<PAGE> 1
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 1, 1996 Commission File Number 1-5025
REVCO D.S., INC.
(Exact name of registrant as specified in its charter)
DELAWARE 34-1527876
(State of incorporation) I.R.S. Employer Identification No.)
1925 ENTERPRISE PARKWAY
TWINSBURG, OHIO 44087
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 216/425-9811
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Common Stock, par value $.01 per share (New York Stock Exchange)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of August 19, 1996 was $1,246,995,169 (based on total shares
outstanding reduced by the number of shares held by directors and officers, at
the last sale price as reported on the New York Stock Exchange Composite Tape
on August 19, 1996).
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No ___
The following documents are incorporated herein by reference: the Registrant's
Annual Report to Stockholders for the fiscal year ended June 1, 1996 (into Part
II of this report); and the Registrant's Proxy Statement for the 1996 Annual
Meeting of Stockholders (into Part III of this report).
As of August 19, 1996, there were 68,561,049 shares of Common Stock outstanding.
<PAGE> 2
REVCO D.S., INC.
FORM 10-K ANNUAL REPORT
Fiscal Year Ended June 1, 1996
<TABLE>
<CAPTION>
PART I: Page:
<S> <C> <C>
Item 1 Business........................................................................................1
Item 2 Properties......................................................................................5
Item 3 Legal Proceedings...............................................................................7
Item 4 Submission of Matters to a Vote of Security Holders.............................................7
PART II:
Item 5 Market for Registrant's Common Equity and
Related Stockholder Matters....................................................................13
Item 6 Selected Financial Data........................................................................13
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................................13
Item 8 Financial Statements and Supplementary Data....................................................13
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.........................................................13
PART III:
Item 10 Directors and Executive Officers of the Registrant.............................................14
Item 11 Executive Compensation.........................................................................14
Item 12 Security Ownership of Certain Beneficial Owners and Management.................................14
Item 13 Certain Relationships and Related Transactions.................................................14
PART IV:
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K...............................14
</TABLE>
i
<PAGE> 3
PART I
Item 1. Business
--------
(a) General
-------
Revco D.S., Inc., a corporation organized under Delaware law ("Revco"
or the "Company"), operates the second largest, in store count, and
third largest, in sales volume, retail drugstore chain in the United
States. As of June 1, 1996, the Company operated 2,184 stores,
averaging approximately 9,000 square feet per store in size, in
fourteen contiguous Midwestern, Eastern and Southeastern states, and
employed over 32,000 employees. The Company's stores are
high-quality, health-oriented neighborhood pharmacies offering
pharmaceuticals and related merchandise. Revco competes primarily on
the basis of convenient store locations, competitive pricing, and an
orientation toward its pharmacy operations designed to provide a high
level of customer service and product information. The stores
typically feature prescription and over-the-counter ("OTC") drugs,
health and beauty aids, toiletries, vitamins, cosmetics and sundries,
and a broad line of consumer products.
The Company's principal executive offices are located at 1925
Enterprise Parkway, Twinsburg, Ohio 44087. The Company's operations
are highly centralized, with purchasing, pricing, advertising,
merchandising, accounting and supervisory activities directed from
the corporate headquarters. The Company purchases substantially all
of its merchandise either directly from manufacturers or from
wholesalers under various types of purchase arrangements.
The following is a breakdown by state of the locations of the 2,184
Company operated stores:
Georgia 181 North Carolina 301
Illinois 69 Ohio 374
Indiana 301 Pennsylvania 111
Kentucky 65 South Carolina 182
Maryland 49 Tennessee 121
New Jersey 24 Virginia 233
New York 115 West Virginia 58
1
<PAGE> 4
The following is the approximate percentage of sales by principal
category for the five most recent fiscal years:
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------
Category 1996 1995 1994 1993 1992
-------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OTC(1) 41.9 % 43.7% 46.7% 49.8% 53.0%
Prescription 58.1 56.3 53.3 50.2 47.0
============ ============ ============ ============ ============
Total retail sales 100.0% 100.0% 100.0% 100.0% 100.0%
============ ============ ============ ============ ============
<FN>
---------------
(1) Includes sales of non-prescription drugs, health and beauty
aids, toiletries, vitamins, cosmetics and sundries and
general merchandise.
</TABLE>
The following table summarizes the change in the drugstore chain from
June 2, 1991 to June 1, 1996, the end of the Company's most recently
completed fiscal year.
<TABLE>
<CAPTION>
Number of Stores Gross Retail Footage
---------------- --------------------
Beginning Period-
of End of End %
Period Period Opened Acquired Closed Sold Period (000's) Increase
------ ------ ------ -------- ------ ---- ------ ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fiscal 1992 1,125 16 32 27 3 1,143 9,682 3
Fiscal 1993 1,143 18 38 8 1 1,190 10,020 3
Fiscal 1994 1,190 42 43 23 4 1,248 10,545 5
Fiscal 1995 1,248 75 822* 27 -- 2,118 18,801 78
Fiscal 1996 2,118 85 16 35 -- 2,184 19,655 5
<FN>
* Includes 801 stores acquired as part of the Hook-SupeRx., Inc. acquisition.
(b) Acquisition of HSI by Revco
---------------------------
On July 15, 1994, the Company consummated its acquisition of
Hook-SupeRx, Inc. ("HSI"). The HSI acquisition is further described
in the Company's Annual Report to Stockholders for the fiscal year
ended June 1, 1996, including the financial statements and notes
included therein, a copy of which is included as Exhibit 13.1 to this
Report.
</TABLE>
2
<PAGE> 5
(c) Business Strategy
-----------------
Management is committed to enhancing its market share and
profitability by pursuing a number of strategies including: (i)
aggressive marketing efforts with respect to its managed care
business, (ii) improved market penetration through new store openings
and strategic acquisitions within its current markets, (iii)
continued utilization of its advanced management information systems
to modify the product mix, pricing and promotional activities, and
(iv) the expanded provision of patient counseling for prescription
drugs. The Company's business strategy was developed by analyzing the
industry and its trends, the Company's markets and their potential,
and the desires of the consumer determined through extensive consumer
research.
Pharmacy Sales/Managed Care
Based upon demographic changes (the "graying of America"), new drug
introductions, an increased trend toward preventive medication,
increased pressure to provide health benefits to all employees, and a
continuing inflation factor, prescription drug sales will provide the
most significant growth opportunities for the future. Within that
category, the most rapidly growing segment is managed care or third
party business. Managed care business involves the collection of the
majority of the cost of the drug from someone other than the customer
(i.e., an HMO, a PPO, an insurance company, employer, or state
agency). Revco has designed and implemented chain-wide an on-line
interactive pharmacy computer system called "Prescription Access
Link" ("PAL"). Revco's PAL system is one of the first systems of its
kind to be implemented in the retail drugstore industry. PAL was
designed to efficiently handle the dispensing of drugs and
appropriate billing to third-party payors. PAL checks for drug
interaction and drug overlap, maintains patient profile information
and is an on-line system so that every pharmacist within the chain,
regardless of location, can access any Revco patient's information
instantaneously. PAL enhances customer service and counseling of
patients by pharmacists through, among other features, a personalized
patient advisory leaflet describing each drug at the time it is
dispensed. Additional benefits of PAL include on-line adjudication of
managed care prescriptions, paperless claim filing for managed care
programs, and drug utilization review reports. The Company believes
PAL is a significant marketing tool.
OTC Sales
OTC encompasses all products sold within the store other than
prescription drugs. Revco competes through product breadth,
assortment, and convenience of store location. Using the information
made available by the Company's point-of-sale ("POS") scanning cash
registers, the Company is able to determine what products are being
sold through each of its 2,184 outlets. With that information,
adjustments can be made to product mix, product pricing, promotional
efforts, shelf allocation, purchasing, and distribution. The Company
is constantly developing new ways to utilize this POS information to
improve sales and profits.
3
<PAGE> 6
New Stores and Remodels
The Company intends to expand its existing store base through new
store development and strategic acquisitions. Acquisition candidates
would include either independent drugstore operators or stores
currently operated by other chains that have decided to exit a store
or market. These acquisitions could take the form of either the
purchase of the store operation to be converted to a Revco store or
the purchase of only the pharmacy inventory and prescription files to
be transferred into a nearby existing Revco location. In addition to
new stores and acquisitions, Revco refreshes its existing store base
through a remodeling program.
During fiscal 1996, the Company reinvested $110.7 million in its
operations, of which $61.0 million represented the Company's
investment in new stores and the upgrade through relocation or
expansion of its existing drugstore base. During fiscal 1996, the
Company opened 85 new stores and relocated 54 stores. The Company
spent $13.4 million to upgrade POS registers with improved
technology in existing core Revco drugstores. An additional $16.4
million was spent on the HSI store base during fiscal 1996 to
install anti-theft detection systems in all of the remaining HSI
stores and to continue remodeling the HSI stores to Revco's store
design and decor package. During fiscal 1996, the Company completed
the remodeling of 149 acquired HSI stores, bringing the total number
of former HSI stores remodeled since the HSI acquisition to 304
stores. Finally, the Company invested $16.0 million in its
distribution centers to expand and upgrade its facilities.
During fiscal 1995, the Company reinvested $138.4 million in its
operations, $38.4 million of which represented the capitalizable
costs of installing Revco's PAL, POS scanning and distribution
systems in the retained HSI operations. An additional $32.1 million
was spent on the HSI store base during fiscal 1995 to remodel the
HSI stores. During fiscal 1995, the Company completed the remodeling
of 155 HSI stores. In addition to the HSI stores, the Company
reinvested $67.9 million in its core Revco business, the majority of
which was used to expand and upgrade the Revco store base. In
addition to other store improvements, the Company opened 75 new
stores and relocated 37 stores.
During fiscal 1994, the Company reinvested $36.0 million in its
operations to, among other improvements, expand and upgrade the
Company's store base. During fiscal 1994, the Company opened or
acquired 85 stores and relocated 29 stores.
During fiscal 1997, the Company intends to open 60 new stores and
relocate 60 existing stores. More than 70% of these store projects
will be the Company's larger, freestanding units. The Company also
intends to continue its remodeling program in the HSI stores, with
150 store projects planned for fiscal 1997. The Company has no
material commitments in connection with these planned capital
expenditures. Funds for these
4
<PAGE> 7
expenditures are expected to be provided from the Company's revolving
credit facility and cash generated internally.
Merchandising/Pricing/Advertising
Revco has established a merchandise mix of products typically found
in a traditional retail drugstore. Three pricing strategies are used
for the Company's OTC products: everyday low pricing (the product is
offered at a consistent low price); value pricing (products are
offered at low everyday prices and occasionally on ad at lower
prices); and promotional pricing (products are promoted at
significant discounts from their regular prices). Products are
advertised in weekly circulars. Prescriptions are priced aggressively
with up to ten possible price zones within a market. Revco's
philosophy is that it will not lose a prescription customer based on
price. The pharmacy is advertised on television and radio with
particular emphasis on PAL and the PAL leaflet.
(d) Competition
-----------
The retail drugstore business is highly competitive. The Company
experiences active competition not only from independent and other
chain drugstores, but also from health maintenance organizations,
hospitals, mail order organizations, supermarkets, discount
drugstores and discount general merchandisers. Among major drug
chains, some competitors have greater financial resources than the
Company and have used such resources, in some instances, to improve
their competitive position through modernized store systems,
aggressive remodeling, new store openings and acquisitions. The deep
discount drug segment has experienced significant growth over the
past several years as drug chains, food, discount and specialty
retailers have entered the business. Major retail companies now
operate deep discount drugstores in the most competitive retailing
markets. So-called "combo" stores, which consist of grocery,
drugstore and several other operations under the same roof, have also
experienced significant growth over the past several years as
consumers have become more attracted to one-stop shopping. Retail
mass merchandisers with prescription departments have also grown in
popularity. The Company believes, based on publicly available
information, that, as of June 1, 1996, it ranked second on a
store-count basis and third on an annual sales-volume basis among
chain drugstores.
Item 2. Properties
----------
Company Leased
--------------
In general, most stores are located within shopping centers in leased
premises ranging in size from less than 2,000 to more than 25,000
gross square feet, with a typical drugstore location averaging
approximately 9,000 square feet. New store locations are larger than
the chain average, averaging approximately 10,400 square feet due to
new
5
<PAGE> 8
store development being concentrated in free-standing
prototypes in either 10,700 or 12,600 square foot configurations.
The equipment, furniture, fixtures and signs in the leased premises
are owned or leased by the Company and its subsidiaries and are
considered by the Company to be well-maintained and in good operating
condition. Virtually all inventory in the stores and distribution
centers is owned by the Company and is considered by the Company to
be in good condition.
The Company leases a 227,000 square foot distribution center located
in Pittsburgh, Pennsylvania, which the Company closed in June 1996.
The term of the lease expires on April 30, 1997.
Company Owned
-------------
The following table reflects, as of June 1, 1996, the location,
character and size of principal real properties owned by the Company
and its subsidiaries.
<TABLE>
<CAPTION>
Location Approximate Size and Description
-------- --------------------------------
Distribution Centers
--------------------
<S> <C>
Knoxville, Tennessee 273,000 sq. ft. distribution center situated on an 18.5 acre site
Aiken County, South Carolina 272,000 sq. ft. distribution center situated on a 30.0 acre site
Henderson, North Carolina 218,000 sq. ft. distribution center situated on a 9.9 acre site
Somerset, Pennsylvania 361,000 sq. ft. distribution center situated on a 30.5 acre site
Indianapolis, Indiana 912,600 sq. ft. distribution center situated on a 34.2 acre site
</TABLE>
<TABLE>
<CAPTION>
Executive Offices and Land.
--------------------------
<S> <C>
Twinsburg, Ohio 173,000 sq. ft. corporate headquarters building on a 13.1 acre site
Twinsburg, Ohio 20.0 acres of vacant land
Waxahachie, Texas 52.0 acres of vacant land
</TABLE>
STORES. The Company owns the real estate and facilities housing 30
of its retail stores.
Other
-----
As a result of the HSI acquisition, the Company also owns and leases
additional administrative office and distribution center properties
in Cincinnati, Ohio and Pawtucket, Rhode Island that are not
materially important physical properties of the Company and its
subsidiaries.
6
<PAGE> 9
Item 3. Legal Proceedings
-----------------
In addition to being involved from time to time in the assertion of
claims and in litigation incidental to the normal course of business,
two of the Company's wholly-owned subsidiaries are defendants in
lawsuits in connection with various claims of injuries resulting from
the consumption of L-Tryptophan which was claimed to have been sold
by the defendants. The lawsuits are further described on Exhibit
99.1.
The Company is also a defendant (i) in a lawsuit filed in the United
States District Court for the Western District of Oklahoma (Case
Number CIV-95-1321-T) by seven plaintiffs, acting individually and as
representatives of five deceased infants, and (ii) in a lawsuit filed
in the District Court of Oklahoma County, State of Oklahoma (Case
Number CJ-95-5737-62) by three plaintiffs, acting individually and as
representatives of a deceased infant, alleging personal injury or
death due to a product, E-Ferol, manufactured by Carter-Glogau
Laboratories, Inc., an inactive subsidiary of the Company now known
as Retrac, Inc., prior to December 1986. The plaintiffs are seeking
unspecified actual and exemplary damages. As of the date of this
report, the case was in the early stages of discovery.
On August 21, 1996, the parties to the previously reported purported
class action entitled SILVERT V. REVCO D.S., INC. ET AL., which
related to the proposed merger with Rite Aid Corporation, filed a
stipulation of dismissal with the Delaware Court of Chancery.
Management is of the opinion that although the ultimate resolution of
such litigation cannot be forecast with certainty, final disposition
of this and other litigation should not materially affect the
consolidated financial position of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable.
7
<PAGE> 10
Executive Officers of the Registrant
- ------------------------------------
(Included pursuant to Instruction 3 to paragraph (b) of Item 401 of Regulation
S-K). Listed below are the names and ages of all executive officers of the
Company as of August 23, 1996. Each executive officer will serve until his
successor is selected by the Board of Directors or until his earlier resignation
or removal. There are no family relationships among these officers.
<TABLE>
<CAPTION>
Name Position Age
- ---- -------- ---
<S> <C> <C>
D. Dwayne Hoven President and Chief Executive Officer, and a Director 54
Carl A. Bellini Executive Vice President and Chief Operating Officer, 62
and a Director
James P. Mastrian Executive Vice President, Marketing 53
Clarence D. Nichols Executive Vice President, Stores and Real Estate 49
Brian P. Carney Senior Vice President, Finance 35
Douglas W. Coffey Senior Vice President, Human Resources 55
Wilson A. Lester, Jr. Senior Vice President, Logistics 44
William D. Russell Senior Vice President, Real Estate 49
Bruce E. Schwallie Senior Vice President, Marketing 41
Jack A. Staph Senior Vice President, Secretary and General Counsel 51
George T. Watt Senior Vice President, Managed Care 52
Dante R. Barone Vice President, Pharmacy Marketing 52
Charles W. Breckenridge Vice President, Control Support Services 54
Richard M. Mergo Vice President, Store Operations 51
Carl E. Palmiter Vice President, Advertising 43
Robert T. Raaf Vice President, Taxes 50
Jay E. Ross Vice President, Merchandising 44
Robert A. Tamplin Vice President, Store Operations 49
Robert I. Thompson Vice President, Pharmacy Operations 43
Hanley H. Wheeler, III Vice President, Store Operations 37
Joseph E. Williams Vice President, Controller 41
Paul N. Harris Assistant Secretary 38
Gregory G. Wilson Assistant Controller 47
</TABLE>
D. Dwayne Hoven was elected Chief Executive Officer of the Company
effective August 1993 and was elected President of the Company in July 1992.
From July 1992 to August 1993, Mr. Hoven served as Chief Operating Officer of
the Company. From December 1991 to July 1992, Mr. Hoven served as Executive Vice
President, Marketing and Stores for the Company. From June 1992 to July 1992,
Mr. Hoven served as a member of the interim office of the President of the
Company. From July 1989 to December 1991, Mr. Hoven served as Executive Vice
President of Stores for the Company. From January 1988 to June 1989, Mr. Hoven
served as Senior Vice President of Distribution for the Company. Mr. Hoven is
also a director of OfficeMax, Inc. Mr. Hoven was selected, effective August 27,
1992, by the Board of Directors to become a member of the Board to fill a
vacancy.
8
<PAGE> 11
Carl A. Bellini was elected Executive Vice President and Chief
Operating Officer of the Company on October 13, 1993. From August 18, 1992 to
October 13, 1993, Mr. Bellini served as Executive Vice President of Marketing
and Stores. From approximately December 1991 to April 1992, Mr. Bellini served
as Acting Chief Operating Officer of Standard Brands Paint Co., which filed a
bankruptcy proceeding in March 1992 and emerged from bankruptcy during 1993.
From June 1989 until June 1991, Mr. Bellini served as President and Chief
Operating Officer of Erol's, Inc., a video and electronics chain based in
Washington, D.C. From December 1987 to June 1989, Mr. Bellini served as
Executive Vice President of Store Operations for the Company. Mr. Bellini was
selected, effective August 1, 1994, by the Board of Directors to become a member
of the Board to fill a vacancy.
James P. Mastrian was elected Executive Vice President, Marketing of
the Company in July 1994. From June 1992 to July 1994, Mr. Mastrian served as
Senior Vice President, Marketing. From September 1990 to June 1992, Mr.
Mastrian served as Vice President and General Manager, Marketing of the
Company. From March 1990 to September 1990, Mr. Mastrian served as Executive
Vice President of Milo Corp., a wholesaler and retailer of professional beauty
and barber products. From October 1989 to March 1990, Mr. Mastrian was
President and Chief Operating Officer of SuperX Drug Company of Arizona. From
July 1987 to October 1989, Mr. Mastrian was Senior Vice President,
Merchandising and Marketing for the Sherwin-Williams Company Paint Stores
Group. Before July 1987, Mr. Mastrian was employed by Gray Drug Fair, a
division of Sherwin-Williams Company, and served as President and General
Manager of Gray Drug Fair from prior to June 1986 to July 1987.
Clarence D. Nichols was elected Executive Vice President, Stores and
Real Estate, in July 1996. From June 1992 to July 1996, Mr. Nichols served as
Senior Vice President, Store Operations. From November 1987 to June 1992, Mr.
Nichols served as Regional Vice President for the Company's southern region.
From August 1986 to November 1987, Mr. Nichols served as a regional merchandise
manager for the Company.
Brian P. Carney was elected Senior Vice President, Finance in May 1996.
From June 1992 to May 1996, Mr. Carney served as Vice President and Controller
of the Company. From October 1989 to June 1992, Mr. Carney served as the
Company's director of general accounting. Prior to October 1989, Mr. Carney was
a manager with the public accounting firm of Arthur Andersen & Co. (now known as
Arthur Andersen LLP).
Douglas W. Coffey was elected Senior Vice President, Human Resources
of the Company in July 1993. For five years prior to July 1993, Mr. Coffey
served as Senior Vice President of Human Resources at Burdine's Department
Stores, a division of Federated Department Stores.
9
<PAGE> 12
Wilson A. Lester, Jr. was elected Senior Vice President, Logistics for
the Company in May 1996. From August 1995 to May 1996, Mr. Lester served as
Vice President, Distribution and Transportation. From December 1993 to August
1995, Mr. Lester served as Senior Vice President of Logistics of Fabri-Centers
of America, Inc. From June 1990 to December 1993, Mr. Lester served as Senior
Vice President of Distribution for Phar-Mor, Inc.
William D. Russell was elected Senior Vice President, Real Estate in
July 1996. From March 1996 to July 1996, Mr. Russell served as Senior Vice
President of Development at The Sembler Co., in St. Petersburg, Florida. From
prior to July 1991 to March 1996, Mr. Russell served as Vice President of Real
Estate for Montgomery Ward.
Bruce E. Schwallie was elected Senior Vice President, Marketing in May
1996. From March 1995 to May 1996, Mr. Schwallie served as Vice President,
Marketing. From February 1991 until March 1995, Mr. Schwallie served in various
capacities within the Company's marketing department, most recently as
divisional merchandise manager. From September 1990 until January 1991, Mr.
Schwallie was employed by RDS Acquisition Corp. in Phoenix, Arizona, where he
served as director of merchandising.
Jack A. Staph has been the Company's Senior Vice President, Secretary
and General Counsel since December 1986 and served as a member of the interim
office of the President of the Company from June 1992 to July 1992. Mr. Staph
had been continuously employed as a member of the Company's in-house legal staff
for more than ten years prior to June 1986.
George T. Watt was elected Senior Vice President, Managed Care in
May 1996. From August 1995 to May 1996, Mr. Watt served as Vice President,
Managed Care. Mr. Watt served as a Vice President of the Company from August
1994 until August 1995. From November 1986 until August 1994, Mr. Watt was
employed by Thrift Drug Corporation, where he served as Vice President of Sales
and Client Service for Thrift Drug's subsidiary, TDI Managed Care Services, Inc.
Dante R. Barone was elected Vice President, Pharmacy Marketing of the
Company in May 1989. From March 1988 to May 1989, Mr. Barone served as
divisional Vice President of Pharmacy Marketing for the Company. From prior to
June 1986 to March 1988, Mr. Barone was a senior buyer for Walgreen Drug Co., a
drugstore chain with retail store locations throughout the United States.
Charles W. Breckenridge was elected Vice President, Control Support
Services of the Company in June 1992. Mr. Breckenridge served as the Company's
director of internal audit from August 1989 to June 1992. From February 1986 to
August 1989, Mr. Breckenridge served as director of business investigation
services at the public accounting firm of Coopers & Lybrand.
10
<PAGE> 13
Richard M. Mergo was elected Vice President, Store Operations of the
Company in March 1995. Mr. Mergo served as a regional vice president for the
Company from 1986 to March 1995.
Carl E. Palmiter was elected Vice President, Advertising of the Company
in July 1996. From July 1994 to June 1996, Mr. Palmiter served as Director of
Advertising of the Company. From prior to 1991 to July 1994, Mr. Palmiter was
employed by Hook-SupeRx, Inc. ("HSI"), where he served as assistant vice
president of advertising at the time of the Company's acquisition of HSI.
Robert T. Raaf assumed duties as Vice President, Taxes of the Company
in July 1994. From July 1993 to July 1994, Mr. Raaf served as Vice President and
Treasurer. From September 1989 to July 1993, Mr. Raaf was Vice President, Tax of
the Company. For more than three years prior to September 1989, Mr. Raaf was a
tax partner with the public accounting firm of Arthur Andersen & Co. (now
known as Arthur Andersen LLP).
Jay E. Ross was elected Vice President, Merchandising of the Company in
March 1995. Mr. Ross has been continuously employed by the Company since 1969,
most recently as director of merchandising.
Robert A. Tamplin was elected Vice President, Store Operations of
the Company in March 1995. Mr. Tamplin has been continuously employed by the
Company for more than 25 years, most recently as a regional vice president.
Robert I. Thompson was elected Vice President, Professional Operations
of the Company in August 1995, and currently is responsible for the Company's
pharmacy operations under the title Vice President, Pharmacy Operations.
Mr. Thompson has been continuously employed by the Company since 1978, most
recently as regional director of pharmacy operations.
Hanley H. Wheeler, III was elected Vice President, Store Operations of
the Company in August 1995. Mr. Wheeler has been continuously employed by the
Company since 1981, most recently as regional director of operations.
Joseph E. Williams was elected Vice President, Controller of the
Company in July 1996. From October 1992 to June 1996, Mr. Williams served as
controller for The Limited Stores, Inc. From prior to 1991 to July 1992,
Mr. Williams served as Senior Vice President and Controller for Fabri-Centers
of America, Inc.
11
<PAGE> 14
Paul N. Harris was elected Assistant Secretary of the Company in July
1993. From prior to May 1989 to July 1993, Mr. Harris served as senior counsel
for the Company.
Gregory G. Wilson was elected Assistant Controller of the Company in
June 1992. From February 1988 to June 1992, Mr. Wilson served as director of
financial planning and analysis for the Company, and from prior to June 1986 to
February 1988, he served as director of investor relations for the Company.
12
<PAGE> 15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
---------------------------------------------------------------------
As of August 19, 1996, there were 6,514 record holders of the
Company's outstanding Common Stock. The other information required
by this item is set forth under the heading "Financial Highlights"
on page 1 of the Company's Annual Report to Stockholders for the
fiscal year ended June 1, 1996, which disclosures are incorporated
in this report by reference.
Item 6. Selected Financial Data
-----------------------
The information required by this item is set forth under the heading
"Selected Financial Data" on page 39 of the Company's Annual Report
to Stockholders for the fiscal year ended June 1, 1996, which
disclosures are incorporated in this report by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
----------------------------------------------------------------
Results of Operations
---------------------
The information required by this item is set forth under the heading
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 18 through 22 of the Company's
Annual Report to Stockholders for the fiscal year ended June 1,
1996, which disclosures are incorporated in this report by reference.
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
The information required by this item is set forth under the headings
"Consolidated Statements of Income", "Consolidated Balance Sheets",
"Consolidated Statements of Changes in Stockholders' Equity",
"Consolidated Statements of Cash Flows", "Notes to Consolidated
Financial Statements" and "Report of Independent Public Accountants"
on pages 23 through 38 of the Company's Annual Report to Stockholders
for the fiscal year ended June 1, 1996, which disclosures are
incorporated in this report by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
Not applicable.
13
<PAGE> 16
PART III
Item 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
The information as to executive officers is set forth in Part I
hereof under the caption "Executive Officers of the Registrant". The
information regarding directors is set forth under the caption "The
Board of Directors" on pages 1 through 7 of the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on
September 24, 1996, which disclosures are incorporated in this report
by reference.
Item 11. Executive Compensation
----------------------
The information required by this item is set forth on pages 11
through 20 of the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on September 24, 1996 under the caption
"Executive Compensation", which disclosures are incorporated in this
report by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
The information required by this item is set forth on pages 8 through
10 of the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on September 24, 1996 under the caption
"Security Ownership of Certain Persons", which disclosures are
incorporated in this report by reference.
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
The information required by this item is set forth on page 6 of the
Company's Proxy Statement for the Annual Meeting of Stockholders to
be held on September 24, 1996 under the caption "Certain
Relationships and Related Transactions", which disclosures are
incorporated in this report by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
---------------------------------------------------------------
(a) Documents filed as part of this report:
1. Financial Statements: The audited consolidated balance
sheets of the Registrant and subsidiaries as of June 1,
1996 and June 3, 1995, and the related consolidated
statements of income, changes in stockholders' equity and
cash flows of the Registrant and subsidiaries for the
three fiscal years ended June 1, 1996, are set forth on
pages 23 through 38 of the Registrant's Annual Report
14
<PAGE> 17
to Stockholders for the fiscal year ended June 1, 1996,
which statements are incorporated in this report by
reference.
2. Financial Statement Schedules: None.
3. Exhibits:
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
Number Exhibit Description Number
------ ------------------- ------
<S> <C> <C>
2.1 -Plan of Reorganization (incorporated by reference to Exhibit --
2.1 to the Company's Registration Statement on Form 10 dated
April 2, 1992)
2.2 -April 16, 1992 Modification to Plan of Reorganization --
(incorporated by reference to Exhibit 2.2 to the Company's
Registration Statement on Form 10, as amended, dated
May 19, 1992)
2.3 -Agreement and Plan of Merger between the Registrant, HSX --
Acquisition Corp. and HSI dated as of March 31, 1994
(incorporated by reference to Exhibit 2.1 to the Registrant's
Registration Statement on Form S-3, dated May 6, 1994
(Registration No. 33-78588))
3.1 -Amended and Restated Certificate of Incorporation --
(incorporated by reference to Exhibit 3.1 to the Company's
Form 10-K for the year ended May 30, 1992)
3.2 -Certificate of Amendment of Amended and Restated Certificate --
of Incorporation (incorporated by reference to Exhibit 3.2 to the
Company's Form 10-K for the year ended May 28, 1994)
3.3 -Amended and Restated By-Laws (incorporated by reference --
to Exhibit 3.2 to the Company's Form 10-K for the year ended
May 30, 1992)
4.1 -Stockholder's Agreement (incorporated by reference to Exhibit --
4.1 to the Company's Form 10-K for the year ended
May 30, 1992)
</TABLE>
15
<PAGE> 18
<TABLE>
<CAPTION>
<S> <C> <C>
4.2 -Specimen of Common Stock Certificate (incorporated by --
reference to Exhibit 4.6 to the Company's Form 10-K for
the year ended May 30, 1992)
4.3 -Registration Rights Agreement between the Company and --
Zell/Chilmark Fund, L.P. (incorporated by reference to Exhibit
4.8 to the Company's Form 10-K for the year ended May 30, 1992)
4.4 -Registration Rights Agreement between the Company and --
Magten Asset Management Corporation dated January 20, 1993
(incorporated by reference to Exhibit 4.4 to the Company's
Registration Statement on Form S-1 dated April 23,
1993 (Reg. No. 33-51930))
4.5 -Senior Note Indenture and Specimen of Senior Note --
(incorporated by reference to Exhibit 4.5 to the Company's
Registration Statement on Form S-1 dated April 23, 1993
(Reg. No. 33-51930))
4.6 -First Amendment to the Senior Note Indenture, dated as of April --
20, 1994, between the Company and First Fidelity Bank,
National Association (incorporated by reference to Exhibit 4.6
to the Company's Registration Statement on Form S-3 dated
May 6, 1994 (Commission File No. 33-78588))
4.7 -HSI Senior Note Indenture relating to its 10-1/8% Senior Notes --
due 2002 (incorporated by reference to Exhibit 4.3 to the Company and
HSI's Registration Statement on Form S-4 dated September 9, 1994
(Reg. No. 33-83806))
4.8 -Form of First Amendment to the HSI Senior Note Indenture --
(incorporated by reference to Exhibit 4.4 to the Company and
HSI's Registration Statement on Form S-4 dated October 7, 1994
(Reg. No. 33-83806))
10.1 -Forms of Employment Agreement between Revco D.S., Inc.
and certain executive officers.
10.2 -The 1992 Long-Term Incentive Plan of Revco D.S., Inc. --
(incorporated by reference to Exhibit 10.8 to the Company's
Form 10-K for the year ended May 30, 1992)
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
<S> <C> <C>
10.3 -Amendment No. 1 to the 1992 Long-Term Incentive Plan of --
Revco D.S., Inc. (incorporated by reference to Exhibit 4.5
to the Company's Registration Statement on Form S-8 dated
May 1, 1995 (Registration No. 33-91774))
10.4 -The 1992 Non-Employee Directors' Stock Option Plan of --
Revco D.S., Inc. (incorporated by reference to Exhibit 10.9
to the Company's Form 10-K for the year ended May 30, 1992)
10.5 -Amendment No. 1 to the 1992 Non-Employee Directors' Stock --
Option Plan of Revco D.S., Inc. (incorporated by reference to
Exhibit 4.7 to the Company's Registration Statement on Form S-8
dated May 1, 1995 (Registration No. 33-91774))
10.6 -Amendment No. 2 to the 1992 Non-Employee Directors' Stock --
Option Plan of Revco D.S., Inc. (incorporated by reference to
Exhibit 4.8 to the Company's Registration Statement on Form
S-8 dated May 1, 1995 (Registration No. 33-91774))
10.7 -Form of Split Dollar Agreement between the Company and
each of its executive officers
10.8 -Revco D.S., Inc. Supplemental Retirement and Survivor Benefit --
Plan (incorporated by reference to Exhibit 10.11 to the
Company's Registration Statement on Form S-1 dated
September 14, 1992 (Reg. No. 33-51930))
10.9 -Amended and Restated Credit Agreement (incorporated by --
reference to Exhibit 10.10 to the Company's Form 10-K for
the year ended June 3, 1995)
10.10 -Description of Modified Economic Value Added-Based
Incentive Plan
13.1 -1996 Annual Report to Stockholders
21.1 -Subsidiaries of Revco
23.1 -Consent of Arthur Andersen LLP, independent public
accountants
23.2 -Consent of Arthur Andersen LLP, independent public
accountants, with respect to Registration Statement
Nos. 33-54592, 33-67816 and 33-91774
</TABLE>
17
<PAGE> 20
27 -Financial Data Schedule
99.1 -Certain Pending Litigation (Part I)
(b) Reports on Form 8-K
-------------------
On April 26, 1996, the Registrant filed a Current Report on Form 8-K
with the Commission reporting, under item 5, Rite Aid Corporation's
withdrawal of its previously announced tender offer to purchase 50.1
percent of the Company's outstanding shares of Common Stock, and the
related termination of the Merger Agreement pursuant to which the
tender offer was made.
18
<PAGE> 21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
REVCO D.S., INC.
(Registrant)
Date: August 23, 1996 By: /s/ JACK A. STAPH
---------------------------
Jack A. Staph,
Senior Vice President,
Secretary and General Counsel
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ D. DWAYNE HOVEN President and Chief Executive Officer August 23, 1996
- ------------------------ and a Director
D. Dwayne Hoven
/s/ BRIAN P. CARNEY Senior Vice President, Finance August 23, 1996
- ------------------------
Brian P. Carney
/s/ JOSEPH WILLIAMS Vice President and Controller August 23, 1996
- ------------------------
Joseph Williams
/s/ CARL A. BELLINI Executive Vice President and Chief August 23, 1996
- ------------------------ Operating Officer and a Director
Carl A. Bellini
/s/ LIVIO M. BORGHESE Director August 23, 1996
- ------------------------
Livio M. Borghese
/s/ ROD F. DAMMEYER Director August 23, 1995
- ------------------------
Rod F. Dammeyer
/s/ TALTON R. EMBRY Co-Chairman of the Board August 23, 1996
- ------------------------ and a Director
Talton R. Embry
/s/ BEN EVANS Director August 23, 1996
- ------------------------
Ben Evans
/s/ JOHN V. GUTTAG Director August 23, 1996
- ------------------------
John V. Guttag
/s/ WALTER B. REINHOLD Director August 23, 1996
- ------------------------
Walter B. Reinhold
/s/ SHELI Z. ROSENBERG Director August 23, 1996
- ------------------------
Sheli Z. Rosenberg
/s/ DAVID M. SCHULTE Director August 23, 1996
- ------------------------
David M. Schulte
/s/ THOMAS O. THORSEN Director August 23, 1996
- ------------------------
Thomas O. Thorsen
/s/ SAMUEL ZELL Co-Chairman of the Board August 23, 1996
- ------------------------ and a Director
Samuel Zell
</TABLE>
<PAGE> 1
Exhibit 10.1
------------
The following are the forms of employment agreement between the
Company and each of its executive officers. The agreements are substantially
the same except for job descriptions and compensation levels, which vary for
each executive officer.
<PAGE> 2
(Executive Committee Members)
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT is entered into as of
the ____ day of ____, 199_, by and between REVCO D.S., INC., a Delaware
corporation (the "Company"), and _______________ ("Employee").
W I T N E S S E T H:
WHEREAS, the Company and Employee desire to enter into this Amended and
Restated Employment Agreement as hereinafter set forth;
NOW, THEREFORE, the Company and Employee agree as follows:
1. Employment; Contract Period.
----------------------------
(a) During the period specified in subparagraph 1(b), the
Company shall employ Employee, and Employee shall serve the
Company, as _________________, based on the terms and
subject to the conditions set forth herein.
(b) The term of Employee's employment hereunder shall continue
until terminated as provided herein (such period commencing
on the date hereof is hereafter referred to as the "Term").
2. Position; Duties; Responsibilities.
-----------------------------------
At all times during the Term, Employee shall:
(a) Hold the position and have the duties and responsibilities
of, as those duties and responsibilities may be defined and
delimited, from time to time, by the President and Chief
Executive Officer (the "President"). Employee's
responsibilities will include
-------------------------------------------------------.
(b) Adhere to the policies and directives promulgated, from time
to time, by the Board of Directors of the Company (the
"Board").
(c) Observe the Company policies applicable to executive
officers of the Company.
1
<PAGE> 3
(d) Devote his entire business time, energy, and talent to the
business, and to the furtherance of the purposes and
objectives, of the Company, and neither directly nor
indirectly act as an employee of or render any business,
commercial, or professional services to any other person,
firm or organization for compensation, without the prior
written approval of the President.
Nothing in this Agreement shall preclude Employee from devoting
reasonable periods of time to charitable and community activities or the
management of his investment assets, provided such activities do not interfere
with the performance by Employee of his duties hereunder and, provided further
that Employee shall not invest in any business (other than the Company) engaged
to a material extent in the retail drug business. Any investment in the Company
shall be made in accordance with the Company's Insider Trading Policy.
3. SALARY AND BONUS; OTHER BENEFITS. For services rendered by Employee on
behalf of the Company during the Term:
(a) The Company shall pay to Employee, in equal
installments, according to the Company's current
practice in effect from time to time during the Term,
a base salary at the initial rate of $____________.
This salary shall be subject to annual review by the
President and the Human Resources Committee of the
Board and may be increased to the extent, if any, the
President and the Human Resources Committee of the
Board may determine.
(b) Employee shall be eligible for participation in the
Company's Executive Incentive Compensation Program in
accordance with the provisions of that program.
(c) Employee shall not be entitled to receive any base
salary during any period in which he receives
disability benefits under the Company's Long-Term
Disability Income Protection Plan.
(d) Employee shall be eligible for participation in such
other benefit plans, including but not limited to the
Company's Retirement Income Plan and Trust, Split
Dollar Insurance and Supplemental Retirement Plans,
Short-Term and Long-Term Disability Income Protection
Plans, the 401(k) Savings Plan (unless participation
therein would adversely affect the tax deferred
status of account balances in such plan) and the 1992
Long-Term Incentive Plan, as the Company's
2
<PAGE> 4
Board of Directors may adopt from time to time for all
executive officers. Such participation shall be subject to
the terms and conditions set forth in the applicable plan
documents, except that preconditions shall be waived for the
Split Dollar Insurance Plan. Employee shall further be
entitled to take, during each one-year period commencing
with the anniversary date of his employment with the
Company, vacation time equal to the greater of (i) four
weeks, or (ii) the amount of vacation time to which Employee
is entitled under the Company's vacation policy.
(e) Employee shall be entitled to have a Company car, a
Company-paid annual physical examination and Company-paid
financial planning services for such time as those benefits
are provided to all senior officers.
4. MEDICAL AND LIFE INSURANCE BENEFITS. Employee shall be entitled to
participate in the Company's Group Term Life Insurance Plan and Comprehensive
Medical/Dental Plan for as long as each of these plans is maintained by the
Company for its executive officers generally. The Group Term Life Insurance Plan
will provide group term life insurance for Employee in an amount equal to 1.5
times the Employee's base compensation.
5. Termination.
------------
(a) Employee's employment hereunder will terminate without
further notice upon the death of Employee.
(b) The Company may terminate Employee's employment hereunder
effective immediately upon giving notice of such termination
if Employee commits an act of gross misconduct. For these
purposes, "gross misconduct" shall include, but is not
limited to, any of the following:
(i) Commission of an act of fraud, embezzlement, theft, or
other criminal act constituting a felony, or
(ii) breach or default by Employee of any of his agreements
or obligations under any provision of this Agreement,
including, without limitation, his agreements and
obligations under Subparagraphs 2(a) through 2(d) of
this Agreement, which is not cured in all substantial
respects within ten (10) days after the Company gives
notice thereof to Employee.
3
<PAGE> 5
(c) Employee's employment hereunder may be terminated upon
disability, if Employee is prevented from performing his
duties hereunder by reason of physical or mental incapacity
for a period of one hundred eighty (180) days.
(d) The Company may terminate Employee's employment hereunder
without cause at any time upon thirty (30) days written
notice.
(e) Employee may terminate his employment hereunder effective
immediately upon giving notice of such termination for "good
reason", as defined in subsection 5(g) below.
(f) Employee may terminate his employment hereunder without
cause or good reason at any time upon thirty (30) days
written notice.
(g) For purposes of this Agreement, "good reason" means the
occurrence of a material reduction in the aggregate direct
remuneration or any reduction in the position or office of
Employee, any material reduction in responsibilities or
duties provided for in accordance with Employee's employment
arrangement with the Company, any material adverse change or
reduction in the aggregate employee benefits, perquisites or
fringe benefits contemplated under such arrangement
(provided that any material reduction in such aggregate
employee benefits, perquisites or fringe benefits that is
required by law or applies generally to all employees of the
Company shall not constitute "good reason" as defined
hereunder), a change in Employee's reporting relationship,
or any relocation of the Employee's principal place of work
with the Company to a place more than fifty (50) miles from
the geographical center of Cleveland, Ohio. As used in this
Section 5(g), a "material reduction" in the aggregate direct
remuneration or in the aggregate employee benefits,
perquisites or fringe benefits shall be deemed to result
from any reduction or any series of reductions which, in the
aggregate, exceeds five percent (5%) of such aggregate
direct remuneration or such aggregate employee benefits,
perquisites or fringe benefits, as the case may be. Employee
shall give written notice to the Company on or before the
date of termination of employment for good reason specifying
in detail the reasons for such termination. If the Company
does not object to such notice by notifying Employee in
writing within thirty (30) days, it shall be deemed
accepted.
4
<PAGE> 6
6. Severance Compensation.
-----------------------
(a) If, at any time during the Term, Employee's employment is
terminated by the Company other than for gross misconduct or
is terminated by Employee for good reason, then, through the
expiration of two years after the effective date of
termination, the Company shall:
(i) continue to pay Employee's base salary in the amounts
and at the times provided in Subparagraph 3(a) hereof;
(ii) continue in effect the medical/dental coverage, long
and short-term disability protection, and any life
insurance protection, including the Split Dollar
Insurance Death benefits, being provided to Employee
immediately prior to his termination;
(iii) continue in effect the Company-paid annual physical
examination and financial planning services being
provided to Employee immediately prior to his
termination; and
(iv) permit Employee to purchase his Company car at the
car's wholesale value as reported in the current, as of
the purchase date, edition of the Automotive Market
Research (AMR) publication.
(b) If, at any time during the Applicable Period (as defined
below), Employee's employment is terminated by the Company
other than for gross misconduct or by Employee for good
reason, then the Company shall continue to pay Employee's
base salary, and shall continue in effect the benefits being
provided to Employee immediately prior to his termination,
in accordance with the provisions of Exhibit A to this
Employment Agreement, which is hereby incorporated into this
Employment Agreement by reference.
"Applicable Period" shall mean the period beginning on the
date that a "change in control", as defined in the Company's
1992 Long-Term Incentive Plan in effect as of the date of
this Agreement and set forth in Exhibit B to this Employment
Agreement, which is hereby incorporated into this Employment
Agreement by reference, occurs, and ending on the last day
for which severance pay would be payable under Paragraph I.A
of Exhibit A to this Employment Agreement (after taking into
account Employee's election thereunder) had
5
<PAGE> 7
Employee been terminated as of the "change in control" date.
After the Applicable Period, if Employee's employment is
terminated as provided in Subsection 6(a) above, Employee
shall be entitled to receive the severance compensation and
benefits described in such subsection.
(c) If Employee's employment hereunder is terminated other than
as specified in subparagraph 6(a) or 6(b), then, except as
otherwise specifically provided in this Agreement or in a
Company plan, no further compensation or benefits will be
provided to Employee by the Company under this Agreement
following the date of such termination.
(d) The Company shall reimburse Employee's reasonable attorneys'
fees incurred by Employee to enforce the provisions of this
Employment Agreement.
7. CONFIDENTIAL INFORMATION. Employee agrees that he will not, during
the Term or at any time thereafter, either directly or indirectly, disclose or
make known to any other person, firm, or corporation any confidential
information, trade secret or proprietary information of the Company that
Employee may acquire in the performance of Employee's duties hereunder. Upon the
termination of Employee's employment with the Company, Employee agrees to
deliver forthwith to the Company any and all literature, documents,
correspondence, and other materials and records furnished to or acquired by
Employee during the course of such employment.
8. NON-COMPETITION. During any period in which Employee is receiving a
base salary under this Agreement, whether during the Term or following
termination pursuant to subsection 6(a) or 6(b), Employee shall not act as a
proprietor, investor, director, officer, employee, substantial stockholder,
consultant, or partner in any business engaged to a material extent in the
retail drug business in direct competition with the Company in any market.
Following any termination under subsection 6(a) or 6(b), Employee may obtain a
release from the non-competition covenant contained in this Paragraph 8 by
delivering to the Company a written waiver of Employee's right to receive any
further compensation or benefits pursuant to subsection 6(a) or 6(b). If
Employee violates the non-competition covenant contained in this Paragraph 8,
the Company shall be relieved of any obligation to make payments or to provide
benefits to Employee pursuant to subsection 6(a) or 6(b) and Employee shall
return to the Company an amount equal to the value of any such payments or
benefits provided to Employee while he was in the violation of this
non-competition covenant.
6
<PAGE> 8
9. NOTICES. For purposes of this Agreement, all communications provided
for herein shall be in writing and shall be deemed to have been duly given when
delivered or mailed by United States registered or certified mail, return
receipt requested, postage prepaid, addressed to the Company, Attention: D.
Dwayne Hoven, President and Chief Executive Officer, and Jack A. Staph, Senior
Vice President, Secretary and General Counsel, at its principal executive office
and to Employee at his principal residence, or to such other address as either
party may have furnished to the other in writing and in accordance herewith;
except that notices of change of address shall be effective only upon receipt.
10. ASSIGNMENT; BINDING EFFECT. This Agreement shall be binding upon
and inure to the benefit of Employee, the Company, and the Company's successors
and assigns. No right, benefit or interest of Employee hereunder shall be
subject to assignment, anticipation, alienation, sale, encumbrance, charge,
pledge, hypothecation, or to execution, attachment, levy, or similar process;
except that Employee may assign any right, benefit, or interest hereunder if
such assignment is permitted under the terms of any plan or policy of insurance
or annuity contract governing such right, benefit, or interest.
11. INVALID PROVISIONS. Any provisions of this Agreement that is
prohibited or unenforceable shall be ineffective to the extent, but only to the
extent, of such prohibition or unenforceability without invalidating the
remaining portions hereof and such remaining portions of this Agreement shall
continue to be in full force and effect. In the event that any provision of this
Agreement shall be determined to be invalid or unenforceable, the parties will
negotiate in good faith to replace such provision with another provision that
will be valid or enforceable and that is as close as practicable to the
provisions held invalid or unenforceable.
12. ENTIRE AGREEMENT, MODIFICATION. This Agreement contains the entire
agreement between the parties with respect to the employment of Employee by the
Company and supersedes all prior and contemporaneous agreements,
representations, and understandings of the parties, whether verbal or written.
No modification, amendment, or waiver of any of the provisions of this Agreement
shall be effective unless in writing, specifically referring hereto, and signed
by both parties.
13. WAIVER OF BREACH. The failure at any time to enforce any of the
provisions of this Agreement or to require performance by the other party of any
of the provisions of this Agreement shall in no way be construed to be a waiver
of such provisions or to affect either the validity of this Agreement or any
part of this Agreement or the right of either party thereafter to enforce each
and every provision of this Agreement in accordance with the terms of this
Agreement.
7
<PAGE> 9
14. GOVERNING LAW. This Agreement has been made in, and shall be
governed and construed in accordance with the laws of, the State of Ohio.
IN WITNESS WHEREOF, the Company and Employee have executed this
Agreement on the day and year first above written.
REVCO D.S., INC.
By:_________________________________
D. Dwayne Hoven
President and Chief Executive Officer
EMPLOYEE
------------------------------------
8
<PAGE> 10
EXHIBIT A
---------
CHANGE IN CONTROL SEVERANCE ENHANCEMENTS
----------------------------------------
I. ENHANCED SEVERANCE AND BENEFITS
-------------------------------
A. At Employee's election, submitted in writing to the Company
within five (5) business days from the date of Employee's
termination of employment, EITHER:
(1) the term "two years" in Section 6(a) of the Employment
Agreement shall be deleted and replaced by the term "three
years"; OR
(2) the phrase "base salary" in Section 6(a)(i) of the
Employment Agreement shall be deleted and replaced by the
phrase "base salary plus annual bonus (assuming pro rata
payment of such amount with base salary)." For this purpose,
a year's "annual bonus" shall mean Employee's target bonus
under the Company's bonus plan for the full fiscal year
immediately preceding the change in control, and "base
salary" shall mean the highest base pay paid to Employee
during any one of the Company's three immediately preceding
fiscal years, provided that base pay for the then-current
fiscal year shall be calculated on an annualized basis, if
necessary.
B. The benefit continuation provided for under Sections 6(a)(ii) and
(iii) of the Employment Agreement (as extended under Paragraph
I.A(1) above) shall be provided to Employee under the Company's
benefit plans on terms at least as favorable to Employee as those
in effect immediately prior to the change in control; provided
that to the extent Employee receives comparable benefits from,
and at the expense of, a subsequent employer, such benefits from
the Company shall cease.
C. The severance pay payable under Section 6(a)(i) of the Employment
Agreement, as modified under Paragraph I.A above, shall be
aggregated without reduction and paid in a lump sum promptly
after termination of Employee's employment.
D. The requirements of Section 8 of the Employment Agreement shall
not apply to Employee.
II. BONUS FOR CURRENT FISCAL YEAR. The Company or any successor thereto
shall pay Employee a cash bonus for the fiscal year in which
termination occurs
<PAGE> 11
calculated based on the Company's financial results as of the date of
termination, and annualized to equal a bonus for a twelve (12) month
period.
III. SERP. Employee shall continue to be provided with coverage and benefits
under the Revco D.S., Inc. Supplemental Retirement and Survivor Benefit
Plan (the "SERP Plan") except that:
A. Employee shall be credited with additional service for vesting and
benefit accrual purposes in an amount equal to the period in respect
of which Employee's severance benefits under Section 6(a) of the
Employment Agreement are being paid, after taking into account the
enhancement under Paragraph I.A(1) above;
B. The provisions of Article V, Section 5 of the Supplemental Retirement
and Survivor Benefit Plan requiring divestiture if a participant
"engages in Competition" shall not be applicable to Employee; and
C. The Company shall contribute to a rabbi trust in amounts sufficient to
pay one hundred percent (100%) of Employee's SERP Plan benefits, as
enhanced pursuant to Paragraph III.A above, and shall at the Company's
sole cost and expense arrange for the SERP Plan to be administered by
an independent third party administrator.
Company and any successor thereto shall remain obligated to honor and pay all
benefits under the SERP Plan, as enhanced hereunder.
IV. CASH PAYMENT. The Company shall make a cash payment to Employee at the time
set forth below equal to the amount of excise taxes (i.e., the "excise tax
gross-up payment") which Employee would be required to pay pursuant to
Section 4999 of the Internal Revenue Code of 1986, as amended ("Code"), as
a result of any payments made by or on behalf of the Company or any
successor thereto resulting in an "excess parachute payment" within the
meaning of Section 280G(b) of the Code. In addition to the foregoing, the
cash payment due to Employee under this Paragraph IV shall be increased by
the aggregate of the amount of federal, state and local income and excise
taxes for which Employee will be liable on account of the cash payment to
be made under this Paragraph IV, such that Employee will receive the excise
tax gross-up payment net of all income and excise taxes imposed on him or
her on account of the receipt of the excise tax gross-up payment. The
computation of this payment shall be determined, at the expense of the
Company, by an independent accounting, actuarial or consulting firm
selected by the Company. Payment of the cash amount set forth above shall
be made at such time as the Company shall determine, in its sole
discretion, but in no event later than the date five (5) business days
before the due date, without regard to any extension, for filing Employee's
federal income tax return for the calendar year which includes the date as
<PAGE> 12
of which the aforementioned "excess parachute payments" are determined.
Notwithstanding the foregoing, there shall be no duplication of payments by
the Company under this Paragraph IV in respect of excise taxes under
Section 4999 of the Code to the extent the Company is making cash payments
in respect of such excise taxes for any other arrangement with Employee. In
the event that Employee is ultimately assessed with excise taxes under
Section 4999 of the Code as a result of payments made by the Company or any
successor thereto which exceed the amount of excise taxes used in computing
Employee's payment under this Paragraph IV, the Company or its successor
shall indemnify Employee for such additional excise taxes plus any
additional excise taxes, income taxes, interest and penalties resulting
from the additional excise taxes and the indemnity hereunder.
V. OTHER BENEFITS.
---------------
A. LONG TERM INCENTIVE PLAN. Subject to the requirements of applicable
law and any administrative procedures and policies deemed appropriate
by the Company, the Company shall make a cashless exercise procedure
available to Employee for the exercise of Employee's options under the
1992 Long Term Incentive Plan ("LTIP"), to the extent vested
(including options which became vested in connection with a "Change in
Control" under the terms of Employee's Award Agreements under the
LTIP), pursuant to which Employee will receive cash upon the exercise
of options without making any direct payment of cash or property to
the Company. The net amount due to Employee, after payment of the
exercise price and taxes in accordance with applicable provisions of
the LTIP, will be paid by the Company based on the greater of (i) the
fair market value of the Company's shares of common stock, and (ii)
the highest per share consideration to be paid for the Company's
shares in any Change in Control transaction. SEE Section V.C below for
special provisions applicable to individuals subject to Section 16 of
the Securities Exchange Act of 1934, as amended (the "Exchange Act").
B. EMPLOYEE STOCK PURCHASE PLAN. The then-current offering period under
the Employee Stock Purchase Plan ("ESPP") shall be shortened so as to
enable Employee to exercise options thereunder as of the date
occurring as soon as administratively practicable. The date used under
the preceding sentence shall be deemed to be the last day of the
current offering for all purposes of the ESPP. See Section V.C below
for special provisions applicable to individuals subject to Section 16
of the Exchange Act.
C. CASH PAYMENTS. If Employee is subject to Section 16 of the Exchange
Act, then to the extent Employee would be deprived of the benefits of
exercise under the LTIP and/or the ESPP, as described above, by reason
of such Section or the Rules issued thereunder, Employee shall be
provided with the alternative
<PAGE> 13
of receiving a cash payment approximating the loss of such benefits
under a cash compensation plan implemented by the Company.
D. OUTPLACEMENT SERVICES. In the event of Employee's termination of
employment other than for cause within the period ending one (1) year
from the change in control, the Company or any successor thereto will
provide Employee with outplacement services from a recognized
outplacement provider selected by the Company.
VI. ADDITIONAL CONSIDERATIONS. To the extent any provisions of this Exhibit A
modify the terms of any existing plan, policy or arrangement affecting the
compensation or benefits of Employee, such modification as set forth herein
shall be deemed amendments to such plan, policy or arrangement as to
Employee, and Employee consents to such amendments.
<PAGE> 14
EXHIBIT B
---------
(Excerpt from the LTIP, as adopted on July 27, 1992. All defined terms
used in the definition of "Change in Control", including those set
forth below, are also incorporated into this Agreement by reference.)
"CHANGE IN CONTROL" means a change in control of the Company of a nature
that would be required to be reported in response to Item 6(e) of Schedule 14A
of Regulation 14A promulgated under the Exchange Act (as in effect on the date
the Plan is adopted by the Board), whether or not the Company is then subject to
such reporting requirements; provided, that, without limitation, a Change in
Control shall be deemed to have occurred if:
a) any "person" (as defined in Sections 13(d) and 14(d) of the Exchange
Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company representing
twenty percent (20%) or more of the combined voting power of the Company's then
outstanding securities; provided, however, that: (i) the twenty percent (20%)
threshold of this clause (a) shall be increased to fifty percent (50%) in the
case of any such "person" who, on the date this Plan is adopted by the Board, is
such a "beneficial owner" directly or indirectly, of securities of the Company
representing five percent (5%) or more of the combined voting power of the
Company's then outstanding securities; and (ii) a Change in Control shall not be
deemed to occur under this clause (a) by reason of the acquisition of securities
by the Company or an employee benefit plan (or any trust funding such a plan)
maintained by the Company, or by reason of the new issuance of securities
directly by the Company;
(b) during any period of one (1) year there shall cease to be a majority of
the Board comprised of Continuing Directors; or
(c) (i) the stockholders of the Company approve a merger or consolidation
of the Company with any other corporation, other than a merger or consolidation
which would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) more than eighty percent (80%) of the combined voting power of the
voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or (ii) the stockholders of the
Company approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company of all or substantially all the
Company's assets.
"COMPANY" means Revco D.S., Inc., and, solely for purposes of Sections 2.4
and 19 of the Plan, any other corporation in an unbroken chain of corporations
ending with
<PAGE> 15
Revco D.S., Inc. that owns, directly or indirectly, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
of Revco D.S., Inc.
"CONTINUING DIRECTORS" means individuals who at the beginning of any
period (not including any period prior to the adoption of this Plan) of one (1)
year constitute the Board, any new director(s) duly selected as a nominee or
nominees pursuant to the Stockholder's Agreement dated as of June 1, 1992 by and
between the Company and Zell/Chilmark Fund L.P., as such agreement may be
amended, restated, supplemented or otherwise modified from time to time, and any
new director(s) whose election by the Board or nomination for election by the
Company's stockholders was approved by a vote of at least a majority of the
directors then still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so approved.
<PAGE> 16
(Officer Version)
-----------------
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT is entered into as of the ___ day of ______,
199_, by and between REVCO D.S., INC., a Delaware corporation (the "Company"),
and ____________________ ("Employee").
W I T N E S S E T H:
WHEREAS, the Company and Employee desire to enter into this Employment
Agreement as hereinafter set forth;
NOW, THEREFORE, the Company and Employee agree as follows:
1. Employment; Contract Period.
---------------------------
(a) During the period specified in subparagraph 1(b), the Company
shall employ Employee, and Employee shall serve the Company, as
________________, based on the terms and subject to the
conditions set forth herein.
(b) The term of Employee's employment hereunder shall continue until
terminated as provided herein (such period commencing on the date
hereof is hereafter referred to as the "Term").
2. Position; Duties; Responsibilities.
-----------------------------------
At all times during the Term, Employee shall:
(a) Hold the position and have the duties and responsibilities of
_______________, as those duties and responsibilities may be
defined and delimited, from time to time, by the _______________
(the "_____________"). Employee's responsibilities will include
-------------------------------------------------------.
(b) Adhere to the policies and directives promulgated, from time to
time, by the Board of Directors of the Company (the "Board").
(c) Observe the Company policies applicable to executive officers of
the Company.
1
<PAGE> 17
(d) Devote his entire business time, energy, and talent to the
business, and to the furtherance of the purposes and objectives,
of the Company, and neither directly nor indirectly act as an
employee of or render any business, commercial, or professional
services to any other person, firm or organization for
compensation, without the prior written approval of the
___________________.
Nothing in this Agreement shall preclude Employee from devoting reasonable
periods of time to charitable and community activities or the management of his
investment assets, provided such activities do not interfere with the
performance by Employee of his duties hereunder and, provided further that
Employee shall not invest in any business (other than the Company) engaged to a
material extent in the retail drug business. Any investment in the Company shall
be made in accordance with the Company's Insider Trading Policy.
3. SALARY AND BONUS; OTHER BENEFITS. For services rendered by Employee on
behalf of the Company during the Term:
(a) The Company shall pay to Employee, in equal installments,
according to the Company's current practice in effect from time
to time during the Term, a base salary at the initial rate of
$__________. This salary shall be subject to annual review by the
___________________ and may be increased to the extent, if any,
the ___________________ may determine, in his discretion, based
on Company compensation guidelines.
(b) Employee shall be eligible for participation in the Company's
Executive Incentive Compensation Program in accordance with the
provisions of that program.
(c) Employee shall not be entitled to receive any base salary during
any period in which he receives disability benefits under the
Company's Long-Term Disability Income Protection Plan.
(d) Employee shall be eligible for participation in such other
benefit plans, including but not limited to the Company's
Retirement Income Plan and Trust, Split Dollar Insurance and
Supplemental Retirement Plans, Short-Term and Long-Term
Disability Income Protection Plans, the 401(k) Savings Plan
(unless participation therein would adversely affect the tax
deferred status of account balances in such plan), Stock Purchase
Plan and the 1992 Long-Term Incentive Plan,
2
<PAGE> 18
as the Company's Board of Directors may adopt from time to time
for all executive officers. Such participation shall be subject
to the terms and conditions set forth in the applicable plan
documents, except that preconditions shall be waived for the
Split Dollar Insurance Plan. Employee shall further be entitled
to take, during each one-year period commencing with the
anniversary date of his employment with the Company, vacation
time equal to the greater of (i) four weeks, or (ii) the amount
of vacation time to which Employee is entitled under the
Company's vacation policy.
(e) Employee shall be entitled to have a Company car and a
Company-paid annual physical examination for such time as those
benefits are provided to all officers.
4. MEDICAL AND LIFE INSURANCE BENEFITS. Employee shall be entitled to
participate in the Company's Group Term Life Insurance Plan and Comprehensive
Medical/Dental Plan for as long as each of these plans is maintained by the
Company for its executive officers generally. The Group Term Life Insurance Plan
will provide group term life insurance for Employee in an amount equal to 1.5
times the Employee's base compensation.
5. Termination.
------------
(a) Employee's employment hereunder will terminate without further
notice upon the death of Employee.
(b) The Company may terminate Employee's employment hereunder
effective immediately upon giving notice of such termination if
Employee commits an act of gross misconduct. For these purposes,
"gross misconduct" shall include, but is not limited to, any of
the following:
(i) Commission of an act of fraud, embezzlement, theft, or other
criminal act constituting a felony, or
(ii) breach or default by Employee of any of his agreements or
obligations under any provision of this Agreement,
including, without limitation, his agreements and
obligations under Subparagraphs 2(a) through 2(d) of this
Agreement, which is not cured in all substantial respects
within ten (10) days after the Company gives notice thereof
to Employee.
3
<PAGE> 19
(c) Employee's employment hereunder may be terminated upon
disability, if Employee is prevented from performing his duties
hereunder by reason of physical or mental incapacity for a period
of one hundred eighty (180) days.
(d) The Company may terminate Employee's employment hereunder without
cause at any time upon thirty (30) days written notice.
(e) Employee may terminate his employment hereunder effective
immediately upon giving notice of such termination for "good
reason", as defined in subsection 5(g) below.
(f) Employee may terminate his employment hereunder without cause or
good reason at any time upon thirty (30) days written notice.
(g) For purposes of this Agreement, "good reason" means the
occurrence of a material reduction in the aggregate direct
remuneration or any reduction in the position or office of
Employee, any material reduction in responsibilities or duties
provided for in accordance with Employee's employment arrangement
with the Company, any material adverse change or reduction in the
aggregate employee benefits, perquisites or fringe benefits
contemplated under such arrangement (provided that any material
reduction in such aggregate employee benefits, perquisites or
fringe benefits that is required by law or applies generally to
all employees of the Company shall not constitute "good reason"
as defined hereunder), a change in Employee's reporting
relationship, or any relocation of the Employee's principal place
of work with the Company to a place more than fifty (50) miles
from the geographical center of Cleveland, Ohio. As used in this
Section 5(g), a "material reduction" in the aggregate direct
remuneration or in the aggregate employee benefits, perquisites
or fringe benefits shall be deemed to result from any reduction
or any series of reductions which, in the aggregate, exceeds five
percent (5%) of such aggregate direct remuneration or such
aggregate employee benefits, perquisites or fringe benefits, as
the case may be. Employee shall give written notice to the
Company on or before the date of termination of employment for
good reason specifying in detail the reasons for such
termination. If the Company does not object to such notice by
notifying Employee in writing within thirty (30) days, it shall
be deemed accepted.
6. Severance Compensation.
-----------------------
4
<PAGE> 20
(a) If, at any time during the Term, Employee's employment is
terminated by the Company other than for gross misconduct or is
terminated by Employee for good reason, then, through the
expiration of one year after the effective date of termination,
the Company shall:
(i) continue to pay Employee's base salary in the amounts and at
the times provided in Subparagraph 3(a) hereof;
(ii) continue in effect the medical/dental coverage, long and
short-term disability protection, and any life insurance
protection, including the Split Dollar Insurance Death
benefits, being provided to Employee immediately prior to
his termination;
(iii) continue in effect the Company-paid annual physical
examination being provided to Employee immediately prior to
his termination; and
(iv) permit Employee to purchase his Company car at the car's
wholesale value as reported in the current, as of the
purchase date, edition of the Automotive Market Research
(AMR) publication.
(b) If, at any time during the Applicable Period (as defined below),
Employee's employment is terminated by the Company other than for
gross misconduct or by Employee for good reason, then the Company
shall continue to pay Employee's base salary, and shall continue
in effect the benefits being provided to Employee immediately
prior to his termination, in accordance with the provisions of
Exhibit A to this Employment Agreement, which is hereby
incorporated into this Employment Agreement by reference.
"Applicable Period" shall mean the period beginning on the date
that a "change in control", as defined in the Company's 1992
Long-Term Incentive Plan in effect as of the date of this
Agreement and set forth in Exhibit B to this Employment
Agreement, which is hereby incorporated into this Employment
Agreement by reference, occurs, and ending on the last day for
which severance pay would be payable under Paragraph I.A of
Exhibit A to this Employment Agreement (after taking into account
Employee's election thereunder) had Employee been terminated as
of the "change in control" date. After
5
<PAGE> 21
the Applicable Period, if Employee's employment is terminated as
provided in Subsection 6(a) above, Employee shall be entitled to
receive the severance compensation and benefits described in such
subsection.
(c) If Employee's employment hereunder is terminated other than as
specified in subparagraph 6(a) or 6(b), then, except as otherwise
specifically provided in this Agreement or in a Company plan, no
further compensation or benefits will be provided to Employee by
the Company under this Agreement following the date of such
termination.
(d) The Company shall reimburse Employee's reasonable attorneys' fees
incurred by Employee to enforce the provisions of this Employment
Agreement.
7. CONFIDENTIAL INFORMATION. Employee agrees that he will not, during the
Term or at any time thereafter, either directly or indirectly, disclose or make
known to any other person, firm, or corporation any confidential information,
trade secret or proprietary information of the Company that Employee may acquire
in the performance of Employee's duties hereunder. Upon the termination of
Employee's employment with the Company, Employee agrees to deliver forthwith to
the Company any and all literature, documents, correspondence, and other
materials and records furnished to or acquired by Employee during the course of
such employment.
8. NON-COMPETITION. During any period in which Employee is receiving a base
salary under this Agreement, whether during the Term or following termination
pursuant to subsection 6(a) or 6(b), Employee shall not act as a proprietor,
investor, director, officer, employee, substantial stockholder, consultant, or
partner in any business engaged to a material extent in the retail drug business
in direct competition with the Company in any market. Following any termination
under subsection 6(a) or 6(b), Employee may obtain a release from the
non-competition covenant contained in this Paragraph 8 by delivering to the
Company a written waiver of Employee's right to receive any further compensation
or benefits pursuant to subsection 6(a) or 6(b). If Employee violates the
non-competition covenant contained in this Paragraph 8, the Company shall be
relieved of any obligation to make payments or to provide benefits to Employee
pursuant to subsection 6(a) or 6(b) and Employee shall return to the Company an
amount equal to the value of any such payments or benefits provided to Employee
while he was in the violation of this non-competition covenant.
9. NOTICES. For purposes of this Agreement, all communications provided for
herein shall be in writing and shall be deemed to have been duly given when
delivered or
6
<PAGE> 22
mailed by United States registered or certified mail, return receipt requested,
postage prepaid, addressed to the Company, Attention: D. Dwayne Hoven, President
and Chief Executive Officer, and Jack A. Staph, Senior Vice President, Secretary
and General Counsel, at its principal executive office and to Employee at his
principal residence, or to such other address as either party may have furnished
to the other in writing and in accordance herewith; except that notices of
change of address shall be effective only upon receipt.
10. ASSIGNMENT; BINDING EFFECT. This Agreement shall be binding upon and
inure to the benefit of Employee, the Company, and the Company's successors and
assigns. No right, benefit or interest of Employee hereunder shall be subject to
assignment, anticipation, alienation, sale, encumbrance, charge, pledge,
hypothecation, or to execution, attachment, levy, or similar process; except
that Employee may assign any right, benefit, or interest hereunder if such
assignment is permitted under the terms of any plan or policy of insurance or
annuity contract governing such right, benefit, or interest.
11. INVALID PROVISIONS. Any provisions of this Agreement that is
prohibited or unenforceable shall be ineffective to the extent, but only to the
extent, of such prohibition or unenforceability without invalidating the
remaining portions hereof and such remaining portions of this Agreement shall
continue to be in full force and effect. In the event that any provision of this
Agreement shall be determined to be invalid or unenforceable, the parties will
negotiate in good faith to replace such provision with another provision that
will be valid or enforceable and that is as close as practicable to the
provisions held invalid or unenforceable.
12. ENTIRE AGREEMENT, MODIFICATION. This Agreement contains the entire
agreement between the parties with respect to the employment of Employee by the
Company and supersedes all prior and contemporaneous agreements,
representations, and understandings of the parties, whether verbal or written.
No modification, amendment, or waiver of any of the provisions of this Agreement
shall be effective unless in writing, specifically referring hereto, and signed
by both parties.
13. WAIVER OF BREACH. The failure at any time to enforce any of the
provisions of this Agreement or to require performance by the other party of any
of the provisions of this Agreement shall in no way be construed to be a waiver
of such provisions or to affect either the validity of this Agreement or any
part of this Agreement or the right of either party thereafter to enforce each
and every provision of this Agreement in accordance with the terms of this
Agreement.
14. GOVERNING LAW. This Agreement has been made in, and shall be governed
and construed in accordance with the laws of, the State of Ohio.
7
<PAGE> 23
IN WITNESS WHEREOF, the Company and Employee have executed this
Agreement on the day and year first above written.
REVCO D.S., INC.
By:_________________________________
EMPLOYEE
------------------------------------
8
<PAGE> 24
EXHIBIT A
---------
CHANGE IN CONTROL SEVERANCE ENHANCEMENTS
----------------------------------------
I. ENHANCED SEVERANCE AND BENEFITS
-------------------------------
A. At Employee's election, submitted in writing to the Company within
five (5) business days from the date of Employee's termination of
employment, EITHER:
(1) the term "one year" in Section 6(a) of the Employment Agreement
shall be deleted and replaced by the term "eighteen months"; OR
(2) the phrase "base salary" in Section 6(a)(i) of the Employment
Agreement shall be deleted and replaced by the phrase "base
salary plus annual bonus (assuming pro rata payment of such
amount with base salary)." For this purpose, a year's "annual
bonus" shall mean Employee's target bonus under the Company's
bonus plan for the full fiscal year immediately preceding the
change in control, and "base salary" shall mean the highest base
pay paid to Employee during any one of the Company's three
immediately preceding fiscal years, provided that base pay for
the then-current fiscal year shall be calculated on an annualized
basis, if necessary.
B. The benefit continuation provided for under Sections 6(a)(ii) and
(iii) of the Employment Agreement (as extended under Paragraph I.A(1)
above) shall be provided to Employee under the Company's benefit plans
on terms at least as favorable to Employee as those in effect
immediately prior to the change in control; provided that to the
extent Employee receives comparable benefits from, and at the expense
of, a subsequent employer, such benefits from the Company shall cease.
C. The severance pay payable under Section 6(a)(i) of the Employment
Agreement, as modified under Paragraph I.A above, shall be aggregated
without reduction and paid in a lump sum promptly after termination of
Employee's employment.
D. The requirements of Section 8 of the Employment Agreement shall not
apply to Employee.
II. BONUS FOR CURRENT FISCAL YEAR. The Company or any successor thereto shall
pay Employee a cash bonus for the fiscal year in which termination occurs
<PAGE> 25
calculated based on the Company's financial results as of the date of
termination, and annualized to equal a bonus for a twelve (12) month
period.
III. SERP. Employee shall continue to be provided with coverage and benefits
under the Revco D.S., Inc. Supplemental Retirement and Survivor Benefit
Plan (the "SERP Plan") except that:
A. Employee shall be credited with additional service for vesting and
benefit accrual purposes in an amount equal to the period in respect
of which Employee's severance benefits under Section 6(a) of the
Employment Agreement are being paid, after taking into account the
enhancement under Paragraph I.A(1) above;
B. The provisions of Article V, Section 5 of the Supplemental Retirement
and Survivor Benefit Plan requiring divestiture if a participant
"engages in Competition" shall not be applicable to Employee; and
C. The Company shall contribute to a rabbi trust in amounts sufficient to
pay one hundred percent (100%) of Employee's SERP Plan benefits, as
enhanced pursuant to Paragraph III.A above, and shall at the Company's
sole cost and expense arrange for the SERP Plan to be administered by
an independent third party administrator.
Company and any successor thereto shall remain obligated to honor and pay all
benefits under the SERP Plan, as enhanced hereunder.
IV. CASH PAYMENT. The Company shall make a cash payment to Employee at the time
set forth below equal to the amount of excise taxes (i.e., the "excise tax
gross-up payment") which Employee would be required to pay pursuant to
Section 4999 of the Internal Revenue Code of 1986, as amended ("Code"), as
a result of any payments made by or on behalf of the Company or any
successor thereto resulting in an "excess parachute payment" within the
meaning of Section 280G(b) of the Code. In addition to the foregoing, the
cash payment due to Employee under this Paragraph IV shall be increased by
the aggregate of the amount of federal, state and local income and excise
taxes for which Employee will be liable on account of the cash payment to
be made under this Paragraph IV, such that Employee will receive the excise
tax gross-up payment net of all income and excise taxes imposed on him or
her on account of the receipt of the excise tax gross-up payment. The
computation of this payment shall be determined, at the expense of the
Company, by an independent accounting, actuarial or consulting firm
selected by the Company. Payment of the cash amount set forth above shall
be made at such time as the Company shall determine, in its sole
discretion, but in no event later than the date five (5) business days
before the due date, without regard to any extension, for filing Employee's
federal income tax return for the calendar year which includes the date as
<PAGE> 26
of which the aforementioned "excess parachute payments" are determined.
Notwithstanding the foregoing, there shall be no duplication of payments by
the Company under this Paragraph IV in respect of excise taxes under
Section 4999 of the Code to the extent the Company is making cash payments
in respect of such excise taxes for any other arrangement with Employee. In
the event that Employee is ultimately assessed with excise taxes under
Section 4999 of the Code as a result of payments made by the Company or any
successor thereto which exceed the amount of excise taxes used in computing
Employee's payment under this Paragraph IV, the Company or its successor
shall indemnify Employee for such additional excise taxes plus any
additional excise taxes, income taxes, interest and penalties resulting
from the additional excise taxes and the indemnity hereunder.
V. OTHER BENEFITS.
---------------
A. LONG TERM INCENTIVE PLAN. Subject to the requirements of applicable
law and any administrative procedures and policies deemed appropriate
by the Company, the Company shall make a cashless exercise procedure
available to Employee for the exercise of Employee's options under the
1992 Long Term Incentive Plan ("LTIP"), to the extent vested
(including options which became vested in connection with a "Change in
Control" under the terms of Employee's Award Agreements under the
LTIP), pursuant to which Employee will receive cash upon the exercise
of options without making any direct payment of cash or property to
the Company. The net amount due to Employee, after payment of the
exercise price and taxes in accordance with applicable provisions of
the LTIP, will be paid by the Company based on the greater of (i) the
fair market value of the Company's shares of common stock, and (ii)
the highest per share consideration to be paid for the Company's
shares in any Change in Control transaction. SEE Section V.C below for
special provisions applicable to individuals subject to Section 16 of
the Securities Exchange Act of 1934, as amended (the "Exchange Act").
B. EMPLOYEE STOCK PURCHASE PLAN. The then-current offering period under
the Employee Stock Purchase Plan ("ESPP") shall be shortened so as to
enable Employee to exercise options thereunder as of the date
occurring as soon as administratively practicable. The date used under
the preceding sentence shall be deemed to be the last day of the
current offering for all purposes of the ESPP. SEE Section V.C below
for special provisions applicable to individuals subject to Section 16
of the Exchange Act.
C. CASH PAYMENTS. If Employee is subject to Section 16 of the Exchange
Act, then to the extent Employee would be deprived of the benefits of
exercise under the LTIP and/or the ESPP, as described above, by reason
of such Section or the Rules issued thereunder, Employee shall be
provided with the alternative
<PAGE> 27
of receiving a cash payment approximating the loss of such benefits
under a cash compensation plan implemented by the Company.
D. OUTPLACEMENT SERVICES. In the event of Employee's termination of
employment other than for cause within the period ending one (1) year
from the change in control, the Company or any successor thereto will
provide Employee with outplacement services from a recognized
outplacement provider selected by the Company.
VI. ADDITIONAL CONSIDERATIONS. To the extent any provisions of this Exhibit A
modify the terms of any existing plan, policy or arrangement affecting the
compensation or benefits of Employee, such modification as set forth herein
shall be deemed amendments to such plan, policy or arrangement as to
Employee, and Employee consents to such amendments.
<PAGE> 28
EXHIBIT B
---------
(EXCERPT FROM THE LTIP, AS ADOPTED ON JULY 27, 1992. ALL DEFINED TERMS
USED IN THE DEFINITION OF "CHANGE IN CONTROL", INCLUDING THOSE SET
FORTH BELOW, ARE ALSO INCORPORATED INTO THIS AGREEMENT BY REFERENCE.)
"CHANGE IN CONTROL" means a change in control of the Company of a nature
that would be required to be reported in response to Item 6(e) of Schedule 14A
of Regulation 14A promulgated under the Exchange Act (as in effect on the date
the Plan is adopted by the Board), whether or not the Company is then subject to
such reporting requirements; provided, that, without limitation, a Change in
Control shall be deemed to have occurred if:
(a) any "person" (as defined in Sections 13(d) and 14(d) of the Exchange
Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company representing
twenty percent (20%) or more of the combined voting power of the Company's then
outstanding securities; provided, however, that: (i) the twenty percent (20%)
threshold of this clause (a) shall be increased to fifty percent (50%) in the
case of any such "person" who, on the date this Plan is adopted by the Board, is
such a "beneficial owner" directly or indirectly, of securities of the Company
representing five percent (5%) or more of the combined voting power of the
Company's then outstanding securities; and (ii) a Change in Control shall not be
deemed to occur under this clause (a) by reason of the acquisition of securities
by the Company or an employee benefit plan (or any trust funding such a plan)
maintained by the Company, or by reason of the new issuance of securities
directly by the Company;
(b) during any period of one (1) year there shall cease to be a majority of
the Board comprised of Continuing Directors; or
(c) (i) the stockholders of the Company approve a merger or consolidation
of the Company with any other corporation, other than a merger or consolidation
which would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) more than eighty percent (80%) of the combined voting power of the
voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or (ii) the stockholders of the
Company approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company of all or substantially all the
Company's assets.
"COMPANY" means Revco D.S., Inc., and, solely for purposes of Sections 2.4
and 19 of the Plan, any other corporation in an unbroken chain of corporations
ending with
<PAGE> 29
Revco D.S., Inc. that owns, directly or indirectly, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
of Revco D.S., Inc.
"CONTINUING DIRECTORS" means individuals who at the beginning of any period
(not including any period prior to the adoption of this Plan) of one (1) year
constitute the Board, any new director(s) duly selected as a nominee or nominees
pursuant to the Stockholder's Agreement dated as of June 1, 1992 by and between
the Company and Zell/Chilmark Fund L.P., as such agreement may be amended,
restated, supplemented or otherwise modified from time to time, and any new
director(s) whose election by the Board or nomination for election by the
Company's stockholders was approved by a vote of at least a majority of the
directors then still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so approved.
<PAGE> 1
Exhibit 10.7
------------
The following is the form of split dollar agreement between the Company
and each of its executive officers. The agreements are substantially the same
except for the percentage set forth in Section 2 and the insurance information
set forth on Schedule A.
<PAGE> 2
SPLIT DOLLAR INSURANCE AGREEMENT
THIS AGREEMENT (the "Agreement") is entered into effective as of the
[AgreeDay] day of [AgreeMo], [AgreeYr], by and between Revco D.S., Inc., a
Delaware corporation ("Employer"), and [FirstName] [Middle] [LastName],
("Employee").
WHEREAS, Employer has heretofore adopted the Revco D.S., Inc. Split
Dollar Insurance Plan ;
WHEREAS, Employee has been employed by Employer as a Corporate Officer,
as a Regional Vice-President Drug Store Division, or in some other job
classification designated as eligible by the Board of Directors of Employer for
participation in the Split Dollar Insurance Plan; and
WHEREAS, Employer and Employee desire to enter into the agreement set
forth herein.
NOW THEREFORE, Employer and Employee agree as follows:
1. The life insurance policy or policies with which this Agreement
deals are identified on Schedule A hereto, which is hereby incorporated into
this Agreement by reference (collectively, the "Policy"), issued by the
insurance company or companies identified on Schedule A (collectively, the
"Insurer"), on the life of Employee. Employer shall be the sole owner of the
Policy and the direct beneficiary of the proceeds of an amount, if any, over and
above the proceeds as calculated in Section 2 below of this Agreement.
2. Employee shall have the right to designate and change direct and
contingent beneficiaries of the proceeds equal to [Percent]% of Employee's
annual base salary as measured on December 31 of the calendar year immediately
preceding the year of death and to elect and change a payment plan for such
beneficiaries. Any assignment of the proceeds by Employee shall be limited to
the death proceeds only. Upon the termination of Employee's employment for any
reason whatsoever, Employee's rights referred to in this Section 2 shall revert
without limitation to Employer.
<PAGE> 3
3. Each premium on the Policy shall be paid by Employer as it becomes
due. Employee shall be imputed income on the value of the economic benefit
attributable to the life insurance protection provided to Employee under this
Agreement. The value of the economic benefit shall be calculated by using the
lower of the P.S. 58 rates or Insurer's one-year term rates multiplied by the
Employee's share of the death benefits as calculated in Section 2 hereof. At the
end of each Calendar Year, Employer shall compensate Employee, through a "gross
up" in pay, for any tax liability incurred as a result of this imputed income.
4. Policy dividends shall be applied to purchase paid-up additional
insurance protection.
5. Employer shall not sell, surrender, change the insured or transfer
ownership of the Policy while this Agreement is in effect without first giving
Employee the option to purchase the Policy during a period of sixty (60) days
from notice to Employee of such intention. The purchase price of the Policy
shall be the cash value of the Policy as of the date of transfer to Employee,
less any policy and premium loans and any other indebtedness secured by the
Policy. This restriction shall not impair the right of Employer to terminate
this Agreement pursuant to Section 6 hereof. The exercise by Employer of the
right to surrender the Policy or to change the insured will terminate the rights
of Employee.
6. This Agreement may be terminated by either party hereto, with or
without the consent of the other, by giving notice of termination in writing to
the other party. This Agreement shall terminate automatically upon termination
of Employee's employment with Employer for any reason whatsoever other than
Employee's death or Permanent Disability. Permanent Disability shall mean
physical or mental disability of a participant to the extent that, in the
opinion of the Committee, he is permanently unable to discharge his normal work
responsibility with the Company, or to engage in an occupation or position at a
substantially equivalent management level with another organization or company.
In arriving at its determination the Committee may rely upon advice of competent
medical authority satisfactory to it and may look to the definition of
"permanent" or "long term" disability in any disability insurance provided by
the Company. In such a case, if a participant terminates his employment with the
Company by reason of Permanent Disability and he may thereafter be eligible for
a normal or early retirement benefit under the Pension Plan, he will be treated
as continuing in the Company's employ for purposes of the Plan for as long as he
continues to receive disability benefits under the Revco Short-Term or Long-Term
Disability Income Protection Plan, as the case may be.
<PAGE> 4
7. The Insurer shall be bound only by the provisions of and
endorsements on the Policy, and any payments made or action taken by it in
accordance therewith shall fully discharge it from all claims, suits and demands
of all persons whatsoever. The Insurer shall in no way be bound by or be deemed
to have notice of the provisions of this Agreement.
8. Employee shall have the right to assign any part or all of
Employee's interest in the Policy and this Agreement to any person, entity or
trust by execution of a written assignment delivered to Employer and to the
Insurer.
9. Employer and Employee may mutually agree to amend this Agreement,
and any such amendment shall be in writing and signed by Employer and Employee.
10. This Agreement shall bind and inure to the benefit of Employer and
its successors and assigns as well as to Employee and Employee's heirs,
executors, administrators and assigns, and any Policy beneficiary.
11. Notwithstanding any other provision, no employee shall become
eligible to enter into an agreement under the Plan and participate in the Plan
where the employee cannot provide satisfactory evidence to the Company's
selected Insurer that he is "Insurable at Reasonable Rates." "Insurable at
Reasonable Rates" with respect to any particular participant shall mean that the
participant's mortality is no greater than 300% of average for his age as
determined by the insurer selected by the company. Where Employee fails to meet
this test after becoming active under the plan, the death benefit as calculated
in Section 2 shall be based upon the annual base salary in effect on the last
day of the Calendar Year immediately preceding the year in which the participant
fails this test.
12. The following provisions are part of this Agreement and are
intended to satisfy the requirements of the Employee Retirement Income Security
Act of 1974:
(a) The named fiduciary: Employer
(b) The funding policy under this plan is that all premiums on the
Policy be remitted to the Insurer when due.
(c) Direct payment by the Insurer is the basis of payment of benefits
under this plan, with those benefits in turn being based on the payment
of premiums as provided in this plan.
<PAGE> 5
(d) For claims procedure purposes, the "Claims Manager" shall be
Employer's Director of Employee Benefits.
(1) If for any reason a claim for benefits under this plan is
denied by Employer, the Claims Manager shall deliver to the
claimant a written explanation setting forth the specific
reasons for the denial, pertinent references to the plan
section on which the denial is based, such other data as may
be pertinent and information on the procedures to be followed
by the claimant in obtaining a review of Employee's claim, all
written in a manner calculated to be understood by the
claimant. For this purpose:
(A) The claimant's claim shall be deemed filed when presented
orally or in writing to the Claims Manager.
(B) The Claims Manager's explanation shall be in writing
delivered to the claimant within 90 days of the date the claim
is filed.
(2) The claimant shall have 60 days following the claimant's
receipt of the denial of the claim to file with the Claims
Manager a written request for review of this denial. For such
review, the claimant or the claimant's representative may
submit pertinent documents and written issues and comments.
(3) The Claims Manager shall decide the issue on review and
furnish the claimant with a copy within 60 days of receipt of
the claimant's request for review of the claim. The decision
on review shall be in writing and shall include specific
reasons for the decision, written in a manner calculated to be
understood by the claimant, as well as specific references to
the pertinent plan provisions on which the decision is based.
If a copy of the decision is not so furnished to the claimant
within such 60 days, the claim shall be deemed denied on
review.
<PAGE> 6
IN WITNESS WHEREOF, the parties have signed and sealed this Agreement.
In the presence of: REVCO D.S., INC.
_______________________ By:__________________________
Title:
- ----------------------- -----------------------------
[FirstName] [Middle] [LastName], Employee
<PAGE> 7
SCHEDULE A
----------
CARRIER POLICY NUMBER POLICY DATE
------- ------------- -----------
[Carrier] [Policy] [PolDate]
<PAGE> 1
EXHIBIT 10.10
INTRODUCTION
This narrative describes the purpose, components and mechanics of Revco's
modified Corporate Incentive Plan. Specifics about how the plan applies to an
individual participant can be addressed by your supervisor or the Managing
Director, Compensation and Benefits.
PURPOSE
The purpose of the program is to:
1. Effectively manage the Company's P & L statement and balance sheet
through the efficient use of capital;
2. Influence a greater linkage between total compensation and
shareholder returns; and
3. Promote individual objectives that, when achieved, contribute to
value creation.
Solid performance in these areas will deliver incentive compensation with
significant upside potential for participants.
COMPONENTS
The four plan components are:
1. Bonus Opportunities
2. Controllable Earnings
3. Shareholder Return
4. Individual Objectives
BONUS OPPORTUNITIES
A range of bonus opportunities, expressed as a percentage of fiscal year
base salary, has been established for the hierarchy of positions that
participate in the plan.
CONTROLLABLE EARNINGS
Controllable earnings applies the cost of capital against Revco's operating
profits to measure the true earnings to investors after covering both operating
and financing costs (debt and equity). Performance will be measured and rewarded
based upon the following formula:
EVA = NOPAT -- (Cost of Capital x Capital Employed)
|_____Capital Charge_____|
NOPAT = Operating profit after taxes but net of non-economic, non-cash
charges
CAPITAL = Net assets invested in the business
COST OF CAPITAL = The minimum return required to compensate investors for
the risk in the Company's operations.
Each fiscal year an EVA target will be established for the corporation.
SHAREHOLDER RETURN
Attempting to influence a greater linkage between executive compensation
and shareholder returns, the SEC requires public companies like Revco to
disclose a line graph in the proxy that compares a company's five-year total
shareholder return to those of other companies. The award earned by controllable
earnings
<PAGE> 2
performance will be adjusted up or down by Revco's year-to-year change in
shareholder return versus the S&P 500 Index. This adjustment will be limited to
25%, up or down.
INDIVIDUAL OBJECTIVES (applies to individuals other than the Chief Executive
Officer)
Individual objectives are an integral plan component and provide impact on
the potential payout since the amount earned via performance versus controllable
earnings and shareholder return will be adjusted by the individual's performance
against predetermined objectives. The maximum rating an individual may receive
is 100%.
VESTING IN THE BONUS
DEATH OR DISABILITY
- Pro-rata payout of current year's bonus award when Revco distributes
awards to all participating employees.
RETIREMENT
- Pro-rata payout of the current year's bonus award when Revco distributes
awards to all participating employees.
WORKFORCE REDUCTION/SALE OF A BUSINESS
- Pro-rata payout of the current year's bonus award when Revco distributes
awards to all participating employees.
QUIT/TERMINATION FOR CAUSE
- If a participant quits or is terminated for cause prior to the end of the
fiscal year, any bonus earned is forfeited.
- All other terminations will result in a pro-rata payout when Revco
distributes awards to all participating employees.
CHANGE IN CONTROL
- Upon a change-in-control, a pro-rata payment will be made to all
participants who are actively employed upon the effective date of the
change-in-control.
MISCELLANEOUS
- Participants in eligible positions for less than the full fiscal year
will be awarded (based upon financial and individual performance)
incentive compensation on a pro-rated basis.
- Participants who change bonus groups prior to March 1st of the fiscal
year will have their final bonus opportunity percentage calculated based
upon their current position at the end of the fiscal year.
-- Those who change bonus groups after March 1st will have their
final bonus opportunity percentage calculated based upon the
previous position held prior to the change.
- Participants who are in the plan for less than three (3) months during
the fiscal year are not eligible for an award from this plan.
- For a given fiscal year, employees are not eligible to participate in
this plan if they are promoted into an eligible position after March 1st.
Participation will begin the next fiscal year.
- Base salary, for bonus calculations, is defined as fiscal year base
salary earnings while in an eligible position.
<PAGE> 1
EXHIBIT 13.1
FINANCIAL HIGHLIGHTS Revco D.S., Inc. and Subsidiaries
<TABLE>
<CAPTION>
(Dollars in Millions, Except Per Share Amounts) 1996 1995 Change
- -----------------------------------------------------------------------------------------------------------------
SUMMARY FINANCIAL INFORMATION
<S> <C> <C> <C>
Net sales $ 5,087.7 $ 4,431.9 14.8%
Operating profit(1) 218.8 175.7 24.5%
Net income(1) 82.7 61.1 35.4%
Net income per share(1) $ 1.24 $ .95 30.5%
- -----------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION AT YEAR END
Total assets $ 2,133.5 $ 2,149.8 (.8%)
Inventories 968.4 962.9 .6%
Working capital 413.3 399.5 3.5%
Total debt (current and long-term) 514.9 681.2 (24.4%)
Stockholders' equity 868.6 773.1 12.4%
Book value per common share $ 12.68 $ 11.53 10.0%
- -----------------------------------------------------------------------------------------------------------------
KEY STATISTICS
Average number of common shares outstanding (000s) 66,870 64,366 3.9%
Number of stores 2,184 2,118 3.1%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PRICE RANGE OF COMMON STOCK
1996 1995
-------------------------- -----------------------
High Low High Low
<S> <C> <C> <C> <C>
First Quarter $25-3/8 $19-1/4 $19 $14-1/2
Second Quarter $25-7/8 $19-5/8 $23-1/4 $16-5/8
Third Quarter $29 $24-5/8 $24-1/2 $20
Fourth Quarter $29 $22-3/8 $24 $17-1/2
- ---------------------------------------------------------------------------------------------------------------------
<FN>
The Company's common stock is listed on the New York Stock Exchange (NYSE)
under the symbol "RXR". The preceding tables set forth the high and low sales
prices of the common stock as reported in the NYSE Composite Tape for the
quarterly periods indicated. No dividends were declared or paid during fiscal
1996 and 1995.
(1) Operating profit in 1996 is shown before the pretax effect of a
non-recurring charge for merger-related expenses of $12.6 million ($6.5
million, net of tax, or $.10 per share). Net income and net income per
share for 1996 are shown before the effect of this non-recurring charge and
for 1995, before an extraordinary item related to a loss on early
retirement of debt of $2.8 million, net of tax, or $.04 per share.
</TABLE>
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the consolidated
financial statements of the Company.
During fiscal 1995, the Company completed an acquisition (the "Acquisition") of
one of its competitors, Hook-SupeRx, Inc. ("HSI"). The operating results of the
Company include the operating results of HSI retained operations (801 drugstores
and a mail order facility) for all 52 weeks of fiscal 1996 and for 44 of the 53
weeks in fiscal 1995. To enhance comparability, unaudited pro forma amounts for
both fiscal 1995 and fiscal 1994 have been presented in Note 13 to the
consolidated financial statements, reflecting the financial results of the
Company as if the Acquisition had occurred at the beginning of the periods
presented.
RESULTS OF OPERATIONS
Comparison of the 52 Weeks Ended June 1, 1996 ("fiscal 1996") and the 53 weeks
ended June 3, 1995 ("fiscal 1995"): Net sales increased 14.8% to $5,087.7
million for fiscal 1996, from $4,431.9 million for fiscal 1995. HSI retained
operations generated $376.0 million of the net sales increase while net sales
from core Revco stores (stores operated prior to the Acquisition) increased
$279.8 million or 9.7%. On a comparable store basis, net sales increased 8.0%
for fiscal 1996, with core Revco stores rising 8.1% and HSI stores rising 7.8%.
Prescription sales, which comprised 58.1% of net sales for fiscal 1996, were
primarily responsible for the overall increase in net sales, increasing $458.9
million, or 18.4%. HSI retained operations generated $239.6 million of the
prescription sales increase. Prescription sales in core Revco stores increased
$219.3 million, or 13.6%. The number of prescriptions filled by the Company in
core Revco stores increased 8.0% from fiscal 1995 to fiscal 1996. Sales
comparisons in core Revco stores for fiscal 1996 are distorted by the fact that
fiscal 1995 contains a 53rd week of operating results. Excluding the 53rd week
of fiscal 1995 operating results, the growth in the number of prescriptions
filled in core Revco stores exceeded 10.0% in fiscal 1996. The increase in
prescription sales was attributable to an increase in managed care sales.
Managed care sales, that segment of the prescription business whereby someone
other than the customer (typically an insurance carrier) pays for the
prescription, continue to drive the overall growth rate in prescription
business. Managed care sales comprised 70.6% of total prescription sales for
fiscal 1996, compared to 64.9% in fiscal 1995.
Over-the-counter ("OTC") sales increased $196.9 million, or 10.2%, to $2,133.7
million for fiscal 1996. HSI retained operations generated $136.4 million of the
OTC sales increase. OTC sales in core Revco stores increased $60.5 million, or
4.8%. The majority of this increase was attributable to the growth in the number
of store locations.
Cost of sales increased 15.9% to $3,593.5 million in fiscal 1996 from $3,100.1
million in fiscal 1995. Gross margin increased 12.2% but declined as a
percentage of sales to 29.4% in fiscal 1996 from 30.1% in fiscal 1995. Margin
rates associated with prescription sales declined due to the increase in managed
care sales as a percentage of total prescription sales and continued pressure on
margin rates within the managed care business. Managed care sales have
positively impacted the Company's net sales and gross margin dollar growth, but
yield lower profit percentages than non-managed care sales. The LIFO charge
increased $2.9 million to $19.7 million in fiscal 1996 primarily due to higher
inflation rates, but remained constant as a percentage of sales at .4%. The
decline in the prescription margin rate and higher LIFO charge was partially
offset by a slight increase in the OTC gross margin rate due to continued
favorable purchasing terms.
Operating expenses increased $102.6 million, or 9.6%, but decreased as a
percentage of sales to 23.0% in fiscal 1996 from 24.0% in fiscal 1995. The
improvement in operating expenses as a percentage of sales was attributable to
the leveraging of relatively fixed, non-store expenses over a broader store base
made possible by the Acquisition, coupled with a more favorable store labor rate
to sales in the HSI stores as the Company realized the benefits of improved
store systems installed in these locations during fiscal 1995.
1
<PAGE> 3
The Company recorded a pretax non-recurring charge of $12.6 million in the
fourth quarter of fiscal 1996 for expenses related to a failed merger
transaction with Rite Aid Corporation ("Rite Aid"). The charge consisted of
professional fees, employee retention costs and other merger-related costs and
is discussed further in Note 2 to the consolidated financial statements.
Depreciation and amortization expense increased $16.7 million to $107.1 million
in fiscal 1996, due to the inclusion of HSI operations and HSI related goodwill
amortization in the Company's consolidated results of operations for 52 weeks in
fiscal 1996 versus 44 weeks in fiscal 1995 and increased depreciation expense
associated with the remodeling program in the HSI stores.
Net interest expense (interest expense net of interest income) was $59.3 million
for fiscal 1996 compared with $55.2 million for fiscal 1995. The increase in
interest expense between years was attributable to higher average debt balances
outstanding for the full fiscal year as a result of the Acquisition.
The Company's effective income tax rate of 48.1% for fiscal 1996 differs from
the federal income tax statutory rate of 35.0% principally because of state and
local income taxes (6.5%) and permanent differences arising from: (1)
amortization of reorganization value in excess of amounts allocable to
identifiable assets totaling $17.6 million; and (2) amortization of goodwill
totaling $9.8 million. The Company expects its taxes payable to be significantly
lower than the amounts recorded in its income tax provision due to the
utilization of net operating loss carryforwards ("NOLs"). See the discussion
under the caption "Certain Tax Matters" in the Liquidity and Capital Resources
section which follows.
Comparison of the 53 Weeks Ended June 3, 1995 ("fiscal 1995") and the 52 Weeks
Ended May 28, 1994 ("fiscal 1994"): Net sales increased 77.0% to $4,431.9
million for fiscal 1995, from $2,504.0 million for fiscal 1994. HSI retained
operations generated $1,535.2 million of the net sales increase while net sales
from core Revco stores increased $392.7 million or 15.7%. On a comparable store
basis, net sales in core Revco stores increased 9.4%.
Prescription sales, which comprised 56.3% of net sales for fiscal 1995, were
primarily responsible for the overall increase in net sales, increasing $1,161.3
million, or 87.1%. Prescription sales in core Revco stores increased $292.4
million, or 21.9%. The number of prescriptions filled by the Company in core
Revco stores increased 17.2% from fiscal 1994 to fiscal 1995. Although a portion
of this increase in prescriptions filled was attributable to an increase in the
number of core Revco store locations, the majority of the increase was
attributable to comparable store sales growth and the inclusion of an additional
week of operations in fiscal 1995. Excluding the additional week of operations,
the growth rate for prescriptions filled in core Revco stores was approximately
14.6%. The increase in prescription sales was attributable to an increase in
managed care sales. Managed care sales comprised 64.9% of total prescription
sales for fiscal 1995, compared to 54.4% in fiscal 1994.
OTC sales increased $766.6 million, or 65.5%, to $1,936.8 million for fiscal
1995 from $1,170.2 million in fiscal 1994. OTC sales in core Revco stores
increased $100.3 million, or 8.6%. Approximately $24.0 million of this increase
was attributable to an additional week of operations in fiscal 1995, with the
remainder of the increase attributable to the growth in the number of core Revco
store locations, which increased 5.0% to 1,311 retail locations at June 3, 1995
from 1,248 retail locations at May 28, 1994.
Cost of sales increased 78.0% to $3,100.1 million in fiscal 1995 from $1,742.0
million in fiscal 1994. Gross margin increased 74.8% but, as a percentage of
sales, declined to 30.1% in fiscal 1995 from 30.4% in fiscal 1994. Gross margin
was negatively impacted by a $9.6 million higher LIFO provision due to higher
inflation rates and inventory levels in fiscal 1995 versus fiscal 1994. The LIFO
charge in fiscal 1995 was $16.8 million or .4% of sales versus $7.2 million or
.3% of sales in fiscal 1994. The remaining decrease in gross margin as a
percentage of sales was attributable to a decline in margin rates on
prescription sales. Margin rates associated with prescription sales declined due
to the increase in managed care sales as a percentage of total prescription
sales. Managed care sales have positively impacted the Company's net sales and
gross margin growth, but yield lower profit percentages than non-managed care
sales.
2
<PAGE> 4
Operating expenses increased $456.8 million, or 75.0%, but decreased as a
percentage of sales to 24.0% in fiscal 1995 from 24.3% in fiscal 1994. Despite
higher store labor and distribution costs in the HSI operations during fiscal
1995, the Company was able to leverage non-store expenses over a broader store
base made possible by the Acquisition.
Depreciation and amortization expense increased $37.8 million, from $52.6
million in fiscal 1994 to $90.4 million in fiscal 1995. Of this increase, $21.1
million was due to the inclusion of HSI retained operations in the Company's
consolidated results of operations. Depreciation expense associated with the
installation of the Company's Prescription Access Link ("PAL") system and
point-of-sale ("POS") scanning in retained HSI stores accounted for the majority
of the remaining increase. Goodwill recorded in the Acquisition of $385.0
million is being amortized using a forty-year life.
Net interest expense was $55.2 million for fiscal 1995 compared with $23.3
million for fiscal 1994. The increase in interest expense between years was
attributable to higher average debt balances outstanding as a result of the
Acquisition.
The Company's effective income tax rate of 49.3% for fiscal 1995 differs from
the federal income tax statutory rate of 35.0% principally because of state and
local income taxes (6.4%) and permanent differences arising from: (1)
amortization of reorganization value in excess of amounts allocable to
identifiable assets totaling $17.6 million; and (2) amortization of goodwill
totaling $8.0 million.
LIQUIDITY AND CAPITAL RESOURCES
The following discussion regarding liquidity and capital resources should be
read in conjunction with the Company's Consolidated Balance Sheets and the
Consolidated Statements of Cash Flows as of and for the periods ended June 1,
1996 and June 3, 1995.
Fiscal 1996: Cash, including temporary cash investments, increased $5.0 million
during fiscal 1996 to $8.4 million. Cash generated by operations, before working
capital items, totaled $226.6 million, an improvement of $21.1 million from the
$205.5 million generated during fiscal 1995. Focused management of working
capital, particularly in the inventory position of the Company, resulted in a
$17.3 million source of cash from net changes in working capital items (and
other operating assets and liabilities).
Cash generated by operations includes $18.7 million in tax benefits from NOLs
expected to be utilized on the Company's 1996 federal income tax return. The
Company expects to utilize approximately $53.0 million of NOLs benefited in
fiscal 1996 and $28.0 million of NOLs benefited in fiscal 1995 on its 1996
federal income tax return. The status of the Company's NOLs is discussed further
under the caption "Certain Tax Matters".
Net cash provided by operating activities includes $10.4 million in cash
proceeds from the sale of substantially all of the assets of the Company's
wholly owned subsidiary, Revco Home Health Care Centers, Inc., which was sold in
the second quarter.
Net cash used for investing activities totaled $110.7 million, all of which
related to the Company's capital expenditures, as discussed further under the
caption "Capital Expenditures".
Net cash used by financing activities was $128.2 million, of which $166.3
million represents a net reduction in borrowings outstanding under the Company's
revolving credit facility (the "Revolving Credit Facility").
In May 1996, the Company's Board of Directors authorized the repurchase by the
Company of up to three million shares of common stock. Through July 12, 1996, no
shares have been repurchased by the Company under this authorization. During
fiscal 1995, the Company repurchased 700,000 shares of common stock at an
aggregate price of $12.8 million under a previously authorized repurchase
program.
3
<PAGE> 5
Fiscal 1995: Cash, including temporary cash investments, decreased $21.0 million
during fiscal 1995 to $3.4 million. Cash generated by operations, before working
capital items, totaled $205.5 million, an improvement of $78.5 million from the
$127.0 million generated in fiscal 1994. Net changes in working capital items
(and other operating assets and liabilities) resulted in a $192.7 million use of
cash. The majority of this use of cash, $161.7 million, represented an increase
in inventory levels, net of vendor support, to adequately stock the acquired HSI
stores.
Net cash used for investing activities during fiscal 1995 was $416.4 million,
$278.0 million of which related to the Acquisition and subsequent HSI
integration efforts. As discussed more fully in Note 3 to the consolidated
financial statements, during fiscal 1995 Revco acquired HSI for a total
acquisition value of $632.6 million, including acquired debt of HSI of $330.5
million, resulting in a net cash outlay to Revco of $302.1 million. Of this cash
outlay, $217.0 million was financed through a rights offering of the Company's
common stock. The Company completed a store divestiture program shortly after
the Acquisition date, divesting certain of the acquired HSI operations. The net
cash proceeds raised from this program, after estimated working capital
paydowns, were $128.8 million. Incremental and non-recurring costs of the
Acquisition totaled $97.3 million and were charged to an acquisition reserve
established in purchase accounting. The majority of these costs represented
severance and payroll costs to former HSI employees.
Additions to property, equipment and leasehold improvements of $138.4 million
for fiscal 1995 include the capitalizable costs of the installation of PAL, POS
scanning and distribution systems in the retained HSI operations and costs
related to the HSI and Revco store base, as discussed further under the caption
"Capital Expenditures".
Net cash provided by financing activities was $382.6 million. Financing for the
Acquisition was accomplished through a $217.0 million rights offering of the
Company's common stock and new bank facilities.
CAPITAL EXPENDITURES: During fiscal 1996, the Company reinvested $110.7 million
in its operations, of which $61.0 million represented the Company's investment
in new stores and the upgrade through relocation or expansion of its existing
drugstore base. During fiscal 1996, the Company opened 85 new stores and
relocated 54 stores. The Company spent $13.4 million to upgrade POS registers
with improved technology in existing core Revco drugstores. An additional $16.4
million was spent on the HSI store base during fiscal 1996 to install anti-theft
detection systems in all of the remaining HSI stores and to continue remodeling
the HSI stores to Revco's store design and decor package. During fiscal 1996,
the Company completed the remodeling of 149 acquired HSI stores, bringing the
total number of former HSI stores remodeled since the Acquisition to 304 stores.
Finally, the Company invested $16.0 million in its distribution centers to
expand and upgrade its facilities.
During fiscal 1995, the Company reinvested $138.4 million in its operations,
$38.4 million of which represented the capitalizable costs of installing Revco's
PAL, POS scanning and distribution systems in the retained HSI operations. An
additional $32.1 million was spent on the HSI store base during fiscal 1995 to
remodel the HSI stores. During fiscal 1995, the Company completed the remodeling
of 155 HSI stores. In addition to the HSI stores, the Company reinvested $67.9
million in its core Revco business, the majority of which was used to expand and
upgrade the Revco store base. In addition to other store improvements, the
Company opened 75 new stores and relocated 37 stores.
During fiscal 1997, the Company intends to open 60 new stores and relocate 60
existing stores. More than 70% of these store projects will be the Company's
larger, freestanding units. The Company also intends to continue its remodeling
program in the HSI stores, with 150 store projects planned for fiscal 1997. The
Company has no material commitments in connection with these planned capital
expenditures. Funds for these expenditures are expected to be provided from the
Revolving Credit Facility and cash generated internally.
4
<PAGE> 6
CERTAIN TAX MATTERS: As of June 3, 1995, estimated NOLs reported on the
Company's federal income tax returns were approximately $352.0 million.
Approximately $98.0 million of these NOLs are subject to a use limitation
("restricted NOLs") of approximately $27.0 million per year under Section 382 of
the Internal Revenue Code. The Company believes that it will not be able to
utilize approximately $81.0 million of the restricted NOLs because of the
allocation method for the annual use limitation under proposed income tax
regulations applicable to related corporations belonging to two separate
consolidated groups.
While the Company believes that it is justified in taking the positions that it
has taken with respect to the NOLs, the law with respect to the treatment of
some of the items making up the NOLs is unclear or unsettled. Although the
Company believes its calculations of the NOLs are reasonable, the NOLs and the
other items on the Company's tax returns are subject to audit by the Internal
Revenue Service ("IRS"). Due to the lack of specific guidance on certain
significant issues, the Company's position with respect to some or all of the
items making up the NOLs could be challenged by the IRS. If the IRS were to
successfully disallow some or all of the Company's NOLs, the Company would be
able to offset less of its taxable income with NOLs and other tax deductions.
For fiscal 1996, the Company will utilize approximately $11.0 million of
restricted NOLs and approximately $70.0 million of unrestricted NOLs to offset
projected taxable income of the Company, leaving estimated NOLs for fiscal 1997
of approximately $271.0 million, of which approximately $81.0 million the
Company may be unable to utilize, as discussed above.
SOURCES OF LIQUIDITY: The Company has three principal sources of liquidity: (1)
cash and cash equivalents; (2) the Revolving Credit Facility; and (3) cash from
operations. Management of the Company believes that the Company's cash on hand
and cash from operations, together with borrowings and letters of credit under
the Revolving Credit Facility, will be sufficient to cover its working capital,
capital expenditure and debt service requirements until the maturity date of the
Revolving Credit Facility.
The Revolving Credit Facility is an unsecured obligation of the Company maturing
on July 27, 2000 and provides for a total credit commitment of $650.0 million,
reducing to $600.0 million in July 1998 and $525.0 million in July 1999.
The Revolving Credit Facility includes minimum interest and lease expense
coverage ratio, maximum total indebtedness to adjusted earnings before interest,
income taxes, depreciation and amortization ("EBITDA") ratio, as well as
customary other covenants, representations and warranties, funding conditions
and events of default. The Company does not believe that the restrictions
contained in these financial and operating covenants will cause significant
limitations on the Company's financial flexibility.
5
<PAGE> 7
REVCO D.S., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE FISCAL YEARS ENDED JUNE 1, 1996, JUNE 3, 1995 AND MAY 28, 1994
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales $5,087.7 $4,431.9 $2,504.0
Cost of sales 3,593.5 3,100.1 1,742.0
Operating expenses 1,168.3 1,065.7 608.9
Depreciation and amortization 107.1 90.4 52.6
Non-recurring charge 12.6 -- --
--------- --------- ---------
Operating profit 206.2 175.7 100.5
Interest expense 60.1 57.6 24.3
Interest income (.8) (2.4) (1.0)
--------- --------- ---------
Income before income taxes and
extraordinary item 146.9 120.5 77.2
Income tax provision 70.7 59.4 38.5
--------- --------- ---------
Net income before extraordinary item 76.2 61.1 38.7
Extraordinary item, loss related to early retirement
of debt, net of income tax benefit of $2.4 million -- (2.8) --
--------- --------- ---------
Net income $ 76.2 $ 58.3 $ 38.7
========= ========= =========
Net income per share:
Net income before extraordinary item $ 1.14 $ .95 $ .77
Extraordinary item -- (.04) --
--------- --------- ---------
Net income $ 1.14 $ .91 $ .77
========= ========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
2
<PAGE> 8
REVCO D.S., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AT JUNE 1, 1996 AND JUNE 3, 1995
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1996 1995
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash, including temporary cash investments $ 8.4 $ 3.4
Accounts receivable, less allowance for doubtful
accounts of $24.6 and $21.7, respectively 120.6 102.5
Inventories 968.4 962.9
Prepaid expenses 19.4 20.2
-------- --------
Total current assets 1,116.8 1,089.0
Property, equipment and leasehold improvements, net 320.1 278.8
Leasehold interests, net 51.3 58.1
Goodwill, net 367.2 377.0
Reorganization value in excess of amounts allocable
to identifiable assets, net 205.0 241.3
Net deferred tax asset 13.6 38.2
Other assets 59.5 67.4
-------- --------
$2,133.5 $2,149.8
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank debit balances $ 52.5 $ 32.2
Current portion of long-term debt -- 41.6
Accounts payable 335.7 325.4
Accrued liabilities 315.3 290.3
-------- --------
Total current liabilities 703.5 689.5
Long-term debt 514.9 639.6
Long-term liabilities 46.5 47.6
Commitments and contingencies (Note 9)
Stockholders' equity:
Common stock, par value $.01 per share; issued
and outstanding 68,486,112 and 67,064,611,
respectively .7 .7
Preferred stock, par value $.01 per share; no
shares issued or outstanding -- --
Additional paid-in capital 693.3 674.0
Retained earnings 187.4 111.2
Treasury stock, at cost, 700,000 shares (12.8) (12.8)
-------- --------
Total stockholders' equity 868.6 773.1
-------- --------
$2,133.5 $2,149.8
======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
3
<PAGE> 9
REVCO D.S., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------
ADDITIONAL TREASURY TOTAL
NUMBER OF PAID-IN RETAINED STOCK, AT STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS COST EQUITY
------ ------ ------- -------- ---- ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, MAY 29, 1993 50,023,772 $ .5 $ 439.0 $ 14.2 $ -- $ 453.7
Net income -- -- -- 38.7 -- 38.7
Exercise of stock options 203,490 -- 1.8 -- -- 1.8
Compensation expense -- -- 1.0 -- -- 1.0
Common stock issued to
401(k) Savings Plan 343,035 -- 4.5 -- -- 4.5
---------- ----- ------- ------- -------- -------
BALANCE, MAY 28, 1994 50,570,297 .5 446.3 52.9 -- 499.7
Net income -- -- -- 58.3 -- 58.3
Exercise of stock options 164,965 -- 1.6 -- -- 1.6
Compensation expense -- -- .8 -- -- .8
Common stock issued to
401(k) Savings Plan 132,204 -- 2.6 -- -- 2.6
Common stock issued to
Stock Purchase Plan 697,780 -- 9.1 -- -- 9.1
Rights offering 15,499,365 .2 216.8 -- -- 217.0
Stock issuance costs -- -- (3.2) -- -- (3.2)
Purchase of treasury stock -- -- -- -- (12.8) (12.8)
---------- ----- ------- ------- -------- -------
BALANCE, JUNE 3, 1995 67,064,611 .7 674.0 111.2 (12.8) 773.1
Net income -- -- -- 76.2 -- 76.2
Exercise of stock options and
other stock awards 967,967 -- 8.9 -- -- 8.9
Compensation expense -- -- .9 -- -- .9
Common stock issued to
401(k) Savings Plan 214,607 -- 5.2 -- -- 5.2
Common stock issued to
Stock Purchase Plan 238,927 -- 4.3 -- -- 4.3
---------- ----- ------- ------- -------- -------
BALANCE, JUNE 1, 1996 68,486,112 $ .7 $ 693.3 $ 187.4 $ (12.8) $ 868.6
========== ===== ======= ======= ======== =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
4
<PAGE> 10
REVCO D.S., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED JUNE 1, 1996, JUNE 3, 1995 AND MAY 28, 1994
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 76.2 $ 58.3 $ 38.7
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 107.1 90.4 52.6
Deferred income taxes 24.6 37.0 11.0
Net operating loss carryforwards utilized 18.7 17.0 24.7
Extraordinary item, loss on early retirement
of debt, net of income tax benefit -- 2.8 --
Changes in operating assets and liabilities:
(Increase) in accounts receivable, net (18.1) (28.9) (7.8)
(Increase) in inventories (5.5) (234.4) (17.6)
(Increase) decrease in prepaid expenses .8 (13.5) (.8)
(Increase) in other assets (1.0) (13.2) (9.1)
Increase in accounts payable 10.3 72.7 24.0
Increase in accrued liabilities 30.8 24.6 8.6
------- ------- -------
Net cash flows provided by operating
activities 243.9 12.8 124.3
------- ------- -----
NET CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, equipment and leasehold
improvements (110.7) (138.4) (36.0)
Purchase of Hook-SupeRx, Inc. subsidiary,
net of cash acquired -- (302.1) --
Payment of professional fees associated with
the Acquisition -- (7.4) --
Proceeds from Store Divestiture Program -- 128.8 --
Acquisition Reserve payments -- (97.3) --
------- ------- ---------
Net cash flows used by investing
activities (110.7) (416.4) (36.0)
------- ------- --------
NET CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in bank debit balances 20.3 32.2 --
Payments of long-term debt (248.4) (432.3) (161.2)
Proceeds from issuance of long-term debt 82.1 582.4 85.0
Payment of debt and stock issuance costs -- (14.4) (4.5)
Payment of consent solicitation fees -- -- (10.3)
Proceeds from stock rights offering -- 217.0 --
Proceeds from common stock issued under employee
benefit plans 17.8 10.5 9.5
Purchase of treasury stock -- (12.8) --
-------- -------- -------
Net cash flows provided (used) by financing
activities (128.2) 382.6 (81.5)
-------- -------- -------
Net increase (decrease) in cash and
temporary cash investments 5.0 (21.0) 6.8
Cash and temporary cash investments at
beginning of period 3.4 24.4 17.6
-------- -------- -------
Cash and temporary cash investments at
end of period $ 8.4 $ 3.4 $ 24.4
======== ======== =======
SUPPLEMENTAL DISCLOSURE OF CASH PAYMENTS FOR:
Interest $ 45.9 $ 52.6 $ 21.0
Income taxes 39.2 9.4 3.2
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
5
<PAGE> 11
REVCO D.S., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revco D.S., Inc. (the "Company") operates 2,184 retail drugstores in
fourteen contiguous Midwestern, Southeastern and Eastern states. The
Company's stores are health-oriented neighborhood pharmacies offering
pharmaceuticals and related merchandise.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Since actual results may differ
from those estimates, the Company revises its estimates and assumptions
as new information becomes available.
The significant accounting policies applied in preparing the accompanying
consolidated financial statements of the Company are summarized below:
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions have been
eliminated. Certain balances have been reclassified to conform to the
presentation at June 1, 1996.
FISCAL YEAR
The Company's fiscal year ends on the Saturday closest to May 31. The
fiscal year refers to the year in which the period ends (e.g., fiscal
1996 ended June 1, 1996). Fiscal years generally consist of 52 weeks,
with the exception of fiscal year 1995 which contains 53 weeks.
CASH AND TEMPORARY CASH INVESTMENTS
Temporary cash investments include all highly liquid investments with
original maturities of three months or less.
INVENTORIES
Inventories are stated at the lower of cost or market. The cost of
substantially all inventories is determined on a last-in, first-out
(LIFO) basis. If the first-in, first-out (FIFO) method of inventory
accounting had been used, inventories would have been approximately $55.8
million and $36.1 million higher than reported at June 1, 1996 and June
3, 1995, respectively.
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Depreciation expense is computed on a straight-line basis. Leasehold
improvements are amortized over the life of the asset or the term of the
lease, whichever is shorter.
The ranges of estimated useful lives used in computing depreciation and
amortization are as follows:
Buildings and improvements 20 years
Fixtures and equipment 3 to 7 years
Autos and trucks 5 years
Leasehold improvements 3 to 10 years
LEASEHOLD INTERESTS
Leasehold interests are being amortized over the remaining lease term or
15 years, whichever is shorter. At June 1, 1996 and June 3, 1995,
accumulated amortization was $13.9 million and $8.6 million,
respectively.
GOODWILL
Goodwill recorded in the acquisition of Hook-SupeRx, Inc. ("HSI") is
being amortized on a straight-line basis over 40 years. This amortization
is a non-deductible expense for tax purposes. At June 1, 1996, and June
3, 1995, accumulated amortization was $17.8 million and $8.0 million,
respectively.
6
<PAGE> 12
REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO IDENTIFIABLE ASSETS
Reorganization value in excess of amounts allocable to identifiable assets
("reorganization goodwill") is being amortized on a straight-line basis
over 20 years. This amortization is a non-deductible expense for tax
purposes.
The Company has net operating loss carryforwards ("NOLs") available to
offset future federal and state taxable income. These NOLs are attributable
to the time period prior to the Company's emergence from Chapter 11 of the
United States Bankruptcy Code ("Chapter 11") in fiscal 1992. Under the
recommended accounting principles for entities emerging from Chapter 11
("Fresh Start Reporting"), any benefits realized from the utilization of
these NOLs should reduce reorganization goodwill. Below is a reconciliation
of the original reorganization goodwill recorded by the Company upon
emergence from Chapter 11 to the net amount reflected in the fiscal 1996
and 1995 balance sheets (dollars in millions):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Original balance recorded $352.1 $352.1
Accumulated amortization (70.4) (52.8)
Cumulative NOLs utilized (76.7) (58.0)
------ ------
$205.0 $241.3
====== ======
</TABLE>
INCOME TAXES
Deferred income taxes are provided for at the current statutory rates on
the difference between financial statement basis and tax basis of assets
and liabilities and are classified in the balance sheet as current or
non-current consistent with the expected reversal date of the temporary
differences.
STORE PRE-OPENING EXPENSES
Non-capital expenditures incurred prior to the opening of a new or
remodeled store are charged to operating expense when incurred.
ADVERTISING
Advertising costs are expensed as incurred. Total advertising expenses were
$88.6, $85.3 and $50.2 million for the three fiscal years ended June 1,
1996, respectively.
POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS
The Company's present benefit structure does not provide for postemployment
benefits other than pensions for current employees. The Company provides
certain health and life insurance benefits for selected retired employees
who met eligibility requirements and are grandfathered under former benefit
plans which have since been amended or terminated. The costs of these
benefits have been fully accrued by the Company.
The Company is a party to deferred compensation and supplemental retirement
arrangements with 58 current and former officers and employees of the
Company. The Company has accrued a liability equal to the present value of
future amounts payable under the terms of these agreements. The agreements
also provide survivor benefits in the event of death prior to retirement
for current officers and employees.
The Company is a party to employment agreements (the "Employment
Agreements") with each of its current officers and two non-officer
employees. Each of the Employment Agreements is effective until terminated
by the Company or the employee, with or without cause. (The aggregate
annual salaries provided by the Employment Agreements are approximately
$5.0 million.) The Employment Agreements provide that, in the event of a
termination for "good reason" by the employee or a termination without
cause by the Company, the Company will have an obligation to continue
benefits and to pay the terminated employee's salary for a specified period
(the "Severance Period"). The Employment Agreements provide for Severance
Periods of 24 months for members of the Company's management executive
committee and 12 months for the other officers as well as the non-officer
employees, with additional enhancements to the Severance Periods in the
event of a change in control of the Company.
7
<PAGE> 13
EARNINGS PER SHARE
Earnings per share were computed using weighted average number of shares
and common stock equivalents outstanding of 66,869,823, 64,365,943 and
50,318,177 for the three fiscal years ended June 1, 1996, respectively.
Fully diluted earnings per share are the same as primary earnings per
share.
ADOPTION OF NEW ACCOUNTING STANDARDS
The Company will adopt the following Statements of Financial Accounting
Standards ("SFAS") during fiscal 1997.
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," was issued in March 1995 and is
effective for fiscal years that begin after December 15, 1995. This
standard requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that full
recoverability is questionable. Management has performed a preliminary
review and has determined that this statement will not have a material
impact on the Company's reported results of operations.
SFAS No. 123, "Accounting for Stock-Based Compensation," was issued in
October 1995 and is effective for fiscal years that begin after December
15, 1995. This standard establishes accounting and disclosure requirements
using a fair value based method of accounting for stock-based employee
compensation plans. Under SFAS No. 123, the Company may either adopt the
new fair value based accounting method or continue the intrinsic value
based method under current accounting standards and provide pro forma
disclosures of net income and net income per share as if the accounting
provisions of SFAS No. 123 had been adopted. The Company plans to continue
to account for its stock-based employee compensation plans using the
intrinsic value based method under current accounting standards and adopt
the disclosure requirements of SFAS No. 123.
(2) NON-RECURRING CHARGE
In November 1995, Rite Aid Corporation ("Rite Aid") and the Company
announced that they had entered into a definitive merger agreement in which
Rite Aid would acquire the Company. In April 1996, Rite Aid informed the
Company that Rite Aid was withdrawing its tender offer for the Company's
common stock. Following Rite Aid's announcement, the Company and Rite Aid
terminated the merger agreement pursuant to which the tender offer had been
made.
The Company recorded a non-recurring charge of $12.6 million for expenses
related to the failed merger attempt consisting of professional fees,
employee retention costs and other merger-related costs.
(3) ACQUISITION OF HOOK-SUPERX, INC.
In July 1994, Revco completed its acquisition of HSI (the "Acquisition")
for a total acquisition value of $632.6 million, including acquired debt of
HSI of $330.5 million. The Acquisition was accounted for using the purchase
method. Accordingly, the carrying values of HSI's net assets, including the
establishment of the acquisition reserve (the "Acquisition Reserve")
discussed below, have been adjusted to their estimated fair values. The
excess of the purchase price over the net identifiable assets and
liabilities of HSI totaled $385.0 million and is reported as goodwill.
To finance the Acquisition, the Company replaced its former bank
facilities. The accelerated amortization of unamortized deferred financing
costs associated with the former bank facilities totaled $5.2 million,
before applicable income tax benefit of $2.4 million, and has been
accounted for as a net extraordinary loss of $2.8 million in fiscal 1995.
8
<PAGE> 14
As a result of the Acquisition, results of operations for the Company for
fiscal 1996 are not comparable to results of operations for fiscal 1995 and
fiscal 1994. Operating results of the Company include the operating results
of retained HSI operations (801 drugstores and a mail order facility) since
the Acquisition date, or for all 52 weeks of fiscal 1996 and for 44 of the
53 weeks included in fiscal 1995. To enhance comparability and to provide a
more meaningful analysis of operating trends, unaudited pro forma amounts
for both fiscal 1995 and 1994 have been presented in Note 13.
STORE DIVESTITURE PROGRAM
Operations of HSI that the Company had targeted for divestiture, 271 HSI
stores and two distribution centers that were sold or closed in non-overlap
states and 42 HSI stores that were consolidated into existing Revco stores
in overlap states (the "Store Divestiture Program") have been excluded from
the Company's results of operations since the date of the Acquisition. The
Store Divestiture Program was completed during the second quarter of fiscal
1995, in a series of unrelated transactions. Net cash proceeds raised,
after estimated working capital paydowns, were $128.8 million.
ACQUISITION RESERVE
Severance and payroll costs associated with the Store Divestiture Program
and the shutdown of HSI's administrative offices, completed during fiscal
1995, as well as the costs of the discontinued activities of these
operations during the closing process, were charged to the Acquisition
Reserve, along with certain incremental non-recurring costs directly
attributable to the Acquisition. Activity charged to the Acquisition
Reserve from the date of the Acquisition through the completion of the
divestiture and integration process at the end of fiscal 1995 totaled $97.3
million and included severance and payroll costs of $39.8 million,
discontinued activities expenses of $32.0 million and other direct,
incremental and non-recurring costs of $25.5 million.
(4) PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consist of (dollars in
millions):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Land $ 17.1 $ 17.6
Buildings and improvements 60.8 52.1
Fixtures and equipment 264.3 209.3
Autos and trucks 2.6 1.5
Leasehold improvements 128.7 97.9
Construction in progress 6.1 7.5
------- -------
479.6 385.9
Less accumulated depreciation and amortization (159.5) (107.1)
------- -------
$ 320.1 $ 278.8
======= =======
(5) FINANCING
Long-term debt consists of (dollars in millions):
1996 1995
---- ----
Bank facilities $230.0 $396.3
9.125% Senior Notes 140.0 140.0
10.125% Senior Notes 144.9 144.9
------ ------
514.9 681.2
Less current portion -- (41.6)
------ ------
Total long-term debt $514.9 $639.6
====== ======
Future maturities of long-term debt are as follows (dollars in millions):
FISCAL YEAR
-----------
1997 $ --
1998 --
1999 --
2000 140.0
2001 230.0
2002 and thereafter 144.9
</TABLE>
9
<PAGE> 15
(6) ACCRUED LIABILITIES
<TABLE>
<CAPTION>
Accrued liabilities consist of (dollars in millions):
1996 1995
---- ------
<S> <C> <C>
Store rental obligations $ 74.3 $ 79.8
Salaries and wages 83.0 68.2
Other employee benefits 59.7 45.5
Insurance 31.0 32.2
Income and non-income taxes 9.2 8.2
Other 58.1 56.4
------- -------
$ 315.3 $ 290.3
======= =======
</TABLE>
Accruals for store rental obligations include any rental obligations
associated with closed store locations.
(7) STOCKHOLDERS' EQUITY
The authorized capital stock of the Company consists of 125,000,000
shares of stock, of which 25,000,000 shares, $.01 par value per share,
are preferred stock and 100,000,000 shares, $.01 par value per share, are
common stock.
COMMON STOCK
The holders of the common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of stockholders.
Subject to any preferential rights held by holders of the preferred
stock, holders of the common stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds
legally available therefor.
In July 1994, a rights offering was completed, raising gross proceeds of
$217.0 million to partially finance the Acquisition. In connection with
the rights offering, the Company entered into a standby purchase
agreement with Zell/Chilmark Fund, L.P. ("Zell/Chilmark"), pursuant to
which Zell/Chilmark agreed to acquire from the Company all shares of
common stock subject to its basic subscription privilege and any and all
of the underlying shares which remained after the exercise of the rights
and the satisfaction of all subscriptions pursuant to an oversubscription
privilege. The Company paid a fee of $2.9 million to Zell/Chilmark in
connection with the standby purchase agreement.
PREFERRED STOCK
The Company's Board of Directors (the "Board") has the authority to issue
25,000,000 shares of preferred stock in one or more series and to fix the
designation and relative powers, preferences and rights and
qualifications, limitations or restrictions of all shares of each such
series, without any further vote or action by the stockholders. The
Company has no present plans to issue any of the preferred stock.
TREASURY STOCK
In May 1996, the Board authorized the repurchase by the Company of up to
three million of the Company's outstanding shares of common stock.
Through July 12, 1996, no shares have been repurchased by the Company
under this authorization. During fiscal 1995, the Company repurchased a
total of 700,000 shares at an aggregate purchase price of $12.8 million
under a previously authorized repurchase program.
11
<PAGE> 16
(8) STOCK PURCHASE AND OPTION PLANS
The Company's 1993 Employee Stock Purchase Plan (the "Stock Purchase
Plan") enables all employees of the Company to subscribe to shares of
common stock on offering dates generally coinciding with the Company's
fiscal year, at a purchase price equal to the lesser of 85% of the fair
market value of the common stock on the first or last day of the offering
period. During fiscal 1996, the Company's stockholders approved an
increase in the maximum number of shares of common stock reserved for
issuance under the Stock Purchase Plan from 1,200,000 to 2,700,000. At
June 1, 1996, 1,763,293 shares remained available for issuance through
the Stock Purchase Plan.
The Company has two plans under which stock awards may be granted.
The 1992 Long-Term Incentive Plan (the "Incentive Plan") provides for the
granting of stock awards to officers and other key employees of the
Company. The stock awards may consist of non-qualified stock options,
restricted stock awards and other performance awards. A maximum of
6,520,000 shares of common stock are reserved for issuance under the
Incentive Plan.
The 1992 Non-Employee Directors' Stock Option Plan (the "Directors'
Plan") provides for the granting of non-qualified stock options to
certain non-employee directors of the Company. A maximum of 270,000
shares of common stock are reserved for issuance under the Directors'
Plan.
Non-qualified stock options granted under the Incentive Plan and
Directors' Plan provide for the option to purchase common stock over a
10-year period, at a price not less than the fair market value on the
date of grant. On each anniversary of the date of grant, the exercise
price for each non-vested option increases by an amount equal to 5% of
the option price then in effect.
The Incentive Plan and Directors' Plan are administered by the Human
Resources Committee of the Board of Directors of the Company (the
"Committee"). Options become exercisable at such times and in such
installments as set by the Committee. Participants generally vest in the
options over a five-year period.
Information regarding the Company's stock option plans is summarized
below:
<TABLE>
<CAPTION>
INCENTIVE DIRECTORS' PRICE
NUMBER OF OPTIONS PLAN PLAN PER SHARE
------------------------- ---------------- --------------- -----------------
<S> <C> <C> <C> <C>
Outstanding May 29, 1993 2,146,000 60,000 $ 8.38 - 10.88
Granted 258,000 50,000 11.50 - 17.00
Exercised (201,490) (2,000) 8.38 - 9.92
Canceled (41,460) -- 9.01 - 15.50
--------- ---------
Outstanding May 28, 1994 2,161,050 108,000 8.75 - 17.00
Granted 1,485,239 49,473 18.00 - 22.13
Exercised (150,119) (14,846) 8.75 - 18.00
Canceled (118,774) (6,000) 9.01 - 19.88
--------- ---------
Outstanding June 3, 1995 3,377,396 136,627 8.75 - 22.13
Granted 1,808,700 35,000 20.75 - 27.75
Exercised (681,917) (5,000) 8.80 - 23.24
Canceled (156,054) -- 9.01 - 23.24
--------- ---------
Outstanding June 1, 1996 4,348,125 166,627 $ 8.75 - 27.75
========= ========= ==============
EXERCISABLE
AT JUNE 1, 1996 943,298 131,671 $ 8.75 - 27.75
========= ========= ==============
RESERVED FOR FUTURE GRANT 732,299 81,527
========= =========
</TABLE>
In May 1996, the Committee awarded an aggregate of 281,050 shares of
restricted stock to certain officers and key employees as a retention
incentive in light of the failed Rite Aid merger transaction. The
restricted stock awards vest over periods not to exceed two years and
require, among other things, continued employment over the vesting
period. Compensation expense of $6.5 million was recognized in
connection with the restricted stock award grants and was included in
the non-recurring charge (see Note 2) recorded in fiscal 1996.
12
<PAGE> 17
(9) LEASES
The Company conducts certain warehousing and substantially all
retailing operations in leased premises. Initial lease terms normally
range from three to 20 years, and are generally renewable at the option
of the Company. Leases are either gross leases, which provide for
annual rentals that include executory expenses such as real estate
taxes, insurance, common area and other operating costs which are paid
by the lessor, or net leases which provide that the Company pay the
above-mentioned expenses. Certain leases include a provision for the
payment of contingent rent based upon a percentage of sales in excess
of defined minimums. The Company also leases certain transportation and
data processing equipment under leases expiring at various dates during
the next ten years. All leases meet the criteria of, and are accounted
for, as operating leases.
Rental expense for the periods indicated was as follows (dollars in
millions):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Minimum rentals $131.4 $112.4 $66.7
Contingent rentals 41.7 30.4 17.2
------ ------ -----
$173.1 $142.8 $83.9
====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
At June 1, 1996, future minimum rental commitments under all
noncancelable leases were as follows (dollars in millions):
REAL
FISCAL YEAR PROPERTY EQUIPMENT TOTAL
----------- -------- --------- -----
<S> <C> <C> <C> <C>
1997 $ 131.5 $4.0 $ 135.5
1998 123.4 2.3 125.7
1999 113.0 1.5 114.5
2000 100.1 .8 100.9
2001 85.1 .5 85.6
2002 and thereafter 471.4 .7 472.1
-------- ---- --------
$1,024.5 $9.8 $1,034.3
======== ==== ========
</TABLE>
<TABLE>
<CAPTION>
(10) INCOME TAXES
The income tax provision consists of (dollars in millions):
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $39.9 $ 15.2 $ 22.1
State and local 13.8 4.8 5.4
----- ------ ------
53.7 20.0 27.5
Utilization of NOLs (18.7) (17.0) (24.7)
----- ------ ------
Net current provision 35.0 3.0 2.8
Deferred:
Federal 16.0 29.9 8.3
State and local 1.0 7.1 2.7
----- ------ ------
17.0 37.0 11.0
----- ------ ------
Provision before add back of NOLs 52.0 40.0 13.8
Add back utilization of NOLs which cannot be
benefited under Fresh Start Reporting 18.7 17.0 24.7
----- ------ ------
70.7 57.0 38.5
Extraordinary benefit -- 2.4 --
----- ------ ------
Income tax provision as reported $70.7 $ 59.4 $ 38.5
===== ====== ======
</TABLE>
For financial reporting purposes, the changes in deferred tax assets
(liabilities) are as follows (dollars in millions):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net change in accruals/reserves $(10.8) $(32.4) $(13.0)
Depreciation and amortization 1.5 1.8 1.7
Other, net (7.7) (6.4) .3
------- ------ ------
Deferred tax provision (17.0) (37.0) (11.0)
Acquired tax assets -- 94.8 --
AMT credit carryforward (1.1) 2.4 1.1
Reconciliation to prior year tax return (6.5) (1.5) (1.9)
------- ------ ------
Net change in deferred tax assets (liabilities) $(24.6) $ 58.7 $(11.8)
======= ====== ======
</TABLE>
13
<PAGE> 18
The following is a reconciliation of the statutory federal income tax
rate to the actual effective income tax rate:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal tax rate 35.0% 35.0% 35.0%
State and local income taxes, net of
federal tax benefit 6.5 6.4 6.9
Amortization of intangible assets 6.5 7.4 8.0
Other .1 .5 --
---- ---- ----
Effective income tax rate 48.1% 49.3% 49.9%
==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
Significant components of deferred tax assets and liabilities as of the end of fiscal 1996 and 1995 are as
follows (dollars in millions):
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Pension, vacation and other employee
benefit accruals $ 31.6 $ 30.9
Store rental obligations 21.0 22.2
Self insurance, contingency and other
reserves 21.8 25.2
Reserves for uncollectible receivables 16.4 17.8
AMT carryforwards 14.3 15.4
Other 13.4 18.1
------- ------
118.5 129.6
------- ------
Deferred tax liabilities:
Excess book over tax bases of inventory (68.0) (71.2)
Excess book over tax bases of fixed assets
and intangibles (19.2) (17.7)
Other (17.7) (2.5)
------- ------
(104.9) (91.4)
------- ------
Net deferred tax asset $ 13.6 $ 38.2
======= ======
</TABLE>
As of June 3, 1995, estimated NOLs reported on the Company's federal
income tax returns were approximately $352.0 million. Approximately $98.0
million of these NOLs are subject to a use limitation ("restricted NOLs")
of approximately $27.0 million per year under Section 382 of the Internal
Revenue Code. The Company believes that it will not be able to utilize
approximately $81.0 million of the restricted NOLs because of the
allocation method for the annual use limitation under proposed income tax
regulations applicable to related corporations belonging to two separate
consolidated groups.
While the Company believes that it is justified in taking the positions
that it has taken with respect to the NOLs, the law with respect to the
treatment of some of the items making up the NOLs is unclear or
unsettled. Although the Company believes its calculations of the NOLs are
reasonable, the NOLs and the other items on the Company's tax returns are
subject to audit by the Internal Revenue Service ("IRS"). Due to the lack
of specific guidance on certain significant issues, the Company's
position with respect to some or all of the items making up the NOLs
could be challenged by the IRS. If the IRS were to successfully disallow
some or all of the Company's NOLs, the Company would be able to offset
less of its taxable income with NOLs and other tax deductions.
For fiscal 1996, the Company will utilize approximately $11.0 million of
restricted NOLs and approximately $70.0 million of unrestricted NOLs to
offset projected taxable income of the Company, leaving estimated NOLs
for fiscal 1997 of approximately $271.0 million, of which approximately
$81.0 million the Company may be unable to utilize, as discussed
previously.
A large portion of the Company's NOLs are attributable to the time period
prior to the Company's emergence from Chapter 11 in fiscal 1992. Under
Fresh Start Reporting, benefits realized from these NOLs should reduce
reorganization goodwill. Accordingly, estimated NOLs to be utilized
during the three fiscal years ended June 1, 1996 have not been included
in the Company's computation of its income tax provision, but reflected
instead as a reduction of reorganization goodwill.
14
<PAGE> 19
(11) RETIREMENT BENEFITS
The principal retirement plans for employees are a non-contributory
defined benefit pension plan (the "Retirement Income Plan") and a 401(k)
savings plan (the "401(k) Savings Plan").
The Retirement Income Plan covers all full-time employees who are 20 1/2
years of age with six months of service and who are not covered by
collective bargaining agreements. Benefits paid to retirees are based
upon age at retirement, years of credited service and average
compensation during the final five years of employment. It is the policy
of the Company to fund its plan at amounts required by the applicable
regulations. The Company made cash contributions of $1.0, $7.8 and $3.1
million to the plan during the three fiscal years ended June 1, 1996,
respectively.
<TABLE>
<CAPTION>
Net periodic pension cost includes the following components (dollars in
millions):
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service cost-benefits $ 7.4 $ 7.1 $ 3.5
Interest cost 13.0 10.3 5.0
Return on plan assets (24.2) (10.8) (4.6)
Net amortization and deferral 11.4 (.1) --
----- ------ ------
Net periodic pension cost $ 7.6 $ 6.5 $ 3.9
===== ===== =====
</TABLE>
The following table sets forth the plan's funded status and amounts
recognized in the Company's Consolidated Balance Sheets (dollars in
millions):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Accumulated benefit obligations, including vested
benefits of $156.5 and $143.6, respectively $165.3 $151.7
====== ======
Projected benefit obligation $185.7 $170.4
Plan assets at fair value 158.4 140.2
------ --------
Projected benefit obligation in excess of plan assets 27.3 30.2
Unrecognized net loss (9.2) (18.5)
Unrecognized prior service cost (3.0) (3.3)
------- --------
Accrued pension cost $ 15.1 $ 8.4
======= ========
Assumptions used to measure the actuarial present value of the projected
benefit obligation are as follows:
1996 1995
---- ----
Assumed discount rate 7.75% 7.75%
Assumed rate of compensation increase 4.50% 4.50%
Assumed rate of return on plan assets 9.00% 9.00%
</TABLE>
Plan assets primarily consist of mutual funds, with the balance invested
in money market funds, common stock and insurance contracts.
The 401(k) Savings Plan covers all employees of the Company meeting
certain eligibility requirements and is funded by voluntary employee
contributions and by Company contributions equal to a certain percentage
of employee contributions. Employees' interests in Company contributions
vest over five years. The cost of the plan was $3.4, $1.3 and $1.0
million for the three fiscal years ended June 1, 1996, respectively.
In addition to the above mentioned plans, and pursuant to various labor
agreements, the Company and certain subsidiaries are required to make
contributions to various union-administered pension plans which
aggregated $1.2, $1.3 and $.8 million in each of the three fiscal years
ended June 1, 1996. The Company may be liable for its share of the plans'
unfunded liabilities if the plans are terminated.
15
<PAGE> 20
REVCO D.S., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) SUMMARY OF QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
1996
Net sales $ 1,076.7 $1,137.0 $ 1,243.3 $ 1,630.7
========= ======== ========= =========
Gross profit $ 320.8 $ 328.3 $ 363.2 $ 481.9
========= ======== ========= =========
Net income $ 8.4 $ 11.5 $ 24.7 $ 31.6
========= ======== ========= =========
Net income per share $ .13 $ .17 $ .37 $ .47
========= ======== ========= =========
1995
Net sales $ 694.4 $1,027.2 $ 1,133.0 $ 1,577.3
========= ======== ========= =========
Gross profit $ 206.9 $ 301.7 $ 335.8 $ 487.4
========= ======== ========= =========
Net income before extraordinary item $ 5.8 $ 5.0 $ 17.7 $ 32.6
Extraordinary item (2.8) -- -- --
--------- -------- -------- ---------
Net income $ 3.0 $ 5.0 $ 17.7 $ 32.6
========= ======== ========= =========
Net income per share:
Net income before extraordinary item $ .10 $ .08 $ .27 $ .49
Extraordinary item (.05) -- -- --
--------- -------- --------- ---------
Net income $ .05 $ .08 $ .27 $ .49
========= ======== ========= =========
</TABLE>
The Company reports its quarterly results of operations on the basis of
12-week periods for each of the first three quarters and a 16-week period
for the fourth quarter. The fourth quarter of fiscal 1995 includes an
additional week of operations due to the timing of the Company's fiscal
year end which ends on the Saturday closest to May 31.
As explained in Note 2, during the fourth quarter of fiscal 1996, the
Company recorded a non-recurring charge of $12.6 million for expenses
related to a failed merger attempt.
Fourth quarter results include normal year end adjustments relating to
estimates made during the year. The effect of such adjustments in fiscal
years 1996 and 1995 were not material to the reported results.
(13) PRO FORMA DATA (UNAUDITED)
The unaudited pro forma data below reflects the financial results of the
Company as if the acquisition of HSI had occurred, and such transactions
had been consummated, as of the beginning of the periods presented. The
unaudited pro forma data reflects pro forma adjustments to historical
results of operations of the Company to: (a) include retained operations
of HSI; (b) record additional interest expense on the incremental debt
levels used to finance the Acquisition; (c) record amortization of
goodwill recognized in connection with the Acquisition; (d) adjust
historical depreciation and amortization expense of HSI as a result of
purchase accounting adjustments; and (e) record adjustments to the
historical tax provision based upon a revised effective tax rate.
The pro forma information presented does not attempt to quantify any
operating expense synergies or cost reductions of the combined operations
of the Company and HSI.
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
AS REPORTED PRO FORMA
---------------------------------- --------------------------------
1995 1994 1995 1994
---------------- ----------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Net sales $4,431.9 $2,504.0 $4,723.3 $4,320.9
Cost of sales 3,100.1 1,742.0 3,304.8 3,009.1
Operating expenses 1,065.7 608.9 1,146.1 1,107.6
Depreciation and
amortization 90.4 52.6 97.4 85.5
-------- -------- -------- --------
Operating profit $ 175.7 $ 100.5 $ 175.0 $ 118.7
======== ======== ======== ========
Net income $ 61.1 $ 38.7 $ 56.2 $ 27.5
======== ======== ======== ========
Net income per share $ .95 $ .77 $ .87 $ .42
======== ======== ======== ========
</TABLE>
16
<PAGE> 21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Revco D.S., Inc.:
We have audited the accompanying consolidated balance sheets of Revco D.S., Inc.
and Subsidiaries (collectively the "Company") as of June 1, 1996 and June 3,
1995, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three fiscal years in the
period ending June 1, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of June 1, 1996
and June 3, 1995, and the results of their operations and their cash flows for
each of the three fiscal years ended June 1, 1996 in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
/s/ Arthur Andersen LLP
Cleveland, Ohio,
July 12, 1996.
1
<PAGE> 22
SELECTED FINANCIAL DATA
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
-------------------------------------------------------------------------------
| PREDECESSOR
| COMPANY(2)
JUNE 1, JUNE 3, MAY 28, MAY 29, | MAY 30,
1996 1995(1) 1994 1993 | 1992
--------------- -------------- -------------- --------------- | ---------------
<S> <C> <C> <C> <C> | <C>
PERIOD DATA: |
Operations: |
Net sales $ 5,087.7 $ 4,431.9 $ 2,504.0 $ 2,242.1 | $2,086.3
Cost of sales 3,593.5 3,100.1 1,742.0 1,568.3 | 1,461.1
Operating expenses 1,168.3 1,065.7 608.9 551.5 | 528.2
Depreciation and amortization 107.1 90.4 52.6 46.3 | 51.2
Non-recurring charge 12.6 -- -- -- | --
--------- ---------- --------- --------- | --------
Operating profit 206.2 175.7 100.5 76.0 | 45.8
Interest expense, net 59.3 55.2 23.3 41.0 | 35.0
Reorganization items (2) -- -- -- -- | 356.9
Income tax provision (benefit) 70.7 59.4 38.5 20.8 | (8.5)
--------- ---------- ---------- --------- | --------
Net income (loss) before |
extraordinary item 76.2 61.1 38.7 14.2 | (337.6)
Extraordinary item -- (2.8) -- -- | 635.3(2)
--------- ---------- ---------- --------- | --------
Net income $ 76.2 $ 58.3 $ 38.7 $ 14.2 | $ 297.7
========= ========== ========== ========= | ========
Net income before non-recurring |
charge and extraordinary item $ 82.7 $ 61.1 $ 38.7 $ 14.2 |
========= ========== ========== ========= |
|
Earnings Per Share(2): |
Net income per share before non- |
recurring charge and extraordinary item $ 1.24 $ .95 $ .77 $ .35 |
========= ========== ========== ========== |
|
Net income per share $ 1.14 $ .91 $ .77 $ .35 |
========= ========== ========== ========= |
Average number of common shares |
outstanding 66,869,823 64,365,943 50,318,177 40,933,214 |
========== ========== =========== ========== |
</TABLE>
<TABLE>
<CAPTION>
JUNE 1, JUNE 3, MAY 28, MAY 29, MAY 30,
1996 1995(1) 1994 1993 1992
--------------- -------------- -------------- --------------- ---------------
BALANCE SHEET DATA (AT PERIOD END):
<S> <C> <C> <C> <C> <C>
Total assets $ 2,133.5 $ 2,149.8 $ 1,060.8 $ 1,045.2 $1,056.3
========= ========= ========= ========= ========
Inventories $ 968.4 $ 962.9 $ 505.4 $ 487.8 $ 436.1
========= ========= ========= ========= ========
Working capital $ 413.3 $ 399.5 $ 243.9 $ 222.0 $ 257.2
========= ========= ========= ========= ========
Capitalization:
Long-term debt $ 514.9 $ 639.6 $ 200.0 $ 253.3 $ 435.2
Stockholders' equity 868.6 773.1 499.7 453.7 320.0
--------- --------- --------- --------- --------
Total capitalization $ 1,383.5 $ 1,412.7 $ 699.7 $ 707.0 $ 755.2
========= ========= ========= ========= ========
Debt to total capitalization percentage 37.2% 45.3% 28.6% 35.8% 57.6%
========= ========= ========= ========= ========
Number of drugstores in
operation 2,184 2,118 1,248 1,190 1,143
========= ========= ========= ========= ========
<FN>
(1) Fiscal 1995 consisted of 53 weeks. All other fiscal years presented consist
of 52 weeks.
(2) On June 1, 1992, the Company, and certain of its subsidiaries which filed
petitions for relief, emerged from Chapter 11 of the United States
Bankruptcy Code pursuant to a confirmed plan of reorganization of the
Company's predecessor company.
The Company implemented the recommended accounting principles for entities
emerging from Chapter 11 ("Fresh Start Reporting"). As a result of the
Company's emergence from bankruptcy and its adoption of Fresh Start
Reporting as of May 30, 1992, the Company's results of operations for the
periods subsequent to May 30, 1992, are not comparable to the predecessor
company's consolidated financial statements. Among other things, the
predecessor company's results of operations for the year ended May 30,
1992, includes as an extraordinary item a one-time gain of $635.3 million
relating to debt discharged, and a one-time reorganization item of $325.6
million to record assets and liabilities at their estimated fair values.
Per share data is not presented for the predecessor company due to the
general lack of comparability with the revised capital structure of the
Company.
</TABLE>
<PAGE> 1
Exhibit 21.1
REVCO D.S., INC. AND SUBSIDIARIES
Subsidiaries of the Registrant
Revco operates, through the directly or indirectly wholly-owned (with the
exception of Twinsurance Limited, less than one percent of whose capital stock
is owned by its directors) subsidiaries listed below, retail drug stores in a
total of 14 states.
<TABLE>
<CAPTION>
Jurisdiction of
Subsidiary Incorporation
---------- -------------
<S> <C>
Revco Discount Drug Centers,Inc. Michigan
("Revco Michigan")
Revco Discount Drug Centers, Inc. Ohio
White Cross Stores, Inc., No. 14 Pennsylvania
Hook-SupeRx, Inc. Delaware
Brooks Drug, Inc. Delaware
</TABLE>
Revco also indirectly owns, through Revco Michigan, SOPCO, Inc., an Ohio
corporation.
Revco also owns in excess of ninety-nine percent of the outstanding capital
stock of Twinsurance Limited, a corporation organized under Bermuda law on
March 27, 1980. Twinsurance Limited owns approximately twenty-one percent of
the outstanding voting stock of Revco Michigan. Revco's investment in
Twinsurance limited is stated on the equity method of accounting in the
consolidated financial statements.
Revco also owns additional subsidiaries which in the aggregate would not
constitute a significant subsidiary.
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of our report dated July 12, 1996 included in Revco
D.S., Inc.'s annual report to stockholders. It should be noted that we have not
audited any financial statements of the Company subsequent to June 1, 1996 or
performed any audit procedures subsequent to the date of our report.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Cleveland, Ohio
August 28, 1996
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report incorporated by reference in this Annual Report on Form 10-K, into the
Company's previously filed Registration Statements on Form S-8, File Nos.
33-54592, 33-67816 and 33-91774.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Cleveland, Ohio
August 28, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-1-1996
<PERIOD-START> JUN-4-1995
<PERIOD-END> JUN-1-1996
<CASH> 8
<SECURITIES> 0
<RECEIVABLES> 145
<ALLOWANCES> 25
<INVENTORY> 968
<CURRENT-ASSETS> 1,117
<PP&E> 480
<DEPRECIATION> 160
<TOTAL-ASSETS> 2,134
<CURRENT-LIABILITIES> 515
<BONDS> 0
<COMMON> 1
0
0
<OTHER-SE> 868
<TOTAL-LIABILITY-AND-EQUITY> 2,134
<SALES> 5,088
<TOTAL-REVENUES> 5,088
<CGS> 3,594
<TOTAL-COSTS> 3,594
<OTHER-EXPENSES> 1,288
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 59
<INCOME-PRETAX> 147
<INCOME-TAX> 71
<INCOME-CONTINUING> 76
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 76
<EPS-PRIMARY> 1.14
<EPS-DILUTED> 1.14
</TABLE>
<PAGE> 1
Exhibit 99.1
------------
1. Charles R. Dexter and Charlette L. Dexter v. Brooks Drug, Inc., Goldine
-----------------------------------------------------------------------
Laboratories, Inc., Showa Denko of America, Inc., et al.
--------------------------------------------------------
United States District Court for the District of New Hampshire
Civil Action No. C 92-584-M
(Defense has been assumed by the vendor who manufactured the product)
2. Lydia Martinez v. Revco Discount Drug Centers, Inc., Showa Denko of
-------------------------------------------------------------------
America, Inc., et al
--------------------
Thirteenth Judicial District Court, County of Cibola, State of New Mexico
Civil Action No. CD 96-59-CV
