-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, bMb7Op7RX+2EHD2ou7LOpchoqwF5JJxwWIJahH0w/PJ6RETKEAPobkiYtNCB2DLr GMrDLpZCOuYtJyge4NmtKg== 0000950124-95-000061.txt : 19950608 0000950124-95-000061.hdr.sgml : 19950608 ACCESSION NUMBER: 0000950124-95-000061 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19941031 FILED AS OF DATE: 19950127 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PERRY DRUG STORES INC CENTRAL INDEX KEY: 0000077628 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DRUG STORES AND PROPRIETARY STORES [5912] IRS NUMBER: 380947300 STATE OF INCORPORATION: MI FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-07941 FILM NUMBER: 95503520 BUSINESS ADDRESS: STREET 1: 5400 PERRY DR STREET 2: P O BOX 436021 CITY: PONTIAC STATE: MI ZIP: 48343-6021 BUSINESS PHONE: 3133341300 MAIL ADDRESS: STREET 2: 5400 PERRY DR P O BOX 436021 CITY: PONTIAC STATE: MI ZIP: 48343-6021 10-K 1 FORM 10-K 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED OCTOBER 31, 1994 COMMISSION FILE NUMBER: 1-7941 PERRY DRUG STORES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MICHIGAN 38-0947300 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
5400 PERRY DRIVE, P.O. BOX 436021, PONTIAC, MI 48343-6021 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES WITH ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (810) 334-1300 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED COMMON STOCK, $.05 PAR VALUE NEW YORK STOCK EXCHANGE 8 1/2% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2010 NEW YORK STOCK EXCHANGE RIGHTS TO PURCHASE SHARES OF SERIES A $5.00 PREFERRED STOCK NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS: YES /X/ NO / / INDICATE BY CHECK MARK WHETHER THE DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF THE REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K: /X/ AS OF JANUARY 12, 1995, THERE WERE 12,027,382 SHARES OF THE REGISTRANT'S COMMON STOCK OUTSTANDING AND THE AGGREGATE MARKET VALUE OF SUCH COMMON STOCK HELD BY NON-AFFILIATES (BASED ON THE CLOSING PRICE ON THE NEW YORK STOCK EXCHANGE) WAS APPROXIMATELY $117,298,600. DOCUMENTS INCORPORATED BY REFERENCE: NONE - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
Item Page ---- ---- PART I 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . 4 PART II 5. Market for Registrant's Common Stock and Related Shareholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 7. Management's Discussion and Analysis of Results of Operations and Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . 9 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 PART III 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . 9 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . 17 PART IV 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Index to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
3 PART I ITEM 1. BUSINESS GENERAL Perry Drug Stores, Inc. is the largest drugstore chain in Michigan. At October 31, 1994, the Company operated 216 retail drugstores and two deep discount health and beauty aids stores in Michigan. The Company was incorporated in the State of Michigan on May 6, 1920, and is the surviving corporation of the merger in March 1980 of two Michigan corporations -- Perry Pharmacy, Inc. (formerly known as A.S. Putnam & Co. which was founded in 1920) and Perry Drug Stores, Inc. (founded in 1957). The first "Perry" drugstore was opened in 1957. The term "Company" as used herein, unless the context otherwise indicates, refers to Perry Drug Stores, Inc. and its subsidiaries. RECENT EVENTS On December 29, 1994, Lake Acquisition Corporation, a Delaware corporation (the "Purchaser"), and a wholly owned subsidiary of Rite Aid Corporation, a Delaware corporation ("Parent"), publicly offered to purchase all outstanding shares of Common Stock of the Company, together with the associated preferred stock purchase rights (the "Rights" and, together with the Common Stock, the "Shares") issued pursuant to the Rights Agreement, dated as of February 4, 1987, as amended as of June 2, 1989, and December 23, 1994, between the Company and State Street Bank & Trust Co., as successor Rights Agent (the "Rights Agreement"), at a price of $11.00 per Share (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 December 29, 1994, and the related Letter of Transmittal (which, as amended from time to time, together constitute the "Offer"). The Offer is being made pursuant to an Agreement and Plan of Merger, dated as of December 23, 1994 (the "Merger Agreement"), by and among Parent, the Purchaser and the Company. The Merger Agreement provided that, among other things, as soon as practicable after the consummation of the Offer and satisfaction or waiver of all conditions to the Merger, the Purchaser will be merged with and into the Company (the "Merger"), and the Company will continue as the surviving corporation. The Company expects that the Merger will be consummated in March 1995. In the Merger, all Shares not tendered in the Offer, other than Shares owned by Purchaser or Parent, will be converted into the right to receive $11.00 in cash. MERCHANDISING AND MARKETING Pharmacy. The primary focus of the Company's business is its pharmacy operations. For the fiscal years ended October 31, 1994, 1993 and 1992, prescription sales accounted for approximately 54.1%, 52.4% and 48.9%, respectively, of the Company's revenues. The Company offers a complete line of both brand name and generic prescription drugs. At October 31, 1994, the Company operated 27 drugstores which were open 24 hours per day, 14 of which had 24-hour pharmacy departments. As part of the marketing of its pharmacy operations, the Company has emphasized the convenience and advantages of its "PerryLink" computerized pharmacy system which electronically links all of the Company's drugstores throughout Michigan. PerryLink enables the Company's pharmacists to offer improved customer service by providing the capability to review a customer's medical information for possible allergies, drug interactions and therapeutic duplication, and to provide tax and insurance reporting information to the Company's customers. PerryLink allows each Company drugstore to have access to this customer information, thus eliminating the need to physically transfer prescription files between stores and making it possible for customers' prescriptions to be refilled at any of the Company's drugstores in the state. 1 4 General Merchandise. The Company's drugstores sell prescription and non-prescription drugs as well as a broad selection of traditional drugstore merchandise and services, including health aids and beauty care products (including cosmetics), film and photo processing, greeting cards, tobacco products, convenience foods, and alcoholic beverages. In addition to offering nationally advertised products, the Company promotes its private label products. It presently offers approximately 1,000 private label products, including a wide variety of health aids, including proprietary remedies for colds, allergies and other ailments, beauty care and cosmetic products. Private label products enable the Company to sell products comparable in quality to name brand products but at lower prices while providing the Company with relatively higher profit margins than brand name products. The percentages of revenues attributable to the Company's sale of general merchandise for the fiscal years ended October 31, 1994, 1993 and 1992 were 45.9%, 47.6% and 51.1%, respectively. Advertising. The Company promotes the sale of its merchandise principally through the use of circulars and television and radio advertising. The Company has increased the use of television and radio advertising to focus on the professionalism of its "Red Coat" pharmacists, the advantages of the PerryLink system, the convenience of its 24-hour stores, as well as film and photo processing, beauty care products and competitive prices. PURCHASING The Company purchases a substantial portion of its merchandise, other than prescription drugs, directly from manufacturers, thus allowing it to take advantage of promotional programs and volume discounts that certain manufacturers offer to retailers. The Company purchases most of its prescription drugs directly from a major wholesaler. The Company believes it has numerous alternate sources of supply for the merchandise sold in its stores. STORE OPERATIONS The Company's stores are open virtually every day of the year, generally from 12 to 13 hours a day, at times tailored to each community's needs. The Company's 24-hour stores are located at strategic sites within the Company's marketing areas. The Company's stores are generally operated on a self-service basis with personnel available for customer assistance when the nature of the merchandise sold or services rendered require such personnel. Each store is individually supervised by a management team comprised of a store manager and one or more assistant managers. At October 31, 1994, the Company operated 216 retail drugstores, all located in Michigan with approximately 61% of the stores located in the seven-county Detroit metropolitan area. In fiscal 1994, the Company opened ten, acquired thirteen and closed two drugstores and relocated two of its existing drugstores. In fiscal 1994 the Company also completed the closing or conversion of all but two of the remaining twelve A.L. Price deep discount health and beauty aids stores, which it had reacquired in fiscal 1993. As part of its continuing efforts to improve customer service and operational efficiency, all of the Company's drugstores now have computerized point-of-sale systems. In addition, all of the Company's drugstores have been equipped with computerized direct-store-delivery systems to track products which are shipped directly from suppliers to the Company's stores. The Company expects these systems will result in faster checkout procedures and price adjustments, and, over time, strengthened inventory and cost controls. COMPETITION The drugstore business is highly competitive. The Company competes with local and national drugstores, hospital and mail order pharmacies and independent drugstores. Many items sold by the Company are also carried by mass merchandisers (including deep discount stores), supermarkets and department stores. Many of the businesses 2 5 with which the Company competes are larger or may have greater financial resources than the Company. The Company's strategy is to offer customer service, convenient locations, a broad merchandising mix and competitive prices. The Company's business is seasonal in nature. Traditionally, a higher proportion of net sales and net income is generated in the Company's first quarter. TRADE NAMES, TRADEMARKS AND LICENSES The Company has established rights to a number of trade names and trademarks and believes they are important to the conduct of its operations in the areas in which they are located. The Company has licenses relating to its pharmacy operations and the sale of alcoholic beverages as well as other general business licenses. The Company does not consider any single license to be materially important to the conduct of its business. EMPLOYEES The Company employs approximately 5,600 persons, approximately 55% of whom are part-time employees (working less than 32 hours per week). The Company considers its employee relations to be satisfactory. ITEM 2. PROPERTIES The Company's drugstores are located either in strip centers or are free-standing, with an average drugstore size of approximately 10,500 square feet. Generally, the Company's stores range in size from 5,000 to 14,000 square feet. All but one of the Company's drugstores are leased. The Company does not consider any single store lease to be material. The equipment, furniture, fixtures and signs in the stores are generally owned by the Company and are considered by the Company to be well maintained and in good operating condition. In selecting new sites for its stores, the Company considers various criteria, including demographic information, the availability and cost of real estate, retail competition and existing general market conditions. The Company believes that it has the opportunity to grow within Michigan by increasing its existing sales, opening new stores and acquiring existing independent drugstores. The Company's drugstores are serviced by the Company's 370,000 square foot distribution center located near Pontiac, Michigan in Waterford Township. Store orders are processed by computer and assembled at the distribution center for delivery to stores. Management considers the facility to be adequate for the Company's present needs as well as its need for the foreseeable future. The Company's executive offices include its 30,000 square foot corporate headquarters, which is adjacent to the distribution center, and an additional building, which is owned in fee, contains 53,000 square feet of office space, and is located next to the Company's corporate headquarters and distribution center. The corporate headquarters and distribution center are leased from Waterford Township, Michigan under a capitalized lease and were financed with an industrial revenue bond issue. The lease expires in 2009, at which time the Company has the option to purchase the combined distribution and headquarters facility for $100. ITEM 3. LEGAL PROCEEDINGS In fiscal 1994 the Company agreed to a proposed settlement of two lawsuits filed in 1993 by shareholders purporting to be class actions seeking damages for alleged violations of federal securities laws. Subject to court approval, which is expected in February 1995 after a hearing on the proposed settlement, the Company has agreed to pay $2.2 million, of which $925,000 and a portion of the attorneys fees will be covered by insurance. Although the Company believes it did not violate any laws, it feels that the settlement of this litigation is in the best interests of the Company in order to avoid the time and expense of protracted litigation. As a result of this settlement, the Company recorded a pretax charge of $1.5 million ($1.1 million after tax, or $0.09 per share) during fiscal 1994. 3 6 In fiscal 1994, the Company reached a settlement with a major third party provider relating to the interpretation of an existing reimbursement contract. As previously reported, this provider had initiated a review of the billing practices of numerous Michigan retail pharmacy participants, including the Company, in late 1993. The Company has agreed to pay the third party $5.5 million plus imputed interest by May 1, 1995. As a result of this settlement, during fiscal 1994, the Company recorded a pretax charge of $860,000 ($600,000 after tax, or $0.05 per share), net of established reserves. This charge, and the charge taken with respect to the settlement of litigation described above, are both included in warehouse, store operating and administrative expenses in the Company's Consolidated Statement of Operations. The Company is also involved in various routine legal proceedings and claims incidental to the normal conduct of its business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS The Company's Common Stock is traded on the New York Stock Exchange under the symbol PDS. As of January 12, 1995, there were 3,195 record holders of the Company's Common Stock according to the records maintained by the Company's stock transfer agent. The price range of the Company's Common Stock during the last two fiscal years ended October 31 is shown in the table below.
Fiscal Quarter Ended High Low -------------------- ---- --- 1993 January 31 $ 9-5/8 $7-7/8 April 30 8-3/4 7-3/8 July 31 7-3/4 6-7/8 October 31 7-3/8 5-3/8 1994 January 31 $ 6-5/8 $5-7/8 April 30 6-5/8 5-3/8 July 31 6 5 October 31 7-1/2 5-5/8 1995 January 31 (through January 25) $ 11 $6-3/4
The Company does not pay cash dividends. The agreements pertaining to the Company's long-term indebtedness contain covenants which restrict the Company's ability to pay dividends on its Common Stock. See Note 6 of Notes to Consolidated Financial Statements. In the event that the Merger with Rite Aid is not completed, the Company's ability to pay cash dividends in the future will depend upon its future earnings, results of operations, capital requirements, financial condition, and such other factors as the Company's Board of Directors deems relevant. 4 7 ITEM 6. SELECTED FINANCIAL DATA. PERRY DRUG STORES, INC. FIVE-YEAR FINANCIAL SUMMARY
Fiscal Years Ended October 31 ------------------------------------------------------------------------------------ 1994 1993 1992 1991 1990 (In Thousands Except Per Share and Certain Statistical Data) ................................................................................................................................ Earnings Summary: Net Sales $737,070 $698,432 $674,431 $640,821 $633,207 Earnings (Loss) From Continuing Operations Before Income Taxes 8,396 (5,764) (8,906) 6,884 2,856 Percent of Total Sales 1.1% (0.8)% (1.3)% 1.1% 0.5% Extraordinary Item (1,295) -- -- -- -- Earnings (Loss) From Discontinued Operations -- -- -- (2,987) (2,261) Change In Accounting For Inventory (Net of Tax) -- -- -- -- (6,800) Net Earnings (Loss) 4,781 (4,223) (5,972) 3,097 (6,205) Percent of Total Sales 0.6% (0.6)% (0.9)% 0.5% (1.0)% Earnings (Loss) Per Share Primary -- Continuing Operations 0.51 (0.35) (0.54) 0.59 0.28 Earnings (Loss) Per Share Primary 0.40 (0.35) (0.54) 0.30 (0.61) Earnings (Loss) Per Share (FIFO) Primary 0.43 (0.38) (0.51) 0.11 (0.46) Dividends Paid Per Share -- -- -- -- -- Average Shares Outstanding 12,028 12,027 11,149 10,227 10,231 ................................................................................................................................ Financial Summary: Assets: Current Assets-Continuing Operations $161,577 $146,060 $157,726 $161,302 $155,007 Property and Equipment-Net 56,543 60,047 58,485 61,302 65,363 Intangible and Other Assets-Net 27,638 33,347 40,011 37,537 31,312 Net Assets of Discontinued Operations -- -- -- -- 8,456 Total Assets $245,758 $239,454 $256,222 $260,141 $260,138 Liabilities and Shareholders' Equity: Current Liabilities $ 96,059 $ 95,506 $ 93,488 $ 89,262 $113,895 Long-Term Debt and Obligations Under Capital Leases 93,510 92,794 107,564 121,905 101,432 Deferred Taxes -- -- -- 465 332 Shareholders' Equity 56,189 51,154 55,170 48,509 44,479 Total Liabilities and Shareholders' Equity $245,758 $239,454 $256,222 $260,141 $260,138 Working Capital $ 65,518 $ 50,554 $ 64,238 $ 72,040 $ 41,112 ................................................................................................................................ Financial Ratios: Return on Average Shareholders' Equity 8.9% N/A N/A 6.7% N/A Return on Average Total Assets 2.0% N/A N/A 1.2% N/A Shareholders' Equity Per Share $ 4.67 $ 4.25 $ 4.59 $ 4.71 $ 4.36 Percent of Capitalization: Shareholders' Equity 37.5% 33.6% 32.6% 27.8% 30.0% Long-Term Debt and Obligations Under Capital Leases 62.5% 66.4% 67.4% 72.2% 70.0% Interest Coverage Ratio 2.0 0.3 0.1 1.5 1.2 Current Ratio 1.7 1.5 1.7 1.8 1.4 ................................................................................................................................ Growth Statistics: Prescription Sales (In Thousands) $398,911 $365,659 $329,971 $279,695 $228,802 Number of Retail Drugstores 218 212 205 212 228 Store Selling Space-(Sq. Ft.) (in thousands) 1,802 1,792 1,692 1,758 2,041 Average Drugstore Sales Per Square Foot $ 393 $ 378 $ 378 $ 336 $ 306 ------------------------------------------------------------------------------------
Financial information for the years ended October 31, 1993 and 1992 has been restated to allocate the previously reported fourth quarter 1993 inventory charge over the periods believed to be affected, as described in Note 2 to Consolidated Financial Statements. Net earnings and earnings per share primary were increased in 1993 due to the restatement by $14,286, or $1.19 per share, and decreased in 1992 due to the restatement by $14,286, or $1.29 per share. In an attempt to better match costs and revenues, the Company uses the LIFO method of accounting for a major portion of its inventories. Earnings data using the FIFO method of inventory valuation are presented as supplementary information to enable some comparison to companies using the FIFO method. FIFO earnings are computed adding the tax affected LIFO provision (benefit) for the year to the LIFO earnings (loss) for the year. On June 27, 1991, the Company completed the divestiture of the Health Care Division for $16 million. The financial information presented above for the periods ending October 31, 1990 and 1991 have been restated to reclassify the results of this discontinued operation. On January 22, 1988, the Company entered into an agreement to sell the Auto Parts Division to an affiliate of Northern Pacific Corporation for a cash price of $51 million, subject to closing adjustments. The proceeds from the sale were received on February 29, 1988. The financial information presented above for the periods ending October 31, 1990 and 1991 have been restated to reclassify the results of this discontinued operation. Fully diluted earnings (loss) per share have not been presented because it would be anti-dilutive or immaterial. Certain reclassifications have been made to prior years' financial statements to conform to the 1994 presentation. 5 8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS: FISCAL 1994 COMPARED TO FISCAL 1993 Net sales in fiscal 1994 were $737.1 million, a 5.5% increase over fiscal 1993 net sales of $698.4 million. The Company's deep discount health and beauty aids stores, reacquired in June 1993, contributed $13.8 million and $8.2 million of net sales in fiscal 1994 and 1993, respectively. The operations of these deep discount health and beauty aids stores were discontinued subsequent to year end. Comparable drugstore sales (those with at least one year of volume comparisons) increased 2.7%. This net sales increase was due to an increase in prescription sales, partially offset by a decline in general merchandise sales. Prescription sales for fiscal 1994 increased 9.1% to $398.9 million, and were 54.1% of net sales as compared to 52.4% in fiscal 1993. The prescription sales increase was primarily due to a 4.1% increase in the number of prescriptions filled by the Company from 14.5 million in 1993 to 15.1 million in 1994, combined with an increase in product cost. The Company expects prescription sales growth to continue given the aging of the nation's population, continued emphasis on preventative care, the development of new drugs and drug therapies and continued pursuit of new customer segments including third party provider arrangements. During fiscal 1994, third party prescription sales represented approximately 78% of total prescription sales, as compared with 75% in fiscal 1993. The Company expects this level of third party activity to continue to increase. An increase in the level of third party prescription sales may contribute to a decline in profit margins, as profit margins on third party prescription sales are typically lower than those on non-third party prescription sales. Comparable drugstore nonprescription sales are down slightly between years, a result of economic conditions and competitive factors. Competitive factors continue to be addressed through marketing programs and continued emphasis on customer care. Cost of goods sold in fiscal 1994 decreased 0.9% as a percentage of net sales to 74.1% compared to 75.0% in fiscal 1993. Profit margins were impacted by many variables including sales mix, promotional activity and inflation. Prescription margins improved slightly and were coupled with a second consecutive year of increased general merchandise margins. The slight improvement in prescription margins is attributed to continued focus on offering generic drug equivalents when allowed and elimination of certain promotional practices. The continued rise in general merchandise margins is a result of what management believes to be an improvement in promotional mix and fewer markdowns of seasonal overstock and discontinued merchandise. The Company anticipates prescription margin pressures to continue while it expects to be able to better control general merchandise margins with new merchandising systems currently being implemented. For a portion of its inventory, the Company uses the last-in, first-out (LIFO) method of inventory valuation which states cost of goods sold at more recent costs. During fiscal 1994, prescription inflation rates were moderate while general product inflation rates were minimal resulting in a LIFO charge to cost of good's sold of $467,000 compared to a charge of $169,000 in fiscal 1993. In 1993 however, liquidation of certain LIFO inventory quantities carried at lower costs prevailing in prior years had the effect of reducing the LIFO charge by $635,000. As a result, the net credit to cost of goods sold was $466,000 in fiscal 1993. During the fiscal 1994 third quarter, the Company recorded a pretax charge of $1.5 million ($1.1 million after tax), or $0.09 per share, relating to the proposed settlement of litigation described in Note 7 of Notes to Consolidated Financial Statements. Also, in the fiscal 1994 third quarter, the Company recorded an extraordinary charge of $1.9 million pretax ($1.3 million after tax) or $0.11 per share which primarily reflects the net earnings effect of early retirement of the Company's former bank debt and 10% senior notes, which were replaced at the end of July with a new three year, $65 million revolving credit agreement, as described in Note 6 of Notes to Consolidated Financial Statements. During the fiscal 1994 second quarter the Company recorded a pretax charge of $860,000 ($600,000 after tax), or $0.05 per share. This charge reflects the net earnings effect, after reserves, of the settlement with a major third party provider relating to the interpretation of an existing reimbursement contract. As previously reported, this provider had initiated a review of billing practices of numerous Michigan retail pharmacy participants, including the 6 9 Company, in late 1993. The Company agreed to pay the third party provider $5.5 million plus imputed interest on May 1, 1995. During the fiscal 1993 first quarter, a $3.5 million pretax ($2.4 million after tax, or $0.20 per share), noncash charge was recorded to cover the remaining payments due from the 1991 divestiture of the Company's Chicago area stores. Warehouse, store operating and administrative expenses in fiscal 1994 were 23.7% of net sales, down from 24.1% in fiscal 1993. This decrease was primarily due to a larger than usual reserve provided in fiscal 1993 for uncollectible accounts relating to receivables remaining from the previous divestiture of the Company's home health care business. Interest expense in fiscal 1994 decreased by 2.4% to $8.3 million. The decrease was a product of the benefits of lower overall average borrowings being mostly offset by a rise in interest rates. The rise in interest rates was attributable to a rise in the prime borrowing rate as well as higher contractual rates being paid by the Company under its operable credit arrangements during fiscal 1994. Overall borrowings (notes payable and long-term debt, including current portions) were reduced by $9.6 million during fiscal 1994. This debt reduction was funded by operations. The effective income tax rates in fiscal 1994 and fiscal 1993 were 27.6% and (26.7%), respectively. Due to the losses in fiscal 1993 and 1992, the Company had recorded net tax benefits of approximately $10.1 million in 1993 consisting of refundable taxes and anticipated future tax benefits. The Company had provided a valuation allowance of approximately one third of the gross tax assets recorded. During fiscal 1994, the Company realized most of these tax benefits by collecting its refundable amounts and by utilizing a majority of its net operation tax loss carryforwards. Considering the carryforward periods remaining on unutilized net operating loss carryforwards as well as operating performance of the Company, the remaining valuation allowance on these tax assets was eliminated in 1994. The Company has fully reserved for the remaining capital loss carry forwards and maintains a reserve on certain other tax assets. There currently remains approximately $5.0 million in net tax benefits recorded. The Company intends to continue to evaluate the realizability of its deferred tax assets through evaluation of the adequacy of the established valuation allowance in relation to actual operating performance, executed or proposed tax strategies and other changes in facts or circumstances. See Note 8 of Notes to Consolidated Financial Statements for additional explanation. During fiscal 1994, primarily as a result of increased sales and improved profit margins being only partially offset by the second and third quarter charges described above, the Company's net earnings were $4.8 million as compared to a net operating loss of $4.2 million in fiscal 1993. Subsequent to year end, the Company entered into an agreement with Rite Aid Corporation pursuant to which Rite Aid Corporation would purchase all the outstanding shares of common stock of the Company for $11.00 per share, or approximately $132 million in cash. See Notes 11, 12 and 14 of Notes to Consolidated Financial Statements for additional explanation. RESULTS OF OPERATIONS: FISCAL 1993 COMPARED TO FISCAL 1992 Net sales in fiscal 1993 were $698.4 million, a 3.6% increase over fiscal 1992 net sales of $674.4 million. Overall, comparable drugstore sales (those with at least one year of volume comparisons) increased 2.1%. This net sales increase was due to an increase in prescription sales, offset by a decline in general merchandise sales. Prescription sales for fiscal 1993 increased 10.8% to $365.7 million, and were 52.4% of net sales as compared to 48.9% in fiscal 1992. The prescription sales increase was due to a 3.5% increase in the number of prescriptions filled by the Company from 14.0 million in 1992 to 14.5 million in 1993, combined with an increase in product cost. During fiscal 1993, third party prescription sales represented approximately 75% of total prescription sales, as compared with 73% in fiscal 1992. Comparable drugstore nonprescription sales were down slightly between years, a result of economic conditions and competitive factors. 7 10 Cost of goods sold in fiscal 1993 decreased 1.3% as a percentage of net sales to 75.0% compared to 76.3% in fiscal 1992. Profit margins were impacted by many variables including sales mix, promotional activity and inflation. Prescription margins were lower and continued to be impacted by third party provider pressures and increasing pharmaceutical product costs. General merchandise margins were higher than the prior year. The Company attributes this increase to a reduction in promotional activity, improved purchasing control resulting in fewer markdowns of seasonal overstock and discontinued merchandise and enhanced pricing integrity and shrinkage controls attributable to the completion of the installation of point-of-sale, direct store delivery and electronic article surveillance systems during fiscal 1993. For a portion of its inventory, the Company uses the last-in, first-out (LIFO) method of inventory valuation which states cost of goods sold at most recent costs. During fiscal 1993, prescription inflation rates decreased resulting in a LIFO charge to cost of goods sold of $169,000 compared to a charge of $879,000 in fiscal 1992. In each year however, liquidation of certain LIFO inventory quantities carried at lower costs prevailing in prior years had the effect of reducing the LIFO charge by $635,000 and $492,000, respectively. As a result, the net charge (credit) to cost of goods sold was ($466,000) and $387,000 in fiscal 1993 and 1992, respectively. Warehouse, store operating and administrative expenses in fiscal 1993 were 24.1% of net sales, up from 23.5% in fiscal 1992. This increase was primarily attributable to increased lease costs for point of sale, direct store delivery and electronic article surveillance systems installed during 1993 and an increase in the reserve for uncollectible accounts relating to receivables remaining from the late 1990 divestiture of the Company's home health care business. Interest expense in fiscal 1993 decreased by 18.7% to $8.5 million. The decrease was due to lower average short term borrowings, a decrease in the average interest rate and a decrease in long-term borrowings. Long-term debt (including current portions) was reduced by $12.7 million during fiscal 1993. This debt reduction was funded by operations. During the first quarter of fiscal 1993, a $3.5 million pretax ($2.4 million after tax) noncash charge was recorded to cover the remaining payments due from the 1991 divestiture of the Company's Chicago area stores. The effective income tax rates in fiscal 1993 and fiscal 1992 were (26.7%) and (32.9%), respectively. Due to the losses in fiscal 1993 and 1992, the Company recorded net tax benefits of approximately $10.1 million consisting of $3.6 million for refundable income taxes and $6.5 million for anticipated future income tax benefits. The Company believed that these future tax benefits, consisting primarily of tax credits and net operating loss carryforwards utilizable through the year 2008, would be fully utilized through the generation of taxable income from ordinary and recurring operations. The Company provided a valuation allowance of approximately one third of the gross tax assets recorded. See Note 8 of Notes to Consolidated Financial Statements for additional explanation. During fiscal 1993, primarily as a result of increased sales, improved profit margins and interest savings all partially offset by the first quarter charge described above, the Company's net operating loss was $4.2 million as compared to $6.0 million in fiscal 1992. LIQUIDITY AND FINANCIAL CONDITION The Company's primary sources of working capital are cash flow from operations and borrowings under its revolving credit agreement. The Company had working capital of $65.5, $50.6 and $64.2 million at October 31, 1994, 1993 and 1992, respectively. The Company's working capital will fluctuate in relation to (i) inventory levels during the course of the year, (ii) the number of new store openings, (iii) payment terms from its vendors and (iv) the dates on which periods end in relation to accounts payable payment dates. Cash provided by operating activities was $20.4 million during fiscal 1994 as compared to $23.4 provided by operating activities during fiscal 1993. The decrease was primarily attributable to an increase in third party receivables which resulted from an increase in third party prescription sales and the timing of collections in relation to month end. 8 11 In July 1994, as described in Note 6 of Notes to Consolidated Financial Statements, the Company entered into a new three year secured, revolving credit agreement which provides for borrowings up to $65 million. Borrowings outstanding under the facility were $40.8 million at October 31, 1994. Capital expenditures, including acquisitions, were approximately $8.1 million and $13.9 million during fiscal 1994 and 1993, respectively. These expenditures were primarily for new store construction, acquisitions and remodeling. During fiscal 1994 the Company opened ten new drugstores, relocated two existing stores to more attractive locations and acquired thirteen independent drugstores, ten of which were consolidated into existing stores. In addition, two under-performing drugstores and five deep discount health and beauty aids stores were closed. The Company expects to open or acquire 45 new drugstores over the next three years. Total capital expenditures are planned to be approximately $10.0 million in fiscal 1995 and are expected to be funded by operations. Net cash used for financing activities amounted to $9.8 million and $10.4 million in fiscal 1994 and 1993, respectively. These amounts consisted primarily of scheduled payments of long-term debt. As a result of net earnings during fiscal 1994 coupled with the reduction of long-term debt, the Company's percentage of long-term debt capitalization decreased to 62.5% at October 31, 1992. The Company's current ratio was 1.7 to 1.0, 1.5 to 1.0 and 1.7 to 1.0 at October 31, 1994, 1993 and 1992. The Company believes that its working capital needs, planned capital expenditures and scheduled debt reductions can be funded from operations and available credit lives. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements (together with the report thereon of Arthur Andersen LLP) under this Item are listed in Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS Thomas O. Fox, Age 65; a director since 1979; President of Accent-Lincoln-Mercury, Inc., a St. Louis, Missouri automobile dealership from 1990 to 1992. Prior to that time, he served for 15 years as Director for Community Affairs for WJBK TV-2, Detroit, Michigan. Currently, he is President of Paramount Vending and Food Services. Mr. Fox is also a registered pharmacist. Andy Giancamilli, Age 44; a director since 1993; President of the Company and Chief Operating Officer since 1993, Mr. Giancamilli also served as Executive Vice President--Operations from 1992 to 1993, Senior Vice President--Store Operations from 1991 to 1992, Vice President--Pharmacy Operations from 1990 to 1991 and Group Vice President--Drug Store Operations from 1988 to 1990. Walter J. McCarthy, Jr., Age 69; a director since 1984; Retired; former Chairman of the Board and Chief Executive Officer of The Detroit Edison Company from 1981 to 1990. Mr. McCarthy also serves as a director of The Detroit Edison Company, Comerica Bank and Federal-Mogul Corporation. 9 12 John C. Nicholls, Jr., Age 61; a director since 1988; Treasurer and Assistant Secretary of Masco Corporation, a building, home improvement, and specialty consumer products company, since 1968. Jack A. Robinson, Age 64; a director since 1971; Chairman of the Board since 1974. Mr. Robinson also served as President of the Company from 1971 to 1980 and from 1991 to 1993. By virtue of his position with the Company and his share ownership, Mr. Robinson may be deemed a "control person" of the Company. Jerome L. Schostak, Age 61; a director since 1990; Chairman of the Board and Chief Executive Officer of Schostak Brothers & Company, Inc., a commercial and industrial real estate development, management and brokerage firm, since 1970. Mr. Schostak also serves as a director of FirstFed Michigan Corporation. Jerry E. Stone, Age 63; a director since 1991; Senior Vice President and Chief Financial Officer of the Company since 1989 and its Treasurer since 1991. From 1986 to 1989, Mr. Stone served as Vice President - Manufacturing of Talon, Inc., a privately held company with manufacturing and retail interests. EXECUTIVE OFFICERS The following information is furnished with respect to each of the Company's executive officers. All of the executive officers of the Company have been elected by the Board of Directors to serve until the 1995 annual election of officers or until their successors are elected and qualified. Except for Messrs. Kuske and Szymanski, the Company's executive officers have been employed with the Company for more than five years and have held positions of similar responsibility during such period. Jack A. Robinson, 64 . . . . . . . Chairman of the Board since 1974 and Chief Executive Officer since 1971. Andy Giancamilli, 44 . . . . . . . President since 1993 and Chief Operating Officer since 1990. Robert A. Berlow, 47 . . . . . . . Executive Vice President, General Counsel and Secretary since 1994, Chief Administrative Officer since 1993, Senior Vice President, General Counsel and Secretary since 1989. Jerry Kuske, 43 . . . . . . . . . Senior Vice President-Merchandising since 1994; Prior to joining the Company, Mr. Kuske was employed from 1974 until 1993 by Payless Drug Stores, Wilsonville, Oregon, most recently as Senior Vice President Operations. Robert A. Shapiro, 56 . . . . . . Senior Vice President--Pharmacy Affairs since 1993; Vice President--Pharmacy Affairs since 1973. Gary M. Stein, 40 . . . . . . . . Senior Vice President--Real Estate since 1993; Vice President--Real Estate since 1988. Jerry E. Stone, 63 . . . . . . . . Senior Vice President and Chief Financial Officer since 1989 and Treasurer since 1991. Steven M. Szymanski, 32 . . . . . Vice President--Finance and Controller since 1992; Prior to joining the Company, Mr. Szymanski was an audit manager for Arthur Andersen & Co., an independent public accounting firm with whom he was employed from 1985 to 1992.
COMPLIANCE WITH THE SECURITIES EXCHANGE ACT The Company's executive officers and directors are required under the Exchange Act to file reports of ownership and changes in ownership with the Securities and Exchange Commission and the New York Stock Exchange. Copies of those reports must also be furnished to the Company. Based solely on a review of the copies of reports furnished to the Company and written representations that no other reports were filed, the Company believes that during the preceding year all required filings applicable to executive officers and directors were made on a timely basis. 10 13 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth information concerning compensation relating to the Chief Executive Officer and the other four most highly paid executive officers of the Company who earned more than $100,000 in salary and bonus in fiscal 1994 (the "Named Officers") for services rendered in all capacities to the Company during fiscal years ended October 31, 1994, 1993 and 1992. SUMMARY COMPENSATION TABLE
LONG TERM COMPENSA- ANNUAL COMPENSATION TION ----------------------------------- ------------ OTHER # OF ANNUAL SECURITIES ALL OTHER COMPENSA- UNDERLYING COMPENSA- FISCAL SALARY TION OPTIONS TION NAME AND PRINCIPAL OCCUPATION YEAR ($) BONUS ($) ($)(1)(2) (#)(3) ($)(1)(4) ----------------------------- ------- --------- ---------- --------- ---------- ----------- Jack A. Robinson . . . . . . . . 1994 $375,000 $ 0 $9,039 0 $65,065 Chairman and Chief 1993 374,039 0 9,460 0 65,988 Executive Officer 1992 347,115 43,750 -- 0 -- Andy Giancamilli . . . . . . . . 1994 $210,769 $ 0 $1,638 12,000 $ 8,508 President and Chief 1993 178,077 0 1,354 5,000 7,232 Operating Officer 1992 128,661 12,350 -- 40,000 -- Robert A. Berlow . . . . . . . . 1994 $189,808 $ 0 $1,140 10,000 $ 6,996 Senior Vice President, 1993 179,615 0 1,140 0 6,792 General Counsel and Secretary 1992 166,538 17,000 -- 15,000 -- Robert A. Shapiro . . . . . . . . 1994 $114,038 $ 0 $1,938 5,000 $ 7,231 Senior Vice President, 1993 99,654 0 1,938 0 6,943 Pharmacy Affairs 1992 90,678 6,825 -- 5,000 -- Jerry E. Stone . . . . . . . . . 1994 $210,000 $ 0 $4,014 5,500 $13,704 Senior Vice President 1993 209,616 00 4,149 0 13,992 and Treasurer 1992 197,115 18,000 -- 15,000 -- - --------------------
(1) In accordance with the transitional provisions applicable to the rules on executive officer compensation disclosure adopted by the Commission, information with respect to the amounts for Other Annual Compensation and All Other Compensation for the fiscal year ended October 31, 1992 has not been included. (2) Perquisites did not exceed established reporting thresholds for any of the Named Officers. The amounts shown represent the amount of reimbursement for the payment of taxes relating to certain Company-provided life insurance policies. (3) The number shown includes options granted under the Company's stock option plans. In addition, Messrs. Robinson, Giancamilli, Berlow, Shapiro and Stone hold restricted shares whose net value (calculated at the Offer Price less acquisition cost) was $250,000, $102,500, $81,250, $15,370 and $91,250, respectively, as of December 28,1994. Such restricted shares are eligible to receive dividends, if any, paid by the Company. Further information concerning these plans is set forth under the caption "Summary of Compensation Plans." (4) The amounts shown represent (a) the vested portion of the Company's annual contributions to the Company's Pension Plan, (b) contributions made by the Company pursuant to the Company's 401(k) Plan, and (c) the dollar value of certain insurance premiums for the Named Officers. The amounts contributed by the Company during fiscal 1994 for each of the Named Officers under the Pension Plan, under the Company's 401(k) Plan, and for the Named Officers' portion of life insurance premiums, respectively, were as follows: Mr. Robinson--$4,717, $0 and $19,827; Mr. Giancamilli--$4,215, $700 and $3,593; Mr. Berlow--$3,796, $700 and $2,500; Mr. Shapiro--$2,281, $700 and $4,250; and Mr. Stone--$4,200, $700 and $8,804. The Company is entitled to (i) the cash surrender value of each split-dollar life insurance policy to the extent of the Company's portion of the premium payments and will recover its portion of the premium payments on the earlier of the twentieth anniversary of each policy or the death of the insured participant and (ii) under certain circumstances, to a portion of the life insurance proceeds. The remainder of the cash surrender value offsets benefits to be received under the supplemental retirement plan. The amount shown for 1994 and 1993 with respect to Mr. Robinson also includes $40,521 paid in each year, representing the Company-paid premium for an additional life insurance policy. 11 14 OPTION GRANTS The Company has in effect employee stock option and restricted stock plans pursuant to which options and rights to purchase Common Stock of the Company are granted to officers and other key employees of the Company. The following table provides information concerning all grants to the Named Officers during fiscal 1994 and options granted on November 1, 1994:
INDIVIDUAL GRANTS(1) ------------------------------------------------------------ % OF POTENTIAL TOTAL REALIZABLE OPTIONS VALUE AT DATE OF OPTIONS GRANTED TO EXERCISE EXPIRATION OFFER NAME GRANT GRANTED EMPLOYEES PRICE DATE PRICE(2) ---------------------- -------- -------- --------- -------- ---------- ----------- Jack A. Robinson . . . . . . . 11/1/93 0 0 N/A N/A N/A 11/1/94 20,000 21.5% $7.50 10/31/99 $70,000 Andy Giancamilli . . . . . . . 11/1/93 12,000 12.3% 6.375 10/31/98 55,500 11/1/94 15,000 16.1% 7.50 10/31/99 52,500 Robert A. Berlow . . . . . . . 11/1/93 10,000 10.2% 6.375 10/31/98 46,250 11/1/94 10,000 10.8% 7.50 10/31/99 35,000 Robert A. Shapiro . . . . . . . 11/1/93 5,000 5.1% 6.375 10/31/98 23,125 11/1/94 5,000 5.4% 7.50 10/31/99 17,500 Jerry E. Stone . . . . . . . . 11/1/93 5,500 5.6% 6.375 10/31/98 25,438 11/1/94 7,500 8.1% 7.50 10/31/99 26,250 - --------------------
(1) All options are non-qualified and were granted at exercise prices equal to fair market value on the date of grant. Each option is fully exercisable on the first anniversary date of the date of grant, except that all options granted on November 1, 1994 will become exercisable upon a change in control of the Company, which would occur upon completion of the Offer. (2) Options have been valued on the basis of the difference between their respective exercise prices and the Offer Price. OPTION VALUES No options were exercised by the Named Officers during the fiscal year ending October 31, 1994. The following table provides information concerning the number and value of unexercised options held at December 28, 1994:
VALUE OF UNEXERCISED IN- SHARES UNDERLYING THE-MONEY OPTIONS (1) NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE -------------------------- ------------------------- ------------------------- Jack A. Robinson . . . . . . . . . . 0/20,000 $ 0/$70,000 Andy Giancamilli . . . . . . . . . . 47,000/15,000 152,375/ 52,500 Robert A. Berlow . . . . . . . . . . 25,000/10,000 89,375/ 35,000 Robert A. Shapiro . . . . . . . . . . 10,000/ 5,000 37,500/ 17,500 Jerry E. Stone . . . . . . . . . . . 20,500/ 7,500 68,563/ 26,250 - --------------------
(1) Represents the total gain which would be realized if all such options were cancelled pursuant to the Merger Agreement in exchange for a cash payment as provided therein. COMPENSATION OF DIRECTORS Directors who are not employed by the Company or its subsidiaries are paid an annual fee of $15,000 plus $750 for each meeting of the Board of Directors attended and $400 for each committee meeting attended. A committee chairman receives a fee of $600 for each meeting of the committee attended. In addition, directors are reimbursed for travel and other expenses relating to their attendance at Board or committee meetings. Each of the Company's independent directors automatically received annual stock option grants in 1992, 1993 and 1994, pursuant to the Company's 1987-Non-Qualified Stock Option Plan, to purchase a total of 9,000 shares of the Company's Common Stock at exercise prices equal to 100% of the fair market value of the Common Stock on the date of each respective grant. These options become exercisable one year, and expire five years, after their respective grant dates, except that all options become exercisable upon a change in control of the Company, which would occur upon completion of the Offer. 12 15 EMPLOYMENT AGREEMENT AND SEVERANCE ARRANGEMENTS The Company has entered into an employment agreement with Mr. Robinson which expires on October 31, 1997. The employment agreement provides for, among other things, (a) a minimum annual salary of $400,000, subject to annual review; (b) termination payments to Mr. Robinson if the Company terminates his employment without cause; and (c) certain death and disability benefits. In addition, Mr. Robinson together with the other Named Officers are entitled to certain severance benefits in the event of a change of control of the Company as described below. The Company has entered into severance agreements with Messrs. Giancamilli, Berlow, Shapiro and Stone. These severance agreements, which are substantially similar, and Mr. Robinson's employment agreement, provide that upon termination of employment by the Company, other than for Cause (as defined in such severance agreements) or termination of employment by such officers for Good Reason (as defined in the severance agreements) within two years following a Change in Control (as defined in the severance agreements) Messrs. Robinson, Giancamilli, Berlow and Stone will be entitled to receive a cash payment in an amount equal to three times, and Mr. Shapiro will be entitled to receive a cash payment in an amount equal to 1-1/2 times, such person's highest annual compensation from the Company during the three calendar years preceding the date of such person's termination. In addition, Messrs. Robinson, Giancamilli, Berlow and Stone will be entitled to receive a cash payment in an amount equal to three times amounts payable to them under the Company's Short Term Bonus Plan as a result of a Change in Control, described below. Each such officer other than Mr. Shapiro is also entitled to continue his participation in the Company's fringe benefit programs until the earlier of three years following his termination of employment or the commencement of comparable benefits from another employer. In addition, Mr. Robinson's severance agreement provides for a tax gross-up payment to assure that his severance benefits will not be subject to a net reduction due to the imposition of excise taxes which may be payable under the Internal Revenue Code of 1986, as amended. A Change in Control for purposes of such employment and severance agreements will be deemed to have occurred upon completion of the Offer. Thereafter, the Named Officers will be entitled to receive the benefits under their respective severance agreements, and total severance payments to those persons under such severance arrangements would be approximately $4,000,000, exclusive of Mr. Robinson's tax gross-up payment. Such severance payments are exclusive of the value attributable to such persons with respect to (a) any stock options held by them which may become exercisable and/or (b) the lapse of restrictions on any restricted stock held by them, as a result of such change in control. SUMMARY OF COMPENSATION PLANS SHORT TERM BONUS PLAN The Company's Short Term Bonus Plan ("Bonus Plan") was adopted for the purpose of rewarding executive officers and selected key executive employees of the Company and its subsidiaries who are expected to contribute materially to the operating success of the Company. The Bonus Plan covers all of the Company's current officers (24 persons). The participants, performance criteria and goals and award opportunities under the Bonus Plan are determined by the Executive Compensation Committee of the Board of Directors. The Bonus Plan provides that an award to a participant will be a percentage of the participant's base salary at the end of the fiscal year. Provided that minimum goals are achieved with respect to the performance criteria, awards are payable after the close of each fiscal year. The corporate performance for fiscal 1995 is based on the Company's earnings before interest and taxes as a percentage of revenues. The Bonus Plan also provides that upon a Change in Control of the Company (which is defined therein to include completion of the Offer), 100% of the target performance levels will be deemed to have been attained and each participant will be entitled to an award that is pro rated over the months in the fiscal year that have elapsed as of the date of the change in control. 13 16 PENSION PLAN Pursuant to its Pension Plan ("Pension Plan"), the Company contributes 2% of each eligible employee's annual compensation (including employee pre-tax contributions under the Company's benefit plans, but excluding bonuses, non-cash awards and incentive compensation) into a fund in which each employee's monetary interest is individually determined and is the basis of the benefit. The Pension Plan provides that forfeitures shall be used to reduce the Company's annual contributions to the Pension Plan. The Pension Plan generally covers all employees of the Company and its subsidiaries. Employees covered by collective bargaining agreements are not eligible to participate in the Pension Plan, but are covered under a separate defined contribution pension plan. All directors and officers of the Company who are employees are covered under the Pension Plan. Payment of an employee's entire pension account is available when the employee reaches normal retirement age or if the employee dies or becomes totally disabled while employed by the Company. Otherwise, the Company's contributions to the Pension Plan become fully vested after an employee has completed five years of service with the Company. The vested portion of an employee's pension account is payable after the employee's termination of employment for reasons other than retirement, death or disability. THRIFT INCENTIVE PLAN Under the terms of the Company's Thrift Incentive Plan ("Thrift Plan"), which was established pursuant to Section 401(k) of the Internal Revenue Code of 1986, as amended, eligible employees may contribute annually on a pre-tax basis from 2% up to 14% of their rate of annual base compensation into a fund in which each employee's monetary interest is individually determined and is the basis of the benefit. The maximum annual employee contribution, which in 1994 was $9,240, is adjusted periodically for cost of living increases. The Company matches each participating employee's contributions dollar-for-dollar up to a maximum annual matching contribution of 2% of the employee's annual compensation or $700, whichever is less. Payment of an employee's entire Thrift Plan account is available when the employee reaches normal retirement age or it the employee dies or becomes totally disabled while employed by the Company. The vested portion of an employee's Thrift Plan account is payable after the employee's termination of employment for reasons other than retirement, death or disability. The Company's annual matching contributions become fully vested after an employee has completed five years of service with the Company. Under certain circumstances, an employee may make withdrawals from the Thrift Plan while employed by the Company. The Thrift Plan generally covers all full-time employees of the Company and its subsidiaries. Employees covered by collective bargaining agreements are not eligible to participate in the Thrift Plan, but are eligible to participate in a separate Section 401(k) plan. All directors and officers of the Company who are employees are eligible to participate in the Thrift Plan. SUPPLEMENTAL RETIREMENT BENEFIT Pursuant to the Company's Top Executive Retirement Plan ("Retirement Plan"), selected key employees of the Company are provided with supplemental retirement benefits. The Retirement Plan is an unfunded, non-qualified plan and, except for certain fiduciary and reporting requirements, is not subject to the provisions of the Employee Retirement Income Security Act of 1974. Upon retirement at age 65 with at least 10 years of employment, the maximum additional retirement benefit (which is payable in monthly installments for life, beginning at age 65) will be equal to 50% of the participant's average annual cash compensation (including salary and bonuses) for the five-year period in which that average is the highest, reduced by the aggregate of the participant's other Company-provided primary retirement benefits the participant's primary social security benefits and cash withdrawal benefits under the split-dollar life insurance program. A participant who retires at age 65 with less than 10 years of employment will be paid a reduced benefit. The benefit will be actuarially increased for those participants who continue employment with the Company after age 65. Presently, Messrs. Robinson, Giancamilli, Berlow, Shapiro and Stone are participating in the Retirement Plan. Messrs. Robinson, Berlow, Shapiro and Giancamilli each have more than 16 years and Mr. Stone has five years of credited employment. A participant may request early retirement after reach age 55 if the participant has completed 15 years of employment with the Company. A participant requesting early retirement will receive a reduced benefit commencing at age 65 unless the Executive Compensation Committee authorizes such benefit to be paid prior to the participant's 14 17 65th birthday. Under certain circumstances, the surviving spouse of a participant is entitled to receive a reduced benefit pursuant to the terms of the Retirement Plan. A participant who terminates employment with the Company before reaching age 55 and completing 15 years of employment forfeits all benefits under the Retirement Plan. Periods of absence due to the participant's long-term disability are included as credited years of employment. Examples of annual benefits payable (at age 65) to participants in various average annual compensation and credited years of employment classifications pursuant to the Retirement Plan are shown in the table below.
CREDITED YEARS OF EMPLOYMENT AVERAGE ANNUAL CASH ---------------------------- COMPENSATION 5 10 OR MORE -------------------- ----------- ------------ $100,000 . . . . . . $ 25,000 $ 50,000 150,000 . . . . . . 37,500 75,000 200,000 . . . . . . 50,000 100,000 250,000 . . . . . . 62,500 125,000 300,000 . . . . . . 75,000 150,000 350,000 . . . . . . 87,500 175,000 400,000 . . . . . . 100,000 200,000
SPLIT DOLLAR LIFE INSURANCE PROGRAM Under the Company's Split Dollar Life Insurance Program ("Split Dollar Program"), all of the Named Officers, receive portable life insurance. The Split Dollar Program provides that the Company is entitled to the cash surrender value of each policy to the extent of the premiums paid by the Company and that the Company will recover such premium payments on the earlier of the twentieth anniversary of each policy or the death of the insured participant. The amount received by the Company is a general asset that may be used for general corporate purposes. The death benefit under each policy is payable to the participant's beneficiary. Premiums are paid by both the Company and the individual participant. The Split Dollar Program constitutes an employee welfare benefit plan under the provisions of the Employee Retirement Income Security Act of 1974. STOCK OPTION PLANS Pursuant to the Company's 1982 Incentive Stock Option Plan, as amended ("Incentive Plan"), which expired by its terms in 1992, the Company granted incentive and non-qualified stock options to selected key salaried employees of the Company and its subsidiaries, including directors and officers who were also employees. The Company reserved 450,000 shares of its Common Stock for issuance under the Incentive Plan. At December 28, 1994, options for 126,600 shares, at option prices ranging from $8.125 to $8.50 per share and averaging $8.20 per share, were outstanding under the Incentive Plan. Under the Company's 1987 Non-Qualified Stock Option Plan, as amended ("Non-Qualified Plan"), which expires by its terms in 1997, options to acquire shares of Common Stock of the Company may be granted to directors and selected key salaried employees, including officers, of the Company and its subsidiaries. The Company has reserved 300,000 shares of its Common Stock for issuance under the Non-Qualified Plan. At December 28, 1994, options for 214,450 shares, at option prices ranging from $5.75 to $10.00 per share and averaging $7.10 per share, were outstanding under the Non-Qualified Plan. RESTRICTED STOCK PLAN Pursuant to the Company's 1986 Restricted Stock Plan, as amended ("Restricted Plan"), which expires in 1995, rights to purchase shares of Common Stock may be granted to selected executive employees at prices and upon terms determined by the Executive Compensation Committee of the Board, provided that the purchase price of the shares may not be less than the par value ($.05 per share) of the Common Stock or greater than 100% of the fair market value of shares of the Common Stock on the date the right to purchase is granted. A person granted the right to 15 18 purchase shares under the Restricted Plan has a period of 60 days from the date of grant to exercise such right. Participants purchasing shares under the Restricted Plan are subject to restrictions prohibiting the disposition thereof, and obligating such participants to resell such shares to the Company at the original purchase price under certain circumstances and until such restrictions lapse. In general, if the purchaser remains in the employ of the Company or its subsidiaries, the restrictions with respect to such shares will lapse in four equal annual installments commencing on the third anniversary of the date of purchase; i.e., the restrictions will fully lapse six years after purchase. The Restricted Plan provides that all restrictions on shares purchased thereunder automatically will lapse upon a Change in Control of the Company (as defined in such plan). Under the Company's Restricted Plan, 300,000 shares of the Company's Common Stock were reserved for sale to selected executive employees of the Company and its subsidiaries. At December 28, 1994, an aggregate of 151,525 shares had been sold by the Company at an average price of $1.00 per share. Presently, 10 executive employees hold shares subject to restrictions under the Restricted Plan. During the fiscal year ended October 31, 1994, amounts were expensed by the Company with respect to 26,413 shares for which restrictions lapsed during such period including 12,500, 500, 4,375, 513 and 6,375 shares sold to Messrs. Robinson, Giancamilli, Berlow, Shapiro and Stone, respectively. During the fiscal year ended October 31, 1994, no rights were granted under the Restricted Plan. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Based on information available to the Company (a Schedule 13G dated January 24, 1994), 888,600 shares of Common Stock, representing 7.39% of the shares outstanding, were beneficially owned on December 31, 1993, by David L. Babson & Company, Inc. ("Babson"), One Memorial Drive, Cambridge, Massachusetts 02142-1300. Of these shares, Babson has reported that it has sole power to vote or direct the vote over 790,000 shares (6.57% of the outstanding shares), shares power to vote or direct the vote over 98,600 shares (0.82%) and has sole dispositive power over all 888,600 shares beneficially owned. Based on information available to the Company (a Schedule 13G dated February 9, 1994), 618,150 shares of Common Stock, representing 5.14% of the shares outstanding, were beneficially owned on December 31, 1993, by Dimensional Fund Advisors, Inc. ("Dimensional"), 1299 Ocean Avenue, 11th Floor, Santa Monica, California 96401. Of these shares, Dimensional has reported that it has sole power to vote or direct the vote over 441,850 shares (3.67% of the outstanding shares), shares power to vote or direct the vote over 176,300 shares (1.47%) and has sole dispositive power over all 618,150 shares beneficially owned. The following table sets forth the number of shares of the Company's Common Stock (which is the only class of stock outstanding) beneficially owned, as of December 28, 1994, together with the percentage of the outstanding shares which such ownership represents, by each director, each executive officer named under "Executive Compensation" and all directors and executive officers of the Company as a group. The information with respect to directors and officers has been obtained from the respective individuals and is reported in accordance with the beneficial ownership rules of the Securities and Exchange Commission under which a person may be deemed to be the beneficial owner of a security if such person has or shares voting power or investment power with respect to such security or has the right to acquire such ownership within the next 60 days. 16 19
Shares Percent of Name Owned Class -------------------------- ------------- ----------- Jack A. Robinson . . . . . . . . . . . . . 1,072,998(1) 8.67% Robert A. Berlow . . . . . . . . . . . . . 44,176(2) * Thomas O. Fox . . . . . . . . . . . . . . . 6,325(3) * Andy Giancamilli . . . . . . . . . . . . . 65,907(4) * Walter J. McCarthy, Jr. . . . . . . . . . 8,000(5) * John C. Nicholls, Jr. . . . . . . . . . . 7,000(6) * Jerome L. Schostak . . . . . . . . . . . . 7,000(7) * Robert A. Shapiro . . . . . . . . . . . . 77,400(8) * Jerry E. Stone . . . . . . . . . . . . . . 46,500(9) * All directors and executive officers as a group (12 persons) . . . . . . . . . 1,373,006(10) 11.10% - --------------------
* Less than 1% (1) Excludes 42,286 shares owned beneficially by Mr. Robinson's wife, as to which Mr. Robinson disclaims any beneficial interest, and includes 982,090 shares held in trust of which Mr. Robinson is a trustee and primary beneficiary. Mr. Robinson's address is 5400 Perry Drive, P.O. Box 436021, Pontiac, Michigan 48343-6021. (2) Includes 25,000 shares which Mr. Berlow has the right to acquire currently or within the next 60 days pursuant to outstanding employee stock options. Excludes 3,016 shares held by Mr. Berlow's wife as custodian for their children, as to which Mr. Berlow disclaims any beneficial interest. (3) Includes 325 shares which are owned jointly by Mr. Fox and his wife and 6,000 shares which Mr. Fox has the right to acquire currently or within the next 60 days pursuant to outstanding director stock options. (4) Includes 500 shares which are owned jointly by Mr. Giancamilli and his wife and 47,000 shares which Mr. Giancamilli has the right to acquire currently or within the next 60 days pursuant to outstanding employee stock options. Excludes 13 shares which are held by Mr. Giancamilli as custodian for his children, as to which Mr. Giancamilli disclaims any beneficial interest. (5) Includes 2,000 shares which are owned jointly by Mr. McCarthy and his wife and 6,000 shares which Mr. McCarthy has the right to acquire currently or within the next 60 days pursuant to outstanding director stock options. (6) Includes 6,000 shares which Mr. Nicholls has the right to acquire currently or within the next 60 days pursuant to outstanding director stock options. (7) Includes 6,000 shares which Mr. Schostak has the right to acquire currently or within the next 60 days pursuant to outstanding director stock options. (8) Includes 10,000 shares which Mr. Shapiro has the right to acquire currently or within the next 60 days pursuant to outstanding employee stock options. (9) Includes 500 shares jointly owned with spouse and 20,500 shares which Mr. Stone has the right to acquire currently or within the next 60 days, pursuant to outstanding employee stock options. (10) Includes 148,100 shares which all directors and executive officers as a group have the right to acquire currently or within the next 60 days pursuant to outstanding director or employee stock options. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Pursuant to five long-term store leases executed between 1977 and 1993 (and which terminate between 1995 and 2009) between the Company and various partnerships of which Jerome L. Schostak, a director of the Company, is a partner, the Company paid $357,718 in rentals during the fiscal year ended October 31, 1994. Mr. Schostak's 17 20 interests in the various partnerships range from 7.3% to 65.0%. The terms of the foregoing leases are believed by management to be at least as favorable to the Company as could have been obtained from unaffiliated persons or entities. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of this report. 1. Financial Statements and Supplementary Information. The following financial statements and supplementary data are included in this report:
PAGE DESCRIPTION NUMBER - ----------- ------ Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2 Consolidated Balance Sheets at October 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . F-3 Consolidated Statements of Operations for the fiscal years ended October 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4 Consolidated Statements of Shareholders' Equity for the fiscal years ended October 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5 Consolidated Statements of Cash Flows for the fiscal years ended October 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
2. Financial Statement Schedules. All schedules are omitted because they are not applicable or not required or because the required information is included in the financial statements or notes thereto. 3. Exhibits.
EXHIBIT NO. DESCRIPTION - ------- ----------- 2 Agreement and Plan of Merger, dated as of December 23, 1994/incorporated by reference to Exhibit 2 to the Company's Current Report on Form 8-K dated December 28, 1994. 2.1 Perry Drug Stores, Inc. Employment Agreement with Jack A. Robinson, as amended/incorporated by reference to Exhibit 2.1 to the Company's Schedule 14D-9 filed with the Commission on December 29, 1994. 2.2 Senior Executive Severance Agreement between Perry Drug Stores, Inc. and Andrea Giancamilli/incorporated by reference to Exhibit 2.2 to the Company's Schedule 14D-9 filed with the Commission on December 29, 1994. 2.3 Senior Executive Severance Agreement between Perry Drug Stores, Inc. and Robert A. Berlow/incorporated by reference to Exhibit 2.3 to the Company's Schedule 14D-9 filed with the Commission on December 29, 1994. 2.4 Senior Executive Severance Agreement between Perry Drug Stores, Inc. and Jerry E. Stone/incorporated by reference to Exhibit 2.4 to the Company's Schedule 14D-9 filed with the Commission on December 29, 1994.
18 21 2.5 Shareholders' Agreement, dated as of December 23, 1994, by and among Jack A. Robinson, Lake Acquisition Corporation, and Rite Aid Corporation/incorporated by reference to Exhibit 2.5 to the Company's Schedule 14D-9 filed with the Commission on December 29, 1994. 2.6 Shareholders' Agreement, dated as of December 23, 1994, by and among Aviva Robinson, Lake Acquisition Corporation, and Rite Aid Corporation/incorporated by reference to Exhibit 2.6 to the Company's Schedule 14D-9 filed with the Commission on December 29, 1994. 2.7 Consulting Agreement, dated as of December 23, 1994, between Jack A. Robinson and Rite Aid Corporation/incorporated by reference to Exhibit 2.7 to the Company's Schedule 14D-9 filed with the Commission on December 29, 1994. 2.8 Confidentiality Agreement, dated December 14, 1994, between Perry Drug Stores, Inc. and Rite Aid Corporation/incorporated by reference to Exhibit 2.7 to the Company's Schedule 14D-9 filed with the Commission on December 29, 1994. 3.1 Articles of Incorporation, as amended/incorporated herein by reference to Exhibit 3 to the Company's Form 10-Q Quarterly Report for the fiscal quarter ended July 31, 1988. 3.2 Bylaws, as amended/incorporated herein by reference to Exhibit 3 to the Company's Form 8-K Current Report dated December 28, 1994. 4.1 Indenture, dated as of September 1, 1985, between the Company and National Bank of Detroit/incorporated herein by reference to Exhibit 4 to the Company's Form S-2 Registration Statement No. 2-99927. 4.2 Shareholder Rights Plan, dated February 4, 1987/incorporated herein by reference to Exhibit 4(a) to the Company's Current Report on Form 8-K dated February 4, 1987. 4.3 Amendment to Exhibit 4.2/incorporated herein by reference to Exhibit 4(b) to the Company's Current Report on Form 8-K dated June 2, 1989. 4.4 Amendment to Exhibit 4.2/incorporated herein by reference to Exhibit 4 to the Company's Current Report on Form 8-K dated December 28, 1994. 10.1 Revised and Amended Top Executive Retirement Plan, effective November 1, 1993. 10.2 Short Term Bonus Plan, as amended and restated October 26, 1994.* 10.3 1982 Incentive Stock Option Plan/incorporated herein by reference to Exhibit 4.1 to the Company's Form S-8 Registration Statement No. 2-83509. 10.4 First Amendment to Exhibit 10.3 dated June 2, 1988/incorporated herein by reference to Exhibit 10.2 to the Company's Form 10-Q Quarterly Report for the fiscal quarter ended April 30, 1988. 10.5 Second Amendment to Exhibit 10.3 dated June 2, 1989/incorporated herein by reference to Exhibit 10.12 to the Company's Form 10-K Annual Report for the fiscal year ended October 31, 1989. 10.6 Executive Severance Benefit Plan, as amended and restated October 26, 1994.* 10.7 1986 Restricted Stock Plan, as amended and restated October 26, 1994* 10.8 1987 Non-Qualified Stock Option Plan, as amended and restated, effective December 17, 1991/incorporated herein by reference to Exhibit 19 to the Company's Form 10-Q Quarterly Report for the fiscal quarter ended April 30, 1992. 10.9 Credit Agreement dated as of July 15, 1994, between the registrant and National City Bank, as agent for certain designated Lenders/incorporated herein by reference to Exhibit 10.19 to the Company's Form 10-Q Quarterly Report for the fiscal quarter ended July 31, 1994.
19 22 11 Statement re computation of per share earnings.* 22 Subsidiaries of the Registrant.* 24 Consent of Independent Public Accountants.* 27 Financial Data Schedule.* -------------- * Filed herewith (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company during the last quarter of the period covered by this report. 20 23 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on January 25, 1995. PERRY DRUG STORES, INC. By: /S/ JERRY E. STONE ---------------------------------- Jerry E. Stone - Senior Vice President, Chief Financial Officer, Treasurer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Capacity Date ----------- -------- ---- /S/ JACK A. ROBINSON Chairman of the Board and January 25, 1995 - --------------------------------- Jack A. Robinson Chief Executive Officer /S/ ANDY GIANCAMILLI President, Chief Operating January 25, 1995 - ------------------------------- Andy Giancamilli Officer and Director /S/ JERRY E. STONE Senior Vice President, Chief January 25, 1995 - ----------------------------------- Jerry E. Stone Financial Officer, Treasurer and Director /S/ THOMAS O. FOX Director January 25, 1995 - ---------------------------------- Thomas O. Fox /S/ WALTER J. McCARTHY, JR. Director January 25, 1995 - ---------------------------- Walter J. McCarthy, Jr. /S/ JOHN C. NICHOLLS, JR. Director January 25, 1995 - --------------------------------- John C. Nicholls, Jr. /S/ JEROME L. SCHOSTAK Director January 25, 1995 - ------------------------------ Jerome L. Schostak
21 24 PERRY DRUG STORES, INC. INDEX TO FINANCIAL STATEMENTS
PAGE DESCRIPTION NUMBER - ----------- ------ Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2 Consolidated Balance Sheets at October 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . F-3 Consolidated Statements of Operations for the fiscal years ended October 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4 Consolidated Statements of Shareholders' Equity for the fiscal years ended October 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5 Consolidated Statements of Cash Flows for the fiscal years ended October 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
F-1 25 PERRY DRUG STORES, INC. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ................................................................................ To Perry Drug Stores, Inc.: We have audited the accompanying consolidated balance sheets of Perry Drug Stores, Inc. (a Michigan corporation) and subsidiaries as of October 31, 1994 and 1993, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended October 31, 1994 (as restated, see Note 2). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Perry Drug Stores, Inc. and subsidiaries as of October 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 1994, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Detroit, Michigan December 13, 1994 (Except with respect to the matters discussed in Note 14, as to which the date is December 27, 1994). F-2 26 PERRY DRUG STORES, INC. CONSOLIDATED BALANCE SHEETS
October 31 ------------------------------- 1994 1993 (In Thousands of Dollars) ......................................................................................... Assets: Current Assets: Cash $ 7,798 $ 5,092 Accounts Receivable, Net 27,780 21,381 Inventories 114,819 111,263 Prepayments and Other 11,180 8,324 ......................................................................................... Total Current Assets 161,577 146,060 ......................................................................................... Property and Equipment: Land and Improvements 1,445 1,445 Buildings 14,529 14,529 Fixtures and Equipment 43,505 44,612 Transportation Equipment 135 135 Leasehold Improvements and Lease Rights 39,816 37,925 ......................................................................................... 99,430 98,646 Less Accumulated Depreciation and Amortization 42,887 38,599 ......................................................................................... Total Property and Equipment, Net 56,543 60,047 ......................................................................................... Intangible and Other Assets, Net of Amortization: Goodwill 19,000 19,201 Intangible Assets 3,419 1,774 Other Assets 5,219 12,372 ......................................................................................... Total Intangible and Other Assets, Net 27,638 33,347 ......................................................................................... $245,758 $239,454 ......................................................................................... Liabilities and Shareholders' Equity: Current Liabilities: Notes Payable $ -- $ 2,500 Current Portion of Long-Term Liabilities 180 8,180 Accounts Payable 71,079 68,465 Accrued Liabilities 24,800 16,361 ......................................................................................... Total Current Liabilities 96,059 95,506 ......................................................................................... Long-Term Debt 90,746 89,850 Obligations Under Capital Leases 2,764 2,944 Shareholders' Equity: Common Stock $.05 Par Value; 30,000,000 Shares Authorized; 12,027,382 Issued and Outstanding. 601 601 Paid-In Capital 58,532 58,278 Retained Deficit (2,944) (7,725) ......................................................................................... Total Shareholders' Equity 56,189 51,154 ......................................................................................... $245,758 $239,454 ===============================
The accompanying notes are an integral part of these statements. F-3 27 PERRY DRUG STORES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Years Ended October 31 1994 1993 1992 (In Thousands of Dollars Except Per Share Data) ............................................................................................... Operations: Net Sales $737,070 $698,432 $674,431 ............................................................................................... Cost and Expenses: Cost of Goods Sold 545,780 523,765 514,577 Warehouse, Store Operating and Administrative Expenses 174,612 168,448 158,330 Interest Expense 8,282 8,483 10,430 Nonrecurring Charge Relating to Sale of Chicago Stores -- 3,500 -- ............................................................................................... Total Cost and Expenses 728,674 704,196 683,337 ............................................................................................... Earnings (Loss) Before Income Taxes and Extraordinary Item 8,396 (5,764) (8,906) Provision (Credit) for Income Taxes 2,320 (1,541) (2,934) ............................................................................................... Earnings (Loss) Before Extraordinary Item 6,076 (4,223) (5,972) ............................................................................................... Extraordinary Item: Early Retirement of Debt Net of Tax Benefit of $555 (1,295) -- -- ............................................................................................... Net Earnings (Loss) $ 4,781 $ (4,223) $ (5,972) ............................................................................................... Primary Earnings (Loss) Per Share: Earnings (Loss) Before Extraordinary Item $ 0.51 $(0.35) $(0.54) Extraordinary Item (0.11) -- -- ............................................................................................... Net Earnings (Loss) Per Share $ 0.40 $(0.35) $(0.54) ------------------------------------------------
The accompanying notes are an integral part of these statements. F-4 28 PERRY DRUG STORES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock ---------------------------------------------------------------- Retained Paid-in Earnings Shares Amount Capital (Deficit) (In Thousands) ............................................................................................. Shareholders' Equity: Balance at October 31, 1991 10,306 $515 $45,524 $ 2,470 Exercise of Stock Options 79 4 580 -- Restricted Stock Plan 16 1 169 -- Issuance of 1,618,750 Shares of Common Stock 1,619 81 11,798 -- Net Loss, 1992 -- -- -- (5,972) .............................................................................................. Balance at October 31, 1992 12,020 $601 $58,071 $(3,502) Exercise of Stock Options 2 -- 10 -- Restricted Stock Plan 5 -- 197 -- Net Loss, 1993 -- -- -- (4,223) .............................................................................................. Balance at October 31, 1993 12,027 $601 $58,278 $(7,725) Restricted Stock Plan -- -- 254 -- Net Earnings, 1994 -- -- -- 4,781 .............................................................................................. Balance at October 31, 1994 12,027 $601 $58,532 $(2,944) ================================================================
Common Stock -- 30,000,000 shares, $0.05 par value authorized. Serial Preferred Stock -- 5,000,000 shares, without par value authorized; none issued. Series A $5.00 Preferred Stock -- 150,000 shares, without par value authorized; none issued. The accompanying notes are an integral part of these statements. F-5 29 PERRY DRUG STORES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended October 31 ------------------------------------------------ 1994 1993 1992 (In Thousands Of Dollars) ............................................................................................. Cash Flows from Operating Activities: Net Earnings (Loss) $ 4,781 $ (4,223) $ (5,972) Adjustments to Reconcile Net Earnings (Loss) to Net Cash Provided By Operating Activities: Continuing Operations: Depreciation and Amortization 7,889 8,903 9,290 Change in Allowance for Uncollectible Accounts (1,328) 2,796 (1,432) Reserve Relating to Sale of Chicago Stores -- 3,500 -- Deferred Taxes 1,489 (5,323) (1,607) Other 3,062 801 1,325 Changes in Certain Assets and Liabilities (Net of Effects of the Purchase of Business): Accounts Receivable (5,071) 498 2,233 Inventory (4,023) 17,254 3,348 LIFO Reserve 467 (466) 387 Prepayments and Other Assets 2,120 1,993 (5,207) Accounts Payable and Accrued Liabilities 11,053 (2,367) 10,069 ............................................................................................ Net Cash Provided by Operating Activities $ 20,439 $ 23,366 $ 12,434 ............................................................................................ Cash Flows from Investing Activities: Capital Acquisitions, Net $ (8,128) $ (7,329) $ (5,682) Purchase of Business, Net of Cash Acquired -- (6,573) -- Sale/Leaseback Arrangements and Other Property Sales 99 80 272 Payment Received on Note for Sale of Stores 290 738 921 Notes Receivable (210) (200) (1,207) Proceeds (Repayments) From Sale of Discontinued Operation -- -- (1,050) ............................................................................................ Net Cash Used for Investing Activities $ (7,949) $(13,284) $ (6,746) ............................................................................................ Cash Flows from Financing Activities: Change in Borrowings Under Notes Payable $ (2,500) $ 2,500 $ (7,000) Repayment of Long-Term Debt and Obligations Under Capital Leases (67,084) (27,885) (11,963) Proceeds From Issuance of Long-Term Debt 59,800 15,000 -- Proceeds from Issuance of Common Stock, Net -- 16 12,479 ............................................................................................ Net Cash Used For Financing Activities $ (9,784) $(10,369) $ (6,484) ............................................................................................ Net Increase (Decrease) in Cash $ 2,706 $ (287) $ (796) Cash at Beginning of Year 5,092 5,379 6,175 ............................................................................................ Cash at End of Year $ 7,798 $ 5,092 $ 5,379 ............................................................................................ Supplemental Disclosures of Cash Flow Information: Interest Paid $ 8,843 $ 8,796 $ 11,044 Income Taxes Paid (Refunded) -- Net $ (3,384) $ 999 $ 2,979 ================================================
The accompanying notes are an integral part of these statements. F-6 30 PERRY DRUG STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ................................................................................ NOTE 1 Principles of Consolidation -- The consolidated financial statements include SIGNIFICANT ACCOUNTING POLICIES Perry Drug Stores, Inc., and its wholly-owned subsidiaries, all operations of which are within the state of Michigan. All significant intercompany accounts and transactions have been eliminated in consolidation. Cash and Cash Equivalents -- For purposes of reporting cash flows, cash includes cash on hand and cash deposits at financial institutions. Accounts Receivable -- Accounts receivable are stated net of an allowance for uncollectible accounts of $2,268,000 and $3,596,000 as of October 31, 1994 and 1993, respectively. A majority of the Company's accounts receivable are due from third party providers (including insurance companies and governmental agencies) under third party payment plans. As is industry practice, these receivables are uncollateralized. Approximately 53% of the third party receivables are associated with three major carriers under contracts negotiated with the Company. Inventories -- Inventories are stated at the lower of cost or market. As of October 31, 1994, 1993 and 1992, the last-in, first-out (LIFO) method was used to determine cost for $81,322,000, $78,967,000 and $91,247,000 of inventory, respectively. Inventories valued on LIFO at October 31, 1994, 1993 and 1992, respectively, were $12,181,000, $11,714,000 and $12,180,000 lower than the amounts that would have been reported using the first-in, first-out (FIFO) method. As of October 31, 1994, 1993 and 1992, the FIFO method was used to determine the cost for $33,497,000, $32,296,000 and $28,692,000 of inventory, respectively. During fiscal 1993 and 1992, certain inventory quantities were reduced resulting in liquidation of certain LIFO inventory quantities carried at lower costs prevailing in prior years. The effect of these reductions was to decrease the LIFO provision by $635,000 and $492,000 in fiscal 1993 and 1992, respectively. These liquidations, through a decreased LIFO provision, increased net earnings after tax by approximately $465,000 and $330,000 in fiscal 1993 and 1992, respectively. Property and Equipment -- Property and equipment are recorded at cost. Capitalized amounts include expenditures which materially extend the useful lives of existing facilities and equipment. Upon retirement or disposal of property or equipment, the asset and its related accumulated depreciation or amortization are eliminated from the accounts and the resulting gain or loss is included in the determination of earnings for the period. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation and Amortization -- Depreciation and amortization are computed based upon the estimated useful lives of the respective assets using the straight-line method. The general range of lives is as follows:
Land Improvements Forty Years Buildings Forty Years Fixtures and Equipment Five to Ten Years Transportation Equipment Three to Six Years Leasehold Improvements and Lease Rights Five to Thirty Years
Intangible and Other Assets -- Intangible and other assets are being amortized on a straight-line basis over periods ranging from three to forty years. Intangible and other assets are shown net of accumulated amortization of $8,206,000 and $11,382,000 at October 31, 1994 and 1993, respectively. The Company reviews the realizability of the assets on an annual basis. Insurance -- The Company is self-insured for its basic medical program. Stop loss insurance coverage is maintained. The Company is self-insured for general liability and workers' compensation claims and maintains liability coverage in excess of certain self insurance limits from various carriers. Management believes its reserve for claims reported and claims incurred but not reported is adequate. Income Taxes -- Income taxes are recorded in accordance with Statement of Financial Accounting Standards 109. See Note 8 to Consolidated Financial Statements. Financial Instruments -- The Company records all instruments, excluding long-term debt and shareholders' equity, at or in amounts approximating market value. Reclassifications -- Certain reclassifications have been made to prior years' financial statements to conform to the 1994 presentation.
F-7 31 PERRY DRUG STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ................................................................................................................ NOTE 2 As previously reported, the Company recorded a charge of $33.4 million pretax RESTATEMENT OF FINANCIAL ($24.0 million after tax) in its 1993 fourth quarter relating primarily to an STATEMENTS inventory adjustment. After further analyzing this adjustment, the Company restated its 1993 and 1992 Consolidated Statements of Operations (including the respective quarters) to more appropriately reflect its results of operations for the periods believed to be affected by the adjustment. The Company restated its 1993 and 1992 Consolidated Statements of Operations as follows:
Years Ended October 31 -------------------------------- (In Thousands Except Per Share Data) 1993 1992 ......................................................................................... Net earnings (loss) -- originally reported $(18,509) $ 8,314 Per share -- originally reported (1.54) 0.75 Adjustment: Pre tax impact 20,263 (20,263) Income tax effect 5,977 (5,977) Net earnings (loss) impact 14,286 (14,286) Per share impact 1.19 (1.29) Net loss -- restated (4,223) (5,972) Per share -- restated $ (0.35) $ (0.54)
.................................................................................................................................. NOTE 3 On June 29, 1993, the Company reacquired 12 of its former metropolitan Detroit area A.L. ACQUISITIONS AND Price deep discount health and beauty aids stores. The Company purchased certain assets DISPOSITIONS and other rights for approximately $10,500,000 including $6,900,000 in cash and a credit of $3,600,000 for the unpaid portion of notes remaining from the original sale. The cash portion of the purchase price was financed through a separate revolving credit facility. The acquisition was accounted for under the purchase method of accounting; and accordingly, the acquired assets were recorded at their estimated fair values at the date of acquisition. Subsequently, the Company has closed or converted to drug stores all of the stores. On October 27, 1991, the Company sold 16 of its Chicago area drugstores for approximately $7,500,000, including $3,400,000 of notes receivable and other assets. As a result of the purchaser's business difficulties, during 1993, the Company established a reserve for the note as well as outstanding interest. .................................................................................................................................. NOTE 4 In July 1994, the Company entered into a new three-year, $65 million revolving credit EXTRAORDINARY ITEM agreement with a group of banks. Proceeds from the new facility were used to retire all of the Company's existing bank debt which would have matured in May, 1995, to prepay the 10% Senior Notes which were due December 1995 and to pay fees and expenses in connection with the transaction. As a result of the early retirement of debt, the Company recorded an extraordinary charge of $1.3 million (net of tax benefit of $0.6 million) during its third quarter ended July 31, 1994. See Note 6 to Consolidated Financial Statements. .................................................................................................................................. NOTE 5 The Company had an unsecured line of credit with a bank which allowed for the borrowing of SHORT-TERM BORROWINGS up to $7,000,000. The interest rate was at the bank's prime interest rate plus 2 1/2%. In July 1994, the Company entered into a new long-term revolving credit agreement which replaced this facility. See Note 6 to Consolidated Financial Statements. The following table is a summary of annual short-term borrowings:
October 31 --------------------------------------------------- (In Thousands) 1994 1993 1992 ......................................................................................... Maximum Amount Outstanding $7,000 $11,000 $18,750 Average Amount Outstanding 6,339 2,316 7,266 Amount Outstanding at Year End -- 2,500 -- Average Annual Interest Rate 8.3% 6.0% 6.8% Average Interest Rate at Year End -- 6.0% 6.0%
F-8 32 PERRY DRUG STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
.............................................................................................................................. NOTE 6 LONG-TERM DEBT Long-term debt at October 31, 1994 and 1993, consisted of the following: October 31 (In Thousands) 1994 1993 ......................................................................................... Convertible Subordinated Debentures, 8.5%, due 2010 $49,996 $49,996 Revolving Credit Agreement, prime + 3/4%, due May 1997 40,750 -- Revolving Credit Agreement, retired during fiscal 1994 -- 25,000 Senior Notes, retired during fiscal 1994 -- 18,354 Credit Agreement, retired during fiscal 1994 -- 4,500 ......................................................................................... 90,746 97,850 Less Current Portion -- 8,000 ......................................................................................... $90,746 $89,850 --------------------------
Maturities of long-term debt for the ensuing five fiscal years are: (In Thousands) ............................................................................................... 1995 $ -- 1996 2,500 1997 43,250 1998 2,500 1999 2,500 The Convertible Subordinated Debentures are convertible at any time into common stock at $18.125 per share, subject to adjustments under certain conditions. At the Company's option, the debentures are redeemable at 100.85% currently and at par in September 1995 and beyond, subject to certain restrictions based on the trading price of the Company's common stock. Commencing September 1996, a mandatory sinking fund will be established with annual payments of $2,500,000. The debentures are subordinated to all other indebtedness of the Company. In July 1994, the Company entered into a three-year, $65 million revolving credit agreement with a group of banks. Proceeds from this facility were used to retire all of the Company's existing bank debt which would have matured in May, 1995, to prepay the 10% Senior Notes which were due December 1995 and to pay fees and expenses in connection with the transaction. See Note 4 to Consolidated Financial Statements. The revolving credit agreement, due May 1997, bears interest at the agent bank's prime rate plus 3/4%, or at LIBOR plus 2 3/4%, at the Company's option. The agreement contains certain provisions to reduce the interest rate based upon achievement of certain financial objectives. Interest on prime rate based borrowings is payable quarterly. Interest on LIBOR based borrowings is payable at the end of the relevant interest period or quarterly, whichever occurs first. The Company is required to pay a commitment fee of 1/2% on the undrawn portion of the facility. Borrowings under this credit agreement are secured by a pledge of the capital stock of the Company's subsidiaries as well as by a security interest in the inventory, receivables and intangible assets of the Company and its subsidiaries. The credit agreement contains certain restrictive covenants requiring the achievement of certain financial ratios such as consolidated tangible net worth, fixed charge coverage, and ratio of total liabilities to capital base as well as providing limitations on the Company with respect to paying dividends and incurring additional indebtedness, among others. Based on the quoted market price of the 8.5% convertible subordinated debentures and on current rates offered to the Company for other long-term debt of similar maturity, the estimated fair market value of total long-term debt was approximately $6.5 million less than carrying value at October 31, 1994.
F-9 33 PERRY DRUG STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ................................................................................ NOTE 7 The Company conducts substantially all of its store operations from leased LEASES AND CONTINGENCIES facilities. Leases expire at varying dates between 1994 and 2023. Generally, these leases have initial periods of five to twenty years, and contain provisions for up to three five-year renewal options and additional rentals based on percentages of sales over minimum amounts. In addition, the Company leases miscellaneous equipment under operating leases. Rental expense aggregated $25,594,000 in 1994, $23,678,000 in 1993 and $21,815,000 in 1992 including, in some instances, property taxes, certain maintenance expenses, and contingent rentals. The contingent rental portion of rental expense amounted to $2,411,000, $2,709,000 and $2,683,000 in 1994, 1993 and 1992, respectively. The Company has recorded the lease for its headquarters and distribution center as a capital lease. The terms of this obligation include semi-annual principal payments of $88,000 to $120,000 through 2009 with interest at 8%. The Company may purchase the facility at the end of the lease term for a nominal amount. The original cost of property and equipment under capital leases was $7,100,000. Minimum annual rental commitments under noncancellable leases at October 31, 1994 are summarized below for the years indicated:
Years Ended October 31 Operating Capital (In Thousands) Leases Leases ......................................................................................... 1995 $ 22,095 $ 409 1996 20,535 395 1997 18,424 378 1998 16,171 361 1999 13,241 347 Thereafter 98,808 2,889 ......................................................................................... $189,274 4,779 ================================== Less Amount Representing Interest 1,835 Less Current Portion of Obligations under Capital Leases 180 ......................................................................................... Obligations under Capital Leases $2,764 ==================================
In June 1994, the Company reached a settlement with a major third party provider relating to the interpretation of an existing reimbursement contract. As previously reported, this provider had initiated a review of the billing practices of numerous Michigan retail pharmacy participants, including the Company, in late 1993. The Company has agreed to pay the third party $5.5 million plus imputed interest by May 1, 1995. As a result of this settlement, during the second quarter of 1994, the Company recorded a pretax charge of $860,000 ($600,000 after tax, or $0.05 per share) which is net of established reserves and is included in warehouse, store operating and administrative expenses in the accompanying Consolidated Statements of Operations and accrued liabilities in the Consolidated Balance Sheets. In July 1994, the Company agreed to a proposed settlement of two lawsuits filed in 1993 by shareholders purporting to be class actions seeking damages for alleged violations of federal securities laws. Subject to court approval which is expected in February 1995, after a hearing on the proposed settlement, the Company has agreed to pay $2.2 million, $925,000 of which, plus a portion of the attorney fees will be covered by insurance. Although the Company believes it did not violate any laws, it feels that the settlement of this litigation is in the best interests of the Company in order to avoid the time and expense of protracted litigation. As a result of this settlement, the Company recorded a pretax charge of $1.5 million ($1.1 million after tax, or $0.09 per share) during the third quarter of 1994. This charge is included in warehouse, store operating and administrative expenses in the accompanying Consolidated Statements of Operations. The Company is also involved in various routine legal proceedings and claims incidental to the normal conduct of its business.
F-10 34 PERRY DRUG STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ................................................................................ NOTE 8 The provision (credit) for income taxes on continuing operations, before INCOME TAXES extraordinary item consists of the following:
Years Ended October 31 (In Thousands) 1994 1993 1992 ......................................................................................... Current $ 819 $ 330 $ 2,125 Deferred 1,501 (1,871) (5,059) ......................................................................................... Total Provision (Credit) $2,320 $(1,541) $(2,934) ================================================================== At October 31, 1994 and 1993, deferred tax assets which are included in prepayments and other in 1994 and other assets in 1993 in the accompanying Consolidated Balance Sheets are comprised of the following:
October 31 (In Thousands) 1994 1993 ......................................................................................... Depreciation and Amortization $4,060 $ 3,244 Inventory Method Change (722) (1,089) Inventory Valuation 1,166 1,456 Bad Debts (856) (2,500) Accruals (1,306) (846) Tax Credits (4,419) (3,525) Capital Loss Carryforwards (1,712) (1,712) Other (5) (57) Net Operating Loss Carryforward (1,021) (3,900) Valuation Allowance 2,531 2,700 Contingency Reserves (2,680) (236) ......................................................................................... $(4,964) $(6,465) =================================== The differences between the statutory Federal income tax rate and the effective rate are shown below, stated as a percent of earnings (loss) from continuing operations before income taxes:
Years Ended October 31 1994 1993 1992 ......................................................................................... Provision (Credit) at Statutory Rate 34.0% (34.0)% (34.0)% Change in Carryforwards Utilized: Net Operating Loss (11.5) -- (3.6) Investment Tax Credit -- -- (1.0) Payroll-Related Tax Credits (4.8) (1.8) (3.8) Capital Loss -- -- (0.5) Valuation Allowance 9.8 4.5 10.2 Amortization of Goodwill 1.0 4.1 2.7 All Other (0.9) 0.5 (2.9) ......................................................................................... Effective Tax Rate 27.6% (26.7)% (32.9)% ==================================================================
Effective November 1, 1991, the Company prospectively adopted Statement of Financial Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes. SFAS 109 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, SFAS 109 generally considers all expected future events other than enactments of changes in the tax law or rates. Previously, the Company used the asset and liability approach of SFAS 96 to record income taxes which gave no recognition to future events other than the recovery of assets and settlement of liabilities at their carrying amounts. The adoption of SFAS 109 had no material impact on the financial statements. For tax reporting purposes, the Company has available loss carryforwards of approximately $9,939,000. These carryforwards are comprised of $1,900,000 of acquired net operating loss carryforwards available through 2003 which will be applied to reduce goodwill in the accompanying financial statements when used and approximately $5,036,000 in capital loss carryforwards which can be offset against future capital gains through 1996. The Company also has approximately $3,003,000 in net operating loss carryforwards available through 2008.
F-11 35 PERRY DRUG STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS .................................................................................................................. NOTE 8 For income tax purposes, the Company has approximately $4,419,000 in tax credit INCOME TAXES carryforwards which are made up of $3,122,000 in targeted jobs tax credits and (CONT'D) $1,297,000 in alternative minimum tax credits. The targeted jobs tax credits can be used to offset future tax liability through the year 2009 while the alternative minimum tax credits can be used to offset any regular tax liability arising in the future. The Company believes it will be in a regular tax paying position in the future after the utilization of all available regular net operating loss carryforwards. .................................................................................................................. NOTE 9 Primary earnings (loss) per share were computed by dividing net earnings (loss) EARNINGS PER SHARE by the weighted average number of shares of common stock outstanding plus incremental shares issuable assuming exercise of stock options using the treasury stock method. The weighted average number of shares of common stock used in the determination of primary earnings (loss) per share was 12,028,000 in 1994, 12,027,000 in 1993 and 11,149,000 in 1992. Fully diluted earnings (loss) per share has not been presented because it would be anti-dilutive. .................................................................................................................. NOTE 10 The Company has noncontributory, defined contribution pension plans for all its EMPLOYEE PENSION PLANS eligible employees which are fully funded annually. There is no liability for past service costs under the terms of the plan. Pension expense amounted to $909,000, $894,000 and $767,000 for the years ended October 31, 1994, 1993, and 1992, respectively. The Company does not offer other post-employment benefits. .................................................................................................................. NOTE 11 On February 4, 1987, the Board of Directors declared a dividend distribution of PREFERRED STOCK PURCHASE RIGHTS one Right for each outstanding share of common stock, distributable to shareholders of record on February 20, 1987. This Rights Plan was amended on June 2, 1989. The amended Plan, among other things, entitles the registered holder to purchase from the Company a unit consisting of one one-hundredth of a share of Series A $5.00 Preferred Stock, no par value, at a price of $48.00 per share. The Company has reserved 150,000 shares of Series A Preferred Stock for issuance upon exercise of the Rights. The Rights trade with the Company's common stock until exercisable at the earlier of ten days after any person or group acquires 20% or more of the Company's outstanding common stock or announces an offer which would result in such person or group acquiring 20% or more of the Company's common stock. The Rights expire on February 20, 1997, and may be redeemed by the Company for five cents per Right until ten days after a person or group acquires 20% or more of the Company's common stock. If, following such an acquisition, there is a merger or other business combination involving the Company, each Right entitles its holder to buy shares of common stock of the surviving company having a market value of twice the current exercise price of each Right. The Plan, as amended, exempts from the provisions a merger which follows a tender offer or exchange offer for all outstanding shares determined by the Continuing Directors to be fair to, and otherwise in the best interests of, the Company's shareholders. In regards to the offer described in Note 14 to Consolidated Financial Statements, the Board of Directors of the Company approved an amendment to the Plan which will render the Rights inoperative with respect to the proposed acquisition by Rite Aid Corporation. .................................................................................................................. NOTE 12 Under the 1986 Restricted Stock Plan, the Company has reserved common stock for STOCK PLANS issuance to key executive employees selected by a committee of independent directors at a price which will not be less than par value. Shares issued under this Plan are restricted as to transfer, such restrictions being removed on 25% of the shares annually commencing three years from the date of purchase. As of October 31, 1994, 151,525 shares of common stock have been purchased under the plan. Shares available for grant were 148,475 at October 31, 1994 and 1993. Shares under restriction were 70,487 which amounted to $540,900 in deferred compensation at October 31, 1994. Under its stock option plans, the Company has reserved 446,000 shares of common stock for issuance to key employees and directors. Options awarded under the plans may be exercised at a price equal to the fair market value at the time of grant. The options are exercisable from one to five years after the dates they were granted. Options available for grant aggregated 123,000 at October 31, 1994, and 168,000 at October 31, 1993. A summary of option transactions is shown below:
------------------------------------------------------- Years Ended October 31 (In Thousands of Shares) 1994 1993 1992 ......................................................................................... Shares under Option, Beginning of Year 226 268 177 Options Granted 98 12 180 Options Exercised -- (2) (79) Options Cancelled (76) (52) (10) ......................................................................................... Shares under Option, End of Year 248 226 268 ------------------------------------------------------- Option Prices per Share: Granted $5.750-$6.375 $8.125 $8.125-$10.000 Exercised -- $6.375 $6.375-$7.875 Cancelled $5.750-$11.000 $6.375-$8.375 $11.750 ......................................................................................... Shares under Option, End of Year $5.750-$10.000 $8.125-$11.000 $6.375-$11.000 -------------------------------------------------------
Certain executive severance arrangements become operable and all restricted stock and stock options become vested upon a change in control. See Note 14 to Consolidated Financial Statements.
F-12 36 PERRY DRUG STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ................................................................................ NOTE 13 Summarized quarterly financial information for the fiscal years ended October QUARTERLY FINANCIAL INFORMATION 31, 1994 and 1993 is shown below: (UNAUDITED)
Three Months Ended (In Thousands Except Per January 31, April 30, July 31, October 31, Share Data) 1994 1994 1994 1994 ........................................................................................ Net Sales $190,584 $178,668 $183,214 $184,604 Gross Profit 49,311 46,153 47,436 48,390 Earnings Before Extraordinay Item 3,394 1,275 221 1,186 Extraordinary Item (Net of Tax) -- -- (1,295) -- ......................................................................................... Net Earnings (Loss) $ 3,394 $ 1,275 $ (1,074) 1,186 ============================================================================ Earnings (Loss) Per Share Before Extraordinary Item $ 0.28 $ 0.11 $ 0.02 $ 0.10 Extraordinary Item -- -- (0.11) -- ......................................................................................... Net Earnings (Loss) Per Share $ 0.28 $ 0.11 $ (0.09) $ 0.10 ============================================================================
Three Months Ended (In Thousands Except PerShare Data) January 31, April 30, July 31, October 31, 1993 1993 1993 1993 ............................................................................................ Net Sales $180,714 $168,058 $173,551 $176,109 Gross Profit 46,084 37,700 43,523 47,360 ......................................................................................... Net Earnings (Loss) $ (478) $ (2,750) $ 1,187 $ (2,182) ============================================================================ Net Earnings (Loss) Per Share $ (0.04) $ (0.23) $ 0.10 $ (0.18) =============================================================================
The Company's business is seasonal in nature. Traditionally, a higher proportion of net sales and net income is generated in the first quarter. .................................................................................................................. NOTE 14 In December 1994, the Company entered into an agreement with Rite Aid SUBSEQUENT EVENTS Corporation pursuant to which Rite Aid Corporation would purchase all of the outstanding shares of common stock of the Company for $11.00 per share, or approximately $132 million in cash. A definitive merger agreement was entered into by the parties following approval by the Company's Board of Directors. The merger agreement provides for a subsidiary of Rite Aid Corporation to make a cash tender offer promptly for all outstanding shares of common stock of the Company at a price of $11.00 per share. The tender offer will be followed as soon as possible by a second-step cash merger in which each share of the Company's stock not acquired in the tender offer or otherwise will be converted into the right to receive $11.00 in cash. The tender offer is conditioned on, among other things, the valid tender of a majority of the outstanding shares on a fully diluted basis and expiration or termination of any applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvement Acts of 1976.
F-13 37 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ------- ----------- 10.2 Short Term Bonus Plan, as amended and restated October 26, 1994. 10.6 Executive Severance Benefit Plan, as amended and restated October 26, 1994. 10.7 1986 Restricted Stock Plan, as amended and restated October 26, 1994. 11 Statement re computation of per share earnings. 22 Subsidiaries of the Registrant. 23 Consent of Independent Public Accountants. 27 Financial Data Schedule.
EX-10.2 2 SHORT TERM BONUS PLAN 1 EXHIBIT 10.2 PERRY DRUG STORES, INC. SHORT TERM BONUS PLAN AMENDED AND RESTATED OCTOBER 26, 1994 1. PURPOSE. The purpose of the Short Term Bonus Plan ("Plan") is to provide meaningful financial incentives to Executive Officers of Perry Drug Stores, Inc., a Michigan corporation ("Parent"), and selected key executive employees of the Parent and its subsidiaries who contribute and who are expected to continue to contribute materially to the success of the Parent and its subsidiaries. 2. DEFINITIONS. (A) "Base Salary" means a Participant's weekly wage in effect as of October 31 of the then current Plan Year multiplied by 52. (B) "Board of Directors" means the Board of Directors of the Parent. (C) "Committee" shall mean the committee appointed pursuant to Section 3 hereof to administer the Plan. (D) "Parent" means Perry Drug Stores, Inc., a Michigan corporation. (E) "Participant" means each Executive Officer (Vice President and above) of the Parent and any other key executive employee of Perry who has been selected by the Committee to participate in the Plan in accordance with paragraph 4 hereof; provided, that directors of the Parent who are not employees of Perry are not eligible to participate in the Plan. (F) "Performance Objectives" mean the criteria upon which each Participant's annual award opportunity shall be based. The Performance Objectives shall be determined annually by the Committee. 1 2 (G) "Perry" means the Parent and its subsidiaries. (H) "Plan Year" means a year commencing November 1 and ending October 31. 3. ADMINISTRATION. The Plan shall be administered by the Parent's Executive Compensation Committee. A majority of the Committee shall constitute a quorum thereof, and the actions of a majority of the Committee members at a meeting of which a quorum is present, or actions unanimously approved in writing by all members of the Committee, shall constitute the actions of the Committee. The Committee is authorized to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to the Plan (provided such rules and regulations are not inconsistent with the provisions hereof) and to make all other determinations necessary or advisable for its administration, including the selection each year of the Participants, other than Officers and Division Presidents of the Parent, who will be included in the Plan and the calculation of incentive awards in accordance with the provisions of paragraph 5. The Committee shall have no authority to amend or modify any of the terms hereof, such authority being fully reserved in the Board of Directors. 4. ELIGIBILITY TO PARTICIPATE IN THE PLAN. On or before January 31 of each Plan Year, the Committee shall select those individuals who, in addition to the Parent's Executive Officers, will be Plan Participants for that Plan Year. Individuals so selected by the Committee shall be those key executive employees of Perry who are determined by the Committee as having a significant impact on Perry's operating success. No individual may be selected as a Participant with respect to any Plan Year unless he or she was an employee of Perry on November 1 of that Plan Year. 5. INCENTIVE AWARDS. (A) The Committee shall establish a basic incentive award for each Participant, expressed as a percentage of the Participant's Base Salary for the Plan Year. The basic award shall reflect the amount to be paid to the Participant if predetermined target levels of performance are met for the year with respect to applicable Performance Objectives. The 2 3 Participant's actual incentive award for a Plan Year may be grater or less than the target award, depending on the extent to which the target levels for applicable Performance Objectives are met. The Committee shall determine which Performance Objectives shall apply to each Participant and shall determine the minimum, target and maximum performance level for each of the Performance Objectives. A schedule or matrix shall be provided to each Participant identifying the Participant's basic (and maximum) award, the Performance Objectives applicable to the Participant and the minimum, target and maximum levels of performance thereof which will yield an incentive award. (B) Actual incentive awards, if any, will be determined by the Committee by reference to the schedules or matrices previously delivered to the Participants, not later than the February 15 next following the end of a Plan Year and will reflect the degree to which the target levels of performance with respect to applicable Performance Objectives for the Plan Year were met. Such awards will be paid in full following certification by Perry's independent auditors of Perry's operating results for the fiscal year coincident with such Plan Year. 6. EFFECT OF TERMINATION OF EMPLOYMENT, DEATH OR DISABILITY. Subject to the following provisions of this paragraph 6, if a Participant shall not have been continuously employed with Perry from the beginning of a Plan Year until the date of payment of the incentive award, if any, with respect to such Plan Year, such Participant shall not be eligible to receive any incentive award for such Plan Year. (A) If the employment of a Participant shall be terminated by reason of the Participant's (i) death or (ii) retirement at or after the Participant's Retirement Date, and if such death or retirement shall have occurred on or after the 180th day of the Plan Year, the Participant or the personal representative of the Participant's estate, as the case may be, shall be paid the full incentive award, if any, to which such Participant would have been entitled had such Participant's death or retirement not occurred. Payment of an incentive award under this subparagraph 6(a) with respect to any Plan Year shall be made at the same time that incentive awards are paid with respect to such Plan Year to other participants. For purposes 3 4 of this paragraph 6 "Retirement Date" shall mean the first day of the month coinciding with or immediately following the Participant's 65th birthday. Nothing herein contained shall be construed as a requirement that a Participant must retire from the employ of Perry at age 65. (B) In the event (i) a Participant retires from the employ of Perry prior to his or her Retirement Date or (ii) a Participant's death or retirement at or after his or her Retirement Date occurs prior to the 180th day of a Plan Year, then, in any such events, such Participant shall not be entitled to receive any incentive award with respect to such Plan Year. (C) Periods of disability totalling in excess of 180 days during any Plan Year will disqualify a Participant from being eligible to receive an incentive award for such Plan Year. A Participant who is disabled for a total of 180 days or less during any Plan Year shall be eligible to receive his or her full incentive award for such Plan Year. For purposes of the Plan, disability is defined in accordance with Section 22(e) of the Internal Revenue Code of 1986, as amended. 7. EFFECT ON EMPLOYMENT. Neither the adoption of the Plan nor participation therein shall be deemed to create any right in any individual to be retained or continued in the employment of Perry. 8. TERMINATION AND AMENDMENT OF THE PLAN. The Board of Directors may at any time terminate or from time to time amend or suspend the Plan, provided that no such termination, amendment or suspension shall adversely affect any of the Participants' rights hereunder (to the extent such rights exist) with respect to the then current Plan Year. 9. CHANGE IN CONTROL. (A) Upon a Change in Control, one hundred percent (100%) of the Performance Objectives shall be deemed to have been achieved for the Plan Year, and each Participant shall be entitled to the incentive award payable as a result of such target level of performance having been achieved, prorated based 4 5 on the number of months in the Plan Year that have elapsed on the date of the Change in Control. All incentive awards shall be paid in a lump sum within twenty (20) days following the Change in Control. For purposes of this Section, a Change in Control shall: (1) Be deemed to have occurred if any person or group of persons acting together, other than (A) the Company or any person who on October 26, 1994 was (i) a director or officer of the Company, or (ii) whose shares of Common Stock of the Company are treated as "beneficially owned" by any such director or officer, or (B) any institutional investor (filing reports on Schedule 13G rather than on Schedule 13D under the Securities Exchange Act of 1934, as amended, including any employee benefit plan or employee benefit trust sponsored by the Company), becomes a beneficial owner, directly or indirectly, of securities of the Company representing twenty percent (20%) or more of either the then outstanding Common Stock of the Company, or the combined voting power of the Company's then outstanding voting securities. As used herein, the term "person" means an individual, a partnership, a corporation, an association, an unincorporated organization, a trust, or any other entity; or (2) Be deemed to have occurred if the Shareholders of the Company approve an agreement to merge or consolidate or sell all or substantially all of the Company's assets to or into any person or entity (other than a wholly-owned subsidiary of the Company formed for the purpose of changing the Company's corporate domicile); or 5 6 (3) Be deemed to have occurred upon the addition of new members to the Board of Directors within any twelve-month period, which members constitute a majority of the members of the Board of Directors. (B) If the receipt of any payment under this Plan, when taken separately or in the aggregate with other payments from Company plans, agreements or policies shall, in the opinion of the independent accounting firm engaged by the Company immediately prior to the Change in Control, result in the payment by the Participant of any excise tax provided for in Sections 280G and 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), then the amount of any payment made under this Plan shall be reduced to the extent required, in the opinion of the aforementioned accounting firm, to prevent the imposition of such excise tax; provided, however, that such reduction shall not apply to a Participant who is covered by a severance agreement with the Company that expressly permits the Participant to receive aggregate payments from the Company in excess of the aforementioned Code limitations. THIS AMENDED AND RESTATED PLAN is executed on the 26th day of October, 1994. ATTEST: PERRY DRUG STORES, INC. /s/ Robert A. Berlow By: /s/ Jack A. Robinson - -------------------- ------------------------- Robert A. Berlow Jack A. Robinson Secretary Chairman MAH4992 6 EX-10.6 3 EXECUTIVE SEVERENCE BENEFIT PLAN 1 EXHIBIT 10.6 PERRY DRUG STORES, INC. EXECUTIVE SEVERANCE BENEFIT PLAN AS AMENDED AND RESTATED OCTOBER 26, 1994 Effective November 1, 1985, Perry Drug Stores, Inc. (the "Company") established the Perry Drug Stores, Inc. Executive Severance Benefit Plan. Effective June 2, 1989, the plan was amended and restated, and effective October 26, 1994 the plan is again amended and restated as set forth on this and the following pages and is referred to herein as the "Plan". SECTION 1. PURPOSES. The purposes of this Plan are to: (A) Assure the Company and its shareholders of continuity of management in the event of any actual or threatened Change in Control; (B) Assure the Company and its shareholders that key executive employees of the Company will be able to evaluate objectively whether a potential Change in Control is in the best interests of the shareholders; and (C) Advance the interests of the Company and its shareholders by providing financial protection to selected key executive employees of the Company who have direct responsibility for running the Company's operations. SECTION 2. ELIGIBILITY. Persons eligible for selection to participate in this Plan are key executive employees of the Company and its subsidiaries. Key executive employees who are division 1 2 presidents and corporate vice presidents and above shall be selected by the Executive Compensation Committee of the Board of Directors (the "Committee"). The Chairman of the Corporation ("Chairman") has the authority to select any other key executive employees to participate in the Plan. In selecting Plan participants (the "Executives"), the Committee and the Chairman (as the case may be) shall take into consideration such factors as they deem relevant in connection with accomplishing the purposes of the Plan. SECTION 3. PLAN ADMINISTRATION. The Committee shall, from time to time, establish rules for the administration of the Plan and the transaction of its business. Except as herein otherwise expressly provided, the Committee shall have the exclusive right to interpret the Plan and to decide any matters arising thereunder in connection with the administration of the Plan. The decisions and the records of the Committee shall be conclusive and binding upon the Company, its officers, employees and shareholders, Executives, and all other persons having any interest under the Plan. SECTION 4. REQUIREMENTS FOR BENEFITS. No benefits shall be payable under the Plan for any Agreement unless there has been a Change in Control as set forth in Section 5 and, within two years following the date of the Change in Control, the Executive has a Termination of Employment as described in Section 6. SECTION 5. CHANGE IN CONTROL. A "Change in Control" as used herein shall: (A) Be deemed to have occurred if any person or group of persons acting together, other than (1) the Company or any person who on October 26, 1994 was (i) a director or officer of the Company, or (ii) whose shares of Common Stock of the Company are 2 3 treated as "beneficially owned" by any such director or officer, or (2) any institutional investor (filing reports on Schdule 13G rather than on Schedule 13D under of the Securities Exchange Act of 1934, as amended, including any employee benefit plan or employee benefit trust sponsored by the Company), becomes a beneficial owner, directly or indirectly, of securities of the Company representing twenty percent (20%) or more of either the then outstanding Common Stock of the Company, or the combined voting power of the Company's then outstanding voting securities. As used herein, the term "person" means an individual, a partnership, a corporation, an association, an unincorporated organization, a trust, or any other entity; or (B) Be deemed to have occurred if the Shareholders of the Company approve an agreement to merge or consolidate or sell all or substantially all of the Company's assets to or into any person or entity (other than a wholly-owned subsidiary of the Company formed for the purpose of changing the Company's corporate domicile); or (C) Be deemed to have occurred upon the addition of new members to the Board of Directors within any twelve-month period, which members constitute a majority of the members of the Board of Directors. This Change in Control definition shall apply to all new Agreements under the Plan and to all Agreements under the Plan in effect as of October 26, 1994. SECTION 6. TERMINATION OF EMPLOYMENT. (A) "Termination of Employment" as used herein shall mean: 3 4 (1) Termination by the Company of the Executive's employment following a Change in Control for any reason other than death, Disability (as hereinafter defined), voluntary retirement on or after age 65 or Cause (as hereinafter defined); or (2) Resignation by the Executive following a Change in Control for Good Reason. For purposes of this Agreement, "Good Reason" shall mean the occurrence of any of the following events without the Executive's express written consent: A. Any reduction in the Executive's salary or other compensation, including pension, welfare, fringe benefits and other perquisites from those in effect immediately prior to the Change in Control; B. Any failure by the Company to continue and maintain any bonus plans, or other incentive plans (without instituting comparable plans) in which the Executive participated immediately prior to the Change in Control, or the taking of any action by the Company that would adversely affect the Executive's participation in or reduce the Executive's benefits under any of such plans; C. Any diminution of the Executive's authority, duties and responsibilities, and a significant change in the nature or scope of the Executive's duties, including any change in the corporate position to which the Executive reports, from those that he had with the Company immediately prior to the Change in Control; 4 5 D. Any change in the Executive's status or title from that which he maintained immediately prior to the Change in Control (except for a bona fide promotion); E. Any required relocation of the Executive's residence following a Change in Control outside of the Detroit metropolitan area, defined as Wayne, Oakland, Macomb, Genesee, Livingston and Washtenaw Counties; or business traveling outside of the Detroit metropolitan area in excess of that done by the Executive prior to the Change in Control; or F. The Company's breach of any provision of this Plan or a participant's Executive Severance Agreement. (B) "Disability" as used herein shall mean an Executive's total and permanent disability, resulting from an accident or mental or physical infirmity, and which prevents the Executive from performing the duties he performed at the time of the Change in Control for a period exceeding nine months. The determination of disability shall be made by a medical or osteopathic board certified physician mutually acceptable to the Company and the Executive (or the Executive's legal representative, if one has been appointed), and if the parties are unable to mutually agree to the selection of a physician, then each party shall select such a physician and the two physicians so selected shall select a third physician who shall make this determination. (C) "Cause" as used herein shall mean willful gross misconduct by the Executive, willful and material breach of duties by the Executive, or an act of material dishonesty or fraud by the Executive that is injurious to the Company. 5 6 SECTION 7. BENEFIT. (A) Each Executive who has been selected to participate in the Plan shall receive a written "Executive Severance Agreement" that will specify the amount of compensation that the Executive is eligible to receive if he incurs a Termination of Employment following a Change in Control. The terms and conditions of each participant's Executive Severance Agreement shall be determined by the Committee or by the Chairman, depending on whether the Committee or the Chairman was authorized to select the participant pursuant to Section 2 of the Plan. Provided, however, that in no event shall an Executive's severance benefit under this Plan exceed three times the Executive's highest annual W-2 Compensation from the Company during the last three calendar years immediately preceding his Termination of Employment. "W-2 Compensation" for purposes of this Section 7(a), shall include salary, bonuses (including bonuses from the Company's long and short term bonus plans), taxable fringe benefits, plus 401(k) salary deferrals, but shall exclude compensation derived from the exercise of stock options and the lapse of restrictions on stock purchased under the Company's restricted stock plans, signing bonuses and relocation expenses. (B) Except as specifically designated otherwise in a participant's Executive Severance Agreement, if the receipt of any payment under this Plan, when taken separately or in the aggregate with other payments from Company plans, agreements, or policies shall, in the opinion of the independent accounting firm engaged by the Company immediately prior to the Change in Control, result in the payment by the Executive of any excise tax provided for in Sections 280G and 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), then the amount of any payment made under this Plan shall be reduced to the extent required, 6 7 in the opinion of the aforementioned accounting firm, to prevent the imposition of such excise tax. SECTION 8. METHOD OF PAYMENT. The benefit determined to be payable to the Executive under Section 7 of this Plan shall be paid in a lump sum cash payment within twenty days after the Executive's Termination of Employment, as defined in Section 6. Any Change in Control payments payable to the Executive under this Plan or any other Company plans, agreements or policies paid later than twenty days after the due date thereof, for whatever reason, shall include interest at the prime rate (as published by Manufacturers National Bank of Detroit on the twentieth day following the due date thereof) plus two percent, which interest shall begin accruing on the twentieth day following such due date. SECTION 9. NO DUTY TO SEEK EMPLOYMENT. The Executive shall not be under any duty or obligation to seek or accept other employment after Termination of Employment. No benefit due the Executive hereunder shall be reduced or suspended if the Executive accepts subsequent employment. SECTION 10. WITHHOLDING OF TAXES. The Company may withhold from any amounts payable to an Executive under the terms of his Executive Severance Agreement, or shall require the Executive to remit to the Company at the time of receipt of payments, all applicable Federal, State, local or other withholding taxes. SECTION 11. SUCCESSORS TO THE COMPANY. This Plan shall be binding upon the Company and any successor of the Company, including, without limitation, any 7 8 corporation or other entity acquiring directly or indirectly all or substantially all of the assets of the Company whether by merger, consolidation, sale or otherwise. Such successor shall thereafter be deemed to be the "Company" for purposes of this Plan. SECTION 12. VALIDITY. The invalidity or unenforceability of any provision of this Plan shall not affect the validity or enforceability of any other provision of this Plan, which shall continue in full force and effect. SECTION 13. LIMITATION ON RIGHTS. (A) The purpose of this Plan is to provide the Executive with severance benefits in accordance with the terms of this Plan if he incurs a Termination of Employment following a Change in Control; however, this Plan shall not be deemed to create a contract of employment between the Company and the Executive and shall create no right in the Executive to continue in the Company's employment for any specific period of time, or to create any other rights in the Executive or obligations on the part of the Company, except as set forth herein. This Plan shall not restrict the right of the Company to terminate the Executive, or restrict the right of the Executive to terminate his employment. (B) This Plan shall not be construed to exclude the Executive from participation in any other compensation or benefit programs in which he is specifically eligible to participate, either prior to or following the adoption of this Plan, or any such programs that generally are available to other executive personnel of the Company, nor shall it affect the kind and amount of other compensation to which the Executive is entitled. 8 9 (C) The rights of the Executive under this Plan shall be solely those of an unsecured general creditor of the Company. SECTION 14. CLAIMS PROCEDURE. (A) The Administrator for purposes of this Plan shall be the Company, whose address is Perry Drug Stores, Inc., 5400 Perry Drive, Post Office Box 436021, Pontiac, MI 48343-6021, and whose telephone number is (810) 334-1300. The "Named Fiduciary" also shall be the Company. The Company shall have the right to designate one or more Company employees as the Administrator and the Named Fiduciary at any time, and to change the address and telephone number of the same. The Company shall give the Executive written notice of any change in the Administrator and Named Fiduciary, or in the address or telephone number of the same. All notices to the Executive under this Section 14 shall be in writing, and delivered to the Executive in person or sent by certified mail to the last address for the Executive on file with the Company. (B) The Administrator shall make all determinations as to the right of any person to receive benefits under the Plan. Any denial by the Administrator of a claim for benefits by the Executive, or his heirs or personal representatives, if applicable ("the claimant") shall be stated in writing by the Administrator and delivered or mailed to the claimant within 10 days after receipt of the claim, unless special circumstances require an extension of time for processing the claim. If such an extension is required, written notice of the extension shall be furnished to the claimant prior to the termination of the initial 10-day period. In no event shall such extension exceed a period of 10 days from the end of the initial period. Failure of the Company to notify the claimant of its decision within 10 days shall be 9 10 deemed to constitute an acceptance of the claimant's claim for benefits hereunder. Any notice of denial shall set forth the specific reasons for the denial, specific reference to pertinent provisions of this Plan upon which the denial is based, a description of any additional material or information necessary for the claimant to perfect his claim, with an explanation of why such material or information is necessary, and any explanation of claim review procedures, written to the best of the Administrator's ability in a manner that may be understood without legal or actuarial counsel. (C) A claimant whose claim for benefits has been wholly or partially denied by the Administrator may request, within 10 days following the date of such denial, in a writing addressed to the Administrator, a review of such denial. The claimant shall be entitled to submit such issues or comments in writing or otherwise, as he shall consider relevant to a determination of his claim, and he may include a request for a hearing in person before the Administrator. Prior to submitting his request, the claimant shall be entitled to review such documents as the Administrator shall agree are pertinent to his claim. The claimant may, at all stages of review, be represented by counsel, legal or otherwise, of his choice. All requests for review shall be promptly resolved. The Administrator's decision with respect to any such review shall be set forth in writing and shall be mailed to the claimant not later than 10 days following receipt by the Administrator of the claimant's request for, review unless special circumstances, such as the need to hold a hearing, require an extension of time for processing, in which case the Administrator's decision shall be so delivered in person, or mailed to the claimant by certified mail, not later than 20 days after receipt of such request. 10 11 (D) A claimant who has followed the procedure in paragraphs (B) and (C) of this section, but who has not obtained full relief on his claim for benefits, may, within 60 days following his receipt of the Administrator's written decision on review, apply in writing to the Administrator for binding arbitration of his claim before three arbitrators in Oakland County, Michigan, in accordance with the commercial arbitration rules of the American Arbitration Association, as then in effect. For purposes of choosing the arbitrators, the Company shall designate one arbitrator, the Executive shall choose an arbitrator and the two arbitrators jointly shall designate a third arbitrator, in accordance with the commercial arbitration rules referenced above. The arbitrators' sole authority shall be to interpret and apply the provisions of this Plan; they shall not change, add to, or subtract from, any of its provisions. The arbitrators shall have the power to compel attendance of witnesses at the hearing. Once a claimant commences arbitration proceedings, he shall be deemed to have waived his right to commence litigation and he shall not be permitted to terminate the arbitration proceedings without the express written consent of the Company. Any court having jurisdiction over this matter may enter a judgment based upon such arbitration. All decisions of the arbitrators shall be final and binding on the claimant and the Company without appeal to any court. SECTION 15. LEGAL FEES AND EXPENSES. To the extent that the Executive is successful as the result of any controversy over the interpretation, enforceability or validity of any provision in this Plan or his Executive Severance Agreement, the Company shall reimburse the Executive for all legal fees and expenses incurred by the Executive during the dispute. The Company shall reimburse the Executive within twenty days following written demand therefor by the Executive. The Company's late reimbursement of legal 11 12 fees and expenses incurred by the Executive under this Section 15 shall accrue interest in accordance with the provisions of Section 8. SECTION 16. NON-ALIENATION OF BENEFITS. Except in so far as this provision may be contrary to applicable law, no sale, transfer, alienation, assignment, pledge, collateralization or attachment of any benefits under this Plan shall be valid or recognized by the Company. SECTION 17. ERISA. This Plan is an unfunded compensation arrangement for a member of a select group of the Company's management and any exemptions under the Employee Retirement Income Security Act of 1974, as amended, as applicable to such an arrangement shall be applicable to this Plan. SECTION 18. REPORTING AND DISCLOSURE. The Company, from time to time, shall provide government agencies with such reports concerning this Plan as may be required by law, and the Company shall provide to the Senior Officer such disclosure concerning this Plan as may be required by law or as the Company may deem appropriate. SECTION 19. AMENDMENT AND TERMINATION. The Board of Directors of the Company has the authority to amend the Plan at any time, but the Plan and any Executive Severance Agreement outstanding at the time of a Change in Control may not be adversely amended during the two-year period following a Change in Control. Subject to the two-year period following a Change in Control, the Company reserves the right to terminate the Plan at any time by resolution of the Board of Directors. 12 13 SECTION 20. GOVERNING LAW. To the extent not preempted by Federal law, this Plan shall be governed and construed in accordance with the laws of the State of Michigan. IN WITNESS WHEREOF, this amended and restated Plan has been executed as of the 26th day of October, 1994. ATTEST: PERRY DRUG STORES, INC. /s/ Robert A. Berlow By: /s/ Jack A. Robinson - --------------------- ------------------------- Robert A. Berlow Jack A. Robinson Secretary Chairman of the Board MAH1129 13 EX-10.7 4 1986 RESTRICTED STOCK PLAN 1 EXHIBIT 10.7 PERRY DRUG STORES, INC. 1986 RESTRICTED STOCK PLAN AS AMENDED AND RESTATED OCTOBER 26, 1994 1. PURPOSES OF THE PLAN. The purposes of the 1986 Restricted Stock Plan (the "Plan") are to advance the interests of Perry Drug Stores, Inc. (the "Company") and its subsidiaries by providing incentives to selected executive employees who contribute, and are expected to continue to contribute, materially to the success of the Company and its subsidiaries, to provide a means of rewarding outstanding performance and to enable the Company and its subsidiaries to maintain a competitive position in attracting and retaining the key personnel necessary for continued growth and profitability. 2. ADMINISTRATION OF THE PLAN. The Plan shall be administered by a committee (the "Committee") of three or more persons appointed by the Board of Directors, all of whom shall be directors of the Company and shall serve at the pleasure of the Board of Directors. A majority of the Committee shall constitute a quorum thereof and the actions of a majority of the Committee at a meeting at which a quorum is present, or actions unanimously approved in writing by all members of the Committee, shall be the actions of the Committee. Vacancies occurring on the Committee shall be filled by the Board. The Committee shall have full and final authority to interpret the Plan, to prescribe, amend or rescind rules and regulations relating to it and to make all determinations necessary or advisable for its administration. 3. GRANT OF RIGHT TO PURCHASE STOCK. The Company may from time to time, on or before December 31, 1995, grant to such executive employees as may be selected in the manner 1 2 hereinafter provided, the right to purchase up to a total of Three Hundred Thousand (300,000) shares ("Shares") of the $.05 par value common stock ("Common Stock") of the Company, subject to adjustment of the number of such Shares as provided in Paragraph (d) of Section 5 hereof, on terms and conditions hereinafter provided. 4. ELIGIBILITY OF PURCHASERS. (A) Shares shall be sold under the Plan only to persons who are employees of the Company or a subsidiary of the Company on the date they are granted the right to purchase Shares. The term "employees" shall include officers, as well as other executive employees of the Company and its subsidiaries. For purposes of the Plan, the term "subsidiary" means any corporation of which the Company owns, directly or indirectly, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock of such corporation. Neither the members of the Committee nor any member of the Board of Directors who is not an employee of the Company or a subsidiary of the Company shall be eligible to purchase Shares. (B) Subject to the terms, provisions and conditions of the Plan, the Committee shall, in its sole discretion, select from among the executive employees of the Company and its subsidiaries those employees to whom, and the time or times when, the right to purchase Shares shall be granted, determine the number of Shares to be offered to each such employee at each such time, determine the sales price of the Shares, which price shall be subject to the provisions of Section 6 hereof, and prescribe the form, which shall be consistent with the terms of the Plan, of (i) the instruments evidencing the grant of the right to purchase Shares, (ii) the legend to be affixed to the stock certificates representing Shares sold under the Plan and (iii) such other documents as the Committee shall deem necessary to carry out the terms of the Plan. (C) Subject to the provisions of Section 5 hereof, Shares may be offered or sold to the same person on more than one occasion. 2 3 5. SHARES SUBJECT TO THE PLAN. (A) The stock to be offered under the Plan shall be shares of the authorized but unissued Common Stock of the Company. (B) The aggregate number of Shares which may be sold to any one employee shall not exceed Sixty Thousand (60,000) Shares. (C) Any Shares which shall have been sold under the Plan and which are repurchased by the Company on or before December 31, 1995, pursuant to an offer made in accordance with the provisions of Section 9 hereof, and any Shares as to which a right to purchase has been granted but is not exercised by the employee to whom the right is granted, shall thereafter be available for further sale under the Plan unless the Plan shall have been theretofore terminated or abandoned. (D) In the event that the number of outstanding shares of Common Stock of the Company shall be changed as a result of a stock dividend or stock split-up, or combination or exchange of shares, or through reorganization, recapitalization, merger, consolidation or otherwise, the number of Shares which may thereafter be sold under the Plan, both in the aggregate and as to any individual, the number and the sales price of Shares then subject to an unexercised right to purchase, and the prices at which Shares shall be offered to the Company for purchase, as hereinafter provided, shall be appropriately adjusted by the Committee so as to prevent dilution or enlargement of rights under the Plan. 6. PURCHASE PRICE. The purchase price for Shares shall be equal to such amount as the Committee may in each individual case and from time to time determine, but in no event shall the price per share of such Shares (a) be less than the par value thereof or (b) exceed one hundred percent (100%) of the fair market value of the unrestricted shares of Common Stock of the Company on the date that such employee is granted the right to purchase such Shares. For the purposes of the Plan, fair market value shall be determined on the basis of the closing price of the Company's Common Stock on the New York Stock Exchange on the date of such determination (or the last previous closing price if there are no sales on such date). The 3 4 purchase price shall be paid in cash. 7. NON-TRANSFERABILITY OF RIGHT TO PURCHASE SHARES. No right to purchase Shares under the Plan shall be assignable or transferable in any manner whatsoever, including by the laws of descent and distribution or by Will. Upon any attempt to transfer, assign or otherwise dispose of a right to purchase Shares granted pursuant to the Plan, or upon the levy of any attachment or similar process upon such right, the right to purchase Shares pursuant to the Plan shall immediately become null and void. 8. EXERCISE OF RIGHT TO PURCHASE SHARES. An employee who is granted the right to purchase Shares may exercise such right for a period of sixty (60) days after the date of grant, provided that he is still an employee of the Company or a subsidiary of the Company on the date of such exercise. An employee electing to purchase Shares shall give written notice to the Company of the number of Shares he has elected to purchase and shall tender the full purchase price therefor within said sixty-day (60) period. 9. RESTRICTIONS ON SHARES. (A) Until the restrictions set forth in this Paragraph (a) shall lapse pursuant to Paragraphs (b) through (g) of this Section 9, Shares purchased by an employee: (1) shall not be sold, assigned, transferred or disposed of and shall not be pledged or otherwise hypothecated (any such sale, assignment, transfer or other disposition, pledge or other hypothecation being hereinafter referred to as a "Disposition"), and (2) shall forthwith be offered to the Company for sale at the purchase price thereof upon - (i) the termination of employment of the purchaser of any such Shares, other than by death, permanent and total disability or retirement at age 65. (ii) a determination by the Committee 4 5 that the purchaser of any such Shares is engaged in activities in competition with the business of the Company or its subsidiaries or otherwise engaged in activities detrimental to the interests of the Company or its subsidiaries, (iii) the attempt by the purchaser of any such Shares to make a Disposition thereof in violation of Subparagraph (a)(i) of this Section 9, or (iv) the occurrence of such other event or events as the Committee in its discretion may designate at the time the right to purchase such Shares is granted. The obligations not to make a Disposition of Shares purchased under the Plan and to offer such Shares to the Company upon the happening of any of the events referred to in this Paragraph (a) are hereinafter referred to as the "Restrictions." (B) Except as set forth in Paragraphs (c) through (g) of this Section 9, the Restrictions shall lapse on or after (but not prior to) the third (3rd) anniversary of the date of the purchase of such Shares at such times and/or upon the occurrence of such event or events as the Committee in its sole discretion may designate in writing at the time the right to purchase such Shares in granted. Such written designation shall be set forth in the instrument evidencing the grant of the right to purchase the Shares. In the event no such written designation is made at the time an employee is granted the right to purchase Shares, the Restrictions applicable to the Shares purchased upon the exercise of such right shall lapse in the manner set forth below on the following anniversary dates of the date of purchase:
Anniversary of Percentage Lapsing Date of Purchase ------------------ ---------------- 25% Third 25% Fourth 25% Fifth 25% Sixth
5 6 (C) In the event the Restrictions on any Shares purchased by an employee under the Plan shall not have elapsed at the end of the calendar year in which such employee retires, such Restrictions shall lapse as to one hundred percent (100%) of such Shares then subject to Restrictions on January 1 of the next following calendar year, provided that at the time of retirement (i) such employee shall have attained the age of 65 years and (ii) the Shares shall have been held for at least three (3) years. Nothing herein contained shall be construed as a requirement that an employee who purchases Shares must retire from the employ of the Company at age 65. (D) In the event the Restrictions on any Shares purchased by an employee under the Plan shall not have lapsed on the date of death of the purchaser thereof or upon his permanent and total disability, such Restrictions shall lapse as to one hundred percent (100%) of such Shares then subject to Restrictions on the day following the date of either of the foregoing events. (E) In the event a purchaser of Shares under this Plan becomes obligated to offer such Shares to the Company, the Restrictions with respect to such Shares shall not lapse until such offer is made, and when such offer is made, shall lapse only if the Company does not exercise its right to purchase such Shares within thirty (30) days after the date the Company receives such offer. Nothing contained in this Plan shall require the Company to repurchase any Shares. (F) The Committee may determine that all or any of the Restrictions shall lapse at any time with respect to any Shares in the event it determines in its sole discretion that such lapse is justified by hardship of the purchaser thereof or his estate or is warranted for any other reason. (G) Notwithstanding any other provisions in this Section 9 of the Plan to the contrary, in the event an employee holds Shares purchased under this Plan that remain subject to Restrictions on the date of a "Change in Control" of the Company, such Restrictions shall lapse as to one hundred percent (100%) of such Shares then subject to Restrictions on the date of the Change in Control. For purposes of this Paragraph (g), a Change in Control shall be deemed to have occurred: 6 7 (1) if any person or group of persons acting together, other than (a) the Company or any person who on October 26, 1994 was (i) a director or officer of the Company, or (ii) whose shares of Common Stock of the Company are treated as "beneficially owned" by any such director or officer, or (b) any institutional investor (filing reports on Schedule 13G rather than on Schedule 13D under the Securities Exchange Act of 1934, as amended, including any employee benefit plan or employee benefit trust sponsored by the Company), becomes a beneficial owner, directly or indirectly, of securities of the Company representing twenty percent (20%) or more of either the then outstanding Common Stock of the Company, or the combined voting power of the Company's then outstanding voting securities. As used herein, the term "person" means an individual, a partnership, a corporation, an association, an unincorporated organization, a trust, or any other entity; or (2) Be deemed to have occurred if the Shareholders of the Company approve an agreement to merge or consolidate or sell all or substantially all of the Company's assets to or into any person or entity (other than a wholly-owned subsidiary of the Company formed for the purpose of changing the Company's corporate domicile); or (3) Be deemed to have occurred upon the addition of new members to the Board of Directors within any twelve-month period, which members constitute a majority of the members of the Board of Directors. 10. ESCROW. (A) In order to implement the Restrictions imposed upon any Shares purchased under this Plan, the Committee 7 8 may require that the certificate or certificates representing such Shares, together with a stock power executed in blank (with signature guaranteed), be delivered to the Treasurer of the Company, as escrow agent, pursuant to such escrow agreement as may be prescribed by the Committee. The escrow agent shall hold such certificates in his physical possession and custody until instructed to release any of such Shares by written notice from the Committee. The Shares released from the escrow shall be delivered by the escrow agent in accordance with the instructions from the Committee. Except for the right to maintain the physical possession and custody of such certificates, the escrow agent shall have no rights in or with respect to such certificates or the Shares represented thereby. (B) If the Committee does not require that the certificate(s) representing Shares purchased under the Plan be delivered to the escrow agent, such certificate(s) shall be delivered to the purchaser thereof free of any escrow agreement. 11. STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS. Any shares of Common Stock of the Company received by the purchaser of Shares under this Plan as a stock dividend or as a result of a stock split-up, or combination or exchange of shares, or through reorganization, recapitalization, merger, consolidation or otherwise, shall have the same status and bear the same legend as the Shares in respect of which they were received by him. Fractional shares resulting from the above adjustments, if any, may be eliminated without consideration. 12. RIGHTS OF PURCHASER OF RESTRICTED SHARES. (A) The purchaser of Shares shall have none of the rights of a shareholder in respect of such Shares until the same are registered on the books of the Company in his name. At the time of such registration, such purchaser shall have all the rights of a shareholder in respect of such Shares, including, without limitation, the right to receive dividends and to vote the same, subject only to the Restrictions set forth in Section 9 hereof and the escrow agreement, if any, applicable to such Shares. (B) No certificate representing Shares purchased under the Plan will be delivered until such time as the purchase price for such Shares has been paid in full. 8 9 (C) This Plan and participation hereunder by any employee shall create no relationship between such employee and the Company or any of its subsidiaries other than may be specifically referred to herein, and this Plan and such participation shall not constitute any employment agreement nor shall they affect, in any way, the Company's or any of its subsidiaries' present or future employment agreements or practices. Nothing contained in this Plan shall be deemed to obligate the Company or any of its subsidiaries to retain any employee in its employ or to limit the right of the Company to terminate any employee's employment with the Company or any of its subsidiaries at any time. 13. AMENDMENTS TO THE PLAN. The Board of Directors of the Company may at any time terminate or from time to time modify or suspend the Plan, provided that no such termination, modification or suspension shall adversely affect any rights to purchase Shares theretofore granted hereunder and unexercised or any rights or obligations (including the Restrictions set forth in Section 9 hereof) with respect to any Shares theretofore purchased hereunder and, further provided, that no such modification, without the approval of the shareholders, shall: (A) increase the maximum number of Shares which may be sold under the Plan or the maximum number of Shares which may be sold to any one person (except as permitted by Paragraphs (c) and (d) of Section 5 hereof); (B) permit th purchase by eligible employees of any Shares on terms more favorable than as set forth in Section 8 hereof or (C) extend the period during which Shares may be sold under the Plan. 14. USE OF PROCEEDS. The proceeds received by the Company from the sale of Shares pursuant to the Plan will be used for general corporate purposes. 15. INDEMNIFICATION OF COMMITTEE. In addition to such other rights of indemnification as they may have as directors or as members of the Committee, the members of the Committee shall be indemnified by the Company against all costs and expenses reasonably incurred by them in connection with any action, suit, 9 10 or proceeding to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan or any right to purchase Shares granted hereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceedings, except a judgment based upon a finding of bad faith; provided that upon institution of any such action, suit or proceeding, a Committee member shall in writing give the Company an opportunity, at its own expense, to handle and defend the same before such Committee undertakes to handle it on his own behalf. 16. SUCCESSORS AND ASSIGNS. The provisions of this Plan shall be binding upon, and inure to the benefit of, the Company, its successors and assigns, and upon any employee purchasing Shares hereunder, his heirs, personal representatives and successors, including, without limitation, the estate of any such employee and the executors, administrators, or trustees of such estate and any receiver, trustee in bankruptcy or representative of the creditors of any such employee. 17. SECURITIES AND EXCHANGE COMMISSION. The Company at any time may require that any Shares offered for sale and/or purchased under the Plan shall be subject to such conditions or representations as the Committee may require in order to assure compliance with the Securities Act of 1933, as amended, and any similar State or Federal legislation, and no employee purchasing Shares hereunder shall dispose of the Shares in violation of the provisions of the Securities Act of 1933, as amended. 18. SHAREHOLDER APPROVAL AND RESCISSION. (A) The Plan shall be effective on the date of approval thereof by the Board of Directors of the Company. The Plan shall be submitted to the shareholders of the Company for their approval at the annual meeting to be held on March 11, 1986 or at any adjournment thereof. (B) If appropriate shareholder approval is not obtained, the Plan shall terminate and any sales of Shares which may have been theretofore been made hereunder shall be rescinded upon the return of any consideration received from an employee 10 11 with respect to such Shares, and any rights to purchase Shares which may have theretofore been granted hereunder shall be deemed null and void. 19. STOCK WITHHOLDING ELECTION. Subject to the consent of the Committee, an employee may make an irrevocable election to unconditionally tender back to the Company upon the lapse of restrictions on shares acquired under the Plan, either (a) unrestricted shares of Common Stock of the Company acquired under the Plan, or (b) previously-acquired shares of the Company's Common Stock with a sufficient Fair Market Value on the date on which the restrictions lapse ("Tax Date") to pay the tax obligations associated with the transaction. Such election must be made by an employee on or prior to the Tax Date and the shares must be tendered back to the Company on the Tax Date. Fair Market Value for purposes of this Section shall mean the closing price of the Company's Common Stock on the principal stock exchange on which the Company's Common Stock is listed on the Tax Date (or the last previous closing price if there are no sales on such date.) A share withholding election by an employee who is subject to the short swing profit restrictions of Section 16(b) of the Securities Exchange Act of 1934 is subject to the following additional restrictions: (a) the election may not be made within six months after the grant of the restricted stock award (except that this limitation does not apply if the employee dies or becomes disabled prior to the expiration of the six-month period), or (b) the election must be made either six months prior to the Tax Date or during the ten business-day "window period" beginning on the third business day following the release of the Company's quarterly or annual summary statement of sales and earnings. THIS AMENDED AND RESTATED PLAN is hereby executed on this the 26th day of October, 1994. ATTEST: PERRY DRUG STORES, INC. /s/ Robert A. Berlow By: /s/ Jack A. Robinson - -------------------- ------------------------- Robert A. Berlow Jack A. Robinson Secretary MAH4994 11 EX-11 5 RE COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
1994 1995 -------- --------- PRIMARY EARNINGS (LOSS) PER SHARE: Weighted Average of Shares Outstanding 12,027 12,027 Incremental Shares Issuable Assuming Exercise of Stock Options 1 -------- --------- Weighted Average of Number of Shares of Common Stock and Equivalents 12,028 12,027 ======== ========= Net Earnings (Loss) $4,781 ($4,223) ======== ========= Primary Earnings (Loss) Per Share $0.40 ($0.35) ======== ========= FULLY DILUTED EARNINGS (LOSS) PER SHARE: Weighted Average Shares Outstanding 12,027 12,027 Dilutive Effect of Outstanding Stock Options (1) 17 Dilutive Effect of Convertible Subordinated Debentures: 1985 Convertible Subordinated Debentures (2) 2,758 2,758 -------- --------- Weighted Average Number of Shares of Common Stock 14,802 14,785 ======== ========= Net Earnings (Loss) $4,781 ($4,223) Interest Expense on Convertible Subordinated Debentures After-Tax Effect 2,805 2,805 -------- --------- Adjusted Net Earnings (Loss) $7,586 ($1,418) ======== ========= Fully Diluted Earning (Loss) Per Share (3) $0.51 ($0.10) ======== =========
____________________ (1) The conversion of stock options was calculated using the treasury stock method. (2) These share amounts assume conversion into common stock at date of issuance. (3) Fully-diluted earnings per share for 1994 and 1993 have not been presented in the accompanying consolidated statements of operations as the effect is anti-dilutive. EX-22 6 SUBSIDIARIES OF REGISTRANT 1 EXHIBIT 22 SUBSIDIARIES OF THE REGISTRANT Apex Drug Stores, Inc., a Michigan corporation PDS-1 Michigan, Inc., a Michigan corporation RDS Detroit, Inc., a Michigan corporation RAB, Inc., an Illinois corporation Perry Price, Inc., a Michigan corporation Perry Distributors, Inc., a Michigan corporation Perry Health Care, Inc., a Michigan corporation Perry HealthNet Services, Inc., a Michigan corporation ComfortCare Laboratory Services, Inc., a Michigan corporation EX-23 7 CONSENT OF ARTHUR ANDERSON 1 EXHIBIT 23 PERRY DRUG STORES, INC. CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS ................................................................................ As independent public accountants, we hereby consent to the incorporation of our report on the October 31, 1994, consolidated financial statements and schedules of Perry Drug Stores, Inc., and subsidiaries dated December 13, 1994 (except with respect to the matters discussed in Note 14, as to which the date is December 27, 1994) included in this Form 10-K into the Company's previously filed Forms S-8 (File No. 33-13640, File No. 2-83509 and File 33-4760) registration statements. /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Detroit, Michigan January 25, 1995 EX-27 8 FINANCIAL DATA SCHEDULE
5 1000 12-MOS OCT-31-1994 OCT-31-1994 7,798 0 30,048 (2,268) 114,189 161,577 99,430 (42,887) 245,758 96,059 93,510 701 0 0 55,588 245,758 737,070 737,070 545,780 720,392 0 3,203 8,282 8,396 2,320 6,076 0 (1,295) 0 4,781 0.40 0.51
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