-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, pFiOHFi0duCznAh9PUsw8SRtYmUM05Qe8a+Q25QoHCm/2v8IUIiZ4BRHJooaouG1 zGz/8AYYYJcoLfIoFRZPhA== 0000950112-94-000848.txt : 19940404 0000950112-94-000848.hdr.sgml : 19940404 ACCESSION NUMBER: 0000950112-94-000848 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19940129 FILED AS OF DATE: 19940331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ECKERD CORP CENTRAL INDEX KEY: 0000031364 STANDARD INDUSTRIAL CLASSIFICATION: 5912 IRS NUMBER: 133302437 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 001-04844 FILM NUMBER: 94519873 BUSINESS ADDRESS: STREET 1: P O BOX 4689 CITY: CLEARWATER STATE: FL ZIP: 34618 BUSINESS PHONE: 8133996000 MAIL ADDRESS: STREET 1: JACK ECKERD CORPORATION STREET 2: P O BOX 4689 CITY: CLEARWATER STATE: FL ZIP: 34618 FORMER COMPANY: FORMER CONFORMED NAME: ECKERD DRUGS OF FLORIDA INC DATE OF NAME CHANGE: 19700112 10-K 1 ECKERD CORPORATION - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES 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 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED JANUARY 29, 1994 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 1-4844 ECKERD CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 13-3302437 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 8333 BRYAN DAIRY ROAD LARGO, FL 34647 (ADDRESS AND ZIP CODE OF PRINCIPAL EXECUTIVE OFFICES) (813) 399-6000 (REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED --------------------- -------------------------- COMMON STOCK, PAR VALUE $.01 NEW YORK STOCK EXCHANGE 11 1/8% SUBORDINATED AMERICAN STOCK EXCHANGE DEBENTURES DUE 2001 9 1/4% SENIOR SUBORDINATED NEW YORK STOCK EXCHANGE NOTES DUE 2004 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 the 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/ The aggregate market value of the voting stock held by non-affiliates of the Company as of March 26, 1994 was $347,938,887 (Calculated on the assumption that all directors, all executive officers, and Merrill Lynch Investors are affiliates). As of March 26, 1994, 31,642,902 shares of common stock, par value $.01, were outstanding. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ECKERD CORPORATION JANUARY 29, 1994 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
ITEM PART I PAGE - --------- --------- 1. Business........................................................................................... 3 2. Properties......................................................................................... 13 3. Legal Proceedings.................................................................................. 14 4. Submission of Matters to a Vote of Security Holders................................................ 14 PART II 5. Market for the Registrant's Common Stock, Debt Securities and Related Stockholder Matters.............................................................................. 14 6. Selected Financial Data............................................................................ 15 7. Management's Discussion and Analysis of Results of Operations and Financial Condition.............................................................................. 16 8. Financial Statements and Supplementary Data........................................................ 23 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......................................................................... 24 PART III 10. Directors, Executive Officers, Promoters and Control Persons of the Registrant..................... 24 11. Executive Compensation............................................................................. 26 12. Security Ownership of Certain Beneficial Owners and Management..................................... 34 13. Certain Relationships and Related Transactions..................................................... 36 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................... 36 2 PART I ITEM 1. BUSINESS GENERAL Eckerd Corporation (the "Company" or "Eckerd") operates the Eckerd Drug store chain, which is the third largest drug store chain in the United States. At January 29, 1994, the Eckerd Drug store chain consisted of 1,718 stores in 13 states located primarily in the Sunbelt, including 550 stores in Florida and 480 stores in Texas. Over its 40-year history, the Eckerd Drug store chain has built a strong market position in areas where demographic characteristics are favorable to drug store growth. The Company's stores are concentrated in 10 of the 12 metropolitan statistical areas with the largest percentage growth in population from 1980 to 1990, and, according to industry sources, the Company ranks first or second in terms of drug store sales in 12 of the 14 major metropolitan markets in which it operates. The primary focus of Eckerd Drug stores is the sale of prescription and over-the-counter drugs. During fiscal 1993, the Company filled more than 81 million prescriptions, and sales of prescription and over-the-counter drugs generated approximately 59% of the Company's drug store sales. During the period from fiscal 1989 to fiscal 1993, the dollar volume of sales of prescription drugs by the Company increased 55.4%. Another significant focus of Eckerd Drug stores is photo finishing. The Company is among the top three retail photo finishers in the United States, and the Company believes that it is the leading source of photo finishing in all of the major markets in which it operates. The Company processed over 28 million rolls of film in its own photo labs in fiscal 1993 and has several well known branded processing programs. The Company offers overnight photo finishing services in all Eckerd Drug stores and operates Eckerd Express Photo centers, which are one-hour photo finishing mini-labs. Eckerd Express Photo centers were located in 413 Eckerd Drug stores at January 29, 1994. The Company was formed in 1985 by Merrill Lynch Capital Partners, Inc. ("Merrill Lynch Capital Partners"), an affiliate of Merrill Lynch & Co., Inc. ("ML & Co."), for the purpose of acquiring the former Jack Eckerd Corporation ("Old Eckerd"), in April 1986 (the "Acquisition"). Merrill Lynch Capital Partners formed EDS Holdings Inc. ("EDS") and its wholly owned subsidiary, Eckerd Holdings II, Inc. ("EH II"), to acquire certain additional drug stores in July 1990. EH II owns 94 drug stores which were operated by the Company as Eckerd Drug stores following their acquisition, from Revco D.S., Inc. and Revco Discount Drug Centers, Inc. (together "Revco"), pursuant to a Management Agreement dated as of July 13, 1990, as amended (the "EH II Management Agreement"). On August 12, 1993, the Company completed an initial public offering (the "IPO") in which it issued and sold 5,175,000 shares of Common Stock for $14.00 per share. In connection with the consummation of the IPO, the holders of EDS common stock exchanged their shares for shares of Common Stock. Immediately thereafter, EDS was merged into Eckerd with EH II becoming a wholly owned subsidiary of Eckerd and the EH II Management Agreement was terminated. The acquisition of EDS by the Company was accounted for as a pooling of interests and all references in this Form 10-K to the "Company" for periods prior to such acquisition mean the Company, EDS and their respective subsidiaries. In connection with the IPO, the Company changed its name from "Jack Eckerd Corporation" to "Eckerd Corporation." See "The 1993 Transactions" and "Item 13. Certain Relationships and Related Transactions." The stockholders of the Company include (i) certain partnerships affiliated with Merrill Lynch Capital Partners, (ii) certain other affiliates of ML & Co. ((i) and (ii), collectively, the "Merrill Lynch Investors"), (iii) approximately 25 members of management (the "Management Investors"), (iv) the Company's Employees' Profit Sharing Plan and (v) certain affiliates of the banks which provided part of the financing for the Acquisition and other institutional investors. None of the Company's stockholders sold any shares of Common Stock in the IPO. THE 1993 TRANSACTIONS The Refinancing On June 15, 1993, the Company consummated the Refinancing, which was designed to simplify its capital structure, reduce interest expense and dividend costs and provide additional financial flexibility. 3 The Company entered a senior secured credit agreement with Chemical Bank and NationsBank of Florida, N.A., as managing agents, and the financial institutions thereto (the "Credit Agreement"), which provides for (a) a $650.0 million term loan facility (the "Senior Term Loans") consisting of a six-year amortizing Tranche A term loan facility of $500.0 million (the "Tranche A Term Loans") and a seven-year amortizing Tranche B term loan facility of $150.0 million (the "Tranche B Term Loans") and (b) a $300.0 million six-year revolving credit facility (a portion of which is available as a swingline loan facility and as a letter of credit and bankers' acceptance facility) (the "Revolving Loans"). The Company also entered into a sale and leaseback arrangement with Imaging Financial Services, Inc. (the "IFS Sale and Leaseback") relating to approximately $35.0 million of photo processing equipment. In addition, Eckerd, EDS and EH II amended the EH II Management Agreement to provide for the payment by EH II to Eckerd of $40.0 million, of which approximately $22.0 million represented payment by EH II of the management fee and interest thereon which was accrued and previously deferred and approximately $18.0 million represented prepayment by EH II of the management fee to be earned by the Company in the future, which prepayment was evidenced by an unsecured promissory note (the "EH II Note"). EH II obtained the funds necessary for such payments from cash generated by its operations and from borrowings of approximately $31.6 million under a new revolving credit and term loan agreement dated as of June 7, 1993 (the "EH II Credit Agreement") (the borrowings under the Credit Agreement, the consummation of the IFS Sale and Leaseback, the amendment to the EH II Management Agreement, including Eckerd's obligations under the EH II Note, borrowings under the EH II Credit Agreement, and the application of the proceeds therefrom, are collectively referred to as the "Refinancing"). The net proceeds from the Refinancing were used to pay, prepay or redeem (i) borrowings outstanding under the Company's prior Credit Agreement, dated as of July 13, 1990, as amended, with Morgan Guaranty Trust Company of New York and the other lenders party thereto (the "Old Credit Agreement"), which consisted of a revolving credit facility and a term loan facility, (ii) the 11.39% Senior Notes due January 31, 1995 of the Company (the "11.39% Senior Notes"), at a prepayment price of 100% of the principal amount thereof plus a make-whole amount, (iii) the 11.75% Senior Notes due April 15, 1995 of the Company (the "11.75% Senior Notes"), at a prepayment price of 105% of the principal amount thereof, (iv) the Senior Secured Floating Rate Notes due April 15, 1997 of the Company (the "Floating Rate Notes"), at a redemption price of 101% of the principal amount thereof, (v) the 13% Senior Secured Fixed Rate Notes due April 15, 1997 of the Company (the "13% Fixed Rate Notes"), at a redemption price of 106.6% of the principal amount thereof, (vi) the Discount Subordinated Debentures due May 1, 2006 of the Company (the "13% Discount Debentures"), at a redemption price of 100% of the principal amount thereof (except for the $50.0 million aggregate principal amount of 13% Discount Debentures which was subsequently redeemed with the net proceeds from the Note Issuance (as defined below)) and (vii) the 14 1/2% Preferred Stock, at a redemption price of $1,000 per share plus a redemption premium of $48.30 per share. The IPO and Related Transactions and the Note Issuance On August 12, 1993, the Company consummated the IPO and certain related transactions. Immediately prior to the consummation of the IPO, the stockholders of EDS (which included certain of the Merrill Lynch Investors and certain of the Management Investors) exchanged their shares of EDS common stock for shares of Class A common stock of the Company. EDS was subsequently merged into the Company with EH II becoming a wholly owned subsidiary of the Company, and the EH II Management Agreement was terminated upon consummation of the IPO. In connection with the IPO the Company also amended its Restated Certificate of Incorporation to effect, among other things, (i) the reclassification of its Class A common stock and Class B common stock into Common Stock at certain specified rates, (ii) a 2-for-3 reverse stock split (the "Stock Split"), (iii) the adoption of certain provisions such as a classified board of directors and the prohibition of stockholder action by written consent, which could make non-negotiated acquisitions of the Company more difficult and (iv) the change of the Company's name from "Jack Eckerd Corporation" to "Eckerd Corporation." Of the approximately $65.8 million of net proceeds of the IPO, the Company used approximately $30.0 million to repay all borrowings outstanding under the EH II Credit Agreement and the balance to repay 4 borrowings under the Credit Agreement consisting of Tranche A Term Loans of $27.5 million and Tranche B Term Loans of $8.3 million. On November 2, 1993, the Company consummated the sale (the"Note Issuance") of $200.0 million aggregate principal amount of 9 1/4% Senior Subordinated Notes due 2004 (the "Notes") . The net proceeds from the Note Issuance were used to redeem (i) the remaining $50.0 million aggregate principal amount of the 13% Discount Debentures and (ii) $145.0 million aggregate principal amount of the 11 1/8% Subordinated Debentures due 2001 of the Company (the "11 1/8% Debentures"). ECKERD DRUG STORES In 1992, the Company celebrated the 40th anniversary of the opening of its first Eckerd Drug store. The Company has grown to its present size and developed its leading position in the industry through both internal expansion and acquisitions. As of January 29, 1994, the Company operated the number of Eckerd Drug stores and Eckerd Express Photo centers indicated below in each of the following states:
DRUG STORES ECKERD WITH ECKERD DRUG EXPRESS PHOTO STORES CENTERS --------- ----------------- Florida............................................................ 550 203 Texas.............................................................. 480 112 North Carolina..................................................... 197 39 Georgia............................................................ 160 38 Louisiana.......................................................... 110 16 South Carolina..................................................... 81 4 Tennessee.......................................................... 35 1 Mississippi........................................................ 26 -- Oklahoma........................................................... 25 -- New Jersey......................................................... 23 -- Alabama............................................................ 19 -- Delaware........................................................... 11 -- Maryland........................................................... 1 -- --------- ------ Total......................................................... 1,718 413 --------- ------ --------- ------
The following table summarizes the number of Eckerd Drug stores operated by the Company and the sales on an aggregate and per store basis for the last five years. Upon consummation of the Acquisition, the Company operated 1,593 Eckerd Drug stores.
FISCAL YEARS -------------------------------------------------------------------------- 1993 1992 1991 1990 1989 ------------------ ------------ ------------ ------------ ------------ (DOLLARS IN THOUSANDS) Number of Eckerd Drug stores at beginning of period................................. 1,696 1,675 1,673 1,630 1,580 Stores opened or acquired................. 52 50 22 139(1) 75 Stores sold or closed..................... (30) (29) (20) (96)(2) (25) ------------------ ------------ ------------ ------------ ------------ Number of Eckerd Drug stores at end of period.................................... 1,718 1,696 1,675 1,673 1,630 ------------------ ------------ ------------ ------------ ------------ ------------------ ------------ ------------ ------------ ------------ Number with Express Photo centers......... 413 378 321 258 189 Sales of Eckerd Drug stores............... $ 4,014,094 $ 3,722,523 $ 3,594,037 $ 3,330,062 $ 3,023,417 Average annual sales per Eckerd Drug store..................................... $ 2,365 $ 2,222 $ 2,142 $ 2,036 $ 1,887
- --------------- (1) Includes 96 stores acquired by, and managed on behalf of, EH II (two of which were closed in fiscal year 1991). Excludes 127 stores acquired by EH II that were liquidated or sold. (2) Includes 14 Eckerd Drug stores closed as a result of the acquisition of drug stores by EH II. The Company intends to continue to expand its business through both internal expansion and acquisitions of smaller drug store chains and independent drug stores. Although the Company currently plans to expand Eckerd Drug stores within the Company's existing markets, the Company also considers strategic acquisitions in other markets. During the last three fiscal years, the Company has 5 acquired or opened 124 new stores. The Company opened or acquired 52 drug stores in fiscal 1993 and has a goal of opening or acquiring up to 50 drug stores per year in fiscal 1994 and thereafter through 1997. In addition to such openings and acquisitions, the Company expects to sell or close approximately 15 drug stores per year in fiscal 1994 and thereafter through 1997, which would be intended to improve the quality of the Company's store base. Because of the improvement in the quality of the Company's store base since the Acquisition, the Company expects the average number of such closures and divestitures per year in future years to be less than the average number of closures and divestitures per year that have occurred since the Acquisition. However, no assurance can be given that the Company will be able to open or acquire such number of drug stores or that the average number of closures and divestitures in future years will in fact be less than the average number of such closures and divestitures since the Acquisition. The cash costs associated with opening a drug store are estimated to be approximately $455,000, which includes initial inventory costs of approximately $265,000. The Company intends to use cash flow from operations to finance the cash costs of this growth, although borrowings may also be available to finance such growth. See "Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition--Liquidity and Capital Resources." In determining the areas in which to open or acquire drug stores, the Company evaluates a number of demographic considerations, including the size, growth pattern and per capita income of the population, as well as the competitive environment and the accessibility of a proposed site to the customer and to the Company's warehouse and distribution facilities. The Company also continually reviews these factors and the performance of individual stores in determining whether to close or relocate certain stores. PRODUCTS AND SERVICES Pharmacy The primary focus of Eckerd Drug stores is the sale of prescription and over-the-counter drugs. During fiscal 1993, the Company filled more than 81 million prescriptions, and sales of prescription and over-the-counter drugs generated approximately 59% of the Company's drug store sales. During the period from fiscal 1989 to fiscal 1993, the dollar volume of sales of prescription drugs by the Company increased 55.4%. The Company seeks to position pharmacists as health-care professionals who build relationships with their customers. Over the years, marketing and advertising campaigns have been focused on reinforcing the professionalism of the Company's pharmacists and positioning them as a key factor to high quality pharmacy service. The Company has also instituted several health-related programs such as health screenings, education and outreach programs, and customer relationship programs. The Company provides the "Rx Advisor," a personalized easy-to-read publication, to each prescription drug customer, which advises the customer of the specific dosages, contraindications and side effects of his or her prescription medicine. Eckerd Drug store pharmacy departments are modern, clean and clearly identified by attractive signs. The pharmacy areas in many of the Company's newer and remodeled stores provide a consultation area and a waiting area with comfortable seating, informational brochures and free blood pressure testing. The pharmacy areas are designed to be conducive to customer service and counseling by the pharmacists. The Company has devoted substantial resources to marketing to third party payors, such as insurance companies, health maintenance organizations, preferred provider organizations and other managed care providers and government agencies. Over the last five fiscal years, the Company increased by more than 50% the number of third-party sales representatives and administrative personnel to 24 people. In addition, the Company's computer systems provide on-line adjudication which permits the Company and the third-party payor to electronically determine, at the time of sale, eligibility of the customer, coverage of the prescription and pricing and co-payment requirement, if any, and automatically bills the respective plan. On-line adjudication reduces losses from rejected claims and eliminates a portion of the Company's paperwork for billing and collection of receivables and costs associated therewith. Third-party prescription sales accounted for approximately 58.0%, 49.6%, and 43.1% of the Company's prescription sales in fiscal 1993, fiscal 1992 and fiscal 1991, respectively. 6 Photo Finishing Another significant focus of Eckerd Drug stores is photo finishing. The Company offers overnight photo finishing services in all Eckerd Drug stores and operates Eckerd Express Photo centers, which are one-hour photo processing mini-labs. Eckerd Express Photo centers were located in 413 Eckerd Drug stores at January 29, 1994. Sales from photo finishing accounted for approximately 5.1% of the Company's drug store sales in fiscal 1993 and were the second largest component of drug store profit. The Company is among the top three retail photo finishers in the United States, and the Company believes that it is the leading source of photo finishing in all of the major markets in which it operates. The Company processed over 28 million rolls of film in fiscal 1993 in its own photo labs and has several well known branded processing programs, including System 2(R) (two prints for the price of one), Ultralab 35(R) (larger size, higher quality prints) and Express Print 60 (one-hour processing). The Company believes that its branded processing programs, which emphasize quality and service, have helped position the Company as a leader in photo finishing. The Company currently intends to continue to expand its one-hour photo finishing business, with a goal of adding approximately 300 new Express Photo centers by 1998. As a method of financing such growth, the Company entered into the IFS Sale and Leaseback, which also provides the Company with up to $10 million per year in new five-year operating leases for future expansion or upgrade of photo processing equipment. The Company's photo departments also offer camera and photo accessories, small electronics, batteries and audio and video tapes. The entire photo department, including photo finishing, represented approximately 9.5% of the Company's total drug store sales in fiscal 1993. Nonpharmacy Merchandise In addition to prescription and over-the-counter drugs and photo finishing services, Eckerd Drug stores sell a wide variety of nonpharmacy merchandise, including health and beauty aids, greeting cards and numerous other convenience products. Eckerd-brand products, which are attractively priced and provide higher margins than similar national brand products, represent a growing segment of products offered by Eckerd Drug stores. Sales of private label products accounted for $188.1 million of the Company's sales in fiscal 1993. Health. Eckerd Drug stores offer a broad assortment of popular national brands as well as private label over-the-counter drugs and other products related to dental care, foot care, vitamins and nutritional supplements, feminine hygiene, family planning and baby care. Eckerd Drug stores provide a helpful environment in which consumers can obtain product information from professional pharmacists, knowledgeable sales associates and store managers or from literature available throughout the store. Beauty. Eckerd Drug stores offer an assortment of popular brand name cosmetics, fragrances and other beauty products. Management believes that Eckerd Drug stores provide the customer with a convenient format in which to purchase the lines of beauty products offered in its stores. Skin care products are an increasingly important component of the beauty category due to the aging population and growing concern about the effects of the environment on the skin. The Company has recently completed an expansion which devoted more shelf space to this product category. Greeting Cards. The greeting card department in Eckerd Drug stores offers a wide selection of contemporary and traditional cards, gift wrap, bows and novelties. The Company believes that the locations of its stores together with the wide selection offered by Eckerd Drug stores enable customers to satisfy their card and gift needs more conveniently than at traditional card stores. The Company has recently increased the space devoted to its greeting card department because of the profitability of such merchandise and because the Company believes that the demand for such merchandise will increase traffic in its stores. Convenience Products. This merchandise category consists of an assortment of items, including candy, food, tobacco products, books and magazines, household products, seasonal merchandise and toys. These items are carefully positioned to provide optimum convenience to the customer with easy access in the front part of the store. The Company also seeks to serve its customers' needs by specifically tailoring items in this category to meet the needs of its customers in specific store locations, including 7 the introduction of a food mart concept in selected locations. For example, souvenirs and select summer products are offered in beach and tourist locations while convenience food is stressed in urban areas and malls. STORE OPERATIONS Eckerd Drug stores are located and designed to maximize customer service and convenience and are situated in areas of high customer traffic, typically in neighborhood shopping centers with strong supermarket co-tenants or in strategically located free-standing stores. Eckerd Drug stores are designed to facilitate customer movement and feature well-stocked shelves, clearly identified aisles and well-lit interiors to maximize product visibility. Pharmacy departments are generally located near the back of the store to maximize customer exposure to the store. The stores are equipped with modern fixtures and equipment and most of them range in size from 8,200 to 10,800 square feet. About 85% of the floor space is selling area, with the remainder used for storeroom and office space. To enhance productivity per square foot and maintain consistent merchandising, the Company utilizes centrally prepared formats for the display and stocking of products in the Company's stores, while continuing to allow some flexibility to store managers to modify the merchandise assortment based upon the Company's program of tailoring merchandise offerings to the markets in which the stores operate. The typical Eckerd Drug store is open every day of the year except Christmas, with store hours geared to the needs of the specific markets. A select number of strategically located stores stay open until midnight or 24 hours a day. Eckerd Drug stores are currently grouped under six operating regions located in or near Orlando and Deerfield Beach, Florida; Atlanta, Georgia; Charlotte, North Carolina; and Dallas and Houston, Texas. Each operating region is headed by a vice president who supervises the various districts comprising the region. Within each district, there are managers who are responsible for the drug stores in their districts and regularly visit their stores to assure quality of service and merchandising. District pharmacy managers supervise the pharmacy operations in the drug stores. Each drug store is individually supervised by a manager who receives training in the Company's merchandise offerings, customer service and management strategy. The Company has implemented various programs designed to reduce shrinkage expense. These programs include training and awareness programs, tailored audit programs for district managers, internal auditors and loss prevention specialists, and computerized exception reporting for, among other things, customer refunds, voids and cash overages and shortages from daily register check-outs. PURCHASING AND DISTRIBUTION Merchandising, buying and supplier payments are generally centralized at Company headquarters to assure consistency of marketing approach and efficiency in supplier relations. The Company has implemented an enhanced electronic buying system to improve inventory management and gross profit by enabling the Company to take better advantage of quantity discounts and forward buying opportunities, which the Company believes will lower the average cost of inventory. Additionally, it is anticipated that this buying system and its improved forecasting ability will improve service levels to the stores and will reduce average inventory required in the Company's distribution centers. Approximately 85% of store merchandise is purchased centrally and distributed, principally by Company-operated trucks, through the Company's five centrally located distribution facilities located in or near Orlando, Florida; Atlanta, Georgia; Charlotte, North Carolina; and Dallas and Houston, Texas. The remainder of store merchandise is purchased at the store level. ADVERTISING AND MARKETING A combination of newspaper advertising and TV and radio spot commercials is carried on throughout the year to promote sales. During the fiscal year ended January 29, 1994, these advertising expenses totaled approximately 0.6% of Company sales. The Company's concentration of stores within its markets enables it to achieve economies of scale in its advertising and marketing expenditures and also enables the Company to negotiate favorable rates for advertising time and print production. From 8 the time of the Acquisition through fiscal 1993, the Company reduced its advertising expense as a percentage of sales by more than 70%. In addition, the Company has derived additional cost savings through a rationalization of its advertising expenditures. As part of the cost reduction program, certain advertising expenditures related to the Company's overall corporate image were reduced in favor of advertising efforts such as newspaper circulars. This change in advertising strategy has resulted in increased financial support from the Company's vendors and a more direct impact on sales. The Company believes that its current level of advertising expenditures is appropriate to support its existing marketing strategies. The Company's communications and marketing programs are based upon an ongoing commitment to consumer research. Through regular telephone surveys in all major markets, exit interviews in its stores, and studies of various consumer groups, the Company is able to monitor changes in customer attitudes and shopping habits and adjust its marketing strategies accordingly. INFORMATION AND TECHNOLOGY The Company intends to continue to invest in information systems to improve customer service, reduce operating costs, provide information needed to support management decisions and enhance the Company's competitive position with third-party payors. The Company's Comp-U-Care System, installed in each pharmacy location, provides support for the pharmacy and assists pharmacists in their prescription processing activities, which in turn enhances the pharmacy's ability to service customers. The system's daily transfer of information between headquarters and each of the in-store pharmacy terminals allows central monitoring of prescription sales activity by store and item, centralized billing of third-party sales and daily updates to the stores' data files. The Comp-U-Care System performs on-line adjudication of customer and claim eligibility and reimbursement for the majority of the third-party payment plans in which the Company participates. Because on-line adjudication reduces losses from rejected claims and eliminates a portion of the Company's paperwork for billing and collection of receivables and costs associated therewith, the Company believes that it is essential to servicing the increasing volume of third-party sales. The Company is in the process of implementing a four-year pharmacy systems enhancement plan designed to provide additional support to pharmacists, meet the increasing complexity of third-party programs and enhance the Company's competitive position through advanced technology. As part of this plan, the Company is currently developing its advanced Comp-U-Care 2000, which is scheduled to be introduced in Eckerd Drug stores in the second half of fiscal 1994. The Comp-U-Care 2000 will electronically link all Eckerd Drug stores, which will permit the transfer of information, such as prescription files directly from one drug store to another thereby improving customer service by providing more comprehensive patient utilization review and enabling customers to fill and refill prescriptions at any Eckerd Drug store. The Company is also in the process of installing a satellite communications system, which will enhance the Company's on-line third-party authorization and adjudication capability and its ability to communicate between stores and reduce communication costs. The Company expects to complete such installation by the end of fiscal 1994. The Company believes that the satellite communications system will facilitate implementation of its pharmacy systems enhancement plan. The Company currently has point-of-sale ("POS") product scanning equipment in approximately 55 stores and expects to expand scanning to approximately 500 stores by the end of fiscal 1994 with a goal of implementing scanning throughout the chain. Scanning is a system which inputs POS information by reading the universal product code of merchandise sold with either a hand held or slot scanner to capture information on each specific item of product, including variations in size and color (a stock-keeping unit or "SKU"), sales data and pricing information. The Company has developed computer systems that use the information generated from scanning to analyze sales, gross profit, inventory levels and direct product profitability by category, department and operating region and, in certain instances, SKU. Such information identifies early trends in sales by SKU, gross profit performance and inventory position and is also a source for measuring inventory shrinkage performances. The Company will expand scanning in 1994 to its higher volume stores in order to maximize benefits and recover the related expenses more efficiently. The Company believes that broader use of scanning throughout the 9 chain will improve customer service by decreasing customer check out time, providing an opportunity to improve margins by more accurately reflecting the prices of merchandise and improving adherence to advertised sale or promotional prices and providing enhanced inventory control and merchandise information. The Company believes the direct benefits of scanning will be adequate to offset the related expense. The Company has had a representative sample of stores located through its six operating regions equipped with electronic POS terminals to capture the same type of SKU, sales data and pricing information as scanning. This sample currently includes 250 stores which were selected based upon certain criteria intended to represent the merchandising results for the entire chain and its operating regions. The Company developed computer systems to analyze the information generated from this electronic POS sample and continues to use this sample information which, similar to scanning, identifies early trends in sales by SKU, gross profit performance and inventory position and is a source for measuring inventory shrinkage performances. The Company believes that its current use of POS terminals and its use of the information generated thereby will facilitate the Company's implementation of scanning throughout the chain. The Company is beginning to expand its use of electronic data interchange ("EDI") systems with certain of its major suppliers. EDI allows for the paperless ordering of products with immediate confirmation from the vendor on price, delivery terms and amount of goods ordered. The Company is also experimenting with automatic replenishment buying in connection with its warehouse and distribution systems, which includes the computer generation of purchase orders for certain vendors. These systems should also allow the Company to reduce lead time on orders and improve cash flow by reducing the amount of inventory required to be kept on hand. EDI will be expanded as the Company expands its scanning system. In 1993, the Company and Integrated Systems Solutions Corporation ("ISSC"), a wholly-owned subsidiary of IBM, entered into a Systems Operations Service Agreement pursuant to which the Company and ISSC are developing a state of the art information systems operation to include pharmacy and POS systems for the Company's drug stores. Under the agreement, ISSC manages the Company's entire information systems operation and is responsible for providing technology services to the Company, which results in, among other things, improved productivity and significant hardware savings to the Company. ISSC is in the process of implementing scanning, the Comp-U-Care 2000 and a new distribution system. The Systems Operations Services Agreement has a 10-year term, and the total payments to be made by the Company thereunder are currently expected to be between $320.0 million and $440.0 million over such term, depending on optional services utilized. The Company believes that this arrangement has and will continue to enable the Company to further improve customer service, replace the Company's existing systems, reduce operating costs and capital expenditures for hardware, obtain information needed to support management decisions on an improved basis and increase the Company's focus on its core business. The Company is also developing software with applications in the human resources area, which would more accurately monitor personnel performance and attendance and assist management in making personnel scheduling decisions in an effort to increase productivity and reduce operating costs. Such software is expected to be implemented in fiscal 1995. COMPETITION The Company's retail drug stores operate in a highly competitive industry. The Company's drug stores compete primarily on the basis of customer service, convenience of location and store design, price and product mix and selection. In addition to traditional competition from independent drug stores and other drug store chains, the Company faces competition from mass merchants (including discounters and deep discounters), supermarkets, combination food and drug stores, mail order distributors, hospitals and HMOs. These other formats have experienced significant growth in their market share of the prescription and over-the-counter drug business. Many of the Company's competitors have greater financial resources than the Company. 10 The Company's Express Photo centers compete with a variety of photo processors including other mini-labs, retail stores and photo specialty stores. The Company's Express Photo business competes primarily on the basis of quality of processing, quality and speed of service and value. In May 1992, the Company commenced a program in certain selected markets involving lowering prices on prescription drugs sold to non third-party customers in order to enhance its market share and long term competitive positions. Such competitive pricing program was implemented in all of the Company's markets by November 1992. Prescription sales to non third-party customers represented 42.0% of the Company's fiscal 1993 prescription sales. The Company believes that its reduced prescription prices, together with the overall value provided by the high level of customer service and convenience offered by its drug stores, have enabled the Company to more aggressively compete with other drug stores and have enhanced its competitive position with other shopping formats. In addition, since May 1992, the Company has implemented a cost reduction program which eliminated operating expenses of approximately $70.0 million in fiscal 1993. The Company estimates that $10.0 million of such savings was recognized in fiscal 1992. REGULATION All of the Company's pharmacists and its stores are required to be licensed by the appropriate state boards of pharmacy. The Company's drug stores and its distribution centers are also registered with the Federal Drug Enforcement Administration. Most of the stores sell beer and wine and are subject to various state and local liquor licensing requirements. By virtue of these license and registration requirements, the Company is obligated to observe certain rules and regulations, and a violation of such rules and regulations could result in a suspension or revocation of the licenses or registrations. The Company has a number of third-party payor contracts pursuant to which the Company is a provider of prescription drugs. "Freedom of choice" state statutes, pursuant to which all pharmacies would be entitled to be a provider under such a contract, have been enacted in certain states, including Alabama, Georgia, New Jersey, North Carolina, Louisiana, Tennessee and Texas, and may be enacted in others. Although such statutes may adversely affect certain of the Company's third-party contracts, they may also provide the Company with opportunities regarding additional third-party contracts. The Clinton Administration has stated that health care reform is one of its top priorities, and a governmental task force was appointed to prepare recommendations as to changes which should be implemented. President Clinton's plan for health care reform was outlined broadly to Congress on September 22, 1993 and was subsequently introduced as legislation on November 20, 1993. The President's plan is currently being considered by several committees in Congress. The goal of such plan, which would be phased in from 1995 through 1997, is to guarantee comprehensive health coverage (including prescription drugs) for all Americans regardless of health or employment status through a system of regional and corporate health alliances that are expected to promote competition and maintain quality, service and price. Under President Clinton's plan, all employers would be required to pay at least 80% of the coverage for their employees, and an independent national supervisory board would be established to implement and enforce the national budget for health care spending, with the power, among others, to investigate the prices of new drugs that represent a breakthrough over existing therapies. In addition, under the Clinton health care reform plan benefits offered under the Medicare program would be expanded to cover prescription drugs on an outpatient basis, and discriminatory pricing by prescription drug manufacturers based on "class of trade" (e.g., hospitals, mail order pharmacies, HMOs) would be eliminated. Health care reform, if implemented, could adversely affect the pricing of prescription drugs or the amount of reimbursement from governmental agencies and third-party payors, and consequently could be adverse to the Company. A number of competing health care reform proposals have been introduced in Congress and others are expected to be introduced in the future. President Clinton's proposals to expand prescription drug coverage to all Americans, including those covered by the Medicare program, and to eliminate discriminatory pricing by prescription drug manufacturers may not be included in any of the other health care reform proposals. The Company cannot predict the outcome of the Clinton health care reform plan or of any other reform initiatives or the impact thereof on the Company's financial position or results of operations. However, to the extent health care reform expands the number of persons receiving health care benefits covering the purchase 11 of prescription drugs, it would also result in increased purchases of such drugs and could thereby have a favorable impact on both the Company and the retail drug industry in general. Nevertheless, there can be no assurance that any such future legislation or any similar legislation adopted by any states in which the Company operates will not adversely affect the Company or the retail drug store industry generally. In 1990, Congress enacted the Omnibus Budget Reconciliation Act of 1990 ("OBRA 1990") which includes a requirement that states implement pharmaceutical drug use review programs for Medicaid beneficiaries receiving covered out-patient prescription drugs. The OBRA 1990 legislation states that pharmacists must offer to discuss with each Medicaid patient "common, severe side or adverse effects or interactions and therapeutic contraindications that may be encountered, including their avoidance and the action required if they occur." In order to ensure reimbursement of out-patient prescription drugs under Medicaid, states were required, pursuant to the OBRA 1990 legislation, to implement drug use review programs by January 1, 1993. In all states where the Company operates (except South Carolina), the State Pharmacy Practices Acts have expanded the OBRA requirements to include all patients receiving prescriptions in a retail setting. Pharmacists now have a duty to warn the purchaser of a prescription drug if the warning could reduce or negate the adverse effects of the use of such drug. In 1993, the state of Florida enacted health care legislation that is applicable to state employees, small businesses with fewer than 50 employees and Medicaid recipients. Such legislation, which will be implemented in 1994, will create 11 health care purchasing cooperatives, which will accept bids from health care providers to provide goods and services to the cooperatives. The Company expects to submit bids to provide prescription drugs to the cooperatives. However, the Company is unable to predict the outcome of such bids or the impact of the Florida legislation on the Company's financial position or results of operations. In January 1994, the state of Tennessee replaced its Medicaid program with a program that is run by various managed care organizations. Several different plans exist under such legislation and the Company is participating in substantially all of the plans but not others. The Company is unable to predict the impact of the Tennessee legislation on the Company's financial position or results of operations but the Company does not believe the impact will be significant. OTHER OPERATIONS The Company has been engaged in the institutional pharmacy business since 1980. In October 1989, the Company purchased the predecessor of Insta-Care from Revco and integrated that business with its existing operations. Insta-Care provides prescription drugs as well as patient record and consulting services to long-term health care facilities in New England and the Sunbelt. Sales of Insta- Care were $107.5 million in fiscal 1993, accounting for approximately 2.5% of the Company's sales and 2.6% of the Company's earnings before interest and taxes. Insta-Care is not part of the Company's core drug store business and the Company is considering the sale of the assets or stock of Insta-Care and would sell such stock or assets if a suitable opportunity arose. No assurance can be given that a sale of Insta-Care will be consummated in the future or, if consummated, that the proceeds will be used other than to repay indebtedness outstanding under the Credit Agreement, as currently required by the Credit Agreement. The Company operated Eckerd Optical centers and "Visionworks" retail optical superstores until the Vision Group was sold effective January 30, 1994. The Company sold the Vision Group to an investment group, which included Richard W. Roberson, the President of the Vision Group, and other members of the Vision Group management, for an amount in cash and notes approximately equal to the book value of the related assets. Sales of the Vision Group were $60.7 million in fiscal 1993, accounting for approximately 1.5% of the Company's sales and 2.2% of the Company's earnings before interest and taxes. EMPLOYEES As of January 29, 1994, the Company had approximately 43,000 employees, of which 24,100 were full-time employees. The Company believes that overall employee relations are good. None of the Company's employees are represented by unions. 12 PATENTS, TRADEMARKS AND TRADENAMES No patent, trademark, license, franchise or concession is considered to be of material importance to the business of the Company other than the trade names under which the Company operates its retail businesses, including the Eckerd name. The Company also holds servicemarks for its photo finishing products, private label products and information systems. ITEM 2. PROPERTIES The Company conducts substantially all of its retail businesses from stores located in leased premises. Substantially all of these leases will expire within the next twenty-five years. In the normal course of business, however, it is expected that leases will be renewed or replaced by leases on other properties. Most of the Company's store leases provide for a fixed minimum rental together with a percentage rental based on sales. The material office and distribution center properties owned or leased by the Company at January 29, 1994 are as follows:
APPROXIMATE OWNED OR LOCATION SQUARE FEET LEASED - --------------------------------------------------------------------------------- ------------ ----------- Largo, Florida................................................................... 488,000 Owned(1) Charlotte, North Carolina........................................................ 587,000 Owned Garland, Texas................................................................... 270,000 Owned Conroe, Texas.................................................................... 345,000 Owned Orlando, Florida................................................................. 321,000 Owned(2) Orlando, Florida................................................................. 587,000 Leased(2) Newnan, Georgia.................................................................. 244,000 Owned(3) Hammond, Louisiana............................................................... 185,000 Owned(3)(4)
- --------------- (1) Includes the Company headquarters. (2) In January, 1993 the Company assumed a lease for an office and distribution facility of approximately 587,000 square feet (lease expires 2005). The Company's existing Orlando facility and the Largo distribution center facility were consolidated into the new facility during 1993. Existing Orlando facilities which are owned are being offered for sale. (3) Construction was financed pursuant to revenue bond issues. Because these properties are currently leased subject to nominal purchase options with development authorities which the Company anticipates it will exercise, they are listed as owned by the Company. (4) The Company closed the Hammond distribution center and subleased the former Hammond, Louisiana office and distribution center. The Company considers that all property owned or leased is well maintained and in good condition. 13 ITEM 3. LEGAL PROCEEDINGS In the ordinary course of its business, the Company and its subsidiaries are parties to various legal actions which the Company believes are routine in nature and incidental to the operation of the business of the Company and its subsidiaries. The Company believes that the outcome of the proceedings to which the Company and its subsidiaries currently are parties will not have a material adverse effect upon its operations or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the last quarter of the fiscal year ended January 29, 1994. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK, DEBT SECURITIES AND RELATED STOCKHOLDER MATTERS The Company's common stock is listed on the New York Stock Exchange (Symbol: ECK) and started trading on August 6, 1993. The approximate number of shareholders of record on March 26, 1994 was 974. The Company has not paid or declared any dividends on its common stock.
FISCAL 1993 QUARTER ENDED MARKET PRICE ------------------------ PER SHARE INFORMATION 10/30/93 1/29/94 - -------------------------------------------------------------------------------- ----------- ----------- High....................................................................... 18 20 3/4 Low........................................................................ 12 3/4 13 3/4
The Company's 11 1/8% Debentures are listed on the American Stock Exchange. The Notes are listed on the New York Stock Exchange. The Company is subject to restrictive covenants under its Credit Agreement and the Notes which restrict the payment of dividends. 14 ITEM 6. SELECTED FINANCIAL DATA The following historical selected financial data for the years presented below has been derived from the Company's consolidated financial statements. The historical financial data for the three fiscal years ended January 29, 1994 has been derived from, and should be read in conjunction with, the Company's audited consolidated financial statements and related notes which are incorporated by reference in Item 8 of this Form 10-K.
FISCAL YEAR ENDED(1) --------------------------------------------------------------- JAN. 29, JAN. 30, FEB. 1, FEB. 2, FEB. 3, 1994(2) 1993 1992 1991 1990 ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Sales and other operating revenue...... $ 4,190,539 $ 3,887,027 $ 3,739,852 $ 3,456,134 $ 3,175,061 Cost of sales, including store occupancy, warehousing, and delivery expense.................................. 3,175,375 2,896,479 2,738,545 2,527,544 2,283,822 ----------- ----------- ----------- ----------- ----------- Gross profit........................... 1,015,164 990,548 1,001,307 928,590 891,239 Operating and administrative expenses.. 857,980 855,165 854,209 817,263 755,840 ----------- ----------- ----------- ----------- ----------- Earnings before interest, taxes, and extraordinary items...................... 157,184 135,383 147,098 111,327 135,399 Total interest expenses................ 113,215 137,404 143,194 147,309 141,548 ----------- ----------- ----------- ----------- ----------- Earnings (loss) before income taxes and extraordinary items...................... 43,969 (2,021) 3,904 (35,982) (6,149) Income tax provision................... 2,556 2,864 2,927 -- 1,828 ----------- ----------- ----------- ----------- ----------- Earnings (loss) before extraordinary items.................................... 41,413 (4,885) 977 (35,982) (7,977) Extraordinary item--early retirement of debt and preferred stock................. (44,354) -- -- -- -- Extraordinary item--tax effect of utilization of net operating loss carryforward............................. -- 762 1,680 -- 1,828 ----------- ----------- ----------- ----------- ----------- Net earnings (loss).................... $ (2,941) $ (4,123) $ 2,657 $ (35,982) $ (6,149) ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net earnings (loss) available to common shares................................... $ (7,865) $ (14,938) $ (8,166) $ (46,848) $ (17,205) Earnings (loss) before extraordinary items per common share(3)................ $ 1.24 $ (0.59) $ (0.38) $ (1.97) $ (0.87) Net earnings (loss) per common share(4)................................. (0.27) (0.56) (0.32) (1.97) (0.79) Ratio of earnings to fixed charges..... -- (5) -- (5) 1.02x -- (5) -- (5) Deficiency in earnings to fixed charges.................................. 2,941 4,123 -- 35,982 6,149 BALANCE SHEET DATA: Working capital........................ $ 306,588 $ 367,027 $ 328,617 $ 347,775 $ 175,009 Total assets........................... 1,417,504 1,418,922 1,412,249 1,443,167 1,392,987 Long-term debt (including current installments)............................ 954,891 1,048,222 1,023,106 1,084,088 1,078,826 Preferred stock........................ -- 75,000 75,000 75,000 75,000 Stockholders' deficit.................. (179,022) (243,291) (228,353) (220,187) (208,339)
- --------------- (1) Statement of operations data and other operating data for fiscal year ended February 3, 1990 includes 53 weeks of operations. All other fiscal years include 52 weeks of operations. The drug store data for fiscal year ended February 3, 1990 has been restated on the basis of a 52-week year for purposes of comparability. (2) The statement of operations data and other operating data for the fiscal year ended January 29, 1994 reflect the results of (i) the Refinancing from June 15, 1993 (except for the redemption of the Floating Rate Notes, 13% Fixed Rate Notes, 13% Discount Debentures and 14 1/2% Preferred Stock (as such terms are defined in "The 1993 Transactions"), which occurred on July 15, 1993 and is reflected from such date), (ii) the IPO from August 12, 1993 and (iii) the Note Issuance from November 2, 1993 (except for the redemption of the 13% Discount Debentures and the 11 1/8% Debentures, which occurred on December 2, 1993 and is reflected from such date). (3) Reflects payment of preferred stock dividends of $4,924 in fiscal 1993, $10,815 in fiscal 1992, $10,823 in fiscal 1991, $10,866 in fiscal 1990 and $11,056 in fiscal 1989. (4) Net earnings (loss) per common share was calculated on the basis of 29,392,805, 26,573,902, 25,677,103, 23,793,496 and 21,764,865 weighted average shares of Common Stock outstanding for fiscal 1993, 1992, 1991, 1990 and 1989, respectively. (5) Earnings were inadequate to cover fixed charges. 15 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS The following table sets forth certain operating data as a percentage of sales and other operating revenue for the periods indicated:
FISCAL YEARS ENDED ------------------------------------- JAN. 29, JAN. 30, FEB. 1, 1994 1993 1992 ----------- ----------- ----------- Sales and other operating revenue............................................ 100.0% 100.0% 100.0% Cost of sales and related expenses........................................... 75.8 74.5 73.2 Gross profit................................................................. 24.2 25.5 26.8 Operating and administrative expenses........................................ 20.5 22.0 22.8 Operating and administrative expenses, excluding amortization of asset write-ups resulting from the Acquisition and related expenses.............. 19.6 21.0 21.5 Earnings before interest and taxes........................................... 3.8 3.5 3.9 Total interest expense....................................................... 2.7 3.5 3.8 Earnings (loss) before income taxes and extraordinary item................... 1.1 -- .1 Net earnings (loss).......................................................... (.1) (.1) .1 ----------- ----------- ----------- ----------- ----------- ----------- EBITDA....................................................................... 5.8 5.9 6.6
Fiscal Year 1993 compared with Fiscal Year 1992 The Company's competitive pricing and cost reduction programs were both largely reflected in fiscal 1993. The Company's sales and other operating revenue for fiscal 1993 and 1992 were $4.191 billion and $3.887 billion, respectively, an increase of $303.5 million, or 7.8%. The increase in sales and other operating revenue was due primarily to a $244.8 million increase in sales of prescription drugs. Prescription sales as a percentage of drug store sales was approximately 48.3% for fiscal 1993 as compared with approximately 45.4% for fiscal 1992. The growth in prescription sales was primarily the result of increased third-party prescription sales, the Company's competitive pricing program and a high incidence of cough and cold/flu virus during the first and fourth quarters of fiscal 1993. Third-party prescription sales represented approximately 58.0% and 49.6% of the Company's prescription sales in fiscal 1993 and 1992, respectively. The Company expects prescription sales to third-party payors, in terms of both dollar volume and as a percentage of total prescription sales, to continue to increase in fiscal 1994 and thereafter. Although contracts with third-party payors may increase the volume of prescription sales and gross profit dollars, third-party payors typically negotiate lower prescription prices than those on non third-party prescriptions, resulting in decreasing gross profit margins on the Company's prescription sales. Comparable drug store sales (stores open for one year or more) increased 6.1% during fiscal 1993 compared to a 3.1% increase in fiscal 1992 from fiscal 1991. The increase in comparable drug store sales was due primarily to the increase in sales of prescription drugs resulting from sales related to new third-party prescription plan contracts, the Company's competitive pricing program, and a high incidence of cough and cold/flu virus during the first and fourth quarters of fiscal 1993. In addition, comparable drug store sales growth was positively affected by increased sales of non prescription items in the health and beauty, greeting card, convenience food and photofinishing categories resulting from increased marketing emphasis and shelf space for these categories, as well as increased sales of over-the-counter drugs because of the high incidence of cough and cold/flu virus during the first and fourth quarters of fiscal 1993. Total sales growth was positively affected by the growth in comparable drug store sales, as well as the inclusion of 34 drug stores acquired during the second half of fiscal 1992 and 19 drug stores acquired in the fourth quarter of fiscal 1993. Cost of sales and related expenses in fiscal 1993 and 1992 was $3.175 billion and $2.896 billion, respectively, an increase of 9.6%. As a percentage of sales, cost of sales and related expenses were 75.8% 16 and 74.5% for fiscal 1993 and 1992, respectively. The competitive pricing strategy for non third-party prescription sales and the continued increase in third-party prescription sales which typically have lower gross profit margins than non third-party prescription sales partially offset by a lower LIFO charge of $8.5 million ($15.0 million in fiscal 1992) were the primary reasons for the increase in cost of sales and related expenses as a percentage of sales in fiscal 1993. Operating and administrative expenses in fiscal 1993 and 1992 were $858.0 million and $855.2 million, respectively, an increase of 0.3%. As a percentage of sales, operating and administrative expenses were reduced to 20.5% in fiscal 1993 from 22.0% for fiscal 1992. Operating and administrative expenses, excluding amortization of asset write-ups and performance related expenses resulting from the Acquisition, were $822.9 million and $815.5 million in fiscal 1993 and 1992, respectively, an increase of 0.9%. As a percentage of sales, operating and administrative expenses, excluding amortization of asset write-ups and performance related expenses resulting from the Acquisition, decreased to 19.6% in fiscal 1993 from 21.0% in fiscal 1992 as a result of the higher sales in fiscal 1993 and lower costs as a percentage of sales in such expense categories as payroll, advertising, insurance and supplies as a result of the cost reduction program initiated in the second half of fiscal 1992. The implementation of the cost reduction program eliminated operating expenses of approximately $70.0 million in fiscal 1993, and the Company estimates that $10.0 million of such savings was recognized in fiscal 1992. Amortization of asset write-ups and charges associated with certain performance related programs included in operating and administrative expenses in fiscal 1993 and 1992 were $35.1 million and $39.7 million, respectively, a decrease of 11.6%. Earnings before interest expenses increased from $135.4 million in fiscal 1992 to $157.2 million in fiscal 1993, an increase of 16.1%, primarily due to the increase in gross profit dollars as a result of higher sales and other operating revenue and the lower rate of increase of operating and administrative expenses compared to the rate of increase of sales and other operating revenue. Total interest expenses were $113.2 million and $137.4 million in fiscal 1993 and 1992, respectively, a decrease of 17.6%. The decrease was due primarily to lower interest rates in the market place and lower cost of debt for the Company after the Refinancing and the Note Issuance and was also due to a decrease in outstanding indebtedness until the redemption of the 14 1/2% Preferred Stock on July 15, 1993 with the proceeds of additional borrowings in connection with the Refinancing and another subsequent decrease after the consummation of the IPO on August 12, 1993. Amortization of original issue discount and deferred debt expenses increased slightly to $7.2 million in fiscal 1993 from $7.0 million in fiscal 1992. The income tax provision for fiscal 1993 was $2.6 million. The income tax provision for fiscal 1992 was $2.9 million. The tax provision for fiscal 1993 and 1992 represent alternative minimum tax and state income taxes. As a result of the foregoing factors, the Company had earnings before income taxes and extraordinary items in fiscal 1993 of $44.0 million, or 1.1% of sales, compared with a loss of $2.0 million in fiscal 1992, a net loss in fiscal 1993 of $2.9 million compared with a net loss of $4.1 million in fiscal 1992, and EBITDA of $242.3 million in fiscal 1993 compared with $229.2 million in fiscal 1992, an increase of $13.1 million, or 5.7%. As part of a program to reduce debt, in fiscal 1993, the Company entered into the IFS Sale and Leaseback relating to certain photo processing equipment and entered into agreements relating to the placement of certain inventory on consignment. These arrangements resulted in lower interest expense but caused certain operating expenses to be higher which negatively affected fiscal 1993 EBITDA. The Company had an extraordinary item of $44.4 million (net of income tax benefit of $0.9 million) in fiscal 1993, which was recognized as a result of the early retirement of existing indebtedness and redemption of the 14 1/2% Preferred Stock in connection with the Refinancing, the IPO and the Note Issuance compared to an extraordinary item of $0.8 million in fiscal 1992, which represents the tax effect of the utilization of the Company's net operating loss carryforward. 17 The Company's results of operations for all periods discussed include the operations of the Vision Group. The Company sold the Vision Group effective January 30, 1994. Sales of the Vision Group were $60.7 million in fiscal 1993, accounting for approximately 1.5% of the Company's sales and 2.2% of the Company's earnings before interest and taxes. Fiscal Year 1992 compared with Fiscal Year 1991 The Company's sales and other operating revenue for fiscal 1992 and 1991 were $3.887 billion and $3.740 billion, respectively, an increase of $147.0 million, or 3.9%. The increase in sales and other operating revenue was due primarily to a $109.0 million increase in sales of prescription drugs. Prescription sales as a percentage of drug store sales was approximately 45.4% for fiscal 1992 as compared with approximately 44.0% for fiscal 1991. The growth in prescription sales was primarily the result of increased third-party prescription sales. Third-party prescription sales accounted for approximately 49.6% and 43.1% of the Company's prescription sales in fiscal 1992 and 1991, respectively. Comparable drug store sales (stores open one year or more) increased 3.1% in fiscal 1992 from fiscal 1991 compared to a 5.7% increase in fiscal 1991 from fiscal 1990. Comparable store sales in fiscal 1992 compared to fiscal 1991 was negatively affected by the continued weakness in the economy, lower inflation in prescription pricing and to a lesser extent reduced prices on non third-party prescriptions as a result of the Company's competitive pricing strategy initiated in May 1992. Cost of sales and related expenses in fiscal 1992 and 1991 was $2.896 billion and $2.739 billion, respectively, an increase of 5.7%. As a percentage of sales, cost of sales and related expenses increased to 74.5% for fiscal 1992 from 73.2% in 1991. Cost of sales and related expenses as a percentage of sales in fiscal 1992 was higher than in fiscal 1991 due mostly to the continued rate of increase in third-party prescription sales with typically lower gross margins than non third-party prescription sales and lower photo finishing gross margins from increased coupon redemptions. In addition, fiscal 1992 was affected by lower gross margins on non third-party prescription sales due to retail price reductions in connection with the Company's competitive pricing program implemented in May 1992. The increase in cost of sales and related expenses as a percentage of sales was offset partially by shrinkage expense reductions and expansion of the Company's Insta-Care and Vision Group operations, which generally have higher gross margins than Eckerd Drug stores, and the expansion of Express Photo centers, which generally have higher gross margins than other products sold in Eckerd Drug stores. Operating and administrative expenses in fiscal 1992 and 1991 were $855.2 million and $854.2 million, respectively, an increase of .1%. As a percentage of sales, operating and administrative expenses decreased to 22.0% in fiscal 1992 from 22.8% in fiscal 1991. Operating and administrative expenses, excluding amortization of asset write-ups and performance related expenses resulting from the Acquisition, were $815. 5 million and $803.8 million and as a percentage of sales were 21.0% and 21.5% in fiscal 1992 and 1991, respectively. Operating and administrative expenses as a percentage of sales were lower in fiscal 1992 than 1991 due to lower costs as a percentage of sales in such expense categories as payroll, advertising and supplies as a result of the cost reduction program initiated in the second half of fiscal 1992. Amortization of asset write-ups and costs associated with certain performance related programs included in operating and administrative expenses in fiscal 1992 and 1991 were $39.7 million and $50.5 million, respectively, a decrease of 21.4%. This decrease is primarily attributable to the higher level of write-offs of favorable lease interests of certain drug stores sold or closed in the first quarter of fiscal 1991 compared to the first quarter of fiscal 1992 and the greater accruals in fiscal 1991 for certain performance related programs as a result of the Acquisition. Earnings before interest expenses decreased from $147.1 million in fiscal 1991 to $135.4 million in fiscal 1992, a decrease of 8.0%, primarily due to lower gross margins partially offset by an increase in gross profit dollars from higher sales, a decrease in operating and administrative expenses as a percentage of sales and a decrease in amortization of asset write-ups and charges due to certain performance related programs. The Company believes that in 1993 and thereafter the gross margin reductions resulting from the new competitive pricing program will be more than offset by the anticipated cost savings derived from the cost reduction program. However, due to the timing of 18 implementation of the two programs, in fiscal 1992, the gross margin impact of the competitive pricing program exceeded the savings derived from the cost reduction program. Total interest expenses were $137.4 million and $143.2 million in fiscal 1992 and 1991, respectively, a decrease of 4.1%. The decrease is due primarily to a decrease in outstanding indebtedness during the first three quarters of fiscal 1992 and lower interest rates. Amortization of original issue discount and deferred debt expenses in fiscal 1992 was $9.5 million less than in fiscal 1991 due primarily to the completion of amortization of original issue discount on the 13% Discount Debentures at the end of April 1991. Consequently, net cash interest expense was $3.8 million higher than in fiscal 1991 due primarily to the accrual for semi-annual cash interest payments on the 13% Discount Debentures beginning May 1, 1991. The income tax provision for fiscal 1992 and 1991 was $2.9 million. The difference between the tax provision and the extraordinary item represents alternative minimum and state income taxes. The Company had an extraordinary item of $.8 million and $1.7 million in fiscal 1992 and 1991, respectively, which represents the tax effect of the utilization of the Company's net operating loss carryforward. As a result of the foregoing factors, the Company had net earnings in fiscal 1991 of $2.7 million, or .1% of sales, compared with a net loss of $4.1 million or (.1)% of sales, in fiscal 1992, and EBITDA of $229.2 million and $248.7 million in fiscal 1992 and fiscal 1991, respectively, a decrease of 7.8%. Quarterly Results and Seasonality The Company's sales and profits are higher during peak holiday periods and from Christmas through Easter in selected geographic areas. Sales of health-related products peak during seasonal outbreaks of cough, cold and flu, typically during the winter and spring. Accordingly, sales and profits are typically highest in the fourth quarter followed by the first quarter. 19 The following table sets forth certain unaudited quarterly operating data for each of fiscal 1993 and 1992. The data presented includes all adjustments, consisting only of normal recurring adjustments, that management considers necessary for a fair presentation of the data shown:
(IN THOUSANDS) FISCAL 1993 ------------------------------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER TOTAL ------------- --------------- --------- ----------- ----------- Sales and other operating revenue........................... $ 1,055,152 $ 981,195 $ 972,675 $ 1,181,517 $ 4,190,539 Gross profit...................... 261,823 238,523 227,769 287,049 1,015,164 EBITDA............................ 74,433 52,005 34,725 81,089 242,252 FISCAL 1992 ------------------------------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER TOTAL ------------- --------------- --------- ----------- ----------- Sales and other operating revenue........................... $ 973,813 $ 913,905 $ 907,493 $ 1,091,816 $ 3,887,027 Gross profit...................... 256,161 238,499 221,384 274,504 990,548 EBITDA............................ 65,421 48,010 36,706 79,080 229,217
LIQUIDITY AND CAPITAL RESOURCES On June 15, 1993, the Company consummated the Refinancing, which was designed to simplify its capital structure, reduce interest expense and dividend costs and provide additional financial flexibility. As part of the Refinancing, the Company entered into the Credit Agreement. The proceeds of the Credit Agreement, together with the IFS Sale and Leaseback, payment of the accrued and deferred management fee by EH II under the EH II Management Agreement and advance of future management fees by EH II pursuant to the EH II Note were used by the Company to prepay or redeem all borrowings under the Old Credit Agreement, the 11.39% Senior Notes, the 11.75% Senior Notes, the Floating Rate Notes, the Fixed Rate Notes, a substantial portion of the 13% Discount Debentures and the 14 1/2% Preferred Stock. At January 29, 1994, the Company had approximately $571.7 million outstanding under the Senior Term Loans, nothing outstanding under the Revolving Credit Facility and $4.5 million of Bankers' Acceptances and had unused and available borrowing commitments under the Revolving Credit Facility of $223.9 million. Pursuant to the Credit Agreement, after giving effect to the IPO and the use of the net proceeds therefrom, the Company is required to make scheduled payments of the outstanding principal amount of Senior Term Loans in the following approximate amounts: $61.4 million in fiscal 1994 (of which $33.1 million was paid on January 28, 1994); $66.2 million in fiscal 1995; $85.0 million in fiscal 1996; $85.0 million in fiscal 1997; $94.4 million in fiscal 1998; $99.3 million in fiscal 1999; and $113.4 million in fiscal 2000. Prepayments made pursuant to the Credit Agreement are applied pro rata among the remaining scheduled principal payments. The Revolving Credit Facility matures in full at the end of July 1999. On August 12, 1993, the Company consummated the IPO. Of the approximately $65.8 million of estimated net proceeds of the IPO, the Company used $30.0 million to repay all borrowings outstanding under the EH II Credit Agreement and the balance to repay Senior Term Loan borrowings under the Credit Agreement consisting of Tranche A Term Loan borrowings of $27.5 million and Tranche B Term Loan borrowings of $8.3 million. Immediately prior to the IPO, the stockholders of EDS (which included certain of the Merrill Lynch Investors and certain of the Management Investors) exchanged their shares of EDS common stock for shares of Class A common stock of the Company pursuant to the EDS Exchange, which shares were subsequently converted into 3,781,275 shares of Common Stock after giving effect to the Stock Split. Following the EDS Exchange, EDS was merged into the Company with EH II becoming a wholly owned subsidiary of the Company, and the EH II Management Agreement was terminated upon the consummation of the IPO. On November 2, 1993 the Company consummated the Note Issuance. The net proceeds from the Note Issuance of $195.0 million were used to redeem the balance of the 13% Discount Debentures and 20 $145.0 aggregate principal amount of the 11 1/8% Debentures on December 2, 1993. The Notes were issued pursuant to an effective shelf registration statement relating to $350.0 million aggregate principal amount of Debt Securities. Subject to certain restrictions contained in the Credit Agreement, the Notes and the Company's other debt instruments, the Company may issue up to an additional $150.0 million aggregate principal amount of Debt Securities pursuant to such shelf registration statement. In fiscal 1993 and 1992, the Company had net losses of $2.9 million and $4.1 million, respectively. The losses in fiscal 1992 were primarily a result of the amortization of asset write-ups and performance related expenses resulting from the Acquisition and interest on the financing and in fiscal 1993 were primarily a result of the extraordinary item charges related to the Refinancing, the IPO and the Note Issuance. After adding back $45.3 million from the extraordinary charge and $92.3 million ($99.7 million in fiscal 1992) of non cash charges and adding $34.6 million of net working capital and other changes in fiscal 1993 (less $16.7 million in fiscal 1992), the Company had positive cash flow from operating activities of $169.3 million in fiscal 1993 ($78.9 million in fiscal 1992). The $90.4 million improvement in cash flow provided by operating activities for fiscal 1993 compared with fiscal 1992 was primarily due to a $46.0 million improvement in earnings before extraordinary items for fiscal 1993 compared with fiscal 1992, an increase of $87.4 million in accounts payable and accrued expenses for fiscal 1993 compared with an increase of $2.0 million in fiscal 1992, which was partially offset by increases in inventories and accounts receivable of $35.5 million and $13.9 million, respectively for fiscal 1993 compared with increases of $19.1 million and $0.6 million, respectively, in fiscal 1992. The Company had a net loss of $4.1 million in fiscal 1992 (net earnings of $2.7 million in fiscal 1991). After adding back $99.7 million ($113.9 million in fiscal 1991) of non cash charges less $16.7 million (plus $9.4 million in fiscal 1991) of net working capital and other changes in fiscal 1992, the Company had cash flow from operating activities of $78.9 million in fiscal 1992 ($126.0 million in fiscal 1991). The $47.1 million decrease in cash flow provided by operating activities for fiscal 1992 compared with fiscal 1991 was due in part to a full year of semi-annual interest payments of $44.8 million on the 13% Discount Debentures ($22.4 million in fiscal 1991), and the increase in accounts payable and accrued expenses of $30.6 million during fiscal 1991 compared with the increase in accounts payable and accrued expenses of $2.0 million during fiscal 1992. Net cash used in investing activities for fiscal 1993 was $18.5 million and net cash used for investing activities for fiscal 1992 was $76.0 million. Uses of cash were principally for capital expenditures of $38.9 million and $51.4 million, respectively, for additions to the Company's drug stores, Visionworks and Express Photo units and improvements to existing stores and, in fiscal 1993 and 1992, $11.5 million and $30.5 million, respectively, for the acquisition of certain drug store assets. In fiscal 1993, a source of cash to the Company from investing activities was the IFS Sale and Leaseback which provided approximately $35.0 million. Net cash used for investing activities for fiscal 1991 was $50.5 million, principally for capital expenditures of $49.4 million for additions to the Company's drug stores, Visionworks and Express Photo units and improvements to existing stores. Cash capital expenditures planned for fiscal 1994, which ends January 28, 1995, are expected to be approximately $45.0 million. Funds for the planned cash capital expenditures are expected to come from cash flow from operating activities and available borrowings, if necessary. In addition, the Company plans to finance future expansion or upgrade of photoprocessing equipment through new five-year operating leases in an amount of up to $10.0 million per year under the IFS Sale and Leaseback. Approximately $5.0 million has been financed as operating leases as of January 29, 1994. Such items were previously treated as capital expenditures. The Company used $157.4 million in cash from financing activities during fiscal 1993. The primary use of funds relates to the net repayment of $106.0 million of debt, the redemption of the 14 1/2% Preferred Stock and payment of dividends on such stock for an aggregate of $80.0 million and approximately $57.0 million in costs associated with the Refinancing and the Note Issuance. These uses of funds were offset partially by $64.8 million of net proceeds from the IPO and the $28.7 million increase in bank debit balances. Fiscal 1992 provided $7.2 million in cash principally to reduce bank 21 debit balances and pay cash dividends on the 14 1/2% Preferred Stock. Financing activities in fiscal 1991 used $76.0 million in cash principally to reduce bank debt. On a pro forma basis giving effect to the Refinancing, the IPO, the Note Issuance and the use of the net proceeds therefrom as if such transactions had occurred at the beginning of fiscal 1993, total interest expense would have been $95.2 million in fiscal 1993 as compared with the actual total interest expense of $113.2 million in fiscal 1993, which represents a decrease of $18.0 million or 15.9%. As compared with the actual total interest expense of $137.4 million in fiscal 1992, the pro forma interest expense of $95.2 million in fiscal 1993 represents a decrease of of $42.2 million, or 30.7%. The Company anticipates that the combination of amortization of purchase accounting write-ups and interest on debt will have a negative impact upon future earnings and, to a lesser degree, cash flow from operating activities. The Company does not believe, however, that the impact of such planned amortization and interest expenses upon earnings indicates a present or future impairment of liquidity. Based upon the Company's ability to generate cash flow from operating activities, the available unused portion of the working capital revolving credit loans under the Credit Agreement and other existing financing sources, the Company believes that it will have the funds necessary to meet the principal and interest payments on its debt as they become due and to operate and expand its businesses. The payment of dividends and other distributions by the Company is subject to restrictions under certain of the financing agreements to which the Company is a party, including the Credit Agreement. See "Description of Certain Indebtedness." The Company does not intend to pay dividends on its Common Stock in the foreseeable future. The Company adopted SFAS 109, "Accounting for Income Taxes" in the first quarter of fiscal 1993. The adoption of SFAS 109 had no material effect on the Company's results of operations. In December 1990, the Financial Accounting Standards Board issued SFAS No. 106, "Employer's Accounting for Postretirement Benefits Other Than Pensions." The implementation of SFAS No. 106 will not have any effect on the Company's results of operations because none of the Company's employee welfare and benefit plans provide for postretirement benefits. 22 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements and auditors' report for the Company as set forth under Item 14 of this Form 10-K are incorporated herein by reference. Unaudited information on selected quarterly financial data of the Company for the years ended January 29, 1994 and January 30, 1993 required by this Item is presented below (in thousands):
FISCAL 1993 QUARTERS ENDED ------------------------------------------------ 05/01/93 07/31/93 10/30/93 01/29/94 ------------- --------- --------- ----------- FINANCIAL INFORMATION - -------------------------------------------------------------- Sales and other operating revenue........................... $ 1,055,152 981,195 972,675 1,181,517 Cost of sales, including store occupancy, warehousing and delivery expense.............................................. 793,329 742,672 744,906 894,468 Operating and administrative expenses....................... 210,420 209,526 212,200 225,834 Net interest expenses....................................... 32,660 30,870 25,161 24,524 ------------- --------- --------- ----------- Earnings (loss) before income taxes and extraordinary item.......................................................... 18,743 (1,873) (9,592) 36,691 Income taxes................................................ 923 1,332 (455) 756 ------------- --------- --------- ----------- Earnings (loss) before extraordinary item................... 17,820 (3,205) (9,137) 35,935 Extraordinary item-early retirement of debt and preferred stock......................................................... -- (27,663) (2,421) (14,270) ------------- --------- --------- ----------- Net earnings (loss)......................................... 17,820 (30,868) (11,558) 21,665 Preferred stock dividends................................... 2,708 2,216 -- -- ------------- --------- --------- ----------- Net earnings (loss) available to common shares.............. $ 15,112 (33,084) (11,558) 21,665 ------------- --------- --------- ----------- ------------- --------- --------- ----------- Net earnings (loss) before extraordinary items per common share......................................................... $ .56 (.20) (.29) 1.12 Net earnings (loss) per common share........................ $ .56 (1.25) (.37) .68 Weighted average common shares outstanding.................. 26,917 26,505 31,606 32,073 FISCAL 1992 QUARTERS ENDED ---------------------------------------------- 05/02/92 08/01/92 10/31/92 01/30/93 ----------- --------- --------- ----------- FINANCIAL INFORMATION - ---------------------------------------------------------------- Sales and other operating revenue............................. $ 973,813 913,905 907,493 1,091,816 Cost of sales, including store occupancy, warehousing and delivery expense................................................ 717,652 675,406 686,109 817,312 Operating and administrative expenses......................... 214,652 213,310 207,817 219,869 Net interest expenses......................................... 34,896 33,436 34,001 35,071 ----------- --------- --------- ----------- Earnings (loss) before income taxes and extraordinary item.... 7,096 (8,247) (20,434) 19,564 Income taxes.................................................. 2,857 (1,661) 664 1,004 ----------- --------- --------- ----------- Earnings (loss) before extraordinary item..................... 4,239 (6,586) (21,098) 18,560 Extraordinary item-tax effect of utilization of net operating loss carryforward............................................... 2,317 (2,317) -- 762 ----------- --------- --------- ----------- Net earnings (loss)........................................... 6,556 (8,903) (21,098) 19,322 Preferred stock dividends..................................... 2,698 2,669 2,709 2,739 ----------- --------- --------- ----------- Net earnings (loss) available to common shares................ $ 3,858 (11,572) (23,807) 16,583 ----------- --------- --------- ----------- ----------- --------- --------- ----------- Net earnings (loss) before extraordinary items per common share........................................................... $ .06 (.34) (.88) .59 Net earnings (loss) per common share.......................... $ .15 (.43) (.88) .61 Weighted average common shares outstanding.................... 26,068 26,977 26,977 27,012
23 Earnings (loss) per common share are computed independently for each of the quarters. Therefore, the sum of the quarterly earnings per share may not equal the annual earnings (loss) per common share. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE REGISTRANT DIRECTORS AND EXECUTIVE OFFICERS The name, age and office or principal occupation of the executive officers and directors of the Company and certain information relating to their business experience are set forth below:
NAME AGE POSITION - ------------- --- -------- Stewart Turley.............................. 59 Director, Chairman of the Board and Chief Executive Officer Francis A. Newman........................... 45 Director, President and Chief Operating Officer John W. Boyle............................... 65 Director and Vice Chairman of the Board Dr. James T. Doluisio....................... 58 Director Donald F. Dunn.............................. 68 Director Albert J. Fitzgibbons, III.................. 48 Director Lewis W. Lehr............................... 73 Director Alexis P. Michas............................ 36 Director Rupinder S. Sidhu........................... 37 Director Edward W. Kelly............................. 48 Senior Vice President/Merchandising James M. Santo.............................. 52 Senior Vice President/Administration and Secretary Samuel G. Wright............................ 43 Senior Vice President/Finance Robert L. Myers............................. 48 Senior Vice President/Pharmacy Robert D. Boos.............................. 54 Vice President Oren M. Peacock............................. 56 Vice President
Mr. Turley is Chairman of the Board, President and Chief Executive Officer of the Company, positions he has held since 1975. He joined Old Eckerd in 1966 and has served as Senior Vice President (1971-1974) and President and Chief Executive Officer (1974-1975) prior to being elected to Chairman of the Board, President and Chief Executive Officer. He is also a director of Barnett Banks, Inc., Sprint Corporation and Springs Industries, Inc. Mr. Newman is President, Chief Operating Officer and Director of the Company, positions he has held since July 6, 1993. Prior to joining the Company, Mr. Newman served as President, Chief Executive Officer and a director of F&M Distributors, Inc. ("F&M"), a drug store chain, since 1986. Prior to joining F&M, he was the Executive Vice President of Household Merchandising, a retail firm, from 1984 to 1985 and the Senior Vice President of Merchandising for F.W. Woolworth, a retail firm, from 1980 to 1984. Mr. Newman is also a director of FabriCenters of America, a retail firm. Mr. Boyle was appointed Vice Chairman of the Board in February 1993. Prior thereto he was Senior Vice President/Finance and Administration of the Company, a position he has held for more than the past five years. He joined Old Eckerd as Senior Vice President/Finance and Administration in 1983. Dr. Doluisio is Dean of the College of Pharmacy, University of Texas, Austin, Texas. Dr. Doluisio has been Dean since 1973 and has served as chairman of the American Pharmaceutical Association, the American Association of College of Pharmacy Council of Deans, the American Association for the Advancement of Science and as a trustee of the United States Pharmacopeia. 24 Mr. Dunn is retired Chairman of the Board and Chief Executive Officer of Maas Brothers/Jordan Marsh, a division of Allied Stores Corporation, New York, New York. In his 39-year career with Allied Stores, starting as an executive trainee, Mr. Dunn held numerous management positions including that of executive group manager of Allied Stores for Jordan Marsh and Maas Brothers in Florida, Cain-Sloan in Tennessee and Joske's in Texas. Mr. Dunn is also a director of Tech Data Corporation and Younkers, Inc. Mr. Fitzgibbons has been a director of Merrill Lynch Capital Partners since 1988. He has been a Partner of Merrill Lynch Capital Partners since 1993; an Executive Vice President of Merrill Lynch Capital Partners from 1988 to 1993; a Senior Vice President of Merrill Lynch Capital Partners from 1987 to 1988; a Managing Director of the Investment Banking Division of Merrill Lynch & Co. ("ML & Co.") since 1978; and Vice President of Merrill Lynch from 1974 to 1988. He is also a director of Amstar Corporation, Borg-Warner Security Corporation, Borg-Warner Automotive, Inc., Consumer Markets, Inc., ESSEX Industries, Inc., Unifax, Inc., AmeriFoods Companies, Inc., White Swan, Inc. and United Artists Theatre Circuit, Inc. Mr. Lehr is former Chairman of the Board of 3M Company, St. Paul, Minnesota. In his 39-year career with 3M Company, starting as an engineer, Mr. Lehr held numerous management positions and from 1980 to March 1986, when he retired, was Chairman of the Board and Chief Executive Officer. He also serves as a director of various IDS Funds. Mr. Michas has been a director of Merrill Lynch Capital Partners since 1989. He has been a Partner of Merrill Lynch Capital Partners since 1993; a Senior Vice President of Merrill Lynch Capital Partners from 1990 to 1993; a Vice President of Merrill Lynch Capital Partners from 1987 to 1989; a Managing Director of the Investment Banking Division of ML & Co. since 1991; a Director of the Investment Banking Division of ML & Co. from 1990 to 1991; and a Vice President of the Investment Banking Division of ML & Co. from 1987 to 1989. He is also a director of Amstar Corporation, Borg-Warner Security Corporation, Borg-Warner Automotive, Inc. and Blue Bird Body Corporation. Mr. Sidhu has been a director of Merrill Lynch Capital Partners since 1988. He has been a Partner of Merrill Lynch Capital Partners since 1993; a Senior Vice President of Merrill Lynch Capital Partners since 1987; a Vice President of Merrill Lynch Capital Partners from 1985 to 1987; a Managing Director of the Investment Banking Division of ML & Co. from 1989 to 1993; and a Director of the Investment Banking Division of ML & Co. from 1987 to 1989. He is also a director of Clinton Mills, Inc., First-USA, Inc., John Alden Financial Corporation and Wherehouse Entertainment, Inc. Mr. Kelly was appointed Senior Vice President/Merchandising in February 1993. Prior thereto he served as Vice President of Merchandising of Eckerd Drug Company, formerly Old Eckerd's principal subsidiary ("Eckerd Drug Company") and now the Company's principal division, for more than the past five years. Mr. Santo was appointed Senior Vice President/Administration in February 1993. Prior thereto he was Vice President/Legal Affairs of the Company, a position he has held for more than the past five years. In addition, Mr. Santo was appointed Secretary of the Company effective January 1, 1992. Mr. Wright was appointed Senior Vice President/Finance in February 1993. Prior thereto he was Vice President and Controller of the Company, a position he has held since September 1988. Mr. Wright became Vice President of the Company in June 1986. In addition, Mr. Wright has served as Vice President of Finance of Eckerd Drug Company since May 1985. Mr. Myers was appointed Senior Vice President/Pharmacy in February 1993. Prior thereto he was Vice President of the Company, a position he has held for more than the past five years. In addition, Mr. Myers has served as Vice President of Pharmacy Services of Eckerd Drug Company for more than the past five years. Mr. Boos was appointed Vice President of the Company in April 1991. In addition, Mr. Boos has been Vice President of Real Estate and Development of Eckerd Drug Company since August 1985. Mr. Boos joined Eckerd Drug Company in 1982. 25 Mr. Peacock is Vice President of the Company, a position he has held for more than the past five years. Mr. Peacock is also a Senior Regional Vice President for the North Texas Region of Eckerd Drug Company. Messrs. Turley, Boyle, Doluisio, Dunn, Fitzgibbons and Lehr have been directors of the Company since May 1986. Mr. Sidhu became a director of the Company in April 1988 and Mr. Michas became a director of the Company in April 1990, and Mr. Newman became a director in July 1993. The Board of Directors of the Company is divided into three classes serving staggered three-year terms. The terms of office of Messrs. Boyle, Doluisio and Sidhu will expire in 1994, the terms of office of Messrs. Michas, Dunn and Newman will expire in 1995 and the terms of office of Messrs. Fitzgibbons, Turley and Lehr will expire in 1996. Messrs. Doluisio, Dunn and Lehr serve as members of the Audit Committee, Messrs. Fitzgibbons, Dunn and Lehr serve as members of the Executive Compensation and Stock Option Committee, and Messrs. Turley, Dunn and Fitzgibbons serve as members of the Executive Committee, of the Board of Directors of the Company. Officers of the Company serve at the discretion of the Board of Directors. Messrs. Fitzgibbons, Sidhu and Michas are employees of Merrill Lynch Capital Partners and serve on the Board of Directors of the Company as representatives of the Merrill Lynch Investors. Officers are elected for a one-year term by the Board of Directors at its annual meeting. There is no family relationship between any of the aforementioned officers or directors of the Company. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth certain information for the 1993, 1992 and 1991 fiscal years with respect to the Chief Executive Officer, each of the four most highly paid executive officers of the Company who were serving as executive officers at January 29, 1994 and one of the five most highly compensated executive officers of the Company during fiscal 1993 who was no longer an executive officer at January 29, 1994. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION ------------------------------------- ------------------------ AWARDS(9) PAYOUTS ----------- ----------- NUMBER OF LONG-TERM SECURITIES INCENTIVE NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING PLAN ALL OTHER POSITION(1) YEAR SALARY BONUS COMPENSATION(2) OPTIONS PAYOUTS COMPENSATION(5)(6) - ------------------------------------ --------- --------- --------- --------------- ----------- ----------- ----------------- Stewart Turley, Chairman of the 1993 $ 601,467 $ 202,093 $ -- 25,000 $ 138,750 $ -- Board, and CEO 1992 591,351 135,906 324,696(3) -- 133,200 469,097 1991 556,244 306,388 87,450 Francis A. Newman, President and 1993 $ 285,601 $ 250,000 $ -- 215,000 $ -- $ -- Chief Operating Officer(4) Harry W. Lambert, Senior Vice 1993 $ 361,467 $ 121,453 $ -- -- $ 83,750 $ -- President, President--Eckerd Drug 1992 356,351 81,774 120,577 -- 80,400 209,828 Company(7) 1991 336,244 184,937 52,800 John W. Boyle, Vice Chairman of the 1993 $ 319,467 $ 107,341 $ -- 20,000 $ 72,500 $ -- Board 1992 311,351 71,408 168,935 -- 69,600 297,251 1991 291,244 160,095 45,540 Richard W. Roberson, Senior Vice 1993 $ 187,297 $ 60,414 $ -- 12,000 $ 42,250 $ -- President, President--Eckerd 1992 181,558 51,950 67,089 -- 40,560 117,635 Vision Group, Chairman of the 1991 170,244 62,926 26,400 Board and CEO Insta-Care (8) James M. Santo, Senior Vice 1993 $ 171,796 $ 57,724 $ -- 12,000 $ 37,750 $ -- President--Administration and 1992 162,558 37,086 70,825 -- 36,240 119,536 Secretary 1991 152,243 83,360 23,595
- --------------- (1) The Company entered into employment agreements with each of the named executive officers that provide for severance payments upon the occurrence of events such as death or termination. See "Employment Agreements." (2) The amounts shown in this column consist of (i) tax "gross up" payments made with respect to certain compensation, including payments made with respect to the named executive officers' Management Notes (see (Footnotes continued on following page) 26 (Footnotes continued from preceding page) note (6)) that are reflected under the heading "All Other Compensation," and (ii) with respect to Mr. Turley, certain perquisites. See note (3). (3) Included in this amount are an automobile allowance of $27,812 and payments for long-term disability insurance of $18,480. (4) Mr. Newman's employment with the Company commenced on July 6, 1993. Under Mr. Newman's employment agreement, the aggregate amount of his annual bonus and Long Term Incentive Plan payouts are guaranteed to be not less than $250,000 in each of 1993 and 1994. (5) Each named executive officer participates in The Jack Eckerd Corporation Profit Sharing Plan (the "Profit Sharing Plan") and The Jack Eckerd Corporation Executive Excess Plan (the "Executive Excess Plan"). The Executive Excess Plan replaces benefits under the Profit Sharing Plan (and The Jack Eckerd Corporation Pension Plan) which are reduced under provisions of the Internal Revenue Code. The amounts allocable in 1993 to the named executive officers under the Profit Sharing Plan and the Executive Excess Plan (with respect to the Profit Sharing Plan) were not calculable as of the date hereof. The amounts allocable in 1992 were as follows: Mr. Turley, $16,622, Mr. Lambert, $9,870, Mr. Boyle, $8,533, Mr. Roberson, $3,106, and Mr. Santo, $3,111. (6) The balances of the amounts shown in 1992 consist of the following amounts paid to each named executive officer equaling the principal amounts due on the named executive officers' Management Notes and the excess, if any, of the interest due on their Management Notes over the interest payable by the Company on their Convertible Debentures: Mr. Turley, $452,475, Mr. Lambert, $199,958, Mr. Boyle, $288,718, Mr. Roberson, $114,529, and Mr. Santo, $116,426. In 1992, payment on the Management Notes was accelerated and the Company made additional payments to the named executive officers in an amount equal to the remaining principal amount due on their Management Notes. The Management Notes were repaid in full and there are no future obligations by the Company or the named executive officers on these Management Notes. See "Compensation Committee Interlocks and Insider Participation." (7) Mr. Lambert retired from his positions as Senior Vice President of the Company and President of Eckerd Drug Company and became a consultant to the Company effective September 30, 1993. Amounts paid to Mr. Lambert after September 30, 1993 which are included in his 1993 salary totalled $120,502. See "Separation Agreements." (8) Mr. Roberson resigned from his employment with the Company effective March 31, 1994. See "Separation Agreements." (9) No restricted stock was awarded during the year ended January 29, 1994. As of January 29, 1994 the named executive officers restricted stock holdings (number of shares and value) were as follows: Mr. Turley, 28,081, $554,600, Mr. Lambert, 15,431, $304,762, Mr. Roberson, 6,755, $133,411 and Mr. Santo, 6,013, $118,757. Mr. Newman and Mr. Boyle had no restricted stock holdings at January 29, 1994. OPTION/SAR GRANTS IN LAST FISCAL YEAR The following table presents information concerning grants of stock options during the 1993 fiscal year to each of the named executive officers. No stock appreciation rights were granted during the 1993 fiscal year.
INDIVIDUAL GRANTS ------------------------------------------------------ PERCENT OF POTENTIAL REALIZABLE VALUE AT NUMBER OF TOTAL ASSUMED SECURITIES OPTIONS/SARS MARKET ANNUAL RATES OF STOCK PRICE UNDERLYING GRANTED TO EXERCISE OR PRICE APPRECIATION FOR OPTION TERM(2) OPTION/SARS EMPLOYEES IN BASE PRICE ON DATE OF EXPIRATION ----------------------------------- NAME GRANTED FISCAL YEAR(1) PER SHARE GRANT(2) DATE 0% 5% 10% - ------------------------ ----------- --------------- ----------- ----------- ---------- --------- ----------- ----------- Stewart Turley.......... 25,000 2.9% $ 14.00 $ 14.00 08/12/03 $ 0 $ 220,113 $ 557,810 Francis A. Newman....... 200,000 23.4 10.00 14.00 08/12/03 800,000 1,257,789 3,187,485 15,000 1.8 14.00 14.00 08/12/03 0 132,068 334,686 Harry W. Lambert........ -- -- -- -- -- -- -- -- John W. Boyle........... 20,000 2.3 14.00 14.00 08/12/03 0 176,090 446,248 Richard W. Roberson..... 12,000 1.4 14.00 14.00 08/12/03 0 105,654 267,749 James M. Santo.......... 12,000 1.4 14.00 14.00 08/12/03 0 105,654 267,749
- --------------- (1) Based on a total of 855,915 options granted to all employees. All options granted to the named executive officers were granted on August 12, 1993. Commencing three years after date of grant, the options are exercisable to the extent of 50%, with an additional 25% exercisable after each of the next two successive years. (2) The market price on the date of grant used herein was the initial public offering price. 27 AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES (1) The following table presents information concerning the exercise of stock options during the 1993 fiscal year and the value of unexercised stock options at the end of the 1993 fiscal year with respect to the named executive officers. No SARs are currently outstanding.
VALUE OF UNEXERCISED IN-THE MONEY OPTIONS/SARS NUMBER OF SECURITIES UNDERLYING AT FY-END UNEXERCISED OPTIONS/SARS AT FY-END (EXERCISABLE/ NAME (EXERCISABLE/UNEXERCISABLE) UNEXERCISABLE) - -------------------------------------------------- -------------------------------------- ------------------------ Stewart Turley.................................... 44,421/25,000 $467,275/$143,750 Francis A. Newman................................. -0-/215,000 $ -0-/$2,036,250 Harry W. Lambert.................................. 20,800/-0- $218,800/-0- John W. Boyle..................................... 20,800/20,000 $218,800/$115,000 Richard W. Roberson............................... 10,400/12,000 $109,400/$69,000 James M. Santo.................................... 9,100/12,000 $ 95,725/$69,000
- --------------- (1) None of the named executive officers exercised any options during the 1993 fiscal year. LONG-TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR (1) The following table presents information regarding Long-Term Incentive Plan Awards made during the 1993 fiscal year to each of the named executive officers.
PERFORMANCE OR OTHER ESTIMATED FUTURE PAYOUTS UNDER PERIOD UNTIL NON-STOCK PRICE-BASED PLANS MATURATION ------------------------------------- NAME OR PAYOUT THRESHOLD TARGET MAXIMUM - ------------------------------------------- ------------ ----------- ----------- ----------- Stewart Turley............................. 1993-1995 $ 30,073 $ 150,367 $ 300,734 Francis A. Newman.......................... 1993-1995 25,000 125,000 250,000 Harry W. Lambert........................... 1993-1995 6,024 30,122 60,244 John W. Boyle.............................. 1993-1995 15,973 79,867 159,734 Richard W. Roberson........................ 1993-1995 -- -- -- James M. Santo............................. 1993-1995 8,590 42,949 85,898
- --------------- (1) All amounts shown represent grants made pursuant to the Company's Executive Three Year Bonus Plan. The bonus awards are granted annually and the payment of such awards are contingent on the attainment of certain performance criteria. The total payment with respect to a grant is based on the annual average increase in the Company's earnings before interest and taxes, as adjusted, and the average annual return on investment, during a three-year performance period consisting of the current year and the succeeding two years, subject to achieving certain specified minimum performance objectives for the three-year period, and are calculated as a percentage of a participant's annual base salary as of the beginning of a three-year performance period. The maximum amount of the bonus award is 50% of the participating executives' annual base salary at the beginning of a performance period. Since a target award is not applicable, the target amount is representative of the amount which would be paid on the payout date based on the previous fiscal year's performance results. 28 THE JACK ECKERD CORPORATION PENSION PLAN The Jack Eckerd Corporation Pension Plan (the "Pension Plan") is qualified under the Code and is non-contributory. Employees who retire or terminate as vested participants are entitled to receive retirement benefits under a final average compensation formula. To the extent benefits cannot be provided under the Pension Plan due to the limitations imposed by Sections 415 and 401(a)(17) of the Code, such benefits will be provided for Messrs. Turley, Lambert and Boyle under The Jack Eckerd Corporation Executive Excess Plan (the "Excess Plan") which is not qualified under the Code. Mr. Roberson and Mr. Santo do not participate in the Excess Plan. Mr. Newman is not eligible to participate in this plan because he has not met the minimum length of service requirement. The following table sets out the estimated Minimum Annual Retirement Benefits payable at age 65 for the noted levels of final average annual compensation and years of service: PENSION PLAN TABLE
CREDITED YEARS OF SERVICE(1)(2) FINAL AVERAGE --------------------------------------------------------------- COMPENSATION 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS - --------------- ----------- ----------- ----------- ----------- ----------- $ 150,000 $ 35,550 $ 47,400 $ 59,250 $ 59,250 $ 59,250 250,000 59,250 79,000 98,750 98,750 98,750 350,000 82,950 110,600 138,250 138,250 138,250 450,000 106,650 142,200 177,750 177,750 177,750 550,000 130,350 173,800 217,250 217,250 217,250 650,000 154,050 205,400 256,750 256,750 256,750 750,000 177,750 237,000 296,250 296,250 296,250 850,000 201,450 268,600 335,750 335,750 335,750 950,000 225,150 300,200 375,250 375,250 375,250 1,050,000 248,850 331,800 414,750 414,750 414,750 1,150,000 272,550 363,400 454,250 454,250 454,250 1,250,000 296,250 395,000 493,750 493,750 493,750
- --------------- (1) The Pension Plan provides for a Minimum Annual Retirement Benefit at age 65 after 25 years of service equal to 24% of final average compensation plus 15.5% of final average compensation in excess of an employee's average Social Security maximum taxable wage base for the 35 years ending with the employee's Social Security normal retirement age. The Minimum Annual Retirement Benefit includes the income which could be provided by a monthly annuity for life purchased with the Profit Sharing Plan vested account balance. Final average compensation is the average compensation (including base salary, Key Management Bonus, and Executive Three-Year Bonus) ("Salary," "Bonus," and "Long-Term Incentive Plan Payouts" in the Summary Compensation Table) for the highest consecutive five of the final ten years of employment. It also includes certain perquisites. The retirement benefit amounts shown are age 65 single life annuity amounts and are not subject to any deduction for Social Security or other offset amounts. The years of service and the current level of compensation recognized for retirement purposes (which would be used to calculate average annual compensation) for the named executive officers are as follows: Mr. Turley, 27 years and $716,181, Mr. Lambert, 23 years and $431,788, Mr. Boyle, 10 years and $372,321, Mr. Roberson, 16 years and $223,319, and Mr. Santo, 17 years and $202,703. The final average compensation for retirement purposes for the relevant five-year period is as follows: Mr. Turley $957,623, Mr. Lambert, $569,811, Mr. Boyle, $492,938, Mr. Roberson, $216,720, and Mr. Santo, $212,597. (2) Mr. Newman is not eligible to participate in this plan because he has not met the minimum length of service requirements. 29 THE EXECUTIVE SUPPLEMENTAL BENEFIT PLAN The Executive Supplemental Benefit Plan (the "ESBP") is a non-qualified, non-contributory plan that provides for supplemental retirement and death benefits for the executive officers, including the named executive officers, and other key management employees of the Company and its subsidiaries. The following table sets out the estimated annual benefits payable at age 65 for the noted levels of mid-point salaries: COVERED ANNUAL BENEFIT SALARY(1) PAYABLE(2) ---------------- ------------------------ $ 100,000 $ 25,000 200,000 50,000 300,000 75,000 400,000 100,000 500,000 125,000 600,000 150,000 700,000 175,000 - --------------- (1) Under the ESBP, the Company is obligated to pay a participant commencing at age 65 an annual amount equal to 25% of the participant's covered salary in equal monthly installments for 15 years. The covered salary is the mid-point salary of a salary range for a particular executive position that is calculated by the Company. It does not relate to the figures provided in the Summary Compensation Table. The mid-point range for 1993 recognized for retirement purposes of the named executive officers are as follows: Mr. Turley, $512,400, Mr. Newman, $484,500, Mr. Lambert, $318,200, Mr. Boyle, $263,000, Mr. Roberson, $163,200 and Mr. Santo, $135,000. The years of service for 1993 recognized for retirement purposes were the same as those provided with respect to the Pension Plan. The ESBP also provides that, in the event of the death of a participant prior to retirement, the participant's beneficiary is entitled to receive either (a) a lump sum payment equal to four times the participants covered salary, or (b) an amount equal to 90% of the participant's covered salary for the first year after death plus 45% of the covered salary annually for the next nine years. (2) Assumes the sum of the participant's age and the number of years of service (which cannot be less than 5) is at least 70. If less than 70, benefits are prorated pursuant to a formula. EMPLOYMENT AGREEMENTS Messrs. Boyle and Turley entered into employment agreements with the Company which became effective April 30, 1986 that provided for base salaries of $216,000 and $410,000, respectively, and for such bonuses under the Company's bonus plan as the Board, in its discretion, shall determine. Each employment agreement provides for an initial term of employment of three years and, thereafter, is automatically renewed on a year-to-year basis, unless terminated by the Company or such employee. Each of the above employment agreements provides that (i) upon the death of the employee, the Company will make a lump sum payment to his beneficiary, estate or representative in an amount equal to his current annual base salary and (ii) upon involuntary termination of employment for disability or any reason other than for cause, the Company will make a lump sum payment to such employee equal to two times such employee's current annual base salary (or, if greater, the base salary which would have been paid to such employee during the remaining term of his employment agreement if he had not been terminated) plus a pro rata portion of any bonus payable to the employee under certain bonus compensation plans in the year of such disability or involuntary termination and, subject to certain limitations, will continue such employee's life, disability and hospitalization insurance and medical and dental plans for a two-year period. The employment agreement with Mr. Lambert and the Company, which provided similar terms, was terminated effective September 30, 1993 pursuant to a consulting agreement. See "Separation Agreements." In October 1988 the Company entered into an employment agreement with Mr. Santo that provides that upon involuntary termination of employment (except for cause) the Company will pay him a severance payment in an amount equal to his then current annual base salary in monthly 30 installments plus a pro rata portion of certain bonus compensation payable under certain bonus plans, and, subject to certain limitations, the Company will continue certain insurance and medical benefits. The severance payments and benefits are payable for one year or 18 months, depending on length of service. The agreement is for a one-year term and is automatically renewed on a year-to-year basis, unless terminated by the Company or Mr. Santo. Mr. Roberson had an employment agreement which had substantially the same terms as Mr. Santo's employment agreement which was terminated effective March 31, 1994. See "Separation Agreements." On June 9, 1993, the Company entered into an employment agreement with Mr. Newman whose period of employment as President of the Company commenced July 6, 1993. The agreement provides that upon involuntary termination of employment (except for cause) the Company will pay Mr. Newman a severance payment in an amount equal to two times his then current annual base salary in monthly installments plus a pro rata portion of certain bonus compensation payable under certain bonus plans, and, subject to certain limitations, the Company will continue certain insurance and medical benefits. The severance payments and benefits are payable for two years. The agreement is for a two-year term and is automatically renewed on a year-to-year basis, unless terminated by the Company or Mr. Newman. SEPARATION AGREEMENTS Harry W. Lambert, who served as Senior Vice President of the Company and President of Eckerd Drug Company for more than the past five years, retired from both positions effective September 30, 1993. Mr. Lambert entered into a consulting agreement with the Company which became effective October 1, 1993 (the "Consulting Agreement"), pursuant to which Mr. Lambert has agreed to act as a consultant and advisor to the Company. In consideration of such services, Mr. Lambert is entitled to compensation in the amount of $30,000 per month until March 31, 1994 and $19,726 per month from April 1, 1994 until April 15, 1997, the date the Consulting Agreement terminates, and will continue to participate in certain of the Company's employee benefit programs. Richard W. Roberson, who served as Senior Vice President of the Company, President of the Vision Group and Chairman of the Board and Chief Executive Officer of Insta- Care, entered into a separation agreement with the Company effective as of March 31, 1994 in conjunction with the sale of the assets of the Vision Group to an investor group which includes Mr. Roberson. See "Item 13. Certain Relationships and Related Transactions." Under the terms of the separation agreement, the Company will pay Mr. Roberson an aggregate of $200,000 in quarterly payments of $25,000 commencing July 15, 1994 and ending on April 15, 1996, which payments are contingent upon his continued employment with Visionworks. MANAGEMENT RESTRICTED STOCK Prior to the consummation of the IPO, the Management Investors and certain other employees of Eckerd owned shares of Class B common stock, 60% of which was fully vested. The remaining non-vested shares of Class B common stock were designed to vest upon the achievement of specified levels of financial performance and other criteria. Immediately prior to the consummation of the IPO, all shares of vested Class B common stock and 50% of the non-vested shares of Class B common stock were exchanged for Common Stock at the rate of 0.69118 shares of Common Stock for each share of Class B common stock (prior to the Stock Split). The remaining shares of non-vested Class B common stock were exchanged at the same exchange ratio for shares of Common Stock subject to certain restrictions (the "Management Restricted Stock"). The Management Restricted Stock will vest automatically on July 31, 1998 provided that the holder thereof is then employed by the Company. The Management Restricted Stock may vest earlier over a three-year period upon the achievement by the Company of certain levels of performance as indicated by the market price of the Common Stock of the Company during each of the 12-month periods ended July 31, 1994, 1995 and 1996 (each of the dates or events upon which the Management Restricted Stock may vest is referred to as a "Restricted Stock Event"). 31 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION At January 29, 1994, the Company's Executive Compensation and Stock Option Committee consisted of Lewis W. Lehr, Donald F. Dunn and Albert J. Fitzgibbons, III. Mr. Turley, an executive officer of the Company, was a member of the Executive Compensation and Stock Option Committee until August 5, 1993, at which time he was replaced by Mr. Dunn. Mr. Fitzgibbons is Executive Vice President and a member of the Board of Directors of Merrill Lynch Capital Partners and is a Managing Director of ML & Co., which are affiliates of the Company. Merrill Lynch Capital Partners is a Delaware corporation and a wholly owned subsidiary of ML & Co. which initiates and structures transactions commonly referred to as leveraged or management buyouts involving publicly owned companies, privately owned companies and subsidiaries and divisions of both publicly and privately owned companies, and manages a fund of equity capital committed by institutional investors for investment in the equity portion of leveraged buyout transactions. Merrill Lynch Capital Partners is the direct or indirect managing partner of Merrill Lynch Capital Appreciation Partnership No. II, L.P., ML Offshore LBO Partnership No. II, ML Employees LBO Partnership No. I, L.P., Merrill Lynch KECALP L.P. 1986, Merrill Lynch Capital Appreciation Partnership No. B-IX, L.P., ML Offshore LBO Partnership No. B-IX, MLCP Associates L.P. No. II, Merrill Lynch KECALP L.P. 1989, ML IBK Positions, Inc., Merchant Banking L.P. No. IV, ML Oklahoma Venture Partners, Limited Partnership and ML Venture Partners II, L.P., which are stockholders of the Company. Merrill Lynch Interfunding, Inc., an affiliate of Merrill Lynch Capital Partners, is also a stockholder of the Company. In January 1987, the Company entered into a sale and leaseback agreement involving 72 Eckerd Drug stores, in a transaction arranged by and including certain affiliates of ML & Co. Pursuant to this agreement, the Company sold 72 Eckerd Drug stores for $48.1 million and is obligated to lease them back for a minimum term of ten years. The Company paid a fee equal to 1 1/2% of the sales price, or approximately $721,500, to an affiliate of ML & Co. for arranging the transaction. Lease payments by the Company, payable semi-annually, are approximately $5.9 million per annum. In addition, an affiliate of ML & Co. will receive a management fee of approximately $100,000 per annum, payable out of such lease payments during the term of the lease. The Company believes that the terms of this agreement were no less favorable to the Company than could have been obtained from unaffiliated third parties. In April 1989, the Company entered into a Master Lease (the "Master Lease") with a third-party lessor ("Lessor") established by an affiliate of ML & Co. Under the Master Lease the Lessor finances the purchase of sites for development as Visionworks and Eckerd Drug stores and finances the construction of the buildings and the acquisition of equipment. The selection of sites and construction of improvements was undertaken by the Company acting as the Lessor's agent pursuant to a construction agency agreement (the "Agreement for Lease"). Under the Agreement for Lease, the Company constructed the improvements and leased the properties from the Lessor pursuant to the Master Lease. As of January 29, 1994, there were 12 stores leased under the Master Lease with a total acquisition and construction cost of approximately $18.4 million. The Company pays a structure fee to the ML & Co. affiliate equal to 1% of the cost of the land, building and equipment leased under the Master Lease plus an administration fee. The Company paid the ML & Co. affiliate fees totalling $44,000, $45,000 and $408,000 for the years ended January 29, 1994, January 30, 1993 and February 1, 1992, respectively. The Company believes that the terms of this arrangement were no less favorable to the Company than could have been obtained from unaffiliated third parties. In July 1989, the Company entered into a Placement Agency Agreement with Merrill Lynch Money Markets, Inc., an affiliate of ML & Co. Under the Placement Agency Agreement, Merrill Lynch Money Markets, Inc. acted as the exclusive Placement Agent for the private placement to accredited investors of the Company's unsecured notes with maturities of up to 270 days from date of issue. The Company did not pay Merrill Lynch Money Markets, Inc. any amounts in connection with this facility during the year ended January 29, 1994. The Company believes that the terms of this 32 arrangement were no less favorable to the Company than could have been obtained from unaffiliated third parties. On June 15, 1993, the Company, EDS and EH II amended the EH II Management Agreement (the "EH II Management Agreement Amendment"). Pursuant to the EH II Management Agreement Amendment, EH II paid to Eckerd an accrued and previously deferred management fee, including interest payable thereon, of approximately $22.0 million and an advance, representing prepayment by EH II of the management fee to be earned by Eckerd in the future, of approximately $18.0 million. Such advance was evidenced by the EH II Note. The EH II Management Agreement was terminated, and the EH II Note was repaid, upon consummation of the IPO. Eckerd also entered into an Exchange Agreement dated as of July 23, 1990 (the "EDS Exchange Agreement") pursuant to which the holders of EDS common stock had the right to exchange their shares for shares of Class A common stock of Eckerd on a share-for-share basis (subject to anti-dilution adjustments) and which granted Eckerd rights of first refusal on the common stock and certain assets of EH II. The Company and the stockholders of EDS amended the Exchange Agreement as of July 29, 1993 to provide for the exchange of EDS common stock for Common Stock at the rate of 1.95 shares of Common Stock for each share of EDS common stock (prior to the Stock Split). Such exchange rate was determined based upon the analysis and opinion of Bear, Stearns & Co. Inc., one of the representatives of the underwriters in the IPO. The Merrill Lynch Investors owned approximately 74.14% of the common stock of EDS. Certain members of management (the "Management Group") purchased, at the effective time of the Acquisition, an aggregate of $8.36 million principal amount of convertible debentures of the Company in exchange for $3.14 million in recourse notes and $5.22 million in non-recourse notes (the "Management Notes"). In April 1992, the Management Notes, which then totaled $2.83 million, were paid in their entirety and the convertible debentures which totaled $8.09 million were exchanged for 1,304,289 shares of Class A common stock of Eckerd. During 1992 and 1993 a total of seven members of the Management Group left the Company. The Company repurchased the Common Stock (507,939 shares) from these former members of the Management Group for cash and notes totaling $13.35 million. Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), an affiliate of each of ML & Co. and Merrill Lynch Capital Partners, acted as one of the representatives of the underwriters in the IPO and received underwriting commissions and related fees of approximately $1.85 million in connection therewith. In addition, in its role as sole underwriter in the issuance of the Notes, Merrill Lynch received approximately $4.0 million in underwriting discounts from the Company. COMPENSATION OF DIRECTORS Members of the Board of Directors who are not employees of the Company are paid for their services as members of the Board an annual fee of $18,000 and a fee of $1,500 for each Board or Committee meeting attended, unless the Committee meeting is held in conjunction with a Board meeting, in which case the Committee member is paid a fee of $1,000 for attending the Committee meeting. Employee directors receive no fee for Board or Committee services. 33 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of the Common Stock as of March 26, 1994 by (i) each of the directors of the Company, (ii) each of the named executive officers of the Company (iii) each person known by the Company to be the beneficial owner of approximately five percent or more of the outstanding Common Stock and (iv) all of the Company's directors and executive officers as a group. Unless otherwise indicated, the Company believes that the beneficial owner has sole voting and investment power over such shares. The following table treats the 136,808 shares of Management Restricted Stock as issued and outstanding.
SHARES OF NAME COMMON STOCK PERCENTAGE - ---- -------------- ---------- Merrill Lynch Investors(1)......................................................... 14,697,104 46.45% The Equitable Life Assurance Society of the United States(2)................................................................. 1,654,526 5.23 J.P. Morgan Capital Corp.(3)....................................................... 1,641,422 5.19 Company Employees' Profit Sharing Plan(4).......................................... 1,409,522 4.45 Stewart Turley(5).................................................................. 567,623 1.79 Francis A. Newman.................................................................. 5,400 * John W. Boyle(6)................................................................... 144,505 * Dr. James Doluisio(7).............................................................. 6,437 * Donald F. Dunn(8).................................................................. 13,217 * Albert J. Fitzgibbons, III(9)(10).................................................. 4,717 * Lewis W. Lehr(11).................................................................. 9,017 * Alexis P. Michas(9)(12)............................................................ 4,675 * Rupinder S. Sidhu(9)(13)........................................................... 4,717 * Harry W. Lambert(14)............................................................... 271,894 * Richard W. Roberson(15)............................................................ 119,999 * James M. Santo(16)................................................................. 113,053 * All directors and executive officers as a group (18 persons) (17)(18).............. 1,651,781 5.19
- --------------- * Less than one percent (1) Shares of Common Stock beneficially owned by the Merrill Lynch Investors are owned of record as follows: 941,148 shares by Merrill Lynch Interfunding, Inc., 9,816,294 shares by Merrill Lynch Capital Appreciation Partnership No. II, L.P., 249,567 shares by ML Offshore LBO Partnership No. II, 244,022 shares by ML Employees LBO Partnership No. I, L.P., 98,597 shares by Merrill Lynch KECALP L.P. 1986, 1,350,577 shares by Merrill Lynch Capital Appreciation Partnership No. B-IX, L.P., 791,101 shares by ML Offshore LBO Partnership No. B-IX, 21,419 shares by MLCP Associates L.P. No. II., 133,856 shares by Merrill Lynch KECALP L.P. 1989, 895,676 shares by ML IBK Positions, Inc., 46,513 shares by Merchant Banking L.P. No. IV, 15,491 shares by ML Oklahoma Venture Partners, Limited Partnership and 92,843 shares by ML Venture Partners II, L.P. The address for the Merrill Lynch Investors and each of the aforementioned record holders is c/o Merrill Lynch & Co., Inc., Merrill Lynch World Headquarters, North Tower, 18th Floor, New York, New York 10281-1201. (2) Includes 165,452 shares of Common Stock beneficially owned by Equitable Variable Life Insurance Company. The address for The Equitable Life Assurance Society of the United States and Equitable Variable Life Insurance Company is 1285 Avenue of the Americas, 19th Floor, New York, New York 10019. (3) Includes 1,036,400 shares of Common Stock and 605,022 shares of Non-Voting Common Stock beneficially owned by J.P. Morgan Capital Corporation ("MCC"). MCC may convert shares of Non-Voting Common Stock into shares of Common Stock to the extent that it would not own more than 4.9% of the voting securities of the Company. The address for MCC is 60 Wall Street, New York, NY 10260. (4) The address for the Company Employees' Profit Sharing Plan is P.O. Box 4689, Clearwater, Florida 34618. NationsBank of Georgia, N.A. is the trustee of the Company Employees' Profit (Footnotes continued on following page) 34 (Footnotes continued from preceding page) Sharing Plan. Total does not reflect the 192,000 shares of Common Stock of the Company that the Company has irrevocably committed to deposit to the Company Employees' Profit Sharing Plan over the next three years. (5) Total does not reflect the 40,234 shares of Common Stock transferred by Mr. Turley to certain family members. Mr. Turley disclaims beneficial ownership of such shares. Total includes options covering 44,421 shares of Common Stock which are exercisable as of March 26, 1994 or within 60 days thereafter. Includes 28,081 shares of Management Restricted Stock which vest upon the occurrence of Restricted Stock Events but does not reflect the 6,650 shares of Management Restricted Stock transferred by Mr. Turley and certain family members. Mr. Turley disclaims beneficial ownership of such shares. (6) Total does not reflect 127,393 shares of Common Stock transferred to certain irrevocable trusts established by Mr. Boyle. Mr. Boyle disclaims beneficial ownership of such shares. Total includes options covering 20,800 shares of Common Stock which are exercisable as of March 26, 1994 or within 60 days thereafter. Total does not reflect 15,432 shares of Management Restricted Stock which vest upon the occurrence of Restricted Stock Events transferred by Mr. Boyle to certain family members. Mr. Boyle disclaims beneficial ownersip of such shares. (7) Total includes options covering 3,334 shares of Common Stock which are exercisable as of March 26, 1994 or within 60 days thereafter. Includes 277 shares of Management Restricted Stock which vest upon the occurrence of Restricted Stock Events. (8) Total includes options covering 3,334 shares of Common Stock which are exercisable as of March 26, 1994 or within 60 days thereafter. Includes 277 shares of Management Restricted Stock which vest upon the occurrence of Restricted Stock Events. (9) Messrs. Fitzgibbons, Michas and Sidhu are directors of the Company and officers of Merrill Lynch Capital Partners, ML & Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated. Each disclaims beneficial ownership of shares of Common Stock beneficially owned by the Merrill Lynch Investors. The business address for Messrs. Fitzgibbons, Michas and Sidhu is set forth in Note 2 above. (10) Total includes options covering 3,334 shares of Common Stock which are exercisable as of March 26, 1994 or within 60 days thereafter. Total includes 277 shares of Management Restricted Stock which vest upon the occurrence of Restricted Stock Events. (11) Total includes options covering 3,334 shares of Common Stock which are exercisable as of March 26, 1994 or within 60 days thereafter. Total includes 277 shares of Management Restricted Stock which vest upon the occurrence of Restricted Stock Events. (12) Total includes options covering 4,675 shares of Common Stock which are exercisable as of March 26, 1994 or within 60 days thereafter, including options covering 295 shares of Common Stock which vest upon the occurrence of Restricted Stock Events. (13) Total includes options covering 4,717 shares of Common Stock which are exercisable as of March 26, 1994 or within 60 days thereafter, including options covering 277 shares of Common Stock which vest upon the occurrence of Restricted Stock Events. (14) Total includes options covering 20,800 shares of Common Stock which are exercisable as of March 26, 1994 or within 60 days thereafter. Includes 15,431 shares of Management Restricted Stock which vest upon the occurrence of Restricted Stock Events. (15) Total includes options covering 10,400 shares of Common Stock which are exercisable as of March 26, 1994 or within 60 days thereafter. Includes 6,755 shares of Management Restricted Stock which vest upon the occurrence of Restricted Stock Events. (16) Total does not reflect the 3,696 shares of Common Stock transferred by Mr. Santo to certain family members. Mr. Santo disclaims beneficial ownership of such shares. Total includes options covering 9,100 shares of Common Stock which are exercisable as of March 26, 1994 or within 60 days thereafter. Includes 6,013 shares of Management Restricted Stock which vest upon the occurrence of Restricted Stock Events but does not reflect 743 shares of Management Restricted Stock transferred by Mr. Santo to certain family members. Mr. Santo disclaims beneficial ownership of such shares. (Footnotes continued on following page) 35 (Footnotes continued from preceding page) (17) The total number of all directors and officers as a group includes Harry W. Lambert who retired from his positions with the Company effective September 30, 1993 and is currently a consultant and advisor to the Company. (18) Total includes options covering 168,524 shares of Common Stock which are exercisable as of March 26, 1994 or within 60 days thereafter, including options covering 941 shares of Common Stock which vest upon the occurrence of Restricted Stock Events. Total includes 78,500 shares of Management Restricted Stock which vest upon the occurrence of Restricted Stock Events. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company sold the business and assets of its Vision Group effective January 30, 1994 to an investment group which included Richard W. Roberson, President of Vision Group and Senior Vice President of the Company, for an amount in cash and notes, approximately equal to the book value of the assets. Mr. Roberson is not a member of the Board of Directors and took no part in the Board's decision to approve the sale to the investment group. See "Item 11. Executive Compensation--Compensation Committee Interlocks and Insider Participation." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K Listed below are all financial statements, notes, schedules, and exhibits filed as part of this Form 10-K annual report: (a)(1) Financial statements and Schedules The following financial statements and schedules of the Company together with the Report of Independent Certified Public Acocuntants dated March 18, 1994 on pages 42 through 61 of this Form 10-K are filed herewith: ECKERD CORPORATION AND SUBSIDIARIES Financial Statements: Report of Independent Certified Public Accountants Consolidated Balance Sheets as of January 29, 1994 and January 30, 1993 Consolidated Statements of Operations for the Years Ended January 29, 1994, January 30, 1993 and February 1, 1992, Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended January 29, 1994, January 30, 1993 and February 1, 1992 Consolidated Statements of Cash Flows for the Years Ended January 29, 1994, January 30, 1993 and February 1, 1992 Notes to Consolidated Financial Statements Schedules: V --Property, Plant and Equipment VI --Accumulated Depreciation and Amortization of Plant and Equipment VIII --Reserves All other schedules for the Company are omitted as the required information is inapplicable or the information is presented in the respective consolidated financial statements or related notes. Also filed in this report is the consent of KPMG Peat Marwick to the incorporation by reference of their auditors' report dated March 18, 1994, relating to the consolidated financial statements appearing in this report, into Registration Statement Numbers 33-49977 and 33-50755 on Form S-8 and Registration Statement Numbers 33-10721 and 33-50223 on Form S-3. 36 (a)(2) Exhibits Exhibits filed by incorporation herein by reference: 3.1(i) --Restated Certificate of Incorporation of Eckerd Corporation (the "Company") (incorporated by reference to Exhibit 3.1(i) to the Registration Statement on Form S-3 of the Company (No. 33-50223)). 3.2(ii) --Amended and Restated By-laws of the Company (incorporated by reference to Exhibit 3.2(ii) to the Registration Statement on Form S-3 of the Company (No. 33-50223)). 4.1 --Form of certificate for the Company's Common Stock, par value $.01 per share (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-2 of the Company (No. 33-64906)). 4.2 --Indenture dated as of May 1, 1986 by and between the Company and Mellon Bank, N.A. as trustee, relating to the 11 1/8% Subordinated Debentures due 2001 (incorporated by reference to the Registration Statement on Form S-1 of Eckerd Holdings Inc. (No. 33-4576)). (On February 6, 1991, Mellon Bank, N.A. was succeeded by Security Pacific National Trust Company, as trustee.) 4.3 --Indenture dated as of May 1, 1986 between the Company and Chemical Bank (as successor by merger to Manufacturers Hanover Trust Company), relating to the Company's Discount Subordinated Debentures due 2006 (incorporated by reference to Exhibit 4.2 to the Registration Statement on Form S-1 of the Company (No. 33-10721)). 4.4 --Indenture dated as of November 1, 1993 between the Company and State Street Bank and Trust Company of Connecticut, National Association, as Trustee (incorporated by reference to Exhibit 4.02 to the Current Report on Form 8-K dated October 26, 1993 of the Company (File No. 1-4844)). 4.5 --Form of 9 1/4% Senior Subordinated Note due 2004 of the Company (incorporated by reference to Exhibit 4.01 to the Current Report on Form 8-K dated October 26, 1993 of the Company (File No. 1-4844)). 10.1 --Credit Agreement dated as of June 14, 1993 (the "Credit Agreement") among the Company, the lenders named therein, Chemical Bank and NationsBank of Florida, N.A., as managing agents and swingline lenders, and Chemical Bank, as administrative agent (incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-2 of the Company (No. 33-64906)). 10.2 --Guarantee Agreement dated as of June 14, 1993 (the "Guarantee Agreement") among the subsidiaries of the Company listed therein and Chemical Bank, as collateral agent (incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-2 of the Company (No. 33-64906)). 10.3 --Indemnity, Subrogation and Contribution Agreement dated as of June 14, 1993 (the "Contribution Agreement"), among the Company, each subsidiary of the Company listed therein and Chemical Bank, as collateral agent (incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-2 of the Company (No. 33-64906)). 10.4 --Pledge Agreement dated as of June 14, 1993 (the "Pledge Agreement") among the Company, each subsidiary of the Registrant listed therein and Chemical Bank, as collateral agent (incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-2 of the Company (No. 33-64906)).
37 10.5 --Security Agreement dated as of June 14, 1993 (the "Security Agreement") among the Company, each subsidiary of the Company listed therein and Chemical Bank, as collateral agent (incorporated by reference to Exhibit 10.5 to the Registration Statement on Form S-2 of the Company (No. 33-64906)). 10.6 --Trademark Security Agreement dated as of June 14, 1993 (the "Trademark Security Agreement") among the Company, each subsidiary of the Company listed therein and Chemical Bank, as collateral agent (incorporated by reference to Exhibit 10.6 to the Registration Statement on Form S-2 of the Company (No. 33-64906)). 10.7 --Amendment No. 1 dated as of August 3, 1993 to the Credit Agreement (incorporated by reference to Exhibit 10.7 to the Registration Statement on Form S-3 of the Company (No. 33-50223)). 10.8 --Supplement No. 1 to the Guarantee Agreement dated as of August 12, 1993 (incorporated by reference in Exhibit 10.8 to the Registration Statement on Form S-3 of the Company (No. 33-50223)). 10.9 --Supplement No. 1 to the Contribution Agreement dated as of August 12, 1993 (incorporated by reference to Exhibit 10.9 to the Registration Statement on Form S-3 of the Company (No. 33-50223)). 10.10 --Supplement No. 1 to the Pledge Agreement dated as of August 12, 1993 (incorporated by reference to Exhibit 10.10 to the Registration Statement on Form S-3 of the Company (No. 33-50223)). 10.11 --Supplement No. 1 to the Security Agreement dated as of August 12, 1993 (incorporated by reference to Exhibit 10.11 to the Registration Statement on Form S-3 of the Company (No. 33-50223)). 10.12 --Supplement No. 1 to the Trademark Security Agreement dated as of August 12, 1993 (incorporated by reference to Exhibit 10.12 to the Registration Statement on Form S-3 of the Company (No. 33-50223)). 10.13 --Amendment No. 2, Consent and Waiver dated as of September 30, 1993 to the Credit Agreement (incorporated by reference to Exhibit 10.01 to the Current Report on Form 8-K dated October 26, 1993 of the Company (File No. 1-4844). 10.14 --Merrill Lynch Common Stock Purchase Agreement dated as of April 1, 1986 by and among the Company and the Merrill Lynch Investors (incorporated by reference to the Registration Statement on Form S-4 of Eckerd Holdings Inc. (No. 33-4497)). 10.15 --Commercial Paper Placement Agency Agreement dated July 17, 1989 between the Company and Merrill Lynch Money Markets, Inc. (incorporated by reference to Exhibit 10.15 of Form 10-K of the Company for the period ended February 3, 1990. 10.16 --Receivables Purchase Agreement dated March 29, 1990 as Amended and Restated as of May 16, 1991 between the Company and Mellon Bank, N.A. (incorporated by reference to Exhibit 10.9 to the Registration Statement on Form S-2 of the Company (No. 33-64906)). 10.17 --Amendment No. 1 to Receivables Purchase Agreement dated as of April 20, 1992 between the Company and Mellon Bank, N.A. (incorporated by reference to Exhibit 10.28 of Form 10-K of the Company for the period ended February 1, 1992). 10.18 --Amendment No. 2 to Receivables Purchase Agreement between the Company and Mellon Bank, N.A. (incorporated by reference to Exhibit 10.35 of Post-Effective Amendment No. 5 to the Registration Statement on Form S-2 of the Company (No. 33-37544)).
38 10.19 --Amendment No. 3 to Receivables Purchase Agreement between the Company and Mellon Bank, N.A. (incorporated by reference to Exhibit 10.36 of Post-Effective Amendment No. 5 to the Registration Statement on Form S-2 of the Company (No. 33-37544)). 10.20 --Amendment No. 4 to Receivables Purchase Agreement dated as of June 11, 1993 between the Company and Mellon Bank, N.A. (incorporated by reference to Exhibit 10.13 to the Registration Statement on Form S-2 of the Company (No. 33-64906)). 10.21 --Reimbursement Agreement dated as of January 24, 1992 among the Company, the guarantors listed therein and Westpac Banking Corporation, New York Branch (incorporated by reference to Exhibit 10.34 of Post-Effective Amendment No. 5 to the Registration Statement on Form S-2 of the Company (No. 33-37544)). 10.22 --Registration Rights Agreement dated as of April 30, 1986 by and among the Company, the Merrill Lynch Investors, Morgan Capital Corporation and the other bank affiliates listed therein, the institutional and corporate investors listed therein and certain members of management of the Company (incorporated by reference to Exhibit 10.19 to the Registration Statement on Form S-2 of the Company (No. 33-64906)). 10.23 --First Amendment to Registration Rights Agreement among the Company, EDS Holdings Inc., the Merrill Lynch Investors, the Bank Affiliates, the Institutional Investors and the Management Investors (incorporated by reference to Exhibit 10.20 to Amendment No. 1 to the Registration Statement on Form S-2 of the Company (No. 33-64906)). 10.24 --First Employees Management Stock Option Plan (incorporated by reference to the Registration Statement on Form S-8 of the Company (No. 33-30761)). 10.25 --Employment Agreement dated as of April 30, 1986, between the Company and Stewart Turley (incorporated by reference to Exhibit 10.23 to the Registration Statement on Form S-2 of the Company (No. 33-64906)). 10.26 --Employment Agreement dated as of April 30, 1986, between the Company and Harry W. Lambert (incorporated by reference to Exhibit 10.24 to the Registration Statement on Form S-2 of the Company (No. 33-64906)). 10.27 --Employment Agreement dated as of April 30, 1986, between the Company and John W. Boyle (incorporated by reference to Exhibit 10.25 to the Registration Statement on Form S-2 of the Company (No. 33-64906)). 10.28 --Employment Agreement dated October 1, 1988, between the Company and Richard W. Roberson (incorporated by reference to Exhibit 10.26 to the Registration Statement on Form S-2 of the Company (No. 33-64906)). 10.29 --Employment Agreement dated June 9, 1993, between the Company and Francis A. Newman (incorporated by reference to Exhibit 10.27 to the Registration Statement on Form S-2 of the Company (No. 33-64906)). 10.30 --Master Lease Agreement I dated as of May 18, 1993 between the Company and Imaging Financial Services d/b/a EKCC ("IFS") (incorporated by reference to Exhibit 10.28 to Amendment No. 1 to the Registration Statement on Form S-2 of the Company (No. 33-64906)). 10.31 --Master Lease Agreement II dated as of June 15, 1993 between the Company and IFS (incorporated by reference to Exhibit 10.29 to Amendment No. 1 to the Registration Statement on Form S-2 of the Company (No. 33-64906)). 10.32 --Systems Operations Service Agreement dated as of July 14, 1993 between the Company and Integrated Systems Solution Corporation (incorporated by reference to Exhibit 10.30
39 to Amendment No. 1 to the Registration Statement on Form S-2 of the Company (No. 33-64906)). 10.33 --Letter dated March 16, 1993 between IFS and the Company relating to IFS Sale and Leaseback (incorporated by reference to Exhibit 10.31 to Amendment No. 2 of the Registration Statement on Form S-2 of the Company (No. 33-64906)). 10.34 --Consulting Agreement dated as of September 30, 1993, between the Company and Harry W. Lambert (incorporated by reference to Exhibit 10.33 to Amendment No. 2 to the Registration Statement on Form S-3 of the Company (No. 33-50223)). 10.35 --1993 Stock Option and Incentive Plan of the Company (incorporated by reference to Exhibit 99.1 to the Registration Statement on Form S-8 of the Company (No. 33-49977)). 12.1 --Statement regarding computation of ratio of earnings to fixed charges of the Company (incorporated by reference to Exhibit 12.1 to the Registration Statement on Form S-3 of the Registrant (No. 33-50223)). Exhibits filed herewith: 10.36 --Form of Separation Agreement between the Company and Richard W. Roberson. 10.37 --Consent and Waiver dated as of January 15, 1994 to the Credit Agreement. 10.38 --Employment Agreement dated October 1, 1988 between the Company and James M. Santo. 22.1 --Subsidiaries of the Company. 23.1 --Consent of Independent Certified Public Accountants. 99.1 --Pro Forma Financial Data for the fiscal year ended January 29, 1994.
(b) Reports on Form 8-K The Company filed a report on Form 8-K dated January 4, 1994 announcing an agreement in principle to sell its Vision Group division. 40 SIGNATURES Pursuant to the requirements of Section 13 or 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. March 31, 1994 ECKERD CORPORATION By /s/ SAMUEL G. WRIGHT --------------------------------- Samuel G. Wright Senior Vice President-Finance Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the date indicated.
SIGNATURE TITLES DATE --------- ------ ---- /s/ STEWART TURLEY Chairman of the Board and Chief March 31, 1994 - ---------------------------------------------- Executive Officer Stewart Turley /s/ FRANCIS A. NEWMAN President, Chief Operating Officer and March 31, 1994 - ---------------------------------------------- Director Francis A. Newman /s/ JOHN W. BOYLE Vice Chairman of the Board, Chief March 31, 1994 - ---------------------------------------------- Financial Officer and Director John W. Boyle (Chief Financial Officer) /s/ SAMUEL G. WRIGHT Senior Vice President/Finance (Chief March 31, 1994 - ---------------------------------------------- Accounting Officer) Samuel G. Wright /s/ JAMES T. DOLUISIO Director March 31, 1994 - ---------------------------------------------- James T. Doluisio /s/ DONALD F. DUNN Director March 31, 1994 - ---------------------------------------------- Donald F. Dunn /s/ ALBERT J. FITZGIBBONS, III Director March 31, 1994 - ---------------------------------------------- Albert J. Fitzgibbons, III /s/ LEWIS W. LEHR Director March 31, 1994 - ---------------------------------------------- Lewis W. Lehr /s/ RUPINDER S. SIDHU Director March 31, 1994 - ---------------------------------------------- Rupinder S. Sidhu /s/ ALEXIS P. MICHAS Director March 31, 1994 - ---------------------------------------------- Alexis P. Michas
41 INDEPENDENT AUDITORS' REPORT The Board of Directors ECKERD CORPORATION AND SUBSIDIARIES: We have audited the accompanying consolidated balance sheets of Eckerd Corporation and subsidiaries as of January 29, 1994 and January 30, 1993, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the years in the three-year period ended January 29, 1994. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Eckerd Corporation and subsidiaries at January 29, 1994 and January 30, 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended January 29, 1994, in conformity with generally accepted accounting principles. Tampa, Florida March 18, 1994 42 ECKERD CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JANUARY 29, 1994 AND JANUARY 30, 1993 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JANUARY 29, JANUARY 30, 1994 1993 ------------ ------------ ASSETS Current assets: Cash and short-term interest-bearing deposits plus accrued interest................ $ 12,110 18,642 Receivables, less allowance for doubtful receivables of $5,000 and $5,000.......... 92,672 78,555 Merchandise inventories............................................................ 765,653 725,231 Prepaid expenses and other current assets.......................................... 6,232 2,824 ------------ ------------ Total current assets....................................................... 876,667 825,252 ------------ ------------ Property, plant and equipment, at cost: Land............................................................................... 19,260 19,269 Buildings.......................................................................... 73,404 68,196 Furniture and equipment............................................................ 273,867 326,145 Transportation equipment........................................................... 13,050 14,660 Leasehold improvements............................................................. 127,480 123,344 ------------ ------------ 507,061 551,614 Less accumulated depreciation................................................... 238,425 223,488 ------------ ------------ Net property, plant and equipment.......................................... 268,636 328,126 ------------ ------------ Excess of cost over net assets acquired, less accumulated amortization of $15,083 and $12,837.............................................................................. 31,594 29,693 Favorable lease interests, less accumulated amortization of $357,912 and $314,917.... 177,803 205,057 Unamortized debt expenses............................................................ 38,779 19,775 Other assets......................................................................... 24,025 11,019 ------------ ------------ $ 1,417,504 1,418,922 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Bank debit balances................................................................ $ 40,974 12,231 Current installments of long-term debt (note 4).................................... 1,905 3,669 Accounts payable................................................................... 363,136 266,468 Accrued interest................................................................... 17,749 31,962 Accrued payroll.................................................................... 69,085 68,536 Other accrued expenses............................................................. 77,230 75,359 ------------ ------------ Total current liabilities.................................................. 570,079 458,225 ------------ ------------ Other noncurrent liabilities......................................................... 73,461 74,958 Long-term debt, excluding current installments (note 4).............................. 952,986 1,044,553 14 1/2% cumulative redeemable preferred stock (note 6)............................... -- 75,000 Voting common stock of $.01 par value held by the management group and key employees; 0 and 2,432,456 shares, respectively................................................. -- 9,477 Stockholders' equity (deficit) (notes 1 and 7): Preferred stock of $.01 par value. Authorized 20,000,000 shares; none issued or outstanding.......................................................................... -- -- Voting common stock of $.01 par value. Authorized 96,481,272 shares; issued 31,031,811 and 23,631,264............................................................ 310 236 Nonvoting common stock of $.01 par value. Authorized 3,518,728 shares; issued 605,022 shares....................................................................... 6 6 Capital in excess of par value..................................................... 225,560 153,500 Retained deficit................................................................... (404,898) (397,033) ------------ ------------ Total stockholders' deficit................................................ (179,022) (243,291) Commitments, related party transactions and subsequent event (notes 8, 9 and 10)..... ------------ ------------ $ 1,417,504 1,418,922 ------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements. 43 ECKERD CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED JANUARY 29, 1994, JANUARY 30, 1993, AND FEBRUARY 1, 1992 (IN THOUSANDS)
JANUARY 29, JANUARY 30, FEBRUARY 1, 1994 1993 1992 ------------- ------------- ------------- Sales and other operating revenue.................................... $ 4,190,539 3,887,027 3,739,852 ------------- ------------- ------------- Costs and expenses: Cost of sales, including store occupancy, warehousing, and delivery expense.............................................................. 3,175,375 2,896,479 2,738,545 Operating and administrative expenses.............................. 857,980 855,165 854,209 ------------- ------------- ------------- 4,033,355 3,751,644 3,592,754 ------------- ------------- ------------- Earnings before interest expenses.......................... 157,184 135,383 147,098 ------------- ------------- ------------- Interest expenses: Interest expense, net.............................................. 105,999 130,435 126,681 Amortization of original issue discount and deferred debt expenses............................................................. 7,216 6,969 16,513 ------------- ------------- ------------- Total interest expenses.................................... 113,215 137,404 143,194 ------------- ------------- ------------- Earnings (loss) before income taxes and extraordinary items................................................................ 43,969 (2,021) 3,904 Income tax provision (note 5)........................................ 2,556 2,864 2,927 ------------- ------------- ------------- Earnings (loss) before extraordinary items................. 41,413 (4,885) 977 Extraordinary items: Early retirement of debt and preferred stock, net of tax benefit of $929 (note 4(a))..................................................... (44,354) -- -- Tax effect of utilization of net operating loss carryforward (note 5)................................................................... -- 762 1,680 ------------- ------------- ------------- Net earnings (loss) for the year........................... (2,941) (4,123) 2,657 Preferred stock dividends 4,924 10,815 10,823 ------------- ------------- ------------- Net loss available to common shares........................ $ (7,865) (14,938) (8,166) ------------- ------------- ------------- ------------- ------------- ------------- Earnings (loss) per common share: Earnings (loss) before extraordinary items......................... $ 1.24 (.59) (.38) Extraordinary items................................................ (1.51) .03 .06 ------------- ------------- ------------- Net loss................................................... $ (.27) (.56) (.32) ------------- ------------- ------------- ------------- ------------- -------------
See accompanying notes to consolidated financial statements. 44 ECKERD CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) YEARS ENDED JANUARY 29, 1994, JANUARY 30, 1993 AND FEBRUARY 1, 1992 (IN THOUSANDS)
CAPITAL TOTAL VOTING NONVOTING IN EXCESS RETAINED STOCKHOLDERS' COMMON COMMON OF PAR EARNINGS EQUITY STOCK STOCK VALUE (DEFICIT) (DEFICIT) ----------- --------------- --------- ---------- ------------ Balance at February 2, 1991......................... $ 236 6 153,500 (373,929) (220,187) Net earnings for the year........................... -- -- -- 2,657 2,657 14 1/2% preferred stock cash dividends.............. -- -- -- (10,823) (10,823) ----------- --------- ---------- ------------ Balance at February 1, 1992......................... 236 6 153,500 (382,095) (228,353) Net loss for the year............................... -- -- -- (4,123) (4,123) 14 1/2% preferred stock cash dividends.............. -- -- -- (10,815) (10,815) ----------- --------- ---------- ------------ Balance at January 30, 1993......................... 236 6 153,500 (397,033) (243,291) Reclassification of common stock previously subject to put options...................................... 21 -- 7,279 -- 7,300 Common stock sold under employee stock option plan................................................ 1 -- 272 -- 273 Common stock sold in a Public Stock Offering, net of expenses of sale.................................... 52 -- 64,509 -- 64,561 Net loss for the year -- -- -- (2,941) (2,941) 14 1/2% preferred stock cash dividends.............. -- -- -- (4,924) (4,924) ----------- --------- ---------- ------------ Balance at January 29, 1994......................... $ 310 6 225,560 (404,898) (179,022) -- -- ----------- --------- ---------- ------------ ----------- --------- ---------- ------------
See accompanying notes to consolidated financial statements. 45 ECKERD CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JANUARY 29, 1994, JANUARY 30, 1993 AND FEBRUARY 1, 1992 (IN THOUSANDS)
JANUARY 29, JANUARY 30, FEBRUARY 1, 1994 1993 1992 ------------ ----------- ----------- Cash flows from operating activities: Net earnings (loss) for the year....................................... $ (2,941) (4,123) 2,657 Adjustments to reconcile net earnings (loss) for the year to net cash provided by operating activities: Extraordinary charge related to early retirement of debt and preferred stock.......................................................... 45,283 -- -- Depreciation and amortization..................................... 85,068 92,759 97,383 Amortization of original issue discount and deferred debt expenses................................................................. 7,216 6,969 16,513 Increase in receivables........................................... (13,867) (633) (5,907) Increase in merchandise inventories............................... (35,455) (19,104) (15,690) Decrease (increase) in prepaid expenses and other current assets................................................................... (3,408) 1,108 407 Increase in accounts payable and accrued expenses................. 87,393 1,963 30,595 ------------ ----------- ----------- Net cash provided by operating activities...................... 169,289 78,939 125,958 ------------ ----------- ----------- Cash flows from investing activities: Additions to property, plant and equipment............................. (33,091) (51,389) (49,410) Sale of property, plant and equipment.................................. 37,942 3,303 2,103 Sale/Purchase of long-term investments (net)........................... 1,173 1,161 (1,068) Acquisition of certain drug store assets............................... (14,314) (30,475) -- Other.................................................................. (10,158) 1,437 (2,092) ------------ ----------- ----------- Net cash used in investing activities.......................... (18,448) (75,963) (50,467) ------------ ----------- ----------- Cash flows from financing activities: Increase (decrease) in bank debit balances............................. 28,743 (5,919) 10,927 14 1/2% preferred stock cash dividends................................. (4,924) (10,815) (10,823) Additions to long-term debt............................................ 1,476 1,435 4,227 Reductions of long-term debt........................................... (3,769) (4,730) (5,561) Net reductions of prior credit agreement............................... (221,723) 34,913 (70,515) Net additions under new credit agreement............................... 576,189 -- -- Redemption of 14 1/2% preferred stock.................................. (75,000) -- -- Common stock sold in a public stock offering, net of expenses of sale..................................................................... 64,561 -- -- Issuance of 9 1/4% senior subordinated notes........................... 200,000 -- -- Redemption of 13% and 11 1/8% subordinated debentures.................. (490,165) -- -- Redemption of senior notes............................................. (168,000) -- -- Federal and state income taxes......................................... -- (111) (1,293) Other, including redemption fees and deferred financing costs.......... (64,761) (7,545) (2,948) ------------ ----------- ----------- Net cash provided by (used in) financing activities............ (157,373) 7,228 (75,986) ------------ ----------- ----------- Net increase (decrease) in cash and cash equivalents..................... (6,532) 10,204 (495) Cash and short-term interest-bearing deposits plus accrued interest at beginning of year........................................................ 18,642 8,438 8,933 ------------ ----------- ----------- Cash and short-term interest-bearing deposits plus accrued interest at end of year.............................................................. $ 12,110 18,642 8,438 ------------ ----------- ----------- ------------ ----------- -----------
See accompanying notes to consolidated financial statements. 46 ECKERD CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 29, 1994, JANUARY 30, 1993 AND FEBRUARY 1, 1992 (IN THOUSANDS, EXCEPT SHARE AMOUNTS) (1) ORGANIZATION OF BUSINESS (a) Acquisitions and Merger On April 30, 1986, all of the outstanding capital stock of Jack Eckerd Corporation (predecessor company) was acquired by certain affiliates of Merrill Lynch Capital Partners, Inc., affiliates of certain banks which provided a portion of the financing for the acquisition and certain members of management. The acquisition has been accounted for using the purchase method of accounting. The cost of acquiring the capital stock has been allocated to assets based on fair market values at April 30, 1986 as determined by American Appraisal Associates, Inc. The excess of cost over net assets acquired at May 1, 1986, as well as subsequent acquisitions, are being amortized on a straight-line basis over a period of 20 years. During 1992 and 1993, Eckerd Corporation (Company) purchased fifty-two drug stores (7 stores were closed subsequent to the acquisition) in three transactions at an aggregate cost of $41,926. The operations of such stores, which have been included in the consolidated financial statements from dates of acquisition, are not material to the Company and, accordingly, pro forma comparative operating numbers are not presented. (b) Initial Public Offering and Common Stock Exchange On August 12, 1993, the Company completed an initial public offering (IPO) in which it issued and sold 5,175,000 shares of its Common Stock par value $.01 per share (Common Stock) for $14.00 per share. In addition in connection with the IPO, the Company amended its Restated Certificate of Incorporation to effect, among other things: i) the reclassification of its Class A common stock and Class B common stock into Common Stock at certain specified rates (Reclassification); ii) a 2-for-3 reverse stock split (Stock Split); iii) the adoption of certain provisions, such as a classified board of directors and the prohibition of stockholder action by written consent, which could make non-negotiated acquisitions of the Company more difficult, and iv) the change of the Company's name from "Jack Eckerd Corporation" to "Eckerd Corporation." In connection with the consummation of the IPO, the shareholders of EDS Holdings Inc. (EDS) exchanged their shares for shares of the Company's common stock. This transaction was accounted for as a combination of companies under common control in a manner similar to a pooling of interests. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts have been eliminated in the consolidation. (b) Definition of Fiscal Year The fiscal year ends on the Saturday nearest January 31. Fiscal years 1993, 1992 and 1991 ended January 29, 1994, January 30, 1993 and February 1, 1992, respectively, consisted of 52 weeks. (c) Merchandise Inventories Inventories consist principally of merchandise held for resale and are based on physical inventories taken throughout the year. Inventories are stated at the lower of cost (last-in, first-out--LIFO) or market. At January 29, 1994 and January 30, 1993, if the first-in, first-out (FIFO) method of valuing 47 ECKERD CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) JANUARY 29, 1994, JANUARY 30, 1993 AND FEBRUARY 1, 1992 (IN THOUSANDS, EXCEPT SHARE AMOUNTS) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) inventories had been used by the Company, inventories would have been higher than reported by approximately $66,100 and $57,600, respectively. (d) Income Taxes Effective January 31, 1993, the Company adopted Statement of Financial Accounting Standards No. 109 (SFAS), "Accounting for Income Taxes." Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect of a change in tax rates on deferred tax assets or liabilities is recognized in income in the period that included the enactment. Previously, the Company accounted for income taxes under Accounting Principles Board Opinion No. 11, which did not give recognition to future events other than the recovery of assets and settlement of liabilities at their carrying amounts. The adoption of SFAS No. 109 had no material effect on the Company's financial position or results of operations. Prior years' financial statements were not restated. (e) Depreciation Policy and Maintenance and Repairs Plant and equipment is depreciated principally by the straight-line method over the estimated useful lives of such assets. The principal lives used to compute depreciation are: Buildings........................................... 16-45 Furniture and equipment............................. 1-10 Transportation equipment............................ 1-8 Leasehold improvements.............................. 2-20 --------- --------- Maintenance and repairs are charged to expense as incurred. The Company's policy is to capitalize expenditures for renewals and betterments and to reduce the asset accounts and the related allowance for depreciation for the cost and accumulated depreciation of items replaced, retired or fully depreciated. The 1992 balances for plant and equipment have been restated to reflect the write-off of certain fully depreciated assets during 1993. (f) Favorable Lease Interests Favorable lease interests represent the present value of the excess of current market rents at dates of acquisition over the below market rents of the Company's then existing operating leases of real property (principally store locations). Such costs are amortized by the interest method over the lives of the favorable leases averaging approximately twenty years. (g) Unamortized Debt Expenses Unamortized debt expenses represent underwriting discounts, professional fees and other costs related to the two issues of subordinated debentures which are amortized over the life of the related debentures; and professional fees and other costs related to the Company's long-term debt refinancings (see note 4) which are amortized over the life of the related agreements. 48 ECKERD CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) JANUARY 29, 1994, JANUARY 30, 1993 AND FEBRUARY 1, 1992 (IN THOUSANDS, EXCEPT SHARE AMOUNTS) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) (h) Original Issue Debt Discount Original issue debt discount is the difference between the principal amount of the two issues of subordinated debentures and their issue price to the public. Such discount which is treated as a reduction of the principal amount of such debentures is amortized to provide a level interest cost over the term of the respective debenture issues. (i) Advertising Costs Advertising costs are expensed when incurred and were $26,758, $45,918 and $47,998 for the years ended January 29, 1994, January 30, 1993 and February 1, 1992, respectively. (j) Reclassifications Certain amounts have been reclassified in the 1991 and 1992 financial statements to conform to the 1993 financial statement presentation. (k) Statement of Cash Flows The Company considers all liquid investments with a maturity of three months or less when purchased to be cash equivalents. During 1992, the Company converted debentures, which were held by certain members of management, totaling $8,092 to 1,304,289 shares of Common Stock. Cash paid for interest was $120,329, $128,896 and $116,661 for the years ended January 29, 1994, January 30, 1993 and February 1, 1992, respectively. (1) Earnings (Loss) Per Share Primary earnings per share have been computed based on the weighted average number of shares of common stock outstanding during each fiscal year (29,392,805 in 1993, 26,573,902 in 1992, and 25,677,103 in 1991) restated for the August 12, 1993 Reclassification and Stock Split. (3) EMPLOYEES' BENEFIT PLANS (a) Profit Sharing Plan The Company has in effect a noncontributory profit sharing plan which covers all regular, full-time employees. The Company makes annual contributions to the Plan at the discretion of the Company's Board of Directors. All funds are held by a bank as trustee under a trust agreement. Included in operating and administrative expenses are charges accrued for contributions to the Plan of $8,765, $7,433 and $8,517 for January 29, 1994, January 30, 1993 and February 1, 1992, respectively. Plan assets at fair value, consisting of fixed income securities, the Company's stock and listed stocks, amounted to approximately $199.4 million for the plan year ended December 31, 1993. (b) Pension Plans The Company has in effect a noncontributory pension plan covering all full-time employees who qualify as to age and length of service. Benefits are computed based on the average annual compensation for the five consecutive years that produce the highest average during the final ten years of creditable service. The Company's policy is to fund the Plan in accordance with minimum Internal Revenue Service (IRS) requirements. 49 ECKERD CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) JANUARY 29, 1994, JANUARY 30, 1993 AND FEBRUARY 1, 1992 (IN THOUSANDS, EXCEPT SHARE AMOUNTS) (3) EMPLOYEES' BENEFIT PLANS--(CONTINUED) The Company accounts for pension costs in accordance with Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions." The following table sets forth the funded status of the Company's pension plan as of the most recent actuarial measurement dates, December 31, 1993 and 1992:
1994 1993 ---------- ---------- (PROJECTED) Accumulated benefit obligation at December 31, 1993 (including vested benefits of $24,210 and $22,756 at January 1, 1993 and January 1, 1992, the most recent valuation dates)... $ (36,829) $ (27,841) Effect of anticipated future compensation levels and other events........................ (1,806) -- ---------- ---------- Projected benefit obligation for service rendered to date................................ (38,635) (27,841) Plan assets at fair value, consisting of fixed income securities and listed stocks....... 38,139 38,361 ---------- ---------- Plan assets in excess (less than) projected benefit obligation................. (496) 10,520 Unrecognized prior service cost.......................................................... (1,281) (1,442) Unrecognized net (gain) loss............................................................. 3,974 (4,947) Unrecognized net asset at January 1, 1987 being amortized over 13 years.................. (3,454) (4,131) ---------- ---------- Accrued pension cost........................................................... $ (1,257) -- ---------- ---------- ---------- ----------
Net periodic pension costs for the years ended January 29, 1994, January 30, 1993 and February 1, 1992 included the following (income) expense components:
1994 1993 1992 ---------- ---------- ---------- Service costs (benefits earned during the period)........................... $ 2,818 $ 1,300 $ 1,197 Interest cost on projected benefit obligation............................... 2,548 2,245 2,351 Return on assets............................................................ (3,271) (2,707) (2,710) Unrecognized prior service cost............................................. (161) (161) (161) Amortization of transitional asset.......................................... (677) (677) (677) ---------- ---------- ---------- Net periodic pension cost......................................... $ 1,257 -- -- ---------- ---------- ---------- ---------- ---------- ---------- Assumptions used in determining net periodic pension cost were: Weighted average discount rate............................................ 7.5% 9% 9% Weighted average long-term rate of return on assets....................... 9% 9% 9% Rate of compensation increases............................................ 5% 5% 5%
The Company has in effect an Executive Supplemental Benefit Plan to provide additional income for its executives after their retirement as well as pre-retirement death benefits to beneficiaries of such executives. Annual benefits will generally be no greater than 25 percent of the participant's salary mid-point on the date the participant retires or separates from service with the Company. 50 ECKERD CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) JANUARY 29, 1994, JANUARY 30, 1993 AND FEBRUARY 1, 1992 (IN THOUSANDS, EXCEPT SHARE AMOUNTS) (4) LONG-TERM DEBT Long-term debt at January 29, 1994 and January 30, 1993 was:
JANUARY 29, JANUARY 30, 1994 1993 ----------- ------------- Tranche A term loans, due July 31, 1999 (a).......................................... $ 429,948 -- Tranche B term loans, due June 15, 2000 (a).......................................... 141,741 -- Revolving credit and bankers acceptances (a)......................................... 4,500 -- 9 1/4% senior subordinated notes due February 15, 2004, $200,000 face amount (b)..... 200,000 -- 11 1/8% subordinated debentures due May 1, 2001, $145,500 and 290,500 face amount, net of original issue discount of $10,943 and $23,604 (b)(c)....................... 134,557 266,896 Bank term/revolving credit and working capital loans and Hancock senior notes, including $9,100 of bankers acceptances, due January 31, 1994 and January 31, 1995 (a).................................................................................. -- 221,723 Senior secured floating rate and fixed rate notes due April 15, 1997 (a)............. -- 123,000 13% subordinated debentures, due May 1, 2006, $345,165 face amount (a)............... -- 345,165 11.75% senior notes, due April 15, 1995 (a).......................................... -- 45,000 Variable rate demand industrial development revenue refunding bonds, due $8,250 March 1, 2009 and $10,000 May 1, 2013 (d).................................................. 18,250 18,250 Other (principally notes secured by fixtures and equipment).......................... 25,895 28,188 ----------- ------------- Total long-term debt....................................................... 954,891 1,048,222 Less amounts due within one year..................................................... 1,905 3,669 ----------- ------------- Amounts due after one year................................................. $ 952,986 1,044,553 ----------- ------------- ----------- -------------
The aggregate minimum annual maturities of long-term debt for the next five fiscal years are: 1994, $1,905; 1995, $67,765; 1996, $85,870; 1997, $85,583 and 1998, $95,040. Although the Tranche A term loan commitment requires a repayment of $28,348 during fiscal year 1994, the Company has excess availability under the revolving credit commitment, and accordingly, has not treated the 1994 required repayment as current. (a) On June 15, 1993, The Company entered into a new Credit Agreement, which provides for i) a $650,000 term loan facility (Senior Term Loans) consisting of a six-year amortizing Tranche A term loan facility of $500,000 (Tranche A Term Loans) and a seven-year amortizing Tranche B term loan facility of $150,000 (Tranche B Term Loans); and ii) a $300,000 six-year revolving credit facility ($30,000 of which is available as a swingline loan facility and $155,000 as a letter of credit and bankers' acceptance facility) (Revolving Loans). The Company used the proceeds of (i) Tranche A Term Loan borrowings of $500,000, (ii) Tranche B Term Loan borrowings of $150,000, and (iii) Revolving Loan borrowings of $70,000 to (a) repay in full all amounts outstanding under the prior credit agreement dated as of July 13, 1990, as amended, with Morgan Guaranty Trust Company of New York and other lenders, which consisted of a revolving credit facility and a term loan facility; (b) to prepay in full the Hancock Senior Notes and the 11.75% Senior Notes, (c) to deposit with a trustee an amount sufficient to satisfy and discharge in full all indebtedness under the Floating Rate Notes; (d) to redeem approximately $295,200 of the 13% Discount Debentures (the remaining $50,000 was subsequently redeemed with the proceeds from the 51 ECKERD CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) JANUARY 29, 1994, JANUARY 30, 1993 AND FEBRUARY 1, 1992 (IN THOUSANDS, EXCEPT SHARE AMOUNTS) (4) LONG-TERM DEBT--(CONTINUED) issuance of the 9 1/4% Senior Subordinated Notes (note 4(b)); (e) to redeem the 14 1/2% Preferred Stock in full; and (f) to pay fees and expenses in connection with these transactions. An extraordinary charge of $44,354 (net of tax benefit of $929) was recognized during the year ended January 29, 1994 in connection with the early repayment of debt and preferred stock from the proceeds of the new Credit Agreement, IPO and the Note issuance (note 4(b)). The Tranche A Term Loans and the Revolving Loans bear interest at various rates approximating, at the Companys option (i) Prime plus 1 3/4% or (ii) Adjusted LIBOR plus 2 3/4%. The spread above Prime and LIBOR may decrease by 1/2 of 1% in two separate instances if certain levels of funded debt and ratios of funded debt to specified measures of earnings are achieved by the Company. The Tranche B Term Loans bear interest at various rates approximating, at the Company's option (i) Prime plus 2% or (ii) Adjusted LIBOR plus 3%. Interest on Prime borrowings will be paid quarterly. Interest on LIBOR borrowings will be payable at the end of the relevant interest period (one, two, three or six month periods, except that with respect to six-month periods, interest shall be payable every three months). The Company is required to pay a commitment fee of 1/2 of 1% per annum on the undrawn amount of the term loan and revolving facilities. The Company is also required to pay Letter of Credit fees and Bankers' Acceptance fees. During 1993, the Company entered into interest rate cap agreements relating to the Credit Agreement. The cap agreements are for $200,000 and mature at various dates over the next three years. The cap agreements have an approximate 6% interest rate. Principal of the Tranche A Term Loans and the Tranche B Term Loans will be amortized on the following schedule: TRANCHE A TRANCHE B FISCAL YEAR TERM LOAN TERM LOAN ----------- ----------- ----------- 1994...................................... $ 28,348 -- 1995...................................... 66,146 -- 1996...................................... 85,045 -- 1997...................................... 85,045 -- 1998...................................... 85,044 9,449 1999...................................... 80,320 18,899 2000...................................... -- 113,393 ----------- ----------- ----------- ----------- Principal of the Tranche A Term Loans will be amortized in quarterly payments and mature in full on July 31, 1999. Principal of the Tranche B Term Loans will be amortized in semi-annual payments and mature in full on June 15, 2000. The Company has the right to prepay any borrowings under the Credit Agreement in whole or in part at any time. The Company is required to prepay borrowings under the Credit Agreement with (i) 50% of the consolidated excess cash flow (as calculated in accordance with the Credit Agreement) of the Company for the preceding fiscal year; (ii) in any fiscal year, the excess of the aggregate net proceeds of dispositions of assets of the Company and its subsidiaries over $6,000; (iii) in any fiscal year, the net proceeds of any incurrence of debt (other than indebtedness permitted under the Credit Agreement); and (iv) all of the net proceeds of any equity issuance until such prepayment or prepayments equal $75,000 (approximately 8,000 remain at January 29, 1994), and thereafter, 75% of such net proceeds. 52 ECKERD CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) JANUARY 29, 1994, JANUARY 30, 1993 AND FEBRUARY 1, 1992 (IN THOUSANDS, EXCEPT SHARE AMOUNTS) (4) LONG-TERM DEBT--(CONTINUED) Prepayments are to be applied pro rata between outstanding Tranche A Term loans and Tranche B Term Loans, applied pro rata among scheduled payments, and, after such loans are paid in full, to the Swingline Loans and then the Revolving Loans. The borrowings under the Credit Agreement are secured by a pledge of all capital stock of the Company's subsidiaries, as well as substantially all personal property, including inventory and accounts receivable and certain real property (as defined), contain certain restrictive covenants which provide limitations on the Company with respect to incurring debt, the incurring of liens, making investments, payment of dividends and purchase of shares of stock of the Company, payment of lease expenses, consolidations and mergers, sale of assets, and transactions with affiliates. The Credit Agreement also requires the Company to satisfy certain financial ratios. At January 29, 1994, the Company was in compliance with these covenants. (b) On November 2, 1993, the Company issued $200,000 aggregate principal amount of 9 1/4% Senior Subordinated Notes (Notes) due February 15, 2004. The Notes are unsecured and subordinated to all existing and future senior debt (as defined) of the Company and are redeemable at the option of the Company, in whole or in part, at any time after February 15, 1999 at various redemption prices (as defined) plus accrued interest to the date of redemption. Interest is payable semi-annually on February 15 and August 15 of each year, commencing February 15, 1994. The Company used the net proceeds from the issuance of the Notes to redeem the remaining $50,000 of the 13% Discount Subordinated Debentures and $145,000 of the 11 1/8% Subordinated Debentures (note 4(c)). (c) The 11 1/8% subordinated debentures are subordinated to all existing and future senior debt (as defined) of the Company, and are redeemable at the option of the Company, in whole or in part, at anytime at 100% of their principal amount plus accrued interest to the date of redemption. During 1993, $145,000 face amount of these subordinated debentures were redeemed by the Company (note 4(b)). (d) The variable rate demand industrial development revenue refunding bonds currently have an interest rate which is a daily rate established by First National Bank of Chicago and is indicative of current bid-side yields of high grade tax-exempt securities. At the Company's option, and under certain conditions, the interest rate may be changed to a monthly rate or a fixed rate. The bonds are secured by the related buildings, leases and letters of credit. 53 ECKERD CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) JANUARY 29, 1994, JANUARY 30, 1993 AND FEBRUARY 1, 1992 (IN THOUSANDS, EXCEPT SHARE AMOUNTS) (5) INCOME TAXES For fiscal years 1993, 1992 and 1991, the income tax provision before utilization of net operating losses and extraordinary item amounted to $2,556, $2,864 and $2,927, which differs from amounts computed by applying the Federal and State statutory rates of 38% in the year ended January 29, 1994 and 34% for the years ended January 30, 1993 and February 1, 1992 to earnings (loss) before income taxes and extraordinary items. The actual tax differs from the expected tax (benefit) as follows:
YEAR ENDED ----------------------------------------- JANUARY 29, JANUARY 30, FEBRUARY 2, 1994 1993 1992 ----------- ------------- ------------- Expected tax (benefit)................................................... $ 16,708 (687) 1,327 Amortization of goodwill................................................. 709 722 732 Other.................................................................... 2,346 2,829 868 ----------- ------------- ------------- 19,763 2,864 2,927 Effect of extraordinary item............................................. (17,207) -- -- ----------- ------------- ------------- Tax provision before utilization of net operating loss carryforward...... $ 2,556 2,864 2,927 ----------- ------------- ------------- ----------- ------------- -------------
"Other" consists principally of alternative minimum tax which is caused by differences in net operating loss utilization rates and depreciation. The amount of alternative minimum tax paid is available in future years to offset regular corporate income tax. For the years ended January 30, 1993 and February 1, 1992, the Company utilized approximately $762 and $1,680, respectively, of net operating loss carryforwards for financial statement purposes. The Company has Federal income tax loss carryforwards of approximately $332,600 for income tax purposes which are available to offset future taxable income, if any, through 2008. The Company's Federal income tax returns have been examined through year-end 1984 and any assessments have been paid or accrued. The Federal income tax returns for 1985, 1986, 1987 and 1988 are currently being examined. The Company believes that an adequate provision for income taxes has been made for all open years. 54 ECKERD CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) JANUARY 29, 1994, JANUARY 30, 1993 AND FEBRUARY 1, 1992 (IN THOUSANDS, EXCEPT SHARE AMOUNTS) (5) INCOME TAXES--(CONTINUED) Temporary differences and carryforwards which give rise to deferred tax assets and liabilities are as follows: Deferred tax assets: Reserves and other liabilities............................................... $ 16,950 Other........................................................................ 8,318 Loss carryforwards........................................................... 125,377 Credit carryforwards......................................................... 5,246 ------------ Gross deferred tax assets................................................. 155,891 Less valuation allowance..................................................... (108,958) ------------ Net deferred tax assets................................................... $ 46,933 ------------ ------------ Deferred tax liabilities: Inventory.................................................................... $ 22,091 Bad debts.................................................................... 846 Fixed assets................................................................. 23,996 ------------ Gross deferred tax liabilities............................................ $ 46,933 ------------ ------------
Upon adoption of Statement 109, effective January 31, 1993, the Company determined a valuation allowance requirement in the amount of $108.9 million. (6) REDEEMABLE PREFERRED STOCK As discussed in note 4(a), seventy-five thousand shares of 14 1/2% cumulative redeemable preferred stock with a stated value of $1,000 ($.01 par value) were redeemed during 1993. Dividends of $4,924 were paid during 1993. (7) STOCKHOLDERS' EQUITY (a) Common Stock The Company's authorized common stock consists of 100,000,000 shares of Common Stock, par value $.01 per share (of which 3,518,728 shares are Nonvoting Common Stock (Series I), par value $.01 per share). (b) Preferred Stock The Company's authorized preferred stock consists of 20,000,000 shares. The preferred stock is issuable in series with terms as fixed by the Board of Directors. No preferred stock has been issued. (c) Stock Options The Company reserves 1,666,667 shares of its Common Stock for the granting of stock options and other incentive awards to officers, directors and key employees under the 1993 Stock Option and Incentive Plan of Eckerd Corporation. Options are granted at prices which are not less than the fair market value of a share of common stock on the date of grant. Commencing three years after the date of grant, all options are exercisable to the extent of 50%, with an additional 25% exercisable after each of the next two successive years. Unexercised options expire ten years after the date of grant. Options 55 ECKERD CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) JANUARY 29, 1994, JANUARY 30, 1993 AND FEBRUARY 1, 1992 (IN THOUSANDS, EXCEPT SHARE AMOUNTS) (7) STOCKHOLDERS' EQUITY--(CONTINUED) granted under prior plans were surrendered and granted under the terms of the 1993 plan. Shares under option and option prices have been adjusted to reflect the Reclassification and the Stock Split (note 1(b)). As of January 29, 1994, January 30, 1993 and February 1, 1992, 222,668, 363,451 and 96,929 shares of Common Stock were available for grant. At January 29, 1994, options for 450,393 shares of Common Stock were exercisable at $.56-$14.00 per share. At January 30, 1993, options for 490,777 shares of Common Stock were exercisable at $.56-$30.00 per share. At February 1, 1992, options for 488,357 shares of Common Stock were exercisable at $.56-$20.62 per share. A summary of changes during the years ended January 29, 1994, January 30, 1993 and February 1, 1992 is set forth below:
SHARES UNDER OPTION OPTION PRICES ------------ ---------------- Outstanding February 2, 1991..................................................... 680,881 $ .56-$20.62 Granted........................................................................ 13,533 $ 36.00-$37.50 Exercised...................................................................... (7,200) $ 5.64-$15.75 Cancelled...................................................................... (14,747) $ 5.64-$36.00 ------------ Outstanding February 1, 1992..................................................... 672,467 $ .56-$37.50 Granted........................................................................ 44,392 $ 27.00-$31.47 Exercised...................................................................... (24,100) $ 5.64-$26.75 Cancelled...................................................................... (5,799) $ 5.16-$36.00 ------------ Outstanding January 30, 1993..................................................... 686,960 $ .56-$37.50 Granted........................................................................ 855,915 $ 10.00-$14.00 Exercised...................................................................... (74,395) $ 5.64-$ 9.23 Cancelled...................................................................... (61,476) $ 5.64-$36.00 ------------ Outstanding January 29, 1994..................................................... 1,407,004 $ .56-$14.00 ------------ ------------
Options previously granted at prices greater than $14.00 per share were modified to $14.00 per share at the date of the IPO. No accounting entries will be made until after the options have been exercised at which time the par value of shares sold will be credited to common stock and the excess of the proceeds of the sale over par value of shares sold will be credited to capital in excess of par value. (8) COMMITMENTS The Company conducts the major portion of its retail operations from leased store premises under leases that will expire within the next 25 years. Such leases generally contain renewal options exercisable at the option of the Company. In addition to minimum rental payments, certain leases provide for payment of taxes, maintenance, and percentage rentals based upon sales in excess of stipulated amounts. 56 ECKERD CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) JANUARY 29, 1994, JANUARY 30, 1993 AND FEBRUARY 1, 1992 (IN THOUSANDS, EXCEPT SHARE AMOUNTS) (8) COMMITMENTS--(CONTINUED) The rental expense for the years ended January 29, 1994, January 30, 1993 and February 1, 1992 was:
JANUARY 29, JANUARY 30, FEBRUARY 1, 1994 1993 1992 ----------- ----------- ----------- Minimum rentals................................... $ 110,998 103,689 97,304 Percentage rentals................................ 18,369 16,938 15,824 ----------- ----------- ----------- $ 129,367 120,627 113,128 ----------- ----------- ----------- ----------- ----------- -----------
At January 29, 1994, minimum rental commitments under noncancelable leases were as follows: FISCAL YEAR ----------- 1994.............................................. $ 102,834 1995.............................................. 98,440 1996.............................................. 93,590 1997.............................................. 86,977 1998.............................................. 75,255 Thereafter........................................ 471,496 ----------- $ 928,592 ----------- ----------- In 1987, the Company entered into an operating lease agreement for 72 stores with a third-party lessor established by an affiliate of Merrill Lynch & Co. (which, through affiliated entities, controls a majority of the Company's common stock). The lease agreement has certain restrictive covenants, which, upon violation by the Company, gives the lessor the right to require the lessee to purchase the leased stores at the remaining balance of the lease contract. At January 29, 1994, the balance subject to the repurchase terms is $38,046. At January 29, 1994, the Company was in compliance with these covenants. During 1993, the Company sold certain photo processing equipment to an unrelated third party for approximately $35,000, and entered into a five-year lease with respect to such equipment. No gain or loss was recorded in connection with this transaction. Annual lease payments of $6,892 are required over the term of the lease. During 1993, the Company and Integrated Systems Solutions Corporation (ISSC) entered into a Systems Operations Service Agreement (Service Agreement) pursuant to which ISSC will manage the Company's entire information systems operation, including the implementation of a new point-of-sale system with scanning capabilities. The Service Agreement has a ten year term and the total payments to be made by the Company are expected to be between $320,000 and $440,000 over such term, depending on the optional services utilized. (9) TRANSACTIONS WITH RELATED PARTIES In April 1989, the Company entered into a "Master Lease" agreement with a third-party lessor established by an affiliate of Merrill Lynch & Co. (which, through affiliated entities controls a majority of the Company's common stock) whereby such lessor would finance the acquisition of store sites and the construction of buildings and acquisition of equipment. As of January 29, 1994, there were 12 stores leased under the agreement with an aggregate cost of approximately $18,400. The Company pays the 57 ECKERD CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) JANUARY 29, 1994, JANUARY 30, 1993 AND FEBRUARY 1, 1992 (IN THOUSANDS, EXCEPT SHARE AMOUNTS) (9) TRANSACTIONS WITH RELATED PARTIES--(CONTINUED) Merrill Lynch affiliate a structure fee of 1% of the cost of land, buildings and equipment financed under the Master Lease plus an administration fee. The Company paid the Merrill Lynch affiliate fees aggregating $44, $45 and $408 for the years ended January 29, 1994, January 30, 1993 and February 1, 1992, respectively. In July 1989, the Company entered into a Placement Agency Agreement with an affiliate of Merrill Lynch & Co. whereby such affiliate would act as exclusive placement agent for the private placement of up to a maximum of $200,000 at any one time, of unsecured notes. The Company did not issue any of these unsecured notes during the years ended January 29, 1994 and January 30, 1993. There were no notes outstanding under this facility at January 29, 1994 and January 30, 1993. During 1993, Merrill Lynch & Co., as one of the representatives of the underwriters in the IPO, received underwriting commissions and related fees of $1,847. In addition, as sole underwriter in the issuance of the Notes, Merrill Lynch & Co. received approximately $4,000 in underwriting discounts from the Company. (10) SUBSEQUENT EVENT Effective January 30, 1994, the Company entered into an agreement in principal to sell certain assets of its Vision Group division. The Company does not expect to recognize any significant gain or loss upon disposition. 58 SCHEDULE V ECKERD CORPORATION AND SUBSIDIARIES PROPERTY, PLANT AND EQUIPMENT YEARS ENDED JANUARY 29, 1994, JANUARY 30, 1993 AND FEBRUARY 1, 1992 (IN THOUSANDS)
OTHER BALANCE AT CHANGES BALANCE AT BEGINNING ADDITIONS RETIREMENTS INCREASE END CLASSIFICATION OF PERIOD AT COST OR SALES (DECREASE) OF PERIOD - -------------------------------------------- ----------- ----------- ----------- ---------- ----------- Year Ended January 29, 1994: Land...................................... $ 19,269 $ 1 $ 10 $ -- $ 19,260 Buildings................................. 68,196 4,381 29 856(a) 73,404 Furniture and equipment................... 326,145 20,418 59,869 19(a) 280(b) (13,126)(a) Transportation equipment.................. 14,660 104 1,721 7(a) 13,050 Leasehold improvements.................... 123,344 8,187 3,464 (882)(a) 127,480 295(b) ----------- ----------- ----------- ---------- ----------- $ 551,614 $ 33,091 $ 65,093 $ (12,551) $507,061 ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- ---------- ----------- Year Ended January 30, 1993: Land...................................... $ 19,343 $ 11 $ 85 $ -- $ 19,269 Buildings................................. 66,181 1,337 8 686(a) 68,196 Furniture and equipment................... 299,169 36,519 11,410 1,867(b) 326,145 Transportation equipment.................. 19,117 33 4,532 42(b) 14,600 (686)(a) Leasehold improvements.................... 113,995 13,489 4,117 663(b) 123,344 ----------- ----------- ----------- ---------- ----------- $ 517,805 $ 51,389 $ 20,152 $ 2,572 $ 551,614 ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- ---------- ----------- Year Ended February 1, 1992: Land...................................... $ 19,677 $ 10 $ 344 $ -- $ 19,343 Buildings................................. 64,640 516 11 1,036(a) 66,181 Furniture and equipment................... 272,989 33,687 7,507 -- 299,169 Transportation equipment.................. 18,052 4,900 3,835 -- 19,117 Leasehold improvements.................... 107,361 10,297 2,627 (1,036)(a) 113,995 ----------- ----------- ----------- ---------- ----------- $ 482,719 $ 49,410 $ 14,324 $ -- $ 517,805 ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- ---------- -----------
- --------------- Notes: (a) Transfers from construction in progress and reclassifications. (b) Acquisition of certain drug store assets. 59 SCHEDULE VI ECKERD CORPORATION AND SUBSIDIARIES ACCUMULATED DEPRECIATION AND AMORTIZATION OF PLANT AND EQUIPMENT YEARS ENDED JANUARY 29, 1994, JANUARY 30, 1993 AND FEBRUARY 1, 1992 (IN THOUSANDS)
ADDITIONS OTHER BALANCE AT CHARGED CHANGES BALANCE BEGINNING TO RETIREMENTS INCREASE AT END CLASSIFICATION OF PERIOD EARNINGS OR SALES (DECREASE) OF PERIOD - ----------------------------------------------- ----------- --------- ----------- ----------- ----------- Year Ended January 29, 1994: Buildings.................................... $ 23,155 $ 3,222 $ 5 $ 198(a) $ 26,570 Furniture and equipment...................... 143,547 32,586 23,902 (4)(a) 144,866 (7,361)(a) Transportation equipment..................... 8,725 1,303 1,683 -- 8,345 Leasehold improvements....................... 48,061 12,338 1,561 (194)(a) 58,644 ----------- --------- ----------- ----------- ----------- $ 223,488 $ 49,449 $ 27,151 $ (7,361) $ 238,425 ----------- --------- ----------- ----------- ----------- ----------- --------- ----------- ----------- ----------- Year Ended January 30, 1993: Buildings.................................... $ 19,135 $ 4,058 $ 346 $ 308(a) $ 23,155 Furniture and equipment...................... 117,105 35,717 9,275 -- 143,547 Transportation equipment..................... 10,994 2,029 4,298 -- 8,725 Leasehold improvements....................... 39,349 11,950 2,930 (308)(a) 48,061 ----------- --------- ----------- ----------- ----------- $ 186,583 $ 53,754 $ 16,849 $ -- $ 223,488 ----------- --------- ----------- ----------- ----------- ----------- --------- ----------- ----------- ----------- Year Ended February 1, 1992: Buildings.................................... $ 15,767 $ 3,336 $ 6 $ 38(a) $ 19,135 Furniture and equipment...................... 91,576 32,321 6,803 11(a) 117,105 Transportation equipment..................... 11,852 2,773 3,631 -- 10,994 Leasehold improvements....................... 30,055 11,124 1,781 (49)(a) 39,349 ----------- --------- ----------- ----------- ----------- $ 149,250 $ 49,554 $ 12,221 $ -- $ 186,583 ----------- --------- ----------- ----------- ----------- ----------- --------- ----------- ----------- -----------
- --------------- Notes: (a) Reclassifications. Depreciation is expensed principally by the straight line method over the estimated useful lives of such assets as follows: Buildings 16-45 years; furniture and equipment 1-10 years; transportation equipment 1-8 years and leasehold improvements 2-20 years. 60 SCHEDULE VIII ECKERD CORPORATION AND SUBSIDIARIES RESERVES YEARS ENDED JANUARY 29, 1994, JANUARY 30, 1993 AND FEBRUARY 1, 1992 (IN THOUSANDS)
BALANCE AT CHARGED BALANCE BEGINNING TO AT END DESCRIPTION OF PERIOD EARNINGS DEDUCTIONS OF PERIOD - ------------------------------------------------------------------ ----------- ----------- ----------- ----------- Allowance for doubtful receivables (a): Year ended January 29, 1994..................................... $ 5,000 $ 7,000 $ 7,000 $ 5,000 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Year ended January 30, 1993..................................... $ 4,600 $ 4,475 $ 4,075 $ 5,000 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Year ended February 1, 1992..................................... $ 4,250 $ 4,155 $ 3,805 $ 4,600 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
- --------------- Notes: (a) This reserve is deducted from receivables in the balance sheets. 61 EXHIBIT INDEX ECKERD CORPORATION FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 29, 1994
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT PAGE - --------- ------------------------------------------------------------------------------------------------- --------- 3.1(i) Restated Certificate of Incorporation of Eckerd Corporation (the "Company") (incorporated by reference to Exhibit 3.1(i) to the Registration Statement on Form S-3 of the Company (No. 33-50223))....................................................................................... * 3.2(ii) Amended and Restated By-laws of the Company (incorporated by reference to Exhibit 3.2(ii) to the Registration Statement on Form S-3 of the Company (No. 33-50223))................................ * 4.1 Form of certificate for the Company's Common Stock, par value $.01 per share (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-2 of the Company (No. 33-64906))....................................................................................... * 4.2 Indenture dated as of May 1, 1986 by and between the Company and Mellon Bank, N.A. as trustee, relating to the 11 1/8% Subordinated Debentures due 2001 (incorporated by reference to the Registration Statement on Form S-1 of Eckerd Holdings Inc. (No. 33-4576)). (On February 6, 1991, Mellon Bank, N.A. was succeeded by Security Pacific National Trust Company, as trustee.)......... * 4.3 Indenture dated as of May 1, 1986 between the Company and Chemical Bank (as successor by merger to Manufacturers Hanover Trust Company), relating to the Company's Discount Subordinated Debentures due 2006 (incorporated by reference to Exhibit 4.2 to the Registration Statement on Form S-1 of the Company (No. 33-10721)).......................................................... * 4.4 Indenture dated as of November 1, 1993 between the Company and State Street Bank and Trust Company of Connecticut, National Association, as Trustee (incorporated by reference to Exhibit 4.02 to the Current Report on Form 8-K dated October 26, 1993 of the Company (File No. 1-4844))......................................................................................... * 4.5 Form of 9 1/4% Senior Subordinated Note due 2004 of the Company (incorporated by reference to Exhibit 4.01 to the Current Report on Form 8-K dated October 26, 1993 of the Company (File No. 1-4844))......................................................................................... * 10.1 Credit Agreement dated as of June 14, 1993 (the "Credit Agreement") among the Company, the lenders named therein, Chemical Bank and NationsBank of Florida, N.A., as managing agents and swingline lenders, and Chemical Bank, as administrative agent (incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-2 of the Company (No. 33-64906))............ * 10.2 Guarantee Agreement dated as of June 14, 1993 (the "Guarantee Agreement") among the subsidiaries of the Company listed therein and Chemical Bank, as collateral agent (incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-2 of the Company (No. 33-64906))......... * 10.3 Indemnity, Subrogation and Contribution Agreement dated as of June 14, 1993 (the "Contribution Agreement"), among the Company, each subsidiary of the Company listed therein and Chemical Bank, as collateral agent (incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-2 of the Company (No. 33-64906)).......................................................... * 10.4 Pledge Agreement dated as of June 14, 1993 (the "Pledge Agreement") among the Company, each subsidiary of the Registrant listed therein and Chemical Bank, as collateral agent (incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-2 of the Company (No. 33-64906))....................................................................................... * 10.5 Security Agreement dated as of June 14, 1993 (the "Security Agreement") among the Company, each subsidiary of the Company listed therein and Chemical Bank, as
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EXHIBIT NUMBER DESCRIPTION OF EXHIBIT PAGE - --------- ------------------------------------------------------------------------------------------------- --------- collateral agent (incorporated by reference to Exhibit 10.5 to the Registration Statement on Form S-2 of the Company (No. 33-64906))............................................................... * 10.6 Trademark Security Agreement dated as of June 14, 1993 (the "Trademark Security Agreement") among the Company, each subsidiary of the Company listed therein and Chemical Bank, as collateral agent (incorporated by reference to Exhibit 10.6 to the Registration Statement on Form S-2 of the Company (No. 33-64906)).......................................................................... * 10.7 Amendment No. 1 dated as of August 3, 1993 to the Credit Agreement (incorporated by reference to Exhibit 10.7 to the Registration Statement on Form S-3 of the Company (No. 33-50223))............ * 10.8 Supplement No. 1 to the Guarantee Agreement dated as of August 12, 1993 (incorporated by reference in Exhibit 10.8 to the Registration Statement on Form S-3 of the Company (No. 33-50223))....................................................................................... * 10.9 Supplement No. 1 to the Contribution Agreement dated as of August 12, 1993 (incorporated by reference to Exhibit 10.9 to the Registration Statement on Form S-3 of the Company (No. 33-50223))....................................................................................... * 10.10 Supplement No. 1 to the Pledge Agreement dated as of August 12, 1993 (incorporated by reference to Exhibit 10.10 to the Registration Statement on Form S-3 of the Company (No. 33-50223))........ * 10.11 Supplement No. 1 to the Security Agreement dated as of August 12, 1993 (incorporated by reference to Exhibit 10.11 to the Registration Statement on Form S-3 of the Company (No. 33-50223))........ * 10.12 Supplement No. 1 to the Trademark Security Agreement dated as of August 12, 1993 (incorporated by reference to Exhibit 10.12 to the Registration Statement on Form S-3 of the Company (No. 33-50223))....................................................................................... * 10.13 Amendment No. 2, Consent and Waiver dated as of September 30, 1993 to the Credit Agreement (incorporated by reference to Exhibit 10.01 to the Current Report on Form 8-K dated October 26, 1993 of the Company (File No. 1-4844)............................................................ * 10.14 Merrill Lynch Common Stock Purchase Agreement dated as of April 1, 1986 by and among the Company and the Merrill Lynch Investors (incorporated by reference to the Registration Statement on Form S-4 of Eckerd Holdings Inc. (No. 33-4497))....................................................... * 10.15 Commercial Paper Placement Agency Agreement dated July 17, 1989 between the Company and Merrill Lynch Money Markets, Inc. (incorporated by reference to Exhibit 10.15 of Form 10-K of the Company for the period ended February 3, 1990............................................................ * 10.16 Receivables Purchase Agreement dated March 29, 1990 as Amended and Restated as of May 16, 1991 between the Company and Mellon Bank, N.A. (incorporated by reference to Exhibit 10.9 to the Registration Statement on Form S-2 of the Company (No. 33-64906))................................ * 10.17 Amendment No. 1 to Receivables Purchase Agreement dated as of April 20, 1992 between the Company and Mellon Bank, N.A. (incorporated by reference to Exhibit 10.28 of Form 10-K of the Company for the period ended February 1, 1992)............................................................... * 10.18 Amendment No. 2 to Receivables Purchase Agreement between the Company and Mellon Bank, N.A. (incorporated by reference to Exhibit 10.35 of Post-Effective Amendment No. 5 to the Registration Statement on Form S-2 of the Company (No. 33-37544))............................................. * 10.19 Amendment No. 3 to Receivables Purchase Agreement between the Company and Mellon Bank, N.A. (incorporated by reference to Exhibit 10.36 of Post-Effective Amendment No. 5 to the Registration Statement on Form S-2 of the Company (No. 33-37544))............................................. *
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EXHIBIT NUMBER DESCRIPTION OF EXHIBIT PAGE - --------- ------------------------------------------------------------------------------------------------- --------- 10.20 Amendment No. 4 to Receivables Purchase Agreement dated as of June 11, 1993 between the Company and Mellon Bank, N.A. (incorporated by reference to Exhibit 10.13 to the Registration Statement on Form S-2 of the Company (No. 33-64906))....................................................... * 10.21 Reimbursement Agreement dated as of January 24, 1992 among the Company, the guarantors listed therein and Westpac Banking Corporation, New York Branch (incorporated by reference to Exhibit 10.34 of Post-Effective Amendment No. 5 to the Registration Statement on Form S-2 of the Company (No. 33-37544)).................................................................................. * 10.22 Registration Rights Agreement dated as of April 30, 1986 by and among the Company, the Merrill Lynch Investors, Morgan Capital Corporation and the other bank affiliates listed therein, the institutional and corporate investors listed therein and certain members of management of the Company (incorporated by reference to Exhibit 10.19 to the Registration Statement on Form S-2 of the Company (No. 33-64906))...................................................................... * 10.23 First Amendment to Registration Rights Agreement among the Company, EDS Holdings Inc., the Merrill Lynch Investors, the Bank Affiliates, the Institutional Investors and the Management Investors (incorporated by reference to Exhibit 10.20 to Amendment No. 1 to the Registration Statement on Form S-2 of the Company (No. 33-64906))............................................. * 10.24 First Employees Management Stock Option Plan (incorporated by reference to the Registration Statement on Form S-8 of the Company (No. 33-30761))............................................. * 10.25 Employment Agreement dated as of April 30, 1986, between the Company and Stewart Turley (incorporated by reference to Exhibit 10.23 to the Registration Statement on Form S-2 of the Company (No. 33-64906)).......................................................................... * 10.26 Employment Agreement dated as of April 30, 1986, between the Company and Harry W. Lambert (incorporated by reference to Exhibit 10.24 to the Registration Statement on Form S-2 of the Company (No. 33-64906)).......................................................................... * 10.27 Employment Agreement dated as of April 30, 1986, between the Company and John W. Boyle (incorporated by reference to Exhibit 10.25 to the Registration Statement on Form S-2 of the Company (No. 33-64906)).......................................................................... * 10.28 Employment Agreement dated October 1, 1988, between the Company and Richard W. Roberson (incorporated by reference to Exhibit 10.26 to the Registration Statement on Form S-2 of the Company (No. 33-64906)).......................................................................... * 10.29 Employment Agreement dated June 9, 1993, between the Company and Francis A. Newman (incorporated by reference to Exhibit 10.27 to the Registration Statement on Form S-2 of the Company (No. 33-64906))....................................................................................... * 10.30 Master Lease Agreement I dated as of May 18, 1993 between the Company and Imaging Financial Services d/b/a EKCC ("IFS") (incorporated by reference to Exhibit 10.28 to Amendment No. 1 to the Registration Statement on Form S-2 of the Company (No. 33-64906))................................ * 10.31 Master Lease Agreement II dated as of June 15, 1993 between the Company and IFS (incorporated by reference to Exhibit 10.29 to Amendment No. 1 to the Registration Statement on Form S-2 of the Company (No. 33-64906)).......................................................................... * 10.32 Systems Operations Service Agreement dated as of July 14, 1993 between the Company and Integrated Systems Solution Corporation (incorporated by reference to Exhibit 10.30 to Amendment No. 1 to the Registration Statement on Form S-2 of the Company (No. 33-64906))............................ * 10.33 Letter dated March 16, 1993 between IFS and the Company relating to IFS Sale and Leaseback (incorporated by reference to Exhibit 10.31 to Amendment No. 2 of the Registration Statement on Form S-2 of the Company (No. 33-64906)).......................................................... *
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EXHIBIT NUMBER DESCRIPTION OF EXHIBIT PAGE - --------- ------------------------------------------------------------------------------------------------- --------- 10.34 Consulting Agreement dated as of September 30, 1993, between the Company and Harry W. Lambert (incorporated by reference to Exhibit 10.33 to Amendment No. 2 to the Registration Statement on Form S-3 of the Company (No. 33-50223)).......................................................... * 10.35 1993 Stock Option and Incentive Plan of the Company (incorporated by reference to Exhibit 99.1 to the Registration Statement on Form S-8 of the Company (No. 33-49977))............................ * 10.36 Form of Separation Agreement between the Company and Richard W. Roberson......................... 10.37 Consent and Waiver dated as of January 15, 1994 to the Credit Agreement.......................... 10.38 Employment Agreement dated October 1, 1988 between the Company and James M. Santo................ 12.1 Statement regarding computation of ratio of earnings to fixed charges of the Company (incorporated by reference to Exhibit 12.1 to the Registration Statement on Form S-3 of the Registrant (No. 33-50223))....................................................................... * 22.1 Subsidiaries of the Company...................................................................... 23.1 Consent of Independent Certified Public Accountants.............................................. 99.1 Pro Forma Financial Data for the fiscal year ended January 29, 1994.
- --------------- * Incorporated by reference. 65 EX-10.36 2 AGREEMENT --------- THIS AGREEMENT made as of this ____ day of March, 1994 by and between ECKERD CORPORATION (the "Company") and RICHARD W. ROBERSON ("Employee") residing at 1330 Preservation Way, Oldsmar, Florida 34677. WHEREAS, Employee has been employed by Company in various capacities for a number of years and most recently as Senior Vice President; and WHEREAS, Employee and Company have reached an agreement for the sale of certain business of the Company to a corporation formed by Employee; and WHEREAS, the Company and Employee desire to terminate the Employment Agreement dated October 1, 1988 between them and to reduce to writing certain rights and obligations in addition to those provided under various plans and agreements between the parties. NOW, THEREFORE, in consideration of the mutual covenants set forth herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Retirement. Employee hereby voluntarily tenders his ---------- resignation of employment with the Company and Company hereby accepts such resignation effective March 31, 1994 (the "Termination Date"). It is further agreed by the parties hereto that the Employment Agreement between the Company and the Employee dated October 1, 1988 shall also terminate effective March 31, 1994. 2. Retirement Benefits. Employee shall be entitled to ------------------- receive any and all retirement benefits payable pursuant to the Company's Retirement Benefit Plans in accordance with terms of such Plans. For purposes hereof, Retirement Benefit Plans shall mean (i) the Jack Eckerd Corporation Profit Sharing Plan; (ii) the Jack Eckerd Corporation Pension Plan; (iii) the Jack Eckerd Corporation Executive Supplemental Benefit Plan; and (iv) the Jack Eckerd Corporation Deferred Compensation Plan. 3. Additional Benefits. ------------------- (a) The Company agrees to pay the Employee Twenty-Five Thousand Dollars ($25,000.00) on each of July 15, 1994; October 15, 1994; January 15, 1995; April 15, 1995; July 15, 1995; October 15, 1995; January 15, 1996; and April 15, 1996; provided, however, the Company's obligation to make such payments shall cease upon termination of Employee's employment with Visionworks, Inc. (b) On or prior to May 1, 1994, the Company shall pay to Employee any bonuses earned by Employee (i) for the Company's 1993 fiscal year under the terms of the Company's Key Management Bonus Plan; and (ii) for the 1991-1993 Performance Period under the Company's 3-Year Bonus Plan. (c) The 6,755 shares of Restricted Stock owned by Employee referred to in the Letter Agreement dated July 19, 1993 between the Company and Employee, a copy of which is attached hereto as Exhibit "A" (the "Letter Agreement") shall continue to vest pursuant to the terms of the Letter Agreement so long as the Employee remains in the employment of Visionworks, Inc. 4. Covenants of the Employee. ------------------------- (a) The Employee agrees that for a period of two (2) years from the Termination Date, he will not, directly or indirectly, engage, assist or participate in, whether as a director, officer, employee, agent, manager, consultant, partner, owner or independent contractor or other participant, any business, firm, corporation, partnership, enterprise or organization that through the operation of retail stores in which prescription drugs are sold competes with the business engaged or hereafter engaged in by the Company or any of its subsidiaries in the Company's or such subsidiaries' trade areas (for purposes hereof, "trade areas" shall mean any county in any state of the United States in which retail drug stores operated by the Company and its subsidiaries are located). Nothing contained herein shall prevent the Employee from acquiring less than 2% of any class of outstanding securities of any company that has any of its securities listed on a national securities exchange or traded in the over-the-counter market. (b) The Employee agrees that for a period of two (2) years after the termination of this Agreement for any reason, he will not directly induce or solicit any person employed or hereafter employed by the Company or any of its subsidiaries to leave the employ of the Company or any of its subsidiaries. (c) The Employee agrees and acknowledges that the Confidential Information of the Company and its subsidiaries (as hereinafter defined) is valuable, special and unique to their business, that such business depends on such Confidential Information; and that the Company wishes to protect such Confidential Information by keeping it confidential for the use and benefit of the Company. Based on the foregoing, the Employee agrees to undertake the following obligations with respect to such Confidential Information: (i) The Employee agrees to keep any and all Confidential Information in trust for the use and benefit of the Company; (ii) The Employee agrees that, except as authorized in writing by the Company and its subsidiaries or required by applicable law, he will not at any time for a period of five (5) years after the Termination Date, disclose, directly or indirectly, any Confidential Information of the Company or its subsidiaries; (iii) The Employee agrees to take all reasonable steps necessary, or reasonably requested by the Company and its subsidiaries, to ensure that all Confidential Information of the Company is kept confidential for the use and benefit of the Company and its subsidiaries; and (iv) The Employee agrees that, prior to his Termination Date, he will promptly deliver to the Company all materials constituting Confidential Information (including all copies thereof) that are in the possession of or under the control of the Employee. The Employee further agrees that, if requested by the Company to return any Confidential Information pursuant to this Subsection (iv), he will not make or retain any copy or extract from such materials. For purposes of this Section 4(c), Confidential Information means any and all information developed by or for the Company or any of its subsidiaries of which the Employee gained knowledge by reason of his employment by the Company or any of its subsidiaries prior to the Termination Date that is not generally known in any industry in which the Company is or may become engaged. Confidential Information includes, but is not limited to, any and all information developed by or for the Company concerning plans, marketing and sales methods, materials, processes, business forms, procedures, devices used by the Company, its subsidiaries, suppliers and customers with which the Company had dealt prior to the Termination Date, plans for development of new stores, products, services and expansion into new areas or markets, internal operations, and any trade secrets and proprietary information of any type owned by the Company and its subsidiaries, together with all written, graphic and other materials relating to all or any part of the same. 5. Successors and Assigns. ---------------------- (a) This Agreement shall be binding upon and shall inure to the benefit of the Company, its successors and assigns. The term "Company" as used herein shall include such successors and assigns. The term "successors and assigns" as used herein shall mean a corporation or other entity acquiring all or substantially all of the assets and business of this Company (including this Agreement) whether by operation of law or otherwise. (b) Neither this Agreement nor any right or interest hereunder shall be assignable by the Employee, his beneficiaries, or legal representatives without the Company's prior written consent; provided, however, that nothing in this Section 5 shall preclude (i) the Employee from designating a beneficiary to receive any benefit payable hereunder upon his death, or (ii) the executors, administrators, or other legal representatives of the Employee or his estate from assigning any rights hereunder to distributees, legatees, beneficiaries, testamentary trustees or other legal heirs of the Employee. 6. Notices. Any notice required or permitted by this ------- Agreement shall be given by registered or certified mail, return receipt requested, addressed to the Company at its then principal office, or to the Employee at his address specified on page 1 of this Agreement, or to either party hereto at such other address or addresses as he or it may from time to time specify for such purposes in a notice similarly given. 7. Governing Law; Litigation; Expenses. ----------------------------------- (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Florida without giving effect to the conflicts of law principles thereof. (b) The Employee and the Company hereby agree that the courts of the State of Florida shall have exclusive jurisdiction to hear and determine any claims or disputes pertaining to this Agreement or to any matter arising therefrom. Each of the Employee and the Company expressly submits and consents in advance to such jurisdiction in any action commenced in such courts hereby waiving personal service of the summons and complaint or other process or papers issued therein, and agreeing that service of such summons and complaint, or other process or papers, may be made by registered or certified mail addressed to the Company at its then principle office or to the Employee at his address specified on page 1 of this Agreement, or to either party hereto at such other addresses as it or he from time to time specify to the other party in writing for such purpose. The exclusive choice of forum set forth in this Section 7 shall not be deemed to preclude the enforcement of any judgment obtained in such forum or the taking of any action under this Agreement to enforce such judgment in any appropriate jurisdiction. (c) All costs and expenses (including attorneys' fees) incurred in connection with any litigation relating to a claim or dispute pertaining to this Agreement shall be paid by the party incurring such expenses. (d) Nothing contained in this Section 7 shall be deemed to limit the Company's obligation to indemnify the Employee to the fullest extent permitted by applicable law in respect of any actions, claims or proceedings which are based upon acts or omissions of the Employee related to the performance of his duties hereunder to the extent he would have otherwise been entitled to indemnification under the By-laws or charter of the Company or any of its subsidiaries or to the extent to which indemnification is to be paid to officers and directors as a matter of law. 8. Entire Agreement. This instrument contains the entire ---------------- agreement of the parties relating to the subject matter hereof, and there are no restrictions, agreements, promises, covenants, undertakings, representations or warranties with respect to the subject matter hereof other than those expressly set forth herein. No modification of this Agreement shall be valid unless in writing and signed by the parties hereto. The waiver of a breach of any term or condition of this Agreement shall not be deemed to constitute a waiver of any subsequent breach of the same or any other term or condition of this Agreement. 9. Severability. If any term or provision of this ------------ Agreement or the application thereof to any person, property or circumstance shall to any extent be invalid or unenforceable, the remainder of this Agreement, or the application of such term or provision to persons, property or circumstances other than those as to which it is invalid or unenforceable shall not be affected thereby, and each term and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 10. Injunctive Relief. ----------------- (a) The Employee acknowledges and agrees that the covenants and obligations contained in Section 4(a), 4(b) and 4(c) of this Agreement relate to special, unique and extraordinary matters and that a violation of any of the terms of such Sections will cause the Company irreparable injury for which adequate remedies at law are not available. Therefore, the Employee agrees that the Company shall be entitled to an injunction, restraining order, or other equitable relief from any court of competent jurisdiction, restraining the Employee from committing any violation of the covenants and obligations set forth in Sections 4(a), 4(b) and 4(c) hereof. (b) The Company's rights and remedies under this Section 10 are cumulative and are in addition to any other rights and remedies the Company may have at law or in equity. In connection with the foregoing provisions of this Section 10, the Employee represents that his economic means and circumstances are such that such provisions will not prevent him from providing for himself and his family on a basis satisfactory to him. 11. Withholding Taxes. The Company may deduct from any ----------------- payments to be made hereunder any federal, state or local withholding or other taxes which the Company determines it is required to deduct under applicable law. IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement as of the day, month and year first written above. ECKERD CORPORATION By: __________________ Stewart Turley Chairman and CEO EMPLOYEE ________________________ Richard W. Roberson EX-10.37 3 EXHIBIT 10.37 CONSENT AND WAIVER dated as of January 15, 1994 (this "Consent and Waiver"), to the Credit Agreement dated as of June 14, 1993, as amended (the "Credit Agreement"), among Eckerd Corporation, a Delaware corporation formerly named Jack Eckerd Corporation (the "Borrower"); the financial institutions party to the Credit Agreement (the "Lenders"); Chemical Bank and NationsBank of Florida, N.A., as managing agents for the Lenders (the "Managing Agents") and as swingline lenders (the "Swingline Lenders"); and Chemical Bank, as administrative agent (in such capacity, the "Administrative Agent") for the Lenders, the Swingline Lenders and the Fronting Banks (such term and each other capitalized term used without definition in this Consent and Waiver having the meanings assigned thereto in the Credit Agreement). WHEREAS, the Borrower intends to sell (the "Vision Group Sale") the business and assets of the Vision Group to a newly formed corporation (the "Purchaser") all the common stock of which will be owned by an investor group consisting of John G. Bull, C.G.W. Southeast Partners I, L.P., Wallace Whitley and certain members of the management of Vision Group on the date hereof; WHEREAS, the Borrower has requested that the Required Lenders (a) consent to the acquisition and holding by the Borrower, in connection with the Vision Group Sale, of subordinated indebtedness of the Purchaser having terms no less favorable to the Borrower than the terms set forth on Annex I to this Consent and Waiver (the "Purchaser Indebtedness"), (b) waive the provisions of the Credit Agreement to the extent necessary to permit the Borrower to acquire and hold the Purchaser Indebtedness, (c) consent to the prepayment by the Borrower of Revolving Credit Borrowings, rather than Term Borrowings, with the Net Proceeds of the Vision Group Sale and (d) waive the provisions of the Credit Agreement to the extent necessary to permit the Borrower to apply the Net Proceeds of the Vision Group Sale to repay Revolving Credit Borrowings; and WHEREAS, the Required Lenders are willing, on the terms, subject to the conditions and to the extent set forth below, to grant such consent and waiver. NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, the Borrower and the Required Lenders hereby agree, on the terms and subject to the conditions set forth herein, as follows: SECTION 1. Consent and Waiver. (a) The Required Lenders ------------------- hereby (i) consent to the acquisition and holding by the Borrower, in connection with the Vision Group Sale, of the Purchaser Indebtedness and (ii) waive the provisions of the Credit Agreement to the extent, but only to the extent, necessary to permit the Borrower to acquire and hold the Purchaser Indebtedness. (b) The Required Lenders hereby (i) consent to the prepayment by the Borrower of Revolving Credit Borrowings, rather than Term Borrowings, with the Net Proceeds of the Vision Group Sale, as described in Section 2 below, and (ii) waive the provisions of Sections 2.13(c) and 2.13(g) of the Credit Agreement to the extent, but only to the extent, that the provisions of such Sections would require the Borrower to make a prepayment of Tranche A Term Loans and Tranche B Term Loans with the Net Proceeds of the Vision Group Sale. SECTION 2. Prepayment of Revolving Credit Borrowings. Upon ------------------------------------------ the consummation of the Vision Group Sale, the Borrower shall, substantially simultaneously with (and in any event not later than the Business Day next following) the consummation of the Vision Group Sale, apply an amount equal to 100% of the Net Proceeds (other than the Purchaser Indebtedness) of the Vision Group Sale to prepay Revolving Credit Borrowings. Upon the receipt by the Borrower of any principal amount of the Purchaser Indebtedness following the consummation of the Vision Group Sale, the Borrower shall, simultaneously with (and in any event not later than the Business Date next following) the receipt of such principal amount, apply an amount equal to 100% of the principal amount so received to prepay Revolving Credit Borrowings. SECTION 3. Release of Security Interest in Vision Care ------------------------------------------- Assets. In connection with the consummation of the Vision Group ------- Sale, the Collateral Agent shall execute and deliver to the Borrower, at the Borrower's expense, all Uniform Commercial Code termination statements and similar documents that the Borrower shall reasonably request in order to evidence the termination of the Security Interest in the assets of the Vision Group. Any execution and delivery of such termination statements or similar documents shall be without recourse to or warranty by the Collateral Agent. SECTION 4. Representations and Warranties. ------------------------------- The Borrower represents and warrants to each of the Lenders that: (a) The execution, delivery and performance by the Borrower of this Consent and Waiver (a) have been duly authorized by all requisite corporate and, if required, stockholder action and (b) will not (i) violate (A) any provision of any law, statute, rule or regulation, other than any law, statute, rule or regulation, the violation of which will not result in a Material Adverse Effect, or of the certificate or articles of incorporation or other constitutive documents or By-laws of the Borrower or any Subsidiary, (B) any order of any Governmental Authority or (C) any provision of any material indenture, agreement or other instrument to which the Borrower or any Subsidiary is a party or by which any of them or any of their property is or may be bound, (ii) constitute (alone or with notice or lapse of time or both) a default under any such indenture, agreement or other instrument or (iii) result in the creation or imposition of any Lien (other than any Lien created under the Security Documents) upon any property or assets of the Borrower or any Subsidiary. (b) This Consent and Waiver has been duly executed and delivered by the Borrower and constitutes a legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms (a) except as the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and (b) subject to general principals of equity. SECTION 5. Loan Documents. This Consent and Waiver and --------------- each certificate and instrument delivered by any party in connection herewith shall be a Loan Document for all purposes. SECTION 6. Effectiveness. This Consent and Waiver shall -------------- become effective as of the date hereof when the Administrative Agent shall have received copies hereof that, when taken together, bear the signatures of each of the Borrower and the Required Lenders. SECTION 7. Notices. All notices hereunder shall be given -------- in accordance with the provisions of Section 10.01 of the Credit Agreement. SECTION 8. Applicable Law. THIS CONSENT AND WAIVER SHALL --------------- BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. SECTION 9. No Novation. Except as expressly set forth ------------ herein, this Consent and Waiver shall not by implication or otherwise limit, impair, constitute a waiver of, or otherwise affect the rights and remedies of any party under the Credit Agreement, nor alter, modify, amend or in any way affect any of the terms, conditions, obligations, covenants or agreements contained in the Credit Agreement, all of which are ratified and affirmed in all respects and shall continue in full force and effect. This Consent and Waiver shall apply and be effective only with respect to the provisions of the Credit Agreement specifically referred to herein. SECTION 10. Counterparts. This Consent and Waiver may be ------------- executed in two or more counterparts, each of which shall constitute an original but all of which when taken together shall constitute but one contract. Delivery of an executed counterpart of a signature page of this Consent and Waiver by facsimile transmission shall be as effective as delivery of a manually executed counterpart of this Consent and Waiver. SECTION 11. Headings. Section headings used herein are for --------- convenience of reference only, are not part of this Consent and Waiver and are not to affect the construction of, or to be taken into consideration in interpreting, this Consent and Waiver. IN WITNESS WHEREOF, the Borrower and the Required Lenders have caused this Consent and Waiver to be duly executed by their duly authorized officers, all as of the date and year first above written. ECKERD CORPORATION by /s/ Thomas E. Whiddon ---------------------- Name: Thomas E. Whiddon Title: CHEMICAL BANK, individually and as Administrative Agent, Managing Agent and Swingline Lender, by /s/ Hans Von Nolde ----------------------- Name: Hans Von Nolde Title: Vice President NATIONSBANK OF FLORIDA, N.A., individually and as Managing Agent and Swingline Lender, by /s/ Andrew M. Airheart ----------------------- Name: Andrew M. Airheart Title: Senior Vice President THE FIRST NATIONAL BANK OF CHICAGO, by /s/ Angela Robinson Smith __________________________ Name: Angela Robinson Smith Title: Assistant Vice President THE FIRST NATIONAL BANK OF BOSTON, by /s/ William C. Parentes ------------------------ Name: William C. Parentes Title: Vice President WELLS FARGO BANK, N.A., by /s/ Peter W. Clark ------------------------- Name: Peter W. Clark Title: Assistant Vice President NATIONAL WESTMINISTER BANK Plc, New York and/or Nassau Branches, by ------------------------- Name: Title: THE LONG-TERM CREDIT BANK OF JAPAN, LIMITED, NEW YORK BRANCH, by /S/ Jay Shankar ------------------------- Name: Jay Shankar Title: Vice President BANQUE PARIBAS, by ------------------------- Name: Title: THE NIPPON CREDIT BANK, LTD., by /s/ Hidaeki Mori ------------------------- Name: Hidaeki Mori Title: Vice President & Manager GENERAL ELECTRIC CAPITAL CORPORATION, by /s/ Elaine L. Moore ------------------------- Name: Elaine L. Moore Title: Senior Vice President HELLER FINANCIAL, INC., by /s/ V. Robert Rotering ------------------------- Name: V. Robert Rotering Title: Assistant Vice President SOCIETE GENERALE, by /s/ John J. Wagner ------------------------- Name: John J. Wagner Title: Vice President UNION BANK OF SWITZERLAND NEW YORK BRANCH, by /s/ John E. Duncan ------------------------- Name: John E. Duncan Title: Vice President by /s/ Jeanne L. Johnson ------------------------- Name: Jeanne L. Johnson Title: Assistant Treasurer MELLON BANK, N.A., by /s/ Lisa M. Pellow ------------------------- Name: Lisa M. Pellow Title: Assistant Vice President UNION BANK OF FINLAND LTD., GRAND CAYMAN BRANCH, by /s/ John Kehole ------------------------- Name: John Kehole Title: Vice President /s/ Durval C. Arau ------------------------- Name: Durval C. Arau Title: Vice President NATIONAL CITY BANK, by /s/ Brian H. Bucher ------------------- Name: Brian H. Bucher Title: Vice President FIRST INTERSTATE BANK OF TEXAS, N.A., by /s/ Frank W. Schageman ------------------------- Name: Frank W. Schageman Title: Assistant Vice President UNITED STATES LEASING INTERNATIONAL, INC., by ------------------------- Name: Title: VAN KAMPEN MERRITT, PRIME RATE INCOME TRUST, by /s/ Jeffrey W. Malliet ------------------------- Name: Jeffrey W. Malliet Title: Vice Pres. & Portfolio Mgr. PILGRIM PRIME RATE TRUST by ------------------------- Name: Title: THE BANK OF TOKYO TRUST COMPANY, by /s/ Adane Dessie ------------------------- Name: Adane Dessie Title: Vice President PRIME INCOME TRUST by /s/ ------------------------ Name: Title: ORIX USA CORPORATION, by ------------------------ Name: Title: HIBERNIA NATIONAL BANK, by /s/ Karen S. DeBlieux ------------------------ Name: Karen S. DeBlieux Title: Vice President BANQUE FRANCAISE DU COMMERCE EXTERIEUR, by /s/ Iain A. Whyte ------------------------ Name: Iain A. Whyte Title: Assistant Vice President GIROCREDIT BANK, by /s/ Dhuane G. Stephens ------------------------ Name: Dhuane G. Stephens Title: Vice President /s/ Lalit Malhotra ------------------------ Name: Lalit Malhotra Title: Senior Vice President NICHIMEN AMERICA, INC., by /s/ S. Watanabe ------------------------- Name: S. Watanabe Title: V.P. & Treasurer PEARL STREET L.P., by /s/ Robert J. O'Shea --------------------------- Name: Robert J. O'Shea Title: Authorized Signer PROSPECT STREET SENIOR PORTFOLIO, L.P., by /s/ Dana E. Erikson -------------------------- Name: Dana E. Erikson Title: Assistant Vice President RESTRUCTURED OBLIGATIONS BACKED BY SENIOR ASSETS D.V., by CHANCELLOR SENIOR SECURED MANAGEMENT INC., as portfolio advisor, by /s/ C. L. Jansen -------------------------- Name: C. L. Jansen Title: Vice President STICHTING RESTRUCTURED OBLIGATIONS BACKED BY SENIOR ASSETS 2, by CHANCELLOR SENIOR SECURED MANAGEMENT INC., as portfolio advisor, by /s/ C. L. Jansen -------------------------- Name: C. L. Jansen Title: Vice President THE SAKURA BANK, LIMITED, ATLANTA AGENCY, by /s/ Minoru Inaba -------------------------- Name: Minoru Inaba Title: VP & Senior Manager CITIBANK, N.A., by /s/ Thomas C. Hendricks -------------------------- Name: Thomas C. Hendrick Title: Attorney-In-Fact SHAWMUT BANK OF CONNECTICUT, N.A., by /s/ Daniel Senecal -------------------------- Name: Daniel Senecal Title: Officer CREDIT LYONNAIS CAYMEN ISLANDS BRANCH, by /s/ Frederick Haddad -------------------------- Name: Frederick Haddad Title: Authorized Signature CREDIT LYONNAIS NEW YORK BRANCH, by /s/ Frederick Haddad -------------------------- Name: Frederick Haddad Title: Senior Vice President FLEET BANK OF MASSACHUSETTS N.A., by /s/ Andrew Beise -------------------------- Name: Andrew Beise Title: Vice President NATIONAL CANADA FINANCE CORPORATION, by /s/ Michael S. Bloomenfeld -------------------------- Name: Michael S. Bloomenfeld Title: Vice President BANKERS TRUST COMPANY, by /s/Robert R. Telesca -------------------------- Name: Robert R. Telesca Title: Assistant Vice President HOUSEHOLD COMMERCIAL FINANCIAL SERVICES INC., by /s/ Robert M. Ceseo -------------------------- Name: Robert M. Ceseo Title: V. P. LEHMAN COMMERCIAL PAPER INC., by /s/ Lisa Raggi -------------------------- Name: Lisa Raggi Title: Authorized Signatory CRESCENT CAPITAL CORP., by /s/ Mark L. Gold -------------------------- Name: Mark L. Gold Title: Managing Director ANNEX I Overview of Terms of Purchaser Indebtedness ------------------------------------------- Issuer: The Purchaser. ------- Purchaser A subordinated debenture payable and due in --------- Indebtness: full on the date that is seven years from the ---------- Effective Date of the Vision Group Sale. Amount: The Purchaser Indebtedness will accrue no ------ interest during years one through five following the date of issuance of the Purchaser Indebtedness. During years six and seven after the date of issuance of the Purchaser Indebtedness, the Purchaser Indebtedness will bear interest, payable quarterly, at a rate of 9% per annum. Security: None. -------- Ranking: The Purchaser Indebtedness will constitute ------- subordinated indebtedness of the Purchaser and will be subordinated, on terms satisfactory to the Borrower and the Purchaser, to all senior indebtedness of the Purchaser. Other Terms: Customary terms for subordinated debentures ----------- of this type. EX-10.38 4 EXHIBIT 10.38 EMPLOYMENT AGREEMENT -------------------- AGREEMENT made as of October 1, 1988, by and between JACK ECKERD CORPORATION, a Delaware corporation (the "Company") and JAMES M. SANTO, residing at 5113 South Nichols Street, Tampa, Florida 33611, (the "Employee"). WHEREAS, upon terms and subject to the conditions of this Agreement, the Company desires to employ the Employee and the Employee is willing to accept employment by the Company. NOW, THEREFORE, in consideration of the mutual covenants set forth herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. Employment. ---------- Upon the terms and subject to the conditions of this Agreement, the Company hereby employs the Employee and the Employee hereby accepts employment by the Company in the capacity hereinafter set forth. 2. Term of Employment. ------------------ The term of the Employee's employment by the Company under this Agreement shall commence on the date hereof and shall be for a term of twelve (12) months, subject to extension and termina- tion as provided in Section 8 hereof (the "Contract Period"). 3. Duties; Extent of Services. -------------------------- (a) During the Contract Period, the Employee shall serve as Vice President Legal Affairs of the Company or in such ---------------------------- other executive capacity as shall be determined from time to time by the Board of Directors of the Company and shall perform the duties, undertake the responsibilities and exercise the authority customarily performed, undertaken and exercised by a person in such position in the businesses in which the Company is engaged. (b) Except as otherwise provided herein and except for illness, permitted vacation periods and permitted leaves of absence during the Contract Period, the Employee shall (i) devote his full time and attention during normal business hours to the business of the Company and its subsidiaries; (ii) use his best efforts to promote the Company's and its subsidiaries' interests; and (iii) discharge such other and further executive and adminis- trative duties as may be assigned to him by the Board of Direc- tors of the Company and its subsidiaries. (c) Except for directorships held by the Employee on the date of this Agreement, during the Contract Period the Employee will not, without the prior written consent of the Company's Board of Directors, serve as a director of any corpora- tion, joint venture, association or other commercial enterprise not controlled by, controlling or under common control with, the Company and its subsidiaries. 2 4. Compensation. ------------ (a) In consideration of the services rendered by the Employee under this Agreement, the Company shall pay the Employee a base annual salary (the "Base Salary") in the amount of $134,000 (or such higher amount as the Board of Directors of the Company shall determine) payable monthly on the fifteenth (15th) of each month during the Contract Period. (b) During the Contract Period, as additional compensa- tion for his services and as a further incentive and inducement to the Employee to accept employment by the Company and to devote his best efforts to the business and affairs of the Company and its subsidiaries, the Company shall pay to the Employee addition- al compensation (the "Bonus Compensation") in the following amounts: (i) The Company shall pay, or shall cause to be paid, to the Employee the payments described in the letter agreement dated April 30, 1986 between the Company and the Employee, the form of which is attached hereto as Exhibit A; and (ii) The Employee shall be entitled to participate in the Company's Key Management Bonus Plan (KMBP), 3- Year Bonus Plan (3-Year Bonus) and such other plans as may be in effect from time to time as determined by the Board of Directors of the Company from time to time. 3 (c) The Company agrees that the Employee shall be entitled to defer some portion or all of his Base Salary for any calendar year in accordance with the provisions of the Company's Executive Deferred Compensation Plan as adopted by the Board of Directors. 5. Fringe Benefits. --------------- In addition to the compensation provided in Section 4 above, during the Contract Period the Employee shall be entitled to the following benefits: (a) The Employee shall be entitled to paid vacation time annually in accordance with the Company policy as determined by the Board of Directors. (b) The Employee shall be entitled to participate in all employee benefit programs now or hereafter maintained by the Company for executive personnel for which he is eligible, includ- ing, without limitation, group life insurance, short and long- term disability, profit sharing, pension, automobile allowance or leasing, stock option (subject to approval by the Board of Directors), supplemental retirement income (subject to approval by the Board of Directors), hospitalization and medical and dental reimbursement plan or program, his participation in such programs to be based upon the applicable provisions of such programs as they may exist from time to time. 6. Expenses. -------- The Company shall pay or reimburse the Employee for all reasonable expenses reasonably incurred or paid by him in connec- 4 tion with the performance of his duties hereunder upon presen- tation of expense statements or vouchers and such other support- ing documentation as the Company may from time to time reasonably request. 7. Benefits Payable Upon Disability, Death, or Retirement. ------------------------------------------------------ (a) In the event of the disability (as hereinafter de- fined) of the Employee during the Contract Period, the Company shall continue to pay the Employee the compensation provided in Section 4 hereof during the period of his disability or earlier termination hereof; provided, however, that in the event the -------- Employee is disabled for a continuous period exceeding six (6) consecutive calendar months, the Company may, at its election, terminate this Agreement at the close of business on the date thirty (30) days after the Company shall have delivered a written notice of such election to the Employee, in which event the Employee shall be entitled to receive benefits under the Company's Long Term Disability Plan as such plan may exist as of the date of termination of this Agreement. As used in this Agreement, the term "disabil- ity" shall mean the inability of the Employee due to illness or physical or mental infirmity to perform his duties under this 5 Agreement as determined by a physician selected by the Employee and acceptable to the Company. (b) During the period the Employee shall be entitled to receive payments under Section 7(a) above, to the extent that he is physically and mentally able to do so, he shall, upon the request of the Company, furnish information and assistance to the Company, and, in addition, upon reasonable request of Senior Management or the Board of Directors, he shall make himself available to the Company to undertake reasonable assignments consistent with the dignity, importance and scope of his position and his physical and mental health. (c) In the event of the death of the Employee during the Contract Period, the Company shall pay, or cause to be paid, to the Employee's designated beneficiary or beneficiaries or estate or legal representatives, the payment due pursuant to the terms of the group term insurance policies together with such other death benefits as may be payable under the Company's benefit plans. (d) In the event of the retirement of the Employee on his Normal Retirement Date (as such term is defined in the Company's Pension Plan) in addition to such retirement benefits that are available to the Employee upon retirement pursuant to the Company's retirement benefit plans, the Company shall reduce the principle amount of the Employee's aggregate obligation under 6 the Employee's 10% Recourse Secured Promissory Note and 10% Non- Recourse Secured Promissory Note dated as of April 30, 1986 (hereinafter collectively referred to as the "Notes") by an amount equal to the amount such Notes would have been reduced had the Employee remained in the employment of the Company for a period of two (2) years from the date of retirement and shall pay the Employee an additional amount equal to the federal, state or local income taxes deemed to be payable by the Employee in respect of the reduction in the principle amount of the Notes pursuant to this clause. 8. Termination. ----------- (a) Except as otherwise provided in subsection (c) (d) and (e) hereof, this Agreement and the employment of the Employee hereunder shall terminate upon the earliest to occur of the dates specified below: (i) the close of business on September 30, 1989 (the "Initial Period"), except that this Agreement and the employment of the Employee hereunder shall be automatically extended from year to year thereafter unless (x) terminated by the Company by delivery of not less than 60 days written notice to the Employee prior to the end of the Initial Period or any extension thereof in which case the employment of the Employee shall terminate on the date specified for termination 7 in such notice, or (y) terminated by the Employee by delivery of not less than 60 days written notice to the Company prior to the end of the Initial Period or any extension thereof in which case the employment of the Employee shall terminate on the date specified for termination in such notice; (ii) the close of business on the date of death of the Employee; (iii) the close of business on the date the Company delivers to the Employee a written notice of its election to terminate his employment for "cause" (as defined in paragraph (b) below); (iv) the close of business on the date thirty (30) days after the Company shall have delivered to the Employee a written notice of its intention to terminate his employment because the Board of Directors has determined that such termination is in the best inter- ests of the Company and such termination is not for cause, death, disability or failure to extend pursuant to Section 8(a)(i)(x) hereof; (v) the close of business on the date of a termination by the Company pursuant to Section 7(a) hereof; or 8 (vi) the close of business the date of the retirement of the Employee pursuant to Section 7(d) hereof. (b) For purposes of this Agreement, the term "cause" shall be limited to (i) a felony conviction or (ii) the commis- sion of an act of fraud or embezzlement against the Company or any of its subsidiaries. (c) For purposes hereof, upon termination of this Agreement and employment of Employee as provided in Section 8(a) (i) - (vi), all obligations and liabilities of the parties hereto shall cease and be of no effect except for those liabilities and obligations provided for in Sections 7, 9, 10, and 11 hereof. (d) For purposes of clauses (i) and (iv) of Section 8(a) above, the Employee shall be relieved of his duties and shall vacate his office and the Company's premises on the date of receipt of the notice required by such clauses unless request- ed by the Company to remain in the active employment of the Company during such period between the receipt of notice and the effective date of termination of employment. (e) Notwithstanding the provisions of this Section 8, the Company in its sole discretion may, in connection with the termination of all of the employment agreements dated as of this date between the Company and the Management Group (as such term is defined in the Registration Rights Agreements), terminate this 9 Agreement upon 3 months written notice; provided, however, that if termination of this Agreement under this provision results in the termination of employment of Employee by the Company other than for cause, death, disability or retirement within one (1) year from the effective date of the termination of this Agreement under this clause (e), Employee shall be entitled to the benefits and shall be bound by the obligations provided in Sections 9, 10 and 11 hereof. 9. Payments to Employee Upon Termination of Employment. --------------------------------------------------- (a) Upon the termination of the Employee's full-time employment hereunder by the Company in accordance with clauses (i) (x) or (iv) of Section 8(a) of this Agreement, the Company shall pay to the Employee, or in the event of his subsequent death, to his beneficiary or beneficiaries or his estate or legal representative, as severance pay (i) an amount equal to the Employee's Base Salary on the date of termination for the Appli- cable Severance Period payable in monthly installments on the fifteenth (15th) of each month during the Applicable Severance Period plus (ii) a pro rata portion of the lower of (x) the bonus compensation which would have been paid to Employee pursuant to the KMBP in respect of the year of termination if he had not been terminated and (y) the amount of Bonus Compensation which would have been paid to Employee under the KMBP in such year if the Company had met Target as such term is defined in the KMBP plus 10 (iii) a pro rata portion of any Bonus Compensation payable under the 3-Year Bonus Plan for any 3-year Performance Period in which Employee has been a participant for a period of 12 months plus (iv) an amount equal to the value as of the valuation date next preceding the date of termination of this Agreement of the pro rata portion of any of the Employee's shares of Class B Common Stock that would have become Vested Shares in respect of the year of termination if he had not been terminated. Any payments due Employee hereunder with respect to the KMBP, 3-Year Bonus Plan or Vested Class B Stock shall be paid promptly after the determina- tion of such amounts. (b) Upon the termination of the Employee's full-time employment hereunder pursuant to (i)(x) or (iv) of Section 8(a) of this Agreement, the Company shall at its expense continue on behalf of the Employee the following benefits: life insurance, short and long-term disability insurance, hospitalization insur- ance and medical and dental reimbursement plan insurance. The coverage of any such insurance provided by the Company hereunder shall be no less favorable to the Employee, in terms of amounts and deductibles, than the coverage provided under the benefit programs maintained by the Company from time to time for the Company's executives. The Company's obligation hereunder with respect to each of the foregoing benefit plans shall terminate upon the earlier of the end of the Applicable Severance Period or 11 the date the Employee obtains any such benefits pursuant to a subsequent employer's benefit plans. (c) Benefits pursuant to the Company's Profit Sharing and Pension Plans (and such other plans in which Employee partic- ipates) shall be payable to Employee in accordance with the terms of such Plans. (d) Upon the termination of the Employee's full-time employment hereunder by the Company in accordance with clauses (i)(x) or (iv) of Section 8(a) of this Agreement, the Company shall reduce the principal amount of the Employee's aggregate obligation under the Employee's 10% Recourse Secured Promissory Note and 10% Non-Recourse Secured Promissory Note dated as of April 30, 1986 by an amount equal to the amount such Notes would have been reduced had the Employee remained in the employment of the Company through the end of the Applicable Severance Period and shall pay the Employee an additional amount equal to the federal, state or local income taxes deemed to be payable by the Employee in respect of the reduction in the principal amount of the Notes pursuant to this clause. (e) For purposes of this Agreement, Applicable Sever- ance Period shall mean (i) one year (12 months) for a termination which occurs prior to the Employee's tenth (10th) anniversary of employment with the Company or (ii) one and one-half years (18 12 months) for a termination which occurs after the Employee's tenth (10th) anniversary of employment with the Company. 10. Covenants of the Employee. ------------------------- (a) The Employee agrees that during the Contract Period and for a period of time equal to (i) one year in the event of a termination of employment in accordance with clauses (i)(y) or (iii) of Section 8(a); (ii) two years in the event of a termination of employment in accordance with Section 7(a) or retirement in accordance with Section 7(d); or (iii) the Appli- cable Severance Period in the event of a termination of employ- ment in accordance with clauses (i)(x) or (iv) of Section 8(a), he will not, directly or indirectly, engage, assist or partici- pate in, whether as a director, officer, employee, agent, manag- er, consultant, partner, owner or independent contractor or other participant, any business, firm, corporation, partnership, enterprise or organization that through the operation of retail stores in which prescription drugs are sold competes with the business engaged or hereafter engaged in by the Company or any of its subsidiaries in the Company's or such subsidiaries' trade areas (for purposes hereof "trade areas" shall mean any county in any state of the United States in which retail drug stores operated by the Company and its subsidiaries are located). 13 Nothing contained herein shall prevent the Employee from acquiring less than 2% of any class of outstanding securities of any company that has any of its securities listed on a national securities exchange or traded in the over-the-counter market. (b) The Employee agrees that during the Contract Period and for a period of two years after the termination of this Agreement for any reason, he will not directly induce or solicit any person employed or hereafter employed by the Company or any of its subsidiaries to leave the employ of the Company or any of its subsidiaries. (c) The Employee agrees and acknowledges that the Confidential Information of the Company and its subsidiaries (as hereinafter defined) is valuable, special and unique to their business; that such business depends on such Confidential Infor- mation; and that the Company wishes to protect such Confidential Information by keeping it confidential for the use and benefit of the Company. Based on the foregoing, the Employee agrees to undertake the following obligations with respect to such Confi- dential Information: 14 (i) The Employee agrees to keep any and all Confiden- tial Information in trust for the use and benefit of the Company; (ii) The Employee agrees that, except as required by the Employee duties or authorized in writing by the Company and its subsidiaries or required by applicable law, he will not at any time during and for a period of five (5) years after the termination of his employment with the Company and its subsidiaries, disclose, directly or indirectly, any Confidential Information of the Company or any of its sub- sidiaries. (iii) The Employee agrees to take all reasonable steps necessary, or reasonably requested by the Company and its subsidiaries, to ensure that all Confidential Informa- tion of the Company is kept confidential for the use and benefit of the Company and its subsidiaries; and (iv) The Employee agrees that, upon termination of his employment by the Company or any of its subsidiaries or at any other time the Company may in writing so request, he will promptly deliver to the Company all materials consti- tuting Confidential Information (including all copies there- of) that are in the possession of or under the control of the Employee. The Employee further agrees that, if request- ed by the Company to return any Confidential Information 15 pursuant to this Subsection (iv), he will not make or retain any copy or extract from such materials. For purposes of this Section 10(c), Confidential Information means any and all information developed by or for the Company or any of its subsidiaries of which the Employee gained knowledge by reason of his employment by the Company or any of its subsidiaries prior to the date hereof or his employment under this Agreement that is not generally known in any industry in which the Company is or may become engaged. Confidential Infor- mation includes, but is not limited to, any and all information developed by or for the Company concerning plans, marketing and sales methods, materials, processes, business forms, procedures, devices used by the Company, its subsidiaries, suppliers and customers with which the Company had dealt prior to the Employe- e's termination of employment with the Company and its subsidiar- ies, plans for development of new products, services and expan- sion into new areas or markets, internal operations, and any trade secrets and proprietary information of any type owned by the Company and its subsidiaries, together with all written, graphic and other materials relating to all or any part of the same. 11. Covenant Not to Sue. ------------------- Employee hereby covenants and agrees with the Company, its successors and assigns forever to refrain from making, 16 instituting, pressing or in any way aiding any claim, demand, action or cause of action against the Company and its officers and agents arising in connection with his employment, modification of employment or termination thereof, including claims, demands, actions or causes of action arising under federal and state fair employment practice or discrimination laws, laws pertaining to breach of employment contract or wrongful discharge and any other federal, state or local laws relating in any way to Employee's employment with the Company or the termination thereof. Employee further understands and agrees that this covenant not to sue applies to any and all forms of relief, whether monetary or other, which Employee might seek in connection with his employ- ment, modification of employment or termination thereof. Provid- ed, however, that this covenant not to sue shall not prohibit Employee from making, instituting or pressing any claim, demand, action or cause of action to enforce the benefits payable to Employee pursuant to Sections 7 and 9 of the Agreement upon termination of employment with the Company or arising under the Management Subscription Agreement dated April 30, 1986 or any employee benefit plan maintained by the Company or any claim under the workman's compensation laws of any state. Employee further acknowledges that as a condition precedent to Employee receiving any benefits under this Agree- ment, Employee shall complete, execute and deliver to the Company 17 at the time of his termination of employment a Release in the form of Exhibit "B" hereto which releases any and all claims that the Employee may have against the Company as of the date of termination arising under federal, state, local or common law. 12. Successors and Assigns. ---------------------- (a) This Agreement shall be binding upon and shall inure to the benefit of the Company, its successors and assigns. The term "Company" as used herein shall include such successors and assigns. The term "successors and assigns" as used herein shall mean a corporation or other entity acquiring all or sub- stantially all the assets and business of this Company (including this Agreement) whether by operation of law or otherwise. (b) Neither this Agreement nor any right or interest hereunder shall be assignable by the Employee, his beneficiaries, or legal representatives without the Company's prior written consent; provided, however, that nothing in this Section 11 shall preclude (i) the Employee from designating a beneficiary to receive any benefit payable hereunder upon his death, or (ii) the executors, administrators, or other legal representatives of the Employee or his estate from assigning any rights hereunder to distributees, legatees, beneficiaries, testamentary trustees or other legal heirs of the Employee. 18 13. Notices. ------- Any notice required or permitted by this Agreement shall be given by registered or certified mail, return receipt requested, addressed to the Company at its then principal office, or to the Employee at his address specified on page 1 of this Agreement, or to either party hereto at such other address or addresses as he or it may from time to time specify for such purposes in a notice similarly given. 14. Governing Law; Litigation; Expenses. ----------------------------------- (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Florida without giving effect to the conflicts of law principles thereof. (b) The Employee and the Company hereby agree that the courts of the State of Florida shall have exclusive jurisdiction to hear and determine any claims or disputes pertaining to this Agreement or to any matter arising therefrom. Each of the Employee and the Company expressly submits and consents in advance to such jurisdiction in any action commenced in such courts hereby waiving personal service of the summons and com- plaint or other process or papers issued therein, and agreeing that service of such summons and complaint, or other process or papers, may be made by registered or certified mail addressed to the Company at its then principal office or to the Employee at his address specified on page 1 of this Agreement, or to either party hereto at such other addresses as it or he from time to 19 time specify to the other party in writing for such purpose. The exclusive choice of forum set forth in this Section 14 shall not be deemed to preclude the enforcement of any judgment obtained in such forum or the taking of any action under this Agreement to enforce such judgment in any appropriate jurisdiction. (c) All costs and expenses (including attorneys' fees) incurred in connection with any litigation relating to a claim or dispute pertaining to this Agreement shall be paid by the party incurring such expenses. (d) Nothing contained in this Section 14 shall be deemed to limit the Company's obligation to indemnify the Employ- ee to the fullest extent permitted by applicable law in respect of any actions, claims or proceedings which are based upon acts or omissions of the Employee related to the performance of his duties hereunder to the extent he would have otherwise been entitled to indemnification under the by-laws or charter of the Company or any of its subsidiaries or to the extent to which indemnification is to be paid to officers and directors as a matter of law. 15. Entire Agreement. ---------------- This instrument contains the entire agreement of the parties relating to the subject matter hereof, and there are no restrictions, agreements, promises, covenants, undertakings, representations or warranties with respect to the subject matter 20 hereof other than those expressly set forth herein and in the following instruments and agreements to which the Company and the Employee are parties: the Recourse Note, the Non-Recourse Note, the Convertible Debentures, the Compensation Letter, the Manage- ment Subscription Agreement, the Registration Rights Agreement, the Stockholders' Agreement and the Pledge Agreement (such instruments and agreements to have the same defined meanings as such instruments and agreements are defined in the Management Subscription Agreement). No modification of this Agreement shall be valid unless in writing and signed by the parties hereto. The waiver of a breach of any term or condition of this Agreement shall not be deemed to constitute a waiver of any subsequent breach of the same or any other term or condition of this Agree- ment. 16. Severability. ------------ If any term or provision of this Agreement or the application thereof to any person, property or circumstance shall to any extent be invalid or unenforceable, the remainder of this Agreement, or the application of such term or provision to persons, property or circumstances other than those as to which it is invalid or unenforceable shall not be affected thereby, and each term and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 21 17. Injunctive Relief. ----------------- (a) The Employee acknowledges and agrees that the covenants and obligations contained in Sections 10(a), 10(b) and 10(c) of this Agreement relate to special, unique and extraordi- nary matters and that a violation of any of the terms of such Sections will cause the Company irreparable injury for which adequate remedies at law are not available. Therefore, the Employee agrees that the Company shall be entitled to an injunc- tion, restraining order, or other equitable relief from any court of competent jurisdiction, restraining the Employee from commit- ting any violation of the covenants and obligations set forth in Sections 10(a), 10(b) and 10(c) hereof. (b) The Company's rights and remedies under this Section 17 are cumulative and are in addition to any other rights and remedies the Company may have at law or in equity. In connection with the foregoing provisions of this Section 17, the Employee represents that his economic means and circumstances are such that such provisions will not prevent him from providing for himself and his family on a basis satisfactory to him. 18. Withholding Taxes. ----------------- The Company may deduct from any payments to be made hereunder any federal, state or local withholding or other taxes which the Company determines it is required to deduct under applicable law. 22 IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement as of the day, month and year first written above. JACK ECKERD CORPORATION By: /s/ Stewart Turley ___________________________ Stewart Turley, President EMPLOYEE /s/ James M. Santo ______________________________ James M. Santo 23 EX-22.1 5 EXHIBIT 22.1 ECKERD CORPORATION SUBSIDIARIES OF THE COMPANY At January 29, 1994, Eckerd Corporation, incorporated in the State of Delaware, had nine wholly-owned subsidiaries, which are included in the consolidated financial statements of the Company. The names of the nine subsidiaries have been omitted because these unnamed subsidiaries, considered in the aggregate as a single subsidiary, do not constitute a significant subsidiary. EX-23.1 6 EXHIBIT 23.1 The Board of Directors Eckerd Corporation and Subsidiaries: Re: Registration Statement on Form S-3 (No. 33-50223) Registration Statement on Form S-8 (No. 33-49977) Registration Statement on Form S-3 (No. 33-10721) Registration Statement on Form S-8 (No. 33-50755) We consent to the incorporation by reference in the above referenced registration statements of Eckerd Corporation and subsidiaries of our report dated March 18, 1994, relating to the consolidated balance sheets of Eckerd Corporation and subsidiaries as of January 29, 1994 and January 30, 1993, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows and related schedules for each of the years in the three-year period ended January 29, 1994, which report appears in the January 29, 1994 annual report on Form 10-K of Eckerd Corporation and subsidiaries. Tampa, Florida March 31, 1994 EX-99.1 7 PRO FORMA FINANCIAL DATA The following unaudited pro forma financial data of Eckerd Corporation (the "Company") is based on the historical consolidated financial statements of the Company included in its Annual Report on Form 10-K for the fiscal year ended January 29, 1994 (the "Form 10-K"), adjusted to give effect to the Refinancing, the IPO and the Note Issuance and the use of net proceeds therefrom. The unaudited pro forma statement of operations data for the year ended January 29, 1994 give effect to the Refinancing, the IPO and the Note Issuance and the use of proceeds therefrom as if such transactions had occurred as of the beginning of the period presented. The adjustments relating to the Refinancing, the IPO and the Note Issuance are described in the accompanying notes. The pro forma adjustments are based upon available information and certain assumptions that management of the Company believes are reasonable. The pro forma financial data does not purport to represent what the Company's results of operations would actually have been if the Refinancing, the IPO and the Note Issuance and the use of proceeds therefrom in fact had occurred at the beginning of the period presented, or to project the Company's results of operations for any future period. The pro forma financial data should be read in conjunction with "Management's Discussion and Analysis of Results of Operations and Financial Condition" and the historical consolidated financial statements of the Company and related notes included in the Form 10-K. All capitalized terms used herein but not defined have the same meanings as ascribed to them in the Form 10-K. FISCAL YEAR ENDED JANUARY 29, 1994 ------------------------------------- REFINANCING, IPO AND NOTE ACTUAL ISSUANCE PRO FORMA ---------- ----------- ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Sales and other operating revenue.................. $4,190,539 $ -- $ 4,190,539 ---------- ----------- ------------ Costs and expenses: Cost of sales, including store occupancy, warehousing, and delivery expense..... 3,175,375 -- 3,175,375 Operating and administrative expenses............. 857,980 1,668(1) 859,648 ---------- ----------- ------------ Earnings before interest expenses............... 157,184 (1,668) 155,516 ---------- ----------- ------------ Interest expenses: Interest expense, net................. 105,999 (2,470)(2) 88,449 (9,500)(3) (3,912)(4) (1,668)(1) Amortization of original issue discount and deferred debt expenses............. 7,216 (2,356)(5) 6,760 2,500(5) (1,025)(6) 425(6) ---------- ----------- ------------ Total interest expenses......... 113,215 (18,006) 95,209 ---------- ----------- ------------ Earnings (loss) before income taxes and extraordinary item....... 43,969 16,338 60,307 ---------- ----------- ------------ Income tax provision..... 2,556 327 2,883(8) ---------- ----------- ------------ Earnings (loss) before extraordinary item..................... 41,413 16,011 57,424(8) Extraordinary item--early retirement of debt and preferred stock.......... (44,354) 44,354(7) -- (8) ---------- ----------- ------------ Net earnings (loss) for the year............. (2,941) 60,365 57,424(8) Dividends declared on preferred stock.......... 4,924 (4,924)(3) -- ---------- ----------- ------------ Net earnings (loss) available to common shares................... $ (7,865) $ 65,289 $ 57,424(8) ---------- ----------- ------------ ---------- ----------- ------------ Earnings (loss) before extraordinary item per common share (9)......... $ 1.24(10) $ 1.80(11) Net earnings (loss) per common share............. (0.27)(10) 1.80(11) ---------- ------------ ---------- ------------ - --------------- (1) Reflects adjustments for the IFS Sale and Leaseback relating to a reduction in depreciation for the assets that were sold, a reduction in interest expense for the debt that was repaid with the net proceeds therefrom and an increase in rent expense payable under the IFS Sale and Leaseback. (2) Reflects the repayment of certain debt with the $65.8 million net proceeds of the IPO and the corresponding reduction in interest expense assuming an interest rate of 7 1/2% under the Credit Agreement and the EH II Credit Agreement for both periods. See "The 1993 Transactions." (3) Reflects the incurrence of new indebtedness under the Credit Agreement and the EH II Credit Agreement and the prepayment or redemption of certain existing indebtedness with, among other things, borrowings thereunder as part of the Refinancing and the corresponding reduction in interest expense based on lower interest rates for such new indebtedness. Also, reflects redemption of the 14 1/2% Preferred Stock. See "The 1993 Transactions." (4) Reflects the issuance of the Notes and the application of the net proceeds therefrom to redeem all of the 13% Discount Debentures and $145.0 million of the 11 1/8% Debentures and the corresponding reduction in interest expense. (5) Reflects reversal of amortization of deferred debt expenses related to debt being repaid of $2.4 million for the year ended January 29, 1994 and the amortization of deferred debt expenses related to the Credit Agreement of $2.5 million for the year ended January 29, 1994. (6) Reflects reversal of original issue discount and deferred debt expenses related to the 13% Discount Debentures and the 11 1/8% Debentures redeemed of $1.0 million for the year ended January 29, 1994, and the amortization of deferred debt expenses related to the Notes of $0.4 million for the year ended January 29, 1994. (7) Reflects the elimination of the extraordinary item of $45.3 million and related income tax benefit of $0.9 million ($44.4 million, net) recognized as a result of the repayment of existing indebtedness and redemption of the 14 1/2% Preferred Stock. (8) If the extraordinary item of $45.3 million and related income tax benefit of $0.9 million were presented as if they had occurred during the period presented, the income tax provision would have been approximately $2.9 million, earnings before extraordinary item would have been approximately $57.4 million, the extraordinary item would have been approximately $(44.4) million, and each of net earnings for the year and net earnings available to common shares would have been approximately $13.1 million. (9) Reflects payment of preferred stock dividends of $4,924. (10) Earnings (loss) before extraordinary item per common share and net earnings (loss) per common share was calculated on the basis of 29,392,805 weighted average shares of Common Stock outstanding. (11) Earnings (loss) before extraordinary item per common share and net earnings (loss) per common share on a pro forma basis assumes 31,980,305 weighted average shares of Common Stock outstanding. -----END PRIVACY-ENHANCED MESSAGE-----