[CONFIDENTIAL TREATMENT HAS BEEN REQUESTED BY FAMILYMEDS GROUP, INC.
CONFIDENTIAL PORTIONS OF THIS DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN
SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.]
SUPPLY AGREEMENT
 

 
This Supply Agreement dated this _____ day of _________________, 2007, between
Familymeds Group, Inc. (hereinafter, known as "Customer") and McKesson
Corporation ("McKesson") shall be to establish a multi-year program for the
supply of prescription drugs and other health and beauty care products by
McKesson to retail pharmacies owned or operated by Customer (referred to herein
as "Pharmacies" or "Stores"). The parties hereto agree as follows:
 
1.
MERCHANDISE

 

 
A.
For purposes hereof, "Merchandise" shall comprise all items normally stocked by
McKesson Drug Distribution Centers servicing the 48 contiguous states, including
prescription drugs, OTC drugs, health and beauty aids and sundries. McKesson
reserves the right at all times to determine what Merchandise it will stock
and/or sell or discontinue from inventory based upon product quality,
manufacturer indemnity, insurance, and other policies and standards determined
by it, and in the event McKesson deletes from its available inventory items of
Merchandise, Customer shall have the right to purchase such products from any
other source of its choosing. This Agreement shall not apply to products sold to
Customer by McKesson subsidiaries, divisions, or other business operations other
than McKesson's pharmaceutical distribution centers.

 

 
B.
Customer may from time to time request that certain private label and other
products (collectively, "Additional Products") be stocked by McKesson to satisfy
Customer's reasonable needs. Such request shall be in writing and shall be
accompanied by a utilization estimate of such Additional Products. The stocking
of any such Additional Products shall be at the sole option of McKesson and if
agreed to by McKesson, shall be subject to any minimum purchase or other
commercial terms of sale established by McKesson and any additional
inventory-related considerations deemed relevant by McKesson. All manufacturers
of such Additional Products must offer industry standard trade terms and must
meet McKesson's standard indemnification, insurance and other requirements to
become an approved vendor.

 

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2.
TERM

 
The term of this Agreement shall be for the three (3) year period commencing on
December 28, 2006, and during such period Customer agrees to designate McKesson
as its primary supplier of Merchandise and to purchase from McKesson
substantially all of
the requirements of its retail Pharmacies for Merchandise and other items
covered
hereunder. Each twelve month period ending on December 27 during the term of
this
Agreement shall constitute a “Contract Year”.

3.
ORDERING AND DELIVERY

 

 
A.
Prescription products will be delivered to Customer's Pharmacies up to five (5)
times per week. Orders transmitted by 6:00 p.m. local time Sunday through
Thursday will be delivered the next day.

 

 
B.
In the event that the primary distribution center servicing the Customer is
temporarily out of stock of any prescription items, such distribution center
will utilize McKesson's National Distribution Network to make those items
available for Store order within 72 hours, at Customer's expense. If the item is
not available within the McKesson network, it will be drop-shipped from the
vendor if stock is available.

 

 
C.
Notwithstanding anything to the contrary herein, McKesson shall not be obligated
either to source or ship any Merchandise from a McKesson pharmaceutical
distribution center that is not the primary distribution center servicing
Customer or to facilitate any drop shipment if, in either case, any such
shipment or sourcing is prohibited by any law, regulation or governmental
requirement or would require that McKesson make additional expenditures in order
to comply with any law, regulation or governmental requirement regarding, or
otherwise affecting, such shipment or sourcing.

 

4.
PAYMENT TERMS

 

 
A.
The payment terms for the Merchandise covered by this Agreement are as follows:

 
Seven (7) Day Payment Terms
 
Payment for Merchandise delivered to Customer’s retail Pharmacies shall be paid
by Customer as follows: Invoices are due and payable within seven days from
invoice date via EFT or ACH.
 

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B.
For purposes of this Agreement, "due and payable" means that Customer shall make
any payments due hereunder on such earlier date as shall be required to provide
McKesson with good funds in hand on each of the designated due dates specified
in this Payment Terms section of this Agreement.

 

 
C.
If any of the above-specified due dates falls on a weekend day or holiday,
payment is due and payable on the preceding business day.

 

 
D.
McKesson requires the use of EFT or ACH payment method. Cost of Goods will be
increased by XX% if Customer for any reason does not pay via EFT or ACH.

 
E.
Any payments made after the due date indicated herein shall result in a XX
percent (XX%) (or the maximum amount permissible under applicable law, if lower)
increase in the purchase price of the Merchandise. A XX percent (XX%) service
charge (or the maximum amount permissible under applicable law, if lower) will
be imposed semi-monthly on all balances delinquent more than fifteen

(15) days.
 

 
F.
Customer agrees to render payment in full to McKesson on the applicable due date
as specified in this Agreement without (i) making any deductions, short
payments, or other accounts payable adjustments to such payment obligation; or
(ii) seeking to condition such remittance on any demand for or receipt of proofs
of delivery. Any accounts payable adjustments claimed by Customer shall require
prior written authorization of McKesson and must be supported by accompanying
detail documenting the basis for any such requested adjustments.

 
G.
This Agreement is conditioned upon Customer's maintaining a sound financial
condition throughout the term hereof and to that end, Customer agrees to
promptly substantiate in writing, at McKesson's request, the existence of such
condition with financial statements and any other supporting information
required by McKesson.

 

 
H.
Each company doing business with McKesson is required to negotiate its payment
terms and credit line with McKesson individually, based upon such company's
individual financial and risk characteristics. Nothing in this Agreement is
intended to be, nor shall it be construed as, a binding obligation or continuing
commitment by McKesson to extend credit or payment terms options and all such
terms and conditions shall be subject to the review and approval of McKesson's
Financial Services Department.

 

 
I.
McKesson reserves the right, in its sole discretion, to change a payment term
(including imposing the requirement of cash payment upon delivery) or limit
total credit, if (i) McKesson concludes there has been a material change in the
Customer's financial condition or an unsatisfactory payment performance; or (ii)
Customer ceases to meet McKesson's credit requirements or McKesson determines
that the Customer is likely to cease meeting such requirements. Upon the
occurrence of any of the above-specified events and with one day’s written
notice, McKesson further shall be entitled to suspend or discontinue the
shipment of any additional orders to Customer's Pharmacies.

 

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5.
COST OF GOODS

 

 
A.
In consideration for the cost of goods pricing (“Cost of Goods”) specified
herein, Customer expressly commits to purchase a minimum of $XX (net of returns,
allowances, rebates and all credits and adjustments issued and exclusive of drop
shipped purchases) per Contract Year in Direct Store Pharmacy Delivery
("D.S.D.") volume of Merchandise from McKesson during the term of this Agreement
("Volume Purchase Commitment"). If at any time after the first two (2) months of
this Agreement Customer has not achieved the appropriate pro rata purchase
volume, measured monthly, based on its Volume Purchase Commitment, McKesson, in
addition to the other rights and remedies available to it hereunder, reserves
the right in its sole discretion to redetermine the Cost of Goods pricing
specified below.

 
B.
Subject to the terms and conditions of this Section, the Cost of Goods for
Merchandise delivered to Customer shall be Cost plus the applicable markup as
specified below. Except in the case of contract items as discussed below, "Cost"
for the purposes of this Agreement shall mean the manufacturer's published
acquisition cost (exclusive of cash discounts) on the date of McKesson's invoice
to Customer, adjusted for selected bonus goods, manufacturers' off-invoice
allowances, and manufacturers' deal prices to be made available to Customer in
accordance with McKesson's established policies. For purchases of Merchandise
with respect to which Customer has entered into a vendor contract with a
manufacturer ("Contract Products") loaded with McKesson, "Cost" shall mean the
"bid price" of the product as set forth in the vendor contract.

 
C.
The Cost of Goods hereunder shall be in accordance with the pricing provisions
set forth below. Customer hereby agrees to maintain a minimum chain-wide monthly
average volume of $XX in D.S.D. prescription drug and OTC product purchases (net
of returns, allowances, rebates and all credits and adjustments issued and
exclusive of drop shipped purchases) per Store from McKesson throughout the term
of this Agreement ("Monthly Volume Commitment"). Customer shall at the time of
implementation of service under this Agreement be charged Cost minus XX% on Rx
product purchases and Cost plus XX% on OTC product purchases. The Customer's
Cost of Goods thereafter shall be subject to quarterly review by McKesson and
will be adjusted no later than ten (10) days following the close of the quarter,
if and to the extent necessary, to reflect the Customer's then current
chain-wide monthly average purchase volume.

 
 

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Chainwide Monthly Average Volume (net of returns, allowances, rebates and all
credits and adjustments issued and Cost Plus Markup (Based on 7 - day Payment
Terms per Section 4.A)
 
Rx
OTC
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX

exclusive of drop shipped purchases)
From XX
 

Contract Products
Cost Plus XX%
   
Drop Shipped Products
Cost Plus XX%

 
Specially Priced Merchandise. The purchase price for selected Merchandise,
including but not limited to multi-source generic pharmaceuticals, repackaged
pharmaceuticals, private label products, HBC/OTC products, medical surgical
supplies, home health care/durable medical equipment, certain antibiotics,
Merchandise acquired by McKesson from vendors not offering customary cash
discounts or other terms, and other specialty; slow moving; non-pharmaceutical;
and/or net-billed Merchandise will not be based upon the cost-plus pricing
described in the Cost of Goods pricing schedule above, but will instead be
billed in accordance with the terms and conditions established by McKesson
(including applicable markup) for such Merchandise. Merchandise described in
this paragraph is sometimes referred to as "Specially Priced Merchandise."
 
D.
The above-specified Cost of Goods pricing is based on and contingent upon
Customer's continued compliance with its commitment herein to maintain the
following minimum purchase (net of returns, allowances, rebates and all credits
and adjustments issued and exclusive of drop shipped purchases) percentage
ratios throughout the term of this Agreement:

 
1. Rx purchases to total purchases of Merchandise of XX% ("Rx Purchase
Percentage Commitment"), and
2. McKesson OneStop Generics purchases to total Rx purchases of XX% ("McKesson
OneStop Generics Purchase Percentage Commitment").

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If Customer fails during any three-month period of this Agreement to achieve
either its Rx Purchase Percentage Commitment or McKesson OneStop Generics
Purchase Percentage Commitment, McKesson, in its sole discretion, reserves the
right upon such occurrence to forthwith reprice the Rx/OTC Cost of Goods set
forth in Section 5.C.
 
E.
The above-specified Cost of Goods pricing schedule (including contract product
pricing) is subject to adjustment with respect to the products of any
manufacturer that offers a cash discount that is below the industry standard
cash discount to McKesson during the term hereof.

 
F.
It is further understood and agreed by the parties that if Customer fails to
maintain a minimum chain-wide average volume of $XX in D.S.D. prescription drug
and OTC product purchases (net of returns, allowances, rebates and all credits
and adjustments issued and exclusive of drop shipped purchases) per Store per
month

from McKesson during any consecutive three (3) months of this Agreement
(excluding the first three (3) month period of this Agreement), such failure
shall
constitute a default under this Agreement by Customer.
 

G.
For the avoidance of doubt, nothing herein will entitle Customer to receive or
share in any fees, discounts, rebates or other consideration received by
McKesson from a vendor or its affiliates for any services rendered by McKesson
or any other action or forbearance by McKesson, including without limitation any
fees, discounts, rebates or other consideration received by McKesson pursuant to
a core distribution agreement, inventory management agreement or any other
similar agreement with the vendor or its affiliates.

 

6.
RETURNED GOODS

 
Subject to any separate policy and/or terms and conditions for returned goods
adopted by McKesson for purposes of complying with any applicable law, rule or
regulation of any state (including without limitation the State of Florida),
McKesson will process returned goods for items purchased by Customer from
McKesson, in accordance with McKesson's Returned Goods Policy (which is subject
to change by McKesson, effective upon thirty
(30) days' prior notice to Customer), as follows:
 

 
1)
Definitions

 

 
a)
Saleable Merchandise

 
• Merchandise is determined saleable by McKesson based upon the ability to
resell the item without special handling, refurbishing or other expense; or

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• Saleable Merchandise must have dating of current month plus XX months
remaining until expiration. Exceptions to this dating policy are:

 
i)
Refrigerated and other temperature-controlled Merchandise; or

 

ii)
Merchandise deemed permanently short-dated by McKesson and
manufacturers/suppliers.

 
In the above-specified instance as set forth in Section 1(a)(ii), Customer shall
be permitted to return the Merchandise with current month plus three
(3) months remaining until expiration.
 

 
b)
Unsaleable Merchandise

• Merchandise with less than current month plus XX months remaining until
expiration (except as otherwise provided in Section 1(a));
• Torn or damaged packaging;
• Labels attached (prescription or price sticker);
• Soiled, stained or worn;
• Safety or security seals not intact; or
• Merchandise requiring special handling (i.e. biological or other
temperature-controlled products) that does not include Customer's signature to
assure that the Merchandise has been stored and protected under proper
conditions specified by the manufacturer/supplier.
 
McKesson reserves the right to determine whether Merchandise is saleable or
unsaleable upon inspection of the returned item.
 

 
c)
Florida Pedigree Product

 
All returns of prescription drug (“Rx”) Merchandise that meet the conditions set
forth in Section 2(e) below will be deemed returnable.
 
 
2)
Merchandise Authorized For Return to McKesson

 

 
a)
Saleable and Unsaleable Merchandise that was purchased from McKesson unless
otherwise blocked for return (determined by manufacturer/supplier or McKesson);

 

 
b)
Unsaleable Merchandise purchased from McKesson which can be returned by McKesson
to the manufacturer/supplier according to their policy;

 

 
c)
McKesson Private Label Merchandise (Valu-Rite®, Health Mart®, SunmarkTM, etc.);
and

 

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d)
Manufacturer/supplier recall or market withdrawal in original manufacturer
containers. Authorized returns of partials require the Customer to include pill
counts, NDC and lot number for any Merchandise not returned in its original
manufacturer container.

 

 
e)
Florida customers may only return Rx Merchandise that meets all of the following
conditions:

 

 
i.
Rx Merchandise that was ordered by mistake; misshipped by McKesson or received
damaged;

 

 
ii.
Customer must provide a valid invoice number when requesting the return;
 

 
iii.
Requests for Return Authorization (“RA”) for Rx Merchandise must be made within
XX days of original invoice date;

 
iv. Rx Merchandise returned to McKesson must contain the identical lot number
and quantity provided on the RA;
v. Rx Merchandise returned to McKesson must be received within XX days of the
date of the request for the RA; and

 
vi.
Customer must sign the oath statement on the RA that each specific unit of Rx
Merchandise being returned was purchased on the invoice referenced and was
stored properly while in the Customer’s custody and control.

 
If the conditions set forth in Section 2(e) i-vi are not fully met, McKesson
will deem the Merchandise as unsaleable and apply the credit issued and pricing
conditions set forth below for unsaleable Merchandise.
 
Customer must provide signed verification certifying that proper conditions for
storage, handling and shipping have been maintained for all Merchandise returned
to McKesson.
 
Excluded Merchandise:
 

 
•
Merchandise not purchased from McKesson;

 
•
Merchandise not physically carried by McKesson;

 
•
Merchandise not eligible for return to the manufacturer/supplier or deemed
collectible by McKesson;

 
•
Saleable Merchandise returned that does not meet proper storage conditions;

 
•
Unsaleable returns of Customer’s private label Merchandise;

 
•
Merchandise not in its original container;

 
•
Overbagged or "robot-ready" Merchandise;

 
•
Merchandise requiring refrigeration except for Merchandise shipped by McKesson
in error or received damaged;

 
•
Repackaged Merchandise that has less than XX months dating or is defined as
Unsaleable Merchandise;

 
•
ScanPakTM Unit Dose and ScanPakTM Multi Dose Merchandise that have less than XX
months dating or are defined as Unsaleable Merchandise;

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•
Merchandise discontinued by manufacturer/supplier and no longer stocked by
McKesson;

 
•
Partial bottles, liquids and other containers except for recalls of Merchandise
other than Controlled Substances;

 
•
Schedule II Controlled Substances will be evaluated on individual return
requests;

 
•
Merchandise damaged or defaced at the Pharmacy location or on the shelf; or

 
•
For Florida accounts, any Rx Merchandise not meeting the stated policy and
required processes in Section 2(e) above will be considered unsaleable and
subject to the credit issued and pricing conditions applicable to unsaleable
items as specified below.

3) Credit Issued
 
McKesson will provide the following credit based on the pricing rules outlined
below in Section 5 as calculated from invoice date to credit request date:

Saleable*
0 - 30 days XX 31+ (or no invoice provided)XX

 
Received Damaged 0 - 15 days XX or Short-dated 16+ (or no invoice provided) XX
 
Recall**
XX, if and to the extent McKesson
 
recovers an equal percent from the
 
manufacturer/supplier.
Unsaleable**
XX, if and to the extent McKesson recovers an equal percent from the
 
manufacturer/supplier.
Florida Saleable Returns
XX, if all conditions in Section 2(e) above are met.

 
*All saleable Home Healthcare Hub Merchandise is eligible for a maximum XX
credit value based on pricing rules outlined below in Section 5.
 
**Notwithstanding anything in this Agreement to the contrary, with regard to
unsaleable products, recalls, market withdrawals and any other
manufacturer/supplier initiated returns (collectively, "Unsaleable and Recalled
Products"), in the event a pharmaceutical manufacturer/supplier fails for any
reason to pay McKesson for the cost of or any amounts due with respect to any
Unsaleable or Recalled Products returned to McKesson by the Customer or the
Customer's agent, the Customer agrees that the Customer will be responsible for
the collection of any unpaid monies due from the manufacturer/supplier, and
shall fully reimburse McKesson for any credits or other forms of advance,
including deductions, that have already been paid to or received by the Customer
for such Unsaleable or Recalled Products.

--------------------------------------------------------------------------------

 
 
4)
Customer Eligibility McKesson reserves the right to designate if the Merchandise
returned by Customer is eligible for return, and to determine the appropriate
percentage of credit to be provided.

 
 
5)
Pricing on Returned Goods

 
McKesson will use the invoice price when Customer provides a valid invoice
number.
 
If no invoice number is provided, the following pricing rules will apply:
 
 

 
•
Customer will be credited the contract price for Merchandise which is a Contract
Product on the date that return authorization is created.

 
•
Customer will be credited a weighted average price based on the Customer's past
twelve (12) month purchase history for Non-Contract Rx/OTC Merchandise.

 
•
Customer will be credited the lowest price paid by the Customer over the past
twelve (12) months for Non-Contract Generics Merchandise.

 
•
Customer will be credited the manufacturer's/supplier's published acquisition
cost (exclusive of cash discounts) on the date of the of the return
authorization for Non-Contract Merchandise purchased more than twelve (12)
months prior to the date the return authorization is created.

Any handling charges will apply where appropriate to the determined price.
 
Final credit will be issued based upon the condition and timing of the returned
goods to McKesson.
 

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6)
Notification of Changes

 
McKesson reserves the right to change the above stated Returned Goods Policy at
any time with 30 days' notification to Customer, including without limitation
implementing modifications required to meet applicable federal and/or state laws
and regulations, FDA and other regulatory guidelines, and any additional
restrictions applicable to returned Merchandise.
 
7.
CUSTOMER SUPPORT

 

 
A.
A National Account Executive will be assigned to Customer's headquarters and
will hold regular meetings and business reviews to identify business
opportunities and address Customer's needs as reasonably required.

 

 
B.
The designated National Account Manager will become the first contact for
headquarters when Customer requires assistance for issue resolution.

 

 
C.
National Account Customer service personnel will be available at the McKesson
Premier Service Center from 8:00 a.m. Eastern Time to 6:00 p.m. Eastern Time
Monday through Friday. Technical and emergency support is available 24 hours a
day, seven (7) days a week.

 

 
D.
Customer will be provided the names and telephone numbers of its key contacts at
McKesson as well as the names and telephone numbers of McKesson's designated
support personnel.

 
 
8.
CONTRACT MANAGEMENT

 

 
A.
McKesson agrees to service all manufacturers' contracts negotiated by Customer,
provided such manufacturers are approved suppliers of McKesson that have
satisfied its indemnification, insurance, credit and other requirements and
provides terms acceptable to McKesson, including without limitation pricing,
payment terms and returned goods policies. Merchandise will be supplied at
Customer's negotiated bid price plus McKesson's applicable markup as described
above in the Cost of Goods section.

 

 
B.
Customer's eligibility for participation under a vendor contract must be
authorized by the vendor and Customer's group purchasing organization, if
applicable, before the contract is loaded by McKesson for Customer. Customer
shall be liable for unpaid chargebacks resulting from eligibility issues.

 

 
C.
In the event a vendor (i) makes an assignment for the benefit of creditors,
files a petition in bankruptcy, is adjudicated insolvent or bankrupt, or if a
receiver of trustee is appointed with respect to a substantial part of the
vendor's property or a proceeding is commenced against it which will
substantially impair its ability to pay on chargebacks or (ii) otherwise
defaults in the payment of chargebacks to McKesson, Customer shall be invoiced
and become liable for the unpaid chargebacks allocable to its purchases from
such vendor.

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9.
GENERIC PHARMACEUTICALS

 
Customer agrees to fully participate in McKesson's OneStop Generics Program
through its auto-substitution feature and to thereby designate this program as
Customer's primary source of generic pharmaceuticals. A quarterly rebate shall
be paid to Customer in accordance with the following schedule based on such
participation:
 
Quarterly McKesson OneStop Generics Purchases as a Percentage of Total Rx
Purchases (All Purchases net of returns, allowances, rebates Quarterly Rebate %
on Net and all credits and adjustments issued McKesson OneStop Generics
Purchases and exclusive of drop shipped purchases) (Rebate amounts are not
cumulative)
XX 
 
XX
 
 
*Notwithstanding anything in the foregoing, in order to qualify for the highest
rebate percentage on the above-specified McKesson OneStop Generics rebate
schedule (XX%), Customer must attain the specified minimum McKesson OneStop
Generics to Rx Product purchases ratio of XX% and must also purchase annualized
McKesson OneStop Generics volume of $XX. If Customer fails to meet the
above-specified $XX purchase volume threshold, the XX rebate percentage tier
shall not apply. For example, if the McKesson OneStop Generics to Rx Product
purchases ratio is XX% but the annualized quarterly volume is $XX, Customer
would qualify for a XX% rebate.
 
10.
SYSTEM SERVICES AND EQUIPMENT

 
The following systems and services will be made available to Customer by
McKesson if and to the extent that such systems and services are being made
generally available to other customers of McKesson, it being understood,
however, that McKesson shall have the right to eliminate or replace any of the
following systems and services, provided that McKesson eliminates such service
or system for McKesson customers generally:
 

 
A.
Telxon electronic order entry equipment, including the wand (the “Telxon”) at no
charge upon such Store’s request. The Telxon remains the property of McKesson at
all times. Within 30 days of the closing of any Store, closing of a Store
account, or the replacement of any non-functioning Telxon with a new Telxon,
Customer agrees to return each Telxon or Telxons supplied to the Customer. If
the Customer fails to return any Telxon to McKesson as specified above, Customer
agrees to pay to McKesson the amount of XX for each Telxon not returned.
Additionally, if the Customer returns any Telxon to McKesson without the wand, a
charge of XX will apply. McKesson will provide, upon request, an inventory of
Telxons supplied to the Customer, including each Telxon’s serial number and the
Store to which the Telxon was supplied.

 

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B.
Access to Supply Management Online ("SMO") for each Customer Store, each
location where Customer has a web link access, and for Customer's Headquarters,
at no charge. SMO is an advanced Internet application allowing on-line,
real-time access to customer information and services, including purchase
histories, accounts payable information, and ordering capability.

 

 
C.
Item price stickers, at no charge, with Customer custom pricing, where required,
and other features such as:

 
1) Department number
2) Invoice cost
3) Month and year ordered
4) Store name
5) AWP or retail pricing
 
 

 
(Note:
Each feature is available for both Rx and OTC.)

 

 
D.
Bar-coded shelf labels, at no charge.

 

 
E.
Consolidated Quarterly Purchase Reports for all Customer Store purchases, at no
charge, via SMO.

 

 
F.
Monthly report of controlled substances purchased from McKesson for each Store,
at no charge, via SMO.

 

 
G.
A complete catalog of items stocked by McKesson's Distribution Centers, at no
charge, via SMO.

 

 
H.
Electronic price update information will be provided weekly, at no charge.

 
11.
VALUE-ADDED PROGRAMS

 

 
A.
McKesson New Store Dating

 

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Subject to the terms and conditions of this Section 11.A., the opening order
will be defined as the initial order placed by a new Store. The amount of the
initial order, which in no event shall exceed an estimated amount of XX days’
purchases from McKesson for such new Store, is to be paid in XX consecutive,
equal monthly installments with payment beginning the first month after the
account is opened. This dating will be extended to a maximum of XX new Stores
each Contract Year and will be limited to $XX per new Store. Notwithstanding
anything in the foregoing, Customer will not be considered for new Store dating
if any amount due to McKesson has been past due in the previous 30 days. The
above-specified dating is subject to the review and approval of McKesson’s
Financial Services Department. For the purposes of this Section, the term “new
Store” shall not include (i) any existing pharmacy of Customer that changes its
address; or (ii) any pharmacy acquired through acquisition, merger, partnership
or other combination that is already serviced by McKesson.
 
B.
To assist Customer in managing the relatively small volume of items that may
become unsaleable while at the Customer, McKesson shall offer the following
programs to Customer for the management of Customer’s unsaleable Rx products.
Customer may utilize either option as described in Section 11.B or Section 11.C.
herein.

 

 
i.
Once each quarter, the Customer will process a return to Carolina Logistic
Services for eligible, unsaleable Rx products.

 

 
ii.
OTC items are not eligible for this program.

 

 
iii.
Customer will not return any expired, unsaleable Rx products directly to its
McKesson Distribution Center or McKesson’s Redistribution Center. Customer will
deliver eligible Rx returns directly to Carolina Logistic Services and be
responsible for shipping fees associated with returns.

 
    iv. McKesson pays processing fees and costs associated with unsaleable
return supplies, for example, shipping labels, etc.
 
    v. All product received by Carolina Logistic Services will be treated as
unsaleable regardless of expiration dates or condition of the product. No items
will be returned to Customer.

 
vi.
McKesson shall pay all processing fees and costs to dispose product according to
the manufacturer’s policy, including any fees from Carolina Logistic Services.

 

 
vii.
Carolina Logistic Services will scan all products sent to it by Customer and
will determine if the products are returnable per the manufacturer’s policy.
Carolina Logistic Services will provide summary and detail reports for all
products received by Carolina Logistic Services from Customer.

 

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viii.
McKesson will process credits for returnable product per manufacturer's policy
within thirty (30) days of the Carolina Logistic Services debit memo or invoice
date.

 
ix.
Credit is issued at the lower of XX McKesson’s current Wholesaler Acquisition
Cost (“WAC”) or XX of contract price for Rx unsaleable returns that meet
manufacturer return policy, unless that manufacturer is identified as a “No
Credit Vendor”, found to be in a debit balance with McKesson, or fails to
reimburse McKesson for such claims at which time McKesson will not pursue credit
for those claims and will not issue credit to Customer. WAC will be updated at
least monthly.

 
x.
McKesson will issue a single credit for all returns to an established Customer’s
corporate account, with back up documentation outlining how much credit is
applied to the Customer’s account including non returnable items that are
processed.

 
xi.
For items that have a return value of zero, Carolina Logistic Services will
destroy these items at no cost to Customer.

 
C.
To assist Customer in managing the relatively small volume of items that may
become unsaleable while at the Customer, McKesson shall offer the following
program to Customer for the management of Customer’s unsaleable Rx products.
Customer may utilize either option as described in Section 11.B or Section 11.C
herein:

 

 
i.
McKesson agrees to assist in facilitating the amount of credits obtained from
“indirect” vendors for goods returned by Customer through Carolina Logistic
Services, or whichever other entity is designated the selected returns processor
for Customer (the Processor). Indirect vendors are those vendors with which
Customer does not have a direct purchasing relationship and for which a majority
of the purchase volume is from McKesson.

 

 
ii.
Customer will provide McKesson access to information provided by the Processor
that includes vendor and store summary and detail; summary and detailed debit
memos; product disposition/shipment tracking information; and other information
required to collect from the vendors. If a change in Processors is made, or the
processing operations are adjusted for the customer, McKesson should be notified
at least sixty (60) days in advance of the change and of the specific effective
date of the change.

 

 
iii.
McKesson will receive debit memos from the Processors via disk, electronic
transmission, or a combination of the two. McKesson will provide the Processor
with the file format for the transmission of the data. Customer will have the
Processor provide to McKesson the shipping data for the return debit memos in
order to facilitate collection of the credits related to the return.

--------------------------------------------------------------------------------

 
iv.
McKesson will process debit memos on behalf of Customer and contact the
appropriate vendors for follow-up credit. If, and when, a vendor is identified
as a “No Credit Vendor,” or a vendor is found to be in a debit balance with
McKesson, McKesson will not pursue credit for those returns debit memos.
McKesson will report the status to Customer and ask that future return debit
memos exclude the reported vendors.

 
v.
The basis for vendor collections will be mutually agreed upon by McKesson and
Customer with the understanding that both companies shall strive for maximum
recovery on returns. The basis of this valuation includes, but is not limited
to, returnable value based on the Processor’s valuation, vendors that do not
allow returns from third parties, and other issues that impact the accuracy of
the valuation of the return debit memos generated for Customer to reflect
expected return value.

 
vi.
Customer will notify McKesson as to the pricing methodology that will be used to
value the product processed at the Processor’s location. The file will be
reviewed periodically by both companies for accuracy.

 

 
vii.
McKesson agrees to pass through all credits collected from the vendor upon
receipt of a final credit notification based on the documentation provided by
the vendor within ten (10) days of posting the vendor credit memo in McKesson’s
system. Any subsequent credits received from the vendor relating to such debit
memo will be passed to Customer within ten

(10) days of posting into McKesson’s system. Credits will be issued less a XX
administrative support fee. If any direct reimbursements are made to Customer
from a vendor that relate to a return debit memo under this program, Customer
will send the funds to McKesson within ten (10) days of receipt of the funds
from the vendor.
 

 
viii.
Customer and McKesson will agree on those open deductions sixty (60) days
subsequent to the date that the original file from the Processor was received.
Customer may deduct at the returnable value as deemed by the Processor for those
vendor debits that have no credits posted on Customer account. Any vendor
credits received after this time will be credited to Customer’s RTV account at
McKesson and the Customer’s amount previously deducted from McKesson will be
repaid. Customer is required to repay any items applied to its account such as
repayment of previous deductions within ten (10) business days of the credit
being posted to the account. Documentation to audit a claim will be available
upon request and supported by quarterly summary and detailed reporting.

 

--------------------------------------------------------------------------------

 

 
ix.
Deductions can only be made if supported with a valid return debit memo from the
authorized Customer Processor, a signed proof of delivery, or authorized
destruction form, and any correspondence with the vendor supporting the return
debit memo.

 
x.
All credits passed to Customer will reference the debit memo assigned by the
Processor, unless such a reference is not made, at which time McKesson will pass
the credit through to Customer referencing the credit memo number. Summary &
detailed reporting related to the vendor credits will be sent to Customer
quarterly.

 
xi.
Upon one hundred eighty (180) days after the debit memo date by the Processor,
if no valid response is received from a vendor, McKesson will credit Customer
the entire value of the debit memo deducted from the vendor. If after that time,
the vendor provides sufficient evidence to review this “closed” debit memo,
McKesson will facilitate discussions regarding the matter between Customer and
the vendor. Customer and McKesson agree to address such matters in a timely,
good faith manner if facts pertaining to the debit memo reasonably warrant such
follow-up action. In the event that any amount is to be repaid to the vendor for
such transaction, Customer will pay McKesson within ten (10) days of agreement
that such sum is due and owing by Customer to McKesson, whereupon McKesson will
repay the vendor within ten (10) days of the receipt of Customer’s payment.
Additionally, Customer agrees to respond within thirty (30) days of receipt of
any production of relevant documentation by McKesson.

 

 
xii.
McKesson will expect a vendor to credit Customer under the vendor’s published
return goods policies. McKesson expects the Processor to evaluate return product
from Customer using the vendor published return goods policies. McKesson will be
notified by Customer to any exceptions to this practice. Reviews will be
performed quarterly, or at such intervals as otherwise determined by McKesson
and Customer, to identify any exceptions to the published return goods policies
being used to evaluate Customer’s product. Customer will provide the signed
agreement with the authorized agent of the vendor noting the exception to the
published policy.

 

 
xiii.
Vendor published returned goods policies and shipping data will be used to
determine the estimated returnable value due for each debit memo. Signed and/or
documented agreements between Customer and vendor will supersede vendor standard
returned goods policies.

 

 
xiv.
McKesson hereby assumes no liability or responsibility of the actual collection
or timely payment of any sums contemplated by Customer from the vendor based on
this returned goods collection process. Customer will not make any unauthorized
deductions from McKesson for such returns.

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12.
TERMINATION

 

 
A.
Failure by Customer to make any payment when due in accordance with the terms of
this Agreement shall constitute a default. Any other material breach of this
Agreement by either party shall constitute a default if not cured within thirty
(30) days after written notice of such breach is given by the non-breaching
party. Upon default by either party, the other party may terminate this
Agreement on five (5) days' written notice.

 

 
B.
Either party may terminate this Agreement without cause upon ninety (90) days'
written notice to the other party.

 

 
C.
Either party may, on ten (10) days written notice, terminate this Agreement:

 

 
1)
If the other party shall file any petition under any bankruptcy, reorganization,
insolvency or moratorium laws, or any other law or laws for the relief of or in
relation to the relief of debtors; or

 

 
2)
If there shall be filed against the other party any involuntary petition under
any bankruptcy statute or a receiver or trustee shall be appointed to take
possession of all or substantial part of the assets of the party which has not
been dismissed or terminated within sixty (60) days of the date of such filing
or appointment; or

 

 
3)
If the other party shall make a general assignment for the benefit of creditors
or shall become unable or admit in writing its inability to meet its obligations
as they mature; or

 

 
4)
If the other party shall institute any proceedings for liquidation or the
winding up of its business other than for purposes of reorganization,
consolidation or merger; or

 

 
5)
If the other party's financial condition shall become such as to endanger
completion of its performance in accordance with the terms and conditions of
this Agreement.

 

 
D.
McKesson may, at its own discretion, terminate this Agreement on ten (10) days
written notice to Customer upon or at any time following the sale or transfer of
the stock or assets of Customer or a controlling interest therein, the
occurrence of a merger involving Customer or a change in the effective control
of the management of Customer.

 

--------------------------------------------------------------------------------

 

 
E.
Upon termination of this Agreement, expiration of this Agreement or
discontinuation by Customer of purchase of any such Additional Products
hereunder, which discontinuation shall be deemed to have occurred if Customer
fails to purchase such Additional Products for a period of at least thirty (30)
days, Customer shall be obligated to purchase from McKesson all Additional
Products purchased by McKesson exclusively for Customer as of the date of such
termination, expiration or discontinuation of purchase pursuant to a request
from Customer in accordance with Section 1.B above; provided that McKesson
cannot return such Additional Products for a full refund. Customer shall pay the
original invoice price charged McKesson by the manufacturer of such Additional
Products. Any such Additional Products will be salable, undamaged, have at least
six months dating (with the exception of private labeled items), and will be
delivered in a single shipment, unless otherwise agreed between the parties, to
a destination mutually agreed upon by Customer and McKesson.

 

 
F.
In the event of a termination hereunder the following continuing obligations,
liabilities and rights shall survive termination and remain in full force and
effect:

 

 
1)
Liability for accounts receivable balances or any other payment due

hereunder to the other party at the date of or upon the occurrence of such
termination;
 

 
2)
Obligations imposed on each party under the Proprietary and Confidentiality
Information section set forth below; and

 

 
3)
Such rights as either party may enjoy in law or in equity.

 
13.
PROPRIETARY AND CONFIDENTIAL INFORMATION

 

 
A.
Any and all accounts, records, books, files, and lists regarding any transaction
provided for or contemplated hereunder, shall be confidential and proprietary to
the party creating or generating such information. This Agreement, and the terms
and conditions hereof, are confidential. The parties expressly agree to maintain
such terms and conditions in confidence, and shall take every precaution to
disclose the contents of this Agreement only to those employees of each of the
parties who have a reasonable need to know such information.

 

 
B.
Customer and McKesson each acknowledge that, in connection with their respective
businesses, they have developed certain operating manuals, symbols, trademarks,
trade names, service marks, trade secrets, customer lists, procedures, formulas,
and other patented, copyrighted, or legally protected materials which are
confidential and/or proprietary to each of them.

 

--------------------------------------------------------------------------------

 

 
C.
Neither party may disclose the terms of this Agreement during the term hereof
and for an additional period of thirty-six (36) months following the effective
date of expiration or other termination of this Agreement. Furthermore, except
upon the prior written consent of the other party, neither party may divulge,
disclose, communicate, or use any of the other party's confidential or
proprietary information generally described in Subsection A and B above, in any
manner or for any purpose, including, without limitation, use in advertising or
for promotional materials. A party hereto may refuse consent to the use of its
confidential or proprietary information for any or no reason. In the event that
any such confidential or proprietary information is used during the course of
this Agreement it shall retain its confidential and proprietary nature and shall
be returned immediately to its owner or destroyed upon termination of this
Agreement. Notwithstanding anything herein to the contrary, nothing in this
subsection shall require either party to maintain in confidence any information,
materials, or data which is in the public domain, enters the public domain
through no fault of such party, was in possession of the party prior to being
furnished to it by the other, was supplied to the party by a third party or
parties lawfully in possession thereof, or which the party is required to
divulge pursuant to process of any judicial or governmental body of competent
jurisdiction, provided that notice of receipt of such process is given to the
other.

 
14. ALTERNATE SERVICE
 
If service from any McKesson distribution center to any Customer Store(s) is
interrupted or delayed because of strike, lockout, labor dispute, fire or other
casualty, or any other reasons beyond the reasonable control of McKesson,
McKesson will take such action as may be reasonably necessary, without
additional cost or expense to Customer, to maintain service as mutually agreed
upon to affected Stores from an alternate McKesson Distribution Center.
 
15. EXTERNAL EVENT
 
For purposes of this Section, “External Event” shall mean an event or series of
events external to and beyond the control of McKesson that has or is likely to
have a significant adverse impact on McKesson’s business or operations. By way
of illustration and not of limitation, an External Event may include a material
market fluctuation, governmental law, the actual or proposed enactment or
promulgation of a regulation or administrative action, or a fundamental change
in manufacturers’ pricing or distribution policies. In response to an External
Event, McKesson may, at its option, request in writing (a “Request”) that the
pricing and/or other terms of this Agreement be renegotiated so as to equitably
reflect the effect of the External Event. The Request shall identify the
External Event and set forth the general nature and scope of the adjustment
requested. As soon as practicable after receipt of such request by Customer, the
parties shall meet and begin good faith negotiations. If, at the end of sixty
(60) days following receipt of a Request by Customer, the parties have been
unable to agree on satisfactory pricing or other terms, McKesson shall have the
right to terminate this Agreement, upon five (5) days’ prior written notice to
Customer.
 

--------------------------------------------------------------------------------

 
In the event that Customer considers the reason(s) for termination to be
inadequate under this provision or refuses to renegotiate the Agreement, each
party agrees that prior to filing any lawsuit or other legal action against the
other party regarding such issue or dispute arising out of or otherwise relating
to this External Event provision, the parties shall participate in an expedited,
non-binding mediation conducted in accordance with the Commercial Mediation
Rules of the American Arbitration Association (“AAA”). A party shall initiate
such mediation by submitting a Request For Mediation ("Mediation Request") to
the AAA and the other party by hand delivery and/or facsimile. Within 10 days
thereafter, the parties shall agree upon a single mediator to conduct the
mediation or, if they are unable to agree, request the AAA to make the
appointment. The mediation shall be conducted in San Francisco, California and,
absent a written waiver executed by both parties, shall be completed within
thirty-five (35) days after either party first submits a Mediation Request. All
mediation fees payable to the AAA shall be shared equally between the parties.
 
16. NOTICES
 
All notices pertaining to this Agreement shall be delivered in person, sent by
certified mail, delivered by air courier, or transmitted by facsimile and
confirmed in writing (sent by air courier or certified mail) to a party at the
address or facsimile number shown in this Section, or such other address or
facsimile number as a party may notify the other party from time to time.
Notices delivered in person, and notices dispatched by facsimile prior to 4:00
p.m. and confirmed, shall be deemed to be received on the day sent. All other
facsimiles and notices shall be deemed to have been received on the business day
following receipt; provided, however, if such day falls on a weekend or legal
holiday, receipt shall be deemed to occur on the next business day. Notices may
also be transmitted electronically between the parties, provided that proper
arrangements are made in advance to facilitate such communications and provide
for their security and verification.
 

--------------------------------------------------------------------------------

 
If to McKesson:
 
MCKESSON CORPORATION
One Post Street
San Francisco, CA 94104
 
 
Attention: Jack Fragie
Executive Vice President, Retail National Accounts
Fax: 415-983-7570
 
 
If to Customer:
 
FAMILYMEDS GROUP, INC.
312 Farmington Avenue
Farmington, CT 06032

Attention:  Ed Mercadante
President and CEO
Fax: 860-679-9337
 

17.
MISCELLANEOUS

 

 
A.
This Agreement embodies the entire agreement between the parties with regard to
the subject matter hereof and supersedes all prior agreements, understandings
and representations with the exception of any promissory note, security
agreement or other credit or financial related document(s) executed by Customer
or between Customer and McKesson. This Agreement may not be modified,
supplemented or extended except by a writing signed by both parties.

 

 
B.
This Agreement supersedes any and all prior McKesson agreements and discount
plans in which any Customer Pharmacy may currently be participating.

 

 
C.
Except as provided above in the Alternate Service section, neither party shall
have any obligation hereunder for failure or delay of performance due to fire,
shortage of materials or transportation, government acts, acts of terrorism or
any other cause beyond its control.

 

--------------------------------------------------------------------------------

 

 
D.
Neither party shall have the right to assign this Agreement or any interest
therein without the prior written consent of the other party, and any such
attempted assignment shall be without effect. This Agreement shall inure to and
be binding upon the successors and permitted assignees of both parties. In the
case of a successor or permitted assignee of Customer, this Supply Agreement
shall apply to all of the Pharmacies of the successor or permitted assignee.

 

 
E.
This Agreement shall be construed in accordance with the laws of the State of
California without regard to the provisions of Section 1654 of the California
Civil Code or the rules regarding conflict of laws.

 

 
F.
If any provision of this Agreement shall be held invalid under any applicable
law, such invalidity shall not affect any other provision of this Agreement. The
parties agree to replace any such invalid provision with a new provision which
has the most nearly similar permissible economic effect.

 

 
G.
The failure of either party to enforce at any time or for any period of time any
one or more of the provisions thereof shall not be construed to be a waiver of
such provisions or of the right of such party thereafter to enforce each such
provision.

 

 
H.
If any federal, state, or local tax currently or in the future is levied upon
McKesson in a jurisdiction where either McKesson or Customer does business and
such tax relates or applies to the Merchandise or any transactions covered by
this Agreement (excluding taxes imposed on McKesson's net income), the Cost of
Goods to those Customer Pharmacies involved will be increased a corresponding
percentage amount.

 
I.
Customer represents and warrants that the above conditions, including prices,
rebates, terms and delivery, have been made available to its Pharmacies by
wholesale drug competitors of McKesson in the areas covered by this Agreement.

 
J.
Participation hereunder by any of Customer's Pharmacies may be terminated by
McKesson if such Pharmacy fails to comply with the terms and conditions of this
Agreement.

 
K.
In the event that either (a) the “U.S. Regular Gasoline Retail Prices (Cents per
Gallon)”, as reported by the Department of Energy in “This Week in Petroleum”
(the “Index Price”), is greater than or equal to One Dollar Fifty Cents ($1.50)
or (b) McKesson is assessed a fuel surcharge or other increase related to
increased cost of fuel by its couriers, McKesson shall have the right to charge
a delivery surcharge of One Dollar ($1.00) (the “Fuel Surcharge”) for all
deliveries made to Customer. Subject to the notice provision below, the Fuel
Surcharge will be assessed on all deliveries following the date on which the
Index Price is greater than or equal to $1.50, until such time as the Index
Price falls beneath $1.50. The Fuel Surcharge shall be assessed for each
delivery stop made by a vehicle, even if such stops are within the same Pharmacy
or occur in the same Pharmacy but at multiple times on the same day or
otherwise. In the event that McKesson imposes a Fuel Surcharge or removes the
same pursuant to this Section 17.K, such action will be effective upon five (5)
days’ written notice to Customer.

 
 

--------------------------------------------------------------------------------

 
L.
If and to the extent any product discounts, rebates or other purchasing
incentives are earned by or granted to Customer and paid by McKesson under this
Agreement, then applicable provisions of the Medicare/Medicaid and state health
care fraud and abuse/antikickback laws and regulations (collectively, "fraud and
abuse laws") may require disclosure of the applicable price reduction on
Customer's claims or cost reports for reimbursement from governmental or other
third party health care programs or provider plans. Customer agrees to comply
with all applicable provisions of the fraud and abuse laws and to defend,
indemnify and hold McKesson harmless for any failure on its part to do so.

 
M.
Any rebate, volume incentive or other similar payment based on Customer's
purchase volume (collectively, "Rebates") are offered to Customer as an
incentive for both volume purchases and prompt payment. Accordingly,
notwithstanding anything to the contrary in this Agreement, in the event that
Customer on the payment date for any such Rebate ("Rebate Payment Date") is not
current with respect to Customer's payments due and owing to McKesson pursuant
to this Agreement as of the Rebate Payment Date McKesson shall have no
obligation hereunder to pay any such Rebate either on the Rebate Payment Date or
at any time thereafter. Any Rebate that falls within the scope of the preceding
sentence shall be deemed forfeited; provided however, such forfeiture shall in
no way be considered a penalty.

 
N.
Participation hereunder by any of Customer's Pharmacies in McKesson's Preferred
Provider Network may be terminated by McKesson if such Pharmacy fails to comply
with the terms and conditions of this Agreement or the M.P.P.N. Agreement.

 
O.
McKesson shall be entitled at all times to set off any amount owing at any time
from Customer to McKesson against any amount payable at any time by McKesson to
Customer whether arising under this Agreement or otherwise. For purposes of this
Section, Customer and McKesson in each case shall include its subsidiaries and
affiliates.

 
P.
If McKesson determines that, as the result of the introduction of or any change
in or in the interpretation of any law, rule, regulation or industry standard or
guideline, or McKesson’s compliance therewith, there shall be any increase in
the cost to McKesson, or any capital expenditures made by McKesson, with respect
to its pharmaceutical distribution business, Customer shall pay to McKesson,
upon request, one or more fees in order to compensate McKesson for such
increased cost or capital expenditures.

 

--------------------------------------------------------------------------------

 
Q.
Customer agrees to fully comply with all federal, state and local laws and
regulations relating to its obligations under this Agreement or otherwise
applicable to the purchase, handling, sale or distribution of the Merchandise
and further agrees to defend, indemnify and hold McKesson harmless from any and
all liability arising out of or due to Customer's nonadherence with such legal
or regulatory requirements.

 
R.
In no event shall McKesson be liable to Customer or any other entity for any
special, consequential, incidental or indirect damages, however caused, on any
theory of liability and whether or not McKesson has been advised of the
possibility of such damages.

 
S.
For all purposes, Customer and McKesson shall remain independent contractors.
Accordingly, this Agreement does not constitute a partnership or other joint
venture between the parties and neither party shall be deemed to be an agent or
representative of the other.

 
T.
Whenever possible, each provision of this Agreement shall be interpreted so as
to be effective and valid under applicable law, but if any provision of this
Agreement should be prohibited or invalid under applicable law, such provision
shall be ineffective to the extent of such prohibition or invalidity without
invalidating the other of such provision or the remaining provisions of this
Agreement.

 
U.
All rights and remedies of the parties in connection with this Agreement are
cumulative and not exclusive.

 
V.
The section headings contained in this Agreement are for reference purposes only
and shall not affect in any way the meaning or interpretation of this Agreement.

 
W.
This Agreement may be executed in any number of counterparts, and each such
counterpart hereof shall be deemed an original instrument, but all such
counterparts together shall constitute one agreement.

 
IN WITNESS WHEREOF the parties have caused this Agreement to be duly executed as
of the date and year written below and the persons signing warrant that they are
duly authorized to sign for and on behalf of the respective parties. This
Agreement shall be deemed accepted by McKesson only upon execution by a duly
authorized representative of McKesson.
 

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MCKESSON CORPORATION
 
By:_________________________________
 
Name: Paul C. Julian________________
 
Title:Executive Vice President, Group President
 
Date: _______________________________
 

FAMILYMEDS GROUP, INC.
 
By:________________________________
 
Name:__Ed Mercadante_______________
 
Title:_President and CEO______________
 
Date:_______________________________