<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE COMMISSION
ONLY (AS PERMITTED BY RULE 14c-5 (D) (2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
FAY'S INCORPORATED
- - -------------------------------------------------------------------------------
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
- - -------------------------------------------------------------------------------
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
[_] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[_] $500 per each party to the controversy pursuant to Exchange Act Rule 14a-
6(i)(3).
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[_] Fee paid previously with preliminary materials.
[X] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: $104,897
(2) Form, Schedule or Registration Statement No.: 333-10397
(3) Filing Party: J.C. Penney Company, Inc.
(4) Date Filed: August 19, 1996
<PAGE>
September 9, 1996
Fellow Shareholders:
On August 5, 1996, Fay's Incorporated ("Fay's") entered into a Merger
Agreement with J. C. Penney Company, Inc. ("JCPenney") pursuant to which each
outstanding share of Fay's Common Stock will be converted into a fractional
share of JCPenney Common Stock valued at $12.75, subject to a minimum per
share exchange of .2253397 of a share of JCPenney Common Stock, a maximum per
share exchange of .2754151 of a share of JCPenney Common Stock and appraisal
rights, as more fully described in the accompanying Proxy
Statement/Prospectus.
Your Board of Directors has called a Special Meeting of the holders of Fay's
Common Stock to consider the approval and adoption of the Merger Agreement.
The meeting will be held at 10:00 a.m., local time, on October 11, 1996 at the
Syracuse Marriott, 6302 Carrier Parkway, Thruway Exit 35, East Syracuse, New
York.
The Board of Directors of Fay's has determined that the merger is fair to,
and in the best interests of, Fay's and its shareholders and has recommended
to the holders of Fay's Common Stock that they vote for the approval and
adoption of the Merger Agreement for the reasons set forth in the accompanying
Proxy Statement/Prospectus. Such Proxy Statement/Prospectus contains a
detailed description of the terms and conditions of the merger, a copy of the
Merger Agreement and a discussion of other information concerning the
transaction.
Your vote is very important. We urge that each holder of Fay's Common Stock
be represented in person or by proxy at this meeting, regardless of the number
of shares you own or whether you are able to attend the meeting. Please
complete, sign, date and return the enclosed proxy card as soon as possible.
Please do not send any stock certificates at this time. This action will not
limit your right to vote in person at the meeting if you wish to do so. A
proxy may be revoked at any time before it is exercised.
We would like to take this opportunity to thank our shareholders for their
support over the years.
Sincerely,
[SIGNATURE OF HENRY [SIGNATURE OF DAVID
A. PANASCI, JR. APPEARS H. PANASCI APPEARS
HERE] HERE]
Henry A. Panasci, Jr. David H. Panasci
Chairman of the Board and President and
Chief Executive Officer Chief Operating Officer
7245 HENRY CLAY BOULEVARD . LIVERPOOL, NEW YORK 13088-3571 . PHONE (315) 451-
8000
<PAGE>
FAY'S INCORPORATED
7245 HENRY CLAY BOULEVARD
LIVERPOOL, NEW YORK 13088
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held on October 11, 1996
A Special Meeting of the holders of Common Stock of Fay's Incorporated, a
New York corporation ("Fay's"), will be held at 10:00 a.m., local time, on
Friday, October 11, 1996 at the Syracuse Marriott, 6302 Carrier Parkway,
Thruway Exit 35, East Syracuse, New York to consider the following:
Proposal to approve and adopt the Agreement and Plan of Merger, dated
as of August 5, 1996 and amended as of September 5, 1996 (the "Merger
Agreement"), relating to the merger ("Merger") of Beta Acquisition
Corp., a New York corporation and a wholly owned subsidiary of J. C.
Penney Company, Inc., a Delaware corporation ("JCPenney"), with and
into Fay's pursuant to which each outstanding share of Fay's common
stock, of the par value of $.10 per share ("Fay's Common Stock"), will
be converted into the right to receive a fractional share of JCPenney
common stock of 50c par value ("JCPenney Common Stock") valued at
$12.75, subject to a minimum per share exchange of .2253397 of a share
of JCPenney Common Stock, a maximum per share exchange of .2754151 of
a share of JCPenney Common Stock and appraisal rights, as more fully
described in the accompanying Proxy Statement/Prospectus.
A copy of the Merger Agreement is attached as Appendix I to the Proxy
Statement/Prospectus that accompanies this Notice of Special Meeting of
Shareholders.
The Board of Directors of Fay's has established the close of business on
August 30, 1996 (the "Record Date") as the record date for the determination
of Fay's shareholders entitled to notice of and to vote at the Special Meeting
or any adjournments or postponements thereof (the "Special Meeting"). Only
holders of record of shares of Fay's Common Stock at the close of business on
the Record Date are entitled to notice of, and to vote at, the Special
Meeting. Holders of Fay's Common Stock who properly dissent in compliance with
the applicable provisions of the New York Business Corporation Law (the
"NYBCL") will be entitled, as an alternative to receiving shares of JCPenney
Common Stock in the Merger, to a judicial determination of the fair value in
cash of their shares of Fay's Common Stock as of the day prior to the Special
Meeting and other rights and benefits provided thereunder. See "The Merger--
Appraisal Rights of Dissenting Shareholders" in the accompanying Proxy
Statement/Prospectus and Sections 623 and 910 of the NYBCL attached as
Appendix III thereto.
The affirmative vote of the holders of at least two-thirds of the
outstanding shares of Fay's Common Stock is required for approval and adoption
of the Merger Agreement. The Board of Directors recommends that Fay's
shareholders vote "FOR" the approval and adoption of the Merger Agreement. See
"The Merger--Recommendation of the Board of Directors of Fay's; Reasons for
the Merger" in the accompanying Proxy Statement/Prospectus.
Holders of Fay's Common Stock, whether or not they expect to be present at
the Special Meeting, are requested to complete, sign, and date the enclosed
proxy and return it promptly in the envelope enclosed for that purpose. Any
person giving a proxy has the power to revoke it at any time before it is
voted at the Special Meeting, and shareholders who are present at the Special
Meeting may withdraw their proxies and vote in person.
By Order of the Board of Directors:
[SIGNATURE OF WARREN D. WOLFSON
APPEARS HERE]
Warren D. Wolfson
Senior Vice President and Secretary
Liverpool, New York
September 9, 1996
<PAGE>
PROSPECTUS OF
J. C. PENNEY COMPANY, INC.
PROXY STATEMENT OF
FAY'S INCORPORATED
----------------
This Proxy Statement/Prospectus ("Proxy Statement/Prospectus") relates to
the proposed merger (the "Merger") of Beta Acquisition Corp., a New York
corporation ("Merger Sub") and a wholly owned subsidiary of J. C. Penney
Company, Inc., a Delaware corporation ("JCPenney"), with and into Fay's
Incorporated, a New York corporation ("Fay's"), pursuant to the Agreement and
Plan of Merger, dated as of August 5, 1996 and amended as of September 5,
1996, among JCPenney, Merger Sub and Fay's (the "Merger Agreement") pursuant
to which Fay's would become a wholly owned subsidiary of JCPenney. Pursuant to
the Merger, each share of common stock, of the par value of $.10 per share, of
Fay's ("Fay's Common Stock") outstanding immediately prior to the effective
time of the Merger (the "Effective Time") would be converted into the right to
receive a fractional share of common stock of 50c par value of JCPenney
("JCPenney Common Stock") valued at $12.75, subject to a minimum per share
exchange of .2253397 of a share of JCPenney Common Stock, a maximum per share
exchange of .2754151 of a share of JCPenney Common Stock and appraisal rights,
as more fully described herein. See "The Merger--Certain Terms of the Merger
Agreement--Consideration to be Paid in the Merger and Conversion of Shares."
This Proxy Statement/Prospectus is being furnished in connection with the
solicitation of proxies by the Board of Directors of Fay's for use at the
Special Meeting of Shareholders of Fay's (including any adjournments or
postponements thereof) to be held on October 11, 1996 (the "Special Meeting").
Only Fay's shareholders of record at the close of business on August 30, 1996
(the "Record Date") are entitled to notice of, and to vote at, the Special
Meeting. This Proxy Statement/Prospectus and the accompanying form of proxy
are first being mailed to holders of Fay's Common Stock on or about September
11, 1996. At the Special Meeting, holders of Fay's Common Stock will be asked
to consider the approval and adoption of the Merger Agreement. This Proxy
Statement/Prospectus also constitutes a prospectus of JCPenney with respect to
the shares of JCPenney Common Stock to be issued to holders of Fay's Common
Stock pursuant to the Merger Agreement.
The JCPenney Common Stock offered hereby has been approved for listing on
The New York Stock Exchange (the "NYSE"), subject to official notice of
issuance. On September 6, 1996, the per share closing sales prices of JCPenney
Common Stock and Fay's Common Stock as reported on the New York Stock Exchange
Composite Transactions Reporting System were $54 3/4 and $12 3/4, respectively.
----------------
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 COMMIS-
SION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATE-
MENT/PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Proxy Statement/Prospectus is September 9, 1996
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROXY STATEMENT/PROSPECTUS IN CONNECTION WITH THE SOLICITATION OF PROXIES OR
THE OFFERING OF SECURITIES MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
JCPENNEY OR FAY'S. THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, ANY SECURITIES, OR
THE SOLICITATION OF A PROXY, IN ANY JURISDICTION IN WHICH, OR TO ANY PERSON TO
WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION OF AN OFFER OR PROXY
SOLICITATION. NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY
DISTRIBUTION OF THE SECURITIES OFFERED HEREBY SHALL UNDER ANY CIRCUMSTANCES
CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF JCPENNEY
OR FAY'S SINCE THE DATE HEREOF OR THAT THE INFORMATION SET FORTH OR
INCORPORATED BY REFERENCE HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE CERTAIN DOCUMENTS
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. JCPENNEY AND FAY'S EACH
UNDERTAKES TO PROVIDE COPIES OF SUCH DOCUMENTS (OTHER THAN EXHIBITS TO SUCH
DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE INTO
SUCH DOCUMENTS), WITHOUT CHARGE, TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER
OF FAY'S COMMON STOCK, TO WHOM THIS PROXY STATEMENT/PROSPECTUS IS DELIVERED,
UPON WRITTEN OR ORAL REQUEST TO, IN THE CASE OF DOCUMENTS RELATING TO
JCPENNEY: J. C. PENNEY COMPANY, INC., PUBLIC INFORMATION, P.O. BOX 10001,
DALLAS, TEXAS 75301-4302 (TELEPHONE (214) 431-1488), AND, IN THE CASE OF
DOCUMENTS RELATING TO FAY'S: FAY'S INCORPORATED, 7245 HENRY CLAY BOULEVARD,
LIVERPOOL, NEW YORK 13088 (TELEPHONE (315) 451-8000), ATTENTION: WARREN D.
WOLFSON, SECRETARY. IN ORDER TO ENSURE TIMELY DELIVERY OF SUCH DOCUMENTS, ANY
REQUEST SHOULD BE MADE BY OCTOBER 4, 1996.
AVAILABLE INFORMATION
JCPenney and Fay's are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed with the Commission by JCPenney and
Fay's can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the Commission's Regional Offices at Seven World Trade Center,
13th Floor, New York, New York 10048, and CitiCorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be
obtained by mail from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission also maintains a Web site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. In addition,
reports, proxy statements and other information concerning JCPenney and Fay's
may be inspected at the offices of the NYSE, 20 Broad Street, New York, New
York 10005.
JCPenney has filed with the Commission a Registration Statement on Form S-4
(together with all amendments, supplements and exhibits thereto, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the JCPenney Common Stock to be issued
pursuant to the Merger Agreement. The information contained herein with
respect to JCPenney and its affiliates, including Merger Sub, has been
provided by JCPenney, and the information contained herein with respect to
Fay's and its affiliates has been provided by Fay's. This Proxy
Statement/Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which were omitted in accordance with
the rules and regulations of the Commission. Such omitted information can be
inspected at and obtained from the Commission and the NYSE in the manner set
forth above. For further information, reference is hereby made to the
Registration Statement. Any statements contained herein concerning the
provisions of any document filed as an exhibit to the Registration Statement
or otherwise filed with the Commission are not necessarily complete and, in
each instance, reference is made to the copy of such document so filed. Each
such statement is qualified in its entirety by such reference.
2
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents and reports of JCPenney, which have been filed with
the Commission pursuant to the Exchange Act, are incorporated herein by
reference:
1. JCPenney's Annual Report on Form 10-K for the 52 weeks ended January
27, 1996 ("JCPenney 1995 Form 10-K").
2. JCPenney's Quarterly Report on Form 10-Q for the 13 weeks ended April
27, 1996 ("JCPenney 1996 First Quarter Form 10-Q").
3. JCPenney's Quarterly Report on Form 10-Q for the 13 and 26 weeks ended
July 27, 1996 ("JCPenney 1996 Second Quarter Form 10-Q").
4. JCPenney's Current Report on Form 8-K dated August 14, 1996.
5. J. C. Penney Funding Corporation's Annual Report on Form 10-K for the
52 weeks ended January 27, 1996.
6. J. C. Penney Funding Corporation's Quarterly Report on Form 10-Q for
the 13 weeks ended April 27, 1996.
7. J. C. Penney Funding Corporation's Quarterly Report on Form 10-Q for
the 13 and 26 weeks ended July 27, 1996.
The following documents and reports of Fay's, which have been filed with the
Commission pursuant to the Exchange Act, are incorporated herein by reference:
1. Fay's Annual Report on Form 10-K for the 52 weeks ended January 27,
1996 ("Fay's 1996 Form 10-K").
2. Fay's Quarterly Report on Form 10-Q for the 13 weeks ended April 27,
1996 ("Fay's 1996 First Quarter Form 10-Q").
3. Fay's Quarterly Report on Form 10-Q for the 13 and 26 weeks ended July
27, 1996 ("Fay's 1996 Second Quarter Form 10-Q").
4. Fay's Current Report on Form 8-K dated August 7, 1996.
All documents and reports filed with the Commission by JCPenney or Fay's
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the
date of this Proxy Statement/Prospectus and prior to the termination of the
offering of JCPenney Common Stock contemplated hereby shall be deemed to be
incorporated by reference herein and to be a part hereof from the respective
dates of filing of such documents or reports.
All information appearing in this Proxy Statement/Prospectus or in any
document or report incorporated herein by reference is not necessarily
complete and is qualified in its entirety by the information and financial
statements (including notes thereto) appearing in the documents and reports
incorporated herein by reference and should be read together with such
information and documents and reports.
Any statement contained herein or in a document or report incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Proxy Statement/Prospectus to the extent
that a statement contained herein or in any other subsequently filed document
or report, 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 Proxy Statement/Prospectus.
THE COMMISSIONER OF INSURANCE OF THE STATE OF NORTH CAROLINA HAS NOT
APPROVED OR DISAPPROVED THIS OFFERING NOR HAS THE COMMISSIONER PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION............... 2
INCORPORATION OF CERTAIN DOCUMENTS
BY REFERENCE....................... 3
SUMMARY............................. 5
The Companies..................... 5
The Special Meeting............... 5
The Merger........................ 6
Market Price and Dividend
Information...................... 12
Certain Per Share Financial
Information...................... 13
JCPenney Selected Historical
Consolidated Financial Data...... 14
Fay's Selected Historical
Consolidated Financial Data...... 15
THE COMPANIES....................... 16
JCPenney.......................... 16
Fay's............................. 16
THE SPECIAL MEETING................. 17
Date, Time, Place and Purpose..... 17
Record Date and Shares Entitled to
Vote............................. 17
Quorum............................ 17
Vote Required..................... 17
Voting of Proxies................. 17
Revocation of Proxies............. 17
Solicitation of Proxies........... 18
Shares Held by Fay's Management;
Stockholders Agreement........... 18
THE MERGER.......................... 19
General........................... 19
Background of the Merger.......... 19
Recommendation of the Board of
Directors of Fay's; Reasons for
the Merger....................... 21
Opinion of Bear Stearns as
Financial Advisor to Fay's....... 22
Interests of Certain Persons in
the Merger....................... 27
Certain Terms of the Merger
Agreement........................ 30
Certain Terms of the Stockholders
Agreement........................ 40
Certain United States Federal
Income Tax Considerations........ 42
Accounting Treatment.............. 43
Certain Regulatory Matters........ 43
Amendment to Fay's Rights
Agreement........................ 44
Appraisal Rights of Dissenting
Shareholders..................... 44
Restrictions on Resales of JCPenney
Common Stock by Affiliates........ 48
DESCRIPTION OF JCPENNEY CAPITAL
STOCK........................... 49
JCPenney Common Stock.......... 49
JCPenney Preferred Stock....... 49
COMPARATIVE RIGHTS OF HOLDERS
OF FAY'S COMMON STOCK AND
JCPENNEY COMMON STOCK........... 54
General........................ 54
Number and Classification of
Board of Directors........... 54
Action by Stockholders'
Written Consent.............. 54
Vote Necessary to Effectuate
Merger....................... 54
Voting Rights.................. 55
Dividend Policy................ 55
Liquidation Rights............. 56
Appraisal Rights............... 56
Issuance of Rights or Options
to Purchase Shares to Directors,
Officers and Employees....... 56
Loans to Directors............. 57
Redeemable Shares.............. 57
"Anti-Greenmail"............... 57
Stockholder Rights Plans....... 57
Duties of the Directors........ 57
Amendment of Bylaws............ 58
Amendment of Certificate of
Incorporation................ 58
Limitation on Directors'
Liability.................... 59
Indemnification of Officers
and Directors................ 59
Removal of Directors........... 59
Newly Created Directorships
and Vacancies................ 60
Special Meetings............... 60
LEGAL MATTERS.................... 60
EXPERTS.......................... 61
SHAREHOLDER PROPOSALS FOR 1997
ANNUAL MEETING................. 61
APPENDICES
Appendix I--Merger Agreement
Appendix II--Bear, Stearns & Co. Inc.
Fairness Opinion
Appendix III--Sections 623 and 910
of the New York Business Corporation Law
</TABLE>
4
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in this
Proxy Statement/Prospectus. Reference is made to, and this summary is qualified
in its entirety by, the more detailed information contained in or incorporated
by reference in this Proxy Statement/Prospectus. Shareholders are urged to
carefully read this Proxy Statement/Prospectus in its entirety. As used in this
Proxy Statement/Prospectus, unless the context otherwise requires, the term
"JCPenney" means J. C. Penney Company, Inc. together with its consolidated
subsidiaries and the term "Fay's" means Fay's Incorporated together with its
consolidated subsidiaries. The description of the terms of the Merger Agreement
contained in this Proxy Statement/Prospectus does not purport to be complete
and is qualified in its entirety by reference to the full text of the Merger
Agreement attached to this Proxy Statement/Prospectus as Appendix I and
incorporated herein by reference. Capitalized terms used herein without
definition are, unless otherwise indicated, defined in the Merger Agreement and
used herein with such meanings.
THE COMPANIES
JCPENNEY
JCPenney, a company founded by James Cash Penney in 1902 and incorporated in
Delaware in 1924, is a major retailer with department stores in all 50 states,
Puerto Rico, Mexico and Chile. The major portion of JCPenney's business
consists of providing merchandise and services to consumers through department
stores that include catalog departments. JCPenney stores market predominantly
family apparel, jewelry, shoes, accessories and home furnishings. Through its
indirect wholly owned subsidiary, Thrift Drug, Inc., a Delaware corporation
("Thrift Drug"), JCPenney also operates a chain of approximately 650 drug
stores predominantly in Pennsylvania, New Jersey and North Carolina.
Merger Sub is a wholly owned subsidiary of JCPenney incorporated in New York
in 1996. The principal executive offices of JCPenney and Merger Sub are located
at 6501 Legacy Drive, Plano, Texas 75024-3698, and the telephone number at such
offices is (214) 431-1000. JCPenney Common Stock is listed on the NYSE under
the symbol "JCP."
FAY'S
Fay's was incorporated under the laws of the State of New York in 1966 as
Fay's Drug Company, Inc. The first Fay's drug store was opened in 1958 by Henry
A. Panasci, Jr. and his late father Henry Panasci. The principal business of
Fay's is the operation of a chain of 224 super drug stores under the name
"Fay's Drugs," 198 of which are located in upstate New York, 23 in
Pennsylvania, two in Vermont and one in New Hampshire. Fay's also operates 47
traditional drug stores and one liquor store. 41 of Fay's traditional drug
stores are located in upstate New York, five in Pennsylvania and one in
Vermont.
The principal executive offices of Fay's are located at 7245 Henry Clay
Boulevard, Liverpool, New York 13088, and the telephone number at such offices
is (315) 451-8000. Fay's Common Stock is listed on the NYSE under the symbol
"FAY."
THE SPECIAL MEETING
DATE, TIME, PLACE AND PURPOSE
A Special Meeting of the holders of Fay's Common Stock will be held on
October 11, 1996, at the Syracuse Marriott, 6302 Carrier Parkway, Thruway Exit
35, East Syracuse, New York, commencing at 10:00 a.m., local time, for the
purpose of considering and voting upon a proposal to approve and adopt the
Merger Agreement.
5
<PAGE>
RECORD DATE AND SHARES ENTITLED TO VOTE
Holders of record of shares of Fay's Common Stock at the close of business on
August 30, 1996 are entitled to notice of and to vote at the Special Meeting.
On the Record Date, there were 21,210,140 shares of Fay's Common Stock
outstanding, with each share entitled to one vote on each matter to be acted
upon at the Special Meeting.
QUORUM AND VOTE REQUIRED
The presence, in person or by proxy, at the Special Meeting of the holders of
a majority of the shares of Fay's Common Stock outstanding and entitled to vote
at the Special Meeting is necessary to constitute a quorum at the Special
Meeting. The affirmative vote of at least two-thirds of the shares of Fay's
Common Stock outstanding and entitled to vote thereon at the Special Meeting is
required to approve and adopt the Merger Agreement. Abstentions and non-voted
shares, including broker non-votes, represented in person or by proxy, will be
considered as being present for purposes of determining the existence of a
quorum and will have the same effect as votes cast against the proposal to
approve and adopt the Merger Agreement.
SHARES HELD BY FAY'S MANAGEMENT; STOCKHOLDERS AGREEMENT
As of the Record Date, directors and executive officers of Fay's and their
affiliates were beneficial owners of an aggregate of 6,102,399 shares
(excluding shares purchasable upon exercise of stock options) of Fay's Common
Stock (approximately 28.8% of the total shares then outstanding).
As a condition and an inducement to JCPenney entering into the Merger
Agreement, on August 5, 1996, Henry A. Panasci, Jr., the Chairman of the Board
and Chief Executive Officer of Fay's and a director, and David H. Panasci, the
President and Chief Operating Officer of Fay's and a director, entered into a
Stockholders Agreement (the "Stockholders Agreement"), which was approved by
the Board of Directors of Fay's, pursuant to which Messrs. Panasci agreed to
vote all shares beneficially owned by them in favor of the proposal to approve
and adopt the Merger Agreement. Messrs. Panasci beneficially own in the
aggregate a total of 5,906,793 outstanding shares of Fay's Common Stock
(approximately 27.8% of the total shares outstanding as of the Record Date).
The obligations under the Stockholders Agreement relating to 672,298 of such
shares (approximately 3.2% of the total shares outstanding as of the Record
Date) are subject to any fiduciary obligations under applicable law. See "The
Merger--Certain Terms of the Stockholders Agreement." In addition, the
remaining directors and executive officers of Fay's have indicated to Fay's
that they intend to vote shares beneficially owned by them in favor of the
proposal to approve and adopt the Merger Agreement.
THE MERGER
GENERAL DESCRIPTION OF THE MERGER
At the Effective Time (as hereinafter defined), Merger Sub will merge with
and into Fay's and Fay's, as the surviving corporation, will become a wholly
owned subsidiary of JCPenney. As a result of the Merger, each outstanding share
of Fay's Common Stock will be converted into a fractional share of JCPenney
Common Stock, together with associated Series A Junior Participating Preferred
Stock purchase rights (the "Rights") under the JCPenney Rights Agreement (as
hereinafter defined), equal to a fraction of a share of JCPenney Common Stock
(the "Conversion Shares") obtained by dividing (i) $12.75 by (ii) the average
per share Daily Price of JCPenney Common Stock during the ten consecutive
trading days immediately preceding the date which is two trading days before
the date of the Special Meeting (the "Measurement Period"); provided, however,
in no event will the Conversion Shares be less than .2253397 of a share of
JCPenney Common Stock or more than .2754151 of a share of JCPenney Common
Stock. "Daily Price" is defined as the average of the high and low sales prices
on the day in question as reported in the Wall Street Journal. Cash will be
paid in lieu of issuing fractional shares of
6
<PAGE>
JCPenney Common Stock. Holders of Fay's Common Stock who do not vote in favor
of the Merger and properly dissent in compliance with the applicable provisions
of the New York Business Corporation Law ("NYBCL") will be entitled, as an
alternative to receiving shares of JCPenney Common Stock in the Merger, to a
judicial determination of the fair value in cash of their shares of Fay's
Common Stock as of the date prior to the Special Meeting and other rights and
benefits provided thereunder.
As soon as reasonably practicable after the Effective Time, each record
holder of Fay's Common Stock will be mailed a letter of transmittal and
instructions for use in surrendering the certificates representing Fay's Common
Stock in exchange for certificates representing JCPenney Common Stock.
Shareholders should not send in their certificates now, but should only return
their certificates with the letter of transmittal.
Based on the number of shares of Fay's Common Stock outstanding as of the
Record Date and the closing sales price of JCPenney Common Stock set forth on
the cover page of this Proxy Statement/Prospectus, the Conversion Shares would
be .2328767 of a share of JCPenney Common Stock and a total of approximately
4,939,348 shares of JCPenney Common Stock would be issuable upon the
consummation of the Merger. Such number of shares would represent approximately
2.1% of the total number of shares of JCPenney Common Stock expected to be
outstanding immediately after such issuance. The precise number of Conversion
Shares will be fixed between .2253397 and .2754151 of a share of JCPenney
Common Stock, depending upon the sales prices for JCPenney Common Stock during
the Measurement Period.
REASONS FOR THE MERGER
The Board of Directors of Fay's believes that the Merger is an opportunity
for Fay's shareholders to participate in a combined enterprise that has
significantly greater resources than Fay's would have absent the Merger and to
receive, on a tax-deferred basis, a premium for their Fay's Common Stock based
on recent market prices. See "The Merger--Recommendation of the Board of
Directors of Fay's; Reasons for the Merger."
DETERMINATION OF THE BOARD OF DIRECTORS OF FAY'S
THE BOARD OF DIRECTORS OF FAY'S HAS DETERMINED THAT THE MERGER IS FAIR TO,
AND IN THE BEST INTERESTS OF, FAY'S AND ITS SHAREHOLDERS AND RECOMMENDS TO THE
HOLDERS OF FAY'S COMMON STOCK THAT THEY VOTE "FOR" THE APPROVAL AND ADOPTION OF
THE MERGER AGREEMENT. See "The Merger--Background of the Merger" and "--
Recommendation of the Board of Directors of Fay's; Reasons for the Merger." In
reaching its determination, the Board of Directors of Fay's considered a number
of factors, including the opinion of Bear, Stearns & Co. Inc. ("Bear Stearns"),
financial advisor to the Board of Directors of Fay's, which opinion was
delivered to the Board of Directors of Fay's on August 5, 1996. In considering
the recommendation of the Board of Directors of Fay's with respect to the
Merger, Fay's shareholders should be aware that all of the officers and
directors of Fay's have certain interests concerning the Merger separate from
their interests as holders of Fay's Common Stock. See "The Merger--Interests of
Certain Persons in the Merger."
The Board of Directors of JCPenney has approved the Merger, the Merger
Agreement and the issuance and reservation for issuance of JCPenney Common
Stock pursuant to the terms of the Merger Agreement. See "The Merger--
Background of the Merger."
Delaware law does not require a vote of JCPenney stockholders in connection
with the Merger. Additionally, because the Merger will result in the issuance
of less than 2.2% of the number of shares of JCPenney Common Stock previously
outstanding, no vote of the JCPenney stockholders is required in connection
with the Merger under the rules of the NYSE. Furthermore, neither the Restated
Certificate of Incorporation of JCPenney (the "JCPenney Charter") nor the
bylaws of JCPenney (the "JCPenney Bylaws") require any vote of its stockholders
in connection with the Merger.
7
<PAGE>
OPINION OF FAY'S FINANCIAL ADVISOR
Bear Stearns delivered its written opinions, dated August 5, 1996 and the
date of this Proxy Statement/Prospectus, to the Board of Directors of Fay's
that, as of such dates, the consideration to be received in the Merger by the
shareholders of Fay's is fair, from a financial point of view, to such
shareholders. For information regarding the opinions of Bear Stearns, including
the assumptions made, procedures followed, matters considered and limits of the
review undertaken, see "The Merger--Opinion of Bear Stearns as Financial
Advisor to Fay's." Fay's shareholders are urged to read carefully in its
entirety the aforementioned opinion of Bear Stearns dated the date of this
Proxy Statement/Prospectus, a copy of which is attached as Appendix II to this
Proxy Statement/Prospectus and incorporated herein by reference.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Each member of the Board of Directors of Fay's and each executive officer of
Fay's has certain interests concerning the Merger separate from their interests
as holders of Fay's Common Stock including, among others, the effects of the
Merger on options to purchase Fay's Common Stock, certain benefit plans, and
directors' and officers' indemnification and insurance. Additionally, all
executive officers of Fay's have employment agreements with Fay's that provide
certain benefits upon a change in control of Fay's and certain of such
executive officers have consulting agreements with Fay's that will continue in
effect after the Effective Time. See "The Merger--Interests of Certain Persons
in the Merger."
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
Fay's has received an opinion from Baker & Botts, L.L.P., counsel to
JCPenney, that, for United States federal income tax purposes, (i) the Merger
will constitute a "reorganization" within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), (ii) no gain or loss
will be recognized by Fay's, JCPenney or Merger Sub as a result of the Merger,
and (iii) no gain or loss will be recognized by the shareholders of Fay's upon
the conversion of their Fay's Common Stock into shares of JCPenney Common Stock
pursuant to the Merger, except with respect to cash, if any, received in lieu
of fractional shares of JCPenney Common Stock or upon exercise of dissenters'
rights of appraisal.
For a discussion of these and certain other United States federal income tax
considerations in connection with the Merger, see "The Merger--Certain United
States Federal Income Tax Consequences."
ACCOUNTING TREATMENT
The Merger will be accounted for as a purchase for financial accounting
purposes. See "The Merger--Accounting Treatment."
CERTAIN REGULATORY MATTERS
Consummation of the Merger is conditioned upon the expiration or termination
of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act"). Except for filings with or approvals of the
Drug Enforcement Agency and the appropriate governmental entities that regulate
pharmaceutical, liquor and ammunition sales, neither JCPenney nor Fay's is
aware of any other governmental or regulatory filings or approvals required in
connection with the Merger, other than compliance with applicable securities
laws. See "The Merger--Certain Regulatory Matters."
CONDITIONS TO THE MERGER
The respective obligations of JCPenney, Merger Sub and Fay's to consummate
the Merger are subject to the satisfaction or waiver of certain conditions,
including, among other matters, the following: (i) approval and
8
<PAGE>
adoption of the Merger Agreement by the holders of at least two-thirds of the
outstanding shares of Fay's Common Stock entitled to vote thereon; (ii) the
approval for listing on the NYSE of the JCPenney Common Stock to be issued in
connection with the Merger; (iii) the expiration or termination of the
applicable waiting periods under the HSR Act and the receipt of any other
required governmental consents; (iv) the absence of any stop order or
proceeding seeking a stop order with respect to the Registration Statement; (v)
the absence of any injunction or other order issued by any court of competent
jurisdiction preventing consummation of the Merger; and (vi) receipt by Fay's
of a letter from counsel to either JCPenney or Fay's opining to certain tax
matters relating to the Merger's treatment as a tax free reorganization for
United States federal income tax purposes. Additionally, the obligations of
JCPenney and Merger Sub to consummate the Merger are subject to not more than
10% of the outstanding shares of Fay's Common Stock demanding appraisal for
their shares under the NYBCL. For a discussion of additional conditions to the
consummation of the Merger, see "The Merger--Certain Terms of the Merger
Agreement--Conditions to the Merger."
While JCPenney and Fay's anticipate that all of the conditions to the
consummation of the Merger will be satisfied at the time of the Special
Meeting, there can be no assurance that all of these conditions will be so
satisfied. Either JCPenney or Fay's may extend the time for performance of any
of the obligations of the other party or may, subject to applicable law, waive
compliance with those obligations at its discretion. The Effective Time will
occur no later than the second business day after satisfaction (or waiver in
accordance with the Merger Agreement) of the latest to occur of such
conditions.
TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement may be terminated prior to the Effective Time (i) by
mutual written consent of JCPenney and Fay's or by mutual action of their
respective Boards of Directors, or (ii) by either party if (a) the Merger has
not been consummated on or before December 31, 1996 (provided that the
terminating party shall not have failed to fulfill any obligation under the
Merger Agreement that resulted in the failure of the Merger before such date);
(b) any court or governmental final order, decree, ruling or action shall have
prohibited consummation of the Merger; (c) the required approval of Fay's
shareholders is not received at the Special Meeting; or (d) the Board of
Directors of Fay's shall have approved or recommended any Acquisition Proposal
(as hereinafter defined) which is financially superior to the Merger (as
determined in good faith by the Board of Directors of Fay's after consultation
with Fay's financial advisors), and the Board of Directors of Fay's is advised
by its outside counsel that the fiduciary duties of the Board of Directors
require acceptance or recommendation of such Acquisition Proposal.
JCPenney may terminate the Merger Agreement upon the occurrence of certain
additional events or circumstances, including, among others, if (i) the Board
of Directors of Fay's withdraws, modifies or changes in any manner adverse to
JCPenney or Merger Sub its approval or recommendation in favor of the Merger;
(ii) after the date of the Merger Agreement there has been any Material Adverse
Change (as hereinafter defined) with respect to Fay's; or (iii) the Conversion
Shares (without regard to the proviso in the Merger Agreement that the
Conversion Shares not be less than .2253397 of a share of JCPenney Common
Stock) would be less than .2065614 of a share of JCPenney Common Stock.
Fay's may terminate the Merger Agreement upon the occurrence of certain
additional events or circumstances, including, among others, if (i) after the
date of the Merger Agreement there has been any Material Adverse Change with
respect to JCPenney; or (ii) the Conversion Shares (without regard to the
proviso in the Merger Agreement that the Conversion Shares not be more than
.2754151 of a share of JCPenney Common Stock) would be more than .3098420 of a
share of JCPenney Common Stock. For a discussion of additional circumstances
under which the Merger Agreement may be terminated, see "The Merger--Certain
Terms of the Merger Agreement--Termination of the Merger Agreement."
9
<PAGE>
As used herein and in the Merger Agreement, a "Material Adverse Effect" or
"Material Adverse Change" means, in respect of JCPenney or Fay's, as the case
may be, any material adverse effect or change to the business, operations,
assets, condition (financial or otherwise) or results of operation of such
party and its Subsidiaries (as defined in the Merger Agreement) taken as a
whole.
TERMINATION FEE
If the Merger Agreement is terminated because (i) the Board of Directors of
Fay's approves or recommends any Acquisition Proposal that is financially
superior to the Merger (as determined in good faith by the Board of Directors
of Fay's after consultation with its financial advisors), and the Board of
Directors of Fay's is advised by its outside counsel that its fiduciary duties
require acceptance or recommendation of such Acquisition Proposal, or (ii) the
Board of Directors of Fay's withdraws, modifies or changes its recommendation
of the Merger Agreement or the Merger in a manner adverse to JCPenney or Merger
Sub, then (a) Fay's will pay JCPenney in immediately available funds $4,000,000
in lieu of reimbursing JCPenney for all out-of-pocket expenses and fees
actually incurred by JCPenney or its Subsidiaries in connection with the Merger
Agreement and the transactions contemplated thereby, and (b) if an Acquisition
Transaction (as hereinafter defined) is consummated within nine months of such
termination, Fay's will, on the day of such consummation, pay JCPenney in same
day funds an additional amount equal to $8,000,000. See "The Merger--Certain
Terms of the Merger Agreement--Fees and Expenses." As used herein and in the
Merger Agreement and the Stockholders Agreement, "Acquisition Proposal" means
any proposal or offer, other than a proposal or offer by JCPenney or any of its
affiliates, with respect to an Acquisition Transaction, and "Acquisition
Transaction" means a tender or exchange offer, a merger, consolidation or other
business combination involving Fay's or any of its Subsidiaries or the
acquisition in any manner of a substantial equity interest in, or substantially
all of the assets of, Fay's or any of its Subsidiaries by any person other than
JCPenney or Merger Sub.
RESTRICTIONS ON RESALES
There are certain restrictions on resales of JCPenney Common Stock to be
received by affiliates (as defined in the Securities Act) of Fay's at the time
of the Special Meeting. See "The Merger--Restrictions on Resales of JCPenney
Common Stock by Affiliates."
APPRAISAL RIGHTS OF DISSENTING SHAREHOLDERS
Holders of Fay's Common Stock who do not vote in favor of the Merger and
properly dissent in compliance with the applicable provisions of the NYBCL will
be entitled, as an alternative to receiving shares of JCPenney Common Stock in
the Merger, to a judicial determination of the fair value in cash of their
shares of Fay's Common Stock as of the date prior to the Special Meeting and
other rights and benefits provided thereunder. In addition to other procedures
that must be complied with, a shareholder who wishes to dissent to the Merger
must file a separate, written objection to the Merger with Fay's before or at
the Special Meeting (but prior to the vote at the Special Meeting). The
obligation of JCPenney to consummate the Merger is subject to the satisfaction
or waiver of the condition that holders of not more than 10% of the outstanding
shares of Fay's Common Stock have properly demanded appraisal rights. See "The
Merger--Appraisal Rights of Dissenting Shareholders," "--Certain Terms of the
Merger Agreement--Conditions to the Merger" and Appendix III to this Proxy
Statement/Prospectus, which contains the full text of Sections 623 and 910 of
the NYBCL (which are the provisions of the NYBCL governing appraisal rights).
COMPARATIVE RIGHTS OF HOLDERS OF FAY'S COMMON STOCK AND JCPENNEY COMMON STOCK
Fay's is incorporated under the laws of the State of New York and JCPenney is
incorporated under the laws of the State of Delaware. Holders of Fay's Common
Stock, whose rights as shareholders are governed by the NYBCL, other applicable
provisions of New York law, the Restated Certificate of Incorporation of Fay's
(the "Fay's Charter") and the By-Laws of Fay's (the "Fay's By-Laws"), will,
upon consummation of the Merger
10
<PAGE>
(except for holders seeking appraisal rights), become stockholders of JCPenney
and their rights as such will be governed by the Delaware General Corporation
Law (the "DGCL"), other applicable provisions of Delaware law, the JCPenney
Charter and the JCPenney Bylaws.
For more detailed information regarding the terms of Fay's Common Stock and
JCPenney Common Stock, see "Description of JCPenney Capital Stock" and
"Comparative Rights of Holders of Fay's Common Stock and JCPenney Common
Stock."
11
<PAGE>
MARKET PRICE AND DIVIDEND INFORMATION
JCPenney Common Stock is traded on the NYSE under the symbol "JCP." Fay's
Common Stock is traded on the NYSE under the symbol "FAY." The following table
sets forth, for the periods indicated, the range of high and low sales prices
per share of JCPenney Common Stock and Fay's Common Stock as reported on the
NYSE Composite Tape and the dividend per share of JCPenney Common Stock and
Fay's Common Stock.
<TABLE>
<CAPTION>
JCPENNEY COMMON STOCK FAY'S COMMON STOCK
------------------------ ------------------------
FISCAL YEAR* HIGH LOW DIVIDEND HIGH LOW DIVIDEND
- - ------------ ------- ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
1994
First Quarter.............. $59 $50 7/8 $.42 $ 7 1/4 $ 6 1/8 $.05
Second Quarter............. 54 3/4 47 1/2 .42 7 3/8 6 1/4 .05
Third Quarter.............. 54 1/4 47 .42 8 6 1/2 .05
Fourth Quarter............. 52 39 7/8 .42 7 6 .05
1995
First Quarter.............. 46 1/2 40 7/8 .48 9 3/8 6 1/4 .05
Second Quarter............. 50 42 5/8 .48 9 1/8 6 5/8 .05
Third Quarter.............. 49 3/4 43 1/8 .48 8 3/8 7 1/2 .05
Fourth Quarter............. 49 1/8 41 5/8 .48 8 1/4 6 1/2 .05
1996
First Quarter.............. 51 7/8 45 3/4 .52 8 6 3/4 .05
Second Quarter............. 53 3/8 47 1/4 .52 10 7/8 7 3/8 .05
Third Quarter (through
September 6).............. 56 3/8 49 1/4 -- 12 7/8 10 3/8 --
</TABLE>
- - --------
* The JCPenney and Fay's fiscal year identification conventions used in their
respective financial statements differ in that Fay's identifies each fiscal
year by the calendar year during which such fiscal year concludes, while
JCPenney refers to the calendar year during which such fiscal year begins.
For example, the 52 week period ended January 27, 1996 is identified as the
1995 fiscal year for JCPenney and the 1996 fiscal year for Fay's and the 52
week period ended January 28, 1995 is identified as the 1994 fiscal year for
JCPenney and the 1995 fiscal year for Fay's. For convenience of comparison,
the JCPenney identification convention is used in this table.
On July 9, 1996, the last trading day prior to the announcement by Fay's that
it had commenced preliminary negotiations with JCPenney regarding a possible
merger, the closing sales prices of JCPenney Common Stock and Fay's Common
Stock as reported on the NYSE Composite Tape were $52 and $8 5/8, respectively.
On August 5, 1996, the last trading day prior to the announcement by JCPenney
and Fay's that they had executed the Merger Agreement, the closing sales prices
of JCPenney Common Stock and Fay's Common Stock as reported on the NYSE
Composite Tape were $53 and $11 7/8, respectively. See the cover page of this
Proxy Statement/Prospectus for recent closing sales prices of JCPenney Common
Stock and Fay's Common Stock. SHAREHOLDERS ARE URGED TO OBTAIN CURRENT MARKET
QUOTATIONS FOR JCPENNEY COMMON STOCK AND FAY'S COMMON STOCK.
Following the Merger, JCPenney Common Stock will continue to be traded on the
NYSE, Fay's Common Stock will cease to be traded on the NYSE and there will be
no further market for Fay's Common Stock.
JCPenney has paid consecutive quarterly cash dividends on JCPenney Common
Stock for over 65 years through the second fiscal quarter of 1996. Future
dividend payments by JCPenney are subject to action by its Board of Directors
and will depend upon its level of earnings, financial requirements and other
relevant factors.
It is expected that the holders of Fay's Common Stock will receive a regular
third quarter dividend of $.05 from Fay's and will not receive a regular third
quarter dividend from JCPenney. See "The Merger--Certain Terms of the Merger
Agreement--Payment of Third Quarter Dividend."
12
<PAGE>
CERTAIN PER SHARE FINANCIAL INFORMATION
The following tables present comparative per share information for JCPenney
and Fay's on both a historical basis and a pro forma basis for the periods
presented. The unaudited pro forma per share information is presented to show
the pro forma effects of the Merger. The Merger will be reported using the
purchase method of accounting. Pro forma net income and cash dividends per
share is presented as if the Merger was consummated at the beginning of the
periods shown below and the pro forma book value per share information assumes
that the Merger was consummated at the end of the periods shown below. The pro
forma per share information does not reflect any synergies which may be
realized after the Merger. Such pro forma information assumes that 21,937,603
shares of Fay's Common Stock are outstanding as of the Effective Time and that
the Conversion Shares are .2503774 of a share of JCPenney Common Stock, the
mid-point between the maximum and minimum Conversion Shares of .2754151 and
.2253397 of a share of JCPenney Common Stock, respectively, as provided for
under the Merger Agreement. The pro forma per share information is based on the
historical consolidated financial statements of JCPenney and Fay's and should
be read in conjunction with (i) such consolidated financial statements and the
notes thereto, which are incorporated by reference in this Proxy
Statement/Prospectus and (ii) the selected historical consolidated financial
data of JCPenney and Fay's appearing elsewhere in this Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
JCPENNEY FAY'S PRO FORMA FAY'S EQUIVALENT
HISTORICAL HISTORICAL COMBINED(A) PRO FORMA(B)
---------- ---------- ----------- ----------------
<S> <C> <C> <C> <C>
COMPARATIVE PER SHARE
DATA:
Net income per common
share(c):
52 weeks ended January
27, 1996............... $3.33 $ (.27)(d) $ 3.21(d) $ .80(d)
26 weeks ended July 27,
1996................... .94 .17 .93 .23
Cash dividends per common
share
52 weeks ended January
27, 1996............... 1.92 .20 1.92 .48
26 weeks ended July 27,
1996................... 1.04 .10 1.04 .26
Book value per common
share
January 27, 1996........ 24.76 4.56 25.37 6.35
July 27, 1996........... 24.71 4.63 25.32 6.34
</TABLE>
- - --------
(a) The unaudited pro forma combined net income per common share is on a fully
diluted basis and the other unaudited pro forma combined per share data are
based on the combined average number of shares of JCPenney Common Stock and
Fay's Common Stock outstanding for each period, assuming a Conversion Share
number of .2503774 of a share of JCPenney Common Stock for each share of
Fay's Common Stock.
(b) Fay's equivalent pro forma per share amounts are calculated by multiplying
the respective pro forma combined per share amount by the assumed
Conversion Share number of .2503774.
(c) With respect to Fay's historical information, represents income per common
share from continuing operations.
(d) Excluding the effect of Fay's restructuring and other charges, Fay's
historical income from continuing operations per common share, pro forma
combined net income per common share and Fay's equivalent pro forma net
income per common share were $.34, $3.26 and $.82 per share, respectively.
13
<PAGE>
J. C. PENNEY COMPANY, INC.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The selected historical consolidated financial data of JCPenney and its
subsidiaries shown below have been derived from JCPenney's audited consolidated
financial statements. This data should be read in conjunction with the audited
consolidated financial statements and related notes and the report of
independent public accountants included in the JCPenney 1995 Form 10-K, which
is incorporated herein by reference. The selected historical consolidated
financial data at, and for the 26 week periods ended, July 27, 1996 and July
29, 1995, respectively, have been derived from unaudited consolidated financial
statements, which, in the opinion of management of JCPenney, reflect all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation of such data at those dates or for those periods. Interim results
are not necessarily indicative of the results which may be expected for any
other interim period or for the full year. This data should be read in
conjunction with the unaudited information at, and for the 26 week periods
ended, July 27, 1996 and July 29, 1995 included in the JCPenney 1996 Second
Quarter Form 10-Q, which is incorporated herein by reference.
<TABLE>
<CAPTION>
AT OR FOR THE
26 WEEKS ENDED AT OR FOR THE AT OR FOR THE AT OR FOR THE
(UNAUDITED) 52 WEEKS ENDED 53 WEEKS ENDED 52 WEEKS ENDED
--------------- ----------------------- -------------- --------------
JULY 27 JULY 29 JAN. 27 JAN. 28 JAN. 29 JAN. 30 JAN. 25
1996 1995 1996 1995 1994(A) 1993 1992(B)
------- ------- ------- ------- ------- -------------- --------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Total revenue......... $ 9,445 $ 9,207 $21,419 $21,082 $19,578 $18,515 $16,648
Net income............ 235 272 838 1,057 940 777 80
Net income per common
share, on a fully
diluted basis........ .94 1.07 3.33 4.05 3.53 2.95 .20
Cash dividends per
common share......... 1.04 .96 1.92 1.68 1.44 1.32 1.32
BALANCE SHEET DATA
Total assets.......... 17,423 16,467 17,102 16,202 14,788 13,467 12,444
Long-term debt........ 4,032 3,526 4,080 3,335 2,929 3,171 3,354
Stockholders' equity.. 5,885 5,654 5,884 5,615 5,365 4,705 4,188
</TABLE>
- - --------
(a) Excluding the effect of an extraordinary charge and the cumulative effect
of an accounting change, after tax income was $944.0 million, or $3.55 per
share, on a fully diluted basis.
(b) Excluding the effect of nonrecurring items and the cumulative effect of an
accounting change, after tax income was $528.0 million, or $2.00 per share,
on a fully diluted basis.
14
<PAGE>
FAY'S INCORPORATED
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The selected historical consolidated financial data of Fay's and its
subsidiaries shown below have been derived from Fay's audited consolidated
financial statements. This data should be read in conjunction with Fay's
consolidated financial statements and related notes and the report of
independent public accountants included in the Fay's 1996 Form 10-K, which is
incorporated herein by reference. The selected historical consolidated
financial data at, and for the 26 week periods ended, July 27, 1996 and July
29, 1995, respectively, have been derived from unaudited consolidated financial
statements, which, in the opinion of management of Fay's, reflect all
adjustments, consisting only of a normal and recurring nature, necessary for a
fair presentation of such data at those dates or for those periods. Interim
results are not necessarily indicative of the results which may be expected for
any other interim period or for the full year. This data should be read in
conjunction with the unaudited information at, and for the 26 week periods
ended, July 27, 1996 and July 29, 1995 included in the Fay's 1996 Second
Quarter Form 10-Q, which is incorporated herein by reference.
<TABLE>
<CAPTION>
AT OR FOR THE AT OR FOR THE AT OR FOR THE AT OR FOR THE
26 WEEKS ENDED 52 WEEKS ENDED 53 WEEKS ENDED 52 WEEKS ENDED
----------------- -------------------------- -------------- --------------
JULY 27, JULY 29, JAN. 27, JAN. 28, JAN. 29, JAN. 30, JAN. 25,
1996 1995 1996(A) 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------------- --------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net sales............. $502 $472 $974 $921 $831 $815 $765
Income (loss)--
continuing
operations........... 4 2 (6) 13 12 13 11
Income (loss) per
common share--
continuing
operations(b)........ .17 .10 (.27) .63 .58 .65 .55
Cash dividends per
common share(b)...... .10 .10 .20 .20 .20 .19 .16
BALANCE SHEET DATA
Total assets.......... 285 308 299 314 280 261 264
Long-term debt........ 47 81 47 82 65 74 87
Shareholders' equity.. 97 107 95 107 97 94 85
</TABLE>
- - --------
(a) Excluding the effect of restructuring and other charges, income from
continuing operations was $7.0 million or $.34 per share.
(b) Gives effect to a five for four stock split effective June 19, 1992.
15
<PAGE>
THE COMPANIES
JCPENNEY
General
JCPenney was founded by James Cash Penney in 1902. Incorporated in Delaware
in 1924, JCPenney has grown to be a major retailer, operating over 1,200
JCPenney department stores in all 50 states, Puerto Rico, Mexico and Chile.
The major portion of JCPenney's business consists of providing merchandise and
services to consumers through department stores that include catalog
departments. JCPenney stores market predominantly family apparel, jewelry,
shoes, accessories and home furnishings. Through its indirect wholly owned
subsidiary, Thrift Drug, JCPenney also operates a chain of approximately 650
drug stores predominantly in Pennsylvania, New Jersey and North Carolina.
Additionally, JCPenney owns and operates several insurance companies, which
market life, health, accident and credit insurance, and JCPenney National
Bank, which offers Visa and MasterCard credit cards to consumers but does not
engage in commercial lending activities.
The business of marketing merchandise and services is highly competitive.
Although JCPenney is one of the largest department store retailers in the
United States, it has numerous competitors. Many factors enter into the
competition for the consumer's patronage, including price, quality, style,
service, product mix, convenience and credit availability. JCPenney's annual
earnings depend to a significant extent on the results of operations for the
last quarter of its fiscal year. Sales for that period average approximately
one-third of annual sales.
Merger Sub is a wholly owned subsidiary of JCPenney incorporated in New York
in 1996 for purposes of the Merger. Merger Sub does not engage in any other
business.
Recent Developments
Total sales for JCPenney for the four weeks ended August 31, 1996 increased
8.3% to $1,757 million from $1,623 million in the comparable 1995 period.
Sales of JCPenney stores for the period increased 9.0% to $1,332 million from
$1,223 million in the comparable 1995 period. On a comparable store basis,
that is stores open at least one year, sales increased 7.0%.
FAY'S
Fay's was incorporated under the laws of the State of New York in 1966 as
Fay's Drug Company, Inc. The first Fay's drug store was opened in 1958 by
Henry A. Panasci, Jr. and his late father Henry Panasci. The principal
business of Fay's is the operation of a chain of 224 super drug stores under
the name "Fay's Drugs." 198 of the super drug stores are located in upstate
New York, 23 in Pennsylvania, two in Vermont and one in New Hampshire. Fay's
also operates 47 traditional drug stores and one liquor store. 41 of Fay's
traditional drug stores are located in upstate New York, five in Pennsylvania
and one in Vermont.
Fay's also operates a mail order pharmacy service division under the name
"PostScript Mail Order Pharmacy Services" and an institutional pharmacy
division which provides pharmacy services on a contract basis to institutional
customers, including nursing homes, adult homes and prison facilities. In
addition, Fay's operates a pharmacy benefits management group under the name
"Optium Pharmacy Services," which provides management and administrative
services to prescription drug benefit plans, and a distribution center.
16
<PAGE>
THE SPECIAL MEETING
DATE, TIME, PLACE AND PURPOSE
The Special Meeting will be held on October 11, 1996, at the Syracuse
Marriott, 6302 Carrier Parkway, Thruway Exit 35, East Syracuse, New York,
commencing at 10:00 a.m., local time. At the Special Meeting, the shareholders
of Fay's will be asked to consider and vote upon the approval and adoption of
the Merger Agreement pursuant to which, among other things, (i) Merger Sub
would be merged with and into Fay's with Fay's surviving the Merger, (ii)
Fay's would become a wholly owned subsidiary of JCPenney, and (iii) each
outstanding share of Fay's Common Stock would be converted into the right to
receive a fractional share of JCPenney Common Stock, together with associated
Rights under the JCPenney Rights Agreement, equal to a fraction of a share of
JCPenney Common Stock obtained by dividing (a) $12.75 by (b) the average per
share Daily Price of JCPenney Common Stock during the Measurement Period (the
ten consecutive trading days immediately preceding the date which is two
trading days before the date of the Special Meeting), subject to a minimum per
share exchange of .2253397 of a share of JCPenney Common Stock, a maximum per
share exchange of .2754151 of a share of JCPenney Common Stock and appraisal
rights. See "The Merger--Certain Terms of the Merger Agreement--Consideration
to be Paid in the Merger and Conversion of Shares."
THE BOARD OF DIRECTORS OF FAY'S HAS APPROVED AND ADOPTED THE MERGER
AGREEMENT AND RECOMMENDS THAT FAY'S SHAREHOLDERS VOTE "FOR" THE APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT.
RECORD DATE AND SHARES ENTITLED TO VOTE
The Board of Directors of Fay's has established August 30, 1996 as the
Record Date. Only holders of record of shares of Fay's Common Stock at the
close of business on the Record Date are entitled to notice of, and to vote
at, the Special Meeting. At the close of business on the Record Date, there
were 21,210,140 shares of Fay's Common Stock outstanding, with each share
entitled to one vote on each matter to be acted upon at the Special Meeting.
QUORUM
The presence, in person or by proxy, at the Special Meeting of the holders
of a majority of the shares of Fay's Common Stock outstanding and entitled to
vote at the Special Meeting is necessary to constitute a quorum at the Special
Meeting.
VOTE REQUIRED
The affirmative vote of at least two-thirds of the shares of Fay's Common
Stock outstanding and entitled to vote thereon at the Special Meeting is
required to approve and adopt the Merger Agreement. Abstentions and non-voted
shares, including broker non-votes, represented in person or by proxy, will be
considered as being present for purposes of determining the existence of a
quorum and will have the same effect as votes cast against the proposal to
approve and adopt the Merger Agreement.
VOTING OF PROXIES
All properly executed proxies received prior to the Special Meeting (that
are not revoked) will be voted at the Special Meeting in accordance with the
instructions contained therein. If a holder of Fay's Common Stock executes and
returns a proxy and does not specify otherwise, the shares represented by such
proxy will be voted "FOR" the approval and adoption of the Merger Agreement.
If a holder of Fay's Common Stock does not return a signed proxy card, his or
her shares will not be voted and thus will have the effect of a vote against
the Merger Agreement at the Special Meeting unless such holder attends and
votes at the Special Meeting.
REVOCATION OF PROXIES
Any holder of Fay's Common Stock who has executed and returned a proxy may
revoke it at any time before it is voted at the Special Meeting by (i)
executing and returning a proxy bearing a later date, (ii) filing
17
<PAGE>
written notice of such revocation with the Secretary of Fay's by (a) sending a
written statement that the proxy is revoked to Fay's at its corporate
headquarters, 7245 Henry Clay Boulevard, Liverpool, New York 13088, Attention:
Warren D. Wolfson, Secretary, or (b) submitting a written statement that the
proxy is revoked to the Secretary of Fay's at the Special Meeting, or (iii)
attending the Special Meeting and voting in person. Any notice of revocation
of a proxy must be received by the Secretary of Fay's prior to the time the
proxy is voted at the Special Meeting. Attendance at the Special Meeting will
not in and of itself constitute revocation of a proxy.
SOLICITATION OF PROXIES
In addition to solicitation by mail, the directors, officers and employees
of Fay's may solicit proxies from the holders of Fay's Common Stock by
personal interview, telephone, facsimile, telegram or otherwise. Such persons
will not be additionally compensated, but will be reimbursed for reasonable
out-of-pocket expenses incurred in connection with such solicitation.
Arrangements will also be made with brokerage firms and other custodians,
nominees and fiduciaries who are record holders of Fay's Common Stock for the
forwarding of solicitation materials to the beneficial owners thereof. Fay's
will reimburse such brokers, custodians, nominees and fiduciaries for the
reasonable out-of-pocket expenses incurred by them in connection therewith.
Fay's has engaged the services of D.F. King & Co., Inc. for a fee of $7,500
(plus reimbursement of reasonable out-of-pocket expenses) to distribute proxy
solicitation materials to brokers, banks and other nominees and to assist in
the solicitation of proxies from holders of Fay's Common Stock.
SHARES HELD BY FAY'S MANAGEMENT; STOCKHOLDERS AGREEMENT
As of the Record Date, the directors and executive officers of Fay's as a
group may be deemed to own beneficially an aggregate of 6,102,399 shares
(excluding shares purchasable upon exercise of stock options) of Fay's Common
Stock (approximately 28.8% of the total shares then outstanding).
As a condition and an inducement to JCPenney entering into the Merger
Agreement, on August 5, 1996, Henry A. Panasci, Jr., the Chairman of the Board
and Chief Executive Officer of Fay's and a director, and David H. Panasci, the
President and Chief Operating Officer of Fay's and a director, entered into a
Stockholders Agreement, which was approved by the Board of Directors of Fay's,
pursuant to which Messrs. Panasci agreed to vote all shares beneficially owned
by them in favor of the proposal to approve and adopt the Merger Agreement.
Messrs. Panasci beneficially own in the aggregate a total of 5,906,793
outstanding shares of Fay's Common Stock (approximately 27.8% of the total
shares outstanding as of the Record Date). The obligations under the
Stockholders Agreement relating to 672,298 of such shares (approximately 3.2%
of the total shares outstanding as of the Record Date) are subject to any
fiduciary obligations under applicable law. In addition, the remaining
directors and executive officers of Fay's have indicated to Fay's that they
intend to vote shares beneficially owned by them in favor of the proposal to
approve and adopt the Merger Agreement.
SHAREHOLDERS SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR PROXY CARDS.
18
<PAGE>
THE MERGER
GENERAL
JCPenney, Fay's and Merger Sub have entered into the Merger Agreement which
provides that, subject to the satisfaction of the conditions set forth
therein, Merger Sub will be merged with and into Fay's with Fay's surviving
the Merger as a wholly owned subsidiary of JCPenney. Each share of Fay's
Common Stock outstanding immediately prior to the Effective Time will be
converted into the right to receive a number of shares of JCPenney Common
Stock, together with associated Rights under the JCPenney Rights Agreement,
equal to the number of Conversion Shares obtained by dividing (i) $12.75 by
(ii) the average per share Daily Price of JCPenney Common Stock during the
Measurement Period (the ten consecutive trading days immediately preceding the
date which is two trading days before the date of the Special Meeting);
provided, however, in no event will the Conversion Shares be less than
.2253397 of a share of JCPenney Common Stock or more than .2754151 of a share
of JCPenney Common Stock. Cash will be paid in lieu of issuing any fractional
shares of JCPenney Common Stock. Holders of Fay's Common Stock who do not vote
in favor of the Merger and properly dissent in compliance with the applicable
provisions of the NYBCL will be entitled, as an alternative to receiving
shares of JCPenney Common Stock in the Merger, to a judicial determination of
the fair value in cash of their shares of Fay's Common Stock as of the date
prior to the Special Meeting and other rights and benefits provided
thereunder. See "--Certain Terms of the Merger Agreement--Consideration to be
Paid in the Merger and Conversion of Shares" and "--Appraisal Rights of
Dissenting Shareholders."
Based upon the number of shares of Fay's Common Stock outstanding as of the
Record Date and the closing sales price of JCPenney Common Stock set forth on
the cover page of this Proxy Statement/Prospectus, a total of approximately
4,939,348 shares of JCPenney Common Stock would be issuable pursuant to the
Merger. Such number of shares of JCPenney Common Stock would represent
approximately 2.1% of the total number of shares of JCPenney Common Stock
expected to be outstanding immediately after such issuance. The precise number
of Conversion Shares will be fixed between .2253397 and .2754151 of a share of
JCPenney Common Stock, depending upon the sales prices for JCPenney Common
Stock during the Measurement Period.
BACKGROUND OF THE MERGER
On May 8, 1995, Robert W. Hannan, President and Chief Executive Officer of
Thrift Drug, wrote to Henry A. Panasci, Jr., Chairman of the Board and Chief
Executive Officer of Fay's, expressing Thrift Drug's interest in discussing a
possible acquisition of Fay's. A transaction was not pursued by the parties at
that time.
On February 20, 1996, Fay's retained Bear Stearns to act as its financial
advisor in connection with a possible business combination transaction.
In early April 1996, Mr. Henry Panasci, Jr. telephoned Mr. Hannan and
expressed an interest in commencing discussions about the possible acquisition
of Fay's by Thrift Drug. On April 16, 1996, Mr. Hannan met with Mr. Henry
Panasci, Jr. in New York City to discuss preliminary aspects of an acquisition
by Thrift Drug of Fay's.
On April 22, 1996, a confidentiality agreement protecting the
confidentiality of Fay's information to be given to JCPenney and Thrift Drug
as part of their evaluation of Fay's was executed by Thrift Drug and Fay's. A
preliminary confidential offering memorandum, previously prepared by Bear
Stearns on behalf of Fay's, was then made available to Thrift Drug.
During the period between approximately April 22, 1996 and June 7, 1996,
three Thrift Drug teams visited approximately 190 Fay's store locations on an
anonymous basis for due diligence purposes.
On April 29, 1996, Mr. Henry Panasci, Jr. and Mr. Hannan met to discuss the
status of the discussions and the process by which the negotiations would be
conducted.
On April 30, 1996, a telephone conference call was held among
representatives of JCPenney/Thrift Drug and Fay's regarding certain follow-up
information needed by the JCPenney/Thrift Drug group to formulate an
19
<PAGE>
initial valuation figure. A written document was submitted to Fay's and Bear
Stearns by JCPenney/Thrift Drug with that initial information request.
From May 1, 1996 through early June 1996, the parties continued to exchange
information so that JCPenney/Thrift Drug could formulate a possible offering
price for a possible transaction.
On May 15, 1996 Mr. Hannan and other representatives of JCPenney/Thrift Drug
met with David H. Panasci, President and Chief Operating Officer of Fay's, and
James F. Poole, Jr., Senior Vice President-Finance and Chief Financial Officer
of Fay's, to discuss general aspects of a possible transaction.
On June 7, 1996, Fay's representatives met with the JCPenney/Thrift Drug
group in Plano, Texas to discuss JCPenney/Thrift Drug's initial valuation of
Fay's. At this meeting, JCPenney made its initial offer. The JCPenney offer
was subject to normal due diligence reviews and the negotiation and
preparation of an acceptable definitive agreement.
On or about June 21, 1996, a second offer was made by JCPenney to
representatives of Fay's.
On June 24, 1996, a special meeting of the Board of Directors of Fay's was
held, at which JCPenney's second offer was discussed. At this meeting, Bear
Stearns made a presentation regarding the proposed transaction.
On June 26, 1996, Fay's held a conference call with the JCPenney/Thrift Drug
group, and on June 27, 1996, Mr. Hannan met with Messrs. Panasci, to discuss
the terms of the second offer.
On July 1, 1996, a conference call between JCPenney and a representative of
Fay's was held and the Fay's representative informed JCPenney that Fay's had
rejected the second offer. Such parties thereafter had further discussions
regarding price.
On July 2, 1996, JCPenney/Thrift Drug informed Fay's representatives that,
subject to due diligence, it was prepared to consummate a transaction
involving the issuance of JCPenney Common Stock at a price of $12.75 per share
of Fay's Common Stock. Fay's representatives informed JCPenney/Thrift Drug
that this price was acceptable. JCPenney/Thrift Drug then instructed its legal
counsel to prepare a draft of a definitive agreement to forward to Fay's and
its legal counsel.
On July 9, 1996, JCPenney/Thrift Drug's legal counsel forwarded a first
draft of the Merger Agreement to Fay's and its legal counsel. Also on July 9,
1996, Fay's informed JCPenney/Thrift Drug that Fay's needed to discuss certain
information and rumors regarding a possible takeover of Fay's. A conference
call was held that evening and Fay's decided to issue a press release the next
morning clarifying the information and rumors in the marketplace. JCPenney
consented to the release of its name the next morning and the public
announcement was made by Fay's early on July 10, 1996, stating that Fay's was
in preliminary discussions with JCPenney regarding a possible business
combination transaction.
On July 10, 1996, the JCPenney Board of Directors, at a regularly scheduled
meeting, approved the acquisition of Fay's, and also approved the issuance and
sale of JCPenney Common Stock in connection with such acquisition. The
JCPenney Board of Directors also appointed a special committee of the Board
(the "Special Committee") and granted the Special Committee the authority of
the full Board of Directors to carry out any transactions necessary to effect
the acquisition of Fay's.
Also on July 10, 1996, Fay's and JCPenney entered into a confidentiality
agreement regarding JCPenney and Thrift Drug information to be provided to
Fay's. This agreement also contained a provision pursuant to which Fay's
agreed not to have any discussions with third parties concerning a business
combination transaction through July 25, 1996 while negotiations were taking
place regarding the terms of a definitive agreement. The term of the
exclusivity provision was subsequently extended through July 30, 1996 and then
through August 5, 1996.
On July 30, 1996, a special meeting of the Board of Directors of Fay's was
held, at which the proposed terms of the Merger Agreement were discussed. At
this meeting, Bear Stearns and Fay's legal counsel made presentations
regarding the proposed transaction.
20
<PAGE>
During the period from July 10, 1996 through August 4, 1996, JCPenney/Thrift
Drug and their legal counsel conducted due diligence investigations and
negotiated the terms of the Merger Agreement, the Stockholders Agreement, and
related documents with Fay's, Messrs. Panasci and their financial advisors and
legal counsel.
By unanimous written consent of the Special Committee dated August 5, 1996,
JCPenney approved and adopted the Merger Agreement, the Stockholders
Agreement, and related transactions. At a meeting on August 5, 1996, which was
attended by Bear Stearns and Fay's legal counsel, the Board of Directors of
Fay's approved and adopted the Merger Agreement, the Stockholders Agreement
and related transactions. After these meetings, the Merger Agreement and the
Stockholders Agreement were executed on August 5, 1996.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF FAY'S; REASONS FOR THE MERGER
The Board of Directors of Fay's believes that the Merger is an opportunity
for Fay's shareholders to participate in a combined enterprise that has
significantly greater resources than Fay's would have absent the Merger, and
to receive, on a tax-deferred basis, a premium for their Fay's Common Stock
based on recent market prices. Additionally, the Board of Directors of Fay's
believes that the terms of the Merger are fair to, and in the best interests
of, Fay's and its shareholders and has approved and adopted the Merger
Agreement. The Board of Directors of Fay's recommends that Fay's shareholders
vote "FOR" the approval and adoption of the Merger Agreement.
As described above under "--Background of the Merger," the decision of the
Board of Directors of Fay's to approve and adopt the Merger Agreement at its
August 5, 1996 board meeting followed several meetings with Bear Stearns
regarding the possible benefits to Fay's shareholders in consummating a merger
with JCPenney.
In reaching its conclusion, the Board of Directors of Fay's considered,
among other factors:
(i) Strategic alternatives for Fay's, including remaining as an
independent company.
(ii) Information concerning the financial performance and condition,
business operations and prospects of each of Fay's and JCPenney, and Fay's
projected future performance and prospects as a separate entity and on a
combined basis with JCPenney.
(iii) Recent and historical market prices of Fay's Common Stock and
JCPenney Common Stock.
(iv) The prices and premiums paid in comparable transactions involving
other retail drug store chains.
(v) The fact that Messrs. Panasci, who beneficially own in the aggregate
27.8% of the outstanding Fay's Common Stock, were willing to enter into the
Stockholders Agreement pursuant to which they agreed to vote the Fay's
Common Stock owned by them in favor of the Merger (it being noted by the
Board of Directors of Fay's that all other shareholders of Fay's will be
treated the same as these two shareholders in the Merger with respect to
their shares of Fay's Common Stock).
(vi) The diminished growth prospects of Fay's due to, among other things,
the erosion of gross margins, decreases in price inflation for
pharmaceuticals, increased competition from competitors with greater
financial resources and uncertainties in the health care industry.
(vii) The lack of significant geographical overlap in the stores operated
by Fay's and the stores operated by Thrift Drug.
(viii) The financial analyses and presentations of Bear Stearns delivered
to the Board of Directors of Fay's at its meetings on June 24, July 30, and
August 5, 1996, including the written opinion of Bear Stearns described
below.
(ix) The fact that the Merger would provide holders of Fay's Common Stock
with the opportunity to receive a premium over recent market prices for
Fay's Common Stock, including an approximate 48% premium over the $8 5/8
market price of the Fay's Common Stock at the close of trading on July 9,
1996 (the last trading day prior to the announcement by Fay's that it had
commenced preliminary negotiations with JCPenney regarding a possible
merger).
(x) The structure of the transaction and the terms of the Merger
Agreement, which were the result of arms-length negotiations between
JCPenney and Fay's, including the terms of the Merger Agreement that
21
<PAGE>
permit the Board of Directors of Fay's, in the exercise of its fiduciary
duties and subject to certain conditions, to respond to inquiries from, to
provide information to, and negotiate with, a third party making an
unsolicited proposal to acquire Fay's and to terminate the Merger Agreement
if the Board of Directors of Fay's determines to recommend an alternative
business combination transaction.
(xi) The expectation that the Merger will afford Fay's shareholders the
opportunity to receive JCPenney Common Stock in a transaction that is
nontaxable for United States federal income tax purposes.
(xii) The likelihood that the Merger will be consummated and the fact
that the Merger Agreement provides for limited conditions to the
obligations of JCPenney to consummate the Merger.
(xiii) The social and economic effects of the Merger on the employees,
customers, suppliers and other constituents of Fay's (and on the
communities in which Fay's operates or is located), including JCPenney's
stated present intention to (a) continue to operate a distribution center
in Liverpool, New York and establish a regional office in the location
presently used by Fay's as its corporate headquarters, (b) continue to
operate substantially all of the existing stores of Fay's, (c) continue to
use the Fay's name for stores located in the State of New York, and (d)
operate new drug stores in currently existing trade areas of Fay's in the
State of New York under the Fay's name (but recognizing that JCPenney is in
no way obligated, contractually or otherwise, to do any of the foregoing).
The foregoing discussion of the information and factors considered by the
Board of Directors of Fay's is not intended to be exhaustive. In view of the
variety of factors considered in connection with its evaluation of the Merger,
the Board of Directors of Fay's did not find it practicable to and did not
quantify or otherwise assign relative weights to the specific factors
considered in reaching its determination that the Merger was fair to, and in
the best interests of, Fay's shareholders.
OPINION OF BEAR STEARNS AS FINANCIAL ADVISOR TO FAY'S
On February 20, 1996, the Board of Directors of Fay's retained Bear Stearns
to act as its financial advisor in connection with a possible business
combination transaction. In connection with their engagement, the Board of
Directors of Fay's instructed Bear Stearns to evaluate the fairness, from a
financial point of view, of the consideration to be received in the Merger by
the shareholders of Fay's. At the August 5, 1996 meeting of the Board of
Directors of Fay's, Bear Stearns delivered its written opinion to the effect
that, as of the date of such opinion and based upon the various qualifications
and assumptions set forth therein, the consideration to be received in the
Merger by the shareholders of Fay's is fair, from a financial point of view,
to such shareholders. Bear Stearns subsequently updated such opinion to the
Board of Directors of Fay's as of the date of this Proxy Statement/Prospectus.
THE FULL TEXT OF BEAR STEARNS' WRITTEN OPINION DATED THE DATE OF THIS PROXY
STATEMENT/PROSPECTUS, WHICH IS SUBSTANTIALLY SIMILAR TO BEAR STEARNS' AUGUST
5, 1996 OPINION, IS ATTACHED AS APPENDIX II TO THIS PROXY STATEMENT/PROSPECTUS
AND IS INCORPORATED HEREIN BY REFERENCE. FAY'S SHAREHOLDERS ARE URGED TO READ
THIS OPINION IN ITS ENTIRETY FOR ASSUMPTIONS MADE, PROCEDURES FOLLOWED,
MATTERS CONSIDERED AND LIMITS OF THE REVIEW BY BEAR STEARNS IN ARRIVING AT ITS
OPINION. THE SUMMARY OF THE OPINION OF BEAR STEARNS SET FORTH IN THIS PROXY
STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL
TEXT OF SUCH OPINION.
Bear Stearns' opinions are directed only to the fairness, from a financial
point of view, of the consideration to be received in the Merger by the
shareholders of Fay's and do not constitute recommendations to any shareholder
of Fay's as to how such shareholder should vote at the Special Meeting. No
limitations were imposed by the Board of Directors of Fay's upon Bear Stearns
with respect to the investigations made or procedures followed by it in
rendering its opinions. Although Bear Stearns evaluated the financial terms of
the Merger and participated in discussions concerning the consideration to be
paid, Bear Stearns did not recommend the amount of consideration to be paid in
the Merger, which was determined through arm's length negotiations between
Fay's and JCPenney.
22
<PAGE>
In connection with rendering its opinions, Bear Stearns, among other things:
(i) reviewed the Merger Agreement; (ii) reviewed Fay's Annual Reports to
Shareholders and Annual Reports on Form 10-K for the fiscal years ended 1992
through 1996, the Fay's 1996 First Quarter Form 10-Q and, in the case of the
opinion dated as of the date of this Proxy Statement/Prospectus, the Fay's
1996 Second Quarter Form 10-Q; (iii) reviewed certain operating and financial
information, including projections, provided to Bear Stearns by Fay's senior
management relating to Fay's business and prospects; (iv) met with certain
members of Fay's senior management to discuss its operations, historical
financial statements and future prospects; (v) visited Fay's headquarters
facility in Liverpool, New York; (vi) reviewed the historical prices and
trading volumes of Fay's Common Stock; (vii) reviewed publicly available
financial data and stock market performance data of companies which Bear
Stearns deemed generally comparable to Fay's; (viii) reviewed the terms of
recent acquisitions of companies which Bear Stearns deemed generally
comparable to Fay's; (ix) reviewed JCPenney's Annual Reports to Stockholders
and Annual Reports on Form 10-K for the fiscal years ended 1992 through 1996,
the JCPenney 1996 First Quarter Form 10-Q and, in the case of the opinion
dated as of the date of this Proxy Statement/Prospectus, the JCPenney 1996
Second Quarter Form 10-Q, and reviewed the historical prices and trading
volume of the shares of JCPenney Common Stock; and (x) conducted such other
studies, analyses, inquiries and investigations as Bear Stearns deemed
appropriate.
In the course of its review, Bear Stearns relied upon and assumed the
accuracy and completeness of all financial and other information provided to
it by Fay's. With respect to projected financial results, Bear Stearns assumed
that they were reasonably prepared on bases reflecting the best currently
available estimates and judgments of the management of Fay's as to its
expected future performance. Bear Stearns did not assume any responsibility
for the information or projections provided to it and further relied upon the
assurances of the management of Fay's that they were unaware of any facts that
would make the information or projections provided to it incomplete or
misleading. In arriving at its opinions, Bear Stearns did not perform or
obtain any independent appraisal of the assets of Fay's or JCPenney. Each Bear
Stearns' opinion is necessarily based upon economic, market and other
conditions, and the information made available to it, as of the date of its
opinion.
In preparing its opinions, Bear Stearns performed a variety of financial and
comparative analyses. The summary of such analyses set forth below does not
purport to be a complete description of the analyses performed and factors
considered by Bear Stearns in arriving at its opinions. The preparation of a
fairness opinion is a complex process and is not necessarily susceptible to
partial analyses or summary description. Bear Stearns believes that its
analyses must be considered as a whole, and that selecting portions of its
analyses or of the summary set forth below, without considering the analyses
as a whole, could create an incomplete view of the processes underlying Bear
Stearns' opinions. In arriving at its fairness determination, Bear Stearns
considered the results of all such reviews, calculations and analyses. The
analyses were prepared solely for the purpose of Bear Stearns providing its
opinions to the Board of Directors of Fay's as to the fairness, from a
financial point of view, of the consideration to be received in the Merger by
Fay's shareholders, and do not purport to be appraisals or necessarily reflect
the prices at which Fay's or its securities actually may be sold. As described
above, certain of the analyses performed by Bear Stearns relied on estimates
of future financial performance provided by the management of Fay's. Analyses
based on forecasts of future results are not necessarily indicative of actual
future results, and may be significantly more or less favorable than suggested
by such analyses. Accordingly, because such forecasts are inherently subject
to substantial uncertainty, none of Fay's, JCPenney, Bear Stearns or any other
person assumes responsibility for their accuracy. Furthermore, no opinion is
being expressed as to the prices at which shares of Fay's Common Stock may
trade at any future time.
The following is a summary of the principal financial and valuation analyses
performed by Bear Stearns in connection with the preparation of its opinion
dated August 5, 1996. These analyses were presented to the Board of Directors
of Fay's at its meeting on July 30, 1996.
Historical Stock Trading Analysis
Bear Stearns reviewed and analyzed selected historical trading prices of the
Fay's Common Stock for the period from July 16, 1993 to July 26, 1996. This
review indicated that the April 26, 1995 closing price of $9.38
23
<PAGE>
was the highest closing price of the Fay's Common Stock for the period from
July 16, 1993 to July 9, 1996, the day prior to the public announcement (the
"Announcement") that Fay's was in preliminary discussions with JCPenney
regarding a potential business combination transaction. Bear Stearns also
reviewed and analyzed selected historical trading prices of the Fay's Common
Stock for the 52-week period prior to July 9, 1996. This review indicated that
the high and low prices of the Fay's Common Stock during this period were
$9.00 (on May 1, 1996) and $6.50 (on December 20, 1995), respectively, and
that the closing price of the Fay's Common Stock on July 3, 1996, one week
prior to the Announcement, was $7.88.
Comparable Company Analysis
Bear Stearns reviewed and compared certain actual and estimated financial,
operating and stock market information of Fay's with that of the following
group of nine publicly traded companies in the drug store industry that Bear
Stearns believed to be comparable in certain relevant respects to Fay's:
Eckerd Corporation, Revco D.S., Inc., Rite Aid Corporation, Thrifty PayLess,
Inc., Walgreen Co., Arbor Drugs, Inc., Big B, Inc., Genovese Drug Stores, Inc.
and Longs Drug Stores Corporation (the "Comparable Companies"). Bear Stearns
calculated certain financial multiples for each of the Comparable Companies,
including price to earnings ("P/E") multiples based on their last 12 months
("LTM") revenues, calendar 1996 earnings per share estimates (based on
published reports) and calendar 1997 earnings per share estimates (based on
published reports) and enterprise value as a multiple of each of LTM earnings
before interest, taxes, depreciation and amortization ("EBITDA") and LTM
revenues. Enterprise value was determined by adding the market value of each
company's equity and the book value of each company's total debt and
subtracting each company's cash on hand.
This analysis resulted in (i) LTM P/E multiples ranging from 14.1x to 21.8x
(with a harmonic mean of 17.0x) for the Comparable Companies as compared to
20.7x and 37.8x for Fay's based upon a $7.88 market price and the Merger value
of $12.75, respectively, (ii) estimated calendar 1996 P/E multiples ranging
from 13.2x to 26.4x (with a harmonic mean of 16.5x) for the Comparable
Companies as compared to 14.1x and 22.8x for Fay's based upon a $7.88 market
price and the Merger value of $12.75, respectively, (iii) estimated calendar
1997 P/E multiples ranging from 11.9x to 18.2x (with a harmonic mean of 13.6x)
for the Comparable Companies as compared to 12.3x and 19.9x for Fay's based
upon a $7.88 market price and the Merger value of $12.75, respectively, (iv)
enterprise value/LTM EBITDA multiples ranging from 5.5x to 12.9x (with a
harmonic mean of 7.8x) for the Comparable Companies as compared to 7.0x and
11.0x for Fay's based upon a $7.88 market price and the Merger value of
$12.75, respectively, and (v) enterprise value/LTM revenues multiples ranging
from 0.24x to 0.70x (with a harmonic mean of 0.39x) for the Comparable
Companies as compared to 0.22x and 0.35x for Fay's based upon a $7.88 market
price and the Merger value of $12.75, respectively.
Bear Stearns noted that none of the Comparable Companies was identical to
Fay's and that, accordingly, any analysis of the Comparable Companies
necessarily involved complex considerations and judgments concerning
differences in financial and operating characteristics and other factors that
would necessarily affect the public trading values of the Comparable
Companies.
Hypothetical Future Share Price Analysis
On the basis of Fay's estimated earnings per share for fiscal years 1997 to
2000 and on the basis of assumed multiples on current earnings per share of
10.0x and 14.0x, Bear Stearns derived (i) estimated future per share price
ranges of the Fay's Common Stock at the middle of each of the fiscal years
during the covered period and (ii) the present value as of July 31, 1996 of
such per share price ranges applying discount rates of 12% and 14% for each of
the fiscal years during the covered period (except for fiscal 1997). This
analysis resulted in (i) an estimated per share price range of $5.60 to $7.84
(with present values of $5.60 to $7.84) for the fiscal year ending January
1997, (ii) an estimated per share price range of $6.40 to $8.96 (with present
values of $5.71 to $8.00 and $5.61 to $7.86 applying discount rates of 12% and
14%, respectively) for the fiscal year ending January 1998, (iii) an estimated
per share price range of $7.20 to $10.08 (with present values of $5.74 to
$8.04 and $5.54 to $7.76 applying discount rates of 12% and 14%, respectively)
for the fiscal year ending January 1999, and (iv) an estimated per share price
range of $8.80 to $12.32 (with present values of $6.26 to $8.77 and $5.94 to
$8.32 applying discount rates of 12% and 14%, respectively) for the fiscal
year ending January 2000.
24
<PAGE>
Selected Acquisition Analysis
Bear Stearns reviewed and compared the publicly available information
regarding 19 selected transactions involving the acquisition or proposed
acquisition of all or part of certain companies in the drug store industry
since 1991 (the "Selected Acquisitions"). To the extent that the relevant
information was publicly available, for each of the Selected Acquisitions Bear
Stearns calculated certain financial multiples, including transaction value as
a multiple of each of LTM EBITDA and LTM revenues and equity value as a
multiple of LTM net income. In addition, Bear Stearns calculated the
transaction value per store acquired or proposed to be acquired for each of
the Selected Acquisitions. Transaction value was determined by adding the
value paid or proposed to be paid for each company's common equity and the
book value of each company's total debt and subtracting each company's cash
and stock option proceeds. This analysis resulted in (i) transaction value/LTM
EBITDA multiples ranging from 6.4x to 13.1x (with a harmonic mean of 8.0x) for
the Selected Acquisitions as compared to 11.0x for the Merger, (ii)
transaction value/LTM revenues multiples ranging from 0.27x to 0.83x (with a
harmonic mean of 0.36x) for the Selected Acquisitions as compared to 0.35x for
the Merger, (iii) equity value/LTM net income multiples ranging from 16.1x to
29.0x (with a harmonic mean of 21.2x) for the Selected Acquisitions as
compared to 37.8x for the Merger, and (iv) transaction value per store ranges
of $0.3 million to $5.4 million (with a harmonic mean of $0.8 million) for the
Selected Acquisitions as compared to $1.3 million for the Merger.
The 19 transactions included in the Selected Acquisitions were: (i) the
acquisition of Revco D.S., Inc. by Rite Aid Corporation (terminated); (ii) the
acquisition of Medicine Shoppe International, Inc. by Cardinal Health, Inc.;
(iii) the acquisition of 22 stores of F&M Distributors, Inc. by Drug Emporium,
Inc.; (iv) the acquisition of 109 stores of Rite Aid Corporation by Eckerd
Corporation; (v) the acquisition of 30 stores of Pathmark Stores, Inc. by Rite
Aid Corporation; (vi) the acquisition of Community Distributors by its
management, Harvest Partners and BancBoston Ventures; (vii) the acquisition of
24 Rx Place, Inc. stores from Woolworth Corporation by Pharmhouse Corp.;
(viii) the acquisition of Kerr Drugstores, Inc. by Thrift Drug; (ix) the
acquisition of Perry Drugstores, Inc. by Rite Aid Corporation; (x) the
acquisition of the Los Angeles stores of Clark Drugs by the American Stores
Company; (xi) the acquisition of 221 stores of Brooks Drug by The Jean Coutu
Group Inc.; (xii) the acquisition of LaVerdiere's Enterprises, Inc. by Rite
Aid Corporation; (xiii) the acquisition of Hook-SupeRx, Inc. by Revco D.S.,
Inc.; (xiv) the acquisition of Payless Drugs from Kmart Corporation by Thrifty
PayLess, Inc.; (xv) the acquisition of the Georgia stores of Thrift Drug by
Big B, Inc.; (xvi) the acquisition of Duane Reade Corporation by Bain Capital,
Inc.; (xvii) the acquisition of Wellby/Alexander's Village Pharmacies by Rite
Aid Corporation; (xviii) the acquisition of the California stores of CVS H.C.,
Inc. by American Stores Company; and (xix) the acquisition of Revco D.S., Inc.
by the Zell/Chilmark Fund, L.P. Bear Stearns noted that none of the Selected
Acquisitions was identical to the transactions contemplated by the Merger
Agreement and that, accordingly, any analysis of the Selected Acquisitions
necessarily involved complex considerations and judgments concerning
differences in financial and operating characteristics and other factors that
would necessarily affect the value of Fay's versus the acquisition values of
the companies to which Fay's was being compared.
Discounted Cash Flow Analysis
Bear Stearns calculated the estimated free cash flows that Fay's is expected
to generate through fiscal year 2002 using operating assumptions prepared by
the management of Fay's. Bear Stearns then calculated estimated terminal
values (as of January 2002) for Fay's by applying terminal value multiples of
6.5x, 7.0x and 7.5x to Fay's estimated fiscal year 2002 EBITDA. The sum of the
free cash flows for the covered period and the range of terminal values were
then discounted to present value using discount rates of 12% and 14%. This
analysis indicated (i) a present value of Fay's per share equity (net of debt)
of $10.45, $11.26 and $12.07 on the basis of terminal value EBITDA multiples
of 6.5x, 7.0x and 7.5x, respectively, using a discount rate of 12%, and (ii) a
present value of Fay's per share equity (net of debt) of $9.32, $10.06 and
$10.79 on the basis of terminal value EBITDA multiples of 6.5x, 7.0x and 7.5x,
respectively, using a discount rate of 14%.
25
<PAGE>
Dividend Analysis
Bear Stearns analyzed and compared the current indicated (and historical
since fiscal year 1986) annual dividend of $.20 per share of Fay's Common
Stock and the equivalent dividend per share of Fay's Common Stock that would
be received from JCPenney after the Merger (assuming that the annual dividend
rate per share of JCPenney Common Stock remains at $2.08). This analysis
indicated that at a $7.88 market price, the closing price of the Fay's Common
Stock on July 3, 1996, one week prior to the Announcement, the current annual
dividend of $0.20 per share of Fay's Common Stock represented a dividend yield
of 2.5%. By way of comparison, this analysis indicated that, based upon a
Merger exchange ratio calculated by reference to an average closing price for
the JCPenney Common Stock of $49.63, the closing price of the JCPenney Common
Stock on July 29, 1996, the equivalent annual dividend that would be received
from JCPenney after the Merger (assuming the annual dividend rate per share of
JCPenney Common Stock remains at $2.08) would be $0.53 per share of Fay's
Common Stock (a $.33 per share (165.0%) increase) with a dividend yield of
4.2% on the basis of a $12.75 Merger value and a dividend yield of 6.7% on the
basis of a $7.88 market price per share of Fay's Common Stock.
Other Analyses
Bear Stearns conducted such other analyses as it deemed necessary, including
reviewing selected investment research reports on, and earnings estimates for,
JCPenney, and analyzing available information regarding the stock ownership
profile of JCPenney.
In connection with its opinion dated August 5, 1996 and its opinion dated
the date of this Proxy Statement/Prospectus, Bear Stearns confirmed the
appropriateness of its reliance on the analyses presented to Fay's Board of
Directors on July 30, 1996, each time by performing procedures to update
certain of such analyses and by reviewing the assumptions on which such
analyses were based and the factors considered therein.
Bear Stearns is an internationally recognized investment banking firm and
was engaged as financial advisor to Fay's in connection with the Merger
because of its experience and expertise and its familiarity with Fay's. As
part of its investment banking business, Bear Stearns is regularly engaged in
the valuation of businesses and their securities in connection with mergers
and acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes.
The terms of Fay's engagement of Bear Stearns are set forth in a letter
agreement dated February 20, 1996, between Bear Stearns and Fay's (the "Bear
Stearns Engagement Letter"). Pursuant to the terms of the Bear Stearns
Engagement Letter, Fay's has paid Bear Stearns an advisory fee of $75,000 and
has agreed to pay Bear Stearns a fee of $400,000 for the preparation and
delivery of the August 5, 1996 fairness opinion. In addition, Fay's has agreed
to pay Bear Stearns, immediately upon consummation of the Merger, a
transaction fee equal to 0.65% of the aggregate consideration paid by JCPenney
pursuant to the Merger Agreement plus the assumption, directly or indirectly,
or repayment by JCPenney of any indebtedness and capital lease obligations of
Fay's. The value of the JCPenney Common Stock paid to the holders of Fay's
Common Stock will be determined by the closing or last sale price of the
JCPenney Common Stock on the date of consummation of the Merger. This
transaction fee is contingent upon consummation of the Merger and against
which the foregoing $75,000 advisory fee will be credited. In addition, Fay's
has agreed to reimburse Bear Stearns for its out-of-pocket expenses, including
the fees and disbursements of its counsel, arising in connection with its
engagement, and to indemnify Bear Stearns to the fullest extent permitted by
law against certain liabilities relating to or arising out of its engagement,
except for liabilities found to have resulted primarily and directly from the
gross negligence or willful misconduct of Bear Stearns.
In the ordinary course of its business, Bear Stearns may actively trade the
equity securities of Fay's and JCPenney for its own account and for the
accounts of its customers and, accordingly, may at any time hold a long or
short position in such securities. Bear Stearns has in the past performed
certain other investment banking
26
<PAGE>
services for Fay's, including services in connection with the adoption of the
Fay's Rights Agreement (as hereinafter defined) in July 1995. In addition,
Bear Stearns has in the past provided financial advisory services to JCPenney
and its subsidiaries.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Board of Directors of Fay's with
respect to the Merger, Fay's shareholders should be aware that all of the
directors and executive officers of Fay's have certain interests including
those referred to below.
Stock Ownership
All directors and executive officers of Fay's are beneficial owners of Fay's
Common Stock. Pursuant to the Merger Agreement, shares of Fay's Common Stock
held by directors and executive officers of Fay's will be converted into the
same merger consideration as will be received by the other shareholders of
Fay's.
Employment Agreements
Fay's has executed written employment agreements (as amended through the
date of the Merger Agreement, the "Employment Agreements") with each of its
executive officers: Henry A. Panasci, Jr., Chairman of the Board and Chief
Executive Officer; David H. Panasci, President and Chief Operating Officer;
Warren D. Wolfson, Senior Vice President, General Counsel and Secretary; James
F. Poole, Jr., Senior Vice President--Finance and Chief Financial Officer;
Gale T. Mitchell, Senior Vice President--Store Operations; James R. Wuest,
Senior Vice President--Marketing; and Craig C. Painter, Vice President and
Chief Information Officer. The Employment Agreements provide that if the
employment of the executive officer is terminated by the executive officer for
Good Reason (as defined below) no earlier than six months nor more than 36
months following a Change in Control (as defined in the Employment Agreements
and which would include consummation of the Merger) or by Fay's without Cause
(as defined in the Employment Agreements) following a Change in Control, each
executive officer will be entitled to receive severance compensation in a lump
sum payment equal to the following multiples of the sum of (a) such executive
officer's annual salary as in effect on July 3, 1996, and (b) the highest
annual bonus paid to each executive officer during the three most recent
complete fiscal years ending prior to the year in which a Change in Control
occurs: three times, in the case of Mr. David Panasci; two and one-half times,
in the case of Messrs. Mitchell and Wuest; and two times, in the case of
Messrs. Henry Panasci, Jr., Wolfson, Poole and Painter. As defined in the
Employment Agreements, "Good Reason" includes (i) any purported termination of
the executive officer's employment for Cause which is not effected in
accordance with the terms of the Employment Agreement; (ii) any time within 60
days following the request of a superior officer of Fay's for the resignation
of the executive officer as an officer of Fay's, (iii) any time within 30 days
of reaching a mutual agreement with a superior officer of Fay's that the
executive officer shall resign as an officer of Fay's, (iv) the assignment by
Fay's of duties inconsistent with the executive officer's position, duties,
responsibilities and status in effect as of the date of a Change in Control,
(v) a change in the executive officer's reporting responsibilities, titles or
offices in effect as of the date of a Change in Control, (vi) the reduction of
the executive officer's base salary in effect immediately prior to a Change in
Control, (vii) the relocation of Fay's principal executive offices to a
location outside Onondaga County, New York, following a Change in Control,
(viii) the relocation of the executive officer's office within the executive
offices of Fay's following a Change in Control, (ix) a failure by Fay's to
comply with any material provision of the Employment Agreements which is not
cured within 30 days after the receipt of notice by Fay's of such non-
compliance, (x) the failure by Fay's to continue in effect without reduction
the level of benefits of any health, welfare or retirement benefit plan or
program of Fay's in which the executive officer was participating immediately
prior to a Change in Control, (xi) a determination made by the executive
officer that due to changed circumstances occurring on or after a Change in
Control he is unable to carry out the duties and responsibilities attached to
his position, and (xii) any failure by Fay's to obtain the assumption of the
Employment Agreement by any successor to Fay's in accordance with the
requirements set forth in the Employment Agreement with respect to such an
assumption. The Employment Agreements also provide that Fay's shall be
required to make an additional payment (a "Gross-Up Payment") to each
executive officer to compensate for the effect of any
27
<PAGE>
excise tax under Section 4999 of the Code that may be imposed on the
compensation and any other payments received by the executive officer under
the Employment Agreement. Under the terms of the Merger Agreement, Messrs.
Henry Panasci, Jr., David Panasci, Poole and Wolfson will be terminated
without Cause as of the Effective Time for purposes of their respective
Employment Agreements.
On January 29, 1996, the Compensation Committee of the Fay's Board of
Directors authorized (i) the execution of an Employment Agreement with Mr.
Henry Panasci, Jr., who had not previously been a party to an Employment
Agreement with Fay's, and (ii) amendments to the other Employment Agreements
that, among other things, (a) adjusted the measurement of the bonus component
of the severance payments from the greater of the executive officer's most
recent annual bonus or the executive officer's average annual bonus for the
two most recent years (or three most recent years, following a Change in
Control) to the highest annual bonus paid in the three most recent fiscal
years, (b) eliminated provisions authorizing reduction in severance payments
to the extent they would be nondeductible by Fay's for federal income tax
purposes because of the application of Section 280G of the Code, and (c) added
provisions for the payment of Gross-Up Payments by Fay's.
On July 3, 1996, the Compensation Committee of the Fay's Board of Directors
authorized amendments to the Employment Agreements to increase the multiples
of salary and bonus applicable to Mr. David Panasci from two to three times
(as provided above) and to Messrs. Mitchell and Wuest from two to two and one-
half times (as provided above). In addition, the Employment Agreements with
Messrs. Henry Panasci, Jr., David Panasci, Wolfson and Poole were amended to
provide each of them with a special payment (the "Special Payment"), payable
upon consummation of a business combination transaction (including a merger)
prior to December 31, 1996, as a result of which the acquiror becomes the
beneficial owner of at least 25% of the outstanding voting securities of
Fay's, of $806,085, $806,085, $411,730 and $420,570, respectively. In
connection with the negotiation of the Merger Agreement, Mr. Henry Panasci,
Jr. agreed, subject to the consummation of the Merger in accordance with the
terms of the Merger Agreement, to reduce the multiple of salary and bonus
applicable to him to two from three times and also agreed to forego his
Special Payment. In addition, Messrs. David Panasci, Wolfson and Poole have,
in lieu of their Special Payments, entered into consulting and non-competition
agreements (the "Consulting Agreements") with Fay's to perform certain
transition consulting services for Fay's after the Effective Time for two
years, in the case of Mr. David Panasci, and one year, in the case of Messrs.
Wolfson and Poole. The fees payable under the Consulting Agreements will be
equal to the amount that would have been payable as Special Payments and will
be payable one half at the Effective Time, one quarter on the first
anniversary of the Effective Time and one quarter on the second anniversary of
the Effective Time, in the case of Mr. David Panasci, and in two equal
installments at the Effective Time and on the first anniversary of the
Effective Time, in the case of Messrs. Wolfson and Poole. The provisions in
the Employment Agreements relating to the excise tax payments are applicable
to payments to be made pursuant to the Consulting Agreements.
The total aggregate amounts that Messrs. Henry Panasci, Jr., David Panasci,
Wolfson, Poole, Mitchell, Wuest, and Painter would have been entitled to,
assuming payments following a Change in Control were made to them under their
respective Employment Agreements and Consulting Agreements at August 5, 1996
(and assuming the cash-out of all employee stock options based upon the
difference between $12.75 and the applicable exercise prices), were
approximately $1,363,270, $2,293,326, $1,798,516, $1,872,550, $893,330,
$723,795, and $620,991, respectively, excluding in each case payment for
excise taxes.
The Employment Agreements also provide for the extension of employee welfare
benefits for the period of two years if the termination of employment occurs
following a Change in Control, or in the case of Mr. Henry Panasci, Jr., the
extension of employee welfare benefits for his lifetime and the lifetime of
his surviving spouse as well as coverage for extended care services. Also,
following termination of employment for any reason, and continuing until his
death or the age of 75, Mr. Henry Panasci, Jr. is entitled, at his option, to
either (i) an office and full time secretarial services within the executive
offices of Fay's in a location acceptable to Mr. Henry Panasci, Jr., or (ii)
an allowance of up to $3,000 per month for office rent and secretarial
services.
28
<PAGE>
Options
Certain directors and executive officers of Fay's are beneficial owners of
options to purchase shares of Fay's Common Stock. Pursuant to the Merger
Agreement, all options to purchase shares of Fay's Common Stock (including
those held by directors and executive officers of Fay's), some of which will
not be exercisable prior to the Effective Time, will be either (i) canceled
and exchanged for a lump sum cash payment equal to the number of shares of
JCPenney Common Stock which the holder of the option would have received if
such holder had exercised the option immediately prior to the Effective Time
(assuming the issuance of fractional shares of JCPenney Common Stock)
multiplied by the difference between (a) the average of the per share Daily
Price of JCPenney Common Stock during the Measurement Period and (b) the
exercise price per share of such options divided by the Conversion Shares
number (the "New Exercise Price"), or (ii) assumed by JCPenney (pursuant to
the existing Fay's option plans) and become exercisable for the same number of
whole shares of JCPenney Common Stock which would have been received if such
options had been exercised immediately prior to the Effective Time and the
Fay's Common Stock received in connection therewith was exchanged for JCPenney
Common Stock pursuant to the terms of the Merger, with an exercise price equal
to the New Exercise Price. See "--Certain Terms of the Merger Agreement--
Treatment of Fay's Options."
Certain Benefit Plans
All executive officers of Fay's are eligible to participate in certain of
its pension benefit plans, employee benefit plans, severance programs and
bonus plans. Pursuant to the Merger Agreement, JCPenney has agreed to honor,
in accordance with their terms, certain of the Fay's Benefit Plans (as
hereinafter defined), as in effect immediately prior to the date of the Merger
Agreement, for at least 12 months after the Effective Time; subject, with
certain limited exceptions, to substitution of a JCPenney Benefit Plan (as
hereinafter defined) if JCPenney in good faith determines, in its sole
discretion, that the JCPenney Benefit Plan, when aggregated with other plans
under which the Employees (as hereinafter defined) are eligible, provides
substantially similar benefits determined at the time of the substitution to
those that the Employees had immediately prior to the Effective Time.
Additionally, JCPenney has agreed that it will, and will cause Fay's to,
from and after the Effective Time, perform Fay's obligations under certain
Bonus Plans (as hereinafter defined) in respect of the current fiscal year.
Notwithstanding the terms of the Bonus Plans, JCPenney will make payments to
all Employees who were employed immediately prior to the Effective Time, in an
amount equal to the product of: (i) such Employee's entitlement under the
Bonus Plans as if all targets are met at 100% multiplied by (ii) a percentage
equal to (a) the number of days such Employee was employed by Fay's (including
days employed by the corporation surviving the Merger) during the fiscal year
ending February 1, 1997, divided by (b) 366. Such payments to terminated
Employees will be made at such time that such payment would have been made if
such Employee's employment had not been so terminated. Notwithstanding the
foregoing, no benefits will be paid to Employees who are terminated for
Summary Dismissal (as defined in the Fay's severance policies referenced under
"--Certain Terms of the Merger Agreement--Employee Matters and Benefit
Plans").
Non-employee directors of Fay's are currently eligible to participate in a
retirement plan sponsored by Fay's. JCPenney has agreed that each non-employee
director of Fay's immediately preceding the Effective Time will be entitled to
receive the retirement benefits he would have received had he retired
immediately prior to the Effective Time and had met all requirements for full
retirement benefits under the plan equal to the director's current annual
retainer. Such benefits will be paid to the director upon his attainment of
age 65 or, at JCPenney's discretion, in a lump sum actuarially equivalent
payment within six months after the Effective Time. See "--Certain Terms of
the Merger Agreement--Employee Matters and Benefit Plans."
Indemnification and Insurance
From and after the Effective Time, JCPenney and Fay's, as the Surviving
Corporation, will indemnify, defend and hold harmless each officer, director
and employee of Fay's or any of its Subsidiaries, to the fullest extent
permitted under applicable law, against any loss arising from a claim based in
whole or in part out of the fact that such person is or was an officer,
director or employee of Fay's, or a fiduciary under any of Fay's employee
benefit plans or pension plans, including actions arising out of or in
connection with the Merger.
29
<PAGE>
Additionally, JCPenney has agreed to cause the provisions regarding
exculpation of director, officer and employee liability and indemnification
contained in the certificate of incorporation of the Surviving Corporation to
be substantively the same as such provisions contained in the Fay's Charter
immediately prior to the Effective Time.
For a period of six years from and after the Effective Time, JCPenney will
maintain in effect the policies of directors' and officers' liability
insurance carried by Fay's and its Subsidiaries, or substitute policies of at
least the same coverage and amounts, with respect to matters arising before
the Effective Time, subject to the limitation that JCPenney will not be
required to pay an annual premium for such insurance in excess of (i) 250% of
the last annual premium paid by Fay's prior to the execution date of the
Merger Agreement, for each of the first three annual premiums, and (ii) 200%
of the last annual premium paid by Fay's prior to the execution date of the
Merger Agreement, thereafter; provided, however, that in the event such
maximum amounts are applicable, JCPenney will purchase as much coverage as
possible for such amount. See "--Certain Terms of the Merger Agreement--
Indemnification and Insurance."
CERTAIN TERMS OF THE MERGER AGREEMENT
THE DESCRIPTION OF THE TERMS OF THE MERGER AGREEMENT CONTAINED IN THIS PROXY
STATEMENT/PROSPECTUS DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE MERGER AGREEMENT ATTACHED TO
THIS PROXY STATEMENT/PROSPECTUS AS APPENDIX I AND INCORPORATED HEREIN BY
REFERENCE. CAPITALIZED TERMS USED HEREIN WITHOUT DEFINITION ARE, UNLESS
OTHERWISE INDICATED, DEFINED IN THE MERGER AGREEMENT AND USED HEREIN WITH SUCH
MEANINGS.
Effective Time of the Merger
The Merger Agreement provides that, if the Merger Agreement is approved and
adopted at the Special Meeting and all other conditions to the Merger have
been satisfied or waived, the closing of the Merger (the "Closing") will occur
no later than two business days following the satisfaction or waiver of the
last of the conditions to the Merger. As soon as practicable on or after the
Closing, the parties will file a Certificate of Merger with the Department of
State of the State of New York, in such form as required by, and executed in
accordance with the relevant provisions of, the NYBCL.
Consideration to be Paid in the Merger and Conversion of Shares
At the Effective Time: (i) Merger Sub will merge with and into Fay's, the
separate existence of Merger Sub shall cease, and Fay's will continue as the
surviving corporation in the Merger, (ii) the certificate of incorporation and
by-laws of Merger Sub will become the certificate of incorporation and by-laws
of the surviving corporation, and (iii) each share of Fay's Common Stock
issued and outstanding immediately prior to the Effective Time will be
converted into a fractional share of JCPenney Common Stock, together with
associated Rights under the JCPenney Rights Agreement, equal to the number of
Conversion Shares obtained by dividing (a) $12.75 by (b) the average per share
Daily Price of JCPenney Common Stock during the Measurement Period; provided,
however, in no event will the Conversion Shares be less than .2253397 of a
share of JCPenney Common Stock or more than .2754151 of a share of JCPenney
Common Stock. Holders of Fay's Common Stock who do not vote in favor of the
Merger and properly dissent in compliance with the applicable provisions of
the NYBCL will be entitled, as an alternative to receiving shares of JCPenney
Common Stock in the Merger, to a judicial determination of the fair value in
cash of their shares of Fay's Common Stock as of the date prior to the Special
Meeting and other rights and benefits provided thereunder.
No fractional shares of JCPenney Common Stock will be issued in the Merger.
Each shareholder of Fay's entitled to a fractional share of JCPenney Common
Stock will receive an amount in cash equal to such fraction multiplied by the
Daily Price of JCPenney Common Stock on the date that the Effective Time
occurs. No interest will be paid on such cash amounts and all shares of Fay's
Common Stock held by a single record holder will be aggregated for purposes of
computing the amount of any such payment.
30
<PAGE>
As soon as practicable following the Effective Time, the Exchange Agent will
mail to each person who was a record holder of Fay's Common Stock immediately
prior to the Effective Time a letter of transmittal and other information
advising such holder of the consummation of the Merger and for use in
exchanging Fay's Common Stock certificates for JCPenney Common Stock
certificates and cash in lieu of fractional shares of JCPenney Common Stock.
Letters of transmittal will also be available following the Effective Time at
the offices of JCPenney in Plano, Texas. After the Effective Time, there will
be no further registration of transfers on the stock transfer books of Fay's
of shares of Fay's Common Stock that were outstanding prior to the Effective
Time (except as permitted under the provisions of the NYBCL governing
appraisal rights). SHARE CERTIFICATES SHOULD NOT BE SURRENDERED FOR EXCHANGE
BY SHAREHOLDERS OF FAY'S PRIOR TO THE RECEIPT OF A LETTER OF TRANSMITTAL.
Until so surrendered and exchanged, and subject to appraisal rights (see "--
Appraisal Rights of Dissenting Shareholders), after the Effective Time each
certificate previously evidencing Fay's Common Stock will represent solely the
right to receive JCPenney Common Stock and cash in lieu of fractional shares
of JCPenney Common Stock. Unless and until a certificate representing shares
of Fay's Common Stock is surrendered and exchanged, no dividends or other
distributions declared or payable to the holders of record of JCPenney Common
Stock as of any time on or after the Effective Time will be paid to the holder
of an unsurrendered certificate with respect to the right to receive shares of
JCPenney Common Stock represented thereby, provided, however, that, subject to
applicable laws and upon surrender and exchange of any such certificate, there
shall be paid to the record holder of the JCPenney Common Stock certificate
issued and exchanged therefor (i) at the time of such surrender, the amount,
without interest thereon, of dividends and other distributions, if any, with a
record date on or after the Effective Time theretofore paid with respect to
the number of whole shares of JCPenney Common Stock issued upon such surrender
and exchange and (ii) at the appropriate payment date, the amount of dividends
or other distributions, if any, with a record date on or after the Effective
Time but prior to surrender and a payment date occurring after surrender,
payable with respect to such whole shares of JCPenney Common Stock.
Representations and Warranties
The Merger Agreement contains various representations and warranties of
Fay's relating to, among other things, (i) its organization and similar
corporate matters; (ii) its capital structure; (iii) authorization, execution,
delivery, performance and enforceability of the Merger Agreement and related
matters, and the absence of conflicts, violations and defaults under the Fay's
Charter and the Fay's By-Laws and certain other agreements and documents; (iv)
the documents and reports filed by Fay's with the Commission and the accuracy
of the information contained therein; (v) the absence of material changes or
events; (vi) litigation; (vii) compliance with laws; (viii) director, officer
and employee agreements and benefits; (ix) certain business practices; (x)
certain environmental matters; (xi) certain tax matters; (xii) title to assets
and leasehold interests; (xiii) take-over defense mechanisms; (xiv) insurance
coverage; (xv) undisclosed liabilities; (xvi) material contracts; and (xvii)
the Merger as a tax-free reorganization.
The Merger Agreement contains various representations and warranties of
JCPenney relating to, among other things, (i) its organization and similar
corporate matters; (ii) its capital structure; (iii) authorization, execution,
delivery, performance and enforceability of the Merger Agreement and related
matters, and the absence of conflicts, violations and defaults under the
JCPenney Charter and the JCPenney Bylaws and certain other agreements and
documents; (iv) the documents and reports filed by JCPenney with the
Commission and the accuracy of the information contained therein; (v) the
absence of certain material changes and events; (vi) litigation; (vii)
undisclosed liabilities and (viii) the Merger as a tax-free reorganization.
The representations and warranties of Fay's, JCPenney and Merger Sub all
expire at the Effective Time.
Certain Covenants; Conduct of Business Prior to the Merger
Fay's has agreed that, prior to the Effective Time, except as expressly
contemplated or permitted by the Merger Agreement or consented to in writing
by JCPenney, it will, and will cause its Subsidiaries to, carry on its
business in the usual, regular and ordinary course in substantially the same
manner as conducted prior to the
31
<PAGE>
date of the Merger Agreement and will use all reasonable efforts to preserve
intact its business organizations, keep available the services of its current
officers and employees, and endeavor to preserve its relationships with
customers, suppliers and others having business dealings with it to the end
that its goodwill and ongoing business will not be impaired in any material
respect at the Effective Time.
Except as expressly contemplated or permitted by the Merger Agreement or
consented to in writing by JCPenney, Fay's has agreed that it will not, and it
will cause its Subsidiaries not to, prior to the Effective Time: (i) declare
or pay any dividends on or make other distributions in respect of any of its
capital stock or partnership interests, except for certain intracompany
dividends and, subject to certain timing constraints discussed elsewhere in
this Proxy Statement/Prospectus, Fay's regular third quarter dividend; (ii)
split, combine or reclassify any of its capital stock or issue or authorize or
propose the issuance of any other securities in respect of, in lieu of or in
substitution for shares of Fay's Common Stock; (iii) repurchase, redeem or
otherwise acquire any shares of Fay's capital stock, except as required by the
terms of its securities outstanding on the date hereof or as contemplated by
any existing employee benefit plan; (iv) issue, deliver or sell, or authorize
or propose to issue, deliver or sell, any shares of its capital stock of any
class, any Voting Debt or any securities convertible into, or any rights,
warrants or options to acquire, any such shares, Voting Debt or convertible
securities, other than (a) the issuance of Fay's Common Stock upon the
exercise of stock options granted, or purchase rights provided for, under
Fay's 1982 Stock Option Plan, Stock Option Plan for Non-Employee Directors or
1971 Employees' Stock Purchase Plan, in each case, that are outstanding on the
date of the Merger Agreement, or in satisfaction of stock grants, stock
purchase rights or stock based awards made prior to the date of the Merger
Agreement pursuant to such plans or upon conversion of the Fay's 10%
convertible notes due January 15, 1998 (the "Fay's Convertible Notes"),
(b) issuances by a wholly owned subsidiary of its capital stock to its parent,
(c) the issuance of up to 20,000 shares of Fay's Common Stock under the Fay's
Service Award Program, and (d) the issuance of preferred stock of Fay's under
the Rights Agreement, dated as of August 17, 1995 (the "Fay's Rights
Agreement"), between Fay's and American Stock Transfer and Trust Company, as
Rights Agent, in accordance with its terms; (v) except as contemplated by the
Merger Agreement or in connection therewith, amend or propose to amend the
Fay's Charter or the Fay's By-Laws; (vi) acquire or agree to acquire by
merging or consolidating with, or by purchasing an equity interest in or
assets of, or by any other manner, any business or any corporation,
partnership, association or other business organization or division thereof;
(vii) other than (a) dispositions or proposed dispositions contemplated by the
Merger Agreement, (b) as may be necessary or required by law to consummate the
transactions contemplated by the Merger Agreement, (c) dispositions in the
ordinary course of business consistent with past practice that are not
material, individually or in the aggregate, to Fay's and its Subsidiaries
taken as a whole, or (d) the sale of inventory in the ordinary course of
business consistent with past practices, sell, lease, encumber or otherwise
dispose of, or agree to sell, lease (whether such lease is an operating or
capital lease), encumber or otherwise dispose of, any of its assets; (viii)
authorize, recommend, propose or announce an intention to adopt a plan of
complete or partial liquidation or dissolution of Fay's or any of its
Subsidiaries; (ix) (a) unless required by law, grant any increases in the
compensation of any directors, officers or employees, except increases in the
ordinary course of business and in accordance with past practice for persons
other than directors and executive officers, (b) unless required by law, pay
or agree to pay any pension, retirement allowance or other employee benefit
not required or contemplated by any of the existing Company Employee Benefit
Plans or Company Pension Plans (as such terms are defined in the Merger
Agreement) as in effect on the date of the Merger Agreement to any such
director, officer or employee, whether past or present, (c) enter into any
new, or amend any existing, employment or severance or termination agreement
with any such director, officer or key employee, or (d) become obligated under
any new employee benefit plan or pension plan, which was not in existence or
approved by the Board of Directors of Fay's prior to or on the date of the
Merger Agreement, or amend any such plan or arrangement in existence on the
date of the Merger Agreement if such amendment would have the effect of
materially enhancing any benefits thereunder; (x) (a) incur any indebtedness
for borrowed money (except for working capital under Fay's existing credit
facilities, and refinancings of existing debt that permit prepayment of such
debt without penalty (other than LIBOR breakage costs)) or guarantee any such
indebtedness or issue or sell any debt securities or warrants or rights to
acquire any debt securities of such party or any of its Subsidiaries or
guarantee any debt securities of others, (b) enter into any lease (whether
such lease is an operating or capital lease) or create any mortgages, liens,
security interests or other encumbrances on
32
<PAGE>
any property in connection with any indebtedness thereof, except for those
securing purchase money indebtedness, (c) commit to capital expenditures other
than aggregate capital expenditures set forth in Fay's capital budget for the
fiscal year ending February 1, 1997, as delivered to JCPenney, which, when
aggregated with all other capital expenditures for the fiscal year ending
February 1, 1997, do not exceed $19,300,000, (d) enter into or terminate any
Company Agreement (as defined in the Merger Agreement), (e) amend, renew or
extend any agreement that involves the payment or receipt of money in excess
of $500,000 in a 12 month period (other than any Company Agreement, excluding
leases, entered into in the ordinary course of business consistent with past
practice), or (f) implement any accounting policy changes; and (xi) take or
cause to be taken, nor to the extent within Fay's control, permit any Fay's
shareholder owning 5% or more of the Fay's Common Stock to take or cause to be
taken, any action, which would prevent the Merger from qualifying as a
reorganization pursuant to Section 368(a) of the Code.
Payment of Third Quarter Dividend
Pursuant to the Merger Agreement, if the record date for JCPenney's regular
fiscal 1996 third quarter dividend is fixed or is to be fixed as of a date on
or before the last business day prior to the Effective Time, Fay's may declare
and pay its regular third quarter dividend of $.05 per share of Fay's Common
Stock prior to the Effective Time. Also under the Merger Agreement, JCPenney
is required to give Fay's written notice of any intended dividend record date
prior to the Effective Time, as soon as reasonably practicable, but in any
event at least 15 days prior to the Effective Time. JCPenney currently
anticipates that the record date for the regular third quarter dividend on
JCPenney Common Stock will be fixed as of a date prior to the Effective Time.
Fay's currently anticipates that the holders of Fay's Common Stock will
receive a regular third quarter dividend of $.05 per share of Fay's Common
Stock from Fay's, and will not receive a regular third quarter dividend from
JCPenney.
No Solicitation
The Merger Agreement provides that Fay's will not, and will not authorize or
permit any of its officers, directors, employees, agents and other
representatives or those of any of its Subsidiaries (collectively, "Fay's
Representatives") to, directly or indirectly, solicit or initiate any
prospective buyer or the making of any proposal that constitutes, or may
reasonably be expected to lead to, an Acquisition Proposal (as defined below)
from any person; provided, however, that if Fay's immediately notifies
JCPenney of the existence of such negotiations and the status, terms and
conditions thereof, then (i) the Board of Directors of Fay's may authorize
Fay's to engage in discussions or negotiations with a third party who (without
any solicitation or initiation, directly or indirectly, by or with Fay's or
any Fay's Representatives after the date of the Merger Agreement) seeks to
initiate such discussions or negotiations and may furnish such third party
with information concerning Fay's and its business, properties and assets;
provided the disclosure of such information is consistent with the fiduciary
obligations of the Board of Directors of Fay's, (ii) the Board of Directors of
Fay's may take and disclose to Fay's shareholders a position contemplated by
Rule 14e-2(a) promulgated under the Exchange Act and (iii) following receipt
of an Acquisition Proposal that is financially superior to the Merger (as
determined in each case in good faith by the Board of Directors of Fay's after
consultation with Fay's financial advisors), the Board of Directors of Fay's
may withdraw, modify or not make its recommendation to the Fay's shareholders
to approve and adopt the Merger Agreement or it may terminate the Merger
Agreement. Fay's may take the actions referred to in the foregoing clauses (i)
through (iii) only to the extent that the Board of Directors of Fay's
concludes in good faith that such action is necessary in order for the Board
of Directors of Fay's to act in a manner that is consistent with its fiduciary
obligations under applicable law. Fay's agreed, as of the execution date of
the Merger Agreement, to cease and cause to be terminated any then existing
solicitation, initiation, encouragement, activity, discussion or negotiation
with any parties conducted before the Merger Agreement by Fay's or any of the
Fay's Representatives with respect to any Acquisition Proposal existing as of
such date.
33
<PAGE>
Response to Certain Actions
Fay's, JCPenney and Merger Sub have agreed to cooperate and use their
reasonable efforts to contest and resist any action and make reasonable
attempts to have vacated, lifted, reversed or overturned any decree, judgment,
injunction or order that restricts, prevents or prohibits the consummation of
the Merger or any other transactions contemplated by the Merger Agreement.
Each of Fay's (before the Effective Time), JCPenney and Merger Sub has agreed
to dispose of drug stores in the Commonwealth of Pennsylvania, on commercially
reasonable terms, to the extent required by the U.S. Federal Trade Commission,
the U.S. Department of Justice or the attorney general of the Commonwealth of
Pennsylvania as a condition to the granting of any approvals required in order
to permit the consummation of the Merger; provided, however, that JCPenney
will not be required to take any action that would result in the disposition
or closure of drug stores which had aggregate revenues in excess of $25.0
million for the fiscal year ended January 27, 1996 (the "Divestiture
Threshold"). In each instance that JCPenney may be required to take action
resulting in the disposition or closure of alternative stores to be selected
by JCPenney, those stores satisfying the requirement that have the lowest
revenues will be used for purposes of calculating the Divestiture Threshold.
Employee Matters and Benefit Plans
Participation in JCPenney Benefit Plans. Pursuant to the Merger Agreement,
JCPenney has agreed to honor, in accordance with their terms, the Fay's
pension benefit plans and certain employee benefit plans previously disclosed
to JCPenney (collectively, the "Fay's Benefit Plans"), as in effect
immediately prior to the date of the Merger Agreement, for at least 12 months
after the Effective Time; provided, however, that, with certain limited
exceptions, any plan maintained by JCPenney or any of its Subsidiaries (a
"JCPenney Benefit Plan") may be substituted by JCPenney for any of the Fay's
Benefit Plans if JCPenney in good faith determines, in its sole discretion,
that the JCPenney Benefit Plan, when aggregated with other plans under which
Employees (as hereinafter defined) are eligible, provides substantially
similar benefits, determined at the time of the substitution, to those that
the Employees had immediately prior to the Effective Time. Notwithstanding the
foregoing, nothing in the Merger Agreement precludes JCPenney from making any
amendments to or terminating any Fay's Benefit Plan to the extent required by
law (provided that JCPenney uses its reasonable efforts to minimize the
reduction of benefits needed to comply with applicable law), and JCPenney will
have the right, at any time after the 12 month period described above, to make
any amendments to or terminate any Fay's Benefit Plan as JCPenney deems
appropriate.
With respect to each JCPenney Benefit Plan for which an Employee becomes
eligible, JCPenney and its Subsidiaries will grant such Employee credit, for
purposes of eligibility and vesting only, for all past service credited for
such purposes by Fay's under similar plans, other than new JCPenney Benefit
Plans which cover a substantial number of JCPenney's employees or employees of
one or more of JCPenney's Subsidiaries (in addition to Employees), including
without limitation Thrift Drug, which do not grant past service credit to
JCPenney's or such Subsidiaries' employees generally. Notwithstanding the
foregoing, for any vacation plan, service will be calculated and credited in
accordance with the Fay's standard vacation plan.
Any pre-existing condition exclusion under any JCPenney Benefit Plan
providing medical benefits (other than dental benefits) will be waived for any
Employee who, immediately prior to commencing participation in such JCPenney
Benefit Plan, was participating in a Fay's Benefit Plan providing medical
benefits (other than dental benefits) and had satisfied any pre-existing
condition provision under such Fay's Benefit Plan. Any pre-existing condition
exclusion under any JCPenney Benefit Plan providing dental benefits shall be
waived for any Employee of Fay's who, immediately prior to commencing
participation in such JCPenney Benefit Plan, was participating in a Fay's
Benefit Plan providing dental benefits and had satisfied any pre-existing
condition provision under such Fay's Benefit Plan. Any expenses that were
taken into account under a Fay's Benefit Plan providing medical or dental
benefits in which the Employee participated immediately prior to commencing
participation in a JCPenney Benefit Plan providing medical or dental benefits
will be taken into account to the same extent under such JCPenney Benefit
Plan, in accordance with the terms of such JCPenney Benefit Plan, for
34
<PAGE>
purposes of satisfying applicable deductible, coinsurance and maximum out-of-
pocket provisions and life-time benefit limits.
As used herein and in the Merger Agreement, the term "Employees" means all
employees of Fay's and its Subsidiaries (including those on disability or
leave of absence, paid or unpaid) immediately prior to the Effective Time.
Employment of Fay's Employees. JCPenney has agreed to cause Fay's at the
Effective Time to continue to employ all Employees (other than Messrs. Henry
Panasci, Jr., David Panasci, Poole and Wolfson, which executive officers of
Fay's will be terminated without cause immediately after the Effective Time
for purposes of their respective Employment Agreements) who are employed
immediately prior to the Effective Time at substantially comparable levels of
cash compensation, but JCPenney will not be obligated to cause Fay's to
continue to employ any such individuals for any specified period of time after
the Effective Time.
Employment Agreements. JCPenney has agreed to be, and to cause Fay's to
continue to be, bound by and honor the Employment Agreements between Fay's and
certain of its executive officers. Fay's has agreed not to exercise its
authority under such agreements to set up an irrevocable trust, establish an
irrevocable letter of credit, or otherwise establish an irrevocable funding
commitment with respect to such Employment Agreements. JCPenney has agreed
that Messrs. Henry Panasci, Jr., David Panasci, Poole and Wolfson will be
terminated without cause immediately after the Effective Time for purposes of
their respective Employment Agreements and has acknowledged that the
consummation of the Merger is a Change in Control (as such term is defined in
the Employment Agreements).
Non-Employee Directors Retirement Plan. JCPenney has agreed that each non-
employee director of Fay's immediately preceding the Effective Time will be
entitled to receive the retirement benefits he would have received had he
retired immediately prior to the Effective Time and had met all requirements
for full retirement benefits under the plan equal to the director's current
annual retainer. Such benefits will be paid to the director upon his
attainment of age 65 or, at JCPenney's discretion, in a lump sum actuarially
equivalent payment within six months after the Effective Time.
Severance Programs. JCPenney has agreed that it will, and will cause Fay's
to, for specified periods from and after the Effective Time, honor and be
bound by the Fay's corporate officers' and non-officer employees' severance
programs in effect as of August 5, 1996.
The Fay's Incorporated Corporate Officers' Severance Program (the "Officers'
Severance Program") covers all corporate officers of Fay's, other than
executive officers who are parties to Employment Agreements (the "Covered
Officers"). This program provides that, in the event of (i) the involuntary
termination of a Covered Officer (except where such termination is due to a
Summary Dismissal, defined in the program as the violation of certain
specified policies by the Covered Officer) within 18 months following the
Effective Time or (ii) the voluntary termination of a Covered Officer for Good
Reason (as hereinafter defined) within 18 months after the Effective Time
(provided that the Covered Officer first gives four weeks written notice),
such Covered Officer will be eligible, for 78 weeks following the termination
of the Covered Officer's employment, to receive salary continuation benefits
(equal to the Covered Officer's weekly base salary in effect immediately prior
to the Effective Time and in addition to any accrued vacation time) and to be
covered under certain specified health and welfare benefit programs of Fay's.
"Good Reason" is defined in the Officers' Severance Program to mean (i) the
relocation of the situs of the Covered Officer's job more than 30 miles
further from the Covered Officer's residence immediately prior to the
Effective Time than the Covered Officer's job site immediately prior to the
Effective Time, provided that the Covered Officer determines, in his sole
discretion, not to relocate to such new job site, or (ii) a reduction in the
Covered Officer's base salary in effect immediately prior to the Effective
Time. In addition, a Covered Officer also has the right to voluntarily
terminate for Good Reason any time after three months, but within 18 months,
following the Effective Time, in the event of a material change in the job
description or responsibilities of the
35
<PAGE>
Covered Officer (excluding changes in title or from corporate to
divisional/subsidiary responsibilities) following the Effective Time.
The Fay's Incorporated Non-Officer Employees' Severance Program (the
"Employees' Severance Program") covers all non-officer employees of Fay's.
This program provides that, in the event of (i) the involuntary termination of
certain specified employees (each, a "Specified Employee") (except where such
termination is due to a Summary Dismissal, defined in the program as the
violation of certain specified policies by the Specified Employee) within 12
months following the Effective Time or (ii) the voluntary termination by a
Specified Employee for Good Reason (as hereinafter defined) within 12 months
after the Effective Time (provided that the Specified Employee first gives
four weeks written notice), such Specified Employee will be eligible, for a
number of weeks (as specified for each Specified Employee) following the
termination of the Specified Employee's employment, to receive salary
continuation benefits (equal to the Specified Employee's weekly base salary in
effect immediately prior to the Effective Time and in addition to any accrued
vacation time) and to be covered under certain specified health and welfare
benefit programs of Fay's. Salary continuation and severance benefits for non-
officer employees who are not Specified Employees are governed by the terms of
the Employees' Severance Program, except that such benefits are effective for
a period of one week for each year of such Employee's service as a full-time
employee of Fay's.
"Good Reason" is defined in the Employees' Severance Program to mean (i) the
relocation of the situs of the Employee's job more than 30 miles further from
the Employee's residence immediately prior to the Effective Time than the
Employee's job site immediately prior to the Effective Time, provided that the
Employee determines, in his sole discretion, not to relocate to such new job
site, or (ii) a reduction in the Employee's base salary in effect immediately
prior to the Effective Time.
Bonus Plans. JCPenney has agreed that it will, and will cause Fay's to, from
and after the Effective Time, perform Fay's obligations under the Management
Incentive Plan and the Key Management Incentive Plan of Fay's and its
Subsidiaries in effect for the fiscal year ending February 1, 1997 (the "Bonus
Plans"). Notwithstanding the terms of the Bonus Plans, JCPenney will make
payments to all Employees who were employed immediately prior to the Effective
Time, in an amount equal to the product of: (i) such Employee's entitlement
under the Bonus Plans as if all targets are met at 100% multiplied by (ii) a
percentage equal to (a) the number of days such Employee was employed by Fay's
(including days employed by the corporation surviving the Merger) during the
fiscal year ending February 1, 1997, divided by (b) 366. Such payments to
terminated Employees will be made at such time that such payment would have
been made if such Employee's employment had not been so terminated.
Notwithstanding the foregoing, no benefits will be paid to Employees who are
terminated for Summary Dismissal (as defined in the Fay's severance policies
referenced above, which definition is the same for both policies).
Stock Purchase Plan. Concurrently with the execution of the Merger
Agreement, Fay's amended the 1971 Fay's Incorporated Employees' Stock Purchase
Plan to provide that (a) no Fay's employee not already participating in such
plan will be eligible to enter such plan; (b) no employee currently
participating in such plan will be able to increase his payroll deduction
under such plan; and (c) all account balances of such plan will be used to
purchase shares of Fay's Common Stock at a date determined by the committee
administering the plan.
Treatment of Fay's Options
Stock Options Issued to Non-Employee Directors. At the Effective Time,
outstanding non-employee director stock options to purchase shares of Fay's
Common Stock ("Directors Stock Options") granted under the Fay's Incorporated
Stock Option Plan for Non-Employee Directors prior to the date of the Merger
Agreement, and exercisable (but not exercised) will, upon their surrender to
Fay's by the holders thereof, be canceled by Fay's, and the holders thereof
will receive a cash payment from Fay's in an amount (if any) equal to the
number of shares of JCPenney Common Stock which the holder of the option would
have received if such holder had exercised the option immediately prior to the
Effective Time (assuming the issuance of fractional shares of JCPenney Common
Stock) multiplied by the difference between (i) the average of the per share
Daily Price of JCPenney Common Stock during the Measurement Period and (ii)
the New Exercise Price; provided, however, that with respect to both (i)
options not yet exercisable and (ii) options for which such payment cannot
36
<PAGE>
be made at the Effective Time because of the requirements of Section 16(b) of
the Exchange Act, JCPenney will cause such options to be assumed by JCPenney
(pursuant to the existing Fay's option plan) and become exercisable for the
same number of whole shares of JCPenney Common Stock which would have been
received if such Directors Stock Options had been exercised immediately prior
to the Effective Time and the Fay's Common Stock received in connection
therewith was exchanged for JCPenney Common Stock pursuant to the terms of the
Merger, with an exercise price equal to the New Exercise Price. JCPenney has
agreed to provide continuing optionees with documentation regarding such
assumed options.
Stock Options Issued to Employees. At the Effective Time, Fay's will offer a
cash payment to all holders of outstanding options ("Employee Stock Options")
to purchase Fay's Common Stock granted prior to the execution of the Merger
Agreement under the Fay's Incorporated 1982 Stock Option Plan. Upon the
surrender to Fay's by holders thereof, such Employee Stock Options will be
canceled by Fay's and the holders thereof will receive a cash payment from
Fay's in an amount equal to the number of shares of JCPenney Common Stock
which the holder of the option would have received if such holder had
exercised the option immediately prior to the Effective Time (assuming the
issuance of fractional shares of JCPenney Common Stock) multiplied by the
difference between (i) the average of the per share Daily Price during the
Measurement Period and (ii) the New Exercise Price. Employee Stock Options not
surrendered by their holders will be assumed by JCPenney (pursuant to the
existing Fay's option plan) and become exercisable for the same number of
whole shares of JCPenney Common Stock which would have been received if such
Employee Stock Options had been exercised immediately prior to the Effective
Time and the Fay's Common Stock received in connection therewith was exchanged
for JCPenney Common Stock pursuant to the terms of the Merger, with an
exercise price equal to the New Exercise Price. JCPenney has agreed to provide
continuing optionees with documentation regarding such assumed options.
Certain Additional Covenants
Pursuant to the Merger Agreement, JCPenney has agreed to use all reasonable
efforts to cause the shares of JCPenney Common Stock to be issued in the
Merger, and the shares of JCPenney Common Stock to be reserved for issuance
upon conversion of the Fay's Convertible Notes, to be approved for listing on
the NYSE, subject to official notice of issuance, prior to the Effective Time.
Fay's has agreed to use all reasonable efforts to cause the conversion of the
Fay's Convertible Notes on or prior to the Effective Time. Additionally, each
of Fay's, JCPenney and Merger Sub has agreed to take all reasonable actions
necessary to (i) comply promptly with all legal requirements that may be
imposed on such party with respect to the Merger and to promptly cooperate
with and furnish information to each other in connection with any such
requirements imposed upon any of them or any of their Subsidiaries in
connection with the Merger and (ii) obtain and cooperate with each other in
obtaining any consent, acquiescence, authorization, order or approval of, or
any exemption or nonopposition by, any governmental entity or court required
in connection with the Merger or the taking of any reasonable action
contemplated thereby or by the Merger Agreement.
Certain Post-Merger Matters
Once the Merger is consummated, Fay's, as the surviving corporation of the
Merger, will possess all of the assets, rights and obligations of Merger Sub
and Fay's.
Pursuant to the Merger Agreement, Merger Sub's certificate of incorporation
and by-laws, as in effect immediately prior to the Effective Time, will be the
certificate of incorporation and by-laws of the surviving corporation of the
Merger. The officers and directors of Merger Sub at the Effective Time shall
be the initial officers and directors of the surviving corporation of the
Merger.
Conditions to the Merger
The respective obligations of JCPenney and Fay's to consummate the Merger
are subject to the satisfaction or waiver of certain conditions, including,
among others, the following: (i) approval and adoption of the
37
<PAGE>
Merger Agreement by the holders of at least two-thirds of the outstanding
shares of Fay's Common Stock entitled to vote thereon; (ii) the approval for
listing on the NYSE of the JCPenney Common Stock to be issued in connection
with the Merger; (iii) the expiration or termination of the applicable waiting
periods under the HSR Act and the receipt of any other required governmental
consents; (iv) the absence of any stop order or proceeding seeking a stop
order with respect to the Registration Statement; (v) the absence of any
injunction or other order issued by any court of competent jurisdiction
preventing consummation of the Merger; and (vi) the receipt by Fay's of a
letter from counsel to either JCPenney or Fay's opining to certain tax matters
relating to the Merger being treated as a tax free reorganization for federal
income tax purposes.
The obligations of JCPenney and Merger Sub to consummate the Merger are
subject to the following additional conditions: (i) the material accuracy of
each of the representations and warranties of Fay's contained in the Merger
Agreement as of the date of the Closing unless such inaccuracy could not
reasonably be expected to have a Material Adverse Effect on Fay's; (ii) the
material performance by Fay's of each of its obligations under the Merger
Agreement; (iii) JCPenney's receipt of an agreement from each affiliate of
Fay's limiting such affiliate's right to sell the shares of JCPenney Common
Stock received in the Merger in accordance with Rule 145 promulgated under the
Securities Act; (iv) the demand by holders of not more than 10% of the
outstanding shares of Fay's Common Stock of appraisal for their shares under
the NYBCL; (v) JCPenney's receipt of a letter from Fay's counsel opining to
certain matters; (vi) JCPenney's receipt of any consents to the Merger under
Fay's contracts, except where the failure to obtain the same could not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect on Fay's or JCPenney or the consummation of the transactions
contemplated by the Merger Agreement; (vii) the absence of any Material
Adverse Change with respect to Fay's; and (viii) the termination of the
Company Stock Purchase Plan, the Company Dividend Reinvestment and Stock
Purchase Plan and the Company Service Award Program (as each such term is
defined in the Merger Agreement) to the extent such plans award any shares of
Fay's Common Stock.
The obligation of Fay's to consummate the Merger is subject to the following
additional conditions: (i) the material accuracy of each of the
representations and warranties of JCPenney and Merger Sub contained in the
Merger Agreement as of the date of the Closing unless such inaccuracy could
not reasonably be expected to have a Material Adverse Effect on JCPenney; (ii)
the material performance by JCPenney and Merger Sub of each of their
obligations under the Merger Agreement; (iii) the receipt by Fay's of letters
from JCPenney's counsel opining to certain matters; and (iv) the absence of
any Material Adverse Change with respect to JCPenney.
While JCPenney and Fay's anticipate that all of the conditions to the
consummation of the Merger will be satisfied at the time of the Special
Meeting, there can be no assurance that all of these conditions will be so
satisfied. Either JCPenney or Fay's may extend the time for performance of any
of the obligations of the other party or may, subject to applicable law, waive
compliance with those obligations at its discretion. The Effective Time will
occur no later than the second business day after satisfaction (or waiver in
accordance with the Merger Agreement) of the latest to occur of such
conditions.
Termination of the Merger Agreement
By Mutual Consent of Either Party. The Merger Agreement may be terminated
prior to the Effective Time by (i) mutual written consent of JCPenney and
Fay's or by mutual action of their respective Boards of Directors, or (ii)
either party if (a) the Merger has not been consummated on or before December
31, 1996 (provided that the terminating party shall not have failed to fulfill
any obligation under the Merger Agreement that resulted in the failure of the
Merger before such date); (b) any court or governmental final order, decree,
ruling or action shall have prohibited consummation of the Merger; (c) the
required approval of Fay's shareholders is not received at the Special
Meeting; or (d) the Board of Directors of Fay's shall have approved or
recommended any Acquisition Proposal which is financially superior to the
Merger (as determined in good faith by the Board of Directors of Fay's after
consultation with Fay's financial advisors), and the Board of Directors of
Fay's is advised by its outside counsel that the fiduciary duties of the Board
of Directors require acceptance or recommendation of such Acquisition
Proposal.
By JCPenney. JCPenney may terminate the Merger Agreement if (i) Fay's fails
to comply in any material respect with any covenant or agreement contained in
the Merger Agreement, if such failure or breach is not cured
38
<PAGE>
within 30 days following notice; (ii) any of the representations or warranties
of Fay's contained in the Merger Agreement is not true in all material
respects when made or on and as of the Effective Time as if made on and as of
the Effective Time, except where the failure to be so true and correct
(without giving effect to the individual materiality thresholds otherwise
contained in such representation or warranty) could not reasonably be expected
to have a Material Adverse Effect on Fay's; (iii) the Board of Directors of
Fay's withdraws, modifies or changes in any manner adverse to JCPenney or
Merger Sub its recommendation in favor of the Merger; (iv) after the date of
the Merger Agreement, there has been any Material Adverse Change with respect
to Fay's; or (v) the Conversion Shares (without regard to the proviso in the
Merger Agreement that the Conversion Shares not be less than .2253397 of a
share of JCPenney Common Stock) would be less than .2065614 of a share of
JCPenney Common Stock.
By Fay's. Fay's may terminate the Merger Agreement if (i) JCPenney or Merger
Sub fails to comply in any material respect with any covenant or agreement
contained in the Merger Agreement, if such failure or breach is not cured
within 30 days following notice; (ii) any of the representations or warranties
of JCPenney or Merger Sub contained in the Merger Agreement is not true in all
material respects when made or on and as of the Effective Time as if made on
and as of the Effective Time, except where the failure to be so true and
correct (without giving effect to the individual materiality thresholds
otherwise contained in such representation or warranty) could not reasonably
be expected to have a Material Adverse Effect on JCPenney; (iii) there has
been any Material Adverse Change with respect to JCPenney; or (iv) the
Conversion Shares (without regard to the proviso in the Merger Agreement that
the Conversion Shares not be more than .2754151 of a share of JCPenney Common
Stock) would be more than .3098420 of a share of JCPenney Common Stock.
Fees and Expenses
If the Merger Agreement is terminated because (i) Fay's Board of Directors
approves or recommends any Acquisition Proposal that is financially superior
to the Merger (as determined in good faith by Fay's Board of Directors after
consultation with Fay's financial advisor), and Fay's Board of Directors is
advised by its outside counsel that its fiduciary duties require acceptance or
recommendation of such Acquisition Proposal, or (ii) Fay's Board of Directors
withdraws, modifies or changes its recommendation of the Merger Agreement or
the Merger in a manner adverse to JCPenney or Merger Sub, then (a) Fay's shall
pay JCPenney in same day funds $4,000,000 in lieu of reimbursing JCPenney for
all out-of-pocket expenses and fees actually incurred by JCPenney or its
subsidiaries in connection with the Merger Agreement and the transactions
contemplated thereby, and (b) if an Acquisition Transaction is consummated
within nine months of such termination, Fay's shall, on the day of such
consummation, pay JCPenney in same day funds an additional amount equal to
$8,000,000.
Except as described above, all costs and expenses incurred in connection
with the Merger Agreement and the transactions contemplated thereby will be
paid by the party incurring such expense, except for the filing fee with
respect to the Proxy Statement/Prospectus and the Registration Statement,
which filing fee shall be shared equally by JCPenney and Fay's.
Indemnification and Insurance
From and after the Effective Time, JCPenney and Fay's, as the Surviving
Corporation, will indemnify, defend and hold harmless each officer, director
or employee of Fay's or any of its Subsidiaries, to the fullest extent
permitted under applicable law, against any loss arising from a claim based in
whole or in part on the fact that such person is or was an officer, director
or employee of Fay's, or a fiduciary under any of Fay's employee benefit plans
or pension plans, including actions arising out of or in connection with the
Merger. Additionally, JCPenney has agreed to cause the provisions regarding
exculpation of directors and officers liability and indemnification contained
in the certificate of incorporation of the Surviving Corporation to be
substantively the same as such provisions contained in the Fay's Charter
immediately prior to the Effective Time.
39
<PAGE>
For a period of six years from and after the Effective Time, JCPenney will
maintain in effect the policies of directors' and officers' liability
insurance carried by Fay's and its Subsidiaries, or substitute policies of at
least the same coverage and amounts, with respect to matters arising before
the Effective Time, subject to the limitation that JCPenney will not be
required to pay an annual premium for such insurance in excess of (i) 250% of
the last annual premium paid by Fay's prior to the execution date of the
Merger Agreement, for each of the first three annual premiums, and (ii) 200%
of the last annual premium paid by Fay's prior to the execution date of the
Merger Agreement, thereafter; provided, however, that in the event such
maximum amounts are applicable, JCPenney will purchase as much coverage as
possible for such amount.
Amendment, Extension and Waiver
The Merger Agreement may be amended by JCPenney, Fay's and Merger Sub, by
action taken or authorized by their respective boards of directors, at any
time before or after approval and adoption by the Fay's shareholders, but,
after any such approval and adoption, no amendment may be made which by law
requires further approval by such shareholders unless such further approval is
obtained. The Merger Agreement can only be amended by the written agreement of
all of the parties thereto.
At any time prior to the Effective Time, JCPenney, Fay's and Merger Sub, by
action taken or authorized by their respective boards of directors, may, to
the extent legally allowed, (i) extend the time for the performance of any of
the obligations or other acts of the other parties thereto, (ii) waive any
inaccuracies in the representations and warranties contained in the Merger
Agreement or in any document delivered pursuant thereto, and (iii) waive
compliance with any of the agreements or conditions contained therein. Any
such extension or waiver can only be accomplished by a written instrument
signed on behalf of such party.
CERTAIN TERMS OF THE STOCKHOLDERS AGREEMENT
The following summary of the material terms of the Stockholders Agreement is
not intended to be a complete description of the terms and conditions thereof,
and is qualified in its entirety by reference to the full text thereof which
is incorporated herein by reference. A copy of the Stockholders Agreement has
been filed with the Commission as an exhibit to the Registration Statement of
which this Proxy Statement/Prospectus is a part.
General. As a condition and an inducement to JCPenney entering into the
Merger Agreement, on August 5, 1996, Henry A. Panasci, Jr. and David H.
Panasci (each, a "Stockholder" and, collectively, the "Stockholders") entered
into the Stockholders Agreement. The Stockholders beneficially own in the
aggregate a total of 5,906,793 outstanding shares of Fay's Common Stock
(approximately 27.8% of the total shares outstanding as of the Record Date).
The obligations under the Stockholders Agreement relating to 672,298 of such
shares (approximately 3.2% of the total shares outstanding as of the Record
Date) are subject to any fiduciary obligations under applicable law.
Voting of Fay's Common Stock. The Stockholders Agreement provides that
during the period commencing on the date of the Stockholders Agreement and
continuing until the first to occur of (i) the Effective Time or (ii) the
termination of the Stockholders Agreement in accordance with its terms, at any
meeting (whether annual or special and whether or not an adjourned or
postponed meeting) of holders of Fay's Common Stock, however called, or in
connection with any written consent of the holders of Fay's Common Stock, each
Stockholder will vote (or cause to be voted) all shares of Fay's Common Stock
held of record or Beneficially Owned (as defined in the Stockholders
Agreement) by such Stockholder (i) in favor of the Merger, the execution and
delivery by Fay's of the Merger Agreement and the approval and adoption of the
terms thereof and each of the other actions contemplated by the Merger
Agreement and the Stockholders Agreement and any actions required in
furtherance thereof; (ii) against any action or agreement that would result in
a breach in any respect of any covenant, representation or warranty or any
other obligation or agreement of Fay's under the Merger Agreement or the
Stockholders Agreement; and (iii) except as otherwise agreed to in writing in
advance by JCPenney, against the following actions (other than the Merger and
the transactions contemplated by the Merger Agreement and the Stockholders
Agreement): (a) any extraordinary corporate transaction, such as a merger,
consolidation or other
40
<PAGE>
business combination involving Fay's or any of its Subsidiaries; (b) any sale,
lease or transfer of a material amount of assets of Fay's or any of its
Subsidiaries, or a reorganization, restructuring, recapitalization, special
dividend, dissolution or liquidation of Fay's or any of its Subsidiaries; or
(c) (1) any change in a majority of the persons who constitute the Board of
Directors of Fay's; (2) any change in the present capitalization of Fay's or
any of its Subsidiaries; (3) any amendment of the Fay's Charter or the Fay's
By-Laws; (4) any other change in Fay's corporate structure or business; or (5)
any other action which, in the case of each of the matters referred to in
clauses (c)(1), (2), (3) or (4), is intended, or could reasonably be expected,
to impede, interfere with, delay, postpone, or materially adversely affect the
Merger and the transactions contemplated by the Stockholders Agreement and the
Merger Agreement. The Stockholders Agreement further provides that none of the
Stockholders will enter into any agreement or understanding with any person or
entity the effect of which would be inconsistent with or violative of the
provisions and agreements described in this paragraph.
Stockholder Covenant. The Stockholders Agreement provides that for a period
of (i) 60 days following termination of the Merger Agreement by either
JCPenney or Fay's due to a failure to obtain the requisite vote of the
shareholders of Fay's, provided that such period shall be extended to an
aggregate of six months (including the initial 60 days) if within the initial
60 day period a public announcement is made regarding an Acquisition Proposal,
(ii) six months following termination of the Merger Agreement by either
JCPenney or Fay's due to the Board of Directors of Fay's having approved or
recommended any Acquisition Proposal which is financially superior to the
Merger and the Board of Directors of Fay's is advised by its outside counsel
that the fiduciary duties of the Board of Directors require acceptance or
recommendation of such Acquisition Proposal, and (iii) 60 days following
termination of the Merger Agreement by JCPenney due to the Board of Directors
of Fay's withdrawing, modifying or changing its recommendation of the Merger
Agreement or the Merger in a manner adverse to JCPenney or Merger Sub or
resolving to do any of the foregoing, provided that such period shall be
extended to an aggregate of six months (including the initial 60 days) if
within the initial 60 day period a public announcement is made regarding an
Acquisition Proposal, each Stockholder shall not enter into, execute, or be a
party to any agreement or understanding, written or otherwise, with any Person
(as defined in the Stockholders Agreement) whereby such Stockholder (i) grants
or otherwise gives to such Person an option or right to purchase or acquire
any or all of the shares of Fay's Common Stock held of record or Beneficially
Owned by such Stockholder other than sales made in open market transactions;
(ii) agrees or covenants to vote or to grant a proxy to vote any or all of the
shares of Fay's Common Stock held of record or Beneficially Owned by the
Stockholder, at any meeting (whether annual or special and whether or not an
adjourned or postponed meeting) of the holders of shares of Fay's Common
Stock, however called, or in connection with any written consent of the
holders of shares of Fay's Common Stock; or (iii) agrees or covenants to
tender any or all of the shares of Fay's Common Stock held of record or
Beneficially Owned by such Stockholder into any tender offer or exchange offer
relating to the shares of Fay's Common Stock.
No Solicitation. The Stockholders Agreement provides that each Stockholder
will not, and will cause its affiliates and investment bankers, attorneys,
accountants and other agents and representatives of such Stockholder and such
affiliates (such affiliates, investment bankers, attorneys, accountants,
agents and representatives of any Person are hereinafter collectively referred
to as the "Representatives" of such Person) not to, directly or indirectly (i)
initiate, solicit or encourage, or take any action to facilitate the making
of, any offer or proposal which constitutes or is reasonably likely to lead to
any Acquisition Proposal or any inquiry with respect thereto, or (ii) in the
event of an unsolicited Acquisition Proposal, engage in negotiations or
discussions with, or provide any information or data to, any person (other
than JCPenney, any of its affiliates or representatives) relating to any
Acquisition Proposal. Notwithstanding the restrictions set forth in this
paragraph, any person who is an officer or director of Fay's may exercise his
fiduciary duties in his capacity as a director or officer of Fay's consistent
with the terms of the Merger Agreement.
Restriction on Transfer, Proxies and Non-Interference. The Stockholders
Agreement also provides that, except as applicable in connection with the
transactions contemplated by the Merger Agreement, the Stockholder will not,
directly or indirectly: (i) offer for sale, sell, transfer, tender, pledge,
encumber, assign or otherwise dispose of, or enter into any contract, option
or other arrangement or understanding with respect to or consent to
41
<PAGE>
the offer for sale, transfer, tender, pledge, encumbrance, assignment or other
disposition of, any or all of the shares of Fay's Common Stock held of record
or Beneficially Owned by such Stockholder or any interest therein; (ii) except
as contemplated by the Stockholders Agreement, grant any proxies or powers of
attorney, deposit the shares of Fay's Common Stock into a voting trust or
enter into a voting agreement with respect to the shares of Fay's Common Stock
held of record or Beneficially Owned by such Stockholder; or (iii) take any
action that would make any representation or warranty of the Stockholder
contained in the Stockholders Agreement untrue or incorrect or would result in
a breach by such Stockholder of its obligations under the Stockholders
Agreement or a breach by Fay's of its obligations under the Merger Agreement.
Termination. Except as otherwise provided therein, the covenants and
agreements contained in the Stockholders Agreement will terminate upon the
earlier of (i) the consummation of the Merger and (ii) the termination of the
Merger Agreement in accordance with its terms, except that the covenant and
agreement described above in the paragraph entitled "--Stockholders Covenant"
shall survive for the periods set forth in such paragraph.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
Fay's has received an opinion from Baker & Botts, L.L.P., counsel to
JCPenney, to the effect that, if the Merger is consummated in accordance with
the terms of the Merger Agreement, (i) the Merger will be treated for federal
income tax purposes as a reorganization within the meaning of Sections
368(a)(1)(A) and (2)(E) of the Code and (ii) JCPenney, Merger Sub and Fay's
will each be a party to that reorganization within the meaning of Section
368(b) of the Code. Accordingly, such opinion concludes that (i) no gain or
loss will be recognized by Fay's, Merger Sub or JCPenney as a result of the
Merger, (ii) no gain or loss will be recognized by a Fay's shareholder upon
the receipt of shares of JCPenney Common Stock (together with the
corresponding Rights under the JCPenney Rights Agreement) in the Merger in
exchange for shares of Fay's Common Stock (except for cash received in lieu of
fractional shares or upon exercise of dissenters' rights of appraisal), (iii)
the basis of the shares of JCPenney Common Stock (including any fractional
shares not actually received) to be received by a Fay's shareholder in the
Merger will be the same as the basis of the shares of Fay's Common Stock
surrendered in exchange therefor and (iv) the holding period of the shares of
JCPenney Common Stock to be received by a Fay's shareholder in the Merger will
include the holding period of the shares of Fay's Common Stock exchanged
therefor, provided that such shares of Fay's Common Stock were held as a
capital asset by such shareholder as of the Effective Time.
The opinion further concludes that a Fay's shareholder who receives cash in
lieu of a fractional share of JCPenney Common Stock, or cash resulting from
the exercise of dissenters' rights, in connection with the Merger will
recognize gain or loss for federal income tax purposes. In the case of
fractional shares, such gain or loss will be equal to the difference between
the cash received in lieu of such fraction of a share and the basis of such
fraction of a share. In the case of an exercise of dissenters' rights, such
gain or loss will equal the difference between the cash received and the basis
of the shares of Fay's Common Stock held by such dissenting shareholder for
which such payment is deemed received. Such gain or loss will be capital gain
or loss, provided that the Fay's Common Stock was held as a capital asset. Any
such capital gain or loss will be long-term capital gain or loss if the
shareholder's holding period for such Fay's Common Stock exceeds one year as
of the Effective Time.
The aforesaid opinion was based upon such counsel's review of those
documents and materials that it considered to be relevant, including this
Proxy Statement/Prospectus, the Merger Agreement and the JCPenney Rights
Agreement relating to the Rights. In addition, in rendering such opinion, such
counsel received and relied upon representations of fact contained in
certificates of JCPenney and Fay's (including, in the case of Fay's, a
representation to the effect that a sufficient number of Fay's shareholders do
not intend to dispose of the shares of JCPenney Common Stock to be received as
a result of the Merger so as to satisfy a "continuity of interest"
requirement).
42
<PAGE>
An opinion of counsel is not binding on the Internal Revenue Service ("IRS")
or on the courts. Therefore, there can be no assurance that the Merger will
constitute a reorganization or that any of the tax consequences of a
reorganization that are described above will be available to the Fay's
shareholders.
THE DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION PURPOSES
ONLY. THE DISCUSSION IS A SUMMARY OF THE PRINCIPAL FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER AND DOES NOT ADDRESS THE STATE, LOCAL OR FOREIGN
TAX ASPECTS OF THE MERGER. THE DISCUSSION IS BASED ON CURRENTLY EXISTING
PROVISIONS OF THE CODE, EXISTING AND PROPOSED TREASURY REGULATIONS UNDER THE
CODE, THE LEGISLATIVE HISTORY OF THE CODE, CURRENT RULINGS AND PRONOUNCEMENTS
OF THE IRS AND COURT DECISIONS. ALL OF THE FOREGOING ARE SUBJECT TO CHANGE AND
ANY SUCH CHANGE COULD AFFECT THE CONTINUING VALIDITY OF THE DISCUSSION. THE
DISCUSSION MAY NOT BE APPLICABLE TO CERTAIN FAY'S SHAREHOLDERS, INCLUDING
SHAREHOLDERS WHO ACQUIRED THEIR SHARES THROUGH THE EXERCISE OF STOCK OPTIONS
OR OTHERWISE AS COMPENSATION. EACH FAY'S SHAREHOLDER SHOULD CONSULT HIS OR HER
OWN TAX ADVISOR WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO
HIM OR HER, INCLUDING THE APPLICATION AND EFFECT OF FEDERAL, STATE, LOCAL AND
FOREIGN TAX LAWS AND OF ANY POSSIBLE FUTURE CHANGES IN THE TAX LAWS.
ACCOUNTING TREATMENT
The Merger is intended to be treated as a purchase of Fay's by JCPenney for
financial accounting purposes. Therefore, the aggregate consideration paid by
JCPenney in connection with the Merger will be allocated to Fay's assets and
liabilities based on their fair values with any excess being treated as
goodwill.
CERTAIN REGULATORY MATTERS
The HSR Act and the rules and regulations promulgated thereunder provide
that certain transactions may not be consummated until required information
and materials have been furnished to the Antitrust Division of the Department
of Justice (the "Antitrust Division") and the Federal Trade Commission (the
"FTC") and certain waiting periods have expired or terminated. The respective
obligations of JCPenney and Fay's to consummate the Merger are conditioned
upon all waiting periods (and extensions thereof) applicable to the
consummation of the Merger under the HSR Act having expired or been
terminated. See "--Certain Terms of the Merger Agreement--Conditions to the
Merger." JCPenney and Fay's made the requisite filings under the HSR Act on
August 13 and 14, 1996, respectively, in connection with the Merger. The
required waiting period under the HSR Act will expire at 11:59 p.m. on
September 13, 1996, unless extended by a request from the Antitrust Division
or the FTC for additional information or documentary material. At any time
before or after the Effective Time, and notwithstanding that the HSR Act
waiting period has expired or terminated, the Antitrust Division or the FTC
could take such action under the antitrust laws as it deems necessary or
advisable in the public interest, including seeking to enjoin the consummation
of the Merger or seeking divestiture of assets or businesses of JCPenney or
Fay's.
At any time before or after the Effective Time, and notwithstanding that the
HSR Act waiting period has expired or terminated, any state could take such
action under its antitrust laws as it deems necessary or desirable in the
public interest. Such action could include seeking to enjoin the consummation
of the Merger or seeking divestiture of assets or businesses of JCPenney or
Fay's. Private parties may also seek to take legal action under antitrust laws
under certain circumstances.
Based on information available to them, JCPenney and Fay's believe that the
Merger can be effected in compliance with federal and state antitrust laws.
However, there can be no assurance that a challenge to the consummation of the
Merger on antitrust grounds will not be made or that, if such a challenge were
made, JCPenney and Fay's would prevail or would not be required to accept
certain conditions, possibly including certain divestitures in order to
consummate the Merger. See "--Certain Terms of the Merger Agreement--Response
to Certain Actions."
43
<PAGE>
Except for filings with or approvals of the Drug Enforcement Agency and the
appropriate governmental agencies that regulate pharmaceutical, liquor and
ammunition sales, respectively, neither JCPenney nor Fay's is aware of any
other governmental or regulatory filings or approvals required in connection
with the Merger, other than compliance with applicable securities laws.
AMENDMENT TO FAY'S RIGHTS AGREEMENT
Pursuant to the terms of the Fay's Rights Agreement, the holder of a right
issued thereunder is entitled to purchase from Fay's one one-hundredth of a
share of Series A Junior Participating Preferred Stock, par value $1.00 per
share, of Fay's at a price of $30 per one one-hundredth of a share upon the
acquisition of the Beneficial Ownership (as defined in the Fay's Rights
Agreement) of more than 20% of the Fay's Common Stock by an Acquiring Person
(as defined in the Fay's Rights Agreement). Immediately prior to the execution
of the Merger Agreement, the definition of an "Acquiring Person" under the
Fay's Rights Agreement was amended to exclude JCPenney and Merger Sub if they
obtained the Beneficial Ownership of more than the permitted percentage of
Fay's Common Stock solely as a result of entering into and consummating the
transactions contemplated by the Merger Agreement and the Stockholders
Agreement. Consistent with the terms of the Fay's Rights Agreement, this
amendment was adopted by the Board of Directors of Fay's and is set forth in
an Amendment to Fay's Rights Agreement.
APPRAISAL RIGHTS OF DISSENTING SHAREHOLDERS
Section 910 of the NYBCL ("Section 910") provides that any holder of Fay's
Common Stock as of the Record Date who has not voted in favor of the Merger
Agreement shall have the right, as an alternative to receiving shares of
JCPenney Common Stock in the Merger, to receive payment of the judicially
determined fair value of his shares as of the date prior to the Special
Meeting and certain other rights and benefits, subject to complying with
Section 623 of the NYBCL ("Section 623"). Pursuant to the terms of the Merger
Agreement, JCPenney is not obligated to consummate the Merger if more than 10%
of the outstanding shares of Fay's Common Stock have properly demanded
appraisal rights. See "--Certain Terms of the Merger Agreement--Conditions to
the Merger." Copies of Section 623 and Section 910 are attached hereto as
Appendix III and a summary of the procedures relating to the exercise of
appraisal rights is set forth below. This summary does not purport to be a
complete statement of the provisions of Section 623 and Section 910 and is
qualified in its entirety by reference to Appendix III. A person having a
beneficial interest in shares of Fay's Common Stock that are held of record in
the name of another person, such as a broker or nominee, must act promptly to
cause the record holder to follow the steps summarized below properly and in a
timely manner to perfect whatever appraisal rights such beneficial owner may
have.
THIS DISCUSSION AND APPENDIX III SHOULD BE REVIEWED CAREFULLY BY ANY
SHAREHOLDER OF FAY'S WHO WISHES TO EXERCISE STATUTORY APPRAISAL RIGHTS OR WHO
WISHES TO PRESERVE THE RIGHT TO DO SO. FAILURE TO STRICTLY COMPLY WITH ANY OF
THE PROCEDURAL REQUIREMENTS OF SECTION 623 MAY RESULT IN A TERMINATION OR
WAIVER OF APPRAISAL RIGHTS UNDER SECTION 623.
Fay's does not intend to waive compliance with any statutory procedures.
Unless all of the procedures as set out in Section 623 are followed by a
shareholder who wishes to exercise appraisal rights, such shareholder will be
bound by the terms of the Merger Agreement.
Each holder of record of Fay's Common Stock who desires to exercise
appraisal rights must satisfy the following conditions and otherwise comply
with the provisions of Section 623:
(i) A separate, written objection to the Merger must be filed with Fay's
before or at the Special Meeting but prior to the taking of the vote on the
Merger. This objection must include: (a) a notice of the shareholder's
election to dissent, (b) the shareholder's name and residence address, (c)
the number of shares as to which the shareholder dissents and (d) a demand
for payment of the fair value of such shares if the
44
<PAGE>
Merger is consummated. Such objection is not required for any holder of
shares of Fay's Common Stock to whom Fay's did not give notice of the
Special Meeting. A shareholder may not dissent as to less than all of the
shares which such shareholder owns beneficially, and a nominee or fiduciary
may not dissent on behalf of any beneficial owner as to less than all of
the shares of such owner held of record by such nominee or fiduciary. A
record holder, such as a broker or an agent, who holds shares of Fay's
Common Stock as a nominee or fiduciary for beneficial owners, some of whom
desire to demand appraisal, must exercise appraisal rights on behalf of
such beneficial owners who desire to demand appraisal with respect to the
shares of Fay's Common Stock held for such beneficial owners. A proxy or
vote abstaining from voting, or voting against the Merger, or a failure to
vote on the Merger, does not constitute such an objection within the
meaning of Section 623. Failure to vote against the Merger Agreement,
however, will not constitute a waiver of rights under Sections 623 and 910
of the NYBCL, provided that a written objection to the Merger, as described
above, has been properly filed. Fay's will treat only those written demands
which are actually received by it before the taking of the vote on the
Merger as being timely.
(ii) A shareholder wishing to exercise appraisal rights under Section 623
must not vote for the approval and adoption of the Merger Agreement. If a
shareholder returns a signed proxy failing to specify either (a) a vote
against the approval and adoption of the Merger Agreement, or (b) a
direction to abstain from voting on the approval and adoption of the Merger
Agreement, the proxy will be voted "FOR" the approval and adoption of the
Merger Agreement, which will have the effect of waiving such shareholder's
appraisal rights and nullifying any previously filed objection.
All notices of election to dissent should be addressed to Fay's at 7245
Henry Clay Boulevard, Liverpool, New York 13086, Attention: Warren D. Wolfson,
Secretary.
Within ten days after the Effective Time, Fay's, as the surviving
corporation in the Merger, will provide written notice of the consummation of
the Merger to all shareholders who filed written objections to the Merger or
from whom a written objection was not required and have not voted for adoption
and approval of the Merger. Within 20 days after the giving of such notice to
any shareholder from whom written objection was not required, if such
shareholder elects to dissent, such shareholder may file with Fay's a written
notice of such election, stating the shareholder's name and residence address,
the number of shares of Fay's Common Stock as to which such shareholder
dissents and a demand for payment of the fair value of such shareholder's
shares of Fay's Common Stock.
Each shareholder who has complied with Section 623 must submit the
certificates representing such shares to Fay's or its transfer agent at the
time of filing the notice of dissent or within one month thereafter for
notation thereon of the pendency of an appraisal claim, after which such
certificates will be returned to such holder or other person who submitted
them on behalf of the holder. American Stock Transfer and Trust Company serves
as the transfer agent for shares of Fay's Common Stock, and its address is 40
Wall Street, New York, New York 10005. Any such shareholder who fails to
submit such certificates for notation will, at the election of Fay's
(exercised by written notice to such holder within 45 days from the date of
filing of the notice to dissent), lose such dissenter's rights unless a court,
for good cause shown, otherwise directs. Upon transfer of a certificate
bearing such notation, each new certificate issued therefor shall bear a
similar notation together with the name of the original dissenting holder of
the shares and a transferee shall acquire no rights in Fay's except those
which the original dissenting shareholder had at the time of the transfer.
Within 15 days after the expiration of the period within which holders of
shares of Fay's Common Stock may file their notices of election to dissent, or
within 15 days after the Effective Time, whichever is later (but in no case
later than 90 days after the Special Meeting), Fay's is required to make a
written offer by registered mail to each shareholder who has filed a notice of
election to dissent to pay for such holder's shares of Fay's Common Stock at a
specified price which Fay's considers to be their fair value (which price
shall be the same for all dissenting holders). Such offer will be accompanied
by a statement setting forth the aggregate number of shares of Fay's Common
Stock with respect to which notices of election to dissent from approval and
adoption of the Merger Agreement have been received and the aggregate number
of holders of such shares of Fay's Common
45
<PAGE>
Stock. If the Merger has been consummated at the time such offer is made, such
offer will also be accompanied by (i) advance payment to each dissenting
holder who has submitted such holder's certificates to shares of Fay's for
notation thereon of such holder's election to dissent of an amount equal to
80% of the amount of such offer, or (ii) as to each dissenting holder who has
not yet submitted such certificates for such notation, a statement that
advance payment to such holder of an amount equal to 80% of such offer will be
made by Fay's promptly upon submission of such certificates. If the Merger has
not been consummated at the time of such offer, such advance payment or
statement as to advance payment will be sent to each holder entitled thereto
forthwith upon consummation of the Merger. Every such advance payment or
statement as to advance payment will include advice to such holder that
acceptance of such payment by a dissenting holder will not constitute a waiver
of such holder's dissenter's rights. If the Merger has not been consummated by
the expiration of the above-mentioned 90-day period, the offer by Fay's may be
conditioned upon the consummation of the Merger. If within 30 days after the
making of a written offer by Fay's, Fay's and any dissenting holder agree upon
the price to be paid for such shareholder's shares of Fay's Common Stock,
payment therefor will be made within 60 days after the making of such offer or
the Effective Time, whichever is later, upon the surrender of the certificates
representing such shares of Fay's Common Stock.
If Fay's fails to make such an offer within the 15-day period described in
the preceding paragraph, or if it makes an offer but Fay's and a dissenting
holder do not agree within 30 days of the making of the offer upon the price
to be paid for such holder's shares of Fay's Common Stock, Fay's must, within
20 days of such 15- or 30-day period, as the case may be, institute a special
proceeding in the New York Supreme Court, Onandaga County (the "Court"), to
determine the rights of dissenting holders and fix the fair value of their
shares of Fay's Common Stock. It is the current intention of Fay's to
institute any such proceeding within the 20-day period; however, if Fay's does
not institute such proceeding within the 20-day period, any dissenting holder
may, within 30 days after the expiration of the 20-day period, institute a
proceeding for the same purposes. If such proceeding is not instituted within
such 30-day period, dissenting holders who have not agreed with Fay's as to
the price to be paid for the shares of Fay's Common Stock will lose their
dissenters' rights, unless the Court, for good cause shown, otherwise directs.
All dissenting holders, other than those who shall have agreed with Fay's as
to the price to be paid for their shares of Fay's Common Stock, will be made
parties to such appraisal proceeding. The Court will determine whether each
dissenting holder, as to whom Fay's requests the Court to make such
determination, is entitled to receive payment for such holder's shares of
Fay's Common Stock. If Fay's does not request any such determination or if the
Court finds that such dissenting shareholder is so entitled, the Court
(without a jury) will then determine the fair value of such holder's shares of
Fay's Common Stock as of the close of business on the day prior to the date of
the Special Meeting. In fixing the fair value of the shares of Fay's Common
Stock, the Court will consider the nature of the transaction giving rise to
the holder's right to receive payment for such holder's shares of Fay's Common
Stock and its effects on Fay's and its shareholders, the concepts and methods
then customary in the relevant securities and financial markets for
determining the fair value of the shares of a corporation engaging in a
similar transaction under comparable circumstances, and all other relevant
factors. Within 60 days after the completion of any such Court proceeding,
Fay's will be required to pay to each dissenting holder the amount found to be
due (less the advance payment referred to above), with interest thereon at
such rate as the Court finds to be equitable, from the date the Merger is
consummated to the date of payment, upon surrender to Fay's by such holder of
the certificates representing such shares of Fay's Common Stock. If the Court
finds that the refusal of any dissenting holder to accept the offer of Fay's
was arbitrary, vexatious, or otherwise not in good faith, no interest will be
allowed to such holder.
The parties to such appraisal proceeding will bear their own costs and
expenses, including the fees and expenses of their counsel and any experts
employed by them, except that the Court, in its discretion, (i) may apportion
and assess all or any part of the costs, expenses and fees incurred by any or
all dissenting holders who are parties to the appraisal proceeding against
Fay's if, among other things, the Court finds (a) that the fair value of the
shares of Fay's Common Stock materially exceeds the offer by Fay's, (b) that
no offer of payment or required advance payment was made by Fay's, (c) that
Fay's failed to institute such appraised proceeding within
46
<PAGE>
the required period, or (d) that the actions of Fay's in complying with its
obligations under Section 623 were arbitrary, vexatious or otherwise not in
good faith, or (ii) may apportion and assess all or any part of the costs,
expenses and fees incurred by Fay's against any or all of the dissenting
holders who are parties to the proceeding, including any who have withdrawn
their notices of election to dissent from the Merger, if the Court finds that
their refusal to accept Fay's offer of payment was arbitrary, vexatious or
otherwise not in good faith.
Any shareholder who has filed a notice of election to dissent will not,
after the Effective Time, have any of the rights of a shareholder with respect
to such holder's shares of Fay's Common Stock, other than the right to be paid
the judicially determined fair value of such shares of Fay's Common Stock
pursuant to the NYBCL and any other rights or benefits provided by the NYBCL
for shareholders who have filed such a notice. Any notice of election to
dissent may be withdrawn by a dissenting shareholder at any time prior to such
shareholder's acceptance in writing of an offer made by Fay's, as described
above, but in no case later than 60 days after the Effective Time (or if Fay's
fails to make a timely offer to pay such shareholder the fair value of such
holder's shares of Fay's Common Stock as described above, at any time within
60 days after any date such an offer is made), or thereafter with the written
consent of Fay's or as provided below. In order to be effective, withdrawal of
a notice of election to dissent must be accompanied by the return to Fay's of
any advance payment to the shareholder made by Fay's, as described above. Any
dissenting shareholder who withdraws such holder's notice of election to
dissent or otherwise loses such dissenter's rights will thereupon have only
the right to receive the consideration provided for in the Merger Agreement
for each of such holder's shares of Fay's Common Stock.
Under Section 623(j) of the NYBCL, no payment of the fair value of shares of
Fay's Common Stock may be made to dissenting shareholders by Fay's if Fay's
were to be insolvent or if such payment would render Fay's insolvent. In that
event, such dissenting shareholder would be required to either (i) withdraw
such holder's notice of election to dissent (which would be deemed accepted by
Fay's) or (ii) retain such holder's status as a claimant against Fay's. If a
dissenting shareholder were to elect to remain a claimant against Fay's, such
dissenting shareholder's rights would be subordinated to the rights of the
creditors of Fay's but would be superior to those of non-dissenting
shareholders, should Fay's be liquidated. If Fay's were not liquidated, the
dissenting shareholder would retain such holder's right to payment for such
holder's shares of Fay's Common Stock, which obligation Fay's would be
required to meet once it was no longer insolvent or if such payment would not
render Fay's insolvent. If a dissenting shareholder fails to exercise either
such option within 30 days after Fay's has given such holder written notice
that payment cannot be made because of the restrictions of Section 623(j) of
the NYBCL, Fay's would be required to exercise such option by written notice
to such holder within 20 days after the expiration of such period of 30 days.
For purposes of the NYBCL, an "insolvent corporation" is a corporation that is
unable to pay its debts as they become due in the usual course of its
business.
If a court in a lawsuit by an unpaid creditor or representative of
creditors, such as a trustee in bankruptcy, were to find that, at the time
Fay's makes any payment in respect of any dissenting shares (each, a
"Transfer"), Fay's (i) made the Transfer with intent to hinder, delay or
defraud creditors or (ii) received less than a reasonably equivalent value or
fair consideration for the Transfer, and (a) was insolvent at the time of the
Transfer, (b) was rendered insolvent by reason of the Transfer, (c) was
engaged or about to engage in a business or transaction for which the assets
remaining with Fay's constituted unreasonably small capital to carry on its
business or (d) intended to incur, or believed that it would incur, debts
beyond its ability to pay as such debts matured, the court could find that the
Transfer constituted a "fraudulent conveyance" under applicable federal or
state law. If the Transfer were determined to be a fraudulent conveyance,
there is a risk that holders of dissenting shares, as recipients of the
Transfers, would be ordered to turn over to Fay's, its creditors or its
trustee in bankruptcy, all or a portion of the payments in respect of
dissenting shares. The measure of insolvency for purposes of the foregoing
will vary depending upon the law of the jurisdiction which is being applied.
Generally, however, Fay's would be considered insolvent if at the time of the
Transfer in question the fair value (or fair saleable value) of its assets was
less than the amount required to pay its probable liability on its existing
debts (including contingent liabilities) as they become absolute and matured,
or if the sum of Fay's debts (including any contingent liabilities) at the
time of the Transfer is greater than the fair value of all Fay's assets. The
Transfers could be deemed to be fraudulent conveyances even if Fay's is not
deemed to be an "insolvent corporation" for purposes of Section 623.
47
<PAGE>
In any proceeding to enforce his rights to payment for shares pursuant to
Section 623, a shareholder is precluded from seeking the enforcement of any
other right to which he might otherwise be entitled by virtue of share
ownership, except (i) the right to be paid the fair value of his shares
pursuant to Section 623 and (ii) the right to bring or maintain an appropriate
action to obtain relief on the ground that the Merger is unlawful or
fraudulent as to him.
A VOTE AGAINST THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT WILL NOT BE
DEEMED TO SATISFY THE REQUIREMENTS FOR A WRITTEN OBJECTION TO THE APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT OR A WRITTEN DEMAND FOR PAYMENT OF THE VALUE
OF THE SHARES OWNED BY A DISSENTING SHAREHOLDER.
The obligation of JCPenney to consummate the Merger is subject to
satisfaction or waiver of the condition that holders of not more than 10% of
the outstanding shares of Fay's Common Stock have properly demanded appraisal
rights. See "--Certain Terms of the Merger Agreement--Conditions to the
Merger."
RESTRICTIONS ON RESALES OF JCPENNEY COMMON STOCK BY AFFILIATES
The shares of JCPenney Common Stock to be issued to the shareholders of
Fay's in the Merger are being registered under the Securities Act pursuant to
the Registration Statement. However, because some shareholders of Fay's are or
may be affiliates of Fay's at the time of the Special Meeting, such persons
will not be able to resell the JCPenney Common Stock received by them in the
Merger unless such JCPenney Common Stock is registered for resale under the
Securities Act, is sold in compliance with an exemption from the registration
requirements of the Securities Act or is sold in compliance with Rule 145
under the Securities Act.
Pursuant to Rule 145 under the Securities Act, the sale of JCPenney Common
Stock acquired by such affiliates of Fay's pursuant to the Merger will be
subject to certain restrictions. Such persons may sell JCPenney Common Stock
under Rule 145 only if (i) JCPenney has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the preceding 12 months,
(ii) the JCPenney Common Stock is sold in a "broker's transaction," which is
defined in Rule 144 under the Securities Act as a sale in which (a) the seller
does not solicit or arrange for orders to buy the securities, (b) the seller
does not make any payment other than to a broker, (c) the broker does no more
than execute the order and receive a nominal commission and (d) the broker
does not solicit customer orders to buy the securities, and (iii) such sale
and all other sales made by such person within the preceding three months do
not collectively exceed the greater of (x) 1% of the outstanding shares of
JCPenney Common Stock and (y) the average weekly trading volume of JCPenney
Common Stock on all national securities exchanges during the four-week period
preceding the sale.
48
<PAGE>
DESCRIPTION OF JCPENNEY CAPITAL STOCK
As of September 4, 1996, JCPenney's authorized capital stock consisted of
25,000,000 shares of preferred stock, without par value ("JCPenney Preferred
Stock"), of which 962,719 shares were issued and outstanding, and
1,250,000,000 shares of JCPenney Common Stock, of which 225,654,715 shares
were issued and outstanding. The descriptions set forth below of the JCPenney
Common Stock, JCPenney Preferred Stock and Rights constitute brief summaries
of certain provisions of the JCPenney Charter, the JCPenney Bylaws and the
Rights Agreement between JCPenney and First Chicago Trust Company of New York,
dated as of February 14, 1990, as amended on January 13, 1992 to reflect
Manufacturers Hanover Trust Company (now Chase Mellon Shareholder Services
L.L.C.) as successor Rights Agent (the "JCPenney Rights Agreement"), and are
qualified in their entirety by reference to the relevant provisions of such
documents, all of which are filed as exhibits to the Registration Statement of
which this Proxy Statement/Prospectus is a part and are incorporated herein by
reference.
JCPENNEY COMMON STOCK
Holders of JCPenney Common Stock are entitled to one vote per share with
respect to each matter submitted to a vote of the stockholders of JCPenney,
including the election of directors, subject to voting rights that may be
established for shares of JCPenney Preferred Stock. Shares of JCPenney Common
Stock vote as a class together with the shares of Series A Preferred Stock (as
hereinafter described), if any such shares of Series A Preferred Stock are
issued, and Series B Preferred Stock (as hereinafter described). The Board of
Directors of JCPenney is divided into three classes to be as nearly equal in
number as possible. One third of the directors are elected every year and
serve three-year terms. Holders of JCPenney Common Stock do not have the right
to cumulate votes in the election of directors and have no preemptive or
subscription rights. JCPenney Common Stock is neither redeemable nor
convertible, and there are no sinking fund provisions relating to such stock.
Subject to the prior rights of any outstanding shares of JCPenney Preferred
Stock, holders of JCPenney Common Stock are entitled to receive such dividends
as may be lawfully declared from time to time by the Board of Directors of
JCPenney. Upon any voluntary or involuntary liquidation, dissolution or
winding up of JCPenney, holders of JCPenney Common Stock will be entitled to
receive such assets as are available for distribution to stockholders after
there shall have been paid or set apart for payment the full amounts necessary
to satisfy any preferential or participating rights to which the holders of
JCPenney Preferred Stock are entitled.
The outstanding shares of JCPenney Common Stock are, and the shares of
JCPenney Common Stock to be issued in connection with the Merger will be,
fully paid and nonassessable. Additional shares of JCPenney Common Stock may
be issued, as authorized by the Board of Directors of JCPenney from time to
time, without stockholder approval, except any stockholder approval required
by the NYSE.
JCPENNEY PREFERRED STOCK
The JCPenney Charter authorizes 25,000,000 shares of preferred stock,
without par value. JCPenney's Board of Directors has designated 1,600,000
shares of preferred stock as Series A Junior Participating Preferred Stock
("Series A Preferred Stock") and has authorized such shares for issuance
pursuant to the exercise of the Rights. As of September 4, 1996, no shares of
Series A Preferred Stock have been issued. In addition, 1,400,000 shares of
preferred stock have been designated Series B ESOP Convertible Preferred Stock
("Series B Preferred Stock"). As of September 4, 1996, 962,719 shares of
Series B Preferred Stock were issued and outstanding.
Rights; Series A Preferred Stock
There is attached to each share of JCPenney Common Stock, including the
shares offered hereby, one Right to purchase from JCPenney one four-hundredth
of a share of Series A Preferred Stock at a purchase price of $140 per share
(the "Purchase Price"), subject to adjustment in certain events. The terms and
conditions of the Rights are contained in the JCPenney Rights Agreement.
49
<PAGE>
Initially, the Rights will not be exercisable, certificates for the Rights
will not be issued and the Rights will automatically trade with the JCPenney
Common Stock.
The Rights will separate from the JCPenney Common Stock and a "Distribution
Date" will occur on the earlier of (i) the tenth day following the earlier of
(a) a public announcement that a person or group of affiliated or associated
persons other than JCPenney, any subsidiary of JCPenney or any employee
benefit plan or employee stock plan of JCPenney or of any subsidiary of
JCPenney (an "Exempt Person") has acquired, or has obtained the right to
acquire, beneficial ownership of 15% or more of the outstanding JCPenney
Common Stock (as used in this Proxy Statement/Prospectus with respect to the
JCPenney Rights Agreement, an "Acquiring Person") or (b) such date that a
majority of the JCPenney Board of Directors shall become aware of the
existence of an Acquiring Person (either date referenced in (a) or (b) above
being the "Stock Acquisition Date") or (ii) the nineteenth business day
following the commencement of or public announcement of the intent to commence
a tender or exchange offer which, if consummated, would result in the
ownership of 30% or more of the outstanding JCPenney Common Stock,
irrespective of whether any shares of JCPenney Common Stock are acquired
pursuant to such offer. The JCPenney Rights Agreement provides that the
Distribution Date may be extended by the JCPenney Board of Directors prior to
the expiration of either of the time periods referenced in the preceding
sentence. It further provides that until the Distribution Date (or earlier
redemption or expiration of the Rights), the Rights will be represented by and
transferred with, and only with, JCPenney Common Stock. Until the Distribution
Date (or the earlier redemption or expiration of the Rights), JCPenney Common
Stock certificates issued after February 14, 1990 (including the certificates
issued in connection with the Merger) will each contain a legend incorporating
the JCPenney Rights Agreement by reference and the surrender for transfer of
any JCPenney Common Stock certificate, with or without the aforesaid legend or
a copy of the Summary of Rights attached thereto, will also constitute the
simultaneous transfer of the Rights associated with the JCPenney Common Stock
represented by such certificate. As soon as practicable following the
Distribution Date, separate Rights Certificates ("Rights Certificates") will
be mailed to holders of record of JCPenney Common Stock at the close of
business on the Distribution Date, and, thereafter, the Rights Certificates
alone will evidence the Rights, and the Rights will thereafter be transferable
separate and apart from the JCPenney Common Stock.
The Rights are not exercisable until the Distribution Date and will expire
at the close of business on February 14, 2000, unless redeemed earlier as
described below.
Under certain circumstances, as provided in the JCPenney Rights Agreement,
Rights issued to or beneficially owned by a person who is or becomes an
Acquiring Person (other than pursuant to a Permitted Tender Offer, as
hereinafter defined) or an associate or affiliate of such Acquiring Person (as
such terms are defined in the JCPenney Rights Agreement) or, under certain
circumstances, transferees thereof, will become null and void and thereafter
may not be transferred to any person.
The Series A Preferred Stock issued upon the exercise of a Right will be
nonredeemable and, unless otherwise provided in connection with the creation
of a subsequent series of preferred stock, will be subordinate to all other
series of JCPenney Preferred Stock. The Series A Preferred Stock will not be
issued except upon exercise of the Rights.
Each share of Series A Preferred Stock will be entitled to receive, when, as
and if declared, a quarterly dividend preference equal to the greater of $50
per share or 200 times the quarterly cash dividend declared on shares of
JCPenney Common Stock and would receive an additional dividend preference
equal to 200 times any extraordinary dividend declared on shares of JCPenney
Common Stock (other than dividends payable in equity securities of JCPenney).
In the event of the dissolution, liquidation or winding-up of JCPenney, the
holders of Series A Preferred Stock will be entitled to receive a liquidation
payment in an amount equal to the greater of $200 per share or 200 times the
payment per share made in respect of JCPenney Common Stock. Each share of
Series A Preferred Stock will have 200 votes, voting together with JCPenney
Common Stock as a single class. In the event of any merger, consolidation or
other transaction in which common shares are exchanged, each share
50
<PAGE>
of Series A Preferred Stock will be entitled to receive 200 times the amount
received per share of JCPenney Common Stock. The rights of the Series A
Preferred Stock as to dividends, liquidation and voting are subject to anti-
dilution adjustment in certain circumstances.
The Purchase Price payable and the number of shares of Series A Preferred
Stock or other securities or property issuable upon exercise of the Rights are
subject to adjustment from time to time to prevent dilution (i) in the event
of a stock dividend on, or a subdivision, combination or reclassification of,
the Series A Preferred Stock, (ii) upon the grant to holders of the Series A
Preferred Stock of certain rights or warrants to subscribe for the purchase of
Series A Preferred Stock or convertible securities at less than the current
market price of the Series A Preferred Stock, or (iii) upon the distribution
to holders of the Series A Preferred Stock of evidences of indebtedness or
assets (excluding regular cash dividends and dividends payable in Series A
Preferred Stock) or of subscription rights or warrants.
If any person (other than an Exempt Person) becomes the beneficial owner of
15% or more of the then outstanding shares of JCPenney Common Stock (other
than pursuant to a tender or exchange offer for all outstanding shares of
JCPenney Common Stock that the JCPenney Board of Directors, taking into
account the long-term value of JCPenney and all other factors that it deems
relevant in the circumstance determines to be at a price and on terms which
are fair to the holders of shares of JCPenney Common Stock ("Permitted Tender
Offer")), each holder of a Right, other than the Acquiring Person, will have
the right to receive, upon payment of the Purchase Price, in lieu of Series A
Preferred Stock, a number of shares of JCPenney Common Stock having a market
value equal to twice the Purchase Price. In lieu of issuing shares of JCPenney
Common Stock upon exercise of Rights, JCPenney may, and to the extent that
insufficient shares of JCPenney Common Stock are available for the exercise in
full of the Rights, JCPenney shall, issue cash, property or other securities
of JCPenney, or any combination thereof (which may be accompanied by a
reduction in the Purchase Price), in proportions determined by JCPenney, so
that the aggregate value received is equal to twice the Purchase Price. Rights
will not be exercisable following the acquisition of shares of JCPenney Common
Stock by an Acquiring Person as described in this paragraph until the
expiration of the period during which the Rights may be redeemed as described
below. Notwithstanding the foregoing, after the acquisition of shares of
JCPenney Common Stock as described above in this paragraph, Rights that are
(or, under certain circumstances, Rights that were) beneficially owned by an
Acquiring Person will be null and void.
The JCPenney Board of Directors may, at its option, at any time after a
person becomes an Acquiring Person (other than pursuant to a Permitted Tender
Offer) exchange all or part of the then outstanding and exercisable Rights for
shares of JCPenney Common Stock at an exchange ratio of one share of JCPenney
Common Stock per Right; provided, however, the JCPenney Board of Directors may
not effect such exchange after the time that any Person (other than an Exempt
Person) becomes the beneficial owner of 50% or more of the JCPenney Common
Stock then outstanding.
Unless the Rights are redeemed earlier, if, after the Stock Acquisition
Date, the Company is acquired in a merger or other business combination (in
which any shares of the JCPenney Common Stock are changed into or exchanged
for other securities or assets) or more than 50% of the assets or earning
power of JCPenney and its subsidiaries (taken as a whole) are sold or
transferred in one transaction or a series of related transactions, the
JCPenney Rights Agreement provides that a proper provision shall be made so
that each holder of record of a Right will from and after that time have the
right to receive, upon payment of the Purchase Price, that number of shares of
common stock of the acquiring or transferee company which has a market value
at the time of such transaction equal to twice the Purchase Price. The right
to purchase stock of an acquiring company would not apply to a transaction
with a person who became an Acquiring Person pursuant to a Permitted Tender
Offer if (i) the form of consideration paid to holders of JCPenney Common
Stock in such transaction were the same as the form of consideration paid in
the Permitted Tender Offer and (ii) the price paid to holders of JCPenney
Common Stock in such transaction was not less than the price paid in the
Permitted Tender Offer.
51
<PAGE>
Fractions of shares of Series A Preferred Stock may, at the election of
JCPenney, be evidenced by depositary receipts. JCPenney may also issue cash in
lieu of fractional shares of Series A Preferred Stock which are not integral
multiples of one four-hundredth of a share.
At any time until ten days following the Stock Acquisition Date (subject to
extension by the JCPenney Board of Directors), the JCPenney Board of Directors
may cause JCPenney to redeem the Rights in whole, but not in part, at a price
of $0.005 per Right, subject to adjustment. Immediately upon the effective
time of the redemption authorized by the JCPenney Board of Directors the right
to exercise the Rights will terminate, and the only remaining right of holders
of Rights will be to receive payment of the redemption price without any
interest thereon.
As long as the Rights are redeemable, JCPenney may, except with respect to
the redemption price or expiration date of the Rights, amend the Rights in any
manner, including, without limitation, an amendment to extend the time period
in which the Rights may be redeemed. At any time when the Rights are not
redeemable, JCPenney may amend the Rights in any manner that does not
adversely affect the interests of holders of the Rights as such.
Until a Right is exercised, the holder, as such, will have no rights as a
stockholder of JCPenney, including, without limitation, the right to vote or
to receive dividends or payments upon the dissolution, liquidation or winding-
up of the Company.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group who attempts to acquire JCPenney on
terms not approved by the JCPenney Board of Directors. The Rights should not
interfere with any merger or other business combination approved by the
JCPenney Board of Directors since the Rights may be redeemed by JCPenney at
$0.005 per Right at any time until the close of business on the tenth day
(unless extended) after a person or group has obtained beneficial ownership of
15% or more of the JCPenney Common Stock.
Series B Preferred Stock
Restrictions on Transfer. Pursuant to the Certificate of Designations
respecting the Series B Preferred Stock, shares of Series B Preferred Stock
may be issued only to a trustee acting on behalf of an employee stock
ownership plan or other employee benefit plan of JCPenney ("Plan Trustee"). In
the event of any transfer of shares of Series B Preferred Stock to other than
such Plan Trustee, the shares of Series B Preferred Stock so transferred, upon
such transfer and without any further action by JCPenney or the holder, will
be automatically converted into shares of JCPenney Common Stock on the terms
provided for such conversion (described below) and no such transferee will
have any of the voting powers, preferences and relative, participating,
optional or special rights ascribed to shares of Series B Preferred Stock but,
rather, only the rights and powers pertaining to the JCPenney Common Stock
(described above) into which such shares of Series B Preferred Stock are so
converted.
Liquidation Rights; Dividends. Shares of Series B Preferred Stock have a
liquidation preference of $600 per share (plus accumulated and unpaid
dividends) and pay cumulative dividends semi-annually in an amount per share
equal to $47.40 per share per annum. So long as shares of Series B Preferred
Stock remain outstanding, no dividend may be declared or paid or set apart for
payment on any other series of stock of JCPenney ranking on a parity with the
Series B Preferred Stock as to dividends unless like dividends have been
declared and paid or set apart for payment on shares of Series B Preferred
Stock. Moreover, except with respect to (i) dividends payable solely in shares
of stock of JCPenney ranking, as to dividends or as to distributions upon the
liquidation, dissolution or winding-up of JCPenney ("Liquidation
Distributions"), junior to the Series B Preferred Stock or (ii) the
acquisition of any shares of stock of JCPenney ranking, as to dividends or as
to Liquidation Distributions, junior to the Series B Preferred Stock either
(a) pursuant to any employee or director incentive or benefit plan or
arrangement (including any employment, severance or consulting agreement) of
JCPenney or any of its subsidiaries or (b) in exchange solely for shares of
stock of JCPenney ranking junior to the Series B Preferred Stock, in the event
that full cumulative dividends on the shares of Series B Preferred Stock have
not been
52
<PAGE>
declared and paid or set apart for payment when due, JCPenney is prohibited
from declaring or paying or setting apart for payment any dividends or making
any distributions in respect of, or, making any payments on account of, the
purchase, redemption or other retirement of any other class of stock or series
thereof of JCPenney ranking, as to dividends or as to Liquidation
Distributions, junior to the Series B Preferred Stock, until full cumulative
dividends on the shares of Series B Preferred Stock shall have been paid or
declared and provided for.
Redemption. Generally, shares of Series B Preferred Stock may be redeemed,
in whole or in part, at the option of JCPenney at an initial redemption price
(payable in cash or securities or a combination thereof) of $633.18 per share,
declining by approximately 1% each succeeding year until July 2, 1998,
whereafter the redemption price per share will be equal to $600 per share;
plus, in each case, an amount equal to all dividends accumulated and unpaid on
such share to the date fixed for redemption. In addition, upon the occurrence
of certain events, JCPenney may elect to redeem shares of Series B Preferred
Stock at a redemption price of $600 per share plus an amount equal to all
dividends accumulated and unpaid on such shares to the date fixed for
redemption.
However, under certain circumstances a holder of shares of Series B
Preferred Stock (for example, a Plan Trustee) may, upon not less than five
days written notice, elect to require JCPenney to redeem such shares at a
redemption price of $600 per share plus an amount equal to all dividends
accumulated and unpaid on such shares to the date fixed for redemption.
Conversion Rights. Shares of Series B Preferred Stock are, at any time prior
to the close of business on the date fixed for redemption of such shares,
convertible into shares of JCPenney Common Stock, at a conversion rate of 20
shares of JCPenney Common Stock for each share of Series B Preferred Stock,
subject to anti-dilution adjustment under certain circumstances. Whenever
JCPenney issues shares of JCPenney Common Stock upon conversion of shares of
Series B Preferred Stock, JCPenney will issue together with each such share of
JCPenney Common Stock an associated Right under the JCPenney Rights Agreement.
Voting Rights. Holders of the Series B Preferred Stock are entitled to vote
upon all matters submitted to a vote of the holders of JCPenney Common Stock
voting together with the holders of JCPenney Common Stock as a single class.
Each share of Series B Preferred Stock carries the number of votes equal to
the number of shares of JCPenney Common Stock into which such share of Series
B Preferred Stock could be converted on the record date for determining the
stockholders entitled to vote, rounded to the nearest one-tenth of a vote.
Holders of shares of Series B Preferred Stock enjoy no special voting rights
and their consent is not specially required for the taking of any corporate
action; provided, however, that the vote of the holders of at least 66 2/3% of
the outstanding shares of Series B Preferred Stock, voting separately as a
series, is necessary before certain actions may be taken which would adversely
affect the rights of the Series B Preferred Stock.
Additional Rights. Holders of shares of Series B Preferred Stock have
certain additional rights in the event JCPenney should (i) consummate a
merger, consolidation or similar transaction ("Extraordinary Transaction")
pursuant to which the outstanding shares of JCPenney Common Stock are, by
operation of law, exchanged solely for, or changed, reclassified or converted
solely into, stock of any successor or resulting company (including JCPenney),
which stock constitutes "employer securities" with respect to a holder of
Series B Preferred Stock (within the meaning of Section 409(l) of the Code, or
any successor provisions of law) and "qualifying employer securities" with
respect to a holder of Series B Preferred Stock (within the meaning of Section
407(d)(5) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), or any successor provisions of law), (ii) consummate an
Extraordinary Transaction pursuant to which the outstanding shares of JCPenney
Common Stock are, by operation of law, exchanged for, or changed, reclassified
or converted into, other stock, securities, cash or any other property, or any
combination thereof, or (iii) enter into any agreement providing for any
Extraordinary Transaction pursuant to which the outstanding shares of JCPenney
Common Stock would, upon consummation thereof, be, by operation of law,
exchanged for, or changed, reclassified or converted into, other stock,
securities, cash or any other property, or any combination thereof, other than
any such consideration constituted solely of qualifying employer securities
and cash payments in lieu of fractional shares, as the case may be.
53
<PAGE>
COMPARATIVE RIGHTS OF HOLDERS OF FAY'S COMMON STOCK AND
JCPENNEY COMMON STOCK
GENERAL
At the Effective Time, each share of Fay's Common Stock will be converted
into the right to receive a fractional share of JCPenney Common Stock,
together with associated Rights under the JCPenney Rights Agreement, equal to
a fraction of a share of JCPenney Common Stock obtained by dividing (a) $12.75
by (b) the average per share Daily Price of JCPenney Common Stock during the
Measurement Period, subject to a minimum per share exchange of .2253397 of a
share of JCPenney Common Stock, a maximum per share exchange of .2754151 of a
share of JCPenney Common Stock and appraisal rights. Such holders' rights will
be governed by the DGCL, the JCPenney Charter and the JCPenney Bylaws, which
differ in certain material respects from the NYBCL, the Fay's Charter and the
Fay's By-Laws. Although it is not practical to compare all the differences
between the NYBCL, the Fay's Charter and the Fay's By-Laws and the DGCL, the
JCPenney Charter and the JCPenney Bylaws, the following is a summary of
material differences which may significantly affect the rights of the holders
of Fay's Common Stock. For a more detailed description of the terms of the
JCPenney Common Stock see "Description of JCPenney Capital Stock--JCPenney
Common Stock."
NUMBER AND CLASSIFICATION OF BOARD OF DIRECTORS
The Boards of Directors of both JCPenney and Fay's are divided into three
classes of directors that are as nearly equal in number as possible, with
directors serving staggered three-year terms. The JCPenney Charter and the
Fay's Charter provide that the number of directors shall be fixed from time to
time by their respective Boards of Directors. Currently, the number of
JCPenney directors is fixed at 12, and the number of Fay's directors is fixed
at 12. There are currently two vacancies on the Board of Directors of Fay's.
ACTION BY STOCKHOLDERS' WRITTEN CONSENT
Under DGCL Section 228, unless otherwise provided in a corporation's
certificate of incorporation, any action required to be taken at an annual
meeting or special meeting of the stockholders may be taken without such a
meeting, without prior notice and without a vote if a consent in writing,
setting forth the action to be taken, is signed by the holders of outstanding
stock representing the number of shares necessary to take such action at a
meeting at which all shares entitled to vote were present. The JCPenney
Charter prohibits stockholder action by written consent. Section 615 of the
NYBCL provides that any action required to be taken at a shareholder meeting
may be taken by unanimous written consent, unless the certificate of
incorporation provides for less than unanimous written consent. The Fay's
Charter does not contain such a provision.
VOTE NECESSARY TO EFFECTUATE MERGER
The DGCL requires a majority vote of the shares entitled to vote in order to
effectuate a merger between two Delaware corporations (Section 251) or between
a Delaware corporation and a corporation organized under the laws of another
state (a "foreign" corporation) (Section 252). However, unless otherwise
provided for in the certificate of incorporation, Sections 251 and 252 do not
require a vote of the stockholders of a constituent corporation surviving the
merger if (i) the merger agreement does not amend, in any respect, the
certificate of incorporation of that corporation, (ii) each share of stock
outstanding immediately prior to the effective date of the merger is identical
to outstanding or treasury shares of the surviving corporation after the
merger, and (iii) any common stock or security convertible into common stock
to be issued pursuant to the merger agreement does not exceed 20% of the
shares outstanding immediately prior to the effective date of the merger.
54
<PAGE>
Section 903 of the NYBCL provides that a plan of merger between two or more
New York corporations must be adopted by at least two-thirds of all
outstanding shares entitled to vote thereon and, in certain circumstances, by
a majority of the holders of all outstanding shares of each class or series.
Where the merger is between one or more New York corporations and one or more
foreign corporations and the surviving corporation is to be a foreign
corporation, the foregoing two-thirds vote (and the majority vote, if
applicable) is required for the domestic corporation but Section 907 of the
NYBCL provides that the foreign corporation should comply with the applicable
provisions of the jurisdiction in which it is incorporated.
The JCPenney Charter provides that a vote of 80% of the stockholders of
JCPenney is required to approve certain business combinations with certain
interested persons, including beneficial owners of 10% or more of the voting
stock of JCPenney, unless the transaction is approved by a majority of the
disinterested directors of JCPenney. The Fay's Charter provides that a vote of
80% of the shareholders of Fay's is required to approve certain business
combinations with certain interested persons, including beneficial owners of
5% or more of the voting stock of Fay's, unless the transaction is approved by
a majority of the disinterested directors of Fay's.
VOTING RIGHTS
Holders of JCPenney Common Stock and Fay's Common Stock are entitled to full
voting rights, with one vote for each share held of record on all matters
submitted to a vote of stockholders.
Holders of Series B Preferred Stock of JCPenney are entitled to vote on each
matter submitted to a vote of holders of JCPenney Common Stock and each share
of Series B Preferred Stock carries the number of votes equal to the number of
shares of JCPenney Common Stock into which such preferred share could have
been converted on the applicable record date (currently 20 votes). See
"Description of JCPenney Capital Stock--JCPenney Preferred Stock--Series B
Preferred Stock." In addition, holders of Series A Preferred Stock of
JCPenney, if any such shares are issued, would be entitled to 200 votes per
share on any matter submitted to a vote of holders of JCPenney Common Stock.
See "Description of JCPenney Capital Stock--JCPenney Preferred Stock--Rights;
Series A Preferred Stock." Shares of Series B Preferred Stock, and shares of
Series A Preferred Stock, if any such shares are issued, vote as a class
together with the shares of JCPenney Common Stock.
In connection with the adoption of the Fay's Rights Agreement, the Board of
Directors of Fay's designated a series of preferred stock (the "Fay's
Preferred Stock"), no shares of which are presently issued or outstanding. If
any such shares are issued, the holders of Fay's Preferred Stock would be
entitled to 100 votes per share on any matter submitted to a vote of holders
of Fay's Common Stock. Shares of Fay's Preferred Stock, if any such shares are
issued, vote as a class together with the shares of Fay's Common Stock.
DIVIDEND POLICY
The JCPenney Bylaws and the Fay's Charter provide that their respective
Boards of Directors may declare dividends from time to time out of funds
legally available therefor. The Board of Directors of each of JCPenney and
Fay's are empowered to designate and issue shares of preferred stock, any of
which may carry preferential rights to receive dividends.
The Board of Directors of JCPenney has designated two series of JCPenney
Preferred Stock, each of which ranks senior to shares of JCPenney Common Stock
in the payment of dividends. Shares of Series B Preferred Stock of JCPenney,
1,400,000 of which have been authorized and 962,719 of which were issued and
outstanding as of September 4, 1996, carry a dividend preference of $47.40 per
annum, payable semi-annually. See "Description of JCPenney Capital Stock--
JCPenney Preferred Stock--Series B Preferred Stock." In addition, shares of
Series A Preferred Stock, 1,600,000 of which have been authorized for possible
issuance pursuant to the terms of the JCPenney Rights Agreement but none of
which are presently issued or outstanding, would carry a quarterly dividend
preference equal to the greater of $50 per share or 200 times the quarterly
cash dividend declared on shares of JCPenney Common Stock and would carry an
additional dividend preference equal to 200 times any extraordinary dividend
declared on shares of JCPenney Common Stock (other than dividends payable in
equity securities of JCPenney). See "Description of JCPenney Capital Stock--
JCPenney Preferred Stock--Rights; Series A Preferred Stock."
55
<PAGE>
The Fay's Preferred Stock, if any such shares are issued, would rank senior
to shares of Fay's Common Stock in the payment of dividends. The Fay's
Preferred Stock, if any such shares are issued, would carry a quarterly
dividend preference equal to the greater of $5 per share or 100 times the
aggregate per share amount of all cash or non-cash dividends paid on shares of
Fay's Common Stock.
Section 170 of the DGCL allows a Delaware corporation to pay dividends out
of surplus or, if there is no surplus, out of its net profits for the fiscal
year in which the dividend is declared or the preceding fiscal year. However,
under Section 510 of the NYBCL, a New York corporation may pay dividends only
out of surplus.
LIQUIDATION RIGHTS
In the event of any liquidation, dissolution or winding up of JCPenney or
Fay's, all assets and funds of either company remaining after the payment to
the holders of any preferred stock of any preferential amounts to which such
holders are entitled, shall be divided and distributed pro rata among the
holders of the JCPenney Common Stock and Fay's Common Stock, respectively.
Shares of Series B Preferred Stock of JCPenney carry a liquidation
preference of $600 per share (plus accumulated and unpaid dividends thereon).
See "Description of JCPenney Capital Stock--JCPenney Preferred Stock--Series B
Preferred Stock." Shares of Series A Preferred Stock, if any such shares are
issued, would carry a liquidation preference equal to the greater of $200 per
share or 200 times the payment made in respect of JCPenney Common Stock. See
"Description of JCPenney Capital Stock--JCPenney Preferred Stock--Rights;
Series A Preferred Stock."
Shares of Fay's Preferred Stock, if any such shares are issued, would carry
a liquidation preference equal to $100 per share (plus accrued and unpaid
dividends and distributions thereon).
APPRAISAL RIGHTS
Pursuant to Section 262 of the DGCL, a stockholder of a Delaware corporation
who complies with the statutory procedure is entitled to receive payment of
the fair value of his or her shares provided he or she does not consent to the
merger, consolidation or sale of substantially all of the assets of the
corporation. In addition, no appraisal rights are available where the
corporation is to be the surviving corporation and a vote of its stockholders
is not required under DGCL Section 251. See "--Vote Necessary to Effectuate
Merger." There are also no appraisal rights, unless otherwise provided for in
the certificate of incorporation (there is no such provision in the JCPenney
Charter), for shares of stock listed on a national securities exchange (on
which shares of JCPenney Common Stock are listed) or held by more than 2,000
holders of record unless such stockholders would be required to accept
anything other than shares of stock in the surviving corporation, shares of
another corporation so listed or held by such number of holders of record,
cash in lieu of fractional shares of such stock, or any combination thereof.
Pursuant to Section 910, a shareholder of a New York corporation who
complies with the statutory procedures is entitled to receive payment of the
fair value for his or her shares provided he or she does not consent to the
merger or consolidation, sale, lease, share exchange, or exchange or
disposition of all or substantially all of the assets of the corporation.
However, no such appraisal rights are available where the corporation is to be
the surviving corporation in a merger of a parent with a 90% owned subsidiary
(except under certain circumstances) or in a merger in which certain rights of
shares remain unaffected. There are also no appraisal rights available where a
disposition of all or substantially all the assets of the corporation is
wholly for cash and approval of the transaction is conditioned upon the
dissolution of the corporation and the distribution of substantially all of
its net assets to shareholders within one year from the date of the
transaction or where the transaction is a share exchange and the petitioning
shareholder's shares were not acquired in the exchange.
ISSUANCE OF RIGHTS OR OPTIONS TO PURCHASE SHARES TO DIRECTORS, OFFICERS AND
EMPLOYEES
The DGCL does not contain any provision requiring the issuance of rights or
options to officers, directors and employees to be approved by a stockholder
vote. Section 505 of the NYBCL requires that the issuance to
56
<PAGE>
officers, directors or employees of rights or options to purchase shares must
be authorized by a majority of all outstanding shares entitled to vote
thereon.
LOANS TO DIRECTORS
Section 143 of the DGCL allows loans to and guarantees of obligations of
officers and directors without any stockholder approval. Section 714 of the
NYBCL requires that any loan made by the corporation to any director must be
authorized by a vote of the shareholders. For purposes of this authorization,
the shares held by the director who would be the borrower in the transaction
are not entitled to vote.
REDEEMABLE SHARES
Section 151 of the DGCL permits both common and preferred shares to be
redeemable at the option of the corporation or at the option of the
stockholder or upon the happening of a specified event, subject to certain
limitations. Under Section 512 of the NYBCL, preferred shares may be
redeemable, but common shares may not be redeemable, except in the case of
certain regulated companies or unless a nonredeemable class of common shares
is outstanding.
"ANTI-GREENMAIL"
The DGCL does not contain any provisions prohibiting the selective
repurchase by a corporation of its stock at a premium over market price
("greenmail"). Delaware courts have permitted the repurchase of shares at a
premium in certain cases.
Section 513 of the NYBCL provides that no domestic corporation may purchase
more than 10% of its stock from a shareholder who has held the shares for less
than two years at any price which is higher than the market price unless such
transaction is approved by both the corporation's board of directors and a
majority of the shares entitled to vote or the corporation offers to purchase
shares from all shareholders on the same terms.
STOCKHOLDER RIGHTS PLANS
The DGCL does not contain any provisions allowing or prohibiting stockholder
rights plans. Delaware courts have permitted the adoption of stockholder
rights plans.
Section 505 of the NYBCL allows a corporation to issue rights or options
which include restrictions or conditions that preclude or limit the exercise,
transfer or receipt of such rights or options by an interested shareholder or
any transferee of such interested shareholder or that invalidate or void such
rights or options held by any such shareholder or transferee.
Both JCPenney and Fay's have instituted stockholder rights plans that could
have the effect of delaying or deterring changes in control. See "Description
of JCPenney Capital Stock--JCPenney Preferred Stock--Rights; Series A
Preferred Stock."
DUTIES OF THE DIRECTORS
The DGCL does not contain a specific provision elaborating the duties of a
board of directors with respect to the best interests of the corporation.
Delaware courts have permitted directors to consider various constituencies
provided that there be some rationally related benefit to the stockholders.
Section 717(b) of the NYBCL permits a board of directors to consider,
including in connection with a change, or potential change, in control of the
corporation, both the long term and short term effects of the decision on the
corporation and, specifically, the effects on: (i) the potential growth,
development, productivity and profitability of the corporation; (ii) current
employees; (iii) retired employees and other beneficiaries of the corporation
still entitled to receive, directly or indirectly, benefits from the
corporation; (iv) customers and
57
<PAGE>
creditors of the corporation; and (v) the ability of the corporation to
continuously provide goods, services, employment opportunities and benefits
and make any other contributions to the communities in which it does business.
AMENDMENT OF BYLAWS
Section 109 of the DGCL provides that the stockholders entitled to vote have
the power to adopt, amend or repeal bylaws and that a corporation may, in its
certificate of incorporation, confer such powers on the board of directors. In
accordance with the JCPenney Charter, the JCPenney Bylaws may be altered,
amended or repealed by a vote of a majority of the directors in office or by a
vote of the holders of a majority of the outstanding stock entitled to vote in
the election of directors, except for certain provisions relating to the
JCPenney Board of Directors (amendment of which requires the affirmative vote
of not less than 80% of the voting stock outstanding).
Section 601(a) of the NYBCL provides that by-laws may be adopted, amended or
repealed by the shareholders entitled to vote in the election of directors and
by the board of directors if the certificate of incorporation or by-laws so
provide. The Fay's By-Laws provide that they may be adopted, amended or
repealed by the holders of Fay's capital stock entitled to vote in the
election of directors or by the Board of Directors of Fay's. Any alteration or
amendment adopted by the Board of Directors of Fay's may be altered or
repealed by the Fay's shareholders and the Board of Directors of Fay's is
prohibited from adopting, amending or repealing any By-Laws the statutory
control over which is vested in the Fay's shareholders.
AMENDMENT OF CERTIFICATE OF INCORPORATION
Section 242 of the DGCL provides that a Delaware corporation may amend its
certificate of incorporation in any respect provided that the amendment
contains only provisions which would have been lawful in the original
certificate of incorporation. A majority of the shares entitled to vote as
well as a majority of shares of each class entitled to vote thereon is
required to amend the certificate of incorporation. Notwithstanding any
provision in the certificate of incorporation to the contrary, the DGCL
provides that any shares which are adversely affected by an amendment are
entitled to vote on that amendment. If shares of any class are affected
adversely while other shares of that same class are not so affected, then
those shares affected shall vote as a separate class. Generally, the JCPenney
Charter may be amended upon the approval of a majority of the JCPenney Common
Stock and Series B Preferred Stock, voting together as a single class;
however, certain provisions of the JCPenney Charter may not be amended without
the approval of at least 80% of the outstanding stock of JCPenney entitled to
vote generally in the election of directors, voting together as a single
class.
Section 801 of the NYBCL provides that a New York corporation can amend its
certificate of incorporation in any respect provided that the amendment
contains only provisions which are then lawful in an original certificate of
incorporation. Under Section 803 of the NYBCL, an amendment may be authorized
by a majority vote of the shares entitled to vote. However, Section 804 of the
NYBCL provides that, notwithstanding any provision in the certificate of
incorporation, and, in addition to the authorization by vote of the holders of
a majority of all outstanding shares entitled to vote thereon, the amendment
must also be authorized by a vote of the holders of a majority of all
outstanding shares of a class or series when the proposed amendment would,
among other things, (i) exclude or limit such holders' right to vote on any
matter; (ii) change such holders' shares by (a) reducing the par value, (b)
changing such shares into a different number of shares in the same class or
the same or different number of shares in a different class, (c) fixing,
changing or abolishing the designation or any relative rights, preferences or
limitations of such holders' shares, or (d) providing that such holders'
shares may be converted into shares of another class or series or altering the
terms or conditions upon which such shares are convertible, if such provisions
would adversely affect such holders; or (iii) subordinate such holders' rights
by authorizing shares having preferences superior, in any respect, to such
holders' rights.
58
<PAGE>
LIMITATION ON DIRECTORS' LIABILITY
Section 102 of the DGCL allows a corporation to limit or eliminate the
personal liability of directors to the corporation and its stockholders for
monetary damages for breach of fiduciary duty as a director. However, this
provision excludes any limitation on liability for (i) any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) intentional or negligent payment of unlawful
dividends or stock purchase or redemption or (iv) any transaction from which
the director derived an improper personal benefit. The JCPenney Charter
provides for the limitation on directors' liability as permitted by such
statute.
Under Section 402 of the NYBCL, a corporation may limit or eliminate the
personal liability of directors to the corporation and its shareholders for
damages for breach of duty in such capacity. This limitation on liability is
not available for acts or omissions by a director which (i) were in bad faith,
(ii) involved intentional misconduct or a knowing violation of law, (iii)
involved financial profit or other advantage to which the director was not
entitled or (iv) resulted in a violation of a statute prohibiting certain
dividend declarations, certain payments to shareholders after dissolution and
particular types of loans. The Fay's Charter provides for the limitation on
directors' liability as permitted by such statute.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 145 of the DGCL provides that a corporation may indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding by reason of the fact that he
or she is or was a director, officer, employee or agent of the corporation or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another entity, provided that such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed
to the best interests of the corporation. The provisions of NYBCL Sections 722
and 723 are substantively equivalent to Section 145 of the DGCL. The JCPenney
Bylaws and the Fay's Charter and the Fay's By-Laws provide for indemnification
of officers, directors, employees and agents to the extent permitted by these
statutes.
REMOVAL OF DIRECTORS
Under Section 141 of the DGCL, any director or the entire board of directors
may be removed, with or without cause, by the holders of a majority of the
shares entitled to vote at an election of directors, except (i) unless the
certificate of incorporation otherwise provides, in the case of a corporation
having a classified board, stockholders may effect such removal only for
cause, (ii) in the case of a corporation having cumulative voting, if less
than the entire board is to be removed, no director may be removed without
cause if the votes cast against his removal would be sufficient to elect him
if then cumulatively voted at an election of the entire board of directors,
or, if there are classes of directors, at an election of the class of
directors of which he or she is a part and (iii) when the certificate of
incorporation provides that a class or series, voting as a class, is entitled
to elect one or more directors, any director so elected may be removed only by
the applicable vote of that class or series, voting as a class. JCPenney has a
classified board, but does not have cumulative voting. The JCPenney Charter
provides that a director may be removed, with or without cause, only upon the
affirmative vote of 80% of the voting stock of JCPenney, voting together as
one class.
Section 706 of the NYBCL permits shareholders to remove any or all directors
for cause by a vote of the shareholders and, if the certificate of
incorporation or by-laws so provide, without cause, provided, however, that
(i) if the corporation has cumulative voting, no director may be removed when
the votes cast against removal would be sufficient to elect such director if
voted cumulatively and (ii) when the certificate of incorporation provides
that a class or series, voting as a class, is entitled to elect one or more
directors, any director so elected may be removed only by the applicable vote
of that class or series, voting as a class. In addition, if provided for in
the certificate of incorporation, or by specific provisions of the by-laws
adopted by the shareholders, the board of directors may remove any director
for cause, except in the case of any director elected by cumulative voting or
by any class or series, voting as a class, when so entitled by the certificate
of incorporation. The Fay's By-Laws provide that no director may be removed
except for cause.
59
<PAGE>
NEWLY CREATED DIRECTORSHIPS AND VACANCIES
Section 223 of the DGCL provides that unless otherwise provided in the
certificate of incorporation or bylaws, vacancies and newly created
directorships may be filled by a majority vote of the directors then in
office, even if the number of directors then in office is less than a quorum,
or by a sole remaining director. In addition, if, at the time of filling any
vacancy or newly created directorship the directors then in office constitute
less than a majority of the whole board, the Delaware Court of Chancery may,
upon application of stockholders holding at least 10% of the shares
outstanding at the time and entitled to vote for such directors, summarily
order an election to be held to fill any such vacancies or newly created
directorships, or to replace the directors chosen by the directors then in
office. Such elections are to be conducted in accordance with the procedures
provided by the DGCL. Unless otherwise provided in the certificate of
incorporation or bylaws, when one or more directors resign from the board, a
majority of directors then in office, including those who have so resigned,
may vote to fill the vacancy. The JCPenney Bylaws provide that any vacancy in
the Board of Directors shall be filled by a majority vote of the remaining
directors, even though less than a quorum.
Under Section 705 of the NYBCL, newly created directorships resulting from
an increase in the number of directors and vacancies occurring for any reason,
other than the removal of a director without cause, may be filled by vote of
the board of directors unless the certificate of incorporation or by-laws
provide for election by the shareholders only. The Fay's Charter and the Fay's
By-Laws do not have such a provision. If the number of directors then in
office is less than a quorum, any vacancies may be filled by vote of a
majority of the directors then in office. Unless a provision of the
certificate of incorporation or a by-law adopted by the shareholders provides
otherwise, vacancies occurring in the board of directors through removal of
directors without cause must be filled by a vote of shareholders. The Fay's
Charter and the Fay's By-Laws provide that no director may be removed from
office except for cause. A director elected to fill a vacancy, unless elected
by the shareholders, holds office until the next meeting of shareholders at
which the election of directors is in the regular course of business.
SPECIAL MEETINGS
Under Section 211 of the DGCL and Section 602 of the NYBCL, special meetings
of stockholders may be called by the board of directors and by such other
person or persons authorized to do so by the corporation's certificate of
incorporation or bylaws. Under the JCPenney Bylaws, a special meeting of
stockholders may be called by the Chairman of the Board of Directors of
JCPenney. Under the Fay's By-Laws, a special meeting of shareholders may be
called by the Board of Directors of Fay's. Both the NYBCL and the DGCL contain
provisions which give certain rights to stockholders of a corporation to
compel the holding of a special meeting in cases where the Board of Directors
of the corporation has failed to hold a meeting for the election of directors
for a period of 13 months or more.
Under both New York and Delaware law, unless the certificate of
incorporation or bylaws provide otherwise, a majority of shares entitled to
vote shall constitute a quorum at special meetings, but in no event shall a
quorum consist of less than one third of the shares entitled to vote. For both
JCPenney and Fay's, a majority of shares entitled to vote constitutes a quorum
at special meetings.
LEGAL MATTERS
The validity of the shares of JCPenney Common Stock being issued in the
Merger will be passed upon for JCPenney by Baker & Botts, L.L.P., Dallas,
Texas. Certain United States tax consequences of the Merger have been passed
upon for JCPenney by Baker & Botts, L.L.P., Dallas, Texas.
60
<PAGE>
EXPERTS
The consolidated financial statements and financial statement schedule of J.
C. Penney Company, Inc. and subsidiaries and the financial statements of J. C.
Penney Funding Corporation as of January 27, 1996, January 28, 1995 and
January 29, 1994 and for each of the years in the three-year period ended
January 27, 1996 included or incorporated by reference in the 1995 JCPenney
Form 10-K have been incorporated herein by reference and in the Registration
Statement of which this Proxy Statement/Prospectus is a part in reliance upon
the reports of KPMG Peat Marwick LLP, independent certified public
accountants, incorporated herein by reference, and upon the authority of said
firm as experts in accounting and auditing. The report of KPMG Peat Marwick
LLP covering the consolidated financial statements of J. C. Penney Company,
Inc. and subsidiaries refers to the adoption of (i) the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of, in 1995, (ii) the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities, in 1994, and (iii) the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes, in 1993.
The consolidated financial statements of Fay's Incorporated included in the
Fay's 1996 Form 10-K have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report, and have been incorporated herein by
reference and in the Registration Statement of which this Proxy
Statement/Prospectus is a part, in reliance upon the report of such firm given
upon its authority as experts in accounting and auditing. The report of
Deloitte & Touche LLP includes an explanatory paragraph relating to a change
in accounting for post retirement benefits other than pensions to conform with
Statement of Financial Accounting Standards No. 106 and to a change in
accounting for income taxes to conform with Statement of Financial Accounting
Standards No. 109.
SHAREHOLDER PROPOSALS FOR 1997 ANNUAL MEETING
If the Merger is not consummated, Fay's will hold its 1997 annual meeting of
shareholders (the "Fay's 1997 Annual Meeting") in accordance with the Fay's
By-Laws and the NYBCL. Any shareholder who desires to submit a proposal to be
presented for a vote of shareholders at the Fay's 1997 Annual Meeting must
submit the proposal in writing in time to be received by the Secretary of
Fay's at the Fay's principal office by December 27, 1996 for inclusion in the
Fay's 1997 proxy statement and form of proxy relating to such meeting. To be
eligible for inclusion in the Fay's 1997 proxy statement, the proposal must
conform to the requirements of Regulation 14A promulgated under the Exchange
Act. Any shareholder who desires to make a nomination for director to be
elected at the Fay's 1997 Annual Meeting must submit the nomination in writing
to be received by the Secretary of Fay's at the Fay's principal office by
December 27, 1996. Any nominations received by that date will be referred to
and considered by the Board of Directors of Fay's.
61
<PAGE>
APPENDIX I
AGREEMENT AND PLAN OF MERGER
AMONG
J. C. PENNEY COMPANY, INC.,
BETA ACQUISITION CORP.
AND
FAY'S INCORPORATED
DATED AS OF AUGUST 5, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<C> <S> <C>
ARTICLE I--THE MERGER................................................... AI-1
1.1 The Merger; Effective Time of the Merger........................... AI-1
1.2 Closing............................................................ AI-1
1.3 Effects of the Merger.............................................. AI-1
ARTICLE II--EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT
CORPORATIONS; EXCHANGE OF CERTIFICATES................................. AI-2
2.1 Effect on Capital Stock............................................ AI-2
(a)Capital Stock of Sub............................................ AI-2
(b)Cancellation of Treasury Stock.................................. AI-2
(c)Exchange Ratio for Company Common Stock......................... AI-2
(d)Stock Options................................................... AI-3
(e)Shares of Dissenting Stockholders............................... AI-3
(f)Changes in Purchaser Capital Stock.............................. AI-3
2.2 Exchange of Certificates........................................... AI-3
(a)Exchange Agent.................................................. AI-3
(b)Exchange Procedures............................................. AI-4
(c)Distributions with Respect to Unexchanged Shares................ AI-4
(d)No Further Ownership Rights in Company Common Stock............. AI-4
(e)No Fractional Shares............................................ AI-5
(f)Termination of Exchange Fund.................................... AI-5
(g)No Liability.................................................... AI-5
(h)Missing Certificates............................................ AI-5
ARTICLE III--REPRESENTATIONS AND WARRANTIES............................. AI-5
3.1 Representations and Warranties of the Company...................... AI-5
(a)Organization, Standing and Power................................ AI-5
(b)Capital Structure............................................... AI-6
(c)Authority; No Violations; Consents and Approvals................ AI-6
(d)SEC Documents................................................... AI-8
(e)Information Supplied............................................ AI-8
(f)Absence of Certain Changes or Events............................ AI-9
(g)No Undisclosed Material Liabilities............................. AI-9
(h)No Default...................................................... AI-9
(i)Compliance with Applicable Laws................................. AI-9
(j)Litigation...................................................... AI-10
(k)Taxes........................................................... AI-10
(l)Pension and Benefit Plans; ERISA................................ AI-11
(m)Labor Matters................................................... AI-14
(n)Assets.......................................................... AI-14
(o)Intellectual Property........................................... AI-15
(p)Environmental Matters........................................... AI-15
(q)Product Liability............................................... AI-16
(r)Charter Takeover Provisions..................................... AI-16
(s)Opinion of Financial Advisor.................................... AI-16
(t)Vote Required................................................... AI-16
(u)Insurance....................................................... AI-16
(v)Advisors........................................................ AI-17
(w)Additional Tax Matters.......................................... AI-17
(x)Contracts....................................................... AI-17
(y)Sale of Division................................................ AI-17
</TABLE>
AI-i
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<C> <S> <C>
3.2 Representations and Warranties of Purchaser and Sub............. AI-17
(a)Organization, Standing and Power............................. AI-17
(b)Capital Structure............................................ AI-17
(c)Authority; No Violations, Consents and Approvals............. AI-18
(d)SEC Documents................................................ AI-19
(e)Information Supplied......................................... AI-19
(f)Absence of Certain Changes or Events......................... AI-20
(g)No Undisclosed Material Liabilities.......................... AI-20
(h)No Default................................................... AI-20
(i)Litigation................................................... AI-20
(j)No Vote Required............................................. AI-21
(k)Brokers...................................................... AI-21
(l)Interim Operations of Sub.................................... AI-21
(m)Additional Tax Matters....................................... AI-21
(n)No Ownership of Company Capital Stock........................ AI-21
ARTICLE IV--COVENANTS RELATING TO CONDUCT OF BUSINESS OF THE COMPANY.. AI-21
4.1 Conduct of Business by the Company Pending the Merger........... AI-21
(a)Ordinary Course.............................................. AI-21
(b)Dividends; Changes in Stock.................................. AI-21
(c)Issuance of Securities....................................... AI-22
(d)Governing Documents.......................................... AI-22
(e)No Acquisitions.............................................. AI-22
(f)No Dispositions.............................................. AI-22
(g)No Dissolution, Etc.......................................... AI-22
(h)Certain Employee Matters..................................... AI-22
(i)Indebtedness; Leases; Capital Expenditures; Accounting
Changes...................................................... AI-23
(j)368(a) Reorganization........................................ AI-23
4.2 No Solicitation................................................. AI-23
ARTICLE V--ADDITIONAL AGREEMENTS...................................... AI-24
5.1 Preparation of S-4 and the Proxy Statement...................... AI-24
5.2 Letter of the Company's Accountants............................. AI-24
5.3 Letter of Purchaser's Accountants............................... AI-24
5.4 Access to Information........................................... AI-24
5.5 The Company Stockholders Meeting................................ AI-24
5.6 Legal Conditions to Merger...................................... AI-25
5.7 Response to Certain Actions..................................... AI-25
5.8 Agreements of Others............................................ AI-25
5.9 Authorization for Shares and Stock Exchange Listing............. AI-25
5.10 Employee Matters................................................ AI-26
(a)Employees.................................................... AI-26
(b)Participation in Plans Maintained by Purchaser............... AI-26
(c)Employment of Company Employees.............................. AI-26
(d)Employment Agreements........................................ AI-27
(e)Non-Employee Directors Retirement Plan....................... AI-27
(f)Severance Policies........................................... AI-27
(g)Bonus Plans.................................................. AI-27
(h)Stock Purchase Plan.......................................... AI-27
(i)Stock Options Issued to Non-Employee Directors............... AI-27
(j)Stock Options Issued to Employees............................ AI-28
(k)Communications to Employees.................................. AI-28
</TABLE>
AI-ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<C> <S> <C>
5.11 Indemnification; Directors' and Officers' Insurance............... AI-28
5.12 Agreement to Defend............................................... AI-29
5.13 Public Announcements.............................................. AI-29
5.14 Other Actions..................................................... AI-30
5.15 Advice of Changes; SEC Filings.................................... AI-30
5.16 Reorganization.................................................... AI-30
5.17 Conveyance Taxes.................................................. AI-30
5.18 Company Operations and Name....................................... AI-30
5.19 Company Convertible Notes......................................... AI-30
ARTICLE VI--CONDITIONS PRECEDENT........................................ AI-30
6.1 Conditions to Each Party's Obligation to Effect the Merger........ AI-30
(a)Company Stockholder Approval................................... AI-30
(b)NYSE Listing................................................... AI-31
(c)Other Approvals................................................ AI-31
(d)S-4............................................................ AI-31
(e)No Injunctions or Restraints................................... AI-31
(f)Tax Opinion.................................................... AI-31
6.2 Conditions of Obligations of Purchaser and Sub.................... AI-31
(a)Representations and Warranties................................. AI-31
(b)Performance of Obligations of the Company...................... AI-31
(c)Agreements from the Company Affiliates......................... AI-32
(d)Appraisal Rights............................................... AI-32
(e)Opinion of Company Counsel..................................... AI-32
(f)Consents Under Agreements...................................... AI-33
(g)Material Adverse Change........................................ AI-33
(h)Termination of Certain Plans................................... AI-33
6.3 Conditions of Obligations of the Company.......................... AI-33
(a)Representations and Warranties................................. AI-33
(b)Performance of Obligations of Purchaser and Sub................ AI-33
(c)Opinion of Purchaser Counsel................................... AI-33
(d)Material Adverse Change........................................ AI-34
ARTICLE VII--TERMINATION AND AMENDMENT.................................. AI-35
7.1 Termination....................................................... AI-35
7.2 Effect of Termination............................................. AI-36
7.3 Amendment......................................................... AI-36
7.4 Extension; Waiver................................................. AI-36
ARTICLE VIII--GENERAL PROVISIONS........................................ AI-36
8.1 Payment of Expenses............................................... AI-36
8.2 Nonsurvival of Representations, Warranties and Agreements......... AI-37
8.3 Notices........................................................... AI-37
8.4 Interpretation.................................................... AI-37
8.5 Counterparts...................................................... AI-38
8.6 Entire Agreement; No Third Party Beneficiaries.................... AI-38
8.7 Governing Law..................................................... AI-38
8.8 No Remedy in Certain Circumstances................................ AI-38
8.9 Specific Performance.............................................. AI-38
8.10 Assignment........................................................ AI-38
8.11 Schedules......................................................... AI-38
</TABLE>
AI-iii
<PAGE>
FAY'S INCORPORATED
SCHEDULES TO THE AGREEMENT AND PLAN OF MERGER
<TABLE>
<CAPTION>
SCHEDULE NO. DESCRIPTION
- - ------------ -----------
<S> <C>
3.1(a)(i) --Subsidiaries
3.1(a)(ii) --Other Ownership Interests
3.1(b) --Capital Structure
3.1(c)(iii) --Certain Filings
3.1(d) --Certain Agreements with Affiliates
3.1(f) --Certain Changes or Events
3.1(g) --Certain Material Liabilities
3.1(h) --Certain Defaults
3.1(i) --Investigations and Reviews
3.1(j) --Litigation and Orders
3.1(k)(i), (ii), (iii),
(iv), (vi), (vii) --Tax Matters
3.1(l)(i), (ii), (iv),
(viii), (ix), (x),
(xi), (xii), (xiii),
(xiv) --Pension and Benefit Plans; ERISA
3.1(m)(i), (ii) --Labor Matters
3.1(n)(i), (ii), (iii) --Assets
3.1(o) --Intellectual Property
3.1(p) --Environmental Matters
3.1(u) --Insurance
3.1(v) --Advisors
3.1(w) --Form of Tax Certificate
3.1(x)(i), (ii), (iii) --Contracts
3.1(y) --Paper Cutter Amendments
4.1(f) --Certain Dispositions
4.1(h) --Certain Employee Matters
4.1(i) --Indebtedness; Leases; Capital Expenditures; Accounting Changes
5.10(b), (d) --Certain Employee Benefits
8.6 --Knowledge
</TABLE>
AI-iv
<PAGE>
J. C. PENNEY COMPANY, INC.
BETA ACQUISITION CORP.
SCHEDULES TO THE AGREEMENT AND PLAN OF MERGER
<TABLE>
<CAPTION>
SCHEDULE NO. DESCRIPTION
- - ------------ -----------
<S> <C>
3.2(b) --Capital Structure
3.2(d) --Certain Agreements with Affiliates
3.2(f) --Certain Changes or Events
3.2(g) --Certain Material Liabilities
3.2(h) --Certain Defaults
3.2(i) --Litigation and Orders
3.2(k) --Brokers Fees
3.2(m) --Form of Tax Certificate
</TABLE>
AI-v
<PAGE>
GLOSSARY OF DEFINED TERMS
<TABLE>
<CAPTION>
DEFINED TERM DEFINED IN SECTION
- - ------------ ------------------
<S> <C>
Acquisition Proposal......................................... 4.2
Acquisition Transaction...................................... 4.2
ADA.......................................................... 3.1(n)(i)
Adjusted Conversion Shares................................... 2.1(c)
Affiliates................................................... 5.8
Agreement.................................................... Preamble
Bonus Plans.................................................. 5.10(g)
CERCLA....................................................... 3.1(p)(i)
Certificate of Merger........................................ 1.1
Certificates................................................. 2.2(b)
Closing...................................................... 1.1
Closing Date................................................. 1.2
Code......................................................... Recitals
Company...................................................... Preamble
Company Agreement............................................ 3.1(x)
Company Benefit Plans........................................ 5.10(b)(i)
Company Benefit Trusts....................................... 3.1(l)(ii)
Company Common Stock......................................... 2.1
Company Convertible Notes.................................... 3.1(b)
Company Employee Benefit Plans............................... 3.1(l)(ii)
Company ERISA Affiliate...................................... 3.1(l)(i)
Company Intellectual Property................................ 3.1(o)
Company Litigation........................................... 3.1(j)
Company Non-Employee Directors Plan.......................... 3.1(b)
Company Order................................................ 3.1(j)
Company Pension Plans........................................ 3.1(l)(i)
Company Pension Trusts....................................... 3.1(l)(i)
Company Permits.............................................. 3.1(i)
Company Preferred Stock...................................... 3.1(b)
Company Representatives...................................... 4.2
Company Rights Plan.......................................... 3.1(b)
Company SEC Documents........................................ 3.1(d)
Company Stock Option......................................... 5.10
Company Stock Plan........................................... 3.1(b)
Company Stock Purchase Plan.................................. 3.1(b)
Constituent Corporations..................................... 1.3(a)
Conversion Shares............................................ 2.1(c)
Daily Price.................................................. 2.1(c)
Defined Benefit Plan......................................... 3.1(1)(xi)
Directors Option Plan........................................ 5.10(i)
Directors Stock Option....................................... 5.10(i)
Dissenting Stockholder....................................... 2.1(e)
Divestiture Threshold........................................ 5.7
Effective Time............................................... 1.1
Employees.................................................... 5.10(a)
Employee Stock Option........................................ 5.10(j)
Employment Agreements........................................ 5.10(d)
Environmental Law............................................ 3.1(p)(i)
ERISA........................................................ 3.1(l)(i)
</TABLE>
AI-vi
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM DEFINED IN SECTION
- - ------------ ------------------
<S> <C>
Exchange Act................................................. 3.1(c)(iii)
Exchange Agent............................................... 2.2(a)
Exchange Fund................................................ 2.2(a)
GAAP......................................................... 3.1(d)
Governmental Entity.......................................... 3.1(c)(iii)
Hazardous Material........................................... 3.1(p)(ii)
HSR Act...................................................... 3.1(c)(iii)
Indemnified Liabilities...................................... 5.11(a)
Indemnified Parties.......................................... 5.11(a)
Injunction................................................... 6.1(e)
IRS.......................................................... 3.1(k)(ii)
Knowledge of the Company..................................... 8.4
Material Adverse Change...................................... 3.1(a)
Material Adverse Effect...................................... 3.1(a)
Merger....................................................... Recitals
NYBCL........................................................ 1.1
NYSE......................................................... 2.1(c)
OSHA......................................................... 3.1(p)(i)
Proxy Statement.............................................. 3.1(c)(iii)
Purchaser.................................................... Preamble
Purchaser Benefit Plan....................................... 5.10(b)(i)
Purchaser Common Stock....................................... 2.1(c)
Purchaser Litigation......................................... 3.2(i)
Purchaser Option Plans....................................... 3.2(b)
Purchaser Order.............................................. 3.2(i)
Purchaser Preferred Stock.................................... 3.2(b)
Purchaser's Rights Agreement................................. 2.1(c)
Purchaser SEC Documents...................................... 3.2(d)
Release...................................................... 3.1(p)(iii)
Returns...................................................... 3.1(k)(i)
Rights....................................................... 2.1(c)
S-4.......................................................... 3.1(e)
SEC.......................................................... 3.1(d)
Securities Act............................................... 3.1(d)
Service...................................................... 3.1(1)(i)
Surviving Corporation........................................ 1.3(a)
Stockholders Agreement....................................... Recitals
Sub.......................................................... Preamble
Subsidiary................................................... 2.1(b)
Tax.......................................................... 3.1(k)(ix)
Taxable...................................................... 3.1(k)(ix)
Taxes........................................................ 3.1(k)(ix)
Tax Return................................................... 3.1(k)(ix)
Voting Debt.................................................. 3.1(b)
</TABLE>
AI-vii
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of August 5, 1996 (this "Agreement"),
among J. C. Penney Company, Inc., a Delaware corporation ("Purchaser"), Beta
Acquisition Corp., a New York corporation and a direct wholly owned subsidiary
of Purchaser ("Sub"), and Fay's Incorporated, a New York corporation (the
"Company").
WHEREAS, the Boards of Directors of Purchaser, Sub and the Company each have
determined that it is in the best interests of their respective stockholders
for Sub to merge with and into the Company (the "Merger") upon the terms and
subject to the conditions of this Agreement;
WHEREAS, the Board of Directors of the Company has directed that this
Agreement be submitted to the stockholders of the Company for their approval;
WHEREAS, as a condition and inducement to Purchaser and Sub entering into
this Agreement and securing the obligations set forth herein, concurrently
with the execution and delivery of this Agreement, Purchaser is entering into
a Stockholders Agreement with certain stockholders of the Company in the form
of Exhibit A attached hereto (the "Stockholders Agreement"), pursuant to
which, among other things, such stockholders have agreed to vote the Company
Common Stock (as hereinafter defined) then owned by such stockholders in favor
of the Merger provided for herein;
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, Purchaser, Sub and the Company desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger and also to prescribe various conditions to the Merger.
NOW, THEREFORE, in consideration of the foregoing and the representations,
warranties, covenants and agreements herein contained, the parties agree as
follows:
ARTICLE 1
THE MERGER
1.1 The Merger; Effective Time of the Merger. Upon the terms and subject to
the conditions of this Agreement and in accordance with the New York Business
Corporation Law (the "NYBCL"), Sub shall be merged with and into the Company
at the Effective Time (as hereinafter defined). The Merger shall become
effective immediately when a certificate of merger (the "Certificate of
Merger") prepared and executed in accordance with the relevant provisions of
the NYBCL is filed with the Department of State of the State of New York or,
if agreed to by the parties, at such time thereafter as is provided in the
Certificate of Merger, but not to exceed 30 days after such filing (the
"Effective Time"). The filing of the Certificate of Merger shall be made as
soon as practicable on or after the closing of the Merger (the "Closing").
1.2 Closing. The Closing shall take place at 10:00 a.m. on a date to be
specified by the parties, which shall be no later than the second business day
after satisfaction (or waiver in accordance with this Agreement) of the latest
to occur of the conditions set forth in Article VI (the "Closing Date"), at
the offices of J. C. Penney Company, Inc., 6501 Legacy Drive, Plano, Texas,
unless another date or place is agreed to in writing by the parties.
1.3 Effects of the Merger.
(a) At the Effective Time: (i) Sub shall be merged with and into the
Company, the separate existence of Sub shall cease and the Company shall
continue as the surviving corporation (Sub and the Company are sometimes
referred to herein as the "Constituent Corporations" and the Company is
sometimes referred to
AI-1
<PAGE>
herein as the "Surviving Corporation"); (ii) the Certificate of
Incorporation of Sub as in effect immediately prior to the Effective Time
shall be the Certificate of Incorporation of the Surviving Corporation; and
(iii) the Bylaws of Sub as in effect immediately prior to the Effective
Time shall be the Bylaws of the Surviving Corporation.
(b) The directors and officers of Sub at the Effective Time shall, from
and after the Effective Time, be the initial directors and officers of the
Surviving Corporation and shall serve until their successors have been duly
elected or appointed and qualified or until their earlier death,
resignation or removal in accordance with the Surviving Corporation's
Certificate of Incorporation and Bylaws.
(c) At and after the Effective Time, the Surviving Corporation shall
possess all the rights, privileges, immunities, powers and purposes of each
of the Constituent Corporations; and all property, real and personal,
including subscriptions to shares, causes of action and every other asset
of each of the Constituent Corporations, shall vest in the Surviving
Corporation without further act or deed; and the Surviving Corporation
shall assume and be liable for all the liabilities, obligations and
penalties of each of the Constituent Corporations. No liability or
obligation due or to become due, claim or demand for any cause existing
against any such corporation, or any stockholder, officer or director
thereof, shall be released or impaired by such merger or consolidation. No
action or proceeding, whether civil or criminal, then pending by or against
any such Constituent Corporation, or any stockholder, officer or director
thereof, shall abate or be discontinued by such merger or consolidation,
but may be enforced, prosecuted, settled or compromised as if such merger
or consolidation had not occurred, or such Surviving Corporation may be
substituted in such action or special proceeding in place of the
Constituent Corporation.
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES
2.1 Effect on Capital Stock. At the Effective Time, by virtue of the Merger
and without any action on the part of the holder of any shares of common
stock, par value $0.10 per share, of the Company ("Company Common Stock") or
capital stock of Sub:
(a) Capital Stock of Sub. Each issued and outstanding share of the
capital stock of Sub shall be converted into and become one fully paid and
nonassessable share of common stock, par value $1.00 per share, of the
Surviving Corporation.
(b) Cancellation of Treasury Stock. Each share of the Company Common
Stock and all other shares of capital stock of the Company that are owned
by the Company as treasury stock and any shares of Company Common Stock and
all other shares of capital stock of the Company owned by any wholly owned
Subsidiary (as hereinafter defined) of the Company shall be canceled and
retired and shall cease to exist and no stock of Purchaser or other
consideration shall be delivered or deliverable in exchange therefor. As
used in this Agreement, the word "Subsidiary" means, with respect to any
party, any corporation or other organization, whether incorporated or
unincorporated, of which: (i) such party or any other Subsidiary of such
party is a general partner (excluding partnerships, the general partnership
interests of which are held by such party or any Subsidiary of such party
that do not represent a majority of the voting interest in such
partnership); or (ii) at least a majority of the securities or other
interests having by their terms ordinary voting power to elect a majority
of the Board of Directors or others performing similar functions with
respect to such corporation or other organization is, directly or
indirectly, owned or controlled by such party or by any one or more of its
Subsidiaries, or by such party and any one or more of its Subsidiaries.
(c) Exchange Ratio for Company Common Stock. Each share of Company Common
Stock issued and outstanding immediately prior to the Effective Time (other
than shares to be canceled in accordance with Section 2.1(b)) shall be
converted into the number of shares of common stock, par value of 50c per
share, of Purchaser ("Purchaser Common Stock"), together with the
associated preferred stock purchase rights (the "Rights") issued under the
Rights Agreement, dated as of February 14, 1990, between Purchaser and
AI-2
<PAGE>
First Chicago Trust Company of New York, as amended on January 13, 1992 to
reflect Manufacturers Hanover Trust Company (now Chase Mellon Shareholder
Services, L.L.C.) as successor rights agent (the "Purchaser's Rights
Agreement"), equal to the quotient obtained by dividing (i) $12.75 by (ii)
the average of the per share Daily Price (as hereinafter defined) on the
New York Stock Exchange, Inc. (the "NYSE") of the Purchaser Common Stock
(as reported in the New York Stock Exchange Composite Transactions) during
the ten consecutive trading days immediately preceding the date which is
two trading days prior to the date of the Company's stockholders meeting
referred to in Section 5.5 (the "Conversion Shares"); provided, however, in
no event will the Conversion Shares be less than .2253397 shares of
Purchaser Common Stock or greater than .2754151 shares of Purchaser Common
Stock. As used herein, the term "Daily Price" shall mean the average of the
high and low selling prices on the day in question as reported in the Wall
Street Journal. All such shares of Company Common Stock, when so converted,
shall no longer be outstanding and shall automatically be canceled and
retired and shall cease to exist, and each holder of a certificate
representing any such shares shall cease to have any rights with respect
thereto, except the right to receive the shares of Purchaser Common Stock
and cash in lieu of fractional shares of Purchaser Common Stock as
contemplated by Section 2.2(e), to be issued or paid in consideration
therefor upon the surrender of such certificate in accordance with Section
2.2, without interest.
(d) Stock Options. Each outstanding Directors Stock Option and Employee
Stock Option (as defined in Section 5.10) shall be treated in the manner
set forth in Section 5.10.
(e) Shares of Dissenting Stockholders. Notwithstanding anything in this
Agreement to the contrary, any issued and outstanding shares of Company
Common Stock held by a stockholder who has not voted such shares in favor
of the Merger and shall have delivered a written demand for appraisal of
such shares in the manner provided in the NYBCL (a "Dissenting
Stockholder") shall not be converted as described in Section 2.1 (c), but
shall become the right to receive the fair value of such shares as may be
determined to be due to such Dissenting Stockholder pursuant to the NYBCL;
provided, however, that the shares of the Company Common Stock held by a
Dissenting Stockholder who shall, after the Effective Time, withdraw his
demand for appraisal or lose his or her right of appraisal, in either case
pursuant to the NYBCL, shall be deemed to have been converted into and to
have become exchangeable for, at the Effective Time, the right to receive
the consideration provided for in Section 2.1 (c). The Company shall give
Purchaser (i) prompt notice of any written objection to the Merger from a
Dissenting Stockholder, and (ii) the opportunity to direct all negotiations
and proceedings with respect to any such Dissenting Stockholders. The
Company shall not, without the prior written consent of Purchaser,
voluntarily make any payment with respect to, or settle, offer to settle or
otherwise negotiate, any such demands.
(f) Changes in Purchaser Capital Stock. In the event that, subsequent to
the date of this Agreement but prior to the Effective Time, Purchaser
changes the number of shares of Purchaser Common Stock issued and
outstanding as a result of a stock split, reverse stock split, stock
dividend, recapitalization or other similar transaction, the Conversion
Shares shall be appropriately adjusted (including the minimum and maximum
Conversion Shares).
2.2 Exchange of Certificates
(a) Exchange Agent. As of the Effective Time, Purchaser shall deposit
with Chase Mellon Shareholder Services, L.L.C. or such other bank or trust
company designated by Purchaser and reasonably acceptable to the Company
(the "Exchange Agent"), for the benefit of the holders of shares of Company
Common Stock and for exchange in accordance with this Article II through
the Exchange Agent, certificates representing the shares of Purchaser
Common Stock (such shares of Purchaser Common Stock, together with any
dividends or distributions with respect thereto, and the associated Rights
being hereinafter referred to as the "Exchange Fund") issuable pursuant to
Section 2.1 in exchange for outstanding shares of Company Common Stock. The
Exchange Agent shall, pursuant to irrevocable instructions, deliver the
Purchaser Common Stock contemplated to be issued pursuant to Section 2.1
out of the Exchange Fund. The Exchange Fund shall not be used for any other
purpose.
AI-3
<PAGE>
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, the Exchange Agent shall mail to each holder of record of a
certificate or certificates which, immediately prior to the Effective Time,
represented outstanding shares of Company Common Stock (the
"Certificates"), which holder's shares of Company Common Stock were
converted into the right to receive shares of Purchaser Common Stock
pursuant to Section 2.1: (i) a letter of transmittal (which shall specify
that delivery shall be effected and risk of loss and title to the
Certificates shall pass only upon delivery of the Certificates to the
Exchange Agent, and shall be in such form and have such other provisions as
Purchaser may reasonably specify); and (ii) instructions for use in
effecting the surrender of the Certificates in exchange for certificates
representing shares of Purchaser Common Stock. Upon surrender of a
Certificate for cancellation to the Exchange Agent or to such other agent
or agents as may be appointed by Purchaser, together with such letter of
transmittal, duly executed, and any other required documents, the holder of
such Certificate shall be entitled to receive in exchange therefor a
certificate representing that number of whole shares of Purchaser Common
Stock which such holder has the right to receive pursuant to the provisions
of this Article II and cash in lieu of fractional shares of Purchaser
Common Stock as contemplated by Section 2.2(e), and the Certificate so
surrendered shall forthwith be canceled. In the event of a transfer of
ownership of Company Common Stock which is not registered in the transfer
records of the Company, a certificate representing the appropriate number
of shares of Purchaser Common Stock may be issued to a transferee if the
Certificate representing such Company Common Stock is presented to the
Exchange Agent accompanied by all documents required to evidence and effect
such transfer and by evidence that any applicable stock transfer taxes have
been paid. Until surrendered as contemplated by this Section 2.2, each
Certificate shall be deemed at any time after the Effective Time to
represent only the right to receive upon such surrender the certificate
representing shares of Purchaser Common Stock and cash in lieu of any
fractional shares of Purchaser Common Stock as contemplated by this Section
2.2. The Exchange Agent shall not be entitled to vote or exercise any
rights of ownership with respect to the Purchaser Common Stock held by it
from time to time hereunder, except that it shall receive and hold all
dividends or other distributions paid or distributed with respect thereto
for the account of persons entitled thereto.
(c) Distributions with Respect to Unexchanged Shares. No dividends or
other distributions with respect to Purchaser Common Stock declared or made
after the Effective Time with a record date after the Effective Time shall
be paid to the holder of any unsurrendered Certificate with respect to the
right to receive shares of Purchaser Common Stock represented thereby and
no cash payment in lieu of fractional shares shall be paid to any such
holder pursuant to Section 2.2(e) until the holder of such Certificate
shall surrender such Certificate. Subject to the effect of applicable laws,
following surrender of any such Certificate, there shall be paid to the
holder thereof, without interest: (i) at the time of such surrender, the
amount of any cash payable in lieu of a fractional share of Purchaser
Common Stock to which such holder is entitled pursuant to Section 2.2(e)
and the amount of dividends or other distributions with a record date after
the Effective Time theretofore paid with respect to such whole shares of
Purchaser Common Stock; and (ii) at the appropriate payment date, the
amount of dividends or other distributions with a record date after the
Effective Time but prior to surrender and a payment date subsequent to
surrender payable with respect to such whole shares of Purchaser Common
Stock.
(d) No Further Ownership Rights in Company Common Stock. All shares of
Purchaser Common Stock and Rights issued upon the surrender for exchange of
shares of Company Common Stock in accordance with the terms hereof
(including any cash paid pursuant to Section 2.2(c) or Section 2.2(e))
shall be deemed to have been issued in full satisfaction of all rights
pertaining to such shares of Company Common Stock, subject, however, to the
Surviving Corporation's obligation to pay any dividends or make any other
distributions with a record date prior to the Effective Time that, subject
to Section 4.1(b), may have been declared or made by the Company on such
shares of Company Common Stock in accordance with the terms of this
Agreement or prior to the date hereof and which remain unpaid at the
Effective Time, and after the Effective Time there shall be no further
registration of transfers on the stock transfer books of the Surviving
Corporation of the shares of Company Common Stock that were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation for any reason,
they shall be canceled and exchanged as provided in this Article II.
AI-4
<PAGE>
(c) No Fractional Shares. No certificates or scrip representing
fractional shares of Purchaser Common Stock shall be issued upon the
surrender for exchange of Certificates pursuant to this Article II, and,
except as provided in this Section 2.2(e), no dividend or other
distribution, stock split or interest shall relate to any such fractional
security, and such fractional interests shall not entitle the owner thereof
to vote or to any rights of a security holder of Purchaser. In lieu of any
fractional security, each holder of shares of Company Common Stock who
would otherwise have been entitled to a fraction of a share of Purchaser
Common Stock upon surrender of Certificates for exchange pursuant to this
Article II will be paid an amount in cash (without interest) rounded to the
nearest whole cent, determined by multiplying (i) the Daily Price on the
date on which the Effective Time occurs, by (ii) the fractional share to
which such holder would otherwise be entitled. All fractional shares to
which a single record holder would be entitled shall be aggregated.
Purchaser shall make available to the Exchange Agent the cash necessary for
this purpose. Calculations made pursuant to this Section 2.2(e) shall be
rounded to three decimal places.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund and
any cash in lieu of fractional shares of Purchaser Common Stock made
available to the Exchange Agent that remain undistributed to the former
stockholders of the Company for one year after the Effective Time shall be
delivered to Purchaser, upon demand, and any stockholders of the Company
who have not theretofore complied with this Article II shall thereafter
look only to Purchaser for payment of their claim for Purchaser Common
Stock, any cash in lieu of fractional shares of Purchaser Common Stock and
any dividends or distributions with respect to Purchaser Common Stock.
(g) No Liability. Neither Purchaser nor the Company shall be liable to
any holder of shares of Company Common Stock or Purchaser Common Stock, as
the case may be, for such shares (or dividends or distributions with
respect thereto) or cash in lieu of fractional shares of Purchaser Common
Stock delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law.
(h) Missing Certificates. In the event any Certificate shall have been
lost, stolen or destroyed, upon the making of an affidavit of that fact by
the person claiming such Certificate to be lost, stolen or destroyed and,
if required by the Surviving Corporation, the posting by such person of a
bond in such reasonable amount as the Surviving Corporation may direct as
indemnity against any claim that may be made against it with respect to
such Certificate, the Exchange Agent will issue in exchange for such lost,
stolen or destroyed Certificate the shares of Purchaser Common Stock and
cash in lieu of fractional shares, and unpaid dividends and distributions
with respect to shares of Purchaser Common Stock as provided in
Section 2.2(c), deliverable in respect thereof pursuant to this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of the Company. The Company represents
and warrants to Purchaser and Sub as follows:
(a) Organization, Standing and Power. Each of the Company and its
Subsidiaries is a corporation or partnership duly organized, validly
existing and in good standing under the laws of its state of incorporation
or organization, has all requisite power and authority to own, lease and
operate its properties and to carry on its business as now being conducted,
and is duly qualified and in good standing to do business in each
jurisdiction in which the business it is conducting, or the operation,
ownership or leasing of its properties, makes such qualification necessary,
other than in such jurisdictions where the failure so to qualify could not
reasonably be expected to have a Material Adverse Effect (as hereinafter
defined). The Company has heretofore delivered to Purchaser complete and
correct copies of its Restated Certificate of Incorporation and Bylaws. All
Subsidiaries of the Company and their respective jurisdictions of
incorporation or organization are identified on Schedule 3.1(a)(i). Except
as set forth on Schedules 3.1(a)(i) or 3.1(a)(ii), the Company does not
directly or indirectly have (or possess any options or other rights to
acquire) any direct or indirect ownership interests in excess of 1% in any
person, business, corporation, partnership, association,
AI-5
<PAGE>
joint venture, trust or other entity. As used in this Agreement, a
"Material Adverse Effect" or "Material Adverse Change" shall mean, in
respect of the Company or Purchaser, as the case may be, any material
adverse effect or change to the business, operations, assets, condition
(financial or otherwise) or results of operation of such party and its
Subsidiaries taken as a whole.
(b) Capital Structure. As of the date hereof, the authorized capital
stock of the Company consists of 30,000,000 shares of Company Common Stock
and 5,000,000 shares of preferred stock, par value $1.00 per share
("Company Preferred Stock"). At the close of business on July 31, 1996: (i)
20,993,618 shares of Company Common Stock were issued and outstanding;
300,000 shares of Series A Junior Participating Preferred Stock, par value
$1.00 per share, of the Company were reserved for issuance pursuant to the
Company Rights Plan (as hereinafter defined); no more than 2,469,000 shares
of Company Common Stock were reserved for issuance pursuant to outstanding
grants under the Company's 1982 Stock Option Plan (the "Company Stock
Plan"); 51,750 shares of Company Common Stock were reserved for issuance
pursuant to outstanding grants under the Company's Stock Option Plan for
Non-Employee Directors (the "Company Non-Employee Directors Plan"); and
732,780 shares of Company Common Stock were reserved for issuance pursuant
to the 1971 Fay's Incorporated Employees' Stock Purchase Plan (the "Company
Stock Purchase Plan"); (ii) 13,303 shares of Company Common Stock were held
by the Company in its treasury or by its wholly owned Subsidiaries; and
(iii) except for the $1,000,000 principal amount 10% convertible notes of
the Company due January 15, 1998 (the "Company Convertible Notes"), which
as of the date hereof are convertible into 191,205 shares of Company Common
Stock at a conversion price of $5.23 per share, no bonds, debentures, notes
or other indebtedness having the right to vote (or convertible into
securities having the right to vote) on any matters on which the Company
stockholders may vote ("Voting Debt") were issued or outstanding. All
outstanding shares of Company Common Stock are validly issued, fully paid
and nonassessable and are not subject to preemptive rights. Except as set
forth on Schedule 3.1(b), all outstanding shares of capital stock of the
Subsidiaries of the Company are owned by the Company, or a direct or
indirect wholly owned Subsidiary of the Company, free and clear of all
liens, charges, encumbrances, claims and options of any nature. Except as
set forth in this Section 3.1(b) or on Schedule 3.1(b), and except for (i)
securities that may be issued under Rights Agreement, dated August 17,
1995, between the Company and American Stock Transfer and Trust Company
(the "Company Rights Plan"); (ii) changes since January 27, 1996 resulting
from the exercise of employee stock options granted pursuant to the Company
Stock Plan or the Company Non-Employee Directors Plan; and (iii) changes
since January 27, 1996 resulting from issuances or purchases under (A) the
Company Stock Purchase Plan, (B) the Company Service Award Program or (C)
as contemplated by this Agreement, there are outstanding: (x) no shares of
capital stock, Voting Debt or other voting securities of the Company; (y)
no securities of the Company or any Subsidiary of the Company convertible
into or exchangeable for shares of capital stock, Voting Debt or other
voting securities of the Company or any Subsidiary of the Company; and (z)
no options, warrants, calls, rights (including preemptive rights),
commitments or agreements to which the Company or any Subsidiary of the
Company is a party or by which it is bound, in any case obligating the
Company or any Subsidiary of the Company to issue, deliver, sell, purchase,
redeem or acquire, or cause to be issued, delivered, sold, purchased,
redeemed or acquired, additional shares of capital stock or any Voting Debt
or other voting securities of the Company or of any Subsidiary of the
Company, or obligating the Company or any Subsidiary of the Company to
grant, extend or enter into any such option, warrant, call, right,
commitment or agreement. Except for the Stockholders Agreement, there are
not as of the date hereof and there will not be at the Effective Time any
stockholder agreements, voting trusts or other agreements or understandings
to which the Company is a party or by which it is bound relating to the
voting of any shares of the capital stock of the Company that will limit in
any way the solicitation of proxies by or on behalf of the Company from, or
the casting of votes by, the stockholders of the Company with respect to
the Merger. There are no restrictions on the right of the Company to vote
the stock of any of its Subsidiaries.
(c) Authority; No Violations; Consents and Approvals.
(i) The Board of Directors of the Company has (A) approved the Merger,
this Agreement and the Stockholders Agreement, in accordance with the
requirements of the NYBCL and, if applicable, the terms
AI-6
<PAGE>
of Article Ninth of the Company's Restated Certificate of Incorporation and
by vote of the directors with no negative vote, and declared the Merger and
this Agreement to be in the best interests of the stockholders of the
Company and (B) adopted an amendment to the Company Rights Plan, a true and
correct copy of which has been delivered to Purchaser, pursuant to which
Purchaser is not deemed to be an Acquiring Person (as defined in the
Company Rights Plan) as a result of the execution or performance of the
Stockholders Agreement or the execution or consummation of the transactions
contemplated by this Agreement. The directors have advised the Company that
they intend to vote or cause to be voted all of the shares Beneficially
Owned (as defined in the Stockholders Agreement) by them in favor of
approval of the Merger and this Agreement. The Company has all requisite
corporate power and authority to enter into this Agreement and, subject,
with respect to consummation of the Merger, to approval of this Agreement
and the Merger by the stockholders of the Company in accordance with the
NYBCL, to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by all necessary corporate
action on the part of the Company, subject, with respect to consummation of
the Merger, to approval of this Agreement and the Merger by the
stockholders of the Company in accordance with the NYBCL. This Agreement
has been duly executed and delivered by the Company and, subject, with
respect to consummation of the Merger, to approval of this Agreement and
the Merger by the stockholders of the Company in accordance with the NYBCL,
and assuming this Agreement constitutes the valid and binding obligation of
Purchaser and Sub, constitutes a valid and binding obligation of the
Company enforceable in accordance with its terms, subject, as to
enforceability, to bankruptcy, insolvency, reorganization and other laws of
general applicability relating to or affecting creditors' rights and to
general principles of equity.
(ii) Except as set forth on Schedule 3.1(c)(ii), the execution and
delivery of this Agreement and the Stockholders Agreement do not, and the
consummation of the transactions contemplated hereby and thereby and
compliance with the provisions hereof and thereof will not, conflict with,
or result in any violation of, or default (with or without notice or lapse
of time, or both) under, or give rise to a right of termination,
cancellation or acceleration of any obligation or to the loss of a material
benefit under, or result in the creation of any lien, security interest,
charge or encumbrance upon any of the properties or assets of the Company
or any of its Subsidiaries under, any provision of (A) the Restated
Certificate of Incorporation or Bylaws of the Company or any provision of
the comparable charter or organizational documents of any of its
Subsidiaries, (B) any loan or credit agreement, note, bond, mortgage,
indenture, lease or other agreement, instrument, permit, concession,
franchise or license applicable to the Company or any of its Subsidiaries
or (C) assuming the consents, approvals, authorizations or permits and
filings or notifications referred to in Section 3.1(c)(iii) are duly and
timely obtained or made and the approval of the Merger and this Agreement
by the stockholders of the Company has been obtained, any judgment, order,
decree, statute, law, ordinance, rule or regulation applicable to the
Company or any of its Subsidiaries or any of their respective properties or
assets, other than, in the case of (B) and (C), any such conflicts,
violations, defaults, rights, liens, security interests, charges or
encumbrances that, individually or in the aggregate, could not reasonably
be expected to have a Material Adverse Effect on the Company, materially
impair the ability of the Company to perform its obligations thereunder, or
prevent the consummation of any of the transactions contemplated hereby.
(iii) No consent, approval, order or authorization of, or registration,
declaration or filing with, or permit from any court, administrative agency
or commission or other governmental authority or instrumentality, domestic
or foreign (a "Governmental Entity"), is required by or with respect to the
Company or any of its Subsidiaries in connection with the execution and
delivery of this Agreement by the Company or the consummation by the
Company of the transactions contemplated hereby, as to which the failure to
obtain or make could reasonably be expected to have a Material Adverse
Effect, except for: (A) filings with and approval of the Drug Enforcement
Agency, any Governmental Entity that regulates pharmaceutical sales and any
Governmental Entity that regulates liquor sales, (B) the filing of a
premerger notification report by the Company under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and the
expiration or termination of the applicable waiting period with respect
thereto; (C) the filing with the SEC of (x) a proxy statement in
preliminary and definitive form relating to the meeting of the Company's
stockholders to be held in connection with the Merger (the "Proxy
Statement") and (y) such
AI-7
<PAGE>
reports under Section 13(a) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and such other compliance with the Exchange
Act and the rules and regulations thereunder, as may be required in
connection with this Agreement and the transactions contemplated hereby;
(D) the filing of the Certificate of Merger with the Secretary of State of
the State of New York; (E) filings with, and approval of, the NYSE; (F)
such filings and approvals as may be required by any applicable state
securities, "blue sky" or takeover laws; and (G) the filings and consents
listed on Schedule 3.1(c)(iii).
(d) SEC Documents. The Company has made available to Purchaser a true and
complete copy of each report, schedule, registration statement and
definitive proxy statement filed by the Company with the Securities and
Exchange Commission (the "SEC") since January 26, 1994 and prior to the
date of this Agreement (the "Company SEC Documents") which are all the
documents (other than preliminary matters) that the Company was required to
file with the SEC since such date. As of their respective dates, the
Company SEC Documents complied in all material respects with the
requirements of the Securities Act of 1933, as amended (the "Securities
Act"), or the Exchange Act, as the case may be, and the rules and
regulations of the SEC thereunder applicable to such Company SEC Documents,
and none of the Company SEC Documents contained any untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of the Company included in the Company SEC Documents complied as
to form in all material respects with the published rules and regulations
of the SEC with respect thereto, were prepared in accordance with generally
accepted accounting principles ("GAAP") applied on a consistent basis
during the periods involved (except as may be indicated in the notes
thereto or, in the case of the unaudited statements, as permitted by Rule
10-01 of Regulation S-X of the SEC) and fairly present in accordance with
applicable requirements of GAAP (subject, in the case of the unaudited
statements, to normal, recurring adjustments, none of which are material)
the consolidated financial position of the Company and its consolidated
Subsidiaries as of their respective dates and the consolidated results of
operations and the consolidated cash flows of the Company and its
consolidated Subsidiaries for the periods presented therein. Except as
disclosed in the Company SEC Documents or in Schedule 3.1(d), there are no
agreements, arrangements or understandings between the Company and any
party who is at the date of this Agreement or was at any time prior to the
date hereof but after January 26, 1994, an Affiliate of the Company that
are required to be disclosed in the Company SEC Documents.
(e) Information Supplied. None of the information supplied or to be
supplied by the Company for inclusion or incorporation by reference in the
Registration Statement on Form S-4 to be filed with the SEC by Purchaser in
connection with the issuance of shares of Purchaser Common Stock in the
Merger (the "S-4") will, at the time the S-4 becomes effective under the
Securities Act or at the Effective Time, contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, and none of the
information supplied or to be supplied by the Company and included or
incorporated by reference in the Proxy Statement will, at the date mailed
to stockholders of the Company or at the time of the meeting of such
stockholders to be held in connection with the Merger or at the Effective
Time, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event
with respect to the Company or any of its Subsidiaries, or with respect to
other information supplied by the Company for inclusion in the Proxy
Statement or S-4, shall occur which is required to be described in an
amendment of, or a supplement to, the Proxy Statement or the S-4, the
Company will immediately notify Purchaser of such event, and the Company
shall cooperate with Purchaser in the prompt filing with the SEC of any
necessary amendment or supplement to the Proxy Statement and the S-4 and,
as required by law, in disseminating the information contained in such
amendment or supplement to the stockholders of the Company. The Proxy
Statement, insofar as it relates to the Company or its Subsidiaries or
other information supplied by the Company for inclusion therein, will
comply as to form in all material respects with the provisions of the
Exchange Act and the rules and regulations thereunder.
AI-8
<PAGE>
(f) Absence of Certain Changes or Events. Except as disclosed in, or
reflected in the financial statements included in, the Company SEC
Documents or on Schedule 3.1(f), or except as contemplated by this
Agreement, since January 27, 1996, there has not been: (i) any declaration,
setting aside or payment of any dividend or other distribution (whether in
cash, stock or property) with respect to any of the Company's capital
stock, except for regular quarterly cash dividends of $.05 per share on
Company Common Stock, with usual record and payment dates for such
dividends (but in the case of the regular quarterly cash dividend for the
third quarter of the Company's 1997 fiscal year only as permitted under
Section 4.1(b)); (ii) any amendment of any material term of any outstanding
equity security of the Company or any Subsidiary; (iii) any repurchase,
redemption or other acquisition by the Company or any Subsidiary of any
outstanding shares of capital stock or other equity securities of, or other
ownership interests in, the Company or any Subsidiary; (iv) any material
change in any method of accounting or accounting practice by the Company or
any Subsidiary; or (v) any other transaction, commitment, dispute or other
event or condition (financial or otherwise) of any character (whether or
not in the ordinary course of business) that could reasonably be expected
to have a Material Adverse Effect on the Company, except for general
economic changes and changes that may affect the industries of the Company
or any of its Subsidiaries generally.
(g) No Undisclosed Material Liabilities. Except as disclosed in the
Company SEC Documents or on Schedule 3.1(g), as of the date hereof, there
are no liabilities of the Company or any of its Subsidiaries of any kind
whatsoever, whether accrued, contingent, absolute, determined, determinable
or otherwise, that would be required under GAAP to be reflected on, or
reserved against in a consolidated balance sheet of the Company and its
consolidated Subsidiaries or in the notes thereto and that could reasonably
be expected to have a Material Adverse Effect on the Company, other than:
(i) liabilities adequately provided for on the balance sheet of the Company
dated as of January 27, 1996 (including the notes thereto) contained in the
Company's Annual Report on Form 10-K for the year ended January 27, 1996;
(ii) liabilities under or contemplated by this Agreement; and (iii)
liabilities arising since such date in the ordinary course of business
consistent with past practices.
(h) No Default. Except as set forth on Schedule 3.1(h), neither the
Company nor any of its Subsidiaries is, or has received any notice that it
is, in default or violation (and no event has occurred which, with notice
or the lapse of time or both, would constitute a default or violation) of
any term, condition or provision of (i) their respective charter and by-
laws, (ii) any note, bond, mortgage, indenture, license, leases, agreement
or other instrument or obligation to which the Company or any of its
Subsidiaries is now a party or by which the Company or any of its
Subsidiaries or any of their respective properties or assets may be bound
or (iii) any order, writ, injunction, decree, statute, rule or regulation
applicable to the Company or any of its Subsidiaries, except in the case of
(ii) and (iii) for defaults or violations which in the aggregate could not
reasonably be expected to have a Material Adverse Effect on the Company.
(i) Compliance with Applicable Laws. The Company and its Subsidiaries
hold all permits, licenses, variances, exemptions, orders, franchises and
approvals of all Governmental Entities necessary for the lawful conduct of
their respective businesses (the "Company Permits"), except where the
failure so to hold could not reasonably be expected to have a Material
Adverse Effect on the Company. The Company and its Subsidiaries are in
compliance with the terms of the Company Permits, except where the failure
so to comply could not reasonably be expected to have a Material Adverse
Effect on the Company. Except as disclosed in Company SEC Documents, the
businesses of the Company and its Subsidiaries are not being conducted in
violation of any law, ordinance or regulation of any Governmental Entity
except where such failures could not reasonably be expected to have a
Material Adverse Effect. Except as set forth on Schedule 3.1(i), as of the
date of this Agreement, no investigation or review by any Governmental
Entity with respect to the Company or any of its Subsidiaries is pending
or, to the knowledge of the Company (as defined in Section 8.4) as of the
date hereof, threatened, other than those the outcome of which could not
reasonably be expected to have a Material Adverse Effect on the Company.
Schedule 3.1(i) sets forth each such failure to hold or comply with the
terms of Company Permits, each such violation of law, ordinance or
regulation of any governmental entity and each such pending or, to the
knowledge of the Company, threatened investigation or review by any
Governmental Entity existing on the date hereof that, individually
AI-9
<PAGE>
or in the aggregate, could reasonably be expected to have a Material
Adverse Effect on the Company. This Section 3.1(i) does not relate to
environmental matters, which are the subject of Section 3.1(p).
(j) Litigation. There are no suits, actions or proceedings pending or, to
the knowledge of the Company, threatened against or affecting the Company
or any Subsidiary of the Company ("Company Litigation") which if adversely
determined, individually or in the aggregate, could reasonably be expected
to have a Material Adverse Effect on the Company or affect its ability to
consummate the transactions contemplated by this Agreement, nor are there
any judgments, decrees, injunctions, rules or orders of any Governmental
Entity or arbitrator outstanding against the Company or any Subsidiary of
Company ("Company Order") which, individually or in the aggregate, could
reasonably be expected to have a Material Adverse Effect on the Company or
affect its ability to consummate the transactions contemplated by this
Agreement. Schedule 3.1(j) lists any Company Litigation or Company Order
with respect to which the uninsured exposure or losses exceed $150,000.
This Section 3.1(j) does not relate to environmental matters, which are the
subject of Section 3.1(p).
(k) Taxes.
(i) Except as set forth on Schedule 3.1(k)(i), each of the Company, each
of its Subsidiaries and any affiliated, combined or unitary group of which
any such corporation is or was a member has (A) timely (taking into account
any extensions) filed all federal income and material federal, state, local
and foreign returns, declarations, reports, estimates, information returns
and statements ("Returns") required to be filed or sent by or with respect
to it in respect of any Taxes (as hereinafter defined), (B) timely paid all
Taxes shown to be due and payable on or with respect to such returns, and
all material Taxes that are otherwise due and payable (except for audit
adjustments not material in the aggregate or to the extent that liability
therefor is reserved for in the Company's most recent audited financial
statements) for which the Company or any of its Subsidiaries may be liable,
(C) established all reserves required by, and in amounts in accordance
with, GAAP, and (D) complied in all material respects with all applicable
laws, rules and regulations relating to the payment and withholding of
Taxes and has in all material respects timely withheld from employee wages
and paid over to the proper governmental authorities all amounts required
to be so withheld and paid over.
(ii) Schedule 3.1(k)(ii) sets forth the last taxable period through which
the federal income Tax Returns of the Company and any of its Subsidiaries
have been examined by the Internal Revenue Service ("IRS") or otherwise
closed, and identifies all open periods for which federal, state or local
examinations are in progress or of which the Company or any of its
Subsidiaries has received written notice of proposed examinations from a
taxing authority with respect to any material Tax. Except to the extent
being contested in good faith, all material deficiencies asserted as a
result of such examinations and any examination by any applicable state or
local taxing authority have been paid, fully settled or adequately provided
for in the Company's most recent audited financial statements. Except as
set forth in Schedule 3.1(k)(ii), no material Tax audits or other
administrative proceedings or court proceedings are presently pending, or
to the knowledge of the Company, threatened, with regard to any Taxes for
which the Company or any of its Subsidiaries would be liable, and no
material deficiency for any such Taxes has been proposed, asserted or
assessed, in writing (whether by examination report or prior to completion
of examination by means of notices of proposed adjustment, or other similar
requests or notices) pursuant to such examination against the Company or
any of its Subsidiaries by any federal, state or local taxing authority
with respect to any period.
(iii) Except as disclosed on Schedule 3.1(k)(iii), neither the Company
nor any of its Subsidiaries has executed or entered into (or prior to the
close of business on the Closing Date will execute or enter into) with the
IRS or any taxing authority (A) any agreement or other document extending
or having the effect of extending the period for assessments or collection
of any federal, state or local income or franchise Taxes for which the
Company or any of its Subsidiaries would be liable or (B) a closing
agreement pursuant to section 7121 of the Code, or any predecessor
provision thereof or any similar provision of state or local income tax law
that relates to the assets or operations of the Company or any of its
Subsidiaries.
AI-10
<PAGE>
(iv) Except as disclosed in Company SEC Documents or as set forth on
Schedule 3.1(k)(iv), neither the Company nor any of its Subsidiaries is a
party to an agreement that provides for the payment of any amount that
would constitute a "parachute payment" within the meaning of section 280G
of the Code.
(v) Neither the Company nor any of its Subsidiaries has made an election
under section 341(f) of the Code or agreed to have section 341(f)(2) of the
Code apply to any disposition of a subsection (f) asset (as such term is
defined in section 341(f)(4) of the Code) owned by the Company or any of
its Subsidiaries.
(vi) Except as set forth in Company SEC Documents or as disclosed on
Schedule 3.1(k)(vi), neither the Company nor any of its Subsidiaries is a
party to, is bound by or has any obligation under any tax sharing agreement
or similar agreement or arrangement.
(vii) Except as set forth in Schedule 3.1(k)(vii), there are no requests
for rulings, outstanding subpoenas or unsatisfied written requests from any
taxing authority for information with respect to Taxes of the Company or
any of its Subsidiaries and, to the knowledge of the Company, no material
reassessments (for property or ad valorem Tax purposes) of any assets or
any property owned (or leased in the case of leased property or assets with
respect to which the Company or any of its Subsidiaries is responsible for
the payment of property Taxes) by the Company or any of its Subsidiaries
have been proposed in written form.
(viii) Neither the Company nor any of its Subsidiaries has agreed to make
any adjustment pursuant to section 481(a) of the Code (or any predecessor
provision) by reason of any change in any accounting method of the Company
or any of its Subsidiaries, and neither the Company nor any of its
Subsidiaries has any application pending with any taxing authority
requesting permission for any changes in any accounting method of the
Company or any of its Subsidiaries. To the knowledge of the Company,
neither the IRS nor any other taxing authority has proposed in writing, and
neither the Company nor any of its Subsidiaries is otherwise required to
make, any such adjustment or change in accounting method.
(ix) Neither the Company nor any of its Subsidiaries has any net
operating losses or other tax attributes presently subject to limitation
under sections 382, 383, or 384 of the Code, or under the regulations under
section 1502 of the Code.
For purposes of this Agreement, "Tax" (and, with correlative meaning,
"Taxes" and "Taxable") means (i) any net income, alternative or add-on
minimum tax, gross income, gross receipts, sales, use, ad valorem, value
added, transfer, franchise, profits, license, withholding on amounts paid
by the Company, payroll, employment, excise, severance, stamp, occupation,
premium, property, environmental or windfall profit tax, custom, duty or
other tax, governmental fee or other like assessment or charge of any kind
whatsoever, together with any interest and/or any penalty, addition to tax
or additional amount imposed by any taxing authority, (ii) any liability of
the Company or any of its Subsidiaries for the payment of any amounts of
the type described in (i) as a result of being a member of an affiliated or
consolidated group, or arrangement whereby liability of the Company or any
of its Subsidiaries for payment of such amounts was determined or taken
into account with reference to the liability of any other person for any
period and (iii) liability of the Company or any of its Subsidiaries with
respect to the payment of any amounts of the type described in (i) or (ii)
as a result of any express or implied obligation to indemnify any other
person or entity.
"Tax Return" means all returns, declarations, reports, estimates,
information returns and statements required to be filed by or with respect
to the Company or any of its Subsidiaries in respect of any Taxes,
including, without limitation, (i) any consolidated federal income tax
return in which the Company or any of its Subsidiaries is included or (ii)
any state, local or foreign income tax returns filed on a consolidated,
combined or unitary basis (for purposes of determining Tax liability) in
which the Company or any of its Subsidiaries is included.
(l) Pension and Benefit Plans; ERISA.
(i) All "employee pension benefit plans," as defined in section 3(2) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
maintained by the Company or any of its Subsidiaries or any trade or
business (whether or not incorporated) which is under common control, or
which is treated as a single employer, with the Company under section
414(b), (c), (m) or (o) of the Code
AI-11
<PAGE>
("Company ERISA Affiliate") or to which the Company or any of its
Subsidiaries or any Company ERISA Affiliate contributed or is obligated to
contribute thereunder (the "Company Pension Plans"), other than unwritten
plans that are not material (as hereinafter defined in paragraph (xv)) are
listed on Schedule 3.1(1)(i). All such plans that are intended to qualify
under section 401 et seq. of the Code do so qualify, the trusts maintained
pursuant thereto (the "Company Pension Trusts") that are intended to be
exempt from federal income taxation under section 501 of the Code are so
exempt, and the Company has received a determination letter from the
Internal Revenue Service (the "Service") with respect to each such Company
Pension Plan and each such Company Pension Trust to the effect that such
Company Pension Plan is qualified and such Company Pension Trust is exempt.
No such determination letter has been revoked, no revocation has been
threatened and nothing has occurred with respect to the operation of any
Company Pension Plan that could reasonably be expected to cause such
revocation. Except as described on Schedule 3.1(l)(i), none of the Company
Pension Plans or Company Pension Trusts have been amended since the
effective date of each respective determination letter.
(ii) All "employee welfare benefit plans," as defined in section 3(1) of
ERISA, all other employee benefit arrangements or payroll practices,
including, without limitation, all severance pay, sick leave, vacation pay,
salary continuation for disability, retirement, deferred compensation,
bonus, long-term incentive, stock option, stock purchase, hospitalization,
medical insurance, life insurance, and scholarship plans or programs
maintained by the Company or any of its Subsidiaries or to which the
Company or any of its Subsidiaries contributed or is obligated to
contribute thereunder (all such plans being hereinafter referred to as the
"Company Employee Benefit Plans") and all trusts maintained pursuant to a
Company Employee Benefit Plan (the "Company Benefit Trusts"), other than
unwritten plans that are not material, are listed on Schedule 3.1(1)(ii).
The Company has received a determination letter from the Service with
respect to each Company Employee Benefit Trust that is intended to be
exempt from federal taxation under section 501 of the Code. No such
determination letter has been revoked, no revocation has been threatened,
and nothing has occurred with respect to the operation of any Company
Employee Benefit Trust that could reasonably be expected to cause such
revocation. Except as described on Schedule 3.1(1)(ii), none of the Company
Employee Benefit Trusts have been amended since the effective date of each
respective determination letter.
(iii) With respect to each such plan, other than unwritten plans that are
not material, the Company has delivered to Purchaser (A) a true, correct,
and complete copy of each Company Pension Plan, including copies of all
amendments made since the most recent favorable determination letter, or
Company Employee Benefit Plan or, in the case of any unwritten Company
Employee Benefit Plan, descriptions thereof; (B) copies of the most recent
Form 5500 filed with the IRS with respect to each Company Pension Plan or
Company Employee Benefit Plan for which such report is required by
applicable law; (C) the most recent summary plan description for each
Company Pension Plan or Company Employee Benefit Plan for which such a
summary plan description is required by applicable law; and (D) each trust
agreement and insurance or annuity contract relating to any Company Pension
Plan or Company Employee Benefit Plan.
(iv) Except as described on Schedule 3.1(l)(iv), neither the Company nor
any Company ERISA Affiliate has ever contributed to any plan subject to
section 413 of the Code or multiple employer welfare arrangement, as
defined in section 3(40) of ERISA.
(v) There is no violation in any material respect of ERISA, the Code or
other applicable law with respect to the filing of reports, returns, and
other similar documents required to be filed with any governmental agency
with respect to any Company Pension Plan or Company Employee Benefit Plan.
All reports, returns or similar documents required to be distributed to any
Company Pension Plan or Company Employee Benefit Plan participant have been
timely distributed.
(vi) The Company Pension Plans and Company Employee Benefit Plans have
been maintained and administered, in all material respects, in accordance
with their terms and with all provisions of ERISA (including rules and
regulations thereunder), the Code, and other applicable Federal and state
law, and neither the Company nor any of its Subsidiaries or any "party-in-
interest" or "disqualified person" with respect to the Company Pension
Plans and the Company Employee Benefit Plans has engaged in a
AI-12
<PAGE>
"prohibited transaction" within the meaning of section 4975 of the Code or
section 406 of ERISA. No event has occurred that could subject the Company,
any Company ERISA Affiliate or any Company Pension Trust or Company
Employee Benefit Trust, as applicable, to any material tax liability
arising under section 511 of the Code that has not been timely paid. The
Company and all Company ERISA Affiliates have complied with all obligations
imposed by section 4980B of the Code.
(vii) None of the Company, any trustee, administrator or other fiduciary
has engaged in any transaction or acted in a manner that could, or failed
to act so as to, subject the Company or any fiduciary to any material
liability for breach of fiduciary duty under ERISA or other applicable law.
(viii) Except as disclosed in Schedule 3.1(l)(viii), there has been no
"reportable event" as that term is defined in section 4043 of ERISA and the
regulations thereunder with respect to the Company Pension Plans subject to
Title IV of ERISA that would require the giving of notice or any event
requiring disclosure under section 4041(c)(3)(C) or 4063(a) of ERISA.
(ix) Except as disclosed on Schedule 3.1(1)(ix), neither the execution
and delivery of this Agreement nor the consummation of the transactions
contemplated hereby will (A) result in any payment becoming due to any
employee or group of employees of the Company or any of its Subsidiaries;
(B) increase any benefits otherwise payable under any Company Employee
Benefit Plan or Company Pension Plan or (C) result in the acceleration of
the time of payment or vesting of any such benefits. Except as disclosed on
Schedule 3.1(l)(ix) or in Company SEC Documents, there are no severance
agreements, employment agreements, or consulting agreements between the
Company or any of its Subsidiaries and any employee of the Company or such
Subsidiary or any individual which provide for total payments with a
present value in excess of $25,000 or which when aggregated with all such
agreements or arrangements provides for total payments with a present value
in excess of $75,000. True, correct and complete copies of all such
severance agreements, employment agreements and consulting agreements have
been provided to Purchaser.
(x) Except as disclosed on Schedule 3.1(l)(x) hereto, no stock or other
security issued by the Company or any of its Subsidiaries forms or has
formed a part of the assets of any Company Pension Plan or Company Employee
Benefit Plan within the last five years.
(xi) Except as disclosed on Schedule 3.1(l)(xi), (A) all contributions
to, and payments from, each Company Pension Plan and Company Employee
Benefit Plan that have been required to be made in accordance with the
terms of such plans and, when applicable, section 302 of ERISA or section
412 of the Code, have been timely made, (B) there has been no application
for or waiver of the minimum funding standards of section 412 of the Code
with respect to the Company Pension Plan, and (C) none of the Company
Pension Plans has an "accumulated funding deficiency" within the meaning of
section 412(a) of the Code as of the end of the most recently completed
plan year. As of the most recent valuation date for each Company Pension
Plan that is a "defined benefit pension plan," as defined in section 3(35)
of ERISA (hereinafter a "Defined Benefit Plan"), there was not any amount
of "unfunded benefit liability," other than that shown in the William M.
Mercer, Incorporated actuarial valuation report as of January 1, 1996 with
respect to the Fay's Incorporated Pension Plan, a copy of which has been
previously provided to Purchaser. The information provided to William M.
Mercer, Incorporated by the Company on which such report is based was, when
given, correct in all material respects. The Company is not aware of any
facts or circumstances that could change the funded status of such Defined
Benefit Plan. The Company has furnished Purchaser with the most recent
actuarial report or valuation with respect to each Defined Benefit Plan.
(xii) Except as disclosed on Schedule 3.1(l)(xii), all premium payments
due to the Pension Benefit Guaranty Corporation pursuant to section 4007 of
ERISA prior to the date hereof have been timely paid.
(xiii) Except as disclosed on Schedule 3.1(l)(xiii), to the knowledge of
the Company, there are no investigations by any governmental agency, other
claims, suits or proceedings against or involving any Company Pension Plan
or Company Employee Benefit Plan, and no events of default that could give
rise to material liability to the Company or any Company ERISA Affiliate.
(xiv) Except as disclosed on Schedule 3.1(l)(xiv), no employee or former
employee of the Company or any Company ERISA Affiliate is, by reason of
such employee's or former employee's employment,
AI-13
<PAGE>
entitled to receive any benefits, including without limitation, death or
medical benefits (whether or not insured) beyond retirement or other
termination of employment, other than (A) death or retirement benefits
under a Company Pension Plan or (B) continuation coverage pursuant to
section 4980B of the Code.
(xv) Solely for purposes of Section 3.1(l)(i), (ii) and (iii), "material"
shall mean with respect to any unwritten plan, any such plan which involves
costs and other liabilities, the present value (using a 7.5% discount rate)
of which exceeds $75,000.00, and, with respect to all unwritten plans, such
plans which involve costs and other liabilities, the present value (using a
7.5% discount rate) of which exceeds $250,000.00 in the aggregate.
(m) Labor Matters.
(i) Except as set forth in Schedule 3.1(m)(i) hereto, as of the date of
this Agreement, (A) no employees of the Company or any of its Subsidiaries
are represented by any labor organization; (B) no labor organization or
group of employees of the Company or any of its Subsidiaries has made a
pending demand for recognition or certification, and there are no
representation or certification proceedings or petitions seeking a
representation proceeding presently pending or threatened in writing to be
brought or filed with the National Labor Relations Board or any other labor
relations tribunal or authority; and (C) to the knowledge of the Company,
there are no organizing activities involving the Company or any of its
Subsidiaries pending with any labor organization or group of employees of
the Company or any of its Subsidiaries.
(ii) Except as set forth on Schedule 3.1(m)(ii) hereto, the Company and
each of its Subsidiaries is in compliance with all laws and orders relating
to the employment of labor, including all such laws and orders relating to
wages, hours, collective bargaining, discrimination, civil rights, safety
and health workers' compensation and the collection and payment of
withholding and or social security taxes and similar Taxes, except where
the failure to comply could not reasonably be expected to have a Material
Adverse Effect on the Company.
(n) Assets.
(i) Except as set forth on Schedule 3.1(n)(i) hereto, the Company and
each of its Subsidiaries has good and marketable title to all of their
respective assets owned by them, and valid leasehold interests in all
assets leased by them, in each case free and clear of all liens, mortgages,
charges, encumbrances, or title defects, except for such liens, mortgages,
charges, encumbrances, or title defects that could not reasonably be
expected to have a material adverse effect on the value or use of such
assets or could not reasonably be expected to have a Material Adverse
Effect on the Company. The assets owned or leased by the Company or its
Subsidiaries comply and conform with all applicable laws relating to their
use and operation, including, but not limited to, the provisions of the
Americans with Disabilities Act of 1990, Public Law 101-336, 42 U.S.C. (S)
12191 et seq. (the "ADA"), except to the extent that such non-compliance or
non-conformity would not have a Material Adverse Effect on the Company. To
the knowledge of the Company, assets owned or leased by the Company or its
Subsidiaries comply and conform in all material respects with the ADA.
(ii) Except as set forth on Schedule 3.1(n)(ii), there are no leases,
subleases, surface or subsurface use agreements, tenancy arrangements or
other instruments or encumbrances that will be in force or effect as of the
Closing Date that grant to any person any right relating to the ownership,
use or operation of all or any part of the assets owned or leased by the
Company or any of its Subsidiaries. No person has any rights in, or right
or option to acquire, fee title (or any portion thereof) to the assets
owned by the Company or any of its Subsidiaries in fee. The Company and its
Subsidiaries enjoy peaceful possession of all assets respectively leased by
the Company or such Subsidiaries, and the Company has delivered to
Purchaser copies of all such leases, which copies contain all of the
material terms and conditions of such leases.
(iii) The assets, properties, rights and contracts, including, without
limitation (as applicable), title or leaseholds thereto, of the Company and
its Subsidiaries, taken as a whole, are sufficient to permit the Company
and its Subsidiaries to conduct their business as currently being conducted
with only such exceptions that in the aggregate could not reasonably be
expected to have a Material Adverse Effect on the
AI-14
<PAGE>
Company. Except as set forth on Schedule 3.1(n)(iii) hereto, the Company
has no continuing material obligations relating to the assets of any
operations that have been disposed.
(o) Intellectual Property. The Company and its Subsidiaries possess or
have adequate rights to use all material trademarks, trade names, patents,
service marks, marks, brand names, computer programs, database, industrial
designs and copyrights necessary for the operation of the businesses of
each of Company and its Subsidiaries (collectively, the "Company
Intellectual Property"). Except as set forth on Schedule 3.1(o), all of the
Company Intellectual Property that is material to the conduct of the
Company's business taken as a whole is owned by the Company or its
Subsidiaries free and clear of any and all liens, claims or encumbrances
that could reasonably be expected to have a material adverse effect on the
value of, or ability of Purchaser to utilize, the item of Company
Intellectual Property to which such lien relates, and neither the Company
nor any such Subsidiary has forfeited or otherwise relinquished any Company
Intellectual Property which forfeiture could reasonably be expected to have
a Material Adverse Effect on the Company. To the knowledge of the Company,
the use of the Company Intellectual Property by the Company or its
Subsidiaries does not conflict with, infringe upon, violate or interfere
with or constitute an appropriation of any right, title, interest or
goodwill, including, without limitation, any intellectual property right,
trademark, trade name, patent, service mark, brand mark, brand name,
computer program, database, industrial design, copyright or any pending
application therefor of any other person. Except as set forth on Schedule
3.1(o), the Company has received no written notice that the use of any
trade dress by the Company or its Subsidiaries conflicts with, infringes
upon, violates or interferes with any trade dress rights of any other
person. To the knowledge of the Company, there are no pending claims that
any of the Company Intellectual Property is invalid or conflicts with the
asserted rights of any other person or has not been used or enforced or has
been failed to be used or enforced in a manner that would result in the
abandonment, cancellation or unenforceability of any of the Company
Intellectual Property that is material to the conduct of the Company's
business.
(p) Environmental Matters.
For purposes of this Agreement:
(i) "Environmental Law" means any applicable law regulating or
prohibiting Releases into any part of the natural environment, or
pertaining to the protection of natural resources, the environment and
public and employee health and safety including, without limitation, the
Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA") (42 U.S.C. Section 9601 et seq.), the Hazardous Materials
Transportation Act (49 U.S.C. Section 1801 et seq.), the Resource
Conservation and Recovery Act (42 U.S.C. Section 6901 et seq.), the Clean
Water Act (33 U.S.C. Section 1251 et seq.), the Clean Air Act (42 U.S.C.
Section 7401 et seq.), the Toxic Substances Control Act (15 U.S.C. Section
7401 et seq.), the Federal Insecticide, Fungicide, and Rodenticide Act (7
U.S.C. Section 136 et seq.), and the Occupational Safety and Health Act (29
U.S.C. Section 651 et seq.) ("OSHA") and the regulations promulgated
pursuant thereto, and any such applicable state or local statutes, and the
regulations promulgated pursuant thereto, as such laws have been and may be
amended or supplemented through the Closing Date;
(ii) "Hazardous Material" means any substance, material or waste which is
regulated pursuant to any Environmental Law by any public or governmental
authority in the jurisdictions in which the applicable party or its
Subsidiaries conducts business, or the United States, including, without
limitation, any material or substance which is defined as a "hazardous
waste," "hazardous material," "hazardous substance," "extremely hazardous
waste" or "restricted hazardous waste," "contaminant," "toxic waste" or
"toxic substance" under any provision of Environmental Law; and
(iii) "Release" means any release, spill, effluent, emission, leaking,
pumping, injection, deposit, disposal, discharge, dispersal, leaching or
migration into the indoor or outdoor environment, or into or out of any
property owned, operated or leased by the applicable party or its
Subsidiaries.
Except as set forth on Schedule 3.1(p) or as could not reasonably be
expected, individually or in the aggregate, to have a Material Adverse
Effect:
AI-15
<PAGE>
(A) The owned or leased properties and operations of the Company and its
Subsidiaries, including without limitation any generation, transportation,
treatment, storage or disposal of hazardous waste, as defined and regulated
under 40 C.F.R. Parts 260-270 (in effect as of the date of this Agreement)
or any state equivalent, have been for the last five years, and currently
are, in compliance with all Environmental Laws;
(B) The Company and its Subsidiaries currently maintain in full force and
effect all permits, licenses, variances, exceptions and approvals required
under applicable Environmental Laws for the continued operations of their
respective businesses;
(C) As of the date hereof the Company and its Subsidiaries are not
subject to any outstanding written orders or contracts with any
Governmental Entity or other person respecting (1) Environmental Laws, (2)
remediation of any Hazardous Materials or (3) any Release or threatened
Release of a Hazardous Material;
(D) The Company and its Subsidiaries have not received within the last
five years any written communication alleging any, and as of the date
hereof there is no, investigation of any such party with respect to, the
violation of or liability under any Environmental Law arising from the
owned or leased properties and the operations of the Company and its
Subsidiaries;
(E) There is no suit, action or proceeding pending or threatened against
the Company or any of its Subsidiaries arising under Environmental Laws or
asserting a damage claim attributable to a Release of or exposure to
Hazardous Materials;
(F) There has been no Release of any Hazardous Material into the indoor
or outdoor environment (whether on-site or off-site) arising from the
operations of, or attributable to the owned or leased properties of, the
Company or its Subsidiaries in violation of or that would require
remediation or other response action under any Environmental Laws; and
(G) There is not now on or in any owned or leased property of the Company
or its Subsidiaries any of the following: (1) any underground storage tanks
or surface impoundments, (2) any asbestos-containing materials, (3) any
friable asbestos-containing materials or (4) any polychlorinated biphenyls.
(q) Product Liability. There are no claims, and to the knowledge of the
Company there is no basis for any claims, against the Company or any
Subsidiary for injury to person or property of any person suffered as a
result of the sale of any product or performance of any service by the
Company or any Subsidiary, including claims arising out of the defective or
unsafe nature of such products or services, which could reasonably be
expected to have a Material Adverse Effect on the Company.
(r) Charter Takeover Provisions. The transactions contemplated by this
Agreement and the Stockholders Agreement of even date herewith, among
Purchaser, Sub, the Company and certain stockholders of the Company, have
been approved by the affirmative vote of a majority of the Continuing
Directors (as such term is defined in the Company's Restated Certificate of
Incorporation) pursuant to Article Ninth of the Company's Restated
Certificate of Incorporation. No state takeover laws are applicable to
Purchaser or Sub as a result of the Merger, this Agreement or the
transactions contemplated hereby.
(s) Opinion of Financial Advisor. The Company has received the opinion of
Bear, Stearns & Co. Inc. (a copy of which has been delivered to Purchaser)
to the effect that, as of the date hereof, the consideration to be received
by the holders of Company Common Stock pursuant to this Agreement is fair
from a financial point of view to such holders.
(t) Vote Required. The affirmative vote of the holders of at least two-
thirds of the outstanding shares of Company Common Stock is the only vote
of the holders of any class or series of Company capital stock necessary to
approve the Merger, this Agreement and the transactions contemplated
hereby.
(u) Insurance. Schedule 3.1(u) hereto contains a true and complete
listing of the Company's and each of its Subsidiaries' directors' and
officers' liability insurance, primary and excess casualty insurance
policies, providing coverage for bodily injury and property damage to third
parties (including products liability and completed operations coverage)
and worker's compensation, in effect as of the date hereof.
AI-16
<PAGE>
(v) Advisors. Except as disclosed on Schedule 3.1(v), no broker, advisor,
attorney, accountant, actuary, investment banker, proxy solicitor or other
person is entitled to any broker's, finder's or other fee, reimbursement of
expenses or commission in connection with the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of the Company.
(w) Additional Tax Matters. As of the date hereof, to the knowledge of
the Company, the representations set forth in the numbered paragraphs of
the form of Certificate of the Company included as Schedule 3.1(w) are true
and correct in all material respects, assuming for purposes of this
representation and warranty that the Merger referred to in such form had
been consummated on the date hereof.
(x) Contracts. Schedule 3.1(x)(i) lists each lease, license, contract,
agreement or other instrument or obligation to which the Company or any of
its Subsidiaries is a party (whether oral or written) or by which any of
them or any of their properties or assets may be bound and which involves
the payment of money in excess of $500,000 or the receipt of money in
excess of $500,000 in any 12 month period (a "Company Agreement"); it being
understood that the term "Company Agreement" does not include purchase
orders entered into in the ordinary course of business consistent with past
practice; provided, however, that Schedule 3.1(x)(i), as attached, shall
not be required to set forth any Company Agreement involving the receipt of
money in excess of $500,000 in any 12 month period, but from and after the
tenth business day after the date of this Agreement, Schedule 3.1(x)(i)
shall be deemed to include, as of the date hereof, the list of Company
Agreements provided to Purchaser by the Company in accordance with Section
4.1(i). Each Company Agreement is valid, binding and enforceable and in
full force and effect, except where failure to be valid, binding and
enforceable and in full force and effect could not reasonably be expected
to have a Material Adverse Effect on the Company and its Subsidiaries, and
there are no defaults thereunder by the Company and its Subsidiaries or, to
the knowledge of the Company, by any other party thereto, except where such
defaults could not reasonably be expected to have a Material Adverse Effect
on the Company. Except as disclosed in Schedule 3.1(x)(ii), neither the
Company nor any of its Subsidiaries is a party to any agreement that
expressly limits the ability of the Company or any of its Subsidiaries or
affiliate to compete in or conduct any line of business or compete with any
person or in any geographic area or during any period of time. Schedule
3.1(x)(iii) sets forth all claims received by the Company for
indemnification made by third parties pursuant to the terms of agreements
relating to the disposition by the Company of lines of business since
January 28, 1995.
(y) Sale of Division. Except as set forth on Schedule 3.1(y), the sale of
the Paper Cutter division of the Company has been completed on the terms
set forth in that certain Asset Purchase Agreement, dated as of June 7,
1996 (the "Paper Cutter Agreement"), by and among the Company, The Party
Experience Inc., a Delaware corporation, and Party Stores Holdings, Inc., a
Delaware corporation. The Company has delivered to Purchaser true and
correct copies of all closing documents entered into and delivered by the
Company with respect to the consummation of the transactions contemplated
in the Paper Cutter Agreement.
3.2 Representations and Warranties of Purchaser and Sub. Purchaser and Sub
jointly and severally represent and warrant to the Company as follows:
(a) Organization, Standing and Power. Each of Purchaser and Sub is a
corporation or partnership duly organized, validly existing and in good
standing under the laws of its state of incorporation or organization, has
all requisite power and authority to own, lease and operate its properties
and to carry on its business as now being conducted, and is duly qualified
and in good standing to do business in each jurisdiction in which the
business it is conducting, or the operation, ownership or leasing of its
properties, makes such qualification necessary, other than in such
jurisdictions where the failure so to qualify could not reasonably be
expected to have a Material Adverse Effect on Purchaser. Purchaser and Sub
have heretofore delivered to the Company complete and correct copies of
their respective Certificates of Incorporation and Bylaws.
(b) Capital Structure. As of the date hereof, the authorized capital
stock of Purchaser consists of 1,250,000,000 shares of Purchaser Common
Stock and 25,000,000 shares of preferred stock, without par value, of
Purchaser (the "Purchaser Preferred Stock"). At the close of business on
July 10, 1996:
AI-17
<PAGE>
(i) 225,397,372 shares of Purchaser Common Stock were issued and
outstanding and 16,777,567 shares of Purchaser Common Stock were reserved
for issuance pursuant to Purchaser's:
<TABLE>
<S> <C>
1984 Equity Compensation Plan................................... 548,624
1989 Equity Compensation Plan................................... 5,263,034
1993 Equity Compensation Plan................................... 10,875,909
1993 Non-Associate Directors' Equity Plan....................... 90,000
</TABLE>
(collectively, the "Purchaser Option Plans"); (ii) 14,700 shares of
Purchaser Common Stock were held by Purchaser in its treasury or by its
wholly owned Subsidiaries; (iii) 1,400,000 shares of Purchaser Preferred
Stock, designated as Series B ESOP Convertible Preferred Stock, were
authorized and reserved for issuance to Purchaser's Savings, Profit Sharing
and Stock Ownership Plan, of which 1,176,666 shares have been issued and
970,116.7 shares are presently issued and outstanding; (iv) 1,600,000
shares of Purchaser Preferred Stock, designated as Series A Junior
Participating Preferred Stock, were reserved for issuance pursuant to
Purchaser's Rights Agreement; and (v) no Voting Debt was outstanding. All
outstanding shares of Purchaser Common Stock are, and the shares of
Purchaser Common Stock when issued in accordance with this Agreement will
be, validly issued, fully paid and nonassessable and not subject to
preemptive rights. All outstanding shares of capital stock of Sub are owned
by Purchaser, free and clear of all liens, charges, encumbrances, claims
and options of any nature. Except as set forth in this Section 3.2(b) or on
Schedule 3.2(b), and except for changes since January 27, 1996 resulting
from the exercise of employee stock options granted pursuant to, or from
issuances or purchases under, Purchaser Option Plans, or as contemplated or
permitted by this Agreement, there are outstanding: (i) no shares of
capital stock, Voting Debt or other voting securities of Purchaser; (ii) no
securities of Purchaser or any Subsidiary of Purchaser convertible into or
exchangeable for shares of capital stock, Voting Debt or other voting
securities of Purchaser or any Subsidiary of Purchaser; and (iii) no
options, warrants, calls, rights (including preemptive rights), commitments
or agreements to which Purchaser or any Subsidiary of Purchaser is a party
or by which it is bound in any case obligating Purchaser or any Subsidiary
of Purchaser to issue, deliver, sell, purchase, redeem or acquire, or cause
to be issued, delivered, sold, purchased, redeemed or acquired, additional
shares of capital stock or any Voting Debt or other voting securities of
Purchaser or of any Subsidiary of Purchaser or obligating Purchaser or any
Subsidiary of Purchaser to grant, extend or enter into any such option,
warrant, call, right, commitment or agreement. There are not as of the date
hereof and there will not be at the Effective Time any stockholder
agreements, voting trusts or other agreements or understandings to which
Purchaser is a party or by which it is bound relating to the voting of any
shares of the capital stock of Purchaser. As of the date hereof, the
authorized capital stock of Sub consists of 1,000 shares of common stock,
par value $1.00 per share, 10 shares of which are validly issued, fully
paid and nonassessable and are owned by Purchaser and the balance of which
are not issued or outstanding. Notwithstanding anything to the contrary
herein, the representations and warranties set forth in this Section 3.2
will not be deemed to have been breached by Purchaser's repurchase of
Purchaser Common Stock pursuant to Purchaser's stock repurchase program;
provided, however, that any repurchase of Purchaser Common Stock effected
by Purchaser complies with Rule 10b-6 of the Exchange Act.
(c) Authority; No Violations, Consents and Approvals.
(i) Each of Purchaser and Sub have all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby, including but not
limited to the issuance of the Purchaser Common Stock pursuant to the
Merger, have been duly authorized by all necessary corporate action on the
part of Purchaser and Sub. This Agreement has been duly executed and
delivered by Purchaser and Sub and, assuming this Agreement constitutes the
valid and binding obligation of the Company, constitutes a valid and
binding obligation of each of Purchaser and Sub enforceable in accordance
with its terms, subject as to enforceability, to bankruptcy, insolvency,
reorganization and other laws of general applicability relating to or
affecting creditors' rights and to general principles of equity.
(ii) The execution and delivery of this Agreement does not, and the
consummation of the transactions contemplated hereby and compliance with
the provisions hereof will not, conflict with, or result in any
AI-18
<PAGE>
violation of, or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancellation or acceleration
of any obligation or to the loss of a material benefit under, or result in
the creation of any lien, security interest, charge or encumbrance upon any
of the properties or assets of Purchaser under any provision of (A) the
Certificate of Incorporation or Bylaws of Purchaser or Sub, (B) any loan or
credit agreement, note, bond, mortgage, indenture, lease or other
agreement, instrument, permit, concession, franchise or license applicable
to Purchaser or (C) assuming the consents, approvals, authorizations or
permits and filings or notifications referred to in Section 3.2(c)(iii) are
duly and timely obtained or made, any judgment, order, decree, statute,
law, ordinance, rule or regulation applicable to Purchaser or any of its
Subsidiaries or any of their respective properties or assets, other than,
in the case of clause (B) or (C), any such conflicts, violations, defaults,
rights, liens, security interests, charges or encumbrances that,
individually or in the aggregate, could not reasonably be expected to have
a Material Adverse Effect on Purchaser, materially impair the ability of
Purchaser to perform its obligations hereunder or prevent the consummation
of any of the transactions contemplated hereby or thereby.
(iii) No consent, approval, order or authorization of, or registration,
declaration or filing with, or permit from any Governmental Entity is
required by or with respect to Purchaser or Sub in connection with the
execution and delivery of this Agreement by Purchaser and Sub or the
consummation by Purchaser and Sub of the transactions contemplated hereby,
as to which the failure to obtain or make could reasonably be expected to
have a Material Adverse Effect on Purchaser, except for: (A) the filing of
a premerger notification report by Purchaser under the HSR Act and the
expiration or termination of the applicable waiting period with respect
thereto; (B) the filing with the SEC of the S-4, such reports under Section
13(a) of the Exchange Act and such other compliance with the Securities Act
and the Exchange Act and the rules and regulations thereunder as may be
required in connection with this Agreement and the transactions
contemplated hereby; (C) the filing of the Certificate of Merger with the
Secretary of State of the State of New York; (D) filings with, and approval
of, the NYSE; and (E) such filings and approvals as may be required by any
applicable state securities, "blue sky" or takeover laws.
(d) SEC Documents. Purchaser has made available to the Company a true and
complete copy of each report, schedule, registration statement and
definitive proxy statement filed by Purchaser with the SEC since January
26, 1994 and prior to the date of this Agreement (the "Purchaser SEC
Documents"), which are all the documents (other than preliminary material)
that Purchaser was required to file with the SEC since such date. As of
their respective dates, the Purchaser SEC Documents complied in all
material respects with the requirements of the Securities Act or the
Exchange Act, as the case may be, and the rules and regulations of the SEC
thereunder applicable to such Purchaser SEC Documents, and none of the
Purchaser SEC Documents contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading. The financial statements of
Purchaser included in the Purchaser SEC Documents complied as to form in
all material respects with the published rules and regulations of the SEC
with respect thereto, were prepared in accordance with GAAP applied on a
consistent basis during the periods involved (except as may be indicated in
the notes thereto or, in the case of the unaudited statements, as permitted
by Rule 10-01 of Regulation S-X of the SEC) and fairly present in
accordance with applicable requirements of GAAP (subject, in the case of
the unaudited statements, to normal, recurring adjustments, none of which
will be material) the consolidated financial position of Purchaser and its
consolidated Subsidiaries as of their respective dates and the consolidated
results of operations and the consolidated cash flows of Purchaser and its
consolidated Subsidiaries for the periods presented therein. Except as
disclosed in the Purchaser SEC Documents or on Schedule 3.2(d), there are
no agreements, arrangements or understandings between Purchaser and any
party who is at the date of this Agreement or was at any time prior to the
date hereof but after January 26, 1994, an affiliate of Purchaser that are
required to be disclosed in the Purchaser SEC Documents.
(e) Information Supplied. None of the information supplied or to be
supplied by Purchaser or Sub for inclusion or incorporation by reference in
the S-4 will, at the time the S-4 becomes effective under the Securities
Act or at the Effective Time, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the
AI-19
<PAGE>
circumstances under which they were made, not misleading, and none of the
information supplied or to be supplied by Purchaser or Sub and included or
incorporated by reference in the Proxy Statement will, at the date mailed
to stockholders of the Company or at the time of the meeting of such
stockholders to be held in connection with the Merger or at the Effective
Time, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event
with respect to Purchaser or any of its Subsidiaries, or with respect to
other information supplied by Purchaser or Sub for inclusion in the Proxy
Statement or S-4, shall occur that is required to be described in an
amendment of, or a supplement to, the Proxy Statement or the S-4, Purchaser
shall immediately notify the Company of such event, and Purchaser shall
cooperate with the Company in the prompt filing with the SEC of any
necessary amendment or supplement to the Proxy Statement and the S-4 and,
as required by law, disseminating the information contained in such
amendment or supplement to the stockholders of the Company. The information
relating to Purchaser, Sub or other Subsidiaries of Purchaser supplied by
Purchaser or Sub for inclusion in the Proxy Statement and the S-4 will
comply as to form in all material respects with the provisions of the
Exchange Act or the Securities Act, as the case may be, and the rules and
regulations thereunder.
(f) Absence of Certain Changes or Events. Except as disclosed in, or
reflected in the financial statements included in, the Purchaser SEC
Documents or on Schedule 3.2(f), or except as contemplated by this
Agreement, since January 27, 1996, there has not been: (i) any declaration,
setting aside or payment of any dividend or other distribution (whether in
cash, stock or property) with respect to any of Purchaser's capital stock,
except for regular quarterly cash dividends on Purchaser Common Stock with
usual record and payment dates for such dividends; (ii) any amendment of
any material term of any outstanding equity security of Purchaser or Sub;
(iii) any repurchase, redemption or other acquisition by Purchaser or any
of its Subsidiaries of any outstanding shares of capital stock or other
equity securities of, or other ownership interests in, Purchaser or any of
its Subsidiaries, except for repurchases made in the ordinary course,
repurchases contemplated by Purchaser benefit plans and repurchases
pursuant to Purchaser's stock repurchase program; (iv) any material change
in any method of accounting or accounting practice by Purchaser or any of
its Subsidiaries; or (v) any other transaction, commitment, dispute or
other event or condition (financial or otherwise) of any character (whether
or not in the ordinary course of business) that could reasonably be
expected to have a Material Adverse Effect on Purchaser, except for general
economic changes and changes that may affect the industries of Purchaser or
any of its Subsidiaries generally.
(g) No Undisclosed Material Liabilities. Except as specifically and
individually set forth on Schedule 3.2(g), as of the date hereof, there are
no liabilities of Purchaser of any kind whatsoever, whether accrued,
contingent, absolute, determined, determinable or otherwise, that could
reasonably be expected to have a Material Adverse Effect on Purchaser,
other than: (i) liabilities adequately provided for on the balance sheet of
Purchaser dated as of January 27, 1996 (including the notes thereto)
contained in Purchaser's Annual Report on Form 10-K; (ii) liabilities under
this Agreement and (iii) liabilities arising since such date in the
ordinary course of business consistent with past practices.
(h) No Default. Neither Purchaser nor Sub is in default or violation (and
no event has occurred which, with notice or the lapse of time or both,
would constitute a default or violation) of any term, condition or
provision of (i) their respective charter and bylaws, (ii) except as
disclosed in Schedule 3.2(h) and except for the requirement under certain
of such instruments to file supplemental indentures as a result of the
transactions contemplated hereby, any note, bond, mortgage, indenture,
license, agreement or other instrument or obligation to which Purchaser or
Sub is now a party or by which Purchaser or Sub or any of their respective
properties or assets may be bound or (iii) any order, writ, injunction,
decree, statute, rule or regulation applicable to Purchaser or Sub, except
in the case of (ii) and (iii) for defaults or violations which in the
aggregate could not reasonably be expected to have a Material Adverse
Effect on Purchaser.
(i) Litigation. Except as disclosed in the Purchaser SEC Documents or on
Schedule 3.2(i) hereto, there is no suit, action or proceeding pending or,
to the knowledge of Purchaser, threatened against or affecting Purchaser
("Purchaser Litigation"), and Purchaser has no knowledge of any facts that
are likely
AI-20
<PAGE>
to give rise to any Purchaser Litigation, that (in any case) could
reasonably be expected to have a Material Adverse Effect on Purchaser, nor
is there any judgment, decree, injunction, rule or order of any
Governmental Entity or arbitrator outstanding against Purchaser or Sub
("Purchaser Order") that could reasonably be expected to have a Material
Adverse Effect on Purchaser or its ability to consummate the transactions
contemplated by this Agreement.
(j) No Vote Required. No vote of the holders of any class or series of
Purchaser capital stock is necessary to approve the issuance of Purchaser
Common Stock pursuant to this Agreement and the transactions contemplated
hereby.
(k) Brokers. Except as disclosed on Schedule 3.2(k), no broker,
investment banker or other person is entitled to any broker's, finder's or
other similar fee or commission in connection with the transactions
contemplated by this Agreement based upon arrangements made by or on behalf
of Purchaser.
(l) Interim Operations of Sub. Sub was formed by Purchaser solely for the
purpose of engaging in the transactions contemplated hereby, has engaged in
no other business or activities, has incurred no other obligations or
liabilities, has no other assets and has conducted its operations only as
contemplated hereby. All of the outstanding capital stock of Sub is owned
directly by Purchaser.
(m) Additional Tax Matters. As of the date hereof, to the knowledge of
Purchaser, the representations set forth in the numbered paragraphs of the
form of Certificate of Purchaser included as Schedule 3.2(m) are true and
correct in all material respects, assuming for purposes of this
representation and warranty that the Merger referred to in such form had
been consummated on the date hereof.
(n) No Ownership of Company Capital Stock. Neither Purchaser nor Sub own,
directly or indirectly, any Company Common Stock, other than shares of
Company Common Stock purchased in the ordinary course of business for
investment purposes by Purchaser's retirement plans, savings plans and
insurance company subsidiaries.
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS OF THE COMPANY
4.1 Conduct of Business by the Company Pending the Merger. During the period
from the date of this Agreement and continuing until the Effective Time, the
Company agrees as to itself and its Subsidiaries that (except as expressly
contemplated or permitted by this Agreement, disclosed on Schedule 4.1(f),
4.1(h), or 4.1(i) or to the extent that Purchaser shall otherwise consent in
writing):
(a) Ordinary Course. Each of the Company and its Subsidiaries shall carry
on its businesses in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted and shall use all
reasonable efforts to preserve intact its present business organizations,
keep available the services of its current officers and employees, and
endeavor to preserve its relationships with customers, suppliers and others
having business dealings with it to the end that its goodwill and ongoing
business shall not be impaired in any material respect at the Effective
Time; provided, however, that the Company and its Subsidiaries shall not be
required to take any action hereunder that will be inconsistent with any of
the provisions set forth in this Agreement. Purchaser acknowledges that
officers and employees of the Company may voluntarily terminate employment
with the Company and the Company has no control over such voluntary
terminations.
(b) Dividends; Changes in Stock. The Company shall not and it shall not
permit any of its Subsidiaries to: (i) declare or pay any dividends on or
make other distributions in respect of any of its capital stock or
partnership interests, except for dividends from a Subsidiary of the
Company to the Company or another Subsidiary of the Company; (ii) split,
combine or reclassify any of its capital stock or issue or authorize or
propose the issuance of any other securities in respect of, in lieu of or
in substitution for shares of the Company capital stock; or (iii)
repurchase, redeem or otherwise acquire, or permit any of its Subsidiaries
to purchase, redeem or otherwise acquire, any shares of its capital stock,
except as required by
AI-21
<PAGE>
the terms of its securities outstanding on the date hereof or as
contemplated by any existing employee benefit plan. Notwithstanding the
foregoing, if the record date for Purchaser's regular fiscal 1996 third
quarter dividend is fixed or to be fixed as of a date on or before the last
business day prior to the Effective Time (in respect of which dividend,
Purchaser agrees to give the Company written notice of the record date as
soon as reasonably practicable, but in any event at least 15 days prior to
the Effective Time), the Company may declare and pay its regular third
quarter dividend of $.05 per share of Company Common Stock prior to the
Effective Time.
(c) Issuance of Securities. The Company shall not and it shall not permit
any of its Subsidiaries to issue, deliver or sell, or authorize or propose
to issue, deliver or sell, any shares of its capital stock of any class,
any Voting Debt or any securities convertible into, or any rights, warrants
or options to acquire, any such shares, Voting Debt or convertible
securities, other than: (i) the issuance of Company Common Stock upon the
exercise of stock options granted, or purchase rights provided for, under
the Company Stock Purchase Plan, the Company Non-Employee Directors Plan,
or the Company Stock Plan, in each case that are outstanding on the date
hereof, or in satisfaction of stock grants, stock purchase rights or stock
based awards made prior to the date hereof pursuant to such plans or upon
conversion of the Company Convertible Notes; (ii) issuances by a wholly
owned Subsidiary of its capital stock to its parent; (iii) the issuance of
up to 20,000 shares of Company Common Stock under the Company's Service
Award Program; and (iv) the issuance of Company Preferred Stock under the
Company's Rights Plan in accordance with its terms.
(d) Governing Documents. Except as contemplated hereby or in connection
herewith, the Company shall not amend or propose to amend its Restated
Certificate of Incorporation or Bylaws.
(e) No Acquisitions. The Company shall not and it shall not permit any of
its Subsidiaries to acquire or agree to acquire by merging or consolidating
with, or by purchasing an equity interest in or assets of, or by any other
manner, any business or any corporation, partnership, association or other
business organization or division thereof.
(f) No Dispositions. Other than: (i) dispositions or proposed
dispositions listed on Schedule 4.1(f); (ii) as may be necessary or
required by law to consummate the transactions contemplated hereby;
(iii) dispositions in the ordinary course of business consistent with past
practice that are not material, individually or in the aggregate, to the
Company and its Subsidiaries taken as a whole; or (iv) the sale of
inventory in the ordinary course of business consistent with past
practices, the Company shall not and it shall not permit any of its
Subsidiaries to sell, lease, encumber or otherwise dispose of, or agree to
sell, lease (whether such lease is an operating or capital lease), encumber
or otherwise dispose of, any of its assets.
(g) No Dissolution, Etc. Except as otherwise permitted or contemplated by
this Agreement, the Company shall not authorize, recommend, propose or
announce an intention to adopt a plan of complete or partial liquidation or
dissolution of the Company or any of its Subsidiaries.
(h) Certain Employee Matters. Except as set forth on Schedule 4.1(h), the
Company shall not and it shall not permit any of its Subsidiaries to: (i)
except to the extent required by applicable law, grant any increases in the
compensation of any of its directors, officers or employees, except
increases in the ordinary course of business and in accordance with past
practice for persons other than directors and executive officers; (ii)
except to the extent required by applicable law, pay or agree to pay any
pension, retirement allowance or other employee benefit not required or
contemplated by any of the existing Company Employee Benefit Plans or
Company Pension Plans as in effect on the date hereof to any such director,
officer or employee, whether past or present; (iii) enter into any new, or
amend any existing, employment or severance or termination agreement with
any such director, officer or key employee; or (iv) become obligated under
any new Company Employee Benefit Plan or Company Pension Plan, which was
not in existence or approved by the Board of Directors of the Company prior
to or on the date hereof, or amend any such plan or arrangement in
existence on the date hereof if such amendment would have the effect of
materially enhancing any benefits thereunder.
AI-22
<PAGE>
(i) Indebtedness; Leases; Capital Expenditures; Accounting
Changes. Except as set forth on Schedule 4.1(i), the Company shall not and
it shall not permit any of its Subsidiaries to, (i) incur any indebtedness
for borrowed money (except for working capital under the Company's existing
credit facilities and refinancings of existing debt that permit prepayment
of such debt without penalty (other than LIBOR breakage costs)) or
guarantee any such indebtedness or issue or sell any debt securities or
warrants or rights to acquire any debt securities of such party or any of
its Subsidiaries or guarantee any debt securities of others, (ii) enter
into any lease (whether such lease is an operating or capital lease) or
create any mortgages, liens, security interests or other encumbrances on
the property of the Company or any of its Subsidiaries in connection with
any indebtedness thereof, except for those securing purchase money
indebtedness, (iii) commit to capital expenditures other than aggregate
capital expenditures set forth in the fiscal 1997 capital budget, a true
and correct copy of which has been previously delivered to Purchaser,
which, when aggregated with all other fiscal 1997 capital expenditures, do
not exceed $19,300,000, (iv) enter into or terminate any of the Company
Agreements, (v) amend, renew, or extend any Company Agreement that involves
the payment or receipt of money in excess of $500,000 in a 12 month period
(other than any Company Agreement, excluding leases, entered into in the
ordinary course of business consistent with past practice), or (vi)
implement any accounting policy changes. The Company shall promptly provide
Purchaser with true, correct and complete copies of any and all leases
which are amended, renewed, replaced or extended as provided in Schedule
4.1(i) or permitted under this Section 4.1(i). Any consent of Purchaser
required pursuant to this Section 4.1(i) may be obtained from Robert W.
Hannan, Edward C. Metting, or their respective successors, and such consent
shall not be unreasonably withheld or delayed. No later than the tenth
business day following the date hereof, the Company shall provide Purchaser
with a true, correct and complete list of all Company Agreements involving
the receipt of money in excess of $500,000 in a 12 month period.
(j) 368(a) Reorganization. From the date hereof through the Closing Date
neither the Company nor any stockholder of the Company owning 5% or more of
the Company Common Stock shall take any action, or cause any action to be
taken, which would prevent the transactions contemplated hereby from
qualifying as a reorganization pursuant to section 368(a) of the Code.
4.2 No Solicitation. From and after the date hereof, the Company will not,
and will not authorize or permit any of its officers, directors, employees,
agents and other representatives or those of any of its Subsidiaries
(collectively, "Company Representatives") to, directly or indirectly, solicit
or initiate any prospective buyer or the making of any proposal that
constitutes, or may reasonably be expected to lead to, an Acquisition Proposal
(as hereinafter defined) from any person; provided, however, that if the
Company immediately notifies Purchaser of the existence of such negotiations
and the status, terms and conditions thereof, then (a) the Company's Board of
Directors may authorize the Company to engage in discussions or negotiations
with a third party who (without any solicitation or initiation, directly or
indirectly, by or with the Company or any Company Representatives after the
date of this Agreement) seeks to initiate such discussions or negotiations and
may furnish such third party information concerning the Company and its
business, properties and assets; provided the disclosure of such information
is consistent with the fiduciary obligations of the Company's Board of
Directors, (b) the Company's Board of Directors may take and disclose to the
Company's stockholders a position contemplated by Rule 14e-2(a) promulgated
under the Exchange Act and (c) following receipt of an Acquisition Proposal
that is financially superior to the Merger (as determined in each case in good
faith by the Company's Board of Directors after consultation with the
Company's financial advisors), the Board of Directors of the Company may
withdraw, modify or not make its recommendation referred to in Section 5.5 or
terminate this Agreement in accordance with Section 7.1(b), but in each case
referred to in the foregoing clauses (a) through (c) only to the extent that
the Company's Board of Directors shall conclude in good faith that such action
is necessary in order for the Company's Board of Directors to act in a manner
that is consistent with its fiduciary obligations under applicable law. The
Company shall immediately cease and cause to be terminated any existing
solicitation, initiation, encouragement, activity, discussion or negotiation
with any parties conducted heretofore by the Company or any the Company
Representatives with respect to any Acquisition Proposal existing on the date
hereof. The Company will promptly notify Purchaser in writing of any such
requests for such information or the receipt of any
AI-23
<PAGE>
Acquisition Proposal, including the identity of the person or group engaging
in such discussions or negotiations, requesting such information or making
such Acquisition Proposal, and the material terms and conditions of any
Acquisition Proposal. As used in this Agreement, "Acquisition Proposal" shall
mean any proposal or offer, other than a proposal or offer by Purchaser or any
of its affiliates, with respect to an Acquisition Transaction. As used in this
Agreement, "Acquisition Transaction" means a tender or exchange offer, a
merger, consolidation or other business combination involving the Company or
any Subsidiary of the Company or the acquisition in any manner of a
substantial equity interest in, or substantially all of the assets of, the
Company or any of its Subsidiaries by any person other than Purchaser or Sub.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Preparation of S-4 and the Proxy Statement. The Company shall promptly
prepare and file with the SEC the Proxy Statement and Purchaser shall prepare
and file with the SEC the S-4, in which the Proxy Statement will be included
as a prospectus. The Company and Purchaser shall give the other party an
opportunity to review, comment on, and make reasonable changes to the Proxy
Statement and the S-4, respectively. Each of Purchaser and the Company shall
use its reasonable efforts to have the S-4 declared effective under the
Securities Act as promptly as practicable after such filing. Each of the
Company and Purchaser shall use its reasonable efforts to cause the Proxy
Statement to be mailed to stockholders of the Company at the earliest
practicable date. Purchaser shall use its reasonable efforts to obtain all
necessary state securities laws or "blue sky" permits, approvals and
registrations in connection with the issuance of Purchaser Common Stock in
connection with the Merger and the Company shall furnish all information
concerning the Company and the holders of Company Common Stock as may be
reasonably requested in connection with obtaining such permits, approvals and
registrations.
5.2 Letter of the Company's Accountants. The Company shall cause to be
delivered to Purchaser a letter of Deloitte & Touche, L.L.P., the Company's
independent public accountants, dated a date within two business days before
the date on which the S-4 shall become effective and addressed to Purchaser
and the Company, in form and substance reasonably satisfactory to Purchaser
and customary in scope and substance for letters delivered by independent
public accountants in connection with registration statements similar to the
S-4.
5.3 Letter of Purchaser's Accountants. Purchaser shall cause to be delivered
to the Company a letter of KPMG Peat Marwick, LLP, Purchaser's independent
public accountants, dated a date within two business days before the date on
which the S-4 shall become effective and addressed to the Company and
Purchaser, in form and substance reasonably satisfactory to the Company and
customary in scope and substance for letters delivered by independent public
accountants in connection with registration statements similar to the S-4.
5.4 Access to Information. Upon reasonable notice, the Company shall (and
shall cause its Subsidiaries to) afford to the officers, employees,
accountants, actuaries, counsel and other representatives of Purchaser,
access, during normal business hours during the period prior to the Effective
Time, to all officers, legal and financial representatives, properties, books,
contracts, commitments, records and all other information concerning its
business, properties and personnel as Purchaser may reasonably request;
provided that such access shall not unreasonably interfere with the business
or operations of the Company. Upon reasonable notice, Purchaser shall make
available such additional information which is reasonably requested by the
Company, and needed, solely for use, in connection with the Company's
preparation of the Proxy Statement. During such period, each of the Company
and Purchaser shall (and shall cause each of their respective Subsidiaries to)
furnish promptly to the other a copy of each report, schedule, registration
statement and other document filed or received by it during such period
pursuant to SEC requirements.
5.5 The Company Stockholders Meeting. The Company shall call a meeting of
its stockholders as soon as practicable after the date upon which the S-4
becomes effective. The Company shall consult with Purchaser in
AI-24
<PAGE>
determining a date for such meeting that is reasonably agreeable to Purchaser
and the Company. Subject only to the proviso of the first sentence of Section
4.2 and any other action taken by, or upon authority of, the Board of
Directors in the exercise of its good faith judgment as to its fiduciary
duties to its stockholders imposed by law, the Company will, through its Board
of Directors, recommend to its stockholders approval of such matters and not
rescind such recommendation and shall use its reasonable efforts to obtain
approval and adoption of this Agreement and the Merger by its stockholders.
5.6 Legal Conditions to Merger. Each of the Company, Purchaser and Sub will
take all reasonable actions necessary to comply promptly with all legal
requirements that may be imposed on such party with respect to the Merger
(including, without limitation, furnishing all information required under the
HSR Act and in connection with approvals of or filings with any other
Governmental Entity) and will promptly cooperate with and furnish information
to each other in connection with any such requirements imposed upon any of
them or any of their Subsidiaries in connection with the Merger. Each of the
Company, Purchaser and Sub will, and will cause its Subsidiaries to, take all
reasonable actions necessary to obtain (and will cooperate with each other in
obtaining) any consent, acquiescence, authorization, order or approval of, or
any exemption or nonopposition by, any Governmental Entity or court required
to be obtained or made by the Company, Purchaser or any of their Subsidiaries
in connection with the Merger or the taking of any reasonable action
contemplated thereby or by this Agreement.
5.7 Response to Certain Actions. Each of the Company, Purchaser and Sub
agree to cooperate and use their reasonable efforts to contest and resist any
action, including administrative or judicial action, and make reasonable
attempts to have vacated, lifted, reversed or overturned any decree, judgment,
injunction or other order, whether temporary, preliminary or permanent, that
is in effect and that restricts, prevents or prohibits the consummation of the
Merger or any other transactions contemplated by this Agreement. Each of the
Company (before the Effective Time), Purchaser and Sub agree to dispose of
drug stores in the State of Pennsylvania, on commercially reasonable terms, to
the extent required by the U.S. Federal Trade Commission, the U.S. Department
of Justice or the attorney general of the State of Pennsylvania as a condition
to the granting of any approvals required in order to permit the consummation
of the Merger; provided, however, that in no event shall Purchaser be required
to take any action that would result in the disposition or closure of drug
stores which had aggregate revenues in excess of $25,000,000 for the fiscal
year ended January 27, 1996 (the "Divestiture Threshold"). In each instance
that Purchaser may be required to take action resulting in the disposition or
closure of alternative stores to be selected by Purchaser, those stores
satisfying the requirement that have the lowest revenues shall be used for
purposes of calculating the Divestiture Threshold.
5.8 Agreements of Others. Prior to the Effective Time, the Company shall
cause to be prepared and delivered to Purchaser a list identifying all persons
who, at the time of the Stockholder Meeting, may be deemed to be "affiliates"
of the Company as that term is used in paragraphs (c) and (d) of Rule 145
under the Securities Act (the "Affiliates"). The Company shall use its
reasonable efforts to cause each person who is identified as an Affiliate in
such list to deliver to Purchaser, at or prior to the Effective Time, a
written agreement, in the form to be approved by the parties hereto, that such
Affiliate will not sell, pledge, transfer or otherwise dispose of any shares
of Purchaser Common Stock issued to such Affiliate pursuant to the Merger,
except pursuant to an effective registration statement or in compliance with
Rule 145 or an exemption from the registration requirements of the Securities
Act.
5.9 Authorization for Shares and Stock Exchange Listing. Prior to the
Effective Time, Purchaser shall have taken all action necessary to permit it
to issue the number of shares of Purchaser Common Stock required to be issued
pursuant to Section 2.1. Purchaser shall use all reasonable efforts to cause
the shares of Purchaser Common Stock to be issued in the Merger and shares of
Purchaser Common Stock to be reserved for issuance upon conversion of the
Company Convertible Notes, to be approved for listing on the NYSE, subject to
official notice of issuance, prior to the Closing Date.
AI-25
<PAGE>
5.10 Employee Matters.
(a) Employees. For purposes of this Section 5.10, the term "Employees"
shall mean all employees of the Company and its Subsidiaries (including
those on disability or leave of absence, paid or unpaid) immediately prior
to the Effective Time.
(b) Participation in Plans Maintained by Purchaser.
(i) Purchaser and its Subsidiaries will honor, in accordance with their
terms, the Company Pension Benefit Plans and Company Employee Benefit Plans
(collectively, the "Company Benefit Plans"), as in effect immediately prior
to the date hereof, listed on Schedule 5.10(b) for a period of not less
than 12 months after the Effective Time; provided, however, that Purchaser
or any of its Subsidiaries may substitute any plan (a "Purchaser Benefit
Plan") that it maintains for any Company Benefit Plan listed on Schedule
5.10(b) if Purchaser in good faith determines, in its sole discretion, that
the Purchaser Benefit Plan, when aggregated with other plans under which
Employees are eligible, provides substantially similar benefits, determined
at the time of the substitution, to those that the Employees had
immediately prior to the Effective Time. Notwithstanding the foregoing, (i)
Purchaser's obligations with respect to the Company's Tuition Assistance
Plan and the Company's Pharmacy Tuition Assistance Program shall be limited
to persons enrolled in such plan or program as of the Effective Time, (ii)
the Company's Tuition Assistance Plan shall be continued, without
substitution, throughout the 1996-1997 academic year, and (iii) the
Company's Pharmacy Tuition Assistance Program shall be continued, without
substitution, for a period of not less than 12 months after the Effective
Time. Notwithstanding the foregoing, nothing herein shall preclude
Purchaser from making any amendments to or terminating any Company Benefit
Plan to the extent required by law (provided that Purchaser uses its
reasonable efforts to minimize the reduction of benefits needed to comply
with applicable law). Purchaser shall have the right, at any time
thereafter following the 12 month period described above, to make any
amendments to or terminate any Company Benefit Plan as Purchaser deems
appropriate.
(ii) With respect to each Purchaser Benefit Plan for which an Employee
becomes eligible, Purchaser and its Subsidiaries shall grant such Employee
credit, for purposes of eligibility and vesting only, for all past service
credited for such purposes by the Company under similar plans, other than
new Purchaser Benefit Plans which cover a substantial number of Purchaser's
employees or employees of one or more of Purchaser's Subsidiaries,
including without limitation Thrift Drug, Inc., (in addition to Employees)
which do not grant past service credit to Purchaser's or such Subsidiaries'
employees generally. Notwithstanding the foregoing, for any vacation plan,
service will be calculated and credited in accordance with the Company's
standard vacation plan, a true and correct copy of which has been provided
to Purchaser.
(iii) Any pre-existing condition exclusion under any Purchaser Benefit
Plan providing medical benefits (other than dental benefits) shall be
waived for any Employee who, immediately prior to commencing participation
in such Purchaser Benefit Plan, was participating in a Company Benefit Plan
providing medical benefits (other than dental benefits) and had satisfied
any pre-existing condition provision under such Company Benefit Plan. Any
pre-existing condition exclusion under any Purchaser Benefit Plan providing
dental benefits shall be waived for any Employee of the Company who,
immediately prior to commencing participation in such Purchaser Benefit
Plan, was participating in a Company Benefit Plan providing dental benefits
and had satisfied any pre-existing condition provision under such Company
Benefit Plan. Any expenses that were taken into account under a Company
Benefit Plan providing medical or dental benefits in which the Employee
participated immediately prior to commencing participation in a Purchaser
Benefit Plan providing medical or dental benefits shall be taken into
account to the same extent under such Purchaser Benefit Plan, in accordance
with the terms of such Purchaser Benefit Plan, for purposes of satisfying
applicable deductible, coinsurance and maximum out-of-pocket provisions and
life-time benefit limits.
(c) Employment of Company Employees. Purchaser agrees to cause the
Company at the Effective Time to continue to employ all Employees (other
than any of the persons listed in Schedule 5.10(d)) who are employed
immediately prior to the Effective Time at substantially comparable levels
of cash compensation. Purchaser shall be under no obligation to cause the
Company to continue to employ any such individuals after the Effective
Time.
AI-26
<PAGE>
(d) Employment Agreements. Purchaser agrees to be, and agrees to cause
the Company to continue to be, bound by and honor the written employment
agreements, as amended through the date hereof (the "Employment
Agreements"), between the Company and those persons listed in Schedule
5.10(d), true, complete and correct copies of which have been provided to
Purchaser. The Company hereby agrees that it shall not exercise its
authority under any such agreement to set up an irrevocable trust,
establish an irrevocable letter of credit, or otherwise establish an
irrevocable funding commitment with respect to such Employment Agreements.
Purchaser agrees that Henry Panasci, David Panasci, James Poole and Warren
Wolfson will be terminated without cause immediately after the Effective
Time for purposes of the Employment Agreements. Purchaser acknowledges that
the consummation of the Merger is a Change in Control (as such term is
defined in the Employment Agreements).
(e) Non-Employee Directors Retirement Plan. Purchaser agrees that each
non-Employee director of the Company immediately preceding the Effective
Time shall be entitled to receive the retirement benefits he would have
received had he retired immediately prior to the Effective Time (as if such
director were at least 65 years old at the Effective Time and served on the
Board for more than ten years). Such benefits shall be paid to the director
upon his attainment of age 65; provided, however, that the Purchaser may,
in its sole discretion, at any time and from time to time within six months
after the Effective Time, pay any or all of such directors the actuarial
equivalent of such benefits in a lump sum. Lump sum amounts shall be
calculated using a 6.75% interest rate and the GAM 83 sex distinct
mortality table.
(f) Severance Policies. Purchaser shall, and shall cause the Company,
from and after the Effective Time, to honor and be bound by the Company's
corporate officers' and non-officer employees' severance policies dated as
of August 5, 1996, true, correct and complete copies of which have been
provided to Purchaser.
(g) Bonus Plans. Purchaser shall, and shall cause the Company, from and
after the Effective Date, to perform the Company's obligations under the
Management Incentive Plan and the Key Management Incentive Plan of the
Company and its Subsidiaries in effect for fiscal year ending February 1,
1997 (the "Bonus Plans"), true, complete and correct copies of which have
been provided to Purchaser. Notwithstanding the terms of the Bonus Plans,
Purchaser shall make payments to all Employees who were employed
immediately prior to the Effective Time, in an amount equal to the product
of:
(i) such Employee's entitlement under the Bonus Plans as if all targets
are met at 100%; times
(ii) a percentage equal to (A) the number of days such Employee was
employed by the Company (including days employed by the Surviving
Corporation) during the fiscal year ending February 1, 1997, divided by (B)
366.
Such payments to terminated Employees shall be made at such time that
such payment would have been made if such employee's employment had not
been so terminated. Notwithstanding the foregoing, no benefits will be paid
to Employees who are terminated for Summary Dismissal (as defined in the
severance policies referenced in Section 5.10(f)).
(h) Stock Purchase Plan. Concurrently with the execution of this
Agreement, the Company Stock Purchase Plan will be amended to provide that
(a) no Company employee not already participating in such plan shall be
eligible to enter such Plan; (b) no employee currently participating in
such Plan shall be able to increase his payroll deduction under such Plan;
and (c) all account balances of such Plan will be used to purchase shares
of Company Common Stock at a date determined by the Committee (as defined
in the Company Stock Purchase Plan) prior to the Effective Time as if such
date was the Annual Purchase Date.
(i) Stock Options Issued to Non-Employee Directors. Concurrent with the
Effective Time, outstanding non-employee director stock options to purchase
shares of Company Common Stock (a "Directors Stock Option") heretofore
granted under the Company Non-Employee Directors Plan, and exercisable but
not exercised shall, upon their surrender to the Company by the holders
thereof, be canceled by the Company, and the holders thereof shall receive
a cash payment from the Company in an amount (if any) equal to the number
of shares of Company Common Stock subject to each surrendered option
multiplied by the difference (if positive) between the exercise price per
share of such Directors Stock
AI-27
<PAGE>
Options and the average of the per share Daily Price on the NYSE (as
reported in the New York Stock Exchange Composite Transactions) during the
ten consecutive trading days immediately preceding the date which is two
trading days prior to the date of the stockholders meeting referred to in
Section 5.5 of the shares of Purchaser Common Stock which such non-employee
director would have received if such non-employee director had exercised
such option prior to the Effective Time; provided, however, that with
respect to both (i) options not yet exercisable and (ii) options for which
such payment cannot be made at the Effective Time because of the
requirements of Section 16(b) of the Securities Exchange Act of 1934, as
amended, Purchaser will cause such options to be assumed by Purchaser and
become exercisable for the same number of whole shares of Purchaser Common
Stock which would have been received if such option had been exercised
immediately prior to the Effective Time and the Company Common Stock
received in connection therewith was exchanged for Purchaser Common Stock
pursuant to the terms of the Merger; provided, however, that cash will be
paid in lieu of the issuance of fractional shares of Purchaser Common
Stock. Purchaser will provide continuing optionees with documentation
regarding such assumed options.
(j) Stock Options Issued to Employees. Concurrent with the Effective
Time, the Company shall offer a cash payment to all holders of outstanding
options (an "Employee Stock Option") to purchase Company Common Stock
heretofore granted under the Company Stock Option Plan. Upon the surrender
to the Company by holders thereof, such Employee Stock Options shall be
canceled by the Company and the holders thereof shall receive a cash
payment from the Company in an amount equal to the number of shares of
Company Common Stock subject to each surrendered Employee Stock Option
multiplied by the difference (if positive) between the exercise price per
share of such Employee Stock Options and the average of the per share Daily
Price on the NYSE (as reported in the New York Stock Exchange Composite
Transactions) during the ten consecutive trading days immediately preceding
the date which is two trading days prior to the date of the stockholders
meeting referred to in Section 5.5 of the shares of Purchaser Common Stock
which such employee would have received if such employee had exercised such
Employee Stock Option prior to the Effective Time. Employee Stock Options
not surrendered by their holders shall be assumed by Purchaser and
exercisable for the same number of whole shares of Purchaser Common Stock
which would have been received if such Employee Stock Option had been
exercised immediately prior to the Effective Time and the Company Common
Stock received in connection therewith was exchanged pursuant to the terms
of the Merger; provided, however, that cash will be paid in lieu of the
issuance of fractional shares of Purchaser Common Stock. Purchaser will
provide continuing optionees with documentation regarding such assumed
options.
(k) Communications to Employees. Purchaser and the Company shall
cooperate with each other with respect to, and endeavor in good faith to
agree in advance upon the method and content of, all written communications
to Employees, and all oral communications to groups of Employees, regarding
the matters that are subject of this Section 5.10.
5.11 Indemnification; Directors' and Officers' Insurance.
(a) From and after the Effective Time, Purchaser and the Surviving
Corporation shall indemnify, defend and hold harmless each person who is
now, or has been at any time prior to the date hereof or who becomes prior
to the Effective Time, an officer or director of the Company or any of its
Subsidiaries or an employee of the Company or any of its Subsidiaries who
acts as a fiduciary under any Company Employee Benefit Plans or Company
Pension Plans (the "Indemnified Parties") against all losses, claims,
damages, costs, expenses (including attorneys' fees), liabilities, fines,
penalties or judgments or amounts that are paid in settlement with the
approval of the indemnifying party (which approval shall not be
unreasonably withheld) of or in connection with any threatened or actual
claim, action, suit, proceeding or investigation based in whole or in part
on or arising in whole or in part out of the fact that such person is or
was a director, officer, or such employee of the Company or any Subsidiary
whether pertaining to any matter of fact existing or occurring at or prior
to the Effective Time ("Indemnified Liabilities"), including all
Indemnified Liabilities based in whole or in part on, or arising in whole
or in part out of, or pertaining to this Agreement or the transactions
contemplated hereby, in each case to the full extent permitted under
applicable law (and Purchaser and the Surviving Corporation will pay
expenses in advance of the final disposition of any such
AI-28
<PAGE>
action or proceeding to each Indemnified Party to the full extent permitted
by law). Without limiting the foregoing, in the event any such claim,
action, suit, proceeding or investigation is brought against any
Indemnified Parties (whether arising before or after the Effective Time),
(i) the Indemnified Parties may retain counsel (which shall be reasonably
acceptable to Purchaser) and Purchaser and the Surviving Corporation shall
pay all reasonable fees and expenses of such counsel for the Indemnified
Parties promptly as statements therefor are received; and (ii) Purchaser
and the Surviving Corporation will use all reasonable efforts to assist in
the vigorous defense of any such matter, provided that neither Purchaser
nor the Surviving Corporation shall be liable for any settlement effected
without its written consent, which consent, however, shall not be
unreasonably withheld. Any Indemnified Party wishing to claim
indemnification under this Section 5.11(a), upon learning of any such
claim, action, suit, proceeding or investigation, shall notify Purchaser
and the Surviving Corporation, but the failure so to notify shall not
relieve a party from any liability that it may have under this Section
5.11(a), except to the extent such failure materially prejudices such
party. The Indemnified Parties as a group may retain only one law firm to
represent them with respect to each such matter in each applicable
jurisdiction unless there is, under applicable standards of professional
conduct, a conflict on any significant issue between the positions of any
two or more Indemnified Parties. Purchaser and Sub agree that all rights to
indemnification, including provisions relating to advances of expenses
incurred in defense of any action or suit, existing in favor of the
Indemnified Parties (including in the Restated Certificate of Incorporation
or Bylaws of the Company or in the indemnification agreements previously
provided to Purchaser) with respect to matters occurring through the
Effective Time, shall survive the Merger and shall continue in full force
and effect for a period of six years from the Effective Time; provided,
however, that all rights to indemnification in respect of any Indemnified
Liabilities asserted or made within such period shall continue until the
disposition of such Indemnified Liabilities. Purchaser shall cause the
provisions providing for the exculpation of directors and officers
liability and indemnification contained in the Certificate of Incorporation
of the Surviving Corporation to be substantively the same as the provisions
providing for the exculpation of directors and officers liabilities and
indemnifications contained in the Restated Certificate of Incorporation of
the Company in effect immediately prior to the Effective Time. The rights
of each Indemnified Party hereunder shall be in addition to any other
rights such Indemnified Party may have under the Restated Certificate of
Incorporation or Bylaws of the Company, under the NYBCL or otherwise. The
provisions of this Section shall survive the consummation of the Merger and
expressly are intended to benefit each of the Indemnified Parties.
(b) For a period of six years after the Effective Time, Purchaser shall
cause to be maintained in effect the current policies of directors' and
officers' liability insurance maintained by the Company and its
Subsidiaries (provided that Purchaser may substitute therefor policies of
at least the same coverage and amounts containing terms and conditions that
are no less advantageous in any material respect to the Indemnified
Parties) with respect to matters arising before the Effective Time;
provided, however, that Purchaser shall not be required to pay an annual
premium for such insurance in excess of (i) 250% of the last annual premium
paid by the Company prior to the date hereof, for each of the first three
annual premiums and (ii) 200% of the last annual premium paid by the
Company prior to the date hereof, thereafter; provided, further, that in
the event such maximum amounts are applicable, Purchaser shall purchase as
much coverage as possible for such amount.
(c) Purchaser shall reimburse an Indemnified Party for reasonable legal
expenses actually incurred by such Indemnified Party in enforcing the
provisions of this Section 5.11 if such Indemnified Party is ultimately
determined to be the prevailing party in a final adjudication by a court
from which there is no further right of appeal (or any such right of appeal
has expired).
5.12 Agreement to Defend. In the event any claim, action, suit,
investigation or other proceeding by any governmental body or other person or
other legal or administrative proceeding is commenced that questions the
validity or legality of the transactions contemplated hereby or seeks damages
in connection therewith, the parties hereto agree to cooperate and use their
reasonable efforts to defend against and respond thereto.
5.13 Public Announcements. Purchaser and Sub, on the one hand, and the
Company, on the other hand, will consult with each other before issuing any
press release or otherwise making any public statements with
AI-29
<PAGE>
respect to the transactions contemplated by this Agreement, and shall not
issue any such press release or make any such public statement prior to such
consultation, except as may be required based upon opinion of counsel by
applicable law or by obligations pursuant to any listing agreement with any
national securities exchange or transaction reporting system.
5.14 Other Actions. Except as contemplated by this Agreement, neither
Purchaser nor the Company shall, and shall not permit any of its Subsidiaries
to, take or agree or commit to take any action that is reasonably likely to
result in any of its respective representations or warranties hereunder being
untrue in any material respect or in any of the conditions to the Merger set
forth in Article VI not being satisfied.
5.15 Advice of Changes; SEC Filings. The Company shall confer on a regular
basis with Purchaser and report on operational matters. Purchaser and the
Company shall promptly advise each other orally and in writing of any change
or event that has, or could reasonably be expected to have, a Material Adverse
Effect on Purchaser or the Company, as the case may be. The Company and
Purchaser shall promptly provide each other (or their respective counsel)
copies of all filings made by such party with the SEC or any other state or
federal Governmental Entity in connection with this Agreement and the
transactions contemplated hereby.
5.16 Reorganization. It is the intention of Purchaser and the Company that
the Merger will qualify as a reorganization described in section 368(a) of the
Code (and any comparable provisions of applicable state law). Neither
Purchaser nor the Company (nor any of their respective Subsidiaries) will take
or omit to take any action (whether before, on or after the Closing Date) that
would cause the Merger not to be so treated. The parties will characterize the
Merger as such a reorganization for purposes of all Returns and other filings.
5.17 Conveyance Taxes. The Company and Purchaser will cooperate in the
preparation, execution and filing of all returns, questionnaires, applications
or other documents regarding any real property transfer or gains, sales, use,
transfer, value added, stock transfer and stamp taxes, any transfer,
recording, registration and other fees and any similar taxes which become
payable in connection with the transactions contemplated by this Agreement
that are required or permitted to be filed on or before the Effective Time and
each party will pay any such tax or fee which becomes payable by it on or
before the Effective Time.
5.18 Company Operations and Name. It is Purchaser's present intention to (i)
continue to operate the Company's existing distribution center in Liverpool,
New York and establish a regional office in the location presently used by the
Company as its corporate headquarters; (ii) operate substantially all of the
existing stores of the Company, provided that Purchaser may, from time to time
in the ordinary course of business, discontinue the operation of any of the
stores of the Company; (iii) continue to use Fay's name for the Company's
stores located in the State of New York; and (iv) operate, directly or through
any of its Subsidiaries, any new drug stores in currently existing trade areas
of the Company in the State of New York under the Fay's name. Nothing in this
Section 5.18 shall be deemed a contractual or other obligation of Purchaser.
5.19 Company Convertible Notes. The Company shall use all reasonable efforts
to cause the conversion of the Company Convertible Notes on or prior to the
Closing Date.
ARTICLE VI
CONDITIONS PRECEDENT
6.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to
the satisfaction prior to the Closing Date of the following conditions:
(a) Company Stockholder Approval. This Agreement and the Merger shall
have been approved and adopted by the affirmative vote of the holders of at
least two-thirds of the outstanding shares of Company Common Stock entitled
to vote thereon.
AI-30
<PAGE>
(b) NYSE Listing. The shares of Purchaser Common Stock issuable to the
Company stockholders pursuant to this Agreement and such other shares of
Purchaser Common Stock required to be reserved for issuance in connection
with the Merger shall have been authorized for listing on the NYSE upon
official notice of issuance.
(c) Other Approvals. The waiting period applicable to the consummation of
the Merger under the HSR Act shall have expired or been terminated and all
filings required to be made prior to the Effective Time with, and all
consents, approvals, permits and authorizations required to be obtained
prior to the Effective Time from any Governmental Entity in connection with
the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby by the Company, Purchaser and Sub shall
have been made or obtained (as the case may be), except where the failure
to obtain such consents, approvals, permits, and authorizations could not
reasonably be expected to result in a Material Adverse Effect on Purchaser
(assuming the Merger has taken place) or to materially adversely affect the
consummation of the transactions contemplated by this Agreement.
(d) S-4. The S-4 shall have become effective under the Securities Act and
shall not be the subject of any stop order or proceedings seeking a stop
order.
(e) No Injunctions or Restraints. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition (an
"Injunction") preventing the consummation of the Merger shall be in effect;
provided, however, that prior to invoking this condition, each party shall
have complied fully with its obligations under Section 5.7 hereof and, in
addition, shall use all reasonable efforts to have any such decree, ruling,
injunction or order vacated, except as otherwise contemplated by this
Agreement.
(f) Tax Opinion. The Company shall have received (i) an opinion, dated on
or about the date that is two days prior to the date the Proxy Statement is
first mailed to stockholders of the Company, of Baker & Botts, L.L.P.,
counsel to Purchaser, to the effect that, if consummated in accordance with
the terms of this Agreement, the Merger will be treated for federal income
tax purposes as a reorganization within the meaning of section 368(a) of
the Code; Purchaser, Sub and the Company will each be a party to that
reorganization within the meaning of section 368(b) of the Code; and no
gain or loss will be recognized by a stockholder of the Company as a result
of the Merger upon the conversion of shares of Company Common Stock into
shares of Purchaser Common Stock, and (ii) an opinion, dated as of the
Closing Date, to the same effect; provided, however, that in the event
Baker & Botts, L.L.P. is unprepared or unwilling to render either or both
such opinions, this condition shall have been satisfied if Bryan Cave
L.L.P., outside general counsel of the Company, or Fried, Frank, Harris,
Shriver & Jacobson, outside special counsel to the Company, is able to
render an opinion to the same effect as substantially above. In rendering
such opinion, such counsel may receive and rely upon representations of
fact contained in certificates of Purchaser and Sub (in the form of the
Certificate at Schedule 3.2(m)) and the Company (in the form of the
Certificate at Schedule 3.1(w)).
6.2 Conditions of Obligations of Purchaser and Sub. The obligations of
Purchaser and Sub to effect the Merger are subject to the satisfaction of the
following conditions, any or all of which may be waived in whole or in part by
Purchaser and Sub.
(a) Representations and Warranties. Each of the representations and
warranties of the Company set forth in this Agreement shall be true and
correct in all material respects as of the date of this Agreement and
(except to the extent such representations and warranties speak as of an
earlier date) as of the Closing Date as though made on and as of the
Closing Date, except where the failure to be so true and correct (without
giving effect to the individual materiality thresholds otherwise contained
in Section 3.1 hereof) could not reasonably be expected to have a Material
Adverse Effect on the Company or as otherwise contemplated by this
Agreement.
(b) Performance of Obligations of the Company. The Company shall have
performed in all material respects all obligations required to be performed
by it under this Agreement at or prior to the Closing Date.
AI-31
<PAGE>
(c) Agreements from the Company Affiliates. Purchaser shall have received
from each person named in the list referred to in Section 5.8 an executed
copy of an agreement as provided in Section 5.8.
(d) Appraisal Rights. Holders of not more than 10% of the outstanding
shares of Company Common Stock shall have properly demanded appraisal
rights for their shares under the NYBCL.
(e) Opinion of Company Counsel. Purchaser shall have received opinions of
counsel from Bryan Cave LLP, counsel to the Company, and Fried, Frank,
Harris, Shriver & Jacobson, counsel to the Company, dated the Effective
Time, covering, collectively and substantially, the opinions expressed
below:
(i) The incorporation, good standing and capitalization of the Company
and its Subsidiaries are as stated in this Agreement; the authorized shares
of Company Common Stock are as stated in this Agreement; all outstanding
shares of Company Common Stock are duly and validly authorized and issued,
fully paid and non-assessable and have not been issued in violation of any
preemptive right of stockholders; and, to the knowledge of such counsel,
there is no existing option, warrant, right, call, subscription or other
agreement or commitment obligating the Company to issue or sell, or to
purchase or redeem, any shares of its capital stock other than as stated in
this Agreement.
(ii) The Company has corporate power and authority to execute, deliver
and perform this Agreement and this Agreement has been duly authorized,
executed and delivered by the Company, and (assuming the due and valid
authorization, execution and delivery by Purchaser and Sub) constitutes the
legal, valid and binding agreement of the Company enforceable against the
Company in accordance with its terms, except to the extent enforceability
may be limited by bankruptcy, insolvency, reorganization, moratorium,
fraudulent transfer or other similar laws of general applicability relating
to or affecting the enforcement of creditors' rights and by the effect of
general principles of equity (regardless of whether enforceability is
considered in a proceeding in equity or at law).
(iii) To the knowledge of such counsel, there are no actions, suits or
proceedings pending or threatened against or affecting the Company or its
Subsidiaries at law or in equity or before or by any court, governmental
department, commission, board, bureau, agency or instrumentality, or before
any arbitrator, of any kind that seek to restrain, prohibit or invalidate
the transactions contemplated by this Agreement.
(iv) The execution and performance by the Company of this Agreement will
not violate the Certificate of Incorporation or By-laws of the Company or
the charter or by-laws of any of its Subsidiaries, and, to the knowledge of
such counsel, will not violate, result in a breach of, or constitute a
default under, any material lease, mortgage, contract, agreement,
instrument, law, rule, regulation, judgment, order or decree known to such
counsel based upon a certificate of the Company, to which the Company or
any of its Subsidiaries is a party or to which they or any of their
properties or assets may be bound.
(v) To the knowledge of such counsel, no consent, approval, authorization
or order of any Governmental Entity which has not been obtained is required
on behalf of the Company or any of its Subsidiaries for consummation of the
transactions contemplated by this Agreement.
(vi) The Proxy Statement (other than financial statements, financial
data, statistical data and supporting schedules included therein, and
information relating to or supplied by Purchaser or Sub as to which counsel
expresses no opinions) complied as to form in all material respects with
the requirements of the Exchange Act and the rules and regulations of the
SEC thereunder.
In addition, there shall be a statement to the effect that in the course
of the preparation of the Proxy Statement such counsel has participated in
conferences with certain of the officers and representatives of the
Company. Such counsel has not independently checked the accuracy or
completeness of, or otherwise verified, and accordingly is not passing
upon, and does not assume responsibility for, the accuracy, completeness or
fairness of the statements contained in the Proxy Statement; and such
counsel has relied as to materiality upon the judgment of certain of the
officers and representatives of the Company. Subject to the foregoing and
on the basis of the information that such counsel gained in the course of
the performance of the services referred to above, including information
obtained from officers and representatives of the Company, nothing has come
to such counsel's attention which causes such counsel to believe that the
Proxy Statement (other than the financial statements, financial data,
statistical data and supporting schedules
AI-32
<PAGE>
included therein, and information relating to or supplied by Purchaser or
Sub, as to which such counsel expresses no belief), at the time the S-4
became effective, included any untrue statement of a material fact or
omitted to state a material fact necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
In rendering such opinion, counsel for the Company may rely as to matters
of fact upon the representations of officers of the Company and its
Subsidiaries contained in any certificate delivered to such counsel and
certificates of public officials which certificates should be attached to
and delivered with such opinion. Such opinion shall be limited to the laws
of the State of New York and the laws of the United States of America.
(f) Consents Under Agreements. The Company shall have obtained the
consent or approval of each person (other than the Governmental Entities
referred to in Section 6.1(c) ) whose consent or approval shall be required
in connection with the transactions contemplated hereby under any
indenture, mortgage, evidence of indebtedness, lease or other agreement or
instrument, except where the failure to obtain the same could not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect on the Company or Purchaser or the consummation of the
transactions contemplated by this Agreement.
(g) Material Adverse Change. Since the date of this Agreement, there
shall have been no Material Adverse Change with respect to the Company; and
Purchaser shall have received a certificate signed on behalf of the Company
by its Chief Executive Officer and its Chief Financial Officer to such
effect.
(h) Termination of Certain Plans. The Company shall have caused the
redemption of the Rights outstanding under the Company Rights Plan and the
termination of the Company Stock Purchase Plan, Company Dividend
Reinvestment and Stock Purchase Plan and the Company Service Award Program
to the extent it awards Company Common Stock.
6.3 Conditions of Obligations of the Company. The obligation of the Company
to effect the Merger is subject to the satisfaction of the following
conditions, any or all of which may be waived in whole or in part by the
Company:
(a) Representations and Warranties. Each of the representations and
warranties of Purchaser and Sub set forth in this Agreement shall be true
and correct in all material respects as of the date of this Agreement and
(except to the extent such representations and warranties speak as of an
earlier date) as of the Closing Date as though made on and as of the
Closing Date, except where the failure to be so true and correct (without
giving effect to the individual materiality thresholds otherwise contained
in Section 3.2 hereof) could not reasonably be expected to have a Material
Adverse Effect on Purchaser or as otherwise contemplated by this Agreement.
(b) Performance of Obligations of Purchaser and Sub. Purchaser and Sub
shall have performed in all material respects all obligations required to
be performed by them under this Agreement at or prior to the Closing Date.
(c) Opinion of Purchaser Counsel. The Company shall have received
opinions from the General Counsel of Purchaser and Baker & Botts, L.L.P.,
counsel to Purchaser and Sub, dated the Effective Time, covering,
collectively and substantially, the opinions expressed below:
(i) The incorporation, good standing and capitalization of Purchaser and
Sub are as stated in this Agreement; the authorized shares of Purchaser and
Sub are as stated in this Agreement; all outstanding shares of Purchaser
Common Stock are duly and validly authorized and issued, fully paid and
non-assessable and have not been issued in violation of any preemptive
right of stockholders; and, to the knowledge of such counsel, there is no
existing option, warrant, right, call, subscription or other agreement or
commitment obligating Purchaser to issue or sell, or to purchase or redeem,
any shares of its capital stock other than as stated in this Agreement.
(ii) Each of Purchaser and Sub has corporate power and authority to
execute, deliver and perform this Agreement and this Agreement has been
duly authorized, executed and delivered by Purchaser or Sub, as
AI-33
<PAGE>
the case may be, and (assuming the due and valid authorization, execution
and delivery by the Company) constitutes the legal, valid and binding
agreement of Purchaser or Sub enforceable against Purchaser or Sub in
accordance with its terms, except to the extent enforceability may be
limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent
transfer or other similar laws of general applicability relating to or
affecting the enforcement of creditors' rights and by the effect of general
principles of equity (regardless of whether enforceability is considered in
a proceeding in equity or at law).
(iii) The execution and performance by Purchaser and Sub of this
Agreement will not violate the Certificates of Incorporation or Bylaws of
Purchaser and Sub, respectively, and, to the knowledge of such counsel,
will not violate, result in a breach of, or constitute a default under, any
material lease, mortgage, contract, agreement, instrument, law, rule,
regulation, judgment, order or decree known to such counsel based upon a
certificate of Purchaser and Sub, to which Purchaser and Sub is a party or
by which they or any of their properties or assets may be bound.
(iv) To the knowledge of such counsel, no consent, approval,
authorization or order of any Governmental Entity which has not been
obtained is required on behalf of Purchaser and Sub for the consummation of
the transactions contemplated by this Agreement.
(v) To the knowledge of such counsel, there are no actions, suits or
proceedings pending or threatened against or affecting Purchaser and Sub at
law or in equity or before or by any court, governmental department,
commission, board, bureau, agency or instrumentality, or before any
arbitrator, of any kind that seek to restrain, prohibit or invalidate the
transactions contemplated by this Agreement.
(vi) At the time the S-4 became effective, the S-4 (other than the
financial statements, financial data, statistical data and supporting
schedules included therein, and information relating to or supplied by the
Company as to which such counsel expresses no opinion) complied as to form
in all material respects with the requirements of the Securities Act and
the rules and regulations of the SEC thereunder.
(vii) The shares of Purchaser Common Stock to be issued pursuant to this
Agreement will be, when so issued, duly authorized, validly issued and
outstanding, fully paid and nonassessable.
In addition, there shall be a statement to the effect that in the course
of the preparation of the S-4 such counsel has participated in conferences
with certain of the officers and representatives of Purchaser. Such counsel
has not independently checked the accuracy or completeness of, or otherwise
verified, and accordingly is not passing upon, and does not assume
responsibility for, the accuracy, completeness or fairness of the
statements contained in the S-4; and such counsel has relied as to
materiality upon the judgment of certain of the officers and
representatives of Purchaser. Subject to the foregoing and on the basis of
the information that such counsel gained in the course of the performance
of the services referred to above, including information obtained from
certain officers and representatives of Purchaser, nothing has come to such
counsel's attention which causes such counsel to believe that the S-4
(other than the financial statements, financial data, statistical data and
supporting schedules included therein, and information relating to or
supplied by the Company, as to which such counsel expresses no belief), at
the time the S-4 became effective, included any untrue statement of a
material fact or omitted to state a material fact necessary in order to
make the statements therein not misleading.
In rendering such opinion, counsel for the Company may rely as to matters
of fact upon the representations of officers of Purchaser or Sub contained
in any certificate delivered to such counsel and certificates of public
officials which certificates shall be attached to or delivered with such
opinion. The opinion called for by this Section 6.3(c) shall be limited to
the laws of the State of New York, the General Corporation Law of the State
of Delaware and the laws of the United States of America.
(d) Material Adverse Change. Since the date of this Agreement, there
shall have been no Material Adverse Change with respect to Purchaser; and
the Company shall have received a certificate signed on behalf of Purchaser
by its Chief Financial Officer to such effect.
AI-34
<PAGE>
ARTICLE VII
TERMINATION AND AMENDMENT
7.1 Termination. This Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time, whether before or after
approval of the matters presented in connection with the Merger by the
stockholders of the Company:
(a) by mutual written consent of the Company and Purchaser, or by mutual
action of their respective Boards of Directors;
(b) by either the Company or Purchaser if (i) the Merger shall not have
been consummated by December 31, 1996 (provided that the right to terminate
this Agreement under this clause (i) shall not be available to any party
whose breach of any representation or warranty or failure to fulfill any
covenant or agreement under this Agreement has been the cause of or
resulted in the failure of the Merger to occur on or before such date);
(ii) any court of competent jurisdiction, or some other governmental body
or regulatory authority shall have issued an order, decree or ruling or
taken any other action permanently restraining, enjoining or otherwise
prohibiting the Merger and such order, decree, ruling or other action shall
have become final and nonappealable; (iii) approval of the stockholders of
the Company shall not have been obtained by reason of the failure to obtain
the required vote upon a vote taken at a duly held meeting of stockholders
(including any adjournment(s) or postponement(s) thereof); or (iv) the
Board of Directors of the Company shall have approved or recommended any
Acquisition Proposal which is financially superior to the Merger (as
determined in good faith by the Company's Board of Directors after
consultation with the Company's financial advisors), and the Board of
Directors of the Company is advised by its outside counsel that the
fiduciary duties of the Board of Directors require acceptance or
recommendation of such Acquisition Proposal.
(c) by Purchaser if (i) the Company shall have failed to comply in any
material respect with any of the covenants or agreements contained in this
Agreement to be complied with or performed by the Company at or prior to
such date of termination (provided such breach has not been cured within 30
days following receipt by the Company of written notice of such breach and
is existing at the time of termination of this Agreement); (ii) any
representation or warranty of the Company contained in this Agreement shall
not be true in all material respects when made or on and as of the
Effective Time as if made on and as of the Effective Time (except to the
extent it relates to a particular date), except where the failure to be so
true and correct (without giving effect to the individual materiality
thresholds otherwise contained in Section 3.1 hereof) could not reasonably
be expected to have a Material Adverse Effect; (iii) the Board of Directors
of the Company withdraws, modifies or changes its recommendation of this
Agreement or the Merger in a manner adverse to Purchaser or Sub or shall
have resolved to do any of the foregoing; (iv) after the date hereof there
has been any Material Adverse Change with respect to the Company; or (v)
the Conversion Shares (without regard to the proviso in the first sentence
of Section 2.1(c)) would be less than .2065614 shares of Purchaser Common
Stock.
(d) by the Company if (i) Purchaser or Sub shall have failed to comply in
any material respect with any of the covenants or agreements contained in
this Agreement to be complied with or performed by it at or prior to such
date of termination (provided such breach has not been cured within 30 days
following receipt by Purchaser of written notice of such breach and is
existing at the time of termination of this Agreement); (ii) any
representation or warranty of Purchaser or Sub contained in this Agreement
shall not be true in all material respects when made or on and as of the
Effective Time as if made on and as of the Effective Time (except to the
extent it relates to a particular date), except where the failure to be so
true and correct (without giving effect to the individual materiality
thresholds otherwise contained in Section 3.2 hereof) could not reasonably
be expected to have a Material Adverse Effect; (iii) after the date hereof
there has been any Material Adverse Change with respect to Purchaser; or
(iv) the Conversion Shares (without regard to the proviso in the first
sentence of Section 2.1(c)) would be more than .3098420 shares of Purchaser
Common Stock.
AI-35
<PAGE>
7.2 Effect of Termination.
(a) In the event of termination of this Agreement by either the Company
or Purchaser as provided in Section 7.1, this Agreement shall forthwith
become void and there shall be no liability or obligation on the part of
Purchaser, Sub or the Company except (i) with respect to this Section 7.2
and Section 8.1, and (ii) to the extent that such termination results from
the willful breach by a party hereto of any of its representations or
warranties or of any of its covenants or agreements, in each case, as set
forth in this Agreement except as provided in Section 8.8.
(b) If this Agreement is terminated pursuant to Section 7.1(b)(iv) or
7.1(c)(iii), then (i) the Company shall no later than five business days
after written demand from Purchaser, pay Purchaser in same day funds an
amount equal to $4,000,000 in lieu of reimbursing Purchaser for all out-of-
pocket expenses and fees (including, without limitation, fees and expenses
payable to investment banking firms and other financial advisors and their
respective counsel, accountants, outside counsel, experts and consultants)
actually incurred by Purchaser or its Subsidiaries on its or their behalf
in connection with this Agreement and the transactions contemplated
hereunder and (ii) if an Acquisition Transaction is consummated within nine
months of such termination, the Company shall, on the day of such
consummation, pay Purchaser in same day funds an additional amount equal to
$8,000,000.
(c) If Purchaser has received payments in accordance with paragraph (b)
above, and the Company is not or was not in willful breach (other than an
immaterial breach) of its representations, warranties, covenants and
agreements under this Agreement, Purchaser shall not (i) assert or pursue
in any manner, directly or indirectly, any claim or cause of action based
in whole or in part upon alleged tortious or other interference with rights
under this Agreement against any entity or person submitting an Acquisition
Proposal or (ii) assert or pursue in any manner, directly or indirectly,
any claim or cause of action against the Company or any of its officers or
directors based in whole or in part upon its or their receipt,
consideration, recommendation or approval of an Acquisition Proposal or the
Company's exercise of its right of termination under Section 7.1. If
Purchaser pursues any claim or cause of action against the Company or any
of its officers or directors based in whole or in part upon its or their
receipt, consideration, recommendation or approval of an Acquisition
Proposal or the Company's exercise of its right of termination under
Section 7.1, then the prevailing party shall be entitled to recover all
reasonable out-of-pocket costs and expenses incurred in the prosecution or
defense of such litigation, including reasonable attorneys' fees and costs.
7.3 Amendment. This Agreement may be amended by the parties hereto, by
action taken or authorized by their respective Boards of Directors, at any
time before or after approval of the matters presented in connection with the
Merger by the stockholders of the Company, but, after any such approval, no
amendment shall be made which by law requires further approval by such
stockholders without such further approval. This Agreement may not be amended
except by an instrument in writing signed on behalf of each of the parties
hereto.
7.4 Extension; Waiver. At any time prior to the Effective Time, the parties
hereto, by action taken or authorized by their respective Boards of Directors,
may, to the extent legally allowed: (a) extend the time for the performance of
any of the obligations or other acts of the other parties hereto; (b) waive
any inaccuracies in the representations and warranties contained herein or in
any document delivered pursuant hereto; and (c) waive compliance with any of
the agreements or conditions contained herein. Any agreement on the part of a
party hereto to any such extension or waiver shall be valid only if set forth
in a written instrument signed on behalf of such party.
ARTICLE VIII
GENERAL PROVISIONS
8.1 Payment of Expenses. Each party hereto shall pay its own expenses
incident to preparing for entering into and carrying out this Agreement and
the consummation of the transactions contemplated hereby, whether or not the
Merger shall be consummated, except (a) as set forth in Section 7.2 and (b)
that the filing fees with respect to the Proxy Statement and the S-4 shall be
shared equally by Purchaser and the Company.
AI-36
<PAGE>
8.2 Nonsurvival of Representations, Warranties and Agreements. None of the
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall survive the Effective
Time and any liability for breach or violation thereof shall terminate
absolutely and be of no further force and effect at and as of the Effective
Time, except for the agreements contained in Sections 2.1, 2.2, 5.10, 5.11 and
7.2 and Article VIII and the agreements delivered pursuant to Section 5.8.
8.3 Notices. All notices, requests, claims, demands and other communications
required or permitted hereunder shall be in writing and shall be given (and
shall be deemed to have been duly received if given) by hand delivery or
telecopy (with a confirmation copy sent for next day delivery via courier
service, such as Federal Express), or by any courier service, such as Federal
Express, providing proof of delivery. All communications hereunder shall be
delivered to the respective parties at the following addresses:
(a) if to Purchaser or Sub, to:
J. C. Penney Company, Inc.
6501 Legacy Drive
Plano, Texas 75024-3698
Attention: Donald A. McKay
with copies to:
J. C. Penney Company, Inc.
6501 Legacy Drive
Plano, TX 75024-3698
Attention: Charles R. Lotter
and
Baker & Botts, L.L.P.
2001 Ross Avenue
Dallas, TX 75201
Attention: Michael A. Saslaw
and if to the Company, to:
Fay's Incorporated
7245 Henry Clay Blvd.
Liverpool, New York 13088
Attention: David H. Panasci
with copies to:
Fay's Incorporated
7245 Henry Clay Blvd.
Liverpool, New York 13088
Attention: Warren D. Wolfson
Bryan Cave LLP
245 Park Avenue
New York, NY 10167
Attention: Robert Altman
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, NY 10004-1980
Attention: Jeffrey Bagner
8.4 Interpretation. When a reference is made in this Agreement to Sections,
such reference shall be to a Section of this Agreement unless otherwise
indicated. The table of contents, glossary of defined terms and headings
contained in this Agreement are for reference purposes only and shall not
affect in any way the meaning or interpretation of this Agreement. Whenever
the word "include," "includes" or "including" are used in this
AI-37
<PAGE>
Agreement, they shall be deemed to be followed by the words "without
limitation." The phrase "made available" in this Agreement shall mean that the
information referred to has been made available if requested by the party to
whom such information is to be made available. Unless the context otherwise
requires, "or" is disjunctive but not necessarily exclusive, and words in the
singular include the plural and in the plural include the singular. The phrase
"to the knowledge of the Company" in this Agreement shall mean to the actual
knowledge of the Company's executive officers and such additional persons,
with respect to specific representations and warranties, as set forth in
Schedule 8.4.
8.5 Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each
of the parties and delivered to the other parties, it being understood that
all parties need not sign the same counterpart.
8.6 Entire Agreement; No Third Party Beneficiaries. This Agreement (together
with any other documents and instruments referred to herein) (a) constitutes
the entire agreement and supersedes all prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter
hereto, except for the Confidentiality Agreements dated April 22, 1996, and
July 10, 1996, between Purchaser and the Company, and (b) except as provided
in Sections 5.10 and 5.11, is not intended to confer upon any person other
than the parties hereto any rights or remedies hereunder.
8.7 Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of New York, without giving effect to
the principles of conflicts of law thereof.
8.8 No Remedy in Certain Circumstances. Each party agrees that, should any
court or other competent authority hold any provision of this Agreement or
part hereof to be null, void or unenforceable, or order any party to take any
action inconsistent herewith or not to take an action consistent herewith or
required hereby, the validity, legality and enforceability of the remaining
provisions and obligations contained or set forth herein shall not in any way
be affected or impaired thereby, unless the foregoing inconsistent action or
the failure to take an action constitutes a material breach of this Agreement
or makes the Agreement impossible to perform in which case this Agreement may
be terminated pursuant to Article VII hereof. Except as otherwise contemplated
by this Agreement, to the extent that a party hereto took an action
inconsistent herewith or failed to take action consistent herewith or required
hereby in each case pursuant to an order or judgment of a court or other
competent authority, such party shall not incur any liability or obligation
unless such party did not in good faith seek to resist or object to the
imposition or entering of such order or judgment and give notice as soon as
possible to the other party of the commitment of any action that could give
rise to any such order or judgment.
8.9 Specific Performance. Each of the parties hereto recognizes and
acknowledges that a breach by it of any covenants or agreements contained in
this Agreement will cause the other parties to sustain damages for which they
would not have an adequate remedy at law for money damages, and therefore each
of the parties hereto agrees that in the event of any such breach, an
aggrieved party shall be entitled to the remedy of specific performance of
such covenants and agreements and injunctive and other equitable relief in
addition to any other remedy to which it may be entitled, at law or in equity.
8.10 Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties hereto (whether
by operation of law or otherwise) without the prior written consent of the
other parties, except that Sub may assign, in its sole discretion, any or all
of its rights, interests and obligations hereunder to any newly-formed direct
wholly owned Subsidiary of Purchaser. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and assigns.
8.11 Schedules. For purposes of this Agreement, Schedules shall mean the
Schedules contained in the Confidential Disclosure Schedule, dated the date
hereof, delivered in connection with this Agreement and initialed by the
parties hereto. Disclosure of information by a party in one Schedule shall be
deemed to be adequate disclosure of such information under any other Schedule
in which such information is required to be disclosed by such party.
AI-38
<PAGE>
IN WITNESS WHEREOF, each party has caused this Agreement to be signed by its
respective officers thereunto duly authorized, all as of the date first
written above.
J. C. Penney Company, Inc.
By: /s/ D. A. McKay
----------------------------------
Name: D. A. McKayTitle: Senior
Vice President and
Chief FinancialOfficer
Beta Acquisition Corp.
By: /s/ Robert W. Hannan
----------------------------------
Name: Robert W.
HannanTitle: President
Fay's Incorporated
By: /s/ James F. Poole, Jr.
----------------------------------
Name: James F. Poole, Jr.
Title: Chief Financial Officer
AI-39
<PAGE>
AMENDMENT
TO
AGREEMENT AND PLAN OF MERGER
THIS AMENDMENT TO AGREEMENT AND PLAN OF MERGER, dated as of September 5,
1996 (this "Amendment"), among J. C. Penney Company, Inc., a Delaware
corporation ("Purchaser"), Beta Acquisition Corp., a New York corporation
("Sub"), and Fay's Incorporated, a New York corporation (the "Company").
WHEREAS, Purchaser, Sub and the Company previously entered into that certain
Agreement and Plan of Merger, dated as of August 5, 1996 (the "Merger
Agreement");
WHEREAS, the parties desire to clarify certain matters addressed in the
Merger Agreement;
WHEREAS, Section 7.3 of the Merger Agreement provides that the Merger
Agreement may be amended by the parties thereto, by action taken or authorized
by their respective Boards of Directors, at any time before or after approval
of the matters presented in connection with the Merger by the stockholders of
the Company, by an instrument in writing signed on behalf of each of the
parties thereto; and
WHEREAS, the respective parties have been authorized to execute this
Amendment;
NOW, THEREFORE, in consideration of the premises, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. Definitions. Capitalized terms used but not defined herein shall have
the meanings assigned them in the Merger Agreement.
2. 368(a) Reorganization. Section 4.1(j) is hereby amended to read in its
entirety as follows:
"(j) 368(a) Reorganization. From the date hereof through the Closing Date
(i) the Company shall not take any action, or cause any action to be taken,
which would prevent the transactions contemplated hereby from qualifying as
a reorganization pursuant to section 368(a) of the Code and (ii) the Company
shall not permit any stockholder of the Company owning 5% or more of the
Company Common Stock to take any action, or cause any action to be taken,
which would prevent the transactions contemplated hereby from qualifying as
a reorganization pursuant to section 368(a) of the Code, unless the Company
has no control over the particular action or inaction of such stockholder."
3. No Redemption of Rights. A new Section 4.1(k) is hereby added and shall
read in its entirety as follows:
"(k) No Redemption of Rights. The Company shall not redeem any of the
Rights outstanding under the Company Rights Plan."
4. Stock Options Issued to Non-Employee Directors. Section 5.10(i) is
hereby amended to read in its entirety as follows:
"(i) Stock Options Issued to Non-Employee Directors. Concurrent with the
Effective Time, outstanding non-employee director stock options to purchase
shares of Company Common Stock ("Directors Stock Options") heretofore
granted under the Company Non-Employee Directors Plan, and exercisable but
not exercised shall, upon their surrender to the Company by the holders
thereof, be canceled by the Company, and the holders thereof shall receive a
cash payment from the Company in an amount (if any) equal to the number of
shares of Purchaser Common Stock which the holder of such Directors Stock
Options would have received if such holder had exercised the Directors Stock
Options immediately prior to the Effective Time (assuming the issuance of
fractional shares of Purchaser Common Stock ) multiplied by the difference
between (i) the average of the per share Daily Price of Purchaser Common
Stock during the ten consecutive trading days immediately preceding the date
which is two trading days prior to the date of the stockholders meeting
referred to in Section 5.5 and (ii) the exercise price per share of such
Directors Stock Options divided by the Conversion Shares number; provided,
however, that with respect to both (A) options not
AI-40
<PAGE>
yet exercisable and (B) options for which such payment cannot be
made at the Effective Time because of the requirements of
Section 16(b) of the Securities Exchange Act of 1934, as
amended, Purchaser will cause such options to be assumed by
Purchaser (pursuant to the Company Non-Employee Directors Plan)
and become exercisable for the same number of whole shares of
Purchaser Common Stock which would have been received if such
Directors Stock Options had been exercised immediately prior to
the Effective Time and the Company Common Stock received in
connection therewith was exchanged for Purchaser Common Stock
pursuant to the terms of the Merger with an exercise price equal
to the exercise price per share of such Directors Stock Options
divided by the Conversion Shares number. Purchaser will provide
continuing optionees with documentation regarding such assumed
options."
5. Stock Options Issued to Employees. Section 5.10(j) is hereby amended to
read in its entirety as follows:
"(j) Stock Options Issued to Employees. Concurrent with the
Effective Time, the Company shall offer a cash payment to all
holders of outstanding options to purchase Company Common Stock
("Employee Stock Options") heretofore granted under the Company
Stock Option Plan. Upon the surrender to the Company by holders
thereof, such Employee Stock Options shall be canceled by the
Company and the holders thereof shall receive a cash payment
from the Company in an amount equal to the number of shares of
Purchaser Common Stock which the holder of such Employee Stock
Options would have received if such holder had exercised the
Employee Stock Options immediately prior to the Effective Time
(assuming the issuance of fractional shares of Purchaser Common
Stock) multiplied by the difference between (i) the average of
the per share Daily Price of Purchaser Common Stock during the
ten consecutive trading days immediately preceding the date
which is two trading days prior to the date of the stockholders
meeting referred to in Section 5.5 and (ii) the exercise price
per share of such Employee Stock Options divided by the
Conversion Shares number. Employee Stock Options not surrendered
by their holders shall be assumed by Purchaser (pursuant to the
Company Stock Plan) and become exercisable for the same number
of whole shares of Purchaser Common Stock which would have been
received if such Employee Stock Options had been exercised
immediately prior to the Effective Time and the Company Common
Stock received in connection therewith was exchanged pursuant to
the terms of the Merger with an exercise price equal to the
exercise price per share of such Employee Stock Options divided
by the Conversion Shares number. Purchaser will provide
continuing optionees with documentation regarding such assumed
options.
6. Example Calculation. Attached hereto as Attachment I is an example of
the calculations contemplated by sections 4 and 5 of this Amendment.
7. Indemnification; Directors' and Officers' Insurance. Section 5.11(a) is
hereby amended by deleting the first sentence thereof and inserting in its
stead the following:
"From and after the Effective Time, Purchaser and the
Surviving Corporation shall indemnify, defend and hold harmless
each person who is now, or has been at any time prior to the
date hereof or who becomes prior to the Effective Time, an
officer, director or employee of the Company or any of its
Subsidiaries (the "Indemnified Parties") against all losses,
claims, damages, costs, expenses (including attorneys' fees),
liabilities, fines, penalties or judgments or amounts that are
paid in settlement with the approval of the indemnifying party
(which approval shall not be unreasonably withheld) of or in
connection with any threatened or actual claim, action, suit,
proceeding or investigation based in whole or in part on or
arising in whole or in part out of the fact that such person is
or was a director, officer or employee of the Company or any
Subsidiary, or acts or acted as a fiduciary under any Company
Employee Benefit Plans or Company Pension Plans, whether
pertaining to any matter of fact existing or occurring at or
prior to the Effective Time ("Indemnified
AI-41
<PAGE>
Liabilities"), including all Indemnified Liabilities based in
whole or in part on, or arising in whole or in part out of, or
pertaining to this Agreement or the transactions contemplated
hereby, in each case to the full extent permitted under
applicable law (and Purchaser and the Surviving Corporation will
pay expenses in advance of the final disposition of any such
action or proceeding to each Indemnified Party to the full
extent permitted by law)."
8. Termination of Certain Plans. Section 6.2(h) of the Merger Agreement is
hereby amended to read in its entirety as follows:
"(h) Termination of Certain Plans. The Company shall have
caused the termination of the Company Stock Purchase Plan,
Company Dividend Reinvestment and Stock Purchase Plan and the
Company Service Award Program to the extent it awards Company
Common Stock."
9. Termination. Section 7.1(c) is hereby amended by inserting the words
"on the Company" immediately following the words "Material Adverse Effect" in
clause (ii) thereof. Section 7.1(d) is hereby amended by inserting the words
"on Purchaser" immediately following the words "Material Adverse Effect" in
clause (ii) thereof.
10. Agreement Remains in Effect. Except as amended by this Amendment, the
Agreement shall hereafter remain in full force and effect with the terms that
were in effect prior to this Amendment.
11. Counterparts. This Amendment may be executed in separate counterparts,
each of which shall constitute an original, and all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, each party has caused this Amendment to be signed by its
respective officers thereunto duly authorized, all as of the date first
written above.
J. C. Penney Company, Inc.
By: /s/ D.A. McKay
---------------------------------
Name: D.A. McKay
Title: Senior Vice President and
Chief Financial Officer
Beta Acquisition Corp.
By: /s/ Robert W. Hannan
---------------------------------
Name: Robert W. Hannan
Title: President
Fay's Incorporated
By: /s/ James F. Poole, Jr.
---------------------------------
Name: James F. Poole, Jr.
Title: Chief Financial Officer
AI-42
<PAGE>
ATTACHMENT I TO AMENDMENT TO THE MERGER AGREEMENT
EXAMPLE CALCULATION
Assuming the following:
a. The holders of Company Common Stock approve the Merger at a meeting held
on October 11, 1996.
b. The average per share Daily Price of Purchaser Common Stock during the
ten consecutive trading days immediately preceding October 9, 1996 (the date
which is two trading days before the date of the above-referenced meeting) is
$54.
c. A Directors Stock Option or Employee Stock Option (for purposes of this
example, an "Option") has an exercise price per share of Company Common Stock
equal to $8.
d. The Option is exercisable immediately prior to the Effective Time for 100
shares of Company Common Stock.
The lump sum cash payment for the Option would be calculated as follows:
1. The Conversion Shares number (determined in accordance with Section
2.1(c)) would be .2361111. [$12.75 divided by $54]
2. The quotient obtained by dividing the exercise price per share of such
Option by the Conversion Shares number is $33.8823545. [$8 divided by
.2361111]
3. The difference between $54 and $33.8823545 is $20.1176455.
4. The number of shares of Purchaser Common Stock which the holder of the
Option would have received if such holder had exercised the Option immediately
prior to the Effective Time is 23.6111100. [100 multiplied by .2361111]
5. The lump sum cash payment would be $475.00. [23.6111100 multiplied by
$20.1176455 (rounded to the nearest cent)]
Alternative calculation for Options assumed by Purchaser:
Assuming such Option constitutes all of the Options held by such holder, an
Option, if assumed by Purchaser pursuant to Section 5.10(i) or 5.10(j) of the
Merger Agreement, would be exercisable for 23 shares of Purchaser Common Stock
[the whole number contained in 23.6111100 (as calculated above); i.e. the
number of whole shares of Purchaser Common Stock which would have been
received if such Option had been exercised immediately prior to the Effective
Time and the Company Common Stock received in connection therewith was
exchanged for Purchaser Common Stock pursuant to the Merger] for an exercise
price of $33.8823 per share of Purchaser Common Stock [$8 divided by
.2361111.]
AI-43
<PAGE>
APPENDIX II
[BEAR STERNS LOGO APPEARS HERE]
245 PARK AVENUE
NEW YORK, NEW YORK 10167
(212) 272-2000
ATLANTA . BOSTON
CHICAGO . DALLAS . LOS ANGELES
NEW YORK . SAN FRANCISCO
GENEVA . HONG KONG
LONDON . PARIS . TOKYO
September 9, 1996
Board of Directors
Fay's Incorporated
7245 Henry Clay Boulevard
Liverpool, New York 13088
Members of the Board:
We understand that Fay's Incorporated ("Fay's"), J.C. Penney Company, Inc.
("JCPenney") and Beta Acquisition Corp. ("Beta"), a direct wholly owned
subsidiary of JCPenney, have entered into an Agreement and Plan of Merger
dated August 5, 1996, as amended on September 5, 1996 (the "Merger
Agreement"), pursuant to which, among other things, Beta will be merged with
and into Fay's and each share of Fay's common stock will be converted into
such number of shares of common stock of JCPenney as equals $12.75 (the
"Merger"), subject to adjustment as set forth in the Merger Agreement. The
terms and conditions of the Merger are set forth in more detail in the Merger
Agreement. You have provided us with the Merger Agreement.
You have asked us to render our opinion as to whether the consideration to
be received in the Merger by the shareholders of Fay's is fair, from a
financial point of view, to such shareholders.
In the course of our analyses for rendering this opinion, we have:
1. reviewed the Merger Agreement;
2. reviewed Fay's Annual Reports to Shareholders and Annual Reports on
Form 10-K for the fiscal years ended 1992 through 1996, and its Quarterly
Reports on Form 10-Q for the periods ended April 27, 1996 and July 27,
1996;
3. reviewed certain operating and financial information, including
projections, provided to us by management relating to Fay's business and
prospects;
4. met with certain members of Fay's senior management to discuss its
operations, historical financial statements and future prospects;
5. visited Fay's headquarters facility in Liverpool, New York;
6. reviewed the historical prices and trading volumes of the common
shares of Fay's;
7. reviewed publicly available financial data and stock market
performance data of companies which we deemed generally comparable to
Fay's;
8. reviewed the terms of recent acquisitions of companies which we deemed
generally comparable to Fay's;
9. reviewed JCPenney's Annual Reports to Shareholders and Annual Reports
on Form 10-K for the fiscal years ended 1992 through 1996, and its
Quarterly Reports on Form 10-Q for the periods ended April 27, 1996 and
July 27, 1996 and reviewed the historical prices and trading volumes of the
common shares of JCPenney; and
10. conducted such other studies, analyses, inquiries and investigations
as we deemed appropriate.
AII-1
<PAGE>
In the course of our review, we have relied upon and assumed the accuracy
and completeness of the financial and other information provided to us by
Fay's. With respect to Fay's projected financial results, we have assumed that
they have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the management of Fay's as to its
expected future performance. We have not assumed any responsibility for the
information or projections provided to us and we have further relied upon the
assurances of the management of Fay's that they are unaware of any facts that
would make the information or projections provided to us incomplete or
misleading. In arriving at our opinion, we have not performed or obtained any
independent appraisal of the assets of Fay's or JCPenney. Our opinion is
necessarily based on economic, market and other conditions, and the
information made available to us, as of the date hereof.
Based on the foregoing, it is our opinion that the consideration to be
received in the Merger by the shareholders of Fay's is fair, from a financial
point of view, to such shareholders.
We have acted as financial advisor to Fay's in connection with the Merger
and will receive a fee for such services, payment of a significant portion of
which is contingent upon the consummation of the Merger.
Sincerely,
Bear, Stearns & Co. Inc.
/s/ Jerry H. Marcus
By: _________________________________
Managing Director
AII-2
<PAGE>
APPENDIX III
SECTION 623 OF THE NEW YORK BUSINESS CORPORATION LAW
PROCEDURE TO ENFORCE SHAREHOLDER'S RIGHT TO RECEIVE PAYMENT FOR SHARES.
(a) A shareholder intending to enforce his right under a section of this
chapter to receive payment for his shares if the proposed corporate action
referred to therein is taken shall file with the corporation, before the
meeting of shareholders at which the action is submitted to a vote, or at such
meeting but before the vote, written objection to the action. The objection
shall include a notice of his election to dissent, his name and residence
address, the number and classes of shares as to which he dissents and a demand
for payment of the fair value of his shares if the action is taken. Such
objection is not required from any shareholder to whom the corporation did not
give notice of such meeting in accordance with this chapter or where the
proposed action is authorized by written consent of shareholders without a
meeting.
(b) Within ten days after the shareholders' authorization date, which term
as used in this section means the date on which the shareholders' vote
authorizing such action was taken, or the date on which such consent without a
meeting was obtained from the requisite shareholders, the corporation shall
give written notice of such authorization or consent by registered mail to
each shareholder who filed written objection or from whom written objection
was not required, excepting any shareholder who voted for or consented in
writing to the proposed action and who thereby is deemed to have elected not
to enforce his right to receive payment for his shares.
(c) Within twenty days after the giving of notice to him, any shareholder
from whom written objection was not required and who elects to dissent shall
file with the corporation a written notice of such election, stating his name
and residence address, the number and classes of shares as to which he
dissents and a demand for payment of the fair value of his shares. Any
shareholder who elects to dissent from a merger under section 905 (Merger of
subsidiary corporation) or paragraph (c) of section 907 (Merger or
consolidation of domestic and foreign corporations) or from a share exchange
under paragraph (g) of section 913 (Share exchanges) shall file a written
notice of such election to dissent within twenty days after the giving to him
of a copy of the plan of merger or exchange or an outline of the material
features thereof under section 905 or 913.
(d) A shareholder may not dissent as to less than all of the shares, as to
which he has a right to dissent, held by him of record, that he owns
beneficially. A nominee or fiduciary may not dissent on behalf of any
beneficial owner as to less than all of the shares of such owner, as to which
such nominee or fiduciary has a right to dissent, held of record by such
nominee or fiduciary.
(e) Upon consummation of the corporate action, the shareholder shall cease
to have any of the rights of a shareholder except the right to be paid the
fair value of his shares and any other rights under this section. A notice of
election may be withdrawn by the shareholder at any time prior to his
acceptance in writing of an offer made by the corporation, as provided in
paragraph (g), but in no case later than sixty days from the date of
consummation of the corporate action except that if the corporation fails to
make a timely offer, as provided in paragraph (g), the time for withdrawing a
notice of election shall be extended until sixty days from the date an offer
is made. Upon expiration of such time, withdrawal of a notice of election
shall require the written consent of the corporation. In order to be
effective, withdrawal of a notice of election must be accompanied by the
return to the corporation of any advance payment made to the shareholder as
provided in paragraph (g). If a notice of election is withdrawn, or the
corporate action is rescinded, or a court shall determine that the shareholder
is not entitled to receive payment for his shares, or the shareholder shall
otherwise lose his dissenter's rights, he shall not have the right to receive
payment for his shares and he shall be reinstated to all his rights as a
shareholder as of the consummation of the corporate action, including any
intervening preemptive rights and the right to payment of any intervening
dividend or other distribution or, if any such rights have expired or any such
dividend or distribution other than in cash has been completed, in lieu
thereof, at the election of the corporation, the fair value thereof in cash as
determined by the board as of the time of such expiration or completion, but
without prejudice otherwise to any corporate proceedings that may have been
taken in the interim.
AIII-1
<PAGE>
(f) At the time of filing the notice of election to dissent or within one
month thereafter the shareholder of shares represented by certificates shall
submit the certificates representing his shares to the corporation, or to its
transfer agent, which shall forthwith note conspicuously thereon that a notice
of election has been filed and shall return the certificates to the
shareholder or other person who submitted them on his behalf. Any shareholder
of shares represented by certificates who fails to submit his certificates for
such notation as herein specified shall, at the option of the corporation
exercised by written notice to him within forty-five days from the date of
filing of such notice of election to dissent, lose his dissenter's rights
unless a court, for good cause shown, shall otherwise direct. Upon transfer of
a certificate bearing such notation, each new certificate issued therefor
shall bear a similar notation together with the name of the original
dissenting holder of the shares and a transferee shall acquire no rights in
the corporation except those which the original dissenting shareholder had at
the time of the transfer.
(g) Within fifteen days after the expiration of the period within which
shareholders may file their notices of election to dissent, or within fifteen
days after the proposed corporate action is consummated, whichever is later
(but in no case later than ninety days from the shareholders' authorization
date), the corporation or, in the case of a merger or consolidation, the
surviving or new corporation, shall make a written offer by registered mail to
each shareholder who has filed such notice of election to pay for his shares
at a specified price which the corporation considers to be their fair value.
Such offer shall be accompanied by a statement setting forth the aggregate
number of shares with respect to which notices of election to dissent have
been received and the aggregate number of holders of such shares. If the
corporate action has been consummated, such offer shall also be accompanied by
(1) advance payment to each such shareholder who has submitted the
certificates representing his shares to the corporation, as provided in
paragraph (f), of an amount equal to eighty percent of the amount of such
offer, or (2) as to each shareholder who has not yet submitted his
certificates a statement that advance payment to him of an amount equal to
eighty percent of the amount of such offer will be made by the corporation
promptly upon submission of his certificates. If the corporate action has not
been consummated at the time of the making of the offer, such advance payment
or statement as to advance payment shall be sent to each shareholder entitled
thereto forthwith upon consummation of the corporate action. Every advance
payment or statement as to advance payment shall include advice to the
shareholder to the effect that acceptance of such payment does not constitute
a waiver of any dissenters' rights. If the corporate action has not been
consummated upon the expiration of the ninety day period after the
shareholders' authorization date, the offer may be conditioned upon the
consummation of such action. Such offer shall be made at the same price per
share to all dissenting shareholders of the same class, or if divided into
series, of the same series and shall be accompanied by a balance sheet of the
corporation whose shares the dissenting shareholder holds as of the latest
available date, which shall not be earlier than twelve months before the
making of such offer, and a profit and loss statement or statements for not
less than a twelve month period ended on the date of such balance sheet, or,
if the corporation was not in existence throughout such twelve month period,
for the portion thereof during which it was in existence. Notwithstanding the
foregoing, the corporation shall not be required to furnish a balance sheet or
profit and loss statement or statements to any shareholder to whom such
balance sheet or profit and loss statement or statements were previously
furnished, nor if in connection with obtaining the shareholders' authorization
for or consent to the proposed corporate action the shareholders were
furnished with a proxy or information statement, which included financial
statements, pursuant to Regulation 14A or Regulation 14C of the United States
Securities and Exchange Commission. If within thirty days after the making of
such offer, the corporation making the offer and any shareholder agree upon
the price to be paid for his shares, payment therefor shall be made within
sixty days after the making of such offer or the consummation of the proposed
corporate action, whichever is later, upon the surrender of the certificates
for any such shares represented by certificates.
(h) The following procedure shall apply if the corporation fails to make
such offer within such period of fifteen days, or if it makes the offer and
any dissenting shareholder or shareholders fail to agree with it within the
period of thirty days thereafter upon the price to be paid for their shares:
(1) The corporation shall, within twenty days after the expiration of
whichever is applicable of the two periods last mentioned, institute a
special proceeding in the supreme court in the judicial district in which
the office of the corporation is located to determine the rights of
dissenting shareholders and to fix the fair value of their shares. If, in
the case of merger or consolidation, the surviving or new corporation is
AIII-2
<PAGE>
a foreign corporation without an office in this state, such proceeding
shall be brought in the county where the office of the domestic
corporation, whose shares are to be valued, was located.
(2) If the corporation fails to institute such proceeding within such
period of twenty days, any dissenting shareholder may institute such
proceeding for the same purpose not later than thirty days after the
expiration of such twenty day period. If such proceeding is not instituted
within such thirty day period, all dissenter's rights shall be lost unless
the supreme court, for good cause shown, shall otherwise direct.
(3) All dissenting shareholders, excepting those who, as provided in
paragraph (g), have agreed with the corporation upon the price to be paid
for their shares, shall be made parties to such proceedings, which shall
have the effect of an action quasi in rem against their shares. The
corporation shall serve a copy of the petition in such proceeding upon each
dissenting shareholder who is a resident of this state in the manner
provided by law for the service of a summons, and upon each nonresident
dissenting shareholder either by registered mail and publication, or in
such other manner as is permitted by law. The jurisdiction of the court
shall be plenary and exclusive.
(4) The court shall determine whether each dissenting shareholder, as to
whom the corporation requests the court to make such determination, is
entitled to receive payment for his shares. If the corporation does not
request any such determination or if the court finds that any dissenting
shareholder is so entitled, it shall proceed to fix the value of the
shares, which, for the purposes of this section, shall be the fair value as
of the close of business on the day prior to the shareholders'
authorization date. In fixing the fair value of the shares, the court shall
consider the nature of the transaction giving rise to the shareholder's
right to receive payment for shares and its effects on the corporation and
its shareholders, the concepts and methods then customary in the relevant
securities and financial markets for determining fair value of shares of a
corporation engaging in a similar transaction under comparable
circumstances and all other relevant factors. The court shall determine the
fair value of the shares without a jury and without referral to an
appraiser or referee. Upon application by the corporation or by any
shareholder who is a party to the proceeding, the court may, in its
discretion, permit pretrial disclosure, including, but not limited to,
disclosure of any expert's reports relating to the fair value of the shares
whether or not intended for use at the trial in the proceeding and
notwithstanding subdivision (d) of section 3101 of the civil practice law
and rules.
(5) The final order in the proceeding shall be entered against the
corporation in favor of each dissenting shareholder who is a party to the
proceeding and is entitled thereto for the value of his shares so
determined.
(6) The final order shall include an allowance for interest at such rate
as the court finds to be equitable, from the date the corporate action was
consummated to the date of payment. In determining the rate of interest,
the court shall consider all relevant factors, including the rate of
interest which the corporation would have had to pay to borrow money during
the pendency of the proceeding. If the court finds that the refusal of any
shareholder to accept the corporate offer of payment for his shares was
arbitrary, vexatious or otherwise not in good faith, no interest shall be
allowed to him.
(7) Each party to such proceeding shall bear its own costs and expenses,
including the fees and expenses of its counsel and of any experts employed
by it. Notwithstanding the foregoing, the court may, in its discretion,
apportion and assess all or any part of the costs, expenses and fees
incurred by the corporation against any or all of the dissenting
shareholders who are parties to the proceeding, including any who have
withdrawn their notices of election as provided in paragraph (e), if the
court finds that their refusal to accept the corporate offer was arbitrary,
vexatious or otherwise not in good faith. The court may, in its discretion,
apportion and assess all or any part of the costs, expenses and fees
incurred by any or all of the dissenting shareholders who are parties to
the proceeding against the corporation if the court finds any of the
following: (A) that the fair value of the shares as determined materially
exceeds the amount which the corporation offered to pay; (B) that no offer
or required advance payment was made by the corporation; (C) that the
corporation failed to institute the special proceeding within the period
specified therefor; or (D) that the action of the corporation in complying
with its obligations as provided in this section was arbitrary, vexatious
or otherwise not in good faith. In making any determination as provided in
clause (A), the court
AIII-3
<PAGE>
may consider the dollar amount or the percentage, or both, by which the
fair value of the shares as determined exceeds the corporate offer.
(8) Within sixty days after final determination of the proceeding, the
corporation shall pay to each dissenting shareholder the amount found to be
due him, upon surrender of the certificate for any such shares represented
by certificates.
(i) Shares acquired by the corporation upon the payment of the agreed value
therefor or of the amount due under the final order, as provided in this
section, shall become treasury shares or be canceled as provided in section
515 (Reacquired shares), except that, in the case of a merger or
consolidation, they may be held and disposed of as the plan of merger or
consolidation may otherwise provide.
(j) No payment shall be made to a dissenting shareholder under this section
at a time when the corporation is insolvent or when such payment would make it
insolvent. In such event, the dissenting shareholder shall, at his option:
(1) Withdraw his notice of election, which shall in such event be deemed
withdrawn with the written consent of the corporation; or
(2) Retain his status as a claimant against the corporation and, if it is
liquidated, be subordinated to the rights of creditors of the corporation,
but have rights superior to the non-dissenting shareholders, and if it is
not liquidated, retain his right to be paid for his shares, which right the
corporation shall be obligated to satisfy when the restrictions of this
paragraph do not apply.
(3) The dissenting shareholder shall exercise such option under
subparagraph (1) or (2) by written notice filed with the corporation within
thirty days after the corporation has given him written notice that payment
for his shares cannot be made because of the restrictions of this
paragraph. If the dissenting shareholder fails to exercise such option as
provided, the corporation shall exercise the option by written notice given
to him within twenty days after the expiration of such period of thirty
days.
(k) The enforcement by a shareholder of his right to receive payment for his
shares in the manner provided herein shall exclude the enforcement by such
shareholder of any other right to which he might otherwise be entitled by
virtue of share ownership, except as provided in paragraph (e), and except
that this section shall not exclude the right of such shareholder to bring or
maintain an appropriate action to obtain relief on the ground that such
corporate action will be or is unlawful or fraudulent as to him.
(l) Except as otherwise expressly provided in this section, any notice to be
given by a corporation to a shareholder under this section shall be given in
the manner provided in section 605 (Notice of meetings of shareholders).
(m) This section shall not apply to foreign corporations except as provided
in subparagraph (e)(2) of section 907 (Merger or consolidation of domestic and
foreign corporations).
AIII-4
<PAGE>
SECTION 910 OF THE NEW YORK BUSINESS CORPORATION LAW
RIGHT OF SHAREHOLDER TO RECEIVE PAYMENT FOR SHARES UPON MERGER OR
CONSOLIDATION, OR SALE, LEASE EXCHANGE OR OTHER DISPOSITION OF ASSETS, OR
SHARE EXCHANGE.
(a) A shareholder of a domestic corporation shall, subject to and by
complying with section 623 (procedure to enforce shareholder's right to
receive payment for shares), have the right to receive payment of the fair
value of his shares and the other rights and benefits provided by such
section, in the following cases:
(1) Any shareholder entitled to vote who does not assent to the taking of
an action specified in subparagraphs (A), (B) and (C).
(A) Any plan of merger or consolidation to which the corporation is a
party; except that the right to receive payment of the fair value of
his shares shall not be available:
(i) To a shareholder of the parent corporation in a merger
authorized by section 905 (Merger of parent and subsidiary
corporations), or paragraph (c) of section 907 (Merger or
consolidation of domestic and foreign corporations); and
(ii) To a shareholder of the surviving corporation in a merger
authorized by this article, other than a merger specified in
subparagraph (i), unless such merger effects one or more of the
changes specified in subparagraph (b)(6) of section 806 (Provisions
as to certain proceedings) in the rights of the shares held by such
shareholder.
(B) Any sale, lease, exchange or other disposition of all or
substantially all of the assets of a corporation which requires
shareholder approval under section 909 (Sale, lease, exchange or other
disposition of assets) other than a transaction wholly for cash where
the shareholders' approval thereof is conditioned upon the dissolution
of the corporation and the distribution of substantially all its net
assets to the shareholders in accordance with their respective
interests within one year after the date of such transaction.
(C) Any share exchange authorized by section 913 in which the
corporation is participating as a subject corporation; except that the
right to receive payment of the fair value of his shares shall not be
available to a shareholder whose shares have not been acquired in the
exchange.
(2) Any shareholder of the subsidiary corporation in a merger authorized
by section 905 or paragraph (c) of section 907, or in a share exchange
authorized by paragraph (g) of section 913. who files with the corporation
a written notice of election to dissent as provided in paragraph (c) of
section 623.
AIII-5
<PAGE>
EXHIBIT 99.1
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
FAY'S INCORPORATED
PROXY PROXY
The undersigned hereby appoints James F. Poole, Jr. and Warren D. Wolfson,
and each of them, with full power of substitution, and hereby authorizes each of
them to represent the undersigned and in the name, place and stead of the
undersigned to vote and act with respect to, as designated below, all the shares
of Common Stock, of the par value of $.10 per share ("Fay's Common Stock"), of
Fay's Incorporated ("Fay's") held of record by the undersigned on August 30,
1996 or with respect to which the undersigned is entitled to vote and act at the
Special Meeting of the holders of shares of Fay's Common Stock to be held on
October 11, 1996, including any adjournment(s) or postponement(s) thereof (the
"Special Meeting"), for the following purpose:
(continued and to be signed on other side)
(continued from other side)
Proposal to approve and adopt the Agreement and Plan of Merger, dated as of
August 5, 1996 and amended as of September 5, 1996 (the "Merger
Agreement"), relating to the merger of Beta Acquisition Corp., a New York
corporation and a wholly owned subsidiary of J.C. Penney Company, Inc., a
Delaware corporation ("JC Penney"), with and into Fay's pursuant to which
each outstanding share of Fay's Common Stock will be converted into the
right to receive a fractional share of JC Penney common stock of 50c par
value ("JC Penney Common Stock") valued at $12.75, subject to a minimum per
share exchange of .2253397 of a share of JC Penney Common Stock, a maximum
per share exchange of .2754151 of a share of JC Penney Common Stock and
appraisal rights, as more fully described in the Proxy Statement/Prospectus
relating to the Special Meeting.
[_] FOR [_] AGAINST [_] ABSTAIN
THE BOARD OF DIRECTORS OF FAY'S RECOMMENDS A VOTE FOR THE APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT.
The undersigned hereby acknowledges receipt of the Notice of Special
Meeting of Shareholders of Fay's and the Proxy Statement/Prospectus relating to
the Special Meeting. This proxy, when properly executed, will be voted in the
manner directed by the undersigned shareholder. If this proxy is executed and
returned, but no direction is indicated hereon, this proxy will be voted FOR the
approval and adoption of the Merger Agreement.
PLEASE DATE, SIGN AND MAIL THIS
PROXY IN THE ENCLOSED ENVELOPE.
NO POSTAGE IS NECESSARY.
Dated 1996
---------------------,
--------------------------------
Signature
--------------------------------
Signature if Held Jointly
Please date this proxy and sign
exactly as your name appears
herein. Where there is more than
one owner, each must sign. When
signing as attorney, executor,
administrator, trustee,
guardian, corporate officer or
partner, please give full title
as such. If a corporation,
please sign in full corporate
name by duly authorized officer.
If a partnership, please sign in
partnership name by authorized
person.
