-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TbeOe5JyJJhUUmv/xDxjzIbSWyE2zV2npjgAlR/H7RPe6thpGTBAQ2OhwRvDnSdN kFbtnnYIG9lNITJFYJLJ8w== 0000950112-95-003030.txt : 19951121 0000950112-95-003030.hdr.sgml : 19951121 ACCESSION NUMBER: 0000950112-95-003030 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19951117 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ECKERD CORP CENTRAL INDEX KEY: 0000031364 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DRUG STORES AND PROPRIETARY STORES [5912] IRS NUMBER: 133302437 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: S-3 SEC ACT: 1933 Act SEC FILE NUMBER: 033-64409 FILM NUMBER: 95594706 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 S-3 1 ECKERD CORPORATION AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 17, 1995 REGISTRATION NO. 33- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------- ECKERD CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 13-3302437 (State or other jurisdiction of (IRS employer incorporation or organization) identification number)
8333 BRYAN DAIRY ROAD LARGO, FLORIDA 34647 (813) 399-6000 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ROBERT E. LEWIS, ESQ. VICE PRESIDENT/GENERAL COUNSEL 8333 BRYAN DAIRY ROAD LARGO, FLORIDA 34647 (813) 399-6000 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------- COPIES TO: STACY J. KANTER, ESQ. MARK KESSEL, ESQ. SKADDEN, ARPS, SLATE, MEAGHER & FLOM SHEARMAN & STERLING 919 THIRD AVENUE 599 LEXINGTON AVENUE NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10022 (212) 735-3000 (212) 848-4000
------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as practicable after this registration statement becomes effective. ------------------- If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box: / / If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box: / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ------------------- CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) REGISTRATION FEE Common Stock ($.01 par value)...... 2,875,000 shares $42.75 $122,906,250 $24,582
(1) Includes 375,000 shares of Common Stock that the Underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of calculating the registration fee. Pursuant to Rules 457(a) and 457(c) under the Securities Act of 1933, the registration fee applicable to the Common Stock is calculated upon the basis of the average high and low sales prices of the Common Stock as reported on the New York Stock Exchange Composite Tape on November 13, 1995. ------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED NOVEMBER 17, 1995 PROSPECTUS 2,500,000 SHARES [LOGO] COMMON STOCK ------------------- All of the 2,500,000 shares of common stock, par value $.01 per share (the "Common Stock"), of Eckerd Corporation (the "Company") offered hereby (the "Offering") are being sold by certain stockholders of the Company (the "Selling Stockholders"). See "Principal and Selling Stockholders." The Company will not receive any proceeds from the sale of shares of Common Stock offered hereby. The Common Stock is listed on the New York Stock Exchange ("NYSE") under the trading symbol "ECK." On November 16, 1995, the last reported sale price of the Common Stock on the NYSE was $43 5/8 per share. See "Price Range of Common Stock and Dividend Policy." FOR INFORMATION CONCERNING CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS, SEE "RISK FACTORS" COMMENCING ON PAGE 8. ------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================================== PROCEEDS TO PRICE TO UNDERWRITING SELLING PUBLIC DISCOUNT(1) STOCKHOLDERS(2) Per Share...................... $ $ $ Total(3)....................... $ $ $ ==================================================================================================
(1) The Company and the Selling Stockholders have agreed to indemnify the several Underwriters against certain liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See "Underwriting." (2) The Company has agreed to pay certain expenses of the Offering estimated at $450,000. (3) The Selling Stockholders have granted the Underwriters a 30-day option to purchase up to an aggregate of 375,000 additional shares of Common Stock, solely to cover over-allotments, if any. If all such additional shares are purchased, the total Price to Public, Underwriting Discount and Proceeds to Selling Stockholders will be $ , $ and $ , respectively. See "Underwriting." ------------------- The shares of Common Stock are offered by the several Underwriters, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of certain legal matters by counsel for the Underwriters and certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the shares of Common Stock will be made in New York, New York on or about , 1995. ------------------- MERRILL LYNCH & CO. CS FIRST BOSTON MORGAN STANLEY & CO. INCORPORATED RAYMOND JAMES & ASSOCIATES, INC. ------------------- The date of this Prospectus is , 1995. INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. [ MAP OF ECKERD DRUG STORES BY STATE ] IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR THE ACCOUNTS OF OTHERS IN THE COMMON STOCK OF THE COMPANY PURSUANT TO EXEMPTIONS FROM RULES 10B-6, 10B-7, AND 10B-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934. PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated financial statements appearing elsewhere in this Prospectus. Unless the context indicates otherwise, all references in this Prospectus to the "Company" include Eckerd Corporation and its subsidiaries. All references to fiscal years shall be determined with respect to the calendar year in which the fiscal year begins. The Company's fiscal year terminates each year on the Saturday nearest to January 31st. Unless the context indicates otherwise, the information contained in this Prospectus assumes that the over-allotment option granted by the Selling Stockholders to the Underwriters has not been exercised. THE COMPANY Eckerd Corporation (the "Company") operates the Eckerd Drug store chain, which is one of the largest drug store chains in the United States. At October 28, 1995, the Eckerd Drug store chain consisted of 1,704 stores in 13 states located primarily in the Sunbelt, including 577 stores in Florida and 474 stores in Texas. The Company's stores are concentrated in 10 of the 12 metropolitan statistical areas in the United States with the largest percentage growth in population from 1980 to 1990, and, according to industry sources, the Company ranks first or second in 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 1994, the Company filled more than 89 million prescriptions, and sales of prescriptions and over-the-counter drugs generated approximately 61.1% of the Company's drug store sales and other operating revenue. During the period from fiscal 1990 through fiscal 1994, the Company's dollar volume of sales of prescription drugs increased at a compound annual growth rate of 12.4% and during the first half of fiscal 1995, the dollar volume of sales of prescription drugs increased by 15.8% as compared to the first half of fiscal 1994. The Company expects that its prescription and over-the-counter drug business will provide significant opportunities for profitable growth primarily as a result of the continued shift to managed health care in the United States and the aging of the American population. The Company believes it is well positioned to take advantage of the growth in managed health care. The Company's extensive store base within its markets, strong third-party payor marketing program, state-of-the-art pharmacy computer systems, and experience and reputation in the industry provide the Company with distinct advantages over independent drug stores, small drug store chains and mass merchandisers in attracting third-party payor sales. In fiscal 1994, sales to third-party payors, such as insurance companies, health maintenance organizations ("HMOs"), preferred provider organizations ("PPOs"), other managed care providers, government agencies or private employers, represented approximately 64.6% of the Company's total prescription drug sales, as compared to 36.0% in fiscal 1990, and this percentage is expected to continue to increase. The Company also expects to benefit from the aging of the population, as approximately 62% of the Company's drug stores are located in Florida and Texas, two of the top three states in terms of growth in the number of persons over age 65. According to industry studies, persons over age 65 purchase twice as many prescription drugs and 50% more over-the-counter drugs than the national average. In addition to prescription and over-the-counter drugs, the Company also sells a wide variety of name brand and private label nonpharmacy merchandise, including health and beauty aids, greeting cards and other convenience products, such as sundries, tobacco, books, magazines, household products, seasonal merchandise and toys. Over the last several years, the Company has introduced convenience food mart sections in over 550 stores, offering beverages and other convenience food items. The Company plans to add food mart departments to over 350 stores in fiscal 1995. The Company is also a leading source of photo finishing in all of the major markets in which it operates, offering overnight 3 developing in all of its stores and 1-hour Express Photo service in 510 of its locations as of October 28, 1995. The Company is one of the top three vertically integrated retail photo finishers in the United States. The Company believes that photo finishing operations increase store traffic and provide for significant incremental sales of other drug store items. The Company anticipates opening additional Express Photo Centers over the next several years in both new and existing store locations, with a goal of adding approximately 240 new Express Photo Centers by 1999. Customer service and convenience are critical in positioning the Company as an alternative to mass merchandisers, supermarkets and other large format retailing channels. The Company typically provides several conveniently located, modern stores in a community. The Company's stores range in size from 8,200 to 10,800 square feet and are primarily located in high-traffic neighborhood strip centers or free standing locations. The Company's stores are typically open every day of the year except Christmas, with some open until midnight or 24 hours a day. The Company offers a high level of professional pharmacy service such as the "Rx Advisor", a personalized, easy-to-read publication provided to each prescription drug customer which advises the customer of the specific dosages, contraindications and side effects of his or her prescription medicine. Other customer service advantages include comfortable pharmacy waiting areas, free health-related programs and screenings (e.g., blood pressure tests) and drive-through pharmacy windows in most new drug stores. In addition, the Company frequently tests new customer service features. The Company's business strategy is focused upon maintaining a strong pharmacy and health-related business. The Company plans to continue to implement this strategy by: . maintaining a high level of customer service and convenience; . providing competitive prices on its merchandise; . maintaining an aggressive marketing program to third-party payors; . continuing its commitment to control costs; . improving store productivity and profitability by continuing to assess the need to reallocate nonpharmacy shelf space; . expanding and improving the Company's store base; and . continuing to invest in and upgrade information systems. The Company was incorporated in Delaware in 1985 and acquired the former Jack Eckerd Corporation ("Old Eckerd") in 1986 (the "Acquisition"). The Company's principal executive offices are located at 8333 Bryan Dairy Road, Largo, Florida 34647; telephone number (813) 399-6000. 4 THE OFFERING Common Stock Offered by the Selling Stockholders......... 2,500,000 shares Total Common Stock Outstanding.................. 34,950,857 shares (1) NYSE Symbol.................... ECK - ------------ (1) Based on the number of shares outstanding as of October 28, 1995. Does not include employee stock options outstanding to purchase an aggregate of 1,656,199 shares of Common Stock at October 28, 1995, of which options to purchase an aggregate of 302,328 shares of Common Stock were exercisable. In addition, another 1,757,910 shares of Common Stock were reserved for issuance pursuant to the Company's 1993 and 1995 Stock Option and Incentive Plans. 5 SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA The following summary historical financial data for the years and periods presented below have been derived from the Company's consolidated financial statements. The historical financial data for the three fiscal years ended January 28, 1995, January 29, 1994 and January 30, 1993 have been derived from, and should be read in conjunction with, the Company's audited consolidated financial statements and related notes contained in the Company's Annual Report on Form 10-K405 (the "Annual Report") incorporated by reference herein. The historical financial data for the twenty-six week periods ended July 29, 1995 and July 30, 1994 have been derived from, and should be read in conjunction with, the unaudited consolidated financial statements of the Company contained in the Company's Quarterly Report on Form 10-Q for the quarter ended July 29, 1995 (the "10-Q") incorporated by reference herein which, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the interim period financial data. The results for the twenty-six week period ended July 29, 1995 are not necessarily indicative of the results to be expected for the full year. The summary pro forma statement of operations data presented below give effect to the Insta-Care Sale (as defined) and the use of the net proceeds therefrom as if such transaction had occurred as of the beginning of the periods presented and for the fiscal year ended January 28, 1995 also reflect the reversal of the gain on the Insta-Care Sale and the charge for future store closings and should be read in conjunction with "Pro Forma Financial Data." The summary pro forma financial data do not purport to represent what the Company's results of operations would actually have been if the Insta-Care Sale 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. All information contained in the following tables should be read in conjunction with "Management's Discussion and Analysis of Results of Operations and Financial Condition" and the consolidated financial statements of the Company and related notes incorporated by reference herein.
TWENTY-SIX WEEKS ENDED FISCAL YEAR ENDED ----------------------- -------------------------------------------------------------- JULY 29, JULY 30, JAN. 28, JAN. 29, JAN. 30, FEB. 1, FEB. 2, 1995 1994 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND PER SQUARE FOOT DATA) STATEMENT OF OPERATIONS DATA: Sales and other operating revenue(1)....................... $2,358,318 $2,203,085 $4,549,031 $4,190,539 $3,887,027 $3,739,852 $3,456,134 Gross profit(2).................... 533,722 516,721 1,104,890 1,015,164 990,548 1,001,307 928,590 Earnings before interest expense... 91,299 83,108 180,819 157,184 135,383 147,098 111,327 Total interest expense............. 39,949 48,392 93,735 113,215 137,404 143,194 147,309 Earnings (loss) before extraordinary items.............. 42,620 32,966 78,331 41,413 (4,885) 977 (35,982) Net earnings (loss) for the period(3)........................ 41,599 32,966 47,808 (2,941) (4,123) 2,657 (35,982) Net earnings (loss) available to common shares(3)................. 41,599 32,966 47,808 (7,865) (14,938) (8,166) (46,848) Earnings (loss) before extraordinary items per common share(4)....................... $ 1.30 $ 1.02 $ 2.41 $ 1.24 $ (0.59) $ (0.38) $ (1.97) Net earnings (loss) per common share(3)(4).................... 1.27 1.02 1.47 (0.27) (0.56) (0.32) (1.97) Weighted average common shares outstanding...................... 32,855,056 32,235,137 32,431,719 29,392,805 26,573,902 25,677,103 23,793,496 OTHER OPERATING DATA: EBITDA(5).......................... $ 130,860 $ 120,401 $ 258,613 $ 242,844 $ 229,217 $ 248,677 $ 235,687 EBITDA Margin(6)................... 5.5% 5.5% 5.7% 5.8% 5.9% 6.6% 6.8% LIFO charge(7)..................... $ 5,992 $ 4,841 $ 10,750 $ 8,500 $ 15,000 $ 21,000 $ 23,000 Depreciation....................... 23,889 21,515 45,842 50,041 53,753 49,554 47,835 Amortization of intangibles and expenses related to Acquisition and other(8)................... 15,672 15,778 31,952 35,619 40,081 52,025 77,925 Capital expenditures............... 40,169 21,739 57,246 39,327 51,389 49,410 73,243 DRUG STORE DATA: Drug stores open at end of period........................... 1,666 1,714 1,735 1,718 1,696 1,675 1,673 Comparable drug store sales growth........................... 8.8% 8.0% 8.1% 6.1% 3.1% 5.7% 6.9% Average sales per drug store....... $ 1,383 $ 1,252 $ 2,561 $ 2,365 $ 2,222 $ 2,142 $ 2,036 Average sales per selling floor square foot...................... 182 159 325 302 283 272 258 Prescription sales as a percentage of drug store sales and other operating revenue................ 53.3% 50.5% 50.8% 48.3% 45.4% 44.0% 42.6% Prescription and over-the-counter sales as a percentage of drug store sales and other operating revenue........................ 63.7% 60.9% 61.1% 59.0% 55.9% 54.7% 52.8% Third-party prescription sales as a percentage of prescription sales.......................... 69.4% 63.2% 64.6% 58.0% 49.6% 43.1% 36.0%
TWENTY-SIX WEEKS ENDED FISCAL YEAR ENDED JULY 30, 1994 JAN. 28, 1995 ---------------------- ----------------- PRO FORMA STATEMENT OF OPERATIONS DATA:(9)(10) Total interest expense(11)................................................ $ 44,125 $ 86,987 Earnings before extraordinary items....................................... 34,375 80,395 Net earnings for the period............................................... 34,375 49,872 Net earnings available to common shares................................... 34,375 49,872 Earnings before extraordinary items per common share...................... 1.07 2.48 Net earnings per common share............................................. 1.07 1.54 Weighted average common shares outstanding................................ 32,235,137 32,431,719
AS OF JULY 29, 1995 ----------------------------- ACTUAL AS ADJUSTED(12) ---------- --------------- BALANCE SHEET DATA: Working capital..................................................................... $ 335,524 $ 353,484 Total assets........................................................................ 1,344,216 1,406,177 Long-term debt (including current installments)..................................... 790,558 776,237 Stockholders' equity (deficit)...................................................... (80,533) (3,225)
(Footnotes on following page) 6 (Footnotes for preceding page) - ------------ (1) Reflects reclassification of sales to employees in the twenty-six weeks ended July 30, 1994 to conform to fiscal 1995 financial statement presentation. Fiscal 1994, 1993, 1992, 1991 and 1990 have not been reclassified. (2) Gross profit represents sales and other operating revenue less cost of sales, including store occupancy, warehousing and delivery expense. (3) Reflects extraordinary item of $762 in fiscal 1992 and $1,680 in fiscal 1991 relating to the tax effect of utilization of net operating loss carryforwards and extraordinary loss net of taxes of $1,021 in the twenty-six weeks ended July 29, 1995 and $30,523 in fiscal 1994 relating to the early retirement of indebtedness and $44,354 in fiscal 1993 relating to the early retirement of indebtedness and preferred stock. (4) Reflects payment of preferred stock dividends of $4,924 in fiscal 1993, $10,815 in fiscal 1992, $10,823 in fiscal 1991 and $10,866 in fiscal 1990. (5) EBITDA means earnings before interest, taxes, depreciation, amortization of intangibles and expenses related to the Acquisition and other, and, for fiscal 1990, the reversal of the inventory valuation reserve established in fiscal 1986 in connection with the Acquisition. See "Management's Discussion and Analysis of Results of Operations and Financial Condition--General--Impact of Non-Cash and Non-Recurring Charges." The Company believes that EBITDA is an important measure of its operating results because of the significant amount of charges resulting from the Acquisition and other transactions which are non-cash and/or non-recurring. However, EBITDA should not be considered in isolation or as a substitute for net earnings and other statement of operations data prepared in accordance with generally accepted accounting principles as a measure of the Company's profitability or liquidity. (6) EBITDA Margin means EBITDA as a percentage of sales and other operating revenue. (7) LIFO charge for fiscal 1990 is before the reversal of the inventory valuation reserve established in fiscal 1986 in connection with the Acquisition. (8) Includes amortization of assets written up as a result of the Acquisition, including goodwill, and charges due to certain performance-related management compensation programs. (9) The pro forma statement of operations data reflect the Insta-Care Sale and the use of the net proceeds as if such transaction had occurred as of the beginning of the periods presented. See "The Company--The 1994 Transactions--The Insta-Care Sale" and "Pro Forma Financial Data." (10) For the fiscal year ended January 28, 1995, excludes $54,125 from sales and other operating revenue for the gain on the Insta-Care Sale, $4,655 from income taxes for the gain on the Insta-Care Sale and $48,988 from operating and administrative expenses for the charge for future store closings. (11) Pro forma interest expense was computed assuming a rate of 6 1/2% under the Credit Agreement. (12) The as adjusted balance sheet data reflect the use of the net proceeds of approximately $82.3 million from the August Offering (as defined under "The Company--The 1995 Transactions") which was completed on August 2, 1995. Such net proceeds, together with approximately $59.4 million of Revolving Loan (as defined) borrowings under the Credit Agreement (as defined under "Description of Certain Indebtedness--The Credit Agreement") were used to redeem all of the Company's 11 1/8% Subordinated Debentures due 2001 (the "11 1/8% Debentures") and to finance the Florida Acquisition (as defined under "The Company--The 1995 Transactions"). 7 RISK FACTORS Prior to making an investment decision, prospective purchasers of Common Stock should carefully consider all of the information contained in this Prospectus, and, in particular, should evaluate the following risk factors. SUBSTANTIAL INDEBTEDNESS As a result of the Acquisition, the related financing and refinancings thereof, the Company is highly leveraged. At July 29, 1995, the Company had long-term debt (including current maturities) of $790.6 million and a stockholders' deficit of $80.5 million. The Company may incur additional indebtedness in the future, including (i) unused and available borrowing commitments under the revolving credit facility portion of the Credit Agreement of $198.7 million on July 29, 1995 and (ii) up to an additional $150.0 million aggregate principal amount of debt securities (the "Debt Securities") which are registered pursuant to an effective shelf registration statement, subject in all cases to certain restrictions contained in the Credit Agreement, the Company's 9 1/4% Senior Subordinated Notes due 2004 (the "9 1/4% Notes") and the Company's other debt instruments. See "--Restrictions Imposed by Terms of the Company's Indebtedness." As of October 28, 1995, the Company had borrowed an additional $99.0 million of Revolving Loan borrowings under the Credit Agreement. The ability of the Company to make cash payments to satisfy its substantial indebtedness will depend upon its future operating performance, which is subject to prevailing economic conditions, and to financial, business and other factors beyond the Company's control. Based upon the Company's ability to generate cash flow from operating activities, the available unused portion of the working capital revolving 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. However, there can be no assurance that the Company will be able to do so. If the Company is unable to generate sufficient earnings and cash flow to meet its obligations with respect to its outstanding indebtedness, refinancing of certain of these debt obligations or asset dispositions might be required. In the event debt refinancing is required, there can be no assurance that the Company can effect such refinancing on satisfactory terms or that the refinancing will be permitted by the lenders under the Credit Agreement, by the terms of the 9 1/4% Notes or by the other creditors of the Company. In addition, asset dispositions may be made under circumstances which might not be favorable to realizing the best price for such assets. Moreover, there can be no assurance that assets can be sold promptly enough, or for amounts sufficient to satisfy outstanding debt obligations. The Credit Agreement and the 9 1/4% Notes contain certain restrictions on the Company's ability to sell assets and on the use of proceeds from permitted asset sales. For information regarding restrictions on debt refinancing and asset dispositions, see "Description of Certain Indebtedness." While certain transactions consummated in fiscal 1993 and 1994, such as the IPO (as defined), the issuance of the 9 1/4% Notes and amendments to the Credit Agreement, and certain transactions consummated in fiscal 1995, such as the August Offering, have improved the Company's financial flexibility, and while a proposed amendment to the Credit Agreement (the "1995 Credit Agreement Amendment"), if completed, will further improve the Company's financial flexibility, the substantial interest and principal payment requirements on borrowings under the Credit Agreement, the 9 1/4% Notes and the Company's other indebtedness could have important consequences to holders of Common Stock. See "Description of Certain Indebtedness--The Credit Agreement." Such consequences include (i) limiting the Company's ability to effect future financings and otherwise restricting corporate activities, including the Company's ability to respond to market conditions, to provide for capital expenditures or to take advantage of acquisition opportunities and (ii) reducing the funds available to the Company for its operations. The Credit Agreement, the 9 1/4% Notes and certain other financing agreements impose other operating and financial restrictions on the Company, the failure to comply 8 with which may result in an event of default which, if not cured or waived, would have a material adverse effect on the Company. See "--Restrictions Imposed by Terms of the Company's Indebtedness." All of the Company's indebtedness under the Credit Agreement is at variable rates of interest, causing the Company to be sensitive to prevailing interest rates. As required by the Credit Agreement, the Company has entered into certain interest rate protection agreements with respect to $200.0 million of its floating rate exposure. Such interest rate protection agreements will remain in full force and effect through August 1996. At October 28, 1995, the Company had $573.2 million of borrowings under the Credit Agreement which are at variable rates of interest. To the extent interest rates rise, the Company's ability to pay principal and interest on borrowings under the Credit Agreement and its other indebtedness could be adversely affected. See "Description of Certain Indebtedness--The Credit Agreement." RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS The terms and conditions of the Credit Agreement and the 9 1/4% Notes Indenture (as defined herein) impose restrictions that affect, among other things, the ability of the Company and its subsidiaries to incur debt, pay dividends, make acquisitions, create liens and make capital expenditures. See "Description of Certain Indebtedness--The Credit Agreement" and "Description of Certain Indebtedness--The 9 1/4% Notes." The Credit Agreement also requires the Company to satisfy certain financial covenants on a quarterly basis. The ability of the Company to comply with such financial covenants can be affected by events beyond the Company's control, and there can be no assurance that the Company will achieve operating results that will comply with such covenants. A breach of any of these covenants could result in a default under the Credit Agreement, the 9 1/4% Notes Indenture and other indebtedness of the Company. In the event of any such default, the lenders under the Credit Agreement could elect to declare all amounts borrowed thereunder, together with accrued interest, to be due and payable. If the Credit Agreement indebtedness or the 9 1/4% Notes were to be accelerated, there can be no assurance that the assets of the Company would be sufficient to repay in full such Credit Agreement indebtedness and the other indebtedness of the Company. See "Description of Certain Indebtedness--The Credit Agreement." COMPETITION The Company operates in highly competitive industries. In addition to traditional competition from independent drug stores and other drug store chains, Eckerd Drug stores face competition from mass merchants (including discounters and deep discounters), supermarkets, combination food and drug stores, mail order distributors, hospitals and HMOs and other managed care providers. These other formats have experienced significant growth in their market share of the prescription and over-the-counter drug business. Many of these competitors have greater financial resources than the Company. The Company competes with these competitors primarily on the basis of customer service, convenience and price. See "Business--Business Strategy--Competitive Pricing" and "Business--Business Strategy--Competition." PRESCRIPTION DRUG SALES AND FUTURE REGULATION The Company relies on prescription drug sales for a significant portion of its revenues and profits, and prescription drug sales represent a growing segment of the Company's business. Prescription drug sales accounted for approximately 53.3%, 50.8%, 48.3%, 45.4%, 44.0% and 42.6% of the Company's drug store sales and other operating revenue for the first half of fiscal 1995, fiscal 1994, fiscal 1993, fiscal 1992, fiscal 1991 and fiscal 1990, respectively. These revenues are affected by changes within the health care industry, including changes in programs providing for reimbursement of the cost of prescription drugs by third-party payors, such as government and private sources, and regulatory 9 changes relating to the approval process for prescription drugs. In recent years, an increasing number of legislative proposals have been introduced or proposed in Congress and in some state legislatures that would effect major changes in the health care system, either nationally or at the state level. The Company cannot predict whether any federal or state health care reform legislation will eventually be passed, and if so, the impact thereof on the Company's financial position or results of operations. 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. However, to the extent health care reform expands the number of persons receiving health care benefits covering the purchase of prescription drugs, it may 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 future federal or state health care reform legislation will not adversely affect the Company or the retail drug store industry generally. See "Business--Regulation." SALES TO THIRD-PARTY PAYORS A growing percentage of the Company's prescription drug volume has been accounted for by sales to customers who are covered by third-party payment programs. Third-party prescription sales accounted for approximately 69.4%, 64.6%, 58.0%, 49.6%, 43.1% and 36.0% of the Company's prescription sales in the first half of fiscal 1995, fiscal 1994, fiscal 1993, fiscal 1992, fiscal 1991 and fiscal 1990, respectively. Prescription sales to third-party payors, in terms of both dollar volume and as a percentage of total prescription sales, continued to increase in the first half of fiscal 1995 and the Company expects this trend to continue. Although contracts with third-party payors may increase the volume of prescription sales and gross profits, third-party payors typically negotiate lower prescription prices than those on non third-party prescriptions. Accordingly, there has been downward pressure on gross profit margins on sales of prescription drugs which is expected to continue in future periods. See "Management's Discussion and Analysis of Results of Operations and Financial Condition" and "Business--The Drug Store Industry." PRINCIPAL STOCKHOLDERS Upon completion of the Offering, the Merrill Lynch Investors (as defined under "The Company-- General") will own approximately 15.80% of the outstanding shares of Common Stock (approximately 14.72% if the over-allotment option is exercised in full) and the Management Investors (as defined under "The Company--General") will own approximately 3.27% of the outstanding shares of Common Stock. As a result of such stock ownership, if the Merrill Lynch Investors and the Management Investors were to vote together, they will be able to influence significantly the election of the Board of Directors of the Company and the vote on all other matters requiring stockholder approval. The Merrill Lynch Investors are affiliates of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"). In addition, certain provisions of the Company's Certificate of Incorporation and By-laws could make more difficult non-negotiated acquisitions of the Company. These provisions include a staggered board of directors, limitation on actions by written consent of stockholders and advance notice procedures for nominations of directors and other stockholder proposals. See "Principal and Selling Stockholders" and "Description of Capital Stock--Certificate of Incorporation and By-laws." SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, approximately 34,950,857 shares of Common Stock will be outstanding. All of the 2,500,000 shares of Common Stock being sold in the Offering, together with approximately 22,424,938 shares currently outstanding, will be freely transferable without restriction under the Securities Act unless held by an affiliate of the Company. The remaining outstanding shares of Common Stock held by existing stockholders are "restricted securities" of the Company within the 10 meaning of Rule 144 under the Securities Act and may not be sold unless they are registered under the Securities Act or sold pursuant to an exemption from registration thereunder, including the exemption contained in Rule 144, which contains certain volume and other resale limitations. Pursuant to Rule 144(k), however, a person (or persons whose shares are aggregated) who is not deemed to have been an affiliate of the Company at the time of sale and has not been an affiliate during the three months immediately preceding the sale may sell such shares without regard to such volume and other resale limitations of Rule 144 provided that a period of at least three years has elapsed since the later of the date the securities were acquired from the issuer or from an affiliate of the issuer. The Merrill Lynch Investors, the Management Investors and the other existing stockholders of the Company were granted rights entitling them, under specified circumstances, to cause the Company to register for sale all or part of their shares of Common Stock and to include such shares in any registered public offerings of Common Stock by the Company. The Company has included the shares of Common Stock to be sold by the Selling Stockholders in the Offering pursuant to the exercise by such Selling Stockholders of their demand registration rights under the Registration Rights Agreement (as defined). See "Description of Capital Stock--Registration Rights." Pursuant to the Registration Rights Agreement, each holder of at least 1% of the outstanding shares of Common Stock who is a party thereto (the "1% Holders") has agreed for a period beginning seven days before, and ending 120 days after, the effective date of the Registration Statement of which this Prospectus is a part, not to effect any public sale or distribution, including any sale pursuant to Rule 144 under the Securities Act, of Common Stock or any securities convertible into or exchangeable or exercisable for Common Stock, or any rights or warrants to acquire Common Stock, subject to certain exceptions, without the prior written consent of the Representatives (as defined herein) of the Underwriters. Approximately 23.22% of the shares of Common Stock outstanding upon consummation of the Offering will be subject to such lock-up agreement. In addition, it is anticipated that certain of the Merrill Lynch Investors that are limited partnerships will be distributing shares of Common Stock owned by them to their partners that have elected not to receive their pro rata share of the proceeds of the sale of Common Stock by such partnerships (the "Merrill Lynch Distribution"). The Merrill Lynch Investors do not expect that the number of shares to be so distributed will exceed 400,000. As a condition to receiving shares of Common Stock in the Merrill Lynch Distribution, such partners have agreed to be bound by the same lock-up provision as the 1% Holders for a period of 120 days after the effective date of the Registration Statement. The Merrill Lynch Distribution is expected to occur as soon as practicable after 120 days from the effective date of the Registration Statement, or on such earlier date consented to by the Representatives of the Underwriters. In addition, each of the Company and the executive officers and directors of the Company will agree, for a period of 90 days after the effective date of the Registration Statement, not to sell or otherwise dispose of any shares of Common Stock or securities convertible into or exchangeable or exercisable for Common Stock, or any rights or warrants to acquire Common Stock, subject to certain exceptions, without the prior written consent of the Representatives of the Underwriters. No prediction can be made as to the effect, if any, that future sales of Common Stock or the availability of Common Stock for future sale will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock (including shares issued upon exercise of employee stock options) in the public market, or the perception that such sales could occur, could adversely affect prevailing market prices of the Common Stock. 11 CAPITALIZATION The following table sets forth the capitalization of the Company as of July 29, 1995 and as adjusted to give effect to the issuance of 2,675,000 shares of Common Stock by the Company in the August Offering and the use of the net proceeds therefrom. The table should be read in conjunction with "Pro Forma Financial Data" and the Company's consolidated financial statements incorporated by reference herein. The Company will not receive any of the proceeds from the sale of the shares of Common Stock in the Offering.
JULY 29, 1995 --------------------------- ACTUAL AS ADJUSTED(1) --------- -------------- (DOLLARS IN THOUSANDS) Total long-term indebtedness (including current installments): Credit Agreement Term Loans................................................... $ 415,280 $415,280 Revolving Loans and Bankers' Acceptances..................... 59,000 118,423 9 1/4% Notes..................................................... 200,000 200,000 11 1/8% Debentures ($78,860 principal amount).................... 73,744 -- Variable rate demand industrial revenue bonds.................... 18,250 18,250 Other (principally notes secured by fixtures and equipment)...... 24,284 24,284 --------- -------------- Total long-term indebtedness (including current installments)............................................ 790,558 776,237 Stockholders' equity (deficit): Common stock................................................... 322 349 Capital in excess of par value................................. 234,636 316,931 Retained deficit............................................... (315,491) (320,505)(2) --------- -------------- Total common stockholders' equity (deficit)................ (80,533) (3,225) --------- -------------- Total capitalization............................................. $ 710,025 $773,012 --------- -------------- --------- --------------
- ------------ (1) Reflects the use of the net proceeds of approximately $82,322 from the August Offering and additional Revolving Loan borrowings of approximately $59,423 to redeem all of the 11 1/8% Debentures on September 5, 1995 and to finance the Florida Acquisition. The Company will not receive any of the proceeds from the sale of the shares of Common Stock in the Offering. (2) Reflects the write-off of original issue discount and deferred debt expense of $6,040 ($5,014 on an after-tax basis) related to the redemption on September 5, 1995 of the 11 1/8% Debentures. 12 PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY The Common Stock is traded on the New York Stock Exchange ("NYSE") under the symbol "ECK." The following table sets forth on a per share basis, for the periods indicated, the high and low sales prices of the Common Stock as reported on the NYSE Composite Tape. The Common Stock was not publicly traded, and no dividends were paid on the Common Stock, prior to the IPO on August 5, 1993.
PRICE RANGE ----------------- HIGH LOW --------------- ------------- FISCAL 1993: Third Quarter (from August 6, 1993)...................................... $18 $12 3/4 Fourth Quarter........................................................... 20 3/4 13 3/4 FISCAL 1994: First Quarter............................................................ $24 $18 1/2 Second Quarter........................................................... 25 1/4 18 1/8 Third Quarter............................................................ 31 1/2 23 1/4 Fourth Quarter........................................................... 32 25 3/8 FISCAL 1995: First Quarter............................................................ $30 1/4 $24 1/2 Second Quarter........................................................... 34 5/8 28 3/8 Third Quarter............................................................ 42 32 5/8 Fourth Quarter (through November 16, 1995)............................... 44 1/2 38 1/8
On November 16, 1995, the last sale price as reported on the NYSE was $43.625 per share. The Company has never paid dividends on its Common Stock and does not intend to pay dividends in the foreseeable future. The payment of dividends by the Company is subject to restrictions under certain of its financing agreements, including the Credit Agreement and the 9 1/4% Notes. See "Description of Certain Indebtedness." Any determination to pay cash dividends in the future will be at the discretion of the Company's Board of Directors and will be dependent upon the Company's results of operations, financial condition, contractual restrictions and other factors deemed relevant at that time by the Company's Board of Directors. 13 THE COMPANY GENERAL Merrill Lynch Capital Partners, Inc. ("Merrill Lynch Capital Partners") formed the Company for the purpose of acquiring Old Eckerd in April 1986. Prior to the Acquisition, the Company had no activities other than those connected to 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 certain drug stores which were operated by the Company 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. The stockholders of the Company include (i) certain partnerships affiliated with Merrill Lynch Capital Partners, (ii) certain other affiliates of Merrill Lynch & Co., Inc. ("ML & Co.") ((i) and (ii), collectively, the "Merrill Lynch Investors" or the "Selling Stockholders"), (iii) approximately 25 members of current and former 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. As of October 28, 1995, the Merrill Lynch Investors owned approximately 8,020,634 shares, or 22.95%, of the Common Stock, and the Management Investors owned approximately 1,168,505 shares, or 3.27%, of the Common Stock. Upon completion of the Offering, the Merrill Lynch Investors will own approximately 15.80% of the outstanding shares of Common Stock (approximately 14.72% if the over-allotment option is exercised in full). The Management Investors are not selling any shares of Common Stock in the Offering. See "Principal and Selling Stockholders." THE 1993 TRANSACTIONS The Refinancing On June 15, 1993, the Company consummated a series of transactions designed to simplify its capital structure, reduce interest expense and dividend costs and provide additional financial flexibility. The Company entered into the Old Credit Agreement (as defined), which provided for (a) a $650.0 million term loan facility 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 was available as a swingline loan facility and as a letter of credit and bankers' acceptance facility). 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, the Company, EDS and EH II amended the EH II Management Agreement to provide for the payment by EH II to the Company 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 Old 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 14 Morgan Guaranty Trust Company of New York and the other lenders party thereto (the "1990 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 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 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 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 at a redemption price of 106.6% of the principal amount thereof, (vi) the Company's Discount Subordinated Debentures due May 1, 2006 (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 issuance of the 9 1/4% Notes) and (vii) the Company's 14 1/2% Cumulative Redeemable Preferred Stock (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 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, (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." The Company used approximately $30.0 million of the net proceeds of the IPO to repay all borrowings outstanding under the EH II Credit Agreement and the balance to repay borrowings under the Old Credit Agreement consisting of Tranche A Term Loans of $27.5 million and Tranche B Term Loans of $8.3 million. The 9 1/4% Note Issuance On November 2, 1993, the Company consummated the sale (the "9 1/4% Note Issuance") of $200.0 million aggregate principal amount of the 9 1/4% Notes. The net proceeds from the 9 1/4% 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% Debentures. The Refinancing, the IPO and the 9 1/4% Note Issuance are collectively referred to herein as the "1993 Transactions." THE 1994 TRANSACTIONS The Vision Group Sale Effective January 30, 1994, the Company sold its operations of Eckerd Optical centers and "Visionworks" retail optical superstores (the "Vision Group Sale"). The Company sold the Vision Group for an amount in cash and notes approximately equal to the book value of the related assets and no gain or loss was recognized by the Company. The net proceeds from the Vision Group Sale were used to reduce outstanding indebtedness under the Credit Agreement. 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, taxes and extraordinary items. 15 The Amendment On August 3, 1994, the Company completed an amendment (the "Amendment") to its then existing credit agreement (the "Old Credit Agreement" and, as amended and restated pursuant to the Amendment, the "Credit Agreement"). The Amendment did not provide any additional proceeds to the Company, but it did provide improved pricing and increased operating flexibility with respect to acquisitions, capital expenditures and lease payments, with future reductions in rates if the Company achieves certain indebtedness levels and performance goals. The Insta-Care Sale On November 15, 1994, the Company consummated the sale of Insta-Care Holdings, Inc. ("Insta-Care") to Pharmacy Corporation of America, a subsidiary of Beverly Enterprises, Inc., for a total consideration of $112.0 million in cash (the "Insta-Care Sale"). Insta-Care provided prescription drugs as well as patient record and consulting services to long-term health care facilities in New England and the Sunbelt. The net proceeds from the Insta-Care Sale, after certain closing adjustments, were approximately $93.3 million. Such net proceeds were used to redeem $50.0 million aggregate principal amount of 11 1/8% Debentures in December 1994 and to repay approximately $43.3 million of Revolving Loan borrowings under the Credit Agreement in November 1994. In fiscal 1994, sales of Insta-Care were approximately $89.0 million and earnings before interest and income taxes were approximately $3.0 million, accounting for approximately 2.0% of the Company's sales and 1.6% of the Company's earnings before interest, taxes and extraordinary items. The Company recognized a gain on the Insta-Care Sale of $49.5 million, net of income taxes of $4.6 million. The Vision Group Sale, the Amendment and the Insta-Care Sale are collectively referred to herein as the "1994 Transactions." THE 1995 TRANSACTIONS The August Offering and Florida Acquisition On August 2, 1995, the Company consummated a public offering of 6,175,500 shares of Common Stock in the aggregate at a public offering price of $32.25 per share (the "August Offering"). Of the shares offered, 2,675,000 shares were sold by the Company and 3,500,500 shares were sold by the Merrill Lynch Investors. The Company used the net proceeds of the August Offering, approximately $82.3 million, and approximately $59.4 million of Revolving Loan borrowings under the Credit Agreement (i) to redeem all of the outstanding 11 1/8% Debentures at a redemption price of 100% of the $78.86 million principal amount thereof and (ii) to finance the acquisition (the "Florida Acquisition") of the assets of 108 drug stores in Florida that were formerly owned and operated by Rite Aid of Florida, Inc. ("Rite Aid"). Pursuant to the Florida Acquisition, the Company acquired 40 Rite Aid leased locations, which are currently being operated as Eckerd Drug stores and the fixtures, inventory and prescription files of an additional 68 Rite Aid locations. The 1995 Credit Agreement Amendment In addition, the Company is currently negotiating an amendment to the Credit Agreement (the "1995 Credit Agreement Amendment") which will, among other things, decrease the interest rate payable by the Company on borrowings. The Company expects that the closing of the 1995 Credit Agreement Amendment will occur by the end of November 1995. For a description of the proposed terms of the 1995 Credit Agreement Amendment, see "Description of Certain Indebtedness--The Credit Agreement--Terms and Conditions of the Proposed Amendment and Restatement of the Credit Agreement." 16 SELECTED HISTORICAL FINANCIAL DATA The following selected historical financial data for the years and periods presented below have been derived from the Company's consolidated financial statements. The selected historical financial data for the three fiscal years ended January 28, 1995, January 29, 1994 and January 30, 1993 have been derived from, and should be read in conjunction with, the Company's audited consolidated financial statements and related notes contained in the Annual Report incorporated by reference herein. The historical financial data for the twenty-six week periods ended July 29, 1995 and July 30, 1994 have been derived from, and should be read in conjunction with, the unaudited consolidated financial statements of the Company contained in the 10-Q incorporated by reference herein which, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the interim period financial data. The results for the twenty-six week period ended July 29, 1995 are not necessarily indicative of the results to be expected for the full year. All information contained in the following tables should be read in conjunction with "Management's Discussion and Analysis of Results of Operations and Financial Condition" and the consolidated financial statements of the Company and related notes incorporated by reference herein.
TWENTY-SIX WEEKS ENDED FISCAL YEAR ENDED ----------------------- -------------------------------------------------------------- JULY 29, JULY 30, JAN. 28, JAN. 29, JAN. 30, FEB. 1, FEB. 2, 1995 1994 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Sales and other operating revenue(1)........................ $2,358,318 $2,203,085 $4,549,031 $4,190,539 $3,887,027 $3,739,852 $3,456,134 Cost of sales, including store occupancy, warehousing and delivery expense................ 1,824,596 1,686,364 3,444,141 3,175,375 2,896,479 2,738,545 2,527,544 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Gross profit(2)..................... 533,722 516,721 1,104,890 1,015,164 990,548 1,001,307 928,590 Operating and administrative expense........................... 442,423 433,613 924,071 857,980 855,165 854,209 817,263 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Earnings before interest expense.... 91,299 83,108 180,819 157,184 135,383 147,098 111,327 Total interest expense.............. 39,949 48,392 93,735 113,215 137,404 143,194 147,309 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Earnings (loss) before income taxes and extraordinary items........... 51,350 34,716 87,084 43,969 (2,021) 3,904 (35,982) Income tax provision................ 8,730 1,750 8,753 2,556 2,864 2,927 -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Earnings (loss) before extraordinary items............................. 42,620 32,966 78,331 41,413 (4,885) 977 (35,982) Extraordinary item--early retirement of debt and preferred stock, net of tax benefit.................... (1,021) -- (30,523) (44,354) -- -- -- Extraordinary item--tax effect of utilization of net operating loss carryforward...................... -- -- -- -- 762 1,680 -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net earnings (loss) for the period(3)......................... $ 41,599 $ 32,966 $ 47,808 $ (2,941) $ (4,123) $ 2,657 $ (35,982) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net earnings (loss) available to common shares(3).................. $ 41,599 $ 32,966 $ 47,808 $ (7,865) $ (14,938) $ (8,166) $ (46,848) Earnings (loss) before extraordinary items per common share(4)......... $ 1.30 $ 1.02 $ 2.41 $ 1.24 $ (0.59) $ (0.38) $ (1.97) Net earnings (loss) per common share(3)(4)....................... 1.27 1.02 1.47 (0.27) (0.56) (0.32) (1.97) Weighted average common shares outstanding....................... 32,855,056 32,235,137 32,431,719 29,392,805 26,573,902 25,677,103 23,793,496 OTHER OPERATING DATA: EBITDA(5)........................... $ 130,860 $ 120,401 $ 258,613 $ 242,844 $ 229,217 $ 248,677 $ 235,687 EBITDA Margin(6).................... 5.5% 5.5% 5.7% 5.8% 5.9% 6.6% 6.8% LIFO charge(7)...................... $ 5,992 $ 4,841 $ 10,750 $ 8,500 $ 15,000 $ 21,000 $ 23,000 Depreciation........................ 23,889 21,515 45,842 50,041 53,753 49,554 47,835 Amortization of intangibles and expenses related to Acquisition and other(8)...................... 15,672 15,778 31,952 35,619 40,081 52,025 77,925 Capital expenditures................ 40,169 21,739 57,246 39,327 51,389 49,410 73,243
17
TWENTY-SIX WEEKS ENDED FISCAL YEAR ENDED ----------------------- -------------------------------------------------------------- JULY 29, JULY 30, JAN. 28, JAN. 29, JAN. 30, FEB. 1, FEB. 2, 1995 1994 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) DRUG STORE DATA: Drug Stores open at end of period... 1,666 1,714 1,735 1,718 1,696 1,675 1,673 Comparable drug store sales growth............................ 8.8% 8.0% 8.1% 6.1% 3.1% 5.7% 6.9% Average sales per drug store........ $ 1,383 $ 1,252 $ 2,561 $ 2,365 $ 2,222 $ 2,142 $ 2,036 Average sales per selling floor square foot....................... 182 159 325 302 283 272 258 Prescription sales as a percentage of drug store sales and other operating revenue................. 53.3% 50.5% 50.8% 48.3% 45.4% 44.0% 42.6% Prescription and over-the-counter sales as a percentage of drug store sales and other operating revenue........................... 63.7% 60.9% 61.1% 59.0% 55.9% 54.7% 52.8% Third-party prescription sales as a percentage of prescription sales............................. 69.4% 63.2% 64.6% 58.0% 49.6% 43.1% 36.0%
AS OF ------------------------------------------------------------------------------------------ JULY 29, 1995 --------------------------- ACTUAL AS ADJUSTED(9) JAN. 28, 1995 JAN. 29, 1994 JAN. 30, 1993 FEB.1, 1992 ---------- -------------- ------------- ------------- ------------- ------------ BALANCE SHEET DATA: Working capital................. $ 335,524 $ 353,484 $ 280,289 $ 306,588 $ 367,027 $ 328,617 Total assets.................... 1,344,216 1,406,177 1,342,347 1,420,137 1,418,922 1,412,249 Long-term debt (including current installments)......... 790,558 776,237 787,013 954,891 1,048,222 1,023,106 Preferred stock................. -- -- -- -- 75,000 75,000 Stockholders' equity (deficit)..................... (80,533) (3,225) (122,742) (179,022) (243,291) (228,353) FEB. 2, 1991 ------------ BALANCE SHEET DATA: Working capital................. $ 347,775 Total assets.................... 1,443,167 Long-term debt (including current installments)......... 1,084,088 Preferred stock................. 75,000 Stockholders' equity (deficit)..................... (220,187)
- ------------ (1) Reflects reclassification of sales to employees in the twenty-six weeks ended July 30, 1994 to conform to fiscal 1995 financial statement presentation. Fiscal 1994, 1993, 1992, 1991 and 1990 have not been reclassified. (2) Gross profit represents sales and other operating revenue less cost of sales, including store occupancy, warehousing and delivery expense. (3) Reflects extraordinary item of $762 in fiscal 1992 and $1,680 in fiscal 1991 relating to the tax effect of utilization of net operating loss carryforwards and extraordinary loss net of taxes of $1,021 in the twenty-six weeks ended July 29, 1995 and $30,523 in fiscal 1994 relating to the early retirement of indebtedness and $44,354 in fiscal 1993 relating to the early retirement of indebtedness and preferred stock. (4) Reflects payment of preferred stock dividends of $4,924 in fiscal 1993, $10,815 in fiscal 1992, $10,823 in fiscal 1991 and $10,866 in fiscal 1990. (5) EBITDA means earnings before interest, taxes, depreciation, amortization of intangibles and expenses related to the Acquisition and other, and, for fiscal 1990, the reversal of the inventory valuation reserve established in fiscal 1986 in connection with the Acquisition. See "Management's Discussion and Analysis of Results of Operations and Financial Condition--General--Impact of Non-Cash and Non-Recurring Charges." The Company believes that EBITDA is an important measure of its operating results because of the significant amount of charges resulting from the Acquisition and other transactions which are non-cash and/or non-recurring. However, EBITDA should not be considered in isolation or as a substitute for net earnings and other statement of operations data prepared in accordance with generally accepted accounting principles as a measure of the Company's profitability or liquidity. (6) EBITDA Margin means EBITDA as a percentage of sales and other operating revenue. (7) LIFO charge for fiscal 1990 is before the reversal of the inventory valuation reserve established in fiscal 1986 in connection with the Acquisition. (8) Includes amortization of assets written up as a result of the Acquisition, including goodwill, and charges due to certain performance-related management compensation programs. (9) The as adjusted balance sheet data reflect the use of the net proceeds of approximately $82.3 million from the August Offering, which was completed on August 2, 1995. Such net proceeds, together with approximately $59.4 million of Revolving Loan borrowings under the Credit Agreement, were used to redeem all of the 11 1/8% Debentures and to finance the Florida Acquisition. 18 PRO FORMA FINANCIAL DATA The following unaudited pro forma financial data of the Company are based on the historical consolidated financial statements of the Company contained in the Annual Report and 10-Q incorporated by reference herein, adjusted to give effect to the Insta-Care Sale and the use of the net proceeds therefrom. The unaudited pro forma statement of operations data for the fiscal year ended January 28, 1995 and the twenty-six weeks ended July 29, 1995 give effect to the Insta-Care Sale and the use of the net proceeds therefrom as if such transactions had occurred as of the beginning of the periods presented and for the fiscal year ended January 28, 1995 also reflect the reversal of the gain on the Insta-Care Sale and the charge for future store closings. The adjustments relating to the Insta-Care Sale and the future store closings are described in the accompanying footnotes. 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 do not purport to represent what the Company's results of operations would actually have been if the Insta-Care Sale 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 incorporated by reference herein.
TWENTY-SIX WEEKS ENDED TWENTY-SIX WEEKS ENDED FISCAL YEAR ENDED JANUARY JULY 29, 1995 JULY 30, 1994 28, 1995 -------------- ------------------------------------------- --------------------------- ACTUAL ACTUAL ADJUSTMENTS PRO FORMA ACTUAL ADJUSTMENTS -------------- ---------- ----------- ---------- ---------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Sales and other operating revenue...... $2,358,318 $2,203,085(1) $ (55,711)(2) $2,147,374 $4,549,031(1) $ (88,663)(2) (54,125)(3) -------------- ---------- ----------- ---------- ---------- ----------- Costs and expenses: Cost of sales, including store occupancy, warehousing and delivery expense.......... 1,824,596 1,686,364 (37,305)(2) 1,649,059 3,444,141 (58,766)(2) Operating and administrative expenses............ 442,423 433,613 (15,608)(2) 418,005 924,071 (25,830)(2) (48,988)(4) -------------- ---------- ----------- ---------- ---------- ----------- Earnings before interest expense................ 91,299 83,108 (2,798) 80,310 180,819 (9,204) Interest expense: Interest expense, net................... 38,881 45,001 (4,049)(5) 40,952 87,838 (6,347)(5) Amortization of original issue discount and deferred debt expense......... 1,068 3,391 (218)(6) 3,173 5,897 (401)(6) -------------- ---------- ----------- ---------- ---------- ----------- Total interest expense............... 39,949 48,392 (4,267) 44,125 93,735 (6,748) -------------- ---------- ----------- ---------- ---------- ----------- Earnings (loss) before income taxes and extraordinary item..... 51,350 34,716 1,469 36,185 87,084 (2,456) Income tax provision..... 8,730 1,750 60 1,810 8,753 135 (4,655)(7) -------------- ---------- ----------- ---------- ---------- ----------- Earnings (loss) before extraordinary item...... 42,620 32,966 1,409 34,375 78,331 2,064 Extraordinary item--early retirement of debt and preferred stock........ (1,021) -- -- -- (30,523) -- -------------- ---------- ----------- ---------- ---------- ----------- Net earnings (loss) for the period............. $ 41,599 $ 32,966 $ 1,409 $ 34,375 $ 47,808 $ 2,064 -------------- ---------- ----------- ---------- ---------- ----------- -------------- ---------- ----------- ---------- ---------- ----------- Net earnings (loss) available to common shares................. $ 41,599 $ 32,966 -- $ 34,375 $ 47,808 -- Earnings (loss) before extraordinary items per common share........... 1.30 1.02 -- 1.07 2.41 -- Net earnings (loss) per common share........... 1.27 1.02 -- 1.07 1.47 -- Weighted average common shares outstanding..... 32,855 32,235 -- 32,235 32,432 -- PRO FORMA ---------- STATEMENT OF OPERATIONS DATA: Sales and other operating revenue...... $4,406,243 ---------- Costs and expenses: Cost of sales, including store occupancy, warehousing and delivery expense.......... 3,385,375 Operating and administrative expenses.................. 849,253 ---------- Earnings before interest expense................ 171,615 Interest expense: Interest expense, net.................. 81,491 Amortization of original issue discount and deferred debt expense......... 5,496 ---------- Total interest expense.............. 86,987 ---------- Earnings (loss) before income taxes and extraordinary item..... 84,628 Income tax provision..... 4,233 ---------- Earnings (loss) before extraordinary item...... 80,395 Extraordinary item--early retirement of debt and preferred stock...... (30,523) ---------- Net earnings (loss) for the period............. $ 49,872 ---------- ---------- Net earnings (loss) available to common shares............... $ 49,872 Earnings (loss) before extraordinary items per common share.............. 2.48 Net earnings (loss) per common share........... 1.54 Weighted average common shares outstanding..... 32,432
(Footnotes on following page) 19 (Footnotes for preceding page) ------------ (1) Reflects an additional $18,355 for the twenty-six weeks ended July 30, 1994 in connection with the reclassification of sales to employees to conform to fiscal 1995 financial statement presentation. Fiscal 1994 has not been reclassified. (2) Reflects exclusion of Insta-Care operations. (3) Reflects reversal of $54,125 gain on the Insta-Care Sale. (4) Reflects reversal of $48,988 charge for future store closings. See "Management's Discussion and Analysis of Results of Operations and Financial Condition." (5) Reflects the redemption of $50,000 aggregate principal amount of 11 1/8% Debentures and repayment of Revolving Loan borrowings under the Credit Agreement of $43,300 from the net proceeds from the Insta-Care Sale, net of income taxes of $4,655 paid from the gain on the Insta-Care Sale and the corresponding reduction in interest expense. (6) Reflects the reversal of original issue discount and deferred debt expenses related to the redemption of $50,000 of 11 1/8% Debentures. (7) Reflects reversal of $4,655 of income taxes related to the gain on the Insta-Care Sale. 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION GENERAL The Company's primary source of revenues is the operation of Eckerd Drug stores, including Eckerd Express Photo centers. Until they were sold effective January 30, 1994 and November 15, 1994, respectively, the Company also derived revenues from the operations of Vision Group and Insta-Care, which together represented approximately 4.0% of the Company's sales and other operating revenue in fiscal 1993. See "The Company--The 1994 Transactions." The following discussion is based upon the Company's consolidated financial statements. Impact of Non-Cash and Non-Recurring Charges As a result of the Acquisition, the Company incurred a significant amount of charges which are non-cash and/or non-recurring. Therefore, the Company believes that earnings before interest and taxes after adding back such non-cash and non-recurring Acquisition related charges (together with other non-cash charges unrelated to the Acquisition) is an important measure of its operating results. The following table sets forth the Company's operating results excluding such non-cash and non-recurring charges.
TWENTY-SIX WEEKS ENDED FISCAL YEAR ENDED ------------------- ---------------------------------------------------- JULY 29, JULY 30, JAN. 28, JAN. 29, JAN. 30, FEB. 1, FEB. 2, 1995 1994 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS) Earnings before interest, taxes and extraordinary items................... $ 91,299 $ 83,108 $180,819 $157,184 $135,383 $147,098 $111,327 Depreciation............................ 23,889 21,515 45,842 50,041 53,753 49,554 47,835 Amortization of asset write-ups, including goodwill.................... 15,672 15,778 31,952 35,055 38,593 46,255 56,800 Charges due to performance related programs.............................. -- -- -- -- 1,075 4,196 20,252 Reversal of inventory valuation reserve............................... -- -- -- -- -- -- (1,400) Other amortization...................... -- -- -- 564 413 1,574 873 -------- -------- -------- -------- -------- -------- -------- EBITDA.................................. $130,860 $120,401 $258,613 $242,844 $229,217 $248,677 $235,687 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Depreciation includes normal depreciation of the Company's plant and equipment over the useful lives of such assets. Other amortization includes the write-off of certain deferred pre-opening costs for the Company's Visionworks Stores, which were sold pursuant to the Vision Group Sale. The non-cash and non-recurring Acquisition related charges are discussed in more detail below. Amortization of Asset Write-ups, Including Goodwill. As a result of the Acquisition, the Company wrote up the carrying value of its assets by approximately $707.5 million as of April 30, 1986 in accordance with the purchase price method of accounting. The write-up was allocated to favorable lease interests ($504.3 million), prescription files ($107.0 million), inventories ($61.7 million) and the excess 21 of cost over net assets acquired, or goodwill ($34.5 million). Since April 30, 1986, these assets have been amortized or written off as follows: FISCAL YEAR AMOUNT - ----------- ------------- (IN MILLIONS) 1986............................................ $ 108.4 1987............................................ 143.1 1988............................................ 50.8 1989............................................ 46.1 1990............................................ 56.8 1991............................................ 46.3 1992............................................ 38.6 1993............................................ 35.1 1994............................................ 32.0 -------- $ 557.2 -------- -------- Most of such amortization is fully tax deductible. Amortization is expected to be approximately $34.0 million in fiscal 1995. Tax Net Operating Loss Carryforwards As of January 28, 1995, the Company estimates that it had NOL carryforwards of approximately $218.0 million for U.S. federal income tax purposes. These NOL carryforwards may be utilized to reduce the Company's federal income tax obligations in future periods and, if not so utilized, will expire in fiscal years 2002 to 2008. See the discussion of the Company's tax NOL carryforwards in "--Tax Net Operating Loss Carryforwards" below. In addition, the Company may be subject to the federal alternative minimum tax ("AMT"), which is equal to 20% of the Company's "alternative minimum taxable income" ("AMTI"), i.e., its regular taxable income adjusted for certain preference items. As the Company generally may utilize its NOL carryforwards (as adjusted for AMT purposes) to offset up to 90% of its AMTI, the Company generally will be subject to the AMT at an effective rate of approximately 2% of its AMTI. After the Company utilizes all of its NOL carryforwards, its effective tax rate will increase. Any AMT paid may be used as a credit against the Company's regular federal income tax liability in future taxable years. Cost Reduction Program In May 1992, the Company implemented a cost reduction program which, during the three fiscal years ended January 28, 1995, January 29, 1994 and January 30, 1993, has eliminated operating expenses of over $80.0 million. The Company continues to actively evaluate and pursue additional cost savings which can be obtained without affecting the Company's customer service, quality or sales growth potential. There can be no assurance, however, that any additional cost reductions will be realized. See "Business--Business Strategy--Cost Reduction Program." Competitive Pricing 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 position. Such program was implemented in all of the Company's markets by November 1992. Prescription sales to non third-party customers represented 35.4% of the Company's fiscal 1994 prescription sales and 30.6% in the first half of fiscal 1995. Although the program has resulted in lower gross margins, as expected, the Company believes that it has also had the intended effect of stimulating additional business. There can be no assurance, however, that additional sales increases will be realized from the competitive pricing program. 22 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. See "Business--Business Strategy--Competitive Pricing." Extraordinary Items and Non-Recurring Adjustments The Company's financial results for fiscal 1994 reflect extraordinary items in connection with the Amendment, as well as the early repayment of debt with a portion of the net proceeds from the Insta-Care Sale, of $28.0 million ($26.6 million on an after-tax basis) and $4.1 million ($3.9 million on an after-tax basis), respectively, which consisted of the write-off of deferred debt expenses and original issue discount ("OID"). In addition, the fiscal 1994 financial results also include non-recurring adjustments of $49.5 million (net of income taxes of $4.6 million) for the gain on the Insta-Care Sale and $49.0 million for the charge for future store closings. The Company's financial results for the first half of fiscal 1995 reflect an extraordinary item in connection with the early repayment of debt which reflects the write-off of OID and deferred debt expense of $1.31 million ($1.02 million on an after-tax basis) for the second quarter of fiscal 1995 related to the redemption on May 12, 1995 of 11 1/8% Debentures. For the third quarter of fiscal 1995, the Company's financial results will reflect an extraordinary item in connection with the early repayment of debt which reflects the write-off of OID and deferred debt expense of $5.96 million ($4.95 million on an after-tax basis) related to the redemption of the balance of the 11 1/8% Debentures with a portion of the net proceeds from the August Offering and the Revolving Loan borrowings. The Company also expects that the financial results for the fourth quarter of fiscal 1995 will reflect an extraordinary item in connection with the 1995 Credit Agreement Amendment of approximately $3.8 million. RESULTS OF OPERATIONS The following table sets forth certain condensed consolidated statements of operations data of the Company in dollars and as a percentage of sales and other operating revenue for the periods indicated. The data for the twenty-six weeks ended July 29, 1995 and for fiscal 1992 are presented on a historical basis, the data for the twenty-six weeks ended July 30, 1994 and for fiscal 1994 are presented on an adjusted basis and the data for fiscal 1993 are presented on both an adjusted basis and a historical basis. The data for the twenty-six weeks ended July 30, 1994 are adjusted to give pro forma effect to the Insta-Care Sale and the use of proceeds therefrom and reflect the reclassification of sales to employees to conform to fiscal 1995 financial statement presentation. The fiscal 1994 data are adjusted to exclude a pre-tax gain of $54.1 million (before income taxes of $4.6 million) from the Insta-Care Sale and also to exclude a reserve of $49.0 million for future store closings. The fiscal 1993 adjusted data exclude the operations of Vision Group for the full fiscal year because it was sold effective January 30, 1994, and exclude the operations of Insta-Care from November 16, 1993 through January 29, 1994 because it was sold effective November 15, 1994. 23
TWENTY-SIX WEEKS ENDED FISCAL YEAR ENDED ------------------------------------- --------------------------------------------------------- JULY 29, JULY 30, JANUARY 28, JANUARY 29, JANUARY 29, 1995 1994 1995 1994 1994 ----------------- ----------------- ----------------- ----------------- ----------------- HISTORICAL ADJUSTED ADJUSTED ADJUSTED HISTORICAL (DOLLARS IN THOUSANDS) $ % $ % $ % $ % $ % --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- Sales and other operating revenue..... 2,358,318 100.0 2,147,374 100.0 4,494,906 100.0 4,108,683 100.0 4,190,539 100.0 Cost of sales and related expenses...... 1,824,596 77.4 1,649,059 76.8 3,444,141 76.6 3,123,899 76.0 3,175,375 75.8 Gross profit............ 533,722 22.6 498,315 23.2 1,050,765 23.4 984,784 24.0 1,015,164 24.2 Operating and administrative expenses................ 442,423 18.8 418,005 19.5 875,083 19.5 829,654 20.2 857,980 20.5 Operating and administrative expenses, excluding amortization of asset write-ups resulting from the acquisition and related expenses... 426,751 18.1 402,393 18.7 843,131 18.8 794,267 19.3 822,361 19.6 Earnings before interest and taxes.............. 91,299 3.9 80,310 3.7 175,682 3.9 155,130 3.8 157,184 3.8 Total interest expense................ 39,949 1.7 44,125 2.1 93,735 2.1 113,215 2.8 113,215 2.7 Earnings (loss) before income taxes and extraordinary item...... 51,350 2.2 36,185 1.7 81,947 1.8 41,915 1.0 43,969 1.0 Net earnings (loss)..... 41,599 1.8 34,375 1.6 47,326 1.1 (4,995) (.1) (2,941) (.1) --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- EBITDA.................. 130,860 5.5 116,680 5.4 253,476 5.6 237,512 5.8 242,844 5.8 JANUARY 30, 1993 ----------------- HISTORICAL $ % --------- ----- Sales and other operating revenue....... 3,887,027 100.0 Cost of sales and related expenses........ 2,896,479 74.5 Gross profit............ 990,548 25.5 Operating and administrative expenses................ 855,165 22.0 Operating and administrative expenses, excluding amortization of asset write-ups resulting from the acquisition and related expenses... 816,159 21.0 Earnings before interest and taxes.............. 135,383 3.5 Total interest expense................. 137,404 3.5 Earnings (loss) before income taxes and extraordinary item..... (2,021) (.1) Net earnings (loss)..... (4,123) (.1) --------- ----- --------- ----- EBITDA.................. 229,217 5.9
The following management's discussion and analysis is based on the historical and as adjusted statements of operation data set forth in the above table. Twenty-Six Weeks Ended July 29, 1995 (historical) compared with Twenty-Six Weeks Ended July 30, 1994 (adjusted) The Company's sales and other operating revenue for the first half of fiscal 1995 were $2,358.3 million, a 9.8% increase over the first half of fiscal 1994. Comparable drug store sales (stores open for one year or more, excluding relocated stores opened less than one year) increased 8.8% for the first half of fiscal 1995, compared to an 8.0% increase for the first half of fiscal 1994. Sales benefited from significant increases in prescription sales as well as by increases in front end sales from strong Valentine and Easter selling seasons in the first quarter and from a change in the promotional calendar in the second quarter of fiscal 1995. Prescription sales for the first half of fiscal 1995 were $1,256.9 million, a 15.8% increase over the first half of fiscal 1994. In addition, front end sales increased to $1,096.8 million, a 3.8% increase over the first half of fiscal 1994. Front end sales in the first half of fiscal 1995 were positively affected primarily by increased sales of non-prescription items in the health, greeting card, convenience food and photofinishing categories. Prescription sales as a percentage of drug store sales and other operating revenue was approximately 53.3% for the first half of fiscal 1995 as compared with approximately 50.5% for the first half of fiscal 1994. The growth in prescription sales for the first half was primarily the result of increased third-party prescription sales and the Company's competitive cash pricing strategy. These strong sales were aided by a more severe cough, cold and flu season in the first quarter of fiscal 1995 compared to the first quarter of fiscal 1994. Third-party prescription sales increased to approximately 69.4% of the Company's prescription sales for the first half of fiscal 1995 from approximately 63.2% in the first half of fiscal 1994. 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 1995 and for the foreseeable future. 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. However, contracts with third-party payors generally increase the volume of prescription sales and gross profit dollars. See "Business--The Drug Store Industry." 24 Cost of sales and related expenses for the first half of fiscal 1995 were $1,824.6 million, a 10.6% increase over the first half of fiscal 1994. As a percentage of sales, cost of sales and related expenses were 77.4% compared to 76.8% for the first half of fiscal 1995 and 1994, respectively. The increase in cost of sales and related expenses as a percentage of sales resulted primarily from the continued increase in third-party prescription sales with typically lower gross profit margins than non third-party prescription sales. The LIFO charge was $6.0 million compared to $4.8 million for the first half of fiscal 1995 and 1994, respectively. Operating and administrative expenses for the first half of fiscal 1995 were $442.4 million, a 5.8% increase over the first half of fiscal 1994. As a percentage of sales, operating and administrative expenses decreased to 18.8% for the first half of fiscal 1995 from 19.5% for the first half of fiscal 1994. The decrease in operating and administrative expenses as a percentage of sales resulted primarily from operating efficiencies related to higher sales, and cost controls which helped produce lower costs as a percentage of sales in such expense categories as payroll and insurance. Non-cash tax deductible amortization of intangibles included in operating and administrative expenses for the first half of fiscal 1995 and the first half of 1994 were $15.7 million and $15.6 million, respectively, an increase of 0.4%. As a result of the above, earnings before interest expense and taxes and extraordinary item increased 13.7% to $91.3 million, or 3.9% of sales, as compared to 3.7 % of sales for the same period of the prior year. Total interest expense was $39.9 million for the first half of fiscal 1995, a decrease of 9.5% from the first half of fiscal 1994. The decrease was due primarily to lower average borrowings in the first half of fiscal 1995 compared to the first half of fiscal 1994. The average interest rate on borrowings in the first half of fiscal 1995 and the first half of 1994 was substantially the same. Income taxes for the first half of fiscal 1995 and the first half of 1994 were $8.7 million and $1.8 million, respectively. The effective income tax rate of 17% in the first half of fiscal 1995 was higher than in the first half of fiscal 1994 (5%). During the second quarter of fiscal 1995, income taxes were adjusted to reflect the estimated 17% annual income tax rate. Income taxes include alternative minimum and state income taxes for the Company and reflect the utilization of net operating loss carryforwards. As a result of the foregoing factors, the Company had net earnings before extraordinary items for the first half of fiscal 1995 of $42.6 million, compared to $34.4 million for the first half of fiscal 1994, an increase of $8.2 million or 24.0%. Fiscal Year 1994 (adjusted) compared with Fiscal Year 1993 (adjusted) The Company's sales and other operating revenue for fiscal 1994 were $4.5 billion, a 9.4% increase over fiscal 1993. Comparable drug store sales (stores open for one year or more) increased 8.1% during fiscal 1994 compared to a 6.1% increase in fiscal 1993. Sales benefited from significant increases in drug store prescription sales and increases in front end sales. For fiscal 1994, prescription sales were $2.2 billion, a 15.2% increase over fiscal 1993. In addition, drug store front end sales increased to $2.2 billion, a 4.2% increase over fiscal 1993. Prescription sales as a percentage of drug store sales and other operating revenue was 50.8% for fiscal 1994 compared with 48.3% for fiscal 1993. The growth in prescription sales was primarily the result of increased third-party prescription sales and the Company's competitive cash pricing strategy. These sales were strong despite a lower incidence of cough and cold/flu virus during the first and fourth quarters of fiscal 1994 compared to fiscal 1993. Third-party prescription sales represented 64.6% and 58.0% of the Company's prescription sales in fiscal 1994 and 1993, respectively. Cost of sales and related expenses in fiscal 1994 were $3.4 billion, a 10.2% increase over fiscal 1993. As a percentage of sales, cost of sales and related expenses were 76.6% and 76.0% for fiscal 1994 and 1993, respectively. The increase in cost of sales and related expenses as a percentage of sales resulted 25 primarily from the continued increase in third-party prescription sales with typically lower gross profit margins than non third-party prescription sales. The LIFO charge was $10.8 million in fiscal 1994 compared to $8.5 million in fiscal 1993. Operating and administrative expenses in fiscal 1994 were $875.1 million, a 5.5% increase over fiscal 1993. As a percentage of sales, operating and administrative expenses were reduced to 19.5% for fiscal 1994 from 20.2% for fiscal 1993. The decrease in operating and administrative expenses in fiscal 1994 as a percentage of sales resulted primarily from the economies of scale related to the higher sales, and cost controls which helped produce lower costs as a percentage of sales in such expense categories as payroll, insurance and supplies. Additionally, non-cash tax deductible amortization of intangibles included in operating and administrative expenses for fiscal 1994 and 1993 were $31.9 million and $35.4 million, respectively, a decrease of 9.9%. In the fourth quarter of fiscal 1994, the Company decided to accelerate the closing of approximately 90 geographically dispersed, under-performing stores over the following twelve to eighteen months, and established a $49.0 million reserve for future store closings. These closings are in addition to the relatively small number of stores the Company closes in the normal course of business. The $49.0 million reserve includes approximately $27.0 million for lease settlements and obligations, approximately $4.0 million for severance and other expenses directly related to the store closings, and approximately $18.0 million for the write-off of impaired assets which include inventory liquidation and the write-off of intangible and fixed assets. As a result of the above, earnings before interest expense and income taxes increased 13.2% to $175.7 million, or 3.9% of sales, as compared to 3.8% of sales for the same period of the prior year. Total interest expense was $93.7 million in fiscal 1994, a decrease of 17.2% from fiscal 1993. The decrease was due primarily to the lower cost of debt to the Company resulting from the 1993 Transactions and the Amendment which provided improved pricing. In addition, the decrease in interest expense was due to lower average borrowings in fiscal 1994, due primarily to repayments of borrowings from net proceeds from the sale of Vision Group and Insta-Care operations, partially offset by the numerous marketplace interest rate increases during fiscal 1994. Amortization of original issue discount and deferred debt expenses decreased to $5.9 million in fiscal 1994 from $7.2 million in fiscal 1993 resulting from the refinancing and early retirement of certain debt issues in fiscal 1994 and 1993. Income tax expense was $4.1 million and $2.6 million in fiscal 1994 and 1993, respectively. Income tax expense in both fiscal years represents alternative minimum tax and state income taxes for the Company, and reflects the utilization of net operating loss carryforwards. As a result of the foregoing factors, the Company had earnings on an adjusted basis before extraordinary items of $77.8 million in fiscal 1994 compared to $39.4 million in fiscal 1993, an increase of $38.4 million or 97.5% and net income of $47.3 million in fiscal 1994 compared to a net loss of $5.0 million in fiscal 1993, a $52.3 million increase. The Company had extraordinary items of $30.5 million (net of tax benefit of $1.6 million) and $44.4 million (net of tax benefit of $0.9 million) in fiscal 1994 and 1993, respectively. The extraordinary item in fiscal 1994 is primarily from the write-off of deferred costs related to the Amendment of the Credit Agreement, as well as from the early retirement of $50.0 million of the 11 1/8% Debentures. The extraordinary item in fiscal 1993 is primarily from the write-off of deferred costs from the early retirement of a portion of the 11 1/8% Debentures, all of the 13% Discount Debentures and the redemption of the 14 1/2% Preferred Stock. Fiscal Year 1993 (historical) compared with Fiscal Year 1992 (historical) 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 were $4.191 billion, a 7.8% 26 increase over fiscal 1992. Comparable drug store sales increased 6.1% during fiscal 1993 compared to a 3.1% increase in fiscal 1992. The increase in sales and other operating revenue was due primarily to a $245 million increase in sales of prescription drugs. Prescription sales as a percentage of drug store sales and other operating revenue 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 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 were $3.175 billion, a 9.6% increase over fiscal 1992. As a percentage of sales, cost of sales and related expenses were 75.8% 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 were $858.0 million, a 0.3% increase over fiscal 1992. As a percentage of sales, operating and administrative expenses were reduced to 20.5% in fiscal 1993 from 22.0% for 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. Non-cash, tax deductible amortization of intangibles included in operating and administrative expenses in fiscal 1993 and 1992 were $35.6 million and $39.0 million, respectively, a decrease of 8.7%. As a result of the above, earnings before interest expense and income taxes increased 16.1% to $157.2 million, or 3.8% of sales, as compared to 3.5% of sales for the same period of the prior year. Total interest expense was $113.2 million in fiscal 1993, a decrease of 17.6% from fiscal 1992. The decrease was due primarily to lower interest rates in the marketplace and lower cost of debt for the Company after the Refinancing and the 9 1/4% Note Issuance and the consummation of the IPO on August 12, 1993. The income tax provision for fiscal 1993 and 1992 was $2.6 million and $2.9 million, respectively. The income tax provision for fiscal 1993 and 1992 represents alternative minimum tax and state income taxes. 27 As a result of the foregoing factors, the Company had earnings before extraordinary items in fiscal 1993 of $41.4 million, compared with a loss of $4.9 million in fiscal 1992, and a net loss in fiscal 1993 of $2.9 million compared with a net loss of $4.1 million in fiscal 1992. The Company had an extraordinary item of $44.4 million (net of an income tax benefit of $0.9 million) in fiscal 1993, which was recognized as a result of the early retirement of existing indebtedness and the redemption of the Company's 14 1/2% Preferred Stock in connection with the Refinancing, the IPO and the 9 1/4% Note Issuance. In fiscal 1992, the Company had an extraordinary item of $0.8 million which represented the tax effect of the utilization of the Company's net operating loss carryforward. 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 and cold/flu virus, typically during the winter and spring. Accordingly, sales and profits are typically highest in the fourth quarter followed by the first quarter. The following table sets forth certain unaudited quarterly operating data for each of fiscal 1994 and 1993 and for the first and second quarters of fiscal 1995. The data presented include all adjustments, consisting only of normal recurring adjustments, that management considers necessary for a fair presentation of the data shown: (IN THOUSANDS) FISCAL 1995 ------------------------- FIRST SECOND QUARTER QUARTER ---------- ---------- Sales and other operating revenue...... $1,219,594 $1,138,724 Gross profit........................... 280,106 253,616 Net earnings (loss).................... 30,544 11,055 EBITDA................................. 79,052 51,808
FISCAL 1994 ------------------------------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER TOTAL ---------- ---------- ----------- ---------- ---------- Sales and other operating revenue...... $1,126,806(1) $1,057,924(1) $ 1,061,704 $1,302,597 $4,549,031 Gross profit........................... 270,112 246,609 239,523 348,646 1,104,890 Net earnings (loss).................... 26,945 6,021 (26,015) 40,857 47,808 EBITDA................................. 70,544 49,795 44,147 94,127 258,613
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 Net earnings (loss).................... 17,820 (30,868) (11,558) 21,665 (2,941) EBITDA................................. 74,433 52,005 34,725 81,681 242,844
- ------------ (1) Does not reflect reclassification of sales to employees to conform to fiscal 1995 financial statement presentation. As reclassified, sales and other operating revenue for the first and second quarters would equal $1,136,195 and $1,066,890, respectively. LIQUIDITY AND CAPITAL RESOURCES At October 28, 1995, the Company had outstanding approximately $405.7 million under the Term Loans and $167.5 million of Revolving Loans under the Credit Agreement and had $94.5 million available for Revolving Loan borrowings under the Credit Agreement (which is net of $88.0 million of letters of credit). Pursuant to the Credit Agreement, the Company is required to make scheduled payments of the outstanding principal amount of Term Loans in the following approximate amounts: 28 $76.4 million in fiscal 1996; $76.4 million in fiscal 1997; $81.1 million in fiscal 1998; $90.7 million in fiscal 1999; and $81.1 million in fiscal 2000. Prepayments made pursuant to the Credit Agreement are applied pro rata among the remaining scheduled principal payments. The Credit Agreement matures at the end of July 2000. At July 29, 1995, the Company had excess availability under the revolving loan facility portion of the Credit Agreement and accordingly was not required to treat the required amortization repayments as current. The foregoing prepayment schedule will be revised if the 1995 Credit Agreement Amendment is executed. See "Description of Certain Indebtedness--The Credit Agreement." On July 29, 1995 the Company had working capital of $335.5 million and a current ratio of 1.7 to 1 compared to $280.3 million and 1.5 to 1 at January 28, 1995. Cash flow provided by operating activities increased $57.1 million to $62.0 million for the first half of fiscal 1995 compared to $4.9 million for the first half of fiscal 1994. This increase was due to higher earnings for the first half of fiscal 1995 compared to the first half of fiscal 1994 and primarily due to the higher than normal cash payments to merchandise vendors in the first quarter of fiscal 1994, resulting in the reduction of accounts payable from an abnormally high balance at January 29, 1994 primarily from the timing of vendor payment due dates. This increase was offset partially by an increase in receivables from third-party prescription sales in fiscal 1995. Net cash from investing activities for the first half of fiscal 1995 and 1994 used $37.4 million and provided $3.8 million, respectively. Uses of cash were principally for capital expenditures of $40.2 million and $21.7 million for fiscal 1995 and 1994, respectively, for point-of-sale product scanning equipment, additions to the Company's drug stores, and Express Photo units, relocation of drug stores and improvements to existing stores. In addition, in fiscal 1994, additions to property, plant and equipment were for the installation of satellite communication equipment. In the first quarter of fiscal 1994, a source of cash to the Company from investing activities was provided by a partial payment for the sale of the Vision Group operations. Capital improvements for fiscal 1995, including those to be acquired under a deferred payment arrangement and through operating leases, which total $54.2 million for the first half of fiscal 1995, are expected to total approximately $119.0 million on an annual basis. Funds for the cash capital expenditures are expected to come from cash flow from operating activities and available borrowings, if necessary. Financing activities for the first half of fiscal 1995 used $23.8 million. Uses of cash were primarily for the reduction of $26.5 million of bank debit balances. Funds provided by $18.9 million of borrowings under the Credit Agreement were primarily used to redeem $16.6 million aggregate principal amount of 11 1/8% Debentures ($15.5 million accreted value) on May 12, 1995. Financing activities for the first half of fiscal 1994 used $11.2 million primarily for the reduction of $28.3 million of bank debit balances. Funds were provided by $19.3 million of borrowings under the Credit Agreement. On August 2, 1995, the Company completed the August Offering of 6,175,500 shares of Common Stock in the aggregate at a public offering price of $32.25 per share. Of the shares offered, 2,675,000 shares were sold by the Company and 3,500,500 shares were sold by the Merrill Lynch Investors. The net proceeds to the Company after the underwriting discount of $1.27 per share and other expenses related to the August Offering was approximately $82.3 million in the aggregate. On September 5, 1995, the Company redeemed the remaining $78.9 million aggregate principal amount of 11 1/8% Debentures ($73.8 million accreted value). The Company anticipates that the combination of amortization of intangibles 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 expense 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 revolving loan facility portion under the Credit Agreement and other existing sources, the Company 29 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 business. 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 and the 9 1/4% Notes. 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 provides for postretirement benefits. TAX NET OPERATING LOSS CARRYFORWARDS While the Company estimates that it had approximately $218 million of NOL carryforwards for U.S. federal income tax purposes as of January 28, 1995, it also expects that a substantial portion of such NOL carryforwards will be utilized to offset taxable income already generated during its current taxable year. The remaining NOL carryforwards would expire in fiscal years 2002 to 2008 if not previously utilized. Although the Company expects that the Offering will cause an "ownership change" within the meaning of Section 382 of the Internal Revenue Code of 1986, which would cause an annual limitation on the utilization of its remaining NOL carryforwards, the Company does not anticipate that, taking into account the current market value of the Common Stock, such a limitation would have a material effect on its U.S. federal income tax liability. 30 BUSINESS The Company operates the Eckerd Drug store chain, which is one of the largest drug store chains in the United States. At October 28, 1995, the Eckerd Drug store chain consisted of 1,704 stores in 13 states located primarily in the Sunbelt, including 577 stores in Florida and 474 stores in Texas. The Company's stores are concentrated in 10 of the 12 metropolitan statistical areas in the United States with the largest percentage growth in population from 1980 to 1990, and, according to industry sources, the Company ranks first or second in drug store sales in 12 of the 14 major metropolitan markets in which it operates. THE DRUG STORE INDUSTRY Prescription and over-the-counter medications have traditionally been sold by independent drug stores as well as conventional drug store chains, such as Eckerd Drug stores, and purchased by consumers with cash or credit cards. According to Drug Store News, drug store sales in 1994 increased 6.3% from 1993 to approximately $82.9 billion, 72% of which was represented by conventional drug store chains, such as Eckerd Drug stores. Drug store prescription sales increased 9.2% from 1993 to approximately $41.5 billion in 1994, which represented 50% of total drug store sales and approximately 66.7% of total retail prescription sales. The remaining retail prescription sales were represented by mail order ($7.1 billion), mass merchandisers ($7.0 billion) and food/drug combo stores ($6.6 billion). The drug store industry has recently undergone significant changes as a result of the following important trends: (i) the increase in third-party payments for prescription drugs, (ii) the consolidation within the drug store industry, (iii) the aging of the United States population and (iv) the increase in competition from non-traditional retailers of prescription and over-the-counter drugs. During the last several years, a growing percentage of prescription drug volume throughout the industry has been accounted for by sales to customers who are covered by third-party payment programs ("third-party sales"). According to IMS-America, in 1994, third-party sales represented approximately 55.3% of total prescription drug sales in the United States, more than three times what it had been in 1986. In a typical third-party sale, the drug store has a contract with a third-party payor, such as an insurance company, HMO, PPO, other managed care provider, government agency or private employer, which agrees to pay for part or all of a customer's eligible prescription purchases. Although these third-party sales contracts often provide a high volume of prescription sales, such sales typically generate lower gross margins than non third-party sales due principally to the highly competitive nature of this business and recent efforts by third-party payors to contain costs. Larger drug store chains, such as Eckerd Drug stores, are better able to service the growing third-party segment than independent drug stores and smaller chains as a result of the larger chains' more sophisticated technology systems, larger number of stores and greater penetration within their markets. As a result of the economies of scale from which larger drug store chains benefit as well as the third-party payment trend, the number of independent drug stores and smaller drug store chains has decreased as many of such retailers have been acquired by larger drug store chains. This trend is expected to continue because larger chains are better positioned to handle the increased third-party sales, purchase inventory on more advantageous terms and achieve other economies of scale with respect to their marketing, advertising, distribution and other expenditures. The Company believes that the number of independent drug stores and smaller drug store chains remaining in operation may provide significant acquisition opportunities for larger drug store chains, such as the Company. Strong demographic trends have also contributed to changes in the drug store industry, as the group of persons over age 50 is the fastest growing segment of the United States population. This trend has had, and is expected to continue to have, a marked effect on the pharmacy business in the United States because consumer prescription and over-the-counter drug usage generally increases with age. In 1991, persons over age 50 represented approximately 26% of the population, although they consumed 31 approximately 67% of all prescription drugs sold in the United States. This segment is projected to increase to 29% of the population by the year 2000. The average per capita prescription usage in the United States is approximately 6.5 prescriptions per year, which increases to approximately 7.9, 10.5 and 13.0 prescriptions filled per year for persons ages 50-59, 60-69 and over 70, respectively. The Company's markets have large concentrations of, and are continuing to experience significant growth in, the number of persons over age 65. In 1994, drug store chains and independent drug stores represented approximately 37.3% and 29.4%, respectively, of all retail prescription sales in the United States. In response to a number of factors, including the aging of the United States population, mass merchants (including discounters and deep discounters), supermarkets, combination food and drug stores, mail order distributors, hospitals, HMOs and other managed care providers have entered the prescription industry. Supermarkets, including combination food and drug stores, and mass merchants each represented approximately 11% of all prescription sales in the United States in 1994. Although the Company currently faces increased competition from these retailers, industry studies show that consumers in the over 65 age group tend to make purchases at traditional drug stores, such as Eckerd Drug stores, and maintain strong store loyalty. ECKERD DRUG STORES In 1992, the Company celebrated the 40th anniversary of the opening of the 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 October 28, 1995, 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................................... 577 243 Texas..................................... 474 137 North Carolina............................ 176 46 Georgia................................... 157 47 Louisiana................................. 96 19 South Carolina............................ 75 13 New Jersey................................ 36 1 Tennessee................................. 33 1 Mississippi............................... 26 -- Oklahoma.................................. 26 -- Alabama................................... 16 3 Delaware.................................. 11 -- Maryland.................................. 1 -- ------ --- Total............................... 1,704 510 ------ --- ------ --- Over the past five years, the Company has implemented several initiatives designed to increase the size and improve the quality and operating performance of the Company's store base. Among such initiatives is the opening and acquisition of new stores, the closure, divestiture or relocation of underperforming stores and an extensive remodeling program. Since the beginning of fiscal 1990, more than 300 Eckerd Drug stores have been opened or acquired within the Company's existing markets, more than 200 under-performing stores have been closed or divested, and more than 50% of the Company's remaining stores have been remodeled. In addition, the Company has opened more than 300 Express Photo centers. The Company has also increased the degree to which merchandise is tailored to 32 specific markets, instituted a chainwide shrinkage reduction program and made a significant investment in its management information systems. As a result of, among other things, these actions, aggregate sales have increased from $3.46 billion in fiscal 1990 to $4.55 billion in fiscal 1994. In fiscal 1994, the Company opened or acquired 39 drug stores, relocated 16 drug stores and closed 22 drug stores. In addition, in the fourth quarter of fiscal 1994, the Company decided to accelerate the closing of approximately 90 geographically dispersed, under-performing stores during the period from fiscal 1995 through mid-1996, and established a $49.0 million reserve for future store closings. As of October 28, 1995, the Company had closed 68 of such stores. These closings are in addition to the relatively small number of stores the Company closes in the normal course of business. See "--Business Strategy--Store Base Strategy." Pursuant to the Florida Acquisition, the Company acquired 40 Rite Aid leased locations, which are being operated as Eckerd Drug stores, and the fixtures, inventory and prescription files of an additional 68 Rite Aid locations. As a result of the Florida Acquisition, the Company intends to close approximately 6 Eckerd Drug stores. 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.
TWENTY-SIX WEEKS ENDED FISCAL YEARS JULY 29, -------------------------------------------------------------- 1995 1994 1993 1992 1991 1990 ---------------- ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Number of Ekerd Drug stores at beginning of period............ 1,735 1,718 1,696 1,675 1,673 1,630 Stores opened or acquired............. 15 39 52 50 22 139(1) Stores sold or closed............. (84) (22) (30) (29) (20) (96)(2) ---------------- ---------- ---------- ---------- ---------- ---------- Number of Eckerd Drug stores at end of period............... 1,666 1,735 1,718 1,696 1,675 1,673 ---------------- ---------- ---------- ---------- ---------- ---------- ---------------- ---------- ---------- ---------- ---------- ---------- Number with Express Photo centers........ 503 481 413 378 321 258 Sales of Eckerd Drug stores............. $2,353,697 $4,396,440 $4,014,094 $3,722,523 $3,594,037 $3,330,062 Average annual sales per Eckerd Drug store............... N/A $ 2,561 $ 2,365 $ 2,222 $ 2,142 $ 2,036
- ------------ (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 of a result of the acquisition of drug stores by EH II. BUSINESS STRATEGY The Company's business strategy is focused on maintaining a strong pharmacy and health-related business because of management's belief regarding the growth prospects of this business. The Company will continue to implement this strategy by: . maintaining a high level of customer service and convenience; . providing competitive prices on its merchandise, including prices on prescription drugs to non third-party customers in order to enhance its market share and long-term competitive position; 33 . maintaining an aggressive marketing program to third-party payors, such as insurance companies, HMOs, PPOs, other managed care providers, government agencies and private employers; . continuing its commitment to control costs; . improving store productivity and profitability by reallocating nonpharmacy shelf space to certain products, such as health and beauty aids and greeting cards, and adding food marts, all of which have higher sales and gross profit growth potential than other products and which the Company believes increase customer traffic; . expanding the number of stores primarily within the Company's existing market areas, both through internal expansion and acquisitions and improving the Company's store base by relocating and renovating certain stores and closing under-performing stores; and . continuing 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. Customer Service and Convenience The Company believes that customer service and convenience are critical in positioning itself as the alternative to mass merchandisers, supermarkets and other large format retailing channels. The Company will continue to emphasize service and convenience through pharmacy support services, store location and design, merchandising programs and operating hours geared to the needs of the particular market. The Company offers a high level of professional pharmacy service, which the Company believes provides added value to its customers. 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. The Company will continue to remodel and reset its stores to provide modern, well-identified stores, which are easily accessible to customers and will seek to open new stores in easily accessible high traffic locations. The Company also tailors its merchandising to provide the product mix and selection to best serve the customers of each particular store, including beach, tourist, business and other target groups. The Company typically provides several conveniently located, modern stores in a community. The Company's stores range in size from 8,200 to 10,800 square feet and are located primarily in neighborhood strip centers or free standing locations. Such stores are typically open every day of the year except Christmas, with some open until midnight or 24 hours a day. Other customer service advantages include comfortable pharmacy waiting areas, free health-related programs, screenings (e.g., blood pressure tests) and drive-through pharmacy windows in most new drug stores. In addition, the Company is continually testing new customer service features. Competitive Pricing While the Company believes that it competes primarily on the basis of customer service and convenience, price is also an important factor. The Company's policy is to price its prescription drug products more competitively than most other traditional drug stores in its markets. The Company believes that this policy has enhanced its competitive position with drug stores and other shopping formats. See "Risk Factors--Competition" and "Management's Discussion and Analysis of Results of Operations and Financial Condition--General--Competitive Pricing." 34 Marketing to Third-Party Payors The Company believes that the number and concentration of Eckerd Drug stores within existing markets, the Company's experience and reputation in the drug store industry and its computerized pharmacy system gives the Company advantages when compared to independent drug stores, small drug store chains and mass merchandisers in competing for the increasing amount of third-party sales. Third-party prescription sales, which are an integral part of the Company's drug store business, accounted for approximately 69.4%, 64.6%, 58.0%, 49.6%, 43.1% and 36.0% of the Company's prescription sales in the first half of fiscal 1995, fiscal 1994, fiscal 1993, fiscal 1992, fiscal 1991 and fiscal 1990, respectively. The Company currently has contracts with approximately 500 third-party payors, 45 of which designate the Company as the exclusive provider of pharmacy services. The third-party payor contracts provide for direct billing to the third-party payor rather than the customer. The Company believes that these third-party sales contracts provide the opportunity for increased volume of prescription sales; however, such sales have lower gross margins than non third-party prescription sales. See "Risk Factors--Prescription Drug Sales and Future Regulation." The Company intends to continue to market itself aggressively with all types of third-party payors, including insurance companies, HMOs, PPOs, other managed care providers, government agencies and private employers. The Company has devoted substantial resources to this marketing effort over the last five fiscal years. For example, Eckerd Health Services, a joint venture formed by the Company, is developing and offering pharmacy benefit management services to third-party payors. Eckerd Health Services provides its expertise in, among other things, data analysis and healthcare services, to third-party payors and presents such third-party payors with operational cost savings opportunities. The Company also provides mail order delivery of its prescription drugs to third-party payors. In addition, the Company's computer systems provide on-line adjudication, which permits the Company and the third-party payor to determine electronically, 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. The Company believes that such systems are essential to service the increasing volume of third-party sales. During the past five years, the Company has reduced the average number of days that receivables from third-party sales were outstanding from 48 days at the end of fiscal 1990 to 21 days during fiscal 1994 while increasing third-party sales by 187% during the same period. Cost Controls The Company's continued commitment to control costs and maintain its competitive position in the marketplace focuses on decreasing expenses without decreasing the level of services provided in its stores. Store staffing remains at historical levels in order to maintain a high level of customer service. The Company continues to actively evaluate and pursue additional cost savings which can be obtained without affecting the Company's customer service, quality or sales growth potential. There can be no assurance, however, that any additional cost reductions will be realized. See "Management's Discussion and Analysis of Results of Operations and Financial Condition--General--Cost Reduction Program." Improved Productivity and Profitability of Nonpharmacy Merchandise The Company is continually seeking to improve store productivity and profitability by monitoring and adjusting the mix and selection of its nonpharmacy merchandise categories and items within each category to emphasize merchandise that has higher sales and gross profit growth potential. Among the over 27,000 nonpharmacy SKUs (as defined herein) typically offered in one of the Company's stores, the Company concentrates on products that it considers especially appropriate for a health-focused convenience-based drug store and which the Company believes will increase customer traffic. Although these categories may shift over time based upon consumer needs and other trends, the Company is 35 currently emphasizing health and beauty aids, greeting cards and the photo finishing business. To implement its reorganization of nonpharmacy merchandise, the Company reallocated nonpharmacy shelf space within all of its stores, resulting in, among other things, substantially increased store space devoted to greeting cards, increased emphasis on health and beauty aids, and the introduction of convenience food mart sections in over 550 selected locations, with plans to add 350 in fiscal 1995. In addition, store configurations have been altered to promote increased store traffic and more closely conform to customer preferences, as indicated in market studies conducted by the Company, including tailoring of specific stores offerings to specific markets where appropriate. Store Base Strategy The Company intends to continue to increase the size and improve the quality and operating performance of its store base through (i) internal expansion and acquisitions of smaller drug store chains and independent drug stores, (ii) relocation and renovation of existing stores and (iii) closing under-performing stores. 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. In addition to its store acquisition program, the Company pursues the acquisition of prescription files from other pharmacies in the Company's existing markets. Once acquired, the prescription files are transferred to an existing Eckerd Drug store, increasing the prescription sales volume in that store. 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. The Company's goal is to open at least 40 new drug stores in fiscal 1995 and 50 new drug stores per year thereafter through fiscal 1999 (excluding acquisitions and relocations). The cash costs associated with opening a drug store are estimated to be approximately $490,000, which includes initial cash inventory costs of approximately $260,000. 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 "Management's Discussion and Analysis of Results of Operations and Financial Condition-- Liquidity and Capital Resources." In fiscal 1995, the Company plans to relocate approximately 40 of its existing stores, mainly from strip shopping centers to new free-standing locations, and thereafter expects that the number of stores to be relocated per year will be increased. In addition, the Company plans to completely remodel 80 of its stores and to perform minor renovations on 400 of its other stores in fiscal 1995. The cash costs associated with a relocation or complete renovation of an existing store are estimated to be approximately $170,000 and $150,000, respectively (not including approximately $35,000 related to the costs of installing scanning and satellite communications equipment, if necessary). The Company also expects to close approximately 10-20 under-performing drug stores per year in fiscal 1995 and thereafter through fiscal 1999 in order to improve the quality of the Company's store base. As a result of the Company's decision in the fourth quarter of fiscal 1994 to accelerate the closing of approximately 90 under-performing stores, the number of stores to be closed may decrease in the future. In addition, the Company currently intends to continue to expand its one-hour photo finishing business, with a goal of adding approximately 240 new Express Photo centers by 1999. The Company 36 believes that its long standing reputation for high quality photo finishing programs and its advertising and marketing programs which emphasize the Company's experience and reinforce its image as a quality photo finisher have enabled the Company to develop and expand its Express Photo center operations. The Company believes that its photo finishing operations provide further opportunities for growth in its drug store business due to both the direct contribution to sales from photo finishing and the significant additional store traffic from such operations, which is important in generating sales of other products. The Company selects locations for Express Photo centers based upon the demographics of the market and intends to concentrate Express Photo center expansion by market to enable the Company to benefit from advertising and other operating synergies. The costs associated with opening each Eckerd Express Photo center are estimated to be approximately $100,000 and are expected to be largely financed through operating leases or arrangements such as the IFS Sale and Leaseback. 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. See "-- Business Strategy--Marketing to Third-Party Payors." 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 System, which began to be introduced in Eckerd Drug stores in the second half of fiscal 1995 and is scheduled to be completely implemented by the summer of 1996. The Comp-U-Care 2000 System will improve speed and productivity in the pharmacy, decrease customer wait time and enhance functionality, including expanded drug utilization reviews. The Company expects that the Comp-U-Care 2000 system will permit the transfer of information, such as prescription files, directly from one drug store to another thereby further improving customer service by enabling customers to fill and refill prescriptions at any Eckerd Drug store. During fiscal 1994, the Company installed a satellite communications network, enhanced the point-of-sale reporting system and upgraded the merchandise buying system. The Company believes that the satellite communications system will facilitate implementation of its pharmacy systems enhancement plan. As of October 28, 1995 the Company had point-of-sale product scanning equipment in approximately 1,100 stores, which stores represent approximately 75% of the Company's total front-end sales. The Company has a goal of implementing scanning throughout the chain by the fall of 1996. Scanning is a system which inputs point-of-sale 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 37 trends in sales by SKU, gross profit performance and inventory position and is also a source for measuring inventory shrinkage performances. The Company has been expanding scanning to its higher volume stores in order to maximize benefits and recover the related expenses more efficiently. Scanning systems will provide more and better merchant and store level information to facilitate inventory management, automatic re-ordering, product sales and gross profit analysis and inventory shrinkage control. The Company believes that broader use of scanning throughout the chain will improve customer service by decreasing customer check-out time and improving adherence to advertised sale or promotional prices. The Company believes the direct benefits of scanning will be sufficient to offset the related expense. The Company is expanding 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. The Company installed the merchandise receiving component of its new warehouse management system in the Atlanta, Georgia distribution facility and expects the entire system to be installed in Atlanta by the spring of 1996 and in all of its distribution facilities by the end of fiscal 1996. 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 point-of-sale 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 System, and the warehouse management 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 approximately $440.0 million over such term. 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 or purchasing 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. In addition, the Company is purchasing or developing software to expand the merchandise and store information data base systems to enable the Company to more efficiently manage its business and to start the initial roll out of the warehouse management system to provide improved control and management of inventory and personnel. The implementation of such software began in fiscal 1995 and is expected to be completed in fiscal 1996. PRODUCTS AND SERVICES Pharmacy The primary focus of Eckerd Drug stores is the sale of prescription and over-the-counter drugs. During fiscal 1994, the Company filled more than 89 million prescriptions, and sales of prescription and over-the-counter drugs generated approximately 61.1% of the Company's drug store sales and other operating revenue. During the period from fiscal 1990 through fiscal 1994, the Company's dollar volume 38 of sales of prescription drugs increased at a compound annual growth rate of 12.4% and during the first half of fiscal 1995, the dollar volume of sales of prescription drugs increased by 15.8% as compared to the first half of fiscal 1994. 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. See "--Business Strategy--Customer Service and Convenience." The Company believes that it is well positioned to take advantage of certain demographic trends, including the aging of the United States population. The Company's stores are concentrated in 10 of the 12 metropolitan statistical areas in the United States with the largest percentage growth in population from 1980 to 1990. In addition, approximately 62% of the Company's drug stores are located in Florida and Texas, two of the top three states experiencing the greatest influx of persons over age 65. According to industry studies, persons over age 65 purchase twice as many prescription drugs and 50% more over-the-counter drugs than the national average. The Company also believes that it is capable of meeting the needs of the increasing volume of third-party prescription sales and is aggressively marketing itself to third-party payors. See "Risk Factors--Prescription Drug Sales and Future Regulation" and "-- Business Strategy--Marketing to Third-Party Payors." The Company believes that new prescription drugs and drug therapies provide an opportunity for increased demand for prescription drugs. In addition, the Food and Drug Administration is approving an increasing number of prescription products for sale over the counter. Prescription drugs which are approved for over-the-counter distribution have historically shown significantly increased sales. Nonpharmacy Merchandise Eckerd Drug stores sell a wide variety of nonpharmacy merchandise, including over-the-counter drugs, 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 $198.7 million of the Company's sales in fiscal 1994. 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. 39 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 the introduction of a food mart section offering convenience food items such as staple grocery shelf items, staple and chilled beverages, snack foods and specialty items, in approximately 550 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. The Company plans to add food mart sections to an additional 350 stores in fiscal 1995. 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, in 510 Eckerd Drug stores as of October 28, 1995. Sales from photo finishing accounted for approximately 4.9% of the Company's drug store sales in fiscal 1994 and were the second largest component of drug store profit. The Company believes that its photo finishing operations provide further opportunities for growth in its drug store business because of the direct contribution to sales from photo finishing and the significant additional store traffic from such operations, which is important in generating sales of other products. Photo finishing generates store traffic because it generally requires two trips to a store--one visit to drop off the roll of film and one visit to pick up the developed pictures. The Company is among the top three vertically integrated retail photo finishers in the United States and the Company believes that it is a 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 1994 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(R) (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 240 new Express Photo centers by 1999. 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 9.2% of the Company's total drug store sales in fiscal 1994. 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 40 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 initiatives designed to reduce shrinkage expense, which was approximately 2.9% for fiscal 1994 compared to an industry-wide average (calculated using the same accounting method as the Company) of approximately 2.8% during the same time period. These initiatives include training and awareness programs, tailored audit programs for district managers, hiring of 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, some of which is purchased at the store level, is distributed directly to the stores. 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 28, 1995, these advertising expenses totaled approximately 0.5% of the Company's 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 the time of the Acquisition through fiscal 1994, the Company reduced its advertising expense as a 41 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. 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. See "Risk Factors--Competition" and "--The Drug Store Industry." The Company's Express Photo centers compete with a variety of photo processors including other mini-labs, retail stores and photo specialty stores, primarily on the basis of quality of processing, quality and speed of service and value. 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, South Carolina, 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. In recent years, an increasing number of legislative proposals have been introduced or proposed in Congress and in some state legislatures that would effect major changes in the health care system, either nationally or at the state level. The Company cannot predict whether any federal or state health care reform legislation will eventually be passed, and if so, the impact thereof on the Company's financial position or results of operations. 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. However, to the extent health care reform 42 expands the number of persons receiving health care benefits covering the purchase of prescription drugs, it may 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 future federal or state health care reform legislation 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. The legislation, which began to be implemented in 1994, created 11 health care purchasing cooperatives, which will accept bids from health care providers to provide goods and services to the cooperatives' members. The Company expects to provide prescription drugs to the cooperatives through its existing managed health care clients. However, the Company is unable to predict whether its efforts will be successful or whether the Florida legislation will have an adverse impact on the Company's financial position or results of operations. EMPLOYEES As of October 28, 1995, the Company had approximately 45,000 employees, of which 23,300 were full-time employees. The Company believes that overall employee relations are good. None of the Company's employees are represented by unions. 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. 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. 43 The material office and distribution center properties owned or leased by the Company at October 28, 1995 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.............................. 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). (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. Such sublease will be terminated in April 1996. The Company is marketing the Hammond property for sale. The Company considers that all property owned or leased is well maintained and in good condition. 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. 44 MANAGEMENT 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..................... 61 Director, Chairman of the Board and Chief Executive Officer Francis A. Newman.................. 47 Director, President and Chief Operating Officer John W. Boyle...................... 66 Director Dr. James T. Doluisio.............. 60 Director Donald F. Dunn..................... 70 Director Albert J. Fitzgibbons, III......... 50 Director Margaret H. Jordan................. 52 Director Lewis W. Lehr...................... 74 Director Alexis P. Michas................... 37 Director Rupinder S. Sidhu.................. 39 Director James M. Santo..................... 54 Executive Vice President/Administration and Secretary Samuel G. Wright................... 45 Executive Vice President/Chief Financial Officer Kenneth L. Flynn................... 50 Senior Vice President/Store Operations Edward W. Kelly.................... 50 Senior Vice President/Merchandising Richard R. Powis................... 47 Senior Vice President/Pharmacy Martin W. Gladysz.................. 43 Vice President/Treasurer Robert E. Lewis.................... 35 Vice President/General Counsel and Assistant Secretary Thomas M. Nash..................... 47 Vice President/Real Estate N. John Simmons, Jr................ 40 Vice President/Controller
The Company has announced that Mr. Turley will relinquish his position as Chief Executive Officer at the end of fiscal 1995 while continuing in his role as Chairman of the Board. Upon the recommendation of Mr. Turley, the Board of Directors is expected to appoint Mr. Newman, currently the President and Chief Operating Officer, to the position of Chief Executive Officer at its February 1996 meeting. Mr. Turley is Chairman of the Board and Chief Executive Officer of the Company, positions he has held since 1986. He served as President of the Company from 1986 until July 1993. 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 a 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. F&M filed bankruptcy under Chapter 11 of the United States Bankruptcy Code in December 1994. 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 retired as Vice Chairman of the Board and Chief Financial Officer of the Company on December 31, 1994, positions he had held since February 1993. He served as a consultant to the Company during the month of January 1995. Prior to being Vice Chairman, he was Senior Vice 45 President/Finance and Administration of the Company, a position he held for more than five years. He joined Old Eckerd as Senior Vice President/Finance and Administration in 1983. Prior to joining Old Eckerd, Mr. Boyle served as Vice Chairman of the Board (1978-1980) and, thereafter, as Chairman of the Board (1980-1983) of May Department Store Co., St. Louis, Missouri. He was a director of Old Eckerd between 1983 and 1986. Dr. Doluisio has been Dean of the College of Pharmacy, University of Texas, Austin, Texas since 1973. Dr. Doluisio 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. He is also a director of COR Therapeutics, Inc. 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 director of Stonington Partners, Inc. ("Stonington Partners") since August 1993; a Partner of Stonington Partners since November 1993; a partner of Merrill Lynch Capital Partners from 1993 to July 1994; 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 ML & Co. from 1978 to July 1994; and Vice President of Merrill Lynch from 1974 to 1988. He is also a director of Borg-Warner Security Corporation, Borg-Warner Automotive, Inc., Dictaphone Corporation and United Artists Theatre Circuit, Inc. Ms. Jordan has been Vice President--Health Care and Employee Services of Southern California Edison Company since 1992. Prior thereto, she worked for Kaiser Foundation Health Plan of Texas, Inc. for more than the preceding five years, most recently as Vice President and Regional Manager of Texas. Ms. Jordan also serves as a director of Epitope, 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 Peregrine Semiconductor Corporation and various IDS Funds. Mr. Michas has been a director of Merrill Lynch Capital Partners since 1989. He has been a Partner of Stonington Partners since November 1993; a director of Stonington Partners since August 1993; a partner of Merrill Lynch Capital Partners from 1993 to July 1994; a Senior Vice President of Merrill Lynch Capital Partners from 1989 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. from 1991 to July 1994; 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 Borg-Warner Security Corporation, Borg-Warner Automotive, Inc., Blue Bird Corporation, Dictaphone Corporation, Pathmark Stores, Inc. and Supermarkets General Holding Corporation. Mr. Sidhu has been a director of Merrill Lynch Capital Partners since 1988. He has been a Special Limited Partner of Stonington Partners since August 1993; a partner of Merrill Lynch Capital Partners from 1993 to July 1994; a Senior Vice President of Merrill Lynch Capital Partners from 1987 to July 1994; 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 46 Banking Division of ML & Co. from 1987 to 1989. He is also a director of Clinton Mills, Inc., First-USA, Inc., and Wherehouse Entertainment, Inc. Mr. Santo was appointed Executive Vice President/Administration in May, 1995. Prior thereto he was appointed Senior Vice President/Administration in February 1993 and was also Vice President/Legal Affairs of the Company, a position he had held for more than the five years prior to 1993. In addition, Mr. Santo was appointed Secretary of the Company effective January 1, 1992. Mr. Wright was appointed Executive Vice President/Chief Financial Officer of the Company in May 1995. Prior thereto he was appointed Senior Vice President/Chief Financial Officer in February 1995 and was also Senior Vice President/Finance from February 1993 until February 1995 and Vice President and Controller of the Company from September 1988 until February 1993. Mr. Wright became Vice President of the Company in June 1986. In addition, Mr. Wright had served as Vice President of Finance of Eckerd Drug Company, formerly Old Eckerd's principal subsidiary ("Eckerd Drug Company"), since May 1985. Mr. Flynn was appointed Senior Vice President/Store Operations of the Company in December 1994. Prior to joining the Company, he was Executive Vice President with the Thrifty/Payless drug chain in Portland, Oregon from August 1993. Prior to joining Thrifty/Payless in August 1993, Mr. Flynn was employed by Lucky Stores, Inc. for over 30 years, most recently as Senior Vice President/Store Operations. Mr. Kelly was appointed Senior Vice President/Merchandising in February 1993. Prior thereto he had served as Vice President of Merchandising of Eckerd Drug Company for more than the preceding five years. Mr. Powis was appointed Senior Vice President/Pharmacy in April 1995. Prior to joining the Company, he was Senior Vice President Pharmacy Services for the American Association of Retired Persons ("AARP") from September 1994. Prior to joining AARP, Mr. Powis was employed for over 19 years by Hooks SupeRx, Inc., most recently as Senior Vice President Pharmacy Services. Mr. Gladysz was appointed Vice President/Treasurer of the Company in May 1994. Prior to joining the Company, Mr. Gladysz was Executive Vice President/Treasurer for Fortune Bancorp, a Florida banking organization, a position he held for more than the five years prior to 1994. Mr. Lewis was appointed Vice President/General Counsel and Assistant Secretary of the Company in August 1994. He was a shareholder in the law firm of Shackleford, Farrior, Stallings & Evans, P.A. in Tampa, Florida, from January 1992 to August 1994 and was an associate at that firm for more than five years prior thereto. Mr. Nash has been Vice President/Real Estate of the Company since August 1995. Prior to joining the Company, he served as Vice President--Real Estate at Checker's Drive-In Restaurants, Inc. from 1993 until 1995 and at Morrison Restaurants, Inc. from 1990 until 1993. Mr. Simmons was appointed Vice President/Controller of the Company in August 1995. Prior to joining the Company, Mr. Simmons served as Vice President of Finance and Chief Financial Officer of Checkers Drive-In Restaurants, Inc. from January 1993 until August 1995. Prior thereto, he was a Partner at KPMG Peat Marwick for more than the preceding five years. 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, Mr. Michas became a director of the Company in April 1990, Mr. Newman became a director in July 1993 and Ms. Jordan became a director in September 1995. 47 The Board of Directors of the Company is divided into three classes serving staggered three-year terms. The terms of office of Messrs. Fitzgibbons, Turley and Lehr will expire on the date of the annual meeting of stockholders of the Company (the "Annual Meeting") in 1996, the terms of office of Messrs. Boyle, Doluisio and Sidhu will expire on the date of the Annual Meeting in 1997 and the terms of office of Messrs. Michas, Dunn and Newman and Ms. Jordan will expire on the date of the Annual Meeting in 1998. 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. Messrs. Fitzgibbons, Sidhu and Michas are employees of Stonington Partners and serve on the Board of Directors of the Company as representatives of the Merrill Lynch Investors. In August 1993, Messrs. Fitzgibbons, Sidhu and Michas, together with other colleagues from Merrill Lynch Capital Partners, founded Stonington Partners. In July 1994, Messrs. Fitzgibbons, Sidhu and Michas left the employment of Merrill Lynch, although each has continued as a director of Merrill Lynch Capital Partners and the other companies in which certain affiliates of Merrill Lynch have equity investments and for which they were serving as a director in July 1994 (such other companies, the "Merrill Lynch Affiliates"). In this connection, each of Messrs. Fitzgibbons, Sidhu and Michas entered into a consulting agreement with Merrill Lynch Capital Partners which provides, among other things, for his continued availability to serve on the Board of Directors of the Company and the respective boards of directors of the Merrill Lynch Affiliates for which he was serving as a director in July 1994 until requested to resign by Merrill Lynch Capital Partners, and for his compensation (directly or indirectly) by Merrill Lynch Capital Partners for serving in such director capacities and for other consulting services. Officers of the Company serve at the discretion of the Board of Directors. 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. 48 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Common Stock as of October 28, 1995 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, (iv) all of the Company's directors and executive officers as a group and (v) by each Selling Stockholder. Unless otherwise indicated, the Company believes that the beneficial owner has sole voting and investment power over such shares. The table does not reflect the Merrill Lynch Distribution or the possible sale of additional shares by the Merrill Lynch Investors if the Underwriters' over-allotment option is exercised in full.
OWNERSHIP PRIOR TO OWNERSHIP AFTER THE OFFERING THE OFFERING -------------------------- -------------------------- SHARES OF SHARES SHARES OF COMMON STOCK PERCENTAGE TO BE SOLD COMMON STOCK PERCENTAGE ------------ ---------- ---------- ------------ ---------- Merrill Lynch Investors (1).. 8,020,634 22.95 2,500,000 5,520,634(2) 15.80(2) Stewart Turley(3)............ 480,723 1.36 -- 480,723 1.36 Francis A. Newman (4)........ 103,350 * -- 103,350 * John W. Boyle (5)............ 164,505 * -- 164,505 * Dr. James T. Doluisio(6) .... 6,937 * -- 6,937 * Donald F. Dunn............... 13,217 * -- 13,217 * Albert J. Fitzgibbons, III(7) 4,717 * -- 4,717 * Lewis W. Lehr (8)............ 9,017 * -- 9,017 * Alexis P. Michas (7)......... 4,675 * -- 4,675 * Rupinder S. Sidhu (7)........ 53,530 * -- 53,530 * Robert L. Myers (9).......... 45,133 * -- 45,133 * James M Santo (10)........... 63,053 * -- 63,053 * Samuel G. Wright (11)........ 62,754 * -- 62,754 * All directors and executive officers as a group (20) persons (12)(13)........... 1,069,224 3.04 -- 1,069,224 3.04
- ------------ * Less than one percent (1) As of October 28, 1995 shares of Common Stock beneficially owned by the Merrill Lynch Investors were owned of record as follows: 516,748 shares by Merrill Lynch Capital Corporation, 5,318,821 shares by Merrill Lynch Capital Appreciation Partnership No. II, L.P., 135,311 shares by ML Offshore LBO Partnership No. II, 140,178 shares by ML Employees LBO Partnership No. I, L.P., 47,974 shares by Merrill Lynch KECALP L.P. 1986, 821,549 shares by Merrill Lynch Capital Appreciation Partnership No. B-IX, L.P., 481,223 shares by ML Offshore LBO Partnership No. B-IX, 13,029 shares by MLCP Associates L.P. No. II., 72,604 shares by Merrill Lynch KECALP L.P. 1989, 447,968 shares by ML IBK Positions, Inc., and 25,229 shares by Merchant Banking L.P. No. IV. 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, South Tower, New York, New York 10080-6123. (2) After the Merrill Lynch Distribution, the Merrill Lynch Investors will beneficially own shares of Common Stock, which would represent approximately % of the shares of Common Stock outstanding after the Offering. (3) Total does not reflect the 43,595 shares of Common Stock transferred by Mr. Turley to certain family members. Mr. Turley disclaims beneficial ownership of such shares. Total includes 16,000 shares transferred by Mr. Turley to The Stewart Turley Foundation, Inc. Mr. Turley disclaims (Footnotes continued on following page) 49 (Footnotes continued from preceding page) beneficial ownership of such shares. Total includes options covering 44,421 shares of Common Stock which are exercisable as of October 28, 1995 or within 60 days thereafter. (4) Total includes options covering 100,000 shares of Common Stock which are exercisable as of October 28, 1995 or within 60 days thereafter. (5) Total does not reflect 125,393 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 40,800 shares of Common Stock which are exercisable as of October 28, 1995 or within 60 days thereafter. (6) Total includes options covering 3,334 shares of Common Stock which are exercisable as of October 28, 1995 or within 60 days thereafter. (7) Messrs. Fitzgibbons, Michas and Sidhu are directors of the Company and Merrill Lynch Capital Partners. Until July 1994 they were officers of Merrill Lynch Capital Partners and employees of ML & Co. 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 c/o Stonington Partners, 767 Fifth Avenue, 48th Floor, New York, NY 10153. (8) Total includes options covering 3,334 shares of Common Stock which are exercisable as of October 28, 1995 or within 60 days thereafter. (9) Mr. Myers resigned as Senior Vice President/Pharmacy of the Company on May 26, 1995. (10) Total includes options covering 9,100 shares of Common Stock which are exercisable as of October 28, 1995 or within 60 days thereafter. (11) Total includes options covering 9,100 shares of Common Stock which are exercisable as of October 28, 1995 or within 60 days thereafter. (12) The total number of all directors and executive officers as a group includes Robert L. Myers, the former Senior Vice President/Pharmacy, who resigned from his position on May 26, 1995. (13) Total includes options covering 216,589 shares of Common Stock which are exercisable as of October 28, 1995 or within 60 days thereafter. 50 DESCRIPTION OF CERTAIN INDEBTEDNESS The following summaries of the principal terms of certain outstanding indebtedness of the Company do not purport to be complete and are subject to the detailed provisions of, and qualified in their entirety by reference to, the respective financing agreements, copies of which have been filed or incorporated by reference as exhibits to the Registration Statement of which this Prospectus is a part and to which exhibits reference is hereby made. Whenever particular provisions of such documents are referred to, such provisions are incorporated by reference as a part of the statements made, and the statements are qualified in their entirety by such reference. THE CREDIT AGREEMENT The Company is party to the Credit Agreement dated as of June 14, 1993 as amended and restated as of August 3, 1994 (the "Credit Agreement") with the financial institutions party thereto (the "Lenders"), Chemical Bank, a New York banking corporation ("Chemical Bank"), NationsBank of Florida, N.A., a national banking association ("NationsBank"), as managing agents for the Lenders (in such capacity, each a "Managing Agent") and as swingline lenders (in such capacity, each a "Swingline Lender"), and Chemical Bank as administrative agent for the Lenders, the Swingline Lenders and the fronting banks with respect to letters of credit ("Letters of Credit") and bankers' acceptances ("Bankers' Acceptances") issued in connection with the Credit Agreement. On October 31, 1995, the Company entered into a Commitment Letter with the Managing Agents, the Lenders, the Administrative Agent and the Documentation Agent (the "Commitment Letter") pursuant to which the parties agreed to amend and restate the Credit Agreement on certain terms and conditions. As of the date of this Prospectus, the amendment and restatement proposed by the Commitment Letter has not been completed. The Company expects to complete the 1995 Credit Agreement Amendment by the end of November 1995. Terms and Conditions of Existing Credit Agreement The Lenders extended credit (i) on a term basis in an aggregate principal amount not to exceed $500.0 million (the "Term Loans") and (ii) on a revolving basis at any time and from time to time prior to July 29, 2000, in an aggregate principal amount outstanding not in excess of $350.0 million (the "Revolving Loans") of which up to (a) $30.0 million of such amount is available as swingline loans (the "Swingline Loans") and (b) $155.0 million of such amount is available as Letters of Credit and Bankers' Acceptances. At October 28, 1995, the Company had approximately $405.7 million outstanding under the Term Loans and $167.5 million outstanding under the Revolving Loans and had unused and available borrowing commitments under the Revolving Loans of $94.5 million (which is net of $88.0 million of letters of credit). The term of the Credit Agreement expires on July 29, 2000. The Company uses the proceeds of Revolving Loan borrowings from time to time for general corporate purposes of the Company and its subsidiaries. The proceeds of Swingline Loans are also used for general corporate purposes of the Company and its subsidiaries. Letters of Credit and Bankers' Acceptances are used to support obligations of the Company and its subsidiaries incurred in the ordinary course of business. The obligations of the Company under the Credit Agreement are unconditionally guaranteed by each of the active subsidiaries of the Company (each, a "Guarantor"). The Company and certain of the Guarantors have in addition pledged capital stock of the Guarantors, and all borrowings under the Credit Agreement are secured by a first priority lien on all accounts, accounts receivable, equipment, inventory, proceeds, intellectual property, and certain other property of the Company and first priority mortgages on two distribution centers of the Company located in Texas and the Company's headquarters located in Florida. 51 The Term Loans and the Revolving Loans bear interest at a rate per annum equal to, at the Company's option, (i) the Alternate Base Rate ("ABR") (defined in the Credit Agreement as the highest of (a) the prime rate, (b) the federal funds effective rate plus 1/2 of 1%, and (c) the base CD rate plus 1%) or (ii) the Adjusted LIBO rate ("LIBOR") (defined in the Credit Agreement as the product of (a) LIBOR in effect for the applicable interest period and (b) statutory reserves) plus, in each case, the applicable LIBOR or ABR spread (the "Interest Spread"), as the case may be. The Interest Spread is determined by reference to the ratio of funded debt to earnings before interest, taxes, depreciation and amortization (the "Ratio"). If the Ratio is (w) less than or equal to 2.5 ("Level I Ratio"), the Interest Spread is 0% on ABR loans and 3/4 of 1% on LIBOR loans, (x) less than or equal to 3.0 but greater than 2.5 ("Level II Ratio"), the Interest Spread is 0% on ABR loans and 1% on LIBOR loans, (y) less than or equal to 3.5 but greater than 3.0 ("Level III Ratio"), the Interest Spread is 1/4 of 1% on ABR loans and 1 1/4% on LIBOR loans, and (z) greater than 3.5 ("Level IV Ratio"), the Interest Spread is 1/2 of 1% on ABR loans and 1 1/2% on LIBOR loans. Interest is computed on the basis of actual number of days elapsed over a 360-day year except when the rate is determined by reference to the prime rate, in which case it is computed on the basis of actual number of days elapsed over a 365- or 366-day year. The Swingline Loans bear interest at the rate applicable to ABR Revolving Loans. Interest on ABR borrowings are payable quarterly. Interest on LIBOR borrowings are 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 pays the Lenders a commitment fee on the undrawn amount of the revolving facilities determined by reference to the Ratio. If the Company has achieved a (x) Level I Ratio, the commitment fee is 1/4 of 1%; (y) Level II Ratio or Level III Ratio, the commitment fee is 3/8 of 1%; or (z) Level IV Ratio, the commitment fee is 1/2 of 1%. The Company also pays Letter of Credit fees and Bankers' Acceptance fees, and has paid commitment and other fees to the Managing Agents and the Lenders. Principal of the Term Loans will be amortized on the following schedule:
DATE AMOUNT DATE AMOUNT ---- ----------- ---- ----------- February 3, 1996................ $33,413,000 May 2, 1998..................... $14,320,000 April 27, 1996.................. 14,320,000 August 1, 1998.................. 14,320,000 August 3, 1996.................. 14,320,000 October 31, 1998................ 14,320,000 November 2, 1996................ 14,320,000 January 30, 1999................ 47,733,000 February 1, 1997................ 33,413,000 May 1, 1999..................... 14,320,000 May 3, 1997..................... 14,320,000 July 31, 1999................... 14,320,000 August 2, 1997.................. 14,320,000 October 30, 1999................ 14,320,000 November 1, 1997................ 14,320,000 January 29, 2000................ 52,507,000 January 31, 1998................ 38,187,000 April 29, 2000.................. 14,320,000 July 29, 2000................... 14,320,000
The Company is required to prepay borrowings under the Credit Agreement with (i) in any fiscal year, the excess of (a) the aggregate net proceeds of dispositions of assets of the Company and its subsidiaries over (b) $6.0 million, (ii) in any fiscal year, the net proceeds of any incurrence of debt (other than indebtedness permitted under the Credit Agreement), and (iii) 50% of the net proceeds of any equity issuance. Mandatory prepayments are to be applied (i) first, pro rata against remaining scheduled installments of principal due in respect of Term Loans and (ii) second, to prepay Swingline Loans and then other Revolving Loans. The Company has the right to prepay any borrowings under the Credit Agreement in whole or in part at any time. Optional prepayments of Term Loans are to be applied (i) first, in the order of maturity of the scheduled installments of principal due on the repayment dates occurring during the twelve-month period beginning on the date of such prepayment and (ii) second, pro rata against the remaining scheduled installments of principal due in respect of Term Loans. 52 The Credit Agreement contains various restrictive covenants prohibiting the Company and its subsidiaries from (subject to certain exceptions), (i) incurring or permitting to exist any indebtedness, other than, among other things, (a) certain indebtedness specified existing on the date the Company restated the Credit Agreement, (b) indebtedness that consists of purchase money indebtedness or capital lease obligations and is either (x) incurred by the Company in the ordinary course of business to finance capital expenditures or (y) exists with respect to an acquired entity if such indebtedness exists at the time of acquisition; provided, that indebtedness described in (x) and (y) shall not exceed $10.0 million in any fiscal year and indebtedness described in (x) must be incurred within 90 days after the making of the capital expenditure financed thereby, (c) certain deferred purchase price obligations in an amount not to exceed $5.0 million, (d) reimbursement obligations in limited amounts, (e) certain intercompany indebtedness, (f) indebtedness in respect of interest rate protection agreements, (g) the 9 1/4% Notes, (h) subordinated indebtedness incurred solely to redeem the 9 1/4% Notes in whole at an interest rate more favorable than that in effect under the 9 1/4% Notes, and on terms no less favorable to the Company than those in effect under the 9 1/4% Notes, and (i) obligations of the Company and certain subsidiaries under various stock or option purchase agreements; (ii) incurring or permitting to exist any liens, other than, among other things, (a) certain specified liens existing on the date the Company restated the Credit Agreement, (b) liens existing on property or assets prior to the acquisition thereof by the Company, (c) purchase money security interests in real property, improvements thereto or equipment, and (d) liens on consigned goods; (iii) entering into sale and leaseback transactions other than those specified in the Credit Agreement; (iv) making investments, loans or advances in excess of $7.0 million in the aggregate at any time outstanding, other than, among others, the acquisitions of entities engaged in one or more lines of business substantially similar to those engaged in on the date the Credit Agreement was restated, not to exceed $50.0 million in any instance or $100.0 million in any fiscal year (subject, in the case of any such acquisition exceeding $15.0 million, to certain pro forma financial ratio compliance tests); (v) merger, consolidation, sale of all or any substantial part of any asset or any capital stock of a subsidiary, or acquisitions (including leases of all or any substantial part of the assets of any entity), except for, among other things, (a) the sale of inventory in the ordinary course of business, (b) the sale of accounts receivable on an ongoing basis; provided that the purchaser of such receivables may at no time invest more than $75.0 million, (c) the sale or other disposal of certain specified real estate, and (d) the sale of $35.0 million of assets, provided that sales not exceed $10.0 million in any twelve-month period; (vi) declaring or paying dividends or distributions, except for, among other things, purchases or redemptions of stock in connection with certain existing management subscription agreements; (vii) engaging in any transaction with any affiliate other than, subject to limited exceptions, on arms-length terms; (viii) engaging in business activities not reasonably related to their current business activities; (ix) subject to limited exceptions, prepaying or redeeming indebtedness; (x) amending, waiving, modifying or terminating certain documents, including, among others, their respective charter documents and the terms of material indebtedness of the Company, unless such amendment, waiver, modification or termination is not adverse to the Lenders; and (xi) maintaining a bank account with a financial institution other than a Lender, except as expressly specified. The Credit Agreement requires the Company to satisfy certain financial covenants, including, among other things, on a quarterly basis, with respect to the four immediately preceding quarters: (i) the Ratio; (ii) interest coverage ratio; and (iii) fixed charge coverage. "Events of Default" under the Credit Agreement include (i) default in the payment when due of any principal payable on the loans under the Credit Agreement; (ii) default in the payment of any interest, fees or other amounts payable under the Credit Agreement for a period of three business days; (iii) the failure to comply with any covenant, condition or agreement contained in the Credit Agreement related loan documents; (iv) the failure to pay any principal or interest due in respect to any indebtedness in a principal amount in excess of $3.0 million (after giving effect to any applicable grace period); (v) the commencement of a bankruptcy, insolvency, receivership or similar action by or against the Company or any subsidiary; (vi) one or more judgments in an aggregate amount in excess of $250,000 (to the extent not covered by insurance) rendered against the Company or any subsidiary 53 which shall remain undischarged for a period of 10 consecutive days; (vii) certain events under the Employee Retirement Income Security Act of 1975; and (viii) a change in control ("Change in Control") which shall occur, if, among other things, (a) any person or group other than Merrill Lynch Capital Partners and its affiliates shall own shares representing more than 30% of the ordinary voting power of the Company, and (b) certain specified changes in the composition of the board of directors of the Company occur. Terms and Conditions of the Proposed Amendment and Restatement of the Credit Agreement Pursuant to the Commitment Letter, the Company has received commitments from the Managing Agents and others to amend and restate the Credit Agreement on certain terms and conditions (the "1995 Credit Agreement Amendment"). The Commitment Letter contemplates the Lenders making available senior secured credit facilities in an aggregate principal amount of $750.0 million (the "Revised Credit Facilities") on terms and conditions which will be either more favorable to the Company or substantially the same as those upon which the Lenders have extended credit under the Credit Agreement. The principal differences between the Credit Agreement and the 1995 Credit Agreement Amendment are expected to be the following: (i) the Revolving Credit Facility will have an aggregate principal amount of $500.0 million and will expire on the fifth anniversary of the execution of the 1995 Credit Agreement Amendment; (ii) the Term Loan Facility will have an aggregate principal amount of $250.0 million and will mature on the fifth anniversary of the execution of the 1995 Credit Agreement Amendment; (iii) scheduled payments of the amounts outstanding under the Term Loan Facility will be $50.0 million per fiscal year, payable in $10.0 million installments in each of the first three quarters and $20.0 million in the fourth quarter; (iv) certain of the financial and restrictive covenants imposed on the Company and its subsidiaries will be amended favorably for the Company, including an increase in the aggregate permitted net investment of a purchaser of accounts receivable to $125 million; (v) the interest rates for the Revised Credit Facilities will be adjusted as follows: the rates for committed borrowings under the Revised Credit Facilities, at the Company's option, will be either (a) ABR or (b) Adjusted LIBOR plus the applicable LIBOR Spread, with the LIBOR Spread to be determined by reference to the ratio of EBITDA of the Company to its Interest Expense (as such terms are to be defined in the 1995 Credit Agreement Amendment, with such ratio being referred to as the "Interest Coverage Ratio"); (vi) if the Interest Coverage Ratio is (a) less than 3.5 ("Level I Interest Coverage Ratio"), the LIBOR Spread will be 75 basis points per annum, (b) equal to or greater than 3.5 but less than 4.5, ("Level II Interest Coverage Ratio"), the LIBOR Spread will be 62.5 basis points per annum or (c) equal to or greater than 4.5 ("Level III Interest Coverage Ratio"), the LIBOR Spread will be 50 basis points per annum; provided, however, that the LIBOR Spread cannot be less than 62.5 basis points per annum prior to receipt by the Lenders of the Company's financial statements for the fiscal quarter ending October 1996 (the "October 1996 Financial Statements"); provided, further, that if, after the receipt of the October 1996 Financial Statements, the Interest Coverage Ratio is greater than or equal to 4.5, no default or event of default has occurred and is continuing and the Revised Credit Facilities have received a Baa3 or better rating from Moody's Investors Service, Inc. and a BBB- or better rating from Standard & Poors Ratings Service, the LIBOR Spread will be 37.5 basis points per annum; and (vii) the commitment fees payable to the Lenders by the Company will be lowered as follows: (a) if the Company achieves a Level I Interest Coverage Ratio, the commitment fee will be 31.25 basis points per annum, (b) if the Company achieves a Level II Interest Coverage Ratio, the commitment fee will be 25 basis points per annum or (c) if the Company achieves a Level III Interest Coverage Ratio, the commitment fee will 18.75 basis points per annum; provided, however, that the commitment fees cannot be less than 25 basis points per annum until delivery to the Lenders of the October 1996 Financial Statements. Each of Chemical Bank and NationsBank has committed to provide $100 million of the Revised Credit Facilities. The Company has received commitments from arrangers to use commercially 54 reasonable efforts to assemble a syndicate of financial institutions to provide the balance of the necessary commitments for the Revised Credit Facilities. The commitments made pursuant to the Commitment Letter are conditional on the entire amount of the Revised Credit Facilities being committed for by Lenders; the negotiation, execution and delivery of satisfactory documentation; there not occurring or becoming known any material adverse change with respect to the condition (financial or otherwise/operations, business, assets, liabilities, prospects or national agreements of the Company and its subsidiaries taken as a whole; and certain other conditions specified in the Commitment Letter. THE 9 1/4% NOTES The 9 1/4% Notes are senior subordinated obligations of the Company, subordinated in right of payment to all existing and future senior debt of the Company. The 9 1/4% Notes are redeemable at the option of the Company, in whole or in part, at specified redemption prices, and upon a Change in Control. The 9 1/4% Notes bear interest at 9 1/4% per annum and mature on February 15, 2004. The indenture pursuant to which the 9 1/4% Notes were issued (the "9 1/4% Notes Indenture") contains certain covenants that, among other things, restrict (i) the incurrence of additional indebtedness by the Company and its Restricted Subsidiaries (as defined in the 9 1/4% Notes Indenture), (ii) the payment of dividends on, and redemptions of, capital stock of the Company and the making of other restricted payments, (iii) the incurrence of restrictions on the ability of Restricted Subsidiaries to pay dividends or other payments to the Company, (iv) the incurrence of liens, (v) transactions with affiliates, (vi) the use of proceeds from the disposition of certain assets of the Company or the sale of the stock of Restricted Subsidiaries, (vii) the issuance of certain guarantees and pledges by Restricted Subsidiaries, (viii) the issuance and sale of capital stock by Restricted Subsidiaries, (ix) the incurrence of other senior subordinated indebtedness and (x) the ability of the Company to engage in certain mergers or consolidations or to transfer all or substantially all of its assets to another person. Upon a Change in Control, (i) the Company will have the option to redeem the 9 1/4% Notes and (ii) subject to certain conditions, the Company will be required to make an offer to purchase each holder's 9 1/4% Notes at 101% of the principal amount thereof plus accrued interest to the date of redemption. In addition, the Company will, under certain circumstances, be obligated to make an offer to purchase 9 1/4% Notes in the event of Asset Sales (as defined in the 9 1/4% Notes Indenture). The Credit Agreement, however, prohibits the Company from optionally redeeming the 9 1/4% Notes. THE INDUSTRIAL DEVELOPMENT REVENUE BONDS The Company has issued and outstanding $18.25 million in Variable Rate Demand Industrial Development Revenue Refunding Bonds including $8.25 million due March 1, 2009 and $10.0 million due May 1, 2013. The variable rate demand industrial development revenue refunding bonds currently have an interest rate which is a daily rate established by J.P. Morgan Securities, Inc. 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 and are guaranteed obligations of the Company. The reimbursement agreement relating to the letters of credit incorporates the restrictive covenants and limitations of the Credit Agreement. THE IFS SALE AND LEASEBACK On June 15, 1993, the Company entered into the IFS Sale and Leaseback, which is an agreement for a sale and leaseback of certain assets related to its photo processing business. The Company has sold certain photo processing equipment to Imaging Financial Services, Inc., a Delaware corporation, for approximately $35.0 million, and entered into a five-year lease with respect to such equipment. At the end of the five years, the Company may renew the agreement or terminate the lease and return the equipment. 55 DESCRIPTION OF CAPITAL STOCK The following summary is subject to the detailed provisions of, and is qualified in its entirety by reference to, the Company's Restated Certificate of Incorporation and Restated By-laws, copies of which have been incorporated by reference as exhibits to the Registration Statement of which this Prospectus is a part. The authorized capital stock of the Company consists of 100 million shares of Common Stock and 20 million shares of preferred stock, par value $.01 per share. COMMON STOCK The Company's authorized common stock consists of 100 million shares of Common Stock, par value $.01 per share (of which 3,518,728 shares are Non-Voting Common Stock (Series I), par value $.01 per share). As of October 28, 1995, there were 34,950,857 shares of Common Stock outstanding and employee stock options outstanding to purchase an aggregate of 1,656,199 shares of Common Stock (of which options to purchase an aggregate of 302,328 shares of Common Stock were exercisable). In addition, another 1,757,910 shares of Common Stock were reserved for issuance pursuant to the Company's 1993 and 1995 Stock Option and Incentive Plans. Subject to certain conditions, shares of Common Stock held by any Regulated Banking Stockholder (as defined in the Restated Certificate of Incorporation) may be converted into the same number of shares of Non-Voting Common Stock and shares of Non-Voting Common Stock held by any holder may be converted into the same number of shares of Common Stock. Voting Rights Each share of Common Stock entitles the holder thereof to one vote in elections of directors and all other matters submitted to a vote of stockholders. The Common Stock does not have cumulative voting rights, which means that holders of a majority of the outstanding Common Stock voting for the election of directors can elect all directors then being elected. Each share of Non-Voting Common Stock does not entitle the holder thereof to any vote on matters on which the holders of Common Stock are entitled to vote, except on any amendment, repeal or modification of any provision of the Company's Restated Certificate of Incorporation which adversely affect the rights of the holders of Non-Voting Common Stock or as otherwise required by law. Dividends Subject to the rights of any preferred stock which may be issued by the Board of Directors, each share of Common Stock and Non-Voting Common Stock has an equal and ratable right to receive dividends to be paid from the Company's assets legally available therefor when, as and if declared by the Board of Directors. The terms of the Company's outstanding indebtedness restrict the declaration and payment of dividends on the Common Stock. Liquidation In the event of the dissolution, liquidation or winding up of the Company, the holders of Common Stock and Non-Voting Common Stock are entitled to share equally and ratably in the assets available for distribution after payments are made to the Company's creditors and to the holders of any preferred stock of the Company that may be outstanding at the time. Other The holders of shares of Common Stock and Non-Voting Common Stock have no preemptive, subscription, redemption or conversion rights and are not liable for further call or assessment. All of the outstanding shares of Common Stock are fully paid and nonassessable. 56 Registrar and Transfer Agent Mellon Securities Trust Company acts as Registrar and Transfer Agent for the Common Stock. PREFERRED STOCK The Company's Restated Certificate of Incorporation provides that the Company may issue up to 20 million shares of preferred stock and the Board of Directors of the Company is authorized, without further stockholder action, to divide any or all shares of authorized preferred stock into series and to fix and determine the designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereon, of any series so established, including voting powers, dividend rights, liquidation preferences, redemption rights and conversion privileges. As of the date of this Prospectus, the Board of Directors of the Company has not authorized any series of preferred stock and there are no plans, agreements or understandings for the issuance of any shares of preferred stock. CERTIFICATE OF INCORPORATION AND BY-LAWS Certain provisions of the Company's Restated Certificate of Incorporation and Restated By-laws could make more difficult non-negotiated acquisitions of the Company. The Board of Directors believes that these provisions will help to assure the continuity and stability of the Board of Directors and the business strategies and policies of the Company as determined by the Board of Directors. These provisions could have the effect, however, of discouraging a third party from making a tender offer or otherwise attempting to obtain control of the Company even though such an attempt might be beneficial to the Company and its stockholders. Pursuant to the Company's Restated Certificate of Incorporation, the Board of Directors of the Company is divided into three classes serving staggered three-year terms. Directors can be removed from office only for cause and only by the affirmative vote of the holders of a majority of the then-outstanding shares of capital stock entitled to vote generally in an election of directors. Vacancies on the Board of Directors may be filled only by the remaining directors and not by the stockholders. The Restated Certificate of Incorporation also provides that any action required or permitted to be taken by the stockholders of the Company may be effected only at an annual or special meeting of stockholders, and prohibits stockholder action by written consent in lieu of a meeting. The Company's Restated By-laws provide that special meetings of stockholders may be called only by the chairman, the president or the secretary of the Company and must be called by any such officer at the request in writing of the Board of Directors. Stockholders may call a special meeting if the holders of not less than 50% of all votes entitled to be cast at a special meeting send a written demand to the Company's Secretary. The Restated By-laws establish an advance notice procedure for the nomination, other than by or at the direction of the Board of Directors, of candidates for election as directors as well as for other stockholder proposals to be considered at annual meetings of stockholders. In general, notice of intent to nominate a director or raise business at such meetings must be received by the Company not less than 60 nor more than 90 days prior to the anniversary of the previous year's annual meeting, and must contain certain specified information concerning the person to be nominated or the matters to be brought before the meeting and concerning the stockholder submitting the proposal. The foregoing summary is qualified in its entirety by the provisions of the Company's Restated Certificate of Incorporation and Restated By-laws, copies of which have been incorporated by reference as exhibits to the Registration Statement of which this Prospectus constitutes a part. 57 LIMITATIONS ON DIRECTORS' LIABILITY The Company's Restated Certificate of Incorporation provides that, to the fullest extent permitted by the General Corporation Law of the State of Delaware (the "DGCL"), directors of the Company shall not be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director. Section 102(7) of the DGCL, however, states that such a provision may not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL, relating to unlawful dividends, distributions or the repurchase or redemption of stock or (iv) for any transaction from which the director derives an improper personal benefit. The Company's Restated By-laws provide that the Company shall indemnify and hold harmless, to the fullest extent permitted by the DGCL, any person against expenses (including attorney's fees), judgments, fines and amounts paid in settlement, actually and reasonably incurred in connection with any threatened, pending or completed legal proceedings in which such person is involved by reason of the fact that he is or was a director, officer, employee or agent of the Company (or serving in any such capacity with another business organization at the request of the Company) if he acted in good faith and in a manner that he reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, if he had no reasonable cause to believe that his conduct was unlawful. If the legal proceeding, however, is by or in the right of the Company, such director, officer, employee or agent may not be indemnified in respect of any claim, issue or matter as to which he shall have been adjudged to be liable to the Company unless a court determines otherwise. The Company has entered into agreements to indemnify its directors and officers in addition to the indemnification provided for in the Restated Certificate of Incorporation. These agreements, among other things, indemnify the Company's directors and officers for certain expenses (including attorneys' fees), judgments, fines and settlement amounts incurred by such person in any action or proceeding, including any action by or in the right of the Company, on account of services as a director or officer of the Company or as a director or officer of any subsidiary of the Company, or as a director or officer of any other company or enterprise to which the person provides services at the request of the Company. REGISTRATION RIGHTS Pursuant to a registration rights agreement, as amended, among the Company, the Merrill Lynch Investors, the Management Investors and the other stockholders of the Company who held shares immediately prior to the IPO (the "Registration Rights Agreement"), holders of at least 25% of the Common Stock have the right to demand registration under the Securities Act of their shares of Common Stock. Subject to certain exceptions, the Company will be required, at its expense, to register such shares and to include in the registration on request all other shares owned by parties to the Registration Rights Agreement (or their permitted transferees) who notify the Company of their request. In addition, in the event the Company proposes to register any of its equity securities under the Securities Act, each party to the Registration Rights Agreement (or its permitted transferee) has the incidental right, subject to certain exceptions, to have the shares of the Common Stock then owned by it included in such registration. The Company has agreed that, in the event of any registration of securities owned by a party to the Registration Rights Agreement (or permitted transferee) in accordance with the provisions thereof, it will indemnify such person, and certain related persons, against liabilities incurred in connection with such registration, including liabilities arising under the Securities Act. The Company and the Eckerd Corporation Profit Sharing Plan have also entered into a demand registration rights agreement with terms similar to those contained in the Registration Rights Agreement (except that such registration rights agreement does not provide for incidental registration rights). 58 The registration rights of the existing stockholders are subject to certain limitations intended to prevent undue interference with the Company's ability to distribute securities, including, without limitation, the provisions that (i) demand registration rights may not be exercised within six months after the effective date of the Company's most recent registration statement (other than registration on Form S-4 or S-8) and (ii) the 1% Holders will not offer for public sale any shares owned by them during the seven days before or 120 days after the effective date of any registration statement filed pursuant to the Registration Rights Agreement. The Company has included the shares of Common Stock to be sold by the Selling Stockholders in the Offering pursuant to the exercise by such Selling Stockholders of their demand registration rights under the Registration Rights Agreement. 59 UNDERWRITING Subject to the terms and conditions set forth in the Purchase Agreement (the "Purchase Agreement") among the Company, the Selling Stockholders and each of the underwriters named below (the "Underwriters"), the Selling Stockholders severally have agreed to sell to each of the Underwriters, and each of the Underwriters severally has agreed to purchase from the Selling Stockholders, the number of shares of Common Stock set forth opposite its name below. NUMBER OF UNDERWRITERS SHARES - ------------ --------- Merrill Lynch, Pierce, Fenner & Smith Incorporated................................................. CS First Boston Corporation.................................. Morgan Stanley & Co. Incorporated............................ Raymond James & Associates, Inc.............................. ......... --------- Total........................................................ 2,500,000 --------- --------- Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), CS First Boston Corporation, Morgan Stanley & Co. Incorporated and Raymond James & Associates, Inc. are acting as representatives (the "Representatives") of the several Underwriters. In the Purchase Agreement, the several Underwriters have agreed, subject to the terms and conditions set forth therein, to purchase all of the shares of Common Stock offered hereby if any of such shares are purchased. Under certain circumstances, the commitments of the non-defaulting Underwriters may be increased. The Underwriters have advised the Company that they propose initially to offer the shares to the public at the public offering price set forth on the cover page of this Prospectus, and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may reallow, a discount not in excess of $ per share to certain other dealers. After the Offering, the public offering price, concession and discount may be changed. The Selling Stockholders have granted the Underwriters an option, exercisable for 30 days after the date of this Prospectus, to purchase up to an aggregate of an additional 375,000 shares to cover over-allotments, if any, at the public offering price set forth on the cover page hereof, less the underwriting discount. The Underwriters may exercise such option only to cover over-allotments, if any, made on the sale of the shares offered hereby. To the extent that the Underwriters exercise such option, each Underwriter will be obligated, subject to certain conditions, to purchase the number of shares proportionate to such Underwriter's initial amount reflected in the foregoing table. For information regarding the ownership by the Merrill Lynch Investors of Common Stock and the representation of affiliates of ML & Co. on the Board of Directors of the Company, see "Management" and "Principal and Selling Stockholders." The Common Stock is listed on the NYSE under the symbol "ECK." Because the Company is an affiliate of Merrill Lynch, one of the Underwriters, the Offering is being conducted in accordance with the applicable provisions of Schedule E to the By-Laws of the National Association of Securities Dealers, Inc. In accordance with Schedule E, no NASD member participating in the distribution is permitted to confirm sales to accounts over which it exercises discretionary authority without prior specific written consent. In addition, under the rules of the NYSE, Merrill Lynch is precluded from 60 issuing research reports that make recommendations with respect to the Common Stock for so long as the Company is an affiliate of Merrill Lynch. Pursuant to the Registration Rights Agreement, each 1% Holder has agreed, for a period beginning seven days before, and ending 120 days after, the effective date of the Registration Statement of which this Prospectus is a part, not to effect any public sale or distribution, including any sale pursuant to Rule 144 under the Securities Act, of Common Stock or any securities convertible into or exchangeable or exercisable for Common Stock, or any rights or warrants to acquire Common Stock, subject to certain exceptions, without the prior written consent of the Representatives of the Underwriters. See "Risk Factors--Shares Eligible for Future Sale." Approximately 23.22% of the shares of Common Stock outstanding upon consummation of the Offering will be subject to such lock-up agreements. In addition, it is anticipated that certain of the Merrill Lynch Investors that are limited partnerships will be distributing shares of Common Stock pursuant to the Merrill Lynch Distribution. The Merrill Lynch Investors do not expect that the number of shares to be so distributed will exceed 400,000. As a condition to receiving shares of Common Stock in the Merrill Lynch Distribution, such partners have agreed to be bound by the same lock-up provision as the 1% Holders for a period of 120 days after the effective date of the Registration Statement. The Merrill Lynch Distribution is expected to occur as soon as practicable after 120 days from the effective date of the Registration Statement, or on such earlier date consented to by the Representatives of the Underwriters. In addition, each of the Company and the executive officers and directors of the Company will agree, for a period of 90 days after the effective date of the Registration Statement, not to sell or otherwise dispose of any shares of Common Stock or securities convertible into or exchangeable or exercisable for Common Stock, or any rights or warrants to acquire Common Stock, subject to certain exceptions, without the prior written consent of the Representatives of the Underwriters. The Company and the Selling Stockholders have agreed to indemnify the Underwriters and their controlling persons against certain civil liabilities, including liabilities under the Securities Act of 1933, as amended, and to contribute to payments the Underwriters may be required to make in respect thereof. Merrill Lynch, an affiliate of the Merrill Lynch Investors, acted as one of the representatives of the underwriters in both the Secondary Offering and the August Offering and received underwriting commissions and related fees of approximately $809,200 and approximately $3.0 million, respectively. In addition, Merrill Lynch received fees of approximately $1.4 million in connection with the financial advisory services rendered to the Company in connection with the Insta-Care Sale. In addition to Merrill Lynch, certain of the Underwriters acted as representatives of the Underwriters in both the Secondary Offering and the August Offering and, from time to time, perform investment banking and other financial services for the Company. LEGAL MATTERS Certain legal matters with respect to the Common Stock will be passed upon for the Company by Skadden, Arps, Slate, Meagher & Flom, New York, New York and Robert E. Lewis, Esq., Vice President/General Counsel of the Company. Certain legal matters will be passed upon for the Underwriters by Shearman & Sterling, New York, New York. Certain partners of Skadden, Arps, Slate, Meagher & Flom are investors in the Company. Skadden, Arps, Slate, Meagher & Flom and Shearman & Sterling occasionally act as counsel to ML & Co. and its affiliates, including the Merrill Lynch Investors, and Skadden, Arps, Slate, Meagher & Flom occasionally acts as counsel to the other Underwriters. 61 EXPERTS The consolidated financial statements and schedules of the Company and subsidiaries as of January 28, 1995 and January 29, 1994, and for the years ended January 28, 1995, January 29, 1994 and January 30, 1993, included in the Company's Annual Report on Form 10-K405 for the period ended January 28, 1995 and incorporated herein by reference, have been incorporated by reference in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, included or incorporated by reference herein, and upon the authority of that firm as experts in accounting and auditing. With respect to the unaudited interim financial information of Eckerd Corporation and subsidiaries for the thirteen week periods ended April 29, 1995 and April 30, 1994 and the thirteen and twenty-six week periods ended July 29, 1995 and July 30, 1994, incorporated by reference herein, the independent certified public accountants have reported that they applied limited procedures in accordance with professional standards for a review of such information. However, their separate reports included in the Eckerd Corporation and subsidiaries' quarterly reports on Form 10-Q for each of the quarters ended April 29, 1995 and July 29, 1995, and incorporated by reference herein, state that they did not audit and they do not express an opinion on that interim financial information. Accordingly, the degree of reliance on their reports on such information should be restricted in light of the limited nature of the review procedures applied. The accountants are not subject to the liability provisions of section 11 of the Securities Act for their report on the unaudited interim financial information because that report is not a "report" or a "part" of the registration statement prepared or certified by the accountants within the meaning of sections 7 and 11 of the Securities Act. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports and other information with the Securities and Exchange Commission (the "Commission"). Such reports and other information filed by the Company with the Commission, may be inspected at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and should also be available for inspection and copying at the regional offices of the Commission located at Seven World Trade Center, 13th Floor, New York, New York 10048; and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may also be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Additionally, such reports and other information concerning the Company are available for inspection at the offices of the New York Stock Exchange located at 20 Broad Street, New York, New York 10005, on which the Common Stock and the 9 1/4% Notes are listed. This Prospectus constitutes a part of a Registration Statement on Form S-3 filed by the Company with the Commission under the Securities Act. This Prospectus omits certain of the information contained in the Registration Statement, and reference is hereby made to the Registration Statement and to the exhibits relating thereto for further information with respect to the Company and the Common Stock offered hereby. Any statements contained herein concerning the provisions of any document are not necessarily complete, and, in each instance, reference is made to such copy filed as an exhibit to the Registration Statement or otherwise filed with the Commission. Each such statement is qualified in its entirety by such reference. The Registration Statement and the exhibits thereto may be inspected without charge at the office of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies thereof may be obtained from the Commission at prescribed rates. 62 INCORPORATION OF CERTAIN INFORMATION BY REFERENCE The following documents filed by the Company with the Commission (File No. 1-4844) pursuant to the Exchange Act, are incorporated herein by reference and made a part hereof: 1. The Company's Annual Report on Form 10-K405 for the fiscal year ended January 28, 1995. 2. The Company's Quarterly Report on Form 10-Q for the quarter ended April 29, 1995. 3. The Company s Quarterly Report on Form 10-Q for the quarter ended July 29, 1995. All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus and prior to the termination of the offering of the shares of Common Stock offered hereby shall be deemed to be incorporated in this Prospectus by reference and to be a part hereof from the date of filing of such documents. The Company will provide without charge to each person to whom a copy of this Prospectus is delivered, on the written or oral request of any such person, a copy of any and all of the documents incorporated herein by reference (other than exhibits unless such exhibits are specifically incorporated herein by reference). Requests for such copies should be directed to the Treasurer, Eckerd Corporation, 8333 Bryan Dairy Road, Largo, Florida 34647 or by telephone at (813) 399-6000. Any statement contained herein or in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. 63 - --------------------------------------------- ------------------------------- - --------------------------------------------- ------------------------------- NO DEALER, SALESPERSON OR ANY OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE 2,500,000 SHARES CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING [ECKERD LOGO] BEEN AUTHORIZED BY THE COMPANY OR THE SELLING STOCKHOLDERS OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY COMMON STOCK JURISDICTION WHERE OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY ----------------- CIRCUMSTANCES, CREATE ANY IMPLICATIONS PROSPECTUS THAT THERE HAS NOT BEEN ANY CHANGE IN ----------------- THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. ----------------- TABLE OF CONTENTS PAGE ---- Prospectus Summary.................... 3 Risk Factors.......................... 8 Capitalization........................ 12 Price Range of Common Stock and Dividend Policy..................... 13 The Company........................... 14 Selected Historical Financial Data.... 17 Pro Forma Financial Data.............. 19 Management's Discussion and Analysis of Results of Operations and Financial Condition................. 21 MERRILL LYNCH & CO. CS FIRST BOSTON Business.............................. 31 MORGAN STANLEY & CO. INCORPORATED Management............................ 45 RAYMOND JAMES & ASSOCIATES, INC. Principal and Selling Stockholders.... 49 Description of Certain Indebtedness... 51 Description of Capital Stock.......... 56 Underwriting.......................... 60 Legal Matters......................... 61 Experts............................... 62 Available Information................. 62 , 1995 Incorporation of Certain Information by Reference........................ 63 - --------------------------------------------- ------------------------------- - --------------------------------------------- ------------------------------- APPENDIX OF OMITTED GRAPHIC MATERIAL A. Graphic Material on Page 2 of Prospectus: 1. "Eckerd" logo 2. "It's right at Eckerd." logo 3. Map of number of Eckerd Drug stores by state as listed under the caption "Business--Eckerd Drug Stores" in the Prospectus B. Photographs on Inside Back Cover Page of Prospectus: 1. Product counter inside Eckerd Drug store 2. Eckerd Drug store exterior 3. "It's right at Eckerd." logo PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the various expenses expected to be incurred in connection with the distribution of the securities being registered, other than the underwriting discounts and commissions. All of the amounts shown are estimates except for the Securities and Exchange Commission and National Association of Securities Dealers, Inc. filing fees. Securities and Exchange Commission filing fee................. $ 24,582 National Association of Securities Dealers, Inc. filing fee... 12,791 Blue sky fees and expenses (including counsel fees)........... 16,500 Costs of printing and engraving............................... 55,000 Legal fees and expenses....................................... 300,000 Accounting fees and expenses.................................. 20,000 Miscellaneous................................................. 21,127 -------- Total......................................................... $450,000 -------- -------- ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 102(b)(7) of the Delaware General Corporation Law permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for payments of unlawful dividends or unlawful stock repurchases or redemptions, or (iv) for any transaction from which the director derived an improper personal benefit. The Registrant's Restated Certificate of Incorporation contains such a provision. Under Article VIII of the Registrant's Restated By-Laws as currently in effect, as well as under Article SEVENTH of the Registrant's Restated Certificate of Incorporation, each person who is or was a director or officer of the Registrant, or who serves or served any other enterprise or organization at the request of the Registrant, shall be indemnified by the Registrant to the full extent permitted by the Delaware General Corporation Law. Section 145 of the Delaware General Corporation Law provides that a corporation may indemnify any person who, by reason of the fact that such person is or was a director or officer of such corporation, is made (or threatened to be made) a party to an action other than one brought by or on behalf of the corporation, against reasonable expenses (including attorneys' fees), judgments, fines and settlement payments, if such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of such corporation and, in criminal actions, in addition, had no reasonable cause to believe his conduct was unlawful. In the case of actions on behalf of the corporation, indemnification may extend only to reasonable expenses (including attorneys' fees) and only if such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, provided that no such indemnification is permitted in respect of any claim as to which such person is adjudged liable to such corporation except to the extent that a court otherwise provides. To the extent that such person has been successful in defending any action (even one on behalf of the corporation), he is entitled to indemnification for reasonable expenses (including attorneys' fees). The indemnification provided for by the Delaware General Corporation Law is not exclusive of any other rights of indemnification, and a corporation may maintain insurance against liabilities for which indemnification is not expressly provided by the Delaware General Corporation Law. The Registrant II-1 has entered into agreements to indemnify its directors and officers in addition to the indemnification provided for in the Restated Certificate of Incorporation. These agreements, among other things, indemnify the Registrant's directors and officers for certain expenses (including attorneys' fees), judgments, fines and settlement amounts incurred by such person in any action or proceeding, including any action by or in the right of the Registrant, on account of services as a director or officer of the Registrant or as a director or officer of any subsidiary of the Registrant, or as a director or officer of any other company or enterprise to which the person provides services at the request of the Registrant. The Registrant maintains a liability insurance policy providing coverage for its directors and officers in an amount up to an aggregate limit of $10,000,000 per policy year. The designees of the Merrill Lynch Investors who serve on the Company's board of directors also have certain rights to indemnification by ML & Co. and the Merrill Lynch Investors for liabilities incurred in connection with actions taken by them in their capacity as directors of the Company. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits:
1.1 --Form of Purchase Agreement among the Registrant, the Selling Stockholders and the Underwriters. 3.1(i) --Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1(i) to the Registration Statement on Form S-3 of the Registrant (No. 33-50223)). 3.1(ii) --Amended and Restated By-laws of the Registrant (incorporated by reference to Exhibit 3.2(ii) to the Registration Statement on Form S-3 of the Registrant (No. 33-50223)). 4.1 --Form of certificate for the Registrant'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 Registrant (No. 33-64906)). 4.2 --Credit Agreement dated as of June 14, 1993, as amended and restated as of August 3, 1994 (incorporated by reference to Exhibit 10.1 of the Form 10-Q of the Registrant dated July 30, 1994 (File No. 1-4844)). 4.3 --Indenture dated as of November 1, 1993 between the Registrant and State Street Bank and Trust Company of Connecticut, National Association, as Trustee (incorporated by reference to Exhibits 4.01 and 4.02 of the Form 8-K of the Registrant dated October 26, 1993 (File No. 1-4844)). 5.1 --Opinion and consent of Robert E. Lewis, Esq. 15.1 --Letter of KPMG Peat Marwick LLP dated November 17, 1995 re Unaudited Interim Financial Information. 23.1 --Consent of KPMG Peat Marwick LLP dated November 17, 1995. 23.2 --Consent of Robert E. Lewis, Esq. as to the validity of the Common Stock being registered (included in Exhibit 5.1 hereto). 24.1 --Power of Attorney (included in signature pages hereto).
II-2 ITEM 17. UNDERTAKINGS 1. The undersigned Registrant hereby undertakes that: (a) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (b) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. 2. The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. 3. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Largo, State of Florida on November 17, 1995. ECKERD CORPORATION By: /s/ SAMUEL G. WRIGHT .................................. Samuel G. Wright Executive Vice President/Chief Financial Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of James M. Santo, Esq. and Robert E. Lewis, Esq., his true and lawful attorney-in-fact and agent, with full power of substitution and revocation, for him and in his name, place and stead, in any and all capacities (until revoked in writing), to sign any and all amendments and supplements (including post-effective amendments) to this Registration Statement and to sign any and all additional registration statements relating to the same offering of securities as this Registration Statement that is filed pursuant to Rule 462(b) under the Securities Act of 1933 and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or their substitutes may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the date indicated:
SIGNATURE TITLE DATE - ----------------------------------- ----------------------------------- ------------------ /s/ STEWART TURLEY Chairman of the Board and Chief November 17, 1995 ................................... Executive Officer Stewart Turley /s/ FRANCIS A. NEWMAN President, Chief Operating Officer November 17, 1995 ................................... and Director Francis A. Newman /s/ JOHN W. BOYLE Director November 17, 1995 ................................... John W. Boyle /s/ SAMUEL G. WRIGHT Executive Vice President/Chief November 17, 1995 ................................... Financial Officer Samuel G. Wright /s/ JAMES T. DOLUISIO Director November 17, 1995 ................................... James T. Doluisio /s/ DONALD F. DUNN Director November 17, 1995 ................................... Donald F. Dunn II-4 /s/ ALBERT J. FITZGIBBONS, III Director November 17, 1995 ................................... Albert J. Fitzgibbons, III /s/ MARGARET H. JORDAN Director November 17, 1995 ................................... Margaret H. Jordan /s/ LEWIS W. LEHR Director November 17, 1995 ................................... Lewis W. Lehr /s/ RUPINDER S. SIDHU Director November 17, 1995 ................................... Rupinder S. Sidhu /s/ ALEXIS P. MICHAS Director November 17, 1995 ................................... Alexis P. Michas
II-5 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 1.1 --Form of Purchase Agreement among the Registrant, the Selling Stockholders and the Underwriters. 3.1(i) --Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1(i) to the Registration Statement on Form S-3 of the Registrant (No. 33-50223)). 3.1(ii) --Amended and Restated By-laws of the Registrant (incorporated by reference to Exhibit 3.2(ii) to the Registration Statement on Form S-3 of the Registrant (No. 33-50223)). 4.1 --Form of certificate for the Registrant'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 Registrant (No. 33-64906)). 4.2 --Credit Agreement dated as of June 14, 1993, as amended and restated as of August 3, 1994 (incorporated by reference to Exhibit 10.1 of the Form 10-Q of the Registrant dated July 30, 1994 (File No. 1-4844)). 4.3 --Indenture dated as of November 1, 1993 between Registrant and State Street and Trust Company of Connecticut, National Association, as Trustee (incorporated by reference to Exhibits 4.01 and 4.02 of the Form 8-K of the Registrant dated October 26, 1993 (File No. 1-4844)). 5.1 --Opinion and consent of Robert E. Lewis, Esq. 15.1 --Letter of KPMG Peat Marwick LLP dated November 17, 1995 re Unaudited Interim Financial Information. 23.1 --Consent of KPMG Peat Marwick LLP dated November 17, 1995. 23.2 --Consent of Robert E. Lewis, Esq. as to the validity of the Common Stock being registered (included in Exhibit 5.1 hereto). 24.1 --Power of Attorney (included in signature pages hereto).
EX-1.1 2 Exhibit 1.1 S&S Draft 11/17/95 - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- Eckerd Corporation (a Delaware corporation) 2,500,000 Shares of Common Stock PURCHASE AGREEMENT Dated: December __, 1995 - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- ECKERD CORPORATION (a Delaware corporation) 2,500,000 Shares of Common Stock Par Value $ 0.01 Per Share PURCHASE AGREEMENT December __, 1995 MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated CS First Boston Corporation Morgan Stanley & Co. Incorporated Raymond James & Associates, Inc. As Representatives of the several Underwriters c/o Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated Merrill Lynch World Headquarters North Tower World Financial Center New York, New York 10281-1201 Ladies and Gentlemen: The stockholders of Eckerd Corporation, a Delaware corporation (the "Company"), named in Schedule B (the "Selling Stockholders") propose to sell severally to the underwriters named in Schedule A (the "Underwriters"), for whom you are acting as representatives (the "Representatives"), an aggregate of 2,500,000 outstanding shares of Common Stock of the Company, par value $ 0.01 per share (shares of which class of stock of the Company are hereinafter referred to as "Common Stock"), as set forth in the appropriate column on Schedule B, to the Underwriters. Such shares of Common Stock, aggregating 2,500,000 shares, are to be sold to each Underwriter, acting severally and not jointly, in such amounts as are set forth in Schedule A opposite the name of such Underwriter. The Selling Stockholders also grant to the Underwriters, severally and not jointly, the option described in Section 2 to purchase all or any part of 375,000 additional shares of Common Stock to cover over-allotments. The aforesaid 2,500,000 shares of Common Stock (the "Initial Shares"), together with all or any part of the 375,000 additional shares of Common Stock subject to the option described in Section 2 (the "Option Shares"), are collectively herein called the "Shares". The Shares are more fully described in the Prospectus referred to below. 2 You have advised us that you and the other Underwriters, acting severally and not jointly, desire to purchase the Shares and that you have been authorized by the other Underwriters to execute this Agreement and the Price Determination Agreement referred to below on their behalf. The price to the public per share and the purchase price per share for the Shares shall be agreed upon by the Selling Stockholders and the Representatives, acting on behalf of the several Underwriters, and such agreement shall be set forth in a separate written instrument substantially in the form of Exhibit A hereto (the "Price Determination Agreement"). The Price Determination Agreement may take the form of an exchange of any standard form of written telecommunication between the Company, the Selling Stockholders and the Representatives and shall specify such applicable information as is indicated in Exhibit A hereto. The offering of the Shares will be governed by this Agreement, as supplemented by the Price Determination Agreement. From and after the date of the execution and delivery of the Price Determination Agreement, this Agreement shall be deemed to incorporate, and all references herein to "this Agreement" shall be deemed to include, the Price Determination Agreement. The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-3 (Registration No. 33-____) covering the registration of the Shares under the Securities Act of 1933, as amended (the "1933 Act"), including the related preliminary prospectus, or prospectuses, and either (A) has prepared and proposes to file, prior to the effective date of such registration statement, an amendment to such registration statement, including a final prospectus or (B) if the Company has elected to rely upon Rule 430A ("Rule 430A") of the rules and regulations of the Commission under the 1933 Act (the "1933 Act Regulations"), will prepare and file a prospectus, in accordance with the provisions of Rule 430A and Rule 424(b) ("Rule 424(b)") of the 1933 Act Regulations, promptly after execution and delivery of the Price Determination Agreement. Additionally, if the Company has elected to rely upon Rule 434 ("Rule 434") of the 1933 Act Regulations, the Company will prepare and file a term sheet (a "Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b), promptly after execution and delivery of the Price Determination Agreement. The information, if any, included in such prospectus that was omitted from the prospectus included in such registration statement at the time it becomes effective but that is deemed, (i) pursuant to paragraph (b) of Rule 430A, to be part of such registration statement at the time it becomes effective is referred to herein as the "Rule 430A Information", and (ii) pursuant to paragraph (d) of Rule 434, to be part of such registration statement at the time it becomes effective is referred to herein as the "Rule 434 Information". Each prospectus used before the time such registration statement becomes effective, and any prospectus that omits the Rule 430A Information or the Rule 434 Information, if applicable, that is used after such effectiveness and prior to the execution and delivery of the Price Determination Agreement, is herein called a "preliminary prospectus". Such registration statement, including the exhibits thereto 3 and the documents incorporated by reference therein pursuant to Item 12 ("Item 12") of Form S-3 under the 1933 Act, as amended, and Rule 412 of the 1933 Act Regulations ("Rule 412") at the time it becomes effective and including, if applicable, the Rule 430A Information or the Rule 434 Information, is herein called the "Original Registration Statement." Any registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b) Registration Statement," and the Original Registration Statement and any Rule 462(b) Registration Statement are herein referred to collectively as the "Registration Statement." The prospectus, including the documents incorporated by reference therein pursuant to Item 12 and Rule 412, included in the Original Registration Statement at the time it becomes effective is herein called the "Prospectus", except that, (i) if the final prospectus first furnished to the Underwriters after the execution of the Price Determination Agreement for use in connection with the offering of the Shares differs from the prospectus included in the Original Registration Statement at the time it becomes effective (whether or not such prospectus is required to be filed pursuant to Rule 424(b)), the term "Prospectus" shall refer to the final Prospectus first furnished to the Underwriters for such use, and (ii) if Rule 434 is relied upon, the term "Prospectus" shall refer to the preliminary prospectus last furnished to the Underwriters in connection with the offering of the Shares, together with the Term Sheet. The Company and the Selling Stockholders understand that the Underwriters propose to make a public offering of the Shares as soon as you deem advisable after the Registration Statement becomes effective and the Price Determination Agreement has been executed and delivered. Section 1. Representations and Warranties. (a) The Company ------------------------------ represents and warrants to and agrees with each of the Underwriters that: (i) The Company meets the requirements for use of Form S-3 under the 1933 Act and when the Registration Statement shall become effective and at all times subsequent thereto up to the Closing Time referred to below (and, if any Option Shares are purchased, at the Date of Delivery referred to below), (A) the Registration Statement and any amendments and supplements thereto will comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations; (B) neither the Registration Statement nor any amendment or supplement thereto will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (C) neither the Prospectus nor any amendment or supplement thereto will include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and (D) if Rule 434 is relied upon, the Prospectus shall not be "materially different", as such term is used in Rule 434, from the prospectus included in the Registration Statement at the time it becomes effective; except that this 4 representation and warranty does not apply to statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of any Underwriter through you expressly for use in the Registration Statement or the Prospectus. (ii) The documents incorporated by reference in the Prospectus pursuant to Item 12 and Rule 412, at the time they were filed with the Commission, complied in all material respects with the requirements of the Securities Exchange Act of 1934, as amended (the "1934 Act"), and the rules and regulations of the Commission thereunder (the "1934 Act Regulations") and, when read together and with, and as modified or superseded by, the other information in the Prospectus, at the time the Registration Statement becomes effective and at all times subsequent thereto up to the Closing Time (and, if any Option Shares are purchased, at the Date of Delivery), will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary in order to make the statements therein, in light of the circumstances under which they were made not misleading. (iii) KPMG Peat Marwick LLP, who are reporting upon the audited financial statements included or incorporated by reference in the Registration Statement, are independent public accountants as required by the 1933 Act and the 1933 Act Regulations. (iv) This Agreement has been duly authorized, executed and delivered by the Company. (v) The consolidated financial statements of the Company and its Subsidiaries (as defined below) included or incorporated by reference in the Registration Statement present fairly the consolidated financial position of the Company and its Subsidiaries as of the dates indicated and the consolidated results of operations and the consolidated cash flows of the Company and its Subsidiaries for the periods specified, respectively. Such financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods involved. The financial statement schedules included in the Registration Statement present fairly the information required to be stated therein. The selected financial data included or incorporated by reference in the Prospectus present fairly the information shown therein and have been compiled on a basis consistent with that of the audited consolidated financial statements included or incorporated by reference in the Registration Statement. The pro forma financial statements and other pro forma financial information included in the Prospectus present fairly the information shown therein, have been prepared in accordance with the Commission's rules and guidelines with respect to pro forma financial statements, have been properly compiled on the pro forma bases described therein, and, in the 5 opinion of the Company, the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions or circumstances referred to therein. (vi) The Company has been duly organized and is subsisting as a corporation and in good standing under the laws of the State of Delaware with corporate power and corporate authority under such laws to own, lease and operate its properties and conduct its business as described in the Prospectus; and the Company is duly qualified to transact business as a foreign corporation and is in good standing in each other jurisdiction in which it owns or leases property of a nature, or transacts business of a type, that would make such qualification necessary, except to the extent that the failure to so qualify or be in good standing would not have a material adverse effect on the condition (financial or otherwise), earnings, business affairs or business prospects of the Company and its Subsidiaries, considered as one enterprise ("Material Adverse Effect") and except for jurisdictions that do not recognize the legal concepts of good standing or qualification. (vii) The Company's only subsidiaries are listed in Schedule C attached hereto (each such corporation is referred to herein as a "Subsidiary" and, collectively, the "Subsidiaries"). Each Subsidiary has been duly organized and is subsisting as a corporation and in good standing under the laws of the jurisdiction of its incorporation with corporate power and corporate authority under such laws to own, lease and operate its properties and conduct its business, except to the extent that the failure to be in good standing would not have a Material Adverse Effect and except for jurisdictions that do not recognize the legal concept of good standing; and each Subsidiary is duly qualified to transact business as a foreign corporation and is in good standing in each other jurisdiction in which it owns or leases property of a nature, or transacts business of a type, that would make such qualification necessary, except to the extent that the failure to so qualify or be in good standing would not have a Material Adverse Effect and except for jurisdictions that do not recognize the legal concepts of good standing or qualification. Except as set forth in Schedule C, all of the outstanding shares of capital stock of each Subsidiary have been duly authorized and validly issued and are fully paid and non-assessable and are owned by the Company, directly or through a Subsidiary, free and clear of any pledge, lien, security interest, charge, claim, equity or encumbrance of any kind except for the pledge of the capital stock of each Subsidiary under the Credit Agreement (as defined in the Prospectus) and the related pledge agreement (referred to in the Credit Agreement). (viii) (a) the Company had at the date indicated a duly authorized, issued and outstanding capitalization as set forth in the Prospectus under the heading "Capitalization"; and (b) the Shares will conform to the description thereof contained 6 or incorporated by reference in the Prospectus and such description conforms to the rights set forth in the instruments defining the same. (ix) The Shares to be sold by the Selling Stockholders have been duly authorized and validly issued and are fully paid and non-assessable; no holder thereof is or will be subject to personal liability solely by reason of being such a holder. (x) All of the other outstanding shares of capital stock of the Company have been duly authorized and validly issued and will have been fully paid and non-assessable; no holder thereof is or will be subject to personal liability by reason of being such a holder; and none of the outstanding shares of capital stock of the Company have been issued in violation of the preemptive rights of any stockholder of the Company. (xi) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, except as otherwise stated therein or contemplated thereby, there has not been (A) any material adverse change in the condition (financial or otherwise), earnings, business affairs or business prospects of the Company and the Subsidiaries, considered as one enterprise, whether or not arising in the ordinary course of business, (B) any transaction entered into by the Company or any Subsidiary, other than in the ordinary course of business, that is material to the Company and the Subsidiaries, considered as one enterprise, or (C) any dividend or distribution of any kind declared, paid or made by the Company on its capital stock. (xii) Neither the Company nor any Subsidiary is in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other agreement or instrument to which it is a party or by which it may be bound or to which any of its properties may be subject, except for such defaults that would not have a Material Adverse Effect. The execution and delivery of this Agreement and compliance by the Company with the terms of this Agreement have been duly authorized by all necessary corporate action on the part of the Company and do not and will, at the Closing Time, not result in any violation of the charter or by-laws of the Company or any Subsidiary, as in effect at the Closing Time, and do not and will, at the Closing Time, not conflict with, or result in a breach of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any Subsidiary (except for such conflicts, breaches or defaults or liens, charges or encumbrances that would not have a Material Adverse Effect) under (A) any contract, indenture, mortgage, loan agreement, note, lease or other agreement or instrument to which the Company or any Subsidiary is a party or by which it may be 7 bound or to which any of its properties may be subject or (B) any existing applicable law, rule, regulation, judgment, order or decree of any government, governmental instrumentality or court, domestic or foreign, having jurisdiction over the Company or any Subsidiary or any of their respective properties. (xiii) No authorization, approval, consent or license of any government, governmental instrumentality or court, domestic or foreign (other than under the 1933 Act and 1933 Act Regulations, the securities or Blue Sky laws of the various states, the securities laws of foreign jurisdictions and the rules and regulations of the National Association of Securities Dealers, Inc. ("NASD")), is required for compliance by the Company with the terms of this Agreement, except such as have been obtained. (xiv) Except as disclosed in the Prospectus, there is no action, suit or proceeding before or by any government, governmental instrumentality or court, domestic or foreign, now pending or, to the knowledge of the Company, threatened against or affecting the Company or any Subsidiary that is required to be disclosed in the Prospectus or that could reasonably be expected to result in a Material Adverse Effect, or that could reasonably be expected to materially and adversely affect the consummation of the transactions contemplated in this Agreement; the aggregate of all pending legal or governmental proceedings that are not described in the Prospectus to which the Company or any Subsidiary is a party or which affect any of their respective properties, including ordinary routine litigation incidental to the business of the Company or any Subsidiary, would not reasonably be expected to have a Material Adverse Effect. (xv) There are no contracts or documents of a character required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described and filed as required. (xvi) Each of the Company and the Subsidiaries has good and marketable title to all properties and assets described in the Prospectus as owned by it, free and clear of all liens, charges or encumbrances, except such as (A) are described in the Prospectus or (B) could not have a Material Adverse Effect; all of the leases and subleases material to the business of the Company and the Subsidiaries, considered as one enterprise, and under which the Company or any Subsidiary holds properties described in the Prospectus, are in full force and effect, and neither the Company nor any Subsidiary has any notice of any material claim of any sort that has been asserted by anyone adverse to the rights of the Company or any Subsidiary under any of the leases or subleases mentioned above, or affecting or questioning the rights of such corporation to the continued possession of the leased or subleased premises under any 8 such lease or sublease, except for such claims that could not reasonably be expected to have a Material Adverse Effect. (xvii) Each of the Company and the Subsidiaries owns, possesses or has obtained all material governmental licenses, permits, certificates, consents, orders, approvals and other authorizations necessary to own or lease, as the case may be, and to operate its properties and to carry on its business as presently conducted, and neither the Company nor any Subsidiary has received any notice of proceedings relating to revocation or modification of any such licenses, permits, certificates, consents, orders, approvals or authorizations, except for such licenses, permits, certificates, consents, orders, approvals or other authorizations that would not have a Material Adverse Effect. (xviii) Each of the Company and the Subsidiaries owns or possesses, or can acquire on reasonable terms, adequate patents, patent licenses, trademarks, service marks and trade names necessary to carry on its business as presently conducted, and neither the Company nor any Subsidiary has received any notice of infringement of or conflict with asserted rights of others with respect to any patents, patent licenses, trademarks, service marks or trade names that in the aggregate could reasonably be expected to have a Material Adverse Effect. (xix) To the best knowledge of the Company, no labor problem exists with its employees or with employees of the Subsidiaries or is imminent that could reasonably be expected to have a Material Adverse Effect, and the Company, without any independent investigation, is not aware of any existing or imminent labor disturbance by the employees of any of its or the Subsidiaries' principal suppliers, contractors or customers that could reasonably be expected to have a Material Adverse Effect. (xx) The Company has not taken and will not take, directly or indirectly, any action designed to, or that might be reasonably expected to, cause or result in stabilization or manipulation of the price of the Common Stock. (xxi) Except as disclosed in the Registration Statement and except as would not individually or in the aggregate reasonably be expected to have a Material Adverse Effect (A) the Company and the Subsidiaries are each in compliance with all applicable Environmental Laws, (B) the Company and the Subsidiaries have all permits, authorizations and approvals required under any applicable Environmental Laws and are each in compliance with their requirements, (C) to the Company's knowledge, there are no pending or threatened Environmental Claims against the Company or any of the Subsidiaries, and (D) under applicable law, there are no circumstances with respect to any property or operations of the Company or the 9 Subsidiaries that are reasonably likely to form the basis of an Environmental Claim against the Company or the Subsidiaries. For purposes of this Agreement, the following terms shall have the following meanings: "Environmental Law" means any United States (or other applicable jurisdiction's) federal, state, local or municipal statute, law, rule, regulation, ordinance, code, policy or rule of common law and any judicial or administrative interpretation thereof including any judicial or administrative order, consent decree or judgment, relating to the environment, health, safety or any chemical, material or substance, exposure to which is prohibited, limited or regulated by any governmental authority. "Environmental Claims" means any and all administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigations or proceedings relating in any way to any Environmental Law. (xxii) All United States federal income tax returns of the Company and the Subsidiaries required by law to be filed have been filed and all taxes shown on such returns or otherwise assessed which are due and payable have been paid, except tax assessments against which appeals have been or will be promptly taken and as to which adequate reserves have been provided. All other tax returns of the Company and the Subsidiaries required to be filed pursuant to applicable foreign, state, local or other law have been filed, except insofar as the failure to file such returns could not reasonably be expected to have a Material Adverse Effect, and all taxes shown on such returns that have been filed or otherwise assessed which are due and payable have been paid, except for such taxes, if any, as are being contested, in good faith and as to which adequate reserves have been provided in accordance with generally accepted accounting principles. The charges, accruals and reserves on the books of the Company and the Subsidiaries in respect of any income and corporate franchise tax liability for any years not finally determined or with respect to which the applicable statute of limitations has not expired are believed to be adequate to meet any assessments or re-assessments for additional income or corporate franchise tax for any years not finally determined, except to the extent of any inadequacy that could not have a Material Adverse Effect. (xxiii) Each of the Company and the Subsidiaries has fulfilled its obligations, if any, under the minimum funding standards of Section 302 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the regulations and published interpretations thereunder with respect to each "pension plan" (as defined in ERISA and such regulations and published interpretations) in which employees of the Company or such Subsidiary are eligible to participate and each such plan is in compliance in all material respects with the presently applicable provisions of ERISA and such regulations and published interpretations (except for 10 such failure to so comply that would not have, singularly or in the aggregate with all other such failures to comply, a Material Adverse Effect), and has not incurred any unpaid liability to the Pension Benefit Guaranty Corporation (other than for the payment of premiums in the ordinary course) or to any such plan under Title IV of ERISA. (xxiv) The Shares have been approved for listing on the New York Stock Exchange, Inc. (b) Each of the Selling Stockholders severally represents and warrants to, and agrees with, each of the Underwriters as follows: (i) When the Registration Statement shall become effective, and at all times subsequent thereto up to the Closing Time (and, if any Option Shares are purchased, at the Date of Delivery), (A) neither the Registration Statement nor any amendment or supplement thereto will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading; and (B) neither the Prospectus nor any amendment or supplement thereto will include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, -------- however, that, as to each Selling Stockholder, the representations and ------- warranties contained in this subsection (i) apply only to statements or omissions made in reliance upon and in conformity with information which is furnished in writing to the Company by or on behalf of such Selling Stockholder expressly for use in the Registration Statement or the Prospectus (a copy of all such statements shall have been previously delivered to you). (ii) This Agreement has been duly authorized, executed and delivered by such Selling Stockholder. (iii) No authorization, approval, consent or license of any government, governmental instrumentality or court, domestic or foreign (other than under the 1933 Act and the securities or Blue Sky laws of the various states, the securities laws of foreign jurisdictions and the rules and regulations of the NASD), is required for the consummation by such Selling Stockholder of the transactions contemplated in this Agreement, including, without limitation, the sale and delivery of the Shares, except such as have been obtained. (iv) The execution and delivery of this Agreement and the consummation by such Selling Stockholder of the transactions contemplated in this Agreement will not, at the Closing Time (a) result in a breach by such Selling Stockholder of, or 11 constitute a default by such Selling Stockholder under, any material agreement or instrument or any decree, judgment or order to which such Selling Stockholder is a party or by which such Selling Stockholder is bound or the properties of such Selling Stockholder are subject or (b) violate (A) any provision of the certificate of incorporation, by-law, partnership agreement or comparable governing documents of such Selling Stockholder or (B) any law, rule or regulation applicable to such Selling Stockholder or to which its properties are subject (other than for the securities or Blue Sky laws of the various states and the rules and regulations of the NASD and assuming compliance with the federal securities laws and the securities laws of foreign jurisdictions by the other parties hereto). (v) Such Selling Stockholder will, at the Closing Time and, if any Option Shares are purchased, on the Date of Delivery, be the sole registered holder of the Shares to be sold by such Selling Stockholder pursuant to this Agreement, free and clear of any pledge, lien, security interest, charge, claim, equity or encumbrance of any kind, other than pursuant to this Agreement; such Selling Stockholder has full right, power and authority to sell, transfer and deliver such Shares pursuant to this Agreement; and, upon delivery of such Shares and payment of the purchase price therefor as contemplated in this Agreement, each of the Underwriters will receive all of such Selling Stockholder's interest in its ratable share of the Shares purchased by it from such Selling Stockholder, free and clear of any pledge, lien, security interest, charge, claim, equity or encumbrance of any kind. (vi) Such Selling Stockholder has not taken and will not take, directly or indirectly, any action designed to, or that might be reasonably expected to, cause or result in stabilization or manipulation of the price of the Common Stock; and such Selling Stockholder has not distributed and will not distribute any prospectus or other offering material in connection with the offering and sale of the Shares other than any preliminary prospectus filed with the Commission or the Prospectus or other material permitted by the 1933 Act or the 1933 Act Regulations. (vii) Such Selling Stockholder is duly organized and subsisting and in good standing under the laws of its jurisdiction of incorporation or organization, as the case may be, with all necessary power and authority to (A) enter into and perform this Agreement and (B) sell and deliver the Shares to the Underwriters in accordance with this Agreement. (c) Any certificate signed by any officer of the Company or any Subsidiary and delivered to you or to counsel for the Underwriters shall be deemed a representation and warranty by the Company to each Underwriter as to the matters covered thereby; and any certificate signed by or on behalf of the Selling Stockholders as such and delivered to you or 12 to counsel for the Underwriters shall be deemed a representation and warranty by the Selling Stockholders to each Underwriter as to the matters covered thereby. Section 2. Sale and Delivery to the Underwriters; Closing. (a) ---------------------------------------------- On the basis of the representations and warranties herein contained, and after consultation with you as to the maximum number of Shares that may be sold in the offering at the price set forth in the Price Determination Agreement, and subject to the terms and conditions herein set forth, each Selling Stockholder agrees, severally and not jointly, to sell to each Underwriter, and each Underwriter agrees, severally and not jointly, to purchase from each Selling Stockholder, at the purchase price per share for the Initial Shares to be agreed upon by the Company, the Selling Stockholders and by the Representatives in accordance with Section 2(b) or 2(c), and set forth in the Price Determination Agreement, the number of Initial Shares that bears the same relation to the aggregate number of Initial Shares proposed to be sold by such Selling Stockholder and set forth opposite such Selling Stockholder's name in the appropriate column on Schedule B as the number of Initial aggregate Shares set forth opposite the name of such Underwriter in Schedule A bears to the total number of Initial Shares (such proportion is hereinafter referred to as such Underwriter's "underwriting obligation proportion"), subject, in each case, to such adjustments as you, in your discretion, shall make to eliminate any sales or purchases of fractional shares. If the Company elects to rely on Rule 430A, Schedules A and B may be attached to the Price Determination Agreement. (b) If the Company has elected not to rely upon Rule 430A, the price to the public per share for the Initial Shares and the purchase price per share for the Initial Shares to be paid by the several Underwriters shall be agreed upon and set forth in the Price Determination Agreement, dated the date hereof, and an amendment to the Original Registration Statement containing such per share price information will be filed before the Original Registration Statement becomes effective. (c) If the Company has elected to rely upon Rule 430A, the price to the public per share for the Initial Shares and the purchase price per share for the Initial Shares to be paid by the several Underwriters shall be agreed upon and set forth in the Price Determination Agreement. In the event that the Price Determination Agreement has not been executed by the close of business on the fourteenth business day following the later of the date on which the Original Registration Statement and any Rule 462(b) Registration Statement becomes effective, this Agreement shall terminate forthwith, without liability of any party to any other party except that Sections 7, 8 and 9 shall remain in effect. (d) In addition, on the basis of the representations and warranties herein contained, and subject to the terms and conditions herein set forth, the Selling Stockholders hereby grant an option to the Underwriters, severally and not jointly, to purchase up to the additional number of Option Shares set forth opposite such Selling Stockholder's name in the 13 appropriate column of Schedule B, or 375,000 shares in the aggregate, in each case, at the same purchase price per share as shall be applicable to the Initial Shares. The option hereby granted will expire 30 days after the later of the date upon which the Original Registration Statement and any Rule 462(b) Registration Statement becomes effective or, if the Company has elected to rely upon Rule 430A, the date of the Price Determination Agreement, and may be exercised, in whole or in part (but not more than once), only for the purpose of covering over-allotments that may be made in connection with the offering and distribution of the Initial Shares upon notice by you to the Company and the Selling Stockholders setting forth the aggregate number of Option Shares as to which the several Underwriters are exercising the option, and the time and date of payment and delivery thereof. Such time and date of delivery (the "Date of Delivery") shall be determined by you but shall not be later than seven full business days after the exercise of such options, nor in any event prior to the Closing Time. If the option is exercised as to only a portion of the Option Shares, the Selling Stockholders will sell their pro rata portion of the Option Shares to be purchased by the Underwriters. If the option is exercised as to all or any portion of the Option Shares, the Option Shares as to which the option is exercised shall be purchased by the Underwriters, severally and not jointly, in their respective underwriting obligation proportions (except as otherwise provided in the Price Determination Agreement), subject to such adjustments as you, in your discretion, shall make to eliminate any sales or purchases of fractional shares. (e) Payment of the purchase price for, and delivery of certificates for, the Initial Shares shall be made at the offices of Shearman & Sterling, 599 Lexington Avenue, New York, New York 10022, or at such other place as shall be agreed upon by the Company, the Selling Stockholders and you, at 10:00 A.M. either (i) on the third full business day after the later of the effective date of the Original Registration Statement and any Rule 462(b) Registration Statement (or if pricing of the Shares occurs after 4:30 P.M. Eastern time, on the fourth full business day thereafter), or (ii) if the Company has elected to rely upon Rule 430A, on the third full business day after execution of the Price Determination Agreement (or, if pricing of the Shares occurs after 4:30 P.M. Eastern time, on the fourth full business day thereafter) (unless, in either case, postponed pursuant to Section 11 or 12), or at such other time not more than ten full business days thereafter as you, the Company and the Selling Stockholders shall determine (such date and time of payment and delivery being herein called the "Closing Time"). In addition, in the event that any or all of the Option Shares are purchased by the Underwriters, payment of the purchase price for, and delivery of certificates for, such Option Shares shall be made at the offices of Shearman & Sterling set forth above, or at such other place as the Company, the Selling Stockholders and you shall determine, on the Date of Delivery as specified in the notice from you to the Company and the Selling Stockholders. Payment shall be made to each of the Selling Stockholders by wire transfer in next day funds or by certified or official bank check or checks in New York Clearing House funds payable to the order of each of the Selling Stockholders against delivery to you for the respective accounts of the several Underwriters of certificates for the Shares to be purchased by them. 14 (f) Certificates for the Initial Shares and Option Shares to be purchased by the Underwriters shall be in such denominations and registered in such names as you may request in writing at least one full business day before the Closing Time or the Date of Delivery, as the case may be. The certificates for the Initial Shares and Option Shares will be made available in New York City for examination and packaging by you not later than 10:00 A.M. on the business day prior to the Closing Time or the Date of Delivery, as the case may be. (g) It is understood that each Underwriter has authorized you, for its account, to accept delivery of, receipt for, and make payment of the purchase price for, the Shares that it has agreed to purchase. You, individually and not as Representatives, may (but shall not be obligated to) make payment of the purchase price for the Initial Shares, or Option Shares, to be purchased by any Underwriter whose check or checks shall not have been received by the Closing Time or the Date of Delivery, as the case may be. Section 3. Certain Covenants of the Company. The Company -------------------------------- covenants with each Underwriter as follows: (a) The Company will use its best efforts to cause the Registration Statement to become effective and, if the Company elects to rely upon Rule 430A and subject to Section 3(b) hereof, will comply with the requirements of Rule 430A and will notify you immediately, and confirm the notice in writing, if requested, (i) when the Registration Statement, or any post-effective amendment to the Registration Statement, shall have become effective, or any supplement to the Prospectus or any amended Prospectus shall have been filed, (ii) of the receipt of any comments from the Commission, (iii) of any request by the Commission to amend the Registration Statement or amend or supplement the Prospectus or for additional information and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any preliminary prospectus, or of the suspension of the qualification of the Shares for offering or sale in any jurisdiction, or of the institution or threatening of any proceedings for any of such purposes. The Company will use every reasonable effort to prevent the issuance of any such stop order or of any order preventing or suspending such use and, if any such order is issued, to obtain the lifting thereof at the earliest possible moment. (b) The Company will not at any time file or make any amendment to the Registration Statement (including any filing under Rule 462(b)), file a Term Sheet or file or make any amendment or supplement (i) if the Company has not elected to rely upon Rule 430A, to the Prospectus (including the documents incorporated by reference into the Prospectus) or (ii) if the Company has elected to rely upon Rule 430A, to either the prospectus included in the Original Registration Statement at 15 the time it becomes effective or to the Prospectus (including documents incorporated by reference into such prospectuses or to the Prospectus pursuant to Item 12 and Rule 412), of which you shall not have previously been advised and furnished a copy, or to which you or counsel for the Underwriters shall reasonably object. (c) The Company has furnished or will furnish to you as many signed copies of the Registration Statement as originally filed and of all amendments thereto, whether filed before or after the Registration Statement becomes effective, copies of all exhibits and documents filed therewith (including documents incorporated by reference into the Prospectus pursuant to Item 12 and Rule 412) and signed copies of all consents and certificates of experts, as you may reasonably request and has furnished or will furnish to you, for each other Underwriter, one conformed copy of the Registration Statement as originally filed and of each amendment thereto (including documents incorporated by reference into the Prospectus but without exhibits). (d) The Company will deliver to each Underwriter, without charge, from time to time until the later of the effective date of the Original Registration Statement and any Rule 462(b) Registration Statement (or, if the Company has elected to rely upon Rule 430A, until the date of the Price Determination Agreement), as many copies of each preliminary prospectus as such Underwriter may reasonably request, and the Company hereby consents to the use of such copies for purposes permitted by the 1933 Act. The Company will deliver to each Underwriter, without charge, as soon as the Registration Statement shall have become effective (or, if the Company has elected to rely upon Rule 430A, as soon as practicable on or after the date of the Price Determination Agreement) and thereafter from time to time as requested during the period when the Prospectus is required to be delivered under the 1933 Act, such number of copies of the Prospectus (as supplemented or amended) as such Underwriter may reasonably request. (e) The Company will comply to the best of its ability with the 1933 Act and the 1933 Act Regulations and the 1934 Act and the 1934 Act Regulations so as to permit the completion of the distribution of the Shares as contemplated in this Agreement and in the Prospectus. If at any time when a prospectus is required by the 1933 Act to be delivered in connection with sales of the Shares any event shall occur or condition exist as a result of which it is necessary, in the opinion of counsel for the Underwriters or counsel for the Company, to amend the Registration Statement or amend or supplement the Prospectus in order that the Prospectus will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, or if it shall be necessary, in the opinion of either such counsel, at any such time to amend the Registration Statement 16 or amend or supplement the Prospectus in order to comply with the requirements of the 1933 Act or the 1933 Act Regulations, the Company will promptly prepare and file with the Commission, subject to Section 3(b) hereof, such amendment or supplement as may be necessary to correct such untrue statement or omission or to make the Registration Statement or the Prospectus comply with such requirements. (f) The Company will use its best efforts, in cooperation with the Underwriters, to qualify the Shares for offering and sale under the applicable securities laws of such states and other jurisdictions as you may designate and to maintain such qualifications in effect for a period of not less than one year from the later of the effective date of the Original Registration Statement any Rule 462(b) Registration Statement; provided, however, that the Company shall not -------- ------- be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject. The Company will file such statements and reports as may be required by the laws of each jurisdiction in which the Shares have been qualified as above provided. (g) The Company will make generally available to its security holders as soon as practicable, but not later than 45 days after the close of the period covered thereby, an earnings statement of the Company (in form complying with the provisions of Rule 158 of the 1933 Act Regulations), covering a period of 12 months beginning after the later of the effective date of the Original Registration Statement and any Rule 462(b) Registration Statement and covering a period of 12 months beginning after the effective date of any post-effective amendment to the Registration Statement but not later than the first day of the Company's fiscal quarter next following such respective effective dates. (h) The Company, during the period when the Prospectus is required to be delivered under the 1933 Act, will file promptly all documents required to be filed with the Commission pursuant to Section 13 or 14 of the 1934 Act subsequent to the time the Registration Statement becomes effective. (i) For a period of five years after the Closing Time, the Company will furnish to you and, upon request, to each Underwriter, copies of all annual reports, quarterly reports and current reports filed with the Commission on Forms 10-K, 10-Q and 8-K, or such other similar forms as may be designated by the Commission, and such other documents, reports and information as shall be furnished by the Company to its stockholders or security holders generally available. 17 (j) For a period of 90 days from the date hereof, the Company will not, without the prior written consent of Merrill Lynch & Co., Merrill Lynch, Pierce Fenner & Smith Incorporated, on behalf of the Underwriters, directly or indirectly, sell, offer to sell, grant any option for the sale of, or otherwise dispose of, any Common Stock or securities convertible into Common Stock, other than to the Underwriters pursuant to this Agreement and other than pursuant to employee benefit plans and dividend reinvestment plans that (i) are existing on the date hereof and (ii) are described in the Prospectus. (k) If the Company has elected to rely upon Rule 430A, it will take such steps as it deems necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 424(b) was received for filing by the Commission and, in the event that it was not, it will promptly file such prospectus. (l) If the Company has elected to rely on Rule 434, it will comply with the requirements of Rule 434, and the Prospectus will not be "materially different," as such term is used in Rule 434, from the prospectus included in the Registration Statement at the time it becomes effective. (m) If the Company elects to rely upon Rule 462(b), the Company shall both file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) and pay the applicable fees in accordance with Rule 111 of the 1933 Act Regulations by the earlier of (i) 10:00 P.M. Eastern time on the date of the Price Determination Agreement and (ii) the time confirmations are sent or given, as specified by Rule 462(b)(2). (n) The Company has complied and will comply with all the provisions of Florida H.B. 1771, codified as Section 517.075 of the Florida statutes, and all regulations promulgated thereunder relating to issuers doing business in Cuba. Section 4. Payment of Expenses. The Company will pay and bear ------------------- all costs and expenses incident to the performance of the obligations of the Company and of the Selling Stockholders under this Agreement, including (a) the preparation, printing and filing of the Registration Statement (including financial statements and exhibits), as originally filed and as amended, the preliminary prospectuses and the Prospectus and any amendments or supplements thereto, and the cost of furnishing copies thereof to the Underwriters, (b) the preparation, printing and distribution of this Agreement (including the Price Determination Agreement), the Shares and the Blue Sky Survey, (c) the delivery of the Shares to the Underwriters, (d) the fees and disbursements of counsel for the Company and for the Selling Stockholders and accountants for the Company and (e) the qualification of the Shares under the applicable securities laws in accordance with Section 3(f) and any filing for review of the offering with the NASD, including filing fees and fees and disbursements of counsel for the 18 Underwriters in connection therewith and in connection with the Blue Sky Survey; provided, however, that the Selling Stockholders will be -------- ------- responsible for any stock transfer taxes payable upon the sale of the Shares to the Underwriters. If this Agreement is terminated by you in accordance with the provisions of Section 5, 10(a)(i) or 12, the Company shall reimburse the Underwriters for all their out-of-pocket expenses, including the fees and disbursements of counsel for the Underwriters. Section 5. Conditions of Underwriters' Obligations. In addition --------------------------------------- to the execution and delivery of the Price Determination Agreement, the obligations of the several Underwriters to purchase and pay for the Shares that they have respectively agreed to purchase hereunder (including any Option Shares as to which the option granted in Section 2 has been exercised and the Date of Delivery determined by you is the same as the Closing Time) are subject to the accuracy of the representations and warranties of the Company and the Selling Stockholders contained herein (including those contained in the Price Determination Agreement) or in certificates of any officer of the Company or any Subsidiary or certificates by or on behalf of the Selling Stockholders delivered pursuant to the provisions hereof, to the performance by the Company and the Selling Stockholders of their obligations hereunder, and to the following further conditions: (a) The Original Registration Statement shall have become effective not later than 5:30 P.M. on the date of this Agreement or, with your consent, at a later time and date not later, however, than 5:30 P.M. on the first business day following the date hereof and if the Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration Statement shall have become effective not later than the earlier of (i) 10:00 P.M. Eastern time on the date of the Price Determination Agreement, and (ii) the time confirmations are sent or given, as specified by Rule 462(b)(2), or, with respect to the Original Registration Statement, at such later time or on such later date as you may agree to in writing with the approval of a majority in interest of the several Underwriters; and at the Closing Time no stop order suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act and no proceedings for that purpose shall have been instituted or shall be pending or, to your knowledge or the knowledge of the Company, shall be contemplated by the Commission, and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of counsel for the Underwriters. If the Company has elected to rely upon Rule 430A, prospectuses containing the Rule 430A Information shall have been filed with the Commission in accordance with Rule 424(b) (or a post-effective amendment providing such information shall have been filed and declared effective in accordance with the requirements of Rule 430A). If the Company has elected to rely upon Rule 434, a Term Sheet, which together with the preliminary prospectus last furnished to the Underwriters in connection with the offering of the Shares shall not be "materially 19 different," as such term is used in Rule 434, from the prospectus included in the Original Registration Statement at the time it becomes effective, shall have been filed with the Commission in accordance with Rule 424(b). (b) At the Closing Time, you shall have received a signed opinion of Skadden, Arps, Slate, Meagher & Flom, special counsel for the Company, dated as of the Closing Time, together with signed or reproduced copies of such opinion for each of the other Underwriters, in form and substance reasonably satisfactory to counsel for the Underwriters, to the effect that: (i) Each of the Company and Eckerd Holdings II, Inc. has been duly organized and is subsisting as a corporation and in good standing under the laws of the State of Delaware with corporate power and corporate authority under such laws to own, lease and operate its properties and conduct its business as described in the Prospectus. (ii) The Shares conform in all material respects as to legal matters to the description thereof in the Prospectus under the caption "Description of Capital Stock". (iii) This Agreement has been duly authorized, executed and delivered by the Company. (iv) No authorization, approval, consent or license of any government, governmental instrumentality or court (other than under the 1933 Act and 1933 Act Regulations, the securities or Blue Sky laws of the various states, and the rules and regulations of the NASD as to which such counsel need express no opinion), is required under the general corporate laws of the State of Delaware, the laws of the State of New York or the laws of the United States, in each case, that in such counsel's experience are normally applicable to the transactions of the type provided for by this Agreement, except such as have been obtained. (v) Such counsel does not know of any statutes or regulations, or any pending or threatened legal or governmental proceedings, required to be described in the Prospectus that are not described as required, nor of any contracts or documents of a character required to be described or referred to in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described, referred to or filed as required. (vi) The statements made in the Prospectus under the caption "Description of Capital Stock", to the extent that they constitute matters of law 20 or legal conclusions, have been reviewed by such counsel and fairly summarize the information required to be disclosed therein in all material respects. (vii) The execution and delivery of this Agreement, the sale and delivery of the Shares and compliance by the Company with the terms of this Agreement do not and will not, as of the date of the Closing Time, result in any violation of the charter or by-laws of the Company or any Subsidiary as in effect at the Closing Time, and do not and will not, as of the date of the Closing Time, conflict with, or result in a breach of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any Subsidiary under (A) any contract, indenture, mortgage, loan agreement, note, lease or any other agreement or instrument filed or incorporated by reference as an exhibit to the Registration Statement (except for such conflicts, breaches or defaults or liens, charges or encumbrances that would not have a Material Adverse Effect), (B) the general corporate laws of the State of Delaware, the laws of the State of New York or the laws of the United States, in each case, that in such counsel's experience are normally applicable to the transactions of the type provided for by this Agreement (other than the 1933 Act and 1933 Act Regulations and the securities or Blue Sky laws of the various states and the rules and regulations of the NASD as to which such counsel need express no opinion), or (C) any judgment, order or decree listed on a schedule to such opinion (which the Company has advised such counsel are the only judgments, orders or decrees of any government, governmental instrumentality or court, domestic or foreign, having jurisdiction over the Company or any Subsidiary or any of their respective properties, by which the Company or any Subsidiary is bound). Such counsel need express no opinion, however, as to whether or not the execution and delivery of this Agreement and compliance by the Company with the terms of this Agreement will constitute a violation of or a default under any covenant, restriction or provision with respect to financial ratios or tests or any aspect of the financial condition or results of operations of the Company. (viii) Such counsel has been advised by the staff of the Commission that the Original Registration Statement became effective under the 1933 Act on the date of this Agreement and the Rule 462(b) Registration Statement, if any, became effective under the 1933 Act no later than the date of the Price Determination Agreement; any required filing of the Prospectus or any supplement thereto pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b); and, to the best knowledge of such counsel, no stop order suspending the effectiveness of the Registration 21 Statement has been issued and no proceedings for that purpose have been instituted or are pending or are contemplated under the 1933 Act. (ix) The Registration Statement (including the Rule 430A Information and Rule 434 Information, if applicable) and the Prospectus, including the documents incorporated by reference therein, and each amendment or supplement thereto (except for the financial statements and other financial or statistical data included or incorporated by reference therein or omitted therefrom, as to which such counsel need express no opinion), as of their respective effective or issue dates, appear on their face to have been appropriately responsive in all material respects to the requirements of the 1933 Act and the 1933 Act Regulations, although such counsel need not pass upon, and need not assume any responsibility for, the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus, except as otherwise specifically referred to in paragraph (vi) above. Such opinion shall be to such further effect that, in connection with the preparation of the Registration Statement and the Prospectus, such counsel has participated in conferences with officers and representatives of the Company, in-house counsel for the Company, representatives of the independent accountants of the Company, the Underwriters and counsel for the Underwriters at which the contents of the Registration Statement and the Prospectus and related matters were discussed, and although such counsel is not passing upon, and does not assume any responsibility for, the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus and has made no independent check or verification thereof except as otherwise specifically referred to in paragraph (vi) above, on the basis of the foregoing, no facts have come to the attention of such counsel that have led them to believe (A) that the Registration Statement (including the Rule 430A Information and Rule 434 Information, if applicable) or any amendment thereto (except for the financial statements, financial statement schedules and other financial or statistical data included or incorporated by reference therein or omitted therefrom, as to which such counsel need express no opinion), at the time the Registration Statement or any such amendment became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or (B) that the Prospectus or any amendment or supplement thereto (except for the financial statements, financial statement schedules and other financial or statistical data included or incorporated by reference therein or omitted therefrom, as to which such counsel need express no opinion), as of its date and at the Closing Time, contained or contains an untrue statement of a material fact or omitted or omits to state a material 22 fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. Such opinion shall be to such further effect with respect to other legal matters relating to this Agreement and the sale of the Shares by the Company pursuant to this Agreement as counsel for the Underwriters may reasonably request. In giving such opinion, such counsel may rely, as to all matters governed by the laws of jurisdictions other than the law of the State of New York, the federal law of the United States and the corporate law of the State of Delaware, upon opinions of other counsel, who shall be counsel reasonably satisfactory to counsel for the Underwriters, in which case the opinion shall also be addressed to the Underwriters and state that such other counsel believes you and they are entitled to so rely. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers of the Company and the Subsidiaries and on certificates of public officials. (c) At the Closing Time, you shall have received a signed opinion of Robert E. Lewis, Esq., Vice President/General Counsel for the Company, dated as of the Closing Time, together with signed or reproduced copies of such opinion for each of the other Underwriters, in form and substance reasonably satisfactory to counsel for the Underwriters, to the effect that: (i) The Company is duly qualified to transact business as a foreign corporation and is in good standing in each other jurisdiction in which it owns or leases property of a nature, or transacts business of a type, that would make such qualification necessary, except to the extent that such failure to so qualify or be in good standing would not have a Material Adverse Effect and except for jurisdictions that do not recognize the legal concepts of good standing or qualification. (ii) Each Subsidiary has been duly organized and is subsisting as a corporation, and is in good standing under the laws of the jurisdiction of its incorporation with corporate power and corporate authority under such laws to own, lease and operate its properties and conduct its business as described in the Prospectus, except to the extent that such failure to so qualify or be in good standing would not have a Material Adverse Effect and except for jurisdictions not recognizing the legal concept of good standing. (iii) Each Subsidiary is duly qualified to transact business as a foreign corporation and is in good standing in each other jurisdiction in which it owns or leases property of a nature, or transacts business of a type, that would make such qualification necessary, except to the extent that such failure 23 to so qualify or be in good standing would not have a Material Adverse Effect and except for jurisdictions not recognizing the legal concepts of good standing or qualification. (iv) All of the outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable; no holder thereof is or will be subject to personal liability solely by reason of being such a holder; and none of the outstanding shares of capital stock of the Company was issued in violation of the preemptive rights of any stockholder of the Company. (v) Such counsel does not know of any statutes or regulations, or any pending or threatened legal or governmental proceedings, required to be described in the Prospectus that are not described as required, nor of any contracts or documents of a character required to be described or referred to in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described, referred to or filed as required. (vi) To the knowledge of such counsel the descriptions in the Prospectus of the statutes, regulations, legal or governmental proceedings, contracts and other documents therein described fairly summarize the information required to be shown. (vii) Such counsel does not know of any default that exists in the performance or observance of any material obligation, agreement, covenant or condition contained in any contract, indenture, loan agreement, note, lease or other agreement or instrument that is described or referred to in the Registration Statement or the Prospectus or filed as an exhibit to the Registration Statement, except for such defaults that would not have a Material Adverse Effect. (viii) The execution and delivery of this Agreement, the sale and delivery of the Shares and compliance by the Company with the terms of this Agreement do not and will not result in any violation of the charter or by-laws of the Company or any Subsidiary, and do not and will not conflict with, or result in a breach of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any Subsidiary under (A) any indenture, mortgage or loan agreement, or any other agreement or instrument known to such counsel, to which the Company or any Subsidiary is a party or by which it may be bound or to which any of its properties may be subject (except for such conflicts, breaches or defaults or liens, charges or 24 encumbrances that would not have a Material Adverse Effect) and (B) any judgment, order or decree of any government, governmental instrumentality or court, domestic or foreign, having jurisdiction over the Company or any Subsidiary or any of its properties, except for such conflicts, breaches or defaults or liens, charges or encumbrances that would not have a Material Adverse Effect. Such counsel need express no opinion, however, as to whether or not the execution and delivery of this Agreement and compliance by the Company with the terms of this Agreement will constitute a violation of or a default under any covenant, restriction or provision with respect to financial ratios or tests or any aspect of the financial condition or results of operations of the Company. (ix) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the heading "Capitalization". (x) Except as set forth in Schedule C attached hereto, all of the outstanding shares of capital stock of each Subsidiary have been duly authorized and validly issued and are fully paid and non-assessable; all of such shares are owned by the Company, directly or through one or more Subsidiaries, free and clear of any pledge, lien, security interest, charge, claim, equity or encumbrance of any kind except for the Credit Agreement and the Pledge Agreement; no holder thereof is subject to personal liability by reason of being such a holder and none of such shares was issued in violation of the preemptive rights of any stockholder of the Subsidiaries. (xi) To the knowledge of such counsel, the execution and delivery of this Agreement, the sale and delivery of the Shares and compliance by the Company with the terms of this Agreement do not and will not result in any conflict with, constitute a default under or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any Subsidiary under any existing applicable law, rule or regulation (other than under the securities or Blue Sky laws of the various states, the securities laws of foreign jurisdictions and the rules and regulations of the NASD as to which such counsel need express no opinion). (xii) The documents incorporated by reference in the Prospectus (except for the financial statements, financial statement schedules and other financial or statistical data included therein or omitted therefrom, as to which such counsel need express no opinion and except to the extent that any statement therein is modified or superseded in the Prospectus or by a subsequent document incorporated by reference therein), as of the dates they were filed with the Commission, appear on their face to have been 25 appropriately responsive in all material respects to the requirements of the 1934 Act and the 1934 Act Regulations, although such counsel need not pass upon, and need not assume any responsibility for, the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus, except as otherwise specifically referred to in paragraph (ix) above. Such opinion shall be to such further effect that in connection with the preparation of the Registration Statement and the Prospectus such counsel has participated in conferences with officers and representatives of the Company, special counsel for the Company, representatives of the independent accountants of the Company, the Underwriters and counsel for the Underwriters at which the contents of the Registration Statement and the Prospectus and related matters were discussed, and although such counsel is not passing upon, and does not assume any responsibility for, the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus and has made no independent check or verification thereof except as otherwise specifically referred to in paragraph (ix), on the basis of the foregoing, no facts have come to the attention of such counsel that have led him to believe (A) that the Registration Statement (including the Rule 430A Information and Rule 434 Information, if applicable) or any amendment thereto (except for the financial statements, financial statement schedules and other financial or statistical data included or incorporated by reference therein or omitted therefrom, as to which such counsel need express no opinion), at the time the Registration Statement or any such amendment became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or (B) that the Prospectus or any amendment or supplement thereto (except for the financial statements, financial statement schedules and other financial or statistical data included or incorporated by reference therein or omitted therefrom, as to which such counsel need express no opinion), as of its date and at the Closing Time, included or includes an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. Such opinion shall be to such further effect with respect to other legal matters relating to this Agreement and the sale of the Shares pursuant to this Agreement as counsel for the Underwriters may reasonably request. In giving such opinion, such counsel may rely, as to all matters governed by the laws of jurisdictions other than the law of the State of Florida, the federal law of the United States and the corporate law of the State of Delaware, upon opinions of other counsel, who shall be counsel reasonably satisfactory to counsel for the Underwriters, in which case the opinions shall also be addressed to the Underwriters and state that such other counsel believes 26 you and they are entitled to so rely. Such counsel may also state that, insofar as such opinion involves factual matters, he has relied, to the extent he deems proper, upon certificates of officers of the Company and the Subsidiaries and certificates of public officials. Such counsel may also state that such counsel is qualified to practice law in the State of Florida and does not purport to be an expert on any law other than the laws of the State of Florida and the Federal laws of the United States and that, insofar as such opinion relates to the general corporate law of the State of Delaware, that such counsel has made such investigation of such law as he has deemed necessary as a basis for such opinion. (d) At the Closing Time you shall have received a signed opinion of the attorneys listed on Schedule D attached hereto for the Selling Stockholders specified opposite such attorney's name, each dated as of the Closing Time, together with signed or reproduced copies of such opinion for each of the other Underwriters, in form and substance reasonably satisfactory to counsel for the Underwriters, each, with respect to the Selling Stockholders that such counsel represents, to the effect that: (i) The execution, delivery and performance of this Agreement has been duly and validly authorized by the Selling Stockholders. (ii) No authorization, approval, consent or license of any government, governmental instrumentality or court is required under the laws of the United States or the state of New York (other than under the 1933 Act, under Blue Sky or state securities law or the securities laws of foreign jurisdictions) for the consummation by the Selling Stockholders of the transactions contemplated by this Agreement. (iii) The execution and delivery of this Agreement by the Selling Stockholders and the compliance by the Selling Stockholders with the terms thereof does not conflict with or result in a violation of (a) the certificate of incorporation, the by-laws, the partnership agreement or similar governing document of any of the Selling Stockholders or (b) any existing applicable law, rule or regulation (other than under the 1933 Act, under Blue Sky or state securities law or the securities laws of foreign jurisdictions or the rules and regulations of the NASD) or any judgment, order or decree known to such counsel of any government, governmental instrumentality or court, domestic or foreign, having jurisdiction over the Selling Stockholders. (iv) The Selling Stockholders, as the case may be, have been organized and are subsisting in good standing as corporations or partnerships under the laws of the jurisdiction of their incorporation or organization with all 27 necessary power and authority under such laws to execute, deliver and perform this Agreement. (v) Assuming that each of the Underwriters acquires the certificates representing the Shares to be sold by the Selling Stockholders in good faith and without notice of any adverse claims, as defined in Section 8-302 of the Uniform Commercial Code as in effect in the State of New York (the "UCC"), upon delivery of the certificates representing such Shares to the person designated by the Underwriters in the State of New York, registered in the name of the Underwriters, endorsed to the Underwriters, or endorsed in blank, the Underwriters will acquire all of the Selling Stockholders' rights in the certificates representing such Shares free of any adverse claims (within the meaning of Section 8-302 of the UCC). Such opinion shall be to such further effect that, such counsel has examined (a) the stock records (or a certified copy of such stock records) of the Company as of the date immediately preceding the Closing Time (the "Stock Record"), as maintained by the Company's Registrar and Transfer Agent (the "Registrar") and a certificate of the Registrar dated the Closing Time (the "Registrar's Certificate") to the effect that, with respect to the Selling Stockholders, there has been no changes to the Stock Record, and (b) certificates representing the Shares to be sold by the Selling Stockholders pursuant to this Agreement (the "Share Certificates") and that, based solely on such counsel's examination of the Stock Record, the Registrar's Certificate and the Share Certificates, except as described in such counsel's opinion, each Selling Stockholder is the sole registered owner of such Selling Stockholder's Share Certificates. Such opinion shall be to such further effect with respect to other legal matters relating to this Agreement and the sale of the Shares pursuant to this Agreement as counsel for the Underwriters may reasonably request. In giving such opinion, such counsel may rely, as to all matters governed by the laws of jurisdictions other than the law of the State of New York, the federal law of the United States and the corporate and partnership law of the State of Delaware, upon opinions of other counsel, who shall be counsel reasonably satisfactory to counsel for the Underwriters, in which case the opinion shall also be addressed to the Underwriters and state that such other counsel believes you and they are entitled to so rely. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers of the Company and the Subsidiaries, certificates of officers or partners, as the case may be, of the such Selling Stockholders and on certificates of public officials. To the extent that any of the above opinions are governed by the laws of the State of Oklahoma, such counsel may also state that it has assumed that the Oklahoma Revised Uniform Limited 28 Partnership Act is identical to the Delaware Revised Uniform Limited Partnership Act. (e) At the Closing Time, you shall have received the favorable opinion of Shearman & Sterling, counsel for the Underwriters, dated as of the Closing Time, together with signed or reproduced copies of such opinion for each of the other Underwriters, to the effect that the opinions delivered pursuant to Sections 5(b), 5(c) and 5(d) appear on their face to be appropriately responsive to the requirements of this Agreement except, specifying the same, to the extent waived by you, and with respect to the incorporation and legal existence of the Company, the Shares, this Agreement, the Registration Statement, the Prospectus, the documents incorporated by reference and such other related matters as you may require. In giving such opinion such counsel may rely, as to all matters governed by the laws of jurisdictions other than the law of the State of New York, the federal law of the United States and the General Corporation Law of the State of Delaware, upon the opinions of counsel satisfactory to you. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers of the Company and the Subsidiaries and certificates of public officials; provided that such certificates have been delivered to the Underwriters. (f) At the Closing Time, (i) the Registration Statement and the Prospectus, as they may then be amended or supplemented, shall conform to the requirements of the 1933 Act and the 1933 Act Regulations, the Company shall have complied in all material respects with Rule 430A (if it shall have elected to rely thereon) and Rule 434 (if it shall have elected to rely thereon) and neither the Registration Statement nor the Prospectus, as they may then be amended or supplemented, shall contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein (in the case of the Prospectus, in light of the circumstances under which they were made) not misleading, (ii) there shall not have been, since the respective dates as of which information is given in the Registration Statement, any material adverse change in the condition (financial or otherwise), earnings, business affairs or business prospects of the Company and the Subsidiaries, considered as one enterprise, whether or not arising in the ordinary course of business, (iii) no action, suit or proceeding shall be pending or, to the knowledge of the Company, threatened against the Company or any Subsidiary that would be required to be set forth in the Prospectus other than as set forth therein and no proceedings shall be pending or, to the knowledge of the Company, threatened against the Company or any Subsidiary before or by any government, governmental instrumentality or court, domestic or foreign, that could reasonably be expected to result in a Material Adverse Effect other than as set forth in the Prospectus, (iv) the Company shall have complied with all agreements and satisfied all conditions set forth in this Agreement on its part to be performed or satisfied at or prior to the Closing 29 Time and (v) the other representations and warranties of the Company set forth in Section 1(a) shall be accurate as though expressly made at and as of the Closing Time. At the Closing Time, you shall have received a certificate of the President or a Vice President, and the Treasurer or the Executive Vice President/Chief Financial Officer, of the Company (each in their capacity as an officer of the Company and not as an individual), dated as of the Closing Time, to such effect. (g) At the Closing Time, the representations and warranties of each Selling Stockholder set forth in Section 1(b) shall be accurate as though expressly made at and as of the Closing Time. At the Closing Time, you shall have received a certificate of or on behalf of each Selling Stockholder, dated as of the Closing Time, to such effect with respect to such Selling Stockholder and a certificate of or on behalf of each Selling Stockholder certifying that there have been no changes or amendments to the certificate of incorporation, by-laws, partnership agreement or other comparable governing document of such Selling Stockholder since August 2, 1995 and as to the accuracy and completeness of the attached resolutions of the board of directors regarding the sale and delivery of the Shares and the authorization, execution and delivery of this Agreement. (h) At the time that this Agreement is executed, you shall have received from KPMG Peat Marwick LLP a letter, dated such date, in form and substance reasonably satisfactory to you, together with signed or reproduced copies of such letter for each of the other Underwriters, confirming that they are independent public accountants with respect to the Company within the meaning of the 1933 Act and the applicable published 1933 Act Regulations, and stating in effect that: (i) in their opinion, the audited financial statements and the related financial statement schedules included or incorporated by reference in the Registration Statement and the Prospectus comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the published rules and regulations thereunder; (ii) on the basis of procedures (but not an examination in accordance with generally accepted auditing standards) consisting of a reading of the latest available unaudited interim consolidated financial statements of the Company for the 13-week periods ended April 29, 1995 and April 30, 1994 and for the 13- week and 26-week periods ended July 29, 1995 and July 30, 1994 included or incorporated by reference in the Registration Statement and the Prospectus (the "10-Q Financials"), a reading of the unaudited interim consolidated financial statements of the Company for the thirteen-week and thirty-nine week periods ended October 28, 1995 and October 27, 1994 included or incorporated by reference in the Registration Statement and the Prospectus (the 30 "Nine-Month Financials"), a reading of the minutes of all meetings of the stockholders and directors of the Company and the Subsidiaries and each Committee of the Company's Board of Directors and of each Subsidiary's Board of Directors since January 28, 1995, inquiries of certain officials of the Company and the Subsidiaries responsible for financial and accounting matters, and such other inquiries and procedures as may be specified in such letter, nothing came to their attention that caused them to believe that: (A) the 10-Q Financials incorporated by reference in the Registration Statement and the Prospectus do not comply as to form in all material respects with the applicable accounting requirements of the 1934 Act and the 1934 Act Regulations applicable to unaudited financial statements included in Form 10-Q or any material modifications should be made to the 10-Q Financials incorporated by reference in the Registration Statement and the Prospectus for them to be in conformity with generally accepted accounting principles; (B) the Nine-Month Financials included in the Registration Statement and the Prospectus do not comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the 1933 Act Regulations applicable to unaudited interim financial statements included in registration statements or any material modifications should be made to the Nine-Month Financials included in the Registration Statement and the Prospectus for them to be in conformity with generally accepted accounting principles; (C) at October 28, 1995 and at a specified date not more than five days prior to the date of this Agreement, there was any change in the capital stock of the Company and the Subsidiaries or any decrease in the consolidated net current assets or stockholders' equity of the Company and the Subsidiaries or any increase in the long-term debt of the Company and the Subsidiaries, in each case as compared with amounts shown in the latest combined balance sheet included in the Registration Statement, except in each case for changes, decreases or increases that the Registration Statement discloses have occurred or may occur; or (D) for the period from July 30, 1995 to October 28, 1995 and for the period from July 30, 1995 to a specified date not more than five days prior to the date of this Agreement, there was any decrease in consolidated net sales, total or per share amounts of income before extraordinary items or of net income in each case as compared with the 31 comparable period in the preceding year, except in each case for any decreases that the Registration Statement discloses have occurred or may occur; (iii) based upon the procedures set forth in clause (ii) above and a reading of the Selected Historical Financial Data included in the Registration Statement, nothing has come to their attention that gives them reason to believe that the Selected Historical Financial Data included in the Registration Statement do not comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the 1933 Act Regulations, or that the information set forth therein is not fairly stated in relation to the financial statements from which it was derived; (iv) they are unable to and do not express any opinion on the Pro Forma Financial Data (the "Pro Forma Statement") included in the Registration Statement or on the pro forma adjustments applied to the historical amounts included in the Pro Forma Statement; however, for purposes of such letter they have: (A) read the Pro Forma Statement; (B) made inquiries of certain officials of the Company who have responsibility for financial and accounting matters about the basis for their determination of the pro forma adjustments and whether the Pro Forma Statement above complies in form in all material respects with the applicable accounting requirements of Rule 11-02 of Regulation S-X; and (C) proved the arithmetic accuracy of the application of the pro forma adjustments to the historical amounts in the Pro Forma Statement; and on the basis of such procedures, and such other inquiries and procedures as may be specified in such letter, nothing came to their attention that caused them to believe that the Pro Forma Statement included in the Registration Statement does not comply as to form in all material respects with the applicable requirements of Rule 11-02 of Regulation S-X and that the pro forma adjustments have not been properly applied to the historical amounts in the compilation of that statement; and (v) in addition to the procedures referred to in clause (ii) above, they have performed other specified procedures, not constituting an audit, with 32 respect to certain amounts, percentages, numerical data and financial information appearing in the Registration Statement, which have previously been specified by you and which shall be specified in such letter, and have compared certain of such items with, and have found such items to be in agreement with, the accounting and financial records of the Company. (i) At the Closing Time, you shall have received from KPMG Peat Marwick LLP a letter, in form and substance reasonably satisfactory to you and dated as of the Closing Time, to the effect that they reaffirm the statements made in the letter furnished pursuant to Section 5(h), except that the specified date referred to shall be a date not more than five days prior to the Closing Time. (j) At the Closing Time, counsel for the Underwriters shall have been furnished with all such documents, certificates and opinions as they may request for the purpose of enabling them to pass upon the sale of the Shares as contemplated in this Agreement and the matters referred to in Section 5(g) and in order to evidence the accuracy and completeness of any of the representations, warranties or statements of the Company and the Selling Stockholders, the performance of any of the covenants of the Company, or the fulfillment of any of the conditions herein contained; and all proceedings taken by the Company and the Selling Stockholders at or prior to the Closing Time in connection with the sale of the Shares as contemplated in this Agreement shall be satisfactory in form and substance to you and to counsel for the Underwriters. (k) The "lock-up" letters which are substantially in the form of Exhibit B attached hereto from (a) each executive officer or director of the Company and (b) each Selling Stockholder have been delivered to you on or before the date hereof. If any of the conditions specified in this Section 5 shall not have been fulfilled when and as required by this Agreement, this Agreement may be terminated by you on notice to the Company and any of the Attorneys- in-Fact on behalf of the Selling Stockholders at any time at or prior to the Closing Time, and such termination shall be without liability of any party to any other party, except as provided in Section 4. Notwithstanding any such termination, the provisions of Sections 7 and 8 herein shall remain in effect. Section 6. Conditions to Purchase of Option Shares. In the --------------------------------------- event that the Underwriters exercise their option granted in Section 2 hereof to purchase all or any of the Option Shares and the Date of Delivery determined by you pursuant to Section 2 hereof is later than the Closing Time, the obligations of the several Underwriters to purchase and pay for the Option Shares that they shall have respectively agreed to purchase pursuant to this Agreement are subject to the accuracy of the representations and warranties of the Company 33 and the Selling Stockholders herein contained, to the performance by the Company and the Selling Stockholders of their obligations hereunder and to the following further conditions: (a) The Registration Statement shall remain effective at the Date of Delivery, and, at the Date of Delivery, no stop order suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act and no proceedings for that purpose shall have been instituted or shall be pending or, to your knowledge or the knowledge of the Company, shall be contemplated by the Commission, and any request on the part of the Commission for additional information shall have been complied with to the satisfaction of counsel for the Underwriters. (b) At the Date of Delivery, the provisions of Sections 5(f)(i) through 5(f)(v) shall have been complied with at and as of the Date of Delivery and, at the Date of Delivery, you shall have received a certificate of the President or a Vice President, and the Treasurer or the Executive Vice President/Chief Financial Officer, of the Company (each in their capacity as an officer of the Company and not as an individual), dated as of the Date of Delivery, to such effect. (c) At the Date of Delivery, you shall have received the favorable opinions of Skadden, Arps, Slate, Meagher & Flom, special counsel for the Company, Robert E. Lewis, Esq., Vice President/General Counsel for the Company, and the attorneys listed on Schedule D attached hereto for the Selling Stockholders, together with signed or reproduced copies of such opinions for each of the other Underwriters, in each case in form and substance reasonably satisfactory to counsel for the Underwriters, dated as of the Date of Delivery, relating to the Option Shares and otherwise to the same effect as the opinions required by Section 5(b), 5(c) or 5(d), respectively. (d) At the Date of Delivery, you shall have received the favorable opinion of Shearman & Sterling, counsel for the Underwriters, dated as of the Date of Delivery, relating to the Option Shares and otherwise to the same effect as the opinion required by Section 5(f). (e) At the Date of Delivery, you shall have received a letter from KPMG Peat Marwick LLP, in form and substance reasonably satisfactory to you and dated as of the Date of Delivery, to the effect that they reaffirm the statements made in the letter furnished pursuant to Section 5(h), except that the specified date referred to shall be a date not more than five days prior to the Date of Delivery. (f) At the Date of Delivery, you shall have received from each of the Selling Stockholders (or on their behalf) certificates substantially in the form of the 34 certificates furnished to you pursuant to Section 5(g), except that such certificates shall be as of the Date of Delivery. (g) At the Date of Delivery, counsel for the Underwriters shall have been furnished with all such documents, certificates and opinions as they may reasonably request for the purpose of enabling them to pass upon the sale of the Option Shares as contemplated in this Agreement and the matters referred to in Section 6(d) and in order to evidence the accuracy and completeness of any of the representations, warranties or statements of the Company or the Selling Stockholders, the performance of any of the covenants of the Company, or the fulfillment of any of the conditions herein contained; and all proceedings taken by the Company and the Selling Stockholders at or prior to the Date of Delivery in connection with the sale of the Option Shares as contemplated in this Agreement shall be satisfactory in form and substance to you and to counsel for the Underwriters. (h) At the Date of Delivery, the representations and warranties of each Selling Stockholder set forth in Section 1(b) hereof shall be accurate as though expressly made at and as of the Date of Delivery. Section 7. Indemnification. (a) The Company agrees to --------------- indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the 1933 Act to the extent and in the manner set forth in clauses (i), (ii) and (iii) below. In addition, each Selling Stockholder, severally and not jointly (but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto) in reliance upon and in conformity with written information furnished by such Selling Stockholder expressly for use in the Registration Statement (or any amendment thereto) or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), a copy of which written information shall have been previously delivered to you), agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the 1933 Act as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of an untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, and all documents incorporated therein by reference, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of an untrue statement or alleged untrue statement of a material fact included in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) or the omission or alleged omission therefrom of a material fact necessary in order to make the statements 35 therein, in the light of the circumstances under which they were made, not misleading, or if Rule 434 is used, if the Prospectus is "materially different", as such term is used in Rule 434, from the prospectus included in the Original Registration Statement at the time it becomes effective; (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, if such settlement is effected with the written consent of the Company and the Selling Stockholders; and (iii) against any and all expense whatsoever, as incurred (including, subject to Section 7(c) hereof, reasonable fees and disbursements of counsel chosen by you), reasonably incurred in investigating, preparing or defending against any litigation, or investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under subparagraph (i) or (ii) above; provided, however, that this indemnity agreement does not apply to any - -------- ------- loss, liability, claim, damage or expense to the extent arising out of an untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by any Underwriter through you expressly for use in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto); provided further that the foregoing indemnification with respect to any - -------- ------- preliminary prospectus shall not inure to the benefit of any Underwriter (or any person controlling such Underwriter) from whom the person asserting any such losses, claims, damages or liabilities purchased any of the Shares if a copy of the Prospectus (as then amended or supplemented if the Company shall furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if such is required by law, at or prior to the written confirmation of the sale of such Shares to such person and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage or liability; and provided further that the liability of a Selling -------- ------- Stockholder pursuant to this Section 7 is limited to the amount of the net proceeds of the offering of the Shares (after deducting the underwriting discount, but before deducting expenses) received by such Selling Stockholder. 36 Insofar as this indemnity agreement may permit indemnification for liabilities under the 1933 Act of any person who is a partner of an Underwriter or who controls an Underwriter within the meaning of Section 15 of the 1933 Act and who, at the date of this Agreement, is a director or officer of the Company or controls the Company within the meaning of Section 15 of the 1933 Act, such indemnity agreement is subject to the undertaking of the Company in the Registration Statement under Item 17 thereof. (b) Each Underwriter severally agrees to indemnify and hold harmless the Company, its directors, each of its officers who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act and each Selling Stockholder and each person, if any, who controls any Selling Stockholder within the meaning of Section 15 of the 1933 Act, against any and all loss, liability, claim, damage and expense described in the indemnity agreement in Section 7(a), as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by such Underwriter through you expressly for use in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or such preliminary prospectus or the Prospectus (or any amendment or supplement thereto). (c) The Company agrees to indemnify and hold harmless, to the extent permitted by law, each Selling Stockholder, its directors and officers or general and limited partners (and the directors and officers thereof), and each other person, if any, who controls such Selling Stockholder within the meaning of the 1933 Act, against any and all losses, claims, damages or liabilities, joint or several, and expenses (including any amounts paid in any settlement effected with the Company's consent) to which such Selling Stockholder, any such director or officer or general or limited partner or controlling person may become subject under the 1933 Act, common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, and all documents incorporated therein by reference, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, together with the documents incorporated by reference therein (as amended or supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto), if used prior to the effective date of the Registration Statement, or contained in the Prospectus (as amended or supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto), or the omission or alleged 37 omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading or (iii) any violation by the Company of any federal, state or common law rule or regulation applicable to the Company and relating to action required of or inaction by the Company in connection with the offering, and the Company will reimburse each such Selling Stockholder and each such director, officer, general or limited partner, and controlling person for any legal or any other expenses reasonably incurred by any of them in connection with investigating or defending any such loss, claim, liability, action or proceeding; provided, that the Company shall not be liable to such Selling -------- Stockholder or any such director, officer, general or limited partner or controlling person in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in such Registration Statement (or any amendment or supplement thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or in any such preliminary prospectus or the Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Selling Stockholder or any such director, officer, general or limited partner or controlling person, specifically stating that it is for use in the preparation thereof. (d) Each Selling Stockholder agrees to indemnify and hold harmless (in the same manner and to the same extent as set forth in Section 7(c)) the Company and its directors and officers and each person controlling the Company within the meaning of the 1933 Act and all other Selling Stockholders and their directors, officers, general and limited partners and respective controlling persons with respect to any statement or alleged statement in or omission or alleged omission from the Registration Statement (or any amendment or supplement thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), if such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company or its representatives by or on behalf of the undersigned specifically stating that it is for use in the preparation of the Registration Statement (or any amendment or supplement thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or a document incorporated by reference into any of the foregoing; provided, however, that the liability of each Selling -------- ------- Stockholder pursuant to this Section 7(d) is limited to the proceeds received by such Selling Stockholder from the sale of the Shares pursuant to this Agreement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any of the other Selling Stockholders or any of its respective directors, officers, general or limited partners or controlling persons and shall survive the transfer of the Shares by each Selling Stockholder. 38 (e) Each indemnified party shall give prompt notice to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. An indemnifying party may participate at its own expense in the defense of such action. In no event shall the indemnifying party or parties be liable for the fees and expenses of more than one counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. If it so elects within a reasonable time after receipt of such notice, an indemnifying party, jointly with any other indemnifying parties receiving such notice, may assume the defense of such action with counsel chosen by it and approved by the indemnified parties defendant in such action, unless such indemnified parties reasonably object to such assumption on the ground that there may be legal defenses available to them which are different from or are in addition to those available to such indemnifying party. If an indemnifying party assumes the defense of such action, the indemnifying parties shall not be liable for any fees and expenses of counsel for the indemnified parties incurred thereafter in connection with such action. Section 8. Contribution. In order to provide for just and ------------ equitable contribution in circumstances under which the indemnity provided for in Section 7 is for any reason held to be unenforceable by the indemnified parties although applicable in accordance with its terms, the Company, the Selling Stockholders and the Underwriters shall contribute to the aggregate losses, liabilities, claims, damages and expenses of the nature contemplated by such indemnity incurred by the Company, the Selling Stockholders and one or more of the Underwriters, as incurred, in such proportions that (a) the Underwriters are responsible for that portion represented by the percentage that the underwriting discount appearing on the cover page of the Prospectus, or, if Rule 434 is used, the corresponding location on the Term Sheet, bears to the offering price appearing thereon and (b) the Company and the Selling Stockholders are severally responsible for the balance on the same basis as each of them would have been obligated to provide indemnification pursuant to Section 7; provided, however, that no person guilty of fraudulent misrepresentation - -------- ------- (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section, each person, if any, who controls an Underwriter within the meaning of Section 15 of the 1933 Act shall have the same rights to contribution as such Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company or a Selling Stockholder within the meaning of Section 15 of the 1933 Act shall have the same rights to contribution as the Company or a Selling Stockholder, as the case may be. Section 9. Representations, Warranties and Agreements to Survive ----------------------------------------------------- Delivery. The representations, warranties, indemnities, agreements and - -------- other statements of the Selling 39 Stockholders and the Company or its officers set forth in or made pursuant to this Agreement will remain operative and in full force and effect regardless of any investigation made by or on behalf of the Selling Stockholders, the Company, any Underwriter or any person who controls a Selling Stockholder, the Company or any Underwriter within the meaning of Section 15 of the 1933 Act and will survive delivery of and payment for the Shares. Section 10. Termination of Agreement. (a) You may terminate ------------------------ this Agreement, by notice to the Company and each of the Selling Stockholders, at any time at or prior to the Closing Time (i) if there has been, since the respective dates as of which information is given in the Registration Statement, any material adverse change in the condition (financial or otherwise), earnings, business affairs or business prospects of the Company and the Subsidiaries, considered as one enterprise, whether or not arising in the ordinary course of business, or (ii) if there has occurred any material adverse change in the financial markets in the United States or any outbreak of hostilities or escalation thereof or other calamity or crisis the effect of which on the financial markets of the United States is such as to make it, in your reasonable judgment, impracticable to market the Shares or enforce contracts for the sale of the Shares or (iii) if trading in any securities of the Company has been suspended by the Commission or the New York Stock Exchange, or if trading generally on either the American Stock Exchange or the New York Stock Exchange or in the over-the-counter market has been suspended, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices for securities have been required, by such exchanges or by order of the Commission or the New York Stock Exchange or any other governmental authority or (iv) if a banking moratorium has been declared by either federal, Florida or New York authorities. (b) If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party, except to the extent provided in Section 4. Notwithstanding any such termination, the provisions of Sections 7 and 8 shall remain in effect. (c) This Agreement may also terminate pursuant to the provisions of Section 2, with the effect stated in such Section. Section 11. Default by One or More of the Underwriters. If one ------------------------------------------ or more of the Underwriters shall fail at the Closing Time to purchase the Initial Shares that it or they are obligated to purchase pursuant to this Agreement (the "Defaulted Shares"), you shall have the right, within 24 hours thereafter, to make arrangements for one or more of the non-defaulting Underwriters, or any other underwriters, to purchase all, but not less than all, of the Defaulted Shares in such amounts as may be agreed upon and upon the terms set forth in this Agreement; if, however, you have not completed such arrangements within such 24-hour period, then: 40 (a) if the number of Defaulted Shares does not exceed 10% of the total number of Initial Shares, the non-defaulting Underwriters shall be obligated to purchase the full amount thereof in the proportions that their respective Initial Share underwriting obligation proportions bear to the underwriting obligation proportion of all non-defaulting Underwriters, or (b) if the number of Defaulted Shares exceeds 10% of the total number of Initial Shares, this Agreement shall terminate without liability on the part of any non-defaulting Underwriter. No action taken pursuant to this Section shall relieve any defaulting Underwriter from liability in respect of its default. In the event of any such default that does not result in a termination of this Agreement, either you or the Company shall have the right to postpone the Closing Time for a period not exceeding seven days in order to effect any required changes in the Registration Statement or Prospectus or in any other documents or arrangements. As used herein, the term "Underwriter" includes any person substituted for an Underwriter under this Section 11. Section 12. Default by a Selling Stockholder. If any Selling --------------------------------- Stockholder selling at least 90,000 Shares shall fail at the Closing Time to sell and deliver the number of Initial Shares that such Selling Stockholder is obligated to sell, then the Underwriters may, at your option, by notice from you to the Company and each of the Selling Stockholders, either (a) terminate this Agreement without any liability on the part of any non-defaulting party except to the extent provided in Section 4 and except that the provisions of Sections 7 and 8 shall remain in effect or (b) elect to purchase the Initial Shares that the remaining Selling Stockholders have agreed to sell pursuant to this Agreement. In the event of a default under this Section that does not result in the termination of this Agreement, either you or the Company shall have the right to postpone the Closing Time for a period not exceeding seven days in order to effect any required changes in the Registration Statement or Prospectus or in any other documents or arrangements. No action taken pursuant to this Section shall relieve any Selling Stockholder so defaulting from liability, if any, in respect of such default. Section 13. Notices. All notices and other communications under ------- this Agreement shall be in writing and shall be deemed to have been duly given if delivered, mailed or transmitted by any standard form of telecommunication. Notices to you or the Underwriters shall be directed to you, c/o Karen Harris, Vice President, Merrill Lynch, Pierce, Fenner & Smith Incorporated at Merrill Lynch World Headquarters, North Tower, 41 World Financial Center, New York, New York 10281; notices to the Company shall be directed to it at 8333 Bryan Dairy Road, Largo, Florida, 34647, Attention: Robert E. Lewis, Esq., Vice President/General Counsel with copies to Skadden, Arps, Slate, Meagher & Flom, 919 Third Avenue, New York, New York 10022, Attention: Stacy J. Kanter, Esq.; notices to the Selling Stockholders shall be directed to James V. Caruso, Merrill Lynch & Co., Merrill Lynch World Headquarters, South Tower, World Financial Center, New York, New York 10080-6123; a copy of all notices to any Selling Stockholder shall be provided to Shearman & Sterling, 599 Lexington Avenue, New York, New York 10022, Attention: Rohan S. Weerasinghe. Section 14. Parties. This Agreement is made solely for the ------- benefit of the several Underwriters, the Company and the Selling Stockholders and, to the extent expressed, any person who controls the Company, any Selling Stockholder or any of the Underwriters within the meaning of Section 15 of the 1933 Act, and the directors of the Company, its officers who have signed the Registration Statement, and their respective executors, administrators, successors and assigns and, subject to the provisions of Section 11, no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" shall not include any purchaser, as such purchaser, from any of the several Underwriters of the Shares. All of the obligations of the Underwriters hereunder are several and not joint. Section 15. Representation of Underwriters. You will act for ------------------------------ the several Underwriters in connection with the transactions contemplated by this Agreement, and any action under or in respect of this Agreement taken by you as Representatives will be binding upon all Underwriters. Section 16. Governing Law and Time. This Agreement shall be ---------------------- governed by the laws of the State of New York. Specified times of the day refer to New York City time. Section 17. Counterparts. This Agreement may be executed in one ------------ or more counterparts and when a counterpart has been executed by each party, all such counterparts taken together shall constitute one and the same agreement. ---------------------------------------- 42 If the foregoing is in accordance with your understanding of our agreement, please sign and return to us a counterpart hereof, whereupon this instrument will become a binding agreement among the Company, the Selling Stockholders and the several Underwriters in accordance with its terms. Very truly yours, ECKERD CORPORATION By ------------------------------------------- Name: Robert E. Lewis Title: Vice President/General Counsel On behalf of the Selling Stockholders named in Schedule B in the capacity as set forth in Schedule E By ------------------------------------------- Name: James V. Caruso Confirmed and accepted as of the date first above written: MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated CS FIRST BOSTON CORPORATION MORGAN STANLEY & CO. INCORPORATED RAYMOND JAMES & ASSOCIATES, INC. By: Merrill Lynch, Pierce, Fenner & Smith Incorporated By ---------------------------- Name: Karen Harris Title: Vice President For themselves and as Representatives of the - -------------------------------------------- other Underwriters named in Schedule A. - --------------------------------------- SCHEDULE A Number of Underwriters Initial Shares ------------ -------------- Merrill Lynch, Pierce, Fenner & Smith Incorporated CS First Boston Corporation Morgan Stanley & Co. Incorporated Raymond James & Associates, Inc. [syndicate list] _________ TOTAL 2,500,000 ========= SCHEDULE B Number of Number of Initial Option Selling Stockholder Shares Shares ------------------- ------- ------- Merrill Lynch Capital Appreciation Partnership No. II, L.P. ML Offshore LBO Partnership No. II Merrill Lynch Capital Appreciation Partnership No. B-IX, L.P. ML Offshore LBO Partnership No. B- IX ML IBK Positions, Inc. Merrill Lynch Capital Corporation ML Employee LBO Partnership No. I, L.P. MLCP Associates L.P., No. II Merrill Lynch KECALP L.P. 1986 Merrill Lynch KECALP L.P. 1989 Merchant Banking L.P. No. IV --------- ------- TOTAL 2,500,000 375,000 ----- ========= ======= SCHEDULE C List of the Subsidiaries Clorwood Distributors, Inc., a Florida corporation. Eckerd Consumer Products, Inc., a Florida corporation. Eckerd Corporation of Florida, Inc., a Florida corporation. Eckerd Fleet, Inc., a Florida corporation. Eckerd Holdings II, Inc., a Delaware corporation. Eckerd's Westbank, Inc., a Louisiana corporation. Eckerd Tobacco Company, Inc., a Florida corporation. E.I.T., Inc., a Florida corporation. Life Care Medical Products, Inc., a Florida corporation (5l% owned) P.C.V., Inc., a Florida corporation. E.T.B., Inc., a Texas corporation (49% owned) SCHEDULE D Attorney Selling Stockholder Marcia L. Tu, Esq. - ML IBK Positions, Inc. - Merrill Lynch Capital Appreciation Partnership No. II, L.P. - ML Offshore LBO Partnership No. II - ML Employees LBO Partnership No. I, L.P. - MLCP Associates L.P. No. II - ML Offshore LBO Partnership No. B-IX - Merrill Lynch Capital Appreciation Partnership No. B-IX, L.P. Margaret E. Nelson, Esq. - Merrill Lynch KECALP L.P. 1986 - Merrill Lynch KECALP L.P. 1989 David Dick, Esq. - Merchant Banking L.P. No. IV Jim Rossi, Esq. - Merrill Lynch Capital Corporation SCHEDULE E Merrill Lynch Capital Appreciation MLCP Associates L.P. No. II Partnership No. II, L.P. By: Merrill Lynch Capital Partners, By: Merrill Lynch LBO Partners, No.I, Inc., General Partner L.P., General Partner By: Merrill Lynch Capital Partners, By: James V. Caruso Inc., General Partner Title: Vice President By: James V. Caruso Merrill Lynch KECALP L.P. 1986 Title: Vice President By: KECALP Inc., General Partner ML Offshore LBO Partnership No. II By: James V. Caruso By: Merrill Lynch LBO Partners, No.I, Title: Vice President L.P., General Partner By: Merrill Lynch Capital Partners, Merrill Lynch KECALP L.P. 1989 Inc., General Partner By: KECALP Inc., General Partner By: James V. Caruso By: James V. Caruso Title: Vice President Title: Vice President Merrill Lynch Capital Appreciation Merchant Banking L.P. No. IV Partnership No. B-IX, L.P. By: Merrill Lynch MBP Inc., By: Merrill Lynch LBO Partners General Partner No. B-II, L.P., General Partner By: Merrill Lynch Capital Partners, By: James V. Caruso Inc., General Partner Title: Vice President By: James V. Caruso Merrill Lynch Capital Corporation Title: Vice President By: James V. Caruso ML Offshore LBO Partnership Title: Attorney-in-fact No. B-IX By: Merrill Lynch LBO Partners, No. B-II, L.P., General Partner By: Merrill Lynch Capital Partners, Inc., General Partner By: James V. Caruso Title: Vice President ML IBK Positions, Inc. By: James V. Caruso Title: Vice President ML Employee LBO Partnership No. I, L.P. By: James V. Caruso Title: Vice President EXHIBIT A Eckerd Corporation (a Delaware corporation) 2,500,000 Shares of Common Stock PRICE DETERMINATION AGREEMENT December __, 1995 MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated CS First Boston Corporation Morgan Stanley & Co. Incorporated Raymond James & Associates, Inc. As Representatives of the several Underwriters c/o Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated Merrill Lynch World Headquarters North Tower World Financial Center New York, New York 10281-1201 Ladies and Gentlemen: Reference is made to the Purchase Agreement dated December __, 1995 (the "Purchase Agreement") among Eckerd Corporation (the "Company"), the Selling Stockholders named in Schedule B thereto or hereto (the "Selling Stockholders") and the several Underwriters named in Schedule A thereto or hereto (the "Underwriters"), for whom Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, CS First Boston Corporation, Morgan Stanley & Co. Incorporated and Raymond James & Associates, Inc. are acting as representatives (the "Representatives"). The Purchase Agreement provides for the purchase by the Underwriters from the Selling Stockholders, subject to the terms and conditions set forth therein, of an aggregate of 2,500,000 shares (the "Initial Shares") of the Company's common stock, par value $ 0.01 per share. This Agreement is the Price Determination Agreement referred to in the Purchase Agreement. Terms not defined herein are used herein as defined in the Purchase Agreement. 2 Pursuant to Section 2 of the Purchase Agreement, the undersigned agree with the Representatives as follows: 1. The price to public per share for the Initial Shares shall be $_____. 2. The purchase price per share for the Initial Shares to be paid by the several Underwriters shall be $_____, representing an amount equal to the price set forth above, less $____ per share. The Company represents and warrants to each of the Underwriters that the representations and warranties of the Company set forth in Section 1(a) of the Purchase Agreement are accurate as though expressly made at and as of the date hereof. Additionally, if the Company elects to rely on Rule 462(b), the Company covenants to each of the Underwriters that: (a) the Company will file a Rule 462(b) Registration Statement in compliance with, and that is effective upon filing pursuant to, Rule 462(b) prior to the time confirmations are sent or given, as specified in Rule 462(b) of the 1933 Act; and (b) the Company will give irrevocable instructions for transmission of the applicable filing fee in connection with the filing of the Rule 462(b) Registration Statement, in compliance with Rule 111 of the 1933 Act Regulations or the Commission will have received payment of such filing fee upon filing of the Rule 462(b) Registration Statement. Each Selling Stockholder represents and warrants to each of the Underwriters that the representations and warranties of such Selling Stockholder set forth in Section 1(b) of the Purchase Agreement are accurate as though expressly made at and as of the date hereof. As contemplated by Section 2 of the Purchase Agreement, attached as Schedule A is a completed list of the several Underwriters and as Schedule B is a completed list of the Selling Stockholders, which shall be a part of this Agreement and the Purchase Agreement. This Agreement shall be governed by the laws of the State of New York. ------------------------------------------ If the foregoing is in accordance with the understanding of the Representatives of the agreement between the Underwriters, the Company and the Selling Stockholders, please sign and return to the Company and the Selling Stockholders a counterpart hereof, whereupon this instrument along with all counterparts and together with the Purchase Agreement shall be a binding agreement between the Underwriters, the Company and the Selling Stockholders in accordance with its terms and the terms of the Purchase Agreement. Very truly yours, ECKERD CORPORATION By ---------------------------- Name: Robert E. Lewis Title: Vice President/General Counsel On behalf of the Selling Stockholders named in Schedule B in the capacity as set forth in Schedule E By ---------------------------- Name: James V. Caruso Confirmed and accepted as of the date first above written: MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated CS FIRST BOSTON CORPORATION MORGAN STANLEY & CO. INCORPORATED RAYMOND JAMES & ASSOCIATES, INC. By: Merrill Lynch, Pierce, Fenner & Smith Incorporated By --------------------------------- Name: Karen Harris Title: Vice President For themselves and as Representatives of the - -------------------------------------------- other Underwriters named in Schedule A - -------------------------------------- Exhibit B LOCK-UP LETTER AGREEMENT ------------------------ December __, 1995 Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated CS First Boston Corporation Morgan Stanley & Co. Incorporated Raymond James & Associates, Inc. As Representatives of the several Underwriters c/o Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated Merrill Lynch World Headquarters North Tower World Financial Center New York, New York 10281-1201 Dear Sirs: The undersigned stockholder of Eckerd Corporation, a Delaware corporation (the "Company"), understands that a Purchase Agreement (the "Purchase Agreement") will be executed by the Company, the Selling Stockholders named therein (the "Selling Stockholders") and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, CS First Boston Corporation, Morgan Stanley & Co. Incorporated and Raymond James & Associates, Inc., as representatives (the "Representatives") of the several underwriters named therein (the "Underwriters"), pursuant to which the Selling Stockholders will sell to the Underwriters 2,500,000 shares of the Common Stock, par value $.01 per share (the "Common Stock"), of the Company and up to 375,000 additional shares of Common Stock pursuant to an option granted by the Selling Stockholders, solely to cover over-allotments as set forth in the Purchase Agreement. The undersigned is a party to that certain Registrations Rights Agreement (the "Registration Rights Agreement"), dated as of April 30, 1986 and amended by the First Amendment thereto dated as of November 21, 1990, by and among the Company and the stockholders named therein. This Lock-Up Letter Agreement is being entered into in accordance with Section 7(a) of the Registration Rights Agreement at the request of the Underwriters. 2 The undersigned also understands that the Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-3 (File No. 33-______, the "Registration Statement") in connection with the public offering (the "Offering") of shares of its Common Stock. In consideration of the Underwriters' agreement to purchase the Common Stock and undertake the Offering, and for other good and valuable consideration, receipt of which is hereby acknowledged, the undersigned agrees not to directly or indirectly effect any public sale or distribution, including any sale pursuant to Rule 144 under the Securities Act of 1933, as amended, of any shares of Common Stock (including, without limitation, shares of Common Stock which may be deemed to be beneficially owned by such stockholder in accordance with the rules and regulations of the Commission and shares of Common Stock which may be issued upon exercise of any option or warrant) or any securities convertible or exchangeable for shares of Common Stock for a period commencing 7 days prior to the date the Registration Statement is declared effective by the Commission (the "Effective Date") and ending 120 days after the Effective Date, other than the Shares sold to the Underwriters pursuant to the Purchase Agreement and shares of Common Stock traded on the New York Stock Exchange, Inc. The undersigned understands that the Company expects the Effective Date to occur as early as ______, 1995. The undersigned understands that the Effective Date may, however, be earlier or later than _____, 1995. In addition, the undersigned agrees that the undersigned will, promptly following the execution of this Lock-Up Letter Agreement and in any event prior to the execution of the Purchase Agreement, (i) with respect to any shares of Common Stock for which the undersigned is the record holder, cause the transfer agent for the Company to note stop transfer instructions with respect to such shares of Common Stock on the transfer books and records of the Company and (ii) with respect to any shares of Common Stock for which the undersigned is the beneficial holder but not the record holder (other than the shares of Common Stock owned of record by persons or entities that are not affiliates of the undersigned and shares of Common Stock which may be issued upon exercise of any option or warrant), cause the record holder of such shares to cause the transfer agent for the Company to note stop transfer instructions with respect to such shares of Common Stock on the transfer books and records of the Company. The undersigned understands that the Company, the Selling Stockholders and the Underwriters will proceed with the Offering in reliance on this Lock-Up Letter Agreement. The undersigned hereby represents and warrants that the undersigned has full power and authority to enter into this Lock-Up Letter Agreement and that, upon request, the undersigned will execute any additional documents necessary or desirable in connection 3 with the enforcement hereof. Any obligations of the undersigned shall be binding upon the successors and assigns of the undersigned. This Lock-Up Letter Agreement has been entered into on the date first written above. Very truly yours, ---------------------------------------- Name of Stockholder By: ------------------------------------- Name: Title: EX-5.1 3 Exhibit 5.1 November 17, 1995 Eckerd Corporation 8333 Bryan Dairy Road Largo, Florida 34647 Ladies and Gentlemen: I am Vice President/General Counsel for Eckerd Corporation, a Delaware corporation (the "Company"). I am providing the opinion set forth herein in connection with the preparation of a registration statement on Form S-3 (the "Registration Statement"), being filed by the Company with the Securities and Exchange Commission (the "Commission") on the date hereof. The Registration Statement relates to the registration by the Company under the Securities Act of 1933, as amended (the "Act"), of up to 2,875,000 shares of Common Stock of the Company, par value $.01 per share (the "Common Stock"), and the sale of (i) 2,500,000 shares of Common Stock (the "Firm Shares") by certain stockholders of the Company (the "Selling Stockholders") and (ii) up to 375,000 shares of Common Stock subject to an option given to the Underwriters (as defined below) by the Selling Stock- holders solely to cover over-allotments, if necessary (the "Option Shares" and, together with the Firm Shares and any shares to be sold by the Selling Stockholders which are registered on a registration statement filed by the Company pursuant to Rule 462(b) of the General Rules and Regulations under the Act, the "Shares"), to the public through a syndicate of under- writers in a firm commitment public offering pursuant to a Purchase Agree- ment (the "Purchase Agreement") in the form filed herewith as Exhibit 1.1 to the Registration Statement, to be entered into by and among the Company, the Selling Stockholders and Merrill Lynch & Co., CS First Boston Corporation, Morgan Stanley & Co. Incorporated and Raymond James & Associ- ates, Inc., acting severally on behalf of themselves and the several Under- writers named therein (the "Underwriters"). This opinion is being delivered in accordance with the requirements of Item 601(b)(5) of Regulation S-K under the Act. Eckerd Corporation November 17, 1995 Page 2 In connection with this opinion, I have examined originals or copies, certified or otherwise identified to our satisfaction, of (i) the Registration Statement; (ii) the form of the Purchase Agreement; (iii) the Company's Restated Certificate of Incorporation, as in effect as of the respective issue dates of the Shares; (iv) the Company's Amended and Re- stated By-laws, as in effect as of the respective issue dates of the Shares; (v) the resolutions of the Board of Directors of the Company relating to, among other things, the issuance of the Shares and the regis- tration of the Shares under the Act; (vi) the form of a specimen certif- icate representing the Shares; and (vii) such other documents as I have deemed necessary or appropriate as a basis for the opinions set forth below. I have also examined originals or copies, certified or otherwise identified to my satisfaction, of such records of the Company and such agreements, certificates of public officials, certificates of officers or other representatives of the Company and others, and such other documents, certificates and records as I have deemed necessary or appropriate as a basis for the opinion set forth herein. In my examination, I have assumed the legal capacity of all natural persons, the genuineness of all signatures, the authenticity of all documents submitted to me as originals, the conformity to original docu- ments of all documents submitted to me as certified or photostatic copies and the authenticity of the originals of such latter documents. In making my examination of documents executed by parties other than the Company, I have assumed that such parties had the power, corporate or other, to enter into and perform all obligations thereunder and have also assumed the due authorization by all requisite action, corporate or other, and the execution and delivery by such parties of such documents and the validity and binding effect thereof. As to any facts material to the opinions ex- pressed herein which were not independently established or verified, I have relied upon oral or written statements and representations of officers and other representatives of the Company and others. I am admitted to practice law in the State of Florida and I do not purport to be an expert on any law other than the laws of the State of Florida and the laws of the United States of America. Insofar as the opin- ions contained herein relate to the general corporate law of the State of Delaware, I have made such investigation of such laws as I have deemed necessary as a basis for such opinions. Eckerd Corporation November 17, 1995 Page 3 Based upon and subject to the foregoing and assuming (i) the conformity of the certificates representing the Shares to the form of the specimen thereof examined by me and the due execution and delivery of such certificates and (ii) that the Company has received the full consideration for the Shares, I am of the opinion that the Shares are duly authorized, validly issued, fully paid and nonassessable. I hereby consent to the use of my name in the Registration State- ment under the caption "Legal Matters" and to the filing of this opinion as an Exhibit to the Registration Statement. I further consent to the incor- poration of this opinion by reference as an exhibit to any registration statement relating to the offering of the Shares which is filed pursuant to Rule 462(b) of the General Rules and Regulations under the Act and to the use of my name under the caption "Legal Matters" in the prospectus included in or incorporated by reference in any such registration statement. In giving such consent, I do not admit that I came within the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Commission thereunder. Very truly yours, /s/ Robert E. Lewis Robert E. Lewis Vice President/General Counsel Eckerd Corporation EX-15.1 4 Exhibit 15.1 Eckerd Corporation 8333 Bryan Dairy Road Largo, Florida 34647 Gentlemen: Re: Registration Statement on Form S-3 of Eckerd Corporation With respect to the subject registration statement, we acknowledge our awareness of the incorporation by reference therein of our reports dated June 10, 1995 and September 7, 1995 related to our reviews of interim financial information. Pursuant to Rule 436(c) under the Securities Act of 1933 (the "Act"), such reports are not considered a part of a registration statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of sections 7 and 11 of the Act. Very truly yours, /s/ KPMG Peat Marwick LLP Tampa, Florida November 17, 1995 EX-23.1 5 Exhibit 23.1 CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors Eckerd Corporation and Subsidiaries We consent to the use of our audit report dated March 20, 1995 on the consolidated financial statements of Eckerd Corporation and Subsidiaries included in its Annual Report on Form 10-K 405 as of January 28, 1995 and January 29, 1994, and the fiscal year ended January 28, 1995, January 29, 1994 and January 30, 1993, incorporated by reference into the Prospectus (the "Prospectus"), which forms a part of the Registration Statement on Form S-3 of the Company originally filed on the date hereof, and to the reference to this firm under the heading "Experts" in the Prospectus. Our report refers to a change in accounting policy related to the timing of the recognition of closed store obligations. /s/ KPMG Peat Marwick LLP Tampa, Florida November 17, 1995 -----END PRIVACY-ENHANCED MESSAGE-----