were Based Diluted............. 434.0 101.2 282.1 Basic............... 420.6 91.5 266.2
- ------ (1) Recast to a March 31 year end. F-41 McKESSON HBOC, INC. FINANCIAL NOTES--(Continued)
Statement of Income -------------------------------------------------------------------------------------------------- Year Ended March 31, 1997 -------------------------------------------------------------------------------------------------- (in millions, except per share amounts) Contingent HBOC as Improper Revenues Effect of McKesson as Effect of McKesson Previously Application Improperly Pooling HBOC as Previously Pooling HBOC as Reported(1) of SOP 91-1 Recognized Other Transactions Restated Reported Transactions Restated ----------- ----------- ---------- ----- ------------ -------- ----------- ------------ --------- Revenues............ $1,021.8 $(21.1) $(20.0) $(0.2) $163.1 $1,143.6 $15,710.8 $59.9 $16,914.3 Costs and Expenses Cost of sales...... 436.7 (1.1) (1.4) 0.3 71.5 506.0 14,673.5 23.8 15,203.3 Selling, distribution and administration.... 420.3 -- (1.8) (2.5) 85.5 501.5 944.5 32.8 1,478.8 Interest........... 3.2 -- -- -- -- 3.2 55.7 2.1 61.0 -------- ------ ------ ----- ------ -------- --------- ----- --------- Total............. 860.2 (1.1) (3.2) (2.2) 157.0 1,010.7 15,673.7 58.7 16,743.1 -------- ------ ------ ----- ------ -------- --------- ----- --------- Income (Loss) Before Income Taxes and Dividends on Preferred Securities of Subsidiary Trust... 161.6 (20.0) (16.8) 2.0 6.1 132.9 37.1 1.2 171.2 Income taxes........ 64.5 (8.0) (6.7) 0.8 5.3 55.9 31.3 -- 87.2 Dividends on preferred securities of subsidiary trust... -- -- -- -- -- -- (0.7) -- (0.7) -------- ------ ------ ----- ------ -------- --------- ----- --------- Income (Loss) After Taxes Continuing Operations......... 97.1 (12.0) (10.1) 1.2 0.8 77.0 5.1 1.2 83.3 Discontinued Operations......... -- -- -- -- -- -- 8.6 -- 8.6 Discontinued Operations--Gain on Sale of Armor All Stock.............. -- -- -- -- -- -- 120.2 -- 120.2 -------- ------ ------ ----- ------ -------- --------- ----- --------- Net Income (Loss)... $ 97.1 $(12.0) $(10.1) $ 1.2 $ 0.8 $ 77.0 $ 133.9 $ 1.2 $ 212.1 ======== ====== ====== ===== ====== ======== ========= ===== ========= Earnings (Loss) per Common Share Diluted Continuing operations........ $ 0.23 $ 0.06 $ 0.32 Discontinued operations........ -- 0.10 0.03 Discontinued operations--Gain on Sale of Armor All Stock ........ -- 1.35 0.45 -------- --------- --------- Total.............. $ 0.23 $ 1.51 $ 0.80 ======== ========= ========= Basic Continuing operations $ 0.24 $ 0.06 $ 0.33 Discontinued operations........ -- 0.10 0.03 Discontinued operations--Gain on sale of Armor All Stock......... -- 1.41 0.47 -------- --------- --------- Total.............. $ 0.24 $ 1.57 $ 0.83 ======== ========= ========= Shares on Which Earnings Per Common Share Were Based Diluted............ 424.5 89.4 265.2 Basic.............. 408.1 85.5 253.9
- ------ (1) Recast to a March 31 year end. F-42 McKESSON HBOC, INC. FINANCIAL NOTES--(Continued)
Statement of Income ----------------------------------------------------------------------------------------------------------- Three Months Ended June 30, 1998 (unaudited) ----------------------------------------------------------------------------------------------------------- (in millions, except per share amounts) Contingent HBOC as Improper Revenues Effect of McKesson as Effect of McKesson Previously Application Improperly Backdated Pooling HBOC as Previously Pooling HBOC as Reported of SOP 97-2 Recognized Contracts Other Transactions Restated Reported Transactions Restated ---------- ----------- ---------- --------- ------ ------------ -------- ----------- ------------ -------- Revenues.......... $382.8 $(25.8) $(32.6) $(4.7) $ (5.5) $62.3 $376.5 $5,870.9 $35.9 $6,283.3 Costs and Expenses Cost of sales.... 155.1 -- -- -- (0.1) 28.8 183.8 5,468.6 18.0 5,670.4 Selling, distribution and administration.. 99.6 1.7 (4.9) -- 21.8 28.8 147.0 302.2 16.0 465.2 Interest......... 2.1 -- -- -- -- -- 2.1 28.0 0.8 30.9 ------ ------ ------ ----- ------ ----- ------ -------- ----- -------- Total........... 256.8 1.7 (4.9) -- 21.7 57.6 332.9 5,798.8 34.8 6,166.5 ------ ------ ------ ----- ------ ----- ------ -------- ----- -------- Income Before Income Taxes and Dividends on Preferred Securities of Subsidiary Trust............ 126.0 (27.5) (27.7) (4.7) (27.2) 4.7 43.6 72.1 1.1 116.8 Income taxes...... 50.4 (11.0) (11.1) (1.9) (11.0) 1.8 17.2 28.4 0.5 46.1 Dividends on preferred securities of subsidiary trust............ -- -- -- -- -- -- -- (1.6) -- (1.6) ------ ------ ------ ----- ------ ----- ------ -------- ----- -------- Net Income........ $ 75.6 $(16.5) $(16.6) $(2.8) $(16.2) $ 2.9 $ 26.4 $ 42.1 $ 0.6 $ 69.1 ====== ====== ====== ===== ====== ===== ====== ======== ===== ======== Earnings per Common Share Diluted.......... $ 0.17 $ 0.43 $ 0.25 Basic............ 0.18 0.45 0.25 Shares on Which Earnings Per Common Share Were Based Diluted.......... 441.9 103.5 288.4 Basic............ 430.0 92.9 272.4
F-43 McKESSON HBOC, INC. FINANCIAL NOTES--(Continued)
Statement of Income ----------------------------------------------------------------------------------------------------------- Three Months Ended September 30, 1998 (unaudited) ----------------------------------------------------------------------------------------------------------- (in millions, except per share amounts) Contingent HBOC as Improper Revenues Effect of McKesson as Effect of McKesson Previously Application Improperly Backdated Pooling HBOC as Previously Pooling HBOC as Reported of SOP 97-2 Recognized Contracts Other Transactions Restated Reported Transactions Restated ---------- ----------- ---------- --------- ------ ------------ -------- ----------- ------------ -------- Revenues........... $406.1 $(20.8) $(22.9) $2.4 $(27.8) $55.8 $392.8 $6,941.5 $3.0 $7,337.3 Costs and Expenses Cost of sales..... 161.3 0.6 (2.2) -- 2.8 28.7 191.2 6,512.8 0.4 6,704.4 Selling, distribution and administration... 105.1 0.7 (3.4) -- 44.3 24.7 171.4 381.9 2.4 555.7 Interest.......... 0.2 -- -- -- 0.1 -- 0.3 29.4 0.2 29.9 ------ ------ ------ ---- ------ ----- ------ -------- ---- -------- Total........... 266.6 1.3 (5.6) -- 47.2 53.4 362.9 6,924.1 3.0 7,290.0 ------ ------ ------ ---- ------ ----- ------ -------- ---- -------- Income (Loss) Before Income Taxes and Dividends on Preferred Securities of Subsidiary Trust.. 139.5 (22.1) (17.3) 2.4 (75.0) 2.4 29.9 17.4 -- 47.3 Income taxes....... 55.8 (8.9) (6.9) 1.0 (30.0) 2.0 13.0 6.5 -- 19.5 Dividends on preferred securities of subsidiary trust.. -- -- -- -- -- -- -- (1.5) -- (1.5) ------ ------ ------ ---- ------ ----- ------ -------- ---- -------- Net Income......... $ 83.7 $(13.2) $(10.4) $1.4 $(45.0) $ 0.4 $ 16.9 $ 9.4 $-- $ 26.3 ====== ====== ====== ==== ====== ===== ====== ======== ==== ======== Earnings per Common Share Diluted........... $ 0.19 $ 0.10 $ 0.10 Basic............. 0.19 0.10 0.10 Shares on Which Earnings Per Common Share Were Based............. Diluted........... 441.8 108.8 289.9 Basic............. 431.1 98.1 274.6
F-44 McKESSON HBOC, INC. FINANCIAL NOTES--(Continued)
Statement of Income ---------------------------------------------------------------------------------------------------------- Three Months Ended December 31, 1998 (unaudited) ---------------------------------------------------------------------------------------------------------- (in millions, except per share amounts) Contingent HBOC as Improper Revenues Effect of McKesson as Effect of McKesson Previously Application Improperly Backdated Pooling HBOC as Previously Pooling HBOC as Reported of SOP 97-2 Recognized Contracts Other Transactions Restated Reported Transactions Restated ---------- ----------- ---------- --------- ----- ------------ -------- ----------- ------------ -------- Revenues.......... $475.8 $(33.7) $(48.8) $(2.8) $(2.7) $-- $387.8 $7,978.8 $-- $8,366.6 Costs and Expenses Cost of sales.... 199.3 0.7 (3.0) -- (6.8) -- 190.2 7,505.8 -- 7,696.0 Selling, distribution and administration.. 171.3 (0.1) (7.2) -- 13.5 -- 177.5 371.2 -- 548.7 Interest......... 0.5 -- -- -- -- -- 0.5 32.4 -- 32.9 ------ ------ ------ ----- ----- ---- ------ -------- ---- -------- Total........... 371.1 0.6 (10.2) -- 6.7 -- 368.2 7,909.4 -- 8,277.6 ------ ------ ------ ----- ----- ---- ------ -------- ---- -------- Income (Loss) Before Income Taxes and Dividends on Preferred Securities of Subsidiary Trust............ 104.7 (34.3) (38.6) (2.8) (9.4) -- 19.6 69.4 -- 89.0 Income taxes...... 45.1 (13.7) (15.4) (1.1) (3.8) -- 11.1 25.7 -- 36.8 Dividends on preferred securities of subsidiary trust............ -- -- -- -- -- -- -- (1.5) -- (1.5) ------ ------ ------ ----- ----- ---- ------ -------- ---- -------- Net Income........ $ 59.6 $(20.6) $(23.2) $(1.7) $(5.6) $-- $ 8.5 $ 42.2 $-- $ 50.7 ====== ====== ====== ===== ===== ==== ====== ======== ==== ======== Earnings per Common Share Diluted.......... $ 0.40 $ 0.18 Basic............ 0.43 0.18 Shares on Which Earnings Per Common Share Were Based Diluted.......... 109.1 289.7 Basic............ 98.6 275.2
F-45 McKESSON HBOC, INC. FINANCIAL NOTES--(Continued)
Balance Sheet ----------------------------------------------------------------------------------------------- March 31, 1998 ----------------------------------------------------------------------------------------------- (in millions) HBOC as Effect of Improper McKesson as Effect of McKesson Previously Pooling Accounting HBOC as Previously Pooling Other HBOC as Reported Transactions Practices Restated Reported Transactions Reclassifications Restated ---------- ------------ ---------- -------- ----------- ------------ ----------------- -------- Assets Cash and cash equivalents............ $ 467.9 $ 57.8 $ -- $ 525.7 $ 35.7 $ 4.9 $ -- $ 566.3 Marketable securities available for sale..... 5.0 34.2 -- 39.2 77.9 -- -- 117.1 Receivables............. 454.1 58.5 48.1 560.7 1,380.4 19.3 (0.4) 1,960.0 Inventories............. 7.9 4.0 4.3 16.2 2,583.5 9.0 -- 2,608.7 Prepaid expenses........ 48.4 17.8 25.7 91.9 28.1 1.6 (16.6) 105.0 -------- ------ ------ -------- -------- ------ ------ -------- Total current assets.............. 983.3 172.3 78.1 1,233.7 4,105.6 34.8 (17.0) 5,357.1 -------- ------ ------ -------- -------- ------ ------ -------- Property, plant and equipment, net......... 96.8 26.7 -- 123.5 430.3 39.3 -- 593.1 Capitalized software.... 72.9 4.3 -- 77.2 -- -- -- 77.2 Notes receivable........ -- -- -- -- -- -- 34.5 34.5 Goodwill and other intangibles............ 165.9 22.6 -- 188.5 752.4 32.9 -- 973.8 Other assets............ 49.3 15.7 11.0 76.0 319.2 3.2 (84.4) 314.0 -------- ------ ------ -------- -------- ------ ------ -------- Total assets......... $1,368.2 $241.6 $ 89.1 $1,698.9 $5,607.5 $110.2 $(66.9) $7,349.7 ======== ====== ====== ======== ======== ====== ====== ======== Liabilities Deferred revenue........ $ 166.0 $ 16.7 $ 99.4 $ 282.1 $ -- $ -- $ -- $ 282.1 Other current liabilities............ 179.8 32.7 85.8 298.3 2,577.8 23.5 (54.7) 2,844.9 -------- ------ ------ -------- -------- ------ ------ -------- Total current liabilities......... 345.8 49.4 185.2 580.4 2,577.8 23.5 (54.7) 3,127.0 -------- ------ ------ -------- -------- ------ ------ -------- Postretirement obligations and other noncurrent liabilities............ 7.6 0.1 -- 7.7 233.3 2.9 (1.9) 242.0 Long-term debt.......... 0.9 0.2 -- 1.1 1,194.2 28.3 -- 1,223.6 McKessonHBOC-obligated mandatorily redeemable preferred securities of subsidiary grantor trust whose sole assets are junior subordinated debentures of McKessonHBOC........... -- -- -- -- 195.4 -- -- 195.4 Stockholders' Equity Total stockholders' equity.............. 1,013.9 191.9 (96.1) 1,109.7 1,406.8 55.5 (10.3) 2,561.7 -------- ------ ------ -------- -------- ------ ------ -------- Total liabilities and stockholders' equity.............. $1,368.2 $241.6 $ 89.1 $1,698.9 $5,607.5 $110.2 $(66.9) $7,349.7 ======== ====== ====== ======== ======== ====== ====== ========
F-46 McKESSON HBOC, INC. FINANCIAL NOTES--(Continued)
Balance Sheet ------------------------------------------------------------------------------------------------------- March 31, 1997 ------------------------------------------------------------------------------------------------------- HBOC as Effect of Improper McKesson as Effect of McKesson Previously Pooling Accounting HBOC as Previously Pooling Other HBOC as Reported Transactions Practices Restated Reported Transactions Reclassifications Restated ---------- ------------ ---------- -------- ----------- ------------ ----------------- -------- (in millions) Assets Cash and cash equivalents..... $ 249.3 $ 59.4 $ -- $ 308.7 $ 124.8 $ 1.0 $ -- $ 434.5 Marketable securities available for sale............ 37.7 22.9 -- 60.6 105.0 -- -- 165.6 Receivables...... 335.0 37.3 4.5 376.8 1,224.5 11.2 (0.3) 1,612.2 Inventories...... 10.1 3.4 -- 13.5 2,259.5 4.5 -- 2,277.5 Prepaid expenses........ 45.5 6.5 13.7 65.7 47.3 1.4 8.4 122.8 -------- ------ ----- -------- -------- ----- ------ -------- Total current assets......... 677.6 129.5 18.2 825.3 3,761.1 18.1 8.1 4,612.6 -------- ------ ----- -------- -------- ----- ------ -------- Property, plant and equipment, net............. 57.0 24.6 -- 81.6 373.6 34.1 -- 489.3 Capitalized software........ 68.1 2.2 -- 70.3 -- -- -- 70.3 Notes receivable...... -- -- -- -- -- -- 29.1 29.1 Goodwill and other intangibles..... 177.7 16.8 -- 194.5 736.2 3.4 -- 934.1 Other assets..... 60.3 24.2 8.7 93.2 301.9 1.6 (58.8) 337.9 -------- ------ ----- -------- -------- ----- ------ -------- Total assets.... $1,040.7 $197.3 $26.9 $1,264.9 $5,172.8 $57.2 $(21.6) $6,473.3 ======== ====== ===== ======== ======== ===== ====== ======== Liabilities Deferred revenue......... $ 115.5 $ 12.7 $73.0 $ 201.2 $ -- $ -- $ -- $ 201.2 Other current liabilities..... 200.1 24.4 14.2 238.7 2,637.2 11.2 (10.0) 2,877.1 -------- ------ ----- -------- -------- ----- ------ -------- Total current liabilities.... 315.6 37.1 87.2 439.9 2,637.2 11.2 (10.0) 3,078.3 -------- ------ ----- -------- -------- ----- ------ -------- Postretirement obligations and other noncurrent liabilities..... 8.1 -- -- 8.1 255.1 3.1 (2.0) 264.3 Long-term debt... 0.6 2.3 -- 2.9 824.9 26.3 -- 854.1 McKessonHBOC- obligated mandatorily redeemable preferred securities of subsidiary grantor trust whose sole assets are junior subordinated debentures of McKessonHBOC.... -- -- -- -- 194.8 -- -- 194.8 Stockholders' Equity Total stockholders' equity......... 716.4 157.9 (60.3) 814.0 1,260.8 16.6 (9.6) 2,081.8 -------- ------ ----- -------- -------- ----- ------ -------- Total liabilities and stockholders' equity......... $1,040.7 $197.3 $26.9 $1,264.9 $5,172.8 $57.2 $(21.6) $6,473.3 ======== ====== ===== ======== ======== ===== ====== ========
F-47 McKESSON HBOC, INC. FINANCIAL NOTES--(Continued) HBOC As Previously Reported Prior to its merger with McKesson, HBOC's fiscal year end was December 31. HBOC's financial statements were recast to a March 31 year end. Accordingly, the previously reported 1998 and 1997 HBOC calendar year first quarter net income of $64.9 million and $38.4 million, respectively, have been added and the 1997 and 1996 HBOC calendar year first quarter net income of $38.4 million and $23.6 million, respectively, have been subtracted from the respective 1997 and 1996 HBOC calendar years to derive the previously reported HBOC financial information for the twelve months ended March 31, 1998 and 1997. All share and earnings per share amounts have been restated to reflect the fiscal 1999 two- for-one stock split effected in the form of a stock dividend. In addition, certain reclassifications have been made to conform to McKesson's financial statement presentation. The twelve months ended March 31, 1998 and 1997 as shown have not been previously presented in this format. Improper Application of SOP 97-2 or SOP 91-1 These adjustments represent the net effects of the reversal or deferral of software, hardware and services revenues (including related maintenance) and other related items because the conditions required for revenue recognition by SOP 97-2, or SOP 91-1, were not met at the time revenue was recognized. In addition, the adjustments include the net deferral of software revenues recognized under multiyear agreements that are required to be recognized over the term of the contract. Contingent Revenues Improperly Recognized These adjustments represent the net effects of the reversal or deferral of software, hardware and services revenues and other related items because the sales were contingent upon a future event which had not occurred, such as board approval, legal review or third party financing. In most cases these contingencies were contained in side letters or other agreements outside of the normal contract process. Backdated Contracts These adjustments represent the net effects of the reversal or deferral of software, hardware and services revenues and other related items because the customer contracts were determined to have been signed subsequent to quarter end and backdated such that revenue was prematurely recognized. These adjustments include the offsetting effect of revenues recognized under these contracts in the periods the contracts were actually signed. Other Adjustments to Statements of Income These adjustments primarily include other revenue adjustments related to the timing of recognition of customer credit memos and one nonmonetary transaction in the quarter ended September 30, 1998 where the earnings process was not complete, expense underaccruals (including commissions and bad debt provisions), and the reversal of certain excess accruals recorded by HBOC in conjunction with acquisitions. Effect of Pooling Transactions These adjustments include the results of operations and financial position of acquired companies, other than the HBOC Transaction, for which the pooling of interests method was utilized. Adjustments to Balance Sheets These adjustments represent the balance sheet impact of the adjustments described above to the Statements of Income, and consist primarily of the reversal of accounts receivable and deferred maintenance revenues related to the revenue reversals and liability adjustments related to expense accruals. Receivables which had been sold and removed from the balance sheet were reinstated, along with the related obligation, because accounting requirements for removal had not been met. In addition, certain reclassifications have been made to conform to the Company's fiscal 1999 consolidated financial statement presentation. F-48 McKESSON HBOC, INC. FINANCIAL NOTES--(Continued) 4. Acquisitions, Investments and Divestitures Poolings of Interests: In addition to the HBOC Transaction (see Financial Note 1), the following acquisitions were accounted for under the pooling of interests method: In August 1998, the Company acquired Hawk Medical Supply, Inc., a distributor of medical-surgical supplies primarily to the primary care sector, for approximately 2 million shares of Company common stock. Also in August 1998, the Company acquired J. Knipper and Company, a provider of direct mail, fulfillment and sales support services, including sample distribution to physician and pharmaceutical company sales representatives, for approximately 300,000 shares of Company common stock. In September 1998, the Company acquired Automated Prescription Systems, Inc., a manufacturer of automated prescription filling and dispensing systems, for approximately 1.4 million shares of Company common stock. In October 1998, the Company acquired US Servis, Inc., a professional management company that provides outsourcing services for physician delivery systems and hospital business offices, for approximately 1.9 million shares of HBOC common stock (equivalent to approximately 700,000 shares of Company common stock after application of the exchange ratio of 0.37 shares of Company common stock for each share of HBOC common stock (the "Exchange Ratio")). In October 1998, the Company completed the acquisition of IMNET Systems, Inc., a provider of electronic information and document management solutions for the health care industry, for approximately 9.6 million shares of HBOC common stock and 1.6 million HBOC stock options (equivalent to approximately 3.6 million shares of Company common stock and 0.6 million Company stock options after application of the Exchange Ratio). In December 1998, the Company acquired Access Health, Inc., a provider of clinically based care management programs and health care information services, for approximately 34.4 million shares of HBOC common stock (equivalent to approximately 12.7 million shares of Company common stock after application of the Exchange Ratio). Also in fiscal 1999, the Company's Water Products segment completed the acquisitions of Ephrata Diamond Spring Water Company ("Ephrata Diamond") and Keystone National Water Company ("Keystone") for an aggregate of approximately 0.5 million shares of Company common stock. In June 1997, the Company completed the acquisition of AMISYS Managed Care Systems, Inc. ("AMISYS"), a provider of information systems for managed care entities and other parties that assume financial risk for healthcare populations, for approximately 10.8 million shares of HBOC common stock (equivalent to approximately 4.0 million shares of Company common stock after application of the Exchange Ratio). Also in June 1997, the Company completed the acquisition of Enterprise Systems, Inc. ("ESi"), a developer of resource management solutions, for approximately 15.2 million shares of HBOC common stock (equivalent to approximately 5.6 million shares of Company common stock after application of the Exchange Ratio). In December 1997, the Company completed the acquisition of HPR, Inc. ("HPR"), a provider of clinical information systems for the managed care industry, for approximately 18.4 million shares of HBOC common F-49 McKESSON HBOC, INC. FINANCIAL NOTES--(Continued) stock (equivalent to approximately 6.8 million shares of Company common stock after application of the Exchange Ratio). Also in December 1997, the Company completed the acquisition of National Health Enhancement Systems, Inc. ("NHES"), a provider of health care information technology solutions specializing in demand and disease management products for approximately 3.6 million shares of HBOC common stock (equivalent to approximately 1.3 million shares of Company common stock after application of the Exchange Ratio). In August 1996, the Company completed the acquisition of CyCare Systems, Inc. ("CyCare"), a provider of physician practice management software systems and electronic commerce services for medical group practices, faculty practice plans and medical enterprises, for approximately 17.6 million shares of HBOC common stock (equivalent to approximately 6.5 million shares of Company common stock after application of the Exchange Ratio). In September 1996, the Company completed the acquisition of Management Software Inc. ("MSI"), a provider of software solutions for the home care industry, for approximately 3.4 million shares of HBOC common stock (equivalent to approximately 1.3 million shares of Company common stock after application of the Exchange Ratio). In December 1996, the Company completed the acquisition of GMIS Inc., a developer of data quality and decision support software for the payor marketplace, for approximately 14.8 million shares of HBOC common stock (equivalent to approximately 5.5 million shares of Company common stock after application of the Exchange Ratio). In connection with the acquisitions discussed above, which were accounted for as pooling of interests, the Company incurred transaction costs, primarily consisting of professional fees such as investment banking, legal and accounting fees, of $84.9 million, $32.7 million and $17.2 million for the years ended March 31, 1999, 1998 and 1997, respectively. The costs for the year ended March 31, 1999 include approximately $6.6 million of transaction costs associated with various terminated transactions which had been explored by the Company, and for the year ended March 31, 1998 include approximately $16.7 million of transaction costs associated with the terminated merger with AmeriSource Health Corporation. In addition, the Company incurred costs of $88.7 million and $1.4 million during the years ended March 31, 1999 and 1998, respectively, primarily related to benefits received by employees in connection with change of control provisions, signing and retention bonuses granted and retirement and employee benefits granted associated with acquisitions. Purchase Transactions: The following acquisitions were accounted for under the purchase method and the results of operations of the acquired businesses have been included in the consolidated financial statements since their respective acquisition dates: In September 1998, the Company acquired MedManagement LLC, a pharmacy management, purchasing, consulting and information services company, for approximately $38 million in cash. The acquisition was funded with debt. The excess of the purchase price over the fair value of the net assets acquired of $41 million is being amortized on a straight-line basis over 40 years. In November 1998, the Company acquired Red Line Healthcare Corporation ("RedLine"), a distributor of medical supplies and services to the extended- care industry, including long-term-care and home-care sites for approximately $233 million in cash. The acquisition was funded with debt. The valuation of the RedLine net F-50 McKESSON HBOC, INC. FINANCIAL NOTES--(Continued) assets acquired included the recognition of liabilities totaling $5.8 million related to closures of duplicate facilities, and involuntary termination and relocation benefits which remained outstanding as of March 31, 1999. The excess of the purchase price over the fair value of the net assets acquired of $149 million is being amortized on a straight-line basis over 40 years. In fiscal 1999, the Company also made a number of smaller acquisitions including six distributors of first-aid products and five water processing businesses. The aggregate cost of these acquisitions, accounted for as purchases, totaled approximately $35 million. In August 1997, the Company's Canadian health care distribution business, Medis Health and Pharmaceutical Services Inc. ("Medis") announced an agreement with Drug Trading Company, Limited ("Drug Trading") to transition Drug Trading's retail customers to Medis over a six-month period. The Company acquired assets consisting primarily of accounts receivable, inventories and customer contracts, for approximately $83 million in cash. The transaction was funded with proceeds from operations and short-term borrowings. This acquisition was accounted for under the purchase accounting method and the excess of the purchase price over the fair value of the net assets acquired of $9.2 million is being amortized on a straight-line basis over 40 years. In October 1997, the Company acquired AT&T's UK Specialist Health Care Services Division ("ATT-UK"), a provider of software solutions and remote processing services for financial and payroll needs of health care providers in the United Kingdom for approximately $30 million in cash. In connection with the acquisition, the Company wrote off $7.7 million of purchase price allocated to in-process technology. These costs were expensed as of the acquisition date. In fiscal 1998, the Company also made a number of smaller acquisitions including six distributors of first-aid products, two distributors of medical- surgical supplies, and a pharmaceuticals distributor. The aggregate cost of these acquisitions, accounted for as purchases, amounted to approximately $20 million. On February 21, 1997, the Company acquired General Medical Inc. ("MGM"), a multi-market distributor of medical-surgical supplies to acute-care, primary care, and extended-care markets, for approximately $775 million including the issuance of approximately 5.6 million shares of the Company's common stock and the assumption of approximately $428 million in debt. The valuation of the MGM net assets acquired included the recognition of liabilities totaling $7.9 million related to closures of duplicate facilities and involuntary termination and relocation benefits, of which $0 million, $1.0 million and $7.3 million remained outstanding as of March 31, 1999, 1998 and 1997, respectively. Changes to the reserve in fiscal 1999 and 1998 consisted primarily of cash payments for severance benefits and costs to close down duplicate facilities. The excess of the purchase price over the fair value of the net assets acquired of approximately $600 million is being amortized on a straight-line basis over 40 years. On November 8, 1996, the Company acquired FoxMeyer Corporation's pharmaceutical distribution business ("FoxMeyer"), pursuant to an expedited auction process in the FoxMeyer Corporation bankruptcy proceeding in Wilmington, Delaware. The Company paid approximately $23 million in cash to the debtors, paid off approximately $500 million in secured debt, and assumed an additional $75 million in other liabilities. The Company utilized proceeds from commercial paper issuances and a note payable to a bank to fund the transaction. The note payable was repaid prior to March 31, 1997, with cash flow from operations and proceeds from divestitures. The Company acquired assets consisting primarily of accounts receivable and inventories of approximately $650 million, customer contracts and property and equipment. As further discussed in Financial Note 5, as a result of the FoxMeyer acquisition, management assessed strategies and program offerings and initiated a plan to optimize the network configuration from the combined F-51 McKESSON HBOC, INC. FINANCIAL NOTES--(Continued) distribution centers of the Company and those acquired. This plan was reflected in the valuation of the FoxMeyer net assets acquired. The plan to consolidate the FoxMeyer business was executed during the latter part of fiscal 1997, fiscal 1998 and fiscal 1999. Liabilities of $37.6 million were recognized for costs associated with closures of duplicate distribution centers and workforce reductions of which $0.3 million, $3.0 million and $21.9 million remained outstanding as of March 31, 1999, 1998 and 1997, respectively. Reductions in the reserves in fiscal 1999 and 1998 consisted primarily of cash payments for severance benefits and costs related to FoxMeyer facility closures. The excess of the fair value of net assets acquired over the purchase price, after reducing to zero the carrying value of long-term assets expected to be retained for use by the Company, of $28 million (negative goodwill) is being amortized over 5 years. The following unaudited pro forma information for fiscal 1997 has been prepared assuming FoxMeyer and MGM had been acquired as of the beginning of the year (in millions except per share amounts):
1997 --------- Revenues.......................................................... $18,602.3 Net loss.......................................................... (191.1) Loss per share Diluted......................................................... (0.75) Basic........................................................... (0.75)
The unaudited pro forma information above is not indicative of the consolidated financial position or results of operations of the Company as they may be in the future or as they might have been had the MGM and FoxMeyer acquisitions been effected on the assumed dates. For instance, due to FoxMeyer's bankruptcy filing on August 27, 1996, and the resulting deterioration in its operations through November 8, 1996, FoxMeyer experienced a decline in its sales base, wrote off its goodwill and other intangibles totaling $207.9 million, and established substantial accounts receivable and inventory reserves and an additional valuation allowance for deferred tax assets aggregating $153.4 million during the period from April 1, 1996 to November 8, 1996. Unaudited pro forma information is not presented for acquisitions accounted for by the purchase method during the years ended March 31, 1999, 1998 and 1997, other than FoxMeyer and MGM, as the impact on consolidated revenues, net income and net income per share would not be significant. In April 1996, the Company acquired Automated Healthcare, Inc. ("MAH") for $61.4 million in cash and the assumption of $3.2 million of employee stock incentives. MAH designs, manufactures, sells, and installs automated pharmaceutical dispensing equipment for use by health care institutions. The goodwill related to the acquisition of approximately $13.4 million is being amortized on a straight-line basis over ten years. A $48.2 million charge was recorded to write off the portion of the purchase price of MAH allocated to in-process technology for which technological feasibility had not been established as of the acquisition date and for which there were no alternative uses. Existing technology was valued at $0.4 million and is being amortized on a straight-line basis over a three-year period. The Company utilized a discounted cash flow methodology by product line to value in-process and existing technologies as of the acquisition date. Divestitures: On March 31, 1997, the Company sold its service merchandising unit, Millbrook Distribution Services, Inc. ("Millbrook"), to R.A.B. Holdings, Inc. The after-tax proceeds on the sale approximated Millbrook's book value. In March 1997, the Company sold its Aqua-Vend vended water business ("Aqua- Vend"), a unit of the Water Products segment. The after-tax proceeds on the sale approximated Aqua-Vend's book value, after giving effect to the $7.0 million pre-tax provision for impairment of certain assets recorded in the third quarter of fiscal 1997. See Financial Note 5. F-52 McKESSON HBOC, INC. FINANCIAL NOTES--(Continued) In December 1996, the Company sold its 55% equity interest in Armor All Products Corporation ("Armor All") to The Clorox Company for $221.9 million and recognized an after-tax gain of $120.2 million. At closing, after-tax proceeds of $109.8 million replaced the 6.9 million Armor All shares held in trust as exchange property for the Company's $180 million exchangeable subordinated debentures, see Financial Note 11. All of the net assets and results of operations of both Armor All and Millbrook are classified as discontinued operations. 5. Restructuring and Asset Impairments In fiscal 1999, 1998 and 1997 the Company recorded charges for restructurings and asset impairments of $144.6 million, $54.3 million, and $126.8 million, respectively. The major components of the charges are as follows:
1999 1998 1997 ------ ----- ------ (in millions) Write-down of assets and other exit-related costs...... $111.3 $36.8 $114.8 Severance.............................................. 33.3 17.5 12.0
Fiscal 1999 Health Care Supply Management In fiscal 1999, the Company identified six distribution centers for closure to be completed by the middle of fiscal 2000. The Company recorded a charge of $25.5 million related to such closures. Of this charge, $21.7 million was required to reduce the carrying value of facility assets to their estimated fair value less disposal costs, and $3.8 million was related to computer hardware and software which will no longer be used at such facilities. Fair value was determined based on sales of similar assets, appraisals, and/or other estimates such as discounting of estimated future cash flows. Considerable management judgment is necessary to estimate fair values, accordingly, actual results could vary significantly from such estimates. Also related to such closures, a charge of $17.2 million was recorded for other exit-related costs. These primarily consist of costs to prepare facilities for disposal, lease costs and property taxes required subsequent to termination of operations, as well as the write-off of costs related to duplicate assets which do not have future use by the Company. $25.5 million of the $42.7 million discussed above was non-cash. As part of this plan, the Company recorded a severance charge of $13.3 million for workforce reductions. The severance charge relates to the termination of approximately 1,000 employees, primarily in distribution centers and associated back-office functions. Severance of $2.7 million was paid during fiscal 1999. The remaining severance will be paid in fiscal 2000. The Company also wrote off $23.5 million (non-cash) of computer hardware and software which were abandoned as the result of an acquisition during the year. Health Care Information Technology In fiscal 1999, the Health Care Information Technology segment completed several acquisitions. In connection with these acquisitions, and the merger with McKesson, plans were approved by management to consolidate facilities, reduce workforce and eliminate duplicate products and internal systems. In order to effect these plans, the Company identified workforce reductions, including both acquired company and Company personnel, and recorded severance costs of $18.6 million (net of a $3 million reversal of previously recorded severance obligations which were determined to be in excess). The severance charge relates F-53 McKESSON HBOC, INC. FINANCIAL NOTES--(Continued) to the termination of approximately 550 employees, primarily in development and administrative functions. Severance of $6.4 million was paid during fiscal 1999. The remaining severance will be paid in fiscal 2000. In addition, duplicate facilities, products and internal systems were identified for elimination, resulting in charges of $22.2 million, relating principally to the write-off of capitalized costs, lease termination costs, and royalty agreements which were terminated at a cost of $12.0 million because products subject to minimum royalty payments to third parties were replaced with acquired products. In addition, following the HBOC Transaction, the Company evaluated the performance of a foreign business and elected to shut down its facility. Charges of $11.6 million were recorded, principally related to the write-off of goodwill to fair value based on discounted cash flows. Revenues and net operating income for this foreign business were not significant in fiscal 1999. Certain investments became impaired during fiscal 1999 and were written down by $4.3 million to their net realizable values based primarily on discounted cash flows, and other reserves of $4.1 million were recorded to cover customer and other claims arising out of the acquisitions. Substantially all of the above charges were non-cash asset write-offs. Water Products Upon completion of certain acquisitions accounted for as pooling of interests during fiscal 1999, the Company identified and wrote off $2.5 million of computer equipment and other assets which were abandoned. In addition, management decided to close down an acquired bottling facility during fiscal 2000 which was determined to be inefficient, and recorded $0.4 million of estimated costs required to prepare the facility for closure which are expected to be paid during fiscal 2000. As a result of duplicative functions arising from certain acquisitions, the Company recorded a charge of $1.4 million for workforce reductions of approximately 100 operational and management personnel, primarily in overhead functions. The individuals will be terminated and severance paid in fiscal 2000. The charges discussed above have been recorded in selling, distribution and administrative expenses. During fiscal 1999 there were no significant changes in estimates or recharacterization of amounts from restructuring reserves recorded in prior years. Fiscal 1998 Health Care Supply Management The Company recorded a charge of $9.4 million for workforce reductions announced in fiscal 1998. The severance charge relates to the termination of approximately 600 employees, primarily in distribution center and back-office functions. Approximately 200 of these employees had been terminated, and $2.8 million of severance costs had been paid during fiscal 1998. The remaining employees were terminated, and the remaining severance was paid, in fiscal 1999. In addition, $3.7 million was recorded due to the loss on the sale of an investment, and a charge of $0.7 million associated with the closure of a facility in Canada. Health Care Information Technology In fiscal 1998, the Health Care Information Technology segment completed several acquisitions. In connection with these acquisitions, duplicate products, facilities and internal systems were eliminated and, employees were terminated. In addition, a minority investment became impaired. F-54 McKESSON HBOC, INC. FINANCIAL NOTES--(Continued) The Company identified workforce reductions, including both acquired company and Company personnel, and recorded severance costs of $8.1 million. Severance of $4.6 million was paid during fiscal 1998 and the remaining severance was paid in fiscal 1999. Duplicate products, facilities and internal systems were identified which resulted in charges of $22.4 million (non-cash), consisting primarily of capitalized costs and intangible write-offs of $19.3 million related to discontinuance of certain product lines. Revenues and net income from the discontinued product lines were replaced by acquired product lines. In addition, a $10.0 million minority investment became impaired and was written off (non-cash). The charges discussed above have been recorded in selling, distribution and administrative expenses. During fiscal 1998 there were no significant changes in estimates or recharacterization of amounts from restructuring reserves recorded in prior years. Fiscal 1997 Health Care Supply Management The acquisition of the assets and operations of FoxMeyer (see Financial Note 4) resulted in a significant increase in sales volume, a substantial change in the customer mix (primarily a large increase in institutional customers), and overlapping, duplicate, and "similar purpose" assets. As a result of this acquisition, management reassessed the Company's operations, distribution center network and business strategies, including program offerings. As a result of this reassessment, management developed a plan to optimize the U.S. network configuration from the combined distribution centers of the Company and those acquired from FoxMeyer. At the same time, management approved a plan to rationalize the distribution network and eliminate certain facilities being used at its Canadian subsidiary. These plans resulted in the closure of 15 distribution facilities, and the disposal of duplicate assets during fiscal 1997 and into fiscal 1998. In connection with the plans discussed above, during fiscal 1997 the Company recorded charges of $10.1 million (non-cash) to reduce the carrying value of the distribution facilities to their estimated fair value less disposal costs. Fair value was determined based on sales of similar assets, appraisals, and/or other estimates such as discounting of estimated future cash flows. Considerable management judgment is necessary to estimate fair values, accordingly, actual results could vary significantly from such estimates. Subsequent to the acquisition of FoxMeyer, management reassessed strategies and program offerings for expanding certain customer markets in light of the larger and more diverse customer base, and identified certain programs and investments that would no longer be pursued as originally contemplated. As a result, the Company recorded charges of $28.0 million (primarily non-cash) for the write off of costs incurred to develop systems and other product offering for customers that would no longer be used or sold. In addition, management reevaluated it current systems capabilities and needs, in light of the resources acquired through FoxMeyer, and identified several systems which were duplicate or not providing benefits to the combined company. This resulted in a charge of $29.3 million (primarily non-cash) for the write off of hardware and software systems which were abandoned by the Company. Health Care Information Technology In fiscal 1997, the Health Care Information Technology segment completed several acquisitions. In connection with these acquisitions, duplicate products were eliminated, and employees were terminated. In addition, a non- compete agreement of an acquired company was written off. F-55 McKESSON HBOC, INC. FINANCIAL NOTES--(Continued) The Company identified workforce reductions, including both acquired company and Company operating and corporate personnel, and recorded severance costs of $12.0 million. Severance of $8.8 million was paid during fiscal 1997 and the remaining severance was paid in fiscal 1998. The elimination of duplicate products resulted in charges of $22.8 million, consisting primarily of the write-off of capitalized costs and intangibles, and reserves for customer settlements. Revenues and net income from the discontinued product lines were replaced by acquired product lines. In addition, a $12.3 million intangible representing a non-compete agreement of an acquired company and $5.3 million of other assets and investments were written off because they were determined to have no future value to the Company. Of the above charges, $32.7 million were non-cash asset write-offs, $3.0 million were paid in fiscal 1997 and the remaining liabilities were paid in fiscal 1998. Water Products During fiscal 1997, management of the Water Products segment decided to exit from the vended water business. Offers received from potential buyers indicated that the net assets of this business were impaired. As a result, the Company recorded a charge of $7.0 million (non-cash) to reduce the carrying value to estimated fair value less disposal costs. The business was sold later in fiscal 1997 with no significant additional gain or loss. The charges discussed above have been recorded in selling, distribution and administrative expenses. During fiscal 1997 there were no significant changes in estimates or recharacterization of amounts from restructuring reserves recorded in prior years. Summary of Reserve Balances The remaining balances outstanding for the combined reserves at March 31, 1999, 1998 and 1997 are as follows, in millions:
March 31, ----------------- 1999 1998 1997 ----- ----- ----- Write-down of assets and other exit-related costs ....... $56.3 $18.0 $27.5 ===== ===== ===== Severance ............................................... $24.2 $10.0 $ 3.2 ===== ===== =====
6. Off-Balance Sheet Risk and Concentrations of Credit Risk Trade receivables subject the Company to a concentration of credit risk with customers in the retail and institutional sectors. This risk is spread over a large number of geographically dispersed customers. The Company entered into an accounts receivable sales program with a financial institution in March 1999, 1998 and 1997, providing for the sale by the Company of $400.0 million, $299.9 million and $147.4 million, respectively, of undivided interests in the Company's total trade accounts receivable. The program qualifies for sale treatment under SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". The sales were recorded at the estimated fair values of the receivables sold, reflecting discounts for the time value of money based on U.S. commercial paper rates and estimated loss provisions. The Company's Canadian subsidiary, Medis, has agreements with certain of its customers' financial institutions to repurchase inventory in the event the customers are unable to meet certain obligations to the financial institutions. Medis has also agreed to guarantee the payment of a major customer's leases. The amounts F-56 McKESSON HBOC, INC. FINANCIAL NOTES--(Continued) related to these guarantees were approximately $83.7 million for the inventory and $17.2 million for the lease obligations at March 31, 1999. The Company's U.S. pharmaceutical distribution business has entered into agreements to provide loans to certain customers some of which are on a revolving basis. As of March 31, 1999, a total of $81.0 million of these commitments remained outstanding. In addition, the Company has agreed to guarantee a customer's $15 million loan to a bank. 7. Receivables
March 31 ---------------------------- 1999 1998 1997 -------- -------- -------- (in millions) Customer accounts.............................. $2,322.0 $1,802.8 $1,477.4 Other.......................................... 443.2 240.9 195.2 -------- -------- -------- Total........................................ 2,765.2 2,043.7 1,672.6 Allowances..................................... (181.5) (83.7) (60.4) -------- -------- -------- Net.......................................... $2,583.7 $1,960.0 $1,612.2 ======== ======== ========
The allowances are for uncollectible accounts, discounts, returns and other adjustments. 8. Inventories The LIFO method was used to value approximately 80%, 75% and 75% of the inventories at March 31, 1999, 1998, and 1997, respectively. Inventories before the LIFO cost adjustment, which approximates replacement cost, were $3,762.6 million, $2,846.3 million and $2,556.6 million at March 31, 1999, 1998 and 1997, respectively. 9. Property, Plant and Equipment, Net
March 31 ---------------------------- 1999 1998 1997 -------- -------- -------- (in millions) Land........................................... $ 50.7 $ 43.3 $ 39.7 Buildings, machinery and equipment............. 1,324.3 1,159.7 1,019.5 -------- -------- -------- Total property, plant and equipment............ 1,375.0 1,203.0 1,059.2 Accumulated depreciation....................... (681.0) (609.9) (569.9) -------- -------- -------- Property, plant and equipment, net............. $ 694.0 $ 593.1 $ 489.3 ======== ======== ========
10. Discontinued Operations The net liabilities of discontinued operations included in other current liabilities were as follows:
March 31 ------------------- 1999 1998 1997 ----- ----- ----- (in millions) Total assets............................................ $ 1.5 $ 1.9 $ 2.5 Total liabilities....................................... (4.1) (2.8) (5.8) ----- ----- ----- Net liabilities....................................... $(2.6) $(0.9) $(3.3) ===== ===== =====
F-57 McKESSON HBOC, INC. FINANCIAL NOTES--(Continued) Assets consist primarily of land held for sale and investments in affiliates. Liabilities consist primarily of other accrued liabilities. Results of discontinued operations were as follows:
Years Ended March 31 -------------------- 1999 1998 1997 ----- ----- ------ (in millions) Revenues............................................. $ 1.5 $ 0.2 $592.1 ===== ===== ====== Discontinued operations before taxes................. $ 0.1 $ 0.1 $ 17.2 Provision for taxes on income........................ (0.1) (0.1) (5.6) Minority interest in Armor All....................... -- -- (3.0) ----- ----- ------ Discontinued operations............................ -- -- 8.6 ----- ----- ------ Gain on sale of Armor All stock...................... -- -- 154.5 Tax expense.......................................... -- -- (34.3) ----- ----- ------ Discontinued operations-gain on sale of Armor All stock............................................. -- -- 120.2 ----- ----- ------ Total............................................ $ -- $ -- $128.8 ===== ===== ======
Discontinued operations in fiscal 1997 of $8.6 million after-tax includes $3.7 million and $4.9 million after-tax from the operations of Armor All and Millbrook, respectively. 11. Long-Term Debt
March 31 ------------------------ 1999 1998 1997 -------- -------- ------ (in millions) ESOP related debt................................. $ 115.5 $ 115.6 $118.3 4.50% exchangeable subordinated debentures due 2004............................................. 37.3 113.3 160.4 8.625% Notes due 1998............................. -- -- 49.0 6.60% Notes due 2000.............................. 175.0 175.0 175.0 6.875% Notes due 2002............................. 175.0 175.0 175.0 6.55% Notes due 2002.............................. 125.0 125.0 -- 6.30% Notes due 2005.............................. 150.0 150.0 -- 6.40% Notes due 2008.............................. 150.0 150.0 -- 7.65% Debentures due 2027......................... 175.0 175.0 175.0 3.15% to 5.375% IDRBs due through 2026............ 15.0 17.8 21.4 Capital lease obligations (averaging 8.9%)........ 19.4 6.7 7.8 Other, 6.0% to 10.875%, due through 2021.......... 3.6 38.6 39.8 -------- -------- ------ Total........................................... 1,140.8 1,242.0 921.7 Less current portion.............................. 195.3 18.4 67.6 -------- -------- ------ Total........................................... $ 945.5 $1,223.6 $854.1 ======== ======== ======
The Company has a revolving credit agreement with several U.S. and Canadian banks whereby the banks commit $400 million borrowing availability at the reference rate (7.75% at March 31, 1999) or money market-based rates. The agreement expires in fiscal 2004. The agreement permits the Company's wholly- owned Canadian subsidiary, Medis, to borrow the Canadian dollar equivalent of up to $100 million (as part of the $400 million arrangement) at the Canadian prime rate or Canadian money market-based rates. The agreement contains limitations F-58 McKESSON HBOC, INC. FINANCIAL NOTES--(Continued) on additional indebtedness. Compensating balances are not required. The Company has an additional $800 million available for general purposes under a facility with a duration of 364 days or less which is due to expire on November 9, 1999. At March 31, 1999, the Company had $1.2 billion of unused borrowing capacity under these agreements, which are used primarily to support commercial paper borrowings. On May 28, 1999, the Company entered into a revolving credit agreement with certain banks participating in the facility referred to in the previous paragraph. This agreement provides the Company with additional credit in the amount of $575 million, and it is due to expire on October 29, 1999. In addition, the Company has a $750 million committed receivables sales facility available. Total interest payments were $120.6 million, $97.3 million, and $55.6 million in fiscal 1999, 1998 and 1997, respectively. ESOP related debt (see Note 17) is payable to banks and insurance companies, bears interest at rates ranging from 8.6% fixed rate to approximately 80% of prime or LIBOR +0.4% and is due in installments through 2009. In connection with the 4.5% exchangeable subordinated debentures, the March 31, 1999 marketable securities balance includes $22.9 million held in trust as exchange property for the exchangeable subordinated debentures. Through March 31, 1999, the Company had repurchased $142.7 million of the exchangeable subordinated debentures. In fiscal 1998, the Company entered into two interest rate swap agreements, each with a notional principal amount of $150 million. The swaps mature in 2005 and 2008 and swap fixed interest payments of 6.30% and 6.40%, respectively, for floating interest payments based on a LIBOR index; the floating rates at March 31, 1999 were 5.24% and 5.14%, respectively. These swaps include an imbedded interest rate cap of 7%. Also in fiscal 1998, a subsidiary of the Company entered into a currency swap agreement to convert the $125 million proceeds from the issuance of senior notes to $173 million Canadian currency, which was used to pay down short-term borrowings of the Company's Canadian subsidiary, Medis. This swap matures on November 1, 2002. Certain debt agreements require that the Company's total debt not exceed 56.5% of total capitalization (total debt plus equity). At March 31, 1999, the Company was in compliance with its capitalization and other financial covenants. Aggregate annual payments on long-term debt and capitalized lease obligations (see Financial Note 13) for the years ending March 31 are:
Long-Term Capital Debt Leases Total --------- ------- -------- (in millions) 2000.............................................. $ 186.0 $ 9.3 $ 195.3 2001.............................................. 11.4 5.0 16.4 2002.............................................. 187.4 2.0 189.4 2003.............................................. 137.9 0.4 138.3 2004.............................................. 11.0 0.5 11.5 Later Years....................................... 587.7 2.2 589.9 -------- ----- -------- Total........................................... $1,121.4 $19.4 $1,140.8 ======== ===== ========
F-59 McKESSON HBOC, INC. FINANCIAL NOTES--(Continued) 12. Convertible Preferred Securities In February 1997, a wholly-owned subsidiary trust of the Company issued 4 million shares of preferred securities to the public and 123,720 common securities to the Company, which are convertible at the holder's option into McKesson HBOC common stock. The proceeds of such issuances were invested by the trust in $206,186,000 aggregate principal amount of the Company's 5% Convertible Junior Subordinated Debentures due 2027 (the "Debentures"). The Debentures represent the sole assets of the trust. The Debentures mature on June 1, 2027, bear interest at the rate of 5%, payable quarterly, and are redeemable by the Company beginning in March 2000 at 103.5% of the principal amount thereof. Holders of the securities are entitled to cumulative cash distributions at an annual rate of 5% of the liquidation amount of $50 per security. Each preferred security is convertible at the rate of 1.3418 shares of McKesson HBOC common stock, subject to adjustment in certain circumstances. The preferred securities will be redeemed upon repayment of the Debentures and are callable by the Company at 103.5% of the liquidation amount beginning in March 2000. The Company has guaranteed, on a subordinated basis, distributions and other payments due on the preferred securities (the "Guarantee"). The Guarantee, when taken together with the Company's obligations under the Debentures and in the indenture pursuant to which the Debentures were issued and the Company's obligations under the Amended and Restated Declaration of Trust governing the subsidiary trust, provides a full and unconditional guarantee of amounts due on the preferred securities. The Debentures and related trust investment in the Debentures have been eliminated in consolidation and the preferred securities reflected as outstanding in the accompanying consolidated financial statements. 13. Lease Obligations The Company leases facilities and equipment under both capital and operating leases. Net assets held under capital leases included in property, plant and equipment were $4.4 million, $4.6 million, and $4.6 million at March 31, 1999, 1998 and 1997, respectively. Amortization of capital leases is included in depreciation expense. As of March 31, 1999, future minimum lease payments and sublease rentals in years ending March 31 are:
Non- Non- cancelable cancelable Operating Sublease Capital Leases Rentals Leases ---------- ---------- ------- (in millions) 2000.......................................... $ 87.8 $ 5.8 $11.0 2001.......................................... 69.9 4.6 5.4 2002.......................................... 56.7 3.5 2.5 2003.......................................... 45.6 2.9 0.8 2004.......................................... 34.7 1.6 0.8 Later Years................................... 104.9 4.2 1.9 ------ ----- ----- Total minimum lease payments................ $399.6 $22.6 22.4 ====== ===== Less amounts representing interest............ 3.0 ----- Present value of minimum lease payments..... $19.4 =====
Rental expense was $114.9 million, $104.2 million, and $70.8 million in fiscal 1999, 1998 and 1997, respectively. F-60 McKESSON HBOC, INC. FINANCIAL NOTES--(Continued) Most real property leases contain renewal options and provisions requiring the Company to pay property taxes and operating expenses in excess of base period amounts. 14. Fair Value of Financial Instruments At March 31, 1999, 1998 and 1997, the carrying amounts of cash and cash equivalents, marketable securities, receivables, drafts payable, accounts payable-trade and other liabilities approximate their estimated fair values because of the short maturity of these financial instruments. The estimated fair values of the Company's remaining financial instruments, as determined under SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", were as follows:
1999 1998 1997 ------------------------- ------------------------- ------------------------ Carrying Estimated Fair Carrying Estimated Fair Carrying Estimated Fair Amount Value Amount Value Amount Value --------- -------------- --------- -------------- -------- -------------- (in millions) Long-term debt, including current portion................ $(1,140.8) $(1,152.1) $(1,242.0) $(1,215.1) $(921.7) $(902.8) Interest rate swaps..... -- 3.7 -- (5.1) -- -- Foreign currency rate swap................... -- 12.6 -- 4.0 -- --
The estimated fair values of these instruments were determined based on quoted market prices or market comparables. At March 31, 1999, the Company had an investment in WebMD which had a cost basis of $23 million. The fair value at that date was unknown because a readily available market did not exist. Subsequent to year end, WebMD entered into a merger transaction with Healtheon Corp., which if consummated, could result in a value substantially above cost for the Company's investment. The estimated fair values may not be representative of actual values of the financial instruments that could have been realized as of March 31, 1999, 1998 or 1997 or that will be realized in the future. 15. Stockholders' Equity On October 29, 1997, the Company's board of directors declared a two-for-one split of the Company's common stock. The split was effective January 2, 1998 for shareholders of record on December 1, 1997. All share and per share amounts have been restated for the split. Before giving effect to the acquisitions accounted for as pooling of interests (see "HBOC Transaction" Financial Note 1 and "Acquisitions, Investments and Divestitures" Financial Note 4), McKesson declared dividends of $0.435, $0.50 and $0.50 per share and HBOC declared dividends of $0.04, $0.035 and $0.02 per share, in fiscal years 1999, 1998, and 1997, respectively. At March 31, 1999, 1998, and 1997, the Company was authorized to issue 100,000,000 shares of series preferred stock ($.01 par value) of which none were outstanding and 400,000,000 shares of common stock ($.01 par value) of which approximately 280,584,000 shares, 270,983,000 shares and 258,981,000 shares, respectively, were outstanding net of treasury stock. In October 1994, the Company's Board of Directors declared a dividend of one right (a "Right") for each then outstanding share of common stock and authorized the issuance of one Right for each share subsequently issued to purchase, upon the occurrence of certain specified triggering events, a unit consisting of one one hundredth of a share of Series A Junior Participating Preferred Stock. Triggering events include, without F-61 McKESSON HBOC, INC. FINANCIAL NOTES--(Continued) limitation, the acquisition by another entity of 15% or more of the Company's common stock without the prior approval of the Company's Board. The Rights have certain anti-takeover effects and will cause substantial dilution to the ownership interest of a person or group that attempts to acquire the Company on terms not approved by the Board. The Rights expire in 2004 unless redeemed earlier by the Board. As a result of the two-for-one stock split described earlier, each share of common stock now has attached to it one-half of a Right. The following is a reconciliation of the numerators and denominators of the basic and diluted per-share computations for income from continuing operations:
1999 ----------------------- Income Shares Per Share ------ ------ --------- (in millions, except per share amounts) Basic EPS Income from continuing operations................ $ 84.9 275.2 $0.31 ===== Effect of Dilutive Securities Options to purchase common stock................. -- 8.9 Trust convertible preferred securities........... 6.2 5.4 Restricted stock................................. -- 0.3 ------ ----- Diluted EPS Income available to common stockholders plus assumed conversions............................. $ 91.1 289.8 $0.31 ====== ===== ===== 1998 ----------------------- Income Shares Per Share ------ ------ --------- (in millions, except per share amounts) Basic EPS Income from continuing operations................ $304.6 266.2 $1.14 ===== Effect of Dilutive Securities Options to purchase common stock................. -- 10.1 Trust convertible preferred securities........... 6.2 5.4 Restricted stock................................. -- 0.4 ------ ----- Diluted EPS Income available to common stockholders plus assumed conversions............................. $310.8 282.1 $1.10 ====== ===== ===== 1997 ----------------------- Income Shares Per Share ------ ------ --------- (in millions, except per share amounts) Basic EPS Income from continuing operations................ $ 83.3 253.9 $0.33 ===== Effect of Dilutive Securities Options to purchase common stock................. -- 10.6 Trust convertible preferred securities........... 0.7 0.6 Restricted stock................................. -- 0.1 ------ ----- Diluted EPS Income available to common stockholders plus assumed conversions............................. $ 84.0 265.2 $0.32 ====== ===== =====
F-62 McKESSON HBOC, INC. FINANCIAL NOTES--(Continued) As of March 31, 1999, the Company had three stock option plans. The 1994 Stock Option and Restricted Stock Plan provides grants of nonqualified stock options to employees of the Company, and, until January 1, 1997 to non- employee directors. After January 1, 1997, all non-employee directors receive grants under the 1997 Non-Employee Director's Equity Compensation and Deferral Plan. The 1998 Canadian Stock Incentive Plan provides grants of nonqualified stock options with stock appreciation rights to the Company's Canadian employees. Most grants under the Director's Equity Compensation and Deferral Plan vest immediately on grant date. Most other options generally vest over four years and all options expire ten years after the grant date. Under the plans, options are generally granted at prices not less than the fair value of the stock on the date of grant. In fiscal 1999, two grants were made at below market prices under the 1998 Canadian Stock Incentive Plan. Under the Plans, the Company is authorized to grant up to 46.6 million shares, including 44.4 million for options as of March 31, 1999. In addition to the above-described plans, options have been granted to certain key executives on generally the same terms as those granted under the 1994 Plan. Finally, the Company has assumed options of acquired companies in connection with the acquisition of such companies. The following is a summary of options outstanding at March 31, 1999:
Options Outstanding Options Exercisable --------------------------------- --------------------- Weighted- Number of Number of Average Weighted- Options Weighted- Range of Options Remaining Average Exercisable Average Exercise Outstanding Contractual Exercise at Year Exercise Prices At Year End Life Price End Price -------- ----------- ----------- --------- ----------- --------- (in years) $ 1.08 to $ 9.94....... 3,824,272 3.9 $ 6.75 3,808,109 $ 6.75 $10.56 to $ 19.57....... 1,438,649 5.6 16.13 1,181,344 16.55 $20.13 to $ 29.92....... 5,295,709 7.1 26.56 3,461,978 26.32 $30.16 to $ 39.74....... 2,141,375 7.5 38.03 763,514 36.95 $41.39 to $ 49.90....... 1,482,969 8.0 44.29 615,796 44.65 $50.38 to $ 59.46....... 2,608,741 8.6 52.94 1,897,959 51.77 $60.63 to $ 69.88....... 181,040 9.2 66.49 36,179 63.49 $70.86 to $ 78.75....... 20,586,278 9.7 72.89 494,879 72.11 $80.41 to $136.74....... 1,686,549 9.1 103.30 237,399 87.20 ---------- ---------- 39,245,582 8.4 55.26 12,497,157 27.93 ========== ==========
Expiration dates range from April 13, 1999 to March 15, 2009. As a result of the change of control of McKesson at the time of the HBOC Transaction on January 12, 1999, most options granted by McKesson which were outstanding on that date vested. Due to certain tax and accounting issues, the vesting for certain officers was postponed until April 22, 1999. The following is a summary of changes in the options for the stock option plans:
1999 1998 1997 --------------------- --------------------- --------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ---------- --------- ---------- --------- ---------- --------- Outstanding at beginning of year................ 24,060,607 $31.39 24,599,182 $19.42 22,142,524 $11.79 Granted................. 21,287,422 75.10 7,478,095 53.17 8,158,921 33.30 Exercised............... (3,762,649) 23.79 (6,815,460) 12.77 (4,653,940) 7.67 Canceled................ (2,339,798) 40.95 (1,201,210) 27.48 (1,048,323) 18.37 ---------- ---------- ---------- Outstanding at year end.................... 39,245,582 55.26 24,060,607 31.39 24,599,182 19.42 ========== ========== ========== Exercisable at year end.................... 12,497,157 27.93 10,558,317 20.59 12,432,083 13.67 ========== ========== ==========
F-63 McKESSON HBOC, INC. FINANCIAL NOTES--(Continued) Pursuant to SFAS No. 123, the Company has elected to account for its stock- based compensation plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, no compensation cost has been recognized in the consolidated financial statements for the stock option plans, except an insignificant amount related to the two Canadian grants noted above. Had compensation cost for the stock option plan been recognized based on the fair value at the grant dates for awards under those plans, consistent with the provision of SFAS No. 123, net income and earnings per share would have been as indicated in the table below. Since pro forma compensation cost relates to all periods over which the awards vest, the initial impact on pro forma net income may not be representative of compensation cost in subsequent years, when the effect of amortization of multiple awards would be reflected.
Years Ended March 31, ------------------- 1999 1998 1997 ----- ------ ------ (in millions, except per share amounts) Net income As reported........................................... $84.9 $304.6 $212.1 Pro forma............................................. 17.6 253.5 185.3 Earnings per common share--diluted As reported........................................... $0.31 $ 1.10 $ 0.80 Pro forma............................................. 0.06 0.92 0.70 Earnings per common share--basic As reported........................................... $0.31 $ 1.14 $ 0.83 Pro forma............................................. 0.06 0.95 0.73
Fair values of the options were estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
Years Ended March 31, ---------------- 1999 1998 1997 ---- ---- ---- Expected stock price volatility............................ 32.4% 40.4% 31.6% Expected dividend yield.................................... 1.42% 0.64% 0.74% Risk-free interest rate.................................... 4.8% 5.9% 6.4% Expected life (in years)................................... 5.0 7.3 7.2
The weighted average grant date fair values of the options granted during 1999, 1998 and 1997 were $24.06, $27.54 and $15.67 per share, respectively. Other, within stockholders' equity, includes notes receivable from certain of the Company's officers and senior managers totaling $99.0 million at March 31, 1999 related to purchases of Company common stock. Such notes were issued for amounts equal to the market value of the stock on the date of the purchase, are full recourse to the borrower, and $55.6 million are collateralized by the related stock. The notes bear interest at rates ranging from 4.7% to 8.0% and are due at various dates through February, 2002. F-64 McKESSON HBOC, INC. FINANCIAL NOTES--(Continued) 16. Taxes on Income The provision for income taxes related to continuing operations consists of the following:
Years Ended March 31, ------------------------ 1999 1998 1997 ------- ------- ------- (in millions) Current Federal............................................ $ 124.7 $ 116.5 $ 99.5 State and local.................................... 15.5 24.2 13.4 Foreign............................................ 8.8 9.6 3.5 ------- ------- ------- Total current.................................... 149.0 150.3 116.4 ------- ------- ------- Deferred Federal............................................ (23.2) 41.1 (25.5) State.............................................. (7.5) 4.2 (3.1) Foreign............................................ (1.2) -- (0.6) ------- ------- ------- Total deferred................................... (31.9) 45.3 (29.2) ------- ------- ------- Total provision.................................. $ 117.1 $ 195.6 $ 87.2 ======= ======= =======
Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. Foreign pre-tax earnings were $24.9 million, $29.6 million, and $16.5 million in fiscal 1999, 1998 and 1997, respectively. The reconciliation between the Company's effective tax rate on income from continuing operations and the statutory Federal income tax rate follows:
Years Ended March 31, ------------------------- 1999 1998 1997 ------- ------- ------- Statutory Federal income tax rate............... 35.0% 35.0% 35.0% State and local income taxes, net of Federal tax benefit........................................ 6.6 4.2 5.8 Nondeductible charge for the write-off of in- process technology............................. -- -- 9.9 Nondeductible acquisition costs................. 16.7 1.1 -- Nondeductible amortization...................... 5.4 1.1 1.1 Nontaxable income--life insurance............... (1.4) (0.8) (1.5) Favorable tax adjustments from the completion of audits for certain prior years................. (4.1) (0.9) -- Dividends paid deduction--ESOP allocated shares......................................... (0.5) (0.2) (0.5) Tax-advantaged debt issuance.................... (1.2) (0.2) -- Other--net...................................... (0.3) (0.7) 1.1 ------- ------- ------- Effective tax rate............................ 56.2% 38.6% 50.9% ======= ======= =======
Income tax payments were $175.8 million, $84.5 million, and $125.0 million in fiscal 1999, 1998 and 1997, respectively. F-65 McKESSON HBOC, INC. FINANCIAL NOTES--(Continued) As of March 31, the deferred tax balances consisted of the following:
1999 1998 1997 ------- ------- ------- (in millions) Assets Nondeductible accruals for environmental obligations........................................ $ 7.8 $ 8.9 $ 10.6 Receivable reserves................................. 63.6 31.1 20.8 Deferred revenue.................................... 65.1 50.2 27.9 Compensation and benefit-related accruals........... 46.6 19.4 16.5 Loss and credit carryovers.......................... -- 39.2 9.4 Costs associated with duplicate facility closures and workforce reductions related to acquired businesses......................................... 7.5 2.4 11.7 Other............................................... 45.5 38.8 38.1 ------- ------- ------- Current......................................... 236.1 190.0 135.0 ------- ------- ------- Nondeductible accruals for: Postretirement and postemployment plans........... 66.5 68.8 76.2 Deferred compensation............................. 33.5 31.1 33.2 Costs associated with facility closures........... 10.0 7.0 11.1 System development costs............................ -- -- 11.8 Intangibles......................................... 65.5 59.8 47.6 Loss and credit carryforwards....................... 67.0 12.5 4.3 Other............................................... 17.3 28.5 38.7 ------- ------- ------- Noncurrent...................................... 259.8 207.7 222.9 ------- ------- ------- Total........................................... $ 495.9 $ 397.7 $ 357.9 ======= ======= ======= Liabilities Basis differences for inventory valuation........... $(192.3) $(139.1) $ (70.1) Other............................................... (1.2) (4.2) (5.3) ------- ------- ------- Current......................................... (193.5) (143.3) (75.4) ------- ------- ------- Accelerated depreciation............................ (22.9) (41.1) (40.7) Systems development costs........................... (83.6) (65.7) (23.2) Retirement plan..................................... (17.3) (13.5) (8.5) Other............................................... (8.9) (4.8) (10.9) ------- ------- ------- Noncurrent...................................... (132.7) (125.1) (83.3) ------- ------- ------- Total........................................... $(326.2) $(268.4) $(158.7) ======= ======= ======= Total net current--included in prepaid expenses..... $ 42.6 $ 46.7 $ 59.6 ======= ======= ======= Total net noncurrent--included in other assets...... $ 127.1 $ 82.6 $ 139.6 ======= ======= =======
At March 31, 1999, the Company had Federal, state and local operating loss carryforwards, the tax effect of which is $41.6 million. These carryforwards will expire principally in 2012. 17. Postretirement and Postemployment Benefits Pension Plans Prior to December 31, 1996, substantially all full-time employees of McKesson were covered under either the Company-sponsored defined benefit retirement plan or by bargaining unit sponsored multi-employer plans. F-66 McKESSON HBOC, INC. FINANCIAL NOTES--(Continued) On December 31, 1996, the Company amended the Company-sponsored defined benefit plan to freeze all plan benefits based on each employee's plan compensation and creditable service accrued to that date. Accordingly, employees joining the Company after December 31, 1996, and employees of companies acquired after December 31, 1996, are not eligible for coverage under the Company-sponsored defined benefit retirement plan. The benefits for such Company-sponsored plans are based primarily on age of employees at date of retirement, years of service and employees' pay during the five years prior to employment. On January 1, 1997, the Company amended the ESOP to provide future additional benefits in place of a portion of those benefits previously provided by the pension plan. The following tables provide a reconciliation of the changes in the Company- sponsored defined benefit retirement plan and executive supplemental retirement plans:
1999 1998 1997 ------ ------ ------ (in millions) Change in benefit obligations: Benefit obligation at beginning of year........... $312.0 $299.9 $328.5 Service cost...................................... 0.7 0.7 5.4 Interest cost..................................... 21.7 22.6 23.6 Amendments........................................ 15.0 -- (0.2) Acquisitions...................................... 17.8 -- -- Actuarial losses (gains).......................... 11.0 24.7 (34.0) Benefit payments.................................. (28.8) (35.9) (23.4) ------ ------ ------ Benefit obligation at end of year................. $349.4 $312.0 $299.9 ====== ====== ====== Change in plan assets: Fair value of plan assets at beginning of year.... $294.0 $262.3 $249.1 Actual return on plan assets...................... 42.5 55.4 35.5 Employer contributions............................ 5.3 14.8 2.7 Expenses paid..................................... (2.1) (2.6) (1.6) Benefits paid..................................... (28.8) (35.9) (23.4) ------ ------ ------ Fair value of plan assets at end of year.......... $310.9 $294.0 $262.3 ====== ====== ====== Funded status: Funded status at end of year...................... $(38.5) $(18.0) $(37.6) Unrecognized net actuarial loss................... 30.1 28.8 34.3 Unrecognized prior service cost................... 1.2 1.3 1.4 Unrecognized prior service cost-plan amendments... 23.0 -- (3.1) Unrecognized transition obligation................ -- (0.3) 0.4 ------ ------ ------ Prepaid (accrued) benefit cost.................... $ 15.8 $ 11.8 $ (4.6) ====== ====== ======
The following table provides the amounts recognized in the Company's consolidated balance sheet:
1999 1998 1997 ------ ------ ------ (in millions) Prepaid benefit cost............................... $ 38.5 $ 29.6 $ 21.4 Accrued benefit cost............................... (22.7) (17.8) (26.0) Intangible asset................................... 24.2 1.3 1.9 Minimum pension liabilitiy--net of tax of $6.2, $6.0 and $3.9..................................... (9.6) (9.3) (5.9) ------ ------ ------ Net amount recognized.............................. $ 30.4 $ 3.8 $ (8.6) ====== ====== ======
F-67 McKESSON HBOC, INC. FINANCIAL NOTES--(Continued) The following table provides components of the net periodic pension expense (income) for the Company sponsored defined benefit retirement plan and executive supplemental retirement plan:
1999 1998 1997 ------ ------ ------ (in millions) Service cost--benefits earned during the year...... $ 0.7 $ 0.7 $ 5.4 Interest cost on projected benefit obligation...... 21.7 22.6 23.6 Return on assets................................... (27.6) (24.8) (23.4) Amortization of unrecognized loss and prior service costs............................................. 1.1 0.8 5.9 Amortization of unrecognized net transition asset.. (0.3) (2.5) (2.5) Curtailment loss recognized in connection with the December 31, 1996 plan amendment.................. -- -- 0.4 ------ ------ ------ Net pension expense (income)..................... $ (4.4) $ (3.2) $ 9.4 ====== ====== ======
Assets of the plans are measured on a calendar year basis. The projected unit credit method is utilized for measuring net periodic pension cost over the employees' service life. Costs are funded based on the recommendations of independent actuaries. The benefit obligations for Company- sponsored plans were determined using discount rates of 7.00% at December 31, 1998, 7.25% at December 31, 1997 and 7.75% at December 31, 1996 and an assumed increase in future compensation levels of 4.0% for all periods. The expected long-term rate of return on assets used to determine pension expense was 9.75% for all periods. The assets of the plan consist primarily of listed common stocks and bonds for which fair value is determined based on quoted market prices. Profit-Sharing Investment Plan Retirement benefits for employees not covered by collective bargaining arrangements include a supplementary contributory profit-sharing investment plan ("PSIP"). The leveraged ESOP portion of the PSIP has purchased an aggregate of 24.3 million shares of common stock since inception. These purchases have been financed by 10 to 20-year loans from or guaranteed by the Company. The Company's related receivables from the ESOP have been classified as a reduction of stockholders' equity. The loans will be repaid by the ESOP from common dividends on shares not yet allocated to participants, interest earnings on cash balances not yet allocated to participants, common dividends on certain allocated shares and future Company cash contributions. The ESOP loan maturities and rates are identical to the terms of related Company borrowings (see Financial Note 11). After-tax ESOP expense (income), including interest expense on ESOP debt, was $0.9 million, $(0.1) million, and $2.3 million in fiscal 1999, 1998 and 1997, respectively. Additional tax benefits received on dividends paid on unallocated shares of $2.2 million, $2.4 million, and $3.1 million in fiscal 1999, 1998 and 1997, respectively, have been credited directly to retained earnings in accordance with SFAS No. 109. Contribution expense for the PSIP in fiscal 1999, 1998 and 1997 was all ESOP related and is reflected in the amounts above. In fiscal 1999, 1998 and 1997 approximately 642,000, 808,000 and 907,000 shares, respectively, were allocated to plan participants. Through March 31, 1999, 12.1 million common shares have been allocated to plan participants. At March 31, 1999, 12.2 million common shares in the ESOP Trust had not been allocated to plan participants. F-68 McKESSON HBOC, INC. FINANCIAL NOTES--(Continued) Health Care and Life Insurance In addition to providing pension benefits, the Company provides health care and life insurance benefits for certain retired employees. The Company's policy is to fund these benefits as claims are paid. The benefits have been reduced significantly for those employees retiring after December 31, 1990. In 1989, the Company implemented an ESOP to provide funds at retirement that could be used for medical costs or health care coverage. Expenses for postretirement health care and life insurance benefits consisted of the following:
1999 1998 1997 ----- ----- ----- (in millions) Service cost--benefits earned during the period....... $ 0.9 $ 0.7 $ 1.1 Interest cost on projected benefit obligation......... 8.4 9.1 9.4 Amortization of unrecognized gain and prior service costs................................................ (0.9) (0.9) (0.9) Recognized actuarial gain............................. (4.0) (8.0) (4.6) Settlement gain....................................... (4.0) -- -- ----- ----- ----- Total............................................... $ 0.4 $ 0.9 $ 5.0 ===== ===== =====
The following table presents a reconciliation of the postretirement health care and life insurance benefits obligation at March 31:
1999 1998 1997 ------- ------- ------- (in millions) Change in benefit obligation: Benefit obligation at beginning of year........ $ 120.2 $ 122.9 $ 134.6 Service cost................................... 0.9 0.7 1.1 Interest cost.................................. 8.4 9.1 9.4 Actuarial loss (gain).......................... 7.5 (0.7) (9.1) Settlement..................................... (4.0) -- -- Benefits paid.................................. (12.3) (11.8) (13.1) ------- ------- ------- Benefit obligation at end of year.............. $ 120.7 $ 120.2 $ 122.9 ======= ======= ======= Funded Status Funded status at end of year................... $(120.7) $(120.2) $(122.9) Unrecognized actuarial loss.................... 4.4 (7.1) (14.3) Unrecognized prior service cost................ (8.0) (9.0) (9.9) ------- ------- ------- Accrued post-retirement benefit obligation..... $(124.3) $(136.3) $(147.1) ======= ======= =======
The assumed health care cost trend rates used in measuring the accumulated postretirement benefit obligation were 5.0%, 5.33% and 6.0% at the end of 1999, 1998 and 1997, respectively. The health care cost trend rate assumption has a significant effect on the amounts reported. Increasing the trend rate by one percentage point would increase the accumulated postretirement health care and life insurance obligation as of March 31, 1999 by $7.0 million and the related fiscal 1999 aggregate service and interest costs by $0.6 million. Decreasing the trend rate by one percentage point would reduce the accumulated postretirement health care and life insurance obligation as of March 31, 1999 by $6.6 million and the related fiscal 1999 aggregate service and interest cost by $0.6 million. The discount rates used in determining the accumulated postretirement benefit obligation were 7.00%, 7.25% and 7.75% at March 31, 1999, 1998 and 1997, respectively. F-69 McKESSON HBOC FINANCIAL NOTES--(Continued) Through the HBOC Transaction, the Company assumed an employee discount stock purchase plan for eligible employees of HBOC. Under such plan, participants may use up to 10% of their annual compensation up to certain dollar limitations whichever is higher, to purchase, through payroll deductions, the Company's common stock at the end of each plan year for 85% of the lower of the beginning or ending stock price for the plan year. HBOC also had a qualified profit-sharing and savings plan ("HBOC Plan") covering all HBOC employees with more than six months of service. Except for certain highly paid employees who were subject to certain limitations, participants were eligible to contribute up to 15% of their compensation to the plan. The Company matched these contributions at a rate equal to 75% of the first 4% of compensation contributed annually. Total plan expense was $10.6 million in fiscal 1999, $8.9 million in fiscal 1998 and $6.3 million in fiscal 1997. On April 1, 1999, the HBOC Plan was merged into the Company Profit-Sharing Investment Plan described earlier. 18. Segments of Business Effective March 31, 1999, the Company adopted the provisions of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 established standards for the way public business enterprises report information about operating segments in annual financial statements, and also established standards for enterprise-wide disclosure of segment information based on products and services, geographic areas, and major customers. Operating segments are defined by SFAS No. 131 as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company's chief operating decision makers who determine the allocation of resources and evaluate the financial performance of the operating segments are the Co-Chief Executive Officers. In evaluating financial performance, management focuses on operating profit as a segment's measure of profit or loss. Operating profit is income before interest expense, corporate interest income, taxes on income, and allocation of certain corporate revenues and expenses. The Company's operating segments include Health Care Supply Management, Health Care Information Technology and Water Products. The Company's Corporate division is included in the presentation of reportable segment information since certain revenues and expenses of this division are not allocated separately to the operating segments. The Health Care Supply Management segment includes the Company's U.S. pharmaceutical, health care products and medical-surgical supplies distribution businesses. U.S. Health Care Supply Management operations also include marketing and other support services to pharmaceutical manufacturers, manufacture and sale of automated pharmaceutical dispensing systems for hospitals and retail pharmacies, consulting and outsourcing services to pharmacies, and distribution of first-aid products to industrial and commercial customers. Health Care Supply Management also includes the Company's international distribution operations (including Canada and an equity interest in a Mexican distribution business). The Health Care Information Technology segment delivers enterprise-wide patient care, clinical, financial, managed care, payor and strategic management software solutions, as well as networking technologies, electronic commerce, outsourcing and other services to health care organizations throughout the U.S. and certain foreign countries. The Water Products segment is engaged in the processing, delivery and sale of bottled drinking water to homes and businesses and the sale of packaged water to retail stores. The Corporate division includes expenses associated with corporate functions and projects, certain employee benefits and an inter-segment elimination in fiscal 1999. F-70 McKESSON HBOC, INC. FINANCIAL NOTES--(Continued) The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Financial information relating to the Company's reportable operating segments as of and for the years ended March 31, is presented below:
1999 1998 1997 --------- ---------- ---------- (in millions) Revenues Health Care Supply Management............ $28,457.7 $ 20,640.4 $ 15,449.5 Health Care Information Technology....... 1,538.1 1,429.2 1,129.3 Water Products........................... 353.6 313.6 301.6 Corporate................................ 32.9 (1) 36.1 33.9 --------- ---------- ---------- Total.................................. $30,382.3 $ 22,419.3 $ 16,914.3 ========= ========== ========== Operating profit (loss) Health Care Supply Management(2)......... $ 341.6 $ 352.8 $ 94.1 Health Care Information Technology....... (31.6) 227.0 121.9 Water Products........................... 46.3 52.7 36.6 --------- ---------- ---------- Total.................................. 356.3 632.5 252.6 Interest--net(3)......................... (96.4) (78.4) (38.6) Corporate................................ (51.7) (47.7) (42.8) --------- ---------- ---------- Income from continuing operations before taxes on income and dividends on preferred securities of subsidiary trust................................. $ 208.2 $ 506.4 $ 171.2 ========= ========== ========== Segment assets--at year-end Health Care Supply Management............ $ 6,889.7 $ 5,219.6 $ 4,630.9 Health Care Information Technology....... 1,357.3 1,133.9 895.7 Water Products........................... 234.0 187.7 155.9 --------- ---------- ---------- Total.................................. 8,481.0 6,541.2 5,682.5 Corporate Cash, cash equivalents and marketable securities............................ 269.0 683.4 600.1 Other.................................. 331.6 125.1 190.7 --------- ---------- ---------- Total.................................. $ 9,081.6 $ 7,349.7 $ 6,473.3 ========= ========== ========== Depreciation and amortization Health Care Supply Management............ $ 74.4 $ 65.9 $ 48.2 Health Care Information Technology....... 90.7 74.6 62.8 Water Products........................... 28.5 24.1 24.6 Corporate................................ 5.7 5.4 5.7 --------- ---------- ---------- Total.................................. $ 199.3 $ 170.0 $ 141.3 ========= ========== ========== Expenditures for long-lived assets Health Care Supply Management............ $ 97.2 $ 82.1 $ 46.3 Health Care Information Technology....... 79.2 76.9 41.2 Water Products........................... 51.5 52.7 36.6 Corporate................................ 22.8 7.4 3.9 --------- ---------- ---------- Total.................................. $ 250.7 $ 219.1 $ 128.0 ========= ========== ==========
F-71 McKESSON HBOC, INC. FINANCIAL NOTES--(Continued)
1999 1998 1997 --------- --------- --------- (in millions) Revenues by products and services Health Care Supply Management Pharmaceutical Distribution and Services..... $26,165.5 $18,761.9 $15,267.4 Medical-Surgical Distribution and Services... 2,292.2 1,878.5 182.1 Health Care Information Technology Software..................................... 345.0 405.9 320.9 Services..................................... 984.4 809.1 646.6 Hardware..................................... 208.7 214.2 161.8 Water Products................................. 353.6 313.6 301.6 Corporate...................................... 32.9(1) 36.1 33.9 --------- --------- --------- Total........................................ $30,382.3 $22,419.3 $16,914.3 ========= ========= =========
- -------- (1) Net of $3.0 million inter-segment elimination related to a Health Care Information Technology segment software sale to the Health Care Supply Management segment for use in that segment's consulting and outsourcing business. (2) Includes $13.3 million, $12.0 million and $11.5 million of pre-tax earnings from an equity investment in fiscal 1999, 1998 and 1997, respectively. (3) Interest expense is shown net of corporate interest income. Revenues and long-lived assets by geographic areas:
1999 1998 1997 --------- --------- --------- (in millions) Revenues United States................................. $28,318.7 $20,706.9 $15,357.6 International(1).............................. 2,063.6 1,712.4 1,556.7 --------- --------- --------- Total....................................... $30,382.3 $22,419.3 $16,914.3 ========= ========= ========= Operating profit United States................................. $ 315.9 $ 606.4 $ 222.9 International(1).............................. 40.4 26.1 29.7 --------- --------- --------- Total....................................... $ 356.3 $ 632.5 $ 252.6 ========= ========= ========= Long-lived assets, at year end United States................................. $ 654.4 $ 549.2 $ 471.0 International(1).............................. 39.6 43.9 18.3 --------- --------- --------- Total....................................... $ 694.0 $ 593.1 $ 489.3 ========= ========= =========
- -------- (1) International represents a wholly-owned subsidiary which distributes pharmaceuticals in Canada, an equity investment in a pharmaceutical distributor in Mexico, and an information technology business in the United Kingdom. 19. Other Commitments and Contingent Liabilities On April 28, 1999, the Company announced that, during the course of its year-end financial audit process, the Company determined that software sales transactions (aggregating $26.2 million for the fourth quarter ended March 31, 1999 and $16.0 million in the prior quarters of the fiscal year) were improperly recorded because they F-72 McKESSON HBOC, INC. FINANCIAL NOTES--(Continued) were subject to contingencies and had been reversed. It also announced that the audit process was ongoing. The Audit Committee of the Company's Board of Directors subsequently initiated an investigation into this matter. On May 25, 1999, the Company announced that as a result of information developed through its continuing year-end internal and external audit process and Audit Committee review, additional instances of improper revenue recognition had been found, that further downward revision would be required of the results for the fiscal year ended March 31, 1999, as well as quarterly results during the fiscal year, and that prior years' results of the Health Care Information Technology business unit ("HBOC") could also require restatement. Since the Company's announcement on April 28, 1999, and as of July 6, 1999, fifty-three class action lawsuits, three derivative actions, and two individual actions have been filed against the Company, and certain current or former officers and directors of the Company (the "Defendants"). One of the actions also names as defendants Bear, Stearns & Company, Inc., and Arthur Andersen LLP. Fifty-three of the actions were filed in Federal Court (the "Federal Actions") alleging violations of the federal securities laws. Of these, fifty-two were filed in the United States District Court for the Northern District of California, and one was filed in the Northern District of Illinois. Of the fifty-two filed in the Northern District of California, fifty-one are class actions and one is a derivative action. The action filed in the Northern District of Illinois is a class action. The Company expects that the Federal Actions, with the exception of the derivative action, will be consolidated into a single action, and the Company will not be required to respond until after the filing of a consolidated complaint. The class actions are purportedly brought on behalf of a class of the Company's shareholders that varies according to the complaint, with July 16, 1996 being the earliest date for shareholders who purchased or acquired the Company's shares and May 25, 1999 being the latest date. In general, these actions allege that the Company and certain officers or directors made false and misleading statements concerning the Company's future prospects and financial results in violation of the federal securities laws. Plaintiffs seek damages in an unspecified amount. Plaintiffs also request pre-judgment and post-judgment interest, costs and attorneys fees. Five actions have also been filed in various state courts (the "State Actions"). Of these, two are derivative actions, one filed in the Chancery Court of the State of Delaware (Fine v. McCall, et. al.), and the other in California State Court in San Francisco (Mitchell v. McCall, et. al). Two individual actions have also been filed, one in California State Court in San Francisco (Yurick v. McKesson et. al.), and the other, for which a summons has issued but a complaint not yet filed, in the Court of Common Pleas, Chester County, Pennsylvania (Grant v. McKesson). One purported class action, on behalf of a class of shareholders of McKesson Corporation at the time of the merger with HBOC, has been filed in the Delaware Court of Chancery. The State Actions seek unspecified damages for alleged breaches of fiduciary duty and other causes of action arising out of the events that led to the Company's need to revise its financial statements. The Company is currently required to respond to the derivative action in Delaware by July 30, 1999 and the actions in California by July 26, 1999. The Company is not currently required to respond to the action filed in Pennsylvania. One additional Federal Action has been filed in the Northern District of Georgia, but that action names only two former officers, and does not name the Company; and one additional class action has been filed in the Delaware Court of Chancery against HBOC, Inc. and former officers and directors of a company acquired by HBOC in 1998 alleging breach of fiduciary duties by such parties in connection with such sale, and is brought on behalf of the shareholders of the acquired company. In addition, the United States Attorney's Office for the Northern District of California and the San Francisco District Office of the United States Securities and Exchange Commission ("SEC") have also commenced investigations in connection with the matters relating to the restatement of previously reported amounts for HBOC described above. The SEC has advised the Company that its inquiry should not be construed as an indication by the SEC or its staff that any violations of law have occurred. F-73 McKESSON HBOC, INC. FINANCIAL NOTES--(Continued) The Company does not believe it is feasible to predict or determine the outcome or resolution of these proceedings, or to estimate the amounts of, or potential range of loss with respect to these proceedings. In addition, the timing of the final resolution of these proceedings is uncertain. The range of possible resolutions of these proceedings could include judgments against the Company or settlements, that could require substantial payments by the Company which could have a material adverse impact on the Company's financial position, results of operations and cash flows. The Company currently is a defendant in numerous civil antitrust actions filed since 1993 in federal and state courts by retail pharmacies. The federal cases have been coordinated for pretrial purposes in the United States District Court in the Northern District of Illinois and are known as MDL 997. MDL 997 consists of a consolidated class action (the "Federal Class Action") as well as approximately 109 additional actions brought by approximately 3,500 individual retail, chain and supermarket pharmacies (the "Individual Actions"). There are numerous other defendants in these actions including several pharmaceutical manufacturers and several other wholesale distributors. These cases allege, in essence, that the defendants have violated the Sherman Act by conspiring to fix the prices of brand name pharmaceuticals sold to plaintiffs at artificially high, and non-competitive levels, especially as compared with the prices charged to mail order pharmacies, managed care organizations and other institutional buyers. On January 19, 1999, the District Court entered its written opinion and judgment granting defendants' motion for a directed verdict. On July 13, 1999, the Seventh Circuit affirmed the District Court's judgment as to dismissal of the claims against the wholesalers. The Individual Actions, which are still pending in the Northern District of Illinois for pre-trial purposes, will be remanded to their original transferor jurisdictions for trial. The wholesalers' motion for partial summary judgment that they should not be liable for any damages resulting from drugs sold prior to four years from the October 1997 amended complaints in those cases was granted. Most of the individual cases brought by chain stores have been settled. The currently pending state court antitrust cases against the Company are in California, Alabama, Mississippi and Tennessee. The state cases are based essentially on the same facts alleged in the Federal Class Action and Individual Actions and assert violations of state antitrust and/or unfair competition laws. The case in California (referred to as Coordinated Special Proceeding, Pharmaceutical Cases I, II & III) is pending in Superior Court for the State of California (San Francisco County). A class of retail pharmacies has been certified and the case is trailing MDL 997. In the Alabama case (Durrett, et al. v. The Upjohn Co. et al.), the Supreme Court has recently held that the Alabama state antitrust statute at issue does not reach the conduct alleged in the complaint. The case in Mississippi (Montgomery Drug Co. et al. v. The Upjohn Co. et al.) is pending in the Chancery Court of Prentiss County, Mississippi. The Chancery Court has held that the case may not be maintained as a class action. The Tennessee case, filed in Knoxville, is a class action on behalf of consumers who purchased brand-name drugs from retail stores in fourteen states. The claims, brought under Tennessee law, allege deceptive trade practices, conspiracy to fix prices, price discrimination, and fraudulent concealment. On July 6, 1998, the court conditionally certified the case as a multi-state class action. A motion to dismiss the complaint is pending on the grounds, among others, that (i) plaintiff class members are indirect purchasers and are not entitled to bring an action against the wholesalers and manufacturers and (ii) the state antitrust statues on which the class relied do not apply to interstate commerce. A motion is also pending for permission to file an interlocutory appeal from the order denying defendants' motion to vacate the order granting conditional class certification. In each of the cases, plaintiffs seek remedies in the form of injunctive relief and unquantified monetary damages, and attorneys fees and costs. Plaintiffs in the California cases also seek restitution. In addition, trebled damages are sought in the Federal Class Action, the Individual Actions, the California case and the Tennessee case and statutory penalties of $500 per violation are sought in the Mississippi and Alabama cases. The Company believes it has meritorious defenses to the allegations made against it and intends to vigorously defend itself in all of these actions. In addition, the Company has entered into a judgment sharing agreement with certain F-74 McKESSON HBOC, INC. FINANCIAL NOTES--(Continued) pharmaceutical manufacturer defendants, which provides generally that the Company (together with the other wholesale distributor defendants) will be held harmless by such pharmaceutical manufacturer defendants and will be indemnified against the costs of adverse judgments, if any, against the wholesaler and manufacturers in these or similar actions, in excess of $1 million in the aggregate per wholesale distributor defendant. In January 1997, the Company and twelve pharmaceutical manufacturers (the "Manufacturer Defendants") were named as defendants in the matter of FoxMeyer Health Corporation vs. McKesson, et. al. filed in the District Court in Dallas County, Texas ("the Texas Action"). Plaintiff (the parent corporation of FoxMeyer Drug Company and FoxMeyer Corporation collectively, "FoxMeyer Corporation") alleges that, among other things, the Company (i) defrauded Plaintiff, (ii) competed unfairly and tortiously interfered with FoxMeyer Corporation's business operations, and (iii) conspired with the Manufacturer Defendants, all in order to destroy FoxMeyer Corporation's business, restrain trade and monopolize the marketplace, and allow the Company to purchase that business at a distressed price. Plaintiff seeks relief against all defendants in the form of compensatory damages of at least $400 million, punitive damages, attorneys fees and costs. The Company answered the complaint, denying the allegations, and removed the case to federal bankruptcy court in Dallas. In March 1997, the Company and the Manufacturer Defendants filed a complaint in intervention against FoxMeyer Health (now known as Avatex Corporation) in the action filed against Avatex by the FoxMeyer Unsecured Creditors Committee in the United States Bankruptcy Court for the District of Delaware. The complaint in intervention seeks declaratory relief and an order enjoining Avatex from pursuing the Texas Action. In November 1998, the Delaware court granted the Company's motion for summary judgment as to the first three counts asserted in the Texas Action on the ground of judicial estoppel. A renewed motion for summary judgment on the four remaining counts of Avatex' complaint in the Texas Action is pending before the Delaware court. In addition, the Company filed an amended complaint adding the Trustee and debtors as defendants. Based on the order granting summary judgment as to the first three counts, the Texas bankruptcy court dismissed those counts with prejudice and ordered the Texas Action remanded to state court. On November 30, 1998, the Company and the other Defendants filed a notice of appeal to the District Court from the remand ruling as well as the August, 1997 ruling denying defendants' motion to transfer the Texas Action to Delaware. In addition, the Company has filed a counterclaim and cross-claim against Avatex and Mssrs. Estrin, Butler and Massman in the Texas Action, asserting various claims of misrepresentation and breach of contract. The District Court upheld the remand order and denied as moot the appeal from the denying transfer. A cross-appeal by Avatex from the order dismissing the three counts with prejudice is still pending. The Company and several of the other defendants have appealed to the Court of Appeals the ruling upholding the order denying transfer. The Company has been named as a defendant, or has received from customers tenders of defense, in approximately forty pending cases alleging injury due to the diet drug combination of fenfluramine or dexfenfluramine and phentermine. All of the cases are pending in the state courts of Alabama, California, Idaho, Michigan, New Mexico and New York. The Company has tendered the cases to the manufacturers of the drugs and is currently defending the cases pending resolution of its negotiations with the manufacturers. Certain subsidiaries of the Company (i.e. MGM and RedLine, collectively, the "Subsidiaries") are defendants in approximately forty cases in which plaintiffs claim that they were injured due to exposure, over many years, to the latex proteins in gloves manufactured by numerous manufacturers and distributed by a number of distributors, including the Subsidiaries. Efforts to resolve tenders of defense to their suppliers are continuing. The Subsidiaries' insurers are providing coverage for these cases, subject to the applicable deductibles. There are six state court class actions in New York, Ohio, Oklahoma, Pennsylvania, South Carolina and Texas filed against MGM on behalf of all health care workers in those states who suffered accidental needle F-75 McKESSON HBOC, INC. FINANCIAL NOTES--(Continued) sticks that exposed them to potentially contaminated bodily fluids, arising from MGM's distribution of allegedly defective syringes. MGM's suppliers of the syringes are also named defendants in these actions. All cases except the Texas case are in the early stages of discovery. The Texas court held a class certification hearing on June 1, 1999, and stayed its ruling on certification pending a decision from the Texas Supreme Court on the issue of whether a products liability class action is proper where issues of comparative fault exist. These cases have been tendered to MGM's suppliers, their insurers, and to MGM's insurer. The Company has filed a declaratory relief action in California against its major supplier's insurer to obtain a determination of rights as an additional insured under the supplier's insurance policy. Salomon Smith Barney ("SSB") filed an action against McKesson and HBOC on December 9, 1998 in federal district court in New York City claiming entitlement to $50 million in fees in connection with the January 12, 1999 merger of the two companies. SSB has sued on the theories of breach of contract, quantum meruit and unjust enrichment; it has also sued HBOC for tortious interference with contract, tortious interference with business relations, and prima facie tort. It also seeks compensatory damages from HBOC for tortiously interfering with its contract and relations with McKesson. SSB also seeks a judgment requiring defendants to indemnify SSB pursuant to the contracts. On May 12, 1999 defendants' motions to stay the action were denied; the Company's motion to dismiss was denied, and HBOC's motion to dismiss was partially granted as to some of the tort claims against it. On June 21, 1999, defendants filed their answer and counterclaims against SSB for violations of Section 10(b) of the Securities Exchange Act of 1934; breach of fiduciary duty; negligence; breach of contract; misappropriation of trade secrets; and rescission and restitution. Trial is scheduled for October 1999. Primarily as a result of the operation of its former chemical businesses, which were divested in fiscal 1987, the Company is involved in various matters pursuant to environmental laws and regulations: The Company has received claims and demands from governmental agencies relating to investigative and remedial action purportedly required to address environmental conditions alleged to exist at five sites where the Company (or entities acquired by the Company) formerly conducted operations; and the Company, by administrative order or otherwise, has agreed to take certain actions at those sites, including soil and groundwater remediation. The current estimate (determined by the Company's environmental staff, in consultation with outside environmental specialists and counsel) of the upper limit of the Company's range of reasonably possible remediation costs for these five sites is approximately $17 million, net of approximately $3.5 million which third parties have agreed to pay in settlement or which the Company expects, based either on agreements or nonrefundable contributions which are ongoing, to be contributed by third parties. The $17 million is expected to be paid out between April 1999 and March 2028 and is included in the Company's recorded environmental liabilities at March 31, 1999. In addition, the Company has been designated as a potentially responsible party (PRP) by the U.S. Environmental Protection Agency under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended (the "Superfund" law), for environmental assessment and cleanup costs as the result of the Company's alleged disposal of hazardous substances at 19 Superfund sites. With respect to each of these Superfund sites, numerous other PRP's have similarly been designated and, while the current state of the law potentially imposes joint and several liability upon PRPs, as a practical matter costs of these sites are typically shared with other PRPs. The Company's estimated liability at those 19 Superfund sites is approximately $2 million. The aggregate settlements and costs paid by the Company in Superfund matters to date has not been significant. The $2 million is included in the Company's recorded environmental liabilities at March 31, 1999. The potential costs to the Company related to environmental matters is uncertain due to such factors as: the unknown magnitude of possible pollution and cleanup costs; the complexity and evolving nature of governmental F-76 McKESSON HBOC, INC. FINANCIAL NOTES--(Continued) laws and regulations and their interpretations; the timing, varying costs and effectiveness of alternate cleanup technologies; the determination of the Company's liability in proportion to other PRPs; and the extent, if any, to which such costs are recoverable from insurance or other parties. Except as specifically stated above with respect to the litigation matters arising from the Company's restatement of previously reported amounts for HBOC, management believes, based on current knowledge and the advice of the Company's counsel, that the outcome of the litigation and governmental proceedings discussed in this Financial Note 19 will not have a material adverse effect on the Company's financial position, results of operations or cash flows. 20. Quarterly Financial Information (unaudited)
First Second Third Fourth Fiscal Quarter Quarter Quarter Quarter Year --------- -------- -------- -------- --------- (in millions except per share amounts) Fiscal 1999 Revenues................... $ 6,283.3 $7,337.3 $8,366.6 $8,395.1 $30,382.3 Gross profit............... 612.9 632.9 670.6 749.2 2,665.6 Net income (loss).......... 69.1 26.3 50.7 (61.2)(1) 84.9 Earnings (loss) per common share Diluted.................. $ 0.25 $ 0.10 $ 0.18 $ (0.22) $ 0.31 Basic.................... 0.25 0.10 0.18 (0.22) 0.31 Cash dividends per common share..................... $ 0.125 $ 0.125 $ 0.125 $ 0.06 $ 0.435 Market prices per common share High..................... $85 13/16 $96 1/4 $ 96 $ 89 3/4 $ 96 1/4 Low...................... 57 5/8 73 5/8 66 1/2 52 1/4 52 1/4 Fiscal 1998 Revenues................... $ 5,324.5 $5,523.1 $5,793.9 $5,777.8 $22,419.3 Gross profit............... 560.7 575.9 616.9 639.9 2,393.4 Net income................. 68.7 82.6 71.6 81.7 (1) 304.6 Earnings per common share Diluted.................. $ 0.25 $ 0.30 $ 0.26 $ 0.29 $ 1.10 Basic.................... 0.26 0.31 0.27 0.30 1.14 Cash dividends per common share..................... 0.125 0.125 0.125 0.125 0.50 Market prices per common share High..................... $ 40 1/16 $53 1/8 $ 56 7/8 $ 61 3/4 $ 61 3/4 Low...................... 31 1/2 38 1/4 48 11/16 47 7/8 31 1/2
- -------- (1) Includes after-tax charges of $89.1 million and $16.8 million during the three months ended March 31, 1999 and 1998, respectively, related to transaction costs and costs associated with employee benefits, primarily related to change in control provisions, incurred in connection with acquisitions (See Financial Note 4). Also includes after-tax charges of $55.3 million and $8.7 million during the three months ended March 31, 1999 and 1998, respectively, related to employee severance and restructuring closures, workforce reductions, and the elimination of product lines and systems (See Financial Note 5). F-77 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT There is no parent of the Company. The following is a listing of the significant subsidiaries of the Company, or if indented, subsidiaries of the Company under which they are listed:
Jurisdiction of Organization --------------- HBO & Company................................................ Delaware McKesson Water Products Company.............................. California Medis Health and Pharmaceutical Services Inc. ............... Canada GM Holdings, Inc. ........................................... Delaware McKesson General Medical Corp. ............................ Virginia
25 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in McKesson HBOC, Inc. Registration Statement Nos. 33-86536, 333-00611, 333-02871, 333-21931, 333- 32643, 333-32645, 333-43101, 333-43079, 333-48337, 333-48339, 333-48859, 333- 50261, 333-70501, and 333-71917 on Form S-8 and Registration Statement Nos. 333-50985, 333-50985-01, 333-50985-02, 333-50985-03 and 333-66359, on Form S- 3, and Registration Statement No. 333-56623 on Form S-4 of our report dated July 12, 1999 (which report was modified to indicate that the consolidated financial statements of HBO & Company ("HBOC"), as of and for the two years ended March 31, 1998 were audited by other auditors whose report (which expresses an unqualified opinion and includes an explanatory paragraph related to certain shareholder litigation) has been furnished to us, and our opinion, insofar as it relates to the amounts included for HBOC as of and for the two years ended March 31, 1998 is based solely on the report of such auditors and to refer to certain shareholder litigation as discussed in Financial Note 19 to the consolidated financial statements), appearing in this Annual Report on Form 10-K of McKesson HBOC, Inc., for the year ended March 31, 1999. Deloitte & Touche LLP San Francisco, California July 12, 1999 26 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated July 12, 1999 with respect to the consolidated financial statements of HBO & Company as of March 31, 1998 and 1997 and for the years then ended, included in this Form 10K of McKesson HBOC, Inc., into the following previously filed Registration Statements of McKesson HBOC, Inc.: . Registration Statements on Form S-3 (No.'s 333-50985, 333-50985-01, 333- 50985-02, 333-50985-03 and 333-66359) . Registration Statement on Form S-4 (No. 333-56623) . Registration Statements on Form S-8 (No.'s 33-86536, 333-00611, 333- 02871, 333-21931, 333-32643, 333-32645, 333-43101, 333-43079, 333-48337, 333-48339, 333-48859, 333-50261, 333-70501 and 333-71917) Reference is made to said report in which the opinion contains an explanatory fourth paragraph with respect to certain shareholder litigation as discussed in Note 10 to the consolidated financial statements. Arthur Andersen LLP Atlanta, Georgia July 12, 1999 27 EX-3.3 2 RESTATED BY-LAWS EXHIBIT 3.3 RESTATED BY-LAWS OF McKESSON HBOC, INC. A Delaware Corporation As amended through April 26, 1999 ARTICLE I Offices Section 1. Registered Office. The address of the registered office of McKesson HBOC, Inc. (the "Corporation") within the State of Delaware is 1013 Centre Road, City of Wilmington 19805-1297, County of New Castle. The name of the registered agent of the Corporation at such address is The Prentice-Hall Corporation System, Inc. Section 2. Other Offices. The Corporation shall also have and maintain an office or principal place of business at One Post Street, San Francisco, California and may also have offices at such other places, both within and without the State of Delaware, as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE II Stockholders' Meetings Section 1. Place of Meetings. Meetings of the stockholders of the Corporation shall be held at such place, either within or without the State of Delaware, as may be designated from time to time by the Board of Directors, or, if not so designated, then at the office of the Corporation required to be maintained pursuant to Section 2 of ARTICLE I hereof. Section 2. Annual Meetings. The annual meetings of stockholders of the Corporation for the purpose of election of directors and for such other business as may lawfully come before it, shall be held on such date and at such time as may be designated from time to time by the Board of Directors, or, if not so designated, then at 10:00 a.m. on the last Wednesday in July in each year if not a legal holiday, and, if a legal holiday, at the same hour and place on the next succeeding day not a holiday. Section 3. Special Meetings. Special Meetings of the stockholders of the Corporation may be called, for any purpose or purposes, by the Chairman of the Board or the President or the Board of Directors at any time. Stockholders may not call Special Meetings of the stockholders of the Corporation. 1 Section 4. Notice of Meetings. (a) Except as otherwise provided by law or the Certificate of Incorporation, written notice of each meeting of stockholders, specifying the place, date and hour and purpose or purposes of the meeting, shall be given not less than 10 nor more than 60 days before the date of the meeting to each stockholder entitled to vote thereat, directed to his address as it appears upon the books of the Corporation; except that where the matter to be acted on is a merger or consolidation of the Corporation or a sale, lease or exchange of all or substantially all of its assets, such notice shall be given not less than 20 nor more than 60 days prior to such meeting. (b) If at any meeting action is proposed to be taken which, if taken, would entitle stockholders fulfilling the requirements of Section 262(d) of the Delaware General Corporation Law to an appraisal of the fair value of their shares, the notice of such meeting shall contain a statement of that purpose and to that effect and shall be accompanied by a copy of that statutory section. (c) When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken unless the adjournment is for more than thirty days, or unless after the adjournment a new record date is fixed for the adjourned meeting, in which event a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. (d) Notice of the time, place and purpose of any meeting of stockholders may be waived in writing, either before or after such meeting, and to the extent permitted by law, will be waived by any stockholder by his attendance thereat, in person or by proxy. Any stockholder so waiving notice of such meeting shall be bound by the proceedings of any such meeting in all respects as if due notice thereof had been given. (e) Unless and until voted, every proxy shall be revocable at the pleasure of the person who executed it or of his legal representatives or assigns, except in those cases where an irrevocable proxy permitted by statute has been given. Section 5. Quorum. At all meetings of stockholders, except where otherwise provided by law, the Certificate of Incorporation, or these By-Laws, the presence, in person or by proxy duly authorized, of the holders of a majority of the outstanding shares of stock entitled to vote shall constitute a quorum for the transaction of business. Shares, the voting of which at said meeting has been enjoined, or which for any reason cannot be lawfully voted at such meeting, shall not be counted to determine a quorum at said meeting. In the absence of a quorum any meeting of stockholders may be adjourned, from time to time, by vote of the holders of a majority of the shares represented thereat, but no other business shall be transacted at such meeting. At such adjourned meeting at which a quorum is present or represented any business may be transacted which might have been transacted at the original meeting. The stockholders present at a duly called or convened meeting, at which a quorum is present, may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. Except as otherwise provided by law, the Certificate of Incorporation or these By-Laws, all action taken by the holders of a majority of the voting power represented at any meeting at which a quorum is present shall be valid and binding upon the Corporation. In the event that at any meeting at which the holders of more than one class or series of the Corporation's capital stock are entitled to vote as a class, a quorum of any such class or series is lacking, the holders of any class or series represented by a quorum may proceed with the 2 transaction of the business to be transacted by that class or series, and if such business is the election of directors, the director whose successors shall not have been elected shall continue in office until their successors shall have been duly elected and shall have qualified. Section 6. Voting Rights. (a) Except as otherwise provided by law, only persons in whose names shares entitled to vote stand on the stock records of the Corporation on the record date for determining the stockholders entitled to vote at said meeting shall be entitled to vote at such meeting. Shares standing in the names of two or more persons shall be voted or represented in accordance with the determination of the majority of such persons, or, if only one of such persons is present in person or represented by proxy, such person shall have the right to vote such shares and such shares shall be deemed to be represented for the purpose of determining a quorum. (b) Every person entitled to vote or execute consents shall have the right to do so either in person or by an agent or agents authorized by a written proxy executed by such person or his duly authorized agent, which proxy shall be filed with the Secretary of the Corporation at or before the meeting at which it is to be used. Said proxy so appointed need not be a stockholder. No proxy shall be voted on after three years from its date unless the proxy provides for a longer period. (c) Without limiting the manner in which a stockholder may authorize another person or persons to act for him as proxy pursuant to subsection (b) of this Section, the following shall constitute a valid means by which a stockholder may grant such authority: (1) A stockholder may execute a writing authorizing another person or persons to act for him as proxy. Execution may be accomplished by the stockholder or his authorized officer, director, employee or agent signing such writing or causing his or her signature to be affixed to such writing by any reasonable means including, but not limited to, by facsimile signature. (2) A stockholder may authorize another person or persons to act for him as proxy by transmitting or authorizing the transmission of a telegram, cablegram, or other means of electronic transmission to the person who will be the holder of the proxy or to a proxy solicitation firm, proxy support service organization or like agent duly authorized by the person who will be the holder of the proxy to receive such transmission, provided that any such telegram, cablegram or other means of electronic transmission must either set forth or be submitted with information from which it can be determined that the telegram, cablegram or other electronic transmission was authorized by the stockholder. If it is determined that such telegrams, cablegrams or other electronic transmissions are valid, the inspectors or, if there are no inspectors, such other persons making that determination shall specify the information upon which they relied. (d) Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission created pursuant to subsection (c) of this Section may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. Section 7. Voting Procedures and Inspectors of Elections. (a) The Corporation shall, in advance of any meeting of stockholders, appoint one or more inspectors to act at the meeting and make a written report thereof. The Corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no 3 inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his ability. (b) The inspectors shall (i) ascertain the number of shares outstanding and the voting power of each, (ii) determine the shares represented at a meeting and the validity of proxies and ballots, (iii) count all votes and ballots, (iv) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors, and (v) certify their determination of the number of shares represented at the meeting, and their count of all votes and ballots. The inspectors may appoint or retain other persons or entities to assist the inspectors in the performance of the duties of the inspectors. (c) The date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting shall be announced at the meeting. No ballot, proxies or votes, nor any revocations thereof or changes thereto, shall be accepted by the inspectors after the closing of the polls unless the Court of Chancery upon application by a stockholder shall determine otherwise. (d) In determining the validity and counting of proxies and ballots, the inspectors shall be limited to an examination of the proxies, any envelopes submitted with those proxies, any information provided in accordance with Section 212(c)(2) of the Delaware General Corporation Law, ballots and the regular books and records of the Corporation, except that the inspectors may consider other reliable information for the limited purpose of reconciling proxies and ballots submitted by or on behalf of banks, brokers, their nominees or similar persons which represent more votes than the holder of a proxy is authorized by the record owner to cast or more votes than the stockholder holds of record. If the inspectors consider other reliable information for the limited purpose permitted herein, the inspectors at the time they make their certification pursuant to subsection (b)(v) of this Section shall specify the precise information considered by them including the person or persons from whom they obtained the information, when the information was obtained, the means by which the information was obtained and the basis for the inspectors' belief that such information is accurate and reliable. (e) The provisions of this Section 7 shall not apply to any annual meeting of stockholders held prior to the annual meeting of stockholders to be held in 1995. Section 8. List of Stockholders. The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least 10 days before every meeting of stockholders, a complete list of the stockholders entitled to vote at said meeting, arranged in alphabetical order, showing the address of and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least 10 days prior to the meeting, either at a place within the city where the meeting is to be held and which place shall be specified in the notice of the meeting, or, if not specified, at the place where said meeting is to be held, and the list shall be produced and kept at the time and place of meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 9. Stockholder Proposals at Annual Meetings. At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, otherwise properly brought before the meeting by or at the direction of the Board of Directors or 4 otherwise properly brought before the meeting by a stockholder of the Corporation (i) who is a stockholder of record on the date of the giving of the notice provided for in this Section 9 and on the record date for the determination of stockholders entitled to vote at such annual meeting and (ii) who complies with the notice procedures set forth in this Section 9. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice to the Secretary must be delivered to or mailed and received at the principal executive offices of the Corporation, not less than 90 days nor more than 120 days prior to the anniversary date of the immediately preceding annual meeting of stockholders; provided, however, that in the event that the annual meeting is called for a date that is not within 30 days before or after such anniversary date, notice by the stockholder in order to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made, whichever first occurs. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting, (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of the stockholder proposing such business, (iii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by the stockholder, (iv) a description of all arrangements or understandings between the stockholder and any other person or persons (including their names) in connection with the proposal of such business by the stockholder and any material interest of the stockholder in such business, and (v) a representation that the stockholder intends to appear in person or by proxy at the annual meeting to bring such business before the meeting. Notwithstanding anything in the By-Laws to the contrary, no business shall be conducted at the annual meeting except in accordance with the procedures set forth in this Section 9, provided, however, that nothing in this Section 9 shall be deemed to preclude discussion by any stockholder of any business properly brought before the annual meeting in accordance with said procedure. The Chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 9, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Section 10. Nominations of Persons for Election to the Board of Directors. In addition to any other applicable requirements, only persons who are nominated in accordance with the following procedures shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of stockholders by or at the direction of the Board of Directors, by any nominating committee or person appointed by the Board of Directors or by any stockholder of the Corporation (i) who is a stockholder of record on the date of the giving of the notice provided for in this Section 10 and on the record date for the determination of stockholders entitled to vote at such annual meeting and (ii) who complies with the notice procedures set forth in this Section 10. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a stockholder's notice to the Secretary must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 90 days nor more than 120 days prior to the anniversary date of the immediately preceding annual meeting of stockholders; provided, however, that in the event that the annual meeting is called for a date that is not within 30 days before or after such anniversary date, notice by the stockholder in order to be timely must be so received not later than the 10th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made, whichever first occurs. Such stockholder's notice shall set 5 forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class and number of shares of the Corporation which are beneficially owned by the person and (iv) any other information relating to the person that is required to be disclosed in solicitations for proxies for election of directors pursuant to Section 14 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder; and (b) as to the stockholder giving the notice, (i) the name and record address of the stockholder, (ii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by the stockholder, (iii) a description of all arrangements or understandings between the stockholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made by the stockholder, (iv) a representation that such stockholder intends to appear in person or by proxy at the meeting to nominate the persons named in such notice and (v) any other information relating to the stockholder that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for the election of directors pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder. Such notice must be accompanied by a written consent of each proposed nominee being named as a nominee and to serve as a director if elected. The Corporation may require any proposed nominee to furnish such other information as may reasonably be required by the Corporation to determine the eligibility of such proposed nominee to serve as a director of the Corporation. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth herein. These provisions shall not apply to nomination of any persons entitled to be separately elected by holders of preferred stock. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. ARTICLE III Directors Section 1. General Powers. The property, affairs and business of the Corporation shall be managed under the direction of its Board of Directors, which may exercise all of the powers of the Corporation, except such as are by law or by the Certificate of Incorporation or by these By-Laws expressly conferred upon or reserved to the stockholders. Section 2. Number and Term of Office; Removal. The number of directors of the Corporation shall be fixed from time to time by these By-Laws but in no event shall be less than three (3). Until these By-Laws are further amended, the number of directors shall be twelve. The directors shall be divided into three classes. Each such class shall consist, as nearly as may be possible, of one- third of the total number of directors, and any remaining directors shall be included within such group or groups as the Board of Directors shall designate. At the initial annual meeting of stockholders in 1994, a class of directors shall be elected for a one-year term, a class of directors for a two-year term and a class of directors for a three-year term. At each succeeding annual meeting of stockholders, beginning in 1995, successors to the class of directors whose term expires at that annual meeting shall be elected for a three-year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, but in no case shall a decrease in the number of directors shorten the term of any incumbent director. A director may be removed from office for cause only and, subject to such removal, death, resignation, retirement or disqualification, shall hold 6 office until the annual meeting for the year in which his term expires and until his successor shall be elected and qualify. No alteration, amendment or repeal of these By-Laws shall be effective to shorten the term of any director holding office at the time of such alteration, amendment or repeal, to permit any such director to be removed without cause, or to increase the number of directors in any class or in the aggregate from that existing at the time of such alteration, amendment or repeal until the expiration of the terms of office of all directors then holding office, unless such alteration, amendment or repeal has been approved by either the holders of all shares of stock entitled to vote thereon or by a vote of a majority of the entire Board of Directors. The provisions of this Section 2 shall not apply to directors governed by Section 15 of this ARTICLE III. Section 3. Election of Directors. At each meeting of the stockholders for the election of directors, the directors to be elected at such meeting shall be elected by a plurality of votes given at such election. Section 4. Vacancies. Any vacancy occurring in the Board of Directors for any cause other than by reason of an increase in the number of directors may be filled by a majority of the remaining members of the Board of Directors, although such majority is less than a quorum, or by the stockholders. Any vacancy occurring by reason of an increase in the number of directors may be filled by action of a majority of the entire Board of Directors or by the stockholders. A director elected by the Board of Directors to fill a vacancy shall be elected to hold office until the expiration of the term for which he was elected and until his successor shall have been elected and shall have qualified. A director elected by the stockholders to fill a vacancy shall be elected to hold office until the expiration of the term for which he was elected and until his successor shall have been elected and shall have qualified. The provisions of this Section 4 shall not apply to directors governed by Section 15 of this ARTICLE III. Section 5. Resignations. A director may resign at any time by giving written notice to the Board of Directors or to the Secretary. Such resignation shall take effect at the time specified therein and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 6. Annual Meetings. The Board of Directors, as constituted following the vote of stockholders at any meeting of the stockholders for the election of directors, may hold its first meeting for the purpose of organization and the transaction of business, if a quorum be present, immediately after such meeting and at the same place, and notice of such meeting need not be given. Such first meeting may be held at any other time and place specified in a notice given as hereinafter provided for special meetings of the Board of Directors or in a consent and waiver of notice thereof signed by all the directors. Section 7. Regular Meetings. Regular meetings of the Board of Directors may be held without notice at such places and times as may be fixed from time to time by resolution of the Board. Section 8. Special Meetings; Notice. Special meetings of the Board of Directors may be called at any time by the Chairman of the Board or the President and shall be called by the Secretary upon the written request of any three directors and each special meeting shall be held at such place and time as shall be specified in the notice thereof. At least twenty-four (24) hours' notice of each such special meeting shall be given to each director personally or sent to him addressed to his residence or usual place of business by telephone, telegram or facsimile transmission, or at least 120 hours' 7 notice of each such special meeting shall be given to each director by letter sent to him addressed as aforesaid or on such shorter notice and by such means as the person or persons calling such meeting may deem reasonably necessary or appropriate in light of the circumstances. Any notice by letter or telegram shall be deemed to be given when deposited in the United States mail so addressed or when duly deposited at an appropriate office for transmission by telegram, as the case may be. Such notice need not state the business to be transacted at or the purpose or purposes of such special meeting. No notice of any such special meeting of the Board of Directors need be given to any director who attends in person or who, in writing executed and filed with the records of the meeting, either before or after the holding thereof, waives such notice. No notice need be given of an adjourned meeting of the Board of Directors. Section 9. Quorum and Manner of Acting. A majority of the total number of directors, but in no event less than two directors, shall constitute a quorum for the transaction of business at any annual, regular or special meeting of the Board of Directors. Except as otherwise provided by law, by the Certificate of Incorporation or by these By-Laws, the act of a majority of the directors present at any meeting, at which a quorum is present, shall be the act of the Board of Directors. In the absence of a quorum, a majority of the directors present may adjourn the meeting from time to time until a quorum be had. Section 10. Consent in Writing. Any action required or permitted to be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting, if a written consent to such action is signed by all members of the Board or of such committee, as the case may be, and such written consent is filed with the minutes of proceedings of the Board or such committee. Section 11. Committees. (a) Executive Committee. The Board of Directors may, by resolution passed by a majority of a quorum of the Board, appoint an Executive Committee of not than three members, each of whom shall be a director. The Executive Committee, to the extent permitted by law, shall have and may exercise when the Board of Directors is not in session all powers of the Board in the management of the business and affairs of the Corporation, including, without limitation, the power and authority to declare a dividend or to authorize the issuance of stock, except such Committee shall not have the power or authority (i) to approve, adopt, or recommend to stockholders any action or matter required by the Delaware General Corporation Law to be submitted for stockholder approval; or (ii) to adopt, amend, or repeal any By-Law of the Corporation. (b) Other Committees. The Board of Directors may, by resolution passed by a majority of a quorum of the Board, from time to time appoint such other committees as may be permitted by law. Such other committees appointed by the Board of Directors shall have such powers and perform such duties as may be prescribed by the resolution or resolutions creating such committee, but in no event shall any such committee have the powers denied to the Executive Committee in these By-Laws. (c) Term. The members of all committees of the Board of Directors shall serve a term coexistent with that of the Board of Directors which shall have appointed such committee. The Board, subject to the provisions of subsections (a) or (b) of this Section 11, may at any time increase or decrease the number of members of a committee or terminate the existence of a committee; provided, that no committee shall consist of less than one member. The membership of a committee member shall terminate on the date of his death or voluntary resignation, but the Board may at any time for any reason remove any individual committee member and the Board may fill any committee vacancy 8 created by death, resignation, removal or increase in the number of members of the committee. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee, and, in addition, in the absence or disqualification of any member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. (d) Meetings. Unless the Board of Directors shall otherwise provide, regular meetings of the Executive Committee or any other committee appointed pursuant to this Section 11 shall be held at such times and places as are determined by the Board of Directors, or by any such committee, and when notice thereof has been given to each member of such committee, no further notice of such regular meetings need be given thereafter; special meetings of any such committee may be held at the principal office of the Corporation required to be maintained pursuant to Section 2 of ARTICLE I hereof; or at any place which has been designated from time to time by resolution of such committee or by written consent of all members thereof, and may be called by any director who is a member of such committee, upon written notice to the members of such committee of the time and place of such special meeting given in the manner provided for the giving of written notice to members of the Board of Directors of the time and place of special meetings of the Board of Directors. Notice of any special meeting of any committee may be waived in writing at any time after the meeting and will be waived by any director by attendance thereat. A majority of the authorized number of members of any such committee shall constitute a quorum for the transaction of business, and the act of a majority of those present at any meeting at which a quorum is present shall be the act of such committee. Section 12. Telephone Meetings. The Board of Directors or any committee thereof may participate in a meeting by means of a conference telephone or similar communications equipment if all members of the Board or of such committee, as the case may be, participating in the meeting can hear each other at the same time. Participation in a meeting by these means shall constitute presence in person at the meeting. Section 13. Compensation. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors and/or a stated salary as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. Section 14. Interested Directors. No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose if (i) the material facts as to his or their relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (ii) the material facts as to his or their relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by 9 vote of the stockholders; or (iii) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee thereof or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. Section 15. Directors Elected by Special Class or Series. To the extent that any holders of any class or series of stock other than Common Stock issued by the Corporation shall have the separate right, voting as a class or series, to elect directors, the directors elected by such class or series shall be deemed to constitute an additional class of directors and shall have a term of office for one year or such other period as may be designated by the provisions of such class or series providing such separate voting right to the holders of such class or series of stock, and any such class of directors shall be in addition to the classes referred to in Section 2 of this ARTICLE III. Any directors so elected shall be subject to removal in such manner as may be provided by law or by the Certificate of Incorporation of this Corporation. The provisions of Sections 2 and 4 of this ARTICLE III do not apply to directors governed by this Section 15. ARTICLE IV Officers Section 1. Designation of Officers. The officers of the Corporation, who shall be chosen by the Board of Directors at its first meeting after each annual meeting of stockholders, shall be a Chairman of the Board, a President, one or more Vice Presidents, a Treasurer, a Secretary and a Controller. The Board of Directors from time to time may choose such other officers as it shall deem appropriate. Any one person may hold any number of offices of the Corporation at any one time unless specifically prohibited therefrom by law. The Chairman of the Board and the President shall be chosen from among the directors; the other officers need not be directors. Section 2. Term of Office; Resignation; Removal. The term of office of each officer shall be until the first meeting of the Board of Directors following the next annual meeting of stockholders and until his successor is elected and shall have qualified, or until his death, resignation or removal, whichever is sooner. Any officer may resign at any time by giving written notice to the Board of Directors or to the Secretary. Such resignation shall take effect at the time specified therein and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Any officer may be removed at any time either with or without cause by the Board of Directors. Notwithstanding anything in these By-Laws to the contrary, for a period of one year following January 12, 1999, the requisite vote or approval of the Board of Directors necessary to terminate or replace, or fill a vacancy in respect of, Charles W. McCall as Chairman of the Board or Mark A. Pulido as President and Chief Executive Officer shall be no less than seventy-five percent (75%) of the members of the Board of Directors. Section 3. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification or any other cause, may be filled for the unexpired portion of the term by the Board of Directors. 10 Section 4. Authority of Officers. Subject to the power of the Board of Directors in its discretion to change and redefine the duties of the officers of the Corporation by resolution in such manner as it may from time to time determine, the duties of the officers of the Corporation shall be as follows: (a) Chairman of the Board. The Chairman of the Board shall preside at meetings of the stockholders and the Board of Directors. Subject to the direction of the Board of Directors, he shall generally manage the affairs of the Board and perform such other duties as are assigned by the Board. (b) President. The President shall be the Chief Executive Officer of the Corporation, and shall execute all the powers and perform all the duties usual to such office. Subject to the direction of the Board of Directors, he shall have the responsibility for the general management of the affairs of the Corporation. The President shall perform such other duties as may be prescribed or assigned to him from time to time by the Board of Directors. (c) Other Officers. The other officers of the Corporation shall have such powers and shall perform such duties as generally pertain to their respective offices, as well as such powers and duties as the Board of Directors, the Executive Committee or the Chief Executive Officer may prescribe. Section 5. Divisional Titles. Any one of the Chief Executive Officer, President, or Vice President Human Resources and Administration (each one an "Appointing Person"), may from time to time confer upon any employee of a division of the Corporation the title of President, Vice President, Treasurer or Secretary of such division or any other divisional title or titles deemed appropriate. Any such titles so conferred may be discontinued and withdrawn at any time by any one Appointing Person. Any employee of a division designated by such a divisional title shall have the powers and duties with respect to such division as shall be prescribed by the Appointing Person. The conferring, withdrawal or discontinuance of divisional titles shall be in writing and shall be filed with the Secretary of the Corporation. Section 6. Salaries. The salaries and other compensation of the principal officers of the Corporation shall be fixed from time to time by the Board of Directors. ARTICLE V Execution of Corporate Instruments and Voting of Securities Owned by the Corporation Section 1. Execution of Instruments. The Board of Directors may in its discretion determine the method and designate the signatory officer or officers or other person or persons, to execute any corporate instrument or document, or to sign the corporate name without limitation, except where otherwise provided by law, and such execution or signature shall be binding upon the Corporation. All checks and drafts drawn on banks or other depositories on funds to the credit of the Corporation or in special accounts of the Corporation, shall be signed by such person or persons as the Treasurer or such other person designated by the Board of Directors for that purpose shall authorize so to do. Section 2. Voting of Securities Owned by the Corporation. All stock and other securities of other corporations and business entities owned or held by the Corporation for itself, or for other 11 parties in any capacity, shall be voted, and all proxies with respect thereto shall be executed, by the person authorized to do so by resolution of the Board of Directors. ARTICLE VI Shares of Stock and Other Securities Section 1. Form and Execution of Certificates. Certificates for the shares of stock of the Corporation shall be in such form as is consistent with the Certificate of Incorporation and applicable law. Every holder of stock in the Corporation shall be entitled to have a certificate signed by, or in the name of the Corporation by, the Chairman of the Board (if there be such an officer appointed), or by the President or any Vice President and by the Treasurer or Assistant Treasurer or the Secretary or Assistant Secretary, certifying the number of shares owned by him in the Corporation. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. If the Corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, a statement that the Corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Section 2. Lost Certificates. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or his legal representative, to indemnify the Corporation in such manner as it shall require and/or to give the Corporation a surety bond in such form and amount as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost or destroyed. Section 3. Transfers. Transfers of record of shares of stock of the Corporation shall be made only upon its books by the holders thereof, in person or by attorney duly authorized, and upon the surrender of a certificate or certificates for a like number of shares, properly endorsed. Section 4. Fixing Record Dates. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in 12 respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other action. If no record date is fixed: (1) the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; (2) the record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is necessary, shall be the day on which the first written consent is expressed; (3) the record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Section 5. Registered Stockholders. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. Section 6. Regulations. The Board of Directors may make such rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates for shares of the stock and other securities of the Corporation, and may appoint transfer agents and registrars of any class of stock or other securities of the Corporation. Section 7. Other Securities of the Corporation. All bonds, debentures and other corporate securities of the Corporation, other than stock certificates, may be signed by the Chairman of the Board (if there be such an officer appointed), or the President or any Vice President or such other person as may be authorized by the Board of Directors and the corporate seal impressed thereon or a facsimile of such seal imprinted thereon and attested by the signature of the Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer; provided, however, that where any such bond, debenture or other corporate security shall be authenticated by the manual signature of a trustee under an indenture pursuant to which such bond, debenture or other corporate security shall be issued, the signature of the persons signing and attesting the corporate seal on such bond, debenture or other corporate security may be the imprinted facsimile of the signatures of such persons. Interest coupons appertaining to any such bond, debenture or other corporate security, authenticated by a trustee as aforesaid, shall be signed by the Treasurer or an Assistant Treasurer of the Corporation, or such other person as may be authorized by the Board of Directors, or bear imprinted thereon the facsimile signature of such person. In case any officer who shall have signed or attested any bond, debenture or other corporate security or whose facsimile signature shall appear thereon shall have ceased to be such officer before the bond, debenture or other corporate security so signed or attested shall have been delivered, such bond, debenture or other corporate security nevertheless may be adopted by the Corporation and issued and delivered as though the person who signed the same or whose facsimile signature shall have been used thereon had not ceased to be such officer of the Corporation. 13 ARTICLE VII Corporate Seal The corporate seal shall consist of a die bearing the name of the Corporation and the state and date of its incorporation. Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. ARTICLE VIII Indemnification of Officers, Directors, Employees and Agents Section 1. Power to Indemnify in Actions, Suits or Proceedings Other Than Those by or in the Right of the Corporation. Subject to Section 3 of this ARTICLE VIII, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a director or officer of the Corporation, or is or was a director or officer of the Corporation serving at the request of the Corporation as a director or officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a ---- ---------- presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. The right to indemnification conferred in this ARTICLE VIII shall be a contract right. Section 2. Power to Indemnify in Actions, Suits or Proceedings by or in the Right of the Corporation. Subject to Section 3 of this ARTICLE VIII, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director or officer of the Corporation, or is or was a director or officer of the Corporation serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation; except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. 14 Section 3. Authorization of Indemnification. Any indemnification under this ARTICLE VIII (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director or officer is proper in the circumstances because he has met the applicable standard of conduct set forth in Section 1 or Section 2 of this ARTICLE VIII, as the case may be. Such determination shall be made (i) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (ii) if such a quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (iii) by the stockholders. To the extent, however, that a director or officer of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding described above, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith, without the necessity of authorization in the specific case. Section 4. Good Faith Defined. For purposes of any determination under Section 3 of this ARTICLE VIII, a person shall be deemed to have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, or, with respect to any criminal action or proceeding, to have had no reasonable cause to believe his conduct was unlawful, if his action is based on the records or books of account of the Corporation or another enterprise, or on information supplied to him by the officers of the Corporation or another enterprise in the course of their duties, or on the advice of legal counsel for the Corporation or another enterprise or on information or records given or reports made to the Corporation or another enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Corporation or another enterprise. The term "another enterprise" as used in this Section 4 shall mean any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise of which such person is or was serving at the request of the Corporation as a director, officer, employee or agent. The provisions of this Section 4 shall not be deemed to be exclusive or to limit in any way the circumstances in which a person may be deemed to have met the applicable standard of conduct set forth in Sections 1 or 2 of this ARTICLE VIII, as the case may be. Section 5. Indemnification by a Court. Notwithstanding any contrary determination in the specific case under Section 3 of this ARTICLE VIII, and notwithstanding the absence of any determination thereunder, any director or officer may apply to any court of competent jurisdiction in the State of Delaware for indemnification to the extent otherwise permissible under Sections 1 and 2 of this ARTICLE VIII. The basis of such indemnification by a court shall be a determination by such court that indemnification of the director or officer is proper in the circumstances because he has met the applicable standards of conduct set forth in Sections 1 or 2 of this ARTICLE VIII, as the case may be. Neither a contrary determination in the specific case under Section 3 of this ARTICLE VIII nor the absence of any determination thereunder shall be a defense to such application or create a presumption that the director or officer seeking indemnification has not met any applicable standard of conduct. Notice of any application for indemnification pursuant to this Section 5 shall be given to the Corporation promptly upon the filing of such application. If successful, in whole or in part, the director or officer seeking indemnification shall also be entitled to be paid the expense of prosecuting such application. Section 6. Expenses Payable in Advance. Expenses incurred by a director or officer in defending or investigating a threatened or pending action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be 15 determined that he is not entitled to be indemnified by the Corporation as authorized in this ARTICLE VIII. Section 7. Nonexclusivity of Indemnification and Advancement of Expenses. The indemnification and advancement of expenses provided by or granted pursuant to this ARTICLE VIII shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any By-Law, agreement, contract, vote of stockholders or disinterested directors or pursuant to the direction (howsoever embodied) of any court of competent jurisdiction or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, it being the policy of the Corporation that indemnification of the persons specified in Sections 1 and 2 of this ARTICLE VIII shall be made to the fullest extent permitted by law. The provisions of this ARTICLE VIII shall not be deemed to preclude the indemnification of any person who is not specified in Sections 1 or 2 of this ARTICLE VIII but whom the Corporation has the power or obligation to indemnify under the provisions of the General Corporation Law of the State of Delaware, or otherwise. Section 8. Insurance. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director or officer of the Corporation, or is or was a director or officer of the Corporation serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power or the obligation to indemnify him against such liability under the provisions of this ARTICLE VIII. Section 9. Certain Definitions. For purposes of this ARTICLE VIII, references to "the Corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors or officers, so that any person who is or was a director or officer of such constituent corporation, or is or was a director or officer of such constituent corporation serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, shall stand in the same position under the provisions of this ARTICLE VIII with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. For purposes of this ARTICLE VIII, references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the Corporation" shall include any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director or officer with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this ARTICLE VIII. Section 10. Survival of Indemnification and Advancement of Expenses. The indemnification and advancement of expenses provided by, or granted pursuant to, this ARTICLE VIII shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such a person. 16 Section 11. Limitation on Indemnification. Notwithstanding anything contained in this ARTICLE VIII to the contrary, except for proceedings to enforce rights to indemnification (which shall be governed by Section 5 hereof), the Corporation shall not be obligated to indemnify any director or officer in connection with a proceeding (or part thereof) initiated by such person unless such proceeding (or part thereof) was authorized or consented to by the Board of Directors of the Corporation. Section 12. Indemnification of Employees and Agents. The Corporation may, to the extent authorized from time to time by the Board of Directors, provide rights to indemnification and to the advancement of expenses to employees and agents of the Corporation similar to those conferred in this ARTICLE VIII to directors and officers of the Corporation. Section 13. Effect of Amendment. Any amendment, repeal or modification of this ARTICLE VIII shall not (a) adversely affect any right or protection of any director or officer existing at the time of such amendment, repeal or modification, or (b) apply to the indemnification of any such person for liability, expense, or loss stemming from actions or omissions occurring prior to such amendment, repeal, or modification. Section 14. Authority to Enter into Indemnification Agreements. The Corporation may enter into indemnification agreements with the directors and officers of the Corporation, including, without limitation, any indemnification agreement in substantially the form set forth in Exhibit 1 attached to these By- Laws. ARTICLE IX Notices Whenever, under any provisions of these By-Laws, notice is required to be given to any stockholder, the same shall be given in writing, timely and duly deposited in the United States Mail, postage prepaid, and addressed to his last known post office address as shown by the stock record of the Corporation or its transfer agent. Any notice required to be given to any director may be given by any of the methods stated in Section 8 of ARTICLE III hereof, except that such notice other than one which is delivered personally, shall be sent to such address or (in the case of facsimile telecommunication) facsimile telephone number as such director shall have disclosed in writing to the Secretary of the Corporation, or, in the absence of such filing, to the last known post office address of such director. If no address of a stockholder or director be known, such notice may be sent to the office of the Corporation required to be maintained pursuant to Section 2 of ARTICLE I hereof. An affidavit of mailing, executed by a duly authorized and competent employee of the Corporation or its transfer agent appointed with respect to the class of stock affected, specifying the name and address or the names and addresses of the stockholder or stockholders, director or directors, to whom any such notice or notices was or were given, and the time and method of giving the same, shall be conclusive evidence of the statements therein contained. All notices given by mail, as above provided, shall be deemed to have been given as at the time of mailing and all notices given by telegram or other means of electronic transmission shall be deemed to have been given as at the sending time recorded by the telegraph company or other electronic transmission equipment operator transmitting the same. It shall not be necessary that the same method of giving be employed in respect of all directors, but one permissible method may be employed in respect of any one or more, and any other permissible method or methods may be employed in respect of any other or others. The period or limitation of time within which any stockholder may exercise any option or right, or enjoy any privilege or benefit, or be required to act, or within which any director may exercise any power or right, or enjoy any privilege, pursuant to 17 any notice sent him in the manner above provided, shall not be affected or extended in any manner by the failure of such a stockholder or such director to receive such notice. Whenever any notice is required to be given under the provisions of this statutes or of the Certificate of Incorporation, or of these By-Laws, a waiver thereof in writing signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. Whenever notice is required to be given, under any provision of law or of the Certificate of Incorporation or By-Laws of the Corporation, to any person with whom communication is unlawful, the giving of such notice to such person shall not be required and there shall be no duty to apply to any governmental authority or agency for a license or permit to give such notice to such person. Any action or meeting which shall be taken or held without notice to any such person with whom communication is unlawful shall have the same force and effect as if such notice had been duly given. In the event that the action taken by the Corporation is such as to require the filing of a certificate under any provision of the Delaware General Corporation Law, the certificate shall state, if such is the fact and if notice is required, that notice was given to all persons entitled to receive notice except such persons with whom communication is unlawful. ARTICLE X Amendments The Board of Directors is expressly authorized to adopt, alter and repeal the By-Laws of the Corporation in whole or in part at any regular or special meeting of the Board of Directors, by vote of a majority of the entire Board of Directors. Except where ARTICLE V of the Certificate of Incorporation of the Corporation requires a higher vote, the By-Laws may also be adopted, altered or repealed in whole or in part at any annual or special meeting of the stockholders by the affirmative vote of three fourths of the shares of the Corporation outstanding and entitled to vote thereon. CERTIFICATE OF SECRETARY The undersigned, Senior Vice President and Corporate Secretary of McKesson HBOC, a Delaware corporation, hereby certifies that the foregoing is a full, true and correct copy of the By-Laws of said Corporation, with all amendments to date of this Certificate. WITNESS the signature of the undersigned and the seal of the Corporation this 26th day of April, 1999. /s/ Ivan D. Meyerson -------------------------------------- Ivan D. Meyerson Senior Vice President, General Counsel and Secretary 18 EXHIBIT 1 INDEMNIFICATION AGREEMENT AGREEMENT, effective as of ______, 19__, between McKesson HBOC, Inc., a Delaware corporation (the "Company"), and ______________ (the "Indemnitee"). WHEREAS, it is essential to the Company to retain and attract as directors and officers the most capable persons available. WHEREAS, Indemnitee is a director/officer of the Company; WHEREAS, both the Company and Indemnitee recognize the increased risk of litigation and other claims being asserted against directors of public companies in today's environment; WHEREAS, the Certificate of Incorporation and the By-laws of the Company require the Company to indemnify and advance expenses to its directors to the fullest extent permitted by law and the Indemnitee has been serving and continues to serve as a director or officer of the Company in part in reliance on such Certificate of Incorporation and By-laws; WHEREAS, in recognition of Indemnitee's need for substantial protection against personal liability in order to enhance Indemnitee's continued service to the Company in an effective manner and Indemnitee's reliance on the aforesaid Certificate of Incorporation and By-laws, and in part to provide Indemnitee with specific contractual assurance that the protection promised by such Certificate of Incorporation and By-laws will be available to Indemnitee (regardless of, among other things, any amendment to or revocation of such Certificate of Incorporation and By-laws or any change in the composition of the Company's Board of Directors or acquisition transaction relating to the Company), and in order to induce Indemnitee to continue to provide services to the Company as a director or officer thereof, the Company wishes to provide in this Agreement for the indemnification of and the advancing of expenses to Indemnitee to the fullest extent (whether partial or complete) permitted by law and as set forth in this Agreement, and, to the extent insurance is maintained, for the continued coverage of Indemnitee under the Company's directors' and officers' liability insurance policies. NOW, THEREFORE, in consideration of the premises and of Indemnitee continuing to serve the Company directly or, at its request, with another enterprise, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Certain Definitions. (a) Change in Control: shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing 20% or more of the total voting power represented by the Company's then outstanding Voting Securities, or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two- thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 80% of the total voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company (in one transaction or a series of transactions) of all or substantially all of the Company's assets. (b) Expense: include attorneys' fees and all other costs, expenses and obligations paid or incurred in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to defend, be a witness in or participate in any Proceeding relating to any Indemnifiable Event. (c) Indemnifiable Event: any event or occurrence that takes place either prior to or after the execution of this Agreement, related to the fact that Indemnitee is or was a director or an officer of the Company, or while a director or officer is or was serving at the request of the Company as a director, officer, employee, trustee, agent or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust or other enterprise, or by reason of anything done or not done by Indemnitee in any such capacity. (d) Potential Change in Control: shall be deemed to have occurred if (i) the Company enters into an agreement or arrangement, the consummation of which would result in the occurrence of Change in Control; (ii) any person (including the Company) publicly announces an intention to take or to consider taking actions which if consummated would constitute Change in Control; (iii) any person, other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company acting in such capacity or a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, who is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 10% or more of the combined voting power of the Company's then outstanding Voting Securities, increases his beneficial ownership of such securities by 5% or more over the percentage so owned by such person on the date hereof; or (iv) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (e) Proceeding: any threatened, pending or completed action, suit or proceeding, or any inquiry, hearing or investigation, whether conducted by the Company or any other party, that Indemnitee in good faith believes might lead to the institution of any such action, suit or proceeding, whether civil, criminal, administrative, investigative or other. (f) Reviewing Party: any appropriate person or body consisting of a member or members of the Company's Board of Directors or any other person or body appointed by the Board (including the special, independent counsel referred to in Section 3) who is not a party to the particular Proceeding with respect to which Indemnitee is seeking indemnification. (g) Voting Securities: any securities of the Company which vote generally in the election of directors. 2 2. Agreement to Indemnify. (a) In the event Indemnitee was, is or becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, a Proceeding by reason of (or arising in part out of) an Indemnifiable Event, the Company shall indemnify Indemnitee to the fullest extent permitted by law, as soon as practicable but in any event no later than thirty days after written demand is presented to the Company, against any and all Expenses, judgments, fines, penalties and amounts paid in settlement (including all interest, assessments and other charges paid or payable in connection with or in respect of such Expenses, judgments, fines, penalties or amounts paid in settlement) of such Proceeding and any federal, state, local or foreign taxes imposed on the Indemnitee as a result of the actual or deemed receipt of any payments under this Agreement (including the creation of the Trust). Notwithstanding anything in this Agreement to the contrary and except as provided in Section 5, prior to a Change in Control Indemnitee shall not be entitled to indemnification pursuant to this Agreement in connection with any Proceeding initiated by Indemnitee against the Company or any director or officer of the Company unless the Company has joined in or consented to the initiation of such Proceeding. If so requested by Indemnitee, the Company shall advance (within ten business days of such request) any and all Expenses to Indemnitee (an "Expense Advance"). (b) Notwithstanding the foregoing, (i) the obligations of the Company under Section 2(a) shall be subject to the condition that the Reviewing Party shall not have determined (in a written opinion, in any case in which the special, independent counsel referred to in Section 3 hereof is involved) that Indemnitee would not be permitted to be indemnified under applicable law, and (ii) the obligation of the Company to make an Expense Advance pursuant to Section 2(a) shall be subject to the condition that, if, when and to the extent that the Reviewing Party determines that Indemnitee would not be permitted to be so indemnified under applicable law, the Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts theretofore paid; provided, however, that if Indemnitee has commenced legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under applicable law, any determination made by the Reviewing Party that Indemnitee would not be permitted to be indemnified under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any Expense Advance until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed). Indemnitee's obligation to reimburse the Company for Expense Advances shall be unsecured and no interest shall be charged thereon. If there has not been a Change in Control the Reviewing Party shall be selected by the Board of Directors, and if there has been such a Change in Control (other than a Change in Control which has been approved by a majority of the Company's Board of Directors who were directors immediately prior to such Change in Control), the Reviewing Party shall be the special, independent counsel referred to in Section 3 hereof. If there has been no determination by the Reviewing Party or if the Reviewing Party determines that Indemnitee substantively would not be permitted to be indemnified in whole or in part under applicable law, Indemnitee shall have the right to commence litigation in any court in the States of California or Delaware having subject matter jurisdiction thereof and in which venue is proper seeking an initial determination by the court or challenging any such determination by the Reviewing Party or any aspect thereof, and the Company hereby consents to service of process and to appear in any such proceeding. Any determination by the Reviewing Party otherwise shall be conclusive and binding on the Company and Indemnitee. 3. Change in Control. The Company agrees that if there is a Change in Control of the Company (other than a Change in Control which has been approved by a majority of the Company's Board of Directors who were directors immediately prior to such Change in Control) then with respect to all matters thereafter arising concerning the rights of Indemnitee to indemnity payments and Expense Advances under this Agreement or any other agreement or under applicable law or the Company's 3 Certificate of Incorporation or By-Laws now or hereafter in effect relating to indemnification for Indemnifiable Events, the Company shall seek legal advice only from special, independent counsel selected by Indemnitee and approved by the Company (which approval shall not be unreasonably withheld), and who has not otherwise performed services for the Company or the Indemnitee (other than in connection with such matters) within the last five years. Such independent counsel shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee's rights under this Agreement. Such counsel, among other things, shall render its written opinion to the Company and Indemnitee as to whether and to what extent the Indemnitee would be permitted to be indemnified under applicable law. The Company agrees to pay the reasonable fees of the special, independent counsel referred to above and to indemnify fully such counsel against any and all expenses (including attorneys' fees), claims, liabilities and damages arising out of or relating to this Agreement or the engagement of special, independent counsel pursuant hereto. 4. Establishment of Trust. In the event of a Potential Change in Control, the Company shall, upon written request by Indemnitee, create a Trust for the benefit of the Indemnitee and from time to time upon written request of Indemnitee shall fund such Trust in an amount sufficient to satisfy any and all Expenses reasonably anticipated at the time of each such request to be incurred in connection with investigating, preparing for and defending any Proceeding relating to an Indemnifiable event, and any and all judgments, fines, penalties and settlement amounts of any and all Proceedings relating to an Indemnifiable Event from time to time actually paid or claimed, reasonably anticipated or proposed to be paid. The amount or amounts to be deposited in the Trust pursuant to the foregoing funding obligation shall be determined by the Reviewing Party, in any case in which the special, independent counsel referred to above is involved. The terms of the Trust shall provide that upon a Change in Control (i) the Trust shall not be revoked or the principal thereof invaded, without the written consent of the Indemnitee, (ii) the Trustee shall advance, within ten business days of a request by the Indemnitee, any and all Expenses to the Indemnitee (and the Indemnitee hereby agrees to reimburse the Trust under the circumstances under which the Indemnitee would be required to reimburse the Company under Section 2(b) of this Agreement), (iii) the Trust shall continue to be funded by the Company in accordance with the funding obligation set forth above, (iv) the Trustee shall promptly pay to the Indemnitee all amounts for which the Indemnitee shall be entitled to indemnification pursuant to this Agreement or otherwise, and (v) all unexpended funds in such Trust shall revert to the Company upon a final determination by the Reviewing Party or a court of competent jurisdiction, as the case may be, that the Indemnitee has been fully indemnified under the terms of this Agreement. The Trustee shall be chosen by the Indemnitee. Nothing in this Section 4 shall relieve the Company of any of its obligations under this Agreement. All income earned on the assets held in the Trust shall be reported as income by the Company for federal, state, local and foreign tax purposes. 5. Indemnification for Expenses Incurred in Enforcing this Agreement. The Company shall indemnify Indemnitee against any and all expenses (including attorneys' fees), and, if requested by Indemnitee, shall (within ten business days of such request) advance such expenses to Indemnitee, which are incurred by Indemnitee in connection with any claim asserted against or action brought by Indemnitee for (i) indemnification or advance payment of Expenses by the Company under this Agreement or any other agreement or under applicable law or the Company's Certificate of Incorporation or By-laws now or hereafter in effect relating to indemnification for Indemnifiable Events and/or (ii) recovery under any directors' and officers' liability insurance policies maintained by the Company, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advance expense payment or insurance recovery, as the case may be. 4 6. Partial Indemnity. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the Expenses, judgments, fines, penalties and amounts paid in settlement of a Proceeding but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is entitled. Moreover, notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any or all Proceedings relating in whole or in part to an Indemnifiable Event or in defense of any issue or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against all Expenses incurred in connection therewith. 7. Defense to Indemnification, Burden of Proof and Presumptions. It shall be a defense to any action brought by the Indemnitee against the Company to enforce this Agreement (other than an action brought to enforce a claim for expenses incurred in defending a Proceeding in advance of its final disposition where the required undertaking has been tendered to the Company) that the Indemnitee has not met the standards of conduct that make it permissible under the Delaware General Corporation Law for the Company to indemnify the Indemnitee for the amount claimed. In connection with any determination by the Reviewing Party or otherwise as to whether the Indemnitee is entitled to be indemnified hereunder, the burden of proving such a defense shall be on the Company. Neither the failure of the Company (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action by the Indemnitee that indemnification of the claimant is proper under the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Company (including its Board of Directors, independent legal counsel, or its stockholders) that the Indemnitee had not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the Indemnitee has not met the applicable standard of conduct. For purposes of this Agreement, the termination of any claim, action, suit or proceeding, by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law. 8. Non-exclusivity. The rights of the Indemnitee hereunder shall be in addition to any other rights Indemnitee may have under the Company's Certificate of Incorporation or By-laws or the Delaware General Corporation Law or otherwise. To the extent that a change in the Delaware General Corporation Law (whether by statute or judicial decision) permits greater indemnification by agreement than would be afforded currently under the Company's Certificate of Incorporation and By-laws and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. 9. Liability Insurance. To the extent the Company maintains an insurance policy or policies providing directors' and officers' liability insurance, Indemnitee shall be covered by such policy or policies, in accordance with its or their terms, to the maximum extent of the coverage available for any Company director or officer. 10. Period of Limitations. No legal action shall be brought and no cause of action shall be asserted by or on behalf of the Company or any affiliate of the Company against Indemnitee, Indemnitee's spouse, heirs, executors or personal or legal representatives after the expiration of two years from the date of accrual of such cause of action, or such longer period as may be required by state law under the circumstances, and any claim or cause of action of the Company or its affiliate shall be extinguished and deemed released unless asserted by the timely filing of a legal action 5 within such period; provided, however, that if any shorter period of limitations is otherwise applicable to any such cause of action such shorter period shall govern. 11. Amendment of this Agreement. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 12. Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Company effectively to bring suit to enforce such rights. 13. No Duplication of Payments. The Company shall not be liable under this Agreement to make any payment in connection with any claim made against Indemnitee to the extent Indemnitee has otherwise actually received payment (under any insurance policy, By-law or otherwise) of the amounts otherwise indemnifiable hereunder. 14. Settlement of Claims. The Company shall not be liable to indemnify Indemnitee under this Agreement for any amounts paid in settlement of any action or claim effected without the Company's written consent. The Company shall not settle any action or claim in any manner which would impose any penalty or limitation on Indemnitee without Indemnitee's written consent. Neither the Company nor the Indemnitee will unreasonably withhold their consent to any proposed settlement. The Company shall not be liable to indemnify the Indemnitee under this Agreement with regard to any judicial award if the Company was not given a reasonable and timely opportunity, at its expense, to participate in the defense of such action. 15. Binding Effect. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns, including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of the Company, spouses, heirs, and personal and legal representatives. The Company shall require and cause any successor (whether direct or indirect by purchase, merger, consolidation or otherwise) to all, substantially all, or a substantial part, of the business and/or assets of the Company, by written agreement in form and substance satisfactory to the Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as a director or officer of the Company or of any other enterprise at the Company's request. 16. Severability. The provisions of this Agreement shall be severable in the event that any of the provisions hereof (including any provision within a single section, paragraph or sentence) is held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, and the remaining provisions shall remain enforceable to the fullest extent permitted by law. Furthermore, to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of this Agreement containing any provision held to be invalid, void or otherwise unenforceable, that is not itself invalid, void or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. 6 17. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware applicable to contracts made and to be performed in such State without giving effect to the principles of conflicts of laws. IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement as of the _______________ day of __________________, 19___. McKESSON HBOC, INC. By: ______________________ Name: Title: ______________________ [Indemnitee] 7 EX-3.4 3 AMENDMENT TO RESTATED BY-LAWS EXHIBIT 3.4 AMENDMENTS TO RESTATED BY-LAWS OF McKESSON HBOC, INC. (As adopted by the Board of Directors on April 26, 1999) The second and fourth sentences, respectively, of Section 9. Stockholder Proposals at Annual Meeting., in Article II of the Restated By-Laws of McKesson HBOC, Inc. were amended to read as follows: "To be properly brought before an annual meeting, business must be specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, otherwise properly brought before the meeting by or at the direction of the Board of Directors or otherwise properly brought before the meeting by a stockholder of the Corporation (i) who is a stockholder of record on the date of the giving of the notice provided for in this Section 9 and on the record date for the determination of stockholders entitled to vote at such annual meeting and (ii) who complies with the notice procedures set forth in this Section 9." "To be timely, a stockholder's notice to the Secretary must be delivered to or mailed and received at the principal executive offices of the Corporation, not less than 90 days nor more than 120 days prior to the anniversary date of the immediately preceding annual meeting of stockholders; provided, however, that in the event that the annual meeting is called for a date that is not within 30 days before or after such anniversary date, notice by the stockholder in order to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made, whichever first occurs." The second and fourth sentences, respectively, of Section 10. Nominations of Persons for Election to the Board of Directors., in Article II of the Restated By-Laws of McKesson HBOC, Inc. were amended to read as follows: "Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of stockholders by or at the direction of the Board of Directors, by any nominating committee or person appointed by the Board of Directors or by any stockholder of the Corporation (i) who is a stockholder of record on the date of the giving of the notice provided for in this Section 10 and on the record date for the determination of stockholders entitled to vote at such annual meeting and (ii) who complies with the notice procedures set forth in this Section 10." "To be timely, a stockholder's notice to the Secretary must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 90 days nor more than 120 days prior to the anniversary date of the immediately preceding annual meeting of stockholders; provided, however, that in the event that the annual meeting is called for a date that is not within 30 days before or after such anniversary date, notice by the stockholder in order to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made, whichever first occurs." EX-10.1 4 FORM OF EMPLOYMENT AGREEMENT EXHIBIT 10.1 EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT, dated as of March 31, 1999, by and between McKesson HBOC, Inc. (the "Company"), a Delaware corporation with its principal office at One Post Street, San Francisco, California, and _______________ ("Executive"). R E C I T A L S - - - - - - - - A. The Company, in its business, develops and uses certain trade secrets, pricing and marketing strategies, new products, customer lists, computer software, and other confidential and proprietary information and data (as hereinafter defined, "Confidential Information"). Such Confidential Information will necessarily be communicated to or acquired by Executive by virtue of his employment with the Company, and the Company has spent time, effort and money to develop such Confidential Information and to promote and increase its goodwill; and B. The Company desires to retain the services of, and employ, Executive on its own behalf and on behalf of its affiliated companies for the period provided in this Agreement and, in so doing, to protect its Confidential Information and goodwill, and Executive is willing to accept employment by the Company on a full-time basis for such period, upon the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants herein contained, the parties hereto agree as follows: 1. Employment. Subject to the terms and conditions of this Employment ---------- Agreement, the Company agrees to employ Executive, and Executive agrees to accept employment from, and remain in the employ of, the Company for the period stated in Paragraph 3 hereof. 2. Position and Responsibilities. During the period of his employment ----------------------------- hereunder, Executive agrees to serve the Company, and the Company shall employ Executive, as Executive Vice President and President and Chief Executive Officer of the Supply Management Business or in such other senior corporate executive capacity or capacities as may be specified from time to time by the Chief Executive Officer of the Company. 3. Term and Duties. --------------- (a) Term of Employment. The period of Executive's employment under this ------------------ Agreement shall be deemed to have commenced on the date of this Agreement and shall continue until March 31, 2003. (b) Duties. During the period of his employment hereunder and except for ------ illness, reasonable vacation periods, and reasonable leaves of absence, Executive shall devote his best efforts and all his business time, attention, skill and efforts to the business and affairs of the Company and its affiliated companies, as such business and affairs now exist and as they may be hereafter changed or added to, under and pursuant to the general direction of the Board of Directors of the Company; provided, however, that, with the approval of the Chief -------- ------- Executive Officer of the Company, Executive may serve, or continue to serve, on the boards of directors of, hold any other offices or positions in, -1- companies or organizations which, in such officer's judgment, will not present any conflict of interest with the Company or any of its subsidiaries or affiliates or divisions, or materially affect the performance of Executive's duties pursuant to this Agreement. The Company shall retain full direction and control of the means and methods by which Executive performs the services for which he is employed hereunder. The services which are to be employed by Executive hereunder are to be rendered in the State of California, or in such other place or places in the United States or elsewhere as may be determined from time to time by the Board of Directors of the Company, but are to be rendered primarily at the Company's principal place of business at One Post Street in San Francisco, California. Unless and until otherwise mutually agreed between the Company and the Executive, the Executive shall be at liberty to maintain his residence in the San Francisco Bay Area, State of California. 4. Compensation and Reimbursement of Expenses; Other Benefits ---------------------------------------------------------- (a) Compensation. During the period of employment under this Agreement, ------------ Executive shall be paid a salary, in monthly or semi-monthly installments, at the rate of Five Hundred Thousand Dollars ($500,000.00) per year, or such higher salary as may be from time to time approved by the Board of Directors (or any duly authorized Committee thereof) of the Company (any such higher salary so approved to be thereafter the minimum salary payable to Executive during the remainder of the term hereof), plus such additional incentive compensation, if any, as may be voted to him yearly by the Board of Directors (or any duly authorized Committee thereof). Executive shall also receive an automobile allowance from Company of One Thousand Dollars ($1000) per month during the term of this Agreement. (b) Reimbursement of Expenses. The Company shall pay or reimburse ------------------------- Executive, in accordance with its normal policies and practices, for all reasonable travel and other expenses incurred by Executive in performing his obligations under this Agreement. The Company further agrees to furnish Executive with such assistance and accommodations as shall be suitable to the character of Executive's position with the Company and adequate for the performance of his duties hereunder. (c) Other Benefits. During the period of employment under this Agreement, -------------- Executive shall be entitled to receive all other benefits of employment generally available to other members of the Company's management and those benefits for which key executives are or shall become eligible, when and as the becomes eligible therefor, including without limitation, group health and life insurance benefits, short and long-term disability plans, deferred compensation plans, and participation in the Company's Profit-Sharing Investment Plan, Employee Stock Purchase Plan, Executive Medical Plan, 1989 Management Incentive Plan, Long Term Incentive Plan, 1984 Executive Benefit Retirement Plan ("EBRP"), 1988 Executive Survivor Benefits Plan ("ESBP"), Stock Purchase Plan and 1994 Restricted Stock and Stock Option Plan (or any similar plan or arrangement), and the Company agrees that none of such benefits shall be altered in any manner in such a way as to reduce any then existing entitlement of Executive thereunder. 5. Initial Incentive Grants. Executive shall receive the following initial ------------------------ incentive awards specified in subparagraphs (a) through (c) below: (a) Retention Bonus. Company shall pay Executive a special, one-time bonus --------------- of One Million Five Hundred Thousand Dollars ($1,500,000.00) as soon as practicable following execution of this Agreement. This bonus is not to be construed as a salary type payment but rather a retention payment, to be retained by Executive if and only if he -2- remains employed by Company one year following execution of this Agreement. Executive acknowledges and agrees that, in the event he voluntarily leaves the Company's employment within one (1) year of the date hereof, he shall promptly (and in no event later than thirty (30) days following cessation of employment) return one-half of said bonus (i.e., $750,000.00) to Company. (b) Stock Options. Executive has received a grant of One Million ------------- (1,000,000) non-qualified stock options, which options will vest at the rate of fifty percent (50%) at the end of two years from the date hereof, seventy-five percent (75%) at the end of three years and one hundred percent (100%) at the end of the fourth year from the date hereof. Such options are otherwise subject to the terms and conditions of the plan or arrangement pursuant to which they were issued. (c) LTIP Cash Award. Company shall grant Executive a Long-Term Incentive --------------- Plan award of Ten Million dollars ($10,000,000.00), payable, if earned, fifty percent (50%) at the end of three years, and fifty percent (50%) at the end of five years, in each case, from the date hereof. Executive acknowledges that payments of the award are contingent and based upon Company's total shareholder return ("TSR"). Full awards will be paid if, at the end of each measurement period, the TSR is at or above the 75th percentile of the S&P 500 (excluding therefrom financial institutions). Partial awards will be paid as follows: 75% if TSR is between the 60th and 75th percentile; 50% if TSR is between the 50th and 60th percentile; and 25% if TSR is below the 50th percentile. 6. Benefits Payable Upon Disability or Death. ----------------------------------------- (a) Disability Benefits. If Executive shall be prevented during the term ------------------- of this Agreement from properly performing services hereunder by reason of illness or other physical or mental incapacity, the Company shall continue to pay Executive his then current salary hereunder during the period of his disability; provided, however, that if Executive is disabled for a continuous period exceeding twelve (12) calendar months, then the Company's obligations hereunder shall cease and terminate. (b) Death Benefits. In the event of the death of Executive during the term -------------- of this Agreement, Executive's salary payable hereunder shall continue to be paid to Executive's surviving spouse, or if there is no spouse surviving, then to Executive's designee or representative (as the case may be) through the six-month period following the end of the calendar month in which death occurs. Thereafter, all of Company's obligations hereunder shall cease and terminate. (c) Other Plans. The provisions of this Paragraph 6 shall not affect any ----------- rights of Executive's heirs, administrators, executors, legatees, beneficiaries or assigns under the Company's Profit-Sharing Investment Plan, EBRP, Long Term Incentive Plan, ESBP, Restricted Stock and Stock Option Plan (or any similar plan or arrangement), any stock purchase plan or any other employee benefit plan of the Company, and any such rights shall be governed by the terms of the respective plans. 7. Obligations of Executive During and After Employment. ---------------------------------------------------- (a) No Competition. Executive agrees that during the term of his -------------- employment under this Agreement, he will engage in no other business activities, directly or indirectly, which are or may be competitive with or which might place him in a competing position to that -3- of the Company, or any affiliated company, without the prior written consent of the Chief Executive Officer of the Company. (a) Unauthorized Use of Confidential Information. Executive acknowledges -------------------------------------------- and agrees that (i) during the course of his employment Executive will have produced and/or have access to Confidential Information, of Company and its affiliated companies, and (ii) the unauthorized use or sale of any of such confidential or proprietary information at any time would harm the Company and would constitute unfair competition with Company. Executive promises and agrees not to engage in any unfair Competition with Company either during or after the term of this Agreement. Therefore, during and subsequent to his employment by Company or an affiliated Company, Executive agrees to hold in confidence and not, directly or indirectly, disclose, use, copy or make lists of any such information, except to the extent expressly authorized by Company in writing. All records, files, drawings, documents, equipment, and the like, or copies thereof, relating to Company's business, or the business of an affiliated company, which Executive shall prepare, or use, or come into contact with, shall be and remain the sole property of Company, or of an affiliated company, and shall not be removed (except to allow Executive to perform his responsibilities hereunder while traveling for business purposes or otherwise working away from his office) from the Company's or the affiliated company's premises without its prior written consent, and shall be promptly returned to Company upon termination of employment with Company and its affiliated companies. This paragraph 7(b) shall survive the termination or expiration of this Agreement. (c) Confidential Information Defined. For purposes of this Agreement, -------------------------------- "Confidential Information" means all information (whether reduced to written, electronic, magnetic or other tangible form) acquired in any way by Executive during the course of his employment with the Company concerning the products, projects, activities, business or affairs of the Company or the Company's customers, including, without limitation, (i) all information concerning trade secrets of the Company, including computer programs, system documentation, special hardware, product hardware, related software development, manuals, formulae, processes, methods, machines, compositions, ideas, improvements or inventions of Company and its affiliated companies, (ii) all sales and financial information concerning the Company, (iii) all customer and supplier lists, (iv) all information concerning products or projects under development or marketing plans for any of those products or projects, and (v) all information in any way concerning the products, projects, activities, business or affairs of customers of the Company which was furnished to him by the Company or any of its agents or customers; provided, however, that Confidential Information does not include information which (A) becomes available to the public other than as a result of a disclosure by Executive, (B) was available to him on a non-confidential basis outside of his employment with the Company, or (C) becomes available to him on a non-confidential basis from a source other than the Company or any of its agents, creditors, suppliers, lessors, lessees or customers. (d) Nonsolicitation. Executive recognizes and acknowledges that it is --------------- essential for the proper protection of the business of the Company that Executive be restrained for a reasonable period following the termination of Executive's employment with the Company from: (1) soliciting or inducing any employee of the Company to leave the employ of the Company; (2) hiring or attempting to hire any employee of the Company; or (3) soliciting the trade of or trading with the customers of the Company for any competitive business purpose. Accordingly, Executive agrees that during the term of his employment under this Agreement, and for the Restricted Period thereafter following the termination of Executive's employment with the Company for any reason, Executive shall not, directly or indirectly, (i) hire, solicit, aid in or encourage the hiring and/or -4- solicitation of, contract with, aid in or encourage the contracting with, or induce or encourage to leave the employment of the Company, any employee of the Company; and (ii) solicit, aid in or encourage the solicitation of, contract with, aid in or encourage the contracting with, service, or contact any person or entity which is, or was, within three years prior to the termination of Executive's employment with the Company, a customer or client of the Company for the purpose of offering or selling a product or service competitive with any of those offered by the Company. For purposes of this Paragraph 7(d), the "Restricted Period" shall be deemed to be two (2) years. This Paragraph 7(d) shall survive the termination or expiration of this Agreement. (e) Remedy for Breach. Executive agrees that in the event of a breach or ----------------- threatened breach of any of the covenants contained in this Paragraph 7, the Company shall have the right and remedy to have such covenants specifically enforced by any court having jurisdiction, it being acknowledged and agreed than any material breach of any of the covenants will cause irreparable injury to the Company and that money damages will not provide an adequate remedy to the Company. 8. Termination. ----------- (a) For Cause. Notwithstanding anything herein to the contrary, the --------- Company may, without liability, terminate Executive's employment hereunder for cause at any time upon written notice from the Board of Directors (or any duly authorized Committee thereof) specifying such cause, and thereafter the Company's obligations hereunder shall cease and terminate; provided, however, that such written notice shall not -------- ------- be delivered until after the Board of Directors (or any duly authorized Committee thereof) shall have given Executive written notice specifying the conduct alleged to have constituted such cause and Executive has failed to cure such conduct, if curable, within fifteen (15) days following receipt of such notice. As used herein, the term "cause" shall mean (i) Executive's willful misconduct, habitual neglect, dishonesty or other intentional actions (or failures to act) which are materially and demonstrably injurious to the Company, or (ii) a material breach by Executive of one or more terms of this Agreement. (a) Arbitration Required to Confirm Cause. In the event of a termination ------------------------------------- for cause pursuant to subparagraph (a) above, the Company shall continue to pay Executive's then current compensation as specified in this Agreement until the issuance of an arbitration award affirming the Company's action. Such arbitration shall be held in accordance with the provisions of Paragraph 9(d) below. In the event the award upholds the action of the Company, Executive shall promptly repay to the Company any sums received pursuant to this subparagraph 8(b), following termination of employment. (b) Other than for Cause; Performance, Reorganization. Notwithstanding ------------------------------------------------- anything herein to the contrary, Company may also terminate Executive's employment (without regard to any general or specific policies of Company relating to the employment or termination of its employees) should (i) Executive fail to perform his duties hereunder in a manner satisfactory to the Chief Executive Officer of Company, provided that Executive shall first be given written notice of such unsatisfactory performance and a period of ninety (90) days to improve such performance to a level deemed acceptable to the Chief Executive Officer or, (ii) Executive's position be eliminated as a result of a reorganization or restructuring of Company or its affiliated companies. (c) Obligations of Company on Termination of Employment. --------------------------------------------------- i) If Company terminates Executive's employment pursuant to subparagraph 8(a) above, and the Company's action is affirmed as specified in subparagraph 8(b) -5- above, then all of Company obligations hereunder shall immediately cease and terminate. Executive shall thereupon have no further right or entitlement to additional salary, incentive compensation payments or awards, or any perquisites from Company whatsoever, and Executive's rights, if any, under Company's employee and executive benefit plans shall be determined solely in accordance with the express terms of the respective plans; ii) If Company terminates Executive's employment pursuant to subparagraph 8(c) above, then in lieu of any benefits payable pursuant to Company's Executive Severance Policy (so long as the compensation and benefits payable hereunder equal or exceed those payable under said Policy) and complete satisfaction and discharge of all of its obligations to Executive hereunder, Company shall, provided Executive is not in breach of the provisions of Paragraph 7 hereof, and except as provided in Section 9(c) below, (a) continue Executive's then base salary, without increase, for the remainder of the term of this Agreement, provided, however that Company's -------- ------- obligation to make such salary payments shall be reduced by any compensation received by Executive from a subsequent employer during such term, (b) consider Executive for a bonus under the terms of Company's Management Incentive Plan for the fiscal year in which termination occurs (but not for any subsequent year) provided that any such bonus, if earned, shall be prorated to reflect the portion of the year for which Executive was actively employed, (c) continue Executive's automobile allowance and Executive Medical Plan benefits until the earlier of the expiration date of this Agreement or the effective date of Executive's medical coverage under a subsequent employer's plan or policy, (d) subject to both (x) the express special forfeiture and repayment provisions of the respective plans (or the terms and conditions applicable thereto) and (y) the provisions of subparagraph (d)(iv) below, continue the accrual and vesting of Executive's rights, benefits and existing awards for the remainder of the term of this Agreement for purposes of the EBRP, ESBP, and the Stock Option and Restricted Stock Plan (or any similar plan or arrangement), provided, however, that (unless the Board of -------- ------- Directors, or any duly authorized Committee, in its sole discretion, determines otherwise) Executive shall in no event receive or be entitled either to additional grants or awards subsequent to the date of termination, or "Approved Retirement" status, under the foregoing plans, (e) continue Executive's participation in the Company's Long Term Incentive Plan for the remainder of the term of this Agreement (prorating performance periods as of the expiration date of the date Executive ceased rendering services to Company), provided, that Executive shall not participate in any way whatsoever -------- ---- in any performance period commencing subsequent to the date of termination, and (f) terminate Executive's participation in Company's tax-qualified profit-sharing plans and stock purchase plans, pursuant to the terms of the respective plans, as of the date of Executive's termination of employment. iii) Company and Executive agree that if Executive resigns or otherwise voluntarily leaves his employment with Company prior to the expiration of this Agreement (other than for Good Reason as defined in the Termination Agreement between the parties dated January 31, 1996 (the "Termination Agreement")), Company shall be under no further obligation to make any additional payments or provide any benefits hereunder. iv) For purposes of subparagraph (d)(ii) above, (a) any stock options granted to Executive prior to January 1, 1999 shall continue to vest according to their original vesting schedule during the term of this Agreement, and (b) any stock -6- options granted to Executive subsequent to January 1, 1999 which are not vested as of the date Executive ceases to render services to Company shall be canceled and of no further force or effect. 9. General Provisions. ------------------ (a) Executive's rights and obligations under this Agreement shall not be transferable by assignment or otherwise. Nothing in this Agreement shall prevent the consolidation of Company with, or its merger into, any other corporation, or the sale by Company of all or substantially all of its properties or assets; and this Agreement shall inure to the benefit of, be binding upon and be enforceable by, any successor surviving or resulting corporation, or other entity to which such assets shall be transferred. This Agreement shall not be terminated by the voluntary or involuntary dissolution of the Company. (b) This Agreement (together with the Termination Agreement) and the rights of Executive with respect to the benefits of employment referred to in Paragraph 4(c) constitute the entire agreement between the parties hereto in respect of the employment of Executive by Company. This Agreement supersedes and replaces all prior oral and written agreements, understandings, commitments, and practices between the parties. (c) In the event Executive's employment with Company shall terminate under circumstances otherwise providing Executive with a right to benefits under both Section 5 of the Termination Agreement and Section 8(d)(ii) of this Agreement, Executive shall be entitled to receive the <+#>greater<-#> of the benefits provided therein, calculated individually, without duplication. (d) Any dispute, controversy or claim arising under or in connection with this Agreement, or the breach hereof, shall be settled exclusively by arbitration in accordance with the Rules of the American Arbitration Association then in effect. Judgment upon the award rendered by the arbitrator may be entered in any court of competent jurisdiction. Any arbitration held pursuant to this paragraph in connection with any termination of Executive's employment shall take place in San Francisco, California at the earliest possible date. If any proceeding is necessary to enforce or interpret the terms of this Agreement, or to recover damages for breach thereof, the prevailing party shall be entitled to reasonable attorneys fees and necessary costs and disbursements, not to exceed in the aggregate one percent (1%) of the net worth of the other party, in addition to any other relief to which he or it may be entitled. (e) The provisions of this Agreement shall be regarded as divisible, and if any of said provisions or any part thereof are declared invalid or unenforceable by a court of competent jurisdiction, the validity and enforceability of the remainder of such provisions or parts thereof and the applicability thereof shall not be affected thereby. (f) This Agreement may not be amended of modified except by a written instrument executed by Company and Executive. (g) This Agreement and the rights and obligations hereunder shall be governed by and construed in accordance with the laws of the State of California. -7- IN WITNESS WHEREOF, the parties have executed this Employment Agreement as of the date first above written. McKESSON HBOC, INC. A Delaware Corporation By ____________________________ Senior Vice President ATTEST: ______________________________________ _______________________________ Senior Vice President and Secretary Executive By the Authority of the Compensation Committee of the Board of Directors of McKesson HBOC, Inc. on January 27, 1999. -8- EX-10.2 5 EMPLOYMENT AGREEMENT DTD 3/31/1999 EXHIBIT 10.2 EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT, dated as of March 31, 1999, by and between McKesson HBOC, Inc. (the "Company"), a Delaware corporation with its principal office at One Post Street, San Francisco, California, and ____________ "Executive"). R E C I T I A L S - - - - - - - - - A. The Company, in its business, develops and uses certain trade secrets, pricing and marketing strategies, new products, customer lists, computer software, and other confidential and proprietary information and data (as hereinafter defined, "Confidential Information"). Such Confidential Information will necessarily be communicated to or acquired by Executive by virtue of his employment with the Company, and the Company has spent time, effort and money to develop such Confidential Information and to promote and increase its goodwill; and B. The Company desires to retain the services of, and employ, Executive on its own behalf and on behalf of its affiliated companies for the period provided in this Agreement and, in so doing, to protect its Confidential Information and goodwill, and Executive is willing to accept employment by the Company on a full-time basis for such period, upon the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants herein contained, the parties hereto agree as follows: 1 Employment. Subject to the terms and conditions of this Employment ---------- Agreement, the Company agrees to employ Executive, and Executive agrees to accept employment from, and remain in the employ of, the Company for the period stated in Paragraph 3 hereof. 2 Position and Responsibilities. During the period of his employment ----------------------------- hereunder, Executive agrees to serve the Company, and the Company shall employ Executive, as Executive Vice President and President and Chief Executive Officer of the Information Technology Business or in such other senior corporate executive capacity or capacities as may be specified from time to time by the Chief Executive Officer of the Company. 3 Term and Duties. --------------- (a) Term of Employment. The period of Executive's employment under ------------------ this Agreement shall be deemed to have commenced on the date of this Agreement and shall continue until March 31, 2003. (b) Duties. During the period of his employment hereunder and except ------ for illness, reasonable vacation periods, and reasonable leaves of absence, Executive shall devote his best efforts and all his business time, attention, skill and efforts to the business and affairs of the Company and its affiliated companies, as such business and affairs now exist and as they may be hereafter changed or added to, under and pursuant to the general direction of the Board of Directors of the Company; provided, however, -------- ------- that, with the approval of the Chief Executive Officer of the Company, Executive may serve, or -1- continue to serve, on the boards of directors of, hold any other offices or positions in, companies or organizations which, in such officer's judgment, will not present any conflict of interest with the Company or any of its subsidiaries or affiliates or divisions, or materially affect the performance of Executive's duties pursuant to this Agreement. The Company shall retain full direction and control of the means and methods by which Executive performs the services for which he is employed hereunder. The services which are to be employed by Executive hereunder are to be rendered in the State of Georgia, or in such other place or places in the United States or elsewhere as may be determined from time to time by the Board of Directors of the Company, but are to be rendered primarily at the Company's principal place of business in the State of Georgia. Unless and until otherwise agreed between the Company and the Executive, the Executive shall be at liberty to maintain his residence in or around the Atlanta Area, State of Georgia. 4. Compensation and Reimbursement of Expenses; Other Benefits; ---------------------------------------------------------- (a) Compensation. During the period of employment under this Agreement, ------------ Executive shall be paid a salary, in monthly or semi-monthly installments, at the rate of Five Hundred Eighty Thousand Dollars ($580,000.00) per year, or such higher salary as may be from time to time approved by the Board of Directors (or any duly authorized Committee thereof) of the Company (any such higher salary so approved to be thereafter the minimum salary payable to Executive during the remainder of the term hereof), plus such additional incentive compensation, if any, as may be voted to him yearly by the Board of Directors (or any duly authorized Committee thereof). Executive shall also receive an automobile allowance from Company of One Thousand Dollars ($1000) per month during the term of this Agreement. (b) Reimbursement of Expenses. The Company shall pay or reimburse ------------------------- Executive, in accordance with its normal policies and practices, for all reasonable travel and other expenses incurred by Executive in performing his obligations under this Agreement. The Company further agrees to furnish Executive with such assistance and accommodations as shall be suitable to the character of Executive's position with the Company and adequate for the performance of his duties hereunder. (c) Other Benefits. During the period of employment under this Agreement, -------------- Executive shall be entitled to receive all other benefits of employment generally available to other members of the Company's management and those benefits for which key executives are or shall become eligible, when and as he becomes eligible therefor, including without limitation, group health and life insurance benefits, short and long-term disability plans, deferred compensation plans, and participation in the Company's Profit-Sharing Investment Plan, Employee Stock Purchase Plan, Executive Medical Plan, 1989 Management Incentive Plan, Long Term Incentive Plan, 1984 Executive Benefit Retirement Plan ("EBRP"), 1988 Executive Survivor Benefits Plan ("ESBP"), Stock Purchase Plan and 1994 Restricted Stock and Stock Option Plan (or any similar plan or arrangement), and the Company agrees that none of such benefits shall be altered in any manner in such a way as to reduce any then existing entitlement of Executive thereunder. (d) EBRP and ESBP Designations. Subject to the terms of the respective -------------------------- Plans, Executive is hereby designated as a participant in both the EBRP and the ESBP. Upon completion of five (5) years of service with Company, Executive shall receive credit for all prior service with HBO & Company for purposes of calculation of benefits pursuant to the EBRP. -2- 5. Initial Incentive Grants. Executive shall receive the following initial ------------------------ incentive awards specified in subparagraphs (a) through (c) below: (a) Retention Bonus. Company shall pay Executive a special, one-time bonus --------------- of Six Million Dollars ($6,000,000.00) as soon as practicable following execution of this Agreement. This bonus is not to be construed as a salary type payment but rather a retention payment, to be retained by Executive if and only if he remains employed by Company one year following execution of this Agreement. Executive acknowledges and agrees that, in the event he voluntarily leaves the Company's employment within one (1) year of the date hereof, he shall promptly (and in no event later than thirty (30) days following cessation of employment) return one-half of said bonus (i.e., $3,000,000.00) to --- Company. (b) Stock Options. Executive has received a grant of One Million ------------- (1,000,000) non-qualified stock options, which options will vest at the rate of fifty percent (50%) at the end of two years from the date hereof, seventy-five percent (75%) at the end of three years and one hundred percent (100%) at the end of the fourth year from the date hereof. Such options are otherwise subject to the terms and conditions of the plan or arrangement pursuant to which they were issued. (c) LTIP Cash Award. Company shall grant Executive a Long-Term Incentive --------------- Plan award of Ten Million dollars ($10,000,000.00), payable, if earned, fifty percent (50%) at the end of three years, and fifty percent (50%) at the end of five years, in each case, from the date hereof. Executive acknowledges that payments of the award are contingent and based upon Company's total shareholder return ("TSR"). Full awards will be paid if, at the end of each measurement period, the TSR is at or above the 75th percentile of the S&P 500 (excluding therefrom financial institutions). Partial awards will be paid as follows: 75% if TSR is between the 60th and 75th percentile; 50% if TSR is between the 50th and 60th percentile; and 25% if TSR is below the 50th percentile. 6. Benefits Payable Upon Disability or Death. ----------------------------------------- (a) Disability Benefits. If Executive shall be prevented during the term ------------------- of this Agreement from properly performing services hereunder by reason of illness or other physical or mental incapacity, the Company shall continue to pay Executive his then current salary hereunder during the period of his disability; provided, however, that if Executive is disabled for a continuous period exceeding twelve (12) calendar months, then the Company's obligations hereunder shall cease and terminate. (b) Death Benefits. In the event of the death of Executive during the term -------------- of this Agreement, Executive's salary payable hereunder shall continue to be paid to Executive's surviving spouse, or if there is no spouse surviving, then to Executive's designee or representative (as the case may be) through the six-month period following the end of the calendar month in which death occurs. Thereafter, all of Company's obligations hereunder shall cease and terminate. (c) Other Plans. The provisions of this Paragraph 6 shall not affect any ----------- rights of Executive's heirs, administrators, executors, legatees, beneficiaries or assigns under the Company's Profit-Sharing Investment Plan, EBRP, Long Term Incentive Plan, ESBP, Restricted Stock and Stock Option Plan (or any similar plan or arrangement), any stock purchase plan or any other employee benefit plan of the Company, and any such rights shall be governed by the terms of the respective plans. -3- 7. Obligations of Executive During and After Employment. ---------------------------------------------------- (a) No Competition. Executive agrees that during the term of his -------------- employment under this Agreement, and for the "Restricted Period" (as hereinafter defined) thereafter following the termination of Executive's employment with the Company for any reason, he will not, within the United States, (i) participate, engage or have any interest in, directly or indirectly,any person, firm, corporation, or business (whether as an employee, officer, director, agent, creditor, or consultant or in any other capacity which calls for the rendering of personal services, advice, acts of management, operation or control) which carries on any business or activity competitive with the Company or any affiliated company (including, without limitation, any products or services sold, investigated, developed or otherwise pursued by the Company or any affiliated company at any time or from time to time). For purposes of this Paragraph 7(a), the "Restricted Period" shall be deemed to be one year. (b) Unauthorized Use of Confidential Information. Executive acknowledges -------------------------------------------- and agrees that (i) during the course of his employment with HBO & Company ("HBOC") and with the Company, Executive has or will have produced and/or has had or will have access to Confidential Information, as hereinafter defined,and (ii) the unauthorized use or sale of any such Confidential Information at any time would harm the Company and would constitute unfair competition with Company. Therefore, during his employment by Company or by an affiliated company, and for a period of five (5) years after termination of such employment, Executive agrees to hold in confidence Confidential Information and not, directly or indirectly, disclose, publish, or otherwise make available to the public or to any individual, firm or corporation, or use, copy or make lists of any Confidential Information, except to the extent expressly authorized by Company in writing. Executive further agrees that all Confidential Information, together with all records, files, drawings, documents, equipment, and the like, or copies thereof, relating to Company's business, or the business of an affiliated company, which Executive shall prepare, or use, or come into contact with, shall be and remain the sole property of Company, or of an affiliated company, and shall not be removed (except to allow Executive to perform his responsibilities hereunder while traveling for business purposes or otherwise working away from his office) from the Company's or the affiliated company's premises without its prior written consent, and shall be promptly returned to Company upon termination of employment with Company and its affiliated companies. (c) Confidential Information Defined. For purposes of this Agreement, -------------------------------- "Confidential Information" means all information (whether reduced to written, electronic, magnetic or other tangible form) acquired in any way by Executive during the course of his employment with the Company concerning the products,projects, activities, business or affairs of the Company or the Company's customers, including, without limitation, (i) all information concerning trade secrets of the Company, including computer programs, system documentation, special hardware, product hardware, related software development, manuals, formulae, processes, methods, machines, compositions, ideas, improvements or inventions of Company and its affiliated companies, (ii) all sales and financial information concerning the Company, (iii) all customer and supplier lists, (iv) all information concerning products or projects under development or marketing plans for any of those products or projects, and (v) all information in any way concerning the products, projects, activities, business or affairs of customers of the Company which was furnished to him by the Company or any of its agents or customers; provided, however, that Confidential Information does not include information which (A) becomes available to the public other than as a result of a disclosure by Executive, (B) was -4- available to him on a non-confidential basis outside of his employment with the Company, or (C) becomes available to him on a non- confidential basis from a source other than the Company or any of its agents, creditors, suppliers, lessors, lessees or customers. "Company" as used herein includes all affiliates of the Company including, without limitation, HBOC. (d) Nonsolicitation. Executive recognizes and acknowledges that it is --------------- essential for the proper protection of the business of the Company that Executive be restrained for a reasonable period following the termination of Executive's employment with the Company from: (1) soliciting or inducing any employee of the Company to leave the employ of the Company; (2) hiring or attempting to hire any employee of the Company; or (3) soliciting the trade of or trading with the customers of the Company for any competitive business purpose. Accordingly, Executive agrees that during the term of his employment under this Agreement, and for the Restricted Period thereafter following the termination of Executive's employment with the Company for any reason, Executive shall not, directly or indirectly, (i) hire, solicit, aid in or encourage the hiring and/or solicitation of, contract with, aid in or encourage the contracting with, or induce or encourage to leave the employment of the Company, any employee of the Company; and (ii) solicit, aid in or encourage the solicitation of, contract with, aid in or encourage the contracting with, service, or contact any person or entity which is, or was, within three years prior to the termination of Executive's employment with the Company, a customer or client of the Company or HBOC, for the purpose of offering or selling a product or service competitive with any of those offered by the Company. For purposes of this Paragraph 7(d), the "Restricted Period" shall be deemed to be two (2) years. (e) Remedy for Breach. Executive agrees that in the event of a breach or ----------------- threatened breach of any of the covenants contained in this Paragraph 7, the Company shall have the right and remedy to have such covenants specifically enforced by any court having jurisdiction, it being acknowledged and agreed than any material breach of any of the covenants will cause irreparable injury to the Company and that money damages will not provide an adequate remedy to the Company. (f) Blue-Penciling. Executive acknowledges and agrees that the -------------- noncompetition and nonsolicitation agreements contained herein are reasonable and valid in geographic, temporal and subject matter scope and in all other respects, and do not impose limitations greater than that are necessary to protect the goodwill, Confidential Information, and other business interests of the Company, Nevertheless, if any court determines that any of said noncompetition and other restrictive covenants and agreements, or any part thereof, is unenforceable because of the duration or geographic scope of such provision, such court shall have the power to reduce the duration or scope of such provision, as the case may be, and, in its reduced form, such provision shall then be enforceable to the maximum extent permitted by applicable law. (g) Survivability. Paragraphs 7(a), (b) and (d) shall survive the ------------- termination or expiration of this Agreement. 8. Termination. ----------- (a) For Cause. Notwithstanding anything herein to the contrary, the --------- Company may, without liability, terminate Executive's employment hereunder for cause at any time upon written notice from the Board of Directors (or any duly authorized Committee thereof) specifying such cause,and thereafter the Company's obligations hereunder shall cease and terminate; provided, however, that such written notice shall not -------- ------- be delivered until -5- after the Board of Directors (or any duly authorized Committee thereof) shall have given Executive written notice specifying the conduct alleged to have constituted such cause and Executive has failed to cure such conduct, if curable, within fifteen (15) days following receipt of such notice. As used herein, the term "cause" shall mean (i) Executive's willful misconduct, habitual neglect, dishonesty or other intentional actions (or failures to act) which are materially and demonstrably injurious to the Company, or (ii) a material breach by Executive of one or more terms of this Agreement. (b) Other than for Cause; Performance, Reorganization. Notwithstanding ------------------------------------------------- anything herein to the contrary, Company may also terminate Executive's employment (without regard to any general or specific policies of Company relating to the employment or termination of its employees) should (i) Executive fail to perform his duties hereunder in a manner satisfactory to the Chief Executive Officer of Company, provided that Executive shall first be given written notice of such unsatisfactory performance and a period of ninety (90) days to improve such performance to a level deemed acceptable to the Chief Executive Officer or, (ii) Executive's position be eliminated as a result of a reorganization or restructuring of Company or its affiliated companies. (c) Obligations of Company on Termination of Employment. --------------------------------------------------- i) If Company terminates Executive's employment pursuant to subparagraph 8(a) above, then all of Company obligations hereunder shall immediately cease and terminate. Executive shall thereupon have no further right or entitlement to additional salary, incentive compensation payments or awards, or any perquisites from Company whatsoever, and Executive's rights, if any, under Company's employee and executive benefit plans shall be determined solely in accordance with the express terms of the respective plans; ii) If Company terminates Executive's employment pursuant to subparagraph 8(b) above, then in lieu of benefits payable pursuant to Company's Executive Severance Policy (so long as the compensation and benefits payable hereunder are equal to or greater than those payable under said Policy) and in complete satisfaction and discharge of all of its obligations to Executive hereunder, Company shall, provided Executive is not in breach of the provisions of Paragraph 7 hereof, and except as provided in Section 9(c) below, (a) continue Executive's then base salary, without increase, for the remainder of the term of this Agreement, provided, however that Company's obligation to make -------- ------- such salary payments shall be reduced by any compensation received by Executive from a subsequent employer during such term, (b) consider Executive for a bonus under the terms of Company's Management Incentive Plan for the fiscal year in which termination occurs (but not for any subsequent year) provided that any such bonus, if earned, shall be prorated to reflect the portion of the year for which Executive was actively employed, (c) continue Executive's automobile allowance and Executive Medical Plan benefits until the earlier of the expiration date of this Agreement or the effective date of Executive's medical coverage under a subsequent employer's plan of policy, (d) subject to both (x) the express special forfeiture and repayment provisions of the respective plans (or the terms and conditions applicable thereto) and (y) the provisions of subparagraph (c)(iv) below, continue the accrual and vesting of Executive's rights, benefits and existing awards for the remainder of the term of this Agreement for purposes of the EBRP, ESBP, and the Stock Option and Restricted Stock Plan (or any other similar plan or arrangement), provided, however, that (unless the Board of -------- ------- Directors, or any duly authorized Committee, in its sole discretion, determines -6- otherwise) Executive shall in no event receive or be entitled either to additional grants or awards subsequent to the date of termination, or "Approved Retirement" status, under the foregoing plans, (e) continue Executive's participation in the Company's Long Term Incentive Plan for the remainder of the term of this Agreement (prorating performance periods as of the date Executive ceased rendering services to Company), provided, that Executive -------- ---- shall not participate in any way whatsoever in any performance period commencing subsequent to the date of termination, and (f) terminate Executive's participation in Company's tax-qualified profit-sharing plans and stock purchase plans, pursuant to the terms of the respective plans, as of the date of Executive's termination of employment. iii) Company and Executive agree that, subject to the provisions of subparagraph (c)(iv) below, if Executive resigns or otherwise voluntarily leaves his employment with Company prior to the expiration of this Agreement (other than for Good Reason as defined in the Termination Agreement between the parties, dated January 27, 1999 (the "Termination Agreement")), Company shall be under no further obligation to make any additional payments or provide any benefits hereunder. iv) Executive acknowledges and agrees that a) should his employment with Company terminate for any reason other than cause within one (1) year from the date hereof, then (i) provided Executive is not in breach of the provisions of Paragraph 7 hereof, any stock options granted to him prior to January 1, 1999 shall continue to vest according to their original vesting schedule during the term of this Agreement, and (ii) any stock options granted to him subsequent to January 1, 1999 shall be canceled and of no further force or effect; b) should his employment with Company terminate for any reason other than cause subsequent to one (1) year from the date hereof, then (i) provided Executive is not in breach of the provisions of Paragraph 7 hereof, any stock options granted to him prior to January 1, 1999 shall immediately vest and become exercisable to the full extent thereof, and (ii) any stock options which are not vested as of the date Executive ceases to render services to Company shall be canceled and of no further force or effect. 9. General Provisions. ------------------ (a) Executive's rights and obligations under this Agreement shall not be transferable by assignment or otherwise. Nothing in this Agreement shall prevent the consolidation of Company with, or its merger into, any other corporation, or the sale by Company of all or substantially all of its properties or assets; and this Agreement shall inure to the benefit of, be binding upon and be enforceable by, any successor surviving or resulting corporation, or other entity to which such assets shall be transferred. This Agreement shall not be terminated by the voluntary or involuntary dissolution of the Company. (b) This Agreement (together with the Termination Agreement) and the rights of Executive with respect to the benefits of employment referred to in Paragraph 4(c) constitute the entire agreement between the parties hereto in respect of the employment of Executive -7- by Company. This Agreement supersedes and replaces all prior oral and written agreements, understandings, commitments, and practices between the parties. (c) In the event Executive's employment with Company shall terminate under circumstances otherwise providing Executive with a right to benefits under both Section 5 of the Termination Agreement and Section 8(c)(ii) of this Agreement, Executive shall be entitled to receive the greater ------- of the benefits provided therein, calculated individually, without duplication. (d) Any dispute, controversy or claim arising under or in connection with this Agreement, or the breach hereof, shall be settled exclusively by arbitration in accordance with the Rules of the American Arbitration Association then in effect. Judgment upon the award rendered by the arbitrator may be entered in any court of competent jurisdiction. Any arbitration held pursuant to this paragraph in connection with any termination of Executive's employment shall take place in San Francisco, California at the earliest possible date. If any proceeding is necessary to enforce or interpret the terms of this Agreement, or to recover damages for breach thereof, the prevailing party shall be entitled to reasonable attorneys fees and necessary costs and disbursements, not to exceed in the aggregate one percent (1%) of the net worth of the other party, in addition to any other relief to which he or it may be entitled. (e) The provisions of this Agreement shall be regarded as divisible, and if any of said provisions or any part thereof are declared invalid or unenforceable by a court of competent jurisdiction, the validity and enforceability of the remainder of such provisions or parts thereof and the applicability thereof shall not be affected thereby. (f) This Agreement may not be amended of modified except by a written instrument executed by Company and Executive. (g) This Agreement and the rights and obligations hereunder shall be governed by and construed in accordance with the laws of the State of Georgia. IN WITNESS WHEREOF, the parties have executed this Employment Agreement as of the date first above written. McKESSON HBOC, INC. A Delaware Corporation By ___________________________ Senior Vice President ATTEST: __________________________________________ ______________________________ Senior Vice President and Secretary Executive By the Authority of the Compensation Committee of the Board of Directors of McKesson HBOC, Inc. on January 27, 1999. -8- EX-10.3 6 AMENDED & RESTATED EMPLOYMENT AGREEMENT DTD 3/26/1999 EXHIBIT 10.3 AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS AGREEMENT, dated March 26, 1999, by and between McKesson HBOC, Inc. (the "Company"), a Delaware corporation with its principal office at One Post Street, San Francisco, California, and _____________ ("Executive"). RECITALS -------- A. Company (previously named McKesson Corporation) and Executive are currently parties to a contract of employment, dated as of May 20, 1996 (the "Prior Agreement"); B. Company and Executive now desire to amend and also to restate the Prior Agreement so as to (i) extend the term thereof, and (ii) make certain other modifications to reflect changes which have occurred since the date of the Prior Agreement; C. The Company, in its business, develops and uses certain trade secrets, pricing and marketing strategies, customer lists and other confidential and proprietary business information and data (as hereinafter defined, ---------------------- "Confidential Information"). Such Confidential Information has been, and will necessarily continue to be, communicated to or acquired by Executive by virtue of his employment with the Company, and the Company has spent time, effort and money to develop such Confidential Information and to promote and increase its goodwill; and D. The Company desires to assure the continued services and employment of Executive on its own behalf and on behalf of its affiliated companies for the period provided in this Agreement, and in so doing, to protect its Confidential Information and goodwill, and Executive is willing to continue in the employment of the Company on a full-time basis for such period, upon the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants herein contained, the parties hereto agree as follows: Page 1 1. Employment. Subject to the terms and conditions of this Agreement, the ---------- Company agrees to employ Executive, and Executive agrees to accept employment from, and remain in the employ of, the Company for the period stated in Paragraph 3 hereof. 2. Position and Responsibilities. During the period of his employment ----------------------------- hereunder, Executive agrees to serve the Company, and the Company shall employ Executive, as President and Chief Executive Officer, or in such other senior corporate executive capacity or capacities as may be mutually agreed upon by Executive and the Board of Directors of the Company. 3. Term and Duties. --------------- (a) Term of Employment. The period of Executive's employment under this ------------------ Agreement shall be deemed to have commenced on the date hereof and shall continue until March 31, 2004. (b) Duties. During the period of his employment hereunder and except for ------ illness, reasonable vacation periods, and reasonable leaves of absence, Executive shall devote his best efforts and all his business time, attention, skill and efforts to the business and affairs of the Company and its affiliated companies, as such business and affairs now exist and as they may be hereafter changed or added to, under and pursuant to the general direction of the Board of Directors of the Company;provided however, that, with the approval of the Board of -------- ------- Directors, Executive may serve, or continue to serve, on the boards of directors of, hold any other offices or positions in, companies or organizations which, in such Board's judgment, will not present any conflict of interest with the Company or any of its subsidiaries or affiliates or divisions, or materially affect the performance of Executive's duties pursuant to this Agreement. The Company shall retain full direction and control of the means and methods by which Executive performs the services for which he is employed hereunder. The services which are to be employed by Executive hereunder are to be rendered in the State of California, or in such other place or places in the United States or elsewhere as may be determined from time to time by the Board of Directors of the Company, but are to be rendered primarily at the Company's principal place of business at One Post Street in San Francisco, California. Unless and until otherwise mutually agreed between the Company and the Executive, the Executive shall be at liberty to maintain his residence in the San Francisco Bay Area, Page 2 State of California, and whenever absent therefrom on account of the performance of services under this Agreement, shall be reimbursed for all expenses reasonably incurred by him in the performance of his duties. 4. Compensation and Reimbursement of Expenses; Other Benefits; ----------------------------------------------------------- (a) Compensation. During the period of employment under this Agreement, ------------ Executive shall be paid a salary, in biweekly installments, at the rate of not less than Eight Hundred Fifty Thousand Dollars ($850,000.00) per year, or such higher salary as may be from time to time approved by the Board of Directors (or any duly authorized Committee thereof) of the Company (any such higher salary so approved to be thereafter the minimum salary payable to Executive during the remainder of the term hereof), plus such additional incentive compensation, if any, as may be voted to him yearly by the Board of Directors (or any duly authorized committee thereof). For Company's fiscal year which commenced on April 1, 1998, any incentive compensation awarded to Executive pursuant to the provisions of the Company's 1989 Management Incentive Plan ("MIP") shall be calculated using an Individual Target Award (as defined in the MIP) of 85% of Executive's base salary. For Company's fiscal years commencing on and after April 1, 1999, Executive's Individual Target Award shall be 100% of base salary for the applicable Year (as defined in the MIP). Executive shall also receive an automobile allowance from the Company of One Thousand Dollars ($1,000) per month during the term of this Agreement. (b) Reimbursement of Expenses. The Company shall pay or reimburse ------------------------- Executive, in accordance with its normal policies and practices, for all reasonable travel and other expenses incurred by Executive in performing his obligations under this Agreement. The Company further agrees to furnish Executive with such assistance and accommodations as shall be suitable to the character of Executive's position with the Company and adequate for the performance of his duties hereunder. (C) Other Benefits. During the period of employment under this Agreement, -------------- Executive shall be entitled to receive all other benefits of employment generally available to other members of the Company's senior management and those benefits for which key executives are or shall become eligible, when and as he becomes eligible therefor, including without limitation, group health and life insurance benefits, short and long-term disability plans and participation in the Company's Profit-Sharing Investment Page 3 Plan, Executive Medical Plan, 1989 Management Incentive Plan, Long Term Incentive Plan, 1984 Executive Benefit Retirement Plan, 1988 Executive Survivor Benefits Plan, Deferred Compensation Administration Plan II, Stock Purchase Plan and 1994 Restricted Stock and Stock Option Plan (or any similar plan or arrangement), and the Company agrees that none of such benefits shall be altered in any manner in such a way as to reduce any existing entitlement of Executive thereunder as of the date hereof without Executive's prior written consent. 5. Benefits Payable Upon Disability or Death. ------------------------------------------ (a) If Executive shall be prevented during the term of this Agreement from properly performing services hereunder by reason of illness or other physical or mental incapacity, the Company shall continue to pay Executive his then current salary hereunder during the period of his disability; provided, however, that if Executive is disabled for a continuous period exceeding twelve (12) calendar months, then the Company's obligations hereunder shall cease and terminate. (b) In the event of the death of Executive during the term of this Agreement, Executive's salary payable hereunder shall continue to be paid to Executive's surviving spouse, or if there is no spouse surviving, then to Executive's designee or representative (as the case may be) through the six-month period following the end of the calendar month in which death occurs. Thereafter, all of Company's obligations hereunder shall cease and terminate. (c) The provisions of this Paragraph 5 shall not affect any rights of Executive's heirs, administrators, executors, legatees, beneficiaries or assigns under the Company's Profit-Sharing Investment Plan, Executive Benefit Retirement Plan, Long Term Incentive Plan, Executive Survivor Benefits Plan, any Stock Purchase, Restricted Stock and Stock Option Plan (or any similar plan or arrangement), or any other employee benefit plan of the Company, and any such rights shall be governed solely by the terms of the respective plans. 6. Obligations of Executive During and After Employment. ---------------------------------------------------- (a) No Competition During Term. Executive agrees that during the term of -------------------------- his employment under this Agreement, he will engage in no other business activities, directly or Page 4 indirectly, which are or may be competitive with or which might place him in a competing position to that of the Company, or any affiliated company, without the prior written consent of the Board of Directors of the Company. (b) Unauthorized Use of Confidential Information. Executive acknowledges -------------------------------------------- and agrees that (i) during the course of his employment, Executive will have produced and/or have access to Confidential Information (as -- hereinafter defined) as well as records, notebooks, data, formulae, ------------------- specifications, and secret inventions and processes of Company and its affiliated companies, and (ii) the unauthorized use or sale of any of such confidential or proprietary information at any time would constitute unfair competition with Company. Executive promises and agrees not to engage in any unfair competition with Company either during or after the term of this Agreement. Therefore, during and subsequent to his employment by Company, or by an affiliated company, Executive agrees to hold in confidence and not, knowingly or intentionally disclose, use, copy or make lists of any such information, except to the extent expressly required to perform his obligations to Company hereunder. All records, files, drawings, documents, equipment, and the like, or copies thereof, relating to Company's business, or the business of an affiliated company, which Executive shall prepare, or use, or come into contact with, shall be and remain the sole property of Company, or of an affiliated company, and shall not be removed (except to allow Executive to perform his responsibilities hereunder while traveling for business purposes or otherwise working away from his office) from the Company's or the affiliated company's premises without its prior written consent, and shall be promptly returned to Company upon termination of employment with Company and its affiliated companies. This paragraph 6(b) shall survive the termination or expiration of this Agreement. (c) Confidential Information Defined. For purposes of this Agreement -------------------------------- "Confidential Information" means all information (whether reduced to written, electronic, magnetic or other tangible form) acquired in any way by Executive during the course of his employment with the Company concerning the products, projects, activities, business or affairs of the Company or the Company's customers, including, without limitation, (i) all information concerning trade secrets of the Company, including computer programs, systems documentation, special hardware, product hardware, related software development, manuals, formulae, processes, methods, machines, compositions, ideas, improvements or inventions of Company and its affiliated companies, (ii) all sales and financial information concerning the Company, (iii) all customer and supplier lists, (iv) Page 5 all information concerning products under development or marketing plans for any of those products or projects, and (v) all information in any way concerning the products, projects, activities, business or affairs of customers of the Company which was furnished to him by the Company or any of its agents or customers; provided, however, that Confidential Information does not include information which (A) becomes available to the public other than as a result of a disclosure by Executive, (B) was available to him on a non-confidential basis outside of his employment with the Company, or (C) becomes available to him on a non-confidential basis from a source other than the Company or any of its agents, creditors, suppliers, lessors, lessees or customers. "Company" as used herein includes all subsidiaries and affiliates of the Company. (d) Nonsolicitation. Executive recognizes and acknowledges that it is --------------- essential for the proper protection of the business of the Company that Executive be restrained for a reasonable period following the termination of Executive's employment with the Company from: (1) soliciting or inducing any employee of the Company to leave the employ of the Company; (2) hiring or attempting to hire any employee of the Company; or (3) soliciting the trade of or trading with the customers of the Company for any competitive business purpose. Accordingly, Executive agrees that during the term of his employment under this Agreement, and for the Restricted Period thereafter following the termination of Executive's employment with the Company for any reason, Executive shall not, directly or indirectly, (i) hire, solicit, aid in or encourage the hiring and/or solicitation of, contract with, aid in or encourage the contracting with, or induce or encourage to leave the employment of the Company, any employee of the Company; and (ii) solicit, aid in or encourage the solicitation of, contract with, aid in or encourage the contracting with, service, or contact any person or entity which is, or was, within three years prior to the termination of Executive's employment with the Company, a customer or client of the Company, for the purpose of offering or selling a product or service competitive with any of those offered by the Company. For purposes of this Paragraph 6(d), the "Restricted Period" shall be deemed to be two (2) years. This Paragraph 6(d) shall survive the termination or expiration of this Agreement. (e) Remedy for Breach. Executive agrees that in the event of a breach or ----------------- threatened breach of any of the covenants contained in this Paragraph 6, the Company shall have the right and remedy to have such covenants specifically enforced by any court having jurisdiction, it being acknowledged and agreed than any material breach of any of the Page 6 covenants will cause irreparable injury to the Company and that money damages will not provide an adequate remedy to the Company. 7. Termination. ----------- (a) For Cause. Notwithstanding anything herein to the contrary, the --------- Company may, without liability, terminate Executive's employment hereunder for cause at any time upon written notice from the Board of Directors (or any duly authorized Committee thereof) specifying such cause, and thereafter the Company's obligations hereunder shall cease and terminate; provided, however, that such written notice shall not -------- ------- be delivered until after the Board of Directors (or any duly authorized Committee thereof) shall have given Executive written notice specifying the conduct alleged to have constituted such cause and Executive has failed to cure such conduct, if curable, within fifteen (15) days following receipt of such notice. As used herein, the term "cause" shall mean (i) Executive's willful misconduct, habitual neglect, dishonesty, or other intentional actions (or failures to act) which are materially and demonstrably injurious to the Company, or (ii) a material breach by Executive of one or more terms of this Agreement. (b) Arbitration Required to Confirm Cause. In the event of a termination ------------------------------------- for cause pursuant to subparagraph (a) above, the Company shall continue to pay Executive's then current compensation as specified in this Agreement until the issuance of an arbitration award affirming the Company's action. Such arbitration shall be held in accordance with the provisions of Paragraph 8(d) below. In the event the award upholds the action of the Company, Executive shall promptly repay to the Company any sums received pursuant to this subparagraph 7(b), following termination of employment. (c) Other than for Cause: Performance. Notwithstanding anything herein to --------------------------------- the contrary, Company may also terminate Executive's employment (without regard to any general or specific policies of Company relating to the employment or termination of its employees) should Executive fail to perform his duties hereunder in a manner satisfactory to the Board of Directors of the Company), provided that Executive shall first be given written notice of such unsatisfactory performance and a period of ninety (90) days to improve such performance to a level deemed acceptable to the Board. (d) Obligations of Company on Termination of Employment. --------------------------------------------------- Page 7 i) If Company terminates Executive's employment pursuant to subparagraph 7(a) above, and the Company's action is affirmed as specified in subparagraph 7(b) above, then all of Company's obligations hereunder shall immediately cease and terminate. Executive shall thereupon have no further right or entitlement to additional salary, incentive compensation payments or awards, or any perquisites from Company whatsoever, and Executive's rights, if any, under Company's employee and executive benefit plans shall be determined solely in accordance with the express terms of the respective plans; ii) If (x) Company terminates Executive's employment pursuant to subparagraph 7(c) above, or (y) Executive, in his sole discretion, resigns or otherwise voluntarily leaves his employment with Company (for any reason whatsoever) prior to the expiration of this Agreement, then, in either case, in complete satisfaction and discharge of all of its obligations to Executive hereunder, Company shall, except as provided in Section 8(c) below, (a) continue Executive's then base salary, without increase or decrease, for the remainder of the term of this Agreement (it being understood, subject to subparagraph 7(d)(iii) below, that Executive shall have no obligation to seek other employment during such term, and that Company shall not reduce its payments hereunder or have the right of offset as a result of any compensation Executive may receive from a subsequent employer during such term), (b) continue Executive's incentive award compensation under the terms of Company's MIP for each fiscal year ending within the term of this Agreement, such MIP awards to be equal, in each case, to 100% of Executive's Individual Target Award existing at the time of his termination of employment, (c) provide Executive with lifetime (i) coverage under Company's Executive Medical Plan and financial counseling program and, (ii) office space and secretarial support services as may be suitable and adequate for Executive's needs, (d) continue Executive's participation in the Deferred Compensation Administration Plan II, and Executive's automobile allowance for the term of this Agreement, (e) continue the accrual and vesting of Executive's rights, and benefits for the remainder of the term of this Agreement for purposes of the Executive Survivor Benefit Plan and the Executive Benefit Retirement Plan (with Executive's benefits, for purposes of those two plans only, calculated on the basis of Executive receiving (i) Approved Retirement commencing on the expiration of this Agreement and, (ii) with respect to the Page 8 Executive Benefit Retirement Plan, a benefit calculated on the basis of the greater of 60% or the maximum percentage of Average Final Compensation then specified in the Plan without any reduction for early retirement), (f) continue the vesting of all of Executive's awards for the remainder of the term of this Agreement (but not thereafter) for purposes of the Company's Stock Option and Restricted Stock Plan (or any similar plan or arrangement) and the Long Term Incentive Plan, provided, however, that (unless the Board of -------- ------- Directors, or any duly authorized Committee, in its sole discretion, determines otherwise) Executive shall in no event be entitled to or receive additional grants or awards subsequent to the date of his termination of employment and, provided, further, that, with respect -------- ------- to the Long Term Incentive Plan, Executive shall receive pro-rata payouts on the expiration date of this Agreement for all then pending performance periods but Executive shall not participate in any way in any performance period commencing subsequent to the date of his termination of employment, and (g) deem Executive's termination to have occurred as if the sum of his age and years of service to Company is at least 65 for purposes of both the Deferred Compensation Administration Plan II and the Stock Option and Restricted Stock Plan (or any similar plan or arrangement), and (h) terminate Executive's participation in Company's tax-qualified profit-sharing plan, pursuant to the terms of said plan, as of the date of Executive's termination of employment. iii) Notwithstanding any contrary language or provision in paragraph 7(d) (ii) above, or elsewhere in this Agreement, Executive expressly acknowledges and agrees that: (x) Company shall have the right to cease all payments otherwise due Executive pursuant to paragraphs 7(d) (ii)(a) and 7(d)(ii)(b) above in the event that, prior to the expiration of date of this Agreement, Executive accepts employment with, advises, consults with or otherwise renders services to, any business which competes with the business then being conducted by Company or its affiliates, and (y) any and all of Executive's grants, awards, or benefits received (or to be received) pursuant to the Company's Stock Option and Restricted Stock Plan (or any similar plan or arrangement), Long Term Incentive Plan and Executive Benefit Retirement Plan (collectively, the "Plans") remain subject to the special Page 9 forfeiture and repayment rules set forth in the Plans (or the Statement of Terms and Conditions applicable thereto). 8. General Provisions. ------------------ (a) Executive's rights and obligations under this Agreement shall not be transferable by assignment or otherwise, nor shall Executive's rights be subject to encumbrance or subject to the claims of Company's creditors. Nothing in this Agreement shall prevent the consolidation of Company with, or its merger into, any other corporation, or the sale by Company of all or substantially all of its properties or assets; and this Agreement shall inure to the benefit of, be binding upon and be enforceable by, any successor surviving or resulting corporation, or other entity to which such assets shall be transferred. This Agreement shall not be terminated by the voluntary or involuntary dissolution of the Company. (b) This Agreement (together with the Termination Agreement between the parties of May 20, 1996) and the rights of Executive with respect to the benefits of employment referred to in Paragraph 4(c) constitute the entire agreement between the parties hereto in respect of the employment of Executive by Company. This Agreement supersedes and replaces all prior oral and written agreements, understandings, commitments, and practices between the parties, including but not limited to the Prior Agreement (whether or not fully performed by Executive prior to the date hereof) which shall be of no further force or effect. (c) In the event Executive's employment with Company shall terminate under circumstances otherwise providing Executive with a right to compensation and benefits under both Section 5 of the Termination Agreement and Section 7(d)(ii) of this Agreement, Executive shall be entitled to receive the greater of the compensation and benefits ------- provided therein, calculated individually, without duplication. (d) Any dispute, controversy or claim arising under or in connection with this Agreement, or the breach hereof, shall be settled exclusively by arbitration in accordance with the Rules of the American Arbitration Association then in effect. Judgment upon the award rendered by the arbitrator may be entered in any court of competent jurisdiction. Any arbitration held pursuant to this paragraph in connection with any termination of Executive's employment shall take place in San Francisco, California at the earliest possible date. If any proceeding is necessary to enforce or interpret the terms of this Page 10 Agreement, or to recover damages for breach thereof, the prevailing party shall be entitled to reasonable attorneys fees and necessary costs and disbursements, not to exceed in the aggregate one percent (1%) of the net worth of the other party, in addition to any other relief to which he or it may be entitled. (e) The provisions of this Agreement shall be regarded as divisible, and if any of said provisions or any part thereof are declared invalid or unenforceable by a court of competent jurisdiction, the validity and enforceability of the remainder of such provisions or parts thereof and the applicability thereof shall not be affected thereby. (f) This Agreement may not be amended or modified except by a written instrument executed by Company and Executive. (g) This Agreement and the rights and obligations hereunder shall be governed by and construed in accordance with the laws of the State of California. IN WITNESS WHEREOF, the parties have executed this Amended and Restated Employment Agreement as of the date first above written. McKESSON HBOC, Inc. a Delaware Corporation By:__________________________ Senior Vice President ATTEST: _______________________________________ __________________________ Senior Vice President and Secretary Executive By the Authority of the Board of Directors of McKesson HBOC, Inc. on January 27, 1999. Page 11 EX-10.5 7 1994 STOCK OPTION & RESTRICTED STOCK PLAN EXHIBIT 10.5 McKESSON HBOC, INC. 1994 STOCK OPTION AND RESTRICTED STOCK PLAN (As Amended Through January 27, 1999) 1. Establishment, Purpose and Definitions. -------------------------------------- (a) There is hereby adopted the McKesson HBOC, Inc. 1994 Stock Option and Restricted Stock Plan (the "Plan"), (formerly known as the McKesson Corporation 1994 Stock Option and Restricted Stock Plan). The Plan shall be the successor to the McKesson Corporation 1988 Restricted Stock Plan and the McKesson Corporation 1978 Stock Option Plan (collectively, the "Predecessor Plans") with respect to those awards under the Predecessor Plans which will be equitably adjusted to become awards under the Plan ("Adjusted Awards"), all in connection with the restructuring of McKesson Corporation, a Delaware corporation ("Old McKesson"), that will result in the sale of Old McKesson's PCS business to Eli Lilly and Company (the "Transaction"). In connection with the Transaction, SP Ventures, Inc. was renamed McKesson Corporation, the name of which was subsequently changed to McKesson HBOC, Inc. on January 12, 1999 (which entities are referred to herein as the "Company", as the context so requires) and the Plan was renamed the McKesson Corporation 1994 Stock Option and Restricted Stock Plan. (b) The purpose of this Plan is to provide a means whereby key executives of the Company and its affiliates may be given an opportunity to purchase shares of the common stock ($0.01 par value) of the Company (the "Stock") pursuant to options which may or may not qualify as "incentive stock options" under Section 422 of the Internal Revenue Code, as amended (the "Code"), and by providing participants with grants of restricted shares of Stock ("Restricted Stock") in accordance with the terms and conditions set forth herein. Until July 30, 1997, the Plan also provided for grants of options to members of the Board of Directors of the Corporation who were not employed as regular salaried officers or employees of the Corporation or its affiliates ("Non-Employee Directors"). On that date, the stockholders approved the Non- Employee Directors' Equity Compensation and Deferral Plan (the "1997 Plan"), and all grants of options to Non-Employee Directors from that date forward will be made under the 1997 Plan. All options previously granted to Non-Employee Directors under this Plan will continue to be governed by the terms and conditions in effect at the time of the grant of such options. 2. Stock Subject to the Plan. ------------------------- (a) The aggregate number of shares of Stock available for the grant of awards hereunder shall equal the sum of (a) the number of shares of Stock issuable in connection with Adjusted Awards, plus (b) 29,300,000 (all such shares shall be subject to equitable adjustment as provided herein). With respect to the shares of Stock referred to in clause (b) above (the "Future Award Shares") no more than 2,200,000 shares may be awarded as Restricted Stock (subject to equitable adjustment as provided herein). The maximum number of Future Award Shares that may be granted to any individual during any plan year in the form of Restricted Stock shall not exceed 40,000 and the maximum number of Future Award Shares that may be granted to any individual in the form of options during any plan year shall not exceed 600,000; in each case, such maximum number shall be subject to equitable adjustment as provided herein. All awards of Future Award Shares shall be contingent on the approval of the Plan by the stockholders of the Company at its first annual meeting of stockholders next following consummation of the Transaction. As the Committee (as hereinafter defined) may determine from time to time, the Stock may consist either in whole or in part of shares of authorized but unissued Stock, or shares of authorized and issued Stock reacquired by the Company and held in its treasury. If an option covered by Future Award Shares is surrendered for cash or for any other reason (except surrender for shares of Stock) ceases to be exercisable in whole or in part, the shares which were subject to such option but as to which the option had not been exercised shall continue to be available for grants of stock options under the Plan. If any shares of Stock underlying Restricted Stock grants which are covered by Future Award Shares shall be reacquired by the Company pursuant to the termination provisions described herein or in the instruments evidencing the making of such Restricted Stock grants, such shares shall again be available for grant of Restricted Stock awards under the Plan (to the extent permitted under Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Prior to the granting of awards, the Company shall be under no obligation to reserve or retain in its treasury any particular number of shares of Stock at any time, and no particular shares of Stock, whether issued or held as treasury Stock, shall be identified as being available for future awards under the Plan. (b) In the case of options which are intended to qualify as "incentive stock options" under Section 422 of the Code, the aggregate fair market value (determined as of the time the option is granted) of the Stock with respect to which incentive stock options are exercisable for the first time by any eligible key executive during any calendar year (under this Plan and any other plans of the Company) shall not exceed $100,000. (c) In the event that the Committee shall determine that any dividend or other distribution (whether in the form of cash, stock, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, spin-off, combination, repurchase, or share exchange, or other similar corporate transaction or event, affects the Stock such that an adjustment is appropriate in order to preserve (but not increase) the rights of participants under the Plan, then the Committee shall make such equitable changes or adjustments as it deems necessary or appropriate to any or all of (i) the number and kind of shares which may thereafter be issued in connection with Future Award Shares (with respect to both Restricted Stock and option awards), (ii) the number and kind of shares issued in respect of outstanding Adjusted Awards, (iii) the number and kind of shares issued in respect of outstanding awards of Future Award Shares, and (iv) the exercise price relating to any options. 2 3. Eligibility. ----------- Persons who shall be eligible to have granted to them awards provided for by the Plan shall be such key executives of the Company and its affiliates as the Committee, in its sole discretion, shall designate from time to time. 4. Administration of the Plan. -------------------------- (a) The Plan shall be administered by a committee (the "Committee") consisting of not less than two directors of the Company to be appointed by the Board, each of whom is an "outside director" within the meaning of Section 162(m) of the Code and a "non-employee director" within the meaning of Rule 16b- 3 under the Exchange Act. (b) The Committee may from time to time determine which key executives of the Company and its affiliates shall be granted awards under the Plan, the terms thereof, and the number of shares covered by an option or the number of shares of Restricted Stock to be granted. (c) The Committee shall have the sole authority, in its absolute discretion, to adopt, amend, and rescind such rules and regulations as, in its opinion, may be advisable in the administration of the Plan, to construe and interpret the Plan, the rules and regulations, and the instruments evidencing awards granted under the Plan and to make all other determinations deemed necessary or advisable for the administration of the Plan. All decisions, determinations, and interpretations of the Committee shall be final and binding on all participants and other interested parties. 5. Stock Options and Stock Appreciation Rights. ------------------------------------------- (a) The Option Price. ---------------- The exercise price of each option shall not be less than the fair market value of the Stock covered by such option on the date the option is granted, except that the option price associated with Adjusted Awards shall be such price as results from the equitable adjustment of such awards. Such fair market value shall, if the Stock is not listed or admitted to trading on a stock exchange, be the mean between the lowest reported bid price and highest reported asked price of the Stock on the date the option is granted in the over-the- counter market, as reported by any publication of general circulation selected by the Company which regularly reports the market price of the Stock in such market, or, if the Stock is then listed or admitted to trading on any stock exchange, the composite closing price on such day as reported in the Wall Street Journal; provided, however, that if the Committee determines that as a result of the Transaction fair market value may be more accurately determined based on the average closing price of the Stock over a three-consecutive-day period immediately prior to the grant, then such average will constitute fair market value. Such price shall be subject to adjustment as provided in paragraph 2(c) hereof. 3 (b) Terms and Conditions of Options. ------------------------------- (i) Each option granted pursuant to the Plan shall be evidenced by a written grant agreement (the "Agreement") executed by the Company and the person to whom such option is granted which shall provide such terms and conditions as the Committee may determine, in its sole discretion. (ii) Unless otherwise provided in the Agreement, the term of each option shall be for no more than ten years and three months; provided however that the term of each option intended to qualify as an "incentive stock option" shall be for no more than ten years. (iii) The Agreement may contain such other terms, provisions, and conditions as may be determined by the Committee (not inconsistent with this Plan) including, without limitation, provisions relating to stock appreciation rights ("SARs") with respect to options granted hereunder. Unless otherwise provided in the Agreement, the Committee may, in its sole discretion, extend the post-termination exercise period with respect to an option (but not beyond the original term of such option). If an option, or any part thereof, is intended to qualify as an "incentive stock option", the Agreement shall contain those terms and conditions necessary to so qualify said option or such part thereof. (iv) The Committee shall have the authority to accelerate the exercisability of any outstanding option at such time and under such circumstances as it, in its sole discretion, deems appropriate. (v) Adjusted Awards shall remain subject to the same terms and conditions to which they were subject prior to any equitable adjustment made in respect of the Transaction. (c) Stock Appreciation Rights. ------------------------- The Committee may, under such terms and conditions as it deems appropriate, authorize the surrender by an optionee of all or part of an unexercised option and authorize a payment in consideration thereof of an amount equal to the difference obtained by subtracting the option price of the shares then subject to exercise under such option from the fair market value of the Stock represented by such shares on the date of surrender, provided that the Committee determines that such settlement is consistent with the purpose of the Plan. Such payment may be made in shares of Stock valued at their fair market value on the date of surrender of such option or in cash, or partly in shares and partly in cash. Acceptance of such surrender and the manner of payment shall be in the discretion of the Committee. If an option is surrendered for cash, the shares covered by the surrendered option will thereafter be available for grant under the Plan to the extent permitted under Rule 16b-3 of the Exchange Act. 4 (d) Use of Proceeds. --------------- Proceeds realized from the sale of Stock pursuant to options granted under the Plan shall constitute general funds of the Company. 6. Restricted Stock Awards. ----------------------- (a) Terms and Conditions. -------------------- Each Restricted Stock grant made pursuant to the Plan shall be evidenced by an Agreement executed by the Company and the person to whom such Restricted Stock is granted (the "Grantee"). Each Restricted Stock grant made under the Plan shall, unless otherwise provided in the Agreement, contain the following terms, conditions and restrictions and such additional terms, conditions and restrictions as may be determined by the Committee. Adjusted Awards shall maintain the same terms and conditions to which they were subject prior to any equitable adjustment made in respect of the Transaction. (b) Restrictions. ------------ Until the restrictions imposed on any Restricted Stock grant shall lapse, shares of Stock granted to a participant pursuant to a Restricted Stock grant: (i) shall not be sold, assigned, transferred, pledged, hypothecated, or otherwise disposed of, and (ii) shall, if the Grantee's continuous employment with the Company shall terminate for any reason, unless otherwise provided in the Agreement, be returned to the Company forthwith, and all the rights of the Grantee to such shares shall immediately terminate; provided that if the Committee, in its sole discretion, shall within ninety (90) days of such termination of employment, notify the participant in writing of its decision not to terminate the Grantee's rights in such shares, then the Grantee shall continue to be the owner of such shares subject to such continuing restrictions as the Committee may prescribe in such notice. If the Grantee's interests in the shares granted pursuant to a Restricted Stock grant shall be terminated, such Grantee shall forthwith deliver or cause to be delivered to the Secretary of the Company the certificate(s), if any, previously delivered to the Grantee for such shares, accompanied by such endorsement(s) and/or instrument(s) of transfer as may be required by the Secretary of the Company. (c) Lapse of Restrictions. --------------------- Except as otherwise provided in the Plan or the Agreement, the restrictions imposed on any Restricted Stock grant shall commence with the date of the grant and continue during a period set by the Committee. Notwithstanding the foregoing, the Committee may accelerate the lapsing of restrictions on a Restricted Stock grant under such terms and conditions as it may deem appropriate. 5 (d) Restrictive Legend; Certificates May be Held in Custody. ------------------------------------------------------- Each certificate evidencing shares granted pursuant to a Restricted Stock grant may bear an appropriate legend referring to the terms, conditions and restrictions described in the Plan and in the instrument evidencing the Restricted Stock grant. Any attempt to dispose of such shares in contravention of such terms, conditions and restrictions shall be invalid. The Committee may enact rules which provide that the certificates evidencing such shares may be held in custody by a bank or other institution, or that the Company may itself hold such shares in custody, until restriction thereon shall have lapsed. (e) Restrictions upon Making of Restricted Stock Grants. --------------------------------------------------- The registration or qualification under any federal or state law of any shares to be granted pursuant to Restricted Stock grants or the resale or other disposition of any such shares by or on behalf of the Grantees receiving such shares may be necessary or desirable as a condition of or in connection with such Restricted Stock grants, and, in any such event, if the Committee in its sole discretion so determines, delivery of the certificates for such shares shall not be made until such registration or qualification shall have been completed. (f) Special Provisions Regarding Awards. ----------------------------------- Notwithstanding anything to the contrary contained herein, unless otherwise provided in the Agreement governing a Restricted Stock grant, Restricted Stock awards granted pursuant to this Section 6 to Executive Officers (as such term is defined in Rule 3b-7 promulgated under the Exchange Act) shall be based on the attainment by the Company (or a subsidiary or division of the Company if applicable) of performance goals pre-established by the Committee, during a performance period pre-established by the Committee, based on one or more of the following criteria: (i) the attainment of a specified percentage return on total capital employed by the Company (or a subsidiary or division of the Company); (ii) the attainment of a specified percentage return on total stockholder equity of the Company; (iii) the attainment of a specified percentage increase in earnings per share of Stock from continuing operations; (iv) the attainment of a specified percentage increase in net income of the Company; (v) the attainment of a specified percentage increase in profit before taxation of the Company (or a subsidiary or division of the Company); and (vi) the attainment of a specified percentage increase in revenues of the Company (or a subsidiary or division of the Company). In addition, such performance goals may be based upon the attainment of specified levels of Company performance under one or more of the measures described above relative to the performance of other corporations. Each such performance criteria shall be evaluated in accordance with generally accepted accounting principles. Such shares of Restricted Stock shall be released from restrictions only after the attainment of such performance measures have been certified by the Committee. 6 7. Change in Control. ----------------- Upon a Change in Control (as hereinafter defined), then notwithstanding anything herein to the contrary, all options granted under the Plan that are outstanding at the time of such Change in Control shall become immediately exercisable in full and all restrictions with respect to shares of Restricted Stock shall lapse and such shares shall become fully vested and exercisable. A "Change in Control" of the Company shall be deemed to have occurred if any of the events set forth in any one of the following paragraphs shall occur: (i) any "person" (as such term is used in sections 13(d) and 14(d) of the Exchange Act), excluding the Company or any of its affiliates, a trustee or any fiduciary holding securities under an employee benefit plan of the Company or any of its affiliates, an underwriter temporarily holding securities pursuant to an offering of such securities or a company owned, directly or indirectly, by stockholders of the Company in substantially the same proportions as their ownership of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities; or (ii) during any period of not more than two consecutive years, individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a Person who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii) or (iv) of this paragraph) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two- thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (iii) the shareholders of the Company approve a merger or consolidation of the Company with any other company, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company, at least 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person acquires more than 50% of the combined voting power of the Company's then outstanding securities; or (iv) the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. 7 Notwithstanding the foregoing, no Change in Control shall be deemed to have occurred if there is consummated any transaction or series of integrated transactions immediately following which the holders of the Stock immediately prior to such transaction or series of transactions continue to have the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately prior to such transaction or series of transactions. 8. Amendment and Termination of the Plan. ------------------------------------- The Board at any time and from time to time may suspend, terminate, modify or amend the Plan; provided, however, that an amendment which requires stockholder approval in order for the Plan to continue to comply with Section 162(m) of the Code or any other law, regulation or stock exchange requirement shall not be effective unless approved by the requisite vote of stockholders. No suspension, termination, modification or amendment of the Plan may adversely affect any award previously granted without the written consent of the Grantee. 9. Assignability. ------------- Each option award granted pursuant to this Plan shall, during the participant's lifetime, be exercisable only by him. No award nor any right thereunder shall be transferable by the participant by operation of law or otherwise other than by will, the laws of descent and distribution or pursuant to a qualified domestic relations order as defined in the Code or the Employee Retirement Income Security Act of 1974, as amended. 10. Payment Upon Exercise. --------------------- Payment of the purchase price upon exercise of any option granted under this Plan shall be made in cash; provided that the Committee, in its sole discretion, may permit an option holder to pay the option price, in whole or in part, by tendering to the Company shares of Stock owned by the option holder, and having a fair market value equal to the option price. The fair market value of such Stock shall be determined by the Committee as it deems appropriate, or as may be required in order to comply with any applicable law or regulation. 11. Effective Date and Duration of the Plan. --------------------------------------- The Plan shall become effective upon its adoption by the Board and the approval thereof by Old McKesson as the sole stockholder of the Company; provided, however, that the effectiveness of the Plan shall be contingent upon the occurrence of the Transaction and all awards of Future Award Shares shall be contingent on the approval of the Plan by the stockholders of the Company at its first annual meeting of stockholders. Unless sooner terminated, the Plan shall remain in effect until terminated by action of the Board, provided, however, that the duration of the Plan shall in no event exceed ten years from the date of the adoption of the Plan by the Board. Termination of the Plan shall not affect any awards previously granted pursuant thereto, which shall remain in effect until their restrictions shall have 8 lapsed (with respect to Restricted Stock grants) or until exercised (with respect to option grants) all in accordance with their terms. 12. Agreement by Participant Regarding Withholding Taxes. ---------------------------------------------------- If the Committee shall so require, as a condition of exercise of an option or SAR or upon the lapsing of restrictions imposed on Restricted Stock (each a "Tax Event"), each participant shall agree that no later than the date of the Tax Event, the participant will pay to the Company or make arrangements satisfactory to the Committee regarding payment of any federal, state or local taxes of any kind required by law to be withheld upon the Tax Event. Alternatively, the Committee may provide, in its sole discretion, that a participant may elect, to the extent permitted or required by law, to have the Company deduct federal, state and local taxes of any kind required by law to be withheld upon the Tax Event from any payment of any kind due to the participant, including withholding of Shares. 13. Rights as a Shareholder. ----------------------- A participant granted an award hereunder or a transferee of an award shall have no rights as a stockholder with respect to any shares covered by the award until the date of the issuance of a stock certificate to him for such shares. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distribution of other rights for which the record date is prior to the date such stock certificate is issued, except as otherwise provided in the Plan. 14. No Rights to Employment. ----------------------- Nothing in the Plan or in any award granted or Agreement entered into pursuant hereto shall confer upon any participant the right to continue in the employ of, or in an independent contractor relationship with, the Company or any subsidiary or to be entitled to any remuneration or benefits not set forth in the Plan or such Agreement or to interfere with or limit in any way the right of the Company or any such subsidiary to terminate such participant's employment. Awards granted under the Plan shall not be affected by any change in duties or position of a participant as long as such participant continues to be employed by, or in a consultant relationship with, the Company or any subsidiary. 15. Interpretation. -------------- The Plan is designed and intended to comply with Rule 16b-3 promulgated under the Exchange Act and Section 162(m) of the Code and all provisions hereof shall be construed in a manner to so comply. 9 EX-10.6 8 1997 NON-EMPLOYEE DIRECTORS' EQUITY COMPENSATION EXHIBIT 10.6 McKESSON HBOC, INC. 1997 NON-EMPLOYEE DIRECTORS' EQUITY COMPENSATION AND DEFERRAL PLAN (As amended through January 27, 1999) 1. Purpose of the Plan. The purpose of the McKesson HBOC, Inc. 1997 Non- ------------------- Employee Directors' Equity Compensation and Deferral Plan (the "Plan") (formerly known as the McKesson Corporation 1997 Non-Employee Directors' Equity Compensation and Deferral Plan) is to attract and retain qualified individuals not employed by McKesson HBOC, Inc. (the "Company") or its subsidiaries to serve on the Board of Directors of the Company and to further align the interests of such non-employee directors with those of the stockholders of the Company. Once approved, the Plan shall replace the Company's Directors' Retirement Program and shall be in lieu of participation by non-employee directors in the Company's 1994 Stock Option and Restricted Stock Plan. 2. Definitions. ----------- (a) "Annual Meeting" shall mean the annual meeting of the stockholders of the Company. (b) "Annual Retainer" shall mean any retainer fee paid to a non-employee director for service on the Board during a Director Year. (c) "Board" shall mean the Board of Directors of the Company. (d) "Change in Control" of the Company shall mean the occurrence of any of the following events: (i) any "person" (as such term is used in sections 13(d) and 14(d) of the Exchange Act), excluding the Company or any of its affiliates, a trustee or any fiduciary holding securities under an employee benefit plan of the Company or any of its affiliates, an underwriter temporarily holding securities pursuant to an offering of such securities or a corporation owned, directly or indirectly, by stockholders of the Company in substantially the same proportions as their ownership of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities; or (ii) during any period of not more than two consecutive years, individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a Person who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii) or (iv) of this paragraph) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company, at least 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person acquires more than 50% of the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. Notwithstanding the foregoing, no Change in Control shall be deemed to have occurred if there is consummated any transaction or series of integrated transactions immediately following which the holders of the Common Stock immediately prior to such transaction or series of transactions continue to have the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately prior to such transaction or series of transactions. (e) Prior to January 27, 1999 the "Committee" shall mean the Committee on Directors and Corporate Governance. Effective January 27, 1999 "Committee" shall mean the Compensation Committee of the Board of Directors. (f) "Committee Chairman Retainer" shall mean any fee paid to a non- employee director for service as the chairman of any committee of the Board. (g) "Common Stock" shall mean shares of Common Stock, par value $0.01 per share, of the Company. (h) "DCAP II" shall mean the McKesson HBOC, Inc. Deferred Compensation Administration Plan II, as amended from time to time. (i) "Director Year" shall mean a calendar year. (j) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. 2 (k) "Fair Market Value" of a share of Common Stock as of a particular date shall mean, if the Common Stock is not listed or admitted to trading on a stock exchange, the average between the lowest reported bid price and highest reported asked price of the Common Stock on such date in the over-the-counter market, or, if the Common Stock is then listed or admitted to trading on any stock exchange, the composite closing price on such date as reported in The Wall Street Journal. (l) "Fees" shall mean the sum, for any Director Year, of the Annual Retainer, Meeting Fees and Committee Chairman Retainer. (m) "Meeting Fees" shall mean any fees paid to a non-employee director for attending a meeting of the Board or a committee of the Board, including any fees paid to a non-employee director for extraordinary or special Board and/or committee meetings. (n) "Participant" shall mean a non-employee director of the Company participating in the Plan. (m) "Restricted Stock Unit" shall mean a right to receive, in accordance with the conditions set forth herein, a share of the Common Stock or, alternatively, a cash payment equal to the Fair Market Value of a share of Common Stock. (p) "Retainer Option" shall mean a stock option granted pursuant to the Plan in lieu of all or a portion of a Participant's Annual Retainer, as provided in Sections 6(c) and 6(d)(iv). 3. Effective Date, Duration of Plan. This Plan shall become effective as of -------------------------------- January 1, 1997, subject to the approval of the Plan by the stockholders of the Company; provided, that if the Plan is so approved, any election made hereunder prior to such approval shall be deemed effective as of the date such election was made. The Plan will terminate on December 31, 2006 or such earlier date as determined by the Board; provided that no such termination shall affect rights earned or accrued under the Plan prior to the date of termination. 4. Participation. Subject to the prior approval of the Committee, each ------------- member of the Board who is not an employee of the Company or any of its subsidiaries shall be eligible to participate in the Plan. 5. Common Stock Subject to the Plan. -------------------------------- (a) Subject to Section 5(b) below, the maximum aggregate number of shares authorized to be issued under the Plan shall be 500,000. All Restricted Stock Units issued hereunder, whether or not distributed in the form of Common Stock, shall count against such maximum. If any options granted hereunder cease to be exercisable in whole or in part, any shares subject thereto but with respect to which such option had not been exercised, shall not count against such maximum. As the Committee shall determine from time to time, the Common Stock may consist of either shares of authorized but unissued Common Stock, or shares of authorized and issued Common Stock reacquired by the Company and held in its treasury. 3 (b) In the event that the Committee shall determine that any dividend or other distribution (whether in the form of cash, stock or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or share exchange or other similar corporate transaction or event affects the Common Stock such that an adjustment is determined by the Committee to be appropriate to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee may, in its sole discretion and in such manner as it may deem equitable, adjust any or all of (i) the number of shares of Common Stock subject to the Plan, (ii) the number of shares of Common Stock subject to outstanding awards under the Plan, and (iii) the grant or exercise price with respect to any option. 6. Restricted Stock Units; Deferrals. --------------------------------- (a) Transition Grant. As soon as practicable following January 1, 1997, ---------------- each Participant shall receive an initial grant (the "Transition Grant") of a number of Restricted Stock Units in consideration for the termination of such Participant's accrued benefits and rights under the Company's Director's Retirement Program (the "Prior Plan"); provided that the Transition Grant shall be subject to the receipt by the Company of a written release from the Participant, in the form approved by the Committee, consenting to such termination. The number of Restricted Stock Units granted to a Participant in respect of the Transition Grant shall equal the Accrued Benefit (as defined below), divided by the Fair Market Value of a share of Common Stock as of December 31, 1996. A Participant's Accrued Benefit shall equal his or her accrued benefit under the Prior Plan, as of December 31, 1996. (b) Annual Grant. On the date of each Annual Meeting prior to the ------------ termination or expiration of the Plan, beginning with the 1997 Annual Meeting, each Participant shall receive a grant of 400 Restricted Stock Units. Effective January 27, 1999, the annual grants of 400 Restricted Stock Units shall be discontinued. (c) Mandatory Deferral. On each date that any portion of the Annual ------------------ Retainer would otherwise be payable to a Participant prior to the termination or expiration of the Plan, each such Participant shall be required to defer the receipt of an amount equal to fifty percent (50%) of such portion of Annual Retainer, which amount shall be deferred in the form of Restricted Stock Units or Retainer Options, as elected by the Participant prior to the end of the calendar year preceding the year in which the Annual Retainer is payable. In the event that a participant fails to make such an election with respect to any calendar year in which he or she receives payment of an Annual Retainer, the Participant shall be deemed to have elected to receive the Annual Retainer in the form of Restricted Stock Units. The number of Restricted Stock Units granted to a Participant in respect of such deferral shall equal the Annual Retainer so deferred, divided by the Fair Market Value of a share of Common Stock as of the last trading day of the calendar quarter immediately preceding the date such Annual Retainer would otherwise be payable. To the extent applicable, Restricted Stock Units granted pursuant to this paragraph shall be subject to the same 4 terms and conditions described in Section 6(d)(ii) below. The number of Retainer Option shares granted to a Participant in respect of such deferral shall be determined using the same conversion rate as employed in that year for the purpose of determining the number of stock option shares to be granted to employees in lieu of awards under the Company's Management Incentive Plan. (d) Optional Deferral. All Fees (other than the portion of Annual Retainer ----------------- subject to Mandatory Deferral described above) earned by a Participant in each Director Year prior to the termination or expiration of the Plan shall be subject to the following payment and deferral options. Each Participant may elect by written notice to the Company, in accordance with the procedures established by the Company, to participate in such payment and deferral options. (i) Cash Alternative. Unless a valid election is made in accordance ---------------- with the procedures established by the Company, each Participant shall receive payment of all Fees (other than the portion of Annual Retainer subject to Mandatory Deferral described above) in the form of cash. (ii) Restricted Stock Unit Alternative. Subject to executing a valid --------------------------------- election with the Company (the "RSU Election"), each Participant may elect to defer all or any portion of his or her Fees (other than the portion of Annual Retainer subject to Mandatory Deferral described above) in the form of Restricted Stock Units. The number of Restricted Stock Units granted shall equal the amount of Fees so deferred, divided by the Fair Market Value of the Common Stock as of the last trading day of the calendar quarter immediately preceding the date such Fees would otherwise be payable. The RSU Election (A) shall be in the form of a document executed by the Participant and filed with the Secretary of the Company, (B) shall be made before the first day of the calendar year in which the applicable Fees are earned and shall become irrevocable on the last day prior to the beginning of such calendar year, and (C) shall continue until the Participant ceases to serve as a director of the Company or until he or she terminates or modifies such election by written notice to the Company in accordance with the procedures established by the Company, any such termination or modification to be effective as of the end of the calendar year in which such notice is given with respect to Fees otherwise payable in subsequent calendar years. Any person who becomes a Participant during any Director Year may execute an RSU Election prior to commencing service on the Board with respect to Fees to be earned for the remainder of such year and for future Director Years in accordance with the procedures established by the Company. Each Restricted Stock Unit shall entitle the holder to, upon distribution thereof (A) receive a cash payment equal to the Fair Market Value of one share of Common Stock, or (B) have issued in his or her name one share of Common Stock. In either case, each such Restricted Stock Unit shall terminate upon distribution. The Company shall credit each Participant holding Restricted Stock Units with a number of additional Restricted Stock Units equal to any dividends and other 5 distributions paid by the Company on an equivalent number of shares of Common Stock, as of the date such dividends or distributions are payable. Such additional Restricted Stock Units shall thereafter be treated as any other Restricted Stock Units issued under the Plan. Restricted Stock Units may not be sold, transferred, assigned, pledged or otherwise encumbered or disposed of until such time as share certificates for Common Stock are issued. Each Participant issued Restricted Stock Units shall execute a valid distribution election in accordance with the procedures established by the Committee (the "Distribution Election"). The Distribution Election shall indicate (A) whether distribution shall be made in the form of Common Stock or cash, (B) whether the distribution shall be made in a single allotment or in substantially equal annual installments over a period not to exceed ten (10) years and (C) with respect to Distribution Elections filed on or after October 28, 1998, the date on which the distribution shall commence in accordance with the next paragraph. The Distribution Election (D) shall be in the form of a document executed by the participant and filed with the Secretary of the Company, (E) shall be made no later than twelve (12) months prior to the distribution date and (F) shall become irrevocable twelve (12) months prior to the distribution date. With respect to a Distribution Election completed on or after October 28, 1998, the Participant shall elect whether distributions shall commence as soon as practicable after (i) the first business day of January of the calendar year following the Participant's cessation from service as a director of the Company; or (ii) the first business day of January of any calendar year, provided that such calendar year is not later than the calendar year following the calendar year in which the Participant attains age 72. All other distributions shall commence as soon as practicable after the first business day of the January following the Participant's cessation from service as a director of the Company. If no valid Distribution Election is made, the Restricted Stock Units shall be distributed in a lump sum as soon as practicable after the first business day of January of the calendar year following the Participant's cessation from service as a director of the Company, in the form of cash. Participants who receive Restricted Stock Units shall have no rights as stockholders with respect to such Restricted Stock Units until share certificates for Common Stock are issued. Notwithstanding any provision to the contrary, any fractional shares of Common Stock issuable hereunder shall be paid in cash. Upon the occurrence of a Change in Control, Common Stock to be issued in respect of all Restricted Stock Units shall be immediately distributed. (iii) DCAP II Alternative. Subject to executing an election in ------------------- accordance with the procedures established by the Company and the terms of DCAP II, each Participant may elect to defer all or any portion of his or her Fees (other than the portion of Annual Retainer subject to Mandatory Deferral described above) under DCAP II. 6 (iv) Retainer Option Alternative. Subject to executing an election in --------------------------- accordance with the procedures established by the Company, each Participant may elect to receive the portion of Annual Retainer not subject to Mandatory Deferral, as described in Section 6(c) above, in the form of Retainer Options. The number of Retainer Option shares granted to a Participant with respect to such deferral shall be determined in the manner described in Section 6(c) above. 7. Stock Options. ------------- (a) Discretionary Grants. The Committee may, in its sole discretion, grant -------------------- options to purchase Common Stock to Participants, pursuant to such terms and conditions that it may deem advisable, so long as not inconsistent with Section 7(d) below or any other terms of this Plan. (b) Formula Grants. Each Participant then serving as a non-employee -------------- director of the Company shall automatically receive, on the date of each January meeting of the Board, an option to purchase 10,000 shares of Common Stock (subject to adjustment as provided in Section 5(b) above); provided, however, that a Participant who is elected to the Board after the January meeting of the Board shall be granted, as of the date of election, a prorated number of options with respect to the initial year of participation in the Plan, based on the number of full calendar quarters remaining in the calendar year in which the Participant is elected to the Board. The options granted pursuant to this Section 7(b) shall be immediately exercisable in full and have an option term of ten years. (c) Retainer Option Grants. At the same time that the Company makes stock ---------------------- option grants annually to eligible employees, each Participant who has made an election to receive a Retainer Option pursuant to Section 6(c) or 6(d)(iv) with respect to all or any portion of the Annual Retainer to be paid in such year shall be granted an option to purchase that number of shares of Common Stock determined pursuant to Section 6(c) and/or Section 6(d)(iv), as applicable. The terms of such Retainer Options shall be as prescribed by the Committee, so long as such terms are not inconsistent with Section 7(d) below or any other terms of this Plan. (d) Terms and Conditions of Options. Except as provided in Section 7(b) ------------------------------- above, the following terms and conditions shall apply to all options granted to Participants under the Plan. (i) The exercise price of each option shall not be less than the Fair Market Value of the Common Stock covered by the option on the date the option is granted. (ii) Each option granted pursuant to the Plan shall be evidenced by a written grant agreement (the "Agreement") executed by the Company and the person to whom such option is granted which shall provide such terms and conditions as the Committee may determine, in its sole discretion, so long as not inconsistent with the terms of this Plan. (iii) The term of each option shall be for no more than ten years. 7 (iv) The Agreement may contain such other terms, provisions, and conditions as may be determined by the Committee (not inconsistent with this Plan). Unless otherwise provided in the Agreement and excluding options granted under paragraph (b) above, the Committee may, in its sole discretion, extend the post-termination exercise period with respect to an option (but not beyond the original term of such option). (v) Payment of the purchase price upon exercise of any option shall be made in cash; provided that the Committee, in its sole discretion, may permit an option holder to pay the option price by such other method that it may deem appropriate, including, without limitation, by tendering to the Company shares of Common Stock owned by the option holder, and having a Fair Market Value equal to the option price. Such stock surrender method may permit an election by the option holder to have the unrealized gain with respect to the option denominated in stock units (based on the fair market value of a share of Common Stock on the date of exercise) and paid in shares of Common Stock at the time specified by the Participant at the time of making the stock surrender option gain deferral election. During the deferral period each such stock unit shall be credited with additional stock units equal to any dividends or other distributions paid by the Company on an equivalent number of shares of Common Stock, as of the date such dividends or distributions are payable. Stock units may not be sold, transferred, assigned, pledged or otherwise encumbered or disposed of until such time as share certificates for Common Stock are issued. (vi) All such options shall be designated as stock options which do not qualify under Section 422 of the Internal Revenue Code of 1986, as amended. (vii) Unless otherwise provided in an Agreement, options granted under the Plan will become immediately and fully vested and exercisable upon the occurrence of a Change in Control. 8. Administration. The Plan shall be administered by the Committee. The -------------- Committee shall have full power to interpret the Plan and formulate additional details and regulations for carrying out the Plan. Any decision or interpretation adopted by the Committee shall be final and conclusive. 9. No Right to Serve. Nothing in the Plan shall confer upon any ----------------- Participant the right to remain in service as a member of the Board. 10. Amendment and Termination. The Board at any time may amend or terminate ------------------------- the Plan; provided that any such amendment or termination does not adversely affect the rights of any Participant. 11. Governing Law. The validity, construction and effect of the Plan and ------------- any such actions taken under or relating to the Plan shall be determined in accordance with the laws of the State of California. 8 12. Notices. All notices under this Plan shall be sent in writing to the ------- Secretary of the Company. All correspondence to the Participants shall be sent in writing to the Participant at the address which is their recorded address as listed on the most recent election form or as specified in the Company's records. 13. Unfunded Status of Awards. The Plan is intended to constitute an ------------------------- "unfunded" plan for incentive and deferred compensation. Nothing contained hereunder shall give any Participant any rights that are greater than those of an unsecured general creditor of the Company. 9 EX-10.7 9 MCKESSON HBOC, INC. SUPPLEMENTAL PSIP EXHIBIT 10.7 McKESSON HBOC, INC. SUPPLEMENTAL PSIP ----------------- A. PURPOSE ------- This Plan is established to allow certain Company executives to elect to defer compensation which cannot be deferred under the McKesson HBOC, Inc. Profit Sharing Investment Plan ("PSIP") because of limitations of tax laws or participation in DCAP II, and to provide for a Company Match on those deferrals at a rate equivalent to the PSIP's "Matching Employer Contribution". B. ERISA PLAN ---------- This Plan is an unfunded deferred compensation program for a select group of management employees of the Company. The Plan, therefore, is covered by Title I of ERISA except that it is exempt from Parts 2, 3, and 4 of Title I of ERISA. C. PARTICIPATION ------------- 1. Eligibility to Participate. The Administrator may, at his discretion, -------------------------- and at any time, and from time to time, select Company executives who may elect to participate in this Plan ("Eligible Executives"). Selection of Eligible Executives may be evidenced by the terms of the executive's employment contract with the Company, or by inclusion among the persons specified in writing by the Administrator. Participants in DCAP II who elect to defer compensation under that plan shall be automatically eligible to participate in and shall constitute Eligible Executives under this Plan. The Administrator may, at his discretion, and at any time, and from time to time, provide that executives previously designated by him are no longer Eligible Executives. If the Administrator determines that an executive is no longer an Eligible Executive, he or she shall remain a Participant in the Plan until all amounts credited to his or her Account prior to such determination are paid out under the terms of the Plan (or until death, if earlier). 2. Election to Participate by Eligible Executives and Deferral Election. -------------------------------------------------------------------- Each Eligible Executive may become a Participant in the Plan by electing to defer Compensation in accordance with the terms of this Plan. However, no Eligible Executive shall defer any Compensation under this Plan for the first Plan Year in which the Eligible Executive becomes eligible to make deferrals under this Plan unless his "Basic Contributions" under the PSIP made with respect to Compensation earned before November 1 of the Plan Year are limited by Code Sections 402(g) or 401(a)(17) or are reduced due to deferral of Compensation under DCAP II. If the Eligible Executive's "Basic Contributions" under the PSIP are not so limited by November 1 of the first Plan Year in which the Eligible Executive becomes eligible to elect deferrals under this Plan, then the Eligible Executive's deferral election for that Plan Year shall be void. An Page 1 election to defer shall be in writing and shall be made at the time and in the form specified by the Administrator. As a condition of electing to defer Compensation under this Plan for a Plan Year, the Eligible Executive shall agree not to change (either by increasing or decreasing) the rate at which the Eligible Executive's compensation is reduced under Section III(2) of the PSIP to make "Basic Contributions" under PSIP. On electing to defer Compensation under this Plan, the Eligible Executive shall be deemed to accept all other terms and conditions of this Plan. All elections to defer amounts under this Plan shall be irrevocable and shall be made pursuant to an election executed and filed with the Administrator before the amounts so deferred are earned. Once such an election is made, the Eligible Executive may alter the timing of receipt of amounts deferred under the Plan, provided that such alteration is made at least one year prior to the earliest date the Eligible Executive could have received distribution of such amounts under a previous election and does not provide for the receipt of such amounts earlier than one year from the date of the alteration. All elections to defer 1989 Compensation shall apply only to Compensation earned after the election is filed with the Administrator and shall be executed and filed with the Administrator no later than July 30, 1989. An election to defer Compensation earned in later Years shall be made prior to the beginning of any such Year. However, if an executive becomes an Eligible Executive after the beginning of a Year, he may make an election to defer Compensation for that Year no later than 30 days after the date he becomes an Eligible Executive, and such election shall apply only to Compensation earned after the election is filed with the Administrator. 3. Relation to Other Plans. ----------------------- (a) DCAP and DCAP II. An Eligible Executive may participate in this ---------------- Plan and may also participate in the McKesson HBOC, Inc. Deferred Compensation Administration Plan ("DCAP") and the McKesson HBOC, Inc. Deferred Compensation Administration Plan II ("DCAP II"). However, no amounts may be deferred under this Plan which have been deferred under the DCAP or DCAP II or any other plan of the Company. (b) Other Plans. For all other benefit programs maintained by the ----------- Company, amounts deferred by an Eligible Executive under this Plan shall, to the extent relevant, be treated in the same manner as amounts deferred under the DCAP and DCAP II, including, but not limited to, the definition of "Average Final Compensation" under the Executive Benefit Retirement Plan. D. AMOUNTS OF DEFERRAL ------------------- 1. PSIP Supplement. This Plan allows an Eligible Executive to defer --------------- Compensation, and receive credit for a Company Match, to the extent that such deferrals (and corresponding Company Match) cannot be made under the PSIP because of the limitations in Code Section 402(g) (limiting annual elective deferrals under the PSIP to $7,000, as adjusted from time to time under the Code), Code Section 401(a)(17) (limiting the amount of annual compensation to be taken into account under the PSIP to $150,000, as adjusted from time to time under the Code), or Page 2 to the extent such deferrals cannot be made under the PSIP because of the Eligible Executive's participation in DCAP II. 2. Amount of Deferrals. As illustrated in Appendix A, an Eligible ------------------- Executive may elect to defer under this Plan up to an amount equal to (a) minus (b), where: (a) is the maximum rate of deferral for "Basic Contributions" under the PSIP multiplied by the Eligible Executive's Compensation, and (b) is the maximum amount that the Eligible Executive is able to defer as a "Basic Contribution" under the PSIP, taking into account the limits of Code Sections 402(g) and 401(a)(17) and the exclusion of Compensation deferred under DCAP II. E. COMPANY MATCH ------------- 1. Eligibility for Match. --------------------- (a) For any Year, a Company Match shall be credited only to the Accounts of Eligible Executives who actually defer Compensation under this Plan for such Year and who are employed by the Company on March 31 following such Year. (b) The requirement of employment on March 31 shall not apply to any Eligible Executive who terminates his employment with the Company (i) on or after attaining age 55 and completing ten "Years of Service" under the PSIP, (ii) due to retirement under the terms of the McKesson HBOC, Inc. Retirement Plan, (iii) on or after attaining age 65, or (iv) due to permanent and total disability as determined under the PSIP. In this case, any Company Match for the year of such Eligible Executive's termination of employment shall not be credited to an Account hereunder but shall be paid (to the extent vested) in a single sum to him or his beneficiaries as soon as practicable after the amount of that match is determined by the Company. (c) Amount of Match. The amount of the Company Match credited to the --------------- Account of an Eligible Executive who is a Participant for any Year shall be a percentage of the Eligible Executive's deferrals under this Plan for the Year. This percentage shall be the same percentage as the "Matching Employer Contribution" (as defined in the PSIP) percentage that would have been credited to the Eligible Executive's PSIP account if his deferrals under this Plan had been made under the PSIP. In determining this amount, the Administrator shall take into account, as illustrated in example 3 in Appendix A, the different "Matching Employer Contribution" rates that may apply under PSIP during a Plan Year. F. PAYMENT OF DEFERRED COMPENSATION -------------------------------- 1. Book Account and Interest Credit. Both Compensation deferred by a -------------------------------- Participant and any Company Match for the benefit of a Participant shall be credited to a separate bookkeeping account maintained for such Participant (the "Account"). Earnings shall be credited Page 3 to each Account (both on the Participant's deferrals and on any Company Match credited to his Account hereunder) at a rate equal to the amount earned during that same period by amounts invested under the PSIP's Guaranteed Principal and Interest investment option. Interest shall be credited to each Account as of the end of each month. 2. Vesting. ------- (a) A Participant shall be 100% vested at all times in the value of his elective deferrals and earnings thereon credited to his Account. (b) A Participant shall vest in the amounts of Company Match and earnings thereon credited to his Account at the same time and in the same manner as if these amounts were "Matching Employer Contributions" under the PSIP and if the rules of the PSIP concerning vesting applied to such amounts. For this purpose, any Company Match shall be deemed to be credited to an Account as of March 31 with respect to which such Company Match is determined. Any amounts that would be forfeited under the rules of the PSIP applicable to "Matching Employer Contributions" under that plan shall be forfeited hereunder. Any forfeiture under this Plan of any portion of the Company Match credited to a Participant's Account shall eliminate any obligation of the Company to pay the forfeited amount hereunder. 3. Election of Methods of Payment. A Participant shall elect in writing, ------------------------------ and file with the Administrator, a method of payment of benefits under this Plan from the following methods based upon the nature of the Payment Event. Subsequent elections by the Participant to change the method of payment shall supersede all prior elections and shall apply to the Participant's entire Account. (a) If the Payment Event is due to the Participant's retirement, permanent and total disability as defined under the PSIP, or because the Participant is an Employee of a subsidiary that ceases to be a Company, the Participant may choose one of the following payment methods: (i) Payment of the vested amounts credited to the Participant's Account in any specified number of approximately equal annual installments, not in excess of the number of whole years remaining of the Participant's life expectancy, determined as of his or her Payment Event and based upon the mortality tables then in use under the McKesson HBOC, Inc. Retirement Plan, the first installment to be paid at a designated interval following the Payment Event. (ii) Payment of the vested amounts credited to the Participant's Account in a single lump sum upon the occurrence of the Payment Event. (b) If the Payment Event occurs as a result of the termination of the Participant's employment with the Company, and such termination is not due to the Participant's death or one of the Payment Events described above, payment of the vested amounts credited to the Page 4 Participant's Account shall be made in a single lump sum upon the occurrence of the Payment Event. (If any Company Match is payable under Section E.1.b. hereunder, that amount may be paid separately and at a later date as provided in such section.) 4. Date Payment Occurs. Payment shall be made as soon as practicable ------------------- after the earliest Payment Event occurs. G. BENEFITS ON DEATH ----------------- 1. Death Prior to Distribution. If a Participant dies before distribution --------------------------- of the vested amounts credited to his or her Account, such distribution shall be paid to his or her Beneficiary in one of the following forms of benefit, as elected by the Participant. (a) in a single lump sum as soon as practicable after the death of the Participant; (b) in a specified number of approximately equal annual installments, not in excess of ten (10) annual installments. 2. Death After Distribution Has Begun. If a Participant has elected to ---------------------------------- receive the vested amounts credited to his or her account in installments, and dies after payment of such installments has begun, the Beneficiary designated by the Participant shall receive any remaining installments on an annual basis, in the same manner as the Participant would have received the installments. 3. Designation of Beneficiary. A Participant may designate any person or -------------------------- entity as his or her Beneficiary, but may not designate more than one person or any person that is not a natural person without the approval of the Administrator. Designation shall be in writing and shall become effective only when filed with (and, if appropriate, approved by) the Administrator. Such filing must occur before the Participant's death. A Participant may change the Beneficiary, from time to time, by filing a new written designation with (and, if appropriate, approved by) the Administrator. If the Participant is married, any Beneficiary designation which does not designate the Participant's spouse to receive at least one-half of the Participant's Account shall only become effective when approved in writing by the Participant's spouse. If the Participant fails to effectively designate a Beneficiary in accordance with the Administrator's procedures or the person designated by the Participant is not living at the time the distribution is to be made, then his or her Beneficiary shall be his beneficiary under the PSIP. H. SOURCE OF PAYMENT ----------------- Amounts paid under this Plan shall be paid from the general funds of the Company, and each Participant and his or her Beneficiaries shall be no more than unsecured general creditors of the Company with no special or prior right to any assets of the Company for payment of any Page 5 obligations hereunder. Nothing contained in this Plan shall be deemed to create a trust of any kind for the benefit of any Participant or Beneficiary, or create any fiduciary relationship between the Company and any Participant or Beneficiary with respect to any assets of the Company. I. MISCELLANEOUS ------------- 1. Withholding. Each Participant and Beneficiary shall make appropriate ----------- arrangements with the Company for the satisfaction of any federal, state, or local income tax withholding requirements and Social Security or other employment tax requirements applicable to the payment of benefits under this Plan. If no other arrangements are made, the Company may provide, at its discretion, for such withholding and tax payments as may be required. 2. No Assignment. The benefits provided under this Plan may not be ------------- alienated, assigned, transferred, pledged, or hypothecated by any person, at any time. These benefits shall be exempt from the claims of creditors or other claimants and from all orders, decrees, levies, garnishments or executions. 3. Applicable Law; Severability. The Plan hereby created shall be ---------------------------- construed, administered, and governed in all respects in accordance with ERISA and the laws of the State of California to the extent that the latter are not preempted by ERISA. If any provision of this instrument shall be held by a court of competent jurisdiction to be invalid or unenforceable, the remaining provisions hereunder shall continue to be effective. 4. No Right to Continued Employment, Etc. Neither the establishment or -------------------------------------- maintenance of the Plan nor the crediting of any amount to any Participant's Account, nor the designation of an executive as an Eligible Executive, shall confer upon any individual any right to be continued as an employee of the Company or shall affect the right of the Company to terminate any executive's employment or change any terms of his employment at any time. J. ADMINISTRATION OF THE PLAN -------------------------- 1. In General. The Plan Administrator shall be the Senior Vice President, ---------- Human Resources and Administration of the Company. If the Senior Vice President, Human Resources and Administration is a Participant, any discretionary action taken as Administrator which directly affects him or her as a Participant shall be specifically approved by the Compensation Committee. The Compensation Committee shall have authority and responsibility to interpret the Plan and shall adopt such rules and regulations for carrying out the Plan as it may deem necessary or appropriate. Decisions of the Compensation Committee shall be final and binding on all parties who have or claim any interest in the Plan. 2. Elections and Notices. All elections and notices made under this Plan --------------------- shall be in writing and filed with the Administrator at the time and in the manner specified by him or her. All elections to defer under this Plan shall be irrevocable. Page 6 K. AMENDMENT OR TERMINATION OF THE PLAN ------------------------------------ A majority of the Outside Directors may at any time, and from time to time, amend the Plan. Such action shall be prospective only and shall not adversely affect the rights of any Participant or Beneficiary to any benefit previously earned under the Plan. A majority of the Outside Directors may increase or decrease the interest rate credited to Compensation previously deferred but the rate shall not be reduced for periods prior to such action. A majority of the Outside Directors may at any time terminate the Plan; thereupon all amounts credited to the Participant's Account for periods preceding the termination date, plus interest credited thereon, shall promptly be paid, on termination, in single sums to the respective Participants or Beneficiaries entitled thereto. L. DEFINITIONS ----------- For purposes of the Plan, the following terms shall have the meanings indicated: 1. "Account" means the Account specified in Section F.1. 2. "Administrator" shall mean the person specified in Section J.1. 3. "Beneficiary" shall mean the person or entity described by Section G.3. 4. "Board" shall mean the Board of Directors of McKesson HBOC, Inc., a Delaware corporation. 5. "Code" shall mean the Internal Revenue Code of 1986, as amended. 6. "Company" shall mean McKesson HBOC, Inc., a Delaware corporation, and any subsidiary in which it owns at least 50% of the issued and outstanding stock. 7. "Company Match" shall mean, with respect to a Plan Year, the amount credited to the Account of an Eligible Employee in accordance with Section E. 8. "Compensation" shall mean, "Compensation" as defined in Section 17.17 of the PSIP; provided, however, that Compensation for purposes of this Plan will be based on the Plan Year of this Plan; further provided that Compensation for purposes of this Plan will be determined without regard to the limit of Section 401(a)(17) of the Code. 9. "Compensation Committee" shall mean the Compensation Committee of the Board. 10. "DCAP" shall mean the McKesson HBOC, Inc. Deferred Compensation Plan. 11. "DCAP II" shall mean the McKesson HBOC, Inc. Deferred Compensation Administration Plan II. Page 7 12. "Eligible Executive" shall mean an employee of the Company who is eligible to participate in this Plan under Section C. 13. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. 14. "Outside Directors" shall mean those members of the Board who are not employees of the Company and who have not deferred under this Plan Compensation earned as an employee. 15. "Participant" shall be any Company executive for whom amounts are credited to an Account under this Plan. Upon his or her death, his or her Beneficiary shall be a Participant until all amounts are paid out of his or her Account. 16. "Payment Event" (a) For any Participant shall mean the earliest of the following: retirement from the Company, death, other termination of employment with the Company, or permanent and total disability as determined under the PSIP. If a subsidiary of McKesson HBOC, Inc. ceases to be a Company, and the Participant is employed by that subsidiary, he shall be treated as having terminated his employment with the Company upon such event. (b) With respect to every Participant who has so elected, Payment Event also shall mean a Change in Control as defined in DCAP II. 17. "Plan" shall mean the McKesson HBOC, Inc. Supplemental PSIP. 18. "Plan Year" or "Year" shall mean the calendar year. 19. "PSIP" shall mean the McKesson HBOC, Inc. Profit-Sharing Investment Plan, as amended from time to time. Executed effective as of January 27, 1999. McKESSON HBOC, INC. By __________________________________________________ E. Christine Rumsey Senior Vice President, Human Resources and Administration Page 8 APPENDIX A ---------- Examples of Deferrals Under Plan -------------------------------- The following illustrate the extent to which a Participant could make deferrals under this Plan. The examples assume that the applicable deferral limit under Section 402(g) of the Code is $7,000 and that the applicable compensation limit under section 401(a)(17) of the Code is $150,000. 1. Example 1 --------- E's Compensation for the Plan Year is $150,000. At all times during the Plan Year E has elected to make Basic Contributions under PSIP at the rate of 6% of his Compensation. Because of section 402(g) of the Code, E may only defer $7,000 under PSIP during the Plan Year instead of $9,000 (i.e., .06 X $150,000). Accordingly, E may defer $2,000 for the Plan Year under the Plan (i.e., $9,000 - $7,000). The Matching Contribution under PSIP for the PSIP plan year in which E's deferrals are made under this Plan is 50%. Accordingly, E's Account will be credited with a Company Contribution of $1,000 (i.e., .50 X $2,000). 2. Example 2 --------- E's Compensation is $250,000. E elects to make Basic Contributions under PSIP at the rate of 2% of his Compensation. Section 402(g) of the Code would not limit E's Basic Contributions (2% of $250,000 equals $5,000), even in the absence of any compensation limit. However, because section 401(a)(17) of the Code limits the amount of E's compensation which may be considered by PSIP to $150,000, E's Basic Contributions for the year are limited to $3,000 (2% of $150,000). Accordingly, E may defer $2,000 (2% of his Compensation in excess of $150,000) into this Plan. This deferral will then be eligible for a Company Match based on the PSIP's "Matching Employer Contribution" for the PSIP plan year ending March 31. 3. Example 3 --------- In December, 1990, E elects to defer 6% of his Compensation under this Plan, less the maximum available under PSIP. For the period from January 1 to March 31, 1991, E earns $100,000 in Compensation. For the PSIP plan year ending on March 31, 1991, E has elected to make Basic Contributions under PSIP at a rate of 5% of his Compensation and E defers $5,000 (.05 X $100,000) under the PSIP for that period. Because the 402(g) limits apply on a calendar year basis, E defers nothing under this Plan for this period. Page 9 From April 1 through December 31, 1991, E earns $300,000 in Compensation. Because of section 402(g), only $2,000 in Basic Contributions are contributed to PSIP for E during this period. Because of E's prior irrevocable election, E defers $15,600 under this Plan (i.e., 6% of $260,000). ($260,000 is the difference between E's $400,000 compensation and $140,000 which is the Compensation level at which the $7,000 402(g) limit is reached deferring at a rate of 5% under PSIP.) For the PSIP plan year ending March 31, 1991, the "Matching Employer Contribution" percentage under PSIP is 60% but that percentage decreases to 50% for the PSIP plan year ending March 31, 1992. Because all $15,600 of E's deferrals under this Plan for the Plan Year ending December 31, 1991 were made with respect to Compensation earned after March 31, 1991, the Company Match is based on the PSIP's "Matching Employer Contribution" percentages for the PSIP plan year ending March 31, 1992. Accordingly, the Company Match is $7,800 (i.e., .50 X $15,600). Example 4 - --------- E's Compensation for the Plan Year is $96,000, including a bonus of $16,000. E is making Basic Contributions to PSIP at a rate of 6%. As a participant in DCAP II, E elects to defer $10,000 of his bonus. Because the $10,000 does not meet the definition of Compensation under the PSIP, E is prevented from deferring $600 (6% of $10,000) into the PSIP. Therefore, that $600 is automatically deferred into this Plan. This deferral will then be eligible for a Company Match based on the PSIP's "Matching Employer Contribution" percentage for the PSIP Plan Year ending March 31. Page 10 EX-10.8 10 DEFERRED COMPENSATION ADMINISTRATION PLAN 01/27/99 EXHIBIT 10.8 McKESSON HBOC, INC. DEFERRED COMPENSATION ADMINISTRATION PLAN (DCAP) ------------------------------------------------ Amended as of January 27, 1999 ------------------------------- The purpose of this Plan is to provide a select group of executives employed by McKesson HBOC, Inc., a Delaware corporation ("McKessonHBOC"), and its subsidiaries (collectively, the "Company"), and McKessonHBOC directors, an opportunity to defer for later payment amounts earned as compensation. 1. PARTICIPATION ------------- a. Employees. An employee of the Company is eligible to be a Participant --------- in this Plan for any year if (i) it is reasonably anticipated by the Company that he or she will receive an award under a Company incentive plan of at least $5,000, or (ii) he or she is entitled to defer compensation from the Company pursuant to the terms of an employment contract or incentive plan. An eligible employee shall become a "Participant" by making an irrevocable election in writing to participate in this Plan or, if such employment contract or incentive plan provides for automatic participation in this Plan, by making an irrevocable election to defer compensation. b. Directors. Each member of the Board of Directors of McKessonHBOC may --------- participate in this Plan in accordance with the terms of the McKessonHBOC Directors' Deferred Compensation Plan ("DDCP"). 2. COMPENSATION THAT MAY BE DEFERRED --------------------------------- a. Employees. --------- (i) Base Salary. Each employee who participates in this Plan may ----------- elect to defer up to fifty percent (50%) of his or her base salary earned from the Company in any calendar year. For calendar year 1987, the maximum amount that may be deferred under this provision is the lesser of fifty percent (50%) of the employee's 1987 base salary or the amount earned by the employee from the Company on and after September 1, 1987. In any event, the Company may limit deferrals as is necessary or appropriate to provide sufficient current compensation to cover taxes, benefit payments and other necessary or appropriate deductions. (ii) Incentive Plans. The Company maintains and administers various --------------- incentive plans for its executives and key employees. Pursuant to the terms of some of these Page 1 plans or an employment contract with the Company, a participating employee may make an irrevocable election to have the incentive compensation awarded to him paid on a deferred basis. b. Directors. A member of the Board of Directors of McKessonHBOC --------- entitled to compensation for service as a director may make an irrevocable election to defer compensation in accordance with the terms of the DDCP. To the extent that the terms of the DDCP conflict with the terms of this Plan, the DDCP shall govern with respect to all amounts deferred by any such Director. 3. ELECTION TO DEFER ----------------- a. Time and Manner of Election; Election is Irrevocable. Each ---------------------------------------------------- Participant shall make an election to defer compensation under this Plan at the time and in the manner prescribed by the Management Incentive Plan Committee. All elections to defer compensation under this Plan shall be irrevocable and shall be made prior to the year in which the compensation is earned. Once an election is made, the Participant may alter the timing of receipt of such deferred compensation, provided that such alteration is made at least one year prior to the earliest date the Participant could have received distribution of the deferred compensation under a previous election and does not provide for the receipt of such amounts earlier than one year from the date of the alteration. An election to defer base salary in 1987, however, shall be made prior to September 1, 1987, which is the first date with respect to which base salary may be deferred under this Plan. b. $5,000 Minimum. The minimum amount that a Participant may defer under -------------- this Plan for any one calendar year is $5,000. c. No New Deferrals After January 1, 1994. Notwithstanding paragraphs a. -------------------------------------- and b., above, no new deferrals shall be made under this Plan after January 1, 1994. 4. RETAINED ACCOUNT OR STOCK ACCOUNT --------------------------------- a. Election of Account. Each Participant's deferred compensation shall ------------------- be credited to a separate bookkeeping account of McKessonHBOC maintained for such Participant (the "Account"). The Participant may elect that deferrals be credited either to the "Retained Account" or the "Stock Account" as defined below. All such elections shall be irrevocable. b. Retained Account. ---------------- (i) The Retained Account shall accrue interest during each calendar year equal to the median yield of all non-convertible debt issues coming to market during the twelve-month period ending one month prior to the end of the month in which the election instructions are issued in the prior fiscal year from companies rated A (includes A- and A+), as reported by the Standard & Poor's Monthly Bond Guides in its calendar of new offerings. The Page 2 rate of interest so determined shall be applied to each Participant's entire Retained Account balance. The Retained Account balance shall be compounded at the end of each calendar year by the annual rate of interest so determined. (ii) Notwithstanding paragraph (i), above, beginning January 1, 1994, all deferrals made by a Participant into his or her Retained Account after 1992 will earn interest at the same rate as deferrals to the McKesson HBOC, Inc. Deferred Compensation Administration Plan II (DCAP II). c. Stock Account. ------------- (i) The amount of stock credited to the Stock Account of the Participant shall be determined by the number of shares of McKessonHBOC Common Stock which could be purchased with the amount of the deferred compensation using the closing price of McKessonHBOC Common Stock on the New York Stock Exchange on the day coinciding with each date on which his or her deferred compensation is credited to his or her Account. If the date of credit is not a business day, then the closing price referred to in the prior sentence shall be the closing price on the business day immediately preceding the date of credit. (ii) Under this bookkeeping arrangement, no shares of McKessonHBOC Common Stock shall be issued to or held in any Account. (iii) The total number of shares of McKessonHBOC Common Stock which may be credited during any single year to the Account of a Participant who is a non-employee Director shall be the lesser of (I) the number of shares which could be purchased with the aggregate amount of compensation eligible for deferral under this Plan which such Participant elects to defer for such year, or (II) the amount of one thousand (1,000) shares. The total number of shares of McKessonHBOC Common Stock which may be credited during any single year to the Account of a Participant who is an employee shall be the number of shares which could be purchased with the aggregate amount of compensation eligible for deferral under this Plan which such Participant elects to defer for such year, provided that such number, when combined with all other shares of McKessonHBOC Common Stock theretofore credited to the Participant's Account under this Plan, shall not exceed one percent (1%) of the then outstanding shares of McKessonHBOC Common Stock. For purposes of this subparagraph (iii), the calculation of the number of shares which a Participant could purchase shall be determined in accordance with subparagraph (i) above. 5. DISTRIBUTION OF AMOUNTS DEFERRED UNDER THE PLAN ----------------------------------------------- a. Irrevocable Election Concerning Distribution. Amounts deferred under -------------------------------------------- the Plan by eligible Directors shall be distributed as specified by the DDCP. Amounts deferred under the Plan by other eligible Participants shall be distributed in whichever of the following forms was irrevocably elected by the Participant at the time that he or she made an irrevocable Page 3 election to defer compensation; provided, however, that any such distribution must commence no later than the January following the year in which the Participant reaches age 72. (i) Installments Beginning Currently. Payment of the funds in any -------------------------------- number of approximately equal annual installments not in excess of ten designated by the Participant, the first installment to be paid at the time that the award is made, if deferral is under an incentive plan or on the January 1 following the year of deferral, if deferral is of base salary. (ii) Installments Beginning in Designated Year. Payment of the funds ----------------------------------------- in any number of approximately equal annual installments not in excess of ten designated by the Participant, the first installment to be paid in the year designated by the Participant. (iii) Installments Beginning on Retirement, Disability or Death. --------------------------------------------------------- Payment of the funds in any number of approximately equal annual installments not in excess of ten designated by the Participant, the first installment to be paid at an interval following the Participant's Retirement, disability or death, whichever is the first to occur, designated by the Participant. For purposes of this subparagraph, Retirement shall mean the Participant's termination of employment after his or her age plus years of service equals 65. (iv) Lump Sum. Payment of the funds in one lump sum in the year -------- designated by the Participant. b. Payment Upon Termination of Employment. If a Participant's employment -------------------------------------- with the Company terminates before Retirement (as defined in 5.a.(iii)), the Participant shall receive a distribution of the entire amount credited to his or her Account in the January following such termination of employment. c. Hardship Distributions. The Management Incentive Plan Committee may ---------------------- in its sole discretion direct payment to a Participant of all or of any portion of any amounts deferred, notwithstanding an election under Subparagraphs (i), (ii), (iii) and (iv) of Paragraph (a) above at any time that it determines that such Participant has suffered an event of undue hardship which causes an emergency condition in his financial affairs. d. Payment to Beneficiary. If a Participant dies after payments from his ---------------------- or her Account have begun, his or her beneficiary or beneficiaries shall continue to receive payments under this Plan in the same form and at the same time as they would have been paid had the Participant survived. If a Participant dies before payments from his or her Account have begun, the amounts credited to the Account shall be paid to the designated beneficiary or beneficiaries at the time and in the manner previously irrevocably elected by the Participant. Benefits shall be paid in one of the forms described in section 5(a)(i), (ii) or (iv) of this Plan. Benefits shall be paid at the time elected by the Participant and as allowed by the Management Incentive Plan Committee of McKessonHBOC (the "Committee"). A Participant may designate any person or entity as his or her Beneficiary. Designation shall be in writing and shall become effective only when filed with the Committee. Page 4 Such filing must occur before the Participant's death. A Participant may change the Beneficiary, from time to time, by filing a new written designation with the Committee. If the Participant is married any Beneficiary designation which does not designate the Participant's spouse to receive at least one-half of the Participant's Account shall only become effective when approved in writing by the Participant's spouse. e. Time of Payment. Payments of deferred funds shall be made in the --------------- first two weeks of January each year except as otherwise irrevocably elected at the time of election of deferral. f. Method of Payment. Amounts deferred and credited to the Retained ----------------- Account shall be paid in cash. Amounts deferred and credited to the Stock Account shall be paid in shares of McKessonHBOC Common Stock. g. Change in Control. For purposes of this Plan, a Change in Control of ----------------- the Company shall be deemed to have occurred if any of the events set forth in any one of the following paragraphs shall occur: (i) any "person" (as defined in section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and as such term is modified in sections 13(d) and 14(d) of the Exchange Act), excluding the Company or any of its subsidiaries, a trustee or any fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, an underwriter temporarily holding securities pursuant to an offering of such securities or a corporation owned, directly or indirectly, by stockholders of the Company in substantially the same proportions as their ownership of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities; or (ii) during any period of not more than two consecutive years, individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a Person who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii) or (iv) or of this paragraph) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (iii) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (I) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company, at least 50% of the combined voting Page 5 power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (II) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person acquires more than 50% of the combined voting power of the Company's then outstanding securities; or (iv) the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. Notwithstanding the foregoing, no Change in Control shall be deemed to have occurred if there is consummated any transaction or series of integrated transactions immediately following which the holders of the Company's Common Stock immediately prior to such transaction or series of transactions continue to have the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately prior to such transaction or series of transactions. With respect to deferrals made prior to January 1, 1994, deferred funds will be distributed upon a Change in Control, if the Participant has so elected. 6. COMPANY PROPERTY ---------------- All amounts credited to the Retained Account and the Stock Account shall be the property solely of the Company. Each Participant and beneficiary shall be solely an unsecured general creditor of the Company with respect to amounts credited to his or her Retained Account or Stock Account and shall have no special or prior right to any stock or assets for payment of any obligations hereunder. 7. NON-ASSIGNABLE -------------- A Participant's rights in the Account shall be non-assignable by him or her, except that payments may be made to his or her estate or beneficiaries designated in accordance with the terms of this Plan, his or her employment contract, the applicable incentive plan or the DDCP. 8. ADMINISTRATION -------------- This Plan shall be administered by the Committee. The Committee shall have full power and authority to interpret the provisions and supervise the administration of this Plan and to take all action in connection therewith as it deems necessary or advisable. All decisions and interpretations of the Committee made hereunder shall be final. Page 6 9. AMENDMENT AND TERMINATION ------------------------- While McKessonHBOC hopes to continue this Plan indefinitely, the Plan may be amended, suspended or terminated at any time by the Board of Directors of McKessonHBOC, provided that no such amendment, suspension or termination shall adversely affect the administration of amounts already credited to an Account under the Plan, with respect to which amounts the Plan shall be continued until all deferred compensation credited to an Account under the Plan has been paid. 10. SUCCESSORS ---------- This Plan shall be binding on the Company and any successors or assigns thereto. Executed effective as of January 27, 1999. McKESSON HBOC, INC. By _______________________________________________ E. Christine Rumsey Senior Vice President, Human Resources and Administration Page 7 EX-10.9 11 DEFERRED COMPENSATION PLAN II, AS AMENDED 01/27/99 EXHIBIT 10.9 McKESSON HBOC, INC. DEFERRED COMPENSATION ADMINISTRATION PLAN II -------------------------------------------- (Amended as of January 27, 1999) A. PURPOSE ------- This Plan is established to further enhance the Company's ability to attract and retain executive personnel and Directors. The Plan replaces and supersedes the Directors' Deferred Compensation Plan, the Management Deferred Compensation Plan, the Deferred Compensation Administration Plan, and the PCS, Inc. Optional Deferred Compensation Administration Plan. B. ERISA PLAN ---------- This Plan is an unfunded deferred compensation program for a select group of management employees and Directors of the Company. The Plan therefore is covered by Title I of ERISA except that it is exempt from Parts 2, 3 and 4 of Title I of ERISA. C. PARTICIPATION ------------- 1. Eligibility to Participate -------------------------- a. Eligible Executives. The Administrator may, at its discretion, ------------------- and at any time, and from time to time, select Company executives who may elect to participate in this Plan ("Eligible Executives"). Selection of Eligible Executives may be evidenced by the terms of the executive's employment contract with the Company, or by inclusion among the persons or classes of persons specified by the Administrator. The Administrator may, at its discretion, and at any time, and from time to time, designate additional Eligible Executives and/or provide that executives previously designated are no longer Eligible Executives. If the Administrator determines that an executive is no longer an Eligible Executive, he or she shall remain a Participant in the Plan until all amounts credited to his or her Account prior to such determination are paid out under the terms of the Plan (or until death, if earlier). b. Eligible Directors. Each Director who is not a Company employee ------------------ may participate in this Plan ("Eligible Directors"). 2. Election to Participate. An Eligible Executive or an Eligible ----------------------- Director may become a Participant in the Plan by electing to defer compensation in accordance with the terms of this Plan. An election to defer shall be in writing, shall be irrevocable and shall be made at the time and in the form specified by the Administrator. On electing to defer compensation under this Plan, the Participant shall be deemed to accept all of the terms and conditions of this Plan. All elections to defer amounts under Page 1 this Plan shall be made pursuant to an election executed and filed with the Administrator before the amounts so deferred are earned. 3. Notification of Participants. The Administrator shall annually notify ---------------------------- each Eligible Executive and each Eligible Director that he or she may participate in the Plan for the next Year. Such notice shall also set forth the Declared Rate for the next Year. 4. Relation to Other Plans. ----------------------- a. Participation in Other Plans. An Eligible Executive or a ---------------------------- Director may participate in this Plan and may also participate in any other benefit plan of the Company in effect from time to time for which he or she is eligible, unless the other plan may otherwise exclude participation on the basis of eligibility for, or participation in, this Plan. No amounts may be deferred under this Plan which have been deferred under any other plan of the Company. Deferrals under this Plan may result in a reduction of benefits payable under the Social Security Act, the Company's Retirement Plan and the Company's Profit- Sharing Investment Plan. b. Automatic Deferral to Supplemental PSIP. Subject to the last --------------------------------------- sentence of Section D.2. below, an Eligible Executive who makes an election to defer compensation under this Plan shall have an additional amount automatically deferred from his or her remaining compensation. The amount of such additional deferral will be an amount equal to (x) the amount deferred by the Eligible Executive into the Plan, multiplied by (y) the percentage rate of the Eligible Executive's deferrals into the McKesson HBOC, Inc. Profit-Sharing Investment Plan ("PSIP"), as in effect at the beginning of each Year. The additional deferrals will be credited to the Eligible Executive's account in the McKesson HBOC, Inc. Supplemental PSIP and governed by the terms of that plan. D. AMOUNTS OF DEFERRAL ------------------- 1. Minimum Deferral. The minimum amount that an Eligible Executive may ---------------- defer under this Plan for any Year is $5,000 of base salary, or $5,000 of any annual bonuses and $5,000 of any Long-Term Incentive Plan award. The minimum amount of compensation that an Eligible Director may defer for any Year is $5,000. 2. Maximum Deferral for Eligible Executives. The maximum amount of ---------------------------------------- compensation which an Eligible Executive may defer under this Plan for any Year is (i) eighty percent (80%) of the amount of such Eligible Executive's base salary for such Year, and (ii) one hundred percent (100%) of any annual bonus award and/or any Long-Term Incentive Plan Award determined and payable to him or her in such Year. Notwithstanding these limits, deferrals may be reduced by the Company to leave sufficient remaining compensation legally required for taxes and other authorized deductions, including, but not limited to, those for Company benefit programs. 3. Maximum Deferral for Eligible Directors. The maximum amount of --------------------------------------- compensation which an Eligible Director may defer under this Plan for any Year is the amount of any annual retainer (other than the portion of the annual retainer subject to Mandatory Deferral under the 1997 Non-Employee Directors' Equity Compensation and Deferral Plan) and other fees from the Company earned by him or her in any such Year. Page 2 E. PAYMENT OF DEFERRED COMPENSATION -------------------------------- 1. Book Account and Interest Credit. Compensation deferred by a -------------------------------- Participant under the Plan shall be credited to a separate bookkeeping account for such Participant (the "Account"). (Sub-Accounts may be established for each Year for which the Participant elects to defer compensation.) Interest shall be credited to each Account (including Sub-Accounts established thereunder) for each Year at a rate equal to a rate declared by the Administrator acting in its sole discretion after taking into account, among other things, the following factors: the Company's cost of funds, corporate tax brackets, expected amount and duration of deferrals, number and age of eligible Participants, expected time and manner of payment of deferred amounts, and expected performance of available fixed-rate insurance contracts covering the lives of Participants (the "Declared Rate"). Each Account balance shall be compounded monthly at the twelfth root of the annual Declared Rate of interest provided for under this Plan. In the case of installment payments as provided in Section E.3. below, interest shall be credited on all amounts remaining in a Participant's Account until all amounts are paid out. 2. Length of Deferral. An Eligible Executive or Eligible Director shall ------------------ elect in writing, and file with the Administrator, at the same time as such Eligible Executive or Eligible Director makes any election to defer compensation, the period of deferral with respect to such election, subject to the minimum required period of deferral and the maximum permissible period of deferral. The minimum required period of deferral is five years after the end of the Year for which compensation is deferred. Notwithstanding the foregoing, the five-year minimum deferral period shall not apply to payments made as a result of death, Disability, Retirement, pre-retirement termination, a Change in Control or hardship. Payment must commence no later than the end of the maximum period of deferral, which is the January following the year in which the Eligible Executive reaches age 72 or, in the case of an Eligible Director, the January after the Company's annual meeting of stockholders next following the Eligible Director's 72nd birthday. Once such an election has been made, the Eligible Executive or Eligible Director may alter the period of deferral, provided that: a. such alteration is made at least one year prior to the earliest date the Participant could have received distribution of the amounts credited to his or her Account under the earlier election, and b. such alteration does not provide for the receipt of such amounts earlier than one year from the date of the alteration, subject to the five-year minimum deferral rule stated above. 3. Election of Methods of Payment. A Participant shall elect in writing, ------------------------------ and file with the Administrator, at the same time as any election to defer compensation, a method of payment of benefits under this Plan from the following methods: a. Payment of amounts credited to the Participant's Account in any specified number of approximately equal annual installments (not in excess of 10), the first installment to be paid in January of the Year designated by the Participant. b. Payment of the amounts credited to the Participant's Account in any specified number of approximately equal annual installments (not in excess of ten), the first installment to be paid in January after the designated interval following the earlier of Participant's Retirement or of the determination disability. Page 3 c. Payment of the amount credited to the Participant's Account in a single sum. 4. Payments on Termination. ----------------------- a. Director Termination. If an Eligible Director ceases to be a -------------------- Director of the Company for any reason other than death, the entire undistributed amount credited to his or her Account will be paid in the form elected by the Participant, or, if no election has been made, in a lump sum in the January of the calendar year following the calendar year in which the Eligible Director ceased to be a Director. b. Executive Termination. If an Eligible Executive terminates --------------------- employment with the Company for any reason other than Retirement, disability or death, then, notwithstanding the election made by the Eligible Executive pursuant to Sections E.2 and 3 above, the entire undistributed amount credited to his or her Account will be paid in the form of a lump sum in the January of the calendar year following the calendar year of termination of employment. 5. Payments on Death. ----------------- a. Death After Payments Have Begun. If a Participant dies after ------------------------------- payments from his or her Account have begun, the remainder of the amounts credited to the Participant's Account shall be paid to his or her Beneficiary at the same time and in the same manner as they would have been paid had the Participant survived. b. Death Before Payments Have Begun. If a Participant dies before -------------------------------- payments from his or her Account have begun, the amount credited to his or her Account shall be paid to his or her Beneficiary at the time and in the manner elected by the Participant. Such election shall be made in writing and filed with the Administrator at the time of any election to defer compensation. Benefits shall be paid in one of the methods specified in paragraphs a. and c. of Section E.3. The Administrator, at his or her discretion, may distribute all benefits to a Beneficiary in a single payment if the value of his or her Account balance is less than $5,000. 6. Payments on Disability. If the Administrator determines that a ---------------------- Participant has become Disabled, the entire undistributed amount credited to his or her Account will be paid in the form and at the time elected by the Participant, or, if no election has been made, in a lump sum as soon as practicable after such determination is made. 7. Payments on Hardship. The Administrator may in his or her sole -------------------- discretion direct payment to a Participant of all or of any portion of the Participant's Account balance, notwithstanding an election under Section E.3. above, at any time that he or she determines that such Participant has suffered an event of undue hardship which causes an emergency condition in his or her financial affairs. 8. Change in Control. For purposes of this Plan, a Change in Control of ----------------- the Company shall be deemed to have occurred if any of the events set forth in any of the following paragraphs shall occur: a. any "person" (as defined in section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and as such term is modified in Sections 13(d) and 14(d) of the Exchange Act), excluding the Company or any of its subsidiaries, a trustee or any fiduciary holding Page 4 securities under an employee benefit plan of the Company or any of its subsidiaries, an underwriter temporarily holding securities pursuant to an offering of such securities or a corporation owned, directly or indirectly, by stockholders of the Company in substantially the same proportions as their ownership of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities; or b. during any period of not more than two consecutive years, individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a Person who has entered into an agreement with the Company to effect a transaction described in clause a., c., or d. of this paragraph) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or c. the shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (I) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company, at least 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (II) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person acquires more than 50% of the combined voting power of the Company's then outstanding securities; or d. the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. Notwithstanding the foregoing, no Change in Control shall be deemed to have occurred if there is consummated any transaction or series of integrated transactions immediately following which the holders of the Company's Common Stock immediately prior to such transaction or series of transactions continue to have the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately prior to such transaction or series of transactions. With respect to deferrals made prior to January 1, 1994, deferred funds will be distributed upon a Change in Control, if the Participant has so elected. 9. Designation of Beneficiary. A Participant may designate any person(s) -------------------------- or any entity as his or her Beneficiary. Designation shall be in writing and shall become effective only when filed with the Administrator. Such filing must occur before the Participant's death. A Participant may change the Beneficiary, from time to time, by filing a new written designation with the Administrator. If the Participant is married, any Beneficiary designation which does not designate the Participant's spouse to receive at least one-half of the Participant's Account shall only become effective when approved in writing by the Participant's spouse. Page 5 F. SOURCE OF PAYMENT ----------------- Amounts paid under this Plan shall be paid from the general funds of the Company, and each Participant and his or her Beneficiaries shall be no more than unsecured general creditors of the Company with no special or prior right to any assets of the Company (whose claims may be subordinated to those of creditors of Company subsidiaries) for payment of any obligations hereunder. Nothing contained in this Plan shall be deemed to create a trust of any kind for the benefit of any Participant or Beneficiary, or create any fiduciary relationship between the Company and any Participant or Beneficiary with respect to any assets of the Company. G. MISCELLANEOUS ------------- 1. Withholding. Each Participant and Beneficiary shall make appropriate ----------- arrangements with the Company for the satisfaction of any federal, state or local income tax withholding requirements and Social Security or other employment tax requirements applicable to the payment of benefits under this Plan. If no other arrangements are made, the Company may provide, at its discretion, for such withholding and tax payments as may be required. 2. No Assignment. The benefits provided under this Plan may not be ------------- alienated, assigned, transferred, pledged or hypothecated by any person, at any time. These benefits shall be exempt from the claims of creditors or other claimants and from all orders, decrees, levies, garnishments or executions. 3. Applicable Law; Severability. The Plan hereby created shall be ---------------------------- construed, administered and governed in all respects in accordance with ERISA and the laws of the State of California to the extent that the latter are not preempted by ERISA. If any provision of this instrument shall be held by a court of competent jurisdiction to be invalid or unenforceable, the remaining provisions hereunder shall continue to be effective. H. ADMINISTRATION OF THE PLAN -------------------------- 1. In General. The Administrator of the Plan shall be the Senior Vice ---------- President, Human Resources and Administration, of the Company. If the Senior Vice President, Human Resources and Administration, is a Participant, any discretionary action taken as Administrator which directly affects him or her as a Participant shall be specifically approved by the Compensation Committee. The Administrator shall have the authority and responsibility to interpret this Plan and shall adopt such rules and regulations for carrying out this Plan as it may deem necessary or appropriate. Decisions of the Administrator shall be final and binding on all parties who have or claim any interest in this Plan. 2. Elections and Notices. All elections and notices made under this Plan --------------------- shall be in writing and filed with the Administrator at the time and in the manner specified by him or her. All elections to defer under this Plan shall be irrevocable. Page 6 I. AMENDMENT OR TERMINATION OF THE PLAN ------------------------------------ The Board may at any time amend this Plan. Such action shall be prospective only and shall not adversely affect the rights of any Participant or Beneficiary to any benefit previously earned under this Plan. The Board may at any time terminate this Plan; thereupon compensation previously deferred plus interest credited thereon shall promptly be paid, on termination, in single lump sums to the respective Participants or Beneficiaries entitled thereto. J. EFFECTIVE DATE -------------- This Plan is effective as of January 27, 1993, the date on which this Plan was approved by the Board. K. DEFINITIONS ----------- For purposes of this Plan, the following terms shall have the meanings indicated: 1. "Account" means the Account specified in Section E.1. ------- 2. "Administrator" shall mean the person specified in Section H. ------------- 3. "Beneficiary" shall mean the person or entity described by Section ----------- E.9. 4. "Board" shall mean the Board of Directors of McKesson HBOC, Inc., a ----- Delaware corporation. 5. "Company" shall mean McKesson HBOC, Inc., a Delaware corporation and ------- any subsidiary in which it owns at least 50% of the issued and outstanding stock (and any subsidiary 50% of the issued and outstanding stock of which is owned by such a subsidiary). 6. "Compensation Committee" shall mean the Compensation Committee of the ---------------------- Board. 7. "Declared Rate" shall have the meaning described in Section E.1. ------------- 8. "Disabled" or "Disability" shall mean (1) a physical or mental ------------------------ condition which, in the judgment of the Administrator, based on competent medical evidence satisfactory to the Administrator, renders a Participant unable to perform the work of his or her regular occupation for the Company and which impairment is likely to result in death or to be of long, continued and indefinite duration, or (2) a judicial declaration of incompetence. 9. "Eligible Director" shall mean a Director described by Section C.1.b. ----------------- 10. "Eligible Executive" shall mean an employee of the Company selected as ------------------ being eligible to participate in this Plan under Section C.1.a. Page 7 11. "ERISA" shall mean the Employee Retirement Income Security Act of ----- 1974, as amended. 12. "Participant" shall be any Company executive or member of the Board ----------- for whom amounts are credited to an Account under this Plan. Upon his or her death, his or her Beneficiary shall be a Participant until all amounts are paid out of his or her Account. 13. "Plan" shall mean the McKesson HBOC, Inc. Deferred Compensation ---- Administration Plan II (DCAP II). 14. "Retirement" shall mean termination of employment after (a) the date ---------- on which the Participant's number of points under the Retirement Share Plan portion of the McKesson HBOC, Inc. Profit-Sharing Investment Plan equals 65, (b) attaining eligibility for a Retirement Allowance under the terms of the McKesson HBOC, Inc. Retirement Plan or (c) receiving an Approved Retirement under the terms of the Executive Benefit Retirement Plan. 15. "Year" is the calendar year. ---- Executed effective as of January 27, 1999. McKESSON HBOC, INC. By _____________________________________________ E. Christine Rumsey Senior Vice President, Human Resources and Administration Page 8 APPENDIX A DEFERRAL OF RESTRICTED STOCK PROCEEDS ------------------------------------- Any other provision of the Plan to the contrary notwithstanding, the following provisions shall apply to the cash paid to the Company by Eli Lilly and Company ("Lilly") upon the tender of certain shares of restricted stock (the "Transaction Proceeds"), which had been granted to executives under the Company's 1988 Restricted Stock Plan, at the completion of the transaction involving the acquisition of PCS Health Systems, Inc. ("PCS") by Lilly (the "Transaction"). 1. Former executives of the Company may be selected to participate in the Plan, and, if so selected, shall be deemed Eligible Executives. 2. The Transaction Proceeds shall be automatically deferred into the Plan on behalf of those Eligible Executives who hold outstanding Restricted Stock Grants under the Company's 1988 Restricted Stock Plan. Such Eligible Executives shall be deemed to have elected the deferral of the Transaction Proceeds. 3. The five-year minimum deferral period required by paragraph E.2. of the Plan shall not apply to the deferral of the Transaction Proceeds. 4. Transaction Proceeds shall not be deferred on behalf of Eligible Executives who are also employees of PCS. Page 9 EX-10.10 12 1994 OPTION GAIN DEFERRAL PLAN EXHIBIT 10.10 McKESSON HBOC, INC. 1994 OPTION GAIN DEFERRAL PLAN (OGDP) ------------------------------------- (Amended as of January 27, 1999) A. PURPOSE ------- This Plan is established to allow those Company executives and directors who hold exercisable stock options granted under the McKesson Corporation 1978 Stock Option Plan (the "1978 Plan") to defer the cash portion of the gain (the "Cash Gain") the executive or director realizes from his or her exercisable stock options in connection with the restructuring of McKesson Corporation resulting in the sale of PCS Health Systems, Inc. to Eli Lilly and Company (the "Transaction"). B. ERISA PLAN ---------- This Plan is an unfunded deferred compensation program for a select group of management employees and Directors of the Company. The Plan therefore is covered by Title I of ERISA except that it is exempt from Parts 2, 3 and 4 of Title I of ERISA. C. PARTICIPATION ------------- 1. Eligibility to Participate -------------------------- a. Eligible Executives. Company executives who (i) are actively ------------------- employed, and (ii) hold exercisable stock options granted under the 1978 Plan as of the date the Transaction closes may elect to participate in this Plan ("Eligible Executives"). b. Eligible Directors. Each director of the Company who (i) is not ------------------ a Company employee and (ii) holds exercisable stock options granted under the 1978 Plan as of the date the Transaction closes may participate in this Plan ("Eligible Directors"). 2. Election to Participate. An Eligible Executive or an Eligible ----------------------- Director may become a Participant in the Plan by electing to defer the Cash Gain in accordance with the terms of this Plan. An election to defer shall be in writing, shall be irrevocable and shall be made at the time and in the form specified by the Administrator. On electing to defer amounts under this Plan, the Participant shall be deemed to accept all of the terms and conditions of this Plan. All elections to defer under this Plan shall be made pursuant to an election executed and filed with the Administrator before the amounts so deferred are earned. Other than to avoid the expiration Page 1 of an option in accordance with its terms, a Participant shall not exercise any option with respect to which he or she has made a deferral election. 3. Relation to Other Plans. An Eligible Executive or a Director may ----------------------- participate in this Plan and may also participate in any other benefit plan of the Company in effect from time to time for which he or she is eligible, unless the other plan may otherwise exclude participation on the basis of eligibility for, or participation in, this Plan. No amounts may be deferred under this Plan which have been deferred under any other plan of the Company. D. AMOUNTS OF DEFERRAL ------------------- 1. Minimum Deferral. The minimum amount that an Eligible Executive or ---------------- Eligible Director may defer under this Plan is $5,000 of the Cash Gain realized upon the completion of the Transaction. 2. Maximum Deferral. The maximum amount of compensation which an ---------------- Eligible Executive or an Eligible Director may defer under this Plan for any Year is one hundred percent (100%) of the Cash Gain realized upon the completion of the Transaction. Notwithstanding these limits, deferrals may be reduced by the Company to leave sufficient remaining amounts legally required for taxes and other authorized deductions. In addition, the amount of deferrals allowed to any Participant may be subject to a limit determined by the Plan Administrator. E. PAYMENT OF DEFERRED COMPENSATION -------------------------------- 1. Book Account and Interest Credit. Any Cash Gain deferred by a -------------------------------- Participant under the Plan shall be credited to a separate bookkeeping account for such Participant (the "Account"). For the remainder of Calendar Year 1994, interest shall be credited to each Account at an annual rate of 7.5%. Thereafter, the interest rate will be set each year to the Moody's Corporate Bond Yield Average for December of the preceding year. Each Account balance shall be credited with interest compounded monthly based on the annual rate of interest provided for under this Plan. In the case of installment payments as provided in Section E.3. below, interest shall be credited on all amounts remaining in a Participant's Account until all amounts are paid out. 2. Length of Deferral. An Eligible Executive or Eligible Director shall ------------------ elect in writing, and file with the Administrator, at the same time as such Eligible Executive or Eligible Director makes any election to defer any portion of the Cash Gain, the period of deferral with respect to such election, subject to the minimum required period of deferral and the maximum permissible period of deferral. The minimum required period of deferral is two years from the date the compensation is deferred. Notwithstanding the foregoing, the two-year minimum deferral period shall not apply to payments made as a result of death, Disability, Retirement, pre-Retirement termination or hardship. Payment must commence no later than the end of the maximum period of deferral, which is the January following the year in which the Eligible Page 2 Employee reaches age 72 or, in the case of an Eligible Director, the January after the Company's annual meeting of stock holders next following the Eligible Director's 72nd birthday. Once such an election has been made, the Eligible Executive or Eligible Director may alter the period of deferral, provided that: a. such alteration is made at least one year prior to the earliest date the Participant could have received distribution of the amounts credited to his or her Account under the earlier election, and b. such alteration does not provide for the receipt of such amounts earlier than one year from the date of the alteration, subject to the two-year minimum deferral rule stated above. 3. Election of Methods of Payment. A Participant shall elect in writing, ------------------------------ and file with the Administrator, at the same time as any election to defer, a method of payment of amounts deferred under this Plan from the following methods: a. Payment of amounts credited to the Participant's Account in any specified number of approximately equal annual installments (not in excess of 10), the first installment to be paid in January of the Year designated by the Participant. b. Payment of the amounts credited to the Participant's Account in any specified number of approximately equal annual installments (not in excess of ten), the first installment to be paid in January after the designated interval following the earlier of Participant's Retirement or the determination of Disability. c. Payment of the amount credited to the Participant's Account in a single sum. 4. Payments on Termination. ----------------------- a. Director Termination. If an Eligible Director ceases to be a -------------------- director of the Company for any reason other than death, the entire undistributed amount credited to his or her Account will be paid in the form elected by the Participant, or, if no election has been made, in a lump sum in the January of the calendar year following the calendar year in which the Eligible Director ceased to be a Director. b. Executive Termination. If an Eligible Executive terminates --------------------- employment with the Company for any reason other than Retirement, Disability or death, the entire undistributed amount credited to his or her Account will be paid in the form of a lump sum in the January of the calendar year following the calendar year of termination of employment. Page 3 5. Payments on Death. ----------------- a. Death After Payments Have Begun. If a Participant dies after ------------------------------- payments from his or her Account have begun, the remainder of the amounts credited to the Participant's Account shall be paid to his or her Beneficiary at the same time and in the same manner as they would have been paid had the Participant survived. b. Death Before Payments Have Begun. If a Participant dies before -------------------------------- payments from his or her Account have begun, the amount credited to his or her Account shall be paid to his or her Beneficiary at the time and in the manner elected by the Participant. Such election shall be made in writing and filed with the Administrator at the time of any election to defer. Deferred amounts shall be paid in one of the methods specified in paragraphs a. and c. of Section E.3. The Administrator, at his or her discretion, may distribute the deferred amounts to a Beneficiary in a single payment if the value of his or her Account balance is less than $5,000. 6. Payments on Disability. If the Administrator determines that a ---------------------- Participant has become Disabled, the entire undistributed amount credited to his or her Account will be paid in the form and at the time elected by the Participant, or, if no election has been made, in a lump sum as soon as practicable after such determination is made. 7. Payments on Hardship. The Administrator may in his or her sole -------------------- discretion direct payment to a Participant of all or of any portion of the Participant's Account balance, notwithstanding an election under Section E.3. above, at any time that he or she determines that such Participant has suffered an event of undue hardship which causes an emergency condition in his or her financial affairs. 8. Designation of Beneficiary. A Participant may designate any person(s) -------------------------- or any entity as his or her Beneficiary. Such designation shall be in writing and shall become effective only when filed with the Administrator. Such filing must occur before the Participant's death. A Participant may change the Beneficiary, from time to time, by filing a new written designation with the Administrator. If the Participant is married, any Beneficiary designation which does not designate the Participant's spouse to receive at least one-half of the Participant's Account shall only become effective when approved in writing by the Participant's spouse. F. SOURCE OF PAYMENT ----------------- Amounts paid under this Plan shall be paid from the general funds of the Company, and each Participant and his or her Beneficiaries shall be no more than unsecured general creditors of the Company with no special or prior right to any assets of the Company (whose claims may be subordinated to those of creditors of Company subsidiaries) for payment of any obligations hereunder. Nothing contained in this Plan shall be deemed to create a trust of any kind for the benefit of any Participant or Beneficiary, or create any fiduciary relationship between the Company and any Participant or Beneficiary with respect to any assets of the Company. Page 4 G. MISCELLANEOUS ------------- 1. Withholding. Each Participant and Beneficiary shall make appropriate ----------- arrangements with the Company for the satisfaction of any federal, state or local income tax withholding requirements and Social Security or other employment tax requirements applicable to deferrals under this Plan or the payment of amounts deferred under this Plan. If no other arrangements are made, the Company may provide, at its discretion, for such withholding and tax payments as may be required. 2. No Assignment. The benefits provided under this Plan may not be ------------- alienated, assigned, transferred, pledged or hypothecated by any person, at any time. These benefits shall be exempt from the claims of creditors or other claimants and from all orders, decrees, levies, garnishments or executions. 3. Applicable Law; Severability. The Plan hereby created shall be ---------------------------- construed, administered and governed in all respects in accordance with ERISA and the laws of the State of California to the extent that the latter are not preempted by ERISA. If any provision of this instrument shall be held by a court of competent jurisdiction to be invalid or unenforceable, the remaining provisions hereunder shall continue to be effective. H. ADMINISTRATION OF THE PLAN -------------------------- 1. In General. The Plan Administrator shall be the Senior Vice President ---------- Human Resources and Administration of the Company. If the Senior Vice President Human Resources and Administration is a Participant, any discretionary action taken as Administrator which directly affects him or her as a Participant shall be specifically approved by the Chief Executive Officer of the Company. The Administrator shall have the authority and responsibility to interpret this Plan and shall adopt such rules and regulations for carrying out this Plan as it may deem necessary or appropriate. Decisions of the Administrator shall be final and binding on all parties who have or claim any interest in this Plan. 2. Elections and Notices. All elections and notices made under this Plan --------------------- shall be in writing and filed with the Administrator at the time and in the manner specified by him or her. Except as may be specifically otherwise stated in any Plan election form, all elections to defer under this Plan shall be irrevocable. I. AMENDMENT OR TERMINATION OF THE PLAN ------------------------------------ The Board may at any time amend this Plan. Such action shall be prospective only and shall not adversely affect the rights of any Participant or Beneficiary to any benefit previously earned under this Plan. The Board may at any time terminate this Plan; thereupon compensation previously deferred plus interest credited thereon shall promptly be paid, on termination, in single lump sums to the respective Participants or Beneficiaries entitled thereto. Page 5 J. EFFECTIVE DATE -------------- This Plan is effective as of July 27, 1994, the date on which this Plan was approved by the Board; provided, however, that this Plan shall be null and void and of no further force or effect if the Transaction is not consummated. K. DEFINITIONS ----------- For purposes of this Plan, the following terms shall have the meanings indicated: 1. "Account" means the Account specified in Section E.1. ------- 2. "Administrator" shall mean the person specified in Section H. ------------- 3. "Beneficiary" shall mean the person or entity described by Section ----------- E.8. 4. "Board" shall mean the Board of Directors of McKesson HBOC, Inc., a ----- Delaware corporation. 5. "Company" shall mean McKesson HBOC, Inc., a Delaware corporation and ------- any subsidiary in which it owns at least 50% of the issued and outstanding stock (and any subsidiary 50% of the issued and outstanding stock of which is owned by such a subsidiary). 6. "Disabled" or "Disability" shall mean (1) a physical or mental ------------------------ condition which, in the judgment of the Administrator, based on competent medical evidence satisfactory to the Administrator, renders a Participant unable to perform the work of his or her regular occupation for the Company and which impairment is likely to result in death or to be of long, continued and indefinite duration, or (2) a judicial declaration of incompetence. 7. "Eligible Director" shall mean a director described by Section C.1.b. ----------------- 8. "Eligible Executive" shall mean an employee of the Company selected as ------------------ being eligible to participate in this Plan under Section C.1.a. 9. "ERISA" shall mean the Employee Retirement Income Security Act of ----- 1974, as amended. 10. "Participant" shall be any Eligible Executive or Eligible Director for ----------- whom amounts are credited to an Account under this Plan. Upon the Participant's death, his or her Beneficiary shall be a Participant until all amounts are paid out of his or her Account. 11. "Plan" shall mean the McKesson HBOC, Inc. 1994 Option Gain Deferral ---- Plan (OGDP). Page 6 12. "Retirement" shall mean termination of employment after (a) the date ---------- on which the Participant's number of points under the Retirement Share Plan portion of the McKesson HBOC, Inc. Profit-Sharing Investment Plan equals 65, (b) attaining eligibility for a Retirement Allowance under the terms of the McKesson HBOC, Inc. Retirement Plan or (c) receiving an Approved Retirement under the terms of the Executive Benefit Retirement Plan. 13. "Transaction" shall mean the restructuring of the Company that will ----------- result in the sale of PCS Health Systems, Inc. to Eli Lilly and Company. 14. "Year" is the calendar year. ---- Executed effective as of January 27, 1999. McKESSON HBOC, INC. By ______________________________________ E. Christine Rumsey Senior Vice President, Human Resources and Administration Page 7 EX-10.11 13 DIRECTORS' DEFERRED COMPENSATION PLAN EXHIBIT 10.11 MCKESSON HBOC, INC. DIRECTORS' DEFERRED COMPENSATION PLAN ------------------------------------- (Amended as of January 27, 1999) 1. ELIGIBILITY ----------- Any director of McKesson HBOC, Inc. (the "Company") entitled to compensation by the Company for service as a director ("Eligible Director") may elect to defer receipt of his compensation under this Plan (the "Plan") and thereby shall become a participant under the Deferred Compensation Administration Plan of the Company. 2. ELECTION TO PARTICIPATE IN PLAN ------------------------------- (a) An Eligible Director may at any time elect to participate in the Plan and defer receipt of either all his annual retainer fees and meeting fees or all his annual retainer fees. Deferred compensation shall be credited to the Deferred Compensation Administration Plan as of the end of each quarter. An Eligible Director may at any time and from time to time, by delivering a written request to the Company, change his election, but all amounts accumulated pursuant to the Plan prior to such election shall continue to be subject to the terms of any prior election by the Eligible Director in effect when such amounts were earned. No new deferrals shall be made under this Plan after January 1, 1994. (b) Income deferred hereunder shall remain the property of the Company and no Eligible Director shall acquire any property interest in the Account, stock or any other assets of the Company, his right being limited to receiving from the Company deferred payments measured as set forth in this Plan and this right is conditioned upon continued compliance with the terms and conditions of this Plan. To the extent that any Eligible Director acquires a right to receive benefits under this Plan, such right shall be no greater than the right of any unsecured general creditor of the Company. No such right shall be assignable by any Eligible Director, except that payments may be made to his estate under the terms of Section 5. (c) Each such Eligible Director shall file with the Company at the time of his election to participate in the Plan an irrevocable election of one of the methods of distribution described in Section 4. 3. TERMINATION OF PARTICIPATION IN THE PLAN ---------------------------------------- Any Eligible Director having previously elected to participate in the Plan may at any later date elect to terminate his participation in the Plan with respect to compensation as a Director to be earned thereafter by executing and delivering to the Company a notice to that effect, in which Page 1 event the amount accumulated pursuant to the Plan prior to notice of his election to terminate will continue to be subject to the provisions of the Plan. An Eligible Director who elects to terminate his participation shall not be re- eligible to participate in this Plan until one year from the effective date of the termination. 4. DISTRIBUTION OF AMOUNTS DEFERRED UNDER THE PLAN ----------------------------------------------- (a) Amounts deferred under the Plan shall be paid in approximately equal annual installments over such period of years, not exceeding ten years, as the Eligible Director has elected. The Eligible Director shall further elect that such distribution shall commence as of: (1) the first day of the first calendar quarter after the Eligible Director ceases being a director of the Company, or (2) the later of: (i) the date determined pursuant to subsection (1) or (ii) the first day of the calendar year following the calendar year in which the Eligible Director has retired from his principal occupation. (b) Once an election is made, the Eligible Director may alter the timing of receipt of such deferred compensation, provided that such alteration is made at least one year prior to the earliest date the Eligible Director could have received distribution of the deferred compensation under a previous election and does not provide for the receipt of such amounts earlier than one year from the date of the alteration. 5. DEATH OF AN ELIGIBLE DIRECTOR ----------------------------- Upon the death of an Eligible Director or former Eligible Director, the balance in full of any amounts deferred under the Plan shall be payable, on the 2nd day of the calendar year following the year in which he or she dies, to his or her designated beneficiary or beneficiaries, and if he or she has designated none, or if none is alive, then it shall be payable to his or her estate. 6. AMENDMENT OF THE PLAN --------------------- The Plan may be amended from time to time by resolution of the Board of Directors of the Company, but no such amendment shall permit amounts accumulated pursuant to the Plan prior to the amendment to be paid to an Eligible Director prior to the time he would otherwise be entitled thereto. Page 2 7. TERMINATION OF THE PLAN ----------------------- The Plan will continue in effect until terminated by resolution of the Board of Directors of the Company, but in the event of such termination, the amounts accumulated pursuant to the Plan prior to termination will continue to be subject to the provisions of the Plan as if the Plan had not been terminated. 8. EFFECTIVE DATE OF THE PLAN -------------------------- The Plan shall be effective with respect to any compensation payable to a Director for services as such following March 31, 1977. Executed effective as of January 27, 1999. McKESSON HBOC, INC. By ______________________________________ E. Christine Rumsey Senior Vice President, Human Resources and Administration Page 3 EX-10.12 14 EXECUTIVES' ELECTIVE DEFERRED COMPENSATION PLAN EXHIBIT 10.12 McKESSON HBOC, INC. 1985 EXECUTIVES ELECTIVE DEFERRED COMPENSATION PLAN --------------------------------------------------- Amended as of January 27, 1999 ------------------------------ A. PURPOSE ------- This Plan is established to further enhance the Company's ability to attract and retain executive personnel. B. ERISA PLAN ---------- This Plan is an unfunded deferred compensation program for a select group of management employees of the Company. The Plan therefore is covered by Title I of ERISA except that it is exempt from Parts 2, 3, and 4 of Title I of ERISA. C. PARTICIPATION ------------- 1. Eligibility to Participate. The Compensation Committee may, at its -------------------------- discretion, and at any time, and from time to time, select Company executives who may elect to participate in this Plan ("Eligible Executives"). Selection of Eligible Executives may be evidenced by the terms of the executive's employment contract with the Company, or by inclusion among the persons specified by the Compensation Committee. The Compensation Committee may, at its discretion, and at any time, and from time to time, designate additional Eligible Executives and/or provide that executives previously designated are no longer Eligible Executives. If the Compensation Committee determines that an executive is no longer an Eligible Executive, he or she shall remain a Participant in the Plan until all amounts credited to his or her Account prior to such determination are paid out under the terms of the Plan (or until death, if earlier). 2. Election to Participate by Eligible Executives. Each Eligible ---------------------------------------------- Executive may become a Participant in the Plan by electing to defer compensation in accordance with the terms of this Plan. An election to defer shall be in writing, shall be irrevocable and shall be made at the time and in the form specified by the Administrator. On electing to defer compensation under this Plan, the Eligible Executive shall be deemed to accept all of the terms and conditions of this Plan. All elections to defer amounts under this Plan shall be made pursuant to an election executed and filed with the Administrator before the amounts so deferred are earned. All elections to defer 1985 compensation shall be executed and filed with the Administrator no Page 1 later than September 15, 1985, or on any later date in 1985 (no later than September 22, 1985) if the election is to defer 1985 compensation earned after such later date. 3. Notification of Participants. The Administrator shall annually notify ---------------------------- each Eligible Executive that he or she may participate in the Plan for the next Year. 4. Relation to Other Plans. ----------------------- a. DCAP. An Eligible Executive may participate in this Plan and may ---- also participate in the McKesson HBOC, Inc. Deferred Compensation Administration Plan. No amounts may be deferred under this Plan which have been deferred under the McKesson HBOC, Inc. Deferred Compensation Administration Plan or any other plan of the Company. b. Other Plans. For all other benefit programs maintained by the ----------- Company, amounts deferred by an Eligible Executive under this Plan shall, to the extent relevant, be treated in the same manner as amounts deferred under the McKesson HBOC, Inc. Deferred Compensation Administration Plan. D. AMOUNTS OF DEFERRAL ------------------- 1. Minimum Deferral. The minimum amount of compensation that may be ---------------- deferred by an Eligible Executive under this Plan for 1985 is one month's salary. The minimum amount that an Eligible Executive may defer for 1986 and later Years is $10,000. 2. Maximum Deferral. ---------------- a. 1985. The maximum amount of compensation which an Eligible ---- Executive may defer under this Plan for 1985 shall be his or her salary earned from September 16, 1985 through December 15, 1985. b. Years After 1985. The maximum amount of compensation which an ---------------- Eligible Executive may defer under this Plan for any Year after 1985 is (i) twenty-five percent (25%) of the amount of such Eligible Executive's base salary for such Year, calculated at the annual base salary rate in effect on January 1 of such Year, and (ii) the amount of any annual bonus award and/or any Long-Term Incentive Plan Award determined and payable to him or her in such Years. 3. As Deferrals After 1986. Eligible Executives may not defer ----------------------- compensation under this Plan for any Year after 1986. E. PAYMENT OF DEFERRED COMPENSATION -------------------------------- 1. Book Account and Interest Credit. Compensation deferred by an -------------------------------- Eligible Executive under the Plan shall be credited to a separate bookkeeping account for such Eligible Executive (the "Account"). (Separate Accounts or Sub- Accounts may be established for each Year for which the Eligible Executive elects to defer compensation.) Interest shall be credited to Page 2 each Account for each Year at a rate equal to 6% plus the Moody's Corporate Bond Yield Average--Monthly Average Corporates as published by Moody's Investors Service, Inc. (or any successor thereto) for December of each Year prior to the Year in which such interest rate is credited. Each Account balance shall be compounded monthly, in a consistent manner as determined by the Administrator, at the appropriate rate of interest provided for under the Plan. 2. Reduced Interest Rate for Participants Who Leave Before Approved ---------------------------------------------------------------- Retirement. If a Participant's employment with the Company is terminated for any - ---------- reason whatsoever prior to the date of his or her Approved Retirement (except on death or disability), the interest rate which shall be credited to his or her Account shall be the rate specified in Section E.1, above, for the period up to and including the date his or her employment terminates and thereafter shall be the rate specified in Section E.1, above, less 6 percentage points per annum. Notwithstanding the foregoing, the Compensation Committee may, in its discretion, credit the Account of any Participant whose employment is terminated at an interest rate up to the plan maximum for years and portions thereof, following the date on which the Participant's employment terminates. This reduced rate shall not apply to any amounts which have been distributed under paragraph b of Section E.3 (relating to interim distributions) prior to such termination. 3. Length of Deferral. ------------------ a. Basic Deferral Period. An Eligible Executive shall elect in --------------------- writing, and file with the Administrator, at the same time as such Eligible Executive makes any election to defer compensation, the period of deferral with respect to such election. Once such an election is made, an Eligible Executive may alter the timing of receipt of benefits under the election, provided that such alteration is made at least one year prior to the earliest date the Participant could have received payment of benefits under the Plan under the previous election and does not provide for the receipt of such amounts earlier than one year from the date of the alteration. Payment of amounts deferred and interest credited thereon must begin no later than the January following the year in which the Eligible Executive reaches age 72, subject to the minimum required period of deferral, which is 5 years. b. Interim Distributions. An Eligible Executive may elect to have --------------------- up to 100% of the amount of compensation deferred in any Year, plus credited interest, paid to him or her prior to age 65. No election made pursuant to this paragraph may provide for payments of deferred compensation and interest credited thereon until at least 5 years from the date of the deferral which is the subject of the election. Any election under this paragraph shall be made in writing and filed with the Administrator at the same time as any election to defer compensation. c. Benefits Payable on Death. See Section F for the payment of ------------------------- benefits on death of a Participant. Page 3 4. Method of Payment. ----------------- a. Election. An Eligible Executive shall elect in writing, and file -------- with the Administrator, at the same time as any election to defer compensation, a method of payment of benefits under the Plan. b. Alternative Methods Available--Basic Deferral Period. The ---------------------------------------------------- following methods of benefit payment may be elected by an Eligible Executive for amounts payable after deferral under paragraph a. of Section E.3 relating to the basic deferral period: (i) Payment of amounts credited to the Participant's Account in any specified number of approximately equal annual installments (not in excess of 10). In the case of installment payments, interest at the appropriate rate shall be credited on all amounts remaining in a Participant's Accounts. (ii) Payment of the amount credited to the Participant's Account in a single sum. c. Alternative Methods Available--Interim Distributions. The ---------------------------------------------------- following methods of benefit payment may be elected by an Eligible Executive for interim distributions under paragraph b of Section E.3: (i) Payment in any specified number of approximately equal annual installments (not in excess of 10). In the case of installment payments, interest at the appropriate rate shall be credited on all amounts remaining in a Participant's Accounts. (ii) Payment in a single sum. 5. Date Payments Begin. ------------------- a. After Basic Deferral Period. Payments shall begin (or, in the --------------------------- case of payments to be made in a single sum, shall generally be made) on the first day of the month after the basic deferral period ends under paragraph a. of Section E.3, but, in any event, must begin no later than the January following the year in which the Eligible Executive reaches age 72. b. Interim Distributions. Payments shall begin (or, in the case of --------------------- payments to be made in a single sum, shall be made) on the date previously elected by the Participant for interim distributions. c. Upon Termination of Employment. Notwithstanding paragraphs 5.a. ------------------------------ and b., above, if an Eligible Executive's employment with the Company terminates before Retirement, the Participant shall receive a single, lump sum payment of the entire amount credited to the Participant's Account in the January following such termination of employment. Page 4 F. BENEFITS ON DEATH ----------------- 1. Death After Payments Have Begun. ------------------------------- a. Basic Deferral. If a Participant dies after payments from his or -------------- her Account have begun (not taking into account interim distributions under paragraph b of Section E.3), and if installment payments are being made, the remainder of the amounts credited to the Participant's Account shall be paid to his or her Beneficiary at the same time and in the same manner as they would have been paid had the Participant survived until all amounts were paid out. If installment payments have not been elected, amounts shall be paid as provided for under any other form of benefit payment elected. b. Interim Distributions. If a Participant dies after interim --------------------- distributions under paragraph b of Section E.3 have begun, the interim distributions shall be paid to the Participant's Beneficiary at the same time and in the same manner as they would have been paid had the Participant survived. 2. Death Before Payments Have Begun. If a Participant dies before -------------------------------- payments (except interim distributions) have begun, the amount credited to his or her Account shall be paid to his or her Beneficiary beginning at the time payments would have been made under paragraph a. of Section E.3. (relating to basic deferrals) or at such earlier time as the Participant elected. Elections shall be made in writing and filed with the Administrator at the time of any election to defer compensation. Benefits shall be paid in one of the methods specified in paragraph b. of Section E.4. If the Participant's employment with the Company is terminated for any reason whatsoever prior to the date of Approved Retirement (except on death or disability), the rate of interest which shall be credited to his or her Account for the period after such termination shall, of course, be the lower rate specified in Section E.2., unless the Compensation Committee otherwise determines as provided in that Section E.2. The Administrator, at his or her discretion, may distribute all benefits to a Beneficiary in a single payment if the present value of the benefits payable to a Participant or Beneficiary is less than $5,000. 3. Designation of Beneficiary. A Participant may designate any person or -------------------------- entity as his or her Beneficiary, but may not designate more than one person or any person that is not a natural person without the approval of the Administrator. Designation shall be in writing and shall become effective only when filed with (and, if appropriate, approved by) the Administrator. Such filing must occur before the Participant's death. A Participant may change the Beneficiary, from time to time, by filing a new written designation with (and, if appropriate, approved by) the Administrator. If the Participant is married any Beneficiary designation which does not designate the Participant's spouse to receive at least one-half of the Participant's Account shall only become effective when approved in writing by the Participant's spouse. G. SOURCE OF PAYMENT ----------------- Amounts paid under this Plan shall be paid from the general funds of the Company, and each Participant and his or her Beneficiaries shall be no more than unsecured general creditors of Page 5 the Company with no special or prior right to any assets of the Company for payment of any obligations hereunder. Nothing contained in this Plan shall be deemed to create a trust of any kind for the benefit of any Participant or Beneficiary, or create any fiduciary relationship between the Company and any Participant or Beneficiary with respect to any assets of the Company. H. MISCELLANEOUS ------------- 1. Withholding. Each Participant and Beneficiary shall make appropriate ----------- arrangements with the Company for the satisfaction of any federal, state, or local income tax withholding requirements and Social Security or other employment tax requirements applicable to the payment of benefits under this Plan. If no other arrangements are made, the Company may provide, at its discretion, for such withholding and tax payments as may be required. 2. No Assignment. The benefits provided under this Plan may not be ------------- alienated, assigned, transferred, pledged, or hypothecated by any person, at any time. These benefits shall be exempt from the claims of creditors or other claimants and from all orders, decrees, levies, garnishments or executions. 3. Insurance Examinations. As a condition of participation in this Plan, ---------------------- each Eligible Executive shall, if requested by the Company, undergo such examination and provide such information as may be required by the Company with respect to an insurance contract on the Eligible Executive's life, and shall authorize the Company to purchase life insurance on his or her life. 4. Applicable Law; Severability. The Plan hereby created shall be ---------------------------- construed, administered, and governed in all respects in accordance with ERISA and the laws of the State of California to the extent that the latter are not preempted by ERISA. If any provision of this instrument shall be held by a court of competent jurisdiction to be invalid or unenforceable, the remaining provisions hereunder shall continue to be effective. I. ADMINISTRATION OF THE PLAN -------------------------- 1. In General. The Plan Administrator shall be the Senior Vice President, ---------- Human Resources and Administration of the Company. If the Senior Vice President, Human Resources and Administration is a Participant, any discretionary action taken as Administrator which directly affects him or her as a Participant shall be specifically approved by the Compensation Committee. The Compensation Committee shall have the authority and responsibility to interpret the Plan and shall adopt such rules and regulations for carrying out the Plan as it may deem necessary or appropriate. Decisions of the Compensation Committee shall be final and binding on all parties who have or claim any interest in the Plan. 2. Elections and Notices. All elections and notices made under this Plan --------------------- shall be in writing and filed with the Administrator at the time and in the manner specified by him or her. All elections to defer under this Plan shall be irrevocable. Page 6 J. AMENDMENT OR TERMINATION OF THE PLAN ------------------------------------ The Board may at any time amend the Plan. Such action shall be prospective only and shall not adversely affect the rights of any Participant or Beneficiary to any benefit previously earned under the Plan. The Board may increase or decrease the interest rate credited to compensation previously deferred but the rate shall not be reduced for periods prior to such action and shall not be reduced below the interest rate specified in Section E.1 less 6 percentage points per annum. The Board may at any time terminate the Plan; thereupon compensation previously deferred plus interest credited thereon shall promptly be paid, on termination, in single sums to the respective Participants or Beneficiaries entitled thereto. K. DEFINITIONS ----------- For purposes of the Plan, the following terms shall have the meanings indicated: 1. "Account" means the Account specified in Section E.1. 2. "Administrator" shall mean the person specified in Section I. 3. "Approved Retirement" shall mean any termination of employment with the Company at or after attainment of Retirement or any retirement before age 65 with the approval of the Board. 4. "Beneficiary" shall mean the person or entity described by Section F.3. 5. "Board" shall mean the Board of Directors of McKesson HBOC, Inc., a Delaware corporation. 6. "Company" shall mean McKesson HBOC, Inc., a Delaware corporation, and any subsidiary in which it owns at least 50% of the issued and outstanding stock (and any subsidiary 50% of the issued and outstanding stock of which is owned by such a subsidiary). 7. "Compensation Committee" shall mean the Compensation Committee of the Board. 8. "Effective Date" shall be September 4, 1985. 9. "Eligible Executive" shall mean an employee of the Company selected as being eligible to participate in this Plan under Section C. 10. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. Page 7 11. "Participant" shall be any company executive for whom amounts are credited to an Account under this Plan. Upon his or her death, his or her Beneficiary shall be a Participant until all amounts are paid out of his or her Account. 12. "Plan" shall mean the McKesson HBOC, Inc. 1985 Executives Elective Deferred Compensation Plan. 13. "Retirement" shall mean termination of a Participant's employment after his or her age plus years of service with the Company reaches 65. 14. "Year" is the calendar year. Executed effective as of January 27, 1999. McKESSON HBOC, INC. By _______________________________________________ E. Christine Rumsey Senior Vice President, Human Resources and Administration Page 8 EX-10.13 15 MANAGEMENT DEFERRED COMPENSATION PLAN EXHIBIT 10.13 McKESSON HBOC, INC. MANAGEMENT DEFERRED COMPENSATION PLAN ------------------------------------- Amended as of January 27, 1999 ------------------------------ A. PURPOSE ------- This Plan is established to further enhance the Company's ability to attract and retain executive personnel and Directors. B. ERISA PLAN ---------- This Plan is an unfunded deferred compensation program for a select group of management employees and Directors of the Company. The Plan therefore is covered by Title I of ERISA except that it is exempt from Parts 2, 3 and 4 of Title I of ERISA. C. PARTICIPATION ------------- 1. Eligibility to Participate -------------------------- a. Eligible Executives. The Compensation Committee may, at its ------------------- discretion, and at any time, and from time to time, select Company executives who may elect to participate in this Plan ("Eligible Executives"). Selection of Eligible Executives may be evidenced by the terms of the executive's employment contract with the Company, or by inclusion among the persons specified by the Compensation Committee. The Compensation Committee may, at its discretion, and at any time, and from time to time, designate additional Eligible Executives and/or provide that executives previously designated are no longer Eligible Executives. If the Compensation Committee determines that an executive is no longer an Eligible Executive, he or she shall remain a Participant in the Plan until all amounts credited to his or her Account prior to such determination are paid out under the terms of the Plan (or until death, if earlier). b. Eligible Directors. Each Director who is not a Company employee ------------------ may participate in this Plan ("Eligible Directors"). 2. Election to Participate. An Eligible Executive or an Eligible ----------------------- Director may become a Participant in the Plan by electing to defer compensation in accordance with the terms of this Plan. An election to defer shall be in writing, shall be irrevocable and shall be made at the time and in the form specified by the Administrator. On electing to defer compensation under this Plan, the Participant shall be deemed to accept all of the terms and conditions of this Plan. Page 1 All elections to defer amounts under this Plan shall be made pursuant to an election executed and filed with the Administrator before the amounts so deferred are earned. All elections to defer compensation for any Year shall be executed and filed with the Administrator no later than (i) November 30 of the immediately preceding Year for Eligible Executives whose salaries are paid monthly and (ii) December 15 of the immediately preceding Year for all other Eligible Executives and Eligible Directors. 3. Notification of Participants. The Administrator shall annually notify ---------------------------- each Eligible Executive and each Eligible Director that he or she may participate in the Plan for the next Year. Such notice shall also set forth the Declared Rate for the next Year. 4. Relation to Other Plans. An Eligible Executive or a Director may ----------------------- participate in this Plan and may also participate in any other benefit plan of the Company in effect from time to time for which he or she is eligible, unless the other plan may otherwise exclude participation on the basis of eligibility for, or participation in, this Plan. No amounts may be deferred under this Plan which have been deferred under any other plan of the Company. Deferrals under this Plan may result in a reduction of benefits payable under the Social Security Act, the Company's Retirement Plan and the Company's Profit-Sharing Investment Plan. D. AMOUNTS OF DEFERRAL ------------------- 1. Minimum Deferral. The minimum amount that an Eligible Executive may ---------------- defer under this Plan for any Year is $5,000 of base salary, or any annual bonuses and/or any Long-Term Incentive Plan award. The minimum amount of compensation that an Eligible Director may defer for any Year is $5,000. 2. Maximum Deferral for Eligible Executives. The maximum amount of ---------------------------------------- compensation which an Eligible Executive may defer under this Plan for any Year is (i) fifty percent (50%) of the amount of such Eligible Executive's base salary for such Year, and (ii) the entire amount of any annual bonus award and/or any Long-Term Incentive Plan Award determined and payable to him or her in such Year. 3. Maximum Deferral for Eligible Directors. The maximum amount of --------------------------------------- compensation which an Eligible Director may defer under this Plan for any Year is the amount of any annual retainer and other fees from the Company earned by him or her in any such Year. 4. No New Deferrals After January 1, 1994. Notwithstanding paragraphs 1, -------------------------------------- 2 and 3 of this Section D., no new deferrals under this Plan shall be made after January 1, 1994. Page 2 E. PAYMENT OF DEFERRED COMPENSATION -------------------------------- 1. Book Account and Interest Credit. Compensation deferred by a -------------------------------- Participant under the Plan shall be credited to a separate bookkeeping account for such Participant (the "Account"). (Sub-Accounts may be established for each Year for which the Participant elects to defer compensation.) Interest shall be credited to each Account (including Sub-Accounts established thereunder) for each Year at a rate equal to a rate declared by the Compensation Committee acting in its sole discretion after taking into account, among other things, the following factors: the Company's cost of funds, corporate tax brackets, expected amount and duration of deferrals, number and age of eligible Participants, expected time and manner of payment of deferred amounts, and expected performance of available fixed-rate insurance contracts covering the lives of Participants (the "Declared Rate"). Each Account balance shall be compounded monthly at the twelfth root of the annual Declared Rate of interest provided for under this Plan. In the case of installment payments as provided in Section E.3 below, interest shall be credited on all amounts remaining in a Participant's Account until all amounts are paid out. 2. Length of Deferral. An Eligible Executive or Eligible Director shall ------------------ elect in writing, and file with the Administrator, at the same time as such Eligible Executive or Eligible Director makes any election to defer compensation, the period of deferral with respect to such election, subject to the minimum required period of deferral, which is five years after the end of the Year for which compensation is deferred, except as otherwise provided in this Section E. Payment must commence no later than the end of the maximum period of deferral, which is the January following the year in which the Eligible Executive reaches age 72, or, in the case of an Eligible Director, the January after the Company's annual meeting of stockholders next following the Eligible Director's 72nd birthday. Once such an election has been made, the Eligible Executive or Eligible Director may alter the period of deferral, provided that: a. such alteration is made at least one year prior to the earliest date the Participant could have received distribution of the amounts credited to his or her Account under the earlier election, and b. such alteration does not provide for the receipt of such amounts earlier than one year from the date of the alteration, subject to the five-year minimum deferral rule stated above. 3. Election of Methods of Payment. A Participant shall elect in writing, ------------------------------ and file with the Administrator, at the same time as any election to defer compensation, a method of payment of benefits under this Plan from the following methods: a. Payment of amounts credited to the Participant's Account in any specified number of approximately equal annual installments (not in excess of 10), the first installment to be paid in the Year designated by the Participant. Page 3 b. Payment of the amounts credited to the Participant's Account in any specified number of approximately equal annual installments (not in excess of ten), the first installment to be paid at a designated interval following the earlier of Participant's Retirement or one continuous year of disability. c. Payment of the amount credited to the Participant's Account in a single sum. 4. Date Payments Begin. Single sum payments to be made following ------------------- Retirement shall be made as soon as practicable following such Retirement. In the case of a Participant's death, single sum or installment payments may begin as soon as practicable after such death. All other payments shall begin (or, in the case of payments to be made in a single sum, shall be made) in January following the deferral period under Section E.2, but, in any event, must begin no later than the January following the year in which the Eligible Executive reaches age 72, or, in the case of an Eligible Director, the January after the Company's annual meeting of stockholders next following the Eligible Director's 72nd birthday. 5. Payments on Termination. If for any reason other than Retirement or ----------------------- Death, an Eligible Executive terminates employment with the Company or an Eligible Director ceases to be a Director, the entire undistributed amount of his or her deferred compensation will be paid in the form of a lump sum as soon as practicable after such termination or cessation. 6. Payments on Death. ----------------- a. Death After Payments Have Begun. If a Participant dies after ------------------------------- payments from his or her Account have begun, the remainder of the amounts credited to the Participant's Account shall be paid to his or her Beneficiary at the same time and in the same manner as they would have been paid had the Participant survived. b. Death Before Payments Have Begun. If a Participant dies before -------------------------------- payments from his or her Account have begun, the amount credited to his or her Account shall be paid to his or her Beneficiary at the time and in the manner elected by the Participant. Such election shall be made in writing and filed with the Administrator at the time of any election to defer compensation. Benefits shall be paid in one of the methods specified in paragraphs a. and c. of Section E.3. and at the time specified in Section E.4. The Administrator, at his or her discretion, may distribute all benefits to a Beneficiary in a single payment if the present value of the benefits payable to a Participant or Beneficiary is less than $5,000. 7. Payments on Hardship. The Compensation Committee may in its sole -------------------- discretion direct payment to a Participant of all or of any portion of any amounts deferred, notwithstanding an election under Section E.3 above at any time that it determines that such Participant has suffered an event of undue hardship which causes an emergency condition in his or her financial affairs. Page 4 8. Effect of Change in Control on Minimum Deferral Period. The five-year ------------------------------------------------------ minimum deferral period described in Section E.2. shall not apply in the event of a Change in Control of the Company. For purposes of this Plan, a Change in Control of the Company shall be deemed to have occurred if any of the events set forth in any one of the following paragraphs shall occur: a. any "person" (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and as such term is modified in Sections 13(d) and 14(d) of the Exchange Act), excluding the Company or any of its subsidiaries, a trustee or any fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, an underwriter temporarily holding securities pursuant to an offering of such securities or a corporation owned, directly or indirectly, by stockholders of the Company in substantially the same proportions as their ownership of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities; or b. during any period of not more than two consecutive years, individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a Person who has entered into an agreement with the Company to effect a transaction described in clause a., c., or d. of this paragraph) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or c. the shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (I) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company, at least 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (II) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person acquires more than 50% of the combined voting power of the Company's then outstanding securities; or d. the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. Notwithstanding the foregoing, no Change in Control shall be deemed to have occurred if there is consummated any transaction or series of integrated transactions immediately Page 5 following which the holders of the Company's Common Stock immediately prior to such transaction or series of transactions continue to have the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately prior to such transaction or series of transactions. With respect to deferrals made prior to January 1, 1994, deferred funds will be distributed upon a Change in Control, if the Participant has so elected. 9. Designation of Beneficiary. A Participant may designate any person(s) -------------------------- or any entity as his or her Beneficiary. Designation shall be in writing and shall become effective only when filed with the Administrator. Such filing must occur before the Participant's death. A Participant may change the Beneficiary, from time to time, by filing a new written designation with the Administrator. If the Participant is married, any Beneficiary designation which does not designate the Participant's spouse to receive at least one-half of the Participant's Account shall only become effective when approved in writing by the Participant's spouse. F. SOURCE OF PAYMENT ----------------- Amounts paid under this Plan shall be paid from the general funds of the Company, and each Participant and his or her Beneficiaries shall be no more than unsecured general creditors of the Company with no special or prior right to any assets of the Company for payment of any obligations hereunder. Nothing contained in this Plan shall be deemed to create a trust of any kind for the benefit of any Participant or Beneficiary, or create any fiduciary relationship between the Company and any Participant or Beneficiary with respect to any assets of the Company. G. MISCELLANEOUS ------------- 1. Withholding. Each Participant and Beneficiary shall make appropriate ----------- arrangements with the Company for the satisfaction of any federal, state or local income tax withholding requirements and Social Security or other employment tax requirements applicable to the payment of benefits under this Plan. If no other arrangements are made, the Company may provide, at its discretion, for such withholding and tax payments as may be required. 2. No Assignment. The benefits provided under this Plan may not be ------------- alienated, assigned, transferred, pledged or hypothecated by any person, at any time. These benefits shall be exempt from the claims of creditors or other claimants and from all orders, decrees, levies, garnishments or executions. 3. Insurance Examinations. As a condition of participation in this Plan, ---------------------- each Eligible Executive shall, if requested by the Company, undergo such examination and provide such information as may be required by the Company with respect to an insurance contract on Page 6 the Participant's life, and shall authorize the Company to purchase life insurance on his or her life. 4. Applicable Law; Severability. The Plan hereby created shall be ---------------------------- construed, administered and governed in all respects in accordance with ERISA and the laws of the State of California to the extent that the latter are not preempted by ERISA. If any provision of this instrument shall be held by a court of competent jurisdiction to be invalid or unenforceable, the remaining provisions hereunder shall continue to be effective. H. ADMINISTRATION OF THE PLAN -------------------------- 1. In General. The Plan Administrator shall be the Senior Vice ---------- President, Human Resources and Administration of the Company. If the Senior Vice President, Human Resources and Administration is a Participant, any discretionary action taken as Administrator which directly affects him or her as a Participant shall be specifically approved by the Compensation Committee. The Compensation Committee shall have the authority and responsibility to interpret this Plan and shall adopt such rules and regulations for carrying out this Plan as it may deem necessary or appropriate. Decisions of the Compensation Committee shall be final and binding on all parties who have or claim any interest in this Plan. 2. Elections and Notices. All elections and notices made under this Plan --------------------- shall be in writing and filed with the Administrator at the time and in the manner specified by him or her. All elections to defer under this Plan shall be irrevocable. I. AMENDMENT OR TERMINATION OF THE PLAN ------------------------------------ The Board may at any time amend this Plan. Such action shall be prospective only and shall not adversely affect the rights of any Participant or Beneficiary to any benefit previously earned under this Plan. The Board may at any time terminate this Plan; thereupon compensation previously deferred plus interest credited thereon shall promptly be paid, on termination, in single lump sums to the respective Participants or Beneficiaries entitled thereto. J. EFFECTIVENESS ------------- This Plan is effective as of November 1, 1989, the date on which this Plan was approved by the Board; provided, however, that deferrals of compensation -------- ------- under this Plan shall not commence unless and until the Company has received a favorable no-action letter regarding this Plan from the Securities and Exchange Commission. K. DEFINITIONS ----------- For purposes of this Plan, the following terms shall have the meanings indicated: Page 7 1. "Account" means the Account specified in Section E.1. ------- 2. "Administrator" shall mean the person specified in Section H. ------------- 3. "Beneficiary" shall mean the person or entity described by Section ----------- E.9. 4. "Board" shall mean the Board of Directors of McKesson HBOC, Inc., a ----- Delaware corporation. 5. "Company" shall mean McKesson HBOC, Inc., a Delaware corporation and ------- any subsidiary in which it owns at least 50% of the issued and outstanding stock (and any subsidiary 50% of the issued and outstanding stock of which is owned by such a subsidiary). 6. "Compensation Committee" shall mean the Compensation Committee of the ---------------------- Board. 7. "Declared Rate" shall have the meaning described in Section E.1. ------------- 8. "Eligible Director" shall mean a Director described by Section C.1.b. ----------------- 9. "Eligible Executive" shall mean an employee of the Company selected as ------------------ being eligible to participate in this Plan under Section C. 10. "ERISA" shall mean the Employee Retirement Income Security Act of ----- 1974, as amended. 11. "Participant" shall be any Company executive or member of the Board ----------- for whom amounts are credited to an Account under this Plan. Upon his or her death, his or her Beneficiary shall be a Participant until all amounts are paid out of his or her Account. 12. "Plan" shall mean the McKesson HBOC, Inc. Management Deferred ---- Compensation Plan. 13. "Retirement" shall mean termination of a Participant's employment ---------- after his or her age plus years of service with the Company reaches 65. 14. "Year" is the calendar year. ---- Executed effective as of January 27, 1999. McKESSON HBOC, INC. By ______________________________________ E. Christine Rumsey Senior Vice President, Human Resources and Administration Page 8 EX-10.14 16 EXECUTIVE BENEFIT RETIREMENT PLAN EXHIBIT 10.14 McKESSON HBOC, INC. 1984 EXECUTIVE BENEFIT RETIREMENT PLAN -------------------------------------- Amended as of January 27, 1999 A. PURPOSE ------- This Plan is established to enable the Company to attract and retain key executive personnel by assisting them and their survivors in maintaining their standards of living on the Executive's retirement or earlier death. B. ERISA PLAN ---------- This Plan is an unfunded deferred compensation program for a select group of highly compensated management employees of the Company. The Plan, therefore, is generally covered by Title I of ERISA, but is exempt from Parts 2, 3, and 4 of Title I of ERISA. C. PARTICIPATION ------------- 1. Selection by the Board. The Board may select, at its discretion ---------------------- and from time to time as it decides, the Key Executives who participate in this Plan. Participation in the Plan shall be limited to those Executives of the Company who are selected by the Board. Selection of a Key Executive to participate in the Plan may be evidenced by the terms of his contract of employment with the Company. 2. Addition and Removal of Participants. The Board may, at its ------------------------------------ discretion and at any time, designate additional Executives to participate in the Plan and remove Executives from participation in the Plan. If an Executive is removed from participation prior to reaching age 65, he shall be entitled to receive benefits, if any, as specified in Section D or F. 3. Notification of Participants. The Administrator shall annually ---------------------------- notify each Executive that he is a participant in the Plan and shall notify each Executive of the estimated amount of benefits which he will receive under the Plan on Approved Retirement. 4. Relation to Other Plans, Etc. If an Executive participates in this ---------------------------- Plan, he shall not participate in or receive benefits under any other Company- paid plan, program or agreement that provides Company Executives, or the individual Executive, with retirement benefits that supplement or are in addition to the benefits under the Retirement Plan, Profit Sharing Investment Plan or Supplemental Profit-Sharing Investment Plan, unless otherwise specifically approved by the Board. For example, any Executive who participates in this Plan shall not receive any retirement benefits under the McKesson HBOC, Inc. Executive Benefit Plan or under any Supplemental Retirement Agreement or Deferred Compensation Agreement that provides Page 1 retirement benefits in addition to benefits provided under the Retirement Plan or Profit-Sharing Investment Plan. This paragraph shall not limit an Executive's participation in or benefits under any plan or program under which the Executive voluntarily defers for later payment compensation otherwise currently payable to him (such as, but not limited to, the Deferred Compensation Administration Plan). D. BENEFITS ON APPROVED RETIREMENT ------------------------------- 1. Amount of Benefits. ------------------ a. In General. Except as otherwise provided herein, each Executive ---------- who participates in the Plan and terminates employment by reason of an Approved Retirement shall be entitled to receive monthly payments equal to (1) reduced by (2), as follows: (1) The percentage of Average Final Compensation specified for the Executive, which shall be as provided herein and no higher than sixty percent (60%) reduced by (2) the Executive's Basic Retirement Benefits. The percentage stated in clause (1) may be specified by the Board or may be specified in the Executive's written employment contract with the Company. Unless otherwise determined by the Board, the percentage of Average Final Compensation specified in clause (1) shall be 20% plus 0.148% for each completed month (1.77% per completed year) of the Executive's full-time continuous employment with the Company, but in no event shall be higher than 60%. b. Special Rule. The benefit of an Executive under this Section D. who is a participant in the Plan as of August 28, 1996, shall not be less than his benefit calculated pursuant to Section F.1.a. of the Plan, without regard to any reduction required by Section D.3. of the Plan. c. Effect of Plan Termination. If the Plan is terminated with -------------------------- respect to any or all Executives, each affected Executive who later terminates employment by reason of an Approved Retirement shall be entitled to receive upon such Approved Retirement monthly payments equal to (1) the applicable percentage of Average Final Compensation under Section D.1.a. multiplied by his Pro Rata Percentage, reduced by (2) his Basic Retirement Benefits. For purposes of this section, his Pro Rata Percentage and Average Final Compensation shall be calculated by treating the date of Plan termination as the date that his employment with the Company terminates. d. Removal from Participation. If an Executive is removed from Plan -------------------------- participation, and later terminates employment by reason of an Approved Retirement, he shall be treated as if the Plan were terminated with respect to him as of the date of his removal, and his Page 2 benefits shall be determined under Section D.1.b. above except that his Basic Retirement benefits reduction will be determined as of the date of his Approved Retirement. e. Change in Percentage. -------------------- (1) If the percentage of Average Final Compensation specified in Section D.l.a. is reduced, the percentage applied to determine the Executive's benefit shall be determined by averaging over his period of participation in the Plan (and in the Executive Benefit Plan) the percentages that have been so specified. For example, if an Executive's percentage is reduced from 60% to 50%, and one-half of his Plan participation is at 60% and one-half at 50%, the percentage used to determine his benefits will be 55%. (See Appendix C.) In addition, the benefit payable under this Plan after a reduction in such percentage shall not be less than the benefit that would have been paid if the Plan had been terminated with respect to the Executive on the date of such reduction. (2) If the percentage of Average Final Compensation specified in Section D.l.a. is increased, such increased percentage shall apply for determining Plan benefits without averaging it with prior percentages, and all prior Plan participation shall be treated as having been participation under that increased percentage. f. Reduction for Basic Retirement Benefits. The reduction for the --------------------------------------- Executive's Basic Retirement Benefits shall be applied, unless otherwise provided herein, by calculating all benefits as if they were payable in the form of a straight life annuity beginning at the date of Approved Retirement, without survivor benefits. There is no requirement, however, that the benefits payable under this Plan and any other plan be paid in the same form or at the same time. 2. Time of Payment. The benefits provided on Approved Retirement shall --------------- commence on the first day of the month following the date of the Executive's Approved Retirement. 3. Early Retirement Benefit. If an Executive's Approved Retirement ------------------------ occurs before attaining age 62, he shall receive a reduced benefit commencing on the first day of the month following his Approved Retirement. This benefit shall be reduced beginning at age 62 at the same rate per year as that specified for Retirement before Social Security Normal Retirement age under the Retirement Plan. On Approved Retirement before age 62, the reduction for Basic Retirement Benefits shall be applied by calculating all benefits as if they were payable in the form of a straight life annuity at the date of Approved Retirement before age 62, without survivor benefits, to determine the net benefit payable under this Plan. See Appendix A for an example of this calculation. 4. No Election of Delayed Retirement Benefit. An Executive may not elect ----------------------------------------- to delay the beginning of his retirement benefits under the Plan after the time for commencement specified in Section D.2. or D.3., as applicable. Page 3 E. DEATH BENEFITS -------------- 1. Death After Approved Retirement. If an Executive dies after ------------------------------- Approved Retirement, benefits shall be paid after his death only in accordance with the Method of Payment determined under Section H. For example, if the Executive received a straight life annuity or a lump sum, no benefits shall be paid under this Plan after his death. 2. Death While Employed. -------------------- a. Benefits Payable to Beneficiary. If an Executive dies while he ------------------------------- is employed by the Company, his beneficiary shall receive the monthly benefit that would have been paid to such beneficiary if the Executive had terminated employment by reason of an Approved Retirement on the last day of the month before his death, had elected to receive his benefits in the actuarially reduced form of a joint and 100% survivor annuity with his beneficiary as the contingent annuitant, had begun to receive such benefits on the day prior to his death, and died immediately thereafter. Such payment shall be calculated by first determining the amount payable to the Executive under this Plan without reduction for Basic Retirement Benefits (applying any early Retirement Benefit reduction and applying the actuarial reduction for joint and 100% survivor annuity) and only thereafter making a reduction for Basic Retirement Benefits. The reduction for Basic Retirement Benefits in connection with the Retirement Plan in this case shall be in the amount payable, if any, under the Retirement Plan as a spouse allowance; if any spouse allowance is payable under the Retirement Plan on account of the Executive, this reduction shall be made even if the Executive's beneficiary under this Plan is not his surviving spouse. See Appendix B for an example of this calculation. b. Average Final Compensation. For purposes of the calculations -------------------------- under this Section E.2., the Executive's Average Final Compensation shall be based on the compensation he actually earned during his employment with the Company. c. No Designated Beneficiary. If an Executive dies before Approved ------------------------- Retirement without having designated a beneficiary, and was married on the date of his death, his surviving spouse shall be his beneficiary, unless otherwise provided by applicable community property or other laws or court order. If he dies before Approved Retirement, has no surviving spouse and has not designated a beneficiary, the present value of the benefits that would be paid to a surviving spouse of the same age as the Executive under a joint and 100% survivor annuity form (and under the method of calculation provided in Section E.2.a. and b.) shall be paid to the Executive's estate in two equal amounts in the 14 months following death. The present value of benefits shall be determined under factors established and uniformly applied by the Administrator. 3. Designation of Beneficiary. An executive may designate any -------------------------- natural person as his beneficiary, but may not designate more than one person, or any person that is not a natural Page 4 person, without the approval of the Administrator. Designation shall be made in writing and shall become effective only when filed with the Administrator. Such filing must occur before the Executive's death. An Executive may change his beneficiary, from time to time, by filing a new written designation with the Administrator. If the Executive is married, any Beneficiary designation which does not designate the Executive's spouse to receive at least one-half of the benefit payable on the Executive's death shall only become effective when approved in writing by the Executive's spouse. F. TERMINATION BEFORE APPROVED RETIREMENT -------------------------------------- 1. Basic Rule ---------- a. Termination Benefits. Subject to other applicable provisions in -------------------- this Plan, an Executive who terminates employment with the Company other than on Approved Retirement or death shall be entitled to receive, beginning at age 65, monthly payments equal to his Termination Benefits. An Executive's Termination Benefits are equal to 1) the applicable percentage of Average Final Compensation under Section D.1.a., multiplied by his Pro Rata Percentage and reduced by 2) his Basic Retirement Benefits at the later of age 65 or the date of actual termination. b. Plan Termination or Removal from Participation. An Executive who ---------------------------------------------- terminates employment with the Company other than on Approved Retirement or death and who has been removed from Plan participation ("removal") , or with respect to whom the Plan has terminated prior to his termination of employment ("termination") shall be entitled to receive, beginning at age 65, monthly payments determined under this Section F but treating his date of "removal" or "termination", whichever is applicable, as his date of termination of employment for purposes of calculating his Pro Rata Percentage and Average Final Compensation. c. Reduction for Subsequent Employer Benefits. Any amount payable ------------------------------------------ under Section F.1.a. or b. shall be reduced by any retirement benefit payable to the Executive or his beneficiary on account of service rendered to another employer after his termination of employment with the Company. 2. Limitations. No benefits shall be paid under this Section F to: ----------- a. Termination for Cause. An Executive who is terminated for cause. --------------------- If the Executive has a written employment agreement, "cause" shall be determined in accordance with that agreement. Otherwise, "cause" shall be determined by the Administrator. b. Violation of Employment Agreement. An Executive who terminates --------------------------------- his employment in violation of his written employment agreement (if any). Termination is in violation of an employment agreement if termination occurs before the end of the term of that contract and is not allowed by the agreement (e.g., for "good reason"). Page 5 c. No Vested Interest. An Executive who has no vested interest in ------------------ benefits under the Retirement Plan at the time of his termination of employment with the Company; provided, however, that this Section F.2.c. shall not apply to any Executive who is a participant in this Plan on September 29, 1993. An Executive who would have such a vested interest 1) if his employment was not terminated by the Company in violation of his employment agreement or 2) if his employment was not terminated for "good reason" under such agreement, shall be treated as having such a vested interest. 3. Pro Rata Percentage. An Executive's Pro Rata Percentage is the higher ------------------- of the following two percentages (but not greater than 100%). The first percentage is determined by dividing the number of the Executive's whole months of employment with the Company by the number of whole months from the date that the Executive was first hired by the Company to the date that he will reach age 65 and multiplying by 100. The second percentage is determined by multiplying 4.44% by the number of his whole and partial years of completed employment with the Company. 4. Rules of Application. -------------------- a. Periods of Employment. For purposes of determining employment --------------------- with the Company, periods that would be disregarded under the Retirement Plan on account of breaks in service shall be disregarded under this Section. b. Basic Retirement Benefits. For purposes of this Section, an ------------------------- Executive's Basic Retirement Benefits shall be determined at the time that he terminates employment with the Company, calculating all benefits as if they were payable in the form of a straight life annuity beginning at the later of age 65 or the date of actual termination of employment, without survivor benefits. c. Method of Payment. Benefits under this section shall be paid in ----------------- the form provided in Section H. d. Date Benefits Begin. Benefits payable under this Section shall ------------------- begin on the first day of the month following the date the Executive reaches age 65. e. Death Benefits. For purposes of this Section: -------------- (1) If an Executive dies after his benefits have begun, benefits payable thereafter, if any, shall be paid in accordance with the method of payment determined under Section H. (2) If an Executive who has terminated employment and is entitled to receive benefits under this Section F dies before his benefits begin, his beneficiary shall receive the monthly benefit payable under an actuarially reduced form of joint and 100% survivor annuity with his beneficiary as the contingent annuitant, payable beginning on the first day of the month after the Executive would have reached age 65. The principles of the second and third Page 6 sentences of Section E.2.a. and the principles of Section E.2.b. and of this Section shall apply for calculating these survivor benefits. (3) The principles of Section E.2.c. and of this Section shall apply if there is no surviving spouse and no designation of beneficiary. The rules of Section E.3. concerning designation of beneficiary shall apply. f. Change in Percentage. The principles of Section D.1.d. shall -------------------- apply to benefits calculated under this Section F. g. Example. An Executive whose specified percentage of Average ------- Final Compensation under Section D.1.a. is 60% who was hired at age 50, whose employment is terminated at age 60, and who otherwise qualifies for a benefit under this Section, will have a vested benefit beginning at age 65 of 2/3's of 60% or 40% of actual Average Final Compensation, less his Basic Retirement Benefits. 5. Other Agreement. If an Executive's written Employment Agreement --------------- with the Company provides higher benefits on termination of employment before Approved Retirement than provided under this Section F, such higher benefits shall be paid. 6. Forfeiture of Benefits. Except as provided in this Section, and as ---------------------- provided elsewhere in this Plan with respect to Approved Retirement or death of an Executive, an Executive or his beneficiaries shall not be entitled to any benefits under this Plan, all obligations of the Company to the Executive and his beneficiaries shall cease, and the Company shall have no further liability to the Executive or any other person under this Plan. G. SPECIAL FORFEITURE AND REPAYMENT RULES -------------------------------------- Any other provisions of this Plan to the contrary notwithstanding, if the Compensation Committee of the Board determines that an Executive has engaged in any of the actions described in 3. below, the consequences set forth in 1. and 2. below shall result. 1. Forfeiture of Benefits. To the extent that the benefit that otherwise ---------------------- would be payable under this Plan exceeds the benefit, if any, that would have been payable if the Executive's retirement had occurred on November 1, 1993, such excess portion shall be forfeited and shall not be payable at any time under this Plan. 2. Repayment. If the Executive received a payment under this Plan at any --------- time within six months prior to the date the Company discovered that the Executive engaged in any action described in 3. below, the Executive, upon written notice from the Company, shall repay to the Company in cash the excess portion of any such payment, such excess portion to be calculated in the manner described in 1. above. 3. The consequences described in 1. and 2. above shall apply if the Executive, either before or after termination of employment with the Company: Page 7 a. Accepts a position as a consultant to or an employee of a business enterprise that is in direct competition with any line of business engaged in by the Company at the time of the termination of the Executive's employment; b. Discloses to others, or takes or uses for his own purpose or the purpose of others, any trade secrets, confidential information, knowledge, data or know-how belonging to the Company and obtained by the Executive during the term of his employment, whether or not they are the Executive's work product. Examples of such confidential information or trade secrets include (but are not limited to) customer lists, supplier lists, pricing and cost data, computer programs, delivery routes, advertising plans, wage and salary data, financial information, research and development plans, processes, equipment, product information and all other types and categories of information as to which the Executive knows or has reason to know that the Company intends or expects secrecy to be maintained; c. Fails to promptly return all documents and other tangible items belonging to the Company in the Executive's possession or control, including all complete or partial copies, recordings, abstracts, notes or reproductions of any kind made from or about such documents or information contained therein, upon termination of employment, whether pursuant to an Approved Retirement or otherwise; d. Fails to provide the Company with at least thirty (30) days' written notice prior to directly or indirectly engaging in, becoming employed by, or rendering services, advice or assistance to any business in competition with the Company. As used herein, "business in competition" means any person, organization or enterprise which is engaged in or is about to become engaged in any line of business engaged in by the Company at the time of the termination of the Executive's employment with the Company; e. Fails to inform any new employer, before accepting employment, of the terms of this section and of the Executive's continuing obligation to maintain the confidentiality of the trade secrets and other confidential information belonging to the Company and obtained by the Executive during the term of his employment with the Company; f. Induces or attempts to induce, directly or indirectly, any of the Company's customers, employees, representatives or consultants to terminate, discontinue or cease working with or for the Company, or to breach any contract with the Company, in order to work with or for, or enter into a contract with, the Executive or any third party; or g. Engages in conduct which is not in good faith and which disrupts, damages, impairs or interferes with the business, reputation or employees of the Company. The Compensation Committee of the Board shall determine in its sole discretion whether the Executive has engaged in any of the acts set forth in (a) through (g) above, and its determination shall be conclusive and binding on all interested persons. Page 8 Any provision of this section which is determined by a court of competent jurisdiction to be invalid or unenforceable shall be construed or limited in a manner that is valid and enforceable and that comes closest to the business objectives intended by such invalid or unenforceable provision, without invalidating or rendering unenforceable the remaining provisions of this section. H. METHOD OF PAYMENT ----------------- 1. Normal Form. The Normal Form of Benefit under this Plan shall be a ----------- straight life annuity of monthly payments over the lifetime of the Executive, with payments ceasing on the first day of the month in which the Executive dies. 2. Joint and Survivor Annuity. If the Executive is married at the time -------------------------- benefits become payable, then, unless he has elected otherwise (as described below), his benefits shall be paid in the actuarially reduced form of a joint and 50% survivor annuity payable to him and his spouse. With the approval of the Administrator, the Executive may elect, in writing, not to receive this form of benefit, but any such election which provides a benefit for a beneficiary other than his spouse must be approved in writing by his spouse to be effective. Such election shall become effective when filed with the Administrator and must be filed before the Executive's termination of employment with the Company. 3. Lump Sum Distribution. An Executive whose employment terminates by --------------------- reason of an Approved Retirement on or after June 1, 1997, may elect to have the actuarial equivalent value of his benefits paid in the form of a lump sum distribution in cash, where actuarial equivalence is determined using (i) the interest rate prescribed by the Pension Benefit Guaranty Corporation for purposes of determining the present value of a lump sum distribution on plan termination for the month in which the Executive makes the lump sum distribution election and (ii) the mortality table in use under the Retirement Plan on the date the Executive makes the lump sum distribution election. An election of a lump sum form of distribution must be made at least twelve months prior to the Executive's Approved Retirement (except that an election made prior to January 1, 1997 shall be effective as to any Approved Retirement occurring during calendar year 1997) and shall be void and of no effect if either of the following occurs: (a) the Executive's employment with the Company does not terminate within 24 months after the date on which the Executive made the election of a lump sum form of distribution; or (b) the Executive makes a new election under this Section H.3. at least twelve months after the date of the Executive's previous election under this Section H.3. An Executive who is married at the time benefits become payable under this Section H.3. may not receive a lump sum form of distribution unless the Executive's spouse approves of the election in writing. An Executive may elect a lump sum form of distribution less than twelve months prior to his Approved Retirement, but in such event the amount of the lump sum distribution shall be reduced by ten percent. Page 9 4. Additional Forms of Benefits. With the approval of the Administrator, ---------------------------- the Executive may elect to receive his benefits in one of the actuarially equivalent benefit forms permitted under the Retirement Plan or such other form as may be approved by the Administrator. If the Executive is married, any such election must be approved in writing by his spouse to be effective, if it would provide the spouse with a benefit less than that provided under Section H.2. I. SOURCE OF PAYMENT ----------------- The benefits paid under this Plan shall be paid from the general funds of the Company, and the Executive and his beneficiaries shall be no more than unsecured general creditors of the Company with no special or prior right to any assets of the Company for payment of any obligations hereunder. Nothing contained in this Plan shall be deemed to create a trust of any kind for the benefit of the Executive or any beneficiary, or create any fiduciary relationship between the Company and the Executive or any beneficiary with respect to any assets of the Company. J. WITHHOLDING ----------- The Executive and any beneficiary shall make appropriate arrangements with the Company for the satisfaction of any federal, state or local income tax withholding requirements and social security or other employee tax requirements applicable to the payment of benefits under this Plan. If no other arrangements are made, the Company may provide, at its discretion, for such withholding and tax payments as may be required. K. ADMINISTRATION OF THE PLAN -------------------------- 1. In General. The Plan shall be administered by the Senior Vice ---------- President, Human Resources and Administration of the Company under the direction of the Compensation Committee of the Board. If the Senior Vice President, Human Resources and Administration, is an Executive participating in the Plan, then any discretionary action taken as Administrator which directly affects him as Executive shall be specifically approved by the Compensation Committee. The Compensation Committee shall have the ultimate responsibility to interpret the Plan and shall adopt such rules and regulations for carrying out the Plan as it may deem necessary or appropriate. Decisions of the Compensation Committee shall be final and binding on all parties who have an interest in the Plan. 2. Elections and Notices. All elections and notices made by an --------------------- Executive under this Plan shall be in writing and filed with the Administrator. 3. Action by Board of Directors. The Board may act under this Plan in ---------------------------- accordance with its normal procedures and practices, including but not limited to delegation of its authority to act under the Plan. 4. Plan Year. The Plan Year is the calendar year. --------- Page 10 L. AMENDMENT OR TERMINATION OF THE PLAN ------------------------------------ The Board may at any time amend, alter, modify or terminate the Plan. This Plan shall be treated as a plan covered by Section 301 of the Retirement Equity Act for purposes of amendment and termination. The Compensation Committee of the Board may amend this Plan to make technical and correcting changes and to make other changes that do not materially increase the cost of the Plan to the Company or materially change its design. M. NO ASSIGNMENT ------------- The benefits provided under this Plan may not be alienated, assigned, transferred, pledged or hypothecated by any person, at any time, or to any person whatsoever. These benefits shall be exempt from the claims of creditors or other claimants and from all orders, decrees, levies, garnishment or executions to the fullest extent allowed by law. N. DEFINITIONS ----------- For purposes of the Plan, the following terms shall have the meanings indicated: 1. "Administrator" shall mean the person specified in Section K. 2. "Approved Retirement" shall mean (i) any termination of employment with the Company after attainment of age 62; (ii) any involuntary termination of employment after both attainment of age 55 and completion of 15 years of service (as determined under the Retirement Plan); or (iii) any other termination of employment before (i) or (ii) above with the approval of the Board. Notwithstanding the foregoing, "Approved Retirement" shall not include any termination for cause, which shall be determined as provided in Section F.2.a. hereof. 3. "Average Final Compensation" shall mean: one-fifth of the sum of the base salary and annual bonuses under the Management Incentive Plan ("MIP") or any successor or replacement plans (including base salary and annual MIP bonuses or portions thereof voluntarily deferred under a cash or deferred plan or any other tax qualified or non-qualified salary deferral plan such as the Deferred Compensation Administration Plan or MIP bonuses relinquished in favor of a stock option grant under the 1994 Stock Option and Restricted Stock Plan) earned by an Executive for the 5 consecutive years of full-time continuous employment with the Company which (a) fall within the 15-year period ending on the first day of the month following his termination of service with the Company and (b) produce the highest such sum. If the Executive has had less than five years of full time continuous employment, Average Final Compensation shall be base salary and annual bonuses, including amounts voluntarily deferred or relinquished Page 11 as described in the previous sentence, for the entire period of such employment with the Company, divided by the number of whole and partial years of service. 4. "Basic Retirement Benefits" shall mean the monthly annuity benefit payable under the Retirement Plan and a hypothetical monthly annuity benefit payable to the Executive under the Profit-Sharing Investment Plan as follows: a. Benefits from the Executive's interest in the Retirement Plan shall be calculated on a straight life annuity basis payable (i) to the Executive in the event of normal retirement, retirement after age 65, early retirement, or termination allowance as defined in the Retirement Plan, or (ii) as a spouse allowance in the event of the Executive's death before Approved Retirement (Section E.2.) or before benefits begin (Section F.4.e.). b. The hypothetical annuity benefit payable under the Profit-Sharing Investment Plan shall be calculated by first determining the value of each share credited to the Executive's Retirement Share Plan account under that Plan as of the date it was credited and applying an annual rate of twelve percent to such value from the date such share was credited to such account to the date the Executive's benefit under this Plan is to commence. The aggregate value of all of the shares credited to the Executive's Retirement Share Plan account so determined shall then be converted to a straight life annuity using the factors for determining actuarial equivalence set forth in Section H.3. 5. "Board" shall mean the Board of Directors of McKesson HBOC, Inc., a Delaware corporation. 6. "Company" shall mean McKesson HBOC, Inc., a Delaware Corporation, and any member of its controlled group as defined by Section 414(b) and 414(c) of the Internal Revenue Code of 1986, as amended. 7. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. 8. "Executive" shall mean an employee of the Company selected to participate in this Plan. 9. "Normal Form of Benefit" is that form described in Section G.l. 10. The "Pro Rata Percentage" is defined in Section F.3. 11. "Retirement Plan" shall mean the McKesson HBOC, Inc. Retirement Plan. 12. "Profit-Sharing Investment Plan" shall mean the McKesson HBOC, Inc. Profit-Sharing Investment Plan. 13. "Termination Benefits" is defined in Section F.l.a. Page 12 O. MISCELLANEOUS ------------- 1. Fiduciary Insurance. The Company may purchase insurance for its ------------------- directors, officers, employees and agents to cover potential liability arising from their acts and omissions concerning this Plan. 2. Applicable Law; Severability. The Plan hereby created shall be ---------------------------- construed, administered, and governed in all respects in accordance with ERISA and the laws of the State of California to the extent the latter are not preempted by ERISA. If any provision of this instrument shall be held by a court of competent jurisdiction to be invalid or unenforceable, the remaining provisions hereof shall continue to be fully effective. 3. No Right to Continued Employment. Each executive selected to -------------------------------- participate in the Plan is deemed by the Company to be a bona fide executive or in a high policy making position for purposes of the Age Discrimination in Employment Act and state laws of similar effect. Accordingly, the terms of the Plan shall not confer any legal rights upon any Executive to continued employment or employment past age 65, nor shall the Plan interfere with the rights of the Company to discharge any Executive or to treat him without regard to the effect which that treatment might have upon him as a participant in the Plan. Executed effective as of January 27, 1999. McKESSON HBOC, INC. By ______________________________________ E. Christine Rumsey Senior Vice President, Human Resources and Administration Page 13 McKESSON HBOC, INC. 1984 EXECUTIVE BENEFIT RETIREMENT PLAN APPENDIX A ---------- SAMPLE CALCULATION EARLY RETIREMENT ---------------- Executive retires at age 59, 3 years early Final Average Compensation: $250,000 Percentage of Average Final Compensation specified under the Plan: 60% Income Objective (60% x $250,000) $150,000 LESS: Early Retirement Reduction (0.003 per month x 36 months = 10.8%) (16,200) Adjusted Objective 133,800 LESS: Single Life Retirement Plan Benefit and annuitized value of Retirement Share Plan (38,000) -------- Annual Single Life EBRP Benefit $ 95,800 NOTE: Retirement Plan benefits are governed by the terms of that Plan, and incorporate the appropriate reduction for early retirement. As intended, the 1984 EBRP provides a retirement income that, when added to income from the Retirement Plan, provides the executive with retirement income equal to the adjusted objective. Page 14 McKESSON HBOC, INC. 1984 EXECUTIVE BENEFIT RETIREMENT PLAN APPENDIX B ---------- SAMPLE CALCULATION SURVIVOR BENEFIT ---------------- Death age 57 Final Average Compensation: $175,000 Percentage of Average Final Compensation specified under the Plan: 60% Income Objective (60% x $175,000) $105,000 LESS: Early Retirement Reduction (0.003 per month x 60 months = 18%) (18,900) -------- Subtotal $ 86,100 Application of 100% J&S Factor 80% -------- Adjusted Objective $ 68,880 LESS: Retirement Plan Spouse Allowance and annuitized value of Retirement Share Plan (25,000) -------- Annual EBRP Survivor Benefit $ 43,880 NOTE: As intended, the 1984 EBRP Survivor Benefit provides a supplement to the Retirement Plan so that the total of these two sources of Company provided benefits equals the survivor's adjusted income objective. This method would apply even if the Retirement Plan Spouse Allowance were paid to a minor child, and the 1984 EBRP benefit were paid to the spouse. Page 15 McKESSON HBOC, INC. 1984 EXECUTIVE BENEFIT RETIREMENT PLAN APPENDIX C ---------- EFFECTS OF AMENDING PLAN TO ELIMINATE REDUCTION FOR PROFIT-SHARING INVESTMENT PLAN BENEFITS AND TO REDUCE THE MAXIMUM AVERAGE COMPENSATION PERCENTAGE TO 60% 1. Amendment Not Treated as Reduction or Increase of Percent of Average Final Compensation The amendment to the Plan as of December 2, 1987 to eliminate the reduction for benefits from the Profit-Sharing Investment Plan and to reduce the maximum Average Final Compensation percentage to 60% from 65% is not treated as a reduction or increase of the percentage of Average Final Compensation under Section D.1.d. of the Plan. This is the case because the change in the percentage is coupled with the reduction in the offset and is intended to provide a better overall benefit to Plan participants. 2. Maintenance of Existing Benefits The amendment to the Plan of December 2, 1987 shall not operate to reduce the benefit accrued as of that date by any person who is a Plan participant. Therefore, any Executive who participated in the Plan on December 2, 1987 and who otherwise is or becomes entitled to benefits under the Plan shall receive the higher of: 1) the benefits which he had earned and to which he is entitled under the Plan calculated on December 2, 1987 immediately before the Plan was amended and taking into account the value of his vested benefit as of that date under the Profit-Sharing Investment Plan, and 2) the benefits to which he is entitled under the Plan as amended. For example: Assume that Appendix A shows the benefits to which an Executive - ----------- who participates in the Plan on December 2, 1987 is entitled immediately after the Plan's amendment (an Annual Single Life EBRP benefit of $95,800). Under the Plan on December 2, 1987, before amendment his benefits would be calculated as follows: Executive retires at age 62, 3 years early Final Average Compensation: $ 250,000 Percentage of Average Final Compensation specified under the Plan: 65% Page 16 Income Objective (65% x $250,000) $ 162,500 LESS: Early Retirement Reduction (0.003 per month x 36 months = 10.8%) (17,550) --------- Adjusted Objective 144,950 LESS: Single Life Retirement Plan Benefit (38,000) --------- Single Life Annuity from Company contributed funds in PSIP ( 45,000) --------- Annual Single Life EBRP Benefit $ 61,950 For this individual, the EBRP benefit from the Plan immediately after the Plan amendment is higher than the benefit provided before amendment. Since he is entitled to the higher of the two, his benefit under the Plan would be $95,800. Page 17 EX-10.15 17 1998 EXECUTIVE SURVIVOR BENEFITS PLAN EXHIBIT 10.15 MCKESSON HBOC, INC. 1988 EXECUTIVE SURVIVOR BENEFITS PLAN ------------------------------------- Amended as of January 27, 1999 A. PURPOSE ------- This Plan amends, restates and supersedes the 1988 Executive Survivor Benefits Plan in its entirety effective as of March 2, 1988. This Plan is established to enable the Company to attract and retain key executive personnel by providing survivor benefits to Executives' Beneficiaries. B. ERISA PLAN ---------- This Plan is covered by Title I of ERISA as a welfare benefit plan. C. PARTICIPATION ------------- 1. Selection by Board. The Board may select, at its discretion and from ------------------ time to time as it decides, the key Executives who participate in this Plan. Participation in the Plan shall be limited to those Executives of the Company who are selected by the Board. Selection of a key Executive to participate in the Plan may be evidenced by the terms of his Employment Agreement, if any, with the Company. 2. Election Not to Participate. An Executive may elect not to --------------------------- participate in this Plan at any time; such election shall be in writing and shall become effective upon its receipt by the Administrator. No compensation or benefits in lieu of this Plan shall be paid to an Executive who elects not to participate, unless otherwise specifically approved by the Board. An election not to participate shall be irrevocable unless otherwise determined by the Board. 3. Insurability. Executives selected by the Board are not automatically ------------ entitled to the benefits provided under this Plan. Each Executive may be required to satisfy such requirements for insurability as the Company shall establish from time to time, if any, before he is entitled to benefits under this Plan. 4. Addition and Removal of Participants. The Board may, at its ------------------------------------ discretion and at any time, designate additional Executives to participate in the Plan and remove Executives from participation in the Plan. When an Executive is removed from participation in the Plan by the Board, his benefits, if any, shall be determined under Section E. 5. Notification of Participants. The Administrator shall annually notify ---------------------------- each Executive that he is a participant in the Plan and shall notify each Executive of the amount of his benefits under the Plan. Page 1 6. Relation to Other Plans. If an Executive participates in this Plan, ----------------------- he shall not participate in any other survivor benefit or life insurance plan or similar program solely for Company Executives unless otherwise specifically approved by the Administrator in writing. For example, any Executive who participates in this Plan shall not receive any life insurance benefits under the McKesson HBOC, Inc. 1984 Executive Insurance Plan, or its predecessor, the McKesson Executive Benefit Plan. This provision shall not preclude the Executive's participation in (i) any Company retirement plan, compensation plan, including but not limited to the Executive Benefit Retirement Plan, the Deferred Compensation Administration Plan and the 1985 Executives Elective Deferred Compensation Plan, or (ii) any group life insurance or survivor benefit plan, made generally available by the Company to all employees. This provision shall not preclude the payment of survivor benefits which are earned and payable under any Company retirement plan such as the plans listed in (i) above. D. SURVIVOR BENEFITS ----------------- 1. Death of Executive While Employed. In the event of the death of an --------------------------------- Executive while employed by the Company and except as provided in Sections D.3. and D.4. below, Company shall pay Executive's Beneficiary as soon as practicable thereafter a lump sum equal to: (i) the lesser of (a) three times the annual base salary of the Executive, or (b) $2,000,000; multiplied by (ii) the Tax Factor. The application of this Section D.1. is illustrated in Appendix I to this Plan. 2. Death of Executive After Approved Retirement. In the event of the -------------------------------------------- death of an Executive after his Approved Retirement and except as provided in Sections D.3. and D.4. below, Company shall pay Executive's Beneficiary as soon as practicable thereafter a lump sum equal to the lesser of (a) the amount of the proceeds from the life insurance policy or policies owned by the Company on the life of the Executive, and (b) (i) $500,000 for an Executive who retires on or before January 1, 1997, or (ii) $1,000,000 for an Executive who retires after January 1, 1997. 3. Limitations on Benefits. No survivor benefits shall be paid under ----------------------- this Section D. in the following circumstances: a. The Administrator shall determine in his discretion that Executive has provided false or misleading information regarding Executive's health or medical history that materially adversely affects the Company, or b. The Administrator shall determine in his discretion that Executive has committed suicide. For purposes of this Section D.3., the Administrator in his discretion may waive in writing the foregoing limitations in whole or in part, and all determinations by the Administrator shall be final. Page 2 4. Executives Removed from Participation, Etc. Except as otherwise ------------------------------------------- approved by the Administrator in writing and at his sole discretion, no survivor benefits shall be paid under this Section D. to any Beneficiary of an Executive (i) who has elected not to participate under Section C.2. or (ii) who has been removed from Plan participation prior to his death, or (iii) subject to Section L. below, with respect to whom the Plan has been terminated prior to his death. E. TERMINATION OF EMPLOYMENT OTHER ------------------------------- THAN ON APPROVED RETIREMENT OR DEATH ------------------------------------ 1. Basic Rule. ---------- a. In the event of the death of an Executive after his termination of employment with the Company other than on Approved Retirement and except as provided in Section E.2. below, the Company shall pay Executive's Beneficiary a lump sum equal to (i) an amount calculated using the formula in Section D.2. above, subject to the limitations of Section D.3. above, (ii) multiplied by the Executive's Pro Rata Percentage, and (iii) reduced by the amount provided in Section E.1.c. below. Except as otherwise approved by the Administrator in writing and at his sole discretion, final annual base salary shall be determined as of the date of the Executive's termination of employment, for purposes of this Section E.1.a. The application of this Section E.1.a. is illustrated in Appendix II to the Plan. b. In the event of the death of an Executive after the Executive has been removed from Plan participation in accordance with Section C.4. ("removal") or with respect to whom the Plan has been terminated in accordance with Section L. ("Plan termination") prior to his termination of employment, and except as provided in Section E.2. below, the Company shall pay Executive's Beneficiary a sum equal to the amount calculated as provided in Section E.1.a. above, but treating the Executive's date of "removal" or the date of the "Plan termination", whichever is applicable, as his date of termination of employment for purposes of calculating his Pro Rata Percentage and his final annual base salary. c. Any amount determined under Section E.1.a. or b. shall be reduced by any death or survivor benefit (other than a retirement benefit paid under a tax qualified retirement plan) payable on account of service rendered by the Executive to another employer after his termination of employment with the Company. 2. Limitations on Benefits. No benefits shall be paid under Section E. ----------------------- in the following circumstances: a. The Executive is terminated for cause; if the Executive has an Employment Agreement, "cause" shall be determined in accordance with the Employment Agreement, otherwise, "cause" shall be determined by the Administrator, b. The Executive has terminated his employment in violation of his Employment Agreement, if any; termination is in violation of an Employment Agreement if Page 3 termination occurs before the end of the term of the Employment Agreement and is not allowed by the Employment Agreement (e.g., for "good reason"), or c. The Executive has not completed five or more years of participation (whether or not consecutive) in this Plan and its predecessors, the McKesson Corporation 1984 Executive Benefit Plan and the McKesson Corporation 1984 Management Benefit Plan; an Executive who would have completed five or more years (i) if his employment was not terminated by the Company in violation of his employment agreement or (ii) if his employment was not terminated for "good reason" under such Agreement, shall be treated as having such years o(Pounds) participation. 3. Pro Rata Percentage. An Executive's Pro Rata Percentage is the higher ------------------- of the following two percentages (but not exceeding 100%): the first percentage is determined by dividing the number of the Executive's whole months of employment with the Company by the number of whole months from the date that the Executive was first hired by the Company to the date that he will reach age 65, and multiplied by 100. The second percentage is determined by multiplying 4.44% by the number of his whole and partial years of completed employment with the Company. 4. Rules of Application. -------------------- a. Periods of Employment. For purposes of determining employment --------------------- with the Company, periods that would be disregarded under the Retirement Plan on account of breaks in service shall be disregarded under this Section E. 5. Other Agreements. If an Executive's Employment Agreement provides for ---------------- higher survivor benefits than provided under this Section E., such higher benefit shall be paid. 6. Forfeiture on Other Terminations. Except as provided in this Section -------------------------------- E., and as provided elsewhere in this Plan with respect to the death of an Executive, on the death of the Executive, an Executive or his Beneficiary shall not be entitled to any benefits under this Plan, all obligations of the Company to the Executive and his Beneficiary under this Plan shall cease, and the Company shall have no further liability to the Executive or any other person under this Plan. F. SPECIAL FORFEITURE RULES ------------------------ Any other provisions of this Plan to the contrary notwithstanding, if the Compensation Committee of the Board determines that any Executive engaged in any of the actions described in 2. below, the consequence set forth in 1. below shall result. 1. Forfeiture of Benefits. To the extent that the benefit that otherwise ---------------------- would be payable under the Plan upon the death of the Executive exceeds the benefit, if any, that would have been payable if the Executive had died on November 1, 1993, such excess portion shall be forfeited and shall not be payable under this Plan. In no event shall the amount payable under Page 4 the Plan with respect to any Executive who is a participant in the Plan on October 27, 1993 be less than the amount, if any, determined pursuant to Section L. 2. Events Resulting in Forfeiture. The consequence described in 1. above ------------------------------ shall apply if the Executive, either before or after termination of employment with the Company: a. Accepts a position as a consultant to or an employee of a business enterprise that is in direct competition with any line of business engaged in by the Company at the time of the termination of the Executive's employment. b. Discloses to others, or takes or uses for his own purpose or the purpose of others, any trade secrets, confidential information, knowledge, data or know-how belonging to the Company and obtained by the Executive during the term of his employment, whether or not they are the Executive's work product. Examples of such confidential information or trade secrets include (but are not limited to) customer lists, supplier lists, pricing and cost data, computer programs, delivery routes, advertising plans, wage and salary data, financial information, research and development plans, processes, equipment, product information and all other types and categories of information as to which the Executive knows or has reason to know that the Company intends or expects secrecy to be maintained; c. Fails to promptly return all documents and other tangible items belonging to the Company in the Executive's possession or control, including all complete or partial copies, recordings, abstracts, notes or reproductions of any kind made from or about such documents or information contained therein, upon termination of employment, whether pursuant to an Approved Retirement or otherwise; d. Fails to provide the Company with at least thirty (30) days' written notice prior to directly or indirectly engaging in, becoming employed by, or rendering services, advice or assistance to any business in competition with the Company or any of its subsidiaries. As used herein, "business in competition" means any person, organization or enterprise which is engaged in or is about to become engaged in any line of business engaged in by the Company at the time of the termination of the Executive's employment with the Company; e. Fails to inform any new employer, before accepting employment, of the terms of this section and of the Executive's continuing obligation to maintain the confidentiality of the trade secrets and other confidential information belonging to the Company and obtained by the Executive during the term of his employment with the Company; f. Induces or attempts to induce, directly or indirectly, any of the Company's customers, employees, representatives or consultants to terminate, discontinue or cease working with or for the Company, or to breach any contract with the Company, in order to work with or for, or enter into a contract with, the Executive or any third party; or g. Engages in conduct which is not in good faith and which disrupts, damages, impairs or interferes with the business, reputation or employees of the Company. Page 5 The Compensation Committee of the Board shall determine in its sole discretion whether the Executive has engaged in any of the acts set forth in (a.) through (g.) above, and its determination shall be conclusive and binding on all interested persons. Any provision of this section which is determined by a court of competent jurisdiction to be invalid or unenforceable shall be construed or limited in a manner that is valid and enforceable and that comes closest to the business objectives intended by such invalid or unenforceable provision, without invalidating or rendering unenforceable the remaining provisions of this section. G. WITHHOLDING ----------- The Executive or any Beneficiary shall make appropriate arrangements with the Company for the satisfaction o(Pounds) any federal, state or local income tax withholding requirements and social security or other employee tax requirements applicable to the provision of benefits under this Plan. If no such arrangements are made, the Company may provide, at its discretion, for such withholding and tax payments as may be required. H. ADMINISTRATION OF THE PLAN -------------------------- 1. In General. The Plan shall be administered by the Senior Vice ---------- President, Human Resources and Administration of the Company under the direction of the Compensation Committee of the Board. If the Senior Vice President, Human Resources and Administration is an Executive participating in the Plan, then any discretionary action he takes as Administrator which directly affects him as Executive shall be specifically approved by the Compensation Committee. The Compensation Committee shall have the ultimate responsibility to interpret the Plan and shall adopt such rules and regulations for carrying out the Plan as it may deem necessary or appropriate. Decisions of the Compensation Committee shall be final and binding on all parties who have an interest in the Plan. 2. Elections and Notices. All elections and notices made by an Executive --------------------- under this Plan shall be in writing and filed with the Administrator. 3. Action By Board of Directors. The Board may act under this Plan in ---------------------------- accordance with its normal procedures and practice, including, but not limited to, delegation of its authority to select key Executives to participate in this plan. I. BENEFICIARY DESIGNATIONS ------------------------ Each Executive may designate one or more Beneficiaries and contingent Beneficiaries entitled to the survivor benefits under this Plan in a signed writing delivered to the Administrator. An Executive may designate different Beneficiaries at any time by delivering a new designation in like manner. Any designation shall become effective only upon its receipt by the Administrator, and the last effective designation received by the Administrator shall revoke Page 6 and supersede all prior designations. If an Executive dies without having effectively designated a Beneficiary, or if no designated Beneficiary survives the Executive, the survivor benefit provided under this Plan shall be paid to the Executive's surviving spouse or, if the Executive is not survived by his or her spouse, such survivor benefit shall be paid to the following first named persons who survive him or her: 1. the Executive's descendants in equal shares and the descendants of any deceased descendants by right of representation; 2. the Executive's parents, in equal shares; 3. the Executive's siblings in equal shares and the descendants of any deceased siblings by right of representation; or 4. the executors and/or administrators of the Executive's estate. J. SOURCE OF PAYMENT ----------------- Amounts paid under Section D.2. of this Plan shall be paid from insurance policy proceeds on the life of the Executive. Amounts paid under Section D.1. may be paid from insurance policy proceeds on the life of the Executive or from the general funds of the Company, and each Executive and his or her Beneficiary shall be no more than an unsecured general creditor of the Company with no special or prior right to any assets of the Company for payment of any obligations hereunder. Nothing contained in this Plan shall be deemed to create a trust of any kind for the benefit of any Executive or Beneficiary, or create any fiduciary relationship between the Company and any Executive or Beneficiary with respect to any assets of the Company. K. ASSIGNABILITY OF BENEFITS ------------------------- The benefits provided under this Plan and a Beneficiary's rights may not be alienated, assigned, transferred, pledged, or hypothecated by any person, at any time, unless such benefits are payable from the proceeds of an insurance policy. Such benefits shall be exempt from the claims of creditors or other claimants and from all orders, decrees, levies, garnishments, or executions to the fullest extent allowed by law. L. AMENDMENT OR TERMINATION OF THE PLAN ------------------------------------ The Board may at any time amend, alter, modify or terminate the Plan. Such action shall not reduce the benefits provided under this Plan with respect to any Executive whose employment has terminated before such action. Also, such action shall not reduce the benefits provided under this Plan with respect to any Executive who is participating in the Plan at the time of such action below the amount provided in Section E., treating for purposes of Section E. the amendment, alteration, modification, or termination which adversely affects the Executive as Page 7 though it were a termination of employment. An illustration of the calculation of benefits in the event of termination of the Plan under this Section L. is attached as Appendix III. M. DEFINITIONS ----------- For the purposes of the Plan, the following terms shall have the meanings indicated: 1. "Administrator" shall mean the person specified in Section H. 2. "Approved Retirement" shall mean any termination of employment with the Company after attainment of age 65 or any retirement before age 65 with the approval of the Board. 3. "Beneficiary" shall mean the beneficiary or beneficiaries entitled to death benefits under this Plan, as designated by Executive or otherwise provided in Section I. 4. "Board" shall mean the Board of Directors of McKesson HBOC, Inc., a Delaware corporation. 5. "Company" shall mean McKesson HBOC, Inc., a Delaware corporation, and any member of its controlled group as defined by Sections 414(b) and 414(c) of the Internal Revenue Code of 1986. 6. "Employment Agreement" shall mean the written contract of employment, if any, between an Executive and the Company. 7. "Executive" shall mean an employee of the Company selected by the Board to participate in this Plan pursuant to Section C. 8. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. 9. "Pro Rata Percentage" shall mean the percentage determined in Section E.3. 10. "Retirement Plan" shall mean the McKesson HBOC, Inc. Retirement Plan. 11. "Tax Factor" shall mean one divided by one minus the Top Marginal Rate of Tax. 12. "Top Marginal Rate of Tax" shall be the highest combined marginal individual federal and state income tax rate, if any, (giving effect to any deduction then allowable for federal tax purposes for the state income tax) for the year survivor benefits are paid to Executive's Beneficiary under this Plan. For example, if the highest marginal individual federal and state income tax rates are 28% and 10% respectively and the state income tax is deductible for federal tax purposes, the Top Marginal Rate would be 35.2% as follows: [($1.00 x 10% = Page 8 $.10 state income tax)] + [($.90 federal taxable income of $1.00 - $.10 state income tax) x 28% = $.252 federal income tax] = $.352 total state and federal tax, or 35.2%. For purposes of determining the Top Marginal Rate of Tax, the Administrator in his discretion shall determine the highest marginal individual federal and state income tax rates to be used (including without limitation whether, and if so to what extent, surtaxes or similar taxes shall be applicable, and what state income tax, if any, shall be applicable), and all such determinations and all calculations made by the Administrator hereunder shall be final. N. MISCELLANEOUS ------------- 1. Fiduciary Insurance. The Company may purchase insurance for its ------------------- directors, officers, employees and agents to cover potential liability arising from their acts and omissions concerning this Plan. 2. Applicable Law; Severability. The Plan hereby created shall be ---------------------------- construed, administered and governed in all respects in accordance with ERISA and the laws of the State of California to the extent the latter are not preempted by ERISA. If any provision of this instrument shall be held by a court of competent jurisdiction to be invalid or unenforceable, the remaining provisions hereof shall continue to be fully effective. Executed effective as of January 27, 1999. McKESSON HBOC, INC. By ______________________________________ E. Christine Rumsey Senior Vice President, Human Resources and Administration Page 9 MCKESSON HBOC, INC. 1988 EXECUTIVE SURVIVOR BENEFITS PLAN ------------------------------------- Appendix I ---------- This Appendix illustrates the calculation of benefits under Section D.1. of the Plan. A. Assumptions ----------- Executive is subject to California Income Tax. Executive's annual base salary:$350,000 Top Marginal Rate of Tax: Top Federal Rate:28.0% Top California Rate:10.0% "Top Marginal Rate of Tax": .10 + [(1.0 - .10) x .28]35.2% "Tax Factor": 1/(1 - .352)1.543 B. Survivor Benefit on Death Before Approved Retirement ---------------------------------------------------- Lesser of (a) $1,000,000 or (b) (3 x $350,000) multiplied by Tax Factor equals $1,000,000 x 1.543, which yields a benefit of: $1,543,000 ========== Page 10 MCKESSON HBOC, INC. 1988 EXECUTIVE SURVIVOR BENEFITS PLAN ------------------------------------- Appendix II ----------- This Appendix illustrates the calculation of benefits under Section E.1.a. of the Plan. An Executive is hired at age 50, his employment is terminated at age 60, and he otherwise qualifies for a benefit under Section E. On the death of this Executive, a benefit will be paid to his Beneficiary equal to the Pro Rata Percentage (see calculation below) times 1-1/2 times the Executive's final annual base compensation at the date of his termination of employment (or $500,000, if smaller) multiplied by the Tax Factor, and reduced by any death or survivor benefit payable to a beneficiary of the Executive on account of service rendered to another employer as provided in Section E.1.c. If the above Executive's annual base compensation was $300,000 at the date of his termination of employment and the Tax Factor at the date the benefit is paid is 1.543, the benefit payable to his Beneficiary would be $462,900, calculated as follows: The Executive's Pro Rata Percentage is 66-2/3%, calculated as follows: The greater of (a) number of whole months of employment divided by total whole months from date of hire to age 65, or (b) 4.44% times whole and partial years of completed employment, or 120 months - 180 months = 66- -- 2/3%, which is greater than 4.44% x 10 years = 44.4%. The Executive's benefit is: Pro Rata Percentage x [1-1/2 of final base compensation (1-1/2 x $300,000 = $450,000) or $500,000, if smaller] x Tax Factor 66-2/3% x $450,000 x 1.543 = $462,900. -------- Page 11 MCKESSON HBOC, INC. 1988 EXECUTIVE SURVIVOR BENEFITS PLAN ------------------------------------- Appendix III ------------ This Appendix illustrates the calculation of benefits in the event of termination of the Plan under Section L. A. Assumptions ----------- Executive's age at date of hire:40 Executive's age at date of termination of this plan:55 Executive's annual base salary at date of termination of this plan:$300,000 Executive's "Tax Factor" for the year benefits are paid (see Section L.11 and Appendix I)1.543 B. Survivor Benefits Under Section L --------------------------------- Under Section L., benefits are determined under Section E. by treating the date the plan is terminated as the date the Executive terminated employment, as follows: Pro Rata Percentage:66-2/3% --------------------------- Greater of (a) whole months of service divided by total whole months from hire to age 65 or (b) 4.44% times whole and partial years of service, a greater of 60% (180 - 300 = 60%) or 66-2/3% (4.44 x 15 years of service) Benefit:$452,900 ---------------- 66-2/3% times (1-1/2 of $300,000, or $500,000 if smaller) times "Tax Factor" (1.543) (66% x $450,000) x 1.543 = $300,000 x 1.543 = $462,900 ======== Page 12 EX-10.16 18 EXECUTIVE MEDICAL PLAN SUMMARY EXHIBIT 10.16 MCKESSON HBOC, INC. Executive Medical Plan Summary The Executive Health Plan is a benefit for senior executives which provides medical and dental insurance coverage with no deductible. There is no exclusion for pre-existing conditions. The Plan pays 100% of eligible expenses. Eligible expenses are those which would otherwise be deductible for Federal Income Tax purposes. The Plan is available to eligible executives and dependents during the executive's employment and ends upon his/her retirement, termination of employment, or removal from participation in the Plan. An eligible dependent is one who qualifies as a legal dependent under Internal Revenue Service regulations. The Plan also includes a prescription drug benefit which currently reimburses 100% of the cost of covered prescription drugs. EX-10.17 19 SEVERANCE POLICY FOR EXECUTIVE EMPLOYEES EXHIBIT 10.17 McKESSON HBOC, INC. SEVERANCE POLICY FOR EXECUTIVE EMPLOYEES (Amended and Restated as of January 27, 1999) 1. ADOPTION AND PURPOSE OF POLICY. The McKesson HBOC, Inc. Severance Policy for Executive Employees (the "Policy") was adopted effective September 29, 1993 by McKesson HBOC, Inc., a Delaware corporation (the "Company"), to provide a program of severance payments to certain employees of the Company and its designated subsidiaries. The Policy is an employee welfare benefit plan within the meaning of Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") and Section 2510.3-1 of the regulations issued thereunder. The plan administrator of the Policy for purposes of ERISA is the Company. 2. DEFINITIONS. Whenever used and capitalized in the text of the Policy, the following terms shall have the meaning set forth below: (a) "Cause" means: i) The continuing willful failure of the Participant to perform the Participant's prescribed duties to the Company (other than any such failure resulting from the Participant's incapacity due to physical or mental illness) after written notice thereof (specifying the particulars thereof in reasonable detail) and a reasonable opportunity to be heard and cure such failure are given to the Participant by the Board of Directors or a committee thereof; or ii) The willful commission by the Participant of a wrongful act that caused or was reasonably likely to cause substantial damage to the Company, or an act of gross negligence, fraud, unfair competition, dishonesty or misrepresentation in the performance of the Participant's duties on behalf of the Company; or iii) The conviction of the Participant for commission of a felony. (b) "Change of Control" shall have the meaning set forth in the Company's standard form of termination agreement for executive employees. (c) "Earnings" means a Participant's monthly base salary. (d) "Participant" means a Principal Officer whose employment is terminated under circumstances that render him or her eligible for the benefits described in Section 3 of the Policy. Page 1 (e) "Principal Officers" means those persons who have been designated as executive officers of the Company for purposes of Section 16 of the Securities Exchange Act of 1934 by resolution adopted by its Board of Directors. (f) "Year of Service" shall have the meaning set forth in Section (1) of Article II of the McKesson HBOC, Inc. Retirement Plan. 3. SEVERANCE BENEFITS. (a) Basic Severance Benefits. In the event that the Company terminates the employment of a Principal Officer for any reason other than Cause at any time other than within two years following a Change of Control, that Principal Officer shall be entitled to a severance payment equal to the lesser of (A) 12 months' Earnings plus one additional month for each Year of Service or (B) 24 months' Earnings. In no event shall the number of months' Earnings a Participant is entitled to receive hereunder exceed the number of months remaining between the Participant's termination date and the date he or she will attain age 62 (rounded to the next higher whole month). (b) Mitigation of Damages. The amount of a Participant's benefits calculated under (a) above shall be reduced by the amount of compensation, if any, the Participant receives from any subsequent employer(s) for work performed during a period of time following his or her termination of employment equal to the number of months of Earnings the Participant is entitled to receive. (c) Effect on Other Plans. Nothing in this Policy shall alter or impair any rights a Participant may have upon termination of employment under any other plan or program of the Company, except as follows: i) If a Participant is at least age 55 with 15 or more Years of Service at the time of his or her termination under this Section 3, he or she will automatically be granted "Approved Retirement" for purposes of the 1984 Executive Benefit Retirement Plan and the 1988 Executive Survivor Benefits Plan. ii) A Participant who is terminated pursuant to this Section 3 shall receive pro rata Long-Term Incentive Plan awards for all cycles in progress as of his or her termination date. Such payments shall be based on actual Company performance for the relevant award cycle, and awards shall be paid at such time and in such manner as are paid to other participants under such Plan. (d) No Duplication of Benefits. In no event shall a Participant be entitled to any benefits under this Policy if his or her employment with the Company terminates under circumstances that entitle the Participant to receive severance benefits following a Change of Control of the Company. Page 2 4. FORM OF BENEFIT. The benefit described in Section 3(a) shall be paid in a lump sum or in monthly installments over a period commencing on the date of the Participant's termination of employment not to exceed the number of months determined under said Section. 5. EFFECT OF DEATH OF EMPLOYEE. Should a Participant die after employment terminates but while participating in the Policy and prior to the payment of the entire benefit due hereunder, the balance of the benefit payable under the Policy shall be paid in a lump sum to the Participant's surviving spouse, or, if none, to his or her surviving children or, if none, to his or her estate. 6. AMENDMENT AND TERMINATION. The Company reserves the right to amend or terminate the Policy at any time and to increase or decrease the amount of any benefit provided under the Policy by action of the Compensation Committee of its Board of Directors; provided, however, that no such action shall have the effect of decreasing the benefit of a Participant whose employment with the Company terminated prior to the date of the Compensation Committee's action. 7. ADMINISTRATION AND FIDUCIARIES. (a) Plan Sponsor and Administrator. The Company is the "plan sponsor" and the "administrator" of the Policy, within the meaning of ERISA. (b) Administrative Responsibilities. The Company shall be the named fiduciary with the power and sole discretion to determine who is eligible for benefits under the Policy, to interpret the Policy and to prescribe such forms, make such rules, regulations and computations and prescribe such guidelines as it may determine are necessary or appropriate for the operation and administration of the Policy and to change the terms of or rescind such rules, regulations or guidelines. Such determinations of eligibility, rules, regulations, interpretations, computations and guidelines shall be conclusive and binding upon all persons. In administering the Policy, the Company shall at all times discharge its duties with respect to the Policy in accordance with the standards set forth in section 404(a)(1) of ERISA. (c) Allocation and Delegation of Responsibilities. The Compensation Committee may allocate any of the Company's responsibilities for the operation and administration of the Policy among the Company's officers, employees and agents. It may also delegate any of the Company's responsibilities under the Policy by designating, in writing, another person to carry out such responsibilities. (d) No Individual Liability. It is declared to be the express purpose and intent of the Company that no individual liability shall attach to or be incurred by any member of the Board of Directors of the Company, or by any officer, employee representative or agent of the Company, under, or by reason of the operation of, the Policy. Page 3 8. CLAIMS AND REVIEW PROCEDURES. The Compensation Committee of the Company's Board of Directors shall establish a procedure pursuant to which a Participant may file a claim for benefits under the Policy, and at the request of a Participant it shall also provide a full and fair review of any denied claim for benefits under the Policy. A claim for benefits and a request for the review of a denied benefit shall be made in writing and addressed to the Compensation Committee at the Company's headquarters. The Compensation Committee's response shall be in writing and shall be given in a manner and time consistent with the regulations under ERISA Section 503. The Compensation Committee shall establish such rules and procedures, consistent with the Policy and with ERISA, as it may deem necessary or appropriate in carrying out its responsibilities under this Section 8. 9. GENERAL PROVISIONS. (a) Basis of Payments to and from Policy. All benefits under the Policy shall be paid by the Company. The Policy shall be unfunded and benefits hereunder shall be paid only from the general assets of the Company. Nothing contained in the Policy shall be deemed to create a trust of any kind for the benefit of any employee, or create any fiduciary relationship between the Company and any employee with respect to any assets of the Company. The Company is under no obligation to fund the benefits provided herein prior to payment, although it may do so if it chooses. Any assets which the Company chooses to use for advance funding shall not cause the Policy to be a funded plan within the meaning of ERISA. (b) No Employment Rights. Nothing in the Policy shall be deemed to give any individual the right to remain in the employ of the Company or a subsidiary or to limit in any way the right of the Company or a subsidiary to discharge, demote, reclassify, transfer, relocate an individual or terminate an individual's employment at any time and for any reason, which right is hereby reserved. (c) Non-alienation of Benefits. No benefit payable under the Policy shall be subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt to do shall be void. (d) Legal Construction. The Policy shall be governed and interpreted in accordance with ERISA. 10. EXECUTION. This Amended and Restated Severance Policy shall be effective as of the 27th day of January, 1999. McKESSON HBOC, INC. By ______________________________________ E. Christine Rumsey Senior Vice President, Human Resources and Administration Page 4 EX-10.18 20 1989 MANAGEMENT INCENTIVE PLAN EXHIBIT 10.18 McKESSON HBOC, INC. 1989 MANAGEMENT INCENTIVE PLAN ------------------------------ Amended as of January 27, 1999 The name of this plan shall be the McKesson HBOC, Inc. 1989 Management Incentive Plan. This Plan replaces in their entirety both the Company's Management Incentive Plan and its Performance Award Plan for Key Employees. This Plan is effective for fiscal years of the Company commencing on and after April 1, 1989. A. PURPOSE ------- The purpose of the Plan is to attract, retain and motivate key employees by providing cash incentive awards to designated executive, managerial and professional employees of the Company, its subsidiaries and affiliates. The Plan is designed to link managers' interests more closely with the interests of the Company's shareholders. The Plan is established as a single incentive plan to reward designated executives, managers and professionals who contribute to shareholder value. Each Participant's award will take into account corporate performance as well as, where appropriate, his or her own business unit's performance. The Plan also provides that awards will reflect individual performance, subject to Article G. Incentive awards paid under this Plan are intended to qualify as performance-based compensation deductible by the Company under the Code. B. ADMINISTRATION -------------- The Compensation Committee of the Board of Directors ("Committee") shall have full power and authority, subject to the provisions of the Plan, to review and approve the designation of Participants and to promulgate such rules and regulations as it deems necessary for the proper administration of the Plan, to interpret the provisions and supervise the administration of the Plan, and to take all action in connection therewith or in relation to the Plan as it deems necessary or advisable. Decisions and selections of the Committee shall be made by a majority of its members and, if made pursuant to the provisions of the Plan, shall be final. Any decision reduced to writing and signed by all of the members of the Committee shall be fully effective as if it had been made at a meeting duly held. The Committee shall consist solely of Disinterested Persons, in conformance with Section 162(m) of the Code ("Section 162(m)"). Page 1 C. PARTICIPATION ------------- 1. Eligibility - Executives, Managers and Professionals ---------------------------------------------------- Only active employees of the Company, its subsidiaries or affiliates who are employed in an executive, managerial or professional capacity may be designated as Participants under the Plan. 2. Designation and Removal of Participants --------------------------------------- No person shall be entitled to any award under this Plan for any Year unless he or she is so designated as a Participant for that Year. The Chief Executive Officer (CEO) of the Company and such other persons as the CEO may designate, shall recommend to the Committee employees (who may include such recommending persons) for selection as Participants. The Committee shall review and approve Plan Participants recommended by management from among those employees who are eligible to participate. The Committee may add to or delete individuals from the list of designated Participants at any time and from time to time, at its sole discretion. 3. Notice of Participation ----------------------- As soon as reasonably practicable, each person who is a Participant in the Plan for a Year will be notified. D. INDIVIDUAL TARGET AWARDS FOR PARTICIPANTS ----------------------------------------- 1. Targets, In General ------------------- At the beginning of each Year, an Individual Target Award shall be established for each Participant. An Individual Target Award shall only be a target and the amount of the target may or may not be paid to the Participant. Establishment of an Individual Target Award for an employee for any Year shall not imply or require that an Individual Target Award be set for any subsequent year. The amount of any actual award paid to any Participant may be greater or less than this target. As set forth in paragraph F4 below (but subject to the limitations applicable to Covered Employees contained in Article G), the actual award may be as much as three times target or as low as zero for any Year. The establishment of an Individual Target Award for an employee shall not affect the right of the Company, its subsidiaries or affiliates to terminate, with or without cause, such employee's employment at any time. 2. Percentage of Base Salary ------------------------- Individual Target Awards shall be a percentage of the Participant's base salary reviewed and approved by the Committee in its sole discretion. Page 2 E. BASIS OF AWARDS --------------- Awards will be based on contribution to shareholder value and individual performance. The Committee shall establish measures, which may include financial and non-financial objectives ("Performance Goals"), to calculate the shareholder value contribution for each segment of the Company. These Performance Goals shall be determined by the Committee in advance of each Year or such period as may be permitted by the regulations issued under Section 162(m), and shall be based on one or more of the following criteria: (i) the attainment of a specified percentage return on total capital employed by the Company (or a subsidiary or division of the Company); (ii) the attainment of a specified percentage return on total stockholder equity of the Company; (iii) the attainment of a specified percentage increase in earnings per share from continuing operations; (iv) the attainment of a specified percentage increase in Net Income of the Company; (v) the attainment of a specified percentage increase in profit before taxation of the Company (or a subsidiary or division of the Company); (vi) the attainment of a specified percentage increase in revenues of the Company (or a subsidiary or division of the Company); and (vii) the attainment of profit after-tax at specified levels of equity investment. In addition, such Performance Goals may be based upon the attainment of specified levels of Company performance under one or more of the measures described above relative to the performance of other corporations. Awards may be based on performance against objectives for more than one segment of the Company. For example, awards for corporate management will be based on overall corporate performance against objectives, but awards for a unit's management may be based on a combination of corporate, unit and sub-unit performance against objectives. Subject to the limitations set forth in Article G below, individual performance of each Participant will also be measured and used in determining awards under this Plan. F. AWARD DETERMINATION ------------------- 1. Award Determined by Committee ----------------------------- After any Year for which an Individual Target Award is established for a Participant under this Plan, the Committee shall review and approve, modify or disapprove the amount, if any, to be paid to the Participant for the Year. The amount paid shall be the Individual Target Award adjusted to reflect both the Company's financial performance and the Participant's individual performance. All awards will be subject to the sole discretion of the Committee. 2. Financial Performance --------------------- Individual Target Award amounts will be modified by achievement of financial objectives by the Company and relevant units and sub-units. Performance results against financial objectives shall be reviewed and approved by the Committee. The Committee may as a result of this review modify or change objectives or performance results for the Year as it Page 3 determines to be necessary or appropriate to take into account changes during the year including, but not limited to, changes in accounting methods, acquisitions or divestitures, and unusual or non-recurring financial or other events, to the extent not precluded by Section 162(m). 3. Individual Performance ---------------------- Any Individual Target Award, adjusted to reflect financial performance, will be further adjusted with the review and approval of the Committee to give full weight to the Participant's individual performance during the Year. 4. Overall Effect -------------- The combination of any financial performance adjustment and individual performance adjustment may increase the amount paid under this Plan to a Participant for any Year to as much as three times the Individual Target Award, and may reduce any amount payable to zero, subject to Article G. G. PROCEDURES APPLICABLE TO CERTAIN DESIGNATED PARTICIPANTS -------------------------------------------------------- Awards under the Plan to Participants who are Covered Employees shall be subject to preestablished Performance Goals as set forth herein. Notwithstanding the provisions of Paragraph F.3 above, the Committee shall not have discretion to modify the terms of awards to such Participants except as specifically set forth in this Article G. 1. Target Award. At the beginning of a Year, the Committee shall ------------ establish Individual Target Awards to such of the Participants who may be Covered Employees, payment of which shall be conditioned upon satisfaction of specific Performance Goals for the Year established by the Committee in writing in advance of the Year, or within such period as may be permitted by regulations issued under Section 162(m) of the Code. The extent, if any, to which an Award will be payable will be based upon the degree of achievement of the Performance Goals; provided, however, that the Committee may, in its sole discretion, reduce some or all of the amount which would otherwise be payable with respect to an Award. 2. Performance Goals. The Performance Goals established by the Committee ----------------- shall be the same as those objectives set for all Plan Participants and shall be based on one or more of the criteria set forth in Article E above. 3. Payment of Awards. At the time the Performance Goals are established, ----------------- the Committee shall prescribe a formula to determine the percentage of the Individual Target Award which may be payable based upon the degree of attainment of the Performance Goals during the Year. If the minimum Performance Goals established by the Committee are not met, no payment will be made to a Participant who is a Covered Employee. To the extent that the minimum Performance Goals are satisfied or surpassed, and upon written certification by the Committee that the Performance Goals have been satisfied to a particular extent, payment of the award shall be made on the Payment Date in accordance with the prescribed formula based upon a Page 4 percentage of the Individual Target Award unless the Committee determines, in its sole discretion, to reduce the payment to be made. 4. Maximum Award. The maximum award payable to any Participant who is a ------------- Covered Employee for any Year shall not exceed two percent (2%) of the Company's Net Income for that Year. H. ELECTIONS --------- 1. Election to Defer Payment. At the time established under the ------------------------- Company's Deferred Compensation Administration Plan II ("DCAP II"), any Participant who is eligible to participate in DCAP II may irrevocably elect, in writing and in accordance with DCAP II, to defer his or her award under this Plan so it is paid at the time and in the manner of, and subject to the terms and conditions provided by, DCAP II. If an election to defer an award is not made, then any award under this Plan shall be paid in a single sum to the Participant as soon as reasonably practicable after the amount of the award is determined. Notwithstanding the above provisions, no amount shall be deferred for the Year under DCAP II unless the actual award under this Plan for that Year is at least $5,000. No awards may be deferred by a Participant under DCAP II unless he or she is an active employee of the Company as of the end of the Year. 2. Election to Receive Stock Option Grant in Lieu of Award Under the ----------------------------------------------------------------- Plan. Prior to the end of a calendar year, any Participant may irrevocably elect, in writing on the form prescribed by the Committee, to receive a stock option grant under the 1994 Stock Option and Restricted Stock Plan in lieu of all or a portion of such Participant's award under this Plan for the Year in which that calendar year ends. Annually management of the Company shall determine the rate at which stock option grants will be made in lieu of an award under the Plan and that conversion rate shall be communicated to Participants prior to the deadline for making the election described in the preceding sentence. The minimum number of option shares that a Participant may elect to receive pursuant to such election is 500, subject to adjustment in the event of a stock split, stock dividend, consolidation or other similar recapitalization involving the capital stock of the Company. In addition, the Company annually shall prescribe a maximum portion of a Participant's Target Award that may be made subject to an election to receive a stock option grant in lieu of an award under the Plan. If for any reason the Company does not make the stock option grant contemplated by the Participant's election, the Participant shall be deemed to have elected to make a deferral election pursuant to Section H.1 of the award that was the subject of the election to receive a stock option. I. NO MANAGEMENT INCENTIVE FUND ---------------------------- Awards paid under this Plan shall not be based on or payable from a "pool" or a "Management Incentive Fund". Page 5 J. EMPLOYMENT AT YEAR END GENERALLY REQUIRED FOR AWARD --------------------------------------------------- No award shall be made to any Participant who is not an active employee of the Company or one of its subsidiaries or affiliates at the end of the Year; provided, however, that the Committee, in its sole and absolute discretion, may - -------- ------- make pro-rata awards to Participants during a year in circumstances that Committee deems appropriate including, but not limited to, a Participant's death, disability, retirement or other termination of employment during such Year. Any such pro-rated awards shall be determined by the Committee in accordance with Section F above after taking into account the portion of the Year then completed. K. NONASSIGNMENT AND PARTICIPANTS ARE GENERAL CREDITORS ---------------------------------------------------- The interest of any Participant under the Plan shall not be assignable either by voluntary or involuntary assignment or by operation of law, except by designation of a beneficiary or beneficiaries to the extent allowed under the Company's DCAP. L. AMENDMENT OR TERMINATION ------------------------ While the Company hopes to continue the Plan indefinitely, it reserves the right in its Board of Directors to amend, suspend or terminate the Plan or adopt a new plan at any time; provided that no such amendment shall (i) without prior approval of the Company's stockholders, alter the business criteria on which the Performance Goals may be based, increase the maximum amount set forth in Paragraph F.4 above, or modify the requirements as to eligibility for participation in the Plan, or (ii) retroactively and adversely affect the payment of any award previously made. In case any one or more of the provisions contained in the Plan shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of the Plan, but the Plan shall be construed as if such invalid, illegal or unenforceable provisions had never been contained herein. M. INTERPRETATION -------------- This Plan is intended to comply with Section 162(m), and all provisions contained herein shall be construed and interpreted in a manner to so comply. N. DEFINITIONS ----------- "Code" shall mean the Internal Revenue Code of 1986, as amended. ---- "Committee" means the Compensation Committee of the Board of Directors of --------- McKesson HBOC, Inc.. "Company" means McKesson HBOC, Inc., a Delaware corporation. ------- Page 6 "Covered Employees" shall mean eligible Participants designated by the ----------------- Committee who are, or are expected to be, "covered employees" within the meaning of Section 162(m) of the Code for the Year in which an award is payable hereunder. "Disinterested Person" shall mean a member of the Board of Directors who -------------------- qualifies as an "outside director" for purposes of Section 162(m) of the Code. "Individual Target Award" means the target award established for each ----------------------- Participant under Article D. "Net Income" shall mean after tax income from continuing operations before ---------- special items and the effect of any accounting changes. "Participants" mean those employees specifically designated as Participants ------------ for a Year under Article C. "Payment Date" shall mean the date following the conclusion of a Year on ------------ which the Committee certifies that applicable Performance Goals have been satisfied and authorizes payment of corresponding awards. "Performance Goals" shall have the meaning set forth in Section E. hereof. ----------------- "Plan" means the McKesson HBOC, Inc. 1989 Management Incentive Plan. ---- "Year" means the fiscal year of the Company. ---- Executed effective as of January 27, 1999. McKESSON HBOC, INC. By ______________________________________ E. Christine Rumsey Senior Vice President, Human Resources and Administration Page 7 EX-10.19 21 LONG-TERM INCENTIVE PLAN EXHIBIT 10.19 McKESSON HBOC, INC. LONG-TERM INCENTIVE PLAN (As Amended through January 27, 1999) 1. Name and Purpose. The name of this plan is the McKesson HBOC, ---------------- Inc. Long-Term Incentive Plan (the "Plan")(formerly known as the McKesson Corporation Long Term Incentive Plan). Its purpose is to advance and promote the interests of the stockholders of McKesson HBOC, Inc., a Delaware Corporation (the "Company") by attracting and retaining employees who strive for excellence, and to motivate those employees to set and achieve above-average financial objectives by providing competitive compensation for those who contribute most to the operating progress and earning power of the Company, its subsidiaries and affiliates. 2. Administration of the Plan. The Plan shall be administered by a -------------------------- committee (the "Committee") consisting of not less than two directors of the Company to be appointed by the Board, each of whom is an "outside director" within the meaning of Section 162(m) of the Internal Revenue code of 1986, as amended. No member of the Committee shall be eligible to receive benefits under the Plan. The Committee shall have the sole authority, in its absolute discretion, to adopt, amend, and rescind such rules and regulations as, in its opinion, may be advisable in the administration of the Plan, to construe and interpret the Plan, the rules and regulations, and to make all other determinations deemed necessary or advisable for the administration of the Plan. All decisions, determinations and interpretations of the Committee shall be final and binding on all participants and other interested parties. 3. Eligibility. Participation in the Plan shall be limited to those ----------- full-time, salaried key officers and other employees of the Company, its subsidiaries and affiliates who are selected from time to time by the Committee. Participants in the Plan are also eligible to participate in any incentive plan of the Company. 4. Calculation of Awards. The Plan is designed to reward --------------------- participants with benefits which reflect the financial performance of the Company over performance periods of a duration designated by the Committee at the beginning of such period. The Committee may (but is not required to) designate for each incentive period the measures of financial performance and the performance objectives (including, but not limited to, earnings per share, total shareholder return or return on capital employed) applicable to awards made with respect to such periods. The foregoing notwithstanding, the maximum amount potentially payable to an individual for a performance period shall not exceed 125% of the participant's rate of basic compensation at the beginning of the performance period, multiplied by the number of years in the performance period. For the purpose of calculating the maximum amount for performance periods beginning after 1997, the 125% factor shall be increased by adjusting it by the compound rate of total shareholder return for the Company, as determined by the Committee, for the period elapsed since the beginning of the last performance period. 5. Payment of Awards. All awards to participants pursuant to the ----------------- Plan shall be paid in cash, provided, however, that, at the participant's election, receipt of all or part of an award may be deferred under the terms of the Company's Deferred Compensation Administration Plan II in the manner prescribed by regulations established by the Committee. A Participant shall have no right to receive payment of any award under the Plan unless he or she has satisfied regulations prescribed by the Committee at the time of making the award and the Committee has determined that the performance objectives applicable to such award, if any, have been achieved. Any other provision of the Plan to the contrary notwithstanding, if the Committee determines that a Participant has engaged in any of the actions described in (c) below, the consequences set forth in (a) and (b) below shall result: (a) Any outstanding award granted on or after October 27, 1993, shall be forfeited immediately and automatically and shall not be payable to the participant under any circumstances. (b) If the participant received payment of an award granted on or after October 27, 1993, within six months prior to the date that the Company discovered that the participant engaged in any action described in (c) below, the participant, upon written notice from the Company, shall immediately repay to the Company in cash the amount of such award (including any amounts withheld pursuant to Paragraph 7). (c) The consequences described in (a) and (b) shall apply if the participant, either before or after termination of employment with the Company or one of its subsidiaries or affiliates: (i) Discloses to others, or takes or uses for his own purpose or the purpose of others, any trade secrets, confidential information, knowledge, data or know-how belonging to the Company or any of its subsidiaries or affiliates and obtained by the participant during the term of his employment, whether or not they are the participant's work product. Examples of such confidential information or trade secrets include (but are not limited to) customer lists, supplier lists, pricing and cost data, computer programs, delivery routes, advertising plans, wage and salary data, financial information, research and development plans, processes, equipment, product information and all other types and categories of information as to which the participant knows or has reason to know that the Company or its subsidiaries or affiliates intends or expects secrecy to be maintained; (ii) Fails to promptly return all documents and other tangible items belonging to the Company or any of its subsidiaries or affiliates in the participant's possession or control, including all complete or partial copies, recordings, abstracts, notes or reproductions of any kind made from or about such documents or iformation contained therein, upon termination of employment, whether pursuant to retirement or otherwise; 2 (iii) Fails to provide the Company with at least thirty (30) days' written notice prior to directly or indirectly engaging in, becoming employed by, or rendering services, advice or assistance to any business in competition with the Company or any of its subsidiaries or affiliates. As used herein, "business in competition" means any person, organization or enterprise which is engaged in or is about to become engaged in any line of business engaged in by the Company or any of its subsidiaries or affiliates at the time of the termination of the participant's employment with the Company or any of its subsidiaries or affiliates; (iv) Fails to inform any new employer, before accepting employment, of the terms of this paragraph 5 and of the participant's continuing obligation to maintain the confidentiality of the trade secrets and other confidential information belonging to the Company or any of its subsidiaries or affiliates and obtained by the participant during the term of his employment with the Company or any of its subsidiaries or affiliates; (v) Induces or attempts to induce, directly or indirectly, any of the customers of the Company or its subsidiaries or affiliates, employees, representatives or consultants to terminate, discontinue or cease working with or for the Company, or any of its subsidiaries or affiliates, or to breach any contract with the Company or any of its subsidiaries or affiliates, in order to work with or for, or enter into a contract with, the participant or any third party; or (vi) Engages in conduct which is not in good faith and which disrupts, damages, impairs or interferes with the business, reputation or employees of the Company or any of its subsidiaries or affiliates. The Committee shall determine in its sole discretion whether the participant has engaged in any of the acts set forth in (i) through (vi) above, and its determination shall be conclusive and binding on all interested persons. Any provision of this paragraph 5 which is determined by a court of competent jurisdiction to be invalid or unenforceable should be construed or limited in a manner that is valid and enforceable and that comes closest to the business objectives intended by such invalid or unenforceable provision, without invalidating or rendering unenforceable the remaining provisions of this paragraph 5. 6. Transferability. Awards made pursuant to the Plan are not --------------- transferable or assignable by the participant other than by will or the laws of descent and distribution, and payment thereunder during the participant's lifetime shall be made only to the participant or to the guardian or legal representative of the participant. Payments which are due to a deceased participant pursuant to the Plan shall be paid to the person or persons to whom such right to payment shall have been transferred by will or the laws of descent and distribution. 7. Withholding Taxes. Whenever the payment of an award is made, such ----------------- payment shall be net of an amount sufficient to satisfy federal, state and local withholding tax requirements and authorized deductions. 3 8. Funding. No provision of the Plan, or regulations adopted ------- hereunder, shall require the Company, for the purpose of satisfying any obligations under the Plan, to purchase assets or segregate or place any assets in a trust or other entity to which contributions are made. 9. Amendment. The Plan may be amended or revised by the Board of --------- Directors of the Company. 10. Termination. The Plan may be terminated at any time by resolution ----------- of the Board of Directors of the Company by the affirmative vote of a majority of the directors in office; provided, however, that such termination shall not affect any incentive award which shall have been granted prior to such termination. 4 EX-10.20 22 STOCK PURCHASE PLAN EXHIBIT 10.20 McKESSON HBOC, INC. STOCK PURCHASE PLAN (As amended and restated through January 27, 1999) 1. Establishment. There is hereby adopted the McKesson HBOC, Inc. Stock Purchase Plan (hereinafter called the "Plan")(formerly known as the McKesson Corporation Stock Purchase Plan), subject to approval by holders of at least a majority of the outstanding shares of voting stock of the Corporation. 2. Stock Subject to the Plan. Rights may be granted under the Plan from time to time to key employees of the Corporation and its Subsidiaries to purchase from the Corporation an aggregate of not more than 2,500,000 shares of Common Stock ($.01 par value) of the Corporation. 3. Administration of the Plan. The Plan shall be administered by a committee (the "Committee") consisting of not less than two directors of the Company to be appointed by the Board, each of whom is a "non-employee director" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934. No member of the Committee shall be eligible to receive benefits under the Plan. The Committee may from time to time determine which eligible employees shall be granted rights under the Plan, and the number of shares for which a right shall be granted to an employee. The Committee shall have the sole authority, in its absolute discretion, to adopt, amend, and rescind such rules and regulations as, in its opinion, may be advisable in the administration of the Plan, to construe and interpret the Plan, the rules and regulations, and to make all other determinations deemed necessary or advisable for the administration of the Plan. All decisions, determinations and interpretations of the Committee shall be final and binding on all grantees and purchasers of stock under the Plan and on other interested parties. 4. Eligibility. Persons eligible for rights under the Plan are those key employees of the Corporation or its Subsidiaries designated from time to time by the Committee. Members of the Board of Directors of the Corporation who are not employed as regular salaried officers or employees of the Corporation or of any Subsidiary of the Corporation may not participate in the Plan. 5. Exercise Price. The exercise price of the stock covered by each right shall not be less than the fair market value of such stock on the date the right is exercised, which shall be the closing sale price on such day on the New York Stock Exchange. 6. Right Terms and Conditions; Extension of Credit by the Corporation. The term of each right shall be for such period not in excess of thirty days as the Committee may determine. Purchases shall be evidenced by a written Stock Purchase Agreement which may provide for the payment of the purchase price (i) by a payment in cash or (ii) entirely by a promissory note payable on such repayment schedule as the Committee may determine or (iii) by any combination of (i) and (ii). The Stock Purchase Agreement may contain such other terms, provisions, and conditions as are determined by the Committee. Stock purchased by an employee under the Plan shall be pledged to the Corporation as collateral for the purchase loan terms and conditions set forth in the Stock Purchase Agreement. 7. Voting, Dividend Rights, etc. Shares purchased by employees under the Plan shall be fully paid and non-assessable and be entitled to voting, dividend and other rights. 8. Amendment, Suspension or Termination of the Plan. The Board of Directors may at any time suspend or terminate this Plan, and may amend it from time to time in such respects as it may deem advisable. 2 EX-10.28 23 STATEMENT OF TERMS AND CONDITIONS EXHIBIT 10.28 McKESSON HBOC, INC. STATEMENT OF TERMS AND CONDITIONS APPLICABLE TO CERTAIN STOCK OPTIONS GRANTED ON JANUARY 27, 1999 Unless otherwise stated in an Agreement (as defined herein) the following terms and conditions shall apply to each stock option ("Option") granted on January 27, 1999, to an employee of McKesson HBOC, Inc. (the "Company") or an affiliate of the Company Optionee) other than stock options designated as granted under the McKesson Corporation (the "Company") 1994 Stock Option and Restricted Stock Plan. 1. Stock Subject to Options. All Options shall be for the ------------------------ purchase of shares of common stock ($0.01 par value) of the Company (the "Stock") subject to adjustment as provided in Section 18 of this Statement of Terms and Conditions. 2. Option Agreement. Options shall be evidenced by an ---------------- agreement ("Agreement") to be executed by the Optionee and the Company setting forth the basic terms and conditions of the Option. Each Agreement shall incorporate by reference and be subject to the terms and conditions set forth in this Statement of Terms and Conditions. 3. Option Purchase Price. The purchase price of the Stock --------------------- subject to this Option shall be the Option Price Per Share, as specified in the Agreement, which price shall be not less than the per share "fair market value" of such Stock as of the date such Option was granted (the "Grant Date"). "Fair market value" means the composite closing price on the Grant Date, as reported in The Wall Street Journal. 4. Option Period and Vesting of Right to Exercise. ---------------------------------------------- (a) Option Period. Options shall be exercisable only during the applicable Option Period, and during such Option Period, the exercisability of an Option shall be subject to the vesting provisions of subparagraph 4(b) herein as modified by the rules set forth in paragraphs 5 and 6 herein. The Option Period shall commence on the Grant Date set forth in the Agreement and, except as otherwise provided in paragraph 5, shall end on the Terminal Date which shall be ten years from such Grant Date. (b) Vesting of Right to Exercise Options. (1) Installment Option. Except as provided in paragraph 6 below, an Option shall be exercisable during the Option Period as follows: (i) As to 50% of the number of shares covered by the Option, at any time after two years from the Grant Date; and (ii) As to an additional 25% of the number of shares covered by the Option, at any time after three years from the Grant Date; and (iii) As to an additional 25% of the number of shares covered by the Option, at any time after four years from the Grant Date. (2) Any vested portion of an Option not exercised hereunder shall accumulate and be exercisable at any time on or before the Terminal Date, subject to the rules set forth in paragraph 6. No Option may be exercised for less than 5% of the total number of shares then available under such Option. In no event shall the Company be required to issue fractional shares. 5. Limits on Option Period and Acceleration of Vesting. The --------------------------------------------------- Option Period may end before the Terminal Date, and in the circumstances described in subparagraphs 5 (b), (d), (e) and (f), the vesting of rights to exercise Options may be accelerated, (subject to the provisions of paragraph 6 below), as follows: (a) If Optionee ceases to be a bona fide employee of the Company or of its affiliates during the Option Period for reasons other than for Cause (as defined herein), Normal or Early Retirement (as defined in (e) below) or death, the Option Period shall end three (3) months after the date of termination or on the Terminal Date, whichever date shall first occur, and the Option shall be exercisable only to the extent that it was exercisable under the provisions of the foregoing paragraph 4 at the time of such cessation of employment. For purposes of this Statement of Terms and Conditions, termination of employment for Cause shall mean termination upon Optionee's negligent or willful engagement in misconduct which, in the sole determination of the Company, is injurious to the Company, its employees, or its customers. If Optionee is absent from work with the Company or an affiliate because of his Disability (as defined in the Company's Short Term Disability Plan), other than Long-Term Disability (as defined herein), or if Optionee is on leave of absence for the purpose of serving the government of the country in which the principal place of employment of Optionee is located, either in a military or civilian capacity, or for such other purpose or reason as the Compensation Committee of the Board of Directors of the Company (the "Committee") may approve, Optionee shall not be deemed during the 2 period of any such absence, by virtue of such absence alone, to have terminated employment with the Company or an affiliate except as the Committee may otherwise expressly determine. (b) If Optionee ceases to be a bona fide employee of the Company or of its affiliates (for reasons other than for cause, retirement or death) during the Option Period, the Committee may, in its sole and absolute discretion (and subject to conditions deemed appropriate in the circumstances) approve the continuation of the vesting schedule for any or all Options of Optionee then remaining outstanding. In the event of Optionee's death, Long-Term Disability, or a Change in Control occurring while Options remain outstanding, Optionee's vesting schedule shall be accelerated. The Option Period for any Option vesting pursuant to this subparagraph (b) shall end three (3) months after the last Option installment vests, or on the Terminal Date, whichever first occurs. (c) If the employment of Optionee is terminated for Cause, the Option Period shall end on the date of such termination of employment and the Option shall thereupon not be exercisable to any extent whatsoever. (d) In the case of Long-Term Disability of an Optionee, the Option Period shall end three (3) years after the date of such disability or on the Terminal Date, whichever shall first occur, and the Optionee may exercise the entire unexercised portion of the then exercisable shares covered by such Option (or any lesser amount) remaining at the date of such Long-Term Disability. Notwithstanding the foregoing, the Committee may, in its sole discretion, accelerate the vesting schedule as to all or any portion of an Option which is not yet exercisable, effective as of the date of Long-Term Disability of such Optionee. For purposes of this Statement of Terms and Conditions, Long-Term Disability shall mean (i) a physical or mental condition which, in the judgment of the Committee based on competent medical evidence satisfactory to the Committee, including, if required by the Committee, medical evidence obtained by an examination conducted by a physician selected by the Committee, renders an individual unable to engage in any substantial gainful activity for the Company and which impairment is likely to result in death or to be of long, continued and indefinite duration, or (ii) a judicial declaration of incompetence. (e) (i) If the employment of Optionee is terminated by reason of Normal Retirement, the vesting schedule for Optionee's rights to exercise Options shall be accelerated, and such Options shall be exercisable to the extent of the entire unexercised portion of the Option (or any lesser amount) remaining at the date of Normal Retirement. 3 For purposes of this paragraph 7(e), "Normal Retirement" shall mean retirement: (I) at age 65 (62, in the case of a participant in the McKesson Corporation 1984 Executive Benefit Retirement Plan) with at least ten years of service with the Company; or (II) as otherwise deemed appropriate by the Committee. (ii) If the employment of Optionee is terminated by reason of Early Retirement, the Option shall be exercised only to the extent of those shares (or any lesser amount) exercisable at the date of Early Retirement; provided, however, that the Committee may, in its sole discretion (and subject to conditions deemed appropriate in the circumstances), either (A) accelerate the vesting schedule as to all or any portion of an Option which is not yet exercisable, effective as of the date of Optionee's Early Retirement or (B) approve the continuation of the vesting schedule for any or all Options of Optionee then remaining outstanding. For purposes of this paragraph 5(e), "Early Retirement" shall be defined to be termination of employment which occurs prior to Normal Retirement (as defined in (i) above) but on or after the date on which the Optionee's age (expressed in terms of years and completed months) plus Years of Retirement Share Plan Service (as determined under the terms of the Profit-Sharing Investment Plan) equals 65. (iii) With respect to any Option held by an Optionee at Normal or Early Retirement, the Option Period shall end three (3) years after the date of retirement or on the Terminal Date, whichever occurs first; provided, however, that in the case of an Option held by an Optionee at Early Retirement as to which the Committee exercises its discretionary authority to approve the continuation of the vesting schedule, the Option Period shall end on the earlier of the Terminal Date or three (3) years after the date when the last Option installment vests. (f) If Optionee should die while in the employ of the Company or an affiliate, or within a period of seven (7) months following retirement from the employ of the Company or an affiliate, or within the month of termination of employment with the Company or one of its affiliates, the Option Period shall end three (3) years after the date of death or on the Terminal Date, whichever shall first occur, and the Optionee's executor or administrator or the person or persons to whom Optionee's rights under any Option shall pass by will or by the applicable laws of descent and 4 distribution, may exercise the entire unexercised portion of the then exercisable shares covered by such Option (or any lesser amount) remaining on the date of death. Notwithstanding the foregoing, the Committee may, in its sole discretion, accelerate the vesting schedule as to all or any portion of an Option which is not yet exercisable, effective as of the date of death of such Optionee. (g) Upon a "Change in Control" (as defined in the Company's 1994 Stock Option and Restricted Stock Plan), then notwithstanding anything herein to the contrary, all Options that are outstanding at the time of such Change in Control shall become immediately exercisable in full. 6. Special Forfeiture and Repayment Rules. Any other -------------------------------------- provision of these terms and conditions to the contrary notwithstanding, if the Committee determines that an Optionee has engaged in any of the actions described in (c) below, the consequences set forth in (a) and (b) below shall result: (a) Any outstanding Option shall immediately and automatically terminate, be forfeited and shall cease to be exercisable, without limitation, by the Optionee or his or her representatives, in the case of the death of the Optionee. (b) If the Optionee exercised an Option within six months prior to the date upon which the Company discovered that the Optionee engaged in any action described in (c) below, the Optionee, upon written notice from the Company, shall immediately pay to the Company the economic value realized or obtained by the exercise of such Option, measured at the date of exercise. (c) The consequences described in (a) and (b) above shall apply if the Optionee, either before or after termination of employment with the Company or its affiliates: (i) Discloses to others, or takes or uses for his own purpose or the purpose of others, any trade secrets, confidential information, knowledge, data or know-how or any other proprietary information or intellectual property belonging to the Company or its affiliates and obtained by the Optionee during the term of his employment, whether or not they are the Optionee's work product. Examples of such confidential information or trade secrets include, without limitation, customer lists, supplier lists, pricing and cost data, computer programs, delivery routes, advertising plans, wage and salary data, financial information, research and development plans, processes, equipment, product information and all other types and categories of 5 information as to which the Optionee knows or has reason to know that the Company or its affiliates intends or expects secrecy to be maintained; (ii) Fails to promptly return all documents and other tangible items belonging to the Company or its affiliates in the Optionee's possession or control, including all complete or partial copies, recordings, abstracts, notes or reproductions of any kind made from or about such documents or information contained therein, upon termination of employment, whether pursuant to retirement or otherwise; (iii) Fails to provide the Company with at least thirty (30) days' written notice prior to directly or indirectly engaging in, becoming employed by, or rendering services, advice or assistance to any business in competition with the Company or its affiliates. As used herein, "business in competition" means any person, organization or enterprise which is engaged in or is about to become engaged in any line of business engaged in by the Company or its affiliates at the time of the termination of the Optionee's employment with the Company or its affiliates; (iv) Fails to inform any new employer, before accepting employment, of the terms of this paragraph and of the Optionee's continuing obligation to maintain the confidentiality of the trade secrets and other confidential information belonging to the Company or its affiliates and obtained by the Optionee during the term of his employment with the Company or any Subsidiary; (v) Induces or attempts to induce, directly or indirectly, any of the customers of the Company or its affiliates, employees, representatives or consultants to terminate, discontinue or cease working with or for the Company or its affiliates, or to breach any contract with the Company or any of its affiliates, in order to work with or for, or enter into a contract with, the Optionee or any third party; or (vi) Engages in conduct which is not in good faith and which disrupts, damages, impairs or interferes with the business, reputation or employees of the Company or its affiliates. The Committee shall determine in its sole discretion whether the Optionee has engaged in any of the acts set forth in (i) through (vi) above, and its determination shall be conclusive and binding on all interested persons. Any provision of this paragraph which is determined by a court of competent jurisdiction to be invalid or unenforceable should be construed or limited in a manner that is valid and enforceable and that comes closest to the business objectives 6 intended by such invalid or unenforceable provision, without invalidating or rendering unenforceable the remaining provisions of this paragraph. 7. Method of Exercise. Optionee may exercise an Option with ------------------ respect to all or any part of the shares of Stock then subject to such exercise as follows: (a) By giving the Company, or its authorized representative designated for this purpose, written notice of such exercise specifying the number of such shares as to which the Option is so exercised. Such notice shall be accompanied by an amount equal to the Option Price of such shares, in the form of any one or combination of the following: cash or a certified check, bank draft, postal or express money order payable to the order of the Company in lawful money of the United States. The Optionee may pay the Option Price, in whole or in part, by tendering to the Company or its authorized representative shares of Stock which have been owned by Optionee for at least six (6) months prior to said tender, and having a fair market value, as determined by the Company, equal to the Option Price for such shares, or in lieu of the delivery of actual shares of Stock in such tender, the Company may accept an attestation by Optionee, in a form prescribed by the Company or its authorized representative, that Optionee owns sufficient shares of Stock of record or in an account in street name to satisfy the option exercise price, and such attestation will be deemed a tender of shares for purposes of this method of exercise. The Company or its authorized representative may accept payment of the Option Price in the form of Optionee's personal check. Payment may also be made by delivery (including by FAX transmission) to the Company of an executed irrevocable option exercise form together with irrevocable instructions to an approved registered investment broker to sell shares in an amount sufficient to pay the exercise price plus any applicable withholding taxes and to transfer the proceeds of such sale to the Company. (b) If required by the Company, by giving satisfactory assurance in writing, signed by Optionee, that such shares are being purchased for investment and not with a view to the distribution thereof; provided that such assurance shall be deemed inapplicable to (1) any sale of such shares by such Optionee made in accordance with the terms of a registration statement covering such sale, which has heretofore been (or may hereafter be) filed and become effective under the Securities Act of 1933, as amended (the "Securities Act") and with respect to which no stop order suspending the effectiveness thereof has been issued, and (2) any other sale of such shares with respect to which, in the opinion of counsel for the Company, such assurance is not required to be given in order to comply with the provisions of the Securities Act. (c) As soon as practicable after receipt of the notice and the assurance described in subparagraphs 7(a) and 7(b), the Company shall, without transfer or issue tax (except for withholding tax arrangements contemplated in paragraph 14 7 hereof) and without other incidental expense to Optionee, deliver to the Optionee at the office of the Company, McKesson Plaza, One Post Street, San Francisco, California 94104, or such other place as may be mutually acceptable to the Company and Optionee, a certificate or certificates of such shares of Stock; provided, however, that the time of such delivery may be postponed by the Company for such period as may be required for it with reasonable diligence to comply with applicable registration requirements under the Securities Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act") any applicable listing requirements of any national securities exchange and requirements under any other law or regulation applicable to the issuance or transfer of such shares. 8. Limitations on Transfer. An Option shall, during ----------------------- Optionee's lifetime, be exercisable only by Optionee. No Option nor any right granted thereunder shall be transferable by Optionee by operation of law or otherwise, other than by will, the laws of descent and distribution, or pursuant to a qualified domestic relations order as defined in the Code or Title I of the Employee Retirement Income Security Act. In the event of any attempt by Optionee to alienate, assign, pledge, hypothecate, or otherwise dispose of an Option or of any right thereunder, except as provided herein, or in the event of the levy of any attachment, execution, or similar process upon the rights or interest hereby conferred, the Company at its election may terminate the affected Option by notice to Optionee and the Option shall thereupon become null and void. 9. No Shareholder Rights. Neither Optionee nor any person --------------------- entitled to exercise Optionee's rights in the event of Optionee's death shall have any of the rights of a shareholder with respect to the shares of Stock subject to an Option except to the extent the certificates for such shares shall have been issued upon the exercise of an Option. 10. No Effect on Terms of Employment. Subject to the terms -------------------------------- of any employment contract entered into by the Company and Optionee to the contrary, the Company (or its affiliate which employs him) shall have the right to terminate or change the terms of employment of Optionee at any time and for any reason whatsoever. 11. Notice. Any notice required to be given under the terms ------ of an Agreement shall be addressed to the Company in care of its Secretary at McKesson Plaza, One Post Street, San Francisco, California 94104, and any notice to be given to Optionee shall be addressed to him at the address indicated beneath his signature on the Agreement or such other address as either party may designate in writing to the other. Any such notice shall be deemed to have been duly given when enclosed in a properly sealed envelope or wrapper addressed as aforesaid, registered or certified and deposited (postage or registration or certification fee prepaid) in a post office or branch post office regularly maintained by the United States. 8 12. Committee Decisions Conclusive. All decisions of the ------------------------------ Committee upon any questions arising under this Statement of Terms and Conditions or under an Agreement shall be conclusive. 13. No Effect on Other Benefit Plans. Nothing herein -------------------------------- contained shall affect Optionee's right to participate in and receive benefits from and in accordance with the then current provisions of any pensions, insurance, or other employment welfare plan or program offered by the Company. 14. Withholding. Optionee agrees to make appropriate ----------- arrangements with the Company and his employer for satisfaction of any applicable federal, state or local income tax, withholding requirements or social security requirements. Such arrangements may include an election by Optionee to have the Company retain some portion of the Shares acquired pursuant to exercise of the Option to satisfy such withholding requirements. The election must be made prior to the date on which the amount to be withheld is determined. If a qualifying election is made, then upon exercise of this Option, in whole or in part, the Company will retain the number of shares of stock having a value equal to the amount necessary to satisfy any withholding requirements. Calculation of the number of shares to be withheld shall be made based on the closing price of the Stock on the New York Stock Exchange on the date that the amount of tax to be withheld is determined. In no event, however, shall the Company be required to issue fractional shares of Stock. The Committee shall be authorized to establish such rules, forms and procedures as it deems necessary to implement the foregoing. 15. Successors. Agreements shall be binding upon and inure ---------- to the benefit of any successor or successors of the Company. "Optionee" as used herein shall include Optionee's executor, administrator, or other legal representative or the person or persons to whom Optionee's rights under any Option pass by will or by the applicable laws of descent and distribution. 16. California Law. The interpretation, performance, and -------------- enforcement of all Agreements shall be governed by the laws of the State of California. 9 17. Stock Appreciation Rights. Options may include stock ------------------------- appreciation rights if the grant of such rights is specified in the applicable Agreement. Any stock appreciation rights granted under an Option subject to the Plan shall be subject to the following: (a) On or after the date an Option which includes stock appreciation rights becomes exercisable under paragraphs 4 and 5 hereof, the Optionee may request the Committee in writing to accept the surrender of up to one half of the Shares then exercisable as provided in paragraphs 4 and 5 hereof and to authorize payment in consideration therefor. The amount of such payment shall be equal to the difference obtained by subtracting the Option Price Per Share of the Stock from the per share fair market value of such Stock on the date of surrender multiplied by the number of shares included in the surrendered portion of the Option. Such payment may be made, in the absolute discretion of the Committee, in shares of Stock valued at fair market value (as defined in the Plan) on the date of surrender or in cash, or partly in such shares and partly in cash. (b) The Committee may accept any requested surrender of up to one half of the Shares hereunder at any time, provided, that any such acceptance shall be made in any event prior to the Terminal Date of an Option, or earlier, the date the Option ceases to be exercisable; and provided, however, that Optionee may exercise his right to surrender such Option in exchange for cash or a combination of cash and Stock only during an Authorized Surrender Period. If Optionee is absent from work with the Company or an affiliate because of disability or if Optionee is on leave of absence for the purpose of serving the government of the country in which the principal place of employment of Optionee is located, either in military or civilian capacity, or for such other purpose or reason as the Committee may approve, Optionee shall not be deemed during the period of such absence, by virtue of such absence alone, to have terminated his employment with the Company or an affiliate, except as the Committee may otherwise expressly provide. (c) Optionee may make the request referred to in this paragraph 17 by giving the Committee written notice of such request, specifying the number of Shares subject to the Option as to which the right to surrender is requested. (d) Notwithstanding the foregoing, if an Optionee's employment is terminated by reason of Retirement, then such Optionee's stock appreciation rights shall not be exercisable after seven (7) months after the date of Retirement or after the Terminal Date, whichever shall first occur. 10 18. Adjustment of Shares Subject to Option. In the event -------------------------------------- that the Committee shall determine that any dividend or other distribution (whether in the form of cash, stock, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, spin-off, combination, repurchase, or share exchange, or other similar corporate transaction or event, affects the Stock such that an adjustment is appropriate in order to preserve (but not increase) the rights of the Optionee, then the Committee shall make such equitable changes or adjustments as it deems necessary or appropriate to (i) the number and kind of Shares issued in respect of an Option and (ii) the Option Price Per Share of an Option. 19. Amendments. This Statement of Terms and Conditions and ---------- any Agreement may be amended at any time by the Committee; provided, that no amendment may adversely affect the Option without the written consent of the Optionee. 11 EX-10.29 24 CREDIT AGREEMENT DATED AS OF 11/10/1998 Exhibit 10.29 CREDIT AGREEMENT Dated as of November 10, 1998 among MCKESSON CORPORATION, MEDIS HEALTH AND PHARMACEUTICAL SERVICES INC., BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Agent, BANK OF AMERICA CANADA, as Canadian Administrative Agent, THE CHASE MANHATTAN BANK, as documentation agent, FIRST UNION NATIONAL BANK, as documentation agent, THE FIRST NATIONAL BANK OF CHICAGO, as documentation agent, and THE OTHER FINANCIAL INSTITUTIONS PARTY HERETO Arranged by NationsBanc Montgomery Securities LLC TABLE OF CONTENTS ----------------- ARTICLE I DEFINITIONS 1.1 Certain Defined Terms....................................... 1 1.2 Other Interpretive Provisions............................... 21 1.3 Accounting Principles....................................... 22 1.4 Canadian Currency Equivalents............................... 22 ARTICLE II THE CREDITS 2.1 Amounts and Terms of Commitments............................ 22 2.2 Loan Accounts............................................... 25 2.3 Procedure for Borrowing..................................... 26 2.4 Conversion and Continuation Elections....................... 27 2.5 Voluntary Termination or Reduction of Commitments........... 29 2.6 Optional Prepayments........................................ 30 2.7 Repayment................................................... 30 2.8 Interest.................................................... 31 2.9 Fees........................................................ 32 2.10 Computation of Fees and Interest............................ 33 2.11 Payments by the Borrowers................................... 34 2.12 Payments by the Banks to the Applicable Agent............... 35 2.13 Sharing of Payments, Etc.................................... 35 2.14 Optional Increase in Commitments............................ 37 2.15 Conversion of Facility B Loans to Term Loans................ 38 2.16 Utilization of Facility A Commitments in Canadian Dollars... 39 2.17 Currency Exchange Fluctuations.............................. 39 2.18 Bankers' Acceptances for Medis.............................. 40 2.19 Replacement of a Bank....................................... 45 ARTICLE III TAXES, YIELD PROTECTION AND ILLEGALITY 3.1 Taxes....................................................... 45 3.2 Illegality.................................................. 47 3.3 Increased Costs and Reduction of Return..................... 47 3.4 Funding Losses.............................................. 49 3.5 Inability to Determine Rates................................ 49 3.6 Certificates of Banks....................................... 50 3.7 Survival.................................................... 50
Section Page ARTICLE IV CONDITIONS PRECEDENT 4.1 Conditions of Initial Loans................................. 50 4.2 Conditions to All Borrowings................................ 52 4.3 Conditions to Bankers' Acceptance Facility.................. 53 ARTICLE V REPRESENTATIONS AND WARRANTIES 5.1 Corporate Existence and Power............................... 53 5.2 Corporate Authorization; No Contravention................... 54 5.3 Governmental Authorization.................................. 54 5.4 Binding Effect.............................................. 54 5.5 Litigation.................................................. 54 5.6 No Default.................................................. 55 5.7 Use of Proceeds; Margin Regulations......................... 55 5.8 Financial Condition......................................... 55 5.9 Regulated Entities.......................................... 55 5.10 No Burdensome Restrictions.................................. 56 5.11 Subsidiaries and Certain Liens As of the Closing Date....... 56 5.12 Year 2000 Compliance........................................ 56 ARTICLE VI AFFIRMATIVE COVENANTS 6.1 Financial Statements........................................ 56 6.2 Certificates; Other Information............................. 57 6.3 Notices..................................................... 57 6.4 Preservation of Corporate Existence, Etc.................... 58 6.5 Insurance................................................... 58 6.6 Payment of Taxes............................................ 58 6.7 Compliance with Laws........................................ 58 6.8 Inspection of Property and Books and Records................ 59 6.9 Use of Proceeds............................................. 59 6.10 Notice of Rating Change..................................... 59
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Section Page ARTICLE VII NEGATIVE COVENANTS 7.1 Limitation on Liens............................................. 59 7.2 Consolidations and Mergers...................................... 60 7.3 Use of Proceeds................................................. 61 7.4 Maximum Debt to Capitalization Ratio............................ 61 ARTICLE VIII THE COMPANY'S GUARANTY OF MEDIS' OBLIGATIONS 8.1 Guaranty of the Guarantied Obligations.......................... 62 8.2 Liability of the Company Absolute............................... 62 8.3 Waivers by Guarantor............................................ 64 8.4 Payment by the Company; Application of Payments................. 65 8.5 Guarantor's Rights of Subrogation, Contribution, Etc............ 66 8.6 Subordination of Other Obligations.............................. 66 8.7 Real Property Security.......................................... 66 8.8 Expenses........................................................ 67 8.9 Continuing Guaranty; Termination of Guaranty.................... 67 8.10 Authority of the Company or Medis............................... 67 8.11 Financial Condition of Medis.................................... 67 8.12 Rights Cumulative............................................... 67 8.13 Bankruptcy; Post-Petition Interest; Reinstatement of Guaranty... 68 ARTICLE IX EVENTS OF DEFAULT 9.1 Event of Default................................................ 69 9.2 Remedies........................................................ 70 9.3 Rights Not Exclusive............................................ 71 ARTICLE X THE AGENTS 10.1 Appointment and Authorization................................... 71 10.2 Delegation of Duties............................................ 71 10.3 Liability of Agent.............................................. 71 10.4 Reliance by the Agent........................................... 72 10.5 Notice of Default............................................... 72
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Section Page 10.6 Credit Decision................................................ 73 10.7 Indemnification of Agent....................................... 73 10.8 Agent in Individual Capacity................................... 73 10.9 Successor Agent................................................ 74 10.10 Withholding Tax................................................ 74 10.11 Documentation Agent; Managing Agent............................ 76 ARTICLE XI MISCELLANEOUS 11.1 Amendments and Waivers......................................... 77 11.2 Notices........................................................ 78 11.3 No Waiver; Cumulative Remedies................................. 78 11.4 Costs and Expenses............................................. 78 11.5 Borrower Indemnification....................................... 79 11.6 Payments Set Aside............................................. 80 11.7 Successors and Assigns......................................... 80 11.8 Assignments, Participations, etc............................... 80 11.9 Confidentiality................................................ 82 11.10 Set-off........................................................ 83 11.11 Notification of Addresses, Lending Offices, Etc................ 83 11.12 Counterparts................................................... 83 11.13 Severability................................................... 83 11.14 No Third Parties Benefited..................................... 83 11.15 Governing Law and Jurisdiction; Language....................... 84 11.16 Waiver of Jury Trial........................................... 84 11.17 Judgment....................................................... 85 11.18 Entire Agreement............................................... 85
iv McKesson Corporation List of Schedules and Exhibits to Credit Agreement SCHEDULES Schedule 2.1 Commitments; Affiliate Banks Schedule 5.11 Subsidiaries and Liens Securing Indebtedness for Borrowed Money Schedule 11.2 Lending Offices; Addresses for Notices EXHIBITS Exhibit A Form of Notice of Borrowing Exhibit B Form of Notice of Conversion/Continuation Exhibit C Form of Compliance Certificate Exhibit D-1 Form of Legal Opinion of Company's Counsel Exhibit D-2 Form of Legal Opinion of Canadian Counsel Exhibit E Form of Assignment and Acceptance Exhibit F-1 Form of Promissory Note Exhibit F-2 Form of Promissory Note Exhibit F-3 Form of Promissory Note Exhibit G Form of Notice of Drawing Exhibit H-1 Form of Draft Exhibit H-2 Form of Acceptance v CREDIT AGREEMENT ---------------- This CREDIT AGREEMENT is entered into as of November 10, 1998 among McKesson Corporation, a Delaware corporation (the "Company"), Medis Health and ------- Pharmaceutical Services Inc., an Ontario corporation and indirect wholly owned subsidiary of the Company ("Medis"), the several financial institutions from ----- time to time party to this Agreement (collectively, the "Banks"; individually, a ----- "Bank"), Bank of America Canada, as administrative agent with respect to ---- Facility A Canadian Loans and the Bankers' Acceptance Facility (as hereinafter defined), The Chase Manhattan Bank, as a documentation agent for the Banks, First Union National Bank, as a documentation agent for the Banks, The First National Bank of Chicago, as a documentation agent for the Banks, and Bank of America National Trust and Savings Association, as administrative agent for the Banks. WHEREAS, the Facility A Banks have agreed to make available to the Company and Medis a revolving credit facility and to Medis the Bankers' Acceptance Facility upon the terms and conditions set forth in this Agreement; WHEREAS, Company has agreed to guaranty the obligations of Medis under such revolving credit facility and the Bankers' Acceptance Facility; WHEREAS, the Facility B Banks have agreed to make available to the Company a revolving credit facility upon the terms and conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained herein, the parties agree as follows: ARTICLE I DEFINITIONS 1.1 CERTAIN DEFINED TERMS. As used in this Agreement and the other ---------------------- Loan Documents, the following terms have the following meanings: "Acceptance Usage" means, as at any date of determination, the ---------------- aggregate Face Amount of all completed Bankers' Acceptances which have not been repaid by Medis or the Company whether or not due and whether or not held by a Facility A Bank. For purposes of this definition, any Bankers' Acceptance that has been prepaid in full shall not be deemed to be outstanding and all Bankers' Acceptances shall be valued in Dollar Equivalents as of the applicable Computation Date. "Affiliate" means, as to any Person, any other Person which, directly --------- or indirectly, is in control of, is controlled by, or is under common control with, such Person. A Person shall be deemed to control another Person if the controlling Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of the other Person, whether through the ownership of voting securities, by contract, or otherwise. 1 "Affiliate Bank" means (i) with respect to any Facility A Bank that -------------- has a Facility A Canadian Commitment and that is a Facility A Domestic Bank but is not a Facility A Canadian Bank, the affiliate of such Facility A Domestic Bank that is serving as a Facility A Canadian Bank and (ii) with respect to any Facility A Bank that is a Facility A Canadian Bank but is not a Facility A Domestic Bank, the affiliate of such Facility A Canadian Bank that is serving as a Facility A Domestic Bank. The Affiliate Bank of each Facility A Bank as of the Closing Date is set forth on Schedule 2.1 hereof ------------ "Agent" means BofA in its capacity as administrative agent for the ----- Banks hereunder, and any successor agent arising under Section 10.9. "Agents" means the Agent and the Canadian Administrative Agent. ------ "Agent-Related Persons" means the Agent and the Canadian --------------------- Administrative Agent and any successor agent arising under Section 10.9, together with their respective Affiliates (including, in the case of BofA, the Arranger), and the officers, directors, employees, agents and attorneys-in-fact of such Persons and Affiliates. "Agent's Payment Office" means the address for payments set forth on ---------------------- Schedule 11.2 in relation to each Applicable Agent, or such other address as - ------------- either Applicable Agent may from time to time specify. "Agreement" means this Credit Agreement. --------- "Applicable Agent" means (1) the Agent in the case of Facility A ---------------- Domestic Loans and Facility B Loans and (2) the Canadian Administrative Agent in the case of Facility A Canadian Loans and in connection with the Bankers' Acceptance Facility. "Applicable Currency" means, as to any particular payment or Loan, ------------------- Dollars in the case of Facility A Domestic Loans and Facility B Loans and Canadian Dollars in the case of Facility A Canadian Loans and the Bankers' Acceptance Facility. "Applicable Facility Fee" means, on any date and with respect to each ----------------------- Loan (subject to clauses (b) through (d) of the definition of "Applicable Rating Level"), the applicable fee (in basis points) set forth below based on the type of Loan and the Applicable Rating Level on such date:
Applicable Applicable Facility Rating Level Fee (in basis points) ------------ --------------------- Facility Facility A Loans B Loans -------- -------- Level I 7.0 5.0 Level II 8.0 6.0 Level III 9.0 7.0
2 Level IV 11.0 9.0 Level V 15.0 12.5 Level VI 20.0 17.5
"Applicable Margin" means, on any date and with respect to each ----------------- Offshore Rate Loan or Bankers' Acceptance (subject to clauses (b) through (d) of the definition of "Applicable Rating Level"), the applicable margin set forth below based on the Applicable Rating Level on such date:
Applicable Applicable Margin Rating Level (in basis points) ------------ ------------------ Facility Facility A Loans B Loans -------- --------- Level I 18.0 20.0 Level II 22.0 24.0 Level III 23.5 25.5 Level IV 26.5 28.5 Level V 30.0 32.5 Level VI 47.5 50.0
The margin set forth above for any Applicable Rating Level on a given date shall be increased by fifteen (15.0) basis points if, on such date, the sum of the Total Utilization of Facility A Commitments on such date and the outstanding Facility B Loans on such date exceeds 30% of the total Commitments and the Term Loans outstanding on such date. "Applicable Rating Level" shall mean and be determined by the ratings ----------------------- issued from time to time by S&P and Moody's (or S&P or Moody's, if ratings shall be available from only one of such Rating Agencies) in respect of the Company's long-term, senior unsecured debt in accordance with the following:
Rating Level S&P Moody's ------------ --- ------- Level I A or more A2 or more favorable favorable Level II A- A3 Level III BBB+ Baa1 Level IV BBB Baa2 Level V BBB- Baa3 Level VI BB+ or less Ba1 or less or not rated or not rated
For purposes of the foregoing, (a) if ratings are available from both S&P and Moody's, and the ratings available from such Rating Agencies do not correspond to the same rating level on the chart above, then (1) if such rating levels differ by 3 only one level on the chart above, then the Applicable Rating Level shall correspond to the higher of the two ratings, and (2) if such rating levels differ by more than one level on the chart above, then the Applicable Rating Level shall correspond to that rating which is one rating higher than the lower of the two ratings; (b) if determinative ratings shall change (other than as a result of a change in the rating system used by any applicable Rating Agency) such that a change in the Applicable Rating Level would result, such change shall effect a change in the Applicable Rating Level as of the day on which the Agent receives notice of such change (such day, a "Change Day"), ---------- and any change in the Applicable Margin shall take effect commencing on such Change Day and ending on the date immediately preceding the next Change Day; (c) if the rating system of any of the Rating Agencies shall change prior to the date all obligations hereunder have been paid and the Commitments cancelled, the Company and the Majority Banks shall negotiate in good faith to amend the references to specific ratings in this definition to reflect such changed rating system, and pending such amendment, if no Applicable Rating Level is otherwise determinable based upon the foregoing, the most recent Applicable Rating Level in effect shall apply; (d) if the Company shall fail to give notice to the Agent of any change in rating by any Rating Agency in respect of the Company's long-term, senior unsecured debt on the date required by Section 6.10, the Applicable Rating Level shall be deemed to be Level VI for the period from the date such notice was required to be delivered to the date such notice is received by the Agent; and (e) subject to subsection 2.8(c), upon the occurrence of and during the existence of an Event of Default, the Applicable Rating Level shall be deemed to be Level VI. "Arranger" means NationsBanc Montgomery Securities LLC, a Delaware -------- limited liability company. "Assignee" has the meaning specified in subsection 11.8(a). -------- "Assignment and Acceptance" has the meaning specified in subsection ------------------------- 11.8(a). "Attorney Costs" means and includes all reasonable fees and -------------- disbursements of any law firm or other external counsel, the allocated reasonable cost of internal legal services and all reasonable disbursements of internal counsel; provided that no fees or disbursements shall qualify as -------- Attorney Costs unless written evidence substantiating such fees and disbursements is available to the Company upon request. "Bank" has the meaning specified in the introductory clause hereto. ---- "Bankers' Acceptance" has the meaning assigned to that term in Section ------------------- 2.18(a). "Bankers' Acceptance Facility" means the facility established by ---------------------------- Section 2.18. "Bankruptcy Code" means the Federal Bankruptcy Reform Act of 1978 (11 --------------- U.S.C. (S)101, et seq.). ------- 4 "Base Rate" means, for any day, the higher of: (a) 0.50% per annum --------- above the Federal Funds Rate in effect for that day; and (b) the rate of interest in effect for such day as publicly announced from time to time by BofA in San Francisco, California, as its "reference rate." (The "reference rate" is a rate set by BofA based upon various factors including BofA's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate.) Any change in the reference rate announced by BofA shall take effect at the opening of business on the day specified in the public announcement of such change. "Base Rate Loan" means a Loan that bears interest based on the Base -------------- Rate. "BofA" means Bank of America National Trust and Savings Association, a ---- national banking association. "BofA Canada " means Bank of America Canada. ------------ "Borrower" means the Company and/or Medis. -------- "Borrowing" means a borrowing hereunder consisting of Loans of the --------- same Facility and Type made to the same Borrower on the same day by the Banks under Article II, and, other than in the case of Base Rate Loans, having the same Interest Period. "Borrowing Date" means any date on which a Borrowing occurs under -------------- Section 2.3. "Business Day" means any day other than a Saturday, Sunday or other ------------ day on which commercial banks in New York City, Chicago or San Francisco, or, in the case of Facility A Canadian Loans or in connection with the Bankers' Acceptance Facility, Toronto or Montreal, are authorized or required by law to close and, if the applicable Business Day relates to any Offshore Rate Loan, means such a day on which dealings in the Applicable Currency are carried on in the applicable offshore interbank market. "Canadian Administrative Agent" means Bank of America Canada, in its ----------------------------- capacity as the Canadian administrative agent for the Facility A Canadian Banks, and any successor arising under Section 10.9. "Canadian Administrative Agent's Payment Office" means the address for ---------------------------------------------- payments set forth on Schedule 11.2 in relation to the Canadian Administrative ------------- Agent, or such other address as the Canadian Administrative Agent may from time to time specify. "Canadian Dollars" and "Cdn.$" each means the lawful money of Canada. ---------------- ----- "Canadian Participant" has the meaning set forth in subsection -------------------- 2.1(a)(ii). "Canadian Participation" has the meaning set forth in subsection ---------------------- 2.1(a)(ii). 5 "Canadian Prime Rate" means, for any day, with respect to any Facility ------------------- A Canadian Loan, the higher of (a) the rate announced by the Canadian Administrative Agent from time to time as its prime lending rate, as in effect from time to time, and (b) a rate equal to the effective rate that a Bankers' Acceptance would bear if made on such day in accordance with Section 2.18. As to any loan, the Canadian Prime Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer. The Canadian Administrative Agent may make commercial loans or other loans at rates of interest at, above or below the Canadian Prime Rate. Any change in the reference rate announced by the Canadian Administrative Agent shall take effect at the opening of business on the day specified in the announcement of such change. "Canadian Prime Rate Loans" means Facility A Canadian Loans bearing ------------------------- interest at rates determined by reference to the Canadian Prime Rate. "Canadian Spot Rate" means the rate quoted by BofA as the spot rate ------------------ for the purchase by BofA of such currency with another currency through its FX Trading Office at approximately 8:00 a.m. (San Francisco time) on the date two Business Days prior to the date as of which the foreign exchange computation is made. "Capital Adequacy Regulation" means any guideline, request or --------------------------- directive of any central bank or other Governmental Authority, or any other law, rule or regulation, whether or not having the force of law, in each case, regarding capital adequacy of any bank or of any corporation controlling a bank. "Clearing House" means The Canadian Depository for Securities Limited, -------------- or such alternative clearing house within the meaning of The Depository Bills and Notes Act (Canada) as may be agreed upon by the Borrowers and the Facility A Canadian Banks. "Closing Date" means the date on which all conditions precedent set ------------ forth in Section 4.1 are satisfied or waived by all Banks (or, in the case of subsection 4.1(e), waived by the Person entitled to receive such payment). "Code" means the Internal Revenue Code of 1986, and regulations ---- promulgated thereunder. "Commitment" means, as of any date of determination as to each Bank, ---------- the aggregate amount of the Facility A Commitment of such Bank and the Facility B Commitment of such Bank in effect on such date, and "Commitments" means the ----------- aggregate amount of the Commitments for each Bank in effect on such date. "Company" has the meaning specified in the introductory clause hereto. ------- "Compliance Certificate" means a certificate substantially in the form ---------------------- of Exhibit C. "Computation Date" has the meaning specified in subsection 2.16(a). ---------------- 6 "Contingent Obligation" means, as to any Person, any direct or --------------------- indirect liability of that Person, whether or not contingent, with or without recourse, (a) with respect to any Indebtedness, lease, dividend, letter of credit or other obligation (the "primary obligations") of another Person (the "primary obligor"), including any obligation of that Person (i) to purchase, repurchase or otherwise acquire such primary obligations or any security therefor, (ii) to advance or provide funds for the payment or discharge of any such primary obligation, or to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency or any balance sheet item, level of income or financial condition of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation, or (iv) otherwise to assure or hold harmless the holder of any such primary obligation against loss in respect thereof (each, a "Guaranty Obligation"); (b) with ------------------- respect to any Surety Instrument issued for the account of that Person or as to which that Person is otherwise liable for reimbursement of drawings or payments; (c) to purchase any materials, supplies or other property from, or to obtain the services of, another Person if the relevant contract or other related document or obligation requires that payment for such materials, supplies or other property, or for such services, shall be made regardless of whether delivery of such materials, supplies or other property is ever made or tendered, or such services are ever performed or tendered, or (d) in respect of any Swap Contract. The amount of any Contingent Obligation shall, in the case of Guaranty Obligations, be deemed equal to the stated or determinable amount of the primary obligation in respect of which such Guaranty Obligation is made or, if not stated or if indeterminable, the maximum reasonably anticipated liability in respect thereof, and in the case of other Contingent Obligations, shall be equal to the maximum reasonably anticipated liability in respect thereof. "Contractual Obligation" means, as to any Person, any provision of any ---------------------- security issued by such Person or of any agreement, undertaking, contract, indenture, mortgage, deed of trust or other instrument, document or agreement to which such Person is a party or by which it or any of its property is bound. "Conversion/Continuation Date" means any date on which, under Section ---------------------------- 2.4, the Company or Medis, as the case may be, (a) converts Loans of one Type to another Type, or (b) continues as Loans of the same Type, but with a new Interest Period, Loans having Interest Periods expiring on such date. "Default" means any event or circumstance which, with the giving of ------- notice, the lapse of time, or both, would (if not cured or otherwise remedied during such time) constitute an Event of Default. "Dollar Equivalent" means, at any time, (a) as to any amount ----------------- denominated in Dollars, the amount thereof at such time, and (b) as to any amount denominated in Canadian Dollars, the equivalent amount in Dollars as determined by the Agent at such time on the basis of the Canadian Spot Rate for the purchase of Dollars with Canadian Dollars on the most recent Computation Date provided for in subsection 2.16(a). 7 "Dollars", "dollars" and "$" each means the lawful money of the United ------- ------- - States. "Draft" means, at any time, a blank bill of exchange, within the ----- meaning of the Bills of Exchange Act (Canada), in substantially the form of Exhibit H-1 annexed hereto, issued by Medis to be accepted by a Facility A Canadian Bank (which upon such acceptance will be a Bankers' Acceptance) and bearing such distinguishing letters and numbers as such Facility A Canadian Bank may determine, but which at such time, except as otherwise provided herein, has not been completed or accepted by a Facility A Canadian Bank. "Drawing" means an acceptance of completed Drafts by a Facility A ------- Canadian Bank or by any other Person pursuant to Section 2.18. "Drawing Date" means any Business Day fixed pursuant to subsection ------------ 2.18(b) for a Drawing. "Drawing Fee" means, with respect to the Drafts issued by Medis ----------- hereunder and accepted as provided herein on any Drawing Date, an amount equal to the Drawing Fee Rate multiplied by the aggregate Face Amount of such Drafts, calculated, in each case, on the basis of the term to maturity of such Draft and a year of 365 days (rounded to the nearest whole cent, with one-half of one cent being rounded up). "Drawing Fee Rate" means, in calculating the Drawing Fee for any ---------------- Draft, the Applicable Margin for Facility A Loans. "Drawing Notice" has the meaning assigned to that term in subsection -------------- 2.18(b)(1). "Drawing Purchase Price" means, in respect of Drafts to be accepted by ---------------------- a Facility A Canadian Bank or any other Person, the difference between (i) the result (rounded to the nearest whole cent, with one-half of one cent being rounded up) obtained by dividing the aggregate Face Amount of such Drafts by the sum of one plus the product of (x) the Effective Discount Rate multiplied by (y) a fraction the numerator of which is the term of maturity of such Drafts and the denominator of which is 365; and (ii) the applicable Drawing Fee. "Effective Discount Rate" means, in respect of any Bankers' ----------------------- Acceptances to be purchased by a Facility A Canadian Bank or any other Person pursuant hereto, the discount rate at which the Canadian Administrative Agent would purchase, at 10:00 a.m. (Toronto time) on the relevant Drawing Date, its own Bankers' Acceptances having an aggregate Face Amount equal to and with a term to maturity the same as the Bankers' Acceptances to be acquired by such Facility A Bank or other Person on such Drawing Date. "Eligible Assignee" means (i) a commercial bank organized under the ----------------- laws of the United States, or any state thereof, and having a combined capital and surplus of at least $100,000,000; (ii) a commercial bank organized under the laws of any other country which is a member of the OECD, or a political subdivision of any such country, and having a combined capital and surplus of at least $100,000,000, provided that such bank is acting through a branch or agency located in the United States or Canada; and (iii) a Person that is primarily engaged in 8 the business of commercial banking and that is (A) a Subsidiary of a Bank, (B) a Subsidiary of a Person of which a Bank is a Subsidiary, or (C) a Person of which a Bank is a Subsidiary; provided that an Eligible Assignee in respect of the Facility A Canadian Loans shall mean only a Schedule I Bank, a Schedule II Bank or another Person who is a resident of Canada for purposes of the Income Tax Act (Canada) and the regulations promulgated thereunder or another person who is not subject to tax under Part XIII of such statute. "Employee Benefit Plan" means any "employee benefit plan" as defined --------------------- in Section 3(3) of ERISA which is, or was at any time, maintained or contributed to by the Company or any of its ERISA Affiliates. "Environmental Laws" means all federal, state, provincial or local ------------------ laws, statutes, common law duties, rules, regulations, ordinances and codes, together with all administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any Governmental Authorities, in each case relating to environmental, health, safety or land use matters. "ERISA" means the Employee Retirement Income Security Act of 1974, and ----- regulations promulgated thereunder. "ERISA Affiliate", as applied to any Person, means (i) any corporation --------------- which is, or was at any time, a member of a controlled group of corporations within the meaning of Section 414(b) of the Code of which that Person is, or was at any time, a member; (ii) any trade or business (whether or not incorporated) which is, or was at any time, a member of a group of trades or businesses under common control within the meaning of Section 414(c) of the Code of which that Person is, or was at any time, a member; and (iii) any member of an affiliated service group within the meaning of Section 414(m) or (o) of the Code of which that Person, any corporation described in clause (i) above or any trade or business described in clause (ii) above is, or was at any time, a member; provided that an ERISA Affiliate shall not include a Person that was a member, as referenced in clause (i), (ii) or (iii) above if the Company or any of its Subsidiaries would not have any liability in connection with an ERISA Event with respect to such Person. "ERISA Event" means (i) a "reportable event" within the meaning of ----------- Section 4043 of ERISA and the regulations issued thereunder with respect to any Pension Plan (excluding those for which the provision for 30-day notice to the PBGC has been waived by regulation); (ii) the failure to meet the minimum funding standard of Section 412 of the Code with respect to any Pension Plan (whether or not waived in accordance with Section 412(d) of the Code) or the failure to make by its due date a required installment under Section 412(m) of the Code with respect to any Pension Plan or the failure to make any required contribution to a Multiemployer Plan; (iii) the provision by the administrator of any Pension Plan pursuant to Section 4041(a)(2) of ERISA of a notice of intent to terminate such plan in a distress termination described in Section 4041(c) of ERISA; (iv) the withdrawal by the Company or any of its ERISA Affiliates from any Pension Plan with two or more contributing sponsors or the termination of any such Pension Plan resulting in liability pursuant to Sections 4063 or 4064 of ERISA; (v) the 9 institution by the PBGC of proceedings to terminate any Pension Plan, or the occurrence of any event or condition which might constitute grounds under ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan; (vi) the imposition of liability on the Company or any of its ERISA Affiliates pursuant to Section 4062(e) or 4069 of ERISA or by reason of the application of Section 4212(c) of ERISA; (vii) the withdrawal by the Company or any of its ERISA Affiliates in a complete or partial withdrawal (within the meaning of Sections 4203 and 4205 of ERISA) from any Multiemployer Plan if there is any potential liability therefor, or the receipt by the Company or any of its ERISA Affiliates of notice from any Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA, or that it intends to terminate or has terminated under Section 4041A or 4042 of ERISA; (viii) the occurrence of an act or omission which could give rise to the imposition on the Company or any of its ERISA Affiliates of fines, penalties, taxes or related charges under Chapter 43 of the Code or under Section 409 or 502(c), (i) or (l) or 4071 of ERISA in respect of any Employee Benefit Plan; (ix) the assertion of a material claim (other than routine claims for benefits) against any Employee Benefit Plan other than a Multiemployer Plan or the assets thereof, or against the Company or any of its ERISA Affiliates in connection with any such Employee Benefit Plan; (x) receipt from the Internal Revenue Service of notice of the failure of any Pension Plan (or any other Employee Benefit Plan intended to be qualified under Section 401(a) of the Code) to qualify under Section 401(a) of the Code, or the failure of any trust forming part of any Pension Plan to qualify for exemption from taxation under Section 501(a) of the Code; or (xi) the imposition of a Lien pursuant to Section 401(a)(29) or 412(n) of the Code or pursuant to ERISA with respect to any Pension Plan. "Eurodollar Reserve Percentage" has the meaning specified in the ----------------------------- definition of "Offshore Rate." "Event of Default" means any of the events or circumstances specified ---------------- in Section 9.1. "Exchange Act" means the Securities Exchange Act of 1934, and ------------ regulations promulgated thereunder. "Existing Credit Agreements" has the meaning specified in Section -------------------------- 11.5. "Exposure" means (a) (i) prior to the termination of the Facility A -------- Commitment, such Bank's Facility A Commitment and (ii) after the termination of the Facility A Commitments, the Total Utilization of Facility A Commitments for such Bank plus (b) (i) prior to the termination of the Facility B Commitment, such Bank's Facility B Commitment and (ii) after the termination of the Facility B Commitments, the aggregate outstanding principal amount of the Facility B Loans made by such Bank. "Face Amount" means, in respect of a Draft or a Bankers' Acceptance, ----------- as the case may be, the amount payable to the holder thereof on its maturity. "Facility A Bank" means a Bank having a Facility A Commitment as set --------------- forth on Schedule 2.1 hereof and its successors and assigns. With respect to ------------ Facility A Canadian Loans 10 and the Bankers' Acceptance Facility, Facility A Banks shall be the Facility A Canadian Banks and, with respect to Facility A Domestic Loans, Facility A Banks shall be the Facility A Domestic Banks. "Facility A Canadian Bank" means each Canadian bank listed on Schedule ------------------------ -------- 2.1 as a Facility A Canadian Bank and its successors and assigns. - --- "Facility A Canadian Commitment" means, as to each Facility A Canadian ------------------------------ Bank, an aggregate amount equal to the amount set forth opposite its name in the column under the heading "Facility A Canadian Commitments" on Schedule 2.1 (as ------------ the same may be reduced under Section 2.5 or as a result of one or more assignments under Section 11.8). The Facility A Canadian Commitment for any Facility A Canadian Bank that has an Affiliate Bank is a single value for such Facility A Canadian Bank and its Affiliate Bank taken together. "Facility A Canadian Exposure" means, as to any Facility A Canadian ---------------------------- Bank, the Exposure of such Bank with respect to its Facility A Canadian Commitment, its Facility A Canadian Loans and its Acceptance Usage. "Facility A Canadian Loan" means any Facility A Loan made to Medis ------------------------ pursuant to Section 2.1(a) denominated in Canadian Dollars which may be an Offshore Rate Loan or a Canadian Prime Rate Loan "Facility A Canadian Pro Rata Share" means, as to any Facility A ---------------------------------- Canadian Bank at any time, the percentage equivalent (expressed as a decimal, rounded to the ninth decimal place) at such time of such Facility A Canadian Bank's Facility A Canadian Exposure divided by the combined Facility A Canadian Exposure of all Facility A Canadian Banks (including, in each case, Exposure of Affiliate Banks). "Facility A Commitment", as to each Bank, has the meaning specified in --------------------- Section 2.1(a) and includes its Facility A Canadian Commitment, if any. The Facility A Commitment for any Facility A Bank that has an Affiliate Bank is a single value for such Facility A Bank and its Affiliate Bank taken together. "Facility A Domestic Bank" means each Facility A Bank acting in the ------------------------ capacity of a domestic bank listed on Schedule 2.1 as a Facility A Domestic Bank ------------ and its successors and assigns. "Facility A Domestic Loan" means any Facility A Loan made to the ------------------------ Company pursuant to Section 2.1(a) denominated in Dollars which may be an Offshore Rate Loan or a Base Rate Loan. "Facility A Exposure" means, as to any Bank, the Exposure of such Bank ------------------- with respect to its Facility A Commitment, its Facility A Loans and its Acceptance Usage. "Facility A Loan" means a Facility A Domestic Loan or a Facility A --------------- Canadian Loan. 11 "Facility A Pro Rata Share" means, as to any Facility A Bank at any ------------------------- time, the percentage equivalent (expressed as a decimal, rounded to the ninth decimal place) at such time of such Facility A Bank's Facility A Exposure divided by the combined Facility A Exposure of all Facility A Banks (including, in each case, Exposure of Affiliate Banks). "Facility A Termination Date" means the earlier to occur of: --------------------------- (a) November 9, 2003, and (b) the date on which the Commitments terminate in accordance with the provisions of this Agreement. "Facility B Bank" means a Bank having a Facility B Commitment as set --------------- forth on Schedule 2.1 hereof and its successors and assigns. ------------ "Facility B Commitment", as to each Facility B Bank, has the meaning --------------------- specified in Section 2.1(b). "Facility B Exposure" means, as to any Bank, the Exposure of such Bank ------------------- with respect to its Facility B Commitment and its Facility B Loans. "Facility B Loan" means any Loan made to the Company pursuant to --------------- Section 2.1(b) which may be an Offshore Rate Loan or a Base Rate and which, depending upon the date such Loan is made, may be a revolving loan or a term loan. "Facility B Pro Rata Share" means, as to any Facility B Bank at any ------------------------- time, the percentage equivalent (expressed as a decimal, rounded to the ninth decimal place) at such time of such Facility B Bank's Facility B Exposure divided by the combined Facility B Exposure of all Facility B Banks. "Facility B Revolving Loans" means all outstanding Facility B Loans as -------------------------- of any date from the date of this Agreement until the Facility B Revolving Termination Date. "Facility B Revolving Termination Date" means the earlier to occur of: ------------------------------------- (a) November 8, 1999; and (b) the date on which the Commitments terminate in accordance with the provisions of this Agreement. "FDIC" means the Federal Deposit Insurance Corporation, and any ---- Governmental Authority succeeding to any of its principal functions. "Federal Funds Rate" means, for any day, the rate set forth in the ------------------ weekly statistical release designated as H.15(519), or any successor publication, published by the Federal Reserve Bank of New York (including any such successor, "H.15(519)") on the preceding Business Day opposite the caption "Federal Funds (Effective)"; or, if for any relevant day such 12 rate is not so published on any such preceding Business Day, the rate for such day will be the arithmetic mean as determined by the Agent of the rates for the last transaction in overnight Federal funds arranged prior to 9:00 a.m. (New York City time) on that day by each of three leading brokers of Federal funds transactions in New York City selected by the Agent. "Fee Letter" has the meaning specified in subsection 2.9(a). ---------- "FRB" means the Board of Governors of the Federal Reserve System, and --- any Governmental Authority succeeding to any of its principal functions. "FX Trading Office" means the Foreign Exchange Trading Center #5193, ----------------- San Francisco, California, of BofA, or such other of BofA's offices as BofA may designate from time to time or, if BofA is no longer the Agent, the offices of Agent as Agent may designate from time to time. "GAAP" means generally accepted accounting principles set forth from ---- time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the U.S. accounting profession), which are applicable to the circumstances as of the date of determination; provided that with respect to Subsidiaries not organized in the United States, "GAAP" means generally accepted accounting principles in accordance with agencies with similar function of comparable stature and authority within the accounting profession in the relevant jurisdiction. "Governmental Authority" means any nation or government, any state or ---------------------- other political subdivision thereof, any central bank (or similar monetary or regulatory authority) thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "Guaranty" means the Company's guaranty of the Obligations of Medis -------- under this Agreement, the terms of which guaranty are located in Article VIII of this Agreement. "Guarantied Obligations" has the meaning assigned to that term in ---------------------- Section 8.1. "Guaranty Obligation" has the meaning specified in the definition of ------------------- "Contingent Obligation". "Indebtedness" of any Person means, without duplication, (a) all ------------ indebtedness for borrowed money; (b) all obligations issued, undertaken or assumed as the deferred purchase price of property or services (other than trade payables entered into in the ordinary course of business on ordinary terms); (c) all non-contingent reimbursement or payment obligations with respect to Surety Instruments; provided that this clause (c) shall not include up to $25,000,000 of non-contingent reimbursement or payment obligations with respect to Surety Instruments that do not support indebtedness for borrowed money to the extent that no default has occurred with 13 respect to the payment thereof; (d) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced incurred in connection with the acquisition of property, assets or businesses; (e) all indebtedness created or arising under any conditional sale or other title retention agreement, or incurred as financing, in either case with respect to property acquired by the Person (even though the rights and remedies of the seller or bank under such agreement in the event of default are limited to repossession or sale of such property); (f) all obligations with respect to capital leases; (g) all net obligations with respect to Swap Contracts; and (h) all indebtedness referred to in clauses (a) through (g) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in property (including accounts and contracts rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness. "Indemnified Liabilities" has the meaning specified in Section 11.5. ----------------------- "Indemnified Person" has the meaning specified in Section 11.5. ------------------ "Independent Auditor" has the meaning specified in subsection 6.1(a). ------------------- "Ineligible Securities" has the meaning specified in subsection --------------------- 7.3(b). "Insolvency Proceeding" means (a) any case, action or proceeding --------------------- before any court or other Governmental Authority relating to bankruptcy, reorganization, insolvency, liquidation, receivership, dissolution, winding-up or relief of debtors, or (b) any general assignment for the benefit of creditors, composition, marshalling of assets for creditors, or other similar arrangement in respect of its creditors generally or any substantial portion of its creditors; undertaken under U.S. Federal, state or foreign law, including the Bankruptcy Code. "Interest Payment Date" means, as to any Offshore Rate Loan, the last --------------------- day of each Interest Period applicable to such Loan and, as to any Base Rate Loan or Canadian Prime Rate Loan, the last Business Day of each calendar quarter; provided, however, that if any Interest Period for an Offshore Rate -------- ------- Loan exceeds three months, the date that falls three months after the beginning of such Interest Period and after each Interest Payment Date thereafter is also an Interest Payment Date. "Interest Period" means, as to any Offshore Rate Loan, the period --------------- commencing on the Borrowing Date of such Loan or on the Conversion/Continuation Date on which the Loan is converted into or continued as an Offshore Rate Loan, and ending on the date one, two, three or six months thereafter as selected by the Company or Medis in its Notice of Borrowing or Notice of Conversion/Continuation; provided that: (1) if any Interest Period would otherwise end on a day that is not a Business Day, that Interest Period shall be extended to the following Business Day unless the result of such extension would be to carry such Interest 14 Period into another calendar month, in which event such Interest Period shall end on the preceding Business Day; (2) any Interest Period pertaining to an Offshore Rate Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month at the end of such Interest Period; and (3) no Interest Period for any Loan shall extend beyond (i) in the case of Facility A Loans, the Facility A Termination Date; (ii) in the case of the Facility B Revolving Loans, until a Notice of Borrowing has been received by the Agent in accordance with subsection 2.15(b), the Facility B Revolving Termination Date; provided that once -------- such Notice of Borrowing has been received by the Agent in accordance with subsection 2.15(b), the limitation in subpart (iii) of this paragraph shall apply to the Facility B Revolving Loans; and (iii) the Term Loan Maturity Date, in the case of the Term Loans . "IRS" means the Internal Revenue Service, and any Governmental --- Authority succeeding to any of its principal functions under the Code. "Lending Office" means, as to any Bank, the office or offices of such -------------- Bank specified as its "Lending Office" or "Domestic Lending Office" or "Offshore Lending Office", as the case may be, on Schedule 11.2, or such other office or ------------- offices as such Bank may from time to time notify the Company and the Agent. "LIBOR" has the meaning specified in the definition of the "Offshore ----- Rate." "Lien" means any security interest, mortgage, deed of trust, pledge, ---- hypothecation, assignment, charge or deposit arrangement, encumbrance, lien (statutory or other) or preferential arrangement of any kind or nature whatsoever in respect of any property (including those created by, arising under or evidenced by any conditional sale or other title retention agreement, the interest of a lessor under a capital lease, any financing lease having substantially the same economic effect as any of the foregoing, or the filing of any financing statement naming the owner of the asset to which such lien relates as debtor, under the Uniform Commercial Code or any comparable law, but not including the interest of a lessor under an operating lease or the sale of accounts receivable, whether or not such sale is evidenced by the filing of a financing statement under the Uniform Commercial Code) and any contingent or other agreement to provide any of the foregoing. "Loan" means an extension of credit by a Bank to a Borrower under ---- Article II, and may be a Base Rate Loan, Canadian Prime Rate Loan or an Offshore Rate Loan (each, a "Type" of Loan). ---- "Loan Documents" means this Agreement, any Notes, any Drafts, any -------------- Bankers' Acceptances and all other documents delivered to the Agent or any Bank in connection herewith. 15 "Majority Banks" means at any time Banks then holding 51% of the -------------- combined Exposure at such time of all Banks. "Margin Stock" means "margin stock" as such term is defined in ------------ Regulation T, U or X of the FRB. "Material Adverse Effect" means (a) a material adverse change in, or a ----------------------- material adverse effect upon, the operations, business, properties, condition (financial or otherwise) or prospects of the Company and its Subsidiaries taken as a whole or any Material Subsidiary; (b) a material impairment of the ability of any Borrower to perform under any Loan Document and to avoid any Event of Default; or (c) a material adverse effect upon the legality, validity, binding effect or enforceability against any Borrower of any Loan Document. "Material Subsidiary" means, at any time, (i) Medis and (ii) any other ------------------- Subsidiary having at such time 10% or more of the Company's consolidated total (gross) revenues for the preceding four fiscal quarter period, as of the last day of the preceding fiscal quarter based upon the Company's most recent annual or quarterly financial statements delivered to the Agent under Section 6.1. "Medis" has the meaning specified in the introductory paragraph ----- hereto. "Member" means a Facility A Canadian Bank that has entered into a ------ contract of membership with the Clearing House. "Moody's" means Moody's Investors Service, Inc. and any successor ------- thereto that is a nationally-recognized rating agency. "Multiemployer Plan" means a "multiemployer plan", as defined in ------------------ Section 3(37) of ERISA, to which the Company or any of its ERISA Affiliates is contributing, or ever has contributed, or to which the Company or any of its ERISA Affiliates has, or ever has had, an obligation to contribute. "Net Worth" means the sum of the capital stock and additional paid in --------- capital plus retained earnings (or minus accumulated deficits) of the Company and its Subsidiaries determined on a consolidated basis in conformity with GAAP on such date. "Note" means a promissory note executed by a Borrower in favor of a ---- Bank pursuant to subsection 2.2(b), substantially in the form of Exhibit F-1 in the case of the Company with respect to Facility A Domestic Loans, substantially in the form of Exhibit F-2 in the case of Medis with respect to Facility A Canadian Loans or substantially in the form of Exhibit F-3 in the case of the Company with respect to Facility B Loans. "Notice of Borrowing" means a notice substantially in the form of ------------------- Exhibit A. "Notice of Conversion/Continuation" means a notice substantially in --------------------------------- the form of Exhibit B. 16 "Obligations" means all advances, debts, liabilities, obligations, ----------- covenants and duties arising under any Loan Document owing by either of the Borrowers to any Bank, the Agent, or any Indemnified Person, whether direct or indirect (including those acquired by assignment), absolute or contingent, due or to become due, now existing or hereafter arising. "OECD" means the Organization for Economic Cooperation and ---- Development. "Offshore Rate" means, for any Interest Period, with respect to ------------- Offshore Rate Loans comprising part of the same Borrowing, the rate of interest per annum (rounded upward to the next 1/100th of 1%) determined by the Agent as follows: Offshore Rate = LIBOR ------------------------------------ 1.00 - Eurodollar Reserve Percentage Where, "Eurodollar Reserve Percentage" means for any day for any ----------------------------- Interest Period (A) in the case of Facility A Domestic Loans or Facility B Loans, the maximum reserve percentage (expressed as a decimal, rounded upward to the next 1/100th of 1%) in effect on such day (whether or not applicable to any Facility A Domestic Bank or Facility B Bank) under regulations issued from time to time by the FRB for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to Eurocurrency funding (currently referred to as "Eurocurrency liabilities") and (B) in the case of Facility A Canadian Loans, the maximum reserve percentage (expressed as a decimal, rounded upward to the next 1/100th of 1%) in effect on such day (whether or not applicable to any Facility A Canadian Bank) under any applicable regulations of the central bank or other relevant Governmental Authority in Canada; and "LIBOR" means the London Interbank Offering Rate for, as ----- applicable, 1-, 2-, 3- or 6-month dollar deposits, appearing on page 3750 of the Dow Jones Telerate Screen (or on any successor or substitute page of such service, or any successor to or substitute for such service, providing rate quotations comparable to those currently provided on such page of such service, as determined by the Agent from time to time for purposes of providing quotations of interest rates applicable to dollar deposits in the interbank market) at approximately 11:00 a.m. (London time) two days prior to the commencement of such Interest Period. If, for any reason, such rate is unavailable at such time, then LIBOR shall be the rate of interest per annum determined by the Agent to be the arithmetic mean (rounded upward to the next 1/16th of 1%) of the rates of interest per annum notified to the Agent by each Reference Bank as the rate of interest at which deposits in the Applicable Currency in the approximate amount of the amount of the Loan to be made or continued as, or converted into, an Offshore Rate Loan by such Reference Bank and having a maturity comparable to such Interest Period would be offered to major banks in the London interbank market at their request at approximately 11:00 a.m. (London time) two Business Days prior to the commencement of such Interest Period. The Offshore Rate shall be adjusted automatically as to all Offshore Rate Loans then outstanding as of the effective date of any change in the Eurodollar Reserve Percentage. 17 "Offshore Rate Loan" means a Loan that bears interest based on an ------------------ Offshore Rate. "Organization Documents" means, for any corporation, the certificate ---------------------- or articles of incorporation, the bylaws, any certificate of determination or instrument relating to the rights of preferred shareholders of such corporation, any shareholder rights agreement, and all applicable resolutions of the board of directors (or any committee thereof) of such corporation. "Other Taxes" means any present or future stamp or documentary taxes ----------- or any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or from the execution, delivery or registration of, or otherwise with respect to, this Agreement or any other Loan Documents. "Overnight Canadian Rate" means, for any day, the rate of interest per ----------------------- annum at which overnight deposits in Canadian Dollars, in an amount approximately equal to the amount with respect to which such rate is being determined, would be offered for such day by Agent's London Branch to major banks in the London or other applicable offshore interbank market "Participant" has the meaning specified in subsection 11.8(d). ----------- "PBGC" means the Pension Benefit Guaranty Corporation, or any ---- Governmental Authority succeeding to any of its principal functions under ERISA. "Pension Plan" means any Employee Benefit Plan, other than a ------------ Multiemployer Plan, which is subject to Section 412 of the Code or Section 302 of ERISA. "Permitted Liens" has the meaning specified in Section 7.1. --------------- "Person" means an individual, partnership, corporation, business ------ trust, limited liability company, joint stock company, trust, unincorporated association, joint venture or other organization or Governmental Authority. "Pro Rata Share" means, as to any Bank at any time, (a) the sum of -------------- such Bank's Facility A Exposure and such Bank's Facility B Exposure, divided by ---------- (b) the sum of (i) the combined Facility A Exposure of all Facility A Banks at such time and (ii) the combined Facility B Exposure of all Facility B Banks at such time. "Rating Agency" means S&P and Moody's. ------------- "Reference Banks" means BofA, The Chase Manhattan Bank, First Union --------------- National Bank and The First National Bank of Chicago. "Requirement of Law" means, as to any Person, any law (statutory or ------------------ common), treaty, rule or regulation or determination of an arbitrator or of a Governmental Authority, in each case applicable to or binding upon the Person or any of its property or to which the Person or any of its property is subject, including but not limited to any Environmental Law. 18 "Responsible Officer" means the chief executive officer, the ------------------- president, any corporate vice president or the treasurer of the Company or Medis; and, with respect to compliance with financial covenants, the chief financial officer or the treasurer of the Company. "S&P" means Standard & Poor's Ratings Group and any successor thereto --- that is a nationally-recognized rating agency. "Schedule I Bank" means any Facility A Canadian Bank that is a bank --------------- referred to in Schedule I to the Bank Act (Canada), S.C. 1991, c.46, as amended. "Schedule II Bank" means any Facility A Canadian Bank that is not a ---------------- Schedule I Bank. "SEC" means the Securities and Exchange Commission, or any --- Governmental Authority succeeding to any of its principal functions. "Subject Bank" has the meaning specified in subsection 2.19. ------------ "Subsidiary" of a Person means any corporation, association, ---------- partnership, limited liability company, joint venture or other business entity of which more than 50% of the voting stock or other equity interests (in the case of Persons other than corporations), is owned or controlled directly or indirectly by the Person, or one or more of the Subsidiaries of the Person, or a combination thereof. Unless the context otherwise clearly requires, references herein to a "Subsidiary" refer to a Subsidiary of the Company. "Surety Instruments" means all letters of credit (including standby ------------------ and commercial), banker's acceptances, bank guaranties, shipside bonds, surety bonds and similar instruments. "Swap Contract" means any agreement (including any master agreement ------------- and any agreement, whether or not in writing, relating to any single transaction) that is an interest rate swap agreement, basis swap, forward rate agreement, commodity swap, commodity option, equity or equity index swap or option, bond option, interest rate option, forward foreign exchange agreement, rate cap, collar or floor agreement, currency swap agreement, cross-currency rate swap agreement, swaption, currency option or any other, similar agreement (including any option to enter into any of the foregoing). "Taxes" means any and all present or future taxes, levies, imposts, ----- deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Bank, the Agent, the Canadian Administrative Agent and any other Person having at any time an interest in any Facility A Canadian Loan or any Bankers' Acceptance, such taxes (including, without limitation, income taxes, capital taxes, minimum taxes, branch taxes, capital gains taxes or franchise taxes) (i) as are imposed on or measured by each Bank's or the Agent's (or such other Person's), as the case may be, net income or taxable capital by the jurisdiction (or any political subdivision thereof) under the laws of which such Bank or the Agent (or such other Person), as the case may be, is organized or in respect of which it is a resident or within 19 which it maintains the actual lending office or (ii) to the extent attributable to a permanent establishment or fixed base located in any jurisdiction (or any political subdivision thereof) identified in (i) hereof. Notwithstanding anything to the contrary herein, Taxes shall include any withholding taxes applied as a result of transactions contemplated by subsection 2.1(a)(ii)(B). "Term Loans" means the Facility B Loans, once all Facility B Loans ---------- have been converted from revolving loans into term loans in accordance with Section 2.15. "Term Loan Maturity Date" means November 8, 2000. ----------------------- "Total Capitalization" means, on any date, the sum of (a) Total Debt -------------------- and (b) the Net Worth on such date. "Total Debt" means, on any date, all Indebtedness of the Company and ---------- its Subsidiaries determined on a consolidated basis on such date. "Total Utilization of Facility A Canadian Commitments" means (i) as to ---------------------------------------------------- all Facility A Banks at any date of determination, the sum of (A) the aggregate principal amount of all outstanding Facility A Canadian Loans plus (B) the Acceptance Usage, in each case valued in Dollar Equivalents, and (ii) as to any Facility A Bank at any date of determination, the sum of (x) the aggregate principal amount of all Facility A Canadian Loans made by such Facility A Canadian Bank or its Affiliate Bank plus (y) the Acceptance Usage of such Facility A Canadian Bank or its Affiliate Bank, in each case valued in Dollar Equivalents. "Total Utilization of Facility A Commitments" means (i) as to all ------------------------------------------- Facility A Banks at any date of determination, the sum of (A) the aggregate principal amount of all outstanding Facility A Loans plus (B) the Acceptance Usage, in each case valued in Dollar Equivalents, and (ii) as to any Facility A Bank at any date of determination, the sum of (x) the aggregate principal amount of all Facility A Loans made by such Facility A Bank or its Affiliate Bank plus (y) the Acceptance Usage of such Facility A Bank or its Affiliate Bank, in each case valued in Dollar Equivalents. "Type" has the meaning specified in the definition of "Loan." ---- "Unfunded Pension Liability" means the excess of a Pension Plan's -------------------------- benefit liabilities under Section 4001(a)(16) of ERISA, over the current value of that Pension Plan's assets, determined in accordance with the assumptions used for funding the Pension Plan pursuant to Section 412 of the Code for the applicable plan year. "United States" and "U.S." each means the United States of America. ------------- ---- "Wholly-Owned Subsidiary" means any corporation in which (other than ----------------------- directors' qualifying shares required by law) 100% of the capital stock of each class having ordinary voting power, and 100% of the capital stock of every other class, in each case, at the 20 time as of which any determination is being made, is owned, beneficially and of record, by the Company, or by one or more of the other Wholly-Owned Subsidiaries, or both. "Year 2000 Problem" means the inability of computers, as well as ----------------- embedded microchips in non-computing devices, to perform properly date-sensitive functions with respect to certain dates prior to and after December 31, 1999. 1.2 Other Interpretive Provisions. ------------------------------ (a) The meanings of defined terms are equally applicable to the singular and plural forms of the defined terms. (b) The words "hereof", "herein", "hereunder" and similar words refer to this Agreement as a whole and not to any particular provision of this Agreement; and subsection, Section, Schedule and Exhibit references are to this Agreement unless otherwise specified. (c) (i) The term "documents" includes any and all instruments, documents, agreements, certificates, indentures, notices and other writings, however evidenced. (ii) The term "including" is not limiting and means "including without limitation." (iii) In the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including"; the words "to" and "until" each mean "to but excluding", and the word "through" means "to and including." (d) Unless otherwise expressly provided herein, (i) references to agreements (including this Agreement) and other contractual instruments shall be deemed to include all subsequent amendments and other modifications thereto, but only to the extent such amendments and other modifications are not prohibited by the terms of any Loan Document, and (ii) references to any statute or regulation are to be construed as including all statutory and regulatory provisions consolidating, amending, replacing, supplementing or interpreting the statute or regulation. (e) The captions and headings of this Agreement are for convenience of reference only and shall not affect the interpretation of this Agreement. (f) This Agreement and the other Loan Documents may use several different limitations, tests or measurements to regulate the same or similar matters. All such limitations, tests and measurements are cumulative and shall each be performed in accordance with their terms. (g) This Agreement and the other Loan Documents are the result of negotiations among and have been reviewed by counsel to the Agents, the Borrowers and the other parties, and are the products of all parties. Accordingly, they shall not be construed against 21 the Banks or the Agents merely because of the Agents' or Banks' involvement in their preparation. 1.3 Accounting Principles. ---------------------- (a) Unless the context otherwise clearly requires, all accounting terms not expressly defined herein shall be construed, and all financial computations required under this Agreement shall be made, in accordance with GAAP, consistently applied. (b) If any changes in accounting principles from those used in the preparation of the financial statements referred to in Section 5.8 hereafter occasioned by the promulgation of rules, regulations, pronouncements and opinions by or required by the Financial Accounting Standards Board or the American Institute of Certified Public Accountants (or successors thereto or agencies with similar functions) result in a change in the method of calculation of financial covenants, standards or terms found in Articles I, VI and VII hereof, the parties hereto agree to enter into negotiations in order to amend such provisions so as to equitably reflect such changes with the desired result that the criteria for evaluating the Company's financial condition shall be the same after such changes as if such changes had not been made. (c) References herein to "fiscal year" and "fiscal quarter" refer to such fiscal periods of the Company. 1.4 Canadian Currency Equivalents. For all purposes of the Loan ----------------------------- Documents (but not for purposes of the preparation of any financial statements delivered pursuant hereto), the equivalent in Canadian Dollars of an amount in Dollars, and the equivalent in Dollars of an amount in Canadian Dollars shall be determined at the Canadian Spot Rate. ARTICLE II THE CREDITS 2.1 Amounts and Terms of Commitments. --------------------------------- (a) (i) Each Facility A Bank severally agrees, on and subject to the terms and conditions set forth herein, to make Facility A Domestic Loans to the Company from time to time as requested by the Company, in accordance with Sections 2.3 and 11.2 on any Business Day during the period from the Closing Date to the Facility A Termination Date, in an aggregate amount not to exceed at any time outstanding a Dollar Equivalent amount equal to the amount set forth opposite its name in the column under the heading "Facility A Commitments" on Schedule 2.1 (such amount as the same may be reduced under Section 2.5 or as a - ------------ result of one or more assignments under Section 11.8, the Bank's "Facility A ---------- Commitment"); provided, however, that, (i) after giving effect to any Borrowing, - ----------- -------- ------- (A) the Total Utilization of Facility A Commitments shall not at any time exceed the combined Facility A Commitments and (B) the sum of (x) the aggregate principal amount of all outstanding Facility B Loans to the Company and (y) the Total Utilization of Facility A Commitments shall not at any time exceed the 22 Commitments; (ii) the Total Utilization of Facility A Commitments of any Facility A Bank (taking into account any Canadian Participations when determining the Total Utilization of Facility A Commitments of a Facility A Canadian Bank) shall not exceed its Facility A Commitment; and (iii) any Facility A Domestic Loan to the Company shall be made by the Facility A Domestic Banks to the Company and shall be denominated and payable in Dollars and no other currency. Within the limits of each Bank's Facility A Commitment, and subject to the other terms and conditions hereof, the Company may borrow under this Section 2.1(a)(i), prepay under Section 2.6 and reborrow under this Section 2.1(a)(i). The aggregate of all Facility A Commitments hereunder on the date of this Agreement is $400,000,000. (ii)(A) Each Facility A Canadian Bank severally agrees, on and subject to the terms and conditions set forth herein, to make Facility A Canadian Loans to Medis from time to time as requested by Medis in accordance with Section 2.3 and 11.2 during the period from the Closing Date to the Facility A Termination Date, in an aggregate amount equivalent to its Facility A Canadian Pro Rata Share of the Dollar Equivalent of the Facility A Canadian Commitments. The original Dollar Equivalent of each Facility A Canadian Bank's Facility A Canadian Commitment is set forth opposite its name on Schedule 2.1 annexed ------------ hereto; provided, however, that, (i) after giving effect to any Borrowing, (A) -------- ------- the Total Utilization of Facility A Commitments shall not at any time exceed the combined Facility A Commitments, (B) Medis shall be a Wholly-Owned Subsidiary of the Company and (C) the sum of (x) the aggregate principal amount of all outstanding Facility B Loans to the Company and (y) the Total Utilization of Facility A Commitments shall not at any time exceed the Commitments; (ii) the Total Utilization of Facility A Commitments of any Facility A Bank (taking into account any Canadian Participations when determining the Total Utilization of Facility A Commitments of a Facility A Canadian Bank) shall not exceed its Facility A Commitment; and (iii) all Facility A Loans to Medis shall be made by the Facility A Canadian Banks, shall be Offshore Rate Loans or Canadian Prime Rate Loans denominated and payable in Canadian Dollars and no other currency and shall not be Base Rate Loans, and the Total Utilization of Facility A Canadian Commitments shall at no time exceed the Facility A Canadian Commitments. Within the limits of each Bank's Facility A Canadian Commitment, and subject to the other terms and conditions hereof, Medis may borrow under this Section 2.1(a)(ii), prepay under Section 2.6 and reborrow under this Section 2.1(a)(ii). The aggregate Dollar Equivalent of the Facility A Canadian Commitments is $100,000,000. (B)(1) Subject to subsection 2.1(a)(ii)(B)(2) below, each Facility A Bank that is not a Facility A Canadian Bank shall be deemed to have purchased, and hereby agrees to purchase, a participation in each outstanding Facility A Canadian Loan in an amount equal to its Facility A Pro Rata Share of the unpaid amount of such Facility A Canadian Loan together with accrued interest thereon (each, a "Canadian Participation"), such Canadian Participation to be governed ---------------------- by this subsection 2.1(a)(ii)(B) and not by subsection 11.8(d) hereof. Only upon demand from any Facility A Canadian Bank on or after the date of (X) any Event of Default under subsections 9.1(a), 9.1(f) or 9.1(g) or (Y) an acceleration of the maturity pursuant to subsection 9.2(b) of any amounts owing to the Facility A Canadian Banks under this Agreement (the date of such demand, the "Participation Funding Date"), each such Facility A Bank that has purchased -------------------------- a Canadian Participation (each a "Canadian Participant") shall deliver to the -------------------- Canadian 23 Administrative Agent an amount equal to its Canadian Participation in same day funds and in Canadian Dollars at the Canadian Administrative Agent's Payment Office for distribution to Facility A Canadian Banks in accordance with their Facility A Canadian Pro Rata Share. If any amount required to be paid by any Canadian Participant pursuant to this subsection 2.1(a)(ii)(B) is not paid to the Canadian Administrative Agent when due but is paid within three Business Days after the date such payment is due, such Canadian Participant shall pay to the Canadian Administrative Agent for distribution to Facility A Canadian Banks on demand an amount equal to the product of (i) such amount, times (ii) the Overnight Canadian Rate, times (iii) a fraction the numerator of which is the number of days that elapse during such period and the denominator of which is 360. If such amount required to be paid by any Canadian Participant pursuant to this subsection 2.1(a)(ii)(B) is not in fact made available to the Canadian Administrative Agent within three Business Days after the date such payment is due, the Canadian Administrative Agent shall be entitled to recover from such Canadian Participant, on demand, such amount with interest thereon calculated from such due date at the rate per annum equal to the rate applicable thereto in accordance with the preceding sentence plus the Applicable Margin in respect of Facility A Loans. A certificate of the Canadian Administrative Agent submitted to any Canadian Participant with respect to any amounts owing under this subsection 2.1(a)(ii)(B) shall be conclusive in the absence of manifest error. In the event the Canadian Administrative Agent receives a payment with respect to any Facility A Canadian Loan in which Canadian Participations have been purchased and as to which the purchase price has been requested by the Canadian Administrative Agent and delivered by a Canadian Participant as in this subsection 2.1(a)(ii)(B) provided, the Canadian Administrative Agent shall promptly distribute to such Canadian Participant its share of such payment based on its Canadian Participation. If the Canadian Administrative Agent shall pay any amount to a Canadian Participant pursuant to this subsection 2.1(a)(ii)(B) in the belief or expectation that a related payment has been or will be received or collected and such related payment is not received or collected by the Canadian Administrative Agent, then such Canadian Participant will promptly on demand by the Canadian Administrative Agent return such amount to the Canadian Administrative Agent, together with interest thereon at such rate as the Canadian Administrative Agent shall determine to be customary between banks for correction of errors. If the Canadian Administrative Agent determines at any time that any amount received or collected by the Canadian Administrative Agent pursuant to this Agreement is to be returned to Medis under this Agreement or paid to any other Person or entity pursuant to any insolvency law, any sharing clause in this Agreement, or otherwise, then, notwithstanding any other provision of this Agreement, the Canadian Administrative Agent shall not be required to distribute any portion thereof to any Canadian Participant, and each such Canadian Participant will promptly on demand by the Canadian Administrative Agent repay any portion that the Canadian Administrative Agent shall have distributed to such Canadian Participant, together with interest thereon at such rate, if any, as the Canadian Administrative shall pay to Medis or such other Person or entity with respect thereto. If any amounts returned to Medis or reimbursed by a Canadian Participant pursuant to this subsection 2.1(a)(ii)(B) are later recovered by the Canadian Administrative Agent, the Canadian Administrative Agent shall promptly pay to each Canadian Participant a proportionate share based on such Canadian Participant's Canadian Participation. 24 (2) Notwithstanding any other provision of this Agreement, each Facility A Bank agrees that, prior to the Participation Funding Date, all amounts paid or credited by Medis under this Agreement to a Facility A Canadian Bank shall be received by such Facility A Canadian Bank (a) for its own benefit and account or (b) as agent for or for the account of an Eligible Assignee in respect of the Facility A Canadian Loans, and not otherwise as agent for or on behalf of any other Person. (b) Each Facility B Bank severally agrees, on and subject to the terms and conditions set forth herein, to make Base Rate Loans or Offshore Rate Loans denominated in Dollars to the Company from time to time as requested by the Company in accordance with Sections 2.3 and 11.2 on any Business Day (I) as Facility B Revolving Loans during the period from the Closing Date to but not including the Facility B Revolving Termination Date and (II) as Term Loans on the Facility B Revolving Termination Date in accordance with the terms of Section 2.15, in an aggregate amount not to exceed at any time outstanding the amount set forth opposite its name in the column under the heading "Facility B Commitments" on Schedule 2.1 (such amount, as the same may be reduced under ------------ Section 2.5 or as a result of one or more assignments under Section 11.8, the Bank's "Facility B Commitment"); provided, however, that, after giving effect to --------------------- -------- ------- any Borrowing, (i) the aggregate principal amount of all outstanding Facility B Loans to the Company shall not at any time exceed the combined Facility B Commitments and (ii) the sum of (A) the aggregate principal amount of all outstanding Facility B Loans to the Company and (B) the Total Utilization of Facility A Commitments shall not at any time exceed the Commitments. Within the limits of each Bank's Facility B Commitment, and subject to the other terms and conditions hereof, the Company may, until the Facility B Revolving Termination Date, borrow under this Section 2.1(b), prepay under Section 2.6 and reborrow under this Section 2.1(b); provided further that no Facility B Loan to the -------- ------- Company shall be denominated in or payable in a currency other than Dollars. The aggregate of all Facility B Commitments hereunder on the date of this Agreement is $800,000,000. 2.2 Loan Accounts. -------------- (a) The Loans made by each Bank shall be evidenced by one or more loan accounts or records maintained by such Bank in the ordinary course of business. The loan accounts or records maintained by the Agent, the Canadian Administrative Agent and each Bank shall be conclusive absent manifest error of the amount of the Loans made by the Banks to each Borrower and the interest and payments thereon. Any failure so to record or any error in doing so shall not, however, limit or otherwise affect the obligation of each Borrower hereunder to pay any amount owing with respect to the Loans made to such Borrower. (b) Upon the request of any Bank made through the Agent, the Loans made by such Bank to either or both Borrowers may be evidenced by one or more Notes, instead of loan accounts. Each such Bank shall endorse on the schedules annexed to its Note(s) the date, amount and maturity of each Loan made by it and the amount and Applicable Currency of each payment of principal made by the applicable Borrower with respect thereto. Each such Bank is irrevocably authorized by the Borrowers to endorse its Note(s) and each Bank's record shall be conclusive absent manifest error; provided, however,that the failure of a -------- ------- Bank to make, or an 25 error in making, a notation thereon with respect to any Loan shall not limit or otherwise affect the obligations of the Borrowers hereunder or under any such Note to such Bank. 2.3 Procedure for Borrowing. ----------------------- (a) Each Borrowing of a Facility A Domestic Loan or Facility B Loan shall be made upon the Company's irrevocable written notice delivered to the Agent in the form of a Notice of Borrowing (which notice must be received by the Agent prior to 9:00 a.m. (San Francisco time)) in the case of Facility A Domestic Loans and Facility B Loans (i) three Business Days prior to the requested Borrowing Date, in the case of Offshore Rate Loans; and (ii) on the requested Borrowing Date, in the case of Base Rate Loans. Each Borrowing of a Facility A Canadian Loan shall be made upon the Company's and Medis' irrevocable written notice delivered to the Agent and the Canadian Administrative Agent in the form of a Notice of Borrowing (which notice must be received by the Canadian Administrative Agent and the Agent prior to 11:00 a.m. (Toronto time)) (i) one Business Day prior to the requested Borrowing Date in the case of Canadian Prime Rate Loans and (ii) three Business Days prior to the requested Borrowing Date in the case of Offshore Rate Loans. Each Notice of Borrowing shall specify: (A) the amount of the Borrowing, which shall be, in the case of a Facility A Domestic Loan or Facility B Loan, in an aggregate minimum amount of $5,000,000 or any multiple of $1,000,000 in excess thereof, and, in the case of Facility A Canadian Loans, in an aggregate minimum amount of Cdn.$5,000,000 or any multiple of Cdn.$1,000,000 in excess thereof; (B) the identity of the Borrower and the requested Borrowing Date, which shall be a Business Day; (C) whether the Loan is to be a Facility A Domestic Loan or Facility A Canadian Loan or Facility B Loan and the Type of Loans comprising the Borrowing; (D) the duration of the Interest Period applicable to such Loans included in such notice. If the Notice of Borrowing fails to specify the duration of the Interest Period for any Borrowing comprised of Offshore Rate Loans, such Interest Period shall be three months; and (E) the Applicable Currency. (b) The Agent will promptly notify (i) each Facility B Bank of its receipt of any Notice of Borrowing requesting a Borrowing of a Facility B Loan and the amount of such Bank's Facility B Pro Rata Share of that Borrowing and (ii) each Facility A Domestic Bank of its receipt of any Notice of Borrowing requesting a Borrowing of a Facility A Domestic Loan and the amount of such Bank's Facility A Pro Rata Share of that Borrowing, and the Canadian Administrative Agent will promptly notify each Facility A Canadian Bank of its receipt of any Notice of Borrowing requesting a Borrowing of a Facility A Canadian Loan and the amount of such Bank's Facility A Pro Rata Share of that Borrowing. 26 (c) The Dollar Equivalent amount of any Borrowing in Canadian Dollars will be determined by the Agent for such Borrowing on the Computation Date therefor in accordance with subsection 2.16(a). (d) Each Facility A Domestic Bank or Facility B Bank, as the case may be, will make the amount of its Facility A Pro Rata Share or Facility B Pro Rata Share, as applicable, of each Borrowing of a Facility A Domestic Loan or Facility B Loan, as the case may be, available to the Agent for the account of the Company at the Agent's Payment Office on the Borrowing Date requested by the Company in funds immediately available to the Agent and in Dollars, by 11:00 a.m. (San Francisco time). Each Facility A Canadian Bank will make the amount of its Facility A Canadian Pro Rata Share of each Borrowing of a Facility A Canadian Loan available to the Canadian Administrative Agent for the account of Medis in Canadian Dollars at the Canadian Administrative Agent's Payment Office by 11:00 a.m. (Toronto time). The proceeds of all such Loans will then be made available to the applicable Borrower on the Borrowing Date by the Applicable Agent at such office by crediting the account of the applicable Borrower on the books of BofA or BofA Canada, as applicable, with the aggregate of the amounts made available to the Applicable Agent by the Banks and in like funds as received by the Applicable Agent. (e) After giving effect to any Borrowing, there may not be more than ten different Interest Periods in effect. 2.4 Conversion and Continuation Elections. ------------------------------------- (a) The Company may in respect of its outstanding Loans, upon irrevocable written notice to the Agent in accordance with subsection 2.4(c): (i) elect, as of any Business Day, in the case of Base Rate Loans, or as of the last day of the applicable Interest Period, in the case of any other Type of Loans, to convert any such Loans (or any part thereof in an amount not less than $10,000,000, or that is in an integral multiple of $1,000,000 in excess thereof) into Loans of any other Type; or (ii) elect, as of the last day of the applicable Interest Period, to continue any Loans having Interest Periods expiring on such day (or any part thereof in an amount not less than $10,000,000, or that is in an integral multiple of $1,000,000 in excess thereof); provided, that if at any time the aggregate amount of Offshore Rate Loans in - -------- respect of any Borrowing is reduced, by payment, prepayment, or conversion of part thereof to be less than $10,000,000, such Offshore Rate Loans shall automatically convert into Base Rate Loans, and on and after such date the right of the Company to continue such Loans as, and convert such Loans into, Offshore Rate Loans shall terminate; provided further, that the Company may not elect to -------- ------- convert a Facility A Loan into a Facility B Loan or convert a Facility B Loan into a Facility A Loan. 27 (b) Medis may in respect of its outstanding Loans, upon irrevocable written notice to the Canadian Administrative Agent in accordance with subsection 2.4(c): (i) elect, as of any Business Day, in the case of Canadian Prime Rate Loans, or as of the last day of the applicable Interest Period, in the case of Offshore Rate Loans, to convert any such Loans (or any part thereof in an amount not less than Cdn.$5,000,000, or that is in an integral multiple of Cdn.$1,000,000 in excess thereof) into Loans of another Type (it being understood that any such Loan of another Type shall be either a Canadian Prime Rate Loan or an Offshore Rate Loan); or (ii) elect, as of the last day of the applicable Interest Period, to continue any Loans having Interest Periods expiring on such day (or any part thereof in an amount not less than Cdn.$5,000,000, or that is an integral multiple of Cdn.$1,000,000 in excess thereof); provided, that if at any time the aggregate amount of Offshore Rate Loans in respect of any Borrowing is reduced, by payment, prepayment, or conversion of part thereof to be less than Cdn.$5,000,000, such Offshore Rate Loans shall automatically convert into Canadian Prime Rate Loans, and on and after such date the right of Medis to continue such Loans, as, and convert such Loans into, Offshore Rate Loans, shall terminate. (c) The Company, in the case of a conversion or continuation of a Facility A Domestic Loan or Facility B Loan, shall deliver a Notice of Conversion/Continuation to be received by the Agent not later than 9:00 a.m. (San Francisco time) (i) three Business Days in advance of the Conversion/Continuation Date, if the Loans are to be converted into or continued as Offshore Rate Loans denominated in Dollars; and (ii) on the Conversion/Continuation Date, if the Loans are to be converted into Base Rate Loans. The Company and Medis, in the case of a continuation of a Facility A Canadian Loan, shall deliver a Notice of Conversion/Continuation to be received by the Canadian Administrative Agent and the Agent not later than 11:00 a.m. (Toronto time) (i) at least three Business Days in advance of the proposed Conversion/Continuation Date if the Loans are to be converted into or continued as Offshore Rate Loans and (ii) at least one Business Day in advance of the proposed Conversion/Continuation Date, if the Loans are to be converted into Canadian Prime Rate Loans. Each Notice of Conversion/Continuation shall specify: (A) the proposed Conversion/Continuation Date; (B) the aggregate amount of Loans to be converted or renewed; (C) the Type of Loans resulting from the proposed conversion or continuation; and (D) other than in the case of conversions into Base Rate Loans or Canadian Prime Rate Loans, the duration of the requested Interest Period. 28 (d) If upon the expiration of any Interest Period applicable to Offshore Rate Loans denominated in Dollars, the Company has failed to select in a timely manner a new Interest Period to be applicable to such Offshore Rate Loans, or if any Default or Event of Default then exists, the Company shall be deemed to have elected to convert such Offshore Rate Loans into Base Rate Loans effective as of the expiration date of such Interest Period. If Medis has failed to select in a timely manner a new Interest Period to be applicable to Offshore Rate Loans prior to 11:00 a.m. (Toronto time) at least three Business Days in advance of the expiration date of the current Interest Period applicable thereto as provided in subsection 2.4(c), or if any Default or Event of Default shall then exist, Medis shall be deemed to have elected to convert such Offshore Rate Loans into Canadian Prime Rate Loans effective as of the expiration date of such Interest Period. (e) The Applicable Agent will promptly notify each Facility A Domestic Bank, Facility A Canadian Bank or Facility B Bank, as applicable, of its receipt of a Notice of Conversion/Continuation, or, if no timely notice is provided by a Borrower, the Applicable Agent will promptly notify each Facility A Domestic Bank, Facility A Canadian Bank or Facility B Bank, as applicable, of the details of any automatic conversion. All conversions and continuations shall be made ratably according to the respective outstanding principal amounts of the Facility A Domestic Loans, Facility A Canadian Loans or Facility B Loans held by each Facility A Domestic Bank, Facility A Canadian Bank or Facility B Bank with respect to which the notice was given. (f) Unless the Majority Banks otherwise agree, during the existence of a Default or Event of Default, the Company may not elect to have a Facility A Domestic Loan or Facility B Loan converted into or continued as an Offshore Rate Loan, and Medis may not elect to have a Facility A Canadian Loan continued as an Offshore Rate Loan. (g) After giving effect to any conversion or continuation of Loans, there may not be more than ten different Interest Periods in effect. (h) The Dollar Equivalent amount for any conversion to or continuation of a Borrowing in Canadian Dollars will be determined by the Agent for such conversion or continuation on the Computation Date therefor in accordance with subsection 2.16(a). 2.5 Voluntary Termination or Reduction of Commitments. The ------------------------------------------------- Company may, upon not less than three Business Days' prior notice to the Agent and the Canadian Administrative Agent, terminate or permanently reduce the Commitments, provided that any such permanent reduction shall be in an aggregate minimum amount of $10,000,000 or any multiple of $1,000,000 in excess thereof; unless, after giving effect thereto and to any ------ prepayments of Loans made on the effective date thereof, the then- outstanding principal amount of the Facility B Loans would exceed the amount of the combined Facility B Commitments then in effect or the Total Utilization of Facility A Commitments would exceed the amount of the combined Facility A Commitments then in effect. Once reduced in accordance with this Section, the Facility A Commitments and the Facility B Commitments may not be increased, except as provided in Section 2.14. Any reduction of the Facility A Commitments shall be applied to each 29 Facility A Bank according to its Facility A Pro Rata Share. Any reduction of the Facility B Commitments shall be applied to each Facility B Bank according to its Facility B Pro Rata Share. All accrued commitment fees to, but not including, the effective date of any reduction or termination of Commitments shall be paid on the effective date of such reduction or termination. 2.6 Optional Prepayments. Subject to Section 3.4, the Company may, in -------------------- the case of Facility A Domestic Loans or Facility B Loans, at any time or from time to time, upon irrevocable notice to the Agent (i) of not less than three Business Days in the case of Offshore Rate Loans (ii) by no later than 9:00 a.m. (San Francisco time) on the date specified for prepayment in the case of Base Rate Loans, prepay Facility A Domestic Loans or Facility B Loans in whole or in part, in minimum amounts of $10,000,000 or any multiple of $1,000,000 in excess thereof. Subject to Section 3.4, Medis, in the case of Facility A Canadian Loans, may, at any time or from time to time, upon irrevocable notice to the Canadian Administrative Agent and the Agent of not less than three Business Days in the case of Facility A Canadian Loans that are Offshore Rate Loans and by no later than 11:00 a.m. (Toronto time) on the date specified for prepayment in the case of Facility A Canadian Loans that are Canadian Prime Rate Loans, ratably prepay Facility A Canadian Loans in whole or in part, and if in part, in minimum amounts of Cdn.$5,000,000 or any integral multiple of Cdn.$1,000,000 in excess thereof. Any notice of prepayment shall specify the date and amount of such prepayment and the Type(s) of Loans to be prepaid and the Applicable Currency. The Applicable Agent will promptly notify each Facility A Domestic Bank, Facility A Canadian Bank or Facility B Bank of its receipt of any such notice, and of such Bank's Facility A Pro Rata Share or Facility B Pro Rata Share, as applicable of such prepayment. If such notice is given by a Borrower, such Borrower shall make such prepayment and the payment amount specified in such notice shall be due and payable on the date specified therein, together with accrued interest to each such date on the amount prepaid and any amounts required pursuant to Section 3.4. 2.7 Repayment. --------- (a) Repayment on Termination Dates and Maturity Dates. Each Borrower ------------------------------------------------- shall repay to the Applicable Agent for payment to the Facility A Domestic Banks or Facility A Canadian Banks, as applicable, on the Facility A Termination Date the aggregate principal amount of Facility A Loans made to such Borrower and outstanding on such date. The Company shall repay to the Agent for payment to the Facility B Banks on the Facility B Revolving Termination Date the aggregate principal amount of Facility B Revolving Loans made to the Company and outstanding on such date (such payment to be effected by converting the Facility B Revolving Loans to Term Loans, if and to the extent the Company so elects). The Company shall repay to the Agent for payment to the Facility B Banks on the Term Loan Maturity Date the aggregate principal amount of Facility B Loans made to the Company and outstanding on such date. (b) Repayment by Medis. If on any date Medis ceases to be a Wholly- ------------------ Owned Subsidiary of the Company, Medis shall repay to the Facility A Canadian Banks (i) the aggregate principal amount of Facility A Canadian Loans made to Medis and outstanding on such date and (ii) the Face Amount of all outstanding Bankers' Acceptances that have not been paid. 30 (c) Repayments Due to Reductions of Facility A Commitments. From time ------------------------------------------------------ to time, if the Total Utilization of Facility A Commitments exceeds the Facility A Commitments of all Banks then in effect, subject to Section 2.17, the Company shall prepay the Facility A Domestic Loans and/or Medis shall prepay the Facility A Canadian Loans, in any event to the extent necessary so that the Total Utilization of Facility A Commitments shall not at any time exceed such Facility A Commitments. (d) Repayments Due to Reductions of Facility A Commitments (Facility ---------------------------------------------------------------- A Canadian Loans). From time to time, if the Total Utilization of Facility A - ---------------- Canadian Commitments exceeds the combined Facility A Canadian Commitments of the Facility A Banks, subject to Section 2.17, Medis shall prepay the Facility A Canadian Loans to the extent necessary so that the aggregate amount of the Facility A Canadian Loans outstanding shall not at any time exceed such maximum amount. (e) Repayments Due to Reductions or Restrictions of Facility B ---------------------------------------------------------- Commitments. From time to time, if the aggregate principal amount of all - ----------- outstanding Facility B Loans to the Company exceeds the Facility B Commitments of all Banks then in effect, the Company shall prepay the Facility B Loans to the extent necessary so that the aggregate principal amount of all outstanding Facility B Loans shall not at any time exceed such Facility B Commitments. 2.8 Interest. -------- (a) Each Loan shall bear interest on the outstanding principal amount thereof from the applicable Borrowing Date as follows: (i) if a Base Rate Loan, then at a rate per annum equal to the Base Rate; (ii) if a Canadian Prime Rate Loan, then a rate per annum equal to the Canadian Prime Rate; and (iii) if an Offshore Rate Loan, then at a rate per annum equal to the Offshore Rate plus the Applicable Margin. ---- (b) Interest on each Loan shall be paid in arrears on each Interest Payment Date. Interest shall also be paid on the date of any prepayment of Loans under Section 2.6 for the portion of the Loans so prepaid and upon payment (including prepayment) in full thereof and, during the existence of any Event of Default, interest shall be paid on demand of the Agent at the request or with the consent of the Majority Banks. (c) Notwithstanding subsection (a) of this Section, if any amount of principal of or interest on any Loan, or any other amount payable hereunder or under any other Loan Document is not paid in full when due (whether at stated maturity, by acceleration, demand or otherwise), the applicable Borrower agrees to pay interest on such unpaid principal or other 31 amount, from the date such amount becomes due until the date such amount is paid in full, and after as well as before ebtry of judgment thereon to the extent permitted by law, payable on demand, at a fluctuating rate per annum equal to (i) the Canadian Prime Rate plus 1% in the case of Facility A Canadian Loans and ---- Bankers' Acceptances and (ii) the Base Rate plus 1% in the case of Facility A ---- Domestic Loans and Facility B Loans and any other Obligation. (d) Anything herein to the contrary notwithstanding, the obligations of each Borrower to any Bank hereunder shall be subject to the limitation that payments of interest shall not be required for any period for which interest is computed hereunder, to the extent (but only to the extent) that contracting for or receiving such payment by such Bank would be contrary to the provisions of any law applicable to such Bank limiting the highest rate of interest that may be lawfully contracted for, charged or received by such Bank, and in such event the applicable Borrower shall pay such Bank interest at the highest rate permitted by applicable law. 2.9 Fees. ---- (a) Arrangement, Agency Fees. The Company shall pay an arrangement ------------------------ fee to the Arranger for the Arranger's own account, and shall pay an agency fee to the Agent for the Agent's own account, as required by the letter agreement ("Fee Letter") between the Company and the Arranger and Agent dated October 14, ---------- 1998. (b) Facility Fees. The Company shall pay to the Agent for the account ------------- of each Facility A Domestic Bank and Facility B Bank a facility fee computed on a quarterly basis in arrears on the later of the fifth Business Day following the end of each calendar quarter or the fifth Business Day after the Company has received from the Agent a notice setting forth the amount of such fee equal to its Pro Rata Share of the Applicable Facility Fee. The facility fee for any period shall be equal to, (i) in the case of Facility A Loans, (A) the average for such period of the combined Facility A Commitments for all Facility A Banks multiplied by (B) the Applicable Facility Fee, and (ii) in the case of Facility - ----------- B Loans, (X) the average for such period of the combined Facility B Commitments of all Facility B Banks multiplied by (Y) the Applicable Facility Fee. ---------- Such facility fee shall accrue from the Closing Date to the Facility A Termination Date or the Facility B Revolving Termination Date, as the case may be, and shall be due and payable quarterly in arrears on each date specified above following the end of each calendar quarter through such termination date, with the final payment to be made on such termination date; provided that, in -------- ---- connection with any reduction or termination of Commitments under Section 2.5, the accrued facility fee calculated for the period ending on such date shall also be paid on the date of such reduction or termination, with the following quarterly payment being calculated on the basis of the period from such reduction or termination date to such quarterly payment date. The facility fee provided in this subsection shall accrue at all times after the Closing Date, including at any time during which one or more conditions in Article IV are not met. 32 2.10 Computation of Fees and Interest. -------------------------------- (a) All computations of interest for Drafts and Bankers' Acceptances and for Base Rate Loans when the Base Rate is determined by BofA's "reference rate" shall be made on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed. All other computations of fees and interest shall be made on the basis of a 360-day year and actual days elapsed (which results in more interest being paid than if computed on the basis of a 365-day year). Interest and fees shall accrue during each period during which interest or such fees are computed from the first day thereof to the last day thereof. (b) Each determination of an interest rate or a Dollar Equivalent by the Agent or the Canadian Administrative Agent shall be conclusive and binding on each Borrower and the Banks in the absence of manifest error. (c) If any Reference Bank's Commitment terminates (other than on termination of all the Commitments), or for any reason whatsoever the Reference Bank ceases to be a Bank hereunder, that Reference Bank shall thereupon cease to be a Reference Bank, and the Offshore Rate shall be determined on the basis of the rates as notified by the remaining Reference Banks. (d) Each Reference Bank shall use its best efforts to furnish quotations of rates to the Agent as contemplated hereby. If any of the Reference Banks fails to supply such rates to the Agent upon its request, the rate of interest shall be determined on the basis of the quotations of the remaining Reference Banks. (e) For purposes of disclosure pursuant to the Interest Act (Canada), the parties hereto acknowledge that: (i) The nominal yearly rate of interest to which any rate of interest based on the Offshore Rate or the Canadian Prime Rate is equivalent may be determined by multiplying the rate otherwise determined hereunder by a fraction, the numerator of which is the number of days in the calendar year in which the period for which interest at such rate is payable under this Agreement and the denominator of which is 360; (ii) The nominal yearly discount rate to which the Effective Discount Rate is equivalent may be determined by multiplying the rate otherwise determined hereunder by a fraction, the numerator of which is the number of days in the calendar year in which the Effective Discount Rate is applied in respect of any Drafts or Bankers' Acceptances issued under this Agreement and the denominator of which is 365. All calculations of interest or discount hereunder shall be made on the basis of the nominal rates of interest or discount determined hereunder and the parties agree that the principle of deemed reinvestment shall not apply. The parties hereto acknowledge that there is a material distinction between nominal and effective rates of interest or discount and that they are capable of making the 33 calculations necessary to calculate and compare such rates. The parties hereto further acknowledge that any rate expressed in the definitions of Offshore Rate and Canadian Prime Rate shall be deemed to be expressed therein as a nominal rate "per annum." 2.11 Payments by the Borrowers. ------------------------- (a) All payments to be made by each Borrower shall be made without set-off, recoupment or counterclaim. Except as otherwise expressly provided herein, all payments by the Company shall be made to the Agent for the account of the Facility A Domestic Banks or the Facility B Banks, as the case may be, at the Agent's Payment Office, and all payments by Medis shall be made to the Canadian Administrative Agent for the account of the Facility A Canadian Banks at the Canadian Administrative Agent's Payment Office, and, with respect to principal of, interest on, and any other amounts relating to, any Facility A Canadian Loan or the Bankers' Acceptance Facility, shall be made in Canadian Dollars, and, with respect to all other amounts payable hereunder, shall be made in Dollars. Such payments shall be made in immediately available funds, and (i) in the case of Facility A Canadian Loan payments, no later than 12:00 noon (Toronto time) on the dates specified herein, and (ii) in the case of any Dollar payments, no later than 12:00 noon (San Francisco time) on the date specified herein. The Applicable Agent will promptly distribute to each Facility A Domestic Bank, Facility A Canadian Bank or Facility B Bank, as applicable, its Facility A Pro Rata Share or Facility B Pro Rata Share, as applicable, (or other applicable share as expressly provided herein) of such payment in like funds as received. Any payment received by the Agent later than 12:00 noon (San Francisco time), or by the Canadian Administrative Agent later than 12:00 noon (Toronto time) shall be deemed to have been received on the following Business Day and any applicable interest or fee shall continue to accrue. (b) Subject to the provisions set forth in the definition of "Interest Period" herein, whenever any payment is due on a day other than a Business Day, such payment shall be made on the following Business Day, and such extension of time shall in such case be included in the computation of interest or fees, as the case may be. (c) Unless the Applicable Agent receives notice from a Borrower prior to the date on which any payment is due to the Banks that such Borrower will not make such payment in full as and when required, the Applicable Agent may assume that such Borrower has made such payment in full to the Applicable Agent on such date in immediately available funds and the Applicable Agent may (but shall not be so required), in reliance upon such assumption, distribute to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent such Borrower has not made such payment in full to the Applicable Agent, each Bank shall repay to the Applicable Agent on demand such amount distributed to such Bank, together with interest thereon at the Federal Funds Rate or, in the case of a payment in Canadian Dollars, the Overnight Canadian Rate, for each day from the date such amount is distributed to such Bank until the date repaid. 34 2.12 Payments by the Banks to the Applicable Agent. --------------------------------------------- (a) Unless the Applicable Agent receives notice from a Bank at least one Business Day prior to the date of any Borrowing, that such Bank will not make available as and when required hereunder to the Applicable Agent for the account of the applicable Borrower the amount of that Bank's Facility A Pro Rata Share or Facility B Pro Rata Share, as applicable, of the Borrowing, the Applicable Agent may assume that each Bank has made such amount available to the Applicable Agent in immediately available funds on the Borrowing Date and the Applicable Agent may (but shall not be so required), in reliance upon such assumption, make available to such Borrower on such date a corresponding amount. If and to the extent any Bank shall not have made its full amount available to the Applicable Agent in immediately available funds and the Applicable Agent in such circumstances has made available to the applicable Borrower such amount, that Bank shall on the Business Day following such Borrowing Date make such amount available to the Applicable Agent, together with interest at the Federal Funds Rate or, in the case of any Borrowing consisting of Facility A Canadian Loans or under the Bankers' Acceptance Facility, the Overnight Canadian Rate, for each day during such period. A notice of the Applicable Agent submitted to any Bank with respect to amounts owing under this subsection (a) shall be conclusive, absent manifest error. If such amount is so made available, such payment to the Applicable Agent shall constitute such Bank's Loan on the date of Borrowing for all purposes of this Agreement. If such amount is not made available to the Applicable Agent on the Business Day following the Borrowing Date, the Applicable Agent will notify the applicable Borrower of such failure to fund and, upon demand by the Applicable Agent, such Borrower shall pay such amount to the Applicable Agent for the Applicable Agent's account, together with interest thereon for each day elapsed since the date of such Borrowing, at a rate per annum equal to the interest rate applicable at the time to the Loans comprising such Borrowing. (b) The failure of any Bank to make any Loan on any Borrowing Date shall not relieve any other Bank of any obligation hereunder to make a Loan on such Borrowing Date, but no Bank shall be responsible for the failure of any other Bank to make the Loan to be made by such other Bank on any Borrowing Date. 2.13 Sharing of Payments, Etc. ------------------------ (a) If, other than as expressly provided elsewhere herein, any Facility A Bank or Facility B Bank, as the case may be, shall obtain on account of the Loans made by it to any Borrower or the Bankers' Acceptance Facility any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) in excess of its Facility A Pro Rata Share or Facility B Pro Rata Share, as applicable, such Bank shall immediately (a) notify the Applicable Agent of such fact, and (b) purchase from the other Facility A Banks or Facility B Banks such participations in the Loans made by them to such Borrower or Bankers' Acceptances as shall be necessary to cause such purchasing Bank to share the excess payment pro rata with each of them; provided, however, -------- ------- that if all or any portion of such excess payment is thereafter recovered from the purchasing Bank, such purchase shall to that extent be rescinded and each other Facility A Bank or Facility B Bank, as applicable, shall repay to the purchasing Bank the 35 purchase price paid therefor, together with an amount equal to such paying Bank's ratable share (according to the proportion of (i) the amount of such paying Bank's required repayment to (ii) the total amount so recovered from the purchasing Bank) of any interest or other amount paid or payable by the purchasing Bank in respect of the total amount so recovered; provided further that, for purposes of this subsection 2.13(a), no Bank other than a Facility A Canadian Bank may purchase any portion of or any interest in a Facility A Canadian Loan or Bankers' Acceptance and no Bank other than a Facility A Domestic Bank may purchase any portion of or any interest in a Facility A Domestic Loan and no Bank other than a Facility B Bank may purchase any portion of or any interest in a Facility B Loan. Each Borrower agrees that any Bank so purchasing a participation from another Bank may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off, but subject to Section 11.10) with respect to such participation as fully as if such Bank were the direct creditor of such Borrower in the amount of such participation. The Applicable Agent will keep records (which shall be conclusive and binding in the absence of manifest error) of participations purchased under this Section and will in each case notify the Banks following any such purchases or repayments. For purposes of this Section 2.13(a), each Bank that has an Affiliate Bank and such Bank's Affiliate Bank shall be deemed to be a single Bank and such Bank shall not purchase a participation in the Loans made by its Affiliate Bank and such Bank's Affiliate Bank shall not purchase a participation in the Loans made by its Affiliate Bank. (b) (1) In the event that there has occurred and is continuing (i) any Event of Default under subsections 9.1(a), 9.1(f) or 9.1(g) or (ii) an acceleration of the maturity of any amounts owing to the Banks under this Agreement, a reallocation of the outstanding Loans (and accrued but unpaid interest thereon) and any outstanding Bankers' Acceptances that have not been paid, the Bankers' Acceptance Facility, the Facility A Commitments and the Facility B Commitments shall occur such that each Bank's Pro Rata Share of the aggregate amount of the outstanding Facility A Loans (and accrued but unpaid interest thereon), Facility B Loans (and accrued but unpaid interest thereon), outstanding Bankers' Acceptances that have not been paid, the Bankers' Acceptance Facility, Facility A Commitments and Facility B Commitments shall equal the percentage obtained by dividing (x) such Bank's Exposure as of the date of notification by (y) the sum of aggregate amount of Exposures of all Banks; (2) such reallocation of Loans (and interest), Bankers' Acceptances and Commitments shall be deemed to be an assignment of such Loans, Bankers' Acceptances and Commitments among the Banks pursuant to Section 11.8, and each Bank shall execute and deliver Assignments and Acceptances (as required) to give effect to such reallocation, and payments shall be made on any Loans or Bankers' Acceptances deemed so assigned as contemplated by Section 3 of the applicable Assignment and Acceptance; provided that no consent of any Borrower or Agent -------- shall be requested under Section 11.8 or otherwise in connection with such reallocation and that such reallocation shall be deemed to have accrued whether or not any Assignment and Acceptance is delivered; (3) each Bank shall identify its applicable lending office which will be deemed to have purchased the Loans, Bankers' Acceptances and Commitments reallocated and deemed assigned above; 36 (4) for the purpose of minimizing any withholding taxes, such reallocation of Loans, Bankers' Acceptances and Commitments and any purchase of participations pursuant to subsection 2.13(c) shall be made to avoid, to the maximum extent possible, (i) the reallocation of Facility A Canadian Loans or Bankers' Acceptances to Facility A Domestic Banks or Facility B Banks, (ii) the reallocation of Facility A Domestic Loans to Facility A Canadian Banks or Facility B Banks and (iii) the reallocation of Facility B Loans to Facility A Domestic Banks or Facility A Canadian Banks; provided that if a reallocation referred to in clause (i), (ii) or (iii) shall be required in accordance with this subsection 2.13(b), to the maximum extent possible, Facility B Loans shall be allocated to Facility A Domestic Banks before they are reallocated to Facility A Canadian Banks and Facility A Domestic Loans shall be reallocated to Facility B Banks before they are reallocated to Facility A Canadian Banks; and (5) for purposes of determining such reallocation, the Agent shall determine the Dollar Equivalent of all outstanding Loans and Banker's Acceptances denominated in Canadian Dollars. (c) In addition to the agreements set forth in paragraph (a) above, the Banks each agree among themselves that if the reallocation set forth in subsection 2.13(b) shall occur, if any of them shall, through the exercise of the right of counterclaim, set-off, banker's lien, collection or other remedy by Agent or otherwise, including the enforcement of rights under this Agreement, or as adequate protection of a deposit treated as cash collateral under the Bankruptcy Code, receive payment or reduction of a proportion of the aggregate amount of principal and interest then due with respect to the Loans, amounts payable in respect of such Bank's right to receive reimbursement from the Company or Medis in respect of amounts due under or in respect of the Bankers' Acceptance Facility (collectively, the "Aggregate Amounts Owing" to such Bank) which is greater than the proportionate reduction of the Aggregate Amounts Owing to any other Bank, then the Bank receiving such proportionately greater payment shall (y) notify each other Bank and the Agent of such receipt and (z) purchase participations (which it shall be deemed to have done simultaneously upon receipt of any such payment) in the Aggregate Amounts Owing to the other Banks as necessary to assure that all such recoveries and payments in respect of the Aggregate Amounts Owing shall be ratably shared by all of the Banks as reallocated pursuant to paragraph (b) above; provided, however, that if all or -------- ------- part of such proportionately greater payment received by such purchasing Bank is thereafter recovered from such Bank, those purchases shall be rescinded and the purchase prices paid for such participations shall be returned to that Bank to the extent of such recovery, but without interest. 2.14 Optional Increase in Commitments. At any time prior to the -------------------------------- Facility A Termination Date, if no Default has occurred and is continuing, the Company shall have the option to increase the total amount of the Commitments either by (a) increasing the Commitment of one or more Banks already party to this Agreement or (b) adding a financial institution not a party hereto (a "New --- Bank") as a party to this Agreement. The effectiveness of any such increase is - ---- subject to the satisfaction of the following conditions: 37 (i) that the Company shall provide prompt notice of such increase to the Agent, who shall promptly notify the other Banks; (ii) that each Bank whose Commitment is to increase shall have agreed to such increase by a writing addressed to the Company and to the Agent; (iii) that each New Bank shall be an Eligible Assignee; (iv) that each New Bank shall have executed counterpart signature pages of this Agreement; (v) the total Commitments, following such increase, shall not exceed $1,500,000,000; and (vi) the total Facility A Commitments, following such increase, shall not exceed $700,000,000 provided, however, that any such increase in the Commitments -------- ------- shall (i) prior to the Facility B Revolving Loan Termination Date, be allocated between the Facility A Commitments and the Facility B Commitments on a pro rata basis such that the proportions of each such type of Commitment as a portion of the total Commitments remains unchanged from such proportions which exist on the date of this Agreement (i.e., 33 1/3% to the Facility A Commitments and 66 2/3% to the Facility B Commitments); and (ii) on or after the Facility B Revolving Termination Date, be allocated entirely to the Facility A Commitments. Upon any such increase in the Commitments of a Bank already party to this Agreement, the signature page hereto for such Bank shall be deemed to be amended to reflect such increase. If a New Bank becomes a party to this Agreement, the counterpart signatures executed by such New Bank shall indicate the Commitments of such New Bank. In case of any increase in Commitments, Schedule 2.1 shall be modified accordingly. ------------ 2.15 Conversion of Facility B Loans to Term Loans. -------------------------------------------- (a) Each Facility B Bank severally agrees on the terms and conditions set forth in this Agreement to advance to the Company (upon request of the Company pursuant to this Agreement) on the Facility B Revolving Termination Date an amount up to the sum of (i) the outstanding principal amount of the Facility B Loans made by such Facility B Bank and outstanding as of the opening of business on the Facility B Revolving Termination Date plus (ii) the amount available to be borrowed from such Facility B Bank as of the opening of business on the Facility B Revolving Termination Date. The aggregate of such advances is collectively called the "Term Loans". The Term Loans will mature on the Term Loan Maturity Date. (b) The Term Loans shall be made upon the irrevocable written notice (including notice via facsimile confirmed immediately by a telephone call) of the Company in 38 the form of a Notice of Borrowing (which notice must be received by the Agent not later than 12:00 noon (San Francisco time) not less than three Business Days prior to the Facility B Revolving Termination Date), specifying: (A) the amount of the Term Loans which shall be in a principal amount not more than the sum of (i) the aggregate principal amount of the Facility B Loans which will be outstanding as of the opening of business on the Facility B Revolving Termination Date, plus (ii) the amount available to be borrowed from the Facility B Banks as of the opening of business on the Facility B Revolving Termination Date; (B) whether the Term Loans shall be comprised of Base Rate Loans or Offshore Rate Loans, and the amounts of such advances; and (C) the Interest Period applicable to the advances included in such notice. (c) The proceeds of the Term Loans will be used to pay the principal amount of the Facility B Revolving Loans outstanding at the time the Term Loans are made. 2.16 Utilization of Facility A Commitments in Canadian Dollars. --------------------------------------------------------- (a) The Agent will determine the Dollar Equivalent amount with respect to any (i) Borrowing comprised of Facility A Canadian Loans that are Offshore Rate Loans as of the date which is three Business Days prior to the requested Borrowing Date, (ii) Bankers' Acceptance or Borrowing comprised of Facility A Canadian Loans that are Canadian Prime Rate Loans, one day prior to the requested Borrowing Date or date of acceptance, (iii) outstanding Facility A Canadian Loans or Bankers' Acceptances as of the last Business Day of each month, and (iv) conversions to or continuation of Facility A Canadian Loans as of the date the related Notice of Conversion/Continuation is received by the Canadian Administrative Agent or, if such conversion or continuation is performed in accordance with subsection 2.16(b) or Section 3.5, as of, in the case of subsection 2.16(b), the date that the request by the Majority Banks is received by the Agent or, in the case of Section 3.5, the date that the notice by the Agent is received by the Borrower and the Banks (each such date under clauses (i) through (iv) a "Computation Date" ). ---------------- (b) Notwithstanding anything herein to the contrary, during the existence of a Default or an Event of Default, upon the request of the Majority Banks, all or any part of any outstanding Facility A Canadian Loans consisting of Offshore Rate Loans shall be converted into Canadian Prime Rate Loans with effect from the last day of the Interest Period with respect to any such Facility A Canadian Loans. The Agent will promptly notify the Company and Medis of any such conversion request. 2.17 Currency Exchange Fluctuations. Subject to Section 3.4, if on any ------------------------------ Computation Date the Agent or the Canadian Administrative Agent shall have determined that (a) the Total Utilization of Facility A Commitments exceeds the combined Facility A Commitments of the Facility A Banks by more than $3,000,000, or (b) the Total Utilization of Facility A Canadian Commitments exceeds the combined Facility A Canadian Commitments of the Facility A Banks by more than $3,000,000, in either event due to a change in applicable rates of exchange between Dollars and Canadian Dollars, then the Agent shall give notice to the ---- Borrowers that a prepayment is required under this Section, and the Borrowers agree thereupon to make prepayments of Loans such that, after giving effect to such prepayment, the Total Utilization of Facility A Commitments does not exceed the combined Facility A Commitments 39 and the Total Utilization of Facility A Canadian Commitments does not exceed the combined Facility A Canadian Commitments of the Facility A Banks. No prepayment of Loans is required pursuant to this Section 2.17 or Section 2.7 in the event that the Total Utilization of Facility A Commitments exceeds the combined Facility A Commitments of the Facility A Banks by $3,000,000 or less, or the Total Utilization of Facility A Canadian Commitments exceeds the combined Facility A Canadian Commitments of the Facility A Banks by $3,000,000 or less, in either event due to a change in applicable rates of exchange between Dollars and Canadian Dollars. 2.18 Bankers' Acceptances for Medis. ------------------------------ (a) Acceptance Commitment. (1) Each Facility A Canadian Bank severally agrees, on and subject to the terms and conditions set forth herein: (i) in the case of a Facility A Canadian Bank that is able to accept Drafts from Medis, to create acceptances (each, a "Bankers' Acceptance") by accepting Drafts from Medis and to purchase such Bankers' Acceptances in accordance with Section 2.18(d); and (ii) in the case of a Facility A Canadian Bank that has participated all or any part of its interest in the Bankers' Acceptance Facilities to a participant which is able to accept Drafts from Medis, to arrange for the creation of Bankers' Acceptances by such participant and for the purchase of such Bankers' Acceptances by such participant, to the extent of such participation or assignment, in accordance with Section 2.18(d). The Total Utilization of Facility A Commitments after any Drawing shall not exceed the combined Facility A Commitments then in effect. (2) Each Drawing shall be in an aggregate Face Amount of not less than Cdn.$5,000,000 and in integral multiples of Cdn.$1,000,000 and shall consist of the creation and purchase of Bankers' Acceptances or the purchase of Drafts on the same day, effected or arranged by the Facility A Banks in accordance with Section 2.18(d), ratably according to their respective Facility A Pro Rata Shares. (3) Anything contained in this Agreement to the contrary notwithstanding, the Bankers' Acceptance Facility and the Facility A Loan Commitment shall be subject to the following limitations: (i) The amount otherwise available for Drawing under the Facility A Commitment as of any time of determination shall be reduced by an amount equal to the sum of the outstanding Facility A Loans and the Acceptance Usage as of such time of determination; (ii) The Total Utilization of Facility A Canadian Commitments shall not exceed the combined Facility A Canadian Commitments of the Facility A Banks; and (iii) The Total Utilization of Facility A Commitments shall not exceed the Facility A Commitments then in effect. 40 (b) Drawing Notice. (1) Each Drawing shall be made on two Business Days' prior written notice specified in relation to Bankers' Acceptances, given not later than 11:00 a.m. (Toronto time), by the Company and Medis to the Agent. Each such notice of a Drawing (a "Drawing Notice") shall be given in substantially the form of Exhibit G annexed hereto or by telephone confirmed promptly in writing, containing the same information as would be contained in a Drawing Notice, and shall specify therein (i) the Drawing Date; (ii) the aggregate Face Amount of Drafts to be accepted; and (iii) the maturity date for such Drafts. The Canadian Administrative Agent shall give each Facility A Canadian Bank prompt notice of such Drawing Notice and of such Facility A Canadian Bank's ratable portion of Drafts to be accepted under the Drawing. (2) Medis shall not request in a Drawing Notice a maturity date for Drafts which would be subsequent to the Facility A Termination Date. (3) Each Drawing Notice shall be irrevocable and binding on Medis and the Company. Medis and the Company shall indemnify each Facility A Canadian Bank against any loss or expense incurred by such Facility A Canadian Bank as a result of any failure by Medis to fulfill or honor before the date specified for any Drawing, the applicable conditions set forth in this Section 2.18 or Section 4.3, if the Drawing, as a result of such failure, is not made on such date. (4) Medis shall repay, and there shall become due and payable, on the Drawing Date the principal amount of any Facility A Canadian Loans which Medis seeks to convert, if any, in whole or in part, to Bankers' Acceptances on such Drawing Date. (5) None of the Canadian Administrative Agent, the Agent or the Facility A Canadian Banks shall incur any liability to Medis or the Company in acting on the telephonic notice referred to above which the Canadian Administrative Agent, the Agent or any Facility A Canadian Bank believes in good faith to have been given by a duly authorized officer or other person authorized to borrow on behalf of Medis or for otherwise acting in good faith under this Section 2.18 and upon the acceptance of Drafts or Bankers' Acceptances pursuant to any such telephonic notice, Medis shall be liable with respect thereto as provided herein. In the event of a conflict between the Canadian Administrative Agent's record of the applicable terms of any Drawing and such Drawing Notice, Canadian Administrative Agent's record shall prevail, absent manifest or demonstrable error. (c) Form of Bankers' Acceptances. (1) Each Draft presented by Medis shall (i) be in a minimum denomination of Cdn $150,000, (ii) be dated the date of the Drawing; (iii) mature and be payable by Medis (in common with all other Drafts presented in connection with such Drawing) on a Business Day which occurs no less than seven days nor more than 180 days after the date thereof, which term shall be specified on the Drawing Notice presented by Medis in accordance with subsection 2.18(b)(1); (iv) be substantially in the form of Exhibit H-1 annexed hereto; and (v) if such Draft is drawn on a Facility A Canadian Bank that is a Member, be payable to the Clearing House. 41 The acceptance endorsed by a Facility A Canadian Bank on any Draft shall be substantially in the form of Exhibit H-2 annexed hereto or such other form as may be agreed by Medis and such Facility A Canadian Bank. (2) Medis hereby renounces, and shall not claim, any days of grace for the payment of any Bankers' Acceptances or Drafts. (d) Acceptance and Purchase of Drafts. (1) Not later than 11:00 a.m. (Toronto time) on an applicable Drawing Date, each Facility A Canadian Bank shall, as the case may be, (i) complete one or more Drafts dated the date of such Drawing, with the maturity date specified by the Company and Medis in the Drawing Notice, accept such Drafts, and purchase the Bankers' Acceptances thereby created for the Drawing Purchase Price; and (ii) arrange for its participant to complete one or more Drafts dated the date of such Drawing, with the maturity date specified by Medis and the Company in the Drawing Notice, to accept such Drafts and to purchase the Bankers' Acceptances thereby created for the Drawing Purchase Price. (2) The failure of any Facility A Canadian Bank to accept Drafts or purchase Bankers' Acceptances or Drafts as part of any Drawing shall not relieve such Facility A Canadian Bank of its obligation, if any, to accept Drafts and purchase Bankers' Acceptances or Drafts hereunder, but a Facility A Canadian Bank shall not be responsible for the failure of any other Facility A Canadian Bank to accept Drafts or purchase Bankers' Acceptance or Drafts on the Drawing Date for any Drawing. (3) Medis shall ensure that there is delivered to each Facility A Canadian Bank that is a Member, and such Facility A Canadian Bank is hereby authorized to release the Bankers' Acceptance accepted by it to the Clearing House (or its custodian or the nominee of the Clearing House or its custodian) upon receipt of, confirmation that the Clearing House holds such Bankers' Acceptance for the account of such Facility A Canadian Bank. (e) Payment of Drawing Purchase Price. (1) Subject to Section 2.18(b)(4), each Facility A Canadian Bank shall, before 12:00 noon (Toronto time) on the applicable Drawing Date, pay or cause to be paid, the Drawing Purchase Price in respect of any Bankers' Acceptances which such Facility A Canadian Bank has purchased or arranged to have purchased pursuant to Section 2.18(d)(1) by depositing or causing to be deposited such amount to such account maintained by the Canadian Administrative Agent at BofA Canada as shall have been notified to such Facility A Canadian Bank by the Canadian Administrative Agent, in Canadian Dollars in same day funds. Promptly upon receipt of such funds, the Canadian Administrative Agent shall make such funds available to Medis by debiting such account (or causing such account to be debited), and by crediting Medis' account, as to which Medis shall have notified the Canadian Administrative Agent prior thereto, maintained by the Canadian Administrative Agent at BofA Canada with like funds in the aggregate amount of such funds. 42 (2) Bankers' Acceptances purchased by a Facility A Canadian Bank or its participant hereunder may be held by such Facility A Canadian Bank or such participant, as the case may be, for its own account until maturity or sold by it at any time prior thereto in any relevant market therefor in Canada, in such Facility A Bank's or its participant's sole discretion. (f) Effective Discount Rate Determination. The Canadian Administrative Agent shall give prompt notice to the Company and Medis of the Effective Discount Rate and the Drawing Fee Rate determined by the Canadian Administrative Agent for an applicable Drawing Date. Promptly upon request of either Borrower, the Canadian Administrative Agent shall provide such Borrower an indicative Effective Discount Rate, which rate shall not be binding on the Canadian Administrative Agent, the Agent or the Banks for purposes of any Drawing or acceptance of Drafts. (g) Payment at Maturity. (1) Medis shall pay to the Canadian Administrative Agent, and there shall become due and payable, at 12:00 noon (Toronto time) on the maturity date for each Bankers' Acceptance an amount in Canadian Dollars in same day funds equal to the Face Amount of such Bankers' Acceptance. Medis shall make each payment hereunder in respect of Bankers' Acceptances by deposit of the required funds to the Canadian Administrative Agent at the Canada Administrative Agent's Payment Office. Upon receipt of such payment, the Canadian Administrative Agent will promptly thereafter cause such payment to be distributed in like funds in payment of Bankers' Acceptances ratably (based on the proportion that the aggregate Face Amount of Bankers' Acceptances held by any Facility A Canadian Bank or any participant thereof maturing on the relevant date bears to the aggregate Face Amount of Bankers' Acceptances accepted or held by all Facility A Canadian Banks or any participants or assignees thereof maturing on such date) to Facility A Canadian Banks for their account and for the account of any participant, to the extent of and in accordance with their participation. Such payment to the Canadian Administrative Agent shall satisfy Medis' obligations under any Bankers' Acceptances to which it relates and each Facility A Canadian Bank that has accepted such Bankers' Acceptances shall thereafter be solely responsible for the payment of such Bankers' Acceptances and shall indemnify and hold Medis harmless against any liabilities, costs or expenses incurred by Medis as a result of any failure by such Facility A Canadian Bank or such participant to pay such Bankers' Acceptance in accordance with its terms. (2) If Medis fails to pay any Bankers' Acceptance when due, or to convert or renew the Face Amount of such Bankers' Acceptance pursuant to Section 2.18(i), the unpaid amount due and payable in respect thereof shall be converted as of such date, and without any necessity for Medis to give a Notice of Borrowing in accordance with Section 2.3, to, and thereafter be outstanding as, a Canadian Prime Rate Loan made by, Facility A Canadian Banks and shall bear interest calculated and payable as provided in Section 2.8. (h) Presigned Draft Forms. To enable the Facility A Banks to create Bankers' Acceptances or complete Drafts in the manner specified in this Section 2.18, Medis shall supply each Facility A Canadian Bank with such number of Drafts as such Facility A Canadian Bank 43 may reasonably request, duly endorsed and executed on behalf of Medis by any one or more of its authorized officers. Each Facility A Canadian Bank shall exercise such care in the custody and safekeeping of Drafts as it would exercise in the custody and safekeeping of similar property owned by it. Each Facility A Canadian Bank will, upon request by Medis, promptly advise Medis of the number and designations, if any, of the uncompleted Drafts then held by it. The signatures of such officers may be mechanically reproduced in facsimile and Drafts and Bankers' Acceptances bearing such facsimile signatures shall be binding upon Medis as if they had been manually signed by such officers. Notwithstanding that any of the individuals whose manual or facsimile signature appears on any Draft or Bankers' Acceptance as one of such officers may no longer hold office at the date thereof or at the date of its acceptance by a Facility A Canadian Bank or a participant hereunder or at any time thereafter, any Draft or Bankers' Acceptance so signed shall be valid and binding upon Medis. (i) Conversion or Renewal of Bankers' Acceptances. Upon the maturity of a Bankers' Acceptance, the Company and Medis may elect to (i) renew such Bankers' Acceptance, by giving a Drawing Notice in accordance with Section 2.18(b)(1); or (ii) have all or a portion of the Face Amount of such Bankers' Acceptance converted to an Offshore Rate Loan or Canadian Prime Rate Loan, by giving a Notice of Borrowing in accordance with Section 2.3. If the Bankers' Acceptances to be converted cannot be converted into an Offshore Rate Loan or Canadian Prime Rate Loan in an aggregate amount which may be made as an Offshore Rate Loan or Canadian Prime Rate Loan, as the case may be, under this Agreement, then the amount which cannot be so converted shall be repaid to the Canadian Administrative Agent for distribution to the Facility A Canadian Banks in accordance with Section 2.18(g) on the date of such conversion. (j) Circumstances Making Bankers' Acceptances Unavailable. (1) If the Canadian Administrative Agent determines in good faith, which determination shall be final, conclusive and binding upon Medis and the Company, and notifies Medis that, by reason of circumstances affecting the money market (i) there is no market for Bankers' Acceptances; or (ii) the demand for Bankers' Acceptances is insufficient to allow the sale or trading of the Bankers' Acceptances created and purchased hereunder; then, (i) the right of the Company and Medis to request a Drawing shall be suspended until the Canadian Administrative Agent determines that the circumstances causing such suspension no longer exist and the Canadian Administrative Agent so notifies Medis; and (ii) any Drawing Notice which is outstanding shall be cancelled and the Drawing requested therein shall not be made. (2) The Canadian Administrative Agent shall promptly notify Medis and the Agent of the suspension of Medis' right to request a Drawing and of the termination of any such suspension. 44 (k) Prepayments. Except as required or permitted by Article IX or Section 2.7, no repayment of a Bankers' Acceptance shall be made by Medis to a Facility A Canadian Bank prior to the maturity date thereof. Any such repayment, made as required by Article IX or Section 2.7, shall be made (unless such repayment has been rescinded or otherwise is required to be returned by such Facility A Canadian Bank to Medis for any reason) in accordance with the provisions of Section 2.18(g)(1). Any such payment by Medis to the Canadian Administrative Agent shall satisfy Medis' obligations under the Bankers' Acceptance to which it relates and, in the case of a Bankers' Acceptance which has been accepted by a Facility A Canadian Bank or its participant, such Facility A Canadian Bank or such participant shall thereafter be solely responsible for the payment of such Bankers' Acceptance and shall indemnify and hold Medis harmless against any liabilities, costs or expenses incurred by Medis as a result of any failure by such Facility A Canadian Bank or such participant to pay such Bankers' Acceptance in accordance with its terms. 2.19 Replacement of a Bank. If either Borrower receives a notice of --------------------- amounts due pursuant to subsection 3.3(a), subsection 3.3(b) or subsection 3.3(c) from a Bank or a Bank defaults in its obligations hereunder (any such Bank, a "Subject Bank"), so long as (i) no Event of Default shall have occurred and be continuing and the Company has obtained a commitment from another Bank or an Eligible Assignee to purchase at par the Subject Bank's Loans and assume the Subject Bank's Commitments and all other obligations of the Subject Bank hereunder and (ii) the Subject Bank is unwilling to remedy its default or withdraw its notice, upon 10 days' prior written notice to the Subject Bank and the Agent, the Company may require the Subject Bank to assign all of its Loans and Commitments to such other Bank or Eligible Assignee pursuant to the provisions of Section 11.8; provided that, prior to or concurrently with such replacement (i) each Borrower has paid to the Subject Bank all amounts under Article III through such date of replacement, (ii) Company or the applicable assignee have paid to Administrative Agent the processing fee required to be paid by Section 11.8 and (iii) all of the requirements for such assignment contained in Section 11.8, including, without limitation, the consent of the Agent (if required) and the receipt by the Agent of an executed Assignment Agreement and other supporting documents, have been fulfilled. ARTICLE III TAXES, YIELD PROTECTION AND ILLEGALITY 3.1 Taxes. ----- (a) Any and all payments by each Borrower to each Bank or the Applicable Agent under this Agreement and any other Loan Document shall be made free and clear of, and without deduction or withholding for any Taxes. In addition, the Borrowers jointly and severally shall pay all Other Taxes. (b) Each Borrower agrees to indemnify and hold harmless each Bank and each of the Agents for the full amount of Taxes or Other Taxes (including any Taxes or Other Taxes 45 imposed by any jurisdiction on amounts payable under this Section) paid by the Bank or any of the Agents and any liability (including penalties, interest, additions to tax and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. Payment under this indemnification shall be made within 30 days after the date the Bank or any of the Agents makes written demand therefor. (c) If any Borrower shall be required by law to deduct or withhold any Taxes or Other Taxes from or in respect of any sum payable hereunder to any Bank or any of the Agents, then: (i) the sum payable shall be increased as necessary so that after making all required deductions and withholdings (including deductions and withholdings applicable to additional sums payable under this Section) such Bank or such of the Agents, as the case may be, receives an amount equal to the sum it would have received had no such deductions or withholdings been made; (ii) such Borrower shall make such deductions and withholdings; (iii) such Borrower shall pay the full amount deducted or withheld to the relevant taxing authority or other authority in accordance with applicable law; and (iv) such Borrower shall also pay to such Bank or such Agent at the time the sum payable is paid, all additional amounts which the Bank or Agent specifies as necessary to preserve the after-tax yield the Bank or Agent would have received if such Taxes or Other Taxes had not been imposed. (d) Within 30 days after the date of any payment by a Borrower of Taxes or Other Taxes, such Borrower shall furnish the Agent the original or a certified copy of a receipt evidencing payment thereof, or other evidence of payment satisfactory to the Agent. (e) If a Borrower is required to pay additional amounts to any Bank or any of the Agents pursuant to this Section 3.1, then such Bank shall use reasonable efforts (consistent with legal and regulatory restrictions) to take such actions as are necessary to minimize such Borrower's obligations under this Article III, including without limitation, changing the jurisdiction of its Lending Office so as to eliminate any such additional payment by such Borrower which may thereafter accrue, if such actions in the sole judgment of such Bank are not otherwise disadvantageous to such Bank. (f) Notwithstanding anything to the contrary in this Section 3.1, neither Borrower shall be required to compensate an Assignee or Participant of a Loan or Bankers' Acceptance for withholding taxes, if at the time of such assignment (i) the assigning Bank was not subject to withholding taxes in respect of any amount in respect of the Loans or Bankers' Acceptances and (ii) the Assignee or Participant was subject to withholding taxes at the time of such assignment in respect of such amount. In addition, notwithstanding anything to the contrary in this Section 3.1, in no event shall any Borrower be required to compensate a Bank or a participant of a Bankers' Acceptance as contemplated in subsection 2.18 for withholding taxes 46 under this Section 3.1 if such withholding tax results from a participation as contemplated in subsection 2.18. (g) Without prejudice to the survival of any other agreement of either Borrower hereunder, the agreements and obligations of the Borrowers contained in this Section 3.1 shall survive the payment in full of principal and interest hereunder and under any instrument delivered hereunder. 3.2 Illegality. ---------- (a) If any Bank determines that the introduction of any Requirement of Law, or any change in any Requirement of Law, or in the interpretation or administration of any Requirement of Law, has made it unlawful, or that any central bank or other Governmental Authority has asserted that it is unlawful, for any Bank or its applicable Lending Office to make Offshore Rate Loans (including Offshore Rate Loans in Canadian Dollars), then, on notice thereof by the Bank to the Borrowers through the Agent, any obligation of that Bank to make Offshore Rate Loans shall be suspended until the Bank notifies the Agent and the Borrowers that the circumstances giving rise to such determination no longer exist. (b) If a Bank determines that it is unlawful to maintain any Offshore Rate Loan, the applicable Borrower shall, upon its receipt of notice of such fact and demand from such Bank (with a copy to the Agent), either, (A)(i) in the case of the Company, convert in full such Offshore Rate Loans into Loans of another Type and (ii) in the case of Facility A Canadian Loans to Medis, convert in full such Offshore Rate Loans into Canadian Prime Rate Loans or (B) prepay in full such Offshore Rate Loans of that Bank then outstanding, together with interest accrued thereon (in the case of a prepayment) and amounts required under Section 3.4, either on the last day of the Interest Period thereof, if the Bank may lawfully continue to maintain such Offshore Rate Loans to such day, or immediately, if the Bank may not lawfully continue to maintain such Offshore Rate Loan. If the applicable Borrower prepays any Offshore Rate Loan as provided in the preceding sentence, then concurrently with such prepayment, such Borrower shall borrow from the affected Bank, in the amount of such repayment, (i) a Base Rate Loan in the case of the Company and (ii) a Canadian Prime Rate Loan, in the case of Medis. 3.3 Increased Costs and Reduction of Return. --------------------------------------- (a) If any Bank determines that, due to either (i) the introduction of or any change in or in the interpretation of any law or regulation (other than any change by way of imposition of or increase in reserve requirements included in the calculation of the Offshore Rate or in respect of the assessment rate payable by any Bank to the FDIC for insuring U.S. deposits or any change introduced prior to the Closing Date) or (ii) the compliance by that Bank with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law) (other than any guideline or request introduced prior to the Closing Date), there shall be any increase in the cost to such Bank of agreeing to make or making, funding or maintaining any Offshore Rate Loans, then the applicable Borrower shall be liable for, and shall from time to time, upon demand (with a copy of such demand to be sent to the Agent), pay to the Applicable Agent for the account of such Bank, additional amounts as are 47 sufficient to compensate such Bank for such increased costs; provided that no -------- Bank shall be entitled to obtain compensation with respect to any period prior to six (6) months prior to making such demand. (b) If the introduction of or any change (including, without limitation, any change by way of imposition or increase of reserve requirements) in or in the interpretation of any law or regulation, or the compliance with any guideline or request imposed or made from any central bank or other governmental authority or quasi-governmental authority exercising control over banks or financial institutions generally (whether or not having the force of law) any reserve (including, without limitation, any reserve requirement imposed under the Bank Act (Canada) or the Regulations thereunder), special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Facility A Canadian Bank's applicable lending office shall be imposed on or deemed applicable or any other condition affecting Drafts or Bankers' Acceptances or such Facility A Canadian Bank's obligation to accept Drafts shall be imposed on such Facility A Canadian Bank or its applicable lending office, in any such case after the Closing Date; and, as a result thereof, there shall be any increase in the cost to such Facility A Canadian Bank of agreeing to accept or accepting, funding or maintaining Drafts or Bankers' Acceptances, or there shall be a reduction in the amount received or receivable by such Facility A Canadian Bank or its applicable lending office, then Medis shall from time to time, upon written notice from and demand by such Facility A Canadian Bank (with a copy of such notice to the Company, the Canadian Administrative Agent and the Agent), pay to the Canadian Administrative Agent, for the account of such Facility A Canadian Bank, within five (5) Business Days after the date specified in such notice and demand, additional amounts sufficient to indemnify such Facility A Canadian Bank against such increased cost; provided, however, that neither Borrower shall have any -------- ------- liability to a Facility A Canadian Bank under this subsection 3.3(b) with respect to the imposition of any withholding tax to the extent Borrowers are not required to make payments to such Facility A Canadian Bank with respect to the imposition of such withholding tax under Section 3.1; provided further that a -------- ------- Facility A Canadian Bank shall not be entitled to avail itself of the benefit of this subsection 3.3(b) to the extent that any such increased cost or reduction was incurred more than six (6) months prior to the time it gives notice to Medis. A certificate as to the amount of such increased cost submitted to Medis, the Company, the Canadian Administrative Agent and the Agent by a Facility A Canadian Bank, shall, except for manifest or demonstrable error, be final, conclusive and binding for all purposes. (c) If any Bank shall have determined that (i) the introduction of any Capital Adequacy Regulation, (ii) any change in any Capital Adequacy Regulation, (iii) any change in the interpretation or administration of any Capital Adequacy Regulation by any central bank or other Governmental Authority charged with the interpretation or administration thereof, or (iv) compliance by the Bank (or its Lending Office) or any corporation controlling the Bank with any Capital Adequacy Regulation, in any such case, after the Closing Date, affects or would affect the amount of capital required or expected to be maintained by the Bank or any corporation controlling the Bank and (taking into consideration such Bank's or such corporation's policies with respect to capital adequacy and such Bank's desired return on capital) determines that the amount of such capital is increased as a consequence of its Commitments, loans, credits 48 or obligations under this Agreement, then, upon demand of such Bank to the applicable Borrower through the Applicable Agent, such Borrower shall pay to the Bank, from time to time as specified by the Bank, additional amounts sufficient to compensate the Bank for such increase; provided no Bank shall be entitled to -------- receive additional amounts with respect to any period prior to six (6) months prior to making such demand. 3.4 Funding Losses. Each Borrower shall reimburse each bank and hold --------------- each Bank harmless from any loss or expense which the Bank may sustain or incur as a consequence of: (a) the failure of such Borrower to make on a timely basis any payment of principal of any Offshore Rate Loan; (b) the failure of such Borrower to borrow, continue or convert a Loan after the Company has, or the Company and Medis have, as the case may be given, (or is/are deemed to have given) a Notice of Borrowing or a Notice of Conversion/Continuation; (c) the failure of such Borrower to make any prepayment in accordance with any notice delivered under Section 2.6; (d) the prepayment or other payment (including after acceleration thereof) of an Offshore Rate Loan on a day that is not the last day of the relevant Interest Period; or (e) the automatic conversion under Section 2.4 of any Offshore Rate Loan to a Base Rate Loan or Canadian Prime Rate Loan on a day that is not the last day of the relevant Interest Period; including any such loss or expense arising from the liquidation or reemployment of funds obtained by such Bank to maintain its Offshore Rate Loans or from fees payable by such Bank to terminate the deposits from which such funds were obtained or from charges relating to any Loans. For purposes of calculating amounts payable by the Company to the Banks under this Section and under subsection 3.3(a), each Offshore Rate Loan made by a Bank (and each related reserve, special deposit or similar requirement) shall be conclusively deemed to have been funded at the LIBOR used in determining the Offshore Rate for such Offshore Rate Loan by a matching deposit or other borrowing in the interbank eurodollar market for a comparable amount and for a comparable period, whether or not such Offshore Rate Loan is in fact so funded. 3.5 Inability to Determine Rates. If the Agent determines that for ---------------------------- any reason adequate and reasonable means do not exist for determining the Offshore Rate for any requested Interest Period with respect to a proposed Offshore Rate Loan, or that the Offshore Rate applicable pursuant to subsection 2.8(a) for any requested Interest Period with respect to a proposed Offshore Rate Loan does not adequately and fairly reflect the cost to the Banks of funding such Loan, the Agent will promptly so notify the applicable Borrower and each Bank. Thereafter, the obligation of the Banks to make or maintain Offshore Rate Loans hereunder shall be suspended until the Agent revokes such notice in writing. Upon receipt of such notice, the 49 applicable Borrower may revoke any Notice of Borrowing or Notice of Conversion/Continuation previously submitted by such Borrower. If the applicable Borrower does not revoke such Notice, the Banks shall make, convert or continue the Loans, as proposed by such Borrower, in the amount specified in the applicable notice submitted by such Borrower, but such Loans shall be made, converted or continued as (i) Base Rate Loans in the case of Facility A Domestic Loans or Facility B Loans and (ii) Canadian Prime Rate Loans in the case of Facility A Canadian Loans instead of Offshore Rate Loans, as the case may be. 3.6 Certificates of Banks. Any Bank claiming reimbursement or --------------------- compensation under this Article III shall deliver to the Company and the applicable Borrower (with a copy to the Agent) a certificate setting forth in reasonable detail the amount payable to the Bank hereunder and such certificate shall be conclusive and binding on the Company in the absence of manifest error. 3.7 Survival. The agreements and obligations of the Borrowers in this -------- Article III shall survive the payment of all other Obligations. ARTICLE IV CONDITIONS PRECEDENT 4.1 Conditions of Initial Loans. The obligation of each Bank to make --------------------------- its initial Loan hereunder is subject to the condition that the Agent have received on or before the date the initial Loan is made but not later than fifteen (15) Business Days after the date hereof all of the following, in form and substance satisfactory to the Agent and each Bank, and in sufficient copies for each Bank: (a) Credit Agreement. This Agreement executed by each party hereto ---------------- and, if requested by any Bank, the Note(s) requested by such Bank executed by the applicable Borrower; (b) Resolutions; Incumbency. ----------------------- (i) Copies of the resolutions of the board of directors of the Company and the unanimous shareholder agreement and resolution of the shareholders of Medis authorizing the transactions contemplated hereby, certified as of the Closing Date by the Secretary or an Assistant Secretary of such Borrower; and (ii) A certificate of the Secretary or Assistant Secretary of each Borrower, certifying the names and true signatures of the officers of such Borrower authorized to execute, deliver and perform, as applicable, this Agreement, and all other Loan Documents to be delivered by it hereunder; 50 (c) Organization Documents; Good Standing. Each of the following ------------------------------------- documents: (i) the articles or certificate of incorporation and the bylaws of each Borrower as in effect on the Closing Date, certified by the Secretary or Assistant Secretary of such Borrower as of the Closing Date; (ii) a good standing and tax good standing certificate for the Company from the applicable Secretary of State (or similar, applicable Governmental Authority) of the States of Delaware and California dated as of a recent date; and (iii) a certificate of status for Medis from the Ministry of Consumer and Commercial Relations (Ontario), dated as of a recent date; (d) Legal Opinions. -------------- (i) An opinion of Ivan D. Meyerson, Vice President and General Counsel of the Company, addressed to the Agent and the Banks, substantially in the form of Exhibit D-1; (ii) an opinion of Blake, Cassels & Graydon, Canadian counsel to the Company and Medis, substantially in the form of Exhibit D-2; (e) Payment of Fees. Evidence of payment by the Company of all --------------- accrued and unpaid fees, costs and expenses to the extent then due and payable on the Closing Date, together with Attorney Costs of BofA to the extent invoiced prior to or on the Closing Date, including any such costs, fees and expenses arising under or referenced in Sections 2.9 and 11.4; (f) Company Certificates. A certificate signed by a Responsible -------------------- Officer of the Company, dated as of the Closing Date, stating that: (i) the representations and warranties contained in Article V and the other Loan Documents are true and correct on and as of such date, as though made on and as of such date; (ii) no Default or Event of Default exists or would result from the initial Borrowing; (iii) there has occurred since March 31, 1998, no event or circumstance that has resulted or could reasonably be expected to result in a Material Adverse Effect; and (iv) designating the Closing Date; 51 (g) Medis Certificate. A certificate signed by a Responsible Officer ----------------- of Medis, dated as of the Closing Date, stating that: (i) the representations and warranties of Medis contained in Article V are true and correct on and as of the Closing Date, as though made on and as of such date; (ii) no Default or Event of Default with respect to Medis or any of its Subsidiaries exists or would result from the initial Borrowing; and (iii) there has occurred since March 31, 1998, no event or circumstance with respect to Medis or any of its Subsidiaries that has resulted or could reasonably be expected to result in a Material Adverse Effect; (h) Notices of Termination. Notices of termination signed by a ---------------------- Responsible Officer of the Company whereby the Company gives notice, pursuant to each of (i) that certain Credit Agreement dated as of March 31, 1995, by and among the Company, Medis, BofA, as agent, Chemical Bank, as co-agent, BofA Canada, as Canadian administrative agent, and the financial institutions on the signature pages thereof, as amended; (ii) that certain Credit Agreement dated as of November 4, 1996, by and among the Company, BofA, as agent, The Chase Manhattan Bank, as co-agent, and the financial institutions on the signature pages thereof, as amended and (iii) that certain Credit Agreement dated as of November 21, 1997, by and among the Company, BofA, as agent, and the financial institutions on the signature pages thereof (such Credit Agreements, the "Existing Credit Agreements"), of the Company's intent to terminate, upon the -------------------------- effectiveness of this Agreement, any commitments currently existing under any of the Existing Credit Agreements. (i) Other Documents. Such other approvals, opinions, documents or --------------- materials as the Agent or any Bank may reasonably request. 4.2 Conditions To All Borrowings. The obligation of each Bank to make ---------------------------- any Loan to be made by it (including its initial Loan) or to continue or convert any Loan under Section 2.4 is subject to the satisfaction of the following conditions precedent on the relevant Borrowing Date or Conversion/Continuation Date: (a) Notice of Borrowing or Conversion/Continuation. The Applicable ---------------------------------------------- Agent shall have received (with, in the case of the initial Loan only, a copy for each Bank) a Notice of Borrowing or a Notice of Conversion/Continuation, as applicable; (b) Continuation of Representations and Warranties. The ---------------------------------------------- representations and warranties in Article V and the other Loan Documents shall be true and correct on and as of such Borrowing Date or Conversion/Continuation Date with the same effect as if made on and as of such Borrowing Date or Conversion/Continuation Date (except to the extent such representations and warranties expressly refer to an earlier date, in which case they shall be true and correct as of such earlier date); 52 (c) No Existing Default. No Default or Event of Default shall exist ------------------- or shall result from such Borrowing or continuation or conversion; and (d) Facility A Canadian Loans. In the case of any Loan to be made to ------------------------- Medis, Medis shall be a Wholly-Owned Subsidiary of the Company. Each Notice of Borrowing and Notice of Conversion/Continuation submitted by the Company or, in the case of a Facility A Canadian Loan, by the Company and Medis hereunder shall constitute a representation and warranty by the Company or, in the case of a Facility A Canadian Loan, by the Company and Medis, as of the date of each such notice and as of each Borrowing Date or Conversion/Continuation Date, as applicable, that the conditions in Section 4.2 are satisfied. 4.3 Conditions To Bankers' Acceptance Facility. The obligation of ------------------------------------------ Facility A Canadian Banks to accept and discount any Draft or Bankers' Acceptance is subject to prior or concurrent satisfaction of all of the following conditions: (a) On or before the date of acceptance and discounting of the initial Draft or Bankers' Acceptance, each of the conditions set forth in Section 4.1 shall have been satisfied. (b) Each of the conditions to the acceptance and discounting of such Draft or Bankers' Acceptance set forth in Section 2.18 shall have been satisfied. (c) On the date of acceptance and discounting of such Draft or Bankers' Acceptance, all conditions precedent described in Section 4.2 (other than paragraph (a)) shall be satisfied to the same extent as though the acceptance and discounting of such Draft or Bankers' Acceptance were the making of a Loan. ARTICLE V REPRESENTATIONS AND WARRANTIES Each Borrower represents and warrants (which representations and warranties in the case of Medis shall be limited to Medis and its Subsidiaries and other facts and circumstances known to Medis and its Subsidiaries) to the Agent and each Bank that: 5.1 Corporate Existence And Power. The Company and each of its ----------------------------- Subsidiaries: (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or formation; (b) has the power and authority and all required governmental licenses, authorizations, consents and approvals to own its assets, carry on its business and to execute, deliver, and perform its obligations under the Loan Documents; 53 (c) is duly qualified as a foreign corporation and is licensed and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification or license; and (d) is in compliance with all Requirements of Law; except, with respect to Subsidiaries of the Company other than Material Subsidiaries, to the extent that the failure to do so could not reasonably be expected to have a Material Adverse Effect, and, with respect to the Company and its Material Subsidiaries in each case referred to in clause (c) or clause (d), to the extent that the failure to do so could not reasonably be expected to have a Material Adverse Effect. 5.2 Corporate Authorization; No Contravention. The execution, ----------------------------------------- delivery and performance by each Borrower of this Agreement and each other Loan Document to which such Borrower is party, and any Borrowing as of the date of such Borrowing have been duly authorized by all necessary corporate action, and do not and will not: (a) contravene the terms of any of any Borrower's Organization Documents; (b) conflict with or result in any breach or contravention of, or the creation of any Lien under, any document evidencing any Contractual Obligation to which any Borrower is a party or any order, injunction, writ or decree of any Governmental Authority to which any Borrower or its property is subject; or (c) violate any Requirement of Law. 5.3 Governmental Authorization. No approval, consent, exemption, -------------------------- authorization, or other action by, or notice to, or filing with, any Governmental Authority is necessary or required in connection with the execution, delivery or performance by, or enforcement against, any Borrower of the Agreement or any other Loan Document. 5.4 Binding Effect. This Agreement and each other Loan Document to -------------- which each Borrower is a party constitute the legal, valid and binding obligations of such Borrower, enforceable against such Borrower in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, or similar laws affecting the enforcement of creditors' rights generally or by equitable principles relating to enforceability. 5.5 Litigation. There are no actions, suits, proceedings, claims or ---------- disputes pending, or to the best knowledge of each Borrower, threatened or contemplated, at law, in equity, in arbitration or before any Governmental Authority, against the Company, or its Subsidiaries or any of their respective properties which: (a) purport to affect or pertain to this Agreement or any other Loan Document, or any of the transactions contemplated hereby or thereby; or 54 (b) if determined adversely to the Company or its Subsidiaries, would reasonably be expected to have a Material Adverse Effect as of the Closing Date. No injunction, writ, temporary restraining order or any order of any nature has been issued by any court or other Governmental Authority purporting to enjoin or restrain the execution, delivery or performance of this Agreement or any other Loan Document, or directing that the transactions provided for herein or therein not be consummated as herein or therein provided. 5.6 No Default. No Default or Event of Default exists or would result ---------- from the incurring of any Obligations by any Borrower. As of the Closing Date, neither the Company nor any Subsidiary is in default under or with respect to any Contractual Obligation in any respect which, individually or together with all such defaults, could reasonably be expected to have a Material Adverse Effect as of the Closing Date, or that would, if such default had occurred after the Closing Date, create an Event of Default under subsection 9.1(e). 5.7 Use Of Proceeds; Margin Regulations. The proceeds of the Loans ----------------------------------- are to be used solely for the purposes set forth in Section 6.9. Neither the Company nor any Subsidiary is generally engaged in the business of purchasing or selling Margin Stock or extending credit for the purpose of purchasing or carrying Margin Stock. 5.8 Financial Condition. ------------------- (a) The (i) audited consolidated financial statements of the Company and its Subsidiaries dated March 31, 1998, and the related consolidated statements of income or operations, shareholders' equity and cash flows for the fiscal year ended on that date and (ii) unaudited consolidated financial statements of the Company and its Subsidiaries dated June 30, 1998, and the related consolidated statements of income or operations, shareholders' equity and cash flows for the three months ended on that date: (A) were prepared in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein, subject in the case of the unaudited statements to ordinary, good faith year end audit adjustments; (B) fairly present the financial condition of the Company and its Subsidiaries as of the date thereof and results of operations for the period covered thereby; and (C) show all material indebtedness and other liabilities, direct or contingent, of the Company and its consolidated Subsidiaries as of the date thereof required to be shown in accordance with GAAP. (b) As of the Closing Date, since March 31, 1998, there has been no Material Adverse Effect. 5.9 Regulated Entities. None of the Company, any Person controlling ------------------ the Company, or any Subsidiary, is an "Investment Company" within the meaning of the Investment 55 Company Act of 1940. Neither Borrower is subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act, any state public utilities code, or any other Federal, state or other statute or regulation limiting its ability to incur Indebtedness. 5.10 No Burdensome Restrictions. Neither the Company nor any -------------------------- Subsidiary is a party to or bound by any Contractual Obligation, or subject to any restriction in any Organization Document, or any Requirement of Law, which could reasonably be expected to have a Material Adverse Effect. 5.11 Subsidiaries And Certain Liens As Of The Closing Date. As of the ----------------------------------------------------- Closing Date, the Company has no corporate Subsidiaries other than those listed in part (a) of Schedule 5.11 hereto. As of the Closing Date, part (b) of Schedule 5.11 describes all outstanding Indebtedness of the Company and its Subsidiaries for borrowed money in excess of $25,000,000 that is secured by a Lien existing on property of the Company or any of its Subsidiaries. 5.12 Year 2000 Compliance. The Company and its Subsidiaries have -------------------- developed and budgeted for a comprehensive program to address the Year 2000 Problem. The Company and its Subsidiaries have implemented that program substantially in accordance with its timetable and budget and the Company reasonably anticipates that they will substantially avoid the Year 2000 Problem as to all computers, as well as embedded microchips in non-computing devices, which are (a) owned, leased or otherwise under the control of the Company or any of its Subsidiaries, and (b) material to the business, properties or operations of the Company or any of its Subsidiaries. The Company and its Subsidiaries have developed commercially reasonable contingency plans adequately to ensure uninterrupted and unimpaired business operation in the event of failure of their own or a third party's systems or equipment due to the Year 2000 Problem, including those of vendors, customers and suppliers. ARTICLE VI AFFIRMATIVE COVENANTS So long as any Bank shall have any Commitment hereunder, or any Loan or other Obligation (other than Obligations under Section 11.5 that remain contingent after termination of the Commitments and payment of all other Obligations) shall remain unpaid or unsatisfied, unless the Majority Banks waive compliance in writing: 6.1 Financial Statements. The Company shall deliver to the Agent, in -------------------- form and detail satisfactory to the Agent and the Majority Banks, with sufficient copies for each Bank: (a) as soon as available, but not later than 90 days after the end of each fiscal year (commencing with the fiscal year ended March 31, 1999), a copy of the audited consolidated balance sheet of the Company and its Subsidiaries as at the end of such year and the related consolidated statements of income or operations, shareholders' equity and cash flows for such year, setting forth in each case in comparative form the figures for the previous fiscal year, 56 and accompanied by the unqualified opinion of Deloitte & Touche or another nationally-recognized independent public accounting firm ("Independent ----------- Auditor"), which report shall state that such consolidated financial statements - ------- present fairly the financial position for the periods indicated in conformity with GAAP applied on a basis consistent with prior years. Such opinion shall not be qualified or limited as to (i) going concern, (ii) any restriction or limitation in the examination by the Independent Auditor of any material portion of the Company's or any Subsidiary's records or (iii) possible errors generated by financial reporting and related systems due to the Year 2000 Problem; and (b) as soon as available, but not later than 60 days after the end of each of the first three fiscal quarters of each fiscal year (commencing with the fiscal quarter ended September 30, 1998), a copy of the unaudited consolidated balance sheet of the Company and its Subsidiaries as at the end of such quarter and the related consolidated statements of income or operations, shareholders' equity and cash flows for the period commencing on the first day and ending on the last day of such quarter, and certified by a Responsible Officer as fairly presenting, in accordance with GAAP (subject to ordinary, good faith year-end audit adjustments), the financial position and the results of operations of the Company and the Subsidiaries (which certification may be part of the related Compliance Certificate delivered pursuant to Section 6.2(a)). 6.2 Certificates; Other Information. The Company shall furnish to the -------------------------------- Agent, with sufficient copies for each Bank: (a) concurrently with the delivery of the financial statements referred to in subsections 6.1(a) and (b), a Compliance Certificate executed by a Responsible Officer of the Company; (b) promptly, copies of all financial statements and reports that the Company sends to its shareholders, and copies of all financial statements and regular, periodical or special reports (including Forms 10K, 10Q and 8K) that the Company or any Subsidiary may make to, or file with, the SEC; and (c) promptly, such additional information regarding the business, financial or corporate affairs of the Company or any Subsidiary, including Medis, as the Agent, at the request of any Bank, may from time to time reasonably request. 6.3 Notices. The Company and Medis shall notify the Agent and each ------- Bank: (a) promptly, upon such occurrence, of the occurrence of any Default or Event of Default, and of the occurrence or existence of any event or circumstance that foreseeably will become a Default or Event of Default; (b) promptly, upon such occurrence, of any matter that has resulted or may result in a Material Adverse Effect; 57 (c) promptly upon any Responsible Officer of Company obtaining knowledge thereof of (i) the institution of, or non-frivolous threat of, any action, suit, proceeding (whether administrative, judicial or otherwise), governmental investigation of arbitration against or affecting the Company or any of its Subsidiaries or any property of the Company or any of its Subsidiaries (collectively "Proceedings") not previously disclosed in writing by the Company to the Banks or (ii) any material development in any Proceeding that, in the case of clause (i) or (ii) above, (1) if adversely determined, has a reasonable possibility of giving rise to a Material Adverse Effect; or (2) seeks to enjoin or otherwise prevent the consummation of, or to recover any damages or obtain relief as a result of, the transactions contemplated hereby, together with such other information as may be reasonably available to Company that the Agent requests to enable the Agent and the Banks to evaluate such matters. (d) of any material change in accounting policies or financial reporting practices by the Company or any of its consolidated Subsidiaries, including but not limited to any change that has any effect on the calculation of any financial covenant in this Agreement. 6.4 Preservation Of Corporate Existence, Etc. The Company and Medis ----------------------------------------- shall, and shall cause their respective Material Subsidiaries to: (a) preserve and maintain in full force and effect its corporate existence and good standing under the laws of their respective states or jurisdictions of incorporation except, in the case of any Material Subsidiary (other than Medis), in connection with transactions permitted by Section 7.2; and (b) preserve and maintain in full force and effect all governmental rights, privileges, qualifications, permits, licenses and franchises necessary in the normal conduct of its business except in connection with transactions permitted by Section 7.2 or except to the extent that the failure to do so could not reasonably be expected to have a Material Adverse Effect. 6.5 Insurance. The Company and Medis shall maintain, and shall cause --------- their respective Material Subsidiaries to maintain, with financially sound and reputable insurers, insurance (including self-insurance) with respect to its properties and business against loss or damage of the kinds customarily insured against by Persons engaged in the same or similar business, of such types and in such amounts as the Company reasonably deems prudent from time to time. 6.6 Payment Of Taxes. The Company and Medis shall, and shall cause ---------------- each of their respective Material Subsidiaries to, pay and discharge as the same shall become due and payable, all tax liabilities, assessments and governmental charges or levies upon it or its properties or assets (other than obligations that a Responsible Officer is not aware of or are of a nominal amount), unless the same are being contested in good faith by appropriate proceedings and adequate reserves in accordance with GAAP are being maintained by the Company or such Subsidiary. 6.7 Compliance With Laws. The Company and Medis shall comply, and -------------------- shall cause each of their respective Subsidiaries to comply, in all material respects with all 58 material Requirements of Law of any Governmental Authority having jurisdiction over it or its business (including the Federal Fair Labor Standards Act), except such as may be contested in good faith or as to which a bona fide dispute may exist. 6.8 Inspection Of Property And Books And Records. The Company and -------------------------------------------- Medis shall maintain and shall cause each of their respective Material Subsidiaries to maintain in all material respects proper books of record and account, in which full, true and correct entries in conformity with GAAP consistently applied shall be made of all financial transactions and matters involving the assets and business of the Company and such Subsidiary. The Company and Medis shall permit, and shall cause each of their respective Subsidiaries to permit, representatives and independent contractors of the Agent or any Bank to visit and inspect any of their respective properties, to examine their respective corporate, financial and operating records, and make copies thereof or abstracts therefrom, and to discuss their respective affairs, finances and accounts with their respective directors, officers, and independent public accountants, at such reasonable times during normal business hours and as often as may be reasonably desired, upon reasonable advance notice to the Company; provided, however, when an Event of Default exists the Agent or any -------- ------- Bank may do any of the foregoing at the reasonable expense of the Company at any time during normal business hours and without advance notice. 6.9 Use Of Proceeds. The Borrowers shall use the proceeds of the --------------- Loans for general corporate purposes (including the refinancing of existing indebtedness) not in contravention of any Requirement of Law or of any Loan Document. 6.10 Notice Of Rating Change. The Company shall, no later than ten ----------------------- (10) Business Days after a Responsible Officer obtains knowledge of any such change, give notice to the Agent (by telephone, followed promptly by written notice transmitted by facsimile with a hard copy sent promptly thereafter) of any change in rating by any Rating Agency in respect of the Company's long-term, senior unsecured debt, together with the details thereof, and of any announcement by any Rating Agency that its rating in respect of such senior unsecured long-term debt is "under review" or that any such debt rating has been placed on a "CreditWatch List"(R) or "watch list" or that any similar action has been taken by such Rating Agency. ARTICLE VII NEGATIVE COVENANTS So long as any Bank shall have any Commitment hereunder, or any Loan or other Obligation (other than Obligations under Section 11.5 that remain contingent after termination of the Commitments and payment of all other Obligations) shall remain unpaid or unsatisfied, unless the Majority Banks waive compliance in writing: 7.1 Limitation On Liens. The Company and Medis shall not, and shall ------------------- not suffer or permit any of their respective Subsidiaries to directly or indirectly, make, create, incur, assume or suffer to exist any Lien upon or with respect to any part of its property, whether now owned or hereafter acquired, other than the following ("Permitted Liens"): --------------- 59 (a) any Lien existing on property of the Company or any Subsidiary on the Closing Date securing Indebtedness outstanding on such date; (b) any Lien created under any Loan Document; (c) Liens for taxes, fees, assessments or other governmental charges which are not delinquent or remain payable without penalty, or to the extent that non-payment thereof is permitted by Section 6.6; (d) carriers', warehousemen's, mechanics', landlords', materialmen's, repairmen's or other similar Liens arising in the ordinary course of business which are not delinquent or remain payable without penalty; (e) Liens (other than any Lien imposed by ERISA) consisting of pledges or deposits required in the ordinary course of business in connection with workers' compensation, unemployment insurance and other social security legislation ; (f) Liens on the property of the Company or any Subsidiary securing (i) the non-delinquent performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, (ii) contingent obligations on surety and appeal bonds, and (iii) other non-delinquent obligations of a like nature; in each case, incurred in the ordinary course of business, provided all such Liens in the aggregate would not (even if enforced) cause a Material Adverse Effect; (g) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, are not substantial in amount, and which do not in any case materially detract from the value of the property subject thereto or interfere with the ordinary conduct of the businesses of the Company and its Subsidiaries; (h) Liens arising solely by virtue of any statutory or common law provision relating to banker's liens, rights of set-off or similar rights and remedies as to deposit accounts or other funds maintained with a creditor depository institution; provided that (i) such deposit account is not a -------- dedicated cash collateral account and is not subject to restrictions against access by the Company in excess of those set forth by regulations promulgated by the FRB, and (ii) such deposit account is not intended by the Company or any Subsidiary to provide collateral to the depository institution; (i) Any other Liens (other than any Lien imposed by ERISA or any Lien for taxes, fees, assessments or other governmental charges that is not expressly permitted under Section 7.1(c)); provided that the aggregate amount of all Permitted Liens shall not exceed at - -------- any time 25% of Net Worth. 7.2 Consolidations And Mergers. The Company shall not, and shall not -------------------------- suffer or permit any of its Material Subsidiaries to, directly or indirectly, liquidate, dissolve, merge, amalgamate, consolidate with or into, or convey, transfer, lease or otherwise dispose of 60 (whether in one transaction or in a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired) to or in favor of any Person, except: (a) any Subsidiary may merge with the Company, provided that the Company shall be the continuing or surviving corporation, or with any one or more Subsidiaries, provided that if any transaction shall be between a Subsidiary and a Wholly-Owned Subsidiary, the Wholly-Owned Subsidiary shall be the continuing or surviving corporation; (b) any Subsidiary of Medis may amalgamate with Medis or with any one or more of Medis' Subsidiaries; (c) any Subsidiary may sell all or substantially all of its assets (upon voluntary liquidation or otherwise) to the Company or another Wholly-Owned Subsidiary; and (d) the Company may merge with another Person provided that the Company shall be the continuing or surviving corporation and no Default or Event of Default is in effect immediately prior to or on the date of or would result from such merger. 7.3 Use of Proceeds. --------------- (a) The Company and Medis shall not, and shall not suffer or permit any of their respective Subsidiaries to, use any portion of the Loan proceeds, directly or indirectly, (i) to purchase or carry Margin Stock, (ii) to repay or otherwise refinance indebtedness of the Company or others incurred to purchase or carry Margin Stock, (iii) to extend credit for the purpose of purchasing or carrying any Margin Stock, or (iv) to acquire any security in any transaction that is subject to Section 13 or 14 of the Exchange Act. (b) The Company and Medis shall not, directly or indirectly, use any portion of the Loan proceeds (i) knowingly to purchase Ineligible Securities from the Arranger during any period in which the Arranger makes a market in such Ineligible Securities, (ii) knowingly to purchase during the underwriting or placement period Ineligible Securities being underwritten or privately placed by the Arranger, or (iii) to make payments of principal or interest on Ineligible Securities underwritten or privately placed by the Arranger and issued by or for the benefit of the Company or any Affiliate of the Company. The Arranger is a registered broker-dealer and permitted to underwrite and deal in certain Ineligible Securities; and "Ineligible Securities" means securities which may --------------------- not be underwritten or dealt in by member banks of the Federal Reserve System under Section 16 of the Banking Act of 1933 (12 U.S.C. (S) 24, Seventh), as amended. 7.4 Maximum Debt to Capitalization Ratio. The Company shall not ------------------------------------ permit the ratio of Total Debt to Total Capitalization as at the last day of any calendar month to exceed 0.565 to 1.00. 61 ARTICLE VIII THE COMPANY'S GUARANTY OF MEDIS' OBLIGATIONS 8.1 Guaranty of the Guarantied Obligations. The Company hereby -------------------------------------- irrevocably and unconditionally guaranties, as primary obligor and not merely as surety, the due and punctual payment in full of all Guarantied Obligations when the same shall become due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. (S) 362(a)). The term "Guarantied Obligations" is used herein in its most comprehensive sense and includes: (a) any and all Obligations of Medis now or hereafter made, incurred or created, whether absolute or contingent, liquidated or unliquidated, whether due or not due, and however arising under or in connection with this Agreement, the Notes and Drafts issued by Medis and the other Loan Documents, including those arising under successive borrowing transactions under this Agreement which shall either continue the Obligations of Medis or from time to time renew them after they have been satisfied; and (b) those expenses set forth in Section 8.8 hereof. 8.2 Liability of the Company Absolute. The Company agrees that its --------------------------------- obligations under this Guaranty are irrevocable, absolute, independent and unconditional and shall not be affected by any circumstance which constitutes a legal or equitable discharge of a guarantor or surety other than indefeasible payment in full of the Guarantied Obligations. In furtherance of the foregoing and without limiting the generality thereof, Guarantor agrees as follows: (a) This Guaranty is a guaranty of payment when due and not of collectibility. (b) The Agent may enforce this Guaranty upon the occurrence of an Event of Default under this Agreement notwithstanding the existence of any dispute between Banks and any Borrower with respect to the existence of such Event of Default. (c) The obligations of the Company under this Guaranty are independent of the obligations of Medis under the Loan Documents and the obligations of any other guarantor of the obligations of Medis under the Loan Documents, and a separate action or actions may be brought and prosecuted against the Company whether or not any action is brought against Medis or any of such other guarantors and whether or not Medis is joined in any such action or actions. (d) The Company's payment of a portion, but not all, of the Guarantied Obligations shall in no way limit, affect, modify or abridge the Company's liability for any portion of the Guarantied Obligations which has not been paid. Without limiting the generality of the foregoing, if the Agent is awarded a judgment in any suit brought to enforce the Company's covenant to pay a portion of the Guarantied Obligations, such judgment shall not be 62 deemed to release the Company from its covenant to pay the portion of the Guarantied Obligations that is not the subject of such suit. (e) Any Agent or any Bank, upon such terms as it deems appropriate, without notice or demand and without affecting the validity or enforceability of this Guaranty or giving rise to any reduction, limitation, impairment, discharge or termination of the Company's liability under this Guaranty, from time to time may (i) renew, extend, accelerate, increase the rate of interest on, or otherwise change the time, place, manner or terms of payment of the Guarantied Obligations, (ii) settle, compromise, release or discharge, or accept or refuse any offer of performance with respect to, or substitutions for, the Guarantied Obligations or any agreement relating thereto and/or subordinate the payment of the same to the payment of any other obligations; (iii) request and accept other guaranties of the Guarantied Obligations and take and hold security for the payment of this Guaranty or the Guarantied Obligations; (iv) release, surrender, exchange, substitute, compromise, settle, rescind, waive, alter, subordinate or modify, with or without consideration, any security for payment of the Guarantied Obligations, any other guaranties of the Guarantied Obligations, or any other obligation of any Person with respect to the Guarantied Obligations; (v) enforce and apply any security now or hereafter held by or for the benefit of the Agents or any Bank in respect of this Guaranty or the Guarantied Obligations and direct the order or manner of sale thereof, or exercise any other right or remedy that the Agents or the Banks, or any of them, may have against any such security, as the Agent in its discretion may determine consistent with this Agreement and any applicable security agreement, including foreclosure on any such security pursuant to one or more judicial or nonjudicial sales, whether or not every aspect of any such sale is commercially reasonable, and even though such action operates to impair or extinguish any right of reimbursement or subrogation or other right or remedy of the Company against Medis or any security for the Guarantied Obligations; and (vi) exercise any other rights available to it under the Loan Documents. This subsection 8.2(e) shall not modify Section 11.1. (f) This Guaranty and the obligations of the Company hereunder shall be valid and enforceable and shall not be subject to any reduction, limitation, impairment, discharge or termination for any reason (other than indefeasible payment in full of the Guarantied Obligations), including without limitation the occurrence of any of the following, whether or not the Company shall have had notice or knowledge of any of them: (i) any failure or omission to assert or enforce or agreement or election not to assert or enforce, or the stay or enjoining, by order of court, by operation of law or otherwise, of the exercise or enforcement of, any claim or demand or any right, power or remedy (whether arising under the Loan Documents, at law, in equity or otherwise) with respect to the Guarantied Obligations or any agreement relating thereto, or with respect to any other guaranty of or security for the payment of the Guarantied Obligations; (ii) any rescission, waiver, amendment or modification of, or any consent to departure from, any of the terms or provisions (including without limitation provisions relating to events of default) of this Agreement, any of the other Loan Documents or any agreement or instrument executed pursuant thereto, or of any other guaranty or security for the Guarantied Obligations, in each case whether or not in accordance with the terms of this Agreement or such Loan Document or any agreement relating to such other guaranty or security; (iii) the Guarantied Obligations, or any agreement relating thereto, at any time being found to be illegal, invalid or 63 unenforceable in any respect; (iv) the application of payments received from any source (other than payments received pursuant to the other Loan Documents or from the proceeds of any security for the Guarantied Obligations, except to the extent such security also serves as collateral for indebtedness other than the Guarantied Obligations) to the payment of indebtedness other than the Guarantied Obligations, even though the Agents or the Banks, or any of them, might have elected to apply such payment to any part or all of the Guarantied Obligations; (v) any Bank's or Agent's consent to the change, reorganization or termination of the corporate structure or existence of the Company or any of its Subsidiaries and to any corresponding restructuring of the Guarantied Obligations; (vi) any failure to perfect or continue perfection of a security interest in any collateral which secures any of the Guarantied Obligations; (vii) any defenses, set-offs or counterclaims which Medis may allege or assert against any Agent or any Bank in respect of the Guarantied Obligations, including but not limited to failure of consideration, breach of warranty, payment, statute of frauds, statute of limitations, accord and satisfaction and usury; and (viii) any other act or thing or omission, or delay to do any other act or thing, which may or might in any manner or to any extent vary the risk of the Company as an obligor in respect of the Guarantied Obligations. 8.3 Waivers by Guarantor. The Company hereby waives with respect to -------------------- the Guarantied Obligations, for the benefit of the Banks and the Agents: (a) any right to require any Agent or any Bank, as a condition of payment or performance by the Company, to (i) proceed against Medis, any other guarantor of the Guarantied Obligations or any other Person, (ii) proceed against or exhaust any security held from Medis, any other guarantor of the Guarantied Obligations or any other Person, (iii) proceed against or have resort to any balance of any deposit account or credit on the books of any Agent or any Bank in favor of Medis or any other Person, or (iv) pursue any other remedy in the power of any Agent or any Bank whatsoever; (b) any defense arising by reason of the incapacity, lack of authority or any disability or other defense of Medis including, without limitation, any defense based on or arising out of the lack of validity or the unenforceability of the Guarantied Obligations or any agreement or instrument relating thereto or by reason of the cessation of the liability of Medis from any cause other than indefeasible payment in full of the Guarantied Obligations; (c) any defense based upon any statute or rule of law which provides that the obligation of a surety must be neither larger in amount nor in other respects more burdensome than that of the principal; (d) any defense based upon any Agent's or any Bank's errors or omissions in the administration of the Guarantied Obligations, except behavior which amounts to bad faith; (e) (i) any principles or provisions of law, statutory or otherwise, which are or might be in conflict with the terms of this Guaranty and any legal or equitable discharge of the Company's obligations hereunder, (ii) the benefit of any statute of limitations affecting the Company's liability hereunder or the enforcement hereof, (iii) any rights to set-offs, recoupments and counterclaims, and (iv) promptness, diligence and any requirement that any Agent or any 64 Bank protect, secure, perfect or insure any security interest or lien or any property subject thereto; (f) notices, demands, presentments, protests, notices of protest, notices of dishonor and notices of any action or inaction, including acceptance of this Guaranty, notices of default under this Agreement or any agreement or instrument related thereto, notices of any renewal, extension or modification of the Guarantied Obligations or any agreement related thereto, notices of any extension of credit to Medis and notices of any of the matters referred to in Section 8.2 and any right to consent to any thereof; and (g) any defenses or benefits that may be derived from or afforded by law which limit the liability of or exonerate guarantors or sureties, or which may conflict with the terms of this Guaranty, including without limitation the provisions of California Civil Code Sections 2809, 2810, 2819, 2839, 2845, 2846, 2850, 2899 and 3433. 8.4 Payment by the Company; Application of Payments. The Company ----------------------------------------------- hereby agrees, in furtherance of the foregoing and not in limitation of any other right which the Agent or any other Person may have at law or in equity against the Company by virtue hereof, that upon the failure of Medis to pay any of the Guarantied Obligations when and as the same shall become due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. (S) 362(a)), the Company will upon demand pay, or cause to be paid, in cash, to the Agent for the ratable benefit of the Banks holding the Guarantied Obligations, an amount equal to the sum of the unpaid principal amount of all Guarantied Obligations then due as aforesaid, accrued and unpaid interest on such Guarantied Obligations (including, without limitation, interest which, but for the filing of a petition in bankruptcy with respect to Medis, would have accrued on such Guarantied Obligations, whether or not a claim is allowed against Medis for such interest in any such bankruptcy proceeding) and all other Guarantied Obligations then owed to the Agent and/or the Banks as aforesaid. All such payments shall be applied promptly from time to time by the Agent: First, to the payment of the costs and expenses of any collection ----- or other realization under this Guaranty, including reasonable compensation to the Agent and its agents and counsel, and all expenses, liabilities and advances made or incurred by the Agent in connection therewith; Second, to the payment of all other Guarantied Obligations to ------ each Bank holding Guarantied Obligations its applicable share as provided in this Agreement; and Third, after payment in full of all Guarantied Obligations, to ----- the payment to the Company, or its successors or assigns, or to whosoever may be lawfully entitled to receive the same or as a court of competent jurisdiction may direct, of any surplus then remaining from such payments. 65 8.5 Guarantor's Rights of Subrogation, Contribution, Etc. Until the ---------------------------------------------------- Guarantied Obligations shall have been indefeasibly paid in full and the Facility A Commitments shall have terminated, the Company shall withhold exercise of (a) any claim, right or remedy, direct or indirect, the Company now has or may hereafter have against Medis or any of its assets in connection with this Guaranty or the performance by the Company of its obligations hereunder, in each case whether such claim, right or remedy arises in equity, under contract, by statute (including without limitation under California Civil Code Section 2847, 2848 or 2849), under common law or otherwise and including without limitation (i) any right of subrogation, reimbursement or indemnification that the Company now has or may hereafter have against Medis, (ii) any right to enforce, or to participate in, any claim, right or remedy that any Agent or any Bank now has or may hereafter have against Medis, and (iii) any benefit of, and any right to participate in, any collateral or security now or hereafter held by any Agent or any Bank, and (b) any right of contribution the Company may have against any other guarantor of the Guarantied Obligations (including without limitation any such right of contribution under California Civil Code Section 2848). The Company further agrees that, to the extent the agreement to withhold the exercise of its rights of subrogation, reimbursement, indemnification and contribution as set forth herein is found by a court of competent jurisdiction to be void or voidable for any reason, any rights of subrogation, reimbursement or indemnification the Company may have against Medis or against any collateral or security, and any rights of contribution the Company may have against any such other guarantor, shall be junior and subordinate to any rights any Agent or any Bank may have against Medis, to all right, title and interest any Agent or any Bank may have in any such collateral or security, and to any right any Agent or any Bank may have against such other guarantor. Each Agent, on behalf of Banks, may use, sell or dispose of any item of collateral or security as it sees fit without regard to any subrogation rights the Company may have, and upon any such disposition or sale any rights of subrogation against such collateral the Company may have shall terminate. If any amount shall be paid to Guarantor on account of any such subrogation, reimbursement or indemnification rights at any time when all Guarantied Obligations shall not have been paid in full, such amount shall be held in trust for the Agent on behalf of the Banks and shall forthwith be paid over to the Agent for the benefit of the Banks to be credited and applied against the Guarantied Obligations, whether matured or unmatured, in accordance with the terms hereof. 8.6 Subordination of Other Obligations. Any indebtedness of Medis now ---------------------------------- or hereafter held by the Company is hereby subordinated in right of payment to the Guarantied Obligations, and any such indebtedness of Medis to the Company collected or received by the Company after an Event of Default has occurred and is continuing shall be held in trust for the Agent on behalf of the Banks and shall forthwith be paid over to the Agent for the benefit of the Banks to be credited and applied against the Guarantied Obligations but without affecting, impairing or limiting in any manner the liability of the Company under any other provision of this Guaranty. 8.7 Real Property Security. The Company agrees that, if all or a ---------------------- portion of the Guarantied Obligations or any other guaranty of all or a portion of the Guarantied Obligations are at any time secured by a deed of trust or mortgage covering interests in real property, the Agent or its designee, in its sole discretion, without notice or demand and without 66 affecting the liability of the Company, may foreclose, pursuant to the terms of the Loan Documents or otherwise, on any such deed of trust or mortgage and the property described therein by nonjudicial or other sale. Without limiting any of the waivers contained elsewhere herein, the Company hereby waives any defense to liability arising by reason of the exercise by the Banks or the Agent, or any of them, of any right or remedy contained in any such deed of trust or mortgage or any of the other Loan Documents. The Company waives all rights and defenses arising out of an election of remedies by the Banks or the Agent, even though the election of remedies, such as a nonjudicial foreclosure with respect to security for a Guaranteed Obligation, has destroyed the Company's rights of subrogation and reimbursement against Medis by the operation of Section 580d of the California Code of Civil Procedure or otherwise. 8.8 Expenses. The Company agrees to pay, or cause to be paid, on -------- demand, and to save the Agent and the Banks harmless against liability for, any and all reasonable costs and expenses (including fees and disbursements of counsel and allocated costs of internal counsel) incurred or expended by the Agent or any Bank in connection with the enforcement of or preservation of any rights under this Guaranty. 8.9 Continuing Guaranty; Termination of Guaranty. This Guaranty is a -------------------------------------------- continuing guaranty and shall remain in effect until all of the Guarantied Obligations shall have been indefeasibly paid in full and the Facility A Commitments shall have terminated. The Company hereby irrevocably waives any right (including without limitation any such right arising under California Civil Code Section 2815) to revoke this Guaranty as to future transactions giving rise to any Guarantied Obligations. 8.10 Authority of the Company or Medis. It is not necessary for any --------------------------------- Bank or any Agent to inquire into the capacity or powers of Medis or the officers, directors or any agents acting or purporting to act on behalf of any of them. 8.11 Financial Condition of Medis. Any extensions of credit may be ---------------------------- granted to Medis or continued from time to time without notice to or authorization from the Company regardless of the financial or other condition of Medis at the time of any such grant or continuation. No Bank or Agent shall have any obligation to disclose or discuss with the Company their assessment, or the Company's assessment, of the financial condition of Medis. The Company has adequate means to obtain information from Medis on a continuing basis concerning the financial condition of Medis and its ability to perform its obligations under the Loan Documents, and the Company assumes the responsibility for being and keeping informed of the financial condition of Medis and of all circumstances bearing upon the risk of nonpayment of the Guarantied Obligations. The Company hereby waives and relinquishes any duty on the part of any Agent or any Bank to disclose any matter, fact or thing relating to the business, operations or conditions of Medis now known or hereafter known by any Agent or any Bank. 8.12 Rights Cumulative. The rights, powers and remedies given to the ----------------- Banks and the Agents by this Guaranty are cumulative and shall be in addition to and independent of all rights, powers and remedies given to any Bank and any Agent by virtue of any statute or rule of law or in any of the other Loan Documents or any agreement between the Company and any 67 Bank and/or any Agent or between Medis and any Bank and/or any Agent. Any forbearance or failure to exercise, and any delay by any Bank or any Agent in exercising, any right, power or remedy hereunder shall not impair any such right, power or remedy or be construed to be a waiver thereof, nor shall it preclude the further exercise of any such right, power or remedy. 8.13 Bankruptcy; Post-Petition Interest; Reinstatement of Guaranty. ------------------------------------------------------------- (a) So long as any Guarantied Obligations remain outstanding, the Company shall not, without the prior written consent of the Agent in accordance with the terms of this Agreement, commence or join with any other Person in commencing any bankruptcy, reorganization or insolvency proceedings of or against Medis. The obligations of the Company under this Guaranty shall not be reduced, limited, impaired, discharged, deferred, suspended or terminated by any proceeding, voluntary or involuntary, involving the bankruptcy, insolvency, receivership, reorganization, liquidation or arrangement of Medis or by any defense which Medis may have by reason of the order, decree or decision of any court or administrative body resulting from any such proceeding. (b) The Company acknowledges and agrees that any interest on any portion of the Guarantied Obligations which accrues after the commencement of any proceeding referred to in clause (a) above (or, if interest on any portion of the Guarantied Obligations ceases to accrue by operation of law by reason of the commencement of said proceeding, such interest as would have accrued on such portion of the Guarantied Obligations if said proceedings had not been commenced) shall be included in the Guarantied Obligations because it is the intention of the Company and the Agent that the Guarantied Obligations which are guarantied by the Company pursuant to this Guaranty should be determined without regard to any rule of law or order which may relieve Medis of any portion of such Guarantied Obligations. The Company will permit any trustee in bankruptcy, receiver, debtor in possession, assignee for the benefit of creditors or similar person to pay the Agent, or allow the claim of the Agent in respect of, any such interest accruing after the date on which such proceeding is commenced. (c) In the event that all or any portion of the Guarantied Obligations are paid by Medis, the obligations of the Company hereunder shall continue and remain in full force and effect or be reinstated, as the case may be, in the event that all or any part of such payment(s) are rescinded or recovered directly or indirectly from any Agent or any Bank as a preference, fraudulent transfer or otherwise, and any such payments which are so rescinded or recovered shall constitute Guarantied Obligations for all purposes under this Guaranty. [Remainder of page intentionally left blank] 68 ARTICLE IX EVENTS OF DEFAULT 9.1 Event of Default. Any of the following shall constitute an "Event ---------------- ----- of Default": - ---------- (a) Non-Payment. Either Borrower fails to pay, (i) when and as ----------- required to be paid herein, any amount of principal of any Loan made to such Borrower or the amount of any Bankers' Acceptance, or (ii) within five (5) days after the same becomes due, any interest, fee or any other amount payable by such Borrower hereunder or under any other Loan Document; or (b) Representation or Warranty. Any representation or warranty by the -------------------------- Company or any Subsidiary made or deemed made herein, in any other Loan Document, or which is contained in any certificate, document or financial or other statement by the Company, any Subsidiary, or any Responsible Officer, furnished at any time under this Agreement, or in or under any other Loan Document, is incorrect in any material respect on or as of the date made or deemed made; or (c) Specific Defaults. The Company fails to perform or observe any ----------------- term, covenant or agreement contained in subsection 6.4(a) or in Article VII; or (d) Other Defaults. Either Borrower fails to perform or observe any -------------- other term or covenant contained in this Agreement or any other Loan Document, and such default shall continue unremedied for a period of twenty (20) days after the earlier of (i) in the case of any provision in Article V or VI, the date upon which a Responsible Officer knew of such failure or (ii) the date upon which written notice thereof is given to the Company by the Agent or any Bank; or (e) Cross-Default. The Company or any Subsidiary (i) fails to make ------------- any payment in respect of any Indebtedness or Contingent Obligation having an aggregate principal amount (including undrawn committed or available amounts and including amounts owing to all creditors under any combined or syndicated credit arrangement) of more than $25,000,000 when due (whether by scheduled maturity, required prepayment, acceleration, demand, or otherwise) and such failure continues after the applicable grace or notice period, if any, specified in the relevant document on the date of such failure; or (ii) fails to perform or observe any other condition or covenant, or any other event shall occur or condition exist, under any agreement or instrument relating to any Indebtedness or Contingent Obligation having an aggregate principal amount (including undrawn committed or available amounts and including amounts owing to all creditors under any combined or syndicated credit arrangement) of more than $25,000,000, if the effect of such failure, event or condition is to cause such Indebtedness to be declared to be due and payable prior to its stated maturity, or such Contingent Obligation to become payable or cash collateral in respect thereof to be demanded; provided, however, the preceding provisions of this subsection -------- ------- 9.1(e) shall not apply to the Company's obligations pursuant to a loan in a principal amount not to exceed $35,000,000 that is secured by real property located at One Post Street in San Francisco, California, except to the extent that, if the Company's payment obligations under 69 such loan are accelerated, either (a) if such acceleration is not rescinded by the lender , the Company fails to pay the accelerated loan in full within ninety (90) days after acceleration or (b) if such acceleration is rescinded by the lender, a default under such loan continues to exist following such rescission on or after a date ninety (90) days after acceleration; or (f) Insolvency; Voluntary Proceedings. The Company or any Material --------------------------------- Subsidiary (i) ceases or fails to be solvent, or generally fails to pay, or admits in writing its inability to pay, its debts as they become due, subject to applicable grace periods, if any, whether at stated maturity or otherwise; (ii) voluntarily ceases to conduct its business in the ordinary course; (iii) commences any Insolvency Proceeding with respect to itself; or (iv) takes any action to effectuate or authorize any of the foregoing; or (g) Involuntary Proceedings. (i) Any involuntary Insolvency ----------------------- Proceeding is commenced or filed against Company or any Material Subsidiary, or any writ, judgment, warrant of attachment, execution or similar process, is issued or levied against a substantial part of Company's or any Material Subsidiary's properties, and any such proceeding or petition shall not be dismissed, or such writ, judgment, warrant of attachment, execution or similar process shall not be released, vacated or fully bonded within sixty (60) days after commencement, filing or levy; (ii) the Company or any Material Subsidiary admits the material allegations of a petition against it in any Insolvency Proceeding, or an order for relief (or similar order under non-U.S. law) is ordered in any Insolvency Proceeding; or (iii) the Company or any Material Subsidiary acquiesces in the appointment of a receiver, trustee, custodian, conservator, liquidator, mortgagee in possession (or agent therefor), or other similar Person for itself or a substantial portion of its property or business; or (h) ERISA. There shall occur one or more ERISA Events which ----- individually or in the aggregate results in or might reasonably be expected to result in liability of the Company or any of its Subsidiaries in excess of $25,000,000 during the term of this Agreement; or there shall exist an amount of unfunded benefit liabilities (as defined in Section 4001(a)(18) of ERISA), individually or in the aggregate for all Pension Plans (excluding for purposes of such computation any Pension Plans with respect to which assets exceed benefit liabilities), which exceeds 5% of Net Worth. 9.2 Remedies. If any Event of Default occurs, the Agent shall, at the -------- request of, or may, with the consent of, the Majority Banks, (a) declare the commitment of each Bank to make Loans or accept or discount Drafts or Bankers' Acceptances to be terminated, whereupon such commitments and the Bankers' Acceptance Facility shall be terminated; (b) declare the unpaid principal amount of all outstanding Loans, all interest accrued and unpaid thereon, and all other amounts owing or payable hereunder or under any other Loan Document (including an amount equal to the Face Amount of all unmatured Bankers Acceptances) to be immediately due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Borrowers; and 70 (c) exercise on behalf of itself and the Banks all rights and remedies available to it and the Banks under the Loan Documents or applicable law; provided, however, that upon the occurrence of any event specified in subsection - -------- ------- (f) or (g) of Section 9.1 (in the case of clause (i) of subsection (g) upon the expiration of the 60-day period mentioned therein), the obligation of each Bank to make Loans or accept or discount Drafts or Bankers' Acceptances shall automatically terminate and the unpaid principal amount of all outstanding Loans and all interest and other amounts as aforesaid shall automatically become due and payable without further act of the Agent or any Bank. 9.3 Rights Not Exclusive. The rights provided for in this Agreement -------------------- and the other Loan Documents are cumulative and are not exclusive of any other rights, powers, privileges or remedies provided by law or in equity, or under any other instrument, document or agreement now existing or hereafter arising. ARTICLE X THE AGENTS 10.1 Appointment and Authorization. Each Bank hereby irrevocably ----------------------------- (subject to Section 10.9) appoints, designates and authorizes each of the Agents to take such action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and perform such duties as are expressly delegated to it by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary contained elsewhere in this Agreement or in any other Loan Document, none of the Agents shall have any duties or responsibilities, except those expressly set forth herein, nor shall any of the Agents have or be deemed to have any fiduciary relationship with any Bank, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against any of the Agents. 10.2 Delegation of Duties. Each of the Agents may execute any of its -------------------- duties under this Agreement or any other Loan Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties; provided that, no Agent in its -------- capacity as an Agent shall delegate its duty hereunder to make or receive payments unless the delegee shall be a resident of the same jurisdiction as the Agent making such delegation. None of the Agents shall be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects with reasonable care. 10.3 Liability of Agent. None of the Agent-Related Persons shall (a) ------------------ be liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Loan Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct), or (b) be responsible in any manner to any of the Banks for any recital, statement, representation or warranty made by the Company or any Subsidiary or Affiliate of the Company, or any officer thereof, contained in this Agreement or in 71 any other Loan Document, or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Agreement or any other Loan Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document, or for any failure of the Company or any other party to any Loan Document to perform its obligations hereunder or thereunder. No Agent- Related Person shall be under any obligation to any Bank to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of the Company or any of the Company's Subsidiaries or Affiliates. 10.4 Reliance by the Agent. --------------------- (a) Each of the Agents shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to the Company), independent accountants and other experts selected with reasonable care by it. Each of the Agents shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Majority Banks as it deems appropriate and, if it so requests, it shall first be indemnified to its satisfaction by the Banks against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. Each of the Agents shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Loan Document in accordance with a request or consent of the Majority Banks and such request and any action taken or failure to act pursuant thereto shall be binding upon all of the Banks. (b) For purposes of determining compliance with the conditions specified in Section 4.1, each Bank that has executed this Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter either sent by any of the Agents to such Bank for consent, approval, acceptance or satisfaction, or required thereunder to be consented to or approved by or acceptable or satisfactory to the Bank. 10.5 Notice of Default. None of the Agents shall be deemed to have ----------------- knowledge or notice of the occurrence of any Default or Event of Default, except with respect to defaults in the payment of principal, interest and fees required to be paid to it for the account of the Banks, unless it shall have received written notice from a Bank or the Company referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". Each of the Agents will notify the Banks of its receipt of any such notice. The Agent shall take such action with respect to such Default or Event of Default as may be requested by the Majority Banks in accordance with Article IX; provided, however, that unless and until the Agent has received any -------- ------- such request, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable or in the best interest of the Banks. 72 10.6 Credit Decision. Each Bank acknowledges that none of the Agent- --------------- Related Persons has made any representation or warranty to it, and that no act by any of the Agents hereinafter taken, including any review of the affairs of the Company and its Subsidiaries, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Bank. Each Bank represents to each of the Agents that it has, independently and without reliance upon any Agent-Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of the Company and its Subsidiaries, and all applicable bank regulatory laws relating to the transactions contemplated hereby, and made its own decision to enter into this Agreement and to extend credit to the Company and/or Medis, as applicable, hereunder. Each Bank also represents that it will, independently and without reliance upon any Agent-Related Person and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of the Company and/or Medis, as applicable. Except for notices, reports and other documents expressly herein required to be furnished to the Banks by the Agents, none of the Agents shall have any duty or responsibility to provide any Bank with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthiness of the Company which may come into the possession of any of the Agent-Related Persons. 10.7 Indemnification of Agent. Whether or not the transactions ------------------------ contemplated hereby are consummated, the Banks shall indemnify upon demand the Agent-Related Persons (to the extent not reimbursed by or on behalf of the Company and without limiting the obligation of the Company to do so), pro rata, from and against any and all Indemnified Liabilities and any other liability, obligation, loss, damage, penalty, action, judgment, suit, cost, charge, expense or disbursement (including Attorney Costs) that would be an Indemnified Liability but for the fact that it relates or arises out of a claim or threatened claim by a Borrower or other Person party to this Agreement; provided, however, that no Bank shall be liable for the payment to the Agent- - -------- ------- Related Persons of any portion of such Indemnified Liabilities resulting solely from such Person's gross negligence or willful misconduct. Without limitation of the foregoing, each Bank shall reimburse each of the Agents upon demand for its ratable share of any costs or out-of-pocket expenses (including Attorney Costs) incurred by it in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Loan Document, or any document contemplated by or referred to herein, to the extent that it is not reimbursed for such expenses by or on behalf of the Company. The undertaking in this Section shall survive the payment of all Obligations hereunder and the resignation or replacement of any of the Agents. 10.8 Agent in Individual Capacity. Any of the Agents and any of their ---------------------------- Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, 73 underwriting or other business with the Company and its Subsidiaries and Affiliates as though such of the Agents were not Agents hereunder and without notice to or consent of the Banks. The Banks acknowledge that, pursuant to such activities, any of the Agents or any of their Affiliates may receive information regarding the Company or its Affiliates (including information that may be subject to confidentiality obligations in favor of the Company or such Subsidiary) and acknowledge that none of the Agents shall be under any obligation to provide such information to them. With respect to its Loans, each of the Agents shall have the same rights and powers under this Agreement as any other Bank and may exercise the same as though it were not one of the Agents. The terms "Bank" and "Banks" include each of the Agents in its individual capacity. 10.9 Successor Agent. Any of the Agents may, and at the request of --------------- the Majority Banks shall, resign as an Agent upon thirty (30) days' notice to the Banks. If the Agent or the Canadian Administrative Agent resigns under this Agreement, then the Majority Banks shall appoint from among the Banks a successor agent for the Banks which successor agent shall be approved by the Company. If no successor agent is appointed prior to the effective date of the resignation of the Agent or the Canadian Administrative Agent, as the case may be, the Agent may appoint, after consulting with the Banks and the Company, a successor agent from among the Banks. Upon the acceptance of its appointment as successor agent hereunder, such successor agent shall succeed to all the rights, powers and duties of the retiring Agent or the Canadian Administrative Agent, as the case may be, and the terms "Agent", "Agents" and "Canadian Administrative Agent" shall, as applicable, mean such successor agent and the retiring agent's appointment, powers and duties as Agent or the Canadian Administrative Agent, as the case may be, shall be terminated. After any retiring agent's resignation hereunder as Agent or Canadian Administrative Agent, as the case may be, the provisions of this Article X and Sections 11.4 and 11.5 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent or the Canadian Administrative Agent, as the case may be, under this Agreement. If no successor agent has accepted appointment as Agent or the Canadian Administrative Agent, as the case may be, by the date which is thirty (30) days following a retiring agent's notice of resignation, the retiring agent's resignation shall nevertheless thereupon become effective and the Banks shall perform all of the duties of the Agent or the Canadian Administrative Agent, as the case may be, hereunder until such time, if any, as the Majority Banks appoint a successor agent as provided for above. 10.10 Withholding Tax. --------------- (a) If any Facility A Domestic Bank or Facility B Bank is a "foreign corporation, partnership or trust" within the meaning of the Code and such Bank claims exemption from, or a reduction of, U.S. withholding tax under Sections 1441 or 1442 of the Code, such Bank agrees with and in favor of the Agent, to deliver to the Agent: (i) if such Bank claims an exemption from, or a reduction of, withholding tax under a United States tax treaty, properly completed IRS Forms 1001 and W-8 before the payment of any interest in the first calendar year and before the payment 74 of any interest in each third succeeding calendar year during which interest may be paid under this Agreement; (ii) if such Bank claims that interest paid under this Agreement is exempt from United States withholding tax because it is effectively connected with a United States trade or business of such Bank, two properly completed and executed copies of IRS Form 4224 before the payment of any interest is due in the first taxable year of such Bank and in each succeeding taxable year of such Bank during which interest may be paid under this Agreement, and IRS Form W-9; and (iii) such other form or forms as may be required under the Code or other laws of the United States as a condition to exemption from, or reduction of, United States withholding tax. Such Bank agrees to promptly notify the Agent of any change in circumstances which would modify or render invalid any claimed exemption or reduction. (b) If any Facility A Domestic Bank or Facility B Bank claims exemption from, or reduction of, withholding tax under a United States tax treaty by providing IRS Form 1001 and such Bank sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of the Company to such Bank, such Bank agrees to notify the Agent of the percentage amount in which it is no longer the beneficial owner of Obligations of the Company to such Bank. To the extent of such percentage amount, the Agent will treat such Bank's IRS Form 1001 as no longer valid. (c) If any Facility A Domestic Bank or Facility B Bank claiming exemption from United States withholding tax by filing IRS Form 4224 with the Agent sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of the Company to such Bank, such Bank agrees to undertake sole responsibility for complying with the withholding tax requirements imposed by Sections 1441 and 1442 of the Code. (d) If any Facility A Domestic Bank or Facility B Bank is entitled to a reduction in the applicable withholding tax, the Agent may withhold from any interest payment to such Bank an amount equivalent to the applicable withholding tax after taking into account such reduction. If the forms or other documentation required by subsection (a) of this Section are not delivered to the Agent, then the Agent may withhold from any interest payment to such Bank not providing such forms or other documentation an amount equivalent to the applicable withholding tax. (e) If the IRS or any other Governmental Authority of the United States or other jurisdiction asserts a claim that the Agent did not properly withhold tax from amounts paid to or for the account of any Facility A Domestic Bank or Facility B Bank (because the appropriate form was not delivered, was not properly executed, or because such Bank failed to notify the Agent of a change in circumstances which rendered the exemption from, or reduction of, withholding tax ineffective, or for any other reason) such Bank shall indemnify the Agent fully for all amounts paid, directly or indirectly, by the Agent as tax or otherwise, including 75 penalties and interest, and including any taxes imposed by any jurisdiction on the amounts payable to the Agent under this Section, together with all costs and expenses (including Attorney Costs). The obligation of the Facility A Domestic Banks or Facility B Banks under this subsection shall survive the payment of all Obligations and the resignation or replacement of the Agent. (f) If any Facility A Canadian Bank is not a resident of Canada for purposes of the Income Tax Act (Canada) and such Facility A Canadian Bank claims exemptions from, or reduction of, Canadian withholding tax, such Facility A Canadian Bank agrees with and in favor of the Agent and the Canadian Administrative Agent, to deliver to the Agent and the Canadian Administrative Agent all forms as may be required under the Income Tax Act (Canada) or other laws of Canada as a condition to exemption from, or reduction of, Canadian withholding tax. Such Facility A Canadian Bank agrees to promptly notify the Agent and the Canadian Administrative Agent of any change in circumstances which would modify or render invalid any claimed exemption or reduction. If any Facility A Canadian Bank claims exemption from, or reduction of, Canadian withholding tax and such Bank sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of Medis to such Facility A Canadian Bank, such Facility A Canadian Bank agrees to notify the Agent and the Canadian Administrative Agent of the percentage amount in which it is no longer the beneficial owner of Obligations of Medis to such Facility A Canadian Bank. If any Facility A Canadian Bank is entitled to a reduction in the applicable Canadian withholding tax, the Canadian Administrative Agent may withhold from any interest payment to such Facility A Canadian Bank an amount equivalent to the applicable withholding tax after taking into account such reduction. If the forms or other documentation required by this subsection 10.10(f) are not delivered to the Agent or the Canadian Administrative Agent, then the Canadian Administrative Agent may withhold from any interest payment to such Facility A Canadian Bank not providing such forms or other documentation an amount equivalent to the applicable withholding tax. If any Governmental Authority of Canada asserts a claim that the Canadian Administrative Agent or Medis did not properly withhold tax from amounts paid to or for the account of any Bank (because the appropriate form is not delivered, was not properly executed, or because such Facility A Canadian Bank failed to notify the Canadian Administrative Agent of a change in circumstances which rendered the exemption from, or reduction of, withholding tax ineffective, or for any other reason) such Facility A Canadian Bank shall indemnify the Canadian Administrative Agent and Medis fully for all amounts paid, directly or indirectly, by the Canadian Administrative Agent or Medis as tax or otherwise, including penalties and interest, and including any taxes imposed by any jurisdiction on the amounts payable to the Canadian Administrative Agent or Medis under this subsection 10.10(f), together with all costs and expenses (including Attorney Costs). The obligation of the Facility A Canadian Bank under this subsection shall survive the payment of all Obligations and the resignation or replacement of the Canadian Administrative Agent. 10.11 Documentation Agent; Managing Agent. No Bank identified as a ----------------------------------- "documentation agent" in the preamble hereof or designated as a "managing agent" on the signature pages hereto, in its capacity as a documentation agent or as a managing agent, as applicable, shall have any duties or responsibilities under this Agreement or any other Loan Document. 76 ARTICLE XI MISCELLANEOUS 11.1 Amendments and Waivers. No amendment or waiver of any provision ---------------------- of this Agreement or any other Loan Document, and no consent with respect to any departure by any Borrower therefrom, shall be effective unless the same shall be in writing and signed by the Majority Banks (or by the Agent at the written request of the Majority Banks) and the Company and acknowledged by the Agent and the Canadian Administrative Agent, and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no such waiver, amendment, or consent shall, -------- ------- unless in writing and signed by all the Banks, the Company and, if such waiver, amendment or consent relates to Medis or rights or Obligations of Medis, Medis and acknowledged by the Agent and the Canadian Administrative Agent, do any of the following: (a) increase or extend the Commitment of any Bank (or reinstate any Commitment terminated pursuant to Section 9.2) or increase or extend the obligation of any Bank to accept or discount Drafts or Bankers' Acceptances, except as otherwise permitted by Section 2.14; (b) postpone or delay any date fixed by this Agreement or any other Loan Document for any payment of principal, interest, fees or other amounts due to the Banks (or any of them) hereunder or under any other Loan Document; (c) reduce the principal of, or the rate of interest specified herein on any Loan, or (subject to clause (ii) below) any fees or other amounts payable hereunder or under any other Loan Document (including, without limitation, a decrease in any amount payable in respect of Drafts or Bankers' Acceptances); (d) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Loans which is required for the Banks or any of them to take any action hereunder; or (e) amend this Section 11.1, or Section 2.13, or any provision herein providing for consent or other action by all Banks; and, provided, further, that (i) no amendment, waiver or consent shall, unless -------- ------- in writing and signed by the Agent or the Canadian Administrative Agent, in addition to the Majority Banks or all the Banks, as the case may be, affect the rights or duties of the Agent or the Canadian Administrative Agent under this Agreement or any other Loan Document, and (ii) the Fee Letter may be amended, or rights or privileges thereunder waived, in a writing executed by the parties thereto. 77 11.2 Notices. ------- (a) All notices, requests and other communications required or permitted hereunder shall be in writing, except as otherwise expressly set forth herein (including, unless the context expressly otherwise provides, by facsimile transmission, provided that any matter transmitted by either Borrower by facsimile (i) shall be immediately confirmed by a telephone call to the recipient at the number specified on Schedule 11.2, and (ii) shall be followed ------------- promptly by delivery of a hard copy original thereof), and mailed, faxed or delivered, to the address or facsimile number specified for notices on Schedule -------- 11.2; or, as directed to the Borrower, the Agent or the Canadian Administrative - ---- Agent, to such other address as shall be designated by such party in a written notice to the other parties, and as directed to any other party, at such other address as shall be designated by such party in a written notice to the Company and the Agents. (b) All such notices, requests and communications shall, when transmitted by overnight delivery, or faxed, be effective when delivered for overnight (next-day) delivery, or transmitted in legible form by facsimile machine, respectively, or if mailed, upon the third Business Day after the date deposited into the U.S. mail, or if delivered, upon delivery; except that notices pursuant to Article II or X shall not be effective until actually received by the Agent and/or the Canadian Administrative Agent, as applicable. (c) Any agreement of the Agents and the Banks herein to receive certain notices by telephone or facsimile is solely for the convenience and at the request of the Borrower. Any of the Agents and the Banks shall be entitled to rely on the authority of any Person purporting to be a Person authorized by a Borrower to give such notice and the Agents and the Banks shall not have any liability to either Borrower or other Person on account of any action taken or not taken by the Agents or the Banks in reliance upon such telephonic or facsimile notice. The obligation of each Borrower to repay the Loans made to it shall not be affected in any way or to any extent by any failure by the Agents and the Banks to receive written confirmation of any telephonic or facsimile notice or the receipt by the Agents and the Banks of a confirmation which is at variance with the terms understood by the Agents and the Banks to be contained in the telephonic or facsimile notice. 11.3 No Waiver; Cumulative Remedies. No failure to exercise and no ------------------------------ delay in exercising, on the part of the Agent, the Canadian Administrative Agent or any Bank, any right, remedy, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights and remedies of the parties provided herein and in the other Loan Documents are cumulative and are in addition to, and not exclusive of, any rights or remedies provided by law . 11.4 Costs and Expenses. The Company and Medis jointly and severally ------------------ shall: (a) whether or not the transactions contemplated hereby are consummated, pay or reimburse all Agent-Related Persons (including BofA in its capacity as Agent) within five (5) Business Days after demand (subject to subsection 4.1(e)) for all reasonable costs and 78 expenses incurred by such Agent-Related Persons (including BofA in its capacity as Agent) reasonably required in connection with the development, preparation, negotiation, delivery, administration and execution of, and any amendment, supplement, waiver or modification to (in each case, whether or not consummated), this Agreement, any Loan Document and any other documents prepared in connection herewith or therewith, and the consummation of the transactions contemplated hereby and thereby including reasonable Attorney Costs incurred by such Agent-Related Persons (including BofA in its capacity as Agent) with respect thereto; provided that any costs and expenses incurred under this -------- subsection 11.4(a) prior to the Closing Date shall be limited to the reasonable Attorney Costs incurred by the Agent and the Canadian Administrative Agent and any out-of-pocket costs and expenses (other than attorney fees) of the Agent, the Canadian Administrative Agent and the Arranger; and (b) pay or reimburse all Agent-Related Persons and each Bank within five Business Days after demand (subject to subsection 4.1(e)) for all costs and expenses (including Attorney Costs) incurred by them in connection with the enforcement, attempted enforcement, or preservation of any rights or remedies under this Agreement or any other Loan Document during the existence of an Event of Default or after acceleration of the Loans (including in connection with any "workout" or restructuring regarding the Loans, and including in any Insolvency Proceeding or appellate proceeding). 11.5 Borrower Indemnification. Whether or not the transactions ------------------------ contemplated hereby are consummated, the Company and Medis jointly and severally shall indemnify and hold the Agent-Related Persons, and each Bank and each of its respective Affiliates, officers, directors, employees, counsel, agents and attorneys-in-fact (each, an "Indemnified Person") harmless from and against any ------------------ and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, charges, expenses and disbursements (including Attorney Costs) of any kind or nature whatsoever which may at any time (including at any time following repayment of the Loans and the termination, resignation or replacement of any of the Agents or replacement of any Bank) be imposed on, incurred by or asserted against any such Person as a result of any claim or threatened claim by a Person not party to this Agreement or by a Borrower (except for claims by a Borrower or against any Agent or a Bank that are successful on the merits as determined by a court of competent jurisdiction), in any case in any way relating to or arising out of this Agreement or any document contemplated by or referred to herein, or the transactions contemplated hereby, or any action taken or omitted by any such Person under or in connection with any of the foregoing, including with respect to any investigation, litigation or proceeding (including any Insolvency Proceeding or appellate proceeding) related to or arising out of this Agreement or the Loans or the use of the proceeds thereof, or related to any Canadian Dollar transactions entered into in connection herewith, whether or not any Indemnified Person is a party thereto (all the foregoing, collectively, the "Indemnified Liabilities"); provided that ----------------------- -------- a Borrower shall have no obligation hereunder to any Indemnified Person with respect to Indemnified Liabilities to the extent resulting from the gross negligence or willful misconduct of such Indemnified Person. The agreements in this Section shall survive payment of all other Obligations; provided further ---------------- that this Section 11.5 shall not be construed to expand the obligations of a Borrower to make payments to the Banks in the circumstances required under Sections 3.1, 3.2, 3.3, 3.4 or 3.5, it being understood and agreed 79 that such Sections shall govern the rights and obligations of the Borrowers and the Banks as to matters set forth therein, or to require a Borrower to compensate a Bank for any Indemnified Liability relating to its cost of funds for any Borrowing. 11.6 Payments Set Aside. To the extent that a Borrower makes a payment ------------------ to any of the Agents or the Banks, or any of the Agents or the Banks exercise their right of set-off, and such payment or the proceeds of such set-off or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required (including pursuant to any settlement entered into by any of the Agents or such Bank in its discretion) to be repaid to a trustee, receiver or any other party, in connection with any Insolvency Proceeding or otherwise, then (a) to the extent of such recovery the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such set-off had not occurred, and (b) each Bank severally agrees to pay to the Agents upon demand its pro rata share of any amount so recovered from or repaid by the Agents. 11.7 Successors and Assigns. The provisions of this Agreement shall be ---------------------- binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that neither Borrower may assign or transfer any of its rights or obligations under this Agreement without the prior written consent of the Agent and each Bank. 11.8 Assignments, Participations, etc. --------------------------------- (a) Any Bank may, with the written consent of the Company at all times other than during the existence of an Event of Default and the Agent, which consents of the Company and the Agent shall not be unreasonably withheld, at any time assign and delegate to one or more Eligible Assignees (provided that no written consent of the Company or the Agent shall be required in connection with any assignment and delegation by a Bank to an Eligible Assignee that is an Affiliate of such Bank) (each an "Assignee") all, or any ratable part of all, of -------- the Loans, the Bankers' Acceptance Facility, the Commitments and the other rights and obligations of such Bank hereunder, in a minimum amount of $10,000,000 or any multiple of $5,000,000 in excess thereof, or, if less, the amount of the Commitment of such Bank; provided, however, that the Borrowers and -------- ------- the Agent may continue to deal solely and directly with such Bank in connection with the interest so assigned to an Assignee until (i) written notice of such assignment, together with payment instructions, addresses and related information with respect to the Assignee, shall have been given to the Company and the Agent by such Bank and the Assignee; (ii) such Bank and its Assignee shall have delivered to the Company and the Agent an Assignment and Acceptance substantially in the form of Exhibit E ("Assignment and Acceptance") with such ------------------------- changes thereto as the Agent and the Company may approve together with any Note or Notes subject to such assignment and (iii) the assignor Bank or Assignee has paid to the Agent a processing fee in the amount of $3,500. Notwithstanding anything to the contrary in this subsection 11.8(a), no Facility A Bank that has an Affiliate Bank shall make or grant any sale, assignment, transfer or negotiation with respect to any percentage of its Loans, the Bankers' Acceptance Facility, Bankers' Acceptances, Commitments or any other Obligation to any other Person (other than to an Affiliate of such Bank) unless its Bank Affiliate shall simultaneously 80 make or grant an assignment with respect to the same percentage of its Loans, the Bankers' Acceptance Facility, Bankers' Acceptances, Commitments or other Obligations to such Person (b) From and after the date that the Agent notifies the assignor Bank that it has received (and provided its consent and received the Company's consent with respect to) an executed Assignment and Acceptance and payment of the above-referenced processing fee, (i) the Assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, shall have the rights and obligations of a Bank under the Loan Documents, and (ii) the assignor Bank shall, to the extent that rights and obligations hereunder and under the other Loan Documents have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under the Loan Documents. (c) If the assignor Bank had received any Notes, within five (5) Business Days after its receipt of notice by the Agent that it has received an executed Assignment and Acceptance and payment of the processing fee, (and provided that the Company and the Agent have consented to such assignment in accordance with subsection 11.8(a)), each Borrower, as applicable, shall execute and deliver to the Agent, new Notes evidencing such Assignee's assigned Loans and, if the assignor Bank has retained a portion of its Loans, replacement Notes in the principal amount of the Loans retained by the assignor Bank (such Notes to be in exchange for, but not in payment of, the Notes held by such Bank). Immediately upon each Assignee's becoming a party to this Agreement in accordance with subsection 11.8(b)(i), this Agreement shall be deemed to be amended to the extent, but only to the extent, necessary to reflect the addition of the Assignee and the resulting adjustment of the Facility A Commitments and the Facility B Commitments arising therefrom. The Facility A Commitment and the Facility B Commitment allocated to each Assignee shall reduce the Facility A Commitment and the Facility B Commitment of the assigning Bank pro tanto. --- ----- (d) In addition to sales of Canadian Participations by Facility A Canadian Banks pursuant to subsection 2.1(a)(ii)(B) hereof, any Bank may, with the written consent of the Company at all times other than during the existence of an Event of Default and the Agent, which consents of the Company and the Agent shall not be unreasonably withheld, at any time sell to one or more Eligible Assignees (provided that no written consent of the Company or the Agent shall be required in connection with any participation by a Bank to an Eligible Assignee that is an Affiliate of such Bank) (a "Participant") participating ----------- interests in any Loans, Bankers' Acceptance Facility, Bankers' Acceptances, the Facility A Commitment or the Facility B Commitment of that Bank and the other interests of that Bank (the "originating Bank") hereunder and under the other Loan Documents; provided, however, that (i) the originating Bank's obligations -------- ------- under this Agreement shall remain unchanged, (ii) the originating Bank shall remain solely responsible for the performance of such obligations, (iii) the Borrowers and the Agent shall continue to deal solely and directly with the originating Bank in connection with the originating Bank's rights and obligations under this Agreement and the other Loan Documents, (iv) no Facility A Bank which has an Affiliate Bank shall make or grant any participation with respect to any percentage of its Loans, Bankers' Acceptance Facility, Bankers' Acceptances, Facility A Commitment or Facility B Commitment or any other Person (other than an Affiliate of 81 such Bank) unless its Affiliate Bank shall simultaneously make or grant a participation with respect to the same percentage of its Loans, Bankers' Acceptance Facility, Bankers' Acceptances, Facility A Commitments or Facility B Commitments to such Person; and (v) no Bank shall transfer or grant any participating interest under which the Participant has rights to approve any amendment to, or any consent or waiver with respect to, this Agreement or any other Loan Document, except to the extent such amendment, consent or waiver would require unanimous consent of the Banks as described in the first proviso ----- ------- to Section 11.1. In the case of any such participation, the Participant shall not have any rights under this Agreement, or any of the other Loan Documents, and all amounts payable by the Borrowers hereunder shall be determined as if such Bank had not sold such participation; except that, if amounts outstanding under this Agreement are due and unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall be deemed to have the right of set-off in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Bank under this Agreement. (e) Notwithstanding any other provision in this Agreement, any Bank may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement and any Notes held by it in favor of any Federal Reserve Bank in accordance with Regulation A of the FRB or U.S. Treasury Regulation 31 CFR ss.203.14, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applicable law. (f) Notwithstanding this Section 11.8, no consent of the Company or Agent or other requirements in this Section 11.8 shall be required to be satisfied in connection with the purchase of a Bankers' Acceptance by a participant as contemplated by Section 2.18. 11.9 Confidentiality. Each of the Agents and each Bank agree to take --------------- and to cause its Affiliates (including the Agent-Related Persons) to take normal and reasonable precautions and exercise due care to maintain the confidentiality of all information identified as "confidential" or "secret" by the Company and provided to it by the Company or any Subsidiary, or by any of the Agents on the Company's or Subsidiary's behalf, under this Agreement or any other Loan Document, and neither it nor any of its Affiliates shall use any such information other than in connection with or in enforcement of this Agreement and the other Loan Documents or in connection with other business now or hereafter existing or contemplated with the Company or any Subsidiary, except to the extent such information (i) was or becomes generally available to the public other than as a result of disclosure by any of the Agents or such Bank, or (ii) was or becomes available on a non-confidential basis from a source other than the Company, provided that such source is not bound by a confidentiality agreement with the Company known to such Agent or such Bank; provided, however, -------- ------- that any of the Agents and any Bank may disclose such information (A) at the request or pursuant to any requirement of any Governmental Authority to which any of the Agents or any Bank is subject or in connection with an examination of such Bank by any such authority; (B) pursuant to subpoena or other court process; (C) when required to do so in accordance with the provisions of any applicable Requirement of Law; (D) to the extent reasonably required in connection with the exercise of any remedy hereunder or under any 82 other Loan Document; (E) to such Bank's independent auditors and other professional advisors and to any of the Agents or any other Bank; (F) to any Participant or Assignee, actual or potential, provided that such Person agrees in writing to keep such information confidential to the same extent required of the Banks hereunder; (G) as to any of the Agents or any Bank or its Affiliate, as expressly permitted under the terms of any other document or agreement regarding confidentiality to which the Company or any Subsidiary is party or is deemed party with such Bank or such Affiliate; and (H) to its Affiliates; provided, further, that to the extent permitted by applicable law or - -------- ------- regulation, each of the Agents and each Bank agree to notify the Company prior to (if reasonably practicable) or concurrently with its disclosure of such information to any third party pursuant to clauses (B), (C), or (F). 11.10 Set-off. In addition to any rights and remedies of the Banks ------- provided by law, if an Event of Default exists or the Loans have been accelerated, each Bank and its respective Affiliates are authorized at any time and from time to time, without prior notice to the Company or Medis, any such notice being waived by the Company and Medis to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held by, and other indebtedness at any time owing by, such Bank or any such Affiliate to or for the credit or the account of the Company or Medis against any and all Obligations owing to such Bank, now or hereafter existing, irrespective of whether or not any of the Agents or such Bank shall have made demand under this Agreement or any Loan Document and although such Obligations may be contingent or unmatured. Each Bank agrees promptly to notify the Company and the Agent and the Canadian Administrative Agent after any such set-off and application made by such Bank; provided, however, that the failure to give such notice shall not affect the - -------- ------- validity of such set-off and application. 11.11 Notification of Addresses, Lending Offices, Etc. Each Bank ----------------------------------------------- shall notify the Agent and the Canadian Administrative Agent in writing of any changes in the address to which notices to the Bank should be directed, of addresses of any Lending Office, of payment instructions in respect of all payments to be made to it hereunder and of such other administrative information as the Agent or the Canadian Administrative Agent shall reasonably request. 11.12 Counterparts. This Agreement may be executed in any number ------------ of separate counterparts, each of which, when so executed, shall be deemed an original, and all of said counterparts taken together shall be deemed to constitute but one and the same instrument. 11.13 Severability. The illegality or unenforceability of any ------------ provision of this Agreement or any instrument or agreement required hereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions of this Agreement or any instrument or agreement required hereunder. 11.14 No Third Parties Benefited. This Agreement is made and -------------------------- entered into for the sole protection and legal benefit of the Borrowers, the Banks, the Agents and the Agent-Related Persons, and their permitted successors and assigns, and no other Person shall be a direct or indirect legal beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any of the other Loan Documents. 83 11.15 Governing Law and Jurisdiction; Language. ---------------------------------------- (a) THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA WITHOUT REFERENCE TO PRINCIPLES OF CONFLICTS OF LAWS. MATTERS PERTAINING TO BANKERS' ACCEPTANCES SHALL, TO THE EXTENT APPLICABLE, BE GOVERNED BY THE BILLS OF EXCHANGE ACT (CANADA). (b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF CALIFORNIA OR OF THE UNITED STATES FOR THE NORTHERN DISTRICT OF CALIFORNIA, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE BORROWERS, THE AGENTS AND THE BANKS CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THOSE COURTS. EACH OF THE BORROWERS, THE AGENTS AND THE BANKS IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY -------------------- NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS AGREEMENT OR ANY DOCUMENT RELATED HERETO. THE BORROWERS, THE AGENTS AND THE BANKS EACH WAIVE PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY CALIFORNIA LAW. (c) The Borrowers expressly require that this document and all documents accessory hereto be drawn up in English and each Agent and each Bank, because of the customer's requirement and by making such documents available to the customer in the English language, expresses the same requirement. Les Emprunteurs requierent expressement que ce document et tous les documents qui s'y rapportent soient rediges en langue anglaise et chaque Mondataire et chaque Banque, a cause de cette exigence du client, exprime la meme volonte en faisant en sorte que les documents en langue anglaise soient a la disposition du client. 11.16 Waiver of Jury Trial. THE BORROWERS, THE BANKS AND THE -------------------- AGENTS EACH WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR ANY AGENT-RELATED PERSON, PARTICIPANT OR ASSIGNEE, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE BORROWERS, THE BANKS AND THE AGENTS EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT 84 THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. 11.17 Judgment. If, for the purposes of obtaining judgment in any -------- court, it is necessary to convert a sum due hereunder or any other Loan Document in one currency into another currency, the rate of exchange used shall be that at which in accordance with normal banking procedures the Agent could purchase the first currency with such other currency on the Business Day preceding that on which final judgment is given. The obligation of a Borrower in respect of any such sum due from it to the Agent hereunder or under the other Loan Documents shall, notwithstanding any judgment in a currency (the "Judgment Currency") other than that in which such sum is denominated in accordance with the applicable provisions of this Agreement (the "Agreement Currency"), be discharged only to the extent that on the Business Day following receipt by the Agent of any sum adjudged to be so due in the Judgment Currency, the Agent may in accordance with normal banking procedures purchase the Agreement Currency with the Judgment Currency. If the amount of the Agreement Currency so purchased is less than the sum originally due to the Agent in the Agreement Currency, the Borrowers agree, as a separate obligation and notwithstanding any such judgment, to indemnify the Agent or the Person to whom such obligation was owing against such loss. If the amount of the Agreement currency so purchased is greater than the sum originally due to the Agent in such currency, the Agent agrees to return the amount of any excess to the applicable Borrower (or to any other Person who may be entitled thereto under applicable law). 11.18 Entire Agreement. This Agreement, together with the other ---------------- Loan Documents, embodies the entire agreement and understanding among the Borrowers, the Banks and the Agents, and supersedes all prior or contemporaneous agreements and understandings of such Persons, verbal or written, relating to the subject matter hereof and thereof. [Remainder of page intentionally left blank] 85 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered in San Francisco, California by their proper and duly authorized officers as of the day and year first above written. McKESSON CORPORATION By:_____________________________ Name: Nicholas A. Loiacono Title: Vice President, Finance and Treasurer MEDIS HEALTH AND PHARMACEUTICAL SERVICES INC. By:_____________________________ Name: Nicholas A. Loiacono Title: Vice President S-1 BANK OF AMERICA NT&SA, as Agent and as a Bank By:______________________________ Name: Vanessa Meyer Title: Managing Director BANK OF AMERICA CANADA, as Canadian Administrative Agent and as a Bank By:______________________________ Name: _________________________ Title: _________________________ S-2 THE CHASE MANHATTAN BANK, as documentation agent and as a Bank By:_____________________________ Name: Lenard Weiner Title: Managing Director THE FIRST NATIONAL BANK OF CHICAGO, as documentation agent and as a Bank By:_____________________________ Name: Mark A. Isley Title: First Vice President S-3 ABN AMRO BANK N.V., as managing agent and as a Bank By:_____________________________ Name: Gina M. Brusatori Title: Group Vice President By:_____________________________ Name: ________________________ Title: ________________________ FIRST UNION NATIONAL BANK, as documentation agent and as a Bank By:_____________________________ Name: John Reid Title: Vice President MELLON BANK, N.A., as managing agent and as a Bank By:_____________________________ Name: Lawrence C. Ivey Title: Vice President TORONTO DOMINION (TEXAS), INC., as managing agent and as a Bank By:_____________________________ Name: Alva J. Jones Title: Vice President S-4 WACHOVIA BANK, N.A., as co-agent and as a Bank By:_____________________________ Name: Eliza Martin Title: Assistant Vice President S-5 THE BANK OF NEW YORK By:_____________________________ Name: Elizabeth T. Ying Title: Vice President PNC BANK NATIONAL ASSOCIATION By:_____________________________ Name: Philip K. Liebscher Title: Vice President WELLS FARGO BANK, N.A. By:_____________________________ Name: Donald Hartmann Title: Senior Vice President By:_____________________________ Name: Eugene Fuentes Title: Vice President U.S. BANK NATIONAL ASSOCIATION By:_____________________________ Name: Aaron J. Gordon Title: Vice President S-6 THE FIRST NATIONAL BANK OF MARYLAND By:_____________________________ Name: Andrew W. Fish Title: Vice President NORWEST BANK MINNESOTA, N.A. By:_____________________________ Name: Bradley A. Hardy Title: Vice President BANK OF MONTREAL By:_____________________________ Name: Leon H. Sinclair Title: Director S-7 FIRST CHICAGO NBD BANK, CANADA By:_____________________________ Name: Mark A. Isley Title: First Vice President S-8 THE TORONTO-DOMINION BANK By:_____________________________ Name: Alva J. Jones Title: Mgr. Cr. Admin. S-9 EX-24 25 POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS THAT the undersigned directors and officers of McKesson HBOC, Inc., a Delaware corporation (the "Company"), do hereby constitute and appoint Ivan D. Meyerson and Kristina Veaco his or her true and lawful attorney and agent, each with full power and authority (acting alone and without the other) to execute in the name and on behalf of the undersigned as such Director and/or Officer, under the Securities Act of 1934, as amended, an annual report on Form 10-K, and thereafter to execute and file any and all amendments to such Form, whether filed prior or subsequent to the time such Form becomes effective. The undersigned hereby grants unto such attorneys and agents, and each of them, full power of substitution and revocation in the premises and hereby ratifies and confirms all that such attorneys and agents may do or cause to be done by virtue of these presents.
Signature Capacity --------- -------- /s/ Alan Seelenfreund Chairman of the Board ------------------------------- Alan Seelenfreund /s/ John H. Hammergren Co-President, Co-Chief Executive ------------------------------- Officer Elect and Director John H. Hammergren (Principal Executive Officer) /s/ David L. Mahoney Co-President, Co-Chief Executive ------------------------------- Officer Elect and Director David L. Mahoney (Principal Executive Officer) /s/ Heidi E. Yodowitz Senior Vice President, Controller ------------------------------- and Acting Chief Financial Heidi E. Yodowitz Officer (Principal Financial and Accounting Officer) /s/ Alfred C. Eckert III Director ------------------------------- Alfred C. Eckert III /s/ Tully M. Friedman Director ------------------------------- Tully M. Friedman /s/ Alton F. Irby III Director ------------------------------- Alton F. Irby III /s/ M. Christine Jacobs Director ------------------------------- M. Christine Jacobs /s/ Gerald E. Mayo Director ------------------------------- Gerald E. Mayo Director ------------------------------- Charles W. McCall /s/ James V. Napier Director ------------------------------- James V. Napier /s/ David S. Pottruck Director ------------------------------- David S. Pottruck
Signature Capacity --------- -------- Director ------------------------------ Mark A. Pulido /s/ Carl E. Reichardt Director ------------------------------ Carl E. Reichardt /s/ Jane E. Shaw Director ------------------------------ Jane E. Shaw
Dated: July 13, 1999 EX-27.1 26 RESTATED FINANCIAL DATA SCHEDULE
5 YEAR MAR-31-1999 APR-01-1998 MAR-31-1999 240,800 28,200 2,765,200 181,500 3,529,000 6,499,500 1,375,000 681,000 9,081,600 4,800,100 1,157,500 0 0 2,800 2,879,000 9,081,600 30,382,300 30,382,300 27,716,700 27,716,700 2,457,400 87,300 124,000 208,200 117,100 84,900 0 0 0 84,900 .31 .31
EX-27.2 27 RESTATED FINANCIAL DATA SCHEDULE
5 YEAR MAR-31-1998 APR-01-1997 MAR-31-1998 566,300 117,100 2,043,700 83,700 2,608,700 5,357,100 1,203,000 609,900 7,349,700 3,127,000 1,335,800 0 0 2,700 2,559,000 7,349,700 22,419,300 22,419,300 20,025,900 20,025,900 1,887,000 17,000 108,900 506,400 195,600 304,600 0 0 0 304,600 1.14 1.10
EX-27.3 28 RESTATED FINANCIAL DATA SCHEDULE
5 YEAR MAR-31-1997 APR-01-1996 MAR-31-1997 434,500 165,600 1,672,600 60,400 2,277,500 4,612,600 1,059,200 569,900 6,473,300 3,078,300 1,047,100 0 0 2,600 2,079,200 6,473,300 16,914,300 16,914,300 15,203,300 15,203,300 1,539,800 28,500 61,000 171,200 87,200 83,300 128,800 0 0 212,100 .83 .80
EX-99.2 29 REGISTRATION RIGHTS AGREEMENT DATED 08/27/1998 EXHIBIT 99.2 REGISTRATION RIGHTS AGREEMENT Dated as of August 27, 1998 REGISTRATION RIGHTS AGREEMENT, dated as of August 27, 1998, by McKesson Corporation, a Delaware corporation (the "Company"), and the other undersigned parties hereto. 1. Introduction; Term of Agreement. The Company is a party to the ------------------------------- separate Agreement and Plan of Merger (the "Merger Agreement"), dated as of August 27, 1998, among the Company, Red Acquisition Corp., a Louisiana corporation, Automated Prescription Systems, Inc., a Louisiana corporation, and the selling stockholders parties thereto (the "Stockholders") pursuant to which the Company has agreed, among other things, to acquire through merger APS and, in connection therewith, to issue to the Stockholders shares of common stock of the Company (the "Common Stock") as specified in the Merger Agreement. This Agreement shall become effective upon the Effective Time (as defined in the Merger Agreement). This Agreement shall terminate and be of no further force and effect on the second anniversary date of the Effective Time. Notwithstanding the preceding sentence, with respect to Registrable Securities being placed in escrow pursuant to the Merger Agreement, (i) section 2.1 hereof shall terminate and be of no further force and effect on the second anniversary date of the Effective Time, and (ii) the other provisions hereof shall terminate and be of no further force and effect on the third anniversary date of the Effective Time. Certain capitalized terms used in this Agreement are defined in section 3 hereof; references to sections shall be to sections of this Agreement. 2. Registration under Securities Act, etc. -------------------------------------- 2.1 Registration on Request. ----------------------- (a) Demand Request. Upon the written request of the Initiating -------------- Holders (on their own and/or on behalf of the other Stockholders), requesting that the Company effect the registration under the Securities Act of all or part of such Initiating Holders' Registrable Securities or the Registrable Securities owned by other Stockholders and specifying the intended method or methods of disposition thereof (a "Demand Request"), the Company will, as promptly as reasonably practicable but in no event later than 20 days after such request, give written notice of such requested registration to all registered holders of Registrable Securities who would be entitled to participate in such registration, and thereupon the Company will, subject to the terms of this Agreement, use its best efforts to effect the registration under the Securities Act of: (i) the Registrable Securities which the Company has been so requested to register by such Initiating Holders (on their own and/or on behalf of the other Stockholders) for disposition in accordance with the intended method or methods of disposition stated in such request; (ii) all other Registrable Securities the holders of which shall have made a written request to the Company for registration -2- thereof within 30 days after the receipt of such written notice from the Company (which request shall specify the intended method or methods of disposition of such Registrable Securities); (iii) all shares of Common Stock which the Company may elect to register in connection with the offering of Registrable Securities pursuant to this section 2.1; and (iv) all shares of Common Stock which the Company may be required to register in connection with "piggyback" or incidental registration rights granted to any other Person; all to the extent requisite to permit the disposition (in accordance with the intended method or methods of distribution specified in the Demand Request) of the Registrable Securities and the additional shares of Common Stock, if any, so to be registered, provided, however, that such Demand Request shall be for not -------- ------- less than 400,000 shares of Common Stock. Subject to the provisions of section 2.1(d), the Initiating Holders will have the right pursuant to this section 2.1(a) to make one Demand Request. Without limiting the generality of the foregoing, the Initiating Holders shall have the right to request registration pursuant to this section 2.1 and specify that one of the methods of disposition of Registrable Securities shall be a block trade or trades involving Registrable Securities held by such Initiating Holders and/or other Stockholders and that, in connection therewith, the Company shall file with the Commission a registration statement under Rule 415 covering all of the Registrable Securities to be sold in the block trade or trades. In such case, the Company shall file an appropriate shelf registration statement with the Commission as promptly as reasonably practicable and in accordance with the provisions of section 2.3. Subject to the provisions of section 2.1(d), a shelf registration which involves a block trade or block trades as an intended method of disposition, whether or not any such block trade is made, shall be considered as the exercise of the Demand Request permitted by this section 2.1(a). Notwithstanding anything herein to the contrary, it is understood and agreed that the Initiating Holders may make a Demand Request for registration pursuant to this section 2.1(a) 30 days prior to the date on which it is agreed by the parties that the restricted period under Accounting Series Release No. 135 would expire. (b) Registration Statement Form. The registration under this --------------------------- section 2.1 shall be on such appropriate registration form of the Commission (i) as shall be selected by the Company and, as shall be reasonably acceptable to the Initiating Holders of the Registrable Securities so to be registered and (ii) as shall permit the disposition of such Registrable Securities in accordance with the intended method or methods of disposition specified in the request for such registration. -3- (c) Expenses. The Company will pay all Registration Expenses in -------- connection with the registration requested pursuant to this section 2.1 (including any registration deemed not to be "effected" under section 2.1). (d) Effective Registration Statement. The registration requested -------------------------------- pursuant to this section 2.1 shall not be deemed to have been effected (and therefore shall not constitute the Demand Request) (i) unless the registration statement with respect thereto has become effective in accordance with the manner of disposition specified by the requesting holders, provided that a -------- registration which does not become effective after the Company has filed the registration statement with respect thereto solely by reason of the refusal to proceed of the Initiating Holders (other than a refusal to proceed based upon the advice of counsel relating to a matter with respect to the Company) shall be deemed to have been effected by the Company at the request of the Initiating Holders unless the Initiating Holders shall have elected to pay all Registration Expenses in connection with such registration, (ii) if, after it has become effective, such registration becomes subject to any stop order, injunction or other order or requirement of the Commission or other governmental agency or court for any reason, or (iii) if the conditions to closing specified in the purchase agreement or underwriting agreement, if any, entered into in connection with such registration are not satisfied, other than by reason of some act or omission by a holder of Registrable Securities. (e) Selection of Underwriters. If a requested registration pursuant ------------------------- to this section 2.1 involves an underwritten offering, the underwriter or underwriters thereof shall be selected by the Company, subject to the approval of the holders of a majority of the Registrable Securities which the Company has been requested to register, which approval shall not be unreasonably withheld. (f) Priority in Requested Registrations. If the requested ----------------------------------- registration pursuant to this section 2.1 involves an underwritten offering, and the managing underwriter shall advise the Company in writing (with a copy to each holder of Registrable Securities requesting registration) that, in its opinion, the number of securities requested to be included in such registration (including securities of the Company which are not Registrable Securities) exceeds the number which can be sold in such offering within a price range acceptable to the holders of a majority of the Registrable Securities requested to be included in such registration, the Company will include in such registration, to the extent of the number which the Company is so advised can be sold in such offering, (i) first, Registrable Securities requested to be included in such registration by the holders of Registrable Securities, pro rata --- ---- among such holders requesting such registration on the basis of the number of such securities requested to be included by such holders, and (ii) second, subject to section 2.1(a) hereof, securities the Company proposes to sell and other securities of the Company included in such registration by other holders who may have "piggyback" or incidental registration rights. -4- (g) Delay Periods. The Company shall be entitled to postpone the ------------- filing of any registration statement otherwise required to be prepared and filed by the Company pursuant to this section 2.1, or suspend the use of any effective registration statement under this section 2.1, for a reasonable period of time, but not in excess of 90 days (a "Delay Period"), if (i) such postponement or suspension is required by applicable law arising from events outside of the control of the Company or (ii) any senior executive officer of the Company determines that in such senior executive officer's reasonable good faith judgment the registration and distribution of the Registrable Securities covered or to be covered by such registration statement would interfere with any pending material financing, acquisition, corporate reorganization, business combination, joint venture, strategic alliance, commercial alliance, customer contract or other transaction involving the Company or any of its subsidiaries or would require premature disclosure thereof and promptly gives the Initiating Holders written notice of such determination, and an approximation of the period of the anticipated delay; provided, however, that (i) the aggregate number of days included in all Delay Periods during any consecutive 12 months shall not exceed the aggregate of 180 days and (ii) a period of at least 90 days shall elapse between the termination of any Delay Period and the commencement of the immediately succeeding Delay Period. Immediately upon receipt of a written notice of suspension, each holder of Registrable Securities who made a request to participate in the underwritten offering pursuant to this section 2.1 shall cease all disposition efforts with respect to Registrable Securities held by such holder. If the Company shall so postpone the filing of a registration statement, the Holders of Registrable Shares to be registered shall automatically be deemed to have withdrawn the request for registration and such request shall not constitute the Demand Request for registration to which the Initiating Holders of Registrable Shares are entitled pursuant to this section 2.1. The time period for which the Company is required to maintain the effectiveness of the registration statement shall be extended by the aggregate Delay Periods during such registration. 2.2 Incidental Registration. ----------------------- (a) Right to Include Registrable Securities. If the Company at --------------------------------------- any time proposes to register any of its shares of Common Stock (other than in connection with a registration of securities which are convertible or exchangeable into Common Stock) under the Securities Act (other than by a registration on Form S-4 or S-8, or any successor or similar forms and other than pursuant to section 2.1), whether or not for sale for its own account, it will each such time give prompt written notice to all holders of Registrable Securities of its intention to do so and of such holders' rights under this section 2.2. Upon the written request of any such holder made within 30 days after the receipt of any such notice (which request shall specify the Registrable Securities intended to be disposed of by such holder and the intended method or methods of disposition thereof), the Company will, subject to the terms of this Agreement, use its best efforts to effect the registration under the Securities Act of all Registrable Securities -5- which the Company has been so requested to register by the holders thereof, to the extent requisite to permit the disposition (in accordance with the intended method or methods of distribution thereof specified in the requests of such holders) of the Registrable Securities so to be registered, by inclusion of such Registrable Securities in the registration statement which covers the securities which the Company proposes to register; provided that if, at any time after -------- giving written notice of its intention to register any securities and prior to the effective date of the registration statement filed in connection with the registration of the Registrable Securities and the securities which the Company proposes to sell, the Company shall determine for any reason either not to register or to delay registration of the securities which the Company proposes to sell, the Company may, at its election, postpone or withdraw the registration statement and give written notice of such determination to each holder of Registrable Securities and, thereupon, (i) in the case of a determination not to register, shall be relieved of its obligation to register any Registrable Securities in connection with such registration (but not from its obligation to pay the Registration Expenses in connection therewith), without prejudice, however, to the rights of any holder or holders of Registrable Securities entitled to do so to request that such registration be effected as a registration under section 2.1, and (ii) in the case of a determination to delay registering, shall be permitted to delay registering any Registrable Securities, for the same period as the delay in registering such other securities. No registration effected under this section 2.2 shall relieve the Company of its obligation to effect any registration upon request under section 2.1, nor shall any such registration hereunder be deemed to have been effected pursuant to section 2.1. The Company will pay all Registration Expenses in connection with each registration of Registrable Securities requested pursuant to this section 2.2, and each holder whose Registrable Securities are included in a registration requested pursuant to this section 2.2 will pay any underwriting discounts and commissions and fees of such holder's counsel in connection therewith. (b) Priority in Incidental Registrations. If (i) a registration ------------------------------------ pursuant to this section 2.2 involves an underwritten offering of the securities so being registered, whether or not for sale for the account of the Company, to be distributed (on a firm commitment basis) by or through one or more underwriters of recognized standing under underwriting terms appropriate for such a transaction, and (ii) the managing underwriter of such underwritten offering shall inform the Company and holders of the Registrable Securities requesting such registration by letter of its belief that the number of securities requested to be included in such registration exceeds the number which can be sold in (or during the time of) such offering, then the Company will include in such registration: (i) first, all the securities the Company proposes to sell for its own account, -6- (ii) second, all securities of any other holder who has made a demand for registration, and (iii) third, to the extent that the number of securities which the Company and any such other holders proposed to include pursuant to clauses (i) and (ii) is less than the number of securities which the Company has been advised can be sold in such offering, the number of (x) such Registrable Securities requested to be included in such registration by the holders of Registrable Securities pursuant to section 2.2(a) hereof and (y) other equity securities of the Company requested to be included in such registration by holders of such securities who are entitled to incidental registration rights under any other registration rights agreements with the Company shall be allocated pro rata among all such holders on the basis of the relative --- ---- number of Registrable Securities and other equity securities each such holder has requested to be included in such registration. 2.3 Registration Procedures. If and whenever the Company is ----------------------- required to effect the registration of any Registrable Securities under the Securities Act as provided in sections 2.1 and 2.2, the Company shall, as expeditiously as reasonably possible: (i) prepare and file with the Commission the requisite registration statement to effect such registration (including such audited financial statements as may be required by the Securities Act or the rules and regulations promulgated thereunder) and thereafter cause such registration statement to become and remain effective for a period of at least 120 days, provided however that the Company may -------- discontinue any registration of its securities which are not Registrable Securities (and, under the circumstances specified in section 2.2(a), its securities which are Registrable Securities) at any time prior to the effective date of the registration statement relating thereto; (ii) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for a period of at least 120 days (30 days in the case of any registration pursuant to section 2.2) and to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement until the earlier of such time as all of such securities have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof set forth in such registration statement or such other time as is required by the Securities Act; -7- (iii) furnish to each seller of Registrable Securities covered by such registration statement and each underwriter, if any, of the securities being sold by such seller such number of conformed copies of such registration statement and of each such amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus contained in such registration statement (including each preliminary prospectus and any summary prospectus) and any other prospectus filed pursuant to Rule 424 under the Securities Act, in conformity with the requirements of the Securities Act, and such other documents, as such seller and underwriter, if any, may reasonably request; (iv) use its best efforts to register or qualify all Registrable Securities and other securities covered by such registration statement under such other state securities laws or blue sky laws of such jurisdictions as any seller thereof and any underwriter of the securities being sold by such seller shall reasonably request, to keep such registrations or qualifications in effect for so long as such registration statement remains in effect, and take any other action which may be reasonably necessary or advisable to enable such seller and underwriter to consummate the disposition in such jurisdictions of the securities owned by such seller, except that the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not but for the requirements of this subsection (iv) be obligated to be so qualified or to consent to general service of process in any such jurisdiction; (v) furnish to each seller of Registrable Securities a signed counterpart, addressed to such seller and the underwriters, if any, of: (X) an opinion of counsel for the Company (which shall be outside counsel if outside counsel is rendering such opinion in the transaction and otherwise may be the Company's inside counsel), dated the effective date of such registration statement (or, if such registration includes an underwritten public offering, an opinion dated the date of the closing under the underwriting agreement), customary for a transaction of such type, and (Y) a "comfort" letter (or, in the case of any such Person which does not satisfy the conditions for receipt of a "comfort" letter specified in Statement on Auditing Standards No. 72, as amended by Statements on Auditing Standards Nos. 76 and 86, an "agreed upon procedures" letter), dated the effective date of such registration statement -8- (and, if such registration includes an underwritten public offering, a letter of like kind dated the date of the closing under the underwriting agreement), signed by the independent public accountants who have certified the Company's financial statements included in such registration statement, covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of the accountants' letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to the underwriters in underwritten public offerings of securities (with, in the case of an "agreed upon procedures" letter, such modifications or deletions as may be required under Statement on Auditing Standards No. 75) and, in the case of the accountants' letter, such other financial matters customarily covered in a transaction of such type; (vi) notify the holders of Registrable Securities and the managing underwriter or underwriters, if any, promptly: (V) when the registration statement, the prospectus or any prospectus supplement related thereto or post-effective amendment to the registration statement has been filed, and, with respect to the registration statement or any post-effective amendment thereto, when the same has become effective; (W) of any request by the Commission for amendments or supplements to the registration statement or the prospectus or for additional information; (X) of the issuance by the Commission of any stop order suspending the effectiveness of the registration statement or the initiation of any proceedings by any Person for that purpose; (Y) if at any time the representations and warranties of the Company made as contemplated by section 2.4 below cease to be true and correct; and (Z) of the receipt by the Company of any notification with respect to the suspension of the qualification of any Registrable Securities for sale under the securities or -9- blue sky laws of any jurisdiction or the initiation or threat of any proceeding for such purpose; (vii) notify each seller of Registrable Securities covered by such registration statement, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, upon the Company's discovery that, or upon the happening of any event as a result of which, the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made, and at the request of any such seller promptly prepare and furnish to such seller and each underwriter, if any, a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made; (viii) make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of the registration statement as promptly as possible; (ix) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, and, if required, make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months, but not more than eighteen months, beginning with the first day of the Company's first full calendar quarter after the effective date of such registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder, and use its best efforts to furnish to each such seller at least one business day prior to the filing thereof a copy of any amendment or supplement to such registration statement or prospectus and shall not file any thereof to which any such seller shall have reasonably objected on the grounds that such amendment or supplement does not comply in all material respects with the requirements of the Securities Act or of the rules or regulations thereunder; (x) provide and cause to be maintained a transfer agent and registrar for all Registrable Securities covered by such registration statement from and after a date not later than the effective date of such registration statement; and -10- (xi) use its best efforts to list all Registrable Securities covered by such registration statement on any securities exchange on which any of the securities of the same class as the Registrable Securities are then listed. The Company will not file any registration statement or amendment thereto or any prospectus or any supplement thereto to which the holders of at least a majority of the Registrable Securities covered by such registration statement or the underwriter or underwriters, if any, shall reasonably object. The Company may require each seller of Registrable Securities as to which any registration is being effected to furnish the Company such information regarding such seller and the distribution of such securities as the Company may from time to time reasonably request in writing in order to assure compliance with applicable securities laws and applicable rules and regulations of securities exchanges. Each holder of Registrable Securities agrees by acquisition of such Registrable Securities that, upon receipt of any notice from the Company of the occurrence of any event of the kind described in paragraph (vii) of this section 2.3, such holder will forthwith discontinue such holder's disposition of Registrable Securities pursuant to the registration statement relating to such Registrable Securities until such holder's receipt of the copies of the supplemented or amended prospectus contemplated by paragraph (vii) of this section 2.3 and, if so directed by the Company, will deliver to the Company (at the Company's expense) all copies, other than permanent file copies, then in such holder's possession of the prospectus relating to such Registrable Securities current at the time of receipt of such notice. In the event the Company shall give any such notice, the period mentioned in paragraph (ii) of this section 2.3 shall be extended by the length of the period from and including the date when each seller of any Registrable Securities covered by such registration statement shall have received such notice to the date on which each such seller has received the copies of the supplemented or amended prospectus contemplated by paragraph (vii) of this section 2.3. 2.4. Underwritten Offerings. ---------------------- (a) Requested Underwritten Offerings. If requested by the -------------------------------- underwriters for any underwritten offering by holders of Registrable Securities pursuant to a registration requested under section 2.1, the Company will enter into an underwriting or similar agreement with such underwriters for such offering, such agreement to be reasonably satisfactory in substance and form to the Company, each such holder and the underwriters, and to contain such representations and warranties by the Company and such other terms as are generally prevailing in agreements of this type, including, without limitation, indemnities to the effect and to the extent provided in section 2.6. The holders of the Registrable Securities will cooperate with the Company in the negotiation of the underwriting or similar agreement and will give consideration to the reasonable -11- suggestions of the Company regarding the form thereof, provided that nothing -------- herein contained shall diminish the foregoing obligations of the Company. The holders of Registrable Securities to be distributed by such underwriters shall be parties to such underwriting agreement, which agreement shall provide that any or all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of such holders of Registrable Securities and that any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement shall be conditions precedent to the obligations of such holders of Registrable Securities. No underwriting or similar agreement shall require any holder of Registrable Securities to make any representations or warranties to or agreements with the Company or the underwriters, other than representations and warranties or agreements regarding such holder, such holder's Registrable Securities and such holder's intended method or methods of distribution and any other representation required by law, or to make any agreements with the Company or the underwriters with respect to indemnification of any Person or the contribution obligations of any Person that would impose any obligation which is broader than the indemnity furnished by such holder pursuant to the provisions of section 2.6. In addition, the holders of Registrable Securities shall cooperate with the Company in an effort to provide that any such agreement will contain a provision modifying the indemnification of the underwriter to the effect that neither the Company nor the holders of the Registrable Securities will be liable to any Person who participates as an underwriter in the offering or sale of Registrable Securities with respect to any preliminary prospectus, to the extent that any such loss, claim, damage or liability of such underwriter results from such underwriter having sold Registrable Securities to a person to whom there was not sent or given, at or prior to the written confirmation of such sale, a copy of the final prospectus, if the Company has previously furnished copies thereof to such underwriter and such final prospectus as then amended or supplemented, has corrected any such misstatement or omission. (b) Incidental Underwritten Offerings. If the Company at any time --------------------------------- proposes to register any of its securities under the Securities Act as contemplated by section 2.2 and such securities are to be distributed by or through one or more underwriters, the Company will, if requested by any holder of Registrable Securities as provided in section 2.2 and subject to the provisions of section 2.2(b), use its best efforts to arrange for such underwriters to include all the Registrable Securities to be offered and sold by such holder among the securities to be distributed by such underwriters. The holders of Registrable Securities to be distributed by such underwriters shall be parties to the underwriting agreement between the Company and such underwriters, which agreement shall provide that any or all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of such holders of Registrable Securities and that any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement be conditions precedent to the obligations of such holders of -12- Registrable Securities. Any such holder of Registrable Securities shall not be required to make any representations or warranties to or agreements with the Company or the underwriters, other than representations, warranties or agreements regarding such holder, such holder's Registrable Securities and such holder's intended method or methods of distribution and any other representation required by law, or to make any agreements with the Company or the underwriters with respect to indemnification of any Person or the contribution obligations of any Person that would impose any obligation which is broader than the indemnity furnished by such holder pursuant to the provisions of section 2.6. In addition, the holders of Registrable Securities shall cooperate with the Company in an effort to provide that any such agreement will contain a provision modifying the indemnification of the underwriter to the effect that neither the Company nor the holders of the Registrable Securities will be liable to any Person who participates as an underwriter in the offering or sale of Registrable Securities with respect to any preliminary prospectus, to the extent that any such loss, claim, damage or liability of such underwriter results from such underwriter having sold Registrable Securities to a person to whom there was not sent or given, at or prior to the written confirmation of such sale, a copy of the final prospectus, if the Company has previously furnished copies thereof to such underwriter and such final prospectus as then amended or supplemented, has corrected any such misstatement or omission. (c) Holdback Agreements. ------------------- (i) Each holder of Registrable Securities agrees by acquisition of such Registrable Securities, if and to the extent so required by the managing underwriter, not to sell, make any short sale of, loan, grant any option for the purchase of, effect any public sale or distribution of or otherwise dispose of any securities of the Company, during the 7 days prior to and the 90 days after any underwritten registration pursuant to section 2.1 or 2.2 has become effective and in which the holders of Registrable Securities have the opportunity to participate, except as part of such underwritten registration, whether or not such holder participates in such registration, unless the underwriters managing the registered public offering otherwise agree, provided that the foregoing restrictions -------- shall not apply with regard to any Stockholder to the transfer to any Affiliate of such Person, or to any bona fide pledge of such Registrable Securities, provided that such Affiliate or other transferee and/or lender or creditor acknowledges in writing that it is bound by the provisions of this section 2.4(c). Each holder of Registrable Securities agrees that the Company may instruct its transfer agent to place stop transfer notations in its records to enforce this section 2.4(c). (ii) The Company agrees (X) if so required by the managing underwriter not to sell, make any short sale of, loan, grant any -13- option for the purchase of, effect any sale or distribution of or otherwise dispose of its equity securities or securities convertible into or exchangeable or exercisable for any of such securities during the seven days prior to and the 90 days after any underwritten registration pursuant to section 2.1 or 2.2 has become effective, except as part of such underwritten registration and except pursuant to registrations on Form S-4, S-8, or any successor or similar forms thereto, and (Y) to cause each holder of its securities purchased from the Company, or any securities convertible into or exchangeable or exercisable for such securities, at any time after the date of this Agreement (other than in a public offering) to agree not to sell, make any short sale of, loan, grant any option for the purchase of, effect any sale or distribution of or otherwise dispose of such securities during such periods, unless the underwriters managing the registered public offering otherwise agree. (d) Participation in Underwritten Offerings. No Person may --------------------------------------- participate in any underwritten offering hereunder unless such Person (i) agrees to sell such Person's securities on the basis provided in any underwriting arrangements approved, subject to the terms and conditions hereof, by the Company and the holders of a majority of the Registrable Securities to be included in such underwritten offering and the Initiating Holders, if applicable, and (ii) completes and executes all questionnaires, indemnities, underwriting agreements and other documents (other than powers of attorney) required under the terms of such underwriting arrangements. Notwithstanding the foregoing, no underwriting agreement (or other agreement in connection with such offering) shall require any holder of Registrable Securities to make any representations or warranties to or agreements with the Company or the underwriters other than representations and warranties regarding such holder, such holder's Registrable Securities and such holder's intended method or methods of distribution and any other representation required by law, or to make any agreements with the Company or the underwriters with respect to indemnification of any Person or the contribution obligations of any Person that would impose any obligation which is broader than the indemnity furnished by such holder pursuant to the provisions of section 2.6. 2.5 Preparation; Reasonable Investigation. In connection with ------------------------------------- the preparation and filing of each registration statement under the Securities Act pursuant to this Agreement, the Company will give the holders of Registrable Securities registered under such registration statement, their underwriters, if any, and their respective counsel and accountants, the opportunity to participate in the preparation of such registration statement, each prospectus included therein or filed with the Commission, and each amendment thereof or supplement thereto, and will give each of them such reasonable access during normal business hours to its books, records, and properties, and cause the Company's officers, employees and the independent public accountants who have certified its financial statements to supply all information reasonably requested by such -14- holders' and such underwriters' respective counsel, to conduct a reasonable investigation within the meaning of the Securities Act. 2.6 Indemnification. --------------- (a) Indemnification by the Company. In the event of any ------------------------------ registration of any securities of the Company under the Securities Act pursuant to section 2.1 or 2.2, the Company will, and hereby does agree to, indemnify and hold harmless the holder of any Registrable Securities covered by such registration statement and its partners, if any, its and their respective directors, officers, partners, agents and Affiliates, each other Person who participates as an underwriter in the offering or sale of such securities and each other Person, if any, who controls such holder or any such underwriter within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which such holder or partner thereof or any such director or officer or partner or agent or Affiliate or underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Securities Act, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Company will reimburse such holder, its respective partners and each such director, officer, partner, agent, Affiliate, underwriter and controlling person for any legal or any other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, liability, action or proceeding, provided, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity with written information furnished to the Company through an instrument duly executed by such holder, specifically stating that it is for use in the preparation thereof. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such holder or partner thereof or any such director, officer, partner, agent, Affiliate, underwriter or controlling person and shall survive the transfer of such securities by such holder. The indemnity agreement contained in this section 2.6 shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, action or proceeding if such settlement is effected without the consent of the Company, which consent shall not be unreasonably withheld. -15- (b) Indemnification by the Sellers. The Company may require, as ------------------------------ a condition to including any Registrable Securities in any registration statement filed pursuant to section 2.3, that the Company shall have received an undertaking reasonably satisfactory to it from the prospective seller of such Registrable Securities, to indemnify severally, not jointly and severally, and hold harmless (in the same manner and to the same extent as set forth in subsection (a) of this section 2.6) the Company, each director of the Company, each officer of the Company and each other person, if any, who controls the Company within the meaning of the Securities Act, with respect to any statement or alleged statement in or omission or alleged omission from such registration statement, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, if such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by the prospective seller of the Registrable Securities through an instrument duly executed by such seller specifically stating that it is for use in the preparation of such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement. Any such indemnity shall remain in full force and effect, regardless of any investigation made by or on behalf of the Company or any such director, officer or controlling person and shall survive the transfer of such securities by such seller. The indemnity agreement provided for in this section 2.6(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, action or proceeding if such settlement is effected without the consent of such seller (which consent shall not be unreasonably withheld). The parties hereto hereby acknowledge and agree that, unless otherwise expressly agreed to in writing by holders of Registrable Securities to the contrary, for all purposes of this Agreement the only information furnished or to be furnished to the Company for use in any registration statement, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto are statements specifically relating to (i) the beneficial ownership of shares of Common Stock by such holders and its Affiliates, (ii) the name and address of such holder and (iii) the method or methods of distribution of such holders. The indemnity provided for under this section 2.6(b) shall be limited in amount to the net amount of proceeds actually received by such seller from the sale of Registrable Securities pursuant to such registration statement. (c) Notices of Claims, etc. Promptly after receipt by an ---------------------- indemnified party of notice of the commencement of any action or proceeding involving a claim referred to in the preceding subsections of this section 2.6, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action, provided that the failure of any indemnified party to give notice -------- as provided herein shall not relieve the indemnifying party of its obligations under the preceding subsections of this section 2.6, except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. In case any such action is brought against an indemnified party, unless in such indemnified party's reasonable judgment a conflict of interest between such -16- indemnified and indemnifying parties may exist in respect of such claim, the indemnifying party shall be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified, to the extent that the indemnifying party may wish, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the consent of the indemnified party, consent to entry of any judgment or enter into any settlement of any such action which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability, or a covenant not to sue, in respect to such claim or litigation. No indemnified party shall consent to entry of any judgment or enter into any settlement of any such action the defense of which has been assumed by an indemnifying party without the consent of such indemnifying party, which consent shall not be unreasonably withheld. (d) Indemnification Payments. The indemnification required by ------------------------ this section 2.6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred. (e) Contribution. If the indemnification provided for in the ------------ preceding subsections of this section 2.6 is unavailable to an indemnified party in respect of any expense, loss, claim, damage or liability referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such expense, loss, claim, damage or liability in such proportion as is appropriate to reflect the relative benefits and the relative fault of the Company on the one hand and the holder or underwriter, as the case may be, on the other in connection with the distribution of the Registrable Securities and the statements or omissions which result in any expense, loss, damage or liability, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand and of the holder or underwriter, as the case may be, on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission to state a material fact relates to information supplied by the Company, by the holder or by the underwriter and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the holders of Registrable Securities agree that it would not be just and equitable if contribution pursuant to this subsection (e) were determined by pro rata allocation (even if the holders and any underwriters --- ---- were treated as one entity for such purpose) or by any other method of allocation that does not take account of the -17- equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth in the preceding sentence and subsection (c) of this section 2.6, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (e), no holder of Registrable Securities or underwriter shall be required to contribute any amount in excess of the amount by which (i) in the case of any such holder the net proceeds actually received by such holder from the sale of Registrable Securities or (ii) in the case of an underwriter, the total price at which the Registrable Securities purchased by it and distributed to the public were offered to the public exceeds, in any such case, the amount of any damages that such holder or underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. No party shall be liable for contribution under this section 2.6 except to the extent and under such circumstances as such party would have been liable to indemnify under this section 2.6 if such indemnification were enforceable under applicable law. 2.7 Limitations on Registrations of Registrable Securities. The ------------------------------------------------------ Company shall not be required to effect any registration of Registrable Securities pursuant to section 2.1 or 2.2 hereof (other than with respect to a registration pursuant to section 2.1 of Registrable Securities of the Initiating Holders) if it shall deliver (i) to the requesting holder of Registrable Securities an opinion of counsel (which opinion and counsel shall be reasonably satisfactory to the Initiating Holders, or other requesting holder of Registrable Securities, if applicable) to the effect that all Registrable Securities held by such Initiating Holders, or other requesting holder of Registrable Securities, if applicable, may be sold immediately in the public market without registration under the Securities Act and any applicable state securities laws and (ii) to the Company's stock transfer agent a letter of instruction removing any stop order and restrictive legends on such Registrable Securities. 3. Definitions. As used herein, unless the context otherwise ----------- requires, the following terms have the following respective meanings. Affiliate: As defined in Rule 12b-2 promulgated under the --------- Exchange Act. Beneficially Own or Beneficial Ownership: With respect to any ----------------- -------------------- securities shall mean having "beneficial ownership" of such securities (as determined pursuant to Rule 13d-3 under the Exchange -18- Act), including pursuant to any agreement, arrangement or understanding, whether or not in writing. Without duplicative counting of the same securities by the same holder, securities Beneficially Owned by a person shall include securities Beneficially Owned by all Affiliates of such Person and all other Persons with whom such person would constitute a "group" within the meaning of Section 13 (d) of the Exchange Act and the rules promulgated thereunder. Commission: The Securities and Exchange Commission or any other ---------- Federal agency at the time administering the Securities Act. Common Stock: As defined in section 1. ------------ Company: As defined in the introductory paragraph of this ------- Agreement. Delay Period: As defined in section 2.1(g). ------------ Demand Request: As defined in section 2.1(a). -------------- Effective Time: As defined in the Merger Agreement. -------------- Exchange Act: The Securities Exchange Act of 1934, or any ------------ similar Federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. Reference to a particular section of the Securities Exchange Act of 1934 shall include a reference to the comparable Section, if any, of any such similar federal statute. Initiating Holders: Any holder or holders of not less than 50% ------------------ of the aggregate number of Registrable Securities held by all holders of Registrable Securities. Merger Agreement: As defined in section 1. ---------------- Person: A corporation, an association, a partnership, an ------ organization, business, an individual, a governmental or political subdivision thereof or a governmental agency. Registrable Securities: The Common Stock issued pursuant to the ---------------------- transactions contemplated by the Merger Agreement and any securities issued or issuable with respect to any Common Stock by way of stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or -19- other reorganization or otherwise. As to any particular Registrable Securities, once issued, such securities shall cease to be Registrable Securities when (a) a registration statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities have been disposed of in accordance with such registration statement, (b) they shall have been distributed to the public pursuant to Rule 144 (or any successor provision) under the Securities Act, (c) all of the Registrable Securities held by such holder shall be eligible for disposition under Rule 144, or (d) they shall have ceased to be outstanding. Registration Expenses: All expenses incident to the Company's --------------------- performance of or compliance with section 2, including, without limitation, all registration, filing and NASD fees, all stock exchange listing fees, all fees and expenses of complying with securities or blue sky laws, all word processing, duplicating and printing expenses, messenger and delivery expenses, the fees and disbursements of counsel for the Company and of its independent public accountants, including the expenses of any special audits or "cold comfort" letters required by or incident to such performance and compliance, and any fees and disbursements of underwriters customarily paid by issuers or sellers or securities, but excluding underwriting discounts and commissions and transfer taxes, if any. Securities Act: The Securities Act of 1933, or any similar -------------- Federal statute, and the rules and regulations of the Commission thereunder, all as of the same shall be in effect at the time. References to a particular section of the Securities Act of 1933 shall include a reference to the comparable Section, if any, of any such similar Federal statute. Transfer: A transfer, sale, pledge, hypothecation, encumbrance, -------- assignment or other conveyance or disposition except an assignment by operation of law. 4. Rule 144. The Company shall timely file the reports required to -------- be filed by it under the Securities Act and the Exchange Act (including but not limited to the reports under sections 13 and 15(d) of the Exchange Act referred to in subparagraph (c) of Rule 144 adopted by the Commission under the Securities Act) and the rules and regulations adopted by the Commission thereunder and will take such further action as any holder of Registrable Securities may reasonably request, all to the extent required from time to time to enable such holder to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144 under the Securities Act, as such Rule may be amended from time to time, or (b) any -20- similar rule or regulation hereafter adopted by the Commission. Upon the request of any holder of Registrable Securities, the Company will (a) deliver to such holder a written statement as to whether it has complied with the requirements of this section 4 or (b) take such action as is necessary to allow transfer of such Registrable Securities in accordance with the provisions of Rule 144(k) (or any successor provision) under the Securities Act, including without limitation, if necessary, the issuance of new certificates for such Registrable Securities bearing a legend restricting further transfer. 5. Amendments and Waivers. This Agreement may be amended and the ---------------------- Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company shall have obtained the written consent to such amendment, action or omission to act, of the holder or holders of more than 50% of the shares of Registrable Securities and in the case of any such amendment, action or omission to act in respect of the first sentence of section 4, the written consent of each holder affected thereby. Each holder of any Registrable Securities at the time or thereafter outstanding shall be bound by any consent authorized by this section 5, whether or not such Registrable Securities shall have been marked to indicate such consent. 6. Nominees for Beneficial Owners. In the event that any ------------------------------ Registrable Securities are held by a nominee for the beneficial owner thereof, the beneficial owner thereof may, at its election, be treated as the holder of such Registrable Securities for purposes of any request or other action by any holder or holders of Registrable Securities pursuant to this Agreement or any determination of any number or percentage of shares of Registrable Securities held by any holder or holders of Registrable Securities contemplated by this Agreement. If the beneficial owner of any Registrable Securities so elects, the Company may require assurances reasonably satisfactory to it of such owner's beneficial ownership of such Registrable Securities. 7. Notices. Except as otherwise provided in this Agreement, all ------- notices, requests and other communications to any Person provided for hereunder shall be in writing and shall be given to such Person (a) in the case of any Stockholder, addressed to such party as provided in the Merger Agreement, or at such other address as such party shall have furnished to the Company in writing, (b) in the case of any other holder of Registrable Securities, at the address that such holder shall have furnished to the Company in writing, or, until any such other holder so furnishes to the Company an address, then to and at the address of the last holder of such Registrable Securities who has furnished an address to the Company or (c) in the case of the Company, at McKesson Corporation, One Post Street, San Francisco, California 94104, to the attention of its General Counsel, or at such other address, or to the attention of such other officer, as the Company shall have furnished to each holder of Registrable Securities at the time outstanding. Each such notice, request or other communication shall be effective (i) if given by mail, on the second business day after such communication is deposited in the -21- mail with first class postage prepaid, addressed as aforesaid or (ii) if given by any other means (including without limitation, by air courier), when delivered at the address specified above, provided that any such notice, request -------- or communication to any holder of Registrable Securities shall not be effective until received. 8. Assignment. This Agreement shall be binding upon and inure to ---------- the benefit of and be enforceable by the parties hereto and their respective successors and assigns. No holder of Registrable Securities shall assign this Agreement or any rights hereunder without the prior written consent of the Company (which consent may be withheld for any reason in the sole discretion of the Company), except that this Agreement and any rights hereunder may be assigned by operation of law and may be assigned to any Affiliate of any Stockholder. Notwithstanding the foregoing, the provisions of this Agreement may be assigned by any holder of Registrable Securities (the "Assignor") to a subsequent holder (the "Assignee") if (i) the Assignor assigned to the Assignee all of his, her or its Registrable Securities and (ii) such Assignee did not acquire such Registrable Securities in a registered public offering of such Registrable Securities or pursuant to a sale made in accordance with the provisions of Rule 144 under the Act or (directly or indirectly) from a holder who acquired the Registrable Securities through such a public offering or sale. 9. Descriptive Headings. The descriptive headings of the several -------------------- sections and paragraphs of this Agreement are inserted for reference only and shall not limit or otherwise affect the meaning hereof. 10. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ------------- ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAWS OF THE STATE OF DELAWARE WITHOUT REFERENCE TO THE PRINCIPLES OF CONFLICTS OF LAWS. 11. Counterparts. This Agreement may be executed simultaneously in ------------ any number of counterparts, each of which shall be deemed an original, but all such counterparts shall together constitute one and the same instrument. 12. Entire Agreement. This Agreement embodies the entire agreement ---------------- and understanding between the Company and each other party hereto relating to the subject matter hereof and supersedes all prior agreements and understandings relating to such subject matter. 13. Severability. If any provision of this Agreement, or the ------------ application of such provisions to any Person or circumstance, shall be held invalid, the remainder of this Agreement, or the application of such provisions to Persons or circumstances other than those to which it is held invalid, shall not be affected thereby. -22- 14. Disposition of Shares. In the event of any public sales or --------------------- distribution of the Registrable Securities effected pursuant to section 2 of this Agreement, the Stockholders shall use their reasonable best efforts to effect, or cause to be effected, such public sale or distribution, so that, without the prior written consent of the Company (which shall not be unreasonably withheld), no participant or purchaser would Beneficially Own in the aggregate 3% or more of all outstanding Common Stock of the Company. The holders of Registrable Securities shall use their respective reasonable efforts in cooperation with the Company to effect as broad a disposition in any such public sale or distribution as is reasonably practicable. -23- EXHIBIT 99.2 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their respective officers thereunto duly authorized as of the date first above written. McKESSON CORPORATION By:_________________________________________ Name: Title: STOCKHOLDERS: The James R. Baker, Sr. & Mary Parker Baker Trust for the Benefit of the Baker Grandchildren By:_________________________________________ Its:________________________________________ Baker Family Limited Partnership I By:_________________________________________ Its:________________________________________ ____________________________________________ Mary P. Baker Rusty Baker Family Limited Partnership By:_________________________________________ Its:________________________________________ ____________________________________________ James R. Baker, Jr. ____________________________________________ Diana Baker Foshee -24- Baker Family Trust for the Benefit of Diana Baker White By:_________________________________________ James R. Baker, Jr., Trustee ____________________________________________ Sharon Baker White Baker Family Trust for the Benefit of Sharon Baker Petrovsky By:_________________________________________ James R. Baker, Jr., Trustee Baker Family Trust for the Benefit of Sharon Baker White By:_________________________________________ James R. Baker, Jr., Trustee ____________________________________________ Brian Jefferson Hurst ____________________________________________ Janelle Hurst Holstrom ____________________________________________ Walter Pearson ____________________________________________ Mrs. Lena Smith ____________________________________________ Rex Ponthie -25- EX-99.3 30 ANNUAL REPORT ON FORM 11-K EXHIBIT 99.3 As Filed with the Securities and Exchange Commission on June 29, 1999. File No. 001-13252 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ___________________ FORM 11-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1998 OR [_] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from ____ to ____ A. Full title of the plan and address of the plan, if different from that of the issuer named below: HBO & COMPANY PROFIT SHARING AND SAVINGS PLAN B. Name of issuer of the securities held pursuant to the plan and the address of its principal executive office: HBO & Company 5995 Windward Parkway Alpharetta, Georgia 30005 (404) 338-6000 Independent Auditors' Report ---------------------------- Administrative Committee HBO & Company Profit Sharing and Savings Plan We have audited the accompanying statements of net assets available for benefits of HBO & Company Profit Sharing and Savings Plan as of December 31, 1998 and 1997, and the related statements of changes in net assets available for benefits for the years then ended. These financial statements are the responsibility of the Plan's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets available for benefits of HBO & Company Profit Sharing and Savings Plan at December 31, 1998 and 1997, and the changes in net assets available for benefits for the years then ended, in conformity with generally accepted accounting principles. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedules are presented for the purpose of additional analysis and are not a required part of the basic financial statements but are supplementary information required by the Securities and Exchange Commission and the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. The supplemental schedules have been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. Snyder, Camp, Stewart & Co., LLP Atlanta, Georgia June 7, 1999 HBO & COMPANY PROFIT SHARING AND SAVINGS PLAN Financial Statements with Supplementary Schedules December 31, 1998 and 1997 HBO & COMPANY PROFIT SHARING AND SAVINGS PLAN Statements of Net Assets Available for Benefits December 31, 1998 and 1997
1998 1997 ---- ---- Assets: Investments, at fair value: HBO & Company Common Stock Fund $ 87,974,789 60,874,776 Fidelity Magellan Fund 47,569,294 32,119,878 Fidelity Growth and Income Fund 49,911,771 34,011,540 Fidelity Retirement Money Market Fund 9,838,027 7,894,849 Fidelity Asset Manager Fund 7,078,608 5,573,548 Fidelity Managed Income Fund 2,917,735 2,182,337 Fidelity Intermediate Bond Fund 3,781,383 2,507,457 Fidelity International Growth and Income Fund 2,778,598 2,418,736 Fidelity Blue Chip Growth Fund 19,543,406 9,852,141 Fidelity Equity Income II Fund 11,525,386 6,884,663 Janus Balanced Fund 936,587 - Templeton Foreign A Fund 835,527 - ------------ ----------- Total investments 244,691,111 164,319,925 Contributions receivable from employer 562,078 461,898 Contributions receivable from participants 1,276,770 1,047,924 Loans receivable from participants 3,066,897 2,622,581 Accrued investment income 61,332 25,365 ------------ ----------- Total assets 249,658,188 168,477,693 Liabilities - - ------------ ----------- Net assets available for benefits $249,658,188 168,477,693 ============ ===========
See accompanying notes to financial statements. HBO & COMPANY PROFIT SHARING AND SAVINGS PLAN Statements of Changes in Net Assets Available for Benefits For the Years Ended December 31, 1998 and 1997
1998 1997 ---- ---- Additions to net assets attributed to: Investment income $ 8,924,038 6,030,961 Unrealized appreciation (depreciation) in fair value of investments 26,778,238 29,863,816 Realized gain (loss) on sale of investments 8,854,144 5,923,294 ------------ ----------- Net increase from investment activities 44,556,420 41,818,071 Contributions: Employer 7,877,002 5,800,893 Participants 42,225,921 18,054,177 Interest income on loans to participants 229,533 185,273 ------------ ----------- Total additions 94,888,876 65,858,414 Deductions from net assets attributed to: Benefits paid directly to participants (13,692,519) (8,251,092) Administrative fees (15,862) (18,778) ------------ ----------- Net increase 81,180,495 57,588,544 Net assets available for benefits: Beginning of year 168,477,693 110,889,149 ------------ ----------- End of year $249,658,188 168,477,693 ============ ===========
See accompanying notes to financial statements. HBO & COMPANY PROFIT SHARING AND SAVINGS PLAN Notes to Financial Statements December 31, 1998 and 1997 (1) Description of Plan ------------------- The following description of HBO & Company Profit Sharing and Savings Plan (the "Plan") provides only general information. The Plan document should be referred to for a more complete description of the Plan's provisions. The Plan is a defined contribution plan which covers all employees of HBO & Company and HBO & Company of Georgia (jointly referred to herein as the "Company") who have completed six months of service (12 months for pre-1995 plan years) and have attained age 21 as of a Plan entry date. The Plan's entry dates are January 1, April 1, July 1, and October 1. Each eligible employee can elect to defer a percentage of pretax compensation, as defined, of from one to a maximum of fifteen percent and may contribute such amounts to the Plan. Such deferral elections must be made in whole percentages. If necessary, the salary deferral contributions allowed by a participant will be reduced by the Plan's Administrative Committee (see note 3) so that such contributions do not cause the Plan to be discriminatory or exceed the limitations of the Internal Revenue Code. The Company may also contribute to the Plan at the election of the Board of Directors through matching contributions and/or discretionary contributions. Each participant's share of Company discretionary contributions is related to the participant's compensation, as defined. Company contributions may not exceed the maximum allowable as a deduction as defined by the Internal Revenue Code. During 1998 and 1997, the Company contributed $.75 for each $1 contributed by employees; however, this Company matching contribution was only applicable for employee contributions of up to 4% of pretax compensation. No Company discretionary contributions were authorized for the years ended December 31, 1998 and 1997. Participants are 100% vested in their pretax compensation contributions and earnings thereon at all times. Company matching and discretionary contributions credited to a participant's account and earnings thereon vest on a graded basis. A participant becomes 20% vested in his/her Company account after one year of service and an additional 20% becomes vested in each of the following four years until a participant fully vests after five years of service (effective January 1, 1995). Prior to January 1, 1995, a participant became 20% vested in his/her Company account after three years of service and an additional 20% vested in each of the following four years until a participant fully vested after seven years of service. Further, a participant is automatically 100% vested without regard to years of service in the event of termination due to death, disability, or attainment of age 65. Allocation of Plan earnings/losses is based on a participant's account balance in the respective fund. Forfeitures of terminated participants' nonvested accounts are allocated among the remaining Plan participants at the end of the Plan year as if the forfeitures are additional matching contributions, as designated by the Administrative Committee. At December 31, 1998, forfeited nonvested accounts amounted to $378,133. These accounts may be used to reduce future employer contributions. Prior to July 1, 1998, participants had the option to direct the investment of their accounts between ten investment funds: the Fidelity Retirement Money Market Fund, the Fidelity Managed Income Fund, the Fidelity Intermediate Bond Fund, the Fidelity Growth and Income Fund, the Fidelity Magellan Fund, the Fidelity Asset Manager Fund, the Fidelity International Growth and Income Fund, the Fidelity Blue Chip Growth Fund, the Fidelity Equity Income II Fund and HBO & Company Common Stock Fund. On July 1, 1998 contributions to the Fidelity International Growth and Income Fund were discontinued and two additional funds, the Janus Balanced Fund and the Templeton Foreign A Fund, were added to the Plan. HBO & COMPANY PROFIT SHARING AND SAVINGS PLAN Notes to Financial Statements, Continued December 31, 1998 and 1997 (1) Description of Plan, Continued ------------------------------ Participants may borrow from their fund accounts a minimum of $1,000 up to a maximum equal to the lesser of $50,000 or 50% of their vested account balance. Loan terms range up to 5 years, except that loan terms for the purchase of a primary residence are at the discretion of the Administrative Committee. The loans are secured by the balance in the participant's account and bear interest at a rate determined by the Administrative Committee. Principal and interest is paid ratably through monthly payroll deductions. Upon termination, participants under age 65 with account balances totaling more than $5,000 may elect to (1) delay the distribution of accounts or (2) receive vested benefits generally in a lump sum distribution. The full value of benefits (regardless of amount) is payable upon normal or postponed retirement or to beneficiaries upon death of the participant. Participants with balances totaling less than $5,000 or on total or permanent disability receive a lump sum distribution of vested benefits. Under a provision of the Plan, the Company, through actions of its Board of Directors, reserves the right to terminate the Plan. If the Plan is terminated, each participant becomes fully vested as of the termination date. (2) Summary of Significant Accounting Policies ------------------------------------------ The accounting records of the Plan are maintained on the accrual basis. HBO & Company Common Stock and investment funds held for investment by the Plan are stated at quoted market values from independent published sources. Loans receivable from participants are stated at cost which approximates fair value. The change in the difference between current value and the cost of the investments is reflected in the statement of changes in net assets available for benefits as unrealized appreciation (depreciation) in fair value of investments. Realized gain (loss) on sale of investments is the difference between the proceeds received and the average cost of investments sold. Benefits are recorded when paid. The preparation of financial statements in conformity with generally accepted accounting principles requires the Plan administrator to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results may differ from those estimates. (3) Administration -------------- The Company's Employee Benefits Administrative Committee (the "Administrative Committee") is the Plan administrator. Fidelity is the Trustee with custodial responsibility for the Plan's assets. The Plan is liable for all administrative expenses not paid by the Company. At the direction of the Administrative Committee, the Plan's administrative expenses for 1998 and 1997 were paid by the Company. HBO & COMPANY PROFIT SHARING AND SAVINGS PLAN Notes to Financial Statements, Continued December 31, 1998 and 1997 (4) Income Tax Status ----------------- The Plan is intended to be qualified under the Internal Revenue Code (the "IRC"). A favorable ruling was obtained from the IRS as to the tax-exempt status of the Plan in May 1997. (5) Transactions with Parties In Interest ------------------------------------- During the year ended December 31, 1998, the Plan purchased 2,103,273 shares of the Common Stock of HBO & Company, the Plan sponsor, for $30,301,298, and sold 304,892 shares of the Common Stock of HBO & Company for $10,529,746 in accordance with the terms of the Plan. During the year ended December 31, 1997, the Plan purchased 780,292 shares of the Common Stock of HBO & Company, the Plan sponsor, for $8,980,274, and sold 138,013 shares of the Common Stock of HBO & Company for $8,449,660 in accordance with the terms of the Plan. (6) Reconciliation of Financial Statements to Form 5500 --------------------------------------------------- The following is a reconciliation of net assets available for benefits per the financial statements at December 31, 1998 and 1997 to Form 5500:
1998 1997 ---- ---- Net assets available for benefits per the financial statements $249,658,188 168,477,693 Amounts allocated to withdrawing participants - - ------------ ----------- Net assets available for benefits per the Form 5500 $249,658,188 168,477,693 ============ ===========
The following is a reconciliation of benefits paid to participants per the financial statements for the year ended December 31, 1998 to Form 5500: Benefits paid to participants per the financial statements $ 13,692,519 Add: Amounts allocated to withdrawing participants at December 31, 1998 - Less: Amounts allocated to withdrawing participants at December 31, 1997 - ------------ Benefits paid to participants per Form 5500 $ 13,692,519 ============
Amounts allocated to withdrawing participants on the Form 5500 include benefit claims that have been processed and approved for payment prior to December 31, but not yet paid as of that date. (7) Investment Funds ---------------- The Plan provides for separate investment funds for participants as described in note 1 to the financial statements. The following pages summarize the net assets available for benefits and the changes in net assets available for benefits for each fund for the years ended December 31, 1998 and 1997. HBO & COMPANY PROFIT SHARING AND SAVINGS PLAN Net Assets Available for Benefits by Investment Program
Fidelity HBO & Fidelity Fidelity Fidelity Fidelity Fidelity Int'l Company Fidelity Growth & Retirement Asset Managed Intermediate Growth Common Magellan Income Money Mkt Manager Income Bond & Income December 31, 1998 Stock Fund Fund Fund Fund Fund Fund Fund - ----------------- ----------- ---------- ---------- ---------- --------- ------------ --------- --------- Assets: Investments at fair value $87,974,789 47,569,294 49,911,771 9,838,027 7,078,608 2,917,735 3,781,383 2,778,598 Contributions receivable from employer company 119,012 102,362 109,905 39,204 20,254 8,715 15,431 - Contributions receivable from participants 251,272 231,916 260,624 67,797 50,755 18,958 37,268 - Loans receivable from participants 69,832 610,242 1,088,987 618,142 334,402 110,641 156,559 6,411 Accrued investment income 61,332 - - - - - - - ----------- ---------- ---------- ---------- --------- --------- --------- --------- Total Assets 88,476,237 48,513,814 51,371,287 10,563,170 7,484,019 3,056,049 3,990,641 2,785,009 ----------- ---------- ---------- ---------- --------- --------- --------- --------- Liabilities - - - - - - - - ----------- ---------- ---------- ---------- --------- --------- --------- --------- Net assets available for benefits $88,476,237 48,513,814 51,371,287 10,563,170 7,484,019 3,056,049 3,990,641 2,785,009 =========== ========== ========== ========== ========= ========= ========= ========= December 31, 1997 - ----------------- Assets: Investments at fair value $60,874,776 32,119,878 34,011,540 7,894,849 5,573,548 2,182,337 2,507,457 2,418,736 Contributions receivable from employer company 99,573 86,445 98,263 26,053 19,715 9,414 11,416 18,768 Contributions receivable from participants 198,607 192,927 245,976 52,396 47,235 21,187 29,812 39,702 Loans receivable from participants 159,570 572,707 780,128 597,244 246,510 100,566 95,503 679 Accrued investment income 25,365 - - - - - - - ----------- ---------- ---------- ---------- --------- --------- --------- --------- Total assets 61,357,891 32,971,957 35,135,907 8,570,542 5,887,008 2,313,504 2,644,188 2,477,885 ----------- ---------- ---------- ---------- --------- --------- --------- --------- Liabilities - - - - - - - - ----------- ---------- ---------- ---------- --------- --------- --------- --------- Net assets available for benefits $61,357,891 32,971,957 35,135,907 8,570,542 5,887,008 2,313,504 2,644,188 2,477,885 =========== ========== ========== ========== ========= ========= ========= ========= Fidelity Fidelity Blue Chip Equity Janus Templeton Growth Income II Balanced Foreign A December 31, 1998 Fund Fund Fund Fund Total - ----------------- ---------- ---------- ---------- --------- ----------- Assets: Investments at fair value 19,543,406 11,525,386 936,587 835,527 244,691,111 Contributions receivable from employer company 79,572 42,392 10,492 14,739 562,078 Contributions receivable from participants 193,394 103,119 27,427 34,240 1,276,770 Loans receivable from participants 34,652 56,170 (18,019) (1,122) 3,066,897 Accrued investment income - - - - 61,332 ---------- ---------- --------- ------- ----------- Total Assets 19,851,024 11,727,067 956,487 883,384 249,658,188 ---------- ---------- --------- ------- ----------- Liabilities - - - - - ---------- ---------- --------- ------- ----------- Net assets available for benefits 19,851,024 11,727,067 956,487 883,384 249,658,188 ========== ========== ========= ======= =========== December 31, 1997 - ----------------- Assets: Investments at fair value 9,852,141 6,884,663 - - 164,319,925 Contributions receivable from employer company 54,478 37,773 - - 461,898 Contributions receivable from participants 130,822 89,260 - - 1,047,924 Loans receivable from participants 61,168 8,506 - - 2,622,581 Accrued investment income - - - - 25,365 ---------- ---------- --------- ------- ----------- Total assets 10,098,609 7,020,202 - - 168,477,693 ---------- ---------- --------- ------- ----------- Liabilities - - - - - ---------- ---------- --------- ------- ----------- Net assets available for benefits 10,098,609 7,020,202 - - 168,477,693 ========== ========== ========= ======= ===========
HBO & COMPANY PROFIT SHARING AND SAVINGS PLAN Changes in Net Assets Available for Benefits by Investment Program For the Year Ended December 31, 1998
Fidelity HBO & Fidelity Fidelity Fidelity Fidelity Int'l Company Fidelity Growth & Retirement Asset Managed Fidelity Growth Common Magellan Income Money Mkt. Manager Income Intermediate & Income Stock Fund Fund Fund Fund Fund Bond Fund Fund ------------ ----------- ----------- ----------- ---------- ---------- ------------- ---------- Additions to net assets attributed to: Investment income $ 215,968 2,156,833 2,586,663 460,071 1,273,855 146,888 192,643 93,814 Unrealized appreciation (depreciation) in fair value of investments 7,328,461 8,691,378 6,711,851 - (442,694) - 22,920 99,147 Realized gain (loss) on sale of investments 5,603,218 903,176 1,442,500 - 152,745 - 3,743 85,260 ----------- ---------- ---------- ---------- --------- --------- --------- --------- Net increase from investment activities 13,147,647 11,751,387 10,741,014 460,071 983,906 146,888 219,306 278,221 Contributions: Employer 1,797,390 1,487,680 1,671,212 307,090 307,994 133,731 189,285 135,327 Participants 15,007,522 5,654,353 7,085,623 2,030,218 1,229,144 516,594 789,507 809,572 Interest income on loans to participants 71,484 43,695 46,120 15,698 7,913 3,640 5,332 2,459 ----------- ---------- ---------- ---------- --------- --------- --------- --------- Total additions 30,024,043 18,937,115 19,543,969 2,813,077 2,528,957 800,853 1,203,430 1,225,579 Deductions from net assets attributed to: Benefits expense (4,049,188) (2,356,445) (2,544,862) (1,253,414) (415,349) (541,306) (268,217) (404,534) Administrative expense (525) (2,850) (4,333) (2,176) (1,275) (823) (1,125) (75) Interfund transfers 1,144,016 (1,035,963) (759,394) 435,141 (515,322) 483,821 412,365 (513,846) ----------- ---------- ---------- ---------- --------- --------- --------- --------- Net increase 27,118,346 15,541,857 16,235,380 1,992,628 1,597,011 742,545 1,346,453 307,124 Net assets available for benefits: Beginning of year 61,357,891 32,971,957 35,135,907 8,570,542 5,887,008 2,313,504 2,644,188 2,477,885 ----------- ---------- ---------- ---------- --------- --------- --------- --------- End of year $88,476,237 48,513,814 51,371,287 10,563,170 7,484,019 3,056,049 3,990,641 2,785,009 =========== ========== ========== ========== ========= ========= ========= ========= Fidelity Fidelity Blue Chip Equity Janus Templeton Growth Income II Balanced Foreign A Fund Fund Fund Fund Total ----------- ----------- --------- ---------- ------------ Additions to net assets attributed to: Investment income 708,380 1,004,202 13,315 71,406 8,924,038 Unrealized appreciation (depreciation) in fair value of investments 3,483,519 819,034 98,992 (34,370) 26,778,238 Realized gain (loss) on sale of investments 456,570 209,850 (580) (2,338) 8,854,144 ---------- ---------- ------- ------- ----------- Net increase from investment activities 4,648,469 2,033,086 111,727 34,698 44,556,420 Contributions: Employer 1,056,445 623,203 33,613 134,032 7,877,002 Participants 5,090,433 3,070,897 593,810 348,248 42,225,921 Interest income on loans to participants 20,629 9,546 625 2,392 229,533 ---------- ---------- ------- ------- ----------- Total additions 10,815,976 5,736,732 739,775 519,370 94,888,876 Deductions from net assets attributed to: Benefits expense (1,285,370) (565,922) (62) (7,850) (13,692,519) Administrative expense (1,030) (1,650) - - (15,862) Interfund transfers 222,839 (462,295) 216,774 371,864 - ---------- ---------- ------- ------- ----------- Net increase 9,752,415 4,706,865 956,487 883,384 81,180,495 Net assets available for benefits: Beginning of year 10,098,609 7,020,202 - - 168,477,693 ---------- ---------- ------- ------- ----------- End of year 19,851,024 11,727,067 956,487 883,384 249,658,188 ========== ========== ======= ======= ===========
HBO & COMPANY PROFIT SHARING AND SAVINGS PLAN Changes in Net Assets Available for Benefits by Investment Program For the Year Ended December 31, 1997
HBO & Fidelity Fidelity Fidelity Fidelity Company Fidelity Growth & Retirement Asset Managed Common Magellan Income Money Mkt Manager Income Stock Fund Fund Fund Fund Fund ----------- ---------- ---------- ---------- --------- --------- Additions to net assets attributed to: Investment income $ 74,474 2,014,711 1,517,739 393,012 476,161 123,686 Unrealized appreciation (depreciation) in fair value of investments 19,095,278 3,921,248 4,922,587 - 375,918 - Realized gain (loss) on sale of investments 4,083,091 440,334 944,504 - 91,381 - ----------- ---------- ---------- --------- --------- --------- Net increase from investment activities 23,252,843 6,376,293 7,384,830 393,012 943,460 123,686 Contributions: Employer 1,284,216 1,169,345 1,300,979 146,783 277,969 126,223 Participants 3,226,750 3,310,968 4,056,772 1,186,532 888,432 353,540 Interest income on loans to participants 52,447 40,000 35,884 11,275 8,881 5,764 ----------- ---------- ---------- --------- --------- --------- Total additions 27,816,256 10,896,606 12,778,465 1,737,602 2,118,742 609,213 Deductions from net assets attributed to: Benefits expense (1,837,481) (1,419,222) (2,004,556) (961,136) (482,324) (118,830) Administrative expense (3,028) (3,450) (5,775) (2,175) (1,425) (375) Interfund transfers (2,302,522) (463,183) 1,301,163 548,605 (67,154) (856) ----------- --------- --------- --------- --------- --------- Net increase 23,673,225 9,010,751 12,069,297 1,322,896 1,567,839 489,152 Net assets available for benefits: Beginning of year 37,684,666 23,961,206 23,066,610 7,247,646 4,319,169 1,824,352 ----------- ---------- ---------- --------- --------- --------- End of year $61,357,891 32,971,957 35,135,907 8,570,542 5,887,008 2,313,504 =========== ========== ========== ========= ========= ========= Fidelity Fidelity Int'l Fidelity Fidelity Intermediate Growth Blue Chip Equity Bond & Income Growth Income II Fund Fund Fund Fund Total ----------- --------- ---------- --------- ----------- Additions to net assets attributed to: Investment income 137,428 141,226 461,173 691,351 6,030,961 Unrealized appreciation (depreciation) in fair value of investments 26,729 (57,275) 1,124,404 454,927 29,863,816 Realized gain (loss) on sale of investments (2,686) 40,864 191,142 134,664 5,923,294 ----------- --------- ---------- --------- ----------- Net increase from investment activities 161,471 124,815 1,776,719 1,280,942 41,818,071 Contributions: Employer 151,079 215,476 664,495 464,328 5,800,893 Participants 506,630 698,766 2,315,581 1,510,206 18,054,177 Interest income on loans to participants 4,393 2,899 15,119 8,611 185,273 ----------- --------- ---------- --------- ----------- Total additions 823,573 1,041,956 4,771,914 3,264,087 65,858,414 Deductions from net assets attributed to: Benefits expense (163,019) (267,447) (591,898) (405,179) (8,251,092) Administrative expense (975) (150) (675) (750) (18,778) Interfund transfers 124,955 125,918 381,819 351,255 - ----------- --------- ---------- --------- ----------- Net increase 784,534 900,277 4,561,160 3,209,413 57,588,544 Net assets available for benefits: Beginning of year 1,859,654 1,577,608 5,537,449 3,810,789 110,889,149 ----------- --------- ---------- --------- ----------- End of year 2,644,188 2,477,885 10,098,609 7,020,202 168,477,693 =========== ========= ========== ========= ===========
HBO & COMPANY PROFIT SHARING AND SAVINGS PLAN Notes to Financial Statements, Continued December 31, 1998 and 1997 (8) Investments ----------- During 1998 and 1997 the Plan's investments (including investments bought and sold as well as held during the year) appreciated (depreciated) in fair value as follows:
Net Appreciation (Depreciation) Fair Value in Fair Value at End During Year of Year ---------- ------- Year ended December 31, 1998: Fair value as determined by quoted market price: HBO & Company Common Stock Fund $ 12,931,679 87,974,789 Fidelity Magellan Fund 9,594,554 47,569,294 Fidelity Growth and Income Fund 8,154,351 49,911,771 Fidelity Retirement Money Market Fund - 9,838,027 Fidelity Asset Manager Fund (289,949) 7,078,608 Fidelity Managed Income Fund - 2,917,735 Fidelity Intermediate Bond Fund 26,663 3,781,383 Fidelity International Growth and Income Fund 184,407 2,778,598 Fidelity Blue Chip Growth Fund 3,940,089 19,543,406 Fidelity Equity Income II Fund 1,028,884 11,525,386 Janus Balanced Fund 98,412 936,587 Templeton Foreign A Fund (36,708) 835,527 ----------- ----------- $ 35,632,382 244,691,111 =========== ===========
The current value of the HBO & Company Common Stock Fund, Fidelity Magellan Fund, Fidelity Growth and Income Fund and Fidelity Blue Chip Growth Fund held for investment at December 31, 1998 was $87,974,789, $47,569,294, $49,911,771, and $19,543,406, respectively, each of which represents an investment greater than 5% of the Plan's net assets. Year ended December 31, 1997: Fair value as determined by quoted market price: HBO & Company Common Stock Fund $ 23,178,369 60,874,776 Fidelity Magellan Fund 4,361,582 32,119,878 Fidelity Growth and Income Fund 5,867,091 34,011,540 Fidelity Retirement Money Market Fund - 7,894,849 Fidelity Asset Manager Fund 467,299 5,573,548 Fidelity Managed Income Fund - 2,182,337 Fidelity Intermediate Bond Fund 24,043 2,507,457 Fidelity International Growth and Income Fund (16,411) 2,418,736 Fidelity Blue Chip Growth Fund 1,315,546 9,852,141 Fidelity Equity Income II Fund 589,591 6,884,663 ----------- ----------- $ 35,787,110 164,319,925 =========== ===========
HBO & COMPANY PROFIT SHARING AND SAVINGS PLAN Notes to Financial Statements, Continued December 31, 1998 and 1997 (8) Investments, Continued ---------------------- The current value of the HBO & Company Common Stock Fund, Fidelity Magellan Fund, Fidelity Growth and Income Fund and Fidelity Blue Chip Growth Fund held for investment at December 31, 1997 was $60,874,776, $32,119,878, $34,011,540, and $9,852,141, respectively, each of which represents an investment greater than 5% of the Plan's net assets. The realized gain on the sale of investments during the years ended December 31, 1998 and 1997 was determined as follows: 1998 1997 ------------- ------------ Aggregate proceeds $ 37,072,412 27,104,707 Aggregate cost (28,218,268) (21,181,413) ------------ ----------- Realized gain $ 8,854,144 5,923,294 ============ ===========
During 1998 and 1997, the balance of unrealized appreciation (depreciation) in the fair value of investments changed as follows:
Balance, December 31, 1996 $29,926,120 Current unrealized appreciation of investments, net of realized gains (losses) 29,863,816 ----------- Balance, December 31, 1997 59,789,936 Current unrealized appreciation of investments, net of realized gains (losses) 26,778,238 ----------- Balance, December 31, 1998 $86,568,174 ===========
(9) Subsequent Events ----------------- In January 1999, the Company merged with McKesson, Inc. and a decision was made to merge the profit sharing plans of both companies. The plans were merged effective April 1, 1999, forming the McKesson HBOC, Inc. Profit Sharing Investment Plan. In conjunction with the merger, several amendments were made to the Plan provisions, including a change that matching contributions consist entirely of McKesson HBOC, Inc. common stock and a change in Plan eligibility requirements. Subsequent to the Plan's merger, the Plan's investment in the common stock of McKesson HBOC, Inc. had a significant decline in market value. SUPPLEMENTARY INFORMATION HBO & COMPANY PROFIT SHARING AND SAVINGS PLAN FEI # 37-0986839 - Plan #001 Item 27a - Schedule of Assets Held for Investment Purposes December 31, 1998 -----------------
(a) Identity of (e) Current Party Involved (b) Identity of Issue (c) Description (d) Cost Value -------------- ----------------- ----------- ---- ----- Fidelity Investments Shares - -------------------- ------ Fidelity Magellan Fund 393,720 $ 32,441,768 47,569,294 Fidelity Growth & Income Fund 1,088,826 33,731,695 49,911,771 Fidelity Retirement Money Market Fund 9,838,027 9,838,027 9,838,027 Fidelity Asset Manager Fund 407,051 6,907,885 7,078,608 Fidelity Managed Income Fund 2,917,735 2,917,735 2,917,735 Fidelity Intermediate Bond Fund 368,197 3,754,130 3,781,383 Fidelity International Growth & Income Fund 132,884 2,655,951 2,778,598 Fidelity Blue Chip Growth Fund 387,843 14,755,434 19,543,406 Fidelity Equity Income II Fund 384,052 10,056,404 11,525,386 Janus Investments Shares - ----------------- ------ Janus Janus Balanced Fund 47,761 837,595 936,587 Templeton Investments Shares - --------------------- ------ Templeton Templeton Foreign A Fund 99,586 869,897 835,527 ------- ------- 118,766,521 156,716,322 Company Stock Fund - ------------------ * HBO & Company Common Stock Shares ------ 3,066,606 39,356,416 87,974,789 Participant Loans Participant Loans Interest - ----------------- -------- 7-13% - 3,066,897 ---------- ------------ Total investments held 158,122,937 247,758,008 =========== =========== December 31, 1997 ----------------- (a) Identity of (e) Current Party Involved (b) Identity of Issue (c) Description (d) Cost Value - ------------------- ----------------- ----------- ---- ----- Fidelity Investments Shares - -------------------- ------ Fidelity Magellan Fund 337,146 25,683,731 32,119,878 Fidelity Growth & Income Fund 892,691 24,543,314 34,011,540 Fidelity Retirement Money Market Fund 7,894,849 7,894,849 7,894,849 Fidelity Asset Manager Fund 303,736 4,960,130 5,573,548 Fidelity Managed Income Fund 2,182,337 2,182,337 2,182,337 Fidelity Intermediate Bond Fund 246,554 2,503,124 2,507,457 Fidelity International Growth & Income Fund 122,778 2,395,236 2,418,736 Fidelity Blue Chip Growth Fund 249,674 8,547,688 9,852,141 Fidelity Equity Income II Fund 254,893 6,234,715 6,884,663 ----------- ----------- 84,945,124 103,445,149 Company Stock Fund Shares - ------------------ ------ * HBO & Company Common Stock 1,268,225 19,584,864 60,874,776 Interest -------- Participant Loans Participant Loans 6-13% - 2,622,581 - ----------------- ----------- ---------- Total investments held $104,529,988 166,942,506 ============ ===========
*Party in interest. HBO & COMPANY PROFIT SHARING AND SAVINGS PLAN FEI # 37-0986839 - Plan #001 Item 27d - Schedule of Reportable Transactions Transactions or Series of Transactions in Excess of Five Percent of the Current Value of Plan Assets
Number of Cost (a) Identity of (b) Description Number of Shares or (c) Purchase (d) Selling of Party Involved of Assets Transactions Units Price Price Assets -------------- --------- ------------ ----- ----- ----- ------ Category (iii) - A series of transactions in excess of 5% of plan assets: - ------------------------------------------------------------------------ December 31, 1998 - ----------------- HBO & Company Common Stock Purchases 141 2,103,271 $ 24,698,080 $ 24,698,080 Sales 101 304,992 $ 10,529,746 4,926,528 Fidelity Magellan Purchases 220 103,380 10,785,256 10,785,256 Sales 194 46,805 4,930,395 4,027,219 Fidelity Growth & Income Fund Purchases 232 362,941 14,717,497 14,717,497 Sales 204 282,817 6,971,616 5,529,116 Fidelity Retirement Money Mtk Fund Purchases 233 7,163,580 7,163,580 7,163,580 Sales 184 5,215,571 5,215,571 5,215,571 Fidelity Blue Chip Growth Fund Purchases 218 196,995 8,403,792 8,403,792 Sales 174 58,825 2,652,616 2,196,046 December 31, 1997 - ----------------- HBO & Company Common Stock Purchases 136 780,292 8,980,274 8,980,274 Sales 109 138,013 8,449,660 4,366,569 Fidelity Magellan Purchases 209 86,379 7,849,019 7,849,019 Sales 178 38,470 3,417,652 2,977,319 Fidelity Growth & Income Fund Purchases 223 315,512 11,165,320 11,165,320 Sales 174 152,918 5,456,748 4,512,244 Fidelity Retirement Money Mkt Fund Purchases 198 4,512,275 4,512,275 4,512,275 Sales 171 3,268,259 3,268,259 3,268,259 Fidelity Blue Chip Growth Fund Purchases 194 126,275 4,699,054 4,699,054 Sales 138 43,022 1,602,778 1,411,636 (h) Current Value of Assets On (i) Net (a) Identity of Transaction Gain Party Involved Date (Loss) -------------- ---- ----- Category (iii) - A series of transactions in excess of 5% of plan assets: - ------------------------------------------------------------------------ December 31, 1998 - ----------------- HBO & Company $ 24,698,080 10,529,746 $ 5,603,218 Fidelity 10,785,256 4,930,395 903,176 Fidelity 14,717,497 6,971,616 1,442,500 Fidelity 7,163,580 5,215,571 - Fidelity 8,403,792 2,652,616 456,570 December 31, 1997 - ----------------- HBO & Company 8,980,274 8,449,660 4,083,091 Fidelity 7,849,019 3,417,652 440,333 Fidelity 11,165,320 5,456,748 944,504 Fidelity 4,512,275 3,268,259 - Fidelity 4,699,054 1,602,778 191,142
SIGNATURES ---------- THE PLAN. Pursuant to the requirements of the Securities Exchange Act of 1934, the trustees (or other persons who administer the employee benefit plan) have duly caused this annual report to be signed on its behalf by the undersigned hereunto duly authorized. HBO & COMPANY PROFIT SHARING AND SAVINGS PLAN By: /s/ E. Christine Rumsey ------------------------ E. Christine Rumsey DATE: June 29, 1999 -----END PRIVACY-ENHANCED MESSAGE-----