SC 14D9

 
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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
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                                 SCHEDULE 14D-9
               SOLICITATION/RECOMMENDATION STATEMENT PURSUANT TO
            SECTION 14(d)(4) OF THE SECURITIES EXCHANGE ACT OF 1934
 
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                               ECKERD CORPORATION
                           (Name of Subject Company)
 
                               ECKERD CORPORATION
                      (Name of Person(s) Filing Statement)
 
                     COMMON STOCK, PAR VALUE $.01 PER SHARE
                         (Title of Class of Securities)
 
                                   278763107
                     (CUSIP Number of Class of Securities)
 
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                               ECKERD CORPORATION
                             8333 BRYAN DAIRY ROAD
                                LARGO, FL 33777
                        ATTENTION: ROBERT E. LEWIS, ESQ.
                         VICE PRESIDENT/GENERAL COUNSEL
                                 (813) 399-6000
          (Name, Address and Telephone Number of Person Authorized to
                Receive Notices and Communications on Behalf of
                        the Person(s) Filing Statement)
 
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                                 WITH A COPY TO
                              CLARE O'BRIEN, ESQ.
                              SHEARMAN & STERLING
                              599 LEXINGTON AVENUE
                               NEW YORK, NY 10022
                                 (212) 848-4000
 
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ITEM 1. SECURITY AND SUBJECT COMPANY
 
  The name of the subject company is Eckerd Corporation, a Delaware
corporation (the "Company"). The address of the principal executive offices of
the Company is 8333 Bryan Dairy Road, Largo, Florida 33777. The title of the
class of equity securities to which this Statement relates is the voting
common stock, par value $.01 per share, of the Company (the "Shares").
 
ITEM 2. TENDER OFFER OF THE BIDDER
 
  The Statement relates to a tender offer by Omega Acquisition Corporation, a
Delaware corporation ("Purchaser") and a wholly owned subsidiary of J. C.
Penney Company, Inc., a Delaware corporation ("Parent"), disclosed in a Tender
Offer Statement on Schedule 14D-1 dated November 7, 1996 (the "Schedule 14D-
1"), with respect to an offer to purchase 35,252,986 of the outstanding
Shares, or such other number of shares representing 50.1% of the Company's
outstanding Shares on the date of purchase of the Shares, at a price of $35.00
per Share (such price, or such higher price per Share as may be paid in the
Offer, being the "Offer Price"), net to the seller in cash, upon the terms and
subject to the conditions set forth in the Offer to Purchase dated November 7,
1996 (the "Offer to Purchase") and the related Letter of Transmittal (which,
as amended from time to time, together with any amendments and supplements
thereto, collectively constitute the "Offer"), which are filed as Exhibits 1
and 2, respectively, to this Schedule 14D-9 and are incorporated herein by
reference.
 
  The Offer is being made pursuant to an Amended and Restated Agreement and
Plan of Merger dated as of November 2, 1996 (the "Merger Agreement") among
Parent, Purchaser and the Company. Pursuant to the Merger Agreement, the Offer
is conditioned, among other things, on there being validly tendered and not
withdrawn prior to the expiration date of the Offer 35,252,986 Shares or such
other number of Shares representing 50.1% of all outstanding Shares on the
date of purchase of the Shares (the "Minimum Condition").
 
  The Merger Agreement further provides that, after consummation of the Offer,
the Company shall be merged with and into Purchaser (the "Forward Merger") or,
depending upon certain conditions, that Purchaser shall be merged with and
into the Company (the "Reverse Merger"). The Forward Merger and the Reverse
Merger are hereinafter collectively referred to as the "Merger". Pursuant to
the Merger, each outstanding Share (excluding Shares owned, directly or
indirectly, by the Company, Parent, Purchaser or any other subsidiary of
Parent and, in the case of the Reverse Merger, Shares owned by holders who
shall have properly exercised their appraisal rights under Delaware law) will
be converted into the right to receive (i) if the Stock Condition (as defined
below) has been satisfied and the Forward Merger is effected, 0.6604 shares of
Parent's common stock, $.50 par value per share ("Parent Common Stock") or
such other number of shares of Parent Common Stock to which such number shall
have been increased in accordance with Sections 1.1 or 2.1 of the Merger
Agreement (the "Stock Merger Consideration") or (ii) if the Stock Condition
has not been satisfied and the Reverse Merger is effected, the Offer Price, in
cash, (the consideration set forth in clause (i) or (ii) being hereinafter
referred to as the "Merger Consideration"), in each case without interest.
 
  The Merger Agreement filed as Exhibit 9 to this Schedule 14D-9 and, together
with any amendments thereto, is incorporated herein by reference. Its terms
and the transactions contemplated therein (the "Transactions") are further
described under Item 3 below.
 
  According to the Offer, the principal executive offices of Parent and
Purchaser are located at 6501 Legacy Drive, Plano, Texas 75024-3698.
 
ITEM 3. IDENTITY AND BACKGROUND
 
  (a) The name and address of the Company, which is the person filing this
Statement, are set forth in Item 1 above.
 
  (b) Except as described below or incorporated by reference herein, to the
knowledge of the Company, as of the date hereof, there exists no material
contract, agreement, arrangement or understanding and no actual or
 
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potential conflict of interest between the Company or its affiliates and (i)
the executive officers, directors or affiliates of the Company, or (ii) Parent
or Purchaser or their respective executive officers, directors or affiliates.
 
  (i) Certain Contracts, Agreements, Arrangements or Understandings and any
Actual or Potential Conflicts of Interests Between (A) the Company or its
Affiliates and (B) the Executive Officers, Directors or Affiliates of the
Company
 
  Certain contracts, agreements, arrangements and understanding between the
Company or its affiliates and certain of the Company's directors and executive
officers are described under the headings "SECURITY OWNERSHIP OF CERTAIN
PERSONS," "EXECUTIVE COMPENSATION," "OPTION GRANTS IN LAST FISCAL YEAR,"
"AGGREGATED OPTION / SAR EXERCISES IN THE LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES," "LONG-TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR,"
"RETIREMENT PLANS," AND "CERTAIN TRANSACTIONS" at pages 8-15 of the notice of
annual meeting and proxy statement of the Company dated April 23, 1996 and
sent by the Company to its stockholders (the "Stockholders") in connection
with the annual meeting of Stockholders held on May 23, 1996 (the "Proxy
Statement"). A copy of such portions of the Proxy Statement is filed as
Exhibit 8 hereto and is incorporated herein by reference.
 
  The Company entered into employment agreements with Messrs. Edward Kelly and
Richard Powis that became effective on February 1, 1996 and that provide for
initial base annual salaries of $211,200 and $200,900, respectively, and for
bonuses pursuant to bonus plans that the Company allows them to participate in
from time to time. Each employment agreement is for an initial term of one
year and is thereafter automatically renewed on a year-to-year basis, unless
terminated by the Company or the employee. Each of the employment agreements
provides that upon an involuntary termination other than for cause, the
Company will (i) continue to pay the base annual salaries of each employee in
monthly installments for a period of one year following a termination which
occurs prior to the employee's tenth anniversary of employment with the
Company or eighteen months following a termination which occurs after the
employee's tenth anniversary of employment (the "Applicable Severance
Period"), (ii) pay each employee a pro rata portion of such employees'
applicable bonus compensation and (iii) continue certain insurance and medical
benefits for the Applicable Severance Period or if earlier, the date the
employee obtains such benefits pursuant to a subsequent employer's plans. Upon
the termination of employment by the Company or by the employees for Good
Reason (as defined in the agreements) within two years after a Change in
Control (as defined in the agreements), the Company will (a) pay each employee
a lump sum severance payment in an amount equal to 2.9 times the employee's
base salary, plus a pro rata portion of such employee's applicable bonus
compensation, (b) continue certain insurance and medical benefits for a period
of two years, and (c) immediately vest each employee in all of such employee's
previously granted incentive awards. A Change of Control is defined as (i) the
acquisition by any person of more than 25% of the outstanding shares of the
Company's voting stock, (ii) any change in the composition of the Board of
Directors of the Company (the "Board") resulting in the members of the Board
on the date of the agreement (or members elected or recommended by such
members) ceasing to constitute a majority of the Board, or (iii) any other
event determined to be a Change of Control by the Board.
 
  The Agreements also provide that in order to receive any payment under the
Agreement upon a termination of employment, (i) each employee must sign a
release which releases the Company from any legal claims such employee may
have against the Company and (ii) the employee agrees not to compete with the
Company for a period of one to two years after termination of such employee's
employment, depending on the circumstances of such termination.
 
  In the event any payment by the Company to Messrs. Kelly and Powis upon a
Change in Control is determined to be subject to the excise tax imposed by
Section 4999 of the Code, the Company is required to pay them an amount on an
after-tax basis equal to the excise tax imposed.
 
  The Company also entered into very similar employment agreements with
Messrs. Gladysz, Lewis, Nash, and Simmons, that became effective October 25,
1996 and that provide for salaries of $152,900, $123,600,
 
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$160,000 and $180,300, respectively, and for bonuses pursuant to bonus plans
that the Company allows them to participate in from time to time. These
employment agreements provide that, upon the termination of employment by the
Company or by the employee for Good Reason (as defined therein) within two
years after a Change of Control, the Company will (a) pay such employee a lump
sum severance payment equal to two times the employee's base salary, plus a
pro rata portion of such employee's applicable bonus compensation, (b)
continue certain insurance and medical benefits for a period of eighteen
months, and (c) immediately vest all incentive awards previously granted to
such employee.
 
  Pursuant to the terms of a letter agreement dated October 24, 1996, between
the Company and Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch"), Merrill Lynch has been retained by the Company to act as financial
advisor to the Company in connection with, among other things, the
transactions contemplated by the Merger Agreement. On November 2, 1996,
Merrill Lynch rendered to the Board an oral opinion, which opinion was
subsequently confirmed in a written opinion dated the same date, to the effect
that, as of such date and based upon the assumptions made, matters considered
and limits of review as set forth in such opinion, the Offer Price and the
Merger Consideration, taken as a whole, is fair from a financial point of
view, to the Stockholders. As of November 5, 1996, Merrill Lynch Group, Inc.,
a wholly owned subsidiary of Merrill Lynch, could be deemed to be the
beneficial owner of 890,439 Shares, representing approximately 1.27% of the
total number of the outstanding Shares, by virtue of its control of its wholly
owned subsidiaries Merrill Lynch Capital Partners, Inc., KECALP, Inc., Merrill
Lynch MBP, Inc., Merrill Lynch Capital Corporation, ML Employees LBO Managers,
Inc. and ML IBK Positions, Inc. (together, with Merrill Lynch Group, Inc., the
"Merrill Lynch Affiliates"). Also, Messrs. Fitzgibbons and Sidhu, directors of
the Company, and Mr. Michas, a former director of the Company, are directors
of Merrill Lynch Capital Partners, Inc. Until July 1994, Messrs. Fitzgibbons,
Sidhu and Michas were officers of Merrill Lynch Capital Partners, Inc. and
employees of Merrill Lynch. Each disclaims beneficial ownership of shares of
Common Stock that could be deemed to be beneficially owned by the Merrill
Lynch Affiliates. See Item 5 "Persons Retained, Employed or to Be
Compensated."
 
 Indemnification under Delaware Law, the Company's Certificate of
Incorporation and By-laws
 
  The Company is a Delaware corporation. Reference is made to Section 145 of
the Delaware General Corporation Law ("Delaware Law" or "DGCL"), which
provides that a corporation may indemnify any person who was or is, or is
threatened to be made, a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of such corporation), by reason of
the fact that such person is or was an officer, director, employee or agent of
such corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorney's fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by the
indemnified person in connection with such action, suit or proceeding,
provided such officer, director, employee or agent acted in good faith and in
a manner he or she reasonably believed to be in or not opposed to the
corporation's best interest and, for criminal proceedings, had no reasonable
cause to believe that his or her conduct was unlawful. A Delaware corporation
may indemnify officers and directors in an action by or in the right of the
corporation under the same conditions, except that no indemnification is
permitted without judicial approval if the officer or director is adjudged to
be liable to the corporation. Where an officer or director is successful on
the merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him or her against the expenses that such officer
or director actually and reasonably incurred.
 
  Reference is also made to Section 102(b)(7) of the Delaware Law, which
enables a corporation in its original certificate of incorporation or an
amendment thereto to eliminate or limit the personal liability of a director
to the corporation or the Stockholders for violations of the director's
fiduciary duty, except (i) for any breach of the director's duty of loyalty to
the corporation or the Stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) pursuant to Section 174 of the Delaware Law (providing for liability of
directors for unlawful payment of dividends or unlawful stock purchases or
redemptions) or (iv) for any transaction from which a director derived an
improper personal benefit.
 
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  Pursuant to Article Seventh of the Restated Certificate of Incorporation of
the Company and Article Eighth of the Amended and Restated By-Laws of the
Company, the Company indemnifies its directors and officers to the fullest
extent authorized or permitted by law and such right to indemnification shall
continue as to a person who has ceased to be a director or officer of the
Company and shall inure to the benefit of his or her heirs, executors and
personal and legal representatives. The right to indemnification includes the
right to be paid by the Company the expenses incurred in defending or
otherwise participating in any proceeding in advance of its final disposition.
 
  The Company may, to the extent authorized from time to time by the Board of
Directors, provide rights to indemnification and to the advancement of
expenses to its employees who are not directors or officers similar to those
conferred to directors and officers.
 
  The Company maintains insurance policies that provide for the
indemnification of directors and officers pursuant to the provisions described
above. In addition, 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.
 
  (ii) Certain Contracts, Agreements, Arrangements or Understandings and any
Actual or Potential Conflicts of Interests Between (A) the Company or its
Affiliates and (B) Purchaser and Parent and their Executive Officers,
Directors or Affiliates
 
 The Merger Agreement
 
  The following is a summary of the material terms of the Merger Agreement.
This summary is not a complete description of the terms and conditions of the
Merger Agreement and is qualified in its entirety by reference to the full
text of the Merger Agreement, which is incorporated by reference and a copy of
which has been filed as an exhibit to this Schedule 14D-9. The Merger
Agreement may be examined, and copies obtained, as set forth in Section 8 of
the Offer to Purchase.
 
  The Offer. The Merger Agreement provides for the commencement of the Offer.
Purchaser has expressly reserved the right to increase the price per Share
payable in the Offer or to make any other changes in the terms and conditions
of the Offer, except that without the written consent of the Company,
Purchaser has agreed that it will not (i) reduce or increase the number of
Shares sought to be purchased pursuant to the Offer, (ii) reduce the price per
Share payable in the Offer, (iii) change the form of consideration to be paid
in the Offer, (iv) impose additional conditions to the Offer or amend any
other term of the Offer in any manner adverse to the holders of Shares or (v)
waive satisfaction of the Minimum Condition, except that if the price per
Share payable in the Offer is increased, the number of shares of Parent Common
Stock into which each Share is to be converted in the Forward Merger will be
increased to that number of shares of Parent Common Stock having a market
value, based upon the closing price of such shares on the New York Stock
Exchange Composite Tape on the day the Offer Price per Share is increased,
equal to the Offer Price. Parent and Purchaser have agreed that Purchaser will
not terminate or withdraw the Offer or extend the expiration date of the Offer
unless at the expiration date of the Offer the conditions to the Offer shall
not have been satisfied or earlier waived. Purchaser may, without the consent
of the Company, extend the Offer on one occasion following the time that all
of the conditions to the Offer have been satisfied as of the scheduled
expiration date of the Offer for a period not to exceed five business days.
However, notwithstanding anything to the contrary contained in the Merger
Agreement, (i) Purchaser may without the consent of the Company, extend the
Offer so as to comply with applicable rules and regulations of the Commission
and (ii) so long as the Merger Agreement has not been terminated in accordance
with its terms, if at the scheduled expiration date of the Offer any of the
conditions to Purchaser's obligation to accept for
 
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payment and pay for Shares shall not be satisfied or waived, Purchaser will
extend the Offer on one or more occasions.
 
  Board Representation. The Merger Agreement provides that promptly upon the
purchase by Parent or Purchaser of the Shares pursuant to the Offer, Parent
shall be entitled to designate the number of directors, rounded up to the next
whole number, on the Board that equals the product of (i) the total number of
directors on the Board (giving effect to the election of any additional
directors pursuant to the terms of the Merger Agreement) and (ii) the
percentage (expressed as a decimal) that the number of Shares beneficially
owned by Parent and Purchaser bears to the total number of Shares outstanding.
The Company has agreed that it will, subject to compliance with Section 14(f)
of the Exchange Act and Rule 14f-1 promulgated thereunder, take all action
necessary to cause all of Parent's designees to be elected or appointed to the
Board, including, without limitation, by increasing the size of the Board or
securing the resignations of incumbent directors, or both. From and after the
time, if any, that Parent's designees constitute a majority of the Company's
Board pursuant to the Merger Agreement (the "Control Date") and prior to the
Effective Time, any amendment of the Merger Agreement, any termination of the
Merger Agreement by the Company, any extension of time for performance of any
of the obligations of Parent or Purchaser under the Merger Agreement or any
waiver thereof, or any waiver of any condition to the obligations of the
Company or any of the Company's rights or other action by the Company under
the Merger Agreement, requires the concurrence of, and shall be effective only
if approved by, a majority of the directors of the Company then in office who
are not affiliates of Parent and were not designated by Parent (the "Company
Designees"), which action will be deemed to constitute the action of the full
Board even if such majority of Company Designees does not constitute a
majority of all directors then in office. However, if there are no Company
Designees, such actions may be effected by majority vote of the entire
Board, except that no such action shall amend the terms of the Merger
Agreement in a manner adverse to the Stockholders.
 
  The Merger. The Merger Agreement provides that if the Stock Condition is
satisfied, the Forward Merger will be effected at the Effective Time;
provided, however, that if the Stock Condition has not been satisfied, the
Reverse Merger will be effected. However, the Merger Agreement provides that
Parent may, in its sole discretion, increase the number of shares constituting
the Stock Merger Consideration so as to satisfy the Stock Condition. The
"Stock Condition" will be satisfied if (i) the aggregate market value of the
shares of Parent Common Stock deliverable upon consummation of the Forward
Merger (the "Stock Value"), based upon the closing price of such stock on the
New York Stock Exchange Composite Tape on the date immediately prior to the
effective time of the Merger (the "Effective Time"), is at least 45% of the
sum of (y) the Stock Value and (z) the aggregate amount paid by Purchaser to
purchase Shares pursuant to the Offer, and (ii) legal counsel to Parent
delivers to Parent and legal counsel to the Company delivers to the Company,
opinions that the Forward Merger will constitute a "tax-free reorganization"
as more fully described to in the Merger Agreement. Notwithstanding the
foregoing, Parent may, in its sole discretion, increase the number of shares
of Parent Common Stock into which the Shares will be converted in the Forward
Merger so as to satisfy the Stock Condition. At the Effective Time, if the
Forward Merger is effected, the separate existence of the Company shall cease
and Purchaser shall continue as the surviving corporation under the name
"Eckerd Corporation" or, if the Reverse Merger is effected, the separate
existence of the Purchaser shall cease and the Company shall continue as the
surviving corporation. The surviving corporation of the Forward Merger or the
Reverse Merger, as the case may be, is referred to herein as the "Surviving
Corporation." The Merger will become effective upon the filing of the
Certificate of Merger (the "Certificate of Merger") with the Delaware
Secretary of State or at such time thereafter as is agreed upon by the parties
and specified in the Certificate of Merger.
 
  Consideration to be Paid in the Merger. The Merger Agreement provides that
upon the terms and subject to the conditions in the Merger Agreement and in
accordance with the DGCL, at the Effective Time, by virtue of the Merger, each
Share issued and outstanding immediately prior to the Effective Time
(excluding Shares owned by the Company or by Parent, Purchaser or any other
subsidiary of Parent, and in the case of the Reverse Merger, Dissenting Shares
shall be converted into the right to receive (i) if the Stock Condition has
been satisfied and the Forward Merger is effected, 0.6604 shares of Parent
Common Stock (together with the associated preferred stock purchase rights
(the "Rights") issued pursuant to the Rights Agreement, dated as of February
14, 1990, as
 
                                       5

 
amended, between Parent and ChaseMellon Shareholder Services, L.L.C., as
rights agent), or such other number of shares of Parent Common Stock to which
such number has been increased in accordance with the terms of the Merger
Agreement, or (ii) if the Stock Condition has not been satisfied and the
Reverse Merger is effected, the Offer Price, in cash, in each case without
interest. Each share of common stock of Purchaser issued and outstanding
immediately prior to the Effective Time will, at the Effective Time, by virtue
of the Merger and without any action on the part of the holder thereof, be
converted into and become, or remain in the case of the Forward Merger, one
validly issued, fully paid and nonassessable share of common stock, $.01 par
value per share, of the Surviving Corporation. Each Share issued and
outstanding immediately prior to the Effective Time that is owned by the
Company, Parent, Purchaser or any other subsidiary of Parent, will
automatically be cancelled and retired without payment of any consideration
therefor and shall cease to exist.
 
  Dissenting Shares. In the event the Reverse Merger is effected, Shares
issued and outstanding immediately prior to the Effective Time held by a
holder (if any) who has the right to demand, and who properly demands, an
appraisal of such Shares in accordance with Section 262 of the DGCL (or any
successor provision) ("Dissenting Shares") will not be converted into the
right to receive the Merger Consideration unless such holder fails to perfect
or otherwise loses such holder's right to such appraisal, if any. If, after
the Effective Time, such holder fails to perfect or loses any such right to
appraisal, each such Share of such holder shall be treated as a Share that had
been converted as of the Effective Time into the right to receive the Merger
Consideration in accordance with the terms of the Merger Agreement. In the
event the Forward Merger is effected, holders of Shares issued and outstanding
immediately prior to the Effective Time will not be entitled to demand an
appraisal of such Shares in accordance with Section 262 of the DGCL.
 
  Company Stock Options. The Merger Agreement provides that each holder of a
then outstanding option to purchase Shares (collectively, "Options") under the
Company's 1993 Stock Option and Incentive Plan and 1995 Stock Option and
Incentive Plan (collectively, the "Stock Option Plans"), whether or not then
exercisable or fully vested, may elect, prior to the Effective Time, in
settlement thereof, to receive from the Company immediately after the
Effective Time for each Share subject to such Option an amount in cash equal
to the difference between the Offer Price and the per Share exercise price of
such Option, to the extent the
Offer Price is greater than the per Share exercise price of such Option (such
excess amount being hereinafter referred to as the "Option Consideration");
provided, however, that with respect to any person subject to Section 16(a) of
the Exchange Act, any such amount shall be paid as soon as practicable after
the first date payment can be made without liability to such person under
Section 16(b) of the Exchange Act. The Merger Agreement further provides that
at the Effective Time, each outstanding Option, other than Options for which
an election to receive cash in settlement thereof has been made pursuant to
the Merger Agreement, will be assumed by Parent and shall constitute a vested
option to acquire, on substantially the same terms and subject to
substantially the same conditions as were applicable under such Option,
including, without limitation, term, exercisability, status as an "incentive
stock option" under Section 422 of the Code, and termination provisions, the
same number of shares of Parent Common Stock, rounded down to the nearest
whole share, determined by multiplying the number of Shares subject to such
Option immediately prior to the Effective Time by the Option Exchange Ratio
(as defined below); at an exercise price per share of Parent Common Stock
(increased to the nearest whole cent) equal to the exercise price per share of
Shares immediately prior to the Effective Time divided by the Option Exchange
Ratio; provided, however, that in the case of any Option to which Section 421
of the Code applies by reason of its qualification as an incentive stock
option under Section 422 of the Code, the conversion formula shall be adjusted
if necessary to comply with Section 424(a) of the Code. The "Option Exchange
Ratio" means (i) if the Stock Condition has been satisfied and the Forward
Merger is effected, the Stock Merger Consideration, or (ii) if the Stock
Condition has not been satisfied and the Reverse Merger is effected, the ratio
determined by dividing the Offer Price by the average of the mean of the high
and low trading prices of the Parent Common Stock on each of the five
consecutive trading days up to and including the date the Effective Time
occurs. The Company has agreed to use its best efforts to obtain all necessary
waivers, consents or releases from holders of Options under the Stock Option
Plans and take any such other action as may be reasonably necessary to give
effect to the transactions described above and to otherwise cause each Option
to be surrendered to the Company and cancelled, whether or not any Option
Consideration is payable with respect thereto, at the Effective Time.
 
                                       6

 
The surrender of an Option to the Company will be deemed a release of any and
all rights the holder had or may have had in such Option, other than the right
to receive the Option Consideration in respect thereof. Parent also has agreed
to take all corporate action necessary to reserve for issuance a sufficient
number of shares of Parent Common Stock for delivery upon exercise of
substitute Options and to register such shares with the Commission on an
appropriate registration statement.
 
  Representations and Warranties. The Merger Agreement contains various
representations and warranties of the parties thereto. These include
representations by the Company with respect to (i) organization, standing and
corporate power, (ii) capitalization, (iii) authority and noncontravention,
(iii) Commission reports, (iv) absence of certain changes or events, (v)
benefit plans, (vi) taxes, (vii) compliance with laws, (viii) opinion of
financial advisor, (ix) voting requirements, (x) investment banking fees and
commissions, (xi) litigation, (xii) environmental laws, (xiii) material
contracts, (xiv) unlawful payments and contributions, (xv) real property and
(xvi) labor matters.
 
  Parent and Purchaser have also made certain representations and warranties
with respect to (i) organization, standing and corporate power, (ii)
capitalization, (iii) authority and noncontravention, (iv) Commission reports,
(v) absence of certain changes or events, (vi) certain matters with respect to
Purchaser and financing arrangements, (vii) compliance with laws, (viii)
investment banking fees and commissions, (ix) unlawful payments and
contributions and (x) environmental laws. No representations and warranties
made by the Company, Parent or Purchaser will survive beyond the Effective
Time and no covenants made in the Merger Agreement will survive beyond the
Control Date; except for any covenant or agreement which by its terms
contemplates performance after the Effective Time.
 
  Conduct of Business Pending the Merger. The Company has agreed that during
the period from the date of the Merger Agreement and continuing until the
earlier to occur of (1) the Control Date, and (2) the Effective Time the
Company will, and will cause its subsidiaries to, act and carry on their
respective businesses in the ordinary course of business and, to the extent
consistent therewith, use reasonable efforts to preserve intact their current
business organizations, keep available the services of their current key
officers and employees and preserve the goodwill of those engaged in material
business relationships with them. The Company has agreed that, during such
period neither it, nor any of its subsidiaries, as the case may be, will,
without the prior consent of Parent, (i) declare, set aside or pay any
dividends on, or make any other distributions (whether in cash, stock or
property) in respect of, any of the Company's outstanding capital stock, (ii)
split, combine or reclassify any of its outstanding capital stock or issue or
authorize the issuance of any other securities in respect of, in lieu of or in
substitution for shares of its outstanding capital stock, or (iii) purchase,
redeem or otherwise acquire any shares of outstanding capital stock or any
rights, warrants or options to acquire any such shares except, in the case of
clause (iii), for the acquisition of Shares from holders of Options in full or
partial payment of the exercise price payable by such holder upon exercise of
Options outstanding on the date of the Merger Agreement.
 
  The Company has further agreed that, during such period neither it, nor any
of its subsidiaries, as the case may be, will, without the prior consent of
Parent, (i) issue, sell, grant, pledge or otherwise encumber any shares of its
capital stock, any other voting securities or any securities convertible into
or exchangeable for, or any rights, warrants or options to acquire, any such
shares, voting securities or convertible or exchangeable securities other than
(a) upon the exercise of Options outstanding on the date of the Merger
Agreement, or (b) pursuant to the Stock Option Agreement; (ii) amend its
certificate of incorporation, by-laws or other comparable charter or
organizational documents; (iii) directly or indirectly acquire, make any
investment in, or make any capital contributions to, any person (other than
any direct or indirect wholly-owned subsidiary of the Company) other than the
acquisition of drug stores, drug store chains or other home health businesses
consistent with the Company's current operations for a purchase price not in
excess of $20 million individually or $50 million in the aggregate; provided,
however, that the Company will not make any such acquisition for a purchase
price in excess of $15 million individually or $40 million in the aggregate
without prior consultation with Parent; (iv) directly or indirectly sell,
mortgage or otherwise encumber or subject to any lien (other than as permitted
by the Merger Agreement) or otherwise dispose of any of its properties or
assets that are material to the Company and its subsidiaries taken as a whole,
except for the sale of inventory in the ordinary course of business or
immaterial
 
                                       7

 
divestitures as may be required by law; (v) (a) incur any indebtedness for
borrowed money or guarantee any such indebtedness of another person, other
than indebtedness owing to or guarantees of indebtedness owing to the Company
or any direct or indirect wholly-owned subsidiary of the Company or (b) make
any loans or advances to any other person, other than to the Company or to any
direct or indirect wholly-owned subsidiary of the Company and other than
routine advances to employees, except, in the case of clause (a) for
borrowings under existing credit facilities in the ordinary course of
business; (vi) make any material tax election or settle or compromise any
material income tax liability of the Company or of any of its subsidiaries;
provided, however, the Company will, before filing or causing to be filed any
material tax return of the Company or any of its subsidiaries, consult with
and obtain the approval of Parent and its advisors as to the positions and
elections that may be taken or made with respect to such return; (vii) except
as disclosed in the Merger Agreement, pay, discharge, settle or satisfy any
claims, liabilities or obligations (absolute, accrued, asserted or unasserted,
contingent or otherwise), other than the payment, discharge or satisfaction,
(a) in the ordinary course of business consistent with past practice or in
accordance with their terms, of claims, liabilities or obligations reflected
or reserved against in, or contemplated by, the most recent consolidated
financial statements (or the notes thereto) of the Company included in
Commission reports or incurred since the date of such financial statements in
the ordinary course of business consistent with past practice or (b) of
claims, liabilities or obligations that are not material to the Company and
its subsidiaries taken as a whole; (viii) grant or agree to grant to any
employee any increase in wages or bonus, severance, profit sharing,
retirement, deferred compensation, insurance or other compensation or
benefits, or establish any new compensation or benefit plans or arrangements,
or amend or agree to amend any existing employee benefit plans, except as may
be required under existing agreements (including collective bargaining
agreements) or normal, regularly scheduled increases in nonofficer employees
consistent with past practices or as required by law; (ix) other than in the
ordinary course of business consistent with past practice, enter into or amend
any employment, consulting, severance or similar agreement with any
individual; (x) waive any claims or rights having a value in excess of $2
million individually or $10 million in the aggregate; (xi) make any change in
any method of accounting or accounting practice or policy except as required
by any changes in generally accepted accounting principles; (xii) incur or
enter into any material commitment (including, but not limited to, any leases,
capital expenditures or purchases of assets) other than in accordance with the
existing business plans of the Company provided to Parent (including any
capital budget contained therein) or purchases of inventory in the ordinary
course of business consistent with past practice; (xiii) enter into any
agreement, understanding or commitment that restrains, limits or impedes the
Company's ability to compete with or conduct any business or line of business;
(xiv) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other material
reorganization or any agreement relating to an Acquisition Proposal (as
defined below) (other than as expressly permitted pursuant to the Merger
Agreement); (xv) other than in the ordinary course of business consistent with
past practice, engage in any transaction with, or enter into any agreement,
arrangement, or understanding with, directly or indirectly, any of the
Company's affiliates, including, without limitation, any transactions,
agreements, arrangements or understandings with any affiliate or other person
covered under Item 404 of Regulation S-K under the Securities Act of 1933 that
would be required to be disclosed under such Item 404, other than pursuant to
such agreements, arrangements, or understandings existing on the date of the
Merger Agreement; (xvi) close, shut down, or otherwise eliminate any of the
Company's stores other than in the ordinary course of business consistent with
past practice; (xvii) change the name of the Company's stores; (xviii) close,
shut down, or otherwise eliminate any of the Company's distribution centers;
(xix) move the location, close, shut down or otherwise eliminate the Company's
headquarters, or effect a general staff reduction at such headquarters; and
(xx) authorize any of, or commit or agree to take any of, the foregoing
actions.
 
  No Solicitation. The Merger Agreement provides that from and after the date
of the Merger Agreement until the termination of the Merger Agreement, the
Company will not, and shall not permit any of its subsidiaries, or any of its
or their officers, directors, employees, representatives, agents or affiliates
(including, without limitation, any investment banker, attorney or accountant
retained by the Company or any of its subsidiaries), to, directly or
indirectly, initiate, solicit or encourage (including by way of furnishing
non-public information or assistance), or take any other action to facilitate,
any inquiries or the making of any proposal that constitutes, or may
reasonably be expected to lead to, an Acquisition Proposal (as defined below),
or enter into or maintain or
 
                                       8

 
continue discussions or negotiate with any person in furtherance of such
inquiries or to obtain an Acquisition Proposal or agree to or endorse any
Acquisition Proposal, or authorize or permit any of its or their officers,
directors or employees or any of its Subsidiaries or any investment banker,
financial advisor, attorney, accountant or other representative retained by it
or any of its subsidiaries to take any such action; provided, however, that
nothing in the Merger Agreement will prohibit the Board from furnishing
information to, or entering into, maintaining or continuing discussions or
negotiations with, any person that makes an unsolicited Acquisition Proposal
after the date of the Merger Agreement, if the Board, after consultation with
and based upon the advice of independent legal counsel, determines in good
faith that (a) such Acquisition Proposal would be more favorable to the
Stockholders than the Offer and the Merger, (b) such Acquisition Proposal
contains no financing condition and (c) the failure to take such action would
result in a breach by the Board of its fiduciary duties to the Stockholders
under applicable law, and, prior to taking such action, the Company (i)
provides prompt notice to Parent of receipt of any such proposal to the effect
that it is taking such action (which notice shall identify the nature and
material terms of the proposal) and (ii) prior to furnishing any non-public
information to such person, receives from such person an executed
confidentiality agreement with provisions no less favorable to the Company
than the confidentiality agreement entered into by Parent and the Company in
connection with the Offer and the Merger. The Company shall keep Parent fully
and timely informed of the status of the same. For purposes of the Merger
Agreement, "Acquisition Proposal" means an inquiry, offer or proposal
regarding any of the following (other than the transactions contemplated by
the Merger Agreement with Parent or Purchaser) involving the Company: (w) any
merger, consolidation, share exchange, recapitalization, business combination
or other similar transaction; (x) any sale, lease, exchange, mortgage, pledge,
transfer or other disposition of all or substantially all of the assets of the
Company and its subsidiaries, taken as a whole, in a single transaction or
series of related transactions; (y) any tender offer or exchange offer for 33
1/3 percent or more of the outstanding shares of capital stock of the Company
or the filing of a registration statement under the Securities Act in
connection therewith; or (z) any public announcement of a proposal, plan or
intention to do any of the foregoing or any agreement to engage in any of the
foregoing.
 
  Fees and Expenses. The Merger Agreement provides that, except as described
below, all costs and expenses incurred in connection with the Merger Agreement
and the transactions contemplated by the Merger Agreement will be paid by the
party incurring the expenses; provided, however, that the costs incurred in
connection with printing and mailing proxy materials to Stockholders shall be
shared equally by Parent and the Company. The Company has agreed to pay
Purchaser a fee equal to $90 million upon the termination of the Merger
Agreement for either of the following reasons: (i) the Company terminates the
Merger Agreement after it has received an Acquisition Proposal, and the Board,
after consultation with and based upon the advice of independent legal
counsel, determines in good faith that the failure to accept such Acquisition
Proposal would result in a breach by the Board of its fiduciary duties to
Stockholders under applicable law; or (ii) Parent terminates the Merger
Agreement because the Board shall have (x) withdrawn, modified or amended in
any adverse respect its approval or recommendation of the Merger Agreement,
the Merger or the transactions contemplated by the Merger Agreement, (y)
endorsed or recommended to the Stockholders an Acquisition Proposal or (z)
resolved to do any of the foregoing. Such fee is payable promptly and in any
event no later than one business day after the first of such events shall have
occurred.
 
  Conditions to the Merger. Pursuant to the Merger Agreement, the obligation
of each party to effect the Merger is subject to the satisfaction or written
waiver on or prior to the Closing Date of the following conditions: (i) the
Merger Agreement and the Merger shall have been approved and adopted by the
affirmative vote of the requisite number of Stockholders, and in the manner as
shall be required pursuant to the Company's certificate of incorporation, by-
laws, the DGCL and other applicable law, and the rules of the NYSE; (ii) no
temporary restraining order, preliminary or permanent injunction or other
order issued by any court of competent jurisdiction or other legal restraint
or prohibition preventing the consummation of the Offer and the Merger shall
be in effect; (iii) the shares of Parent Common Stock issuable to the
Stockholders pursuant to the Merger Agreement if the Stock Condition has been
satisfied shall have been approved for listing on the NYSE, subject to
official notice of issuance; and (iv) a Form S-4 shall have been declared
effective under the Securities Act and shall not be the subject of any stop
order or proceedings seeking a stop order.
 
 
                                       9

 
  The obligations of Parent and Purchaser to effect the Merger are further
subject to the condition that Parent or Purchaser shall have accepted for
payment and paid for Shares pursuant to the Offer in accordance with the terms
thereof; provided, however, that this condition will not be applicable to the
obligations of Parent or Purchaser if, in breach of the Merger Agreement or
the terms of the Offer, Purchaser fails to purchase any Shares validly
tendered and not withdrawn pursuant to the Offer.
 
  The Merger Agreement further provides that the obligation of each party to
effect the Forward Merger is subject to the following conditions: (i) the
Company shall have received an opinion of Shearman & Sterling, dated the
Closing Date, to the effect that (y) the Merger will be treated for federal
income tax purposes as a reorganization within the meaning of Section 368(a)
of the Code and (z) each of Parent, Purchaser and the Company will be a party
to the reorganization within the meaning of Section 368(b) of the Code; and
(ii) Parent shall have received an opinion of Weil, Gotshal & Manges LLP,
dated the Closing Date, to the effect that (x) the Merger will be treated for
federal income tax purposes as a reorganization within the meaning of Section
368(a) of the Code; (y) each of Parent, Purchaser and the Company will be a
party to the reorganization within the meaning of Section 368(b) of the Code;
and (z) no gain or loss will be recognized by Parent, Purchaser or the Company
as a result of the Merger. If either the opinion of Weil, Gotshal & Manges LLP
or the opinion of Shearman & Sterling referred to above cannot be rendered,
then the Reverse Merger will be effected pursuant to the terms of the Merger
Agreement
 
  Termination. The Merger Agreement may be terminated and the transactions
contemplated thereby may be abandoned at any time prior to the Control Date
(or in the case of clause (v) or (vi) below, the Effective Time),
notwithstanding approval thereof by the Stockholders, in any one of the
following circumstances: (i) by mutual written consent duly authorized by the
Boards of Directors of Parent and the Company; (ii) by the Company, if the
Offer has not been timely commenced in accordance with Merger Agreement;
provided, however, that the Company may not terminate the Merger Agreement
pursuant to this clause if the Company is
in material breach of the Merger Agreement; (iii) by Parent or the Company,
if, without any material breach by such terminating party of its obligations
under the Merger Agreement, the purchase of Shares pursuant to the Offer shall
not have occurred on or before February 1, 1997; provided, however, that the
Merger Agreement shall be automatically extended for 120 days thereafter if
the purchase of Shares shall not have occurred on or before February 1, 1997
as a result of the failure (A) to receive the necessary governmental
clearances or (B) to resolve any matter related to any injunction or legal
restraint which prevents the consummation of the Merger and the parties are
diligently pursuing such governmental clearances or the resolution of such
matter; (iv) by Parent or the Company, if any federal or state court of
competent jurisdiction or other governmental entity shall have issued an
order, decree or ruling, or taken any other action permanently restraining,
enjoining or otherwise prohibiting the Merger and such order, decree, ruling
or other action shall have become final and non-appealable; (v) by Parent or
the Company if, upon a vote at a duly held stockholders meeting of the
Company, any required approval of the Stockholders shall not have been
obtained; (vi) by the Company if it has received an Acquisition Proposal, and
the Board, after consultation with and based upon the advice of independent
legal counsel, determines in good faith that the failure to accept such
Acquisition Proposal would result in a breach by the Board of its fiduciary
duties to the Stockholders under applicable law; (vii) by Parent if the Board
shall have (a) withdrawn, modified or amended in any adverse respect its
approval or recommendation of the Merger Agreement, the Merger or the
transactions contemplated by the Merger Agreement, (b) endorsed or recommended
to its stockholders an Acquisition Proposal or (c) resolved to do any of the
foregoing; or (viii) by Parent or the Company if (a) the other party shall
have failed to comply in any material respect with any of the material
covenants and agreements contained in the Merger Agreement to be complied with
or performed by such party at or prior to such date of termination, and such
failure continues for 20 business days after the actual receipt by such party
of a written notice from the other party setting forth in detail the nature of
such failure, or (b) a material representation or warranty of the other party
contained in the Merger Agreement shall have been untrue in any material
respect on the date when made and at the Expiration Date, or in the case of
any representations and warranties that are made as of a different date, as of
that date.
 
  Indemnification. The Merger Agreement provides that the certificate of
incorporation and by-laws of the Surviving Corporation will contain the
provisions with respect to indemnification set forth in the certificate of
 
                                      10

 
incorporation and by-laws of the Company on the date of the Merger Agreement,
which provisions shall not be amended, repealed or otherwise modified for a
period of six years after the Effective Time in any manner that would
adversely affect the rights thereunder of individuals who at any time prior to
the Effective Time were directors or officers of the Company in respect of
actions or omissions occurring at or prior to the Effective Time (including,
without limitation, the transactions contemplated by the Merger Agreement),
unless such modification is required by law. The Company will, and from and
after the Effective Time, Parent and the Surviving Corporation will,
indemnify, defend and hold harmless each person who is now, or has been at any
time prior to the date hereof or who becomes prior to the Effective Time, an
officer or director of the Company (the "Indemnified Parties") against all
losses, claims, damages, costs, expenses (including reasonable attorneys' fees
and expenses), liabilities or judgments or amounts that are paid in
settlement, with the approval of the indemnifying party (which approval shall
not be unreasonably withheld), of or in connection with any threatened or
actual claim, action, suit, proceeding or investigation based in whole or in
part on or arising in whole or in part out of the fact that such person is or
was a director or officer of the Company whether pertaining to any matter
existing or occurring at or prior to the Effective Time and whether asserted
or claimed prior to, or at or after, the Effective Time ("Indemnified
Liabilities"), including all Indemnified Liabilities based in whole or in part
on, or arising in whole or in part out of, or pertaining to the Merger
Agreement or the transactions contemplated thereby, in each case, to the full
extent a corporation is permitted under the DGCL to indemnify its own
directors or officers as the case may be (and Parent and the Surviving
Corporation, as the case may be, will pay expenses in advance of the final
disposition of any such action or proceeding to each Indemnified Party to the
full extent permitted by law). In the event any such claim, action, suit,
proceeding or investigation is brought against any Indemnified Parties
(whether arising before or after the Effective Time), (i) the Indemnified
Parties may retain counsel satisfactory to them and the Company (or them and
Parent and the Surviving Corporation after the Effective Time) and the Company
(or after the Effective Time, Parent and the Surviving
Corporation) shall pay all fees and expenses of such counsel for the
Indemnified Parties promptly as statements therefor are received; and (ii) the
Company (or after the Effective Time, Parent and the Surviving Corporation)
shall use all reasonable efforts to assist in the vigorous defense of any such
matter, provided that neither the Company, Parent nor the Surviving
Corporation shall be liable for any settlement effected without its prior
written consent. Any Indemnified Party wishing to claim indemnification, upon
learning of any such claim, action, suit, proceeding or investigation, shall
notify the Company (or after the Effective Time, Parent and the Surviving
Corporation) (but the failure so to notify shall not relieve a party from any
liability which it may have except to the extent such failure prejudices such
party), and will deliver to the Company (or after the Effective Time, Parent
and the Surviving Corporation) the undertaking contemplated by Section 145(e)
of the DGCL. The Merger Agreement provides that the Indemnified Parties as a
group may retain only one law firm to represent them with respect to each such
matter unless there is, under applicable standards of professional conduct, a
conflict on any significant issue between the positions of any two or more
Indemnified Parties. The Company, Parent and Purchaser agree that all rights
to indemnification, including provisions relating to advances of expenses
incurred in defense of any action or suit, existing in favor of the
Indemnified Parties with respect to matters occurring through the Effective
Time, shall survive the Merger and shall continue in full force and effect for
a period of not less than six years from the Effective Time; provided,
however, that all rights to indemnification in respect of any Indemnified
Liabilities asserted or made within such period shall continue until the
disposition of such Indemnified Liabilities.
 
  The Merger Agreement further provides that for a period of two years after
the Effective Time, Parent will cause to be maintained in effect the current
policies of directors' and officers' liability insurance maintained by the
Company (provided that Parent may substitute therefor policies of at least the
same coverage and amounts containing terms and conditions that are no less
advantageous in any material respect to the Indemnified Parties) with respect
to matters arising before the Effective Time, provided that Parent will not be
required to pay an annual premium for such insurance in excess of 150% of the
last annual premium paid by the Company prior to the date of the Merger
Agreement, but in such case will purchase as much coverage as possible for
such amount.
 
  Stockholders Meetings. The Merger Agreement provides that the Company will
(and after the Control Date Parent will) take all action necessary, in
accordance with the DGCL, the Exchange Act and other applicable
 
                                      11

 
law, the rules of the NYSE, and its certificate of incorporation and by-laws,
to convene a special meeting of Stockholders (the "Stockholders Meeting"), if
necessary, as promptly as practicable after the consummation of the Offer and
the effectiveness of the Registration Statement for the purpose of considering
and voting upon the Merger Agreement and the transactions contemplated
thereby, including the Merger. Subject to the fiduciary duties of the Board
under applicable law as advised by independent legal counsel, the Board will
recommend that the holders of the Shares vote in favor of and approve the
Merger Agreement and the Merger at the Stockholders Meeting. At the
Stockholders Meeting, Parent and Purchaser shall vote all Shares beneficially
owned by them in favor of the adoption and approval of the Merger Agreement
and the Merger.
 
  Consents, Approvals, Filings. The Merger Agreement provides that each of the
parties to the Merger Agreement will (i) make promptly its respective filings,
and thereafter make any other required submissions, under the HSR Act, the
Securities Act and the Exchange Act, with respect to the Transactions and (ii)
use its reasonable best efforts to take, or cause to be taken, all appropriate
action, and to do, or cause to be done, all things necessary, proper or
advisable under applicable laws and regulations to consummate and make
effective the Transactions, including, without limitation, using its
reasonable best efforts to obtain all licenses, permits (including, without
limitation, environmental permits), consents, approvals, authorizations,
qualifications and orders of governmental authorities and parties to contracts
with the Company and its subsidiaries as are necessary for the consummation of
the Transactions and to fulfill the conditions to the Offer and the Merger. In
case at any time after the Effective Time any further action is necessary or
desirable to carry out the purposes of the Merger Agreement, the proper
officers and directors of each party to the Merger Agreement will use their
reasonable best efforts to take all such action. Each of the parties to the
Merger Agreement will, and will cause each of its respective subsidiaries, to
cooperate and to use their respective best efforts to obtain any government
clearances required for completion of the Transactions (including through
compliance with the HSR Act), to respond to any government requests for
information, and to contest and resist any action, including any legislative,
administrative or judicial action, and to have vacated, lifted, reversed or
overturned any decree, judgment, injunction or other order (whether temporary,
preliminary or permanent) (an "Order") that restricts, prevents or prohibits
the consummation of any of the Transactions, including, without limitation, by
vigorously pursuing all available avenues of administrative and judicial
appeal and all available legislative actions. Subject to the conditions of the
Offer, each of the parties to the Merger Agreement will take any and all of
the following actions to the extent necessary to obtain the approval of any
governmental entity with jurisdiction over the enforcement of any applicable
laws regarding the Transactions: entering into negotiations; providing
information; substantially complying with any second request for information
pursuant to the HSR Act; entering into and performing agreements or submitting
to judicial or administrative orders and selling or otherwise disposing of, or
holding separate (through the establishment of a trust or otherwise)
particular assets or categories of assets, or businesses of Parent, Company or
any of their affiliates. The parties to the Merger Agreement will consult and
cooperate with one another, and consider in good faith the views of one
another, with respect to any actions taken in connection with proceedings
under or relating to the HSR Act or any other federal, state or foreign
antitrust or fair trade law. Parent will be entitled to direct any proceedings
or negotiations with any governmental entity relating to any of the foregoing,
provided that it will afford Company a reasonable opportunity to participate
therein.
 
  Employee Benefit Matters. Parent, Purchaser and the Company have agreed in
the Merger Agreement to certain matters with respect to the compensation and
benefit programs of the Surviving Corporation and its subsidiaries.
 
  The Merger Agreement provides that for a period of at least twelve months
following the Effective Time, Parent will, or will cause the Surviving
Corporation to, provide employee benefit plans and arrangements which in the
aggregate will provide a substantially comparable level of benefits to active
and retired employees of the Surviving Corporation and its Subsidiaries,
considered as a group, to those provided under the Company employee benefit
plans and arrangements as in effect immediately prior to the Effective Time,
it being understood and agreed that Parent will cause the Surviving
Corporation to consult with senior management of the Surviving Corporation,
including Mr. Newman, before any changes are made in the benefit plans or
arrangements of the Surviving Corporation during such twelve month period.
Notwithstanding the foregoing, changes to the benefit
 
                                      12

 
plans and arrangements applicable to employees of the Surviving Corporation
that would not comply with the substantially comparable standard set forth in
the immediately preceding sentence will be permitted to the extent approved by
senior management of the Surviving Corporation, including Mr. Newman. All
service credited to each employee by the Company or any of its Subsidiaries
through the Effective Time will be recognized by Parent for purposes of
eligibility and vesting under any employee benefit plan provided by Parent or
its subsidiaries for the benefit of the employees of the Surviving Corporation
and its Subsidiaries; provided, however, that, to the extent necessary to
avoid duplication of benefits, amounts payable under employee benefit plans
provided by Parent or its subsidiaries may be reduced by amounts payable under
similar Company plans with respect to the same periods of service. In
addition, with respect to any welfare benefit plan established or maintained
by Parent or its subsidiaries for the benefit of employees of the Surviving
Corporation or its subsidiaries, Parent will, or will cause the relevant
subsidiary to, waive any pre-existing condition exclusions (other than any
pre-existing condition that was not waived by a Company plan) and provide that
any covered expenses incurred on or before the Effective Time in respect of
the current plan year by any employee of the Company or any of its
subsidiaries (or any covered dependent of such an employee) will be taken into
account for purposes of satisfying applicable deductible, coinsurance and
maximum out-of-pocket provisions after the Effective Time in respect of such
current plan year.
 
  In addition, as of the Effective Time (or if later, as soon as practicable
following the close of the Company's 1996 fiscal year), a pro-rated bonus
award will be paid in cash to each executive employee of the Company and its
Subsidiaries who has been selected to participate in the Company's Executive
Three (3) Year Bonus Plan (the "Three Year Plan") in accordance with Section
14 thereof, so that 100% of such executive employee's long-term bonus for the
1994-1996 cycle, 66 2/3% of his long-term bonus for the 1995-1997 cycle, and
33 1/3% of his long-term bonus for the 1996-1998 cycle will be paid, in each
case based on the actual performance of the Company through the end of its
1996 fiscal year. The maximum amount payable to all the Company's executive
employees pursuant to the preceding sentence will be $4,000,000. Following the
payment of such awards, the Three Year Plan will terminate. As soon as
practicable following such termination, Parent will cause the Surviving
Corporation to implement a new long-term incentive program in place of the
Three Year Plan.
 
  The Merger Agreement further provides that Parent will cause the Surviving
Corporation to retain the Company's Key Management Bonus Plan (the "Company
Bonus Plan") following the Effective Time, with the same employees eligible
for bonuses thereunder, until bonuses are paid with respect to the Company's
1996 fiscal year. The amounts payable to each such employee participating in
the Company Bonus Plan with respect to such fiscal year will be determined
pursuant to the terms of the Company Bonus Plan; provided, that appropriate
adjustments will be made to the "Threshold", "Target" and "Goal" levels (as
defined in Section 6 of the Company Bonus Plan) to eliminate the effect of
legal, investment banking and other extraordinary fees and expenses incurred
by the Surviving Corporation as a consequence of the transactions effected
pursuant to this Agreement and the preparation and negotiations leading
thereto. As soon as practicable following the termination of the Company Bonus
Plan, Parent will cause the Surviving Corporation to implement an annual bonus
plan for key employees of Surviving Corporation in place of the Company Bonus
Plan.
 
  Parent has agreed to cause the Surviving Corporation to honor and assume,
and to perform all obligations under, the employment agreements, supplemental
executive retirement plans, deferred compensation plans and
individual benefit arrangements with current and former employees of the
Company and its Subsidiaries set forth in the Merger Agreement. Nothing
contained therein shall be construed as requiring Parent or the Surviving
Corporation to continue without modification any specific employee benefit
plan or arrangement (except as required by its terms) or to continue the
employment of any specific person.
 
  The Company has agreed to take all actions necessary (if any) to ensure that
the transactions contemplated pursuant to the Merger Agreement will not
constitute a "Change of Control" for purposes of (a) the Company's Pension
Plan, (b) the Company's Profit Sharing Plan, (c) the Executive Excess Benefit
Plan of the Company Corporation, (d) The First Executive Supplemental Benefit
Plan of the Company and its Subsidiaries (as Amended and Restated as of
February 3, 1996), (e) The Second Executive Supplemental Benefit Plan of the
Company and it Subsidiaries (as Amended and Restated as of February 4, 1996),
(f) The Executive Deferred
 
                                      13

 
Compensation Plan of the Company (as Amended and Restated effective January 1,
1994), and (g) the Company's Benefit Plans Trust.
 
  Amendment. Subject to the applicable provisions of the DGCL and certain
other restrictions contained in the Merger Agreement, the Merger Agreement may
be modified or amended at any time prior to the Effective Time, by Parent,
Purchaser and the Company by written agreement executed and delivered by duly
authorized officers of the respective parties; provided, however, that after
approval of the Merger by the Stockholders, no amendment shall be made which
would reduce the amount or change the type of consideration into which each
Share shall be converted upon consummation of the Merger. The Merger Agreement
may not be amended except by an instrument in writing signed on behalf of each
of the parties.
 
  Timing. The exact timing and details for the Merger will depend upon legal
requirements and a variety of other factors, including the number of Shares
acquired by the Purchaser pursuant to the Offer. Although Purchaser has agreed
to cause the Merger to be consummated on the terms set forth above, there can
be no assurance as to the timing of the Merger.
 
 Stock Option Agreement
 
  The following is a summary of the material terms of the Stock Option
Agreement. This summary is not a complete description of the terms and
conditions of the Stock Option Agreement and is qualified in its entirety by
reference to the full text of the Stock Option Agreement, which is
incorporated by reference and a copy of which has been filed with the
Commission as an exhibit to the Schedule 14D-1. The Stock Option Agreement may
be examined, and copies obtained, as set forth in Section 8 above. Capitalized
terms not otherwise defined herein or in the following summary shall have the
meaning set forth in the Stock Option Agreement.
 
  Grant of Option. The Stock Option Agreement provides for the grant by the
Company to Parent of an irrevocable option (the "Stock Option") to purchase up
to 10,554,786 Shares, or such other number of Shares as equals 15% of the
issued and outstanding Shares at the time of exercise of the Stock Option, at
a price of $35 per Share (the "Exercise Price"), payable in cash in accordance
with the terms of the Stock Option Agreement.
 
  Exercise of Option. The Stock Option Agreement provides that the Stock
Option may be exercised by Parent, in whole or in part, at any time or from
time to time (a) after the Merger Agreement is terminated pursuant to a
Trigger Event (as defined below) or (b) after Purchaser accepts for payment
and pays for Shares pursuant to the Offer prior to the Effective Time. For the
purposes of the Stock Option Agreement, "Trigger Event" means the termination
of the Merger Agreement either (i) by the Company, if it has received an
Acquisition Proposal, and the Board, after consultation with and based upon
the advice of independent legal counsel, determines in good faith that failure
to accept such Acquisition Proposal would result in a breach by the Board of
its fiduciary duties to the Stockholders under applicable law, or (ii) by
Parent, if the Board has (A) withdrawn, modified or amended in any adverse
respect its approval or recommendation of the Merger Agreement, the Merger or
the transactions contemplated by the Stock Option Agreement, (B) endorsed or
recommended to the Stockholders an Acquisition Proposal or (C) resolved to do
any of the foregoing.
 
  The Stock Option Agreement provides that the Stock Option will terminate
upon the earlier of: (i) the Effective Time of the Merger; (ii) the
termination of the Merger Agreement pursuant to the termination provisions
thereof, other than a termination as a result of the occurrence of a Trigger
Event; or (iii) 120 days following any termination of the Merger Agreement as
a result of the occurrence of a Trigger Event (or if, at the expiration of
such 120 day period the Stock Option cannot be exercised by reason of any
applicable judgment, decree, order, law or regulation, or because the
applicable waiting period under the HSR Act has not expired or been
terminated, 10 business days after such impediment to exercise has been
removed or has become final and not subject to appeal, but in no event later
than 210 days after the date of termination of the Merger Agreement). The
Stock Option Agreement further provides that the Stock Option may not be
exercised if Parent or, in the case of the Merger Agreement, Parent or
Purchaser, is in material breach of any of their respective representations,
warranties, covenants or agreements contained in the Stock Option Agreement or
in the Merger Agreement.
 
                                      14

 
  Certain Repurchases. The Stock Option Agreement provides that, at the
request of Parent at any time during which the Stock Option is exercisable
(the "Repurchase Period"), the Company will repurchase from Parent the Stock
Option, or any portion thereof, for a price equal to the amount by which the
Market/Tender Offer Price (as defined below) for Shares as of the date Parent
gives notice of its intent to exercise its rights to "put" the Stock Option to
the Company exceeds the Exercise Price, multiplied by the number of Shares
purchasable pursuant to the Stock Option (or portion thereof with respect to
which Parent is exercising its rights to "put" the Stock Option to the
Company). For purposes of the Stock Option Agreement, "Market/Tender Offer
Price" means the higher of (A) the highest price per Share paid as of such
date pursuant to any tender or exchange offer or other Acquisition Proposal or
(B) the average of the closing sale prices of Shares on the NYSE for the ten
trading days immediately preceding such date.
 
  Registration Rights. The Stock Option Agreement provides that in the event
that Parent desires to sell any of the Shares purchased pursuant to the Stock
Option within three years after such purchase, and such sale requires in the
opinion of counsel to Parent, registration of such shares under the Securities
Act, Parent may, by written notice (the "Registration Notice") to the Company,
request the Company to register under the Securities Act all or any part of
the Shares purchased pursuant to the Stock Option ("Restricted Shares")
beneficially owned by Parent (the "Registrable Securities") pursuant to a bona
fide firm commitment underwritten public offering in which Parent and the
underwriters will effect as wide a distribution of such Registrable Securities
as is reasonably practicable and will use their best efforts to prevent any
person and its affiliates from purchasing through such offering Restricted
Shares representing more than 2% of the outstanding Shares on a fully diluted
basis (a "Permitted Offering"). The Company (and/or any person designated by
the Company) will have the option, exercisable by written notice delivered to
Parent within 10 business days after the receipt of the Registration Notice,
to purchase all or any part of the Registrable Securities for cash at a price
(the "Option Price") equal to the product of (i) the number of Registrable
Securities and (ii) the Fair Market Value (as defined in the Stock Option
Agreement) of such Registrable Securities. Parent is entitled to request an
aggregate of two effective registration statements under the terms of the
Stock Option Agreement.
 
  Profit Limitation. The Stock Option Agreement provides that in no event will
Parent's Total Profit (as defined below) exceed $20 million and, if it
otherwise would exceed such amount Parent, at its sole election, will either
(i) deliver to the Company for cancellation Shares previously purchased by
Parent, (ii) pay cash or other consideration to the Company or (iii) undertake
any combination thereof, so that Parent's Total Profit will not exceed $20
million after taking into account the foregoing actions. Further, the Stock
Option may not be exercised for a number of Shares as would, as of the date of
the Exercise Notice, result in a Notional Total Profit (as defined below) of
more than $20 million, and, if exercise of the Stock Option otherwise would
exceed such amount, Parent, at its discretion, may increase the Price for that
number of Shares set forth in the Exercise Notice so that the Notional Total
Profit will not exceed $20 million. For the purposes of the Stock Option
Agreement, (A) the term "Total Profit" means the aggregate amount (before
taxes) of the following: (i) the amount received by Parent pursuant to any
repurchase by the Company of the Stock Option pursuant to the terms of the
Stock Option Agreement, and (ii) (x) the net cash amounts received by Parent
pursuant to the sale of Restricted Shares (or any other securities into which
such shares are converted or exchanged) to any unaffiliated party, less (y)
Parent's purchase price for such Shares; and (B) the term "Notional Total
Profit" with respect to any number of Restricted Shares as to which Parent
proposes to exercise the Stock Option will be the Total Profit determined as
of the date of the Exercise Notice assuming that this Stock Option were
exercised on such date for such number of Restricted Shares and assuming that
such Restricted Shares, together with all other Restricted Shares held by
Parent and its affiliates as of such date, were sold for cash at the closing
market price for Shares as of the close of business on the preceding trading
day (less customary brokerage commissions).
 
  Adjustment upon Changes in Capitalization. The Stock Option Agreement
provides that in the event of any change in the Shares by reason of stock
dividends, stock splits, mergers (other than the Merger), recapitalizations,
combinations, exchange of shares or the like, the type and number of shares or
securities subject to the Stock Option, and the Exercise Price per share, will
be adjusted appropriately.
 
                                      15

 
  A copy of the Stock Option Agreement is attached as Exhibit 11 hereto. See
also Section 12 of the Offer to Purchase under the caption "Purpose of the
Offer and the Merger; Plans for the Company; the Merger Agreement; the Stock
Option Agreement."
 
 Amendment to Employment Agreement
 
  Francis A. Newman, Chief Executive Officer, President and Chief Operating
Officer of the Company ("Newman"), and Parent, have entered into an amendment,
dated November 2, 1996, to Newman's existing employment agreement, dated as of
February 4, 1996 (the "Employment Agreement"), which provides that upon
consummation of the Merger, among other things, (i) the Employment Agreement
will be extended from a term of twelve months to a term of three years
commencing upon the consummation of the Merger, (ii) Newman will become a
member of the Management Committee of Parent, (iii) Newman will not be able to
terminate the Employment Agreement for Good Reason (as defined in the
Employment Agreement) until at least one year following a Change in Control
(as defined in the Employment Agreement), (iv) the definition of Good Reason
will be amended to mean (a) the demotion of Newman from his position as Chief
Executive Officer, President and Chief Operating Officer of the Company, his
removal as a member of Parent's Management Committee or his ceasing to report
directly to the Chief Executive Officer of Parent, (b) a reduction by the
Company in Newman's annual base salary or a material reduction in Newman's
bonus opportunity through incentive compensation awards, (c) any other
material breach by the Company of the provisions of Sections of the Employment
Agreement dealing with compensation, fringe benefits and expenses,
respectively, or (d) any relocation of Newman's principal place of business
from the Tampa Bay, Florida area or from the Company's headquarters and (v)
Parent will guarantee the performance of the Company's obligations under the
Employment Agreement. A copy of the Amendment to Mr. Newman's employment
agreement is filed as Exhibit 11 hereto and incorporated herein by reference.
 
 Confidentiality Agreement
 
  On October 16, 1996, the Company and Parent entered into a Confidentiality
Agreement of which a copy is filed as Exhibit 7 to this Schedule 14D-9 and
incorporated herein by reference.
 
ITEM 4. THE SOLICITATION OR RECOMMENDATION
 
  (a) Recommendation of the Board of Directors. The Board has unanimously
determined that the Merger Agreement and the Transactions are fair to, and in
the best interests of, the Stockholders, has approved the Merger Agreement,
the Offer at the Offer Price and the Merger, and recommends that the
Stockholders that wish to receive cash for their Shares accept the Offer and
tender their Shares to Purchaser under the Offer to Purchase and the
Stockholders approve and adopt the Merger Agreement and the Merger.
 
  (b)(1) Background.
 
  For some time prior to entering into discussions with Parent with respect to
a possible transaction between the Company and Parent, the Company had been
engaged in sporadic discussions with representatives of another company
involved in the drug store industry ("Company A") concerning the possibility
of a transaction between the Company and Company A.
 
  In early 1996, the Company retained Merrill Lynch to assist the Company in
evaluating any acquisition proposals that might be received by the Company
from Company A.
 
  In May 1996, Company A made a proposal to acquire the Company, which was
presented by management to the Board together with a presentation by Merrill
Lynch with respect to the financial terms of that proposal. Following
discussion by the Board, the proposal was rejected on the grounds that the
consideration offered by Company A was of insufficient value. Following that
rejection, discussions with Company A terminated. Following such termination,
Company A, from time to time, expressed its continuing interest in acquiring
the Company.
 
                                      16

 
  During the summer and fall of 1996, in light of the continuing consolidation
in the drug store industry and the potential negative impact on the Company of
increased competition from the ever larger competitors resulting from such
consolidations, management and the Board began to consider various strategic
alternatives. Merrill Lynch continued to assist the Company in its
consideration of various alternatives. In early October 1996, the Company
learned that Parent might have some interest in acquiring the Company, and
authorized Merrill Lynch to contact Parent to explore whether Parent would be
interested in pursuing a transaction with the Company. On October 24, 1996,
Merrill Lynch was formally retained by the Company.
 
  On October 3, 1996, Mr. Turley, the Company's Chairman, and Mr. Newman, the
Company's President and Chief Executive Officer, received a proposal from
Company A to acquire the Company. Messrs. Turley and Newman expressed their
disappointment as to the terms of that proposal.
 
  On October 10, 1996, Messrs. Turley and Newman met with Messrs.
Oesterreicher, McKay and Fesperman, Vice Chairman and Chief Executive Officer,
Senior Vice President and Chief Financial Officer and Senior Vice President--
Support Services and Subsidiary Operations, respectively of Parent in Dallas,
Texas. At that meeting, the representatives of Parent expressed interest in
pursuing an acquisition of the Company. On October 11, 1996, Messrs. Turley
and Oesterreicher discussed by telephone various aspects of a possible
transaction.
 
  On October 16, 1996, Messrs. Fesperman and McKay, as well as Mr. Lotter,
Executive Vice President and General Counsel of Parent, met with Mr. Newman
and Mr. Wright, Executive Vice President and Chief Financial Officer of the
Company, in New York City to further discuss the possibility of a transaction
between the Company and Parent. The Company's financial advisors and Parent's
financial and legal advisors also attended that meeting.
 
  On October 16, 1996, the Company and Parent also executed a mutual
Confidentiality Agreement. Over the next two weeks, as part of the Company's
and Parent's due diligence review of each other, there were various contacts
between the Company and Parent in order to obtain additional information about
each other.
 
  As part of Parent's and the Company's continuing due diligence investigation
of each other, on October 18 and 19, 1996, Mr. Fesperman, Mr. Hannon,
President and Chief Executive Officer of Parent's Subsidiary Thrift Drug, Inc.
("Thrift"), Mr. Cerro, Executive Vice President, Merchandise and Distribution
of Thrift, and Mr. Civello, President of Stores of Thrift, met with Messrs.
Newman and Wright, as well as Mr. Simmons, Vice President and Controller of
the Company, and Mr. Gladysz, Vice President and Treasurer of the Company, in
St. Petersburg, Florida. The financial advisors to Parent participated in the
second day of that meeting to review various financial information relating to
the Company.
 
  On October 21, 1996, the Board held a telephonic meeting, during which,
among other things, the Board members were updated as to the continuing
consolidation in the drug store industry. The Board members were also informed
of the discussions that had occurred between the Company and Parent, as well
as recent discussions that had occurred between the Company and Company A.
Board members were told that discussions with these companies were
preliminary. Following discussion among the Board members, the Board
authorized management to continue to pursue discussions with both Parent and
Company A.
 
  During the weekend of October 26 and 27, 1996, Mr. Turley called each member
of the Board to inform them of the continuing discussions between
representatives of the Company and each of Parent and Company A, as well as
certain related matters.
 
  On October 26, 1996, Mr. Newman and Mr. Oesterreicher had a telephone
conversation regarding possible structures of a transaction between the
Company and Parent, including whether a portion of any consideration should be
tax free to the Stockholders.
 
  On October 29, 1996, Mr. Turley met with the Chief Executive Officer of
Company A. During that meeting, Company A made a revised proposal to acquire
the Company for consideration that consisted partly of cash and partly of
stock of Company A.
 
                                      17

 
  Later during the day of October 29, 1996, Mr. Turley met with Mr. McKay and
Mr. Lotter and the Company's and Parent's respective financial advisors in New
York City to further discuss the terms of a possible transaction, including
the price at which Parent might be interested in acquiring the Company. At
that meeting, Parent made a proposal to acquire the Company in a transaction
that was similarly structured to the transaction being discussed with Company
A, but at a higher value. Parent had previously been advised that another
entity had also expressed an interest in acquiring the Company, although
neither the identity of Company A nor the price or terms of its proposal were
disclosed. Parent was also advised that the Board would consider both
proposals at its meeting on October 31, 1996.
 
  In advance of the meeting with each of Company A and Parent, Mr. Turley had
encouraged each of them to make its best and final offer for the Company.
 
  In the afternoon of October 29, 1996, the Board held a telephonic meeting to
inform the Board members of the proposals that had been received from Parent
and Company A.
 
  During the evening of October 29, 1996, Parent provided the Company and its
advisors with drafts of a Merger Agreement, a Stock Option Agreement and a
proposed employment agreement for Mr. Newman.
 
  In conversations with Company A on October 30, 1996, Company A was advised
that its proposal was being considered in light of another proposal that had
been received by the Company, and that the Board would consider both proposals
at its meeting on October 31, 1996. Again, neither the identity of Parent nor
the price or terms of its proposal were disclosed. Company A confirmed that
its outstanding proposal constituted its best and final proposal for the
Company.
 
  During the period of October 30 through November 2, representatives of the
Company, Parent and their respective counsels met several times to negotiate
the terms of the Merger Agreement and the Stock Option Agreement.
 
  At a Special Meeting of the Board on October 31 and November 1, 1996, the
Board discussed both proposals in detail and Merrill Lynch made presentations
to the Board comparing the financial terms of both proposals.
 
  On November 2, 1996, the Board held a telephonic meeting to discuss the
final terms of the Merger Agreement and the Stock Option Agreement. At that
meeting, Merrill Lynch delivered its oral opinion to the Board, subsequently
confirmed in writing, to the effect that, and based upon the assumptions made,
matters considered and limits of review as set forth in such opinion, the
consideration to be received by the Stockholders pursuant to the Offer and the
Merger, taken as a whole, was fair, from a financial point of view, to such
Stockholders. The Board voted unanimously to approve the Merger Agreement the
Offer at the Offer Price and the Merger, and to recommend that all
Stockholders that wish to receive cash for their Shares accept the Offer and
tender their Shares to Purchaser thereunder, and that Stockholders approve and
adopt the Merger Agreement and the Merger. Following such approval, the
Company, Parent and Purchaser entered into the Merger Agreement, the Company
and Parent entered into the Stock Option Agreement, and the Company, Parent
and Mr. Newman entered into the amendment to the Employment Agreement.
 
  On November 7, 1996, Purchaser commenced the Offer.
 
  (b)(2) Reasons for the Recommendation.
 
  In approving the Merger Agreement and the Transactions and recommending that
Stockholders that wish to receive cash in the Offer accept the Offer and
tender their Shares pursuant to the Offer and that Stockholders approve and
adopt the Merger Agreement and the Merger, the Board considered a number of
factors, including, but not limited to, the following:
 
    (i) the terms and conditions of the Merger Agreement;
 
 
                                      18

 
    (ii) the presentations by management of the Company (at Board meetings on
  October 31, November 1 and November 2, 1996 and at previous board meetings)
  regarding the financial condition, results of operations, business and
  prospects of the Company, including the prospects of the Company if the
  Company were to remain independent;
 
    (iii) the trading price of the Shares over the last three years, and that
  (A) the $35.00 per Share to be paid in the Offer represents a premium (the
  "Premium") of approximately 21.2% over the $28 7/8 closing price for the
  Shares on the New York Stock Exchange ("NYSE") on November 1, 1996, the
  last trading day prior to the public announcement of the execution of the
  Merger Agreement and (B) the $35.00 per Share in cash or $35.00 per Share
  value of the consideration to be paid in the Merger (based on the closing
  price for the Parent's shares of Common Stock on the NYSE on November 1,
  1996) represents a premium of approximately 21.2% over the closing trade
  price for the Shares on the NYSE on November 1, 1996;
 
    (iv) the views expressed by management and Merrill Lynch, that there
  appeared to be a limited number of parties with which the Company would be
  a good strategic fit, and that it was unlikely that any other party would
  propose a transaction that was more favorable to the Company and its
  Stockholders;
 
    (v) the presentations by Merrill Lynch at the October 31 and November 1
  and November 2, 1996, Board meetings and the oral opinion of Merrill Lynch
  on November 2, 1996, which opinion was subsequently confirmed in a written
  opinion dated the same date, to the effect that, as of such date, and based
  upon the assumptions made, matters considered and limits of review as set
  forth in such opinion, the consideration to be received by the Stockholders
  pursuant to the Offer and the Merger, taken as a whole, is fair from a
  financial point of view to the Stockholders. A copy of the written opinion
  of Merrill Lynch, which sets forth the assumptions made, matters considered
  and certain limitations on the scope of review undertaken by Merrill Lynch,
  is attached as Exhibit 6 to this Schedule 14D-9 and is hereby incorporated
  herein by reference. STOCKHOLDERS ARE URGED TO READ THE OPINION OF MERRILL
  LYNCH CAREFULLY AND IN ITS ENTIRETY;
 
    (vi) the recommendation of management that the Offer and the Merger be
  approved;
 
    (vii) the Merger Agreement permits the Board, in the exercise of its
  fiduciary duties, to engage in negotiations with or to furnish information
  to third parties in response to unsolicited, written alternative
  acquisition proposals after the date of the Merger Agreement;
 
    (viii) the Merger Agreement permits the Board, in the exercise of its
  fiduciary duties, to terminate the Merger Agreement in favor of a superior
  alternative acquisition proposal, although such termination would trigger
  the payment by the Company of a fee of $90 million and the exerciseability
  of the Stock Option; and
 
    (ix) the merger of the Company with Purchaser offers the opportunity for
  substantial synergy and the transaction structure allows the Stockholders
  to participate in the ownership of the combined entity, in the event that
  the Forward Merger is consummated.
 
  The Board did not assign relative weights to the above factors or determine
that any factor was of particular importance. Rather, the Board viewed its
position and recommendations as being based on the totality of the information
presented to and considered by it.
 
  The Board recognized that there can be no assurance that the requisite
regulatory approvals for the Offer and the Merger will be obtained.
 
  It is expected that, if the Shares are not purchased by Purchaser in
accordance with the terms of the Offer or if the Merger is not consummated,
the Company's current management, under the general direction of the Board,
will continue to manage the Company as an ongoing business in accordance with
the Company's current long-term strategic plan.
 
 
                                      19

 
ITEM 5. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED
 
  Except as described below, neither the Company nor any person acting on its
behalf has employed, retained or agreed to compensate any person to make
solicitations or recommendations to the Stockholders concerning the Offer.
 
  Merrill Lynch has been retained, pursuant to the terms of a letter agreement
dated October 24, 1996, as financial advisor to the Company in connection with
any proposed Business Combination (as defined in the letter agreement)
involving the Company and another party, including, among other things, (a)
any merger, consolidation, reorganization or other business combination
pursuant to which the business of the Company is combined with that of one or
more other parties, (b) the acquisition of more than 50% of the outstanding
Shares of the Company, (c) the acquisition of all or a substantial portion of
the assets of, or of any right to all or a substantial portion of the revenues
or income of, the Company or (d) the acquisition of control of the Company
through a proxy contest or otherwise.
 
  Pursuant to a letter agreement, dated October 24, 1996, between the Company
and Merrill Lynch, the Company will pay to Merrill Lynch (i) a fee of
$500,000, contingent upon and payable in cash upon the execution of the Merger
Agreement; and (ii) if the Transactions are consummated or the Company
otherwise enters into an agreement which subsequently results in a business
combination, an additional fee (the "Transaction Fee") payable in cash in an
amount equal to 0.34% of the aggregate purchase price paid in connection with
the Transactions, provided however, that any fee paid under clause (i) of this
paragraph will be deducted from the Transaction Fee. The Company also has
agreed to reimburse Merrill Lynch for its out-of-pocket expenses, including
reasonable fees and disbursements of its legal counsel. In addition, the
Company has agreed to indemnify Merrill Lynch, its affiliates and their
respective directors, officers, employees, agents and controlling persons from
and against any and all losses, claims, damages and liabilities to which they
may become subject under any applicable law and related to or arising out of
any business combination contemplated by the letter agreement and the
engagement of Merrill Lynch.
 
  Merrill Lynch has, in the past, provided financial advisory and financing
services to the Company and the Purchaser and has received fees for the
rendering of such services. See Annex I, "Compensation Committee Interlocks
and Insider Participation." In the ordinary course of business, Merrill Lynch
may actively trade the securities of the Company for its account and for the
accounts of its customers and, accordingly, may at any time hold a long or
short position in such securities.
 
  Except as disclosed herein, neither the Company nor any person acting on its
behalf currently intends to employ, retain or compensate any other person to
make solicitations or recommendations to security holders on its behalf
concerning the Offer or the Merger.
 
ITEM 6. RECENT TRANSACTIONS AND INTENT WITH RESPECT TO SECURITIES
 
  (a) To the best of the knowledge of the Company, no transactions in the
Shares have been effected during the last 60 days by the Company or by any
executive officer, director, affiliate or subsidiary of the Company, other
than those described below.
 
  On September 6, 1996, Mr. Newman sold 2,500 Shares at a price per Share of
$24.75. On September 16, 1996, Mr. Turley sold 5,000 Shares at a price per
Share of $26.00, 1,000 Shares at a price per Share of $25.625 and 9,000 Shares
at a price per Share of $26.50. On September 17, 1996, Mr. Turley sold 12,000
Shares at a price per Share of $26.625 and on September 18, 1996, Mr. Turley
sold 13,000 Shares at a price per Share of $27.00.
 
  (b) To the best of the knowledge of the Company, (i) Mr. Newman presently
intends to tender pursuant to the Offer all Shares owned beneficially or of
record by him, (ii) Messrs. Turley and Wright intend to tender pursuant to the
Offer a portion of the Shares owned beneficially or of record by such persons,
(iii) Messrs. Rupinder S. Sidhu, Albert J. Fitzgibbons and Lewis W. Lehr, Dr.
James T. Doluisio and Ms. Margaret H. Jordan,
 
                                      20

 
who are directors of the Company and Messrs. Edward Kelly and John Simons who
are executive officers of the Company are undecided concerning whether to
tender pursuant to the Offer any Shares owned beneficially or of record by
such persons and (iv) none of the other directors and executive officers of
the Company who owns Shares presently intends to tender pursuant to the Offer
any Shares owned beneficially or of record by such persons, in each case,
subject to and consistent with any fiduciary obligations in the case of Shares
held of fiduciaries.
 
ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY THE SUBJECT COMPANY
 
  (a) Except as described in Item 3(b) and Item 4 above, no negotiation is
being undertaken or is underway by the Company in response to the Offer which
relates to or would result in (i) an extraordinary transaction, such as a
merger or reorganization, involving the Company or any of its subsidiaries,
(ii) a purchase, sale or transfer of a material amount of assets by the
Company or any of its subsidiaries, (iii) a tender offer for, or other
acquisition of, securities by or of the Company or (iv) any material change in
the present capitalization or dividend policy of the Company.
 
  (b) Except as described in Item 3(b) and Item 4 above, there are no
transactions, board resolutions, agreements in principle or signed contracts
in response to the Offer which relate to or would result in one or more of the
matters referred to in paragraph (a) of this Item 7.
 
ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED
 
  (a) Directors of the Company
 
    Not applicable.
 
  (b) Certain Litigation
 
  Litigation. On November 4, 1996, three actions purporting to be class
actions on behalf of Stockholders were filed in the Delaware Court of
Chancery; Ziff v. Turley, et al (C.A. No. 15302NC); Morse v. Newman, et al
(C.A. No. 15304NC); and Lubin v. Eckerd Corp., et al (C.A. No. 15306NC). These
actions allege that the price offered to Stockholders by Parent is inadequate
and that in agreeing to this price the Company's directors breached their
fiduciary duties to Stockholders. Parent is alleged to have aided and abetted
this breach of fiduciary duty. Plaintiffs seek, among other things, injunctive
relief preventing consummation of the Offer and the Merger, equitable relief,
unspecified damages and an award of their costs and expenses, including legal
fees. The defendants in these actions deny all allegations of wrongdoing.
 
 
                                      21

 
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS
 


   EXHIBIT NO.
   -----------
            
   Exhibit 1   Form of Offer to Purchase, dated November 7, 1996 (filed as
                Exhibit (a)(1) to the Schedule 14D-1 of Omega Acquisition
                Corporation and J. C. Penney Company, Inc. filed with the
                Securities and Exchange Commission (the "Commission") on
                November 7, 1996 (the "Schedule 14D-1") and incorporated herein
                by reference).*
   Exhibit 2   Form of Letter of Transmittal, dated November 7, 1996 (filed as
                Exhibit (a)(2) to the Schedule 14D-1 and incorporated herein by
                reference).*
   Exhibit 3   Letter to Stockholders, dated November 7, 1996.*+
   Exhibit 4   Form of Summary Advertisement dated as of November 7, 1996
                (filed as Exhibit (a) (7) to the Schedule 14D-1 and
                incorporated herein by reference).
   Exhibit 5   Text of press release issued by Eckerd Corporation dated
                November 3, 1996.+
   Exhibit 6   Opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated,
                dated November 2, 1996.*+
   Exhibit 7   Confidentiality Agreement, dated October 16, 1996, by and
                between Eckerd Corporation and J. C. Penney Company, Inc.+
   Exhibit 8   Pages 8-15 of Eckerd Corporation's Notice of Annual Meeting of
                Stockholders and Proxy Statement dated April 23, 1996 (pages A-
                8 to A-19 in the Exhibit), containing the sections thereof
                referred to in Item 3(b) of this Schedule 14D-9.+
   Exhibit 9   Amended and Restated Agreement and Plan of Merger among Eckerd
                Corporation, J. C. Penney Company, Inc. and Omega Acquisition
                Corporation, dated as of November 2, 1996 (filed as Exhibit
                (c)(1) to the Schedule 14D-1 and incorporated herein by
                reference).
   Exhibit 10  Amended and Restated Stock Option Agreement dated as of November
                2, 1996, between Eckerd Corporation and J.C. Penney Company,
                Inc. (filed as Exhibit (c) (2) to the Schedule 14D-1 and
                incorporated herein by reference).
   Exhibit 11  Amendment No. 1, dated as of November 2, 1996, to the Employment
                Agreement dated as of February 4, 1996, by and between Eckerd
                Corporation and Francis A. Newman (filed as Exhibit (c) (3) to
                the Schedule 14D-1 and incorporated herein by reference).
   Exhibit 12  Complaint filed in Ziff v. Turley, et al. in the Court of
                Chancery of the State of Delaware in and for New Castle County
                on November 4, 1996 (filed as Exhibit (g)(1) to the Schedule
                14D-1 and incorporated herein by reference).
   Exhibit 13  Complaint filed in Morse v. Newman, et al. in the Court of
                Chancery of the State of Delaware in and for New Castle County
                on November 4, 1996 (filed as Exhibit (g)(2) to the Schedule
                14D-1 and incorporated herein by reference).
   Exhibit 14  Complaint filed in Lubin v. Eckerd Corp., et al. in the Court of
                Chancery of the State of Delaware in and for New Castle County
                on November 4, 1996 (filed as Exhibit (g)(3) to the Schedule
                14D-1 and incorporated herein by reference).

 
- --------
* Included in copies mailed to Stockholders.
+ Filed herewith.
 
                                       22

 
                                   SIGNATURE
 
  After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
 
                                          Eckerd Corporation
 
                                                   /s/ Francis A. Newman
                                          By: _________________________________
                                            Name: Francis A. Newman
                                            Title: President and Chief
                                            Executive Officer
 
Dated: November 7, 1996
 
                                      23

 
                                 EXHIBIT INDEX
 


                                                                           PAGE
   EXHIBIT NO.                        DESCRIPTION                          NO.
   -----------                        -----------                          ----
                                                                     
   Exhibit 1   Form of Offer to Purchase, dated November 7, 1996 (filed
                as Exhibit (a)(1) to the Schedule 14D-1 of Omega
                Acquisition Corporation and J. C. Penney Company, Inc.
                filed with the Securities and Exchange Commission (the
                "Commission") on November 7, 1996 (the "Schedule 14D-1")
                and incorporated herein by reference).*
   Exhibit 2   Form of Letter of Transmittal, dated November 7, 1996
                (filed as Exhibit (a)(2) to the Schedule 14D-1 and
                incorporated herein by reference).*
   Exhibit 3   Letter to Stockholders, dated November 7, 1996.*+
   Exhibit 4   Form of Summary Advertisement dated as of November 7,
                1996 (filed as Exhibit (a) (7) to the Schedule 14D-1 and
                incorporated herein by reference).
   Exhibit 5   Text of press release issued by Eckerd Corporation, dated
                November 3, 1996.+
   Exhibit 6   Opinion of Merrill Lynch, Pierce, Fenner & Smith
                Incorporated, dated November 2, 1996.*+
   Exhibit 7   Confidentiality Agreement, dated October 16, 1996, by and
                between Eckerd Corporation and J. C. Penney Company,
                Inc.+
   Exhibit 8   Pages 8-15 of Eckerd Corporation's Notice of Annual
                Meeting of Stockholders and Proxy Statement dated April
                23, 1996 (pages A-8 to A-19 in the Exhibit), containing
                the sections thereof referred to in Item 3(b) of this
                Schedule 14D-9.+
   Exhibit 9   Amended and Restated Agreement and Plan of Merger among
                Eckerd Corporation, J. C. Penney Company, Inc. and Omega
                Acquisition Corporation, Inc., dated as of November 2,
                1996 (filed as Exhibit (c)(1) to the Schedule 14D-1 and
                incorporated herein by reference).
   Exhibit 10  Amended and Restated Stock Option Agreement dated as of
                November 2, 1996, between Eckerd Corporation and J.C.
                Penney Company, Inc. (filed as Exhibit (c) (2) to the
                Schedule 14D-1 and incorporated herein by reference).
   Exhibit 11  Amendment No. 1, dated as of November 2, 1996, to the
                Employment Agreement dated as of February 4, 1996, by
                and between Eckerd Corporation and Francis A. Newman
                (filed as Exhibit (c) (3) to the Schedule 14D-1 and
                incorporated herein by reference).
   Exhibit 12  Complaint filed in Ziff v. Turley, et al. in the Court of
                Chancery of the State of Delaware in and for New Castle
                County on November 4, 1996 (filed as Exhibit (g)(1) to
                the Schedule 14D-1 and incorporated herein by
                reference).
   Exhibit 13  Complaint filed in Morse v. Newman, et al. in the Court
                of Chancery of the State of Delaware in and for New
                Castle County on November 4, 1996 (filed as Exhibit
                (g)(2) to the Schedule 14D-1 and incorporated herein by
                reference).
   Exhibit 14  Complaint filed in Lubin v. Eckerd Corp., et al. in the
                Court of Chancery of the State of Delaware in and for
                New Castle County on November 4, 1996 (filed as Exhibit
                (g)(3) to the Schedule 14D-1 and incorporated herein by
                reference).

 
- --------
* Included in copies mailed to Stockholders.
+ Filed herewith.

EX-99.3

 
                                                                      EXHIBIT 3
 
 
                                                       [LOGO] ECKERD CORPORATION
 
                                                               November 7, 1996
 
Dear Fellow Stockholders:
 
  I am very pleased to inform you that, on November 2, 1996, the Company
entered into an Agreement and Plan of Merger with J. C. Penney Company, Inc.
and a wholly owned subsidiary of J. C. Penney, pursuant to which J. C. Penney
will, subject to the satisfaction of certain conditions, acquire the Company.
 
  The Merger Agreement provides for a two-step acquisition transaction, the
first step being a tender offer (the "Offer") to purchase 50.1% of the
outstanding shares of the Company's common stock at a price of $35 per share
in cash. Following the completion of the Offer, upon the terms and subject to
the conditions of the Merger Agreement, the Company will be merged with
Parent's wholly owned subsidiary, and the remaining stockholders of the
Company will receive for each share of common stock of the Company either (i)
0.6604 shares of J. C. Penney common stock, if the Merger would be tax free to
the Company's stockholders, or (ii) $35 in cash if the Merger would not be tax
free to the Company's stockholders. The J. C. Penney offer will expire at
midnight, New York City time, on Friday, December 6, 1996, unless otherwise
extended.
 
  The terms of the Offer and the Merger are described in more detail in the
Offer to Purchase being distributed to you, as well as in the Schedule 14D-9
attached hereto. Both these documents contain important information with
respect to the proposed transaction, including, in the case of the Offer to
Purchase, information as to how you can tender your shares into the Offer, and
you are encouraged to read both these documents carefully and in their
entirety.
 
  After a thorough review of all the factors it considered relevant, which are
described in the attached Schedule 14D-9, and after consultation with its
financial advisor, the Board of Directors of the Company determined that the
terms of the J. C. Penney offer and merger are fair to, and in the best
interests of, the Company's stockholders.
 
  ACCORDINGLY, THE BOARD RECOMMENDS THAT SHAREHOLDERS TENDER THEIR SHARES INTO
THE OFFER AND VOTE IN FAVOR OF THE MERGER.
 
  As we proceed toward completion of this important transaction, your
management team will be working with the management of J. C. Penney to plan
how both our companies can best realize the anticipated benefits of this
transaction. We are pleased that our stockholders, in addition to receiving a
high price for their shares in the Company, will have an opportunity to
participate in the synergy we expect to be realized from this transaction
through their ownership of J. C. Penney stock.
 
                                          Very truly yours,

                                          /s/ Stewart Turley

                                          Stewart Turley
                                          Chairman of the Board of Directors
 
 Mailing Address: PO Box 4689 . Clearwater, FL . 34618 . Street Address: 8333
         Bryan Dairy Road . Largo, FL . 33777 . Phone: (813) 399-6000

EX-99.5

 
 
                                                                       EXHIBIT 5
                                                                       ---------


November 3, 1996
NR #26


            JCPENNEY TO ACQUIRE ECKERD CORPORATION FOR $3.3 BILLION


                 Combination of Eckerd and Thrift Will Create
             a $10 Billion Leader in The U.S. Drug Store Industry



CLEARWATER, FL - November 3, 1996 - Eckerd Corporation (NYSE:ECK) announced 
today that JCPenney Company, Inc. (NYSE:JCP) and Eckerd have signed a definitive
agreement to combine the Eckerd and JCPenney's Thrift drug store operations
through a cash and stock acquisition of Eckerd by JCPenney. Thrift is a wholly
owned subsidiary of JCPenney. The aggregate transaction value, including the
assumption of $760 million of Eckerd debt, is $3.3 billion.

The transaction will be effected through a cash tender offer at $35.00 per share
for approximately 37.1 million shares, or 50.1%, of Eckerd stock, to be followed
by a second-step merger in which Eckerd shareholders will receive 0.6604 of a
share of JCPenney stock for each remaining Eckerd share not purchased in the
cash tender offer (valued at $35.00 per Eckerd share, based on the price of
JCPenney's stock as of the close of trading on November 1, 1996). In conjunction
with the transaction, JCPenney's board has authorized a stock repurchase program
of up to 15 million of its shares, which will occur prior to the issuance of
approximately 24 million JCPenney shares to be issued as part of the second-step
merger.

Eckerd President and Chief Executive Officer Frank A. Newman will become Chief 
Executive Officer of the combined Eckerd and Thrift drug stores.  Mr. Newman 
will report directly to James E. Oesterreicher, Chief Executive Officer of 
JCPenney Company and will become a member of the JCPenney Company Management 
Committee.  The planned acquisition would create a combined 2,800 drug store 
operation with a leading industry position, stretching across the Northeast, 
Midwest and the Sunbelt, with combined projected 1997 sales approaching $10.0
billion.  A transition team headed by Mr. Newman and including John E. 
Fesperman, JCPenney Senior Vice President and Chairman of the Board of Thrift, 
and Robert Hannan, President and Chief Executive Officer of Thrift, has been 
formed to ensure an orderly integration of the two operations.

Mr. Newman said, "We considered a number of strategic alternatives, and the 
management and Board of Directors of Eckerd unanimously concluded that this 
transaction with JCPenney is best for Eckerd's shareholder's, employees and 
customers.  It is best for our shareholders because they will receive a generous
price for their investment in Eckerd and an opportunity to participate in our 
continuing growth through their investment in JCPenney.  Our associates and 
customers will have the added advantage of benefitting from our alliance with 
JCPenney, one of America's largest and best known retailers."


                                  -continued-



 
Mr. Oesterreicher said, "Our acquisition of Eckerd represents a major strategic 
step which creates one of the nation's premier drug store businesses. Having 
been in the drug store business for more than 27 years, it is a business that 
we know and run well, and that offers an attractive long-term growth platform to
compliment our strong and growing department store and catalog business, whose 
outlook remains outstanding."

Mr. Oesterreicher added, "We were particularly attracted to Eckerd because of 
its impressive record of sales and earnings growth, its excellent geographic fit
with Thrift, and its strong presence and brand name recognition in markets with 
large and growing populations. We anticipate significant synergy from both cost 
reductions and revenue enhancements. In addition, JCPenney brings merchandising 
opportunities and operational expertise which we believe will add further value
to the front end of the drug store. The effect of the cost savings, combined 
with the share repurchase, is expected to make the transaction accretive to 
JCPenney,s earnings per share in 1998."

JCPenney has been a leading player in the consolidating drug store sector over 
the past eighteen months. This acquisition follows on the acquisition of Kerr 
Drug Stores in North Carolina in 1995, Fay's in the Northeast in October 1996, 
and the pending purchase of 200 Rite Aid stores which is projected to be 
completed in early 1997. With the acquisition of Eckerd, JCPenney's drug store 
operations will represent about one third of its total sales and will be a 
significant contributor to the company's earnings.

The transaction, which has been unanimously approved by the Boards of Directors 
of JCPenney and Eckerd, is subject to Eckerd shareholder and customary
regulatory approvals. It is contemplated that the exchange of shares in the
second-step of the transaction will be tax-free to Eckerd shareholders. It is
expected that both the acquisition and the share repurchase will be completed in
early 1997.

CS First Boston acted as financial advisor to JCPenney and Merrill Lynch & Co. 
was financial advisor to Eckerd.

Eckerd is currently the nation's fourth largest drug store chain with 1,724 
stores in 13 states and 542 Eckerd Express Photo labs in 11 states. The Company 
had 1995 revenues of over $5.0 billion. Eckerd's operating area includes 10 of 
the 12 fastest growing markets of the last decade, including the high growth 
retirement areas of Florida, Texas and the Carolinas.

JCPenney is America's largest department store, operating approximately 1,250 
JCPenney stores in all 50 states, Puerto Rico, Mexico, and Chile. The Company 
merchandises approximately 116 million square feet of space, the majority of 
which is in premier shopping malls, more store space than any other U.S. 
department store. In addition, Company licensees operate smaller JCPenney 
Collections stores offering JCPenney private brand merchandise to consumers in 
the Middle East, Indonesia, and the Philippines. The JCPenney Catalog is the No.
1 catalog in sales in the United States. Additional businesses include Thrift
Drug; JCPenney insurance companies; and JCPenney National Bank.


Financial Contact: Marty Gladysz, Vice President/Treasurer, (813) 399-6315
Media Contact: Gerry Hoeppner, Director/Public Relations, (813) 399-6380


                                     # # #

EX-99.6

 
                                                                       EXHIBIT 6

                     [LOGO] [LETTERHEAD OF MERRILL LYNCH]



                                         November 2, 1996

Board of Directors
Eckerd Corporation
8333 Bryan Dairy Road
Largo, FL  34617



Members of the Board of Directors:


          Eckerd Corporation (the "Company"), J.C. Penney Company, Inc. (the
"Acquiror"), and Omega Acquisition Corporation, a wholly owned subsidiary of the
Acquiror (the "Acquisition Sub"), have entered into an agreement and plan of
merger (the "Agreement") pursuant to which the Acquisition Sub will make a
tender offer (the "Offer") for 50.1% of the shares of the Company's common
stock, par value $0.01 per share (the "Shares"), at $35.00 per Share, net to the
seller in cash.  The Agreement also provides that, following consummation of the
Offer, (i) if the Stock Condition (as defined in the Agreement) has been
satisfied, the Company will be merged with and into the Acquisition Sub (the
"Forward Merger") or (ii) if the Stock Condition has not been satisfied, the
Acquisition Sub will be merged with and into the Company (the "Reverse Merger,"
and together with the Forward Merger, the "Merger").  Pursuant to the Agreement,
each remaining Share outstanding after consummation of the Offer not held by the
Acquiror or its affiliates will be converted into the right to receive either
(i) if the Forward Merger is consummated 0.6604 shares of the common stock of
the Acquiror (the "Acquiror Shares") or (ii) if the Reverse Merger is
consummated, $35.00 per Share in cash, as such amounts may be adjusted pursuant
to the Agreement.  In connection with the Offer and the Merger, the parties have
also entered into an agreement (the "Option Agreement") pursuant to which the
Company has granted the Acquiror an option under certain circumstances described
in the Option Agreement to acquire up to 10,554,786 Shares, or such other number
of Shares as would equal 15% of the total Shares outstanding at the time of
exercise of the option.


     You have asked us whether, in our opinion, the proposed consideration to be
received by the holders of the Shares in the Offer and the Merger, taken as a
whole, is fair to such stockholders from a financial point of view.


     In arriving at the opinion set forth below, we have, among other things:


     (1) Reviewed the Company's Annual Reports, Forms 10-K and related financial
         information for the three fiscal years ended January 29, 1994, January
         28, 1995, and February 3, 1996, and the Company's Forms 10-Q and the
         related unaudited financial information for the quarterly periods
         ending May 4, 1996, and August 3, 1996;


 
     (2) Reviewed the Acquiror's Annual Reports, Forms 10-K and related
         financial information for the three fiscal years ended January 29,
         1994, January 28, 1995, and January 27, 1996, and the Acquiror's Forms
         10-Q and the related unaudited financial information for the quarterly
         periods ending April 27, 1996, and July 27, 1996;

     (3) Reviewed certain information, including financial forecasts, relating
         to the business, earnings, cash flow, assets and prospects of the
         Company and the Acquiror as well as the cost savings and related
         synergies expected to result from the Merger, furnished to us by the
         Company and the Acquiror, respectively;

     (4) Conducted discussions with members of senior management of the Company
         and the Acquiror concerning their respective businesses and prospects,
         including the cost savings and synergies expected to result from the
         Merger;

     (5) Reviewed the historical market prices and trading activity for the
         Shares and the Acquiror Shares and compared them with that of certain
         publicly traded companies which we deemed to be reasonably similar to
         the Company and the Acquiror, respectively;

     (6) Compared the historical and projected results of operations of the
         Company and the Acquiror with that of certain companies which we deemed
         to be reasonably similar to the Company and the Acquiror, respectively;

     (7) Compared the proposed financial terms of the transactions contemplated
         by the Agreement with the financial terms of certain other mergers and
         acquisitions which we deemed to be relevant;

     (8) Considered the pro forma effect of the Merger on the Acquiror's
         earnings, consolidated capitalization and certain financial ratios;

     (9) Reviewed the Agreement dated November 2, 1996;

     (10) Reviewed the Option Agreement dated November 2, 1996; and

     (11) Reviewed such other financial studies and analyses and performed such
          other investigations and took into account such other matters as we
          deemed necessary, including our assessment of general economic, market
          and monetary conditions.

     In preparing our opinion, we have relied on the accuracy and completeness
of all information supplied or otherwise made available to us by or on behalf of
the Company or the Acquiror, or made publicly available by the Company or
Acquiror, and we have not independently verified such information or undertaken
an independent evaluation or appraisal of the assets or liabilities of the
Company or the Acquiror or been furnished with any such evaluation or appraisal.
With respect to the financial forecasts and information related to cost savings
and synergies expected to result from the Merger furnished by the Company and
the Acquiror, we have assumed with your consent that they have been reasonably
prepared and reflect the best currently available estimates and judgment of the
Company's or the Acquiror's management as to the expected future financial
performance of the Company or the Acquiror, as the case may be, as well as the
cost savings and synergies expected to result from the Merger.  We have further
assumed that the Forward Merger will qualify as a reorganization within the
meaning of Section 368 (a) of the Internal Revenue Code of 1986, as amended.
Our opinion is necessarily based upon market, monetary, general economic and
other conditions as they exist and can be evaluated on the date hereof.

 
     We have acted as financial advisor to the Company in connection with the
Merger and will receive a fee from the Company for our services, a significant
portion of which is contingent upon the consummation of the Merger.  We have
also, in the past, provided financial advisory and financing services to the
Company and the Acquiror and have received fees for the rendering of such
services.  In addition, in the ordinary course of business, we may actively
trade the Shares, as well as the Acquiror Shares, for our own account and for
accounts of customers and, accordingly, may at any time hold a long or short
position in such securities.  Affiliates of Merrill Lynch own approximately
1.27% of the outstanding Shares, and Messrs. Fitzgibbons and Sidhu, directors of
Merrill Lynch Capital Partners, Inc., are also members of the Board of Directors
of the Company.

     This opinion is addressed to the Board of Directors of the Company and does
not constitute a recommendation to any stockholder as to whether such
stockholder should tender any Shares pursuant to the Offer or vote in favor of
the Merger.

     We are not expressing any opinion herein as to the prices at which the
Acquiror Shares will trade following the announcement or consummation of the
Merger.

     On the basis of, and subject to the foregoing, we are of the opinion that
the proposed consideration to be received by the holders of the Shares pursuant
to the Offer and the Merger, taken as a whole, is fair to such stockholders from
a financial point of view.

                               Very truly yours,

                               MERRILL LYNCH, PIERCE, FENNER & SMITH
                               INCORPORATED

EX-99.7

 
                                                                       EXHIBIT 7

                              Eckerd Corporation
                             8333 Bryan Dairy Road
                                Largo, FL  34647


                                                        October 16, 1996


J.C. Penney Company, Inc.
6501 Legacy Drive
Plano, TX  75024-3698


Attention:  Donald A. McKay
            Chief Financial Officer

Gentlemen:

     In order to allow you to evaluate the possible acquisition (the "Proposed
Acquisition") of Eckerd Corporation (the "Company"), we will deliver to you,
upon your execution and delivery to us of this letter agreement, certain
information about the properties and operations of the Company.  All information
about the Company furnished by us or our Representatives (as defined below),
whether furnished before or after the date hereof, whether oral or written, and
regardless of the manner in which it is furnished, is referred to in this letter
agreement as "Proprietary Information". Proprietary Information does not
include, however, information which (a) is or becomes generally available to the
public other than as a result of a disclosure by you or your Representatives,
(b) was available to you on a nonconfidential basis prior to its disclosure by
us or our Representatives or (c) becomes available to you on a nonconfidential
basis from a person other than us or our Representatives who is not known by you
after reasonable inquiry to be bound by a confidentiality agreement with us or
any Representative of ours, or is otherwise not known by you after reasonable
inquiry to be under an obligation to us or any Representative of ours not to
transmit the information to you.  As used in this letter agreement, the term
"Representative" means, as to any person, such person's affiliates and its and
their directors, officers, employees, agents, advisors (including, without
limitation, financial advisors, counsel and accountants) and controlling
persons.  As used in this letter agreement, the term "person" shall be broadly
interpreted to include, without limitation, any corporation, company,
partnership, other entity or individual.

     Except as required by law or agreement with a stock exchange as advised by
counsel, unless otherwise agreed to in writing by us, you agree (a) to keep all
Proprietary Information confidential and not to disclose or reveal any
Proprietary Information to any person other than your Representatives who are
actively and directly participating in your evaluation of the Proposed
Acquisition or who otherwise need to know the Proprietary Information for the
purpose of evaluating the Proposed Acquisition and to cause those persons to
observe the terms of this letter agreement, (b) not to use Proprietary
Information for any purpose other than in connection with your evaluation of the
Proposed Acquisition or the consummation of the Proposed Acquisition and (c) not
to disclose to any person (other than those of your Representatives who are
actively and directly participating in your evaluation of the Proposed
Acquisition or who otherwise need to know for the purpose of evaluating the
Proposed Acquisition and, in the case of your Representatives, whom you will
cause to observe the terms of this letter agreement) any information about the
Proposed Acquisition, or the terms or conditions or any other facts relating

 
                                      -2-


thereto, including, without limitation, the fact that discussions are taking
place with respect thereto or the status thereof, or the fact that Proprietary
Information has been made available to you or your Representatives.  You will be
responsible for any breach of the terms of this letter agreement by you or your
Representatives.

     In the event that you are requested pursuant to, or required by, applicable
law or regulation or by legal process to disclose any Proprietary Information or
any other information concerning the Company or the Proposed Acquisition, you
agree that you will provide us with prompt notice of such request or requirement
in order to enable us to seek an appropriate protective order or other remedy,
to consult with you with respect to our taking steps to resist or narrow the
scope of such request or legal process, or to waive compliance, in whole or in
part, with the terms of this letter agreement.  In any such event you will use
your reasonable best efforts to ensure that all Proprietary Information and
other information that is so disclosed will be accorded confidential treatment.

     You also agree that for a period of one year from the date of this letter
agreement, neither you nor any of your Representatives will, without the prior
written consent of the Company or its Board of Directors:

   (a)  acquire, offer to acquire, or agree to acquire, directly or indirectly,
        by purchase or otherwise, any voting securities or direct or indirect
        rights to acquire any voting securities of the Company or any subsidiary
        thereof, or of any successor to or person in control of the Company, or
        any assets of the Company or any subsidiary or division thereof or of
        any such successor or controlling person;
      
   (b)  make, or in any way participate, directly or indirectly, in any
        "solicitation" of "proxies" to vote (as such terms are used in the rules
        of the Securities and Exchange Commission), or seek to advise or
        influence any person or entity with respect to the voting of any voting
        securities of the Company;
      
   (c)  make any public announcement with respect to, or submit a proposal for,
        or offer of (with or without conditions) any extraordinary transaction
        involving the Company or any of its securities or assets;
      
   (d)  form, join or in any way participate in a "group" as defined in Section
        13(d)(3) of the Securities Exchange Act of 1934, as amended, in
        connection with any of the foregoing; or
      
   (e)  request the Company or any of our Representatives, directly or
        indirectly, to amend or waive any provision of this paragraph.

     The provisions of the preceding paragraph shall terminate and will not be
deemed to prohibit any of the potential actions described therein the event that
(x) the Company enters into an agreement to engage in (i) a merger transaction
involving a change in control of the Company, (ii) a consolidation transaction
involving a change in control of the Company or (iii) a transaction related to
the sale of all or substantially all of the Company's assets or more that 20% of
the Company's outstanding equity securities, or (y) a third party makes a tender
offer, exchange offer or any other public offer with respect to the Company to
acquire control of the Company.  You will promptly advise the Company of any
inquiry or proposal made to you with respect.

     If you determine that you do not wish to proceed with the Proposed
Acquisition, you will promptly advise us of that decision.  In that case, or in
the event that we, in our sole discretion, so request or the Proposed
Acquisition is not consummated by you, you will, upon our request, promptly
deliver to us or destroy all Proprietary Information, including all copies,
reproductions, summaries, analyses or extracts thereof or based thereon in your
possession or in the possession of any Representative of yours.

 
                                      -3-

     You acknowledge that none of the Company, Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch") or our other Representatives and none of
the respective officers, directors, employees, agents or controlling persons of
Merrill Lynch or such other Representatives makes any express or implied
representation or warranty as to the accuracy or completeness of any Proprietary
Information, and you agree that none of such persons shall have any liability to
you or any of your Representatives relating to or arising from your or their use
of any Proprietary Information or for any errors therein or omissions therefrom.
You also agree that you are not entitled to rely on the accuracy or completeness
of any Proprietary Information and that you shall be entitled to rely solely on
such representations and warranties as may be made to you in any final
acquisition agreement relating to the Proposed Acquisition, subject to the terms
and conditions of such agreement.

     You agree that, without our prior written consent, you will not for a
period of one year from the date hereof directly or indirectly solicit for
employment or employ any person who is now employed by us or any of our
subsidiaries in a managerial or senior capacity and who is identified by you as
a result of your evaluation or otherwise in connection with the Proposed
Acquisition; provided, however, that the foregoing shall not prohibit any
advertisement or general solicitation for employment as a result thereof that is
not specifically targeted to such employees and you shall not be prohibited from
employing any such person who contacts you on his or her own initiative and
without any direct or indirect solicitation by you (other than pursuant to any
advertisement or general solicitation).

     You agree that until a final acquisition agreement regarding the Proposed
Acquisition has been executed by you and us, neither we nor any of our
Representatives are under any legal obligation and shall have no liability to
you of any nature whatsoever with respect to the Proposed Acquisition by virtue
of this letter agreement or otherwise.  You also acknowledge and agree that (i)
we and our Representatives may conduct the process that may or may not result in
the Proposed Acquisition in such manner as we, in our sole discretion, may
determine (including, without limitation, negotiating and entering into a final
acquisition agreement with any third party without notice to you) and (ii) we
reserve the right to change (in our sole discretion, at any time and without
notice to you) the procedures relating to our and your consideration of the
Proposed Acquisition (including, without limitation, terminating all further
discussions with you and requesting that you return to us or destroy all
Proprietary Information).

     Without prejudice to the rights and remedies otherwise available to us, you
agree we shall be entitled to equitable relief by way of injunction or otherwise
if you or any of your Representatives breach or threaten to breach any of the
provisions of this letter agreement.

     It is further understood and agreed that no failure or delay by us in
exercising any right, power or privilege hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise thereof preclude any other or
further exercise thereof or the exercise of any right, power or privilege
hereunder.

 
                                      -4-

     This letter agreement shall be governed by and construed in accordance with
the laws of the State of New York applicable to contracts executed in and to be
performed in that state.

     Any assignment of this letter agreement by you without our prior written
consent shall be void.

     This letter agreement contains the entire agreement between you and us
concerning confidentiality of the Proprietary Information, and no modification
of this letter agreement or waiver of the terms and conditions hereof shall be
binding upon you or us, unless approved in writing by each of you and us.

     Please confirm your agreement with the foregoing by signing and returning
to the undersigned the duplicate copy of this letter enclosed herewith.

     In connection with the Proposed Acquisition, J.C. Penney will provide
certain confidential information to the Company, including confidential
information concerning Thrift Drugstores, Inc.  The parties agree that all of
the terms and provisions of this letter agreement, including without limitation,
the exceptions to the definition of "Proprietary Information", that apply to
J.C. Penney in respect of Proprietary Information furnished to it by the Company
shall also apply to the Company in respect of Proprietary Information furnished
to it by J.C. Penney.

                                       ECKERD CORPORATION

                                       By /s/ Samuel G. Wright
                                         -----------------------------------
                                         Samuel G. Wright

                                         Executive Vice President and Chief
                                         Financial Officer

Accepted and Agreed
as of the date
first written above:

J.C. PENNEY COMPANY, INC.


By /s/ Donald A. McKay
  --------------------------
  Donald A. McKay
  Chief Financial  Officer

EX-99.8

                                                                       EXHIBIT 8
 
                     SECURITY OWNERSHIP OF CERTAIN PERSONS

  The following table sets forth information regarding the stock ownership as of
March 29, 1996 of all persons known to the Company to be the beneficial owner of
more than five percent of the Common Stock, the directors (which includes
nominees) of the Company, the named executive officers and all directors and
executive officers as a group:



                                                                                NUMBER OF
           NAME                                                                 SHARES(1)       PERCENTAGE
           ----                                                                 ---------       ----------
                                                                                           
Merrill Lynch Investors(2)..................................................    4,041,268          5.78
Loomis, Sayles & Company, L.P.(3)...........................................    5,296,418          7.57
Directors (who are not named executive officers)                                                   
John W. Boyle(4)............................................................     288,534              *
Dr. James Doluisio(5).......................................................      13,874              *
Donald F. Dunn..............................................................      26,434              *
Albert J. Fitzgibbons, III(6)...............................................       9,434              *
Margaret H. Jordan..........................................................         -0-              *
Lewis W. Lehr(7)............................................................      18,034              *
Alexis P. Michas(6).........................................................       9,350              *
Rupinder S. Sidhu(6)........................................................     107,060              *
Named Executive Officers                                                                           
Stewart Turley(8)...........................................................     950,076           1.36
Francis A. Newman(9)........................................................     206,700              *
James M. Santo(10)..........................................................     102,106              *
Samuel G. Wright(11)........................................................     125,508              *
Kenneth L. Flynn............................................................         -0-              *
All directors and executive officers as a group                                                    
 (19 individuals)(12).......................................................   1,972,336           2.80
 

- ----------
 
 *  Less than one percent
 
(1)  Does not include 3,075,044 shares of Common Stock beneficially owned by the
     Company Employees' Profit Sharing Plan (the "Plan") (4.40% of the Common
     Stock). The address for the Plan is P.O. Box 4689, Clearwater, Florida
     34618. NationsBank, N.A. (South) is the trustee of the Plan. The Company
     has irrevocably committed to deposit 128,000 shares of Common Stock to the
     Plan during fiscal 1996.
 
(2)  Shares of Common Stock are owned of record as follows: 201,016 shares by
     Merrill Lynch Capital Corporation, 2,935,828 shares by Merrill Lynch
     Capital Appreciation Partnership No. II, L.P., 74,268 shares by ML Offshore
     LBO Partnership No. II, 54,530 shares by ML Employees LBO Partnership No.
     I, L.P., 18,662 shares by Merrill Lynch KECALP L.P. 1986, 340,266 shares by
     Merrill Lynch Capital Appreciation Partnership No. B-IX, L.P., 199,310
     shares by ML Offshore LBO Partnership No. B-IX, 5,068 shares by MLCP
     Associates L.P. No. II., 28,244 shares by Merrill Lynch KECALP L.P. 1989,
     174,262 shares by ML IBK Positions, Inc. and 9,814 shares by Merchant
     Banking L.P. No. IV. The address for each of the aforementioned record
     holders is c/o Merrill Lynch & Co., Inc., Merrill Lynch World Headquarters,
     North Tower, New York, New York 10281. The foregoing are collectively
     referred to herein as the "Merrill Lynch Investors". As previously
     disclosed in connection with the Company's December 1995 secondary stock
     offering, certain of the Merrill Lynch Investors

                                      A-8

 
     that are limited partnerships distributed approximately 921,212 shares of
     Common Stock owned by them to certain of their partners in April 1996. As a
     result of such distribution, the Merrill Lynch Investors owned 3,120,056
     shares of Common Stock, representing approximately 4.45% of the Company's
     outstanding Common Stock. 

(3)  Loomis, Sayles & Company, L.P. has sole voting power over 1,687,440 shares
     of Common Stock, shared voting power over 800 shares of common Stock and
     shared dispositive power over 5,296,418 shares of Common Stock. The address
     for Loomis, Sayles & Company, L.P. is One Financial Center, Boston,
     Massachusetts 02111. The foregoing information is based on a Form 13G dated
     February 12, 1996.
 
(4)  Total does not reflect 244,786 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 41,600
     shares of Common Stock which are exercisable as of March 29, 1996 or within
     60 days thereafter.
 
(5)  Total includes options covering 6,668 shares of Common Stock which are
     exercisable as of March 29, 1996 or within 60 days thereafter.
 
(6)  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 767 5th Avenue, 48th Floor, New York, New York 10153.
 
(7)  Total includes options covering 6,668 shares of Common Stock which are
     exercisable as of March 29, 1996 or within 60 days thereafter.
 
(8)  Total does not reflect the 91,990 shares of Common Stock transferred by Mr.
     Turley to certain family members. Mr. Turley disclaims beneficial ownership
     of such shares. Total includes 32,000 shares transferred by Mr. Turley to
     The Stewart Turley Foundation, Inc. Mr. Turley disclaims beneficial
     ownership of such shares. Total includes options covering 88,842 shares of
     Common Stock which are exercisable as of March 29, 1996 or within 60 days
     thereafter.
 
(9)  Total includes options covering 200,000 shares of Common Stock which are
     exercisable as of March 29, 1996 or within 60 days thereafter.

(10) Total includes options covering 18,200 shares of Common Stock which are
     exercisable as of March 29, 1996 or within 60 days thereafter.
 
(11) Total includes options covering 18,200 shares of Common Stock which are
     exercisable as of March 29, 1996 or within 60 days thereafter.

(12) Total includes options covering 393,178 shares of Common Stock which are
     exercisable as of March 29, 1996 or within 60 days thereafter.
 
     All filings required to be filed by the Company's directors and executive
officers pursuant to Section 16(a) of the Securities Exchange Act of 1934, as
amended, for fiscal year 1995 were filed on a timely basis

                                      A-9

 
     except that a Form 5 for Mr. Boyle for fiscal year 1995 that reflected a
     gift by him of 476 shares made during fiscal year 1995 was filed two days
     late.

                             EXECUTIVE COMPENSATION

          The following table sets forth certain information for the 1995, 1994
and 1993 fiscal years with respect to the Chief Executive Officer and each of
the four most highly paid executive officers of the Company who were serving as
executive officers at February 3, 1996 (collectively, the "named executive
officers").

                           SUMMARY COMPENSATION TABLE


                                       ANNUAL COMPENSATION              LONG-TERM COMPENSATION
                                       -------------------              ----------------------
                                                                        AWARDS(2)        PAYOUTS
                                                                        ---------        -------
                                                                        NUMBER OF
                                                                        SECURITIES      LONG-TERM       ALL OTHER
NAME AND PRINCIPAL                                     OTHER ANNUAL     UNDERLYING      INCENTIVE      COMPENSATION
   POSITION(1)               YEAR   SALARY    BONUS    COMPENSATION      OPTIONS       PLAN PAYOUTS        (3)
- ------------------           ----   ------    -----    ------------     ----------     ------------        ---
                                                                                
Stewart Turley,............  1995  $651,570  $513,886       $63,076(4)      40,000         $258,300            $--
  Chairman of the            1994   621,574   511,428        60,542(4)          --          147,500         18,005
  Board and CEO              1993   601,467   201,419              --       50,000          138,750         11,327

Francis A. Newman,.........  1995  $533,449  $419,805             $--       30,000         $184,894            $--
  President and Chief        1994   516,574   424,815              --           --           65,705         13,861
  Operating Officer(5)       1993   285,601   250,000              --      430,000               --             --

James M. Santo,............  1995  $222,569  $156,537             $--       20,000         $ 73,185            $--
  Executive Vice             1994   187,602   153,160              --           --           40,250          2,699
  President --               1993   171,796    57,069              --       24,000           37,750          3,239
  Administration and
  Secretary

Samuel G. Wright,..........  1995  $231,504  $163,653             $--       60,000         $ 71,463            $--
  Executive Vice             1994   184,247   150,592              --           --           40,250          2,677
  President -- Chief         1993   167,797    55,726              --       24,000           37,750          3,101
  Financial Officer

Kenneth L. Flynn,..........  1995  $302,405  $213,460             $--       20,000         $ 43,050            $--
  Senior Vice                1994    43,259    75,000              --       50,000               --             --
  President -- Store
 Operations(6)
 

- ----------

(1)   The Company has entered into employment agreements with each of the named
      executive officers that provide for severance payments upon the occurrence
      of events such as death, termination or a change in control. See
      "Employment Agreements."
 
(2)   No restricted stock or stock appreciation rights were awarded or granted
      to the named executive officers during the year ended February 3, 1996.

                                     A-10

 
(3)   Each named executive officer participates in the Eckerd Corporation Profit
      Sharing Plan (the "Profit Sharing Plan") and the Eckerd Corporation
      Executive Excess Plan (the "Executive Excess Plan"). Mr. Flynn began
      participation in the Executive Excess Plan in January 1996. The Executive
      Excess Plan replaces benefits under the Profit Sharing Plan (and the
      Eckerd Corporation Pension Plan) which are reduced under provisions of the
      Internal Revenue Code of 1986 (the "Code"). The amounts allocable in 1995
      to the named executive officers under the Profit Sharing Plan and the
      Executive Excess Plan (with respect to the Profit Sharing Plan) were not
      calculable as of the date hereof. The amounts allocable in 1994 and 1993
      are shown in this column.

(4)   Included in this amount are transportation allowances and expenses of
      $29,233 in 1995 and $28,022 in 1994 and payments for long-term disability
      insurance of $18,480 in each of 1995 and 1994.

(5)   Under the terms of Mr. Newman's employment, which commenced on July 6,
      1993, the aggregate amount of his annual bonus and Long Term Incentive
      Plan payouts were guaranteed to be not less than $250,000 in each of 1993
      and 1994. Mr. Newman became the Chief Executive Officer of the Company in
      February 1996.

(6)   Mr. Flynn became Senior Vice President-Store Operations in December
      1994.

                     OPTION/SAR GRANTS IN LAST FISCAL YEAR

          The following table presents information concerning grants of stock
options during the 1995 fiscal year to each of the named executive officers. No
stock appreciation rights were granted during the 1995 fiscal year.



                                                      INDIVIDUAL GRANTS                              POTENTIAL REALIZABLE
                                                      -----------------                            
                                 NUMBER OF                                                             VALUE AT ASSUMED
                                SECURITIES          % OF TOTAL                                      ANNUAL RATES OF STOCK
                                UNDERLYING       OPTIONS GRANTED      EXERCISE                      PRICE APPRECIATION FOR
                               OPTIONS/SARS      TO EMPLOYEES IN      PRICE PER      EXPIRATION         OPTION TERM(2)
                                                                                                        --------------          
NAME                              GRANTED       FISCAL YEAR(1)          SHARE           DATE          5%             10%
- ----                              -------       --------------          -----           ----          --             ---   
                                                                                                    
Stewart Turley............        40,000             6.57%             $15.75          5/24/05        $396,204       $1,004,058

Francis A. Newman.........        30,000             4.93               15.75          5/24/05         297,153          753,043

James M. Santo............        20,000             3.29               15.75          5/24/05         198,102          502,029

Samuel G. Wright..........        40,000             6.57               12.81          2/06/05         322,308          816,793

                                  20,000             3.29               15.75          5/24/05         198,102          502,029

Kenneth L. Flynn..........        20,000             3.29               15.75          5/24/05         198,102          502,029
 

- ---------
 
(1)   Based on a total of 1,057,800 options granted to all employees. Except for
      the grant of 40,000 to Mr. Wright which options occurred on February 6,
      1995, all options granted to the named executive officers were granted on
      May 24, 1995. Commencing three years after date of grant, the options are
      exercisable to the extent of 50% with an additional 25% exercisable after
      each of the next two successive years.
 
(2)   The assumed rates of growth were selected by the Securities and Exchange
      Commission for illustration purposes and are not intended to forecast the
      future appreciation, if any, in the price of the Company's Common Stock.
      If the named executive officers realize these values, the Company's
      stockholders will realize aggregate appreciation in the price of the
      Company's Common Stock. For example, the market value of 69.958 million
      shares of the Company's Common Stock on May 24, 1995 based on the market
      price on that date was approximately $1.102 billion. If the share price of
      the Company's Common Stock 

                                     A-11

 
      increases by 5% and 10% per year for the same number of shares, the
      approximate market value on May 24, 2005 would be approximately $1.795
      billion and $2.858 billion, respectively.


              AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
                        AND FY-END OPTION/SAR VALUES(1)

       The following table presents information concerning the value of
unexercised stock options at the end of the 1995 fiscal year with respect to the
named executive officers. No SARs are currently outstanding.



                            NUMBER OF SECURITIES               VALUE OF
                                 UNDERLYING                   UNEXERCISED
                                 UNEXERCISED                 IN-THE-MONEY
                               OPTIONS/SARS AT              OPTIONS/SARS AT
                                   FY-END                       FY-END
NAME                     (EXERCISABLE/UNEXERCISABLE)  (EXERCISABLE/UNEXERCISABLE)
- ----                     ---------------------------  ---------------------------
                                                
Stewart Turley.........      88,842/90,000              $  1,522,308/$977,500
                                                    
Francis A. Newman......     200,000/260,000             $  3,350,000/$3,972,500
                                                    
James M. Santo.........      18,200/44,000              $    311,857/$474,000
                                                    
Samuel G. Wright.......      18,200/84,000              $    311,857/$831,500
                                                    
Kenneth L. Flynn.......           0/70,000              $          0/$507,500
 

- ----------

(1)  None of the named executive officers exercised any options during the 1995
     fiscal year.

           LONG-TERM INCENTIVE PLANS -- AWARDS IN LAST FISCAL YEAR(1)

          The following table presents information regarding Long-Term Incentive
Plan Awards made during the 1995 fiscal year to each of the named executive
officers.

                      PERFORMANCE OR
                       OTHER PERIOD    ESTIMATED FUTURE PAYOUTS UNDER
                     UNTIL MATURATION   NON STOCK PRICE-BASED PLANS
                                        ---------------------------  
       NAME             OR PAYOUT      THRESHOLD    TARGET   MAXIMUM
       ----             ---------      ---------    ------   ------- 
Stewart Turley.....     1995-1997       $32,500    $279,825  $325,000
                                                 
Francis A. Newman..     1995-1997        26,550     228,596   265,500
                                                 
James M. Santo.....     1995-1997        11,000      94,710   110,000
                                                 
Samuel G. Wright...     1995-1997        11,500      99,015   115,000
                                                 
Kenneth L. Flynn...     1995-1997        15,000     129,150   150,000

- ----------


(1)  All amounts shown represent grants made pursuant to the Company's Executive
     Three Year Bonus Plan. The bonus awards are granted annually and the
     payment of such awards are contingent on the attainment of certain
     performance criteria. The total payment with respect to a grant is based on
     the annual average increase in the Company's earnings before interest and
     taxes, as adjusted, and the average annual return on investment, during a
     three-year performance period consisting of the current year and the
     succeeding two years, subject to achieving certain specified minimum
     performance objectives for the three-year period, and are calculated as a
     percentage of a participant's annual base salary as of the beginning of a
     three-year performance period. The range of payment of the bonus award is
     from zero to fifty percent of the participating executive's annual base
     salary at the beginning of a performance period. The 

                                     A-12

 
     threshold amount is the amount that would be paid for meeting the minimum
     level of performance for which an award would be payable under the plan.
     Since a target award is not applicable, the target amount is representative
     of the amount which would be paid on the payout date based on the previous
     fiscal year's performance results.


THE ECKERD CORPORATION PENSION PLAN

  The Eckerd Corporation Pension Plan (the "Pension Plan") is qualified under
the Code and is non-contributory. Employees who retire or terminate as vested
participants are entitled to receive retirement benefits under a final average
compensation formula. To the extent benefits cannot be provided under the
Pension Plan due to the limitations imposed by Sections 415 and 401(a)(17) of
the Code, such benefits will be provided for Messrs. Turley, Newman, Santo and
Wright under The Eckerd Corporation Executive Excess Plan (the "Excess Plan")
which is not qualified under the Code. Mr. Flynn did not participate in the
Excess Plan until January 1996.

  The following table sets out the estimated Minimum Annual Retirement Benefits
payable at age 65 for the noted levels of final average annual compensation and
years of service:

                               PENSION PLAN TABLE


FINAL AVERAGE              CREDITED YEARS OF SERVICE(1)
                           ----------------------------
 COMPENSATION    15 YEARS  20 YEARS  25 YEARS  30 YEARS  35 YEARS
 ------------    --------  --------  --------  --------  --------
$ 250,000......  $ 59,250  $ 79,000  $ 98,750  $ 98,750  $ 98,750
  350,000......    82,950   110,600   138,250   138,250   138,250
  450,000......   106,640   142,200   177,750   177,750   177,750
  550,000......   130,350   173,800   217,250   217,250   217,250
  650,000......   154,050   205,400   256,750   256,750   256,750
  750,000......   177,750   237,000   296,250   296,250   296,250
  850,000......   201,450   268,600   335,750   335,750   335,750
  950,000......   225,150   300,200   375,250   375,250   375,250
1,050,000......   248,850   331,800   414,750   414,750   414,750
1,150,000......   272,550   363,400   454,250   454,250   454,250
1,250,000......   296,250   395,000   493,750   493,750   493,750
1,350,000......   319,950   426,600   533,250   533,250   533,250
1,450,000......   343,650   458,200   572,750   572,750   572,750

- ----------

(1)  The Pension Plan provides for a Minimum Annual Retirement Benefit at age 65
     after 25 years of service equal to 24% of final average compensation plus
     15.5% of final average compensation in excess of an employee's average
     Social Security maximum taxable wage base for the 35 years ending with the
     employee's Social Security normal retirement age. The Minimum Annual
     Retirement Benefit includes the income which could be provided by a monthly
     annuity for life purchased with the Profit Sharing Plan vested account
     balance. Final average compensation is the average compensation (including
     base salary, Key Management Bonus, and Executive Three-Year Bonus which are
     set forth under the headings "Salary," "Bonus," and "Long-Term Incentive
     Plan Payouts" in the Summary Compensation Table) for the highest
     consecutive five of the final ten years of employment. It also includes
     certain perquisites. The retirement benefit amounts shown are age 65 single
     life annuity amounts and are not 

                                     A-13

 
     subject to any deduction for Social Security or other offset amounts. The
     years of service and the current level of compensation recognized for
     retirement purposes (which would be used to calculate average annual
     compensation) for the named executive officers are as follows: Mr. Turley,
     29 years and $1,370,319, Mr. Newman, 2 years and $1,050,354, Mr. Santo, 19
     years and $436,583, Mr. Wright, 13 years and $432,923 and Mr. Flynn, 1 year
     and $318,807. The final average compensation for retirement purposes for
     the relevant five year period is as follows: Mr. Turley $1,061,041, Mr.
     Santo, $307,929 and Mr. Wright, $299,967. Because Mr. Newman and Mr. Flynn
     have not completed 5 years of service with the Company and therefore do not
     yet have a vested benefit, there are no relevant final average compensation
     calculations for them.

THE EXECUTIVE SUPPLEMENTAL BENEFIT PLAN

  The Executive Supplemental Benefit Plan (the "ESBP") is a non-qualified, non-
contributory plan that provides for supplemental retirement and death benefits
for the executive officers, including the named executive officers, and other
key management employees of the Company.

  The following table sets out the estimated annual benefits payable at age 65
for the noted levels of mid-point salaries:

 
  COVERED SALARY(1)                   ANNUAL BENEFIT PAYABLE(2)
  -----------------                   -------------------------
    $ 100,000                                 $ 25,000        
      200,000                                   50,000        
      300,000                                   75,000        
      400,000                                  100,000        
      500,000                                  125,000        
      600,000                                  150,000        
      700,000                                  175,000         

- ----------

(1)  Under the ESBP, the Company is obligated to pay a participant commencing at
     age 65 an annual amount equal to 25% of the participant's covered salary in
     equal monthly installments for 15 years. The covered salary is the mid-
     point of a salary range for a particular executive position that is
     calculated by the Company. It does not relate to the figures provided in
     the Summary Compensation Table. The covered salaries for 1995 recognized
     for retirement purposes for the named executive officers are as follows:
     Mr. Turley, $615,200, Mr. Newman, $508,800, Mr. Santo, $261,200, Mr.
     Wright, $287,300 and Mr. Flynn, $287,300. As of 1995, the years of service
     recognized for retirement purposes with respect to the ESBP were the same
     as those provided with respect to the Pension Plan. The ESBP also provides
     that, in the event of the death of a participant prior to retirement, the
     participant's beneficiary is entitled to receive either (a) a lump sum
     payment equal to four times the participant's covered salary, or (b) an
     amount equal to 90% of the participant's covered salary for the first year
     after death plus 45% of the covered salary annually for the next nine
     years.

(2)  Assumes the sum of the participant's age and the number of years of service
     (which cannot be less than 5) is at least 70. If less than 70, benefits are
     prorated pursuant to a formula.

EMPLOYMENT AGREEMENTS

  Mr. Turley entered in an employment and consulting agreement with the Company
which became effective on February 4, 1996. The agreement provides for Mr.
Turley to serve as the Company's Chairman 

                                     A-14

 
of the Board until January 31, 1998 and then to serve as a consultant to the
Company until February 3, 2001. The agreement provides for an annual base salary
of $650,000 for his services as Chairman, an annual consulting fee of $325,000
for his services as a consultant, and that Mr. Turley will continue to
participate in the Company's Executive Three Year Bonus Plan while serving as
Chairman. The agreement provides that (i) upon Mr. Turley's death or disability
during the term of the agreement, the Company will pay Mr. Turley or his estate
a lump sum payment in the amount of the base salary or consulting fee or both,
as the case may be, that would have been payable to him during the remainder of
the term (the "Termination Payment"), (ii) upon an involuntary termination other
than for cause, the Company will pay the Termination Payment plus, if the
termination occurs while he is serving as the Chairman of the Company, a pro
rata portion of any bonus compensation payable to him under the Executive Three
Year Bonus Plan and the Company will continue certain insurance and medical
benefits for a period of 18 months, and (iii) upon the termination of Mr.
Turley's agreement by the Company or by Mr. Turley for Good Reason (as defined
in the agreement) within two years after a Change in Control (as defined in the
agreement), the Company will pay him the Termination Payment plus all accrued
but unpaid bonus compensation, and all previously granted incentive awards will
become vested and, if the termination occurs during his service as Chairman, the
Company will pay him an additional payment equal to two times his annual base
salary and will continue certain insurance and medical benefits for a period of
two years.

  The Company entered into an employment agreement with Mr. Newman that became
effective on February 4, 1996 that provides for an initial base salary of
$575,000. The agreement is for an initial term of one year and is thereafter
automatically renewed on a year-to-year basis, unless terminated by the Company
or Mr. Newman. The agreement provides that upon involuntary termination of
employment (except for cause) the Company will pay Mr. Newman a severance
payment in an amount equal to two times his then current annual base salary in
monthly installments plus a pro rata portion of certain bonus compensation
payable under certain bonus plans, and subject to certain limitations, the
Company will continue certain insurance and medical benefits. The severance
payments and benefits are payable for two years. The agreement provides that
upon the termination of employment by the Company or by Mr. Newman for Good
Reason (as defined in the agreement) within two years after a Change in Control
(as defined in the agreement), the Company will (a) pay Mr. Newman a lump sum
severance payment in an amount equal to 2.9 times his base salary, plus a pro
rata portion of his applicable bonus compensation, (b) continue certain
insurance and medical benefits for a period of two years, and (c) immediately
vest all previously granted incentive awards.

  The Company entered into employment agreements with Messrs. Santo, Wright and
Flynn that became effective on February 4, 1996 that provide for initial base
annual salaries of $241,000, $265,000, and $309,000, respectively, and for
bonuses pursuant to bonus plans that the Company allows them to participate in
from time to time. Each employment agreement is for an initial term of one year
and is thereafter automatically renewed on a year-to-year basis, unless
terminated by the Company or the employee. Each of the three employment
agreements provides (i) upon an involuntary termination other than for cause,
the Company will continue to pay their base annual salaries in monthly
installments for a period of two years with respect to Messrs. Santo and Wright
and for a period of one year with respect to Mr. Flynn, and will also pay them a
pro rata portion of such employees' applicable bonus compensation and that the
Company will continue certain insurance and medical benefits for a period of two
years with respect to Mr. Santo and Wright and one year with respect to Mr.
Flynn, (ii) upon the termination of employment by the Company or by the
employees for Good Reason (as defined in the agreements) within two years after
a Change in Control (as defined in the agreements), the Company will (a) pay the
employees a lump sum severance payment in an amount equal to 2.9 times the
employees' base salary, plus a pro rata portion of such employees' applicable
bonus compensation, (b) continue certain insurance and medical benefits for a
period of two years, and (c) immediately vest all of them previously granted
incentive awards.

                                     A-15

 
  In the event any payment by the Company to Messrs. Turley, Newman, Santo,
Wright or Flynn upon a Change in Control is determined to be subject to the
excise tax imposed by Section 4999 of the Code, the Company is required to pay
them an amount on an after-tax basis equal to the excise tax imposed.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

  The Company's Executive Compensation and Stock Option Committee consists of
Lewis W. Lehr, Donald F. Dunn and Albert J. Fitzgibbons, III. Mr. Fitzgibbons is
a member of the Board of Directors of Merrill Lynch Capital Partners and, until
July 1994, was a Managing Director of ML & Co. Both Merrill Lynch Capital
Partners and ML & Co. are affiliated with the Merrill Lynch Investors. The
Merrill Lynch Investors held 38.33% of the Company's Common Stock as of March
31, 1995 and 5.78% of the Company's Common Stock as of March 29, 1996. 

  Merrill Lynch Capital Partners, a Delaware corporation and an affiliate of ML
& Co., initiates and structures transactions commonly referred to as leveraged
or management buyouts involving publicly owned companies, privately owned
companies and subsidiaries and divisions of both publicly and privately owned
companies, and manages a fund of equity capital committed by institutional
investors for investment in the equity portion of leveraged buyout transactions.

  Merrill Lynch Capital Partners or its affiliates is the direct or indirect
managing partner of Merrill Lynch Capital Appreciation Partnership No. II, L.P.,
ML Offshore LBO Partnership No. II, ML Employees LBO Partnership No. I, L.P.,
Merrill Lynch KECALP L.P. 1986, Merrill Lynch Capital Appreciation Partnership
No. B-IX, L.P., ML Offshore LBO Partnership No. B-IX, MLCP Associates L.P. No.
II, Merrill Lynch KECALP L.P. 1989, Merchant Banking L.P. No. IV, ML Oklahoma
Venture Partners, Limited Partnership and ML Venture Partners II, L.P., which
are, or during fiscal 1995 were, stockholders of the Company. Merrill Lynch
Capital Corporation and ML IBK Positions, Inc., affiliates of Merrill Lynch
Capital Partners, are also a stockholders of the Company.

  In January 1987, the Company entered into a sale and leaseback agreement
involving 72 Eckerd Drug stores, in a transaction arranged by and including
certain affiliates of ML & Co. Pursuant to this agreement, the Company sold 72
Eckerd Drug stores for $48.1 million and is obligated to lease them back for a
minimum term of ten years. The Company paid a fee equal to 1 1/2% of the sales
price, or approximately $721,500, to an affiliate of ML & Co. for arranging the
transaction. Lease payments by the Company, payable semi-annually, are
approximately $5.9 million per annum. An affiliate of ML & Co. was paid a
management fee of approximately $74,000 in 1995 out of such lease payments. The
Company believes that the terms of this agreement were no less favorable to the
Company than could have been obtained from unaffiliated third parties.

  In April 1989, the Company entered into a Master Lease (the "Master Lease")
with a third-party lessor ("Lessor") established by an affiliate of ML & Co.
Under the Master Lease the Lessor finances the purchase of sites for development
as Eckerd Drug stores and finances the construction of the buildings and the
acquisition of equipment. The selection of sites and construction of
improvements was undertaken by the Company acting as the Lessor's agent pursuant
to a construction agency agreement (the "Agreement for Lease"). Under the
Agreement for Lease, the Company constructed the improvements and leased the
properties from the Lessor pursuant to the Master Lease. As of February 3, 1996,
there were 12 stores leased under the Master Lease with a total acquisition and
construction cost of approximately $18.4 million. The Company pays a structure
fee to the ML & Co. affiliate equal to 1% of the cost of the land, building and
equipment leased under the Master Lease plus an administration fee. The Company
paid the ML & Co. affiliate fees totaling approximately $43,000 for the year
ended February 3, 1996. The Company believes that the terms of this 

                                     A-16

 
arrangement were no less favorable to the Company than could have been obtained
from unaffiliated third parties.

  On July 27, 1995, the Company completed the sale of 12,351,000 shares of the
Company's Common Stock (the "August Offering"). Of the shares sold in the August
Offering, 5,350,000 shares were sold by the Company and 7,001,000 shares were
sold by the Merrill Lynch Investors. The Company and the Merrill Lynch Investors
paid ML & Co. approximately $3.0 million in underwriting commissions and related
fees in connection with the August Offering.

  On December 7, 1995, the Company completed the sale of 12,000,000 shares of
the Company's Common Stock (the "December Offering"), all of which were sold by
the Merrill Lynch Investors. The Merrill Lynch Investors paid ML & Co.
approximately $5.0 million in underwriting commissions and related fees in
connection with the December Offering.

  The Company paid the expenses of the August Offering and the December Offering
and the Company and the Merrill Lynch Investors also agreed to indemnify ML &
Co., as one of the Underwriters, against certain civil liabilities, including
liabilities under the Securities Act of 1933, as amended.

             REPORT OF THE EXECUTIVE COMPENSATION AND STOCK OPTION
                      COMMITTEE ON EXECUTIVE COMPENSATION

  The Executive Compensation and Stock Option Committee of the Board of
Directors (the "Committee"), composed of three non-management directors of the
Board of Directors of the Company, reviews the performance of the Company's
executive personnel and develops and makes recommendations to the Board with
respect to executive compensation policies. The Committee reviews, approves and
submits to the Board for its acceptance the financial targets for the executive
compensation program, long term incentive plans, incentive objectives for
management for the upcoming fiscal year and salary increases for executives.

  The objectives of the Committee are to support the achievement of desired
Company performance, to provide compensation and benefits that will attract and
retain superior talent and reward performance, and to make a portion of
compensation relate specifically to the outcome of corporate performance.

  The Committee has access to independent compensation data and is authorized,
if determined appropriate in any particular case, to engage outside compensation
consultants. The Committee engaged a compensation consultant during 1994 to
review the Company's executive compensation program and made certain previously
disclosed changes to the Company's executive compensation program based on the
consultant's recommendations.

  The executive compensation program is generally comprised of base salary,
performance bonuses in the form of the Key Management Bonus Plan, and long term
incentives in the form of stock options and the Company's Executive Three Year
Bonus Plan. The compensation program also includes various benefits, including a
supplemental executive retirement program, health insurance plans and programs,
and pension, profit sharing and retirement plans in which substantially all of
the Company's employees participate.

  All of the Company's 1995 compensation is anticipated to be fully deductible
under Section 162(m) of the Code ("Section 162(m)"). The following sections of
this report contain information concerning each component of the Company's
executive compensation program.

BASE SALARY

                                     A-17

 
  In determining the base salary levels for the Company's executive officers,
the Committee reviews independent compensation data which provide compensation
information with respect to companies in the same or similar business, companies
of similar size and companies with comparable locations. Based on a review of
this information, the Committee attempts to set its base salaries at competitive
levels. Because of its desire to maintain flexibility, the Committee does not
necessarily set its base salaries at a specific level relative to other
companies. In each instance, base salary takes into account the individual's
level of experience and the individual's performance on behalf of the Company.

KEY MANAGEMENT BONUS PLAN

  Executives of the Company (including the named executive officers ) as well as
certain other key employees participate in the Key Management Bonus Plan
("KMBP"). KMBP is a performance-based plan which takes into account the
Company's overall financial performance for the previous fiscal year. Generally
the plan considers the following three factors relating to Company performance
for the previous fiscal year: the Company's earnings before interest and taxes;
return on investment; and sales. In addition to these three factors, bonuses for
certain executives (other than the named executive officers) and for certain key
employees are based upon financial performance related to such officer's or
employee's geographic business area or business group.

EXECUTIVE THREE YEAR BONUS PLAN

  Bonus awards made under this plan are made annually based on the annual
average increase in the Company's earnings before interest and taxes, as
adjusted, and the average annual return on investment during a three year
performance period consisting of the current year and the succeeding two years,
subject to achieving certain specified minimum performance objectives for the
three year period, and are calculated as a percentage of a participant's annual
base salary at the beginning of a three year performance period. The range of a
bonus award is from zero to a maximum of fifty percent of the participating
executives' annual base salary at the beginning of a performance period. The
Board of Directors, upon recommendation of the Committee, determines which
executives may participate in this plan. All named executive officers
participate in this plan.

1993 AND 1995 STOCK OPTION AND INCENTIVE PLANS

  The Committee believes that employee equity ownership provides significant
additional motivation to executive officers to maximize values for the Company's
stockholders and therefore periodically recommends to the Board of Directors
grants of stock options to the Company's employees, including its executive
officers. The Company believes that granting stock options provides a long term
incentive to such persons to contribute to the growth of the Company and
establishes a direct link between compensation and stockholder return, measured
by the same index used by stockholders to measure Company performance. As of
March 31, 1996, approximately 360 individuals had been granted stock options
under the Company's two option plans since the inception of the plans.

  The plans provide that a total of 7,333,334 shares (3,333,334 shares under the
1993 plan and 4,000,000 shares under the 1995 plan) of common stock were
reserved for issuance under the plans. Awards are available under these plans in
the form of stock options, stock appreciation rights, limited stock appreciation
rights, and restricted stock. The purpose of these plans is to advance the
interest of the Company and its shareholders by providing eligible employees
with an opportunity to acquire a proprietary interest in the Company, to
increase their efforts on behalf of the Company, to promote the successful
conduct of its business, and to provide them with an incentive to remain in the
Company's employment. The Committee has the exclusive discretion to 

                                     A-18

 
select the employees and the time or times at which awards will be granted, to
determine the type, size and terms of each award, to modify the terms of any
award and to determine when awards will be granted and paid.

  In general, the Committee has historically made its awards based upon
subjective factors such as relative position and responsibilities of each
recipient, and historical and expected contributions of each recipient to the
Company, and in determining the amount of an award also considers the amount and
terms of options and restricted stock already held by recipients. In 1995 the
Committee decided to consider granting stock option awards annually pursuant to
suggested option award guidelines developed by the Committee. The Committee
followed these guidelines in making option awards in 1995.

CHIEF EXECUTIVE OFFICER COMPENSATION AND COMPANY PERFORMANCE

  The Chief Executive Officer's compensation for 1995 was earned pursuant to the
executive compensation plans described in the preceding sections of this report.
He participated in both the KMBP and the Executive Three Year Bonus Plan, and
the performance factors and criteria on which his 1995 compensation was based
are thus the same as those applicable to each of those plans, as summarized in
the preceding sections. Because the KMBP and the Executive Three Year Bonus Plan
are based upon the Company's earnings before interest and taxes, annual return
on investment, and sales (KMBP only), a significant part of the Chief Executive
Officer's compensation was tied directly to the Company's performance in these
areas. The Chief Executive Officer's 1995 stock option award was made by the
Committee pursuant to the guidelines developed by the Committee.

                            Lewis W. Lehr, Chairman                  
                            Donald F. Dunn
                            Albert J. Fitzgibbons, III

                                     A-19