===============================================================================
As filed with the Securities and Exchange Commission on March 28, 1997
Registration No. -
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------
CVS CORPORATION
(Exact name of Registrant as specified in its charter)
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<TABLE>
<S> <C> <C>
Delaware 5912 05-0494040
(State or Other Jurisdiction of (Primary Standard Industrial (IRS Employer
Incorporation or Organization) Classification Code Number) Identification No.)
One CVS Drive
Woonsocket, Rhode Island 02895
(401) 765-1500
(Address, Including Zip Code, and Telephone Number,
including Area Code, of Registrant's Principal Executive
Offices)
-------------
Charles C. Conaway
Executive Vice President and
Chief Financial Officer
CVS Corporation
One CVS Drive
Woonsocket, Rhode Island 02895
(401) 765-1500
(Name, Address, Including Zip Code, and Telephone
Number, Including Area Code, of Agent for Service)
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copies to:
</TABLE>
Dennis S. Hersch Alan C. Stephenson
Davis Polk & Wardwell Cravath, Swaine & Moore
450 Lexington Avenue Worldwide Plaza
New York, New York 10017 825 Eighth Avenue
(212) 450-4000 New York, New York 10019
(212) 474-1000
Approximate Date of Commencement of Proposed Sale to Public: As soon as
practicable after the effectiveness of this Registration Statement and the
effective time (the "Effective Time") of the merger (the "Merger") of a
wholly-owned subsidiary of the Registrant with and into Revco D.S., Inc.
("Revco") as described in the Agreement and Plan of Merger dated as of
February 6, 1997, as amended as of March 19, 1997.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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<S> <C> <C> <C> <C>
Proposed Maximum Amount of
Title of each Class of Amount to be Proposed Maximum Aggregate Offering Registration
Securities to be Registered Registered(1) Offering Price Per Unit Price (2) Fee(3)(4)
--------------------------- ------------ ----------------------- ------------------ ------------
Common Stock, par value $.01 per share. 68,312,962 (2) $2,749,596,720.50 $833,211.13
(1) Represents the maximum number of shares of Common Stock, par value $.01
per share, of the Registrant ("CVS Common Stock") to be issued in connection
with the Merger in exchange for shares of Common Stock, par value $.01 per
share, of Revco ("Revco Common Stock"), determined on the basis of the maximum
exchange ratio that could be applicable in the Merger (1.0097 shares of CVS
Common Stock for each share of Revco Common Stock).
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f)(1) and Rule 457(c) of the Securities Act of 1933, as
amended (the "Securities Act"), based on the average of the high and low sales
prices of Revco Common Stock on March 24, 1997 on the New York Stock Exchange,
which was $40.25.
(3) The registration fee for the securities registered hereby of $833,211.13
is being paid herewith. This fee has been calculated pursuant to Rule 457(f)
under the Securities Act, as one thirty-third of one percent of
$2,749,596,720.50.
</TABLE>
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
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<TABLE>
CVS CORPORATION
CROSS REFERENCE SHEET
<CAPTION>
ITEM NUMBER LOCATION IN PROXY
IN FORM S-4 STATEMENT/PROSPECTUS
---------------------------- ------------------------------
<S> <C>
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement
and Outside Front Cover Page of
Prospectus............................. Facing Page of the Registration Statement;
Outside Front Cover Page of
Proxy Statement/Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus................. Where You Can Find More Information;
Table of Contents
3. Risk Factors, Ratio of Earnings to
Fixed Charges and Other Information. Outside Front Cover Page of Prospectus;
Summary; Interests of Certain Persons
in the Merger; The Merger; Comparative
Per Share Market Price and Dividend
Information; The Meetings; Where You
Can Find More Information**
4. Terms of the Transaction............ Outside Front Cover Page of Prospectus;
Summary; The Merger; Role of Financial
Advisors; The Merger Agreement; The
Meetings; Comparison of Stockholders
Rights; Description of CVS Capital Stock
5. Pro Forma Financial Information..... Summary; Unaudited Pro Forma Combined
Condensed Financial Statements
6. Material Contacts with the Company
Being Acquired...................... Summary; The Merger; The Merger Agreement
7. Additional Information Required for
Reoffering by Persons and Parties
Deemed to be Underwriters........... *
8. Interests of Named Experts and
Counsel ............................ *
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities......................... *
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3
Registrants......................... Summary; Where You Can Find More Information
11. Incorporation of Certain Information
by Reference........................ Where You Can Find More Information
12. Information with Respect to S-2 and
S-3 Registrants..................... *
13. Incorporation of Certain Information
by Reference........................ *
14. Information with Respect to
Registrants Other Than S-3 or S-2
Registrants ........................ *
C. INFORMATION ABOUT THE COMPANIES
BEING ACQUIRED
15. Information with Respect to S-3
Companies........................... Summary; Where You Can Find More
Information
16. Information with Respect to S-2 or
S-3 Companies....................... *
17. Information with Respect to
Companies Other Than S-2 or S-3
Companies........................... *
D. VOTING AND MANAGEMENT
INFORMATION
18. Information if Proxies, Consents or
Authorizations are to be Solicited.. Outside Front Cover Page of
Prospectus; Summary; Interests of
Certain Persons in the Merger; The
Merger; The Merger Agreement; The
Meetings; Comparison of Stockholders
Rights; Description of CVS Capital
Stock; Where You Can Find More Information
19. Information if Proxies, Consents or
Authorizations are not to be
Solicited or in an Exchange Offer... *
* Omitted because the item is inapplicable or the answer thereto is negative.
** Indicates that the registrant has departed from the Item in certain
respects by virtue of the "Plain English" format of the Joint Proxy
Statement/Prospectus.
</TABLE>
[CVS CORPORATION LOGO]
NOTICE OF ANNUAL MEETING OF CVS STOCKHOLDERS
CVS Corporation will hold an annual meeting of its stockholders on May
[27], 1997 at [10:00 a.m.] local time, at One CVS Drive, Woonsocket, Rhode
Island for the following purposes:
1. To consider and vote upon a proposal to approve the
issuance of shares of CVS common stock in connection with the
proposed merger of Revco D.S., Inc. with North Acquisition
Corp., a wholly owned subsidiary of CVS;
2. To consider and vote upon a proposal to elect eleven
directors for terms expiring in May 1998;
3. To consider and vote upon a proposal to approve the
CVS 1997 Incentive Compensation Plan;
4. To consider and vote upon a proposal to ratify the
appointment of KPMG Peat Marwick LLP as CVS' auditors for the
year ending December 31, 1997;
5. If necessary, to approve any adjournment of the
meeting without further notice except by announcement at the
meeting being adjourned; and
6. To transact such other business as may properly be
brought before the CVS annual meeting.
CVS has fixed the close of business on [April 9], 1997 as the record
date for the determination of stockholders entitled to notice of and to
vote at the annual meeting or any adjournment thereof. A list of such
stockholders will be available for inspection by stockholders of record
during business hours at CVS--One CVS Drive, Woonsocket, Rhode Island--for
ten days prior to the date of the annual meeting, and will also be
available at the annual meeting.
YOUR BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE TO APPROVE
THE ABOVE MENTIONED PROPOSALS. THESE PROPOSALS AND OTHER INFORMATION
RELATING TO THE ANNUAL MEETING ARE DESCRIBED IN DETAIL IN THE ACCOMPANYING
JOINT PROXY STATEMENT/PROSPECTUS.
Please sign and promptly return the proxy card in the enclosed envelope,
whether or not you expect to attend the annual meeting.
Stanley P. Goldstein
Chairman of the Board and Chief Executive Officer April __, 1997
[REVCO D.S., INC. LOGO]
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
Revco D.S., Inc. will hold a special meeting of its stockholders on
May 28, 1997 at 10:00 a.m. at 1925 Enterprise Parkway, Twinsburg, Ohio for
the following purposes:
1. To consider and vote upon a proposal to approve
and adopt an Agreement and Plan of Merger dated as of
February 6, 1997 (the "Merger Agreement") among Revco D.S.,
Inc., CVS Corporation, a Delaware corporation, and North
Acquisitions Corp., a Delaware corporation and wholly-owned
subsidiary of CVS Corporation. The Merger Agreement
provides, among other things, for the merger of North
Acquisition Corp. with and into Revco, with Revco surviving
the merger as a wholly-owned subsidiary of CVS;
2.To transact such other business as may properly
come before the special meeting; and
3.If necessary, to approve any adjournment of the
meeting without further notice except by announcement at the
meeting being adjourned.
Revco has fixed the close of business on [April 9], 1997 as the record
date for the determination of stockholders entitled to notice of and to
vote at the special meeting or any adjournment thereof. A list of such
stockholders will be available for examination by stockholders of record
during business hours at Revco--1925 Enterprise Parkway, Twinsburg, Ohio--
for ten days prior to the special meeting and will also be available at the
special meeting.
YOUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE TO APPROVE AND
ADOPT THE MERGER AGREEMENT, WHICH IS DESCRIBED IN DETAIL IN THE ACCOMPANYING
JOINT PROXY STATEMENT/PROSPECTUS.
Adoption of the Merger Agreement requires the affirmative vote of a
majority of the outstanding shares of Revco common stock entitled to vote
at the special meeting. Please sign and promptly return the proxy card in
the enclosed envelope, whether or not you expect to attend the special
meeting. Failure to return a properly executed proxy card or to vote at
the special meeting will have the same effect as a vote against the merger.
D. Dwayne Hoven
Chief Executive Officer April [9], 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
(PRELIMINARY DRAFT DATED MARCH 28, 1997, SUBJECT TO COMPLETION)
[CVS logo] [REVCO logo]
MERGER PROPOSED -- YOUR VOTE IS VERY IMPORTANT
The Boards of Directors of CVS Whether or not you plan to attend a
Corporation and Revco D.S., Inc. have meeting, please take the time to
approved a merger agreement that would vote on the proposal(s) submitted
result in Revco becoming owned by CVS. to stockholders at your meeting by
The combined company would be the completing and mailing the enclosed
nation's largest chain drugstore proxy card to us. If you sign, date
company based on store count and would and mail your proxy card without
be named CVS Corporation, with its indicating how you wish to vote,
headquarters in Woonsocket, Rhode your proxy will be counted as a
Island. vote in favor of the proposal(s)
submitted at your meeting. If you
If the merger is completed, as are a Revco stockholder and fail to
illustrated in the table on page 1, return your card, the effect in
Revco stockholders will receive, most cases will be a vote against
for each Revco share, between 0.8837 the merger. If you are a CVS
and 1.0097 CVS shares. The exact stockholder and fail to return
number of shares of CVS common stock your card, you will not be counted
to be received for each share of Revco as present or voting unless you
common stock will be determined by appear in person.
adding to 0.4692 of a CVS share an
additional fraction of a CVS share The dates, times and places of
calculated by dividing $20 by the meetings are:
the average closing price of the
CVS common stock on the New York Stock For CVS stockholders:
Exchange during a specified period
prior to closing. CVS stockholders [May 27, 1997]
will continue to own their existing [Time]
shares after the merger. One CVS Drive
Woonsocket, Rhode Island 02895
We estimate that the shares of CVS
common stock to be issued to Revco For Revco stockholders:
stockholders will represent between
36% and 39% of the outstanding CVS [May 28, 1997]
common stock after the merger. [Time]
Likewise, CVS shares held by CVS 1925 Enterprise Parkway
stockholders before the merger will Twinsburg, Ohio 44087
represent between 64% and 61% of
the outstanding CVS shares This Joint Proxy Statement/
after the merger. Prospectus provides you with
detailed information about the
Stockholders of CVS are being asked, proposed merger. It also provides
at CVS' annual meeting of CVS stockholders with detailed
stockholders, to approve the issuance information about the CVS-specific
of CVS shares in the merger and to annual meeting matters. In addition,
vote on the election of CVS directors, you may obtain information about our
approval of the CVS 1997 Incentive companies from documents that we
Compensation Plan and other CVS annual have filed with the Securities and
meeting matters described in this Exchange Commission. We encourage
document. Stockholders of Revco are you to read this entire document
being asked, at Revco's special carefully.
meeting of stockholders, to approve
the merger agreement and the merger.
The merger cannot be completed unless
stockholders of both companies approve
it. YOUR VOTE IS VERY IMPORTANT.
- ------------------------------------- ------------------------------------
Stanley P. Goldstein D. Dwayne Hoven
Chairman and Chief Executive Officer Chief Executive Officer
CVS Corporation Revco D.S., Inc.
- -----------------------------------------------------------------------------
Neither the SEC nor any state securities regulators have approved the CVS
common stock to be issued under this Joint Proxy Statement/Prospectus or
determined if this Joint Proxy Statement/Prospectus is accurate or
adequate. Any representation to the contrary is a criminal offense.
- -----------------------------------------------------------------------------
Joint Proxy Statement/Prospectus dated ______, 1997, and first mailed to
stockholders on _____, 1997.
TABLE OF CONTENTS
QUESTIONS AND ANSWERS ABOUT THE THE MEETINGS....................... 64
MERGER............................ 2 Times and Places; Purposes....... 64
Voting Rights; Votes Required
SUMMARY............................ 3 for Approval................... 65
Proxies.......................... 66
THE MERGER......................... 13 Other Business; Adjournments..... 67
General.......................... 13
Background of the Merger......... 13 COMPARISON OF STOCKHOLDER RIGHTS... 68
CVS' Reasons for the Merger; General.......................... 68
Recommendation of the CVS Comparison of Current Revco
Board.......................... 17 Stockholder Rights and Rights
Revco's Reasons for the Merger; of CVS Stockholders Following
Recommendation of the Revco the Merger..................... 68
Board.......................... 19
Cautionary Statement Concerning DESCRIPTION OF CVS CAPITAL STOCK... 70
Forward-Looking Statements..... 22 Authorized Capital Stock......... 70
Accounting Treatment............. 22 CVS Common Stock................. 70
Certain U.S. Federal Income Tax CVS Preferred Stock and CVS
Consequences................... 23 Preference Stock............... 71
Regulatory Matters............... 23 Transfer Agent and Registrar..... 71
No Appraisal Rights.............. 24 Stock Exchange Listing;
Federal Securities Laws Delisting and Deregistration
Consequences; Stock Transfer of Revco Common Stock.......... 71
Restriction Agreements......... 24
LEGAL MATTERS...................... 71
COMPARATIVE PER SHARE MARKET PRICE
AND DIVIDEND INFORMATION......... 25 EXPERTS............................ 71
UNAUDITED PRO FORMA COMBINED OTHER CVS ANNUAL MEETING PROPOSALS. 72
CONDENSED FINANCIAL STATEMENTS... 26 Nominees for Election as CVS
Directors........................ 72
ROLE OF FINANCIAL ADVISORS......... 30 Share Ownership Information of
Opinion of CVS Financial Advisor. 30 CVS Nominees as Directors and
Opinions of Revco's Financial Named Executive Officers....... 75
Advisors....................... 35 Share Ownership Information of
Certain Principal
INTERESTS OF CERTAIN PERSONS IN THE Stockholders................... 76
MERGER........................... 50 Executive Compensation........... 76
Revco Directors Who Will Become Other CVS Proposal 1 -- Election
Directors of CVS at the of Directors................... 86
Effective Time................. 50 Other CVS Proposal 2 -- Proposed
Employment Agreements............ 50 1997 Incentive Compensation
Other Arrangements Affecting Plan........................... 86
Covered Executives............. 54 Other CVS Proposal 3 --
1992 Non-Employee Directors' Appointment of Independent
Stock Option Plan.............. 55 Auditors....................... 92
Treatment of Revco Stock Options. 55
Other Employee Benefits.......... 55 FUTURE STOCKHOLDER PROPOSALS....... 93
Directors and Officers Insurance;
Limitation of Liability of WHERE YOU CAN FIND MORE
Revco Directors and Officers... 56 INFORMATION...................... 93
THE MERGER AGREEMENT............... 56 LIST OF DEFINED TERMS.............. 95
General.......................... 56
Merger Consideration............. 57 LIST OF ANNEXES
Treatment of Revco Stock Options. 57
Exchange of Shares............... 57 Annex A....... Agreement and Plan of
Certain Covenants................ 58 Merger
Certain Representations and Annex B....... Opinion of Donaldson,
Warranties..................... 60 Lufkin & Jenrette
Conditions to the Merger......... 61 Securities Corporation
Termination of the Merger Annex C....... Opinion of Wasserstein,
Agreement...................... 61 Perella & Co., Inc.
Other Expenses................... 62 Annex D....... Opinion of Salomon
Certain Stockholder Arrangements. 63 Brothers Inc
Annex E....... Zell/Chilmark
Stockholder Agreement
Annex F....... 1997 CVS Incentive
Compensation Plan
What Revco stockholders will receive in the merger
Formula for determining number of CVS shares per Revco share
If the merger is completed, Revco stockholders will receive, for each
Revco share, between 0.8837 and 1.0097 CVS shares. The exact number of CVS
shares to be received per Revco share will equal the sum of (1) 0.4692 of a
CVS share plus (2) an additional fraction of a CVS share computed by
dividing $20 by the average closing price of the CVS common stock on the
New York Stock Exchange during 10 trading days randomly selected by lot out
of the twenty trading days ending on the fifth trading day before the
closing date for the merger.
We expect that the CVS and Revco stockholder meetings will take place
fewer than five trading days before the closing date and, therefore, we
expect the exact exchange ratio to be known before the stockholder
meetings. In the event the closing date occurs more than five trading days
after the stockholder meetings, the exact exchange ratio will be determined
after the stockholder votes.
The table shows the number of CVS shares that Revco stockholders would
receive per Revco share in the merger at the average closing prices of CVS
common stock illustrated in the table.
Ownership of CVS by Revco stockholders after the merger
CVS will issue between 60 million and 68 million CVS shares to Revco
stockholders in the merger. The shares of CVS common stock to be issued to
Revco stockholders in the merger will represent between 36% and 39% of the
outstanding CVS common stock after the merger. This information is based
on the number of shares of CVS and Revco common stock outstanding on
January 31, 1997 and does not take into account stock options.
Transaction value
Based on the high and low of the average closing price of CVS common stock
and the related exchange ratios shown in the table below and the number of
Revco shares outstanding as of _____, 1997 (excluding stock options), the
approximate total value of CVS shares to be paid to Revco stockholders in
the merger will be between $___ and $____. The table below shows the
approximate value of the CVS shares to be issued per Revco share in the
merger at the average closing prices of CVS stock illustrated in the table.
The value of CVS shares discussed above and illustrated in the table is
based on an assumed average closing price of CVS stock. The actual value
of CVS shares issued in the merger will fluctuate based on the market price
of the CVS stock. For your information, the closing price on March __,
1997 of CVS common stock was $__ and of Revco common stock was $___. You
should obtain current market prices for these stocks.
<PAGE>
Dollar value of
Number of the CVS shares
Average CVS shares to to be issued per
closing be issued for Revco share based
price of each Revco share on the average closing
CVS stock in the merger price of CVS stock
--------- ---------------- ----------------------
$48.250 and above........ 0.8837.............. $42.64 and above
$48.000.................. 0.8859.............. $42.52
$47.500.................. 0.8903.............. $42.29
$47.000.................. 0.8947.............. $42.05
$46.500.................. 0.8993.............. $41.82
$46.000.................. 0.9040.............. $41.58
$45.500.................. 0.9088.............. $41.35
$45.000.................. 0.9136.............. $41.11
$44.500.................. 0.9186.............. $40.88
$44.000.................. 0.9237.............. $40.64
$43.500.................. 0.9290.............. $40.41
$43.000.................. 0.9343.............. $40.18
$42.500.................. 0.9398.............. $39.94
$42.000.................. 0.9454.............. $39.71
$41.500.................. 0.9511.............. $39.47
$41.000.................. 0.9570.............. $39.24
$40.500.................. 0.9630.............. $39.00
$40.000.................. 0.9692.............. $38.77
$39.500.................. 0.9755.............. $38.53
$39.000.................. 0.9820.............. $38.30
$38.500.................. 0.9887.............. $38.06
$38.000.................. 0.9955.............. $37.83
$37.500.................. 1.0025.............. $37.60
$37.000 and less......... 1.0097.............. $37.36 and less
QUESTIONS AND ANSWERS
ABOUT THE MERGER
Q: Why are the two companies proposing the merger? How will I benefit?
A: This merger means that you will have a stake in one of the nation's leading
chain drugstore companies. The combined company will have a presence in 24
states and the District of Columbia. CVS expects the merger to contribute to
earnings (before one-time merger-related charges) in the first year of
combined operations, and expects cost savings of about $100 million annually
beginning in 1998. CVS believes that the merger offers significant upside
potential, presented by the opportunity for CVS to elevate the performance
level of Revco stores towards that of CVS stores. We believe that the merger
will allow us to accelerate long-term growth and provide added stockholder
value. CVS notes that achieving these earnings and costs savings is subject
to certain risks as discussed in the section "Cautionary Statement Concerning
Forward-Looking Statements" on page 22. To review the reasons for the merger
in greater detail, see pages 17 through 22.
Q: When are the stockholder meetings?
A: The CVS meeting will take place on [May 27], 1997. The Revco meeting will
take place on [May 28], 1997
Q: What do I need to do now?
A: Just mail your signed proxy card in the enclosed return envelope as soon as
possible, so that your shares may be represented at the stockholder meetings.
The Board of Directors of CVS recommends voting in favor of the proposed
issuance of CVS shares in the merger and the other CVS annual meeting
proposals. The Revco Board recommends voting in favor of the approval of the
merger agreement and the merger.
Q: What do I do if I want to change my vote?
A: Just send in a later-dated, signed proxy card to your company's Secretary
before your meeting or attend your meeting in person and vote.
Q: Should I send in my stock certificates now?
A: No. After the merger is completed, we will send Revco stockholders written
instructions for exchanging their share certificates. CVS stockholders will
keep their existing certificates.
Q: Please explain what I will receive in the merger.
A: If the merger is completed, Revco stockholders will receive between 0.8837
and 1.0097 shares of CVS common stock for each share of Revco common stock.
The exact amount of CVS common stock to be received will be determined by
adding to 0.4692 of a CVS share an additional fraction of a CVS share
calculated by dividing $20 by the average closing price of the CVS common
stock on the New York Stock Exchange during a specified period prior to
closing.
The table on page 1 illustrates the exact number of CVS shares that would be
received at different assumed average closing prices of CVS common stock. We
will not issue fractional shares of CVS common stock. Instead, Revco
stockholders will receive a check in the amount of the net proceeds from the
sale of those shares in the market.
If you currently own shares of CVS common stock, then you will continue to
hold those shares after the merger.
Q: What happens to my future dividends?
A: We expect no changes in CVS' or Revco's dividend policies before the
merger. After the merger, we expect the initial annual dividend rate to be
$0.44 per share of CVS stock, which is equivalent to the current annual
dividend payment to CVS stockholders. The payment of dividends by CVS in the
future, however, will depend on business conditions, its financial condition
and earnings, and other factors.
Q: When do you expect the merger to be completed?
A: We are working towards completing the merger as quickly as possible. In
addition to stockholder approvals, we must also obtain regulatory approvals.
We hope to complete the merger by mid-year 1997.
Q: What are the tax consequences to stockholders of the merger?
A: The exchange of shares by Revco stockholders will be tax-free to Revco
stockholders for federal income tax purposes, except for taxes on cash
received for a fractional share. The merger will be tax-free to CVS
stockholders for federal income tax purposes. To review the federal income tax
consequences to stockholders in greater detail, see page 23.
SUMMARY
This summary highlights selected information from this Joint Proxy
Statement/Prospectus and may not contain all of the information that is
important to you. To understand the merger fully and for a more complete
description of the legal terms of the merger, you should read carefully this
entire document and the documents we have referred you to. See "Where You Can
Find More Information". (Page 93)
The Companies
CVS Corporation
One CVS Drive
Woonsocket, Rhode Island 02895
(401) 765-1500
Founded in 1963, CVS is the country's fifth largest drugstore chain in
terms of store count and sales volume, with approximately 1,400 stores and
$5.5 billion in 1996 annual revenue. CVS operates in 14 states along the
Northeastern seaboard and the District of Columbia.
In November 1996 CVS changed its name from Melville Corporation to CVS
Corporation, reflecting its concentration on the chain drugstore business and
the completion of its restructuring program that was approved by its Board in
1995 following a strategic review initiated in 1994.
Revco D.S., Inc.
1925 Enterprise Parkway
Twinsburg, Ohio 44087
(216) 425-9811
Revco is the country's second largest drugstore chain in terms of store
count and third in terms of sales volume, with approximately 2,600 stores and
$5.3 billion in annual revenues. Revco operates in 17 contiguous Midwestern,
Eastern and Southeastern states.
Our Reasons for the Merger
Achieving a critical mass in terms of store count and locating our
stores in appropriate geographic markets is essential to competing effectively
in the chain drugstore industry as well as with alternative distribution
channels such as food/drug combos, mail order and mass merchandisers. We
believe that the merger provides us the opportunity to accomplish these
objectives and to be recognized as a leading retail growth company.
If completed, the merger will create one of the nation's leading chain
drugstore companies. Here are a few highlights of how our combined company
would look following the merger:
bullet The combined company will have more than 4,000 stores in 24
states and the District of Columbia, ranking number one
nationally in store count.
bullet It will dispense over 7% of all prescriptions in the U.S.,
ranking number one on this measure.
bullet It will have combined annual sales of approximately $13
billion, ranking second nationally on this measure.
CVS believes that the merger meets its three criteria for a strategic
acquisition.
bullet CVS expects the combination to contribute to earnings (before
one-time merger-related charges) in the first year of
combined operations, and expects cost savings of about $100
million annually beginning in 1998. CVS expects to achieve
these cost savings principally through the closing of
Revco's headquarters, economies of scale in advertising,
distribution and other operational areas, and spreading its
investments in information technology over a broader store
base. CVS notes that achieving these earnings and costs
savings is subject to certain risks as discussed in the
section "Cautionary Statement Concerning Forward-Looking
Statements" on page 22.
bullet The merger will bring CVS into high-growth, contiguous
geographic markets without significant overlap and will
position the company to sustain its long-term growth.
bullet The combination offers significant upside potential, presented
by the opportunity for CVS to elevate the performance level
of Revco stores towards that of CVS stores. In addition,
the merger should provide significant opportunities in our
managed care business. We also believe that the
compatibility of our companies, given their similarity in
store size and format as well as merchandising strategy,
should facilitate a relatively smooth integration of our
businesses.
In reaching its recommendation in favor of the merger, each of our
Boards of Directors considered the following principal uncertainties:
(1) the challenges of integrating the companies and the risks associated
with achieving the expected cost savings, as discussed in the section
"Cautionary Statement Concerning Forward-Looking Statements" on page
22; and
(2) the likelihood of obtaining regulatory approvals and the possibility
that government regulators might impose conditions to granting
approval.
Revco's Board also considered that the number and value of the CVS
shares that Revco stockholders receive in the merger will fluctuate based on
changes in CVS' stock price.
To review the reasons for the merger in greater detail, see pages 17
through 22.
Recommendations to Stockholders
To CVS Stockholders:
The CVS Board believes that the merger is in your best interest and
recommends that you vote FOR the proposal to approve the issuance of shares of
CVS common stock to Revco stockholders in the merger.
To Revco Stockholders:
The Revco Board believes that the merger is in your best interest and
recommends that you vote FOR the proposal to approve and adopt the merger
agreement.
The Merger
The merger agreement is attached as Annex A to this Joint Proxy
Statement/Prospectus. We encourage you to read the merger agreement as it is
the legal document that governs the merger.
What Revco Stockholders Will Receive (See page 1 and page 57)
As a result of the merger, as illustrated in the table on page 1, Revco
stockholders will receive, for each share of Revco common stock, between
0.8837 and 1.0097 shares of CVS common stock. The exact number of shares of
CVS common stock to be received per Revco share will be determined by adding
to 0.4692 of a CVS share an additional fraction of a CVS share computed by
dividing $20 by the average closing price of the CVS common stock on the New
York Stock Exchange during a specified period prior to closing. CVS will not
issue any fractional shares. Instead, Revco stockholders otherwise entitled
to receive fractional shares will receive a check in the amount of the net
proceeds from the sale of those shares in the market.
Revco stockholders should not send in their stock certificates for
exchange until instructed to do so after we complete the merger.
What Current CVS Stockholders Will Hold After the Merger
CVS stockholders will continue to own their existing shares after the
merger. CVS stockholders should not send in their stock certificates in
connection with the merger.
Ownership of CVS After the Merger
CVS will issue between 60 million and 68 million CVS shares to Revco
stockholders in the merger. The shares of CVS common stock that CVS will issue
to Revco stockholders in the merger will represent between 36% and 39% of the
outstanding CVS common stock after the merger. This information is based on
the number of shares of CVS and Revco common stock outstanding on February 28,
1997 and does not take into account stock options.
Stockholder Vote Required to Approve the Merger
The favorable vote of a majority of the shares of CVS common stock and
ESOP preference stock (voting as a single class) present or represented at the
CVS meeting is required to approve the issuance of the shares of CVS common
stock in the merger.
The favorable vote of a majority of the outstanding shares of Revco
common stock is required to approve and adopt the merger agreement. CVS has
entered into a Stockholder Agreement with Zell/Chilmark Fund, L.P., owner of
approximately 19% of the Revco shares, in which Zell/Chilmark has agreed to
vote all its shares in favor of the merger.
Board of Directors and Management of CVS after the Merger
Following the merger, the CVS Board will consist of the CVS directors
elected by the CVS stockholders at its annual meeting. In addition, CVS agreed
in the merger agreement that Thomas Thorsen and Sheli Rosenberg will become
CVS directors upon completion of the merger. Mr. Thorsen and Ms. Rosenberg are
presently directors of Revco.
The existing management of CVS will continue in office upon completion
of the merger.
Interests of Officers and Directors in the Merger
When considering the Revco Board's recommendation that Revco
stockholders vote in favor of the merger, you should be aware that a number of
Revco officers, including two who are also directors, have employment and
other agreements, retention incentives, stock options and other benefit
plans that provide them with interests in the merger that are different
from, or in addition to, yours. Please see pages 50 through 56 for more
information concerning these arrangements.
Conditions to the Merger (See page 61)
The completion of the merger depends upon meeting a number of
conditions, including the following:
(1) obtaining the approval of the stockholders of CVS and Revco;
(2) there being no law or court order that prohibits the merger;
(3) the relevant waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, having expired;
(4) there being no governmental proceeding pending that seeks
to prohibit the merger or to compel the disposition of
stores with aggregate fiscal year 1996 revenues in excess
of $400 million; and
(5) receipt of an opinion of Revco's counsel that the
merger will be tax-free to Revco and its stockholders.
Certain of the conditions to the merger, but not (1), (2) or (3) above, may be
waived by the company entitled to assert the condition. We intend to
resolicit stockholder approval if we waive a condition that we believe to be
material.
Termination of the Merger Agreement (See page 61)
Either CVS or Revco can terminate the merger agreement if any of the
following occurs:
(1) we do not complete the merger by September 30, 1997;
(2) the stockholders of either CVS or Revco do not give the
required stockholder approvals;
(3) a law or court order permanently prohibits the merger;
(4) the other party materially breaches its representations,
warranties or obligations under the merger agreement; or
(5) the Revco Board changes, in a manner adverse to CVS, its
recommendation in favor of the merger or Revco enters into an
agreement for a significant business combination or similar
transaction with a third party. However, Revco may not terminate
for the reasons laid out in this paragraph (5) unless, before the
Revco stockholder meeting, Revco has received an offer that is
superior to the merger with CVS.
Neither CVS nor Revco can terminate the merger agreement if it is in material
breach of its obligations under the merger agreement.
Termination Fees and Expenses (See page 62)
Revco must pay CVS a termination fee of $80 million in cash, plus
out-of-pocket transaction expenses of up to $5 million, if the merger
agreement is terminated as described in paragraph (5) above. If CVS or Revco
terminates the merger agreement because the other company's stockholders do
not vote in favor of the merger and the other company's Board has adversely
changed its recommendation of the merger, then the other company must pay the
terminating party the same termination fee and transaction expenses.
Regulatory Approvals
The Hart-Scott-Rodino statute prohibits us from completing the merger
until after we have given certain information and materials to the Antitrust
Division of the Department of Justice and the Federal Trade Commission and a
required waiting period has expired. On March 21, 1997 the FTC requested
additional information from CVS and Revco relating to the proposed merger. The
Department of Justice and the Federal Trade Commission have the authority to
challenge the merger on antitrust grounds before or after the merger is
completed.
Each state where we have stores may also review the merger under state
antitrust law. Attorneys General in certain of these states have indicated
that they intend to review the merger.
It is possible that some of these governmental authorities may impose
conditions for approving the merger, such as requiring us to sell stores in
certain locations. We have given each other a commitment to use our best
efforts to take whatever actions are required to obtain these approvals.
However, neither of us is required to accept any governmental condition that
requires us to sell stores with aggregate fiscal year 1996 revenues of more
than $400 million. Therefore, we cannot predict whether we will obtain the
required regulatory approvals within the time frame contemplated by the merger
agreement or on terms that we find satisfactory.
Accounting Treatment (see page 22)
We expect the merger to qualify as a pooling of interests, which means
that we will treat our companies as if they had always been combined for
accounting and financial reporting purposes. We have each received a letter
from our independent accounting firms that the merger should be accounted for
as a pooling of interests.
Opinions of Financial Advisors (see pages 30 through 50)
In deciding to approve the merger, our Boards considered opinions from
our respective financial advisors as to the fairness of the exchange ratio to
our stockholders from a financial point of view. CVS received an opinion from
Donaldson, Lufkin & Jenrette Securities Corporation, and Revco received
separate opinions from Wasserstein Perella & Co., Inc. and Salomon Brothers
Inc. These opinions are attached as Annexes B, C and D to this Joint Proxy
Statement/Prospectus. We encourage you to read these opinions.
In connection with these opinions, our financial advisors performed a
variety of analyses. While not performed or presented in the same way, the
analyses included comparing CVS and Revco historical stock prices and
financial multiples to each other and to those of other selected
publicly-traded companies, comparing the financial terms of the merger to
those of other publicly announced transactions, and estimating the relative
values and contributions of CVS and Revco based on past and estimated future
performance.
Material Federal Income Tax Consequences (see page 23)
We have structured the merger so that neither CVS, Revco nor our
stockholders will recognize any gain or loss for federal income tax purposes in
the merger (except for tax payable on cash received by Revco stockholders
instead of fractional shares). The merger is conditioned on a legal opinion of
Revco's counsel as to these tax consequences to Revco and its stockholders.
No Appraisal Rights (see page 24)
Under Delaware law, neither Revco stockholders nor CVS stockholders have
any right to an appraisal of the value of their shares in connection with the
merger.
Comparative Per Share Market Price Information (see page 25)
CVS and Revco common stock are both listed on the New York Stock
Exchange. On February 6, 1997, the last full trading day prior to the public
announcement of the proposed merger, CVS common stock closed at $44 and Revco
common stock closed at $38. On [date near effectiveness of Form S-4], CVS
common stock closed at $__ and Revco common stock closed at $__.
Listing of CVS Common Stock
CVS will list the shares of its common stock to be issued in the merger
on the New York Stock Exchange.
Other CVS Annual Meeting Matters
At the CVS meeting, CVS is also asking its stockholders to vote on the
following CVS annual meeting proposals :
bullet the election of directors to the CVS Board (see page 86);
bullet the approval of the CVS 1997 Incentive Compensation Plan (see page
86); and
bullet the ratification of the appointment of KPMG Peat Marwick LLP as
CVS' independent auditors (see page 92).
Approval by CVS stockholders of these annual meeting proposals is not a
condition to completion of the merger. Likewise, approval of the merger is not
a condition to approval of these annual meeting proposals.
The CVS Board recommends that you vote FOR these CVS annual meeting
proposals.
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
HOW WE PREPARED THE FINANCIAL STATEMENTS
We are providing the following information to aid you in your analysis of
the financial aspects of the merger. We derived this information from the
audited and unaudited financial statements of CVS and Revco for their respective
fiscal years 1992 through 1996, and with respect to Revco, for the thirty-six
weeks ended February 10, 1996 and February 8, 1997. The information is only a
summary and you should read it in conjunction with our historical financial
statements (and related notes) contained in the annual reports and other
information that we have filed with the SEC. See "Where You Can Find More
Information" on page 94.
POOLING OF INTERESTS ACCOUNTING TREATMENT
We expect that the merger will be accounted for as a "pooling of
interests", which means that for accounting and financial reporting purposes we
will treat our companies as if they had always been combined. For a more
detailed description of pooling of interests accounting, see "The Merger --
Accounting Treatment" on page 22.
We have presented unaudited pro forma financial information that reflects
the pooling of interests method of accounting to give you a better picture of
what our businesses might have looked like had they always been combined. We
prepared the pro forma statements of operations and balance sheet by adding or
combining the historical amounts of each company. Except for converting Revco's
financial information from the last-in, first-out (LIFO) method of accounting
for inventories to the first-in, first-out (FIFO) method used by CVS, we did not
adjust the combined amounts for differences in the accounting methods used by
the companies because we do not believe that any such differences will be
significant. The companies may have performed differently if they had always
been combined. You should not rely on the pro forma information as being
indicative of the historical results that we would have had or the future
results that we will experience after the merger. See "Unaudited Pro Forma
Combined Condensed Financial Statements" on page 26.
MERGER RELATED EXPENSES
We estimate that merger related fees and expenses, consisting primarily of
transaction costs for fees of investment bankers, attorneys and accountants, and
financial printing and other related charges will be approximately $25 million
(after tax). The impact of these fees and expenses has been reflected as a
reduction of pro forma shareholders' equity. These charges are not reflected in
the pro forma statements of operations or the pro forma combined per share data.
We estimate that merger related costs of approximately $275 million (after tax),
will be incurred for severance and other integration-related expenses, including
the elimination of duplicate facilities and excess capacity, organizational
realignment and related work force reductions. We estimate that approximately
$125 million (after tax), of the merger-related costs will be in the form of
asset write-offs which will not require future cash outlays. The balance, $150
million (after tax), will require future cash outlays. The pro forma statements
of operations and the pro forma balance sheet do not reflect the impact of these
charges because the estimates are preliminary and therefore subject to change.
We will charge these costs to operations as a non-recurring charge in the
quarter the merger occurs. The pro forma information does not include any
potential cost savings from the merger.
PERIODS COVERED
The unaudited pro forma statements of operations combine CVS' results for
its 1994, 1995 and 1996 fiscal years with Revco's results for its 1994 and 1995
fiscal years and for its twelve months ended February 8, 1997, giving effect to
the merger as if it had occurred on January 1, 1994. The unaudited pro forma
balance sheet combines CVS' balance sheet as of December 31, 1996 and Revco's
balance sheet as of February 8, 1997 giving effect to the merger as if it had
occurred on December 31, 1996.
CVS' fiscal year ends December 31, while Revco's fiscal year ends on the
Saturday closest to May 31. As a result, the unaudited pro forma financial
information for the year ended December 31, 1996 includes Revco's financial
statements conformed to CVS' fiscal year end.
As permitted by SEC regulations, Revco's thirty-six week period ended
February 10, 1996 has been omitted from the unaudited pro forma statements of
operations. Revco's net sales, profit from continuing operations and net income
from continuing operations were $3,457.0 million, $128.3 million and $44.6
million, respectively, for this period. Revco paid no dividends during this
period.
8
<PAGE>
CVS Realignment, Restructuring Charges And Change in Accounting Estimate
You should note that CVS' profit from continuing operations was reduced by
$59.4 million in 1992 and $203.4 million in 1995 due to realignment charges,
restructuring charges and a change in accounting estimate. These charges also
reduced income from continuing operations by $35.1 million in 1992 and $120.0
million in 1995, and income per common share from continuing operations by $.34
in 1992 and $1.14 in 1995.
Revco "Fresh Start Reporting" And Other Non Recurring Charges
In 1992, Revco implemented "Fresh Start Reporting" upon emerging from
Chapter 11 bankruptcy. A charge of $356.9 million was recorded to adjust the
Company's assets to fair value and to record certain other charges associated
with the reorganization. In 1996, non-recurring charges for Revco reduced profit
from continuing operations by $12.6 million, income from continuing operations
by $6.5 million and income per common share from continuing operations by $.10.
For the thirty-six weeks ended February 8, 1997, non-recurring charges for Revco
reduced profit from continuing operations by $31.0 million, income from
continuing operations by $18.6 million and income per common share from
continuing operations by $.27.
SELECTED HISTORICAL FINANCIAL DATA
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CVS
Historical Consolidated Statement of FISCAL YEAR ENDED DECEMBER 31,
Operations Data: ----------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales................................. $3,632.1 $3,948.2 $4,330.1 $4,865.0 $5,528.1
Profit from continuing operations......... 134.4 177.1 183.8 8.6 299.6
Income from continuing operations......... 65.7 91.9 90.3 (26.5) 239.6
Income per common share from continuing
operations.............................. 0.48 0.71 0.70 (.41) 2.12
Dividends paid per common share........... 1.48 1.52 1.52 1.52 0.44
Weighted average number of common shares
outstanding............................. 104.4 105.1 105.5 105.1 105.7
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
Historical Consolidated Balance Sheet Data: 1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total assets.............................. $4,202.2 $4,258.0 $4,735.5 $3,961.6 $2,831.8
Long-term debt............................ 349.0 341.8 331.3 327.7 303.7
Total shareholders' equity................ 2,076.6 2,246.8 2,381.6 1,547.8 1,245.1
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
REVCO FISCAL YEAR ENDED
Historical Consolidated Statement of ----------------------------------------------------
Operations Data: MAY 30, MAY 29, MAY 28, JUNE 3, JUNE 1,
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales................................. $2,086.3 $2,242.1 $2,504.0 $4,431.9 $5,087.7
Profit from continuing operations......... 45.8 76.0 100.5 175.7 206.2
Income from continuing operations......... (337.6) 14.2 38.7 61.1 76.2
Income per common share from continuing
operations.............................. n/a 0.35 0.77 0.95 1.14
Dividends paid per common share........... -- -- -- -- --
Weighted average number of common shares
outstanding............................. n/a 40.9 50.3 64.4 66.9
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------------
MAY 30, MAY 29, MAY 28, JUNE 3, JUNE 1,
Historical Consolidated Balance Sheet Data: 1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total assets.............................. $1,056.3 $1,045.2 $1,060.8 $2,149.8 $2,133.5
Long-term debt............................ 435.2 253.3 200.0 639.6 514.9
Total shareholders' equity................ 320.0 453.7 499.7 773.1 868.6
</TABLE>
9
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
UNAUDITED
THIRTY-SIX WEEKS ENDED
-------------------------------
REVCO FEBRUARY
Historical Consolidated Statement of Operations 10, FEBRUARY 8,
Data: 1996 1997
----------- -----------
<S> <C> <C>
Net sales............................................ $ 3,457.0 $ 3,944.6
Profit from continuing operations.................... 128.3 118.7
Income from continuing operations.................... 44.6 41.8
Income per common share from continuing operations... .67 .62
Dividends paid per common share...................... -- --
Weighted average number of common shares
outstanding........................................ 66.6 67.5
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY
10, FEBRUARY 8,
Historical Consolidated Balance Sheet Data: 1996 1997
----------- -----------
<S> <C> <C>
Total assets......................................... $ 2,261.2 $ 2,853.4
Long-term debt....................................... 668.9 925.4
Total shareholders' equity........................... 829.9 907.8
</TABLE>
10
<PAGE>
UNAUDITED SELECTED PRO FORMA COMBINED FINANCIAL DATA
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1994 1995 1996
--------- --------- ----------
<S> <C> <C> <C>
Pro Forma Combined Statement of Operations Data:(1,7)
Net sales................................................. $6,834.1 $9,296.9 $11,103.4
Profit from continuing operations(2,3,4).................. 291.6 201.1 519.8
Income from continuing operations(2,3,4).................. 133.4 44.6 327.1
Income per common share from continuing
operations(2,3,4,5,6).................................. 0.77 0.17 1.86
Dividends paid per common share(5)........................ 1.06 0.97 0.28
Weighted average number of common shares
outstanding(5,6)....................................... 152.0 164.6 168.1
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
<S> <C>
Pro Forma Combined Balance Sheet Data:(1,7)
Total assets(4)........................................................ $ 5,757.3
Long-term debt......................................................... 1,229.1
Total shareholders' equity(4,7)........................................ 2,171.2
</TABLE>
- ---------------
(1) It is estimated that merger related costs of approximately $275 million
(after-tax), will be incurred for severance and other integration-related
expenses, including the elimination of duplicate facilities and excess
capacity, organizational realignment and related workforce reductions. It is
estimated that approximately $125 million (after tax), of the merger-related
costs will be in the form of asset write-offs which will not require future
cash outlays. The balance, $150 million (after tax), will require future
cash outlays. The pro forma combined statements of operations and the pro
forma combined balance sheet do not reflect the impact of these charges
because the estimates are preliminary and therefore subject to change. These
costs will be charged to operations as a non-recurring charge in the quarter
the merger occurs.
(2) In 1995, restructuring charges and the change in accounting estimate for CVS
reduced profit from continuing operations by $203.4 million, income from
continuing operations by $120.0 million and income per common share from
continuing operations by $.73.
(3) In 1996, non-recurring charges for Revco reduced profit from operations by
$43.6 million, income from continuing operations by $25.1 million and income
per common share from continuing operations by $.15.
(4) Revco's cost of sales and inventories have been restated from LIFO to FIFO
in order to conform the accounting method for the combined inventories. The
impact of the restatement was to reduce cost of sales and to increase
inventories by $7.3 million in 1994, $16.8 million in 1995 and $23.6 million
in 1996, increase income from continuing operations and income from
continuing operations available to common shareholders by $4.4 million in
1994, $10.1 million in 1995 and $14.2 million in 1996 and to increase pro
forma income per common share from continuing operations by $.03 in 1994,
$.06 in 1995 and $.08 in 1996.
(5) Pursuant to the terms of the Merger Agreement, Revco stockholders will
receive between 0.8837 and 1.0097 shares of CVS common stock for each share
of Revco common stock they hold. If Revco stockholders were to receive
0.8837 shares of CVS common stock per Revco share, pro forma combined income
per common share from continuing operations would be $.78 in 1994, $.17 in
1995 and $1.89 in 1996. Pro forma combined dividends paid per share would be
$1.07 in 1994, $.99 in 1995 and $.28 in 1996. If Revco stockholders were to
receive 1.0097 shares of CVS common stock per Revco share, pro forma
combined income per common share from continuing operations would be $.74 in
1994, $.16 in 1995 and $1.80 in 1996. Pro forma combined dividends paid per
share would be $1.03 in 1994, $.94 in 1995 and $.27 in 1996.
(6) The calculation of income per common share uses the weighted average number
of common shares outstanding, including common share equivalents.
(7) It is estimated that merger related fees and expenses, consisting primarily
of transaction costs for fees of investment bankers, attorneys and
accountants, and financial printing and other related charges, will be
approximately $25 million (after tax). The impact of these fees and expenses
has been reflected as a reduction of pro forma shareholders' equity. These
charges are not reflected in the pro forma combined per share data.
11
<PAGE>
COMPARATIVE PER SHARE DATA
We have summarized below the per share information for our respective
companies on an historical, pro forma combined and equivalent basis. The pro
forma information gives effect to the merger accounted for on a pooling of
interests basis, assuming that .9237 shares of CVS common stock were issued for
each share of Revco common stock outstanding, based on the closing price of CVS
common stock used in determining the exchange ratio of $44 which was the closing
price of CVS common stock on February 6, 1997. You should read this information
in conjunction with our historical financial statements (and related notes)
contained in the annual reports and other information that we have filed with
the SEC. See "Where You Can Find More Information" on page 94. You should also
read this information in connection with the pro forma financial information set
forth on page 26. You should not rely on the pro forma information as being
indicative of the historical results that we would have had or the future
results that we will experience after the merger.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994(1) 1995(1) 1996(1)
------- ------- -------
(IN DOLLARS)
<S> <C> <C> <C>
CVS
Historical Per Common Share:
Income from continuing operations(2)........................ .70 (.41) 2.12
Dividends paid.............................................. 1.52 1.52 .44
Book value(4)............................................... 11.68
Pro Forma Combined-Per CVS Common Share:(5,6)
Income from continuing operations(2,7)...................... .77 .17 1.86
Dividends paid(3)........................................... 1.06 .97 .28
Book value(4)............................................... 12.84
REVCO
Historical Per Common Share:(1)
Income from continuing operations(2,3)...................... .77 .95 1.30
Dividends paid(3)........................................... -- -- --
Book value(4)............................................... 13.42
Pro forma Combined-Per Equivalent Revco Common Share:(5,6)
Income from continuing operations(2,7)...................... .71 .16 1.72
Dividends paid(3)........................................... .97 .90 .26
Book value(4)............................................... 11.86
</TABLE>
- ---------------
(1) Revco's historical per common share data is for the fiscal years ended May
28, 1994, June 3, 1995 and the twelve months ended February 8, 1997.
(2) In 1995, restructuring charges and a change in accounting estimate for CVS
reduced income per common share from continuing operations by $.73, on a pro
forma combined-per CVS common share basis. In 1996, non-recurring charges
for Revco reduced income per common share from continuing operations by $.15
on a pro forma combined per CVS common share basis.
(3) Pursuant to the terms of the Merger Agreement, Revco stockholders will
receive between 0.8837 and 1.0097 shares of CVS common stock for each share
of Revco common stock they hold. If Revco stockholders were to receive
0.8837 shares of CVS common stock per Revco share, pro forma combined income
per common share from continuing operations would be $.78 in 1994, $.17 in
1995 and $1.89 in 1996. Pro forma combined dividends paid per share would be
$1.07 in 1994, $.99 in 1995 and $.28 in 1996. Pro forma combined book value
would be $13.05 in 1996. If Revco stockholders were to receive 1.0097 shares
of CVS common stock per Revco share, pro forma combined income per common
share from continuing operations would be $.74 in 1994, $.16 in 1995 and
$1.80 in 1996. Pro forma combined dividends paid per share would be $1.03 in
1994, $.94 in 1995 and $.27 in 1996. Pro forma combined book value would be
$12.41 in 1996. On a pro forma combined per Revco share basis, if CVS
stockholders were to receive 1.1316 shares of Revco common stock for each
share of CVS stock they hold, pro forma combined income per common share
from continuing operations would be $.69 in 1994, $.15 in 1995 and $1.67 in
1996. Pro forma combined dividends paid per share would be $.95 in 1994,
$.87 in 1995 and $.25 in 1996. Pro forma combined book value would be $11.53
in 1996. If CVS stockholders were to receive .9904 shares of Revco common
stock for each share of CVS stock they hold, pro forma combined income per
common share from continuing operations would be $.75 in 1994, $.16 in 1995
and $1.82 in 1996. Pro forma combined dividends paid per share would be
$1.04 in 1994, $.95 in 1995 and $.27 in 1996. Pro forma book value would be
$12.53 in 1996.
(4) Historical book value per common share is computed by dividing shareholders'
equity for CVS and Revco by the number of shares of common stock outstanding
at the end of each period for CVS and Revco, respectively. Pro forma book
value per common share is computed by dividing pro forma shareholders'
equity by the pro forma number of shares of common stock outstanding at the
end of the period.
(5) The pro forma combined per share data combines the financial information of
CVS for the fiscal years ended December 31, 1994, 1995, and 1996 with the
financial information of Revco for the fiscal years ended May 28, 1994 and
June 3, 1995 and its twelve months ended February 8, 1997. CVS' fiscal year
ends December 31, while Revco's fiscal year ends on the Saturday closest to
May 31. As a result, the unaudited pro forma financial information for the
year ended December 31, 1996 includes Revco's financial statements conformed
to CVS' fiscal year end.
(6) The calculation of income per common share uses the weighted average number
of common shares outstanding, including common share equivalents.
(7) Revco's cost of sales and inventories have been restated from LIFO to FIFO
in order to reflect CVS' intention to conform the accounting method for the
combined inventories. The impact of the restatement was to reduce cost of
sales and to increase inventories by $7.3 million in 1994, $16.8 million in
1995 and $23.6 million in 1996, increase income from continuing operations
and income from continuing operations available to common shareholders by
$4.4 million in 1994, $10.1 million in 1995 and $14.2 million in 1996 and to
increase pro forma income per common share from continuing operations by
$.03 in 1994, $.06 in 1995 and $.08 in 1996.
12
<PAGE>
THE MERGER
General
CVS and Revco are furnishing this Joint Proxy
Statement/Prospectus to holders of common stock, par value $0.01 per share
("CVS Common Stock"), of CVS Corporation, a Delaware corporation (formerly
known as Melville Corporation, "CVS"), and holders of common stock, par value
$0.01 per share ("Revco Common Stock"), of Revco D.S., Inc., a Delaware
corporation ("Revco"), in connection with the solicitation of proxies by the
Board of Directors of CVS at an annual meeting of CVS' stockholders (the "CVS
Meeting") and by the Revco Board at a special meeting of Revco's stockholders
(the "Revco Meeting"), and at any adjournments or postponements thereof (the
"CVS Meeting" and the "Revco Meeting" being referred to together as the
"Meetings").
At the CVS Meeting, holders of CVS Common Stock will be asked
to vote upon (i) a proposal to approve the issuance of shares of CVS Common
Stock to Revco stockholders in the Merger (as defined below) and (ii) certain
other CVS annual meeting proposals described under "Other CVS Annual Meeting
Proposals" on page 72. At the Revco Meeting, holders of Revco Common Stock
will be asked to vote upon a proposal to approve and adopt an Agreement and
Plan of Merger dated as of February 6, 1997 (the "Merger Agreement"), among
CVS, Revco and North Acquisition Corp., a Delaware corporation ("Merger
Subsidiary"), and the transactions contemplated thereby. A copy of the Merger
Agreement is attached hereto as Annex A.
The Merger Agreement provides for the merger of Merger
Subsidiary, a wholly-owned subsidiary of CVS, with and into Revco (the
"Merger"), with Revco surviving the Merger as a wholly-owned subsidiary of
CVS. The Merger will become effective at the time of filing of a Certificate
of Merger with the Secretary of State of the State of Delaware or at such
other time as is specified in the Certificate of Merger (such time being
herein referred to as the "Effective Time"), which is expected to occur as
soon as practicable after the last of the conditions precedent to the Merger
set forth in the Merger Agreement has been satisfied or waived.
Background of the Merger
The chain drugstore industry has recently undergone rapid
consolidation. A number of competitive factors underlie this trend. First, a
growing percentage of pharmacy revenue is attributable to third party payors
(such as HMOs, managed care plans, Medicare and Medicaid), which has resulted
in declining pharmacy margins. At the same time, pharmacy and prescription
drug sales have become increasingly important relative to the overall
business. Second, the chain drugstore business has become increasingly
capital intensive, requiring significant investment in information systems and
infrastructure and new forms of real estate development. CVS believes that
achieving a critical mass in terms of store count and locating its stores in
appropriate geographic markets is essential to competing effectively in the
chain drugstore industry as well as with alternative distribution channels
such as combination food/drug stores, mail order and mass merchandisers.
Historically, CVS has grown through new store openings as well
as through acquisitions. CVS acquired Peoples Drugs Stores in 1990 and
Standard Drug Stores in 1994, and has added an average of 77 stores in each of
the past five years through new store openings, relocations, and small
acquisitions. In light of the significant consolidation in the industry
during 1996, CVS believed that, to accomplish its long-term objectives, it
should explore opportunities for growth through strategic acquisitions meeting
CVS' acquisition criteria.
In November 1995, Revco and Rite Aid Corporation ("Rite Aid")
entered into a merger agreement providing for Rite Aid to acquire 50.1% of the
outstanding Revco Common Stock for $27.50 per share in cash and the remaining
shares of Revco Common Stock in exchange for common stock of Rite Aid at an
exchange ratio under which Rite Aid would issue not more than 1.125 or fewer
than 0.91666 Rite Aid shares for each share of Revco Common Stock. On April
29, 1996, Revco and Rite Aid announced that they were terminating their merger
agreement as a result of the failure to obtain antitrust clearance for the
transaction.
Following the termination of the merger agreement with Rite
Aid, Revco determined that it would pursue a strategy of remaining an
independent company and would pursue growth through internal expansion of its
operations and acquisitions. In September 1996, Revco commenced a cash tender
offer to acquire Big B, Inc. ("Big B"), which operates a chain of
approximately 400 drugstores in the southeastern United States. Revco
completed the acquisition of Big B on December 23, 1996, at a total cost of
approximately $420 million, including the assumption of approximately $50
million of Big B debt.
In October 1996, Rite Aid announced an agreement to acquire
Thrifty Payless Holdings, Inc. ("Thrifty Payless"), and in November 1996,
Eckerd Corporation ("Eckerd") announced an agreement to combine with the
Thrift Drug business ("Thrift Drug") of J.C. Penney Company, Inc. ("J. C.
Penney").
To further CVS' objective to explore opportunities for a
suitable strategic acquisition, in the fall of 1997 Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJ"), as CVS' financial advisor, had
initial discussions with Samuel Zell, Co-Chairman of the Board of Revco, to
ascertain Mr. Zell's level of interest in a possible business combination of
CVS and Revco. Following these initial discussions, on October 10, 1996,
Stanley Goldstein, Thomas Ryan and Charles Conaway (respectively CVS' chief
executive, operating and financial officers) and representatives of DLJ, CVS'
financial advisor, met in Chicago with Mr. Zell and Rod Dammeyer, a director
of Revco, to propose a business combination between CVS and Revco. Mr. Zell
stated that, before proceeding further, he would need to involve Mr. Hoven,
Revco's chief executive officer, and the Revco Board in any discussions
regarding such a business combination. Mr. Zell suggested that Mr. Ryan
contact Mr. Hoven directly. Mr. Ryan contacted Mr. Hoven on October 16 and
reiterated the potential attractiveness of a business combination and
suggested an in-person meeting. Mr. Hoven responded that Revco was not for
sale, but indicated that the Revco Board would consider the merits of any
reasonable proposal. An initial meeting was scheduled for November 7 in
Cleveland.
On October 24, at a telephonic meeting of the Revco Board held
in connection with Revco's acquisition of Big B, the Revco Board recommended
that Revco hire an investment banking firm to study Revco's strategic
direction and position within the industry and to conduct a valuation of Revco.
At the November 7 meeting, Messrs. Ryan and Conaway made a
presentation to Mr. Hoven and Jack Staph (Revco's general counsel), in which
they reviewed the potential merits of a business combination, CVS' operations
and performance and a preliminary analysis of potential synergies achievable
through the combination. They also discussed the changing nature of the
industry and the on-going consolidation trend and its impact on the two
companies. The analysis of the companies in CVS' presentation was based on a
value of $33 per Revco share for illustration purposes only (the "CVS $33
Presentation"), as compared with the closing price of Revco Common Stock on
November 6 of $31 7/8. Mr. Hoven stated that Revco had hired Wasserstein
Perella & Co., Inc. ("Wasserstein Perella") as its financial advisor, and that
Wasserstein Perella would conduct a valuation of Revco and an analysis of
Revco's strategic options for presentation to Revco's Board in approximately
30 days.
On November 16, Mr. Ryan met with Mr. Zell in Monterey,
California, and continued to discuss the attractiveness of a potential
business combination. Mr. Zell reiterated that Wasserstein Perella was
undertaking a valuation of Revco and performing other strategic analyses for
Revco's Board, which would affect the timing of discussions on a potential
transaction.
On November 19, Mr. Ryan proposed in writing a business
combination (the "CVS $36 Proposal") between CVS and Revco under which (i) 50%
of the shares of Revco Common Stock would be converted into the right to
receive 0.8701 shares of CVS Common Stock per share of Revco Common Stock
(having a value as of such date of $36 per share, as compared with the closing
price of Revco Common Stock on November 18 of $34 3/8) on a tax-free basis,
with the remaining 50% of the shares of Revco Common Stock to be converted
into the right to receive $36 per share in cash; (ii) certain Revco
officers, directors and principal stockholders (together, the "Principals")
would grant to CVS an option to acquire the Revco Common Stock held by such
Principals at $36 per share and would agree to (x) vote in favor of the CVS
$36 Proposal and (y) in the event the transaction contemplated by the CVS
$36 Proposal was terminated as a result of a transaction with a party other
than CVS within 12 months after the termination, to pay CVS any amount
received by the Principals in excess of the consideration offered by CVS;
(iii) Revco would grant to CVS an option to acquire shares of Revco Common
Stock representing 19.9% of the Revco Common Stock outstanding at a price
of $36.00 per share; (iv) Revco would pay to CVS a break-up fee of $90
million in customary circumstances; and (v) Revco would agree not to
solicit alternative offers for the business of Revco.
At a meeting of the Revco Board on December 3, Revco's
management and financial and legal advisors reviewed with the Revco Board the
CVS $36 Proposal as well as strategic alternatives available to Revco in light
of the consolidation trend continuing in the industry. These alternatives
included Revco merging with or being acquired by another large retail store
operator and Revco continuing as an independent company with growth through
internal expansion and acquisitions. Wasserstein Perella advised the Revco
Board that it would not be able to provide a fairness opinion with respect to
the CVS $36 Proposal. See "Role of Financial Advisors--Opinions of Revco's
Financial Advisors--Opinion of Wasserstein Perella". The Revco Board voted
unanimously to reject the CVS $36 Proposal. That evening, Mr. Hoven contacted
Mr. Ryan by telephone and advised him that the Revco Board had rejected the
CVS $36 Proposal.
At a CVS Board meeting on December 4, senior management of CVS
reviewed the status of discussions with Revco. Management also discussed a
proposal to structure the merger as a stock-for-stock pooling transaction on a
tax-free basis to Revco stockholders.
On December 18, Mr. Ryan met with Mr. Hoven in New York to
discuss price and other transaction terms, as well as the performance of the
respective companies. Mr. Ryan presented to Mr. Hoven a financial analysis
for a combination of CVS and Revco assuming a purchase price of $38 per share
in a 50% stock, 50% cash transaction. Mr. Hoven indicated his view that a new
CVS proposal based on a $38 per share valuation of Revco would be inadequate.
Later in December, in a telephone call with Mr. Hoven, Mr. Ryan suggested that
the principals meet to try to reach terms acceptable to all parties. Mr.
Hoven stated that a meeting based on a $38 offer would not be productive. Mr.
Ryan expressed his view that progress could be made at a meeting, and a
January 5, 1997 meeting was arranged.
On January 5, 1997, Messrs. Goldstein and Ryan met in Chicago
with Messrs. Zell, Hoven and Dammeyer and Ms. Rosenberg. At the meeting, CVS
proposed an all-stock pooling transaction intended to be tax-free to Revco
stockholders, based on a $40 per share valuation of Revco (the "CVS $40
Proposal"). This proposal was subject to CVS' due diligence and verification
of potential synergies. The participants at this meeting discussed a method
for determining the exchange ratio of CVS Common Stock for Revco Common Stock
in which one-half of the CVS Common Stock to be issued would be based on a
fixed exchange ratio and the other half would have a fixed value of $20,
subject to an upper and lower "collar" limit on the number of shares issuable
by CVS. The CVS $40 Proposal was the basis upon which the parties entered
into substantive negotiations.
On January 7, Mr. Hoven contacted a leading retail drugstore
company, a leading company engaged in the grocery and drugstore businesses and
a leading retailer to inquire whether they had interest in acquiring all or
any substantial part of Revco. On January 14 and January 20, respectively,
such companies advised Mr. Hoven that they had no interest in pursuing a
transaction with Revco at that time.
On January 8, Mr. Ryan sent to Mr. Hoven a letter summarizing
the CVS $40 Proposal. The CVS $40 Proposal provided for a stock-for-stock
acquisition of Revco by CVS, to be tax-free to Revco stockholders and to be
accounted for as a pooling of interests, the principal terms of which would be
(i) each Revco stockholder would receive a fixed number of shares of CVS
Common Stock based on an exchange ratio reflecting a value of $40 per Revco
share; (ii) the Principals would grant to CVS an option to acquire the Revco
Common Stock held by such Principals at $40 per share and would agree to vote
in favor of the CVS $40 Proposal; (iii) Revco would pay to CVS a break-up fee
equal to 3% of the consideration to be paid to Revco stockholders plus
reimbursement of out-of-pocket expenses; and (iv) Revco would agree not to
solicit alternative offers for the business of Revco. The letter indicated
that the CVS $40 Proposal was subject to completion of satisfactory due
diligence, acceptable documentation of the transaction and board approval.
On January 8 the parties also entered into a reciprocal confidentiality and
three-year standstill agreement.
At a CVS Board meeting on January 9, senior management updated
the CVS Board on the status of discussions with Revco. The CVS Board
authorized management to proceed with these discussions.
On January 10, Mr. Ryan met with Mr. Hoven in Florida to
discuss procedures for commencing due diligence and more specific transaction
terms, as well as issues relating to management of the combined company, plans
regarding Revco's headquarters and employee severance. Mr. Hoven stressed the
importance to Revco of minimizing the substantive conditions to completion of
a transaction.
On January 14, the terms of the CVS $40 Proposal were reviewed
at a telephonic meeting of the Revco Board by Revco's management and financial
and legal advisors. No formal action with respect to the CVS $40 Proposal was
taken by the Revco Board at this meeting, but it was the consensus of the
Revco Board that Revco's management and advisors should proceed to enter into
discussions with CVS, with a view to determining whether acceptable terms
could be negotiated, including reaching agreement on the structure of the
exchange ratio and a "collar" and minimizing any conditions to closing a
transaction with CVS.
On January 17, Davis Polk & Wardwell ("Davis Polk"), counsel to
CVS, distributed a draft of a merger agreement to Revco and its advisors.
Davis Polk subsequently distributed drafts of a stockholder agreement between
CVS and Zell/Chilmark and a registration rights agreement.
Commencing on January 20, representatives of CVS and its
advisors conducted their business and legal due diligence review of non-public
information relating to Revco's business and affairs, particularly with a view
to evaluating potential cost savings and synergies from the combination.
Commencing on January 29, representatives of Revco and its advisors conducted
their business and legal due diligence review of non-public information
relating to CVS' business and affairs.
Following satisfactory completion of CVS' due diligence and
verification of cost savings and synergies, on January 23 Mr. Ryan and
representatives of DLJ had discussions by telephone with Messrs. Zell, Hoven
and Dammeyer and representatives of Wasserstein Perella regarding a fixed
exchange ratio to be applicable to one-half of the merger consideration. The
principals on this telephone call determined that the fixed exchange ratio
should be based on a CVS price of $42 5/8 per share, the closing price on the
New York Stock Exchange (the "NYSE") for CVS Common Stock on January 20, 1997.
On January 23, Cravath, Swaine & Moore, counsel to Revco,
provided written comments on the draft merger agreement to CVS and its
advisors. The principal issues related to: the structure of the Exchange Ratio
and the "collar"; the extent of the parties' commitments relative to obtaining
regulatory approvals; the amount of any termination fees and the circumstances
under which such fees would be payable; CVS Board representation for Revco
designees; restrictions on Revco's ability to pursue an alternative
transaction; employee benefits arrangements; the scope of the proposed
arrangements with Zell/Chilmark; the nature of registration rights to be
available to certain Revco stockholders; and restrictions on Revco's conduct
of business between signing and closing.
On January 24, Mr. Brian Carney, Senior Vice President, Finance
of Revco, Messrs. Goldstein and Ryan, and the legal and financial advisors of
CVS and Revco met in New York to discuss the issues described in the preceding
paragraph, including the structure of the Exchange Ratio and an appropriate
"collar" mechanism. None of these issues was resolved at such meeting.
On January 25, the parties determined that the Exchange Ratio
would reflect a $40 value per Revco share consisting of (i) a fixed ratio of
0.4692 for one-half of such value calculated based on the CVS price of $42 5/8
referred to above and (ii) an additional fraction of a CVS share calculated by
dividing $20 by an average closing price of the CVS Common Stock over a
specified period prior to the closing. Over the next few days the parties
continued to negotiate to reach agreement on a "collar" mechanism to establish
a minimum and maximum number of CVS shares to be issued.
On January 27, in response to news articles describing a
possible transaction, CVS and Revco issued a statement publicly confirming
that they were in discussions regarding a possible business combination.
Following the January 27 public statement by CVS and Revco that
they were in discussions regarding a possible merger, Revco authorized
Wasserstein Perella to contact certain third parties (including leading
drugstore, supermarket and discount store operators) to inquire whether they
had an interest in acquiring all or any substantial part of Revco. None of
such parties indicated an interest in pursuing a transaction with Revco at
that time.
On January 29, Revco engaged Salomon Brothers Inc ("Salomon")
to act as a financial advisor in connection with the proposed Merger.
On February 4, a meeting of the Revco Board was held at which
Revco's management and legal and financial advisors reviewed the status of
negotiations regarding the proposed agreements and the unresolved issues. At
such meeting, the terms of the proposed Merger were described to the Revco
Board. Such terms were in many respects similar to the CVS $40 Proposal, with
the following exceptions: (i) the Exchange Ratio included a "collar" which
fixed the number of shares of CVS Common Stock to be issued for each share of
Revco Common Stock within a price range of $37.00 to $48.25 per share of CVS
Common Stock and a range of 0.8837 and 1.0097 shares of CVS Common Stock; (ii)
none of the Principals would be required to grant CVS an option to acquire its
shares of Revco Common Stock but Zell/Chilmark would agree to vote in favor of
the Merger; (iii) Revco would pay to CVS a termination fee of $80 million plus
$5 million in expense reimbursement in certain circumstances, and in certain
circumstances CVS would pay such a termination fee and expenses to Revco; (iv)
two current directors of Revco would join the CVS Board at the Effective Time;
and (v) CVS and Revco would agree to use their best efforts to obtain
antitrust clearance for the Merger subject to a limitation on divestitures of
stores having in excess of $400 million in aggregate fiscal year 1996
revenues. Wasserstein Perella and Salomon made presentations to the Revco
Board, including a discussion of valuation methodologies and analyses used in
evaluating the proposed transaction. Wasserstein Perella and Salomon provided
oral opinions to the Revco Board that as of February 4, 1997, and based on the
assumptions contained in their opinions, the Exchange Ratio was fair, from a
financial point of view, to the Revco stockholders. Such opinions were
subsequently confirmed in writing on February 6. See "Role of Financial
Advisors--Opinions of Revco's Financial Advisors". Subject to reaching
agreement with CVS on the remaining open contractual matters, the Revco Board
(i) determined that the Merger is fair to, and in the best interests of, the
Revco stockholders, (ii) approved the Merger Agreement and the transactions
contemplated thereby, including the Stockholder Agreement, and (iii) resolved
to recommend that the stockholders of Revco vote in favor of the approval and
adoption of the Merger Agreement. One director, Mr. Talton Embry, was not
present at the meeting. Two directors, Mr. Hoven and Mr. Carl Bellini,
abstained from voting at the meeting in view of certain of their interests in
connection with the Merger. See "Interests of Certain Persons in the Merger".
On February 4, a CVS Board meeting was held at which Davis Polk
reviewed the proposed merger agreement and certain unresolved contractual
issues. DLJ made a presentation which included a discussion of its valuation
methodologies and analyses used in arriving at DLJ's fairness opinion. DLJ
gave its opinion to the CVS Board that, as of such date, and based upon and
subject to the assumptions, limitations and qualifications in such opinion,
the Exchange Ratio was fair to the holders of CVS Common Stock from a
financial point of view. See "Role of Financial Advisors--Opinion of CVS
Financial Advisor". Subject to resolution of the remaining contractual
matters in a manner deemed satisfactory by management, the CVS Board (i) voted
that the Merger Agreement and the proposed Merger and other transactions
contemplated by the Merger Agreement were fair to and in the best interests of
CVS stockholders, (ii) approved the Merger Agreement and the transactions
contemplated thereby and (iii) recommended that the stockholders of CVS
approve the issuance of shares of CVS Common Stock in connection with the
Merger.
Following the Board meetings, the parties continued to
negotiate and resolve the open contractual matters, principally relating to
the conduct of business between signing and closing, registration rights and
certain employee benefits arrangements. The parties executed the Merger
Agreement and Stockholder Agreement on the evening of February 6 and publicly
announced the execution of the agreements before the opening of business on
February 7.
CVS' Reasons for the Merger; Recommendation of the CVS Board
At a meeting of the CVS Board held on February 4, 1997, after
careful consideration, the CVS Board, subject to reaching agreement with Revco
on the remaining open contractual matters, (i) voted that the Merger Agreement
and the proposed Merger and other transactions contemplated by the Merger
Agreement were fair to and in the best interests of CVS stockholders, (ii)
approved the Merger Agreement and the transactions contemplated thereby and
(iii) recommended that the stockholders of CVS approve the issuance of shares
of CVS Common Stock in connection with the Merger. The following briefly
describes the material reasons, factors and information taken into account by
the CVS Board in reaching its conclusion.
CVS' Reasons for the Merger
bullet Consolidation Trend in the Drugstore Industry. The chain drugstore
industry has recently undergone rapid consolidation. A number of
competitive factors underlie this trend. First, a growing
percentage of pharmacy revenue is attributable to third party
payors (such as HMOs, managed care plans, Medicare and Medicaid)
which has resulted in declining pharmacy margins. At the same
time, pharmacy and prescription drug sales have become increasingly
important relative to the overall business. Second, the chain
drugstore business has become increasingly capital intensive,
requiring significant investment in information systems and
infrastructure and new forms of real estate development. CVS
management believes that achieving a critical mass in terms of
store count and locating its stores in appropriate geographic
markets is essential to competing effectively in the chain
drugstore industry as well as with alternative distribution
channels such as combination food/drug stores, mail order and mass
merchandisers.
bullet A Suitable Acquisition Provides Opportunity for Growth.
Historically, CVS has grown through new store openings, as well as
through acquisitions. In light of the significant consolidation in the
industry during 1996 (and the corresponding decrease in the number of
suitable merger partners), CVS believed that to meet its long-term
objectives it should explore opportunities for growth through
strategic acquisitions meeting CVS' acquisition criteria.
bullet The Merger Meets CVS' Three Criteria for Strategic Acquisitions. CVS
believes that the Merger meets CVS' three criteria for strategic
acquisitions for the following reasons. First, CVS expects the
combination to be accretive to earnings (before one-time merger-
related charges) in the first year of combined operations. CVS
expects cost savings of about $100 million annually beginning in
1998. CVS expects to achieve these cost savings principally
through the closing of Revco's headquarters in Twinsburg, Ohio,
economies of scale in advertising, distribution and other
operational areas and the spreading of its investments in
information technology over a broader store base. (CVS notes that
achieving these earnings and costs savings is subject to certain
risks as discussed under "--Cautionary Statement Concerning
Forward-Looking Statements" below). Second, the Merger will bring
CVS into high growth, contiguous geographic markets without
significant overlap and will position the company to sustain its
long-term growth. The combined company will have more than 4,000
stores in 24 states and the District of Columbia. For CVS, the
combination would add more than 2,500 stores in 10 new states.
Third, the combination offers significant upside potential,
presented by the opportunity for CVS to elevate the performance
level of Revco stores towards that of CVS stores.
bullet The Opportunities Provided by the Merger in the Managed Care
Business. CVS believes that the merger will provide the following
benefits for its managed care business. CVS has made significant
investments in infrastructure necessary to develop and maintain
successful relationships in the managed care business. The Merger
will provide an opportunity to make this infrastructure more cost-
efficient due to higher volumes. The expanded geographic reach of
the combined company will strengthen CVS' position to offer more
competitive services to managed care providers. In addition, the
Merger will bring together Revco's mail service facility (a
capability not possessed by CVS' Prescription Benefit Management
("PBM") business, Pharmacare) with innovative and integrated
healthcare products and services offered by Pharmacare. The
combined company will therefore be able to offer a more competitive
and differentiated PBM service across the industry's largest retail
base.
bullet Compatibility of the Companies. CVS management believes that
the two companies are highly compatible, with similar average store
size and format as well as merchandising strategies. CVS
management believes that such compatibility should facilitate a
relatively smooth integration of the companies.
Information and Factors Considered by the CVS Board
The CVS Board made its determination after careful
consideration of, and based on, a number of factors including those described
below, which are the material factors considered by the CVS Board:
(i) all the reasons described above under "CVS' Reasons for the
Merger";
(ii) the oral opinion of DLJ to the CVS Board, subsequently
confirmed in writing, that the Exchange Ratio is fair to the
stockholders of CVS from a financial point of view (a copy of the
written opinion dated February 6, 1997 of DLJ, setting forth the
assumptions, limitations and qualifications set forth in such
opinion, is attached as Annex B hereto) (see "Role of Financial
Advisors--Opinion of CVS Financial Advisor);
(iii) information concerning the business, assets, capital
structure, financial performance and condition and prospects of CVS
and Revco;
(iv) current and historical market prices and trading information
with respect to each company's common stock;
(v) the strategic fit between CVS and Revco, the opportunity for
significant cost savings and synergies and the possibility that CVS
on its own might not be able to achieve the level of cost savings,
operating efficiencies and synergies that may be available as a
result of the Merger;
(vi) the challenges of combining the businesses of two major
corporations of this size and the attendant risk of not achieving
the expected cost savings or synergies or improvement in earnings
(as discussed under "--Cautionary Statement Concerning Forward-
Looking Statements") and of diverting management focus and
resources from other strategic opportunities and from operational
matters for an extended period of time;
(vii) the terms and structure of the transaction and the terms
and conditions of the Merger Agreement, including the Exchange
Ratio (and the related "collar" mechanism) and the intended tax and
accounting treatment for the Merger;
(viii) the agreement of Zell/Chilmark to vote its Revco shares in
favor of the Merger;
(ix) the likelihood of obtaining required regulatory approvals,
the possibility that regulatory authorities may impose conditions
to the grant of such approvals and the extent of the commitment of
the parties to take actions to obtain required regulatory
approvals; and
(x) the interests of the Revco officers and directors in the
Merger, and the impact of the Merger on the customers and employees
of each company.
In view of the wide variety of factors considered in connection
with its evaluation of the Merger and the complexity of these matters, the CVS
Board did not find it practicable to and did not attempt to quantify, rank or
otherwise assign relative weights to these factors or to undertake to make any
specific determination as to whether any particular factor (or any aspect of
any particular factor) was favorable or unfavorable to the CVS Board's
ultimate determination. In addition, individual members of the CVS Board may
have given different weight to different factors. The CVS Board considered all
these factors as a whole, and overall considered the factors to be favorable
to and to support its determination. However, discussions among the CVS Board
members evidenced that factors (iii), (iv) and (x) were considered as part of
the general mix of available information without being clearly favorable or
unfavorable, factors (vi) and (ix) were considered uncertainties relating to
the transaction, and the other reasons and factors described above were
generally considered favorable.
Recommendation of the CVS Board
The CVS Board recommends that the stockholders of CVS vote
"FOR" the issuance of shares of CVS Common Stock in the Merger.
Revco's Reasons for the Merger; Recommendation of the Revco Board
At a meeting of the Revco Board held on February 4, 1997, after
careful consideration, the Revco Board, subject to reaching agreement with CVS
on the remaining open contractual matters, (a) determined that the Merger is
fair to, and in the best interests of, the Revco stockholders, (b) approved
the Merger Agreement and the transactions contemplated thereby, including the
Stockholder Agreement, and (c) resolved to recommend that the stockholders of
Revco vote in favor of the approval and adoption of the Merger Agreement. The
following briefly describes certain of the reasons, factors and information
taken into account by the Revco Board in reaching its conclusion.
Information and Factors Considered by the Revco Board
The Revco Board made its determination after careful
consideration of, and based on, a number of factors including those described
below, which are the material factors considered by the Revco Board:
(i) current industry, economic and market conditions, including
in particular the recent consolidation trend within the retail
drugstore business, including the pending combination of Eckerd
with Thrift Drug and the acquisition of Thrifty Payless by Rite
Aid;
(ii) Revco's desire to consolidate to keep pace with the larger
drugstore chains, including Walgreen's, Rite Aid/Thrifty Payless and
Thrift Drug/Eckerd;
(iii) the strategic fit between Revco and CVS, including the
opportunity for significant synergies and cost savings and the fact
that the Merger will create the largest retail drugstore chain in
the country based on store count and the second largest based on
sales revenue;
(iv) the fact that the value of the shares of CVS Common Stock to
be received in the Merger for each share of Revco Common Stock,
based on the closing price of CVS Common Stock on January 31, 1997,
represented (a) a premium of approximately 26.4% over the closing
price of Revco Common Stock on November 6, 1996, the last trading
day prior to the CVS $33 Presentation and (b) a 13.5% premium over
the closing price of Revco Common Stock on January 3, 1997, the
last trading day prior to the CVS $40 Proposal (see "Background of
the Merger");
(v) the potential for appreciation in the value of CVS Common
Stock as a result of the Merger and the ability of Revco
stockholders to have a significant equity participation in the
combined company and any such appreciation through the ownership of
a minimum of approximately 36% and a maximum of approximately 39%
of the outstanding CVS Common Stock following the Merger;
(vi) the fact that the value at the Effective Time of the shares
of CVS Common Stock to be received in the Merger for each share of
Revco Common Stock will vary as a result of any change in the value
of CVS Common Stock, in accordance with the limitations of the
Exchange Ratio, and that any change in the value of the shares of
CVS Common Stock to be received in the Merger for each share of
Revco Common Stock as a result of a decrease in the value of CVS
Common Stock prior to the Effective Time will be limited within the
operation of the "collar" feature of the Exchange Ratio;
(vii) the analyses prepared by Wasserstein Perella and Salomon and
the oral opinion of each of them presented at the meeting of the
Revco Board and subsequently confirmed in writing to the effect
that, as of the date of such opinions and based upon its review and
analysis and subject to the limitations set forth therein, the
Exchange Ratio is fair, from a financial point of view, to the
Revco stockholders; (copies of the written opinions dated February
6, 1997, of each of Wasserstein Perella and Salomon, setting forth
the assumptions made, factors considered and scope of the review
undertaken by each of them, are attached as Annexes C and D hereto,
respectively, and are incorporated herein by reference; see "Role
of Financial Advisors--Opinions of Revco's Advisors--Opinion of
Wasserstein Perella" and "Role of Financial Advisors--Opinions of
Revco's Advisors--Opinion of Salomon");
(viii) Revco's and Wasserstein Perella's investigation of strategic
alternatives, including Revco merging with or being acquired by
another large retail drugstore or supermarket operator and Revco
continuing as an independent company with growth through internal
expansion and acquisitions, and the fact that Wasserstein Perella
and Revco contacted seven other parties regarding their possible
interest in acquiring Revco, including after the public
confirmation on January 27, 1997 of discussions between CVS and
Revco relating to a possible merger, and that none of the parties
contacted had indicated an interest in pursuing a transaction with
Revco at that time (see "Background of the Merger");
(ix) the fact that Revco and CVS have leading market positions in
contiguous geographic regions but with very little overlap within
geographic regions;
(x) the provisions of the Merger Agreement pursuant to which CVS
has committed to work closely with Revco to gain clearance for the
Merger from antitrust authorities and to use its best efforts to
take all actions necessary to secure such approvals, subject to a
limitation on divestitures of drugstores having aggregate fiscal
year 1996 revenues in excess of $400 million (see "The Merger
Agreement--Certain Covenants--Best Efforts; Antitrust Matters");
(xi) the advice of Revco's independent accountants that the
Merger should be accounted for as a pooling of interests under
generally accepted accounting principles;
(xii) the ability to consummate the Merger as a tax-free
reorganization under the Code;
(xiii) advice from Revco's legal advisors as to the likelihood that
the legal conditions to the Merger could be satisfied;
(xiv) the provisions of the Merger Agreement that permit Revco,
under certain circumstances, to furnish information to and
participate in substantive negotiations and discussions with third
parties and to terminate the Merger Agreement to enter into a
definitive agreement with a third party in connection with a
Superior Proposal (as defined herein under "The Merger Agreement--
Certain Covenants--No Solicitation by Revco") upon the payment of
an $80 million termination fee plus up to $5 million in expense
reimbursement (see "The Merger Agreement--Termination of the Merger
Agreement");
(xv) the other provisions of the Merger Agreement, including the
required approvals of the stockholders of Revco and CVS and the
protection of the severance and other benefits afforded to Revco's
employees (see "The Merger Agreement--Certain Covenants--Certain
Employee Benefits Matters");
(xvi) the stated desire of Zell/Chilmark to dispose of its Revco
Common Stock pursuant to the Merger and the fact that Zell/Chilmark
was willing to agree to vote all of its shares of Revco Common
Stock in favor of the Merger pursuant to the Stockholder Agreement
(as described in "The Merger Agreement--Certain Stockholder
Arrangements--Stockholder Agreement");
(xvii) the fact that two current directors of Revco will become CVS
directors upon consummation of the Merger (see "The Merger
Agreement--Certain Covenants--Certain Other Covenants");
(xviii) the business, assets, financial condition, results of
operations and cash flow of Revco, CVS and the combined company, on
both an historical and a prospective basis;
(xix) the current and historical trading prices and values of CVS
Common Stock and Revco Common Stock and the current and historical
trading multiples of other comparable companies;
(xx) the challenges of combining the businesses of two major
corporations of this size and the attendant risk of not achieving
the expected cost savings or synergies or improvement in earnings
(as discussed under "--Cautionary Statement Concerning Forward-
Looking Statements") and of diverting management focus and
resources from other strategic opportunities and from operational
matters for an extended period of time; and
(xxi) the interests of the officers and directors of Revco in the
Merger, including the matters described under "Interests of Certain
Persons in the Merger".
In view of the wide variety of factors considered by the Revco
Board in connection with its evaluation of the Merger and the complexity of
such matters, the Revco Board did not consider it practicable to, nor did it
attempt to, quantify, rank or otherwise assign relative weights to the
specific factors it considered in reaching its decision or to undertake to
make any specific determination as to whether any particular factor (or any
aspect of any particular factor) was favorable or unfavorable to the Revco
Board's ultimate determination. In addition, individual members of the Revco
Board may have given different weight to different factors. On balance,
however, the discussions among the members of the Revco Board evidenced the
general view that, except as described below, the factors enumerated above
were regarded favorably by the Revco Board in making its determination to
approve the Merger and the Merger Agreement, while the factors set forth in
paragraphs (i), (xviii), (xix) and (xxi) were part of the general mix of
information considered by the Revco Board and were not regarded as favorable
or unfavorable. The Revco Board considered the factors described in paragraph
(xx) to be an uncertainty relating to the transaction. In the case of the
factor described in paragraph (vi), the Revco Board recognized that the
Exchange Ratio represented consideration half of which had a fixed value,
subject to the operation of the "collar", and half of which was based on a
fixed ratio, the value of which would increase or decrease along with changes
in the value of the CVS Common Stock. The Revco Board recognized that such
formula had advantages and disadvantages, but on balance viewed the Exchange
Ratio as a reasonable means of balancing the upside and downside risk.
For information concerning certain interests of members of the
Revco Board, see "Interests of Certain Persons in the Merger".
Recommendation of the Revco Board
The Revco Board recommends that the Revco stockholders vote
"FOR" the approval and adoption of the Merger Agreement.
Cautionary Statement Concerning Forward-Looking Statements
We have made forward-looking statements in this document that
are subject to risks and uncertainties. Forward-looking statements include
the information concerning future results of operations, cost savings and
synergies of CVS after the Effective Time, and concerning the ability of CVS
to elevate the performance level of Revco stores after the Effective Time, set
forth under "Questions and Answers About The Merger", "Summary", "--Background
of the Merger", "--CVS' Reasons for the Merger; Recommendation of the CVS
Board", "--Revco's Reasons for the Merger; Recommendation of the Revco Board",
"Role of Financial Advisors" and those preceded by, followed by or that
otherwise include the words "believes," "expects," "anticipates," "intends,"
"estimates" or similar expressions. For those statements, we claim the
protection of the safe harbor for forward-looking statements contained in
the Private Securities Litigation Reform Act of 1995. You should
understand that the following important factors, in addition to those
discussed elsewhere in this document and in the documents which we
incorporate by reference, could affect the future results of CVS and Revco,
and of CVS after the Effective Time, and could cause those results to
differ materially from those expressed in our forward-looking statements:
materially adverse changes in economic conditions generally or in the
markets served by our companies; a significant delay in the expected
closing of the Merger; future regulatory actions affecting our companies'
industry; competition from other drugstore chains, from alternative
distribution channels such as supermarkets, membership clubs, other
retailers and mail order companies and from other third party plans; and
the continued efforts of HMOs, managed care organizations, PBM companies
and other third party payors to reduce prescription drug costs. The
forward looking statements referred to above are also subject to
uncertainties and assumptions relating to the operations and results of
operations of CVS following the Merger, including: risks relating to CVS'
ability to combine the businesses of two major corporations and the
challenges inherent in diverting CVS' management focus and resources from
other strategic opportunities and from operational matters for an extended
period of time; CVS' ability to secure suitable new store locations on
favorable lease terms; CVS' ability to attract, hire and retain suitable
pharmacists and management personnel; relationships with suppliers and CVS'
ability to continue to purchase inventory on favorable terms; and the
impact of inflation.
Accounting Treatment
CVS has received from KPMG Peat Marwick LLP, its independent
accounting firm, a letter dated February 6, 1997, and addressed to CVS to the
effect that, as of such date, based on such firm's best judgment regarding the
application of generally accepted accounting principles ("GAAP") and the
published rules and regulations of the Securities and Exchange Commission (the
"SEC") relative to matters of accounting for business combinations, no
conditions exist which would preclude CVS from accounting for the Merger as a
pooling of interests. Revco has received from Arthur Andersen, LLP, its
independent accounting firm, a letter dated February 6, 1997, and addressed to
Revco to the effect that such firm believes that the acquisition of Revco by
CVS should be treated as a pooling of interests in conformity with GAAP, as
described in Accounting Principles Board Opinion No. 16.
Under the pooling of interests accounting method, the assets
and liabilities of Revco will be carried forward to CVS at their historical
recorded bases. Results of operations of CVS will include the results of both
CVS and Revco for the entire fiscal year in which the Merger occurs. The
reported balance sheet amounts and results of operations of the separate
companies for prior periods will be combined, reclassified and conformed, as
appropriate, to reflect the combined financial position and results of
operations for CVS. See "Unaudited Pro Forma Combined Condensed Financial
Statements".
Certain U.S. Federal Income Tax Consequences
Tax Opinion. Cravath, Swaine & Moore, tax counsel for Revco,
has provided an opinion that, among other things, neither Revco nor any of its
stockholders will recognize gain or loss for U.S. federal income tax purposes
as a result of the Merger (other than in respect of any cash received in lieu
of fractional shares).
In rendering such an opinion, Cravath, Swaine & Moore has
relied upon representations contained in letters from CVS and Revco delivered
for purposes of the opinion. The opinion of tax counsel is also based on the
assumption that the Merger will be consummated in accordance with the
provisions of the Merger Agreement. In addition, the opinion is based on the
conclusion that the Merger will constitute a "reorganization" within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended
(the "Code").
It is a condition to the consummation of the Merger that tax
counsel confirms the foregoing opinion at the Effective Time.
Certain Consequences of Reorganization Status. Provided that
the Merger constitutes a reorganization within the meaning of Section 368(a)
of the Code, for U.S. federal income tax purposes: (i) no gain or loss will
be recognized by the stockholders of Revco upon the receipt of the CVS Common
Stock in exchange for Revco Common Stock in the Merger; (ii) the aggregate
adjusted tax basis of the shares of CVS Common Stock to be received by a
stockholder of Revco in the Merger will be the same as the aggregated adjusted
tax basis in the shares of Revco Common Stock surrendered in exchange
therefor; (iii) the holding period of the shares of CVS Common Stock received
by a stockholder of Revco in exchange for the Revco Common Stock will include
the holding period of the shares of Revco Common Stock surrendered in exchange
therefor, provided that such shares of Revco Common Stock are held as capital
assets at the Effective Time; and (iv) a stockholder of Revco who receives
cash in lieu of a fractional share of CVS Common Stock would generally
recognize gain or loss equal to the difference, if any, between the amount
of cash received and such stockholder's adjusted tax basis in the
fractional share interest.
The foregoing discussion is intended only as a summary of the
material U.S. federal income tax consequences of the Merger and does not
purport to be a complete analysis or description of all potential tax effects
of the Merger. In addition, the discussion does not address all of the tax
consequences that may be relevant to particular taxpayers in light of their
personal circumstances or to taxpayers subject to special treatment under the
Code (for example, insurance companies, financial institutions, dealers in
securities, tax-exempt organizations, foreign corporations, foreign
partnerships or other foreign entities and individuals who are not citizens or
residents of the United States).
No information is provided herein with respect to the tax
consequences, if any, of the Merger under applicable foreign, state, local and
other tax laws. The foregoing discussion is based upon the provisions of the
Code, applicable Treasury regulations thereunder, Internal Revenue Service
rulings and judicial decisions, as in effect as of the date of this Joint
Proxy Statement/ Prospectus. There can be no assurance that future
legislative, administrative or judicial changes or interpretations will not
affect the accuracy of the statements or conclusions set forth herein. Any
such change could apply retroactively and could affect the accuracy of such
discussion. No rulings have or will be sought from the Internal Revenue
Service concerning the tax consequences of the Merger.
Each stockholder of Revco is urged to consult such
stockholder's own tax advisor as to the specific tax consequences to such
stockholder of the Merger under U.S. federal, state, local or any other
applicable tax laws.
Regulatory Matters
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended (the "HSR Act"), and the rules promulgated thereunder by the
Federal Trade Commission (the "FTC"), the Merger may not be consummated until
notifications have been given and certain information has been furnished to
the FTC and the Antitrust Division of the United States Department of Justice
(the "Antitrust Division") and specified waiting period requirements have been
satisfied. CVS and Revco have filed the required notification and report
forms under the HSR Act with the FTC and the Antitrust Division, and the
applicable waiting period commenced on February 19, 1997. On March 21, 1997
the FTC requested additional information from CVS and Revco relating to the
proposed merger. The FTC and the Antitrust Division have the authority to
challenge the Merger on antitrust grounds before or after the Merger is
completed. Each state in which CVS or Revco has stores may also review the
Merger under state antitrust law. Attorneys General in certain of these states
have indicated that they intend to review the Merger.
It is possible that some of these governmental authorities may
impose conditions for granting approval of the Merger, such as requiring CVS
or Revco to sell stores in certain locations. CVS and Revco have agreed to
use their best efforts to take whatever actions are required to obtain these
approvals. However, neither Revco nor CVS is required to accept any
governmental condition that requires CVS and/or Revco to sell stores with
aggregate fiscal year 1996 revenues of more than $400 million. (For
additional information on this commitment, see "The Merger Agreement--Certain
Covenants--Best Efforts; Antitrust Matters" on page 59.) We cannot predict
whether we will obtain the required regulatory approvals within the time frame
contemplated by the Merger Agreement or on terms that we find satisfactory.
Revco's pharmacists and pharmacy technicians are required to be
licensed by or registered with, as applicable, the appropriate state board of
pharmacy. Revco's stores and certain of Revco's distribution centers are also
registered with the Federal Drug Enforcement Administration. Many of Revco's
stores sell alcoholic beverages and are subject to various state and local
licensing requirements as a result. By virtue of these license and
registration requirements, certain governmental consents and approvals or
certain other related actions may be required in connection with the Merger.
While there can be no assurance that such consents, approvals or other
actions, if needed, could be obtained or could be obtained without expense,
delay or certain conditions being imposed by the appropriate regulators, CVS
does not believe that any license or registration material to the business of
the combined company will be adversely affected as a result of the Merger.
No Appraisal Rights
Holders of Revco Common Stock are not entitled to dissenters'
appraisal rights under Delaware law in connection with the Merger because the
Revco Common Stock was listed on the NYSE on the Revco Record Date and the
shares of CVS Common Stock that such holders will be entitled to receive in
the Merger will be listed on the NYSE at the Effective Time. Holders of CVS
Common Stock are not entitled to dissenters' appraisal rights under Delaware
law in connection with the Merger because CVS is not a constituent corporation
in the Merger.
Federal Securities Laws Consequences; Stock Transfer Restriction Agreements
This Joint Proxy Statement/Prospectus does not cover any
resales of the CVS Common Stock to be received by the stockholders of Revco
upon consummation of the Merger, and no person is authorized to make any use
of this Joint Proxy Statement/Prospectus in connection with any such resale.
All shares of CVS Common Stock received by Revco stockholders
in the Merger will be freely transferable, except that shares of CVS Common
Stock received by persons who are deemed to be "affiliates" of Revco under the
Securities Act of 1933, as amended (the "1933 Act"), at the time of the Revco
Meeting may be resold by them only in transactions permitted by Rule 145 or as
otherwise permitted under the 1933 Act. Persons who may be deemed to be
affiliates of Revco for such purposes generally include individuals or
entities that control, are controlled by, or are under common control with,
Revco and may include certain officers, directors and principal stockholders
of Revco. The Merger Agreement requires Revco to use its reasonable best
efforts to cause each of such affiliates to execute a written agreement to the
effect that such persons will not offer or sell or otherwise dispose of any of
the shares of CVS Common Stock issued to such persons in the Merger in
violation of the 1933 Act or the rules and regulations promulgated by the SEC
thereunder.
In addition, each of the affiliates of CVS and Revco as of the
date of the Merger Agreement has executed a written agreement prohibiting such
affiliate from selling, transferring or otherwise disposing of, or acquiring
or selling any options or other securities relating to securities of CVS or
Revco that would be intended to reduce such affiliate's risk relative to,
any shares of CVS Common Stock or Revco Common Stock beneficially owned by
such affiliate, during the period commencing 30 days prior to the Effective
Time and ending at such time as financial results covering at least 30 days
of combined operations of CVS and Revco have been publicly released by CVS
after the Merger (which release is required of CVS pursuant to the covenant
described under "The Merger Agreement--Certain Covenants--Certain Other
Covenants").
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION
CVS Common Stock and Revco Common Stock are listed on the NYSE.
The CVS ticker symbol on the NYSE is CVS. The Revco ticker symbol on the NYSE
is RXR.
The tables below set forth, for the calendar quarters
indicated, the reported high and low sale prices of CVS Common Stock and Revco
Common Stock as reported on the NYSE Composite Transaction Tape, in each case
based on published financial sources, and the dividends declared on such
stock.
<TABLE>
<CAPTION>
CVS Common Stock Revco Common Stock
---------------------------------- --------------------------------
Market Price Cash Market Price Cash
------------------- Dividends ------------------- Dividends
High Low Declared High Low Declared
----- -------- --------- ----- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
1994
First Quarter.......................... $40 5/8 $35 3/4 $0.38 $18 1/8 $13 7/8 -
Second Quarter......................... 41 5/8 37 1/8 0.38 19 14 3/8 -
Third Quarter.......................... 39 7/8 34 1/2 0.38 21 1/8 14 1/2 -
Fourth Quarter......................... 36 5/8 29 1/2 0.38 24 1/2 20 -
1995
First Quarter.......................... $37 1/2 $30 5/8 $0.38 $23 3/4 $17 1/2 -
Second Quarter......................... 39 7/8 33 5/8 0.38 25 3/8 20 1/2 -
Third Quarter.......................... 37 1/4 32 3/4 0.38 24 7/8 19 1/4 -
Fourth Quarter......................... 37 1/8 28 5/8 0.38 28 3/8 21 3/4 -
1996
First Quarter.......................... $36 3/8 $27 1/4 $0.11 $29 $27 1/2 -
Second Quarter......................... 44 1/2 35 1/4 0.11 27 5/8 22 3/8 -
Third Quarter(*)....................... 46 36 5/8 0.11 29 1/2 21 3/4 -
Fourth Quarter......................... 44 3/4 36 3/8 0.11 37 28 1/4 -
1997
First Quarter (through March 27, 1997) 48 39 $0.11 41 7/8 34 1/2 -
</TABLE>
__________
(*) On October 12, 1996, CVS completed the distribution of 100% of the common
stock of Footstar, Inc. ("Footstar") to CVS' stockholders. The CVS stock
prices shown in the table are actual CVS trading prices and do not reflect
any adjustment for the when-issued price of Footstar prior to October 16,
1996 (the date on which Footstar common stock commenced trading regular
way on the NYSE).
On February 6, 1997, the last full trading day prior to the
public announcement of the proposed Merger, the closing price on the NYSE
Composite Transaction Tape was $44 per share of CVS Common Stock and $38 per
share of Revco Common Stock. Certain of the prices set forth in the above
table may reflect the impact of several news articles relating to the merger
discussions between Revco and CVS. On _______, 1997, the most recent
practicable date prior to the printing of this Joint Proxy
Statement/Prospectus, the closing price on the NYSE Composite Transaction Tape
was $___ per share of CVS Common Stock and $___ per share of Revco Common
Stock. Stockholders are urged to obtain current market quotations prior to
making any decision with respect to the Merger.
CVS expects that the initial annualized dividend rate paid to
holders of CVS Common Stock after completion of the Merger will be $0.44 per
share. This is equal to the current annual dividend payment to CVS
stockholders. The payment of dividends by CVS in the future, however, will
depend on business conditions, CVS' financial condition and earnings and other
factors.
UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements,
including the notes thereto, are qualified in their entirety by reference to,
and should be read in conjunction with, the historical consolidated financial
statements of CVS and Revco, including the notes thereto, incorporated herein by
reference.
The unaudited pro forma condensed combined financial statements assume a
business combination between CVS and Revco accounted for on a pooling of
interests basis and are based on each company's respective historical audited
and unaudited consolidated financial statements and notes thereto, which are
incorporated herein by reference. The unaudited pro forma condensed combined
balance sheet combines CVS' consolidated condensed balance sheet as of December
31, 1996 and Revco's consolidated condensed balance sheet as of February 8, 1997
giving effect to the Merger as if it had occurred on December 31, 1996.
As permitted by SEC regulations, Revco's nine-month period ended February
10, 1996 has been omitted from the unaudited pro forma condensed combined
statements of operations. Revco's net sales, profit from operations and net
income were $3,457.0 million, $128.3 million and $44.6 million, respectively,
for this period. Revco paid no dividends during this period.
The pro forma information is presented for illustrative purposes only and
is not necessarily indicative of the operating results or financial position
that would have occurred if the Merger had been consummated at the beginning of
the earliest period presented, nor is it necessarily indicative of future
operating results or the future financial position of CVS.
26
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 FOR CVS
AND FISCAL YEARS ENDED MAY 28, 1994 AND JUNE 3, 1995
AND TWELVE MONTHS ENDED FEBRUARY 8, 1997, FOR REVCO
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CVS REVCO PRO FORMA COMBINED
------------------------------ ------------------------------ -------------------------------
1994 1995 1996 1994 1995 1996 1994 1995 1996
-------- -------- -------- -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales...................... $4,330.1 $4,865.0 $5,528.1 $2,504.0 $4,431.9 $5,575.3 $6,834.1 $9,296.9 $11.103.4
Cost of sales(1)............... 3,088.2 3,506.4 3,978.1 1,734.7 3,083.3 3,935.7 4,822.9 6,589.7 7,913.8
------- ------- ------- ------- ------- ------- ------- ------- --------
Gross profit................... 1,241.9 1,358.6 1,550.0 769.3 1,348.6 1,639.6 2,011.2 2,707.2 3,189.6
Selling, general and
administrative expense....... 1,058.1 1,184.4 1,250.4 661.5 1,156.1 1,375.8 1,719.6 2,340.5 2,626.2
Restructuring and non-recurring
charges(3)................... -- 165.6 -- -- -- 43.6 -- 165.6 43.6
------- ------- ------- ------- ------- ------- ------- ------- --------
Profit from continuing
operations(2)................ 183.8 8.6 299.6 107.8 192.5 220.2 291.6 201.1 519.8
------- ------- ------- ------- ------- ------- ------- ------- --------
Non-operating charges (income)
Interest income.............. (1.0) (0.3) (7.5) (1.0) (2.4) (0.6) (2.0) (2.7) (8.1)
Interest expense............. 31.8 53.8 30.7 24.3 57.6 54.4 56.1 111.4 85.1
Other -- net................. -- -- (127.0) -- -- -- -- -- (127.0)
------- ------- ------- ------- ------- ------- ------- ------- --------
30.8 53.5 (103.8) 23.3 55.2 53.8 54.1 108.7 (50.0)
------- ------- ------- ------- ------- ------- ------- ------- --------
Income from continuing
operations before income
taxes(2,3)................... 153.0 (44.9) 403.4 84.5 137.3 166.4 237.5 92.4 569.8
Income taxes................... 62.7 (18.4) 163.8 41.4 66.1 78.8 104.1 47.7 242.6
------- ------- ------- ------- ------- ------- ------- ------- --------
Income from continuing
operations(1,2,3)............ 90.3 (26.5) 239.6 43.1 71.2 87.6 133.4 44.7 327.2
Preferred stock dividends, net
of tax benefits.............. 17.0 17.0 14.5 -- -- -- 17.0 17.0 14.5
------- ------- ------- ------- ------- ------- ------- ------- --------
Income from continuing
operations available to
common shareholders(1)....... $ 73.3 $ (43.5) $ 225.1 $ 43.1 $ 71.2 $ 87.6 $ 116.4 $ 27.7 $ 312.7
======= ======= ======= ======= ======= ======= ======= ======= ========
Income per common share from
continuing
operations(2,3,4)............ $ 0.70 $ (.41) $ 2.12 $ 0.86 $ 1.11 $ 1.30 $ 0.77 $ 0.17 $ 1.86
------- ------- ------- ------- ------- ------- ------- ------- --------
Dividends paid per common
share........................ 1.52 1.52 0.44 -- -- -- 1.06 0.97 0.28
Weighted average number of
common shares
outstanding(4)............... 105.5 105.1 105.7 50.3 64.4 67.5 152.0 164.6 168.1
</TABLE>
- ---------------
(1) Revco's cost of sales and inventories have been restated from LIFO to FIFO
in order to reflect CVS' intention to conform the accounting method for the
combined inventories. The impact of the restatement was to reduce cost of
sales and to increase inventories by $7.3 million in 1994, $16.8 million in
1995 and $23.6 million in 1996, increase income from continuing operations
and income from continuing operations available to common shareholders by
$4.4 million in 1994, $10.1 million in 1995 and $14.2 million in 1996 and to
increase pro forma income per common share from continuing operations by
$.03 in 1994, $.06 in 1995, and $.08 in 1996.
(2) In 1995, restructuring charges and a change in accounting estimate for CVS
reduced profit from continuing operations by $203.4 million, income from
continuing operations by $120.0 million and pro forma combined income per
common share from continuing operations by $.73.
(3) In 1996, non-recurring charges for Revco reduced profit from operations by
$43.6 million, income from continuing operations by $25.1 million and pro
forma combined income per common share from continuing operations by $.15.
(4) Pursuant to the terms of the Merger Agreement, Revco stockholders will
receive between 0.8837 and 1.0097 shares of CVS Common Stock for each share
of Revco Common Stock they hold. If Revco stockholders were to receive
0.8837 shares of CVS Common Stock per Revco share, pro forma combined income
per common share from continuing operations would be $.78 in 1994, $.17 in
1995 and $1.89 in 1996. Pro forma combined dividends paid per share would be
$1.07 in 1994, $.99 in 1995 and $.28 in 1996. If Revco stockholders were to
receive 1.0097 shares of CVS Common Stock per Revco share, pro forma
combined income per common share from continuing operations would be $.74 in
1994, $.16 in 1995 and $1.80 in 1996. Pro forma combined dividends paid per
share would be $1.03 in 1994, $.94 in 1995 and $.27 in 1996.
See accompanying notes to unaudited pro forma condensed combined financial
statements.
27
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 1996
(IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
HISTORICAL
----------------- PRO FORMA PRO FORMA
CVS REVCO ADJUSTMENTS COMBINED
------- ------- ----------- -------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents.................... $ 423.9 $ 17.9 $ $ 441.8
Investments.................................. 179.4 -- 179.4
Accounts receivable, net..................... 160.8 202.9 363.7
Inventories.................................. 1,031.4 1,297.0 72.1(1) 2,400.5
Prepaid expenses............................. 177.2 22.0 199.2
------- ------- ---- -------
Total current assets...................... 1,972.7 1,539.8 72.1 3,584.6
Property and equipment....................... 606.5 420.2 1,026.7
Deferred charges and other assets............ 131.9 123.9 255.8
Goodwill, net................................ 120.7 769.5 890.2
------- ------- ---- -------
Total assets.............................. $2,831.8 $2,853.4 $72.1 $5,757.3
======= ======= ==== =======
LIABILITIES
Accounts payable............................. $ 507.7 $ 566.1 $ $1,073.8
Accrued expenses............................. 674.2 408.6 53.8(3,6) 1,136.6
------- ------- ---- -------
Total current liabilities................. 1,181.9 974.7 53.8 2,210.4
Long-term debt............................... 303.7 925.4 1,229.1
Long-term liabilities........................ 101.1 45.5 146.6
Total shareholders' equity................... 1,245.1 907.8 18.3(1-6) 2,171.2
------- ------- ---- -------
Total liabilities and shareholders'
equity.................................. $2,831.8 $2,853.4 $72.1 $5,757.3
======= ======= ==== =======
</TABLE>
- ---------------
1 Revco's inventories were increased by $72.1 million to reflect CVS' intention
to conform Revco's accounting treatment for inventories (LIFO) to that of CVS'
(FIFO).
2 Revco's treasury stock, at cost, was retired and charged to paid-in-capital.
3 The tax effect of the change from LIFO to FIFO, as explained in 1 above, is
reflected in accrued expenses.
4 Common stock was increased by $.6 million to record the CVS common stock that
will be issued in the merger and was decreased by $.7 million to record the
Revco common stock that will be retired as a result of the merger.
5 Additional paid-in capital was adjusted for the effect of pro forma
adjustments 2 and 4 above.
6 Accrued expenses and retained earnings were adjusted by $25 million (after
tax) for merger related fees and expenses.
See accompanying notes to unaudited pro forma condensed combined financial
statements.
28
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The unaudited pro forma condensed combined statements of operations combine
the historical statements of operations of CVS for the years ended December 31,
1994, 1995 and 1996 with the historical statements of operations of Revco for
the fiscal years ended May 28, 1994 and June 3, 1995 and for its twelve months
ended February 8, 1997.
CVS' fiscal year ends December 31, while Revco's fiscal year ends on the
Saturday closest to May 31. As a result, the unaudited pro forma financial
information for the year ended December 31, 1996 includes Revco's financial
statements conformed to CVS' fiscal year end.
Except for converting Revco's financial information from the LIFO method of
accounting for inventories to the FIFO method used by CVS, no adjustments have
been made in these pro forma condensed combined financial statements to conform
the accounting policies of the combining companies. The nature and extent of
other such adjustments, if any, are not expected to be significant.
The calculation of pro forma income from continuing operations per common
share uses the weighted average number of common shares outstanding, including
common share equivalents.
NOTE 2. PRO FORMA NUMBER OF SHARES OUTSTANDING
The number of shares of CVS common stock that will be issued in the merger
in exchange for the outstanding shares of Revco common stock assumes an Exchange
Ratio of .9237 shares of CVS common stock, based on an assumed average closing
price of CVS common stock of $44, which was the closing price of CVS Common
Stock on February 6, 1997. The following table sets forth the pro forma number
of shares to be outstanding after completion of the Merger based on the number
of shares of CVS Common Stock outstanding as of December 31, 1996:
<TABLE>
<CAPTION>
(MILLIONS)
----------
<S> <C>
Number of shares of Revco common stock outstanding as of March 21,
1997............................................................. 67.7
Exchange Ratio..................................................... .9237
-----
Number of shares of CVS common stock issued in the Merger.......... 62.5
Number of shares of CVS common stock outstanding as of December 31,
1996............................................................. 106.6
-----
Number of shares of CVS common stock outstanding after completion
of the Merger.................................................... 169.1
=====
</TABLE>
NOTE 3. MERGER-RELATED EXPENSES
It is estimated that merger related costs of approximately $275 million
(after tax), will be incurred for severance and other integration-related
expenses, including the elimination of duplicate facilities and excess capacity,
organizational realignment and related work force reductions. It is anticipated
that approximately $125 million (after tax), relates to asset write-offs
(non-cash charges) while the remainder relates to cash charges. The pro forma
statements of operations and the pro forma balance sheet do not reflect the
impact of these charges because the estimates are preliminary and therefore
subject to change. These costs will be charged to operations as a non-recurring
charge in the quarter the merger occurs.
It is estimated that merger related fees and expenses, consisting primarily
of transaction costs for fees of investment bankers, attorneys and accountants,
and financial printing and other related charges, will be approximately $25
million (after tax). The impact of these fees and expenses have been reflected
as a reduction of pro forma shareholders' equity. These charges are not
reflected in the pro forma statements of operations or the pro forma combined
per share data.
NOTE 4. DIVIDENDS
The pro forma combined dividends paid per common share are not necessarily
indicative of dividends to be paid to holders of CVS common stock in future
periods. It is the current intention of the CVS Board to declare quarterly cash
dividends following the merger initially in the amount of $.11 per share of CVS
common stock. Future dividends will be determined by the CVS Board in light of
the earnings and financial condition of CVS and its subsidiaries and other
factors. See "Comparative Per Share Market Price and Dividend Information".
29
ROLE OF FINANCIAL ADVISORS
In connection with the proposed Merger, we retained financial
advisors to assist us and our respective Boards in our evaluation of
valuation, financial and other matters relating to the transactions
contemplated by the Merger Agreement. In this regard, CVS retained DLJ and
Credit Suisse First Boston Corporation ("CS First Boston") as its financial
advisors, and Revco retained Wasserstein Perella and Salomon as its financial
advisors. In addition, Zell/Chilmark retained Merrill Lynch & Co. as its
financial advisor. Revco initially retained Wasserstein Perella in November
1996 to conduct a valuation of Revco and an analysis of its strategic options,
as well as to advise it in connection with evaluating, structuring and
negotiating any potential business combination. As a transaction with CVS
became more likely, Revco also retained Salomon on January 29, 1997 to advise
it and to provide a second fairness opinion in connection with the Merger in
view of Salomon's previous relationship as a financial advisor to Revco,
including having acted as financial advisor to Revco in connection with
Revco's acquisition of Big B. Each of CVS and Revco entered into engagement
letter agreements with its respective financial advisors providing for
customary fee, expense reimbursement and indemnification terms.
The financial advisors of CVS and Revco assisted in conducting
the due diligence investigation of the other company and advised the
respective management and Board in relation to the structure and terms of the
Merger and the negotiation of the Merger Agreement.
In deciding to approve the Merger, our Boards considered
opinions from our respective financial advisors as to the fairness of the
Exchange Ratio to our respective stockholders from a financial point of view.
CVS received an opinion from DLJ, and Revco received separate opinions from
Wasserstein Perella and Salomon. These opinions are described below and are
attached as Annexes B, C and D to this Joint Proxy Statement/Prospectus. We
encourage you to read these opinions. None of our financial advisors has
given any opinion or recommendation as to the form or amount of the merger
consideration or as to how stockholders should vote.
Opinion of CVS Financial Advisor
CVS engaged DLJ to act as one of its financial advisors in
connection with the transactions contemplated by the Merger Agreement based
upon DLJ's qualifications, expertise and reputation, as well as DLJ's prior
investment banking relationship and familiarity with CVS and Revco. On
February 4, 1997, DLJ rendered an oral opinion to the CVS Board, which was
confirmed by delivery of its written opinion dated February 6, 1997 (the "DLJ
Opinion"), to the effect that, as of such date, and based upon and subject to
the assumptions, limitations and qualifications set forth in such opinion, the
Exchange Ratio was fair to the holders of CVS Common Stock from a financial
point of view.
The full text of the DLJ Opinion is set forth as Annex B to
this Joint Proxy Statement/Prospectus and should be read carefully in its
entirety for assumptions made, procedures followed, other matters considered
and limits of the review by DLJ. The DLJ Opinion was prepared for the CVS
Board and addresses only the fairness of the Exchange Ratio to the holders of
CVS Common Stock from a financial point of view and does not constitute a
recommendation to any stockholder of CVS as to how such stockholder should
vote at the Special Meeting.
The DLJ Opinion does not constitute an opinion as to the price
at which CVS Common Stock will actually trade at any time. The type and
amount of consideration was determined in arm's length negotiations between CVS
and Revco in which negotiations CVS was advised by DLJ. No restrictions or
limitations were imposed upon DLJ with respect to the investigations made or
procedures followed by DLJ in rendering its opinion.
In arriving at its opinion, DLJ reviewed the February 4, 1997
draft of the Merger Agreement, including exhibits thereto, as well as
financial and other information that was publicly available or furnished to it
by CVS and Revco, including information provided during discussions with their
respective managements. Included in the information provided during
discussions with the respective managements were certain internal financial
analyses and forecasts for CVS and Revco prepared by their respective
managements. In addition, DLJ compared certain financial and securities data
of CVS and Revco with that of various other companies whose securities are
traded in public markets, reviewed the historical stock prices and trading
volumes of the Revco Common Stock and CVS Common Stock, reviewed prices and
premiums paid in certain other business combinations and conducted such other
financial studies, analyses and investigations as DLJ deemed appropriate for
purposes of rendering its opinion.
In rendering its opinion, DLJ relied upon and assumed the
accuracy and completeness of all of the financial and other information that
was available to it from public sources or that was provided to or discussed
with it by CVS and Revco or their respective representatives. DLJ relied upon
the estimates of the management of CVS of the cost savings (the "Cost
Savings") achievable as a result of the Merger. DLJ also assumed that the
financial analyses and forecasts regarding CVS and Revco supplied by their
respective managements to DLJ were reasonably prepared on a basis reflecting
the best currently available estimates and judgments of the management of CVS
and Revco, respectively, as to the future operating and financial performance
of CVS and Revco, respectively.
The DLJ Opinion is necessarily based on economic, market,
financial and other conditions as they existed on, and on information made
available to DLJ as of, the date of the DLJ Opinion. DLJ does not have any
obligation to update, revise or reaffirm its opinion.
The following is a summary of the analyses contained in the
materials presented by DLJ to the CVS Board at its February 4, 1997 meeting in
connection with the DLJ Opinion. All analyses discussed below, unless
otherwise indicated, (i) exclude Cost Savings estimated by CVS management of
$50.0 million, $100.0 million and $105.0 million for the fiscal years ended
December 31, 1997, 1998 and 1999, respectively and (ii) assume the Exchange
Ratio is calculated using an average CVS Common Stock closing price of
$42.625, based on the closing price of the CVS Common Stock on January 20,
1997.
Common Stock Performance Analysis. DLJ's analysis of the
performance of CVS Common Stock consisted of an historical analysis of closing
prices and trading volumes for the 120 trading days ended February 3, 1997.
For dates prior to October 16, 1996, the closing price of CVS Common Stock was
adjusted to exclude the value of the Footstar common stock spun-off to holders
of CVS Common Stock on October 16, 1996, using the ratio of 0.2879 shares of
Footstar for each CVS share and the October 16, 1996 Footstar common stock
closing price of $21.00. In the 120 trading days ended February 3, 1997, CVS
Common Stock reached a high of $44.63 per share and a low of $36.20 per share.
On February 3, 1997, the closing price of CVS Common Stock of $44.63 per share
represented the high closing price of such range. In the 120 trading days
ended February 3, 1997, CVS Common Stock outperformed the S&P 400.
DLJ's analysis of the performance of Revco Common Stock
consisted of an historical analysis of closing prices and trading volumes for
the 120 trading days ended February 3, 1997. In the 120 trading days ended
February 3, 1997, Revco Common Stock reached a high of $39.25 per share and a
low of $25.50 per share. On February 3, 1997, the closing price of Revco
Common Stock of $38.00 per share was at the high end of such range. In the
120 trading days ended February 3, 1997, Revco Common Stock has outperformed
CVS, Common Stock, the S&P 400 and a comparable company index that includes
Rite Aid, Walgreen's, Longs Drug Stores Corporation ("Longs Drug Stores") and
Arbor Drugs, Inc. ("Arbor Drugs"). While DLJ noted that the Merger is
intended to qualify for pooling of interests accounting treatment, DLJ advised
the CVS Board that the DLJ Opinion was not based on the assumption that the
Merger will be treated as a pooling of interests, and DLJ also analyzed the pro
forma effects on CVS' EPS which would result from the Merger if accounted for
as a purchase transaction. The analysis indicated that the Merger, accounted
for as a purchase transaction, with the benefit of the Cost Savings but
excluding one-time Merger related pre-tax expenses of $498 million, would be
expected to be dilutive to CVS' stand-alone EPS by 2.8% for the fiscal year
ending December 31, 1997 and accretive to CVS' stand-alone EPS by 5.1% and
10.7% for the fiscal years ending December 31, 1998 and 1999, respectively.
DLJ also analyzed the historical relationship between the
trading prices of CVS Common Stock and Revco Common Stock over several time
periods. For each period selected, the high, low and average ratios of the
closing price of Revco Common Stock to that of CVS Common Stock were
calculated. The time periods (ending on February 3, 1997) selected for
analysis were as follows: last 120 trading days, last 60 trading days, last 30
trading days and last 10 trading days. The average ratios of the closing
price of Revco Common Stock to that of CVS Common Stock for each
aforementioned time period were 0.790, 0.859, 0.878, and 0.887, respectively.
EPS Impact Analysis. DLJ analyzed the pro forma effects on the
earnings per share ("EPS") resulting from the Merger, including, without
independent verification, the Cost Savings forecasted by the management of CVS
in each of CVS' projected fiscal years ending December 31, 1997, 1998 and
1999. This analysis is based on a number of assumptions, including, among
other things, the cost of integrating the operations of CVS and Revco,
estimated amounts and timing of the Cost Savings, the projected financial
performance of CVS and Revco and prevailing interest rates. The analysis
indicated that the Merger, accounted for as a pooling of interests, with the
benefit of the Cost Savings but excluding one-time Merger related expenses, is
anticipated to be accretive to CVS' stand-alone EPS estimates by 6.7%, 12.0%
and 14.4% for the fiscal years ending December 1997, 1998 and 1999,
respectively.
Premium Analysis. DLJ compared the premium represented by the
Exchange Ratio to premiums offered in acquisitions of $1.0 billion to $5.0
billion in size ("Comparable Acquisitions") from January 1, 1995 through the
date of the DLJ Opinion. DLJ's analysis indicated that for the Comparable
Acquisitions surveyed, the average premiums to the market price one day, one
week and one month prior to announcement were 34.0%, 39.8% and 43.1%,
respectively, for pooling of interests transactions, and 32.2%, 34.5% and
41.0%, respectively, for all transactions. As compared to the above premiums,
the Exchange Ratio represented: a 1.9% premium to the trading price one day
prior to the January 27, 1997 announcement that CVS and Revco were in
discussions with respect to a possible transaction, a 5.6% premium to the
trading price one week prior to such announcement and a 12.7% premium to the
trading price one month prior to such announcement.
Relative Contribution Analysis. DLJ analyzed the relative
contributions of CVS and Revco to the revenues, net earnings before interest,
taxes, depreciation and amortization ("EBITDA"), net earnings before interest
and taxes ("EBIT") and net income of the combined entity for the estimated
calendar year 1996 and the projected calendar years 1997 and 1998. Based on
the latest estimated financial information for the calendar year 1996, Revco's
revenues, EBITDA, EBIT and net income represent 52.6%, 50.7%, 45.0%, and
40.3%, respectively, of the combined entity. Based on the projected financial
information for the calendar year 1997, Revco's revenues, EBITDA, EBIT and net
income represent 51.8%, 48.3%, 41.9% and 36.5%, respectively, of the combined
entity. Based on the projected financial information for the calendar year
1998, Revco's revenues, EBITDA, EBIT and net income represent 51.7%, 48.1%,
41.8% and 36.6%, respectively, of the combined entity. The shares of CVS
Common Stock (including shares underlying all outstanding options, calculated
using the treasury method) to be issued to the holders of Revco Common Stock
represent approximately 36.7% of the outstanding shares of CVS Common Stock
after giving effect to the Merger, based on the number of shares of CVS and
Revco common stock outstanding as of January 31, 1997.
Comparable Company Analysis. To provide contextual data and
comparative market information, DLJ analyzed the operating performance of CVS
and Revco relative to four retail drugstore companies whose securities are
publicly traded and that are deemed by DLJ to be reasonably comparable to CVS
and Revco. These companies are Walgreen's, Rite Aid, Longs Drug Stores and
Arbor Drugs (the "Comparable Companies"). Historical financial information
used in connection with the ratios provided below with respect to the
Comparable Companies is as of the most recent financial statements publicly
available for each company as of February 3, 1997.
DLJ analyzed the relative performance and value for CVS and
Revco by comparing certain market trading statistics for CVS and Revco with
those of the Comparable Companies. DLJ examined certain publicly available
financial data of the Comparable Companies, including enterprise value
(defined as market value of common equity plus book value of total debt and
preferred stock less cash) as multiples of latest 12 months ("LTM") revenues,
EBITDA, EBIT and price to earnings ratios ("P/E") based on estimated EPS for
the calendar years ending 1996 and 1997. DLJ analyzed the implied multiples
for Revco at the Exchange Ratio with and without including the Cost Savings.
DLJ noted that as of February 3, 1997, the Comparable Companies were trading
at implied multiples of enterprise value and earnings, as the case may be, in
(i) a range of 0.3x to 0.8x (with an average, excluding the high and low (the
"Average"), of 0.6x) LTM revenues compared to 0.6x for Revco at the Exchange
Ratio and 0.9x for CVS; (ii) a range of 6.8x to 13.2x (with an Average of
10.0x) LTM EBITDA compared to 9.9x for Revco at the Exchange Ratio (7.8x
including the Cost Savings) and 13.0x for CVS; (iii) a range of 9.9x to 17.0x
(with an Average of 13.8x) LTM EBIT compared to 15.6x for Revco at the
Exchange Ratio (11.0x including the Cost Savings) and 16.1x for CVS; (iv) a
range of 16.4x to 26.4x estimated 1996 calendar year EPS compared to 28.1x for
Revco at the Exchange Ratio (17.5x including the Cost Savings) and 31.9x for
CVS; and (v) a range of 15.1x to 23.2x (with an Average of 19.2x) estimated
1997 calendar year EPS compared to 24.2x for Revco (15.9x including the Cost
Savings) and 23.4x for CVS. EPS estimates for CVS, Revco and the Comparable
Companies were based on estimates provided by CVS, Revco and First Call
Research Direct, respectively.
No company utilized in the comparable company analysis is
identical to CVS or Revco. Accordingly, an analysis of the results of the
foregoing necessarily involves complex considerations and judgments concerning
differences in financial and operating characteristics of CVS and Revco and
other factors that could affect the public trading value of the Comparable
Companies or company to which they are being compared. Mathematical analysis
such as determining the average is not in itself a meaningful method of using
comparable company data.
Comparable Transaction Analysis. DLJ also performed an
analysis of selected merger and acquisition transactions in the retail
drugstore industry. Multiples of (i) aggregate transaction value (defined as
the equity value of the offer plus book value of total debt and preferred
stock less cash) to revenues, EBITDA and EBIT and (ii) aggregate purchase
price (defined as the equity value of the offer) to net income and tangible
book value were compared with multiples paid or implied in certain other
merger and acquisition transactions involving public retail drugstore
companies from 1994 through 1996. The comparison included a total of seven
transactions including: Thrift Drug and Eckerd (pending); Rite Aid and Thrifty
Payless; Revco and Big B (revenue and book value only); Thrift Drug and Fay's
Drug ("Fay's"); Rite Aid and Revco (terminated); Rite Aid and Perry Drug
Stores; and Revco and Hook-SupeRx, Inc. ("HSI"). DLJ noted that the implied
multiples of aggregate transaction value and aggregate purchase price, as the
case may be, for these transactions were in (i) a range of 0.3x to 0.6x (with
an Average of 0.4x) LTM revenues compared to 0.6x for Revco at the Exchange
Ratio; (ii) a range of 8.1x to 10.6x (with an Average of 9.3x) LTM EBITDA
compared to 9.9x for Revco at the Exchange Ratio (7.8x including the Cost
Savings); (iii) a range of 13.1x to 19.8x (with an Average of 15.5x) LTM EBIT
compared to 15.6x for Revco at the Exchange Ratio (11.0x including the Cost
Savings); (iv) a range of 21.3x to 52.7x (with an Average of 31.2x) LTM net
income compared to 28.1x for Revco at the Exchange Ratio (17.5x including the
Cost Savings); and (v) a range of 1.9x to 5.3x (with an Average of 3.4x) LTM
book value per share compared to 3.1x for Revco at the Exchange Ratio.
No transaction utilized in the comparable transaction analysis
is identical to the Merger. Accordingly, an analysis of the results of the
foregoing necessarily involves complex considerations and judgments concerning
differences in financial and operating characteristics of CVS and Revco and
other factors that could affect the acquisition value of the companies to
which they are being compared. Mathematical analysis such as determining the
average is not itself a meaningful method of using comparable transaction
data.
Discounted Cash Flow Analysis. In addition, DLJ performed a
discounted cash flow ("DCF") analysis for the five-year period ending with the
2001 fiscal year on the stand-alone unlevered free cash flows of CVS and
Revco, based upon financial projections provided by the respective
managements of each company. Unlevered free cash flows were calculated as
the after-tax operating earnings of CVS and Revco, respectively, plus
depreciation and amortization and other non-cash items, plus (or minus) net
changes in working capital, minus projected capital expenditures. DLJ
calculated terminal values by applying a range of estimated EBITDA
multiples of 8.0x to 11.0x to the projected unlevered free cash flows of
CVS and Revco, respectively, in fiscal year 2001. The unlevered free cash
flows and terminal values were then discounted to the present using a range
of discount rates of 10.0% to 12.0% representing an estimated range of the
weighted average cost of capital (the "WACC") of each of CVS and Revco.
Based on this analysis, DLJ calculated per share equity values of CVS
ranging from $35.83 to $51.84 and of Revco ranging from $35.29 to $57.48
and ratios of Revco DCF value to CVS DCF value ranging from 0.985 to 1.109.
The summary set forth above does not purport to be a complete
description of the analyses performed by DLJ, but describes, in summary form,
the principal elements of the analyses contained in the materials presented by
DLJ to the CVS Board in connection with the DLJ Opinion. The preparation of a
fairness opinion involves various determinations as to the most appropriate
and relevant methods of financial analysis and the application of these
methods to the particular circumstances and, therefore, such an opinion is not
readily susceptible to summary description. Each of the analyses conducted by
DLJ was carried out in order to provide a different perspective on the
transaction and add to the total mix of information available. DLJ did not
form a conclusion as to whether any individual analysis, considered in
isolation, supported or failed to support an opinion as to fairness from a
financial point of view. Rather, in reaching its conclusion, DLJ considered
the results of the analyses in light of each other and ultimately reached its
opinion based on the results of the analyses taken as a whole. DLJ did not
place particular reliance or weight on any individual factor, but instead
concluded that its analyses, taken as a whole, supported its determination.
Accordingly, notwithstanding the separate factors summarized above, DLJ
believes that its analyses must be considered as a whole and that selecting
portions of its analysis and the factors considered by it, without considering
all analyses and factors, could create an incomplete or misleading view of the
evaluation process underlying its opinion. In performing its analyses, DLJ
made numerous assumptions with respect to industry performance, business and
economic conditions and other matters, including the continuing shift in the
U.S. private healthcare system toward managed care plans, the ongoing
consolidation trend in the chain drugstore industry and the absence of any
material change in the competitive environment in the retail drug industry or
U.S. economic conditions, generally. The analyses performed by DLJ are not
necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses.
DLJ was selected to render an opinion in connection with the
Merger based upon DLJ's qualifications, expertise and reputation, including
the fact that DLJ, as part of its investment banking business, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, underwritings, sales and distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes.
Pursuant to a letter agreement between CVS and DLJ dated
February 4, 1997 (the "DLJ Engagement Letter"), DLJ is entitled to (i) a
retainer fee of $500,000 payable upon execution of the DLJ Engagement Letter,
(ii) a fee of $500,000 payable at the time DLJ delivers its opinion to the CVS
Board and (iii) a transaction fee equal to $9.0 million less the sum of the
amounts paid pursuant to clauses (i) and (ii) above, payable upon consummation
of the Merger. In addition, CVS has agreed to reimburse DLJ for its
out-of-pocket expenses including reasonable fees and expenses of its counsel
(up to a limit of $100,000 for such reimbursement of expenses), and to
indemnify DLJ for certain liabilities and expenses arising out of the Merger
or the transactions in connection therewith, including liabilities under
federal securities laws. The terms of the fee arrangement with DLJ, which DLJ
and CVS believe are customary in transactions of this nature, were negotiated
at arm's length between CVS and DLJ and the CVS Board was aware of such
arrangement, including the fact that a significant portion of the aggregate
fee payable to DLJ is contingent upon consummation of the Merger.
DLJ provides a full range of financial, advisory and brokerage
services and in the course of its normal trading activities may from time to
time effect transactions and hold positions in the securities or options on
the securities of Revco and/or CVS for its own account and for the account of
customers. Over the past two years, DLJ has co-managed a $201.5 million
initial public offering for CVS' former subsidiary, Linens 'n Things, Inc.
("Linens 'n Things") for which it received usual and customary
compensation. DLJ has also acted as financial advisor (or in a comparable
capacity) in various other transactions for Zell/Chilmark, the largest
single shareholder of Revco.
Opinions of Revco's Financial Advisors
Opinion of Wasserstein Perella
The Revco Board retained Wasserstein Perella to provide certain
investment banking advice and services in connection with a possible business
combination between Revco and CVS. Wasserstein Perella was not requested to
recommend the amount of consideration to be received by Revco stockholders; it
was requested to evaluate, among other things, the fairness of the
consideration to be received, which was determined by negotiation between
Revco and CVS.
Wasserstein Perella made presentations to the Revco Board on
two occasions, with respect to the CVS $36 Proposal and with respect to the
Merger. Wasserstein Perella attended a meeting of the Revco Board on December
3, 1996 and reviewed with the members of the Board certain information
relating to the CVS $36 Proposal. The presentation to the Revco Board
included a summary of the CVS $33 Presentation, a summary and analysis of the
CVS $36 Proposal, various financial analyses of Revco and CVS, an analysis of
the business of Revco, a discussion of developments in the chain drugstore
industry and selected strategic options available to Revco. A summary of
Wasserstein Perella's December 3, 1996 presentation is set forth below under
"Summary and Analysis of the CVS $36 Proposal".
At such meeting, Wasserstein Perella informed the Revco Board
that, in its judgment, the CVS $36 Proposal would not be fair from a financial
point of view to the holders of Revco Common Stock. Wasserstein Perella noted
that, in its judgment, based upon the full range of analyses described below,
a reference range for a cash and stock transaction structured similarly to the
CVS $36 Proposal would be $41.00 to $46.00 per share of Revco Common Stock.
Wasserstein Perella advised the Revco Board that it was not asked to and had
not solicited third-party indications of interest in acquiring all or any part
of Revco, and that the responses (or lack thereof) to such a solicitation or
"market check" could have an effect on its views of an appropriate reference
range.
On January 5, 1997, CVS described to Revco the CVS $40
Proposal, which provided for a combination of the two companies in which the
consideration would be paid entirely in CVS Common Stock in a pooling
transaction.
Following the January 27, 1997 public statement by Revco and
CVS confirming that they were engaged in merger discussions, Wasserstein
Perella contacted selected third parties (including certain leading drugstore,
supermarket and discount store operators determined by Wasserstein Perella in
consultation with the management of Revco to be appropriate under the
circumstances) to inquire whether they had any interest in acquiring all or
any substantial part of Revco. None of such parties indicated an interest in
pursuing a transaction with Revco at that time.
At a meeting of the Revco Board on February 4, 1997,
Wasserstein Perella advised the members of the Revco Board that the value of
the CVS $40 Proposal calculated using the Exchange Ratio and the closing
prices for Revco Common Stock and CVS Common Stock on January 31, 1997 (the
last trading day prior to the time of calculation) was $40.29 for each share
of Revco Common Stock. Wasserstein Perella participated in certain
negotiations of the terms of the proposal and advised management of Revco with
respect thereto.
At such meeting, Wasserstein Perella delivered its oral opinion
to the Revco Board, which opinion was subsequently confirmed by Wasserstein
Perella's written opinion dated February 6, 1997 (collectively, the
"Wasserstein Perella Opinion"), to the effect that, as of the date of such
opinion and based upon the assumptions specified in the Wasserstein Perella
Opinion, the Exchange Ratio is fair, from a financial point of view, to the
holders of Revco Common Stock. Wasserstein Perella also presented to the
Revco Board the analyses described below.
A copy of the Wasserstein Perella Opinion is attached as Annex
C to this Joint Proxy Statement/Prospectus. Stockholders are urged to read
the Wasserstein Perella Opinion in its entirety for information with respect
to the procedures followed, assumptions made, matters considered and limits of
the review by Wasserstein Perella in rendering its opinion. References to the
Wasserstein Perella Opinion herein and the summary of the Wasserstein Perella
Opinion set forth below are qualified by reference to the full text of the
Wasserstein Perella Opinion, which is incorporated herein by reference. The
Wasserstein Perella Opinion is directed only to the fairness from a financial
point of view to the Revco stockholders of the Exchange Ratio and it does not
address any other aspect of the Merger. The Wasserstein Perella Opinion does
not constitute a recommendation to any stockholder with respect to whether to
vote in favor of the Merger and should not be relied upon by any stockholder
as such.
In connection with arriving at its opinion, Wasserstein Perella
reviewed, among other things, (i) drafts of the Merger Agreement, the
stockholder agreement between CVS and Zell/Chilmark and the registration
rights agreement between CVS and such persons as are "affiliates" of Revco for
purposes of Rule 145 under the 1933 Act; (ii) certain publicly available
business and financial information with respect to each of CVS and Revco,
including publicly available consolidated financial statements of each of CVS
and Revco, in each case, for recent years and interim periods that were
available as of the date of the Wasserstein Perella Opinion; (iii) certain
internal financial and operating information, including financial forecasts,
analyses and projections prepared by or on behalf of Revco and CVS and
provided by or on behalf of the managements of CVS and Revco to Wasserstein
Perella for purposes of its analysis; (iv) certain financial and stock market
data relating to Revco and CVS, and compared such data with similar data for
certain other companies, the securities of which are publicly traded, that
Wasserstein Perella believed to be relevant or comparable in certain respects
to Revco or CVS or both or one or more of their businesses or assets; and (v)
the financial terms of certain recent acquisitions and business combination
transactions in the chain drugstore industry specifically, and in other
industries generally, which Wasserstein Perella believed to be relevant to its
inquiry.
Wasserstein Perella had discussions with the managements of
Revco and CVS and their representatives concerning the respective businesses,
operations, assets, financial condition and future prospects of Revco and CVS.
Wasserstein Perella also performed such studies, analyses and investigations
and reviewed such other information as it considered appropriate for purposes
of arriving at and preparing the Wasserstein Perella Opinion.
In conducting its analyses and arriving at its opinion,
Wasserstein Perella assumed and relied upon the accuracy and completeness of
all financial and other information that was provided to or discussed with it
or was publicly available, and did not assume any responsibility for
independent verification of such information. Wasserstein Perella also relied
upon the reasonableness and accuracy of the financial projections, forecasts
and analyses provided to it and assumed that all financial projections,
analyses and forecasts provided by CVS and Revco were prepared in good faith
and on bases reflecting the best currently available judgments and estimates of
CVS' and Revco's respective managements. Wasserstein Perella did not express
any opinion with respect to such projections, forecasts and analyses or the
assumptions upon which they are based. In addition, Wasserstein Perella did
not review any of the books and records of Revco or CVS, except as described
above, or assume any responsibility for conducting a physical inspection of
the properties or facilities of Revco or CVS, or for making or obtaining an
independent valuation or appraisal of the assets or liabilities of Revco or
CVS, and Wasserstein Perella was not provided with any such independent
valuation or appraisal. Wasserstein Perella noted that the Merger is intended
to qualify (i) for pooling of interests accounting treatment in accordance
with generally accepted accounting principles and (ii) as a reorganization
within Section 368(a) of the Internal Revenue Code of 1986, as amended (a
"Reorganization"), and Wasserstein Perella assumed that the Merger will
qualify as a Reorganization. Notwithstanding the foregoing, Wasserstein
Perella advised the Revco Board that the Wasserstein Perella Opinion would not
be adversely affected if the Merger did not qualify for pooling of interests
accounting treatment. Wasserstein Perella also assumed that the transactions
described in the Merger Agreement would be consummated on the terms set forth
therein, without material waiver or modification.
Wasserstein Perella's valuation analyses of Revco necessarily
required it to make a broad range of subjective judgments as to appropriate
comparable companies and acquisitions and appropriate multiples of various
selected financial data and appropriate discount rates. Such judgments also
were required in selecting appropriate analyses for the purposes of arriving
at its opinion. Wasserstein Perella relied upon its experience in valuing
retail and other companies to select data that enabled it to perform valuation
analyses that adequately evaluated Revco and the Merger, as the case may be,
as well as to select appropriate analyses for the purpose of arriving at its
opinion.
Wasserstein Perella's opinion was necessarily based on economic
and market conditions and other circumstances as they existed and could be
evaluated by Wasserstein Perella on the date thereof. Wasserstein Perella
does not have any obligation to update, revise or reaffirm its opinion. In
addition, Wasserstein Perella did not express any opinion as to the price or
trading range at which the CVS Common Stock will trade following the Merger.
Wasserstein Perella performed substantially the same analyses
in connection with the December 3, 1996 Revco Board meeting and the February
4, 1997 Revco Board meeting. The differences in such analyses are described
below.
Summary and Analysis of the CVS $36 Proposal
At the December 3, 1996 Revco Board meeting, Wasserstein
Perella presented a summary of the material terms of the CVS $36 Proposal,
which terms are described on page 13 under "The Merger--Background of the
Merger". Wasserstein Perella noted that the CVS $36 Proposal did not include
any collar, cap or other share price protection to address fluctuations prior
to closing in CVS' stock price, did not address any employee or management
issues and did not include a break-up fee for Revco under any circumstances.
Summary Implied Valuation of Revco
Discounted Cash Flow Analysis. Wasserstein Perella performed a
DCF analysis of the business of Revco. A DCF analysis is a traditional
valuation methodology used to derive a valuation of a corporate entity by
capitalizing the estimated future earnings and calculating the estimated
future unlevered free cash flows of such corporate entity and discounting such
aggregated results back to a present value. The Wasserstein Perella DCF
analysis considered the projected operating performance of Revco over the five
year period fiscal year 1997 through 2001 based on a management case utilizing
projections prepared by Revco management (the "December Projections") that
assume certain cost savings (including $19.4 million pretax for fiscal year
1997) as a result of the acquisition by Revco of Big B and projected
improvements in Big B's operating margins. Wasserstein Perella conducted
various analyses to evaluate the reasonableness of the December Projections,
including a review of more than five years of historical store-by-store data
based on a number of factors including age, size and format as well as a
comparison of Revco's actual historical financial data to prior estimates to
analyze the relationship between projected and actual results. Wasserstein
Perella also performed a DCF analysis using a sensitivity case that assumed
the realization of only 50% of Revco management's projected cost savings in
connection with the acquisition of Big B.
In conducting the DCF analysis, Wasserstein Perella applied
discount rates of 11% to 13% to Revco's unlevered free cash flow for the
period fiscal year 1997 through 2001 and applied such discount rates and
terminal multiples of 8.5x to 9.5x to projected EBITDA calculated on a
first-in-first-out ("FIFO") basis for fiscal year 2001 to yield, after
subtracting net debt, a range of implied equity values. The range of implied
equity values was then divided by approximately 69.6 million fully diluted
shares (including shares issuable pursuant to all outstanding options using
the treasury method) of Revco Common Stock (the "Fully Diluted Outstanding
Shares"). Based on this analysis, the management case generated an implied
equity value range of $41.79 to $52.21 per share, and the sensitivity case
generated an implied equity value range of $40.18 to $50.32 per share.
With respect to the DCF analysis, Wasserstein Perella noted
that the selection of an appropriate discount rate is an inherently subjective
process and is affected by such factors as Revco's cost of capital, the
uncertainty associated with achieving the projections provided by the
management of Revco and transaction risk generally. Wasserstein Perella also
noted that DCF analysis is a widely used valuation methodology, but that it
relies on numerous assumptions regarding the future performance of a company
and the future economic environment, including earnings growth rates,
unlevered free cash flows, terminal values and discount rates, all of which
are inherently uncertain because they are predicated upon future events and
circumstances.
Comparable Acquisitions Analysis. Wasserstein Perella
calculated a range of implied equity values per share of Revco Common Stock by
reviewing certain publicly available financial and other information relating
to (i) the following recent business combination transactions ("Recent
Transactions") in the chain drugstore industry: the pending combination of
Thrift Drug with Eckerd and the combination of Rite Aid with Thrifty Payless
(which was completed on December 12, 1996); and (ii) certain selected
completed business combination transactions ("Historical Transactions") in the
chain drugstore industry since 1990, including Revco's acquisitions of Big B
and HSI, Thrift Drug's acquisitions of Fay's and Kerr Drugs, Rite Aid's
acquisition of Perry Drug Stores, Thrifty Corporation's acquisition of Payless
Holdings, Inc., Bain Capital Inc.'s acquisition of Duane Reade Holdings and
Melville Corporation's acquisition of Peoples' Drug Stores, Incorporated.
In conducting its analysis, Wasserstein Perella calculated the
following transaction multiples for each Recent Transaction and Historical
Transaction based on the latest publicly available information as of the date
of each such transaction: (i) "Adjusted Purchase Price" (defined as total
shares of common stock outstanding times the purchase price per share minus
cash and cash equivalents plus total debt, capitalized leases, preferred stock
and minority interest) as a multiple of sales, EBITDA and EBIT calculated on a
FIFO basis for the LTM and (ii) "Equity Purchase Price" (defined as total
shares of common stock outstanding times the purchase price per share) as a
multiple of net income and of book value for the latest twelve months and as
of the most recent balance sheet date, respectively.
Based on such calculations, Wasserstein Perella determined that
the appropriate range of implied multiples of Adjusted Purchase Price or
Equity Purchase Price, as the case may be, for the Recent Transactions was
.48x to .63x of sales, 9.3x to 10.3x of EBITDA, 13.2x to 14.4x of EBIT and
21.8x to 22.0x of net income. The appropriate range of implied multiples of
Adjusted Purchase Price or Equity Purchase Price, as the case may be, for the
Historical Transactions was .35x to .45x of sales, 8.5x to 9.5x of EBITDA,
13.5x to 15.5x of EBIT, 31.0x to 35.0x of net income and 2.0x to 2.5x of book
value.
Based on such analyses, Wasserstein Perella determined ranges
of implied equity values for Revco based on the Recent Transactions and the
Historical Transactions by applying the appropriate range of multiples to the
relevant LTM financial information of Revco. Wasserstein Perella noted that
in addition to applying such implied multiples to the sales, EBITDA, EBIT, net
income and book value of Revco, it applied the implied EBITDA transaction
multiples to the EBITDA of Revco, as adjusted to reflect the assumed
realization of $9.7 million of pre-tax cost savings associated with the
acquisition of Big B, an amount equal to 50% of Revco management's
projected cost savings. These ranges of implied equity values were then
divided by the Fully Diluted Outstanding Shares to yield a range of implied
public market equity values based on the Recent Transactions of $26.72 to
$45.51 per share of Revco Common Stock and a range of implied public market
equity values based on the Historical Transactions of $16.31 to $46.78 per
share of Revco Common Stock.
Premium Analysis. With respect to selected public
change-in-control transactions completed from 1994 to November 1996,
Wasserstein Perella also analyzed the purchase price per share of common stock
for each acquired company as a premium to such company's stock price on the
days that were one day, one week and four weeks prior to the transaction's
public announcement (the "Premium to Stock Price"). The Premium to Stock
Price for such transactions ranged from 30.6% to 44.6%. Wasserstein Perella
also reviewed the Premium to Stock Price of selected public change-in-control
transactions completed since 1994 in the drugstore industry. The Premium to
Stock Price for such transactions ranged from 27.2% to 43.7%.
Comparable Companies Analysis. In order to analyze the
relative public market valuations of Revco and certain selected comparable
public chain drugstore companies, Wasserstein Perella analyzed stock price
performance and operating performance of Revco, CVS, Longs Drug Stores, Rite
Aid and Walgreen's. Wasserstein Perella calculated the following market
trading multiples for each of such companies based on LTM data as of November
29, 1996 and estimates for each of their respective next fiscal years:
"Adjusted Market Value" (defined as total shares of common stock outstanding
times the closing price per share as of November 29, 1996 minus cash and cash
equivalents plus total debt, capitalized leases, preferred stock and minority
interest) as a multiple of sales, EBITDA and EBIT; and "Market Value" (defined
as total shares outstanding times the closing price per share as of November
29, 1996) as a multiple of net income and book value. Wasserstein Perella
noted that its comparable company analysis was prepared both with and without
giving effect to any change-of-control premium that may arise in connection
with a transaction such as the CVS $36 Proposal. For such purpose,
Wasserstein Perella included a control premium of 35% to imputed equity value.
Based on such calculations, Wasserstein Perella determined that
the appropriate range of LTM market multiples was: .65x to .75x for sales;
10.0x to 11.0x for EBITDA; 13.0x to 15.0x for EBIT; 24.0x to 28.0x for net
income; and 2.5x to 3.0x for book value. Using the same approach, Wasserstein
Perella determined that the appropriate range of market multiples for 1997
estimated financial information was: .60x to .70x for sales; 9.5x to 10.5x for
EBITDA; 12.0x to 14.0x for EBIT; and 20.0x to 24.0x for net income.
Based on such analyses, Wasserstein Perella determined ranges
of implied equity values for Revco by applying the appropriate range of
multiples to the relevant LTM financial information of Revco and to the
relevant 1997 estimated financial information of Revco. Wasserstein Perella
also applied the implied EBITDA market trading multiples to the EBITDA of
Revco, as adjusted to reflect the assumed realization of $9.7 million of
pretax cost savings associated with the acquisition of Big B, an amount
equal to 50% of Revco management's projected cost savings. The range of
implied public equity values of Revco was then divided by approximately
68.0 million fully diluted shares (including shares issuable pursuant to
all exercisable options using the treasury method) of Revco Common Stock
(the "Fully Diluted Exercisable Shares") to yield a range of implied public
market equity values of $30.11 to $51.77 per share of Revco Common Stock
based on LTM financial information and $30.52 to $53.34 per share of Revco
Common Stock based on 1997 estimated financial information.
Applying a 35% control premium to the implied equity values
described in the preceding paragraph resulted in a new range of implied equity
values for Revco. Wasserstein Perella divided such increased range of implied
equity values by the Fully Diluted Exercisable Shares, which yielded a range
of implied equity values of $40.64 to $69.88 per share of Revco Common Stock
based on LTM financial information and $41.21 to $72.01 per share of Revco
Common Stock based on 1997 estimated financial information. Wasserstein
Perella noted, however, its belief that because the stock prices of comparable
chain drugstore companies were trading at high multiples relative to the
historical stock price performance of the industry, adding a change of control
premium of 35% to the implied public market equity value produced an
unrealistically high equity value range.
Analysis of Revco's Position in Chain Drugstore Industry.
Wasserstein Perella analyzed and discussed with the Revco Board its views
regarding Revco's current and future competitive position on a stand-alone
basis, including industry-wide factors such as the shift in the U.S. private
healthcare system toward managed care plans, the ongoing consolidation trend
in the chain drugstore industry and the increasing market share of mail
pharmacy companies.
Strategic Options. In addition to a stand-alone strategy,
Wasserstein Perella reviewed with the Revco Board certain potential merger or
acquisition partners, including retail drugstore chains, supermarket chains
and financial buyers, in terms of business and geographic fit, financial
capability and likely interest. Wasserstein Perella also reviewed with the
Revco Board a list of potential targets, including retail drugstore chains and
combination food and drugstores, in terms of business and geographic fit,
likelihood of sale and reasonableness of anticipated transaction price, if
Revco were to remain independent and seek to achieve a continuing leadership
position in the chain drugstore industry through consolidation.
Analysis of Consequences of CVS $36 Proposal. Wasserstein
Perella also analyzed the pro forma effects of a merger between CVS and Revco
pursuant to the CVS $36 Proposal. In performing its pro forma analysis
Wasserstein Perella assumed the acquisition of Big B by Revco as of December
31, 1996 and the realization of Revco management's projected cost savings of
$19.4 million in the first year following the Big B acquisition and the
realization by CVS following the acquisition of Revco of a range of cost
savings based on estimates provided by CVS management. As part of its
analysis, Wasserstein Perella also compared those cost savings to the expected
synergies, calculated as a percentage of both the combined sales and EBITDA of
acquirors and targets, in certain comparable acquisitions. Wasserstein
Perella's analyses showed that, depending on the amount of assumed cost
savings, the CVS $36 Proposal would be immediately accretive to the EPS of CVS
and that CVS could pay in excess of $36 per share of Revco Common Stock
without suffering earnings dilution.
Summary and Analysis of the Merger
At the February 4, 1997 meeting of the Revco Board, Wasserstein
Perella presented a summary of the material terms of the Merger, which terms
are described on page 13 under "The Merger--Background of the Merger". In
addition, Wasserstein Perella reviewed with the members of the Revco Board
certain financial, industry and market information with respect to Revco and
CVS, and the procedures used in arriving at, and the analyses underlying, the
Wasserstein Perella Opinion. The summary set forth below does not purport to
be a complete description of the Wasserstein Perella Opinion or of Wasserstein
Perella's analyses relating thereto. The preparation of a fairness opinion is
a complex process that is not purely mathematical and is not necessarily
susceptible to partial analyses or summary description. Stockholders are
encouraged to review Wasserstein Perella's written opinion in its entirety.
Pro Forma Ownership Analysis. Wasserstein Perella noted that
calculation of the Exchange Ratio (based on the closing price of CVS Common
Stock on January 31, 1997) implied a value of $40.29 per share of Revco Common
Stock and would result in a pro forma ownership of CVS by the stockholders of
Revco of 38.6%. Wasserstein Perella reviewed with the Revco Board the
structure of the Exchange Ratio and the implied price per share of Revco
Common Stock. In particular, Wasserstein Perella explained that, within a
band of $37.00 to $48.25 per share of CVS Common Stock (the "Collar"), the
Exchange Ratio has a fixed ratio component and a variable ratio component,
with a net result of partially hedging the risk to the stockholders of Revco
from changes in the price of CVS Common Stock prior to the closing of the
Merger while still allowing the stockholders of Revco some benefit from
increases in the price of CVS Common Stock during such period. Wasserstein
Perella also noted that outside the Collar, the Exchange Ratio is entirely
fixed. Wasserstein Perella further noted that increases or decreases in the
price of CVS Common Stock (inside the Collar) prior to the closing of the
Merger would affect the pro forma percentage ownership of CVS by the
stockholders of Revco.
Based on 71.9 million shares of Revco Common Stock outstanding
(including shares issuable pursuant to all outstanding options) and 106.6
million shares of CVS Common Stock outstanding (including shares issuable
pursuant to all outstanding options using the treasury method), Wasserstein
Perella compared the pro forma ownership of CVS by the stockholders of Revco
(approximately 38.6% based on the price per share of CVS Common Stock on
January 31, 1997) to the relative contributions by Revco and CVS to the
implied combined equity value based on their respective book value and market
value and noted that Revco's contributions were 35.6% and 42.1%, respectively.
Wasserstein Perella also compared the 38.6% level of pro forma ownership to
the relative contributions by Revco and CVS to the implied combined equity
value based on an application of mean trading multiples of LTM and
estimated 1997 revenue, EBITDA and EBIT for each of Revco and CVS and
subtracting, in each case, net debt. Based on the LTM financial
information, Revco's rates of contribution based on revenue, EBITDA and
EBIT were 43.4%, 43.5% and 39.0%, respectively, and based on estimated 1997
financial data, Revco's rates of contribution based on revenue, EBITDA and
EBIT were 42.2%, 39.5% and 34.2%, respectively. Wasserstein Perella also
compared the relative contributions by Revco and CVS to the combined equity
value based on their respective net income and noted that Revco's
contributions were 38.2% and 33.7%, respectively, based on LTM and
estimated 1997 financial data.
Summary Implied Valuation of Revco
Discounted Cash Flow Analysis. Wasserstein Perella received
from the management of Revco updated projections covering fiscal years 1998
through 2001 prior to the February 4, 1997 meeting of the Revco Board.
Following a comparison of the updated projections with the December
Projections and discussions with Revco's management to evaluate the
reasonableness of such updated management projections, Wasserstein Perella
again performed a DCF analysis of the business of Revco utilizing a management
case based on such updated projections as well as a sensitivity case based on
the December Projections, again assuming realization of only 50% of the cost
savings projected by Revco management in connection with the acquisition of
Big B.
In conducting the DCF analysis, Wasserstein Perella applied
discount rates of 11% to 13% to Revco's unlevered free cash flow for the
period fiscal year 1997 through 2001 and applied such discount rates and
terminal multiples of 8.5x to 9.5x to projected EBITDA for fiscal year 2001 to
yield, after subtracting net debt (including as net debt approximately $50
million in future severance payments related to the Merger, offset by assumed
option exercise proceeds of approximately $80.8 million), a range of implied
equity values. The range of implied equity values was then divided by
approximately 71.9 million shares (including shares issuable pursuant to all
outstanding options) of Revco Common Stock (the "Outstanding Shares"). Based
on this analysis, the management case generated an implied equity value range
of $42.76 to $53.18 per share, and the sensitivity case generated an implied
equity value range of $39.32 to $49.15 per share.
Comparable Acquisitions Analysis. Wasserstein Perella
calculated a range of implied equity values per share of Revco Common Stock by
reviewing certain publicly available financial and other information relating
to (i) the Recent Transactions and (ii) the Historical Transactions. In
conducting its analysis, Wasserstein Perella calculated the same transaction
multiples (other than net income for the Recent Transactions, which was not
calculated) for each Recent Transaction and Historical Transaction as it did
in connection with its December 3, 1996 presentation.
Based on such calculations, Wasserstein Perella determined
ranges of implied equity values for Revco based on the Recent Transactions and
the Historical Transactions by applying the appropriate range of multiples to
the relevant LTM financial information of Revco. For purposes of calculating
implied equity value, Wasserstein Perella included in the net debt of Revco
approximately $50 million in future severance payments related to the Merger,
offset by assumed option exercise proceeds of approximately $80.8 million.
These ranges of implied equity values were then divided by the Outstanding
Shares to yield a range of implied public market equity values based on the
Recent Transactions of $25.89 to $44.48 per share of Revco Common Stock and a
range of implied public market equity values based on the Historical
Transactions of $16.20 to $45.71 per share of Revco Common Stock.
Premium Analysis. Wasserstein Perella analyzed the Premium to
Stock Price of the Merger and, based on (i) the closing price of Revco Common
Stock on January 31, 1997, found the range to be 2.7% to 13.5%; (ii) the
closing price of Revco Common Stock on January 27, 1997 (the date on which CVS
and Revco confirmed they had entered into merger discussions), found the range
to be 2.7% to 12.3%; (iii) the closing price of Revco Common Stock on January
6, 1997 (the first business day following the CVS $40 Proposal), found the
range to be 12.3% to 17.6%; and (iv) the closing price of Revco Common Stock
on November 19, 1996 and November 7, 1996 (the dates of the CVS $36 Proposal
and CVS $33 Presentation, respectively), found the ranges to be 16.8% to 38.3%
and 26.4% to 38.3%, respectively.
Comparable Companies Analysis. Based on additional financial
data and stock price trading information, Wasserstein Perella updated to
January 31, 1997 the comparable companies analysis it presented at the
December 3, 1996 meeting of the Revco Board based on the market trading
multiples of the selected comparable public chain drugstore companies analyzed
at the December 3, 1996 meeting of the Revco Board.
Based on its updated calculations, Wasserstein Perella noted
that the appropriate range of LTM market multiples was: .65x to .75x for
sales, 9.5x to 10.5x for EBITDA; 12.5x to 14.5x for EBIT; 23.0x to 27.0x for
net income; and 2.5x to 3.0x for book value. Using the same approach,
Wasserstein Perella noted that the appropriate range for 1997 estimated
financial information market multiples was: .60x to .70x for sales; 9.0x to
10.0x for EBITDA; 10.0x to 12.0x for EBIT; and 18.0x to 22.0x for net income.
Based on such analyses, Wasserstein Perella determined ranges
of implied public market equity values for Revco by applying the appropriate
range of multiples to the relevant LTM financial information of Revco and to
the relevant 1997 estimated financial information of Revco. Wasserstein
Perella also applied the implied EBITDA market trading multiples to the EBITDA
of Revco, as adjusted to reflect the assumed realization of $9.7 million of
pretax cost savings associated with the acquisition of Big B, an amount equal
to 50% of Revco management's projected cost savings. The ranges of implied
public equity values of Revco were then divided by the Fully Diluted
Exercisable Shares to yield a range of implied public market equity values of
$28.85 to $51.77 per share of Revco Common Stock based on LTM financial
information and $27.47 to $51.40 per share of Revco Common Stock based on 1997
estimated financial information.
Applying a 35% control premium to the implied equity values
described in the preceding paragraph resulted in a new range of implied equity
values for Revco. Wasserstein Perella then divided such range of implied
equity values by the Fully Diluted Exercisable Shares, which yielded a range
of implied equity values of $38.95 to $69.88 per share of Revco Common Stock
based on LTM financial information and $37.09 to $69.39 per share of Revco
Common Stock based on 1997 estimated financial information. Wasserstein
Perella noted, however, its belief that because the stock prices of comparable
chain drugstore companies were trading at high multiples relative to the
historical stock price performance of the industry, adding a change of control
premium of 35% to the implied public market equity value produced an
unrealistically high equity value range.
Analysis of Merger Consequences. Wasserstein Perella conducted
a pro forma analysis of the Merger (which assumes (i) the Merger is accounted
for as a pooling of interests, (ii) the acquisition of Big B by Revco as of
December 31, 1996 and the realization of Revco management's projected cost
savings of $19.4 million in the first year following the Big B acquisition and
(iii) the realization by CVS following the Merger of cost savings of $100
million (and for purposes of a sensitivity analysis, 80% of such amount) based
on estimates provided by CVS management), which showed that the Merger should
be immediately accretive to the EPS of CVS. Wasserstein Perella also
performed such analysis assuming the Merger is accounted for as a purchase,
which showed that the Merger would be dilutive to CVS only in the near term,
with an accretive effect expected by the first full year following the Merger.
The summary set forth above does not purport to be a complete
description of the analyses performed by Wasserstein Perella or of Wasserstein
Perella's presentations to the Revco Board. Wasserstein Perella believes that
its analyses must be considered as a whole and that selecting portions of its
analyses and the factors considered by it, without considering all factors and
analyses, could create a misleading view of the process underlying the
Wasserstein Perella Opinion. While the conclusions reached in connection with
each analysis were considered carefully by Wasserstein Perella in arriving at
its opinion, Wasserstein Perella made various subjective judgments in arriving
at its opinion and did not consider it practicable to, nor did it attempt to,
assign relative weights to the individual analyses and specific factors
considered in reaching its opinion. In performing its analyses, Wasserstein
Perella made numerous macroeconomic, operating and financial assumptions with
respect to industry performance, general business, regulatory and economic
conditions and other matters, many of which are beyond the control of Revco
and CVS. Any estimates incorporated in the analyses performed by Wasserstein
Perella are not necessarily indicative of actual past or future results or
values, which may be significantly more or less favorable than such estimates.
Estimated values do not purport to be appraisals and do not necessarily
reflect the prices at which businesses or companies may be sold. Since such
estimates are inherently subject to uncertainty, Wasserstein Perella does not
assume any responsibility for their accuracy. No company analyzed for
comparative purposes is identical to Revco or CVS or the business segment for
which a comparison is being made. Accordingly, an analysis of comparative
companies and comparative business combinations is not simply mathematical but
rather involves complex considerations and judgments concerning financial and
operating characteristics of the companies involved and other factors that
affect value.
In connection with rendering the Wasserstein Perella Opinion,
Wasserstein Perella performed such financial analyses as it deemed appropriate
in determining the fairness of the Exchange Ratio from a financial point of
view to the holders of Revco's Common Stock, the material portions of which
are summarized above. Wasserstein Perella concluded that, as of February 4,
1997, in its judgment, including the full range of its analyses described
above, the Exchange Ratio is fair, from a financial point of view, to such
stockholders.
Wasserstein Perella is an investment banking firm engaged in,
among other things, 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 corporate and other
purposes. The Revco Board selected Wasserstein Perella as its financial
advisor because Wasserstein Perella is an internationally recognized
investment banking firm and members of Wasserstein Perella have substantial
experience in transactions such as the Merger and in valuing companies,
particularly in the retail industry.
Pursuant to the terms of an engagement letter dated November
19, 1996, as amended by an addendum dated January 14, 1997, Revco paid
Wasserstein Perella a fee of $1 million (in addition to a previously paid
$250,000 retainer) upon the rendering of its written opinion, and has agreed
to pay Wasserstein Perella an additional fee of approximately $8 million upon
consummation of the Merger. Revco has also agreed to reimburse Wasserstein
Perella, whether or not the Merger is consummated, for its reasonable
out-of-pocket expenses, including all reasonable fees, disbursements and other
charges of counsel, and to indemnify Wasserstein Perella and certain related
persons against certain liabilities relating to or arising out of its
engagement, including certain liabilities under the Federal securities laws.
The terms of the fee arrangement with Wasserstein Perella, which Wasserstein
Perella and Revco believe are customary in transactions of this nature, were
negotiated at arm's length between Revco and Wasserstein Perella and the Revco
Board was aware of such arrangement, including the fact that a significant
portion of the aggregate fee payable to Wasserstein Perella is contingent upon
consummation of the Merger.
In the ordinary course of its business, Wasserstein Perella may
actively trade the securities of Revco and CVS for the accounts of Wasserstein
Perella and for the accounts of its customers and, accordingly, may at any
time hold a long or short position in such securities.
Opinion of Salomon
Salomon has acted as a financial advisor to Revco in connection
with the Merger. Salomon was not requested to recommend the amount of
consideration to be received by the Revco stockholders; it was requested to
evaluate, among other things, the fairness of the consideration, which was
determined by negotiation between Revco and CVS. Salomon delivered its oral
opinion to Revco's Board of Directors on February 4, 1997, which opinion was
subsequently confirmed in writing on February 6, 1997 (collectively, the
"Salomon Opinion"), to the effect that, based on and subject to various
considerations set forth in the Salomon Opinion, the Exchange Ratio is fair,
from a financial point of view, to the holders of Revco Common Stock. Except
as described below, no limitations were imposed by the Revco Board upon
Salomon with respect to the investigations made or the procedures followed by
it in rendering the Salomon Opinion.
The full text of the Salomon Opinion, which sets forth the
assumptions made, general procedures followed, matters considered and
limitations on the review undertaken by Salomon, is attached hereto as Annex
D. The Salomon Opinion should be read carefully and in its entirety by the
holders of Revco Common Stock. The Salomon Opinion is directed only to the
fairness, from a financial point of view, of the Exchange Ratio to the holders
of Revco Common Stock and does not address Revco's underlying business
decision to effect the Merger or constitute a recommendation to any holder of
Revco Common Stock as to how such holder should vote with respect to the
Merger. The Salomon Opinion also does not constitute an opinion or imply any
conclusion of Salomon as to the likely trading range of the CVS Common Stock
following consummation of the Merger, which may vary depending upon various
factors discussed in the Salomon Opinion. The summary of the Salomon Opinion
set forth in this Joint Proxy Statement/Prospectus is qualified in its
entirety by reference to the full text of the Salomon Opinion attached hereto
as Annex D.
In connection with rendering the Salomon Opinion, Salomon,
among other things: (i) reviewed the February 3, 1997 draft of the Merger
Agreement, including the exhibits and the documents referred to therein, in
the form provided to Salomon, and assumed that the final form of such
agreement would not vary in any respect that was material to Salomon's
analysis; (ii) reviewed certain publicly available information concerning
Revco; (iii) reviewed certain publicly available information concerning CVS;
(iv) reviewed certain publicly available information concerning the industry
in which Revco and CVS operate; (v) reviewed and analyzed certain financial
forecasts and other non-public financial and operating data concerning the
businesses and operations of Revco and CVS that were provided to Salomon by
the managements of Revco and CVS, respectively; (vi) reviewed certain publicly
available information with respect to certain other companies that Salomon
believed to be comparable in certain respects to Revco and CVS and the trading
markets for such other companies' securities; (vii) reviewed and analyzed
certain publicly available and other information concerning the trading of,
and the trading market for, the Revco Common Stock and the CVS Common Stock;
(viii) reviewed the financial terms of certain recent business combinations
and acquisition transactions Salomon deemed reasonably comparable to the
Merger and otherwise relevant to its inquiry; (ix) analyzed certain
information concerning cost savings and combination benefits expected to
result from the Merger that was provided to Salomon by the managements of
Revco and CVS; and (x) considered such other information, financial studies,
analyses, investigations and financial, economic, market and trading criteria
as Salomon deemed relevant to its inquiry. Salomon also discussed the
foregoing with certain officers and employees of Revco and CVS, including the
past and current business operations, financial condition and prospects of
Revco and CVS, respectively, as well as other matters Salomon believed
relevant to its inquiry. However, it should be noted that, within the context
of Salomon's engagement by Revco, Salomon was not authorized to and did not
solicit alternative offers for Revco or its assets, or investigate any other
alternative transactions which might have been available to Revco. The
Salomon Opinion was necessarily based upon conditions as they existed and
could be evaluated as of the date of the Salomon Opinion. Salomon does not have
any obligation to update, revise or reaffirm its opinion.
In connection with rendering the Salomon Opinion, Salomon
assumed and relied upon the accuracy and completeness of all of the financial
and other information provided to, discussed with, or reviewed by Salomon or
publicly available and neither attempted independently to verify nor assumed
responsibility for verifying any of such information. With respect to Revco's
and CVS' financial projections, as well as the information concerning cost
savings and combination benefits provided to Salomon by the managements of
Revco and CVS, Salomon assumed that such projections and information had been
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the management of Revco or CVS, as the case may be, as to the
future financial performance of Revco or CVS, as the case may be, and as to
the cost savings and combination benefits expected to result from the Merger.
Salomon did not make or obtain or assume any responsibility for making or
obtaining any independent evaluations or appraisals of any of the assets
(including properties and facilities) or liabilities of Revco or CVS. Salomon
assumed that the Merger would qualify as a Reorganization. Salomon advised
the Revco Board that the Salomon Opinion would not be adversely affected if
the Merger did not qualify for pooling of interests accounting treatment.
For purposes of rendering the Salomon Opinion, Salomon assumed,
in all respects material to its analysis, that the representations and
warranties of each party contained in the Merger Agreement were true and
correct, that each party would perform all of the covenants and agreements
required to be performed by it under the Merger Agreement and that all
conditions to the consummation of the Merger would be satisfied without waiver
thereof. Salomon also assumed that all material governmental, regulatory or
other consents and approvals would be obtained and that in the course of
obtaining any necessary governmental, regulatory or other consents and
approvals, or any amendments, modifications or waivers to any documents to
which either Revco or CVS is a party, as contemplated by the Merger Agreement,
no restrictions would be imposed or amendments, modifications or waivers made
that would have any material adverse effect on the contemplated benefits of
the Merger.
In connection with rendering the Salomon Opinion to the Revco
Board, Salomon performed a variety of financial analyses, the material
portions of which are summarized below. The summary of such analyses set forth
below does not purport to be a complete description of the analyses underlying
the Salomon Opinion or of Salomon's presentation to the Revco Board. In
addition, Salomon believes that its analyses must be considered as a whole and
that selecting portions of such analyses and the factors considered therein,
without considering all such analyses and factors, could create an incomplete
view of the analyses and the processes underlying the Salomon Opinion. While
the conclusions reached in connection with each analysis were considered
carefully by Salomon in arriving at its opinion, Salomon made various
subjective judgments in arriving at its opinion and did not consider it
practicable to, nor did it attempt to, assign relative weights to the
individual analyses and specific factors considered in reaching its opinion.
The preparation of a fairness opinion is a complex process and
is not necessarily susceptible to partial analysis or summary description. In
addition, the process of preparing a fairness opinion necessarily requires a
broad range of subjective judgments with respect to appropriate comparable
companies and transactions, appropriate multiples of various selected
financial data, appropriate discount rates and other financial and other
factors. Analyses and estimates of the values of companies do not purport to
be appraisals or necessarily reflect the prices at which companies or their
securities actually may be sold. The range of valuation for any particular
analysis should not be taken to be the view of Salomon of the actual value of
Revco or CVS.
The projections furnished to Salomon and used in formulating
the Salomon Opinion were provided to Salomon by the management of each of
Revco and CVS. Revco and CVS do not publicly disclose internal management
projections of the type provided to Salomon in connection with the review of
the Merger and, accordingly, such projections were not prepared with a view
toward public disclosure. The projections were based on numerous variables
and assumptions which are inherently uncertain, including, without limitation,
factors related to general economic and competitive conditions. Accordingly,
actual results could vary significantly from those set forth in such
projections.
Comparison of Revco and CVS
Financial Comparison. Salomon compared (i) annual revenues,
EBITDA, EBIT, net income to common stock and EPS for calendar year 1996 for
each of Revco and CVS and (ii) EBITDA, EBIT and net income to common stock,
expressed as a percentage of revenue, for each company for the same period.
Salomon also compared the ratio of total debt to total capitalization at
fiscal year end for each of Revco and CVS, and the market capitalization, the
firm value (defined as fully diluted public market equity value, plus
non-convertible debt, minority interests, non-convertible preferred stock and
out-of-the-money convertible securities, less investments in unconsolidated
affiliates and cash), the price to estimated 1997 EPS ratio and the five year
EPS growth rate as of January 31, 1997 for each of Revco and CVS.
Selected Public Company Operating Performance Analysis. Using
publicly available information, Salomon compared each of Revco and CVS to the
following five publicly traded drugstore chains (the "Selected Drugstore
Chains"): Arbor Drugs, Eckerd, Walgreen's, Rite Aid and Longs Drug Stores.
With respect to Revco, CVS and the Selected Drugstore Chains, Salomon
compared: (i) comparable store sales growth for each company's respective
fiscal year 1996, which ranged from 0.7% to 10.0% with a median (including
Revco and CVS) of 8.5%; (ii) latest quarter comparable store sales growth,
which ranged from 5.2% to 12.4% with a median (including Revco and CVS) of
7.8%; (iii) sales growth for each company's respective fiscal year 1996, which
ranged from 3.4% to 20.1% with a median (including Revco and CVS) of 13.3%;
(iv) three year compound annual growth rate ("CAGR") of EBITDA from each
company's respective fiscal year 1994 to its respective fiscal year 1996, which
ranged from 6.6% to 26.3% with a median (including Revco and CVS) of 14.4%;
(v) three year CAGR of EBIT from each company's respective fiscal year 1994 to
its respective fiscal year 1996, which ranged from 5.1% to 35.8% with a median
(including Revco and CVS) of 15.1%; (vi) five-year projected EPS growth rate,
which ranged from 7% to 18% with a median (including Revco and CVS) of 14%;
(vii) LTM gross margin, which ranged from 22.2% to 29.1% with a median
(including Revco and CVS) of 26.6%; (viii) LTM selling, general and
administrative expenses as a percentage of sales, which ranged from 15.4% to
22.1% with a median (including Revco and CVS) of 20.8%; (ix) LTM EBITDA
Margin, which ranged from 5.0% to 7.1% with a median (including Revco and CVS)
of 6.4%; (x) LTM EBIT Margin, which ranged from 3.5% to 5.7% with a median
(including Revco and CVS) of 4.4%; (xi) fiscal year 1995 sales per retail
square foot, which ranged from $248 to $399 with a median (including Revco and
CVS) of $336; and (xii) fiscal year 1995 average selling space, which ranged
from to 7.5 million square feet to 16 million square feet with a median
(including Revco and CVS) of 8.9 million square feet.
Summary Implied Valuation of CVS
Public Market Valuation. Salomon calculated a range of implied
public market equity values per share of CVS Common Stock based on an analysis
of selected multiples of CVS' LTM revenues, LTM EBITDA, LTM EBIT and projected
net income for the years 1996 through 1998. The analysis utilized LTM revenue
multiples ranging from 85% to 90%, LTM EBITDA multiples ranging from 12.0x to
13.5x, LTM EBIT multiples ranging from 16.0x to 17.0x, 1996 projected net
income multiples ranging from 23.0x to 25.0x, 1997 projected net income
multiples ranging from 21.0x to 23.0x and 1998 projected net income multiples
ranging from 18.0x to 20.0x. Salomon applied the foregoing ranges of LTM
multiples and projected multiples to the relevant LTM and projected financial
data of CVS and determined a summary reference range of implied public market
equity values per share of CVS Common Stock of $40.00 to $45.00, as compared
to a trading price of $43.25 per share of CVS Common Stock as of January 31,
1997.
Discounted Cash Flow Analysis. Using a DCF analysis, Salomon
calculated the implied present value of the estimated unlevered free cash
flows that CVS could produce on a stand-alone basis (without giving effect to
any operating or other efficiencies arising from the Merger) over the
five-year period from fiscal year end 1997 through fiscal year end 2001 based
on certain forecasts provided by CVS' management. Salomon determined an
implied equity value reference range for CVS based on (a) the sum of (i) the
discounted value (using various discount rates, representing the WACC for CVS,
ranging from 11.5% to 12.5%) of the five year estimated unlevered free cash
flows of CVS, plus (ii) the discounted value (using various WACCs ranging from
11.5% to 12.5%) of the product of (A) projected EBITDA for 2001 and (B)
various projected terminal value multiples (ranging from 10.5x to 11.5x), less
(b) total debt, net of cash and minority interests, including, among others,
CVS' ownership interest in Linens 'n Things. This analysis resulted in an
implied equity value reference range per share of CVS Common Stock of $44.66
to $50.52.
As to the DCF analysis for CVS and descriptions of all of the
following DCF analyses, Salomon noted that the selection of an appropriate
discount rate is an inherently subjective process and is affected by such
factors as Revco's and/or CVS' cost of capital, the uncertainty associated
with achieving the projections provided by the managements of Revco and CVS
and transaction risk generally. Salomon also noted that a DCF analysis is a
widely used valuation methodology, but that it relies on numerous assumptions
regarding the future performance of a company and the future economic
environment, including earnings growth rates, unlevered free cash flows,
terminal values and discount rates, all of which are inherently uncertain
because they are predicated upon future events and circumstances.
Linens 'n Things Trading Value. Salomon compared certain
publicly available information available for Linens 'n Things and four
publicly traded bath and home furnishings chains: Bed, Bath & Beyond Inc., The
Bombay Company, Inc., Lechters, Inc. and Williams-Sonoma, Inc., and observed
that Linens 'n Things' market capitalization at its January 31, 1997 stock
price was approximately $424 million. Based on CVS' approximately 32.5%
ownership interest, the analysis indicated that CVS' minority ownership in
Linens 'n Things would be valued on a pre-tax basis at approximately $138
million, or $1.23 per share of CVS Common Stock.
Summary Implied Valuation of Revco
Public Market Valuation and Premium Analysis. Salomon
calculated a range of implied public market equity values per share of Revco
Common Stock based on an analysis of selected multiples of Revco's LTM
revenues, LTM EBITDA, LTM EBIT and projected net income for the years 1996
through 1998. The analysis utilized LTM revenue multiples ranging from 50% to
60%, LTM EBITDA multiples ranging from 8.5x to 9.5x, LTM EBIT multiples
ranging from 13.5x to 14.5x, 1996 projected net income multiples ranging from
20.0x to 24.0x, 1997 projected net income multiples ranging from 17.0x to
20.0x and 1998 projected net income multiples ranging from 15.0x to 16.5x.
Salomon applied the foregoing ranges of LTM multiples and projected multiples
to the relevant LTM and projected financial data of Revco (including the
realization of Revco management's projected cost savings of $19.4 million in
the first year following the Big B acquisition) and determined a summary
reference range of implied public market equity values per share of Revco
Common Stock of $30.00 to $35.00, as compared to a trading price of $37.50 per
share of Revco Common Stock as of January 31, 1997 (the "current price") and a
trading price of $33.25 per share of Revco Common Stock based on the 60-day
average trading price for the period ending 10 trading days prior to January
27, 1997 (the date on which Revco and CVS publicly disclosed that they were
engaged in merger discussions) (the "pre-announcement price"). Salomon also
calculated the premium represented by the value of the Exchange Ratio as of
January 31, 1997 (0.9316x) of $40.29 over the current price and
pre-announcement price and observed premiums of 7.4% and 21.2%, respectively.
Salomon observed that the Revco Common Stock had experienced a 52-week trading
range of $21.75 to $41.25 per share.
Discounted Cash Flow Analysis. Using a DCF analysis, Salomon
calculated the implied present value of the estimated unlevered free cash
flows that Revco could produce on a stand-alone basis (without giving effect
to any operating or other efficiencies arising from the Merger) over the five
year period from fiscal year end 1997 through fiscal year end 2001 based on
forecasts developed by Revco's management (including the realization of Revco
management's projected cost savings of $19.4 million in the first year
following the Big B acquisition). Salomon determined an implied equity value
reference range for Revco based on (a) the sum of (i) the aggregate discounted
value (using various discount rates, representing the WACC for Revco, ranging
from 11.5% to 12.5%) of the five year estimated unlevered free cash flows of
Revco, plus (ii) the discounted value (using various WACCs ranging from 11.5%
to 12.5%) of the product of (A) projected EBITDA for 2001 and (B) various
projected terminal value multiples (ranging from 7.5x to 8.5x), less (b) total
debt, net of cash. This analysis resulted in an implied equity value
reference range per share of Revco Common Stock of $37.83 to $45.67.
Implied Private Market Valuation. Salomon reviewed publicly
available information regarding eight selected drug chain industry
transactions between January 1995 and November 1996. The drug chain industry
transactions and the dates the transactions were announced are as follows:
J.C. Penney's acquisition of Eckerd (November 1996), Rite Aid's acquisition of
Thrifty Payless (October 1996), Phar-Mor, Inc.'s acquisition of ShopKo Stores,
Inc. (September 1996), Revco's acquisition of Big B (September 1996), J.C.
Penney's acquisition of Fay's (August 1996), Rite Aid's terminated agreement
to acquire Revco (November 1995), Cardinal Health, Inc.'s acquisition of
Medicine Shoppe International, Inc. (August 1995) and Thrift Drug's
acquisition of Kerr Drug Stores, Inc. (January 1995). For such transactions,
Salomon calculated a range of: (i) implied ratios of firm value to LTM
revenues, ranging from 34.2% to 62.4% with a median of 51.3%; (ii) implied
ratios of firm value to LTM EBITDA, which ranged from 6.2x to 10.9x with a
median of 9.8x; (iii) implied ratios of firm value to LTM EBIT, which ranged
from 9.7x to 29.0x with a median of 15.5x; and (iv) premiums paid based on the
closing stock price for the acquired company on the date that was 30 days
prior to the transaction announcement date, which ranged from 6.0% to 64.5%
with a median of 29.5%.
Salomon calculated implied private market equity values per
share of Revco Common Stock based on selected multiples of LTM revenues, LTM
EBITDA and LTM EBIT derived from the foregoing. The analysis utilized revenue
multiples ranging from 50% to 65%, EBITDA multiples ranging from 9.5x to 11.5x
and EBIT multiples ranging from 15.0x to 17.0x. Salomon applied the foregoing
ranges of LTM multiples to the relevant LTM financial data of Revco and
determined a summary reference range of implied private market equity values
per share of Revco Common Stock of $36.00 to $45.00.
Analysis of Merger Consequences
Contribution Analysis. Based on projections supplied to
Salomon by the managements of Revco and CVS, Salomon compared the pro forma
ownership of the combined company of 36.7% and 63.3% (assuming a 0.9316x
exchange ratio based on the January 31, 1997 CVS closing stock price of
$43.25) by the holders of Revco Common Stock and CVS Common Stock,
respectively, to the contributions of each of Revco and CVS to combined firm
value and to projected annual revenues, EBITDA, EBIT, net income, funds from
operations and free cash flow for each calendar year from 1997 through 2001.
The analysis did not assume the realization of any cost savings or synergies
from the Merger or the Big B acquisition. The analysis indicated a combined
company firm value of $8,456 million with a 42.7% and 57.3% contribution from
Revco and CVS, respectively, and that Revco's contribution to the combined
company for the calendar years from 1997 to 2001 was: (i) as to revenues, from
46.9% to 48.9%, (ii) as to EBITDA, from 42.3% to 42.9% (falling in an interim
year to 42.2%), (iii) as to EBIT, from 35.5% to 37.5% (falling in an interim
year to 35.3%), (iv) as to net income, from 35.9% to 41.4%, (v) as to funds
from operations, from 48.1% to 49.4% and (vi) as to free cash flow, from 32.3%
to 44.5% (peaking in an interim year at 48.8%).
Historical Exchange Ratio Analysis. Salomon calculated the
average historical implied exchange ratio based on the relative daily stock
prices of Revco and CVS for the period from October 12, 1996 through January
31, 1997 and determined that such ratio ranged from a high of 0.95x to a low
of 0.64x with an average of 0.8392x. The analysis indicated that the assumed
Exchange Ratio as of January 31, 1997 of 0.9316x reflected a 12.0% premium to
such average historical implied Exchange Ratio since CVS began trading as a
drug chain company.
Pro Forma Effects to Revco. Salomon analyzed the estimated pro
forma effects on Revco's EPS based on projections for Revco and CVS provided
by the managements of Revco and CVS (and assuming pooling of interests
accounting treatment, $100 million of annual pretax cost savings arising from
the Merger for the years 1997 through 1999 (fully phased-in by 1998) and the
realization of Revco management's projected cost savings of $19.4 million in
the first year following the Big B acquisition) at various final Exchange
Ratios ranging from 1.0097x to 0.8837x. This analysis indicated that the
average Revco EPS accretion for the three year period ranged from 19.6% (at a
0.8837x ratio) to 29.8% (at a 1.0097x ratio) and that at an assumed Exchange
Ratio of 0.9316x (as of January 31, 1997) the projected Revco EPS accretion
was 15.8%, 29.7%, 25.2%, 18.6% and 9.1% for each of the years from 1997 to
2001, respectively. Salomon also performed a sensitivity analysis estimating
such pro forma effects under circumstances where the relevant accounting
treatment would be purchase instead of pooling of interests. The sensitivity
analysis indicated that, under purchase accounting treatment, Revco's
projected EPS accretion at an assumed 0.9316x exchange ratio would be 1.5%,
18.8%, 16.2%, 11.1% and 3.2% for each of the years from 1997 to 2001,
respectively. The sensitivity analysis also indicated that, under purchase
accounting treatment, Revco's projected EPS accretion (dilution) at a 0.8837x
exchange ratio would be (3.0%) and 13.8% in 1997 and 1998, respectively, and
at a 1.0097x exchange ratio, would be 8.4% and 26.2% in 1997 and 1998,
respectively.
Cost Savings Estimates. Salomon compared CVS management's
estimate of $100 million in annual pretax cost savings, which represents 1.7%
of Revco's LTM revenues (with full cost savings expected to be realized by
1998 fiscal year end), to announced estimated cost savings and synergies in
three selected drug chain combinations. The drug chain combinations compared
were: (i) J.C. Penney's acquisition of Eckerd, which had $100 million in
estimated cost savings and synergies representing 1.9% of Eckerd's revenues;
(ii) Rite Aid's acquisition of Thrifty Payless, which had $110 million in
estimated cost savings and synergies representing 2.3% of Thrifty Payless'
revenues; and (iii) Rite Aid's attempted acquisition of Revco, which had $156
million in estimated synergies representing 3.2% of Revco's revenues.
Discounted Cash Flow Valuation of Cost Savings. Using a DCF
analysis, Salomon calculated the implied present value of the cost savings,
from 1997 through 2001, based on forecasts developed by CVS management and
assuming a 0.9316x Exchange Ratio. Salomon determined implied cost savings
reference ranges based on the sum of (a) the discounted value (using various
discount rates, representing the WACC for the combined company, ranging from
11.5% to 12.5%) of the estimated cost savings, plus (b) the discounted value
(using various WACCs ranging from 11.5% to 12.5%) of the product of (i)
projected cost savings for 2001 and (ii) terminal pre-tax multiples (ranging
from 4.5x to 5.5x). This analysis resulted in an implied present value cost
savings reference range per share of Revco Common Stock of $2.33 to $2.73.
Combined Company Discounted Cash Flow Analysis. Using a DCF
analysis, Salomon calculated the implied present value of the estimated
unlevered free cash flows that the combined company could produce, giving
effect to all projected cost savings from the Merger, over the five year
period from 1997 through 2001 based on forecasts and cost savings information
developed by the managements of Revco and CVS and assuming a 0.9316x Exchange
Ratio. Salomon determined an implied equity market value reference range for
the combined company based on (a) the sum of (i) the discounted value (using
various discount rates, representing the WACC for the combined company,
ranging from 11.5% to 12.5%) of the estimated unlevered free cash flows of the
combined company, plus (ii) the discounted value (using various WACCs ranging
from 11.5% to 12.5%) of the product of (A) projected EBITDA for 2001 and (B)
various projected terminal value multiples (ranging from 9.0x to 10.0x), less
(b) debt, net of cash and minority interests, including Linens 'n Things.
This analysis resulted in a combined company implied equity value reference
range per share of Revco Common Stock of $44.10 to $51.01.
Salomon is an internationally recognized investment banking
firm that regularly engages in the valuation of companies and their securities
in connection with mergers and acquisitions, negotiated underwritings,
competitive bids, secondary distributions of listed and unlisted securities
and corporate, estate and other purposes. Revco retained Salomon as a
financial advisor because of its reputation, expertise in the valuation of
companies and substantial experience in transactions such as the Merger.
In addition to the financial advisory services referred to
below, Salomon has from time to time provided investment banking and related
services to Revco for which Salomon has received customary fees. In the
ordinary course of its business, Salomon or its affiliates may actively trade
the securities of Revco and CVS for its own account and for the accounts of
its customers and, accordingly, at any time may hold a long or short position
in such securities.
Revco and Salomon have entered into a letter agreement dated
January 29, 1997 (together with the Pre-Existing Letter defined below, the
"Salomon Engagement Letter") relating to the services to be provided by
Salomon in connection with the Merger. The Salomon Engagement Letter
supplements and confirms a pre-existing letter agreement dated August 1,
1996 (the "Pre-Existing Letter") relating to services to be provided by
Salomon in connection with various possible transactions, including those
such as the Merger, pursuant to which Salomon has previously been paid
$250,000 and would receive additional annual fees of $250,000 and
transaction fees to be agreed upon in the context of a particular
transaction. Pursuant to the Salomon Engagement Letter, Revco has agreed
to pay Salomon the following fees in the context of the Merger: (i)
$250,000, payable promptly upon the execution of the Merger Agreement and
(ii) additional fees of $750,000 (less the $250,00 payable under the
preceding clause (i) and less the $250,000 previously paid by Revco to
Salomon pursuant to the Pre-Existing Letter), contingent upon the
consummation of the Merger and payable at the Effective Time. The Revco
Board was aware of this fee structure and took it into account in
considering the Salomon Opinion and in approving the Merger Agreement and
the transactions contemplated thereby. Revco also agreed to reimburse
Salomon for the reasonable fees and disbursements of Salomon's counsel and
Salomon's reasonable travel and other out-of-pocket expenses and to
indemnify Salomon against certain liabilities, including liabilities under
the federal securities law, relating to or arising out of its engagement.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of Revco management and of the Revco Board may
be deemed to have interests in the Merger that are different from, or in
addition to, the interests of Revco stockholders generally. The Revco Board
was aware of these interests and considered them, among other matters, in
approving the Merger Agreement and the transactions contemplated thereby.
These interests are described below.
Revco Directors Who Will Become Directors of CVS at the Effective Time
At the Effective Time, two of the present directors of Revco,
Sheli Rosenberg and Thomas Thorsen, are expected to become members of the CVS
Board.
Employment Agreements
In May and June 1996 (with the exception of three such
agreements entered into with officers who assumed their current positions
subsequent to such time), Revco entered into employment agreements (the
"Employment Agreements") containing "change in control" provisions with 26 of
its officers and key employees (the "Covered Executives"). The Compensation
Committee of the Revco Board approved these Employment Agreements in an effort
to retain Revco's key management in light of the terminated merger with Rite
Aid, and in recognition of management's efforts during the pendency of the
proposed merger with Rite Aid. There are two forms of the Employment
Agreements, which are substantially the same other than with respect to job
description and salary, except for the differences noted below.
Cash Payment Upon Termination. Each Employment Agreement
provides that if, during the Applicable Period following a "change in control"
(which would be deemed to occur for purposes of the Employment Agreements upon
the approval and adoption by the Revco stockholders of the Merger Agreement
(the "Revco stockholder approval")), the Covered Executive's employment with
Revco is terminated by Revco other than for gross misconduct (as defined in
the Employment Agreements) or by the Covered Executive for good reason (as
defined below), the Covered Executive will be entitled to receive severance
compensation and other benefits. The Covered Executives who are parties to
the first form of Employment Agreement (the "Group A Executives") will be
entitled to receive severance compensation in a lump-sum payment without
reduction equal to, at each such Group A Executive's election, either (i) 18
months of such Group A Executive's base pay as in effect at the time of the
Revco stockholder approval ("Base Salary") or (ii) the sum of (A) the highest
base pay paid to such Group A Executive during the three immediately preceding
fiscal years (the then-current fiscal year to be calculated on an annualized
basis, if necessary) and (B) the Group A Executive's target bonus under the
EVA Plan (as defined below) for the full fiscal year immediately preceding the
change in control (collectively, "Salary Plus Bonus"). The Covered Executives
who are parties to the second form of Employment Agreement (the "Group B
Executives") will be entitled to receive (i) in the case of Group B Executives
other than Messrs. Hoven and Mastrian, at each such Group B Executive's
election, either (A) three years of Base Salary or (B) two years of Salary
Plus Bonus, (ii) in the case of Mr. Mastrian, at his election, either (A) four
years of Base Salary or (B) three years of Salary Plus Bonus and (iii) in the
case of Mr. Hoven, three years of Salary Plus Bonus. During the Applicable
Period both Group A and Group B Executives will be entitled to receive (a)
medical and dental coverage, long and short term disability protection and any
life insurance protection being provided immediately prior to such Covered
Executive's termination; (b) a company-paid annual physical examination and,
in the case of the Group B Executives only, the financial planning services
being provided immediately prior to termination; (c) the right to purchase his
company car at the wholesale value thereof; and (d) to the extent terminated
without cause within one year of the Effective Time, outplacement services
from a recognized outplacement provider selected by CVS. The Employment
Agreements also provide that the benefits payable pursuant to clauses (a) and
(b) of the preceding sentence will be on terms at least as favorable as those
in effect immediately preceding the change in control, and that such benefits
will cease if the Covered Executive receives comparable benefits from a
subsequent employer. Furthermore, in the event of such termination the
Covered Executives will be released from their obligations under any
non-compete provisions of the Employment Agreements.
As used in the Employment Agreements, "Applicable Period"
means, with respect to each Covered Executive, the period beginning at the
time of the change in control (in the case of the Merger, the Revco
stockholder approval) and ending on the last day for which severance
compensation would be payable pursuant to the election described in the
preceding paragraph. "Good Reason" is defined in the Employment Agreements
as (i) the occurrence of a material reduction (defined as 5%) in the
aggregate direct remuneration of the Covered Executive or any reduction in
the Covered Executive's position or office, (ii) any material reduction in
the Covered Executive's responsibilities or duties provided for in
accordance with the Covered Executive's prior arrangements with Revco,
(iii) any material adverse change or reduction in the aggregate employee
benefits, perquisites or fringe benefits contemplated under such
arrangement, (iv) a change in the Covered Executive's reporting
relationship or (v) any relocation of the Covered Executive's principal
place of work to a place more than 50 miles from the Covered Executive's
work location.
The following table sets forth the names, positions and
estimated maximum cash amounts payable under the election referred to above
for the five Covered Executives who are expected to receive the greatest
benefits under the Employment Agreements (the "Named Officers"), based on
compensation levels as of the date of this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
Maximum Cash
Name Position Amount Payable
- ---- -------- ----------------
<S> <C> <C>
D. Dwayne Hoven President and Chief Executive Officer $3,937,500
James P. Mastrian Executive Vice President, Marketing $1,316,701
Carl A. Bellini Executive Vice President and Chief Operating Officer $1,323,001
Clarence D. Nichols Executive Vice President, Stores and Real Estate $810,000
Jack A. Staph Senior Vice President, Secretary and General Counsel $779,067
</TABLE>
The following summarizes additional payments and other benefits
which each of the Covered Executives will be entitled to receive upon a change
in control. A more detailed description of the benefits under certain of the
plans described may be found in Revco's 1996 Proxy Statement under the section
titled "Executive Compensation"; copies or description of such plans have been
filed as exhibits to Revco's 1996 Annual Report on Form 10-K.
Gross-Up Payment. The Employment Agreements provide that Revco
will be required to make an additional payment (the "gross-up payment") to
each Covered Executive to compensate for the effect of any excise tax under
Section 4999 of the Code that may be imposed on the compensation, accelerated
vesting of options and stock awards and any other payments received by the
Covered Executives under the Employment Agreements or otherwise, and that
such gross-up payment will be increased by the aggregate of all federal,
state and local income and excise taxes for which the Covered Executive
becomes liable as a result of such gross-up payment.
1992 Long-Term Incentive Plan (the "LTIP"). Each of the
Covered Executives is a participant in the LTIP and has been granted
restricted stock awards and non-qualified stock options thereunder. Upon a
change in control, which will be deemed to occur at the time of the Revco
stockholder approval, all awards and options granted under the LTIP will vest
in full.
As described under "The Merger Agreement--Treatment of Revco
Stock Options" below, outstanding options to purchase Revco Common Stock under
the LTIP will be converted into options to purchase CVS Common Stock. The
following table sets forth with respect to the Named Officers (i) the number
of shares of Revco Common Stock subject to stock options held by such persons
as of February 28, 1997, (ii) the weighted average exercise price for such
Revco stock options held by such persons and (iii) the estimated aggregate
value of such stock options (before deduction for applicable withholding
taxes), assuming that such options are converted into options to purchase CVS
Common Stock, based on the price of CVS Common Stock at the close of business
on February 28, 1997, of $46.25, determined by subtracting the aggregate
exercise price from the total value of the shares subject to such stock
options.
Stock Options
(including those Weighted
that accelerate upon Average Exercise Aggregate Value
a change in control) Price Per Share of Stock Options
-------------------- ---------------- -----------------
Mr. Hoven 1,016,509 $17.786 $24,308,032
Mr. Mastrian 251,536 $16.298 $6,389,267
Mr. Bellini 315,763 $16.865 $7,841,564
Mr. Nichols 85,470 $20.087 $1,847,154
Mr. Staph 198,314 $14.168 $5,459,747
The Covered Executives hold in the aggregate Revco stock
options having a value of $65,752,247, determined as described in the
preceding paragraph.
The Employment Agreements provide that Covered Executives
holding options to purchase Revco Common Stock under the LTIP are entitled,
upon the exercise of their options following termination during the Applicable
Period, to receive a cash payment by the Company equal to the greater of (i)
the fair market value of Revco Common Stock at the time of exercise and (ii)
the highest per share consideration to be paid for Revco Common Stock in the
relevant change in control transaction, less the amount of the exercise price
and applicable taxes. The Covered Executives have waived their rights to
receive cash for their options under this provision of the Employment
Agreements in connection with the Merger.
The Named Officers hold shares of restricted Revco Common Stock
under the LTIP, which will be converted into CVS Common Stock pursuant to the
Merger. Such restricted stock will become fully vested and all restrictions
thereon will lapse upon the Revco stockholder approval. The following table
sets forth with respect to the Named Officers (i) the number of shares of
restricted Revco Common Stock held by such persons as of February 28, 1997,
and (ii) the estimated aggregate value of such stock based on the Exchange
Ratio and the price of CVS Common Stock at the close of business on February
28, 1997, of $46.25.
Shares of Aggregate Value
Name Restricted Stock of Restricted Stock
---- ---------------- -------------------
Mr. Hoven 25,000 $1,042,475
Mr. Mastrian 18,000 750,582
Mr. Bellini 18,000 750,582
Mr. Nichols 10,600 442,009
Mr. Staph 10,700 446,179
The Covered Executives hold in the aggregate 230,050 shares of
restricted stock having a value of $9,592,855, determined as described in
the preceding paragraph.
Employee Stock Purchase Plan (the "ESPP"). Each of the Covered
Executives is a participant in the ESPP, which permits participants to
purchase Revco Common Stock at the lesser of (a) 85% of the fair market value
of the Revco Common Stock on the first day of the offering period or (b) 85%
of the fair market value of the Revco Common Stock on the last day of the
offering period. The price based on the fair market value on the first day of
the offering period for the current ESPP plan year is $20.19. The Employment
Agreements provide that upon a change in control (which for purposes of the
ESPP will be deemed to occur upon the Revco stockholder approval), the
then-current offering period under the ESPP will be shortened to allow each
Covered Executive to exercise his options thereunder as soon as practicable.
All other employees that participate in the ESPP will receive the same
benefits under the ESPP in connection with the Merger, with the number of
shares to be received based upon the amount of each employee's contribution to
the ESPP.
Economic Value Added Incentive Plan (the "EVA Plan"). The
Employment Agreements provide that the Covered Executives will receive a cash
bonus for the fiscal year in which termination of their employment occurs
based on Revco's financial results as of the date of termination and
annualized to equal a bonus for a twelve month period.
Pursuant to the Merger Agreement, CVS has agreed that Revco may
pay under the EVA Plan a bonus to each participant in the EVA Plan who is
actively employed by Revco at the earlier of (i) the Effective Time and (ii)
May 31, 1997, equal to the bonus such individual is entitled to under the EVA
Plan based upon Revco's performance through May 31, 1997, or, if earlier,
annualized performance through the Effective Time. To the extent the
Effective Time is after May 31, 1997, a new plan year will begin and each
participant in the EVA Plan who is actively employed by Revco at the Effective
Time will be entitled to receive a bonus based upon annualized performance
pro-rated for the part of the new plan year which has elapsed as of the
Effective Time, except that the bonus paid to the Covered Executives will be
annualized as described in the preceding paragraph. For the first plan year
of CVS ending after the Effective Time, each Continuing Employee who was a
participant in the EVA Plan will be entitled to participate in the CVS
incentive bonus plans or arrangements with a target bonus opportunity
(expressed as a percentage of base pay) not less than such Continuing
Employee's target bonus opportunity (expressed as a percentage of base pay)
under the EVA Plan for the plan year in which the Effective Time occurs.
The result of the foregoing provisions is that if the Merger is
consummated prior to May 31, 1997, the last day of Revco's current fiscal
year, Covered Executives and non-officers will be treated the same with
respect to the payment of bonuses under the EVA Plan. In the event the Merger
is consummated after May 31, the Covered Executives, if terminated, will be
entitled to annualized bonuses while the other employees (including
non-terminated Covered Executives) will be entitled only to pro rata
bonuses. The following table sets forth the maximum bonuses payable to the
Named Officers upon a termination following a change in control based on
the maximum bonuses for which each such officer is eligible pursuant to the
EVA Plan for the current fiscal year.
Maximum EVA Plan
Name Bonus Payable
---- ----------------
Mr. Hoven $1,158,656
Mr. Mastrian 286,974
Mr. Bellini 384,461
Mr. Nichols 218,078
Mr. Staph 194,054
The aggregate maximum bonuses payable to the Covered Executives
upon a termination following a change in control based on the maximum
bonuses for which such officers are eligible for the current fiscal year
under the EVA Plan is $4,762,314.
Supplemental Retirement and Survivor Benefit Plan (the "SERP").
Upon termination following a change in control, which will be deemed to occur
at the time of the Revco stockholder approval, each Covered Executive will be
credited with additional service for vesting and benefit accrual purposes for
the respective Applicable Period. The following table sets forth, on a
present value basis, the maximum additional benefits that may accrue for the
benefit of the Named Officers upon a termination following a change in control
based on the election such officers are entitled to make as described under
"--Cash Payment Upon Termination". Because Messrs. Hoven, Nichols and Staph
are currently entitled to a full benefit under the SERP, a termination
following a change in control will not affect their accrued benefits.
Maximum Additional
Name Accrued SERP Benefits
- ---- ---------------------
Mr. Mastrian $1,123,127
Mr. Bellini 2,807,460
The present value of the aggregate maximum additional benefits
that may accrue for the account of the Covered Executives upon a termination
following a change in control based on the election such Covered Executives
are entitled to make as described under "--Cash Payment Upon Termination" is
$6,427,509.
Revco will be required to contribute to rabbi trusts in amounts
sufficient to fund 100% of all benefits due under the SERP to each Covered
Executive after giving effect to such change in control, as well as to arrange
for the rabbi trusts to be administered by an independent third party. In
addition, the Covered Executives will be released from the provision of the
SERP that requires the loss of their benefits should they "engage in
Competition" (as defined under the SERP).
Other Arrangements Affecting Covered Executives
In order to provide incentives relating to the consummation of
the Merger and the integration of CVS and Revco, at or about the time that the
Merger Agreement was executed Revco entered into agreements with each of the
Covered Executives providing that each Covered Executive who remains employed
by Revco on the closing date for the Merger will be entitled to receive a cash
bonus equal to approximately 50% of such Covered Executive's annual base
salary. These cash bonuses were authorized by the Revco Board. The amounts
of the transition bonuses payable to the Named Officers are: Mr. Hoven,
$375,000; Mr. Mastrian, $164,588; Mr. Bellini, $220,500; Mr. Nichols,
$135,000; and Mr. Staph, $129,845. The total amount of transition bonuses
payable to all Covered Executives is $2,865,543.
In light of the extensive industry and company knowledge,
experience and expertise of each of Messrs. Hoven, Mastrian and Bellini and to
facilitate a smooth integration of the companies, CVS has entered into
consulting agreements (the "Consulting Agreements") with each of Messrs.
Hoven, Mastrian and Bellini, which will become effective upon consummation of
the Merger. The Consulting Agreements provide that each of Messrs. Hoven,
Mastrian and Bellini will make himself available to consult and cooperate with
and advise senior management of CVS, its Board of Directors and certain
persons designated by CVS with respect to matters involving the business and
affairs of Revco, including the closing of Revco's corporate headquarters in
Twinsburg, Ohio, for a term of one year, in the case of Mr. Hoven, and 18
months, in the cases of Messrs. Mastrian and Bellini, from the Effective Time
(each a "Termination Date"). Messrs. Hoven, Bellini and Mastrian shall be
entitled to receive $750,000, $661,500 and $493,763, respectively, over the
term of the Consulting Agreements, provided that if the closing of Revco's
corporate headquarters occurs prior to the Termination Date, all remaining
amounts payable under the Consulting Agreements will accelerate and become
immediately due and payable in full.
1992 Non-Employee Directors' Stock Option Plan
All of the directors of Revco who are not employees of Revco,
other than Talton Embry and Samuel Zell, have been granted stock options under
the Non-Employee Directors' Stock Option Plan (the "Directors' Plan"). Upon a
"change in control", the options granted under the Directors' Plan will become
immediately exercisable in full. As permitted by the Merger Agreement, the
Directors' Plan will be amended prior to the closing date for the Merger to
provide that a "change in control" will be deemed to occur with respect to the
Merger at the Effective Time (and not at the earlier of Revco stockholder
approval and the Effective Time, as would have applied in the absence of such
amendment). The non-employee directors hold in the aggregate 185,627 options
to purchase Revco Common Stock having a weighted average exercise price per
share of $17.608. As described under "The Merger Agreement--Treatment of
Revco Stock Options" below, outstanding options to purchase Revco Common Stock
under the Directors' Plan will be converted into options to purchase CVS
Common Stock. Assuming that such options are so converted, based on the price
of CVS Common Stock at the close of business on February 28, 1997 of $46.25,
the estimated aggregate value of such options is approximately $5,316,820.
Certain additional information with respect to executive
compensation and related employee benefits and other information concerning
Revco's executive officers and directors, subject to any modifications
contained in the foregoing discussion, is set forth in the 1996 Revco
Proxy Statement under the sections titled "The Board of Directors--
Compensation of the Board", "Security Ownership of Certain Persons" and
"Executive Compensation" and is incorporated herein by reference.
Treatment of Revco Stock Options
As described under "The Merger Agreement--Treatment of Revco
Stock Options", each outstanding option granted by Revco to purchase shares of
Revco Common Stock under the LTIP and the Directors Plan will be converted at
the Effective Time into options to purchase CVS Common Stock.
Revco currently maintains for the benefit of the holders of
Revco stock options a "cashless exercise procedure" whereby Revco arranges for
a broker-dealer to immediately sell, upon the request of any such holder, the
shares of Revco Common Stock to be issued upon the exercise of the underlying
options, the proceeds of such sale to be paid to Revco to the extent of the
exercise price for the underlying options and to the holder to the extent of
any excess above such price. In addition, Revco pays all related brokerage
commissions. The Merger Agreement requires CVS to maintain such procedure in
place for at least one year following the Effective Time.
Pursuant to the Merger Agreement, CVS and Revco agreed to
eliminate the discretion granted to their respective Boards under the LTIP to
terminate all existing options 90 days after a change in control, which will
be deemed to occur upon the Revco stockholder approval.
Other Employee Benefits
In the Merger Agreement, CVS agreed that following the
Effective Time it will honor all obligations under the Employment Agreements
and pay all benefits accrued through the Effective Time under all of Revco's
employee benefit plans, programs, policies and arrangements in accordance with
the terms thereof. In addition, CVS agreed to provide all employees of Revco
who continue to be employed by Revco as of the Effective Time ("Continuing
Employees") for a period of not less than one year following the Effective
Time with (a) annual compensation not less favorable than the annual
compensation they were receiving immediately prior to the Effective Time and
(b) benefits that, in the aggregate, are no less favorable than the benefits
provided to such Revco employees immediately prior to the Effective Time,
provided that the CVS incentive bonus plans or arrangements, the EVA Plan and
the ESPP are disregarded for such purpose. Following such one-year period,
CVS has agreed to provide the Continuing Employees with compensation and
benefits no less favorable than the compensation and benefits provided to
similarly situated CVS employees. In addition, for a period of one year
following the Effective Time, CVS has agreed to establish and maintain a plan
to provide severance and termination benefits to all non-union employees of
Revco that are no less favorable than the severance and termination benefits
to which such employees would have been entitled under Revco's plans and
arrangements in effect as of February 6, 1997. CVS also has agreed that it
will waive waiting periods and pre-existing condition requirements under its
medical benefit plans (to the extent waived under Revco's plans), give
Continuing Employees credit for any copayments and deductibles actually paid
by such employees under Revco's medical plans during the calendar year in
which the Merger occurs and recognize service with Revco for purposes of
eligibility under its welfare plans as well as for purposes of CVS' programs
or policies for vacation pay and sick pay. In addition, CVS has agreed to
honor all vacation, personal and sick days accrued by Continuing Employees
under Revco's plans, policies, programs and arrangements in effect immediately
prior to the Effective Time.
Directors and Officers Insurance; Limitation of Liability of Revco Directors
and Officers
The Merger Agreement provides that CVS will cause Revco to
indemnify (including the payment of reasonable fees and expenses of legal
counsel) the current or former directors or officers of Revco to the fullest
extent permitted by law for damages and liabilities arising out of facts and
circumstances occurring at or prior to the Effective Time. The Merger
Agreement also provides that for a period of six years after the Effective
Time, CVS will cause to be maintained in effect Revco's existing policies of
directors' and officers' liability insurance as in effect on February 6, 1997
(provided that CVS may substitute policies with reputable and financially sound
carriers having at least the same coverage and amounts and containing terms
and conditions that are no less advantageous) with respect to facts or
circumstances occurring at or prior to the Effective Time; provided that if the
annual premium for such insurance during such six-year period exceeds 200% of
the annual premiums paid by Revco as of February 6, 1997 for such insurance
(such 200% amount, the "Maximum Premium") then CVS will cause Revco to provide
the most advantageous directors' and officers' insurance coverage then
available for an annual premium equal to the Maximum Premium.
THE MERGER AGREEMENT
The following summary of the Merger Agreement is qualified in
its entirety by reference to the complete text of the Merger Agreement, which
is incorporated by reference herein and attached hereto as Annex A.
General
The Merger Agreement contemplates the Merger of Merger
Subsidiary with and into Revco, with Revco surviving the Merger as a
wholly-owned subsidiary of CVS. The Merger will become effective at the time
specified in the Certificate of Merger to be filed with the Secretary of State
of the State of Delaware. It is anticipated that such filing will be made
immediately upon the closing of the Merger, which closing will occur no later
than the second business day after the last of the conditions precedent to the
Merger set forth in the Merger Agreement has been satisfied or waived, unless
CVS and Revco agree upon a different date.
Merger Consideration
The Merger Agreement provides that each share of Revco Common
Stock outstanding immediately prior to the Effective Time (except as described
in the next sentence) will, at the Effective Time, be converted into the right
to receive that number (the "Exchange Ratio") of fully paid and non-assessable
shares of CVS Common Stock equal to (i) 0.4692 plus (ii) an additional
fraction of a share equal to the quotient obtained by dividing $20 by the
average closing price of CVS Common Stock on the NYSE during ten trading days
randomly selected by lot out of the twenty trading days ending on the fifth
trading day preceding the closing date; provided that the Exchange Ratio will
not be greater than 1.0097 or less than 0.8837. All shares of Revco Common
Stock that are owned by Revco as treasury stock and any shares of Revco Common
Stock owned by CVS or any subsidiary of CVS will, at the Effective Time, be
canceled and retired and will cease to exist and no payment will be made for
such shares.
Treatment of Revco Stock Options
Pursuant to the Merger Agreement, each outstanding option
granted by Revco to purchase shares of Revco Common Stock under the LTIP and
the Directors' Plan will be adjusted to provide that at the Effective Time,
such Revco stock option, to the extent outstanding immediately prior to the
Effective Time, will be deemed to constitute an option (without regard to any
vesting limitations) to acquire, on the same terms and conditions as were
applicable under such Revco stock option, the same number of shares of CVS
Common Stock as the holder of such Revco stock option would have been entitled
to receive pursuant to the Merger had such holder exercised such Revco stock
option in full immediately prior to the Effective Time, at a price per share
of CVS Common Stock equal to (A) the aggregate exercise price for the shares
of Revco Common Stock otherwise purchasable pursuant to such Revco stock
option divided by (B) the aggregate number of shares of CVS Common Stock deemed
purchasable pursuant to such Revco stock option; provided that after
aggregating all the shares subject to Revco stock options of a holder, any
fractional share of CVS Common Stock resulting from such calculation will be
rounded down to the nearest whole share. Outstanding options to purchase
Revco Common Stock under the ESPP will terminate at the Effective Time and
amounts contributed under the ESPP will be used to purchase shares of Revco
Common Stock. Because the terms of all Revco stock options granted under the
LTIP and the Directors' Plan will result in those options becoming exercisable
immediately upon a change of control, the options to acquire CVS Common Stock,
into which the Revco options will be deemed to have been converted, likewise
will be exercisable immediately at the Effective Time. For additional
information on Revco stock options, see "Interests of Certain Persons in the
Merger--Treatment of Revco Stock Options".
Exchange of Shares
Prior to the Effective Time, CVS will appoint an exchange agent
reasonably acceptable to Revco (the "Exchange Agent") for the purpose of
exchanging certificates representing shares of Revco Common Stock for
certificates representing shares of CVS Common Stock (and cash in lieu of
fractional shares as described below). CVS will deposit certificates
representing shares of CVS Common Stock with the Exchange Agent for conversion
of shares as described above under "--Merger Consideration". Promptly after
the Effective Time, CVS or the Exchange Agent will send each holder of Revco
Common Stock a letter of transmittal for use in the exchange and instructions
explaining how to surrender certificates to the Exchange Agent. Holders of
Revco Common Stock that surrender their certificates to the Exchange Agent,
together with a properly completed letter of transmittal, will receive CVS
Common Stock certificates representing such number of shares as described
under "--Merger Consideration". Holders of unexchanged shares of Revco Common
Stock will not be entitled to receive any dividends or other distributions
payable by CVS after the Effective Time until their certificates are
surrendered. Upon surrender, however, subject to applicable laws, such
holders will receive accumulated dividends and distributions payable on the
related shares of CVS Common Stock subsequent to the Effective Time, without
interest, together with cash in lieu of fractional shares (paid as described
in the following paragraph).
No fractional shares of CVS Common Stock will be issued in the
Merger. Instead, Revco stockholders that would otherwise be entitled to
receive fractional shares will receive a check in the amount of the net
proceeds from the sale of those shares in the market.
Certain Covenants
Interim Operations of Revco. From February 6, 1997 (the date
of execution of the Merger Agreement) until the Effective Time, Revco and its
subsidiaries are required to conduct their business in the ordinary course
consistent with past practice and to use their best efforts to preserve intact
their business organizations and relationships with customers, suppliers,
creditors and business partners and to use their reasonable efforts to keep
available the services of their present officers and employees. Without
limiting the foregoing, during this period, each of Revco and its subsidiaries
is subject to restrictions on (subject to certain limited exceptions) among
other things: amending its organizational documents; entering into any merger,
liquidation or other significant transaction; acquiring any businesses, stores
or material assets (other than acquisitions of not more than ten drugstores
and of inventory); selling or otherwise disposing of assets (other than
inventory) or selling, closing or relocating any stores except pursuant to
existing commitments; declaring dividends with respect to its capital stock
or redeeming or repurchasing its capital stock; issuing or selling equity
securities or options or other securities convertible into or exercisable for
equity securities; closing or taking certain other actions with respect to its
headquarters or distribution centers; entering into or renewing leases or
purchasing real estate, except pursuant to existing commitments; making
capital expenditures in excess of $1 million per project or item; taking
certain actions with respect to tax matters; incurring indebtedness; making
any changes in its accounting policies; increasing employee compensation or
severance benefits; and taking any other action that would make any
representation or warranty of Revco inaccurate in any material respect at, or
as of any time prior to, the Effective Time.
Interim Operations of CVS. From February 6, 1997 until the
Effective Time, CVS and its subsidiaries also are required to conduct their
business in the ordinary course consistent with past practice and to use their
best efforts to preserve intact their business organizations and relationships
with customers, suppliers, creditors and business partners and to use their
reasonable efforts to keep available the services of their present officers
and employees. Without limiting the foregoing, during this period, each of
CVS and its subsidiaries is subject to restrictions on (subject to certain
limited exceptions), among other things: amending its organizational documents
(except to the extent necessary if CVS determines to adopt a shareholder
rights plan); entering into any merger, liquidation or other significant
transaction; making material acquisitions of businesses or stores of any
person (except that CVS and its subsidiaries are expressly permitted to
acquire any drug store or any drug store or related business for cash in an
aggregate amount not in excess of $350 million so long as no significant
overlap exists between the acquired stores and Revco's stores); selling or
otherwise disposing of assets in an amount material to CVS and its
subsidiaries taken as a whole (other than inventory and except for its Bob's
Stores business and its remaining interest in Linens 'n Things); issuing or
selling equity securities or options or other securities convertible into or
exercisable for equity securities; declaring dividends with respect to its
capital stock (except for cash dividends of up to $0.14 per share per calendar
quarter on CVS Common Stock and required cash dividends on Series One ESOP
Convertible Preference Stock, $1 par value, of CVS ("CVS ESOP Preference
Stock")) or redeeming or repurchasing capital stock; incurring indebtedness;
making any changes in its accounting policies; and taking any other action
that would make any representation or warranty of CVS inaccurate in any
material respect at, or as of any time prior to, the Effective Time.
No Solicitation by Revco. Revco has covenanted in the Merger
Agreement that it will not, and that it will cause its subsidiaries, agents
and affiliates over which it exercises control not to, directly or indirectly,
take any action to solicit, initiate, encourage or facilitate the making of
any Acquisition Proposal (as defined below) or any inquiry with respect
thereto or engage in discussions or negotiations with any person with respect
thereto, or disclose any non-public information relating to Revco or any
subsidiary of Revco or afford access to the properties, books or records of
Revco or any subsidiary of Revco to any person that has made any Acquisition
Proposal. Notwithstanding the foregoing, CVS has agreed that Revco may
furnish non-public information to, and enter into discussions or negotiations
with, any person in connection with an unsolicited bona fide Acquisition
Proposal received from such person so long as prior to doing so, Revco
receives from such person an executed confidentiality agreement with terms no
less favorable to Revco than those contained in the existing confidentiality
agreement between CVS and Revco. Revco must notify CVS promptly of the
receipt of any Acquisition Proposal or any request for nonpublic information
relating to Revco or any subsidiary of Revco or for access to the properties,
books or records of Revco or any subsidiary of Revco by any person that may be
considering making, or has made, an Acquisition Proposal. "Acquisition
Proposal" means any offer or proposal for, or any indication of interest in, a
merger or other business combination involving Revco or any subsidiary of
Revco or the acquisition of any equity interest in, or a substantial portion
of the assets of, Revco or any subsidiary of Revco, other than the
transactions contemplated by the Merger Agreement and other than an offer for
a bona fide de minimis equity interest, or for an amount of assets not
material to Revco and its subsidiaries taken as a whole, that Revco has no
reason to believe would lead to a change of control of Revco (or to the
acquisition of a substantial portion of the assets of Revco and its
subsidiaries).
Revco Board's Covenant to Recommend. The Revco Board has
agreed to recommend the approval and adoption of the Merger Agreement to
Revco's stockholders. Notwithstanding the foregoing, the Revco Board is
permitted not to make such recommendation or to withdraw or modify in a manner
adverse to CVS such recommendation if it has complied with its obligations
under the no solicitation covenant described above under "--No Solicitation by
Revco" and a Superior Proposal (as defined below) is pending at the time the
Revco Board determines to take any such action or inaction. Revco must advise
CVS of the receipt of, and identity of the person making, the Superior
Proposal and must keep CVS reasonably informed of the status and material
terms of any Superior Proposal. "Superior Proposal" means any bona fide
Acquisition Proposal for at least a majority of the outstanding shares of
Revco Common Stock on terms that the Revco Board determines in its good faith
judgment (based on the advice of a financial advisor of nationally recognized
reputation, taking into account all the terms and conditions of the
Acquisition Proposal, including any break-up fees, expense reimbursement
provisions and conditions to consummation) are more favorable and provide
greater value to all Revco's stockholders than the Merger Agreement and the
Merger taken as a whole.
CVS Board's Covenant to Recommend. Unless the Revco Board has
taken action with respect to a Superior Proposal permitted by the Merger
Agreement as described above in "--Revco Board's Covenant to Recommend", the
CVS Board is obligated to recommend to the CVS stockholders the approval of
the issuance of shares of CVS Common Stock in the Merger.
Best Efforts; Antitrust Matters. Each party has agreed to use
its best efforts to take all actions and do all things necessary or advisable
under applicable laws and regulations to consummate the Merger and the
transactions contemplated by the Merger Agreement. In furtherance thereof,
each party has (i) filed a Notification and Report Form pursuant to the HSR
Act with respect thereto, (ii) agreed to provide as promptly as practicable
any additional information and documentary material that may be requested
pursuant to the HSR Act and (iii) agreed to take all other actions necessary
to cause the expiration or termination of the applicable waiting period under
the HSR Act as soon as practicable. Each party has also agreed to cooperate
in all respects with the other and to keep the other informed and involved in
all material respects in its dealings with any government regulator or other
person in connection with obtaining regulatory approval. In addition, each
party has agreed to use its respective best efforts to contest and resist any
action or proceeding challenging any transaction contemplated by the Merger
Agreement as violative of any federal or state antitrust law and 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 prohibits, prevents or restricts consummation of the transactions
contemplated by the Merger Agreement. If any objection is asserted with
respect to the transactions contemplated by the Merger Agreement under any
antitrust law or if any governmental or private suit is brought challenging
the contemplated transactions as violative of any antitrust law, the parties
will use their best efforts to resolve the objections or challenge so as to
permit consummation of the transactions. In furtherance thereof, each of CVS
and Revco (and, to the extent required by any Governmental Authority, its
respective subsidiaries and affiliates over which it exercises control) is
required to enter into a settlement with a governmental authority regarding
antitrust matters in connection with the transactions contemplated by the
Merger Agreement so long as the terms of such settlement do not require CVS or
Revco to hold separate (including by establishing a trust or otherwise) or to
sell or otherwise dispose of stores of CVS (and its subsidiaries) or of Revco
(and its subsidiaries) the aggregate revenues of which (for the fiscal year
ended December 31, 1996, in the case of CVS stores, and June 1, 1996, in the
case of Revco stores) exceeded $400 million (excluding for purposes of such
calculation stores, if any, acquired by CVS subsequent to the date of
execution of the Merger Agreement but including for purposes of such
calculation stores, if any, acquired by Revco subsequent to the date of
execution of the Merger Agreement).
Certain Employee Benefits Matters. The Merger Agreement
provides that CVS will honor all obligations under existing Revco employment
agreements and will pay all benefits accrued through the Effective Time under
Revco benefit plans and arrangements. In addition, CVS has agreed to certain
employee benefits matters and arrangements with respect to Continuing
Employees described under "Interests of Certain Persons in the Merger--Other
Employee Benefits".
Indemnification and Insurance of Revco Directors and Officers.
Pursuant to the Merger Agreement, (i) CVS has agreed that, after the Effective
Time, it will cause Revco and its subsidiaries to indemnify directors and
officers of Revco and its subsidiaries against certain liabilities and (ii)
CVS will maintain in effect for six years after the Effective Time certain
directors' and officers' liability insurance coverage for Revco directors and
officers, all as more fully described under "Interests of Certain Persons in
the Merger--Directors and Officers Insurance; Limitation of Liability of Revco
Directors and Officers".
Certain Other Covenants. The Merger Agreement contains certain
mutual covenants of the parties, including covenants relating to: actions to
be taken so as not to jeopardize the intended tax or accounting treatment of
the Merger; preparation and distribution of this Joint Proxy
Statement/Prospectus; public announcements; notification of certain matters;
access to information; co-operation in connection with scheduling their
respective stockholder meetings and in connection with certain governmental
filings and in obtaining any necessary governmental or other third party
consents or approvals; and confidential treatment of non-public information.
The Merger Agreement also contains certain covenants of CVS,
including covenants requiring CVS to: use its best efforts to list the CVS
Common Stock to be issued in the Merger on the New York Stock Exchange on or
prior to the closing date, subject to official notice of issuance; take the
necessary corporate action so that Thomas Thorsen and Sheli Rosenberg will
become directors of CVS effective at the Effective Time; maintain a charitable
commitment in the Cleveland area for a three-year period after the Effective
Time commensurate with the level previously maintained by Revco (but in an
amount not required to exceed $1,000,000 annually); and as promptly as
practicable following the Effective Time and in any event no later than the
earlier of (i) 45 days after the end of the calendar month in which the
Effective Time occurs and (ii) 60 days after the Effective Time, publicly
release the financial results of CVS and Revco covering at least a 30-day
period following the Effective Time.
Certain Representations and Warranties
The Merger Agreement contains substantially reciprocal
representations and warranties made by CVS and Revco to each other as to,
among other things: due organization and good standing; capitalization;
ownership of subsidiaries; corporate authorization to enter into the
contemplated transactions; governmental approvals required in connection with
the contemplated transactions; absence of any breach of organizational
documents and certain material agreements as a result of the contemplated
transactions; financial statements; filings with the SEC; information provided
by it for inclusion in this Joint Proxy Statement/Prospectus; absence of
certain material changes since a specified balance sheet date; absence of
undisclosed material liabilities; employee matters; tax matters; insurance;
compliance with laws; transactions with affiliates; litigation; absence of
certain defaults; sufficiency of assets; real property; environmental matters;
agreements with third party payors; stockholder vote required to approve the
contemplated transactions; finders fees; and the receipt of opinions of
financial advisors and accountant's letters. The representations and
warranties in the Merger Agreement do not survive the Effective Time.
Conditions to the Merger
Conditions to Each Party's Obligations to Effect the Merger.
The obligations of CVS, Revco and Merger Subsidiary to consummate the Merger
are subject to the satisfaction (or waiver by the party for whose benefit the
applicable condition exists) of the following conditions: (i) the obtaining
of approvals of the stockholders of CVS and Revco; (ii) the expiration of the
applicable waiting period under the HSR Act; (iii) the absence of any law,
judgment, injunction, order or decree prohibiting or enjoining the
consummation of the Merger; (iv) the absence of any suit, action or proceeding
by any governmental entity (A) seeking to restrain or prohibit the
consummation of the Merger or any of the other transactions contemplated by
the Merger Agreement, or seeking to obtain from CVS or Revco any damages the
amount of which would be reasonably likely to have a Material Adverse
Effect on Revco and CVS, taken as a whole, or (B) except to the extent
consistent with the obligations of Revco and CVS under the covenant
described above under "--Certain Covenants--Best Efforts; Antitrust
Matters", seeking to prohibit or limit the ownership or operation by CVS,
Revco or any of their respective subsidiaries of, or to compel CVS, Revco
or any of their respective subsidiaries to dispose of or hold separate, any
material portion of the business or assets of CVS, Revco or any of their
respective subsidiaries, as a result of the Merger or any of the other
transactions contemplated by the Merger Agreement; (v) CVS' registration
statement on Form S-4 with respect to the shares of CVS Common Stock to be
issued in the Merger having become effective under the 1933 Act and not
being subject to any stop order or related proceedings by the SEC; and (vi)
the shares of CVS Common Stock to be issued in the Merger having been
listed on the NYSE, subject to official notice of issuance.
Conditions to the Obligations of CVS. The obligations of CVS
and Merger Subsidiary to effect the Merger are further subject to all the
following conditions: (i) the performance in all material respects by Revco
of its obligations and the compliance by Revco in all material respects with
its covenants under the Merger Agreement at or prior to the Effective Time;
and (ii) the representations and warranties of Revco contained in the Merger
Agreement being true and correct in all material respects at and as of the
Effective Time (except for representations and warranties that address matters
only as of a particular date, which must be true and correct in all material
respects as of such date).
Conditions to the Obligations of Revco. The obligation of
Revco to effect the Merger is further subject to all the following conditions:
(i) the performance in all material respects by CVS of its obligations and the
compliance by CVS in all material respects with its covenants under the Merger
Agreement at or prior to the Effective Time; (ii) the representations and
warranties of CVS contained in the Merger Agreement being true and correct in
all material respects at and as of the Effective Time (except for
representations and warranties that address matters only as of a particular
date, which must be true and correct in all material respects as of such
date); and (iii) Revco having received the legal opinion of Cravath, Swaine &
Moore, to the effect that neither Revco nor any of its stockholders will
recognize gain or loss for U.S. federal income tax purposes as a result of the
Merger (other than in respect of any cash received in lieu of fractional
shares).
Termination of the Merger Agreement
Right to Terminate. The Merger Agreement may be terminated at
any time prior to the Effective Time by mutual written consent of Revco and
CVS. The Merger Agreement may be terminated by either Revco or CVS:
(a) if the Merger has not been consummated by September 30,
1997;
(b) if the stockholders of Revco or CVS fail to give the
necessary approval at a duly held meeting or any adjournment thereof;
(c) so long as the party seeking to terminate has complied in
all material respects with its obligations under the covenant
described above under "--Certain Covenants--Best Efforts;
Antitrust Matters", if consummation of the Merger would violate or
be prohibited by any law or regulation or if any injunction,
judgment, order or decree enjoining Revco or CVS from consummating
the Merger is entered and such injunction, judgment, order or
decree shall become final and nonappealable;
(d) upon a breach of any representation, warranty, covenant or
agreement of the other party, or if any representation or warranty
of the other party shall become untrue, in either case such that
the closing condition with respect thereto would be incapable of
being satisfied by September 30, 1997; or
(e) the Revco Board shall have failed to recommend or shall
have withdrawn or modified or changed in a manner adverse to CVS
its approval or recommendation of the Merger Agreement or the
Merger or shall have recommended a Superior Proposal, or Revco
shall have entered into a definitive agreement providing for a
Superior Proposal with a person other than CVS or its subsidiaries
(or the Revco Board shall have resolved to do any of the
foregoing); provided that Revco may not terminate under this
provision unless (i) prior to the Revco stockholder meeting Revco
shall have received a Superior Proposal and complied with its
obligations described under "Revco Board's Covenant to Recommend"
above and (ii) Revco shall have paid to CVS the termination fee
described below.
The right to terminate the Merger Agreement and receive any
termination payment thereunder will not be available to any party that is in
material breach of its obligations under the Merger Agreement or whose failure
to fulfill its obligations or to comply with its covenants under the Merger
Agreement has been the cause of, or resulted in, the failure to satisfy any
conditions to the obligations of either party.
If the Merger Agreement is validly terminated, the Agreement
will become void (except for the provisions relating to expenses) without any
liability on the part of any party unless such party is in willful material
breach thereof. The confidentiality agreement entered into between CVS and
Revco on January 8, 1997, will continue in effect until January 8, 2000
notwithstanding termination of the Merger Agreement.
Termination Fees and Expenses Payable by Revco. Revco has
agreed to pay CVS an amount equal to $80,000,000 plus all out-of-pocket
expenses (not to exceed $5,000,000) incurred by CVS in connection with the
transactions contemplated by the Merger Agreement if CVS or Revco terminates
the Merger Agreement (i) pursuant to paragraph (e) under "--Right to
Terminate" above or (ii) pursuant to paragraph (b) under "--Right to
Terminate" above because the Revco stockholders have voted against the Revco
Merger Proposal and the Revco Board has not complied with its obligation to
recommend the Merger to Revco's stockholders.
Termination Fees and Expenses Payable by CVS. CVS has agreed
to pay Revco an amount equal to $80,000,000 plus all out-of-pocket expenses
(not to exceed $5,000,000) incurred by Revco in connection with the
transactions contemplated by the Merger Agreement if CVS or Revco terminates
the Merger Agreement pursuant to paragraph (b) under "--Right to Terminate"
above because the CVS stockholders have voted against the CVS Merger Proposal
and the CVS Board has not complied with its obligation to recommend to the CVS
stockholders the issuance of shares of CVS common stock in the Merger.
Other Expenses
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 costs or expenses. We estimate that
Merger-related fees and expenses, consisting primarily of transaction costs
for fees and expenses of investment bankers, attorneys and accountants and
financial printing and other related charges, will total approximately $25
million (after tax), assuming the Merger is completed.
Certain Stockholder Arrangements
Termination of Existing Revco Stockholder Arrangements. Revco
has entered into letter agreements pursuant to which, as of the Effective
Time, each of the Stockholder Agreement between Zell/Chilmark Fund, L.P.
("Zell/Chilmark") and Revco dated as of June 1, 1992, the Registration Rights
Agreement between Zell/Chilmark and Revco dated as of June 1, 1992, and the
Registration Rights Agreement between Magten Asset Management Corporation
("Magten") and Revco dated as of January 20, 1993 will be terminated.
Stockholder Agreement. As an inducement and a condition to CVS
entering into the Merger Agreement, Zell/Chilmark (owner of approximately 19%
of the outstanding Revco Common Stock) entered into a Stockholder Agreement
with CVS dated as of February 6, 1997 (the "Stockholder Agreement"). The
following summary of the Stockholder Agreement is qualified in its entirety by
reference to the complete text of the Stockholder Agreement, which is
incorporated by reference herein and attached hereto as Annex E.
Pursuant to the Stockholder Agreement, Zell/Chilmark has
agreed, among other things, to vote all shares (the "Zell Shares") of Revco
Common Stock held by it in favor of the approval and adoption of the Merger
Agreement.
The Stockholder Agreement also provides that, during the period
commencing February 6, 1997, and continuing until the earlier of the Effective
Time and the termination of the Merger Agreement in accordance with its terms,
Zell/Chilmark will not, among other things, directly or indirectly: (i) offer
for sale, sell, transfer, tender, pledge, encumber (other than by operation of
law), assign or otherwise dispose of, or enter into any contract, option or
other arrangement or understanding with respect to or consent to the offer for
sale, sale, transfer, tender, pledge, encumbrance, assignment or other
disposition of, any or all of the Zell Shares or any interest therein; (ii)
except as contemplated by the Stockholder Agreement, grant any proxies or
powers of attorney, deposit the Zell Shares into a voting trust or enter into
a voting agreement with respect to the Zell Shares; or (iii) take any action
that would make any representation or warranty of Zell/Chilmark contained in
the Stockholder Agreement untrue or incorrect or would result in a breach by
Zell/Chilmark of its obligations thereunder or a breach by Revco of its
obligations under the Merger Agreement. In addition, Zell/Chilmark has agreed
not to take any actions with respect to solicitation of offers to acquire
Revco or a portion of its business on substantially the same terms as
described under "--Certain Covenants--No Solicitation by Revco" above.
The Stockholder Agreement will terminate upon the earlier to
occur of (i) the Effective Time and (ii) the termination of the Merger
Agreement in accordance with its terms.
Registration Rights Agreement. CVS has agreed in the Merger
Agreement to enter into a Registration Rights Agreement, effective as of the
Effective Time, with certain affiliates of Revco (including Zell/Chilmark and
Magten) and with the investors in Zell/Chilmark (each a "Holder"). The
following summary of the Registration Rights Agreement is qualified in its
entirety by reference to the complete text of the Registration Rights
Agreement, which is incorporated by reference herein and attached hereto as
Exhibit B to the Merger Agreement (Annex A hereto).
Under the Registration Rights Agreement, CVS is required to
file a shelf registration statement under the 1933 Act to permit Holders to
sell CVS Common Stock received by them in the Merger ("Registrable
Securities") on a delayed or continuous basis pursuant to Rule 415 under the
1933 Act. CVS may also sell securities for its own account under such shelf
registration statement. CVS is required to use its reasonable best efforts to
cause such shelf registration statement to be declared effective within 15
days after the public release of the combined financial report referred to
above under "--Certain Covenants--Certain Other Covenants". Except as
described below, CVS is generally required to maintain such shelf registration
statement effective for a period of 12 months following its initial
effectiveness.
Following the termination of effectiveness of the shelf
registration statement, the Holders are entitled to request, on one occasion
within 180 days after such termination, that CVS register (the "Demand
Registration") Registrable Securities for sale for such Holders' account, so
long as a minimum of 3,000,000 Registrable Securities are to be included by
Holders in such registration.
CVS is entitled to delay the filing or effectiveness of the
foregoing registrations or to suspend sales under the shelf registration for
specified periods, in the case of certain material events or matters affecting
CVS, in which case such 12-month and 180-day periods will be extended
accordingly.
A Holder will cease to have registration rights with respect
to Registrable Securities if (i) such Registrable Securities have been sold
pursuant to an effective registration statement or have been transferred to a
person that is not a Holder, or (ii) based on an opinion of counsel or a
no-action letter of the SEC, in either case reasonably acceptable to CVS (and,
in the case of securities held by Zell/Chilmark or its affiliates or partners
who are Holders, reasonably acceptable to Zell/Chilmark), such stock is
eligible for immediate sale pursuant to Rule 144 or Rule 145 under the 1933
Act (whether or not subject to applicable volume limitations thereunder),
provided that, notwithstanding such opinion or no-action letter, prior to the
termination of the twelve month shelf effectiveness period (as extended as
described above, if applicable), the shares of CVS common stock held by such
holder will be considered to be Registrable Securities unless they are then
generally eligible for sale without violation of applicable Rule 144 volume
limitations.
CVS is required to pay customary expenses in connection with
such registrations. The Holders will pay, among other expenses, underwriting
discounts and commissions, selling or placement agent or broker fees and
commissions relating to Registrable Securities sold by them, and transfer
taxes, if any, in connection with the sale of any Registrable Securities.
THE MEETINGS
This Joint Proxy Statement/Prospectus is furnished in
connection with the solicitation of proxies (i) from the holders of CVS Common
Stock and CVS ESOP Preference Stock by the CVS Board for use at the CVS Meeting
and (ii) from the holders of Revco Common Stock by the Revco Board for use at
the Revco Meeting. This Joint Proxy Statement/Prospectus and accompanying
form of proxy are first being mailed to the respective stockholders of CVS and
Revco on or about [April 11], 1997.
Times and Places; Purposes
The CVS Meeting will be held at CVS' headquarters, One CVS
Drive, Woonsocket, Rhode Island, 02895, on [May 27, 1997], starting at [10:00]
a.m. local time. At the CVS Meeting, the stockholders of CVS will be asked to
consider and vote upon (i) the approval of the issuance of shares of CVS
Common Stock in the Merger (the "CVS Merger Proposal"), (ii) the other CVS
annual meeting proposals (the "Other CVS Annual Meeting Proposals", and
together with the CVS Merger Proposal, the "CVS Proposals") described under
"Other CVS Annual Meeting Proposals" on page 72, and (iii) the approval of any
adjournment of the CVS Meeting.
Revco Meeting will be held at Revco's headquarters, 1925
Enterprise Parkway, Twinsburg, Ohio 44087, on [May 28, 1997], starting at
[10:30] a.m., local time. At the Revco Meeting, the stockholders of Revco
will be asked to consider and vote upon (i) the approval and adoption of the
Merger Agreement and the Merger (the "Revco Merger Proposal"), (ii) the
approval of any adjournment of the Revco Meeting, and (iii) such other matters
as may properly come before the Revco Meeting.
Voting Rights; Votes Required for Approval
CVS. The CVS Board has fixed the close of business on [April
9], 1997 as the record date (the "CVS Record Date") for CVS stockholders
entitled to notice of and to vote at the CVS Meeting.
The only outstanding voting securities of CVS are the shares of
CVS Common Stock and CVS ESOP Preference Stock. Only holders of record of the
shares of CVS Common Stock and CVS ESOP Preference Stock on the CVS Record
Date are entitled to notice of and to vote at the CVS Meeting. Under the
Delaware Law and the CVS Charter, each share of CVS Common Stock is entitled
to one vote on all matters submitted to CVS stockholders. Under the CVS
Charter, the holders of CVS ESOP Preference Stock are entitled to vote on all
matters submitted to a vote of holders of CVS Common Stock, voting together
with the CVS Common Stock as a single class. Each share of CVS ESOP
Preference Stock is entitled to the number of votes equal to the number of
shares of CVS Common Stock into which such share of CVS ESOP Preference Stock
could be converted on the record date for the applicable meeting (which is
currently approximately 1.2, subject to adjustment in the case of certain
dilutive events).
On the CVS Record Date, there were approximately ______ shares
of CVS Common Stock outstanding and entitled to vote at the CVS Meeting, held
by approximately ______ stockholders of record. On the CVS Record Date, there
were approximately ______ shares of CVS ESOP Preference Stock outstanding and
entitled to vote at the CVS Meeting, all held of record by the Trustee under
the CVS Corporation and Subsidiaries Employee Stock Ownership Plan (the "CVS
ESOP").
The affirmative vote of a majority of the votes represented by
the shares of CVS Common Stock and CVS ESOP Preference Stock present at the
CVS Meeting, in person or by proxy, voting as a single class (so long as such
shares represent a quorum), is required to approve the CVS Merger Proposal and
each Other CVS Annual Meeting Proposal, other than the election of directors.
The presence in person or by proxy of the holders of shares of CVS Common
Stock and CVS ESOP Preference Stock entitled to cast a majority of the total
votes of all such outstanding shares constitutes a quorum. The affirmative
vote of a plurality of the votes represented by the shares of CVS Common Stock
and CVS ESOP Preference Stock present at the CVS Meeting, in person or by
proxy, voting as a single class (whether or not a quorum exists), is required
to approve the election of directors.
The directors and officers of CVS beneficially own
approximately 2% of the outstanding CVS Common Stock. For additional
information on ownership of CVS Common Stock by CVS directors and executive
officers, see "Other CVS Annual Meeting Proposals--Share Ownership Information
of CVS Directors and Named Executive Officers" below.
Revco. The Revco Board has fixed the close of business on
[April 9], 1997 (the "Revco Record Date") as the record date for Revco
stockholders entitled to notice of and to vote at the Revco Meeting.
The only class of Revco capital stock entitled to notice of and
to vote at the Revco Meeting is the Revco Common Stock. Only holders of record
of shares of Revco Common Stock on the Revco Record Date are entitled to
notice of and to vote at the Revco Meeting. Each holder of record, as of the
Revco Record Date, of Revco Common Stock is entitled to cast one vote per
share.
On the Revco Record Date, there were approximately ________
shares of Revco Common Stock outstanding and entitled to vote at the Revco
Meeting, held by approximately ______ stockholders of record.
The presence, in person or by proxy, of the holders of a
majority of the outstanding shares of Revco Common Stock entitled to vote is
necessary to constitute a quorum at the Revco Meeting. The affirmative vote,
in person or by proxy, of the holders of a majority of the shares of Revco
Common Stock outstanding on the Revco Record Date is required to approve and
adopt the Revco Merger Proposal.
The directors and officers of Revco beneficially own
approximately 31% of the outstanding Revco Common Stock. This includes the
shares of Revco Common Stock owned by Zell/Chilmark (approximately 19% of the
Revco Common Stock), an entity controlled by three of the directors of Revco,
and the shares owned by Magten, an entity controlled by one of the directors
of Revco.
Proxies
All shares of CVS Common Stock and of Revco Common Stock
represented by properly executed proxies received prior to or at the
respective CVS Meeting or Revco Meeting, as the case may be, and not revoked,
will be voted in accordance with the instructions indicated in such proxies.
If no instructions are indicated on a properly executed returned proxy, such
proxies will be voted FOR the approval of the CVS Proposals or the Revco
Proposal, as the case may be. Each participant in the CVS ESOP instructs the
Trustee of the CVS ESOP how to vote his or her shares. As to unallocated
shares and shares with respect to which the Trustee receives no timely voting
instructions, the Trustee, pursuant to the ESOP Trust Agreement, votes these
shares in the same proportion as it votes all of the shares with respect to
which it has received timely voting instructions.
A properly executed proxy marked "ABSTAIN," although counted
for purposes of determining whether there is a quorum and for purposes of
determining the aggregate voting power and number of shares represented and
entitled to vote at the applicable Meeting, will not be voted. Accordingly,
since the affirmative votes described above are required for approval of the
Revco Merger Proposal and the CVS Proposals, a proxy marked "ABSTAIN" will
have the effect of a vote against the Revco Merger Proposal and the CVS
Proposals. In addition, the failure of a Revco stockholder to return a proxy
will have the effect of a vote against the Revco Merger Proposal.
Shares represented by "broker non-votes" (i.e., shares held by
brokers or nominees which are represented at a meeting but with respect to
which the broker or nominee is not empowered to vote on a particular proposal)
will be counted for purposes of determining whether there is a quorum at the
applicable Meeting, but will be considered to be voted only as to those
matters actually voted on. In accordance with NYSE rules, brokers and nominees
are precluded from exercising their voting discretion with respect to the
approval and adoption of non-routine matters such as the Merger, the issuance
of shares of CVS Common Stock in the Merger and approval of the CVS 1997
Incentive Compensation Plan and thus, absent specific instructions from the
beneficial owner of such shares, brokers are not empowered to vote such shares
with respect to the approval and adoption of the CVS Merger Proposal, the
Revco Merger Proposal or the CVS 1997 Incentive Compensation Plan. Since the
affirmative vote described above is required for approval of the Revco Merger
Proposal, a "broker non-vote" with respect to such proposal will have the
effect of a vote against such proposal.
A stockholder may revoke his or her proxy at any time prior to
its use by delivering to the Secretary of CVS or Revco, as the case may be, a
signed notice of revocation or a later-dated signed proxy or by attending the
applicable Meeting and voting in person. Attendance at the CVS Meeting or the
Revco Meeting will not in itself constitute the revocation of a proxy.
It is the policy of CVS and Revco to keep confidential proxy
cards, ballots and voting tabulations that identify individual stockholders,
except where disclosure is mandated by law and in other limited circumstances.
The cost of solicitation of proxies will be paid by CVS for CVS
proxies and by Revco for Revco proxies. In addition to solicitation by mail,
arrangements will be made with brokerage houses and other custodians, nominees
and fiduciaries to send the proxy materials to beneficial owners; and CVS or
Revco, as the case may be, will, upon request, reimburse such brokerage houses
and custodians for their reasonable expenses in so doing. CVS has retained
Morrow & Co. and Revco has retained D.F. King & Co., Inc. to aid in the
solicitation of proxies and to verify certain records related to the
solicitations. Each such firm will receive customary fees, and expense
reimbursement, for such services. To the extent necessary in order to ensure
sufficient representation at its Meeting, CVS or Revco may request by
telephone or telegram the return of proxy cards. The extent to which this
will be necessary depends entirely upon how promptly proxy cards are returned.
Stockholders are urged to send in their proxies without delay.
Stockholders should not send in any stock certificates with
their proxy cards. A transmittal form with instructions for the surrender of
stock certificates for Revco Common Stock will be mailed by CVS to former
Revco stockholders as soon as practicable after the consummation of the Merger.
Other Business; Adjournments
The CVS Board and the Revco Board are not currently aware of
any business to be acted upon at their respective Meetings other than as
described herein. If, however, other matters are properly brought before
either Meeting, or any adjournments or postponements thereof, the persons
appointed as proxies will have discretion to vote or act thereon according to
their best judgment. Adjournments may be made for the purpose of, among other
things, soliciting additional proxies. Any adjournment may be made from time
to time by approval of the holders of a majority of the shares present in
person or by proxy at the Meeting (whether or not a quorom exists) without
further notice other than by an announcement made at the Meeting. Neither CVS
nor Revco currently intends to seek an adjournment of its respective Meeting.
COMPARISON OF STOCKHOLDER RIGHTS
General
The rights of CVS stockholders are currently governed by the
Delaware General Corporation Law (the "Delaware Law") and the certificate of
incorporation and bylaws of CVS (the "CVS Charter" and the "CVS Bylaws",
respectively). The rights of Revco stockholders are currently governed by the
Delaware Law and the certificate of incorporation and bylaws of Revco (the
"Revco Charter" and the "Revco Bylaws", respectively). Accordingly, upon
consummation of the Merger, the rights of CVS stockholders and of Revco
stockholders who become CVS stockholders in the Merger will be governed by the
Delaware Law, the CVS Charter and the CVS Bylaws. The following is a summary
of the principal differences between the current rights of Revco stockholders
and those of CVS stockholders following the Merger.
The following discussions are not intended to be complete and
are qualified by reference to the Delaware Law, the CVS Charter, the CVS
Bylaws, the Revco Charter and the Revco Bylaws. Copies of the CVS Charter,
the CVS Bylaws, the Revco Charter and the Revco Bylaws are incorporated by
reference herein and will be sent to holders of shares of CVS Common Stock and
Revco Common Stock upon request. See "Where You Can Find More Information".
Comparison of Current Revco Stockholder Rights and Rights of CVS Stockholders
Following the Merger
The CVS Charter is not being amended in connection with the
Merger. The CVS Bylaws are not being amended in connection with the Merger
(except to the extent necessary to create vacancies on the CVS Board so that
Mr. Thorsen and Ms. Rosenberg may become directors of CVS at the Effective
Time).
The rights of Revco stockholders under the Delaware Law and the
Revco Charter and Revco Bylaws prior to the Merger are substantially the same
as the rights of CVS stockholders (including Revco stockholders who become CVS
stockholders as a result of the Merger) under the Delaware Law and the CVS
Charter and CVS Bylaws, with the following principal exceptions.
Authorized Capital Stock. The authorized capital stock of
Revco consists of 100,000,000 shares of Revco Common Stock and 25,000,000
shares of preferred stock, par value $0.01 per share. The authorized capital
of CVS is set forth under "Description of CVS Capital Stock--Authorized
Capital Stock".
Board of Directors. The Revco Charter provides that the number
of directors will be eleven. The Revco Bylaws provide that the size of the
Revco Board may be increased or decreased by the Revco Board. CVS' Board
currently consists of thirteen directors. The CVS Charter provides that the
number of directors will be not less than three nor more than eighteen, as
determined by the CVS Board.
Special Meetings of Stockholders. Under the CVS Charter,
special meetings of stockholders may be called by the Board of Directors, the
Chairman of the Board of Directors or the President (or the Vice Chairman in
the absence of a President) and may not be called by any other person. Under
the Revco Bylaws, the Board of Directors, the Chairman of the Board or
stockholders holding, in the aggregate, at least 50 percent of the voting
power of the issued and outstanding shares of capital stock of Revco may call
a special meeting at any time.
Stockholder Action by Written Consent. The Revco Bylaws permit
its stockholders to act by written consent whenever any action is required or
permitted to be taken by a vote at a stockholder meeting; provided that any
such written consent must be signed by the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares of stock of Revco
entitled to vote thereon were present and voted. The CVS Charter permits its
stockholders to act by written consent whenever any action is required or
permitted to be taken by a vote at a stockholder meeting; provided that any
such written consent must be signed by the holders of all outstanding shares
entitled to vote thereon.
Amendment of Corporate Charter and By-Laws. Generally, any
amendment of the Revco Charter or the CVS Charter requires approval by a
majority of the applicable Board and the holders of at least a majority of the
voting power of the issued and outstanding stock of the applicable company
entitled to vote thereon. Any amendment of the Revco Bylaws or the CVS Bylaws
requires the approval of a majority of the applicable Board or the holders of
at least a majority of the voting power of the issued and outstanding stock of
the applicable company. Notwithstanding the foregoing, the approval of CVS
stockholders holding more than two-thirds of the voting power of the then
outstanding shares of CVS ESOP Preference Stock, voting separately as a
series, is required if the amendment of the CVS Charter would alter or change
the powers, preferences or special rights of the shares of CVS ESOP Preference
Stock so as to affect them adversely.
Voting Rights. The Revco Common Stock is the only class of
Revco capital stock entitled to vote generally on all matters submitted to
Revco stockholders, including the election of directors and the Merger and
other transactions contemplated by the Merger Agreement. Each share of Revco
Common Stock is entitled to one vote on all matters submitted to Revco
stockholders.
The outstanding voting securities of CVS are the shares of CVS
Common Stock and CVS ESOP Preference Stock. Under the Delaware Law and the
CVS Charter, each share of CVS Common Stock is entitled to one vote on all
matters submitted to CVS stockholders. Under the CVS Charter, the holders of
CVS ESOP Preference Stock are entitled to vote on all matters submitted to a
vote of holders of CVS Common Stock, voting together with the CVS Common Stock
as a single class. Each share of CVS ESOP Preference Stock is entitled to the
number of votes equal to the number of shares of CVS Common Stock into which
such share of CVS ESOP Preference Stock could be converted on the record date
for the applicable meeting (which is currently approximately 1.2, subject to
adjustment in the case of certain dilutive events).
Certain Business Combinations. Article Fifth of the CVS Charter
provides that any Business Combination (defined below) with a Related Person
(defined below) requires, in addition to any vote required by law, the
affirmative approval of at least 66 2/3% of the outstanding shares of voting
stock, voting together as a single class, held by stockholders other than a
Related Person, unless, among other things, (i) the Continuing Directors
(defined below), by at least 66 2/3% vote of such Continuing Directors, have
expressly approved such Business Combination either in advance of or
subsequent to such Related Person's having become a Related Person or (ii)
certain fair price criteria and disclosure obligations are satisfied. The term
"Related Person" is defined to mean (a) any Person (other than CVS or any
wholly owned subsidiary) that, alone or together with any affiliates and
associates, is or becomes the beneficial owner of an aggregate of 10% or more
of the outstanding voting stock, and (b) any affiliate or associate of any
such Person, provided that the term "Related Person" shall not include (x) a
Person whose acquisition of such aggregate percentage of voting stock was
approved in advance by at least 66 2/3% of the Continuing Directors or (y) any
pension, profit sharing, employee stock ownership or other employee benefit
plan of CVS or any subsidiary, all of the capital stock of or equity interest
in which subsidiary is owned by CVS and one or more subsidiaries or CVS, or
any trustee or fiduciary when acting in such capacity with respect to any such
plan. The term "Business Combination" is defined to mean (a) any merger or
consolidation of CVS or a subsidiary with or into a Related Person, (b) any
sale, lease, exchange, transfer or other disposition, including without
limitation by way of a mortgage or any other security device, of any
substantial amount of the assets of CVS, one or more of its subsidiaries or
CVS and one or more of its subsidiaries to a Related Person, (c) the adoption
of any plan or proposal for the liquidation or dissolution of CVS proposed by
or on behalf of any Related Person, (d) any sale, lease, exchange, transfer or
other disposition, including without limitation by way of a mortgage or any
other security device, of any substantial amount of the assets of a Related
Person to CVS, one or more of its subsidiaries or CVS and one or more of its
subsidiaries, (e) the issuance of any securities of CVS, one or more of its
subsidiaries or CVS and one or more of its subsidiaries to a Related Person or
to a Person that, after giving effect thereto, would be a Related Person other
than the issuance of securities on a pro rata basis to all holders of stock of
the same class pursuant to a stock split or stock dividend, (f) any
reclassification of CVS' securities, recapitalization of CVS, or any merger or
consolidation of CVS with or into one or more of its subsidiaries or any other
transaction that would have the effect, directly or indirectly, of increasing
the voting power or other equity interest of a Related Person in CVS, (g) any
loan, advance, guaranty, pledge or other financial assistance by CVS, one or
more of its subsidiaries or CVS and one or more of its subsidiaries to or for
the benefit, directly or indirectly (except proportionately as a stockholder),
of a Related Person, (h) any agreement, contract or other arrangement
providing for any Business Combination and (i) any series of transactions that
a majority of Continuing Directors determines are related and that, taken
together, would constitute a Business Combination. The term "Continuing
Director" is defined to mean a director of CVS who is not the Related Person,
or an affiliate or associate of the Related Person (or a representative or
nominee of the Related Person or such affiliate or associate), that is
involved in the relevant Business Combination and (a) who was a member of the
CVS Board immediately prior to the time that such Related Person became a
Related Person or (b) whose initial election as a director was recommended by
the affirmative vote of at least 66 2/3% of the Continuing Directors then in
office, provided that, in either such case, such Continuing Director has
continued in office after becoming a Continuing Director.
There is no similar provision in the Revco Charter. However,
each of Revco and CVS is subject to the Delaware takeover statute set forth in
Section 203 of the Delaware Law.
DESCRIPTION OF CVS CAPITAL STOCK
The summary of the terms of the capital stock of CVS set forth
below does not purport to be complete and is qualified by reference to the CVS
Charter and CVS Bylaws. Copies of the CVS Charter and CVS Bylaws are
incorporated by reference herein and will be sent to holders of shares of CVS
Common Stock and Revco Common Stock upon request. See "Where You Can Find
More Information".
Authorized Capital Stock
Under the CVS Charter, CVS' authorized capital stock consists
of 300,000,000 shares of CVS Common Stock, 120,619 shares of Cumulative
Preferred Stock, par value $0.01 per share (the "CVS Preferred Stock"), and
50,000,000 shares of Preference Stock, par value $1 per share (the "CVS
Preference Stock") (CVS Cumulative Preferred Stock and CVS Preference Stock
being referred to herein collectively as "Preferred Stock").
CVS Common Stock
The holders of CVS Common Stock are entitled to receive
ratably, from funds legally available for the payment thereof, dividends when
and as declared by resolution of the CVS Board, subject to any preferential
dividend rights granted to the holders of any outstanding Preferred Stock. In
the event of liquidation, each share of CVS Common Stock is entitled to share
pro rata in any distribution of CVS' assets after payment or providing for the
payment of liabilities and the liquidation preference of any outstanding
Preferred Stock. Each holder of CVS Common Stock is entitled to one vote for
each share of CVS Common Stock held of record on the applicable record date on
all matters submitted to a vote of stockholders, including the election of
directors. In addition, holders of CVS ESOP Preference Stock are entitled to
vote on all matters submitted to a vote of holders of CVS Common Stock, voting
together with the CVS Common Stock as a single class. Each share of CVS ESOP
Preference Stock is entitled to the number of votes equal to the number of
shares of CVS Common Stock into which such share of CVS ESOP Preference Stock
could be converted on the record date for the applicable meeting, which is
currently approximately 1.2 (subject to adjustment in the case of certain
dilutive events).
Holders of CVS Common Stock have no cumulative voting rights or
preemptive rights to purchase or subscribe for any stock or other securities
and there are no conversion rights or redemption rights or sinking fund
provisions with respect to CVS Common Stock. The outstanding shares of CVS
Common Stock are, and the shares of CVS Common Stock issued pursuant to the
Merger will be, duly authorized, validly issued, fully paid and nonassessable.
CVS Preferred Stock and CVS Preference Stock
As of the CVS Record Date, (i) __ shares of CVS ESOP Preference
Stock were issued and outstanding and (ii) no other shares of Preferred Stock
were issued or outstanding. Under the CVS Charter, the CVS Board has the
authority, without further stockholder approval but subject to certain
limitations set forth in the CVS Charter, to create one or more series of
Preferred Stock, to issue shares of Preferred Stock in such series up to the
maximum number of shares of the relevant class of Preferred Stock authorized,
and to determine the preferences, rights, privileges and restrictions of any
such series, including the dividend rights, voting rights, rights and terms of
redemption, liquidation preferences, the number of shares constituting any
such series and the designation of such series. Pursuant to this authority,
the CVS Board could create and issue a series of preferred stock with rights,
privileges or restrictions, and adopt a stockholder rights plan, having the
effect of discriminating against an existing or prospective holder of such
securities as a result of such security holder beneficially owning or
commencing a tender offer for a substantial amount of CVS Common Stock. One of
the effects of authorized but unissued and unreserved shares of capital stock
may be to render more difficult or discourage an attempt by a potential
acquiror to obtain control of CVS by means of a merger, tender offer, proxy
contest or otherwise, and thereby protect the continuity of CVS' management.
The issuance of such shares of capital stock may have the effect of delaying,
deferring or preventing a change in control of CVS without any further action
by the stockholders of CVS. CVS has no present intention to adopt a
shareholder rights plan, but could do so without shareholder approval at any
future time.
Transfer Agent and Registrar
ChaseMellon Shareholder Services, LLC is the transfer agent and
registrar for the CVS Common Stock.
Stock Exchange Listing; Delisting and Deregistration of Revco Common Stock
It is a condition to the Merger that the shares of CVS Common
Stock issuable in the Merger be approved for listing on the NYSE on or prior
to the Effective Time, subject to official notice of issuance. If the Merger
is consummated, Revco Common Stock will cease to be listed on the NYSE.
LEGAL MATTERS
The validity of the CVS Common Stock to be issued to Revco
stockholders pursuant to the Merger will be passed upon by Davis Polk &
Wardwell, special counsel to CVS. It is a condition to the consummation of the
Merger that Revco receive an opinion from Cravath, Swaine & Moore, special
counsel to Revco, to the effect that, among other things, neither it nor any
of its stockholders will recognize gain or loss for U.S. federal income tax
purposes as a result of the Merger (other than in respect of any cash paid in
lieu of fractional shares). See "The Merger Agreement--Conditions to the
Merger" and "The Merger--Certain U.S. Federal Income Tax Consequences".
EXPERTS
The consolidated financial statements and schedule of CVS
Corporation and its subsidiaries as of December 31, 1996 have been
incorporated by reference in this Joint Proxy Statement/Prospectus in reliance
upon the reports of KPMG Peat Marwick LLP, independent certified public
accountants, incorporated by reference herein, and given upon the authority of
said firm as experts in accounting and auditing.
The consolidated financial statements and schedules of Revco
D.S., Inc. and subsidiaries as of June 1, 1996, incorporated by reference in
this Joint Proxy Statement/Prospectus to the extent and for the periods
indicated in their report, have been audited by Arthur Andersen LLP,
independent public accountants, and are incorporated by reference herein in
reliance upon the authority of said firm as experts in giving said report.
OTHER CVS ANNUAL MEETING PROPOSALS
In addition to the CVS Merger Proposal discussed above, CVS
stockholders are also being asked, at CVS' annual meeting of stockholders, to
vote upon the following Other CVS Annual Meeting Proposals: (i) Other CVS
Proposal 1 -- the election of eleven CVS directors for terms expiring in May
1998, (ii) Other CVS Proposal 2 -- the approval of the CVS 1997 Incentive
Compensation Plan, (iii) Other CVS Proposal 3 -- the ratification of the
appointment of KPMG Peat Marwick LLP as CVS' auditors for the year ending
December 31, 1997, and (iv) such other business as may be properly brought
before the CVS Meeting and any adjournments thereof.
For information on the CVS Meeting, the vote required to
approve each of the Other CVS Annual Meeting Proposals and proxy instructions,
see "The Meetings" on page 64.
Nominees for Election as CVS Directors
The following individuals are nominees for election as
directors at the CVS Meeting. Each individual's age is indicated in
parentheses alongside such individuals name.
Allan J. Bloostein, (67), a director since 1989, is the
President of Allan J. Bloostein Associates, a consulting firm; retired Vice
Chairman and director of May Department Stores; director of Taubman Centers
Inc.; trustee or director of various Smith Barney investment portfolios.
W. Don Cornwell, (49), a director since 1994, is the Chairman
of the Board and Chief Executive Officer of Granite Broadcasting Corporation,
a group broadcasting company.
Thomas P. Gerrity, (55), a director since 1995, is the Dean of
The Wharton School of the University of Pennsylvania; director of Digital
Equipment Corporation, the Federal National Mortgage Association, Reliance
Group Holdings, Inc., the Sun Company, Inc., and Union Carbide Corporation;
trustee of the MAS Funds.
Stanley P. Goldstein, (62), a director since 1984, is the
Chairman of the Board and Chief Executive Officer of CVS since January 1987;
director of NYNEX Corporation, Linens 'n Things and Footstar.
William H. Joyce, (61), a director since 1994, is the Chairman
of the Board and Chief Executive Officer of Union Carbide Corporation, a
leading producer of chemicals and polymers; from January 1993 to January 1996,
President, Chief Operating Officer and director of Union Carbide Corporation;
from December 1991 to January 1993, Executive Vice President of Union Carbide
Corporation; director of Reynolds Metals Company.
Terry R. Lautenbach, (58), a director since 1991, is a retired
Senior Vice President of IBM Corporation, a multinational advanced information
technology company; director of Air Products and Chemicals Inc., Varian
Associates, Inc. and Footstar; trustee of Loomis-Sayles Mutual Funds.
Terrence Murray, (57), a director since 1996, is the Chairman,
President and Chief Executive Officer of Fleet Financial Group; director of
A.T. Cross Company and Allmerica Financial Corporation.
Thomas M. Ryan, (44), a director since 1996, is the Vice
Chairman and Chief Operating Officer of CVS since October 1996; President and
Chief Executive Officer of CVS Pharmacy, Inc., since January 1994; from January
1990 to January 1994, Executive Vice President - Stores of CVS Pharmacy, Inc.;
director of Citizen's Bank.
Ivan G. Seidenberg, (50), a director since 1993, is the
Chairman of the Board and Chief Executive Officer of NYNEX Corporation, a
worldwide communications company; from January 1995 to April 1995, President,
Chief Executive Officer and director of NYNEX Corporation; from February 1994
to January 1995, President, Chief Operating Officer and Vice Chairman of NYNEX
Corporation; from April 1991 to February 1994, Vice Chairman,
Telecommunications Group, NYNEX Corporation; director of American Home
Products Corporation, Viacom Inc. and Allied Signal Inc.
Patricia Carry Stewart, (68), a director since 1989, is a
retired Vice President of The Edna McConnell Clark Foundation, a charitable
foundation; director of Bankers Trust New York Corporation.
M. Cabell Woodward, Jr., (68), a director since 1982, is a
retired Vice Chairman, Chief Financial Officer and director of ITT
Corporation, a diversified multinational corporation; director of The Black &
Decker Corporation and Footstar; trustee of a management investment company
sponsored by Paine Webber.
Meetings and Committees of the CVS Board
During the 1996 fiscal year, there were nine meetings of the
CVS Board of directors. CVS maintains standing Audit, Nominating and
Compensation Committees of the CVS Board of Directors. No director attended
fewer than 75% of the total number of meetings of the Board and of the
committees of the Board on which he or she served during 1996, except for
Michael H. Jordan.
The Audit Committee held three meetings during the 1996 fiscal
year. The duties of the Audit Committee are (i) to consider the adequacy of
the accounting and internal control systems, (ii) to oversee the audit
function, both independent and internal, (iii) to review annual consolidated
financial statements, (iv) to direct and supervise special investigations, (v)
to recommend to the CVS Board of Directors the appointment of independent
auditors, (vi) to review non-audit services provided by the independent
auditors, (vii) to review conflict of interest policy and compliance
procedures and (viii) to report to the CVS Board of Directors from time to
time and make such recommendations and observations as it sees fit.
The members of the Audit Committee are Patricia Carry Stewart,
Chairman, W. Don Cornwell, William H. Joyce and Thomas P. Gerrity.
The Nominating Committee held four meetings during the 1996
fiscal year. The duties of the Nominating Committee are to nominate, in
concert with the Chairman of the CVS Board of Directors, any new director for
election by the CVS Board of Directors. The Nominating Committee will
consider nominees recommended by the shareholders; the Committee, however,
does not have any formal procedure to be followed by shareholders in
submitting such recommendations.
The members of the Nominating Committee are Terry R.
Lautenbach, Chairman, Allan J. Bloostein, William H. Joyce and M. Cabell
Woodward, Jr.
The Compensation Committee held seven meetings during the 1996
fiscal year. The duties of the Compensation Committee are (i) to review and
approve the salaries, bonuses and other compensation of all officers and
directors of CVS and its subsidiaries and of each executive of CVS and its
subsidiaries whose base salary is greater than $200,000 per annum, (ii) to
administer the 1997 Incentive Compensation Plan and any outstanding awards
under the Omnibus Stock Incentive Plan and the 1973 and 1987 Stock Option
Plans, subject to the terms of such plans and (iii) to administer any profit
incentive plans for the benefit of CVS and its divisions.
The members of the Compensation Committee are M. Cabell
Woodward, Jr., Chairman, Allan J. Bloostein, Terry R. Lautenbach, Ivan G.
Seidenberg and Terrence Murray.
Compensation of CVS Directors
Summarized below are each of the components of directors
compensation in effect for the fiscal year ended December 31, 1996.
Annual Retainer and Stock Grant. Each director who is not an
employee of CVS receives a retainer of $25,000 per year and a fee of $1,000
for each CVS Board or committee meeting that he or she attends. In addition,
each director who is not an employee of CVS receives an annual retainer of
$2,500 for each committee he or she chairs. One-half of the annual retainer
is paid in CVS Common Stock. At a director's election, all retainers and
meeting fees may be paid in CVS Common Stock. In accordance with the 1996
Directors Stock Plan, each non-employee director receives an annual grant
of 347 shares of CVS Common Stock, subject to proration for any partial
year of service. Receipt of shares may be electively deferred.
As of December 31, 1996, CVS' directors had deferred receipt of
shares of CVS Common Stock as follows: Mr. Bloostein, 3,558 shares; Mr.
Cornwell, 1,026 shares; Mr. Gerrity, 183 shares; Mr. Jordan, 2,523 shares; Mr.
Joyce, 1,393 shares, Mr. Lautenbach, 1,911 shares; Mr. Seidenberg, 1,185
shares; Ms. Stewart, 3,711 shares; and Mr. Woodward, 5,573 shares.
Directors Retirement Plan. The CVS Board of Directors
determined to cease further accruals under the Directors Retirement Plan and
to permit each director who is entitled to a benefit under the Directors
Retirement Plan to elect to receive the present value of such benefit in the
form of shares of CVS Common Stock. Each of CVS' entitled directors elected
to do so.
Directors and Officers Liability Insurance. CVS has purchased
directors and officers liability insurance with a limit of $100,000,000 and
pension trust liability insurance with a limit of $50,000,000. This insurance
was purchased in layers from National Union Fire Insurance Company of
Pittsburgh, Pennsylvania; Federal Insurance Company of Warren, New Jersey;
Royal Indemnity Company of Charlotte, North Carolina; Columbia Casualty
Insurance Company of Chicago, Illinois; St. Paul Surplus Lines Company of St.
Paul, Minnesota; and Reliance Insurance Company of Philadelphia, Pennsylvania.
The pension trust liability insurance covers actions of directors and officers
as well as other employees with fiduciary responsibilities under ERISA. All
of the insurance policies expire on June 30, 1997. The aggregate premium for
these insurance policies is $791,445 for the directors and officers liability
coverage and $110,753 for the pension trust liability coverage. It is
expected that the above liability insurance coverage will be renewed or
replaced upon expiration of the above policies.
Compensation Committee Interlocks and Insider Participation
Mr. Ivan Seidenberg, the President and Chief Executive Officer
of NYNEX, who is one of the directors standing for re-election, serves on CVS'
Compensation Committee. Mr. Stanley Goldstein, the Chairman and Chief
Executive Officer of CVS, serves on the Board of Directors of NYNEX but does
not serve on NYNEX's Compensation Committee.
Share Ownership Information of CVS Directors, Nominees as Directors and Named
Executive Officers
Share ownership information for directors, the nominees for
election at the CVS Meeting and the executive officers named in the Summary
Compensation Table on page 80 hereof is set forth below. Mr. Jordan and Mr.
Rosenthal are current directors who are not standing for re-election at the
CVS meeting.
Ownership of CVS Common Stock(1)
----------------------------------
Name Number Percent
- ---- ------------ ---------
Allan J. Bloostein 10,087(2)(5) *
Charles Conaway 111,504(2)(3)(4) *
W. Don Cornwell 3,565(2)(5) *
Thomas P. Gerrity 4,001(2)(5) *
Stanley P. Goldstein 838,483(2)(3)(4)(6) *
Michael H. Jordan 10,382(2)(5) *
William H. Joyce 4,465(2)(5) *
Terry R. Lautenbach 8,730(2)(5) *
Larry J. Merlo 40,892(2)(3)(4) *
Terrence Murray 1,309(6) *
Daniel C. Nelson 119,278(2)(3)(4) *
Harvey Rosenthal 432,640(2)(4) *
Thomas M. Ryan 221,863(2)(3)(4) *
Ivan G. Seidenberg 4,620(2)(5) *
Patricia Carry Stewart 9,740(2)(5) *
M. Cabell Woodward, Jr. 13,240(2)(5) *
All directors and executive
officers as a group (18 persons) 1,885,422(2)(3)(4)(6) 1.7%
- --------------------
*Less than 1%.
(1) Unless otherwise indicated, ownership means sole voting and investment
power. The number of shares and other information indicated in this table
are as of February 17, 1997.
(2) The following shares of CVS Common Stock included above for the indicated
persons and group are not presently owned, but are subject to options
which were outstanding on February 17, 1997 and were exercisable within
60 days thereafter: Mr. Goldstein, 660,583; each of Messrs.
Bloostein, Jordan, Woodward and Ms. Stewart, 9,240; Mr. Lautenbach,
6,930; Mr. Gerrity, 2,310; Mr. Seidenberg, 4,620; Messrs. Joyce
and Cornwell, 3,465; Mr. Rosenthal 411,517; Mr. Ryan, 184,316; Mr.
Conaway, 93,544; Mr. Nelson, 98,163; Mr. Merlo, 34,473; directors
and executive officers as a group, 1,588,274.
(3) The following shares of CVS Common Stock included above for the indicated
persons and group were granted under CVS' Omnibus Stock Incentive Plan
and, although no longer subject to performance standards since the one
year performance period for these awards has expired, are subject to
certain restrictions as to continued employment and transfer of such
shares as provided in the plan: Mr. Goldstein, 9,177; Mr. Ryan,
33,044; Mr. Conaway, 17,960; Mr. Nelson, 18,545; Mr. Merlo,
6,419; executive officers as a group, 87,840.
(4) The CVS ESOP, established in 1989, held as of February 17, 1997, 5,526,677
shares of CVS ESOP Preference Stock. The Bank of New York, the trustee of
the CVS ESOP, will vote shares held by the CVS ESOP in proportion to
instructions received from plan participants. As of December 31, 1996 the
last date on which an allocation was made, Mr. Goldstein has been
allocated 776.619 shares; Mr. Ryan has been allocated 750.062 shares;
Mr. Conaway has been allocated 203.498 shares; Mr. Nelson has been
allocated 147.150 shares; Mr. Merlo has been allocated 462.799
shares; Mr. Rosenthal has been allocated 720.492 shares; and all
executive officers as a group have been allocated 3,595.170 shares.
These amounts have not been included in the above table.
(5) The receipt of the following shares of Common Stock received as director
compensation has been deferred pursuant to the 1996 Directors Stock Plan:
Mr. Bloostein, 3,558 shares; Mr. Cornwell, 1,026 shares; Mr. Gerrity, 183
shares; Mr. Jordan, 2,523 shares; Mr. Joyce, 1,393 shares; Mr. Lautenbach,
1,911 shares; Mr. Seidenberg, 1,185 shares; Ms. Stewart, 3,711 shares; and
Mr. Woodward, 5,573 shares. These amounts have not been included in the
above table.
(6) Of the shares shown opposite Mr. Goldstein's name, 20,000 shares are held
by Mr. Goldstein's wife. Mr. Goldstein disclaims beneficial ownership of
such shares. Of the shares shown opposite Mr. Murray's name, 500 shares
are held by a charitable foundation. Mr. Murray disclaims beneficial
ownership of such shares.
Share Ownership Information of Certain Principal Stockholders
CVS is not aware of any person who owned beneficially more than
5% of the outstanding voting securities of CVS as of February 17, 1997, except
as shown in the following table:
<TABLE>
<S> <C> <C> <C>
Percent of
Title of Class Name and Address of Beneficial Owner No. of Shares Class
- -------------- ------------------------------------ ------------- ----------
Common Stock FMR Corp.(1) 15,947,754 14.9%
82 Devonshire Street
Boston, MA 02109
Common Stock Brinson Partners, Inc.(2) 6,904,354 6.5%
209 S. LaSalle Street,
11th Floor
Chicago, IL 60604-1295
Series One ESOP CVS Corporation and Subsidiaries 5,526,677 100%
Convertible Preference Employee Stock Ownership Plan Trust
Stock c/o Bank of New York, as Trustee(3)
48 Wall Street
New York, NY 10005
</TABLE>
- --------------------
* This calculation is based on all outstanding shares of CVS Common Stock
and CVS ESOP Preference Stock as of February 17, 1997. The percent of
voting securities owned by FMR Corp., Brinson Partners, Inc. and the
CVS ESOP are 14.0%, 6.1% and 5.8%, respectively.
(1) FMR Corp. ("FMR") filed a statement with the SEC dated December 12, 1996
on Schedule 13G under the Securities Exchange Act of 1934, as the parent
holding company in accordance with Rule 13d-1(b)(ii)(G) of such Act,
disclosing beneficial ownership of greater than 5% of CVS Common Stock
(15,947,754 shares). According to the statement, FMR and/or subsidiaries
have sole voting power with respect to 951,613 of such shares and sole
dispositive power over all of these shares, and FMR has certified that all
of these shares were acquired in the ordinary course of business, and not
for the purpose of changing or influencing the control of CVS.
(2) Share ownership information relating to Brinson Partners, Inc. set forth
in the table above is based on information contained in a 13(f) Filing
Report obtained from CDA/Spectrum as of August 31, 1996.
(3) Each participant in the CVS ESOP instructs the Trustee of the CVS ESOP how
to vote his or her shares. As to unallocated shares and shares with
respect to which the Trustee receives no timely voting instructions, the
Trustee, pursuant to the ESOP Trust Agreement, votes these shares in the
same proportion as it votes all of the shares with respect to which it has
received timely voting instructions. Currently, each share of CVS ESOP
Preference Stock is entitled to 1.2 votes per share on all matters
submitted to a vote of the holders of CVS Common Stock, voting together
with the holders of CVS Common Stock as a single class.
Executive Compensation
Compensation Committee Report on Executive Compensation
CVS' executive compensation program is administered by the
Compensation Committee of the CVS Board of Directors. This Committee is
comprised of five independent, non-employee directors. The Compensation
Committee has prepared the following report on the executive compensation
program in which executive officers, including those named in the Summary
Compensation Table below, participate.
Compensation Policies. The Compensation Committee has
established several important policies as a framework for CVS' executive
compensation program. The compensation program is designed to motivate key
executives to achieve business objectives, reward them for their achievements
and align their long term interests with those of the shareholders to create
maximum shareholder value. The program is also designed to provide
compensation opportunities that are comparable in the aggregate to those
offered by peer companies in the retail industry, allowing CVS to compete for
and retain top caliber executives who are critical to CVS' success.
The Compensation Committee engaged a leading national
compensation consultant to assist it in the design of a new executive
compensation program for the key CVS management group. The consultant was
engaged to research market data and best practices for the key management
group, including the Chief Executive Officer and the executive officers named
in the Summary Compensation Table, to compare their salaries and other
compensation awards to retail industry standards and to make appropriate
recommendations reflective of CVS' high-growth strategy. This comparison
included compensation levels reported for senior executives of nine specific
retailers (including four drug chains) with sales ranging from approximately
$2.5 billion to $11.8 billion. Five of the companies in this survey group are
included in the S&P Retail Composite Index used in the stock performance graph
on page 83.
In connection with CVS' restructuring and implementation of a
new executive compensation program, the Committee terminated the multi-year
special incentive plan previously maintained for certain CVS senior executives
(including Messrs. Ryan, Conaway, Merlo and Nelson), which focused on
divisional performance measures. The Committee has determined to tie the
future compensation of such executives directly to the annual achievement of
Corporate goals and the creation of long-term CVS shareholder value.
Therefore, commencing in 1997, CVS executive officers as well as other key
management will participate in the Corporate annual Profit Incentive Plan and
the newly designed Corporate long term Partnership Equity Program described
below. The last payment under the divisional special incentive plan occurred
with respect to 1996 and was made in cash, restricted stock that vests in
equal installments over a three-year period, and stock options whose terms are
described below.
Therefore, compensation in 1996 for CVS' executive officers
named in the Summary Compensation Table was comprised of base salaries and
cash bonus under the Corporate Profit Incentive Plan with respect to the Chief
Executive Officer; base salaries, cash bonus, restricted stock and stock
options under the special incentive plan for other CVS senior executives
(including Messrs. Ryan, Conaway, Merlo and Nelson); and for Messrs. Ryan and
Conaway, recognition awards for their exceptional efforts and contributions to
CVS' highly successful restructuring. Total executive compensation levels,
comprised of salaries, annual incentives, and long term incentives (excluding
recognition awards), were targeted in 1996 at the 50th to 75th percentile of
compensation paid by comparable companies in the survey group. However,
actual total compensation levels of executive officers range well below or
above in any one year and over a period of years based on performance against
annual and long term business objectives and total return to shareholders.
Base Salaries. The Committee reviews base salaries annually
and considers increases based on corporate profitability, competitive
salaries, position responsibility levels and individual qualifications and
performance. Salaries payable in 1996 to all executive officers named in the
Summary Compensation Table were increased, on average, 7.3%. The Chief
Executive Officer's base salary has not been increased since 1993.
Annual Incentive Awards. The Corporate Profit Incentive Plan
is an annual cash incentive program that rewards corporate employees based on
performance relative to predetermined objectives established for the year.
The award paid to each participant in the Corporate Profit Incentive Plan for
100% performance relative to annual objectives is known as the "Normal Award."
Normal Awards range up to 60% of base salary for the Chief Executive Officer
and scale down depending on position responsibilities. The Plan provides for
larger awards, up to a maximum award of 200% of the Normal Award if
performance exceeds pre-determined objectives, and smaller or no awards if
performance falls below such objectives. For 1996, the Committee determined
the Chief Executive Officer's award based on meeting CVS' objective for
consolidated earnings before federal income taxes, its assessment of
achievements in meeting CVS' restructuring plan in terms of key milestones in
the scheduled disposition of businesses in a timely, cost-effective and value
added manner, reducing overhead, and having in place all necessary corporate
governance measures to meet the needs of the new entities. The Committee
concluded that the Chief Executive Officer's performance in implementing CVS'
restructuring was outstanding and, accordingly, the Chief Executive Officer's
annual award was paid at 159% of Normal Award based on the achievement of
objectives.
As discussed above, several executive officers, including
certain named executive officers with CVS operational responsibilities during
1996 received 1996 awards in cash and restricted stock based on achievement of
multi-year profit objectives under the CVS special incentive plan. Other
executive officers with CVS operational responsibilities during 1996 were
awarded 1996 bonuses based on achievement of CVS annual objectives.
In assessing the results achieved by management during 1996,
the Committee recognized the extraordinary work performed and resultant
value created for CVS' shareholders by Messrs. Ryan and Conaway in
successfully implementing CVS' restructuring. Total return to shareholders
during 1996 was approximately 82% (including reinvested cash dividends as
well as the Footstar spin-off), resulting in the creation of approximately
$2.3 billion in shareholder value. Accordingly, the Committee awarded each
of Messrs. Ryan and Conaway special bonuses of $1.5 million payable in
1999.
Stock Options. Since significant grants of stock options with
new three-year staggered vesting were made to the Chief Executive Officer
and other executive officers in April 1995 to provide a significant
incentive for achieving high shareholder returns over the long term, no
grants were made to these officers in 1996. However, stock option grants
were made in 1996 to certain CVS executive officers, including Messrs.
Ryan, Conaway, Nelson and Merlo, in connection with the termination of the
special incentive plan for certain CVS executives. One-half of these
options vest in three equal installments on the second, third and fourth
anniversaries of the grant date based on continued future employment. The
remaining one-half of the options vest after seven years of continued
future employment, subject to accelerated vesting of 50% if the trading
value of CVS Common Stock reaches $43.2950 per share and the other 50% if
the trading value reaches $47.6245 per share (as adjusted for the Footstar
spin-off).
Restricted Stock. The purpose of the performance-based
restricted stock awards granted in recent years was to further motivate
executives to achieve annual business objectives, encourage retention and
reward the creation of long term shareholder value. The number of
restricted shares earned by executives was based on CVS' annual return on
net assets as measured against a pre-approved budget. Once earned, such
shares remain restricted until the third anniversary from the date of
grant.
In 1996, the Committee did not grant performance-based
restricted stock to the Chief Executive Officer or to the other executives
named in the Summary Compensation Table. The only awards of restricted
stock in 1996 were in connection with the special incentive plan for
certain CVS executives, and such awards are forfeitable if the recipient
ceases to be employed by CVS during the three-year restriction period,
subject to accelerated vesting in certain events. The Committee
accelerated the vesting of restricted stock grants held by certain
executives whose employment terminated in 1996 as a result of CVS'
restructuring.
Partnership Equity Program. As a major element in CVS' new
executive compensation program, the Committee has adopted the Partnership
Equity Program for key management of CVS. The Program is designed to
ensure that those executives with significant impact on the future success
of CVS have a substantial "at risk" personal equity investment in the CVS
Common Stock. The Committee believes that implementation of the Program
will strongly link the economic interests of key managers with each other
and with CVS shareholders; provide future reward opportunities that are
competitive in the external marketplace and that reflect internal
responsibility levels; and assure key management stability, retention,
motivation, and long term focus on corporate strategy. Upon implementation
in 1997, the key management group of CVS, including its executive officers,
was given the opportunity to invest in CVS Common Stock based on their
position, responsibilities and potential impact on the creation of long
term shareholder value. The purchase price, set at fair market value, will
be paid from each executive's personal funds, without loans or guarantees
by CVS. For each share purchased (up to certain individual dollar limits)
and retained for a five-year period, the Committee made a matching grant of
one deferred share that will vest at the end of five years of continued
future employment, subject to accelerated vesting in certain events.
Furthermore, the Committee has granted stock options at a rate of ten
shares for each share purchased under the Program. The options have an
exercise price equal to fair market value on the date of grant and vest in
equal installments at the end of three, four and five years following the
grant date based on continued future employment, subject to accelerated
vesting in certain events. The Committee believes that the Partnership
Equity Program evidences a strong personal commitment by key management --
both financially and through continued future employment -- to the growth
of CVS and creation of long term shareholder value. The Committee does not
consider stock holdings, prior option or restricted stock grants, or the
appreciation thereon when making future option, restricted stock and
Partnership Equity Program award determinations. Compliance with Internal
Revenue Code Section 162(m). Section 162(m) of the Code, which took effect
January 1, 1994, generally disallows a tax deduction to public companies
for compensation over $1 million paid to CVS' Chief Executive Officer and
the other four most highly compensated individuals who are executive
officers as of the end of the year. Qualifying performance-based
compensation will not be subject to the deduction limit if certain
requirements are met. While it is the Committee's policy to preserve
corporate tax deductions by qualifying compensation paid over $1 million to
named executive officers, it also maintains the flexibility to approve
compensation arrangements that it deems to be in the best interests of CVS
and its stockholders but which may not always qualify for full tax
deductibility.
Compensation Committee Members are M. Cabell Woodward, Jr.,
Chairman, Allan J. Bloostein, Terry R. Lautenbach, Ivan G. Seidenberg and
Terrence Murray.
Summary Compensation Table
The following table summarizes all compensation awarded to,
earned by or paid to the five named executive officers for all services
rendered to CVS and its subsidiaries for the periods indicated.
<TABLE>
<CAPTION>
Long Term Compensation
----------------------------------------
Awards Payouts
----------------------------------------
All
Annual Compensation Restricted Securities LTIP Other
Name and Principal -------------------------------------- Stock Awards Underlying Payouts Compensation
Position Year Salary($) Bonus($)(1) ($)(2)(3) Options(#)(2) ($)(4) ($)(5)
- ------------------ ---- --------- ----------- ------------ ------------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stanley P. Goldstein 1996 1,050,000 1,000,000 -- -- -- 20,040
Chairman of the CVS 1995 1,050,000 -- -- 519,690 -- 3,750
Board, Chief 1994 1,050,000 491,400 240,863 -- 109,549 4,350
Executive Officer and
Director of CVS
Thomas M. Ryan 1996 587,599 2,558,000 300,000 346,460 -- 9,167
Vice Chairman, Chief 1995 525,000 862,000 870,000 86,615 -- 10,580
Operating Officer and 1994 450,000 230,000 145,515 11,549 -- 7,914
Director of CVS;
President and Chief
Executive Officer of
CVS Pharmacy, Inc.
Charles C. Conaway 1996 387,500 2,037,000 230,000 230,974 -- 9,167
Executive Vice
President and Chief
Financial Officer of
CVS; Executive Vice
President and Chief
Financial Officer of
CVS Pharmacy, Inc.
Daniel C. Nelson 1996 337,575 537,000 230,000 230,974 -- 8,375
Vice President of CVS;
Executive Vice
President - Marketing
of CVS Pharmacy,
Inc.
Larry J. Merlo 1996 266,250 358,000 153,000 86,615 -- 9,000
Vice President of CVS;
Senior Vice President-
Stores of CVS
Pharmacy, Inc.
</TABLE>
- --------------------
(1) Includes a deferred bonus in the amount of $1,500,000 payable to each of
Messrs. Ryan and Conaway in 1999 in recognition of their work in
successfully implementing CVS' restructuring.
(2) Options outstanding have been adjusted to account for the spin-off of
Footstar on October 12, 1996. Options granted in 1996 become
exercisable as follows: one-half of the grant becomes exercisable in
three annual installments beginning on the second anniversary of the
grant date and the remaining one-half of the grant becomes exercisable
after seven years of continued future employment, subject to
accelerated vesting of 50% if the trading value of the CVS Common Stock
reaches $43.295 and the other 50% if the trading value reaches
$47.6245.
(3) Restricted stock granted in 1996 is forfeitable if the recipient ceases
to be employed by CVS during the three-year restriction period, subject
to accelerated vesting in certain events. All restricted stock
disclosed in this table and currently outstanding reflect awards of
either (i) performance-based restricted stock which is contingent upon
meeting one year performance objectives and subject to a three-year
holding period from the date of grant or (ii) restricted stock that
vests over either a three or four year period based on continuing
employment. Based on the number of shares of restricted stock earned
at the end of a period, dividends are paid at the same rate as paid to
all shareholders from the date of the award. On December 31, 1996, Mr.
Goldstein had a right to receive, in the aggregate, 9,177 restricted
shares having a market value on December 31, 1996 of $378,551. Mr.
Ryan had a right to receive, in the aggregate, 33,044 restricted shares
having a market value on December 31, 1996 of $1,363,065. Mr. Conaway
had a right to receive, in the aggregate, 17,960 restricted shares
having a market value on December 31, 1996 of $740,850. Mr. Nelson
had a right to receive, in the aggregate, 18,545 restricted shares
having a market value on December 31, 1996 of $764,981. Mr. Merlo had
a right to receive, in the aggregate, 6,419 restricted shares having a
market value on December 31, 1996 of $264,784.
(4) Represents performance shares granted for the 1992-1994 performance cycle
based on the market value on December 31, 1994 of $30.31. These units were
earned at the end of the performance cycle based on pre-established
financial performance objectives with respect to earnings per share,
growth and return on equity.
(5) For 1996, includes $3,000, $6,167, $6,167, $5,375 and $6,000 contributed
under CVS' 401(k) Profit Sharing Plan for Mr. Goldstein, Mr. Ryan,
Mr. Conaway, Mr. Nelson and Mr. Merlo, respectively; 56.127 ESOP
shares based on an assumed market value of $53.45 per share (total
value of $3,000) contributed under the CVS ESOP for each of the named
executives; and $14,040 paid as premiums on life insurance on behalf of
Mr. Goldstein.
Option Grants in Fiscal Year Ending December 31, 1996
The following table summarizes activity relating to stock options
awarded to the named executive officers in the last fiscal year.
<TABLE>
<CAPTION>
No. of Percentage of
Securities total Options
Underlying Granted to
Options Granted Employees in Exercise Expiration Grant Date
Name (#)(1) Fiscal Year(2) Price Date Present Value(3)
- ---- --------------- -------------- -------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Stanley P. Goldstein 0 0.00% N/A N/A N/A
Thomas M. Ryan 346,460 31.25% $33.4445 5/14/2006 $3,073,100
Charles C. Conaway 230,974 20.83% $33.4445 5/14/2006 $2,048,739
Daniel C. Nelson 230,974 20.83% $33.4445 5/14/2006 $2,048,739
Larry J. Merlo 86,615 7.81% $33.4445 5/14/2006 $ 768,275
</TABLE>
- ---------------
(1) The number of shares granted and the exercise price per share has been
adjusted to account for the spin-off of Footstar on October 12, 1996.
These options become exercisable as follows: one-half of the grant
becomes exercisable in three annual installments beginning on the
second anniversary of the grant date and one-half of the grant becomes
exercisable after seven years of continued future employment, subject
to accelerated vesting of 50% if the trading value of the CVS Common
Stock reaches $43.295 and the other 50% if the trading value reaches
$47.6245. The exercise prices are equal to the fair market value of
CVS Common Stock on the grant date.
(2) Based on options to purchase 1,108,673 shares granted to all employees
during 1996.
(3) The hypothetical present values on the grant date are calculated under
the modified Black Scholes Model, which is a mathematical formula used
to value options traded on stock exchanges. This formula considers a
number of factors in hypothesizing an option's present value. Factors
used to value options granted which expire 5/14/2006 include the
stock's expected volatility rate (20.7%), risk free rate of return
(6.58%), projected dividend yield (1.1%), projected time of exercise (7
years) and projected risk of forfeiture rate for vesting period (5% per
annum). There is no assurance that the hypothetical present value of
the stock options reflected in this table will be realized.
Aggregated Option Exercises in Fiscal Year Ending December 31, 1996
and Year-end Option Values
The following table summarizes stock option exercise activity
for the named executive officers during the last fiscal year and the fiscal
year-end values of unexercised options.
<TABLE>
<CAPTION>
Number of Value of
Securities Underlying Unexercised
Unexercised Options In-the-Money Options
at Fiscal Year-End($)(2) at Fiscal Year-End($)(2)
------------------------ ------------------------
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise(#) Realized Unexercisable Unexercisable
- ---- --------------- -------- ------------------------ ------------------------
<S> <C> <C> <C> <C>
Stanley P. Goldstein 30,000 $465,569 487,353/346,460 $3,157,567/$3,079,301
Thomas M. Ryan 3,000 $ 40,691 155,444/317,589 $1,124,312/$2,541,442
Charles C. Conaway 0 $ 0.00 81,995/196,329 $561,268/$1,557,446
Daniel C. Nelson 0 $ 0.00 86,614/196,329 $592,005/$1,557,446
Larry J. Merlo 0 $ 0.00 34,473/64,962 $255,164/$507,060
</TABLE>
- --------------------
(1) Options outstanding have been adjusted to account for the spin-off of
Footstar on October 12, 1996.
(2) The value of unexercised in-the-money options at fiscal year-end assumes
a fair market value of CVS Common Stock of $41.25, the average of the
high and low sale prices of the CVS Common Stock as reported by the New
York Stock Exchange on December 31, 1996. The actual before-tax
amount, if any, realized upon the exercise of a stock option will
depend upon the market price of the CVS Common Stock at the time the
stock option is exercised. There is no assurance that the value of
unexercised in-the-money stock options reflected in this table will be
realized.
Comparison of Five Year Cumulative Total Shareholders'
Return among CVS, S&P Retail Composite and S&P 500
The following graph compares the annual percentage change in
CVS' cumulative total stockholder return on CVS Common Stock during the
period commencing on December 31, 1991 and ending on December 31, 1996 (as
measured by dividing (i) the sum of (A) the cumulative amount of dividends
for the measurement period, assuming dividend reinvestment and (B) the
difference between CVS' share price at the end and the beginning of the
measurement period; by (ii) the share price at the beginning of the
measurement period) with the cumulative total return of the S&P Retail
Composite and the S&P 500 during such period. The stock price performance
on the graph below is not necessarily indicative of future price
performance.
CVS CORPORATION
- ------------------------------------------------------------------------------
Comparison of Cumulative Total Return to Shareholders
December 31, 1991 to December 31, 1996
- ------------------------------------------------------------------------------
[graph]
Compound
Year End Annual
----------------------------------------------- Return
1991 1992 1993 1994 1995 1996 Rate
------ ------ ------ ------ ------ ------ -------
CVS Corporation $100.0 $123.0 $ 97.2 $ 76.9 $ 80.1 $145.8 7.8%
S&P Retail Composite* 100.0 118.1 110.2 101.1 112.4 132.2 5.7%
S&P 500 100.0 107.6 118.4 120.0 165.0 202.9 15.2%
*Index includes 35 retail companies, including CVS.
Income Continuation Policy
In January 1987, the CVS Board of Directors adopted and in May
1988 amended, the Income Continuation Policy for Select Senior Executives
of CVS (the "Income Continuation Policy"), which provides that in the event
of a change in control, as defined in the Income Continuation Policy, and
subsequent termination of employment by CVS other than for cause, or by the
executive with good reason (as defined in the Income Continuation Policy),
within 24 months of a change in control, the Chief Executive Officer and
other current named executive officers in the Summary Compensation Table
will be entitled to receive from CVS a single sum payment equal to three
times the sum of annual base pay plus their full normal annual incentive
compensation award immediately prior to such termination of employment. In
addition, upon such a termination of employment, each covered executive
will be entitled to remain a participant in all employee welfare benefit
plans maintained by CVS at the time of such termination of employment for a
period of 24 months after such termination of employment (or if such
participation is not possible under the terms of any such plan, each such
executive shall be provided with benefits which are comparable to the
coverage provided by such plan). The Income Continuation Policy also
provides that in the event of a change in control each covered executive
shall be fully vested in all shares previously awarded to the executive
under CVS' Omnibus Stock Incentive Plan and any successor plan thereto
without regard to any restrictions previously imposed under the terms of
such plan and entitled to exercise any stock options on CVS Common Stock
(whether or not otherwise exercisable). In addition, upon termination of
employment each outstanding option shall remain exercisable until the
earlier of six months after such termination, provided such exercise does
not violate the terms of the plan under which such option was granted, or
the expiration of the option period specified in such plan. The Income
Continuation Policy also provides that if payments under such policy or the
Supplemental Executive Retirement Plan described below are subject to the
"golden parachute" excise tax under Section 4999 of the Code (which deals
with certain payments contingent on a change in control), CVS will make an
additional payment to the covered executive in respect of such tax.
Supplemental Executive Retirement Plan
CVS maintains a Supplemental Executive Retirement Plan for
Select Senior Management of CVS (the "Supplemental Retirement Plan"). The
Supplemental Retirement Plan is designed to increase the retirement
benefits of selected executive employees. In connection with CVS'
restructuring, the Supplemental Retirement Plan was amended to create a new
benefit formula (the "New Benefit Formula"). Under the New Benefit
Formula, executives selected for participation (including Messrs. Ryan,
Conaway, Nelson and Merlo) will receive an annual benefit commencing on the
later of age 55 or retirement, equal to 1.6% of a three-year average of
final compensation (as defined) for each year of service (including
credited years of service under the Supplemental Retirement Plan prior to
amendment) up to 30 years, or a maximum benefit of 48% of final
compensation, with no offset for any amounts provided by CVS' qualified
plans, social security or other retirement benefits. Except in the event
of a change in control (as defined in the plan) or as provided in the
employment agreements referred to below, no benefits are payable to an
eligible executive unless he or she terminates employment after attaining
age 55 or after five years of credited service under the plan. The
following table shows the approximate amounts of annual retirement income
that would be payable under the New Benefit Formula to executives covered
by it based on various assumptions as to compensation and years of service,
assuming benefits are computed under a straight life annuity formula and
retirement after attaining age 55 or with five years of service:
Estimated Annual Retirement Benefits Based on Service of
Compensation 5 Years 10 Years 15 Years 20 Years 30 Years
Estimated Annual Retirement Benefits Based on Service of
---------------------------------------------------------------
Compensation 5 Years 10 Years 15 Years 20 Years 30 Years
$ 600,000 $ 48,000 $ 96,000 $144,000 $192,000 $288,000
800,000 64,000 128,000 192,000 256,000 384,000
1,000,000 80,000 160,000 240,000 320,000 480,000
1,300,000 104,000 208,000 312,000 416,000 624,000
1,600,000 128,000 256,000 384,000 512,000 768,000
1,900,000 152,000 304,000 456,000 608,000 912,000
Final compensation for purposes of the New Benefit Formula is the
average of the executive's three highest years of annual salary and bonus
out of the last ten years of service. For this purpose, salary and bonus
are the amounts shown in the Salary and Bonus column of the Summary
Compensation Table. The estimated credited years of benefit service for
Messrs. Ryan, Conaway, Nelson and Merlo are 21, 4, 3, and 18 years,
respectively. Enhanced benefits are payable in a lump sum upon termination
of employment following a change in control.
The benefit formula in place prior to amendment of the
Supplemental Retirement Plan (the "Prior Benefit Formula") continues to
apply to Mr. Goldstein and certain other executives who have terminated
employment with a vested benefit. The Prior Benefit Formula provides that
executive officers with at least 10 years of credited service will receive
upon retirement at or after age 60 an annual benefit equal to 50% of final
compensation less any amounts provided by other retirement programs of CVS
or programs of other companies (but without deduction for social security).
In the case of retirement on or after age 55 but before age 60, a reduced
benefit is provided. Except in the event of a change in control (as
defined in the plan) or as provided in the employment agreements referred
to below, no benefits are payable to an eligible executive who terminates
employment prior to age 55 or prior to completing 10 years of credited
service.
Under the Prior Benefit Formula, Mr. Goldstein is currently
entitled to retire with an annual benefit of $768,000, computed under a
straight life annuity formula. Final compensation for purposes of the
Prior Benefit Formula is the executive's final year of salary plus targeted
annual incentive bonus for his or her final year. In the event of a change
in control, benefits will be payable under the Prior Benefit Formula upon
subsequent termination of employment on a lump sum basis.
Benefits under the New Benefit Formula and the Prior Benefit
Formula are generally payable in annual installments for the life of the
executive, but joint and survivor forms of payment of equivalent actuarial
value may be elected.
CVS Employment Agreements
In December 1996, the CVS Board approved that CVS enter into
employment agreements (each referred to below as a "CVS Employment
Agreement" and collectively as the "CVS Employment Agreements") with
Messrs. Ryan, Conaway, Nelson, Merlo and one other executive officer
relating to their employment with CVS. CVS has entered into a CVS
Employment Agreement with certain of these officers and expects that the
remaining unexecuted employment agreements will be entered into within a
reasonable period after the date of this Joint Proxy Statement/Prospectus.
The CVS Employment Agreements supersede the Income Continuation Policy
(referred to above) as it relates to such executives.
The period of employment under the CVS Employment Agreements
extends initially for three years, subject to automatic one-year extensions
at the end of the initial term unless either party gives notice of non-
renewal at least 180 days prior to expiration of the term. The CVS
Employment Agreements generally provide for payment of an annual base
salary, subject to review for increase at the discretion of the
Compensation Committee. Base salaries are currently $725,000, $500,000,
$450,000 and $350,000 for Messrs. Ryan, Conaway, Nelson and Merlo,
respectively. The CVS Employment Agreements also generally provide for (i)
continued payment of base salary, target cash bonuses, and other benefits
for 36 months in the case of Mr. Ryan and for 24 months in the case of
other named executive officers (or a lump sum equal to three times salary
plus target bonuses in the case of a change in control) in the event the
executive's employment is terminated by CVS without "cause" or voluntarily
by the executive due to a "constructive termination without cause"; (ii)
non-competition for a period of 18 months subsequent to a voluntary
termination of employment if CVS elects to continue paying 50% of the
executive's base salary during such period; (iii) other restrictive
covenants including nondisclosure, non-solicitation of employees and
availability for litigation support; (iv) participation in certain benefit
plans and programs (including life insurance and medical benefits); (v)
annual and long term incentive compensation opportunities; and (vi)
deferred compensation arrangements. Mr. Ryan's CVS Employment Agreement
provides that his target annual incentive opportunity may not be less than
65% of his base salary, and the CVS Employment Agreements for Messrs.
Conaway, Nelson and Merlo provide that their target annual incentive
opportunities may not be less than 60%, 60% and 50%, respectively, of their
base salaries.
A "change in control" is defined in generally the same manner
as under the proposed 1997 Incentive Compensation Plan, as described below.
"Constructive termination without cause" is defined generally as demotion,
reduction in compensation, unapproved relocation in the case of Mr. Ryan
(or, in the case of other named executive officers, following a change in
control), material breach of the CVS Employment Agreement by CVS, or, in
the case of Mr. Ryan, failure to extend the term of the CVS Employment
Agreement to his 60th birthday. "Cause" is defined generally as a breach of
the restrictive covenants, felony convictions, or willful gross neglect or
gross misconduct resulting in material harm to CVS.
If payments under the CVS Employment Agreements following a
change in control are subject to the "golden parachute" excise tax, CVS
will make an additional "gross-up" payment sufficient to ensure that the
net after-tax amount retained by the executive (taking into account all
taxes, including those on the gross-up payment) is the same as would have
been the case had such excise tax not applied. The CVS Employment
Agreements obligate CVS to indemnify the executives to the fullest extent
permitted by law, including the advancement of expenses, and provide that
CVS generally will reimburse an executive for expenses incurred in seeking
enforcement of the CVS Employment Agreement if he prevails or, after a
change in control, if the executive's assertion of rights is in good faith
and not frivolous.
The CVS Employment Agreement with Mr. Ryan relates to his
employment as Vice Chairman and Chief Operating Officer of CVS, President
and Chief Executive Officer of CVS Pharmacy Inc., and his agreement to
serve as a member of the CVS Board of Directors of CVS. The CVS Employment
Agreements with Messrs. Conaway, Nelson and Merlo relate to their
employment as executive officers of CVS.
Pursuant to the terms of his employment agreement with CVS,
Mr. Harvey Rosenthal (who is a former officer of CVS whose employment with
CVS terminated during 1996 and who is a current director of CVS who is not
standing for re-election at the CVS Meeting) will be paid his base salary
at the rate in effect on September 30, 1996 (the date of his termination)
for a period of two years, plus $800,000 to be paid in equal monthly
installments over the severance period and a lump sum amount of $323,995
which was paid in 1996. All restrictions on restricted stock held by Mr.
Rosenthal lapsed as of his date of termination. Mr. Rosenthal's
outstanding options will continue to vest during the severance period in
accordance with the options' original schedules and will remain exercisable
for six years following his termination.
Other CVS Proposal 1 -- Election of Directors
Eleven directors of CVS are to be elected at the CVS Meeting, to
hold office until the next Annual Meeting of Stockholders and until their
successors are duly elected and qualified. The nominees for election as
CVS directors are: Allan J. Bloostein, W. Don Cornwell, Thomas P.
Gerrity, Stanley P. Goldstein, William H. Joyce, Terry R. Lautenbach,
Terrence Murray, Thomas M. Ryan, Ivan G. Seidenberg, Patricia Carry
Stewart and M. Cabell Woodward, Jr. For information on such nominees, see
"--Nominees for Election as CVS Directors". The persons named as proxies
in the enclosed proxy have advised CVS that the shares represented are to
be voted at the CVS Meeting in accordance with the proxy for the nominees
for election as directors. The persons named as proxies have also advised
CVS that it is their present intention, if any of said nominees shall
unexpectedly become unavailable, to vote for the election of any person
substituted by the management for any of said nominees.
The CVS Board of Directors recommends that CVS stockholders vote FOR all
nominees.
Other CVS Proposal 2 -- Proposed 1997 Incentive Compensation Plan
The CVS Board adopted, effective January 8, 1997, subject to
stockholder approval, the 1997 Incentive Compensation Plan (the "1997
ICP"). The 1997 ICP is intended to supersede the CVS Omnibus Stock
Incentive Plan, CVS 1987 Stock Option Plan, and CVS 1973 Stock Option Plan
(the "Preexisting Plans"). If the 1997 ICP is approved by CVS'
stockholders, authority to make future grants under the Preexisting Plans
will be terminated, although previously granted awards will remain
outstanding in accordance with their terms and the terms of the Preexisting
Plans.
The CVS Board of Directors believes that attracting and
retaining key employees is essential to CVS' growth and success. In
addition, the CVS Board believes that the long term success of CVS is
enhanced by a competitive and comprehensive compensation program, which may
include tailored types of incentives designed to motivate and reward such
persons for outstanding service, including awards that link compensation to
applicable measures of CVS' performance and the creation of shareholder
value. Such awards will enable CVS to attract and retain key employees and
enable such persons to acquire and/or increase their proprietary interest
in CVS and thereby align their interests with the interests of CVS'
shareholders. In addition, the CVS Board has concluded that the
Compensation Committee of the CVS Board (the "Committee") should be given
as much flexibility as possible to provide for annual and long term
incentive awards contingent on performance.
The following is a brief description of the material features
of the 1997 ICP. Such description is qualified in its entirety by
reference to the full text of the 1997 ICP, which is attached hereto as
Annex F. Types of Awards. The terms of the 1997 ICP provide for grants of
stock options, stock appreciation rights ("SARs"), restricted stock,
deferred stock, other stock-related awards, and performance or annual
incentive awards that may be settled in cash, stock, or other property
("Awards").
Shares Subject to the 1997 ICP; Annual Per-Person Limitations.
Under the 1997 ICP, the total number of shares of CVS Common Stock reserved
and available for delivery to participants in connection with Awards is (i)
2.5 million, plus (ii) the number of shares of CVS Common Stock remaining
available under Preexisting Plans immediately prior to the date on which
stockholders of CVS approve the adoption of the 1997 ICP, plus (iii) the
number of shares of CVS Common Stock subject to awards under Preexisting
Plans which become available (generally due to cancellation or forfeiture)
after the date on which stockholders of CVS approve the adoption of the
1997 ICP, plus (iv) 9.4% of the number of shares of CVS Common Stock issued
or delivered by CVS after the effective date of the 1997 ICP (excluding any
issuance or delivery in connection with Awards, or any other compensation
or benefit plan of CVS); provided, however, that the total number of shares
of CVS Common Stock with respect to which incentive stock options ("ISOs")
may be granted shall not exceed two million and the total number of shares
of restricted stock awarded under the 1997 ICP shall not exceed 1.8 million
shares. As of February 22, 1997, there were 3,072,183 shares available for
grant under Preexisting Plans and 5,233,863 shares subject to awards under
Preexisting Plans. Any shares of CVS Common Stock delivered under the 1997
ICP may consist of authorized and unissued shares or treasury shares. CVS
Common Stock subject to an Award that is canceled, expired, forfeited,
settled in cash, or otherwise terminated without a delivery of shares to
the participant, including CVS Common Stock withheld or surrendered in
payment of any exercise or purchase price of an Award or taxes relating to
an Award, will again be available for Awards under the 1997 ICP.
In addition, the 1997 ICP imposes individual limitations on the
amount of certain Awards in order to comply with Section 162(m) of the
Code. Under these limitations, during any fiscal year the number of
options, SARs, shares of restricted stock, shares of deferred stock, shares
of CVS Common Stock issued as a bonus or in lieu of other obligations, and
other stock-based Awards granted to any one participant shall not exceed
1.5 million shares for each type of such Award, subject to adjustment in
certain circumstances. The maximum cash amount that may be earned as a
final annual incentive award or other annual cash Award in respect of any
fiscal year by any one participant is $5 million, and the maximum cash
amount that may be earned as a final performance award or other cash Award
in respect of a performance period other than an annual period by any one
participant on an annualized basis is $5 million.
The Committee is authorized to adjust the number and kind of
shares subject to the aggregate share limitations and annual limitations
under the 1997 ICP and subject to outstanding Awards (including adjustments
to exercise prices and number of shares of options and other affected terms
of Awards) in the event that a dividend or other distribution (whether in
cash, shares, or other property), recapitalization, forward or reverse
split, reorganization, merger, consolidation, spin-off, combination,
repurchase, or share exchange, or other similar corporate transaction or
event affects the CVS Common Stock so that an adjustment is appropriate.
The Committee is also authorized to adjust performance conditions and other
terms of Awards in response to these kinds of events or in response to
changes in applicable laws, regulations, accounting principles, or other
special events. Eligibility. Executive officers and other officers and
employees of CVS or any subsidiary, including any such person who may also
be a director of CVS, shall be eligible to be granted Awards under the 1997
ICP. It is anticipated that approximately 975 persons will be eligible to
receive Awards under the 1997 ICP. Administration. The 1997 ICP will be
administered by the Committee except to the extent the CVS Board elects to
administer the 1997 ICP. Subject to the terms and conditions of the 1997
ICP, the Committee is authorized to select participants, determine the type
and number of Awards to be granted and the number of shares of CVS Common
Stock or dollar amounts to which Awards will relate, specify times at which
Awards will be exercisable (including performance conditions that may be
required as a condition thereof) set other terms and conditions of such
Awards, prescribe forms of Award agreements, interpret and specify rules
and regulations relating to the 1997 ICP, and make all other determinations
that may be necessary or advisable for the administration of the 1997 ICP.
The 1997 ICP provides that Committee members shall not be personally
liable, and shall be fully indemnified, in connection with any action,
determination, or interpretation taken or made in good faith under the 1997
ICP.
Stock Options and SARs. The Committee is authorized to grant
stock options, including both ISOs that can result in potentially favorable
tax treatment to the participant and non-qualified stock options (i.e,
options not qualifying as ISOs), and SARs entitling the participant to
receive the excess of the fair market value of a share of CVS Common Stock
on the date of exercise over the grant price of the SAR. The exercise
price per share subject to an option and the grant price of an SAR is
determined by the Committee, but must not be less than the fair market
value of a share of CVS Common Stock on the date of grant (except to the
extent of in-the-money awards or cash obligations surrendered by the
participant at the time of grant). The maximum term of each option or SAR,
the times at which each option or SAR will be exercisable, and provisions
requiring forfeiture of unexercised options or SARs at or following
termination of employment generally is fixed by the Committee, except no
option or SAR may have a term exceeding ten years. Options may be
exercised by payment of the exercise price in cash, CVS Common Stock,
outstanding Awards, or other property (possibly including notes or
obligations to make payment on a deferred basis) having a fair market value
equal to the exercise price, as the Committee may determine from time to
time. Methods of exercise and settlement and other terms of the SARs are
determined by the Committee.
Repricing. The Committee shall not, without further approval
of CVS stockholders, grant any options or SARs under the 1997 ICP that
would constitute a "repricing" of such options or SARs and thereby trigger
the disclosure obligation under Item 402(i) of Regulation S-K or any
successor provision.
Restricted and Deferred Stock. The Committee is authorized
to grant restricted stock and deferred stock. Restricted stock is a grant
of CVS Common Stock which may not be sold or disposed of, and which may be
forfeited in the event of certain terminations of employment and/or failure
to meet certain performance requirements prior to the end of a restricted
period specified by the Committee. A participant granted restricted stock
generally has all of the rights of a stockholder of CVS, including the
right to vote the shares and to receive dividends thereon, unless otherwise
determined by the Committee. An Award of deferred stock confers upon a
participant the right to receive shares at the end of a specified deferral
period, subject to possible forfeiture of the Award in the event of certain
terminations of employment and/or failure to meet certain performance
requirements prior to the end of a specified restricted period (which
restricted period need not extend for the entire duration of the deferral
period). Prior to settlement, an Award of deferred stock carries no voting
or dividend rights or other rights associated with share ownership,
although dividend equivalents may be granted, as discussed below.
Dividend Equivalents. The Committee is authorized to grant
dividend equivalents conferring on participants the right to receive,
currently or on a deferred basis, cash, shares, other Awards, or other
property equal in value to dividends paid on a specific number of shares or
other periodic payments. Dividend equivalents may be granted on a free-
standing basis or in connection with another Award, may be paid currently
or on a deferred basis, and, if deferred, may be deemed to have been
reinvested in additional shares, Awards, or other investment vehicles
specified by the Committee.
Bonus Stock and Awards in Lieu of Cash Obligations. The
Committee is authorized to grant shares as a bonus free of restrictions, or
to grant shares or other Awards in lieu of obligations to pay cash under
other plans or compensatory arrangements, subject to such terms as the
Committee may specify.
Other Stock-Based Awards. The 1997 ICP authorizes the
Committee to grant Awards that are denominated or payable in, valued by
reference to, or otherwise based on or related to shares. Such Awards
might include convertible or exchangeable debt securities, other rights
convertible or exchangeable into shares, purchase rights for shares, Awards
with value and payment contingent upon performance of CVS or any other
factors designated by the Committee, and Awards valued by reference to the
book value of shares or the value of securities of or the performance of
specified subsidiaries. The Committee determines the terms and conditions
of such Awards, including consideration to be paid to exercise Awards in
the nature of purchase rights, the period during which Awards will be
outstanding, and forfeiture conditions and restrictions on Awards.
Performance Awards, Including Annual Incentive Awards. The
right of a participant to exercise or receive a grant or settlement of an
Award, and the timing thereof, may be subject to such performance
conditions as may be specified by the Committee. In addition, the 1997 ICP
authorizes specific annual incentive awards, which represent a conditional
right to receive cash, shares or other Awards upon achievement of
preestablished performance goals during a specified one-year period.
Performance awards and annual incentive awards granted to persons the
Committee expects will, for the year in which a deduction arises, be among
the Chief Executive Officer and four other most highly compensated
executive officers, will, if so intended by the Committee, be subject to
provisions that should qualify such Awards as "performance-based
compensation" not subject to the limitation on tax deductibility by CVS
under Code Section 162(m).
The performance goals to be achieved as a condition of payment
or settlement of a performance award or annual incentive award will consist
of (i) one or more business criteria and (ii) a targeted level or levels of
performance with respect to each such business criteria. In the case of
performance awards intended to meet the requirements of Code Section
162(m), the business criteria used must be one of those specified in the
1997 ICP, although for other participants the Committee may specify any
other criteria. The business criteria specified in the 1997 ICP are: (1)
earnings per share; (2) revenues; (3) cash flow; (4) cash flow return on
investment; (5) return on net assets, return on assets, return on
investment, return on capital, return on equity; (6) economic value added;
(7) operating margin; (8) net income; pretax earnings; pretax earnings
before interest, depreciation and amortization; pretax operating earnings
after interest expense and before incentives, service fees, and
extraordinary or special items; operating earnings; (9) total shareholder
return; and (10) any of the above goals as compared to the performance of a
published or special index deemed applicable by the Committee including,
but not limited to, the Standard & Poor's 500 Stock Index or a group of
comparable companies.
In granting annual incentive or performance awards, the
Committee may establish unfunded award "pools," the amounts of which will
be based upon the achievement of a performance goal or goals using one or
more of the business criteria described in the preceding paragraph. During
the first 90 days of a fiscal year or other performance period (or such
other period as permitted under Code Section 162(m)), the Committee will
determine who will potentially receive annual incentive or performance
awards for that fiscal year or other performance period, either out of the
pool or otherwise. After the end of each fiscal year or other performance
period, the Committee will determine the amount, if any, of the pool, the
maximum amount of potential annual incentive or performance awards payable
to each participant in the pool, and the amount of any potential annual
incentive or performance award otherwise payable to a participant. The
Committee may, in its discretion, determine that the amount payable as a
final annual incentive or performance award will be increased or reduced
from the amount of any potential Award, but may not exercise discretion to
increase any such amount intended to qualify under Code Section 162(m).
Subject to the requirements of the 1997 ICP, the Committee will
determine other performance award and annual incentive award terms,
including the required levels of performance with respect to the business
criteria, the corresponding amounts payable upon achievement of such levels
of performance, termination and forfeiture provisions, and the form of
settlement.
Other Terms of Awards. Awards may be settled in the form of
cash, CVS Common Stock, other Awards, or other property, in the discretion
of the Committee. The Committee may require or permit participants to
defer the settlement of all or part of an Award in accordance with such
terms and conditions as the Committee may establish, including payment or
crediting of interest or dividend equivalents on deferred amounts, and the
crediting of earnings, gains, and losses based on deemed investment of
deferred amounts in specified investment vehicles. The Committee is
authorized to place cash, shares, or other property in trusts or make other
arrangements to provide for payment of CVS' obligations under the 1997 ICP.
The Committee may condition any payment relating to an Award on the
withholding of taxes and may provide that a portion of any shares or other
property to be distributed will be withheld (or previously acquired shares
or other property surrendered by the participant) to satisfy withholding
and other tax obligations. Awards granted under the 1997 ICP generally may
not be pledged or otherwise encumbered and are not transferable except by
will or by the laws of descent and distribution, or to a designated
beneficiary upon the participant's death, except that the Committee may, in
its discretion, permit transfers for estate planning or other purposes.
Awards under the 1997 ICP are generally granted without a
requirement that the participant pay consideration in the form of cash or
property for the grant (as distinguished from the exercise), except to the
extent required by law. The Committee may, however, grant Awards in
exchange for other Awards under the 1997 ICP, awards under other plans of
CVS, or other rights to payment from CVS, and may grant Awards in addition
to and in tandem with such other Awards, awards, or rights as well.
Unless the Award agreement specifies otherwise, the Committee
may cancel or rescind Awards if the participant fails to comply with
certain noncompetition, confidentiality, intellectual property or other
covenants. For instance, Awards may be canceled or rescinded if the
participant engages in competitive activity while employed with CVS or
within a specified period following termination of employment.
Acceleration of Vesting. The Committee may, in its discretion,
accelerate the exercisability, the lapsing of restrictions, or the
expiration of deferral or vesting periods of any Award, and such
accelerated exercisability, lapse, expiration and vesting shall occur
automatically in the case of a "change in control" of CVS except to the
extent otherwise determined by the Committee at the date of grant. In
addition, the Committee may provide that the performance goals relating to
any performance-based award will be deemed to have been met upon the
occurrence of any change in control. Upon the occurrence of a change in
control, except to the extent otherwise determined by the Committee at the
date of grant, options may at the election of the participant be cashed out
based on a defined "change in control price," which will be the higher of
(i) the cash and fair market value of property that is the highest price
per share of CVS Common Stock paid (including extraordinary dividends) in
any change in control or liquidation of shares of CVS Common Stock
following a sale of substantially all of the assets of CVS, or (ii) the
highest fair market value per share of CVS Common Stock (generally based on
market prices) at any time during the 60 days before and 60 days after a
change in control. "Change in control" is defined in the 1997 ICP to
include a variety of events, including significant changes in the stock
ownership of CVS or a significant subsidiary, changes in CVS' board of
directors, certain mergers and consolidations of CVS or a significant
subsidiary, and the sale or disposition of all or substantially all the
consolidated assets of CVS.
Amendment and Termination of the 1997 ICP. The CVS Board of
Directors may amend, alter, suspend, discontinue, or terminate the 1997 ICP
or the Committee's authority to grant Awards without further shareholder
approval, except shareholder approval must be obtained for any amendment or
alteration if required by law or regulation or under the rules of any stock
exchange or automated quotation system on which the shares are then listed
or quoted. Shareholder approval will not be deemed to be required under
laws or regulations, such as those relating to ISOs, that condition
favorable treatment of participants on such approval, although the CVS
Board may, in its discretion, seek shareholder approval in any circumstance
in which it deems such approval advisable. Thus, shareholder approval will
not necessarily be required for amendments that might increase the cost of
the 1997 ICP or broaden eligibility. Unless earlier terminated by the CVS
Board, the 1997 ICP will terminate at such time as no shares remain
available for issuance under the 1997 ICP and CVS has no further rights or
obligations with respect to outstanding Awards under the 1997 ICP.
Federal Income Tax Implications of the 1997 ICP. The following
is a brief description of the federal income tax consequences generally
arising with respect to Awards under the 1997 ICP.
The grant of an option or SAR will create no tax consequences
for the participant or CVS. A participant will not recognize taxable
income upon exercising an ISO (except that the alternative minimum tax may
apply). Upon exercising an option other than an ISO, the participant must
generally recognize ordinary income equal to the difference between the
exercise price and fair market value of the freely transferable and
nonforfeitable shares acquired on the date of exercise. Upon exercising an
SAR, the participant must generally recognize ordinary income equal to the
cash or the fair market value of the freely transferable and nonforfeitable
shares received.
Upon a disposition of shares acquired upon exercise of an ISO
before the end of the applicable ISO holding periods, the participant must
generally recognize ordinary income equal to the lesser of (i) the fair
market value of the shares at the date of exercise of the ISO minus the
exercise price, or (ii) the amount realized upon the disposition of the ISO
shares minus the exercise price. Otherwise, a participant's disposition of
shares acquired upon the exercise of an option (including an ISO for which
the ISO holding periods are met) or SAR generally will result in short-term
or long-term capital gain or loss measured by the difference between the
sale price and the participant's tax basis in such shares (the tax basis
generally being the exercise price plus any amount previously recognized as
ordinary income in connection with the exercise of the option or SAR).
CVS generally will be entitled to a tax deduction equal to the
amount recognized as ordinary income by the participant in connection with
an option or SAR. CVS generally is not entitled to a tax deduction
relating to amounts that represent a capital gain to a participant.
Accordingly, CVS will not be entitled to any tax deduction with respect to
an ISO if the participant holds the shares for the ISO holding periods
prior to disposition of the shares.
With respect to Awards granted under the 1997 ICP that result
in the payment or issuance of cash or shares or other property that is
either not restricted as to transferability or not subject to a substantial
risk of forfeiture, the participant must generally recognize ordinary
income equal to the cash or the fair market value of shares or other
property received. Thus, deferral of the time of payment or issuance will
generally result in the deferral of the time the participant will be liable
for income taxes with respect to such payment or issuance. CVS generally
will be entitled to a deduction in an amount equal to the ordinary income
recognized by the participant.
With respect to Awards involving the issuance of shares or
other property that is restricted as to transferability and subject to a
substantial risk of forfeiture, the participant must generally recognize
ordinary income equal to the fair market value of the shares or other
property received at the first time the shares or other property becomes
transferable or is not subject to a substantial risk of forfeiture,
whichever occurs earlier. A participant may elect to be taxed at the time
of receipt of shares or other property rather than upon lapse of
restrictions on transferability or substantial risk of forfeiture, but if
the participant subsequently forfeits such shares or property, the
participant would not be entitled to any tax deduction, including as a
capital loss, for the value of the shares or property on which he
previously paid tax. The participant must file such election with the
Internal Revenue Service within 30 days of the receipt of the shares or
other property. CVS generally will be entitled to a deduction in an amount
equal to the ordinary income recognized by the participant.
Awards that are granted, accelerated or enhanced upon the
occurrence of a change in control may give rise, in whole or in part, to
excess parachute payments within the meaning of Code Section 280G and, to
such extent, will be non-deductible by CVS and subject to a 20% excise tax
by the participant. The foregoing summary of the federal income tax
consequences in respect of the 1997 ICP is for general information only.
Interested parties should consult their own advisors as to specific tax
consequences, including the application and effect of foreign, state and
local tax laws.
The Board of Directors of CVS recommends a vote FOR approval of
the CVS 1997 Incentive Compensation Plan.
Other CVS Proposal 3 -- Appointment of Independent Auditors
KPMG Peat Marwick LLP was CVS' independent auditor for the year
ended December 31, 1996 and has been selected by the CVS Board, upon
recommendation of the Audit Committee, to serve as such for the year ending
December 31, 1997. This appointment is being submitted to the shareholders
for ratification. A representative of KPMG Peat Marwick LLP is expected to
attend the CVS Meeting and will be given the opportunity to make a
statement and/or to respond to appropriate questions.
In the event that ratification of the appointment of KPMG Peat
Marwick LLP as CVS' independent auditors is not obtained at the CVS
Meeting, the CVS Board will reconsider its appointment.
The Board of Directors of CVS recommends a vote FOR
ratification of the appointment of KPMG Peat Marwick LLP as CVS'
independent auditors.
FUTURE STOCKHOLDER PROPOSALS
Any CVS stockholder who intends to submit a proposal for
inclusion in the proxy materials for the 1998 annual meeting of CVS
stockholders must submit such proposal to the Secretary of CVS by November
__, 1997. Revco expects to hold an annual meeting of stockholders in the
third quarter of 1997 unless the Merger is completed prior thereto. Any
Revco stockholder who intends to submit a proposal for inclusion in the
proxy materials for the 1997 annual meeting of Revco must submit such
proposal to the Secretary of Revco by April 25, 1997.
SEC rules set forth standards as to what stockholder proposals
are required to be included in a proxy statement for an annual meeting.
WHERE YOU CAN FIND MORE INFORMATION
CVS and Revco file annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements or other information we file at the SEC's public
reference rooms in Washington, D.C., New York, New York and Chicago,
Illinois. Please call the SEC at 1-800-SEC-0330 for further information on
the public reference rooms. Our SEC filings are also available to the
public from commercial document retrieval services and at the web site
maintained by the SEC at "http://www.sec.gov."
CVS filed a Registration Statement on Form S-4 to register
with the SEC the CVS Common Stock to be issued to Revco stockholders in the
Merger. This Joint Proxy Statement/Prospectus is a part of that
Registration Statement and constitutes a prospectus of CVS in addition to
being a proxy statement of CVS and Revco for the Meetings. As allowed by
SEC rules, this Joint Proxy Statement/Prospectus does not contain all the
information you can find in the Registration Statement or the exhibits to
the Registration Statement.
The SEC allows us to "incorporate by reference" information
into this Joint Proxy Statement/Prospectus, which means that we can
disclose important information to you by referring you to another document
filed separately with the SEC. The information incorporated by reference
is deemed to be part of this Joint Proxy Statement/Prospectus, except for
any information superseded by information in this Joint Proxy
Statement/Prospectus. This Joint Proxy Statement/Prospectus incorporates
by reference the documents set forth below that we have previously filed
with the SEC. These documents contain important information about our
companies and their finances.
CVS SEC Filings (File No. 1-1011) Period
--------------------------------- ------
Annual Report on Form 10-K Year ended December 31, 1996
Quarterly Reports on Form 10-Q Quarter ended March 31, 1997
Current Reports on Form 8-K Filed on October 28, 1996 and
The description of CVS Common February 7, 1997
Stock set forth in the Registration
Statement on Form 8-B Filed on November 5, 1996
Revco SEC Filings (File No. 1-5025) Period
--------------------------------- ------
Annual Report on Form 10-K Year ended June 1, 1996
Quarterly Reports on Form 10-Q Quarters ended August 24, 1996,
November 16, 1996, and February 8,
1997
Current Reports on Form 8-K Filed on September 12, 1996,
November 1, 1996 and November 26,
1996
We are also incorporating by reference additional documents
that we file with the SEC between the date of this Joint Proxy
Statement/Prospectus and the dates of the Meetings of our stockholders.
CVS has supplied all information contained or incorporated by
reference in this Joint Proxy Statement/Prospectus relating to CVS, and
Revco has supplied all such information relating to Revco.
If you are a stockholder, we may have sent you some of the
documents incorporated by reference, but you can obtain any of them through
us or the SEC. Documents incorporated by reference are available from us
without charge, excluding all exhibits unless we have specifically
incorporated by reference an exhibit in this Joint Proxy
Statement/Prospectus. Stockholders may obtain documents incorporated by
reference in this Joint Proxy Statement/Prospectus by requesting them in
writing or by telephone from the appropriate party at the following
address:
CVS Corporation Revco D.S., Inc.
One CVS Drive 1925 Enterprise Parkway
Woonsocket, RI 02895 Twinsburg, OH 44087
Tel: (404) 765-1500 Tel: (216) 425-9811
If you would like to request documents from us, please do so by
__________, 1997 to receive them before the Meetings.
You should rely only on the information contained or
incorporated by reference in this Joint Proxy Statement/Prospectus to vote
on the CVS Proposals and the Revco Merger Proposal. We have not authorized
anyone to provide you with information that is different from what is
contained in this Joint Proxy Statement/Prospectus. This Joint Proxy
Statement/Prospectus is dated April [11], 1997. You should not assume that
the information contained in the Joint Proxy Statement/Prospectus is
accurate as of any date other than such date, and neither the mailing of
this Joint Proxy Statement/Prospectus to stockholders nor the issuance of
CVS Common Stock in the Merger shall create any implication to the
contrary.
LIST OF DEFINED TERMS
Defined Term Page No.
- ------------ --------
1933 Act................................24
1997 ICP................................86
Adjusted Purchase Price.................38
Adjusted Market Value...................39
Antitrust Division......................23
Applicable Period.......................51
Arbor Drugs.............................31
Average.................................33
Awards..................................87
Base Salary.............................50
Big B...................................13
Business Combination....................69
CAGR....................................46
Cause...................................86
Change in Control.......................85
Code....................................23
Collar..................................40
Committee...............................87
Comparable Companies....................32
Comparable Acquisitions.................32
Constructive Termination Without Cause..85
Consulting Agreements...................54
Continuing Employees....................55
Continuing Director.....................70
Cost Savings............................31
Covered Executives......................50
Current Price...........................47
CVS.....................................13
CVS Bylaws..............................68
CVS Charter.............................68
CVS Common Stock........................13
CVS Employment Agreement................85
CVS ESOP................................65
CVS ESOP Preference Stock...............58
CVS $40 Proposal........................15
CVS Meeting.............................13
CVS Merger Proposal.....................64
CVS Preference Stock....................70
CVS Preferred Stock.....................70
CVS Proposals...........................64
CVS Record Date.........................65
CVS $33 Presentation....................14
CVS $36 Proposal........................14
Davis Polk..............................16
DCF.....................................33
December Projections....................37
Delaware Law............................68
Demand Registration.....................64
Directors' Plan.........................55
DLJ.....................................14
DLJ Engagement Letter...................34
DLJ Opinion.............................30
EBIT....................................32
EBITDA..................................32
Eckerd..................................14
Effective Time..........................13
Employment Agreements...................50
EPS.....................................32
Equity Purchase Price...................38
ESPP....................................53
EVA Plan................................53
Exchange Agent..........................57
Exchange Ratio..........................57
Fay's...................................33
FIFO....................................37
FMR.....................................76
Footstar................................25
FTC.....................................23
Fully Diluted Exercisable Shares........39
Fully Diluted Outstanding Shares........37
GAAP....................................22
Good Reason.............................51
Gross-Up Payment........................51
Group A Executives......................50
Group B Executives......................50
Historical Transactions.................38
Holder..................................63
HSI.....................................33
HSR Act.................................23
Income Continuation Policy..............83
ISOs....................................87
J.C.Penney..............................14
Linens 'n Things........................34
Longs Drug Stores.......................31
LTIP....................................52
LTM.....................................33
Magten..................................63
Market Value............................39
Maximum Premium.........................56
Meetings................................13
Merger..................................13
Merger Agreement........................13
Merger Subsidiary.......................13
Named Executive Officers................51
New Benefit Formula.....................84
Normal Award............................77
NYSE....................................16
Other CVS Annual Meeting Proposals......64
Outstanding Shares......................41
P/E.....................................33
PBM.....................................18
Pre-Announcement Price..................47
Pre-Existing Letter.....................49
Preexisting Plans.......................86
Preferred Stock.........................70
Premium to Stock Price..................39
Principals..............................14
Prior Benefit Formula...................85
Recent Transactions.....................38
Registrable Securities..................63
Related Person..........................69
Reorganization..........................36
Revco...................................13
Revco Bylaws............................68
Revco Charter...........................68
Revco Common Stock......................13
Revco Meeting...........................13
Revco Merger Proposal...................64
Revco Record Date.......................65
Revco stockholder approval..............50
Rite Aid................................13
Salary Plus Bonus.......................50
Salomon.................................16
Salomon Engagement Letter...............49
Salomon Opinion.........................43
SARs....................................87
SEC.....................................22
Selected Drugstore Chains...............46
SERP....................................54
Stockholder Agreement...................63
Superior Proposal.......................59
Supplemental Retirement Plan............84
Termination Date........................55
Thrift Drug.............................14
Thrifty Payless.........................14
WACC....................................34
Walgreen's...............................?
Wasserstein Perella.....................14
Wasserstein Perella Opinion.............35
Zell/Chilmark...........................63
Zell Shares.............................63
ANNEX A
AGREEMENT AND PLAN OF MERGER
dated as of
February 6, 1997*
among
CVS CORPORATION,
REVCO D.S., INC.
AND
NORTH ACQUISITION CORP.
_________________________________
(*Text of Annex A reflects the
First Amendment dated as of March 19, 1997 to
Agreement and Plan of Merger,
but the Agreement and Plan of Merger
dated as of February 6, 1997
has not been amended and restated)
TABLE OF CONTENTS
Page
----
ARTICLE 1
The Merger
Section 1.1. The Merger........................... 2
Section 1.2. Conversion of Shares................. 2
Section 1.3. Surrender and Payment................ 4
Section 1.4. Stock Options........................ 5
Section 1.5. Fractional Shares.................... 7
Section 1.6. Adjustments.......................... 8
ARTICLE 2
The Surviving Corporation
Section 2.1. Certificate of Incorporation......... 9
Section 2.2. Bylaws............................... 9
Section 2.3. Directors and Officers............... 9
ARTICLE 3
Representations and Warranties of Revco
Section 3.1. Organization and Power............... 9
Section 3.2. Corporate Authorization.............. 10
Section 3.3. Governmental Authorization........... 10
Section 3.4. Non-Contravention.................... 11
Section 3.5. Capitalization of Revco.............. 12
Section 3.6. Capitalization of Subsidiaries....... 13
Section 3.7. SEC Filings.......................... 13
Section 3.8. Financial Statements................. 14
Section 3.9. Disclosure Documents................. 14
Section 3.10. Information Supplied................ 14
Section 3.11. Absence of Certain Changes.......... 15
Section 3.12. No Undisclosed Material Liabilities. 17
Section 3.13. Litigation.......................... 17
Section 3.14. Taxes............................... 17
Section 3.15. Employee Benefit Plans; ERISA....... 18
Section 3.16. Compliance with Laws; No Default; No
Non-Competes........................ 20
Section 3.17. Finders' Fees....................... 20
Section 3.18. Environmental Matters............... 21
Section 3.19. Assets.............................. 22
Section 3.20. Opinion of Financial Advisor........ 22
Section 3.21. Transactions with Affiliates........ 22
Section 3.22. Accounting Matters.................. 23
Section 3.23. Insurance........................... 23
Section 3.24. Takeover Statutes................... 23
Section 3.25. Former Merger Agreement............. 23
Section 3.26. Pooling Letter...................... 23
Section 3.27. Affiliates.......................... 24
ARTICLE 4
Representations and Warranties of CVS
Section 4.1. Organization and Power............... 24
Section 4.2. Corporate Authorization.............. 24
Section 4.3. Governmental Authorization........... 25
Section 4.4. Non-Contravention.................... 25
Section 4.5. Capitalization of CVS................ 26
Section 4.6. Capitalization of Subsidiaries....... 27
Section 4.7. SEC Filings.......................... 27
Section 4.8. Financial Statements................. 28
Section 4.9. Disclosure Documents................. 28
Section 4.10. Information Supplied................ 29
Section 4.11. Absence of Certain Changes.......... 29
Section 4.12. No Undisclosed Material Liabilities. 30
Section 4.13. Litigation.......................... 31
Section 4.14. Taxes............................... 31
Section 4.15. Employee Benefits, ERISA............ 31
Section 4.16. Compliance with Laws; No Default; No
Non-Competes........................ 33
Section 4.17. Finders' Fees....................... 33
Section 4.18. Environmental Matters............... 34
Section 4.19. Assets.............................. 34
Section 4.20. Opinion of Financial Advisor........ 34
Section 4.21. Transactions with Affiliates........ 35
Section 4.22. Accounting Matters.................. 35
Section 4.23. Insurance........................... 35
Section 4.24. Takeover Statutes................... 35
Section 4.25. Pooling Letter...................... 35
Section 4.26. Affiliates.......................... 35
ARTICLE 5
Covenants
Section 5.1. Conduct of Revco..................... 36
Section 5.2. Conduct of CVS....................... 38
Section 5.3. Stockholder Meetings; Proxy Materials;
Form S-4............................. 40
Section 5.4. Access to Information................ 42
Section 5.5. Other Offers......................... 42
Section 5.6. Notices of Certain Events............ 43
Section 5.7. Best Efforts......................... 44
Section 5.8. Cooperation.......................... 46
Section 5.9. Public Announcements................. 46
Section 5.10. Further Assurances.................. 47
Section 5.11. Affiliates; Registration Rights..... 47
Section 5.12. Director and Officer Liability...... 47
Section 5.13. Obligations of Merger Subsidiary.... 48
Section 5.14. Listing of Stock.................... 48
Section 5.15. Antitakeover Statutes............... 49
Section 5.16. Confidentiality/Standstill Agreement 49
Section 5.17. Tax and Accounting Treatment........ 49
Section 5.18. Employee Benefits................... 49
Section 5.19. CVS Board of Directors.............. 51
Section 5.20. Combined Financial Results.......... 51
Section 5.21. Charitable Commitment............... 51
ARTICLE 6
Conditions to the Merger
Section 6.1. Conditions to the Obligations of Each
Party............................... 51
Section 6.2. Conditions to the Obligations of CVS
and Merger Subsidiary................ 52
Section 6.3. Conditions to the Obligations of
Revco................................ 52
ARTICLE 7
Termination
Section 7.1. Termination.......................... 53
Section 7.2. Effect of Termination................ 55
ARTICLE 8
Miscellaneous
Section 8.1. Notices.............................. 55
Section 8.2. Entire Agreement; Non-Survival of
Representations and Warranties;
Third Party Beneficiaries............ 56
Section 8.3. Amendments; No Waivers............... 56
Section 8.4. Expenses............................. 57
Section 8.5. Successors and Assigns............... 58
Section 8.6. Governing Law........................ 58
Section 8.7. Jurisdiction......................... 58
Section 8.8. Counterparts; Effectiveness.......... 58
Section 8.9. Interpretation....................... 58
Section 8.10. Severability........................ 59
Section 8.11. Specific Performance................ 59
Section 8.12. Joint and Several Liability......... 59
Schedules
Exhibit A Zell/Chilmark Stockholder Agreement
Exhibit B Registration Rights Agreement
Exhibit C-1 Affiliate's Letter Relating to Pooling (Revco)
Exhibit C-2 Affiliate's Letter Relating to Pooling (CVS)
Exhibit C-3 Affiliate's Letter (Revco)
Exhibit D Form of Tax Certificate (CVS)
Exhibit E Form of Tax Certificate (Revco)
TABLE OF DEFINITIONS
<TABLE>
<CAPTION>
Term Section
- ------------------------------------------- -------------------------
<S> <C>
1933 Act Affiliates 5.11(c)
1933 Act 3.03
1934 Act 3.03
Acquisition Proposal 5.03(a)
Adjusted Option 1.04(a)
Affiliate 3.21
Antitrust Law 5.07(b)
Big B 3.05(a)
Big B Acquisition 3.05(a)
Calculated Number 1.02(a)
Closing 1.01(b)
Closing Date 1.01(b)
Code recitals
Common Shares Trust 1.05(b)
Confidentiality Agreement 5.04(a)
Continuing Employees 5.18(a)
Conversion Number 1.02(a)
CVS preamble
CVS 10-K 4.08
CVS Agreement 4.04
CVS Average Closing Price 1.02(a)
CVS Balance Sheet 4.08
CVS Balance Sheet Date 4.08
CVS Benefit Plans 4.15(a)
CVS Common Stock 1.02(a)
CVS Disclosure Documents 4.09(a)
CVS ESOP Preference Stock 4.05(a)
CVS Preferred Stock 4.05(a)
CVS Proxy Statement 4.09(a)
CVS Restructuring Program 4.11(f)
CVS Securities 4.05(a)
CVS SEC Documents 4.07(a)
CVS Stockholder Approval 5.03(b)
CVS Stockholder Meeting 5.03(b)
CVS Subsidiary Securities 4.06
Delaware Law 1.01(a)
DOJ 5.07(b)
Effective Time 1.01(c)
End Date 7.01(b)
ERISA 3.15(a)
ERISA Affiliate 3.15(a)
EVA Plan 5.18(b)
Exchange Agent 1.03(a)
Existing Company/Stockholder Agreements 3.05(b)
Fixed Number 1.02(a)
Form S-4 4.09
FTC 5.07(c)
GAAP recitals
Governmental Authority 3.03
HSR Act 3.03
Indemnified Party 5.12
IS Projects 5.01(k)
Lien 3.04
LTIP 1.04(a)
Material Adverse Effect 3.01
Merger 1.01(a)
Merger Consideration 1.02(c)
Merger Subsidiary preamble
NEDP 1.04(a)
Notice of Superior Proposal 5.03(a)
NYSE 1.02(a)
Permitted CVS Transactions 5.02
Person 1.02(d)
qualified stock options 1.04(a)
Random Trading Days 1.02(a)
Revco preamble
Revco 10-K 3.08
Revco Agreement 3.04
Revco Balance Sheet 3.08
Revco Balance Sheet Date 3.08
Revco Benefit Plans 3.15(a)
Revco Common Stock 1.02(a)
Revco Option Plans 1.04(a)
Revco Preferred Stock 3.05(a)
Revco Proxy Statement 3.09
Revco Securities 3.05(a)
Revco SEC Documents 3.07(a)
Revco Stockholder Approval 5.03(a)
Revco Stockholder Meeting 5.03(a)
Revco Stock Option 1.04(a)
Revco Subsidiary Securities 3.06
SEC 3.07(a)
Service 3.14(c)
Settlement 5.07(d)
Share 1.02(a)
Significant Subsidiary 3.01
Subsidiary 1.02(d)
Superior Proposal 5.03(a)
Surviving Corporation 1.01(a)
Takeover Statute 3.24
Tax Return 3.14(d)
Taxes 3.14(d)
Taxing Authority 3.14(d)
Threshold Settlement 5.07(d)
Trigger Event 8.04(b)
Zell/Chilmark recitals
Zell/Chilmark Stockholder Agreement recitals
</TABLE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated as of February 6, 1997*
among CVS Corporation, a Delaware corporation ("CVS"), Revco D.S., Inc., a
Delaware corporation ("Revco"), and North Acquisition Corp., a Delaware
corporation and a wholly-owned subsidiary of CVS ("Merger Subsidiary").
WHEREAS, the respective Boards of Directors of CVS and Revco
have approved, and deem it advisable and in the best interests of their
respective stockholders to consummate, the acquisition of Revco by CVS on the
terms and conditions set forth herein;
WHEREAS, for United States federal income tax purposes, it is
intended that the Merger contemplated by this Agreement qualify as a
"reorganization" within the meaning of Section 368 of the Internal Revenue
Code of 1986, as amended, and the rules and regulations promulgated thereunder
(the "Code");
WHEREAS, for accounting purposes, it is intended that the
Merger be accounted for as a pooling of interests under United States
generally accepted accounting principles ("GAAP"); and
WHEREAS, as a condition and inducement to CVS entering into this
Agreement and incurring the obligations set forth herein, concurrently with the
execution and delivery of this Agreement, CVS is entering into a Stockholder
Agreement with Zell/Chilmark Fund, L.P. ("Zell/Chilmark") in the form of
Exhibit A hereto (the "Zell/Chilmark Stockholder Agreement") pursuant to
which, among other things, such stockholder has agreed to vote the shares of
Revco Common Stock owned by such stockholder in favor of this Agreement and
the Merger provided for herein;
NOW, THEREFORE, in consideration of the promises and the
respective representations, warranties, covenants, and agreements set forth
herein and in the Zell/Chilmark Stockholder Agreement, the parties hereto
agree as follows:
__________________________
(*Text of Annex A reflects the First Amendment dated as of March 19, 1997
to Agreement and Plan of Merger, but the Agreement and Plan of Merger dated
as of February 6, 1997 has not been amended and restated)
ARTICLE 1
The Merger
Section 1.01. The Merger. (a) Upon the terms and subject
to the conditions set forth in this Agreement, at the Effective Time,
Merger Subsidiary shall be merged (the "Merger") with and into Revco in
accordance with the Delaware General Corporation Law (the "Delaware Law"),
whereupon the separate existence of Merger Subsidiary shall cease, and
Revco shall continue as the surviving corporation (the "Surviving
Corporation").
(b) Upon the terms and subject to the conditions of this Agreement,
the closing of the Merger (the "Closing") shall take place at 10:00 a.m. on a
date to be specified by the parties (the "Closing Date"), which shall be no
later than the second business day after satisfaction of the conditions set
forth in Article 6, at the offices of Davis Polk & Wardwell, 450 Lexington
Avenue, New York, New York 10017, unless another time, date or place is agreed
to in writing by the parties hereto.
(c) Upon the Closing, Revco and Merger Subsidiary will file a
certificate of merger with the Secretary of State of the State of Delaware and
make all other filings or recordings required by Delaware Law in connection
with the Merger. The Merger shall become effective at such time as the
certificate of merger is duly filed with the Secretary of State of the State of
Delaware or at such later time as is agreed by CVS and Revco and specified in
the certificate of merger (the "Effective Time").
(d) The Merger shall have the effects set forth in Section 259 of
the Delaware Law.
Section 1.02. Conversion of Shares. (a) At the Effective Time:
(i) each share of Common Stock, par value $0.01 per share,
of Revco (the "Revco Common Stock") held by Revco as treasury stock or owned
by CVS or any Subsidiary of CVS immediately prior to the Effective Time shall
be cancelled, and no CVS Common Stock or other consideration shall be
delivered in exchange therefor;
(ii) each share of common stock, par value $0.01 per share, of
Merger Subsidiary outstanding immediately prior to the Effective Time shall be
converted into and become one share of common stock of the Surviving
Corporation and shall constitute the only outstanding shares of capital stock
of the Surviving Corporation; and
(iii) each share (each, a "Share" and collectively, the
"Shares") of Revco Common Stock outstanding immediately prior to the Effective
Time shall, except as otherwise provided in Section 1.02(a)(i), be converted
into the right to receive the number of shares of fully paid and
non-assessable Common Stock, par value $0.01 per share (the "CVS Common
Stock"), of CVS equal to the sum of:
(x) 0.4692 (the "Fixed Number"); and
(y) that number (the "Calculated Number") (rounded
to the nearest ten-thousandth) determined by
dividing $20 by the CVS Average Closing Price;
provided that the Calculated Number shall not
exceed 0.5405 and shall not be less than
0.4145.
For purposes of this Agreement, "CVS Average Closing Price" means
the average closing price per share of the CVS Common Stock on the
New York Stock Exchange, Inc. (the "NYSE") for the Random Trading
Days; and "Random Trading Days" means the ten trading days
selected by lot out of the twenty trading days ending on and
including the fifth trading day preceding the Closing Date. The
Random Trading Days shall be selected by lot by CVS and Revco at
5:00 p.m. New York time on the fifth trading day prior to the
Closing Date. The sum of the Fixed Number and the Calculated
Number is referred to herein as the "Conversion Number".
(b) From and after the Effective Time, all Shares converted in
accordance with Section 1.02(a)(iii) 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 Merger Consideration and
any dividends payable pursuant to Section 1.03(f). From and after the
Effective Time, all certificates representing the common stock of Merger
Subsidiary shall be deemed for all purposes to represent the number of shares
of Common Stock of the Surviving Corporation into which they were converted in
accordance with Section 1.02(a)(ii).
(c) The CVS Common Stock to be received as consideration pursuant
to the Merger by each holder of Shares (together with cash in lieu of
fractional shares of CVS Common Stock) is referred to herein as the "Merger
Consideration".
(d) For purposes of this Agreement, the word "Subsidiary" when
used with respect to any Person means any other Person, whether incorporated
or unincorporated, of which at least a majority of the securities or other
interests having by their terms ordinary voting power to elect at least 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 Person or by any one or more of its Subsidiaries.
For purposes of this Agreement, "Person" means an individual, a corporation,
a limited liability company, a partnership, an association, a trust or any
other entity or organization, including a Governmental Authority.
Section 1.03. Surrender and Payment. (a) Prior to the
Effective Time, CVS shall appoint an agent reasonably acceptable to Revco (the
"Exchange Agent") for the purpose of exchanging certificates representing
Shares for the Merger Consideration. Immediately following the Effective
Time, CVS shall deposit with the Exchange Agent, for the benefit of the
holders of shares of Revco Common Stock, certificates representing the CVS
Common Stock issuable pursuant to Section 1.02 in exchange for outstanding
shares of Revco Common Stock. Promptly after the Effective Time, CVS will
send, or will cause the Exchange Agent to send, to each holder of Shares at
the Effective Time (i) a letter of transmittal for use in such exchange (which
shall specify that delivery of the Merger Consideration shall be effected, and
risk of loss and title to the certificates representing CVS Common Stock and
Revco Common Stock shall pass, only upon proper delivery of the certificates
representing Shares to the Exchange Agent) and (ii) instructions for use in
effecting the surrender of the certificates representing Shares in exchange for
the certificates representing CVS Common Stock.
(b) Each holder of Shares that have been converted into a right to
receive the Merger Consideration, upon surrender to the Exchange Agent of a
certificate or certificates representing such Shares, together with a properly
completed letter of transmittal covering such Shares, will be entitled to
receive the Merger Consideration payable in respect of such Shares and any
dividends payable pursuant to Section 1.03(f). Until so surrendered, each such
certificate shall, after the Effective Time, represent for all purposes only
the right to receive the Merger Consideration and any dividends payable
pursuant to Section 1.03(f).
(c) If any portion of the Merger Consideration is to be paid to a
Person other than the registered holder of the Shares represented by the
certificate or certificates surrendered in exchange therefor, it shall be a
condition to such payment that the certificate or certificates so surrendered
shall be properly endorsed or otherwise be in proper form for transfer and that
the Person requesting such payment shall pay to the Exchange Agent any
transfer or other taxes required by reason of the issuance of shares of CVS
Common Stock to a Person other than the registered holder of such Shares
represented by the certificate or certificates so surrendered or establish to
the satisfaction of the Exchange Agent that such tax has been paid or is not
applicable.
(d) After the Effective Time, there shall be no further
registration of transfers of Shares. If, after the Effective Time,
certificates representing Shares are presented to the Surviving Corporation,
they shall be cancelled and exchanged for the consideration provided for, and
in accordance with the procedures set forth, in this Article 1.
(e) Any portion of the Merger Consideration made available to the
Exchange Agent pursuant to Section 1.03(a) that remains unclaimed by the
holders of Shares six months after the Effective Time shall be returned to
CVS, upon demand, and any such holder who has not exchanged his Shares for the
Merger Consideration in accordance with this Section 1.03 prior to that time
shall thereafter look only to CVS for payment of the Merger Consideration and
any dividends payable pursuant to Section 1.03(f) in respect of his Shares.
Notwithstanding the foregoing, CVS shall not be liable to any holder of Shares
for any amount paid to a public official pursuant to applicable abandoned
property laws. Any amounts remaining unclaimed by holders of Shares seven
years after the Effective Time (or such earlier date immediately prior to such
time as such amounts would otherwise escheat to or become property of any
governmental entity) shall, to the extent permitted by applicable law, become
the property of CVS free and clear of any claims or interest of any Person
previously entitled thereto.
(f) No dividends or other distributions with respect to CVS Common
Stock issued in the Merger shall be paid to the holder of any unsurrendered
certificates representing Shares until such certificates are surrendered as
provided in this Section 1.03. Subject to the effect of applicable laws,
following the surrender of such certificates, there shall be paid, without
interest, to the record holder of the CVS Common Stock issued in exchange
therefor at the time of such surrender, the amount of dividends or other
distributions with a record date after the Effective Time payable prior to or
on the date of such surrender with respect to such whole shares of CVS Common
Stock and not previously paid, less the amount of any withholding taxes which
may be required thereon.
Section 1.04. Stock Options. (a) As soon as practicable
following the date of this Agreement, CVS and Revco (or, if appropriate, any
committee of the Board of Directors of Revco administering the Revco 1992
Long-Term Incentive Compensation Plan, as amended (the "LTIP"), the Revco 1992
Non-Employee Directors' Stock Option Plan, as amended (the "NEDP") and the
Revco 1993 Employee Stock Purchase Plan (collectively, the "Revco Option
Plans") shall take such action as may be required to effect the following:
(i) the terms of each outstanding option granted by Revco to
purchase shares of Revco Common Stock under the Revco Option Plans (a "Revco
Stock Option"), whether vested or unvested, shall be adjusted as necessary to
provide that at the Effective Time, each Revco Stock Option outstanding
immediately prior to the Effective Time shall be deemed to constitute an
immediately exercisable (without regard to any vesting limitations under the
Revco Option Plans) option to acquire, on the same terms and conditions as
were applicable under such Revco Stock Option, the same number of shares of
CVS Common Stock as the holder of such Revco Stock Option would have been
entitled to receive pursuant to the Merger had such holder exercised such
Revco Stock Option in full immediately prior to the Effective Time, at a price
per share of CVS Common Stock equal to (A) the aggregate exercise price for
the shares of Revco Common Stock otherwise purchasable pursuant to such Revco
Stock Option divided by (B) the aggregate number of shares of CVS Common Stock
deemed purchasable pursuant to such Revco Stock Option (each, as so adjusted,
an "Adjusted Option"); provided that (after aggregating all the Shares of a
holder subject to Revco Stock Options) any fractional share of CVS Common
Stock resulting from such calculation for such holder shall be rounded down to
the nearest whole share and provided, further, that in the case of any option
to which Section 421 of the Code applies by reason of its qualification under
any of Sections 422 through 424 of the Code ("qualified stock options"), the
option price, the number of shares purchasable pursuant to such option and the
terms and conditions of exercise of such option shall be determined in order
to comply with Section 424 of the Code;
(ii) either the Board of Directors (or a committee thereof
with the requisite authority) of each of Revco and CVS will agree, or the
terms of the LTIP and each outstanding Revco Stock Option under the LTIP shall
be modified, to eliminate the discretion of such Board of Directors to
terminate any Revco Stock Option granted thereunder 90 days following a Change
in Control (as defined under the LTIP);
(iii) each holder of a Revco Stock Option shall have the right
to elect to exercise his or her Revco Stock Option, as modified pursuant to
clause (i) above, under the "Cashless Exercise Program" adopted by the Human
Resources Committee of the Board of Directors of Revco on January 24, 1996,
and neither the Board of Directors of Revco nor any committee thereof prior to
the Effective Time, nor CVS, its Board of Directors, the Surviving Corporation
or its Board of Directors, at or after the Effective Time, shall take any
action that would have the effect of rendering such Cashless Exercise Program
inapplicable to such Revco Stock Options so long as such Revco Stock Options
or Adjusted Options are outstanding and exercisable in accordance with their
terms. CVS shall ensure that, for a period of at least one year following the
Effective Time, the Surviving Corporation shall have such procedures in place
as are necessary to effect the exercise of any Adjusted Option pursuant to
such Cashless Exercise Program so long as such Adjusted Option is outstanding
and exercisable in accordance with its terms; and
(iv) Revco has delivered to CVS letters from each of the
officers named on Annex A to Schedule 3.15 waiving such officer's right to
receive from Revco and CVS, in the event of such officer's termination
following the Merger, a cash payment in settlement of such officer's
outstanding options under the LTIP.
(b) As soon as practicable after the Effective Time, CVS shall
deliver to the holders of Revco Stock Options appropriate notices setting
forth such holders' rights pursuant to the respective Revco Option Plans and
the agreements evidencing the grants of such Revco Stock Options and that such
Revco Stock Options and agreements shall be assumed by CVS and shall continue
in effect on the same terms and conditions (subject to the adjustments
required by this Section 1.04 after giving effect to the Merger). CVS shall
comply with the terms of the Revco Option Plans and ensure, to the extent
required by, and subject to the provisions of, such Revco Option Plans, that
the Revco Stock Options which qualified as qualified stock options prior to the
Effective Time continue to qualify as qualified stock options after the
Effective Time.
(c) CVS shall take such actions as are reasonably necessary for the
assumption of the Revco Option Plans pursuant to this Section 1.04, including
the reservation, issuance and listing of CVS Common Stock as is necessary to
effectuate the transactions contemplated by this Section 1.04. CVS shall
prepare and file with the SEC a registration statement on Form S-8 or other
appropriate form with respect to shares of CVS Common Stock subject to Revco
Stock Options issued under such Revco Option Plans and shall use its
reasonable best efforts to have such registration statement declared effective
immediately following the Effective Time and to maintain the effectiveness of
such registration statement or registration statements covering such Revco
Stock Options (and maintain the current status of the prospectus or
prospectuses contained therein) for so long as such Revco Stock Options remain
outstanding. With respect to those individuals, if any, who subsequent to the
Effective Time will be subject to the reporting requirements under Section
16(a) of the 1934 Act, where applicable, CVS shall use all reasonable efforts
to administer the Revco Option Plans assumed pursuant to this Section 1.04 in
a manner that complies with Rule 16b-3 promulgated under the 1934 Act to the
extent the applicable Revco Option Plan complied with such rule prior to the
Merger.
Section 1.05. Fractional Shares. (a) No fractional shares of
CVS Common Stock shall be issued in the Merger, but in lieu thereof each holder
of Shares otherwise entitled to a fractional share of CVS Common Stock will
be entitled to receive, from the Exchange Agent in accordance with the
provisions of this Section 1.05, a cash payment in lieu of such fractional
shares of CVS Common Stock representing such holder's proportionate interest,
if any, in the net proceeds from the sale by the Exchange Agent in one or more
transactions of (i) the number of shares of CVS Common Stock delivered to the
Exchange Agent by CVS pursuant to Section 1.03(a) over (ii) the aggregate
number of whole shares of CVS Common Stock to be distributed to the holders of
the certificates representing Shares pursuant to Section 1.03(b) (such excess
being herein called the "Excess Shares"). As soon as practicable after the
Effective Time, the Exchange Agent, as agent for the holders of the
certificates representing Shares, shall sell the Excess Shares at then
prevailing prices on the NYSE all in the manner provided in the following
paragraph.
(b) The sale of the Excess Shares by the Exchange Agent shall be
executed on the NYSE through one or more member firms of the NYSE and shall be
executed in round lots to the extent practicable. Until the net proceeds of
such sale or sales have been distributed to such holders of Shares, the
Exchange Agent will hold such proceeds in trust for such holders. The
proceeds from such sale or sales available for distribution to the holders of
Shares shall be reduced by the compensation payable to the Exchange Agent and
the expenses incurred by the Exchange Agent, in each case, in connection with
such sale or sales of the Excess Shares, including all related commissions,
transfer taxes and other out-of-pocket transaction costs. Until the net
proceeds of such sale or sales have been distributed to the holders of Shares,
the Exchange Agent shall hold such net proceeds in trust for the holders of
Shares (the "Common Shares Trust"). The Exchange Agent shall determine the
portion of the Common Shares Trust to which each holder of Shares shall be
entitled, if any, by multiplying the amount of the aggregate net proceeds
comprising the Common Shares Trust by a fraction, the numerator of which is
the amount of the fractional share interest to which such holder of Shares
would otherwise be entitled and the denominator of which is the aggregate
amount of fractional share interests to which all holders of Shares would
otherwise be entitled.
(c) As soon as practicable after the determination of the amount of
cash, if any, to be paid to holders of Shares in lieu of any fractional shares
of CVS Common Stock, the Exchange Agent shall make available such amounts to
such holders of Shares without interest.
Section 1.06. Adjustments. In the event of any split,
combination or reclassification of the outstanding CVS Common Stock or any
issuance of any other securities in exchange or in substitution for
outstanding shares of CVS Common Stock at any time during the period from the
date of this Agreement to the Effective Time, Revco and CVS shall make such
adjustment to the Conversion Number as Revco and CVS shall mutually agree so
as to preserve the economic benefits that Revco and CVS each reasonably
expected on the date of this Agreement to receive as a result of the
consummation of the Merger and the other transactions contemplated by this
Agreement.
ARTICLE 2
The Surviving Corporation
Section 2.01. Certificate of Incorporation. The
certificate of incorporation of Revco shall be the certificate of
incorporation of the Surviving Corporation, except that, at the Effective
Time, the name of the Surviving Corporation shall be changed to "CVS Revco
D.S., Inc." and certain other amendments thereto shall be effected in the
certificate of merger filed pursuant to Section 1.01(c).
Section 2.02. Bylaws. The bylaws of Merger Subsidiary in
effect at the Effective Time shall be the bylaws of the Surviving Corporation
until amended in accordance with applicable law.
Section 2.03. Directors and Officers. From and after the
Effective Time, until successors are duly elected or appointed and
qualified in accordance with the Delaware Law and the certificate of
incorporation and bylaws of the Surviving Corporation, (a) the directors of
Merger Subsidiary at the Effective Time shall be the directors of the
Surviving Corporation, and (b) the officers of Merger Subsidiary at the
Effective Time shall be the officers of the Surviving Corporation.
ARTICLE 3
Representations and Warranties of Revco
Revco represents and warrants to CVS that:
Section 3.01. Organization and Power. Each of Revco and its
Subsidiaries is a corporation, partnership or other entity duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation or organization, and has the requisite corporate or other power
and authority and governmental approvals to own, lease and operate its
properties and to carry on its business as now being conducted, except where
the failure to be so organized, existing and in good standing or to have such
power, authority and governmental approvals would not, individually or in the
aggregate, have a Material Adverse Effect on Revco. Each of Revco and its
Subsidiaries is duly qualified or licensed to do business and is in good
standing in each jurisdiction in which the property owned, leased or operated
by it or the nature of the business conducted by it makes such qualification
or licensing necessary, except where the failure to be so duly qualified or
licensed and in good standing would not, individually or in the aggregate,
have a Material Adverse Effect on Revco. For purposes of this Agreement, a
"Material Adverse Effect" with respect to any Person means a material adverse
effect (i) on the condition (financial or otherwise), business, liabilities,
properties, assets, or results of operations of such Person and its
Subsidiaries, taken as a whole, or (ii) on the ability of such Person to
perform its obligations under or to consummate the transactions contemplated
by this Agreement. Schedule 3.01 sets forth a complete list of Revco's
Subsidiaries that are "significant subsidiaries", as such term is defined in
Section 1-02 of Regulation S-X under the 1934 Act (each, a "Significant
Subsidiary"). Revco has heretofore delivered to CVS true and complete copies
of Revco's certificate of incorporation and bylaws as currently in effect.
Section 3.02. Corporate Authorization. (a) The execution,
delivery and performance by Revco of this Agreement and the consummation by
Revco of the transactions contemplated hereby are within Revco's corporate
powers and, except as set forth in the next succeeding sentence of this
Section 3.02(a), have been duly authorized by all necessary corporate action.
The affirmative vote of a majority of the outstanding Shares is the only vote
of any class or series of Revco's capital stock necessary to approve and adopt
this Agreement and the transactions contemplated by this Agreement. This
Agreement has been duly executed and delivered by Revco and, subject to the
receipt of the approval described in the immediately preceding sentence,
constitutes a valid and binding agreement of Revco, enforceable against Revco
in accordance with its terms (subject to applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer and other similar laws
affecting creditors' rights generally from time to time in effect and to
general principles of equity, including concepts of materiality,
reasonableness, good faith and fair dealing, regardless of whether in a
proceeding at equity or at law).
(b) The Board of Directors of Revco has duly and validly approved
this Agreement and the transactions contemplated by this Agreement (including
the termination of the Existing Company/Stockholder Agreements as of the
Effective Time), including all actions necessary to render the provisions of
Section 203 of the Delaware Law inapplicable to the Merger.
Section 3.03. Governmental Authorization. The execution,
delivery and performance by Revco of this Agreement, and the consummation by
Revco of the transactions contemplated hereby, require no action by or in
respect of, or filing with, any federal, state or local government or any
court, administrative agency or commission or other governmental agency or
authority (a "Governmental Authority") other than (a) the filing of a
certificate of merger with respect to the Merger with the Delaware Secretary
of State and appropriate documents with the relevant authorities of other
states in which Revco is qualified to do business; (b) compliance with any
applicable requirements of the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act"); (c) compliance with any applicable
requirements of the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder (the "1933 Act"); (d) compliance with any
applicable requirements of the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder (the "1934 Act"); (e)
compliance with any other applicable securities laws; (f) those that may be
required solely by reason of CVS' or Merger Subsidiary's (as opposed to any
other third party's) participation in the transactions contemplated by this
Agreement; (g) the approval of the relevant pharmacy boards and alcoholic
beverage commissions or comparable entities in the states in which Revco and
its Subsidiaries do business; (h) actions or filings which, if not taken or
made, would not, individually or in the aggregate, reasonably be expected to
have a Material Adverse Effect on Revco; and (i) filings and notices not
required to be made or given until after the Effective Time.
Section 3.04. Non-Contravention. Except as set forth on
Schedule 3.04, the execution, delivery and performance by Revco of this
Agreement do not, and the consummation by Revco of the transactions
contemplated hereby will not (a) assuming receipt of the approval of
stockholders referred to in Section 3.02, contravene or conflict with the
certificate of incorporation, bylaws or similar organizational documents of
Revco or any of its Significant Subsidiaries, (b) assuming compliance with the
matters referred to in Section 3.03, contravene or conflict with or constitute
a violation of any provision of any law, regulation, judgment, injunction,
order or decree binding upon or applicable to Revco or any Subsidiary of
Revco, (c) constitute a default (or an event which with notice, the lapse of
time or both would become a default) under or give rise to a right of
termination, cancellation or acceleration of any right or obligation of Revco
or any Subsidiary of Revco or to a loss of any benefit to which Revco or any
Subsidiary of Revco is entitled under any provision of any agreement, contract
or other instrument binding upon Revco or any Subsidiary of Revco and which
either has a term of more than one year or involves the payment or receipt of
money in excess of $500,000 (a "Revco Agreement") or any license, franchise,
permit or other similar authorization held by Revco or any Subsidiary of
Revco, or (d) result in the creation or imposition of any Lien on any asset of
Revco or any Subsidiary of Revco, except for such contraventions, conflicts or
violations referred to in clause (b) or defaults, rights of termination,
cancellation or acceleration, losses or Liens referred to in clause (c) or (d)
that would not, individually or in the aggregate, have a Material Adverse
Effect on Revco. For purposes of this Agreement, "Lien" means, with respect
to any asset, any mortgage, lien, pledge, charge, security interest or
encumbrance of any kind in respect of such asset.
Section 3.05. Capitalization of Revco. (a) The authorized
capital stock of Revco consists of 100,000,000 shares of Revco Common Stock and
25,000,000 shares of preferred stock, par value $0.01 per share (the "Revco
Preferred Stock"). As of the close of business on January 31, 1997, (i)
67,589,308 shares of Revco Common Stock are issued and outstanding, 1,202,000
shares of Revco Common Stock are held in Revco's treasury, 903,451 shares of
Revco Common Stock are reserved for issuance under Revco's 401(k) Savings
Plan, 524,536 shares of Revco Common Stock are reserved for issuance under
Revco's 1993 Employee Stock Purchase Plan and 4,407,728 shares of Revco Common
Stock are reserved for issuance pursuant to options previously granted
pursuant to the Revco Stock Option Plans, (ii) no shares of Revco Preferred
Stock are issued and outstanding and (iii) no shares of Revco Preferred Stock
are issued and held in the treasury of Revco. All the outstanding shares of
Revco's capital stock are, and all shares which may be issued pursuant to the
Revco Stock Option Plans will be, when issued in accordance with the
respective terms thereof, duly authorized, validly issued, fully paid and
non-assessable. Except (i) as set forth in this Section 3.05 or in Schedule
5.01, (ii) for the transactions contemplated by this Agreement, including
those permitted in accordance with Section 5.01(f), (iii) for changes since
January 31, 1997 resulting from the exercise of employee and director stock
options outstanding on such date and (iv) for Shares that may be issued as
provided in Section 5.01(f), there are outstanding (x) no shares of capital
stock or other voting securities of Revco, (y) no securities of Revco
convertible into or exchangeable for shares of capital stock or voting
securities of Revco, and (z) no options, warrants or other rights to acquire
from Revco, and no preemptive or similar rights, subscriptions or other
rights, convertible securities, agreements, arrangements or commitments of any
character, relating to the capital stock of Revco, obligating Revco to issue,
transfer or sell, any capital stock, voting securities or securities
convertible into or exchangeable for capital stock or voting securities of
Revco or obligating Revco to grant, extend or enter into any such option,
warrant, subscription or other right, convertible security, agreement,
arrangement or commitment (the items in clauses (x), (y) and (z) being
referred to collectively as the "Revco Securities"). Other than shares of Big
B, Inc. ("Big B") to be acquired upon surrender by the holders thereof in
connection with the merger of RDS Acquisition Co., a wholly owned Subsidiary
of Revco, into Big B as part of Revco's acquisition of Big B (collectively,
the "Big B Acquisition"), none of Revco or its Subsidiaries has any
contractual obligation to redeem, repurchase or otherwise acquire any Revco
Securities or any Revco Subsidiary Securities, including as a result of the
transactions contemplated by this Agreement. Except as permitted by this
Agreement, following the Merger, neither Revco nor any of its Subsidiaries
will have any obligation to issue, transfer or sell any shares of its capital
stock pursuant to any employee benefit plan or otherwise.
(b) Except for the Existing Company/Stockholder Agreement with
Zell/Chilmark, there are no voting trusts or other agreements or
understandings to which Revco or any Subsidiary of Revco is a party with
respect to the voting of the capital stock of Revco or any Subsidiary of
Revco. Within five business days of the date of this Agreement, Revco will
enter into letter agreements, copies of which shall be delivered promptly to
CVS, pursuant to which as of the Effective Time the Stockholder Agreement
between Zell/Chilmark and Revco dated as of June 1, 1992, the Registration
Rights Agreement between Zell/Chilmark and Revco dated as of June 1, 1992 and
the Registration Rights Agreement between Magten Asset Management Corporation
and Revco dated as of January 20, 1993 (such agreements being referred to
herein as the "Existing Company/Stock-holder Agreements") shall be terminated.
Section 3.06. Capitalization of Subsidiaries. Except as set
forth in Schedule 3.06, all of the outstanding shares of capital stock of, or
other ownership interests in, each Subsidiary of Revco, is owned by Revco,
directly or indirectly, free and clear of any consensual Lien (including any
restriction on the right to vote, sell or otherwise dispose of such capital
stock or other ownership interests). There are no outstanding (i) securities
of Revco or any Subsidiary of Revco convertible into or exchangeable for
shares of capital stock or other voting securities or ownership interests in
any Subsidiary of Revco, or (ii) options or other rights to acquire from Revco
or any Subsidiary of Revco, and no other obligation of Revco or any Subsidiary
of Revco to issue, any capital stock, voting securities or other ownership
interests in, or any securities convertible into or exchangeable for, any
capital stock, voting securities or ownership interests in, any Subsidiary of
Revco (the items in clauses (i) and (ii) being referred to collectively as the
"Revco Subsidiary Securities").
Section 3.07. SEC Filings. (a) Revco has filed all required
reports, schedules, forms, statements and other documents with the Securities
and Exchange Commission (the "SEC") since May 31, 1995 (the "Revco SEC
Documents").
(b) As of its filing date, each Revco SEC Document filed pursuant
to the 1934 Act did not contain any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, except to the extent that such statements have been modified or
superseded by a later filed Revco SEC Document.
(c) Each Revco SEC Document that is a registration statement, as
amended or supplemented, if applicable, filed pursuant to the 1933 Act as of
the date such registration statement or amendment became effective did not
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
not misleading, except to the extent that such statements have been modified or
superseded by a later filed Revco SEC Document.
Section 3.08. Financial Statements. The audited consolidated
financial statements and unaudited consolidated interim financial statements
of Revco included in Revco's Annual Report on Form 10-K for the fiscal year
ended June 1, 1996 (the "Revco 10-K") and its Quarterly Report on Form 10-Q for
the fiscal quarter ended November 16, 1996 have been prepared in accordance
with GAAP (except, in the case of unaudited statements, as permitted by Form
10-Q of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly present the
consolidated financial position of Revco and its consolidated Subsidiaries as
of the dates thereof and their consolidated results of operations and cash
flows for the periods then ended (subject to normal year-end adjustments in
the case of any unaudited interim financial statements). For purposes of this
Agreement, "Revco Balance Sheet" means the consolidated balance sheet of Revco
as of June 1, 1996 set forth in the Revco 10-K and "Revco Balance Sheet Date"
means June 1, 1996.
Section 3.09. Disclosure Documents. Neither the proxy
statement of Revco (the "Revco Proxy Statement") to be filed with the SEC in
connection with the Merger, nor any amendment or supplement thereto, will, at
the date the proxy statement or any such amendment or supplement is first
mailed to stockholders of Revco or at the time such stockholders vote on the
adoption and approval of this Agreement and the transactions contemplated
hereby, contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. The Revco Proxy
Statement will, when filed, comply as to form in all material respects with the
requirements of the 1934 Act and the rules and regulations promulgated
thereunder. No representation or warranty is made by Revco in this Section
3.09 with respect to statements made or incorporated by reference therein
based on information supplied by CVS or Merger Subsidiary for inclusion or
incorporation by reference in the Revco Proxy Statement.
Section 3.10. Information Supplied. None of the information
supplied or to be supplied by Revco for inclusion or incorporation by reference
in (i) the CVS Proxy Statement or any amendment or supplement thereto will,
at the date the CVS Proxy Statement or any amendment or supplement thereto is
first mailed to stockholders of CVS and at the time such stockholders vote on
the issuance of shares of CVS Common Stock in connection with the Merger,
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading or (ii) the Form S-4
or any amendment or supplement thereto will, at the time the Form S-4 or any
such amendment or supplement becomes effective under the 1933 Act or at the
Effective Time, contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading.
Section 3.11. Absence of Certain Changes. Except as disclosed
in the Revco SEC Documents filed prior to the date of this Agreement or as
disclosed in Schedule 3.11, since November 16, 1996, Revco and its
Subsidiaries have conducted their business in the ordinary course consistent
with past practice and there has not been:
(a) any event, occurrence or development which, individually or in
the aggregate, has had or would be reasonably likely to have a Material
Adverse Effect on Revco, except for general economic changes, changes that
affect the industry of Revco or any of its Subsidiaries generally, and changes
in Revco's business after the date hereof attributable solely to actions taken
by CVS;
(b) any declaration, setting aside or payment of any dividend or
other distribution with respect to any shares of capital stock of Revco, or any
repurchase, redemption or other acquisition by Revco or any Subsidiary of
Revco of any amount of outstanding shares of capital stock or other equity
securities of, or other ownership interests in, Revco or any Subsidiary of
Revco;
(c) any amendment of any term of any outstanding security of Revco
or any Subsidiary of Revco that would materially increase the obligations of
Revco or such Subsidiary under such security;
(d) other than in connection with any indebtedness for borrowed
money of Big B and its Subsidiaries assumed as a result of the Big B
Acquisition, (x) any incurrence or assumption by Revco or any Subsidiary of
Revco of any indebtedness for borrowed money other than under existing credit
facilities (or any renewals, replacements or extensions that do not increase
the aggregate commitments thereunder) (A) in the ordinary course of business
consistent with past practices (it being understood that any indebtedness
incurred prior to the date hereof in respect of capital expenditures shall be
considered to have been in the ordinary course of business consistent with
past practice) or (B) in connection with (1) any acquisition or capital
expenditure permitted by Section 5.01 or (2) the transactions contemplated
hereby, or (y) any guarantee, endorsement or other incurrence or assumption
of liability (whether directly, contingently or otherwise) by Revco or any
Subsidiary of Revco for the obligations of any other Person (other than any
wholly owned Subsidiary of Revco), other than in the ordinary course of
business consistent with past practice;
(e) any creation or assumption by Revco or any Subsidiary of Revco
of any consensual Lien on any material asset of Revco or any Subsidiary of
Revco other than in the ordinary course of business consistent with past
practices and any consensual Liens assumed as a result of the Big B
Acquisition;
(f) any making of any loan, advance or capital contribution to or
investment in any Person by Revco or any Subsidiary of Revco other than (i)
any acquisition permitted by Section 5.01, (ii) loans, advances or capital
contributions to or investments in wholly-owned Subsidiaries of Revco or (iii)
loans or advances to employees of Revco or any Subsidiary of Revco made in the
ordinary course of business consistent with past practices;
(g) (i) any contract or agreement entered into by Revco or any
Subsidiary of Revco on or prior to the date hereof relating to any material
acquisition or disposition of any assets or business or (ii) any modification,
amendment, assignment, termination or relinquishment by Revco or any
Subsidiary of Revco of any contract, license or other right (including any
insurance policy naming it as a beneficiary or a loss payable payee) that would
be reasonably likely to have a Material Adverse Effect on Revco, other than,
in the case of (i) and (ii), transactions, commitments, contracts or agreements
in the ordinary course of business consistent with past practice and those
contemplated by this Agreement;
(h) any material change in any method of accounting or accounting
principles or practice by Revco or any Subsidiary of Revco, except for any
such change required by reason of a change in GAAP; or
(i) except for items permitted by Section 5.18, any (i) grant of
any severance or termination pay to any director, officer or employee of Revco
or any of its Subsidiaries, (ii) entering into of any employment, deferred
compensation or other similar agreement (or any amendment to any such existing
agreement) with any director, officer or employee of Revco or any of its
Subsidiaries, (iii) increase in benefits payable under any existing severance
or termination pay policies or employment agreements or (iv) increase in
compensation, bonus or other benefits payable to directors, officers or
employees of Revco or any of its Subsidiaries other than, in the case of clause
(iv) only, increases prior to the date hereof in compensation, bonus or other
benefits payable to employees (other than officers) of Revco or any of its
Subsidiaries in the ordinary course of business consistent with past practice
or merit increases in salaries of employees (other than officers) at regularly
scheduled times in customary amounts consistent with past practices.
Section 3.12. No Undisclosed Material Liabilities. There have
been no liabilities or obligations (whether pursuant to contracts or
otherwise) of any kind whatsoever incurred by Revco or any Subsidiary of
Revco since November 16, 1996, whether accrued, contingent, absolute,
determined, determinable or otherwise, other than:
(a) liabilities or obligations disclosed or provided for in the
Revco Balance Sheet or in the notes thereto or in the Revco SEC Documents filed
prior to the date hereof;
(b) liabilities or obligations which, individually and in the
aggregate, have not had and are not reasonably likely to have a Material
Adverse Effect on Revco; or
(c) liabilities or obligations under this Agreement or incurred in
connection with the transactions contemplated hereby.
Section 3.13. Litigation. Except as disclosed in the Revco SEC
Documents filed prior to the date hereof, there is no action, suit,
investigation or proceeding pending against, or to the knowledge of Revco,
threatened against or affecting, Revco or any Subsidiary of Revco or any of
their respective properties before any Governmental Authority which,
individually or in the aggregate, would be reasonably likely to have a
Material Adverse Effect on Revco.
Section 3.14. Taxes. (a) Revco and each of its Subsidiaries
has timely filed (or has had timely filed on its behalf) or will file or cause
to be timely filed, all material Tax Returns required by applicable law to be
filed by it prior to or as of the Effective Time, and all such material Tax
Returns are, or will be at the time of filing, complete in all material
respects;
(b) Revco and each of its Subsidiaries has paid (or has had paid
on its behalf) or, where payment is not yet due, has established in accordance
with GAAP (or has had established on its behalf and for its sole benefit and
recourse) or will establish or cause to be established on or before the
Effective Time an adequate accrual for the payment of, all material Taxes due
with respect to any period ending prior to or as of the Effective Time; and
(c) the federal income Tax Returns of (w) Hook-SupeRx, Inc. and its
Subsidiaries, (x) Big B and its Subsidiaries and (y) Revco and its Subsidiaries
(other than those specified in (w) and (x)) have been examined and settled with
the Internal Revenue Service (the "Service") (or the applicable statutes of
limitation for the assessment of federal income Taxes for such periods have
expired) through the respective fiscal years ending in 1991, 1993 and 1991.
(d) "Taxes" shall mean any and all taxes, charges, fees, levies or
other assessments, including income, gross receipts, excise, real or personal
property, sales, withholding, social security, retirement, unemployment,
occupation, use, goods and services, service use, license, value added,
capital, net worth, payroll, profits, withholding, franchise, transfer and
recording taxes, fees and charges, and any other taxes, assessment or similar
charges imposed by the Service or any taxing authority (whether domestic or
foreign including any state, county, local or foreign government or any
subdivision or taxing agency thereof (including a United States possession))
(a "Taxing Authority"), whether computed on a separate, consolidated, unitary,
combined or any other basis; and such term shall include any interest whether
paid or received, fines, penalties or additional amounts attributable to, or
imposed upon, or with respect to, any such taxes, charges, fees, levies or
other assessments. "Tax Return" shall mean any report, return, document,
declaration or other information or filing required to be supplied to any
taxing authority or jurisdiction (foreign or domestic) with respect to Taxes,
including information returns, any documents with respect to or accompanying
payments of estimated Taxes, or with respect to or accompanying requests for
the extension of time in which to file any such report, return, document,
declaration or other information.
Section 3.15. Employee Benefit Plans; ERISA. (a) Except as
set forth in Schedule 3.15(a), there are no material employee benefit plans
(including any plans for the benefit of directors or former directors),
arrangements, practices, contracts or agreements (including employment
agreements and severance agreements, incentive compensation, bonus, stock
option, stock appreciation rights and stock purchase plans) of any type
(including plans described in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")), maintained by Revco, any of its
Subsidiaries or any trade or business, whether or not incorporated (an "ERISA
Affiliate"), that together with Revco would be deemed a "controlled group"
within the meaning of Section 4001(a)(14) of ERISA, or with respect to which
Revco or any of its Subsidiaries has or may have a liability (the "Revco
Benefit Plans"). Except as disclosed in Schedule 3.15(a) (or as otherwise
permitted by this Agreement): (1) neither Revco nor any ERISA Affiliate has
any formal plan or commitment, whether legally binding or not, to create any
additional Revco Benefit Plan or modify or change any existing Revco Benefit
Plan that would affect any employee or terminated employee of Revco or any
ERISA Affiliate; and (2) since November 16, 1996, there has been no change,
amendment, modification to, or adoption of, any Revco Benefit Plan, in each
case, that has had, or would be reasonably likely to have, a Material Adverse
Effect on Revco.
(b) With respect to each Revco Benefit Plan, except as disclosed in
Schedule 3.15(b) or as would not, individually or in the aggregate, have a
Material Adverse Effect on Revco: (i) if intended to qualify under Section
401(a), 401(k) or 403(a) of the Code, such plan so qualifies, and its trust is
exempt from taxation under Section 501(a) of the Code; (ii) such plan has been
administered in accordance with its terms and applicable law; (iii) no breaches
of fiduciary duty have occurred; (iv) no prohibited transaction within the
meaning of Section 406 of ERISA has occurred; (v) as of the date of this
Agreement, no lien imposed under the Code or ERISA exists; and (vi) all
contributions and premiums due (including any extensions for such
contributions and premiums) have been made in full.
(c) None of the Revco Benefit Plans has incurred any "accumulated
funding deficiency", as such term is defined in Section 412 of the Code,
whether or not waived.
(d) Except as disclosed in Schedule 3.15(d): (i) neither Revco nor
any ERISA Affiliate has incurred any liability under Title IV of ERISA
(including Sections 4063-4064 and 4069 of ERISA) since the effective date of
ERISA that has not been satisfied in full except as, individually or in the
aggregate, would not have or would not be reasonably likely to have a Material
Adverse Effect on Revco.
(e) With respect to each Revco Benefit Plan that is a "welfare
plan" (as defined in Section 3(1) of ERISA), except as specifically disclosed
in Schedule 3.15(e), no such plan provides medical or death benefits with
respect to current or former employees of Revco or any of its Subsidiaries
beyond their termination of employment, other than on an employee-pay-all
basis, except as would not be reasonably likely, individually or in the
aggregate, to have a Material Adverse Effect on Revco.
(f) Except with respect to payments under the agreements and
programs specified in Schedule 3.15(f), the consummation of the transactions
contemplated by this Agreement will not (i) entitle any individual to severance
pay or any tax "gross-up" payments with respect to the imposition of any tax
pursuant to Section 4999 of the Code or accelerate the time of payment or
vesting, or increase the amount, of compensation or benefits due to any
individual with respect to any Revco Benefit Plan, or (ii) constitute or
result in a prohibited transaction under Section 4975 of the Code or Section
406 or 407 of ERISA with respect to any Revco Benefit Plan.
(g) Except as disclosed in Schedule 3.15(a), there is no Revco
Benefit Plan that is a "multiemployer plan", as such term is defined in
Section 3(37) of ERISA, or which is covered by Section 4063 or 4064 of ERISA.
(h) Schedule 3.15(h) identifies each collective bargaining
agreement to which Revco or any of its Significant Subsidiaries is a party and
copies of each such agreement have been furnished to or made available to CVS.
Except as set forth on Schedule 3.15(h), or except as would not be reasonably
likely, individually or in the aggregate, to have a Material Adverse Effect on
Revco, (i) there is no labor strike, slowdown or work stoppage or lockout
against Revco or any of its Significant Subsidiaries and (ii) there is no
unfair labor practice charge or complaint against or pending before the
National Labor Relations Board. As of the date of this Agreement, there is no
representation claim or petition pending before the National Labor Relations
Board and, to the knowledge of Revco, no question concerning representation
exists with respect to the employees of Revco or any of its Significant
Subsidiaries.
Section 3.16. Compliance with Laws; No Default; No
Non-Competes. (a) Neither Revco nor any of its Subsidiaries is in violation
of or has violated or failed to comply with any statute, law, ordinance,
regulation, rule, judgment, decree, order, writ, injunction, permit or license
or other authorization or approval of any Governmental Authority applicable to
its business or operations, except for violations and failures to comply that
have not had and would not, individually or in the aggregate, be reasonably
likely to result in a Material Adverse Effect on Revco.
(b) Each Revco Agreement is a valid, binding and enforceable
obligation of Revco and in full force and effect, except where the failure to
be valid, binding and enforceable and in full force and effect would not,
individually or in the aggregate, have a Material Adverse Effect on Revco.
None of Revco or any of its Subsidiaries is in default or violation of any
term, condition or provision of (i) its respective certificate of
incorporation or by-laws or similar organizational documents or (ii) except as
disclosed in Schedule 3.16, any Revco Agreement, except, in the case of clause
(i) (with respect to organizational documents that are partnership, joint
venture or similar documents) and (ii), for defaults or violations that,
individually or in the aggregate, have not had and would not be reasonably
likely to have a Material Adverse Effect on Revco. Revco has all permits and
licenses (including pharmaceutical and liquor licenses and permits) necessary
to carry on the business being conducted at each store location, except where
the failure to have such permit or license would not, individually or in the
aggregate, be reasonably likely to have a Material Adverse Effect on Revco.
Except as disclosed in Schedule 3.16, neither Revco nor any Subsidiary of
Revco is a party to any agreement that expressly limits the ability of Revco or
any Subsidiary of Revco 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
except to the extent that any such limitation would not be reasonably likely
to have a Material Adverse Effect on CVS after giving effect to the Merger.
Section 3.17. Finders' Fees. Except for Wasserstein, Perella
& Co., Inc. and Salomon Brothers Inc, a copy of each of whose engagement
agreement has been provided to CVS, no investment banker, broker, finder,
other intermediary or other Person is entitled to any fee or commission from
Revco or any Subsidiary of Revco upon consummation of the transactions
contemplated by this Agreement.
Section 3.18. Environmental Matters. (a) Except as set forth
in the Revco 10-K:
(i) no notice, notification, demand, request for information,
citation, summons or order has been received by, no complaint has been filed
against, no penalty has been assessed against, and no investigation, action,
claim, suit, proceeding or review is pending or, to the knowledge of Revco or
any Subsidiary of Revco, is threatened by any Person against, Revco or any
Subsidiary of Revco with respect to any matters relating to or arising out of
any Environmental Law which, individually or in the aggregate, would be
reasonably likely to have a Material Adverse Effect on Revco;
(ii) no Hazardous Substance has been discharged, disposed of,
dumped, injected, pumped, deposited, spilled, leaked, emitted or released at,
on or under any property now or, to the knowledge of Revco, previously owned,
leased or operated by Revco or any Subsidiary of Revco, which circumstance,
individually or in the aggregate, would be reasonably likely to have a
Material Adverse Effect on Revco; and
(iii) there are no Environmental Liabilities that,
individually or in the aggregate, have had or would be reasonably likely to
have a Material Adverse Effect on Revco.
(b) For purposes of this Section, the following terms shall have
the meanings set forth below:
(i) "Revco" and "Subsidiary of Revco" shall include any
entity which is, in whole or in part, a predecessor of Revco or any of its
Subsidiaries;
(ii) "Environmental Laws" means any and all federal, state,
local and foreign law (including common law), treaty, judicial decision,
regulation, rule, judgment, order, decree, injunction, permit, or governmental
restrictions or any agreement with any governmental authority or other third
party, relating to human health and safety, the environment or to pollutants,
contaminants, wastes or chemicals or toxic, radioactive, ignitable, corrosive,
reactive or otherwise hazardous substances, wastes or materials;
(iii) "Environmental Liabilities" means any and all liabilities
of or relating to Revco or any Subsidiary of Revco of any kind whatsoever,
whether accrued, contingent, absolute, determined, determinable or otherwise,
which (A) arise under or relate to matters covered by Environmental Laws and
(B) arise from actions occurring or conditions existing on or prior to the
Effective Time; and
(iv) "Hazardous Substances" means any pollutant, contaminant,
waste or chemical or any toxic, radioactive, corrosive, reactive or otherwise
hazardous substance, waste or material, or any substance having any
constituent elements displaying any of the foregoing characteristics,
including, without limitation, petroleum, its derivatives, by-products and
other hydrocarbons, or any substance, waste or material regulated under any
Environmental Laws.
Section 3.19. Assets. The assets, properties, rights and
contracts, including (as applicable), title or leaseholds thereto, of Revco
and its Subsidiaries, taken as a whole, are sufficient to permit Revco and its
Subsidiaries to conduct their business as currently being conducted with only
such exceptions as are not reasonably likely to have a Material Adverse Effect
on Revco. All material real property owned by Revco and its Subsidiaries is
owned free and clear of all Liens, except (A) those reflected or reserved
against in the latest balance sheet (or notes thereto) of Revco included in the
Revco SEC Documents filed prior to the date hereof, (B) taxes and general and
special assessments not in default and payable without penalty or interest,
(C) Liens assumed as a result of the Big B Acquisition and (D) Liens that do
not materially adversely interfere with any present use of such property.
Section 3.20. Opinion of Financial Advisor. Revco has
received the written opinion of each of Wasserstein, Perella & Co., Inc. and
Salomon Brothers Inc. to the effect that, as of the date hereof, the
Conversion Number to be received by the holders of Shares in connection with
the Merger is fair to such holders from a financial point of view. Revco has
delivered to CVS and Merger Subsidiary a copy of each such opinion.
Section 3.21. Transactions with Affiliates. Except to the
extent disclosed in the Revco SEC Documents filed prior to the date of this
Agreement, from June 1, 1996 through the date of this Agreement, there have
been no transactions, agreements, arrangements or understandings between Revco
or its Subsidiaries, on the one hand, and Revco's Affiliates (other than
wholly-owned Subsidiaries of Revco) or other Persons, on the other hand, that
would be required to be disclosed under Item 404 of Regulation S-K under the
1933 Act. For purposes of this Agreement, the term "Affiliate", when used
with respect to any Person, means any other Person directly or indirectly
controlling, controlled by, or under common control with such Person. As used
in the definition of "Affiliate", the term "control" means possession,
directly or indirectly, of the power to direct or cause the direction of the
management or policies of a Person, whether through the ownership of voting
securities, by contract or otherwise.
Section 3.22. Accounting Matters. Neither Revco nor, to its
best knowledge, any of its Subsidiaries has taken or agreed to take any action
that would prevent CVS from accounting for the business combination to be
effected by the Merger as a "pooling of interests".
Section 3.23. Insurance. Except as set forth on Schedule 3.23,
Revco and each of its Significant Subsidiaries are insured by insurers,
reasonably believed by Revco to be of recognized financial responsibility and
solvency, against such losses and risks and in such amounts as are customary
in the businesses in which they are engaged. Revco's unsettled workers
compensation and general liability claims would not, individually or in the
aggregate, be reasonably likely to have a Material Adverse Effect on Revco.
Section 3.24. Takeover Statutes. The Board of Directors of
Revco has approved the Merger and this Agreement, and such approval is
sufficient to render inapplicable to the Merger, this Agreement, and the
transactions contemplated by this Agreement and the Zell/Chilmark Stockholder
Agreement the provisions of Section 203 of the Delaware Law. To the best of
Revco's knowledge, no other "fair price", "moratorium", "control share
acquisition" or other similar antitakeover statute or regulation enacted under
state or federal laws in the United States (each, a "Takeover Statute")
applicable to Revco or any of its Subsidiaries is applicable to the Merger or
the other transactions contemplated hereby.
Section 3.25. Former Merger Agreement. The Agreement and Plan
of Merger dated as of November 29, 1995 among Rite Aid Corporation, Ocean
Acquisition Corporation and Revco has been terminated in accordance with its
terms, and Revco has no liabilities or obligations, contingent or otherwise,
under or arising out of such agreement or the transactions contemplated
thereby, except for obligations under the confidentiality provisions of such
agreement.
Section 3.26. Pooling Letter. Revco has received a letter from
Arthur Andersen, LLP dated as of the date of this Agreement and addressed to
Revco, a copy of which has been delivered to CVS, stating that Arthur
Andersen, LLP believes that the acquisition of Revco by CVS should be treated
as a pooling of interests in conformity with generally accepted accounting
principles, as described in Accounting Principles Board Opinion No. 16.
Section 3.27. Affiliates. Schedule 3.27 sets forth each
Person who, as of the date hereof, is, to the best of Revco's knowledge,
deemed to be an Affiliate of Revco.
ARTICLE 4
Representations and Warranties of CVS
CVS represents and warrants to Revco that:
Section 4.01. Organization and Power. Each of CVS and its
Subsidiaries is a corporation, partnership or other entity duly organized,
validly existing and is in good standing under the laws of the jurisdiction of
its incorporation or organization, and has the requisite corporate or other
power and authority and governmental approvals to own, lease and operate its
properties and to carry on its business as now being conducted, except where
the failure to be so organized, existing and in good standing or to have such
power, authority and governmental approvals would not, individually or in the
aggregate, have a Material Adverse Effect on CVS. Each of CVS and its
Subsidiaries is duly qualified or licensed to do business and is in good
standing in each jurisdiction in which the property owned, leased or operated
by it or the nature of the business conducted by it makes such qualification
or licensing necessary, except where the failure to be so duly qualified or
licensed and in good standing would not, individually or in the aggregate,
have a Material Adverse Effect on CVS. Schedule 4.01 sets forth a complete
list of CVS' Significant Subsidiaries. CVS has delivered to Revco true and
complete copies of CVS' and Merger Subsidiary's certificate of incorporation
and bylaws as currently in effect.
Section 4.02. Corporate Authorization. The execution, delivery
and performance by CVS and Merger Subsidiary of this Agreement and the
consummation by CVS and Merger Subsidiary of the transactions contemplated
hereby, including entering into the Zell-Chilmark Stockholder Agreement, are
within the corporate powers of CVS and Merger Subsidiary and, except for any
required approval by the stockholders of CVS of the issuance of shares of CVS
Common Stock in connection with the Merger, have been duly authorized by all
necessary corporate action, including by resolution of the Board of Directors
of CVS. The affirmative vote, in favor of the issuance of shares of CVS
Common Stock in connection with the Merger (including any shares contemplated
by Section 1.04), of a majority of the votes represented by the shares of CVS
Common Stock and CVS ESOP Preference Stock, voting as a single class, present
at the CVS Stockholder Meeting in person or by proxy and entitled to vote (so
long as a majority of the votes represented by the total outstanding shares of
CVS Common Stock and CVS ESOP Preference Stock is cast at such meeting), is
the only vote of any class or series of CVS' capital stock necessary in
connection with this Agreement and the transactions contemplated hereby. This
Agreement has been duly executed and delivered by each of CVS and Merger
Subsidiary and constitutes a valid and binding agreement of each of CVS and
Merger Subsidiary, enforceable against CVS or Merger Subsidiary, as
applicable, in accordance with its terms (subject to applicable bankruptcy,
insolvency, reorganization, moratorium, fraudulent transfer and other similar
laws affecting creditors' rights generally from time to time in effect and to
general principles of equity, including concepts of materiality,
reasonableness, good faith and fair dealing, regardless of whether in a
proceeding at equity or at law). The shares of CVS Common Stock issued
pursuant to the Merger, when issued in accordance with the terms hereof, will
be duly authorized, validly issued, fully paid and nonassessable and not
subject to preemptive rights.
Section 4.03. Governmental Authorization. The execution,
delivery and performance by CVS and Merger Subsidiary of this Agreement, and
the consummation by CVS and Merger Subsidiary of the transactions contemplated
hereby, require no action, by or in respect of, or filing with, any
Governmental Authority other than (a) the filing of a certificate of merger
with respect to the Merger with the Delaware Secretary of State and appropriate
documents with the relevant authorities of other states in which Merger
Subsidiary is qualified to do business; (b) compliance with any applicable
requirements of the HSR Act; (c) compliance with any applicable requirements
of the 1933 Act; (d) compliance with any applicable requirements of the 1934
Act; (e) compliance with any other applicable securities laws; (f) those that
may be required solely by reason of Revco's (as opposed to any other third
party's) participation in the transactions contemplated by this Agreement; (g)
the approval of the relevant pharmacy boards and alcoholic beverage
commissions or comparable entities in the states in which CVS and its
Subsidiaries do business; (h) actions or filings which, if not taken or made,
would not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect on CVS; and (i) filings and notices not required to be
made or given until after the Effective Time.
Section 4.04. Non-Contravention. Except as set forth on
Schedule 4.04, the execution, delivery and performance by CVS and Merger
Subsidiary of this Agreement do not, and the consummation by CVS and Merger
Subsidiary of the transactions contemplated hereby will not (a) assuming
receipt of the approval of stockholders referred to in Section 4.02, contravene
or conflict with the certificate of incorporation, bylaws or similar
organizational documents of CVS or any of its Subsidiaries, (b) assuming
compliance with the matters referred to in Section 4.03, contravene or conflict
with or constitute a violation of any provision of any law, regulation,
judgment, injunction, order or decree binding upon or applicable to CVS or
Merger Subsidiary, (c) constitute a default (or an event which with notice, the
lapse of time or both would become a default) under or give rise to a right of
termination, cancellation or acceleration of any right or obligation of CVS or
Merger Subsidiary or to a loss of any benefit to which CVS or Merger
Subsidiary is entitled under any provision of any agreement, contract or other
instrument binding upon CVS or Merger Subsidiary and which either has a term
of more than one year or involves the payment or receipt of money in excess of
$500,000 (a "CVS Agreement") or any license, franchise, permit or other
similar authorization held by CVS or Merger Subsidiary, or (d) result in the
creation or imposition of any Lien on any asset of CVS or Merger Subsidiary,
except for such contraventions, conflicts or violations referred to in clause
(b) or defaults, rights of termination, cancellation or acceleration, losses
or Liens referred to in clause (c) or (d) that would not, individually or in
the aggregate, have a Material Adverse Effect on CVS.
Section 4.05. Capitalization of CVS. (a) The authorized
capital stock of CVS consists of 300,000,000 shares of CVS Common Stock,
120,619 shares of Cumulative Preferred Stock, par value $0.01 per share (the
"CVS Preferred Stock"), and 50,000,000 shares of Preference Stock, par value $1
per share (the "CVS ESOP Preference Stock"). As of the close of business on
January 31, 1997, (i) 106,907,752 shares of CVS Common Stock are issued and
outstanding, 5,830,722 shares of CVS Common Stock are held in CVS' treasury,
6,392,382 shares of CVS Common Stock are reserved for issuance upon conversion
of shares of CVS ESOP Preference Stock, 3,000,000 shares of CVS Common Stock
are reserved for additional grants under option and other stock-based plans
and 5,490,637 shares of CVS Common Stock are reserved for issuance pursuant to
options previously granted pursuant to CVS option plans, (ii) 5,558,595 shares
of CVS ESOP Preference Stock are issued and outstanding and (iii) no shares of
CVS Preferred Stock are issued or outstanding. All the outstanding shares of
CVS' capital stock are, and all shares which may be issued pursuant to CVS
option plans will be, when issued in accordance with the respective terms
thereof, duly authorized, validly issued, fully paid and non-assessable.
Except as set forth in this Section 4.05, except for the transactions
contemplated by this Agreement (including those permitted in Section 5.02(d)),
and except for changes since January 31, 1997 resulting from the exercise of
employee and director stock options outstanding on such date, as of the date
hereof, there are outstanding (x) no shares of capital stock or other voting
securities of CVS, (y) no securities of CVS convertible into or exchangeable
for shares of capital stock or voting securities of CVS, and (z) no options,
warrants or other rights to acquire from CVS, and no preemptive or similar
rights, subscriptions or other rights, convertible securities, agreements,
arrangements or commitments of any character, relating to the capital stock of
CVS, obligating CVS to issue, transfer or sell, any capital stock, voting
securities or securities convertible into or exchangeable for capital stock or
voting securities of CVS or obligating CVS to grant, extend or enter into any
such option, warrant, subscription or other right, convertible security,
agreement, arrangement or commitment (the items in clauses (x), (y) and (z)
being referred to collectively as the "CVS Securities"). None of CVS or its
Subsidiaries has any contractual obligation to redeem, repurchase or otherwise
acquire any CVS Securities or any CVS Subsidiary Securities, including as a
result of the transactions contemplated by this Agreement.
(b) Except for the provisions of CVS' certificate of incorporation
relating to the voting of CVS ESOP Preference Stock by the applicable trustee
in accordance with the instructions of plan participants, there are no voting
trusts or other agreements or understandings to which CVS or any Subsidiary
of CVS is a party with respect to the voting of the capital stock of CVS or any
Subsidiary of CVS.
Section 4.06. Capitalization of Subsidiaries. Except as set
forth in Schedule 4.06, all of the outstanding shares of capital stock of, or
other ownership interests in, each Subsidiary of CVS, is owned by CVS,
directly or indirectly, free and clear of any consensual Lien (including any
restriction on the right to vote, sell or otherwise dispose of such capital
stock or other ownership interests). There are no outstanding (i) securities
of CVS or any Subsidiary of CVS convertible into or exchangeable for shares of
capital stock or other voting securities or ownership interests in any
Subsidiary of CVS, or (ii) options or other rights to acquire from CVS or any
Subsidiary of CVS, and no other obligation of CVS or any Subsidiary of CVS to
issue, any capital stock, voting securities or other ownership interests in,
or any securities convertible into or exchangeable for, any capital stock,
voting securities or ownership interests in, any Subsidiary of CVS (the items
in clauses (i) and (ii) being referred to collectively as the "CVS Subsidiary
Securities").
Section 4.07. SEC Filings. (a) CVS has filed all required
reports, schedules, forms, statements and other documents with the SEC since
January 1, 1995 (the "CVS SEC Documents").
(b) As of its filing date, each CVS SEC Document filed pursuant to
the 1934 Act did not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading,
except to the extent that such statements have been modified or superseded by
a later filed CVS SEC Document.
(c) Each CVS SEC Document that is a registration statement, as
amended or supplemented, if applicable, filed pursuant to the 1933 Act as of
the date such registration statement or amendment became effective did not
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
not misleading, except to the extent that such statements have been modified or
superseded by a later filed CVS SEC Document.
Section 4.08. Financial Statements. The audited consolidated
financial statements and unaudited consolidated interim financial statements
of CVS (or its predecessor, Melville Corporation) included in CVS' Annual
Report on Form 10-K for the fiscal year ended December 31, 1995 (the "CVS
10-K") and its Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 1996 have been prepared in accordance with GAAP (except, in the
case of unaudited statements, as permitted by Form 10-Q of the SEC) applied on
a consistent basis during the periods involved (except as may be indicated in
the notes thereto) and fairly present the consolidated financial position of
CVS (or such predecessor) and its consolidated Subsidiaries as of the dates
thereof and their consolidated results of operations and cash flows for the
periods then ended (subject to normal year-end adjustments in the case of any
unaudited interim financial statements). For purposes of this Agreement, "CVS
Balance Sheet" means the consolidated balance sheet of Melville Corporation as
of December 31, 1995 set forth in the CVS 10-K and "CVS Balance Sheet Date"
means December 31, 1995.
Section 4.09. Disclosure Documents. (a) The Registration
Statement on Form S-4 of CVS (the "Form S-4") to be filed under the 1933 Act
relating to the issuance of CVS Common Stock in the Merger and the proxy
statement of CVS (the "CVS Proxy Statement" and, together with the Form S-4,
the "CVS Disclosure Documents"), to be filed with the SEC in connection with
the Merger, and any amendments or supplements thereto, will, when filed,
subject to the last sentence of Section 4.09(b), comply as to form in all
material respects with the applicable requirements of the 1933 Act and 1934
Act and the rules and regulations promulgated thereunder.
(b) (i) Neither the Form S-4 nor any amendment or supplement
thereto will at the time it becomes effective under the 1933 Act or at the
Effective Time contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading, and (ii) neither the CVS Proxy Statement
nor any amendment or supplement thereto will, at the date it is first mailed to
stockholders of CVS or at the time such stockholders vote on the approval of
the issuance of shares of CVS Common Stock in connection with the Merger,
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. No representation
or warranty is made by CVS in this Section 4.09 with respect to statements
made or incorporated by reference therein based on information supplied by
Revco for inclusion or incorporation by reference in any CVS Disclosure
Document.
Section 4.10. Information Supplied. None of the information
supplied or to be supplied by CVS for inclusion or incorporation by reference
in the Revco Proxy Statement or any amendment or supplement thereto will, at
the date the Revco Proxy Statement or any amendment or supplement thereto is
first mailed to stockholders of Revco and at the time such stockholders vote
on the adoption and approval of this Agreement and the transactions
contemplated hereby, contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading.
Section 4.11. Absence of Certain Changes. Except as disclosed
in the CVS SEC Documents filed prior to the date of this Agreement or as
disclosed in Schedule 4.11 and except in connection with the Permitted CVS
Transactions, since September 30, 1996, CVS and its Subsidiaries have
conducted their business in the ordinary course consistent with past practice
and there has not been:
(a) any event, occurrence or development which, individually or in
the aggregate, has had or would be reasonably likely to have a Material
Adverse Effect on CVS, except for general economic changes and changes that
affect the industry of CVS or any of its Subsidiaries generally;
(b) any declaration, setting aside or payment of any dividend or
other distribution with respect to any shares of capital stock of CVS (other
than payment of CVS' regular quarterly cash dividend on CVS Common Stock and
payment of required dividends on CVS ESOP Preference Stock) or any repurchase,
redemption or other acquisition by CVS or any Subsidiary of CVS of any amount
of outstanding shares of capital stock or other equity securities of, or other
ownership interests in, CVS or any Subsidiary of CVS;
(c) any amendment of any term of any outstanding security of CVS
or any Subsidiary of CVS that would materially increase the obligations of CVS
or such Subsidiary under such security;
(d) (x) any incurrence or assumption by CVS or any Subsidiary of
CVS of any indebtedness for borrowed money other than under existing credit
facilities (or any renewals, replacements or extensions thereof that do not
materially increase the commitments thereunder except to the extent of the
amount required to refinance any indebtedness for borrowed money of Revco and
its Subsidiaries as of the Closing Date) (A) in the ordinary course of
business consistent with past practices (it being understood that any
indebtedness incurred prior to the date hereof in respect of capital
expenditures shall be considered to have been in the ordinary course of
business consistent with past practice) or (B) in connection with the
transactions contemplated by this Agreement, or (y) any guarantee, endorsement
or other incurrence or assumption of liability (whether directly, contingently
or otherwise) by CVS or any Subsidiary of CVS for the obligations of any other
Person (other than any Subsidiary of CVS), other than in the ordinary course
of business consistent with past practice or in connection with obligations of
Revco and its Subsidiaries assumed at the Effective Time;
(e) any creation or assumption by CVS or any Subsidiary of CVS of
any consensual Lien on any material asset of CVS or any Subsidiary of CVS
other than in the ordinary course of business consistent with past practices;
(f) any making of any loan, advance or capital contribution to or
material investment in any Person by CVS or any Subsidiary of CVS other than
(i) prior to the date hereof to former Subsidiaries prior to or in connection
with the disposition of the Marshalls, KayBee Toys, This End Up, Wilsons
Leather, Footstar, Inc. (including Meldisco, Footaction and Thom McAn) and
Linens 'n Things, Inc. businesses pursuant to Melville Corporation's publicly
announced restructuring program (the "CVS Restructuring Program"), (ii) loans,
advances or capital contributions to or investments in wholly-owned
Subsidiaries of CVS or (iii) loans or advances to employees of CVS or any
Subsidiary of CVS made in the ordinary course of business consistent with past
practices;
(g) (i) any contract or agreement entered into by CVS or any
Subsidiary of CVS on or prior to the date hereof relating to any material
acquisition or disposition of any assets or business or (ii) any modification,
amendment, assignment, termination or relinquishment by CVS or any Subsidiary
of CVS of any contract, license or other right (including any insurance policy
naming it as a beneficiary or a loss payable payee) that would be reasonably
likely to have a Material Adverse Effect on CVS, other than, in the case of
(i) and (ii), (x) transactions, commitments, contracts or agreements in the
ordinary course of business consistent with past practice, (y) those in
connection with the CVS Restructuring Program and (z) those contemplated by
this Agreement; or
(h) any material change in any method of accounting or accounting
principles or practice by CVS or any Subsidiary of CVS, except for any such
change required by reason of a change in GAAP.
Section 4.12. No Undisclosed Material Liabilities. There have
been no liabilities or obligations (whether pursuant to contracts or
otherwise) of any kind whatsoever incurred by CVS or any Subsidiary of CVS
since September 30, 1996, whether accrued, contingent, absolute, determined,
determinable or otherwise, other than:
(a) liabilities or obligations (i) disclosed or provided for in
the CVS Balance Sheet or in the notes thereto, (ii) disclosed in the CVS SEC
Documents filed prior to the date hereof or (iii) disclosed in Schedule 4.12;
(b) liabilities or obligations which, individually and in the
aggregate, have not had and are not reasonably likely to have a Material
Adverse Effect on CVS; or
(c) liabilities or obligations under this Agreement or incurred in
connection with the transactions contemplated hereby.
Section 4.13. Litigation. Except as disclosed in the CVS SEC
Documents filed prior to the date hereof, there is no action, suit,
investigation or proceeding pending against, or to the knowledge of CVS,
threatened against or affecting, CVS or any Subsidiary of CVS or any of their
respective properties before any Governmental Authority which, individually or
in the aggregate, would be reasonably likely to have a Material Adverse Effect
on CVS.
Section 4.14. Taxes. (a) CVS and each of its Subsidiaries has
timely filed (or has had timely filed on its behalf) or will file or cause to
be timely filed, all material Tax Returns required by applicable law to be
filed by it prior to or as of the Effective Time, and all such material Tax
Returns are, or will be at the time of filing, complete in all material
respects;
(b) CVS and each of its Subsidiaries has paid (or has had paid on
its behalf) or, where payment is not yet due, has established in accordance
with GAAP (or has had established on its behalf and for its sole benefit and
rcourse) or will establish or cause to be established on or before the
Effective Time an adequate accrual for the payment of, all material Taxes due
with respect to any period ending prior to or as of the Effective Time; and
(c) the federal income Tax Returns of CVS have been examined by
and settled with the Service (or the applicable statutes of limitation for the
assessment of federal income Taxes for such periods have expired) for all
years through 1990.
Section 4.15. Employee Benefits, ERISA. (a) Except as set
forth in Schedule 4.15, there are no material employee benefit plans
(including any plans for the benefit of directors or former directors),
arrangements, practices, contracts or agreements (including employment
agreements and severance agreements, incentive compensation, bonus, stock
option, stock appreciation rights and stock purchase plans) of any type
(including plans described in Section 3(3) of ERISA), maintained by CVS, any
of its Subsidiaries or any ERISA Affiliate, that together with CVS would be
deemed a "controlled group" within the meaning of Section 4001(a)(14) of
ERISA, or with respect to which CVS or any of its Subsidiaries has or may have
a liability (the "CVS Benefit Plans"). Since September 30, 1996, there has
been no change, amendment, modification to, or adoption of, any CVS Benefit
Plan, in each case, that has had, or would be reasonably likely to have, a
Material Adverse Effect on CVS.
(b) With respect to each CVS Benefit Plan, except as would not,
individually or in the aggregate, have a Material Adverse Effect on CVS: (i) if
intended to qualify under Section 401(a), 401(k) or 403(a) of the Code, such
plan so qualifies, and its trust is exempt from taxation under Section 501(a)
of the Code; (ii) such plan has been administered in accordance with its terms
and applicable law; (iii) no breaches of fiduciary duty have occurred; (iv) no
prohibited transaction within the meaning of Section 406 of ERISA has
occurred; (v) as of the date of this Agreement, no lien imposed under the Code
or ERISA exists; and (vi) all contributions and premiums due (including any
extensions for such contributions and premiums) have been made in full.
(c) None of the CVS Benefit Plans has incurred any "accumulated
funding deficiency", as such term is defined in Section 412 of the Code,
whether or not waived.
(d) Neither CVS nor any ERISA Affiliate has incurred any liability
under Title IV of ERISA (including Sections 4063-4064 and 4069 of ERISA) since
the effective date of ERISA that has not been satisfied in full except as,
individually or in the aggregate, would not have or would not be reasonably
likely to have a Material Adverse Effect on CVS.
(e) With respect to each CVS Benefit Plan that is a "welfare plan"
(as defined in Section 3(1) of ERISA), no such plan provides medical or death
benefits with respect to current or former employees of CVS or any of its
Subsidiaries beyond their termination of employment, other than on an
employee-pay-all basis, except as would not be reasonably likely, individually
or in the aggregate, to have a Material Adverse Effect on CVS.
(f) The consummation of the transactions contemplated by this
Agreement will not (i) entitle any individual to severance pay or any tax
"gross-up" payments with respect to the imposition of any tax pursuant to
Section 4999 of the Code or accelerate the time of payment or vesting, or
increase the amount, of compensation or benefits due to any individual with
respect to any CVS Benefit Plan, or (ii) constitute or result in a prohibited
transaction under Section 4975 of the Code or Section 406 or 407 of ERISA with
respect to any CVS Benefit Plan.
(g) There is no CVS Benefit Plan that is a "multiemployer plan", as
such term is defined in Section 3(37) of ERISA, or which is covered by Section
4063 or 4064 of ERISA.
(h) Neither CVS nor any of its Significant Subsidiaries is a party
to any collective bargaining agreement. Except as would not be reasonably
likely, individually or in the aggregate, to have a Material Adverse Effect on
CVS, (i) there is no labor strike, slowdown or work stoppage or lockout
against CVS or any of its Significant Subsidiaries and (ii) there is no unfair
labor practice charge or complaint against or pending before the National
Labor Relations Board. As of the date of this Agreement, there is no
representation claim or petition pending before the National Labor Relations
Board and, to the knowledge of CVS, no question concerning representation
exists with respect to the employees of CVS or any of its Significant
Subsidiaries.
Section 4.16. Compliance with Laws; No Default; No
Non-Competes. (a) Neither CVS nor any of its Subsidiaries is in violation of
or has violated or failed to comply with any statute, law, ordinance,
regulation, rule, judgment, decree, order, writ, injunction, permit or license
or other authorization or approval of any Governmental Authority applicable to
its business or operations, except for violations and failures to comply that
would not, individually or in the aggregate, be reasonably likely to result in
a Material Adverse Effect on CVS.
(b) Each CVS Agreement is a valid, binding and enforceable
obligation of CVS and in full force and effect, except where the failure to be
valid, binding and enforceable and in full force and effect would not,
individually or in the aggregate, have a Material Adverse Effect on CVS. None
of CVS or any of its Subsidiaries is in default or violation of any term,
condition or provision of (i) its respective certificate of incorporation or
by-laws or similar organizational documents or (ii) any CVS Agreement, except,
in the case of clauses (i) (with respect to organizational documents that are
partnership, joint venture or similar documents) and (ii), for defaults or
violations that, individually or in the aggregate, have not had and would not
be reasonably likely to have a Material Adverse Effect on CVS. CVS has all
permits and licenses (including pharmaceutical and liquor licenses and permits)
necessary to carry on the business being conducted at each store location,
except where the failure to have such permit or license would not, individually
or in the aggregate, be reasonably likely to have a Material Adverse Effect on
CVS. Neither CVS nor any Subsidiary of CVS is a party to any agreement that
expressly limits the ability of CVS or any Subsidiary of CVS 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 except to the extent that any such
limitation would not be reasonably likely to have a Material Adverse Effect on
CVS after giving effect to the Merger.
Section 4.17. Finders' Fees. Except for Donaldson, Lufkin &
Jenrette Securities Corporation and CS First Boston Corporation, a copy of
each of whose engagement agreement has been provided to Revco, no investment
banker, broker, finder, other intermediary or other Person is entitled to any
fee or commission from CVS or any Subsidiary of CVS upon consummation of the
transactions contemplated by this Agreement.
Section 4.18. Environmental Matters. (a) Except as set forth
in the CVS 10-K:
(i) no notice, notification, demand, request for information,
citation, summons or order has been received by, no complaint has been filed
against, no penalty has been assessed against, and no investigation, action,
claim, suit, proceeding or review is pending or, to the knowledge of CVS or
any Subsidiary of CVS, is threatened by any Person, against CVS or any
Subsidiary of CVS with respect to any matters relating to or arising out of
any Environmental Law which, individually or in the aggregate, would be
reasonably likely to have a Material Adverse Effect on CVS;
(ii) no Hazardous Substance has been discharged, disposed of,
dumped, injected, pumped, deposited, spilled, leaked, emitted or released at,
on or under any property now or, to the knowledge of CVS, previously owned,
leased or operated by CVS or any Subsidiary of CVS, which circumstance,
individually or in the aggregate, would be reasonably likely to have a
Material Adverse Effect on CVS; and
(iii) there are no Environmental Liabilities that,
individually or in the aggregate, have had or would be reasonably likely to
have a Material Adverse Effect on CVS.
(b) For purposes of this Section, capitalized terms used shall
have the meanings assigned to them in Section 3.18(b), except that in all
cases the word "CVS" shall be substituted for the word "Revco".
Section 4.19. Assets. The assets, properties, rights and
contracts, including (as applicable), title or leaseholds thereto, of CVS and
its Subsidiaries, taken as a whole, are sufficient to permit CVS and its
Subsidiaries to conduct their business as currently being conducted with only
such exceptions as are not reasonably likely to have a Material Adverse Effect
on CVS. All material real property owned by CVS and its Subsidiaries is owned
free and clear of all Liens, except (A) those reflected or reserved against in
the latest balance sheet (or notes thereto) of CVS included in the CVS SEC
Documents filed prior to the date hereof, (B) taxes and general and special
assessments not in default and payable without penalty or interest, (C) Liens
disclosed in Schedule 4.19 and (D) Liens that do not materially adversely
interfere with any present use of such property.
Section 4.20. Opinion of Financial Advisor. CVS has received
the written opinion of Donaldson, Lufkin & Jenrette Securities Corporation to
the effect that, as of the date hereof, the Conversion Number to be received
by the holders of Shares in the Merger is fair to CVS from a financial point
of view. CVS has delivered to Revco a copy of such opinion.
Section 4.21. Transactions with Affiliates. Except to the
extent disclosed in the CVS SEC Documents filed prior to the date of this
Agreement and except as set forth on Schedule 4.21, from January 1, 1996
through the date of this Agreement, there have been no transactions,
agreements, arrangements or understandings between CVS or its Subsidiaries, on
the one hand, and CVS' Affiliates (other than wholly-owned Subsidiaries of
CVS) or other Persons, on the other hand, that would be required to be
disclosed under Item 404 of Regulation S-K under the 1933 Act.
Section 4.22. Accounting Matters. Neither CVS nor, to its
knowledge, any of its Subsidiaries has taken or agreed to take any action that
would prevent CVS from accounting for the business combination to be effected
by the Merger as a "pooling of interests".
Section 4.23. Insurance. Except as set forth on Schedule
4.23, CVS and each of its Significant Subsidiaries are insured by insurers,
reasonably believed by CVS to be of recognized financial responsibility and
solvency, against such losses and risks and in such amounts as are customary
in the businesses in which they are engaged. CVS' unsettled workers
compensation and general liability claims would not, individually or in the
aggregate, be reasonably likely to have a Material Adverse Effect on CVS.
Section 4.24. Takeover Statutes. The Board of Directors of CVS
has approved the Merger and this Agreement, and such approval is sufficient to
render inapplicable to the Merger, this Agreement, and the transactions
contemplated by this Agreement the provisions of Section 203 of the Delaware
Law. To the best of CVS' knowledge, no other Takeover Statute applicable to
CVS or any of its Subsidiaries, is applicable to the Merger or the other
transactions contemplated hereby.
Section 4.25. Pooling Letter. CVS has received a letter from
KPMG Peat Marwick, LLP dated as of the date of this Agreement and addressed to
CVS, a copy of which has been delivered to Revco, stating that, as of the date
of this Agreement, based on their best judgment regarding the application of
GAAP and the published rules and regulations of the SEC relative to matters
of accounting for business combinations, no conditions exist which would
preclude CVS from accounting for the Merger as a pooling of interests.
Section 4.26. Affiliates. Schedule 4.26 sets forth each
Person who, as of the date hereof, is, to the best of CVS' knowledge, deemed
to be an Affiliate of CVS.
ARTICLE 5
Covenants
Section 5.01. Conduct of Revco. Revco covenants and agrees
that, from the date hereof until the Effective Time, except as expressly
provided otherwise in this Agreement, including Schedules 3.11 and 5.01
hereto, or as reasonably necessary for Revco to fulfill its obligations
hereunder, Revco and its Subsidiaries shall conduct their business in the
ordinary course consistent with past practice and shall use their best efforts
to preserve intact their business organizations and relationships with
customers, suppliers, creditors and business partners and shall use their
reasonable efforts to keep available the services of their present officers
and employees. Without limiting the generality of the foregoing, from the
date hereof until the Effective Time, without the prior written approval of
CVS (which approval shall not be unreasonably withheld):
(a) Revco will not adopt or propose any change in its certificate
of incorporation or any material change in its bylaws;
(b) Revco will not, and will not permit any Subsidiary of Revco to,
adopt a plan or agreement of complete or partial liquidation, dissolution,
merger, consolidation, restructuring, recapitalization or other material
reorganization of Revco or any of its Subsidiaries (other than a liquidation or
dissolution of any Subsidiary or a merger or consolidation between wholly
owned Subsidiaries);
(c) Revco will not, and will not permit any Subsidiary of Revco to,
make any investment in or acquisition of any business or stores of any Person
or any material amount of assets (other than inventory), except for (i)
acquisitions for cash of drug store businesses comprising not more than ten
stores in any such business acquisition so long as no significant overlap
exists between the stores so acquired and CVS' stores and (ii) any capital
expenditure permitted by Section 5.01(k);
(d) Revco will not, and will not permit any Subsidiary of Revco
to, sell, lease, license, close, shut down or otherwise dispose of any assets
(other than inventory) or stores or relocate any stores, except (i) pursuant
to existing contracts or commitments listed on Schedule 5.01 or (ii) sales or
other dispositions of assets (other than stores) in the ordinary course of
business consistent with past practice;
(e) Revco will not, and will not permit any Subsidiary of Revco to,
declare, set aside or pay any dividend or other distribution payable in cash,
stock or property with respect to its capital stock other than dividends paid
by any Subsidiary of Revco to Revco or any other Subsidiary of Revco;
(f) Revco will not, and will not permit any Subsidiary of Revco
to, issue, sell, transfer, pledge, dispose of or encumber any additional
shares of, or securities convertible into or exchangeable for, or options,
warrants, calls, commitments or rights of any kind to acquire, any shares
of capital stock of any class or series of Revco or its Subsidiaries, other
than (i) issuances pursuant to the exercise of stock-based awards or
options (including under the plans described in Section 3.05(a))
outstanding on the date hereof, (ii) options and Shares that may become
issuable under Revco's 1993 Employee Stock Purchase Plan, and options
granted under the NEDP in accordance with its terms and Shares issued upon
exercise of such options, (iii) issuances by any Subsidiary of Revco to
Revco or any other Subsidiary of Revco, (iv) Shares issuable pursuant to
Revco's 401(k) Savings Plan and (v) Shares issuable pursuant to options
granted to newly hired management level employees in accordance with
Revco's past practices;
(g) Revco will not, and will not permit any Subsidiary of Revco to,
redeem, purchase or otherwise acquire directly or indirectly any of Revco's
capital stock;
(h) Revco will not, and will not permit any Subsidiary of Revco to,
close, shut down, or otherwise eliminate any of Revco's or such Subsidiary's
distribution centers;
(i) Revco will not, and will not permit any Subsidiary of Revco to,
move the location, close, shut down or otherwise eliminate Revco's or such
Subsidiary's headquarters or effect a general staff reduction at such
headquarters (other than the shutdown of, and related staff reduction at, the
headquarters of Big B in Bessemer, Alabama);
(j) Revco will not, and will not permit any Subsidiary of Revco to,
(i) enter into (or commit to enter into) any new lease or renew any existing
lease (except pursuant to commitments for such lease or lease renewal entered
into as of the date hereof) or (ii) purchase or acquire or enter into any
agreement to purchase or acquire any real estate (except pursuant to
commitments existing as of the date hereof);
(k) Revco will not, and will not permit any Subsidiary of Revco to,
make or commit to make any capital expenditure (including for store
remodellings, store signage and information systems) except for (i) (x)
information systems expenditures in respect of the Integrated Voice Response
and Patient Services Information Document projects (the "IS Projects") not to
exceed $1,850,000 in the aggregate, provided that Revco shall keep CVS
informed on a prompt basis of the status of each IS Project and shall use
reasonable best efforts to terminate any further work or expenditure on either
or both such projects if so requested by CVS, (y) information systems
expenditures in Big B stores acquired as a result of the Big B Acquisition not
in excess of $30,000 per store, and (z) expenditures on information systems as
part of the expenditures permitted in subclauses (ii), (iv) and (v) of this
clause (k) (it being understood that this clause (k)(i) will not restrict
expenditures necessary for maintenance of existing information systems), (ii)
expenditures not in excess of $50,000 per store in respect of any store
acquired in accordance with Section 5.01(c)(i), (iii) expenditures in
connection with changing the external store signage in order to change the
name of Big B stores to Revco, to the extent such expenditures are
contractually committed as of the date hereof, (iv) expenditures not in excess
of $7.5 million in connection with modifications to Big B's warehouse in
Bessemer, Alabama, (v) expenditures in respect of store commitments specified
in paragraph (j) above in an amount not in excess of that specified in
Schedule 5.01(k) for each such store (or, for any such store for which no
amount is so specified, not in excess of $300,000), (vi) expenditures not in
excess of $1,500,000 incurred pursuant to an agreement dated December 19, 1996
with Andersen Consulting, and (vii) other individual capital expenditure
projects or items (in respect of matters not covered above in this clause (k))
not exceeding $1 million per project or item,
(l) Revco will not, and will not permit any Subsidiary of Revco to,
without the prior written consent of CVS, change any tax election, change any
annual tax accounting period, change any method of tax accounting, file any
amended Tax Return, enter into any closing agreement relating to any material
Tax, settle any material Tax claim or assessment, surrender any right to claim
a Tax refund or consent to any extension or waiver (other than a reasonable
extension or waiver) of the limitations period applicable to any Tax claim or
assessment, if any such action would have the effect of materially increasing
the aggregate Tax liability or materially reducing the aggregate tax assets of
Revco and its Subsidiaries, taken as a whole, or, to the knowledge of Revco,
CVS and its Subsidiaries, taken as a whole;
(m) Revco will not, and will not permit any Subsidiary of Revco to,
agree or commit to do any of the foregoing; and
(n) Revco will not, and will not permit any Subsidiary of Revco to
take or agree or commit to take any action that would make any representation
and warranty of Revco hereunder inaccurate in any material respect at, or as
of any time prior to, the Effective Time.
Section 5.02. Conduct of CVS. From the date hereof until the
Effective Time, except as expressly provided otherwise in this Agreement
including Schedule 5.02 hereto, or as reasonably necessary for CVS to fulfill
its obligations hereunder, CVS and its Subsidiaries shall conduct their
business in the ordinary course consistent with past practice and shall use
their best efforts to preserve intact their business organizations and
relationships with customers, suppliers, creditors and business partners and
shall use their reasonable efforts to keep available the services of their
present officers and employees. It is understood that nothing in this
Agreement will restrict (x) any acquisition by CVS or any of its
Subsidiaries, in one or more transactions, of any drug store or any drug store
or related business for cash in an aggregate amount not to exceed $350 million
so long as no significant overlap exists between the stores so acquired and
Revco's stores or (y) any disposition by CVS or its Subsidiaries, in one or
more transactions, of (1) any or all of its Bob's Stores business, (2) its
ownership interest in Linens 'n Things, Inc. or (3) its ownership interest in
any real property or stores leased primarily to Bob's Stores Center, Inc.,
Linens 'n Things, Inc. or their respective Subsidiaries or to any former
Subsidiary of CVS disposed of pursuant to the CVS Restructuring Program ((x)
and (y) being referred to herein as the "Permitted CVS Transactions")).
Without limiting the generality of the foregoing but subject to the preceding
sentence, from the date hereof until the Effective Time, without the prior
written approval of Revco (which approval shall not be unreasonably withheld):
(a) CVS will not adopt or propose any change in its certificate of
incorporation or any material change in its bylaws, except for the creation of
a series of preferred stock in connection with the adoption of a shareholder
rights plan;
(b) CVS will not, and will not permit any Subsidiary of CVS to, (i)
adopt a plan or agreement of complete or partial liquidation, dissolution,
merger, consolidation, restructuring, recapitalization or other material
reorganization of CVS or any of its Subsidiaries (other than a liquidation or
dissolution of any Subsidiary or a merger or consolidation between wholly
owned Subsidiaries) or (ii) make any material acquisition of the business or
stores of any Person (other than a wholly owned Subsidiary);
(c) CVS will not, and will not permit any Subsidiary of CVS to,
sell, lease, license or otherwise dispose of any assets (other than inventory)
in an amount that would be material to CVS and its Subsidiaries, taken as a
whole, except (i) pursuant to existing contracts or commitments or (ii) in the
ordinary course of business consistent with past practice;
(d) CVS will not, and will not permit any Subsidiary of CVS to,
issue, sell, transfer, pledge, dispose of or encumber any additional shares of,
or securities convertible into or exchangeable for, or options, warrants,
calls, commitments or rights of any kind to acquire, any shares of capital
stock of any class or series of CVS or its Subsidiaries, other than (v)
issuances by any Subsidiary of CVS to CVS or any other Subsidiary of CVS, (w)
preferred stock purchase rights and related preferred stock in connection with
the adoption of a shareholder rights plan, (x) issuances pursuant to the
exercise of stock-based awards or options, including under the plans described
in Section 4.05(a), outstanding on the date hereof or granted as contemplated
in clause (z) below, (y) issuances of shares of CVS Common Stock upon
conversion of shares of CVS ESOP Preference Stock outstanding on the date
hereof, and (z) any grant of options or other stock based awards in respect of
CVS Common Stock to employees or directors of CVS or any of its Subsidiaries
that could result in the issuance of not more than 1,600,000 shares in the
aggregate of CVS Common Stock;
(e) CVS will not, and will not permit any Subsidiary of CVS to,
declare, set aside or pay any dividend or other distribution payable in cash,
stock or property with respect to its capital stock other than (i) cash
dividends payable by CVS in an aggregate amount not in excess of $0.14 per
share per calendar quarter, (ii) required cash dividends on CVS ESOP
Preference Stock and (iii) dividends paid by any Subsidiary of CVS to CVS or
any other Subsidiary of CVS;
(f) CVS will not, and will not permit any Subsidiary of CVS to,
redeem, purchase or otherwise acquire directly or indirectly any of CVS'
capital stock;
(g) CVS will not, and will not permit any Subsidiary of CVS to,
agree or commit to do any of the foregoing; and
(h) CVS will not, and will not permit any Subsidiary of CVS to take
or agree or commit to take any action that would make any representation and
warranty of CVS hereunder inaccurate in any material respect at, or as of any
time prior to, the Effective Time.
Section 5.03. Stockholder Meetings; Proxy Materials; Form S-4.
(a) Unless the Board of Directors of Revco shall take any action permitted by
the third sentence of this Section 5.03(a), Revco shall cause a meeting of its
stockholders (the "Revco Stockholder Meeting") to be duly called and held as
soon as reasonably practicable after the date of this Agreement for the
purpose of voting on the approval and adoption of this Agreement and the
Merger (the "Revco Stockholder Approval"). Except as provided in the next
sentence, the Board of Directors of Revco shall recommend approval and
adoption of this Agreement and the Merger by Revco's stockholders. The Board
of Directors of Revco shall be permitted to (i) not recommend to Revco's
stockholders that they give the Revco Stockholder Approval or (ii) withdraw or
modify in a manner adverse to CVS its recommendation to Revco's stockholders
that they give the Revco Stockholder Approval, but in each of cases (i) and
(ii) only if and to the extent that Revco has complied with Section 5.05 and a
Superior Proposal is pending at the time Revco's Board of Directors determines
to take any such action or inaction; provided that no such failure to
recommend, withdrawal or modification shall be made unless Revco shall have
delivered to CVS a written notice (a "Notice of Superior Proposal") advising
CVS that the Board of Directors of Revco has received a Superior Proposal and
identifying the Person making such Superior Proposal; provided, further that
nothing contained in this Agreement shall prevent the Board of Directors of
Revco from complying with Rule 14e-2 under the 1934 Act with regard to an
Acquisition Proposal. In connection with such stockholder meeting, Revco (x)
will promptly prepare and file with the SEC, will use its reasonable best
efforts to have cleared by the SEC and will thereafter mail to its
stockholders as promptly as practicable the Revco Proxy Statement and all
other proxy materials for such meeting, (y) will use its reasonable best
efforts, subject to the immediately preceding sentence, to obtain the Revco
Stockholder Approval and (z) will otherwise comply with all legal requirements
applicable to such meeting. For purposes of this Agreement, "Superior
Proposal" means any bona fide Acquisition Proposal for at least a majority of
the outstanding Shares on terms that the Board of Directors of Revco
determines in its good faith judgment (based on the advice of a financial
advisor of nationally recognized reputation, taking into account all the terms
and conditions of the Acquisition Proposal, including any break-up fees,
expense reimbursement provisions and conditions to consummation) are more
favorable and provide greater value to all Revco's stockholders than this
Agreement and the Merger taken as a whole. For purposes of this Agreement,
"Acquisition Proposal" means any offer or proposal for, or any indication of
interest in, a merger or other business combination involving Revco or any
Subsidiary of Revco or the acquisition of any equity interest in, or a
substantial portion of the assets of, Revco or any Subsidiary of Revco, other
than the transactions contemplated by this Agreement and other than an offer
for a bona fide de minimis equity interest, or for an amount of assets not
material to Revco and its Subsidiaries taken as a whole, that Revco has no
reason to believe would lead to a change of control Revco (or to the
acquisition of a substantial portion of the assets of Revco and its
Subsidiaries).
(b) Unless the Board of Directors of Revco shall take any action
permitted by the third sentence of paragraph (a) above, CVS shall cause a
meeting of its stockholders (the "CVS Stockholder Meeting") to be duly called
and held as soon as reasonably practicable after the date of this Agreement
for the purpose of voting on the issuance of shares of CVS Common Stock in
connection with the Merger (the "CVS Stockholder Approval") and, at such
stockholder meeting, the Directors of CVS shall recommend approval by CVS'
stockholders of such issuance of shares of CVS Common Stock. Unless the Board
of Directors of Revco shall take any action permitted by the third sentence of
paragraph (a) above in connection with such stockholder meeting, CVS (i) will
promptly prepare and file with the SEC, will use its reasonable best efforts
to have cleared by the SEC and will thereafter mail to its stockholders as
promptly as practicable the CVS Proxy Statement and all other proxy materials
for such meeting, (ii) will use its reasonable best efforts to obtain the CVS
Stockholder Approval and (iii) will otherwise comply with all legal
requirements applicable to such meeting.
(c) CVS shall promptly prepare and file with the SEC the Form S-4
with respect to the CVS Common Stock issuable in connection with the Merger
and take any action required to be taken under applicable state securities
laws and the regulations of the NYSE in connection with such issuance of CVS
Common Stock. Subject to the terms and conditions of this Agreement and
unless the Board of Directors of Revco shall take any action permitted by the
third sentence of paragraph (a) above, CVS shall use its reasonable best
efforts to have the Form S-4 declared effective under the 1933 Act as promptly
as practicable after the Form S-4 is filed.
Section 5.04. Access to Information. (a) To the extent
permitted by applicable law, from the date hereof until the Effective Time,
Revco will give CVS, its counsel, financial advisors, auditors and other
authorized representatives reasonable access during normal business hours to
the offices, properties, books and records of Revco and its Subsidiaries, will
furnish to CVS, its counsel, financial advisors, auditors and other authorized
representatives such financial and operating data and other information as such
Persons may reasonably request and will instruct Revco's employees, auditors,
counsel and financial advisors to cooperate with CVS in its investigation of
the business of Revco and its Subsidiaries; provided that no investigation
pursuant to this Section shall affect any representation or warranty given by
Revco to CVS hereunder. In the event Revco requests approval of CVS pursuant
to Section 5.01 to enter into any new store lease, CVS agrees not to contact
the applicable landlord regarding such store lease or property unless CVS is
already involved in discussions with the landlord regarding such lease or
property and such discussions have not been terminated prior to such request.
The foregoing information shall be held in confidence to the extent required
by, and in accordance with, the provisions of the letter agreement dated
January 8, 1997 between CVS and Revco (the "Confidentiality Agreement").
(b) To the extent permitted by applicable law, from the date hereof
until the Effective Time, CVS will give Revco, its counsel, financial advisors,
auditors and other authorized representatives reasonable access during normal
business hours to the offices, properties, books and records of CVS and its
Subsidiaries, will furnish to Revco, its counsel, financial advisors, auditors
and other authorized representatives such financial and operating data and
other information as such Persons may reasonably request and will instruct CVS'
employees, auditors, counsel and financial advisors to cooperate with Revco in
its investigation of the business of CVS and its Subsidiaries; provided that no
investigation pursuant to this Section shall affect any representation or
warranty given by CVS to Revco hereunder. Such information shall be held in
confidence to the extent required by, and in accordance with, the
Confidentiality Agreement.
Section 5.05. Other Offers. From the date hereof until the
termination hereof, Revco will not and will cause its Subsidiaries and the
officers, directors, employees, investment bankers, consultants and other
agents of Revco and its Subsidiaries and the Affiliates of Revco over which
Revco exercises control not to, directly or indirectly, take any action to
solicit, initiate, encourage or facilitate the making of any Acquisition
Proposal or any inquiry with respect thereto or engage in discussions or
negotiations with any Person with respect thereto, or disclose any non-public
information relating to Revco or any Subsidiary of Revco or afford access to
the properties, books or records of Revco or any Subsidiary of Revco to, any
Person that has made any Acquisition Proposal; provided that nothing
contained in this Section 5.05 shall prevent Revco from furnishing non-public
information to, or entering into discussions or negotiations with, any Person
in connection with an unsolicited bona fide Acquisition Proposal received from
such Person so long as prior to furnishing non-public information to, or
entering into discussions or negotiations with, such Person, Revco receives
from such Person an executed confidentiality agreement with terms no less
favorable to Revco than those contained in the Confidentiality Agreement;
provided, further that nothing contained in this Agreement shall prevent (a)
the Board of Directors of Revco from complying with Rule 14e-2 under the 1934
Act with regard to an Acquisition Proposal or (b) Revco from taking any
action, reasonably acceptable to CVS, that may be necessary in order to comply
with Revco's obligations under Section 5.07. Revco will promptly (and in no
event later than 24 hours after receipt of any Acquisition Proposal) notify
(which notice shall be provided orally and in writing and shall identify the
Person making such Acquisition Proposal and set forth the material terms
thereof) CVS after receipt of any Acquisition Proposal or any request for
nonpublic information relating to Revco or any Subsidiary of Revco or for
access to the properties, books or records of Revco or any Subsidiary of Revco
by any Person that may be considering making, or has made, an Acquisition
Proposal. Revco will keep CVS reasonably informed of the status and material
terms of any Superior Proposal. Revco shall give CVS at least 24 hours'
advance notice of any information to be supplied to, and at least 48 hours'
advance notice of any agreement to be entered into with, any Person making
such Superior Proposal. Revco will, and will cause its Subsidiaries and the
officers, directors, employees and other agents of Revco and its Subsidiaries
and the Affiliates of Revco over which Revco exercises control to, immediately
cease and cause to be terminated all discussions and negotiations, if any,
that have taken place prior to the date hereof with any parties with respect
to any Acquisition Proposal.
Section 5.06. Notices of Certain Events. (a) Revco and CVS
shall promptly notify each other of:
(i) any notice or other communication from any Person
alleging that the consent of such Person is or may be required in connection
with the transactions contemplated by this Agreement; and
(ii) any notice or other communication from any Governmental
Authority in connection with the transactions contemplated by this Agreement.
(b) Revco shall promptly notify CVS of any actions, suits, claims,
investigations or proceedings commenced or, to its knowledge threatened
against, relating to or involving or otherwise affecting Revco or any
Subsidiary of Revco which, if pending on the date of this Agreement, would
have been required to have been disclosed pursuant to Section 3.13 or which
relate to the consummation of the transactions contemplated by this Agreement.
(c) CVS shall promptly notify Revco of any actions, suits, claims,
investigations or proceedings commenced or, to its knowledge threatened
against, relating to or involving or otherwise affecting CVS or any Subsidiary
of CVS which, if pending on the date of this Agreement, would have been
required to have been disclosed pursuant to Section 4.13 or which relate to the
consummation of the transactions contemplated by this Agreement.
Section 5.07. Best Efforts. (a) Subject to the terms and
conditions of this Agreement, each party will use its best efforts to take, or
cause to be taken, all actions and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate the Merger and the other transactions contemplated by this
Agreement. In furtherance and not in limitation of the foregoing, each party
hereto agrees to make an appropriate filing of a Notification and Report Form
pursuant to the HSR Act with respect to the transactions contemplated hereby
as promptly as practicable and in any event within ten business days of the
date hereof and to supply as promptly as practicable any additional
information and documentary material that may be requested pursuant to the HSR
Act and to take all other actions necessary to cause the expiration or
termination of the applicable waiting periods under the HSR Act as soon as
practicable.
(b) Each of CVS and Revco shall, in connection with the efforts
referenced in Section 5.07(a) to obtain all requisite approvals and
authorizations for the transactions contemplated by this Merger Agreement
under the HSR Act or any other Antitrust Law, use its best efforts to (i)
cooperate in all respects with each other in connection with any filing or
submission and in connection with any investigation or other inquiry, including
any proceeding initiated by a private party; (ii) keep the other party informed
in all material respects of any material communication received by such party
from, or given by such party to, the Federal Trade Commission (the "FTC"), the
Antitrust Division of the Department of Justice (the "DOJ") or any other
Governmental Authority and of any material communication received or given in
connection with any proceeding by a private party, in each case regarding any
of the transactions contemplated hereby; and (iii) permit the other party to
review any material communication given by it to, and consult with each other
in advance of any meeting or conference with, the FTC, the DOJ or any such
other Governmental Authority or, in connection with any proceeding by a
private party, with any other Person, and to the extent permitted by the FTC,
the DOJ or such other applicable Governmental Authority or other Person, give
the other party the opportunity to attend and participate in such meetings and
conferences. For purposes of this Agreement, "Antitrust Law" means the
Sherman Act, as amended, the Clayton Act, as amended, the HSR Act, the Federal
Trade Commission Act, as amended, and all other federal, state and foreign, if
any, statutes, rules, regulations, orders, decrees, administrative and
judicial doctrines and other laws that are designed or intended to prohibit,
restrict or regulate actions having the purpose or effect of monopolization or
restraint of trade or lessening of competition through merger or acquisition.
(c) In furtherance and not in limitation of the covenants of the
parties contained in Sections 5.07(a) and (b), each of CVS and Revco shall use
its best efforts to resolve such objections if any, as may be asserted with
respect to the transactions contemplated hereby under any Antitrust Law. In
connection with the foregoing, if any administrative or judicial action or
proceeding, including any proceeding by a private party, is instituted (or
threatened to be instituted) challenging any transaction contemplated by this
Agreement as violative of any Antitrust Law, each of CVS and Revco shall
cooperate in all respects with each other and use its respective best efforts
to contest and resist any such action or proceeding and 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
prohibits, prevents or restricts consummation of the transactions contemplated
by this Agreement. Notwithstanding the foregoing or any other provision of
this Agreement, nothing in this Section 5.07 shall limit a party's right to
terminate this Agreement pursuant to Section 7.01(b)(i) or 7.01(c) so long as
such party has up to then complied in all material respects with its
obligations under this Section 5.07.
(d) If any objections are asserted with respect to the transactions
contemplated hereby under any Antitrust Law or if any suit is instituted by any
Governmental Authority or any private party challenging any of the
transactions contemplated hereby as violative of any Antitrust Law, each of
CVS and Revco shall use its best efforts to resolve any such objections or
challenge as such Governmental Authority or private party may have to such
transactions under such Antitrust Law so as to permit consummation of the
transactions contemplated by this Agreement. In furtherance and not in
limitation of the foregoing, each of CVS and Revco (and, to the extent
required by any Governmental Authority, its respective Subsidiaries and
Affiliates over which it exercises control) shall be required to enter into a
settlement, undertaking, consent decree, stipulation or other agreement (each,
a "Settlement") with a Governmental Authority regarding antitrust matters in
connection with the transactions contemplated by this Agreement, but,
notwithstanding anything else contained in this Agreement, neither CVS nor
Revco shall be required to enter into any Settlement that requires CVS and/or
Revco to hold separate (including by establishing a trust or otherwise) or to
sell or otherwise dispose of stores of CVS (and its Subsidiaries) and/or Revco
(and its Subsidiaries) the aggregate revenues of which (for the fiscal year
ended December 31, 1996, in the case of CVS stores, and June 1, 1996, in the
case of Revco stores) exceeded $400 million (such a Settlement so requiring
the holding separate, sale or other disposition of such stores the aggregate
revenues of which, so determined, did not exceed $400 million being referred
to herein as the "Threshold Settlement"); provided that there shall be
excluded from stores counted in determining whether the Threshold Settlement
has been exceeded any stores acquired pursuant to, and CVS agrees that it
shall take any action necessary to resolve any objections that are raised as
contemplated by this Section 5.07 in connection with, any acquisition
permitted under clause (x) of the second sentence of Section 5.02 or under
Section 5.02(b)(ii); provided further that any stores acquired by Revco as
permitted by Section 5.01(c) shall be counted in determining whether the
Threshold Settlement has been exceeded. The parties agree that compliance
with any such Threshold Settlement may require holding separate, sale or
disposition of stores of either or both of the parties.
Section 5.08. Cooperation. Without limiting the generality of
Section 5.07, CVS and Revco shall together, or pursuant to an allocation of
responsibility to be agreed between them, coordinate and cooperate (i) with
respect to the timing of the CVS Stockholder Meeting and Revco Stockholder
Meeting and shall use their reasonable efforts to hold such meetings on the
same day, (ii) in connection with the preparation of the Revco Proxy Statement
and the CVS Disclosure Documents, (iii) in determining whether any action by
or in respect of, or filing with, any governmental body, agency or official, or
authority is required, or any actions, consents, approvals or waivers are
required to be obtained from parties to any material contracts, in connection
with the consummation of the transactions contemplated by this Agreement, and
(iv) in seeking any such actions, consents, approvals or waivers or making any
such filings, furnishing information required in connection therewith or with
the Revco Proxy Statement or the CVS Disclosure Documents and seeking timely
to obtain any such actions, consents, approvals or waivers.
Section 5.09. Public Announcements. So long as this Agreement
is in effect, CVS and Revco will consult with each other before issuing any
press release or making any SEC filing or other public statement with respect
to this Agreement or the Zell/Chilmark Stockholder Agreement or the
transactions contemplated hereby or thereby and, except as may be required by
applicable law, court process or any listing agreement with any national
securities exchange, will not issue any such press release or make any such
SEC filing or other public statement prior to such consultation and providing
the other party with a reasonable opportunity to comment thereon.
Section 5.10. Further Assurances. At and after the Effective
Time, the officers and directors of the Surviving Corporation will be
authorized to execute and deliver, in the name and on behalf of Revco or Merger
Subsidiary, any deeds, bills of sale, assignments or assurances and to take and
do, in the name and on behalf of Revco or Merger Subsidiary, any other actions
and things to vest, perfect or confirm of record or otherwise in the Surviving
Corporation any and all right, title and interest in, to and under any of the
rights, properties or assets of Revco acquired or to be acquired by the
Surviving Corporation as a result of, or in connection with, the Merger.
Section 5.11. Affiliates; Registration Rights. (a) Revco
shall use its best efforts to deliver to CVS, within 15 days of the date
hereof, a letter agreement substantially in the form of Exhibit C-1 hereto
executed by each Person listed on Schedule 3.27.
(b) CVS shall use its best efforts to obtain, within 15 days of
the date hereof, a letter agreement substantially in the form of Exhibit C-2
hereto executed by each Person listed on Schedule 4.26.
(c) Prior to the Closing Date, Revco shall cause to be delivered to
CVS a letter identifying, to the best of Revco's knowledge, all Persons who
are, at the time of the Revco Stockholder Meeting described in Section
5.03(a), deemed to be "affiliates" of Revco for purposes of Rule 145 under the
1933 Act (the "1933 Act Affiliates"). Revco shall use its reasonable best
efforts to cause each Person who is so identified as a 1933 Act Affiliate to
deliver to CVS on or prior to the Closing Date a letter agreement substantially
in the form of Exhibit C-3 to this Agreement.
(d) At or prior to the Effective Time, CVS shall enter into a
Registration Rights Agreement in the form attached as Exhibit B hereto with
each of the 1933 Act Affiliates of Revco that has theretofore executed and
delivered to CVS letter agreements substantially in the form of Exhibits C-1
and C-3 hereto.
Section 5.12. Director and Officer Liability. CVS agrees that
at all times after the Effective Time, it shall cause the Surviving
Corporation and its Subsidiaries to indemnify each Person who is now, or has
been at any time prior to the date hereof, an employee, agent, director or
officer of Revco or of any Subsidiary of Revco, its successors and assigns
(individually an "Indemnified Party" and collectively the "Indemnified
Parties"), to the fullest extent permitted by law, with respect to any claim,
liability, loss, damage, judgment, fine, penalty, amount paid in settlement or
compromise, cost or expense (including reasonable fees and expenses of legal
counsel), whenever asserted or claimed, based in whole or in part on, or
arising in whole or in part out of, any facts or circumstances occurring at or
prior to the Effective Time whether commenced, asserted or claimed before or
after the Effective Time, including liability arising under the 1933 Act, the
1934 Act or state law. CVS shall, or shall cause the Surviving Corporation
to, maintain in effect for not less than six years after the Effective Time
the current policies of directors' and officers' liability insurance
maintained by Revco and its Subsidiaries on the date hereof (provided that CVS
may substitute therefor policies with reputable and financially sound carriers
having at least the same coverage and amounts thereof and containing terms and
conditions which are no less advantageous to the Persons currently covered by
such policies as insured) with respect to facts or circumstances occurring at
or prior to the Effective Time; provided that if the aggregate annual premiums
for such insurance during such six-year period shall exceed 200% of the per
annum rate of the aggregate premium currently paid by Revco and its
Subsidiaries for such insurance on the date of this Agreement, then CVS shall
cause the Surviving Corporation to, and the Surviving Corporation shall,
provide the most advantageous coverage that shall then be available at an
annual premium equal to 200% of such rate. CVS agrees to pay all expenses
(including fees and expenses of counsel) that may be incurred by any
Indemnified Party in successfully enforcing the indemnity or other obligations
under this Section 5.12. The rights under this Section 5.12 are in addition
to rights that an Indemnified Party may have under the certificate of
incorporation, bylaws, or other similar organizational documents of Revco or
any of its Subsidiaries or the Delaware Law. The rights under this Section
5.12 shall survive consummation of the Merger and are expressly intended to
benefit each Indemnified Party. CVS agrees to cause the Surviving Corporation
and any of its Subsidiaries (or their successors) to maintain in effect for a
period of six years the provisions of its certificate of incorporation or
bylaws or similar organizational documents providing for indemnification of
Indemnified Parties, with respect to facts or circumstances occurring at or
prior to the Effective Time, to the fullest extent provided by law; provided
that the foregoing shall not in any way restrict or preclude any sale,
liquidation or dissolution of any Subsidiary of CVS at any time after the
Effective Time.
Section 5.13. Obligations of Merger Subsidiary. CVS will take
all action necessary to cause Merger Subsidiary to perform its obligations
under this Agreement and to consummate the Merger on the terms and conditions
set forth in this Agreement.
Section 5.14. Listing of Stock. CVS shall use its best
efforts to cause the shares of CVS Common Stock to be issued in connection
with the Merger to be approved for listing on the NYSE on or prior to the
Closing Date, subject to official notice of issuance.
Section 5.15. Antitakeover Statutes. If any Takeover Statute
is or may become applicable to the Merger, each of CVS and Revco shall take
such actions as are necessary so that the transactions contemplated by this
Agreement may be consummated as promptly as practicable on the terms
contemplated hereby and otherwise act to eliminate or minimize the effects of
any Takeover Statute on the Merger.
Section 5.16. Confidentiality/Standstill Agreement. The
parties hereto agree that the Confidentiality Agreement shall be hereby
amended to provide that any provision therein which in any manner would be
inconsistent with this Agreement or the Zell/Chilmark Stockholder Agreement or
the transactions contemplated hereby or thereby shall terminate as of the date
hereof; provided, however, that such provisions of the Confidentiality
Agreement shall be reinstated in the event of any termination of this
Agreement. Revco agrees not to take any action that would impede, bar,
restrict or otherwise interfere in any material respect with CVS' rights under
the Zell/Chilmark Stockholder Agreement. The provisions of this Section 5.16
shall survive any termination of this Agreement.
Section 5.17. Tax and Accounting Treatment. Each of CVS and
Revco shall not take any action and shall not fail to take any action which
action or failure to act would prevent, or would be reasonably likely to
prevent, the Merger from qualifying (A) for pooling of interests accounting
treatment or (B) as a reorganization within the meaning of Section 368(a) of
the Code, and Revco shall use reasonable efforts to obtain the opinion of
counsel referred to in Section 6.03(b).
Section 5.18. Employee Benefits. (a) Subject to Section 1.04,
following the Effective Time, CVS shall, or shall cause the Surviving
Corporation to (i) honor all obligations under employment agreements of Revco
and (ii) pay all benefits accrued through the Effective Time under employee
benefit plans, programs, policies and arrangements of Revco (including any
rabbi trust agreement) in accordance with the terms thereof. In furtherance
and not in limitation of the foregoing, CVS agrees to provide, or cause the
Surviving Corporation to provide, employees of Revco who continue to be
employed by Revco as of the Effective Time ("Continuing Employees") for a
period of not less than one year following the Effective Time with (A) annual
compensation not less favorable than the annual compensation which they were
receiving immediately prior to the Effective Time, and (B) benefits which, in
the aggregate, are no less favorable than the benefits provided to such Revco
employees immediately prior to the Effective Time; provided, however, that the
CVS incentive bonus plans or arrangements, the EVA Plan and the Revco 1993
Employee Stock Purchase Plan shall be disregarded for purposes of this clause
(B). Following such one-year period, Continuing Employees shall be provided
with compensation and benefits no less favorable than the compensation and
benefits provided to similarly situated CVS employees. In addition to the
foregoing, for a period of one year following the Effective Time, CVS shall,
or shall cause the Surviving Corporation to, establish and maintain a plan to
provide severance and termination benefits to all non-union employees of Revco
which are no less favorable than the severance and termination benefits
provided under Revco's plans and arrangements in effect as of the date of this
Agreement as described in Schedule 5.18(a). Furthermore, with respect to
medical benefits provided to Continuing Employees as of the Effective Time
under CVS' benefit plans, CVS agrees that it will, or it will cause the
Surviving Corporation and its Subsidiaries to, waive waiting periods and
pre-existing condition requirements under such plans (to the extent waived
under Revco's plans), and will give Continuing Employees credit for any
copayments and deductibles actually paid by such employees under Revco's
medical plans during the calendar year in which the Closing occurs. In
addition, service with Revco shall be recognized for purposes of eligibility
under CVS welfare plans as well as for purposes of CVS' programs or policies
for vacation pay and sick pay. Without limiting the generality of the
foregoing, CVS shall honor all vacation, personal and sick days accrued by
Continuing Employees under Revco's plans, policies, programs and arrangements
immediately prior to the Effective Time.
(b) Revco shall be permitted to pay, under its Economic Value Added
Incentive Bonus Plan (the "EVA Plan"), a bonus to each participant in the EVA
Plan who is actively employed by Revco at the earlier of (i) the Effective
Time and (ii) May 31, 1997, equal to the bonus such individual is entitled to
under the EVA plan based upon the Company's performance through May 31, 1997
or, if earlier, annualized performance through the Effective Time. To the
extent the Effective Time is after May 31, 1997, a new plan year shall begin
under the EVA Plan and each participant in the EVA Plan who is actively
employed by Revco at the Closing Date will be entitled to receive a bonus
based upon annualized performance through the Closing Date with the size of
such bonus payments to be pro-rated for the part of the new plan year which
has elapsed as of the Closing Date. For the first plan year of CVS ending
after the Closing Date, each Continuing Employee who was a participant in the
EVA Plan shall be entitled to participate in the CVS incentive bonus plans or
arrangements with a target bonus opportunity (when expressed as a percentage
of base pay) not less than such Continuing Employee's target bonus opportunity
(when expressed as a percentage of base pay) under the EVA Plan for the plan
year in which the Closing Date occurs. The parties agree that Schedule
5.18(b) accurately sets forth the methodology for calculating bonuses payable
under the EVA Plan.
(c) Upon the Effective Time, the Revco 1993 Employee Stock
Purchase Plan shall be terminated with the effect that the then current
offering period under such plan will be terminated effective as of the
Effective Time, with the result that the participants in such plan will be
deemed to have exercised their options thereunder, as adjusted pursuant to
Section 1.04(a), as of the Effective Time.
Section 5.19. CVS Board of Directors. The Board of Directors
of CVS shall take such corporate actions as are necessary to provide that,
effective at the Effective Time of the Merger, the individuals set forth on
Schedule 5.19 shall become members of the Board of Directors of CVS.
Section 5.20. Combined Financial Results. CVS covenants and
agrees for the benefit of the Persons specified in Schedules 3.27 and 4.26
that, as promptly as practicable following the Effective Time and in any
event no later than the earlier of (i) 45 days after the end of the
calendar month in which the Effective Time occurs and (ii) 60 days after
the Effective Time, it will publicly release the financial results of CVS
and Revco for the 30-day period following the Effective Time.
Section 5.21. Charitable Commitment. CVS agrees that for a
period of three years following the Effective Time, CVS will continue to
maintain a charitable commitment in the Cleveland area (including suburbs)
commensurate with the level previously maintained by Revco, such commitment to
take the form of and include contributions, sponsorship of charitable events
and similar activities in the nature of the contributions and activities set
forth on Schedule 5.21; provided that CVS shall not be required to expend more
than $1,000,000 annually in respect of such commitment.
ARTICLE 6
Conditions to the Merger
Section 6.01. Conditions to the Obligations of Each Party. The
obligations of Revco, CVS and Merger Subsidiary to consummate the Merger are
subject to the satisfaction (or waiver by the party for whose benefit the
applicable condition exists) of the following conditions:
(a) (i) this Agreement and the transactions contemplated hereby
shall have been approved and adopted by the stockholders of Revco in accordance
with the Delaware Law and (ii) if required by the applicable rules of the
NYSE, by the stockholders of CVS;
(b) any applicable waiting period under the HSR Act relating to the
transactions contemplated by this Agreement shall have expired;
(c) no provision of any applicable law or regulation and no
judgment, injunction, order or decree shall prohibit or enjoin the
consummation of the Merger;
(d) there shall not be pending any suit, action or proceeding by
any governmental entity, (i) seeking to restrain or prohibit the consummation
of the Merger or any of the other transactions contemplated by this Agreement,
or seeking to obtain from CVS or Revco any damages the amount of which would
be reasonably likely to have a Material Adverse Effect on Revco and CVS, taken
as a whole, or (ii) except to the extent consistent with the obligations of
Revco and CVS under Section 5.07, seeking to prohibit or limit the ownership
or operation by CVS, Revco or any of their respective Subsidiaries of, or to
compel CVS, Revco or any of their respective Subsidiaries to dispose of or
hold separate, any material portion of the business or assets of CVS, Revco or
any of their respective Subsidiaries, as a result of the Merger or any of the
other transactions contemplated by this Agreement;
(e) the Form S-4 shall have been declared effective under the 1933
Act and no stop order suspending the effectiveness of the Form S-4 shall be in
effect and no proceedings for such purpose shall be pending before or
threatened by the SEC; and
(f) the shares of CVS Common Stock to be issued in the Merger shall
have been approved for listing on the NYSE, subject to official notice of
issuance.
Section 6.02. Conditions to the Obligations of CVS and Merger
Subsidiary. The obligations of CVS and Merger Subsidiary to consummate the
Merger are subject to the satisfaction (or waiver by CVS) of the following
further conditions:
(a) (i) Revco shall have performed in all material respects all of
its obligations and complied in all material respects with all of its covenants
hereunder required to be performed or complied with by it at or prior to the
Effective Time and (ii) the representations and warranties of Revco contained
in this Agreement shall be true and correct in all material respects at and as
of the Effective Time, as if made at and as of such time, except (x) for
changes specifically permitted by this Agreement and (y) those representations
and warranties that address matters only as of a particular date which are
true and correct in all material respects as of such date; and CVS shall have
received a certificate signed by an executive officer of Revco to the effect
set forth in clauses (i) and (ii).
Section 6.03. Conditions to the Obligations of Revco. The
obligations of Revco to consummate the Merger are subject to the satisfaction
(or waiver by Revco) of the following further conditions:
(a) (i) CVS shall have performed in all material respects all of
its obligations and complied in all material respects with all of its covenants
hereunder required to be performed or complied with by it at or prior to the
Effective Time and (ii) the representations and warranties of CVS contained in
this Agreement shall be true and correct in all material respects at and as of
the Effective Time, as if made at and as of such time, except (x) for changes
specifically permitted by this Agreement and (y) those representations and
warranties that address matters only as of a particular date which are true and
correct in all material respects as of such date; and Revco shall have received
a certificate signed by an executive officer of CVS to the effect set forth in
clauses (i) and (ii); and
(b) Revco shall have received an opinion of Cravath, Swaine &
Moore in form and substance reasonably satisfactory to Revco, on the basis of
certain facts, representations and assumptions set forth in such opinion which
are consistent with the state of facts existing at the Effective Time, to the
effect that neither it nor any of its stockholders shall recognize gain or
loss for U.S. federal income tax purposes as a result of the Merger (other
than in respect of any cash paid in lieu of fractional shares). In rendering
the opinions described in the preceding sentence, such counsel may require and
rely upon representations contained in certificates of officers and principal
stockholders of Revco, CVS and their respective Subsidiaries (the certificates
substantially in the form of Exhibits D and E).
ARTICLE 7
Termination
Section 7.01. Termination. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time
(notwithstanding any approval of this Agreement by the stockholders of Revco
or CVS):
(a) by mutual written consent of Revco and CVS;
(b) by either Revco or CVS,
(i) if the Merger has not been consummated by September 30,
1997 (the "End Date"); or
(ii) if the Revco Stockholder Approval or the CVS Stockholder
Approval shall not have been obtained by reason of the failure to obtain the
required vote at a duly held meeting of stockholders or any adjournment
thereof;
(c) by either Revco or CVS (so long as such party has complied in
all material respects with its obligations under Section 5.07), if
consummation of the Merger would violate or be prohibited by any law or
regulation or if any injunction, judgment, order or decree enjoining Revco or
CVS from consummating the Merger is entered and such injunction, judgment,
order or decree shall become final and nonappealable;
(d) by Revco:
(i) if prior to the Revco Stockholder Meeting, the Board of
Directors of Revco shall have failed to recommend or withdrawn or modified or
changed in a manner adverse to CVS its approval or recommendation of this
Agreement or the Merger or shall have recommended a Superior Proposal, or
Revco shall have entered into a definitive agreement providing for a Superior
Proposal with a Person other than CVS or its Subsidiaries (or the Board of
Directors of Revco resolves to do any of the foregoing), in each case in
accordance with and to the extent permitted by Section 5.03(a); provided that
Revco shall have given CVS at least forty-eight hours advance actual notice of
any termination pursuant to this Section 7.01(d)(i) and shall have made the
payment referred to in Section 8.04(b) hereof; or
(ii) upon a breach of any representation, warranty, covenant
or agreement of CVS, or if any representation or warranty of CVS shall become
untrue, in either case such that the conditions set forth in Section 6.03(a)
would be incapable of being satisfied by the End Date;
(e) by CVS:
(i) if the Board of Directors of Revco shall have failed to
recommend or withdrawn, or modified or changed in a manner adverse to CVS its
approval or recommendation of this Agreement or the Merger or shall have
recommended a Superior Proposal, or Revco shall have entered into a definitive
agreement providing for a Superior Proposal with a Person other than CVS or
its Subsidiaries (or the Board of Directors of Revco resolves to do any of the
foregoing); or
(ii) upon a breach of any representation, warranty, covenant
or agreement of Revco, or if any representation or warranty of Revco shall
become untrue, in either case such that the conditions set forth in Section
6.02(a) would be incapable of being satisfied by the End Date.
The party desiring to terminate this Agreement pursuant to
clauses (b), (c), (d) or (e) of this Section 7.01 shall give written notice of
such termination to the other party in accordance with Section 8.01,
specifying the provision hereof pursuant to which such termination is
effected. Notwithstanding anything else contained in this Agreement, (A) the
right to terminate this Agreement under this Section 7.01 shall not be
available to any party (1) that is in material breach of its obligations
hereunder or (2) whose failure to fulfill its obligations or to comply with
its covenants under this Agreement in all material respects has been the cause
of, or resulted in, the failure to satisfy any condition to the obligations of
either party hereunder, and (B) no party that is in material breach of its
obligations hereunder shall be entitled to any payment of any amount from the
other party pursuant to Section 8.04.
Section 7.02. Effect of Termination. If this Agreement is
terminated pursuant to Section 7.01, this Agreement shall become void and of
no effect with no liability on the part of any party hereto, except that (a)
the agreements contained in this Section 7.02 and in Sections 5.16 and 8.04
and in the Confidentiality Agreement shall survive the termination hereof and
(b) no such termination shall relieve any party of any liability or damages
resulting from any willful material breach by that party of this Agreement.
ARTICLE 8
Miscellaneous
Section 8.01. Notices. All notices, requests and other
communications to any party hereunder shall be in writing (including telecopy
or similar writing) and shall be given:
if to CVS, to:
CVS Corporation
One CVS Drive
Woonsocket, RI 02895
Fax: (401) 762-3012
Attention:Thomas M. Ryan, Vice Chairman and
Chief Operating Officer
with a copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Fax: (212) 450-4800
Attention:Dennis S. Hersch, Esq.
if to Revco, to:
Revco D.S., Inc.
1925 Enterprise Parkway
Twinsburg, OH 44087
Fax: (216) 487-1679
Attention:Jack A. Staph, Esq.
with a copy to:
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019-7475
Fax: (212) 474-3700
Attention:Alan C. Stephenson, Esq.
or such other address or telecopy number as such party may hereafter specify
for the purpose by notice to the other parties hereto. Each such notice,
request or other communication shall be effective (a) if given by telecopy,
when such telecopy is transmitted to the telecopy number specified in this
Section 8.01 and the appropriate telecopy confirmation is received or (b) if
given by any other means, when delivered at the address specified in this
Section 8.01.
Section 8.02. Entire Agreement; Non-Survival of
Representations and Warranties; Third Party Beneficiaries. (a) This
Agreement (including any exhibits hereto), the other agreements referred to
in this Agreement and the Confidentiality Agreement constitute the entire
agreement among the parties with respect to the subject matter hereof and
thereof and supersede all prior agreements, understandings and
negotiations, both written and oral, between the parties with respect to
such subject matter. None of this Agreement, the Confidentiality Agreement
or any other agreement contemplated hereby or thereby (or any provision
hereof or thereof) is intended to confer on any Person other than the
parties hereto or thereto any rights or remedies (except that Article I and
Sections 5.12, 5.18 and 5.20 are intended to confer rights and remedies on
the Persons specified therein).
(b) The representations and warranties contained herein or in any
schedule, instrument or other writing delivered pursuant hereto shall not
survive the Effective Time.
Section 8.03. Amendments; No Waivers. (a) Any provision of this
Agreement may be amended or waived prior to the Effective Time if, and only
if, such amendment or waiver is in writing and signed, in the case of an
amendment, by Revco and CVS or, in the case of a waiver, by the party against
whom the waiver is to be effective; provided that after the adoption of this
Agreement by the stockholders of (i) Revco, there shall be made no amendment
that by law requires further approval by stockholders without the further
approval of such stockholders and (ii) CVS, there shall be made no amendment
that by law requires further approval by stockholders without the further
approval of such stockholders.
(b) No failure or delay by any party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof nor shall any
single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The rights
and remedies herein provided shall be cumulative and not exclusive of any
rights or remedies provided by law.
Section 8.04. Expenses. (a) Except as otherwise specified in
this Section 8.04 or agreed in writing by the parties, all costs and expenses
incurred in connection with this Agreement and the transactions contemplated
by this Agreement shall be paid by the party incurring such cost or expense.
(b) If (x) Revco shall terminate this Agreement pursuant to Section
7.01(d)(i) hereof, or (y) CVS shall terminate this Agreement pursuant to
Section 7.01(e)(i) hereof, or (z) either party shall terminate this Agreement
pursuant to Section 7.01(b)(ii) in circumstances where the Revco Stockholder
Approval has not been obtained and Revco has not complied with its obligation
to recommend the Revco Stockholder Approval in accordance with Section
5.03(a), then in any such case as described in clause (x), (y) or (z) (each
such case of termination being referred to as a "Trigger Event"), Revco shall
pay to CVS (by wire transfer of immediately available funds not later than the
date of termination of this Agreement) an amount equal to $80,000,000 plus all
out-of-pocket expenses (not to exceed $5,000,000) incurred by CVS in connection
with this Agreement, the Merger and the other transactions contemplated
hereby. Acceptance by CVS of the payment referred to in the foregoing
sentence shall constitute conclusive evidence that this Agreement has been
validly terminated.
(c) If either party shall terminate this Agreement pursuant to
Section 7.01(b)(ii) in circumstances where the CVS Stockholder Approval has
not been obtained and CVS has not complied with its obligation to recommend
the CVS Stockholder Approval in accordance with Section 5.03(b), then CVS
shall pay to Revco (by wire transfer of immediately available funds not later
than the date of termination of this Agreement) an amount equal to $80,000,000
plus all out-of-pocket expenses (not to exceed $5,000,000) incurred by Revco in
connection with this Agreement, the Merger and the other transactions
contemplated hereby.
Section 8.05. Successors and Assigns. The provisions of this
Agreement shall be binding upon, inure to the benefit of and be enforceable by
the parties hereto and their respective successors and assigns; provided that
no party may assign, delegate or otherwise transfer any of its rights or
obligations under this Agreement without the written consent of the other
parties hereto except that CVS may assign, in its sole discretion, any or all
of its rights, interests and obligations hereunder to any direct or indirect
wholly owned Subsidiary of CVS, it being understood that no such assignment
shall relieve CVS from any of its obligations hereunder.
Section 8.06. Governing Law. This Agreement shall be construed
in accordance with and governed by the law of the State of Delaware (without
regard to principles of conflict of laws).
Section 8.07. Jurisdiction. Any suit, action or proceeding
seeking to enforce any provision of, or based on any matter arising out of or
in connection with, this Agreement or the transactions contemplated by this
Agreement may be brought against any of the parties in any federal court
located in the State of Delaware or any Delaware state court, and each of the
parties hereto hereby consents to the exclusive jurisdiction of such courts
(and of the appropriate appellate courts therefrom) in any such suit, action or
proceeding and waives any objection to venue laid therein. Process in any
such suit, action or proceeding may be served on any party anywhere in the
world, whether within or without the State of Delaware. Without limiting the
generality of the foregoing, each party hereto agrees that service of process
upon such party at the address referred to in Section 8.01, together with
written notice of such service to such party, shall be deemed effective service
of process upon such party.
Section 8.08. Counterparts; Effectiveness. This Agreement may
be signed in any number of counterparts, each of which shall be an original,
with the same effect as if the signatures thereto and hereto were upon the same
instrument. This Agreement shall become effective when each party hereto
shall have received counterparts hereof signed by all of the other parties
hereto.
Section 8.09. Interpretation. When a reference is made in this
Agreement to a Section or Schedule, such reference shall be to a Section of or
a Schedule to this Agreement unless otherwise indicated. The table of contents
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 words "include", "includes" or "including" are used in this
Agreement they shall be deemed to be followed by the words "without
limitation". The phrases "the date of this Agreement", "the date hereof", and
terms of similar import, unless the context otherwise requires, shall be deemed
to refer to February 6, 1997.
Section 8.10. Severability. If any term, provision, covenant
or restriction of this Agreement is held by a court of competent jurisdiction
or other authority to be invalid, void, unenforceable or against its regulatory
policy, the remainder of the terms, provisions, covenants and restrictions of
this Agreement shall remain in full force and effect and shall in no way be
affected, impaired or invalidated. Upon such determination that any term,
provision, covenant or restriction of this Agreement is invalid, void,
unenforceable or against regulatory policy, the parties hereto shall negotiate
in good faith to modify this Agreement so as to effect the original intent of
the parties as closely as possible in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the extent possible.
Section 8.11. Specific Performance. The parties hereto agree
that irreparable damage would occur in the event any provision of this
Agreement was not performed in accordance with the terms hereof and that the
parties shall be entitled to an injunction or injunctions to prevent breaches
of this Agreement and to enforce specifically the terms and provisions of this
Agreement in any Federal court located in the State of Delaware or any
Delaware state court, in addition to any other remedy to which they are
entitled at law or in equity.
Section 8.12. Joint and Several Liability. CVS and Merger
Subsidiary hereby agree that they will be jointly and severally liable for all
covenants, agreements, obligations and representations and warranties made by
either of them in this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their respective authorized officers as of the
day and year first above written.
CVS CORPORATION
By: /s/ Stanley P. Goldstein
--------------------------------------
Name: Stanley P. Goldstein
Title: Chairman and Chief Executive
Officer
REVCO D.S., INC.
By: /s/ D. Dwayne Hoven
--------------------------------------
Name: D. Dwayne Hoven
Title: Chief Executive Officer
NORTH ACQUISITION CORP.
By: /s/ Thomas M. Ryan
--------------------------------------
Name: Thomas M. Ryan
Title: Vice Chairman and Chief
Operating Officer
Exhibit A
[See Annex E to Joint Proxy Statement/Prospectus]
EXHIBIT B
REGISTRATION RIGHTS AGREEMENT
AGREEMENT dated as of ___________, 1997 among CVS Corporation,
a Delaware corporation (the "Issuer"), and the Holders as defined herein.
W I T N E S S E T H:
WHEREAS, this Agreement is being entered into in connection
with the closing under the Merger Agreement referred to below;
NOW, THEREFORE, in consideration of the foregoing and the mutual
promises, representation, warranties, covenants and agreements contained
herein, the parties hereto, intending to be legally bound hereby, agree as
follows:
ARTICLE 1
Definitions
Section 1.01. Definitions. Terms defined in the Agreement and
Plan of Merger dated as of February 6, 1997 among the Issuer, Revco D.S.,
Inc., a Delaware corporation, and North Acquisition Corp., a Delaware
corporation, are used herein as defined therein. In addition, the following
terms, as used herein, shall have the following respective meanings:
"Commission" means the Securities and Exchange Commission or
any successor governmental body or agency.
"Common Stock" means the common stock, par value $.01 per
share, of the Issuer.
"Demand Registration" has the meaning ascribed thereto in
Section 2.02(a)(i).
"Demand Request" has the meaning ascribed thereto in Section
2.02(a).
"Disadvantageous Condition" has the meaning ascribed thereto in
Section 2.04.
"Holder" means a person who owns Registrable Securities and is
either (i) an Investor or (ii) a Person that (A) has agreed to be bound by the
terms of this Agreement as if such Person were an Investor and (B) is (1) upon
the death of any Investor, the executor of the estate of such Investor or such
Investor's heirs, devisees, legatees or assigns, (2) upon the disability of
any Investor, any guardian or conservator of such Investor or (3) a general or
limited partner of Zell/Chilmark that has received Registrable Securities
pursuant to the distribution to such partners of Registrable Securities in
accordance with the agreement of limited partnership governing the rights of
such partners.
"Holders' Agent" means each of Magten, the Zell Holders' Agent
and each Revco Individual Holder, as the case may be.
"Investor" means each Person listed on Schedule I hereto.
"Magten" means Magten Asset Management Corporation.
"Permitted Holder" means each of (i) the Zell Holders' Agent
(or one representative of the Zell Holders that (x) is designated by Zell
Holders that hold a majority of the Registrable Securities proposed to be sold
by Zell Holders in the applicable offering and (y) is reasonably acceptable to
the Issuer), (ii) Magten and (iii) one representative of the Revco Individual
Holders that is reasonably acceptable to the Issuer, as the case may be.
"1933 Act" means the Securities Act of 1933, as amended.
"Registrable Securities" means Common Stock acquired by the
Holders pursuant to the Merger (and any shares of stock or other securities
into which or for which such Common Stock may hereafter be changed, converted
or exchanged and any other shares or securities issued to Holders of such
Common Stock (or such shares of stock or other securities into which or for
which such shares are so changed, converted or exchanged) upon any
reclassification, share combination, share subdivision, share dividend, share
exchange, merger, consolidation or similar transaction or event). As to any
particular Registrable Securities, such Registrable Securities shall cease to
be Registrable Securities as soon as (i) such Registrable Securities have been
sold or otherwise disposed of pursuant to a registration statement that was
filed with the Commission in accordance with this Agreement and declared
effective under the 1933 Act, (ii) based on an opinion of counsel or a
no-action letter of the Commission, in either case reasonably acceptable to the
Issuer (and, in the case of Registrable Securities held by a Zell Holder,
reasonably acceptable to the Zell Holders' Agent), such Registrable Securities
are eligible for immediate sale pursuant to Rule 144 or Rule 145 (whether or
not subject to applicable volume limitations thereunder), provided that,
notwithstanding such opinion or no-action letter, prior to the Shelf
Termination Date (determined disregarding clause (c) of the definition of
Shelf Termination Date in Section 2.01) (x) no Registrable Securities held by
a Zell Holder shall cease to be Registrable Securities unless all Registrable
Securities held by all Zell Holders could then be sold in a single transaction
(assuming for these purposes the aggregation of all such Registrable
Securities of all Zell Holders) without violation of applicable Rule 144
volume limitations and (y) no Registrable Securities held by Magten shall
cease to be Registrable Securities unless all Registrable Securities held by
Magten could then be sold in a single transaction without violation of
applicable Rule 144 volume limitations, (iii) they shall have been otherwise
sold, transferred or disposed of by a Holder to any Person that is not a
Holder, or (iv) they shall have ceased to be outstanding.
"Registration Expenses" means any and all expenses incident to
performance of or compliance with any registration of securities pursuant to
Article II, including, without limitation, (i) the fees, disbursements and
expenses of the Issuer's counsel and accountants (including in connection with
the delivery of opinions and/or comfort letters) in connection with this
Agreement and the performance of the Issuer's obligations hereunder; (ii) all
expenses, including filing fees, in connection with the preparation, printing
and filing of one or more registration statements hereunder; (iii) the cost of
printing or producing any agreements among underwriters, underwriting
agreements, and blue sky or legal investment memoranda; (iv) the filing fees
incident to securing any required review by the National Association of
Securities Dealers, Inc. of the terms of the sale of the securities to be
disposed of; (v) transfer agents' and registrars' fees and expenses in
connection with such offering; (vi) all security engraving and security
printing expenses; (vii) all fees and expenses payable in connection with the
listing of the Registrable Securities on any securities exchange or automated
interdealer quotation system on which the Common Stock is then listed; and
(viii) all reasonable fees and expenses of one legal counsel for the Holders
in connection with each of the Required Shelf Registration and the Demand
Registration, which legal counsel shall be selected by Holders owning a
majority of the Registrable Securities then being registered; provided that
Registration Expenses shall exclude (x) all underwriting discounts and
commissions, selling or placement agent or broker fees and commissions, and
transfer taxes, if any, in connection with the sale of any securities, (y) the
fees and expenses of counsel for any Holder (other than pursuant to clause
(viii)) and (z) all costs and expenses of the Issuer incurred as contemplated
in Section 2.06(g).
"Required Shelf Registration" has the meaning ascribed thereto
in Section 2.01.
"Revco Individual Holder" means each Holder that immediately
prior to the Effective Time was an officer or director of Revco and each
transferee thereof (contemplated in the definition of "Holder") that is a
Holder.
"Rule 144" means Rule 144 (or any successor rule to similar
effect) promulgated under the 1933 Act.
"Rule 145" means Rule 145 (or any successor rule to similar
effect) promulgated under the 1933 Act.
"Rule 415 Offering" means an offering on a delayed or
continuous basis pursuant to Rule 415 (or any successor rule to similar
effect) promulgated under the 1933 Act.
"Selling Holder" means any Holder who sells Registrable
Securities pursuant to a public offering registered hereunder.
"Shelf Registration" means the registration under the 1933 Act
of a Rule 415 Offering.
"Shelf Registration Statement" means a registration statement
intended to effect a Shelf Registration.
"Zell Holder" means Zell/Chilmark, any Affiliate of
Zell/Chilmark that is a Holder, and each partner of Zell/Chilmark referred
to in clause (C) of the definition of "Holder."
"Zell Holders' Agent" has the meaning ascribed thereto in
Section 3.11.
Section 1.02. Internal References. Unless the context indicates
otherwise, references to Articles, Sections and paragraphs shall refer to the
corresponding articles, sections and paragraphs in this Appendix A, and
references to the parties shall mean the parties to this Agreement.
ARTICLE 2
Registration Rights
Section 2.01. Shelf Registration. If requested by any Holder,
as soon as practicable (but in any event not more than 10 days) after the
date of this Agreement, the Issuer shall prepare and file with the
Commission a Shelf Registration Statement on an appropriate form that shall
include all Registrable Securities, and may include securities of the
Company for sale for the Company's own account (the "Required Shelf
Registration"). The Issuer shall use its reasonable best efforts to cause
such Shelf Registration Statement to be declared effective within 15 days
after the public release by the Issuer of the financial results of the
Issuer and Revco referred to in Section 5.20 of the Merger Agreement.
Notwithstanding anything else contained in this Agreement, the Issuer shall
only be obligated to keep such Shelf Registration Statement effective until
the earliest of (a) 12 months after the date such Shelf Registration
Statement has been declared effective, provided that such 12-month period
shall be extended by (i) the length of any period during which the Issuer
delays in maintaining the Shelf Registration Statement current pursuant to
Section 2.04, (ii) the length of any period (in which such Shelf
Registration Statement is required to be effective hereunder) during which
such Shelf Registration Statement is not maintained effective, and (iii)
such number of days that equals the number of days elapsing from (x) the
date the written notice contemplated by Section 2.06 (e) below is given by
the Issuer to (y) the date on which the Issuer delivers to the Holders of
Registrable Securities the supplement or amendment contemplated by Section
2.06 (e) below, (b) such time as all Registrable Securities have been sold
or disposed of thereunder or sold, transferred or otherwise disposed of to
a person that is not a Holder and (c) such time as all securities that were
Registrable Securities on the date hereof have ceased to be Registrable
Securities (the earliest of (a), (b) and (c) being the "Shelf Termination
Date"). The Required Shelf Registration shall not be counted as a Demand
Registration for purposes of Section 2.02 of this Agreement.
Section 2.02. Demand Registration. (a) Upon written notice
to the Issuer from one or more Holders at any time after the Shelf
Termination Date (but not later than the date that is 180 days after the
Shelf Termination Date) (the "Demand Request") requesting that the Issuer
effect the registration under the 1933 Act of any or all of the Registrable
Securities held by such requesting Holders, which notice shall specify the
intended method or methods of disposition of such Registrable Securities,
the Issuer shall prepare and, within 60 days after such request, file with
the Commission a registration statement with respect to such Registrable
Securities and thereafter use its reasonable best efforts to cause such
registration statement to be declared effective under the 1933 Act for
purposes of dispositions in accordance with the intended method or methods
of disposition stated in such request. Notwithstanding any other provision
of this Agreement to the contrary:
(i) the Holders may collectively exercise their rights to
request registration under this Section 2.02(a) on not more than one
occasion (such registration being referred to herein as the "Demand
Registration");
(ii) the Issuer shall not be required to effect the Demand
Registration hereunder unless the aggregate number of Registrable Securities
to be registered pursuant to the Demand Registration is equal to or more than
3,000,000 shares;
(iii) the method of disposition requested by Holders in
connection with any Demand Registration may not, without the Issuer's written
consent, be a Rule 415 Offering; and
(iv) the Issuer shall not be required to effect the Demand
Registration hereunder if all securities that were Registrable Securities on
the date hereof have ceased to be Registrable Securities.
(b) Notwithstanding any other provision of this Agreement to
the contrary, a Demand Registration requested by Holders pursuant to this
Section 2.02 shall not be deemed to have been effected, and, therefore, not
requested and the rights of each Holder shall be deemed not to have been
exercised for purposes of paragraph (a) above, if such Demand Registration
has not become effective under the 1933 Act or if such Demand Registration,
after it became effective under the 1933 Act, was not maintained effective
under the 1933 Act (other than as a result of any stop order, injunction or
other order or requirement of the Commission or other government agency or
court solely on the account of a material misrepresentation or omission of
a Holder) for at least 30 days (or such shorter period ending when all the
Registrable Securities covered thereby have been disposed of pursuant
thereto) and, as a result thereof, the Registrable Securities requested to
be registered cannot be distributed in accordance with the plan of
distribution set forth in the related registration statement. So long as a
Demand Request is made by the Holders within the 180-day period referred to
in Section 2.02(a), the Holders shall not lose their right to their Demand
Registration under Section 2.02 if the Demand Registration related to such
Demand Request is delayed or not effected in the circumstances set forth in
this clause (b).
(c) The Issuer shall have the right to cause the registration
of additional equity securities for sale for the account of the Issuer in
the registration of Registrable Securities requested by the Holders
pursuant to Section 2.02(a) above; provided that if such Holders are
advised in writing (with a copy to the Issuer) by the lead or managing
underwriter referred to in Section 2.03(b) that, in such underwriter's good
faith view, all or a part of such Registrable Securities and additional
equity securities cannot be sold and the inclusion of such Registrable
Securities and additional equity securities in such registration would be
likely to have an adverse effect on the price, timing or distribution of
the offering and sale of the Registrable Securities and additional equity
securities then contemplated, then the number of securities that can, in
the good faith view of such underwriter, be sold in such offering without
so adversely affecting such offering shall be allocated pro rata among the
requesting Holders and the Issuer on the basis of the relative number
requested to be included therein by the Issuer and each such Holder (in
which case Section 2.02(a)(ii) shall be disregarded for purposes of such
Demand Registration); provided that in the event such a pro rata allocation
shall be made in connection with the Demand Request, the remaining Holders
shall be entitled to request one additional Demand Registration (without
needing to make a Demand Request therefor within the 180-day period
referred to in Section 2.02(a) and disregarding Section 2.02(a)(ii) for
purposes of such additional Demand Registration); provided further that in
conection with such additional Demand Registration, if any, the Issuer may
not include additional securities therein for its own account if such
inclusion would result in any reduction in the Registrable Securities
proposed to be sold therein by the Holders. The Holders of the Registrable
Securities to be offered pursuant to paragraph (a) above may require that
any such additional equity securities be included by the Issuer in the
offering proposed by such Holders on the same conditions as the Registrable
Securities that are included therein.
(d) Within 7 days after delivery of a Demand Request by a
Holder, the Issuer shall provide a written notice to each Holder (or, if so
requested by the Issuer after appropriate notice to the Zell Holders' Agent
by the Issuer, the Zell Holders' Agent shall provide written notice to each
Zell Holder), advising such Holder of its right to include any or all of
the Registrable Securities held by such Holder for sale pursuant to the
Demand Registration and advising such Holder of procedures to enable such
Holder to elect to so include Registrable Securities for sale in the Demand
Registration. Any Holder may, within 7 days of delivery to such Holder of
a notice pursuant to this Section 2.02(d), elect to so include Registrable
Securities in the Demand Registration by written notice to such effect to
the Issuer specifying the number of Registrable Securities desired to be so
included by such Holder.
Section 2.03. Other Matters In Connection With Registrations.
(a) Each Zell Holder shall keep the Zell Holders' Agent informed promptly (x)
of the name, address and other contact information of such Zell Holder, (y)
of the number of Registrable Securities held from time-to-time by such Zell
Holder, and (z) of each sale, transfer or other disposition of Registrable
Securities (including the number of shares sold) by each such Zell Holder.
Each Holders' Agent shall keep the Issuer informed promptly (x) of the
name, address and other contact information of each Holder for whom such
Holders' Agent is acting as agent hereunder (or, of itself, in the case of
each Revco Individual Holder), (y) of the number of Registrable Securities
held from time-to-time by each such Holder, and (z) of each sale, transfer
or other disposition of Registrable Securities (including the number of
shares sold) by each such Holder.
(b) In the event that any public offering pursuant to this
Agreement shall involve, in whole or in part, an underwritten offering, the
Issuer shall have the right to designate an underwriter or underwriters as
the lead or managing underwriters of such underwritten offering who shall
be reasonably acceptable to Holders owning a majority of the Registrable
Securities proposed to be sold therein.
Section 2.04. Certain Delay Rights. Notwithstanding any other
provision of this Agreement to the contrary, if at any time while the Required
Shelf Registration is effective the Issuer provides written notice to each
Holder (whether by notice directly to such Holder or through the Holders'
Agent acting as agent for such Holder hereunder) that in the Issuer's good
faith and reasonable judgment it would be materially disadvantageous to the
Issuer (because the sale of Registrable Securities covered by such
registration statement or the disclosure of information therein or in any
related prospectus or prospectus supplement would materially interfere with
any acquisition, financing or other material event or transaction in
connection with which a registration of securities under the 1933 Act for the
account of the Issuer is then intended or the public disclosure of which at
the time would be materially prejudicial to the Issuer) (a "Disadvantageous
Condition") for sales of Registrable Securities thereunder to then be
permitted, and setting forth the general reasons for such judgment, the Issuer
may refrain from maintaining current the prospectus contained in the Shelf
Registration Statement until such Disadvantageous Condition no longer exists
(notice of which the Issuer shall promptly deliver to each Holder (directly or
through the applicable Holders' Agent)). Furthermore, notwithstanding
anything else contained in this Agreement, with respect to any registration
statement filed, or to be filed, pursuant to Section 2.02, if the Issuer
provides written notice to each Holder (whether by notice directly to such
Holder or through the Holders' Agent acting as agent for such Holder
hereunder) that in the Issuer's good faith and reasonable judgment it would
be materially disadvantageous to the Issuer (because of a Disadvantageous
Condition) for such a registration statement to be maintained effective, or to
be filed and become effective, and setting forth the general reasons for such
judgment, the Issuer shall be entitled to cause such registration statement to
be withdrawn or the effectiveness of such registration statement terminated,
or, in the event no registration statement has yet been filed, shall be
entitled not to file any such registration statement, until such
Disadvantageous Condition no longer exists Holder (notice of which the Issuer
shall promptly deliver to each Holder (directly or through the applicable
Holders' Agent)). With respect to each Holder, upon the receipt by such
Holder of any such notice of a Disadvantageous Condition (directly from the
Issuer or through the applicable Holders' Agent) (i) in connection with the
Required Shelf Registration , such Holder shall forthwith discontinue use of
the prospectus and any prospectus supplement under such registration statement
and shall suspend sales of Registrable Securities until such Disadvantageous
Condition no longer exists and (ii) in connection with the Required Shelf
Registration or the Demand Registration, as applicable, if so directed by the
Issuer by notice as aforesaid, such Holder will deliver to the Issuer all
copies, other than permanent file copies then in such Holder's possession, of
the prospectus and prospectus supplements then covering such Registrable
Securities at the time of receipt of such notice as aforesaid. Notwithstanding
anything else contained in this Agreement, (x) neither the filing nor the
effectiveness of any registration statement under Section 2.02 may be delayed
for more than a total of 60 days pursuant to this Section 2.04 and (y) the
maintaining current of a prospectus (and the suspension of sales of
Registrable Securities) in connection with the Required Shelf Registration may
not be delayed under this Section 2.04 for more than a total of 60 days in any
six-month period.
Section 2.05. Expenses. Except as provided herein, the Issuer
shall pay all Registration Expenses with respect to each registration
hereunder. Notwithstanding the foregoing, each Holder and the Issuer shall
be responsible for its own internal administrative and similar costs, which
shall not constitute Registration Expenses, each Holder shall be responsible
for the legal fees and expenses of its own counsel (except as provided in
clause (viii) of the definition of Registration Expenses), (iii) each Holder
shall be responsible for all underwriting discount and commissions, selling or
placement agent or broker fees and commissions, and transfer taxes, if any, in
connection with the sale of securities by such Holder, and (iv) the Holders
shall be jointly and severally responsible for all out-of-pocket costs and
expenses of the Issuer and its officers and employees incurred in connection
with providing the assistance and/or attending analyst or investor
presentations or any "road show" undertaken in connection with the
registration and/or marketing of any Registrable Securities as contemplated in
Section 2.06(g).
Section 2.06. Registration and Qualification. If and
whenever the Issuer is required to effect the registration of any
Registrable Securities under the 1933 Act as provided in Sections 2.01 or
2.02, the Issuer shall as promptly as practicable (but subject to the
provisions of Sections 2.01 and 2.02):
(a) prepare, file and cause to become effective a
registration statement under the 1933 Act relating to the Registrable
Securities to be offered in accordance with the intended method of
disposition thereof;
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the 1933 Act with
respect to the disposition of all Registrable Securities (i) in the case of
the Required Shelf Registration, until the Shelf Termination Date and (ii)
in the case of the Demand Registration, until the earlier of such time as
all Registrable Securities proposed to be sold therein have been disposed
of in accordance with the intended methods of disposition set forth in such
registration statement and the expiration of 30 days after such
registration statement becomes effective; provided, that such 30-day period
shall be extended for such number of days that equals the number of days
elapsing from (x) the date the written notice contemplated by paragraph (e)
below is given by the Issuer to (y) the date on which the Issuer delivers
to the Holders of Registrable Securities the supplement or amendment
contemplated by paragraph (e) below;
(c) furnish to the Holders of Registrable Securities and to
any underwriter of such Registrable Securities such number of conformed
copies of such registration statement and of each such amendment and
supplement thereto (in each case including all exhibits), such number of
copies of the prospectus included in such registration statement (including
each preliminary prospectus), in conformity with the requirements of the
1933 Act, and such documents incorporated by reference in such registration
statement or prospectus, as the Holders of Registrable Securities or such
underwriter may reasonably request;
(d) furnish to any underwriter of such Registrable Securities
an opinion of counsel for the Issuer and a "cold comfort" letter signed by
the independent public accountants who have audited the financial
statements of the Issuer included in the applicable registration statement,
in each such case covering substantially such matters with respect to such
registration statement (and the prospectus included therein) and the
related offering as are customarily covered in opinions of issuer's counsel
with respect thereto and in accountants' letters delivered to underwriters
in underwritten public offerings of securities and such other matters as
such underwriters may reasonably request;
(e) promptly notify the Selling Holders in writing (i) at any
time when a prospectus relating to a registration pursuant to Section 2.01
or 2.02 is required to be delivered under the 1933 Act of the happening of
any event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material
fact or omits 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 (ii) of any request by the
Commission or any other regulatory body or other body having jurisdiction
for any amendment of or supplement to any registration statement or other
document relating to such offering, and in either such case, at the request
of the Selling Holders prepare and furnish to the Selling Holders a
reasonable number of copies of a supplement to or an amendment of such
prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such Registrable Securities, such prospectus shall not
include an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they are made, not
misleading;
(f) use its reasonable best efforts to list all such
Registrable Securities covered by such registration on each securities
exchange and automated inter-dealer quotation system on which the Common
Stock is then listed;
(g) use reasonable efforts to assist the Holders in the
marketing of Common Stock in connection with up to two underwritten
offerings hereunder (including, to the extent reasonably consistent with
work commitments, using reasonable efforts to have officers of the Issuer
attend "road shows" and analyst or investor presentations scheduled in
connection with such registration), with all out-of-pocket costs and
expenses incurred by the Issuer or such officers in connection with such
attendance or assistance to be paid by the Holders as provided in Section
2.05; and
(h) furnish for delivery in connection with the closing of any
offering of Registrable Securities pursuant to a registration effected
pursuant to Sections 2.01 or 2.02 unlegended certificates representing
ownership of the Registrable Securities being sold in such denominations as
shall be requested by the Selling Holders or the underwriters.
Section 2.07. Underwriting; Due Diligence. (a) If requested
by the underwriters for any underwritten offering of Registrable Securities
pursuant to a registration requested under this Article II, the Issuer
shall enter into an underwriting agreement with such underwriters for such
offering, which agreement will contain such representations and warranties
by the Issuer and such other terms and provisions as are customarily
contained in underwriting agreements with respect to secondary
distributions, including, without limitation, indemnification and
contribution provisions substantially to the effect and to the extent
provided in Section 2.08, and agreements as to the provision of opinions of
counsel and accountants' letters to the effect and to the extent provided
in Section 2.06(d). Such underwriting agreement shall also contain such
representations and warranties by such Selling Holders and such other terms
and provisions as are customarily contained in underwriting agreements with
respect to secondary distributions, including, without limitation,
indemnification and contribution provisions substantially to the effect and
to the extent provided in Section 2.08.
(b) In connection with the preparation and filing of each
registration statement registering Registrable Securities under the 1933
Act pursuant to this Article II, the Issuer shall give the Permitted
Holders of such Registrable Securities and the underwriters, if any, and
their respective counsel and accountants (the identity and number of whom
shall be reasonably acceptable to the Issuer), such reasonable and
customary access to its books, records and properties and such
opportunities to discuss the business and affairs of the Issuer with its
officers and the independent public accountants who have certified the
financial statements of the Issuer as shall be necessary, in the opinion of
such Holders and such underwriters or their respective counsel, to conduct
a reasonable investigation within the meaning of the 1933 Act; provided
that the foregoing shall not require the Issuer to provide access to (or
copies of) any competitively sensitive information relating to the Issuer
or its Subsidiaries or their respective businesses; provided further that
(i) each Holder and the underwriters and their respective counsel and
accountants shall have entered into a confidentiality agreement reasonably
acceptable to the Issuer and (ii) the Permitted Holders and the
underwriters and their respective counsel and accountants shall use their
reasonable best efforts to minimize the disruption to the Issuer's business
and coordinate any such investigation of the books, records and properties
of the Issuer and any such discussions with the Issuer's officers and
accountants so that all such investigations occur at the same time and all
such discussions occur at the same time.
Section 2.08. Indemnification and Contribution. (a) The Issuer
agrees to indemnify and hold harmless each Selling Holder and each person,
if any, who controls each Selling Holder within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act from and
against any and all losses, claims, damages and liabilities (including,
without limitation, any legal or other expenses reasonably incurred in
connection with defending or investigating any such action or claim)
insofar as such losses, claims, damages or liabilities are caused by any
untrue statement or alleged untrue statement of a material fact contained
in any registration statement or any amendment thereof, any preliminary
prospectus or prospectus (as amended or supplemented if the Issuer shall
have furnished any amendments or supplements thereto) relating to the
Registrable Securities, or caused by any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, except insofar as such losses,
claims, damages or liabilities are caused by any such untrue statement or
omission or alleged untrue statement or omission based upon information
furnished to the Issuer in writing by a Selling Holder expressly for use
therein. The Issuer also agrees to indemnify any underwriter of the
Registrable Securities so offered and each person, if any, who controls
such underwriter on substantially the same basis as that of the
indemnification by the Issuer of the Selling Holder provided in this
Section 2.08(a).
(b) Each Selling Holder agrees to indemnify and hold harmless
the Issuer, its directors, the officers who sign any registration statement
and each person, if any who controls the Issuer within the meaning of
either Section 15 of the Securities Act or Section 20 of the Exchange Act,
from and against any and all losses, claims, damages and liabilities
(including, without limitation, any legal or other expenses reasonably
incurred in connection with defending or investigating any such action or
claim) insofar as such losses, claims, damages or liabilities are caused by
any untrue statement or alleged untrue statement of a material fact
contained in any registration statement or any amendment thereof, any
preliminary prospectus or prospectus (as amended or supplemented if the
Issuer shall have furnished any amendments or supplements thereto) relating
to the Registrable Securities, or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, but only with
reference to information furnished in writing by a Selling Holder (or any
representative thereof) expressly for use in a registration statement, any
preliminary prospectus, prospectus or any amendments or supplements
thereto. Each Selling Holder also agrees to indemnify any underwriter of
the Registrable Securities so offered and each person, if any, who controls
such underwriter on substantially the same basis as that of the
indemnification by such Selling Holder of the Issuer provided in this
Section 2.08(b).
(c) Each party indemnified under paragraph (a) or (b) above
shall, promptly after receipt of notice of a claim or action against such
indemnified party in respect of which indemnity may be sought hereunder,
notify the indemnifying party in writing of the claim or action; provided
that the failure to notify the indemnifying party shall not relieve it from
any liability that it may have to an indemnified party on account of the
indemnity agreement contained in paragraph (a) or (b) above except to the
extent that the indemnifying party was actually prejudiced by such failure,
and in no event shall such failure relieve the indemnifying party from any
other liability that it may have to such indemnified party. If any such
claim or action shall be brought against an indemnified party, and it shall
have notified the indemnifying party thereof, unless based on the written
advice of counsel to such indemnified party a conflict of interest between
such indemnified party and indemnifying parties may exist in respect of
such claim, the indemnifying party shall be entitled to participate
therein, and, to the extent that it wishes, jointly with any other
similarly notified indemnifying party, to assume the defense thereof.
After notice from the indemnifying party to the indemnified party of its
election to assume the defense of such claim or action, the indemnifying
party shall not be liable to the indemnified party under this Section 2.08
for any legal or other expenses subsequently incurred by the indemnified
party in connection with the defense thereof. Any indemnifying party
against whom indemnity may be sought under this Section 2.08 shall not be
liable to indemnify an indemnified party if such indemnified party settles
such claim or action without the consent of the indemnifying party. The
indemnifying party may not agree to any settlement of any such claim or
action, other than solely for monetary damages for which the indemnifying
party shall be responsible hereunder, the result of which any remedy or
relief shall be applied to or against the indemnified party, without the
prior written consent of the indemnified party, which consent shall not be
unreasonably withheld. In any action hereunder as to which the
indemnifying party has assumed the defense thereof, the indemnified party
shall continue to be entitled to participate in the defense thereof, with
counsel of its own choice, but the indemnifying party shall not be
obligated hereunder to reimburse the indemnified party for the costs
thereof.
(d) If the indemnification provided for in this Section 2.08
shall for any reason be unavailable (other than in accordance with its
terms) to an indemnified party in respect of any loss, liability, cost,
claim or damage referred to therein, then each indemnifying party shall, in
lieu of indemnifying such indemnified party, contribute to the amount paid
or payable by such indemnified party as a result of such loss, liability,
cost, claim or damage (i) in such proportion as is appropriate to reflect
the relative benefits received by the Issuer on the one hand and the
Selling Holders on the other hand from the offering of the Registrable
Securities or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of the indemnifying party or parties on the one
hand and of the indemnified party or parties on the other hand in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative benefits received by the Issuer on the one
hand and the Selling Holders on the other hand in connection with the
offering of the Registrable Securities shall be deemed to be in the same
respective proportions as the net proceeds from the offering of the
Registrable Securities (before deducting expenses) received by the Issuer
and the Selling Holders, respectively, bear to the aggregate public
offering price of the Registrable Securities. The relative fault of the
Issuer on the one hand and the Selling Holders on the other hand shall be
determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Issuer or a Selling Holder and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement
or omission. The amount paid or payable by an indemnified party as a
result of the loss, cost, claim, damage or liability, or action in respect
thereof, referred to above in this paragraph (d) shall be deemed to
include, for purposes of this paragraph (d), any legal or other expenses
reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. The Issuer and the
Selling Holders agree that it would not be just and equitable if
contribution pursuant to this Section 2.08 were determined by pro rata
allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in this paragraph.
Notwithstanding any other provision of this Section 2.08, no Selling Holder
shall be required to contribute any amount in excess of the amount by which
the total price at which the Registrable Securities of such Selling Holder
were offered to the public exceeds the amount of any damages which such
Selling Holder has otherwise been required to pay by reason of such untrue
or alleged untrue statement or omission or alleged omission. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f)
of the 1933 Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
(e) The obligations of the parties under this Section 2.08
shall be in addition to any liability which any party may otherwise have to
any other party.
Section 2.09. Holdback Agreement. If the Demand Registration
pursuant to this Article II shall be in connection with an underwritten public
offering of Registrable Securities, each Selling Holder agrees not to effect
any sale or distribution, including any sale under Rule 144, of any equity
security of the Issuer (otherwise than through the registered public offering
then being made), within 7 days prior to or 60 days (or such lesser period as
the lead or managing underwriters may permit) after the effective date of the
applicable registration statement.
ARTICLE 3
Miscellaneous
Section 3.01. Entire Agreement. This Agreement constitutes the
entire agreement between the parties with respect to the subject matter hereof
and supersedes all other prior agreements and understandings, both written and
oral, between the parties with respect to the subject matter hereof.
Section 3.02. Assignment. No party may assign any of its
rights or obligations hereunder by operation of law or otherwise without
the prior written consent of the other parties.
Section 3.03 Amendments, Waivers, Etc. This Agreement may not
be amended, changed, supplemented, waived or otherwise modified or terminated,
except upon the execution and delivery of a written agreement executed by the
Issuer and Holders representing a majority of the Registrable Securities then
held by all Holders.
Section 3.04 Notices. All notices, requests, claims, demands
and other communications 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, 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 address or telecopy number set forth on the
signature pages hereto (unless such contact information in the case of the
Holders is updated pursuant to Section 2.03(a)).
Section 3.05. Severability. Whenever possible, each
provision or portion of any provision of this Agreement will be interpreted
in such manner as to be effective and valid under applicable law but if any
provision or portion of any provision of this Agreement is held to be
invalid, illegal or unenforceable in any respect under any applicable law
or rule in any jurisdiction, such invalidity, illegality or
unenforceability will not affect any other provision or portion of any
provision in such jurisdiction, and this Agreement will be reformed,
construed and enforced in such jurisdiction as if such invalid, illegal or
unenforceable provision or portion of any provision had never been
contained herein.
Section 3.06. No Waiver. The failure of any party hereto to
exercise any right, power or remedy provided under this Agreement or otherwise
available in respect hereof at law or in equity, or to insist upon compliance
by any other party hereto with its obligations hereunder, and any custom or
practice of the parties at variance with the terms hereof, shall not
constitute a waiver by such party of its right to exercise any such or other
right, power or remedy or to demand such compliance.
Section 3.07. No Third Party Beneficiaries. This Agreement is
not intended to be for the benefit of, and shall not be enforceable by, any
Person who or which is not a party hereto.
Section 3.08. 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.
Section 3.09. Jurisdiction. Each party hereby irrevocably
submits to the exclusive jurisdiction of the United States District Court for
the Southern District of New York or any state court sitting in the City of
New York, Borough of Manhattan in any action, suit or proceeding arising in
connection with this Agreement, and agrees that any such action, suit or
proceeding shall be brought only in such courts (and waives any objection
based on forum non conveniens or any other objection to venue therein);
provided, however, that such consent to jurisdiction is solely for the purpose
referred to in this Section 3.09 and shall not be deemed to be a general
submission to the jurisdiction of said Courts or in the State of New York
other than for such purposes. Each party hereto hereby waives any right to a
trial by jury in connection with any such action, suit or proceeding.
Section 3.10. Descriptive Headings. The descriptive headings
used herein are inserted for convenience of reference only and are not
intended to be part of or to affect the meaning or interpretation of this
Agreement.
Section 3.11. Zell Holders' Agent. Each Zell Holder hereby
appoints Zell/Chilmark Fund. L.P. as its agent and attorney-in-fact (the
"Zell Holders' Agent") for purposes of the delivery and receipt of all
notices and requests pursuant to this Agreement. The Issuer may give
notice to any Zell Holder hereunder by giving such notice directly to such
Zell Holder. Alternatively, the Issuer may request that the Zell Holders'
Agent deliver to each Zell Holder any notice given by the Issuer hereunder,
in which event the Zell Holders' Agent will promptly so give such notice to
each Zell Holder. Prompt delivery by the Zell Holders' Agent to the Zell
Holders will be deemed satisfied if delivery is made to the Zell Holders,
in accordance with Section 3.04, not later than the third business day
after actual receipt of the applicable notice or document by the Zell
Holders' Agent from the Issuer. Notwithstanding anything else contained
herein, the Zell Holders' Agent will not be liable or responsible to any
Person should any Zell Holder fail to act in accordance with any notice so
given to such Zell Holder hereunder.
Section 3.12. Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed to be an original, but all of
which, taken together, shall constitute one and the same Agreement.
IN WITNESS WHEREOF, the Issuer and the Holders have caused this
Agreement to be duly executed as of the day and year first above written.
CVS CORPORATION
By:___________________________________
Name:
Title:
Holders
- -------
ZELL/CHILMARK FUND, L.P.
By: ZC Limited Partnership, general partner
By: ZC Partnerships, general partner
By: ZC Inc., a partner
By:___________________________________
Name: Sheli Z. Rosenberg
Title: Vice President
Address:
Name of Holder:
By:___________________________________
Name:
Title:
Address:
EXHIBIT C-1(A)
AFFILIATE'S LETTER RELATING TO POOLING
(Revco D.S., Inc.)
February __, 1997
CVS Corporation
One CVS Drive
Woonsocket, RI 02895
Revco D.S., Inc.
1925 Enterprise Parkway
Twinsburg, OH 44087
Ladies and Gentlemen:
Pursuant to the terms of the Agreement and Plan of Merger dated
as of February 6, 1997 (the "Agreement") among CVS Corporation, a Delaware
corporation ("CVS"), Revco D.S., Inc., a Delaware corporation ("Revco"), and
North Acquisition Corp., a Delaware corporation ("Merger Subsidiary"), Merger
Subsidiary will be merged with and into Revco with Revco to be the surviving
corporation in the Merger (the "Merger").
The undersigned represents, warrants and covenants with and to
CVS and Revco that:
A. The undersigned understands that the Merger is intended to
be accounted for using the "pooling-of-interests" method and that such
treatment for financial accounting purposes is dependent upon the accuracy
of certain of the representations and warranties, and the undersigned's
compliance with certain of the covenants and agreements, set forth herein.
Accordingly, the undersigned will not sell, transfer or otherwise dispose
of the undersigned's interests in, or acquire or sell any options or other
securities relating to securities of CVS or Revco that would be intended to
reduce the undersigned's risk relative to, any shares of common stock of
either CVS or Revco beneficially owned by the undersigned, during the
period commencing on the 30th day prior to the effectiveness of the Merger
and ending at such time as CVS publicly releases a report (the "Combined
Financial Results Report") covering at least 30 days of combined operations
of CVS after the Merger.
B. The undersigned also understands that stop transfer
instructions will be given to the transfer agents of CVS and Revco in order to
prevent any breach of the covenants and agreements make by the undersigned in
paragraph A, although such stop transfer instructions will be promptly
rescinded upon the publication of the Combined Financial Results Report.
C. The undersigned understands and agrees that this letter
agreement shall apply to all shares of the capital stock of CVS and Revco that
are deemed to be beneficially owned by the undersigned pursuant to applicable
federal securities laws.
Very truly yours,
By: ______________________
Name:
Accepted this ____ day of
February, 1997.
CVS CORPORATION
By: _______________________________
Name:
Title:
EXHIBIT C-1(B)
AFFILIATE'S LETTER RELATING TO POOLING
FOR ZELL/CHILMARK FUND, L.P.
(Revco D.S., Inc.)
February 6, 1997
CVS Corporation
One CVS Drive
Woonsocket, RI 02895
Revco D.S., Inc.
1925 Enterprise Parkway
Twinsburg, OH 44087
Ladies and Gentlemen:
Pursuant to the terms of the Agreement and Plan of Merger dated as of
February 6, 1997 (the "Agreement") among CVS Corporation, a Delaware
corporation ("CVS"), Revco D.S., Inc., a Delaware corporation ("Revco"),
and North Acquisition Corp., a Delaware corporation ("Merger Subsidiary"),
Merger Subsidiary will be merged with and into Revco with Revco to be the
surviving corporation in the Merger (the "Merger").
The undersigned represents, warrants and covenants with and to CVS
and Revco that:
A. The undersigned understands that the Merger is intended to be
accounted for using the "pooling-of-interests" method and that such
treatment for financial accounting purposes is dependent upon the accuracy
of certain of the representations and warranties, and the undersigned's
compliance with certain of the covenants and agreements, set forth herein.
Accordingly, the undersigned will not sell, transfer or otherwise dispose
of the undersigned's interests in, or acquire or sell any options or other
securities relating to securities of CVS or Revco that would be intended to
reduce the undersigned's risk relative to, any shares of common stock of
either CVS or Revco beneficially owned by the undersigned, during the
period commencing on the 30th day prior to the effectiveness of the Merger
and ending at such time as CVS publicly releases a report (the "Combined
Financial Results Report") covering at least 30 days of combined operations
of CVS after the Merger; provided that the foregoing shall not restrict the
distribution after the Effective Time (as defined in the Agreement) by the
undersigned to its partners of the shares of common stock of CVS held by
the undersigned so long as (if such distribution occurs before the date of
publication of the Combined Financial Results Report) no later than the
time of such distribution each such partner shall have executed and
delivered to CVS a letter agreement in the form of this letter (but
excluding this proviso).
B. The undersigned also understands that stop transfer
instructions will be given to the transfer agents of CVS and Revco in order to
prevent any breach of the covenants and agreements make by the undersigned in
paragraph A, although such stop transfer instructions will be promptly
rescinded upon the publication of the Combined Financial Results Report.
C. The undersigned understands and agrees that this letter
agreement shall apply to all shares of the capital stock of CVS and Revco that
are deemed to be beneficially owned by the undersigned pursuant to applicable
federal securities laws.
Very truly yours,
Zell/Chilmark Fund, L.P.
By: ZC Limited Partnership, general
partner
By: ZC Partnerships, general partner
By: ZC Inc., a partner
By: /s/ Sheli Rosenberg
--------------------------------------
Name: Sheli Rosenberg
Title: Vice President
Accepted this 6th day of
February, 1997.
CVS CORPORATION
By: /s/ Charles Conaway
- ------------------------------------
Name: Charles Conaway
Title: Chief Financial Officer
EXHIBIT C-2
AFFILIATE'S LETTER RELATING TO POOLING
(CVS Corporation)
February __, 1997
CVS Corporation
One CVS Drive
Woonsocket, RI 02895
Revco D.S., Inc.
1925 Enterprise Parkway
Twinsburg, OH 44087
Ladies and Gentlemen:
Pursuant to the terms of the Agreement and Plan of Merger dated
as of February 6, 1997 (the "Agreement") among CVS Corporation, a Delaware
corporation ("CVS"), Revco D.S., Inc., a Delaware corporation ("Revco"), and
North Acquisition Corp., a Delaware corporation ("Merger Subsidiary"), Merger
Subsidiary will be merged with and into Revco with Revco to be the surviving
corporation in the Merger (the "Merger").
I represent, warrant and covenant with and to CVS and Revco
that:
A. I understand that the Merger is intended to be accounted for
using the "pooling-of-interests" method and that such treatment for
financial accounting purposes is dependent upon the accuracy of certain of
the representations and warranties, and my compliance with certain of the
covenants and agreements, set forth herein. Accordingly, I will not sell,
transfer or otherwise dispose of my interests in, or acquire or sell any
options or other securities relating to securities of CVS or Revco that
would be intended to reduce my risk relative to, any shares of common stock
of either CVS or Revco beneficially owned by me, during the period
commencing on the 30th day prior to the effectiveness of the Merger and
ending at such time as CVS publicly releases a report (the "Combined
Financial Results Report") covering at least 30 days of combined operations
of CVS after the Merger.
B. I also understand that stop transfer instructions will be
given to the transfer agents of CVS and Revco in order to prevent any breach
of the covenants and agreements I make in paragraph A, although such stop
transfer instructions will be promptly rescinded upon the publication of the
Combined Financial Results Report.
C. I understand and agree that this letter agreement shall apply
to all shares of the capital stock of CVS and Revco that are deemed to be
beneficially owned by me pursuant to applicable federal securities laws.
Very truly yours,
------------------------------
Name:
Accepted this ____ day of
February, 1997.
CVS CORPORATION
By: ______________________
Name:
Title:
EXHIBIT C-3(A)
AFFILIATE'S LETTER
(Revco D.S., Inc.)
____________, 1997
CVS Corporation
One CVS Drive
Woonsocket, RI 02895
Revco D.S., Inc.
1925 Enterprise Parkway
Twinsburg, OH 44087
Ladies and Gentlemen:
The undersigned has been advised that as of the date of this
letter the undersigned may be deemed to be an "affiliate" of Revco D.S., Inc.,
a Delaware corporation ("Revco"), as the term "affiliate" is defined for
purposes of paragraphs (c) and (d) of Rule 145 of the rules and regulations
(the "Rules and Regulations") of the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act").
Pursuant to the terms of the Agreement and Plan of Merger dated as of February
6, 1997 (the "Agreement") among Revco, CVS Corporation, a Delaware corporation
("CVS"), and North Acquisition Corp., a Delaware corporation and a wholly
owned subsidiary of CVS ("Merger Subsidiary"), Merger Subsidiary will be
merged with and into Revco with Revco to be the surviving corporation in the
merger (the "Merger").
As a result of the Merger, the undersigned will receive shares
of Common Stock, par value $0.01 per share, of CVS (the "CVS Common Stock") in
exchange for shares owned by the undersigned of Common Stock, par value $0.01
per share, of Revco (the "Revco Common Stock").
The undersigned represents, warrants and covenants to CVS and
Revco that as of the date the undersigned receives any CVS Common Stock as a
result of the Merger:
A. The undersigned shall not make any sale, transfer or other
disposition of the CVS Common Stock in violation of the Act or the Rules
and Regulations.
B. The undersigned has carefully read this letter and the
Agreement and discussed the requirements of such documents and other
applicable limitations upon the undersigned's ability to sell, transfer or
otherwise dispose of the CVS Common Stock to the extent the undersigned
felt necessary with the undersigned's counsel or counsel for Revco.
C. The undersigned has been advised that the issuance of CVS
Common Stock to the undersigned pursuant to the Merger will be registered
with the Commission under the Act on a Registration Statement on Form S-4.
However, the undersigned has also been advised that, since at the time the
Merger is submitted for a vote of the stockholders of Revco, the
undersigned may be deemed to be an affiliate of Revco, the undersigned may
not sell, transfer or otherwise dispose of the CVS Common Stock issued to
the undersigned in the Merger unless (i) such sale, transfer or other
disposition has been registered under the Act, (ii) such sale, transfer or
other disposition is made in conformity with Rule 145 promulgated by the
Commission under the Act, or (iii) in the opinion of counsel reasonably
acceptable to CVS, or pursuant to a "no action" letter obtained by the
undersigned from the staff of the Commission, such sale, transfer or other
disposition is otherwise exempt from registration under the Act.
D. The undersigned understands that CVS is under no
obligation to register the sale, transfer or other disposition of the CVS
Common Stock by the undersigned or on the undersigned's behalf under the
Act or to take any other action necessary in order to enable such sale,
transfer or other disposition by the undersigned in compliance with an
exemption from such registration, other than pursuant to and in accordance
with the Registration Rights Agreement dated as of ___________, 1997
between CVS and the holders referred to therein.
E. The undersigned also understands that there will be placed
on the certificates for the CVS Common Stock issued to the undersigned or
any substitution thereof, a legend stating in substance:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN
A TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE
SECURITIES ACT OF 1933 APPLIES. THE SECURITIES REPRESENTED
BY THIS CERTIFICATE MAY BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF ONLY IN ACCORDANCE WITH THE TERMS OF A LETTER
AGREEMENT BETWEEN THE REGISTERED HOLDER HEREOF AND CVS
CORPORATION , A COPY OF WHICH AGREEMENT IS ON FILE AT THE
PRINCIPAL OFFICES OF CVS CORPORATION."
F. The undersigned also understands that unless the transfer
by the undersigned of the undersigned's CVS Common Stock has been
registered under the Act or is a sale made in conformity with the
provisions of Rule 145 under the Act, CVS reserves the right to put the
following legend on the certificates issued to the undersigned's
transferee:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND WERE
ACQUIRED FROM A PERSON WHO RECEIVED SUCH SECURITIES IN A
TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE
SECURITIES ACT OF 1933 APPLIES. THE SECURITIES HAVE NOT
BEEN ACQUIRED BY THE HOLDER WITH A VIEW TO, OR FOR RESALE IN
CONNECTION WITH, ANY DISTRIBUTION THEREOF WITHIN THE MEANING
OF THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD,
TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT OR IN ACCORDANCE WITH AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT OF 1933."
It is understood and agreed that the legends set forth in
paragraphs E and F above [and any stop transfer legends pursuant to paragraph
G](1) shall be removed by delivery of substitute certificates without such
legend if (i) the securities represented thereby have been registered for sale
by the undersigned under the 1933 Act or (ii) CVS has received either an
opinion of counsel, which opinion and counsel shall be reasonably satisfactory
to CVS, or a "no-action" letter obtained by the undersigned from the staff of
the Commission, to the effect that the restrictions imposed by Rule 145 under
the Act no longer apply to the undersigned.
- ----------
(1) To be deleted if you have executed and delivered to CVS and Revco an
affiliate's letter in the form of Exhibit C-1 to the Agreement.
[G. The undersigned understands that the Merger is intended
to be accounted for using the "pooling-of-interests" method and that such
treatment for accounting purposes is dependent upon the accuracy of certain of
the representations and warranties, and the undersigned's compliance with
certain of the covenants and agreements, set forth herein. Accordingly, the
undersigned will not sell, transfer or otherwise dispose of the undersigned's
interests in, or acquire or sell any options or other securities relating to
securities of CVS or Revco that would be intended to reduce the undersigned's
risk relative to, any shares of common stock of either CVS or Revco
beneficially owned by the undersigned, during the period commencing on the
30th day prior to the effectiveness of the Merger and ending at such time as
CVS publicly releases a report (the "Combined Financial Results Report")
covering at least 30 days of combined operations of CVS after the Merger. The
undersigned also understand that stop transfer instructions will be given to
the transfer agents of CVS and Revco in order to prevent any breach of the
covenants and agreements the undersigned makes in this Section G, although
such stop transfer instructions will be promptly rescinded upon the
publication of the Combined Financial Results Report.](2)
- ----------
(2) To be deleted if you have executed and delivered to CVS and Revco an
affiliate's letter in the form of Exhibit C-1 to the Agreement.
H. The undersigned further understands and agrees
that the representations, warranties, covenants and agreements of the
undersigned set forth herein are for the benefit of CVS, Revco and the
Surviving Corporation (as defined in the Merger Agreement) and will be relied
upon by such entities and their respective counsel and accountants.
I. The undersigned understands and agrees that this letter
agreement shall apply to all shares of the capital stock of CVS and Revco that
are deemed to be beneficially owned by the undersigned pursuant to applicable
federal securities laws.
Execution of this letter should not be considered an admission
on the part of the undersigned that the undersigned is an "affiliate" of Revco
as described in the first paragraph of this letter or as a waiver of any
rights the undersigned may have to object to any claim that the undersigned is
such an affiliate on or after the date of this letter.
Very truly yours,
By: _______________________
Name:
Accepted this ____ day of
____________, 1997.
CVS CORPORATION
By: _____________________
Name:
Title:
EXHIBIT C-3(B)
AFFILIATE'S LETTER FOR ZELL/CHILMARK FUND, L.P.
(Revco D.S., Inc.)
____________, 1997
CVS Corporation
One CVS Drive
Woonsocket, RI 02895
Revco D.S., Inc.
1925 Enterprise Parkway
Twinsburg, OH 44087
Ladies and Gentlemen:
The undersigned has been advised that as of the date of this
letter the undersigned may be deemed to be an "affiliate" of Revco D.S., Inc.,
a Delaware corporation ("Revco"), as the term "affiliate" is defined for
purposes of paragraphs (c) and (d) of Rule 145 of the rules and regulations
(the "Rules and Regulations") of the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act").
Pursuant to the terms of the Agreement and Plan of Merger dated as of February
6, 1997 (the "Agreement") among Revco, CVS Corporation, a Delaware corporation
("CVS"), and North Acquisition Corp., a Delaware corporation and a wholly
owned subsidiary of CVS ("Merger Subsidiary"), Merger Subsidiary will be
merged with and into Revco with Revco to be the surviving corporation in the
merger (the "Merger").
As a result of the Merger, the undersigned will receive shares
of Common Stock, par value $0.01 per share, of CVS (the "CVS Common Stock") in
exchange for shares owned by the undersigned of Common Stock, par value $0.01
per share, of Revco (the "Revco Common Stock").
The undersigned represents, warrants and covenants to CVS and
Revco that as of the date the undersigned receives any CVS Common Stock as a
result of the Merger:
A. The undersigned shall not make any sale, transfer or other disposition
of the CVS Common Stock in violation of the Act or the Rules and Regulations.
B. The undersigned has carefully read this letter and the Agreement and
discussed the requirements of such documents and other applicable limitations
upon the undersigned's ability to sell, transfer or otherwise dispose of the
CVS Common Stock to the extent the undersigned felt necessary with the
undersigned's counsel or counsel for Revco.
C. The undersigned has been advised that the issuance of CVS Common Stock
to the undersigned pursuant to the Merger will be registered with the
Commission under the Act on a Registration Statement on Form S-4. However,
the undersigned has also been advised that, since at the time the Merger is
submitted for a vote of the stockholders of Revco, the undersigned may be
deemed to be an affiliate of Revco, the undersigned may not sell, transfer or
otherwise dispose of the CVS Common Stock issued to the undersigned in the
Merger unless (i) such sale, transfer or other disposition has been registered
under the Act, (ii) such sale, transfer or other disposition is made in
conformity with Rule 145 promulgated by the Commission under the Act, or (iii)
in the opinion of counsel reasonably acceptable to CVS, or pursuant to a "no
action" letter obtained by the undersigned from the staff of the Commission,
such sale, transfer or other disposition is otherwise exempt from registration
under the Act. Notwithstanding the foregoing, assuming the undersigned's
partners do not vote in connection with the Merger, the distribution (in
accordance with the terms of the undersigned's limited partnership agreement)
after the Effective Time (as defined in the Agreement) by the undersigned to
its partners of the shares of CVS Common Stock held by the undersigned shall
be understood to be exempt from registration under the Act.
D. The undersigned understands that CVS is under no obligation to register
the sale, transfer or other disposition of the CVS Common Stock by the
undersigned or on the undersigned's behalf under the Act or to take any other
action necessary in order to enable such sale, transfer or other disposition
by the undersigned in compliance with an exemption from such registration,
other than pursuant to and in accordance with the Registration Rights
Agreement dated as of ___________, 1997 between CVS and the holders referred
to therein.
E. The undersigned also understands that there will be placed on the
certificates for the CVS Common Stock issued to the undersigned or any
substitution thereof, a legend stating in substance:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A
TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF
1933 APPLIES. THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY BE
SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF ONLY IN ACCORDANCE WITH THE
TERMS OF A LETTER AGREEMENT BETWEEN THE REGISTERED HOLDER HEREOF AND CVS
CORPORATION, A COPY OF WHICH AGREEMENT IS ON FILE AT THE PRINCIPAL
OFFICES OF CVS CORPORATION."
F. The undersigned also understands that if the undersigned distributes
shares of CVS Common Stock to its partners as provided in the last sentence of
paragraph C, CVS reserves the right to put the following legend on the
certificates issued to the undersigned's partners:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 AND WERE ACQUIRED FROM A PERSON WHO
RECEIVED SUCH SECURITIES IN A TRANSACTION TO WHICH RULE 145 PROMULGATED
UNDER THE SECURITIES ACT OF 1933 APPLIES. THE SECURITIES REPRESENTED BY
THIS CERTIFICATE MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF
UNLESS (I) SUCH SALE, TRANSFER OR OTHER DISPOSITION HAS BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, (II) SUCH SALE, TRANSFER OR OTHER
DISPOSITION IS MADE IN CONFORMITY WITH RULE 145 PROMULGATED BY THE
SECURITIES AND EXCHANGE COMMISSION UNDER SUCH ACT, OR (III) IN THE
OPINION OF COUNSEL REASONABLY ACCEPTABLE TO CVS CORPORATION, OR PURSUANT
TO A "NO ACTION" LETTER OBTAINED BY THE HOLDER HEREOF FROM THE STAFF OF
THE SECURITIES AND EXCHANGE COMMISSION, SUCH SALE, TRANSFER OR OTHER
DISPOSITION IS OTHERWISE EXEMPT FROM REGISTRATION UNDER SUCH ACT."
It is understood and agreed that the legends set forth in
paragraphs E and F above [and any stop transfer legends pursuant to paragraph
G](1) shall be removed by delivery of substitute certificates without such
legend if (i) the securities represented thereby have been registered for sale
(1)To be deleted if you have executed and delivered to CVS and Revco an
affiliate's letter in the form of Exhibit C-1 to the Agreement.
by the undersigned under the 1933 Act or (ii) CVS has received either an
opinion of counsel, which opinion and counsel shall be reasonably satisfactory
to CVS, or a "no-action" letter obtained by the undersigned from the staff of
the Commission, to the effect that the restrictions imposed by Rule 145 under
the Act no longer apply to the undersigned.
G. The undersigned understands that the Merger is intended to be
accounted for using the "pooling-of-interests" method and that such
treatment for accounting purposes is dependent upon the accuracy of certain
of the representations and warranties, and the undersigned's compliance
with certain of the covenants and agreements, set forth herein.
Accordingly, the undersigned will not sell, transfer or otherwise dispose
of the undersigned's interests in, or acquire or sell any options or other
securities relating to securities of CVS or Revco that would be intended to
reduce the undersigned's risk relative to, any shares of common stock of
either CVS or Revco beneficially owned by the undersigned, during the
period commencing on the 30th day prior to the effectiveness of the Merger
and ending at such time as CVS publicly releases a report (the "Combined
Financial Results Report") covering at least 30 days of combined operations
of CVS after the Merger. The undersigned also understand that stop
transfer instructions will be given to the transfer agents of CVS and Revco
in order to prevent any breach of the covenants and agreements the
undersigned makes in this Section G, although such stop transfer
instructions will be promptly rescinded upon the publication of the
Combined Financial Results Report.](2)
H. The undersigned further understands and agrees that the
representations, warranties, covenants and agreements of the undersigned
set forth herein are for the benefit of CVS, Revco and the Surviving
Corporation (as defined in the Merger Agreement) and will be relied upon by
such entities and their respective counsel and accountants.
I. The undersigned understands and agrees that this letter
agreement shall apply to all shares of the capital stock of CVS and Revco that
are deemed to be beneficially owned by the undersigned pursuant to applicable
federal securities laws.
Execution of this letter should not be considered an admission on the
part of the undersigned that the undersigned is an "affiliate" of Revco as
described in the first paragraph of this letter or as a waiver of any
rights the undersigned may have to object to any claim that the undersigned
is such an affiliate on or after the date of this letter.
Very truly yours,
-------------------------------------------
Zell/Chilmark Fund, L.P.
-------------------------------------------
By: ZC Limited Partnership, general partner
By: ZC Partnerships, general partner
By: ZC Inc., a partner
By: _______________________
Name:
Title:
Accepted this ____ day of
____________, 1997.
CVS CORPORATION
By:
- ------------------------------
Name:
Title:
(2)To be deleted if you have executed and delivered to CVS and Revco an
affiliate's letter in the form of Exhibit C-1 to the Agreement.
EXHIBIT D
CVS CORPORATION REPRESENTATION LETTER
[Closing Date]
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019
Ladies and Gentlemen:
In connection with the opinion to be delivered pursuant to
Section 6.03(b) of the Agreement and Plan of Merger (the "Agreement")(1) dated
February 6, 1997, among CVS Corporation, a Delaware corporation ("CVS"), North
Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of CVS
("Merger Subsidiary"), and Revco D.S., Inc., a Delaware corporation
("Revco")(2), the undersigned officers of CVS and Merger Subsidiary hereby
certify and represent as to CVS and Merger Subsidiary that the facts relating
to the merger (the "Merger") of Merger Subsidiary with and into Revco pursuant
to the Agreement and as described in the Joint Proxy Statement/Prospectus of
CVS and Revco dated ____________, 19__ (the "Proxy Statement") are true,
correct and complete in all respects at the date hereof and will be true,
correct and complete in all respects at the Effective Time and that:
1 The aggregate fair market value of the consideration to be received
in the Merger by holders of Revco Common Stock will be approximately equal
to the fair market value of the Revco Common Stock surrendered in exchange
therefor, as determined by arm's length negotiations between the
managements of CVS and Revco. In connection with the Merger, no holder of
Revco Common Stock will receive in exchange for such stock, directly or
indirectly, any consideration other than CVS Common Stock and cash in lieu
of a fractional share thereof.
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(1) References contained in this Certificate to the Agreement include, unless
the context otherwise requires, each document attached as an exhibit or
annex thereto.
(2) Each term capitalized and not defined herein shall have the meaning
ascribed to such term in the Proxy Statement (as defined herein).
2 To the knowledge of the management of CVS and Merger Subsidiary,
there is no plan or intention on the part of the holders of Revco Common
Stock to sell, exchange, transfer or otherwise dispose of a number of
shares of CVS Common Stock to be received by them in connection with the
Merger that would reduce the Revco shareholder's ownership of CVS Common
Stock to a number of shares having a value, as of the Effective Time, of
less than 50 percent of the total value of all of the formerly outstanding
stock of Revco immediately prior to the Effective Time. For purposes of
this representation, shares of Revco Common Stock exchanged for cash or
other property or exchanged for cash in lieu of fractional shares of CVS
Common Stock, are treated as outstanding shares of Revco Common Stock at
the Effective Time. Moreover, shares of Revco Common Stock that are sold,
redeemed or disposed of prior to the Merger and in contemplation or as part
of the Merger, and shares of CVS Common Stock that are received by holders
of Revco Common Stock in connection with the Merger and that are otherwise
sold, redeemed, or disposed of subsequent to the Merger will be taken into
account for purposes of this representation.
3 After the Merger, Revco will hold (i) at least ninety percent (90%)
of the fair market value of the net assets and at least seventy percent
(70%) of the fair market value of the gross assets held by Merger
Subsidiary immediately prior to the Merger and (ii) to the knowledge of the
management of CVS, at least ninety percent (90%) of the fair market value
of the net assets and at least seventy percent (70%) of the fair market
value of the gross assets held by Revco immediately prior to the Merger.
For purposes of this representation, included as assets of Merger
Subsidiary or Revco held immediately prior to the Merger will be amounts
paid or incurred by Merger Subsidiary or Revco in connection with the
Merger, including payments to holders of Revco Common Stock in lieu of
fractional shares of CVS Common Stock, amounts used to pay reorganization
expenses and all payments, redemptions and distributions made in
contemplation or as part of the Merger of assets held by Merger Subsidiary
prior to the Merger will be for full fair market value.
4 Prior to the Merger, CVS will be in control of Merger Subsidiary
within the meaning of Section 368(c) of the Internal Revenue Code of 1986,
as amended (the "Code"). Merger Subsidiary has been formed solely in order
to consummate the Merger, and at no time has or will Merger Subsidiary
conduct any business activities or other operations of any kind other than
the issuance of its stock to CVS prior to the Effective Time.
5 Following the Merger, Revco has no plan or intention to issue and
CVS has no plan or intention to cause Revco to issue additional shares of
stock that would result in CVS losing control of Revco within the meaning
of Section 368(c) of the Code.
6 Neither CVS nor any corporation affiliated with CVS has any plan or
intention to purchase, redeem or otherwise acquire any of the CVS Common Stock
issued pursuant to the Merger (other than through a stock purchase plan
program meeting the requirements of Section 4.05(1)(b) of Revenue Procedure
96-30). After the Merger, no dividends or distributions will be made to the
former Revco shareholders by CVS other than regular, normal dividends or
distributions made to all holders of CVS Common Stock.
7 CVS has no plan or intention to liquidate Revco, to merge Revco
with or into another corporation, to sell, exchange, transfer or otherwise
dispose of any stock of Revco or to cause Revco to sell, exchange, transfer
or otherwise dispose of any of its assets or of any assets acquired from
Merger Subsidiary in the Merger, except for dispositions made in the
ordinary course of business or in accordance with Section 5.07 of the
Merger Agreement, transfers described in Section 368(a)(2)(C) of the Code,
or asset dispositions to the extent that all such dispositions, sale,
transfer or exchange of assets will not, in the aggregate, violate
paragraph 3 of this letter.
8 In the Merger, Merger Subsidiary will have no liabilities (other
than immaterial liabilities related to its incorporation) assumed by Revco
and will not transfer to Revco any assets subject to liabilities.
9 Following the Merger, Revco will continue (and CVS will cause Revco
to continue) its historic business or use a significant portion of its
historic business assets in a business.
10 CVS and Merger Subsidiary each will pay its or their own expenses,
if any, incurred in connection with or as part of the Merger or related
transactions. Neither CVS nor Merger Subsidiary has paid or will pay,
directly or indirectly, any expenses (including transfer taxes) incurred by
any holder of Revco Common Stock in connection with or as part of the Merger
or any related transactions. Neither CVS nor Merger Subsidiary has agreed to
assume, nor will it directly or indirectly assume, any expense or other
liability, whether fixed or contingent, of any holder of Revco Common Stock.
11 There is no intercorporate indebtedness existing between CVS and
Revco or between Merger Subsidiary and Revco that was issued, acquired or
will be settled at a discount.
12 All shares of CVS Common Stock into which shares of Revco Common
Stock will be converted pursuant to the Merger will be newly issued or
treasury shares, and will be issued by CVS directly to holders of Revco
Common Stock pursuant to the Merger.
13 In the Merger, shares of Revco Common Stock representing control of
Revco, as defined in Section 368(c) of the Code, will be exchanged solely for
voting stock of CVS. For purposes of this representation, any shares of Revco
Common Stock exchanged for cash or other property will be treated as
outstanding Revco Common Stock at the Effective Time.
14 In the Merger, no liabilities of shareholders of Revco will be
assumed by CVS, and none of the Revco Stock acquired by CVS will be subject to
liabilities. Furthermore, there is no plan or intention for CVS to assume any
liabilities of Revco.
15 Neither CVS nor Merger Subsidiary is an "investment company" within
the meaning of Section 368(a)(2)(F) of the Code.
16 Neither CVS nor Merger Subsidiary is under the jurisdiction of a
court in a Title 11 or similar case within the meaning of Section
368(a)(3)(A) of the Code.
17 The payment of cash in lieu of fractional shares of CVS Common
Stock in the Merger is solely for the purpose of avoiding the expense and
inconvenience to CVS of issuing fractional shares and does not represent
separately bargained-for consideration. The total cash consideration that
will be paid in the Merger to holders of Revco Common Stock instead of
issuing fractional shares of CVS Common Stock will not exceed one percent
of the total consideration that will be issued in the Merger to holders of
Revco Common Stock. The fractional share interests of each holder of Revco
Common Stock will be aggregated and, to the knowledge of the management of
CVS, no holder of Revco Common Stock will receive cash in an amount equal
to or greater than the value of one full share of CVS Common Stock.
18 None of the employee compensation received by any
shareholder-employees of Revco is or will be separate consideration for, or
allocable to, any of their shares of Revco Common Stock to be surrendered
in the Merger. None of the shares of CVS Common Stock received by any
shareholder of Revco is or will be separate consideration for, or allocable
to, any employment, consulting or similar arrangement which may be entered
into between CVS, Merger Subsidiary, Revco, or any affiliate thereof and
such shareholder for services rendered or to be rendered by such
shareholder. Any compensation paid or to be paid to any shareholder of
Revco who will be an employee of or perform advisory services for CVS,
Merger Subsidiary, Revco, or any affiliate thereof after the Merger, will
not be in consideration for stock of Revco.
19 During the past five (5) years, none of CVS or any affiliate
thereof has owned or owns, beneficially or of record, any class of stock of
Revco or any securities of Revco or any instrument giving the holder the
right to acquire any such stock or securities.
20 The Merger is being effected for bona fide business reasons and
will be carried out strictly in accordance with the Agreement, as described
in the Proxy Statement, and none of the material terms and conditions
therein have been or will be waived or modified.
21 The Merger Agreement and the documents described in the Merger
Agreement represent the entire understanding of CVS, Merger Subsidiary, and
Revco with respect to the Merger.
22 Neither CVS nor Merger Subsidiary will take any position on any
Federal, state or local income or franchise tax return, or take any other
tax reporting position, that is inconsistent with the treatment of the
Merger as a reorganization within the meaning of Section 368(a) of the
Code, unless otherwise required by a "determination" (as defined in Section
1313(a)(1) of the Code) or by applicable state or local income or franchise
tax law.
We understand that Cravath, Swaine & Moore as counsel for Revco
will rely on this Certificate in rendering their opinion as to certain United
States Federal income tax consequences of the Merger and we will promptly and
timely inform them if, after signing this Certificate, we have reason to
believe that any of the facts described herein or in the Proxy Statement or
any of the representations made in this Certificate are untrue, incorrect or
incomplete in any respect.
Very truly yours,
CVS CORPORATION
By: _________________________
Title:_______________________
NORTH ACQUISITION CORP.
By: _________________________
Title: ______________________
EXHIBIT E
REVCO D.S., INC. REPRESENTATION LETTER
[Closing Date]
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019
Ladies and Gentlemen:
In connection with the opinions to be delivered pursuant to
Section 6.03(b) of the Agreement and Plan of Merger (the "Agreement")(1) dated
February 6, 1997, among CVS Corporation, a Delaware corporation ("CVS"), North
Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of CVS
("Merger Subsidiary"), and Revco D.S., Inc., a Delaware corporation
("Revco")(2), the undersigned officers of Revco hereby certify and represent
as to Revco that the facts relating to the merger (the "Merger") of Merger
Subsidiary with and into Revco pursuant to the Agreement and as described in
the Joint Proxy Statement/Prospectus of CVS and Revco dated ___________, 19__
(the "Proxy Statement"), are true, correct and complete in all respects at the
date hereof and will be true, correct and complete in all respects at the
Effective Time and that:
1 The aggregate fair market value of the consideration to be
received in the Merger by holders of Revco Common Stock will be
approximately equal to the fair market value of the Revco Common Stock
surrendered in exchange therefor, as determined by arm's length
negotiations between the managements of CVS and Revco. In connection with
the Merger, no holder of Revco Common Stock will receive in exchange for
such stock, directly or indirectly, any consideration other than CVS Common
Stock and cash in lieu of a fractional share thereof.
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(1) References contained in this Certificate to the Agreement include, unless
the context otherwise requires, each document attached as an exhibit or
annex thereto.
(2) Each term capitalized and not defined herein shall have the meaning
ascribed to such term in the Proxy Statement (as defined herein).
2 There is no plan or intention by any of the holders of
Revco Common Stock who own five percent or more of the Revco Common Stock,
and to the knowledge of the management of Revco, there is no plan or
intention on the part of the remaining holders of Revco Common Stock to
sell, exchange, transfer or otherwise dispose of a number of shares of CVS
Common Stock to be received by them in connection with the Merger that
would reduce the Revco shareholders' ownership of CVS Common Stock to a
number of shares having a value, as of the Effective Time, of less than 50
percent of the total value of all of the formerly outstanding stock of
Revco immediately prior to the Effective Time. For purposes of this
representation, shares of Revco Common Stock exchanged for cash or other
property or exchanged for cash in lieu of fractional shares of CVS Common
Stock, are treated as outstanding shares of Revco Common Stock at the
Effective Time. Moreover, shares of Revco Common Stock that are sold,
redeemed or disposed of prior to the Merger and in contemplation or as part
of the Merger, and shares of CVS Common Stock that are received by holders
of Revco Common Stock in connection with the Merger and that are otherwise
sold, redeemed, or disposed of subsequent to the Merger will be taken into
account for purposes of this representation.
3 After the Merger, Revco will hold (i) to the knowledge of
the management of Revco, at least ninety percent (90%) of the fair market
value of the net assets and at least seventy percent (70%) of the fair market
value of the gross assets held by Merger Subsidiary immediately prior to
the Merger and (ii) at least ninety percent (90%) of the fair market value of
the net assets and at least seventy percent (70%) of the fair market value
of the gross assets held by Revco immediately prior to the Merger. For
purposes of this representation, included as assets of Merger Subsidiary or
Revco held immediately prior to the Merger will be amounts paid or incurred
by Merger Subsidiary or Revco in connection with the Merger, including
payments to holders of Revco Common Stock in lieu of fractional shares of
CVS Common Stock, amounts used to pay Revco's reorganization expenses and
all payments, redemptions and distributions made in contemplation or as
part of the Merger. Any dispositions in contemplation or as part of the
Merger of assets held by Revco prior to the Merger will be for full fair
market value.
4 In the Merger, to the knowledge of the management of Revco,
Merger Subsidiary will have no liabilities (other than immaterial
liabilities related to its incorporation) assumed by Revco and will not
transfer to Revco any assets subject to liabilities.
5 No assets of Revco have been sold, transferred or
otherwise disposed of which would prevent CVS from continuing the historic
business of Revco or from using a significant portion of Revco's historic
business assets in a business following the merger.
6 Revco and the holders of Revco Common Stock each will pay
its or their own expenses, if any, incurred in connection with or as part
of the Merger or related transactions. Revco has not paid or will not pay,
directly or indirectly, any expenses (including transfer taxes) incurred by
any holder of Revco Common Stock in connection with or as part of the
Merger or any related transactions. Revco has not agreed to assume, nor
will it directly or indirectly assume, any expense or other liability,
whether fixed or contingent, of any holder of Revco Common Stock.
7 There is no intercorporate indebtedness existing between
CVS and Revco or between Merger Subsidiary and Revco that was issued,
acquired or will be settled at a discount.
8 Revco has no authorized stock other than Revco Common Stock
and preferred stock, par value $0.01 per share. At the date hereof, the
only capital stock of Revco issued and outstanding is Revco Common Stock.
9 In the Merger, shares of Revco Common Stock representing
control of Revco, as defined in Section 368(c) of the Code, will be
exchanged solely for voting stock of CVS. For purposes of this
representation, any shares of Revco Common Stock exchanged for cash or
other property will be treated as outstanding Revco Common Stock at the
Effective Time.
10 There exist no options, warrants, convertible securities or
other rights to acquire Revco stock, other than rights under Revco's
employee stock option plan, Revco's employee stock purchase plan, and
Revco's restricted stock plan, in each case outstanding on the date of the
Agreement.
11 In the Merger, no liabilities of the shareholders of Revco
will be assumed by CVS and none of the Revco stock acquired by CVS will be
subject to liabilities. Furthermore, there is no plan or intention for CVS
to assume any liabilities of Revco.
12 Revco is not an "investment company" within the meaning of
Section 368(a)(2)(F) of the Code.
13 At the Effective Time, the total fair market value of the
assets of Revco exceeds the total liabilities of Revco assumed, including
the amount of any liabilities to which the assets of Revco are subject.
14 Revco is not under the jurisdiction of a court in a Title
11 or similar case within the meaning of Section 368(a)(3)(A) of the Code.
15 The payment of cash in lieu of fractional shares of CVS
Common Stock in the Merger is solely for the purpose of avoiding the
expense and inconvenience to CVS of issuing fractional shares and does not
represent separately bargained-for consideration. The total cash
consideration that will be paid in the Merger to holders of Revco Common
Stock instead of issuing fractional shares of CVS Common Stock will not
exceed one percent of the total consideration that will be issued in the
Merger to holders of Revco Common Stock. The fractional share interests of
each holder of Revco Common Stock will be aggregated and, to the knowledge
of the management of Revco, no holder of Revco Common Stock will receive
cash in an amount equal to or greater than the value of one full share of
CVS Common Stock.
16 None of the employee compensation received by any
shareholder-employees of Revco is or will be separate consideration for, or
allocable to, any of their shares of Revco Common Stock to be surrendered
in the Merger. None of the shares of CVS Common Stock received by any
shareholder of Revco is or will be separate consideration for, or allocable
to, any employment, consulting or similar arrangement which may be entered
into between CVS, Merger Subsidiary, Revco, or any affiliate thereof and
such shareholder for services rendered or to be rendered by such
shareholder. Any compensation paid or to be paid to any shareholder of
Revco who will be an employee of or perform advisory services for CVS,
Merger Subsidiary, Revco, or any affiliate thereof after the Merger, will
not be in consideration for stock of Revco.
17 Except for the possible issuance of Revco Common Stock
pursuant to Revco's employee stock option plans, Revco's employee stock
purchase plan, or Revco's restricted stock plan, Revco will not issue any
additional shares of Revco Common Stock prior to the Merger.
18 No holders of Revco Common Stock have dissenters' rights
with respect to the Merger under applicable laws.
19 Revco has not redeemed any of its stock, made any
distributions with respect to its stock, or disposed of any of its assets
in contemplation or as part of the Merger, excluding for purposes of this
representation regular, normal dividends and common stock acquired in the
ordinary course of business in connection with employee incentive and
benefit programs, or other programs or arrangements in existence on the
date hereof.
20 The Merger is being effected for bona fide business reasons
and will be carried out strictly in accordance with the Agreement, as
described in the Proxy Statement, and none of the material terms and
conditions therein have been or will be waived or modified.
21 The Merger Agreement and the documents described in the
Merger Agreement represent the entire understanding of CVS, Merger
Subsidiary and Revco with respect to the Merger.
22 Revco will not take any position on any Federal, state or
local income or franchise tax return, or take any other tax reporting
position, that is inconsistent with the treatment of the Merger as a
reorganization within the meaning of Section 368(a) of the Code, unless
otherwise required by a "determination" (as defined in Section 1313(a)(1)
of the Code) or by applicable state or local income or franchise tax law.
We understand that Cravath, Swaine & Moore as counsel for Revco
will rely on this Certificate in rendering their opinion as to certain United
States Federal income tax consequences of the Merger and we will promptly and
timely inform them if, after signing this Certificate, we have reason to
believe that any of the facts described herein or in the Proxy Statement or
any of the representations made in this Certificate are untrue, incorrect or
incomplete in any respect.
Very truly yours,
REVCO D.S., INC.
By:______________________
Title:___________________
ANNEX B
[DLJ Letterhead]
February 6, 1997
Board of Directors
CVS Corporation
One CVS Drive
Woonsocket, RI 02895
Dear Sirs:
You have requested our opinion as to the fairness from a
financial point of view to the stockholders of CVS Corporation (the "Company")
of the Conversion Number (as defined below) pursuant to the terms of the
Agreement and Plan of Merger dated as of February 6, 1997 (the "Agreement"),
among the Company, Revco D.S., Inc. ("Revco") and North Acquisition Corp.
("Merger Subsidiary"), a wholly-owned subsidiary of CVS, pursuant to which
Merger Subsidiary will be merged (the "Merger") with and into Revco.
Pursuant to the Agreement, each share of common stock, par
value $.01 per share of Revco (the "Revco Common Stock") will be converted
into the right to receive, subject to certain exceptions, a number of shares
of common stock, par value $0.01 per share of the Company (the "CVS Common
Stock") as set forth in the Agreement (the "Conversion Number"). The
Agreement provides that in no event shall the Conversion Number exceed 1.0097
or be less than 0.8837.
In arriving at our opinion, we have reviewed the draft dated
February 4, 1997 of the Agreement, including exhibits thereto, as well as
financial and other information that was publicly available or furnished to us
by the Company and Revco including information provided during discussions
with their respective managements. Included in the information provided
during discussions with the respective managements were certain internal
financial analyses and forecasts for the Company and Revco prepared by their
respective managements. In addition, we have compared certain financial and
securities data of the Company and Revco with various other companies whose
securities are traded in public markets, reviewed the historical stock prices
and trading volumes of the Revco Common Stock and CVS Common Stock, reviewed
prices and premiums paid in certain other business combinations and conducted
such other financial studies, analyses and investigations as we deemed
appropriate for purposes of this opinion.
In rendering our opinion, we have relied upon and assumed the
accuracy and completeness of all of the financial and other information that
was available to us from public sources, that was provided to us by the
Company and Revco or their respective representatives, or that was otherwise
reviewed by us. In particular, we have relied upon the estimates of the
management of the Company of the cost savings and operating synergies
achievable as a result of the Merger. With respect to the financial analysis
and forecasts supplied to us, we have assumed that they have been reasonably
prepared on the basis reflecting the best currently available estimates and
judgments of the management of the Company and Revco as to the future
operating and financial performance of the Company and Revco. We have not
assumed any responsibility for making any independent verification of any of
the information reviewed by us. We have relied as to all legal matters on
advice of counsel to the Company.
Our opinion is necessarily based on economic, market, financial
and other conditions as they exist on, and on the information made available
to us as of, the date of this letter. It should be understood that, although
subsequent developments may affect this opinion, we do not have any obligation
to update, revise or reaffirm this opinion. We are expressing no opinion
herein as to the prices at which the CVS Common Stock will trade at any time.
Our opinion does not constitute a recommendation to any stockholder of the
Company as to how such stockholder should vote on the proposed transaction.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as
part of its investment banking services, is regularly engaged in the valuation
of businesses and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes.
DLJ has performed investment banking and other services for both the Company
and Revco in the past and has been compensated for such services. Over the
past two years, DLJ has co-managed a $201.5 million initial public offering
for the Company's former subsidiary, Linens 'n Things, for which it received
usual and customary compensation.
Based upon the foregoing and other factors as we deem relevant,
we are of the opinion that the Conversion Number is fair to the holders of CVS
Common Stock from a financial point of view.
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
ANNEX C
[Wasserstein Perella Letterhead]
February 10, 1997
Board of Directors
Revco D.S., Inc.
1925 Enterprise Parkway
Twinsburg, Ohio 44037
Members of the Board:
You have asked us for our opinion as to the fairness, from a
financial point of view, to the holders of the common stock, par value $.01
per share (the "Shares") of Revco D.S., Inc. (the "Company") of the Exchange
Ratio (as defined below) to be received by such holders pursuant to the terms
of the Agreement and Plan of Merger, dated as of February 10, 1997 (the
"Merger Agreement"), among the Company, CVS Corporation ("Parent"), and North
Acquisition Corp., a wholly-owned subsidiary of Parent ("Sub"). The Merger
Agreement provides for, among other things, a merger (the "Merger") of Sub
with and into the Company pursuant to which each outstanding Share will be
converted into the right to receive:
(x) 0.4692 shares (the "Fixed Number") of fully paid
and non-assessable common stock, par value $0.01 per share, of Parent (the
"Parent Common Stock"); and
(y) that number (the "Calculated Number") of shares
(or fraction of a share) of fully paid and non-assessable Parent Common
Stock (rounded to the nearest ten-thousandth) determined by dividing $20 by
the Parent Average Closing Price (as defined in the Merger Agreement);
provided that the Calculated Number shall not exceed 0.5405 and shall not
be less than 0.4145.
As used herein, the ratio of the Fixed Number plus the
Calculated Number for each Share as determined in accordance with the Merger
Agreement is referred to as the "Exchange Ratio." The terms and conditions of
the Merger are set forth in more detail in the Merger Agreement.
In connection with rendering our opinion, we have reviewed the
Merger Agreement, the form presented to us on or prior to the date hereof as
the execution form of the Stockholder Agreement between Parent and
Zell/Chilmark Fund L.P. and the form presented to us on or prior to the date
hereof as the execution form of the Registration Rights Agreement between
Parent and Holders (as defined therein). We have also reviewed and analyzed
certain publicly available business and financial information relating to the
Company and Parent for recent years and interim periods to date, as well as
certain internal financial and operating information, including financial
forecasts, analyses and projections prepared by or on behalf of the Company
and Parent and provided to us for purposes of our analysis, and we have met
with management of the Company and Parent to review and discuss such
information and, among other matters, the respective businesses, operations,
assets, financial conditions and future prospects of the Company and Parent.
We were not, however, provided with detailed store-by-store financial
information for Parent.
We have reviewed and considered certain financial and stock
market data relating to the Company and Parent, and we have compared that data
with similar data for certain other companies, the securities of which are
publicly traded, that we believe may be relevant or comparable in certain
respects to the Company or Parent or both or one or more of their businesses
or assets, and we have reviewed and considered the financial terms of certain
recent acquisitions and business combination transactions in the chain drug
store industry specifically, and in other industries generally, which we
believe to be relevant to our inquiry. We have also performed such other
studies, analyses, and investigations and reviewed such other information as
we considered appropriate.
In our review and analysis and in formulating our opinion,
we have assumed and relied upon the accuracy and completeness of all the
financial and other information provided to or discussed with us or
publicly available, and we have not assumed any responsibility for
independent verification of any of such information. We have also relied
upon the reasonableness and accuracy of the financial projections,
forecasts and analyses provided to us and we have assumed that the
financial projections, forecasts and analyses provided to us were
reasonably prepared in good faith and on bases reflecting the best
currently available judgments and estimates of the Company's management and
Parent's management, as appropriate. We express no opinion with respect to
such projections, forecasts and analyses or the assumptions upon which they
are based. In addition, we have not reviewed any of the books and records
of the Company or Parent, except as described above, or assumed any
responsibility for conducting a physical inspection of the properties or
facilities of the Company or Parent, or for making or obtaining an
independent valuation or appraisal of the assets or liabilities of the
Company or Parent, and no such independent valuation or appraisal was
provided to us. We note that the Merger is intended to qualify (i) for
pooling-of-interests accounting treatment in accordance with generally
accepted accounting principles and (ii) as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended
(a "Reorganization"). We have assumed that the Merger will qualify as a
Reorganization. We have assumed that the transactions described in the
Merger Agreement will be consummated on the terms set forth therein,
without material waiver or modification. Our opinion is necessarily based
on economic and market conditions and other circumstances as they exist and
can be evaluated by us as of the date hereof. In rendering this opinion,
we are not expressing any opinion as to the price at which the shares of
Parent Common Stock will actually trade at any time.
We have acted as financial advisor to the Company in
connection with the transaction described in this letter and we will be
paid a fee for our services, a substantial portion of which will be paid at
closing. In addition, we have performed various investment banking
services for the Company in the past and have received customary fees for
the rendering of such services. In the ordinary course of our business, we
may actively trade the debt and equity securities of the Company and the
Parent for our own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such
securities.
It is understood that this letter is for the benefit and use of
the Board of Directors of the Company in its consideration of the Merger and
except for inclusion in its entirety in a proxy statement relating to the
Merger, may not be used for any other purpose or reproduced, disseminated,
quoted or referred to at any time, in any manner or for any purpose without
our prior written consent. This opinion does not constitute a recommendation
to any shareholder with respect to how such holder should vote with respect to
the Merger.
Based upon and subject to the foregoing, including the various
assumptions and limitations set forth herein, it is our opinion that as of the
date hereof the Exchange Ratio is fair to the stockholders of the Company from
a financial point of view.
Very truly yours,
WASSERSTEIN & PERELLA CO.,
INC.
ANNEX D
[Salomon Letterhead]
February 6, 1997
Board of Directors
Revco D.S., Inc.
1925 Enterprise Parkway
Twinsburg, Ohio 44087
Members of the Board:
You have requested our opinion as investment bankers as to the
fairness, from a financial point of view, to the holders of common stock, par
value $.01 per share (the "Common Stock"), of Revco D.S., Inc. (the "Company")
of the Exchange Ratio (as defined below) pursuant to the Agreement and Plan of
Merger among CVS Corporation ("CVS"), North Acquisition Corp., a wholly owned
subsidiary of CVS ("Merger Sub"), and the Company (the "Merger Agreement").
The Merger Agreement provides for, among other things, the merger of Merger
Sub with and into the Company, pursuant to which each issued and outstanding
share of Common Stock not owned directly or indirectly by CVS or any
subsidiary of CVS or the Company will be converted into the right to
receive: (i) 0.4692 shares (the "Fixed Exchange Ratio") of fully paid and
non-assessable common stock, par value $0.01 per share, of CVS (the "CVS
Common Stock"); and (ii) that number (the "Calculated Exchange Ratio") of
shares (or fraction of a share) of fully paid and non-assessable CVS Common
Stock (rounded to the nearest ten-thousandth) determined by dividing $20 by
the CVS Average Closing Price (as defined in the Merger Agreement);
provided that the Calculated Exchange Ratio shall not exceed 0.5405 and
shall not be less than 0.4145. We understand that the Merger Agreement
provides that cash will be received in lieu of fractional shares of CVS
Common Stock. The sum of the Fixed Exchange Ratio plus the Calculated
Exchange Ratio for each share of Common Stock is referred to herein as the
"Exchange Ratio."
We understand that the Merger is intended to qualify as a
reorganization within the meaning of Section 368 of the Internal Revenue Code
of 1986, as amended (a "Reorganization"). The terms and conditions of the
Merger are set forth in more detail in the Merger Agreement.
In connection with rendering our opinion, we have, among other
things: (i) reviewed the February 3, 1997 draft of the Merger Agreement,
including the exhibits thereto and certain documents referred to therein, in
the form provided to us and have assumed that the final form of such agreement
will not vary in any respect that is material to our analysis; (ii) reviewed
certain publicly available information concerning the Company, including the
Annual Reports on Form 10-K of the Company for each of the fiscal years in the
three-year period ended June 1, 1996, the Quarterly Reports on Form 10-Q of
the Company for the fiscal quarters ended August 24, 1996 and November 16,
1996 and the Current Reports on Form 8-K of the Company dated September 9,
1996, October 28, 1996 and November 15, 1996; (iii) reviewed certain publicly
available information concerning CVS, including the Annual Reports on Form
10-K of CVS for each of the fiscal years in the three-year period ended
December 31, 1995, the Quarterly Reports on Form 10-Q of CVS for the fiscal
quarters ended May 13, 1996, June 29, 1996 and September 28, 1996 and the
Current Reports on Form 8-K of CVS dated May 5, 1996, June 3, 1996, September
24, 1996, October 12, 1996 and December 2, 1996; (iv) reviewed certain
publicly available information concerning the industry in which the Company
and CVS operate; (v) reviewed and analyzed certain financial forecasts and
other non-public financial and operating data concerning the businesses and
operations of the Company and CVS that were provided to or reviewed for us by
managements of the Company and CVS, respectively; (vi) reviewed certain
publicly available information with respect to certain other companies that we
believe to be comparable in certain respects to the Company and CVS and the
trading markets for such other companies' securities; (vii) reviewed and
analyzed certain publicly available and other information concerning the
trading of, and the trading market for, the Company's common stock and CVS's
common stock; (viii) reviewed the financial terms of certain recent business
combinations and acquisition transactions we deem reasonably comparable to the
Merger and otherwise relevant to our inquiry; (ix) analyzed certain
information concerning cost savings and combination benefits expected to
result from the Merger that was provided to or reviewed for us by the
managements of the Company and CVS; and (x) considered such other
information, financial studies, analyses, investigations and financial,
economic, market and trading criteria as we deemed relevant to our inquiry.
We have also discussed with certain officers and employees of the Company
and CVS the foregoing, including the past and current business operations,
financial condition and prospects of the Company and CVS, respectively, as
well as other matters we believe relevant to our inquiry. However, it
should be noted that, within the context of our current engagement by the
Company, we have not been authorized to and have not solicited alternative
offers for the Company or its assets, or investigated any other alternative
transactions which may be available to the Company.
In our review and analysis and in arriving at our opinion, we
have assumed and relied upon the accuracy and completeness of all of the
financial and other information provided to, discussed with, or reviewed by or
for us or publicly available and have neither attempted independently to
verify nor assumed responsibility for verifying any of such information. With
respect to the Company's and CVS's financial projections, as well as the
information concerning cost savings and combination benefits provided to or
reviewed for us by the managements of the Company and CVS, we have assumed
that they have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the Company's or CVS's, as the case may
be, management as to the future financial performance of the Company or CVS,
as the case may be, and as to the cost savings and combination benefits
expected to result from the Merger. We have not made or obtained or assumed
any responsibility for making or obtaining any independent evaluations or
appraisals of any of the assets (including properties and facilities) or
liabilities of the Company or CVS. We have assumed that the Merger will
qualify as a Reorganization.
Our opinion necessarily is based upon conditions as they exist
and can be evaluated on the date hereof, and we assume no responsibility to
update or revise our opinion based upon circumstances or events occurring
after the date hereof. Our opinion does not address the Company's underlying
business decision to effect the Merger or constitute a recommendation to any
holder of common stock of the Company as to how such holder should vote with
respect to the Merger. Our opinion as expressed below does not imply any
conclusion as to the likely trading range for the common stock of CVS
following the consummation of the Merger, which may vary depending upon, among
other factors, changes in interest rates, dividend rates, market conditions,
general economic conditions and other factors that generally influence the
price of securities.
For purposes of rendering our opinion, we have assumed, in all
respects material to our analysis, that the representations and warranties of
each party contained in the Merger Agreement are true and correct, that each
party will perform all of the covenants and agreements required to be
performed by it under the Merger Agreement and that all conditions to the
consummation of the Merger will be satisfied without waiver thereof. We have
also assumed that all material governmental, regulatory or other consents and
approvals will be obtained and that in the course of obtaining any necessary
governmental, regulatory or other consents and approvals, or any amendments,
modifications or waivers to any documents to which either the Company or CVS
is a party, as contemplated by the Merger Agreement, no restrictions will be
imposed or amendments, modifications or waivers made that would have any
material adverse effect on the contemplated benefits of the Merger.
As you are aware, we have acted as the financial advisor to the
Company in connection with the Merger and will receive fees from the Company
for our services, a portion of which is contingent upon consummation of the
Merger. Additionally, we have rendered certain investment banking and
financial advisory services to the Company in the past for which we have been
paid customary fees. In addition, in the ordinary course of our business, we
or our affiliates may actively trade the securities of the Company and CVS for
our own account and for the accounts of customers and, accordingly, may at any
time hold a long or short position in such securities.
This letter, and our opinion expressed herein, is not to be
quoted, summarized or referred to, in whole or in part, without our prior
written consent. Notwithstanding the foregoing, this opinion may be included
in its entirety or, with our prior review and consent, referred to in any
registration statement or proxy statement sent to the stockholders of the
Company and CVS with respect to the Merger.
Based upon and subject to the foregoing, we are of the opinion
that, as of the date hereof, the Exchange Ratio is fair, from a financial
point of view, to the holders of the Common Stock.
Very truly yours,
SALOMON BROTHERS INC
ANNEX E
STOCKHOLDER AGREEMENT
AGREEMENT dated as of February 6, 1997 between CVS Corporation,
a Delaware corporation ("CVS"), and Zell/Chilmark Fund, L.P., a Delaware
limited partnership (the "Stockholder").
W I T N E S S E T H:
WHEREAS, immediately prior to the execution of this Agreement,
CVS, Revco D.S., Inc., a Delaware corporation (the "Company"), and North
Acquisition Corp., a Delaware corporation ("Merger Subsidiary"), have entered
into an Agreement and Plan of Merger (as such agreement may hereafter be
amended from time to time, the "Merger Agreement"), pursuant to which Merger
Subsidiary will be merged with and into the Company (the "Merger"); and
WHEREAS, as an inducement and a condition to entering into the
Merger Agreement, CVS has requested that the Stockholder agree, and the
Stockholder has agreed, to enter into this Agreement;
NOW, THEREFORE, in consideration of the foregoing and the mutual
promises, representations, warranties, covenants and agreements contained
herein, the parties hereto, intending to be legally bound hereby, agree as
follows:
Section 1. Certain Definitions. Capitalized terms used and not
defined herein have the respective meanings ascribed to them in the Merger
Agreement. For purposes of this Agreement:
(a) "Affiliate" shall mean, when used with respect to any Person,
any other Person directly or indirectly controlling, controlled by or under
common control with such Person. As used in this definition, the term
"control" means possession, directly or indirectly, of the power to direct or
control the direction of management or policies of a Person, whether through
the ownership of voting securities, by contract or otherwise. Notwithstanding
the foregoing, "Affiliate" when used with respect to the Stockholder shall
exclude any entity that would otherwise be an Affiliate hereunder but that is
not 100% Beneficially Owned by Samuel Zell.
(b) "Beneficially Own" or "Beneficial Ownership" with respect to
any securities shall mean having "beneficial ownership" of such securities (as
determined pursuant to Rule 13d-3 under the Securities Exchange Act of 1934,
as amended (the "Exchange Act")), including pursuant to any agreement,
arrangement or understanding, whether or not in writing. Without duplicative
counting of the same securities by the same holder, securities Beneficially
Owned by a Person shall include securities Beneficially Owned by all other
Persons with whom such Person would constitute a "group" within the meaning of
Section 13(d) of the Exchange Act with respect to securities of the same
issuer.
(c) "Company Common Stock" shall mean at any time the common
stock, $.01 par value, of the Company.
(d) "Existing Shares" shall mean the shares of Company Common
Stock Beneficially Owned by the Stockholder on the date hereof.
(e) "Shares" shall mean the Existing Shares and any shares of
Company Common Stock and/or other equity securities of the Company acquired by
the Stockholder in any capacity after the date hereof and prior to the
termination of this Agreement, whether upon the exercise of options, warrants
or rights, the conversion or exchange of convertible or exchangeable
securities, or by means of purchase, dividend, distribution, split-up,
recapitalization, combination, exchange of shares or the like, gift, bequest,
inheritance or as a successor in interest in any capacity or otherwise
Beneficially Owned by the Stockholder.
Section 2. Voting of Company Common Stock. The Stockholder
hereby agrees that at any meeting (whether annual or special and whether or
not an adjourned or postponed meeting) of the holders of Company Common Stock,
however called, or in connection with any written consent of the holders of
Company Common Stock, the Stockholder will appear at the meeting or otherwise
cause the Shares to be counted as present thereat for purposes of establishing
a quorum and the Stockholder shall vote or consent (or cause to be voted or
consented) the Shares held of record or Beneficially Owned by the Stockholder
in favor of the Merger, the execution and delivery by the Company 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 this Agreement
and any actions required in furtherance thereof and hereof.
Section 3. Covenants, Representations and Warranties of the
Stockholder. The Stockholder hereby represents and warrants to, and agrees
with, CVS as follows:
(a) Ownership of Shares. The Stockholder is the record and
Beneficial Owner of Existing Shares consisting of 13,102,288 shares of Company
Common Stock. On the date hereof, the Existing Shares constitute all of the
Shares owned of record or Beneficially Owned by the Stockholder. The
Stockholder has sole voting power (except as provided in the Stockholder's
Agreement dated as of June 1, 1992, by and between Revco and the Stockholder
(the "Revco Stockholder Agreement")) and sole power to issue instructions with
respect to the matters set forth in Section 2 hereof, sole power of
disposition (except as provided in the Agreement of Limited Partnership of
Zell/Chilmark Fund, L.P. (the "Zell Fund Agreement")), sole power of
conversion, sole power to demand appraisal rights and sole power to agree to
all of the matters set forth in this Agreement, in each case with respect to
all of the Existing Shares with no limitations, qualifications or restrictions
on such rights, subject to applicable securities laws and the terms of this
Agreement. Upon consummation of the Merger, the Stockholder will have sole
voting power (except as provided in the Revco Stockholder Agreement) and sole
power to issue instructions with respect to the matters set forth in Section 4
hereof, sole power of disposition (except as provided in the Zell Fund
Agreement), sole power of conversion, sole power to demand appraisal rights
and sole power to agree to all of the matters set forth in this Agreement, in
each case with respect to all of the shares of CVS Common Stock it holds of
record or Beneficially Owns with no limitations, qualifications or
restrictions on such rights, subject to applicable securities laws and the
terms of this Agreement.
(b) Corporate Authorization. This Agreement has been duly and
validly executed and delivered by the Stockholder and constitutes a valid and
binding agreement enforceable against the Stockholder in accordance with its
terms except to the extent (i) such enforcement may be limited by applicable
bankruptcy, insolvency or similar laws affecting creditors rights and (ii) the
remedy of specific performance and injunctive and other forms of equitable
relief may be subject to equitable defenses and to the discretion of the court
before which any proceeding therefor may be brought.
(c) No Conflicts. Except for filings, authorizations, consents and
approvals as may be required under the HSR Act, the 1934 Act and the 1933 Act,
(i) no filing with, and no permit, authorization, consent or approval of, any
state or federal governmental body or authority is necessary for the execution
and delivery of this Agreement by the Stockholder and the consummation by the
Stockholder of the transactions contemplated hereby and (ii) none of the
execution and delivery of this Agreement by the Stockholder, the consummation
by the Stockholder of the transactions contemplated hereby or compliance by
the Stockholder with any of the provisions hereof shall (A) conflict with or
result in any breach of the organizational documents of the Stockholder, (B)
result in a violation or breach of, or constitute (with or without notice or
lapse of time or both) a default (or give rise to any third party right of
termination, cancellation, material modification or acceleration) under any of
the terms, conditions or provisions of any note, loan agreement, bond,
mortgage, indenture, license, contract, commitment, arrangement,
understanding, agreement or other instrument or obligation of any kind to
which the Stockholder is a party or by which the Stockholder or any of its
properties or assets may be bound, or (C) violate any order, writ, injunction,
decree, judgment, statute, law, rule or regulation applicable to the
Stockholder or any of its properties or assets.
(d) No Encumbrances. Other than as provided in the Revco
Stockholder Agreement as to voting of the Shares and in the Zell Fund
Agreement as to provisions relating to timing of disposition of the Shares by
the Stockholder, and except as applicable in connection with the transactions
contemplated hereby, the Shares and the certificates representing such Shares
are now, and at all times during the term hereof, will be, held by the
Stockholder, or by a nominee or custodian for the benefit of the Stockholder,
free and clear of all liens, claims, security interests, proxies, voting
trusts or agreements, understandings or arrangements or any other encumbrances
whatsoever, except for any such encumbrances or proxies arising hereunder.
(e) No Finder's Fees. Other than as contemplated by the Merger
Agreement with respect to fees payable by the Company, no broker, investment
banker, financial advisor or other Person is entitled to any broker's,
finder's, financial adviser's or other similar fee or commission in connection
with the transactions contemplated hereby based upon arrangements made by or
on behalf of the Stockholder.
(f) No Solicitation. The Stockholder shall not, and shall cause
its Affiliates and officers, directors, employees, investment bankers,
consultants and other agents of the Stockholder and such Affiliates (such
Affiliates, officers, directors, employees, investment bankers, consultants
and other agents of any Person are hereinafter collectively referred to as the
"Representatives" of such Person) not to, directly or indirectly (i) take any
action to initiate, solicit, encourage or facilitate the making of any
Acquisition Proposal or any inquiry with respect thereto, or engage in
discussions or negotiations with any Person (other than CVS or any of its
Affiliates or Representatives) relating to any Acquisition Proposal or
disclose any non-public information relating to Revco or any Subsidiary of
Revco or afford access to the properties, books or records of Revco or any
Subsidiary of Revco to, any Person that has made any Acquisition Proposal. The
Stockholder shall notify CVS orally and in writing of any offers, proposals or
inquiries received by the Stockholder relating to the purchase or acquisition
by any Person of the Shares and of any Acquisition Proposal actually known to
the Stockholder (including in each case the material terms and conditions
thereof and the identity of the Person making it), within 24 hours of the
receipt thereof. The Stockholder shall, and shall cause its Representatives
to, immediately cease and cause to be terminated any and all existing
activities, discussions or negotiations, if any, with any parties conducted
heretofore with respect to any Acquisition Proposal, other than discussions or
negotiations with CVS and its Affiliates. For purposes of the foregoing,
Representatives of the Stockholder will not include investment bankers or
consultants that approach or contact the Stockholder, the Company or any other
Person, without having been solicited by the Stockholder, regarding such an
offer, proposal or inquiry so long as the Stockholder does not thereafter
encourage or retain such investment bankers or consultants to pursue such
offer, proposal or inquiry. Notwithstanding the restrictions set forth in
this Section 3(f), each of the Company and any Person who is an officer or
director of the Company may take any action consistent with the terms of the
Merger Agreement.
(g) Restriction on Transfer, Proxies; Non-Interference. The
Stockholder shall not, directly or indirectly: (i) offer for sale, sell,
transfer, tender, pledge, encumber (other than by operation of law), assign or
otherwise dispose of, or enter into any contract, option or other arrangement
or understanding with respect to or consent to the offer for sale, sale,
transfer, tender, pledge, encumbrance, assignment or other disposition of, any
or all of the Shares or any interest therein; (ii) except as contemplated by
this Agreement, grant any proxies or powers of attorney, deposit the Shares
into a voting trust or enter into a voting agreement with respect to the
Shares; or (iii) take any action that would make any representation or
warranty of the Stockholder contained herein untrue or incorrect or would
result in a breach by the Stockholder of its obligations under this Agreement
or a breach by the Company of its obligations under the Merger Agreement or
the effect of which would be inconsistent or violative of any provision or
agreement contained in this Agreement.
(h) Reliance by CVS. The Stockholder understands and acknowledges
that CVS is entering into the Merger Agreement in reliance upon the
Stockholder's execution and delivery of this Agreement.
Section 4. Representations and Warranties of CVS. CVS hereby
represents and warrants to the Stockholder as follows:
(a) Organization. CVS is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware, has all
requisite corporate power and authority to execute and deliver this Agreement
and perform its obligations hereunder. The execution and delivery by CVS of
this Agreement and the performance by CVS of its obligations hereunder have
been duly and validly authorized by the Board of Directors of CVS and no other
corporate proceedings on the part of CVS are necessary to authorize the
execution, delivery or performance of this Agreement or the consummation of
the transactions contemplated hereby.
(b) Corporate Authorization. This Agreement has been duly and
validly executed and delivered by CVS and constitutes a valid and binding
agreement of CVS enforceable against CVS in accordance with its terms except
to the extent (i) such enforcement may be limited by applicable bankruptcy,
insolvency or similar laws affecting creditors rights and (ii) the remedy of
specific performance and injunctive and other forms of equitable relief may be
subject to equitable defenses and to the discretion of the court before which
any proceeding therefor may be brought.
(c) No Conflicts. Except for filings, authorizations, consents and
approvals as may be required under the HSR Act, the 1934 Act and the 1933 Act,
(i) no filing with, and no permit, authorization, consent or approval of, any
state or federal governmental body or authority is necessary for the execution
and delivery of this Agreement by CVS and the consummation by CVS of the
transactions contemplated hereby and (ii) none of the execution and delivery
of this Agreement by CVS, the consummation by CVS of the transactions
contemplated hereby or compliance by CVS with any of the provisions hereof
shall (A) conflict with or result in any breach of the certificate of
incorporation or by-laws of CVS, (B) result in a violation or breach of, or
constitute (with or without notice or lapse of time or both) a default (or
give rise to any third party right of termination, cancellation, material
modification or acceleration) under any of the terms, conditions or provisions
of any note, loan agreement, bond, mortgage, indenture, license, contract,
commitment, arrangement, understanding, agreement or other instrument or
obligation of any kind to which CVS is a party or its properties or assets may
be bound, or (C) violate any order, writ, injunction, decree, judgment,
statute, law, rule or regulation applicable to CVS or any of its properties or
assets.
(d) No Finder's Fee. Except for Donaldson, Lufkin & Jenrette
Securities Corporation and CS First Boston Corporation whose fees will be paid
by CVS, no broker, investment banker, financial adviser or other Person is
entitled to any broker's, finder's, financial adviser's or other similar fee or
commission in connection with the transactions contemplated hereby based upon
arrangements made by or on behalf of CVS.
Section 5. Stop Transfer; Legend. (a) The Stockholder agrees
with, and covenants to, CVS that the Stockholder shall not request that the
Company register the transfer (book-entry or otherwise) of any certificate or
uncertificated interest representing any of the Shares unless such transfer is
made in compliance with this Agreement.
(b) In the event of a stock dividend or distribution, or any
change in the Company Common Stock by reason of any stock dividend, split-up,
recapitalization, combination, exchange of shares or the like other than
pursuant to the Merger, the term "Shares" shall be deemed to refer to and
include the shares of Company Common Stock as well as all such stock dividends
and distributions and any shares into which or for which any or all of the
Shares may be changed or exchanged and appropriate adjustments shall be made
to the terms and provisions of this Agreement.
(c) The Stockholder will, prior to the Effective Time, duly execute
and deliver to CVS the Affiliate's letter contemplated in Section 5.11 of the
Merger Agreement substantially in the form of Exhibit C-3 to the Merger
Agreement.
(d) The Stockholder shall promptly after the date hereof surrender
to the Company all certificates representing the Shares, and the Company shall
place the following legend on such certificates:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT
TO A STOCKHOLDER AGREEMENT DATED AS OF FEBRUARY 6, 1997 BY
AND BETWEEN CVS CORPORATION AND ZELL/CHILMARK FUND, L.P.
WHICH AMONG OTHER THINGS RESTRICTS THE TRANSFER AND VOTING
THEREOF."
Section 6. Termination. The provisions of this Agreement shall
terminate upon the earlier to occur of (i) the Effective Time and (ii) the
termination of the Merger Agreement in accordance with its terms.
Section 7. Confidentiality. The Stockholder recognizes that
successful consummation of the transactions contemplated by this Agreement may
be dependent upon confidentiality with respect to the matters referred to
herein. In this connection, pending public disclosure thereof, the Stockholder
hereby agrees not to disclose or discuss such matters with anyone not a party
to this Agreement (other than to the Company and to its and the Company's
counsel and advisors) without the prior written consent of CVS, except for
filings required pursuant to the Exchange Act and the rules and regulations
thereunder or disclosures its counsel advises are necessary in order to
fulfill its obligations imposed by law, in which event the Stockholder shall
give prior notice of such disclosure to CVS as promptly as practicable so as
to enable CVS to seek a protective order from a court of competent
jurisdiction with respect thereto.
Section 8. Disclosure. (a) The Stockholder hereby agrees to
permit CVS to publish and disclose in the Form S-4 and the CVS Proxy Statement
(including all documents, exhibits and schedules filed with the SEC), and any
press release or other disclosure document which CVS's counsel advises are
necessary or desirable in connection with the Merger and any transactions
related thereto, the Stockholder's identity and ownership of Company Common
Stock or shares of CVS Common Stock, as the case may be, and the nature of its
commitments, arrangements and understandings under this Agreement.
(b) The Stockholder hereby agrees to permit Revco to publish and
disclose in the Revco Proxy Statement (including all documents, exhibits and
schedules filed with the SEC), and any press release or other disclosure
document which Revco, in its sole discretion, determines to be necessary or
desirable in connection with the Merger and any transactions related thereto,
the Stockholder's identity and ownership of Company Common Stock or shares of
CVS Common Stock, as the case may be, and the nature of its commitments,
arrangements and understandings under this Agreement.
Section 9. Miscellaneous. (a) Entire Agreement. This
Agreement, the Merger Agreement and the Registration Rights Agreement referred
to therein constitute the entire agreement between the parties with respect to
the subject matter hereof and thereof and supersedes all other prior agreements
and understandings, both written and oral, between the parties with respect to
the subject matter hereof and thereof.
(b) Binding Agreement. The Stockholder agrees that this Agreement
and the obligations hereunder shall attach to the Shares and shall be binding
upon any Person to which legal or Beneficial Ownership of such Shares shall
pass, whether by operation of law or otherwise, including, without limitation,
the Stockholder's heirs, distributees, guardians, administrators, executors,
legal representatives, or successors, partners or other transferees (for value
or otherwise) and any other successors in interest. Notwithstanding any
transfer of Shares, the transferor shall remain liable for the performance of
all obligations under this Agreement of the transferor. Nothing in this
clause (b) shall permit any transfer of Shares otherwise prohibited by the
provisions of this Agreement.
(c) Assignment. No party may assign any of its rights or
obligations hereunder, by operation of law or otherwise, without the prior
written consent of the other party; provided that CVS may assign, in its sole
discretion, its rights and obligations hereunder to any direct or indirect
wholly owned subsidiary of CVS, but no such assignment shall relieve CVS of
its obligations hereunder if such assignee does not perform such obligations.
(d) Amendments, Waivers, Etc. This Agreement may not be amended,
changed, supplemented, waived or otherwise modified or terminated, except upon
the execution and delivery of a written agreement executed by the parties
hereto.
(e) Notices. All notices, requests, claims, demands and other
communications 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:
If to Stockholder: Zell/Chilmark Fund, L.P.
Two CVS Riverside Plaza
Suite 1500
Chicago, Illinois 60606
Attention: Sheli Z. Rosenberg
Telephone No.: (312) 984-9711
Telecopy No.: (312) 984-0317
with a copy to: Rosenberg & Liebentritt
2 North Riverside Plaza
Suite 1601
Chicago, Illinois 60606
Attention: Alisa Singer
Telephone No.: (312) 454-0335
Telecopy No.: (312) 466-3196
If to CVS: CVS Corporation
One CVS Drive
Woonsocket, RI 02895
Attention: Thomas M. Ryan
Telephone: 401-765-1500
Telecopy No.: 401-765-4128
with a copy to: Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Attention: Dennis S. Hersch
Telephone No.: (212) 450-4545
Telecopy No.: (212) 450-5744
or to such other address as the Person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above.
(f) Severability. Whenever possible, each provision or portion of
any provision of this Agreement will be interpreted in such manner as to be
effective and valid under applicable law but if any provision or portion of any
provision of this Agreement is held to be invalid, illegal or unenforceable in
any respect under any applicable law or rule in any jurisdiction, such
invalidity, illegality or unenforceability will not affect any other provision
or portion of any provision in such jurisdiction, and this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision or portion of any provision had near been
contained herein.
(g) 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 party to sustain damages for which it
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 the
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.
(h) Remedies Cumulative. All rights, powers and remedies provided
under this Agreement or otherwise available in respect hereof at law or in
equity shall be cumulative and not alternative, and the exercise of any thereof
by any party shall not preclude the simultaneous or later exercise of any other
such right, power or remedy by such party.
(i) No Waiver. The failure of any party hereto to exercise any
right, power or remedy provided under this Agreement or otherwise available in
respect hereof at law or in equity, or to insist upon compliance by any other
party hereto with its obligations hereunder, and any custom or practice of the
parties at variance with the terms hereof, shall not constitute a waiver by
such party of its right to exercise any such or other right, power or remedy
or to demand such compliance.
(j) No Third Party Beneficiaries. Except for Section 8(b) hereof,
this Agreement is not intended to be for the benefit of, and shall not be
enforceable by, any Person who or which is not a party hereto.
(k) Governing Law. This Agreement shall be governed and construed
in accordance with the laws of the State of Delaware, without giving effect to
the principles of conflicts of law thereof.
(l) Jurisdiction. Each party hereby irrevocably submits to the
exclusive jurisdiction of the Court of Chancery in the State of Delaware in any
action, suit or proceeding arising in connection with this Agreement, and
agrees that any such action, suit or proceeding shall be brought only in such
court (and waives any objection based on forum non conveniens or any other
objection to venue therein); provided, however, that such consent to
jurisdiction is solely for the purpose referred to in this Section 9(l) and
shall not be deemed to be a general submission to the jurisdiction of said
Court or in the State of Delaware other than for such purposes. Each party
hereto hereby waives any right to a trial by jury in connection with any such
action, suit or proceeding.
(m) Further Assurances. From time to time, at the other party's
request and without further consideration, each party hereto shall execute and
deliver such additional documents and take all such further lawful action as
may be necessary or desirable to consummate and make effective, in the most
expeditious manner practicable, the transactions contemplated by this
Agreement.
(n) Descriptive Headings. The descriptive headings used herein are
inserted for convenience of reference only and are not intended to be part of
or to affect the meaning or interpretation of this Agreement.
(o) Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed to be an original, but all of which, taken
together, shall constitute one and the same Agreement.
IN WITNESS WHEREOF, CVS and the Stockholder have caused this
Agreement to be duly executed as of the day and year first above written.
CVS CORPORATION
By: /s/ Stanley P. Goldstein
----------------------------------------
Name: Stanley P. Goldstein
Title: Chairman and Chief Executive
Officer
ZELL/CHILMARK FUND, L.P.
By: ZC Limited Partnership, general
partner
By: ZC Partnerships, general partner
By: ZC Inc., a partner
By: /s/ Sheli Z. Rosenberg
----------------------------------------
Name: Sheli Z. Rosenberg
Title: Vice President
ANNEX F
CVS CORPORATION
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1997 Incentive Compensation Plan
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TABLE OF CONTENTS
-----------------
Page
1 Purpose.....................................................F-1
2 Definitions.................................................F-1
3 Administration..............................................F-3
(a) Authority of the Committee..............................F-3
(b) Manner of Exercise of Committee Authority...............F-3
(c) Limitation of Liability.................................F-4
4 Stock Subject to Plan.......................................F-4
(a) Overall Number of Shares Available for Delivery.........F-4
(b) Application of Limitation to Grants of Awards...........F-4
(c) Availability of Shares Not Delivered under Awards.......F-5
5 Eligibility; Per-Person Award Limitations...................F-5
6 Specific Terms of Awards....................................F-5
(a) General.................................................F-5
(b) Options.................................................F-5
(c) Stock Appreciation Rights...............................F-6
(d) Restricted Stock........................................F-6
(e) Deferred Stock..........................................F-7
(f) Bonus Stock and Awards in Lieu of Obligations...........F-8
(g) Dividend Equivalents....................................F-8
(h) Other Stock-Based Awards................................F-8
7 Certain Provisions Applicable to Awards.....................F-8
(a) Stand-Alone, Additional, Tandem, and Substitute Awards..F-8
(b) Term of Awards..........................................F-9
(c) Form and Timing of Payment under Awards; Deferrals......F-9
(d) Exemptions from Section 16(b) Liability.................F-9
(e) Cancellation and Rescission of Awards...................F-9
8 Performance and Annual Incentive Awards.....................F-10
(a) Performance Conditions..................................F-10
(b) Performance Awards Granted to Designated Covered
Employees.............................................F-10
(c) Annual Incentive Awards Granted to Designated
Covered Employees.....................................F-10
(d) Written Determinations..................................F-12
(e) Status of Section 8(b) and Section 8(c) Awards
under Code Section 162(m)...............................F-13
9 Change in Control...........................................F-13
(a) Effect of "Change in Control"...........................F-13
(b) Definition of "Change in Control".......................F-14
(c) Definition of "Change in Control Price".................F-15
10 General Provisions..........................................F-15
(a) Compliance with Legal and Other Requirements............F-15
(b) Limits on Transferability; Beneficiaries................F-15
(c) Adjustments.............................................F-16
(d) Taxes...................................................F-16
(e) Changes to the Plan and Awards..........................F-16
(f) Limitation on Rights Conferred under Plan...............F-17
(g) Unfunded Status of Awards; Creation of Trusts...........F-17
(h) Nonexclusivity of the Plan..............................F-17
(i) Payments in the Event of Forfeitures; Fractional
Shares...............................................F-17
(j) Governing Law...........................................F-17
(k) Awards under Preexisting Plans..........................F-18
(l) Plan Effective Date and Shareholder Approval............F-18
CVS CORPORATION
1997 Incentive Compensation Plan
1 Purpose. The purpose of this 1997 Incentive Compensation Plan
(the "Plan") is to assist CVS Corporation, a Delaware corporation (the
"Corporation"), and its subsidiaries in attracting, retaining, and rewarding
high-quality executives, employees, and other persons who provide services to
the Corporation and/or its subsidiaries, enabling such persons to acquire or
increase a proprietary interest in the Corporation in order to strengthen the
mutuality of interests between such persons and the Corporation's
shareholders, and providing such persons with annual and long-term performance
incentives to expend their maximum efforts in the creation of shareholder
value. The Plan is also intended to qualify certain compensation awarded
under the Plan for tax deductibility under Code Section 162(m) (as hereafter
defined) to the extent deemed appropriate by the Committee (or any successor
committee) of the Board of Directors of the Corporation.
2 Definitions. For purposes of the Plan, the following terms
shall be defined as set forth below, in addition to such terms defined in
Section 1 hereof:
(a) "Annual Incentive Award" means a conditional right granted to
a Participant under Section 8(c) hereof to receive a cash payment, Stock or
other Award, unless otherwise determined by the Committee, after the end of a
specified fiscal year.
(b) "Award" means any Option, SAR (including Limited SAR),
Restricted Stock, Deferred Stock, Stock granted as a bonus or in lieu of
another award, Dividend Equivalent, Other Stock-Based Award, Performance Award
or Annual Incentive Award, together with any other right or interest granted
to a Participant under the Plan.
(c) "Beneficiary" means the person, persons, trust or trusts which
have been designated by a Participant in his or her most recent written
beneficiary designation filed with the Committee to receive the benefits
specified under the Plan upon such Participant's death or to which Awards or
other rights are transferred if and to the extent permitted under Section
10(b) hereof. If, upon a Participant's death, there is no designated
Beneficiary or surviving designated Beneficiary, then the term Beneficiary
means person, persons, trust or trusts entitled by will or the laws of descent
and distribution to receive such benefits.
(d) "Beneficial Owner" shall have the meaning ascribed to such
term in Rule 13d-3 under the Exchange Act and any successor to such Rule.
(e) "Board" means the Corporation's Board of Directors.
(f) "Change in Control" means Change in Control as defined with
related terms in Section 9 of the Plan.
(g) "Change in Control Price" means the amount calculated in
accordance with Section 9(c) of the Plan.
(h) "Code" means the Internal Revenue Code of 1986, as amended
from time to time, including regulations thereunder and successor provisions
and regulations thereto.
(i) "Committee" means a committee of two or more directors
designated by the Board to administer the Plan; provided, however, that,
unless otherwise determined by the Board, the Committee shall consist solely
of two or more directors, each of whom shall be (i) a "non-employee director"
within the meaning of Rule 16b-3 under the Exchange Act, unless administration
of the Plan by "non-employee directors" is not then required in order for
exemptions under Rule 16b-3 to apply to transactions under the Plan, and (ii)
an "outside director" as defined under Code Section 162(m), unless
administration of the Plan by "outside directors" is not then required in
order to qualify for tax deductibility under Code Section 162(m).
(j) "Covered Employee" means an Eligible Person who is a Covered
Employee as specified in Section 8(e) of the Plan.
(k) "Deferred Stock" means a right, granted to a Participant under
Section 6(e) hereof, to receive Stock, cash or a combination thereof at the
end of a specified deferral period.
(l) "Dividend Equivalent" means a right, granted to a Participant
under Section 6(g), to receive cash, Stock, other Awards or other property
equal in value to dividends paid with respect to a specified number of shares
of Stock, or other periodic payments.
(m) "Effective Date" means January 8, 1997.
(n) "Eligible Person" means each Executive Officer and other
officers and employees of the Corporation or of any subsidiary, including such
persons who may also be directors of the Corporation. An employee on leave of
absence may be considered as still in the employ of the Corporation or a
subsidiary for purposes of eligibility for participation in the Plan.
(o) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, including rules thereunder and successor provisions
and rules thereto.
(p) "Executive Officer" means an executive officer of the
Corporation as defined under the Exchange Act.
(q) "Fair Market Value" means the fair market value of Stock,
Awards or other property as determined by the Committee or under procedures
established by the Committee. Unless otherwise determined by the Committee,
the Fair Market Value of Stock shall be the average of the highest and lowest
prices of a share of Stock, as quoted on the composite transactions table on
the New York Stock Exchange, on the last trading day prior to the date on
which the determination of fair market value is being made.
(r) "Incentive Stock Option" or "ISO" means any Option intended to
be and designated as an incentive stock option within the meaning of Code
Section 422 or any successor provision thereto.
(s) "Limited SAR" means a right granted to a Participant under
Section 6(c) hereof.
(t) "Option" means a right, granted to a Participant under Section
6(b) hereof, to purchase Stock or other Awards at a specified price during
specified time periods.
(u) "Other Stock Based Awards" means Awards granted to a
Participant under Section 6(h) hereof.
(v) "Participant" means a person who has been granted an Award
under the Plan which remains outstanding, including a person who is no longer
an Eligible Person.
(w) "Performance Award" means a right, granted to a Participant
under Section 8 hereof, to receive Awards based upon performance criteria
specified by the Committee.
(x) "Person" shall have the meaning ascribed to such term in
Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d)
thereof, and shall include a "group" as defined in Section 13(d) thereof.
(y) "Preexisting Plans" mean the CVS Corporation Omnibus Stock
Incentive Plan, the CVS Corporation 1987 Stock Option Plan, and the CVS
Corporation 1973 Stock Option Plan.
(z) "Qualified Member" means a member of the Committee who is a
"Non-Employee Director" within the meaning of Rule 16b-3(b)(3) and an "outside
director" within the meaning of Regulation 1.162-27 under Code Section 162(m).
(aa) "Restricted Stock" means Stock granted to a Participant under
Section 6(d) hereof, that is subject to certain restrictions and to a risk of
forfeiture.
(bb) "Rule 16b-3" means Rule 16b-3, as from time to time in effect
and applicable to the Plan and Participants, promulgated by the Securities and
Exchange Commission under Section 16 of the Exchange Act.
(cc) "Stock" means the Corporation's Common Stock, and such other
securities as may be substituted (or resubstituted) for Stock pursuant to
Section 10(c) hereof.
(dd) "Stock Appreciation Rights" or "SAR" means a right granted to
a Participant under Section 6(c) hereof.
3 Administration.
(a) Authority of the Committee. The Plan shall be administered by
the Committee except to the extent the Board elects to administer the Plan, in
which case references herein to the "Committee" shall be deemed to include
references to the "Board". The Committee shall have full and final authority,
in each case subject to and consistent with the provisions of the Plan, to
select Eligible Persons to become Participants, grant Awards, determine the
type, number and other terms and conditions of, and all other matters relating
to, Awards, prescribe Award agreements (which need not be identical for each
Participant) and rules and regulations for the administration of the Plan,
construe and interpret the Plan and Award agreements and correct defects,
supply omissions or reconcile inconsistencies therein, and to make all other
decisions and determinations as the Committee may deem necessary or advisable
for the administration of the Plan.
(b) Manner of Exercise of Committee Authority. At any time that a
member of the Committee is not a Qualified Member, any action of the Committee
relating to an Award granted or to be granted to a Participant who is then
subject to Section 16 of the Exchange Act in respect of the Corporation, or
relating to an Award intended by the Committee to qualify as
"performance-based compensation" within the meaning of Code Section 162(m) and
regulations thereunder, may be taken either (i) by a subcommittee, designated
by the Committee, composed solely of two or more Qualified Members, or (ii) by
the Committee but with each such member who is not a Qualified Member
abstaining or recusing himself or herself from such action; provided, however,
that, upon such abstention or recusal, the Committee remains composed solely
of two or more Qualified Members. Such action, authorized by such a
subcommittee or by the Committee upon the abstention or recusal of such
non-Qualified Member(s), shall be the action of the Committee for purposes of
the Plan. Any action of the Committee shall be final, conclusive and binding
on all persons, including the Corporation, its subsidiaries, Participants,
Beneficiaries, transferees under Section 10(b) hereof or other persons
claiming rights from or through a Participant, and shareholders. The express
grant of any specific power to the Committee, and the taking of any action by
the Committee, shall not be construed as limiting any power or authority of
the Committee. The Committee may delegate to officers or managers of the
Corporation or any subsidiary, or committees thereof, the authority, subject
to such terms as the Committee shall determine, to perform such functions,
including administrative functions, as the Committee may determine, to the
extent that such delegation will not result in the loss of an exemption under
Rule 16b-3(d)(1) for Awards granted to Participants subject to Section 16 of
the Exchange Act in respect of the Corporation and will not cause Awards
intended to qualify as "performance-based compensation" under Code Section
162(m) to fail to so qualify. The Committee may appoint agents to assist it in
administering the Plan.
(c) Limitation of Liability. The Committee and each member
thereof shall be entitled to, in good faith, rely or act upon any report or
other information furnished to him or her by any executive officer, other
officer or employee of the Corporation or a subsidiary, the Corporation's
independent auditors, consultants or any other agents assisting in the
administration of the Plan. Members of the Committee and any officer or
employee of the Corporation or a subsidiary acting at the direction or on
behalf of the Committee shall not be personally liable for any action or
determination taken or made in good faith with respect to the Plan, and shall,
to the extent permitted by law, be fully indemnified and protected by the
Corporation with respect to any such action or determination.
4 Stock Subject to Plan.
(a) Overall Number of Shares Available for Delivery. Subject to
adjustment as provided in Section 10(c) hereof, the total number of shares of
Stock reserved and available for delivery in connection with Awards under the
Plan shall be (i) 2.5 million, plus (ii) the number of shares of Stock
remaining available under Preexisting Plans immediately prior to the date on
which shareholders of the Corporation approve the adoption of the Plan, plus
(iii) the number of shares of Stock subject to awards under Preexisting Plans
which become available in accordance with Section 4(c) hereof after the date
on which shareholders of the Corporation approve the adoption of the Plan,
plus (iv) 9.4% of the number of shares of Stock issued or delivered by the
Corporation during the term of the Plan (excluding any issuance or delivery
in connection with Awards, or any other compensation or benefit plan of the
Corporation); provided, however, that the total number of shares of Stock with
respect to which ISOs may be granted shall not exceed 2 million and the total
number of shares of restricted stock awarded under the Plan shall not exceed
1.8 million. Any shares of Stock delivered under the Plan shall consist of
authorized and unissued shares or treasury shares.
(b) Application of Limitation to Grants of Awards. No Award may
be granted if the number of shares of Stock to be delivered in connection with
such Award or, in the case of an Award relating to shares of Stock but
settleable only in cash (such as cash-only SARs), the number of shares to
which such Award relates, exceeds the number of shares of Stock remaining
available under the Plan minus the number of shares of Stock issuable in
settlement of or relating to then-outstanding Awards. The Committee may adopt
reasonable counting procedures to ensure appropriate counting, avoid double
counting (as, for example, in the case of tandem or substitute awards) and
make adjustments if the number of shares of Stock actually delivered differs
from the number of shares previously counted in connection with an Award.
(c) Availability of Shares Not Delivered under Awards. Shares of
Stock subject to an Award under the Plan or award under a Preexisting Plan
that is canceled, expired, forfeited, settled in cash or otherwise terminated
without a delivery of shares to the Participant, including (i) the number of
shares withheld in payment of any exercise or purchase price of an Award or
award or taxes relating to Awards or awards, and (ii) the number of shares
surrendered in payment of any exercise or purchase price of an Award or award
or taxes relating to any Award or award, will again be available for Awards
under the Plan, except that if any such shares could not again be available
for Awards to a particular Participant under any applicable law or regulation,
such shares shall be available exclusively for Awards to Participants who are
not subject to such limitation.
5 Eligibility; Per-Person Award Limitations. Awards may be
granted under the Plan only to Eligible Persons. In each fiscal year during
any part of which the Plan is in effect, an Eligible Person may not be granted
Awards relating to more than 1.5 million shares of Stock, subject to
adjustment as provided in Section 10(c), under each of Sections 6(b), 6(c),
6(d), 6(e), 6(f), 6(g), 6(h), 8(b) and 8(c). In addition, the maximum cash
amount that may be earned under the Plan as a final Annual Incentive Award or
other cash annual Award in respect of any fiscal year by any one Participant
shall be $5 million, and the maximum cash amount that may be earned under the
Plan as a final Performance Award or other cash Award in respect of a
performance period other than an annual period by any one Participant on an
annualized basis shall be $5 million.
6 Specific Terms of Awards.
(a) General. Awards may be granted on the terms and conditions
set forth in this Section 6. In addition, the Committee may impose on any
Award or the exercise thereof, at the date of grant or thereafter (subject to
Section 10(e)), such additional terms and conditions, not inconsistent with
the provisions of the Plan, as the Committee shall determine, including terms
requiring forfeiture of Awards in the event of termination of employment by the
Participant and terms permitting a Participant to make elections relating to
his or her Award. The Committee shall retain full power and discretion to
accelerate, waive or modify, at any time, any term or condition of an Award
that is not mandatory under the Plan. Except in cases in which the Committee
is authorized to require other forms of consideration under the Plan, or to
the extent other forms of consideration must by paid to satisfy the
requirements of the Delaware General Corporation Law, no consideration other
than services may be required for the grant (but not the exercise) of any
Award.
(b) Options. The Committee is authorized to grant Options to
Participants on the following terms and conditions:
(i) Exercise Price. The exercise price per share of Stock
purchasable under an Option shall be determined by the Committee, provided
that such exercise price shall be not less than the Fair Market Value of a
share of Stock on the date of grant of such Option except as provided under
Section 7(a) hereof.
(ii) Time and Method of Exercise. The Committee shall
determine the time or times at which or the circumstances under which an
Option may be exercised in whole or in part (including based on achievement of
performance goals and/or future service requirements), the methods by which
such exercise price may be paid or deemed to be paid, the form of such
payment, including, without limitation, cash, Stock, other Awards or awards
granted under other plans of the Corporation or any subsidiary, or other
property (including notes or other contractual obligations of Participants to
make payment on a deferred basis), and the methods by or forms in which Stock
will be delivered or deemed to be delivered to Participants.
(iii) ISOs. The terms of any ISO granted under the Plan shall
comply in all respects with the provisions of Code Section 422. Anything in
the Plan to the contrary notwithstanding, no term of the Plan relating to ISOs
(including any SAR in tandem therewith) shall be interpreted, amended or
altered, nor shall any discretion or authority granted under the Plan be
exercised, so as to disqualify either the Plan or any ISO under Code Section
422, unless the Participant has first requested the change that will result in
such disqualification.
(c) Stock Appreciation Rights. The Committee is authorized to
grant SAR's to Participants on the following terms and conditions:
(i) Right to Payment. A SAR shall confer on the Participant
to whom it is granted a right to receive, upon exercise thereof, the excess of
(A) the Fair Market Value of one share of Stock on the date of exercise (or,
in the case of a "Limited SAR," the Fair Market Value determined by reference
to the Change in Control Price, as defined under Section 9(c) hereof) over (B)
the grant price of the SAR as determined by the Committee.
(ii) Other Terms. The Committee shall determine at the date
of grant or thereafter, the time or times at which and the circumstances under
which a SAR may be exercised in whole or in part (including based on
achievement of performance goals and/or future service requirements), the
method of exercise, method of settlement, form of consideration payable in
settlement, method by or forms in which Stock will be delivered or deemed to
be delivered to Participants, whether or not a SAR shall be in tandem or in
combination with any other Award, and any other terms and conditions of any
SAR. Limited SARs that may only be exercised in connection with a Change in
Control or other event as specified by the Committee may be granted on such
terms, not inconsistent with this Section 6(c), as the Committee may
determine. SARs and Limited SARs may be either freestanding or in tandem with
other Awards.
(d) Restricted Stock. The Committee is authorized to grant
Restricted Stock to Participants on the following terms and conditions:
(i) Grant and Restrictions. Restricted Stock shall be
subject to such restrictions on transferability, risk of forfeiture and other
restrictions, if any, as the Committee may impose, which restrictions may
lapse separately or in combination at such times, under such circumstances
(including based on achievement of performance goals and/or future service
requirements), in such installments or otherwise, as the Committee may
determine at the date of grant or thereafter. Except to the extent restricted
under the terms of the Plan and any Award agreement relating to the Restricted
Stock, a Participant granted Restricted Stock shall have all of the rights of a
shareholder, including the right to vote the Restricted Stock and the right to
receive dividends thereon (subject to any mandatory reinvestment or other
requirement imposed by the Committee). During the restricted period applicable
to the Restricted Stock, subject to Section 10(b) below, the Restricted Stock
may not be sold, transferred, pledged, hypothecated, margined or otherwise
encumbered by the Participant.
(ii) Forfeiture. Except as otherwise determined by the
Committee, upon termination of employment during the applicable restriction
period, Restricted Stock that is at that time subject to restrictions shall be
forfeited and reacquired by the Corporation; provided that the Committee may
provide, by rule or regulation or in any Award agreement, or may determine in
any individual case, that restrictions or forfeiture conditions relating to
Restricted Stock shall be waived in whole or in part in the event of
terminations resulting from specified causes, and the Committee may in other
cases waive in whole or in part the forfeiture of Restricted Stock.
(iii) Certificates for Stock. Restricted Stock granted under
the Plan may be evidenced in such manner as the Committee shall determine. If
certificates representing Restricted Stock are registered in the name of the
Participant, the Committee may require that such certificates bear an
appropriate legend referring to the terms, conditions and restrictions
applicable to such Restricted Stock, that the Corporation retain physical
possession of the certificates, and that the Participant deliver a stock power
to the Corporation, endorsed in blank, relating to the Restricted Stock.
(iv) Dividends and Splits. As a condition to the grant of an
Award of Restricted Stock, the Committee may require that any cash dividends
paid on a share of Restricted Stock be automatically reinvested in additional
shares of Restricted Stock or applied to the purchase of additional Awards
under the Plan. Unless otherwise determined by the Committee, Stock
distributed in connection with a Stock split or Stock dividend, and other
property distributed as a dividend, shall be subject to restrictions and a
risk of forfeiture to the same extent as the Restricted Stock with respect to
which such Stock or other property has been distributed.
(e) Deferred Stock. The Committee is authorized to grant Deferred
Stock to Participants, which are rights to receive Stock, cash, or a
combination thereof at the end of a specified deferral period, subject to the
following terms and conditions:
(i) Award and Restrictions. Satisfaction of an Award of
Deferred Stock shall occur upon expiration of the deferral period specified
for such Deferred Stock by the Committee (or, if permitted by the Committee,
as elected by the Participant). In addition, Deferred Stock shall be subject
to such restrictions (which may include a risk of forfeiture) as the Committee
may impose, if any, which restrictions may lapse at the expiration of the
deferral period or at earlier specified times (including based on achievement
of performance goals and/or future service requirements), separately or in
combination, in installments or otherwise, as the Committee may determine.
Deferred Stock may be satisfied by delivery of Stock, cash equal to the Fair
Market Value of the specified number of shares of Stock covered by the
Deferred Stock, or a combination thereof, as determined by the Committee at
the date of grant or thereafter.
(ii) Forfeiture. Except as otherwise determined by the
Committee, upon termination of employment during the applicable deferral
period or portion thereof to which forfeiture conditions apply (as provided in
the Award agreement evidencing the Deferred Stock), all Deferred Stock that is
at that time subject to deferral (other than a deferral at the election of the
Participant) shall be forfeited; provided that the Committee may provide, by
rule or regulation or in any Award agreement, or may determine in any
individual case, that restrictions or forfeiture conditions relating to
Deferred Stock shall be waived in whole or in part in the event of terminations
resulting from specified causes, and the Committee may in other cases waive in
whole or in part the forfeiture of Deferred Stock.
(iii) Dividend Equivalents. Unless otherwise determined by
the Committee at date of grant, Dividend Equivalents on the specified number
of shares of Stock covered by an Award of Deferred Stock shall be either (A)
paid with respect to such Deferred Stock at the dividend payment date in cash
or in shares of unrestricted Stock having a Fair Market Value equal to the
amount of such dividends, or (B) deferred with respect to such Deferred Stock
and the amount or value thereof automatically deemed reinvested in additional
Deferred Stock, other Awards or other investment vehicles, as the Committee
shall determine or permit the Participant to elect.
(f) Bonus Stock and Awards in Lieu of Obligations. The Committee
is authorized to grant Stock as a bonus, or to grant Stock or other Awards in
lieu of obligations to pay cash or deliver other property under the Plan or
under other plans or compensatory arrangements, provided that, in the case of
Participants subject to Section 16 of the Exchange Act, the amount of such
grants remains within the discretion of the Committee to the extent necessary
to ensure that acquisitions of Stock or other Awards are exempt from liability
under Section 16(b) of the Exchange Act. Stock or Awards granted hereunder
shall be subject to such other terms as shall be determined by the Committee.
(g) Dividend Equivalents. The Committee is authorized to grant
Dividend Equivalents to a Participant, entitling the Participant to receive
cash, Stock, other Awards, or other property equal in value to dividends paid
with respect to a specified number of shares of Stock, or other periodic
payments. Dividend Equivalents may be awarded on a free-standing basis or in
connection with another Award. The Committee may provide that Dividend
Equivalents shall be paid or distributed when accrued or shall be deemed to
have been reinvested in additional Stock, Awards, or other investment
vehicles, and subject to such restrictions on transferability and risks of
forfeiture, as the Committee may specify.
(h) Other Stock-Based Awards. The Committee is authorized,
subject to limitations under applicable law, to grant to Participants such
other Awards that may be denominated or payable in, valued in whole or in part
by reference to, or otherwise based on, or related to, Stock, as deemed by the
Committee to be consistent with the purposes of the Plan, including, without
limitation, convertible or exchangeable debt securities, other rights
convertible or exchangeable into Stock, purchase rights for Stock, Awards with
value and payment contingent upon performance of the Corporation or any other
factors designated by the Committee, and Awards valued by reference to the
book value of Stock or the value of securities of or the performance of
specified subsidiaries. The Committee shall determine the terms and conditions
of such Awards. Stock delivered pursuant to an Award in the nature of a
purchase right granted under this Section 6(h) shall be purchased for such
consideration, paid for at such times, by such methods, and in such forms,
including, without limitation, cash, Stock, other Awards, or other property,
as the Committee shall determine. Cash awards, as an element of or supplement
to any other Award under the Plan, may also be granted pursuant to this
Section 6(h).
7 Certain Provisions Applicable to Awards.
(a) Stand-Alone, Additional, Tandem, and Substitute Awards.
Awards granted under the Plan may, in the discretion of the Committee, be
granted either alone or in addition to, in tandem with, or in substitution or
exchange for, any other Award or any award granted under another plan of the
Corporation, any subsidiary, or any business entity to be acquired by the
Corporation or a subsidiary, or any other right of a Participant to receive
payment from the Corporation or any subsidiary. Such additional, tandem, and
substitute or exchange Awards may be granted at any time. If an Award is
granted in substitution or exchange for another Award or award, the Committee
shall require the surrender of such other Award or award in consideration for
the grant of the new Award. In addition, Awards may be granted in lieu of
cash compensation, including in lieu of cash amounts payable under other plans
of the Corporation or any subsidiary, in which the value of Stock subject to
the Award is equivalent in value to the cash compensation (for example,
Deferred Stock or Restricted Stock), or in which the exercise price, grant
price or purchase price of the Award in the nature of a right that may be
exercised is equal to the Fair Market Value of the underlying Stock minus the
value of the cash compensation surrendered (for example, Options granted with
an exercise price "discounted" by the amount of the cash compensation
surrendered).
(b) Term of Awards. The term of each Award shall be for such
period as may be determined by the Committee; provided that in no event shall
the term of any Option or SAR exceed a period of ten years (or such shorter
term as may be required in respect of an ISO under Code Section 422).
(c) Form and Timing of Payment under Awards; Deferrals. Subject
to the terms of the Plan and any applicable Award agreement, payments to be
made by the Corporation or a subsidiary upon the exercise of an Option or
other Award or settlement of an Award may be made in such forms as the
Committee shall determine, including, without limitation, cash, Stock, other
Awards or other property, and may be made in a single payment or transfer, in
installments, or on a deferred basis. The settlement of any Award may be
accelerated, and cash paid in lieu of Stock in connection with such
settlement, in the discretion of the Committee or upon occurrence of one or
more specified events (in addition to a Change in Control). Installment or
deferred payments may be required by the Committee (subject to Section 10(e)
of the Plan, including the consent provisions thereof in the case of any
deferral of an outstanding Award not provided for in the original Award
agreement) or permitted at the election of the Participant on terms and
conditions established by the Committee. Payments may include, without
limitation, provisions for the payment or crediting of reasonable interest on
installment or deferred payments or the grant or crediting of Dividend
Equivalents or other amounts in respect of installment or deferred payments
denominated in Stock.
(d) Exemptions from Section 16(b) Liability. It is the intent of
the Corporation that the grant of any Awards to or other transaction by a
Participant who is subject to Section 16 of the Exchange Act shall be exempt
under Rule 16b-3 (except for transactions acknowledged in writing to be
non-exempt by such Participant). Accordingly, if any provision of this Plan or
any Award agreement does not comply with the requirements of Rule 16b-3 as
then applicable to any such transaction, such provision shall be construed or
deemed amended to the extent necessary to conform to the applicable
requirements of Rule 16b-3 so that such Participant shall avoid liability
under Section 16(b).
(e) Cancellation and Rescission of Awards. Unless the Award
agreement specifies otherwise, the Committee may cancel any unexpired, unpaid,
or deferred Awards at any time, and the Corporation shall have the additional
rights set forth in Section 7(e)(iv) below, if the Participant is not in
compliance with all applicable provisions of the Award agreement and the Plan
including the following conditions:
(i) A Participant shall not render services for any
organization or engage directly or indirectly in any business which, in the
judgment of the Chief Executive Officer of the Corporation or other senior
officer designated by the Committee, is or becomes competitive with the
Corporation. For Participants whose employment has terminated, the judgment
of the Chief Executive Officer or other senior officer designated by the
Committee shall be based on the Participant's position and responsibilities
while employed by the Corporation, the Participant's post-employment
responsibilities and position with the other organization or business, the
extent of past, current and potential competition or conflict between the
Corporation and the other organization or business, the effect on the
Corporation's shareholders, customers, suppliers and competitors of the
Participant assuming the post-employment position and such other
considerations as are deemed relevant given the applicable facts and
circumstances. A Participant who has terminated employment shall be free,
however, to purchase as an investment or otherwise, stock or other securities
of such organization or business so long as they are listed upon a recognized
securities exchange or traded over-the-counter, and such investment does not
represent a greater than five percent equity interest in the organization or
business.
(ii) A Participant shall not, without prior written
authorization from the Corporation, disclose to anyone outside the
Corporation, or use in other than the Corporation's business, any confidential
information or material relating to the business of the Corporation that is
acquired by the Participant either during or after employment with the
Corporation.
(iii) A Participant shall disclose promptly and assign to the
Corporation all right, title, and interest in any invention or idea,
patentable or not, made or conceived by the Participant during employment by
the Corporation, relating in any manner to the actual or anticipated business,
research or development work of the Corporation and shall do anything
reasonably necessary to enable the Corporation to secure a patent where
appropriate in the United States and in foreign countries.
(iv) Upon exercise, settlement, payment or delivery pursuant
to an Award, the Participant shall certify on a form acceptable to the
Committee that he or she is in compliance with the terms and conditions of the
Plan. Failure to comply with the provisions of this Section 7(e) prior to, or
during the six months after, any exercise, payment or delivery pursuant to an
Award shall cause such exercise, payment or delivery to be rescinded. The
Corporation shall notify the Participant in writing of any such rescission
within two years after such exercise, payment or delivery. Within ten days
after receiving such a notice from the Corporation, the Participant shall pay
to the Corporation the amount of any gain realized or payment received as a
result of the rescinded exercise, payment or delivery pursuant to an Award.
Such payment shall be made either in cash or by returning to the Corporation
the number of shares of Stock that the Participant received in connection with
the rescinded exercise, payment or delivery.
8 Performance and Annual Incentive Awards.
(a) Performance Conditions. The right of a Participant to
exercise or receive a grant or settlement of any Award, and the timing
thereof, may be subject to such performance conditions as may be specified by
the Committee. The Committee may use such business criteria and other measures
of performance as it may deem appropriate in establishing any performance
conditions, and may exercise its discretion to reduce or increase the amounts
payable under any Award subject to performance conditions, except as limited
under Sections 8(b) and 8(c) hereof in the case of a Performance Award or
Annual Incentive Award intended to qualify under Code Section 162(m).
(b) Performance Awards Granted to Designated Covered Employees.
If the Committee determines that a Performance Award to be granted to an
Eligible Person who is designated by the Committee as likely to be a Covered
Employee should qualify as "performance-based compensation" for purposes of
Code Section 162(m), the grant, exercise and/or settlement of such Performance
Award shall be contingent upon achievement of preestablished performance goals
and other terms set forth in this Section 8(b).
(i) Performance Goals Generally. The performance goals for
such Performance Awards shall consist of one or more business criteria and a
targeted level or levels of performance with respect to each of such criteria,
as specified by the Committee consistent with this Section 8(b). Performance
goals shall be objective and shall otherwise meet the requirements of Code
Section 162(m) and regulations thereunder (including Regulation 1.162-27 and
successor regulations thereto), including the requirement that the level or
levels of performance targeted by the Committee result in the achievement of
performance goals being "substantially uncertain." The Committee may determine
that such Performance Awards shall be granted, exercised and/or settled upon
achievement of any one performance goal or that two or more of the performance
goals must be achieved as a condition to grant, exercise and/or settlement of
such Performance Awards. Performance goals may differ for Performance Awards
granted to any one Participant or to different Participants.
(ii) Business Criteria. One or more of the following
business criteria for the Corporation, on a consolidated basis, and/or for
specified subsidiaries or business units of the Corporation (except with
respect to the total shareholder return and earnings per share criteria),
shall be used by the Committee in establishing performance goals for such
Performance Awards: (1) earnings per share; (2) revenues; (3) cash flow; (4)
cash flow return on investment; (5) return on net assets, return on assets,
return on investment, return on capital, return on equity; (6) economic value
added; (7) operating margin; (8) net income; pretax earnings; pretax earnings
before interest, depreciation and amortization; pretax operating earnings
after interest expense and before incentives, service fees, and extraordinary
or special items; operating earnings; (9) total shareholder return; and (10)
any of the above goals as compared to the performance of a published or
special index deemed applicable by the Committee including, but not limited
to, the Standard & Poor's 500 Stock Index or a group of comparator companies.
One or more of the foregoing business criteria shall also be exclusively used
in establishing performance goals for Annual Incentive Awards granted to a
Covered Employee under Section 8(c) hereof.
(iii) Performance Period; Timing for Establishing Performance
Goals. Achievement of performance goals in respect of such Performance Awards
shall be measured over a performance period of up to ten years, as specified
by the Committee. Performance goals shall be established not later than 90
days after the beginning of any performance period applicable to such
Performance Awards, or at such other date as may be required or permitted for
"performance-based compensation" under Code Section 162(m).
(iv) Performance Award Pool. The Committee may establish a
Performance Award pool, which shall be an unfunded pool, for purposes of
measuring performance of the Corporation in connection with Performance
Awards. The amount of such Performance Award pool shall be based upon the
achievement of a performance goal or goals based on one or more of the
business criteria set forth in Section 8(b)(ii) hereof during the given
performance period, as specified by the Committee in accordance with Section
8(b)(iii) hereof. The Committee may specify the amount of the Performance
Award pool as a percentage of any of such business criteria, a percentage
thereof in excess of a threshold amount, or as another amount which need not
bear a strictly mathematical relationship to such business criteria.
(v) Settlement of Performance Awards; Other Terms.
Settlement of such Performance Awards shall be in cash, Stock, other Awards or
other property, in the discretion of the Committee. The Committee may, in its
discretion, reduce the amount of a settlement otherwise to be made in
connection with such Performance Awards, but may not exercise discretion to
increase any such amount payable to a Covered Employee in respect of a
Performance Award subject to this Section 8(b). The Committee shall specify
the circumstances in which such Performance Awards shall be paid or forfeited
in the event of termination of employment by the Participant prior to the end
of a performance period or settlement of Performance Awards.
(c) Annual Incentive Awards Granted to Designated Covered
Employees. If the Committee determines that an Annual Incentive Award to be
granted to an Eligible Person who is designated by the Committee as likely to
be a Covered Employee should qualify as "performance-based compensation" for
purposes of Code Section 162(m), the grant, exercise and/or settlement of such
Annual Incentive Award shall be contingent upon achievement of preestablished
performance goals and other terms set forth in this Section 8(c).
(i) Annual Incentive Award Pool. The Committee may
establish an Annual Incentive Award pool, which shall be an unfunded pool, for
purposes of measuring performance of the Corporation in connection with Annual
Incentive Awards. The amount of such Annual Incentive Award pool shall be
based upon the achievement of a performance goal or goals based on one or more
of the business criteria set forth in Section 8(b)(ii) hereof during the given
performance period, as specified by the Committee in accordance with Section
8(b)(iii) hereof. The Committee may specify the amount of the Annual
Incentive Award pool as a percentage of any of such business criteria, a
percentage thereof in excess of a threshold amount, or as another amount which
need not bear a strictly mathematical relationship to such business criteria.
(ii) Potential Annual Incentive Awards. Not later than the
end of the 90th day of each fiscal year, or at such other date as may be
required or permitted in the case of Awards intended to be "performance-based
compensation" under Code Section 162(m), the Committee shall determine the
Eligible Persons who will potentially receive Annual Incentive Awards, and the
amounts potentially payable thereunder, for that fiscal year, either out of an
Annual Incentive Award pool established by such date under Section 8(c)(i)
hereof or as individual Annual Incentive Awards. In the case of individual
Annual Incentive Awards intended to qualify under Code Section 162(m), the
amount potentially payable shall be based upon the achievement of a performance
goal or goals based on one or more of the business criteria set forth in
Section 8(b)(ii) hereof in the given performance year, as specified by the
Committee; in other cases, such amount shall be based on such criteria as
shall be established by the Committee. In all cases, the maximum Annual
Incentive Award of any Participant shall be subject to the limitation set
forth in Section 5 hereof.
(iii) Payout of Annual Incentive Awards. After the end of
each fiscal year, the Committee shall determine the amount, if any, of (A) the
Annual Incentive Award pool, and the maximum amount of potential Annual
Incentive Award payable to each Participant in the Annual Incentive Award
pool, or (B) the amount of potential Annual Incentive Award otherwise payable
to each Participant. The Committee may, in its discretion, determine that the
amount payable to any Participant as a final Annual Incentive Award shall be
increased or reduced from the amount of his or her potential Annual Incentive
Award, including a determination to make no final Award whatsoever, but may
not exercise discretion to increase any such amount in the case of an Annual
Incentive Award intended to qualify under Code Section 162(m). The Committee
shall specify the circumstances in which an Annual Incentive Award shall be
paid or forfeited in the event of termination of employment by the Participant
prior to the end of a fiscal year or settlement of such Annual Incentive Award.
(d) Written Determinations. All determinations by the Committee
as to the establishment of performance goals, the amount of any Performance
Award pool or potential individual Performance Awards and as to the
achievement of performance goals relating to Performance Awards under Section
8(b), and the amount of any Annual Incentive Award pool or potential
individual Annual Incentive Awards and the amount of final Annual Incentive
Awards under Section 8(c), shall be made in writing in the case of any Award
intended to qualify under Code Section 162(m). The Committee may not delegate
any responsibility relating to such Performance Awards or Annual Incentive
Awards.
(e) Status of Section 8(b) and Section 8(c) Awards under Code
Section 162(m). It is the intent of the Corporation that Performance Awards
and Annual Incentive Awards under Sections 8(b) and 8(c) hereof granted to
persons who are designated by the Committee as likely to be Covered Employees
within the meaning of Code Section 162(m) and regulations thereunder
(including Regulation 1.162-27 and successor regulations thereto) shall, if so
designated by the Committee, constitute "performance-based compensation"
within the meaning of Code Section 162(m) and regulations thereunder.
Accordingly, the terms of Sections 8(b), (c), (d) and (e), including the
definitions of Covered Employee and other terms used therein, shall be
interpreted in a manner consistent with Code Section 162(m) and regulations
thereunder. The foregoing notwithstanding, because the Committee cannot
determine with certainty whether a given Participant will be a Covered
Employee with respect to a fiscal year that has not yet been completed, the
term Covered Employee as used herein shall mean only a person designated by
the Committee, at the time of grant of Performance Awards or an Annual
Incentive Award, as likely to be a Covered Employee with respect to that
fiscal year. If any provision of the Plan as in effect on the date of
adoption or any agreements relating to Performance Awards or Annual Incentive
Awards that are designated as intended to comply with Code Section 162(m) does
not comply or is inconsistent with the requirements of Code Section 162(m) or
regulations thereunder, such provision shall be construed or deemed amended to
the extent necessary to conform to such requirements.
9 Change in Control.
(a) Effect of "Change in Control". In the event of a "Change in
Control," the following provisions shall apply unless otherwise provided in
the Award agreement:
(i) Any Award carrying a right to exercise that was not
previously exercisable and vested shall become fully exercisable and vested as
of the time of the Change in Control and shall remain exercisable and vested
for the balance of the stated term of such Award without regard to any
termination of employment by the Participant, subject only to applicable
restrictions set forth in Section 10(a) hereof;
(ii) Any optionee who holds an Option shall be entitled to
elect, during the 60-day period immediately following a Change in Control, in
lieu of acquiring the shares of Stock covered by such Option, to receive, and
the Corporation shall be obligated to pay, in cash the excess of the Change in
Control Price over the exercise price of such Option, multiplied by the number
of shares of Stock covered by such Option;
(iii) The restrictions, deferral of settlement, and forfeiture
conditions applicable to any other Award granted under the Plan shall lapse
and such Awards shall be deemed fully vested as of the time of the Change in
Control, except to the extent of any waiver by the Participant and subject to
applicable restrictions set forth in Section 10(a) hereof; and
(iv) With respect to any outstanding Award subject to
achievement of performance goals and conditions under the Plan, such
performance goals and other conditions will be deemed to be met if and to the
extent so provided by the Committee in the Award agreement relating to such
Award.
(b) Definition of "Change in Control". A "Change in Control"
shall be deemed to have occurred if:
(i) any Person (other than the Company, any trustee or other
fiduciary holding securities under any employee benefit plan of the Company,
or any company owned, directly or indirectly, by the stockholders of the
Company immediately prior to the occurrence with respect to which the
evaluation is being made in substantially the same proportions as their
ownership of the common stock of the Company) becomes the Beneficial Owner
(except that a Person shall be deemed to be the Beneficial Owner of all shares
that any such Person has the right to acquire pursuant to any agreement or
arrangement or upon exercise of conversion rights, warrants or options or
otherwise, without regard to the sixty day period referred to in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the Company
or any Significant Subsidiary (as defined below), representing 25% or more of
the combined voting power of the Company's or such subsidiary's then
outstanding securities;
(ii) during any period of two consecutive years, individuals
who at the beginning of such period constitute the Board, and any new director
(other than a director designated by a person who has entered into an
agreement with the Company to effect a transaction described in clause (i),
(iii), or (iv) of this paragraph) whose election by the Board or nomination
for election by the Company's stockholders was approved by a vote of at least
two-thirds of the directors then still in office who either were directors at
the beginning of the two-year period or whose election or nomination for
election was previously so approved but excluding for this purpose any such new
director whose initial assumption of office occurs as a result of either an
actual or threatened election contest (as such terms are used in Rule 14a-11
of Regulation 14A promulgated under the Exchange Act) or other actual or
threatened solicitation of proxies or consents by or on behalf of an
individual, corporation, partnership, group, associate or other entity or
Person other than the Board, cease for any reason to constitute at least a
majority of the Board;
(iii) the consummation of a merger or consolidation of the
Company or any subsidiary owning directly or indirectly all or substantially
all of the consolidated assets of the Company (a "Significant Subsidiary")
with any other entity, other than a merger or consolidation which would result
in the voting securities of the Company or a Significant Subsidiary
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving or resulting entity) more than 50% of the combined voting power of
the surviving or resulting entity outstanding immediately after such merger or
consolidation;
(iv) the stockholders of the Company approve a plan or
agreement for the sale or disposition of all or substantially all of the
consolidated assets of the Company (other than such a sale or disposition
immediately after which such assets will be owned directly or indirectly by
the stockholders of the Company in substantially the same proportions as their
ownership of the common stock of the Company immediately prior to such sale or
disposition) in which case the Board shall determine the effective date of the
Change in Control resulting therefrom; or
(v) any other event occurs which the Board determines, in
its discretion, would materially alter the structure of the Company or its
ownership.
(c) Definition of "Change in Control Price" The "Change in
Control Price" means an amount in cash equal to the higher of (i) the amount
of cash and fair market value of property that is the highest price per share
paid (including extraordinary dividends) in any transaction triggering the
Change in Control or any liquidation of shares following a sale of
substantially all assets of the Corporation, or (ii) the highest Fair Market
Value per share at any time during the 60-day period preceding and 60-day
period following the Change in Control.
10 General Provisions.
(a) Compliance with Legal and Other Requirements. The Corporation
may, to the extent deemed necessary or advisable by the Committee, postpone
the issuance or delivery of Stock or payment of other benefits under any Award
until completion of such registration or qualification of such Stock or other
required action under any federal or state law, rule or regulation, listing or
other required action with respect to any stock exchange or automated
quotation system upon which the Stock or other securities of the Corporation
are listed or quoted, or compliance with any other obligation of the
Corporation, as the Committee may consider appropriate, and may require any
Participant to make such representations, furnish such information and comply
with or be subject to such other conditions as it may consider appropriate in
connection with the issuance or delivery of Stock or payment of other benefits
in compliance with applicable laws, rules, and regulations, listing
requirements, or other obligations. The foregoing notwithstanding, in
connection with a Change in Control, the Corporation shall take or cause to be
taken no action, and shall undertake or permit to arise no legal or
contractual obligation, that results or would result in any postponement of
the issuance or delivery of Stock or payment of benefits under any Award or
the imposition of any other conditions on such issuance, delivery or payment,
to the extent that such postponement or other condition would represent a
greater burden on a Participant than existed on the 90th day preceding the
Change in Control.
(b) Limits on Transferability; Beneficiaries. No Award or other
right or interest of a Participant under the Plan shall be pledged,
hypothecated or otherwise encumbered or subject to any lien, obligation or
liability of such Participant to any party (other than the Corporation or a
subsidiary), or assigned or transferred by such Participant otherwise than by
will or the laws of descent and distribution or to a Beneficiary upon the
death of a Participant, and such Awards or rights that may be exercisable
shall be exercised during the lifetime of the Participant only by the
Participant or his or her guardian or legal representative, except that Awards
and other rights (other than ISOs and SARs in tandem therewith) may be
transferred to one or more Beneficiaries or other transferees during the
lifetime of the Participant, and may be exercised by such transferees in
accordance with the terms of such Award, but only if and to the extent such
transfers are permitted by the Committee pursuant to the express terms of an
Award agreement (subject to any terms and conditions which the Committee may
impose thereon). A Beneficiary, transferee, or other person claiming any
rights under the Plan from or through any Participant shall be subject to all
terms and conditions of the Plan and any Award agreement applicable to such
Participant, except as otherwise determined by the Committee, and to any
additional terms and conditions deemed necessary or appropriate by the
Committee.
(c) Adjustments. In the event that any dividend or other
distribution (whether in the form of cash, Stock, or other property),
recapitalization, forward or reverse split, reorganization, merger,
consolidation, spin-off, combination, repurchase, share exchange, liquidation,
dissolution or other similar corporate transaction or event affects the Stock
such that an adjustment is determined by the Committee to be appropriate under
the Plan, then the Committee shall, in such manner as it may deem equitable,
adjust any or all of (i) the number and kind of shares of Stock which may be
delivered in connection with Awards granted thereafter, (ii) the number and
kind of shares of Stock by which annual per-person Award limitations are
measured under Section 5 hereof, (iii) the number and kind of shares of Stock
subject to or deliverable in respect of outstanding Awards and (iv) the
exercise price, grant price or purchase price relating to any Award and/or
make provision for payment of cash or other property in respect of any
outstanding Award. In addition, the Committee is authorized to make
adjustments in the terms and conditions of, and the criteria included in,
Awards (including Performance Awards and performance goals, and Annual
Incentive Awards and any Annual Incentive Award pool or performance goals
relating thereto) in recognition of unusual or nonrecurring events (including,
without limitation, events described in the preceding sentence, as well as
acquisitions and dispositions of businesses and assets) affecting the
Corporation, any subsidiary or any business unit, or the financial statements
of the Corporation or any subsidiary, or in response to changes in applicable
laws, regulations, accounting principles, tax rates and regulations or
business conditions or in view of the Committee's assessment of the business
strategy of the Corporation, any subsidiary or business unit thereof,
performance of comparable organizations, economic and business conditions,
personal performance of a Participant, and any other circumstances deemed
relevant; provided that no such adjustment shall be authorized or made if and
to the extent that such authority or the making of such adjustment would cause
Options, SARs, Performance Awards granted under Section 8(b) hereof or Annual
Incentive Awards granted under Section 8(c) hereof to Participants designated
by the Committee as Covered Employees and intended to qualify as
"performance-based compensation" under Code Section 162(m) and regulations
thereunder to otherwise fail to qualify as "performance-based compensation"
under Code Section 162(m) and regulations thereunder.
(d) Taxes. The Corporation and any subsidiary is authorized to
withhold from any Award granted, any payment relating to an Award under the
Plan, including from a distribution of Stock, or any payroll or other payment
to a Participant, amounts of withholding and other taxes due or potentially
payable in connection with any transaction involving an Award, and to take
such other action as the Committee may deem advisable to enable the
Corporation and Participants to satisfy obligations for the payment of
withholding taxes and other tax obligations relating to any Award. This
authority shall include authority to withhold or receive Stock or other
property and to make cash payments in respect thereof in satisfaction of a
Participant's tax obligations, either on a mandatory or elective basis in the
discretion of the Committee.
(e) Changes to the Plan and Awards. The Board may amend, alter,
suspend, discontinue or terminate the Plan or the Committee's authority to
grant Awards under the Plan without the consent of shareholders or
Participants, except that any amendment or alteration to the Plan shall be
subject to the approval of the Corporation's shareholders not later than the
annual meeting next following such Board action if such shareholder approval
is required by any federal or state law or regulation or the rules of any
stock exchange or automated quotation system on which the Stock may then be
listed or quoted, and the Board may otherwise, in its discretion, determine to
submit other such changes to the Plan to shareholders for approval; provided
that, without the consent of an affected Participant, no such Board action may
materially and adversely affect the rights of such Participant under any
previously granted and outstanding Award. The Committee may waive any
conditions or rights under, or amend, alter, suspend, discontinue or terminate
any Award theretofore granted and any Award agreement relating thereto, except
as otherwise provided in the Plan; provided that, without the consent of an
affected Participant, no such Committee action may materially and adversely
affect the rights of such Participant under such Award. Notwithstanding
anything in the Plan to the contrary, if any right under this Plan would cause
a transaction to be ineligible for pooling of interest accounting that would,
but for the right hereunder, be eligible for such accounting treatment, the
Committee may modify or adjust the right so that pooling of interest accounting
shall be available, including the substitution of Stock having a Fair Market
Value equal to the cash otherwise payable hereunder for the right which caused
the transaction to be ineligible for pooling of interest accounting.
(f) Limitation on Rights Conferred under Plan. Neither the Plan
nor any action taken hereunder shall be construed as (i) giving any Eligible
Person or Participant the right to continue as an Eligible Person or
Participant or in the employ or service of the Corporation or a subsidiary,
(ii) interfering in any way with the right of the Corporation or a subsidiary
to terminate any Eligible Person's or Participant's employment or service at
any time, (iii) giving an Eligible Person or Participant any claim to be
granted any Award under the Plan or to be treated uniformly with other
Participants and employees, or (iv) conferring on a Participant any of the
rights of a shareholder of the Corporation unless and until the Participant is
duly issued or transferred shares of Stock in accordance with the terms of an
Award.
(g) Unfunded Status of Awards; Creation of Trusts. The Plan is
intended to constitute an "unfunded" plan for incentive and deferred
compensation. With respect to any payments not yet made to a Participant or
obligation to deliver Stock pursuant to an Award, nothing contained in the
Plan or any Award shall give any such Participant any rights that are greater
than those of a general creditor of the Corporation; provided that the
Committee may authorize the creation of trusts and deposit therein cash,
Stock, other Awards or other property, or make other arrangements to meet the
Corporation's obligations under the Plan. Such trusts or other arrangements
shall be consistent with the "unfunded" status of the Plan unless the
Committee otherwise determines with the consent of each affected Participant.
The trustee of such trusts may be authorized to dispose of trust assets and
reinvest the proceeds in alternative investments, subject to such terms and
conditions as the Committee may specify and in accordance with applicable law.
(h) Nonexclusivity of the Plan. Neither the adoption of the Plan
by the Board nor its submission to the shareholders of the Corporation for
approval shall be construed as creating any limitations on the power of the
Board or a committee thereof to adopt such other incentive arrangements as it
may deem desirable including incentive arrangements and awards which do not
qualify under Code Section 162(m).
(i) Payments in the Event of Forfeitures; Fractional Shares.
Unless otherwise determined by the Committee, in the event of a forfeiture of
an Award with respect to which a Participant paid cash or other consideration,
the Participant shall be repaid the amount of such cash or other
consideration. No fractional shares of Stock shall be issued or delivered
pursuant to the Plan or any Award. The Committee shall determine whether
cash, other Awards or other property shall be issued or paid in lieu of such
fractional shares or whether such fractional shares or any rights thereto
shall be forfeited or otherwise eliminated.
(j) Governing Law. The validity, construction and effect of the
Plan, any rules and regulations under the Plan, and any Award agreement shall
be determined in accordance with the Delaware General Corporation Law, without
giving effect to principles of conflicts of laws, and applicable federal law.
(k) Awards under Preexisting Plans. Upon approval of the Plan by
shareholders of the Corporation as required under Section 10(l) hereof, no
further awards shall be granted under the Preexisting Plans.
(l) Plan Effective Date and Shareholder Approval. The Plan has
been adopted by the Board effective January 8, 1997, subject to approval by
the shareholders of the Corporation.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Exculpation. Section 102(b)(7) of the Delaware Law permits a
corporation to include in its certificate of incorporation a provision
eliminating or limiting the personal liability of a director to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided that such provision may not eliminate or limit
the liability of a director for any breach of the director's duty of loyalty
to the corporation or its stockholders, for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
for the payment of unlawful dividends, or for any transaction from which the
director derived an improper personal benefit.
The CVS Charter limits the personal liability of a director to
CVS and its stockholders for monetary damages for a breach of fiduciary duty
as a director to the fullest extent permitted by law.
Indemnification. Section 145 of the Delaware Law permits a
corporation to indemnify any of its directors or officers who was or is a
party, or is threatened to be made a party to any third party proceeding by
reason of the fact that such person is or was a director or officer of the
corporation, against expenses (including attorney's fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such action, suit or proceeding, if 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, and, with respect to any
criminal action or proceeding, had no reason to believe that such person's
conduct was unlawful. In a derivative action, i.e., one by or in the right of
a corporation, the corporation is permitted to indemnify directors and
officers against expenses (including attorneys' fees) actually and reasonably
incurred by them in connection with the defense or settlement of an action or
suit if they acted in good faith and in a manner that they reasonably believed
to be in or not opposed to the best interests of the corporation, except that
no indemnification shall be made if such person shall have been adjudged
liable to the corporation, unless and only to the extent that the court in
which the action or suit was brought shall determine upon application that the
defendant directors or officers are fairly and reasonably entitled to
indemnity for such expenses despite such adjudication of liability.
The CVS Charter provides for indemnification of directors and
officers of CVS against liability they may incur in their capacities as such
to the fullest extent permitted under the Delaware Law.
Insurance. CVS has in effect Directors and Officers Liability
Insurance with a limit of $100,000,000 and pension trust liability insurance
with a limit of $50,000,000. This insurance was purchased in layers from
National Union Fire Insurance Company of Pittsburgh, Pennsylvania; Federal
Insurance Company of Warren, New Jersey; Royal Indemnity Company of Charlotte,
North Carolina; Columbia Casualty Insurance Company of Chicago, Illinois; St.
Paul Surplus Lines Company of St. Paul, Minnesota; and Reliance Insurance
Company of Philadelphia, Pennsylvania. The pension trust liability insurance
covers actions of directors and officers as well as other employees with
fiduciary responsibilities under ERISA.
Revco Directors and Officers. The Merger Agreement provides
that CVS will cause Revco and its Subsidiaries to indemnify (including the
payment of reasonable fees and expenses of legal counsel) the current or
former directors or officers of Revco to the fullest extent permitted by law
for damages and liabilities arising out of facts and circumstances occurring
at or prior to the Effective Time. The Merger Agreement also provides that
for a period of six years after the Effective Time CVS will cause to be
maintained in effect Revco's existing policies of directors' and officers'
liability insurance as in effect on February 6, 1997 (provided that CVS may
substitute policies with reputable and financially sound carriers having at
least the same coverage and amounts and containing terms and conditions that
are no less advantageous) with respect to facts or circumstances occurring at
or prior to the Effective Time; provided that if the annual premium for such
insurance during such six-year period exceeds 200% of the annual premiums paid
by Revco as of February 6, 1997 for such insurance (such 200% amount, the
"Maximum Premium") then CVS will cause Revco to provide the most advantageous
directors' and officers' insurance coverage then available for an annual
premium equal to the Maximum Premium.
Item 21. Exhibits and Financial Statement Schedules.
<TABLE>
<CAPTION>
Exhibit
Number Description Page
------- ----------- ----
<S> <C> <C>
2 Agreement and Plan of Merger dated as of February 6, 1997, as amended
on March 19, 1997, among the Registrant, Revco D.S., Inc., and North
Acquisition Corp. (included as Annex A to the Joint Proxy
Statement/Prospectus contained in this Registration Statement).
3(a) Amended and Restated Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.1 to the Registrant's Annual Report
on Form 10-K (the "CVS 1996 Form 10-K") for the year ended December
31, 1996).
3(b) By-Laws of CVS Corporation (incorporated by reference to Exhibit 3.2 to
the CVS 1996 Form 10-K).
4 Specimen Common Stock Certificate (incorporated by reference to Exhibit
4-1 to the Registrant's Registration Statement on Form 8-B dated
November 4, 1996).
5 Opinion of Davis Polk & Wardwell regarding the validity of the securities
being registered.*
8 Opinion of Cravath, Swaine & Moore regarding certain federal income tax
consequences relating to the Merger.*
23(a) Consent of KPMG Peat Marwick LLP.*
23(b) Consent of Arthur Andersen LLP.*
23(c) Consent of Davis Polk & Wardwell (included in the opinion filed as
Exhibit 5 to this Registration Statement).*
23(d) Consent of Cravath, Swaine & Moore (included in the opinion filed as
Exhibit 8 to this Registration Statement).*
23(e) Consent of Donaldson, Lufkin & Jenrette Securities Corporation.*
23(f) Consent of Wasserstein Perella & Co., Inc.*
23(g) Consent of Salomon Brothers Inc.*
24 Powers of Attorney.*
99(a) Consent of Sheli Rosenberg to be named as a nominee for director of CVS
Corporation.*
99(b) Consent of Thomas Thorsen to be named as a nominee for director of CVS
Corporation.*
99(c) Forms of CVS Proxy Cards.*
99(d) Form of Revco Proxy Card.*
99(e) Consulting Agreement between CVS Corporation and Dwayne Hoven.*
99(f) Consulting Agreement between CVS Corporation and James Mastrian.*
99(g) Consulting Agreement between CVS Corporation and Carl Bellini.*
<FN>
- ------------
* To be filed by amendment.
</TABLE>
Item 22. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement;
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4) That prior to any public reoffering of the securities
registered hereunder through use of a prospectus which is a part of this
registration statement, by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c), such reoffering prospectus will
contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition
to the information called for by the other items of the applicable form.
(5) That every prospectus (i) that is filed pursuant to
paragraph (1) immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Securities Act of 1933 and is used
in connection with an offering of securities subject to Rule 415, will be
filed as a part of an amendment to the registration statement and will not
be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act of 1933, each such post-
effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(6) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the registrant's annual report pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant
to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated
by reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(b) The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the Joint
Proxy Statement/Prospectus pursuant to Item 4, 10(b), 11 or 13 of this Form,
within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding to
the request.
(c) The undersigned registrant hereby undertakes to supply by
means of a post-effective amendment all information concerning a transaction,
and the company being acquired involved therein, that was not the subject of
and included in the registration statement when it became effective.
(d) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Woonsocket, State of Rhode Island, on March 28, 1997.
CVS CORPORATION
(Registrant)
Date: March 28, 1997 By: /s/ Charles C. Conaway
------------------------------- -------------------------
Charles C. Conaway
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Chairman of the Board, Chief Executive March 28, 1997
* Officer and Director
- ------------------------------------ (Principal Executive Officer)
(Stanley P. Goldstein)
/s/ Charles C. Conaway Executive Vice President and Chief March 28, 1997
- ------------------------------------ Financial Officer (Principal Financial and
(Charles C. Conaway) Accounting Officer)
* Director March 28, 1997
- ------------------------------------
(Allan J. Bloostein)
* Director March 28, 1997
- ------------------------------------
(W. Don Cornwell)
* Director March 28, 1997
- ------------------------------------
(Thomas P. Gerrity)
* Director March 28, 1997
- ------------------------------------
(Michael H. Jordan)
* Director March 28, 1997
- ------------------------------------
(William H. Joyce)
* Director March 28, 1997
- ------------------------------------
(Terry R. Lautenbach)
* Director March 28, 1997
- ------------------------------------
(Terrence Murray)
* Director March 28, 1997
- ------------------------------------
(Harvey Rosenthal)
* Vice Chairman of the Board, Chief March 28, 1997
- ------------------------------------ Operating Officer and Director
(Thomas M. Ryan)
* Director March 28, 1997
- ------------------------------------
(Ivan G. Seidenberg)
* Director March 28, 1997
- ------------------------------------
(Patricia Carry Stewart)
* Director March 28, 1997
- ------------------------------------
(M. Cabell Woodward, Jr.)
*/s/ Charles C. Conaway March 28, 1997
- ------------------------------------
(Charles C. Conaway)
Attorney-in-Fact
</TABLE>
