Filed Pursuant to Rule 424(b)(4)
Registration No. 33-64409
Registration No. 33-64837
PROSPECTUS
5,500,000 SHARES
[ECKERD CORPORATION LOGO]
COMMON STOCK
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All of the 5,500,000 shares of common stock, par value $.01 per share (the
"Common Stock"), of Eckerd Corporation (the "Company") offered hereby (the
"Offering") are being sold by certain stockholders of the Company (the "Selling
Stockholders"). See "Principal and Selling Stockholders." The Company will not
receive any proceeds from the sale of shares of Common Stock offered hereby.
The Common Stock is listed on the New York Stock Exchange ("NYSE") under the
trading symbol "ECK." On December 7, 1995, the last reported sale price of the
Common Stock on the NYSE was $42 7/8 per share. See "Price Range of Common Stock
and Dividend Policy."
FOR INFORMATION CONCERNING CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS, SEE "RISK FACTORS" COMMENCING ON PAGE 8.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
[CAPTION]
<TABLE>
PROCEEDS TO
PRICE TO UNDERWRITING SELLING
PUBLIC DISCOUNT(1) STOCKHOLDERS(2)
<S> <C> <C> <C>
Per Share...................... $42.00 $1.60 $40.40
Total(3)....................... $231,000,000 $8,800,000 $222,200,000
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities under the Securities Act of
1933, as amended (the "Securities Act"). See "Underwriting."
(2) The Company has agreed to pay certain expenses of the Offering estimated at
$525,000.
(3) The Selling Stockholders have granted the Underwriters a 30-day option to
purchase up to an aggregate of 825,000 additional shares of Common Stock,
solely to cover over-allotments, if any. If all such additional shares are
purchased, the total Price to Public, Underwriting Discount and Proceeds to
Selling Stockholders will be $265,650,000, $10,120,000 and $255,530,000,
respectively. See "Underwriting."
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The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York on or
about December 13, 1995.
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MERRILL LYNCH & CO.
CS FIRST BOSTON
MORGAN STANLEY & CO.
INCORPORATED
RAYMOND JAMES & ASSOCIATES, INC.
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The date of this Prospectus is December 7, 1995.
<PAGE>
[ECKERD CORPORATION LOGO]
["It's right at Eckerd." logo]
[MAP OF ECKERD DRUG STORES BY STATE]
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING
IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR THE
ACCOUNTS OF OTHERS IN THE COMMON STOCK OF THE COMPANY PURSUANT TO EXEMPTIONS
FROM RULES 10b-6, 10b-7, AND 10b-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements appearing elsewhere in this
Prospectus. Unless the context indicates otherwise, all references in this
Prospectus to the "Company" include Eckerd Corporation and its subsidiaries. All
references to fiscal years shall be determined with respect to the calendar year
in which the fiscal year begins. The Company's fiscal year terminates each year
on the Saturday nearest to January 31st. Unless the context indicates otherwise,
the information contained in this Prospectus assumes that the over-allotment
option granted by the Selling Stockholders to the Underwriters has not been
exercised.
THE COMPANY
Eckerd Corporation (the "Company") operates the Eckerd Drug store chain,
which is one of the largest drug store chains in the United States. At October
28, 1995, the Eckerd Drug store chain consisted of 1,704 stores in 13 states
located primarily in the Sunbelt, including 577 stores in Florida and 474 stores
in Texas. The Company's stores are concentrated in 10 of the 12 metropolitan
statistical areas in the United States with the largest percentage growth in
population from 1980 to 1990, and, according to industry sources, the Company
ranks first or second in drug store sales in 12 of the 14 major metropolitan
markets in which it operates.
The primary focus of Eckerd Drug stores is the sale of prescription and
over-the-counter drugs. During fiscal 1994, the Company filled more than 89
million prescriptions, and sales of prescriptions and over-the-counter drugs
generated approximately 61.1% of the Company's drug store sales and other
operating revenue. During the period from fiscal 1990 through fiscal 1994, the
Company's dollar volume of sales of prescription drugs increased at a compound
annual growth rate of 12.4% and during the first half of fiscal 1995, the dollar
volume of sales of prescription drugs increased by 15.8% as compared to the
first half of fiscal 1994. The Company expects that its prescription and
over-the-counter drug business will provide significant opportunities for
profitable growth primarily as a result of the continued shift to managed health
care in the United States and the aging of the American population.
The Company believes it is well positioned to take advantage of the growth
in managed health care. The Company's extensive store base within its markets,
strong third-party payor marketing program, state-of-the-art pharmacy computer
systems, and experience and reputation in the industry provide the Company with
distinct advantages over independent drug stores, small drug store chains and
mass merchandisers in attracting third-party payor sales. In fiscal 1994, sales
to third-party payors, such as insurance companies, health maintenance
organizations ("HMOs"), preferred provider organizations ("PPOs"), other managed
care providers, government agencies or private employers, represented
approximately 64.6% of the Company's total prescription drug sales, as compared
to 36.0% in fiscal 1990, and this percentage is expected to continue to
increase.
The Company also expects to benefit from the aging of the population, as
approximately 62% of the Company's drug stores are located in Florida and Texas,
two of the top three states in terms of growth in the number of persons over age
65. According to industry studies, persons over age 65 purchase twice as many
prescription drugs and 50% more over-the-counter drugs than the national
average.
In addition to prescription and over-the-counter drugs, the Company also
sells a wide variety of name brand and private label nonpharmacy merchandise,
including health and beauty aids, greeting cards and other convenience products,
such as sundries, tobacco, books, magazines, household products, seasonal
merchandise and toys. Over the last several years, the Company has introduced
convenience food mart sections in over 550 stores, offering beverages and other
convenience food items. The Company plans to add food mart departments to over
350 stores in fiscal 1995. The Company is also a leading source of photo
finishing in all of the major markets in which it operates, offering overnight
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developing in all of its stores and 1-hour Express Photo service in 510 of its
locations as of October 28, 1995. The Company is one of the top three vertically
integrated retail photo finishers in the United States. The Company believes
that photo finishing operations increase store traffic and provide for
significant incremental sales of other drug store items. The Company anticipates
opening additional Express Photo Centers over the next several years in both new
and existing store locations, with a goal of adding approximately 240 new
Express Photo Centers by 1999.
Customer service and convenience are critical in positioning the Company as
an alternative to mass merchandisers, supermarkets and other large format
retailing channels. The Company typically provides several conveniently located,
modern stores in a community. The Company's stores range in size from 8,200 to
10,800 square feet and are primarily located in high-traffic neighborhood strip
centers or free standing locations. The Company's stores are typically open
every day of the year except Christmas, with some open until midnight or 24
hours a day. The Company offers a high level of professional pharmacy service
such as the "Rx Advisor", a personalized, easy-to-read publication provided to
each prescription drug customer which advises the customer of the specific
dosages, contraindications and side effects of his or her prescription medicine.
Other customer service advantages include comfortable pharmacy waiting areas,
free health-related programs and screenings (e.g., blood pressure tests) and
drive-through pharmacy windows in most new drug stores. In addition, the Company
frequently tests new customer service features.
The Company's business strategy is focused upon maintaining a strong
pharmacy and health-related business. The Company plans to continue to implement
this strategy by:
. maintaining a high level of customer service and convenience;
. providing competitive prices on its merchandise;
. maintaining an aggressive marketing program to third-party payors;
. continuing its commitment to control costs;
. improving store productivity and profitability by continuing to assess the
need to reallocate nonpharmacy shelf space;
. expanding and improving the Company's store base; and
. continuing to invest in and upgrade information systems.
The Company was incorporated in Delaware in 1985 and acquired the former
Jack Eckerd Corporation ("Old Eckerd") in 1986 (the "Acquisition"). The
Company's principal executive offices are located at 8333 Bryan Dairy Road,
Largo, Florida 34647; telephone number (813) 399-6000.
RECENT OPERATING RESULTS
On November 28, 1995, the Company announced its operating results for the
nine-month period ended October 28, 1995. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition--Recent Operating
Results."
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THE OFFERING
Common Stock Offered by the
Selling Stockholders......... 5,500,000 shares
Total Common Stock
Outstanding.................. 34,950,857 shares (1)
NYSE Symbol.................. ECK
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(1) Based on the number of shares outstanding as of October 28, 1995. Does not
include employee stock options outstanding to purchase an aggregate of
1,656,199 shares of Common Stock at October 28, 1995, of which options to
purchase an aggregate of 302,328 shares of Common Stock were exercisable. In
addition, another 1,757,910 shares of Common Stock were reserved for
issuance pursuant to the Company's 1993 and 1995 Stock Option and Incentive
Plans.
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SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following summary historical financial data for the years and periods
presented below have been derived from the Company's consolidated financial
statements. The historical financial data for the three fiscal years ended
January 28, 1995, January 29, 1994 and January 30, 1993 have been derived from,
and should be read in conjunction with, the Company's audited consolidated
financial statements and related notes contained in the Company's Annual Report
on Form 10-K405 (the "Annual Report") incorporated by reference herein. The
historical financial data for the twenty-six week periods ended July 29, 1995
and July 30, 1994 have been derived from, and should be read in conjunction
with, the unaudited consolidated financial statements of the Company contained
in the Company's Quarterly Report on Form 10-Q for the quarter ended July 29,
1995 (the "10-Q") incorporated by reference herein which, in the opinion of
management, reflect all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the interim period financial
data. The results for the twenty-six week period ended July 29, 1995 are not
necessarily indicative of the results to be expected for the full year. The
summary pro forma statement of operations data presented below give effect to
the Insta-Care Sale (as defined) and the use of the net proceeds therefrom as if
such transaction had occurred as of the beginning of the periods presented and
for the fiscal year ended January 28, 1995 also reflect the reversal of the gain
on the Insta-Care Sale and the charge for future store closings and should be
read in conjunction with "Pro Forma Financial Data." The summary pro forma
financial data do not purport to represent what the Company's results of
operations would actually have been if the Insta-Care Sale and the use of
proceeds therefrom in fact had occurred at the beginning of the period
presented, or to project the Company's results of operations for any future
period. All information contained in the following tables should be read in
conjunction with "Management's Discussion and Analysis of Results of Operations
and Financial Condition" and the consolidated financial statements of the
Company and related notes incorporated by reference herein.
<TABLE><CAPTION>
TWENTY-SIX WEEKS ENDED FISCAL YEAR ENDED
----------------------- --------------------------------------------------------------
JULY 29, JULY 30, JAN. 28, JAN. 29, JAN. 30, FEB. 1, FEB. 2,
1995 1994 1995 1994 1993 1992 1991
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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND PER SQUARE FOOT DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales and other operating
revenue(1)....................... $2,358,318 $2,203,085 $4,549,031 $4,190,539 $3,887,027 $3,739,852 $3,456,134
Gross profit(2).................... 533,722 516,721 1,104,890 1,015,164 990,548 1,001,307 928,590
Earnings before interest expense... 91,299 83,108 180,819 157,184 135,383 147,098 111,327
Total interest expense............. 39,949 48,392 93,735 113,215 137,404 143,194 147,309
Earnings (loss) before
extraordinary items.............. 42,620 32,966 78,331 41,413 (4,885) 977 (35,982)
Net earnings (loss) for the
period(3)........................ 41,599 32,966 47,808 (2,941) (4,123) 2,657 (35,982)
Net earnings (loss) available to
common shares(3)................. 41,599 32,966 47,808 (7,865) (14,938) (8,166) (46,848)
Earnings (loss) before
extraordinary items per common
share(4)......................... $ 1.30 $ 1.02 $ 2.41 $ 1.24 $ (0.59) $ (0.38) $ (1.97)
Net earnings (loss) per common
share(3)(4)...................... 1.27 1.02 1.47 (0.27) (0.56) (0.32) (1.97)
Weighted average common shares
outstanding...................... 32,855,056 32,235,137 32,431,719 29,392,805 26,573,902 25,677,103 23,793,496
OTHER OPERATING DATA:
EBITDA(5).......................... $ 130,860 $ 120,401 $ 258,613 $ 242,844 $ 229,217 $ 248,677 $ 235,687
EBITDA Margin(6)................... 5.5% 5.5% 5.7% 5.8% 5.9% 6.6% 6.8%
LIFO charge(7)..................... $ 5,992 $ 4,841 $ 10,750 $ 8,500 $ 15,000 $ 21,000 $ 23,000
Depreciation....................... 23,889 21,515 45,842 50,041 53,753 49,554 47,835
Amortization of intangibles and
expenses related to Acquisition
and other(8)..................... 15,672 15,778 31,952 35,619 40,081 52,025 77,925
Capital expenditures............... 40,169 21,739 57,246 39,327 51,389 49,410 73,243
DRUG STORE DATA:
Drug stores open at end of
period........................... 1,666 1,714 1,735 1,718 1,696 1,675 1,673
Comparable drug store sales
growth........................... 8.8% 8.0% 8.1% 6.1% 3.1% 5.7% 6.9%
Average sales per drug store....... $ 1,383 $ 1,252 $ 2,561 $ 2,365 $ 2,222 $ 2,142 $ 2,036
Average sales per selling floor
square foot...................... 182 159 325 302 283 272 258
Prescription sales as a percentage
of drug store sales and other
operating revenue................ 53.3% 50.5% 50.8% 48.3% 45.4% 44.0% 42.6%
Prescription and over-the-counter
sales as a percentage of drug
store sales and other operating
revenue.......................... 63.7% 60.9% 61.1% 59.0% 55.9% 54.7% 52.8%
Third-party prescription sales as a
percentage of prescription
sales............................ 69.4% 63.2% 64.6% 58.0% 49.6% 43.1% 36.0%
<CAPTION>
TWENTY-SIX WEEKS ENDED FISCAL YEAR ENDED
JULY 30, 1994 JAN. 28, 1995
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<S> <C> <C>
PRO FORMA STATEMENT OF OPERATIONS DATA:(9)(10)
Total interest expense(11)................................................ $ 44,125 $ 86,987
Earnings before extraordinary items....................................... 34,375 80,395
Net earnings for the period............................................... 34,375 49,872
Net earnings available to common shares................................... 34,375 49,872
Earnings before extraordinary items per common share...................... 1.07 2.48
Net earnings per common share............................................. 1.07 1.54
Weighted average common shares outstanding................................ 32,235,137 32,431,719
<CAPTION>
AS OF JULY 29, 1995
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ACTUAL AS ADJUSTED(12)
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<S> <C> <C>
BALANCE SHEET DATA:
Working capital..................................................................... $ 335,524 $ 353,484
Total assets........................................................................ 1,344,216 1,406,177
Long-term debt (including current installments)..................................... 790,558 771,600
Stockholders' equity (deficit)...................................................... (80,533) (3,225)
</TABLE>
(Footnotes on following page)
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(Footnotes for preceding page)
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(1) Reflects reclassification of sales to employees in the twenty-six weeks
ended July 30, 1994 to conform to fiscal 1995 financial statement
presentation. Fiscal 1994, 1993, 1992, 1991 and 1990 have not been
reclassified.
(2) Gross profit represents sales and other operating revenue less cost of
sales, including store occupancy, warehousing and delivery expense.
(3) Reflects extraordinary item of $762 in fiscal 1992 and $1,680 in fiscal
1991 relating to the tax effect of utilization of net operating loss
carryforwards and extraordinary loss net of taxes of $1,021 in the
twenty-six weeks ended July 29, 1995 and $30,523 in fiscal 1994 relating to
the early retirement of indebtedness and $44,354 in fiscal 1993 relating to
the early retirement of indebtedness and preferred stock.
(4) Reflects payment of preferred stock dividends of $4,924 in fiscal 1993,
$10,815 in fiscal 1992, $10,823 in fiscal 1991 and $10,866 in fiscal 1990.
(5) EBITDA means earnings before interest, taxes, depreciation, amortization of
intangibles and expenses related to the Acquisition and other, and, for
fiscal 1990, the reversal of the inventory valuation reserve established in
fiscal 1986 in connection with the Acquisition. See "Management's
Discussion and Analysis of Results of Operations and Financial
Condition--General--Impact of Non-Cash and Non-Recurring Charges." The
Company believes that EBITDA is an important measure of its operating
results because of the significant amount of charges resulting from the
Acquisition and other transactions which are non-cash and/or non-recurring.
However, EBITDA should not be considered in isolation or as a substitute
for net earnings and other statement of operations data prepared in
accordance with generally accepted accounting principles as a measure of
the Company's profitability or liquidity.
(6) EBITDA Margin means EBITDA as a percentage of sales and other operating
revenue.
(7) LIFO charge for fiscal 1990 is before the reversal of the inventory
valuation reserve established in fiscal 1986 in connection with the
Acquisition.
(8) Includes amortization of assets written up as a result of the Acquisition,
including goodwill, and charges due to certain performance-related
management compensation programs.
(9) The pro forma statement of operations data reflect the Insta-Care Sale and
the use of the net proceeds as if such transaction had occurred as of the
beginning of the periods presented. See "The Company--The 1994
Transactions--The Insta-Care Sale" and "Pro Forma Financial Data."
(10) For the fiscal year ended January 28, 1995, excludes $54,125 from sales and
other operating revenue for the gain on the Insta-Care Sale, $4,655 from
income taxes for the gain on the Insta-Care Sale and $48,988 from operating
and administrative expenses for the charge for future store closings.
(11) Pro forma interest expense was computed assuming a rate of 6 1/2% under the
Credit Agreement.
(12) The as adjusted balance sheet data reflect the use of the net proceeds of
approximately $82.3 million from the August Offering (as defined under "The
Company--The 1995 Transactions") which was completed on August 2, 1995.
Such net proceeds, together with approximately $54.8 million of Revolving
Loan (as defined) borrowings under the Credit Agreement (as defined under
"Description of Certain Indebtedness--The Credit Agreement") were used to
redeem all of the Company's 11 1/8% Subordinated Debentures due 2001 (the
"11 1/8% Debentures") and to finance the Florida Acquisition (as defined
under "The Company--The 1995 Transactions").
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RISK FACTORS
Prior to making an investment decision, prospective purchasers of Common
Stock should carefully consider all of the information contained in this
Prospectus, and, in particular, should evaluate the following risk factors.
SUBSTANTIAL INDEBTEDNESS
As a result of the Acquisition, the related financing and refinancings
thereof, the Company is highly leveraged. At July 29, 1995, the Company had
long-term debt (including current maturities) of $790.6 million and a
stockholders' deficit of $80.5 million. The Company may incur additional
indebtedness in the future, including (i) unused and available borrowing
commitments under the Credit Agreement of $198.7 million on July 29, 1995 and
(ii) up to an additional $150.0 million aggregate principal amount of debt
securities (the "Debt Securities") which are registered pursuant to an effective
shelf registration statement, subject in all cases to certain restrictions
contained in the Credit Agreement, the Company's 9 1/4% Senior Subordinated
Notes due 2004 (the "9 1/4% Notes") and the Company's other debt instruments.
See "--Restrictions Imposed by Terms of the Company's Indebtedness." As of
November 30, 1995, the Company had borrowed under the Credit Agreement an
additional $158.7 million and had $28.0 million of unused and available
borrowing commitments thereunder.
The ability of the Company to make cash payments to satisfy its substantial
indebtedness will depend upon its future operating performance, which is subject
to prevailing economic conditions, and to financial, business and other factors
beyond the Company's control. Based upon the Company's ability to generate cash
flow from operating activities, the available unused portion of the working
capital revolving loans under the Credit Agreement and other existing financing
sources, the Company believes that it will have the funds necessary to meet the
principal and interest payments on its debt as they become due and to operate
and expand its businesses. However, there can be no assurance that the Company
will be able to do so. If the Company is unable to generate sufficient earnings
and cash flow to meet its obligations with respect to its outstanding
indebtedness, refinancing of certain of these debt obligations or asset
dispositions might be required. In the event debt refinancing is required, there
can be no assurance that the Company can effect such refinancing on satisfactory
terms or that the refinancing will be permitted by the lenders under the Credit
Agreement, by the terms of the 9 1/4% Notes or by the other creditors of the
Company. In addition, asset dispositions may be made under circumstances which
might not be favorable to realizing the best price for such assets. Moreover,
there can be no assurance that assets can be sold promptly enough, or for
amounts sufficient to satisfy outstanding debt obligations. The Credit Agreement
and the 9 1/4% Notes contain certain restrictions on the Company's ability to
sell assets and on the use of proceeds from permitted asset sales. For
information regarding restrictions on debt refinancing and asset dispositions,
see "Description of Certain Indebtedness."
While certain transactions consummated in fiscal 1993 and 1994, such as the
IPO (as defined), the issuance of the 9 1/4% Notes and amendments to the Credit
Agreement, and certain transactions consummated in fiscal 1995, such as the
August Offering and the recent amendment to the Credit Agreement (the "1995
Credit Agreement Amendment"), have improved the Company's financial flexibility,
the substantial interest and principal payment requirements on borrowings under
the Credit Agreement, the 9 1/4% Notes and the Company's other indebtedness
could have important consequences to holders of Common Stock. See "Description
of Certain Indebtedness--The Credit Agreement." Such consequences include (i)
limiting the Company's ability to effect future financings and otherwise
restricting corporate activities, including the Company's ability to respond to
market conditions, to provide for capital expenditures or to take advantage of
acquisition opportunities and (ii) reducing the funds available to the Company
for its operations. The Credit Agreement, the 9 1/4% Notes and certain other
financing agreements impose other operating and financial restrictions on the
Company, the failure to comply with which may result in an event of default
which, if not cured or waived, would have
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a material adverse effect on the Company. See "--Restrictions Imposed by Terms
of the Company's Indebtedness."
All of the Company's indebtedness under the Credit Agreement is at variable
rates of interest, causing the Company to be sensitive to prevailing interest
rates. As required by the Credit Agreement, the Company has entered into certain
interest rate protection agreements with respect to $200.0 million of its
floating rate exposure. Such interest rate protection agreements will remain in
full force and effect through August 1996. At November 30, 1995, the Company had
$633.0 million of borrowings under the Credit Agreement which are at variable
rates of interest. To the extent interest rates rise, the Company's ability to
pay principal and interest on borrowings under the Credit Agreement and its
other indebtedness could be adversely affected. See "Description of Certain
Indebtedness--The Credit Agreement."
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
The terms and conditions of the Credit Agreement and the 9 1/4% Notes
Indenture (as defined herein) impose restrictions that affect, among other
things, the ability of the Company and its subsidiaries to incur debt, pay
dividends, make acquisitions, create liens and make capital expenditures. See
"Description of Certain Indebtedness--The Credit Agreement" and "Description of
Certain Indebtedness--The 9 1/4% Notes." The Credit Agreement also requires the
Company to satisfy certain financial covenants on a quarterly basis. The ability
of the Company to comply with such financial covenants can be affected by events
beyond the Company's control, and there can be no assurance that the Company
will achieve operating results that will comply with such covenants. A breach of
any of these covenants could result in a default under the Credit Agreement, the
9 1/4% Notes Indenture and other indebtedness of the Company. In the event of
any such default, the lenders under the Credit Agreement could elect to declare
all amounts borrowed thereunder, together with accrued interest, to be due and
payable. If the Credit Agreement indebtedness or the 9 1/4% Notes were to be
accelerated, there can be no assurance that the assets of the Company would be
sufficient to repay in full such Credit Agreement indebtedness and the other
indebtedness of the Company. See "Description of Certain Indebtedness--The
Credit Agreement."
COMPETITION
The Company operates in highly competitive industries. In addition to
traditional competition from independent drug stores and other drug store
chains, Eckerd Drug stores face competition from mass merchants (including
discounters and deep discounters), supermarkets, combination food and drug
stores, mail order distributors, hospitals and HMOs and other managed care
providers. These other formats have experienced significant growth in their
market share of the prescription and over-the-counter drug business. Many of
these competitors have greater financial resources than the Company. The Company
competes with these competitors primarily on the basis of customer service,
convenience and price. See "Business--Business Strategy--Competitive Pricing"
and "Business--Business Strategy--Competition."
PRESCRIPTION DRUG SALES AND FUTURE REGULATION
The Company relies on prescription drug sales for a significant portion of
its revenues and profits, and prescription drug sales represent a growing
segment of the Company's business. Prescription drug sales accounted for
approximately 53.3%, 50.8%, 48.3%, 45.4%, 44.0% and 42.6% of the Company's drug
store sales and other operating revenue for the first half of fiscal 1995,
fiscal 1994, fiscal 1993, fiscal 1992, fiscal 1991 and fiscal 1990,
respectively. These revenues are affected by changes within the health care
industry, including changes in programs providing for reimbursement of the cost
of prescription drugs by third-party payors, such as government and private
sources, and regulatory changes relating to the approval process for
prescription drugs. In recent years, an increasing number of
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legislative proposals have been introduced or proposed in Congress and in some
state legislatures that would effect major changes in the health care system,
either nationally or at the state level. The Company cannot predict whether any
federal or state health care reform legislation will eventually be passed, and
if so, the impact thereof on the Company's financial position or results of
operations. Health care reform, if implemented, could adversely affect the
pricing of prescription drugs or the amount of reimbursement from governmental
agencies and third-party payors, and consequently could be adverse to the
Company. However, to the extent health care reform expands the number of persons
receiving health care benefits covering the purchase of prescription drugs, it
may also result in increased purchases of such drugs and could thereby have a
favorable impact on both the Company and the retail drug industry in general.
Nevertheless, there can be no assurance that any future federal or state health
care reform legislation will not adversely affect the Company or the retail drug
store industry generally. See "Business--Regulation."
SALES TO THIRD-PARTY PAYORS
A growing percentage of the Company's prescription drug volume has been
accounted for by sales to customers who are covered by third-party payment
programs. Third-party prescription sales accounted for approximately 69.4%,
64.6%, 58.0%, 49.6%, 43.1% and 36.0% of the Company's prescription sales in the
first half of fiscal 1995, fiscal 1994, fiscal 1993, fiscal 1992, fiscal 1991
and fiscal 1990, respectively. Prescription sales to third-party payors, in
terms of both dollar volume and as a percentage of total prescription sales,
continued to increase in the first half of fiscal 1995 and the Company expects
this trend to continue. Although contracts with third-party payors may increase
the volume of prescription sales and gross profits, third-party payors typically
negotiate lower prescription prices than those on non third-party prescriptions.
Accordingly, there has been downward pressure on gross profit margins on sales
of prescription drugs which is expected to continue in future periods. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and "Business--The Drug Store Industry."
PRINCIPAL STOCKHOLDERS
Upon completion of the Offering, the Merrill Lynch Investors (as defined
under "The Company-- General") will own approximately 7.21% of the outstanding
shares of Common Stock (approximately 4.85% if the over-allotment option is
exercised in full) and the Management Investors (as defined under "The
Company--General") will own approximately 3.27% of the outstanding shares of
Common Stock. As a result of such stock ownership, if the Merrill Lynch
Investors and the Management Investors were to vote together, they may be able
to influence significantly the election of the Board of Directors of the Company
and the vote on all other matters requiring stockholder approval. In addition,
three members of the Board of Directors of the Company serve as representatives
of the Merrill Lynch Investors. The Merrill Lynch Investors are affiliates of
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"). In
addition, certain provisions of the Company's Certificate of Incorporation and
By-laws could make more difficult non-negotiated acquisitions of the Company.
These provisions include a staggered board of directors, limitation on actions
by written consent of stockholders and advance notice procedures for nominations
of directors and other stockholder proposals. See "Principal and Selling
Stockholders" and "Description of Capital Stock--Certificate of Incorporation
and By-laws."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, approximately 34,950,857 shares of Common
Stock will be outstanding. All of the 5,500,000 shares of Common Stock being
sold in the Offering, together with approximately 22,424,938 shares currently
outstanding, will be freely transferable without restriction under the
Securities Act unless held by an affiliate of the Company. The remaining
outstanding shares of Common Stock held by existing stockholders are "restricted
securities" of the Company within the
10
<PAGE>
meaning of Rule 144 under the Securities Act and may not be sold unless they are
registered under the Securities Act or sold pursuant to an exemption from
registration thereunder, including the exemption contained in Rule 144, which
contains certain volume and other resale limitations. Pursuant to Rule 144(k),
however, a person (or persons whose shares are aggregated) who is not deemed to
have been an affiliate of the Company at the time of sale and has not been an
affiliate during the three months immediately preceding the sale may sell such
shares without regard to such volume and other resale limitations of Rule 144
provided that a period of at least three years has elapsed since the later of
the date the securities were acquired from the issuer or from an affiliate of
the issuer.
The Merrill Lynch Investors, the Management Investors and the other existing
stockholders of the Company were granted rights entitling them, under specified
circumstances, to cause the Company to register for sale all or part of their
shares of Common Stock and to include such shares in any registered public
offerings of Common Stock by the Company. The Company has included the shares of
Common Stock to be sold by the Selling Stockholders in the Offering pursuant to
the exercise by such Selling Stockholders of their demand registration rights
under the Registration Rights Agreement (as defined). See "Description of
Capital Stock--Registration Rights."
Pursuant to the Registration Rights Agreement, each holder of at least 1% of
the outstanding shares of Common Stock who is a party thereto (the "1% Holders")
has agreed for a period beginning seven days before, and ending 120 days after,
the effective date of the Registration Statement of which this Prospectus is a
part, not to effect any public sale or distribution, including any sale pursuant
to Rule 144 under the Securities Act, of Common Stock or any securities
convertible into or exchangeable or exercisable for Common Stock, or any rights
or warrants to acquire Common Stock, subject to certain exceptions, without the
prior written consent of the Representatives (as defined herein) of the
Underwriters. Approximately 14.63% of the shares of Common Stock outstanding
upon consummation of the Offering will be subject to such lock-up agreement. In
addition, certain of the Merrill Lynch Investors that are limited partnerships
will be distributing an aggregate of approximately 432,762 shares of Common
Stock owned by them to their partners that have elected not to receive their pro
rata share of the proceeds of the sale of Common Stock by such partnerships (the
"Merrill Lynch Distribution"). As a condition to receiving shares of Common
Stock in the Merrill Lynch Distribution, such partners have agreed to be bound
by the same lock-up provision as the 1% Holders for a period of 120 days after
the effective date of the Registration Statement. The Merrill Lynch Distribution
is expected to occur as soon as practicable after 120 days from the effective
date of the Registration Statement, or on such earlier date consented to by the
Representatives of the Underwriters. In addition, each of the Company and the
executive officers and directors of the Company will agree, for a period of 90
days after the effective date of the Registration Statement, not to sell or
otherwise dispose of any shares of Common Stock or securities convertible into
or exchangeable or exercisable for Common Stock, or any rights or warrants to
acquire Common Stock, subject to certain exceptions, without the prior written
consent of the Representatives of the Underwriters.
No prediction can be made as to the effect, if any, that future sales of
Common Stock or the availability of Common Stock for future sale will have on
the market price of the Common Stock prevailing from time to time. Sales of
substantial amounts of Common Stock (including shares issued upon exercise of
employee stock options) in the public market, or the perception that such sales
could occur, could adversely affect prevailing market prices of the Common
Stock.
11
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of July
29, 1995 and as adjusted to give effect to the issuance of 2,675,000 shares of
Common Stock by the Company in the August Offering and the use of the net
proceeds therefrom. The table should be read in conjunction with "Pro Forma
Financial Data" and the Company's consolidated financial statements incorporated
by reference herein. The Company will not receive any of the proceeds from the
sale of the shares of Common Stock in the Offering.
<TABLE><CAPTION>
JULY 29, 1995
---------------------------
ACTUAL AS ADJUSTED(1)
--------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Total long-term indebtedness (including current installments):
Credit Agreement
Term Loans................................................... $ 415,280 $415,280
Revolving Loans and Bankers' Acceptances..................... 59,000 113,786
9 1/4% Notes..................................................... 200,000 200,000
11 1/8% Debentures ($78,860 principal amount).................... 73,744 --
Variable rate demand industrial revenue bonds.................... 18,250 18,250
Other (principally notes secured by fixtures and equipment)...... 24,284 24,284
--------- --------------
Total long-term indebtedness (including current
installments)............................................ 790,558 771,600
Stockholders' equity (deficit):
Common stock................................................... 322 349
Capital in excess of par value................................. 234,636 316,931
Retained deficit............................................... (315,491) (320,505)(2)
--------- --------------
Total common stockholders' equity (deficit)................ (80,533) (3,225)
--------- --------------
Total capitalization............................................. $ 710,025 $768,375
--------- --------------
--------- --------------
</TABLE>
- ------------
(1) Reflects the use of the net proceeds of approximately $82,322 from the
August Offering and additional Revolving Loan borrowings of approximately
$54,786 to redeem all of the 11 1/8% Debentures on September 5, 1995 and to
finance the Florida Acquisition. The Company will not receive any of the
proceeds from the sale of the shares of Common Stock in the Offering.
(2) Reflects the write-off of original issue discount and deferred debt expense
of $6,040 ($5,014 on an after-tax basis) related to the redemption on
September 5, 1995 of the 11 1/8% Debentures.
12
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock is traded on the New York Stock Exchange ("NYSE") under the
symbol "ECK." The following table sets forth on a per share basis, for the
periods indicated, the high and low sales prices of the Common Stock as reported
on the NYSE Composite Tape. The Common Stock was not publicly traded, and no
dividends were paid on the Common Stock, prior to the IPO on August 5, 1993.
<TABLE><CAPTION>
PRICE RANGE
-----------------
HIGH LOW
--------------- -------------
<S> <C> <C>
FISCAL 1993:
Third Quarter (from August 6, 1993)...................................... $18 $12 3/4
Fourth Quarter........................................................... 20 3/4 13 3/4
FISCAL 1994:
First Quarter............................................................ $24 $18 1/2
Second Quarter........................................................... 25 1/4 18 1/8
Third Quarter............................................................ 31 1/2 23 1/4
Fourth Quarter........................................................... 32 25 3/8
FISCAL 1995:
First Quarter............................................................ $30 1/4 $24 1/2
Second Quarter........................................................... 34 5/8 28 3/8
Third Quarter............................................................ 42 32 5/8
Fourth Quarter (through December 7, 1995)................................ 44 1/2 38 1/8
</TABLE>
On December 7, 1995, the last sale price as reported on the NYSE was $42 7/8
per share.
The Company has never paid dividends on its Common Stock and does not intend
to pay dividends in the foreseeable future. The payment of dividends by the
Company is subject to restrictions under certain of its financing agreements,
including the Credit Agreement and the 9 1/4% Notes. See "Description of Certain
Indebtedness." Any determination to pay cash dividends in the future will be at
the discretion of the Company's Board of Directors and will be dependent upon
the Company's results of operations, financial condition, contractual
restrictions and other factors deemed relevant at that time by the Company's
Board of Directors.
13
<PAGE>
THE COMPANY
GENERAL
Merrill Lynch Capital Partners, Inc. ("Merrill Lynch Capital Partners")
formed the Company for the purpose of acquiring Old Eckerd in April 1986. Prior
to the Acquisition, the Company had no activities other than those connected to
the Acquisition. Merrill Lynch Capital Partners formed EDS Holdings Inc. ("EDS")
and its wholly owned subsidiary, Eckerd Holdings II, Inc. ("EH II"), to acquire
certain additional drug stores in July 1990. EH II owns certain drug stores
which were operated by the Company pursuant to a Management Agreement dated as
of July 13, 1990, as amended (the "EH II Management Agreement"). On August 12,
1993, the Company completed an initial public offering (the "IPO") in which it
issued and sold 5,175,000 shares of Common Stock for $14.00 per share. The
stockholders of the Company include (i) certain partnerships affiliated with
Merrill Lynch Capital Partners, (ii) certain other affiliates of Merrill Lynch &
Co., Inc. ("ML & Co.") ((i) and (ii), collectively, the "Merrill Lynch
Investors" or the "Selling Stockholders"), (iii) approximately 25 members of
current and former management (the "Management Investors"), (iv) the Company's
Employees' Profit Sharing Plan and (v) certain affiliates of the banks which
provided part of the financing for the Acquisition and other institutional
investors. As of October 28, 1995, the Merrill Lynch Investors owned
approximately 8,020,634 shares, or 22.95%, of the Common Stock, and the
Management Investors owned approximately 1,143,505 shares, or 3.27%, of the
Common Stock. Upon completion of the Offering, the Merrill Lynch Investors will
own approximately 7.21% of the outstanding shares of Common Stock (approximately
4.85% if the over-allotment option is exercised in full). The Management
Investors are not selling any shares of Common Stock in the Offering. See
"Principal and Selling Stockholders."
THE 1993 TRANSACTIONS
The Refinancing
On June 15, 1993, the Company consummated a series of transactions designed
to simplify its capital structure, reduce interest expense and dividend costs
and provide additional financial flexibility. The Company entered into the Old
Credit Agreement (as defined), which provided for (a) a $650.0 million term loan
facility consisting of a six-year amortizing Tranche A term loan facility of
$500.0 million (the "Tranche A Term Loans") and a seven-year amortizing Tranche
B term loan facility of $150.0 million (the "Tranche B Term Loans") and (b) a
$300.0 million six-year revolving credit facility (a portion of which was
available as a swingline loan facility and as a letter of credit and bankers'
acceptance facility). The Company also entered into a sale and leaseback
arrangement with Imaging Financial Services, Inc. (the "IFS Sale and Leaseback")
relating to approximately $35.0 million of photo processing equipment. In
addition, the Company, EDS and EH II amended the EH II Management Agreement to
provide for the payment by EH II to the Company of $40.0 million, of which
approximately $22.0 million represented payment by EH II of the management fee
and interest thereon which was accrued and previously deferred and approximately
$18.0 million represented prepayment by EH II of the management fee to be earned
by the Company in the future, which prepayment was evidenced by an unsecured
promissory note (the "EH II Note"). EH II obtained the funds necessary for such
payments from cash generated by its operations and from borrowings of
approximately $31.6 million under a new revolving credit and term loan agreement
dated as of June 7, 1993 (the "EH II Credit Agreement") (the borrowings under
the Old Credit Agreement, the consummation of the IFS Sale and Leaseback, the
amendment to the EH II Management Agreement, including Eckerd's obligations
under the EH II Note, borrowings under the EH II Credit Agreement, and the
application of the proceeds therefrom, are collectively referred to as the
"Refinancing").
The net proceeds from the Refinancing were used to pay, prepay or redeem (i)
borrowings outstanding under the Company's prior Credit Agreement, dated as of
July 13, 1990, as amended, with
14
<PAGE>
Morgan Guaranty Trust Company of New York and the other lenders party thereto
(the "1990 Credit Agreement"), which consisted of a revolving credit facility
and a term loan facility, (ii) the 11.39% Senior Notes due January 31, 1995 of
the Company at a prepayment price of 100% of the principal amount thereof plus a
make-whole amount, (iii) the 11.75% Senior Notes due April 15, 1995 of the
Company at a prepayment price of 105% of the principal amount thereof, (iv) the
Senior Secured Floating Rate Notes due April 15, 1997 of the Company at a
redemption price of 101% of the principal amount thereof, (v) the 13% Senior
Secured Fixed Rate Notes due April 15, 1997 of the Company at a redemption price
of 106.6% of the principal amount thereof, (vi) the Company's Discount
Subordinated Debentures due May 1, 2006 (the "13% Discount Debentures"), at a
redemption price of 100% of the principal amount thereof (except for the $50.0
million aggregate principal amount of 13% Discount Debentures which was
subsequently redeemed with the net proceeds from the issuance of the 9 1/4%
Notes) and (vii) the Company's 14 1/2% Cumulative Redeemable Preferred Stock
(the "14 1/2% Preferred Stock"), at a redemption price of $1,000 per share plus
a redemption premium of $48.30 per share.
The IPO and Related Transactions
On August 12, 1993, the Company consummated the IPO and certain related
transactions. Immediately prior to the consummation of the IPO, the stockholders
of EDS (which included certain of the Merrill Lynch Investors and certain of the
Management Investors) exchanged their shares of EDS common stock for shares of
Class A common stock of the Company. EDS was subsequently merged into the
Company with EH II becoming a wholly owned subsidiary of the Company, and the EH
II Management Agreement was terminated upon consummation of the IPO. In
connection with the IPO the Company also amended its Restated Certificate of
Incorporation to effect, among other things, (i) the reclassification of its
Class A common stock and Class B common stock into Common Stock at certain
specified rates, (ii) a 2-for-3 reverse stock split, (iii) the adoption of
certain provisions such as a classified board of directors and the prohibition
of stockholder action by written consent, which could make non-negotiated
acquisitions of the Company more difficult and (iv) the change of the Company's
name from "Jack Eckerd Corporation" to "Eckerd Corporation." The Company used
approximately $30.0 million of the net proceeds of the IPO to repay all
borrowings outstanding under the EH II Credit Agreement and the balance to repay
borrowings under the Old Credit Agreement consisting of Tranche A Term Loans of
$27.5 million and Tranche B Term Loans of $8.3 million.
The 9 1/4% Note Issuance
On November 2, 1993, the Company consummated the sale (the "9 1/4% Note
Issuance") of $200.0 million aggregate principal amount of the 9 1/4% Notes. The
net proceeds from the 9 1/4% Note Issuance were used to redeem (i) the remaining
$50.0 million aggregate principal amount of the 13% Discount Debentures and (ii)
$145.0 million aggregate principal amount of the 11 1/8% Debentures.
The Refinancing, the IPO and the 9 1/4% Note Issuance are collectively
referred to herein as the "1993 Transactions."
THE 1994 TRANSACTIONS
The Vision Group Sale
Effective January 30, 1994, the Company sold its operations of Eckerd
Optical centers and "Visionworks" retail optical superstores (the "Vision Group
Sale"). The Company sold the Vision Group for an amount in cash and notes
approximately equal to the book value of the related assets and no gain or loss
was recognized by the Company. The net proceeds from the Vision Group Sale were
used to reduce outstanding indebtedness under the Credit Agreement. Sales of the
Vision Group were $60.7 million in fiscal 1993, accounting for approximately
1.5% of the Company's sales and 2.2% of the Company's earnings before interest,
taxes and extraordinary items.
15
<PAGE>
The Amendment
On August 3, 1994, the Company entered into an amendment (the "Amendment")
to its then existing credit agreement (the "Old Credit Agreement" and, as
amended and restated pursuant to the Amendment for periods prior to November 29,
1995, and, as amended and restated pursuant to the Amendment and the 1995 Credit
Agreement Amendment for periods on or after November 29, 1995, the "Credit
Agreement"). The Amendment did not provide any additional proceeds to the
Company, but it did provide improved pricing and increased operating flexibility
with respect to acquisitions, capital expenditures and lease payments, with
future reductions in rates if the Company achieves certain indebtedness levels
and performance goals.
The Insta-Care Sale
On November 15, 1994, the Company consummated the sale of Insta-Care
Holdings, Inc. ("Insta-Care") to Pharmacy Corporation of America, a subsidiary
of Beverly Enterprises, Inc., for a total consideration of $112.0 million in
cash (the "Insta-Care Sale"). Insta-Care provided prescription drugs as well as
patient record and consulting services to long-term health care facilities in
New England and the Sunbelt. The net proceeds from the Insta-Care Sale, after
certain closing adjustments, were approximately $93.3 million. Such net proceeds
were used to redeem $50.0 million aggregate principal amount of 11 1/8%
Debentures in December 1994 and to repay approximately $43.3 million of
Revolving Loan borrowings under the Credit Agreement in November 1994. In fiscal
1994, sales of Insta-Care were approximately $89.0 million and earnings before
interest and income taxes were approximately $3.0 million, accounting for
approximately 2.0% of the Company's sales and 1.6% of the Company's earnings
before interest, taxes and extraordinary items. The Company recognized a gain on
the Insta-Care Sale of $49.5 million, net of income taxes of $4.6 million.
The Vision Group Sale, the Amendment and the Insta-Care Sale are
collectively referred to herein as the "1994 Transactions."
THE 1995 TRANSACTIONS
The August Offering and Florida Acquisition
On August 2, 1995, the Company consummated a public offering of 6,175,500
shares of Common Stock in the aggregate at a public offering price of $32.25 per
share (the "August Offering"). Of the shares offered, 2,675,000 shares were sold
by the Company and 3,500,500 shares were sold by the Merrill Lynch Investors.
The Company used the net proceeds of the August Offering, approximately $82.3
million, and approximately $54.8 million of Revolving Loan borrowings under the
Credit Agreement (i) to redeem all of the outstanding 11 1/8% Debentures at a
redemption price of 100% of the $78.86 million principal amount thereof and (ii)
to finance the acquisition (the "Florida Acquisition") of the assets of 108 drug
stores in Florida that were formerly owned and operated by Rite Aid of Florida,
Inc. ("Rite Aid"). Pursuant to the Florida Acquisition, the Company acquired 40
Rite Aid leased locations, which are currently being operated as Eckerd Drug
stores and the fixtures, inventory and prescription files of an additional 68
Rite Aid locations.
The 1995 Credit Agreement Amendment
On November 29, 1995, the Company entered into the 1995 Credit Agreement
Amendment, pursuant to which (i) the maximum aggregate amount of borrowings
available under the Credit Agreement was reduced to $750.0 million (with the
amount of the Term Loan facility having been decreased from $406.0 million to
$250.0 million and the amount of the Revolving Loan facility having been
increased from $350.0 million to $500.0 million), (ii) certain of the financial
and restrictive covenants were amended and (iii) the calculation of the interest
rate on borrowings was adjusted resulting in a lower interest rate being paid by
the Company.
16
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following selected historical financial data for the years and periods
presented below have been derived from the Company's consolidated financial
statements. The selected historical financial data for the three fiscal years
ended January 28, 1995, January 29, 1994 and January 30, 1993 have been derived
from, and should be read in conjunction with, the Company's audited consolidated
financial statements and related notes contained in the Annual Report
incorporated by reference herein. The historical financial data for the
twenty-six week periods ended July 29, 1995 and July 30, 1994 have been derived
from, and should be read in conjunction with, the unaudited consolidated
financial statements of the Company contained in the 10-Q incorporated by
reference herein which, in the opinion of management, reflect all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the interim period financial data. The results for the
twenty-six week period ended July 29, 1995 are not necessarily indicative of the
results to be expected for the full year. All information contained in the
following tables should be read in conjunction with "Management's Discussion and
Analysis of Results of Operations and Financial Condition" and the consolidated
financial statements of the Company and related notes incorporated by reference
herein.
<TABLE><CAPTION>
TWENTY-SIX WEEKS ENDED FISCAL YEAR ENDED
----------------------- --------------------------------------------------------------
JULY 29, JULY 30, JAN. 28, JAN. 29, JAN. 30, FEB. 1, FEB. 2,
1995 1994 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales and other operating
revenue(1)........................ $2,358,318 $2,203,085 $4,549,031 $4,190,539 $3,887,027 $3,739,852 $3,456,134
Cost of sales, including store
occupancy, warehousing and
delivery expense(1)............... 1,824,596 1,686,364 3,444,141 3,175,375 2,896,479 2,738,545 2,527,544
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit(2)..................... 533,722 516,721 1,104,890 1,015,164 990,548 1,001,307 928,590
Operating and administrative
expense........................... 442,423 433,613 924,071 857,980 855,165 854,209 817,263
---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings before interest expense.... 91,299 83,108 180,819 157,184 135,383 147,098 111,327
Total interest expense.............. 39,949 48,392 93,735 113,215 137,404 143,194 147,309
---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings (loss) before income taxes
and extraordinary items........... 51,350 34,716 87,084 43,969 (2,021) 3,904 (35,982)
Income tax provision................ 8,730 1,750 8,753 2,556 2,864 2,927 --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings (loss) before extraordinary
items............................. 42,620 32,966 78,331 41,413 (4,885) 977 (35,982)
Extraordinary item--early retirement
of debt and preferred stock, net
of tax benefit.................... (1,021) -- (30,523) (44,354) -- -- --
Extraordinary item--tax effect of
utilization
of net operating loss
carryforward...................... -- -- -- -- 762 1,680 --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net earnings (loss) for the
period(3)......................... $ 41,599 $ 32,966 $ 47,808 $ (2,941) $ (4,123) $ 2,657 $ (35,982)
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net earnings (loss) available to
common shares(3).................. $ 41,599 $ 32,966 $ 47,808 $ (7,865) $ (14,938) $ (8,166) $ (46,848)
Earnings (loss) before extraordinary
items
per common share(4)............... $ 1.30 $ 1.02 $ 2.41 $ 1.24 $ (0.59) $ (0.38) $ (1.97)
Net earnings (loss) per common
share(3)(4)....................... 1.27 1.02 1.47 (0.27) (0.56) (0.32) (1.97)
Weighted average common shares
outstanding....................... 32,855,056 32,235,137 32,431,719 29,392,805 26,573,902 25,677,103 23,793,496
OTHER OPERATING DATA:
EBITDA(5)........................... $ 130,860 $ 120,401 $ 258,613 $ 242,844 $ 229,217 $ 248,677 $ 235,687
EBITDA Margin(6).................... 5.5% 5.5% 5.7% 5.8% 5.9% 6.6% 6.8%
LIFO charge(7)...................... $ 5,992 $ 4,841 $ 10,750 $ 8,500 $ 15,000 $ 21,000 $ 23,000
Depreciation........................ 23,889 21,515 45,842 50,041 53,753 49,554 47,835
Amortization of intangibles and
expenses related to Acquisition
and other(8)...................... 15,672 15,778 31,952 35,619 40,081 52,025 77,925
Capital expenditures................ 40,169 21,739 57,246 39,327 51,389 49,410 73,243
</TABLE>
17
<PAGE>
<TABLE><CAPTION>
TWENTY-SIX WEEKS ENDED FISCAL YEAR ENDED
----------------------- --------------------------------------------------------------
JULY 29, JULY 30, JAN. 28, JAN. 29, JAN. 30, FEB. 1, FEB. 2,
1995 1994 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
DRUG STORE DATA:
Drug Stores open at end of period... 1,666 1,714 1,735 1,718 1,696 1,675 1,673
Comparable drug store sales
growth............................ 8.8% 8.0% 8.1% 6.1% 3.1% 5.7% 6.9%
Average sales per drug store........ $ 1,383 $ 1,252 $ 2,561 $ 2,365 $ 2,222 $ 2,142 $ 2,036
Average sales per selling floor
square foot....................... 182 159 325 302 283 272 258
Prescription sales as a percentage
of drug store sales and other
operating revenue................. 53.3% 50.5% 50.8% 48.3% 45.4% 44.0% 42.6%
Prescription and over-the-counter
sales as a percentage of drug
store sales and other operating
revenue........................... 63.7% 60.9% 61.1% 59.0% 55.9% 54.7% 52.8%
Third-party prescription sales as a
percentage of prescription
sales............................. 69.4% 63.2% 64.6% 58.0% 49.6% 43.1% 36.0%
<CAPTION>
AS OF
------------------------------------------------------------------------------------------
JULY 29, 1995
---------------------------
ACTUAL AS ADJUSTED(9) JAN. 28, 1995 JAN. 29, 1994 JAN. 30, 1993 FEB. 1, 1992
---------- -------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................. $ 335,524 $ 353,484 $ 280,289 $ 306,588 $ 367,027 $ 328,617
Total assets.................... 1,344,216 1,406,177 1,342,347 1,420,137 1,418,922 1,412,249
Long-term debt (including
current installments)......... 790,558 771,600 787,013 954,891 1,048,222 1,023,106
Preferred stock................. -- -- -- -- 75,000 75,000
Stockholders' equity
(deficit)..................... (80,533) (3,225) (122,742) (179,022) (243,291) (228,353)
<CAPTION>
FEB. 2, 1991
------------
<S> <C>
BALANCE SHEET DATA:
Working capital................. $ 347,775
Total assets.................... 1,443,167
Long-term debt (including
current installments)......... 1,084,088
Preferred stock................. 75,000
Stockholders' equity
(deficit)........................ (220,187)
</TABLE>
- ------------
(1) Reflects reclassification of sales to employees in the twenty-six weeks
ended July 30, 1994 to conform to fiscal 1995 financial statement
presentation. Fiscal 1994, 1993, 1992, 1991 and 1990 have not been
reclassified.
(2) Gross profit represents sales and other operating revenue less cost of
sales, including store occupancy, warehousing and delivery expense.
(3) Reflects extraordinary item of $762 in fiscal 1992 and $1,680 in fiscal 1991
relating to the tax effect of utilization of net operating loss
carryforwards and extraordinary loss net of taxes of $1,021 in the
twenty-six weeks ended July 29, 1995 and $30,523 in fiscal 1994 relating to
the early retirement of indebtedness and $44,354 in fiscal 1993 relating to
the early retirement of indebtedness and preferred stock.
(4) Reflects payment of preferred stock dividends of $4,924 in fiscal 1993,
$10,815 in fiscal 1992, $10,823 in fiscal 1991 and $10,866 in fiscal 1990.
(5) EBITDA means earnings before interest, taxes, depreciation, amortization of
intangibles and expenses related to the Acquisition and other, and, for
fiscal 1990, the reversal of the inventory valuation reserve established in
fiscal 1986 in connection with the Acquisition. See "Management's Discussion
and Analysis of Results of Operations and Financial
Condition--General--Impact of Non-Cash and Non-Recurring Charges." The
Company believes that EBITDA is an important measure of its operating
results because of the significant amount of charges resulting from the
Acquisition and other transactions which are non-cash and/or non-recurring.
However, EBITDA should not be considered in isolation or as a substitute for
net earnings and other statement of operations data prepared in accordance
with generally accepted accounting principles as a measure of the Company's
profitability or liquidity.
(6) EBITDA Margin means EBITDA as a percentage of sales and other operating
revenue.
(7) LIFO charge for fiscal 1990 is before the reversal of the inventory
valuation reserve established in fiscal 1986 in connection with the
Acquisition.
(8) Includes amortization of assets written up as a result of the Acquisition,
including goodwill, and charges due to certain performance-related
management compensation programs.
(9) The as adjusted balance sheet data reflect the use of the net proceeds of
approximately $82.3 million from the August Offering, which was completed on
August 2, 1995. Such net proceeds, together with approximately $54.8 million
of Revolving Loan borrowings under the Credit Agreement, were used to redeem
all of the 11 1/8% Debentures and to finance the Florida Acquisition.
18
<PAGE>
PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial data of the Company are based on
the historical consolidated financial statements of the Company contained in the
Annual Report and 10-Q incorporated by reference herein, adjusted to give effect
to the Insta-Care Sale and the use of the net proceeds therefrom. The unaudited
pro forma statement of operations data for the fiscal year ended January 28,
1995 and the twenty-six weeks ended July 29, 1995 give effect to the Insta-Care
Sale and the use of the net proceeds therefrom as if such transactions had
occurred as of the beginning of the periods presented and for the fiscal year
ended January 28, 1995 also reflect the reversal of the gain on the Insta-Care
Sale and the charge for future store closings. The adjustments relating to the
Insta-Care Sale and the future store closings are described in the accompanying
footnotes. The pro forma adjustments are based upon available information and
certain assumptions that management of the Company believes are reasonable. The
pro forma financial data do not purport to represent what the Company's results
of operations would actually have been if the Insta-Care Sale and the use of
proceeds therefrom in fact had occurred at the beginning of the period
presented, or to project the Company's results of operations for any future
period. The pro forma financial data should be read in conjunction with
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and the historical consolidated financial statements of the Company
and related notes incorporated by reference herein.
<TABLE><CAPTION>
TWENTY-SIX
WEEKS ENDED TWENTY-SIX WEEKS ENDED FISCAL YEAR ENDED JANUARY
JULY 29, 1995 JULY 30, 1994 28, 1995
-------------- ------------------------------------------- ---------------------------
ACTUAL ACTUAL ADJUSTMENTS PRO FORMA ACTUAL ADJUSTMENTS
-------------- ---------- ----------- ---------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Sales and other
operating revenue...... $2,358,318 $2,203,085(1) $ (55,711)(2) $2,147,374 $4,549,031(1) $ (88,663)(2)
(54,125)(3)
-------------- ---------- ----------- ---------- ---------- -----------
Costs and expenses:
Cost of sales,
including store
occupancy,
warehousing and
delivery expense..... 1,824,596 1,686,364(1) (37,305)(2) 1,649,059 3,444,141(1) (58,766)(2)
Operating and
administrative
expenses............. 442,423 433,613 (15,608)(2) 418,005 924,071 (25,830)(2)
(48,988)(4)
-------------- ---------- ----------- ---------- ---------- -----------
Earnings before interest
expense................ 91,299 83,108 (2,798) 80,310 180,819 (9,204)
Interest expense:
Interest expense,
net.................. 38,881 45,001 (4,049)(5) 40,952 87,838 (6,347)(5)
Amortization of
original issue
discount and deferred
debt expense......... 1,068 3,391 (218)(6) 3,173 5,897 (401)(6)
-------------- ---------- ----------- ---------- ---------- -----------
Total interest
expense.............. 39,949 48,392 (4,267) 44,125 93,735 (6,748)
-------------- ---------- ----------- ---------- ---------- -----------
Earnings (loss) before
income taxes and
extraordinary item..... 51,350 34,716 1,469 36,185 87,084 (2,456)
Income tax provision... 8,730 1,750 60 1,810 8,753 135
(4,655)(7)
-------------- ---------- ----------- ---------- ---------- -----------
Earnings (loss) before
extraordinary item..... 42,620 32,966 1,409 34,375 78,331 2,064
Extraordinary item--early
retirement of debt and
preferred stock........ (1,021) -- -- -- (30,523) --
-------------- ---------- ----------- ---------- ---------- -----------
Net earnings (loss) for
the period............. $ 41,599 $ 32,966 $ 1,409 $ 34,375 $ 47,808 $ 2,064
-------------- ---------- ----------- ---------- ---------- -----------
-------------- ---------- ----------- ---------- ---------- -----------
Net earnings (loss)
available to common
shares................. $ 41,599 $ 32,966 -- $ 34,375 $ 47,808 --
Earnings (loss) before
extraordinary items per
common share........... 1.30 1.02 -- 1.07 2.41 --
Net earnings (loss) per
common share........... 1.27 1.02 -- 1.07 1.47 --
Weighted average common
shares outstanding..... 32,855 32,235 -- 32,235 32,432 --
<CAPTION>
PRO FORMA
----------
<S> <C>
STATEMENT OF OPERATIONS
DATA:
Sales and other
operating revenue...... $4,406,243
----------
Costs and expenses:
Cost of sales,
including store
occupancy,
warehousing and
delivery expense..... 3,385,375
Operating and
administrative
expenses............. 849,253
----------
Earnings before interest
expense................ 171,615
Interest expense:
Interest expense,
net.................. 81,491
Amortization of
original issue
discount and deferred
debt expense......... 5,496
----------
Total interest
expense.............. 86,987
----------
Earnings (loss) before
income taxes and
extraordinary item..... 84,628
Income tax provision... 4,233
----------
Earnings (loss) before
extraordinary item..... 80,395
Extraordinary item--early
retirement of debt and
preferred stock........ (30,523)
----------
Net earnings (loss) for
the period............. $ 49,872
----------
----------
Net earnings (loss)
available to common
shares................. $ 49,872
Earnings (loss) before
extraordinary items per
common share........... 2.48
Net earnings (loss) per
common share........... 1.54
Weighted average common
shares outstanding........ 32,432
</TABLE>
(Footnotes on following page)
19
<PAGE>
(Footnotes for preceding page)
- ------------
(1) Reflects an additional $18,355 for the twenty-six weeks ended July 30, 1994
in connection with the reclassification of sales to employees to conform to
fiscal 1995 financial statement presentation. Fiscal 1994 has not been
reclassified.
(2) Reflects exclusion of Insta-Care operations.
(3) Reflects reversal of $54,125 gain on the Insta-Care Sale.
(4) Reflects reversal of $48,988 charge for future store closings. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition."
(5) Reflects the redemption of $50,000 aggregate principal amount of 11 1/8%
Debentures and repayment of Revolving Loan borrowings under the Credit
Agreement of $43,300 from the net proceeds from the Insta-Care Sale, net of
income taxes of $4,655 paid from the gain on the Insta-Care Sale and the
corresponding reduction in interest expense.
(6) Reflects the reversal of original issue discount and deferred debt expenses
related to the redemption of $50,000 of 11 1/8% Debentures.
(7) Reflects reversal of $4,655 of income taxes related to the gain on the
Insta-Care Sale.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
The Company's primary source of revenues is the operation of Eckerd Drug
stores, including Eckerd Express Photo centers. Until they were sold effective
January 30, 1994 and November 15, 1994, respectively, the Company also derived
revenues from the operations of Vision Group and Insta-Care, which together
represented approximately 4.0% of the Company's sales and other operating
revenue in fiscal 1993. See "The Company--The 1994 Transactions." The following
discussion is based upon the Company's consolidated financial statements.
Impact of Non-Cash and Non-Recurring Charges
As a result of the Acquisition, the Company incurred a significant amount of
charges which are non-cash and/or non-recurring. Therefore, the Company believes
that earnings before interest and taxes after adding back such non-cash and
non-recurring Acquisition related charges (together with other non-cash charges
unrelated to the Acquisition) is an important measure of its operating results.
The following table sets forth the Company's operating results excluding such
non-cash and non-recurring charges.
<TABLE><CAPTION>
TWENTY-SIX WEEKS
ENDED FISCAL YEAR ENDED
------------------- ----------------------------------------------------
JULY 29, JULY 30, JAN. 28, JAN. 29, JAN. 30, FEB. 1, FEB. 2,
1995 1994 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings before interest, taxes and
extraordinary items..................... $ 91,299 $ 83,108 $180,819 $157,184 $135,383 $147,098 $111,327
Depreciation............................ 23,889 21,515 45,842 50,041 53,753 49,554 47,835
Amortization of asset write-ups,
including goodwill...................... 15,672 15,778 31,952 35,055 38,593 46,255 56,800
Charges due to performance related
programs................................ -- -- -- -- 1,075 4,196 20,252
Reversal of inventory valuation
reserve................................. -- -- -- -- -- -- (1,400)
Other amortization...................... -- -- -- 564 413 1,574 873
-------- -------- -------- -------- -------- -------- --------
EBITDA.................................. $130,860 $120,401 $258,613 $242,844 $229,217 $248,677 $235,687
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
</TABLE>
Depreciation includes normal depreciation of the Company's plant and
equipment over the useful lives of such assets. Other amortization includes the
write-off of certain deferred pre-opening costs for the Company's Visionworks
Stores, which were sold pursuant to the Vision Group Sale. The non-cash and
non-recurring Acquisition related charges are discussed in more detail below.
Amortization of Asset Write-ups, Including Goodwill. As a result of the
Acquisition, the Company wrote up the carrying value of its assets by
approximately $707.5 million as of April 30, 1986 in accordance with the
purchase price method of accounting. The write-up was allocated to favorable
lease interests ($504.3 million), prescription files ($107.0 million),
inventories ($61.7 million) and the excess
21
<PAGE>
of cost over net assets acquired, or goodwill ($34.5 million). Since April 30,
1986, these assets have been amortized or written off as follows:
FISCAL YEAR AMOUNT
- -------------------------------------------------------- -------------
(IN MILLIONS)
1986.................................................. $ 108.4
1987.................................................. 143.1
1988.................................................. 50.8
1989.................................................. 46.1
1990.................................................. 56.8
1991.................................................. 46.3
1992.................................................. 38.6
1993.................................................. 35.1
1994.................................................. 32.0
-------------
$ 557.2
-------------
-------------
Most of such amortization is fully tax deductible. Amortization is expected to
be approximately $34.0 million in fiscal 1995.
Tax Net Operating Loss Carryforwards
As of January 28, 1995, the Company estimates that it had NOL carryforwards
of approximately $218.0 million for U.S. federal income tax purposes. These NOL
carryforwards may be utilized to reduce the Company's federal income tax
obligations in future periods and, if not so utilized, will expire in fiscal
years 2002 to 2008. See the discussion of the Company's tax NOL carryforwards in
"--Tax Net Operating Loss Carryforwards" below. In addition, the Company may be
subject to the federal alternative minimum tax ("AMT"), which is equal to 20% of
the Company's "alternative minimum taxable income" ("AMTI"), i.e., its regular
taxable income adjusted for certain preference items. As the Company generally
may utilize its NOL carryforwards (as adjusted for AMT purposes) to offset up to
90% of its AMTI, the Company generally will be subject to the AMT at an
effective rate of approximately 2% of its AMTI. After the Company utilizes all
of its NOL carryforwards, its effective tax rate will increase. Any AMT paid may
be used as a credit against the Company's regular federal income tax liability
in future taxable years.
Cost Reduction Program
In May 1992, the Company implemented a cost reduction program which, during
the three fiscal years ended January 28, 1995, January 29, 1994 and January 30,
1993, has eliminated operating expenses of over $80.0 million. The Company
continues to actively evaluate and pursue additional cost savings which can be
obtained without affecting the Company's customer service, quality or sales
growth potential. There can be no assurance, however, that any additional cost
reductions will be realized. See "Business--Business Strategy--Cost Reduction
Program."
Competitive Pricing
In May 1992, the Company commenced a program in certain selected markets
involving lowering prices on prescription drugs sold to non third-party
customers in order to enhance its market share and long term competitive
position. Such program was implemented in all of the Company's markets by
November 1992. Prescription sales to non third-party customers represented 35.4%
of the Company's fiscal 1994 prescription sales and 30.6% in the first half of
fiscal 1995. Although the program has resulted in lower gross margins, as
expected, the Company believes that it has also had the intended effect of
stimulating additional business. There can be no assurance, however, that
additional sales increases will be realized from the competitive pricing
program.
22
<PAGE>
The Company believes that its reduced prescription prices, together with the
overall value provided by the high level of customer service and convenience
offered by its drug stores, have enabled the Company to more aggressively
compete with other drug stores and have enhanced its competitive position with
other shopping formats. See "Business--Business Strategy--Competitive Pricing."
Extraordinary Items and Non-Recurring Adjustments
The Company's financial results for fiscal 1994 reflect extraordinary items
in connection with the Amendment, as well as the early repayment of debt with a
portion of the net proceeds from the Insta-Care Sale, of $28.0 million ($26.6
million on an after-tax basis) and $4.1 million ($3.9 million on an after-tax
basis), respectively, which consisted of the write-off of deferred debt expenses
and original issue discount ("OID"). In addition, the fiscal 1994 financial
results also include non-recurring adjustments of $49.5 million (net of income
taxes of $4.6 million) for the gain on the Insta-Care Sale and $49.0 million for
the charge for future store closings.
The Company's financial results for the first half of fiscal 1995 reflect an
extraordinary item in connection with the early repayment of debt which reflects
the write-off of OID and deferred debt expense of $1.31 million ($1.02 million
on an after-tax basis) for the second quarter of fiscal 1995 related to the
redemption on May 12, 1995 of 11 1/8% Debentures.
For the third quarter of fiscal 1995, the Company's financial results will
reflect an extraordinary item in connection with the early repayment of debt
which reflects the write-off of OID and deferred debt expense of $5.96 million
($5.01 million on an after-tax basis) related to the redemption of the balance
of the 11 1/8% Debentures with a portion of the net proceeds from the August
Offering and the Revolving Loan borrowings. The Company also expects that the
financial results for the fourth quarter of fiscal 1995 will reflect an
extraordinary item in connection with the 1995 Credit Agreement Amendment of
approximately $3.8 million.
RECENT OPERATING RESULTS
On November 28, 1995, the Company announced its operating results for the
nine-month period ended October 28, 1995. The Company announced that earnings
before extraordinary items were $48.2 million and sales were $3.5 billion for
the nine-month period ended October 28, 1995, compared to $35.5 million and $3.2
billion, respectively, for the comparable period of fiscal 1994. Improved sales
and operations and lower interest costs, partially offset by a higher tax rate,
contributed to the results. Comparable drug store sales (stores open for one
year or more, excluding relocated stores opened less than one year) increased
9.2% for the nine-month period ended October 28, 1995. For the nine-month period
ended October 28, 1995, pharmacy sales and non-pharmacy sales increased 16.7%
and 3.9%, respectively, over the comparable period of fiscal 1994.
Operating profit for the nine-month period ended October 28, 1995 increased
to $116.8 million from $102.8 million for the comparable period of fiscal 1994.
The LIFO inventory charge for the nine-month period ended October 28, 1995
increased to $9.8 million from $7.4 million for the comparable period of fiscal
1994.
During the quarter ended October 28, 1995, the Company recorded an
extraordinary non-cash charge of $5.0 million, net of taxes. See
"--General--Extraordinary Items and Non-Recurring Adjustments."
The foregoing results for the comparable nine-month period of fiscal 1994
have been adjusted to give pro forma effect to the Insta-Care Sale and the use
of proceeds therefrom and reflect the reclassification of sales to employees to
conform to fiscal 1995 financial statement presentation.
23
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain condensed consolidated statements of
operations data of the Company in dollars and as a percentage of sales and other
operating revenue for the periods indicated. The data for the twenty-six weeks
ended July 29, 1995 and for fiscal 1992 are presented on a historical basis, the
data for the twenty-six weeks ended July 30, 1994 and for fiscal 1994 are
presented on an adjusted basis and the data for fiscal 1993 are presented on
both an adjusted basis and a historical basis. The data for the twenty-six weeks
ended July 30, 1994 are adjusted to give pro forma effect to the Insta-Care Sale
and the use of proceeds therefrom and reflect the reclassification of sales to
employees to conform to fiscal 1995 financial statement presentation. The fiscal
1994 data are adjusted to exclude a pre-tax gain of $54.1 million (before income
taxes of $4.6 million) from the Insta-Care Sale and also to exclude a reserve of
$49.0 million for future store closings. The fiscal 1993 adjusted data exclude
the operations of Vision Group for the full fiscal year because it was sold
effective January 30, 1994, and exclude the operations of Insta-Care from
November 16, 1993 through January 29, 1994 because it was sold effective
November 15, 1994.
<TABLE><CAPTION>
TWENTY-SIX WEEKS ENDED FISCAL YEAR ENDED
------------------------------------- ---------------------------------------------------------
JULY 29, JULY 30, JANUARY 28, JANUARY 29, JANUARY 29,
1995 1994 1995 1994 1994
----------------- ----------------- ----------------- ----------------- -----------------
HISTORICAL ADJUSTED ADJUSTED ADJUSTED HISTORICAL
(DOLLARS IN THOUSANDS)
$ % $ % $ % $ % $ %
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales and other
operating revenue....... 2,358,318 100.0 2,147,374 100.0 4,494,906 100.0 4,108,683 100.0 4,190,539 100.0
Cost of sales and
related expenses........ 1,824,596 77.4 1,649,059 76.8 3,444,141 76.6 3,123,899 76.0 3,175,375 75.8
Gross profit............ 533,722 22.6 498,315 23.2 1,050,765 23.4 984,784 24.0 1,015,164 24.2
Operating and
administrative
expenses................ 442,423 18.8 418,005 19.5 875,083 19.5 829,654 20.2 857,980 20.5
Operating and
administrative
expenses, excluding
amortization of asset
write-ups resulting
from the acquisition
and related expenses... 426,751 18.1 402,393 18.7 843,131 18.8 794,267 19.3 822,361 19.6
Earnings before interest
and taxes............... 91,299 3.9 80,310 3.7 175,682 3.9 155,130 3.8 157,184 3.8
Total interest
expense................. 39,949 1.7 44,125 2.1 93,735 2.1 113,215 2.8 113,215 2.7
Earnings (loss) before
income taxes and
extraordinary item...... 51,350 2.2 36,185 1.7 81,947 1.8 41,915 1.0 43,969 1.0
Net earnings (loss)..... 41,599 1.8 34,375 1.6 47,326 1.1 (4,995) (.1) (2,941) (.1)
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
EBITDA.................. 130,860 5.5 116,680 5.4 253,476 5.6 237,512 5.8 242,844 5.8
<CAPTION>
JANUARY 30,
1993
-----------------
HISTORICAL
$ %
--------- -----
<S> <C> <C>
Sales and other
operating revenue....... 3,887,027 100.0
Cost of sales and
related expenses........ 2,896,479 74.5
Gross profit............ 990,548 25.5
Operating and
administrative
expenses................ 855,165 22.0
Operating and
administrative
expenses, excluding
amortization of asset
write-ups resulting
from the acquisition
and related expenses... 816,159 21.0
Earnings before interest
and taxes............... 135,383 3.5
Total interest
expense................. 137,404 3.5
Earnings (loss) before
income taxes and
extraordinary item...... (2,021) (.1)
Net earnings (loss)..... (4,123) (.1)
--------- -----
--------- -----
EBITDA.................. 229,217 5.9
</TABLE>
The following management's discussion and analysis is based on the
historical and as adjusted statements of operation data set forth in the above
table.
Twenty-Six Weeks Ended July 29, 1995 (historical)
compared with Twenty-Six Weeks Ended
July 30, 1994 (adjusted)
The Company's sales and other operating revenue for the first half of fiscal
1995 were $2,358.3 million, a 9.8% increase over the first half of fiscal 1994.
Comparable drug store sales (stores open for one year or more, excluding
relocated stores opened less than one year) increased 8.8% for the first half of
fiscal 1995, compared to an 8.0% increase for the first half of fiscal 1994.
Sales benefited from significant increases in prescription sales as well as by
increases in front end sales from strong Valentine and Easter selling seasons in
the first quarter and from a change in the promotional calendar in the second
quarter of fiscal 1995. Prescription sales for the first half of fiscal 1995
were $1,256.9 million, a 15.8% increase over the first half of fiscal 1994. In
addition, front end sales increased to $1,096.8 million, a 3.7% increase over
the first half of fiscal 1994. Front end sales in the first half of fiscal 1995
were positively affected primarily by increased sales of non-prescription items
in the health, greeting card, convenience food and photofinishing categories.
24
<PAGE>
Prescription sales as a percentage of drug store sales and other operating
revenue was approximately 53.3% for the first half of fiscal 1995 as compared
with approximately 50.5% for the first half of fiscal 1994. The growth in
prescription sales for the first half was primarily the result of increased
third-party prescription sales and the Company's competitive cash pricing
strategy. These strong sales were aided by a more severe cough, cold and flu
season in the first quarter of fiscal 1995 compared to the first quarter of
fiscal 1994. Third-party prescription sales increased to approximately 69.4% of
the Company's prescription sales for the first half of fiscal 1995 from
approximately 63.2% in the first half of fiscal 1994. The Company expects
prescription sales to third-party payors, in terms of both dollar volume and as
a percentage of total prescription sales, to continue to increase in fiscal 1995
and for the foreseeable future. Third-party payors typically negotiate lower
prescription prices than those on non third-party prescriptions, resulting in
decreasing gross profit margins on the Company's prescription sales. However,
contracts with third-party payors generally increase the volume of prescription
sales and gross profit dollars. See "Business--The Drug Store Industry."
Cost of sales and related expenses for the first half of fiscal 1995 were
$1,824.6 million, a 10.6% increase over the first half of fiscal 1994. As a
percentage of sales, cost of sales and related expenses were 77.4% compared to
76.8% for the first half of fiscal 1995 and 1994, respectively. The increase in
cost of sales and related expenses as a percentage of sales resulted primarily
from the continued increase in third-party prescription sales with typically
lower gross profit margins than non third-party prescription sales. The LIFO
charge was $6.0 million compared to $4.8 million for the first half of fiscal
1995 and 1994, respectively.
Operating and administrative expenses for the first half of fiscal 1995 were
$442.4 million, a 5.8% increase over the first half of fiscal 1994. As a
percentage of sales, operating and administrative expenses decreased to 18.8%
for the first half of fiscal 1995 from 19.5% for the first half of fiscal 1994.
The decrease in operating and administrative expenses as a percentage of sales
resulted primarily from operating efficiencies related to higher sales, and cost
controls which helped produce lower costs as a percentage of sales in such
expense categories as payroll and insurance. Non-cash tax deductible
amortization of intangibles included in operating and administrative expenses
for the first half of fiscal 1995 and the first half of 1994 were $15.7 million
and $15.6 million, respectively, an increase of 0.4%.
As a result of the above, earnings before interest expense and taxes and
extraordinary item increased 13.7% to $91.3 million, or 3.9% of sales, as
compared to 3.7 % of sales for the same period of the prior year.
Total interest expense was $39.9 million for the first half of fiscal 1995,
a decrease of 9.5% from the first half of fiscal 1994. The decrease was due
primarily to lower average borrowings in the first half of fiscal 1995 compared
to the first half of fiscal 1994. The average interest rate on borrowings in the
first half of fiscal 1995 and the first half of 1994 was substantially the same.
Income taxes for the first half of fiscal 1995 and the first half of 1994
were $8.7 million and $1.8 million, respectively. The effective income tax rate
of 17% in the first half of fiscal 1995 was higher than in the first half of
fiscal 1994 (5%). During the second quarter of fiscal 1995, income taxes were
adjusted to reflect the estimated 17% annual income tax rate. Income taxes
include alternative minimum and state income taxes for the Company and reflect
the utilization of net operating loss carryforwards.
As a result of the foregoing factors, the Company had net earnings before
extraordinary items for the first half of fiscal 1995 of $42.6 million, compared
to $34.4 million for the first half of fiscal 1994, an increase of $8.2 million
or 24.0%.
Fiscal Year 1994 (adjusted) compared with Fiscal Year 1993 (adjusted)
The Company's sales and other operating revenue for fiscal 1994 were $4.5
billion, a 9.4% increase over fiscal 1993. Comparable drug store sales (stores
open for one year or more) increased 8.1% during
25
<PAGE>
fiscal 1994 compared to a 6.1% increase in fiscal 1993. Sales benefited from
significant increases in drug store prescription sales and increases in front
end sales. For fiscal 1994, prescription sales were $2.2 billion, a 15.2%
increase over fiscal 1993. In addition, drug store front end sales increased to
$2.2 billion, a 4.2% increase over fiscal 1993.
Prescription sales as a percentage of drug store sales and other operating
revenue was 50.8% for fiscal 1994 compared with 48.3% for fiscal 1993. The
growth in prescription sales was primarily the result of increased third-party
prescription sales and the Company's competitive cash pricing strategy. These
sales were strong despite a lower incidence of cough and cold/flu virus during
the first and fourth quarters of fiscal 1994 compared to fiscal 1993.
Third-party prescription sales represented 64.6% and 58.0% of the Company's
prescription sales in fiscal 1994 and 1993, respectively.
Cost of sales and related expenses in fiscal 1994 were $3.4 billion, a 10.2%
increase over fiscal 1993. As a percentage of sales, cost of sales and related
expenses were 76.6% and 76.0% for fiscal 1994 and 1993, respectively. The
increase in cost of sales and related expenses as a percentage of sales resulted
primarily from the continued increase in third-party prescription sales with
typically lower gross profit margins than non third-party prescription sales.
The LIFO charge was $10.8 million in fiscal 1994 compared to $8.5 million in
fiscal 1993.
Operating and administrative expenses in fiscal 1994 were $875.1 million, a
5.5% increase over fiscal 1993. As a percentage of sales, operating and
administrative expenses were reduced to 19.5% for fiscal 1994 from 20.2% for
fiscal 1993. The decrease in operating and administrative expenses in fiscal
1994 as a percentage of sales resulted primarily from the economies of scale
related to the higher sales, and cost controls which helped produce lower costs
as a percentage of sales in such expense categories as payroll, insurance and
supplies. Additionally, non-cash tax deductible amortization of intangibles
included in operating and administrative expenses for fiscal 1994 and 1993 were
$31.9 million and $35.4 million, respectively, a decrease of 9.9%.
In the fourth quarter of fiscal 1994, the Company decided to accelerate the
closing of approximately 90 geographically dispersed, under-performing stores
over the following twelve to eighteen months, and established a $49.0 million
reserve for future store closings. These closings are in addition to the
relatively small number of stores the Company closes in the normal course of
business. The $49.0 million reserve includes approximately $27.0 million for
lease settlements and obligations, approximately $4.0 million for severance and
other expenses directly related to the store closings, and approximately $18.0
million for the write-off of impaired assets which include inventory liquidation
and the write-off of intangible and fixed assets.
As a result of the above, earnings before interest expense and income taxes
increased 13.2% to $175.7 million, or 3.9% of sales, as compared to 3.8% of
sales for the same period of the prior year.
Total interest expense was $93.7 million in fiscal 1994, a decrease of 17.2%
from fiscal 1993. The decrease was due primarily to the lower cost of debt to
the Company resulting from the 1993 Transactions and the Amendment which
provided improved pricing. In addition, the decrease in interest expense was due
to lower average borrowings in fiscal 1994, due primarily to repayments of
borrowings from net proceeds from the sale of Vision Group and Insta-Care
operations, partially offset by the numerous marketplace interest rate increases
during fiscal 1994. Amortization of original issue discount and deferred debt
expenses decreased to $5.9 million in fiscal 1994 from $7.2 million in fiscal
1993 resulting from the refinancing and early retirement of certain debt issues
in fiscal 1994 and 1993.
Income tax expense was $4.1 million and $2.6 million in fiscal 1994 and
1993, respectively. Income tax expense in both fiscal years represents
alternative minimum tax and state income taxes for the Company, and reflects the
utilization of net operating loss carryforwards.
26
<PAGE>
As a result of the foregoing factors, the Company had earnings on an
adjusted basis before extraordinary items of $77.8 million in fiscal 1994
compared to $39.4 million in fiscal 1993, an increase of $38.4 million or 97.5%
and net income of $47.3 million in fiscal 1994 compared to a net loss of $5.0
million in fiscal 1993, a $52.3 million increase.
The Company had extraordinary items of $30.5 million (net of tax benefit of
$1.6 million) and $44.4 million (net of tax benefit of $0.9 million) in fiscal
1994 and 1993, respectively. The extraordinary item in fiscal 1994 is primarily
from the write-off of deferred costs related to the Amendment of the Credit
Agreement, as well as from the early retirement of $50.0 million of the 11 1/8%
Debentures. The extraordinary item in fiscal 1993 is primarily from the
write-off of deferred costs from the early retirement of a portion of the 11
1/8% Debentures, all of the 13% Discount Debentures and the redemption of the 14
1/2% Preferred Stock.
Fiscal Year 1993 (historical) compared with Fiscal Year 1992 (historical)
The Company's competitive pricing and cost reduction programs were both
largely reflected in fiscal 1993. The Company's sales and other operating
revenue for fiscal 1993 were $4.191 billion, a 7.8% increase over fiscal 1992.
Comparable drug store sales increased 6.1% during fiscal 1993 compared to a 3.1%
increase in fiscal 1992. The increase in sales and other operating revenue was
due primarily to a $245 million increase in sales of prescription drugs.
Prescription sales as a percentage of drug store sales and other operating
revenue was approximately 48.3% for fiscal 1993 as compared with approximately
45.4% for fiscal 1992. The growth in prescription sales was primarily the result
of increased third-party prescription sales, the Company's competitive pricing
program and a high incidence of cough and cold/flu virus during the first and
fourth quarters of fiscal 1993. Third-party prescription sales represented
approximately 58.0% and 49.6% of the Company's prescription sales in fiscal 1993
and 1992, respectively.
The increase in comparable drug store sales was due primarily to the
increase in sales of prescription drugs resulting from sales related to new
third-party prescription plan contracts, the Company's competitive pricing
program, and a high incidence of cough and cold/flu virus during the first and
fourth quarters of fiscal 1993. In addition, comparable drug store sales growth
was positively affected by increased sales of non-prescription items in the
health and beauty, greeting card, convenience food and photofinishing categories
resulting from increased marketing emphasis and shelf space for these
categories, as well as increased sales of over-the-counter drugs because of the
high incidence of cough and cold/flu virus during the first and fourth quarters
of fiscal 1993. Total sales growth was positively affected by the growth in
comparable drug store sales, as well as the inclusion of 34 drug stores acquired
during the second half of fiscal 1992 and 19 drug stores acquired in the fourth
quarter of fiscal 1993.
Cost of sales and related expenses in fiscal 1993 were $3.175 billion, a
9.6% increase over fiscal 1992. As a percentage of sales, cost of sales and
related expenses were 75.8% and 74.5% for fiscal 1993 and 1992, respectively.
The competitive pricing strategy for non third-party prescription sales and the
continued increase in third-party prescription sales, which typically have lower
gross profit margins than non third-party prescription sales, partially offset
by a lower LIFO charge of $8.5 million ($15.0 million in fiscal 1992), were the
primary reasons for the increase in cost of sales and related expenses as a
percentage of sales in fiscal 1993.
Operating and administrative expenses in fiscal 1993 were $858.0 million, a
0.3% increase over fiscal 1992. As a percentage of sales, operating and
administrative expenses were reduced to 20.5% in fiscal 1993 from 22.0% for
fiscal 1992 as a result of the higher sales in fiscal 1993 and lower costs as a
percentage of sales in such expense categories as payroll, advertising,
insurance and supplies as a result of the cost reduction program initiated in
the second half of fiscal 1992. The implementation of the cost reduction program
eliminated operating expenses of approximately $70.0 million in fiscal 1993, and
the
27
<PAGE>
Company estimates that $10.0 million of such savings was recognized in fiscal
1992. Non-cash, tax deductible amortization of intangibles included in operating
and administrative expenses in fiscal 1993 and 1992 were $35.6 million and $39.0
million, respectively, a decrease of 8.7%.
As a result of the above, earnings before interest expense and income taxes
increased 16.1% to $157.2 million, or 3.8% of sales, as compared to 3.5% of
sales for the same period of the prior year.
Total interest expense was $113.2 million in fiscal 1993, a decrease of
17.6% from fiscal 1992. The decrease was due primarily to lower interest rates
in the marketplace and lower cost of debt for the Company after the Refinancing
and the 9 1/4% Note Issuance and the consummation of the IPO on August 12, 1993.
The income tax provision for fiscal 1993 and 1992 was $2.6 million and $2.9
million, respectively. The income tax provision for fiscal 1993 and 1992
represents alternative minimum tax and state income taxes.
As a result of the foregoing factors, the Company had earnings before
extraordinary items in fiscal 1993 of $41.4 million, compared with a loss of
$4.9 million in fiscal 1992, and a net loss in fiscal 1993 of $2.9 million
compared with a net loss of $4.1 million in fiscal 1992.
The Company had an extraordinary item of $44.4 million (net of an income tax
benefit of $0.9 million) in fiscal 1993, which was recognized as a result of the
early retirement of existing indebtedness and the redemption of the Company's 14
1/2% Preferred Stock in connection with the Refinancing, the IPO and the 9 1/4%
Note Issuance. In fiscal 1992, the Company had an extraordinary item of $0.8
million which represented the tax effect of the utilization of the Company's net
operating loss carryforward.
28
<PAGE>
Quarterly Results and Seasonality
The Company's sales and profits are higher during peak holiday periods and
from Christmas through Easter in selected geographic areas. Sales of
health-related products peak during seasonal outbreaks of cough and cold/flu
virus, typically during the winter and spring. Accordingly, sales and profits
are typically highest in the fourth quarter followed by the first quarter.
The following table sets forth certain unaudited quarterly operating data
for each of fiscal 1994 and 1993 and for the first and second quarters of fiscal
1995. The data presented include all adjustments, consisting only of normal
recurring adjustments, that management considers necessary for a fair
presentation of the data shown:
(IN THOUSANDS)
FISCAL 1995
-------------------------
FIRST SECOND
QUARTER QUARTER
---------- ----------
Sales and other operating revenue... $1,219,594 $1,138,724
Gross profit........................ 280,106 253,616
Net earnings (loss)................. 30,544 11,055
EBITDA.............................. 79,052 51,808
<TABLE><CAPTION>
FISCAL 1994
-------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Sales and other operating revenue... $1,126,806(1) $1,057,924(1) $ 1,061,704(1) $1,302,597 $4,549,031
Gross profit........................ 270,112 246,609 239,523 348,646 1,104,890
Net earnings (loss)................. 26,945 6,021 (26,015) 40,857 47,808
EBITDA.............................. 70,544 49,795 44,147 94,127 258,613
<CAPTION>
FISCAL 1993
-------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Sales and other operating revenue... $1,055,152 $ 981,195 $ 972,675 $1,181,517 $4,190,539
Gross profit........................ 261,823 238,523 227,769 287,049 1,015,164
Net earnings (loss)................. 17,820 (30,868) (11,558) 21,665 (2,941)
EBITDA.............................. 74,433 52,005 34,725 81,681 242,844
</TABLE>
- ------------
(1) Does not reflect reclassification of sales to employees to conform to fiscal
1995 financial statement presentation. As reclassified, sales and other
operating revenue for the first, second and third quarters would equal
$1,136,195, $1,066,890, and $1,071,036, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At November 30, 1995, the Company had outstanding approximately $250.0
million of Term Loans and $383.0 million of Revolving Loans under the Credit
Agreement and had $28.0 million available for Revolving Loan borrowings under
the Credit Agreement (which is net of $89.0 million of letters of credit).
Pursuant to the Credit Agreement, the Company is required to make scheduled
payments of the outstanding principal amount of Term Loans in the amount of
$50.0 million per fiscal year over the next five fiscal years. Prepayments made
pursuant to the Credit Agreement are applied pro rata among the remaining
scheduled principal payments. The term of the Credit Agreement expires on
November 29, 2000. At July 29, 1995, the Company had excess availability under
the revolving loan facility portion of the Credit Agreement and accordingly was
not required to treat the required amortization repayments as current. See
"Description of Certain Indebtedness--The Credit Agreement."
On July 29, 1995 the Company had working capital of $335.5 million and a
current ratio of 1.7 to 1 compared to $280.3 million and 1.5 to 1 at January 28,
1995. Cash flow provided by operating activities increased $57.1 million to
$62.0 million for the first half of fiscal 1995 compared to $4.9 million for the
first half of fiscal 1994. This increase was due to higher earnings for the
first half of fiscal 1995 compared to the first half of fiscal 1994 and
primarily due to the higher than normal cash payments to merchandise vendors in
the first quarter of fiscal 1994, resulting in the reduction of accounts payable
from an abnormally high balance at January 29, 1994 primarily from the timing of
vendor payment due dates. This increase was offset partially by an increase in
receivables from third-party prescription sales in fiscal 1995.
29
<PAGE>
Net cash from investing activities for the first half of fiscal 1995 and
1994 used $37.4 million and provided $3.8 million, respectively. Uses of cash
were principally for capital expenditures of $40.2 million and $21.7 million for
fiscal 1995 and 1994, respectively, for point-of-sale product scanning
equipment, additions to the Company's drug stores, and Express Photo units,
relocation of drug stores and improvements to existing stores. In addition, in
fiscal 1994, additions to property, plant and equipment were for the
installation of satellite communication equipment. In the first quarter of
fiscal 1994, a source of cash to the Company from investing activities was
provided by a partial payment for the sale of the Vision Group operations.
Capital improvements for fiscal 1995, including those to be acquired under a
deferred payment arrangement and through operating leases, which total $54.2
million for the first half of fiscal 1995, are expected to total approximately
$119.0 million on an annual basis. Funds for the cash capital expenditures are
expected to come from cash flow from operating activities and available
borrowings, if necessary.
Financing activities for the first half of fiscal 1995 used $23.8 million.
Uses of cash were primarily for the reduction of $26.5 million of bank debit
balances. Funds provided by $18.9 million of borrowings under the Credit
Agreement were primarily used to redeem $16.6 million aggregate principal amount
of 11 1/8% Debentures ($15.5 million accreted value) on May 12, 1995. Financing
activities for the first half of fiscal 1994 used $11.2 million primarily for
the reduction of $28.3 million of bank debit balances. Funds were provided by
$19.3 million of borrowings under the Credit Agreement.
On August 2, 1995, the Company completed the August Offering of 6,175,500
shares of Common Stock in the aggregate at a public offering price of $32.25 per
share. Of the shares offered, 2,675,000 shares were sold by the Company and
3,500,500 shares were sold by the Merrill Lynch Investors. The net proceeds to
the Company after the underwriting discount of $1.27 per share and other
expenses related to the August Offering was approximately $82.3 million in the
aggregate.
On September 5, 1995, the Company redeemed the remaining $78.9 million
aggregate principal amount of 11 1/8% Debentures ($73.8 million accreted value).
The Company anticipates that the combination of amortization of intangibles
and interest on debt will have a negative impact upon future earnings and, to a
lesser degree, cash flow from operating activities. The Company does not
believe, however, that the impact of such planned amortization and interest
expense upon earnings indicates a present or future impairment of liquidity.
Based upon the Company's ability to generate cash flow from operating
activities, the available unused portion of the revolving loan facility portion
under the Credit Agreement and other existing sources, the Company believes that
it will have the funds necessary to meet the principal and interest payments on
its debt as they become due and to operate and expand its business.
The payment of dividends and other distributions by the Company is subject
to restrictions under certain of the financing agreements to which the Company
is a party, including the Credit Agreement and the 9 1/4% Notes. See
"Description of Certain Indebtedness." The Company does not intend to pay
dividends on its Common Stock in the foreseeable future.
The Company adopted SFAS 109, "Accounting for Income Taxes" in the first
quarter of fiscal 1993. The adoption of SFAS 109 had no material effect on the
Company's results of operations.
In December 1990, the Financial Accounting Standards Board issued SFAS No.
106, "Employer's Accounting for Postretirement Benefits Other Than Pensions."
The implementation of SFAS No. 106 will not have any effect on the Company's
results of operations because none of the Company's employee welfare and benefit
plans provides for postretirement benefits.
TAX NET OPERATING LOSS CARRYFORWARDS
While the Company estimates that it had approximately $218 million of NOL
carryforwards for U.S. federal income tax purposes as of January 28, 1995, it
also expects that a substantial portion of such NOL carryforwards will be
utilized to offset taxable income already generated during its current taxable
year. The remaining NOL carryforwards would expire in fiscal years 2002 to 2008
if not previously utilized. Although the Company expects that the Offering will
cause an "ownership change" within the meaning of Section 382 of the Internal
Revenue Code of 1986, which would cause an annual limitation on the utilization
of its remaining NOL carryforwards, the Company does not anticipate that, taking
into account the current market value of the Common Stock, such a limitation
would have a material effect on its U.S. federal income tax liability.
30
<PAGE>
BUSINESS
The Company operates the Eckerd Drug store chain, which is one of the
largest drug store chains in the United States. At October 28, 1995, the Eckerd
Drug store chain consisted of 1,704 stores in 13 states located primarily in the
Sunbelt, including 577 stores in Florida and 474 stores in Texas. The Company's
stores are concentrated in 10 of the 12 metropolitan statistical areas in the
United States with the largest percentage growth in population from 1980 to
1990, and, according to industry sources, the Company ranks first or second in
drug store sales in 12 of the 14 major metropolitan markets in which it
operates.
THE DRUG STORE INDUSTRY
Prescription and over-the-counter medications have traditionally been sold
by independent drug stores as well as conventional drug store chains, such as
Eckerd Drug stores, and purchased by consumers with cash or credit cards.
According to Drug Store News, drug store sales in 1994 increased 6.3% from 1993
to approximately $82.9 billion, 72% of which was represented by conventional
drug store chains, such as Eckerd Drug stores. Drug store prescription sales
increased 9.2% from 1993 to approximately $41.5 billion in 1994, which
represented 50% of total drug store sales and approximately 66.7% of total
retail prescription sales. The remaining retail prescription sales were
represented by mail order ($7.1 billion), mass merchandisers ($7.0 billion) and
food/drug combo stores ($6.6 billion). The drug store industry has recently
undergone significant changes as a result of the following important trends: (i)
the increase in third-party payments for prescription drugs, (ii) the
consolidation within the drug store industry, (iii) the aging of the United
States population and (iv) the increase in competition from non-traditional
retailers of prescription and over-the-counter drugs.
During the last several years, a growing percentage of prescription drug
volume throughout the industry has been accounted for by sales to customers who
are covered by third-party payment programs ("third-party sales"). According to
IMS-America, in 1994, third-party sales represented approximately 55.3% of total
prescription drug sales in the United States, more than three times what it had
been in 1986. In a typical third-party sale, the drug store has a contract with
a third-party payor, such as an insurance company, HMO, PPO, other managed care
provider, government agency or private employer, which agrees to pay for part or
all of a customer's eligible prescription purchases. Although these third-party
sales contracts often provide a high volume of prescription sales, such sales
typically generate lower gross margins than non third-party sales due
principally to the highly competitive nature of this business and recent efforts
by third-party payors to contain costs. Larger drug store chains, such as Eckerd
Drug stores, are better able to service the growing third-party segment than
independent drug stores and smaller chains as a result of the larger chains'
more sophisticated technology systems, larger number of stores and greater
penetration within their markets.
As a result of the economies of scale from which larger drug store chains
benefit as well as the third-party payment trend, the number of independent drug
stores and smaller drug store chains has decreased as many of such retailers
have been acquired by larger drug store chains. This trend is expected to
continue because larger chains are better positioned to handle the increased
third-party sales, purchase inventory on more advantageous terms and achieve
other economies of scale with respect to their marketing, advertising,
distribution and other expenditures. The Company believes that the number of
independent drug stores and smaller drug store chains remaining in operation may
provide significant acquisition opportunities for larger drug store chains, such
as the Company.
Strong demographic trends have also contributed to changes in the drug store
industry, as the group of persons over age 50 is the fastest growing segment of
the United States population. This trend has had, and is expected to continue to
have, a marked effect on the pharmacy business in the United States because
consumer prescription and over-the-counter drug usage generally increases with
age. In 1991, persons over age 50 represented approximately 26% of the
population, although they consumed
31
<PAGE>
approximately 67% of all prescription drugs sold in the United States. This
segment is projected to increase to 29% of the population by the year 2000. The
average per capita prescription usage in the United States is approximately 6.5
prescriptions per year, which increases to approximately 7.9, 10.5 and 13.0
prescriptions filled per year for persons ages 50-59, 60-69 and over 70,
respectively. The Company's markets have large concentrations of, and are
continuing to experience significant growth in, the number of persons over age
65.
In 1994, drug store chains and independent drug stores represented
approximately 37.3% and 29.4%, respectively, of all retail prescription sales in
the United States. In response to a number of factors, including the aging of
the United States population, mass merchants (including discounters and deep
discounters), supermarkets, combination food and drug stores, mail order
distributors, hospitals, HMOs and other managed care providers have entered the
prescription industry. Supermarkets, including combination food and drug stores,
and mass merchants each represented approximately 11% of all prescription sales
in the United States in 1994. Although the Company currently faces increased
competition from these retailers, industry studies show that consumers in the
over 65 age group tend to make purchases at traditional drug stores, such as
Eckerd Drug stores, and maintain strong store loyalty.
ECKERD DRUG STORES
In 1992, the Company celebrated the 40th anniversary of the opening of the
first Eckerd Drug store. The Company has grown to its present size and developed
its leading position in the industry through both internal expansion and
acquisitions. As of October 28, 1995, the Company operated the number of Eckerd
Drug stores and Eckerd Express Photo centers indicated below in each of the
following states:
DRUG STORES
ECKERD WITH ECKERD
DRUG EXPRESS PHOTO
STORES CENTERS
------ -------------
Florida............................................... 577 243
Texas................................................. 474 137
North Carolina........................................ 176 46
Georgia............................................... 157 47
Louisiana............................................. 96 19
South Carolina........................................ 75 13
New Jersey............................................ 36 1
Tennessee............................................. 33 1
Mississippi........................................... 26 --
Oklahoma.............................................. 26 --
Alabama............................................... 16 3
Delaware.............................................. 11 --
Maryland.............................................. 1 --
------ ---
Total........................................... 1,704 510
------ ---
------ ---
Over the past five years, the Company has implemented several initiatives
designed to increase the size and improve the quality and operating performance
of the Company's store base. Among such initiatives is the opening and
acquisition of new stores, the closure, divestiture or relocation of
underperforming stores and an extensive remodeling program. Since the beginning
of fiscal 1990, more than 300 Eckerd Drug stores have been opened or acquired
within the Company's existing markets, more than 200 under-performing stores
have been closed or divested, and more than 50% of the Company's remaining
stores have been remodeled. In addition, the Company has opened more than 300
Express Photo centers. The Company has also increased the degree to which
merchandise is tailored to
32
<PAGE>
specific markets, instituted a chainwide shrinkage reduction program and made a
significant investment in its management information systems. As a result of,
among other things, these actions, aggregate sales have increased from $3.46
billion in fiscal 1990 to $4.55 billion in fiscal 1994.
In fiscal 1994, the Company opened or acquired 39 drug stores, relocated 16
drug stores and closed 22 drug stores. In addition, in the fourth quarter of
fiscal 1994, the Company decided to accelerate the closing of approximately 90
geographically dispersed, under-performing stores during the period from fiscal
1995 through mid-1996, and established a $49.0 million reserve for future store
closings. As of October 28, 1995, the Company had closed 68 of such stores.
These closings are in addition to the relatively small number of stores the
Company closes in the normal course of business. See "--Business Strategy--Store
Base Strategy."
Pursuant to the Florida Acquisition, the Company acquired 40 Rite Aid leased
locations, which are being operated as Eckerd Drug stores, and the fixtures,
inventory and prescription files of an additional 68 Rite Aid locations. As a
result of the Florida Acquisition, the Company intends to close approximately 6
Eckerd Drug stores.
The following table summarizes the number of Eckerd Drug stores operated by
the Company and the sales on an aggregate and per store basis for the last five
years.
<TABLE><CAPTION>
TWENTY-SIX
WEEKS
ENDED FISCAL YEARS
JULY 29, --------------------------------------------------------------
1995 1994 1993 1992 1991 1990
---------------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Number of Ekerd Drug
stores at beginning
of period............ 1,735 1,718 1,696 1,675 1,673 1,630
Stores opened or
acquired............. 15 39 52 50 22 139(1)
Stores sold or
closed............... (84) (22) (30) (29) (20) (96)(2)
---------------- ---------- ---------- ---------- ---------- ----------
Number of Eckerd Drug
stores at end of
period............... 1,666 1,735 1,718 1,696 1,675 1,673
---------------- ---------- ---------- ---------- ---------- ----------
---------------- ---------- ---------- ---------- ---------- ----------
Number with Express
Photo centers........ 503 481 413 378 321 258
Sales of Eckerd Drug
stores............... $2,353,697 $4,396,440 $4,014,094 $3,722,523 $3,594,037 $3,330,062
Average annual sales
per Eckerd Drug
store................ N/A $ 2,561 $ 2,365 $ 2,222 $ 2,142 $ 2,036
</TABLE>
- ------------
(1) Includes 96 stores acquired by, and managed on behalf of, EH II (two of
which were closed in fiscal year 1991). Excludes 127 stores acquired by EH
II that were liquidated or sold.
(2) Includes 14 Eckerd Drug stores closed as of a result of the acquisition of
drug stores by EH II.
BUSINESS STRATEGY
The Company's business strategy is focused on maintaining a strong pharmacy
and health-related business because of management's belief regarding the growth
prospects of this business. The Company will continue to implement this strategy
by:
. maintaining a high level of customer service and convenience;
. providing competitive prices on its merchandise, including prices on
prescription drugs to non third-party customers in order to enhance its
market share and long-term competitive position;
33
<PAGE>
. maintaining an aggressive marketing program to third-party payors,
such as insurance companies, HMOs, PPOs, other managed care providers,
government agencies and private employers;
. continuing its commitment to control costs;
. improving store productivity and profitability by reallocating
nonpharmacy shelf space to certain products, such as health and beauty aids
and greeting cards, and adding food marts, all of which have higher sales
and gross profit growth potential than other products and which the Company
believes increase customer traffic;
. expanding the number of stores primarily within the Company's existing
market areas, both through internal expansion and acquisitions and improving
the Company's store base by relocating and renovating certain stores and
closing under-performing stores; and
. continuing to invest in information systems to improve customer
service, reduce operating costs, provide information needed to support
management decisions and enhance the Company's competitive position with
third-party payors.
Customer Service and Convenience
The Company believes that customer service and convenience are critical in
positioning itself as the alternative to mass merchandisers, supermarkets and
other large format retailing channels. The Company will continue to emphasize
service and convenience through pharmacy support services, store location and
design, merchandising programs and operating hours geared to the needs of the
particular market.
The Company offers a high level of professional pharmacy service, which the
Company believes provides added value to its customers. The Company provides the
"Rx Advisor," a personalized easy-to-read publication, to each prescription drug
customer, which advises the customer of the specific dosages, contraindications
and side effects of his or her prescription medicine.
The Company will continue to remodel and reset its stores to provide modern,
well-identified stores, which are easily accessible to customers and will seek
to open new stores in easily accessible high traffic locations. The Company also
tailors its merchandising to provide the product mix and selection to best serve
the customers of each particular store, including beach, tourist, business and
other target groups. The Company typically provides several conveniently
located, modern stores in a community. The Company's stores range in size from
8,200 to 10,800 square feet and are located primarily in neighborhood strip
centers or free standing locations. Such stores are typically open every day of
the year except Christmas, with some open until midnight or 24 hours a day.
Other customer service advantages include comfortable pharmacy waiting
areas, free health-related programs, screenings (e.g., blood pressure tests) and
drive-through pharmacy windows in most new drug stores. In addition, the Company
is continually testing new customer service features.
Competitive Pricing
While the Company believes that it competes primarily on the basis of
customer service and convenience, price is also an important factor. The
Company's policy is to price its prescription drug products more competitively
than most other traditional drug stores in its markets. The Company believes
that this policy has enhanced its competitive position with drug stores and
other shopping formats. See "Risk Factors--Competition" and "Management's
Discussion and Analysis of Results of Operations and Financial
Condition--General--Competitive Pricing."
34
<PAGE>
Marketing to Third-Party Payors
The Company believes that the number and concentration of Eckerd Drug stores
within existing markets, the Company's experience and reputation in the drug
store industry and its computerized pharmacy system gives the Company advantages
when compared to independent drug stores, small drug store chains and mass
merchandisers in competing for the increasing amount of third-party sales.
Third-party prescription sales, which are an integral part of the Company's
drug store business, accounted for approximately 69.4%, 64.6%, 58.0%, 49.6%,
43.1% and 36.0% of the Company's prescription sales in the first half of fiscal
1995, fiscal 1994, fiscal 1993, fiscal 1992, fiscal 1991 and fiscal 1990,
respectively. The Company currently has contracts with approximately 500
third-party payors, 45 of which designate the Company as the exclusive provider
of pharmacy services. The third-party payor contracts provide for direct billing
to the third-party payor rather than the customer. The Company believes that
these third-party sales contracts provide the opportunity for increased volume
of prescription sales; however, such sales have lower gross margins than non
third-party prescription sales. See "Risk Factors--Prescription Drug Sales and
Future Regulation." The Company intends to continue to market itself
aggressively with all types of third-party payors, including insurance
companies, HMOs, PPOs, other managed care providers, government agencies and
private employers.
The Company has devoted substantial resources to this marketing effort over
the last five fiscal years. For example, Eckerd Health Services, a joint venture
formed by the Company, is developing and offering pharmacy benefit management
services to third-party payors. Eckerd Health Services provides its expertise
in, among other things, data analysis and healthcare services, to third-party
payors and presents such third-party payors with operational cost savings
opportunities. The Company also provides mail order delivery of its prescription
drugs to third-party payors. In addition, the Company's computer systems provide
on-line adjudication, which permits the Company and the third-party payor to
determine electronically, at the time of sale, eligibility of the customer,
coverage of the prescription and pricing and co-payment requirement, if any, and
automatically bills the respective plan. On-line adjudication reduces losses
from rejected claims and eliminates a portion of the Company's paperwork for
billing and collection of receivables and costs associated therewith. The
Company believes that such systems are essential to service the increasing
volume of third-party sales. During the past five years, the Company has reduced
the average number of days that receivables from third-party sales were
outstanding from 48 days at the end of fiscal 1990 to 21 days during fiscal 1994
while increasing third-party sales by 187% during the same period.
Cost Controls
The Company's continued commitment to control costs and maintain its
competitive position in the marketplace focuses on decreasing expenses without
decreasing the level of services provided in its stores. Store staffing remains
at historical levels in order to maintain a high level of customer service. The
Company continues to actively evaluate and pursue additional cost savings which
can be obtained without affecting the Company's customer service, quality or
sales growth potential. There can be no assurance, however, that any additional
cost reductions will be realized. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition--General--Cost Reduction Program."
Improved Productivity and Profitability of Nonpharmacy Merchandise
The Company is continually seeking to improve store productivity and
profitability by monitoring and adjusting the mix and selection of its
nonpharmacy merchandise categories and items within each category to emphasize
merchandise that has higher sales and gross profit growth potential. Among the
over 27,000 nonpharmacy SKUs (as defined herein) typically offered in one of the
Company's stores, the Company concentrates on products that it considers
especially appropriate for a health-focused convenience-based drug store and
which the Company believes will increase customer traffic. Although these
categories may shift over time based upon consumer needs and other trends, the
Company is
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currently emphasizing health and beauty aids, greeting cards and the photo
finishing business. To implement its reorganization of nonpharmacy merchandise,
the Company reallocated nonpharmacy shelf space within all of its stores,
resulting in, among other things, substantially increased store space devoted to
greeting cards, increased emphasis on health and beauty aids, and the
introduction of convenience food mart sections in over 550 selected locations,
with plans to add 350 in fiscal 1995. In addition, store configurations have
been altered to promote increased store traffic and more closely conform to
customer preferences, as indicated in market studies conducted by the Company,
including tailoring of specific stores offerings to specific markets where
appropriate.
Store Base Strategy
The Company intends to continue to increase the size and improve the quality
and operating performance of its store base through (i) internal expansion and
acquisitions of smaller drug store chains and independent drug stores, (ii)
relocation and renovation of existing stores and (iii) closing under-performing
stores.
The Company intends to continue to expand its business through both internal
expansion and acquisitions of smaller drug store chains and independent drug
stores. Although the Company currently plans to expand Eckerd Drug stores within
the Company's existing markets, the Company also considers strategic
acquisitions in other markets. In addition to its store acquisition program, the
Company pursues the acquisition of prescription files from other pharmacies in
the Company's existing markets. Once acquired, the prescription files are
transferred to an existing Eckerd Drug store, increasing the prescription sales
volume in that store.
In determining the areas in which to open or acquire drug stores, the
Company evaluates a number of demographic considerations, including the size,
growth pattern and per capita income of the population, as well as the
competitive environment and the accessibility of a proposed site to the customer
and to the Company's warehouse and distribution facilities. The Company also
continually reviews these factors and the performance of individual stores in
determining whether to close or relocate certain stores.
The Company's goal is to open at least 40 new drug stores in fiscal 1995 and
50 new drug stores per year thereafter through fiscal 1999 (excluding
acquisitions and relocations). The cash costs associated with opening a drug
store are estimated to be approximately $490,000, which includes initial cash
inventory costs of approximately $260,000. The Company intends to use cash flow
from operations to finance the cash costs of this growth, although borrowings
may also be available to finance such growth. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition-- Liquidity and
Capital Resources."
In fiscal 1995, the Company plans to relocate approximately 40 of its
existing stores, mainly from strip shopping centers to new free-standing
locations, and thereafter expects that the number of stores to be relocated per
year will be increased. In addition, the Company plans to completely remodel 80
of its stores and to perform minor renovations on 400 of its other stores in
fiscal 1995. The cash costs associated with a relocation or complete renovation
of an existing store are estimated to be approximately $170,000 and $150,000,
respectively (not including approximately $35,000 related to the costs of
installing scanning and satellite communications equipment, if necessary).
The Company also expects to close approximately 10-20 under-performing drug
stores per year in fiscal 1995 and thereafter through fiscal 1999 in order to
improve the quality of the Company's store base. As a result of the Company's
decision in the fourth quarter of fiscal 1994 to accelerate the closing of
approximately 90 under-performing stores, the number of stores to be closed may
decrease in the future.
In addition, the Company currently intends to continue to expand its
one-hour photo finishing business, with a goal of adding approximately 240 new
Express Photo centers by 1999. The Company
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believes that its long standing reputation for high quality photo finishing
programs and its advertising and marketing programs which emphasize the
Company's experience and reinforce its image as a quality photo finisher have
enabled the Company to develop and expand its Express Photo center operations.
The Company believes that its photo finishing operations provide further
opportunities for growth in its drug store business due to both the direct
contribution to sales from photo finishing and the significant additional store
traffic from such operations, which is important in generating sales of other
products. The Company selects locations for Express Photo centers based upon the
demographics of the market and intends to concentrate Express Photo center
expansion by market to enable the Company to benefit from advertising and other
operating synergies. The costs associated with opening each Eckerd Express Photo
center are estimated to be approximately $100,000 and are expected to be largely
financed through operating leases or arrangements such as the IFS Sale and
Leaseback.
Information and Technology
The Company intends to continue to invest in information systems to improve
customer service, reduce operating costs, provide information needed to support
management decisions and enhance the Company's competitive position with
third-party payors. The Company's Comp-U-Care System, installed in each pharmacy
location, provides support for the pharmacy and assists pharmacists in their
prescription processing activities, which in turn enhances the pharmacy's
ability to service customers. The system's daily transfer of information between
headquarters and each of the in-store pharmacy terminals allows central
monitoring of prescription sales activity by store and item, centralized billing
of third-party sales and daily updates to the stores' data files. The
Comp-U-Care System performs on-line adjudication of customer and claim
eligibility and reimbursement for the majority of the third-party payment plans
in which the Company participates. Because on-line adjudication reduces losses
from rejected claims and eliminates a portion of the Company's paperwork for
billing and collection of receivables and costs associated therewith, the
Company believes that it is essential to servicing the increasing volume of
third-party sales. See "-- Business Strategy--Marketing to Third-Party Payors."
The Company is in the process of implementing a four-year pharmacy systems
enhancement plan designed to provide additional support to pharmacists, meet the
increasing complexity of third-party programs and enhance the Company's
competitive position through advanced technology. As part of this plan, the
Company is currently developing its advanced Comp-U-Care 2000 System, which
began to be introduced in Eckerd Drug stores in the second half of fiscal 1995
and is scheduled to be completely implemented by the summer of 1996. The
Comp-U-Care 2000 System will improve speed and productivity in the pharmacy,
decrease customer wait time and enhance functionality, including expanded drug
utilization reviews. The Company expects that the Comp-U-Care 2000 system will
permit the transfer of information, such as prescription files, directly from
one drug store to another thereby further improving customer service by enabling
customers to fill and refill prescriptions at any Eckerd Drug store.
During fiscal 1994, the Company installed a satellite communications
network, enhanced the point-of-sale reporting system and upgraded the
merchandise buying system. The Company believes that the satellite
communications system will facilitate implementation of its pharmacy systems
enhancement plan.
As of October 28, 1995 the Company had point-of-sale product scanning
equipment in approximately 1,100 stores, which stores represent approximately
75% of the Company's total front-end sales. The Company has a goal of
implementing scanning throughout the chain by the fall of 1996. Scanning is a
system which inputs point-of-sale information by reading the universal product
code of merchandise sold with either a hand held or slot scanner to capture
information on each specific item of product, including variations in size and
color (a stock-keeping unit or "SKU"), sales data and pricing information. The
Company has developed computer systems that use the information generated from
scanning to analyze sales, gross profit, inventory levels and direct product
profitability by category, department and operating region and, in certain
instances, SKU. Such information identifies early
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trends in sales by SKU, gross profit performance and inventory position and is
also a source for measuring inventory shrinkage performances. The Company has
been expanding scanning to its higher volume stores in order to maximize
benefits and recover the related expenses more efficiently. Scanning systems
will provide more and better merchant and store level information to facilitate
inventory management, automatic re-ordering, product sales and gross profit
analysis and inventory shrinkage control. The Company believes that broader use
of scanning throughout the chain will improve customer service by decreasing
customer check-out time and improving adherence to advertised sale or
promotional prices. The Company believes the direct benefits of scanning will be
sufficient to offset the related expense.
The Company is expanding its use of electronic data interchange ("EDI")
systems with certain of its major suppliers. EDI allows for the paperless
ordering of products with immediate confirmation from the vendor on price,
delivery terms and amount of goods ordered. The Company is also experimenting
with automatic replenishment buying in connection with its warehouse and
distribution systems, which includes the computer generation of purchase orders
for certain vendors. The Company installed the merchandise receiving component
of its new warehouse management system in the Atlanta, Georgia distribution
facility and expects the entire system to be installed in Atlanta by the spring
of 1996 and in all of its distribution facilities by the end of fiscal 1996.
These systems should also allow the Company to reduce lead time on orders and
improve cash flow by reducing the amount of inventory required to be kept on
hand. EDI will be expanded as the Company expands its scanning system.
In 1993, the Company and Integrated Systems Solutions Corporation ("ISSC"),
a wholly-owned subsidiary of IBM, entered into a Systems Operations Service
Agreement pursuant to which the Company and ISSC are developing a state of the
art information systems operation to include pharmacy and point-of-sale systems
for the Company's drug stores. Under the agreement, ISSC manages the Company's
entire information systems operation and is responsible for providing technology
services to the Company, which results in, among other things, improved
productivity and significant hardware savings to the Company. ISSC is in the
process of implementing scanning, the Comp-U-Care 2000 System, and the warehouse
management system. The Systems Operations Services Agreement has a 10-year term,
and the total payments to be made by the Company thereunder are currently
expected to be approximately $440.0 million over such term. The Company believes
that this arrangement has and will continue to enable the Company to further
improve customer service, replace the Company's existing systems, reduce
operating costs and capital expenditures for hardware, obtain information needed
to support management decisions on an improved basis and increase the Company's
focus on its core business.
The Company is also developing or purchasing software with applications in
the human resources area, which would more accurately monitor personnel
performance and attendance and assist management in making personnel scheduling
decisions in an effort to increase productivity and reduce operating costs. In
addition, the Company is purchasing or developing software to expand the
merchandise and store information data base systems to enable the Company to
more efficiently manage its business and to start the initial roll out of the
warehouse management system to provide improved control and management of
inventory and personnel. The implementation of such software began in fiscal
1995 and is expected to be completed in fiscal 1996.
PRODUCTS AND SERVICES
Pharmacy
The primary focus of Eckerd Drug stores is the sale of prescription and
over-the-counter drugs. During fiscal 1994, the Company filled more than 89
million prescriptions, and sales of prescription and over-the-counter drugs
generated approximately 61.1% of the Company's drug store sales and other
operating revenue. During the period from fiscal 1990 through fiscal 1994, the
Company's dollar volume
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of sales of prescription drugs increased at a compound annual growth rate of
12.4% and during the first half of fiscal 1995, the dollar volume of sales of
prescription drugs increased by 15.8% as compared to the first half of fiscal
1994.
The Company seeks to position pharmacists as health-care professionals who
build relationships with their customers. Over the years, marketing and
advertising campaigns have been focused on reinforcing the professionalism of
the Company's pharmacists and positioning them as a key factor to high quality
pharmacy service. The Company has also instituted several health-related
programs such as health screenings, education and outreach programs, and
customer relationship programs. The Company provides the "Rx Advisor," a
personalized easy-to-read publication, to each prescription drug customer, which
advises the customer of the specific dosages, contraindications and side effects
of his or her prescription medicine.
Eckerd Drug store pharmacy departments are modern, clean and clearly
identified by attractive signs. The pharmacy areas in many of the Company's
newer and remodeled stores provide a consultation area and a waiting area with
comfortable seating, informational brochures and free blood pressure testing.
The pharmacy areas are designed to be conducive to customer service and
counseling by the pharmacists. See "--Business Strategy--Customer Service and
Convenience."
The Company believes that it is well positioned to take advantage of certain
demographic trends, including the aging of the United States population. The
Company's stores are concentrated in 10 of the 12 metropolitan statistical areas
in the United States with the largest percentage growth in population from 1980
to 1990. In addition, approximately 62% of the Company's drug stores are located
in Florida and Texas, two of the top three states experiencing the greatest
influx of persons over age 65. According to industry studies, persons over age
65 purchase twice as many prescription drugs and 50% more over-the-counter drugs
than the national average. The Company also believes that it is capable of
meeting the needs of the increasing volume of third-party prescription sales and
is aggressively marketing itself to third-party payors. See "Risk
Factors--Prescription Drug Sales and Future Regulation" and "-- Business
Strategy--Marketing to Third-Party Payors."
The Company believes that new prescription drugs and drug therapies provide
an opportunity for increased demand for prescription drugs. In addition, the
Food and Drug Administration is approving an increasing number of prescription
products for sale over the counter. Prescription drugs which are approved for
over-the-counter distribution have historically shown significantly increased
sales.
Nonpharmacy Merchandise
Eckerd Drug stores sell a wide variety of nonpharmacy merchandise, including
over-the-counter drugs, health and beauty aids, greeting cards and numerous
other convenience products. Eckerd-brand products, which are attractively priced
and provide higher margins than similar national brand products, represent a
growing segment of products offered by Eckerd Drug stores. Sales of private
label products accounted for $198.7 million of the Company's sales in fiscal
1994.
Health. Eckerd Drug stores offer a broad assortment of popular national
brands as well as private label over-the-counter drugs and other products
related to dental care, foot care, vitamins and nutritional supplements,
feminine hygiene, family planning and baby care. Eckerd Drug stores provide a
helpful environment in which consumers can obtain product information from
professional pharmacists, knowledgeable sales associates and store managers or
from literature available throughout the store.
Beauty. Eckerd Drug stores offer an assortment of popular brand name
cosmetics, fragrances and other beauty products. Management believes that Eckerd
Drug stores provide the customer with a convenient format in which to purchase
the lines of beauty products offered in its stores. Skin care products are an
increasingly important component of the beauty category due to the aging
population and growing concern about the effects of the environment on the skin.
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Greeting Cards. The greeting card department in Eckerd Drug stores offers a
wide selection of contemporary and traditional cards, gift wrap, bows and
novelties. The Company believes that the locations of its stores together with
the wide selection offered by Eckerd Drug stores enable customers to satisfy
their card and gift needs more conveniently than at traditional card stores. The
Company has recently increased the space devoted to its greeting card department
because of the profitability of such merchandise and because the Company
believes that the demand for such merchandise will increase traffic in its
stores.
Convenience Products. This merchandise category consists of an assortment of
items, including candy, food, tobacco products, books and magazines, household
products, seasonal merchandise and toys. These items are carefully positioned to
provide optimum convenience to the customer with easy access in the front part
of the store. The Company also seeks to serve its customers' needs by
specifically tailoring items in this category to meet the needs of its customers
in specific store locations, including the introduction of a food mart section
offering convenience food items such as staple grocery shelf items, staple and
chilled beverages, snack foods and specialty items, in approximately 550
locations. For example, souvenirs and select summer products are offered in
beach and tourist locations while convenience food is stressed in urban areas
and malls. The Company plans to add food mart sections to an additional 350
stores in fiscal 1995.
Photo Finishing
Another significant focus of Eckerd Drug stores is photo finishing. The
Company offers overnight photo finishing services in all Eckerd Drug stores and
operates Eckerd Express Photo centers, which are one-hour photo processing
mini-labs, in 510 Eckerd Drug stores as of October 28, 1995. Sales from photo
finishing accounted for approximately 4.9% of the Company's drug store sales in
fiscal 1994 and were the second largest component of drug store profit. The
Company believes that its photo finishing operations provide further
opportunities for growth in its drug store business because of the direct
contribution to sales from photo finishing and the significant additional store
traffic from such operations, which is important in generating sales of other
products. Photo finishing generates store traffic because it generally requires
two trips to a store--one visit to drop off the roll of film and one visit to
pick up the developed pictures.
The Company is among the top three vertically integrated retail photo
finishers in the United States and the Company believes that it is a leading
source of photo finishing in all of the major markets in which it operates. The
Company processed over 28 million rolls of film in fiscal 1994 in its own photo
labs and has several well known branded processing programs, including System
2(R) (two prints for the price of one), Ultralab 35(R) (larger size, higher
quality prints) and Express Print 60(R) (one-hour processing). The Company
believes that its branded processing programs, which emphasize quality and
service, have helped position the Company as a leader in photo finishing. The
Company currently intends to continue to expand its one-hour photo finishing
business, with a goal of adding approximately 240 new Express Photo centers by
1999.
The Company's photo departments also offer camera and photo accessories,
small electronics, batteries and audio and video tapes. The entire photo
department, including photo finishing, represented approximately 9.2% of the
Company's total drug store sales in fiscal 1994.
STORE OPERATIONS
Eckerd Drug stores are located and designed to maximize customer service and
convenience and are situated in areas of high customer traffic, typically in
neighborhood shopping centers with strong supermarket co-tenants or in
strategically located free-standing stores. Eckerd Drug stores are designed to
facilitate customer movement and feature well-stocked shelves, clearly
identified aisles and well-lit interiors to maximize product visibility.
Pharmacy departments are generally located near the back of the store to
maximize customer exposure to the store. The stores are equipped with modern
fixtures and
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equipment and most of them range in size from 8,200 to 10,800 square feet. About
85% of the floor space is selling area, with the remainder used for storeroom
and office space.
To enhance productivity per square foot and maintain consistent
merchandising, the Company utilizes centrally prepared formats for the display
and stocking of products in the Company's stores, while continuing to allow some
flexibility to store managers to modify the merchandise assortment based upon
the Company's program of tailoring merchandise offerings to the markets in which
the stores operate.
The typical Eckerd Drug store is open every day of the year except
Christmas, with store hours geared to the needs of the specific markets. A
select number of strategically located stores stay open until midnight or 24
hours a day.
Eckerd Drug stores are currently grouped under six operating regions located
in or near Orlando and Deerfield Beach, Florida; Atlanta, Georgia; Charlotte,
North Carolina; and Dallas and Houston, Texas. Each operating region is headed
by a vice president who supervises the various districts comprising the region.
Within each district, there are managers who are responsible for the drug stores
in their districts and regularly visit their stores to assure quality of service
and merchandising. District pharmacy managers supervise the pharmacy operations
in the drug stores. Each drug store is individually supervised by a manager who
receives training in the Company's merchandise offerings, customer service and
management strategy.
The Company has implemented various initiatives designed to reduce shrinkage
expense, which was approximately 2.9% for fiscal 1994 compared to an
industry-wide average (calculated using the same accounting method as the
Company) of approximately 2.8% during the same time period. These initiatives
include training and awareness programs, tailored audit programs for district
managers, hiring of internal auditors and loss prevention specialists, and
computerized exception reporting for, among other things, customer refunds,
voids and cash overages and shortages from daily register check-outs.
PURCHASING AND DISTRIBUTION
Merchandising, buying and supplier payments are generally centralized at
Company headquarters to assure consistency of marketing approach and efficiency
in supplier relations. The Company has implemented an enhanced electronic buying
system to improve inventory management and gross profit by enabling the Company
to take better advantage of quantity discounts and forward buying opportunities,
which the Company believes will lower the average cost of inventory.
Additionally, it is anticipated that this buying system and its improved
forecasting ability will improve service levels to the stores and will reduce
average inventory required in the Company's distribution centers.
Approximately 85% of store merchandise is purchased centrally and
distributed, principally by Company-operated trucks, through the Company's five
centrally located distribution facilities located in or near Orlando, Florida;
Atlanta, Georgia; Charlotte, North Carolina; and Dallas and Houston, Texas. The
remainder of store merchandise, some of which is purchased at the store level,
is distributed directly to the stores.
ADVERTISING AND MARKETING
A combination of newspaper advertising and TV and radio spot commercials is
carried on throughout the year to promote sales. During the fiscal year ended
January 28, 1995, these advertising expenses totaled approximately 0.5% of the
Company's sales. The Company's concentration of stores within its markets
enables it to achieve economies of scale in its advertising and marketing
expenditures and also enables the Company to negotiate favorable rates for
advertising time and print production. From the time of the Acquisition through
fiscal 1994, the Company reduced its advertising expense as a
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percentage of sales by more than 70%. In addition, the Company has derived
additional cost savings through a rationalization of its advertising
expenditures. As part of the cost reduction program, certain advertising
expenditures related to the Company's overall corporate image were reduced in
favor of advertising efforts such as newspaper circulars. This change in
advertising strategy has resulted in increased financial support from the
Company's vendors and a more direct impact on sales. The Company believes that
its current level of advertising expenditures is appropriate to support its
existing marketing strategies.
The Company's communications and marketing programs are based upon an
ongoing commitment to consumer research. Through regular telephone surveys in
all major markets, exit interviews in its stores, and studies of various
consumer groups, the Company is able to monitor changes in customer attitudes
and shopping habits and adjust its marketing strategies accordingly.
COMPETITION
The Company's retail drug stores operate in a highly competitive industry.
The Company's drug stores compete primarily on the basis of customer service,
convenience of location and store design, price and product mix and selection.
In addition to traditional competition from independent drug stores and
other drug store chains, the Company faces competition from mass merchants
(including discounters and deep discounters), supermarkets, combination food and
drug stores, mail order distributors, hospitals and HMOs. These other formats
have experienced significant growth in their market share of the prescription
and over-the-counter drug business. Many of the Company's competitors have
greater financial resources than the Company. See "Risk Factors--Competition"
and "--The Drug Store Industry."
The Company's Express Photo centers compete with a variety of photo
processors including other mini-labs, retail stores and photo specialty stores,
primarily on the basis of quality of processing, quality and speed of service
and value.
REGULATION
All of the Company's pharmacists and its stores are required to be licensed
by the appropriate state boards of pharmacy. The Company's drug stores and its
distribution centers are also registered with the Federal Drug Enforcement
Administration. Most of the stores sell beer and wine and are subject to various
state and local liquor licensing requirements. By virtue of these license and
registration requirements, the Company is obligated to observe certain rules and
regulations, and a violation of such rules and regulations could result in a
suspension or revocation of the licenses or registrations.
The Company has a number of third-party payor contracts pursuant to which
the Company is a provider of prescription drugs. "Freedom of choice" state
statutes, pursuant to which all pharmacies would be entitled to be a provider
under such a contract, have been enacted in certain states, including Alabama,
Georgia, New Jersey, North Carolina, Louisiana, South Carolina, Tennessee and
Texas, and may be enacted in others. Although such statutes may adversely affect
certain of the Company's third-party contracts, they may also provide the
Company with opportunities regarding additional third-party contracts.
In recent years, an increasing number of legislative proposals have been
introduced or proposed in Congress and in some state legislatures that would
effect major changes in the health care system, either nationally or at the
state level. The Company cannot predict whether any federal or state health care
reform legislation will eventually be passed, and if so, the impact thereof on
the Company's financial position or results of operations. Health care reform,
if implemented, could adversely affect the pricing of prescription drugs or the
amount of reimbursement from governmental agencies and third-party payors, and
consequently could be adverse to the Company. However, to the extent health care
reform
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expands the number of persons receiving health care benefits covering the
purchase of prescription drugs, it may also result in increased purchases of
such drugs and could thereby have a favorable impact on both the Company and the
retail drug industry in general. Nevertheless, there can be no assurance that
any future federal or state health care reform legislation will not adversely
affect the Company or the retail drug store industry generally.
In 1990, Congress enacted the Omnibus Budget Reconciliation Act of 1990
("OBRA 1990"), which includes a requirement that states implement pharmaceutical
drug use review programs for Medicaid beneficiaries receiving covered
out-patient prescription drugs. The OBRA 1990 legislation states that
pharmacists must offer to discuss with each Medicaid patient "common, severe
side or adverse effects or interactions and therapeutic contraindications that
may be encountered, including their avoidance and the action required if they
occur." In order to ensure reimbursement of out-patient prescription drugs under
Medicaid, states were required, pursuant to the OBRA 1990 legislation, to
implement drug use review programs by January 1, 1993. In all states where the
Company operates (except South Carolina), the State Pharmacy Practices Acts have
expanded the OBRA requirements to include all patients receiving prescriptions
in a retail setting. Pharmacists now have a duty to warn the purchaser of a
prescription drug if the warning could reduce or negate the adverse effects of
the use of such drug.
In 1993, the state of Florida enacted health care legislation that is
applicable to state employees, small businesses with fewer than 50 employees and
Medicaid recipients. The legislation, which began to be implemented in 1994,
created 11 health care purchasing cooperatives, which will accept bids from
health care providers to provide goods and services to the cooperatives'
members. The Company expects to provide prescription drugs to the cooperatives
through its existing managed health care clients. However, the Company is unable
to predict whether its efforts will be successful or whether the Florida
legislation will have an adverse impact on the Company's financial position or
results of operations.
EMPLOYEES
As of October 28, 1995, the Company had approximately 45,000 employees, of
which 23,300 were full-time employees. The Company believes that overall
employee relations are good. None of the Company's employees are represented by
unions.
PATENTS, TRADEMARKS AND TRADENAMES
No patent, trademark, license, franchise or concession is considered to be
of material importance to the business of the Company other than the trade names
under which the Company operates its retail businesses, including the Eckerd
name. The Company also holds servicemarks for its photo finishing products,
private label products and information systems.
PROPERTIES
The Company conducts substantially all of its retail businesses from stores
located in leased premises. Substantially all of these leases will expire within
the next twenty-five years. In the normal course of business, however, it is
expected that leases will be renewed or replaced by leases on other properties.
Most of the Company's store leases provide for a fixed minimum rental together
with a percentage rental based on sales.
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The material office and distribution center properties owned or leased by
the Company at October 28, 1995 are as follows:
<TABLE><CAPTION>
APPROXIMATE OWNED OR
LOCATION SQUARE FEET LEASED
- ----------------------------------------------------------------- ----------- --------
<S> <C> <C>
Largo, Florida................................................... 488,000 Owned(1)
Charlotte, North Carolina........................................ 587,000 Owned
Garland, Texas................................................... 270,000 Owned
Conroe, Texas.................................................... 345,000 Owned
Orlando, Florida................................................. 587,000 Leased(2)
Newnan, Georgia.................................................. 244,000 Owned(3)
Hammond, Louisiana............................................... 185,000 Owned(3)(4)
</TABLE>
- ------------
(1) Includes the Company headquarters.
(2) In January 1993, the Company assumed a lease for an office and distribution
facility of approximately 587,000 square feet (lease expires 2005).
(3) Construction was financed pursuant to revenue bond issues. Because these
properties are currently leased subject to nominal purchase options with
development authorities which the Company anticipates it will exercise, they
are listed as owned by the Company.
(4) The Company closed the Hammond distribution center and subleased the former
Hammond, Louisiana office and distribution center. Such sublease will be
terminated in April 1996. The Company is marketing the Hammond property for
sale.
The Company considers that all property owned or leased is well maintained
and in good condition.
LEGAL PROCEEDINGS
In the ordinary course of its business, the Company and its subsidiaries are
parties to various legal actions which the Company believes are routine in
nature and incidental to the operation of the business of the Company and its
subsidiaries. The Company believes that the outcome of the proceedings to which
the Company and its subsidiaries currently are parties will not have a material
adverse effect upon its operations or financial condition.
44
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The name, age and office or principal occupation of the executive officers
and directors of the Company and certain information relating to their business
experience are set forth below:
<TABLE><CAPTION>
NAME AGE POSITION
- ----------------------------------- --- ----------------------------------------------------
<S> <C> <C>
Stewart Turley..................... 61 Director, Chairman of the Board and Chief Executive
Officer
Francis A. Newman.................. 47 Director, President and Chief Operating Officer
John W. Boyle...................... 66 Director
Dr. James T. Doluisio.............. 60 Director
Donald F. Dunn..................... 70 Director
Albert J. Fitzgibbons, III......... 50 Director
Margaret H. Jordan................. 52 Director
Lewis W. Lehr...................... 74 Director
Alexis P. Michas................... 37 Director
Rupinder S. Sidhu.................. 39 Director
James M. Santo..................... 54 Executive Vice President/Administration and
Secretary
Samuel G. Wright................... 45 Executive Vice President/Chief Financial Officer
Kenneth L. Flynn................... 50 Senior Vice President/Store Operations
Edward W. Kelly.................... 50 Senior Vice President/Merchandising
Richard R. Powis................... 47 Senior Vice President/Pharmacy
Martin W. Gladysz.................. 43 Vice President/Treasurer
Robert E. Lewis.................... 35 Vice President/General Counsel and Assistant
Secretary
Thomas M. Nash..................... 47 Vice President/Real Estate
N. John Simmons, Jr................ 40 Vice President/Controller
</TABLE>
The Company has announced that Mr. Turley will relinquish his position as
Chief Executive Officer at the end of fiscal 1995 while continuing in his role
as Chairman of the Board. Upon the recommendation of Mr. Turley, the Board of
Directors is expected to appoint Mr. Newman, currently the President and Chief
Operating Officer, to the position of Chief Executive Officer at its February
1996 meeting.
Mr. Turley is Chairman of the Board and Chief Executive Officer of the
Company, positions he has held since 1986. He served as President of the Company
from 1986 until July 1993. He joined Old Eckerd in 1966 and has served as Senior
Vice President (1971-1974) and President and Chief Executive Officer (1974-1975)
prior to being elected to Chairman of the Board, President and Chief Executive
Officer. He is also a director of Barnett Banks, Inc., Sprint Corporation and
Springs Industries, Inc.
Mr. Newman is President, Chief Operating Officer and a Director of the
Company, positions he has held since July 6, 1993. Prior to joining the Company,
Mr. Newman served as President, Chief Executive Officer and a director of F&M
Distributors, Inc. ("F&M"), a drug store chain, since 1986. F&M filed bankruptcy
under Chapter 11 of the United States Bankruptcy Code in December 1994. Prior to
joining F&M, he was the Executive Vice President of Household Merchandising, a
retail firm, from 1984 to 1985 and the Senior Vice President of Merchandising
for F.W. Woolworth, a retail firm, from 1980 to 1984. Mr. Newman is also a
director of FabriCenters of America, a retail firm.
Mr. Boyle retired as Vice Chairman of the Board and Chief Financial Officer
of the Company on December 31, 1994, positions he had held since February 1993.
He served as a consultant to the Company during the month of January 1995. Prior
to being Vice Chairman, he was Senior Vice
45
<PAGE>
President/Finance and Administration of the Company, a position he held for more
than five years. He joined Old Eckerd as Senior Vice President/Finance and
Administration in 1983. Prior to joining Old Eckerd, Mr. Boyle served as Vice
Chairman of the Board (1978-1980) and, thereafter, as Chairman of the Board
(1980-1983) of May Department Store Co., St. Louis, Missouri. He was a director
of Old Eckerd between 1983 and 1986.
Dr. Doluisio has been Dean of the College of Pharmacy, University of Texas,
Austin, Texas since 1973. Dr. Doluisio has served as chairman of the American
Pharmaceutical Association, the American Association of College of Pharmacy
Council of Deans, the American Association for the Advancement of Science and as
a trustee of the United States Pharmacopeia. He is also a director of COR
Therapeutics, Inc.
Mr. Dunn is retired Chairman of the Board and Chief Executive Officer of
Maas Brothers/Jordan Marsh, a division of Allied Stores Corporation, New York,
New York. In his 39-year career with Allied Stores, starting as an executive
trainee, Mr. Dunn held numerous management positions including that of executive
group manager of Allied Stores for Jordan Marsh and Maas Brothers in Florida,
Cain-Sloan in Tennessee and Joske's in Texas. Mr. Dunn is also a director of
Tech Data Corporation and Younkers, Inc.
Mr. Fitzgibbons has been a director of Merrill Lynch Capital Partners since
1988. He has been a director of Stonington Partners, Inc. ("Stonington
Partners") since August 1993; a Partner of Stonington Partners since November
1993; a partner of Merrill Lynch Capital Partners from 1993 to July 1994; an
Executive Vice President of Merrill Lynch Capital Partners from 1988 to 1993; a
Senior Vice President of Merrill Lynch Capital Partners from 1987 to 1988; a
Managing Director of the Investment Banking Division of ML & Co. from 1978 to
July 1994; and Vice President of Merrill Lynch from 1974 to 1988. He is also a
director of Borg-Warner Security Corporation, Borg-Warner Automotive, Inc.,
Dictaphone Corporation and United Artists Theatre Circuit, Inc.
Ms. Jordan has been Vice President--Health Care and Employee Services of
Southern California Edison Company since 1992. Prior thereto, she worked for
Kaiser Foundation Health Plan of Texas, Inc. for more than the preceding five
years, most recently as Vice President and Regional Manager of Texas. Ms. Jordan
also serves as a director of Epitope, Inc.
Mr. Lehr is former Chairman of the Board of 3M Company, St. Paul, Minnesota.
In his 39-year career with 3M Company, starting as an engineer, Mr. Lehr held
numerous management positions and from 1980 to March 1986, when he retired, was
Chairman of the Board and Chief Executive Officer. He also serves as a director
of Peregrine Semiconductor Corporation and various IDS Funds.
Mr. Michas has been a director of Merrill Lynch Capital Partners since 1989.
He has been a Partner of Stonington Partners since November 1993; a director of
Stonington Partners since August 1993; a partner of Merrill Lynch Capital
Partners from 1993 to July 1994; a Senior Vice President of Merrill Lynch
Capital Partners from 1989 to 1993; a Vice President of Merrill Lynch Capital
Partners from 1987 to 1989; a Managing Director of the Investment Banking
Division of ML & Co. from 1991 to July 1994; a Director of the Investment
Banking Division of ML & Co. from 1990 to 1991; and a Vice President of the
Investment Banking Division of ML & Co. from 1987 to 1989. He is also a director
of Borg-Warner Security Corporation, Borg-Warner Automotive, Inc., Blue Bird
Corporation, Dictaphone Corporation, Pathmark Stores, Inc. and Supermarkets
General Holding Corporation.
Mr. Sidhu has been a director of Merrill Lynch Capital Partners since 1988.
He has been a Special Limited Partner of Stonington Partners since August 1993;
a partner of Merrill Lynch Capital Partners from 1993 to July 1994; a Senior
Vice President of Merrill Lynch Capital Partners from 1987 to July 1994; a Vice
President of Merrill Lynch Capital Partners from 1985 to 1987; a Managing
Director of the Investment Banking Division of ML & Co. from 1989 to 1993; and a
Director of the Investment
46
<PAGE>
Banking Division of ML & Co. from 1987 to 1989. He is also a director of Clinton
Mills, Inc., First-USA, Inc., and Wherehouse Entertainment, Inc.
Mr. Santo was appointed Executive Vice President/Administration in May,
1995. Prior thereto he was appointed Senior Vice President/Administration in
February 1993 and was also Vice President/Legal Affairs of the Company, a
position he had held for more than the five years prior to 1993. In addition,
Mr. Santo was appointed Secretary of the Company effective January 1, 1992.
Mr. Wright was appointed Executive Vice President/Chief Financial Officer of
the Company in May 1995. Prior thereto he was appointed Senior Vice
President/Chief Financial Officer in February 1995 and was also Senior Vice
President/Finance from February 1993 until February 1995 and Vice President and
Controller of the Company from September 1988 until February 1993. Mr. Wright
became Vice President of the Company in June 1986. In addition, Mr. Wright had
served as Vice President of Finance of Eckerd Drug Company, formerly Old
Eckerd's principal subsidiary ("Eckerd Drug Company"), since May 1985.
Mr. Flynn was appointed Senior Vice President/Store Operations of the
Company in December 1994. Prior to joining the Company, he was Executive Vice
President with the Thrifty/Payless drug chain in Portland, Oregon from August
1993. Prior to joining Thrifty/Payless in August 1993, Mr. Flynn was employed by
Lucky Stores, Inc. for over 30 years, most recently as Senior Vice
President/Store Operations.
Mr. Kelly was appointed Senior Vice President/Merchandising in February
1993. Prior thereto he had served as Vice President of Merchandising of Eckerd
Drug Company for more than the preceding five years.
Mr. Powis was appointed Senior Vice President/Pharmacy in April 1995. Prior
to joining the Company, he was Senior Vice President Pharmacy Services for the
American Association of Retired Persons ("AARP") from September 1994. Prior to
joining AARP, Mr. Powis was employed for over 19 years by Hooks SupeRx, Inc.,
most recently as Senior Vice President Pharmacy Services.
Mr. Gladysz was appointed Vice President/Treasurer of the Company in May
1994. Prior to joining the Company, Mr. Gladysz was Executive Vice
President/Treasurer for Fortune Bancorp, a Florida banking organization, a
position he held for more than the five years prior to 1994.
Mr. Lewis was appointed Vice President/General Counsel and Assistant
Secretary of the Company in August 1994. He was a shareholder in the law firm of
Shackleford, Farrior, Stallings & Evans, P.A. in Tampa, Florida, from January
1992 to August 1994 and was an associate at that firm for more than five years
prior thereto.
Mr. Nash has been Vice President/Real Estate of the Company since August
1995. Prior to joining the Company, he served as Vice President--Real Estate at
Checker's Drive-In Restaurants, Inc. from 1993 until 1995 and at Morrison
Restaurants, Inc. from 1990 until 1993.
Mr. Simmons was appointed Vice President/Controller of the Company in August
1995. Prior to joining the Company, Mr. Simmons served as Vice President of
Finance and Chief Financial Officer of Checkers Drive-In Restaurants, Inc. from
January 1993 until August 1995. Prior thereto, he was a Partner at KPMG Peat
Marwick for more than the preceding five years.
Messrs. Turley, Boyle, Doluisio, Dunn, Fitzgibbons and Lehr have been
directors of the Company since May 1986. Mr. Sidhu became a director of the
Company in April 1988, Mr. Michas became a director of the Company in April
1990, Mr. Newman became a director in July 1993 and Ms. Jordan became a director
in September 1995.
47
<PAGE>
The Board of Directors of the Company is divided into three classes serving
staggered three-year terms. The terms of office of Messrs. Fitzgibbons, Turley
and Lehr will expire on the date of the annual meeting of stockholders of the
Company (the "Annual Meeting") in 1996, the terms of office of Messrs. Boyle,
Doluisio and Sidhu will expire on the date of the Annual Meeting in 1997 and the
terms of office of Messrs. Michas, Dunn and Newman and Ms. Jordan will expire on
the date of the Annual Meeting in 1998. Effective February 4, 1996, the annual
fee payable to members of the Board of Directors who are not employees of the
Company for their services as members of the Board will be increased from
$18,000 to $24,000.
Messrs. Doluisio, Dunn and Lehr serve as members of the Audit Committee,
Messrs. Fitzgibbons, Dunn and Lehr serve as members of the Executive
Compensation and Stock Option Committee, and Messrs. Turley, Dunn and
Fitzgibbons serve as members of the Executive Committee, of the Board of
Directors of the Company.
Messrs. Fitzgibbons, Sidhu and Michas are employees of Stonington Partners
and serve on the Board of Directors of the Company as representatives of the
Merrill Lynch Investors. In August 1993, Messrs. Fitzgibbons, Sidhu and Michas,
together with other colleagues from Merrill Lynch Capital Partners, founded
Stonington Partners. In July 1994, Messrs. Fitzgibbons, Sidhu and Michas left
the employment of Merrill Lynch, although each has continued as a director of
Merrill Lynch Capital Partners and the other companies in which certain
affiliates of Merrill Lynch have equity investments and for which they were
serving as a director in July 1994 (such other companies, the "Merrill Lynch
Affiliates"). In this connection, each of Messrs. Fitzgibbons, Sidhu and Michas
entered into a consulting agreement with Merrill Lynch Capital Partners which
provides, among other things, for his continued availability to serve on the
Board of Directors of the Company and the respective boards of directors of the
Merrill Lynch Affiliates for which he was serving as a director in July 1994
until requested to resign by Merrill Lynch Capital Partners, and for his
compensation (directly or indirectly) by Merrill Lynch Capital Partners for
serving in such director capacities and for other consulting services.
Officers of the Company serve at the discretion of the Board of Directors.
Officers are elected for a one-year term by the Board of Directors at its annual
meeting. There is no family relationship between any of the aforementioned
officers or directors of the Company.
48
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of October 28, 1995 by (i) each of the
directors of the Company, (ii) each of the named executive officers of the
Company, (iii) each person known by the Company to be the beneficial owner of
approximately five percent or more of the outstanding Common Stock, (iv) all of
the Company's directors and executive officers as a group and (v) by each
Selling Stockholder. Unless otherwise indicated, the Company believes that the
beneficial owner has sole voting and investment power over such shares. The
table does not reflect the Merrill Lynch Distribution or the possible sale of
additional shares by the Merrill Lynch Investors if the Underwriters'
over-allotment option is exercised in full.
<TABLE><CAPTION>
OWNERSHIP PRIOR TO OWNERSHIP AFTER
THE OFFERING THE OFFERING
-------------------------- --------------------------
SHARES OF SHARES SHARES OF
COMMON STOCK PERCENTAGE TO BE SOLD COMMON STOCK PERCENTAGE
------------ ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Merrill Lynch Investors
(1)........................ 8,020,634 22.95 5,500,000 2,520,634(2) 7.21(2)
Stewart Turley(3).......... 480,723 1.37 -- 480,723 1.37
Francis A. Newman (4)...... 103,350 * -- 103,350 *
John W. Boyle (5).......... 164,505 * -- 164,505 *
Dr. James T. Doluisio
(6)........................ 6,937 * -- 6,937 *
Donald F. Dunn............. 13,217 * -- 13,217 *
Albert J. Fitzgibbons, III
(7)........................ 4,717 * -- 4,717 *
Lewis W. Lehr (8).......... 9,017 * -- 9,017 *
Alexis P. Michas (7)....... 4,675 * -- 4,675 *
Rupinder S. Sidhu (7)...... 53,530 * -- 53,530 *
Robert L. Myers (9)........ 45,133 * -- 45,133 *
James M Santo (10)......... 63,053 * -- 63,053 *
Samuel G. Wright (11)...... 62,754 * -- 62,754 *
All directors and executive
officers as a group (20)
persons (12)(13)........... 1,069,224 3.04 -- 1,069,224 3.04
</TABLE>
- ------------
* Less than one percent
(1) As of October 28, 1995 shares of Common Stock beneficially owned by the
Merrill Lynch Investors were owned of record as follows: 516,748 shares by
Merrill Lynch Capital Corporation, 5,318,821 shares by Merrill Lynch
Capital Appreciation Partnership No. II, L.P., 135,311 shares by ML
Offshore LBO Partnership No. II, 140,178 shares by ML Employees LBO
Partnership No. I, L.P., 47,974 shares by Merrill Lynch KECALP L.P. 1986,
821,549 shares by Merrill Lynch Capital Appreciation Partnership No. B-IX,
L.P., 481,223 shares by ML Offshore LBO Partnership No. B-IX, 13,029 shares
by MLCP Associates L.P. No. II., 72,604 shares by Merrill Lynch KECALP L.P.
1989, 447,968 shares by ML IBK Positions, Inc., and 25,229 shares by
Merchant Banking L.P. No. IV. The address for the Merrill Lynch Investors
and each of the aforementioned record holders is c/o Merrill Lynch & Co.,
Inc., Merrill Lynch World Headquarters, South Tower, New York, New York
10080-6123.
(2) After the Merrill Lynch Distribution, the Merrill Lynch Investors will
beneficially own approximately 2,087,872 shares of Common Stock, which
would represent approximately 5.97% of the shares of Common Stock
outstanding after the Offering.
(3) Total does not reflect the 43,595 shares of Common Stock transferred by Mr.
Turley to certain family members. Mr. Turley disclaims beneficial ownership
of such shares. Total includes 16,000 shares transferred by Mr. Turley to
The Stewart Turley Foundation, Inc. Mr. Turley disclaims
(Footnotes continued on following page)
49
<PAGE>
(Footnotes continued from preceding page)
beneficial ownership of such shares. Total includes options covering 44,421
shares of Common Stock which are exercisable as of October 28, 1995 or
within 60 days thereafter.
(4) Total includes options covering 100,000 shares of Common Stock which are
exercisable as of October 28, 1995 or within 60 days thereafter. Mr. Newman
has advised the Company that prior to the end of fiscal 1996 he expects to
exercise options and dispose of shares of Common Stock, as a result of
which he would receive net proceeds of up to $1.0 million.
(5) Total does not reflect 125,393 shares of Common Stock transferred to
certain irrevocable trusts established by Mr. Boyle. Mr. Boyle disclaims
beneficial ownership of such shares. Total includes options covering 40,800
shares of Common Stock which are exercisable as of October 28, 1995 or
within 60 days thereafter.
(6) Total includes options covering 3,334 shares of Common Stock which are
exercisable as of October 28, 1995 or within 60 days thereafter.
(7) Messrs. Fitzgibbons, Michas and Sidhu are directors of the Company and
Merrill Lynch Capital Partners. Until July 1994 they were officers of
Merrill Lynch Capital Partners and employees of ML & Co. Each disclaims
beneficial ownership of shares of Common Stock beneficially owned by the
Merrill Lynch Investors. The business address for Messrs. Fitzgibbons,
Michas and Sidhu is c/o Stonington Partners, 767 Fifth Avenue, 48th Floor,
New York, NY 10153.
(8) Total includes options covering 3,334 shares of Common Stock which are
exercisable as of October 28, 1995 or within 60 days thereafter.
(9) Mr. Myers resigned as Senior Vice President/Pharmacy of the Company on May
26, 1995.
(10) Total includes options covering 9,100 shares of Common Stock which are
exercisable as of October 28, 1995 or within 60 days thereafter.
(11) Total includes options covering 9,100 shares of Common Stock which are
exercisable as of October 28, 1995 or within 60 days thereafter.
(12) The total number of all directors and executive officers as a group
includes Robert L. Myers, the former Senior Vice President/Pharmacy, who
resigned from his position on May 26, 1995.
(13) Total includes options covering 216,589 shares of Common Stock which are
exercisable as of October 28, 1995 or within 60 days thereafter.
50
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
The following summaries of the principal terms of certain outstanding
indebtedness of the Company do not purport to be complete and are subject to the
detailed provisions of, and qualified in their entirety by reference to, the
respective financing agreements, copies of which have been filed or incorporated
by reference as exhibits to the Registration Statement of which this Prospectus
is a part and to which exhibits reference is hereby made. Whenever particular
provisions of such documents are referred to, such provisions are incorporated
by reference as a part of the statements made, and the statements are qualified
in their entirety by such reference.
THE CREDIT AGREEMENT
The Company is party to the Credit Agreement dated as of June 14, 1993 as
amended and restated as of November 29, 1995 (the "Credit Agreement") with the
financial institutions party thereto (the "Lenders"), Chemical Bank, a New York
banking corporation ("Chemical Bank"), NationsBank of Florida, N.A., a national
banking association ("NationsBank"), as managing agents for the Lenders (in such
capacity, each a "Managing Agent") and as swingline lenders (in such capacity,
each a "Swingline Lender"), and Chemical Bank as administrative agent for the
Lenders, the Swingline Lenders and the fronting banks with respect to letters of
credit ("Letters of Credit") and bankers' acceptances ("Bankers' Acceptances")
issued in connection with the Credit Agreement and NationsBank as documentation
agent for the Lenders, the Swingline Lenders and the Fronting Banks (the
"Documentation Agent").
The Lenders extended credit (i) on a term basis in an aggregate principal
amount not to exceed $250.0 million (the "Term Loans") and (ii) on a revolving
basis at any time and from time to time prior to November 29, 2000, in an
aggregate principal amount outstanding not in excess of $500.0 million (the
"Revolving Loans") of which up to (a) $30.0 million of such amount is available
as swingline loans (the "Swingline Loans") and (b) $155.0 million of such amount
is available as Letters of Credit and Bankers' Acceptances. At November 30,
1995, the Company had approximately $250.0 million outstanding under the Term
Loans and $383.0 million outstanding under the Revolving Loans and had unused
and available borrowing commitments under the Revolving Loans of $28.0 million
(which is net of $89.0 million of letters of credit). The term of the Credit
Agreement expires on November 29, 2000.
The Company uses the proceeds of Revolving Loan borrowings from time to time
for general corporate purposes of the Company and its subsidiaries. The proceeds
of Swingline Loans are also used for general corporate purposes of the Company
and its subsidiaries. Letters of Credit and Bankers' Acceptances are used to
support obligations of the Company and its subsidiaries incurred in the ordinary
course of business.
The obligations of the Company under the Credit Agreement are
unconditionally guaranteed by each of the active subsidiaries of the Company
(each, a "Guarantor"). In addition, the Company has pledged the capital stock of
the Guarantors, and all borrowings under the Credit Agreement are secured by a
first priority lien on all accounts, accounts receivable, equipment, inventory,
proceeds, intellectual property, and certain other property of the Company and
first priority mortgages on two distribution centers of the Company located in
Texas and the Company's headquarters located in Florida.
The Term Loans and the Revolving Loans bear interest at a rate per annum
equal to, at the Company's option, (i) the Alternate Base Rate ("ABR") (defined
in the Credit Agreement as the highest of (a) the prime rate, (b) the federal
funds effective rate plus 1/2 of 1%, and (c) the base CD rate plus 1%) or (ii)
the Adjusted LIBO rate ("LIBOR") (defined in the Credit Agreement as the product
of (a) LIBOR in effect for the applicable interest period and (b) statutory
reserves) plus, in the case of LIBOR a spread (the "LIBOR Spread") determined by
reference to the ratio of earnings before interest, taxes, depreciation and
amortization to Interest Expense (the "Ratio"). If the Ratio is (a) less than
3.5 ("Level I Ratio"), the LIBOR Spread will be 75 basis points per annum, (b)
equal to or greater
51
<PAGE>
than 3.5 but less than 4.5, ("Level II Ratio"), the LIBOR Spread will be 62.5
basis points per annum or (c) equal to or greater than 4.5 ("Level III Ratio"),
the LIBOR Spread will be 50 basis points per annum; provided, however, that the
LIBOR Spread cannot be less than 62.5 basis points per annum prior to receipt by
the Lenders of the Company's financial statements for the fiscal quarter ending
October 1996 (the "October 1996 Financial Statements"); provided, further, that
if, after the receipt of the October 1996 Financial Statements, the Ratio is
greater than or equal to 4.5, no default or event of default has occurred and is
continuing and the Credit Agreement has received both a Baa3 or better rating
from Moody's Investors Service, Inc. and a BBB- or better rating from Standard &
Poors Ratings Service, the LIBOR Spread will be 37.5 basis points per annum.
Interest is computed on the basis of actual number of days elapsed over a
360-day year except when the rate is determined by reference to the prime rate,
in which case it is computed on the basis of actual number of days elapsed over
a 365- or 366-day year. The Swingline Loans bear interest at the rate applicable
to ABR Revolving Loans.
Interest on ABR borrowings are payable quarterly. Interest on LIBOR
borrowings are payable at the end of the relevant interest period (one, two,
three or six-month periods, except that with respect to six-month periods,
interest shall be payable every three months).
The Company pays the Lenders a commitment fee on the undrawn amount of the
revolving facilities determined by reference to the Ratio. If the Company has
achieved a (x) Level I Ratio, the commitment fee is 31.25 basis points per
annum, (y) if the Company achieves a Level II Ratio, the commitment fee is 25
basis points per annum or (z) if the Company achieves a Level III Ratio, the
commitment fee is 18.75 basis points per annum; provided, however, that the
commitment fee cannot be less than 25 basis points per annum until delivery to
the Lenders of the October 1996 Financial Statements. The Company also pays
Letter of Credit fees and Bankers' Acceptance fees, and has paid commitment and
other fees to the Managing Agents and the Lenders.
Principal of the Term Loans will be amortized according to a schedule which
requires amounts outstanding under the Term Loan facility to be reduced by $50.0
million per fiscal year, payable in $10.0 million installments in each of the
first three quarters and $20.0 million in the fourth quarter.
The Company is required to prepay borrowings under the Credit Agreement
with, among others, in any fiscal year, (i) the excess of the aggregate net
proceeds of dispositions of assets of the Company and its subsidiaries over
$10.0 million and (ii) the net proceeds of any incurrence of debt (other than
indebtedness permitted under the Credit Agreement). Mandatory prepayments are to
be applied (i) first, pro rata against remaining scheduled installments of
principal due in respect of Term Loans and (ii) second, to prepay Swingline
Loans and then other Revolving Loans.
The Company has the right to prepay any borrowings under the Credit
Agreement in whole or in part at any time. Optional prepayments of Term Loans
are to be applied (i) first, in the order of maturity of the scheduled
installments of principal due on the repayment dates occurring during the
twelve-month period beginning on the date of such prepayment and (ii) second,
pro rata against the remaining scheduled installments of principal due in
respect of Term Loans.
The Credit Agreement contains various restrictive covenants prohibiting the
Company and its subsidiaries from (subject to certain exceptions), (i) incurring
or permitting to exist any indebtedness, other than, among other things, (a)
certain indebtedness specified existing on the date the Company restated the
Credit Agreement, (b) indebtedness that consists of purchase money indebtedness
or capital lease obligations and is either (x) incurred by the Company in the
ordinary course of business to finance capital expenditures or (y) exists with
respect to an acquired entity if such indebtedness exists at the time of
acquisition; provided, that indebtedness described in (x) must be incurred
within 90 days after the making of the capital expenditure financed thereby, (c)
certain deferred purchase price obligations in an amount not to exceed $10.0
million, (d) reimbursement obligations in limited amounts, (e) certain
intercompany indebtedness, (f) indebtedness in respect of interest rate
protection agreements, (g) the 9 1/4% Notes, (h) subordinated indebtedness
incurred solely to redeem outstanding
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<PAGE>
subordinated indebtedness in whole at an interest rate more favorable than that
in effect under the subordinated indebtedness being refinanced and on terms no
less favorable to the Company than those in effect under the subordinated
indebtedness being refinanced, (i) other subordinated indebtedness, provided no
material term of such subordinated indebtedness is more favorable to the lenders
of such indebtedness than the terms applicable under the 9 1/4% Notes, such
subordinated indebtedness is unsecured and not guaranteed and such subordinated
indebtedness has a maturity greater than or equal to the maturity of the Credit
Agreement; and (j) obligations of the Company and certain subsidiaries under
various stock or option purchase agreements; (ii) incurring or permitting to
exist any liens, other than, among other things, (a) certain specified liens
existing on the date the Company restated the Credit Agreement, (b) liens
existing on property or assets prior to the acquisition thereof by the Company,
(c) purchase money security interests in real property, improvements thereto or
equipment, and (d) liens on consigned goods; (iii) entering into sale and
leaseback transactions other than those specified in the Credit Agreement; (iv)
making investments, loans or advances in excess of $7.0 million in the aggregate
at any time outstanding, other than, among others, the acquisitions of entities
engaged in one or more lines of business substantially similar to those engaged
in on the date the Credit Agreement was restated, not to exceed $50.0 million in
cash in any instance or $100.0 million in any fiscal year; (v) merger,
consolidation, sale or other disposal of all or any substantial part of any
asset or any capital stock of a subsidiary, or acquisitions (including leases)
of all or any substantial part of the assets of any entity, except for, among
other things, (a) the sale of inventory in the ordinary course of business, (b)
the sale of accounts receivable on an ongoing basis; provided that the purchaser
of such receivables may at no time invest more than $125.0 million, (c) the sale
or other disposal of certain specified real estate, and (d) the sale of an
aggregate of $35.0 million of assets, provided that sales not exceed $10.0
million in any twelve-month period; (vi) declaring or paying dividends or
distributions, except for, among other things, purchases or redemptions of stock
in connection with certain existing management subscription agreements; (vii)
engaging in any transaction with any affiliate other than, subject to limited
exceptions, on arms-length terms; (viii) engaging in business activities not
reasonably related to their current business activities; (ix) subject to limited
exceptions, prepaying or redeeming indebtedness; (x) amending, waiving,
modifying or terminating certain documents, including, among others, their
respective charter documents and the terms of material indebtedness of the
Company, unless such amendment, waiver, modification or termination is not
adverse to the Lenders; and (xi) maintaining a bank account with a financial
institution other than a Lender, except as expressly specified.
The Credit Agreement requires the Company to satisfy certain financial
covenants, including, among other things, on a quarterly basis, with respect to
the four immediately preceding quarters: (i) a ratio of funded debt to earnings
before interest, taxes, depreciation and amortization; (ii) interest coverage
ratio; and (iii) fixed charge coverage ratio.
"Events of Default" under the Credit Agreement include (i) default in the
payment when due of any principal payable on the loans under the Credit
Agreement; (ii) default in the payment of any interest, fees or other amounts
payable under the Credit Agreement for a period of three business days; (iii)
the failure to comply with certain other covenants, conditions or agreements
contained in the Credit Agreement; (iv) the failure to comply with any covenant,
condition or agreement contained in the Credit Agreement related loan documents
for a period of 15 days; (v) the failure to pay any principal or interest due in
respect to any indebtedness in a principal amount in excess of $3.0 million
(after giving effect to any applicable grace period); (vi) the commencement of a
bankruptcy, insolvency, receivership or similar action by or against the Company
or any subsidiary; (vii) one or more judgments in an aggregate amount in excess
of $250,000 (to the extent not covered by insurance) rendered against the
Company or any subsidiary which shall remain undischarged for a period of 10
consecutive days; (viii) certain events under the Employee Retirement Income
Security Act of 1975; and (ix) a change in control ("Change in Control") which
shall occur, if, among other things, (a) any person or group other than Merrill
Lynch Capital Partners and its affiliates shall own shares representing more
than 30% of the ordinary voting power of the Company, and (b) certain specified
changes in the composition of the board of directors of the Company occur.
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THE 9 1/4% NOTES
The 9 1/4% Notes are senior subordinated obligations of the Company,
subordinated in right of payment to all existing and future senior debt of the
Company. The 9 1/4% Notes are redeemable at the option of the Company, in whole
or in part, at specified redemption prices, and upon a Change in Control. The 9
1/4% Notes bear interest at 9 1/4% per annum and mature on February 15, 2004.
The indenture pursuant to which the 9 1/4% Notes were issued (the "9 1/4%
Notes Indenture") contains certain covenants that, among other things, restrict
(i) the incurrence of additional indebtedness by the Company and its Restricted
Subsidiaries (as defined in the 9 1/4% Notes Indenture), (ii) the payment of
dividends on, and redemptions of, capital stock of the Company and the making of
other restricted payments, (iii) the incurrence of restrictions on the ability
of Restricted Subsidiaries to pay dividends or other payments to the Company,
(iv) the incurrence of liens, (v) transactions with affiliates, (vi) the use of
proceeds from the disposition of certain assets of the Company or the sale of
the stock of Restricted Subsidiaries, (vii) the issuance of certain guarantees
and pledges by Restricted Subsidiaries, (viii) the issuance and sale of capital
stock by Restricted Subsidiaries, (ix) the incurrence of other senior
subordinated indebtedness and (x) the ability of the Company to engage in
certain mergers or consolidations or to transfer all or substantially all of its
assets to another person.
Upon a Change in Control, (i) the Company will have the option to redeem the
9 1/4% Notes and (ii) subject to certain conditions, the Company will be
required to make an offer to purchase each holder's 9 1/4% Notes at 101% of the
principal amount thereof plus accrued interest to the date of redemption. In
addition, the Company will, under certain circumstances, be obligated to make an
offer to purchase 9 1/4% Notes in the event of Asset Sales (as defined in the 9
1/4% Notes Indenture). The Credit Agreement, however, prohibits the Company from
optionally redeeming the 9 1/4% Notes.
THE INDUSTRIAL DEVELOPMENT REVENUE BONDS
The Company has issued and outstanding $18.25 million in Variable Rate
Demand Industrial Development Revenue Refunding Bonds including $8.25 million
due March 1, 2009 and $10.0 million due May 1, 2013. The variable rate demand
industrial development revenue refunding bonds currently have an interest rate
which is a daily rate established by J.P. Morgan Securities, Inc. and is
indicative of current bid-side yields of high grade tax-exempt securities. At
the Company's option, and under certain conditions, the interest rate may be
changed to a monthly rate or a fixed rate. The bonds are secured by the related
buildings, leases and letters of credit and are guaranteed obligations of the
Company. The reimbursement agreement relating to the letters of credit
incorporates the restrictive covenants and limitations of the Credit Agreement.
THE IFS SALE AND LEASEBACK
On June 15, 1993, the Company entered into the IFS Sale and Leaseback, which
is an agreement for a sale and leaseback of certain assets related to its photo
processing business. The Company has sold certain photo processing equipment to
Imaging Financial Services, Inc., a Delaware corporation, for approximately
$35.0 million, and entered into a five-year lease with respect to such
equipment. At the end of the five years, the Company may renew the agreement or
terminate the lease and return the equipment.
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DESCRIPTION OF CAPITAL STOCK
The following summary is subject to the detailed provisions of, and is
qualified in its entirety by reference to, the Company's Restated Certificate of
Incorporation and Restated By-laws, copies of which have been incorporated by
reference as exhibits to the Registration Statement of which this Prospectus is
a part. The authorized capital stock of the Company consists of 100 million
shares of Common Stock and 20 million shares of preferred stock, par value $.01
per share.
COMMON STOCK
The Company's authorized common stock consists of 100 million shares of
Common Stock, par value $.01 per share (of which 3,518,728 shares are Non-Voting
Common Stock (Series I), par value $.01 per share). As of October 28, 1995,
there were 34,950,857 shares of Common Stock outstanding and employee stock
options outstanding to purchase an aggregate of 1,656,199 shares of Common Stock
(of which options to purchase an aggregate of 302,328 shares of Common Stock
were exercisable). In addition, another 1,757,910 shares of Common Stock were
reserved for issuance pursuant to the Company's 1993 and 1995 Stock Option and
Incentive Plans. Subject to certain conditions, shares of Common Stock held by
any Regulated Banking Stockholder (as defined in the Restated Certificate of
Incorporation) may be converted into the same number of shares of Non-Voting
Common Stock and shares of Non-Voting Common Stock held by any holder may be
converted into the same number of shares of Common Stock.
Voting Rights
Each share of Common Stock entitles the holder thereof to one vote in
elections of directors and all other matters submitted to a vote of
stockholders. The Common Stock does not have cumulative voting rights, which
means that holders of a majority of the outstanding Common Stock voting for the
election of directors can elect all directors then being elected. Each share of
Non-Voting Common Stock does not entitle the holder thereof to any vote on
matters on which the holders of Common Stock are entitled to vote, except on any
amendment, repeal or modification of any provision of the Company's Restated
Certificate of Incorporation which adversely affect the rights of the holders of
Non-Voting Common Stock or as otherwise required by law.
Dividends
Subject to the rights of any preferred stock which may be issued by the
Board of Directors, each share of Common Stock and Non-Voting Common Stock has
an equal and ratable right to receive dividends to be paid from the Company's
assets legally available therefor when, as and if declared by the Board of
Directors. The terms of the Company's outstanding indebtedness restrict the
declaration and payment of dividends on the Common Stock.
Liquidation
In the event of the dissolution, liquidation or winding up of the Company,
the holders of Common Stock and Non-Voting Common Stock are entitled to share
equally and ratably in the assets available for distribution after payments are
made to the Company's creditors and to the holders of any preferred stock of the
Company that may be outstanding at the time.
Other
The holders of shares of Common Stock and Non-Voting Common Stock have no
preemptive, subscription, redemption or conversion rights and are not liable for
further call or assessment. All of the outstanding shares of Common Stock are
fully paid and nonassessable.
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Registrar and Transfer Agent
Mellon Securities Trust Company acts as Registrar and Transfer Agent for the
Common Stock.
PREFERRED STOCK
The Company's Restated Certificate of Incorporation provides that the
Company may issue up to 20 million shares of preferred stock and the Board of
Directors of the Company is authorized, without further stockholder action, to
divide any or all shares of authorized preferred stock into series and to fix
and determine the designations, preferences and relative, participating,
optional or other special rights, and qualifications, limitations or
restrictions thereon, of any series so established, including voting powers,
dividend rights, liquidation preferences, redemption rights and conversion
privileges. As of the date of this Prospectus, the Board of Directors of the
Company has not authorized any series of preferred stock and there are no plans,
agreements or understandings for the issuance of any shares of preferred stock.
CERTIFICATE OF INCORPORATION AND BY-LAWS
Certain provisions of the Company's Restated Certificate of Incorporation
and Restated By-laws could make more difficult non-negotiated acquisitions of
the Company. The Board of Directors believes that these provisions will help to
assure the continuity and stability of the Board of Directors and the business
strategies and policies of the Company as determined by the Board of Directors.
These provisions could have the effect, however, of discouraging a third party
from making a tender offer or otherwise attempting to obtain control of the
Company even though such an attempt might be beneficial to the Company and its
stockholders.
Pursuant to the Company's Restated Certificate of Incorporation, the Board
of Directors of the Company is divided into three classes serving staggered
three-year terms. Directors can be removed from office only for cause and only
by the affirmative vote of the holders of a majority of the then-outstanding
shares of capital stock entitled to vote generally in an election of directors.
Vacancies on the Board of Directors may be filled only by the remaining
directors and not by the stockholders.
The Restated Certificate of Incorporation also provides that any action
required or permitted to be taken by the stockholders of the Company may be
effected only at an annual or special meeting of stockholders, and prohibits
stockholder action by written consent in lieu of a meeting. The Company's
Restated By-laws provide that special meetings of stockholders may be called
only by the chairman, the president or the secretary of the Company and must be
called by any such officer at the request in writing of the Board of Directors.
Stockholders may call a special meeting if the holders of not less than 50% of
all votes entitled to be cast at a special meeting send a written demand to the
Company's Secretary.
The Restated By-laws establish an advance notice procedure for the
nomination, other than by or at the direction of the Board of Directors, of
candidates for election as directors as well as for other stockholder proposals
to be considered at annual meetings of stockholders. In general, notice of
intent to nominate a director or raise business at such meetings must be
received by the Company not less than 60 nor more than 90 days prior to the
anniversary of the previous year's annual meeting, and must contain certain
specified information concerning the person to be nominated or the matters to be
brought before the meeting and concerning the stockholder submitting the
proposal.
The foregoing summary is qualified in its entirety by the provisions of the
Company's Restated Certificate of Incorporation and Restated By-laws, copies of
which have been incorporated by reference as exhibits to the Registration
Statement of which this Prospectus constitutes a part.
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LIMITATIONS ON DIRECTORS' LIABILITY
The Company's Restated Certificate of Incorporation provides that, to the
fullest extent permitted by the General Corporation Law of the State of Delaware
(the "DGCL"), directors of the Company shall not be personally liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty as
a director. Section 102(7) of the DGCL, however, states that such a provision
may not eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the Company or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the DGCL, relating to unlawful
dividends, distributions or the repurchase or redemption of stock or (iv) for
any transaction from which the director derives an improper personal benefit.
The Company's Restated By-laws provide that the Company shall indemnify and
hold harmless, to the fullest extent permitted by the DGCL, any person against
expenses (including attorney's fees), judgments, fines and amounts paid in
settlement, actually and reasonably incurred in connection with any threatened,
pending or completed legal proceedings in which such person is involved by
reason of the fact that he is or was a director, officer, employee or agent of
the Company (or serving in any such capacity with another business organization
at the request of the Company) if he acted in good faith and in a manner that he
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, if he had no
reasonable cause to believe that his conduct was unlawful. If the legal
proceeding, however, is by or in the right of the Company, such director,
officer, employee or agent may not be indemnified in respect of any claim, issue
or matter as to which he shall have been adjudged to be liable to the Company
unless a court determines otherwise.
The Company has entered into agreements to indemnify its directors and
officers in addition to the indemnification provided for in the Restated
Certificate of Incorporation. These agreements, among other things, indemnify
the Company's directors and officers for certain expenses (including attorneys'
fees), judgments, fines and settlement amounts incurred by such person in any
action or proceeding, including any action by or in the right of the Company, on
account of services as a director or officer of the Company or as a director or
officer of any subsidiary of the Company, or as a director or officer of any
other company or enterprise to which the person provides services at the request
of the Company.
REGISTRATION RIGHTS
Pursuant to a registration rights agreement, as amended, among the Company,
the Merrill Lynch Investors, the Management Investors and the other stockholders
of the Company who held shares immediately prior to the IPO (the "Registration
Rights Agreement"), holders of at least 25% of the Common Stock have the right
to demand registration under the Securities Act of their shares of Common Stock.
Subject to certain exceptions, the Company will be required, at its expense, to
register such shares and to include in the registration on request all other
shares owned by parties to the Registration Rights Agreement (or their permitted
transferees) who notify the Company of their request. In addition, in the event
the Company proposes to register any of its equity securities under the
Securities Act, each party to the Registration Rights Agreement (or its
permitted transferee) has the incidental right, subject to certain exceptions,
to have the shares of the Common Stock then owned by it included in such
registration. The Company has agreed that, in the event of any registration of
securities owned by a party to the Registration Rights Agreement (or permitted
transferee) in accordance with the provisions thereof, it will indemnify such
person, and certain related persons, against liabilities incurred in connection
with such registration, including liabilities arising under the Securities Act.
The Company and the Eckerd Corporation Profit Sharing Plan have also entered
into a demand registration rights agreement with terms similar to those
contained in the Registration Rights Agreement (except that such registration
rights agreement does not provide for incidental registration rights).
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The registration rights of the existing stockholders are subject to certain
limitations intended to prevent undue interference with the Company's ability to
distribute securities, including, without limitation, the provisions that (i)
demand registration rights may not be exercised within six months after the
effective date of the Company's most recent registration statement (other than
registration on Form S-4 or S-8) and (ii) the 1% Holders will not offer for
public sale any shares owned by them during the seven days before or 120 days
after the effective date of any registration statement filed pursuant to the
Registration Rights Agreement.
The Company has included the shares of Common Stock to be sold by the
Selling Stockholders in the Offering pursuant to the exercise by such Selling
Stockholders of their demand registration rights under the Registration Rights
Agreement.
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UNDERWRITING
Subject to the terms and conditions set forth in the Purchase Agreement (the
"Purchase Agreement") among the Company, the Selling Stockholders and each of
the underwriters named below (the "Underwriters"), the Selling Stockholders
severally have agreed to sell to each of the Underwriters, and each of the
Underwriters severally has agreed to purchase from the Selling Stockholders, the
number of shares of Common Stock set forth opposite its name below.
NUMBER OF
UNDERWRITERS SHARES
---------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................................... 945,000
CS First Boston Corporation..................................... 945,000
Morgan Stanley & Co. Incorporated............................... 945,000
Raymond James & Associates, Inc. ............................... 945,000
Bear, Stearns & Co. Inc. ....................................... 80,000
Alex. Brown & Sons Incorporated................................. 80,000
Dean Witter Reynolds Inc. ...................................... 80,000
Donaldson, Lufkin & Jenrette Securities Corporation............. 80,000
A.G. Edwards & Sons, Inc. ...................................... 80,000
Goldman, Sachs & Co. ........................................... 80,000
Lehman Brothers Inc. ........................................... 80,000
Montgomery Securities........................................... 80,000
Paribas Corporation............................................. 80,000
Prudential Securities Incorporated.............................. 80,000
Salomon Brothers Inc............................................ 80,000
Schroder Wertheim & Co. Incorporated............................ 80,000
Advest, Inc. ................................................... 40,000
J.C. Bradford & Co. ............................................ 40,000
The Chicago Corporation......................................... 40,000
Cowen & Company................................................. 40,000
Dominick & Dominick, Incorporated............................... 40,000
EVEREN Securities, Inc. ........................................ 40,000
Gruntal & Co., Incorporated..................................... 40,000
Howard, Weil, Labouisse, Friedrichs Incorporated................ 40,000
Interstate/Johnson Lane Corporation............................. 40,000
Janney Montgomery Scott Inc. ................................... 40,000
Edward D. Jones & Co. .......................................... 40,000
Legg Mason Wood Walker, Incorporated............................ 40,000
McDonald & Company Securities, Inc. ............................ 40,000
Morgan Keegan & Company, Inc. .................................. 40,000
Principal Financial Securities, Inc. ........................... 40,000
Rauscher Pierce Refsnes, Inc. .................................. 40,000
The Robinson-Humphrey Company, Inc. ............................ 40,000
Muriel Siebert & Co., Inc. ..................................... 40,000
Wheat, First Securities, Inc. .................................. 40,000
---------
Total........................................................... 5,500,000
---------
---------
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), CS
First Boston Corporation, Morgan Stanley & Co. Incorporated and Raymond James &
Associates, Inc. are acting as representatives (the "Representatives") of the
several Underwriters.
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In the Purchase Agreement, the several Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all of the shares of
Common Stock offered hereby if any of such shares are purchased. Under certain
circumstances, the commitments of the non-defaulting Underwriters may be
increased.
The Underwriters have advised the Company that they propose initially to
offer the shares to the public at the public offering price set forth on the
cover page of this Prospectus, and to certain dealers at such price less a
concession not in excess of $.98 per share. The Underwriters may allow, and such
dealers may reallow, a discount not in excess of $.10 per share to certain other
dealers. After the Offering, the public offering price, concession and discount
may be changed.
The Selling Stockholders have granted the Underwriters an option,
exercisable for 30 days after the date of this Prospectus, to purchase up to an
aggregate of an additional 825,000 shares to cover over-allotments, if any, at
the public offering price set forth on the cover page hereof, less the
underwriting discount. The Underwriters may exercise such option only to cover
over-allotments, if any, made on the sale of the shares offered hereby. To the
extent that the Underwriters exercise such option, each Underwriter will be
obligated, subject to certain conditions, to purchase the number of shares
proportionate to such Underwriter's initial amount reflected in the foregoing
table.
For information regarding the ownership by the Merrill Lynch Investors of
Common Stock and the representation of affiliates of ML & Co. on the Board of
Directors of the Company, see "Management" and "Principal and Selling
Stockholders."
The Common Stock is listed on the NYSE under the symbol "ECK." Because the
Company is an affiliate of Merrill Lynch, one of the Underwriters, the Offering
is being conducted in accordance with the applicable provisions of Schedule E to
the By-Laws of the National Association of Securities Dealers, Inc. In
accordance with Schedule E, no NASD member participating in the distribution is
permitted to confirm sales to accounts over which it exercises discretionary
authority without prior specific written consent. In addition, under the rules
of the NYSE, Merrill Lynch is precluded from issuing research reports that make
recommendations with respect to the Common Stock for so long as the Company is
an affiliate of Merrill Lynch.
Pursuant to the Registration Rights Agreement, each 1% Holder has agreed,
for a period beginning seven days before, and ending 120 days after, the
effective date of the Registration Statement of which this Prospectus is a part,
not to effect any public sale or distribution, including any sale pursuant to
Rule 144 under the Securities Act, of Common Stock or any securities convertible
into or exchangeable or exercisable for Common Stock, or any rights or warrants
to acquire Common Stock, subject to certain exceptions, without the prior
written consent of the Representatives of the Underwriters. See "Risk
Factors--Shares Eligible for Future Sale." Approximately 14.63% of the shares of
Common Stock outstanding upon consummation of the Offering will be subject to
such lock-up agreements. In addition, certain of the Merrill Lynch Investors
that are limited partnerships will be distributing an aggregate of approximately
432,762 shares of Common Stock pursuant to the Merrill Lynch Distribution. As a
condition to receiving shares of Common Stock in the Merrill Lynch Distribution,
such partners have agreed to be bound by the same lock-up provision as the 1%
Holders for a period of 120 days after the effective date of the Registration
Statement. The Merrill Lynch Distribution is expected to occur as soon as
practicable after 120 days from the effective date of the Registration
Statement, or on such earlier date consented to by the Representatives of the
Underwriters. In addition, each of the Company and the executive officers and
directors of the Company will agree, for a period of 90 days after the effective
date of the Registration Statement, not to sell or otherwise dispose of any
shares of Common Stock or securities convertible into or exchangeable or
exercisable for Common Stock, or any rights or warrants to acquire Common Stock,
subject to certain exceptions, without the prior written consent of the
Representatives of the Underwriters.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters and their controlling persons against certain civil liabilities,
including liabilities under the Securities Act of 1933,
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as amended, and to contribute to payments the Underwriters may be required to
make in respect thereof.
Merrill Lynch, an affiliate of the Merrill Lynch Investors, acted as one of
the representatives of the underwriters in both the Secondary Offering and the
August Offering and received underwriting commissions and related fees of
approximately $809,200 and approximately $3.0 million, respectively. In
addition, Merrill Lynch received fees of approximately $1.4 million in
connection with the financial advisory services rendered to the Company in
connection with the Insta-Care Sale. In addition to Merrill Lynch, certain of
the Underwriters acted as representatives of the Underwriters in both the
Secondary Offering and the August Offering and, from time to time, perform
investment banking and other financial services for the Company.
LEGAL MATTERS
Certain legal matters with respect to the Common Stock will be passed upon
for the Company by Skadden, Arps, Slate, Meagher & Flom, New York, New York and
Robert E. Lewis, Esq., Vice President/General Counsel of the Company. Certain
legal matters will be passed upon for the Underwriters by Shearman & Sterling,
New York, New York. Certain partners of Skadden, Arps, Slate, Meagher & Flom are
investors in the Company. Skadden, Arps, Slate, Meagher & Flom and Shearman &
Sterling occasionally act as counsel to ML & Co. and its affiliates, including
the Merrill Lynch Investors, and Skadden, Arps, Slate, Meagher & Flom
occasionally acts as counsel to the other Underwriters.
EXPERTS
The consolidated financial statements and schedules of the Company and
subsidiaries as of January 28, 1995 and January 29, 1994, and for the years
ended January 28, 1995, January 29, 1994 and January 30, 1993, included in the
Company's Annual Report on Form 10-K405 for the period ended January 28, 1995
and incorporated herein by reference, have been incorporated by reference in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, included or incorporated by reference herein, and upon the
authority of that firm as experts in accounting and auditing.
With respect to the unaudited interim financial information of Eckerd
Corporation and subsidiaries for the thirteen week periods ended April 29, 1995
and April 30, 1994 and the thirteen and twenty-six week periods ended July 29,
1995 and July 30, 1994, incorporated by reference herein, the independent
certified public accountants have reported that they applied limited procedures
in accordance with professional standards for a review of such information.
However, their separate reports included in the Eckerd Corporation and
subsidiaries' quarterly reports on Form 10-Q for each of the quarters ended
April 29, 1995 and July 29, 1995, and incorporated by reference herein, state
that they did not audit and they do not express an opinion on that interim
financial information. Accordingly, the degree of reliance on their reports on
such information should be restricted in light of the limited nature of the
review procedures applied. The accountants are not subject to the liability
provisions of section 11 of the Securities Act for their report on the unaudited
interim financial information because that report is not a "report" or a "part"
of the registration statement prepared or certified by the accountants within
the meaning of sections 7 and 11 of the Securities Act.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Such reports and other information filed
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by the Company with the Commission, may be inspected at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and should also be available for inspection
and copying at the regional offices of the Commission located at Seven World
Trade Center, 13th Floor, New York, New York 10048; and at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material may also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. Additionally, such reports and other information concerning the Company
are available for inspection at the offices of the New York Stock Exchange
located at 20 Broad Street, New York, New York 10005, on which the Common Stock
and the 9 1/4% Notes are listed.
This Prospectus constitutes a part of a Registration Statement on Form S-3
filed by the Company with the Commission under the Securities Act. This
Prospectus omits certain of the information contained in the Registration
Statement, and reference is hereby made to the Registration Statement and to the
exhibits relating thereto for further information with respect to the Company
and the Common Stock offered hereby. Any statements contained herein concerning
the provisions of any document are not necessarily complete, and, in each
instance, reference is made to such copy filed as an exhibit to the Registration
Statement or otherwise filed with the Commission. Each such statement is
qualified in its entirety by such reference. The Registration Statement and the
exhibits thereto may be inspected without charge at the office of the Commission
at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies
thereof may be obtained from the Commission at prescribed rates.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by the Company with the Commission (File No.
1-4844) pursuant to the Exchange Act, are incorporated herein by reference and
made a part hereof:
1. The Company's Annual Report on Form 10-K405 for the fiscal year ended
January 28, 1995.
2. The Company's Quarterly Report on Form 10-Q for the quarter ended
April 29, 1995.
3. The Company's Quarterly Report on Form 10-Q for the quarter ended
July 29, 1995.
4. The Company's Current Report on Form 8-K dated November 28, 1995.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering of the shares of Common Stock offered hereby shall
be deemed to be incorporated in this Prospectus by reference and to be a part
hereof from the date of filing of such documents.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, on the written or oral request of any such person,
a copy of any and all of the documents incorporated herein by reference (other
than exhibits unless such exhibits are specifically incorporated herein by
reference). Requests for such copies should be directed to the Treasurer, Eckerd
Corporation, 8333 Bryan Dairy Road, Largo, Florida 34647 or by telephone at
(813) 399-6000.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
62
<PAGE>
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- --------------------------------------------- --------------------------------
NO DEALER, SALESPERSON OR ANY OTHER
INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY 5,500,000 SHARES
THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE SELLING
STOCKHOLDERS OR THE UNDERWRITERS. THIS [ECKERD CORPORATION LOGO]
PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, THE COMMON STOCK IN ANY
JURISDICTION WHERE OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATIONS
THAT THERE HAS NOT BEEN ANY CHANGE IN
THE FACTS SET FORTH IN THIS PROSPECTUS
OR IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF.
------------------ COMMON STOCK
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.................... 3
Risk Factors.......................... 8 ---------------------
Capitalization........................ 12 PROSPECTUS
Price Range of Common Stock and ---------------------
Dividend Policy..................... 13
The Company........................... 14
Selected Historical Financial Data.... 17
Pro Forma Financial Data.............. 19
Management's Discussion and Analysis
of Results of Operations and
Financial Condition................. 21 MERRILL LYNCH & CO.
Business.............................. 31 CS FIRST BOSTON
Management............................ 45 MORGAN STANLEY & CO.
INCORPORATED
Principal and Selling Stockholders.... 49
RAYMOND JAMES & ASSOCIATES, INC.
Description of Certain Indebtedness... 51
Description of Capital Stock.......... 55
Underwriting.......................... 59
Legal Matters......................... 61
Experts............................... 61
Available Information................. 61
Incorporation of Certain Information DECEMBER 7, 1995
by Reference........................ 62
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<PAGE>
APPENDIX
OF
OMITTED GRAPHIC MATERIAL
A. Graphic Material on Page 2 of Prospectus:
1. "Eckerd" logo
2. "It's right at Eckerd." logo
3. Map of number of Eckerd Drug stores by state as listed under the
caption "Business--Eckerd Drug Stores" in the Prospectus
B. Photographs on Inside Back Cover Page of Prospectus:
1. Product counter inside Eckerd Drug store
2. Eckerd Drug store exterior
3. "It's right at Eckerd." logo
