<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
SCHEDULE 14A INFORMATION
----------------
PROXY STATEMENT PURSUANT TO SECTION 14A OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_]Preliminary Proxy Statement
[X]Definitive Proxy Statement
[_]Definitive Additional Materials
[_]Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
- --------------------------------------------------------------------------------
HOOK-SUPERX, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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HOOK-SUPERX, INC.
(NAME OF PERSON(S) FILING PROXY STATEMENT)
- --------------------------------------------------------------------------------
Payment of Filing Fee (Check the appropriate box):
[_]$125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(j)(2)
[_]$500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3)
[X]Fee computed on table below per Exchange Act Rules 14a-6(i) and 0-11:
1) Title of each class of securities to which transaction applies:
HOOK-SUPERX, INC. COMMON STOCK, PAR VALUE $.01 PER SHARE
--------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
20,938,195 (OUTSTANDING SHARES OF HOOK-SUPERX, INC.
COMMON STOCK ON CLOSE OF TRADING JUNE 15, 1994)
----------------------------------
3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11:
$13.75 IN CASH FOR ALL OF THE SECURITIES TO WHICH THE TRANSACTION APPLIES
-------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction: $287,900,182
[X]Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing:
1) Amount Previously Paid:
$57,401.04
--------
2) Form, Schedule or Registration Statement No.:
SCHEDULE 14A (COMMISSION FILE NO. 1-11122)
------------------------------------------
3) Filing Party:
HOOK-SUPERX, INC.
-----------------
4) Date Filed:
APRIL 26, 1994
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<PAGE>
[LOGO OF HOOK-SUPERX, INC. APPEARS HERE]
HOOK-SUPERX, INC.
175 TRI-COUNTY PARKWAY
CINCINNATI, OHIO 45246-3222
June 17, 1994
DEAR FELLOW STOCKHOLDER:
You are cordially invited to attend a Special Meeting of Stockholders of
Hook-SupeRx, Inc. (the "Company"), to be held at One New York Plaza, New York,
New York, 27th Floor, on July 8, 1994, at 10:00 a.m., local time. A Notice of
the Special Meeting, a proxy and a Proxy Statement containing information about
the matters to be acted upon are enclosed. All holders of the Company's
outstanding shares of common stock as of the close of business on June 7, 1994
(the "Record Date") will be entitled to notice of and to vote at the Special
Meeting.
At the Special Meeting, you will be asked to consider and vote upon a
proposal to approve and adopt an Agreement and Plan of Merger, dated as of
March 31, 1994 (the "Merger Agreement"), between the Company, Revco D.S., Inc.,
a Delaware corporation ("Revco"), and HSX Acquisition Corp., a Delaware
corporation and wholly-owned subsidiary of Revco ("Merger Sub"), and the
transactions contemplated thereby. Pursuant to the terms of the Merger
Agreement, among other things, (i) Merger Sub will be merged with and into the
Company, with the Company being the surviving corporation (the "Merger"), and
(ii) each outstanding share of the common stock, par value $.01 per share
("Common Stock"), of the Company (other than shares of Common Stock held by the
Company as treasury stock or held by stockholders, if any, who properly
exercised their dissenters' rights under Delaware law) will be cancelled and
converted into the right to receive $13.75 in cash.
Details of the Merger and other important information are set forth in the
accompanying Proxy Statement, which you are urged to read carefully before
voting.
The Kroger Co., Bridge Street Fund 1986, Stone Street Fund 1986, Goldman
Sachs & Co., The Goldman Sachs Group, L.P. and Broad Street Investment Fund,
L.P., which beneficially owned, in the aggregate, approximately 49.0% of the
outstanding shares of Common Stock as of the Record Date, have agreed with
Revco to vote their shares FOR the approval and adoption of the Merger. In
addition, Philip E. Beekman, Chairman of the Board, President and Chief
Executive Officer of the Company, who beneficially owned approximately 5.8% of
the outstanding shares of Common Stock as of the Record Date, has informed the
Company that he intends to vote all of his shares of Common Stock FOR the
approval and adoption of the Merger Agreement and the transactions contemplated
thereby. Although the aforementioned stockholders have sufficient voting power
to approve and adopt the Merger Agreement, your Board of Directors nevertheless
believes that your representation at the Special Meeting is important and urges
you to vote your shares of Common Stock.
Your Board of Directors has determined that the terms of the Merger are fair
to, and in the best interests of, the Company and its stockholders, has
approved and adopted the Merger Agreement and the transactions contemplated
thereby and recommends that the stockholders of the Company vote FOR the
approval and adoption of the Merger Agreement and the transactions contemplated
thereby. The Board has received a written opinion of Goldman, Sachs & Co., who
has acted as financial advisor to the Company in connection with the Merger, as
to the fairness of the consideration to be received by the Company's
stockholders in the Merger. Furthermore, Salomon Brothers Inc has also
furnished a written opinion to the Board as to the fairness, from a financial
point of view, of the consideration to be received by the Company's
stockholders in the Merger.
Whether or not you plan to attend the Special Meeting, please complete, sign
and date the accompanying proxy card and return it in the enclosed postage-
prepaid envelope as soon as possible so that your shares will be represented at
the Special Meeting. If you attend the Special Meeting, you may vote in person
even if you have previously returned your proxy card.
Sincerely,
/s/Philip E. Beekman
Philip E. Beekman
Chairman of the Board, President and
Chief Executive Officer
<PAGE>
HOOK-SUPERX, INC.
175 TRI-COUNTY PARKWAY
CINCINNATI, OHIO 45246-3222
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
June 17, 1994
TO THE STOCKHOLDERS OF HOOK-SUPERX, INC.:
Notice is hereby given that a Special Meeting of the stockholders of Hook-
SupeRx, Inc. (the "Company") will be held at One New York Plaza, New York, New
York, 27th Floor, on Friday, July 8, 1994 at 10:00 a.m., local time, for the
following purpose:
To consider and vote upon a proposal to approve and adopt the Agreement and
Plan of Merger, dated as of March 31, 1994 (the "Merger Agreement"), between
the Company, Revco D.S., Inc., a Delaware corporation ("Revco"), and HSX
Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of
Revco ("Merger Sub"), and the transactions contemplated thereby, pursuant to
which, among other things, (i) Merger Sub will be merged with and into the
Company, with the Company being the surviving corporation (the "Merger"),
and (ii) each outstanding share of the common stock, par value $.01 per
share (the "Common Stock"), of the Company (other than shares of Common
Stock owned by the Company as treasury stock immediately prior to the
Effective Time (as defined in the Merger Agreement), which shares will be
cancelled, and other than shares of Common Stock held by stockholders, if
any, who properly exercised their dissenters' rights under Delaware law)
will be cancelled and converted into the right to receive $13.75 in cash as
more fully described in the accompanying Proxy Statement.
A copy of the Merger Agreement is attached as Annex A to the Proxy Statement
that accompanies this Notice of Special Meeting.
Your Board of Directors has determined that the terms of the Merger are fair
to, and in the best interests of, the Company and its stockholders, has
approved and adopted the Merger Agreement and the transactions contemplated
thereby and recommends that the stockholders of the Company vote FOR the
approval and adoption of the Merger Agreement and the transactions contemplated
thereby.
The Board of Directors of the Company has fixed the close of business on June
7, 1994 as the record date (the "Record Date") for determination of
stockholders entitled to notice of, and to vote at, the Special Meeting and any
adjournments or postponements thereof.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE
AND SIGN THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED POSTAGE PREPAID
ENVELOPE PROMPTLY IN ORDER TO ASSURE THAT YOUR SHARES OF COMMON STOCK WILL BE
REPRESENTED. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON EVEN IF
YOU HAVE PREVIOUSLY RETURNED YOUR PROXY CARD.
Under Delaware law, holders of shares of Common Stock have the right to
dissent from the Merger and to receive payment of the fair value of their
shares upon compliance with Section 262 of the Delaware General Corporation
Law. This right is explained more fully in the accompanying Proxy Statement in
the section headed "APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS." Section 262
of the Delaware General Corporation Law is attached to the Proxy Statement as
Annex B.
By order of the Board of Directors,
/s/ Raymond W. Rizzo
Raymond W. Rizzo
Secretary
Cincinnati, Ohio
June 17, 1994
IMPORTANT
PLEASE DO NOT SEND YOUR COMMON STOCK CERTIFICATES AT THIS TIME. IF THE MERGER
IS CONSUMMATED, YOU WILL BE SENT INSTRUCTIONS REGARDING THE SURRENDER OF YOUR
STOCK CERTIFICATES.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY................................................................... 3
THE SPECIAL MEETING....................................................... 10
Date, Place and Time.................................................... 10
Matters to be Considered at the Meeting................................. 10
Record Date; Voting at the Meeting...................................... 10
Vote Required........................................................... 10
Solicitation, Revocation and Use of Proxies............................. 11
THE MERGER................................................................ 11
Background; Reasons for the Merger...................................... 11
Recommendation of the Board of Directors................................ 12
Evaluation By Certain Executive Officers................................ 13
Opinions of Investment Bankers.......................................... 14
THE MERGER AGREEMENT...................................................... 20
In General; Payment of Purchase Price................................... 20
Representations and Warranties.......................................... 21
Certain Covenants....................................................... 22
Agreements with Respect to Company Stock Option Plans................... 24
Revco's Agreements with Respect to Certain Employee Benefits............ 24
Amendment of Merger Agreement........................................... 25
Conditions to Closing................................................... 25
Termination............................................................. 26
Payment of Expenses..................................................... 27
Regulatory Approval..................................................... 27
Financing............................................................... 27
CERTAIN FEDERAL INCOME TAX CONSEQUENCES; ACCOUNTING TREATMENT............. 28
Certain Federal Income Tax Consequences................................. 28
Accounting Treatment.................................................... 29
CERTAIN OTHER AGREEMENTS.................................................. 29
Voting Agreement........................................................ 29
Stockholders Rights Agreement........................................... 29
INTERESTS OF CERTAIN PERSONS IN THE MERGER................................ 29
Employment Agreement.................................................... 29
Protective Compensation and Benefit Agreements; Supplemental Executive
Retirement Plan........................................................ 30
Company Bonus Plans..................................................... 31
Indemnification and Insurance........................................... 32
Financial Advisor....................................................... 33
APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS............................... 33
PRICE RANGE OF STOCK...................................................... 36
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT............... 37
SELECTED FINANCIAL DATA................................................... 39
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS..................... 42
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 44
CERTAIN PROJECTED FINANCIAL INFORMATION................................... 54
BUSINESS.................................................................. 55
INDEPENDENT ACCOUNTANTS................................................... 60
STOCKHOLDER PROPOSALS FOR THE 1995 MEETING................................ 60
OTHER MATTERS............................................................. 60
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................ F-1
ANNEX A Agreement and Plan of Merger...................................... A-1
ANNEX B Section 262 of the Delaware General Corporation Law............... B-1
ANNEX C Voting Agreement.................................................. C-1
ANNEX D Fairness Opinion of Goldman, Sachs & Co........................... D-1
ANNEX E Fairness Opinion of Salomon Brothers Inc.......................... E-1
</TABLE>
ii
<PAGE>
[LOGO OF HOOK-SUPERX, INC. APPEARS HERE]
175 TRI-COUNTY PARKWAY
CINCINNATI, OHIO 45246-3222
----------------------------
PROXY STATEMENT
----------------------------
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JULY 8, 1994
----------------------------
This Proxy Statement is furnished to holders of common stock, par value $.01
per share ("Common Stock"), of Hook-SupeRx, Inc., a Delaware corporation (the
"Company"), in connection with the solicitation by the Board of Directors of
the Company (the "Board of Directors" or the "Board") of proxies to be used at
the Special Meeting of Stockholders of the Company to be held on July 8, 1994
at 10:00 a.m., local time, at One New York Plaza, New York, New York, 27th
Floor, and at any adjournments or postponements thereof (the "Special
Meeting"). The date on which this Proxy Statement and the enclosed proxy are
being first sent to stockholders is on or about June 17, 1994.
At the Special Meeting, stockholders will be asked to consider and vote upon
a proposal to approve and adopt an Agreement and Plan of Merger, dated as of
March 31, 1994 (the "Merger Agreement"), between the Company, Revco D.S., Inc.,
a Delaware corporation ("Revco"), and HSX Acquisition Corp., a Delaware
corporation and wholly-owned subsidiary of Revco ("Merger Sub"), and the
transactions contemplated thereby. A copy of the Merger Agreement is attached
hereto as Annex A. Pursuant to the terms of the Merger Agreement, among other
things, (i) Merger Sub will be merged with and into the Company, with the
Company being the surviving corporation (the "Merger"), and (ii) each
outstanding share of Common Stock and each associated preferred stock purchase
right attached thereto (other than shares of Common Stock held by the Company
as treasury stock immediately prior to the Effective Time (as defined herein),
will be cancelled, and other than shares of Common Stock held by stockholders,
if any, who properly exercised their dissenters' rights under Delaware law)
will be cancelled and converted into the right to receive $13.75 in cash (the
"Purchase Price"). Upon the consummation of the Merger, stockholders of the
Company will have no further interest in the Company. No additional
consideration will be paid by Revco for the preferred stock purchase rights
attached to each share of Common Stock.
Stockholders of record at the close of business on June 7, 1994 (the "Record
Date") are entitled to notice of, and to vote at, the Special Meeting and any
adjournments or postponements thereof. At the Record Date there were
outstanding 20,932,865 shares of Common Stock, each of which will be entitled
to one vote on each matter to be acted upon at the Special Meeting and all
adjournments and postponements thereof.
The By-laws of the Company provide that a majority of the shares of Common
Stock issued and outstanding and entitled to vote, present in person or
represented by proxy, will constitute a quorum for the transaction of business
at the Special Meeting. Any stockholder present in person or by proxy
(including broker non-votes) at the Special Meeting, but who abstains from
voting, shall be counted for purposes of determining whether a quorum exists.
The Merger Agreement is conditioned, among other things, upon the affirmative
vote of the holders of a majority of the issued and outstanding shares of
Common Stock. Abstentions and broker non-votes will be counted as votes against
the proposal to approve the Merger Agreement. The Kroger Co., Bridge Street
Fund 1986, Stone Street Fund 1986, Goldman, Sachs & Co., The Goldman Sachs
Group, L.P.
<PAGE>
and Broad Street Investment Fund, L.P. (collectively, the "Voting Agreement
Stockholders"), which beneficially owned, in the aggregate, approximately 49.0%
of the outstanding shares of Common Stock as of the Record Date, have entered
into a Voting Agreement (the "Voting Agreement"), dated as of March 31, 1994,
with Revco pursuant to which the Voting Agreement Stockholders have agreed,
among other things, to vote their shares of Common Stock in favor of the
Merger. A copy of the Voting Agreement is attached as Annex C. In addition,
Philip E. Beekman, Chairman of the Board, President and Chief Executive Officer
of the Company, who beneficially owned approximately 5.8% of the outstanding
shares of Common Stock as of the Record Date, has informed the Company that he
intends to vote all of his shares of Common Stock FOR the approval and adoption
of the Merger Agreement and the transactions contemplated thereby. Accordingly,
the Voting Agreement Stockholders and Mr. Beekman have sufficient voting power
to approve and adopt the Merger Agreement, regardless of the vote of any other
stockholder of the Company.
If the enclosed form of proxy is properly executed and returned to the
Company in time to be voted at the Special Meeting, the shares of Common Stock
represented thereby will be voted in accordance with the instructions marked
thereon. Executed but unmarked proxies will be voted FOR the approval and
adoption of the Merger Agreement.
The presence of a stockholder at the Special Meeting will not automatically
revoke such stockholder's proxy. However, a stockholder may revoke a proxy at
any time prior to its exercise by filing with the Secretary of the Company
(2800 Enterprise Street, Indianapolis, Indiana 46219) a written notice of
revocation, by delivering to the Company a duly executed proxy representing
such shares of Common Stock and bearing a later date, or by voting in person at
the Special Meeting.
The cost of solicitation of proxies will be borne by the Company. In addition
to the solicitation of proxies by mail, the Company, through its directors,
officers and regular employees (who will receive no compensation therefor in
addition to their regular salaries), may also solicit proxies personally, by
telephone, by facsimile or by other means of communication. The Company has
retained Georgeson & Company Inc. ("Georgeson") to assist in the solicitation
of proxies. The Company will pay to Georgeson a fee for proxy solicitation
services in the amount of $6,000 plus out-of-pocket expenses. The Company also
will request brokers, custodians and other nominees or fiduciaries to send
proxy materials to, and to obtain proxies from, beneficial owners of stock and
will reimburse such parties for their reasonable expenses in doing so.
PLEASE DO NOT SEND YOUR COMMON STOCK CERTIFICATES AT THIS TIME. IF THE MERGER
IS CONSUMMATED, YOU WILL BE SENT INSTRUCTIONS REGARDING THE SURRENDER OF YOUR
STOCK CERTIFICATES.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT IN
CONNECTION WITH THE SOLICITATION OF PROXIES HEREBY AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED ON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY OTHER PERSON.
2
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in this
Proxy Statement and the documents incorporated herein by reference. This
summary does not contain a complete statement of all material information
relating to the Merger and the transactions related thereto. Reference is made
to, and this summary is qualified in its entirety by, the more detailed
information appearing in this Proxy Statement and the Annexes hereto. Unless
otherwise defined herein, capitalized terms used in this summary have the
respective meanings set forth elsewhere in this Proxy Statement. Stockholders
are urged to read this Proxy Statement and the Annexes hereto in their
entirety.
THE PARTIES
Hook-SupeRx, Inc.............. The Company operates one of the largest retail
drug store chains in the United States in terms
of store count. The Company's approximately
1,150 drug stores are located over a diverse
geographic area consisting of 22 states, pri-
marily in the Midwestern and Northeastern re-
gions of the United States. The Company also
operates 33 home health care centers primarily
in the Midwestern region of the United States.
The principal executive offices of the Company
are located at 175 Tri-County Parkway, Cincin-
nati, Ohio 45246-3222 and the telephone number
is (513) 782-3000.
Revco D.S., Inc............... Revco operates one of the largest retail drug
store chains in the United States with approxi-
mately 1,150 stores located in nine contiguous
eastern states. The principal executive offices
of Revco are located at 1925 Enterprise Park-
way, Twinsburg, Ohio 44087 and the telephone
number is (216) 425-9811.
THE SPECIAL MEETING
Date, Place and Time.......... The Special Meeting of stockholders of the Com-
pany is to be held at One New York Plaza, New
York, New York, 27th Floor, on July 8, 1994 at
10:00 a.m., local time. See "THE SPECIAL MEET-
ING--Date, Place and Time."
Matters to be Considered at
the Meeting.................. The purpose of the Special Meeting is to con-
sider and vote upon a proposal to approve and
adopt the Merger Agreement and the transactions
contemplated thereby. See "THE SPECIAL MEET-
ING--Matters to be Considered at the Meeting."
Record Date; Voting at the
Meeting...................... Holders of record of shares of Common Stock at
the close of business on June 7, 1994 are enti-
tled to notice of and to vote at the Special
Meeting. At the Record Date, there were out-
standing 20,932,865 shares of Common Stock,
each of which will be entitled to one vote on
each matter to be acted upon at the Special
Meeting and all adjournments and postponements
thereof. See "THE SPECIAL MEETING--Record Date;
Voting at the Meeting."
3
<PAGE>
Vote Required................. The affirmative vote of holders of a majority
of the outstanding shares of Common Stock is
required under applicable law to approve and
adopt the Merger Agreement. The Kroger Co.,
Bridge Street Fund 1986, Stone Street Fund
1986, Goldman, Sachs & Co., The Goldman Sachs
Group, L.P. and Broad Street Investment Fund I,
L.P. (collectively, the "Voting Agreement
Stockholders"), which beneficially owned, in
the aggregate, approximately 49.0% of the out-
standing shares of Common Stock as of the Rec-
ord Date, have entered into the Voting Agree-
ment, dated as of March 31, 1994 (the "Voting
Agreement"), with Revco. Pursuant to the Voting
Agreement, the Voting Agreement Stockholders
have agreed, among other things, to vote their
shares of Common Stock in favor of the Merger.
A copy of the Voting Agreement is attached as
Annex C to this Proxy Statement. In addition,
Philip E. Beekman, President, Chairman of the
Board and Chief Executive Officer of the Com-
pany ("Mr. Beekman"), who beneficially owned
approximately 5.8% of the outstanding shares of
Common Stock as of the Record Date, has in-
formed the Company that he intends to vote all
of his shares of Common Stock FOR the approval
and adoption of the Merger Agreement. Accord-
ingly, the Voting Agreement Stockholders and
Mr. Beekman have sufficient voting power to ap-
prove and adopt the Merger Agreement, regard-
less of the vote of any other stockholder of
the Company. See "THE SPECIAL MEETING--Vote Re-
quired."
Solicitation, Revocation and
Use of Proxies............... All expenses of the solicitation of the stock-
holders of the Company in connection with this
Proxy Statement will be borne by the Company.
The Company has retained Georgeson to assist in
the solicitation of proxies. Any proxy given
pursuant to this solicitation may be revoked at
any time prior to its exercise by the execution
of a proxy signed at a later date, by the fil-
ing of a written notice of revocation with the
Secretary of the Company at any time before the
taking of the vote at the Special Meeting or by
voting in person at the Special Meeting. See
"THE SPECIAL MEETING--Solicitation, Revocation
and Use of Proxies."
THE MERGER
Recommendation of the Board
of Directors................. On April 1, 1994, the Board of Directors of the
Company approved the Merger Agreement and the
transactions contemplated thereby. The Board
recommends that the holders of Common Stock
vote FOR the approval and adoption of the
Merger Agreement and the transactions contem-
plated thereby. For a discussion of the factors
considered by the Board of Directors in reach-
ing its decision, see "THE
4
<PAGE>
MERGER--Background; Reasons for the Merger,"
"THE MERGER--Recommendation of the Board of Di-
rectors," "THE MERGER--Evaluation by Certain
Executive Officers" and "CERTAIN PROJECTED FI-
NANCIAL INFORMATION."
Opinions of Investment
Bankers...................... On April 1, 1994, Goldman, Sachs & Co.
("Goldman Sachs"), the financial advisor of the
Company, delivered its oral opinion to the
Board of Directors to the effect that, based on
various considerations and assumptions, the
Purchase Price to be paid to the holders of
Common Stock pursuant to the Merger was fair to
such holders. Goldman Sachs subsequently con-
firmed its oral opinion by delivery of its
written opinion dated as of the date of this
Proxy Statement. Goldman Sachs and certain of
its affiliates beneficially owned approximately
24.5% of the shares of Common Stock outstanding
as of the Record Date and have agreed, pursuant
to the Voting Agreement, to vote in favor of
the Merger. Howard A. Silverstein, a general
partner of Goldman Sachs, and Michael H. Coles,
a limited partner of Goldman Sachs, are direc-
tors of the Company.
On April 1, 1994, Salomon Brothers Inc ("Salo-
mon Brothers") provided its oral opinion to the
Board of Directors to the effect that, based on
various considerations and assumptions, the
Purchase Price to be paid to the holders of
Common Stock pursuant to the Merger was fair,
from a financial point of view, to such hold-
ers. Salomon Brothers subsequently confirmed
such opinion by delivery of its written opinion
dated as of April 1, 1994.
Copies of the full text of the written opinions
of Goldman Sachs and Salomon Brothers, which
set forth the assumptions made, procedures fol-
lowed, matters considered and limits of their
respective reviews, are attached to this Proxy
Statement as Annexes D and E, respectively, and
should be read carefully in their entirety. See
"THE MERGER--Opinions of Investment Bankers."
THE MERGER AGREEMENT
General....................... Upon the terms and subject to the conditions of
the Merger Agreement, (i) Merger Sub will be
merged with and into the Company, with the Com-
pany being the surviving corporation (the "Sur-
viving Corporation") and (ii) each outstanding
share of Common Stock (other than shares of
Common Stock held by the Company as treasury
stock immediately prior to the Effective Time,
which shares will be cancelled, and other than
shares of Common Stock held by stockholders, if
any, who properly exercised their dissenters'
rights of appraisal under Delaware law) will be
cancelled and converted into the right to re-
ceive $13.75 in cash. A closing (the
5
<PAGE>
"Closing") will be held on the first business
day immediately following the day on which the
last of the required conditions to the Closing
has been satisfied or waived, or on such other
date as is agreed upon by the Company and
Revco. The date on which the Closing occurs is
referred to herein as the "Closing Date." The
Merger will become effective upon the filing of
a Certificate of Merger with the Secretary of
State of the State of Delaware in accordance
with the Delaware General Corporation Law (the
"DGCL") or at such later time as is provided in
such Certificate (the "Effective Time"). See
"THE MERGER AGREEMENT--In General; Payment of
Purchase Price."
Conditions to the Merger...... The respective obligations of the Company and
Revco to consummate the Merger are subject to
the satisfaction or, where applicable, waiver
of the following conditions, among others: (i)
the approval of the Merger by the holders of at
least a majority of the outstanding shares of
Common Stock, (ii) the expiration or termina-
tion of the waiting period applicable to the
consummation of the Merger under the Hart-
Scott-Rodino Antitrust Improvements Act of 1976
(the "HSR Act"), (iii) neither the Company nor
Revco shall be subject to any order or injunc-
tion of a court of competent jurisdiction which
prohibits the consummation of the transactions
contemplated by the Merger Agreement, (iv)
other than as specified in the Merger Agree-
ment, the making or obtaining of all consents,
authorizations, orders and approvals of (or
filings or registrations with) any governmental
commission, board or other regulatory body, (v)
compliance by the other party with its agree-
ments contained in the Merger Agreement to be
performed on or prior to the Closing Date, (vi)
the representations and warranties of the other
party contained in the Merger Agreement or in
any other document delivered pursuant to the
Merger Agreement shall be true and correct as
of the Closing Date (unless the failure of any
representation and warranty to be so true and
correct would not have or would not be reasona-
bly likely to have a material adverse effect,
in the case of Revco, on the business, results
of operations or financial condition of the
Company (a "Company Material Adverse Effect")
or, in the case of the Company, on the ability
of Revco to perform its obligations under the
Merger Agreement (a "Revco Material Adverse Ef-
fect")), or (vii) from the date of the Merger
Agreement through the Effective Time, there
shall have not occurred any change in the fi-
nancial condition, business, operations or
prospects of the other party which would or
would be reasonably likely to have a Company
Material Adverse Effect or a Revco Material Ad-
verse Effect, as the case may be. See "THE
MERGER AGREEMENT--Conditions to Closing."
6
<PAGE>
Termination of the Merger
Agreement.................... The Merger Agreement may be terminated (i) by
the mutual consent of the Company and Revco;
(ii) by either the Company or Revco if (a) the
Merger shall not have been consummated by Sep-
tember 30, 1994, (b) the approval of holders of
a majority of the shares of Common Stock shall
not have been obtained at the Special Meeting
or any adjournment thereof, (c) a United States
Federal or state court of competent jurisdic-
tion or United States Federal or state govern-
mental, regulatory or administrative agency or
commission prohibits the transactions contem-
plated by the Merger Agreement, (d) the other
party has breached any representations or war-
ranties contained in the Merger Agreement which
would have or would be reasonably likely to
have a Company Material Adverse Effect or a
Revco Material Adverse Effect, as the case may
be, or (e) the other party has materially
breached any covenants or agreements set forth
in the Merger Agreement, which breach is either
not curable or, if curable, is not cured within
30 days after notice thereof; or (iii) by the
Company if, in the exercise of its good faith
judgment as to its fiduciary duties to its
stockholders imposed by law, the Board of Di-
rectors determines that such termination is re-
quired by reason of a proposal or offer being
made with respect to a merger, acquisition,
consolidation or similar transaction involving,
or any purchase of all or any significant por-
tion of the assets of, the Company or any of
its significant subsidiaries (an "Acquisition
Proposal"). See "THE MERGER AGREEMENT--Termina-
tion."
CERTAIN FEDERAL INCOME
TAX CONSEQUENCES; ACCOUNTING TREATMENT
Certain Federal Income Tax
Consequences................. The receipt of cash by a stockholder of the
Company pursuant to the Merger or pursuant to
the exercise of dissenters' rights under Dela-
ware law will generally be a taxable transac-
tion for Federal income tax purposes for stock-
holders subject to Federal income tax. The gain
or loss recognized thereon generally will be
treated as a capital gain or capital loss, and
such transaction may also be taxable under ap-
plicable state, local and foreign tax laws and
may be subject to backup withholding. All
stockholders are urged to consult their own tax
advisors. See "CERTAIN FEDERAL INCOME TAX CON-
SEQUENCES; ACCOUNTING TREATMENT."
Accounting Treatment.......... The Company understands that the Merger will be
accounted for by Revco as a "purchase" under
generally accepted accounting principles. See
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES; AC-
COUNTING TREATMENT."
7
<PAGE>
CERTAIN OTHER AGREEMENTS
The Voting Agreement.......... Concurrently upon entering into the Merger
Agreement, Revco, Merger Sub and the Voting
Agreement Stockholders entered into the Voting
Agreement pursuant to which the Voting Agree-
ment Stockholders agreed, among other things,
to vote all of their shares of Common Stock in
favor of the Merger. A copy of the Voting
Agreement is attached to this Proxy Statement
as Annex C.
Stockholders Rights
Agreement.................... The Company is a party to a Rights Agreement,
dated as of June 3, 1992 (the "Rights Agree-
ment"), pursuant to which each outstanding
share of Common Stock has attached to it one
preferred stock purchase right (a "Right") that
entitles the holder to purchase from the Com-
pany one one-hundredth of a share of Series A
Preferred Stock at a price of $64 per one-hun-
dredth of a share. Immediately prior to the ex-
ecution of the Merger Agreement, the definition
of an "Acquiring Person" under the Rights
Agreement was amended to exclude Revco and
Merger Sub if they obtained the Beneficial Own-
ership (as defined in the Rights Agreement) of
more than the permitted percentage of Common
Stock under the Rights Agreement solely as a
result of the execution, delivery and perfor-
mance of the Voting Agreement and the Merger
Agreement. Consistent with the terms of the
Rights Agreement, this amendment was adopted by
the Board and is set forth in an Amendment to
Rights Agreement. No additional consideration
will be paid by Revco for the Rights and, at
the Effective Time, the Rights will be can-
celled. See "CERTAIN OTHER AGREEMENTS--Stock-
holders Rights Agreement."
INTEREST OF CERTAIN PERSONS IN THE MERGER
General Statement............. In considering the recommendation of the Board
of Directors with respect to the Merger Agree-
ment, stockholders should be aware that certain
members of the Board of Directors and the
Company's management may have certain interests
in the Merger that are in addition to or dif-
ferent from the interests of stockholders of
the Company generally. Under existing agree-
ments (the "Protective Compensation and Benefit
Agreements"), 43 employees of the Company, in-
cluding Mr. Beekman, will be entitled to pay-
ments totaling approximately $12,267,133, ex-
cluding payment for excise taxes, in the event
their employment with the Company is terminated
within a specified period following the Effec-
tive Time. Under the terms of an employment
agreement, Mr. Beekman will be entitled, under
certain circumstances, to a severance payment
of approximately $1,237,500 upon the consumma-
tion of the Merger. Mr. Beekman, however, is
not entitled to any duplication of pay-
8
<PAGE>
ment under his employment agreement and his
Protective Compensation and Benefit Agreement.
Since Mr. Beekman would be entitled to a higher
severance pay benefit under his Protective Com-
pensation and Benefit Agreement, no severance
payment will be made to him under his employ-
ment agreement as a result of the Merger. Under
the terms of the HSI Supplemental Executive Re-
tirement Plan, the Company would be obliged to
pay the 35 participants thereunder a total of
$3,939,149 upon the consummation of the Merger.
The aforementioned amounts were determined as-
suming that they had become payable on February
28, 1994. Furthermore, Revco has agreed that
bonuses paid under the Company's bonus plans
(the "Bonus Plans") for the fiscal year ending
August 31, 1994 ("Fiscal 1994") to all execu-
tive officers and administrative employees cov-
ered by Bonus Plans and who are employed by the
Company on August 31, 1994 will equal 30% of
the total potential bonus that had been payable
thereunder (regardless of actual performance by
the Company). Revco has also agreed to pay to
such employees whose employment is terminated
prior to August 31, 1994 and on or after the
Effective Time a bonus equal to the product of
(x) 30% of such employee's total potential bo-
nus under the Bonus Plans for Fiscal 1994 and
(y) a percentage equal to the number of days
such employee was employed by the Company (in-
cluding days employed by the Surviving Corpora-
tion) during Fiscal 1994, divided by 365. Revco
also agreed to indemnify and hold harmless to
the fullest extent permitted under applicable
law officers, directors, employees, trustees
and agents of the Company for certain losses,
claims, damages, liabilities, costs, expenses,
judgments, fines, penalties and other matters
arising from actions or omissions incurred in
their capacity as such. See "INTERESTS OF CER-
TAIN PERSONS IN THE MERGER." The Board of Di-
rectors was aware of these interests and con-
sidered them, among other matters, in approving
and adopting the Merger Agreement.
APPRAISAL RIGHTS
Appraisal Rights.............. Pursuant to the DGCL, holders of shares of Com-
mon Stock will be entitled to dissenters'
rights of appraisal in connection with the
Merger. See "APPRAISAL RIGHTS OF DISSENTING
STOCKHOLDERS" and Annex B hereto.
9
<PAGE>
THE SPECIAL MEETING
DATE, PLACE AND TIME
The Special Meeting will be held at One New York Plaza, New York, New York,
27th Floor, on Friday, July 8, 1994 at 10:00 a.m., local time.
MATTERS TO BE CONSIDERED AT THE MEETING
At the Special Meeting, holders of Common Stock as of the Record Date will be
asked to consider and vote upon a proposal to approve and adopt the Merger
Agreement and the transactions contemplated thereby.
The Board of Directors has approved the Merger Agreement and the transactions
contemplated thereby and recommends a vote FOR approval and adoption of the
Merger Agreement and the transactions contemplated thereby by the stockholders
of the Company.
RECORD DATE; VOTING AT THE MEETING
The Board of Directors has fixed June 7, 1994 as the Record Date for the
determination of the stockholders of the Company entitled to notice of and to
vote at the Special Meeting and any adjournments or postponements thereof. On
the Record Date, there were 20,932,865 shares of Common Stock outstanding,
which shares were held by approximately 784 holders of record. Shares of Common
Stock are the only authorized and outstanding voting securities of the Company.
Each holder of record of Common Stock on the Record Date is entitled to cast
one vote per share, exercisable in person or by properly executed proxy, upon
each matter properly submitted for the vote of the stockholders at the Special
Meeting. The presence, in person or by properly executed proxy, of holders of a
majority of the shares of Common Stock outstanding and entitled to vote at the
Special Meeting is necessary to constitute a quorum at the Special Meeting. THE
BOARD OF DIRECTORS HAS DETERMINED THAT THE TERMS OF THE MERGER ARE FAIR TO, AND
IN THE BEST INTERESTS OF, THE COMPANY AND ITS STOCKHOLDERS, HAS APPROVED AND
ADOPTED THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY AND
RECOMMENDS THAT THE STOCKHOLDERS OF THE COMPANY VOTE FOR THE APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY.
Holders of Common Stock on the Record Date will be entitled to dissenters'
appraisal rights under the DGCL in connection with the Merger. Stockholders of
the Company who vote in favor of the Merger, however, will waive their
dissenters' appraisal rights. See "APPRAISAL RIGHTS OF DISSENTING
STOCKHOLDERS."
This Proxy Statement is being furnished to stockholders of the Company in
connection with the solicitation of proxies by and on behalf of the Board of
Directors for use at the Special Meeting. All shares of Common Stock which are
entitled to vote and are represented at the Special Meeting by properly
executed proxies received and not duly and timely revoked will be voted at the
Special Meeting in accordance with the instructions contained therein. In the
absence of contrary instructions, such shares will be voted FOR the approval
and adoption of the Merger Agreement.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the outstanding shares
of Common Stock is required under applicable law to approve and adopt the
Merger Agreement. The Voting Agreement Stockholders beneficially owned, in the
aggregate, approximately 49.0% of the outstanding shares of Common Stock as of
the Record Date and have entered into the Voting Agreement with Revco pursuant
to which they have agreed, among other things, to vote their shares of Common
Stock in favor
10
<PAGE>
of the Merger. In addition, Mr. Beekman, who beneficially owned approximately
5.8% of the outstanding shares of Common Stock as of the Record Date, has
informed the Company that he intends to vote all of his shares of Common Stock
FOR the approval and adoption of the Merger Agreement and the transactions
contemplated thereby. Accordingly, the Voting Agreement Stockholders and Mr.
Beekman have sufficient voting power to approve and adopt the Merger Agreement,
regardless of the vote of any other stockholder of the Company.
SOLICITATION, REVOCATION AND USE OF PROXIES
All expenses of this solicitation, including the cost of preparing and
mailing this Proxy Statement, will be borne by the Company. In addition to
solicitation by use of the mails, proxies may be solicited by directors,
officers and employees of the Company in person or by telephone, facsimile or
by other means of communication. Such directors, officers and employees will
not be additionally compensated, but may be reimbursed for reasonable out-of-
pocket expenses in connection with such solicitation. Arrangements will be made
with custodians, nominees and fiduciaries for forwarding of proxy solicitation
materials to the beneficial owners of shares held of record by such custodians,
nominees and fiduciaries, and the Company will reimburse such custodians,
nominees and fiduciaries for reasonable expenses incurred in connection
therewith. In addition, Georgeson has been retained by the Company to solicit
proxies for a fee estimated at $6,000 and reimbursement of out-of-pocket
expenses.
Any proxy given pursuant to this solicitation may be revoked at any time
prior to its exercise by the execution of a proxy signed at a later date or by
the giving of written notice of revocation to the Secretary of the Company at
any time before the taking of the vote at the Special Meeting. Furthermore, a
stockholder giving a proxy may revoke such proxy by attending the Special
Meeting and voting his or her shares in person. Any written notice of
revocation should be delivered to Hook-SupeRx, Inc., 2800 Enterprise Street,
Indianapolis, Indiana 46219, Attention: Secretary, at or before the taking of
the vote at the Special Meeting.
STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY CARDS.
THE MERGER
BACKGROUND; REASONS FOR THE MERGER
The Company was incorporated in Delaware on October 8, 1986 for the purpose
of acquiring, on a leveraged basis, a major portion of the retail drug store
business then owned by The Kroger Co. ("Kroger"). On December 9, 1986, Hook
Drugs, Inc., then a wholly-owned subsidiary of Kroger, was merged into the
Company, and upon consummation of the merger, became a division of the Company.
The Company also acquired certain assets and assumed certain liabilities of
Superx Drugs Corporation, another wholly-owned subsidiary of Kroger. On June
15, 1988, the Company acquired all of the outstanding common stock of Brooks
Drug, Inc. ("Brooks"), then a wholly-owned subsidiary of Andrews Group
Incorporated. Upon consummation of this transaction, Brooks became a wholly-
owned subsidiary of the Company. In June of 1992, the Company completed a
public offering of 7,900,000 shares of Common Stock at a per share price of
$13.00 (the "Initial Public Offering"). The Initial Public Offering was part of
a recapitalization plan of the Company (the "Recapitalization Plan"), which
included a concurrent offering of senior notes, the restructuring of bank debt
and the redemption of the Company's then outstanding debentures.
The Company's earnings before interest, taxes and restructuring charges
declined from $68,279,000 for the fiscal year ended August 31, 1992 ("Fiscal
1992") to $47,501,000 for the fiscal year ended August 31, 1993 ("Fiscal
1993"). In Fiscal 1993, the Company also recorded a pre-tax restructuring
charge of $19,704,000 as a result of its decision to dispose of approximately
60
11
<PAGE>
unproductive stores and its reorganization of its store operations and
marketing departments. Several factors contributed to this decline in earnings.
Some of these factors were the decrease in the rate of sales growth due to the
significant decline in the level of price inflation on pharmaceuticals as a
result of the increased emphasis placed by the manufacturers of pharmaceuticals
on limiting price increases. In addition, the Company's performance was
adversely affected by the erosion of gross margins for prescription drugs
resulting largely from the continued migration of non-third party prescription
sales to third party payors who typically pay a lower price for prescription
drugs than do non-third party payors. During Fiscal 1993, the Company also
experienced increased competitive pressures. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Comparison of the
Six Months Ended February 28, 1994 with the Six Months Ended February 28,
1993."
In light of the factors noted in the preceding paragraph and the Board of
Director's belief that, given the current competitive environment and the
Company's leveraged capitalization, the Company lacked the capital resources
necessary in the long-term to compete effectively in its industry (in
particular, the Company's ongoing need to remodel existing stores, open new
stores and implement technological innovations), the Board of Directors
concluded that the growth prospects of the Company had diminished. In order to
seek to maximize the value of the stockholders' investment in the Company, the
Board decided to examine certain financial and strategic alternatives to the
Company remaining independent. In July 1993, the Board retained Goldman Sachs
as its financial advisor to examine these alternatives and to contact certain
potential strategic and financial partners with respect to a transaction with
the Company.
On March 28, 1994, Goldman Sachs, as agent for the Company, received a
proposal from Revco to acquire the Company at $13.75 per share, subject to the
negotiation of a merger agreement containing customary terms and conditions. On
March 29, 1994, the Board of Directors authorized management to seek to
negotiate a definitive agreement with Revco. Prior to that time, the Company
had received from several other parties indications of interest to acquire the
Company, but these indications of interest were at proposed acquisition prices
less than the Purchase Price. On April 1, 1994, after extensive negotiations
with Revco and several telephonic Board meetings, the Board of Directors
approved the Merger Agreement.
RECOMMENDATION OF THE BOARD OF DIRECTORS
In reaching its decision to enter into the Merger Agreement with Revco and
not to remain as an independent company, the Board of Directors considered a
number of factors, including the following:
(i) The premium which the Purchase Price represents over the historical
and then current market prices for shares of the Common Stock (as described
in greater detail under "PRICE RANGE OF STOCK"), including the fact that
the Purchase Price (a) represents a premium of approximately 50.7% over the
$9 1/8 market price of the Common Stock at the close of trading on March
31, 1994 (the day immediately preceding the execution of the Merger
Agreement), (b) represents a premium of approximately 70.6% over the
average closing price of the Common Stock as of the end of each of the 52
weeks prior to the public announcement of the Merger Agreement and (c) is
in excess of the highest closing price of the Common Stock as reported on
The New York Stock Exchange Composite Tape since the Common Stock has been
publicly traded.
(ii) The prices and premiums paid in comparable acquisition transactions
involving other retail drug store chains, which transactions are listed
under "--Opinions of Investment Bankers--Opinion of Goldman Sachs--
Comparable Transactions Analysis."
12
<PAGE>
(iii) The Board's familiarity with and review of the Company's business,
results of operations, financial condition and prospects (including,
without limitation, the decline in the Company's earnings in Fiscal 1993,
as discussed under "--Background; Reasons for the Merger"), as well as
retail drug store chain industry conditions generally and its changing
environment.
(iv) The oral opinions of Goldman Sachs and Salomon Brothers delivered on
April 1, 1994 to the effect that, as of the date of such opinions, the
Purchase Price to be received by the holders of Common Stock pursuant to
the Merger Agreement was fair to such holders.
(v) The presentations by each of Goldman Sachs and Salomon Brothers that
discussed, among other things, the relationship of the Purchase Price to be
received pursuant to the Merger Agreement to the historical market prices
for the Common Stock and the historical, current and projected financial
condition, results of operations, assets, liabilities and prospects of the
Company.
(vi) The alternative of the Company remaining an independent entity and
the possible further downsizing of the number of stores operated by the
Company.
(vii) The fact that the Voting Agreement Stockholders, who owned an
aggregate of approximately 49.0% of the Common Stock as of the Record Date,
were willing to enter into the Voting Agreement pursuant to which they
agreed to vote the shares of Common Stock owned by them in favor of the
Merger; it being noted by the Board of Directors that the Voting Agreement
Stockholders were being treated the same as all other stockholders in the
Merger.
(viii) The likelihood that Revco will be able to complete the Merger and
the fact that the Merger Agreement provides for limited conditions to the
obligations of Revco to consummate the Merger. In this regard the Board
noted that the only financing condition relating to the Merger is that
Revco's obligation to consummate the Merger is subject to Revco issuing at
least $175 million in senior subordinated notes at or prior to the Closing
(which condition has been waived by Revco). See "THE MERGER AGREEMENT--
Conditions to Closing."
(ix) The efforts in exploring the financial and strategic alternatives
for the Company since July 1993 as discussed under "--Background; Reasons
for the Merger."
(x) The diminished growth prospects of the Company due to, among other
things, the erosion of gross margins, decrease in price inflation for
pharmaceuticals, increased competition from competitors with greater
financial resources (and less leverage), the Company's lack of financial
ability to make on an ongoing basis the capital improvements and
commitments necessary for the Company to remain competitive and the
uncertainties of health care reform.
(xi) A review of the terms and conditions of the Merger Agreement.
In view of the wide variety of factors considered in connection with its
evaluation of the proposed Merger, the Board of Directors did not find it
practical to, and did not, quantify or otherwise attempt to assign relative
weights to the specific factors considered in reaching its determination.
Based upon all of these factors, the Board of Directors approved the Merger
Agreement and recommends that the stockholders of the Company approve and adopt
the Merger.
EVALUATION BY CERTAIN EXECUTIVE OFFICERS
At the March 29, 1994 Board of Directors meeting, the Board discussed the
proposed Merger with certain of the Company's executive officers.
Notwithstanding the Company's recent financial difficulties (as described under
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS"), these executive officers generally believed that, to the extent
the Company had the financial ability to make on an ongoing basis the capital
improvements and commitments necessary for it to remain competitive, the
Company could have positive long-term growth prospects. These executive
officers generally stated that $13.75 represented a fair purchase price for the
Company at this time, although the Chief Financial Officer stated that, given
the Company's long-term growth prospects, the price was not fair and another
executive officer reserved judgment. See "CERTAIN PROJECTED FINANCIAL
INFORMATION." In making its decision to approve the Merger Agreement, the Board
of Directors took into account these views.
13
<PAGE>
OPINIONS OF INVESTMENT BANKERS
Opinion of Goldman Sachs.
The Board of Directors retained Goldman Sachs as the Company's exclusive
financial advisor in connection with the possible sale of the Company. Goldman
Sachs has performed various investment banking services for the Company from
time to time, including having acted as managing underwriter of a $145,000,000
senior note offering in June 1992 and the Initial Public Offering, and having
acted as the Company's financial advisor in connection with, and having
participated in certain of the negotiations leading to, the Merger Agreement.
Goldman Sachs and certain of its affiliates acquired 500,000 shares of Common
Stock in the secondary market after completion of the distribution of the
shares in the Initial Public Offering at an average purchase price of $12.65
per share. On December 8, 1986, Goldman Sachs and certain of its affiliates
invested $13,875,000 in exchange for approximately 37.5% of the outstanding
shares of Common Stock of the Company in connection with the Company's
acquisition of a major portion of the retail drug store business then owned by
Kroger. Goldman Sachs and certain of its affiliates currently hold 5,124,998
shares of Common Stock or approximately 24.5% of the shares of Common Stock
currently outstanding, and have agreed, pursuant to the Voting Agreement to,
among other things, vote such shares of Common Stock in favor of the Merger.
See "CERTAIN OTHER AGREEMENTS--Voting Agreement." In addition, Howard A.
Silverstein, a general partner of Goldman Sachs, and Michael H. Coles, a
limited partner of Goldman Sachs, have served on the Board of Directors since
December of 1986. The Board selected Goldman Sachs to act as the Company's
exclusive financial advisor based on Goldman Sachs' familiarity with the
Company and Goldman Sachs' substantial experience in mergers and acquisitions
and in securities valuation generally.
On April 1, 1994, Goldman Sachs delivered its oral opinion to the Company's
Board to the effect that, based on various considerations and assumptions, the
Purchase Price was fair to the holders of the Common Stock. Goldman Sachs
subsequently confirmed its oral opinion by delivery of its written opinion
dated the date of this Proxy Statement. The full text of Goldman Sachs' written
opinion, which sets forth the assumptions made, procedures followed, matters
considered and limits of its review, is attached hereto as Annex D and is
incorporated by reference herein. HOLDERS OF THE COMMON STOCK ARE URGED TO AND
SHOULD READ SUCH OPINION IN ITS ENTIRETY.
In connection with its written opinion dated the date of this Proxy
Statement, Goldman Sachs reviewed, among other things, the Merger Agreement;
the Voting Agreement; this Proxy Statement; Annual Reports to stockholders of
the Company for the two fiscal years ended August 31, 1993; Annual Reports on
Form 10-K of the Company for the five fiscal years ended August 31, 1993;
certain interim reports to stockholders and Quarterly Reports on Form 10-Q of
the Company; certain other communications from the Company to its stockholders;
and certain internal financial analyses and forecasts for the Company prepared
by its management. See "CERTAIN PROJECTED FINANCIAL INFORMATION." In addition,
Goldman Sachs reviewed the reported price and trading activity for the Common
Stock, compared certain financial and stock market information for the Company
with similar information for certain other companies the securities of which
are publicly traded, reviewed the financial terms of certain recent business
combinations in the drug store industry specifically and in other industries
generally and performed such other studies and analyses as Goldman Sachs
considered appropriate.
Goldman Sachs relied without independent verification upon the accuracy and
completeness of all the financial and other information reviewed by it for the
purposes of its opinion. In addition, Goldman Sachs did not make an independent
evaluation or appraisal of the assets and liabilities of the Company or any of
its subsidiaries nor has Goldman Sachs been furnished with any such evaluation
or appraisal.
The following is a summary of certain of the financial analyses used by
Goldman Sachs in connection with providing its oral opinion to the Company's
Board on April 1, 1994. Goldman Sachs
14
<PAGE>
utilized substantially the same types of financial analyses in preparing its
written opinion dated the date of this Proxy Statement.
Historical Stock Trading Analysis. Goldman Sachs reviewed and analyzed
selected historical trading prices and volumes for the Common Stock since the
Initial Public Offering both separately and in comparison to the Standard &
Poor's 400 Index and an index of selected companies in the drug store industry
(including Arbor Drugs, Inc., Big B, Inc., Eckerd Corporation, Fay's Inc.,
Genovese Drug Stores, Inc., Long's Drug Stores Corp., Perry Drug Stores, Inc.,
Rite-Aid Corporation and Walgreen Co.). Such analysis indicated that in the
period commencing July 1, 1992 and ending January 1, 1994, the trading price of
the Common Stock underperformed as compared with the trading prices of the
analyzed indices. In the period commencing January 1, 1994 and ending March 31,
1994, the trading price of the Common Stock performed better than the trading
prices of the analyzed indices. Such analysis indicated that, except for a
brief period in December of 1992, the Common Stock has traded at a discount to
the price at which it was initially offered to the public and that the Common
Stock's all-time high closing price was $13.375 on December 2-4, 1992.
Analysis of Purchase Price. Goldman Sachs prepared a financial analysis of
the Merger and calculated the aggregate consideration and various financial
multiples based upon the cash consideration of $13.75 per share. The multiples
were as follows, in each case for Fiscal 1992, latest twelve months ("LTM") and
Fiscal 1994, respectively: (i) sales--0.31x, 0.29x, and 0.28x; (ii) earnings
before interest, taxes, depreciation and amortization ("EBITDA") (adjusted on a
first-in, first-out basis)--6.0x, 7.7x and 6.4x, and (iii) earnings before
interest and taxes ("EBIT")--8.5x, 13.0x and 11.3x. Such analysis also
indicated that such cash consideration of $13.75 per share as a multiple of
calendar 1994 and 1995 estimated EPS (excluding accreted income relating to a
major contract the Company and a major supplier entered into in January 1994)
was 19.6x and 14.4x, respectively, and that the Purchase Price represented a
48.6% premium over the closing price of the Common Stock on March 28, 1994.
Valuation Summary of Selected Publicly Traded Companies. Goldman Sachs
reviewed and compared certain financial, operating and stock market information
of the Company and selected publicly traded companies in the drug store
industry. Selected drug store companies analyzed included Walgreen Co., Eckerd
Corporation, Rite-Aid Corporation, Long's Drug Stores Corp., Revco, Fay's Inc.,
Perry Drug Stores, Inc., Big B, Inc., Arbor Drugs, Inc. (without taking into
account its provision for settlement of certain third-party claims) and
Genovese Drug Stores, Inc. (the "Goldman Sachs Comparable Companies"). Goldman
Sachs examined and compared various valuation methods and calculated various
financial multiples and ratios. The multiples of the Company were calculated
using a price of $9.25 per share, which was the closing price of the Common
Stock on the New York Stock Exchange on March 25, 1994. The multiples and
ratios for LTM for the Company were based on information provided by the
Company's management and the multiples for each of the Goldman Sachs Comparable
Companies were based on the most recent publicly available information. The
multiples were as follows: (i) 1994 and 1995 estimates for the price to
earnings ratio (which ratio was based on calendarized analysts' estimates)--
12.2x and 10.0x, respectively, for the Company, compared to medians for the
Goldman Sachs Comparable Companies of 12.7x and 11.3x, respectively, (ii) LTM
sales--0.22x for the Company, compared to the median for the Goldman Sachs
Comparable Companies of 0.44x, (iii) LTM EBITDA--6.1x for the Company, compared
to the median of the Goldman Sachs Comparable Companies of 6.4x, and (iv) LTM
EBIT--10.6x for the Company, compared to the median for the Goldman Sachs
Comparable Companies of 9.0x. The ratios were as follows: (i) LTM EBITDA
margin--3.7% for the Company, compared to the median for the Goldman Sachs
Comparable Companies of 5.5%, and (ii) LTM EBIT margin--2.1% for the Company,
compared to the median for the Goldman Sachs Comparable Companies of 3.7%. The
review also indicated that the LTM median revenue per square foot of stores of
the Goldman Sachs Comparable Companies was $389, compared to $241 for the
Company, and that the median percentage of total debt to total book
capitalization was 38.5% for the Goldman Sachs Comparable Companies, compared
to 78.8% for the Company.
15
<PAGE>
Comparable Transactions Analysis. Goldman Sachs reviewed and compared the
consideration paid in selected mergers and acquisitions transactions in the
drug store industry since 1988, including Thrifty Holdings Inc.'s then pending
acquisition of Payless Drugs (using $950 million for the aggregate
consideration, based on Thrifty Holdings' filing on Form S-1 on December 30,
1993), Zell/Chilmark Fund, L.P.'s acquisition of a 18.3% stake in Revco, Rite-
Aid Corporation's acquisition of Wellby Super Drug Stores, Inc. (owned by
Hannaford Bros. Company), Fay's Inc.'s acquisition of Carls Drug Co., Inc.
(owned by Victory Markets Inc.), and Victory Markets, Inc.'s acquisition of
Carls Drug Co., Inc. (then a subsidiary of Revco) (the "Comparable
Transactions"). Such review indicated that, for the Comparable Transactions,
aggregate consideration as a multiple of LTM earnings per share/net income
ranged from 13.1x to 44.6x, leveraged consideration as a multiple of LTM sales
ranged from .30x to .76x, leveraged consideration as a multiple of LTM EBIT
ranged from 6.6x to 13.4x, and leveraged consideration as a multiple of LTM
EBITDA ranged from 5.0x to 7.2x, as compared to the aggregate consideration
payable in the Merger of 19.6x calendar 1994 EPS, .29x LTM sales, 13.0x LTM
EBIT, and 7.7x LTM EBITDA. Such review also indicated that, for the Comparable
Transactions, the aggregate consideration paid in such transactions represented
a premium ranging from 4.2% to 33.8% over the tangible book value of the
acquired entity, as compared to a premium for the Merger of 270% over the
tangible book value of the Company (see "--Analysis of Purchase Price").
Discounted Cash Flow Analyses. Goldman Sachs performed a discounted cash flow
analysis using the financial projections prepared by the management of the
Company. Using such discounted cash flow analysis, Goldman Sachs estimated the
present value of the future cash flows set forth in the Company's projections.
Goldman Sachs calculated a net present value of free cash flows (defined as
earnings before interest after taxes plus depreciation and amortization less
capital expenditures and any increase in net working capital) for the years
1994 through 2000 using discount rates ranging from 10% to 18%. Such analyses
were based on the Company attaining 100%, 90% and 80% of its projected earnings
as contained in the Company's projections. Goldman Sachs calculated the
Company's terminal values in the year 1999 based on multiples ranging from 8x
to 12x year 2000 projected net income, as well as the Company's terminal values
in the year 2000 based on multiples ranging from 5x to 7x year 2000 projected
EBITDA. Based on the financial projections prepared by the Company's
management, the discounted cash flow analyses indicated (i) when net income
terminal values were utilized, a net present value per share of Common Stock
ranging from $5.19 to $20.36 (assuming earnings at 100% of projected levels),
$4.54 to $19.58 (assuming earnings at 90% of projected levels), $3.89 to $18.79
(assuming earnings at 80% of projected levels) and a percent of value from the
terminal value ranging from 62% (assuming earnings at 100% of projected levels)
to 75% (assuming earnings at 80% of projected levels) and (ii) when EBITDA
terminal values were utilized, a net present value per share of Common Stock
ranging from $5.83 to $24.80 (assuming earnings at 100% of projected levels),
$5.18 to $24.02 (assuming earnings at 90% of projected levels), and $4.54 to
$23.23 (assuming earnings at 80% of projected levels) and a percent of value
from the terminal value ranging from 58.6% (assuming earnings at 100% of
projected levels) to 73.8% (assuming earnings at 80% of projected levels).
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analysis or of the summary set forth above, without considering
the analysis as a whole, could create an incomplete view of the processes
underlying Goldman Sachs' opinion. In arriving at its fairness determination,
Goldman Sachs considered the results of all such analyses. No company or
transaction used as a comparison in the analyses is identical to the Company or
the contemplated transaction. The analyses were prepared solely for the
purposes of Goldman Sachs providing its opinion to the Board of Directors as to
the fairness of the Purchase Price to holders of Common Stock, and do not
purport to be appraisals or necessarily reflect the prices at which the Company
or its securities actually may be sold. As described above, certain of the
analyses performed by Goldman Sachs relied on estimates of future financial
performance provided by the management of the Company. Analyses based on
forecasts of future results are not necessarily
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indicative of actual future results, which may be significantly more or less
favorable than suggested by such analyses. As described above, Goldman Sachs'
opinion and presentation to the Board of Directors was one of the several
factors taken into consideration by the Board of Directors in making its
determination to approve the Merger. The foregoing summary does not purport to
be a complete description of the analyses performed by Goldman Sachs and is
qualified by reference to the written opinion of Goldman Sachs set forth in
Annex D hereto, which stockholders are urged to read in its entirety.
The terms of the Company's engagement of Goldman Sachs are set forth in a
letter agreement, dated March 23, 1994, between Goldman Sachs and the Company
(the "Goldman Sachs Engagement Letter"). Pursuant to the terms of the Goldman
Sachs Engagement Letter, the Company will pay Goldman Sachs upon consummation
of the Merger a transaction fee based on the total consideration paid for the
Common Stock, including amounts paid to holders of options (the "Aggregate
Consideration"). The transaction fee will be 1.125% of the Aggregate
Consideration. In addition, the Company has agreed to reimburse Goldman Sachs
for its reasonable out-of-pocket expenses, including the fees and disbursements
of its counsel, plus any sales, use, or similar taxes (including additions to
such taxes, if any) arising in connection with its engagement, and to indemnify
Goldman Sachs against certain liabilities relating to or arising out of its
engagement, including liabilities under the Federal securities laws.
Opinion of Salomon Brothers.
The Board of Directors retained Salomon Brothers to render an opinion to the
effect that the Purchase Price to be paid to the holders of Common Stock
pursuant to the Merger is fair, from a financial point of view, to such
stockholders. On April 1, 1994, Salomon Brothers provided its opinion to the
Board to the effect that, based on various considerations and assumptions, the
Purchase Price was fair, from a financial point of view, to the holders of the
Common Stock. The full text of Salomon Brothers' written opinion, which sets
forth the assumptions made, procedures followed, matters considered and limits
of its review, is attached as Annex E to this Proxy Statement. HOLDERS OF THE
COMMON STOCK ARE URGED TO AND SHOULD READ SUCH OPINION IN ITS ENTIRETY.
In connection with rendering such opinion, Salomon Brothers reviewed and
analyzed, among other things, certain publicly available information concerning
the Company; certain internal information, primarily financial in nature,
including projections, prepared by the management of the Company (see "CERTAIN
PROJECTED FINANCIAL INFORMATION"); certain publicly available information with
respect to other companies comparable to the Company and trading markets for
such other companies' common stock; the trading and ownership characteristics
of the Common Stock; drafts and final versions of the Merger Agreement and the
Voting Agreement; certain publicly available information with respect to
transactions involving the sale of other companies comparable to the Company;
and other analyses and studies it deemed appropriate. Salomon Brothers also had
discussions with certain senior management of the Company regarding the
Company's past and current business operations, financial condition and future
prospects as well as other matters which it believed to be relevant to its
inquiry.
Salomon Brothers relied without independent verification upon the accuracy
and completeness of all financial and other information reviewed by it for
purposes of its opinion. With respect to financial projections, Salomon
Brothers has assumed that they were reasonably prepared on a basis reflecting
the best currently available estimates and judgments of management of the
Company as to the future financial performance of the Company, and expressed no
view as to such forecasts or the assumptions on which they are based. Salomon
Brothers did not conduct a physical inspection of any of the properties or
facilities of the Company (other than certain office facilities) nor did it
make or obtain any independent evaluations or appraisals of any of such
properties or facilities.
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The following is a summary of certain of the financial analyses used by
Salomon Brothers in connection with providing its written opinion to the Board
of Directors.
Historical Stock Trading and Ownership Analysis.
Salomon Brothers reviewed and analyzed selected historical trading prices and
volumes for the Common Stock since the Initial Public Offering. Salomon
Brothers also analyzed the present ownership characteristics of the Common
Stock as compared to such characteristics at the time of the Initial Public
Offering. Salomon Brothers noted that except for a brief period in December
1992, the Common Stock has traded at a discount to the price at which it was
initially offered and that the historically highest closing price was $13.375
in December 1992. The Purchase Price per share exceeded the highest historical
closing price for the Common Stock. Salomon Brothers also reviewed the
ownership characteristics of the Common Stock and observed that there was a
perception of market overhang as a result of the combined ownership position of
Goldman Sachs and its affiliates and Kroger in the stock. This position
represented approximately 336 days of average daily trading volume in the
Common Stock based on average daily trading volume during calendar 1993. Also,
in the opinion of Salomon Brothers, this resultant overhang of the Common Stock
could have a depressive effect on the future performance of the Common Stock.
Comparative Operating Performance and Valuation of Selected Publicly Traded
Companies.
Salomon Brothers compared financial, operating and stock market information
of the Company and other publicly traded companies in the drug store industry.
Selected publicly traded drug store companies analyzed included Walgreen Co.,
Rite-Aid Corporation, Eckerd Corporation, Revco, Perry Drug Stores, Inc., Arbor
Drugs, Inc. and Big B, Inc. (the "Salomon Brothers Comparable Companies").
Salomon Brothers observed that the Company's sales and profit growth since the
Initial Public Offering was below most of the Salomon Brothers Comparable
Companies. In addition, the Company's profitability as measured by the ratio of
EBIT to sales and the ratio of earnings before depreciation, interest,
amortization and tax ("EBDIAT") to sales was also below most of the Salomon
Brothers Comparable Companies. Finally, Salomon Brothers observed that the
Company's financial leverage was above that of most of the Salomon Brothers
Comparable Companies and that its capital expenditures were below that of most
of the Salomon Brothers Comparable Companies. Salomon Brothers examined and
compared various valuation methods and calculated various ratios for the stock
of the Salomon Brothers Comparable Companies. Median valuation multiples for
the stock of the Salomon Brothers Comparable Companies were as follows: stock
price ratios to 1994 and 1995 earnings estimates (based on the Institutional
Brokerage Estimate System analysts' estimates) were 15.4x and 13.2x,
respectively; firm value to LTM sales was 45.1%; firm value to LTM EBIT was
10.9x; and firm value to LTM EBDIAT was 6.9x. Salomon Brothers considered these
median multiples, and the historical and projected financial results for the
Company (before non-recurring items), in rendering its opinion.
Discounted Cash Flow.
Salomon Brothers performed discounted cash flow analyses using the financial
projections prepared by the management of the Company. Using such discounted
cash flow analyses, Salomon Brothers estimated the present value of the future
cash flows set forth in the Company's projections. Salomon Brothers calculated
a net present value of free cash flows on an unleveraged basis, using
unleveraged cash flows (defined as earnings before interest after tax and
before non-recurring items, plus depreciation and amortization, less capital
expenditures and any increase in net working capital) for the years 1994
through 2000 and using discount rates ranging from 10% to 14%. Salomon Brothers
calculated the terminal value of the Company in the year 2000 based on
multiples ranging from 5-7x estimated EBDIAT in the year 2000. Salomon Brothers
also calculated the net present value of the Company's equity using fully
leveraged cash flows (defined as net earnings before non-recurring items, plus
depreciation and amortization, less capital expenditures and any increase in
net working capital) for the years 1994 through 2000 and using equity discount
rates ranging from 15% to 19%. Salomon
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Brothers calculated the Company's terminal value in the year 2000 based on
multiples ranging from 11-15x estimated net income in the year 2000.
Comparable Transaction Analysis.
Salomon Brothers reviewed and compared the consideration paid in selected
mergers and acquisitions transactions in the drug store industry since 1990.
Such review indicated that the median multiple of firm value to sales was
35.5%; the median multiple of firm value to EBDIAT was 9.8x and the median
multiple of firm value to EBIT was 10.1x. The multiples for the acquisition of
the Company, based on the Purchase Price, were as follows, in each case for
Fiscal 1992, LTM and Fiscal 1994, respectively: (i) sales--0.31x, 0.29x, and
0.28x; (ii) EBDIAT (adjusted on a first-in, first-out basis)--6.0x, 7.7x and
6.4x, and (iii) EBIT--8.5x, 13.0x and 11.3x. Such analysis also indicated that
such cash consideration of $13.75 per share as a multiple of calendar 1994 EPS
(excluding accreted income relating to a major contract the Company and a major
supplier entered into in December 1993) was 19.6x. Salomon Brothers placed
greater emphasis on transactions that occurred during 1993, including Thrifty
Holdings Inc.'s then pending acquisition of Payless Drugstore. Since April 1,
1994 (the date of Salomon Brothers' opinion letter), the consideration to be
paid in the Payless Drugstore acquisition has changed. Salomon Brothers'
analysis with respect to that acquisition was based on the consideration
pending at April 1, 1994.
In arriving at its fairness determination, Salomon Brothers considered the
results of all such analyses. However, the preparation of a fairness opinion is
a complex process and is not necessarily susceptible to summary description.
Selecting portions of the analysis or of the summary set forth above, without
considering the analysis as a whole, could create an incomplete view of the
processes underlying Salomon Brothers' opinion. No company or transaction used
as a comparison in the analyses is identical to the Company or the contemplated
transaction. The analyses were prepared solely for the purposes of Salomon
Brothers providing its opinion to the Board of Directors as to the fairness,
from a financial point of view, of the Purchase Price to the holders of the
Common Stock, and do not purport to be appraisals or necessarily reflect the
prices at which the Company or its securities actually may be sold. As
described above, certain of the analyses performed by Salomon Brothers relied
on estimates of future financial performance provided by the management of the
Company. Analyses based on forecasts of future results are not necessarily
indicative of actual future results, which may be significantly more or less
favorable than suggested by such analyses. As described above, Salomon
Brothers' opinion and presentation to the Board of Directors was one of the
several factors taken into consideration by the Board of Directors in making
its determination to approve the Merger. The foregoing summary does not purport
to be a complete description of the analyses performed by Salomon Brothers and
is qualified by reference to the written opinion of Salomon Brothers set forth
in Annex E hereto.
The terms of the Company's engagement of Salomon Brothers are set forth in a
letter agreement dated March 4, 1994, between Salomon Brothers and the Company
(the "Salomon Brothers Engagement Letter"). Pursuant to the terms of the
Salomon Brothers Engagement Letter, the Company has paid Salomon Brothers a fee
of $500,000 for the preparation and delivery of its fairness opinion. In
addition, the Company has agreed to reimburse Salomon Brothers for its
reasonable out-of-pocket expenses, including the fees and disbursements of its
counsel arising in connection with its engagement, and to indemnify Salomon
Brothers against certain liabilities relating to or arising out if its
engagement, including liabilities under the Federal securities laws.
Salomon Brothers had previously rendered certain investment banking and
financial advisory services to the Company including having acted as co-manager
for the Initial Public Offering and as qualified independent underwriter in
pricing the $145,000,000 senior note offering in June of 1992. In each case
Salomon Brothers received customary compensation. Salomon Brothers trades the
outstanding debt and equity securities of the Company for its own account and
for the accounts of its customers and, accordingly, may at any time hold a long
or short position in such securities.
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THE MERGER AGREEMENT
The following is a summary of the Merger Agreement, a copy of which is
attached as Annex A to this Proxy Statement and is incorporated herein by
reference. Such summary is qualified in its entirety by reference to the Merger
Agreement. Stockholders are urged to review the Merger Agreement carefully and
in its entirety. Capitalized terms which are not otherwise defined in this
summary have the meanings set forth in the Merger Agreement.
IN GENERAL; PAYMENT OF PURCHASE PRICE
The Merger Agreement provides that, upon the satisfaction or waiver of
certain conditions, Merger Sub will be merged with and into the Company and the
separate corporate existence of Merger Sub will cease and the Company will
continue as the surviving corporation (the Company, in such capacity, is
sometimes referred to as the "Surviving Corporation").
The Merger will become effective at the time of filing with the Secretary of
State of the State of Delaware of a duly executed Certificate of Merger or at
such later time as is provided in such Certificate.
Pursuant to the Merger Agreement, at the Effective Time, each share of Common
Stock issued and outstanding immediately prior to the Effective Time (other
than shares of Common Stock held by the Company as treasury stock immediately
prior to the Effective Time, which shares will be cancelled, and other than
shares of Common Stock, held by stockholders, if any, who properly exercised
their dissenters' rights under the DGCL) will be cancelled and converted into
the right to receive cash in the amount of $13.75, without interest, payable to
the holder thereof upon surrender of the certificate evidencing such share in
the manner provided below.
Promptly after the Effective Time, Revco has agreed to cause letters of
transmittal to be mailed by Continental Bank, N.A. or such other party
reasonably satisfactory to the Company (the "Exchange Agent") to each holder of
record of a certificate (a "Certificate") which immediately prior to the
Effective Time represented issued and outstanding shares of Common Stock,
accompanied by instructions for use in effecting the surrender of the
Certificates in exchange for payment of the Purchase Price. After receipt of
such transmittal form, each holder of Certificates should surrender such
Certificates together with a duly executed letter of transmittal, completed in
accordance with the instructions thereto, to the Exchange Agent, and each such
holder will receive in exchange therefor, in cash, the product of the Purchase
Price and the number of shares of Common Stock represented by such Certificates
so surrendered by such holder. The Certificates so surrendered shall forthwith
be cancelled. STOCKHOLDERS OF THE COMPANY SHOULD NOT SEND IN THEIR CERTIFICATES
UNTIL THEY RECEIVE A TRANSMITTAL FORM.
Upon consummation of the Merger, until so surrendered and exchanged, each
Certificate will be deemed, for all purposes, to evidence the right to receive
the Purchase Price in respect of the number of shares previously evidenced by
such Certificate, without any interest thereon.
The Closing will be held on the first business day immediately following the
date on which the last of the required conditions to Closing (which include the
approval and adoption of the Merger by the holders of a majority of the shares
of Common Stock) has been satisfied or waived, or on such other date as is
agreed upon by the Company and Revco.
The Merger Agreement also provides that (i) the certificate of incorporation
of Merger Sub, as in effect at the Effective Time, will be the certificate of
incorporation of the Surviving Corporation, until duly amended in accordance
with applicable law, (ii) the by-laws of Merger Sub, as in effect at the
Effective Time, will be the by-laws of the Surviving Corporation, until duly
amended in accordance with applicable law, (iii) the directors of Merger Sub
immediately prior to the Effective Time will be the
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directors of the Surviving Corporation as of the Effective Time, and (iv) the
officers of the Company immediately prior to the Effective Time will be the
officers of the Surviving Corporation as of the Effective Time.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of the
Company as to, among other things, (i) the due incorporation, existence, good
standing, and licensing or qualification to do business of the Company; (ii)
the authorization, execution and delivery of the Merger Agreement and all other
agreements and documents contemplated thereby, and the validity and the
enforceability thereof against the Company; (iii) the capitalization of the
Company, including the number of shares of Common Stock outstanding and the
number of shares of Common Stock reserved for issuance pursuant to the Company
Outside Director Stock Option Plan, the 1987 Stock Option Plan and the 1992
Stock Plan (collectively, the "Company Stock Option Plans"); (iv) the Company's
ownership of shares of capital stock of each of the Company's subsidiaries; (v)
the Company's interest or investment in any corporation, partnership, joint
venture, business, trust or entity; (vi) the non-contravention as a result of
the execution, delivery and performance of the Merger Agreement by the Company
with the certificate of incorporation or by-laws of the Company, or with any
note, bond, mortgage, indenture, deed of trust or any material license,
franchise, permit, lease, contract, agreement or other instrument, commitment
or obligation to which the Company or any of its subsidiaries is a party, or by
which the Company or any of its subsidiaries or any of their properties is
bound or affected, except for any of the foregoing matters which would not
have, individually or in the aggregate, a Company Material Adverse Effect, the
non-contravention of any material applicable law, decree, injunction, writ,
rule, regulation or order affecting or binding upon the Company, any of its
subsidiaries or any of their respective properties; (vii) compliance with the
Securities Act of 1933, as amended (the "Securities Act"), and the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), in connection with the
Company Reports filed by the Company with the Securities and Exchange
Commission (the "SEC"), the fair presentation of the consolidated balance
sheets of the Company included in or incorporated by reference into the Company
Reports and the absence of undisclosed liabilities; (viii) the absence of
material litigation; (ix) the absence of certain material adverse changes; (x)
certain tax matters; (xi) certain employee benefit plans; (xii) certain labor
matters; (xiii) certain environmental matters; (xiv) the lease of real
property; (xv) the status of the Company's insurance policies; (xvi) certain
matters relating to Intellectual Property; (xvii) the Company's compliance with
certain contracts; (xviii) the Company's taking of all necessary actions so
that neither the execution of the Merger Agreement nor the consummation of the
Merger (including the execution and performance of the Voting Agreement by the
parties thereto) will cause the Rights issued pursuant to the Rights Agreement
to become exercisable, cause any person to become an Acquiring Person or give
rise to a Distribution Date or a Triggering Date (each as defined in the Rights
Agreement); (xix) certain matters relating to finder's fees, brokerage or
agent's commissions or other like payments (collectively, "Brokerage Fees") in
connection with the negotiations leading to the Merger Agreement or the
consummation of the transactions contemplated thereby; and (xx) the receipt by
the Company of opinions of Goldman Sachs and Salomon Brothers, to the effect
that, as of April 1, 1994, the Purchase Price under the Merger Agreement is
fair to the holders of Common Stock.
The Merger Agreement also contains various representations and warranties of
Revco and Merger Sub as to, among other things, (i) the due incorporation,
existence, good standing, and licensing or qualification to do business of
Revco and Merger Sub; (ii) the authorization, execution and delivery of the
Merger Agreement and all other agreements and documents contemplated thereby
and the validity and the enforceability thereof against Revco and Merger Sub;
(iii) the non-contravention as a result of Revco's and Merger Sub's execution,
delivery and performance of the Merger Agreement with the certificate of
incorporation or by-laws of Revco and Merger Sub or with any note, bond,
mortgage, indenture, deed of trust or any material license, franchise, permit,
lease, contract, agreement or other instrument, commitment or obligation to
which Revco or any of its subsidiaries or any of their properties
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is bound or affected, except for any of the foregoing matters which would not
have a Revco Material Adverse Effect, the creation of any liens upon any of the
material properties of Revco or its subsidiaries, and the non-contravention
with any material applicable law, decree, injunction, writ, rule, regulation or
order affecting or binding upon Revco, any of its subsidiaries or any of their
respective properties; (iv) the receipt of a written commitment of financing to
provide Revco and Merger Sub with sufficient available funds to consummate the
Merger and to perform their respective obligations under the Merger Agreement
and that, at the Effective Time, Revco and Merger Sub will have available all
funds necessary for the acquisition of all shares of Common Stock pursuant to
the Merger and to perform their respective obligations under the Merger
Agreement; (v) that, immediately after the Effective Time and after giving
effect to any change in the Surviving Corporation's assets and liabilities as a
result of the Merger, the Surviving Corporation will not be insolvent or have
unreasonably small capital with which to engage in its business or have created
liabilities beyond its ability to pay as they become due; (vi) that neither
Revco nor Merger Sub owns, directly or indirectly, any Common Stock; (vii)
certain matters relating to Brokerage Fees in connection with the negotiations
leading to the Merger Agreement or the consummation of the transactions
contemplated thereby; and (viii) the absence of material litigation.
CERTAIN COVENANTS
Acquisition Proposals.
Pursuant to the Merger Agreement, the Company has agreed that, prior to the
Effective Time, (a) neither it nor any of its subsidiaries shall, and the
Company shall direct and use its best efforts to cause its officers, directors,
employees, agents and representatives not to, initiate, solicit or encourage
any inquiries or the making or implementation of any proposal or offer
(including, without limitation, any proposal or offer to its stockholders) with
respect to an Acquisition Proposal or engage in any negotiations concerning, or
provide any confidential information or data to, or have any discussions with,
any person relating to an Acquisition Proposal, or otherwise facilitate any
effort or attempt to make or implement an Acquisition Proposal; (b) it will
immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted prior to March 31, 1994
with respect to any of the foregoing and will inform the individuals or
entities referred to above of the obligations so undertaken; and (c) it will
notify Revco immediately if any such inquiries or proposals are received by,
any such information is requested from, or any such negotiations or discussions
are sought to be initiated or continued with, it. The Merger Agreement provides
that the Board may, however, (i) furnish information to or enter into
discussions or negotiations with, any person or entity that makes an
unsolicited bona fide proposal to acquire the Company pursuant to a merger,
consolidation, share exchange, purchase of a substantial portion of the assets,
business combination or other similar transaction, if, and only to the extent
that, (A) the Board of Directors determines in good faith, based as to legal
matters on the written opinion of outside legal counsel, that such action is
required for the Board of Directors to comply with its fiduciary duties to
stockholders imposed by law, (B) prior to furnishing such information to, or
entering into discussions or negotiations with, such person or entity, the
Company provides written notice to Revco to the effect that it is furnishing
information to, or entering into discussions or negotiations with, such person
or entity and provides Revco with a copy of any such written proposal, and (C)
the Company keeps Revco informed of the status (not the terms) of any such
discussions or negotiations; and (ii) to the extent applicable, comply with
Rule 14e-2 promulgated under the Exchange Act with regard to an Acquisition
Proposal.
Conduct of the Business of the Company Pending the Effective Date.
The Company has agreed that, prior to the Effective Time (except as
previously disclosed to Revco), unless Revco has consented in writing thereto,
it (a) shall, and shall cause each of its subsidiaries to, conduct its
operations according to its usual, regular and ordinary course in substantially
the same manner as conducted prior to March 31, 1994; (b) shall use its
reasonable efforts, and shall
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cause each of its respective subsidiaries to use its reasonable efforts, to
preserve intact its business organization and goodwill, keep available the
services of its officers and employees and maintain satisfactory relationships
with those persons having business relationships with it; (c) shall confer on a
regular basis with one or more representatives of Revco to report operational
matters of materiality and any proposals to engage in material transactions;
(d) shall not amend its Certificate of Incorporation or By-laws; (e) shall
promptly notify Revco of (i) any material emergency or other material change in
the condition of the Company's or any subsidiary's business, properties,
assets, liabilities, prospects or the normal course of its businesses or in the
operation of its properties, (ii) any material litigation or material
governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated), or (iii) the breach in any
material respect of any representation or warranty contained in the Merger
Agreement; (f) shall promptly deliver to Revco true and correct copies of any
report, statement or schedule filed with the SEC subsequent to March 31, 1994;
(g) shall not (i) except pursuant to the exercise of options, warrants,
conversion rights and other contractual rights existing on March 31, 1994 and
disclosed pursuant to the Merger Agreement, issue any shares of its capital
stock, effect any stock split or otherwise change its capitalization as it
existed on March 31, 1994, (ii) grant, confer or award any option, warrant,
conversion right or other right not existing on March 31, 1994 to acquire any
shares of its capital stock from the Company, (iii) increase any compensation
or enter into or amend any employment agreement with any of its present or
future officers or directors, except for normal increases in compensation to
employees not earning more than $75,000 in annual base compensation consistent
with past practice and the payment of cash bonuses to employees pursuant to and
consistent with existing plans or programs, or (iv) adopt any new employee
benefit plan or amend any existing employee benefit plan in any material
respect; (h) shall not (i) declare, set aside or pay any dividend or make any
other distribution or payment with respect to any shares of its capital stock,
(ii) except in connection with the use of shares of capital stock to pay the
exercise price or tax withholding in connection with stock-based benefit or
compensation plans or arrangements, including each "employee benefit plan," as
defined in Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), maintained by the Company or any of its subsidiaries (the
"Company Benefit Plans"), directly or indirectly redeem, purchase or otherwise
acquire any shares of its capital stock or capital stock of any of its
subsidiaries, or make any commitment for any such action, including the Rights,
or (iii) split, combine or reclassify any of its capital stock; (i) shall not,
and shall not permit any of its subsidiaries to, sell, lease or otherwise
dispose of any of its assets which are material, except in the ordinary course
of business; (j) shall not (i) incur or assume any long-term or short-term debt
or issue any debt securities except for borrowings under existing lines of
credit in the ordinary course of business; (ii) except for obligations of
wholly-owned subsidiaries of the Company, assume, guaranty, endorse or
otherwise become liable or responsible for the obligations of any other person
except in the ordinary course of business consistent with past practices in an
amount not material to the Company and its subsidiaries, taken as a whole;
(iii) other than to wholly-owned subsidiaries of the Company, make any loans,
advances or capital contributions to or investments in, any other person; (iv)
pledge or otherwise encumber shares of capital stock of the Company or its
subsidiaries; or (v) mortgage or pledge any of its material assets, or create
or suffer to create any material mortgage, lien, pledge, charge, security
interest or encumbrance of any kind in respect to such asset; (k) shall not
acquire, sell, lease or dispose of any assets outside the ordinary course of
business or any assets which in the aggregate are material to the Company and
its subsidiaries taken as a whole, or enter into any commitment or transaction
outside the ordinary course of business consistent with past practices which
would be material to the Company and its subsidiaries taken as a whole; (l)
except as may be required as a result of a change in law or in generally
accepted accounting principles, shall not change any of the accounting
principles or practices used by the Company; (m) shall not (i) acquire any
corporation, partnership or other business organization or division thereof or
any equity interest therein; (ii) enter into any contract or agreement other
than in the ordinary course of business consistent with past practice which
would be material to the Company and its subsidiaries taken as a whole; (iii)
authorize any new capital expenditure or expenditures which, individually, is
in excess of $25,000 or, in the aggregate, are in excess of $1,500,000;
provided, that none of the foregoing shall limit any capital
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expenditure within the aggregate amount previously authorized by the Company's
Board of Directors for capital expenditures where written evidence thereof has
been previously provided to Revco or Merger Sub; or (iv) enter into or amend
any contract, agreement, commitment or arrangement providing for the taking of
any action which would be prohibited by the Merger Agreement; (n) shall not
make any tax election or settle or compromise any income tax liability material
to the Company and its subsidiaries taken as a whole; (o) shall not pay,
discharge or satisfy any claims, liabilities or obligations, other than the
payment, discharge or satisfaction of business of liabilities reflected or
reserved against in, and contemplated by, the consolidated financial statements
of the Company and its subsidiaries or incurred in the ordinary course of
business consistent with past practice; and (p) shall not settle or compromise
any pending or threatened suit, action or claim relating to the transactions
contemplated hereby. The Company has also agreed not to take, or agree in
writing or otherwise to take, any of the actions described above or any action
that would make any of the representations and warranties of the Company
contained in the Merger Agreement untrue or incorrect as of the date when made.
AGREEMENTS WITH RESPECT TO COMPANY STOCK OPTION PLANS
Pursuant to the Merger Agreement, Revco and the Company have agreed to take
all actions necessary to provide that, immediately prior to the Effective Time,
(i) each outstanding option to purchase shares of Common Stock, each stock
appreciation right, and each limited stock appreciation right or other similar
right (individually, a "Company Option" and collectively, the "Company
Options") granted under the Company Stock Option Plans, whether or not then
exercisable or vested, shall become fully exercisable and vested, (ii) each
Company Option which is then outstanding shall be cancelled and (iii) in
consideration of such cancellation, Revco shall pay to each holder of a Company
Option, net of any withholding taxes, an amount in respect of each such Company
Option held by such holder equal to the product of (A) the excess, if any, of
the Purchase Price over the exercise or strike price of such Company Option and
(B) the number of shares of Common Stock subject to such Company Option. The
Company and Revco will use their best efforts to obtain any necessary consents
of the holders of Company Options and to make any necessary amendments to the
Company Stock Option Plans.
REVCO'S AGREEMENTS WITH RESPECT TO CERTAIN EMPLOYEE BENEFITS
Pursuant to the Merger Agreement, Revco has agreed that from and after the
Effective Time, subject to applicable law, and except as contemplated in the
Merger Agreement with respect to the Company Stock Option Plans, Revco and its
subsidiaries will honor in accordance with their terms, all of the Company's
Benefit Plans; provided, however, that Revco may make the changes, if effected
on a prospective basis, in any Company Benefit Plan that are permitted pursuant
to the following sentence. For a period of not less than six months following
the Effective Time, subject to applicable law, Revco and its subsidiaries will
provide benefits (or cash compensation in lieu thereof) to Company employees
who become employees of Revco and its subsidiaries which will, in the
aggregate, be no less favorable than those provided by the Company and its
subsidiaries to their employees immediately prior to the Effective Time.
"Employees" means all current employees of the Company and its subsidiaries
(including those on lay-off, disability or leave of absence, paid or unpaid).
With respect to each employee benefit or compensation plan or arrangement,
including each "employee benefit plan" as defined in Section 3(3) of ERISA
maintained by Revco or any of its subsidiaries (the "Revco Benefit Plans"),
Revco and the Surviving Corporation shall grant all Company employees from and
after the Effective Time credit for all service with the Company and its
affiliates and predecessors prior to the Effective Time for all purposes for
which such service was recognized by the Company. To the extent the Revco
Benefit Plans provide medical or dental welfare benefits after the Effective
Time, such plans shall waive any pre-existing conditions and actively-at-work
exclusions and shall provide that any expenses incurred on or before the
Effective Time shall be taken into account under the Revco Benefit Plans for
purposes of satisfying applicable deductible, coinsurance and maximum out-of-
pocket provisions.
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Revco has also agreed to employ at the Effective Time all employees of the
Company and its subsidiaries who are employed on the Closing Date on terms
consistent with the Company's current employment practices and at comparable
levels of compensation and positions. Such employment shall be at will and
Revco shall be under no obligation to continue to employ any individuals.
For a discussion of the treatment under the Merger Agreement of the
Protective Compensation and Benefit Agreements and the Bonus Plans, see
"INTERESTS OF CERTAIN PERSONS IN THE MERGER."
AMENDMENT OF MERGER AGREEMENT
The Merger Agreement may be amended by the Company and Revco, by action taken
by their respective Boards of Directors at any time before or after approval of
the matters presented at the Special Meeting (providing that no amendment may
be made after such approval without first obtaining such further approval from
the Company's stockholders as may be required by law), only by an instrument in
writing signed by or on behalf of Revco and the Company.
CONDITIONS TO CLOSING
The respective obligations of the Company and Revco to consummate the Merger
are subject to the satisfaction or, where applicable, waiver of the following
conditions: (a) the approval of the Merger Agreement and the transactions
contemplated thereby by the holders of at least a majority of the issued and
outstanding shares of Common Stock; (b) the expiration or termination of the
waiting period applicable to the consummation of the Merger under the HSR Act;
(c) neither the Company nor Revco shall be subject to any order or injunction
of a court of competent jurisdiction which prohibits the consummation of the
transactions contemplated by the Merger Agreement (in the event any such order
or injunction shall have been issued, the Company and Revco have agreed to use
their reasonable efforts to have any such injunction lifted); and (d) all
consents, authorizations, orders and approvals of (or filings or registrations
with) any governmental commission, board or other regulatory body required in
connection with the execution, delivery and performance of the Merger Agreement
shall have been obtained or made, except for filings in connection with the
Merger and any other documents required to be filed after the Effective Time
and except where the failure to have obtained or made any such consent,
authorization, order, approval, filing or registration would not have a Company
Material Adverse Effect following the Effective Time.
The obligation of the Company to consummate the Merger is subject to the
fulfillment at or prior to the Closing Date of the following conditions: (a)
Revco shall have performed its agreements contained in the Merger Agreement
required to be performed on or prior to the Closing Date and the
representations and warranties of Revco and Merger Sub contained in the Merger
Agreement and in any document delivered in connection therewith shall be true
and correct as of the Closing Date (this condition shall be deemed to have been
satisfied even if such representations and warranties are not true and correct,
unless the failure of any of the representations or warranties to be so true
and correct would have or would be reasonably likely to have a Revco Material
Adverse Effect); and (b) from the date of the Merger Agreement through the
Effective Time, there shall not have occurred any change in the financial
condition, business, operations prospects of Revco and its subsidiaries, taken
as a whole, that would have or would be reasonably likely to have a Revco
Material Adverse Effect.
The obligations of Revco and Merger Sub to consummate the Merger are subject
to the fulfillment at or prior to the Closing Date of the following conditions:
(a) the Company shall have performed its agreements contained in the Merger
Agreement required to be performed on or prior to the Closing Date and the
representations and warranties of the Company contained in the Merger Agreement
and in any document delivered in connection therewith shall be true and correct
as of the Closing Date (this condition shall be deemed to have been satisfied
even if such representations or warranties are not
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true and correct, unless the failure of any of the representations or
warranties to be so true and correct would have or would be reasonably likely
to have a Company Material Adverse Effect); and (b) from the date of the Merger
Agreement through the Effective Time, there shall not have occurred any change
in the financial condition, business, operations or prospects of the Company
and its subsidiaries, taken as a whole, that would have or would be reasonably
likely to have a Company Material Adverse Effect.
On May 24, 1994, Revco waived the condition to its obligation to consummate
the Merger that it complete and receive the proceeds from the issuance and sale
of not less than $175,000,000 aggregate principal amount of Senior Subordinated
Notes (as defined) pursuant to an underwritten public offering registered under
the Securities Act or pursuant to a placement in compliance with Regulation
144A thereunder or in a private placement made in accordance with exemptions
thereunder. In consideration for the waiver of this condition by Revco, the
Company has agreed to permit Revco, at Revco's expense, to install prior to the
Effective Time certain computer equipment at the Company's Midwestern warehouse
and distribution facility.
TERMINATION
The Merger Agreement may be terminated and the Merger may be abandoned at any
time prior to the Effective Time, before or after the approval thereof by the
stockholders of the Company at the Special Meeting, by the mutual consent of
Revco and the Company.
The Merger Agreement may also be terminated and the Merger may be abandoned
by action of the Board of Directors of either Revco or the Company if (a) the
Merger shall not have been consummated by September 30, 1994, or (b) the
approval of the Company's stockholders shall not have been obtained at the
Special Meeting or at any adjournment thereof, or (c) a United States Federal
or state court of competent jurisdiction or United States Federal or state
governmental, regulatory or administrative agency or commission shall have
issued an order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the transactions contemplated
by the Merger Agreement and such order, decree, ruling or other action shall
have become final and non- appealable; provided, that, the party seeking to
terminate the Merger Agreement pursuant to this clause (c) shall have used all
reasonable efforts to remove such injunction, order or decree; and provided, in
the case of a termination pursuant to clause (a) above, that the terminating
party shall not have breached in any material respect its obligations under the
Merger Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in said clause.
The Merger Agreement may be terminated and the Merger may be abandoned at any
time prior to the Effective Time, before or after the adoption and approval
thereof by the stockholders of the Company at the Special Meeting, by action of
the Board of Directors of the Company, if (i) in the exercise of its good faith
judgment as to its fiduciary duties to its stockholders imposed by law the
Board of Directors determines that such termination is required by reason of an
Acquisition Proposal being made, or (ii) there has been a breach by Revco or
Merger Sub of any representation or warranty contained in the Merger Agreement
which would have or would be reasonably likely to have a Revco Material Adverse
Effect, or (iii) there has been a material breach of any of the covenants or
agreements set forth in this Agreement on the part of Revco, which breach is
not curable or, if curable, is not cured within 30 days after written notice of
such breach is given by the Company to Revco. The Merger Agreement also
provides that if, on or prior to April 29, 1994, Revco fails to either (A)(i)
deposit or cause to be deposited with First Fidelity Bank, National
Association, New Jersey (the "Trustee"), trustee under that certain Indenture
(the "Indenture") dated as of January 1, 1993 between Revco and the Trustee,
sufficient funds to defease (the "Defeasance") Revco's 9 1/8% Senior Notes due
2000 (the "Revco Notes") and (ii) take any other action required to effect the
Defeasance at the earliest time permitted under the Indenture; or (B) obtain
the consents (which may be in the form of waivers) of the holders of Revco
Notes to certain covenants contained in the Revco Notes necessary to permit the
consummation of the Merger in accordance with the terms of the Merger
Agreement, including the incurrence of indebtedness and granting of liens
resulting therefrom (clauses (A) and (B) above being
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hereinafter referred to as the "Revco Notes Condition"), then Revco shall pay
the Company a fee in cash of $6,000,000, payable on or before the fifth
business day following Revco's failure to satisfy the Revco Notes Condition;
and the Company, by action of its Board of Directors taken within five business
days of Revco's failure to satisfy the Revco Notes Condition, may terminate the
Merger Agreement and the Merger. Revco has advised the Company that it received
the requisite consents necessary to satisfy the Revco Notes Condition on April
20, 1994.
The Merger Agreement may be terminated and the Merger may be abandoned at any
time prior to the Effective Time by action of the Board of Directors of Revco
if (a) there has been a breach by the Company of any representation or warranty
contained in the Merger Agreement which would have or would be reasonably
likely to have a Company Material Adverse Effect, or (b) there has been a
material breach of any of the covenants or agreements set forth in the Merger
Agreement on the part of the Company, which breach is not curable or, if
curable, is not cured within 30 days after written notice of such breach is
given by Revco to the Company.
PAYMENT OF EXPENSES
The Merger Agreement provides that, whether or not the Merger is consummated,
all costs and expenses incurred in connection therewith and the transactions
contemplated thereby shall be paid by the party incurring such expenses.
REGULATORY APPROVAL
Under the HSR Act, and the rules promulgated thereunder by the Federal Trade
Commission (the "FTC"), the Merger could not be consummated until notifications
have been given and certain information has been furnished to the FTC and the
Antitrust Division of the Department of Justice (the "Antitrust Division") and
specified waiting period requirements have been satisfied. Revco and the
Company filed notification and report forms under the HSR Act with the FTC and
the Antitrust Division on April 13, 1994 and April 15, 1994, respectively. On
May 13, 1994, Revco and the Company received from the FTC a request under the
HSR Act for additional information and documentary material regarding a limited
number of markets served by both Revco and the Company. Revco and the Company
are each in the process of seeking to comply with the request of the FTC. The
waiting period under the HSR Act will not terminate until 20 days after the
Company and Revco have each "substantially complied" (as such term is defined
under the HSR Act) with such request unless the FTC voluntarily terminates the
waiting period prior to substantial compliance. At any time before or after
consummation of the Merger, the Antitrust Division or the FTC could take such
action under the antitrust laws as it deems necessary or desirable in the
public interest, including seeking to enjoin the consummation of the Merger or
seeking divestiture of substantial assets of Revco or the Company. At any time
before or after the Effective Time, and notwithstanding that the HSR Act
waiting period has expired, any state could take such action under the
antitrust laws as it deems necessary or desirable. Such action could include
seeking to enjoin the consummation of the Merger or seeking divestiture of the
Company or businesses of Revco or the Company by Revco. Private parties may
also seek to take legal action under the antitrust laws under certain
circumstances.
FINANCING
In the Merger Agreement, Revco and Merger Sub have represented to the Company
that they have received a written commitment from certain banking institutions
to enable them to consummate the Merger on the terms contemplated by the Merger
Agreement and that, at the Effective Time, they will have available, in
accordance with the Merger Agreement, all funds necessary for the acquisition
of all shares of Common Stock and all outstanding Company Options.
The Company understands that Revco has received a debt financing commitment
from the agents under its current bank facility, Banque Paribas and Continental
Bank N.A., providing for a credit facility
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of up to $805 million, consisting of both term and revolving credit loans,
which would be guaranteed by certain of Revco's subsidiaries and secured by a
pledge of the stock of certain of Revco's subsidiaries. In addition, Revco has
commenced an equity rights offering to its existing stockholders pursuant to
which, if the offer is fully solicited, Revco will raise $217 million gross
proceeds. In connection with its equity rights offering, Revco has received a
standby purchase commitment from Zell/Chilmark Fund, L.P., a principal
stockholder of Revco.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES;
ACCOUNTING TREATMENT
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain federal income tax consequences of the
Merger to stockholders of the Company. This summary does not purport to discuss
all tax consequences of the Merger to all stockholders.
The receipt of cash by a stockholder of the Company pursuant to the Merger or
pursuant to the exercise of dissenters' rights of appraisal (see "APPRAISAL
RIGHTS OF DISSENTING STOCKHOLDERS") will be a taxable event for federal income
tax purposes and may also be a taxable transaction under applicable state,
local, foreign or other tax laws. In general, a stockholder will recognize a
gain or loss equal to the difference, if any, between the stockholder's
adjusted tax basis in his or her shares and the amount of cash received for
such shares in the Merger. In general, a stockholder who is not exercising his
or her dissenters' rights of appraisal will recognize such gain or loss at the
Effective Time. In general, such gain or loss will be capital gain or loss,
provided the shares are held as capital assets, and will be a long-term capital
gain or loss if the stockholder's holding period for such shares exceeds one
year.
The receipt of cash by a stockholder pursuant to the Merger (or exercise of
dissenter's rights of appraisal) may be subject to backup withholding at the
rate of 31% unless the stockholder (i) is a corporation or comes within certain
other exempt categories, or (ii) provides a certified taxpayer identification
number on Form W-9 and otherwise complies with the backup withholding rules.
Backup withholding is not an additional tax; any amounts so withheld may be
credited against the federal income tax liability of the stockholder subject to
the withholding.
Pursuant to the Merger Agreement, all options to purchase shares of Common
Stock, stock appreciation rights or limited stock appreciation rights or other
similar rights granted under the Company Stock Option Plans, whether or not
then exercisable or vested, shall be cancelled and Revco shall pay to each
holder thereof, net of any withholding taxes, an amount in respect of each such
option equal to the product of (a) the excess, if any, of the Purchase Price
pursuant to the Merger over the exercise or strike price of such option and (b)
the number of shares of Common Stock subject to such options. The cash realized
by holders of such options will be taxed to such holder as ordinary income.
EACH STOCKHOLDER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR WITH RESPECT TO
THE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER IN HIS OR HER OWN INDIVIDUAL
CIRCUMSTANCES AND WITH RESPECT TO THE STATE, LOCAL, FOREIGN OR OTHER TAX
CONSEQUENCES OF THE MERGER. FURTHER, ANY STOCKHOLDER WHO IS A CITIZEN OR
RESIDENT OF A COUNTRY OTHER THAN THE UNITED STATES SHOULD CONSULT HIS OR HER
OWN TAX ADVISOR WITH RESPECT TO THE TAX TREATMENT IN SUCH COUNTRY OF THE MERGER
AND WITH RESPECT TO THE QUESTION OF WHETHER TAX CONSEQUENCES OTHER THAN THOSE
DESCRIBED ABOVE MAY APPLY BY REASON OF THE PROVISIONS OF THE INTERNAL REVENUE
CODE APPLICABLE TO FOREIGN PERSONS OR THE PROVISIONS OF ANY TAX TREATY
APPLICABLE TO SUCH STOCKHOLDER.
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ACCOUNTING TREATMENT
The Company understands that Revco will account for the Merger as a
"purchase" under generally accepted accounting principles.
CERTAIN OTHER AGREEMENTS
VOTING AGREEMENT
As an inducement to Revco to enter into the Merger Agreement, the Voting
Agreement Stockholders, who in the aggregate beneficially owned approximately
49.0% of the outstanding Common Stock as of the Record Date, entered into the
Voting Agreement. A copy of the Voting Agreement is attached to this Proxy
Statement as Annex C. Pursuant to the Voting Agreement, the Voting Agreement
Stockholders agreed that at the Special Meeting (or any other meeting of the
stockholders of the Company, however called) they will (a) vote all of the
shares of Common Stock held by them in favor of the Merger; (b) vote such
shares against any action or agreement that would result in a breach in any
material respect of any covenant, representation, warranty or any other
obligation of the Company under the Merger Agreement; and (c) vote such shares
against any action or agreement that would impede, interfere with or attempt to
discourage the Merger, including, but not limited to: (i) any extraordinary
corporate transaction (other than the Merger), such as a merger, consolidation,
business combination, reorganization, recapitalization or liquidation involving
the Company or any of its subsidiaries; (ii) a sale or transfer of a material
amount of the assets of the Company or any of its subsidiaries; (iii) any
change in the management of the Board of Directors, except as otherwise agreed
to in writing by Merger Sub; (iv) any material change in the present
capitalization or dividend policy of the Company; or (v) any material change in
the Company's corporate structure or business.
Agreements similar to the Voting Agreement have been the subject of a number
of challenges in Delaware and other states. The Company cannot predict whether
or not a Delaware court or other court of competent jurisdiction would enforce
any or all of the terms of the Voting Agreement.
STOCKHOLDERS RIGHTS AGREEMENT
Pursuant to the terms of the Rights Agreement, the holder of a Right
thereunder is entitled to purchase from the Company one one-hundredth of a
share of Series A Preferred Stock at a price of $64 per one-hundredth of a
share. Immediately prior to the execution of the Merger Agreement, the
definition of an "Acquiring Person" under the Rights Agreement was amended to
exclude Revco and Merger Sub if they obtained the Beneficial Ownership (as
defined in the Rights Agreement) of more than the permitted percentage of
Common Stock under the Rights Agreement solely as a result of the execution,
delivery and performance of the Merger Agreement and the Voting Agreement.
Consistent with the terms of the Rights Agreement, this amendment was adopted
by the Board and is set forth in an Amendment to Rights Agreement.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
EMPLOYMENT AGREEMENT
Effective December 1, 1986, the Company entered into an employment agreement
with Mr. Beekman (the "Beekman Employment Agreement") which initially ran
through November 30, 1989 and presently expires on November 30, 1995. The
Beekman Employment Agreement is automatically extended for successive
additional three year terms unless either Mr. Beekman or the Company delivers
notice of termination not less than one year before the then expiration date.
On October 31,
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1991, the Board approved an increase in Mr. Beekman's salary from $500,000 to
$550,000, effective November 2, 1991. The agreement also provides for an annual
bonus, not to exceed 100% of base salary, in accordance with the terms of the
Company's Corporate Bonus Plan. Pursuant to the Beekman Employment Agreement,
Mr. Beekman is entitled under certain circumstances to severance pay in a lump
sum cash payment equal to two times the sum of his highest annual base salary
and his average bonus compensation for the year of termination and the prior
year. Such severance obligations are payable if, among other things, Mr.
Beekman's employment is terminated due to the expiration of the Beekman
Employment Agreement or any extension thereof, termination by Mr. Beekman for
"good cause" (as defined in the Beekman Employment Agreement) or termination
within one year after a "Change of Control" (which, as defined in the Beekman
Employment Agreement, would occur upon the consummation of the Merger). At
February 28, 1994, the total amount that Mr. Beekman would have been entitled
to, assuming he had become entitled to severance payments under the Beekman
Employment Agreement as of that date, would have been approximately $1,237,500.
However, Mr. Beekman also has a Protective Compensation and Benefit Agreement
with the Company as described under "--Protective Compensation and Benefit
Agreements; Supplemental Executive Retirement Plan." Mr. Beekman is not
entitled to receive any duplication of payment under the Beekman Employment
Agreement and his Protective Compensation and Benefit Agreement and, in the
event of a conflict, the agreement which provides for the most beneficial
treatment to Mr. Beekman will take precedence. Since Mr. Beekman would be
entitled to a higher severance pay benefit under his Protective Compensation
and Benefit Agreement, no severance payment will be made to him under the
Beekman Employment Agreement as a result of the Merger.
Mr. Beekman is also entitled to an annual retirement income under the Beekman
Employment Agreement, which provides for an annual cash retirement payment to
be made to him by the Company from the day he attains age 65 up to and
including the date of his death. The annual cash retirement income will be
based upon Mr. Beekman's average cash compensation for the three years in which
he was most highly compensated by the Company up to a maximum amount of 55% of
such compensation. Benefits under this arrangement are reduced by amounts paid
to Mr. Beekman under any other retirement or pension plan of the Company. The
Company has established an irrevocable trust for the benefit of Mr. Beekman for
the purpose of funding retirement benefits due him under the Beekman Employment
Agreement. In the event of a Change of Control, the Company is required to fund
this trust. If a Change of Control had occurred on February 28, 1994, the
Company would have been required to pay $4,278,840 into this trust.
Pursuant to the terms of the Merger Agreement, Revco has agreed to assume and
perform the obligations of the Company under the Beekman Employment Agreement.
PROTECTIVE COMPENSATION AND BENEFIT AGREEMENTS; SUPPLEMENTAL EXECUTIVE
RETIREMENT PLAN
The Company maintains Protective Compensation and Benefit Agreements with 43
employees, including all of the executive officers of the Company. These
agreements, in most instances, expire May 31, 1996. On each anniversary date of
the agreements, unless notice of intent not to extend any agreement is given by
either party thereto at least 60 days before such anniversary date, the
agreements will continue in effect for an additional one year past the then
expiration date. If a "Change of Control" (which, as defined in the agreements,
would occur upon the consummation of the Merger) occurs while these agreements
are in effect, such agreements shall not expire before the third anniversary of
such Change of Control. The agreements are intended, in the event of a
potential Change of Control, to induce key personnel to remain in the
employment of the Company.
The agreements provide that if the covered individual is terminated from
employment by the Company within 36 months following a Change of Control
(except for Death, Disability or Cause, each as defined in the agreements) or
if the individual resigns for "good reason" (as defined in the agreements)
within 18 months following the Change of Control, the Company, in addition to
those
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payments to which the individual is otherwise entitled pursuant to the terms of
the Company's benefit plans (other than any severance pay), will pay to the
individual "Change of Control Compensation."
Change of Control Compensation includes: (i) a lump sum cash payment in an
amount equal to a multiple of the individual's annual compensation (base salary
and bonus) in effect immediately prior to his or her termination of employment
or the date of the Change of Control, if greater, (ii) benefit continuation for
a period of up to three years, and (iii) a cash payment equal to the present
value of the additional retirement benefit the individual would have accrued
under certain retirement plans had he or she continued to be employed by the
Company for the number of years equal to the multiple of annual compensation
referred to above. The agreements also provide that the Company shall be
required to make an additional payment to each covered individual to compensate
for the effect of any excise tax under Section 4999 of the Internal Revenue
Code of 1986, as amended, that may be imposed on the Change of Control
Compensation and any other payments received by the individual. At February 28,
1994, three individuals, Mr. Beekman, Mr. Gayl W. Doster, Executive Vice
President; Strategic Planning and Administration, and Mr. Timothy M. Mooney,
Senior Vice President; Chief Financial Officer, would be entitled to benefits
based on three times their respective annual compensation; 7 individuals would
be entitled to benefits based on two times their annual compensation; 12
individuals would be entitled to benefits based on one and one-half their
annual compensation and 21 employees would be entitled to benefits based on
their annual compensation. At February 28, 1994, the total cost to the Company,
assuming all covered employees would have become entitled to Change of Control
Compensation as of that date, would have been approximately $12,267,133,
excluding payment for excise taxes, if any. Although Mr. Beekman is also a
party to the Beekman Employment Agreement, Mr. Beekman is not entitled to
receive any duplication of payment under the Protective Compensation and
Benefit Agreement and the Beekman Employment Agreement and, as described under
"--Employment Agreement," will not receive any severance payments under the
Beekman Employment Agreement as a result of the Merger.
Pursuant to the Merger Agreement, Revco has agreed to pay any Change of
Control Compensation required to be paid under the terms of the Protective
Compensation and Benefit Agreements.
The Company also maintains the HSI Supplemental Executive Retirement Plan
(the "HSI SERP") to provide additional retirement benefits on a non-qualified
basis to 35 members of management (all of whom are also parties to Protective
Compensation and Benefit Agreements). Under the HSI SERP, in the event of a
Change of Control (which, as defined in the HSI SERP, would occur upon the
consummation of the Merger), the Company will be obliged to pay to each
eligible participant as of the date of the Change of Control an amount equal to
the present value of the amount the participant would have been entitled to
receive under the HSI SERP plus tax gross-ups at the highest marginal tax rate
for Federal, state and local income taxes. Assuming all covered participants
had become entitled to this HSI SERP payment on February 28, 1994, the total
cost to the Company (including the aforementioned tax gross-ups) would have
been approximately $3,939,149. Pursuant to the Merger Agreement, Revco has
agreed to make any Change of Control payments that may be required under the
HSI SERP.
COMPANY BONUS PLANS
The Company's Bonus Plans were adopted to reward, annually, officers and
selected management employees who have significant impact on the operating
success of the Company. Rewards are based in part upon the achievement of
annually preset performance goals keyed to sales, net working investments, and
earnings before non-cash charges. The Bonus Plans provide that eligible
employees shall be awarded a percentage of his or her base salary paid during
the fiscal year or a specific amount determined at the beginning of the fiscal
year. Under the terms of the Bonus Plans, an employee must remain in the
employment of the Company on August 31 of the year to which the bonus relates.
31
<PAGE>
Pursuant to the terms of the Merger Agreement, as supplemented by a letter
agreement dated May 16, 1994 (the "Letter Agreement"), Revco has agreed to
assume and perform the obligations under the Bonus Plans in effect for Fiscal
1994 as modified as provided below. Revco has agreed that bonuses paid under
the Bonus Plans for Fiscal 1994 to all executive officers and administrative
employees covered by Bonus Plans and who are employed by the Company on August
31, 1994 will equal 30% of the total potential bonus payable thereunder
(regardless of actual performance by the Company). Revco has also agreed to
make payments to such employees whose employment is terminated prior to August
31, 1994 and on or after the Effective Time of a bonus equal to the product of
(x) 30% of such employee's total potential bonus under the Bonus Plans for
Fiscal 1994 and (y) a percentage equal to the number of days such employee was
employed by the Company (including days employed by the Surviving Corporation)
during Fiscal 1994, divided by 365.
Pursuant to the Letter Agreement, the Company agreed to permit Revco to
communicate to the Company's existing associates Revco's intentions with
respect to the employment of such associates for periods after the Effective
Time. Revco agreed to make offers of full time employment to certain associates
of the Company and to offer to certain other associates a stay bonus equal to
24 weeks base salary if those associates remained in the Company's employment
for specified periods following the Effective Time. Revco agreed to provide the
remaining associates with at least six weeks notice prior to termination, which
termination shall not become effective until after the Effective Time, and
agreed further that such notice shall not be given prior to June 7, 1994. The
stay bonus arrangements and termination notice provisions do not apply to
associates who are parties to Protective Compensation and Benefit Agreements.
INDEMNIFICATION AND INSURANCE
Pursuant to the Merger Agreement, Revco has agreed that, from and after the
Effective Time, it shall indemnify, defend and hold harmless to the fullest
extent permitted under applicable law each person who is now, or has been at
any time prior to the date hereof, an officer, director, employee, trustee or
agent of the Company (or any subsidiary or division thereof) (individually, an
"Indemnified Party" and collectively, the "Indemnified Parties"), against all
losses, claims, damages, liabilities, costs or expenses (including attorneys'
fees), judgments, fines, penalties and amounts paid in settlement in connection
with any claim, action, suit, proceeding or investigation arising out of or
pertaining to acts or omissions, or alleged acts or omissions, by Indemnified
Parties in their capacities as such, whether commenced, asserted or claimed
before or after the Effective Time and including, without limitation,
liabilities arising under the Securities Act, the Exchange Act and state
corporation laws in connection with the Merger (any such claim, action, suit,
proceeding or investigation being hereinafter referred to as an "Action"). In
the event of any Action, (i) Revco has agreed to pay the reasonable fees and
expenses of counsel selected by the Indemnified Party, which counsel shall be
reasonably acceptable to Revco, in advance of the final disposition of any such
Action to the full extent permitted by applicable law, upon receipt of any
undertaking required by applicable law, and (ii) Revco has agreed that the
Surviving Corporation will cooperate in the defense of any such matter. Revco,
however, shall not be liable for any settlement effected without its written
consent (which consent shall not be unreasonably withheld or delayed) and Revco
shall not be obligated to pay the fees and disbursements of more than one
counsel for all Indemnified Parties in any single Action except under certain
circumstances.
Revco has also agreed that it will cause the Surviving Corporation to keep in
effect provisions in its Certificate of Incorporation and By-laws providing for
exculpation of director and officer liability and indemnification of the
Indemnified Parties to the fullest extent permitted under the DGCL.
The Merger Agreement further provides that, for a period of four years after
the Effective Time, Revco shall cause to be maintained officers' and directors'
liability insurance covering the Indemnified Parties who are currently covered,
in their capacities as officers and directors, by the Company's existing
officers' and directors' liability insurance policies on terms substantially no
less advantageous
32
<PAGE>
to the Indemnified Parties than such existing insurance. The Merger Agreement
provides, however, that Revco shall not be required in order to maintain or
procure the coverage contemplated in the immediately proceeding sentence to pay
an annual premium in excess of two times the current annual premium paid by the
Company for its existing coverage (the "Cap"). If equivalent coverage cannot be
obtained, or can be obtained only by paying an annual premium in excess of the
Cap, Revco shall only be required to obtain as much coverage as can be obtained
by paying an annual premium equal to the Cap.
The Merger Agreement provides that Revco shall pay all expenses, including
attorneys' fees, that may be incurred by any Indemnified Parties in enforcing
the above-discussed indemnity provisions. The rights of each Indemnified Party
discussed above shall be in addition to any other rights such Indemnified Party
may have under the Certificate of Incorporation or Bylaws of the Company, under
the DGCL or otherwise.
FINANCIAL ADVISOR
Goldman Sachs is acting as financial advisor to the Company in connection
with the Merger. Goldman Sachs beneficially owned approximately 24.5% of the
shares of Common Stock outstanding as of the Record Date and has, pursuant to
the Voting Agreement, agreed to vote in favor of the Merger Agreement. Howard
A. Silverstein, a general partner of Goldman Sachs, and Michael H. Coles, a
limited partner of Goldman Sachs, are directors of the Company. See "THE
MERGER--Opinions of Investment Bankers."
APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS
Under the DGCL, any stockholder who does not wish to accept the Purchase
Price provided for in the Merger Agreement has the right to dissent from the
Merger and to seek an appraisal of, and to be paid the fair cash value
(exclusive of any element of value arising from the accomplishment or
expectation of the Merger) for, his or her shares of Common Stock (the
"Dissenting Shares") provided that the stockholder complies with the provisions
of Section 262 of the DGCL ("Appraisal Rights").
The following is intended as a brief summary of the material provisions of
the statutory procedures required to be followed by a stockholder in order to
dissent from the Merger and perfect the stockholder's Appraisal Rights. This
summary, however, is not a complete statement of all applicable requirements
and is qualified in its entirety by reference to Section 262 of the DGCL, the
text of which is set forth in Annex B hereto.
If any stockholder elects to demand appraisal of his or her shares of Common
Stock, the stockholder must satisfy each of the following conditions:
(i) the stockholder must deliver to the Company a written demand for
appraisal of his or her shares of Common Stock before the vote with respect
to the Merger is taken (this written demand for appraisal must be in
addition to and separate from any proxy or vote abstaining from or against
the Merger; voting against or failing to vote for the Merger by itself does
not constitute a demand for appraisal within the meaning of Section 262);
and
(ii) the stockholder must not vote in favor of the Merger (an abstention
or failure to vote will satisfy this requirement, but a vote in favor of
the Merger, by proxy or in person, will constitute a waiver of the
stockholder's Appraisal Right in respect of the shares of Common Stock so
voted and will nullify any previously filed written demands for appraisal).
Within ten days after the Effective Time, the Company must give written
notice that the Merger has become effective to each stockholder who so
filed a written demand for appraisal and who did
33
<PAGE>
not vote in favor of the Merger. Within 120 days after the Effective Time,
but not thereafter, either the Company or any stockholder who has complied
with the requirements of Section 262 of the DGCL may file a petition in the
Delaware Court of Chancery (the "Court") demanding a determination of the
fair value of the shares of Common Stock held by all stockholders entitled
to appraisal. The Company does not presently intend to file such a petition
in the event there are dissenting stockholders. INASMUCH AS THE COMPANY HAS
NO OBLIGATION TO FILE SUCH A PETITION, THE FAILURE OF A STOCKHOLDER TO DO
SO WITHIN THE PERIOD SPECIFIED COULD NULLIFY SUCH STOCKHOLDER'S PREVIOUSLY
WRITTEN DEMAND FOR APPRAISAL. At any time within 60 days after the
Effective Time, any stockholder who has demanded appraisal has the right to
withdraw the demand and to accept the payment of the Purchase Price
pursuant to the Merger Agreement.
If any stockholder fails to comply with the above provisions and the Merger
becomes effective, the stockholder will be entitled to receive the Purchase
Price as provided for in the Merger Agreement but will have no Appraisal Rights
with respect to his or her shares of Common Stock.
All demands for appraisal should be addressed to Hook-SupeRx, Inc., 2800
Enterprise Street, Indianapolis, Indiana 46219, Attention: Secretary, before
the vote on the Merger Agreement is taken at the Special Meeting, and should be
executed by, or on behalf of, the holder of record of the shares of Common
Stock. The demand must reasonably inform the Company of the identity of the
stockholder and the intention of the stockholder to demand appraisal of his or
her shares of Common Stock.
To be effective, a demand for appraisal must be made by or in the name of the
registered stockholder, fully and correctly, as the stockholder's name appears
on his or her stock certificate(s) and cannot be made by the beneficial owner
if the beneficial owner does not also hold the shares of Common Stock of
record. The beneficial holder must, in such cases, have the registered owner
submit the required demand in respect of such shares of Common Stock.
If shares of Common Stock are owned of record in a fiduciary capacity, such
as by a trustee, guardian or custodian, execution of a demand for appraisal
should be made in such a capacity, and if the shares of Common Stock are owned
of record by more than one person, as in joint tenancy or tenancy in common,
the demand should be executed by or for all joint owners. An authorized agent,
including one for two or more joint owners, may execute the demand for
appraisal for a stockholder of record; however, the agent must identify the
record owner or owners and expressly disclose the fact that, in executing the
demand, he or she is acting as agent for the record owner. A record owner, such
as a broker, who holds shares of Common Stock as a nominee for others, may
exercise his or her right of appraisal with respect to the shares of Common
Stock held for one or more beneficial owners, while not exercising this right
for other beneficial owners. In such case, the written demand should state the
number of shares of Common Stock as to which appraisal is sought. Where no
number of shares of Common Stock is expressly mentioned, the demand will be
presumed to cover all shares of Common Stock held in the name of such record
owner.
If a petition for appraisal is duly filed by a stockholder and a copy thereof
is delivered to the Company, the Company will then be obligated within 20 days
thereafter to provide the Court with a duly verified list containing the names
and addresses of all stockholders who have demanded an appraisal of their
shares of Common Stock. After notice to such stockholders, the Court is
empowered to conduct a hearing upon the petition, to determine those
stockholders who have complied with Section 262 of the DGCL and who have become
entitled to Appraisal Rights. The Court may require the stockholders who have
demanded payment for their shares of Common Stock to submit their stock
certificates to the Register in Chancery for notation thereon of the pendency
of the appraisal proceedings; and if any stockholder fails to comply with such
direction, the Court may dismiss the proceedings as to such stockholder.
34
<PAGE>
After determination of the stockholders entitled to an appraisal, the Court
will appraise the shares of Common Stock, determining their fair value
exclusive of any element of value arising from the accomplishment or
expectation of the Merger. When the value is so determined, the Court will
direct the payment by the Company of such value, with interest thereon accrued
during the pendency of the proceeding if the Court so determines, to the
stockholders entitled to receive the same, upon surrender to the Company by
such holders of the certificates representing such shares of Common Stock. In
determining fair value, the Court is required to take into account all relevant
factors.
Stockholders considering seeking appraisal should be aware that the fair
value of their shares of Common Stock determined under Section 262 could be
more, the same, or less than the Purchase Price that they are entitled to
receive pursuant to the Merger Agreement if they do not seek appraisal of their
shares of Common Stock, and that investment banking opinions as to fairness
from a financial point of view are not necessarily opinions as to fair value
under Section 262.
Costs of the appraisal proceeding may be imposed upon the parties thereto
(i.e., the Company and the stockholders participating in the appraisal
proceeding) by the Court as the Court deems equitable in the circumstances.
Upon the application of a stockholder, the Court may order all or a portion of
the expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorneys' fees and the
fees and expenses of experts, to be charged pro rata against the value of all
shares of Common Stock entitled to appraisal.
Any stockholder who had demanded Appraisal Rights will not, after the
Effective Time, be entitled to vote shares of Common Stock subject to such
demand for any purpose or to receive payments of dividends or any other
distribution with respect to such shares of Common Stock (other than with
respect to payment as of a record date prior to the Effective Time) or to
receive the Purchase Price pursuant to the Merger Agreement; however, if no
petition for appraisal is filed within 120 days after the Effective Time, or if
such stockholder delivers a written withdrawal of his or her demand for
appraisal and an acceptance of the Merger, either within 60 days after the
Effective Time, or thereafter with written approval of the Company, then the
right of such stockholder to appraisal will cease and such stockholder will be
entitled to receive the Purchase Price without interest.
Failure to follow the steps required by Section 262 of the DGCL for
perfecting Appraisal Rights may result in the loss of such rights. In view of
the complexity of Section 262 of the DGCL, stockholders of the Company who are
considering dissenting from the Merger should consult their legal advisors.
35
<PAGE>
PRICE RANGE OF STOCK
The Common Stock is traded on the New York Stock Exchange (the "NYSE") under
the symbol "HSX." The following table presents quarterly information on the
price range of the Common Stock as reported by The New York Stock Exchange
Composite Tape. This information indicates the high and low closing sale prices
for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
Fiscal year ended August 31, 1994
First Quarter................................................ $ 7 1/4 $ 6 1/8
Second Quarter............................................... $ 8 5/8 $ 7 3/4
Third Quarter................................................ $13 3/8 $ 7 1/8
Fourth Quarter (through June 16, 1994)....................... $13 1/2 $13 3/8
Fiscal year ended August 31, 1993
First Quarter................................................ $12 5/8 $ 9 3/4
Second Quarter............................................... $13 3/8 $ 8 7/8
Third Quarter................................................ $10 7/8 $ 9
Fourth Quarter............................................... $10 $ 6 3/4
Fiscal year ended August 31, 1992
First Quarter................................................ (a) (a)
Second Quarter............................................... (a) (a)
Third Quarter................................................ (a) (a)
Fourth Quarter............................................... $13 1/8 $ 9 1/2
</TABLE>
- --------
(a) The Common Stock was not listed on an exchange or traded over-the-counter
at these times.
On March 31, 1994, the last trading day on the NYSE prior to the public
announcement of the execution of the Merger Agreement, the high and low sale
prices for the Common Stock were $9 1/2 and $7 1/8, respectively.
The Company has never paid any dividends to its stockholders.
On June 16, 1994, the last trading date prior to the date of this Proxy
Statement, the high and low sales prices for the Common Stock were $13 1/2 and
$13 3/8, respectively.
Stockholders are urged to obtain current market quotations for the Common
Stock.
36
<PAGE>
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
As at the Record Date, the Company had approximately 784 stockholders of
record. The following table sets forth certain information concerning
beneficial ownership of shares of the Company by each person known to the
Company to own five percent or more of the outstanding shares of Common Stock,
by each director, by each other executive officer, and by all directors and
officers as a group, as of the Record Date. The following information includes
the right of any person listed to acquire beneficial ownership within sixty
days of the Record Date. Except as otherwise noted, each of the following
stockholders has sole voting power and investment discretion with respect to
the shares beneficially owned.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE
SHARES OUTSTANDING
--------- -----------
<S> <C> <C>
The Kroger Co............................................ 5,125,000 24.5%
1014 Vine Street
Cincinnati, OH 45201
Goldman, Sachs & Co.(1)(2)(3)(4)......................... 5,124,998 24.5%
85 Broad Street
New York, NY 10004
Philip E. Beekman(5)(6).................................. 1,242,999 5.8%
175 Tri-County Parkway
Cincinnati, OH 45246
Michael H. Coles(7)(8)................................... 5,126,998 24.5%
Goldman, Sachs & Co.
85 Broad Street
New York, NY 10004
Thomas J. Kelly(7)....................................... 8,333 *
3 Todd Court
Florham Park, NJ 28604
Robert F. Longbine(7).................................... 10,833 *
213 Meadow Lane
Elk River Club, Box 1146
Banner Elk, NC 28604
Howard A. Silverstein(7)(8).............................. 5,125,998 24.5%
Goldman, Sachs & Co.
85 Broad Street
New York, NY 10004
Patrick A. Thiele(7)..................................... 3,083 *
St. Paul Companies
385 Washington Street
St. Paul, MN 55102
Gayl W. Doster(6)........................................ 112,042 *
75 Sabin Street
Pawtucket, RI 02860
Timothy M. Mooney(6)..................................... 99,266 *
175 Tri-County Parkway
Cincinnati, OH 45246
Thomas E. Stilgenbauer(6)................................ 52,133 *
175 Tri-County Parkway
Cincinnati, OH 45246
All directors and officers as a group(8)(9).............. 6,971,273 33.0%
(18 individuals)
</TABLE>
See accompanying notes
37
<PAGE>
- --------
* less than 1.0%
(1) Includes 4,109,275 shares of Common Stock owned of record by Broad Street
Investment Fund I, L.P. ("Broad Street") as to which shares Goldman Sachs,
as general partner of Broad Street, has the power to vote and to dispose.
Goldman Sachs, as general partner, has a 1.0% interest in Broad Street and
the right, subject to certain limitations, to up to 20% of the gain upon a
disposition of Common Stock.
(2) Includes 66,666 shares of Common Stock owned of record by Bridge Street
Fund 1986 ("Bridge Street") as to which Goldman Sachs, as sole stockholder
of a general partner of Bridge Street, has the power to direct the vote and
to direct the disposition. Goldman Sachs, as general partner, has a 0.1%
interest in Bridge Street.
(3) Includes 83,333 shares of Common Stock owned of record by Stone Street Fund
1986 ("Stone Street") as to which Goldman Sachs, as sole stockholder of the
general partner of Stone Street, has the power to direct the vote and to
direct the disposition. Goldman Sachs, as sole stockholder of the general
partner and as an affiliate of a limited partner, has an aggregate 7.05%
interest in Stone Street.
(4) Includes 500,000 shares of Common Stock owned of record by The Goldman
Sachs Group, L.P. The Goldman Sachs Group, L.P. is a general partner of
Goldman Sachs, and the general partners of The Goldman Sachs Group, L.P.
are the individual general partners of Goldman Sachs.
(5) The table excludes 166,667 shares of Common Stock that Mr. Beekman has
donated to trusts of which his children and grandchildren are beneficiaries
and in which he retains an income interest. Mr. Beekman holds a power of
appointment that is exercisable only under certain circumstances by his
will upon his death, by which power he can change the persons entitled to
receive such shares upon termination of the trusts. The table also excludes
2,000 shares held by Mr. Beekman's spouse for which Mr. Beekman disclaims
any beneficial ownership.
(6) Includes shares subject to currently exercisable options as follows: Mr.
Beekman, 339,167 shares; Mr. Doster, 62,042; Mr. Mooney, 73,333; and Mr.
Stilgenbauer, 37,917.
(7) The Company's 1987 Outside Director Stock Option Plan provides for the
grant of options for 8,333 shares to each director who is not an employee
of the Company. The non-employee directors who are affiliated with
stockholders of the Company (Messrs. Coles and Silverstein) have waived all
rights under such options. Options issued to Mr. Longbine for 8,333 shares
and Mr. Kelly for 6,333 shares are currently exercisable and are reflected
above. Options were issued to Mr. Thiele for 8,333 shares. Of such options,
6,250 are not yet exercisable and are therefore excluded above and 2,083
are currently exercisable and reflected above.
(8) Includes 5,124,998 shares of Common Stock beneficially owned by Goldman
Sachs and certain of its affiliates. Mr. Silverstein is a general partner,
and Mr. Coles is a limited partner, of Goldman Sachs.
(9) In addition to the option shares described in notes 6 and 7, included in
the total for all directors and officers as a group are also 164,294 shares
that are subject to currently exercisable options granted to officers not
named in the table.
38
<PAGE>
SELECTED FINANCIAL DATA
The following table presents selected consolidated financial data derived
from the audited consolidated financial statements of the Company for the five
years ended August 31, 1993. The selected consolidated financial data for the
six months ended February 28, 1994 and 1993 were derived from the unaudited
consolidated financial statements of the Company, which reflect all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of such data. The operating results for the six months ended
February 28, 1994 and 1993 are not necessarily indicative of the operating
results for the full year. The following financial data should be read in
conjunction with the Consolidated Financial Statements and Notes thereto and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" included elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
-------------------------
FEBRUARY 28, FEBRUARY 28, FISCAL FISCAL FISCAL FISCAL FISCAL
1994 1993 1993 1992 1991 1990 1989
------------ ------------ ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING STATEMENT DA-
TA:
Net sales............... $1,181,733 $1,149,396 $2,280,048 $2,134,670 $1,994,553 $1,868,028 $1,733,488
Cost of merchandise
sold, including
distribution costs..... 831,075 800,950 1,602,129 1,481,809 1,389,133 1,290,690 1,190,249
Gross profit............ 350,658 348,446 677,919 652,861 605,420 577,338 543,239
Selling, general and
administrative and rent
expenses (1)........... 305,184 301,857 596,174 552,012 511,019 487,073 451,029
Restructuring costs (2). 19,704
Earnings before interest
and taxes.............. 26,741 29,737 27,797 68,279 58,336 51,747 50,439
Interest expense........ 14,733 16,175 31,378 46,728 53,312 58,929 58,095
Income (loss) before
extraordinary items and
cumulative effect of
accounting change...... 7,204 8,153 (3,619) 15,584 3,482 (8,382) (8,537)
Extraordinary items (3). 4,674 (22,855) 1,046
Cumulative effect of
accounting change (4).. (5,192) (18,612) (18,612)
Net income (loss)....... 2,012 (5,785) (22,231) (7,271) 4,528 (8,382) (8,537)
Income (loss) per common
share before
extraordinary items and
cumulative effect of
accounting change (5).. .33 .38 (.17) .99 .27 (.65) (.68)
Per common share effect
of extraordinary items. .22 (1.45) .08
Per common share effect
of cumulative effect of
accounting change...... (.24) (.87) (.89)
Net income (loss) per
common share (5)....... .09 (.27) (1.06) (.46) .35 (.65) (.68)
BALANCE SHEET DATA:
Total assets............ $ 741,917 $ 732,400 $ 717,599 $ 688,226 $ 673,993 $ 678,906 $ 673,908
Long-term debt (6)...... 295,446 270,658 290,516 270,430 416,506 438,470 452,029
OTHER DATA:
Depreciation and
amortization expense... 18,733 16,852 34,244 32,570 36,065 38,518 41,771
Capital expenditures.... 6,790 19,112 33,201 30,642 16,804 19,480 19,884
Ratio of earnings to
fixed charges (7)...... 1.46x 1.49x 1.31x 1.07x
Comparable store sales
increase............... 3.3% 5.8% 4.6% 5.9% 5.7% 6.7% 8.1%
Number of stores at end
of period
Drug stores............. 1,118 1,165 1,124 1,134 1,107 1,088 1,053
Home Health Care
Centers................ 33 34 33 32 32 30 30
</TABLE>
See accompanying notes
39
<PAGE>
- --------
(1) Rent expense is approximately $33,832,000 and $33,091,000 for the six
months ended February 28, 1994 and 1993, respectively, and $68,218,000,
$60,060,000, $55,682,000, $50,420,000 and $44,288,000 for Fiscal 1993,
1992, 1991, 1990 and 1989, respectively.
(2) During Fiscal 1993, the Company undertook a review of its existing asset
base to identify underproductive stores, as well as other non-productive
assets, for disposition and a reorganization of its store operations and
marketing departments (the "Asset Review Program"). As a result, the
Company identified approximately 60 stores for disposition. In addition to
the asset review program, the Company also undertook a plan to reorganize
its store operations and marketing departments in a way which better
supports the "one company" philosophy the Company has adopted. As a result
of these efforts, the Company recorded a pre-tax charge of $19,704,000,
which provides principally for the estimated remaining contractual lease
liability and other occupancy costs for the closed stores and increased
amounts for previously closed stores, write-off of the net book value of
fixtures and equipment, costs of redistributing inventory from the closed
stores to other stores and severance and relocation costs resulting from
the store closing program as well as the costs of the above mentioned
reorganization. As of February 28, 1994, the Company has closed or
otherwise disposed of 53 stores out of the total initially identified. The
remaining stores identified will be closed or otherwise disposed of during
the balance of calendar 1994.
(3) During Fiscal 1992, in connection with its Recapitalization Plan, the
Company recorded an extraordinary charge to operations of approximately
$22,900,000, net of tax benefits of approximately $5,900,000, for the early
retirement of debt. During the year ended August 31, 1991 ("Fiscal 1991"),
the Company realized a benefit of approximately $1,046,000 from the
utilization of net operating loss carryforwards.
(4) During the six months ended February 28, 1994, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 109--Accounting
for Income Taxes, effective September 1, 1993 (the beginning of the fiscal
year). This statement requires a change from the deferred method of
accounting for income taxes (as previously required by Accounting
Principles Board ("APB") Opinion No. 11) to the liability method. Under the
liability method, deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax
rates applicable to future years to differences between the carrying amount
of assets and liabilities for financial reporting purposes and the tax
bases of these assets and liabilities. Under SFAS No. 109, the effect on
deferred taxes of a change in tax rates is recognized in the period that
includes the enactment date. The Company recorded the change in accounting
for income taxes as the cumulative effect of a change in accounting in the
Consolidated Statements of Operations for the six months ended February 28,
1994. During Fiscal 1993, the Company adopted SFAS No. 106--Employers'
Accounting for Postretirement Benefit Costs Other Than Pensions, effective
as of September 1, 1992 (the beginning of the fiscal year). This statement
requires that the cost of providing postretirement benefits to employees be
accrued during the active service period of the employees. The Company has
previously accounted for these costs on a "pay-as-you-go" method or cash
basis. The Company elected to recognize immediately the transition
obligation of $18,612,000, which represents the accumulated postretirement
benefit obligation existing at September 1, 1992, and is presented as the
cumulative effect of a change in accounting in the Consolidated Statements
of Operations. The current year impact of SFAS No. 106 on Fiscal 1993,
which is included in selling, general and administrative expenses, in
excess of that which would have been reflected under the Company's prior
method of accounting for these benefits, was $1,300,000.
(5) Under a former stockholders' agreement (the "Old Stockholders Agreement"),
which terminated on June 10, 1992, management investors held certain put
rights which gave them the right to require the Company to purchase certain
shares and options at formula prices under certain circumstances. Prior to
the termination of the Old Stockholders Agreement, the shares subject to
such put rights were classified as redeemable for financial reporting
purposes. The per share amounts, as reported prior to the above referenced
termination, were computed by adjusting net
40
<PAGE>
income (loss), for the respective years, by the change in redemption value
of redeemable common stock and options held by management investors, to
arrive at loss applicable to common shares and dividing the loss applicable
to common shares by the weighted average number of shares of common stock
(including common stock held by management investors subject to put options)
outstanding during the year. The per share amounts included above for each
of Fiscal 1991, 1990 and 1989 have been restated to give effect to the
termination of the Old Stockholders Agreement and the elimination of the
above referenced put rights.
(6) Includes long-term debt and obligations under capital leases (including the
current portion of both).
(7) Earnings before income taxes were inadequate to cover fixed charges by
$3,581,000, $7,181,000 and $7,655,000 for Fiscal 1993, 1990 and 1989,
respectively. Fixed charges consist of interest expense and a portion of
operating lease rental expense representative of the interest factor. The
interest factor portion of the operating lease rental expense was
calculated assuming all operating leases were capitalized at 6.0% for the
six months ended February 28, 1994 and 1993 and for Fiscal 1993, 7.5% for
Fiscal 1992, 9.5% for Fiscal 1991, 11.75% for Fiscal 1990 and 11.5% for
Fiscal 1989 and the related debt obligation amortized over the term of the
leases.
41
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following Pro Forma Condensed Consolidated Statement of Operations for
the year ended August 31, 1993 was prepared under the assumption that the
stores identified by the Company pursuant to the Asset Review Program were
closed or otherwise disposed of prior to September 1, 1992 and accordingly the
results of operations for these stores, as well as the components of the
restructuring charge relating to the Asset Review Program, have been excluded.
The Pro Forma Condensed Consolidated Statement of Operations for the six months
ended February 28, 1994 and the Pro Forma Condensed Consolidated Balance Sheet
at February 28, 1994 have not been presented due to the immaterial effect the
above referenced assumptions would have on the aforementioned pro forma
condensed consolidated financial statements. The Pro Forma Condensed
Consolidated Statement of Operations does not purport to represent what the
Company's results of operations would have been if the stores identified
pursuant to the Asset Review Program had in fact been closed or otherwise
disposed of prior to September 1, 1992 or to project the Company's results of
operations for any future period. The Pro Forma Condensed Consolidated
Statement of Operations and accompanying notes should be read in conjunction
with the Consolidated Financial Statements and the related notes thereto
included elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------------------------------
YEAR ENDED PRO FORMA
AUGUST 31, 1993 ADJUSTMENTS PRO FORMA
------------------- --------------- ----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net sales.................. $2,280,048 $(43,843)(/1/) $2,236,205
Cost of merchandise sold,
including distribution
costs..................... 1,602,129 (31,864)(/1/) 1,570,265
----------------- -------------- ----------------
Gross profit............. 677,919 (11,979)(/1/) 665,940
Costs and expenses
Operating expenses....... 630,418 (12,422)(/1/) 617,996
Restructuring costs...... 19,704 (14,228)(/2/) 5,476
Interest................. 31,378 31,378
----------------- -------------- ----------------
Income (loss) before
income taxes and
cumulative effect of
accounting change..... (3,581) 14,671 11,090
Income taxes............... 38 4,889 (/3/) 4,927
----------------- -------------- ----------------
Income (loss) before
cumulative effect of
accounting change..... $ (3,619) $ 9,782 $ 6,163
================= ============== ================
Income (loss) per share
before cumulative effect
of accounting change...... $(0.17) $0.29
================= ================
Weighted average number of
shares outstanding........ 20,958,854 20,958,854
================= ================
</TABLE>
See accompanying notes.
42
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(1) Reflects the elimination of the results of operations for the stores
identified for closing or other disposition pursuant to the Asset Review
Program.
(2) Reflects the reversal of the portion of the restructuring charge related
to the Asset Review Program. The remaining amount of the restructuring charge
is associated with the Company's reorganization of its marketing and store
operations departments and the write-off of the net book value of other non-
productive assets not related to the Asset Review Program. The portion of the
remaining restructuring charge associated with the reorganization of marketing
and store operations departments is comprised of (a) severance costs for
approximately 50 employees to be terminated, which included estimates of
termination pay and benefits continuation, costs of outplacement counseling and
purchase of Company leased automobiles (if employees had Company leased
automobiles prior to termination) for a discounted price from fair value, and
(b) relocation costs for approximately 30 employees to be relocated, which
included estimates for house hunting trips, temporary living expenses, realtor
sales commission reimbursement, reimbursement of losses on sales of existing
residences and forgiveness of loans on new residences.
The portion of the restructuring charge related to the Asset Review Program can
be categorized into the following major components:
(A) Estimated remaining contractual lease liability plus other occupancy
related costs (which included real estate taxes, utilities and common area
maintenance). The remaining contractual lease liability was estimated based
upon the lesser of the end of the existing lease term or 36 months with a
rent payment assumed to be the base rent obligation during the lease term
assumed above. The other occupancy related costs were estimated based upon
historical experience for the affected stores over the lease term indicated
above. This component of the charge amounts to approximately $8,386,000,
all of which represents future cash outflows.
(B) The write-off of the net book value of fixtures and equipment and
leasehold interests. The net book value of fixtures and equipment and
leasehold interests written off was the net book value of these assets in
the affected stores. This component of the charge amounts to approximately
$3,560,000, all of which is non-cash.
(C) Costs associated with redistributing inventory. This category
included an estimate of (i) markdown expenses related to inventory
liquidation at store level, which was based upon the Company's historical
experience with similar inventory liquidation efforts, (ii) costs incurred
to ship the inventory not identified as liquidation inventory in the
affected stores back to one of the Company's distribution centers for
redistribution to other of the Company's stores, and (iii) labor costs at
the distribution center to rework product and prepare it for
redistribution. This component of the charge amounts to approximately
$1,710,000, of which $738,000 represents future cash outflows and the
balance is non-cash.
(D) Costs associated with severance and relocation for affected
employees. The costs associated with severance were based on the
anticipated number of hourly and salaried employees (approximately 500) to
be terminated in the affected stores and included termination pay and
employee benefit continuation for a limited time and costs associated with
relocation, which included trips for house hunting, temporary living
expenses, realtor sales commission reimbursement and moving of household
items for eight salaried employees. This component of the charge amounts to
approximately $572,000, all of which represents future cash outflows.
(3) The Company did not provide any Federal or state income tax expense for
the year ended August 31, 1993 as a result of the Company being in a net
operating loss position. Pro forma income tax expense for the period is
computed using the statutory regular Federal income tax rate of 35% and an
estimated state tax rate of 7% (combined 42%) applied to pro forma financial
statement taxable income. This results in a combined Federal and state
effective tax rate in the Pro Forma Condensed Consolidated Statement of
Operations of 44.4%, because of permanent differences in expense recognition
for financial reporting and tax purposes.
43
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following table sets forth the Company's operating data as a percentage
of net sales for the periods indicated:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
-------------------------
FEBRUARY 28, FEBRUARY 28,
1994 1993 FISCAL 1993 FISCAL 1992 FISCAL 1991
------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales............... 100.00% 100.00% 100.00% 100.00% 100.00%
Cost of merchandise
sold, including distri-
bution costs........... 70.33 69.68 70.27 69.42 69.65
------ ------ ------ ------ ------
Gross profit............ 29.67 30.32 29.73 30.58 30.35
Costs and expenses
Selling, general and
administrative........ 22.96 23.38 23.16 23.05 22.83
Rent................... 2.86 2.88 2.99 2.81 2.79
Depreciation and amor-
tization.............. 1.59 1.47 1.50 1.52 1.81
Restructuring costs.... .86
------ ------ ------ ------ ------
Income before interest,
income taxes, extraor-
dinary items and cumu-
lative effect of ac-
counting change........ 2.26 2.59 1.22 3.20 2.92
Interest................ 1.25 1.41 1.38 2.19 2.67
------ ------ ------ ------ ------
Income (loss) before
income taxes,
extraordinary items and
cumulative effect of
accounting change...... 1.01 1.18 (.16) 1.01 .25
Income taxes............ .41 .47 .28 .08
------ ------ ------ ------ ------
Income (loss) before
extraordinary items and
cumulative effect of
accounting change...... .60 .71 (.16) .73 .17
Extraordinary items
resulting from early
retirement of debt in
1992 and from income
tax benefit from
utilizing net operating
loss carryforwards in
1991................... .41 (1.07) .06
Cumulative effect of
accounting change for
income taxes in 1994
and for postretirement
benefits other than
pensions in 1993....... (.44) (1.62) (.82)
------ ------ ------ ------ ------
Net income (loss)....... .16% (.50%) (.98%) (.34%) .23%
====== ====== ====== ====== ======
</TABLE>
The following discussion and analysis explains the major factors affecting
the Company's results of operations, financial condition and changes in
financial condition at February 28, 1994 and 1993 and for the six months then
ended, respectively, and at August 31, 1993, 1992 and 1991 and for the fiscal
years then ended, respectively.
RESULTS OF OPERATIONS
COMPARISON OF THE SIX MONTHS ENDED FEBRUARY 28, 1994 WITH THE SIX MONTHS
ENDED FEBRUARY 28, 1993
At February 28, 1994, the Company operated 1,118 drug stores and 33 health
care centers ("HHC"), as compared with 1,165 drug stores and 34 HHCs at
February 28, 1993.
44
<PAGE>
Net sales of $1,181.7 million for the six months ended February 28, 1994 were
approximately $32.3 million or 2.8% above net sales for the same period of the
prior year. Sales increases from stores opened one year or more were 3.3% over
the same period of the prior year. The net sales for this period were adversely
affected by the large number and severity of winter storms in many of the
states where the Company operates. The increase in net sales of 2.8% is less
than the comparable store sales increase as a result of the Company operating
forty-eight fewer stores this fiscal year as compared to the same time of the
prior year. During the six months ended February 28, 1994, the Company opened
twenty-one new stores and closed twenty-seven (sixteen of which were closed in
connection with the Asset Divestiture Program implemented during Fiscal 1993
and the remaining stores were closed in the normal course of business), as
compared with forty-seven new store openings and fifteen store closings during
the same period of the prior year.
Prescription sales, as a percentage of net sales, continued to increase
during the six months ended February 28, 1994. For this period, prescription
sales increased 7.5% over the prior year to $612.2 million, which represented
51.8% of net sales, as compared with $569.5 million or 49.5% of net sales for
the prior year. This sales growth in prescription sales is a trend which the
Company expects will continue because of the (a) aging of the U.S. population
and the corresponding increased use of prescription drugs by the elderly, (b)
continued pursuit of new customer segments such as mail order, nursing home and
third party payor arrangements, (c) development of new pharmaceutical products
and new applications of existing drugs and, (d) to a lesser extent price
inflation for pharmaceuticals. For the six months ended February 28, 1994, the
Company experienced lower levels of price inflation on pharmaceuticals than in
the same period of the prior year. The Company expects this lower level of
price inflation to continue, at least for the foreseeable future, as a result
of the increased emphasis placed on limiting price increases by the
pharmaceutical manufacturers, thereby adversely affecting the rate of the
Company's sales growth.
For the six months ended February 28, 1994, prescription sales to third party
payors increased 16% over the prior year to $311.1 million or 50.8% of total
prescription sales, as compared with $268.1 million or 47.1% of total
prescription sales for the same period of the prior year. Excluded from the
third party sales amounts above are amounts received directly from customers
pursuant to third party arrangements which require the customer to contribute a
portion of the sales price. The Company expects prescription sales to third
party payors to continue to increase, both in absolute terms and as a
percentage of total prescription sales, as a result of anticipated new third
party payor arrangements and the continued migration of non-third party
pharmacy customers to third party plans. The Company cannot predict when or if
any health care reform will be enacted by the Federal government, or the form
that such reform would take. However, the Company believes that market forces
will cause prescription sales to third party payors to continue to increase as
a percentage of total prescription sales and any legislated health care reform
may accelerate that trend. The increasing levels of third party prescription
sales have resulted in a decline in gross profit margin, as gross profit
margins on prescription sales to third party payors are typically lower than
those on non-third party prescription sales. In addition, increased competition
has led to declining gross profit margins on third party prescription sales.
The Company expects the trend of gross profit margin erosion on third party
prescription sales to continue, at least for the foreseeable future. The
Company continues to develop strategies to mitigate this erosion. In addition
to the adverse effect third party prescription sales have on gross profit
margin, these sales are predominately sales on credit. In November 1993, the
Company implemented a program to sell, on a continuous basis, certain of its
third party accounts receivable. The proceeds from these sales will be utilized
to reduce borrowings under the Company's revolving line of credit. At February
28, 1994, third party accounts receivable, net of allowance, amounted to $15.8
million, as compared with $57.0 million, net of allowance at February 28, 1993.
The primary reason for the decline in third party accounts receivable from
February 28, 1993 to February 28, 1994 is the accounts receivable sales program
discussed above.
45
<PAGE>
Cost of merchandise sold, as a percentage of net sales, for the six months
ended February 28, 1994 was 70.3%, as compared with 69.7% for the same period
of the prior year. One of the principal reasons for the decline in gross profit
margin, from 30.3% to 29.7%, was the duplicate warehouse and distribution
expenses incurred by the Company arising from the transition away from its
warehouse and distribution arrangement with Peyton's, Inc. ("Peyton's") for the
Company's SupeRx stores into the enlarged Midwestern warehouse and distribution
center operated by the Company. Beginning in September 1993, the Company began
providing seasonal and promotional product to all its SupeRx stores from the
Midwestern distribution facility while still utilizing Peyton's as the product
source, to the SupeRx stores, for everyday products. Beginning January 1994,
the Company commenced a gradual transition away from Peyton's for everyday
product shipment. Currently, all SupeRx stores are being serviced, for seasonal
and promotional products as well as everyday products, from the enlarged
Midwestern distribution center. The duplicate warehouse and distribution
expenses incurred during this six month period represent the cost of continuing
the Peyton's arrangement for distribution of everyday products to the SupeRx
stores during the above referenced transition. The Company does not expect to
incur these duplicate warehouse and distribution expenses in subsequent
quarters now that the transition away from Peyton's is complete. Management
estimates that the annual benefit of converting from the Peyton's warehouse
service arrangement to the Company's warehouse and distribution facility will
be a reduction of approximately .5% in cost of merchandise sold, as a percent
of net sales. The remaining decline in gross profit margin was primarily due to
the continuing shift of prescription sales to lower gross margin third party
prescription sales. The Company believes that as the absolute and percentage
amount of prescription sales to third party payors continues to increase, gross
margins will continue to be under downward pressures. Also included in gross
profit for the six months ended February 28, 1994 is income recognized in
connection with the cash prepayment received from one of the Company's vendors
in January 1994. See "Liquidity and Capital Resources." For the six months
ended February 28, 1994, the Company recorded a LIFO charge to operations of $3
million, as compared with $4.8 million for the same period of the prior year.
The smaller LIFO charge, this year when compared to the same time period of the
prior year, is the result of declining rates of inflation on the Company's
inventory purchases, primarily pharmaceuticals. At February 28, 1994 and 1993,
LIFO inventories were approximately $70.3 million and $65.8 million,
respectively, less than the amount of such inventories valued on a FIFO basis.
Selling, general and administrative expenses, as a percentage of net sales,
for the six months ended February 28, 1994 was 23.0% as compared with 23.4% for
the six months ended February 28, 1993. The decline in selling, general and
administrative expenses as a percentage of net sales was primarily due to more
stringent cost control measures combined with the benefits derived from the
Company's ongoing consolidation efforts, as well as the elimination of costs
previously incurred by stores which were closed as part of the Company's Asset
Divestiture Program undertaken in Fiscal 1993. In addition, during the six
month period ended February 28, 1993, the Company opened significantly more
stores than were opened during the six month period ended February 28, 1994,
resulting in increased advertising and store pre-opening expenses, which
adversely affected selling, general and administrative expenses, as a
percentage of net sales, for the six months ended February 28, 1993.
Interest expense, as a percentage of net sales, for the six month period
ended February 28, 1994 was 1.2%, as compared with 1.4% for the six months
ended February 28, 1993. This improvement was primarily the result of lower
amounts outstanding under the Company's revolving line of credit and lower
rates of interest on both the Company's bank term debt and the revolving line
of credit. As was previously discussed, on November 2, 1993, the Company
implemented a four year program to sell up to $75 million of its health care
receivables on a continuous basis. The proceeds from these sales are applied to
reduce the level of borrowings under the Company's revolving line of credit. As
of February 28, 1994, the Company has received $36 million in proceeds from
such sales. In addition, on January 14, 1994, the Company received a cash
prepayment of $40 million from a vendor. See "Liquidity and
46
<PAGE>
Capital Resources." This cash prepayment was applied to reduce the level of
borrowings outstanding under the revolving line of credit.
The Company adopted SFAS No. 109--Accounting for Income Taxes, as of
September 1, 1993, and recorded the change in accounting for income taxes as
the cumulative effect of an accounting change in the Consolidated Statements of
Operations for the three months ended November 30, 1993. The cumulative effect
of this adoption (which is reflected in the Consolidated Statements of
Operations for the six months ended February 28, 1994) was a charge of $5,192
or $.24 per share. Prior year financial statements have not been restated to
apply the provisions of SFAS No. 109.
The net current and non-current components of deferred income taxes
recognized in the balance sheet at February 28, 1994 are as follows (dollars in
thousands):
<TABLE>
<S> <C>
Net current asset............................................... $ 6,287
Net non-current asset........................................... 15,007
-------
Net asset..................................................... $21,294
=======
</TABLE>
The tax effects of the significant temporary differences which comprise the
deferred tax assets and liabilities at February 28, 1994 are as follows:
<TABLE>
<CAPTION>
DEFERRED TAX DEFERRED TAX
ASSETS LIABILITIES
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Capital leases................................... $11,289 $ 8,138
Postretirement benefits other than pensions...... 8,826
Depreciation and amortization.................... 3,147 21,812
Inventories...................................... 3,421 8,809
Bad debts........................................ 5,131
Accrued liabilities.............................. 15,737
Restructuring reserve............................ 8,416
Tax credits...................................... 5,200
Other............................................ 7,253 3,190
------- -------
68,420 41,949
Valuation allowance.............................. (5,177)
------- -------
Total.......................................... $63,243 $41,949
======= =======
</TABLE>
The valuation allowance relates to certain future deductible items in excess
of future taxable items that are not expected to be realized.
The Company believes the deferred tax assets ($63.2 million) are realizable
due primarily to (i) expectation of the future reversal of existing taxable
temporary differences; (ii) utilization of tax credit carryforwards; and (iii)
net operating loss ("NOL") carrybacks to prior years. The Company anticipates
realizing from the future reversal of existing taxable temporary differences
approximately $39.3 million ($16.6 million in the first five years, $19.2
million in the subsequent five years and $3.5 million in the remaining six
years). In addition, the Company anticipates realizing approximately $4.1
million through the utilization of tax credit carryforwards and approximately
$17 million through carrybacks of NOLs to prior years. Also, the Company has
available certain tax planning or other strategies, approximating $2.8 million
principally related to the sale of real estate, that could be implemented, if
necessary, to supplement the above expectation to realize fully the recorded
tax asset.
For the six months ended February 28, 1994, the Company has recorded income
tax expense of $4.8 million, which was based upon the estimated annual
effective tax rate for both Federal and state tax purposes of approximately
40%. For the six months ended February 28, 1993, the Company
47
<PAGE>
recorded income tax expense of $5.4 million, which was also based upon the
estimated annual effective tax rate for both Federal and state tax purposes of
approximately 40%. Also, during the six month period ended February 28, 1993,
the Company utilized approximately $13.5 million of net operating loss
carryforwards for financial reporting purposes and the related tax benefit of
$4.7 million was reflected as an extraordinary item in the Consolidated
Statement of Operations and Accumulated Deficit.
During the fourth quarter of Fiscal 1993, the Company adopted SFAS No. 106--
Employers' Accounting for Postretirement Benefits Other Than Pensions.
Consistent with the provisions of this statement, when adoption of this
statement is in any quarter other than the first, the adoption is effective as
of the beginning of the fiscal year, September 1, 1992 in this instance.
The results of operations for any six month period of a fiscal year are not
necessarily indicative of the results of operations for a full fiscal year.
COMPARISON OF THE YEAR ENDED AUGUST 31, 1993 WITH THE YEAR ENDED AUGUST 31,
1992
At August 31, 1993, the Company operated 1,124 drug stores and 33 HHCs, as
compared with 1,134 drug stores and 32 HHCs at August 31, 1992.
Net sales of $2.28 billion for the year ended August 31, 1993 were $145.4
million or 6.8% above net sales for the prior year. Comparable sales increases
from drug stores opened one year or more were 4.6% and the remaining increase
was attributable to new store sales.
Prescription sales, as a percentage of net sales, continued to increase
during Fiscal 1993. For the year, prescription sales increased 10.1% to $1.2
billion, which represented 50.5% of net sales, as compared with $1.05 billion
or 49% of net sales for the prior year. This sales growth is a trend which the
Company expects will continue because of the (a) aging of the U.S. population
and the corresponding increased use of prescription drugs by the elderly, (b)
development of new pharmaceutical products and new applications of existing
drugs, (c) continued pursuit of new customer segments such as nursing homes and
third party payor arrangements and (d) to a lesser extent, price inflation for
pharmaceuticals. For Fiscal 1993, the Company experienced a significantly lower
level of price inflation on pharmaceuticals than in the prior year. This lower
level of price inflation is a trend which the Company expects to continue, at
least for the foreseeable future, as a result of the increased emphasis placed
on limiting price increases by the pharmaceutical manufacturers, thereby
adversely affecting the rate of the Company's sales growth.
During Fiscal 1993, sales to third party payors increased 19.6% to $552.7
million, which represented 48% of total prescription sales, as compared to
$462.2 million or 44% of total prescription sales for the prior year. In a
typical third party payor arrangement, the Company contracts with a third party
payor, such as an insurance company, health maintenance organization, preferred
provider organization, government agency or private employer, who agrees to pay
for a portion or all of a customer's eligible prescription purchases. Excluded
from the third party sales amounts above are amounts received directly from
customers pursuant to third party arrangements which require the customer to
contribute a portion of the sales price. The Company expects prescription sales
to third party payors to continue to increase, both in absolute terms and as a
percentage of total prescription sales, as a result of anticipated new third
party payor arrangements and continued migration of non-third party pharmacy
customers to third party plans. The Company cannot predict when or if any
health care reform will be enacted by the Federal government, or the form that
such reform would take. However, the Company believes that market forces will
cause prescription sales to third party payors to continue to increase as a
percentage of total prescription sales and any legislated health care reform
may accelerate that trend. The increasing levels of third party prescription
sales have resulted in a decline in gross profit margin, as gross profit
margins on sales to third party payors are typically lower than
48
<PAGE>
those on non-third party sales. The Company expects the trend of gross profit
margin erosion relating to third party prescription sales to continue, at least
for the foreseeable future. The Company is developing strategies to mitigate
this erosion. An example is to encourage the use of generic pharmaceuticals,
when available, in filling the prescription. Typically, generic drugs have a
higher gross profit margin than non-generic drugs. During Fiscal 1993,
approximately 38% of all prescriptions filled by the Company were filled using
generic drugs, as compared with approximately 35% for the prior year. In
addition to the adverse effect third party prescription sales have on gross
profit margin, these sales are predominantly sales on credit. At August 31,
1993, third party accounts receivable amounted to $49.7 million, as compared
with $44.5 million at August 31, 1992. Payments from certain state government
programs under Medicaid are, due to fiscal constraints or otherwise, delayed
from time to time beyond normal payment terms, increasing the Company's working
capital requirements and short-term borrowing needs. The Company has recently
implemented a program to sell, on a continuous basis, certain of its third
party accounts receivable. The proceeds from these sales will be utilized to
reduce borrowings on the Company's revolving line of credit. On November 2,
1993 the Company completed the first sale of such receivables.
For Fiscal 1993, total prescription and over-the-counter ("OTC") drug sales
increased 9.2% to $1.4 billion or 63.3% of net sales, as compared with $1.3
billion or 61.9% of net sales for the prior year. Sales of products other than
prescription and OTC drugs have increased at a lesser rate than sales of such
drugs due largely to competitive factors and economic conditions. Management
believes that the sales of products other than prescription and OTC drugs will
continue to increase at lesser rates, at least for the foreseeable future, than
the sales of prescription and OTC drugs.
Cost of merchandise sold, as a percentage of net sales, for Fiscal 1993 was
70.3%, as compared with 69.4% for the prior year. This decline in gross profit
margin is due to several factors, the first of which is the significant growth
in third party prescription sales. As previously mentioned, these sales
typically have a lower gross profit margin than non-third party prescription
sales and, consequently, as the absolute and percentage amount of prescription
sales to third party payors increase, management believes that gross profit
margins will continue to be under downward pressure. Second, increases in the
Company's new store opening program, primarily during the first half of the
fiscal year, also adversely affected the gross profit margin. While the new
stores provided incremental sales growth, promotional programs associated with
these new stores, including grand opening sales promotions, adversely affected
the gross profit margin. Third, the Company implemented various pricing/sales
programs in selected markets to respond to the increased level of competition
in these markets, which also caused gross profit margins to decline. The
Company is continually developing plans to mitigate the downward pressure
placed on gross profit margins. As mentioned previously, increased usage of
generic drugs is one strategy utilized by the Company to mitigate this downward
pressure. Also, the Company promotes higher gross profit front-end merchandise,
such as home health care products and private label products. For Fiscal 1993,
home health care product sales and private label product sales represented 2.1%
and 7.5%, respectively, of total non-prescription sales, as compared with 1.8%
and 7.0%, respectively, of total non-prescription sales for the prior year.
There can be no assurances that such programs will be effective in mitigating
the downward pressures on the Company's gross profit margin.
For Fiscal 1993, the Company recorded a LIFO charge of $6.3 million, as
compared with $10.8 million for the prior year. The smaller LIFO charge this
year, when compared with the prior year, is the result of declining rates of
inflation on the Company's inventory purchases, primarily in pharmaceuticals,
during Fiscal 1993. At August 31, 1993 and 1992, LIFO inventories were $67.3
million and $61 million, respectively, less than the amount of such inventories
valued on a FIFO basis.
Selling, general and administrative expenses, as a percentage of net sales,
were 23.2% as compared with 23.1% for the prior year. This increase is
primarily attributable to the following items:
49
<PAGE>
increased costs, primarily store labor, related to the Company's opening or
acquiring eighteen additional stores during this fiscal year compared to the
prior year and the increase in the number of 24 hour and extended hour
locations. In addition, during the fourth quarter of Fiscal 1993, the Company
adopted SFAS No. 106--Employers' Accounting for Postretirement Benefit Costs
Other Than Pensions, effective as of September 1, 1992 (the beginning of the
fiscal year). Accordingly, the previously issued results of operations for the
first three quarters of Fiscal 1993 have been restated to reflect this
adoption. This statement requires the accrual of the costs of providing
postretirement benefits to employees during the active service period of the
employees. The Company previously accounted for these costs on a "pay-as-you-
go" method or cash basis. The Company elected to recognize immediately the
transition obligation of $18.6 million or $.89 per share, which represents the
accumulated postretirement benefit obligation existing at September 1, 1992,
which is presented as the cumulative effect of a change in accounting in the
Consolidated Statements of Operations. The current year impact of SFAS No. 106,
which is included in selling, general and administrative expenses, in addition
to what would have been reflected under the prior method of accounting for
these benefits, was $1.3 million. The Company anticipates that the impact on
subsequent fiscal years resulting from the adoption of SFAS No. 106 will not
materially affect the results of operations.
Rent expense, as a percentage of net sales, was 3.0% as compared with 2.8%
for the prior fiscal year. For the year, the Company opened 69 new stores and
closed 41 (excluding the 37 stores closed as a result of the Asset Review
Program, discussed below), as compared with opening 51 new stores and 24
closings in the prior year. In addition, the Company renegotiated a total of 26
existing store leases, resulting in higher annual rent.
As was previously announced, the Company undertook a review of its existing
asset base to identify underproductive stores, as well as other non-productive
assets, for disposition, and a reorganization of its store operations and
marketing departments. As a result of this review, the Company identified
approximately 60 stores for disposition, of which 16 stores contained no
pharmacy and the balance were full service stores. These stores were spread
throughout the Company's area of operations and were not concentrated in any
specific markets. As of August 31, 1993, the Company had closed approximately
40 stores and, since that time through October 1993, an additional 10 stores
have been closed. It is the Company's intention that the balance will be closed
during Fiscal 1994. The plan of disposition varied and was store specific in
nature. It included outright sales to independent third parties, transferring
of prescription files to nearby Company stores or selling prescription files to
independent third parties and subsequently closing the store or, in situations
where sales to independent third parties could not be negotiated and there was
not a Company store nearby to transfer the prescription files, the store was
closed. In addition to the Asset Review Program, the Company also undertook a
plan to reorganize its store operations and marketing departments in a way that
provides for a single company focus rather than a divisional focus previously
utilized by the Company. As a result of the asset dispositions and departmental
reorganization, the Company has recorded a pre-tax charge of $19.7 million
($.94 per share) which provides principally for the estimated remaining
contractual lease liability plus other occupancy costs for the closed stores
and increased amounts for previously closed stores, the write-off of the net
book value of fixtures and equipment, costs of redistributing inventory from
the closed stores to other stores and severance and relocation costs for
employees affected by the store closing program and the above mentioned
reorganization.
Interest expense for Fiscal 1993, as a percentage of net sales, was 1.4% as
compared with 2.2% for the prior year. This improvement was primarily the
result of lower amounts outstanding under, and lower rates of interest on, the
Company's 10 1/8% Senior Notes due June 1, 2002 (the "Senior Notes") (in
comparison to the previously outstanding debentures) and the Company's term
loan. In accordance with the terms of its senior bank credit agreement (the
"Senior Bank Agreement"), the Company has entered into several interest rate
protection agreements for certain contract amounts covering various time
periods at varying rates of interest. See "Note G to the Notes to the
Consolidated Financial
50
<PAGE>
Statements." Amortization expense related to interest rate cap agreements in
effect at August 31, 1993 amounted to $203,000 in Fiscal 1993. No amounts were
received as reimbursement under the cap agreements in Fiscal 1993. The Company
currently believes that amounts received or paid, if any, under these
agreements, as well as agreements entered into in September 1993, will be
immaterial to the Company's results of operations and liquidity.
For Fiscal 1993, the Company has not provided Federal or state income taxes
as a result of the Company being in a net operating loss position. Federal and
state income taxes were provided for in Fiscal 1992 based upon earnings before
extraordinary item. The Federal income tax component of this provision was
recorded utilizing the Alternative Minimum Tax ("AMT") rates, since the Company
was subject to AMT provision at that date. In Fiscal 1992, an offsetting
Federal and state benefit was recorded in the Consolidated Statement of
Operations relating to the extraordinary charge for the early retirement of
debt.
COMPARISON OF THE YEAR ENDED AUGUST 31, 1992 WITH THE YEAR ENDED AUGUST 31,
1991
At August 31, 1992, the Company operated 1,134 drug stores and 32 HHCs, as
compared with 1,107 drug stores and 32 HHCs at August 31, 1991.
Net sales of $2.135 billion for the year ended August 31, 1992 were $140.1
million or approximately 7.0% above net sales for the prior year. Comparable
sales increases from drug stores opened one year or more were approximately
5.9% and the remaining increase was attributable to new store sales.
For the year ended August 31, 1992, prescription sales, as a percentage of
net sales were approximately 49%, as compared with approximately 46% for the
same period of the prior year. This sales growth was primarily due to the
development of new pharmaceutical products and new applications of existing
drugs, continued pursuit of new customer segments such as nursing homes and
third party payor arrangements and, to a lesser extent, pharmaceutical
inflation. During Fiscal 1992, sales to third party payors represented
approximately 44% of total prescription sales, as compared with 42% for the
prior year. The increasing levels of third party prescriptions contributed to a
decline in gross profit margins, as gross profit margins on third party
prescription sales are typically lower than those on non-third party
prescription sales.
Sales of products, other than prescription and over-the-counter drugs,
increased at a lesser rate than sales of such drugs due largely to economic
conditions and competitive factors.
Cost of merchandise sold, as a percentage of net sales, for Fiscal 1992 was
approximately 69.4%, as compared to approximately 69.7% for the prior year.
This improvement, as a percentage of net sales, was the result of several
factors. First, the Company experienced a change in sales mix to include
increased sales levels of private label products and generic drugs and other
higher gross profit merchandise. Private label product sales amounted to
approximately 7% of total non-prescription sales for Fiscal 1992, as compared
with approximately 6% of total non-prescription sales for the prior year.
Second, the Company experienced an improvement in the sales of higher gross
profit Christmas and Easter season merchandise when compared with the prior
year. Also, for Fiscal 1992, the Company recorded a LIFO charge of
approximately $10.8 million, as compared with $14.1 million for the prior year.
This was the result of experiencing lower rates of inflation on the Company's
inventory purchases, primarily prescription drugs, during Fiscal 1992, when
compared to prior years. At August 31, 1992 and 1991, LIFO inventories were
approximately $61 million and $50.2 million, respectively, less than the amount
of such inventories valued on a FIFO basis.
Selling, general and administrative expenses, as a percentage of net sales,
were approximately 23.1%, as compared with approximately 22.8% for the prior
year. The increase was primarily the result of increases in the Company's
advertising expense due to the production of additional circulars in two
51
<PAGE>
of the Company's divisions during the fourth quarter, increases in certain
employee benefit costs primarily related to health care benefits and additional
costs associated with the opening or acquisition of 5 more stores in Fiscal
1992 than in Fiscal 1991. During Fiscal 1992, the Company initiated the process
of consolidating its administrative overhead departments, including accounting,
legal, human resources, management information systems and real estate, into
single departments.
Rent expense for Fiscal 1992, as a percentage of net sales, was approximately
2.8%, which was comparable to the prior year. During Fiscal 1992, the Company
opened a net 27 new stores and renegotiated a total of 26 existing store
leases, resulting in higher annual rents.
Depreciation and amortization expense for Fiscal 1992, as a percentage of net
sales, was approximately 1.5%, as compared with 1.8% for the prior year. This
decline was the result of certain store improvements and fixtures and equipment
becoming fully depreciated.
Interest expense for Fiscal 1992, as a percentage of net sales, was
approximately 2.2% as compared with approximately 2.7% for the prior year. This
improvement was primarily the result of lower amounts outstanding under, and
lower rates of interest on, the Company's term loan and revolving line of
credit.
In connection with the completion of the Company's Recapitalization Plan, the
Company recorded an extraordinary charge to earnings of approximately $22.9
million, net of tax benefits of approximately $5.9 million, for the early
retirement of debt. The components of this charge were as follows:
. write-off of the unamortized original issue discount associated with the
Company's $80 million aggregate principal amount of 13% Subordinated
Debentures due 2000, Series B (the "Series B Debentures), net of tax
benefits ($3.1 million);
. write-off of the unamortized deferred costs and fees associated with the
Series B Debentures and the Company's $125 million aggregate principal
amount of 13% Subordinated Debentures due 2001 and the bank debt of the
Company that existed prior to the consummation of the Recapitalization
Plan, net of tax benefits ($4.3 million);
. recognition of the call premium associated with the redemption of the
Debentures, net of tax benefits ($10.6 million); and
. recognition of expenses associated with the unwinding of various interest
rate protection agreements, net of tax benefits ($4.9 million).
The non-recurring charges were presented net of tax benefits utilizing an
effective tax rate for both Federal and state taxes of approximately 20.5%,
which is less than the rate applicable to income before income taxes and
extraordinary item, since the tax benefit would be limited given the net loss
position of the Company after inclusion of the aforementioned non-recurring
charges.
Liquidity and Capital Resources.
For the six months ended February 28, 1994, the Company had additions to
property and equipment of approximately $6.8 million, as compared with
approximately $19.1 million for the same period of the prior year. These
additions consisted primarily of capital expenditures for new store openings
and remodeling of existing stores. The amount reflected for the six months
ended February 28, 1993 includes not only amounts for new store openings and
remodels, but also amounts related to the construction of the enlarged
Midwestern warehouse and distribution facility (approximately $4.4 million),
for which construction was completed in September 1993. For the six months
ended February 28, 1994, the Company opened twenty-one new stores and closed
twenty-seven (sixteen of which were closed in connection with the Asset
Divestiture Program), compared with forty-seven new store openings and fifteen
closings for the same time period of the prior year.
52
<PAGE>
As of February 28, 1994, the Company has closed or otherwise disposed of 53
stores out of the total 60 stores identified as part of the Asset Divestiture
Program initiated in Fiscal 1993. The remaining stores will be closed during
the balance of calendar 1994 as those leases expire. The Company has reduced
the reserve established at the time of the divestiture program by approximately
$7.4 million, which primarily represents charges relating to lease and other
occupancy related payments related to these closed stores, the write-off of the
net book value of fixtures, equipment and certain intangible assets related to
these closed stores, severance and relocation costs for affected employees and
markdowns incurred relating to inventory in these closed stores. At February
28, 1994, the balance in the restructuring reserve was approximately $11.4
million.
At February 28, 1994, the Company had $117.4 million outstanding under the
bank term loan, of which $15 million is reflected as current portion of long-
term debt and due on July 31, 1994. During the six months ended February 28,
1994, the Company made a required prepayment of $2.6 million on this bank term
debt based upon available cash flow with respect to Fiscal 1993 cash flow.
For the six months ended February 28, 1994, borrowings under the Company's
revolving line of credit have ranged from $30 million to $98 million, with an
average amount outstanding for this six month period of $66.5 million, as
compared with a range of $74 million to $115 million and an average balance
outstanding of $94.8 million for the comparable six month period of the prior
year. On April 13, 1994, the balance outstanding under the revolving line of
credit was $10 million. There are two principal reasons for the significant
change in the range of the outstanding balance and the average balance
outstanding under the revolving line of credit from the prior year. The first
is the health care receivable sales program implemented by the Company. As was
previously discussed, on November 2, 1993, the Company implemented a four year
program to sell, on a continuous basis, up to $75 million of its health care
receivables. Proceeds for such sales during the six months ended February 28,
1994 were $36 million. The second reason for the significant decline in the
outstanding balance and the average balance of the revolving line of credit is
the $40 million cash prepayment received by the Company from a vendor in
January 1994. In December 1993, the Company entered into an agreement with one
of its vendors which will have exclusive rights to provide products and
services to the Company for a period of at least five years. This agreement
requires the Company to purchase a minimum dollar amount of products and/or
services from the vendor. In the event that the Company has not met this
minimum purchase amount by the end of five years, the term of the agreement is
extended in one year increments until the end of the year in which the minimum
purchase is met. Pursuant to this agreement, the Company received the above-
mentioned $40 million in cash. For financial reporting purposes the Company has
reflected this cash prepayment as deferred revenue and is recognizing income on
a pro-rata basis over the 60-month term of the agreement. At February 28, 1994,
the amount of unamortized deferred revenue is $38.8 million. The terms relating
to the Company's purchase of products and services from the vendor under this
agreement, in the opinion of management, are no less favorable to the Company
than the Company's arrangements with the vendor prior to entering into this
agreement.
The Company from time to time, reviews the terms of its senior credit
facility to determine whether changes should be sought in light of changing
circumstances or to take advantage of opportunities in the market place.
On December 1, 1992, the Company entered into a services agreement with an
independent third party which provides for outsourcing all of the Company's
data center operations to the third party for a ten year period. This will
enable the Company to consolidate its three existing data centers into a single
data center. In addition to the outsourcing component, this agreement provides
for the development, installation and on-going support of a point-of-sale
scanning system within all of the Company's stores. See "Note D to the Notes to
the Consolidated Financial Statements." Management believes this services
agreement provides the Company with improved and enhanced data center
operations at a cost comparable to that which has been historically incurred
and significantly improves its information gathering and processing
capabilities at the store level.
53
<PAGE>
In November 1992, the Financial Accounting Standards Board issued SFAS No.
112--Employers' Accounting for Postemployment Benefits. This statement
establishes accounting standards for employers who provide benefits to former
or inactive employees, their beneficiaries or covered dependents, after
employment but before retirement. Postemployment benefits include, but are not
limited to, salary continuation, supplemental unemployment benefits, severance
benefits, disability-related benefits (including workers compensation), job
training and counseling and health and welfare benefit continuation. This
statement requires employers to recognize the obligation to provide
postemployment benefits if the obligation is attributable to employees'
services already rendered, employees' rights to these benefits vest or
accumulate, payment is probable and the amount of the benefit is reasonably
estimated. Currently, the Company is not required to adopt the provisions of
SFAS No. 112 until its fiscal year ending August 31, 1995, however, it will
consider early adoption in accordance with the provisions of this statements.
The Company has completed its initial review of this statement and believes it
will not have a material effect on the results of operations upon adoption.
CERTAIN PROJECTED FINANCIAL INFORMATION
In the course of its discussions with Revco and certain other parties who
expressed an interest in a possible transaction with the Company, the Company
provided such parties, as well as Goldman Sachs and Salomon Brothers, with
certain non-public information, including, among other things, certain
projected financial information prepared by the management of the Company in
October 1993 for the seven fiscal years ending August 31, 2000 (the "Period").
Those projections, as revised in January 1994 solely to include for the five
fiscal years ending August 31, 1998 accreted income of approximately $40
million from a vendor contract which is being amortized over the anticipated
five year term of the contract and to correct a computational error, are set
forth below. The Company does not as a matter of course publicly disclose
internal projections as to future revenues and earnings.
The projections were predicated on certain assumptions and do not give effect
to the Merger. Among other factors, the projections assume: (i) pharmacy sales
growth from net new storing of 1% per year resulting from 20 net new stores per
year during the Period, (ii) pharmacy price inflation of 4% for Fiscal 1994 and
1995 and 3% per year for the remainder of the Period, (iii) growth in
prescription count of 4.5% for Fiscal 1994 and 5% per year for the remainder of
the Period, (iv) non-pharmacy price inflation of 2% for Fiscal 1994 and 2.5%
per year for the remainder of the Period, (v) non-pharmacy sales growth from
net new storing of .25% for Fiscal 1994 and 1995 and 1.5% per year for the
remainder of the Period, (vi) real growth in non-pharmacy sales of .25% per
year during the Period, (vii) a continuing downward trend in pharmacy gross
profit rate from 1% for Fiscal 1994 to .5% by the end of the Period, primarily
due to lower margins from third party prescription plans, (viii) non-pharmacy
gross profit rate, which in Fiscal 1994 declines 5 basis points, in Fiscal 1995
increases 5 basis points, in Fiscal 1996 and 1997 increases 25 basis points,
and which, for the remainder of the Period, increases 5 basis points per year,
(ix) increases in store expense of between 4.5% and 5.5% per year during the
Period, and (x) an increase in administration expenses of between 4.5% and
4.75% per year during the Period.
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDING AUGUST 31,
------------------------------------------------
1994 1995 1996 1997 1998 1999 2000
------ ------ ------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Total Sales.................... $2,364 $2,550 $2,723 $2,910 $3,111 $3,328 $3,561
Net Income..................... 18 24 30 40 48 53 60
EBITDA(a)...................... 106 120 130 144 156 162 172
</TABLE>
- --------
(a) EBITDA includes accreted income from the vendor contract referred to above
equal to $6.6 million in Fiscal 1994, $10 million in each of Fiscal 1995
through 1998 and $3.3 million in Fiscal 1999.
54
<PAGE>
Projections and estimated financial results of the types set forth above are
based on estimates and assumptions that are inherently subject to significant
economic and competitive uncertainties and contingencies, all of which are
difficult to predict and many of which are beyond the control of management.
The above projections and the assumptions utilized in their preparation reflect
an assessment of future states of events and courses of action that the
Company's management believes are reasonably possible, though not necessarily
probable. Financial projections based on a different set of assumptions as to
future states of events and courses of action could differ substantially from
the projections set forth above. Furthermore, the projections set forth above
do not account for the effect, if any, of the adoption of any health care
reform legislation. Accordingly, there can be no assurance that the projected
results would be realized or that actual results would not be significantly
higher or lower than those projected. In addition, these projections were not
prepared with a view to compliance with the published guidelines of the SEC or
the guidelines established by the American Institute of Certified Public
Accountants regarding projections. The Company does not assume any
responsibility for the accuracy or validity of the foregoing projections.
BUSINESS
The primary business of the Company is the operation of retail drug stores
which carry a wide variety of products, including prescription drugs, over-the-
counter drugs, health and beauty aids, cosmetics, photofinishing and consumable
products (including snack food, candy and beverages).
As of February 28, 1994, the Company operated 1,151 stores in the following
22 states:
<TABLE>
<CAPTION>
DRUG STORES* SUPERX DEEP
------------------ HOME HEALTH DISCOUNT
STATE BROOKS HOOK SUPERX CARE CENTERS DRUG STORES TOTAL
----- ------ ---- ------ ------------ ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Arkansas..................... 1 1
Connecticut.................. 48 48
Illinois..................... 50 41 3 94
Indiana...................... 307 2 16 325
Kentucky..................... 6 54 3 5 68
Louisiana.................... 2 2
Maine........................ 22 22
Maryland..................... 1 1
Massachusetts................ 91 91
Michigan..................... 32 32
Mississippi.................. 2 2
Missouri..................... 1 1
New Hampshire................ 14 14
New Jersey................... 24 24
New York..................... 70 25 95
Ohio......................... 7 109 7 12 135
Pennsylvania................. 31 31
Rhode Island................. 26 26
Tennessee.................... 55 4 59
Vermont...................... 18 18
Virginia..................... 35 35
West Virginia................ 27 27
--- --- --- --- --- -----
Total........................ 321 402 376 33 19 1,151
=== === === === === =====
</TABLE>
- --------
* Includes 34 stores which do not have a pharmacy department.
Note: The above table includes seven store locations identified for closing in
the balance of calendar 1994 in connection with the Asset Review Program
not yet closed as of February 28, 1994.
55
<PAGE>
During the six months ended February 28, 1994 ("Stub Fiscal 1994") and Fiscal
1993, Fiscal 1992 and Fiscal 1991, the Company experienced the following net
changes in stores operated:
<TABLE>
<CAPTION>
FISCAL
------------------------
1994 1993 1992 1991
---- ---- ---- ----
<S> <C> <C> <C> <C>
New Stores.......................................... 21 69 51 35
Closed Stores....................................... (27)* (78)* (24) (14)
--- --- --- ---
Net Change.......................................... (6) (9) 27 21
=== === === ===
</TABLE>
- --------
* Includes sixteen and thirty-seven stores closed during Stub Fiscal 1994 and
Fiscal 1993, respectively, pursuant to the Asset Review Program.
During Fiscal 1993, the Company undertook the Asset Review Program. As a
result of its review, the Company identified approximately 60 stores for
disposition, of which 16 contained no pharmacy and the balance were full
service stores. These stores were spread throughout the Company's area of
operations and were not concentrated in any specific markets. As of February
28, 1994, the Company had closed approximately 53 stores. The remaining stores
will be closed during the balance of calendar 1994 as those leases expire. The
plan of disposition varied and was store specific in nature. It included
outright sales to independent third parties; transferring prescription files to
nearby Company stores or selling the prescription files to independent third
parties and subsequently closing the store or, in situations where sales to
independent third parties could not be negotiated and there was not a Company
store nearby to which to transfer the prescription files, the store was closed.
In connection with the Asset Review Program, the Company recorded a pre-tax
charge of $19.7 million which principally provides for (a) the estimated
remaining contractual lease liability plus other occupancy costs for the closed
stores and increased amounts for previously closed stores; (b) the write-off of
the net book value of fixtures and equipment and other assets deemed to have no
value; (c) costs of redistributing inventory from closed stores to other stores
and (d) severance and relocation costs for employees affected by the store
closings, as well as the above mentioned departmental reorganization. Excluding
the effect of the Asset Review Program, the Company closed 11 and 41 stores
during Stub Fiscal 1994 and Fiscal 1993, respectively, for a net increase in
store count of 10 and 28 stores, respectively.
The Company's drug stores vary in both total and selling square footage with
Hook stores averaging approximately 7,800 square feet in total size and 6,800
square feet in selling area, SupeRx stores averaging approximately 10,800
square feet in total size and 8,500 square feet in selling area and Brooks
stores averaging approximately 6,900 square feet in total size and 5,700 square
feet in selling area.
The Company employed approximately 18,900, 18,450, 18,400 and 17,200
employees as of Stub Fiscal 1994 and Fiscal 1993, 1992 and 1991, respectively,
of which approximately 700, 900, 860 and 870 employees, respectively, were
covered by collective bargaining agreements. The Company considers its overall
labor relations with its employees to be good.
Store Operations and Merchandising.
The Company has three retail operating divisions, Hook, SupeRx, and Brooks.
Until recently, the Company has operated these divisions largely as three
separate divisions. During Fiscal 1992, the Company embarked upon a program to
consolidate certain overlapping administrative functions, such as accounting,
legal, real estate, human resources and management information systems. During
Fiscal 1993, the Company continued its consolidation efforts by reorganizing
the three divisional marketing and store operations departments into single
departments. Costs associated with the reorganization of the store operations
and marketing departments are included in the restructuring charge discussed
56
<PAGE>
above. A single company business plan is prepared which contains marketing
variations dependent upon the region of the country and the type of store
involved.
The Company's primary focus is health care, especially prescription and OTC
drugs. In Stub Fiscal 1994 and Fiscal 1993, 1992 and 1991, sales of these items
represented approximately 63%, 63%, 62% and 59%, respectively, of total sales,
with prescription drugs representing approximately 52%, 50%, 49% and 46%,
respectively, of total sales. Prescription sales are a growing percentage of
total sales. This is a trend which is expected to continue because of the
following: (a) the aging of the U.S. population and the corresponding increased
use of prescription drugs by the elderly, (b) development of new pharmaceutical
products and new applications of existing products, and (c) to a lesser extent,
price inflation for pharmaceuticals. For Stub Fiscal 1994 and Fiscal 1993, the
Company experienced lower levels of price inflation on pharmaceuticals. The
Company expects this lower level of price inflation to continue, at least for
the foreseeable future, thereby adversely affecting the Company's sales growth.
Additionally, prescription sales growth is supported by the continued pursuit
of new customer segments such as mail order, nursing homes and third party
payor arrangements. In a typical third party payor arrangement, the Company has
a contract with a third party payor such as an insurance company, health
maintenance organization, preferred provider organization, government agency,
or private employer who agrees to pay for a portion or all of a customer's
eligible prescription purchases. During Stub Fiscal 1994 and Fiscal 1993, 1992
and 1991, sales to third party organizations represented approximately 51%,
48%, 44% and 42%, respectively, of total prescription sales. Excluded from the
third party sales amounts above are amounts received directly from customers
pursuant to third party payor arrangements which require the customer to
contribute a portion of the sales price. The Company expects that prescription
sales to third party organizations will continue to increase, as a result of
anticipated new third party payor arrangements and continued migration of non-
third party pharmacy customers to third party plans.
The Clinton Administration has stated that health care reform is one of its
top priorities. The goal of such reform is to guarantee comprehensive health
care coverage, which would include prescription drugs, for all Americans
regardless of health or employment status, promote competition and maintain
quality, service and price. Health care reform, if implemented, could adversely
affect the pricing of prescription drugs or the amount of reimbursement from
government agencies and third party payors. However, the broader availability
of health care services could increase the number of prescriptions that the
Company dispenses each year. At this time, the Company cannot predict the
timing, the likelihood, or the final form of such health care reform or the
effect on the Company's operations of any plan adopted.
A major portion of the Company's sales are for cash; however, certain
national credit cards are also honored. In addition, a majority of prescription
sales to third party organizations are credit sales. The Company has
implemented a health care receivable sales program to accelerate the timing of
cash being received by the Company. See "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
The Company's drug stores offer a wide variety of products, including
prescription drugs, OTC drugs, health and beauty aids, cosmetics,
photofinishing and consumable products. The Company offers leading brand names
in its merchandise lines, concentrating on brands which have a wide customer
acceptance and provide quality and value. In addition to brand name
merchandise, the Company also promotes its private label products. During Stub
Fiscal 1994 and Fiscal 1993, 1992 and 1991, private label sales represented
approximately 8.3%, 7.5%, 7.0% and 6.0%, respectively, of total non-pharmacy
sales.
Seasonality.
In general, pre-tax profits for the Company are skewed toward the second and
third quarters of the Company's fiscal year, reflecting the Christmas season,
the cough, cold and flu season and the Easter
57
<PAGE>
season. In Fiscal 1993, the combined pre-tax profit for the second and third
quarters was approximately $21.5 million, compared with a combined pre-tax loss
for the first and fourth quarters of approximately $25.1 million. The combined
pre-tax loss for the first and fourth quarters of Fiscal 1993 was adversely
affected by the $19.7 million charge recorded in connection with the Asset
Review Program, which was recorded by the Company during the fourth quarter.
Without this non-recurring charge, the combined pre-tax loss for the first and
fourth quarters of Fiscal 1993 would have been $5.4 million. In connection with
the Company's adoption, during the fourth quarter of Fiscal 1993, of SFAS No.
106, as of September 1, 1992 (the beginning of the fiscal year), the Company
has restated the previously issued results of operations for the first three
quarters of Fiscal 1993. The amounts disclosed above with respect to pre-tax
profits or losses are after giving effect to this restatement. For Fiscal 1992,
the combined pre-tax profit for the second and third quarters was approximately
$18.2 million, compared with a combined pre-tax profit for the first and fourth
quarter of approximately $3.3 million. Any material adverse conditions
occurring during the Company's second or third quarter may disproportionately
affect the Company's profits for that fiscal year. The duration and intensity
of the cough, cold and flu season may also have a significant effect on pre-tax
income.
Store Format.
The Company utilizes a variety of store formats, in addition to the
conventional drug store format, to respond to particular market needs,
opportunities and competitive situations.
Apothecaries.
The Company operates approximately 30 "apothecaries," which are smaller
scale drug stores, typically ranging in size from 600 to 5,000 square feet.
The Company began using this format in 1988. Apothecaries emphasize the
pharmacy and are generally located in densely populated areas with heavy
foot traffic. These stores carry a wide range of drug store products but in
limited quantities.
HHCs.
Hook opened its first HHC in 1977. HHCs serve their customers' needs by
supplying services and goods (for purchase or lease) for home
convalescence, exercise and rehabilitation, including wheelchairs, hospital
beds, exercise equipment and other convalescent supplies. At February 28,
1994, the Company operated 33 full service HHCs and 156 "boutiques." A
boutique is a smaller scale HHC located within the Company's drug stores
which offers products similar to that found in a full service HHC. The
Company's HHC business is characterized by lower inventory turnover and a
higher gross profit percentage than is typical of most drug store
operations. This portion of the business has accounted for approximately 1%
of total Company sales for each of Stub Fiscal 1994 and Fiscal 1993, 1992
and 1991, respectively.
Deep Discount Drug Stores.
SupeRx has utilized deep discount drug stores as an operational strategy
in markets where competitors are utilizing the same concept. At February
28, 1994, SupeRx operated 19 deep discount drug stores under the names of
"Drug World" and "Warehouse Drugs." SupeRx places greater emphasis on price
competitiveness in these stores. Overall, these stores are characterized by
lower gross profit margins but greater sales volume when compared to
typical drug stores. Staffing requirements of deep discount drug stores are
somewhat higher than those of conventional drug stores due to their higher
sales volume and larger size. These stores offer a large selection of very
competitively priced merchandise. The average store size is approximately
25,000 square feet.
58
<PAGE>
The deep discount drug stores accounted for approximately 3.5%, 3.4%, 3.1%
and 3.2% of total sales of the Company during Stub Fiscal 1994 and Fiscal
1993, 1992 and 1991, respectively.
Distribution.
As of February 28, 1994, the Company operated warehouse and distribution
facilities located in the Midwestern and Northeastern regions of the United
States, which provided merchandise to all of the Company's stores. In
September 1993, the Company completed a 340,000 square foot expansion to
its Midwestern warehouse and distribution facility. As a result of this
expanded facility, the Company expects to terminate its warehouse and
distribution services agreement with Peyton's (discussed below) within the
next few months and to provide these services to all its stores from
Company operated facilities. Beginning in September 1993, the Company began
providing promotional and seasonal merchandise to all of its SupeRx stores
from the expanded facility, while still utilizing Peyton as the product
source to its SupeRx stores for everyday merchandise. Beginning January
1994, the Company commenced a gradual transition away from Peyton's for
everyday merchandise shipments. Currently, all of the SupeRx stores are
being serviced, for promotional and seasonal merchandise as well as
everyday merchandise, from the expanded Midwestern facility. During Fiscal
1993 and 1992, approximately 85% of the merchandise sold (based upon cost)
in the Hook and Brooks stores flowed through Company owned facilities, with
the remainder generally coming as direct store deliveries from vendors.
During Fiscal 1993 and 1992, approximately 75% of all merchandise sold
(based upon cost) in the SupeRx stores was purchased pursuant to a
warehouse services agreement with Kroger (doing business as Peyton's
Northern Distribution Center, Peyton's Northern and Peyton's) and
Peyton's--Southeastern, Inc. (a wholly-owned subsidiary of Kroger) doing
business as Peyton's Mid-South Company, a successor-in-interest to
Peyton's, Inc. (collectively, "Peyton's"), with the remainder generally
coming as direct store deliveries from vendors. Peyton's is a warehouse and
distribution operation owned by Kroger. Peyton's provides certain services
to SupeRx, including buying, warehousing and distributing certain products
to SupeRx stores. Under the terms of this agreement, Peyton's generally
charges SupeRx its product acquisition cost, without reflecting cash
discounts received by Peyton's, plus a charge (the "Upcharge") computed as
a percentage of this product cost. The amount charged by Peyton's for the
Upcharge but excluding interest, was approximately $5,371,000, $13,489,000,
$13,350,000 and $12,220,000 for Stub Fiscal 1994 and Fiscal 1993, 1992 and
1991, respectively. The Company paid interest on amounts due Peyton's that
were outstanding for more than nine days. The amount of this interest paid
for Fiscal 1993, 1992 and 1991 was $2,156,000, $541,000 and $1,402,000,
respectively. There was no interest paid by the Company to Peyton's during
Stub Fiscal 1994. As discussed above, in connection with the Midwestern
warehouse and distribution center expansion, the Company expects to
terminate the arrangement with Peyton's within the next few months. At the
time of the Buy Out, the Company entered into this arrangement because Old
SupeRx, as part of Kroger, had been using Peyton's for buying, warehousing
and distributing its products and management believed that continuation of
this arrangement was the most effective strategy at that time.
Management Information Systems ("MIS").
The Company's computer operations provide systems to support all aspects of
the Company's operations, except for certain management information systems
utilized by SupeRx which are still provided by Kroger. All of the Company's
pharmacy departments have computers that provide support for the pharmacist.
During Fiscal 1993, the Company entered into a management information systems
services agreement with an independent third party. This services agreement
provides for outsourcing all of the Company's data center operations to the
third party for a ten year period. The outsourcing arrangement
59
<PAGE>
permits the Company to consolidate its three existing data processing centers
into a single data center operation. This consolidation is expected to be
completed by mid Fiscal 1994. The Company's applications development will
remain in place with Company personnel responsible for systems planning and
development. In addition to the outsourcing component, the services agreement
also provides for the development, installation and on-going support of a
point-of-sale scanning system within all of the Company's stores beginning in
late Fiscal 1994, with a full roll-out expected to be completed by the middle
of the fiscal year ended August 31, 1996.
In December 1993, the Company entered into a nine year contract with an
independent third party to install and maintain an interactive satellite
communications network for all of the Company's stores.
Competition.
The Company operates in a highly competitive industry. In the Company's
opinion, the principal competitive factors include convenience, price and
service. In addition to traditional competition from independent drug stores
and other chain drug stores, other national, regional and local retailers
compete for prescription drug, OTC drug, health and beauty aid and toiletries
business. Discounters, deep discounters, supermarkets, combination food and
drug stores ("Combo stores") (including those operated by Kroger), providers of
mail order prescriptions, hospitals and health maintenance organizations all
compete with the Company. In Fiscal 1993, the Company experienced increased
competition from, in particular, other national chain drug stores as well as
national food and discount retailers.
The deep discount drug store field has experienced significant growth as drug
chains, food, discount and specialty retailers entered the business. Major
retail companies now operate deep discount drug stores in the most competitive
retailing markets. SupeRx occasionally utilizes this operational strategy in
markets where competitors are utilizing the same concept. See "--Deep Discount
Drug Stores."
Combo stores have also experienced growth as consumers have become more
attracted to one-stop shopping. Discounters with prescription departments have
also grown in number.
The Company believes that its emphasis on convenience, service and quality
health care provides it with a core competitive strategy.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand are the Company's Independent Accountants. Representatives
of Coopers & Lybrand are expected to be present at the Special Meeting to
respond to appropriate questions of stockholders and make a statement if they
so desire.
STOCKHOLDER PROPOSALS FOR THE 1995 MEETING
If the Merger is not consummated, the Company will hold its 1995 annual
meeting of the stockholders of the Company in accordance with its By-laws and
Delaware law. Pursuant to the rules of the SEC, the deadline for stockholders
to submit proposals to be considered for inclusion in the proxy material for
the 1995 annual meeting of stockholders is August 1, 1994. The By-laws of the
Company provide additional requirements affecting the submission of proposals
by stockholders.
OTHER MATTERS
Pursuant to the By-laws of the Company, no matter may properly be presented
for consideration at the Special Meeting except those described in the Notice
of Special Meeting mailed together with this Proxy Statement.
60
<PAGE>
HOOK-SUPERX, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PERIOD ENDED FEBRUARY 28, 1994
Consolidated Balance Sheet............................................... F-2
Consolidated Statements of Operations and Accumulated Deficit............ F-4
Consolidated Statements of Cash Flows.................................... F-5
Notes to Consolidated Financial Statements............................... F-6
YEARS ENDED AUGUST 31, 1993, 1992 AND 1991
Report of Independent Accountants........................................ F-8
Consolidated Balance Sheets.............................................. F-9
Consolidated Statements of Operations.................................... F-10
Consolidated Statements of Stockholders' Equity.......................... F-11
Consolidated Statements of Cash Flows.................................... F-12
Notes to Consolidated Financial Statements............................... F-13
</TABLE>
F-1
<PAGE>
HOOK-SUPERX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FEBRUARY 28, 1994
-----------------
<S> <C>
ASSETS
------
Current Assets
Cash....................................................... $ 4,169
Accounts receivable, less allowances for doubtful accounts
of $11,476................................................ 44,217
Inventories................................................ 372,481
Prepaid expenses and other current assets.................. 18,348
---------
Total current assets................................... 439,215
Property and Equipment
Land....................................................... 8,285
Buildings.................................................. 41,758
Store improvements......................................... 65,979
Fixtures and equipment..................................... 144,111
Leased property under capital leases....................... 36,636
Leasehold interests........................................ 165,764
---------
462,533
Less allowances for accumulated depreciation and
amortization.............................................. (206,027)
---------
256,506
Other Assets................................................. 46,196
---------
$ 741,917
=========
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
HOOK-SUPERX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FEBRUARY 28, 1994
-----------------
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities
Notes payable under revolving credit commitment............ $ 40,000
Current portion of long-term debt.......................... 15,042
Current portion of obligations under capital leases........ 3,025
Accounts payable
Trade.................................................... 113,978
Related parties.......................................... 4,876
Accrued liabilities
Payroll and related taxes................................ 52,022
State and local taxes other than income.................. 18,535
Restructuring costs...................................... 11,404
Other.................................................... 46,182
--------
Total current liabilities.............................. 305,064
Long-term debt............................................... 247,358
Obligations under capital leases............................. 30,021
Deferred credits and other liabilities....................... 69,618
--------
Total liabilities...................................... 652,061
Commitments and contingency
Stockholders' Equity
Preferred stock, par value $.01; 10,000,000 shares
authorized, none issued
Common stock, par value $.01;
Authorized 100,000,000 shares;
Issued: February 28, 1994: 20,912,578..................... 209
Additional paid in capital................................. 135,214
Accumulated deficit........................................ (45,428)
Stockholders' notes receivable............................. (21)
Treasury stock, at cost
(February 28, 1994 - 49,166 shares)........................ (118)
--------
Total stockholders' equity............................. 89,856
--------
$741,917
========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
HOOK-SUPERX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
FOR THE THREE MONTHS AND SIX MONTHS ENDED FEBRUARY 28, 1994 AND 1993
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
---------------------- ----------------------
1994 1993 1994 1993
---------- ---------- ---------- ----------
(RESTATED) (RESTATED)
<S> <C> <C> <C> <C>
Net sales...................... $ 613,856 $ 605,267 $1,181,733 $1,149,396
Cost of merchandise sold,
including distribution costs.. 428,264 419,393 831,075 800,950
---------- ---------- ---------- ----------
Gross profit............... 185,592 185,874 350,658 348,446
Costs and Expenses
Selling, general and adminis-
trative..................... 136,836 136,337 271,352 268,766
Rent......................... 17,064 17,051 33,832 33,091
Depreciation and amortiza-
tion........................ 9,644 8,568 18,733 16,852
Interest..................... 7,194 8,332 14,733 16,175
---------- ---------- ---------- ----------
Income before income taxes,
extraordinary item and
cumulative effect of
accounting change......... 14,854 15,586 12,008 13,562
Income taxes................... 5,936 5,409 4,804 5,409
---------- ---------- ---------- ----------
Income before extraordinary
item and cumulative effect
of accounting change...... 8,918 10,177 7,204 8,153
Extraordinary item resulting
from income tax benefit from
utilizing net operating loss
carryforward.................. 4,674 4,674
Cumulative effect of change in
method of accounting for
income taxes.................. (5,192)
Cumulative effect of change in
method of accounting for
postretirement benefits other
than pensions................. (18,612)
---------- ---------- ---------- ----------
Net income (loss).......... $ 8,918 $ 14,851 $ 2,012 $ (5,785)
========== ========== ========== ==========
Income (loss) per share:
Before extraordinary item and
cumulative effect of
accounting change............. $ .42 $ .47 $ .33 $ .38
Per share effect of
extraordinary item resulting
from net operating loss
carryforward.................. .22 .22
Per share effect of cumulative
effect of accounting change... (.24) (.87)
---------- ---------- ---------- ----------
Net income (loss) per
share: $ .42 $ .69 $ .09 $ (.27)
========== ========== ========== ==========
Weighted average number of
shares outstanding............ 21,433,864 21,638,600 21,392,974 21,501,631
========== ========== ========== ==========
Accumulated deficit
Beginning of period.......... $ (54,346) $ (45,845) $ (47,440) $ (25,209)
Net income (loss)............ 8,918 14,851 2,012 ( 5,785)
---------- ---------- ---------- ----------
End of period................ $ (45,428) $ (30,994) $ (45,428) $ (30,994)
========== ========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
HOOK-SUPERX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
SIX MONTHS ENDED FEBRUARY 28, 1994 AND 1993
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1993
--------- ----------
(RESTATED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................ $ 2,012 $ (5,785)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Cumulative effect of change in accounting for income
taxes.................................................. 5,192
Cumulative effect of change in accounting for
postretirement benefits other than pensions............ 18,612
Depreciation and amortization........................... 18,733 16,852
Loss on sale of equipment............................... 1,725 158
Proceeds from vendor contract........................... 40,153
Increase in deferred income taxes....................... (6,109) (5,103)
Other, net.............................................. (879) (508)
Changes in operating assets and liabilities:
Increase in accounts receivable........................ (9,056) (17,517)
Increase in inventories................................ (35,296) (8,921)
Increase in prepaid expenses and other current assets.. (4,370) (3,808)
Increase in accounts payable........................... 2,282 2,030
Increase in accrued liabilities........................ 4,553 1,262
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES.. 18,940 (2,728)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment....................... (6,790) (19,112)
Proceeds from sale of receivables........................ 36,000
Proceeds from sale of equipment.......................... 8 334
Other, net............................................... 813 (5,168)
--------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES.. 30,031 (23,946)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short-term borrowings...................... 283,000 285,000
Reduction of short-term borrowings....................... (324,000) (257,000)
Repayments of obligations under capital leases........... (1,469) (797)
Proceeds from increase in term loan...................... 15,000
Repayments of long-term debt............................. (2,600) (15,125)
Other, net............................................... 267 198
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES.. (44,802) 27,276
--------- ---------
INCREASE IN CASH.......................................... 4,169 602
CASH, BEGINNING OF PERIOD.................................
--------- ---------
CASH, END OF PERIOD....................................... $ 4,169 $ 602
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
HOOK-SUPERX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE A--CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements have been prepared by the Company,
without audit, in accordance with generally accepted accounting principles and
in the opinion of management include all adjustments necessary for a fair
presentation of the results of operations for the periods presented. Pursuant
to the rules and regulations of the Securities and Exchange Commission, certain
information and footnote disclosures normally included in consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been omitted or condensed. It is management's belief that the
disclosures made are adequate to make the information presented not misleading.
It is recommended that these consolidated financial statements be read in
conjunction with the consolidated financial statements for the year ended
August 31, 1993, and the notes thereto.
Inventories are stated at the lower of LIFO cost or market utilizing the
retail and average cost methods. If these inventories had been valued on the
first-in, first-out method of inventory valuation, the inventory values would
have been approximately $70,292 higher at February 28, 1994. The LIFO charge to
operations was $605 and $1,600 for the three months and $3,005 and $4,763 for
the six months ended February 28, 1994 and 1993, respectively.
The Company considers all liquid investments with a maturity of three months
or less when purchased to be cash equivalents. Cash paid for interest was
$11,083 and $11,908 for the three months and $14,339 and $15,815 for the six
months ended February 28, 1994 and 1993, respectively. During the six months
ended February 28, 1994, the Company entered into capital lease obligations of
$9,000, relating to equipment leased in connection with the Company's expansion
to the Midwestern distribution facility. For the same six month period of the
prior year the Company entered into capital lease obligations amounting to
$1,150.
During the fourth quarter of Fiscal 1993, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 106--Employers' Accounting for
Postretirement Benefits Other Than Pensions. Consistent with the provisions of
this statement, when adoption of this statement is in any quarter other than
the first, the adoption is effective as of the beginning of the fiscal year of
adoption. Accordingly, the Company has restated the operating results for the
three months and six months ended February 28, 1993 to give effect to this
adoption as of the beginning of the fiscal year. The result of this restatement
on the three months and six months ended February 28, 1993 was a reduction of
$327 and $19,266, respectively, in the previously reported net income for these
periods. The amount for the six months then ended principally reflects the
cumulative effect of the accounting change.
NOTE B--INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued SFAS No.
109--Accounting for Income Taxes. This statement requires a change from the
deferred method of accounting for income taxes (as previously required by
Accounting Principles Board Opinion ("APB") No. 11) to the liability method.
Under the liability method, deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the carrying amount of assets
and liabilities for financial reporting purposes and the tax bases of these
assets and liabilities. Under SFAS No. 109, the effect on deferred taxes of a
change in tax rates is recognized in the period that includes the enactment
date. The Company adopted the provisions of SFAS No. 109 on September 1, 1993,
and recorded the change in accounting for income
F-6
<PAGE>
HOOK-SUPERX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
(UNAUDITED)
taxes as the cumulative effect of an accounting change in the Consolidated
Statements of Operations for the six months ended February 28, 1994. The
cumulative effect of this adoption was a charge of $5,192 or $.24 per share.
Prior year financial statements have not been restated to apply the provisions
of SFAS No. 109.
The Company's effective income tax rate was 40% for the three months and six
months ended February 28, 1994, as compared with 35.5% and 39.7% for the three
months and six months ended February 28, 1993, respectively. The effective rate
differs from the Federal statutory rate of 35% primarily due to state and local
income taxes.
During the three months and six months ended February 28, 1993, the Company
utilized approximately $13,500 of net operating loss carryforwards for
financial reporting purposes and the related tax benefit of approximately
$4,912 was reflected as an extraordinary item in the Consolidated Statements of
Operations and Accumulated Deficit.
Cash paid for income taxes (Federal, state and local) was $1,387 and $1,006
for the three months ended and $1,512 and $1,012 for the six months ended
February 28, 1994 and 1993, respectively. During the six months ended February
28, 1994 the Company received a state income tax refund of $150 and during the
six months ended February 28, 1993 a Federal income tax refund of $1,500, due
to the overpayment of estimated income taxes.
NOTE C--SUBSEQUENT EVENT
On April 1, 1994, the Company entered into a definitive merger agreement with
Revco D.S., Inc. ("Revco") pursuant to which Revco has agreed to acquire all of
the outstanding common stock of the Company for $13.75 per share. Stockholders
of HSI owning approximately 49% of the outstanding common stock of HSI have
agreed to vote in favor of the transaction. Revco's obligation to consummate
this transaction is subject to Revco raising up to $175 million through the
issuance of senior subordinated debentures. On May 24, 1994, Revco waived the
aforementioned financing condition. This transaction is also subject to certain
conditions under the above referenced definitive merger agreement.
F-7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Hook-SupeRx, Inc.
We have audited the accompanying consolidated balance sheets of Hook-SupeRx,
Inc. and Subsidiaries as of August 31, 1993 and 1992, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended August 31, 1993. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Hook-SupeRx, Inc.
and Subsidiaries as of August 31, 1993 and 1992, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended August 31, 1993, in conformity with generally accepted accounting
principles.
As discussed in Note K to the Consolidated Financial Statements, the Company
changed its method of accounting for postretirement benefit costs other than
pensions, as of September 1, 1992.
Coopers & Lybrand
Cincinnati, Ohio
November 12, 1993
F-8
<PAGE>
HOOK-SUPERX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AUGUST 31,
--------------------
1993 1992
--------- ---------
<S> <C> <C>
ASSETS
------
Current Assets
Accounts receivable, less allowances for doubtful
accounts of $11,786 and $9,676, respectively........... $ 73,660 $ 69,994
Inventories............................................. 337,185 325,690
Prepaid expenses........................................ 8,532 7,115
--------- ---------
Total current assets................................. 419,377 402,799
Property and Equipment
Land.................................................... 8,285 8,296
Buildings............................................... 42,666 32,602
Store Improvements...................................... 65,108 57,019
Fixtures and equipment.................................. 141,830 129,932
Leased property under capital leases.................... 27,637 27,360
Leasehold interests..................................... 162,360 162,653
--------- ---------
447,886 417,862
Less allowances for accumulated depreciation and
amortization........................................... (192,463) (169,328)
--------- ---------
255,423 248,534
Other Assets............................................. 42,799 36,893
--------- ---------
$ 717,599 $ 688,226
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities
Notes payable under revolving credit commitment......... $ 81,000 $ 62,000
Current portion of long-term debt....................... 17,642 39,300
Current portion of obligations under capital leases..... 1,910 1,676
Accounts payable
Trade.................................................. 106,406 96,622
Related parties........................................ 10,166 41,116
Accrued liabilities
Payroll and related taxes.............................. 50,305 55,705
State and local taxes other than income................ 17,861 17,885
Restructuring costs.................................... 18,851
Other.................................................. 28,543 25,775
--------- ---------
Total current liabilities............................ 332,684 340,079
Long-term debt........................................... 247,358 205,700
Obligations under capital leases......................... 23,606 23,754
Deferred credits and other liabilities................... 26,497 9,596
--------- ---------
Total liabilities.................................... 630,145 579,129
Commitments and contingency
Stockholders' Equity
Preferred stock, par value $.01; 10,000,000 shares
authorized, none issued
Common stock, par value $.01; Authorized 100,000,000
shares; Issued: 1993--20,839,930; 1992--20,735,699..... 208 207
Additional paid-in capital.............................. 134,831 134,248
Accumulated deficit..................................... (47,440) (25,209)
Stockholders' notes receivable.......................... (127) (146)
Less treasury stock (at cost) (1993--15,833 shares;
1992--833 shares)...................................... (18) (3)
--------- ---------
Total stockholders' equity........................... 87,454 109,097
--------- ---------
$ 717,599 $ 688,226
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-9
<PAGE>
HOOK-SUPERX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
----------------------------------
1993 1992 1991
---------- ---------- ----------
<S> <C> <C> <C>
Net sales................................... $2,280,048 $2,134,670 $1,994,553
Cost of merchandise sold, including distri-
bution costs............................... 1,602,129 1,481,809 1,389,133
---------- ---------- ----------
Gross profit............................ 677,919 652,861 605,420
Costs and Expenses
Selling, general and administrative....... 527,956 491,952 455,337
Rent...................................... 68,218 60,060 55,682
Depreciation and amortization............. 34,244 32,570 36,065
Restructuring costs....................... 19,704
Interest.................................. 31,378 46,728 53,312
---------- ---------- ----------
Income (loss) before income taxes,
extraordinary items and cumulative
effect of accounting change............ (3,581) 21,551 5,024
Income taxes................................ 38 5,967 1,542
---------- ---------- ----------
Income (loss) before extraordinary items
and cumulative effect of accounting
change................................. (3,619) 15,584 3,482
Extraordinary charge resulting from early
retirement of debt, net of tax benefit of
$5,908..................................... (22,855)
Extraordinary item resulting from income tax
benefit from utilizing net operating loss
carryforward............................... 1,046
Cumulative effect of change in method of
accounting for postretirement benefits
other than pensions........................ (18,612)
---------- ---------- ----------
Net income (loss)....................... $ (22,231) $ (7,271) $ 4,528
========== ========== ==========
Net income (loss) per share:
Before extraordinary items and cumulative
effect of accounting change (Pro forma for
1991)...................................... $ (.17) $ .99 $ .27
Per share effect of extraordinary charge
resulting from early retirement of debt.... (1.45)
Per share effect of extraordinary item
resulting from net operating loss
carryforward............................... .08
Per share effect of cumulative effect of
accounting change.......................... (.89)
---------- ---------- ----------
Net income (loss) per share (Pro forma
for 1991).............................. $ (1.06) $ (.46) $ .35
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-10
<PAGE>
HOOK-SUPERX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------------
ISSUED IN TREASURY ADDITIONAL STOCKHOLDERS'
------------------ --------------- PAID-IN ACCUMULATED NOTES
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE TOTAL
---------- ------ ------- ------ ---------- ----------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 1,
1990................... 10,804,166 $108 12,500 $ (50) $ 29,431 $(22,466) $ 7,023
Net income.............. 4,528 4,528
Repurchase of common
stock held by
management investors... 75,000 1 75,000 (312) 311
Sale of common stock to
management investors... (26,666) (26,666) 108 (108)
Change in redemption
value of redeemable
common stock and
options held by
management investors... (5,699) (5,699)
---------- ---- ------- ----- -------- -------- ----- --------
Balance, August 31,
1991................... 10,852,500 109 60,834 (254) 23,935 (17,938) 5,852
Net loss................ (7,271) (7,271)
Change in redemption
value of redeemable
common stock and
options held by
management investors
through May 31, 1992... (3,143) (3,143)
Elimination of the
change in redemption
value and
reclassification of
common stock and
options held by
management investors... 1,977,899 19 18,570 (146) 18,443
Issuance and sale of
common stock in the
initial public
offering, net of
underwriting discounts
and other transaction
costs.................. 7,900,000 79 95,365 95,444
Sale of common stock to
management investors... (60,001) 251 251
Shares issued pursuant
to the exercise of
options................ 5,300 17 17
Other................... (496) (496)
---------- ---- ------- ----- -------- -------- ----- --------
Balance, August 31,
1992................... 20,735,699 207 833 (3) 134,248 (25,209) (146) 109,097
Net loss................ (22,231) (22,231)
Shares issued pursuant
to the exercise of
options................ 104,231 1 311 312
Repurchase of restricted
shares of common stock
held by a former member
of management.......... 15,000 (15) (15)
Repayment of a
stockholder loan by a
former member of
management............. 19 19
Other................... 272 272
---------- ---- ------- ----- -------- -------- ----- --------
Balance, August 31,
1993................... 20,839,930 $208 15,833 $ (18) $134,831 $(47,440) $(127) $ 87,454
========== ==== ======= ===== ======== ======== ===== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-11
<PAGE>
HOOK-SUPERX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
-------------------------------
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................... $ (22,231) $ (7,271) $ 4,528
Adjustments to reconcile net income (loss)
to net cash (used in) provided by operating
activities:
Extraordinary charge resulting from early
retirement of debt....................... 28,763
Cumulative effect of change in accounting
for postretirement benefits other than
pensions................................. 18,612
Restructuring costs....................... 19,704
Depreciation and amortization............. 34,244 32,570 36,065
Loss (gain) on sale of property and
equipment................................ 249 642 (509)
Increase in deferred income taxes......... (7,894) (2,576) (5,446)
Other, net................................ (1,682) (715) (841)
Changes in operating assets and
liabilities
(Increase) decrease in accounts
receivable............................. (3,667) (17,399) 1,785
(Increase) decrease in inventories...... (11,495) (23,963) 7,800
(Increase) decrease in prepaid expenses. (2,928) (3,200) 1,177
(Decrease) increase in accounts payable. (21,166) 3,806 4,823
(Decrease) increase in accrued
liabilities............................ (3,508) 2,057 13,759
--------- --------- ---------
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES................................. (1,762) 12,714 63,141
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment......... (33,201) (30,642) (16,804)
Proceeds from sale of equipment............. 411 109 1,123
Other, net.................................. (3,066) (4,725) (4,620)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES....... (35,856) (35,258) (20,301)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short-term borrowings......... 520,000 511,000 270,000
Reduction of short-term borrowings.......... (501,000) (449,000) (270,000)
Increase in debt issuance costs............. (6,906)
Repayment of long-term debt................. (15,125) (393,700) (20,833)
Proceeds from Senior Notes and Senior Bank
Agreement.................................. 35,125 245,000
Issuance and sale of common stock in initial
public offering, net of underwriting
discounts and other transaction costs...... 95,444
Payment of fees associated with the
Debentures Redemption and unwinding
interest rate protection agreements........ (19,527)
Repayment of obligations under capital
leases..................................... (1,690) (1,468) (1,385)
Other, net.................................. 308 1,839 477
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES................................. 37,618 (17,318) (21,741)
--------- --------- ---------
(DECREASE) INCREASE IN CASH................... (39,862) 21,099
CASH, BEGINNING OF PERIOD..................... 39,862 18,763
--------- --------- ---------
CASH, END OF PERIOD........................... $ 39,862
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-12
<PAGE>
HOOK-SUPERX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Organization
Hook-SupeRx, Inc. ("HSI" or the "Company") was incorporated as a Delaware
corporation on October 8, 1986, for the purpose of acquiring on a leveraged
basis a major portion of the retail drug store business then owned by The
Kroger Co. ("Kroger"). On December 9, 1986, Hook Drugs, Inc., then a wholly-
owned subsidiary of Kroger, was merged into HSI, and, upon consummation of the
merger, became a division of HSI. Also, HSI acquired certain assets and assumed
certain liabilities of Superx Drugs Corporation, another wholly-owned
subsidiary of Kroger.
On June 15, 1988, the Company acquired all of the outstanding common stock of
Brooks Drug, Inc. ("Brooks"), a wholly-owned subsidiary of Andrews Group
Incorporated (formerly Compact Video, Inc.) ("Andrews"). Upon consummation of
this transaction, Brooks became a wholly-owned subsidiary of the Company.
The consolidated financial statements include the Company and all of its
subsidiaries. All significant intercompany transactions and balances are
eliminated. Certain amounts reflected in the prior years' financial statements
have been reclassified to be comparable with the current year.
Accounts Receivable
The Company operates a chain of retail drug stores and home health care
centers throughout the midwestern and northeastern parts of the United States.
The Company, as a part of its prescription sales business, extends credit to
third party providers including health maintenance organizations ("HMOs"),
medicare and medicaid and various insurance companies.
Inventories
Inventories are stated at the lower of LIFO cost or market utilizing the
retail and average cost methods. LIFO inventories at August 31, 1993 and 1992
were approximately $67,287 and $61,012, respectively, less than the amount of
such inventories valued on the FIFO basis. For the years ended August 31, 1993,
1992 and 1991, inventory quantities were reduced, resulting in a liquidation of
LIFO inventory quantities carried at lower costs prevailing in prior years. The
effect of these liquidations increased net income in Fiscal 1991 by
approximately $1,602 or $.12 per share of common stock. The effect of these
liquidations for the years ending August 31, 1993 and 1992 was not material.
Property and Equipment
Property and equipment are stated at cost. Expenditures for improvements and
major renewals are capitalized. Expenditures for maintenance and repairs are
expensed as incurred. The carrying amounts of major assets sold, retired, or
otherwise disposed of, and the related accumulated depreciation amounts are
eliminated from the accounts. Any resulting gain or loss is included in income.
Provisions for depreciation are computed by the straight-line method based upon
the estimated useful
life. Estimated useful lives range from 25 to 30 years on buildings, 3 to 10
years on fixtures and equipment, and 10 to 15 years for store improvements.
Capital leases are recorded at the lower of the fair market value of the
leased property or the present value of the minimum lease payments.
Amortization of leased property is computed by the straight-line method over
the term of the lease, generally 15 to 20 years.
F-13
<PAGE>
HOOK-SUPERX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Leasehold interests represent the amounts assigned to favorable lease
agreements on real property. These amounts are amortized by the straight-line
method over the estimated remaining terms of the leases.
Store Pre-Opening Expense
Costs of a non-capital nature, incurred in the opening of a new or remodeling
of an existing store, are expensed as incurred.
Statement of Cash Flows
The Company considers all liquid investments with a maturity of three months
or less when purchased to be cash equivalents.
Cash paid for interest was $31,370, $48,924 and $54,566 for the years ended
August 31, 1993, 1992 and 1991, respectively. Cash paid for income taxes
(Federal, state and local) was $3,392, $5,373 and $5,949 for the years ended
August 31, 1993, 1992 and 1991, respectively.
During the year ended August 31, 1993, the Company entered into capital lease
obligations amounting to $2,275. During the years ended August 31, 1992 and
1991, the Company incurred no capital lease obligations.
The extraordinary charge resulting from the early retirement of debt
presented in the Consolidated Statements of Cash Flows for the year ended
August 31, 1992, is presented before related income tax benefits of $5,908 due
to the non-cash nature of these tax benefits.
Deferred Income Taxes
Deferred income taxes result from payments made under the Alternative Minimum
Tax ("AMT") provisions.
Intangible Assets
Amortization of goodwill and other intangible assets is provided principally
on the straight-line basis over the following lives:
<TABLE>
<S> <C>
Goodwill.................................... 40 years
Other....................................... 2-15 years
</TABLE>
Amortization of debt issuance costs is provided using the interest method
over the terms of the related debt, which range from 4-10 years.
Software Development Costs
Costs of purchased software and, under certain conditions, costs associated
with internally developed software are capitalized and then amortized over
future periods. Amortization of capitalized software costs, for both internally
developed and purchased software products, is computed on a straight-line basis
over the estimated economic useful life, generally 5 years. The unamortized
costs associated with software development at August 31, 1993 and 1992 were
$5,189 and $1,853, respectively.
F-14
<PAGE>
HOOK-SUPERX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Per Share Data
Net income (loss) per share of common stock is computed by dividing net
income (loss) by the weighted average number of shares of common stock, and
common stock equivalents when dilutive. Weighted average shares outstanding
also include Common Stock and options to purchase Common Stock issued within
one year prior to the Company's Initial Public Stock Offering (defined below),
as if the Common Stock and options to purchase Common Stock were issued and
outstanding for all years presented. The weighted average number of shares
outstanding for the years ended August 31, 1993, 1992 and 1991, respectively,
were 20,958,854, 15,691,305 and 12,922,363 shares. Per share data for the year
ended August 31, 1991 has been presented on a pro forma basis to eliminate the
effect of the change in redemption value of common stock and options held by
management investors due to the termination of the agreement which provided for
this redemption option. See Note C.
NOTE B--RESTRUCTURING COSTS
During fiscal 1993, the Company undertook a program to review its existing
asset base to identify underproductive stores (as well as other non-productive
assets) for disposition, and a reorganization of its store operations and
marketing departments (the "Asset Review Program"). The intent of the Asset
Review Program is to allow the Company, once this program is completed, to
focus its resources on productive assets and stores within its core market
areas and to better support the "one company" philosophy the Company has
adopted (in the case of the reorganization of store operations and marketing
departments). The Asset Review Program identified approximately 60 store
locations for disposition. These stores were spread throughout the Company's
area of operations and were not concentrated in any specific markets. Of these
stores, 16 stores did not contain a pharmacy and the balance were full service
stores. As of August 31, 1993, the Company closed approximately 40 stores, with
the balance to be closed during fiscal 1994. The plan of disposition varied and
was store specific in nature. It included outright sales to independent third
parties, transferring of prescription files to nearby HSI stores or selling the
prescription files to independent third parties and subsequently closing the
store or in situations where sales to independent third parties could not be
negotiated and there was not an HSI store nearby to transfer the prescription
file, the store was closed. In connection with the Asset Review Program, the
Company recorded a pre-tax charge of $19.7 million ($.94 per share) which
principally provides for (a) the estimated remaining contractual lease
liability plus other occupancy costs for the closed stores and increased
amounts for previously closed stores, (b) the write-off of the net book value
of fixtures and equipment and other assets deemed to have no value, (c) costs
of redistributing inventory from the closed stores to other stores, and (d)
severance and relocation costs for employees affected by store closings, as
well as the reorganization of the store operations and marketing departments.
NOTE C--CAPITAL STOCK AND RELATED MATTERS
On June 10, 1992, the Company received net proceeds in connection with the
issuance and sale of 7,900,000 shares of Common Stock at $13.00 per share (the
"Initial Public Offering") of approximately $95.4 million, after deducting
approximately $6.2 million in underwriting discounts and approximately $1.1
million in other professional fees and related transactions costs.
Common Stock
All outstanding shares of Common Stock are fully paid and non-assessable.
Each outstanding share is entitled to one vote on all matters submitted to
stockholders. Holders of Common Stock have
F-15
<PAGE>
HOOK-SUPERX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
no redemption rights, conversion rights or percentage rights to purchase or
subscribe for securities of the Company. Each share of Common Stock has
attached to it a Preferred Stock Purchase Right. See Stockholder Rights Plan.
Prior to the consummation of the Initial Public Offering, the shares of Common
Stock were issued and sold in accordance with the provisions of a stockholders
agreement. The stockholders agreement contained provisions which, under certain
circumstances, allowed management investors to require the Company to purchase
all of the shares held by such management investors at a predetermined price.
As a result, the Company recorded the shares held by management investors at
fair market value at the date of issue and did not classify the shares as a
component of stockholders' equity. Additionally, the Company was recording
periodic accretion of the excess of the redemption price over the fair market
value at the date of issue. Such accretion served to reduce the net income
available to common stockholders. For the year ended August 31, 1991 the amount
of accretion recorded was $5,699. In connection with the consummation of the
Initial Public Offering, the obligation of the Company to repurchase these
management shares no longer exists due to the termination, pursuant to its
terms, of the stockholders' agreement, and accordingly the Company has
reclassified these shares held by management investors to "Stockholders Equity"
at August 31, 1992.
Preferred Stock
Pursuant to the Restated Certificate, the Board of Directors is authorized to
issue shares of Preferred Stock, divide the Preferred Stock into series and,
with respect to each series, to determine the dividend rights, dividend rate,
conversion rights, voting rights, redemption rights and terms, liquidation
preferences, sinking fund provisions, the number of shares constituting the
series and the designation of such series. The Board has authorized a series of
Preferred Stock (the "Series A Preferred") which is issuable upon exercise of
Rights (defined below) issued pursuant to the Company's Stockholder Rights
Plan. At August 31, 1993 and 1992, no shares of Series A Preferred Stock are
outstanding. The Company has no other present plans to issue any shares of
Preferred Stock.
Stockholder Rights Plan
On June 3, 1992, the Company adopted a stockholders' rights plan (the
"Stockholder Rights Plan"), whereby immediately after the consummation of the
Initial Public Offering, each share of Common Stock outstanding will have
attached to it one preferred stock purchase right (a "Right"). Each Right will
entitle the holder to purchase from the Company one one-hundredth of a share of
Series A Preferred Stock at a price of $64 per one one-hundredth of a share,
subject to adjustment. The Rights are not exercisable until 10 business days
after the acquisition by person or group of 20% or more of the outstanding
Common Stock (an "Acquiring Person") or 10 business days after the announcement
of an intention to make or commencement of a tender offer or exchange offer the
consummation of which would result in the beneficial ownership by a person or
group of 20% or more of the outstanding Common Stock (the earlier of such dates
being called the "Distribution Date"). Until a Right is exercised, the holder
thereof will have no rights as a stockholder of the Company. Until the
Distribution Date, the Rights will be transferred with and only with the Common
Stock. Under the terms of the Stockholder Rights Plan, Goldman, Sachs & Co. and
its affiliates ("Goldman Sachs") and Kroger (both related parties--see Note H)
will not be deemed an Acquiring Person unless their beneficial ownership of the
outstanding Common Stock exceeds 30% and 25%, respectively. In the event that
any person becomes an Acquiring Person, each holder of a Right, other than
Rights beneficially owned by the Acquiring Person, will thereafter have the
right to receive upon exercise that number of shares of Common Stock having a
market value of two times the Purchase Price, and in the event that the Company
is acquired in a business combination transaction or 50% or more of its assets
are sold, each
F-16
<PAGE>
HOOK-SUPERX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
holder of a Right will thereafter have the right to receive upon exercise that
number of shares of common stock of the acquiring company which at the time of
the transaction will have a market value of two times the Purchase Price. The
Stockholder Rights Plan expires at the close of business on June 3, 2002 or the
time at which the Rights are redeemed, whichever is earlier.
NOTE D--LONG-TERM SERVICE AGREEMENTS
On May 31, 1990, the Company entered into agreements with an independent
third party which provide for photoprocessing services to all retail locations
operated by the Company. As consideration for entering into these long-term
exclusive agreements, the Company received $10,600 in cash and a $3,000 non-
interest bearing note receivable, which was paid during fiscal 1993. For
financial reporting purposes, the Company has reflected these amounts as
deferred revenue at the closing date and is recognizing the proceeds on a
straight-line basis over the seventy-five month term of the agreements. For
income tax purposes, the cash proceeds were recognized as taxable income during
the year ended August 31, 1990. Deferred revenue is $6,528 and $8,704 at August
31, 1993 and 1992, respectively.
On December 1, 1992, the Company entered into a services agreement with an
independent third party which provides for outsourcing all of the Company's
data center operations to the third party for a ten-year period. In addition to
the outsourcing component of the services agreement, this agreement also
provides for the development, installation and on-going support of a point-of-
sale scanning system within all of the Company's stores. Charges to the Company
under the services agreement will include an annual service charge subject to
adjustment for, among other things, actual usage of data center operations,
certain variances from the targeted number of point-of-sale systems to be
installed in certain periods, and cost of living adjustments. Subject to these
adjustments, the aggregate amount payable by the Company during the ten year
period of this services agreement is $120 million, comprised of approximately
$30 million for the installation of the point-of-sale scanning equipment and
approximately $90 million for the data center operation, software licenses,
applications development, maintenance and ongoing support related to the point-
of-sale scanning system. As of August 31, 1993, the Company has recorded $3,205
as prepaid expenses which reflect payments made toward the outsourcing
component of the services agreement in advance of the actual work being
completed. These costs will begin to be expensed during fiscal 1994 as the work
is completed.
NOTE E--INCOME TAXES
The Company and its subsidiaries file a consolidated income tax return.
Federal income tax expense for the years ended August 31, 1992 and 1991 is the
result of the Company being subject to the AMT provisions. Income tax expense
is included in the Consolidated Statements of Operations as follows:
<TABLE>
<CAPTION>
AUGUST 31,
-------------------
1993 1992 1991
---- ------ ------
<S> <C> <C> <C>
Ordinary operations:
Federal.............................................. $4,510 $1,162
State and local...................................... $38 1,457 380
--- ------ ------
38 5,967 1,542
Extraordinary items:
Federal, state and local tax benefit of early retire-
ment of debt........................................ (5,908)
Tax benefit from utilizing net operating loss
carryforward........................................ (1,046)
--- ------ ------
$38 $ 59 $ 496
=== ====== ======
</TABLE>
F-17
<PAGE>
HOOK-SUPERX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income tax expense consists of the following:
<TABLE>
<CAPTION>
1993 1992 1991
------- ------- -------
<S> <C> <C> <C>
Current
Federal......................................... $ 7,200 $ 2,576 $ 5,424
State and local................................. 732 59 518
------- ------- -------
Total current................................. 7,932 2,635 5,942
------- ------- -------
Deferred
Federal......................................... (7,200) (2,576) (5,308)
State and local................................. (694) (138)
------- ------- -------
Total deferred................................ (7,894) (2,576) (5,446)
------- ------- -------
$ 38 $ 59 $ 496
======= ======= =======
</TABLE>
The following table reconciles actual income tax expense (before
extraordinary items and cumulative effect of an accounting change) to income
taxes computed by applying the regular tax statutory rate to earnings before
income taxes, extraordinary items and cumulative effect of an accounting
change:
<TABLE>
<CAPTION>
1993 1992 1991
------- ------ ------
<S> <C> <C> <C>
Federal income tax (benefit)....................... $(1,218) $7,327 $1,708
State and local taxes, net of Federal tax.......... 38 975 380
Difference between regular tax and AMT tax......... (3,140)
Losses without income tax benefits................. 1,218
Difference between AMT tax and regular tax due to
regular tax net operating loss carryforwards...... (546)
Other, net......................................... 805
------- ------ ------
$ 38 $5,967 $1,542
======= ====== ======
</TABLE>
At August 31, 1993, the Company had available net operating losses for
financial reporting purposes amounting to approximately $33,821 which expire at
various times during the years 2004 through 2008. The potential tax benefit of
these net operating losses has not been recorded for financial statement
purposes because of the uncertainty of realizing these benefits. At August 31,
1993, such carryforwards for income tax purposes were approximately $2,016
which will expire in 2007. Additionally, at August 31, 1993 the Company had net
operating loss carryforwards available for AMT purposes of approximately
$35,321 for financial reporting purposes which will expire during the years
2004 through 2008. The Company has no AMT net operating loss carryforwards
available for income tax purposes. AMT net operating losses can be used to
offset only 90% of the Company's AMT taxable income. During fiscal 1991, the
Company utilized approximately $5,232 of net operating loss carryforwards for
financial reporting purposes and the related tax benefit of $1,046 has been
reflected as an extraordinary item in the Consolidated Statements of
Operations. The Company also has available for financial reporting purposes
approximately $5,521 in net operating loss carryforwards acquired in the Brooks
acquisition, which can only be utilized by Brooks. These net operating loss
carryforwards expire at various times between the years 2001 and 2003. Upon
utilization, these acquired loss carryforwards will be accounted for as an
adjustment to goodwill.
F-18
<PAGE>
HOOK-SUPERX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In February 1992, the FASB issued SFAS No. 109--Accounting for Income Taxes.
This statement requires a change from the deferred method of accounting for
income taxes (as previously required by Accounting Principles Board Opinion No.
11) to the asset and liability method. Under the asset and liability method,
deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable to future years
to differences between carrying amounts of assets and liabilities for financial
reporting purposes and the tax bases of these assets and liabilities. Under
SFAS No. 109, the effect on deferred taxes of a change in tax rates is
recognized in the period that includes the enactment date. The Company will
adopt the provisions of SFAS No. 109 effective September 1, 1993, and will
record the change in accounting for income taxes as the cumulative effect of an
accounting change in the Consolidated Statement of Operations for the three
months ended November 30, 1993. The Company estimates the cumulative effect on
prior years resulting from this change in accounting principle will approximate
a charge ranging from $4 million to $11 million depending upon the outcome of
various tax planning strategies that are currently being evaluated.
NOTE F--LEASES
The Company leases various properties under capital leases and noncancelable
operating leases. Many of the leases contain contingent rental provisions
computed on the basis of store sales. Certain of the leases also provide for
the payment, by the Company, of real estate taxes, insurance, and maintenance.
The Company has the option to extend the lease terms in the majority of the
leases.
Capital leases included in the consolidated financial statements consist of
the following:
<TABLE>
<CAPTION>
1993 1992
------- -------
<S> <C> <C>
Land and buildings........................................ $27,637 $27,360
Less accumulated amortization............................. 9,178 8,918
------- -------
Net leased property under capital leases.................. $18,459 $18,442
======= =======
</TABLE>
Future minimum lease payments for leases with initial or remaining
noncancelable terms of one year or more consist of the following at August 31,
1993:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES TOTAL
------- --------- --------
<S> <C> <C> <C>
1994.............................................. $ 4,741 $ 49,226 $ 53,967
1995.............................................. 4,519 44,972 49,491
1996.............................................. 4,396 40,286 44,682
1997.............................................. 4,347 35,813 40,160
1998.............................................. 4,274 31,406 35,680
1999 and thereafter............................... 24,701 143,797 168,498
------- -------- --------
Total minimum lease payments.................... 46,978 $345,500 $392,478
======== ========
Less:
Executory costs................................... 937
Amounts representing interest..................... 20,525
-------
Present value of net minimum lease payments..... $25,516
=======
</TABLE>
F-19
<PAGE>
HOOK-SUPERX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Rent expense under all operating leases for the years ended August 31, 1993,
1992 and 1991, respectively, was:
<TABLE>
<CAPTION>
1993 1992 1991
------- ------- -------
<S> <C> <C> <C>
Minimum rental..................................... $58,264 $51,600 $47,487
Contingent rental.................................. 9,954 8,460 8,195
------- ------- -------
$68,218 $60,060 $55,682
======= ======= =======
</TABLE>
NOTE G--DEBT
Long-term debt as of August 31, 1993 and 1992 consists of the following:
<TABLE>
<CAPTION>
1993 1992
-------- --------
<S> <C> <C>
Indebtedness under Senior Bank Agreement (other than
revolving credit commitment)............................ $120,000 $100,000
10 1/8% Senior Notes due June 2002....................... 145,000 145,000
-------- --------
265,000 245,000
Less current maturities.................................. 17,642 39,300
-------- --------
Total long-term debt................................... $247,358 $205,700
======== ========
</TABLE>
At August 31, 1993, the aggregate annual maturities and payments of long-term
debt for the five succeeding years are:
<TABLE>
<S> <C>
1994........................................................... $ 17,642
1995........................................................... $ 15,409
1996........................................................... $ 15,409
1997........................................................... $ 14,186
1998........................................................... $ 19,077
thereafter..................................................... $183,277
</TABLE>
In July 1993, the Company entered into the Third Amended and Restated Credit
Agreement dated as of July 29, 1993 (the "Third Amendment") which amended and
restated the terms and conditions of the Second Amended and Restated Credit
Agreement dated as of May 21, 1992 (the "Second Amended Agreement") as amended.
The Third Amendment provides for the following loan commitments: a) term loan
commitment in the aggregate principal amount of $45 million ("Tranche A") due
on July 31, 1996 and payable in $15 million annual installments on July 31 of
each year commencing 1994 through 1996; b) revolving credit commitment of $100
million ("Tranche B") which expires on December 31, 1996; c) term loan
commitment in the aggregate principal amount of $75 million ("Tranche C") due
on July 31, 2000 and payable in annual installments on July 31 of each year
commencing 1994 through 2000 in the following amounts: $375, $750 (each 1995
and 1996); $14,500; $19,500 (each 1998 and 1999) and $19,625; and d) bridge
loan commitment, which is intended to cover the Company's short-term working
capital needs until the Accounts Receivable Program (discussed below) can be
implemented, in the aggregate principal amount up to $50 million ("Bridge
Loan") due February 28, 1994 unless extended at the sole discretion of the
bank. Commitments under Tranche A and Tranche C have been fully drawn by the
Company as of August 31, 1993, no amounts have been drawn under the Bridge
Loan. The Third
F-20
<PAGE>
HOOK-SUPERX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Amendment also permits the Company to implement a program to sell its health
care receivables (the "Accounts Receivable Program"). The Accounts Receivable
Program was entered into by the Company with The Chase Manhattan Bank (National
Association) ("Chase") and has an initial four year term, and allows the
Company to sell on a continuous basis up to $75 million of health care
receivables, the proceeds of which will be applied to reduce any borrowings
first under the Bridge Loan then to reduce borrowings under Tranche B. On
November 2, 1993, the Company completed the first sale of such receivables to
Chase and received $34 million in proceeds, all of which were applied to reduce
borrowings under Tranche B; the Bridge Loan was never utilized.
Tranche A and Tranche B bear interest at (a) a rate of 1 1/4% over the base
rate (as defined in the agreement), or (b) at the Company's election, a rate of
2 1/4% over LIBOR. Tranche C bears interest at 1 7/8% over the base rate or 2
7/8% over LIBOR, at the Company's election. In the event the Company causes the
Leverage Ratio (ratio of Senior Indebtedness to the sum of Net Worth, on a FIFO
basis, plus Subordinated Indebtedness), for a period of two consecutive fiscal
quarters of the Company (excluding the Company's first fiscal quarter of each
fiscal year), to fall within ranges specified by the Third Amendment, the loans
will bear interest at a rate per annum ranging from 1/4% to 1% below the
initial rate per annum. The loans will continue to bear interest at such
reduced rate per annum until the Leverage Ratio for any succeeding fiscal
quarter (excluding the Company's first fiscal quarter of each fiscal year)
increases to a higher range, in which case the loans will bear interest at a
rate per annum specified by the higher range or at the initial rate per annum
if the Leverage Ratio increases to an amount above the specified ranges. This
interest rate "step-down" is not applicable to the Tranche C loan. Upon an
Event of Default, the loans will bear interest at a rate of an additional 1%
per annum over the otherwise applicable rate. The carrying value of
indebtedness under the Senior Bank Agreement approximates its fair value.
In addition to the scheduled repayments, the Third Amendment also requires
the Company to make prepayments in each fiscal year, in an amount equal to 25%
of the Available Cash Flow (as defined) for the prior fiscal year. Such
required prepayments are applied on a pro rata basis to the Tranche A and
Tranche C loans ratably to each scheduled installment within each tranche. The
required prepayment with respect to Fiscal 1993 cash flow is approximately $2.6
million, payable on November 30, 1993. The Third Amendment also requires the
Company to make prepayments of 100% of the net proceeds of certain asset
dispositions, if the net proceeds of such dispositions exceed $1 million in any
fiscal year. The application of this required prepayment to the outstanding
loans is similar to that discussed above. The Company is required to pay a
commitment fee of .5% per annum on the available but unused amount of the loan
commitments.
Borrowings under the Third Amendment are collateralized by mortgages on all
real property of the Company and a significant portion of the leasehold
interests of the Company, a pledge of all of the capital stock of substantially
all of the direct and indirect subsidiaries of the Company and a security
interest in all tangible and intangible property (other than inventory) and
accounts receivable (provided, however, that upon consummation of the Accounts
Receivable Program, health care receivables shall no longer comprise
collateral) of the Company. The Third Amendment contains certain restrictive
covenants applicable to the Company and its subsidiaries which, among other
things, require maintenance of certain financial ratios, limit the issuance of
additional indebtedness, restrict payments or distributions in respect of its
capital stock, limit the amount of capital expenditures, limit the ability to
incur liens on property or assets, limit the ability to enter into transactions
with affiliates, and limit the ability to acquire or dispose of assets other
than in the ordinary course of business. All covenants under the Third
Amendment are applied using the FIFO method of inventory valuation and will be
applied on
F-21
<PAGE>
HOOK-SUPERX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
a basis that excludes (a) charges, not to exceed $24 million in the aggregate,
incurred or paid by the Company in the Debenture Redemption (defined below) and
in the liquidation and termination of interest rate protection agreements in
existence on June 9, 1992; (b) non-cash charges incurred by the Company in
connection with the Company's adoption of SFAS No. 106 and No. 109 on or before
August 31, 1994 (up to $24 million in the case of SFAS No. 106 and up to $3
million in the case of SFAS No. 109); (c) non-cash charges not to exceed $7
million incurred by the Company in connection with the write-off of the
transaction fees paid by the Company in establishing the Amended Agreement
(defined below) and in issuing the Debentures (defined below); and (d) charges,
not to exceed $20 million in the aggregate, incurred or paid by the Company in
connection with the Company's Asset Review Program. Compliance with these
covenants will be measured as of the end of each fiscal quarter.
During Fiscal 1993 and 1992, the weighted average of borrowings outstanding
under the revolving lines of credit was $94,135 and $30,858, respectively, and
the maximum amount borrowed under these commitments was $115,000 and $100,000,
for Fiscal 1993 and 1992, respectively. At August 31, 1993 and 1992, the
amounts outstanding under the revolving lines of credit were $81,000 and
$62,000, respectively. The weighted average interest rate for these borrowings
during Fiscal 1993 and 1992 was 5.7% and 8.5%, respectively, and at August 31,
1993 and 1992, the interest rate was 5.5% and 6.3%, respectively.
In accordance with the terms of its Senior Bank Agreement, the Company has
entered into various interest rate cap agreements for various contract amounts
which cover various time periods with cap rates ranging from 8% to 9%. At
August 31, 1993 and 1992, the unamortized costs associated with these
agreements were $134 and $337, respectively. In September 1993, the Company
entered into additional interest rate cap agreements covering various dates and
contract amounts with rates ranging from 4% to 7.75%. Also in September 1993,
the Company entered into interest rate floor agreements covering various dates
and contract amounts with rates ranging from 3% to 4.75%. Under the cap
agreements, the Company is compensated to the extent that the three months
LIBOR rate exceeds the cap rates during the contract period. Under the floor
agreements, the Company must pay to the extent that the three month LIBOR rate
falls below the floor rate during the contract period. Costs associated with
the interest rate protection agreements are expensed over the term of the
agreements.
In June 1992, the Company implemented a recapitalization plan (the
"Recapitalization Plan") which was designed to increase stockholders' equity
and reduce indebtedness and interest expense. The principal components of the
Recapitalization Plan were: (i) the Initial Public Offering, see Note C--
Capital Stock and Related Matters, (ii) issuance and sale of $145 million
aggregate principal amount of 10 1/8% Senior Notes due June 1, 2002 (the
"Senior Notes"), (iii) use of substantially all of the net proceeds from the
Initial Public Offering and the issuance and sale of Senior Notes to redeem
(the "Debenture Redemption") the Company's $125 million aggregate principal
amount of 13% Subordinated Debentures due 2001 (the "Buy Out Debentures") and
the Company's $80 million aggregate principal amount of 13% Subordinated
Debentures due 2001, Series B (the "Series B Debentures") (collectively, the
"Debentures"), and (iv) restructure of the Company's debt under its senior bank
agreement by the repayment of all indebtedness of the Company under the Amended
and Restated Credit Agreement dated June 15, 1988 (the "Amended Agreement"),
and entering into the Second Amended Agreement.
On June 10, 1992, the Company received net proceeds from the Initial Public
Offering of approximately $95.4 million (see Note C) and net proceeds from the
issuance and sale of the Senior Notes of approximately $140.9 million (net of
approximately $3.3 million in underwriting discounts and
F-22
<PAGE>
HOOK-SUPERX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
approximately $800 in other professional fees and transaction costs). Also on
June 10, 1992, the Company, with a portion of the net proceeds received, repaid
all amounts outstanding under the Amended Agreement (which included the term
loan amount of $156 million and notes payable under revolving lines of credit
of $29 million) and entered into the Second Amended Agreement, which provided
for a term loan commitment of $100 million and a revolving credit commitment of
$105 million. The remaining net proceeds not used to repay indebtedness under
the Amended Agreement were invested in short-term, high grade securities until
they were applied to the Debenture Redemption payment.
On July 10, 1992, the Company redeemed the Debentures at 106.5% of the
principal amount ($218.3 million), plus accrued interest to July 10, 1992, for
an aggregate redemption payment of approximately $231.3 million. The balance of
the Debenture Redemption payment was funded by drawing down the full extent of
the term loan commitment under the Second Amended Agreement with the balance
being drawn on the revolving line of credit under the Second Amended Agreement.
In connection with the completion of the Recapitalization Plan, the Company
recorded an extraordinary charge for the early retirement of debt in the amount
of $22,855, net of tax benefits of $5,908.
The Senior Notes were issued at 100% of principal amount and are due June 1,
2002 and interest is payable semi-annually on June 1 and December 1 each year,
commencing December 1, 1992. The Senior Notes are redeemable at the option of
the Company, in whole or in part, at any time on or after June 1, 1997 at the
following redemption prices and dates during the succeeding twelve months
beginning June 1: 1997--105.0%; 1998--102.5% and 1999 and thereafter 100%, plus
accrued and unpaid interest to the redemption date. The Senior Notes are not
entitled to the benefit of any sinking fund. The Senior Notes are general
unsecured obligations of the Company, ranking pari passu with other general
unsecured obligations of the Company. Accordingly, the Senior Notes are
effectively subordinated to collateralized indebtedness of the Company to the
extent of the assets collateralizing such indebtedness. The indenture under
which the Senior Notes (the "Senior Note Indenture") were issued contains
covenants which restrict, among other things, the ability of the Company to (i)
incur additional indebtedness, (ii) enter into sale and leaseback transactions,
(iii) pledge or dispose of assets, (iv) engage in transactions with affiliates,
(v) make distributions on and repurchases of its Common Stock, (vi) merge or
consolidate with or transfer all or substantially all of its assets to another
entity, and (vii) make certain investments. The Company is required to offer to
repurchase all outstanding Senior Notes at 101% of principal amount plus
accrued interest promptly after the occurrence of a Change of Control (as
defined in the Senior Note Indenture) of the Company or in the event of certain
Asset Dispositions (as defined in the Senior Note Indenture) to the extent
permitted by the Third Amendment. The bid price of the Senior Notes at August
31, 1993 was $1,054 per $1,000. Accordingly, the fair value of the Senior Notes
at August 31, 1993 was $152.9 million versus their carrying value of $145
million.
NOTE H--RELATED PARTY TRANSACTIONS
The Company has transactions with certain parties related to the Company.
Kroger, which owns approximately 24.6% of the outstanding Common Stock of the
Company, has the following agreements with the Company:
. A warehouse service agreement which expires November 30, 1996 subject to
the right of the Company to cancel upon six months notice, whereby Kroger
(doing business as Peyton's
F-23
<PAGE>
HOOK-SUPERX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Northern Distribution Center, Peyton's Northern and Peyton's) and
Peyton's-Southeastern, Inc. (a wholly-owned subsidiary of Kroger) doing
business as Peyton's Mid-South Company, a successor-in-interest to
Peyton's Inc. (collectively, "Peyton's"), a wholly-owned subsidiary of
Kroger, furnishes certain services to SupeRx including buying,
warehousing, and distribution of certain products to SupeRx stores. The
fee charged by Peyton's for this service was approximately $13,489,
$13,350 and $12,220 for the years ended August 31, 1993, 1992 and 1991,
respectively. The Company pays interest to Peyton's on amounts due
Peyton's which are outstanding for more than 9 days. The amount of this
interest paid for the years ended August 31, 1993, 1992 and 1991 was
$2,156, $541 and $1,402, respectively. It is the Company's intention to
utilize its expanded Midwestern warehouse and distribution facility to
supply merchandise to SupeRx. As a result, the Company plans to terminate
the warehouse services agreement with Peyton's prior to April 1994 and to
use its Midwestern warehouse and distribution facility to supply the
merchandise currently provided by Peyton's. At August 31, 1993 and 1992,
the Company had amounts payable to Peyton's of $10,166 and $41,116,
respectively.
. The Company leases certain drug stores and its headquarters facility from
Kroger. The aggregate rental payments made by the Company to Kroger
amounted to approximately $1,497, $1,411 and $1,419 for the years ended
August 31, 1993, 1992 and 1991, respectively.
. A management information services agreement, whereby Kroger is to provide
certain management information services to the Company. The Company may
terminate this agreement at any time. The fee charged by Kroger for this
service was approximately $397, $438 and $516 for the years ended August
31, 1993, 1992 and 1991, respectively.
. The Company fills prescriptions under third party prescription contracts
with various health maintenance organizations and preferred provider
organizations. Under certain contracts, the prescription customer may
choose to have the prescription filled at either SupeRx or Kroger stores.
Under some of these contracts, the Company bills and receives payment
from the third party for prescriptions filled by Kroger and reimburses
Kroger. During the years ended August 1, 1993, 1992 and 1991, the amount
reimbursed to Kroger was approximately $442, $304 and $362, respectively.
Goldman Sachs owns approximately 24.6% of the Company's outstanding Common
Stock. In connection with the Initial Public Offering, Goldman Sachs and
Goldman Sachs International Limited, acted as managing underwriters and
received underwriting discounts of $781 and $581, respectively. In addition,
Goldman Sachs acted as an underwriter in the issuance and sale of the Company's
Senior Notes and received underwriting discounts of $3,263. Goldman Sachs has
provided financial advisory services to the Company in the past and continues
to provide these services to the Company on an ongoing basis. The Company has
agreed to indemnify Goldman Sachs against certain liabilities, including
liabilities under the Securities Act of 1933.
At August 31, 1993 and 1992, the Company had outstanding notes receivable
from members of management amounting to approximately $1,381 and $1,399,
respectively.
NOTE I--STOCK OPTIONS
The Company maintains three stock option plans, the Hook-SupeRx, Inc. Outside
Director Stock Option Plan (the "Director Plan"), the 1987 Stock Option Plan
(the "1987 Plan") and the 1992 Stock Plan (the "1992 Plan"). The 1987 Plan set
aside 1,850,000 shares of common stock to be used for management employee stock
options, which include incentive stock options ("ISO") and non-qualified
F-24
<PAGE>
HOOK-SUPERX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
stock options ("NQ"), and restricted stock grants. The Director Plan sets aside
66,667 shares of Common Stock issuable to non-employee Directors upon the
exercise of options granted under this plan. The 1992 Plan provides for awards
not exceeding 1,333,333 shares of Common Stock plus any shares of Common Stock
previously authorized and not issued pursuant to the 1987 Plan. The 1992 Plan
provides for ISO grants, NQ grants, grants of restricted stock, stock
appreciation rights, limited stock appreciation rights, performance units and
stock units.
Options under the 1987 Plan and ISO's granted under the 1992 Plan may not be
granted at an exercise price less than fair market value of the Common Stock on
the grant date. NQ options granted under the 1992 Plan may not be granted at an
exercise price less than 50% or more than 100% of such fair market value on the
grant dates. The ISO's issued will expire 10 years from the date of grant and
the NQ options will expire 10 years and 1 day from the date of grant. The
options granted under these plans are exercisable in four equal annual
installments, beginning on the first anniversary of the date the option was
granted. Stock option activity for all plans is as follows:
<TABLE>
<CAPTION>
AUGUST 31,
---------------------------------------
1993 1992 1991
------------ ------------ -----------
<S> <C> <C> <C>
Options outstanding, beginning of
year.............................. 1,602,953 1,151,166 974,333
Granted............................ 226,266 569,900 298,666
Exercised.......................... (104,231) (88,613) (11,625)
Cancelled.......................... (87,830) (29,500) (110,208)
------------ ------------ -----------
Options outstanding, end of year... 1,637,158 1,602,953 1,151,166
============ ============ ===========
Options exercisable, end of year... 918,062 703,654 550,260
============ ============ ===========
Option price per share of
outstanding options............... $3.00-$13.00 $3.00-$13.00 $3.00-$3.93
Option price per share of options
exercised......................... $3.00-$ 4.23 $3.00-$ 4.23 $3.00-$3.54
</TABLE>
At August 31, 1993 and 1992, there were 1,006,204 and 1,144,640 shares,
respectively, available for future grants under the plans.
Both the 1987 Plan and the 1992 Plan authorizes Board grants of Limited Stock
Appreciation Rights ("LSARS") tied directly to options granted to officers of
the Company who are potentially subject to section 16(b) of the Securities
Exchange Act of 1934 ("Exchange Act"). These LSARS can only be exercised if the
Company has equity securities registered under the Exchange Act and if there
has been a change in control, as defined in the respective plans. At August 31,
1993, 1992 and 1991 there were 843,911, 779,742 and 170,166 stock options
outstanding, respectively, which were issued in tandem with LSARS.
The 1992 Plan authorizes Board grants of Performance units, entitling the
participant to receive an amount ("Payment Value"), which shall be determined
by the Board and shall be based upon the performance of the participant, the
Company or a division of the Company over a performance period or such other
measure of performance as may be determined by the Board. At August 31, 1993 or
1992 there were no Performance units outstanding.
On September 28, 1993 the Board of Directors approved the grant of an
additional 15,000 options to purchase shares of Common Stock of the Company to
a member of management at an exercise price of $7.38 per share, all of which
were issued in tandem with LSARS.
F-25
<PAGE>
HOOK-SUPERX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE J--COMMITMENTS AND CONTINGENCY
The Company maintains Protective Compensation and Benefit Agreements with
certain employees, including all executive officers of the Company. These
agreements and the employees covered by them are subjected to review by the
Company's Board of Directors. These agreements expire May 31, 1996 and will be
automatically extended in one year increments on each anniversary of the
execution of these agreements, unless notice of intent not to so extend any
agreement is given by either party at least 60 days before such anniversary
date. These Agreements provide for specified benefits in the event of a change
in control and constructive termination of employment, within specified periods
thereafter, as defined in the Agreements. At September 30, 1993, the maximum
amount which could be required to be paid under these Agreements, if such
events occurred at that time, is approximately $11,392.
In addition to the Protective Compensation and Benefit Agreements discussed
above, the Company maintains an employment agreement with its Chairman and
Chief Executive Officer. This Agreement provides for a lump-sum cash payment in
the event of a termination of employment within one year after a "Change in
Control" (as defined in this Agreement), death, termination of this Agreement
or "good reason" (as defined in this Agreement). At August 31, 1993, if this
Agreement had been terminated under the circumstances entitling the Chairman to
his full severance obligation, the Company would have been obligated to pay
approximately $1.2 million. The Chairman and the Company have agreed that no
duplication of payment is to be made under these two arrangements and, in the
event of a conflict, the agreement which provides for the most beneficial
treatment to the Chairman will take precedence.
NOTE K--RETIREMENT BENEFITS
The Company maintains a noncontributory defined benefit pension plan (the
"HSI Retirement Plan") covering substantially all employees. Normal retirement
age is 65, however provisions are made for early and late retirement. Employees
are eligible to participate upon the attainment of age 21 and completion of one
year of service. Benefits are based upon a five year average salary and years
of service. Vesting is based upon years of service and age. Funding for the
pension plan is based upon a review of the specific requirements and on an
evaluation of the assets and liabilities of the plan. The plan assets are
invested primarily in cash and short-term investments, listed stocks (which
include 500,000 shares of the Company's Common Stock), bonds and guaranteed
investment contracts. The net periodic pension cost for the years ended August
31, 1993, 1992 and 1991 was $2,843, $2,982 and $2,527, respectively.
The net periodic pension cost for the years ended August 31, 1993, 1992 and
1991 includes the following components:
<TABLE>
<CAPTION>
1993 1992 1991
------- ------- -------
<S> <C> <C> <C>
Service costs................................... $ 4,354 $ 4,069 $ 3,542
Interest costs.................................. 6,705 6,149 5,602
Return on assets-actual......................... (4,499) (7,748) (3,861)
Return on assets-deferred gain (loss)........... (3,215) 1,014 (2,254)
Net amortization................................ (502) (502) (502)
------- ------- -------
Net periodic pension cost...................... $ 2,843 $ 2,982 $ 2,527
======= ======= =======
</TABLE>
F-26
<PAGE>
HOOK-SUPERX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The funded status of the plan at August 31, 1993 and 1992 is as follows:
<TABLE>
<CAPTION>
1993 1992
-------- -------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested employees..................................... $ 74,160 $59,394
Non-vested employees................................. 1,452 1,116
-------- -------
Accumulated benefit obligation....................... 75,612 60,510
Additional benefits related to projected salary
increases............................................. 16,905 18,037
-------- -------
Actuarial present value of projected benefit
obligations........................................... 92,517 78,547
Plan assets at fair value.............................. 75,638 68,970
-------- -------
Projected benefit obligation in excess of Plan assets.. (16,879) (9,577)
Unrecognized prior service cost from Plan amendments
resulting from the Tax Reform Act of 1986............. (1,093) (1,206)
Unrecognized net loss.................................. 14,209 4,987
Unrecognized transition asset existing at adoption of
SFAS No. 87........................................... (1,948) (2,337)
-------- -------
Accrued pension liability.............................. $ (5,711) $(8,133)
======== =======
</TABLE>
Assumptions used to develop the benefit obligations at August 31, 1993 and
1992 were:
<TABLE>
<CAPTION>
1993 1992
----- -----
<S> <C> <C>
Discount rate.................................................. 8.00% 8.75%
Salary increase
Hourly....................................................... 3.0% 4.5%
Salaried..................................................... 4.0% 5.0%
Expected long-term return on Plan assets....................... 10.0% 11.0%
</TABLE>
The Company has a defined contribution retirement plan, the Hook-SupeRx, Inc.
Savings and Profit Sharing Plan (the "Savings Plan"), which covers all eligible
employees. The Company may make a matching contribution and/or a profit sharing
contribution in any year at the discretion of the Board. A contribution of $464
was accrued for the year ended August 31, 1991. There were no contributions for
the years ended August 31, 1993 or 1992.
The Company also contributes to multi-employer pension plans. These plans
cover those employees who are represented by collective bargaining agreements.
Pension expense for these plans for the years ended August 31, 1993, 1992 and
1991 was $477, $515, and $567. Information on the actuarial present value of
accumulated plan benefits and net assets available for benefits relating to the
multi-employer plans is not available.
The Company also maintains two non-qualified retirement plans. The HSI
Supplemental Executive Retirement Plan was established to provide additional
retirement benefits to all members of management at the level of Assistant Vice
President and above, who are eligible to participate in the HSI Retirement
Plan. The other non-qualified plan was established in accordance with the terms
of an employment agreement with the Company's Chairman and Chief Executive
Officer, to provide a lifetime pension benefit. The retirement benefits
provided by the two non-qualified retirement plans will be offset by any
pension benefit received by the participants from the HSI Retirement Plan. Both
of these plans
F-27
<PAGE>
HOOK-SUPERX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
are unfunded. The net periodic pension cost associated with these non-qualified
plans for the years ended August 31, 1993, 1992 and 1991 was $1,028, $807 and
$753, respectively. The accrued pension liability associated with these non-
qualified plans is not material at August 31, 1993 and 1992.
In addition to the retirement benefits discussed above, the Company provides
certain health care and life insurance benefits for retired employees.
Substantially all of the Company's employees may become eligible for these
benefits if they reach retirement age with the Company. Effective September 1,
1992, the Company adopted SFAS No. 106--Employers' Accounting for
Postretirement Benefits Other Than Pensions. This statement requires the
accrual of the costs of providing postretirement benefits during the active
service period of the employees. The Company elected to immediately recognize
the cumulative effect of the change in accounting for these benefits of $18.6
million which represents the accumulated postretirement benefit obligation
existing at September 1, 1992. The effect of this change on fiscal 1993
operating results, after recording the cumulative effect on prior years, was to
recognize additional pre-tax expense of $1.3 million. Prior to September 1,
1992, the Company recognized expense in the year the benefits or premiums were
paid. The costs of the benefits were not material to the Company's operations
for the years ended August 31, 1992 and 1991.
Net periodic postretirement benefit cost for the year ended August 31, 1993
includes the following components:
<TABLE>
<S> <C>
Service costs--benefits attributed to service during the period.... $ 795
Interest cost on accumulated postretirement benefit obligation..... 1,513
------
Net periodic postretirement benefit cost........................... $2,308
======
</TABLE>
The following table sets forth the funded status of the plan, reconciled to
the accrued postretirement benefit cost recognized in the Consolidated Balance
Sheets at August 31, 1993:
Accumulated postretirement benefit obligation:
<TABLE>
<S> <C>
Current retirees................................................ $ 8,678
Active employees fully eligible for benefits.................... 22
Other active employees.......................................... 11,498
--------
Total......................................................... 20,198
Fair value of assets............................................ 0
--------
Accumulated postretirement benefit obligation in excess of fair
value of assets................................................ (20,198)
Deferred loss................................................... 254
--------
Accrued postretirement benefit cost............................. $(19,944)
========
</TABLE>
The discount rate used in determining the accumulated postretirement benefit
obligation was 8%. The assumed health care cost trend rate used in measuring
the accumulated postretirement benefit obligation was 12% for Fiscal 1993,
declining by 1% annually over the next seven years to an ultimate rate of 5%.
If the health care cost trend rate assumptions were increased by 1%, the
accumulated postretirement benefit obligation as of August 31, 1993 would be
increased by 7.95% or $1,605. The effect of this change on the components of
net periodic postretirement benefit cost (service cost and interest cost) for
fiscal 1993 would be an increase of 10.1% or $232.
F-28
<PAGE>
HOOK-SUPERX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In November 1992, the FASB issued SFAS No. 112--Employers' Accounting for
Postemployment Benefits. This statement establishes accounting standards for
employers who provide benefits to former or inactive employees, their
beneficiaries or covered dependents, after employment but before retirement.
Postemployment benefits include, but are not limited to, salary continuation,
supplemental unemployment benefits, severance benefits, disability-related
benefits (including workers compensation), job training and counseling and
health and welfare benefit continuation. This statement requires employers to
recognize the obligation to provide postemployment benefits if the obligation
is attributable to employees' services already rendered, employees' rights to
these benefits vest or accumulate, payment is probable and the amount of the
benefit is reasonably estimated. Currently, the Company is not required to
adopt the provisions of SFAS No. 112 until its fiscal year ending August 31,
1995; however, it will consider early adoption in accordance with the
provisions of this statement. The Company has completed its initial review of
this statement and believes it will not have a material effect on the results
of operations upon adoption.
NOTE L--QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table presents summarized quarterly financial information:
<TABLE>
<CAPTION>
THREE MONTHS ENDED (FISCAL 1993)
----------------------------------------------------------------
NOVEMBER 30 FEBRUARY 28 MAY 31 AUGUST 31
------------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net sales................. $ 544,129 $ 605,267 $ 571,134 $ 559,518
Gross profit.............. 162,572 184,707 170,765 159,875
Income (loss) before
extraordinary item and
cumulative effect of
change in accounting..... (2,024) 10,177 3,661 (15,431)
Extraordinary item........ 4,674 1,467 (6,141)
Cumulative effect of
change in accounting for
postretirement benefits
other than pension....... (18,612)
Net income (loss)......... (20,636) 14,851 5,128 (21,572)
Earnings per share:
Before extraordinary
item and cumulative
effect of change in
accounting............. (.10) .47 .17 (.74)
Extraordinary item...... .22 .07 (.29)
Cumulative effect of
change in accounting... (.89)
Net income (loss)....... (.99) .69 .24 (1.03)
Cash dividends per share.. (a) (a) (a) (a)
Market price per share:
High.................... $12 5/8 $13 3/8 $10 7/8 $10
Low..................... $ 9 3/4 $ 8 7/8 $ 9 $ 6 3/4
</TABLE>
During the fourth quarter of Fiscal 1993, the Company adopted SFAS No. 106--
Employers' Accounting for Postretirement Benefits Other Than Pensions,
effective as of September 1, 1992 (beginning of the Company's fiscal year).
Accordingly, the Company has restated the operating results for the first three
quarters to give effect to this adoption as of the beginning of the fiscal
year. The result of this restatement was an increase of $18.9 million in the
previously reported first quarter net loss and a decrease of $327 in the
previously reported net income for both the second and third quarters.
F-29
<PAGE>
HOOK-SUPERX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
Additionally, during the fourth quarter, the Company recognized a
restructuring charge of $19.7 million in connection with the Asset Review
Program and reorganization of the store operations and marketing departments.
See Note B.
The extraordinary item reflected above for the three months ended February
28, 1993 and May 31, 1993 is the result of utilizing net operating loss
carryforwards.
- --------
(a) The Company has not paid any cash dividends.
<TABLE>
<CAPTION>
THREE MONTHS ENDED (FISCAL 1992)
----------------------------------------------------------
NOVEMBER 30 FEBRUARY 29 MAY 31 AUGUST 31
------------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net sales............... $ 501,142 $ 557,058 $ 539,197 $ 537,274
Gross profit............ 152,909 171,268 163,130 165,554
Income (loss) before
extraordinary item..... (2,610) 8,923 4,802 4,469
Extraordinary item...... 1,820 280 (24,955)
Net income (loss)....... (2,610) 10,743 5,082 (20,486)
Earnings per share:
Before extraordinary
item................. (.20) .65 .35 .21
Extraordinary item.... .13 .02 (1.18)
Net income (loss)..... (.20) .78 .37 (.97)
Cash dividends per
share.................. (b) (b) (b) (b)
Market price per share:
High.................. (a) (a) (a) $13 1/8
Low................... (a) (a) (a) $ 9 1/2
</TABLE>
During the three months ended August 31, 1992, the Company recorded a
favorable LIFO adjustment of $1,087. The extraordinary item reflected above for
the three months ended February 29, 1992 and May 31, 1992 is the result of
utilizing net operating loss carryforwards.
- --------
(a) The Company's stock was not listed on an exchange or traded over-the-
counter at these times.
(b) The Company has not paid any cash dividends.
F-30
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
BETWEEN
REVCO D.S., INC.,
HSX ACQUISITION CORP.
AND
HOOK-SUPERX, INC.
DATED AS OF MARCH 31, 1994
A-1
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of March 31, 1994,
between Revco D.S., Inc., a Delaware corporation ("Parent"), HSX Acquisition
Corp., a Delaware corporation and a wholly-owned subsidiary of Parent ("Merger
Sub"), and Hook-SupeRx, Inc., a Delaware corporation ("HSI").
RECITALS
A. The Boards of Directors of Parent and HSI each have determined that a
business combination between Parent and HSI is in the best interests of their
respective companies and stockholders and presents an opportunity for their
respective companies to achieve long-term strategic and financial benefits and,
accordingly, have agreed to effect the merger provided for herein upon the
terms and subject to the conditions set forth herein.
B. Parent and HSI have each received a fairness opinion relating to the
transactions contemplated hereby as more fully described herein.
C. Parent, Merger Sub and HSI desire to make certain representations,
warranties and agreements in connection with the merger.
NOW, THEREFORE, in consideration of the foregoing, and of the
representations, warranties, covenants and agreements contained herein, the
parties hereto hereby agree as follows:
ARTICLE 1
1. THE MERGER.
1.1. The Merger. Subject to the terms and conditions of this Agreement, at
the Effective Time (as defined in Section 1.3), Merger Sub shall be merged with
and into HSI in accordance with this Agreement and the separate corporate
existence of Merger Sub shall thereupon cease (the "Merger"). HSI shall be the
surviving corporation in the Merger (sometimes hereinafter referred to as the
"Surviving Corporation"). The Merger shall have the effects specified in the
Delaware General Corporation Law (the "DGCL").
1.2. The Closing. Subject to the terms and conditions of this Agreement, the
closing of the Merger (the "Closing") shall take place at the offices of Fried,
Frank, Harris, Shriver & Jacobson, One New York Plaza, New York, New York, at
9:00 a.m., local time, on the first business day immediately following the day
on which the last to be fulfilled or waived of the conditions set forth in
Article 8 shall be fulfilled or waived in accordance herewith, or at such other
time, date or place as Parent and HSI may agree. The date on which the Closing
occurs is hereinafter referred to as the "Closing Date."
1.3. Effective Time. If all the conditions to the Merger set forth in Article
8 shall have been fulfilled or waived in accordance herewith and this Agreement
shall not have been terminated as provided in Article 9, the parties hereto
shall cause a Certificate of Merger meeting the requirements of Section 251 of
the DGCL to be properly executed and filed in accordance with such Section on
the Closing Date. The Merger shall become effective at the time of filing of
the Certificate of Merger with the Secretary of State of the State of Delaware
in accordance with the DGCL or at such later time which the parties hereto
shall have agreed upon and designated in such filing as the effective time of
the Merger (the "Effective Time").
A-2
<PAGE>
ARTICLE 2
2. CERTIFICATE OF INCORPORATION AND BYLAWS OF THE SURVIVING CORPORATION.
2.1. Certificate of Incorporation. The Certificate of Incorporation of Merger
Sub in effect immediately prior to the Effective Time shall be the Certificate
of Incorporation of the Surviving Corporation, until duly amended in accordance
with applicable law.
2.2. Bylaws. The Bylaws of Merger Sub in effect immediately prior to the
Effective Time shall be the Bylaws of the Surviving Corporation, until duly
amended in accordance with applicable law.
ARTICLE 3
3. DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION.
3.1. Directors. The directors of Merger Sub immediately prior to the
Effective Time shall be the directors of the Surviving Corporation as of the
Effective Time.
3.2. Officers. The officers of HSI immediately prior to the Effective Time
shall be the officers of the Surviving Corporation as of the Effective Time.
ARTICLE 4
4. CONVERSION OF HSI STOCK.
4.1. Conversion of HSI Stock.
(a) At the Effective Time, each share of the common stock, $.01 par
value, of Merger Sub outstanding immediately prior to the Effective Time
shall remain outstanding and shall represent one share of common stock,
$.01 par value, of the Surviving Corporation.
(b) At the Effective Time, each share of the common stock, $.01 par value
(the "HSI Common Stock"), together with associated preferred stock rights
(the "Rights") issued pursuant to the HSI Rights Agreement (as defined
herein), of HSI issued and outstanding immediately prior to the Effective
Time, other than the Dissenting Shares (as defined below), shall, by virtue
of the Merger and without any action on the part of the holder thereof, be
converted into the right to receive cash in the amount of $13.75, without
interest (the "Purchase Price").
(c) As a result of the Merger and without any action on the part of the
holder thereof, all shares of HSI Common Stock, together with associated
Rights, shall cease to be outstanding and shall be cancelled and retired
and shall cease to exist, and each holder of a certificate (a
"Certificate") representing any shares of HSI Common Stock or associated
Rights shall thereafter cease to have any rights with respect to such
shares of HSI Common Stock or associated Rights, except the right to
receive the Purchase Price upon the surrender of such Certificate.
(d) Each share of HSI Common Stock issued and held in HSI's treasury at
the Effective Time shall, by virtue of the Merger, cease to be outstanding
and shall be cancelled and retired without payment of any consideration
therefor.
(e) Parent and HSI shall take all actions necessary to provide that,
immediately prior to the Effective Time, (i) each outstanding option to
purchase shares of HSI Common Stock, each stock appreciation right, and
each limited stock appreciation right or other similar right (individually,
an "HSI Option" and collectively, the "HSI Options") granted under the HSI
Outside Director Stock Option Plan, the 1987 Stock Option Plan, and the
1992 Stock Plan (collectively, the "HSI Stock Option Plans"), whether or
not then exercisable or vested, shall become fully exercisable and
A-3
<PAGE>
vested, (ii) each HSI Option which is then outstanding shall be cancelled
and (iii) in consideration of such cancellation, Parent shall pay to each
holder of an HSI Option, net of any withholding taxes, an amount in respect
of each such HSI Option held by such holder equal to the product of (A) the
excess, if any, of the Purchase Price over the exercise or strike price of
such HSI Option and (B) the number of shares of HSI Common Stock subject to
such HSI Option. HSI and Parent will use their best efforts to obtain any
necessary consents of the holders of HSI Options and to make any necessary
amendments to the HSI Stock Option Plans.
4.2. Exchange of Certificates Representing HSI Common Stock.
(a) On the Closing Date, Parent shall deposit, or shall cause to be
deposited, with an exchange agent selected by Parent, which shall be
Parent's Transfer Agent or such other party reasonably satisfactory to HSI
(the "Exchange Agent"), for the benefit of the holders of shares of HSI
Common Stock, for payment in accordance with this Article 4, a sum in cash
equal to the total of (i) the product of (A) the Purchase Price and (B) the
number of shares of HSI Common Stock issued and outstanding as set forth in
Section 5.3, and (ii) an amount sufficient to purchase all of the HSI
Options under the HSI Option Plans, such sum being hereinafter referred to
as the ("Exchange Fund"), to be paid pursuant to this Section 4.2 in
exchange for outstanding shares of HSI Common Stock and pursuant to Section
4.1(e) in exchange for the HSI Options.
(b) Promptly after the Effective Time, Parent shall cause the Exchange
Agent to mail to each holder of record of a Certificate or Certificates (i)
a letter of transmittal which shall specify that delivery of such
Certificates shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the
Exchange Agent and shall be in such form and have such other provisions as
Parent may reasonably specify and (ii) instructions for use in effecting
the surrender of the Certificates in exchange for payment of the Purchase
Price per share hereunder. Upon surrender of a Certificate for cancellation
to the Exchange Agent together with such letter of transmittal, duly
executed and completed in accordance with the instructions thereto, the
holder of such Certificate shall be entitled to receive in exchange
therefor, in cash, the product of (x) the Purchase Price and (y) the number
of shares of HSI Common Stock represented by such Certificates so
surrendered by such holder, and the Certificate so surrendered shall
forthwith be cancelled. In the event of a transfer of ownership of HSI
Common Stock which is not registered in the transfer records of HSI, the
Exchange Agent may condition payment hereunder upon the surrender of the
Certificate representing such HSI Common Stock to the Exchange Agent,
accompanied by all documents required to evidence and effect such transfer
and to evidence that any applicable stock transfer taxes have been paid.
(c) At or after the Effective Time, there shall be no transfers on the
stock transfer books of HSI of the shares of HSI Common Stock which were
outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation,
they shall be cancelled and exchanged for payment in accordance with the
procedures set forth in this Article 4.
(d) Any portion of the Exchange Fund (including the proceeds of any
investments thereof) that remains unclaimed by the former stockholders of
HSI nine (9) months after the Effective Time shall be delivered to the
Surviving Corporation. Any former stockholders of HSI who have not
theretofore complied with this Article 4 shall thereafter look only to the
Surviving Corporation for payment of the Purchase Price in respect of each
share of HSI Common Stock that such stockholder holds as determined
pursuant to this Agreement, in each case, without any interest thereon.
(e) None of Parent, HSI, the Exchange Agent or any other person shall be
liable to any former holder of shares of HSI Common Stock for any amount
properly delivered to a public official pursuant to applicable abandoned
property, escheat or similar laws.
(f) In the event any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed and,
A-4
<PAGE>
if required by the Surviving Corporation, the posting by such person of a
bond in such reasonable amount as the Surviving Corporation may direct as
indemnity against any claim that may be made against it with respect to
such Certificate, the Exchange Agent will pay in exchange for such lost,
stolen or destroyed Certificate the Purchase Price as provided in Section
4.2(a), deliverable in respect thereof pursuant to this Agreement.
4.3 Dissenting Shares.
(a) Notwithstanding anything in this Agreement to the contrary, shares of
HSI Common Stock which are held by any recordholder who has not voted in
favor of the Merger or consented thereto in writing and who has demanded
appraisal rights in accordance with Section 262 of the DGCL ("the
Dissenting Shares") shall not be converted into the right to receive the
Purchase Price hereunder but shall become the right to receive such
consideration as may be determined due in respect of such Dissenting Shares
pursuant to the DGCL; provided, however, that any holder of Dissenting
Shares who shall have failed to perfect, or shall have withdrawn or lost,
his rights to appraisal of such Dissenting Shares, in each case under the
DGCL, shall forfeit the right to appraisal of such Dissenting Shares, and
such Dissenting Shares shall be deemed to have been converted into the
right to receive, as of the Effective Time, the Purchase Price in
accordance with Article 4, without interest. Notwithstanding anything
contained in this Section 4.3, if (i) the Merger is rescinded or abandoned
or (ii) if the stockholders of HSI revoke the authority to effect the
Merger, then the right of any stockholder to be paid the fair value of such
stockholder's Dissenting Shares shall cease. The Surviving Corporation
shall comply with all of its obligations under the DGCL with respect to
holders of Dissenting Shares.
(b) HSI shall give Parent (i) prompt notice of any demands for appraisal,
and any withdrawals of such demands, received by HSI and any other related
instruments served pursuant to the DGCL and received by HSI, and (ii) the
opportunity to direct all negotiations and proceedings with respect to
demands for appraisal under the DGCL. HSI shall not, except with the prior
written consent of Parent, make any payment with respect to any demands for
appraisal or offer to settle any such demands.
ARTICLE 5
5. REPRESENTATIONS AND WARRANTIES OF HSI.
Except as set forth in the disclosure letter delivered by or on behalf of HSI
to Parent at or prior to the execution hereof (the "HSI Disclosure Letter"),
HSI represents and warrants to Parent as of the date of this Agreement as
follows:
5.1. Existence; Good Standing; Corporate Authority; Compliance With Law. HSI
is a corporation duly incorporated, validly existing and in good standing under
the laws of Delaware. HSI is duly licensed or qualified to do business as a
foreign corporation and is in good standing under the laws of any other state
of the United States in which the character of the properties owned or leased
by it therein or in which the transaction of its business makes such
qualification necessary, except where the failure to be so licensed or
qualified or be in good standing would not have, individually or in the
aggregate, a material adverse effect on the business, results of operations or
financial condition of HSI and its Subsidiaries taken as a whole (an "HSI
Material Adverse Effect"). HSI has all requisite corporate power and authority
to own, operate and lease its properties and carry on its business as now
conducted. Each of HSI's Subsidiaries is a corporation or partnership duly
organized, validly existing and in good standing under the laws of its
respective jurisdiction of incorporation or organization, has the corporate or
partnership power and authority to own its properties and to carry on its
business as it is now being conducted, and is duly licensed or qualified to do
business and is in good standing in each jurisdiction in which the ownership of
its property or the conduct of its business requires such qualification, except
A-5
<PAGE>
for jurisdictions in which such failure to be so licensed or qualified or to be
in good standing would not reasonably be expected to have, individually or in
the aggregate, an HSI Material Adverse Effect. Neither HSI nor any of its
Subsidiaries is in violation of any order of any court, governmental authority
or arbitration board or tribunal, or any law, ordinance, governmental rule or
regulation to which HSI or any HSI Subsidiary or any of their respective
properties or assets is subject, except where such violation would not have,
individually or in the aggregate, an HSI Material Adverse Effect. HSI and its
Subsidiaries have obtained all licenses, permits and other authorizations and
have taken all actions required by applicable law or governmental regulations
in connection with their business as now conducted, where the failure to obtain
any such item or to take any such action would have an HSI Material Adverse
Effect. The copies of HSI's Restated Certificate of Incorporation and Bylaws
and the HSI Rights Agreement previously delivered to Parent are true and
correct.
5.2. Authorization, Validity and Effect of Agreements.
(a) HSI has the requisite corporate power and authority to execute and
deliver this Agreement and all agreements and documents contemplated
hereby. Subject only to the approval of this Agreement and the transactions
contemplated hereby by the holders of a majority of the outstanding shares
of HSI Common Stock, the consummation by HSI of the transactions
contemplated hereby has been duly authorized by all requisite corporate
action. This Agreement constitutes, and all agreements and documents
contemplated hereby (when executed and delivered pursuant hereto for value
received) will constitute, the valid and legally binding obligations of
HSI, enforceable in accordance with their respective terms, subject to
applicable bankruptcy, insolvency, moratorium or other similar laws
relating to creditors' rights and general principles of equity.
(b) The provisions of Section 203 of the DGCL do not apply to the
transactions contemplated by this Agreement.
5.3. Capitalization. The authorized capital stock of HSI consists of
100,000,000 shares of HSI Common Stock, and 10,000,000 shares of preferred
stock, par value $.01 per share (the "HSI Preferred Stock"). As of March 30,
1994, there were 20,922,270 shares of HSI Common Stock issued and outstanding
and no shares of HSI Preferred Stock issued and outstanding. Since such date,
no additional shares of capital stock of HSI have been issued, except pursuant
to the HSI Stock Option Plans. HSI has no outstanding bonds, debentures, notes
or other obligations the holders of which have the right to vote (or which are
convertible into or exercisable for securities having the right to vote) with
the stockholders of HSI on any matter. All such issued and outstanding shares
of HSI Common Stock are duly authorized, validly issued, fully paid,
nonassessable and free of preemptive rights. Other than as contemplated by this
Agreement or the HSI Stock Option Plans or the HSI Rights Agreement, there are
not at the date of this Agreement any existing options, warrants, calls,
subscriptions, convertible securities, or other rights, agreements or
commitments which obligate HSI or any of its Subsidiaries to issue, transfer or
sell any shares of capital stock of HSI or any of its Subsidiaries. As of March
30, 1994, 1,671,472.94 shares of Common Stock were reserved for issuance and
are issuable upon or otherwise deliverable in connection with the exercise of
outstanding Options; since that date, no Options have been granted under the
Option Plans and no new option plans have been authorized or adopted. After the
Effective Time, the Surviving Corporation will have no obligation to issue,
transfer or sell any shares of capital stock of HSI or the Surviving
Corporation pursuant to any HSI Benefit Plan (as defined in Section 5.11).
There are no outstanding obligations of HSI or any of its Subsidiaries to
purchase, redeem or otherwise acquire any shares of Common Stock, any capital
voting securities or securities convertible into or exchangeable for capital
stock or voting securities of HSI.
5.4. Subsidiaries. HSI owns directly or indirectly each of the outstanding
shares of capital stock of each of HSI's Subsidiaries. Each of the outstanding
shares of capital stock of each of HSI's Subsidiaries is duly authorized,
validly issued, fully paid and nonassessable, and is owned, directly or
A-6
<PAGE>
indirectly, by HSI free and clear of all liens, pledges, security interests,
claims or other encumbrances. The following information for each Subsidiary of
HSI has been previously provided to Parent, if applicable: (i) its name and
jurisdiction of incorporation or organization; (ii) its authorized capital
stock or share capital; and (iii) the number of issued and outstanding shares
of capital stock or share capital.
5.5. Other Interests. Except for interests in the HSI Subsidiaries, neither
HSI nor any HSI Subsidiary owns directly or indirectly any interest or
investment (whether equity or debt) in any corporation, partnership, joint
venture, business, trust or entity.
5.6. No Violation. Neither the execution and delivery by HSI of this
Agreement nor the consummation by HSI of the transactions contemplated hereby
in accordance with the terms hereof will: (i) conflict with or result in a
breach of any provisions of the respective certificates of incorporation or
bylaws (or similar governing documents) of HSI or its Subsidiaries; (ii) except
as disclosed in the HSI Reports (as defined in Section 5.7), result in a breach
or violation of, a default under, or the triggering of any payment or other
material obligations pursuant to, or accelerate vesting under, any of its
existing HSI Stock Option Plans, or any grant or award made under any of the
foregoing other than accelerated vesting of outstanding options under stock
option agreements in existence on the date hereof with certain employees of HSI
or any of its Subsidiaries by reason of, in whole or in part, the consummation
of the Merger; (iii) violate, or conflict with, or result in a breach of any
provision of, or constitute a default (or an event which, with notice or lapse
of time or both, would constitute a default) under, or result in the
termination or in a right of termination or cancellation of, or accelerate the
performance required by, or result in the creation of any lien, security
interest, charge or encumbrance upon any of the material properties of HSI or
its Subsidiaries under, or result in being declared void, voidable, or without
further binding effect, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, deed of trust or any material license, franchise,
permit, lease, contract, agreement or other instrument, commitment or
obligation to which HSI or any of its Subsidiaries is a party, or by which HSI
or any of its Subsidiaries or any of their properties is bound or affected,
except for any of the foregoing matters which would not have, individually or
in the aggregate, an HSI Material Adverse Effect; or (iv) violate any order,
writ, injunction, decree, law, statute, rule or regulation applicable to HSI or
any of its Subsidiaries or any of their respective properties or assets, except
for violations which would not have, individually or in the aggregate, an HSI
Material Adverse Effect; (v) other than the filings provided for in Article 1,
certain federal, state and local regulatory filings, filings required under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
Securities Act or applicable state securities and "Blue Sky" laws or filings in
connection with the maintenance of qualification to do business in other
jurisdictions (collectively, the "Regulatory Filings"), require any material
consent, approval or authorization of, or declaration, filing or registration
with, any domestic governmental or regulatory authority, the failure to obtain
or make which would have, individually or in the aggregate, an HSI Material
Adverse Effect.
5.7. SEC Documents. HSI has delivered to Parent each registration statement,
report, proxy statement or information statement prepared by it since August
31, 1993, including, without limitation, (i) its Annual Report on Form 10-K for
the fiscal year ended August 31, 1993, (ii) its Quarterly Report on Form 10-Q
for the period ended November 30, 1993, and (iii) its Proxy Statement for the
Annual Meeting of Stockholders held January 20, 1994, each in the form
(including exhibits and any amendments thereto) filed with the Securities and
Exchange Commission (the "SEC") (collectively, the "HSI Reports"). As of their
respective dates, the HSI Reports (including, without limitation, any financial
statements or schedules included or incorporated by reference therein) (i) were
prepared in all material respects in accordance with the applicable
requirements of the Securities Act, the Exchange Act, and the respective rules
and regulations thereunder and (ii) did not 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 made therein, in the light of the
circumstances under which they were made, not misleading. Each of the
consolidated balance sheets of HSI included in or incorporated by reference
into the HSI
A-7
<PAGE>
Reports (including the related notes and schedules) fairly presents the
consolidated financial position of HSI and the HSI Subsidiaries as of its date
and each of the consolidated statements of income, retained earnings and cash
flows of HSI included in or incorporated by reference into the HSI Reports
(including any related notes and schedules) fairly presents the results of
operations, retained earnings or cash flows, as the case may be, of HSI and the
HSI Subsidiaries for the periods set forth therein (subject, in the case of
unaudited statements, to normal year-end audit adjustments which would not be
material in amount or effect), in each case in accordance with generally
accepted accounting principles consistently applied during the periods
involved, except as may be noted therein. Except as and to the extent set forth
on the consolidated balance sheet of HSI and the HSI Subsidiaries at August 31,
1993, including all notes thereto, or as set forth in the HSI Reports, neither
HSI nor any of the HSI Subsidiaries has any material liabilities or obligations
of any nature (whether accrued, absolute, contingent or otherwise) that would
be required to be reflected on, or reserved against in, a balance sheet of HSI
or in the notes thereto, prepared in accordance with generally accepted
accounting principles consistently applied, except liabilities arising in the
ordinary course of business since such date.
5.8. Litigation. Except as disclosed in the HSI Reports filed with the SEC
prior to the date hereof, there are no actions, suits or proceedings pending
against HSI or the HSI Subsidiaries or, to the knowledge of HSI, threatened
against HSI or the HSI Subsidiaries any of their respective properties or
assets, at law or in equity, or before or by any federal or state commission,
board, bureau, agency or instrumentality, that would have, individually or in
the aggregate, an HSI Material Adverse Effect or would prevent or delay, in any
internal report, the consummation of the transactions contemplated by this
Agreement. Except as disclosed in HSI Reports filed with the SEC prior to the
date hereof, neither HSI nor any of its subsidiaries are subject to any
outstanding order, writ, injunction or decree which, insofar as can be
reasonably foreseen, individually or in the aggregate, in the future would have
an HSI Material Adverse Effect or would prevent or delay the consummation of
the transactions contemplated hereby.
5.9. Absence of Certain Changes. Except as disclosed in the HSI Reports filed
with the SEC prior to the date hereof, since August 31, 1993, each of HSI and
its Subsidiaries has conducted its business only in the ordinary course of such
business and there has not been (i) any event or changes with respect to HSI
and its Subsidiaries having, individually or in the aggregate, a HSI Material
Adverse Effect, (ii) any declaration, setting aside or payment of any dividend
or other distribution with respect to its capital stock, or (iii) any material
change in its accounting principles, practices or methods.
5.10. Taxes. HSI and each of its Subsidiaries (i) have timely filed all
material federal, state, local and foreign tax returns (including but not
limited to all employment tax returns) required to be filed by any of them for
tax years ended prior to the date of this Agreement or requests for extensions
have been timely filed and any such request shall have been granted and not
expired and all such returns are complete in all material respects, (ii) have
paid or accrued all taxes, including interest and penalties, if any, shown to
be due and payable (and believed by HSI to be owed) on such returns other than
such taxes as are being contested by HSI or its Subsidiaries in good faith,
(iii) have properly accrued in all material respects all such taxes for such
periods subsequent to the periods covered by such returns, (iv) have "open"
years for federal income tax returns only as set forth in the HSI Reports and,
(v) are not aware of the existence of any tax liens on any of their respective
properties or assets. There are no contracts covering any person that
individually or collectively could give rise to the payment of any amount that
would not be deductible by HSI by reason of Section 280(G) or 162(m) of the
Internal Revenue Code of 1986, as amended (the "Code").
5.11. Certain Employee Plans.
(a) Each employee benefit or compensation plan or arrangement, including
each "employee benefit plan," as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974,
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as amended ("ERISA") maintained by HSI or any of its Subsidiaries (the "HSI
Benefit Plans") complies, and has been administered, in all material
respects with all applicable requirements of law, except for instances of
non-compliance that would not have caused, individually or in the
aggregate, an HSI Material Adverse Effect. The HSI Benefit Plans are listed
in the HSI Disclosure Letter and copies or descriptions of all material
Plans have previously been provided to Parent.
(b) With respect to each HSI Benefit Plan intended to qualify under
Section 401(a) of the Code, (i) a favorable determination letter has been
issued by the Internal Revenue Service (the "IRS") with respect to the
qualification of each HSI Benefit Plan and (ii) no "reportable event" or
"prohibited transaction" (as such terms are defined in ERISA) or
termination has occurred under circumstances which present a risk of
material liability by HSI or any of its Subsidiaries to any governmental
entity or other person, including a HSI Benefit Plan. Each HSI Benefit Plan
which is subject to Part 3 of Subtitle B of Title I of ERISA or Section 412
of the Code has been maintained in compliance with the minimum funding
standards of ERISA and the Code and no such HSI Benefit Plan has incurred
any "accumulated funding deficiency" (as defined in Section 412 of the Code
and Section 302 of ERISA), whether or not waived. Neither HSI nor any of
its Subsidiaries has incurred any material withdrawal liability under any
"multiemployer plan" (within the meaning of Section 3(37) of ERISA) which
has not been satisfied in full.
(c) Except as required by applicable law, neither HSI nor any of its
Subsidiaries provides any health, welfare or life insurance benefits to any
of their former or retired employees, which benefits would be material
either individually or in the aggregate to HSI.
5.12. Labor Matters.
(a) Neither HSI nor any of its Subsidiaries is a party to, or bound by,
any collective bargaining agreement, contract or other agreement or
understanding with a labor union or labor organization. There is no unfair
labor practice or labor arbitration proceeding pending or, to the knowledge
of HSI, threatened against HSI or its Subsidiaries relating to their
business, except for any such proceeding which would not have, individually
or in the aggregate, an HSI Material Adverse Effect. To the knowledge of
HSI, there are no organizational efforts with respect to the formation of a
collective bargaining unit presently being made or threatened involving
employees of HSI or any of its Subsidiaries.
(b) HSI has delivered to Parent copies of all employment agreements,
consulting agreements, severance agreements, bonus and incentive plans,
profit-sharing plans and other agreements, plans or arrangements with
respect to compensation of the employees of HSI and its Subsidiaries (the
"Compensation Arrangements"). HSI has determined that the Merger will
accelerate or otherwise give rise to payments pursuant to the Compensation
Arrangements in an amount not to exceed $30,000,000 (assuming each such
payment was required to be made as of February 28, 1994).
5.13. Environmental Laws and Regulations.
(a) Except as disclosed in HSI Reports filed with the SEC prior to the
date hereof, (i) HSI and each of its Subsidiaries is in compliance with all
applicable federal, state and local laws and regulations relating to
pollution or protection of human health or the environment (collectively,
"Environmental Laws") which compliance includes, but is not limited to, the
possession by HSI and its Subsidiaries of all material permits and other
governmental authorizations required under applicable Environmental Laws,
and compliance with the terms and conditions thereof, except for non-
compliance that would not have, individually or in the aggregate, an HSI
Material Adverse Effect; (ii) neither HSI nor any of its subsidiaries has
received written notice of, or, to the knowledge of HSI, is the subject of,
any action, cause of action, claim, investigation, demand or notice by any
person or entity alleging liability under or non-compliance with any
Environmental Law (an "Environmental Claims") that would have, individually
or in the aggregate, an HSI Material Adverse
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Effect; and (iii) to the knowledge of HSI, there are no circumstances that
are reasonably likely to prevent or interfere with such material compliance
in the future.
(b) Except as disclosed in the HSI Reports filed with the SEC prior to
the date hereof, there are no Environmental Claims which would have,
individually or in the aggregate, an HSI Material Adverse Effect that are
pending or, to the knowledge of HSI, threatened against HSI or any of its
Subsidiaries or, to the knowledge of HSI, against any person or entity
whose liability for any Environmental Claim HSI or any of its Subsidiaries
has or may have retained or assumed either contractually or by operation of
law.
5.14. Rights Agreement. HSI has taken all necessary actions so that none of
(i) the execution of this Agreement by the parties hereto or (ii) the
consummation of the Merger (including execution and performance by the parties
to that certain Voting Agreement, dated as of the date hereof, among Parent,
Merger Sub and the Shareholders (as defined therein)) will (x) cause the Rights
issued pursuant to the Rights Agreement to become exercisable, (y) cause any
person to become an Acquiring Person (as such term is defined in the Rights
Agreement) or (z) give rise to a Distribution Date or a Triggering Event (as
each such term is defined in the Rights Agreement).
5.15. Real Property.
(a) HSI has delivered to Parent copies of lease abstracts (the "Lease
Abstracts") for each of its leases, subleases, licenses or other agreements
under which HSI or any of its Subsidiaries uses or occupies or has the
right to use or occupy, now or in the future, any real property (the "Real
Estate Leases"). Each Real Property Lease is valid, binding and in full
force and effect, all rent and other sums and charges payable by HSI and
its Subsidiaries as tenants thereunder are current, no termination event or
condition or uncured default of a material nature on the part of HSI or any
such Subsidiary or, to the knowledge of HSI, as to a landlord exists under
any Real Property Lease, except for any of the foregoing matters which
would not have, individually or in the aggregate, an HSI Material Adverse
Effect. The information contained in the Lease Abstracts is true and
correct in all material respects.
(b) From August 31, 1993 through March 30, 1994, no portion of the real
property subject to the Real Property Leases has suffered any material
damage by fire or other casualty which has not heretofore been
substantially repaired or restored.
(c) Except for any of the following matters which would not have,
individually or in the aggregate, an HSI Material Adverse Effect, HSI
(i) has not granted, and to the best of HSI's knowledge, no other
person has granted, any leases, subleases, licenses or other agreements
granting to any person other than HSI any right to possession, use,
occupancy or enjoyment of the stores covered by the Real Estate Leases,
or any portion thereof; and
(ii) HSI is not obligated under any option, right of first refusal or
any contractual right to purchase, acquire, sell or dispose of any real
property covered by the Real Property Leases.
(d) None of the Real Property Leases contain continuous operating
covenants, radius restrictions or provisions requiring the consent of the
landlord to Parent's or Merger Sub's assumption of HSI's obligations under
the Real Property Leases in the manner contemplated by this Agreement,
except for any of the foregoing matters which would not have, individually
or in the aggregate, an HSI Material Adverse Effect.
5.16. Insurance. HSI and its Subsidiaries maintain with respect to their
operations and their assets, in full force and effect, policies of insurance in
the ordinary course of business as is usual and customary for businesses
similarly situated to HSI. HSI has provided Parents copies of loss runs
associated with its operations and the operations of its subsidiaries for the
three most recent years and used by HSI and its Subsidiaries in the ordinary
course of business.
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5.17. Intellectual Property. Every material trademark, service mark, trade
name or copyright, or application thereof in connection with any of the
foregoing (the "Intellectual Property"), is owned by HSI and, to the knowledge
of HSI, HSI's Intellectual Property does not infringe upon the Intellectual
Property rights of any person. HSI has not granted to any other person the
right to use the Intellectual Property, or any part thereof.
5.18. Certain Contracts. HSI has delivered copies of its (i) Agreement, dated
as of November 30, 1986, with Peyton's Inc. and The Kroger Co., as amended
January 11, 1990 (the "Peyton's Agreement"), (ii) Agreement for Systems
Operations Services, dated as of December 1, 1992, with Integrated Systems
Solutions Corporation (the "ISSC Agreement"), (iii) Photofinishing Agreements,
dated as of May 31, 1990, as amended, with Qualex Inc., (the "Qualex
Agreements"), and (iv) Customer Agreement, dated as of December 22, 1993, with
Hughes Network Systems, Inc. (the "Hughes Agreement"). HSI (x) is in
compliance, in all material respects, with all terms and conditions of the
Peyton's Agreement, ISSC Agreement, Qualex Agreements and Hughes Agreement, (y)
has not exceeded the implementation schedule set forth in the Hughes Agreement
in any material respect, and (z) has no further material obligations under the
Peyton's Agreement other than the obligation to purchase certain items of
inventory. HSI is in compliance with all terms of its contracts or other
arrangements with the vendor, dated December 21, 1993, providing for a cash
payment on January 14, 1994 of approximately $40,000,000.
5.19. No Brokers. HSI has not entered into any contract, arrangement or
understanding with any person or firm which may result in the obligation of HSI
or Parent to pay any finder's fees, brokerage or agent's commissions or other
like payments in connection with the negotiations leading to this Agreement or
the consummation of the transactions contemplated hereby, except that HSI has
retained Goldman, Sachs & Co. ("Goldman") as its financial advisor and Salomon
Brothers Inc ("Salomon") to render a fairness opinion with respect to the
Purchase Price, the arrangements with which have been disclosed in writing to
Parent prior to the date hereof. Other than the foregoing arrangements, HSI is
not aware of any claim for payment of any finder's fees, brokerage or agent's
commissions or other like payments in connection with the negotiations leading
to this Agreement or the consummation of the transactions contemplated hereby.
5.20. Fairness Opinion. HSI has received opinions of Goldman and Salomon, to
the effect that, as of the date hereof the Purchase Price hereunder is fair to
the holders of HSI Common Stock.
ARTICLE 6
6. REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB.
Except as set forth in the disclosure letter delivered by or on behalf of
Parent or Merger Sub to HSI at or prior to the execution hereof (the "Parent
Disclosure Letter"), Parent and Merger Sub represent and warrant to HSI as of
the date of this Agreement as follows:
6.1. Existence; Good Standing; Corporate Authority; Compliance With Law. Each
of Parent and Merger Sub is a corporation duly incorporated, validly existing
and in good standing under the laws of its jurisdiction of incorporation.
Parent is duly licensed or qualified to do business as a foreign corporation
and is in good standing under the laws of any other state of the United States
in which the character of the properties owned or leased by it therein or in
which the transaction of its business makes such qualification necessary,
except where the failure to be so qualified would not have a material adverse
effect on the ability of Parent or Merger Sub to perform its obligations
hereunder (a "Parent Material Adverse Effect"). Parent has all requisite
corporate power and authority to own, operate and lease its properties and
carry on its business as now conducted.
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6.2. Authorization, Validity and Effect of Agreements. Each of Parent and
Merger Sub has the requisite corporate power and authority to execute and
deliver this Agreement and all agreements and documents contemplated hereby.
The consummation by Parent and Merger Sub of the transactions contemplated
hereby has been duly authorized by all requisite corporate action. This
Agreement constitutes, and all agreements and documents contemplated hereby
(when executed and delivered pursuant hereto for value received) will
constitute, the valid and legally binding obligations of Parent and Merger Sub,
enforceable in accordance with their respective terms, subject to applicable
bankruptcy, insolvency, moratorium or other similar laws relating to creditors'
rights and general principles of equity.
6.3. No Violation. Neither the execution and delivery by Parent and Merger
Sub of this Agreement, nor the consummation by Parent and Merger Sub of the
transactions contemplated hereby in accordance with the terms hereof, will: (i)
conflict with or result in a breach of any provisions of the Certificate of
Incorporation or Bylaws of Parent or Merger Sub; (ii) violate, or conflict
with, or result in a breach of any provision of, or constitute a default (or an
event which, with notice or lapse of time or both, would constitute a default)
under, or result in the termination or in a right of termination or
cancellation of, or accelerate the performance required by, or result in the
creation of any lien, security interest, charge or encumbrance upon any of the
material properties of Parent or its Subsidiaries under, or result in being
declared void, voidable, or without further binding effect, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, deed of trust
or any material license, franchise, permit, lease, contract, agreement or other
instrument, commitment or obligation to which Parent or any of its Subsidiaries
is a party, or by which Parent or any of its Subsidiaries or any of their
properties is bound or affected, except for any of the foregoing matters which
would not have a Parent Material Adverse Effect; or (iii) other than the
Regulatory Filings, require any material consent, approval or authorization of,
or declaration, filing or registration with, any domestic governmental or
regulatory authority, the failure to obtain or make which would have a Parent
Material Adverse Effect.
6.4. Litigation. There are no actions, suits or proceedings pending against
Parent or the Parent Subsidiaries or, to the actual knowledge of the executive
officers of Parent, threatened against Parent or the Parent Subsidiaries, at
law or in equity, or before or by any federal or state commission, board,
bureau, agency or instrumentality, that are reasonably likely to have a Parent
Material Adverse Effect.
6.5. Financing. Parent and Merger Sub have received a written commitment from
Banque Paribas and Continental Bank N.A. to enable them to consummate the
Merger on the terms contemplated by this Agreement and, at the Effective Time,
Parent and Merger Sub will have available all funds necessary for the
acquisition of all shares of HSI Common Stock and HSI Options pursuant to the
Merger and to perform their respective obligations under this Agreement.
6.6. No Brokers. Parent has not entered into any contract, arrangement or
understanding with any person or firm which may result in the obligation of HSI
or Parent to pay any finder's fees, brokerage or agent's commissions or other
like payments in connection with the negotiations leading to this Agreement or
the consummation of the transactions contemplated hereby, except that Parent
has retained Donaldson, Lufkin, Jenrette Securities Corporation as its
financial advisor, the arrangements with which have been disclosed in writing
to HSI prior to the date hereof. Other than the foregoing arrangements, Parent
is not aware of any claim for payment of any finder's fees, brokerage or
agent's commissions or other like payments in connection with the negotiations
leading to this Agreement or the consummation of the transactions contemplated
hereby.
6.7. Surviving Corporation After the Merger. Immediately after the Effective
Time and after giving effect to any change in the Surviving Corporation's
assets and liabilities as a result of the Merger, the Surviving Corporation
will not (i) be insolvent (either because its financial condition is such that
the sum of its debts is greater than the fair value of its assets or because
the fair saleable value of its assets
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is less than the amount required to pay its probable liability on existing
debts as they become absolute and mature), (ii) have unreasonably small capital
with which to engage in its business or (iii) have incurred liabilities beyond
its ability to pay as they become due.
6.8. No Ownership of Company Capital Stock. Neither Parent nor Merger Sub
own, directly or indirectly, any HSI Common Stock.
ARTICLE 7
7. COVENANTS.
7.1. Acquisition Proposals. Prior to the Effective Time, HSI agrees (a) that
neither HSI nor any of its Subsidiaries shall, and HSI shall direct and use its
best efforts to cause its officers, directors, employees, agents and
representatives (including, without limitation, any investment banker, attorney
or accountant retained by it or any of its Subsidiaries) not to, initiate,
solicit or encourage, directly or indirectly, any inquiries or the making or
implementation of any proposal or offer (including, without limitation, any
proposal or offer to its stockholders) with respect to a merger, acquisition,
consolidation or similar transaction involving, or any purchase of all or any
significant portion of the assets or any equity securities of, HSI or any of
its Significant Subsidiaries (any such proposal or offer being hereinafter
referred to as an "Acquisition Proposal") or engage in any negotiations
concerning, or provide any confidential information or data to, or have any
discussions with, any person relating to an Acquisition Proposal, or otherwise
facilitate any effort or attempt to make or implement an Acquisition Proposal;
(b) that it will immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any parties conducted heretofore
with respect to any of the foregoing and will take the necessary steps to
inform the individuals or entities referred to above of the obligations
undertaken in this Section 7.1; and (c) that it will notify Parent immediately
if any such inquiries or proposals are received by, any such information is
requested from, or any such negotiations or discussions are sought to be
initiated or continued with, it; provided, however, that nothing contained in
this Section 7.1 shall prohibit the Board of Directors of HSI from (i)
furnishing information to or entering into discussions or negotiations with,
any person or entity that makes an unsolicited bona fide written proposal to
acquire HSI pursuant to a merger, consolidation, share exchange, purchase of a
substantial portion of the assets, business combination or other similar
transaction, if, and only to the extent that, (A) the Board of Directors of HSI
determines in good faith, based as to legal matters on the written opinion of
outside legal counsel, that such action is required for the Board of Directors
to comply with its fiduciary duties to stockholders imposed by law, (B) prior
to furnishing such information to, or entering into discussions or negotiations
with, such person or entity, HSI provides written notice to Parent to the
effect that it is furnishing information to, or entering into discussions or
negotiations with, such person or entity and provide Parent with a copy of any
such written proposal, and (C) HSI keeps Parent informed of the status (not the
terms) of any such discussions or negotiations; and (ii) to the extent
applicable, complying with Rule 14e-2 promulgated under the Exchange Act with
regard to an Acquisition Proposal. Nothing in this Section 7.1 shall (x) permit
any party to terminate this Agreement (except as specifically provided in
Article 9 hereof), (y) permit HSI to enter into any agreement with respect to
an Acquisition Proposal during the term of this Agreement (it being agreed that
during the term of this Agreement, HSI shall enter into any agreement with any
person that provides for, or in any way facilitates, an Acquisition Proposal
(other than a confidentiality agreement in customary form)), or (z) affect any
other obligation of any party under this Agreement.
7.2. Conduct of Businesses. Prior to the Effective Time, except as set forth
in the HSI Disclosure Letter or as contemplated by any other provision of this
Agreement, unless Parent has consented in writing thereto, HSI:
(a) shall, and shall cause each of its Subsidiaries to, conduct its
operations according to its usual, regular and ordinary course in
substantially the same manner as heretofore conducted;
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(b) shall use its reasonable efforts, and shall cause each of its
respective Subsidiaries to use its reasonable efforts, to preserve intact
its business organization and goodwill, keep available the services of its
officers and employees and maintain satisfactory relationships with those
persons having business relationships with it;
(c) shall confer on a regular basis with one or more representatives of
Parent to report operational matters of materiality and any proposals to
engage in material transactions;
(d) shall not amend its Certificates of Incorporation or Bylaws;
(e) shall promptly notify Parent of (i) any material emergency or other
material change in the condition (financial or otherwise), HSI's or any
Subsidiary's business, properties, assets, liabilities, prospects or the
normal course of its businesses or in the operation of its properties, (ii)
any material litigation or material governmental complaints, investigations
or hearings (or communications indicating that the same may be
contemplated), or (iii) the breach in any material respect of any
representation or warranty or covenant contained herein;
(f) shall promptly deliver to Parent true and correct copies of any
report, statement or schedule filed by HSI with the SEC subsequent to the
date of this Agreement;
(g) shall not (i) except pursuant to the exercise of options, warrants,
conversion rights and other contractual rights existing on the date hereof
and disclosed pursuant to this Agreement, issue any shares of its capital
stock, effect any stock split or otherwise change its capitalization as it
exists on the date hereof, (ii) grant, confer or award any option, warrant,
conversion right or other right not existing on the date hereof to acquire
any shares of its capital stock from HSI, (iii) increase any compensation
or enter into or amend any employment severance, termination or similar
agreement with any of its present or future officers or directors, except
for normal increases in compensation to employees not earning more than
$75,000 in annual base compensation consistent with past practice and the
payment of cash bonuses to employees pursuant to and consistent with
existing plans or programs, or (iv) adopt any new employee benefit plan
(including any stock option, stock benefit or stock purchase plan) or amend
any existing employee benefit plan in any material respect, except for
changes which are less favorable to participants in such plans or as may be
required by applicable law;
(h) shall not (i) declare, set aside or pay any dividend or make any
other distribution or payment with respect to any shares of its capital
stock; (ii) except in connection with the use of shares of capital stock to
pay the exercise price or tax withholding in connection with stock-based
HSI Benefit Plans, directly or indirectly redeem, purchase or otherwise
acquire any shares of its capital stock or capital stock of any of its
Subsidiaries, or make any commitment for any such action, including the
Rights or (iii) split, combine or reclassify any of its capital stock;
(i) shall not, and shall not permit any of its Subsidiaries to sell,
lease or otherwise dispose of any of its assets (including capital stock of
Subsidiaries) which are material, individually or in the aggregate, except
in the ordinary course of business;
(j) shall not (i) incur or assume any long-term or short-term debt or
issue any debt securities except for borrowings under existing lines of
credit in the ordinary course of business; (ii) except for obligations of
wholly-owned Subsidiaries of HSI; assume, guaranty, endorse or otherwise
become liable or responsible (whether directly, indirectly, contingently or
otherwise) for the obligations of any other person except in the ordinary
course of business consistent with past practices in an amount not material
to HSI and its Subsidiaries, taken as a whole; (iii) other than wholly-
owned Subsidiaries of HSI, make any loans, advances or capital
contributions to or investments in, any other person; (iv) pledge or
otherwise encumber shares of capital stock of HSI or its Subsidiaries; or
(v) mortgage or pledge any of its material assets, tangible or intangible,
or create or suffer to create any material mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect to such asset;
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(k) shall not acquire, sell, lease or dispose of any assets outside the
ordinary course of business or any assets which in the aggregate are
material to HSI and its Subsidiaries taken as a whole, or enter into any
commitment or transaction outside the ordinary course of business
consistent with past practices which would be material to HSI and its
Subsidiaries taken as a whole;
(l) except as may be required as a result of a change in law or in
generally accepted accounting principles shall not change any of the
accounting principles or practices used by HSI;
(m) shall not (i) acquire (by merger, consolidation or acquisition of
stock or assets) any corporation, partnership or other business
organization or division thereof or any equity interest therein; (ii) enter
into any contract or agreement other than in the ordinary course of
business consistent with past practice which would be material to HSI and
its Subsidiaries taken as a whole; (iii) authorize any new capital
expenditure or expenditures which, individually, is in excess of $25,000
or, in the aggregate, are in excess of $1,500,000; provided, that none of
the foregoing shall limit any capital expenditure within the aggregate
amount previously authorized by HSI's Board of Directors for capital
expenditures and written evidence thereof has been previously provided to
Parent or Merger Sub; or (iv) enter into or amend any contract, agreement,
commitment or arrangement providing for the taking of any action which
would be prohibited hereunder;
(n) shall not make any tax election or settle or compromise any income
tax liability material to HSI and its Subsidiaries taken as a whole;
(o) shall not pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction of business
of liabilities reflected or reserved against in, and contemplated by, the
consolidated financial statements (or the notes thereto) of HSI and its
Subsidiaries or incurred in the ordinary course of business consistent with
past practice;
(p) shall not settle or compromise any pending or threatened suit, action
or claim relating to the transactions contemplated hereby; or
(q) shall not take, or agree in writing or otherwise to take, any of the
actions described in Section 6.1(a) through 6.1(p) or any action that would
make any of the representations and warranties of HSI contained in this
Agreement untrue or incorrect as of the date when made.
7.3. Meeting of Stockholders. HSI will take all action necessary in
accordance with applicable law and its Certificate of Incorporation and Bylaws
to convene a meeting of its stockholders as promptly as practicable to consider
and vote upon the approval of this Agreement and the transactions contemplated
hereby. The Board of Directors of HSI shall recommend such approval and HSI
shall take all lawful action to solicit such approval, including, without
limitation, timely mailing the Proxy Statement (as defined in Section 7.7);
provided, however, that such recommendation or solicitation is subject to any
action taken by, or upon authority of, the Board of Directors of HSI in the
exercise of its good faith judgment as to its fiduciary duties to its
stockholders imposed by law. HSI shall coordinate and cooperate with respect to
the timing of such meetings and shall use its best efforts to hold such
meetings on the same day. It shall be a condition to the mailing of the Proxy
Statement that HSI shall have received opinions of Goldman and Salomon, each
dated the date of the Proxy Statement, to the effect that, as of the date
thereof, the Purchase Price pursuant to the Merger is fair to the holders of
HSI Common Stock.
7.4. Filings; Other Action. Subject to the terms and conditions herein
provided, HSI and Parent shall: (a) promptly make their respective filings and
thereafter make any other required submissions under the HSR Act with respect
to the Merger; (b) use all reasonable efforts to cooperate with one another in
(i) determining which filings are required to be made prior to the Effective
Time with, and which consents, approvals, permits or authorizations are
required to be obtained prior to the Effective Time from, governmental or
regulatory authorities of the United States, the several states and foreign
jurisdictions in connection with the execution and delivery of this Agreement
and the consummation of
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the transactions contemplated hereby and (ii) timely making all such filings
and timely seeking all such consents, approvals, permits or authorizations; and
(c) use all reasonable efforts to take, or cause to be taken, all other action
and do, or cause to be done, all other things necessary, proper or appropriate
to consummate and make effective the transactions contemplated by this
Agreement. Each of Parent and HSI will use its best efforts to resolve such
objections, if any, as may be asserted with respect to the Merger under the HSR
Act or other antitrust laws. In the event a suit is instituted challenging the
Merger as violative of the HSR Act or other antitrust laws, each of Parent and
HSI will use its best efforts to resist or resolve such suit. Each of Parent
and HSI will use its best efforts to take such action as may be required (a) by
the Antitrust Division of the Department of Justice or the Federal Trade
Commission in order to resolve such objections as either of them may have to
the Merger under the HSR Act or other antitrust laws or (b) by any federal or
state court of the United States, in any suit challenging the Merger as
violative of the HSR Act or other antitrust laws, in order to avoid the entry
of, or to effect the dissolution of, any injunction, temporary restraining
order or other order which has the effect of preventing the consummation of the
Merger. In complying with the foregoing, each of Parent and HSI shall use all
reasonable and appropriate measures available to them, including, if
appropriate, "hold-separate" agreements or divestitures of Subsidiaries, assets
or operations if necessary to consummate the transactions contemplated hereby,
so long as such actions do not, in the aggregate, have a HSI Material Adverse
Effect (after giving effect to the Merger). If, at any time after the Effective
Time, any further action is necessary or desirable to carry out the purpose of
this Agreement, the proper officers and directors of Parent and HSI shall take
all such necessary action.
7.5. Inspection of Records; Access. From the date hereof to the Effective
Time, HSI shall allow all designated officers, attorneys, accountants and other
representatives of Parent ("Parent's Representatives") access at all reasonable
times to all employees, stores, offices, warehouses, and other facilities and
to the records and files, correspondence, audits and properties, as well as to
all information relating to commitments, contracts, titles and financial
position, or otherwise pertaining to the business and affairs, of HSI and its
Subsidiaries; provided, however, Parent's Representatives shall use their
reasonable best efforts to avoid interfering with, hindering or otherwise
disrupting the employees of HSI in the execution of their employment duties
during any visit to, or inspection of, HSI's facilities or stores.
7.6. Publicity. The initial press release relating to this Agreement shall be
a joint press release and thereafter HSI and Parent shall, subject to their
respective legal obligations (including requirements of stock exchanges and
other similar regulatory bodies), consult with each other, and use reasonable
efforts to agree upon the text of any press release, before issuing any such
press release or otherwise making public statements with respect to the
transactions contemplated hereby and in making any filings with any federal or
state governmental or regulatory agency or with any national securities
exchange with respect thereto.
7.7. Proxy Statement. HSI shall promptly prepare and then file with the SEC a
proxy statement with respect to the meeting of the stockholders of HSI in
connection with the Merger (the "Proxy Statement"). HSI will cause the Proxy
Statement to comply as to form in all material respects with the applicable
provisions of the Exchange Act and the rules and regulations thereunder. HSI
agrees that the Proxy Statement and each amendment or supplement thereto at the
time of mailing thereof and at the time of the meeting of the stockholders of
HSI will 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 were made, not
misleading.
7.8. Further Action. Each party hereto shall, subject to the fulfillment at
or before the Effective Time of each of the conditions of performance set forth
herein or the waiver thereof, perform such further acts and execute such
documents as may be reasonably required to effect the Merger.
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7.9. Expenses. Whether or not the Merger is consummated, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses.
7.10. Indemnification and Insurance.
(a) From and after the Effective Time, Parent shall indemnify, defend and
hold harmless to the fullest extent permitted under applicable law each
person who is now, or has been at any time prior to the date hereof, an
officer, director, employee, trustee or agent of HSI (or any Subsidiary or
division thereof), including, without limitation, each person controlling
any of the foregoing persons (individually, an "Indemnified Party" and
collectively, the "Indemnified Parties"), against all losses, claims,
damages, liabilities, costs or expenses (including attorneys' fees),
judgments, fines, penalties and amounts paid in settlement in connection
with any claim, action, suit, proceeding or investigation arising out of or
pertaining to acts or omissions, or alleged acts or omissions, by them in
their capacities as such, whether commenced, asserted or claimed before or
after the Effective Time and including, without limitation, liabilities
arising under the Securities Act, the Exchange Act and state corporation
laws in connection with the Merger. In the event of any such claim, action,
suit, proceeding or investigation (an "Action"), (i) Parent shall pay the
reasonable fees and expenses of counsel selected by the Indemnified Party,
which counsel shall be reasonably acceptable to Parent, in advance of the
final disposition of any such action to the full extent permitted by
applicable law, upon receipt of any undertaking required by applicable law,
and (ii) the Surviving Corporation will cooperate in the defense of any
such matter; provided, however, that Parent shall not be liable for any
settlement effected without its written consent (which consent shall not be
unreasonably withheld or delayed) and provided, further, that Parent shall
not be obligated pursuant to this Section to pay the fees and disbursements
of more than one counsel for all Indemnified Parties in any single Action
except to the extent that, in the opinion of counsel for the Indemnified
Parties, two or more of such Indemnified Parties have conflicting interests
in the outcome of such action.
(b) Parent shall cause the Surviving Corporation to keep in effect
provisions in its Certificate of Incorporation and Bylaws providing for
exculpation of director and officer liability and indemnification of the
Indemnified Parties to the fullest extent permitted under the DGCL, which
provisions shall not be amended except as required by applicable law or
except to make changes permitted by law that would enlarge the Indemnified
Parties' right of indemnification.
(c) For a period of four years after the Effective Time, Parent shall
cause to be maintained officers' and directors' liability insurance
covering the Indemnified Parties who are currently covered, in their
capacities as officers and directors, by HSI's existing officers' and
directors' liability insurance policies on terms substantially no less
advantageous to the Indemnified Parties than such existing insurance;
provided, however, that Parent shall not be required in order to maintain
or procure such coverage to pay an annual premium in excess of two times
the current annual premium paid by HSI for its existing coverage (the
"Cap"); and provided, further, that if equivalent coverage cannot be
obtained, or can be obtained only by paying an annual premium in excess of
the Cap, Parent shall only be required to obtain as much coverage as can be
obtained by paying an annual premium equal to the Cap.
(d) Parent shall pay all expenses, including attorneys' fees, that may be
incurred by any Indemnified Parties in enforcing the indemnity and other
obligations provided for in this Section 7.10.
(e) The rights of each Indemnified Party hereunder shall be in addition
to any other rights such Indemnified Party may have under the Certificate
of Incorporation or Bylaws of HSI, under the DGCL or otherwise. The
provisions of this Section shall survive the consummation of the Merger and
expressly are intended to benefit each of the Indemnified Parties.
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7.11. Certain Benefits.
(a) From and after the Effective Time, subject to applicable law, and
except as contemplated hereby with respect to the HSI Stock Option Plans,
Parent and its Subsidiaries will honor in accordance with their terms, all
HSI Benefit Plans; provided, however, that nothing herein shall preclude
any change effected on a prospective basis in any HSI Benefit Plan that is
permitted pursuant to the following sentence of this Section 7.11. For a
period of not less than six months following the Effective Time, subject to
applicable law, Parent and its Subsidiaries will provide benefits (or cash
compensation in lieu thereof) to HSI employees who become employees of
Parent and its Subsidiaries which will, in the aggregate, be no less
favorable than those provided by HSI and its Subsidiaries to their
employees immediately prior to the Effective Time. With respect to the each
employee benefit or compensation plan or arrangement, including each
"employee benefit plan" as defined in Section 3(3) of ERISA maintained by
Parent or any of its Subsidiaries (the "Parent Benefit Plans"), Parent and
the Surviving Corporation shall grant all HSI employees from and after the
Effective Time credit for all service with HSI and its affiliates and
predecessors prior to the Effective Time for all purposes for which such
service was recognized by HSI. To the extent Parent Benefit Plans provide
medical or dental welfare benefits after the Effective Time, such plans
shall waive any pre-existing conditions and actively-at-work exclusions and
shall provide that any expenses incurred on or before the Effective Time
shall be taken into account under Parent Benefit Plans for purposes of
satisfying applicable deductible, coinsurance and maximum out-of-pocket
provisions.
(b) Parent agrees to employ at the Effective Time all employees of HSI
and its Subsidiaries who are employed on the Closing Date on terms
consistent with HSI's current employment practices and at comparable levels
of compensation and positions. Such employment shall be at will and Parent
shall be under no obligation to continue to employ any individuals.
(c) For purposes of this Section 7.11, the term "employees" shall mean
all current employees of HSI and its Subsidiaries (including those on lay-
off, disability or leave of absence, paid or unpaid).
(d) Notwithstanding the provisions of Section 7.11(a), at or prior to the
Effective Time, Parent shall expressly assume and agree to perform (i) the
Protective Compensation and Benefits Agreement between the HSI and certain
employees of HSI (ii) the Employment Agreement between HSI and Philip E.
Beekman and (iii) the various bonus plans of the Company and its
Subsidiaries in effect for Fiscal Year 1994 (the "Bonus Plans").
Notwithstanding the terms of the Bonus Plans, Parent shall make payments to
all employees whose employment is terminated on or prior to August 31, 1994
and on or after the Effective Time of a bonus equal to the product of
(x) such employee's entitlement under the Bonus Plans; and
(y) a percentage equal to (1) the number of days such employee was
employed by the Company (including days employed by the Surviving
Corporation) during the fiscal year ending August 31, 1994, divided by
(ii) 365.
It is understood that in making any discretionary payments under the Bonus
Plans, Parent shall determine the amount of any such payment consistent
with the Company's past practice (with any such payments to employees no
longer employed at the time of payment being made without consideration of
the fact that such employee is no longer employed).
7.12. Restructuring of Merger. Upon the mutual agreement of Parent and HSI,
the Merger shall be restructured in the form of a forward triangular merger of
HSI into Merger Sub, with Merger Sub being the surviving corporation, or as a
merger of HSI into Parent, with Parent being the surviving corporation. In such
event, this Agreement shall be deemed appropriately modified to reflect such
form of merger.
7.13 New York Real Estate Gains Tax. Merger Sub agrees that either Merger Sub
or the Surviving Corporation will pay the New York State Real Property Transfer
Tax, the New York State Real
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Property Transfer Gains Tax and the New York City Real Property Transfer Tax
(collectively, the "Gains Taxes"), if any, and any penalties or interest with
respect to the Gains Taxes payable in connection with the consummation of the
Merger. HSI agrees to cooperate with Merger Sub in the filing of any returns
with respect to the Gains Taxes, including supplying in a timely manner a
complete list of all real property interests held by HSI that are located in
New York State and any information with respect to such property that is
reasonably necessary to complete such returns.
7.14 Placement of Subordinated Notes. Parent shall not seek to issue nor file
with the SEC any registration statement under the Securities Act of 1933, as
amended (the "Securities Act") with respect to any public debt, except
Subordinated Notes (as defined herein) of aggregate principal amount not in
excess of $175,000,000; except, however, that this Section 7.14 shall not apply
and be of no force and effect if the condition set forth in Section 8.3(c) has
been waived in writing by Parent. Parent shall use reasonable best efforts to
take, or cause to be taken, all action and do, or cause to be done, all things
necessary, proper or appropriate to satisfy the condition set forth in Section
8.3(c).
ARTICLE 8
8. CONDITIONS.
8.1. Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Closing Date of the following conditions:
(a) This Agreement and the transactions contemplated hereby shall have
been approved in the manner required by applicable law or by applicable
regulations of any stock exchange or other regulatory body by the holders
of the issued and outstanding shares of capital stock of HSI entitled to
vote thereon.
(b) The waiting period applicable to the consummation of the Merger under
the HSR Act shall have expired or been terminated.
(c) Neither of the parties hereto shall be subject to any order or
injunction of a court of competent jurisdiction which prohibits the
consummation of the transactions contemplated by this Agreement. In the
event any such order or injunction shall have been issued, each party
agrees to use its reasonable efforts to have any such injunction lifted.
(d) All consents, authorizations, orders and approvals of (or filings or
registrations with) any governmental commission, board or other regulatory
body required in connection with the execution, delivery and performance of
this Agreement shall have been obtained or made, except for filings in
connection with the Merger and any other documents required to be filed
after the Effective Time and except where the failure to have obtained or
made any such consent, authorization, order, approval, filing or
registration would not have an HSI Material Adverse Effect following the
Effective Time.
8.2. Conditions to Obligation of HSI to Effect the Merger. The obligation of
HSI to effect the Merger shall be subject to the fulfillment at or prior to the
Closing Date of the following conditions:
(a) Parent shall have performed its agreements contained in this
Agreement required to be performed on or prior to the Closing Date and the
representations and warranties of Parent and Merger Sub contained in this
Agreement and in any document delivered in connection herewith shall be
true and correct as of the Closing Date, and HSI shall have received a
certificate of the President or a Vice President of Parent, dated the
Closing Date, certifying to such effect; provided, however, that
notwithstanding anything herein to the contrary, this Section 8.2(a) shall
be deemed to have been satisfied even if such representations or warranties
are not true and correct, unless
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the failure of any of the representations or warranties to be so true and
correct would have or would be reasonably likely to have a Parent Material
Adverse Effect.
(b) From the date of this Agreement through the Effective Time, there
shall not have occurred any change in the financial condition, business,
operations or prospects of Parent and its Subsidiaries, taken as a whole,
that would have or would be reasonably likely to have a Parent Material
Adverse Effect.
8.3. Conditions to Obligation of Parent and Merger Sub to Effect the
Merger. The obligations of Parent and Merger Sub to effect the Merger shall be
subject to the fulfillment at or prior to the Closing Date of the following
conditions:
(a) HSI shall have performed its agreements contained in this Agreement
required to be performed on or prior to the Closing Date and the
representations and warranties of HSI contained in this Agreement and in
any document delivered in connection herewith shall be true and correct as
of the Closing Date, and Parent shall have received a certificate of the
President or a Vice President of HSI, dated the Closing Date, certifying to
such effect; provided, however, that notwithstanding anything herein to the
contrary, this Section 8.3(a) shall be deemed to have been satisfied even
if such representations or warranties are not true and correct, unless the
failure of any of the representations or warranties to be so true and
correct would have or would be reasonably likely to have an HSI Material
Adverse Effect.
(b) From the date of this Agreement through the Effective Time, there
shall not have occurred any change in the financial condition, business,
operations or prospects of HSI and its Subsidiaries, taken as a whole, that
would have or would be reasonably likely to have an HSI Material Adverse
Effect.
(c) Parent shall have completed and received the proceeds from the
issuance and sale of not less than $175,000,000 aggregate principal amount
of Subordinated Notes pursuant to an underwritten public offering
registered under the Securities Act, or pursuant to a placement in
compliance with Regulation 144A thereunder or in a private placement made
in accordance with exemptions thereunder. As used herein, "Subordinated
Notes" shall mean notes of Parent issued under an indenture qualifiable
under the Trust Indenture Act which shall (i) bear a stated interest rate
of not greater than 12% per annum, (ii) mature not more than ten years from
the date of issue, (iii) be subordinated to the Parent's bank indebtedness
and senior to other subordinated indebtedness, (iv) not be redeemable at
the Parent's option for a period of not less than five years following the
date of issue, (v) have other terms and non-financial covenants
substantially similar to the existing $145,000,000 Senior Subordinated
Debentures of HSI, and (vi) have financial covenants customary for other
similar debt issuances then being issued in the market by corporations of
comparable credit.
ARTICLE 9
9. TERMINATION.
9.1. Termination by Mutual Consent. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before or
after the approval of this Agreement by the stockholders of HSI, by the mutual
consent of Parent and HSI.
9.2. Termination by Either Parent or HSI. This Agreement may be terminated
and the Merger may be abandoned by action of the Board of Directors of either
Parent or HSI if (a) the Merger shall not have been consummated by September
30, 1994, or (b) the approval of HSI's stockholders required by Section 8.1(a)
shall not have been obtained at a meeting duly convened therefor or at any
adjournment thereof, or (c) a United States federal or state court of competent
jurisdiction or United States federal
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or state governmental, regulatory or administrative agency or commission shall
have issued an order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the transactions contemplated
by this Agreement and such order, decree, ruling or other action shall have
become final and non-appealable; provided, that the party seeking to terminate
this Agreement pursuant to this clause (c) shall have used all reasonable
efforts to remove such injunction, order or decree; and provided, in the case
of a termination pursuant to clause (a) above, that the terminating party shall
not have breached in any material respect its obligations under this Agreement
in any manner that shall have proximately contributed to the occurrence of the
failure referred to in said clause.
9.3. Termination by HSI.
(a) This Agreement may be terminated and the Merger may be abandoned at
any time prior to the Effective Time, before or after the adoption and
approval by the stockholders of HSI referred to in Section 8.1(a), by
action of the Board of Directors of HSI, if (i) in the exercise of its good
faith judgment as to its fiduciary duties to its stockholders imposed by
law the Board of Directors of HSI determines that such termination is
required by reason of an Acquisition Proposal being made, or (ii) there has
been a breach by Parent or Merger Sub of any representation or warranty
contained in this Agreement which would have or would be reasonably likely
to have a Parent Material Adverse Effect, or (iii) there has been a
material breach of any of the covenants or agreements set forth in this
Agreement on the part of Parent, which breach is not curable or, if
curable, is not cured within 30 days after written notice of such breach is
given by HSI to Parent.
(b) If, on or prior to April 29, 1994, Parent fails to either (A) (i)
deposit or cause to be deposited with First Fidelity Bank, National
Association, New Jersey, (the "Trustee"), trustee under that certain
Indenture (the "Indenture") dated as of January 1, 1993 between Parent and
Trustee, sufficient funds to defease (the "Defeasance") Parent's 9 1/8%
Senior Notes due 2000 (the "Parent Notes") and (ii) take any other action
required to effect the Defeasance at the earliest time permitted under the
Indenture; or (B) obtain the consents (which may be in the form of waivers)
of the holders of Parent Notes to certain covenants contained in the Parent
Notes necessary to permit the consummation of the Merger in accordance with
the terms of this Agreement, including the incurrence of indebtedness and
granting of liens resulting therefrom (clauses (A) and (B) of this Section
9.03(b), hereinafter referred to as "Parent Notes Condition"), then
(x) Parent shall pay HSI a fee in cash of $6,000,000, payable on or
before the fifth business day following Parent's failure to satisfy the
Parent Note Condition; and
(y) HSI, by action of its Board of Directors taken within five
business days of Parent's failure to satisfy the Parent Note Condition,
may terminate the Agreement and the Merger.
9.4. Termination by Parent. This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time by action of the Board
of Directors of Parent, if (a) there has been a breach by HSI of any
representation or warranty contained in this Agreement which would have or
would be reasonably likely to have an HSI Material Adverse Effect, or (b) there
has been a material breach of any of the covenants or agreements set forth in
this Agreement on the part of HSI, which breach is not curable or, if curable,
is not cured within 30 days after written notice of such breach is given by
Parent to HSI.
9.5. Effect of Termination and Abandonment. In the event of termination of
this Agreement and the abandonment of the Merger pursuant to this Article 9,
all obligations of the parties hereto shall terminate, except the obligations
of the parties pursuant to this Section 9.5 and Section 7.9 and except for the
provisions of Sections 10.3, 10.4, 10.6, 10.9, 10.12 and 10.13 and the
Confidentiality Agreement referred to in Section 10.4. Moreover, in the event
of termination of this Agreement pursuant to Section 9.3 or 9.4, nothing herein
shall prejudice the ability of the non-breaching party from seeking damages
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from any other party for any breach of this Agreement, including without
limitation, attorneys' fees and the right to pursue any remedy at law or in
equity.
9.6. Extension; Waiver. At any time prior to the Effective Time, any party
hereto, by action taken by its Board of Directors, may, to the extent legally
allowed, (a) extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (b) waive any inaccuracies in the
representations and warranties made to such party contained herein or in any
document delivered pursuant hereto and (c) waive compliance with any of the
agreements or conditions for the benefit of such party contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall
be valid only if set forth in an instrument in writing signed by or on behalf
of the party granting such extension or waiver. HSI's determination to forego
action under Section 9.3(b)(y) shall not be deemed a waiver by HSI of any other
provisions of this Agreement.
ARTICLE 10
10. GENERAL PROVISIONS.
10.1. Nonsurvival of Representations, Warranties and Agreements. All
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall be deemed to the extent
expressly provided herein to be conditions to the Merger and shall not survive
the Merger, provided, however, that the agreements contained in Article 4 and
in Sections 7.10, 7.11, 7.12, and 7.13 and this Article 10 and the agreements
delivered pursuant to this Agreement shall survive the Merger.
10.2. Notices. Any notice required to be given hereunder shall be sufficient
if in writing, and sent by facsimile transmission and by courier service (with
proof of service), hand delivery or certified or registered mail (return
receipt requested and first-class postage prepaid), addressed as follows:
If to HSI: If to Parent or Merger Sub:
Philip E. Beekman D. Dwayne Hoven
President, Chairman of the Board and President and Chief Executive
Chief Executive Officer Officer
Hook-SupeRx, Inc. Revco D.S., Inc.
175 Tri-County Parkway 1925 Enterprise Parkway
Cincinnati, OH 45246-3298 Twinsburg, OH 44017
Facsimile: (513) 782-3576 Facsimile: (216) 487-1679
With copies to: With copies to:
James S. Johns, Esq. Jack A. Staph, Esq.
Hook-SupeRx, Inc. Senior Vice President, Secretary and
175 Tri-County Parkway General Counsel
Cincinnati, OH 45246-3290 Revco D.S., Inc.
Facsimile: (513) 782-3062 1925 Enterprise Parkway
Twinsburg, OH 44017
Facsimile: (216) 487-1679
Jeffrey Bagner, Esq.
Fried, Frank, Harris, Shriver &
Jacobson Michael K. L. Wager, Esq.
One New York Plaza Benesch, Friedlander, Coplan &
New York, NY 10004 Aronoff
Facsimile: (212) 747-1526 88 East Broad Street
Columbus, OH 43215-3506
Facsimile: (614) 223-9330
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
telecommunicated, personally delivered or mailed.
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10.3. Assignment; Binding Effect; Benefit. Neither this Agreement nor any of
the rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. Subject to the preceding sentence, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns. Notwithstanding anything
contained in this Agreement to the contrary, except for the provisions of
Article 4 and Sections 7.10, 7.11, and 7.13 (collectively, the "Third Party
Provisions"), nothing in this Agreement, expressed or implied, is intended to
confer on any person other than the parties hereto or their respective heirs,
successors, executors, administrators and assigns any rights, remedies,
obligations or liabilities under or by reason of this Agreement. The Third
Party Provisions may be enforced on behalf of the beneficiaries thereof by the
directors of HSI prior to the Effective Time. Parent shall pay all expenses,
including attorneys' fees, that may be incurred by any of such directors in
enforcing the Third Party Provisions.
10.4. Entire Agreement. This Agreement, the Exhibits, the HSI Disclosure
Letter, the Parent Disclosure Letter, the Confidentiality Agreement between HSI
and Parent and any documents delivered by the parties in connection herewith
constitute the entire agreement among the parties with respect to the subject
matter hereof and supersede all prior agreements and understandings (oral and
written) among the parties with respect thereto. No addition to or modification
of any provision of this Agreement shall be binding upon any party hereto
unless made in writing and signed by all parties hereto. During the term of
this Agreement, neither party hereto shall terminate the foregoing
Confidentiality Agreement.
10.5. Amendment. This Agreement may be amended by the parties hereto, by
action taken by their respective Boards of Directors, at any time before or
after approval of matters presented in connection with the Merger by the
stockholders of HSI, but after any such stockholder approval, no amendment
shall be made which by law requires the further approval of stockholders
without obtaining such further approval. This Agreement may not be amended
except by an instrument in writing signed by or on behalf of each of the
parties hereto.
10.6. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware without regard to its rules
of conflict of laws. Each of HSI and Parent hereby irrevocably and
unconditionally consents to submit to the exclusive jurisdiction of the courts
of the State of Delaware and of the United States of America located in the
State of Delaware (the "Delaware Courts") for any litigation arising out of or
relating to this Agreement and the transactions contemplated hereby (and agrees
not to commence any litigation relating thereto except in such courts), waives
any objection to the laying of venue of any such litigation in the Delaware
Courts and agrees not to plead or claim that such litigation brought in any
Delaware Court has been brought in an inconvenient forum.
10.7. Counterparts. This Agreement may be executed by the parties hereto in
separate counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute one and the same
instrument. Each counterpart may consist of a number of copies of this
Agreement, each of which may be signed by less than all of the parties hereto,
but together all such copies are signed by all of the parties hereto.
10.8. Headings. Headings of the Articles and Sections of this Agreement are
for the convenience of the parties only, and shall be given no substantive or
interpretive effect whatsoever.
10.9. Interpretation. In this Agreement, unless the context otherwise
requires, words describing the singular number shall include the plural and
vice versa, and words denoting any gender shall include all genders and words
denoting natural persons shall include corporations and partnerships and vice
versa.
10.10. Waivers. Except as provided in this Agreement, no action taken
pursuant to this Agreement, including, without limitation, any investigation by
or on behalf of any party, shall be deemed to constitute a waiver by the party
taking such action of compliance with any representations, warranties,
covenants or agreements contained in this Agreement. The waiver by any party
hereto of a
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breach of any provision hereunder shall not operate or be construed as a waiver
of any prior or subsequent breach of the same or any other provision hereunder.
10.11. Incorporation of Exhibits. The HSI Disclosure Letter, the Parent
Disclosure Letter and all Exhibits attached hereto and referred to herein are
hereby incorporated herein and made a part hereof for all purposes as if fully
set forth herein.
10.12. Severability. Any term or provision of this Agreement which is invalid
or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or otherwise affecting the validity or enforceability of any of the
terms or provisions of this Agreement in any other jurisdiction. If any
provision of this Agreement is so broad as to be unenforceable, the provision
shall be interpreted to be only so broad as is enforceable.
10.13. Enforcement of Agreement. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with its specific terms or was otherwise
breached. It is accordingly agreed 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 hereof in any Delaware Court, this being
in addition to any other remedy to which they may be entitled at law or in
equity.
10.14. Subsidiaries. As used in this Agreement, the word "Subsidiary" when
used with respect to any party means any corporation or other organization,
whether incorporated or unincorporated, of which such party directly or
indirectly owns or controls at least a majority of the securities or other
interests having by their terms ordinary voting power to elect a majority of
the board of directors or others performing similar functions with respect to
such corporation or other organization, or any organization of which such party
is a general partner. When a reference is made in this Agreement to Significant
Subsidiaries, the words "Significant Subsidiaries" shall refer to Subsidiaries
(as defined above) which constitute "significant subsidiaries" under Rule 405
promulgated by the SEC under the Securities Act.
10.15 Performance by Merger Sub. Parent hereby agrees to cause Merger Sub to
comply with its obligations hereunder and to cause Merger Sub to consummate the
Merger as contemplated herein.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
A-24
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement and caused the
same to be duly delivered on their behalf as of the day and year first written
above.
REVCO D.S., INC.
By: /s/ D. Dwayne Hoven
----------------------------------
D. Dwayne Hoven
President and Chief Executive
Officer
HSX ACQUISITION CORP.
By: /s/ D. Dwayne Hoven
----------------------------------
D. Dwayne Hoven
President
HOOK-SUPERX, INC.
By: /s/ Philip E. Beekman
----------------------------------
Philip E. Beekman
President and Chief Executive
Officer
A-25
<PAGE>
ANNEX B
SECTION 262 OF THE
DELAWARE GENERAL CORPORATION LAW
262 APPRAISAL RIGHTS.--(a) Any stockholder of a corporation of this State who
holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation,
who has otherwise complied with subsection (d) of this section and who has
neither voted in favor of the merger or consolidation nor consented thereto in
writing pursuant to (S) 228 of this title shall be entitled to an appraisal by
the Court of Chancery of the fair value of his shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation.
(b) Appraisal rights shall be available for the shares of any class or series
of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to (S) 251, 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock which, at the
record date fixed to determine the stockholders entitled to receive notice
of and to vote at the meeting of stockholders to act upon the agreement of
merger or consolidation, were either (i) listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or (ii) held of record by more than 2,000 stockholders; and
further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger
did not require for its approval the vote of the stockholders of the
surviving corporation as provided in subsection (f) of (S) 251 of this
title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to (S)(S)
251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation;
b. Shares of stock of any other corporation which at the effective
date of the merger or consolidation will be either listed on a national
securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of
Securities Dealers, Inc. or held of record by more than 2,000
stockholders;
c. Cash in lieu of fractional shares of the corporations described in
the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock and cash in lieu of
fractional shares described in the foregoing subparagraphs a., b. and
c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under (S) 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent
B-1
<PAGE>
corporation or the sale of all or substantially all of the assets of the
corporation. If the certificate of incorporation contains such a provision, the
procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are
available pursuant to subsections (b) or (c) hereof that appraisal rights
are available for any or all of the shares of the constituent corporations,
and shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of his shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation,
a written demand for appraisal of his shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to (S) 228 or
253 of this title, the surviving or resulting corporation, either before
the effective date of the merger or consolidation or within 10 days
thereafter, shall notify each of the stockholders entitled to appraisal
rights of the effective date of the merger or consolidation and that
appraisal rights are available for any or all of the shares of the
constituent corporation, and shall include in such notice a copy of this
section. The notice shall be sent by certified or registered mail, return
receipt requested, addressed to the stockholder at his address as it
appears on the records of the corporation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of the
notice, demand in writing from the surviving or resulting corporation the
appraisal of his shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of his shares.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw his demand for
appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and (d)
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been
received and the aggregate number of holders of such shares. Such written
statement shall be mailed to the stockholder within 10 days after his written
request for such a statement is received by the surviving or resulting
corporation within 10 days after expiration of the period for delivery of
demands for appraisal under subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and
B-2
<PAGE>
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The
forms of the notices by mail and by publication shall be approved by the Court,
and the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as
to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger
or consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court may,
in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on the
list filed by the surviving or resulting corporation pursuant to subsection (f)
of this section and who has submitted his certificates of stock to the Register
in Chancery, if such is required, may participate fully in all proceedings
until it is finally determined that he is not entitled to appraisal rights
under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as the
Court may direct. Payment shall be so made to each such stockholder, in the
case of holders of uncertificated stock forthwith, and the case of holders of
shares represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed upon
the parties as the Court deems equitable in the circumstances. Upon application
of a stockholder, the Court may order all or a portion of the expenses incurred
by any stockholder in connection with the appraisal proceeding, including,
without limitation, reasonable attorney's fees and the fees and expenses of
experts, to be charged pro rata against the value of all the shares entitled to
an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall
deliver to the
B-3
<PAGE>
surviving or resulting corporation a written withdrawal of his demand for an
appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation. (Last amended by Ch. 61, L.
'93, eff. 7-1-93.)
B-4
<PAGE>
ANNEX C
VOTING AGREEMENT
VOTING AGREEMENT (this "Agreement"), dated as of March 31, 1994, by and among
Broad Street Investment Fund I, L.P., Stone Street Fund 1986, Bridge Street
Fund 1986, Goldman, Sachs & Co., The Goldman Sachs Group, L.P., and The Kroger
Co., (individually, a "Shareholder" and collectively, the "Shareholders"),
Revco D.S., Inc., a Delaware corporation ("RDS"), and HSX Acquisition Corp., a
Delaware corporation and wholly owned subsidiary of RDS ("Sub").
W I T N E S S E T H:
WHEREAS, the Shareholders own, of record and/or beneficially, an aggregate of
10,249,998 shares of Common Stock, par value $.01 per share (the "Common
Stock"), of Hook-SupeRx, Inc., a Delaware corporation (the "Company"), which
shares constitute approximately 49% of the currently issued and outstanding
shares of Common Stock (all such shares together with any shares of Common
Stock acquired by the Shareholders after the date hereof and prior to the
termination hereof, being referred to herein as the "Shares"); and
WHEREAS, concurrently herewith, RDS, Sub and the Company are entering into an
Agreement and Plan of Merger, dated as of the date hereof (the "Merger
Agreement"), pursuant to which, among other things, Sub will merge with and
into the Company (the "Merger"), and the holders of all of the issued and
outstanding shares of Common Stock will receive for $13.75 per share (the
"Merger Price") in cash; and
WHEREAS, the Shareholders desire to vote in favor of the Merger; and
WHEREAS, RDS and Sub are entering into the Merger Agreement in reliance on
the Shareholders' covenants hereunder;
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
covenants and agreements herein contained and other good and valuable
consideration, the parties hereto hereby agree as follows:
1. AGREEMENT TO VOTE.
1.1 Voting. The Shareholders hereby agree, during the time this Agreement is
in effect, at any meeting of the shareholders of the Company, however called,
and in any action by written consent of the shareholders of the Company, to (a)
vote all of their Shares in favor of the Merger; (b) vote such Shares against
any action or agreement that would result in a breach in any material respect
of any covenant, representation or warranty or any other obligation of the
Company under the Merger Agreement; and (c) vote such Shares against any action
or agreement that would impede, interfere with or attempt to discourage the
Merger, including, but not limited to: (i) any extraordinary corporate
transaction (other than the Merger), such as a merger, consolidation, business
combination, reorganization, recapitalization or liquidation involving the
Company or any of its subsidiaries; (ii) a sale or transfer of a material
amount of assets of the Company or any of its subsidiaries; (iii) any change in
the management or board of directors of the Company, except as otherwise agreed
to in writing by Sub; (iv) any material change in the present capitalization or
dividend policy of the Company; or (v) any other material change in the
Company's corporate structure or business; provided, however, that nothing
herein shall be construed to obligate any Shareholder to act in accordance with
the terms hereof in such person's capacity as a director or officer of the
Company.
C-1
<PAGE>
2. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS. Each Shareholder
represents and warrants to Sub and RDS as follows:
2.1 Ownership of Shares. The Shares indicated on Exhibit I hereto next to the
name of such Shareholder are owned of record and/or beneficially by such
Shareholder, constitute all of the outstanding shares of Common Stock owned of
record and/or beneficially by such Shareholder. Such Shareholder does not have
any rights to acquire any additional shares of Common Stock.
2.2 Power; Binding Agreement. Such Shareholder has full legal right, power
and authority to enter into and perform all of such Shareholder's obligations
under this Agreement. The execution and delivery of this Agreement by such
Shareholder will not violate any other agreement to which such Shareholder is a
party including, without limitation, any voting agreement, shareholders'
agreement or voting trust. This Agreement has been duly executed and delivered
by such Shareholder. To the knowledge of such Shareholder, no consent or
approval of or filing with any governmental or other regulatory body is
required for the execution and performance in accordance with the terms of this
Agreement, except for filings required pursuant to the Exchange Act and the
rules and regulations promulgated thereunder.
2.3 Shares. On the date hereof each Shareholder is, and on the date of the
Closing hereunder each Shareholder will be, the lawful owner of the Shares
indicated next to such Shareholder's name on Exhibit I hereto, and there are no
restrictions of any kind upon the ability of such Shareholder to vote such
Shares on the date hereof and there will be no such restrictions to vote such
Shares during the term of this Agreement.
3. REPRESENTATIONS AND WARRANTIES OF RDS AND SUB. Each of RDS and Sub jointly
and severally represent and warrant to the Shareholders as follows: (a) that
each of RDS and Sub has all requisite corporate power and authority to enter
into this Agreement and to consummate the transactions contemplated hereby; (b)
the execution, delivery and performance of this Agreement by each of RDS and
Sub have been duly authorized and approved by all required corporate action on
the part of each of Sub and RDS; (c) this Agreement has been duly executed and
delivered by each of RDS and Sub and is a legal, valid and binding obligation
of each of RDS and Sub, enforceable against each in accordance with its terms,
subject to bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and similar laws, now or hereafter in effect, affecting creditors'
rights and remedies generally and to general principles of equity (regardless
of whether enforcement is sought in a proceeding at law or in equity).
4. TERMINATION OF AGENT. The Agreement shall expire upon the earliest to
occur of (x) the Effective Time (as defined in the Merger Agreement), and (y)
September 30, 1994.
5. CERTAIN COVENANTS OF THE SHAREHOLDERS. Except in accordance with the
provisions of this Agreement, each Shareholder, while this Agreement is in
effect, shall not:
(a) sell, transfer, pledge, encumber, assign or otherwise dispose of, or
enter into any contract, option or other arrangement or understanding with
respect to the sale, transfer, pledge, encumbrance, assignment or other
disposition of, any Shares;
(b) acquire any additional shares of Common Stock without the prior
consent of Sub;
(c) grant any proxies, deposit any Shares into a voting trust or enter
into a voting agreement with respect to any Shares; or
(d) solicit or enter into any negotiations with, or furnish or cause to
be furnished any information concerning the business or assets of the
Company or its subsidiaries to, any person or entity (other than RDS and
Sub) in connection with the acquisition of the business or substantially
all the assets (including by merger, sale of stock, consolidation, business
combination or otherwise) of the Company; provided, however, that the
foregoing shall not restrict any Shareholder or any
C-2
<PAGE>
officer, director or partner of such Shareholder or its affiliates, from
otherwise exercising the fiduciary duties owed by such person to the
Company by virtue of such person's position as a director or officer of the
Company; provided further, however, that each Shareholder will promptly
communicate to RDS any solicitation or inquiry received by such
Shareholder; and, provided further that the foregoing shall not prohibit
Goldman, Sachs & Co. from taking any action solely in its capacity as
financial advisor to the Company.
6. EXPENSES. Each party hereto will pay all of its own expenses in connection
with the transactions contemplated by this Agreement, including, without
limitation, the fees and expenses of its counsel and other advisors.
7. CONFIDENTIALITY. The Shareholders recognize 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, each Shareholder shall not
disclose or discuss such matters with anyone (other than such Shareholder's
counsel and advisors, if any) not a party to this Agreement, without the prior
written consent of Sub, except for filings required pursuant to the Exchange
Act and the rules and regulations thereunder or disclosures such Shareholder's
counsel advises are necessary in order to fulfill such Shareholder's
obligations imposed by law, in which event such Shareholder shall give notice
of such disclosure to Sub as promptly as practicable so as to enable RDS to
seek a protective order from a court of competent jurisdiction with respect
thereto.
8. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations,
warranties, covenants and agreements made by the Shareholders, RDS or Sub in
this Agreement shall survive each Closing hereunder and any investigation at
any time made by or on behalf of any party.
9. AMENDMENT; ASSIGNS. This Agreement may not be modified, amended, altered
or supplemented except by an agreement in writing executed by all of the
parties hereto. This Agreement shall be binding upon and inure to the benefit
of the parties hereto and their respective successors and assigns, but none of
the parties hereto may assign any of such party's rights, interests or
obligations under this Agreement without the prior written consent of the other
parties hereto, except that Sub may assign all of its rights and obligations
under this Agreement to any subsidiary of Sub or RDS without the consent of the
Shareholders, but no such transfer shall relieve Sub of its obligations
hereunder if such subsidiary does not perform such obligations.
10. 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 given if so given) if delivered in person, by cable, telegram, telex,
or telecopy, or sent by registered or certified mail (postage prepaid, return
receipt requested), to the respective parties as follows:
If to RDS or Sub:
REVCO D.S., INC.
1925 Enterprise Parkway
Twinsburg, Ohio 44087
Attention: Jack A. Staph
With copies to:
BENESCH FRIEDLANDER COPLAN & ARONOFF
88 East Broad Street
Columbus, Ohio 43215-3506
Attention: Michael K.L. Wager, Esq.
C-3
<PAGE>
WEIL, GOTSHAL & MANGES
767 Fifth Avenue
New York, New York 10153
Attention: Akiko Mikumo, Esq.
If to Broad Street Investment Fund I, L.P.,
Stone Street Fund 1986,
Bridge Street Fund 1986,
Goldman, Sachs & Co.
The Goldman Sachs Group, L.P.:
GOLDMAN, SACHS & CO.
85 Broad Street
New York, New York 10004
Attention: Richard A. Friedman
With a copy to:
SULLIVAN & CROMWELL
125 Broad Street
New York, New York 10004
Attention: James C. Morphy
If to The Kroger Co.:
The Kroger Co.
1014 Vine Street
Cincinnati, Ohio 45202
Attention: Paul W. Heldman, Esq.
or to such other address as any party may designate in writing in accordance
herewith, except that notices of changes of address shall only be effective
upon receipt.
11. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed to be an original but all of which together shall
constitute one and the same document.
12. GOVERNING LAW. THIS AGREEMENT, AND ALL MATTERS RELATING HERETO, SHALL BE
GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE
OF DELAWARE WITHOUT REGARD TO ANY PRINCIPLES OF CHOICE OF LAWS OR CONFLICTS OF
LAW.
13. SEVERABILITY. Any term or provision of this Agreement which is invalid or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in another jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, such provision shall be
interpreted to be only so broad as is enforceable.
14. FURTHER ASSURANCES. Each party hereto shall execute and deliver such
additional documents as may be necessary or desirable to consummate the
transactions contemplated by this Agreement.
15. THIRD PARTY BENEFICIARIES. Nothing in this Agreement, expressed or
implied, shall be construed to give any person other than the parties hereto
any legal or equitable right, remedy or claim under or by reason of this
Agreement or any provision contained herein.
16. ENTIRE AGREEMENT. This Agreement, together with the documents expressly
referred to herein, constitutes the entire agreement among the parties hereto
with respect to the subject matter
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<PAGE>
contained herein and therein and supersedes all prior agreements and
understandings, express or implied, between the parties with respect to such
subject matter.
17. INJUNCTIVE RELIEF. The parties agree that in the event of a breach of any
provision of this Agreement, the aggrieved party may be without an adequate
remedy at law. The parties therefore agree that in the event of a breach of any
provision of this Agreement, the aggrieved party may elect to institute and
prosecute proceedings in any court of competent jurisdiction to enforce
specific performance or to enjoin the continuing breach of such provision, as
well as to obtain damages for breach of this Agreement. By seeking or obtaining
any such relief, the aggrieved party will not be precluded from seeking or
obtaining any other relief to which it may be entitled.
IN WITNESS WHEREOF, each of the parties hereto have caused this Agreement to
be duly executed and delivered as of the day and year first above written.
Revco D.S., Inc.
By: /s/ D. Dwayne Hoven
---------------------------------
Name:D. Dwayne Hoven
Title: President and Chief
Executive Officer
HSX Acquisition Corp.
By: /s/ D. Dwayne Hoven
---------------------------------
Name:D. Dwayne Hoven
Title:President
Broad Street Investment Fund I, L.P.
By:Goldman, Sachs & Co.
General Partner
By: /s/ Goldman Sachs & Co.
---------------------------------
Name:Joseph H. Gleberman
Title:Partner
Stone Street Fund 1986
By:Stone Street Advisors Corp.
General Partner
By: /s/ Sanjeev Mehra
---------------------------------
Name:Sanjeev Mehra
Title:Vice President
C-5
<PAGE>
BRIDGE STREET FUND 1986
By:Stone Street Advisors Corp.
Managing General Partner
By: /s/ Sanjeev Mehra
----------------------------------
Name:Sanjeev Mehra
Title:Vice President
GOLDMAN, SACHS & CO.
By: /s/ Goldman, Sachs & Co.
----------------------------------
Name:Joseph H. Gleberman
Title:Partner
THE GOLDMAN SACHS GROUP, L.P.
By:Goldman, Sachs & Co.
General Partner
By: /s/ Goldman, Sachs & Co.
----------------------------------
Name:Joseph H. Gleberman
Title:Partner
THE KROGER CO.
By: /s/ William J. Sinkula
----------------------------------
Name:William J. Sinkula
Title:Executive Vice President
C-6
<PAGE>
EXHIBIT I TO ANNEX C
OWNERSHIP OF SHARES
<TABLE>
<CAPTION>
SHARES
---------
<S> <C>
Bridge Street Fund 1986............................................... 66,666
Stone Street Fund 1986................................................ 83,333
Goldman, Sachs & Co................................................... 365,724
The Goldman Sachs Group, L.P. ........................................ 500,000
Broad Street Investment Fund I, L.P................................... 4,109,275
The Kroger Co......................................................... 5,125,000
</TABLE>
C-7
<PAGE>
[LOGO OF GOLDMAN SACHS APPEARS HERE]
ANNEX D
[LOGO OF GOLDMAN SACHS APPEARS HERE]
June 17, 1994
Board of Directors Hook-SupeRx, Inc. 175 Tri-County Parkway Cincinnati, OH
45246
Gentlemen:
You have requested our opinion as to the fairness to the holders of the
outstanding shares of Common Stock, par value $0.01 per share (the "Shares"),
of Hook-SupeRx, Inc. (the "Company") of the $13.75 per Share in cash to be
received by such holders pursuant to the Agreement and Plan of Merger dated as
of March 31, 1994 among Revco D.S., Inc. ("Revco"), HSX Acquisition Corp., a
wholly-owned subsidiary of Revco ("Merger Sub"), and the Company (the "Merger
Agreement").
Goldman, Sachs & Co., as part of its investment banking business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes. We are
familiar with the Company, having performed various investment banking services
for the Company from time to time, including having acted as managing
underwriter of a $145,000,000 senior note offering and the Company's initial
public offering of Common Stock, both in June 1992, and having acted as the
Company's financial advisor in connection with, and having participated in
certain of the negotiations leading to, the Merger Agreement. On December 8,
1986, Goldman, Sachs & Co. and certain of its affiliates invested $13,875,000
in exchange for approximately 37.5% of the outstanding Shares in connection
with the Company's acquisition of the drug store operations of The Kroger Co.
Goldman, Sachs & Co. and certain of its affiliates currently hold 5,124,998
Shares or approximately 24.6% of the Shares currently outstanding and have
agreed pursuant to a Voting Agreement, dated as of March 31, 1994, by and among
Broad Street Investment Fund I, L.P., Stone Street Fund 1986, Bridge Street
Fund 1986, Goldman, Sachs & Co., The Goldman Sachs Group, L.P., The Kroger Co.,
Revco, and Merger Sub (the "Voting Agreement") to, among other things, vote
such Shares in favor of the proposed transaction. In addition, Howard A.
Silverstein, a general partner of Goldman, Sachs & Co., and Michael H. Coles, a
limited partner of Goldman, Sachs & Co., have served on the Board of Directors
of the Company since December of 1986.
D-1
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HOOK-SUPERX, INC.
JUNE 17, 1994
PAGE 2
In connection with this opinion, we have reviewed, among other things, the
Merger Agreement; the Voting Agreement; the Proxy Statement, dated the date
hereof, relating to the Special Meeting of Stockholders of the Company to be
held in connection with the Merger Agreement; Annual Reports to Stockholders
for the two fiscal years ended August 31, 1993; Annual Reports on Form 10-K of
the Company for the five fiscal years ended August 31, 1993; certain interim
reports to stockholders and Quarterly Reports on Form 10-Q; certain other
communications from the Company to its stockholders; and certain internal
financial analyses and forecasts for the Company prepared by its management. We
also have held discussions with members of the senior management of the Company
regarding its past and current business operations, financial condition and
future prospects. In addition, we have reviewed the reported price and trading
activity for the Shares, compared certain financial and stock market
information for the Company with similar information for certain other
companies the securities of which are publicly traded, reviewed the financial
terms of certain recent business combinations in the drug store industry
specifically and in other industries generally and performed such other studies
and analyses as we considered appropriate.
We have relied without independent verification upon the accuracy and
completeness of all of the financial and other information reviewed by us for
purposes of this opinion. In addition, we have not made an independent
evaluation or appraisal of the assets and liabilities of the Company or any of
its subsidiaries and we have not been furnished with any such evaluation or
appraisal.
Based upon and subject to the foregoing and based upon such other matters as we
consider relevant, it is our opinion that as of the date hereof the $13.75 per
Share in cash to be received by the holders of Shares pursuant to the Merger
Agreement is fair to such holders.
Very truly yours,
GOLDMAN, SACHS & CO.
D-2
<PAGE>
ANNEX E
(LETTERHEAD)
April 1, 1994
Board of Directors
Hook-SupeRx, Inc.
175 Tri-County Parkway
Cincinnati, OH 45246-3298
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to the holders (the "Stockholders") of the outstanding shares of Common
Stock, $.01 par value (the "Shares") of Hook-SupeRx, Inc. (the "Company"), of
the consideration to be received by the Stockholders in the merger of the
Company into a wholly-owned subsidiary of Revco D.S., Inc. ("Revco") and the
resultant conversion of each of the Shares, together with the conversion of all
associated preferred stock rights, other than dissenting shares, into the right
to receive cash from Revco in the amount of $13.75 in a merger transaction (the
"Merger Agreement").
In connection with rendering our opinion, we have reviewed and analyzed, among
other things, the following: (i) certain publicly available information
concerning the Company; (ii) certain internal information, primarily financial
in nature, including projections, prepared by the management of the Company,
furnished to us for purposes of our analysis; (iii) certain publicly available
information with respect to other companies that we believe to be comparable to
the Company and the trading markets for such other companies' securities; (iv)
the trading and ownership characteristics of the Shares; (v) certain publicly
available information with respect to transactions involving the sale of other
companies that we believe to be comparable to the Company; (vi) drafts and
final versions of the Agreement and Plan of Merger and the Voting Agreement by
any among Broad Street Investment Fund I, L.P., Stone Street Fund 1986, Bridge
Street Fund 1986, Goldman, Sachs & Co., The Goldman Sachs Group, L.P., and The
Kroger Co., Revco D.S., Inc. and HSX Acquisition Corp.; and (vii) certain other
analyses and studies that we deemed appropriate. We have also had discussions
with certain senior management of the Company, regarding the Company's past and
current business operation, financial condition and future prospects as well as
other matters we believed to be relevant to our inquiry.
In our review and analysis and in arriving at our opinion, we have assumed and
relied upon the accuracy and completeness of all the financial and other
information provided us or publicly available and have not attempted
independently to verify any of such information. We have also taken into
account our assessment of general economic, market and financial conditions, as
well as our experience in connection with similar transactions. Our opinion
necessarily is based upon conditions as they exist and that were evaluated on
the date hereof. With respect to financial projections, we have assumed that
they have been reasonably prepared on a basis reflecting the best currently
available estimates and judgments of the management of the Company, as to the
future financial performance of the Company. We express no view as to such
forecasts or the assumptions on which they are based. We have not conducted a
physical inspection of any of the properties or facilities of the Company
(other than of certain office facilities), nor have we made or obtained any
independent evaluations or
E-1
<PAGE>
[LOGO OF SALOMON BROTHERS INC. APPEARS HERE]
appraisals of any of such properties or facilities. Our opinion is limited to
the fairness, from a financial point of view, of the consideration to be
received by the Stockholders and we express no opinion with respect to the
underlying business decision of the Company to agree to the Merger Agreement.
Salomon Brothers Inc trades the outstanding debt and equity securities of the
Company for our own account and for the accounts of our customers and,
accordingly, may at any time hold a long or short position in such securities.
Salomon Brothers Inc has previously rendered certain investment banking and
financial advisory services to the Company (including having acted as co-
manager for the IPO in June 1992) for which we have received customary
compensation.
Based upon and subject to the foregoing, we are of the opinion that the
consideration to be received by the Stockholders pursuant to the Merger
Agreement is fair, from a financial point of view, to the Stockholders.
Very truly yours,
/s/SALOMON BROTHERS INC
SALOMON BROTHERS INC
E-2
<PAGE>
HOOK-SUPERX, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR
SPECIAL MEETING - JULY 8, 1994
The undersigned hereby (1) acknowledges receipt of the Notice of Special
Meeting of Stockholders of Hook-SupeRx, Inc., a Delaware corporation (the
"Company"), to be held at One New York Plaza, New York, NY 10004, 27th Floor,
on July 8, 1994 at 10:00 a.m., local time (the "Special Meeting") and the Proxy
Statement in connection therewith and (2) appoints Philip E. Beekman and
Timothy M. Mooney, and each of them, as proxies, each with full power to
appoint his substitute, and hereby authorizes them to represent and to vote, as
designated on the reverse side hereof, all the shares of common stock, par
value $.01 per share (the "Common Stock"), of the Company, held of record by
the undersigned as of the close of business on June 7, 1994, at the Special
Meeting, or at any postponement or adjournment thereof.
This proxy when properly executed will be voted in the manner directed herein
by the undersigned stockholder. If no direction is made, this proxy will be
voted FOR the approval and adoption of the Merger Agreement as listed on the
reverse side.
The undersigned directs that his or her proxy be voted as follows:
(TO BE SIGNED AND DATED ON OTHER SIDE)
<PAGE>
1. APPROVAL AND ADOPTION OF THE AGREEMENT AND PLAN OF MERGER, DATED AS OF MARCH
31, 1994 (THE "MERGER AGREEMENT"), BETWEEN THE COMPANY, REVCO D.S., INC., A
DELAWARE CORPORATION ("REVCO"), AND HSX ACQUISITION CORP., A DELAWARE CORPO-
RATION AND WHOLLY-OWNED SUBSIDIARY OF REVCO ("MERGER SUB"), AND THE TRANSAC-
TIONS CONTEMPLATED THEREBY. PURSUANT TO THE TERMS OF THE MERGER AGREEMENT,
AMONG OTHER THINGS, (i) MERGER SUB WILL BE MERGED WITH AND INTO THE COMPANY,
WITH THE COMPANY BEING THE SURVIVING CORPORATION (THE "MERGER"), AND (ii)
EACH OUTSTANDING SHARE OF THE COMMON STOCK OF THE COMPANY (OTHER THAN SHARES
OF COMMON STOCK HELD BY THE COMPANY AS TREASURY STOCK OR HELD BY STOCKHOLD-
ERS, IF ANY, WHO PROPERLY EXERCISED THEIR DISSENTERS' RIGHTS UNDER DELAWARE
LAW) WILL BE, TOGETHER WITH EACH ASSOCIATED PREFERRED STOCK PURCHASE RIGHT
ATTACHED THERETO, CANCELLED AND CONVERTED INTO THE RIGHT TO RECEIVE $13.75
IN CASH.
For [X] Against [X] Abstain [X]
2. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE SPECIAL MEETING.
For [X] Against [X] Abstain [X]
Sign, Date and Return the Proxy Card Promptly Using the Enclosed Envelope
- ------------------------------------------------------
Address Change Comments
- ------------------------------------------------------
If you have noted either an Address Change or made
Comments on the reverse side of this card, mark here.
- ------------------------------------------------------
Address Change [X]
and/or Comments Mark Here
- ------------------------------------------------------
Please sign exactly as your name appears hereon. When shares are held as joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporate name by President or other authorized officer. If a
partnership, please sign in partnership name by authorized person.
Dated 1994
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- --------------------------------------------------------------------------------
Signature
- --------------------------------------------------------------------------------
Signature, if held jointly
VOTES MUST BE INDICATED
(X) IN BLACK OR BLUE INK. [X]
