<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant /x/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/x/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
/ / Confidential, for Use of the Commission
Only (as permitted by Rule 14A-6(e)(2))
Filing By:
RITE AID CORPORATION*
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
(NAME OF PERSON(S) FILING PROXY STATEMENT)
Payment of Filing Fee (Check the appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or Item
22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/x/ Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
<TABLE>
<CAPTION>
AGGREGATE NUMBER
TITLE OF EACH CLASS OF OF SECURITIES TO PRICE PROPOSED MAXIMUM
SECURITIES TO WHICH WHICH TRANSACTION PER AGGREGATE VALUE OF AMOUNT OF
TRANSACTION APPLIES APPLIES(1) SHARE(2) TRANSACTION(3) FILING FEE
- ------------------------------------------------------------- ----------------- ---------- ------------------ -----------
<S> <C> <C> <C> <C>
Revco D.S., Inc. Common Stock, $.01 par value................ 35,004,534 $ 27 7/8 $975,751,385.2 $195,150.27
</TABLE>
- ------------------
(1) Based on 66,587,990 shares of Revco Common Stock issued and outstanding plus
3,561,377 shares of Revco Common Stock reserved for issuance pursuant to the
Revco 1992 Long-Term Incentive Compensation Plan, as amended, and the Revco
1992 Non-Employee Directors' Stock Option Plan, as amended, as of November
29, 1995, less the 35,144,833 shares of Revco Common Stock that Rite Aid
expects to purchase pursuant to its December 4, 1995 offer to purchase
35,144,833 shares of Revco Common Stock at a price of $27.50 per share.
(2) Price per share for Revco D.S., Inc. Common Stock is the average of the
reported high and low sales prices per share of Revco Common Stock on the
New York Stock Exchange Composite Tape on Friday, December 22, 1995.
(3) Estimated solely for the purpose of calculating the filing fee.
/x/ Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: $195,150.27
(2) Form, Schedule or Registration Statement No.: Schedule 14A
(3) Filing Party: Joint Filing by Rite Aid and Revco
(4) Date Filed: December 27, 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ------------------
* Rite Aid Corporation will be the Registrant with respect to the Form S-4
Registration Statement to be filed under the Securities Act of 1933 to
register the shares of Rite Aid Common Stock to be issued pursuant to the
Agreement and Plan of Merger to which the Proxy Statement relates.
<PAGE>
[LOGO]
Rite Aid Corporation
MARTIN L. GRASS
Chairman
Chief Executive Officer
February 16, 1996
Dear Stockholder:
You are cordially invited to attend the Special Meeting of Stockholders of
Rite Aid Corporation ('Rite Aid') to be held at the Radisson Hotel, 1150 Camp
Hill Bypass, Camp Hill, Pennsylvania on Thursday, March 28, 1996, at 10:00 a.m.,
local time (the 'Rite Aid Special Meeting').
The purpose of the Rite Aid Special Meeting is to consider a proposal to
approve the issuance of up to a maximum of 42,865,712 shares (the 'Share
Issuance') of Rite Aid common stock, par value $1.00 ('Rite Aid Common Stock'),
pursuant to an Agreement and Plan of Merger, dated as of November 29, 1995 (the
'Merger Agreement'), by and among Rite Aid, Ocean Acquisition Corporation
('Sub'), a wholly owned subsidiary of Rite Aid, and Revco D.S., Inc. ('Revco'),
which provides for the merger (the 'Merger') of Sub with and into Revco. As the
first step of the transaction contemplated by the Merger Agreement, Sub has
commenced a tender offer (the 'Offer') to purchase 50.1% of the outstanding
shares of common stock, par value $.01, of Revco ('Revco Common Stock') at a
price of $27.50 per share of Revco Common Stock, on a fully diluted basis. The
Offer is currently scheduled to expire on February 23, 1996.
In the Merger, each share of Revco Common Stock, other than shares of Revco
Common Stock owned by Revco as treasury stock and any shares of Revco Common
Stock owned by Rite Aid, Sub or any other direct or indirect wholly owned
subsidiary of Rite Aid (and, if the Alternative Consideration, as defined below,
is applicable, other than shares of Revco Common Stock held by holders who have
properly exercised and perfected their appraisal rights under the Delaware
General Corporation Law), will by virtue of the Merger and without any action on
the part of the holder thereof be converted into either (i) the right to receive
a number of duly authorized, validly issued, fully paid and nonassessable shares
of Rite Aid Common Stock determined as set forth below (the 'Exchange Ratio');
provided that Rite Aid will not issue more than 1.125 or fewer than .91666
shares of Rite Aid Common Stock per share of Revco Common Stock or (ii) if the
Alternative Consideration is applicable, the right to receive the Alternative
Consideration.
As described in the Proxy Statement accompanying this letter, the value of
Rite Aid Common Stock to be delivered for each share of Revco Common Stock in
the Merger will increase to the extent the average value of Rite Aid Common
Stock during a pricing period is greater than $27.50 per share and will decrease
if the average value of Rite Aid Common Stock during such pricing period is less
than $27.50 per share, but in no event will more than 1.125 shares or fewer than
.91666 shares of Rite Aid Common Stock be issued for each share of Revco Common
Stock in the Merger.
In the event that at the Rite Aid Special Meeting the stockholders of Rite
Aid do not approve the Share Issuance pursuant to the Merger, and if all
conditions to the Merger are otherwise satisfied or waived (if permissible),
Rite Aid will nonetheless cause the Merger to occur, issue a number of shares of
Rite Aid Common Stock equal to 19.9% of the then outstanding shares of Rite Aid
Common Stock, and shares of Revco Common Stock issued immediately prior to the
effective time of the Merger (other than shares of Revco Common Stock held in
treasury and shares of Revco Common Stock owned by Rite Aid and its subsidiaries
and other than shares of Revco Common Stock held by holders who have properly
exercised and perfected their appraisal rights under the Delaware General
Corporation Law) will, at the effective time of the Merger, be converted into
the right to receive a combination of (x) shares of Rite Aid Common Stock which
will represent in the aggregate 19.9% of the then outstanding shares of Rite Aid
Common Stock (which will be determined in a manner consistent with the
determination of the Exchange Ratio) and (y) cash based on a pro rata portion of
$27.50 (the 'Alternative Consideration'). The Merger Agreement provides that in
the event the Merger is not consummated prior to certain dates, holders of
shares of Revco Common Stock will be entitled to receive interest on the
consideration payable to them in the Merger at rates set forth in the Merger
Agreement. Following the Merger, Revco will become a wholly owned subsidiary of
Rite Aid.
<PAGE>
The combination of Rite Aid and Revco will create the preeminent retail
drugstore chain in the United States. This transaction will nearly double our
revenues and number of stores. Our significant investment in technology and
infrastructure coupled with our innovative management changes have prepared us
to seize the competitive advantages this Merger represents. We anticipate a
quick and smooth integration of the two companies.
The Merger will increase Rite Aid's competitive advantage in our
prescription benefits management subsidiary, Eagle Managed Care. The addition of
Revco's mail order capacity, as well as the increased number of outlets
available in the combined entity, complements and broadens Rite Aid's managed
healthcare delivery system. This expanded capacity is important leverage in
attracting new contracts to Rite Aid.
We will be the best-positioned retail drugstore chain in the country to
compete with the three large vertically integrated pharmacy benefit managers
owned by the major pharmaceutical manufacturers. This combination should allow
Rite Aid to offer customers the most competitive pharmacy prescription prices
and services.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY DETERMINED THAT THE MERGER IS
ADVISABLE, FAIR TO AND IN THE BEST INTERESTS OF THE STOCKHOLDERS OF RITE AID AND
HAS APPROVED THE MERGER AGREEMENT AND ACCORDINGLY RECOMMENDS THAT RITE AID
STOCKHOLDERS VOTE IN FAVOR OF THE SHARE ISSUANCE.
Your vote is important, regardless of the number of shares you own.
Approval of the Share Issuance requires the affirmative vote of a majority of
the votes cast by all stockholders entitled to vote at the Rite Aid Special
Meeting. The Notice of Special Meeting and Proxy Statement accompanying this
letter describe the proposed transactions more fully and include other
information about Rite Aid, Sub and Revco. Please give this information your
careful attention.
Accordingly, on behalf of your Board of Directors, I urge you to complete,
date and sign the accompanying proxy and return it promptly in the enclosed
postage-paid envelope. This will not prevent you from attending the Rite Aid
Special Meeting or voting in person, but will assure that your vote is counted
if you are unable to attend the Rite Aid Special Meeting. You may revoke your
proxy at any time by filing a written notice of revocation with, or delivering a
duly executed proxy bearing a later date to, the Secretary of Rite Aid at Rite
Aid's main office prior to the Rite Aid Special Meeting or by attending the Rite
Aid Special Meeting and voting in person.
On behalf of your Board of Directors, I thank you for your support and urge
you to vote FOR approval of the Share Issuance.
Sincerely,
Martin L. Grass
Chairman and Chief Executive Officer
2
<PAGE>
RITE AID CORPORATION
30 HUNTER LANE
CAMP HILL, PENNSYLVANIA 17011
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD MARCH 28, 1996
------------------------
To the Stockholders of Rite Aid Corporation:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Rite Aid
Corporation, a Delaware corporation ('Rite Aid'), will be held on Thursday,
March 28, 1996, at 10:00 a.m., local time, at the Radisson Hotel, 1150 Camp Hill
Bypass, Camp Hill, Pennsylvania (the 'Rite Aid Special Meeting'), for the
following purposes:
1. To consider and vote upon a proposal to approve the issuance of up
to a maximum of 42,865,712 shares of Rite Aid common stock, par value $1.00
per share, pursuant to an Agreement and Plan of Merger, dated as of
November 29, 1995 (the 'Merger Agreement'), providing for the merger (the
'Merger') of Ocean Acquisition Corporation ('Sub'), a Delaware corporation
and a wholly owned subsidiary of Rite Aid, with and into Revco D.S., Inc.
('Revco'), as a result of which Revco will become a wholly owned subsidiary
of Rite Aid, all as more fully described in the accompanying Proxy
Statement.
2. To transact such other business as may properly come before the
Rite Aid Special Meeting or any adjournments or postponements thereof.
Only holders of record of Rite Aid at the close of business on February 12,
1996 are entitled to notice of the Rite Aid Special Meeting and to vote thereat
and at any and all adjournments or postponements thereof.
BY ORDER OF THE BOARD OF DIRECTORS
I. Lawrence Gelman
Vice President and Secretary
February 16, 1996
WHETHER OR NOT YOU PLAN TO ATTEND THE RITE AID SPECIAL MEETING, PLEASE
COMPLETE, SIGN AND DATE YOUR PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED
POSTAGE-PREPAID ENVELOPE. YOU MAY REVOKE YOUR PROXY IN THE MANNER DESCRIBED IN
THE PROXY STATEMENT AT ANY TIME BEFORE THE PROXY HAS BEEN VOTED AT THE RITE AID
SPECIAL MEETING.
<PAGE>
RITE AID CORPORATION
PROXY STATEMENT
This Proxy Statement ('Proxy Statement') is being furnished to the holders
of common stock, par value $1.00 per share ('Rite Aid Common Stock'), of Rite
Aid Corporation, a Delaware corporation ('Rite Aid'), in connection with the
solicitation of proxies by the Board of Directors of Rite Aid (the 'Rite Aid
Board') for use at a Special Meeting of Stockholders of Rite Aid to be held at
the Radisson Hotel, 1150 Camp Hill Bypass, Camp Hill, Pennsylvania on Thursday,
March 28, 1996, at 10:00 a.m., local time, and at any and all adjournments or
postponements thereof (the 'Rite Aid Special Meeting') for the purposes
described herein.
This Proxy Statement relates to the Agreement and Plan of Merger, dated as
of November 29, 1995 (the 'Merger Agreement'), by and among Rite Aid, Ocean
Acquisition Corporation, a Delaware corporation and a wholly owned subsidiary of
Rite Aid ('Sub'), and Revco D.S., Inc., a Delaware corporation ('Revco'), which
provides for the merger (the 'Merger') of Sub with and into Revco, with Revco
surviving as a wholly owned subsidiary of Rite Aid. Subject to the terms and
conditions of the Merger Agreement, if the Merger is consummated, each share of
common stock, par value $.01 per share, of Revco ('Revco Common Stock') issued
and outstanding immediately prior to the effective time of the Merger (other
than shares of Revco Common Stock owned by Revco as treasury stock and other
than shares of Revco Common Stock owned by Rite Aid and Sub and other than
shares of Revco Common Stock held by holders who have properly exercised and
perfected appraisal rights, if applicable ('Dissenting Revco Shares'), under the
Delaware General Corporation Law) shall by virtue of the Merger and without any
action on the part of the holder thereof be converted into either (x) the right
to receive a number of duly authorized, validly issued, fully paid and
nonassessable shares of Rite Aid Common Stock determined as set forth herein
(the 'Exchange Ratio'); provided that Rite Aid will not issue more than 1.125 or
fewer than .91666 shares of Rite Aid Common Stock per share of Revco Common
Stock or (y) if the Alternative Consideration (as defined below) is applicable,
then the right to receive the Alternative Consideration, plus, in each of clause
(x) and (y) above, any Additional Consideration (as defined below). Each share
of Rite Aid Common Stock will be issued with one associated preferred stock
purchase right (a 'Right').
The per share value of Rite Aid Common Stock which stockholders of Revco
will receive in the Merger will be determined during a randomly selected
fifteen-day pricing period (the 'Pricing Period') during the forty trading days
ending five days before the Revco Special Meeting to consider the Merger.
PROMPTLY FOLLOWING THE CLOSE OF THE PRICING PERIOD, RITE AID AND REVCO WILL
ISSUE A JOINT PRESS RELEASE ANNOUNCING THE EXCHANGE RATIO. IF THERE IS TO BE ANY
CASH ADJUSTMENT AMOUNT (AS DESCRIBED HEREIN), SUCH PRESS RELEASE WILL ALSO
DISCLOSE THAT AMOUNT. ONCE THE PRICING PERIOD HAS ENDED, STOCKHOLDERS MAY ALSO
CALL MACKENZIE PARTNERS, INC. TOLL FREE AT 1-800-322-2885 OR COLLECT AT (212)
929-5500 TO LEARN THE EXCHANGE RATIO AND THE CASH ADJUSTMENT AMOUNT, IF ANY. In
the Merger, stockholders of Revco will receive one share of Rite Aid Common
Stock if the average per share value of Rite Aid Common Stock during the Pricing
Period is $27.50. If the average per share value of Rite Aid Common Stock
determined during the Pricing Period is greater than $27.50, stockholders of
Revco will receive, for each share of Revco Common Stock, that amount of Rite
Aid Common Stock having a value so determined of $27.50 plus 50% of such
increase in market value of Rite Aid Common Stock over $27.50, provided that in
no event will Rite Aid issue fewer than .91666 shares of Rite Aid Common Stock
for each share of Revco Common Stock. Similarly, if the average per share value
of Rite Aid Common Stock determined during the Pricing Period is less than
$27.50, stockholders of Revco will receive, for each share of Revco Common
Stock, that amount of Rite Aid Common Stock having a value so determined of
$27.50 less 50% of such decrease in market value of Rite Aid Common Stock below
$27.50, provided that in no event will Rite Aid issue more than 1.125 shares of
Rite Aid Common Stock for each share of Revco Common Stock. Alternatively, if
the average per share value of the Rite Aid Common Stock determined during the
Pricing Period is less than $27.50, Rite Aid will have the option of delivering,
for each share of Revco Common Stock, one share of Rite Aid Common Stock plus
cash (the 'Cash Adjustment Amount') in an amount equal to 50% of such decrease
in market value of Rite Aid Common Stock below $27.50, provided that in no event
will more than $2.75 per share of Revco Common Stock be paid in cash.
In the event that at the Rite Aid Special Meeting the stockholders of Rite
Aid do not approve the issuance of Rite Aid Common Stock pursuant to the Merger
Agreement (the 'Share Issuance'), but all conditions to the Merger are otherwise
satisfied or waived (if permissible), Revco, Rite Aid and Sub will nonetheless
consummate the Merger and shares of Revco Common Stock issued and outstanding
immediately prior to the effective time (the 'Effective Time') of the Merger
(other than shares of Revco Common Stock owned by Revco as treasury stock and
other than shares of Revco Common Stock owned by Rite Aid and Sub and other than
Dissenting Revco Shares) will, at the Effective Time, be converted into the
right to receive a combination of (x) shares of Rite Aid Common Stock which will
represent in the aggregate 19.9% of the then outstanding shares of Rite Aid
Common Stock (which will be determined in a manner consistent with the
determination of the Exchange Ratio) and (y) cash based on a pro rata portion of
$27.50 (collectively, the 'Alternative Consideration'). The Merger Agreement
provides that in the event the Merger is not consummated prior to certain dates,
holders of shares of Revco Common Stock will be entitled to receive interest on
the consideration payable to them in the Merger at rates set forth in the Merger
Agreement.
This Proxy Statement and the accompanying form of proxy are first being
mailed to stockholders of Rite Aid on or about February 20, 1996.
------------------------
The date of this Proxy Statement is February 16, 1996.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
- ----------------------------------------------------------------------------------------------------------- ----
<S> <C>
AVAILABLE INFORMATION...................................................................................... 4
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................................................ 4
SUMMARY.................................................................................................... 6
The Companies......................................................................................... 6
The Meetings.......................................................................................... 6
The Merger............................................................................................ 7
Accounting Treatment.................................................................................. 17
Appraisal Rights for Revco Stockholders............................................................... 17
Comparative Market Prices And Dividends............................................................... 17
Stockholder Agreement................................................................................. 18
Stock Option Agreement................................................................................ 18
Unaudited Comparative Per Share Data.................................................................. 19
Selected Historical Consolidated and Pro Forma Financial Data......................................... 20
INTRODUCTION............................................................................................... 25
RITE AID SPECIAL MEETING................................................................................... 26
Purpose............................................................................................... 26
Record Date; Voting Rights............................................................................ 26
Share Ownership of Management......................................................................... 27
Quorum................................................................................................ 27
Proxies............................................................................................... 27
Solicitation of Proxies............................................................................... 27
Required Vote......................................................................................... 27
REVCO SPECIAL MEETING...................................................................................... 28
THE MERGER................................................................................................. 29
General............................................................................................... 29
Background of the Merger.............................................................................. 30
Rite Aid's Reasons for the Merger; Recommendation of the Rite Aid Board............................... 35
Opinion of DLJ........................................................................................ 36
Revco's Reasons for the Merger; Recommendation of the Revco Board..................................... 39
Opinion of Morgan Stanley............................................................................. 41
Certain Advantages and Disadvantages of the Merger.................................................... 44
Plans for Revco....................................................................................... 45
Interests of Certain Persons.......................................................................... 45
Indemnification....................................................................................... 51
Certain Projected Financial Information............................................................... 52
Estimated Synergies................................................................................... 53
Financing the Transaction............................................................................. 53
Accounting Treatment.................................................................................. 54
Other Legal Matters; Regulatory Approvals............................................................. 54
Appraisal Rights for Revco Stockholders............................................................... 56
Resales of Rite Aid Common Stock...................................................................... 56
New York Stock Exchange Listing....................................................................... 56
COMPARATIVE MARKET PRICES AND DIVIDENDS.................................................................... 57
MERGER AGREEMENT........................................................................................... 58
The Offer............................................................................................. 58
The Merger............................................................................................ 58
Conversion of Revco Common Stock...................................................................... 58
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
SECTION PAGE
- ----------------------------------------------------------------------------------------------------------- ----
<S> <C>
Treatment of Stock Options............................................................................ 60
Directors and Officers................................................................................ 61
Interim Operations.................................................................................... 61
Treatment of Certain Indebtedness..................................................................... 63
No Solicitation....................................................................................... 63
Directors' and Officers' Insurance and Indemnification................................................ 64
Employee Benefits and Employee Matters................................................................ 64
Confidentiality Agreement............................................................................. 66
Representations and Warranties........................................................................ 66
Effective Time........................................................................................ 67
Conditions to the Merger.............................................................................. 67
Termination; Fees..................................................................................... 67
Termination of Existing Stockholder Agreements........................................................ 68
STOCKHOLDER AGREEMENT...................................................................................... 69
Tender of Shares of Revco Common Stock................................................................ 69
Voting of Revco Common Stock.......................................................................... 69
Stockholder Covenant.................................................................................. 69
No Solicitation....................................................................................... 70
Distribution of Shares of Rite Aid Common Stock....................................................... 70
Restriction on Transfer, Proxies and Non-Interference................................................. 70
Termination........................................................................................... 70
STOCK OPTION AGREEMENT..................................................................................... 70
Grant of Stock Option................................................................................. 71
Exercise of Stock Option.............................................................................. 71
Sale of Option Shares................................................................................. 71
Adjustment Upon Changes in Capitalization............................................................. 71
Termination........................................................................................... 71
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA.................................................. 72
DESCRIPTION OF RITE AID CAPITAL STOCK...................................................................... 79
Rite Aid Preferred Stock.............................................................................. 79
Rite Aid Common Stock................................................................................. 79
Dividend Rights....................................................................................... 79
Voting Rights......................................................................................... 79
Change of Control..................................................................................... 79
Miscellaneous......................................................................................... 81
BUSINESS OF RITE AID....................................................................................... 82
BUSINESS OF REVCO.......................................................................................... 82
EXPERTS.................................................................................................... 83
STOCKHOLDERS' PROPOSALS.................................................................................... 83
</TABLE>
<TABLE>
<S> <C> <C>
ANNEXES
Annex A Agreement and Plan of Merger
Annex B Opinion, dated November 29, 1995, of Donaldson, Lufkin & Jenrette Securities
Corporation
Annex C Opinion, dated November 29, 1995, of Morgan Stanley & Co. Incorporated
Annex D Stockholder Agreement
Annex E Stock Option Agreement
</TABLE>
3
<PAGE>
AVAILABLE INFORMATION
Each of Rite Aid and Revco is subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the 'Exchange Act'), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commmission (the 'Commission'). Information, as of
particular dates, concerning Rite Aid's and Revco's directors and officers,
their remuneration, stock options granted to them, the principal holders of Rite
Aid's and Revco's securities, any material interests of such persons in
transactions with Rite Aid and Revco and other matters is required to be
disclosed in proxy statements distributed to Rite Aid's stockholders and to
Revco's stockholders and filed with the Commission. Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of
the Commission: 7 World Trade Center, Thirteenth Floor, New York, New York
10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies
of such materials may also be obtained by mail, upon payment of the Commission's
customary fees, by writing to the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549. Rite Aid Common Stock and Revco
Common Stock are each listed on the New York Stock Exchange ('NYSE'). Rite Aid
Common Stock is also listed on the Pacific Stock Exchange ('PSE'). Reports,
proxy statements and other information filed by Revco and Rite Aid may be
inspected at the offices of the NYSE at 20 Broad Street, New York, New York
10005, and such information filed by Rite Aid may also be inspected at the
offices of the PSE, 301 Pine Street, San Francisco, California 94101.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission by Rite Aid
pursuant to the Exchange Act are incorporated by reference in this Proxy
Statement:
1. Rite Aid's Annual Report on Form 10-K for the fiscal year ended
March 4, 1995;
2. Rite Aid's Quarterly Reports on Forms 10-Q for the fiscal quarters
ended June 3, 1995, September 2, 1995 and December 2, 1995;
3. Rite Aid's Current Reports on Forms 8-K dated April 19, 1995, April
20, 1995, and December 5, 1995;
4. The description of capital stock of Rite Aid, including Rite Aid
Common Stock, that is contained in the registration statement filed under
the Exchange Act under File No. 2-28883, including all amendments or
reports filed for the purpose of updating such description;
5. Rite Aid's Schedule 14A Definitive Proxy Statement dated June 7,
1995; and
6. Schedule 13D and Tender Offer Statement of Rite Aid and Sub on
Schedule 14D-1, dated December 4, 1995, as amended by Amendment No. 1
thereto dated December 5, 1995, Amendment No. 2 thereto dated December 12,
1995, Amendment No. 3 thereto dated December 18, 1995, Amendment No. 4
thereto dated December 28, 1995, Amendment No. 5 thereto dated January 16,
1996, Amendment No. 6 thereto dated January 31, 1996 and Amendment No. 7
thereto dated February 9, 1996 (the 'Schedule 14D-1').
The following documents previously filed with the Commission by Revco
pursuant to the Exchange Act are incorporated by reference in this Proxy
Statement:
1. Revco's Annual Report on Form 10-K for the year ended June 3, 1995,
as amended;
2. Revco's Quarterly Reports on Form 10-Q for the quarters ended
August 26, 1995 and November 18, 1995;
3. Revco's Current Report on Form 8-K dated December 6, 1995;
4. Revco's Solicitation/Recommendation Statement on Schedule 14D-9
dated December 4, 1995, as amended by Amendment No. 1 thereto dated
December 29, 1995, Amendment No. 2 thereto dated
4
<PAGE>
January 17, 1996, Amendment No. 3 thereto dated February 1, 1996 and
Amendment No. 4 thereto dated February 12, 1996 (the 'Schedule 14D-9'); and
5. Revco's Schedule 14A Definitive Proxy Statement dated August 28,
1995 (the '1995 Revco Proxy Statement').
The information relating to Rite Aid and Revco contained in this Proxy
Statement does not purport to be comprehensive and should be read together with
the information in the documents incorporated by reference herein.
All information herein with respect to Rite Aid and Sub has been furnished
by Rite Aid and all information herein with respect to Revco has been furnished
by Revco.
All documents filed by either Rite Aid or Revco pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Proxy
Statement and prior to the date of the Special Meetings shall be deemed to be
incorporated by reference in this Proxy Statement and be a part hereof from the
dates of filing such documents or reports. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Proxy Statement to the extent
that a statement contained herein, or in any other subsequently filed document
which also is or is deemed to be incorporated herein, modifies or supersedes
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this Proxy
Statement.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS WITH RESPECT TO THE MATTERS DESCRIBED IN THIS PROXY STATEMENT
OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE HEREIN, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY EITHER RITE AID OR REVCO. THIS PROXY STATEMENT DOES NOT CONSTITUTE
AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES, NOR DOES
IT CONSTITUTE THE SOLICITATION OF A PROXY, IN ANY JURISDICTION TO OR FROM ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE ANY SUCH SOLICITATION IN SUCH
JURISDICTION. THE DELIVERY OF THIS PROXY STATEMENT SHALL NOT, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF RITE AID OR REVCO SINCE THE DATE HEREOF OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THIS PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF SUCH DOCUMENTS (OTHER THAN
EXHIBITS THERETO WHICH ARE NOT SPECIFICALLY INCORPORATED BY REFERENCE HEREIN)
ARE AVAILABLE, WITHOUT CHARGE, TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER OF
SHARES OF RITE AID COMMON STOCK OR REVCO COMMON STOCK TO WHOM THIS PROXY
STATEMENT IS DELIVERED, UPON WRITTEN OR ORAL REQUEST, TO, IN THE CASE OF
DOCUMENTS RELATING TO RITE AID, FRANKLIN C. BROWN, ESQ., RITE AID CORPORATION,
30 HUNTER LANE, CAMP HILL, PENNSYLVANIA 17011, TELEPHONE NUMBER (717) 761-2633
AND, IN THE CASE OF DOCUMENTS RELATING TO REVCO, JACK A. STAPH, ESQ., REVCO
D.S., INC., 1925 ENTERPRISE PARKWAY, TWINSBURG, OHIO 44087, TELEPHONE NUMBER
(216) 425-9811. IN ORDER TO ENSURE DELIVERY OF DOCUMENTS PRIOR TO THE APPLICABLE
SPECIAL MEETING, ANY REQUEST THEREFOR SHOULD BE MADE NOT LATER THAN MARCH 21,
1996.
5
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement. This summary is qualified in its entirety by reference to
the more detailed information contained elsewhere in this Proxy Statement, the
Annexes hereto and the documents referred to herein. Stockholders are urged to
review carefully this Proxy Statement, the Merger Agreement attached hereto as
Annex A and the other Annexes attached hereto.
THE COMPANIES
Rite Aid Corporation. Rite Aid Corporation ('Rite Aid') is a Delaware
corporation with its principal executive offices located at 30 Hunter Lane, Camp
Hill, Pennsylvania 17011. The telephone number of Rite Aid at such offices is
(717) 761-2633. Rite Aid, incorporated in 1968, is one of the largest retail
drugstore chains in the United States. As of March 4, 1995, Rite Aid operated
over 2,700 drugstores, averaging approximately within a range of 7,200 to 11,000
square feet per store in size, in twenty-three states and the District of
Columbia and employed over 36,700 employees. Pharmacy service forms the core of
Rite Aid's business, with prescriptions accounting for 53.1% of drugstore sales
in the year ended March 4, 1995.
Rite Aid's drugstores cater to convenience, offering a full selection of
health and personal care products, seasonal merchandise and a large private
label product line. Express mail with complementary services and one-hour photo
departments have recently been added in select locations.
Rite Aid also operates Eagle Managed Care Corporation, a wholly owned
subsidiary, which markets prescription plans and sells other managed health care
services to large employers and government-sponsored employee benefit programs.
See 'BUSINESS OF RITE AID.'
Ocean Acquisition Corporation. Ocean Acquisition Corporation ('Sub'), a
newly incorporated Delaware corporation and a wholly owned subsidiary of Rite
Aid, has not conducted any business other than in connection with its tender
offer, dated December 4, 1995, to purchase 35,144,833 shares of common stock,
par value $.01 per share, of Revco D.S., Inc. ('Revco') ('Revco Common Stock')
at a price of $27.50 per share of Revco Common Stock, net to the seller in cash
(the 'Offer'), the Agreement and Plan of Merger, dated as of November 29, 1995,
by and among Revco, Rite Aid and Sub (the 'Merger Agreement'), the Stock Option
Agreement, dated as of November 29, 1995, by and among Revco, Rite Aid and Sub
(the 'Stock Option Agreement') and the Stockholder Agreement, dated as of
November 29, 1995, by and among Rite Aid, Sub and Zell/Chilmark Fund, L.P. (the
'Stockholder') (the 'Stockholder Agreement'). All of the issued and outstanding
shares of capital stock of Sub are directly or indirectly owned by Rite Aid. The
principal executive offices of Sub are located at 30 Hunter Lane, Camp Hill,
Pennsylvania 17011. The telephone number of Sub at such offices is (717)
761-2633. See 'BUSINESS OF RITE AID.'
THE MEETINGS
Rite Aid Special Meeting.
Purpose. A Special Meeting of Stockholders of Rite Aid (the 'Rite Aid
Special Meeting') will be held at the Radisson Hotel, 1150 Camp Hill Bypass,
Camp Hill, Pennsylvania on Thursday, March 28, 1996, at 10:00 a.m., local time,
to consider and vote upon a proposal to approve the issuance of shares of common
stock, par value $1.00 per share, of Rite Aid (the 'Rite Aid Common Stock')
pursuant to the Merger Agreement (the 'Share Issuance'). The stockholders of
Rite Aid will also consider and take action upon any other business which may
properly be brought before the Rite Aid Special Meeting. See 'RITE AID SPECIAL
MEETING--Purpose.'
Record Date. Only holders of record of Rite Aid Common Stock at the close
of business on February 12, 1996 (the 'Rite Aid Record Date') are entitled to
receive notice of and to vote at the Rite Aid Special Meeting. At the close of
business on the Rite Aid Record Date, there were 83,829,330 shares of Rite Aid
Common Stock outstanding, each of which entitles the registered holder thereof
to one vote. See 'RITE AID SPECIAL MEETING--Record Date; Voting Rights.'
Share Ownership of Management. At the close of business on the Rite Aid
Record Date, directors and executive officers of Rite Aid and their affiliates
were the beneficial owners of an aggregate of approximately
6
<PAGE>
3,425,439 (approximately 4.1%) of the shares of Rite Aid Common Stock then
outstanding. See 'RITE AID SPECIAL MEETING--Share Ownership of Management.'
Required Vote. Approval of the Share Issuance will require the affirmative
vote of a majority of the votes cast on the Share Issuance, provided that a
quorum is present at the Rite Aid Special Meeting.
THE BOARD OF DIRECTORS OF RITE AID (THE 'RITE AID BOARD') HAS UNANIMOUSLY
APPROVED THE MERGER AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT RITE AID
STOCKHOLDERS VOTE FOR THE SHARE ISSUANCE. SEE 'RITE AID SPECIAL MEETING--
REQUIRED VOTE.'
Revco Special Meeting.
Purpose. A Special Meeting of Stockholders of Revco (the 'Revco Special
Meeting') will be held as soon as practicable following the Rite Aid Special
Meeting to consider and vote upon a proposal to approve and adopt the Merger
Agreement, which provides for the Merger of Sub with and into Revco, with Revco
surviving as a wholly owned subsidiary of Rite Aid. The stockholders of Revco
will also consider and take action upon any other business which may properly be
brought before the Revco Special Meeting. See 'REVCO SPECIAL MEETING.'
THE MERGER
General.
On December 4, 1995, Sub commenced the Offer. On December 11, 1995, Rite
Aid and Revco filed notifications and report forms under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the 'HSR Act') with the Federal
Trade Commission (the 'FTC') and the Antitrust Division of the United States
Department of Justice (the 'Antitrust Division'). On December 27, 1995, Rite Aid
and Revco received a request for additional information (the 'Second Request')
from the FTC. On January 4, 1996, Sub extended the Offer in order to comply with
the Second Request. The Offer is presently scheduled to expire on February 23,
1996 and Rite Aid reserves the right to extend the Offer until the expiration of
the waiting period under the HSR Act.
At the Effective Time of the Merger, each share of Revco Common Stock
issued and outstanding immediately prior to the Effective Time, other than
shares of Revco Common Stock owned by Revco as treasury stock and any shares of
Revco Common Stock owned by Rite Aid, Sub or any other direct or indirect wholly
owned subsidiary of Rite Aid (and, if the Alternative Consideration, as defined
below, is applicable, other than shares of Revco Common Stock held by holders
who have properly exercised and perfected their appraisal rights ('Dissenting
Revco Shares'), under the Delaware General Corporation Law (the 'DGCL')), shall
by virtue of the Merger and without any action on the part of the holder thereof
be converted into either (x) the right to receive a number of duly authorized,
validly issued, fully paid and nonassessable shares of Rite Aid Common Stock,
determined as set forth below (the 'Exchange Ratio'); provided that Rite Aid
shall not issue more than 1.125 or fewer than .91666 shares of Rite Aid Common
Stock per share of Revco Common Stock or (y) if the Alternative Consideration
(as defined below) is applicable, then the right to receive the Alternative
Consideration, plus, in each of clause (x) and (y) above, any Additional
Consideration (as defined below). Each share of Rite Aid Common Stock will be
issued with one associated preferred stock purchase right (a 'Right') in
accordance with the Shareholder Rights Agreement, dated as of April 15, 1989,
between Rite Aid and Harris Trust Company of New York (the 'Rights Agreement').
The per share value of the Rite Aid Common Stock which stockholders of
Revco would receive in the Merger will be determined during a randomly selected
fifteen-day pricing period (the 'Pricing Period') during the forty trading days
ending five days before the Revco Special Meeting. PROMPTLY FOLLOWING THE CLOSE
OF THE PRICING PERIOD, RITE AID AND REVCO WILL ISSUE A JOINT PRESS RELEASE
ANNOUNCING THE EXCHANGE RATIO. IF THERE IS TO BE ANY CASH ADJUSTMENT AMOUNT (AS
DEFINED BELOW), SUCH PRESS RELEASE WILL ALSO DISCLOSE THAT AMOUNT. ONCE THE
PRICING PERIOD HAS ENDED, STOCKHOLDERS MAY ALSO CALL MACKENZIE PARTNERS, INC.
TOLL FREE AT 1-800-322-2885 OR COLLECT AT (212) 929-5500 TO LEARN THE EXCHANGE
RATIO AND THE CASH ADJUSTMENT AMOUNT, IF ANY.
In the Merger, stockholders of Revco will receive one share of Rite Aid
Common Stock if the average value per share of Rite Aid Common Stock during the
Pricing Period is $27.50. If the average value per share of Rite
7
<PAGE>
Aid Common Stock determined during the Pricing Period is greater than $27.50,
stockholders of Revco will receive, for each share of Revco Common Stock, that
amount of Rite Aid Common Stock having a value so determined of $27.50 plus 50%
of such increase in market value of Rite Aid Common Stock over $27.50, provided
that in no event will Rite Aid issue fewer than .91666 shares of Rite Aid Common
Stock for each share of Revco Common Stock. Similarly, if the average per share
value of Rite Aid Common Stock determined during the Pricing Period is less than
$27.50, stockholders of Revco will receive, for each share of Revco Common
Stock, that amount of Rite Aid Common Stock having a value so determined of
$27.50 less 50% of such decrease in market value of Rite Aid Common Stock below
$27.50, provided that in no event will Rite Aid issue more than 1.125 shares of
Rite Aid Common Stock for each share of Revco Common Stock. Alternatively, if
the average per share value of the Rite Aid Common Stock determined during the
Pricing Period is less than $27.50, Rite Aid will have the option of delivering,
for each share of Revco Common Stock, one share of Rite Aid Common Stock plus
cash (the 'Cash Adjustment Amount') in an amount equal to 50% of such decrease
in market value of Rite Aid Common Stock below $27.50, provided that in no event
will more than $2.75 per share of Revco Common Stock be paid in cash.
In the event the Merger is not consummated prior to April 29, 1996, and
Revco has not materially breached the Merger Agreement (other than by acts
caused or permitted by Rite Aid), then the stockholders of Revco will be
entitled to receive interest on the amount of the consideration that they
receive pursuant to the immediately preceding paragraph and the immediately
following paragraph (such consideration and interest thereon being referred to
herein as the 'Merger Consideration'), from April 29, 1996 until the earlier of
the Effective Time or June 30, 1996, calculated at an annual rate equal to the
prime rate of interest (as announced from time to time by Morgan Guaranty Trust
Company of New York). In the event Rite Aid and/or Sub, in violation of their
obligations under the Merger Agreement, fail or refuse to consummate the Merger
on or prior to June 30, 1996 and Revco has not materially breached the Merger
Agreement (other than by acts caused or permitted by Rite Aid), then, in
addition to any rights or remedies that Revco and its stockholders otherwise
have in law or at equity as a result thereof, the stockholders of Revco will be
entitled to receive interest from June 30, 1996 on the amount of the Merger
Consideration not paid until such Merger Consideration is paid, calculated at
the annual rate of the higher of (i) the prime rate of interest (as announced
from time to time by Morgan Guaranty Trust Company of New York) plus 300 basis
points or (ii) the amount otherwise permitted by law. Any additional
consideration paid or payable pursuant to this paragraph is referred to herein
as 'Additional Consideration.' See 'MERGER AGREEMENT--Conversion of Revco Common
Stock.'
In the event that at the Rite Aid Special Meeting the stockholders of Rite
Aid do not approve the issuance of Rite Aid Common Stock pursuant to the Merger
Agreement (the 'Share Issuance'), but all conditions to the Merger are otherwise
satisfied or waived (if permissible), Revco, Rite Aid and Sub will nonetheless
consummate the Merger and shares of Revco Common Stock issued and outstanding
immediately prior to the Effective Time (other than shares of Revco Common Stock
held in treasury and shares of Revco Common Stock owned by Rite Aid and its
subsidiaries and other than Dissenting Revco Shares) will, at the Effective
Time, be converted into the right to receive a combination of (x) shares of Rite
Aid Common Stock which will represent in the aggregate 19.9% of the then
outstanding shares of Rite Aid Common Stock (which will be determined in a
manner consistent with the determination of the Exchange Ratio) and (y) cash
based on a pro rata portion of $27.50 (collectively, the 'Alternative
Consideration'). See 'MERGER AGREEMENT--Conditions to the Merger.'
The DGCL does not require the Rite Aid Board to submit the Merger Agreement
to a vote of the Rite Aid stockholders. Accordingly, the stockholders of Rite
Aid are not being asked to consider and vote upon the adoption and approval of
the Merger Agreement at the Rite Aid Special Meeting. At the Rite Aid Special
Meeting, the stockholders of Rite Aid will consider and vote upon the Share
Issuance as required by a rule of the New York Stock Exchange. Pursuant to such
New York Stock Exchange rule, a company may not issue 20% or more of the
company's outstanding shares without a vote of the company's stockholders.
The Rite Aid Board has determined that the Merger is advisable, fair to and
in the best interests of the stockholders of Rite Aid and determined to proceed
with the Merger even if the Share Issuance is not approved by the Rite Aid
stockholders. Therefore, in the event that the Rite Aid stockholders do not
approve the Share Issuance but all conditions to the Merger are otherwise
satisfied or waived (if permissible), the Alternative Consideration contemplated
by the Merger Agreement will be paid to Revco's stockholders upon consummation
8
<PAGE>
of the Merger and approximately 19.9% of Rite Aid's current issued and
outstanding shares will be issued in the Merger.
Rite Aid's Reasons for the Merger; Recommendation of the Rite Aid Board.
The Rite Aid Board has unanimously determined that the Merger is advisable
and fair to and in the best interests of the stockholders of Rite Aid and has
approved the Merger Agreement. THE RITE AID BOARD UNANIMOUSLY RECOMMENDS THAT
THE STOCKHOLDERS OF RITE AID VOTE IN FAVOR OF THE SHARE ISSUANCE AT THE RITE AID
SPECIAL MEETING. In reaching its conclusion, the Rite Aid Board considered, a
number of factors, including, without limitation, the following:
o the judgment, advice and analyses of its management;
o the analyses prepared by Donaldson, Lufkin & Jenrette Securities
Corporation ('DLJ'), and the oral opinion of DLJ presented to the
Rite Aid Board on November 28, 1995 and confirmed in writing on
November 29, 1995, to the effect that the consideration to be paid
by Rite Aid pursuant to the Merger Agreement, taken as a whole, is
fair to the stockholders of Rite Aid from a financial point of view.
See 'THE MERGER--Opinion of DLJ' and 'THE MERGER--Background of the
Merger;'
o the financial condition, results of operations and cash flows of
Rite Aid and Revco, both on a historical and a prospective basis;
o the fact that the Merger is expected to be accretive to Rite Aid's
earnings per share by the end of the first year of operations
following the Merger;
o Rite Aid management's estimate, based on a preliminary review of
Revco's business and operations, that the Merger will result in
approximately $156 million of quantifiable annual cost savings,
including the improvement in gross margins through enhanced
purchasing power, closure of Revco's corporate headquarters and
overlapping distribution facilities, elimination of duplicative
overhead, elimination of redundant advertising expenditures, the
consolidation of data centers and improved communications systems
and a working capital benefit from the consolidation of warehouse
inventories. See 'THE MERGER--Estimated Synergies;'
o the terms and conditions of the Merger Agreement, including the
amount and form of Merger Consideration and the formulas and
mechanisms which determine the Merger Consideration;
o historical market prices and trading information with respect to
Rite Aid Common Stock and Revco Common Stock;
o the structure of the second-step Merger which provides for the
Alternative Consideration in the event that the Rite Aid
stockholders do not approve the Share Issuance, including the
Additional Consideration which may be payable;
o the Stockholder's agreement to tender all of its shares of Revco
Common Stock in the Offer and vote its shares of Revco Common Stock
in favor of the approval of the Merger and the Merger Agreement
pursuant to the Stockholder Agreement; and
o the fact that as an inducement and a condition to entering into the
Merger Agreement Revco agreed, pursuant to the Stock Option
Agreement, to grant Rite Aid an irrevocable option to purchase up to
19.9% of Revco's issued and outstanding shares of Revco Common Stock
at the time of exercise of such option.
See 'THE MERGER--Rite Aid's Reasons for the Merger; Recommendations of the
Rite Aid Board.'
Opinion of DLJ.
DLJ delivered its oral opinion to the Rite Aid Board, which was confirmed
by its written opinion dated November 29, 1995 to the Rite Aid Board, to the
effect that the consideration to be paid by Rite Aid pursuant to the Merger
Agreement, taken as a whole, is fair to the stockholders of Rite Aid from a
financial point of view. The full text of the DLJ opinion, which sets forth a
description of the assumptions made, matters considered and limitations on the
review undertaken, is attached hereto as Annex B. RITE AID STOCKHOLDERS ARE
URGED TO READ THE DLJ OPINION CAREFULLY IN ITS ENTIRETY. See 'THE
MERGER--Opinion of DLJ.'
9
<PAGE>
Revco's Reasons for the Merger; Recommendation of the Revco Board.
PRIOR TO THE EXECUTION OF THE MERGER AGREEMENT, THE BOARD OF DIRECTORS OF
REVCO (THE 'REVCO BOARD') UNANIMOUSLY DETERMINED (WITH ONE DIRECTOR ABSENT AND
TWO DIRECTORS ABSTAINING) THAT THE MERGER IS FAIR TO, AND IN THE BEST INTERESTS
OF, THE STOCKHOLDERS OF REVCO, APPROVED THE MERGER AGREEMENT, AND RECOMMENDED
THAT THE STOCKHOLDERS OF REVCO VOTE IN FAVOR OF APPROVAL AND ADOPTION OF THE
MERGER AGREEMENT AT THE REVCO SPECIAL MEETING. In reaching its conclusion, the
Revco Board considered a number of factors, including, without limitation, the
following:
o the terms and conditions of the Merger Agreement, including the
amount and form of Merger Consideration;
o the fact that the value of the shares of Rite Aid Common Stock to be
received for each share of Revco Common Stock in the Merger will
increase to the extent the average value of Rite Aid Common Stock is
greater than $27.50 per share during the Pricing Period and will
decrease if the average value of the Rite Aid Common Stock is less
than $27.50 per share during the Pricing Period;
o presentations by management of Revco (at a board meeting held on
November 28, 1995, and at previous board meetings) regarding the
financial condition, results of operations, business and prospects
of Revco, including the prospects of Revco if it remained
independent;
o the fact that upon consummation of the Offer, Rite Aid and/or Sub
will own at least 50.1% of the outstanding shares of Revco Common
Stock and have agreed to vote in favor of the approval and adoption
of the Merger Agreement, and, therefore, a vote in favor of the
approval and adoption of the Merger Agreement would be assured
without the vote of any other holder of shares of Revco Common
Stock;
o the historical market prices for the shares of Revco Common Stock,
particularly the fact that the $27.50 per share price in the Offer
represented (x) a premium of approximately 6.8% over the closing
price of $25.75 for the shares of Revco Common Stock on November 27,
1995, the last trading day prior to the approval of the Merger
Agreement, and (y) a higher price than the shares of Revco Common
Stock had ever traded;
o the expected future trading values of the shares of Revco Common
Stock in light of, among other things, the historical trading
multiples of other companies in Revco's line of business;
o the analyses prepared by Morgan Stanley & Co. Incorporated ('Morgan
Stanley') and the oral opinion of Morgan Stanley presented to the
Revco Board on November 28, 1995 and confirmed in writing on
November 29, 1995 to the effect that, as of such date and based upon
its review and analysis and subject to the limitations set forth
therein, the consideration to be received by the holders of Revco
Common Stock pursuant to the Offer and the Merger, taken together,
is fair from a financial point of view to such holders. See 'THE
MERGER--Opinion of Morgan Stanley;'
o the fact that the Merger offers the opportunity for substantial
synergies and the transaction structure allows Revco stockholders
who receive Rite Aid Common Stock to participate in those synergies
through continued ownership of the combined company;
o the views expressed by management and Morgan Stanley that there did
not appear to be any other party with which Revco would be as good a
strategic fit as Rite Aid;
o the fact that the Stockholder agreed to tender all of its shares of
Revco Common Stock in the Offer and to support the Merger Agreement;
o the fact that the Merger is not conditioned on the availability of
financing;
o the fact that the Merger Agreement, which prohibits Revco, its
subsidiaries or its affiliates from initiating, soliciting or
encouraging any potential acquisition proposal, does permit Revco to
furnish information to and participate in discussions or
negotiations with any third party if certain conditions are
satisfied;
10
<PAGE>
o the fact that if the Revco Board decided to accept an acquisition
proposal by a third party, the Revco Board may terminate the Merger
Agreement and pay Rite Aid a termination fee of $45 million, or
approximately $.68 per issued and outstanding share, which the Revco
Board did not believe would be a significant deterrent to a higher
offer by a third party interested in acquiring Revco; and
o the regulatory approvals required to consummate the Merger,
including, among other things, antitrust approvals, and the
prospects of receiving such approvals.
See 'THE MERGER--Revco's Reasons for the Merger; Recommendation of the
Revco Board.'
Opinion of Morgan Stanley.
Morgan Stanley delivered its oral opinion to the Revco Board, which was
confirmed by its written opinion dated November 29, 1995 to the Revco Board, to
the effect that the consideration to be received by the holders of Revco Common
Stock pursuant to the Offer and the Merger, taken together, is fair from a
financial point of view to such holders. The full text of the Morgan Stanley
opinion, which sets forth a description of the assumptions made, matters
considered and limitations on the review undertaken, is attached hereto as Annex
C. See 'THE MERGER--Opinion of Morgan Stanley.'
Certain Advantages and Disadvantages of the Merger.
In considering whether to approve the Share Issuance, stockholders of Rite
Aid should consider the following advantages and disadvantages.
Advantages. The Merger will provide significant benefits to Rite Aid and
Revco and each of their respective stockholders. The Merger will create
substantial opportunities for synergies and will allow the combined company to
compete more effectively in a marketplace that is becoming increasingly
competitive.
In addition, the Rite Aid Board has determined that the Merger is
advisable, fair to and in the best interests of the Rite Aid stockholders and
has approved the Merger Agreement.
Moreover, the Merger is expected to be accretive to Rite Aid's earnings per
share by the end of the first year of operations following the Merger.
Similarly, Rite Aid's management estimates, based on a preliminary review of
Revco's business and operations, that the Merger will result in approximately
$156 million of quantifiable annual cost savings, including improvement in gross
margins through enhanced purchasing power, closure of Revco's corporate
headquarters and overlapping distribution facilities, elimination of duplicative
overhead, elimination of redundant advertising expenditures, the consolidation
of data centers and improved communications systems and a working capital
benefit from the consolidation of warehouse inventories.
Further, DLJ has delivered its opinion to the Rite Aid Board to the effect
that the consideration to be paid by Rite Aid pursuant to the Merger Agreement,
taken as a whole, is fair to the stockholders of Rite Aid from a financial point
of view. Similarly, Morgan Stanley has delivered its written opinion to the
Revco Board to the effect that the aggregate consideration to be received by the
holders of shares of Revco Common Stock pursuant to the Offer and the aggregate
consideration to be received by the holders of shares of Revco Common Stock
pursuant to the Merger, taken together, are fair from a financial point of view
to such holders.
Disadvantages. The Rite Aid Board considered the fact that Rite Aid would
be a more leveraged company in the event that the Share Issuance was not
approved by Rite Aid's stockholders and the Merger was consummated using the
Alternative Consideration.
In determining that the Merger is advisable and in the best interests of
its stockholders, the Rite Aid Board considered the cost savings, operating
efficiencies and other synergies expected to result from the consummation
thereof. The consolidation of functions, the integration of departments, systems
and procedures and the relocation of staff present significant management
challenges. There can be no assurance that such actions will be successfully
accomplished as rapidly as currently expected. Moreover, although the primary
purpose of such actions will be to realize direct cost savings and other
operating efficiencies, there can be no assurance of the extent to which such
cost savings and efficiencies will be achieved.
If the stockholders of Rite Aid approve the Share Issuance and assuming a
one-for-one Exchange Ratio, the current stockholders of Rite Aid would own
approximately 72.7% of the then outstanding shares of Rite Aid Common Stock
after the Merger.
11
<PAGE>
Rite Aid also expects to take a pre-tax charge to earnings estimated to be
in the range of $150 million to $175 million to cover the cost of integrating
the two companies. See Note (n) of Notes to Unaudited Pro Forma Condensed
Consolidated Financial Data for a discussion of such merger and integration
charges. There can be no assurance, however, that the amount of such charge will
not increase as Rite Aid's integration plan is further developed and more
accurate estimates become possible or as to the amount of the after-tax cost of
such charge. See 'THE MERGER--Certain Advantages and Disadvantages of the
Merger.'
Plans for Revco.
It is expected that the business and operations of Revco will be integrated
into the operations of Rite Aid as rapidly as practicable following the Merger.
Rite Aid intends to close Revco's corporate headquarters at 1925 Enterprise
Parkway, Twinsburg, Ohio (the 'Headquarters') within twelve months following
consummation of the Merger and to integrate Revco's corporate headquarters
operations into Rite Aid's operations. Rite Aid also expects to take a pre-tax
charge to earnings estimated to be in the range of $150 million to $175 million
to cover the cost of integrating the two companies. Rite Aid anticipates that
only a small percentage of the combined stores of Rite Aid and Revco will be
closed. A decision on which stores will be closed is not expected to be made
until after the consummation of the Merger. In addition, Rite Aid will continue
to evaluate the business and operations of Revco after the consummation of the
Merger, and will take such further actions as it deems appropriate under the
circumstances then existing. See 'THE MERGER--Plans for Revco.'
Background of the Merger.
For a description of the background of the Merger, see 'THE
MERGER--Background of the Merger.'
Interests of Certain Persons.
Existing Employment Agreements. Revco maintains employment agreements
with, among others, its eight executive officers ('Group A Executives') and
fifteen other officers (collectively with the Group A Executives, the 'Covered
Executives' or, individually, a 'Covered Executive'), with one form of agreement
for executive officers and one form of agreement for non-executive officers.
Except for the severance periods, the forms of these agreements are
substantially similar.
The agreements provide, among other things, for the payment of base salary
and participation in Revco's bonus plan and provides that the employee will be
eligible to participate in Revco's other employee benefit programs for the
provision of welfare and other benefits.
In addition, the agreements provide for the payment of an employee's base
salary and the continuation of other benefits for a specified period upon
termination of employment by Revco other than for gross misconduct or by the
employee for good reason. The severance period for Group A Executives is two
years and, for the other fifteen officers ('Group B Executives'), is one year.
See 'THE MERGER--Interests of Certain Persons.'
Economic Value Added (EVA) Incentive Plan (the 'Bonus Plan'). Each of the
Covered Executives is eligible to participate in the Bonus Plan. Awards pursuant
to the Bonus Plan are based upon the achievement of a combination of performance
objectives by Revco and the individual participant. Each participant in the
Bonus Plan is credited with bonus units equal to his base salary multiplied by a
target bonus percentage. If the target bonus is exceeded by a specified amount,
the excess is deposited into a bonus bank on behalf of the individual
participant for the following year. See 'THE MERGER--Interests of Certain
Persons.'
Defined Benefit Plan. The Revco Retirement Income Plan and Trust, as
amended ('Pension Plan'), is a defined benefit pension plan generally covering
employees of Revco, other than those covered by collective bargaining agreements
that provide for pension benefits.
On reaching normal retirement at or after age 65, a participant is
generally entitled to receive a monthly retirement benefit for life. Alternative
actuarially equivalent forms of benefit payments are provided for in the Pension
Plan. Vesting under the Pension Plan occurs after five years of service (with no
vesting where less than five years of service has been completed).
The annual retirement benefit at the normal retirement age of at least 65
is equal to an amount which, when added to the participant's social security
benefit, is the product of the employee's average earnings for the last five
years of his service and the applicable percentage. If the employee has fewer
than 30 years of credited
12
<PAGE>
service with Revco, the benefit determined by this formula is reduced by a
percentage determined substantially by the ratio of the number of years of
credited service to 30. A participant who has attained age 55 and has completed
five years of service may elect early retirement with reduced monthly benefit
payments. See 'THE MERGER--Interests of Certain Persons.'
Supplemental Retirement and Survivor Benefit Plan (the 'SERP'). Each of
the Covered Executives participates in the SERP, which provides supplemental
retirement benefits generally commencing upon either (i) retirement or
disability at age sixty, or (ii) upon termination of employment at age
sixty-five. The basic supplemental benefit is an amount that, when added to
other benefits (pension plan benefits, social security benefits and other
monthly retirement income as provided), equals 70% of a participant's final
salary. The SERP benefit is reduced for early retirement. Upon execution of an
individual agreement under the SERP, a participant is 50% vested. Thereafter, a
participant vests in his SERP benefits at a rate of 10% each year. See 'THE
MERGER--Interests of Certain Persons.'
Split Dollar Plan. Each of the Covered Executives participates in the
Split Dollar Plan. See 'THE MERGER--Interests of Certain Persons.'
1992 Long-Term Incentive Plan (the 'LTIP'). Each of the Covered Executives
participates in the LTIP, which provides for the grant of incentive and
non-qualified stock options, reload options, stock appreciation rights,
restricted stock awards, stock bonus awards and performance plan awards. In the
event of a 'change in control,' as defined in the LTIP, the options granted to
Revco's officers become fully exercisable. The consummation of the Offer
constitutes a 'change in control' for purposes of the LTIP.
The estimated amount of gain associated with the options of Group A
Executives that vest upon a 'change in control' is:
<TABLE>
<S> <C>
Mr. Hoven................................................... $5,098,674
Mr. Bellini................................................. $1,940,324
Mr. Hagan................................................... $ 797,095
Mr. Mastrian................................................ $1,357,569
Mr. Coffey.................................................. $ 438,627
Mr. Gropp................................................... $ 322,573
Mr. Nichols................................................. $ 758,784
Mr. Staph................................................... $ 942,912
</TABLE>
The estimated aggregate amount of gain associated with the options of Group
B Executives that vest upon a 'change in control' is approximately $3,200,000.
See 'THE MERGER--Interests of Certain Persons.'
1992 Non-Employee Directors' Stock Option Plan (the 'Non-Employee
Directors' Plan'). All of the directors who are not officers or key employees
of Revco are eligible to participate in the Non-Employee Directors' Plan, which
provides for the grant of options to purchase shares of Revco Common Stock. The
consummation of the Offer constitutes a 'change in control' for purposes of the
Non-Employee Directors' Plan. The estimated aggregate amount of gain associated
with the options of non-employee directors that vest upon a 'change in control'
is approximately $577,000. See 'THE MERGER--Interests of Certain Persons.'
Employee Stock Purchase Plan (the 'ESPP'). Each of the Covered Executives
is eligible to participate in the ESPP, which permits participants to purchase
Revco's common stock at the lesser of (a) 85% of the fair market value of the
stock on the first day of the offering period, or (b) 85% of the fair market
value of the stock on the last day of the offering period. See 'THE
MERGER--Interests of Certain Persons.'
Treatment of Stock Options. The Merger Agreement provides that, effective
as of the Effective Time, each option granted by Revco to purchase Revco Common
Stock that is outstanding and unexercised (each a 'Revco Stock Option') will
cease to represent a right to acquire Revco Common Stock and will be converted
automatically into an option to purchase shares of Rite Aid Common Stock. The
number of shares of Rite Aid Common Stock subject to the new option shall be
determined in a manner that preserves both (i) the aggregate gain (or loss) on
Revco Stock Options immediately prior to the Effective Time and (ii) the ratio
of the exercise price per share subject to Revco Stock Options to the fair
market value (determined immediately prior to the Effective Time) per share
subject to such option, provided that any fractional shares of Rite Aid Common
Stock resulting from such determination will be rounded down to the nearest
share. The Merger Agreement also provides that, effective as of the Effective
Time, the surviving corporation will assume each Revco Stock Option
13
<PAGE>
agreement, each as amended, as provided therein. The duration, vesting and other
terms of the new options will be the same as the Revco Stock Options that they
replace, except that all references to Revco shall be deemed to be references to
Rite Aid.
The Merger Agreement further provides that, notwithstanding the immediately
preceding paragraph, outstanding vested options under the LTIP held by Covered
Executives, including options that become vested in connection with a 'change in
control' under the terms of existing award agreements under the LTIP, will,
effective as of the Effective Time, become exercisable under a cashless exercise
procedure made available by Revco.
The Merger Agreement provides that, effective as of the Effective Time, the
Option Plans will terminate and the provisions in any other plan, program,
agreement or arrangement providing for the issuance or grant of any other
interest in respect of the capital stock of Revco or any of its subsidiaries,
will be deleted. See 'THE MERGER--Interests of Certain Persons.'
Bonus; Severance Benefits. Pursuant to the Merger Agreement, as soon as
practicable following the earlier of (i) the Effective Time and (ii) the end of
Revco's 1996 fiscal year, Revco will pay, pursuant to the terms of the Bonus
Plan as modified by the terms of the Merger Agreement, bonuses for fiscal year
1996, calculated based on Revco's financial results as of February 10, 1996, and
annualized to equal a bonus for a twelve month period.
With respect to the Covered Executives, effective as soon as practicable
following the Effective Time (or if later, the date of termination of employment
of the Covered Executive), the Merger Agreement provides that Revco will pay to
each Covered Executive severance payments (the 'Severance Payments'), on a basis
consistent with Rite Aid's executive payroll practices, based on one of the two
formulae set forth below, pursuant to elections made by each Covered Executive
prior to the Effective Time:
(i) Severance Payments equal to, on an annualized basis, 'Base Pay'
(as defined below), continuing for a period of three years with respect to
Group A Executives, and for a period of 18 months with respect to Group B
Executives. For purposes of this provision, 'Base Pay' means the highest
base pay paid to the Covered Executive during any one of the 1994, 1995 or
1996 fiscal years, provided that Base Pay for fiscal year 1996 will be
calculated on an annualized basis; or
(ii) Severance Payments equal to, on an annualized basis, 'Base Plus
Bonus Pay' (as defined below), continuing for a period of two years with
respect to Group A Executives, and for a period of one year with respect to
Group B Executives. For purposes of this provision 'Base Plus Bonus Pay'
means Base Pay plus the amount that would have been paid to the executive
under the Bonus Plan for fiscal year 1995 as the targeted bonus (the '1995
Target Bonus').
In lieu of the Severance Payments described in clauses (i) and (ii) above,
Mr. Hoven and Mr. Mastrian will receive Severance Payments, continuing for three
years, equal to, on an annualized basis, Base Plus Bonus Pay.
The estimated cost of providing the additional severance payments to Group
A Executives upon termination of employment is:
<TABLE>
<S> <C>
Mr. Hoven................................................... $1,726,943
Mr. Bellini................................................. $ 420,000
Mr. Hagan................................................... $ 270,000
Mr. Mastrian................................................ $ 701,496
Mr. Coffey.................................................. $ 245,700
Mr. Gropp................................................... $ 203,963
Mr. Nichols................................................. $ 226,740
Mr. Staph................................................... $ 247,323
</TABLE>
The aggregate estimated cost of providing the additional severance payments
to Group B Executives is $1,190,738.
Pursuant to the Merger Agreement, each employee, other than any Covered
Executive, of Revco who is covered by Revco's severance pay plan as in effect on
November 1, 1995 (each, a 'Severance-Eligible Employee') and who is employed by
Revco immediately prior to the Effective Time and terminated for other than
Cause (as defined below), within twelve months following the Effective Time,
will be entitled to receive bi-weekly severance payments, made on a basis
consistent with Rite Aid's payroll practices, for a six month period
14
<PAGE>
commencing on such Severance-Eligible Employee's date of termination of
employment, equal to, on an annualized basis, such Severance-Eligible Employee's
Base Pay; provided, however, that except for employees located at Revco's
headquarters such payments will be reduced (but not below zero) by the amount of
compensation such Severance-Eligible Employee receives from a subsequent
employer to the extent that such Severance-Eligible Employee is employed during
such six month period.
For purposes of the Merger Agreement, 'Cause' will mean the conviction of
an employee or executive (as the case may be) for the commission of a felony,
including the entry of a guilty or nolo contendere plea, any willful, grossly
negligent or fraudulent action or inaction by an employee or executive, as the
case may be, or the employee's or executive's willful and continued failure to
substantially perform an employee's or executive's assigned duties. See 'THE
MERGER--Interests of Certain Persons.'
SERP. Pursuant to the Merger Agreement, each Revco employee who is (i)
covered by the SERP and (ii) actively employed by Revco, in either case,
immediately prior to the Effective Time (each, a 'SERP Executive') will be
eligible to receive benefits under the SERP based on the terms of the SERP, as
modified by the terms of the Merger Agreement.
The estimated present value (using a 7.5% discount factor) of the
additional SERP and Split Dollar Plan benefits for the Group A Executives is:
<TABLE>
<S> <C>
Mr. Hoven................................................... $1,503,112
Mr. Bellini................................................. $1,877,388
Mr. Hagan................................................... $ 56,756
Mr. Mastrian................................................ $ 487,121
Mr. Coffey.................................................. $ 234,699
Mr. Gropp................................................... $ 12,028
Mr. Nichols................................................. $ 161,405
Mr. Staph................................................... $ 191,735
</TABLE>
The aggregate estimated present value (using a 7.5% discount factor) of the
additional SERP and Split Dollar Plan benefits for Group B Executives is
$762,150. See 'THE MERGER--Interests of Certain Persons.'
Gross-Up Payments. Pursuant to the Merger Agreement, Revco will provide
each Group A Executive with a cash gross-up payment to make such executive whole
for the excise taxes imposed on all benefits and other amounts paid or payable
to such executive on account of the transactions contemplated by the Merger
Agreement. With respect to all other employees of Revco who are entitled to
benefits and other amounts paid or payable to such employee on account of the
transactions contemplated by the Merger Agreement, Revco shall not be obligated
to pay or provide to any such employee any payments or benefits to the extent
that such payments or benefits would constitute a 'parachute payment' within the
meaning of Section 280G(b)(2)(A) of the Code. Based upon preliminary estimates,
the aggregate cost of the gross-up payments is expected to be between $6,000,000
and $9,000,000. See 'THE MERGER--Interests of Certain Persons.'
ESPP. Each Covered Executive who is subject to Section 16 ('Section 16')
of the Securities Exchange Act of 1934, as amended (the 'Exchange Act') will be
provided with a cash payment approximating the benefits that would be deprived
by reason of Section 16. Revco will amend the ESPP to provide that the option
period that was in effect as of November 29, 1995 will cease as soon as
practicable after such date. See 'THE MERGER--Interests of Certain Persons.'
Other Benefits. Revco will provide outplacement services from a recognized
outplacement provider selected by Rite Aid to all employees of Revco as of the
Effective Time who were based in Twinsburg, Ohio as of the Effective Time, and
are terminated without Cause within one year of the Effective Time.
In addition, pursuant to the Merger Agreement, employees of Revco who
continue to be employed by Revco as of the Effective Time will receive employee
benefits comparable to those benefits provided to similarly situated employees
of Rite Aid. See 'THE MERGER--Interests of Certain Persons.'
15
<PAGE>
Indemnification.
Pursuant to the terms of the Merger Agreement, Rite Aid has agreed that at
all times after the Effective Time, it will indemnify, or will cause Revco, as
the surviving corporation, and its subsidiaries to indemnify each director,
officer, employee or agent of Revco or any of Revco's subsidiaries, successors
and assigns (an 'Indemnified Party'), to the fullest extent permitted by law,
with respect to any claim, liability, loss, damage, judgment, fine, penalty,
amount paid in settlement or compromise, cost or expense, including reasonable
fees and expenses of legal counsel (whenever asserted or claimed) ('Indemnified
Liability') based in whole or in part on, or arising in whole or in part out of,
any matter existing or occurring at or prior to the Effective Time. See 'THE
MERGER--Indemnification'; and 'MERGER AGREEMENT--Directors' and Officers'
Insurance and Indemnification.'
Estimated Synergies.
Rite Aid regards the resulting consolidation of Revco and Sub as an
opportunity to achieve certain cost savings and synergies. Based on a
preliminary review of Revco's business and operations, Rite Aid currently
estimates that the Merger will result in approximately $156 million of
quantifiable annual cost savings, including the improvement in gross margins
through enhanced purchasing power, closure of Revco's corporate headquarters and
overlapping distribution facilities, elimination of duplicative overhead,
elimination of redundant advertising expenditures, the consolidation of data
centers and improved communications systems and a working capital benefit from
the consolidation of warehouse inventories. THE FOREGOING ESTIMATES OF COST
SAVINGS AND SYNERGIES ARE INHERENTLY SUBJECT TO SIGNIFICANT UNCERTAINTIES AND
CONTINGENCIES, MANY OF WHICH ARE BEYOND THE CONTROL OF RITE AID. THERE CAN BE NO
ASSURANCE THAT THEY WILL BE ACHIEVED AND ACTUAL SAVINGS AND SYNERGIES MAY VARY
MATERIALLY FROM THOSE ESTIMATED. THE INCLUSION OF SUCH ESTIMATES HEREIN SHOULD
NOT BE REGARDED AS AN INDICATION THAT RITE AID, SUB OR ANY OTHER PARTY CONSIDERS
SUCH ESTIMATES AN ACCURATE PREDICTION OF FUTURE EVENTS. See 'THE
MERGER--Estimated Synergies.'
Conditions to the Merger.
The obligations of Rite Aid and Revco to consummate the Merger are subject
to the satisfaction or waiver (where permissible) of various conditions,
including, among others, the absence of any order or legal restraint or
prohibition preventing the consummation of the Merger. See 'MERGER
AGREEMENT--Conditions to the Merger.'
Other Legal Matters; Regulatory Approvals.
General. Except as otherwise disclosed herein, based upon its review of
publicly available information with respect to Revco and the review of certain
information furnished by Revco to Rite Aid, neither Sub nor Rite Aid is aware of
(i) any license or regulatory permit that appears to be material to the business
of Revco and its subsidiaries, taken as a whole, that might be adversely
affected pursuant to the Merger or (ii) any approval or other action by any
governmental, administrative or regulatory agency or authority, domestic or
foreign, that would be required for the consummation of the Merger. Should any
such approval or other action be required, Rite Aid and Sub currently
contemplate that such approval or action would be sought. Revco's pharmacists
and pharmacy technicians are required to be licensed by the appropriate state
board of pharmacy. Revco's stores and certain of Revco's distribution centers
are also registered with the Federal Drug Enforcement Administration. Many of
Revco's stores sell alcoholic beverages and are subject to various state and
local licensing requirements as a result. By virtue of these license and
registration requirements, Revco may be obligated to obtain certain governmental
consents and approvals in order to consummate the Merger.
Antitrust. Under the HSR Act and the regulations promulgated thereunder by
the FTC, the Offer may not be consummated until notifications have been given
and certain information has been furnished to the FTC and the Antitrust Division
and the applicable waiting period has expired or been terminated. The
consummation of the Offer is conditioned upon the expiration or termination of
the applicable waiting period under the HSR Act. On December 11, 1995, Rite Aid
and Revco filed notifications and report forms under the HSR Act with the FTC
and the Antitrust Division. On December 27, 1995, Rite Aid and Revco received a
request for additional
16
<PAGE>
information (the 'Second Request') from the FTC. Rite Aid has submitted its
responses and certified to the FTC that it was in substantial compliance with
the Second Request as of February 7, 1996. Under the applicable HSR Act
regulations, the Offer may not be consummated until 10 days after Rite Aid has
substantially complied with the Second Request or the Second Request has been
withdrawn by the FTC and termination of the waiting period has been granted or
such later date as may be agreed to by Rite Aid on a voluntary basis. Rite Aid
has voluntarily agreed with the FTC to extend such 10 day waiting period through
Friday, February 23, 1996. At any time before or after the Effective Time, and
notwithstanding that the waiting period under the HSR Act has expired, any state
could take such action under its antitrust law as it deems necessary or
desirable in the public interest. Rite Aid has received requests for information
regarding antitrust issues from four state attorneys general concerning the
Merger. Rite Aid is cooperating with such attorneys general. See 'THE
MERGER--Other Legal Matters; Regulatory Approvals.'
ACCOUNTING TREATMENT
The Merger will be accounted for under the 'purchase' method of accounting
in accordance with generally accepted accounting principles ('GAAP').
APPRAISAL RIGHTS FOR REVCO STOCKHOLDERS
If only shares of Rite Aid Common Stock are issued in the Merger, then
Revco stockholders will not have any appraisal rights. However, in the event (i)
the Alternative Consideration or any Additional Consideration contemplated by
the Merger Agreement is applicable or (ii) that Rite Aid elects to pay any Cash
Adjustment Amount, under Section 262 of the DGCL ('Section 262'), any holder of
record of shares of Revco Common Stock who does not vote in favor of approval
and adoption of the Merger Agreement and delivers a demand for appraisal prior
to the vote of Revco's stockholders at the Revco Special Meeting on the Merger
Agreement has the right to obtain cash payment for the 'fair value' of his or
her shares at the Effective Time (excluding any element of value arising from
the accomplishment or expectation of the Merger). See 'THE MERGER--Appraisal
Rights.'
COMPARATIVE MARKET PRICES AND DIVIDENDS
The shares of Rite Aid Common Stock are listed and principally traded on
the New York Stock Exchange, Inc. (the 'NYSE') and Pacific Stock Exchange (the
'PSE') and quoted under the symbol RAD. The following table sets forth, for the
quarters indicated, the high and low sales prices and the dividends paid per
share of Rite Aid Common Stock on the NYSE as reported on the Dow Jones News
Service.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW DIVIDEND
- -------------------------------------------------------------- ---- ---- --------
<S> <C> <C> <C>
Fiscal Year Ended February 26, 1994:
Quarter Ended May 29........................................ $20 7/8 $17 5/8 15.00 cents
Quarter Ended August 28..................................... 19 1/8 16 1/4 15.00 cents
Quarter Ended November 27................................... 17 3/4 15 1/4 15.00 cents
Quarter Ended February 26................................... 19 3/8 15 1/4 15.00 cents
Fiscal Year Ended March 4, 1995:
Quarter Ended May 28........................................ $20 3/8 $18 1/8 15.00 cents
Quarter Ended August 27..................................... 21 1/2 18 7/8 15.00 cents
Quarter Ended November 26................................... 24 20 15.00 cents
Quarter Ended March 4....................................... 26 3/8 21 5/8 17.00 cents
Fiscal Year Ending March 2, 1996:
Quarter Ended June 3........................................ $25 5/8 $22 17.00 cents
Quarter Ended September 2................................... 29 1/2 24 17.00 cents
Quarter Ended December 2.................................... 32 5/8 26 1/4 17.00 cents
Quarter Ending March 2 (through February 15, 1996).......... 34 3/8 30 18.50 cents
</TABLE>
On November 29, 1995, the last full trading day prior to the public
announcement of the execution of the Merger Agreement, the highest reported
sales price of Rite Aid Common Stock on the NYSE Composite Tape was $28 7/8 per
share, the lowest reported sales price was $28 3/8 per share, and the reported
closing sales price was
17
<PAGE>
$28 5/8 per share. On February 15, 1996, the last full trading day for which
information was available prior to the printing and mailing of this Proxy
Statement, the last sales prices reported for Rite Aid Common Stock on the NYSE
Composite Tape was $32 3/8 per share.
The shares of Revco Common Stock are listed and principally traded on the
NYSE and quoted under the symbol RXR. The following table sets forth, for the
quarters indicated, the high and low sales prices per share on the NYSE as
reported by the Dow Jones News Service.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
- ------------------------------------------------------------------------- ---- ----
<S> <C> <C>
Fiscal Year Ended May 28, 1994:
Quarter Ended August 21................................................ $12 5/8 $10
Quarter Ended November 11.............................................. 16 1/2 11 1/8
Quarter Ended February 5............................................... 17 1/8 13 5/8
Quarter Ended May 28................................................... 18 5/8 13 7/8
Fiscal Year Ended June 3, 1995:
Quarter Ended August 20................................................ $19 $14 1/2
Quarter Ended November 12.............................................. 23 1/4 16 5/8
Quarter Ended February 4............................................... 24 1/2 20
Quarter Ended June 3................................................... 24 17 1/2
Fiscal Year Ending June 1, 1996:
Quarter Ended August 26................................................ $25 3/8 $19 1/4
Quarter Ended November 18.............................................. 25 7/8 19 5/8
Quarter Ended February 10.............................................. 29 24 5/8
Quarter Ending June 1 (through February 15, 1996)...................... 28 3/4 27 7/8
</TABLE>
Revco has not declared any cash dividends on the shares of Revco Common
Stock since fiscal year 1986.
On November 29, 1995, the last full trading day prior to the public
announcement of the execution of the Merger Agreement, the highest reported
sales price of Revco Common Stock on the NYSE Composite Tape was $25 1/2 per
share, the lowest reported sales price was $25 1/8 per share, and the reported
closing sales price was $25 1/2 per share. On February 15, 1996, the last full
trading day for which information was available prior to the printing and
mailing of this Proxy Statement, the last sales prices reported for Revco Common
Stock on the NYSE Composite Tape was $28 1/8 per share.
STOCKHOLDER AGREEMENT
Immediately after the execution of the Merger Agreement, the Stockholder
entered into a Stockholder Agreement, dated as of November 29, 1995, with Rite
Aid and Sub pursuant to which the Stockholder, who at such time owned
approximately 19.7% of all outstanding shares of Revco Common Stock, has agreed,
among other things, to (i) tender in the Offer and (ii) vote in favor of the
Merger, upon the terms and conditions thereof, all shares of Revco Common Stock
owned by the Stockholder. See 'STOCKHOLDER AGREEMENT.'
STOCK OPTION AGREEMENT
Immediately after the execution of the Merger Agreement, Revco entered into
a Stock Option Agreement, dated as of November 29, 1995, with Rite Aid and Sub
pursuant to which Revco has granted to Rite Aid an irrevocable option (the
'Stock Option') to purchase up to 13,251,010 fully paid and nonassessable shares
of Revco Common Stock at a purchase price of $27.50 per share of Revco Common
Stock, or such other number of shares of Revco Common Stock as equals 19.9% of
Revco's issued and outstanding shares of Revco Common Stock at the time of
exercise of the Stock Option, exercisable upon the occurrence of certain events.
See 'STOCK OPTION AGREEMENT.'
18
<PAGE>
UNAUDITED COMPARATIVE PER SHARE DATA
The following table sets forth certain historical and pro forma equivalent
per share data for Rite Aid Common Stock for the thirty-nine weeks ended
December 2, 1995 and for the fiscal year ended March 4, 1995, and certain
historical and pro forma equivalent per share data for Revco Common Stock for
the forty-one weeks ended November 18, 1995 and for the fiscal year ended June
3, 1995. The information presented herein should be read in conjunction with the
selected historical financial data and unaudited pro forma combined financial
statements found elsewhere in this Proxy Statement. Equivalent historical per
share data is derived from the audited financial statements of Rite Aid and
Revco. Equivalent pro forma per share data of Rite Aid Common Stock is derived
from the pro forma combined financial statements found elsewhere in this Proxy
Statement. Pro forma Revco Common Stock per share data is calculated based upon
pro forma combined per share data allocable to the approximately 35,005,000
shares of Revco Common Stock that will be converted into shares of Rite Aid
Common Stock upon completion of the Merger based upon an assumed Exchange Ratio
of one share of Rite Aid Common Stock for each share of Revco Common Stock.
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS FISCAL YEAR
ENDED ENDED
DECEMBER 2, 1995(1) MARCH 4, 1995(1)
------------------- ----------------
(UNAUDITED)
<S> <C> <C>
RITE AID COMMON STOCK(2):
Net Income
Historical............................................................. $ 1.22 $ 1.67
Pro Forma.............................................................. .90 .99
Book Value
Historical............................................................. 12.65 12.02
Pro Forma.............................................................. 16.19 15.69
Cash Dividends Declared
Historical............................................................. .51 .62
Pro Forma.............................................................. .51 .62
<CAPTION>
FORTY-ONE WEEKS FISCAL YEAR
ENDED ENDED
NOVEMBER 18, 1995 JUNE 3, 1995
------------------- ----------------
(UNAUDITED)
<S> <C> <C>
REVCO COMMON STOCK(3):
Net Income Before Extraordinary Item
Historical............................................................. $ .79 $ .95
Pro Forma.............................................................. .90 .99
Book Value
Historical............................................................. 11.98 11.54
Pro Forma.............................................................. 16.19 15.69
Cash Dividends Declared
Historical............................................................. -- --
Pro Forma.............................................................. .51 .62
</TABLE>
- ------------------
(1) The pro forma financial information has been prepared assuming the Merger
occurred at the beginning of the respective periods using a one-for-one
Exchange Ratio of shares of Rite Aid Common Stock for shares of Revco Common
Stock.
(2) The per share amount used in the pro forma calculations were computed by
adding the approximately 35,005,000 shares of Rite Aid Common Stock to be
issued in the Merger to the actual number of outstanding shares of Rite Aid
Common Stock for the respective periods.
(3) Equivalent pro forma data for Revco were computed by multiplying the pro
forma combined per share data of Rite Aid by the Exchange Ratio, assuming an
Exchange Ratio of 1.00.
19
<PAGE>
SELECTED HISTORICAL CONSOLIDATED AND PRO FORMA FINANCIAL DATA
The following summary sets forth certain unaudited historical consolidated
financial data and selected unaudited pro forma financial data. This financial
data should be read in conjunction with the historical consolidated financial
data, including the notes thereto, which are incorporated herein by reference,
and in conjunction with the unaudited pro forma financial statements and related
notes thereto included elsewhere in this Proxy Statement. See 'INCORPORATION OF
CERTAIN DOCUMENTS BY REFERENCE;' 'AVAILABLE INFORMATION;' and 'UNAUDITED PRO
FORMA CONDENSED CONSOLIDATED FINANCIAL DATA.'
SELECTED HISTORICAL FINANCIAL DATA
The following tables set forth certain selected historical financial data
of Rite Aid and Revco for each of the last five years and selected unaudited
historical financial data for Rite Aid's thirty-nine weeks periods ended
December 2, 1995 and November 26, 1994 and Revco's twenty-four weeks periods
ended November 18, 1995 and November 12, 1994. The selected historical financial
data for the last five years has been derived from the audited historical
financial statements of Rite Aid and Revco and should be read in conjunction
with such information. The thirty-nine weeks and twenty-four weeks information
is derived from the unaudited books and records of both Rite Aid and Revco and
include, in the opinion of the management of each of Rite Aid and Revco, all
adjustments necessary to present fairly the information for each period. Such
adjustments include only normal recurring adjustments. Such data is not
necessarily indicative of an entire year's results or future operating results.
RITE AID CORPORATION
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED FISCAL YEAR ENDED
-------------------------- --------------------------------------------------------------------
DECEMBER 2, NOVEMBER 26, MARCH 4, FEBRUARY 26, FEBRUARY 27, FEBRUARY 29, MARCH 2,
1995 1994 1995 1994 1993 1992 1991
----------- ------------ ---------- ------------ ------------ ------------ ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net Sales.................. $4,015,036 $3,180,085 $4,533,851 $4,058,711 $3,833,591 $3,530,560 $3,259,766
Income from Continuing
Operations Before
Taxes.................... 166,863 144,312 231,464 45,670 200,569 187,202 163,008
Income (Loss) from
Discontinued
Operations............... -- -- -- (16,920) 8,646 9,075 7,171
Net Income................. 101,953 88,032 141,286 9,288 132,396 124,016 107,300
PER SHARE INFORMATION:
Continuing Operations...... 1.22 1.04 1.67 .30 1.41 1.32 1.21
Discontinued Operations.... -- -- -- (.19) .10 .11 .08
Net Income per
Share(1)(2).............. 1.22 1.04 1.67 .11 1.51 1.43 1.29
</TABLE>
<TABLE>
<CAPTION>
AT AT AT AT AT AT
DECEMBER 2, MARCH 4, FEBRUARY 26, FEBRUARY 27, FEBRUARY 29, MARCH 2,
1995 1995 1994 1993 1992 1991
------------ ---------- ------------ ------------ ------------ ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current Assets............. $1,535,077 $1,373,220 $1,125,425 $1,079,684 $ 999,244 $ 931,451
Property, Plant and
Equipment, Net(3)........ 898,294 778,479 638,694 551,392 502,728 493,947
Net Non-Current Assets of
Discontinued
Operations(4)............ -- 40,743 77,784 71,406 67,100 66,500
Total Assets............... 2,791,902 2,472,607 1,989,070 1,858,506 1,734,479 1,666,958
Current Liabilities........ 687,745 577,225 362,209 268,039 276,049 224,000
Long-Term Debt, Less
Current Maturities(5).... 971,253 805,984 613,418 489,220 427,503 585,434
Stockholders' Equity(6).... 1,059,683 1,011,812 954,714 1,035,643 950,575 773,948
</TABLE>
(Footnotes on next page)
20
<PAGE>
(Footnotes from previous page)
- ------------------
(1) Primary earnings per share have been computed based on the weighted average
number of shares of Rite Aid Common Stock outstanding during each of the
following fiscal years (84,771,000 in fiscal year 1995, 87,972,000 in fiscal
year 1994, 87,933,000 in fiscal year 1993, 86,917,000 in fiscal year 1992
and 82,996,000 in fiscal year 1991) restated to reflect the June 17, 1991,
two-for-one stock split. There were 83,816,000 weighted average shares
outstanding during the thirty-nine week period ended December 2, 1995.
(2) On April 3, 1991, the Rite Aid Board declared a two-for-one stock split of
the company's common stock, payable July 8, 1991, to shareholders of record
at the close of business on June 17, 1991. The par value of $44,936,000 for
the additional shares issued was transferred from the additional paid-in
capital account to the common stock account. All share and per share data in
these financial statements (for fiscal years ended February 27, 1993,
February 29, 1992, and March 2, 1991) have been restated to reflect the
stock split, except where otherwise noted.
(3) Depreciation and amortization expenses were $82,740,000 for fiscal year
1995, $76,312,000 for fiscal year 1994, $71,998,000 for fiscal year 1993,
$69,371,000 for fiscal year 1992 and $73,250,000 for fiscal year 1991.
Depreciation and amortization generally are computed on a straight-line
basis over the following estimated lives: Buildings, 30 to 45 years;
Leasehold improvements, term of lease or useful lives of assets, whichever
is shorter; and Equipment, 3 to 15 years. Accelerated methods are used for
income tax purposes. As of March 4, 1995, land, buildings and related
equipment with a carrying value of $11,285,000 were pledged to secure
certain long-term debt totaling $10,812,000.
(4) As part of the corporate restructuring strategy, Rite Aid concentrated its
focus and resources entirely on the drugstore segment and, therefore,
authorized the sale of its four non-drugstore businesses. The businesses
sold were ADAP, an auto parts retailer with 96 stores, Encore Books, which
operated 98 stores, Concord Custom Cleaners which had 168 outlets and
Sera-Tec Biologicals, which consisted of 33 plasma collection centers
providing plasma for use in therapeutic and diagnostic products. During
fiscal year 1995, Encore, Concord and Sera-Tec were sold. The net proceeds
received amounted to $75,765,000 after taxes and expenses of $24,312,000.
The resulting aggregate after-tax loss of $12,274,000 was recorded to the
reserve for loss on disposal of discontinued operations and compares
favorably to the $12,320,000 reserve amount originally provided for the sale
of these three businesses. The remaining net reserve balance of $13,346,000
as of March 4, 1995, is included with net current assets of discontinued
operations on the balance sheet. Sera-Tec was sold to a group of investors
that included Alex Grass, former Chairman and Chief Executive Officer of
Rite Aid Corporation. As of March 4, 1995 the sale of ADAP was being
negotiated and was subsequently completed in the first quarter of fiscal
1996. Rite Aid believes that the remaining reserve amount for loss on
disposal of ADAP is adequate. ADAP's net assets are segregated on the March
4, 1995, balance sheet and primarily consist of inventories, property,
leasehold improvements, store fixtures and equipment.
A pre-tax provision of $42,000,000 for loss on disposal of these
discontinued operations was recorded in the fourth quarter of fiscal year
1994 and is shown on the consolidated statement of income net of a
$16,380,000 income tax benefit. The provision includes after-tax income
from operations during the phaseout period of $959,000.
Net sales for the discontinued operations were $273,149,000, $251,462,000
and $217,816,000 for fiscal years 1994, 1993 and 1992, respectively. The
interest expense allocation was $4,490,000 in fiscal year 1994, $3,501,000
in fiscal year 1993 and $3,358,000 in fiscal year 1992. Assets and
liabilities of the discontinued operations have been reclassified to
separately identify them on the consolidated balance sheet. The net current
assets of discontinued operations principally consist of inventories and
for fiscal year 1994 includes the $42,000,000 disposition reserve with
applicable income tax benefit of $16,380,000. The net non-current assets of
discontinued operations primarily consist of property, leasehold
improvements, store fixtures and equipment. Prior fiscal years'
consolidated financial statements and notes to the consolidated financial
statements have been restated, except where otherwise noted, to reflect
continuing operations.
(5) As of March 4, 1995, Rite Aid had $600,000,000 in revolving credit
commitments for general corporate purposes consisting of a $250,000,000,
364-day facility and a $350,000,000 five-year facility. Borrowings under
these facilities bear interest rates, at Rite Aid's option, based on the
prime federal funds, certificate of deposit or London interbank rates, as
well as competitive bid. Pricing on loans and commitments will vary
21
<PAGE>
commensurate with credit quality. The 364-day facility has a 7/100% per
annum facility fee on the entire commitment amount irrespective of usage.
The five-year facility has a 1/10% per annum facility fee on the entire
commitment amount. Both credit facilities also have a 1/20% per annum
utilization fee on borrowing in excess of 50% of the facilities. As of March
4, 1995, and February 26, 1994, there were no amounts outstanding under
these agreements.
Rite Aid maintains, at all times, unused long-term revolving credit
agreement commitments at least equal to the principal amount of its
outstanding commercial paper which Rite Aid intends to carry on a long-term
basis. Accordingly, outstanding commercial paper of $350,000,000 as of
March 4, 1995, and $156,000,000 as of February 26, 1994, was classified as
long-term debt on the consolidated balance sheet. The remaining outstanding
commercial paper of $86,500,000 at year-end 1995 and $30,000,000 at
year-end 1994 was classified as short-term debt.
In August 1993, Rite Aid issued 6 7/8% senior debentures having an
aggregate principal amount of $200,000,000. These debentures are due August
15, 2013, and may not be redeemed prior to maturity or be entitled to any
sinking fund. The net proceeds from this issuance were used for working
capital and general corporate purposes, including the repayment of
outstanding commercial paper of Rite Aid.
Rite Aid's 6 3/4% zero coupon subordinated convertible notes due on July
24, 2006, are convertible at any time by the holder into Rite Aid Common
Stock at a rate of 15.993 shares per note. The conversion rate will not be
adjusted for accrued original issue discount. Any note will be purchased by
Rite Aid, at the option of the holder, on July 24, 1996, and July 24, 2001,
for a purchase price per note of $514.86 and $717.54, respectively,
representing the issue price plus accrued original issue discount to each
such date. Rite Aid may redeem the notes for cash at any time, in whole or
in part, at redemption prices equal to the issue price plus accrued
original issue discount to the date of redemption.
In accordance with the terms of the merger agreement with Perry Drug
Stores, Inc. ('Perry'), Perry's 8 1/2% convertible debentures were redeemed
on March 15, 1995, through the use of proceeds from additional commercial
paper borrowings.
The aggregate annual principal payments as of March 4, 1995 of long-term
debt for the five succeeding fiscal years are as follows: 1996,
$51,053,000; 1997, $607,000; 1998, $862,000; 1999, $4,139,000; and 2000,
$435,000.
Rite Aid has complied with restrictions and limitations included in the
provisions of various loan and credit agreements. As of March 4, 1995,
retained earnings were not restricted as to payment of dividends by these
provisions.
(6) As part of Rite Aid's restructuring in fiscal year 1994, the Rite Aid Board
authorized a 'Dutch Auction' cash self-tender offer for up to 22,000,000
shares of its common stock. The tender offer commenced on January 10, 1994,
and expired on February 7, 1994, at tender prices ranging from $16.00 per
share to $18.50 per share. A total of 2,077,271 shares were acquired by Rite
Aid at $18.50 per share.
On February 16, 1994, the Rite Aid Board approved a stock repurchase
program to acquire up to 5,000,000 shares of Rite Aid's Common Stock in the
open market or in privately negotiated transactions. During fiscal year
1995, 1,847,798 shares were purchased in connection with this repurchase
program. During fiscal year 1996, an additional 407,100 shares of Rite Aid
Common Stock have been repurchased.
22
<PAGE>
REVCO D.S., INC.
SELECTED CONSOLIDATED FINANCIAL DATA
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TWENTY-FOUR WEEKS ENDED FISCAL YEAR ENDED
--------------------------- -------------------------------------------------
NOVEMBER 18, NOVEMBER 12, JUNE 3, MAY 28, MAY 29, MAY 30, JUNE 1,
1995 1994 1995 1994 1993 1992 1991
------------ ------------ -------- -------- -------- -------- --------
(PREDECESSOR
(UNAUDITED) COMPANY)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING STATEMENT DATA:
Net Sales............................ $2,213.7 $1,721.6 $4,431.9 $2,504.0 $2,242.1 $2,086.3 $1,878.1
Cost of Sales........................ 1,564.6 1,213.0 3,100.1 1,742.0 1,568.3 1,461.1 1,331.4
Operating Profit..................... 67.5 43.5 175.7 100.5 76.0 45.8 1.6
Income (Loss) Before Income Taxes and
Extraordinary Items............... 38.3 21.5 120.5 77.2 35.0 10.8 (43.7)
Net Income (Loss) Before
Extraordinary Item................ 19.9 10.8 61.1 38.7 14.2 (337.6) (65.2)
Extraordinary Item(1)(2)............. -- (2.8) (2.8) -- -- 635.3 --
Net Income (Loss).................... 19.9 8.0 58.3 38.7 14.2 297.7 (65.2)
PER SHARE INFORMATION:
Net Income Per Share Before
Extraordinary Item................ .30 .18 .95 .77 .35 * *
Extraordinary Item................... -- (.05) (.04) -- -- * *
Net Income per Share................. .30 .13 .91 .77 .35 * *
</TABLE>
<TABLE>
<CAPTION>
AT AT AT AT AT AT
NOVEMBER 18, JUNE 3, MAY 28, MAY 29, MAY 30, JUNE 1,
1995 1995 1994 1993 1992 1991
------------ ------- ------- ------- ------- -------------
(UNAUDITED) (PREDECESSOR
COMPANY)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current Assets................................. $1,236.5 $1,089.0 $ 584.5 $ 551.5 $ 558.3 $ 554.5
Property, Equipment and Leasehold
Improvements, Net........................... 314.8 278.8 115.6 109.9 113.9 174.9
Total Assets................................... 2,307.5 2,149.8 1,060.8 1,045.2 1,056.3 1,411.1
Current Liabilities............................ 741.8 689.5 340.6 329.5 301.1 199.1
Long-Term Debt................................. 719.9 639.6 200.0 253.3 435.2 1,189.3
Long-Term Liabilities.......................... 48.1 47.6 -- -- -- --
Stockholders' Equity........................... 797.7 773.1 499.7 453.7 320.0 (606.7)
</TABLE>
- ------------------
<TABLE>
<S> <C>
* Per share data is not presented for the Predecessor Company due to the general lack of compatibility with the
revised capital structure of Revco.
(1) For fiscal year ended June 3, 1995, Revco charged as an extraordinary item the early retirement of debt, net
of income tax benefit of $2.4 million.
(2) On June 1, 1992, Revco, 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 its predecessor
company, Revco D.S., Inc. (the 'Predecessor Company'), and substantially all of its respective subsidiaries
(collectively, the 'Revco Companies'). The Chapter 11 cases of the Revco Companies were commenced on July 28,
1988 (the 'Petition Date'). The Revco Companies' financial difficulties, and the reasons for the Chapter 11
filings, were principally attributable to their inability to meet interest payments, dividends and retirement
provisions on debt and equity incurred to finance a 1986 leveraged buyout.
</TABLE>
23
<PAGE>
SELECTED UNAUDITED SUMMARY PRO FORMA FINANCIAL DATA
The following selected unaudited pro forma financial information for Rite
Aid and Revco gives effect to the Offer and the Merger. The applicable
transactions are reflected in the pro forma combined balance sheet as if they
occurred on December 2, 1995 and in the pro forma combined statements of
operations as if they occurred at the beginning of the period presented. The
Merger will be accounted for under the purchase method of accounting. The
unaudited pro forma financial statements are prepared for illustrative purposes
only and are not necessarily indicative of the financial position or results of
operations that might have occurred had the applicable transactions actually
taken place on the dates indicated, or of future results of operations or
financial position of the stand alone or combined entities. The unaudited pro
forma financial statements do not reflect any synergies expected to be realized
after the Merger. The unaudited pro forma financial statements are based on the
historical consolidated financial statements of Rite Aid and Revco and should be
read in conjunction with (i) such historical financial statements and the notes
thereto, which are incorporated by reference in this Proxy Statement, (ii) the
unaudited selected pro forma financial data and unaudited comparative per share
data, including the notes thereto, appearing elsewhere in this Proxy Statement
and (iii) the selected historical financial data of Rite Aid and Revco appearing
elsewhere in this Proxy Statement. See 'UNAUDITED CONDENSED CONSOLIDATED PRO
FORMA FINANCIAL DATA.'
<TABLE>
<CAPTION>
FOR THE FISCAL
FOR THE THIRTY-NINE WEEKS YEAR ENDED
ENDED DECEMBER 2, 1995 MARCH 4, 1995
------------------------- -------------------------
(IN THOUSANDS)
<S> <C> <C>
OPERATING STATEMENT DATA:
Net Sales.................................. $ 7,806,036 $ 8,965,751
Net Income Before Extraordinary Item....... 107,162 118,731
<CAPTION>
AS OF DECEMBER 2, 1995
-------------------------
<S> <C> <C>
BALANCE SHEET DATA:
Current Assets............................. $ 2,811,777
Total Assets............................... 6,256,989
Long-Term Debt............................. 2,928,807
Stockholders' Equity....................... 2,022,308
</TABLE>
24
<PAGE>
INTRODUCTION
This Proxy Statement ('Proxy Statement') is being furnished to the holders
of common stock, par value $1.00 per share ('Rite Aid Common Stock'), of Rite
Aid Corporation, a Delaware corporation ('Rite Aid'), in connection with the
solicitation of proxies by the Board of Directors of Rite Aid (the 'Rite Aid
Board') for use at a Special Meeting of Stockholders of Rite Aid to be held at
the Radisson Hotel, 1150 Camp Hill Bypass, Camp Hill, Pennsylvania on Thursday,
March 28, 1996, at 10:00 a.m., local time, and at any and all adjournments or
postponements thereof (the 'Rite Aid Special Meeting') for purposes described
herein.
This Proxy Statement relates to the Agreement and Plan of Merger, dated as
of November 29, 1995 (the 'Merger Agreement'), among Rite Aid, Ocean Acquisition
Corporation, a Delaware corporation and a wholly owned subsidiary of Rite Aid
('Sub'), and Revco D.S., Inc., a Delaware corporation ('Revco'), which provides
for the merger (the 'Merger') of Sub with and into Revco, with Revco surviving
as a wholly owned subsidiary of Rite Aid. Subject to the terms and conditions of
the Merger Agreement, if the Merger is consummated, each share of common stock,
par value $.01 per share, of Revco ('Revco Common Stock') issued and outstanding
immediately prior to the effective time of the Merger (other than shares of
Revco Common Stock owned by Revco as treasury stock and other than shares of
Revco Common Stock owned by Rite Aid and Sub and other than shares of Revco
Common Stock held by holders who have properly exercised and perfected any
appraisal rights ('Dissenting Revco Shares') under the Delaware General
Corporation Law (the 'DGCL')) shall by virtue of the Merger and without any
action on the part of the holder thereof be converted into either (x) the right
to receive a number of duly authorized, validly issued, fully paid and
nonassessable shares of Rite Aid Common Stock determined as set forth below (the
'Exchange Ratio'); provided that Rite Aid will not issue more than 1.125 nor
fewer than .91666 shares of Rite Aid Common Stock per share of Revco Common
Stock or (y) if the Alternative Consideration (as defined below) is applicable,
then the right to receive the Alternative Consideration, plus, in each of clause
(x) and (y) above, any Additional Consideration (as defined herein). Each share
of Rite Aid Common Stock will be issued with one associated preferred stock
purchase right (a 'Right') in accordance with the Shareholder Rights Agreement,
dated as of April 5, 1989, between Rite Aid and Harris Trust Company of New York
(the 'Rite Aid Rights Agreement').
The per share value of Rite Aid Common Stock which stockholders of Revco
will receive in the Merger will be determined during a randomly selected
fifteen-day pricing period (the 'Pricing Period') during the forty trading days
ending five days before the Revco Special Meeting to consider the Merger.
PROMPTLY FOLLOWING THE CLOSE OF THE PRICING PERIOD, RITE AID AND REVCO WILL
ISSUE A JOINT PRESS RELEASE ANNOUNCING THE EXCHANGE RATIO. IF THERE IS TO BE ANY
CASH ADJUSTMENT AMOUNT (AS DESCRIBED HEREIN), SUCH PRESS RELEASE WILL ALSO
DISCLOSE THAT AMOUNT. ONCE THE PRICING PERIOD HAS ENDED, STOCKHOLDERS MAY ALSO
CALL MACKENZIE PARTNERS, INC. TOLL FREE AT 1-800-322-2855 OR COLLECT AT (212)
929-5500 TO LEARN THE EXCHANGE RATIO AND THE CASH ADJUSTMENT AMOUNT, IF ANY.
In the Merger, stockholders of Revco will receive one share of Rite Aid
Common Stock if the average value per share of Rite Aid Common Stock during the
Pricing Period is $27.50. If the average per share value of Rite Aid Common
Stock determined during the Pricing Period is greater than $27.50, stockholders
of Revco will receive, for each share of Revco Common Stock, that amount of Rite
Aid Common Stock having a value so determined of $27.50 plus 50% of such
increase in market value of Rite Aid Common Stock over $27.50, provided that in
no event will Rite Aid issue less than .91666 shares of Rite Aid Common Stock
for each share of Revco Common Stock. Similarly, if the average per share value
of Rite Aid Common Stock determined during the Pricing Period is less than
$27.50, stockholders of Revco will receive, for each share of Revco Common
Stock, that amount of Rite Aid Common Stock having a value so determined of
$27.50 less 50% of such decrease in market value of Rite Aid Common Stock below
$27.50, provided that in no event will Rite Aid issue more than 1.125 shares of
Rite Aid Common Stock for each share of Revco Common Stock. Alternatively, if
the average per share value of the Rite Aid Common Stock determined during the
Pricing Period is less than $27.50, Rite Aid will have the option of delivering,
for each share of Revco Common Stock, one share of Rite Aid Common Stock plus
cash (the 'Cash Adjustment Amount') in an amount equal to 50% of such decrease
in market value of Rite Aid Common Stock below $27.50, provided that in no event
will more than $2.75 per share of Revco Common Stock be paid in cash.
25
<PAGE>
The DGCL does not require the Rite Aid Board to submit the Merger Agreement
to a vote of the Rite Aid stockholders. Accordingly, the stockholders of Rite
Aid are not being asked to consider and vote upon the adoption and approval of
the Merger Agreement at the Rite Aid Special Meeting. At the Rite Aid Special
Meeting, the stockholders of Rite Aid will consider and vote upon the Share
Issuance as required by a rule of the New York Stock Exchange. Pursuant to such
New York Stock Exchange rule, a company may not issue 20% or more of the
company's outstanding shares without a vote of the company's stockholders.
The Rite Aid Board has determined that the Merger is advisable, fair to and
in the best interests of the stockholders of Rite Aid and determined to proceed
with the Merger even if the Share Issuance is not approved by the Rite Aid
stockholders. Therefore, in the event that the Rite Aid stockholders do not
approve the Share Issuance but all conditions to the Merger are otherwise
satisfied or waived (if permissible), the Alternative Consideration contemplated
by the Merger Agreement will be paid to Revco's stockholders upon consummation
of the Merger and approximately 19.9% of Rite Aid's current issued and
outstanding shares will be issued in the Merger.
In the event that at the Rite Aid Special Meeting the stockholders of Rite
Aid do not approve the issuance of Rite Aid Common Stock pursuant to the Merger
Agreement (the 'Share Issuance'), but all conditions to the Merger are otherwise
satisfied or waived (if permissible), Revco, Rite Aid and Sub will nonetheless
consummate the Merger and shares of Revco Common Stock issued and outstanding
immediately prior to the Effective Time (other than shares of Revco Common Stock
owned by Revco as treasury stock and other than shares of Revco Common Stock
owned by Rite Aid and Sub and other than Dissenting Revco Shares) will, at the
effective time of the Merger, be converted into the right to receive a
combination of (x) shares of Rite Aid Common Stock which will represent in the
aggregate 19.9% of the then outstanding shares of Rite Aid Common Stock (which
will be determined in a manner consistent with the determination of the Exchange
Ratio) and (y) cash based on a pro rata portion of $27.50 (collectively, the
'Alternative Consideration'). The Merger Agreement provides that in the event
the Merger is not consummated prior to certain dates, holders of shares of Revco
Common Stock will be entitled to receive interest on the consideration payable
to them in the Merger at rates set forth in the Merger Agreement. See 'MERGER
AGREEMENT--Conversion of Revco Common Stock.'
This Proxy Statement and the accompanying form of proxy are first being
mailed to stockholders of Rite Aid on or about February 20, 1996.
RITE AID SPECIAL MEETING
PURPOSE
At the Rite Aid Special Meeting, the stockholders of Rite Aid will consider
and vote upon a proposal to approve the issuance of up to a maximum of
42,865,712 shares of Rite Aid Common Stock pursuant to the Merger (the 'Share
Issuance').
The Rite Aid Board has unanimously determined that the Merger is advisable
and fair to and in the best interests of the stockholders of Rite Aid and has
approved the Merger Agreement. THE RITE AID BOARD HAS UNANIMOUSLY APPROVED THE
MERGER AGREEMENT AND RECOMMENDS THAT THE STOCKHOLDERS OF RITE AID VOTE IN FAVOR
OF THE SHARE ISSUANCE AT THE RITE AID SPECIAL MEETING. See 'THE MERGER--Rite
Aid's Reasons for the Merger; Recommendation of the Rite Aid Board.'
Representatives of Rite Aid's principal accountants are not expected to be
present at the Rite Aid Special Meeting.
RECORD DATE; VOTING RIGHTS
Only holders of record of Rite Aid Common Stock at the close of business on
February 12, 1996 (the 'Rite Aid Record Date') are entitled to receive notice of
and to vote at the Rite Aid Special Meeting. At the close of business on the
Rite Aid Record Date, there were 83,829,330 shares of Rite Aid Common Stock
outstanding, each of which entitles the registered holder thereof to one vote.
26
<PAGE>
SHARE OWNERSHIP OF MANAGEMENT
At the close of business on the Rite Aid Record Date, directors and
executive officers of Rite Aid and their affiliates were the beneficial owners
of an aggregate of approximately 3,425,439 (approximately 4.1%) of the shares of
Rite Aid Common Stock then outstanding.
QUORUM
The holders of a majority of the shares of Rite Aid Common Stock
outstanding and entitled to vote must be present in person or represented by
proxy at the Rite Aid Special Meeting in order for a quorum to be present.
Shares of Rite Aid Common Stock represented by proxies which are marked
'abstain' will be counted as shares present for purposes of determining the
presence of a quorum on all matters, as will shares that are represented by
proxies that are executed by any broker, fiduciary or other nominee on behalf of
the beneficial owner(s) thereof regardless of whether authority to vote is
withheld by such broker, fiduciary or nominee on one or more matters.
In the event that a quorum is not present at the Rite Aid Special Meeting,
it is expected that such meeting will be adjourned or postponed to solicit
additional proxies.
PROXIES
All shares of Rite Aid Common Stock represented by properly executed
proxies in the enclosed form which are received in time for the Rite Aid Special
Meeting and have not been revoked will be voted in accordance with the
instructions indicated in such proxies. IF A PROXY IS SUBMITTED BUT NO
DIRECTIONS ARE GIVEN THEREIN, SHARES OF RITE AID COMMON STOCK REPRESENTED BY THE
PROXY WILL BE VOTED FOR THE SHARE ISSUANCE. Abstentions will have the effect of
a vote cast against the Share Issuance. Broker non-votes will be disregarded and
will have no effect on the vote. In addition, the persons designated in such
proxy will have discretion to vote upon any procedural matter relating to the
Rite Aid Special Meeting, including the right to vote for any adjournment or
postponement thereof proposed by the Rite Aid Board, including a postponement
and adjournment, to solicit additional proxies. Any proxy in the enclosed form
may be revoked by the stockholder executing it at any time prior to its exercise
by giving written notice thereof to the Secretary of Rite Aid, by signing and
returning a later dated proxy or by voting in person at the Rite Aid Special
Meeting. Attendance at the Rite Aid Special Meeting will not in and of itself
constitute the revocation of a proxy.
SOLICITATION OF PROXIES
Proxies are being solicited hereby on behalf of the Rite Aid Board. In
addition to the use of the mail, solicitation may be made in person or by
telephone or otherwise by directors, officers and regular employees of Rite Aid.
Such directors, officers and regular employees will not be additionally
compensated for such solicitation, but may be reimbursed for out-of-pocket
expenses incurred in connection therewith. If undertaken, the expense of such
solicitation would be nominal. Rite Aid has retained MacKenzie Partners, Inc.
('MacKenzie') to aid in the solicitation of proxies from its stockholders.
MacKenzie will receive reasonable and customary compensation for its services
and will be reimbursed for certain reasonable out-of-pocket expenses.
REQUIRED VOTE
Approval of the Share Issuance will require the affirmative vote of a
majority of the votes cast on the Share Issuance, provided that the total number
of votes cast on such proposal represents more than 50% of the outstanding
shares of Rite Aid Common Stock entitled to vote thereon at the Rite Aid Special
Meeting.
27
<PAGE>
REVCO SPECIAL MEETING
A Special Meeting of Stockholders of Revco (the 'Revco Special Meeting')
will be held as soon as practicable following the Rite Aid Special Meeting. At
the Revco Special Meeting, the stockholders of Revco will consider and vote upon
a proposal to approve and adopt the Merger Agreement. Following the consummation
of the Offer (as defined herein), because Rite Aid will own in excess of 50% of
the outstanding shares of Revco Common Stock, the affirmative vote of a majority
of Revco stockholders in favor of the approval and adoption of the Merger
Agreement will be assured. The stockholders of Revco will also consider and take
action upon any other business which may properly be brought before the Revco
Special Meeting.
PRIOR TO THE EXECUTION OF THE MERGER AGREEMENT, THE BOARD OF DIRECTORS OF
REVCO (THE 'REVCO BOARD') UNANIMOUSLY DETERMINED (WITH ONE DIRECTOR ABSENT AND
TWO DIRECTORS ABSTAINING) THAT THE MERGER IS FAIR TO, AND IN THE BEST INTERESTS
OF, THE STOCKHOLDERS OF REVCO, APPROVED THE MERGER AGREEMENT, AND RECOMMENDED
THAT THE STOCKHOLDERS OF REVCO VOTE IN FAVOR OF THE APPROVAL AND ADOPTION OF THE
MERGER AGREEMENT AT THE REVCO SPECIAL MEETING. See 'THE MERGER--Revco's Reasons
for the Merger; Recommendation of the Revco Board.' For a discussion of the
interests that certain executive officers of Revco have with respect to the
Merger in addition to their interests as stockholders of Revco generally and
information regarding the treatment of options to purchase Revco Common Stock
and other rights of certain members of the Revco Board, see 'THE
MERGER--Interests of Certain Persons.' Such interests, together with other
relevant factors, were considered by the Revco Board in making its
recommendation and approving the Merger Agreement.
28
<PAGE>
THE MERGER
The description of the Merger and the Merger Agreement contained in this
Proxy Statement does not purport to be complete and is qualified in its entirety
by reference to the Merger Agreement, a conformed copy of which is attached
hereto as Annex A and incorporated herein by reference.
GENERAL
On December 4, 1995, Sub offered to purchase (the 'Offer') 35,144,833
shares of Revco Common Stock validly tendered according to the terms of the
Offer (representing approximately 50.1% of Revco's outstanding shares of common
stock on a fully diluted basis). On December 11, 1995, Rite Aid and Revco filed
notifications and report forms under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the 'HSR Act') with the Federal Trade
Commission (the 'FTC') and the Antitrust Division of the United States
Department of Justice (the 'Antitrust Division'). On December 27, 1995, Rite Aid
and Revco received a request for additional information (the 'Second Request')
from the FTC. On January 4, 1996, Sub extended the Offer in order to comply with
the Second Request. On February 7, 1996, Rite Aid submitted its responses to the
Second Request with the FTC and believes that it is in substantial compliance
with the Second Request. Under applicable regulations, the Offer may not be
consummated until ten days after Rite Aid has substantially complied with the
Second Request or such later date as Rite Aid may agree to. Rite Aid has
voluntarily agreed with the FTC to extend such ten day waiting period through
Friday, February 23, 1996. The Offer is presently scheduled to expire on
February 23, 1996 and Rite Aid reserves the right to extend the Offer until the
expiration of the waiting period under the HSR Act.
At the effective time of the Merger, each share of Revco Common Stock
issued and outstanding immediately prior to the Effective Time (other than
shares of Revco Common Stock owned by Revco as treasury stock and shares of
Revco Common Stock owned by Rite Aid, Sub or any other direct or indirect wholly
owned subsidiary of Rite Aid and other than Dissenting Revco Shares), shall by
virtue of the Merger and without any action on the part of the holder thereof be
converted into either (x) the right to receive a number of duly authorized,
validly issued, fully paid and nonassessable shares of Rite Aid Common Stock,
determined as set forth below (the 'Exchange Ratio'); provided that Rite Aid
shall not issue more than 1.125 or fewer than .91666 shares of Rite Aid Common
Stock per share of Revco Common Stock or (y) if the Alternative Consideration
(as defined below) is applicable, then the right to receive the Alternative
Consideration, plus, in each of clause (x) and (y) above, any Additional
Consideration (as defined below). Each share of Rite Aid Common Stock will be
issued with one associated Right.
The per share value of the Rite Aid Common Stock which stockholders of
Revco would receive in the Merger will be determined during a randomly selected
fifteen-day pricing period (the 'Pricing Period') during the forty trading days
ending five days before the Revco Special Meeting to consider the Merger.
PROMPTLY FOLLOWING THE CLOSE OF THE PRICING PERIOD, RITE AID AND REVCO WILL
ISSUE A JOINT PRESS RELEASE ANNOUNCING THE EXCHANGE RATIO. IF THERE IS TO BE ANY
CASH ADJUSTMENT AMOUNT (AS DESCRIBED HEREIN), SUCH PRESS RELEASE WILL ALSO
DISCLOSE THAT AMOUNT. ONCE THE PRICING PERIOD HAS ENDED, STOCKHOLDERS MAY ALSO
CALL MACKENZIE PARTNERS, INC. TOLL FREE AT 1-800-322-2855 OR COLLECT AT (212)
929-5500 TO LEARN THE EXCHANGE RATIO AND THE CASH ADJUSTMENT AMOUNT, IF ANY.
In the Merger, stockholders of Revco will receive one share of Rite Aid
Common Stock if the average per share value of Rite Aid Common Stock during the
Pricing Period is $27.50. If the average per share value of Rite Aid Common
Stock determined during the Pricing Period is greater than $27.50, stockholders
of Revco will receive, for each share of Revco Common Stock, that amount of Rite
Aid Common Stock having a value so determined of $27.50 plus 50% of such
increase in market value of Rite Aid Common Stock over $27.50, provided that in
no event will Rite Aid issue fewer than .91666 shares of Rite Aid Common Stock
for each share of Revco Common Stock. Similarly, if the average per share value
of Rite Aid Common Stock determined during the Pricing Period is less than
$27.50, stockholders of Revco will receive, for each share of Revco Common
Stock, that amount of Rite Aid Common Stock having a value so determined of
$27.50 less 50% of such decrease in market value of Rite Aid Common Stock below
$27.50, provided that in no event will Rite Aid issue more than 1.125 shares of
Rite Aid Common Stock for each share of Revco Common Stock. Alternatively, if
the average per share value of the Rite Aid Common Stock determined during the
Pricing Period is less than $27.50,
29
<PAGE>
Rite Aid will have the option of delivering, for each share of Revco Common
Stock, one share of Rite Aid Common Stock plus cash in an amount equal to 50% of
such decrease in market value of Rite Aid Common Stock below $27.50, provided
that in no event will more than $2.75 per share of Revco Common Stock be paid in
cash.
In the event that at the Rite Aid Special Meeting the stockholders of Rite
Aid do not approve the issuance of Rite Aid Common Stock pursuant to the Merger
Agreement, but all conditions to the Merger are otherwise satisfied or waived
(if permissible), Revco, Rite Aid and Sub will nonetheless consummate the Merger
and shares of Revco Common Stock issued and outstanding immediately prior to the
Effective Time (other than shares of Revco Common Stock owned by Revco as
treasury stock and other than shares of Revco Common Stock owned by Rite Aid and
Sub and other than Dissenting Revco Shares) will, at the Effective Time, be
converted into the right to receive a combination of (x) shares of Rite Aid
Common Stock which will represent in the aggregate 19.9% of the then outstanding
shares of Rite Aid Common Stock (which will be determined in a manner consistent
with the determination of the Exchange Ratio) and (y) cash based on a pro rata
portion of $27.50 (the 'Alternative Consideration').
In the event the Merger is not consummated prior to April 29, 1996, and
Revco has not materially breached the Merger Agreement (other than by acts
caused or permitted by Rite Aid), then the stockholders of Revco will be
entitled to receive interest on the amount of the consideration that they
receive pursuant to the immediately preceding two paragraphs (such consideration
and interest thereon being referred to herein as the 'Merger Consideration'),
from April 29, 1996 until the earlier of the Effective Time or June 30, 1996,
calculated at an annual rate equal to the prime rate of interest (as announced
from time to time by Morgan Guaranty Trust Company of New York). In the event
Rite Aid and/or Sub, in violation of their obligations under the Merger
Agreement, fail or refuse to consummate the Merger on or prior to June 30, 1996
and Revco has not materially breached the Merger Agreement (other than by acts
caused or permitted by Rite Aid), then, in addition to any rights or remedies
that Revco and its stockholders otherwise have in law or at equity as a result
thereof, the stockholders of Revco will be entitled to receive interest from
June 30, 1996 on the amount of the Merger Consideration not paid until such
Merger Consideration is paid, calculated at the annual rate of the higher of (i)
the prime rate of interest (as announced from time to time by Morgan Guaranty
Trust Company of New York) plus 300 basis points or (ii) the amount otherwise
permitted by law. Any additional consideration paid or payable pursuant to this
paragraph is referred to herein as 'Additional Consideration.'
THE MARKET VALUE OF THE RITE AID COMMON STOCK DURING THE PRICING PERIOD AND
AFTER THE EFFECTIVE TIME WILL, AMONG OTHER THINGS, DEPEND UPON, AND IS EXPECTED
TO FLUCTUATE WITH, THE PERFORMANCE OF RITE AID, CONDITIONS (ECONOMIC OR
OTHERWISE) AFFECTING THE RETAIL DRUGSTORE INDUSTRY, AND MARKET CONDITIONS AND
OTHER FACTORS THAT GENERALLY INFLUENCE PRICES OF SECURITIES.
BACKGROUND OF THE MERGER
The Revco Board and senior management of Revco regularly review the current
and future state of Revco's strategic position and short-term and long-term
prospects. In the ordinary course of Rite Aid's long-term strategic review
process, Rite Aid routinely analyzes potential acquisitions of various retail
drugstore chains. On August 17, 1995, Mr. Martin Grass, Chairman and Chief
Executive Officer of Rite Aid, spoke by telephone with Mr. David Schulte, a
general partner of the general partner of the Stockholder and a member of the
Revco Board. In the conversation, Mr. Grass told Mr. Schulte that Rite Aid was
possibly interested in purchasing Revco in a merger transaction involving a
combination of cash and stock. Mr. Schulte told Mr. Grass that he would contact
Mr. Dwayne Hoven, President and Chief Executive Officer of Revco, to ask him to
send Mr. Grass a Confidentiality Agreement. After execution of the
Confidentiality Agreement, Revco provided certain due diligence information
requested by Rite Aid.
On August 28, 1995, Mr. Grass, Mr. Franklin Brown, Executive Vice President
and Chief Legal Counsel of Rite Aid, and Mr. Frank Bergonzi, Executive Vice
President and Chief Financial Officer of Rite Aid, met in Chicago with Mr.
Schulte, Ms. Sheli Rosenberg, a member of the Revco Board, Mr. Joel Friedland, a
general partner of Chilmark Partners, L.P., an affiliate of the Stockholder, Mr.
Hoven, and Mr. James Hagan, Executive
30
<PAGE>
Vice President and Chief Financial Officer of Revco. A dinner meeting took place
and issues such as the possible price and synergies that would be created from a
merger were discussed. The parties ended the meeting without any definitive
conclusions about a future meeting.
On September 21, 1995, Mr. Grass and Mr. Brown were in Cleveland, Ohio for
a meeting on another business matter with Mr. Hoven. After the meeting, Mr.
Grass met with Mr. Hoven for a brief period to discuss the possible acquisition
of Revco by Rite Aid. At the meeting, Mr. Grass advised Mr. Hoven that if an
acceptable price could be negotiated, Mr. Grass believed that the transaction
would create the opportunity to build a more successful company than if either
company continued on a stand-alone basis.
On September 28, 1995, Mr. Grass spoke by telephone with Mr. Sam Zell, the
Co-Chairman of Revco, and discussed the terms and price range Mr. Grass would
offer for Revco.
On October 6, 1995, Mr. Hoven spoke with Mr. Grass by telephone and
discussed questions that Mr. Grass had about the due diligence review Rite Aid
was conducting with respect to Revco.
During the week of October 9, 1995, Mr. Rod Dammeyer, a member of the Revco
Board, called Mr. Grass and a meeting was arranged for October 31, 1995 in
Chicago. At the October 31, 1995 meeting, Mr. Grass and Mr. Brown met with Mr.
Dammeyer and Ms. Rosenberg and established a preliminary basis for continuing
discussions to seek to reach an agreement concerning a transaction, subject to
mutual due diligence, receipt of fairness opinions and Board approvals. Such
officers of Rite Aid and representatives of Revco and the Stockholder determined
to continue discussions on the basis of tentative terms as follows: Rite Aid
would acquire a majority of the outstanding shares of Revco Common Stock at
$27.50 per share of Revco Common Stock and the remaining shares of Revco Common
Stock would be acquired for shares of Rite Aid Common Stock based on a target
price of $27.50 for Rite Aid Common Stock subject to negotiating the terms of a
'collar' mechanism. In addition, the Stockholder would enter into a Stockholder
Agreement with Rite Aid in which it would agree to support the transaction. On
November 1, 1995, Mr. Grass and Mr. Brown held a telephone call with Mr.
Dammeyer, Ms. Rosenberg, Mr. Schulte and Mr. Friedland to discuss the collar. At
the end of the conversation, the parties had tentatively agreed upon the terms
of a 20% 'collar' mechanism which would provide that stockholders of Revco
participate in 50% of any increase or decrease in the market value of Rite Aid
Common Stock above or below $27.50 during an agreed upon pricing period.
On November 3, 1995, counsel for Rite Aid distributed a draft Merger
Agreement and Stockholder Agreement to Revco and its legal and financial
advisors.
On November 7, 1995, representatives of Rite Aid and its legal advisors met
with representatives of Revco and its legal advisors to commence negotiations
with respect to the terms of the proposed Merger Agreement and Stockholder
Agreement. Such negotiations continued throughout such week.
On November 9, 1995, the Rite Aid Board held a meeting. At such meeting,
members of Rite Aid's senior management, Rite Aid's outside legal advisors and
Donaldson, Lufkin & Jenrette Securities Corporation ('DLJ') made presentations
to the Board regarding the proposed acquisition of Revco. The Rite Aid Board of
Directors analyzed and discussed the proposed Merger Agreement, Offer, Merger
and Stockholder Agreement and it was the consensus of Rite Aid's Board that
senior management of Rite Aid should continue with the negotiations relating to
the proposed transaction and report back to the Rite Aid Board once such
negotiations were completed.
On November 10, 1995, the Human Resources Committee of the Revco Board held
a special meeting to discuss the need to provide for continuity of management in
light of the proposed transaction, including adequate change of control
mechanisms and severance benefit levels. After a detailed discussion, the Human
Resources Committee adopted the severance and compensation enhancement described
in 'THE MERGER--Interests of Certain Persons.'
During the week of November 13, 1995, members of senior management of Rite
Aid and its legal advisors continued to negotiate the terms of the Merger
Agreement and Stockholder Agreement with representatives of Revco and the
Stockholder, including Mr. Dammeyer and Ms. Rosenberg, and their legal advisors.
During such negotiations, representatives of the Stockholder advised Rite Aid
that the Stockholder would be willing to agree
31
<PAGE>
to tender its shares of Revco Common Stock in the Offer and vote for the Merger
but would not be willing to grant Rite Aid an option to purchase the
Stockholder's shares of Revco Common Stock.
Rite Aid then insisted upon, and negotiated with Revco to obtain, an option
to purchase 19.9% of Revco's outstanding shares of Revco Common Stock at a price
of $27.50 per share of Revco Common Stock. Representatives of Revco advised Rite
Aid that they would be willing to recommend entering into such a Stock Option
Agreement subject to negotiation of satisfactory terms. The parties continued to
negotiate various modifications to the Merger Agreement, Stock Option Agreement
and Stockholder Agreement. Such negotiations continued through November 29,
1995.
On November 28, 1995, the Rite Aid Board held a special meeting to review,
with the advice and assistance of the Board's financial and legal advisors, the
proposed Merger Agreement, the Stock Option Agreement, the Stockholder Agreement
and the transactions contemplated thereby, including the Offer and the Merger.
At such meeting, Rite Aid's management and legal advisors made presentations to
the Rite Aid Board concerning the transaction and DLJ provided its opinion to
the effect that the consideration to be paid by Rite Aid pursuant to the Merger
Agreement, taken as a whole, is fair to the stockholders of Rite Aid from a
financial point of view. The opinion of DLJ is attached hereto as Annex B.
Stockholders of Rite Aid are urged to read the full text of that opinion.
Following the Rite Aid Board's review of the transaction, the Rite Aid Board,
subject to the resolution of remaining open issues, unanimously authorized and
approved the proposed Merger Agreement, Stock Option Agreement, Stockholder
Agreement and the transactions contemplated thereby, and authorized the
execution and delivery of such Agreements.
Also on November 28, 1995, the Revco Board held a special meeting to
review, with the advice and assistance of the Revco Board's financial and legal
advisors, the proposed Merger Agreement, Stock Option Agreement, Stockholder
Agreement and the transactions contemplated thereby, including the Offer and the
Merger. At such meeting, Revco's management and financial and legal advisors
discussed the transaction with the Revco Board and Morgan Stanley & Co.
Incorporated ('Morgan Stanley') provided its opinion to the effect that the
consideration to be received by the holders of shares of Revco Common Stock
pursuant to the Offer and the Merger, taken together, is fair from a financial
point of view to such holders. The opinion of Morgan Stanley is attached hereto
as Annex C. Stockholders of Revco are urged to read the full text of that
opinion. Following the Revco Board's review of the transaction, the Revco Board,
subject to the resolution of remaining open issues, unanimously (with one
director absent and two directors abstaining) approved the proposed Merger
Agreement, Stock Option Agreement and the transactions contemplated thereby,
authorized the execution and delivery of such Agreements, determined that the
Offer and the Merger are fair to and in the best interests of the holders of
shares of Revco Common Stock, recommended that stockholders of Revco who desire
to receive cash for their shares of Revco Common Stock accept the Offer and
tender their shares of Revco Common Stock pursuant to the Offer, and recommended
that stockholders of Revco approve and adopt the Merger Agreement. The Revco
Board's approval of the Merger Agreement, the Stock Option Agreement, the
Stockholder Agreement and the transactions contemplated thereby constituted
approval for purposes of Section 203 of the DGCL such that the provisions of the
statute are not applicable to such Agreements or the transactions contemplated
thereby.
Negotiations between members of senior management of Rite Aid and its legal
advisors and representatives of Revco and their legal advisors to finalize the
remaining issues in the Merger Agreement continued through November 29, 1995. On
the evening of November 29, 1995, following the resolution of such open issues,
Rite Aid, the Sub and Revco executed and delivered the Merger Agreement and the
Stock Option Agreement; and Rite Aid, Sub and the Stockholder executed and
delivered the Stockholder Agreement.
On November 30, 1995, Rite Aid and Revco issued the following joint press
release announcing the execution of the Merger Agreement, the Stockholder
Agreement and the Stock Option Agreement:
32
<PAGE>
FOR IMMEDIATE RELEASE
RITE AID CORPORATION AND REVCO COMBINE TO CREATE
NATION'S LARGEST DRUGSTORE CHAIN
MERGER CREATES COMPANY WITH OVER $11 BILLION IN REVENUES
CASH TENDER SCHEDULED TO COMMENCE EARLY NEXT WEEK
------------------------
CAMP HILL, PA (November 30, 1995)--Rite Aid Corporation (RAD: NYSE,
PSE) and Revco D.S., Inc. (RXR: NYSE) today announced that they have
entered into a definitive merger agreement in which Rite Aid would acquire
Revco. The merger creates the nation's largest drugstore chain with
expected annualized revenues of over $11 billion and more than 4,500 stores
in 22 states and the District of Columbia. The transaction is expected to
be accretive to Rite Aid's earnings per share by the end of the first year
of operations following the merger.
Under the agreement, Rite Aid would purchase, in a first-step tender
offer, at least 50.1% of the outstanding shares of Revco on a fully-diluted
basis for $27.50 per share in cash and the remainder of the outstanding
shares would be converted into Rite Aid stock in a second-step merger. As
described below, the value of Rite Aid shares to be received for each Revco
share in the second-step merger will increase to the extent the average
value of Rite Aid stock is greater than $27.50 per share during a pricing
period and will decrease if the average value of Rite Aid stock is less
than $27.50 per share during such pricing period, but in no event will more
than 1.125 shares or less than .91666 shares of Rite Aid stock be issued
for each Revco share in the merger.
The tender offer is not conditioned on obtaining financing. The total
value of the merger is approximately $1.8 billion.
The merger, which was approved by each company's Board of Directors,
is expected to be completed in the first quarter of 1996. The tender offer
is scheduled to commence early next week.
Martin Grass, Chairman of the Board of Directors and Chief Executive
Officer of Rite Aid, said, 'The combination of these two great companies
will create the preeminent retail drugstore chain in the United States.
This transaction will nearly double our revenues and number of stores. Our
significant investment in technology and infrastructure coupled with our
innovative management changes have prepared us to seize the competitive
advantage this merger represents. We anticipate a quick and smooth
integration of the two companies.
'The merger will increase Rite Aid's competitive advantage in our
prescription benefits management subsidiary, Eagle Managed Care,' Mr. Grass
continued. 'The addition of Revco's mail order capacity, as well as the
increased number of outlets available in the combined entity, complements
and broadens Rite Aid's managed healthcare delivery system. This expanded
capacity is important leverage in attracting new contracts to the company.
'We will be the best-positioned retail drugstore chain in the country
to compete with the three large vertically integrated pharmacy benefit
managers owned by the major pharmaceutical manufacturers. This combination
should allow Rite Aid to offer customers the most competitive pharmacy
prescription prices and services.'
D. Dwayne Hoven, President and Chief Executive Officer of Revco, said,
'In an environment of consolidation, Revco's Board of Directors felt that
this offer was fair and reasonable and in the best interest of our
stockholders. This offer is the culmination of one of the most remarkable
turnarounds in corporate history. We built a company with productive real
estate, clean inventories and great people. Revco people should not lose
sight of what they have accomplished.'
Rite Aid expects to achieve synergies of $156 million through
elimination of overlapping positions, streamlining distribution, reducing
redundant advertising, and enhanced purchasing power. As in past Rite Aid
mergers, Rite Aid will provide excellent severance packages, including
out-placement counseling, to all affected personnel. Following completion
of the merger, the Revco stores will operate under the Rite Aid banner. The
headquarters of Rite Aid will remain in Camp Hill, Pennsylvania.
33
<PAGE>
Rite Aid indicated that it plans to take a pre-tax charge to earnings
of $163 million to cover the cost of integrating the two companies. Rite
Aid anticipates that only a small percentage of the combined company's
stores will be closed. A decision on which drugstores will be closed will
occur after the merger is completed.
The merger agreement provides for Ocean Acquisition Corporation, a
subsidiary of Rite Aid, to make a cash tender offer for at least 50.1% of
the outstanding shares of common stock of Revco on a fully diluted basis at
a price of $27.50 per share. The tender offer will be followed by a
second-step merger in which each share of Revco not acquired in the tender
offer will be converted into the right to receive Rite Aid common stock
and/or, under certain circumstances, cash.
The per share value of Rite Aid common stock which stockholders of
Revco would receive in the second-step merger will be determined during a
randomly selected fifteen-day pricing period during the forty trading days
ending five days before the meeting of stockholders of Revco to consider
the merger. Stockholders of Revco would receive one share of Rite Aid
common stock if the average market value of Rite Aid common stock during
the pricing period is $27.50.
If the average value of Rite Aid common stock is greater than $27.50
during the selected fifteen-day pricing period, stockholders of Revco will
receive, for each Revco share, Rite Aid common stock having a value of
$27.50 plus 50% of the increase in market value of Rite Aid common stock
over $27.50, provided that in no event would Rite Aid issue less than
.91666 shares of Rite Aid common stock for each Revco share in the merger.
Similarly, if the average value of Rite Aid common stock during the pricing
period is less than $27.50, stockholders of Revco will receive, for each
Revco share, Rite Aid common stock having a value of $27.50 less 50% of the
decrease in market value of Rite Aid common stock below $27.50, provided
that in no event would Rite Aid issue more than 1.125 shares of Rite Aid
common stock.
If the average value of Rite Aid common stock during the pricing
period is less than $27.50, Rite Aid would have the option of delivering,
for each Revco share, one share of Rite Aid common stock plus cash in an
amount equal to 50% of the decrease in market value of Rite Aid common
stock below $27.50, provided that in no event would more than $2.75 per
Revco share be paid in cash.
In the event that the stockholders of Rite Aid do not approve the
issuance of Rite Aid common stock pursuant to the merger, but all
conditions to the merger are otherwise satisfied or waived, each Revco
share would be converted into the right to receive a combination of cash
and shares of Rite Aid common stock (determined based on the formulas
described above) representing in the aggregate 19.9% of Rite Aid's
outstanding shares.
Rite Aid also stated that it has entered into a stockholder agreement
with Zell/Chilmark Fund L.P., the major stockholder of Revco, pursuant to
which Zell/Chilmark has agreed to tender its Revco shares (representing
approximately 19.7 % of Revco's outstanding shares) into Rite Aid's tender
offer and to vote in favor of the merger. Revco has granted Rite Aid an
option to purchase 19.9% of Revco's shares under certain circumstances at
$27.50 per share.
The tender offer is conditioned on, among other things, the valid
tender of 50.1% of the outstanding Revco shares on a fully diluted basis
and the expiration or termination of any applicable waiting period under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
Donaldson, Lufkin & Jenrette Securities Corporation provided a
fairness opinion for Rite Aid. Morgan Stanley & Co. Incorporated provided a
fairness opinion for Revco.
Revco D.S., Inc., based in Twinsburg, Ohio, operates over 2,100 stores
in 14 Midwestern, Southeastern and Eastern states and has annual sales of
approximately $4.4 billion.
Rite Aid Corporation, based in Camp Hill, Pennsylvania, is the
nation's largest drugstore chain, with over 2,700 stores in 21 states and
the District of Columbia.
General information about Rite Aid including corporate background and
press releases is available, free of charge, through the company's
News-On-Demand fax service at 800-916-7788.
Sub commenced the Offer on December 4, 1995. On December 27, 1995, Rite Aid
received the Second Request from the FTC. On January 4, 1996, Sub extended the
Offer in order to comply with the Second Request. The Offer is presently
scheduled to expire on February 23, 1996 and Rite Aid reserves the right to
extend the Offer until the expiration of the waiting period under the HSR Act.
34
<PAGE>
RITE AID'S REASONS FOR THE MERGER; RECOMMENDATION OF THE RITE AID BOARD
The Rite Aid Board has unanimously determined that the Merger is advisable
and fair to and in the best interests of the stockholders of Rite Aid and has
approved the Merger Agreement. Accordingly, the Rite Aid Board recommends that
the stockholders of Rite Aid vote to approve the Share Issuance.
For the foregoing reasons, the Rite Aid Board believes that the terms and
conditions of the Merger Agreement are in the best interests of Rite Aid and its
stockholders. In reaching its conclusion, the Rite Aid Board considered, among
other things:
1. the judgment, advice and analyses of Rite Aid's management;
2. the analyses prepared by DLJ and the oral opinion of DLJ presented
to the Rite Aid Board on November 28, 1995 and confirmed in writing on
November 29, 1995, to the effect that the consideration to be paid by Rite
Aid pursuant to the Merger Agreement, taken as a whole, is fair to the
stockholders of Rite Aid from a financial point of view. A copy of the
written opinion dated November 29, 1995 of DLJ, setting forth the
assumptions made, factors considered and scope of the review undertaken by
DLJ, is attached as Annex B hereto and is incorporated herein by reference.
RITE AID STOCKHOLDERS ARE URGED TO READ THE OPINION OF DLJ CAREFULLY AND IN
ITS ENTIRETY. See 'THE MERGER--Opinion of DLJ'; 'THE MERGER--Background of
the Merger;'
3. the financial condition, results of operations and cash flows of
Rite Aid and Revco, both on a historical and a prospective basis;
4. the fact that the Merger is expected to be accretive to Rite Aid's
earnings per share by the end of the first year of operations following the
Merger;
5. Rite Aid management's estimate, based on a preliminary review of
Revco's business and operations, that the Merger will result in
approximately $156 million of quantifiable annual cost savings, including
the improvement in gross margins through enhanced purchasing power, closure
of Revco's corporate headquarters and overlapping distribution facilities,
elimination of duplicative overhead, elimination of redundant advertising
expenditures, the consolidation of data centers and improved communications
systems and a working capital benefit from the consolidation of warehouse
inventories. See 'THE MERGER--Estimated Synergies;'
6. the terms and conditions of the Merger Agreement, including the
amount and form of Merger Consideration and the formulas and mechanisms
which determine the Merger Consideration;
7. historical market prices and trading information with respect to
Rite Aid Common Stock and Revco Common Stock;
8. the structure of the second-step Merger which provides for the
Alternative Consideration in the event that the Rite Aid stockholders do
not approve the Share Issuance, including the Additional Consideration
which may be payable;
9. the Stockholder's agreement to tender all of its shares of Revco
Common Stock in the Offer and vote its shares of Revco Common Stock in
favor of approval of the Merger and the Merger Agreement pursuant to the
Stockholder Agreement; and
10. the fact that as an inducement and a condition to entering into
the Merger Agreement Revco agreed, pursuant to the Stock Option Agreement,
to grant Rite Aid an irrevocable option to purchase up to 19.9% of Revco's
issued and outstanding shares of Revco Common Stock at the time of exercise
of such option.
The foregoing discussion of the information and factors considered and
given weight by the Rite Aid Board is not intended to be exhaustive. The Rite
Aid Board did not assign relative weights to the factors or determine that any
factor was of particular importance. Rather, the Rite Aid Board viewed their
position and recommendation as being based on the totality of the information
presented to and considered by it.
THE RITE AID BOARD UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF RITE AID
COMMON STOCK VOTE 'FOR' APPROVAL OF THE SHARE ISSUANCE.
35
<PAGE>
OPINION OF DLJ
Rite Aid engaged DLJ to render an opinion to the Rite Aid Board as to the
fairness of the Offer and the Merger, taken as a whole, to the stockholders of
Rite Aid from a financial point of view, to conduct such investigations as DLJ
deemed appropriate for such purposes, and to act as exclusive Dealer Manager for
Rite Aid in any tender or exchange offer for any debt or equity security
relating to the Offer and the Merger.
On November 28, 1995, DLJ delivered its oral opinion, which was confirmed
by delivery of its written opinion dated November 29, 1995, to the effect that,
as of such date, the consideration to be paid by Rite Aid pursuant to the Offer
and the Merger (the 'Consideration'), taken as a whole, is fair to the
stockholders of Rite Aid from a financial point of view. THE FULL TEXT OF DLJ'S
WRITTEN OPINION IS SET FORTH AS ANNEX B TO THIS PROXY STATEMENT AND SHOULD BE
READ CAREFULLY IN ITS ENTIRETY, INCLUDING, WITHOUT LIMITATION, THE DESCRIPTIONS
OF THE PROCEDURES FOLLOWED, MATTERS CONSIDERED, ASSUMPTIONS MADE AND LIMITATIONS
OF THE REVIEW UNDERTAKEN IN ARRIVING AT SUCH OPINION. The opinion of DLJ
addresses the fairness of the Consideration, taken as a whole, to the
stockholders of Rite Aid from a financial point of view and does not constitute
a recommendation to any individual stockholder of Rite Aid or Revco as to how
such stockholder should vote at the Special Meeting.
In rendering its opinion, DLJ, among other things: (i) analyzed certain
publicly available financial statements and other information of Rite Aid and
Revco; (ii) reviewed certain financial projections for Rite Aid, including
estimates of certain potential benefits of the proposed business combination,
prepared by the management of Rite Aid; (iii) reviewed certain financial
projections for Revco prepared by the management of Revco; (iv) discussed on a
limited basis the past and current operations and financial conditions and the
prospects of Rite Aid and Revco with senior executives of Rite Aid and Revco,
respectively; (v) reviewed the reported prices and trading activity for the Rite
Aid Common Stock and Revco Common Stock; (vi) reviewed publicly available
financial data and stock market performance data of other comparable public
retail drug store companies; (vii) reviewed the financial terms, to the extent
publicly available, of certain comparable acquisition transactions; (viii)
participated in discussions among representatives of Rite Aid, Revco and their
financial and legal advisors; (ix) reviewed the Merger Agreement and certain
related documents; and (x) performed such other analyses, inquiries and
investigations as it deemed appropriate.
In addition, DLJ assumed and relied upon, without independent verification,
the accuracy and completeness of the information it reviewed for purposes of its
opinion. DLJ also assumed that the financial projections, including the
estimates of Rite Aid of certain potential benefits of the proposed business
combination, were reasonably prepared on bases reflecting the best currently
available estimates and judgments of the future financial performance of Rite
Aid and Revco, respectively. DLJ did not make an independent valuation or
appraisal of the assets or liabilities of Rite Aid or Revco, nor was it
furnished with any such appraisal. DLJ's opinion was necessarily based on
economic, market and other conditions as in effect on, and the information made
available to it as of, the date thereof. In arriving at its opinion, DLJ was not
authorized to solicit, and did not solicit, interest from any party with respect
to the acquisition of Revco or any of its assets nor did it consider the
prospect of alternate transactions involving Rite Aid.
The following is a brief summary of the analyses performed by DLJ in
connection with DLJ's opinion to the Rite Aid Board. Such analyses are based on
a number of assumptions, including, among other things, the cost of integration,
estimated amounts and timing of the anticipated synergies, the projected
performance of Rite Aid and Revco, the projected performance of Rite Aid Common
Stock, prevailing interest rates and the final structure of the Offer and the
Merger.
Rite Aid Common Stock Performance. DLJ's analysis of Rite Aid's Common
Stock performance consisted of a historical analysis of closing prices and
trading volumes for the twelve months ended November 3, 1995 and of the S&P 400
relative to a comparable company index, which included Rite Aid, Revco,
Walgreen, Longs Drug Stores, Eckerd Corporation and Arbor Drugs from November 9,
1990 to November 3, 1995. In the twelve months ended November 3, 1995, the Rite
Aid Common Stock reached a high of $30.13 per share and a low of $21.63 per
share. On November 3, 1995, the closing price of Rite Aid Common Stock of $28.88
per share was at the high end of such range. Since September 1994, such
comparable company index has outperformed the S&P 400.
36
<PAGE>
Revco Common Stock Performance. DLJ's analysis of Revco's Common Stock
performance consisted of a historical analysis of Revco's closing prices and
trading volumes for the twelve months ended November 3, 1995 and of the S&P 400
relative to a comparable company index, which included Rite Aid, Revco,
Walgreen, Longs Drug Stores, Eckerd Corporation and Arbor Drugs from November 9,
1990 to November 3, 1995. In the twelve months ended November 3, 1995, Revco
Common Stock reached a high of $25.38 per share and a low of $17.50 per share.
On November 3, 1995, the closing price of Revco Common Stock of $24.38 per share
was at the high end of such range. Since September 1994, such comparable company
index has outperformed the S&P 400.
Pro Forma Accretion/Dilution Analysis. DLJ analyzed the accretive/dilutive
impact of the Offer and the Merger, both excluding synergies and on a pro forma
basis for the estimated synergies, with respect to Rite Aid's twelve months
ended September 2, 1995 and estimated 1996 earnings per share ('EPS') and, both
excluding synergies and as such synergies are expected to be realized, with
respect to Rite Aid's projected 1997 and 1998 EPS. This analysis is based on a
number of assumptions, including, among other things, the cost of integration,
estimated amounts and timing of the synergies, the projected financial
performance of Rite Aid and Revco, the projected performance of Rite Aid Common
Stock, prevailing interest rates and the final structure of the Offer and the
Merger.
Comparable Company Analysis. Comparable company analysis ('Comparable
Company Analysis') examines a company's operating performance relative to a
group of publicly traded peers. Based on relative performance and outlook for a
company versus its peers, this analysis enables an implied unaffected market
trading value to be determined. DLJ analyzed the operating performance of Rite
Aid and Revco relative to four retail drug store companies deemed by DLJ to be
reasonably comparable to Rite Aid and Revco. These companies are as follows:
Walgreen, Longs Drug Stores, Eckerd Corporation and Arbor Drugs (these four
companies together with Rite Aid and Revco constitute the 'Comparable
Companies'). Historical financial information used in connection with the ratios
provided below with respect to the Comparable Companies is as of the most recent
financial statements publicly available for each company as of November 3, 1995.
DLJ analyzed the relative performance and value for Rite Aid and Revco by
comparing certain market trading statistics for Rite Aid and Revco with the
Comparable Companies. DLJ examined certain publicly available financial data of
the Comparable Companies including enterprise value (defined as market value of
common equity plus book value of total debt and preferred stock less cash) as
multiples of latest twelve months revenues, earnings before interest taxes,
depreciation and amortization ('EBITDA') and earnings before interest and taxes
('EBIT') and price earnings ratios ('P/E') based on the latest twelve months EPS
and estimated 1995 and 1996 EPS. As of November 3, 1995, this analysis resulted
in (i) a range of 0.3x to 0.7x enterprise value to latest twelve months revenues
for the Comparable Companies compared to 0.5x for Revco at the assumed
Consideration price to be paid per share ($27.50) in the Offer and the Merger,
taken as a whole (the 'Consideration Price'), (ii) a range of 6.3x to 11.2x
enterprise value to latest twelve months EBITDA for the Comparable Companies
compared to 9.0x for Revco at the Consideration Price before synergies, (iii) a
range of 9.4x to 13.8x enterprise value to latest twelve months EBIT for the
Comparable Companies compared to 13.9x for Revco at the Consideration Price
before synergies, (iv) a range of 15.9x to 22.8x P/E based on latest twelve
months earnings for the Comparable Companies compared to 22.0x for Revco at the
Consideration Price before synergies and (v) a range of 14.5x to 21.3x and 13.2x
to 18.8x estimated P/E based on 1995 and 1996 estimates, respectively, for the
Comparable Companies, compared to 21.1x and 17.8x, respectively, for Revco at
the Consideration Price before synergies. EPS estimates for Rite Aid, Revco and
the Comparable Companies were based on estimates provided by the Institutional
Brokers Estimate System ('IBES').
No company utilized in the Comparable Companies analysis as a comparison is
identical to Rite Aid or Revco. Accordingly, an analysis of the results of the
foregoing necessarily involves complex considerations and judgments concerning
differences in financial and operating, characteristics of Rite Aid and Revco
and other factors that could affect the public trading value of the Comparable
Companies or company to which they are being compared. Mathematical analysis
(such as determining the mean or median) is not in itself a meaningful method of
using comparable company data.
Comparable Transaction Analysis. DLJ performed an analysis of precedent
transactions involving retail drug store companies in order to obtain a
valuation range for Revco Common Stock based upon selected merger and
acquisition transactions in the retail drug store industry. Multiples of
aggregate purchase price (defined as the
37
<PAGE>
equity value of the offer plus book value of total debt and preferred stock less
cash) to be paid by the stockholders of Rite Aid in the Offer and the Merger to
revenues, EBITDA and EBIT were compared with multiples paid in certain other
merger and acquisition transactions involving retail drug store companies from
January 1989 through March 1995. The comparison included a total of seven
transactions. These transactions included: Rite Aid and Perry Drug Stores, Inc.;
Revco and Hook-SupeRx, Inc.; PayLess Drug Stores and TPH Corp.; Zell/Chilmark,
et al. and Revco; THC Corp. and Thrifty Corp.; Melville Corp. and Peoples Drugs;
and Big B Inc. and Reed Drug Co. This analysis resulted in (i) a range of 0.3x
to 0.5x latest twelve months revenue compared to 0.5x for Revco at the
Consideration Price, (ii) a range of 7.4x to 8.9x latest twelve months EBITDA
compared to 9.0x for Revco at the Consideration Price before synergies and (iii)
a range of 12.1x to 18.7x latest twelve months EBIT compared to 13.9x for Revco
at the Consideration Price before synergies.
No transaction utilized in the comparable transaction analysis is identical
to the Offer and the Merger. Accordingly, an analysis of the results of the
foregoing necessarily involves complex considerations and judgments concerning
differences in financial and operating characteristics of Rite Aid and Revco and
other factors that could affect the acquisition value of the companies to which
they are being compared. Mathematical analysis (such as determining the mean or
median) is not itself a meaningful method of using comparable transaction data.
Premium Analysis. DLJ performed a comparison of the premium represented by
the Consideration Price to premiums offered in acquisitions of $1.0 billion to
$3.0 billion in size ('Comparable Acquisitions') for the year to date ended
November 3, 1995 and to premiums offered in selected retail drug store company
merger and acquisition transactions ('Related Acquisitions') from April 1994 to
March 1995. DLJ found that of the 12 transactions surveyed, nine had a premium
of less than 50% to the market price one day prior to announcement, while four
had a premium of less than 40% to the market price one day prior to
announcement. The Consideration Price represented: a 7.8% premium to the trading
price one day prior to announcement, as compared to mean premiums for Comparable
and Related Acquisitions of 41.6% and 48.7%, respectively; a premium of 8.9% to
the trading price one week prior to the announcement, as compared to mean
premiums for Comparable and Related Acquisitions of 42.4% and 53.6%,
respectively; and a 15.8% premium to the trading price one month prior to the
announcement, as compared to mean premiums for Comparable and Related
Acquisitions of 50.4% and 63.1%, respectively.
Discounted Cash Flow Analysis. DLJ performed a discounted cash flow
analysis for the five-year period ending with the 2001 fiscal year on the
stand-alone unlevered free cash flows of Rite Aid and Revco, based upon
financial projections prepared by the respective managements of each company.
Unlevered free cash flows were calculated as the after-tax operating earnings of
Rite Aid and Revco, respectively, plus depreciation and amortization and other
non-cash items, plus (or minus) net changes in non-cash working capital, minus
projected capital expenditures. DLJ calculated terminal values by applying a
range of estimated EBITDA multiples to the projected unlevered free cash flows
of Rite Aid and Revco, respectively, in fiscal year 2001. The unlevered free
cash flows and terminal values were then discounted to the present using a range
of discount rates, representing an estimated range of the weighted average cost
of capital of Rite Aid and Revco. Based on this analysis, DLJ calculated per
share equity values of Rite Aid ranging from $29.07 to $42.14 and of Revco
ranging from $25.68 to $37.90.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. DLJ
believes that its analyses must be considered as a whole and that selecting
portions of its analyses, without considering the entirety of the analyses,
would create an incomplete view of the process underlying its opinion. In
addition, DLJ may have given various analyses more or less weight than other
analyses, and may have deemed various assumptions more or less probable than
other assumptions, so that the ranges of valuations resulting for any particular
analysis described above should not be taken to be DLJ's view of the actual
value of Rite Aid and Revco.
In performing its analyses, DLJ made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond the control of Rite Aid and Revco. The
analyses performed by DLJ are not necessarily indicative of actual values, which
may be significantly more or less favorable than suggested by such analyses.
Such analyses were prepared solely as a part of DLJ's analysis of the fairness
of the consideration to be paid by Rite Aid pursuant to the Merger Agreement to
38
<PAGE>
the stockholders of Rite Aid and were reviewed with the Rite Aid Board in
connection with the delivery of DLJ's opinion. The analyses do not purport to be
appraisals or to reflect the prices at which Rite Aid or Revco might actually be
sold. Because such estimates are inherently subject to uncertainty, none of Rite
Aid, DLJ or any other person assumes responsibility for their accuracy. In
addition, as described above, DLJ's opinion and the information provided by it
to the Rite Aid Board were two of many factors taken into consideration by the
Rite Aid Board in making its determination to approve the Offer and the Merger.
Consequently, DLJ's methods of analysis described above should not be viewed as
determinative of the Rite Aid Board's or Rite Aid management's opinion with
respect to the value of Rite Aid or of whether the Rite Aid Board or Rite Aid
management would have been willing to agree to different consideration.
DLJ provides a full range of financial, advisory and brokerage services and
in the course of its normal trading activities may from time to time effect
transactions and hold positions in the securities or options on securities of
Revco and/or Rite Aid for its own account and for the account of customers.
DLJ was selected to render an opinion in connection with the Offer and the
Merger based upon DLJ's qualifications, expertise and reputation, including the
fact that DLJ, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive bidding,
secondary distributions of listed and unlisted securities, private placements
and valuation for corporate and other purposes.
Pursuant to Rite Aid's November 9, 1995 letter agreement, Rite Aid has
agreed, as compensation for DLJ's services as both renderer of an opinion to
Rite Aid in connection with its acquisition of Revco and exclusive Dealer
Manager in connection with the Offer, (i) to pay DLJ a fee of $1,550,000 (which
has been paid) at the time DLJ notifies the Rite Aid Board that it is prepared
to deliver an opinion as to the fairness of the Consideration, taken as a whole,
to the stockholders of Rite Aid from a financial point of view and (ii) upon the
request by DLJ from time to time, to reimburse DLJ promptly for all
out-of-pocket expenses (including the reasonable fees and expenses of counsel)
and to indemnify DLJ against certain liabilities and expenses in connection with
its engagement, including certain liabilities under the federal securities laws.
DLJ is entitled to the foregoing fees, expenses and indemnification as a result
of the delivery to the Rite Aid Board of its written opinion dated November 29,
1995 and the commencement of the Offer with respect to which DLJ acted as Dealer
Manager.
REVCO'S REASONS FOR THE MERGER; RECOMMENDATION OF THE REVCO BOARD
At a special meeting held on November 28, 1995, the Revco Board (i)
determined that the Merger Agreement and the transactions contemplated thereby,
including, without limitation, the Offer, the Merger, the Stockholder Agreement,
the Stock Option Agreement and the transactions contemplated thereby, are fair
to, and in the best interest of, the stockholders of Revco, and (ii) approved
the Merger Agreement and the transactions contemplated thereby, including,
without limitation, the Offer and the Merger, and approved the Stockholder
Agreement, the Stock Option Agreement and the transactions contemplated thereby.
At such meeting, the Revco Board recommended that the holders of shares of Revco
Common Stock approve and adopt the Merger Agreement.
In reaching its conclusion to approve the Merger Agreement and recommend
that holders of shares of Revco Common Stock approve and adopt the Merger
Agreement, the Revco Board considered a number of factors, including, without
limitation, the following:
1. the terms and conditions of the Merger Agreement, including the
amount and form of Merger Consideration;
2. the fact that the value of the shares of Rite Aid Common Stock to
be received for each share of Revco Common Stock in the Merger will
increase to the extent the average value of Rite Aid Common Stock is
greater than $27.50 per share during the Pricing Period and will decrease
if the average value of Rite Aid Common Stock is less than $27.50 per share
during the Pricing Period;
3. presentations by management of Revco (at a board meeting held on
November 28, 1995, and at previous board meetings) regarding the financial
condition, results of operations, business and prospects of Revco,
including the prospects of Revco if it remained independent;
39
<PAGE>
4. the fact that upon consummation of the Offer, Rite Aid and/or Sub
will own at least 50.1% of the outstanding shares of Revco Common Stock and
have agreed to vote in favor of the approval and adoption of the Merger
Agreement, and, therefore, a vote in favor of the approval and adoption of
the Merger Agreement would be assured without the vote of any other holder
of shares of Revco Common Stock;
5. the historical market prices for the shares of Revco Common Stock,
particularly the fact that the $27.50 per share price in the Offer
represented (x) a premium of approximately 6.8% over the closing price of
$25.75 for the shares of Revco Common Stock on November 27, 1995, the last
trading day prior to the approval of the Merger Agreement, and (y) a higher
price than the shares of Revco Common Stock have ever traded;
6. the expected future trading values of the shares of Revco Common
Stock in light of, among other things, the historical trading multiples of
other companies in Revco's line of business;
7. the analyses prepared by Morgan Stanley and the oral opinion of
Morgan Stanley presented to the Revco Board on November 28, 1995 and
confirmed in writing on November 29, 1995 to the effect that, as of such
date and based upon its review and analysis and subject to the limitations
set forth therein, the consideration to be received by the holders of Revco
Common Stock pursuant to the Offer and the Merger, taken together, is fair
from a financial point of view to such holders. A copy of the written
opinion, dated November 29, 1995, of Morgan Stanley, setting forth the
assumptions made, factors considered and scope of the review undertaken by
Morgan Stanley, is attached as Annex C hereto and is incorporated herein by
reference. See 'THE MERGER--Opinion of Morgan Stanley';
8. the fact that the Merger offers the opportunity for substantial
synergies and the transaction structure allows Revco stockholders who
receive Rite Aid Common Stock to participate in those synergies through
continued ownership of the combined company;
9. the views expressed by management and Morgan Stanley that there did
not appear to be any other party with which Revco would be as good a
strategic fit as Rite Aid;
10. the fact that the Stockholder agreed to tender all of its shares
of Revco Common Stock in the Offer and to support the Merger Agreement;
11. the fact that the Merger is not conditioned on the availability of
financing;
12. the fact that the Merger Agreement, which prohibits Revco, its
subsidiaries or its affiliates from initiating, soliciting or encouraging
any potential acquisition proposal, does permit Revco to furnish
information to and participate in discussions or negotiations with any
third party if certain conditions are satisfied;
13. the fact that if the Revco Board decided to accept an acquisition
proposal by a third party, the Revco Board may terminate the Merger
Agreement and pay Rite Aid a termination fee of $45 million, or
approximately $.68 per issued and outstanding share, which the Revco Board
did not believe would be a significant deterrent to a higher offer by a
third party interested in acquiring Revco; and
14. the regulatory approvals required to consummate the Merger,
including, among other things, antitrust approvals, and the prospects of
receiving such approvals.
The Revco Board did not assign relative weights to the above factors or
determine that any factor was of particular importance. Rather, the Revco Board
viewed its position and recommendations as being based on the totality of the
information presented to, and considered by, it.
The Revco Board recognized that, while there can be no assurance as to the
level of growth or profits to be attained by Revco in the future and there can
be no assurance that the requisite FTC and other regulatory approvals for the
Merger will be obtained, the Merger and the transactions contemplated thereby
give Revco's stockholders the opportunity to receive Rite Aid Common Stock
pursuant to the Merger and thereby participate in the synergies expected to be
created by the combination of Revco with Rite Aid and the future growth and
profits of the combined company. See 'THE MERGER--Estimated Synergies.'
40
<PAGE>
It is presently expected that, if the Merger is not consummated, Revco's
management, under the general direction of the current Revco Board, will
continue to manage Revco as an ongoing business.
OPINION OF MORGAN STANLEY
Revco retained Morgan Stanley to act as Revco's financial advisor in
connection with the Merger and related matters based upon Morgan Stanley's
qualifications, expertise and reputation, as well as Morgan Stanley's prior
investment banking relationship and familiarity with Revco. At the November 28,
1995 special meeting of the Revco Board, Morgan Stanley rendered an oral opinion
to the Revco Board that as of such date, the aggregate consideration to be
received by the holders of shares of Revco Common Stock pursuant to the Offer
(the 'Offer Consideration') and the aggregate consideration to be received by
the holders of shares of Revco Common Stock pursuant to the Merger (the 'Merger
Consideration' and, together with the Offer Consideration, the 'Consideration'),
taken together, were fair from a financial point of view to such holders. Morgan
Stanley subsequently confirmed its oral opinion by delivery of a written opinion
dated November 29, 1995.
THE FULL TEXT OF MORGAN STANLEY'S WRITTEN OPINION DATED NOVEMBER 29, 1995,
WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE
REVIEW UNDERTAKEN, IS ATTACHED AS ANNEX C TO THIS PROXY STATEMENT AND IS
INCORPORATED HEREIN BY REFERENCE. MORGAN STANLEY'S OPINION IS DIRECTED ONLY TO
THE REVCO BOARD OF DIRECTORS AND THE FAIRNESS OF THE CONSIDERATION TO BE
RECEIVED BY THE HOLDERS OF SHARES OF REVCO COMMON STOCK PURSUANT TO THE OFFER
AND THE MERGER, TAKEN TOGETHER, FROM A FINANCIAL POINT OF VIEW TO THE HOLDERS OF
REVCO COMMON STOCK, AND IT DOES NOT ADDRESS ANY OTHER ASPECT OF THE MERGER NOR
DOES IT CONSTITUTE A RECOMMENDATION TO ANY HOLDER OF REVCO COMMON STOCK AS TO
HOW TO VOTE AT THE REVCO SPECIAL MEETING. THE SUMMARY OF THE OPINION OF MORGAN
STANLEY SET FORTH IN THIS PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In arriving at its opinion, Morgan Stanley: (i) analyzed certain publicly
available financial statements and other information of Revco and Rite Aid,
respectively; (ii) reviewed certain internal financial statements and other
financial and operating data concerning Revco and Rite Aid prepared by the
managements of Revco and Rite Aid, respectively; (iii) reviewed certain
financial projections for Revco and Rite Aid, including estimates of certain
potential benefits of the proposed business combination, prepared by the
managements of Revco and Rite Aid, respectively; (iv) discussed the past and
current operations and financial conditions and the prospects of Revco and Rite
Aid with senior executives of Revco and Rite Aid, respectively; (v) reviewed the
reported prices and trading activity for Revco Common Stock and Rite Aid Common
Stock; (vi) compared the financial performance of Revco and Rite Aid and the
prices and trading activity of Revco Common Stock and Rite Aid Common Stock with
that of certain other comparable publicly-traded companies and their securities;
(vii) reviewed the financial terms, to the extent publicly available, of certain
comparable acquisition transactions; (viii) participated in discussions among
representatives of Revco and Rite Aid and their legal advisors; (ix) reviewed
the Merger Agreement, Stock Option Agreement and the Stockholder Agreement; and
(x) performed such other analyses as it deemed appropriate.
In rendering its opinion, Morgan Stanley assumed and relied without
independent verification upon the accuracy and completeness of the information
reviewed by Morgan Stanley for the purposes of this opinion. With respect to the
financial projections, including the estimates of Revco and Rite Aid of certain
potential benefits of the proposed business combination, Morgan Stanley assumed
that they were reasonably prepared on bases reflecting the best currently
available estimates and judgments of the future financial performance of Revco
and Rite Aid, respectively. Morgan Stanley did not make any independent
valuation or appraisal of the assets or liabilities of Revco and Rite Aid nor
was Morgan Stanley furnished with any such appraisals. Morgan Stanley's opinion
was necessarily based on economic, market, and other conditions as in effect on,
and the information made available to it as of November 29, 1995. In addition,
Morgan Stanley assumed that following completion of the Offer the Merger would
be consummated in accordance with the terms set forth in the Merger Agreement.
Morgan Stanley was not authorized to solicit, and did not solicit, interest
from any party with respect to a merger with or other business combination
transaction involving Revco, or any of its assets, nor did Morgan Stanley have
any discussions with any parties, other than Rite Aid, in connection with the
Merger.
41
<PAGE>
The following is a brief summary of certain analyses performed by Morgan
Stanley and reviewed with the Revco Board on November 28, 1995 in connection
with Morgan Stanley's opinion to the Revco Board on such date:
Revco Common Stock Performance. Morgan Stanley's analysis of Revco's
Common Stock performance consisted of a historical analysis of closing
prices and trading volumes from November 17, 1992 to November 16, 1995;
Revco's indexed price performance from November 17, 1994 to November 16,
1995 relative to the S&P 500, Rite Aid and a Comparable Companies Index,
which was comprised of Walgreen Co. and Eckerd Corporation; and the high
and low prices in the twelve months ended November 16, 1995. The shares of
Revco Common Stock have generally traded in line with both the Comparable
Companies Index and the S&P 500 during the twelve months ending on November
16, 1995. In the twelve months ended November 16, 1995, the shares of Revco
Common Stock closed at a high of $25.375 per share and reached a low of
$17.500 per share.
Rite Aid Common Stock Performance. Morgan Stanley's analysis of Rite
Aid's Common Stock performance consisted of a historical analysis of
closing prices and trading volumes from November 17, 1992 to November 16,
1995; Rite Aid's indexed price performance from November 17, 1994 to
November 16, 1995 relative to the S&P 500, Revco and a Comparable Companies
Index, which was comprised of Walgreen Co. and Eckerd Corporation; and the
high and low prices in the twelve months ended November 16, 1995. Rite Aid
Common Stock has generally traded in line with both the Comparable
Companies Index and the S&P 500 during the twelve months ending on November
16, 1995. In the twelve months ended November 16, 1995, Rite Aid Common
Stock closed at a high of $30.125 per share and reached a low of $21.625
per share.
Peer Group Comparison. As part of its analysis, Morgan Stanley
compared certain financial information of Rite Aid with that of a group of
publicly traded drug store companies, including Eckerd Corporation, Longs
Drug Stores Corporation, Revco, and Walgreen Co. (collectively, the 'Rite
Aid Comparables'). Historical financial information used in connection with
this analysis was as of the most recent financial statements publicly
available for each company as of November 16, 1995. Such financial
information included common stock market prices as a multiple of earnings
per share ('EPS') for the latest twelve months ('LTM'), estimated EPS for
calendar 1995, 1996, and 1997 based upon EPS estimates from the
International Brokers Estimates System ('IBES'), and aggregate value
(equity value plus debt minus cash) as a multiple of LTM revenues, earnings
before interest and taxes ('EBIT'), earnings before interest, taxes,
depreciation and amortization ('EBITDA'), and EBITDA less capital
expenditures. In particular, such analyses indicated that as of November
16, 1995, Rite Aid traded at 15.4x LTM earnings, 14.4x, 12.9x, and 11.6x
IBES estimated earnings for the calendar years 1995, 1996, and 1997,
respectively, and had aggregate value multiples of 0.65x LTM revenues,
11.0x LTM EBIT, 8.1x LTM EBITDA, and 18.8x LTM EBITDA less capital
expenditures. Morgan Stanley noted that the median multiples for the Rite
Aid Comparables included equity multiples of 16.1x LTM earnings, 18.5x IBES
estimated 1995 earnings, 16.3x IBES estimated 1996 earnings and 14.4x IBES
estimated 1997 earnings, and aggregate value multiples of 0.50x LTM
revenues, 12.4x LTM EBIT, 8.5x LTM EBITDA, and 14.0x LTM EBITDA less
capital expenditures.
No company utilized in the peer group analysis as a comparison is
identical to Rite Aid. Accordingly, an analysis of the results of the
foregoing necessarily involves complex considerations and judgements
concerning financial and operating characteristics of Rite Aid and other
factors that could affect the public trading value of one or more of the
Rite Aid Comparables. Mathematical analysis (such as determining the
average or the median) is not itself a meaningful method of using
comparable company data.
Historical Exchange Ratio Analysis. Morgan Stanley also reviewed the
ratio of the Revco Common Stock to Rite Aid Common Stock trading prices
over varying intervals of time over the one year period ended November 16,
1995. This ratio ranged from approximately 0.69 to 1.07 and, based on the
closing price of Revco Common Stock and Rite Aid Common Stock on November
16, 1995 of $23.875 and $27.50, respectively, the ratio was 0.87.
Discounted Cash Flow Analysis. Morgan Stanley performed a discounted
cash flow analysis of Revco and Rite Aid for the fiscal years ended 1996
through 2005 based on financial projections prepared by
42
<PAGE>
the respective managements of each company. Unlevered free cash flows of
each company were calculated as net income available to common shareholders
plus the aggregate of preferred stock dividends, depreciation and
amortization, deferred taxes, and other non-cash expenses and after-tax net
interest expense less the sum of capital expenditures and investment in
non-cash working capital. Morgan Stanley calculated terminal values by
applying a range of EBITDA multiples to the normalized unlevered free cash
flows in fiscal 2005, representing estimated ranges of long-term EBITDA
multiples for Revco and Rite Aid. The cash-flow streams and terminal values
were then discounted to the present using a range of discount rates,
representing an estimated range of the weighted average cost of capital for
Revco and Rite Aid. Based on this analysis, Morgan Stanley calculated per
share values for Revco ranging from $22.52 to $28.35 and for Rite Aid
ranging from $22.58 to $29.25.
Comparable Transaction Analysis. Using publicly available
information, Morgan Stanley performed an analysis of precedent transactions
involving drugstore and other retail companies in order to calculate a
valuation range for the Shares. Multiples to be received by the
stockholders of Revco in the Offer and the Merger of aggregate value (fully
diluted equity value of the Consideration plus any debt assumed less cash
and option proceeds) to revenues, EBITDA, and EBIT and of fully diluted
equity value to book value of equity and LTM earnings were compared with
multiples paid in certain other merger and acquisition transactions
involving drugstore and other retail companies from February 27, 1991 to
June 28, 1995. The transactions included Rite Aid and Eckerd Corporation;
Pathmark Stores Inc. and Rite Aid; Perry Drug Stores, Inc. and Rite Aid;
Hook-SupeRX, Inc. and Revco, and Payless Drug Stores and TCH Corporation.
Based on this analysis, aggregate value multiples with ranges of 0.35x to
0.50x LTM revenues, 7.0x to 9.0x LTM EBITDA, and 13.0x to 15.0x LTM EBIT,
and equity value multiples with ranges of 0.5x to 2.5x book value of equity
and 18.0x to 22.0x LTM earnings were applied to Revco's corresponding
financial statistics to suggest a median equity value range per share of
Revco Common Stock of $17.42 to $26.74.
No transaction utilized in the comparable transaction analysis is
identical to the Offer and the Merger. Accordingly, an analysis of the
results of the foregoing necessarily involves complex considerations and
judgements concerning financial and operating characteristics of Revco and
other factors that could affect the acquisition value of the companies to
which it is being compared. Mathematical analysis (such as determining the
average or median) is not itself a meaningful method of using comparable
transaction data.
Pro Forma Analysis of the Merger. Morgan Stanley analyzed the pro
forma impact of the Offer and the Merger on Revco earnings per share for
the fiscal years ended 1997 through 2000. Such analysis was performed
utilizing standalone earnings estimated for the fiscal years ended 1997
through 2000 for Revco and Rite Aid based on IBES earnings estimates.
Morgan Stanley analyzed the impact of the Offer and the Merger both with
and without the cost savings expected to be derived from the Merger as
estimated by the managements of Revco and Rite Aid.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. Morgan
Stanley believes that its analyses must be considered as a whole and that
selecting portions of its analyses, without considering all analyses, would
create an incomplete view of the process underlying its opinion. In addition,
Morgan Stanley may have given various analyses more or less weight than other
analyses, and may have deemed various assumptions more or less probable than
other assumptions, so that the ranges of valuations resulting for any particular
analysis described above should not be taken to be Morgan Stanley's view of the
actual value of Revco and Rite Aid.
In performing its analyses, Morgan Stanley made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of Revco and Rite Aid. The
analyses performed by Morgan Stanley are not necessarily indicative of actual
value, which may be significantly more or less favorable than suggested by such
analyses. Such analyses were prepared solely as a part of Morgan Stanley's
analysis of whether the Consideration to be received by the holders of Revco
Common Stock pursuant to the Offer and the Merger, taken together, was fair from
a financial point of view to the holders of Revco Common Stock and were
conducted in connection with the delivery of Morgan Stanley's oral opinion of
November 28, 1995. The analyses do not purport to be appraisals or to reflect
the prices at which Revco and Rite Aid might actually be sold. Because such
estimates are inherently subject to uncertainty, none of Revco, Morgan Stanley,
or any other person assumes responsibility for their accuracy. In addition, as
described
43
<PAGE>
above, Morgan Stanley's opinion and the information provided by it to the Revco
Board were two of many factors taken into consideration by the Revco Board in
making its determination to approve the Merger. Consequently, the Morgan Stanley
analyses described above should not be viewed as determinative of the opinion of
the Revco Board or the view of Revco management with respect to the value of
Revco or of whether the Revco Board or the management of Revco would have been
willing to agree to different consideration.
The Revco Board retained Morgan Stanley based upon its experience and
expertise. Morgan Stanley is an internationally recognized investment banking
and advisory firm. As part of its investment banking business, Morgan Stanley is
regularly engaged in the valuation of businesses and securities in connection
with mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuation for estate, corporate and other purposes. In the ordinary course
of its business, Morgan Stanley and its affiliates may actively trade the debt
and equity securities of Revco and Rite Aid for their own account and for the
accounts of customers and, accordingly, may at any time hold a long or short
position in such securities. In the past, Morgan Stanley has provided financial
advisory and investment banking services to Revco and Rite Aid for which
services Morgan Stanley has received customary fees.
The consideration to be received by the stockholders of Revco pursuant to
the Merger was determined through negotiations between Revco and Rite Aid and
was approved by the Revco Board. During the course of such negotiations, Morgan
Stanley did not make a recommendation with respect to the amount of the
Consideration.
Pursuant to a letter agreement dated November 6, 1995 between Revco and
Morgan Stanley, Morgan Stanley is entitled to a fairness opinion fee of
$2,250,000. In addition, Revco has agreed to reimburse Morgan Stanley for its
expenses, including reasonable fees and expenses of its counsel, and to
indemnify Morgan Stanley and its affiliates against certain liabilities and
expenses, including liabilities under federal securities laws.
CERTAIN ADVANTAGES AND DISADVANTAGES OF THE MERGER
In considering whether to approve the Share Issuance, stockholders of Rite
Aid should consider the following advantages and disadvantages.
Advantages. The Merger will provide significant benefits to Rite Aid and
its stockholders. The Merger will create substantial opportunities for synergies
and will allow the combined company to compete more effectively in a marketplace
that is becoming increasingly competitive.
In addition, the Rite Aid Board has determined that the Merger is
advisable, fair to and in the best interests of the Rite Aid stockholders and
has approved the Merger Agreement.
Morever, the Merger is expected to be accretive to Rite Aid's earnings per
share by the end of the first year of operations following the Merger.
Similarly, Rite Aid's management estimates, based on a preliminary review of
Revco's business and operations, that the Merger will result in approximately
$156 million of quantifiable annual cost savings, including improvement in gross
margins through enhanced purchasing power, closure of Revco's corporate
headquarters and overlapping distribution facilities, elimination of duplicative
overhead, elimination of redundant advertising expenditures, the consolidation
of data centers and improved communications systems and a working capital
benefit from the consolidation of warehouse inventories.
Further, DLJ has delivered its opinion to the Rite Aid Board to the effect
that the consideration to be paid by Rite Aid pursuant to the Merger Agreement,
taken as a whole, is fair to the stockholders of Rite Aid from a financial point
of view. Similarly, Morgan Stanley has delivered its written opinion to the
Revco Board to the effect that the aggregate consideration to be received by the
holders of shares of Revco Common Stock pursuant to the Offer and the aggregate
consideration to be received by the holders of shares of Revco Common Stock
pursuant to the Merger, taken together, are fair from a financial point of view
to such holders.
Disadvantages. The Rite Aid Board considered the fact that Rite Aid would
be a more leveraged company in the event that the Share Issuance was not
approved by Rite Aid's stockholders and the Merger was consummated using the
Alternative Consideration.
In determining that the Merger is advisable and in the best interests of
its stockholders, the Rite Aid Board considered the cost savings, operating
efficiencies and other synergies expected to result from the consummation
44
<PAGE>
thereof. The consolidation of functions, the integration of departments, systems
and procedures and the relocation of staff present significant management
challenges. There can be no assurance that such actions will be successfully
accomplished as rapidly as currently expected. Moreover, although the primary
purpose of such actions will be to realize direct cost savings and other
operating efficiencies, there can be no assurance of the extent to which such
cost savings and efficiencies will be achieved.
If the stockholders of Rite Aid approve the Share Issuance and assuming a
one-for-one Exchange Ratio, the current stockholders of Rite Aid would own
approximately 72.7% of the then outstanding shares of Rite Aid Common Stock
after the Merger.
Rite Aid also expects to take a pre-tax charge to earnings estimated to be
in the range of $150 million to $175 million to cover the cost of integrating
the two companies. See Note (n) of Notes to Unaudited Pro Forma Condensed
Consolidated Financial Data for a discussion of such merger and integration
charges. There can be no assurance, however, that the amount of such charge will
not increase as Rite Aid's integration plan is further developed and more
accurate estimates become possible or as to the amount of the after-tax cost of
such charge.
PLANS FOR REVCO
It is expected that, initially following the Merger, the business and
operations of Revco will be integrated into the operations of Rite Aid as
rapidly as practicable following the Merger. Rite Aid intends to close Revco's
corporate headquarters at 1925 Enterprise Parkway, Twinsburg, Ohio (the
'Headquarters') within twelve months following consummation of the Merger and to
integrate Revco's corporate headquarters operations into Rite Aid's operations.
Rite Aid also expects to take a pre-tax charge to earnings estimated to be in
the range of $150 million to $175 million to cover the cost of integrating the
two companies. Rite Aid anticipates that only a small percentage of the combined
stores of Rite Aid and Revco will be closed. A decision on which stores will be
closed is not expected to be made until after the consummation of the Merger. In
addition, Rite Aid will continue to evaluate the business and operations of
Revco after the consummation of the Merger, and will take such further actions
as it deems appropriate under the circumstances then existing.
INTERESTS OF CERTAIN PERSONS
Certain members of Revco's management and Revco's Board may be deemed to
have certain interests in the Merger that are in addition to their interests as
stockholders of Revco generally. The Revco Board was aware of these interests
and considered them, among other matters, in approving the Merger Agreement and
the transactions contemplated thereby.
Described below under 'Existing Arrangements' are material employment and
employee benefit agreements and arrangements as they currently exist. Pursuant
to the terms of the Merger Agreement, certain terms and conditions of such
agreements and arrangements will be amended. A description of such amendments
follows under the heading 'The Merger Agreement.'
EXISTING ARRANGEMENTS
Existing Employment Agreements. Revco maintains employment agreements
with, among others, its eight executive officers and fifteen other officers
(collectively, the 'Covered Executives' or, individually, a 'Covered
Executive'), with one form of agreement for executive officers and one form of
agreement for non-executive officers. Except for the severance period (described
below), the forms of these agreements are substantially similar. The significant
provisions of the agreements are as follows:
1. Term of the Agreement. The agreements continue until terminated by
reason of (a) the employee's death, (b) the employee's disability, (c)
thirty days' written notice of termination by either Revco or the employee,
(d) notice by the employee of his resignation for 'good reason' (as defined
below), or (e) notice by Revco of the employee's 'gross misconduct' (as
defined below). For purposes of the employment agreements, 'good reason'
means (i) the occurrence of a material reduction in the aggregate direct
remuneration of the employee or any reduction in the position of the
employee, (ii) any material reduction in responsibilities or duties
provided for in accordance with employee's arrangement with Revco, (iii)
any material adverse change or reduction in the aggregate employee
benefits, perquisites or fringe benefits contemplated under such
arrangement, (iv) a change in the employee's reporting relationship, or (v)
any
45
<PAGE>
relocation of the employee's principal place of work. For purposes of the
employment agreements, 'gross misconduct' includes, but is not limited to,
(i) commission of an act of fraud, embezzlement, theft, or other criminal
act constituting a felony, or (ii) breach or default by the employee of any
of his agreements or obligations under the agreement which is not cured in
all substantial respects within ten days after Revco gives notice to the
employee of such breach or default.
2. Salary and Bonus. The agreements provide for the payment of base
salary and participation in Revco's bonus plan, described more fully below.
The following table summarizes Revco's executive officers (hereinafter
referred to as 'Group A Executives'), their positions and their base
salaries:
<TABLE>
<CAPTION>
NAME POSITION BASE SALARY
- -------------------------- ---------------------------------------------------- -----------
<S> <C> <C>
D. Dwayne Hoven........... President and Chief Executive Officer $ 640,016
Carl A. Bellini........... Executive VP and Chief Operating Officer $ 420,000
James J. Hagan............ Executive VP and Chief Financial Officer $ 270,000
James P. Mastrian......... Executive VP of Marketing $ 313,500
Douglas W. Coffey......... Senior VP of Human Resources $ 245,700
Edwin R. Gropp, Jr........ Senior VP of Information Services $ 203,963
Clarence D. Nichols....... Senior VP, Store Operations $ 226,740
Jack A. Staph............. Senior VP, Secretary and General Counsel $ 247,323
</TABLE>
3. Other Benefits. The agreements provide that the employee will be
eligible to participate in Revco's other employee benefit programs for the
provision of welfare and other benefits.
4. Severance. The agreements provide for the payment of an employee's
base salary and the continuation of other benefits for a specified period
upon termination of employment by Revco other than for gross misconduct or
by the employee for good reason. The severance period for Group A
Executives is two years and, for the other fifteen officers ('Group B
Executives'), is one year.
Economic Value Added (EVA) Incentive Plan (the 'Bonus Plan'). Each of the
Covered Executives is eligible to participate in the Bonus Plan. Awards pursuant
to the Bonus Plan are based upon the achievement of a combination of performance
objectives by Revco and the individual participant. Each participant in the
Bonus Plan is credited with bonus units equal to his base salary multiplied by a
target bonus percentage. If the target bonus is exceeded by a specified amount,
the excess is deposited into a bonus bank on behalf of the individual
participant for the following year.
Defined Benefit Plan. The Revco Retirement Income Plan and Trust, as
amended ('Pension Plan'), is a defined benefit pension plan generally covering
employees of Revco, other than those covered by collective bargaining agreements
that provide for pension benefits.
On reaching normal retirement at or after age 65, a participant is
generally entitled to receive a monthly retirement benefit for life. Alternative
actuarially equivalent forms of benefit payments are provided for in the Pension
Plan. Vesting under the Pension Plan occurs after five years of service (with no
vesting where less than five years of service has been completed).
The annual retirement benefit at the normal retirement age of at least 65
is equal to an amount which, when added to the participant's social security
benefit, is the product of the employee's average earnings for the last five
years of his service and the applicable percentage set forth in the table below.
If the employee has fewer than 30 years of credited service with Revco, the
benefit determined by this formula is reduced by a percentage determined
substantially by the ratio of the number of years of credited service to 30. A
participant who has attained age 55 and has completed five years of service may
elect early retirement with reduced monthly benefit payments.
46
<PAGE>
The amounts shown in the following table are based on the pension being
paid during the lifetime of the retired employee only, including social security
benefits, and would be reduced for service of less than 30 years and on an
actuarially equivalent basis in the event of a survivor benefit or other
optional form of payment.
<TABLE>
<CAPTION>
RETIREMENT BENEFIT
FINAL AVERAGE (% OF FINAL
MONTHLY PAY AVERAGE PAY)
------------- ------------------
<S> <C>
$ 500 81%
1,000 73
1,500 65
2,000 60
2,500 56
3,000 54
3,500 52
4,000 51
4,500 or more 50
</TABLE>
The following table sets forth the estimated annual benefits (including
social security) payable to a participant who qualifies for normal retirement in
1995 with the specified average earnings during the last five calendar years
prior to retirement and the specified years of credited service:
<TABLE>
<CAPTION>
AVERAGE ANNUAL EARNINGS FOR YEARS OF CREDITED SERVICE
FIVE-YEAR PERIOD --------------------------------------------------------------
PRECEEDING RETIREMENT(1) 10 15 20 25 30 OR MORE
--------------------------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
$ 125,000 $ 30,426 $ 38,445 $ 46,464 $ 54,483 $ 62,500
150,000 34,592 44,694 54,796 64,898 75,000
175,000 38,758 50,943 63,128 75,313 87,500
200,000 42,926 57,195 71,464 85,733 100,000
225,000 47,092 63,444 79,796 96,148 112,500
250,000 51,258 69,693 88,128 106,563 125,000*
300,000 59,592 82,194 104,796 127,398* 150,000*
400,000 76,258 107,193 138,128* 169,063* 200,000*
450,000 84,592 119,694 154,795* 189,898* 225,000*
500,000 92,926 132,195* 171,463* 210,733* 250,000*
600,000 109,592 157,194* 204,796* 252,398* 300,000*
700,000 126,258* 182,193* 238,128* 294,063* 350,000*
</TABLE>
- ------------------
(1) For plan years beginning on or after January 1, 1989, the Internal Revenue
Code of 1986, as amended (the 'Code'), limits the amount of compensation
that can be used for plan calculation purposes to $200,000 (indexed). For
plan years beginning on or after January 1, 1994, this limit is reduced to
$150,000 (indexed).
* As required by the Code, plan payments may not provide annual benefits
exceeding a maximum amount, currently $120,000.
Supplemental Retirement and Survivor Benefit Plan (the 'SERP'). Each of
the Covered Executives participates in the SERP, which provides supplemental
retirement benefits generally commencing upon either (i) retirement or
disability at age sixty, or (ii) upon termination of employment at age
sixty-five. The basic supplemental benefit is an amount that, when added to
other benefits (pension plan benefits, social security benefits and other
monthly retirement income as provided), equals 70% of a participant's final
salary. The SERP benefit is reduced for early retirement. Upon execution of an
individual agreement under the SERP, a participant is 50% vested. Thereafter, a
participant vests in his SERP benefits at a rate of 10% each year. Mr. Hoven and
Mr. Staph are eligible for a reduced early retirement benefit, which is provided
for a participant who is at least fifty-five years of age and has at least ten
years of service. Such benefits, reduced by estimated social security and
pension plan benefits, are also subject to a reduction based upon age on a scale
from 40% at age fifty-five to a maximum of 70% at age sixty-five.
Split Dollar Plan. Each of the Covered Executives participates in the
Split Dollar Plan which provides that beneficiaries designated by participants
will receive insurance proceeds equal to a multiple of base salary measured in
the year preceding death. Revco is the direct beneficiary of the proceeds, if
any, in excess of the
47
<PAGE>
proceeds as calculated in the preceding sentence. At the end of each calendar
year a participant's pay is 'grossed up' to pay any tax liability for imputed
income resulting from Revco's payment of premiums. Participation in the Split
Dollar Plan ceases upon a participant's termination of employment for any reason
other than death or permanent disability.
1992 Long-Term Incentive Plan (the 'LTIP'). Each of the Covered Executives
participates in the LTIP, which provides for the grant of incentive and
non-qualified stock options, reload options, stock appreciation rights,
restricted stock awards, stock bonus awards and performance plan awards. To
date, long-term incentive awards granted under the LTIP have consisted solely of
non-qualified stock options. Pursuant to the LTIP, generally 20% of the options
are immediately exercisable upon the date of grant. Thereafter, an additional
20% of the options become exercisable each year until 100% of the options become
exercisable five years from the date of grant. The exercise price of the options
granted increases annually by 5% until the shares subject to the option vest. In
the event of a 'change in control,' as defined in the LTIP, the options granted
to Revco's officers become fully exercisable. The consummation of the Offer
constitutes a 'change in control' for purposes of the LTIP. Option awards to
Group A Executives contain a gross-up provision for excise taxes resulting from
application of Sections 280G and 4999 of the Code.
The estimated amount of gain associated with the options of Group A
Executives that vest upon a 'change in control' is:
<TABLE>
<S> <C>
Mr. Hoven................................................... $ 5,098,674
Mr. Bellini................................................. $ 1,940,324
Mr. Hagan................................................... $ 797,095
Mr. Mastrian................................................ $ 1,357,569
Mr. Coffey.................................................. $ 438,627
Mr. Gropp................................................... $ 322,573
Mr. Nichols................................................. $ 758,784
Mr. Staph................................................... $ 942,912
</TABLE>
The estimated aggregate amount of gain associated with the options of Group
B Executives that vest upon a 'change in control' is approximately $3,200,000.
1992 Non-Employee Directors' Stock Option Plan (the 'Non-Employee
Directors' Plan'). All of the directors who are not officers or key employees
of Revco are eligible to participate in the Non-Employee Directors' Plan, which
provides for the grant of options to purchase shares of Revco's common stock.
The options vest at a rate of 20% each year until they are 100% exercisable
after five years from the date of grant. The exercise price of the options
granted increases annually by 5% until the shares subject to the options vest.
In the event of a 'change in control,' as defined in the Non-Employee Directors'
Plan, the options granted to the participants become fully exercisable. The
consummation of the Offer constitutes a 'change in control' for purposes of the
Non-Employee Directors' Plan. The estimated aggregate amount of gain associated
with the options of non-employee Directors that vest upon a 'change in control'
is approximately $577,000.
Employee Stock Purchase Plan (the 'ESPP'). Each of the Covered Executives
is eligible to participate in the ESPP, which permits participants to purchase
Revco's common stock at the lesser of (a) 85% of the fair market value of the
stock on the first day of the offering period, or (b) 85% of the fair market
value of the stock on the last day of the offering period.
THE MERGER AGREEMENT
The Merger Agreement provides that, effective as of the Effective Time,
Rite Aid will cause the Surviving Corporation to provide to employees of Revco
certain payments and benefits, as described below.
Treatment of Stock Options. The Merger Agreement provides that, effective
as of the Effective Time, each option granted by Revco to purchase shares of
Revco Common Stock that is outstanding and unexercised immediately prior thereto
(the 'Revco Stock Options'), will cease to represent a right to acquire shares
of Revco Common Stock and will be converted automatically into an option to
purchase shares of Rite Aid Common Stock in an amount and at an exercise price
determined as provided below (and otherwise subject to the terms of the LTIP and
the Non-Employee Directors' Plan (together the 'Option Plans'), and the
agreements evidencing grants thereunder). The number of shares of Rite Aid
Common Stock subject to, and the option price and terms
48
<PAGE>
and conditions of, the new option shall be determined in a manner that preserves
both (i) the aggregate gain (or loss) on Revco Stock Options immediately prior
to the Effective Time and (ii) the ratio of the exercise price per share subject
to Revco Stock Options to the fair market value (determined immediately prior to
the Effective Time) per share subject to such option, provided that any
fractional shares of Rite Aid Common Stock resulting from such determination
will be rounded down to the nearest share. The Merger Agreement also provides
that, effective as of the Effective Time, the Surviving Corporation will assume
each Revco Stock Options agreement, each as amended, as provided therein. The
duration, vesting and other terms of the new options will be the same as Revco
Stock Options that they replace, except that all references to Revco shall be
deemed to be references to Rite Aid. In the event that a holder of a Revco Stock
Option is terminated without Cause (as defined in the Merger Agreement) within
12 months of the Effective Time, then such holder's new option will become 100%
exercisable as of such date of termination.
The Merger Agreement further provides that, notwithstanding the immediately
preceding paragraph, outstanding vested options under the LTIP held by Covered
Executives, including options that become vested in connection with a 'change in
control' under the terms of existing award agreements under the LTIP, will,
effective as of the Effective Time, become exercisable under a cashless exercise
procedure made available by Revco (subject to applicable law and any
administrative procedures and policies deemed appropriate by Revco). Individuals
subject to Section 16 of the Exchange Act ('Section 16') will be provided with a
cash payment approximating the benefits that would be deprived by reason of
Section 16.
The Merger Agreement provides that, effective as of the Effective Time, the
Option Plans will terminate and the provisions in any other plan, program,
agreement or arrangement providing for the issuance or grant of any other
interest in respect of the capital stock of Revco or any of its Subsidiaries,
will be deleted. Furthermore, Revco will take all actions necessary to ensure
that following the Effective Time, no holder of Revco Stock Options or any
participant in the Option Plans or any other plans, programs, agreements or
arrangements will have any right thereunder to acquire any equity securities of
Revco, the Surviving Corporation or any subsidiary of either of the foregoing.
Bonus; Severance Benefits. As soon as practicable following the earlier of
(i) the Effective Time and (ii) the end of Revco's 1996 fiscal year, Revco will
pay, pursuant to the terms of the Bonus Plan as modified by the terms of the
Merger Agreement, bonuses for fiscal year 1996, calculated based on Revco's
financial results as of February 10, 1996, and annualized to equal a bonus for a
twelve month period.
With respect to the Covered Executives, effective as soon as practicable
following the Effective Time (or if later, the date of termination of employment
of the Covered Executive), Revco will pay to each Covered Executive severance
payments (the 'Severance Payments'), on a basis consistent with Rite Aid's
executive payroll practices, based on one of the two formulae set forth below,
pursuant to elections made by each Covered Executive prior to the Effective
Time:
(i) Severance Payments equal to, on an annualized basis, 'Base Pay'
(as defined below), continuing for a period of three years with respect to
Group A Executives, and for a period of 18 months with respect to Group B
Executives. For purposes of this provision, 'Base Pay' means the highest
base pay paid to the Covered Executive during any one of the 1994, 1995 or
1996 fiscal years, provided that Base Pay for fiscal year 1996 will be
calculated on an annualized basis; or
(ii) Severance Payments equal to, on an annualized basis, 'Base Plus
Bonus Pay' (as defined below), continuing for a period of two years with
respect to Group A Executives, and for a period of one (1) year with
respect to Group B Executives. For purposes of this provision 'Base Plus
Bonus Pay' means Base Pay plus the amount that would have been paid to the
executive under the Bonus Plan for fiscal year 1995 as the targeted bonus
(the '1995 Target Bonus').
In lieu of the Severance Payments described in clauses (i) and (ii) above,
Mr. Hoven and Mr. Mastrian will receive Severance Payments, continuing for three
years, equal to, on an annualized basis, Base Plus Bonus Pay.
The period during which a Covered Executive continues to receive Severance
Payments is hereinafter referred to as the 'Severance Period' for such Covered
Executive.
49
<PAGE>
The estimated cost of providing the additional severance payments to Group
A Executives upon termination of employment is:
<TABLE>
<S> <C>
Mr. Hoven................................................... $1,726,943
Mr. Bellini................................................. $ 420,000
Mr. Hagan................................................... $ 270,000
Mr. Mastrian................................................ $ 701,496
Mr. Coffey.................................................. $ 245,700
Mr. Gropp................................................... $ 203,963
Mr. Nichols................................................. $ 226,740
Mr. Staph................................................... $ 247,323
</TABLE>
The aggregate estimated cost of providing the additional severance payments
to Group B Executives is $1,190,738.
During the Severance Period, each Covered Executive will continue to
receive, at Revco's expense, continuation of benefits described in such Covered
Executive's employment agreement with Revco on terms at least as favorable to
the Covered Executive as is currently in effect, which benefits may be provided
under benefit plans and programs maintained by Rite Aid; provided, however, that
to the extent any such Covered Executive receives comparable benefits from, and
at the expense of, a subsequent employer, such benefits from the Surviving
Corporation will cease.
Notwithstanding anything to the contrary in the Merger Agreement, the
Severance Payments described in clauses (i) and (ii) above will be paid to a
Covered Executive only if such Covered Executive is actively employed by Revco
immediately prior to the Effective Time. In the event that a Covered Executive
who continues employment with Revco following the Effective Time is terminated
prior to the expiration of the Severance Period that would have applied had such
Covered Executive been terminated effective as of the Effective Time, then such
Covered Executive will be entitled to receive the Severance Payments described
above.
Each employee, other than any Covered Executive, of Revco who is covered by
Revco's severance pay plan as in effect on November 1, 1995 (each, a
'Severance-Eligible Employee') and who is employed by Revco immediately prior to
the Effective Time and terminated for other than Cause (as defined below) within
twelve months following the Effective Time, will be entitled to receive
bi-weekly severance payments, made on a basis consistent with Rite Aid's payroll
practices, for a six month period commencing on such Severance-Eligible
Employee's date of termination of employment, equal to, on an annualized basis,
such Severance-Eligible Employee's Base Pay; provided, however, that except for
employees located at Revco's headquarters such payments will be reduced (but not
below zero) by the amount of compensation such Severance-Eligible Employee
receives from a subsequent employer to the extent that such Severance-Eligible
Employee is employed during such six month period.
For purposes of the Merger Agreement, 'Cause' will mean the conviction of
an employee or executive (as the case may be) for the commission of a felony,
including the entry of a guilty or nolo contendere plea, any willful, grossly
negligent or fraudulent action or inaction by an employee or executive, as the
case may be, or the employee's or executive's willful and continued failure to
substantially perform an employee's or executive's assigned duties.
SERP. Each Revco employee who is (i) covered by the SERP and (ii) actively
employed by Revco, in either case, immediately prior to the Effective Time
(each, a 'SERP Executive') will be eligible to receive benefits under the SERP
based on the terms of the SERP as modified by the terms of the Merger Agreement.
For each SERP Executive (i) the amount of service taken into account for
purposes of calculating benefits and vesting under the SERP will be equal to the
SERP Executive's service with Revco prior to the Effective Time plus the Covered
Executive's Severance Period, if any, and (ii) compensation for each SERP
Executive for purposes of the SERP will include one-half of the 1995 Target
Bonus for such SERP Executive.
50
<PAGE>
The estimated present value (using a 7.5% discount factor) of the
additional SERP and Split Dollar Plan benefits for the Group A Executives is:
<TABLE>
<S> <C>
Mr. Hoven................................................... $1,503,112
Mr. Bellini................................................. $1,877,388
Mr. Hagan................................................... $ 56,756
Mr. Mastrian................................................ $ 487,121
Mr. Coffey.................................................. $ 234,699
Mr. Gropp................................................... $ 12,028
Mr. Nichols................................................. $ 161,405
Mr. Staph................................................... $ 191,735
</TABLE>
The aggregate estimated present value (using a 7.5% discount factor) of the
additional SERP and Split Dollar Plan benefits for Group B Executives is
$762,150.
Gross-Up Payments. Revco will provide each Group A Executive with a cash
gross-up payment to make such executive whole for the excise taxes imposed on
all benefits and other amounts paid or payable to such executive on account of
the transactions contemplated by the Merger Agreement as a result of the
application of Sections 280G and 4999 of the Code. With respect to all other
employees of Revco who are entitled to benefits and other amounts paid or
payable to such employee on account of the transactions contemplated by the
Merger Agreement as a result of the application of Sections 280G and 4999 of the
Code, Revco shall not be obligated to pay or provide to any such employee any
payments or benefits to the extent that such payments or benefits would
constitute a 'parachute payment' within the meaning of Section 280G(b)(2)(A) of
the Code.
Based upon preliminary estimates, the aggregate cost of the gross-up
payments is expected to be between $6,000,000 and $9,000,000.
ESPP. Each Covered Executive who is subject to Section 16 will be provided
with a cash payment approximating the benefits that would be deprived by reason
of Section 16. Revco will amend the ESPP to provide that the option period that
was in effect as of November 29, 1995 will cease as soon as practicable
thereafter.
Other Benefits. Revco will provide outplacement services from a recognized
outplacement provider selected by Rite Aid to all employees of Revco as of the
Effective Time who were based in Twinsburg, Ohio as of the Effective Time, and
are terminated without Cause within one (1) year of the Effective Time.
In addition, pursuant to the Merger Agreement, employees of Revco who
continue to be employed by Revco as of the Effective Time will receive employee
benefits comparable to those benefits provided to similarly situated employees
of Rite Aid. In addition, with respect to medical benefits provided to
continuing employees as of the Effective Time, waiting periods and pre-existing
condition requirements under the plans covering the continuing employees will be
waived, and these employees will be given credit for any co-payments and
deductibles actually paid by such employees under Revco's medical plans during
the calendar year in which the closing of the Merger occurs. Finally, service
with Revco will be recognized for purposes of eligibility under Rite Aid's
welfare plans as well as for purposes of Rite Aid's programs or policies for
vacation pay and sick pay.
Certain additional information with respect to executive compensation and
related employee benefits and other information concerning Revco's executive
officers and directors, as modified by the foregoing discussion set forth in
this Proxy Statement, is set forth in the 1995 Revco Proxy Statement under the
sections titled 'The Board of Directors--Compensation of the Board,' 'Security
Ownership of Certain Persons,' 'Executive Compensation' and 'Report of the Human
Resources Committee' and is incorporated herein by reference.
INDEMNIFICATION
Pursuant to the terms of the Merger Agreement, Rite Aid has agreed that at
all times after the Effective Time, it will indemnify, or will cause Revco, as
the surviving corporation, and its subsidiaries to indemnify each director,
officer, employee or agent of Revco or any of Revco's subsidiaries, successors
and assigns (an 'Indemnified Party'), to the fullest extent permitted by law,
with respect to any claim, liability, loss, damage, judgment, fine, penalty,
amount paid in settlement or compromise, cost or expense, including reasonable
fees and expenses of legal counsel (whenever asserted or claimed) ('Indemnified
Liability') based in whole or in part on, or arising in whole or in part out of,
any matter existing or occurring at or prior to the Effective Time. Rite Aid
51
<PAGE>
has also agreed to maintain certain directors and officers liability insurance
for four years following the Merger as set forth in the Merger Agreement. See
'MERGER AGREEMENT--Directors' and Officers' Insurance and Indemnification.'
CERTAIN PROJECTED FINANCIAL INFORMATION
In the course of its discussions with DLJ in November 1995, Revco provided
DLJ with certain business and financial information which DLJ and Revco believe
was not publicly available. Such information included, among other things,
certain financial projections for fiscal 1996 through fiscal 1998 prepared by
management of Revco as a long-range plan (the 'Projections'). The Projections do
not take into account any of the potential effects of the transactions
contemplated by the Merger.
Set forth below is a selected summary of the Projections.
<TABLE>
<CAPTION>
FISCAL 1996 FISCAL 1997 FISCAL 1998
-------------- ----------- -----------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INCOME STATEMENT DATA:
Total Sales........................................................... $5,221,616 $5,922,191 $6,792,000
Operating Profit...................................................... 206,802 230,887 252,212
Interest Expense, Net................................................. 62,853 58,500 54,500
Pretax Income......................................................... 143,949 172,387 197,712
Income Tax Provision.................................................. 69,446 80,992 91,273
Net Income............................................................ 74,503 91,395 106,438
Net Income Per Share.................................................. 1.12 1.35 1.55
</TABLE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
FISCAL 1996 FISCAL 1996 FISCAL 1996 FISCAL 1996
----------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Total Current Assets................................... $1,124,827 $1,253,414 $1,216,046 $1,187,602
Total Assets........................................... 2,213,516 2,354,737 2,310,128 2,266,093
Total Current Liabilities.............................. 722,459 793,636 766,105 693,891
Long-Term Debt......................................... 659,248 719,548 677,848 666,148
Long-Term Liabilities.................................. 47,590 47,590 47,590 47,590
Total Common Stockholders' Equity...................... 784,219 793,963 818,585 858,464
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1996
--------------
<S> <C>
(IN THOUSANDS)
CASH FLOW STATEMENT DATA:
Opening Cash Balance.................................................. $ 3,360
EBITDA................................................................ 322,242
Sub-Total Non-Working Capital Items................................... (250,481)
Cash Flow Available for Working Capital............................... 71,761
Sub-Total Net Inventory Change........................................ (30,034)
Sub-Total Other Working Capital Changes............................... (40,715)
Total Working Capital Changes......................................... (70,749)
Cash Flow From Operations............................................. 1,012
Cash Flow From Financing Activity..................................... (4,275)
Increase (Decrease) in Cash........................................... (3,263)
Closing Cash Balance.................................................. 97
</TABLE>
52
<PAGE>
THE PROJECTIONS WERE NOT PREPARED WITH A VIEW TO PUBLIC DISCLOSURE OR
COMPLIANCE WITH PUBLISHED GUIDELINES OF THE COMMISSION OR THE GUIDELINES
ESTABLISHED BY THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS. THE
PROJECTIONS ARE INCLUDED IN THIS PROXY STATEMENT ONLY BECAUSE SUCH INFORMATION
WAS PROVIDED TO DLJ. NONE OF RITE AID, SUB, DLJ OR ANY PARTY TO WHOM THE
PROJECTIONS WERE PROVIDED ASSUMES ANY RESPONSIBILITY FOR THE ACCURACY OF SUCH
INFORMATION. WHILE PRESENTED WITH NUMERICAL SPECIFICITY, THESE PROJECTIONS ARE
BASED UPON A VARIETY OF ASSUMPTIONS RELATING TO THE BUSINESS OF REVCO WHICH,
THOUGH DLJ HAS BEEN ADVISED WERE CONSIDERED REASONABLE BY REVCO AT THE TIME THEY
WERE FURNISHED TO DLJ, MAY NOT BE REALIZED AND ARE SUBJECT TO SIGNIFICANT
UNCERTAINTIES AND CONTINGENCIES, MANY OF WHICH ARE BEYOND THE CONTROL OF REVCO.
THERE CAN BE NO ASSURANCE THAT THE PROJECTIONS WILL BE REALIZED, AND ACTUAL
RESULTS MAY VARY MATERIALLY FROM THOSE SHOWN. FOR THESE REASONS, AS WELL AS THE
BASES ON WHICH SUCH PROJECTIONS WERE COMPILED, THERE CAN BE NO ASSURANCE THAT
SUCH PROJECTIONS WILL BE REALIZED, OR THAT ACTUAL RESULTS WILL NOT BE HIGHER OR
LOWER THAN THOSE ESTIMATED. THE INCLUSION OF SUCH PROJECTIONS HEREIN SHOULD NOT
BE REGARDED AS AN INDICATION THAT RITE AID, SUB, DLJ OR ANY OTHER PARTY WHO
RECEIVED SUCH INFORMATION CONSIDERS IT AN ACCURATE PREDICTION OF FUTURE EVENTS.
THE INDEPENDENT ACCOUNTANTS FOR RITE AID AND REVCO HAVE NOT EXAMINED OR
COMPILED THESE PROJECTIONS AND ACCORDINGLY DO NOT EXPRESS AN OPINION OR ANY
OTHER FORM OF ASSURANCE ON THEM.
ESTIMATED SYNERGIES
Upon consummation of the Merger, Rite Aid intends to continue to review
Revco and its assets, businesses, operations, properties, policies, corporate
structure, capitalization and management and consider if any changes would be
desirable in light of the circumstances then existing. Upon consummation of the
Merger, Rite Aid intends to review the business of Revco and identify synergies
and cost savings.
Rite Aid regards the resulting consolidation of Revco and Sub as an
opportunity to achieve certain cost savings and synergies. Based on a
preliminary review of Revco's business and operations, Rite Aid currently
estimates that the Merger will result in approximately $156 million of
quantifiable annual cost savings, including the improvement in gross margins
through enhanced purchasing power, closure of Revco's corporate headquarters and
overlapping distribution facilities, elimination of duplicative overhead,
elimination of redundant advertising expenditures, the consolidation of data
centers and improved communications systems and a working capital benefit from
the consolidation of warehouse inventories. THE FOREGOING ESTIMATES OF COST
SAVINGS AND SYNERGIES ARE INHERENTLY SUBJECT TO SIGNIFICANT UNCERTAINTIES AND
CONTINGENCIES, MANY OF WHICH ARE BEYOND THE CONTROL OF RITE AID. THERE CAN BE NO
ASSURANCE THAT THEY WILL BE ACHIEVED AND ACTUAL SAVINGS AND SYNERGIES MAY VARY
MATERIALLY FROM THOSE ESTIMATED. THE INCLUSION OF SUCH ESTIMATES HEREIN SHOULD
NOT BE REGARDED AS AN INDICATION THAT RITE AID, SUB OR ANY OTHER PARTY CONSIDERS
SUCH ESTIMATES AN ACCURATE PREDICTION OF FUTURE EVENTS.
FINANCING THE TRANSACTION
Rite Aid estimates that the total amount of funds required for the Offer
and the Merger, to refinance Revco's indebtedness and to pay related fees and
expenses will be approximately $2.5 billion.
Rite Aid intends to obtain a portion of the funds for the purchase of
shares of Revco Common Stock in the Offer pursuant to a Credit Agreement, (the
'Credit Agreement'), to be entered into among Rite Aid, Morgan Guaranty Trust
Company of New York, as Agent ('Morgan Guaranty') and the other banks (the
'Banks') named therein, which provides Rite Aid with a revolving credit facility
in the amount of $2.5 billion (the 'Credit
53
<PAGE>
Facility') which will terminate, and all outstanding loans shall be due and
payable, on February 15, 2001. The Credit Agreement requires that (x) the
commitments thereunder be reduced to $1.5 billion no later than the second
anniversary of the closing date of the Offer and (y) that the net cash proceeds
from the issuance by Rite Aid of any equity or long term debt securities be
applied to the reduction of the commitments until they have been so reduced to
$1.5 billion.
The Credit Agreement provides that the interest rate on base rate loans
from the Banks under the Credit Facility is to be at a rate per annum equal to
the higher of (i) the prime rate and (ii) the sum of 1/2 of 1% plus the rate per
annum equal to the weighted average of the rates on overnight Federal funds
transactions with members of the Federal Reserve System arranged by Federal
funds brokers. The Credit Facility provides for other interest rates with
respect to CD loans, Euro-Dollar loans, and money-market London Interbank
Offered Rate loans. The effective interest rates will vary depending on the
ratings of Rite Aid's long term senior debt.
The Credit Agreement contains certain covenants including, among others,
(i) restrictions that the aggregate amount of indebtedness of Rite Aid and its
subsidiaries will not exceed $3 billion at any time prior to February 15, 1997,
(ii) restrictions on sales with leases back, (iii) maintenance of a maximum
leverage ratio (debt to equity) with required reductions over time, (iv)
maintenance of a minimum fixed charge coverage ratio that increases over time,
(v) restrictions on subsidiary indebtedness and (vi) restrictions on
consolidations, mergers, sales of assets, minority investments and the creation
of liens.
In order to consummate the Offer, Rite Aid expects to obtain approximately
$966.5 million pursuant to the Credit Agreement. In the event that the average
per share value of Rite Aid Common Stock determined during the Pricing Period is
less than $27.50, Rite Aid will obtain additional funds pursuant to the Credit
Agreement and/or Rite Aid's working capital in order to deliver any Cash
Adjustment Amount to Revco stockholders (but only in the event such an election
to pay the Cash Adjustment Amount is made by Rite Aid).
In the event that stockholders of Rite Aid do not approve the Share
Issuance at the Rite Aid Special Meeting, Rite Aid estimates that up to $3
billion (or an additional $500 million in excess of the amount necessary if such
stockholder approval is obtained in the Merger) will be required to consummate
such refinancing and to pay for the remaining shares of Revco Common Stock. In
this connection Rite Aid has received a letter, dated November 16, 1995, from
J.P. Morgan (the 'J.P. Morgan Letter') which states that, subject to the
conditions described therein, J.P. Morgan is 'highly confident' that in the
event that the stockholders of Rite Aid do not approve the proposed issuance of
Rite Aid Common Stock, an aggregate amount of up to $3 billion can be raised by
Rite Aid in the syndicated bank market.
In the event Rite Aid becomes obligated to deliver the Additional
Consideration pursuant to the Merger Agreement, Rite Aid will obtain the
additional funds needed pursuant to the Credit Agreement and/or Rite Aid's
working capital.
Any remaining costs of the Offer and the Merger will be obtained from funds
pursuant to the Credit Agreement and/or Rite Aid's working capital.
No final decisions have been made concerning the method Rite Aid will
employ to repay such indebtedness. Such decisions when made will be based on
Rite Aid's review from time to time of the advisability of particular actions,
as well as on prevailing interest rates and financial and other economic
conditions.
ACCOUNTING TREATMENT
The Merger will be accounted for under the 'purchase' method of accounting
in accordance with generally accepted accounting principles ('GAAP').
OTHER LEGAL MATTERS; REGULATORY APPROVALS
General. Except as otherwise disclosed herein, based upon its review of
publicly available information with respect to Revco and the review of certain
information furnished by Revco to Rite Aid, neither Sub nor Rite Aid is aware of
(i) any license or regulatory permit that appears to be material to the business
of Revco and its subsidiaries, taken as a whole, that might be adversely
affected pursuant to the Merger or (ii) any approval or other action by any
governmental, administrative or regulatory agency or authority, domestic or
foreign, that
54
<PAGE>
would be required for the consummation of the Merger. Should any such approval
or other action be required, Rite Aid and Sub currently contemplate that such
approval or action would be sought. Revco's pharmacists and pharmacy technicians
are required to be licensed by the appropriate state board of pharmacy. Revco's
stores and certain of Revco's distribution centers are also registered with the
Federal Drug Enforcement Administration. Many of Revco's stores sell alcoholic
beverages and are subject to various state and local licensing requirements as a
result. By virtue of these license and registration requirements, Revco may be
obligated to obtain certain governmental consents and approvals in order to
consummate the Merger. While Rite Aid does not currently intend to delay the
Merger pending the outcome of any such matter, there can be no assurance that
any such approval or action, if needed, would be obtained or would be obtained
without substantial conditions or that adverse consequences might not result to
the business of Revco, Sub or Rite Aid or that certain parts of the businesses
of Revco, Sub or Rite Aid, might not have to be disposed of in the event that
such approvals were not obtained or any other actions were not taken.
Antitrust. Under the HSR Act and the regulations promulgated thereunder by
the FTC, the Offer may not be consummated until notifications have been given
and certain information has been furnished to the FTC and the Antitrust Division
and the applicable waiting period has expired or been terminated. The
consummation of the Offer is conditioned upon the expiration or termination of
the applicable waiting period under the HSR Act. On December 11, 1995, Rite Aid
and Revco filed notifications and report forms under the HSR Act with the FTC
and the Antitrust Division. On December 27, 1995, Rite Aid and Revco received
the Second Request from the FTC. Under the applicable HSR Act regulations, the
Offer may not be consummated until 10 days after Rite Aid has substantially
complied with the Second Request or the Second Request has been withdrawn by the
FTC and termination of the waiting period has been granted or such later date as
may be agreed to by Rite Aid on a voluntary basis. Rite Aid has submitted its
responses to the Second Request and certified to the FTC that it was in
substantial compliance with the Second Request as of February 7, 1996. Rite Aid
has voluntarily agreed with the FTC to extend such 10 day waiting period through
February 23, 1996.
At any time before or after the Effective Time, notwithstanding that the
waiting period under the HSR Act has expired, the FTC or the Antitrust Division
could take such action under the antitrust laws as it deems necessary or
desirable in the public interest, including seeking to enjoin the consummation
of the Merger or seeking divestiture of substantial assets of Rite Aid or Revco.
At any time before or after the Effective Time, and notwithstanding that the
waiting period under the HSR Act has expired, any state could take such action
under its antitrust law as it deems necessary or desirable in the public
interest. Such action could include seeking to enjoin the consummation of the
Merger or seeking divestiture of substantial assets of Rite Aid or Revco.
Private persons may also seek to take legal action under the antitrust laws
under certain circumstances.
Rite Aid has received requests for information from four state attorneys
general concerning the Merger. Rite Aid is cooperating with such attorneys
general.
Certain Litigation. On November 30, 1995, a purported class action
entitled Silvert v. Revco D.S., Inc., et al.('Silvert') was filed in the Court
of Chancery of the State of Delaware, New Castle County, on behalf of the class
of all Revco's stockholders. The Silvert complaint named Revco, all of Revco's
directors and Rite Aid as defendants. The Silvert complaint alleges that the
$27.50 per share of Revco Common Stock price offered by Rite Aid in the Offer is
insufficient and that the Offer is unfair to Revco's stockholders and represents
an attempt by the defendants to enrich themselves at the expense of the
plaintiff class. The plaintiff in the Silvert action asserts that defendants
violated their fiduciary duties to Revco's stockholders by allegedly failing
adequately to evaluate Revco as a potential acquisition candidate; to take
adequate steps to enhance Revco's value as an acquisition candidate; and to
create an active and open auction for Revco. The Silvert complaint further
alleges that the option granted to Rite Aid pursuant to the Stock Option
Agreement impedes the maximization of Revco stockholder value. The Silvert
complaint seeks, among other relief, a preliminary and permanent injunction
barring defendants from taking any steps to accomplish the proposed Merger at a
price that is not fair and equitable to the plaintiffs and enjoining any
improper device or transaction which will impede maximization of stockholder
value. The Silvert complaint also seeks unspecified damages for losses suffered
and to be suffered by the plaintiff class as a result of the acts alleged in the
Silvert complaint.
On December 26, 1995, a purported consumer class action entitled Ruth
Brady, et al. v. Rite Aid Corporation, Case No. 1:95 CV 2793 was filed in the
United States District Court for the Northern District of
55
<PAGE>
Ohio, Eastern Division. The complaint was filed on behalf of customers of Revco
stores against Rite Aid alleging that Rite Aid's proposed Merger with Revco
violates the federal antitrust laws because the alleged effect of the Merger may
be substantially to lessen competition or it may tend to create a monopoly. The
complaint seeks a preliminary and permanent injunction enjoining Rite Aid from
acquiring Revco, or rescission of the Merger if it is consummated; a preliminary
injunction enjoining Rite Aid from voting any Revco shares or exercising any
influence or control over Revco; and an award of the costs of the litigation,
including attorneys' fees. Rite Aid has filed an answer to the complaint denying
the substantive allegations therein. On December 26, 1995, the plaintiff filed a
Motion For Preliminary Injunction seeking such relief. A hearing relating to
such Motion is expected to be held in the near future.
Closing Condition. The respective obligations of Rite Aid and Revco to
consummate the Merger are subject to the condition that no court, arbitrator or
governmental body, agency or official will have issued any order, decree or
ruling which remains in force and there will not have been any statute, rule or
regulation, restraining, enjoining or prohibiting the consummation of the
Merger. See 'MERGER AGREEMENT--Conditions to the Merger.'
APPRAISAL RIGHTS FOR REVCO STOCKHOLDERS
If only shares of Rite Aid Common Stock are issued in the Merger, then
Revco stockholders will not have any appraisal rights. However, in the event (i)
the Alternative Consideration or any Additional Consideration contemplated by
the Merger Agreement is applicable or (ii) Rite Aid elects to pay any Cash
Adjustment Amount, dissenting holders of Revco Common Stock will be entitled to
have the 'fair value' (exclusive of any element of value arising from the
accomplishment or expectation of the Merger) of their shares of Revco Common
Stock at the Effective Time judicially determined and paid to them by complying
with the provisions of Section 262 of the DGCL. Rite Aid stockholders will not
have any appraisal rights in connection with the Merger.
RESALES OF RITE AID COMMON STOCK
All shares of Rite Aid Common Stock constituting the Share Issuance will be
freely transferable, except that shares received by any person who may be deemed
to be an 'affiliate' (as used in paragraphs (c) and (d) of Rule 145 under the
Securities Act, including, without limitation, directors and certain executive
officers) of Revco for purposes of such Rule 145 may not be resold except in
transactions permitted by such Rule 145 or as otherwise permitted under the
Securities Act.
Revco has agreed to deliver to Rite Aid a letter identifying, to the best
of Revco's knowledge, all persons who are, at the time of the Revco Special
Meeting, deemed to be 'affiliates' (as used in the preceding paragraph) of Revco
and to use its best efforts to cause each person so identified to deliver to
Rite Aid at least 30 days prior to the Closing Date an agreement, substantially
in the form previously approved by Rite Aid and Revco, providing that such
person will not sell, pledge, transfer or otherwise dispose of any Rite Aid
Common Stock received by such person in exchange for shares of Revco Common
Stock pursuant to the Merger, except pursuant to an effective registration
statement or in compliance with such Rule 145 or another exemption from the
registration requirements of the Securities Act.
NEW YORK STOCK EXCHANGE LISTING
Rite Aid has agreed to use its best efforts to list, prior to the Effective
Time, on the NYSE and the Pacific Stock Exchange (the 'PSE'), subject to
official notice of issuance, the shares of Rite Aid Common Stock to be issued in
the Merger.
56
<PAGE>
COMPARATIVE MARKET PRICES AND DIVIDENDS
The shares of Rite Aid Common Stock are listed and principally traded on
the NYSE and the PSE and quoted under the symbol RAD. The following table sets
forth, for the quarters indicated, the high and low sales prices and the
dividends paid per share of Rite Aid Common Stock on the NYSE as reported on the
Dow Jones News Service.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW DIVIDEND
- ------------------------------------------------------------------------- ----- ----- --------
<S> <C> <C> <C>
Fiscal Year Ended February 26, 1994:
Quarter Ended May 29................................................... $ 20 7/8 $ 17 5/8 15.00 cents
Quarter Ended August 28................................................ 19 1/8 16 1/4 15.00 cents
Quarter Ended November 27.............................................. 17 3/4 15 1/4 15.00 cents
Quarter Ended February 26.............................................. 19 3/8 15 1/4 15.00 cents
Fiscal Year Ended March 4, 1995:
Quarter Ended May 28................................................... $ 20 3/8 $ 18 1/8 15.00 cents
Quarter Ended August 27................................................ 21 1/2 18 7/8 15.00 cents
Quarter Ended November 26.............................................. 24 20 15.00 cents
Quarter Ended March 4.................................................. 26 3/8 21 5/8 17.00 cents
Fiscal Year Ending March 2, 1996:
Quarter Ended June 3................................................... $ 25 5/8 $ 22 17.00 cents
Quarter Ended September 2.............................................. 29 1/2 24 17.00 cents
Quarter Ended December 2............................................... 32 5/8 26 1/4 17.00 cents
Quarter Ending March 2 (through February 15, 1996)..................... 34 3/8 30 18.50 cents
</TABLE>
On November 29, 1995, the last full trading day prior to the public
announcement of the execution of the Merger Agreement, the highest reported
sales price of Rite Aid Common Stock on the NYSE Composite Tape was $28 7/8 per
share, the lowest reported sales price was $28 3/8 per share, and the reported
closing sales price was $28 5/8 per share. On the same date, the highest
reported sales price of Revco Common Stock on the NYSE Composite Tape was
$25 1/2 per share, the lowest reported sales price was $25 1/8 per share, and
the reported closing sales price was $25 1/2 per share. On February 15, 1996,
the last full trading day for which information was available prior to the
printing and mailing of this Proxy Statement, the last sales prices reported for
Revco Common Stock and Rite Aid Common Stock on the NYSE Composite Tape were
$28 1/8 per share and $32 3/8 per share, respectively.
The shares of Revco Common Stock are listed and principally traded on the
NYSE and quoted under the symbol RXR. The following table sets forth, for the
quarters indicated, the high and low sales prices per share on the NYSE as
reported by the Dow Jones News Service.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
- ------------------------------------------------------------------------------------ ----- -----
<S> <C> <C>
Fiscal Year Ended May 28, 1994:
Quarter Ended August 21........................................................... $ 12 5/8 $ 10
Quarter Ended November 11......................................................... 16 1/2 11 1/8
Quarter Ended February 5.......................................................... 17 1/8 13 5/8
Quarter Ended May 28.............................................................. 18 5/8 13 7/8
Fiscal Year Ended June 3, 1995:
Quarter Ended August 20........................................................... $ 19 $ 14 1/2
Quarter Ended November 12......................................................... 23 1/4 16 5/8
Quarter Ended February 4.......................................................... 24 1/2 20
Quarter Ended June 3.............................................................. 24 17 1/2
Fiscal Year Ending June 1, 1996:
Quarter Ended August 26........................................................... $ 25 3/8 $ 19 1/4
Quarter Ended November 18......................................................... 25 7/8 19 5/8
Quarter Ended February 10......................................................... 29 24 5/8
Quarter Ending June 1 (through February 15, 1996)................................. 28 3/4 27 7/8
</TABLE>
Revco has not declared any cash dividends on the shares of Revco Common
Stock since fiscal year 1986.
STOCKHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR THE SHARES
OF RITE AID COMMON STOCK AND REVCO COMMON STOCK.
57
<PAGE>
MERGER AGREEMENT
The following summary of the Merger Agreement and the Merger contained in
this Proxy Statement is not intended to be a complete description of the terms
and conditions thereof and is qualified in its entirety by reference to the full
text thereof, which is incorporated herein by reference and a copy of which is
attached hereto as Annex A. Capitalized terms not otherwise defined herein or in
the following summary shall have the meanings set forth in the Merger Agreement.
The Offer. Pursuant to the Merger Agreement, on December 4, 1995, Sub
commenced the Offer. The Offer has been extended and is presently scheduled to
expire on February 23, 1996. Rite Aid reserves the right to further extend the
Offer.
The Merger. The Merger Agreement provides that, subject to the terms and
conditions thereof, and in accordance with the DGCL, at the Effective Time,
Revco and Sub shall consummate the Merger pursuant to which (i) Sub shall be
merged with and into Revco and the separate corporate existence of Sub shall
thereupon cease, and (ii) Revco shall be the Surviving Corporation and shall
continue to be governed by the laws of the State of Delaware. Pursuant to the
Merger, (x) the Certificate of Incorporation of Revco, as in effect immediately
prior to the Effective Time, shall be the Certificate of Incorporation of the
Surviving Corporation until thereafter amended as provided by law and such
Certificate of Incorporation, and (y) the By-laws of Revco, as in effect
immediately prior to the Effective Time, shall be the By-laws of the Surviving
Corporation until thereafter amended as provided by law, the Certificate of
Incorporation of the Surviving Corporation and such By-laws. The Merger shall
have the effects set forth in the DGCL.
Conversion of Revco Common Stock. The Merger Agreement provides that each
share of Common Stock, par value $.01 per share, of Sub issued and outstanding
immediately prior to the Effective Time without any other action by Rite Aid,
Sub or Revco, shall, at the Effective Time, be converted into and become one
fully paid and nonassessable share of common stock of the Surviving Corporation.
Each share of Revco Common Stock issued and outstanding immediately prior
to the Effective Time (other than Revco Common Stock owned by Revco as treasury
stock and any Revco Common Stock owned by Rite Aid, Sub or any other direct or
indirect wholly owned subsidiary of Rite Aid and other than Dissenting Revco
Shares, if any) shall, at the Effective Time, by virtue of the Merger and
without any action on the part of the holder thereof, be converted into either
(i) the right to receive a number of duly authorized, validly issued, fully paid
and nonassessable shares of Rite Aid Common Stock determined as set forth below
(the 'Exchange Ratio'); provided that Rite Aid shall not issue more than 1.125
or fewer than .91666 shares of Rite Aid Common Stock per share of Revco Common
Stock, or (ii) if the alternative consideration described below is applicable,
then the right to receive the Alternative Consideration, plus, in each of clause
(i) and (ii) of this sentence, any Additional Consideration.
For purposes hereof, 'Average Rite Aid Share Price' shall mean the average
closing price per share of Rite Aid Common Stock on the NYSE as reported on the
NYSE Composite Tape for fifteen NYSE trading days selected by Rite Aid and Revco
by lot from among the forty NYSE trading days ending on the fifth trading day
immediately preceding the Revco Special Meeting. 'Transaction Price' shall mean
$27.50 per share of Revco Common Stock. The number of shares of Rite Aid Common
Stock into which each share of Revco Common Stock shall be converted in the
Merger shall be determined as follows:
In the event the Average Rite Aid Share Price equals the Transaction
Price, each Share shall be converted into one share of Rite Aid Common
Stock.
In the event that the Average Rite Aid Share Price is greater than the
Transaction Price, each share of Revco Common Stock shall be converted into
a number of shares of Rite Aid Common Stock (rounded to the nearest one
one-hundred thousandth) determined by the following formula:
<TABLE>
<S> <C> <C>
Transaction Price plus .5 X (Average
Number of shares of Rite Aid Common Stock = Rite Aid Share Price minus Transaction Price)
---------------------------------------------
Average Rite Aid Share Price
</TABLE>
58
<PAGE>
In the event that the Average Rite Aid Share Price is less than the
Transaction Price, each share of Revco Common Stock shall be converted, at
the option of Rite Aid, into either:
(I) a number of shares of Rite Aid Common Stock (rounded to the
nearest one one-hundred thousandth) determined by the following
formula:
<TABLE>
<S> <C> <C>
Transaction Price minus .5 x (Transaction
Number of shares of Rite Aid Common Stock = Price minus Average Rite Aid Share Price)
-----------------------------------------
Average Rite Aid Share Price
</TABLE>
or (II) one share of Rite Aid Common Stock plus the Cash Adjustment
Amount, without any interest thereon, where the Cash Adjustment
Amount (as defined in the Merger Agreement) is determined by the
following formula:
<TABLE>
<S> <C> <C>
.5 x (Transaction Price minus Average
Cash Adjustment Amount = Rite Aid Share Price);
</TABLE>
provided however, in no event will the Cash Adjustment Amount be greater than
$2.75 per share of Revco Common Stock.
Set forth below is a table setting forth several numerical examples of the
varying amounts of consideration that stockholders of Revco would receive in the
Merger based on assumed Average Rite Aid Share Prices.
EXAMPLES OF CALCULATION OF MERGER CONSIDERATION
<TABLE>
<CAPTION>
AMOUNT OF MERGER CONSIDERATION
ASSUMED PAID IF CASH ADJUSTMENT AMOUNT APPLIES
AVERAGE --------------------------------------------------------------------------------
RITE AID EXCHANGE REVISED EXCHANGE CASH ADJUSTMENT
SHARE PRICE RATIO(1) RATIO(1) AMOUNT
----------- -------- -------------------------------------- --------------------------------------
<S> <C> <C> <C> <C>
$35 .91666 N/A N/A
$33 .91666 N/A N/A
$29 .97414 N/A N/A
$27.50 1 N/A N/A
$25 1.050 1 $ 1.25
$22 1.125 1 $ 2.75
$20 1.125 1 $ 2.75
</TABLE>
- ------------------
(1) Represents the number of shares of Rite Aid Common Stock to be issued for
each share of Revco Common Stock.
All shares of Revco Common Stock that are owned by Revco as treasury stock
and any shares of Revco Common Stock owned by Rite Aid, Sub or any other direct
or indirect wholly owned Subsidiary of Rite Aid shall, at the Effective Time, be
cancelled and retired and shall cease to exist and no Rite Aid Common Stock or
cash, if the Alternative Consideration is applicable, shall be delivered in
exchange therefor.
The Merger Agreement provides that, on and after the Effective Time,
holders of certificates which immediately prior to the Effective Time
represented outstanding shares of Revco Common Stock (the 'Certificates') shall
cease to have any rights as stockholders of Revco, except the right to receive
the consideration set forth therein (other than the Merger Consideration) for
each share of Revco Common Stock held by them or, if applicable, payments due to
holders of Dissenting Revco Shares.
The Merger Agreement provides that in the event that the stockholders of
Rite Aid do not approve the issuance of Rite Aid Common Stock pursuant to the
Merger at the Rite Aid Special Meeting, but all conditions to the Merger are
otherwise satisfied or waived (if permissible), Revco, Rite Aid and Sub shall
nonetheless consummate the Merger and each share of Revco Common Stock issued
and outstanding immediately prior to the Effective Time (other than treasury
shares of Revco Common Stock and shares of Revco Common Stock owned by Rite Aid
and its Subsidiaries) will, at the Effective Time, by virtue of the Merger and
without any action on the part of the holder thereof, be converted into the
right to receive the following Alternative Consideration in a combination of
shares of Rite Aid Common Stock and cash determined as follows:
The number of shares of Rite Aid Common Stock into which each share of
Revco Common Stock shall be converted in the Merger (the 'Adjusted Exchange
Ratio') shall equal the Exchange Ratio determined pursuant to the
applicable formula set forth above (assuming no Cash Adjustment Amount is
paid) multiplied by a fraction (the 'Adjustment Fraction'), the numerator
of which is the number of shares of
59
<PAGE>
Rite Aid Common Stock equal to 19.9% of the then outstanding shares of Rite
Aid Common Stock and the denominator of which is (a) the Exchange Ratio
multiplied by (b) the aggregate number of outstanding shares of Revco
Common Stock (other than treasury shares of Revco Common Stock and shares
of Revco Common Stock owned by Rite Aid and its subsidiaries); and
The amount of cash (the 'Adjusted Alternative Cash Consideration')
into which each share of Revco Common Stock shall be converted in the
Merger shall equal the Transaction Price multiplied by (1 minus the
Adjustment Fraction).
The Merger Agreement provides that in the event the Merger is not
consummated prior to April 29, 1996 and Revco shall not have materially breached
the Merger Agreement (other than by acts caused or permitted by Rite Aid), then
the stockholders of Revco will be entitled to receive interest on the amount of
the Merger Consideration that they receive, from April 29, 1996 until the
earlier of the Effective Time or June 30, 1996, calculated at an annual rate
equal to the prime rate of interest (as announced from time to time by Morgan
Guaranty Trust Company of New York). For purposes of calculating the Merger
Consideration, the Average Rite Aid Share Price, if not otherwise ascertainable
in accordance with the terms of the Merger Agreement, shall be the average price
of Rite Aid Common Stock based on the 15 highest closing prices of Rite Aid
Common Stock since the consummation of the Offer until the earlier of June 30,
1996 or the Effective Time.
In the event Rite Aid and/or Sub, in violation of their obligations under
the Merger Agreement, fails or refuses to consummate the Merger on or prior to
June 30, 1996 and Revco shall not have materially breached the Merger Agreement
(other than by acts caused or permitted by Rite Aid), then, in addition to any
rights or remedies that Revco and its stockholders otherwise have in law or at
equity as a result thereof, the stockholders of Revco will be entitled to
receive interest from June 30, 1996 on the amount of the Merger Consideration
not paid until such Merger Consideration is paid, calculated at the annual rate
of the higher of (i) the prime rate of interest (as announced from time to time
by Morgan Guaranty Trust Company of New York) plus 300 basis points or (ii) the
amount otherwise permitted by law. For purposes of calculating the Merger
Consideration, the Average Rite Aid Share Price, if not otherwise ascertainable
in accordance with the terms of the Merger Agreement, shall be the average price
of Rite Aid Common Stock based on the 15 highest closing prices of Rite Aid
Common Stock since the consummation of the Offer until such Merger Consideration
is paid.
Rite Aid and Sub have covenanted and agreed to consummate the Merger
pursuant to the terms of the Merger Agreement not later than June 30, 1996.
In lieu of any fractional share of Rite Aid Common Stock, Rite Aid shall
pay to each former stockholder of Revco who otherwise would be entitled to
receive a fractional share of Rite Aid Common Stock an amount in cash determined
by multiplying (i) the Average Rite Aid Share Price on the date on which the
Effective Time occurs by (ii) the fractional interest in a share of Rite Aid
Common Stock to which such holder would otherwise be entitled.
Each share of Rite Aid Common Stock issued to holders of Revco Common Stock
in the Merger will be issued together with one associated Right in accordance
with the Rite Aid Rights Agreement.
THE MARKET VALUE OF THE RITE AID COMMON STOCK DURING THE PRICING PERIOD AND
AFTER THE EFFECTIVE TIME WILL, AMONG OTHER THINGS, DEPEND UPON, AND IS EXPECTED
TO FLUCTUATE WITH, THE PERFORMANCE OF RITE AID, CONDITIONS (ECONOMIC OR
OTHERWISE) AFFECTING THE RETAIL DRUGSTORE INDUSTRY, AND MARKET CONDITIONS AND
OTHER FACTORS THAT GENERALLY INFLUENCE PRICES OF SECURITIES.
Treatment of Stock Options. The Merger Agreement provides that, effective
as of the Effective Time, each Revco Stock Option, will cease to represent a
right to acquire shares of Revco Common Stock and will be converted
automatically into an option to purchase shares of Rite Aid Common Stock in an
amount and at an exercise price determined as provided below (and otherwise
subject to the terms of the Option Plans, and the agreements evidencing grants
thereunder). The number of shares of Rite Aid Common Stock subject to, and the
option price and terms and conditions of, the new option shall be determined in
a manner that preserves both (i) the aggregate gain (or loss) on Revco Stock
Option immediately prior to the Effective Time and (ii) the ratio of the
exercise price per share subject to Revco Stock Option to the fair market value
(determined immediately prior to the Effective Time) per share subject to such
option, provided that any fractional shares of Rite Aid Common Stock resulting
from such determination will be rounded down to the nearest share. The Merger
Agreement also provides that, effective as of the Effective Time, the Surviving
Corporation will assume each Revco Stock Option agreement, each as amended, as
provided therein. The adjustment provided herein with
60
<PAGE>
respect to any Revco Stock Options that are 'incentive stock options' (as
defined in Section 422 of the Code) shall be and is intended to be effected in a
manner that is consistent with Section 424(a) of the Code. The duration, vesting
and other terms of the new options will be the same as Revco Stock Options that
they replace, except that all references to Revco shall be deemed to be
references to Rite Aid. In the event that a holder of a Revco Stock Option is
terminated without Cause (as defined in the Merger Agreement) within 12 months
of the Effective Time, then such holder's new option will become 100%
exercisable as of such date of termination.
The Merger Agreement further provides that, notwithstanding the immediately
preceding paragraph, outstanding vested options under the 1992 Long Term
Incentive Plan ('LTIP') held by Covered Executives (as defined in the Merger
Agreement), including options that become vested in connection with a 'Change in
Control' under the terms of existing award agreements under the LTIP, will,
effective as of the Effective Time become exercisable under a cashless exercise
procedure made available by Revco (subject to applicable law and any
administrative procedures and policies deemed appropriate by Revco). Individuals
subject to Section 16 of the Exchange Act will be provided with a cash
compensation arrangement providing such individuals with the opportunity to
receive a cash payment approximating the benefits that would be deprived by
reason of Section 16 of the Exchange Act.
The Merger Agreement provides that, effective as of the Effective Time, the
Option Plans will terminate and the provisions in any other plan, program,
agreement or arrangement, providing for the issuance or grant of any other
interest in respect of the capital stock of Revco or any of its subsidiaries
will be deleted. Furthermore, Revco will take all actions necessary to ensure
that following the Effective Time, no holder of Revco Stock Options or any
participant in the Option Plans or any other plans, programs, agreements or
arrangements will have any right thereunder to acquire any equity securities of
Revco, the Surviving Corporation or any subsidiary of either of the foregoing.
Directors and Officers. Pursuant to the Merger Agreement, promptly upon
the acceptance for payment of any shares of Revco Common Stock by Rite Aid or
any of its Subsidiaries pursuant to the Offer, Rite Aid shall be entitled to
designate such number of directors, rounded up to the next whole number, on
Revco Board as is equal to the product of the total number of directors on such
Board (giving effect to the directors designated by Rite Aid pursuant to this
sentence) multiplied by the percentage that the aggregate number of shares of
Revco Common Stock beneficially owned by Sub, Rite Aid and any of their
affiliates bears to the total number of shares of Revco Common Stock then
outstanding. Revco shall, upon request of Rite Aid, use its best efforts
promptly either to increase the size of its Board of Directors or, at Revco's
election, secure the resignations of such number of its incumbent directors as
is necessary to enable Rite Aid's designees to be so elected to Revco's Board,
and shall cause Rite Aid's designees to be so elected. At such time, Revco shall
also cause persons designated by Rite Aid to constitute the same percentage
(rounded up to the next whole number) as is on the Revco Board of (i) each
committee of the Revco Board, (ii) each board of directors (or similar body) of
each Subsidiary of Revco and (iii) each committee (or similar body) of each such
board, in each case only to the extent permitted by applicable law or the rules
of any stock exchange on which Revco Common Stock is listed. Notwithstanding the
foregoing, until the Effective Time, each of Rite Aid, Sub and Revco shall use
its best efforts to retain as a member of Revco's Board at least two directors
who are directors of Revco on the date of the Merger Agreement (the 'Revco
Continuing Directors'); provided, that subsequent to the purchase of and payment
for shares of Revco Common Stock pursuant to the Offer, Rite Aid shall always
have its designees represent at least a majority of the entire Board of
Directors. In the event of a vacancy on the Revco Board resulting from the
resignation or death of any Revco Continuing Director, such vacancy shall be
filled by the remaining Revco Continuing Directors, or if there are no remaining
Revco Continuing Directors, by the designees of the Stockholder. Revco's
obligations pursuant to this paragraph are subject to Section 14(f) of the
Exchange Act and Rule 14f-1 promulgated thereunder. Promptly following the
expiration of the Offer, Rite Aid intends to designate certain of its designees
(the 'Rite Aid Designees') as directors to the Revco Board and certain incumbent
members of the Revco Board are expected to resign; as a result, the Rite Aid
Designees will represent a majority of the directors on the Revco Board
following consummation of the Offer.
Interim Operations. In the Merger Agreement, Revco has covenanted and
agreed that: (i) except as expressly provided in the Merger Agreement, (ii)
during the period prior to the consummation of the Offer, except with the prior
written consent of Rite Aid, (iii) during the period following the consummation
of the Offer and prior to the Effective Time, except with the authorization of
the Revco Board, including the affirmative vote of a majority of the Revco
Continuing Directors, and (iv) during the period following consummation of the
Offer
61
<PAGE>
and prior to the Effective Time, except for prepayments by Rite Aid of
indebtedness of Revco and the advancement of funds by Rite Aid to Revco on the
terms and conditions, and at the interest rate, and for the purposes for which
borrowing may be made, under Revco's existing credit facility: (a) the business
of Revco and its Subsidiaries shall be conducted only in the ordinary course of
business consistent with past practice and, to the extent consistent therewith,
each of Revco and its Subsidiaries will use its best efforts to preserve its
business organization intact and maintain its existing relations with customers,
suppliers, employees, creditors and business partners; (b) Revco will not,
directly or indirectly, split, combine or reclassify the outstanding shares of
Revco Common Stock, or any outstanding capital stock of any of the Subsidiaries
of Revco; (c) neither Revco nor any of its Subsidiaries will: (I) amend its
certificate of incorporation or by-laws or similar organizational documents;
(II) declare, set aside or pay any dividend or other distribution payable in
cash, stock or property with respect to its capital stock other than dividends
paid by Revco's Subsidiaries to Revco or its Subsidiaries; (III) issue, sell,
transfer, pledge, dispose of or encumber any additional shares of, or securities
convertible into or exchangeable for, or options, warrants, calls, commitments
or rights of any kind to acquire, any shares of capital stock of any class of
Revco or its Subsidiaries, other than issuances pursuant to exercise of
stock-based awards or options outstanding on the date thereof; (IV) transfer,
lease, license, sell, mortgage, pledge, dispose of, or encumber any material
assets other than (x) in the ordinary course of business consistent with past
practice or (y) pursuant to existing agreements previously disclosed by Revco in
writing to Rite Aid and Sub; or (V) redeem, purchase or otherwise acquire
directly or indirectly any of its capital stock; (d) neither Revco nor any of
its Subsidiaries shall: (I) except as otherwise provided in the Merger
Agreement, and except for normal, regularly scheduled increases for nonofficer
employees consistent with past practice or pursuant to the terms of existing
collective bargaining agreements, grant any increase in the compensation payable
or to become payable by Revco or any of its Subsidiaries to any officer or
employee (including through any new award made under, or the exercise of any
discretion under, any Benefit Plan); (II) adopt any new, or amend or otherwise
increase, or accelerate the payment or vesting of the amounts payable or to
become payable under any existing, bonus, incentive compensation, deferred
compensation, severance, profit sharing, stock option, stock purchase,
insurance, pension, retirement or other employee benefit plan agreement or
arrangement; (III) enter into any, or amend any existing,employment or severance
agreement with or, grant any severance or termination pay to any officer,
director, employee or consultant of Revco or any of its Subsidiaries; or (IV)
make any additional contributions to any grantor trust created by Revco to
provide funding for non-tax-qualified employee benefits or compensation; or (V)
provide any severance program to any Subsidiary which does not have a severance
program as of the date of the Merger Agreement; (e) neither Revco nor any of its
Subsidiaries shall modify, amend or terminate any of the Revco Agreements or
waive, release or assign any material rights or claims, except in the ordinary
course of business consistent with past practice; (f) neither Revco nor any of
its Subsidiaries will permit any material insurance policy naming it as a
beneficiary or a loss payable payee to be cancelled or terminated without notice
to Rite Aid, except in the ordinary course of business consistent with past
practice; (g) except as previously disclosed by Revco in writing to Rite Aid and
Sub, neither Revco nor any of its Subsidiaries will: (I) incur or assume any
debt except for borrowings under existing credit facilities in the ordinary
course consistent with past practice; (II) assume, guarantee, endorse or
otherwise become liable or responsible (whether directly, contingently or
otherwise) for the obligations of any other person, except in the ordinary
course of business consistent with past practice; (III) make any loans, advances
or capital contributions to, or investments in, any other person (other than to
wholly owned Subsidiaries of Revco or customary loans or advances to employees
in accordance with past practice); or (IV) enter into any material commitment
(including, but not limited to, any leases, capital expenditure or purchase of
assets) other than purchases of inventory in the ordinary course of business
consistent with past practice; (h) neither Revco nor any of its Subsidiaries
shall change any of the accounting principles used by it unless required by
GAAP; (i) neither Revco nor any of its Subsidiaries shall pay, discharge or
satisfy any claims, liabilities or obligations (absolute, accrued, asserted or
unasserted, contingent or otherwise), other than the payment, discharge or
satisfaction of any such claims, liabilities or obligations, (I) reflected or
reserved against in the consolidated financial statements (or the notes thereto)
of Revco and its consolidated Subsidiaries, (II) incurred in the ordinary course
of business consistent with past practice or (III) which are legally required to
be paid, discharged or satisfied; (j) neither Revco nor any of its Subsidiaries
will adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other material reorganization
of Revco or any of its Subsidiaries or any agreement relating to a Takeover
Proposal (as defined below) (other than the Merger); (k) neither Revco nor any
of its Subsidiaries will take, or agree to commit to take, any action that would
make any representation or warranty of Revco contained
62
<PAGE>
in the Merger Agreement inaccurate in any respect at, or as of any time prior
to, the Effective Time; (l) neither Revco nor any of its Subsidiaries will
engage in any transaction with, or enter into any agreement, arrangement, or
understanding with, directly or indirectly, any of Revco's affiliates,
including, without limitation, any transactions, agreements, arrangements or
understandings with any affiliate or other Person covered under Item 404 of
Regulation S-K under the Securities Act that would be required to be disclosed
under such Item 404, other than pursuant to such agreements, arrangements, or
understandings existing on the date of the Merger Agreement; (m) close, shut
down, or otherwise eliminate any of Revco's stores other than in the ordinary
course of business consistent with past practice; (n) change the name of or
signage at any of Revco's stores; (o) close, shut down, or otherwise eliminate
any of Revco's distribution centers; (p) move the location, close, shut down or
otherwise eliminate Revco's headquarters, or effect a general staff reduction at
such headquarters; (q) change or modify in any material respect Revco's existing
advertising program and policies; (r) except as previously disclosed by Revco in
writing to Rite Aid and Sub, enter into any new lease (other than renewals of
existing leases after consultation with Rite Aid) or purchase or acquire or
enter into any agreement to purchase or acquire any real estate; (s) neither
Revco nor any of its Subsidiaries will incur any liabilities or obligations of
any nature, whether or not accrued, contingent or otherwise, that have, or would
be reasonably likely to have, a material adverse effect on Revco and its
Subsidiaries; and (t) neither Revco nor any of its Subsidiaries will enter into
an agreement, contract, commitment or arrangement to do any of the foregoing, or
to authorize, recommend, propose or announce an intention to do any of the
foregoing.
Treatment of Certain Indebtedness. The Merger Agreement provides that
Revco will cooperate with Rite Aid, if Rite Aid so requests, to effect a
defeasance of, and/or a repurchase by means of a debt tender offer (together
with a solicitation of consents to eliminate the restrictive covenants) of the
Debt Offers, provided that any funds and all related out-of-pocket transaction
expenses necessary to effect any such defeasance or repurchase shall be provided
and borne by Rite Aid, without any right of reimbursement. The Merger Agreement
also provides that Revco and Rite Aid will cooperate to effect such defeasance
and/or repurchase in a manner which takes into account all relevant tax,
accounting, corporate, structural, contractual and similar issues. Rite Aid
presently expects that it will commence the Debt Offers after the consummation
of the Offer.
No Solicitation. Pursuant to the Merger Agreement, Revco (and its
Subsidiaries, and affiliates over which it exercises control) will not, and
Revco (and its Subsidiaries, and affiliates over which it exercises control)
will use their best efforts to ensure that their respective officers, directors,
employees, investment bankers, attorneys, accountants and other agents do not,
directly or indirectly: (i) initiate, solicit or encourage, or take any action
to facilitate the making of, any offer or proposal which constitutes or is
reasonably likely to lead to any Takeover Proposal (as defined below) of Revco
or any Subsidiary or an inquiry with respect thereto, or, (ii) in the event of
an unsolicited Takeover Proposal for Revco or any Subsidiary or affiliate of
Revco, engage in negotiations or discussions with, or provide any information or
data to, any corporation, partnership, person or other entity or group (other
than Rite Aid, any of its affiliates or representatives) (each, a 'Person')
relating to any Takeover Proposal, except in the case of clause (ii) above to
the extent that (x) the Takeover Proposal is a bona fide written proposal
submitted to Revco's Board of Directors and (y) the Revco Board determines,
after having received the oral or written opinion of outside legal counsel to
Revco, that the failure to engage in such negotiations or discussions or provide
such information would result in a breach of the Board of Directors' fiduciary
duties under applicable law. Revco has agreed to notify Rite Aid and Sub orally
and in writing of any such offers, proposals, inquiries or Takeover Proposals
(including, without limitation, the material terms and conditions thereof and
the identity of the Person making it), within 24 hours of the receipt thereof,
and shall thereafter inform Rite Aid on a reasonable basis of the status and
content of any discussions or negotiations with such a third party, including
any material changes to the terms and conditions thereof. The Merger Agreement
also provides that Revco shall, and shall cause its Subsidiaries and affiliates
over which it exercises control, and will use best efforts to ensure their
respective officers, directors, employees, investment bankers, attorneys,
accountants and other agents to immediately cease and cause to be terminated all
discussions and negotiations that have taken place prior to the date of the
Merger Agreement, if any, with any parties conducted theretofore with respect to
any Takeover Proposal relating to Revco. The Merger Agreement provides that
nothing contained in this paragraph will prohibit Revco or the Revco Board from
taking and disclosing to its stockholders a position with respect to a tender
offer by a third party pursuant to Rules 14d-9 and 14e-2(a) promulgated under
the Exchange Act or making such disclosure as may be required by applicable law.
63
<PAGE>
As used in the Merger Agreement and herein, 'Takeover Proposal' when used
in connection with any Person shall mean any tender or exchange offer involving
the capital stock of such Person, any proposal for a merger, consolidation or
other business combination involving such Person or any Subsidiary of such
Person, any proposal or offer to acquire in any manner a substantial equity
interest in, or a substantial portion of the business or assets of, such Person
or any Subsidiary of such Person, any proposal or offer with respect to any
recapitalization or restructuring with respect to such Person or any Subsidiary
of such Person or any proposal or offer with respect to any other transaction
similar to any of the foregoing with respect to such Person or any Subsidiary of
such Person other than pursuant to the transactions to be effected pursuant to
the Merger Agreement.
Directors' and Officers' Insurance and Indemnification. In the Merger
Agreement, Rite Aid agreed that at all times after the Effective Time, it will
cause the Surviving Corporation and its Subsidiaries to indemnify, each person
who is now, or has been at any time prior to the date of the Merger Agreement,
an employee, agent, director or officer of Revco or of any of Revco's
Subsidiaries, successors and assigns (individually an 'Indemnified Party' and
collectively the 'Indemnified Parties'), to the fullest extent permitted by law,
with respect to any claim, liability, loss, damage, judgment, fine, penalty,
amount paid in settlement or compromise, cost or expense, including reasonable
fees and expenses of legal counsel, (whenever asserted or claimed) ('Indemnified
Liability') based in whole or in part on, or arising in whole or in part out of,
any matter existing or occurring at or prior to the Effective Time whether
commenced, asserted or claimed before or after the Effective Time, including
liability arising under the Securities Act, the Exchange Act or state law. The
Merger Agreement provides that Rite Aid will, and will cause the Surviving
Corporation to, maintain in effect for not less than four years after the
Effective Time the current policies of directors' and officers' liability
insurance maintained by Revco and its Subsidiaries on the date of the Merger
Agreement (provided that Rite Aid may substitute therefor policies having at
least the same coverage and containing terms and conditions which are no less
advantageous to the persons currently covered by such policies as insured) with
respect to matters existing or occurring at or prior to the Effective Time;
provided, however, that if the aggregate annual premiums for such insurance
during such period shall exceed 200% of the per annum rate of the aggregate
premium currently paid by Revco and its Subsidiaries for such insurance on the
date of the Merger Agreement, then Rite Aid will cause the Surviving Corporation
to, and the Surviving Corporation will, provide the maximum coverage that will
then be available at an annual premium equal to 200% of such rate. The Merger
Agreement provides that Rite Aid shall pay all expenses (including fees and
expenses of counsel) that may be incurred by any Indemnified Party in
successfully enforcing the indemnity or other obligations under this paragraph.
The rights under this paragraph are in addition to rights that an Indemnified
Party may have under the Certificate of Incorporation, By-laws, other similar
organizational documents of Revco or any of its Subsidiaries or the DGCL. The
Merger Agreement also provides that the rights under this paragraph shall
survive consummation of the Merger and are expressly intended to benefit each
Indemnified Party. Rite Aid will cause the Surviving Corporation and any of its
Subsidiaries (or their successors) to keep in effect the provisions of its
Certificate of Incorporation or By-laws or similar organizational documents
providing for indemnification to the fullest extent provided by law.
Employee Benefits and Employee Matters. Pursuant to the Merger Agreement,
Rite Aid has agreed that, effective as of the Effective Time, Revco will provide
to employees of Revco certain payments and benefits, as described below.
As soon as practicable following the earlier of (A) the Effective Time and
(B) the end of Revco's 1996 fiscal year, Revco will pay, pursuant to the terms
of Revco's Economic Value Added Incentive Plan (the 'EVA Plan') as modified by
the terms of the Merger Agreement, bonuses for fiscal year 1996, calculated
based on Revco's financial results as of February 10, 1996, and annualized to
equal a bonus for a 12-month period.
With respect to the Covered Executives, effective as soon as practicable
following the Effective Time (or if later, the date of termination of employment
of the Covered Executive), Revco will pay to each Covered Executive severance
payments (the 'Severance Payments'), on a bi-weekly basis or at such other
intervals as are consistent with Rite Aid's executive payroll practices, based
on one of the two formulae set forth below, pursuant to elections made by each
Covered Executive prior to the Effective Time:
(A) Severance Payments equal to, on an annualized basis, 'Base Pay'
(as defined below), continuing for a period of three years with respect to
Covered Executives who are listed as Group A Executives on a schedule to
the Merger Agreement and for a period of 18 months with respect to Covered
Executives listed
64
<PAGE>
as Group B Executives on a schedule to the Merger Agreement. For purposes
of this provision, 'Base Pay' means the highest base pay paid to the
Covered Executive during any one of the 1994, 1995 or 1996 fiscal years,
provided that the base pay for the 1996 fiscal year will be calculated on
an annualized basis; or
(B) Severance Payments equal to, on an annualized basis, 'Base Plus
Bonus Pay' (as defined below), continuing for a period of two years with
respect to Group A Executives, and for a period of one year with respect to
Group B Executives. For purposes of this provision 'Base Plus Bonus Pay'
means Base Pay plus the amount that would have been paid to the executive
under the EVA Plan for fiscal year 1995 as the targeted bonus (the '1995
Target Bonus').
In lieu of the Severance Payments described in clauses (A) and (B) above,
Messrs. Hoven and James P. Mastrian will receive Severance Payments, continuing
for three years, equal to, on an annualized basis, Base Plus Bonus Pay.
The period during which a Covered Executive continues to receive Severance
Payments is hereinafter referred to as the 'Severance Period' for such Covered
Executive.
During the Severance Period, each Covered Executive will continue to
receive, at Revco's expense, continuation of benefits described in such Covered
Executive's employment agreement with Revco on terms at least as favorable to
the Covered Executive as is currently in effect, which benefits may be provided
under benefit plans and programs maintained by Rite Aid; provided, however, that
to the extent any such Covered Executive receives comparable benefits from, and
at the expense of, a subsequent employer, such benefits from Revco will cease.
Notwithstanding anything in the Merger Agreement to the contrary, the
Severance Payments described in clauses (A) or (B) above will be paid to a
Covered Executive only if such Covered Executive is actively employed by Revco
immediately prior to the Effective Time.
In the event that a Covered Executive that continues employment with Revco
following the Effective Time is terminated prior to the expiration of the
Severance Period that would have applied had such Covered Executive been
terminated effective as of the Effective Time, then such Covered Executive will
be entitled to receive the Severance Payments described above.
Each employee, other than any Covered Executive, of Revco who is covered by
Revco's severance pay plan as in effect on November 1, 1995 (each, a
'Severance-Eligible Employee') and who is employed by Revco immediately prior to
the Effective Time and terminated for other than 'Cause,' as defined below,
within 12 months following the Effective Time, will be entitled to receive
bi-weekly severance payments, consistent with Rite Aid's payroll practices, for
a six-month period commencing on such Severance-Eligible Employee's date of
termination of employment, equal to, on an annualized basis, such
Severance-Eligible Employee's Base Pay; provided, however, that such payments
will be reduced (but not below zero), by the amount of compensation such
Severance-Eligible Employee receives from a subsequent employer to the extent
that such Severance-Eligible Employee is employed during such six-month period.
For purposes of the Merger Agreement, 'Cause' will mean the conviction of
an employee or executive (as the case may be) for the commission of a felony,
including the entry of a guilty or nolo contendere plea, any willful, grossly
negligent or fraudulent action or inaction by an employee or executive, as the
case may be, or the employee's or executive's willful and continued failure to
substantially perform an employee's or executive's assigned duties.
Each Revco employee who is (A) covered by Revco's Supplemental Executive
Retirement Plan ('SERP') and (B) actively employed by Revco, in either case,
immediately prior to the Effective Time (each, a 'SERP Executive') will be
eligible to receive benefits under the SERP based on the terms of the SERP, as
modified by the terms of the Merger Agreement. For each SERP Executive (i) the
amount of service taken into account for purposes of calculating benefits and
vesting under the SERP will be equal to the SERP Executive's service with Revco
prior to the Effective Time plus the Covered Executive's Severance Period, if
any, and (ii) compensation for each SERP Executive for purposes of the SERP will
include one-half of the 1995 Target Bonus for such SERP Executive.
With respect to the Group A Executives, Revco will provide such executives
with a cash gross-up payment to make such executives whole for the excise taxes
imposed on all benefits and other amounts paid or payable to such executive on
account of the transactions contemplated by the Merger Agreement as a result of
the
65
<PAGE>
application of Sections 280G and 4999 of the Code. With respect to all other
employees of Revco who are entitled to benefits and other amounts paid or
payable to such executive on account of the transactions contemplated by the
Merger Agreement as a result of the application of Sections 280G and 4999 of the
Code, Revco shall not be obligated to pay or provide to any such employee any
payments or benefits to the extent that such payments or benefits would
constitute a 'parachute payment' within the meaning of Section 280G(b)(2)(A) of
the Code.
Revco will amend Revco's Employee Stock Purchase Plan to provide that the
option period that is in effect as of November 29, 1995 will cease as soon as
practicable thereafter.
Revco will provide outplacement services from a recognized outplacement
provider selected by Rite Aid to all employees of Revco as of the Effective Time
who were based in Twinsburg, Ohio as of the Effective Time, and are terminated
without Cause within one year of the Effective Time.
In addition, pursuant to the Merger Agreement, employees of Revco who
continue to be employed by Revco as of the Effective Time will receive employee
benefits comparable to those benefits provided to similarly situated employees
of Rite Aid. In addition, with respect to medical benefits provided to
continuing employees as of the Effective Time, waiting periods and pre-existing
condition requirements under the plans covering the continuing employees will be
waived, and these employees will be given credit for any co-payments and
deductibles actually paid by such employees under Revco's medical plans during
the calendar year in which the Closing occurs. Finally, service with Revco will
be recognized for purposes of eligibility under Rite Aid's welfare plans as well
as for purposes of Rite Aid's programs or policies for vacation pay and sick
pay.
Confidentiality Agreement. Pursuant to the Confidentiality Agreement,
dated as of August 17, 1995, between Rite Aid and Revco (the 'Confidentiality
Agreement'), Rite Aid has agreed, among other things, to keep confidential
certain non-public confidential or proprietary information of Revco furnished to
Rite Aid by or on behalf of Revco. The Confidentiality Agreement provides that
for a period of eighteen months from the date of the Confidentiality Agreement,
except with respect to a business combination with Revco or as otherwise
specifically authorized in writing by Revco, neither Rite Aid nor any of its
directors, officers, employees, agents, advisors (including, without limitation,
financial advisors, counsel and accountants), affiliates or controlling persons
(collectively, the 'Rite Aid Representatives') will, propose or publicly
announce or otherwise disclose an intent to propose, or enter into or agree to
enter into, singly or with any other person or directly or indirectly, (i) any
form of business combination,acquisition or other transaction relating to Revco
or any affiliate thereof, or (ii) any form of restructuring, recapitalization or
similar transaction with respect to Revco or any such affiliate, nor except as
aforesaid during such period will Rite Aid or any such Representative as a
principal (1) acquire, or offer, propose or agree to acquire, by purchase or
otherwise, any securities of Revco, any direct or indirect options or other
rights to acquire any such securities ('Revco Securities'), (2) make, or in any
way participate in, any solicitation of proxies with respect to any Revco
Securities (including by the execution of action by written consent), become a
participant in any election contest with respect to Revco, seek to influence any
person with respect to any Revco Securities or demand a copy of Revco's list of
its stockholders or other books and records relating to holders of Revco
Securities, (3) participate in or encourage the formation of any partnership,
syndicate or other group which owns or seeks or offers to acquire beneficial
ownership of any Revco Securities or which seeks to affect control of Revco or
for the purpose of circumventing any provision of the Confidentiality Agreement
or (4) otherwise act, alone or in concert with others (including by providing
financing for another person), to seek or to offer to control or influence, in
any manner, the management, the Revco Board or policies or operations of Revco.
The Merger Agreement provides that any provision in the Confidentiality
Agreement which in any manner limits, restricts or prohibits the voting or
acquisition of shares of Revco Common Stock by Rite Aid or any of its affiliates
or the representation of Rite Aid's designees on the Revco Board or which in any
manner would be inconsistent with the Merger Agreement, the Stock Option
Agreement or the Stockholder Agreement or the transactions contemplated thereby
terminated as of the date of the Merger Agreement. The Merger Agreement further
provides that Revco will not take any action that would impede, bar, restrict or
otherwise interfere in any manner with Rite Aid's rights under the Stockholder
Agreement or the Stock Option Agreement, including, without limitation, Rite
Aid's right to exercise the Stock Option.
Representations and Warranties. In the Merger Agreement, Revco has made
customary representations and warranties to Rite Aid and Sub with respect to,
among other things, its organization, capitalization, corporate
66
<PAGE>
authorization, financial statements, public filings, employee benefit plans,
insurance, compliance with laws, transactions with affiliates, litigation,
absence of default, contracts, tax matters, labor matters, assets, real
property, environmental matters, consents and approvals, information in the
Proxy Statement/Prospectus, agreements with third party payors, vote required,
undisclosed liabilities and the absence of any material adverse change in Revco
since June 3, 1995.
In the Merger Agreement, Rite Aid and Sub have made customary
representations and warranties to Revco with respect to, among other things, its
organization, capitalization, corporate authorization, financial statements,
public filings, compliance with laws, litigation, absence of default, tax
matters, consents and approvals, compliance with laws, financing, information in
the Proxy Statement, opinion of financial advisors, undisclosed liabilities and
the absence of any material adverse change in Rite Aid since March 4, 1995.
Effective Time. The Merger will become effective upon the date (the
'Effective Time') on which a certificate of merger (the 'Certificate of Merger')
has been duly filed with the Secretary of State of the State of Delaware, or at
such time as is agreed upon by the parties and specified in the Certificate of
Merger.
Conditions to the Merger. The respective obligations of Rite Aid and Sub,
on the one hand, and Revco, on the other hand, to consummate the Merger are
subject to the satisfaction (or, if permissible, waiver by the party for whose
benefit such conditions exist) of the following conditions: (i) the Merger
Agreement shall have been adopted by stockholders of Revco in accordance with
the DGCL; (ii) no court, arbitrator or governmental body, agency or official
shall have issued any order, decree or ruling which remains in force and there
shall not be any statute, rule or regulation restraining, enjoining or
prohibiting the consummation of the Merger; (iii) the Registration Statement
shall have become effective under the Securities Act and no stop order
suspending effectiveness of the Registration Statement shall have been issued
and no proceeding for that purpose shall have been initiated or threatened by
the Commission; and (iv) Rite Aid, Sub or their affiliates shall have purchased
the shares of Revco Common Stock pursuant to the Offer.
Termination; Fees. The Merger Agreement may be terminated and the Merger
contemplated therein may be abandoned at any time prior to the Effective Time,
whether before or after stockholder approval thereof, (a) by mutual consent of
the Rite Aid Board and the Revco Board, (b) by either the Rite Aid Board or the
Revco Board (i) if Rite Aid or Sub has not purchased shares of Revco Common
Stock in accordance with the terms of the Offer on or prior to April 29, 1996;
provided, however, that the right to terminate the Merger Agreement shall not be
available to any party whose failure to fulfill any obligations under the Merger
Agreement has been the cause of, or resulted in, the failure to satisfy the
conditions to the Offer; provided further, however, that Rite Aid shall not have
the right to terminate the Merger Agreement under this clause (i) if Rite Aid or
Sub purchases any shares of Revco Common Stock in connection with the Offer
after April 29, 1996; or (ii) if any Governmental Entity (as defined therein)
shall have issued an order, decree or ruling or taken any other action (which
order, decree, ruling or other action the parties thereto shall use their best
efforts to lift), in each case permanently restraining, enjoining or otherwise
prohibiting the transactions contemplated by the Merger Agreement and such
order, decree, ruling or other action shall have become final and
non-appealable.
The Merger Agreement may be terminated by the Revco Board: (i) if, prior to
the purchase of shares of Revco Common Stock pursuant to the Offer, the Revco
Board shall have (A) withdrawn, or modified or changed in a manner adverse to
Rite Aid or Sub its approval or recommendation of the Offer, the Merger
Agreement or the Merger in order to approve and permit Revco to execute a
definitive agreement relating to a Takeover Proposal, and (B) determined, after
having received the oral or written opinion of outside independent legal counsel
to Revco, that the failure to take such action as set forth in the preceding
clause (A) would result in a breach of the Board of Directors' fiduciary duties
under applicable law; provided, however, that Revco shall have given Rite Aid
and Sub at least thirty-six hours advance actual notice of any termination
pursuant to this clause (i) and shall have made the payment referred to in the
second following paragraph; or (ii) if prior to the purchase of shares of Revco
Common Stock pursuant to the Offer, Rite Aid or Sub (x) breaches or fails in any
material respect to perform or comply with any of its material covenants and
agreements contained therein or (y) breaches its representations and warranties
in any material respect and such breach would have or would be reasonably likely
to have a material adverse effect on Rite Aid and its Subsidiaries; provided,
however, that if any such breach is cured, Revco may not terminate the Merger
Agreement pursuant to this clause (ii); or (iii) if Rite Aid or Sub shall have
terminated the Offer, or the Offer shall have expired, without Rite Aid or Sub,
as the case may be, purchasing any shares of Revco Common Stock pursuant
thereto; provided that Revco may not terminate the
67
<PAGE>
Merger Agreement pursuant to this clause (iii) if Revco is in material breach of
the Merger Agreement; or (iv) if, due to an occurrence that if occurring after
the commencement of the Offer would result in a failure to satisfy any of the
conditions to the Offer, Rite Aid, Sub or any of their affiliates shall have
failed to commence the Offer on or prior to five business days following the
date of the initial public announcement of the Offer; provided, that Revco may
not terminate the Merger Agreement pursuant to this clause (iv) if Revco is in
material breach of the Merger Agreement.
The Merger Agreement may be terminated by the Rite Aid Board: (i) if, due
to an occurrence that if occurring after the commencement of the Offer would
result in a failure to satisfy any of the conditions set forth in the Offer,
Rite Aid, Sub or any of their affiliates shall have failed to commence the Offer
on or prior to five business days following the date of the initial public
announcement of the Offer; provided that Rite Aid may not terminate the Merger
Agreement pursuant to this clause (i) if Rite Aid or Sub is in material breach
of the Merger Agreement; or (ii) if (A) prior to the purchase of shares of Revco
Common Stock pursuant to the Offer, the Revco Board shall have withdrawn, or
modified or changed in a manner adverse to Rite Aid or Sub its approval or
recommendation of the Offer, the Merger Agreement or Merger or shall have
recommended a Takeover Proposal or other business combination, or Revco shall
have entered into an agreement in principle (or similar agreement) or definitive
agreement providing for a Takeover Proposal or other business combination with a
person or entity other than Rite Aid, Sub or their Subsidiaries (or the Revco
Board resolves to do any of the foregoing), or (B) prior to the consummation of
the Offer, it shall have been publicly disclosed or Rite Aid or Sub shall have
learned that any person, entity or 'group' (as that term is defined in Section
13(d)(3) of the Exchange Act) (an 'Acquiring Person'), other than Rite Aid, Sub
or the Stockholder, or Magten Asset Management Corporation ('Magten') or FMR
Corp. (including any of FMR Corp.'s affiliates) shall have acquired beneficial
ownership (determined pursuant to Rule 13d-3 promulgated under the Exchange Act)
of more than 14.9% of any class or series of capital stock of Revco (including
the shares of Revco Common Stock), through the acquisition of stock, the
formation of a group or otherwise, or shall have been granted any option, right
or warrant, conditional or otherwise, to acquire beneficial ownership of more
than 14.9% of any class or series of capital stock of Revco (including Revco
Common Stock); or (iii) if Rite Aid or Sub, as the case may be, shall have
terminated the Offer, or the Offer shall have expired without Rite Aid or Sub,
as the case may be, purchasing any shares of Revco Common Stock thereunder,
provided that Rite Aid may not terminate the Merger Agreement pursuant to this
clause (iii) if Rite Aid or Sub is in material breach of the Merger Agreement.
If (w) the Revco Board shall terminate the Merger Agreement pursuant to
clause (i) in the immediately second preceding paragraph hereof, (x) the Board
of Directors of Rite Aid shall terminate the Merger Agreement pursuant to clause
(ii)(A) in the immediately preceding paragraph hereof, (y) the Rite Aid Board
shall terminate the Merger Agreement pursuant to clause (ii)(B) in the
immediately preceding paragraph hereof and within nine months of such
termination, an Acquiring Person shall acquire or beneficially own a majority of
the then outstanding shares of Revco Common Stock or shall have obtained
representation on the Revco Board or shall enter into a definitive agreement
with Revco with respect to a Takeover Proposal or similar business combination,
or (z) the Rite Aid Board shall terminate the Merger Agreement pursuant to
clause (i) or clause (iii) of the immediately preceding paragraph, in each case
due to (I) a material breach of the representations and warranties of Revco set
forth in the Merger Agreement or (II) a material breach of, or failure to
perform or comply with, by Revco any material obligation, covenant or agreement
contained in the Merger Agreement, then in any such case as described in clause
(w), (x), (y) or (z) (each such case of termination being referred to as a
'Trigger Event'), Revco shall pay to Rite Aid (not later than the date of
termination of the Merger Agreement in the case of clauses (w), (x) and (z)
above) an amount equal to $45 million.
Termination of Existing Stockholder Agreements. Pursuant to the Merger
Agreement, Revco and the Stockholder entered into a Termination Agreement, dated
as of November 29, 1995, providing for the termination of (i) the Stockholder
Agreement, dated as of June 1, 1992, between the Stockholder and Revco, and (ii)
the Registration Rights Agreement, dated as of June 1, 1992 between the
Stockholder and Revco. In addition, pursuant to the Merger Agreement, Revco and
Magten, as agent for and on behalf of individual investment advisory clients,
entered into a Termination Agreement, dated as of November 29, 1995, providing
for the termination of the Registration Rights Agreement, dated as of January
20, 1993, between Magten and Revco.
68
<PAGE>
STOCKHOLDER AGREEMENT
The following summary of the material terms of the Stockholder Agreement
contained in this Proxy Statement is not intended to be a complete description
of the terms and conditions thereof and is qualified in its entirety by
reference to the full text thereof which is incorporated herein by reference and
a copy of which is attached hereto as Annex D. Capitalized terms not otherwise
defined herein or in the following summary shall have the meanings set forth in
the Stockholder Agreement.
Tender of Shares of Revco Common Stock. Immediately after the execution of
the Merger Agreement, Rite Aid, Sub and the Stockholder entered into the
Stockholder Agreement. Upon the terms and subject to the conditions of such
agreement, the Stockholder has agreed to validly tender (or cause the record
owner of such shares of Revco Common Stock to tender), and not to withdraw,
pursuant to and in accordance with the terms of the Offer, not later than prior
to the expiration of the Offer, 13,102,288 shares of Revco Common Stock (and
together with any shares of Revco Common Stock acquired by the Stockholder in
any capacity after the date thereof and prior to the termination of the
Stockholder Agreement whether upon the exercise of options, warrants or rights,
the conversion or exchange of convertible or exchangeable securities, or by
means of purchase, dividend, distribution, gift, bequest, inheritance or as a
successor in interest in any capacity or otherwise, the 'Stockholder Shares')
Beneficially Owned by the Stockholder, which shares represented at such time
approximately 19.7% of the issued and outstanding shares of Revco Common Stock.
Voting of Revco Common Stock. The Stockholder Agreement provides that
during the period commencing on the date of the Stockholder Agreement and
continuing until the first to occur of (i) the Effective Time or (ii)
termination of the Merger Agreement in accordance with its terms, at any meeting
(whether annual or special and whether or not an adjourned or postponed meeting)
of Revco's stockholders, however called, or in connection with any written
consent of the stockholders of Revco, the Stockholder will vote (or cause to be
voted) the Stockholder Shares held of record or Beneficially Owned by such
Stockholder (i) in favor of the Merger, the execution and delivery by Revco of
the Merger Agreement and the approval and adoption of the terms thereof and each
of the other actions contemplated by the Merger Agreement and the Stockholder
Agreement and any actions required in furtherance thereof; (ii) against any
action or agreement that would result in a breach in any respect of any
covenant, representation or warranty or any other obligation or agreement of
Revco under the Merger Agreement or the Stockholder Agreement; and (iii) except
as otherwise agreed to in writing in advance by Rite Aid, against the following
actions (other than the Merger and the transactions contemplated by the
Stockholder Agreement and the Merger Agreement): (A) any extraordinary corporate
transaction, such as a merger, consolidation or other business combination
involving Revco or its subsidiaries; (B) any sale, lease or transfer of a
material amount of assets of Revco or its Subsidiaries, or a reorganization,
restructuring, recapitalization, special dividend, dissolution or liquidation of
Revco or its Subsidiaries; or (C) (1) any change in a majority of the persons
who constitute the Revco Board; (2) any change in the present capitalization of
Revco including any proposal to sell a substantial equity interest in Revco and
its Subsidiaries; (3) any amendment of Revco's Certificate of Incorporation or
By-laws; (4) any other change in Revco's corporate structure or business; or (5)
any other action which, in the case of each of the matters referred to in
clauses (C)(1), (2), (3) or (4), is intended, or could reasonably be expected,
to impede, interfere with, delay, postpone, or materially adversely affect the
Offer, the Merger and the transactions contemplated by the Stockholder Agreement
and the Merger Agreement. The Stockholder Agreement further provides that the
Stockholder will not enter into any agreement or understanding with any person
or entity the effect of which would be inconsistent or violative of the
provisions and agreements described in the above paragraph.
Stockholder Covenant. The Stockholder Agreement provides that, except as
contemplated by the Stockholder Agreement, the Stockholder shall not for a
period of six months following the termination of the Stockholder Agreement
(other than as a result of a breach by Rite Aid or Sub) enter into, execute, or
be a party to any agreement or understanding, written or otherwise, with any
Person whereby the Stockholder (i) grants or otherwise gives to such Person an
option or right to purchase or acquire any or all of the Stockholder Shares
other than sales made in open market transactions; (ii) agrees or covenants to
vote or to grant a proxy to vote any or all of the Stockholder Shares held of
record or Beneficially Owned by the Stockholder, at any meeting (whether annual
or special and whether or not an adjourned or postponed meeting) of the holders
of shares of Revco Common Stock, however called, or in connection with any
written consent of the holders of shares of Revco Common Stock; or (iii) agrees
or covenants to tender any or all of the Stockholder Shares held of record or
69
<PAGE>
Beneficially Owned by the Stockholder into any tender offer or exchange offer
relating to the Stockholder Shares.
No Solicitation. The Stockholder Agreement provides that the Stockholder
will not, and will cause its affiliates and officers, directors, employees,
partners, investment bankers, attorneys, accountants and other agents and
representatives of the Stockholder and such affiliates (such affiliates,
officers, directors, employees, partners, investment bankers, attorneys,
accountants, agents and representatives of any Person are hereinafter
collectively referred to as the 'Representatives' of such Person) not to,
directly or indirectly (i) initiate, solicit or encourage, or take any action to
facilitate the making of, any offer or proposal which constitutes or is
reasonably likely to lead to any Takeover Proposal of Revco or any affiliate or
any inquiry with respect thereto, or (ii) in the event of an unsolicited
Takeover Proposal for Revco or any affiliate of Revco, engage in negotiations or
discussions with, or provide any information or data to, any Person (other than
Rite Aid, any of its affiliates or representatives) relating to any Takeover
Proposal. Notwithstanding the restrictions set forth in this paragraph, any
person who is an officer or director of Revco may exercise his fiduciary duties
in his capacity as a director or officer of Revco consistent with the terms of
the Merger Agreement.
The Stockholder Agreement also provides that the Stockholder notify Rite
Aid and Sub orally and in writing of any such offers, proposals, or inquiries
relating to the purchase or acquisition by any Person of the Stockholder Shares
(including, without limitation, the terms and conditions thereof and the
identity of the Person making it), within 24 hours of the receipt thereof. The
Stockholder has also agreed to, and to cause its Representatives to, immediately
cease and cause to be terminated any and all existing activities, discussions or
negotiations, if any, with any parties conducted theretofore with respect to any
Takeover Proposal relating to Revco, other than discussions or negotiations with
Rite Aid and its affiliates.
Distribution of Shares of Rite Aid Common Stock. The Stockholder Agreement
provides that upon the consummation of the Merger, the Stockholder shall within
90 days thereafter either distribute the shares of Rite Aid Common Stock to each
of the limited partners of Zell/Chilmark Fund, L.P. or sell or otherwise dispose
of such shares of Rite Aid Common Stock, in each case in accordance with the
governing documents thereto and applicable law; provided that no such sale or
other disposition shall be made if immediately following such sale or other
disposition the acquiror of such Rite Aid Common Stock, together with the
acquiror's affiliates and any members of a group of which the acquiror is a
party, would Beneficially Own in the aggregate 4.9% or more of the shares of
Rite Aid Common Stock then outstanding.
Restriction on Transfer, Proxies and Non-Interference. The Stockholder
Agreement also provides that, except as otherwise provided in the Stockholder
Agreement, the Stockholder will not, directly or indirectly: (i) offer for sale,
sell, transfer, tender, pledge, encumber, assign or otherwise dispose of, or
enter into any contract, option or other arrangement or understanding with
respect to or consent to the offer for sale, transfer, tender, pledge,
encumbrance, assignment or other disposition of, any or all of the Stockholder
Shares or any interest therein; (ii) grant any proxies or powers of attorney,
deposit the Stockholder Shares into a voting trust or enter into a voting
agreement with respect to the Stockholder Shares; or (iii) take any action that
would make any representation or warranty of the Stockholder contained in the
Stockholder Agreement untrue or incorrect or would result in a breach by the
Stockholder of its obligations under the Stockholder Agreement or a breach by
Revco of its obligations under the Merger Agreement.
Termination. Except as otherwise provided therein, the covenants and
agreements contained in the Stockholder Agreement with respect to the
Stockholder Shares shall terminate upon the earlier of (i) the consummation of
the Merger and (ii) the termination of the Merger Agreement in accordance with
its terms except, that the covenant and agreement set forth in the Stockholder
Covenant described in the fifth preceding paragraph shall survive for six months
after such termination (other than a termination as a result of a breach by Rite
Aid or Sub).
STOCK OPTION AGREEMENT
The following summary of the material terms of the Stock Option Agreement
contained in this Proxy Statement is not intended to be a complete description
of the terms and conditions thereof and is qualified in its entirety by
reference to the full text thereof which is incorporated herein by reference and
a copy of which is attached hereto as Annex E. Capitalized terms not otherwise
defined herein or in the following summary shall have the meanings set forth in
the Stock Option Agreement.
70
<PAGE>
Grant of Stock Option. The Stock Option Agreement provides for the grant
by Revco to Rite Aid of an unconditional, irrevocable option (a 'Stock Option')
to purchase up to 13,251,010 fully paid and nonassessable shares of Revco Common
Stock at a purchase price of $27.50 per share of Revco Common Stock (the 'Option
Purchase Price'), or such other number of shares of Revco Common Stock as equals
19.9% of Revco's issued and outstanding shares of Revco Common Stock at the time
of exercise of the Stock Option; provided that in no event shall the number of
shares of Revco Common Stock for which the Stock Option is exercisable exceed
19.9% of the shares of Revco Common Stock issued and outstanding at the time of
exercise of the Stock Option (the 'Option Shares').
Exercise of Stock Option. The Stock Option Agreement also provides that
upon (x) the occurrence of a Trigger Event, or (y) the occurrence of a tender or
exchange offer for some or all of the shares of Revco Common Stock or if a
proposal for a Takeover Proposal shall have been publicly proposed to be made or
shall have been made by another person or entity, the Stock Option shall become
immediately exercisable, in whole or in part, and remain exercisable in whole or
in part until the later of (i) the date which is six months after the date the
Stock Option first became exercisable and (ii) the fifth business day following
expiration or termination of any applicable waiting period under the HSR Act
(the 'Option Period').
Sale of Option Shares. The Stock Option Agreement also provides that if,
at any time following the exercise of the Stock Option, Rite Aid will either (i)
transfer, sell or otherwise dispose of any or all of the Option Shares,
including by means of tender or exchange of any or all of the Option Shares
pursuant to a tender or exchange offer involving the capital stock of Revco, or
(ii) convert such Option Shares into cash, capital stock, other securities or
any other consideration of any third party in a merger, any recapitalization or
restructuring or similar business combination transaction (a 'Business
Combination Transaction'), Rite Aid will pay to Revco within five days the
amount equal to the Profit (as defined below) Rite Aid will receive, if any,
pursuant to such Disposition or Business Combination Transaction. 'Profit,' for
purposes of this paragraph, will equal (i) the product of (a) the number of
Option Shares Rite Aid transfers, sells, tenders, exchanges or otherwise
disposes of pursuant to a Disposition or a Business Combination Transaction
multiplied by (b) the excess of the per Share consideration received by Rite Aid
pursuant to such Disposition or Business Combination Transaction, valuing any
non-cash consideration at its fair market value on the date of such consummation
(not including any increase in such aggregate per Share consideration after the
date thereof), over the Option Purchase Price. For purposes thereof, the fair
market value of any non-cash consideration shall be the closing price or the
last sale price, or, in case no such sale takes place on the day of consummation
of such Business Combination Transaction, the average of the closing bid and
asked prices, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the principal national securities exchange on which such
consideration is listed or admitted to trading or, if such consideration is not
listed or admitted to trading on any national securities exchange, the last
quoted price or, if not so quoted, the average of the high bid and low asked
prices in the over-the-counter market, as reported by the National Association
of Securities Dealers, Inc. Automated Quotation System or such other system then
in use, or, if not so determinable, the fair value of such consideration on such
date will be determined in good faith by the Rite Aid Board.
Adjustment Upon Changes in Capitalization. The Stock Option Agreement
provides that in the event of any change in shares of Revco Common Stock by
reason of stock dividends, split-ups, recapitalizations, combinations, exchanges
of shares or the like, the type and number of shares of Revco Common Stock
subject to the Stock Option and the Purchase Price shall be appropriately
adjusted and proper provision shall be made so that, in the event that any
additional shares of Revco Common Stock are issued or otherwise become
outstanding as a result of any such change after the date of the Stock Option
Agreement (other than pursuant to the Stock Option Agreement), the number of
shares of Revco Common Stock subject to the Stock Option shall be adjusted so
that, after such issuance and together with shares of Revco Common Stock
previously issued pursuant to the exercise of the Stock Option (as adjusted on
account of any of the foregoing change in shares of Revco Common Stock), it
equals 19.9% of the number of shares of Revco Common Stock then issued and
outstanding.
Termination. The Stock Option Agreement will terminate, except as
otherwise provided therein, upon the earlier of (i) the consummation of the
Merger and (ii) the expiration of the Option Period.
71
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following Pro Forma Condensed Consolidated Statements of Operations for
the fifty-three weeks ended March 4, 1995 and the thirty-nine weeks ended
December 2, 1995 present pro forma operating results for Rite Aid as if the
Merger had occurred as of the beginning of the periods presented. The following
Pro Forma Condensed Consolidated Balance Sheet presents the pro forma financial
condition of Rite Aid as if the Merger had occurred as of December 2, 1995. The
purchase price of Revco was determined based on arm's-length negotiations
between the parties to the Merger Agreement. The excess of the purchase price of
Revco over the net identifiable assets and liabilities of Revco is reported as
goodwill. The carrying values of Revco's net assets are assumed to equal their
fair values for purposes of these pro forma financial statements, unless
indicated otherwise in the Notes to Unaudited Pro Forma Condensed Consolidated
Financial Data. These values are subject to revision following the results of
any appraisals after consummation of the Merger and related transactions.
However, management does not believe that the results of any such appraisals
will yield materially different values from the carrying values. The Pro Forma
Condensed Consolidated Balance Sheet and Statements of Operations were prepared
assuming consummation of:
(i) the Merger, which is accounted for under the purchase method of
accounting;
(ii) the Credit Facility; and
(iii) the refinancing of $720 million of outstanding Revco debt.
The pro forma adjustments are described in the accompanying notes and
represent Rite Aid's preliminary determination of the necessary adjustments. The
pro forma adjustments are based upon certain assumptions Rite Aid considered
reasonable under the circumstances, including certain assumptions based on the
information provided by Revco. Final amounts will differ from those set forth in
the statements.
The pro forma information presented does not consider any future events
which may occur after the Merger has been consummated. These pro forma
statements do not present any operating expense synergies or cost reductions of
the combined operations of Rite Aid and Revco that are expected to be realized
after Rite Aid has completed its conversion of the Revco stores to the Rite Aid
format and has installed its store systems and marketing programs. See 'THE
MERGER--Estimated Synergies' for a discussion of the $156 million of cost
benefits and synergies estimated to be realized annually. The Notes to Unaudited
Pro Forma Condensed Consolidated Financial Data describe one-time Merger and
integration charges expected to be incurred primarily for store integration,
present value of estimated lease terminations and severance and retention costs.
Rite Aid estimates approximately 300 stores will be closed subsequent to the
Merger. The closings are expected to increase profitability primarily through
the pourover sales from the closed stores into existing stores while eliminating
costs of the closed stores.
The pro forma information is presented for informational purposes only and
is not necessarily indicative of the operating results or financial position
that would have occurred had the Merger been consummated at the dates indicated,
nor is it necessarily indicative of future operating results or financial
position.
The pro forma condensed financial information shoud be read in conjunction
with the consolidated financial statements of each of Rite Aid and Revco and the
related notes thereto contained in (i) Rite Aid's Annual Report on Form 10-K for
the year ended March 4, 1995, (ii) Rite Aid's Quarterly Report on Form 10-Q for
the quarter ended December 2, 1995, (iii) Revco's Annual Report to Stockholders
for the year ended June 3, 1995 and (iv) Revco's Quarterly Report on Form 10-Q
for the quarter ended November 18, 1995.
72
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED MARCH 4, 1995
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
RITE AID REVCO
53 WEEKS ENDED 53 WEEKS ENDED PRO FORMA PRO FORMA
MARCH 4, 1995 JUNE 3, 1995 ADJUSTMENTS COMBINED
-------------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Net Sales............................... $ 4,533,851 $ 4,431,900 $ 8,965,751
Cost of Goods Sold, Including Occupancy
Costs................................. 3,327,920 3,100,100 6,428,020
Selling, General and Administrative
Expenses.............................. 932,167 1,156,100 $ 34,299 (a) 2,105,636
(17,600)(a)
670 (c)
Interest Expense........................ 42,300 55,200 163,866 (b) 206,166
(55,200)(b)
-------------- -------------- ----------- ------------
Costs and Expenses...................... 4,302,387 4,311,400 126,035 8,739,822
-------------- -------------- ----------- ------------
Income From Continuing Operations Before
Extraordinary Item and Income Taxes... 231,464 120,500 (126,035) 225,929
Income Taxes............................ 90,178 59,400 (42,380)(d) 107,198
-------------- -------------- ----------- ------------
Net Income Before Extraordinary Item.... $ 141,286 $ 61,100 $ (83,655) $ 118,731 (m)(n)
-------------- -------------- ----------- ------------
-------------- -------------- ----------- ------------
Average Shares Outstanding.............. 84,771,000 64,366,000 35,005,000 119,776,000 (m)
Earnings Per Share...................... $ 1.67 $ 0.95 $ 0.99 (m)
-------------- -------------- ------------
-------------- -------------- ------------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Data.
73
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THIRTY-NINE WEEKS ENDED DECEMBER 2, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
RITE AID REVCO
THIRTY-NINE WEEKS FORTY-ONE WEEKS
ENDED ENDED PRO FORMA PRO FORMA
DECEMBER 2, 1995 NOVEMBER 18, 1995 ADJUSTMENTS COMBINED
----------------- ----------------- ----------- ------------
<S> <C> <C> <C> <C>
Net Sales............................... $ 4,015,036 $ 3,791,000 $ 7,806,036
Cost Of Goods Sold, Including Occupancy
Costs................................. 2,960,998 2,654,500 5,615,498
Selling, General and Administrative
Expenses.............................. 837,629 985,400 $ 25,724 (a) 1,836,056
(13,200)(a)
503 (c)
Interest Expense........................ 49,546 49,000 105,079 (b) 154,625
(49,000)(b)
----------------- ----------------- ----------- ------------
Costs and Expenses...................... 3,848,173 3,688,900 69,106 7,606,179
----------------- ----------------- ----------- ------------
Income From Continuing Operations Before
Extraordinary Item and Income Taxes... 166,863 102,100 (69,106) 199,857
Income Taxes............................ 64,910 49,600 (21,815)(d) 92,695
----------------- ----------------- ----------- ------------
Net Income Before Extraordinary Item.... $ 101,953 $ 52,500 $ (47,291) $ 107,162 (n)
----------------- ----------------- ----------- ------------
----------------- ----------------- ----------- ------------
Average Shares Outstanding.............. 83,816,000 66,285,000 35,005,000 118,821,000
Earnings Per Share...................... $ 1.22 $ 0.79 $ 0.90
----------------- ----------------- ------------
----------------- ----------------- ------------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Data.
74
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 2, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
RITE AID REVCO
AS OF AS OF PRO FORMA PRO FORMA
DECEMBER 2, 1995 NOVEMBER 18, 1995 ADJUSTMENTS COMBINED
---------------- ----------------- ----------- ----------
<S> <C> <C> <C> <C>
Cash......................................... $ 28,273 $ 8,300 $ 36,573
Accounts Receivable, Net..................... 251,308 141,100 392,408
Inventories.................................. 1,218,234 1,068,500 $ 40,200 (e) 2,326,934
Other Current Assets......................... 37,262 18,600 55,862
---------------- ----------------- ----------- ----------
Total Current Assets....................... 1,535,077 1,236,500 40,200 2,811,777
Net Property, Plant & Equipment.............. 898,294 314,800 1,213,094
Intangible Assets, Net....................... 322,282 427,700 1,146,145 (g) 2,121,927
225,800 (h)
Reorganization Value, Net.................... 225,800 (225,800)(h) --
Other Noncurrent Assets...................... 36,249 64,500 4,442 (i) 110,191
5,000 (f)
---------------- ----------------- ----------- ----------
Total Assets............................... $2,791,902 $ 2,269,300 $ 1,195,787 $6,256,989
---------------- ----------------- ----------- ----------
---------------- ----------------- ----------- ----------
Short-Term Debt and Current Maturities Of
Long-Term Debt............................. $ 251,171 $ (251,171)(j) --
Accounts Payable............................. 279,205 $ 394,400 $ 673,605
Other Current Liabilities.................... 157,369 347,400 16,400 (k) 521,169
---------------- ----------------- ----------- ----------
Total Current Liabilities.................. 687,745 741,800 (234,771) 1,194,774
Long-Term Debt, Net.......................... 971,253 719,900 1,237,654 (j) 2,928,807
Deferred Taxes............................... 73,221 (38,200) 27,979 (i) 63,000
Other Long-Term Liabilities.................. 48,100 48,100
Common Stock................................. 90,291 700 34,305 (l) 125,296
Additional Paid In Capital................... 61,124 678,700 248,920 (l) 988,744
Retained Earnings............................ 1,014,318 131,100 (131,100)(l) 1,014,318
Cumulative Pension Liability Adjustment...... (1,304) (1,304)
Treasury Stock............................... (104,746) (12,800) 12,800 (l) (104,746)
---------------- ----------------- ----------- ----------
Total Stockholders' Equity................. 1,059,683 797,700 164,925 2,022,308
---------------- ----------------- ----------- ----------
Total Liabilities and Stockholders'
Equity.................................. $2,791,902 $ 2,269,300 $ 1,195,787 $6,256,989
---------------- ----------------- ----------- ----------
---------------- ----------------- ----------- ----------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Data.
75
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL DATA
BASIS OF CONSOLIDATION
Revco's most recent fiscal year ended June 3, 1995 and consisted of 53
weeks. For purposes of the Unaudited Pro Forma Condensed Consolidated Statement
of Operations for Rite Aid's fiscal year ended March 4, 1995, results of
operations for Revco are for the year ended June 3, 1995. Revco reports its
quarterly results for the first three quarters of the fiscal year on a
twelve-week period basis with the fourth quarter consisting of a sixteen or
seventeen week period. For purposes of the Unaudited Pro Forma Condensed
Consolidated Statement of Operations for the thirty-nine week period ended
December 2, 1995, results of operations for Revco are for the forty-one weeks
ended November 18, 1995.
As a result of installing standardized store systems in all Revco
locations, and combining and standardizing various administrative support
functions such as marketing, advertising, accounting and management information
systems, Rite Aid's management expects to operate the combined operations of
Rite Aid and Revco with a more efficient overhead expense structure than each of
the two entities operating on a stand alone basis. Rite Aid also expects to
achieve cost reductions in inventory management and purchasing. However, for the
purposes of the Unaudited Pro Forma Condensed Consolidated Statements of
Operations, these and other potential synergies in overhead expenses have not
been reflected because their realization cannot be assured. See 'THE MERGER--
Estimated Synergies.'
DETERMINATION AND ALLOCATION OF PURCHASE PRICE
Pursuant to the Merger Agreement, Rite Aid will acquire 35.1 million shares
of Revco Common Stock representing 50.1% of the outstanding shares of Revco at a
price of $27.50 per share in cash. Upon acquiring 50.1% of the outstanding
shares of Revco Common Stock, Rite Aid will acquire the remaining shares in the
Merger in exchange for Rite Aid Common Stock. The purchase price is determined
as follows and assumes a market value of each share of Rite Aid Common Stock of
$27.50, the value which represents a one-for-one conversion. If the final
determined market value of Rite Aid Common Stock is different from $27.50, the
share price will be adjusted by 50% of the increased/decreased amounts. That
difference will either increase or decrease the purchase price allocation
assigned to goodwill based on the movement of the stock price. The following
table sets forth the purchase based on the $27.50 market value used in a
one-for-one conversion:
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
First Step Cash Tender (35.1 million shares at $27.50 per share)................. $ 966
Merger Exchange of Shares (35 million shares of Revco Common Stock converted into
Rite Aid Common Stock at an Exchange Ratio of one-for-one at an assumed Rite
Aid market price of $27.50 per share).......................................... 963
Transaction Costs................................................................ 20
-------------
Pro Forma Purchase Price......................................................... $ 1,949
-------------
-------------
</TABLE>
The Merger will be accounted for as a purchase. The preliminary allocation
of the Pro Forma Purchase Price is as follows:
<TABLE>
<S> <C>
Purchase Price................................................................... $ 1,949
Equity Acquired.................................................................. (798)
-------------
Unallocated Purchase Price....................................................... $ 1,151
-------------
-------------
Purchase Price Allocation
Inventory...................................................................... $ 40
Goodwill....................................................................... 1,146
Other.......................................................................... (35)
-------------
Total....................................................................... $ 1,151
-------------
-------------
</TABLE>
76
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL DATA--(CONTINUED)
(a) Amortization of the new goodwill of $1.1461 billion plus the reorganization
value reconstituted as new goodwill of $225.8 million over a 40 year period
($1.3719 billion / 40 years). The $17.6 million credit to amortization
reflects the historical amortization of the reorganization value which is
now included as part of the new goodwill amortization amount.
The pro forma adjustment for the 39-week period ended December 2, 1995
represents 3/4 of the annualized pro forma adjustment amount.
(b) Reflects the net additional interest expense on Rite Aid's total
borrowings. It is assumed that after completion of the Merger, Rite Aid
will refinance or retire all of Revco's outstanding debt. Shown below are
the components of Rite Aid's total pro forma combined debt after Revco's
debt is refinanced or retired.
7.625% on $200 million Rite Aid senior debt
6.875% on $200 million Rite Aid senior debt
8.25% on new $500 million Rite Aid senior debt (see Note (c) below)
7% on $24 million of Rite Aid IDA and other debt
$197 million of Rite Aid zero coupon bonds accreting interest at 6.75%
6.75% on $1.808 billion of new Rite Aid bank debt
For the 39 weeks ended December 2, 1995, the pro forma combined interest
expense is equal to 3/4 of the annualized pro forma combined amount.
(c) To record amortization of financing fees for the Credit Facility, based
upon the fee arrangement of approximately $1.7 million over the five year
term of the Credit Facility as defined in the Credit Agreement; and debt
issue costs for $500 million in new senior debt of approximately $3.3
million amortized over the estimated ten year life of the debt ($1.7
million / 5 years) plus ($3.3 million / 10 years). Rite Aid anticipates
refinancing approximately $500 million of the Credit Facility with
long-term fixed interest rate senior debt following consummation of the
Merger.
The pro forma adjustment for the 39 weeks ended December 2, 1995 represents
3/4 of the annualized pro forma adjustment amount.
(d) Income taxes have been calculated based on Rite Aid's effective statutory
rate for the respective periods. The amortization of the goodwill is not
deductible for tax purposes.
(e) Reflects the adjustment of LIFO inventories to FIFO carrying amounts and
values the inventory at fair market value. Rite Aid believes FIFO carrying
values represent estimated selling prices of merchandise inventories less
the sum of costs of disposal and a reasonable profit allowance. This value
is subject to revision pending completion of physical inventories.
(f) Records estimated $5 million in financing fees for the Credit Facility and
issuance of $500 million of new senior debt.
(g) Records purchase price allocation to goodwill for excess of purchase price
over net assets and direct costs of the transaction, primarily consulting
and legal fees. Based on the purchase of 50.1% of outstanding shares of
Revco Common Stock at $27.50 in the Offer (approximately 35,144,833 shares)
and a one-for-one conversion of the remaining shares of Revco Common Stock
into Rite Aid Common Stock at $27.50 per share (approximately 35,005,000
shares).
(h) Reorganization value was an intangible asset recorded by Revco upon
emerging from Chapter 11 of the United States Bankruptcy Code and
represents the excess of amounts charged to identifiable assets.
Accordingly, upon completion of the Merger, the reorganization value will
be allocated to goodwill.
(i) Reclassify Revco's historical net deferred tax asset, record the fair value
adjustment to inventory, and other deferred tax items.
(j) Reclassify Rite Aid commercial paper to long-term Credit Facility, record
issuance of debt for purchase of 50.1% of Revco Common Stock in the Offer
and funding for financing and consulting fees. Rite Aid plans to repurchase
or otherwise retire the Revco 9.125% Senior Notes and the Revco 10.125%
Senior Notes with proceeds from the Credit Facility. Rite Aid has provided
for the premium on repurchasing or otherwise retiring those Revco Notes in
adjustment 'k.'
(k) Records call premium on retirement of Revco outstanding debt.
(l) Records issuance of 35,004,534 shares of Rite Aid Common Stock at $27.50
per share assuming a one-for-one Exchange Ratio, and elimination of Revco
equity accounts.
(m) Based upon the terms of the Merger Agreement, stockholders of Revco will
receive one share of Rite Aid Common Stock for each share of Revco Common
Stock if the average value per share of Rite Aid Common Stock during the
Pricing Period is $27.50. If the average per share value of Rite Aid Common
Stock is
77
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL DATA--(CONTINUED)
greater than $27.50 during the Pricing Period, Revco stockholders will
receive 50% of the increase in market value of Rite Aid Common Stock over
$27.50, provided that Rite Aid would not issue less than .91666 shares of
Rite Aid Common Stock for each share of Revco Common Stock. Conversely, if
the average per share value of Rite Aid Common Stock is less than $27.50
during the Pricing Period, Revco stockholders will receive shares equivalent
to the $27.50 less 50% of the decrease in market value of Rite Aid Common
Stock from $27.50, provided that Rite Aid would not issue more than 1.125
shares of Rite Aid Common Stock for each share of Revco Common Stock. The
following table shows the effect on the pro forma earnings per share and
goodwill amounts for fluctuations in the per share value of Rite Aid Common
Stock.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ASSUMING .91666 EXCHANGE RATIO ASSUMING 1.125 EXCHANGE RATIO
AT MARKET PRICE OF $33.00 AT MARKET PRICE OF $22.00
------------------------------ -----------------------------
<S> <C> <C>
Year ended March 4, 1995
Pro Forma Combined Net Income Before
Extraordinary Item........................ $116,527,000 $121,138,000
Average Pro Forma Shares Outstanding........ 116,856,000 124,151,000
Pro Forma Earnings Per Share................ $1.00 $.98
39 Weeks ended December 2, 1995
Pro Forma Combined Net Income Before
Extraordinary Item........................ $105,359,000 $108,967,000
Average Pro Forma Shares Outstanding........ 115,901,000 123,196,000
Pro Forma Earnings Per Share................ $.91 $.88
December 2, 1995
Pro Forma Increase (Decrease) of Goodwill
and Stockholder's Equity.................. 96,185,000 (96,263,000)
</TABLE>
(n) Rite Aid expects to incur one-time Merger and integration charges in the
range of $150-$175 million. Such charges are expected to consist of future
lease costs of closed stores, severance and retention costs of employees,
and store integration and other Merger costs. These costs will be charged
to operations and not recorded as a liability assumed in the Merger. There
can be no assurance, however, that the amount of such charges will not
increase as Rite Aid's integration plan is further developed and more
accurate estimates become possible or as to the amount of the after-tax
cost of such charge.
After consummation of the Merger, it is anticipated that stores will be
closed in markets where a Revco store and Rite Aid store compete directly
against one another. The specific stores to be closed, the method of
disposition, and the closing dates have not yet been determined.
Rite Aid contemplates closing redundant distribution facilities and
eliminating duplicate corporate headquarters functions. The distribution
centers to be closed have not been identified pending a review of the
distribution needs of the combined company. The severance and retention
costs of employees relate to termination or relocation of personnel at the
stores, distribution centers and Revco's corporate headquarters to be
closed. The employees to be terminated or relocated, and their functions
and locations have not yet been specifically identified.
Expenses associated with store integration and other Merger costs include
training for Revco personnel to familiarize them with Rite Aid's systems
and procedures. Also included are the costs of remerchandising the Revco
stores to conform to Rite Aid's product mix and merchandise format. Other
integration costs involve advertising expenses to create public awareness
of the name change from Revco to Rite Aid.
Set forth below is an analysis of the components of the estimated $150-$175
million one-time Merger and integration costs expected to be incurred.
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
Present value of future lease costs of closed stores........................... $ 60 - $ 70
Severance and retention of employees........................................... 38 - 44
Store integration.............................................................. 27 - 31
Other Merger costs............................................................. 25 - 30
Total.......................................................................... $ 150 - $175
</TABLE>
78
<PAGE>
DESCRIPTION OF RITE AID CAPITAL STOCK
The statements set forth under this heading with respect to the DGCL, Rite
Aid's Certificate of Incorporation (the 'Rite Aid Charter'), Rite Aid's By-laws
(the 'Rite Aid By-laws') and the Rite Aid Rights Agreement, with Harris Trust
Company of New York, as Rights Agent, are brief summaries thereof and do not
purport to be complete; such statements are subject to the detailed provisions
of the DGCL, the Rite Aid Charter, the Rite Aid By-laws and the Rite Aid Rights
Agreement. See 'Available Information.'
Under Rite Aid's Charter, Rite Aid's authorized capital stock consists of
240,000,000 shares of Rite Aid Common Stock and 20,000,000 shares of Rite Aid
preferred stock, par value $1.00 per share (the 'Rite Aid Preferred Stock').
RITE AID PREFERRED STOCK
No shares of Rite Aid Preferred Stock will be issued or outstanding
immediately following the Merger. The Rite Aid Board is authorized to issue Rite
Aid Preferred Stock in one or more series and to determine liquidation
preferences, voting rights, dividend rights, conversion rights and redemption
rights.
RITE AID COMMON STOCK
Assuming the issuance of 42,865,712 shares of Rite Aid Common Stock
issuable to stockholders of Revco in the Merger and assuming the Merger occurred
as of the Record Date 126,695,042 shares of Rite Aid Common Stock would be
issued and outstanding. An additional 6,532,169 shares of Rite Aid Common Stock
are issued and held in the treasury of Rite Aid, and 6,279,486 shares of Rite
Aid Common Stock are reserved for issuance under Rite Aid's 1990 Omnibus Stock
Incentive Plan.
DIVIDEND RIGHTS
The holders of Rite Aid Common Stock are entitled to receive ratably, from
funds legally available for the payment thereof, dividends when and as declared
by resolution of the Rite Aid Board, subject to any preferential dividend rights
granted to the holders of Rite Aid Preferred Stock.
VOTING RIGHTS
Each holder of Rite Aid Common Stock is entitled to one vote in respect of
each share of such stock.
CHANGE OF CONTROL
DGCL. Section 203 of the DGCL prohibits generally a public Delaware
corporation, including Rite Aid, from engaging in a Business Combination (as
defined below) with an Interested Stockholder (as defined below) for a period of
three years after the date of the transaction in which an Interested Stockholder
became such, unless: (i) the board of directors of such corporation approved,
prior to the date such Interested Stockholder became such, either such Business
Combination or such transaction; (ii) upon consummation of such transaction,
such Interested Stockholder owns at least 85% of the voting shares of such
corporation (excluding specified shares); or (iii) such Business Combination is
approved by the board of directors of such corporation and authorized by the
affirmative vote (at an annual or special meeting and not by written consent) of
at least 66 2/3 % of the outstanding voting shares of such corporation
(excluding shares held by such Interested Stockholder). A 'Business Combination'
includes (i) mergers, consolidations and sales or other dispositions of 10% or
more of the assets of a corporation to or with an Interested Stockholder, (ii)
certain transactions resulting in the issuance or transfer to an Interested
Stockholder of any stock of such corporation or its subsidiaries and (iii) other
transactions resulting in a disproportionate financial benefit to an Interested
Stockholder. An 'Interested Stockholder' is a person who, together with its
affiliates and associates, owns (or within a three-year period did own) 15% or
more of a corporation's stock entitled to vote generally in the election of
directors.
Charter Provisions. The Rite Aid Charter specifies that the Rite Aid Board
shall be divided into three classes, as nearly equal in number as possible, and
shall consist of not less than three (3) nor more than fifteen (15) directors
elected for three year staggered terms. The Rite Aid By-laws provide that the
number of directors on the Rite Aid Board be fixed by the Rite Aid Board only,
or if the number is not fixed, the number will be
79
<PAGE>
seven. The number of directors may be increased or decreased by the Rite Aid
Board only. In the interim period between annual meetings of stockholders or of
special meetings of stockholders, vacancies and newly created directorships may
be filled by the Rite Aid Board. Any directors so elected will hold office until
the next election of the class to which such directors have been elected.
The Rite Aid Charter requires that any mergers, consolidations, asset
dispositions and other transactions involving a beneficial owner of 10% or more
of the voting power of the then outstanding classes of stock entitled to vote in
the election of directors (the 'Voting Stock') be approved, unless certain
conditions are satisfied, by the affirmative vote of the holders of shares
representing not less than 75% of the Voting Stock. These special voting
requirements do not apply if the transaction is approved by a majority of the
Continuing Directors (as defined below) or the consideration offered to the
stockholders of Rite Aid meets specified fair price standards (including related
procedural requirements as to the form of consideration and continued payment of
dividends). 'Continuing Directors' as defined in the Rite Aid Charter means a
member of the Rite Aid Board who was not affiliated with a Related Person (as
defined below) and was a member of the Rite Aid Board prior to the time that the
Related Person acquired the last shares of Rite Aid Common Stock entitling such
Related Person to exercise, in the aggregate, in excess of 10% of the total
voting power of all classes of Voting Stock, or any individual, corporation,
partnership, person or other entity ('Person') recommended to succeed a
Continuing Director by a majority of Continuing Directors. 'Related Person' as
defined in the Rite Aid Charter means any Person, affiliate or associate of such
Person, which has beneficial ownership directly or indirectly of shares of stock
of Rite Aid entitling such Person to exercise more than 10% of the total voting
power of all classes of Voting Stock.
The Rite Aid Charter also provides that any corporate action taken at a
special meeting of stockholders called by the Rite Aid Board or by written
consent of stockholders, a majority of which are not Continuing Directors, shall
require the approval of not less than 75% of the then outstanding Voting Stock.
The ability of the Rite Aid Board to issue and set the terms of Rite Aid
Preferred Stock could have the effect of making it more difficult for a third
person to acquire, or of discouraging a third person from attempting to acquire,
control of Rite Aid.
Rite Aid Rights Agreement. On April 5, 1989, the Rite Aid Board of
Directors declared a dividend distribution of one Right for each outstanding
share of Rite Aid Common Stock to stockholders of record at the close of
business on April 19, 1989. Each Right entitles the registered holder to
purchase from Rite Aid a unit consisting of one one-thousandth of a share (a
'Unit') of Series A Junior Participating Preferred Stock, par value $1.00 per
share, at a purchase price of $120 per Unit (the 'Purchase Price'), subject to
adjustment.
The Rights will separate from the Rite Aid Common Stock and a distribution
date (the 'Distribution Date') will occur upon the earlier of (i) 10 business
days following a public announcement that a person or group of affiliated or
associated persons (an 'Acquiring Person') has acquired, or obtained the right
to acquire, beneficial ownership of 20% or more of the outstanding shares of
Rite Aid Common Stock (the 'Stock Acquisition Date'), (ii) 10 business days (or
such later date as may be determined by the Rite Aid Board) following the
commencement of a tender offer or exchange offer that would result in a person
or group beneficially owning 20% or more of such outstanding shares of Rite Aid
Common Stock or (iii) 10 business days after the Rite Aid Board determines any
person, alone or together with its affiliates and associates, has become the
beneficial owner of an amount of Rite Aid Common Stock which the Rite Aid Board
determines to be substantial (which amount shall in no event be less than 15% of
the shares of Rite Aid Common Stock outstanding) and at least a majority of the
Rite Aid Board who are not officers of Rite Aid, after reasonable inquiry and
investigation, shall determine that (a) such beneficial ownership by such person
is intended to cause Rite Aid to repurchase the Rite Aid Common Stock
beneficially owned by such person or to cause pressure on Rite Aid to take
action or enter into a transaction or series of transactions intended to provide
such person with short-term financial gain under circumstances where the Rite
Aid Board determines that Rite Aid's and Rite Aid's stockholders' best long-term
interests would not be served by taking such action or entering into such
transactions or series of transactions at that time or (b) such beneficial
ownership is causing or is reasonably likely to cause a material adverse impact
on the business prospects of Rite Aid (any such person is herein referred to as
an 'Adverse Person').
Until the Distribution Date, (i) the Rights will be evidenced by the
certificates of Rite Aid Common Stock and will be transferred with and only with
such certificates, (ii) new Rite Aid Common Stock certificates issued after
April 19, 1989 will contain a notation incorporating the Rights Agreement by
reference and (iii) the
80
<PAGE>
surrender or transfer of any certificates of Rite Aid Common Stock outstanding
will also constitute the transfer of the Rights associated with the Rite Aid
Common Stock represented by such certificate.
The Rights are not exercisable until the Distribution Date and will expire
at the close of business on April 5, 1999, unless earlier redeemed by Rite Aid.
In the event that (i) a person becomes the beneficial owner of 20% or more
of the then outstanding shares of Rite Aid Common Stock (except pursuant to an
offer for all outstanding shares which at least a majority of non-interested
directors of Rite Aid determine to be fair to and otherwise in the best
interests of Rite Aid and its stockholders) or (ii) the Rite Aid Board
determines that a person is an Adverse Person, each Right holder will thereafter
have the right to receive, upon exercise, Rite Aid Common Stock (or, in certain
circumstances, cash, property or other securities of Rite Aid) having a value
equal to two times the exercise price of the Right. Notwithstanding any of the
foregoing, following the occurrence of any of the events set forth in this
paragraph, all Rights that are, or (under certain circumstances) were,
beneficially owned by any Acquiring Person or Adverse Person will be null and
void. However, Rights are not exercisable following the occurrence of either of
the events set forth above until such time as the Rights are no longer
redeemable by Rite Aid.
In the event that, at any time following the Stock Acquisition Date (i)
Rite Aid is acquired in a merger or other business combination transaction in
which Rite Aid is not the surviving corporation (other than mergers which follow
certain types of offers) or (ii) more than 50% of Rite Aid's assets, cash flow
or earning power is sold or transferred, each holder of a Right (except voided
Rights) shall thereafter have the right to receive, upon exercise, common stock
of the acquiring company having a value equal to two times the exercise price of
the Right. In the event that Rights cannot be exercised for common stock of the
acquiring company as set forth above, holders of Rights will be entitled to put
the Rights to the Acquiring Person for cash equal to the Purchase Price.
The Purchase Price payable, and the number of Units of Rite Aid Preferred
Stock or other securities or property issuable, upon exercise of the Rights are
subject to adjustment from time to time to prevent dilution (i) in the event of
a stock dividend on, or a subdivision, combination or reclassification of, Rite
Aid Preferred Stock, (ii) if holders of Rite Aid Preferred Stock are granted
certain rights or warrants to subscribe for Rite Aid Preferred Stock or
convertible securities at less than the current market price of the Rite Aid
Preferred Stock, or (iii) upon the distribution to holders of the Rite Aid
Preferred Stock of evidences of indebtedness or assets (excluding regular
quarterly cash dividends) or of subscription rights or warrants (other than
those referred to above).
In general, at any time until 10 business days following the Stock
Acquisition Date, Rite Aid may redeem the Rights in whole, but not in part, at a
price of $.01 per Right (payable in cash, Rite Aid Common Stock or other
consideration deemed appropriate by the Rite Aid Board). Rite Aid may not redeem
the Rights if the Rite Aid Board had previously declared a person to be an
Adverse Person. Immediately upon the action of the Rite Aid Board ordering
redemption of the Rights, the Rights will terminate and the only right of the
holders of Rights will be to receive the $.01 redemption price.
Each share of Revco Common Stock issued to holders of Revco Common Stock in
the Merger will be issued together with one associated Right in accordance with
the Rite Aid Rights Agreement.
MISCELLANEOUS
The holders of Rite Aid Common Stock do not have preemptive, subscription,
redemption or conversion rights. The outstanding shares of Rite Aid Common Stock
are, and the shares of Rite Aid Common Stock constituting the Share Issuance
upon issuance will be, duly authorized, validly issued, fully paid,
nonassessable and the outstanding shares of Rite Aid Common Stock are, and the
shares of Rite Aid Common Stock constituting the Share Issuance upon notice of
issuance will be, listed on the NYSE and the PSE.
81
<PAGE>
BUSINESS OF RITE AID
Rite Aid. Rite Aid Corporation is a Delaware corporation with its
principal executive offices located at 30 Hunter Lane, Camp Hill, Pennsylvania
17011. The telephone number of Rite Aid at such offices is (717) 761-2633. Rite
Aid is one of the largest retail drugstore chains in the United States. As of
March 4, 1995, Rite Aid operated over 2,700 drugstores, ranging approximately
from 7,200 to 11,000 square feet per store in size, in twenty-three states and
the District of Columbia. Rite Aid and its subsidiaries employed over 36,700
employees. Pharmacy service forms the core of Rite Aid's business, with
prescriptions accounting for 53.1% of drugstore sales in the year ended March 4,
1995.
Rite Aid's drugstores cater to convenience, offering a full selection of
health and personal care products, seasonal merchandise and a large private
label product line. Express mail with complementary services and one-hour photo
departments have recently been added in select locations.
Rite Aid also operates Eagle Managed Care Corporation, a wholly owned
subsidiary, which markets prescription plans and sells other managed health care
services to large employers and government-sponsored employee benefit programs.
Information regarding the names, ages, positions, and business backgrounds
of the executive officers and directors of Rite Aid, as well as additional
information, including executive compensation, security ownership of certain
beneficial owners and management and certain relationships and related
transactions, is incorporated by reference to Items 10, 11, 12 and 13 of Rite
Aid's Annual Report on Form 10-K for the fiscal year ended March 4, 1995 (which
incorporates portions of Rite Aid's definitive Proxy Statement for its 1995
Annual Meeting of Stockholders held on July 11, 1995).
Sub. Sub, a newly incorporated Delaware corporation and a wholly owned
subsidiary of Rite Aid, has not conducted any business other than in connection
with the Offer, the Merger Agreement, the Stock Option Agreement, and the
Stockholder Agreement. The Offer, which was commenced on December 4, 1995, has
been extended and is presently scheduled to expire on February 23, 1996. Rite
Aid reserves the right to further extend the Offer. All of the issued and
outstanding shares of capital stock of Sub are owned directly or indirectly by
Rite Aid. The principal executive offices of Sub are located at 30 Hunter Lane,
Camp Hill, Pennsylvania 17011. The telephone number of Sub at such offices is
(717) 761-2633.
BUSINESS OF REVCO
Revco is a Delaware corporation with its principal executive offices
located at 1925 Enterprise Parkway, Twinsburg, Ohio 44087. The telephone number
of Revco at such offices is (216) 425-9811. Revco is one of the largest retail
drugstore chains in the United States. As of June 3, 1995, Revco, operated over
2,100 stores, averaging approximately 8,864 square feet per store in size, in
fourteen contiguous midwestern, eastern and southeastern states, and employed
over 32,000 employees. Revco's stores are high-quality, health-oriented
neighborhood pharmacies offering pharmaceutical 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 drugs, health and beauty aids,
toiletries, vitamins, cosmetics and sundries, and a broad line of consumer
products.
Information regarding the names, ages, positions, and business backgrounds
of the executive officers and directors of Revco, as well as additional
information, including executive compensation, security ownership of certain
beneficial owners and management and certain relationships and related
transactions, is incorporated by reference to Items 10, 11, 12 and 13 of Revco's
Annual Report on Form 10-K for the fiscal year ended June 3, 1995 (which
incorporates portions of Revco's definitive Proxy Statement for its 1995 Annual
Meeting of Stockholders held on September 27, 1995).
82
<PAGE>
EXPERTS
The consolidated financial statements of Rite Aid Corporation as of March
4, 1995 and February 26, 1994, and for each of the years in the three-year
period ended March 4, 1995, have been incorporated by reference in this Proxy
Statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, incorporated by reference herein, and upon the
authority of said firm as experts in accounting and auditing. The report of KPMG
Peat Marwick LLP covering the March 4, 1995 consolidated financial statements
contains an explanatory paragraph describing changes in accounting principles.
With respect to the unaudited interim financial information of Rite Aid
Corporation for the periods ended June 3, 1995, September 2, 1995, and December
2, 1995 incorporated by reference herein, KPMG Peat Marwick LLP has reported
that they applied limited procedures in accordance with professional standards
for a review of such information. However, their separate report included in
Rite Aid's quarterly reports on Form 10-Q for the quarters ended June 3, 1995,
September 2, 1995, and December 2, 1995 and incorporated by reference herein,
state that they did not audit and they do not express an opinion on the interim
financial information. Accordingly, the degree of reliance on their reports on
such information should be restricted in light of the limited nature of the
review procedures applied. The accountants are not subject to the liability
provisions of Section 11 of the Securities Act for their report on the unaudited
interim financial information because that report is not a 'report' or a 'part'
of the Proxy Statement prepared or certified by the accountants within the
meaning of Sections 7 and 11 of the Securities Act.
The consolidated financial statements of Revco incorporated by reference in
this Proxy Statement to the extent and for the periods indicated in their report
have been audited by Arthur Andersen LLP, independent public accountants, and
are incorporated herein in reliance upon the authority of said firm as experts
in accounting and auditing in giving said report.
STOCKHOLDERS' PROPOSALS
It is presently anticipated that Rite Aid will hold its 1996 Annual Meeting
on or about June 26, 1996. Any stockholder wishing to submit a proposal to Rite
Aid for consideration for inclusion in its proxy statement relating to its 1996
Annual Meeting of Stockholders must have delivered such proposal to Rite Aid by
February 8, 1996.
83
<PAGE>
ANNEX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
RITE AID CORPORATION
OCEAN ACQUISITION CORPORATION
AND
REVCO D.S., INC.
DATED AS OF
NOVEMBER 29, 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I THE OFFER AND MERGER................................................................. A-1
Section 1.1 The Offer............................................................................ A-1
Section 1.2 Company Actions...................................................................... A-2
Section 1.3 The Merger........................................................................... A-3
Section 1.4 Effective Time....................................................................... A-4
Section 1.5 Closing.............................................................................. A-4
Section 1.6 Directors and Officers............................................................... A-4
Section 1.7 Stockholders' Meetings............................................................... A-5
ARTICLE II CONVERSION OF SHARES................................................................. A-6
Section 2.1 Conversion of Shares................................................................. A-6
Section 2.2 Alternative Consideration and Additional Consideration............................... A-7
Section 2.3 Issuance of Parent Common Stock or Payment of Cash Consideration..................... A-7
Section 2.4 Treatment of Stock Options........................................................... A-9
Section 2.5 Stock Transfer Books................................................................. A-9
Section 2.6 Dissenting Shares.................................................................... A-9
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY........................................ A-10
Section 3.1 Organization......................................................................... A-10
Section 3.2 Capitalization....................................................................... A-10
Section 3.3 Corporate Authorization; Validity of Agreement; Company Action....................... A-11
Section 3.4 Consents and Approvals; No Violations................................................ A-11
Section 3.5 SEC Reports and Financial Statements................................................. A-12
Section 3.6 Absence of Certain Changes........................................................... A-12
Section 3.7 No Undisclosed Liabilities........................................................... A-13
Section 3.8 Information in Proxy Statement/Prospectus............................................ A-13
Section 3.9 Employee Benefit Plans; ERISA........................................................ A-13
Section 3.10 Litigation........................................................................... A-15
Section 3.11 No Default........................................................................... A-15
Section 3.12 Taxes................................................................................ A-15
Section 3.13 Contracts............................................................................ A-16
Section 3.14 Assets; Real Property................................................................ A-16
Section 3.15 Environmental Matters................................................................ A-16
Section 3.16 Reimbursement........................................................................ A-17
Section 3.17 Labor Relations...................................................................... A-17
Section 3.18 Insurance............................................................................ A-17
Section 3.19 Transactions with Affiliates......................................................... A-17
Section 3.20 Compliance with Law.................................................................. A-17
Section 3.21 Vote Required........................................................................ A-17
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB..................................... A-18
Section 4.1 Organization......................................................................... A-18
Section 4.2 Capitalization....................................................................... A-18
Section 4.3 Corporate Authorization; Validity of Agreement; Necessary Action..................... A-18
Section 4.4 Consents and Approvals; No Violations................................................ A-19
Section 4.5 SEC Reports and Financial Statements................................................. A-19
Section 4.6 Absence of Certain Changes........................................................... A-19
Section 4.7 No Undisclosed Liabilities........................................................... A-20
Section 4.8 Information in Proxy Statement/Prospectus............................................ A-20
Section 4.9 Litigation........................................................................... A-20
Section 4.10 Taxes................................................................................ A-20
Section 4.11 Compliance with Law.................................................................. A-21
Section 4.12 No Default........................................................................... A-21
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Section 4.13 Financing............................................................................ A-21
Section 4.14 Opinion of Financial Advisor......................................................... A-21
ARTICLE V COVENANTS............................................................................ A-22
Section 5.1 Interim Operations of the Company.................................................... A-22
Section 5.2 Treatment of Certain Indebtedness.................................................... A-24
Section 5.3 Access to Information................................................................ A-24
Section 5.4 Consents and Approvals............................................................... A-24
Section 5.5 Employee Benefits.................................................................... A-25
Section 5.6 No Solicitation...................................................................... A-27
Section 5.7 Additional Agreements................................................................ A-27
Section 5.8 Publicity............................................................................ A-27
Section 5.9 Notification of Certain Matters...................................................... A-28
Section 5.10 Directors' and Officers' Insurance and Indemnification............................... A-28
Section 5.11 Rule 145 Affiliates.................................................................. A-28
Section 5.12 Cooperation.......................................................................... A-28
Section 5.13 Proxy Statement/Prospectus........................................................... A-29
Section 5.14 New York State Real Property Transfer and Gains Taxes................................ A-29
Section 5.15 Confidentiality/Standstill Agreement................................................. A-29
Section 5.16 Stock Exchange Listing............................................................... A-29
ARTICLE VI CONDITIONS........................................................................... A-30
Section 6.1 Conditions to the Obligations of Each Party.......................................... A-30
ARTICLE VII TERMINATION.......................................................................... A-30
Section 7.1 Termination.......................................................................... A-30
Section 7.2 Effect of Termination................................................................ A-31
Section 7.3 Termination Fee...................................................................... A-31
ARTICLE VIII MISCELLANEOUS........................................................................ A-32
Section 8.1 Fees and Expenses.................................................................... A-32
Section 8.2 Finders' Fees........................................................................ A-32
Section 8.3 Amendment and Modification........................................................... A-32
Section 8.4 Nonsurvival of Representations and Warranties........................................ A-32
Section 8.5 Notices.............................................................................. A-32
Section 8.6 Interpretation....................................................................... A-33
Section 8.7 Counterparts......................................................................... A-33
Section 8.8 Entire Agreement; No Third Party Beneficiaries; Rights of Ownership.................. A-33
Section 8.9 Severability......................................................................... A-33
Section 8.10 Specific Performance................................................................. A-33
Section 8.11 Governing Law........................................................................ A-34
Section 8.12 Assignment........................................................................... A-34
Section 8.13 Joint and Several Liability.......................................................... A-34
Exhibits
Annexes
</TABLE>
ii
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of November 29, 1995, by and among
Rite Aid Corporation, a Delaware corporation ('Parent'), Ocean Acquisition
Corporation, a Delaware corporation and a wholly owned subsidiary of Parent
('Sub'), and Revco D.S., Inc., a Delaware corporation (the 'Company').
WHEREAS, the Boards of Directors of Parent, Sub and the Company have
approved, and deem it advisable and in the best interests of their respective
stockholders to consummate, the acquisition of the Company by Parent upon the
terms and subject to the conditions set forth herein;
WHEREAS, it is intended that the acquisition be accomplished by Sub
commencing a cash tender offer for Shares (as defined in Section 1.1) to be
followed by a merger of Sub with and into the Company (the 'Merger'), with the
Company being the surviving corporation;
WHEREAS, as a condition and inducement to Parent and Sub entering into this
Agreement and incurring the obligations set forth herein, concurrently with the
execution and delivery of this Agreement, Parent is entering into a Stockholder
Agreement with Zell/Chilmark Fund, L.P. in the form of Exhibit A hereto (the
'Zell/Chilmark Stockholder Agreement'), pursuant to which, among other things,
such stockholder has agreed to vote the Shares then owned by such stockholder in
favor of the Merger provided for herein;
WHEREAS, as a condition and inducement to Parent and Sub entering into this
Agreement and incurring the obligations set forth herein, concurrently with the
execution and delivery of this Agreement, Parent and the Company are entering
into a Stock Option Agreement in the form of Exhibit B hereto (the 'Stock Option
Agreement'), pursuant to which, among other things, the Company has granted
Parent the right to purchase Shares representing 19.9% of the outstanding Shares
at the date of exercise under certain circumstances;
WHEREAS, the Board of Directors of the Company has approved the
transactions contemplated by this Agreement, the Zell/Chilmark Stockholder
Agreement and the Stock Option Agreement in accordance with the provisions of
Section 203 of the Delaware General Corporation Law (the 'DGCL') and has
resolved to recommend the acceptance of the Offer (as defined in Section 1.1)
and the approval of the Merger by the holders of Shares; and
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein and in
the Zell/Chilmark Stockholder Agreement and the Stock Option Agreement, the
parties hereto agree as follows:
ARTICLE I
THE OFFER AND MERGER
Section 1.1 The Offer. (a) As promptly as practicable (but in no event
later than five business days after the public announcement of the execution
hereof), Sub shall commence (within the meaning of Rule 14d-2 under the
Securities Exchange Act of 1934, as amended (the 'Exchange Act')) an offer (the
'Offer') to purchase for cash not less than 35,144,833 shares and up to all of
the issued and outstanding common stock, par value $.01 per share (referred to
herein as either the 'Shares' or 'Company Common Stock'), of the Company at a
price of $27.50 per Share, net to the seller in cash (such price, or such higher
price per Share as may be paid in the Offer, being referred to herein as the
'Offer Price'), the exact number of Shares within such range to be determined by
Parent in its sole discretion, it being hereby agreed that Parent may change the
amount of Shares sought to be purchased in the Offer within such range at any
time prior to consummation of the Offer, provided that Parent complies with the
requirements of Rule 14e-1 of the Exchange Act. The Offer shall be subject to
there being validly tendered and not withdrawn prior to the expiration of the
Offer, at least 35,144,833 Shares or such other number of Shares as shall equal
50.1% of the Shares outstanding on a fully-diluted basis as of the expiration of
the Offer (the 'Minimum Condition') and to the other conditions set forth in
Annex A hereto. Sub shall, on the terms and subject to the prior satisfaction or
waiver of the conditions of the Offer, accept for payment and pay for Shares
tendered as soon as practicable after the later of the satisfaction of the
conditions to the Offer and the expiration of the Offer; provided, however, that
no such payment shall be made until after any calculation of proration as
required by applicable law. The obligations of Sub to commence the Offer and to
accept for payment and to pay for any Shares validly tendered on or prior to the
expiration of the Offer and not withdrawn shall be
A-1
<PAGE>
subject only to the conditions set forth in Annex A hereto. The Offer shall be
made by means of an offer to purchase (the 'Offer to Purchase') containing the
terms set forth in this Agreement and the conditions set forth in Annex A
hereto. Without the written consent of the Company, Sub shall not amend or waive
the Minimum Condition, decrease the Offer Price, change the number of Shares
sought to an amount less than 50.1% of the outstanding Shares on a fully-diluted
basis, change the form of consideration to be paid pursuant to the Offer or
impose conditions to the Offer in addition to those set forth in Annex A hereto,
or amend any other term or condition of the Offer in any manner which is adverse
to the holders of Shares; provided, however, that if on the initial scheduled
expiration date of the Offer (as it may be extended in accordance with the terms
hereof), all conditions to the Offer shall not have been satisfied or waived,
the Offer may be extended from time to time without the consent of the Company
for such period of time as is reasonably expected to be necessary to satisfy the
unsatisfied conditions. In addition, the Offer Price may be increased and the
Offer may be extended to the extent required by law in connection with such
increase in each case without the consent of the Company.
(b) Parent and Sub shall file with the United States Securities and
Exchange Commission (the 'SEC') as soon as practicable on the date the Offer is
commenced, a Tender Offer Statement on Schedule 14D-1 with respect to the Offer
(together with all amendments and supplements thereto and including the exhibits
thereto, the 'Schedule 14D-1') which will include, as exhibits, the Offer to
Purchase and a form of letter of transmittal and summary advertisement
(collectively, together with the Schedule 14D-1 and any amendments and
supplements thereto, the 'Offer Documents'). Parent and Sub represent that the
Offer Documents will comply in all material respects with the provisions of
applicable federal securities laws and, on the date filed with the SEC and on
the date first published, sent or given to the Company's stockholders, will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading, except that no representation is made by Parent or Sub with respect
to information supplied by the Company in writing for inclusion in the Offer
Documents. The information supplied by the Company for inclusion in the Offer
Documents will not, on the date filed with the SEC and on the date first
published, sent or given to the Company's stockholders, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. Each of Parent and
Sub further agrees to take all steps necessary to cause the Offer Documents to
be filed with the SEC and to be disseminated to holders of Shares, in each case
as and to the extent required by applicable federal securities laws. Each of
Parent and Sub, on the one hand, and the Company, on the other hand, agrees
promptly to correct any information provided by it for use in the Offer
Documents if and to the extent that it shall have become false and misleading in
any material respect, and Parent and Sub further agree to take all steps
necessary to cause the Offer Documents as so corrected to be filed with the SEC
and to be disseminated to holders of Shares, in each case as and to the extent
required by applicable federal securities laws. The Company and its counsel
shall be given the opportunity to review the Schedule 14D-1 and the Offer
Documents before they are filed with the SEC. In addition, Parent and Sub agree
to provide the Company and its counsel in writing with any comments Parent, Sub
or their counsel may receive from time to time from the SEC or its staff with
respect to the Offer Documents promptly after the receipt of such comments.
Parent and Sub will cooperate with the Company in responding to any comments
received from the SEC with respect to the Offer and amending the Offer in
response to any such comments.
Section 1.2 Company Actions. (a) The Company hereby approves of and
consents to the Offer and represents that the Board of Directors, at a meeting
duly called and held, has unanimously (with one director absent and two
directors abstaining) (i) determined that this Agreement and the transactions
contemplated hereby, including, without limitation, the Offer, the Merger, the
Zell/Chilmark Stockholder Agreement, the Stock Option Agreement and the
transactions contemplated thereby, are fair to and in the best interests of the
holders of Shares, (ii) approved this Agreement and the transactions
contemplated hereby, including, without limitation, the Offer and the Merger,
and approved the Zell/Chilmark Stockholder Agreement, the Stock Option Agreement
and the transactions contemplated thereby, such determination and approval
constituting approval thereof for purposes of Section 203 of the DGCL, and (iii)
resolved to recommend that the stockholders of the Company who desire to receive
cash for their Shares accept the Offer and tender their Shares thereunder to Sub
and that all stockholders of the Company approve and adopt this Agreement;
provided, however, that prior to the purchase by Sub of Shares pursuant to the
Offer, the Company may modify, withdraw or change such recommendation only to
the extent that the Board of Directors of the Company determines, after having
received the oral or written opinion of
A-2
<PAGE>
outside legal counsel to the Company, that the failure to so withdraw, modify or
change would result in a breach of the Board of Directors' fiduciary duties
under applicable laws.
(b) Concurrently with the commencement of the Offer, the Company shall file
with the SEC a Solicitation/Recommendation Statement on Schedule 14D-9 (together
with all amendments and supplements thereto and including the exhibits thereto,
the 'Schedule 14D-9') which shall contain the recommendation referred to in
clauses (i), (ii) and (iii) of Section 1.2(a) hereof; provided, however, that
the Company may modify, withdraw or change such recommendation only to the
extent that the Board of Directors of the Company determines, after having
received the oral or written opinion of outside legal counsel to the Company,
that the failure to so withdraw, modify or change would result in a breach of
the Board of Directors' fiduciary duties under applicable laws and any such
withdrawal, change or modification shall not constitute a breach of this
Agreement. The Company represents that the Schedule 14D-9 will comply in all
material respects with the provisions of applicable federal securities laws and,
on the date filed with the SEC and on the date first published, sent or given to
the Company's stockholders, shall not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading, except that no representation is
made by the Company with respect to information supplied by Parent or Sub for
inclusion in the Schedule 14D-9. The information supplied by Parent and Sub for
inclusion in the Schedule 14D-9 will not, on the date filed with the SEC and on
the date first published, sent or given to the Company's stockholders, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The Company further agrees to take all steps necessary to cause the
Schedule 14D-9 to be filed with the SEC and to be disseminated to holders of
Shares, in each case as and to the extent required by applicable federal
securities laws. Each of the Company, on the one hand, and Parent and Sub, on
the other hand, agrees promptly to correct any information provided by it for
use in the Schedule 14D-9 if and to the extent that it shall have become false
and misleading in any material respect and the Company further agrees to take
all steps necessary to cause the Schedule 14D-9 as so corrected to be filed with
the SEC and to be disseminated to holders of Shares, in each case as and to the
extent required by applicable federal securities laws. Parent and its counsel
shall be given the opportunity to review the Schedule 14D-9 before it is filed
with the SEC. In addition, the Company agrees to provide Parent, Sub and their
counsel in writing with any comments the Company or its counsel may receive from
time to time from the SEC or its staff with respect to the Schedule 14D-9
promptly after the receipt of such comments. The Company will cooperate with
Parent and Sub in responding to any comments received from the SEC with respect
to the Schedule 14D-9 and amending the Schedule 14D-9 in response to any such
comments.
(c) In connection with the Offer, if requested by Sub, the Company will
promptly furnish or cause to be furnished to Sub mailing labels, security
position listings and any available listing or computer file containing the
names and addresses of the record holders of the Shares as of a recent date, and
shall furnish Sub with such information and assistance as Sub or its agents may
reasonably request in communicating the Offer to the stockholders of the
Company. Except for such steps as are necessary to disseminate the Offer
Documents, Parent and Sub shall hold in confidence the information contained in
any of such labels and lists and the additional information referred to in the
preceding sentence, will use such information only in connection with the Offer,
and, if this Agreement is terminated, will upon request of the Company deliver
or cause to be delivered to the Company all copies of such information then in
its possession or the possession of its agents or representatives.
(d) The Board of Directors of the Company has received the written opinion
of Morgan Stanley & Co. Incorporated ('Company Financial Advisor'), dated as of
a date which is on or prior to the date of this Agreement, to the effect that,
as of such date, the consideration to be received by holders of Shares (other
than Sub and its affiliates) pursuant to the Offer and Merger, taken together,
is fair from a financial point of view to such holders (the 'Company Fairness
Opinion'). The Company has delivered to Sub a copy of the Company Fairness
Opinion, together with Company Financial Advisor's authorization to the
inclusion of the Company Fairness Opinion in the Offer Documents and the Proxy
Statement/Prospectus (as defined in Section 1.7).
Section 1.3 The Merger. Subject to the terms and conditions of this
Agreement and in accordance with the DGCL at the Effective Time, the Company and
Sub shall consummate a merger (the 'Merger') pursuant to which (i) Sub shall be
merged with and into the Company and the separate corporate existence of Sub
shall thereupon cease, and (ii) the Company shall be the successor or surviving
corporation in the Merger (the
A-3
<PAGE>
'Surviving Corporation') and shall continue to be governed by the laws of the
State of Delaware. Pursuant to the Merger, (x) the Certificate of Incorporation
of the Company, as in effect immediately prior to the Effective Time, shall be
the Certificate of Incorporation of the Surviving Corporation until thereafter
amended as provided by law and such Certificate of Incorporation, and (y) the
By-laws of the Company, as in effect immediately prior to the Effective Time,
shall be the By-laws of the Surviving Corporation until thereafter amended as
provided by law, the Certificate of Incorporation of the Surviving Corporation
and such By-laws. The Merger shall have the effects set forth in the DGCL.
Section 1.4 Effective Time. (a) Parent, Sub and the Company will cause a
Certificate of Merger (the 'Certificate of Merger') with respect to the Merger
to be executed and filed on the date of the Closing (as defined in Section 1.5)
(or on such other date as Parent and the Company may agree) with the Secretary
of State of the State of Delaware as provided in the DGCL. The Merger shall
become effective on the date on which the Certificate of Merger has been duly
filed with the Secretary of State or such time as is agreed upon by the parties
and specified in the Certificate of Merger, and such time is hereinafter
referred to as the 'Effective Time'.
(b) If Shares are purchased in the Offer, Parent and Sub covenant and agree
to consummate the Merger pursuant to the terms of this Agreement not later than
June 30, 1996.
Section 1.5 Closing. The closing of the Merger (the 'Closing') will take
place at 10:00 a.m., New York City time, on a date to be specified by the
parties, which shall be no later than the third business day after satisfaction
or waiver of all of the conditions set forth in Article VII hereof (the 'Closing
Date'), at the offices of Skadden, Arps, Slate, Meagher & Flom, 919 Third
Avenue, New York, New York, unless another time, date or place is agreed to in
writing by the parties hereto.
Section 1.6 Directors and Officers. (a) Promptly upon the acceptance for
payment of any Shares by Parent or any of its Subsidiaries (as defined in
Section 3.1 hereof) pursuant to the Offer, Parent shall be entitled to designate
such number of directors, rounded up to the next whole number, on the Board of
Directors of the Company as is equal to the product of the total number of
directors on such Board (giving effect to the directors designated by Parent
pursuant to this sentence) multiplied by the percentage that the aggregate
number of Shares beneficially owned by Sub, Parent and any of their affiliates
bears to the total number of shares of Company Common Stock then outstanding.
The Company shall, upon request of Parent, use its best efforts promptly either
to increase the size of its Board of Directors or, at the Company's election,
secure the resignations of such number of its incumbent directors as is
necessary to enable Parent's designees to be so elected to the Company's Board,
and shall cause Parent's designees to be so elected. At such time, the Company
shall also cause persons designated by Parent to constitute the same percentage
(rounded up to the next whole number) as is on the Company's Board of Directors
of (i) each committee of the Company's Board of Directors, (ii) each board of
directors (or similar body) of each Subsidiary of the Company and (iii) each
committee (or similar body) of each such board, in each case only to the extent
permitted by applicable law or the rules of any stock exchange on which the
Company Common Stock is listed. Notwithstanding the foregoing, until the
Effective Time, each of Parent, Sub and the Company shall use its best efforts
to retain as a member of the Company's Board of Directors at least two directors
who are directors of the Company on the date hereof (the 'Continuing
Directors'); provided, that subsequent to the purchase of and payment for Shares
pursuant to the Offer, Parent shall always have its designees represent at least
a majority of the entire Board of Directors. In the event of a vacancy on the
Board of Directors resulting from the resignation or death of any Continuing
Director, such vacancy shall be filled by the remaining Continuing Directors, or
if there are no remaining Continuing Directors by the designees of Zell/Chilmark
Fund, L.P. The Company's obligations under this Section 1.6(a) shall be subject
to Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder. The
Company shall promptly take all actions required pursuant to such Section 14(f)
and Rule 14f-1 in order to fulfill its obligations under this Section 1.6(a),
including mailing to stockholders the information required by such Section 14(f)
and Rule 14f-1 as is necessary to enable Parent's designees to be elected to the
Company's Board of Directors. Parent or Sub will supply the Company any
information with respect to either of them and their nominees, officers,
directors and affiliates required by such Section 14(f) and Rule 14f-1. The
provisions of this Section 1.6(a) are in addition to and shall not limit any
rights which Sub, Parent or any of their affiliates may have as a holder or
beneficial owner of Shares as a matter of law with respect to the election of
directors or otherwise.
A-4
<PAGE>
(b) From and after the time, if any, that Parent's designees constitute a
majority of the Company's Board of Directors and prior to the Effective Time,
(i) any material amendment of this Agreement, (ii) any termination of this
Agreement by the Company, (iii) any extension of time for performance of any of
the obligations of Parent or Sub hereunder, (iv) any waiver of any condition or
any of the Company's rights hereunder, (v) any amendment or change to the
Certificate of Incorporation or By-laws of the Company or any of its
Subsidiaries, (vi) any amendment or change to any Benefit Plan (as defined in
Section 3.9(a)) or compensation policies or severance obligations (including
those agreements or obligations referenced in Section 3.9 hereof or set forth in
Schedule 3.9 of the Company Disclosure Schedule) or (vii) any amendment or
change to the policies of directors' and officers' liability insurance
maintained by the Company and its Subsidiaries on the date hereof, may be
effected only by the action of a majority of the Board of Directors of the
Company, which majority includes a majority of the Continuing Directors;
provided, that if there shall be no Continuing Directors, actions may be
effected by majority vote of the entire Board of Directors of the Company. Any
actions with respect to the enforcement of this Agreement by the Company shall
be effected only by the action of a majority of the Continuing Directors.
(c) The directors and officers of Sub at the Effective Time shall, from and
after the Effective Time, be the initial directors and officers of the Surviving
Corporation until their successors shall have been duly elected or appointed or
qualified or until their earlier death, resignation or removal in accordance
with the Surviving Corporation's Certificate of Incorporation and By-laws.
Section 1.7 Stockholders' Meetings. (a) In order to consummate the Merger,
the Company, acting through its Board of Directors, shall, in accordance with
applicable law, duly call, give notice of, convene and hold a special meeting of
its stockholders (the 'Company Special Meeting'), as soon as practicable after
the registration statement on Form S-4 (together with all amendments, schedules,
and exhibits thereto) to be filed by Parent in connection with the registration
of the Parent Common Stock to be issued by Parent in the Merger (the
'Registration Statement') is declared effective, for the purpose of considering
and taking action upon this Agreement. The Company shall include in the joint
proxy statement/prospectus forming a part of the Registration Statement (the
'Proxy Statement/Prospectus') the recommendation of the Board of Directors of
the Company that stockholders of the Company vote in favor of the approval of
the Merger and the adoption of this Agreement. Parent agrees that it will vote,
or cause to be voted, all of the Shares then owned by it, Sub or any of its
other Subsidiaries, in favor of the approval of the Merger and adoption of the
Merger Agreement at the Company Special Meeting.
(b) In order to consummate the Merger, Parent, acting through its Board of
Directors, shall, in accordance with applicable law, duly call, give notice of,
convene and hold a special meeting of its stockholders (the 'Parent Special
Meeting' and together with the Company Special Meeting, the 'Special Meetings'),
as soon as practicable after the Registration Statement is declared effective,
for the purpose of authorizing the issuance of shares of Parent Common Stock (as
defined below) pursuant to the Merger. Parent shall include in the Proxy
Statement/Prospectus the recommendation of the Board of Directors of Parent that
stockholders of Parent vote in favor of the issuance of shares of Parent common
stock, par value $1.00 per share ('Parent Common Stock'), in the Merger.
(c) Nothing in this Section 1.7 is intended to impair the fiduciary duties
of the Boards of Directors of the Company or Parent or, in the case of the Board
of Directors of the Company, to restrict its ability to exercise its right of
termination pursuant to Section 7.1(c)(1) of this Agreement.
A-5
<PAGE>
ARTICLE II
CONVERSION OF SHARES
Section 2.1 Conversion of Shares. (a) Each share of Common Stock, par
value $.01 per share, of Sub issued and outstanding immediately prior to the
Effective Time, without any other action by Parent, Sub or the Company, shall,
at the Effective Time, be converted into and become one fully paid and
nonassessable share of common stock of the Surviving Corporation.
(b) Each share of Company Common Stock issued and outstanding immediately
prior to the Effective Time (other than Shares to be cancelled pursuant to
Section 2.1(d) hereof and other than Dissenting Shares (as defined in Section
2.6), if any) shall, at the Effective Time, by virtue of the Merger and without
any action on the part of the holder thereof, be converted into either (i) the
right to receive a number of duly authorized, validly issued, fully paid and
nonassessable shares of Parent Common Stock determined as set forth in clause
(c) below; provided that Parent shall not issue more than 1.12500 nor less than
.91666 shares of Parent Common Stock per Share (the 'Exchange Ratio') or (ii) if
the alternative consideration contemplated by Section 2.2 hereof is applicable,
then the right to receive the Alternative Consideration (as defined in Section
2.2), plus, in each of clause (i) and (ii) above, any Additional Consideration
contemplated by Section 2.2 hereof.
(c) For purposes hereof, 'Average Parent Share Price' shall mean the
average closing price per share of Parent Common Stock on the New York Stock
Exchange (the 'NYSE') as reported on the NYSE Composite Tape for fifteen NYSE
trading days selected by Parent and the Company by lot from among the forty NYSE
trading days ending on the fifth trading day immediately preceding the Company
Special Meeting. 'Transaction Price' shall mean $27.50 per Share. The number of
shares of Parent Common Stock into which each Share shall be converted in the
Merger shall be determined as follows:
1. In the event the Average Parent Share Price equals the Transaction
Price, each Share shall be converted into one share of Parent Common Stock.
2. In the event that the Average Parent Share Price is greater than
the Transaction Price, each Share shall be converted into a number of
shares of Parent Common Stock (rounded to the nearest one one-hundred
thousandth) determined by the following formula:
<TABLE>
<S> <C> <C>
Number of shares of Parent Common Transaction Price plus .5 x (Average
Stock = Parent Share Price minus Transaction Price)
-------------------------------------------
Average Parent Share Price
</TABLE>
3. In the event that the Average Parent Share Price is less than the
Transaction Price, each Share shall be converted, at the option of Parent,
into either:
(I) a number of shares of Parent Common Stock (rounded to the
nearest one one-hundred thousandth) determined by the following
formula:
<TABLE>
<S> <C> <C>
Number of shares of Parent Common Transaction Price minus .5 x (Transaction
Stock = Price minus Average Parent Share Price)
-----------------------------------------
Average Parent Share Price
</TABLE>
or (II) one share of Parent Common Stock plus the Cash Adjustment
Amount, without any interest thereon, where the Cash Adjustment
Amount is determined by the following formula:
<TABLE>
<S> <C> <C>
Cash Adjustment Amount = .5 x (Transaction Price minus Average Parent Share Price);
</TABLE>
provided, however, in no event shall the Cash Adjustment Amount be
greater than $2.75 per Share.
(d) All shares of Company Common Stock that are owned by the Company as
treasury stock and any shares of Company Common Stock owned by Parent, Sub or
any other direct or indirect wholly owned Subsidiary of Parent shall, at the
Effective Time, be cancelled and retired and shall cease to exist and no Parent
Common Stock or cash, if the alternative consideration contemplated by Section
2.2 hereof is applicable, shall be delivered in exchange therefor.
(e) On and after the Effective Time, holders of certificates which
immediately prior to the Effective Time represented outstanding Shares (the
'Certificates') shall cease to have any rights as stockholders of the Company,
except the right to receive the consideration set forth in this Article II
(other than the Additional
A-6
<PAGE>
Consideration provided by Section 2.2(c) hereof) (the 'Merger Consideration')
for each Share held by them or, if applicable, payments due to holders of
Dissenting Shares (as defined in Section 2.6 hereof).
Section 2.2 Alternative Consideration and Additional Consideration. (a) In
the event that the stockholders of Parent shall not approve the issuance of
Parent Common Stock pursuant to the Merger at the Parent Special Meeting, but
all conditions to the Merger are otherwise satisfied or waived (if permissible),
the Company, Parent and Sub shall nonetheless consummate the Merger and each
share of Company Common Stock issued and outstanding immediately prior to the
Effective Time (other than treasury Shares and Shares owned by Parent and its
Subsidiaries) shall, at the Effective Time, by virtue of the Merger and without
any action on the part of the holder hereof, be converted into the right to
receive the following consideration (the 'Alternative Consideration') in a
combination of shares of Parent Common Stock and cash determined as follows:
1. The number of shares of Parent Common Stock into which each Share
shall be converted in the Merger (the 'Adjusted Exchange Ratio') shall
equal the Exchange Ratio determined pursuant to Section 2.1(c) hereof
(assuming no Cash Adjustment Amount is paid) multiplied by a fraction (the
'Adjustment Fraction'), the numerator of which is the number of shares of
Parent Common Stock equal to 19.9% of the then outstanding shares of Parent
Common Stock and the denominator of which is (a) the Exchange Ratio
multiplied by (b) the aggregate number of outstanding Shares (other than
treasury Shares and Shares owned by Parent and its Subsidiaries); and
2. The amount of cash (the 'Adjusted Alternative Cash Consideration')
into which each Share shall be converted in the Merger shall equal the
Transaction Price multiplied by 1 minus the Adjustment Fraction.
(b) In the event the Merger is not consummated prior to April 29, 1996 and
the Company shall not have materially breached this Agreement (other than by
acts caused or permitted by Parent), then the stockholders of the Company shall
be entitled to receive interest on the amount of the Merger Consideration that
they receive, from April 29, 1996 until the earlier of the Effective Time or
June 30, 1996, calculated at an annual rate equal to the prime rate of interest
(as announced from time to time by Morgan Guaranty Trust Company of New York).
For purposes of calculating the Merger Consideration, the Average Parent Share
Price, if not otherwise ascertainable in accordance with the terms of this
Agreement, shall be the average price of Parent Common Stock based on the 15
highest closing prices of Parent Common Stock since the consummation of the
Offer until the earlier of June 30, 1996 or the Effective Time.
(c) In the event Parent and/or Sub, in violation of their obligations under
this Agreement, fails or refuses to consummate the Merger on or prior to June
30, 1996 and the Company shall not have materially breached this Agreement
(other than by acts caused or permitted by Parent), then, in addition to any
rights or remedies that the Company and its stockholders otherwise have in law
or at equity as a result thereof, the stockholders of the Company shall be
entitled to receive interest from June 30, 1996 on the amount of the Merger
Consideration not paid until such Merger Consideration is paid, calculated at
the annual rate of the higher of (i) the prime rate of interest (as announced
from time to time by Morgan Guaranty Trust Company of New York) plus 300 basis
points or (ii) the amount otherwise permitted by law. For purposes of
calculating the Merger Consideration, the Average Parent Share Price, if not
otherwise ascertainable in accordance with the terms of this Agreement, shall be
the average price of Parent Common Stock based on the 15 highest closing prices
of Parent Common Stock since the consummation of the Offer until such Merger
Consideration is paid. Any additional consideration paid or payable pursuant to
Section 2.2(b) or Section 2.2(c) is referred to herein as 'Additional
Consideration'.
Section 2.3 Issuance of Parent Common Stock or Payment of Cash
Consideration. (a) The manner in which each Share (other than Shares to be
cancelled as set forth in Section 2.1(d)) shall be converted into Parent Common
Stock or, if the Alternative Consideration contemplated by Section 2.2 hereof is
applicable, the right to receive the Alternative Consideration in the Merger
shall be as set forth in this Section 2.3.
(b) No certificates or scrip representing fractional shares of Parent
Common Stock shall be issued upon the surrender for exchange of Certificates
representing Shares, no dividend or distribution with respect to shares shall be
payable on or with respect to any fractional share and such fractional share
interests shall not entitle the owner thereof to vote or to any other rights of
a stockholder of Parent. In lieu of any such fractional share of Parent Common
Stock, Parent shall pay to each former stockholder of the Company who otherwise
would be entitled to receive a fractional share of Parent Common Stock an amount
in cash determined by multiplying (i) the Average Parent Share Price on the date
on which the Effective Time occurs by (ii) the fractional interest in a share of
Parent Common Stock to which such holder would otherwise be entitled.
A-7
<PAGE>
(c) Parent shall designate a bank or trust company to act as agent for the
holders of shares of Company Common Stock in connection with the Merger (the
'Exchange Agent') to receive the shares of Parent Common Stock and the Cash
Adjustment Amount, if any, or the Alternative Consideration, as the case may be,
and any Additional Consideration to which holders of shares of Company Common
Stock shall become entitled pursuant to this Article II.
(d) As soon as reasonably practicable after the Effective Time, the
Exchange Agent shall mail to each holder of record of a Certificate whose shares
were converted pursuant to this Article II into the right to receive the Merger
Consideration (i) a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Certificates shall pass,
only upon delivery of the Certificates to the Exchange Agent and shall be in
such form and have such other provisions as Parent may reasonably specify) and
(ii) instructions for use in effecting the surrender of the Certificates in
exchange for the Merger Consideration and any Additional Consideration
contemplated by Section 2.2(c). Upon surrender of a Certificate for cancellation
to the Exchange Agent or to such other agent or agents as may be appointed by
Parent, together with such letter of transmittal, duly executed, the holder of
such Certificate shall be entitled to receive in exchange therefor the Merger
Consideration and any Additional Consideration contemplated by Section 2.2(c)
for each share of Company Common Stock formerly represented by such Certificate
and the Certificate so surrendered shall forthwith be cancelled. If payment of
the Merger Consideration and any Additional Consideration contemplated by
Section 2.2(c) is to be made to a person other than the person in whose name the
surrendered Certificate is registered, it shall be a condition of payment that
the Certificate so surrendered shall be properly endorsed or shall be otherwise
in proper form for transfer and that the person requesting such payment shall
have paid any transfer and other taxes required by reason of the payment of the
Merger Consideration and any Additional Consideration contemplated by Section
2.2(c) to a person other than the registered holder of the Certificate
surrendered or shall have established to the satisfaction of the Surviving
Corporation that such tax either has been paid or is not applicable.
(e) Immediately following the Effective Time, Parent shall deliver, in
trust, to the Exchange Agent, for the benefit of the holders of Shares, (i)
certificates representing an aggregate number of shares of Parent Common Stock
as nearly as practicable equal to the product of the Exchange Ratio and the
number of Shares to be converted into Parent Common Stock as determined by this
Article II plus, if applicable, the Cash Adjustment Amount multiplied by the
number of Shares to be converted into Parent Common Stock as determined by this
Article II or (ii) if the Alternative Consideration contemplated by Section 2.2
hereof is applicable, certificates representing an aggregate number of shares of
Parent Common Stock as nearly as practicable equal to the product of the
Adjusted Exchange Ratio and the number of Shares to be converted into Parent
Common Stock as determined by this Article II, plus an amount of cash equal to
the product of the Adjusted Alternative Cash Consideration and the number of
Shares to be converted into the Adjusted Alternative Cash Consideration pursuant
to this Article II. In addition, Parent shall deliver to the Exchange Agent the
aggregate amount of any Additional Consideration to be paid to holders of
Shares. As soon as practicable after the Effective Time, each holder of Shares
converted into Parent Common Stock (plus the Cash Adjustment Amount, if
applicable or any Additional Consideration, if applicable) or cash pursuant to
this Article II, upon surrender to the Exchange Agent of one or more
Certificates for such Shares for cancellation, shall be entitled to receive
either certificates representing the number of shares of Parent Common Stock
into which such Shares shall have been converted in the Merger (plus the Cash
Adjustment Amount, if applicable, or any Additional Consideration, if
applicable) or, in case the Alternative Consideration contemplated by Section
2.2 is applicable the cash (including any Additional Consideration, if
applicable) and certificates representing the number of shares of Parent Common
Stock into which such Shares shall have been converted in the Merger. No
dividends or distributions that have been declared will be paid to persons
entitled to receive certificates for shares of Parent Common Stock until such
persons surrender their Certificates for Shares, at which time all such
dividends shall be paid. In no event shall the persons entitled to receive such
dividends be entitled to receive interest on such dividends. Notwithstanding the
foregoing, neither the Exchange Agent nor any party hereto shall be liable to a
holder of Shares for any Parent Common Stock, Alternative Consideration or
dividends thereon delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.
(f) At any time following nine months after the Effective Time, the
Surviving Corporation shall be entitled to require the Exchange Agent to deliver
to it any shares of Parent Common Stock or funds (including any interest
received with respect thereto) which had been made available to the Exchange
Agent and which have not
A-8
<PAGE>
been disbursed to holders of Certificates, and thereafter such holders shall be
entitled to look to the Surviving Corporation and Parent (subject to abandoned
property, escheat or other similar laws) only with respect to the Merger
Consideration payable or issuable upon due surrender of their Certificates,
without any interest thereon.
Section 2.4 Treatment of Stock Options. (a) Effective as of the Effective
Time, each option granted by the Company to purchase shares of Company Common
Stock that is outstanding and unexercised immediately prior thereto (the
'Company Stock Options'), shall cease to represent a right to acquire shares of
Company Common Stock and shall be converted automatically into an option to
purchase shares of Parent Common Stock in an amount and at an exercise price
determined as provided below (and otherwise subject to the terms of the Company
1992 Long-Term Incentive Compensation Plan, as amended and the Company 1992
Non-Employee Directors' Stock Option Plan, as amended (together the 'Option
Plans'), and the agreements evidencing grants thereunder). The number of shares
of Parent Common Stock subject to, and the option price and terms and conditions
of, the new option shall be determined in a manner that preserves both (i) the
aggregate gain (or loss) on the Company Stock Option immediately prior to the
Effective Time and (ii) the ratio of the exercise price per share subject to the
Company Stock Option to the fair market value (determined immediately prior to
the Effective Time) per share subject to such option, provided that any
fractional shares of Parent Common Stock resulting from such determination shall
be rounded down to the nearest share. Effective as of the Effective Time, the
Surviving Corporation shall assume each Company Stock Option agreement, each as
amended, as provided herein. The adjustment provided herein with respect to any
Company Stock Options that are 'incentive stock options' (as defined in section
422 of the Code) shall be and is intended to be effected in a manner that is
consistent with section 424(a) of the Code. The duration, vesting and other
terms of the new options shall be the same as the Company Stock Options that
they replace, except that all references to the Company shall be deemed to be
references to Parent. In the event that a holder of a Company Stock Option is
terminated without Cause (as defined in Section 5.5(a) of this Agreement) within
12 months of the Effective Time, then such holder's new option shall become 100%
exercisable as of such date of termination.
(b) Notwithstanding Section 2.4(a) above, outstanding vested options under
the Long Term Incentive Plan (LTIP) held by Covered Executives (as defined in
Section 5.5(a) hereof), including options that become vested in connection with
a 'Change in Control' under the terms of existing award agreements under the
LTIP, shall, effective as of the Effective Time become exercisable under a
cashless exercise procedure made available by the Company (subject to applicable
law and any administrative procedures and policies deemed appropriate by the
Company). Individuals subject to Section 16 of the Exchange Act shall be
provided with a cash compensation arrangement providing such individuals with
the opportunity to receive a cash payment approximating the benefits that would
be deprived by reason of Section 16 of the Exchange Act.
(c) Effective as of the Effective Time, the Options Plans shall terminate
and the provisions in any other plan, program, agreement or arrangement,
providing for the issuance or grant of any other interest in respect of the
capital stock of the Company or any of its Subsidiaries shall be deleted.
Furthermore, the Company shall take all actions necessary to ensure that
following the Effective Time, no holder of Company Stock Options or any
participant in the Option Plans or any other plans, programs, agreements or
arrangements shall have any right thereunder to acquire any equity securities of
the Company, the Surviving Corporation or any subsidiary of either of the
foregoing.
Section 2.5 Stock Transfer Books. At the Effective Time, the stock
transfer books of the Company shall be closed and there shall be no further
registration of transfers of Shares on the records of the Company. If, after the
Effective Time, Certificates representing Shares are presented to the Surviving
Corporation, they shall be cancelled and exchanged for cash or certificates
representing Parent Common Stock pursuant to this Article II.
Section 2.6 Dissenting Shares. Notwithstanding anything in this Agreement
to the contrary, in the event the Alternative Consideration or any Additional
Consideration contemplated by Section 2.2 hereof is applicable or in the event
that Parent elects to pay any Cash Adjustment Amount, Shares which immediately
prior to the Effective Time are held by stockholders who have properly exercised
and perfected appraisal rights under Section 262 of the DGCL (the 'Dissenting
Shares'), shall not be converted into the right to receive the Merger
Consideration, but the holders of Dissenting Shares shall be entitled to receive
such consideration as shall be determined pursuant to Section 262 of the DGCL;
provided, however, that if any such holder shall have failed to perfect or shall
withdraw or lose his right to appraisal and payment under the DGCL, such
holder's Shares shall thereupon be deemed to have been converted as of the
Effective Time into the right to receive the Merger Consideration, without any
interest thereon, and such Shares shall no longer be Dissenting Shares.
A-9
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Sub as follows:
Section 3.1 Organization. Each of the Company and its Subsidiaries is a
corporation, partnership or other entity duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation or
organization, and has all requisite corporate or other power and authority and
all necessary governmental approvals to own, lease and operate its properties
and to carry on its business as now being conducted, except where the failure to
be so organized, existing and in good standing or to have such power, authority
and governmental approvals would not have a material adverse effect on the
Company and its Subsidiaries taken as a whole. Each of the Company and its
Subsidiaries is duly qualified or licensed to do business and in good standing
in each jurisdiction in which the property owned, leased or operated by it or
the nature of the business conducted by it makes such qualification or licensing
necessary, except where the failure to be so duly qualified or licensed and in
good standing would not, in the aggregate, have a material adverse effect on the
Company and its Subsidiaries taken as a whole. As used in this Agreement, the
word 'Subsidiary' means, with respect to any party, any corporation or other
organization, whether incorporated or unincorporated, of which (i) such party or
any other Subsidiary of such party is a general partner (excluding such
partnerships where such party or any Subsidiary of such party do not have a
majority of the voting interest in such partnership) or (ii) at least a majority
of the securities or other interests having by their terms ordinary voting power
to elect a majority of the Board of Directors or others performing similar
functions with respect to such corporation or other organization is directly or
indirectly owned or controlled by such party or by any one or more of its
Subsidiaries, or by such party and one or more of its Subsidiaries. As used in
this Agreement, any reference to any event, change or effect having a material
adverse effect on or with respect to any entity (or group of entities taken as a
whole) means such event, change or effect, individually or in the aggregate with
such other events, changes, or effects, which is materially adverse to the
financial condition, business, results of operations, assets, liabilities,
properties or prospects of such entity. If 'material adverse effect' is used
with respect to more than one entity, it shall mean such events, changes or
effects with respect to all such entities taken as a whole. Section 3.1 of the
Disclosure Schedule delivered by the Company to Parent on or prior to the date
hereof (the 'Company Disclosure Schedule') sets forth a complete list of the
Company's Subsidiaries.
Section 3.2 Capitalization. (a) The authorized capital stock of the
Company consists of 100,000,000 Shares and 25,000,000 shares of preferred stock,
par value $.01 per share (the 'Preferred Stock'). As of the date hereof, (i)
66,587,990 shares of Company Common Stock are issued and outstanding, 700,000
shares of Company Common Stock are held in the Company's treasury, 1,096,101
shares of Company Common Stock are reserved for issuance under the Company's
401(k) Savings Plan, 2,002,220 shares of Company Common Stock are reserved for
issuance under the Company's 1993 Employee Stock Purchase Plan and 3,561,377
shares of Company Common Stock are reserved for issuance pursuant to options
previously granted pursuant to the Company Stock Option Plans, (ii) no shares of
Preferred Stock are issued and outstanding, and (iii) no Shares or shares of
Preferred Stock are issued and held in the treasury of the Company. All the
outstanding shares of the Company's capital stock are, and all shares which may
be issued pursuant to the Company Stock Option Plans will be, when issued in
accordance with the respective terms thereof, duly authorized, validly issued,
fully paid and non-assessable. Except as disclosed in Section 3.2(a) of the
Company Disclosure Schedule, there are no bonds, debentures, notes or other
indebtedness having voting rights (or convertible into securities having such
rights) ('Voting Debt') of the Company or any of its Subsidiaries issued and
outstanding. Except as set forth above and except for the transactions
contemplated by this Agreement and the Stock Option Agreement, as of the date
hereof, (i) there are no shares of capital stock of the Company authorized,
issued or outstanding and (ii) there are no existing options, warrants, calls,
pre-emptive rights, subscriptions or other rights, convertible securities,
agreements, arrangements or commitments of any character, relating to the issued
or unissued capital stock of the Company or any of its Subsidiaries, obligating
the Company or any of its Subsidiaries to issue, transfer or sell or cause to be
issued, transferred or sold any shares of capital stock or Voting Debt of, or
other equity interest in, the Company or any of its Subsidiaries or securities
convertible into or exchangeable for such shares or equity interests or
obligations of the Company or any of its Subsidiaries to grant, extend or enter
into any such option, warrant, call, subscription or other right, convertible
security, agreement, arrangement or commitment. Except as disclosed in Section
3.2(a) of the Company Disclosure Schedule, there are no outstanding contractual
obligations
A-10
<PAGE>
of the Company or any of its Subsidiaries to repurchase, redeem or otherwise
acquire any Shares or the capital stock of the Company or any subsidiary or
affiliate of the Company or to provide funds to make any investment (in the form
of a loan, capital contribution or otherwise) in any Subsidiary or any other
entity. Except as permitted by this Agreement, following the Merger, neither the
Company nor any of its Subsidiaries will have any obligation to issue, transfer
or sell any shares of its capital stock pursuant to any employee benefit plan or
otherwise.
(b) Except as disclosed in Section 3.2(b) of the Company Disclosure
Schedule, all of the outstanding shares of capital stock of each of the
Subsidiaries are beneficially owned by the Company, directly or indirectly, and
all such shares have been validly issued and are fully paid and nonassessable
and are owned by either the Company or one of its Subsidiaries free and clear of
all liens, charges, security interests, options, claims or encumbrances of any
nature whatsoever.
(c) Except for the Zell/Chilmark Stockholder Agreement, there are no voting
trusts or other agreements or understandings to which the Company or any of its
Subsidiaries is a party with respect to the voting of the capital stock of the
Company or any of the Subsidiaries. None of the Company or its Subsidiaries is
required to redeem, repurchase or otherwise acquire shares of capital stock of
the Company, or any of its Subsidiaries, respectively, as a result of the
transactions contemplated by this Agreement. The Company has delivered to Parent
a letter agreement which causes the termination, as of the consummation of the
Offer, of the Stockholder Agreement by and between Zell/Chilmark and the Company
dated as of June 1, 1992 the Registration Rights Agreement by and between
Zell/Chilmark Fund, L.P. and the Company dated as of June 1, 1992 and the
Registration Rights Agreement by and between Magten Asset Management Corporation
('Magten') and the Company, dated as of January 20, 1993 (such agreements being
referred to herein as the 'Existing Company/Stockholder Agreements').
(d) At the Effective Time, the number of shares of Company Common Stock
outstanding shall not exceed 73,247,688.
Section 3.3 Corporate Authorization; Validity of Agreement; Company
Action. (a) The Company has full corporate power and authority to execute and
deliver this Agreement and the Stock Option Agreement, and, subject to obtaining
any necessary approval of its stockholders as contemplated by Section 1.7(a)
hereof with respect to the Merger, to consummate the transactions contemplated
hereby and thereby. The execution, delivery and performance by the Company of
this Agreement and the Stock Option Agreement, and the consummation by it of the
transactions contemplated hereby and thereby, have been duly and validly
authorized by its Board of Directors and, except in the case of this Agreement
for obtaining the approval of its stockholders as contemplated by Section 1.7(a)
hereof with respect to the Merger, no other corporate action or proceedings on
the part of the Company is necessary to authorize the execution and delivery by
the Company of this Agreement and the Stock Option Agreement, and the
consummation by it of the transactions contemplated hereby and thereby. This
Agreement and the Stock Option Agreement has been duly executed and delivered by
the Company and, assuming this Agreement and the Stock Option Agreement
constitutes a valid and binding obligation of Parent and Sub, constitutes a
valid and binding obligation of the Company enforceable against the Company in
accordance with its terms, except that (i) such enforcement may be subject to
applicable bankruptcy, insolvency or other similar laws, now or hereafter in
effect, affecting creditors' rights generally, and (ii) the remedy of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought.
(b) The Board of Directors of the Company has duly and validly approved and
taken all corporate action required to be taken by the Board of Directors for
the consummation of the transactions contemplated by this Agreement (including,
without limitation, the Offer, the acquisition of Shares pursuant to the Offer
and the Merger, the Stock Option Agreement, the Zell/Chilmark Stockholder
Agreement and the termination of the Existing Company/Stockholder Agreements),
including, but not limited to, all actions necessary to render the provisions of
Section 203 of the DGCL inapplicable to such transactions.
Section 3.4 Consents and Approvals; No Violations. Except as disclosed in
Section 3.4 of the Company Disclosure Schedule, and except for all filings,
permits, authorizations, consents and approvals as may be required under, and
other applicable requirements of, the Exchange Act, the DGCL, the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the 'HSR
Act'), and for the approval of this Agreement by the Company's stockholders and
the filing and recordation of the Certificate of Merger as required by the DGCL,
A-11
<PAGE>
neither the execution, delivery or performance of this Agreement and the Stock
Option Agreement, nor the consummation by the Company of the transactions
contemplated hereby or thereby nor compliance by the Company with any of the
provisions hereof or thereof will (i) conflict with or result in any breach of
any provision of the certificate of incorporation or by-laws or similar
organizational documents of the Company or of any of its Subsidiaries, (ii)
require any filing with, or permit, authorization, consent or approval of, any
court, arbitral tribunal, administrative agency or commission or other
governmental or other regulatory authority or agency (a 'Governmental Entity'),
except where the failure to obtain such permits, authorizations, consents or
approvals or to make such filings would not have a material adverse effect on
the Company and its Subsidiaries and would not, or would not be reasonably
likely to, materially impair the consummation of the Offer or the Zell/Chilmark
Stockholder Agreement or the Stock Option Agreement or the ability of the
Company to consummate the Merger or the other transactions contemplated hereby
or thereby, (iii) result in a violation or breach of, or constitute (with or
without due notice or lapse of time or both) a default (or give rise to any
right of termination, amendment, cancellation or acceleration) under, any of the
terms, conditions or provisions of any note, bond, mortgage, indenture,
guarantee, other evidence of indebtedness (collectively, the 'Debt
Instruments'), lease, license, contract, agreement or other instrument or
obligation to which the Company or any of its Subsidiaries is a party or by
which any of them or any of their properties or assets may be bound and which
either has a term of more than one year or involves the payment or receipt of
money in excess of $300,000 (a 'Company Agreement') or (iv) violate any order,
writ, injunction, decree, statute, rule or regulation applicable to the Company,
any of its Subsidiaries or any of their properties or assets, except in the case
of clause (iii) or (iv) for such violations, breaches or defaults which would
not, individually or in the aggregate, have a material adverse effect on the
Company and its Subsidiaries, and which would not, or would not be reasonably
likely to, materially impair the consummation of the Offer, the Stock Option
Agreement or the Zell/Chilmark Stockholder Agreement or the ability of the
Company to consummate the Merger or the other transactions contemplated hereby
or thereby.
Section 3.5 SEC Reports and Financial Statements. The Company has filed
with the SEC, and has heretofore made available to Parent true and complete
copies of, all forms, reports, schedules, statements and other documents
required to be filed by it and its Subsidiaries since May 30, 1992 under the
Exchange Act or the Securities Act (as such documents have been amended since
the time of their filing, collectively, the 'Company SEC Documents'). As of
their respective dates or, if amended, as of the date of the last such
amendment, the Company SEC Documents, including, without limitation, any
financial statements or schedules included therein (a) did not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading and (b) complied
in all material respects with the applicable requirements of the Exchange Act
and the Securities Act, as the case may be, and the applicable rules and
regulations of the SEC thereunder. Each of the consolidated financial statements
included in the Company SEC Documents have been prepared from, and are in
accordance with, the books and records of the Company and/or its consolidated
Subsidiaries, comply in all material respects with applicable accounting
requirements and with the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with United States generally
accepted accounting principles ('GAAP') applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto) and fairly
present in all material respects the consolidated financial position and the
consolidated results of operations and cash flows (and changes in financial
position, if any) of the Company and its consolidated Subsidiaries as at the
dates thereof or for the periods presented therein.
Section 3.6 Absence of Certain Changes. Except to the extent disclosed in
the Company SEC Documents filed prior to the date of this Agreement or as
otherwise disclosed to Parent in Section 3.6 of the Company Disclosure Schedule,
from June 3, 1995 through the date of this Agreement, the Company and its
Subsidiaries have conducted their respective businesses and operations in the
ordinary course of business consistent with past practice. From June 3, 1995
through the date of this Agreement, there has not occurred (i) any events,
changes, or effects (including the incurrence of any liabilities of any nature,
whether or not accrued, contingent or otherwise) having or, which would be
reasonably likely to have, individually or in the aggregate, a material adverse
effect on the Company and its Subsidiaries; (ii) any declaration, setting aside
or payment of any dividend or other distribution (whether in cash, stock or
property) with respect to the equity interests of the Company or of any of its
Subsidiaries, other than dividends paid by wholly owned Subsidiaries; or (iii)
any material change by the Company or any of its Subsidiaries in accounting
principles or methods, except insofar as may be required by a
A-12
<PAGE>
change in GAAP. Except as set forth on Schedule 3.6 of the Company Disclosure
Schedule, from June 3, 1995 through the date of this Agreement, neither the
Company nor any of its Subsidiaries has taken any of the actions prohibited by
Section 5.1 hereof.
Section 3.7 No Undisclosed Liabilities. Except (a) to the extent disclosed
in the Company SEC Documents filed prior to the date of this Agreement and (b)
for liabilities and obligations incurred in the ordinary course of business
consistent with past practice, during the period from June 3, 1995 through the
date of this Agreement, neither the Company nor any of its Subsidiaries have
incurred any liabilities or obligations of any nature, whether or not accrued,
contingent or otherwise, that have, or would be reasonably likely to have, a
material adverse effect on the Company and its Subsidiaries or would be required
to be reflected or reserved against on a consolidated balance sheet of the
Company and its Subsidiaries (including the notes thereto) prepared in
accordance with GAAP as applied in preparing the June 3, 1995 consolidated
balance sheet of the Company and its Subsidiaries. Section 3.7 of the Company
Disclosure Schedule sets forth each instrument evidencing indebtedness of the
Company and its Subsidiaries which will accelerate or become due or payable, or
result in a right of redemption or repurchase on the part of the holder of such
indebtedness, or with respect to which any other payment or amount will become
due or payable, in any such case with or without due notice or lapse of time, as
a result of this Agreement, the Merger or the other transactions contemplated
hereby.
Section 3.8 Information in Proxy Statement/Prospectus. The Proxy
Statement/Prospectus (or any amendment thereof or supplement thereto), at the
date mailed to the Company's stockholders, on the date filed with the SEC and at
the time of the Special Meetings, will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading, provided, however, that
no representation is made by the Company with respect to statements made therein
based on information supplied by Parent or Sub for inclusion in the Proxy
Statement/Prospectus. None of the information supplied by the Company for
inclusion or incorporation by reference in the Registration Statement will, at
the date it becomes effective and at the time of the Special Meetings contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. Subject to the proviso set forth in the second preceding sentence,
the Proxy Statement/Prospectus will comply in all material respects with the
provisions of the Exchange Act and the rules and regulations thereunder.
Section 3.9 Employee Benefit Plans; ERISA. (a) As of the date of this
Agreement, except as set forth in Section 3.9(a) of the Company Disclosure
Schedule: there are no material employee benefit plans, arrangements, practices,
contracts or agreements (including, without limitation, employment agreements,
change of control employment agreements and severance agreements, incentive
compensation, bonus, stock option, stock appreciation rights and stock purchase
plans) of any type (including but not limited to plans described in section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended ('ERISA')),
maintained by the Company, any of its Subsidiaries or any trade or business,
whether or not incorporated (an 'ERISA Affiliate'), that together with the
Company would be deemed a 'controlled group' within the meaning of section
4001(a)(14) of ERISA, or with respect to which the Company or any of its
Subsidiaries has or may have a liability, other than those listed on Section
3.9(a) of the Company Disclosure Schedule (the 'Benefit Plans'). Except as
disclosed in Section 3.9(a) of the Company Disclosure Schedule (or as otherwise
permitted by this Agreement): (1) neither the Company nor any ERISA Affiliate
has any formal plan or commitment, whether legally binding or not, to create any
additional Benefit Plan or modify or change any existing Benefit Plan that would
affect any employee or terminated employee of the Company or any ERISA
Affiliate; and (2) since September 31, 1995, there has been no change,
amendment, modification to, or adoption of, any Benefit Plan. Section 3.9(a) of
the Company Disclosure Schedule contains a list of each material employment,
termination, severance, incentive and deferred compensation agreement or
arrangement that is a Benefit Plan, and the date of execution of each such
agreement or arrangement.
(b) Except as disclosed in Section 3.9(b) of the Company Disclosure
Schedule, under the applicable laws of all jurisdictions within the United
States of America and all foreign jurisdictions, with respect to any Benefit
Plan, there are no material amounts accrued but unpaid as of the most recent
balance sheet date that are not reflected on that balance sheet prepared in
accordance with GAAP.
A-13
<PAGE>
(c) With respect to each Benefit Plan, except as disclosed on Schedule
3.9(c) of the Company Disclosure Schedule and as would not have a material
adverse effect on the Company and its Subsidiaries: (i) if intended to qualify
under section 401(a), 401(k) or 403(a) of the Code, such plan so qualifies, and
its trust is exempt from taxation under section 501(a) of the Code; (ii) such
plan has been administered in accordance with its terms and applicable law;
(iii) no breaches of fiduciary duty have occurred; (iv) no disputes are pending,
or, to the knowledge of the Company, threatened; (v) no prohibited transaction
(within the meaning of Section 406 of ERISA) has occurred; (vi) no lien imposed
under the Code or ERISA exists or is likely to exist; and (vii) all
contributions and premiums due (including any extensions for such contributions
and premiums) have been made in full.
(d) Except as disclosed in Section 3.9(d) of the Company Disclosure
Schedule, none of the Benefit Plans has incurred any 'accumulated funding
deficiency,' as such term is defined in section 412 of the Code, whether or not
waived.
(e) Except as disclosed on Section 3.9(e) of the Company Disclosure
Schedule: (i) neither the Company nor any ERISA Affiliate has incurred any
liability under Title IV of ERISA since the effective date of ERISA that has not
been satisfied in full except as would not have or would not reasonably be
likely to have a material adverse effect on the Company and its Subsidiaries
(including sections 4063-4064 and 4069 of ERISA) and, to the knowledge of the
Company, no basis for any such liability exists; (ii) neither the Company nor
any ERISA Affiliate maintains (or contributes to), or has maintained (or has
contributed to) within the last six years, any employee benefit plan that is
subject to Title IV of ERISA; and (iii) there is no pending dispute between the
Company or any ERISA Affiliate concerning payment of contributions or payment of
withdrawal liability payments.
(f) With respect to each Benefit Plan that is a 'welfare plan' (as defined
in section 3(1) of ERISA), except as specifically disclosed in Section 3.9(f) of
the Company Disclosure Schedule, no such plan provides medical or death benefits
with respect to current or former employees of the Company or any of its
Subsidiaries beyond their termination of employment, other than on an
employee-pay-all basis, and each such welfare plan may be amended or terminated
by the Company or any of its Subsidiaries at any time with respect to such
former or current employees.
(g) With respect to each Benefit Plan that is intended to provide special
tax treatment to participants (including sections 79, 105, 106, 125, 127 and 129
of the Code), to the Company's knowledge, such Benefit Plan has satisfied all of
the material requirements for the receipt of such special tax treatment since
January 1, 1992.
(h) Except as specifically set forth in Section 3.9(h) of the Company
Disclosure Schedule, the consummation of the transactions contemplated by this
Agreement will not (i) entitle any individual to severance pay or any tax
'gross-up' payments with respect to the imposition of any tax pursuant to
Section 4999 of the Code or accelerate the time of payment or vesting, or
increase the amount, of compensation or benefits due to any individual with
respect to any Benefit Plan, or (ii) constitute or result in a prohibited
transaction under section 4975 of the Code or section 406 or 407 of ERISA with
respect to any Benefit Plan.
(i) Except as disclosed on Section 3.9(i) of the Company Disclosure
Schedule, neither the Company, any Benefits Affiliate nor any 'administrator' as
that term is defined in section 3(16) of ERISA, has any liability with respect
to or connected with any Benefit Plan for excise taxes payable under the Code or
civil penalties payable under ERISA and, to the Company's knowledge, no basis
for any such liability exists.
(j) Except as disclosed on Schedule 3.9(j) of the Company Disclosure
Schedule, there is no Benefit Plan that is a 'multiemployer plan,' as such term
is defined in section 3(37) of ERISA, or which is covered by section 4063 or
4064 of ERISA.
(k) With respect to each Benefit Plan except Plans in which employees of
Parent or its Affiliates do not participate and except Multiemployer Plans from
which the Company has withdrawn, the Company has delivered or made available to
Parent accurate and complete (with de minimis omissions) copies of all plan
texts, summary plan descriptions, summaries of material modifications, trust
agreements and other related agreements including all amendments to the
foregoing; the two most recent annual reports; the most recent annual and
periodic accounting of plan assets; the most recent determination letter
received from the United States Internal Revenue Service (the 'Service'); and
the two most recent actuarial reports, to the extent any of the foregoing may be
applicable to a particular Benefit Plan.
A-14
<PAGE>
(l) With respect to each Benefit Plan that is a 'group health plan' as such
term is defined in section 5000(b) of the Code, except as specifically set forth
in Section 3.9(l) of the Company Disclosure Schedule, to the Company's
knowledge, each such Benefit Plan complies and has complied with the
requirements of Part 6 of Title I of ERISA and Sections 4980B and 5000 of the
Code except where the failure to so comply would not have a material adverse
effect on the Company and its Subsidiaries.
(m) There are no material plans, arrangements, practices, contracts or
agreements (including change of control agreements, severance agreements,
retirement agreements, stock option or purchase agreements, medical or death
benefit agreements) maintained by the Company or an ERISA Affiliate or with
respect to which the Company or any of its Subsidiaries has a material liability
to a director or former director (as a director) of the Company or an ERISA
Affiliate other than those listed on Section 3.9(m) of the Company Disclosure
Schedule or disclosed in the Company's most recent proxy statement (the
'Director Plans'). Neither the Company nor any ERISA Affiliate has any formal
plan or commitment, whether legally binding or not, to create any Director Plan
or modify or change any existing Director Plan that would affect any director or
former director of the Company or any ERISA Affiliate.
Section 3.10 Litigation. Except to the extent disclosed in the Company SEC
Documents filed prior to the date of this Agreement or on Section 3.10 of the
Company Disclosure Schedule, there is no suit, claim, action, proceeding or
investigation pending or, to the best knowledge of the Company, threatened
against or affecting, the Company or any of its Subsidiaries which, individually
or in the aggregate, is reasonably likely to have a material adverse effect on
the Company and its Subsidiaries, or would, or would be reasonably likely to,
materially impair the consummation of the Offer or the ability of the Company to
consummate the Merger or the other transactions contemplated hereby or thereby.
Section 3.11 No Default. The business of the Company and each of its
Subsidiaries is not being conducted in default or violation of any term,
condition or provision of (a) its respective certificate of incorporation or by-
laws or similar organizational documents, (b) any Company Agreement or (c)
except as disclosed in Section 3.11 of the Company Disclosure Schedule, any
federal, state, local or foreign law, statute, regulation, rule, ordinance,
judgment, decree, order, writ, injunction, concession, grant, franchise, permit
or license or other governmental authorization or approval applicable to the
Company or any of its Subsidiaries, excluding from the foregoing clauses (b) and
(c), defaults or violations that would not have a material adverse effect on the
Company and its Subsidiaries or would not, or would not be reasonably likely to,
materially impair the consummation of the Offer or the ability of the Company to
consummate the Merger or the other transactions contemplated hereby. No
investigation or review by any Governmental Entity with respect to the Company
or any of its Subsidiaries is pending or, to the best knowledge of the Company,
threatened, nor to the best knowledge of the Company, has any Governmental
Entity indicated an intention to conduct the same.
Section 3.12 Taxes. (a) As of the date of this Agreement, except as set
forth in Section 3.12 of the Company Disclosure Schedule:
(i) the Company and its Subsidiaries have (I) duly filed (or there
have been filed on their behalf) with the appropriate governmental
authorities all Tax Returns (as hereinafter defined) required to be filed
by them and such Tax Returns are true, correct and complete in all material
respects, and (II) duly paid in full or made provision in accordance with
GAAP (or there has been paid or provision has been made on their behalf)
for the payment of all Taxes (as hereinafter defined) for all periods
ending through the date hereof;
(ii) the Company and its Subsidiaries have complied in all material
respects with all applicable laws, rules and regulations relating to the
payment and withholding of Taxes and have, within the time and the manner
prescribed by law, withheld and paid over to the proper governmental
authorities all amounts required to be so withheld and paid over under
applicable laws;
(iii) no federal, state, local or foreign audits or other
administrative proceedings or court proceedings are presently pending with
regard to any Taxes or Tax Returns of the Company or its Subsidiaries and
neither the Company nor its Subsidiaries has received a written notice of
any pending audits or proceedings;
(iv) neither the Service nor any other taxing authority (whether
domestic or foreign) has asserted, or to the best knowledge of the Company,
is threatening to assert, against the Company or any of its Subsidiaries
any deficiency or claim for Taxes; and
A-15
<PAGE>
(b) As of the date of this Agreement, except as set forth in Section 3.12
of the Company Disclosure Schedule:
(i) there are no material liens for Taxes upon any property or assets
of the Company or any Subsidiary thereof, except for liens for Taxes not
yet due and payable and liens for Taxes that are being contested in good
faith by appropriate proceedings;
(ii) neither the Company nor any of its Subsidiaries has agreed to or
is required to make any adjustment under Section 481(a) of the Code;
(iii) the federal income Tax Returns of the Company and its
Subsidiaries have been examined by the Service (or the applicable statutes
of limitation for the assessment of federal income Taxes for such periods
have expired) for all periods as set forth on Section 3.12 of the Company
Disclosure Schedule;
(iv) neither the Company nor any of its Subsidiaries is a party to
any material agreement providing for the allocation or sharing of Taxes;
and
(v) neither the Company nor any of its Subsidiaries has, with regard
to any assets or property held or acquired by any of them, filed a consent
to the application of Section 341(f) of the Code, or agreed to have Section
341(f)(2) of the Code apply to any disposition of a subsection (f) asset
(as such term is defined in Section 341(f)(4) of the Code) owned by the
Company or any of its Subsidiaries.
(c) 'Taxes' shall mean any and all taxes, charges, fees, levies or other
assessments, including, without limitation, income, gross receipts, excise, real
or personal property, sales, withholding, social security, retirement,
unemployment, occupation, use, service, service use, license, net worth,
payroll, franchise, transfer and recording taxes, fees and charges, imposed by
the Service or any taxing authority (whether domestic or foreign including,
without limitation, any state, county, local or foreign government or any
subdivision or taxing agency thereof (including a United States possession)),
whether computed on a separate, consolidated, unitary, combined or any other
basis; and such term shall include any interest whether paid or received, fines,
penalties or additional amounts attributable to, or imposed upon, or with
respect to, any such taxes, charges, fees, levies or other assessments. 'Tax
Return' shall mean any report, return, document, declaration or other
information or filing required to be supplied to any taxing authority or
jurisdiction (foreign or domestic) with respect to Taxes, including, without
limitation, information returns, any documents with respect to or accompanying
payments of estimated Taxes, or with respect to or accompanying requests for the
extension of time in which to file any such report, return, document,
declaration or other information.
Section 3.13 Contracts. Each Company Agreement is valid, binding and
enforceable and in full force and effect, except where failure to be valid,
binding and enforceable and in full force and effect would not have a material
adverse effect on the Company and its Subsidiaries, and there are no material
defaults thereunder by the Company or its Subsidiaries or, to the best knowledge
of the Company, by any other party thereto. Except as disclosed in Section 3.13
of the Company Disclosure Schedule, neither the Company nor any Subsidiary is a
party to any agreement that expressly limits the ability of the Company or any
Subsidiary or affiliate to compete in or conduct any line of business or compete
with any person or in any geographic area or during any period of time.
Section 3.14 Assets; Real Property. The assets, properties, rights and
contracts, including, without limitation (as applicable), title or leaseholds
thereto, of the Company and its Subsidiaries, taken as a whole, are sufficient
to permit the Company and its Subsidiaries to conduct their business as
currently being conducted with only such exceptions as are immaterial to the
Company and its Subsidiaries. All material real property owned by the Company
and its Subsidiaries (the 'Real Property') is owned free and clear of all liens,
charges, security interests, options, claims, mortgages, pledges, easements,
rights-of-way or other encumbrances and restrictions of any nature whatsoever,
except as described in Section 3.14 of the Company Disclosure Schedule or those
that do not materially adversely interfere with the use of such Real Property as
currently used.
Section 3.15 Environmental Matters. Except as disclosed in Section 3.15 of
the Company Disclosure Schedule, as of the date of this Agreement, the Company
is in material compliance with all applicable Environmental Laws and there are
no Environmental Liabilities and Costs of the Company and its Subsidiaries that
would have or are reasonably likely to have a material adverse effect on the
Company and its Subsidiaries.
A-16
<PAGE>
For purposes of this Section 3.15, the following definitions shall apply:
'Environmental Laws' means all applicable foreign, federal, state and local
laws, common law, regulations, rules and ordinances relating to pollution or
protection of health, safety or the environment.
'Environmental Liabilities and Costs' means all liabilities, obligations,
responsibilities, obligations to conduct cleanup, losses, damages, deficiencies,
punitive damages, consequential damages, treble damages, costs and expenses
(including, without limitation, all reasonable fees, disbursements and expenses
of counsel, expert and consulting fees and costs of investigations and
feasibility studies and responding to government requests for information or
documents), fines, penalties, restitution and monetary sanctions, interest,
direct or indirect, known or unknown, absolute or contingent, past, present or
future, resulting from any claim or demand, by any person or entity, whether
based in contract, tort, implied or express warranty, strict liability, joint
and several liability, criminal or civil statute, under any Environmental Law,
or arising from environmental, health or safety conditions, as a result of past
or present ownership, leasing or operation of any properties, owned, leased or
operated by the Company or any of its Subsidiaries.
Section 3.16 Reimbursement. The Company or its Subsidiaries, as the case
may be, are parties to such agreements with third party payors, including
Medicaid, health maintenance organizations, preferred provider organizations,
insurance companies and other payment sources, which are necessary to conduct
their respective businesses as of the date of this Agreement and a true and
accurate list of all such agreements is set forth on Section 3.16 of the Company
Disclosure Schedule.
Section 3.17 Labor Relations. Except as set forth on Section 3.17 of the
Company Disclosure Schedule, there is no labor strike, slowdown or work stoppage
or lockout against the Company or any of its Subsidiaries, there is no unfair
labor practice charge or complaint against or pending before the National Labor
Relations Board (the 'NLRB') which if decided adversely could have a material
adverse effect on the Company and its Subsidiaries, taken as a whole, and there
is no representation claim or petition pending before the NLRB and no question
concerning representation exists with respect to the employees of the Company or
its Subsidiaries.
Section 3.18 Insurance. As of the date hereof, the Company and each of its
Subsidiaries are insured by insurers, reasonably believed by the Company to be
of recognized financial responsibility and solvency, against such losses and
risks and in such amounts as are customary in the businesses in which they are
engaged. All material policies of insurance and fidelity or surety bonds are in
full force and effect. Descriptions of these plans and related liability
coverage have been previously provided to Parent. Section 3.18 of the Company
Disclosure Schedule contains a listing of all open workers compensation and
general liability claims as of a recent date. These claims, individually or in
the aggregate, would not have a material adverse effect on the Company and its
Subsidiaries, taken as a whole. All necessary notifications of claims have been
made to insurance carriers other than those which will not have a material
adverse effect on the Company and its Subsidiaries, taken as a whole.
Section 3.19 Transactions with Affiliates. Except to the extent disclosed
in the Company SEC Documents filed prior to the date of this Agreement, from May
29, 1993 through the date of this Agreement there have been no transactions,
agreements, arrangements or understandings between the Company or its
Subsidiaries, on the one hand, and the Company's affiliates (other than
wholly-owned Subsidiaries of the Company) or other Persons, on the other hand,
that would be required to be disclosed under Item 404 of Regulation S-K under
the Securities Act.
Section 3.20 Compliance with Law. The Company and its Subsidiaries have
complied in all material respects with all laws, statutes, regulations, rules,
ordinances, and judgments, decrees, orders, writs and injunctions, of any court
or governmental entity relating to any of the property owned, leased or used by
them, or applicable to their business, including, but not limited to, equal
employment opportunity, discrimination, occupational safety and health,
environmental, interstate commerce, antitrust laws, ERISA and laws relating to
Taxes (as defined in Section 3.12). The Company, with respect to each store
location, has all permits and licenses (including, without limitation,
pharmaceutical and liquor licenses and permits) necessary to carry on the
business being conducted at each store location.
Section 3.21 Vote Required. The affirmative vote of the holders of a
majority of the outstanding shares of Company Common Stock are the only votes of
the holders of any class or series of the Company's capital stock necessary to
approve the Merger.
A-17
<PAGE>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Parent and Sub represent and warrant to the Company as follows:
Section 4.1 Organization. Each of Parent and Sub is a corporation duly
organized, validly existing and in good standing under the laws of Delaware and
has all requisite corporate or other power and authority and all necessary
governmental approvals to own, lease and operate its properties and to carry on
its business as now being conducted, except where the failure to be so
organized, existing and in good standing or to have such power, authority and
governmental approvals would not have a material adverse effect on Parent and
its Subsidiaries. Parent and each of its Subsidiaries is duly qualified or
licensed to do business and in good standing in each jurisdiction in which the
property owned, leased or operated by it or the nature of the business conducted
by it makes such qualification or licensing necessary, except where the failure
to be so duly qualified or licensed and in good standing would not have a
material adverse effect on Parent and its Subsidiaries.
Section 4.2 Capitalization. (a) The authorized capital stock of Parent
consists of 240,000,000 shares of Parent Common Stock and (b) 20,000,000
preferred shares, par value $1.00 per share (the 'Parent Preferred Stock'). As
of the date hereof, (i) 83,758,467 shares of Parent Common Stock are issued and
outstanding, (ii) no shares of Parent Preferred Stock are issued and
outstanding, (iii) 6,532,169 shares of Parent Common Stock are issued and held
in the treasury of Parent, and (iv) 6,417,062 shares of Parent Common Stock are
reserved for issuance under Parent's 1990 Omnibus Stock Incentive Plan (the
'Parent Plan'). All of the outstanding shares of Parent's capital stock are, and
all shares which may be issued pursuant to the exercise of outstanding options
or pursuant to the Parent Plan will be, when issued in accordance with the
respective terms thereof, duly authorized, validly issued, fully paid and
non-assessable. Except for Parent's 6.75% Zero Coupon Convertible Subordinated
Notes due July 24, 2006, there are no bonds, debentures, notes or other
indebtedness having voting rights (or convertible into securities having such
rights) ('Parent Voting Debt') of Parent or any of its Subsidiaries issued and
outstanding. Except as set forth above, and except as set forth in Section 4.2
of the Disclosure Schedule delivered to the Company on or prior to the date
hereof (the 'Parent Disclosure Schedule') and except for transactions
contemplated by this Agreement, as of the date hereof, (i) there are no shares
of capital stock of Parent authorized, issued or outstanding and (ii) there are
no existing options, warrants, calls, preemptive rights, subscriptions or other
rights, convertible securities, agreements, arrangements or commitments of any
character, relating to the issued or unissued capital stock of Parent or any of
its Subsidiaries, obligating Parent or any of its Subsidiaries to issue,
transfer or sell or cause to be issued, transferred or sold any shares of
capital stock or Parent Voting Debt of, or other equity interest in, Parent or
any of its Subsidiaries or securities convertible into or exchangeable for such
shares or equity interests or obligations of Parent or any of its Subsidiaries
to grant, extend or enter into any such option, warrant, call, subscription or
other right, convertible security, agreement, arrangement or commitment. There
are no outstanding contractual obligations of Parent or any of its Subsidiaries
to repurchase, redeem or otherwise acquire any shares of Parent Common Stock or
the capital stock of Parent or any subsidiary or affiliate of Parent or to
provide funds to make any investment (in the form of a loan, capital
contribution or otherwise) in any Subsidiary or any other entity.
(b) There are no voting trusts or other agreements or understandings to
which Parent or any of its Subsidiaries is a party with respect to the voting of
the capital stock of Parent or its Subsidiaries. None of Parent or its
Subsidiaries is required to redeem, repurchase or otherwise acquire shares of
capital stock of Parent, or any of its Subsidiaries, respectively, as a result
of the transactions contemplated by this Agreement.
Section 4.3 Corporate Authorization; Validity of Agreement; Necessary
Action. Each of Parent and Sub has full corporate power and authority to
execute and deliver this Agreement, the Stock Option Agreement and the
Zell/Chilmark Stockholder Agreement and, subject in the case of this Agreement
to obtaining any necessary approval of Parent's stockholders as contemplated by
Section 1.7(b) hereof with respect to the Merger, to consummate the transactions
contemplated hereby and thereby. The execution, delivery and performance by
Parent and Sub of this Agreement and the consummation by Parent and Sub of the
transactions contemplated hereby have been duly and validly authorized by their
respective Boards of Directors and by Sub's sole stockholder and, except in the
case of obtaining any necessary approval of Parent's stockholders as
contemplated by Section 1.7(b) hereof, no other corporate action or proceedings
on the part of Parent and Sub are necessary to authorize the execution and
delivery by Parent and Sub of this Agreement and the consummation by Parent and
A-18
<PAGE>
Sub of the transactions contemplated hereby. This Agreement has been duly
executed and delivered by Parent and Sub, and, assuming this Agreement
constitutes valid and binding obligations of the Company, constitutes valid and
binding obligations of each of Parent and Sub, enforceable against them in
accordance with its terms, except that (i) such enforcement may be subject to
applicable bankruptcy, insolvency or other similar laws, now or hereafter in
effect, affecting creditors' rights generally, and (ii) the remedy of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought. The shares of Parent Common Stock issued
pursuant to the Merger, if any, will be duly authorized, validly issued, fully
paid and nonassessable and not subject to preemptive rights.
Section 4.4 Consents and Approvals; No Violations. Except for filings,
permits, authorizations, consents and approvals as may be required under, and
other applicable requirements of, the Exchange Act, the Securities Act of 1933
(the 'Securities Act'), the DGCL, the HSR Act, state blue sky laws and any
applicable state takeover laws and the approval by Parent's stockholders of the
issuance of Parent Common Stock in the Merger, neither the execution, delivery
or performance of this Agreement by Parent and Sub nor the consummation by
Parent and Sub of the transactions contemplated hereby nor compliance by Parent
and Sub with any of the provisions hereof will (i) conflict with or result in
any breach of any provision of the certificate of incorporation or by-laws of
Parent and Sub, (ii) require any filing with, or permit, authorization, consent
or approval of, any Governmental Entity (except where the failure to obtain such
permits, authorizations, consents or approvals or to make such filings would not
have a material adverse effect on Parent and its Subsidiaries or would not, or
would not be reasonably likely to, materially impair the ability of Parent and
Sub to consummate the Offer, the Merger or the other transactions contemplated
hereby or thereby), (iii) result in a violation or breach of, or constitute
(with or without due notice or lapse of time or both) a default (or give rise to
any right of termination, amendment, cancellation or acceleration) under, any of
the terms, conditions or provisions of any note, bond, mortgage, indenture,
guarantee, other evidence of indebtedness, lease, license, contract, agreement
or other instrument or obligation to which Parent or any of its Subsidiaries is
a party or by which any of them or any of their properties or assets may be
bound or (iv) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to Parent, any of its Subsidiaries or any of their
properties or assets, except in the case of clauses (iii) and (iv) for
violations, breaches or defaults which would not have a material adverse effect
on Parent and its Subsidiaries or would not, or would not be reasonably likely
to, materially impair or the ability of Parent or Sub to consummate the Offer,
the Merger or the other transactions contemplated hereby.
Section 4.5 SEC Reports and Financial Statements. Parent has filed with
the SEC, and has heretofore made available to the Company, true and complete
copies of, all forms, reports, schedules, statements and other documents
required to be filed by it and its Subsidiaries since February 27, 1993 under
the Exchange Act or the Securities Act (as such documents have been amended
since the time of their filing, collectively, the 'Parent SEC Documents'). As of
their respective dates or, if amended, as of the date of the last such
amendment, the Parent SEC Documents, including, without limitation, any
financial statements or schedules included therein (a) did not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading and (b) complied
in all material respects with the applicable requirements of the Exchange Act
and the Securities Act, as the case may be, and the applicable rules and
regulations of the SEC thereunder. Each of the consolidated financial statements
included in the Parent SEC Documents have been prepared from, and are in
accordance with, the books and records of Parent and/or its consolidated
Subsidiaries, comply in all material respects with applicable accounting
requirements and with the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP applied on a
consistent basis during the periods involved (except as may be indicated in the
notes thereto) and fairly present in all material respects the consolidated
financial position and the consolidated results of operations and cash flows
(and changes in financial position, if any) of Parent and its consolidated
Subsidiaries as at the dates thereof or for the periods presented therein.
Section 4.6 Absence of Certain Changes. Except to the extent disclosed in
the Parent SEC Documents filed prior to the date of this Agreement, from March
4, 1995 through the date of this Agreement, Parent and its Subsidiaries have
conducted their respective businesses in the ordinary course of business
consistent with past practice. From March 4, 1995 through the date of this
Agreement, there has not occurred (i) any events, changes,
A-19
<PAGE>
or effects (including the incurrence of any liabilities of any nature, whether
or not accrued, contingent or otherwise) having or, which would be reasonably
likely to have, individually or in the aggregate, a material adverse effect on
Parent and its Subsidiaries; (ii) any declaration, setting aside or payment of
any dividend or other distribution (whether in cash, stock or property) with
respect to the equity interests of Parent or of any of its Subsidiaries other
than regular quarterly cash dividends or dividends paid by wholly owned
Subsidiaries; or (iii) any change by Parent or any of its Subsidiaries in
accounting principles or methods, except insofar as may be required by a change
in GAAP.
Section 4.7 No Undisclosed Liabilities. Except (a) to the extent disclosed
in the Parent SEC Documents filed prior to the date of this Agreement and (b)
for liabilities and obligations incurred in the ordinary course of business
consistent with past practice, during the period from March 4, 1995 through the
date of this Agreement, neither Parent nor any of its Subsidiaries have incurred
any liabilities or obligations of any nature, whether or not accrued, contingent
or otherwise, that have, or would be reasonably likely to have, a material
adverse effect on Parent and its Subsidiaries or would be required to be
reflected or reserved against on a consolidated balance sheet of Parent and its
Subsidiaries (including the notes thereto) prepared in accordance with GAAP as
applied in preparing the March 4, 1995 consolidated balance sheet of Parent and
its Subsidiaries.
Section 4.8 Information in Proxy Statement/Prospectus. The Registration
Statement (or any amendment thereof or supplement thereto) will, at the date it
is filed with the SEC and as of the date it becomes effective and the Proxy
Statement/Prospectus (or any amendment thereof or supplement thereto) at the
date mailed to Parent's stockholders and at the time of the Special Meetings,
will not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
misleading, provided, however, that no representation is made by Parent or Sub
with respect to statements made therein based on information supplied by the
Company for inclusion in the Registration Statement. None of the information
supplied by Parent or Sub for inclusion or incorporation by reference in the
Proxy Statement/Prospectus will, at the date mailed to stockholders and at the
time of the Special Meetings, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading. Subject to the proviso set forth in the second
preceding sentence, the Registration Statement will comply in all material
respects with the provisions of the Securities Act and Exchange Act,
respectively, and the rules and regulations thereunder.
Section 4.9 Litigation. Except to the extent disclosed in the Parent SEC
Documents filed prior to the date of this Agreement, as of the date of this
Agreement, there is no suit, claim, action, proceeding or investigation pending
or, to the best knowledge of Parent, threatened against or affecting, Parent or
any of its Subsidiaries, which, individually or in the aggregate, is reasonably
likely to have a material adverse effect on Parent and its Subsidiaries or
would, or would be reasonably likely to, materially impair the ability of Parent
or Sub to consummate the Offer, the Merger or the other transactions
contemplated hereby.
Section 4.10 Taxes. (a) As of the date of this Agreement, except as set
forth in Section 4.10 of the Parent Disclosure Schedule:
(i) Parent and its Subsidiaries have (I) duly filed (or there have
been filed on their behalf) with the appropriate governmental authorities
all Tax Returns required to be filed by them and such Tax Returns are true,
correct and complete in all material respects, and (II) duly paid in full
or made provision in accordance with GAAP (or there has been paid or
provision has been made on their behalf) for the payment of all Taxes (as
hereinafter defined) for all periods ending through the date hereof;
(ii) Parent and its Subsidiaries have complied in all material
respects with all applicable laws, rules and regulations relating to the
payment and withholding of Taxes and have, within the time and the manner
prescribed by law, withheld and paid over to the proper governmental
authorities all amounts required to be so withheld and paid over under
applicable laws;
(iii) no federal, state, local or foreign audits or other
administrative proceedings or court proceedings are presently pending with
regard to any Taxes or Tax Returns of Parent or its Subsidiaries and
neither Parent nor its Subsidiaries has received a written notice of any
pending audits or proceedings; and
A-20
<PAGE>
(iv) neither the Service nor any other taxing authority (whether
domestic or foreign) has asserted, or to the best knowledge of Parent, is
threatening to assert, against Parent or any of its Subsidiaries any
deficiency or claim for Taxes.
(b) As of the date of this Agreement, except as set forth in Section 4.10
of the Parent Disclosure Schedule:
(i) there are no material liens for Taxes upon any property or assets
of Parent or any Subsidiary thereof, except for liens for Taxes not yet due
and payable and liens for Taxes that are being contested in good faith by
appropriate proceedings;
(ii) neither Parent nor any of its Subsidiaries has agreed to or is
required to make any adjustment under Section 481(a) of the Code;
(iii) the federal income Tax Returns of Parent and its Subsidiaries
have been examined by the Service (or the applicable statutes of limitation
for the assessment of federal income Taxes for such periods have expired)
for all periods through and including March 2, 1991 for Parent and October
31, 1987 for Perry Drug Stores, Inc.;
(iv) neither Parent nor any of its Subsidiaries is a party to any
material agreement providing for the allocation or sharing of Taxes; and
(v) neither Parent nor any of its Subsidiaries has, with regard to any
assets or property held or acquired by any of them, filed a consent to the
application of Section 341(f) of the Code, or agreed to have Section
341(f)(2) of the Code apply to any disposition of a subsection (f) asset
(as such term is defined in Section 341(f)(4) of the Code) owned by Parent
or any of its Subsidiaries.
Section 4.11 Compliance with Law. Parent and its Subsidiaries have
complied in all material respects with all laws, statutes, regulations, rules,
ordinances, and judgments, decrees, orders, writs and injunctions, of any court
or governmental entity relating to any of the property owned, leased or used by
them, or applicable to their business, including, but not limited to, equal
employment opportunity, discrimination, occupational safety and health,
environmental, interstate commerce, antitrust laws, ERISA and laws relating to
Taxes.
Section 4.12 No Default. The business of Parent and each of its
Subsidiaries is not being conducted in default or violation of any term,
condition or provision of (a) its respective certificate of incorporation or
by-laws or similar organizational documents, (b) any lease, license, contract,
agreement or other instrument or obligation to which Parent or any of its
Subsidiaries is a party or by which any of them or any of their properties or
assets may be bound and which either has a term of more than one year or
involves the payment or receipt of money in excess of $300,000 (a 'Parent
Agreement') or (c) any federal, state, local or foreign law, statute,
regulation, rule, ordinance, judgment, decree, order, writ, injunction,
concession, grant, franchise, permit or license or other governmental
authorization or approval applicable to Parent or any of its Subsidiaries,
excluding from the foregoing clauses (b) and (c), defaults or violations that
would not have a material adverse effect on Parent and its Subsidiaries or would
not, or would not be reasonably likely to, materially impair the consummation of
the Offer or the ability of Parent or Sub to consummate the Merger or the other
transactions contemplated hereby. Except as set forth on Schedule 4.12 of the
Parent Disclosure Schedule, no investigation or review by any Governmental
Entity with respect to Parent or any of its Subsidiaries is pending or, to the
best knowledge of Parent or Sub, threatened, nor to the best knowledge of Parent
or Sub, has any Governmental Entity indicated an intention to conduct the same.
Section 4.13 Financing. Either Parent or Sub has, or will have prior to
the consummation of the Offer, sufficient funds available to purchase the Shares
pursuant to the Offer.
Section 4.14 Opinion of Financial Advisor. Parent has received an opinion
from Donaldson, Lufkin & Jenrette Securities Corporation ('DLJ'), dated as of a
date which is on or prior to the date of this Agreement to the effect that, as
of such date, the consideration to be paid by Parent in the Offer and the
Merger, taken together, is fair to Parent from a financial point of view (the
'Parent Fairness Opinion'). Parent has delivered to the Company a copy of the
Parent Fairness Opinion, together with DLJ's authorization to include the Parent
Fairness Opinion in the Offer Documents and the Proxy Statement/Prospectus.
A-21
<PAGE>
ARTICLE V
COVENANTS
Section 5.1 Interim Operations of the Company. The Company covenants and
agrees that, (i) except as expressly provided in this Agreement, and (ii) during
the period prior to the consummation of Offer, except with the prior written
consent of Parent, and (iii) during the period following the consummation of the
Offer and prior to the Effective Time, except with the authorization of the
Board of Directors of the Company, including the affirmative vote of a majority
of the Continuing Directors, and (iv) following consummation of the Offer and
prior to the Effective Time, except for prepayments by Parent of indebtedness of
the Company and the advancement of funds by Parent to the Company on the terms
and conditions, and at the interest rate, and for the purposes for which
borrowing may be made, under the Company's existing credit facility:
(a) the business of the Company and its Subsidiaries shall be
conducted only in the ordinary course of business consistent with past
practice and, to the extent consistent therewith, each of the Company and
its Subsidiaries shall use its best efforts to preserve its business
organization intact and maintain its existing relations with customers,
suppliers, employees, creditors and business partners;
(b) the Company will not, directly or indirectly, split, combine or
reclassify the outstanding Company Common Stock, or any outstanding capital
stock of any of the Subsidiaries of the Company;
(c) neither the Company nor any of its Subsidiaries shall: (i) amend
its certificate of incorporation or by-laws or similar organizational
documents; (ii) declare, set aside or pay any dividend or other
distribution payable in cash, stock or property with respect to its capital
stock other than dividends paid by the Company's Subsidiaries to the
Company or its Subsidiaries; (iii) issue, sell, transfer, pledge, dispose
of or encumber any additional shares of, or securities convertible into or
exchangeable for, or options, warrants, calls, commitments or rights of any
kind to acquire, any shares of capital stock of any class of the Company or
its Subsidiaries, other than issuances pursuant to exercise of stock-based
awards or options outstanding on the date hereof as disclosed in Section
3.2 or in Section 5.1(c) of the Company Disclosure Schedule; (iv) transfer,
lease, license, sell, mortgage, pledge, dispose of, or encumber any
material assets other than (a) in the ordinary course of business
consistent with past practice or (b) pursuant to existing agreements
disclosed in Section 5.1(c) of the Company Disclosure Schedule; or (v)
redeem, purchase or otherwise acquire directly or indirectly any of its
capital stock;
(d) except as disclosed in Section 5.1(d) of the Company Disclosure
Schedule, neither the Company nor any of its Subsidiaries shall: (i) except
as otherwise provided in this Agreement and except for normal, regularly
scheduled increases for non-officer employees consistent with past practice
or pursuant to the terms of existing collective bargaining agreements,
grant any increase in the compensation payable or to become payable by the
Company or any of its Subsidiaries to any officer or employee (including
through any new award made under, or the exercise of any discretion under,
any Benefit Plan (ii) adopt any new, or amend or otherwise increase, or
accelerate the payment or vesting of the amounts payable or to become
payable under any existing, bonus, incentive compensation, deferred
compensation, severance, profit sharing, stock option, stock purchase,
insurance, pension, retirement or other employee benefit plan agreement or
arrangement; (iii) enter into any, or amend any existing, employment or
severance agreement with or, grant any severance or termination pay to any
officer, director, employee or consultant of the Company or any of its
Subsidiaries; or (iv) make any additional contributions to any grantor
trust created by the Company to provide funding for non-tax-qualified
employee benefits or compensation; or (v) provide any severance program to
any Subsidiary which does not have a severance program as of the date of
this Agreement;
(e) neither the Company nor any of its Subsidiaries shall modify,
amend or terminate any of the Company Agreements or waive, release or
assign any material rights or claims, except in the ordinary course of
business consistent with past practice;
(f) neither the Company nor any of its Subsidiaries shall permit any
material insurance policy naming it as a beneficiary or a loss payable
payee to be cancelled or terminated without notice to Parent, except in the
ordinary course of business consistent with past practice;
A-22
<PAGE>
(g) except as set forth in Section 5.1(g) of the Company Disclosure
Schedule, neither the Company nor any of its Subsidiaries shall: (i) incur
or assume any debt except for borrowings under existing credit facilities
in the ordinary course consistent with past practice; (ii) assume,
guarantee, endorse or otherwise become liable or responsible (whether
directly, contingently or otherwise) for the obligations of any other
person, except in the ordinary course of business consistent with past
practice; (iii) make any loans, advances or capital contributions to, or
investments in, any other person (other than to wholly owned Subsidiaries
of the Company or customary loans or advances to employees in accordance
with past practice); or (iv) enter into any material commitment (including,
but not limited to, any leases, capital expenditure or purchase of assets)
other than purchases of inventory in the ordinary course of business
consistent with past practice;
(h) neither the Company nor any of its Subsidiaries shall change any
of the accounting principles used by it unless required by GAAP;
(i) neither the Company nor any of its Subsidiaries shall pay,
discharge or satisfy any claims, liabilities or obligations (absolute,
accrued, asserted or unasserted, contingent or otherwise), other than the
payment, discharge or satisfaction of any such claims, liabilities or
obligations, (x) reflected or reserved against in the consolidated
financial statements (or the notes thereto) of the Company and its
consolidated Subsidiaries, (y) incurred in the ordinary course of business
consistent with past practice or (z) which are legally required to be paid,
discharged or satisfied;
(j) neither the Company nor any of its Subsidiaries will adopt a plan
of complete or partial liquidation, dissolution, merger, consolidation,
restructuring, recapitalization or other material reorganization of the
Company or any of its Subsidiaries or any agreement relating to a Takeover
Proposal (as defined in Section 5.6) (other than the Merger);
(k) neither the Company nor any of its Subsidiaries will take, or
agree to commit to take, any action that would make any representation or
warranty of the Company contained herein inaccurate in any respect at, or
as of any time prior to, the Effective Time;
(l) neither the Company nor any of its Subsidiaries will engage in any
transaction with, or enter into any agreement, arrangement, or
understanding with, directly or indirectly, any of the Company's
affiliates, including, without limitation, any transactions, agreements,
arrangements or understandings with any affiliate or other Person covered
under Item 404 of Regulation S-K under the Securities Act that would be
required to be disclosed under such Item 404, other than pursuant to such
agreements, arrangements, or understandings existing on the date of this
Agreement (which are set forth on Section 5.1(l) of the Company Disclosure
Schedule);
(m) close, shut down, or otherwise eliminate any of the Company's
stores other than in the ordinary course of business consistent with past
practice;
(n) change the name of or signage at any of the Company's stores;
(o) close, shut down, or otherwise eliminate any of the Company's
distribution centers;
(p) move the location, close, shut down or otherwise eliminate the
Company's headquarters, or effect a general staff reduction at such
headquarters;
(q) change or modify in any material respect the Company's existing
advertising program and policies;
(r) except as set forth in Section 5.1(r) of the Company Disclosure
Schedule, enter into any new lease (other than renewals of existing leases
after consultation with Parent) or purchase or acquire or enter into any
agreement to purchase or acquire any real estate;
(s) neither the Company nor any of its Subsidiaries will incur any
liabilities or obligations of any nature, whether or not accrued,
contingent or otherwise, that have, or would be reasonably likely to have,
a material adverse effect on the Company and its Subsidiaries; and
A-23
<PAGE>
(t) neither the Company nor any of its Subsidiaries will enter into an
agreement, contract, commitment or arrangement to do any of the foregoing,
or to authorize, recommend, propose or announce an intention to do any of
the foregoing.
Section 5.2 Treatment of Certain Indebtedness. The Company will cooperate
with Parent, if Parent shall so request, to effect a defeasance of, and/or a
repurchase by means of a debt tender offer (together with a solicitation of
consents to eliminate the restrictive covenants) of, the 9 1/8% Senior Notes due
2000 issued by the Company and the 10 1/8% Senior Notes due June 1, 2002 issued
by Hook SupeRx, Inc., provided that any funds and all related out-of-pocket
transaction expenses necessary to effect any such defeasance or repurchase shall
be provided and borne by Parent, without any right of reimbursement. The Company
and Parent will cooperate to effect such defeasance and/or repurchase in a
manner which takes into account all relevant tax, accounting, corporate,
structural, contractual and similar issues.
Section 5.3 Access to Information. (a) To the extent permitted by
applicable law, the Company shall (and shall cause each of its Subsidiaries to)
afford to the officers, employees, accountants, counsel, financing sources and
other representatives of Parent, access, during normal business hours, during
the period prior to the Effective Time, to all of its and its Subsidiaries'
properties, books, contracts, commitments and records (including any Tax Returns
or other Tax related information pertaining to the Company and its Subsidiaries)
and, during such period, the Company shall (and shall cause each of its
Subsidiaries to) furnish promptly to Parent (i) a copy of each report, schedule,
registration statement and other document filed or received by it during such
period pursuant to the requirements of federal securities laws and (ii) all
other information concerning its business, properties and personnel as Parent
may reasonably request (including any Tax Returns or other Tax related
information pertaining to the Company and its Subsidiaries). Parent will hold
any such information which is nonpublic in confidence in accordance with the
provisions of the existing confidentiality agreement between the Company and
Parent, dated August 17, 1995 (the 'Confidentiality Agreement').
(b) To the extent permitted by applicable law, Parent shall (and shall
cause each of its Subsidiaries to) afford to the officers, employees,
accountants, counsel, financing sources and other representatives of the
Company, access, during normal business hours, during the period prior to the
Effective Time, to all of its and its Subsidiaries' properties, books,
contracts, commitments and records (including any Tax Returns or other Tax
related information pertaining to Parent and its Subsidiaries) and, during such
period, Parent shall (and shall cause each of its Subsidiaries to) furnish
promptly to the Company (a) a copy of each report, schedule, registration
statement and other document filed or received by it during such period pursuant
to the requirements of the federal securities laws and (b) all other information
as the Company may reasonably request (including any Tax Returns or other Tax
related information pertaining to Parent and its Subsidiaries). The Company will
hold any such information which is nonpublic in confidence in accordance with
the provisions of the Confidentiality Agreement.
Section 5.4 Consents and Approvals. (a) The Company and Parent shall take
all reasonable actions necessary to file as soon as practicable notifications
under the HSR Act and to respond as promptly as practicable to any inquiries
received from the Federal Trade Commission and the Anti-trust Division of the
Department of Justice for additional information or documentation and to respond
as promptly as practicable to all inquiries and requests received from any State
Attorney General or other Governmental Entity in connection with antitrust
matters.
(b) Parent and the Company shall, and each shall cause each of its
Subsidiaries to, subject to the preceding subsection, (i) cooperate with one
another to prepare, as soon as practicable, all filings and other presentations
in connection with seeking any regulatory approval from a Governmental Entity,
exemption or other authorization necessary to consummate the transactions
contemplated by this Agreement, (ii) prosecute such filings and other
presentations with diligence, (iii) diligently oppose any objections to, appeals
from or petitions to reconsider or reopen any such approval by persons not party
to this Agreement, and (iv) take all such further action as in Parent's and the
Company's judgment reasonably may facilitate obtaining any final order or orders
approving such transactions consistent with this Agreement.
(c) Each of the Company, Parent and Sub will take all reasonable actions
necessary to comply promptly with all legal requirements (which actions shall
include, without limitation, furnishing all information in connection with
approvals of or filings with any Governmental Entity, including, without
limitation, any schedule, or reports
A-24
<PAGE>
required to be filed with the SEC), and will promptly cooperate with and furnish
information to each other in connection with any such requirements imposed upon
any of them or any of their Subsidiaries in connection with this Agreement and
the transactions contemplated hereby. Each of the Company, Parent and Sub will,
and will cause its Subsidiaries to, take all reasonable actions necessary to
obtain any consent, authorization, order or approval of, or any exemption by,
any Governmental Entity or other public or private third party, required to be
obtained or made by Parent, Sub, the Company or any of their Subsidiaries in
connection with the Offer, the Merger or the taking of any action contemplated
thereby or by this Agreement or the Stockholders Agreements.
Section 5.5 Employee Benefits. (a) Parent agrees to cause Surviving
Corporation and its Subsidiaries to provide to certain employees of the Company
payments and benefits, which are set forth in this Section 5.5(a) and which
shall be effected, by means of individual agreements, negotiated in good faith
by the parties hereto, reflecting the economic terms set forth in this Section
5.5.
(i) EVA Plan Bonus
As soon as practicable following the earlier of (A) the Effective Time and
(B) the end of the Company's 1996 fiscal year, the Company shall pay, pursuant
to the terms of the Company's Economic Value Added Incentive Plan (the 'EVA
Plan') as herein modified, bonuses for fiscal year 1996, calculated based on the
Company's financial results as of February 10, 1996, and annualized to equal a
bonus for a 12 month period.
(ii) Severance Pay
With respect to the executives of the Company listed on Schedule 5.5(a)(ii)
attached hereto ('Covered Executives'), effective as soon as practicable
following the Effective Time (or if later, the date of termination of employment
of the Covered Executive), the Company shall pay to each Covered Executive
severance payments (the 'Severance Payments'), on a bi-weekly basis or at such
other intervals as are consistent with Parent's executive payroll practices,
based on one of the two formulae set forth below, pursuant to elections made by
each Covered Executive prior to the Effective Time:
(A) Severance Payments equal to, on an annualized basis, 'Base Pay'
(as defined below), continuing for a period of three years with respect to
Covered Executives who are listed as Group A Executives ('Group A
Executives') on Schedule 5.5(a)(ii)(A) of the Company Disclosure Schedule
and for a period of 18 months with respect to Covered Executives listed as
Group B Executives ('Group B Executives') on Schedule 5.5(a)(ii)(A) of the
Company Disclosure Schedule. For purposes of this Section 5.5(a), Base Pay
shall mean the highest base pay paid to the Covered Executive during any
one of the 1994, 1995 or 1996 fiscal years, provided that the base pay for
the 1996 fiscal year shall be calculated on an annualized basis; or
(B) Severance Payments equal to, on an annualized basis, 'Base Plus
Bonus Pay' (as defined below), continuing for a period of two years with
respect to Group A Executives, and for a period of one year with respect to
Group B Executives. For purposes of this Section 5.5(a), Base Plus Bonus
Pay shall mean Base Pay plus the amount that would have been paid to the
executive under the EVA Plan for fiscal year 1995 as the targeted bonus
(the '1995 Target Bonus').
In lieu of the Severance Payments described in clauses (A) and (B) above,
Messrs. Hoven and Mastrian shall receive Severance Payments, continuing for
three years, equal to, on an annualized basis, Base Plus Bonus Pay.
The period during which a Covered Executive continues to receive Severance
Payments shall be referred to in this Section 5.5(a) as the 'Severance Period'
for such Covered Executive.
During the Severance Period, each Covered Executive shall continue to
receive, at the Company's expense, continuation of benefits described in Section
6(a)(ii) of the Covered Executive's employment agreement with the Company on
terms at least as favorable to the Covered Executive as is currently in effect,
which benefits may be provided by covering such Covered Executive under benefit
plans and programs maintained by Parent provided, further however, that to the
extent any such Covered Executive receives comparable benefits from, and at the
expense of, a subsequent employer, such benefits from the Company shall cease.
Notwithstanding anything in this Agreement to the contrary, the Severance
Payments described in clauses (A) or (B) above shall be paid to a Covered
Executive only if such Covered Executive is actively employed by the Company
immediately prior to the Effective Time.
A-25
<PAGE>
In the event that a Covered Executive that continues employment with the
Company following the Effective Time is terminated prior to the expiration of
the Severance Period that would have applied had such Covered Executive been
terminated effective as of the Effective Time, then such Covered Executive shall
be entitled to receive the Severance Payments determined pursuant to this
Section 5.5(a).
Each employee, other than any Covered Executives, of the Company, who is
covered by the Company's severance pay plan as in effect on November 1, 1995
(each, a 'Severance-Eligible Employee') and who is employed by the Company
immediately prior to the Effective Time and terminated for other than 'Cause,'
as defined below, within 12 months following the Effective Time, shall be
entitled to receive bi-weekly severance payments, consistent with Parent's
payroll practices, for a six-month period commencing on such Severance-Eligible
Employee's date of termination of employment, equal to, on an annualized basis,
such Severance-Eligible Employee's Base Pay; provided, however, that such
payments shall be reduced (but not below zero), by the amount of compensation
such Severance-Eligible Employee receives from a subsequent employer to the
extent that such Severance-Eligible Employee is employed during such six-month
period.
For purposes of this Agreement, 'Cause' shall mean the conviction of an
employee or executive (as the case may be) for the commission of a felony,
including the entry of a guilty or nolo contendere plea, any willful, grossly
negligent or fraudulent action or inaction by an employee or executive, as the
case may be, or the employee's or executive's willful and continued failure to
substantially perform an employee's or executive's assigned duties.
(iii) SERP Benefits
Each Company employee who is (A) covered by the Company's Supplemental
Executive Retirement Plan ('SERP') and (B) actively employed by the Company, in
either case, immediately prior to the Effective Time (each, a 'SERP Executive')
shall be eligible to receive benefits under the SERP based on the terms of the
SERP, as modified herein. For each SERP Executive (i) the amount of service
taken into account for purposes of calculating benefits and vesting under the
SERP shall be equal to the SERP Executive's service with the Company prior to
the Effective Time plus the Covered Executive's Severance Period, if any, and
(ii) compensation for each SERP Executive for purposes of the SERP shall include
one-half of the 1995 Target Bonus for such SERP Executive.
(iv) Gross-Up; Cap
With respect to the eight Executives listed on Section 5.5(a)(iv) of the
Company Disclosure Schedule, the Company shall provide such executives with a
cash gross-up payment to make such executives whole for the excise taxes imposed
on all benefits and other amounts paid or payable to such executive on account
of the transactions contemplated by this Agreement as a result of the
application of sections 280G and 4999 of the Code. With respect to all other
employees of the Company who are entitled to benefits and other amounts paid or
payable to such executive on account of the transactions contemplated by this
Agreement as a result of the application of sections 280G and 4999 of the Code,
the Company shall not be obligated to pay or provide to any such employee any
payments or benefits to the extent that such payments or benefits would
constitute a 'parachute payment' within the meaning of section 280G(b)(2)(A) of
the Code.
(v) ESPP
The Company shall amend the Company's Employee Stock Purchase Plan to
provide that the option period that is in effect as of the date hereof shall
cease as soon as practicable following the date hereof.
(vi) Outplacement
The Company shall provide outplacement services from a recognized
outplacement provider selected by Parent to all employees of the Company as of
the Effective Time who were based in Twinsburg, Ohio as of the Effective Time,
and are terminated without Cause within one year of the Effective Time.
(b) Parent agrees to cause Surviving Corporation and its Subsidiaries to
provide to all active employees of the Company who continue to be employed by
the Company as of the Effective Time ('Continuing Employees') employee benefits
comparable to those benefits provided to similarly situated employees of Parent
(which benefits may be provided by covering Company employees under benefit
plans maintained by Parent for
A-26
<PAGE>
employees of Parent who perform similar duties). In addition, with respect to
medical benefits provided to Continuing Employees as of the Effective Time,
Parent agrees to cause Surviving Corporation and its Subsidiaries to waive
waiting periods and pre-existing condition requirements under such plans, and to
give Continuing Employees credit for any copayments and deductibles actually
paid by such employees under the Company's medical plans during the calendar
year in which the Closing occurs. In addition, service with the Company shall be
recognized for purposes of eligibility under Parent welfare plans as well as for
purposes of Parent's programs or policies for vacation pay and sick pay.
Section 5.6 No Solicitation. (a) The Company (and its Subsidiaries, and
affiliates over which it exercises control) will not, and the Company (and its
Subsidiaries, and affiliates over which it exercises control) will use their
best efforts to ensure that their respective officers, directors, employees,
investment bankers, attorneys, accountants and other agents do not, directly or
indirectly: (i) initiate, solicit or encourage, or take any action to facilitate
the making of, any offer or proposal which constitutes or is reasonably likely
to lead to any Takeover Proposal (as defined below) of the Company or any
Subsidiary or an inquiry with respect thereto, or, (ii) in the event of an
unsolicited Takeover Proposal for the Company or any Subsidiary or affiliate of
the Company, engage in negotiations or discussions with, or provide any
information or data to, any corporation, partnership, person or other entity or
group (other than Parent, any of its affiliates or representatives) (each, a
'Person') relating to any Takeover Proposal, except in the case of clause (ii)
above to the extent that (x) the Takeover Proposal is a bona fide written
proposal submitted to the Company's Board of Directors and (y) the Company's
Board of Directors determines, after having received the oral or written opinion
of outside legal counsel to the Company, that the failure to engage in such
negotiations or discussions or provide such information would result in a breach
of the Board of Directors' fiduciary duties under applicable law. The Company
shall notify Parent and Sub orally and in writing of any such offers, proposals,
inquiries or Takeover Proposals (including, without limitation, the material
terms and conditions thereof and the identity of the Person making it), within
24 hours of the receipt thereof, and shall thereafter inform Parent on a
reasonable basis of the status and content of any discussions or negotiations
with such a third party, including any material changes to the terms and
conditions thereof. The Company shall, and shall cause its Subsidiaries and
affiliates over which it exercises control, and will use best efforts to ensure
their respective officers, directors, employees, investment bankers, attorneys,
accountants and other agents to, immediately cease and cause to be terminated
all discussions and negotiations that have taken place prior to the date hereof,
if any, with any parties conducted heretofore with respect to any Takeover
Proposal relating to the Company. Nothing contained in this Section 5.6 shall
prohibit the Company or its Board of Directors from taking and disclosing to its
stockholders a position with respect to a tender offer by a third party pursuant
to Rules 14d-9 and 14e-2(a) promulgated under the Exchange Act or making such
disclosure as may be required by applicable law.
(b) As used in this Agreement, 'Takeover Proposal' when used in connection
with any Person shall mean any tender or exchange offer involving the capital
stock of such Person, any proposal for a merger, consolidation or other business
combination involving such Person or any Subsidiary of such Person, any proposal
or offer to acquire in any manner a substantial equity interest in, or a
substantial portion of the business or assets of, such Person or any Subsidiary
of such Person, any proposal or offer with respect to any recapitalization or
restructuring with respect to such Person or any Subsidiary of such Person or
any proposal or offer with respect to any other transaction similar to any of
the foregoing with respect to such Person or any Subsidiary of such Person other
than pursuant to the transactions to be effected pursuant to this Agreement.
Section 5.7 Additional Agreements. Subject to the terms and conditions
herein provided (including, but not limited to, Section 5.4) each of the parties
hereto agrees to use its reasonable efforts to take, or cause to be taken, all
action and to do, or cause to be done, all things necessary, proper or
advisable, whether under applicable laws and regulations or otherwise, or to
remove any injunctions or other impediments or delays, legal or otherwise, to
consummate and make effective the Merger and the other transactions contemplated
by this Agreement. In case at any time after the Effective Time any further
action is necessary or desirable to carry out the purposes of this Agreement,
the proper officers and directors of the Company and Parent shall use their
reasonable efforts to take, or cause to be taken, all such necessary actions.
Section 5.8 Publicity. So long as this Agreement is in effect, neither the
Company nor Parent nor affiliates which either of them control shall issue or
cause the publication of any press release or other public statement or
announcement with respect to this Agreement, the Stock Option Agreement or the
Zell/Chilmark Stockholder
A-27
<PAGE>
Agreement or the transactions contemplated hereby or thereby without the prior
consultation of the other party, except as may be required by law or by
obligations pursuant to any listing agreement with a national securities
exchange, provided that each party will use its best efforts to consult with the
other party prior to any such issuance.
Section 5.9 Notification of Certain Matters. The Company shall give prompt
notice to Parent, and Parent shall give prompt notice to the Company, of (a) the
occurrence, or non-occurrence of any event the occurrence or non-occurrence of
which would cause any representation or warranty contained in this Agreement to
be untrue or inaccurate in any material respect at or prior to the Effective
Time and (b) any material failure of the Company or Parent, as the case may be,
to comply with or satisfy any covenant, condition or agreement to be complied
with or satisfied by it hereunder; provided, however, that the delivery of any
notice pursuant to this Section 5.9 shall not limit or otherwise affect the
remedies available hereunder to the party receiving such notice.
Section 5.10 Directors' and Officers' Insurance and
Indemnification. Parent agrees that at all times after the Effective Time, it
shall cause the Surviving Corporation and its Subsidiaries to indemnify, each
person who is now, or has been at any time prior to the date hereof, an
employee, agent, director or officer of the Company or of any of the Company's
Subsidiaries, successors and assigns (individually an 'Indemnified Party' and
collectively the 'Indemnified Parties'), to the fullest extent permitted by law,
with respect to any claim, liability, loss, damage, judgment, fine, penalty,
amount paid in settlement or compromise, cost or expense, including reasonable
fees and expenses of legal counsel, (whenever asserted or claimed) ('Indemnified
Liability') based in whole or in part on, or arising in whole or in part out of,
any matter existing or occurring at or prior to the Effective Time whether
commenced, asserted or claimed before or after the Effective Time, including
liability arising under the Securities Act, the Exchange Act or state law.
Parent shall, and shall cause the Surviving Corporation to, maintain in effect
for not less than four years after the Effective Time the current policies of
directors' and officers' liability insurance maintained by the Company and its
Subsidiaries on the date hereof (provided that Parent may substitute therefor
policies having at least the same coverage and containing terms and conditions
which are no less advantageous to the persons currently covered by such policies
as insured) with respect to matters existing or occurring at or prior to the
Effective Time; provided, however, that if the aggregate annual premiums for
such insurance during such period shall exceed 200% of the per annum rate of the
aggregate premium currently paid by the Company and its Subsidiaries for such
insurance on the date of this Agreement, then Parent shall cause the Surviving
Corporation to, and the Surviving Corporation shall, provide the maximum
coverage that shall then be available at an annual premium equal to 200% of such
rate. Parent agrees to pay all expenses (including fees and expenses of counsel)
that may be incurred by any Indemnified Party in successfully enforcing the
indemnity or other obligations under this Section 5.10. The rights under this
Section 5.10 are in addition to rights that an Indemnified Party may have under
the Certificate of Incorporation, By-laws, other similar organizational
documents of the Company or any of its Subsidiaries or the DGCL. The rights
under this Section 5.10 shall survive consummation of the Merger and are
expressly intended to benefit each Indemnified Party. Parent agrees to cause
Surviving Corporation and any of its Subsidiaries (or their successors) to keep
in effect the provisions of its Certificate of Incorporation or By-laws or
similar organizational documents providing for indemnification to the fullest
extent provided by law.
Section 5.11 Rule 145 Affiliates. At least 40 days prior to the Closing
Date, the Company shall deliver to Parent a letter identifying, to the best of
the Company's knowledge, all persons who are, at the time of the Company Special
Meeting, deemed to be 'affiliates' of the Company for purposes of Rule 145 under
the Securities Act ('Company Affiliates'). The Company shall use its best
efforts to cause each Person who is identified as a Company Affiliate to deliver
to Parent at least 30 days prior to the Closing Date an agreement substantially
in the form of Exhibit C to this Agreement.
Section 5.12 Cooperation. Parent and the Company shall together, or
pursuant to an allocation of responsibility to be agreed upon between them,
coordinate and cooperate (a) with respect to the timing of the Special Meetings,
(b) in determining whether any action by or in respect of, or filing with, any
Governmental Entity is required, or any actions, consents approvals or waivers
are required to be obtained from parties to any material contracts, in
connection with the consummation of the transactions contemplated by this
Agreement, (c) in seeking any such actions, consents, approvals or waivers or
making any such filings, furnishing information required in connection therewith
and timely seeking to obtain any such actions, consents approvals or waivers. As
soon as possible following the commencement of the Offer, the Company shall
cooperate with Parent in the
A-28
<PAGE>
preparation and filing of the Proxy Statement/Prospectus with the Commission,
including, but not limited to providing legal, financial, and accounting
information concerning the Company and assisting in the preparation of all
financial and pro forma financial information required to be included in such
Proxy Statement/Prospectus. Subject to the terms and conditions of this
Agreement, Parent and the Company will each use its best efforts to have the
Registration Statement declared effective under the Securities Act as promptly
as practicable after the Registration Statement is filed, and Parent and the
Company shall, subject to applicable law, confer on a regular and frequent basis
with one or more representatives of one another to report operational matters of
significance to the Merger and the general status of ongoing operations insofar
as relevant to the Merger, provided that the parties will not confer on any
matter to the extent inconsistent with law.
Section 5.13 Proxy Statement/Prospectus. As soon as practicable following
the consummation of the Offer, Parent and the Company shall prepare and file
with the SEC the Proxy Statement/Prospectus and each shall use its best efforts
to have the Proxy Statement/Prospectus cleared by the SEC as promptly as
practicable. As soon as practicable following such clearance Parent shall
prepare and file with the SEC the Registration Statement, of which the Proxy
Statement/Prospectus will form a part, and shall use its best efforts to have
the Registration Statement declared effective by the SEC as promptly as
practicable thereafter. Parent and the Company shall cooperate with each other
in the preparation of the Proxy Statement/Prospectus, and each will provide to
the other promptly copies of all correspondence between it or any of its
representatives and the SEC. Each of the Company and Parent shall furnish all
information concerning it required to be included in the Registration Statement
and the Proxy Statement/Prospectus, and as promptly as practicable after the
effectiveness of the Registration Statement, the Proxy Statement/Prospectus will
be mailed to the stockholders of the Company and Parent. No amendment or
supplement to the Registration Statement or the Proxy Statement/Prospectus will
be made without the approval of each of the Company and Parent, which approval
will not be unreasonably withheld or delayed. Each of the Company and Parent
will advise the other promptly after it receives notice thereof, of the time
when the Registration Statement has become effective or any amendment thereto or
any supplement or amendment to the Proxy Statement/Prospectus has been filed, or
the issuance of any stop order, or the suspension of the qualification of the
Parent Common Stock to be issued in the Merger for offering or sale in any
jurisdiction, or of any request by the SEC or the NYSE for amendment of the
Registration Statement or the Proxy Statement/Prospectus.
Section 5.14 New York State Real Property Transfer and Gains Taxes. Sub or
the Surviving Corporation shall pay or cause to be paid any New York State and
New York City Real Property Transfer or Gains Taxes incurred in connection with
the Offer and the Merger.
Section 5.15 Confidentiality/Standstill Agreement. The parties hereto
agree that the Confidentiality Agreement shall be hereby amended to provide that
any provision therein which in any manner limits, restricts or prohibits the
voting or acquisition of Shares by Parent or any of its affiliates or the
representation of Parent's designees on the Company's Board of Directors or
which in any manner would be inconsistent with this Agreement or the
Zell/Chilmark Stockholder Agreement or the Stock Option Agreement or the
transactions contemplated hereby and thereby shall terminate as of the date
hereof. The Company agrees not to take any action that would impede, bar,
restrict or otherwise interfere in any manner with Parent's rights under the
Zell/Chilmark Stockholder Agreement or the Stock Option Agreement, including,
without limitation, Parent's right to exercise the option granted to Parent
pursuant to the Stock Option Agreement. The provisions of this Section 5.15
shall survive any termination of this Agreement.
Section 5.16 Stock Exchange Listing. The Parent shall use its best efforts
to list prior to the Effective Time on the New York Stock Exchange, Inc.
('NYSE') and the Pacific Stock Exchange, subject to official notice of issuance,
the shares of Parent Common Stock to be issued in the Merger.
A-29
<PAGE>
ARTICLE VI
CONDITIONS
Section 6.1 Conditions to the Obligations of Each Party. The obligations
of the Company, on the one hand, and Parent and Sub, on the other hand, to
consummate the Merger are subject to the satisfaction (or, if permissible,
waiver by the party for whose benefit such conditions exist) of the following
conditions:
(a) this Agreement shall have been adopted by the stockholders of the
Company in accordance with the DGCL;
(b) no court, arbitrator or governmental body, agency or official
shall have issued any order, decree or ruling which remains in force and
there shall not be any statute, rule or regulation, restraining, enjoining
or prohibiting the consummation of the Merger;
(c) the Registration Statement shall have become effective under the
Securities Act and no stop order suspending effectiveness of the
Registration Statement shall have been issued and no proceeding for that
purpose shall have been initiated or threatened by the SEC; and
(d) Parent, Sub or their affiliates shall have purchased Shares
pursuant to the Offer.
ARTICLE VII
TERMINATION
Section 7.1 Termination. Anything herein or elsewhere to the contrary
notwithstanding, this Agreement may be terminated and the Merger contemplated
herein may be abandoned at any time prior to the Effective Time, whether before
or after stockholder approval hereof:
(a) By the mutual consent of the Board of Directors of Parent and the
Board of Directors of the Company.
(b) By either of the Board of Directors of the Company or the Board of
Directors of Parent:
(i) if Parent or Sub has not purchased Shares in accordance with
the terms of the Offer on or prior to April 29, 1996; provided, however,
that the right to terminate this Agreement under this Section 7.1(b)(i)
shall not be available to any party whose failure to fulfill any
obligations under this Agreement has been the cause of, or resulted in,
the failure to satisfy the conditions to the Offer; provided further,
however, that Parent shall not have the right to terminate this
Agreement under this Section 7.1(b)(i) if Parent or Sub purchases any
Shares in connection with the Offer after April 29, 1996; or
(ii) if any Governmental Entity shall have issued an order, decree
or ruling or taken any other action (which order, decree, ruling or
other action the parties hereto shall use their best efforts to lift),
in each case permanently restraining, enjoining or otherwise prohibiting
the transactions contemplated by this Agreement and such order, decree,
ruling or other action shall have become final and non-appealable.
(c) By the Board of Directors of the Company:
(i) if, prior to the purchase of Shares pursuant to the Offer, the
Board of Directors of the Company shall have (A) withdrawn, or modified
or changed in a manner adverse to Parent or Sub its approval or
recommendation of the Offer, this Agreement or the Merger in order to
approve and permit the Company to execute a definitive agreement
relating to a Takeover Proposal, and (B) determined, after having
received the oral or written opinion of outside independent legal
counsel to the Company, that the failure to take such action as set
forth in the preceding clause (A) would result in a breach of the Board
of Directors' fiduciary duties under applicable law; provided, however,
that the Company shall have given Parent and Sub at least thirty-six
hours advance actual notice of any termination pursuant to this Section
7.1(c)(i) and shall have made the payment referred to in Section 7.3
hereof; or
(ii) if prior to the purchase of Shares pursuant to the Offer,
Parent or Sub (x) breaches or fails in any material respect to perform
or comply with any of its material covenants and agreements contained
herein or (y) breaches its representations and warranties in any
material respect and such breach would
A-30
<PAGE>
have or would be reasonably likely to have a material adverse effect on
Parent and its Subsidiaries; provided, however, that if any such breach
is cured, the Company may not terminate this Agreement pursuant to this
Section 7.1(c)(ii); or
(iii) if Parent or Sub shall have terminated the Offer, or the
Offer shall have expired, without Parent or Sub, as the case may be,
purchasing any shares of Company Common Stock pursuant thereto; provided
that the Company may not terminate this Agreement pursuant to this
Section 7.1(c)(iii) if the Company is in material breach of this
Agreement; or
(iv) if, due to an occurrence that if occurring after the
commencement of the Offer would result in a failure to satisfy any of
the conditions set forth in Annex A hereto, Parent, Sub or any of their
affiliates shall have failed to commence the Offer on or prior to five
business days following the date of the initial public announcement of
the Offer; provided, that the Company may not terminate this Agreement
pursuant to this Section 7.1(c)(iv) if the Company is in material breach
of this Agreement.
(d) By the Board of Directors of Parent:
(i) if, due to an occurrence that if occurring after the
commencement of the Offer would result in a failure to satisfy any of
the conditions set forth in Annex A hereto, Parent, Sub or any of their
affiliates shall have failed to commence the Offer on or prior to five
business days following the date of the initial public announcement of
the Offer; provided that Parent may not terminate this Agreement
pursuant to this Section 7.1(d)(i) if Parent or Sub is in material
breach of this Agreement; or
(ii) if (A) prior to the purchase of Shares pursuant to the Offer,
the Board of Directors of the Company shall have withdrawn, or modified
or changed in a manner adverse to Parent or Sub its approval or
recommendation of the Offer, this Agreement or Merger or shall have
recommended a Takeover Proposal or other business combination, or the
Company shall have entered into an agreement in principle (or similar
agreement) or definitive agreement providing for a Takeover Proposal or
other business combination with a person or entity other than Parent,
Sub or their Subsidiaries (or the Board of Directors of the Company
resolves to do any of the foregoing), or (B) prior to the consummation
of the Offer, it shall have been publicly disclosed or Parent or Sub
shall have learned that any person, entity or 'group' (as that term is
defined in Section 13(d)(3) of the Exchange Act) (an 'Acquiring
Person'), other than Parent, Sub or Zell/Chilmark Fund, L.P. or Magten
or FMR Corp. (including any of FMR Corp.'s affiliates) shall have
acquired beneficial ownership (determined pursuant to Rule 13d-3
promulgated under the Exchange Act) of more than 14.9% of any class or
series of capital stock of the Company (including the Shares), through
the acquisition of stock, the formation of a group or otherwise, or
shall have been granted any option, right or warrant, conditional or
otherwise, to acquire beneficial ownership of more than 14.9% of any
class or series of capital stock of the Company (including the Shares);
or
(iii) if Parent or Sub, as the case may be, shall have terminated
the Offer, or the Offer shall have expired without Parent or Sub, as the
case may be, purchasing any Shares thereunder, provided that Parent may
not terminate this Agreement pursuant to this Section 7.1(d)(iii) if
Parent or Sub is in material breach of this Agreement.
Section 7.2 Effect of Termination. In the event of the termination of this
Agreement as provided in Section 7.1, written notice thereof shall forthwith be
given to the other party or parties specifying the provision hereof pursuant to
which such termination is made, and this Agreement shall forthwith become null
and void, and there shall be no liability on the part of Parent, Sub or the
Company except (A) for fraud or for material breach of this Agreement and (B) as
set forth in Sections 5.15, 7.3, 8.1 and 8.2 hereof.
Section 7.3 Termination Fee. If (w) the Board of Directors of the Company
shall terminate this Agreement pursuant to Section 7.1(c)(i) hereof, (x) the
Board of Directors of Parent shall terminate this Agreement pursuant to Section
7.1(d)(ii)(A) hereof, (y) the Board of Directors of Parent shall terminate this
Agreement pursuant to Section 7.1(d)(ii)(B) and within nine months of such
termination, an Acquiring Person shall acquire or beneficially own a majority of
the then outstanding Shares or shall have obtained representation on the
Company's Board of Directors or shall enter into a definitive agreement with the
Company with respect to a Takeover Proposal or similar business combination, or
(z) the Board of Directors of Parent shall terminate this Agreement pursuant to
Section 7.1(d)(i) or Section 7.1(d)(iii) hereof, in each case due to (I) a
material breach of
A-31
<PAGE>
the representations and warranties of the Company set forth in this Agreement or
(II) a material breach of, or failure to perform or comply with, by the Company
any material obligation, covenant or agreement contained in this Agreement, then
in any such case as described in clause (w), (x), (y) or (z) (each such case of
termination being referred to as a 'Trigger Event'), the Company shall pay to
Parent (not later than the date of termination of this Agreement in the case of
clauses (w), (x) and (z) above) an amount equal to $45 million.
ARTICLE VIII
MISCELLANEOUS
Section 8.1 Fees and Expenses. Except as otherwise provided in Section 7.3
hereof and except for expenses incurred in connection with printing the Offer
Documents, Schedule 14D-9, Proxy Statement/Prospectus and the Registration
Statement, as well as the filing fees relating thereto and relating to the
filing under the HSR Act, which costs shall be shared equally by Parent and the
Company, all costs (other than the filing fee for registration of the Parent
Common Stock which will be paid by Parent) and expenses incurred in connection
with this Agreement and the consummation of the transactions contemplated hereby
and thereby shall be paid by the party incurring such expenses.
Section 8.2 Finders' Fees. (a) Except for Morgan Stanley & Co.
Incorporated, a copy of whose engagement agreement has been provided to Parent
and whose fees will be paid by the Company, there is no investment banker,
broker, finder or other intermediary which has been retained by or is authorized
to act on behalf of the Company or any of its Subsidiaries who might be entitled
to any fee or commission from the Company or any of its Subsidiaries upon
consummation of the transactions contemplated by this Agreement.
(b) Except for Donaldson, Lufkin & Jenrette Securities Corporation, a copy
of whose engagement agreement has been provided to the Company and whose fees
will be paid by Parent, there is no investment banker, broker, finder or other
intermediary which has been retained by or is authorized to act on behalf of
Parent or any of its Subsidiaries who might be entitled to any fee or commission
from Parent or any of its Subsidiaries upon consummation of the transactions
contemplated by this Agreement.
Section 8.3 Amendment and Modification. Subject to applicable law, this
Agreement may be amended, modified and supplemented in any and all respects,
whether before or after any vote of the stockholders of the Company contemplated
hereby, by written agreement of the parties hereto, pursuant to action taken by
their respective Boards of Directors (which, in the case of the Company, shall
include the affirmative vote of a majority of the Continuing Directors), at any
time prior to the Closing Date with respect to any of the terms contained
herein; provided, however, that after the approval of this Agreement by the
stockholders of the Company, no such amendment, modification or supplement shall
reduce or change the consideration to be received by the Company's stockholders
in the Merger.
Section 8.4 Nonsurvival of Representations and Warranties. None of the
representations and warranties in this Agreement or in any schedule, instrument
or other document delivered pursuant to this Agreement shall survive the
Effective Time.
Section 8.5 Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered personally, telecopied
(which is confirmed) or sent by an overnight courier service, such as FedEx, to
the parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(a) if to Parent or Sub, to:
Rite Aid Corporation
30 Hunter Lane
Camp Hill, Pennsylvania 17011
Attention: Chief Executive Officer
Telephone No.: (717) 761-2633
Telecopy No.: (717) 975-5905
A-32
<PAGE>
with a copy to:
Nancy A. Lieberman, Esq.
Skadden, Arps, Slate, Meagher & Flom
919 Third Avenue
New York, New York 10022
Telephone No.: (212) 735-3000
Telecopy No.: (212) 735-2000
and
(b) if to the Company, to:
Revco D.S., Inc.
1925 Enterprise Parkway
Twinsburg, Ohio 44087
Attention: Chief Executive Officer
Telephone No.: (216) 425-9811
Telecopy No.: (216) 487-1679
with a copy to:
Michael K.L. Wager, Esq.
Benesch, Friedlander,
Coplan & Aronoff
2300 BP America Building
200 Public Square
Cleveland, Ohio 44114
Telephone No.: 216-363-4500
Telecopy No.: 216-363-4588
Section 8.6 Interpretation. When a reference is made in this Agreement to
Sections, such reference shall be to a Section of this Agreement unless
otherwise indicated. Whenever the words 'include', 'includes' or 'including' are
used in this Agreement they shall be deemed to be followed by the words 'without
limitation'. The phrases 'the date of this Agreement', 'the date hereof', and
terms of similar import, unless the context otherwise requires, shall be deemed
to refer to November , 1995. As used in this Agreement, the term
'affiliate(s)' shall have the meaning set forth in Rule l2b-2 of the Exchange
Act.
Section 8.7 Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
Section 8.8 Entire Agreement; No Third Party Beneficiaries; Rights of
Ownership. This Agreement, the Zell/Chilmark Stockholder Agreement, the Stock
Option Agreement and the Confidentiality Agreement, as modified hereby
(including the exhibits hereto and the documents and the instruments referred to
herein and therein): (a) constitute the entire agreement and supersede all prior
agreements and understandings, both written and oral, among the parties with
respect to the subject matter hereof, and (b) except as provided in Sections 5.5
and 5.10 with respect to the obligations of the Company or the Surviving
Corporation thereunder, are not intended to confer upon any person other than
the parties hereto any rights or remedies hereunder.
Section 8.9 Severability. If any term, provision, covenant or restriction
of this Agreement is held by a court of competent jurisdiction or other
authority to be invalid, void, unenforceable or against its regulatory policy,
the remainder of the terms, provisions, covenants and restrictions of this
Agreement shall remain in full force and effect and shall in no way be affected,
impaired or invalidated.
Section 8.10 Specific Performance. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement was
not performed in accordance with the terms hereof and that the parties shall be
entitled to the remedy of specific performance of the terms hereof, in addition
to any other remedy at law or equity.
A-33
<PAGE>
Section 8.11 Governing Law. This Agreement shall be governed and construed
in accordance with the laws of the State of Delaware without giving effect to
the principles of conflicts of law thereof.
Section 8.12 Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties, except that Sub may assign, in its sole
discretion, any or all of its rights, interests and obligations hereunder to
Parent or to any direct or indirect wholly owned Subsidiary of Parent; provided,
however, that no such assignment shall relieve Parent from any of its
obligations hereunder. Subject to the preceding sentence, this Agreement will be
binding upon, inure to the benefit of and be enforceable by the parties and
their respective successors and assigns.
Section 8.13 Joint and Several Liability. Parent and Sub hereby agree that
they will be jointly and severally liable for all covenants, agreements,
obligations and representations and warranties made by either of them in this
Agreement.
IN WITNESS WHEREOF, Parent, Sub and the Company have caused this Agreement
to be signed by their respective officers thereunto duly authorized as of the
date first written above.
RITE AID CORPORATION
By: /s/ MARTIN L. GRASS
----------------------------------
Martin L. Grass
Chairman of the Board
and Chief Executive Officer
OCEAN ACQUISITION CORPORATION
By: /s/ MARTIN L. GRASS
----------------------------------
Martin L. Grass
President
REVCO D.S., INC.
By: /s/ D. DWAYNE HOVEN
----------------------------------
D. Dwayne Hoven
President and Chief
Executive Officer
A-34
<PAGE>
ANNEX A
TO MERGER AGREEMENT
CONDITIONS TO THE TENDER OFFER
Notwithstanding any other provisions of the Offer, and in addition to (and
not in limitation of) Sub's rights to extend and amend the Offer at any time in
its sole discretion (subject to the provisions of the Merger Agreement), Sub
shall not be required to accept for payment or, subject to any applicable rules
and regulations of the SEC, including Rule 14e-1(c) under the Exchange Act
(relating to Sub's obligation to pay for or return tendered Shares promptly
after termination or withdrawal of the Offer), pay for, and may delay the
acceptance for payment of or, subject to the restriction referred to above, the
payment for, any tendered Shares, and may terminate the Offer as to any Shares
not then paid for, if (i) any applicable waiting period under the HSR Act has
not expired or terminated prior to the expiration of the Offer, (ii) the Minimum
Condition has not been satisfied, or (iii) at any time on or after November 17,
1995 and prior to the acceptance for payment of any Shares, any of the following
events shall occur or shall be determined by Sub to have occurred:
(a) there shall be instituted, pending or threatened any action or
proceeding by any government or governmental authority or agency, domestic
or foreign, (i) challenging or seeking to make illegal, to delay materially
or otherwise directly or indirectly to restrain or prohibit the making of
the Offer, the acceptance for payment of or payment for some of or all the
Shares by Parent or Sub or the consummation by Parent or Sub of the Merger,
seeking to obtain material damages relating to the Merger Agreement, the
Zell/Chilmark Stockholder Agreement, the Stock Option Agreement or any of
the transactions contemplated thereby or otherwise seeking to prohibit
directly or indirectly the transactions contemplated by the Offer or the
Merger, or challenging or seeking to make illegal the transactions
contemplated by the Zell/Chilmark Stockholder Agreement, the Stock Option
Agreement or otherwise directly or indirectly to restrain, prohibit or
delay the transactions contemplated by the Zell/Chilmark Stockholder
Agreement or the Stock Option Agreement, (ii) seeking to restrain, prohibit
or delay Parent's, Sub's or any of their subsidiaries' ownership or
operation of all or any portion (other than an immaterial portion) of the
business or assets of the Company or its subsidiaries, or to compel Parent
or any of its subsidiaries to dispose of or hold separate all or any
portion (other than an immaterial portion) of the business or assets of the
Company or Parent or their respective subsidiaries, (iii) seeking to impose
or confirm material limitations on the ability of Parent, Sub or any of
their subsidiaries or affiliates effectively to exercise full rights of
ownership of the Shares, including, without limitation, the right to vote
any Shares acquired or owned by Parent, Sub or any of their subsidiaries or
affiliates on all matters properly presented to the Company's stockholders,
or (iv) seeking to require divestiture by Parent, or Sub or any of their
subsidiaries of any Shares; or
(b) there shall be any action taken, or any statute, rule, regulation,
injunction, judgment, order or decree enacted, enforced, entered,
promulgated, issued or deemed applicable to the Offer or the Merger, by any
court, government or governmental authority or agency, domestic or foreign,
that, directly or indirectly, results in any of the consequences referred
to in clauses (i) through (iv) of paragraph (a) above; or
(c) there shall have occurred (i) any general suspension of trading
in, or limitation on prices for, securities on the New York Stock Exchange
for a period in excess of three hours, (ii) the declaration of a banking
moratorium or any suspension of payments in respect of banks in the United
States (whether or not mandatory), (iii) the commencement of a war, armed
hostilities or other international or national calamity directly or
indirectly involving the United States, (iv) any limitation (whether or not
mandatory) by any foreign or United States governmental authority or agency
on the extension of credit by banks or other financial institutions, (v)
any decline in either the Dow Jones Industrial Average or the Standard &
Poor's Index of 500 Industrial Companies by an amount in excess of 20%
measured from the close of business on November 29, 1995, or (vi) in the
case of any of the foregoing existing at the time of the commencement of
the Offer, a material acceleration or worsening thereof; or
(d) the representations and warranties of the Company set forth in the
Merger Agreement shall not be true and correct in any material respect as
of the date of consummation of the Offer as though made on or as of such
date, except (i) for changes specifically permitted by the Merger Agreement
and (ii) those representations and warranties that address matters only as
of a particular date which are true and correct as of such date, or the
Company shall have breached or failed in any material respect to perform or
comply
A-35
<PAGE>
with any material obligation, agreement or covenant required by the Merger
Agreement to be performed or complied with by it; or
(e) the Merger Agreement shall have been terminated in accordance with
its terms; or
(f) any party to the Zell/Chilmark Stockholder Agreement or the Stock
Option Agreement other than Sub and Parent shall have breached or failed to
perform any of its agreements under such agreements or breached any of its
representations and warranties in such agreements or any such agreement
shall not be valid, binding and enforceable, except for such breaches or
failures or failures to be valid, binding and enforceable that do not
materially and adversely affect the benefits expected to be received by
Parent and Sub under the Merger Agreement, the Zell/Chilmark Stockholder
Agreement or the Stock Option Agreement; or
(g) (i) it shall have been publicly disclosed or Parent or Sub shall
have otherwise learned that any person, entity or 'group' (as defined in
Section 13(d)(3) of the Exchange Act), other than Zell/Chilmark Fund, L.P.
or Magten Asset Management Corporation, or FMR Corp. (including any of FMR
Corp.'s affiliates) Parent or its affiliates or any group of which any of
them is a member, shall have acquired beneficial ownership (determined
pursuant to Rule 13d-3 promulgated under the Exchange Act) of more than
14.9% of any class or series of capital stock of the Company (including the
Shares), through the acquisition of stock, the formation of a group or
otherwise, or shall have been granted an option, right or warrant,
conditional or otherwise, to acquire beneficial ownership of more than
14.9% of any class or series of capital stock of the Company (including the
Shares); or (ii) any person, entity or group shall have entered into a
definitive agreement or agreement in principle with the Company with
respect to a merger, consolidation or other business combination with the
Company; or
(h) a tender or exchange offer for some or all of the Shares or
proposal for a Takeover Proposal shall have been publicly proposed to be
made or shall have been made by another person or entity;
(i) the Board of Directors of the Company shall have withdrawn, or
modified or changed in a manner adverse to Parent or Sub (including by
amendment of the Schedule 14D-9), its approval or recommendation of the
Offer, the Merger Agreement, or the Merger, or recommended another proposal
or offer, or shall have resolved to do any of the foregoing; or
(j) there shall have occurred any event, change or effect (including
the incurrence of any liabilities of any nature, whether or not accrued,
contingent or otherwise) which has, individually or in the aggregate, a
material adverse effect (as defined in the Merger Agreement) on the Company
and its Subsidiaries;
which in the sole judgment of Parent or Sub, in any such case, and regardless of
the circumstances (including any action or inaction by Parent or Sub giving rise
to such condition) makes it inadvisable to proceed with the Offer or with such
acceptance for payment or payments.
The foregoing conditions are for the sole benefit of Parent and Sub and may
be asserted by Parent or Sub regardless of the circumstances giving rise to any
such condition or may be waived by Parent or Sub in whole or in part at any time
and from time to time in their sole discretion. The failure by Parent or Sub at
any time to exercise any of the foregoing rights shall not be deemed a waiver of
any such right; the waiver of any such right with respect to particular facts
and other circumstances shall not be deemed a waiver with respect to other facts
and circumstances; and each such right shall be deemed an ongoing right which
may be asserted at any time and from time to time.
A-36
<PAGE>
ANNEX B
[DONALDSON, LUFKIN & JENRETTE LETTERHEAD]
November 29, 1995
Board of Directors
Rite Aid Corporation
30 Hunter Lane
Camp Hill, PA 17011
Dear Sirs:
You have requested our opinion as to the fairness from a financial point of
view to the stockholders of Rite Aid Corporation (the 'Company') of the
consideration to be paid by the Company pursuant to the terms of the Agreement
and Plan of Merger to be dated as of November 29, 1995, among the Company, Ocean
Acquisition Corporation, a wholly owned subsidiary of the Company ('Acquisition
Sub') and Revco D.S., Inc. ('Revco') (the 'Agreement').
Pursuant to the Agreement, the Company will commence a tender offer for not
less then 50.1% of the outstanding shares of the common stock of Revco at a
price of $27.50 per share. In its sole discretion, the Company may seek to
purchase up to all of such outstanding shares of Revco common stock pursuant to
such tender offer. The tender offer is to be followed by a merger in which all
shares of such Revco common stock not purchased in the offer would be converted
into shares of the Company's common stock pursuant to the conversion formulas
set forth in the Agreement. Under certain circumstances, the Company may elect,
in its sole discretion, to cause a portion of the merger consideration to be
paid in cash, as more fully provided in the Agreement. In addition, the
Agreement also requires that the Company make available the aggregate merger
consideration in a combination of cash and Company common stock if the Company's
stockholders shall not have approved the issuance of Company common stock in the
merger as contemplated by the Agreement.
In arriving at our opinion, we have reviewed the Agreement, the associated
Stockholder Agreement between the Company and Zell/Chilmark Fund, L.P. and the
associated Stock Option Agreement between the Company and Revco, as well as
financial and other information that was publicly available or furnished to us
by the Company and Revco including information provided during discussions with
their respective managements. Included in the information provided during
discussions with the respective managements were certain financial projections
of Revco for the period beginning June 1996 and ending June 1998 prepared by the
management of Revco and certain financial projections of the Company for the
period beginning February 1996 and ending February 1998 prepared by the
management of the Company. In addition, we have compared certain financial and
securities data of the Company and Revco with various other companies whose
securities are traded in public markets, reviewed the historical stock prices
and trading volumes of the common stock of the Company and Revco, reviewed
prices and premiums paid in other business combinations and conducted such other
financial studies, analyses and investigations as we deemed appropriate for
purposes of this opinion.
In rendering our opinion, we have relied upon and assumed the accuracy,
completeness and fairness of all of the financial and other information that was
available to us from public sources, that was provided to us by the Company and
Revco or their respective representatives, or that was otherwise reviewed by us.
In particular, we have relied upon the estimates of the management of the
Company of the operating synergies achievable as a result of the Merger and upon
our discussion of such synergies with the management of Revco. With respect to
the financial projections supplied to us, we have assumed that they have been
reasonably prepared on the basis reflecting the best currently available
estimates and judgments of the management of the Company and Revco as to the
future operating and financial performance of the Company and Revco. We have not
assumed any
B-1
<PAGE>
responsibility for making any independent evaluation of Revco's assets or
liabilities or for making any independent verification of any of the information
reviewed by us.
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as of,
the date of this letter. It should be understood that, although subsequent
developments may affect this opinion, we do not have any obligation to update,
revise or reaffirm this opinion. We are expressing no opinion herein as to the
prices at which the Company's common stock will trade at any time. Our opinion
does not constitute a recommendation to any stockholder of the Company or Revco
as to how such stockholder should vote on the proposed transaction.
Donaldson, Lufkin & Jenrette Securities Corporation ('DLJ'), as part of its
investment banking services, is regularly engaged in the valuation of businesses
and securities in connection with mergers, acquisitions, underwritings, sales
and distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. DLJ has performed
investment banking and other services for both the Company and Revco in the past
and has been compensated for such services. Over the past two years, DLJ has (i)
lead managed a $200 million senior notes offering for the Company, (ii) advised
the Company in the sale of four of its non-drugstore subsidiaries and (iii)
advised the Company on its Dutch auction to buy back outstanding shares. DLJ has
received customary compensation for the above-mentioned services. Over the past
two years, DLJ has also (i) advised Revco on its acquisition of Hook-SupeRx and
provided $150 million of bridge financing for the acquisition and (ii) advised
Revco on its sale of certain stores acquired from Brooks Drug. DLJ has also
received customary compensation for the above-mentioned services.
Based upon the foregoing and such other factors as we deem relevant, we are
of the opinion that the consideration to be paid by the Company pursuant to the
Agreement, taken as a whole, is fair to the stockholders of the Company from a
financial point of view.
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ PETER J. NOLAN
____________________________________
Peter J. Nolan
Managing Director
B-2
<PAGE>
ANNEX C
MORGAN STANLEY
MORGAN STANLEY & CO.
INCORPORATED
1585 BROADWAY
NEW YORK, NEW YORK 10036
(212) 761-4000
November 29, 1995
Board of Directors
Revco D.S., Inc.
1925 Enterprise Parkway
Twinsburg, OH 44087
Gentlemen and Madame:
We understand that Revco D.S., Inc., a Delaware Corporation, (the
'Company'), Rite Aid Corporation, a Delaware Corporation, (the 'Buyer') and
Ocean Acquisition Corp., a Delaware Corporation and a wholly owned subsidiary of
Buyer ('Acquisition Sub'), have entered into an Agreement and Plan of Merger,
dated as of November 29, 1995 (the 'Merger Agreement'), which provides, among
other things, for (I) the commencement by Acquisition Sub of a cash tender offer
(the 'Offer') for not less than 50.1% (the 'Minimum Condition') of the issued
and outstanding shares of common stock, par value $.01 per share, of the Company
(the 'Company Common Stock') for $27.50 per share net to the seller in cash (in
the aggregate, the 'Offer Consideration'), and (II) upon satisfaction of the
Minimum Condition pursuant to the Offer, the subsequent merger (the 'Merger') of
Acquisition Sub with and into the Company. Pursuant to the Merger, the Company
will become a wholly owned subsidiary of the Buyer and each share of Company
Common Stock issued and outstanding immediately prior to the closing of the
Merger, other than shares held in treasury or held by Buyer or any subsidiary of
Buyer or as to which dissenters' rights have been perfected, shall be converted
into either (i) a number of shares of common stock, par value $1.00 per share,
of the Buyer (the 'Buyer Common Stock') to be determined based upon a formula
set forth in the Merger Agreement, subject to a collar which provides that the
exchange ratio shall not be greater than 1.12500 nor less than 0.91666 shares of
Buyer Common Stock per share of Company Common Stock (the 'Exchange Ratio'), or
(ii) in the event that the stockholders of Buyer do not approve the issuance of
Buyer Common Stock, a combination of Buyer Common Stock and cash based upon a
formula set forth in the Merger Agreement, whereby the number of shares of Buyer
Common Stock to be issued in the Merger will not exceed 19.9% of the Buyer
Common Stock outstanding immediately prior to the Merger (the shares of Buyer
Common Stock and/or cash to be received in the Merger being, in the aggregate,
the 'Merger Consideration' and together with the Offer Consideration, the
'Consideration'). We also understand that Parent and a holder of Company Common
Stock have entered into a Stockholder Agreement, dated as of November 29, 1995
(the 'Stockholder Agreement'), pursuant to which, among other things, such
holder has agreed to vote its shares in favor of the Merger. We further
understand that the Company and the Buyer have entered into a Stock Option
Agreement pursuant to which the Company has granted Buyer the right to purchase,
in certain circumstances, a number of shares of Company Common Stock equal to
19.9% of the shares of Company Common Stock outstanding at the time of exercise
of such purchase right. The terms and conditions of the Offer and the Merger are
more fully set forth in the Merger Agreement.
You have asked for our opinion as to whether the Consideration to be
received by the holders of shares of Company Common Stock pursuant to the Offer
and the Merger, taken together, is fair from a financial point of view to such
holders.
C-1
<PAGE>
For purposes of the opinion set forth herein, we have:
(i) analyzed certain publicly available financial statements and
other information of the Company and the Buyer, respectively;
(ii) reviewed certain internal financial statements and other
financial and operating data concerning the Company and the Buyer prepared
by the managements of the Company and the Buyer, respectively;
(iii) reviewed certain financial projections for the Company and the
Buyer, including estimates of certain potential benefits of the proposed
business combination, prepared by the managements of the Company and the
Buyer, respectively;
(iv) discussed the past and current operations and financial
condition and the prospects of the Company and the Buyer with senior
executives of the Company and the Buyer, respectively;
(v) reviewed the reported prices and trading activity for the
Company Common Stock and the Buyer Common Stock;
(vi) compared the financial performance of the Company and the Buyer
and the prices and trading activity of the Company Common Stock and the
Buyer Common Stock with that of certain other comparable publicly-traded
companies and their securities;
(vii) reviewed the financial terms, to the extent publicly available,
of certain comparable acquisition transactions;
(viii) participated in discussions among representatives of the
Company and Parent and their legal advisors;
(ix) reviewed the Merger Agreement, Stock Option Agreement and the
Stockholder Agreement; and
(x) performed such other analyses as we have deemed appropriate.
We have assumed and relied without independent verification upon the
accuracy and completeness of the information reviewed by us for the purposes of
this opinion. With respect to the financial projections, including the estimates
of the Buyer and the Company of certain potential benefits of the proposed
business combination, we have assumed that they have been reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
future financial performance of the Company and the Buyer, respectively. We have
not made any independent valuation or appraisal of the assets or liabilities of
the Company or the Buyer, nor have we been furnished with any such appraisals.
Our opinion is necessarily based on economic, market and other conditions as in
effect on, and the information made available to us as of, the date hereof. In
addition, for purposes of this opinion we have assumed that following completion
of the Offer the Merger will be consummated in accordance with the terms of the
Merger Agreement.
In arriving at our opinion, we were not authorized to solicit, and did not
solicit, interest from any party with respect to the acquisition of the Company
or any of its assets.
We express no opinion and make no recommendations as to whether the holders
of Company Common Stock should elect to tender their shares to the Acquisition
Sub pursuant to the Offer, nor do we express any recommendation as to how such
holders should vote at the stockholders' meeting held in connection with the
Merger.
We have acted as financial advisor to the Board of Directors of the Company
in connection with this transaction and will receive a fee for our services. In
the past, Morgan Stanley & Co. Incorporated and its affiliates have provided
financial advisory and financing services to the Company and have received fees
for the rendering of these services.
It is understood that this letter is for the information of the Board of
Directors of the Company and may not be used for any other purpose without our
prior written consent, except that this opinion may be included in its entirety
in any filing made by the Company or the Buyer with the Securities and Exchange
Commission with respect to the Offer and the Merger.
C-2
<PAGE>
Based on, and subject to, the foregoing, we are of the opinion on the date
hereof that the Consideration to be received by the holders of shares of Company
Common Stock pursuant to the Offer and the Merger, taken together, is fair from
a financial point of view to such holders.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By: /s/ STEPHEN R. MUNGER
----------------------------------
Stephen R. Munger
Managing Director
C-3
<PAGE>
ANNEX D
STOCKHOLDER AGREEMENT
AGREEMENT, dated as of November 29, 1995, by and among Rite Aid
Corporation, a Delaware corporation ('Parent'), Ocean Acquisition Corporation, a
Delaware corporation and a wholly owned subsidiary of Parent ('Sub'), and
Zell/Chilmark Fund, L.P., a Delaware limited partnership (referred to herein as
the 'Stockholder').
W I T N E S S E T H:
WHEREAS, immediately prior to the execution of this Agreement, Parent, Sub
and Revco D.S., Inc., a Delaware corporation (the 'Company'), have entered into
an Agreement and Plan of Merger (as such agreement may hereafter be amended from
time to time, the 'Merger Agreement'), pursuant to which Sub will be merged with
and into the Company (the 'Merger');
WHEREAS, in furtherance of the Merger, Parent and the Company desire that
as soon as practicable (but in no event later than five business days) after the
execution of the Merger Agreement, Sub shall commence an offer (the 'Offer') to
purchase for cash not less than 35,144,833 shares and up to all of the issued
and outstanding Company Common Stock (as defined in Section 1 hereof) at a price
of $27.50 per share of Company Common Stock; and
WHEREAS, as an inducement and a condition to entering into the Merger
Agreement, Parent has required that the Stockholder agree, and the Stockholder
has agreed, to enter into this Agreement;
NOW, THEREFORE, in consideration of the foregoing and the mutual promises,
representations, warranties, covenants and agreements contained herein, the
parties hereto, intending to be legally bound hereby, agree as follows:
1. Certain Definitions. Capitalized terms used and not defined herein
have the respective meanings ascribed to them in the Merger Agreement. For
purposes of this Agreement:
(a) 'Beneficially Own' or 'Beneficial Ownership' with respect to
any securities shall mean having 'beneficial ownership' of such
securities (as determined pursuant to Rule 13d-3 under the Securities
Exchange Act of 1934, as amended (the 'Exchange Act')), including
pursuant to any agreement, arrangement or understanding, whether or not
in writing. Without duplicative counting of the same securities by the
same holder, securities Beneficially Owned by a Person shall include
securities Beneficially Owned by all other Persons with whom such Person
would constitute a 'group' within the meaning of Section 13(d) of the
Exchange Act.
(b) 'Company Common Stock' shall mean at any time the common stock,
$.01 par value, of the Company.
(c) 'Person' shall mean an individual, corporation, partnership,
limited liability company, joint venture, association, trust,
unincorporated organization or other entity.
2. Tender of Shares.
(a) The Stockholder hereby agrees to validly tender (or cause the
record owner of such shares to tender), and not to withdraw, pursuant to
and in accordance with the terms of the Offer, not later than prior to
the expiration of the Offer pursuant to Section 1.1 of the Merger
Agreement and Rule 14d-2 under the Exchange Act, 13,102,288 shares of
Company Common Stock (the 'Existing Shares' and together with any shares
of Company Common Stock acquired by the Stockholder in any capacity
after the date hereof and prior to the termination of this Agreement
whether upon the exercise of options, warrants or rights, the conversion
or exchange of convertible or exchangeable securities, or by means of
purchase, dividend, distribution, gift, bequest, inheritance or as a
successor in interest in any capacity or otherwise, the 'Shares')
Beneficially Owned by the Stockholder. The Stockholder hereby
acknowledges and agrees that Parent's and Sub's obligation to accept for
payment and pay for the Shares in the Offer, is subject to the terms and
conditions of the Offer. The parties agree that the
D-1
<PAGE>
Stockholder will, for all Shares tendered by the Stockholder in the
Offer and accepted for payment and paid for by Sub, receive the same per
share consideration paid to other shareholders who have tendered into
the Offer.
(b) The transfer by the Stockholder of the Shares to Sub in the
Offer shall pass to and unconditionally vest in Sub good and valid title
to the Shares, free and clear of all claims, liens, restrictions,
security interests, pledges, limitations and encumbrances whatsoever.
(c) The Stockholder hereby agrees to permit Parent and Sub to
publish and disclose in the Offer Documents and, if approval of the
Company's shareholders is required under applicable law, the
Registration Statement and the Proxy Statement/Prospectus (including all
documents and schedules filed with the SEC) its identity and ownership
of Company Common Stock and the nature of its commitments, arrangements
and understandings under this Agreement.
3. Voting of Company Common Stock. The Stockholder hereby agrees that
during the period commencing on the date hereof and continuing until the
first to occur of (i) the Effective Time or (ii) termination of this
Agreement in accordance with its terms, at any meeting (whether annual or
special and whether or not an adjourned or postponed meeting) of the
holders of Company Common Stock, however called, or in connection with any
written consent of the holders of Company Common Stock, the Stockholder
shall vote (or cause to be voted) the Shares held of record or Beneficially
Owned by the Stockholder (i) in favor of the Merger, the execution and
delivery by the Company of the Merger Agreement and the approval and
adoption of the terms thereof and each of the other actions contemplated by
the Merger Agreement and this Agreement and any actions required in
furtherance thereof and hereof; (ii) against any action or agreement that
would result in a breach in any respect of any covenant, representation or
warranty or any other obligation or agreement of the Company under the
Merger Agreement or this Agreement; and (iii) except as otherwise agreed to
in writing in advance by Parent, against the following actions (other than
the Merger and the transactions contemplated by this Agreement and the
Merger Agreement): (A) any extraordinary corporate transaction, such as a
merger, consolidation or other business combination involving the Company
or its Subsidiaries; (B) any sale, lease or transfer of a material amount
of assets of the Company or its Subsidiaries, or a reorganization,
restructuring, recapitalization, special dividend, dissolution or
liquidation of the Company or its Subsidiaries; or (C)(1) any change in a
majority of the persons who constitute the board of directors of the
Company; (2) any change in the present capitalization of the Company
including any proposal to sell a substantial equity interest in the Company
and its Subsidiaries; (3) any amendment of the Company's Certificate of
Incorporation or By-laws; (4) any other change in the Company's corporate
structure or business; or (5) any other action which, in the case of each
of the matters referred to in clauses (C)(1), (2), (3) or (4), is intended,
or could reasonably be expected, to impede, interfere with, delay,
postpone, or materially adversely affect the Offer, the Merger and the
transactions contemplated by this Agreement and the Merger Agreement. The
Stockholder shall not enter into any agreement or understanding with any
person or entity the effect of which would be inconsistent or violative of
the provisions and agreements contained in this Section 3.
4. Stockholder Covenant. Except as contemplated by this Agreement,
the Stockholder shall not for a period of six months following the
termination of this Agreement (other than as a result of a breach by Parent
or Sub) enter into, execute, or be a party to any agreement or
understanding, written or otherwise, with any Person whereby the
Stockholder (i) grants or otherwise gives to such Person an option or right
to purchase or acquire any or all of the Shares other than sales made in
open market transactions; (ii) agrees or covenants to vote or to grant a
proxy to vote any or all of the Shares held of record or Beneficially Owned
by the Stockholder, at any meeting (whether annual or special and whether
or not an adjourned or postponed meeting) of the holders of Company Common
Stock, however called, or in connection with any written consent of the
holders of Company Common Stock; or (iii) agrees or covenants to tender any
or all of the Shares held of record or Beneficially Owned by the
Stockholder into any tender offer or exchange offer relating to the Company
Common Stock.
D-2
<PAGE>
5. Covenants, Representations and Warranties of Stockholder. The
Stockholder hereby represents and warrants to, and agrees with, Parent and
Sub as follows:
(a) Ownership of Shares. The Stockholder is the record and
Beneficial Owner of the Existing Shares. On the date hereof, the
Existing Shares constitute all of the Shares owned of record or
Beneficially Owned by the Stockholder. The Stockholder has sole voting
power and sole power to issue instructions with respect to the matters
set forth in Sections 2 and 3 hereof, sole power of disposition, sole
power of conversion, sole power to demand appraisal rights and sole
power to agree to all of the matters set forth in this Agreement, in
each case with respect to all of the Existing Shares with no
limitations, qualifications or restrictions on such rights, subject to
applicable securities laws and the terms of this Agreement.
(b) Corporate Authorization. This Agreement has been duly and
validly executed and delivered by the Stockholder and constitutes a
valid and binding agreement enforceable against the Stockholder in
accordance with its terms except to the extent (i) such enforcement may
be limited by applicable bankruptcy, insolvency or similar laws
affecting creditors rights and (ii) the remedy of specific performance
and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought.
(c) No Conflicts. Except for filings, authorizations, consents and
approvals as may be required under the HSR Act, the Exchange Act and the
Securities Act (i) no filing with, and no permit, authorization, consent
or approval of, any state or federal public body or authority is
necessary for the execution of this Agreement by the Stockholder and the
consummation by the Stockholder of the transactions contemplated hereby
and (ii) none of the execution and delivery of this Agreement by the
Stockholder, the consummation by the Stockholder of the transactions
contemplated hereby or compliance by the Stockholder with any of the
provisions hereof shall (A) conflict with or result in any breach of the
organizational documents of the Stockholder, (B) result in a violation
or breach of, or constitute (with or without notice or lapse of time or
both) a default (or give rise to any third party right of termination,
cancellation, material modification or acceleration) under any of the
terms, conditions or provisions of any note, loan agreement, bond,
mortgage, indenture, license, contract, commitment, arrangement,
understanding, agreement or other instrument or obligation of any kind
to which Stockholder is a party or by which the Stockholder or any of
its properties or assets may be bound, or (C) violate any order, writ,
injunction, decree, judgment, statute, rule or regulation applicable to
the Stockholder or any of its properties or assets.
(d) No Encumbrances. Except as applicable in connection with the
transactions contemplated by Sections 2, 3 and 4 hereof, the Shares and
the certificates representing such Shares are now, and at all times
during the term hereof, will be, held by the Stockholder, or by a
nominee or custodian for the benefit of such Stockholder, free and clear
of all liens, claims, security interests, proxies, voting trusts or
agreements, understandings or arrangements or any other encumbrances
whatsoever, except for any such encumbrances or proxies arising
hereunder.
(e) No Finder's Fees. No broker, investment banker, financial
advisor or other person is entitled to any broker's, finder's, financial
adviser's or other similar fee or commission in connection with the
transactions contemplated hereby based upon arrangements made by or on
behalf of the Stockholder.
(f) No Solicitation. Stockholder shall not, and shall cause its
affiliates and officers, directors, employees, partners, investment
bankers, attorneys, accountants and other agents and representatives of
Stockholder and such affiliates (such affiliates, officers, directors,
employees, partners investment bankers, attorneys, accountants, agents
and representatives of any Person are hereinafter collectively referred
to as the 'Representatives' of such Person) not to, directly or
indirectly (i) initiate, solicit or encourage, or take any action to
facilitate the making of, any offer or proposal which constitutes or is
reasonably likely to lead to any Takeover Proposal (as defined in the
Merger Agreement) of the Company or any affiliate or any inquiry with
respect thereto, or (ii) in the event of an unsolicited Takeover
Proposal for the Company or any affiliate of the Company, engage in
negotiations or discussions with, or provide any information or data to,
any Person (other than Parent, any of its affiliates or representatives)
relating to any Takeover Proposal. Stockholder shall notify Parent and
Sub
D-3
<PAGE>
orally and in writing of any such offers, proposals, or inquiries
relating to the purchase or acquisition by any Person of the Shares
(including, without limitation, the terms and conditions thereof and the
identity of the Person making it), within 24 hours of the receipt
thereof. Stockholder shall, and shall cause its Representatives to,
immediately cease and cause to be terminated any and all existing
activities, discussions or negotiations, if any, with any parties
conducted heretofore with respect to any Takeover Proposal relating to
the Company, other than discussions or negotiations with Parent and its
affiliates. Notwithstanding the restrictions set forth in this Section
5(f), any Person who is an officer or director of the Company may
exercise his fiduciary duties in his capacity as a director or officer
of the Company consistent with the terms of the Merger Agreement.
(g) Restriction on Transfer, Proxies and Non-Interference. Except
as applicable in connection with the transactions contemplated by
Sections 2 and 3 hereof, the Stockholder shall not, directly or
indirectly: (i) offer for sale, sell, transfer, tender, pledge,
encumber, assign or otherwise dispose of, or enter into any contract,
option or other arrangement or understanding with respect to or consent
to the offer for sale, sale, transfer, tender, pledge, encumbrance,
assignment or other disposition of, any or all of the Shares or any
interest therein; (ii) except as contemplated by this Agreement, grant
any proxies or powers of attorney, deposit the Shares into a voting
trust or enter into a voting agreement with respect to the Shares; or
(iii) take any action that would make any representation or warranty of
the Stockholder contained herein untrue or incorrect or would result in
a breach by the Stockholder of their obligations under this Agreement or
a breach by the Company of its obligations under the Merger Agreement.
(h) Reliance by Parent. The Stockholder understands and
acknowledges that Parent is entering into, and causing Sub to enter
into, the Merger Agreement in reliance upon the Stockholder's execution
and delivery of this Agreement.
(i) Further Assurances. From time to time, at the other party's
request and without further consideration, each party hereto shall
execute and deliver such additional documents and take all such further
lawful action as may be necessary or desirable to consummate and make
effective, in the most expeditious manner practicable, the transactions
contemplated by this Agreement.
(j) Distribution of Shares of Parent Common Stock. Upon the
consummation of the Merger, the Stockholder shall within 90 days
thereafter either distribute the shares of Parent Common Stock (as
defined in the Merger Agreement) to each of the limited partners of
Zell/Chilmark Fund, L.P. or sell or otherwise dispose of such shares of
Parent Common Stock, in each case in accordance with the governing
documents thereto and applicable law; provided that no such sale or
other disposition shall be made if immediately following such sale or
other disposition the acquiror of such Parent Common Stock, together
with the acquiror's affiliates and any members of a group of which the
acquiror is a party, would Beneficially Own in the aggregate 4.9% or
more of the Parent Common Stock then outstanding.
6. Representations and Warranties of Parent and Sub. Parent and Sub
hereby represent and warrant to Stockholder as follows:
(a) Organization. Each of Parent and Sub is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Delaware, has all requisite corporate power or other power and
authority to execute and deliver this Agreement and perform their
respective obligations hereunder. The execution and delivery by Parent
and Sub of this Agreement and the performance by Parent and Sub of their
respective obligations hereunder have been duly and validly authorized
by the Board of Directors of each of Parent and Sub and no other
corporate proceedings on the part of Parent or Sub are necessary to
authorize the execution, delivery or performance of this Agreement or
the consummation of the transactions contemplated hereby.
(b) Corporate Authorization. This Agreement has been duly and
validly executed and delivered by Parent and Sub and constitutes a valid
and binding agreement of each of Parent and Sub enforceable against each
of Parent and Sub in accordance with its terms except to the extent (i)
such enforcement may be limited by applicable bankruptcy, insolvency or
similar laws affecting creditors rights and
D-4
<PAGE>
(ii) the remedy of specific performance and injunctive and other forms
of equitable relief may be subject to equitable defenses and to the
discretion of the court before which any proceeding therefor may be
brought.
(c) No Conflicts. Except for filings, authorizations, consents and
approvals as may be required under the HSR Act, the Exchange Act and the
Securities Act (i) no filing with, and no permit, authorization, consent
or approval of, any state or federal public body or authority is
necessary for the execution of this Agreement by Parent or Sub and the
consummation by Parent or Sub of the transactions contemplated hereby
and (ii) none of the execution and delivery of this Agreement by Parent
of Sub, the consummation by Parent or Sub of the transactions
contemplated hereby or compliance by Parent or Sub with any of the
provisions hereof shall (A) conflict with or result in any breach of the
certificate of incorporation or by-laws of Parent or Sub, (B) result in
a violation or breach of, or constitute (with or without notice or lapse
of time or both) a default (or give rise to any third party right of
termination, cancellation, material modification or acceleration) under
any of the terms, conditions or provisions of any note, loan agreement,
bond, mortgage, indenture, license, contract, commitment, arrangement,
understanding, agreement or other instrument or obligation of any kind
to which Parent or Sub is a party or by which Parent or Sub or any of
their respective properties or assets may be bound, or (C) violate any
order, writ, injunction, decree, judgment, statute, rule or regulation
applicable to Parent or Sub or any of their respective properties or
assets.
(d) No Finder's Fee. Except for Donaldson, Lufkin & Jenrette
Securities Corporation, no broker, investment banker, financial adviser
or other person is entitled to any broker's, finder's, financial
adviser's or other similar fee or commission in connection with the
transactions contemplated hereby based upon arrangements made by or on
behalf of Parent or Sub.
7. Stop Transfer; Legend.
(a) The Stockholder agrees with, and covenants to, Parent that the
Stockholder shall not request that the Company register the transfer
(book-entry or otherwise) of any certificate or uncertificated interest
representing any of the Shares, unless such transfer is made in
compliance with this Agreement (including the provisions of Section 2
hereof). In the event of a stock dividend or distribution, or any change
in the Company Common Stock by reason of any stock dividend, split-up,
recapitalization, combination, exchange of shares or the like, the term
'Shares' shall be deemed to refer to and include the Shares as well as
all such stock dividends and distributions and any shares into which or
for which any or all of the Shares may be changed or exchanged and
appropriate adjustments shall be made to the terms and provisions of
this Agreement.
(b) The Stockholder shall promptly after the date hereof surrender
to the Company all certificates representing the Shares, and the Company
shall place the following legend on such certificates:
'THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A
STOCKHOLDER AGREEMENT, DATED AS OF NOVEMBER 29, 1995 BY AND AMONG
RITE AID CORPORATION, OCEAN ACQUISITION CORPORATION AND
ZELL/CHILMARK FUND, L.P. WHICH AMONG OTHER THINGS RESTRICTS THE
TRANSFER AND VOTING THEREOF.'
8. Termination. Except as otherwise provided herein, the covenants
and agreements contained herein with respect to the Shares shall terminate
upon the earlier of (i) the consummation of the Merger and (ii) the
termination of the Merger Agreement in accordance with its terms except,
that the covenant and agreement set forth in Section 4 hereof shall survive
for six months after such termination (other than a termination as a result
of a breach by Parent or Sub).
9. Confidentiality. The Stockholder recognizes that successful
consummation of the transactions contemplated by this Agreement may be
dependent upon confidentiality with respect to the matters referred to
herein. In this connection, pending public disclosure thereof, the
Stockholder hereby agrees not to disclose or discuss such matters with
anyone not a party to this Agreement (other than its counsel and advisors,
if any) without the prior written consent of Parent, except for filings
required pursuant to the Exchange Act and the rules and regulations
thereunder or disclosures its counsel advises are necessary in
D-5
<PAGE>
order to fulfill its obligations imposed by law, in which event such
Stockholder shall give notice of such disclosure to Parent as promptly as
practicable so as to enable Parent to seek a protective order from a court
of competent jurisdiction with respect thereto.
10. Miscellaneous.
(a) Entire Agreement. This Agreement and the Merger Agreement
constitute the entire agreement between the parties with respect to the
subject matter hereof and supersedes all other prior agreements and
understandings, both written and oral, between the parties with respect
to the subject matter hereof.
(b) Binding Agreement. The Stockholder agrees that this Agreement
and the obligations hereunder shall attach to the Shares and shall be
binding upon any person or entity to which legal or Beneficial Ownership
of such Shares shall pass, whether by operation of law or otherwise,
including, without limitation, the Stockholder's heirs, distributees,
guardians, administrators, executors, legal representatives, or
successors or other transferees (for value or otherwise) and any other
successors in interest. Notwithstanding any transfer of Shares, the
transferor shall remain liable for the performance of all obligations
under this Agreement of the transferor.
(c) Assignment. This Agreement shall not be assigned by operation
of law or otherwise without the prior written consent of the other
party, provided that Parent may assign, in its sole discretion, its
rights and obligations hereunder to any direct or indirect wholly owned
subsidiary of Parent, but no such assignment shall relieve Parent of its
obligations hereunder if such assignee does not perform such
obligations.
(d) Amendments, Waivers, Etc. This Agreement may not be amended,
changed, supplemented, waived or otherwise modified or terminated,
except upon the execution and delivery of a written agreement executed
by the parties hereto.
(e) Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and
shall be deemed to have been duly received if given) by hand delivery or
telecopy (with a confirmation copy sent for next day delivery via
courier service, such as Federal Express), or by any courier service,
such as Federal Express, providing proof of delivery. All communications
hereunder shall be delivered to the respective parties at the following
addresses:
If to Stockholder: Zell/Chilmark Fund, L.P.
Two North Riverside Plaza
Suite 1500
Chicago, Illinois 60606
Attention.: Sheli Z. Rosenberg
Telephone No.: (312) 984-9711
Telecopy No.: (312) 984-0317
copy to: Michael K.L. Wager, Esq.
Benesch, Friedlander, Coplan & Aronoff
2300 BP America Building
200 Public Square
Cleveland, Ohio 44114
Telephone No.: (216) 363-4500
Telecopy No.: (216) 363-4588
If to Parent or Sub: Rite Aid Corporation
30 Hunter Lane
Camp Hill, Pennsylvania 17011
Attention.: Chief Executive Officer
Telephone No.: (717) 761-2633
Telecopy No.: (717) 975-5905
D-6
<PAGE>
copy to: Nancy A. Lieberman, Esq.
Skadden, Arps, Slate, Meagher & Flom
919 Third Avenue
New York, New York 10022
Telephone No.: (212) 735-3000
Telecopy No.: (212) 735-2000
or to such other address as the person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above.
(f) Severability. Whenever possible, each provision or portion of
any provision of this Agreement will be interpreted in such manner as to
be effective and valid under applicable law but if any provision or
portion of any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule
in any jurisdiction, such invalidity, illegality or unenforceability
will not affect any other provision or portion of any provision in such
jurisdiction, and this Agreement will be reformed, construed and
enforced in such jurisdiction as if such invalid, illegal or
unenforceable provision or portion of any provision had never been
contained herein.
(g) Specific Performance. Each of the parties hereto recognizes
and acknowledges that a breach by it of any covenants or agreements
contained in this Agreement will cause the other party to sustain
damages for which it would not have an adequate remedy at law for money
damages, and therefore each of the parties hereto agrees that in the
event of any such breach the aggrieved party shall be entitled to the
remedy of specific performance of such covenants and agreements and
injunctive and other equitable relief in addition to any other remedy to
which it may be entitled, at law or in equity.
(h) Remedies Cumulative. All rights, powers and remedies provided
under this Agreement or otherwise available in respect hereof at law or
in equity shall be cumulative and not alternative, and the exercise of
any thereof by any party shall not preclude the simultaneous or later
exercise of any other such right, power or remedy by such party.
(i) No Waiver. The failure of any party hereto to exercise any
right, power or remedy provided under this Agreement or otherwise
available in respect hereof at law or in equity, or to insist upon
compliance by any other party hereto with its obligations hereunder, and
any custom or practice of the parties at variance with the terms hereof,
shall not constitute a waiver by such party of its right to exercise any
such or other right, power or remedy or to demand such compliance.
(j) No Third Party Beneficiaries. This Agreement is not intended
to be for the benefit of, and shall not be enforceable by, any person or
entity who or which is not a party hereto.
(k) Governing Law. This Agreement shall be governed and construed
in accordance with the laws of the State of Delaware, without giving
effect to the principles of conflicts of law thereof.
(l) Jurisdiction. Each party hereby irrevocably submits to the
exclusive jurisdiction of the Court of Chancery in the State of Delaware
in any action, suit or proceeding arising in connection with this
Agreement, and agrees that any such action, suit or proceeding shall be
brought only in such court (and waives any objection based on forum non
conveniens or any other objection to venue therein); provided, however,
that such consent to jurisdiction is solely for the purpose referred to
in this paragraph (l) and shall not be deemed to be a general submission
to the jurisdiction of said Court or in the State of Delaware other than
for such purposes. Each party hereto hereby waives any right to a trial
by jury in connection with any such action, suit or proceeding.
(m) Descriptive Headings. The descriptive headings used herein are
inserted for convenience of reference only and are not intended to be
part of or to affect the meaning or interpretation of this Agreement.
(n) Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed to be an original, but all of which, taken
together, shall constitute one and the same Agreement.
D-7
<PAGE>
IN WITNESS WHEREOF, Parent, Sub and the Stockholder have caused this
Agreement to be duly executed as of the day and year first above written.
RITE AID CORPORATION
By: /s/ MARTIN L. GRASS
----------------------------------
Name: Martin L. Grass
Title: Chairman of the Board
and Chief Executive Officer
OCEAN ACQUISITION CORPORATION
By: /s/ MARTIN L. GRASS
----------------------------------
Name: Martin L. Grass
Title: President
ZELL/CHILMARK FUND, L.P.
By: ZC Limited Partnership, general
partner
By: ZC Partnership, general partner
By: CZ Inc., a partner
By: /s/ SHELI Z. ROSENBERG
----------------------------------
Name: Sheli Z. Rosenberg
Title: Vice President
D-8
<PAGE>
ANNEX E
STOCK OPTION AGREEMENT
AGREEMENT, dated as of November 29, 1995, by and among Rite Aid
Corporation, a Delaware corporation ('Parent'), Ocean Acquisition Corporation, a
Delaware corporation and a wholly owned subsidiary of Parent ('Sub'), and Revco
D.S., Inc., a Delaware corporation (the 'Company').
W I T N E S S E T H:
WHEREAS, immediately prior to the execution of this Agreement, Parent, Sub
and the Company, have entered into an Agreement and Plan of Merger (as such
agreement may hereafter be amended from time to time, the 'Merger Agreement'),
pursuant to which Sub will be merged with and into the Company (the 'Merger');
WHEREAS, in furtherance of the Merger, Parent and the Company desire that
as soon as practicable (but in no event later than five business days) after the
execution of the Merger Agreement, Sub shall commence an offer (the 'Offer') to
purchase for cash not less than 35,144,833 shares and up to all of the issued
and outstanding Company Common Stock (as defined in Section 1 hereof), or such
greater number of shares as equals 50.1% of the shares outstanding on a fully
diluted basis as of the expiration of the Offer, at a price of $27.50 per share
of Company Common Stock; and
WHEREAS, as an inducement and a condition to entering into the Merger
Agreement, Parent and Sub have required that the Company agree, and the Company
has agreed, to enter into this Agreement;
NOW, THEREFORE, in consideration of the foregoing and the mutual promises,
representations, warranties, covenants and agreements contained herein, the
parties hereto, intending to be legally bound hereby, agree as follows:
1. Certain Definitions. Capitalized terms used and not defined herein
have the respective meanings ascribed to them in the Merger Agreement. For
purposes of this Agreement:
a. 'Beneficially Own' or 'Beneficial Ownership' with respect to any
securities shall mean having 'beneficial ownership' of such securities
(as determined pursuant to Rule 13d-3 under the Securities Exchange Act
of 1934, as amended (the 'Exchange Act')), including pursuant to any
agreement, arrangement or understanding, whether or not in writing.
Without duplicative counting of the same securities by the same holder,
securities Beneficially Owned by a Person shall include securities
Beneficially Owned by all other Persons with whom such Person would
constitute a 'group' within the meaning of Section 13(d) of the Exchange
Act.
b. 'Company Common Stock' shall mean at any time the common stock,
$.01 par value, of the Company.
c. 'Person' shall mean an individual, corporation, limited
liability company, partnership, joint venture, association, trust,
unincorporated organization or other entity.
2. Grant of Stock Option. In order to induce Parent and Sub to enter
into the Merger Agreement, the Company hereby grants to Parent an
unconditional, irrevocable option (a 'Stock Option') to purchase up to
13,251,010 fully paid and nonassessable shares of Company Common Stock at a
purchase price of $27.50 per share (the 'Purchase Price'), or such other
number of shares of Company Common Stock as equals 19.9% of the Company's
issued and outstanding shares of Company Common Stock at the time of
exercise of the Stock Option; provided that in no event shall the number of
shares of Company Common Stock for which the Stock Option is exercisable
exceed 19.9% of the shares of Company Common Stock issued and outstanding
at the time of exercise of the Stock Option (the 'Option Shares'). The
number of shares of Company Common Stock that may be received upon the
exercise of the Stock Option is subject to adjustments as herein set forth.
3. Exercise of Stock Option. (a) Upon (x) the occurrence of a Trigger
Event (as defined in Section 7.3 of the Merger Agreement), or (y) the
occurrence of the condition set forth in clause (h) of Annex A to the
Merger Agreement, the Stock Option shall become immediately exercisable, in
whole or in part, and remain
E-1
<PAGE>
exercisable in whole or in part until the later of (i) the date which is
six months after the date the Stock Option first became exercisable and
(ii) the fifth business day following expiration or termination of any
applicable waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the 'HSR Act') (the 'Option Period').
(b) In the event that Parent is entitled to and wishes to exercise
the Stock Option, Parent shall, during the Option Period, send a written
notice (the 'Notice') to the Company identifying the place and date for
the closing of such purchase and the number of Option Shares to be
purchased. Upon the giving by Parent to the Company of the Notice and
the tender of the aggregate Purchase Price at the closing so specified,
Parent shall be deemed to be the holder of record of the shares of
Company Common Stock issuable upon such exercise, notwithstanding that
the stock transfer books of the Company shall then be closed or that
certificates representing such shares of Company Common Stock shall not
then be actually delivered to Parent. The Company shall pay all
expenses, and any and all United States federal, state and local taxes
and other charges that may be payable in connection with the
preparation, issue and delivery of stock certificates under this Section
3 in the name of Parent or its assignee, transferee or designee.
4. Sale of Option Shares. If, at any time following the exercise of
the Option, Parent shall either (i) transfer, sell or otherwise dispose of
any or all of the Option Shares, including, without limitation, by means of
tender or exchange of any or all of the Option Shares pursuant to a tender
or exchange offer involving the capital stock of the Company, or (ii)
convert such Option Shares into cash, capital stock, other securities or
any other consideration of any third party in a merger any recapitalization
or restructuring or similar business combination transaction (a 'Business
Combination Transaction'), Parent shall pay to the Company within five days
the amount equal to the Profit (as defined below) Parent shall receive, if
any, pursuant to such Disposition or Business Combination Transaction.
'Profit', for purposes of this Agreement, shall equal (i) the product of
(a) the number of Option Shares Parent transfers, sells, tenders, exchanges
or otherwise disposes of pursuant to a Disposition or a Business
Combination Transaction by (b) the excess of the per Share consideration
received by Parent pursuant to such Disposition or Business Combination
Transaction valuing any non-cash consideration at its fair market value on
the date of such consummation (not including any increase in such aggregate
per Share consideration after the date thereof) over the Purchase Price.
For purposes hereof, the fair market value of any non-cash consideration
shall be the closing price or the last sale price, or, in case no such sale
takes place on the day of consummation of such Business Combination
Transaction, the average of the closing bid and asked prices, in either
case as reported in the principal consolidated transaction reporting system
with respect to securities listed or admitted to trading on the principal
national securities exchange on which such consideration is listed or
admitted to trading or, if such consideration is not listed or admitted to
trading on any national securities exchange, the last quoted price or, if
not so quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported by the National Association of
Securities Dealers, Inc. Automated Quotation System or such other system
then in use, or, if not so determinable, the fair value of such
consideration on such date shall be determined in good faith by the Board
of Directors of Parent.
5. Covenants, Representations and Warranties of the Company. The
Company hereby represents and warrants to, and agrees with, Parent and Sub
as follows:
a. Organization. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Delaware, has all requisite corporate power or other power and authority
to execute and deliver this Agreement and perform its obligations
hereunder. The execution and delivery by the Company of this Agreement
and the performance by the Company of its obligations hereunder have
been duly and validly authorized by the Board of Directors of the
Company and no other corporate proceedings on the part of the Company
are necessary to authorize the execution, delivery or performance of
this Agreement or the consummation of the transactions contemplated
hereby.
b. Corporate Authorization. This Agreement has been duly and
validly executed and delivered by the Company and constitutes a valid
and binding agreement enforceable against the Company in accordance with
its terms, except that (i) such enforcement may be subject to applicable
bankruptcy,
E-2
<PAGE>
insolvency or other similar laws, now or hereafter in effect, affecting
creditors' rights generally, and (ii) the remedy of specific performance
and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought.
c. Authorized Stock. The Company has taken all necessary corporate
and other action to authorize, reserve and permit it to issue, and, at
all times from the date hereof until the obligation to deliver the
Option Shares upon the exercise of the Stock Option terminates, will
have reserved for issuance, upon exercise of the Stock Option, shares of
Company Common Stock necessary for Parent to exercise the Stock Option,
and the Company will take all necessary corporate action to (x)
authorize and reserve for issuance all additional shares of Company
Common Stock or other securities which may be issued pursuant to Section
7 upon exercise of the Stock Option and (y) protect the rights of Parent
against dilution. The shares of Company Common Stock to be issued upon
due exercise of the Stock Option, including all additional shares of
Company Common Stock or other securities which may be issuable pursuant
to Section 7, upon issuance pursuant hereto, shall be duly and validly
issued, fully paid and nonassessable, and shall be delivered free and
clear of all liens, claims, charges and encumbrances of any kind or
nature whatsoever, including any preemptive rights of any stockholder of
the Company.
d. No Conflicts. Except for filings, authorizations, consents and
approvals as may be required under the HSR Act, the Exchange Act and the
Securities Act of 1933, as amended (the 'Securities Act'), (i) no filing
with, and no permit, authorization, consent or approval of, any state or
federal public body or authority is necessary for the execution of this
Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby and (ii) none of the execution and
delivery of this Agreement by the Company, the consummation by the
Company of the transactions contemplated hereby or compliance by the
Company with any of the provisions hereof shall (A) conflict with or
result in any breach of any applicable organizational documents
applicable to the Company or any of its subsidiaries, (B) result in a
violation or breach of, or constitute (with or without notice or lapse
of time or both) a default (or give rise to any third party right of
termination, cancellation, material modification or acceleration) under
any of the terms, conditions or provisions of any note, loan agreement,
pledge, bond, mortgage, indenture, license, contract, commitment,
arrangement, understanding, agreement or other instrument or obligation
of any kind to which the Company or any subsidiary is a party or by
which the Company or any subsidiary or any of their respective
properties or assets may be bound, or (C) violate any order, writ,
injunction, decree, judgment, statute, rule or regulation applicable to
the Company or any of its subsidiaries or any of its properties or
assets
e. Reliance by Parent. The Company understands and acknowledges
that Parent is entering into, and causing Sub to enter into, the Merger
Agreement in reliance upon the Company's execution and delivery of this
Agreement.
f. Further Assurances. From time to time, at the other party's
request and without further consideration, each party hereto shall
execute and deliver such additional documents and take all such further
lawful action as may be necessary or desirable to consummate and make
effective, in the most expeditious manner practicable, the transactions
contemplated by this Agreement.
g. Listing on New York Stock Exchange. Upon the exercise of the
Stock Option, the Company shall use its best efforts to promptly list on
the New York Stock Exchange, Inc. (the 'NYSE'), subject to official
notice of issuance, the shares of Company Common Stock to be issued
pursuant to this Agreement.
6. Representations and Warranties of Parent and Sub. Parent and Sub
hereby represent and warrant to the Company as follows:
a. Organization. Each of Parent and Sub is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Delaware, has all requisite corporate power or other power and
authority to execute and deliver this Agreement and perform their
respective obligations hereunder.
E-3
<PAGE>
The execution and delivery by Parent and Sub of this Agreement and the
performance by Parent and Sub of their respective obligations hereunder
have been duly and validly authorized by the Board of Directors of each
of Parent and Sub and no other corporate proceedings on the part of
Parent or Sub are necessary to authorize the execution, delivery or
performance of this Agreement or the consummation of the transactions
contemplated hereby.
b. Corporate Authorization. This Agreement has been duly and
validly executed and delivered by Parent and Sub and constitutes a valid
and binding agreement of each of Parent and Sub enforceable against each
of Parent and Sub in accordance with its terms, except that (i) such
enforcement may be subject to applicable bankruptcy, insolvency or other
similar laws, now or hereafter in effect, affecting creditors' rights
generally, and (ii) the remedy of specific performance and injunctive
and other forms of equitable relief may be subject to equitable defenses
and to the discretion of the court before which any proceeding therefor
may be brought.
c. No Conflicts. Except for filings, authorizations, consents and
approvals as may be required under the HSR Act, the Exchange Act and the
Securities Act (i) no filing with, and no permit, authorization, consent
or approval of, any state or federal public body or authority is
necessary for the execution of this Agreement by Parent or Sub and the
consummation by Parent or Sub of the transactions contemplated hereby
and (ii) none of the execution and delivery of this Agreement by Parent
of Sub, the consummation by Parent or Sub of the transactions
contemplated hereby or compliance by Parent or Sub with any of the
provisions hereof shall (A) conflict with or result in any breach of any
applicable organizational documents applicable to Parent or Sub, (B)
result in a violation or breach of, or constitute (with or without
notice or lapse of time or both) a default (or give rise to any third
party right of termination, cancellation, material modification or
acceleration) under any of the terms, conditions or provisions of any
note, loan agreement, bond, mortgage, indenture, license, contract,
commitment, arrangement, understanding, agreement or other instrument or
obligation of any kind to which Parent or Sub is a party or by which
Parent or Sub or any of their respective properties or assets may be
bound, or (C) violate any order, writ, injunction, decree, judgment,
statute, rule or regulation applicable to Parent or Sub or any of their
respective properties or assets.
7. Adjustment Upon Changes in Capitalization. In the event of any
change in Company Common Stock by reason of stock dividends, split-ups,
recapitalizations, combinations, exchanges of shares or the like, the type
and number of shares of Company Common Stock subject to the Stock Option
and the Purchase Price shall be appropriately adjusted and proper provision
shall be made so that, in the event that any additional shares of Company
Common Stock are issued or otherwise become outstanding as a result of any
such change after the date of this Agreement (other than pursuant to this
Agreement), the number of shares of Company Common Stock subject to the
Stock Option shall be adjusted so that, after such issuance and together
with shares of Company Common Stock previously issued pursuant to the
exercise of the Stock Option (as adjusted on account of any of the
foregoing change in Company Common Stock), it equals 19.9% of the number of
shares of Company Common Stock then issued and outstanding. Nothing
contained in this Section 7 shall be deemed to authorize the Company to
breach any provision of the Merger Agreement.
8. Registration Rights. The Company shall, if requested by Parent at
any time and from time to time within three years of the first exercise of
the Stock Option, promptly prepare, file and keep current a registration
statement under the Securities Act in order to permit the sale or other
disposition of the shares of Company Common Stock that have been acquired
by or are issuable to Parent upon exercise of the Stock Option in
accordance with the intended method of sale or other disposition stated by
Parent, including a 'shelf' registration statement under Rule 415 of the
Securities Act or any successor provision, and the Company shall use its
best efforts to qualify such shares or other securities under any
applicable state securities laws. Parent shall provide all information
reasonably requested by the Company for inclusion in any registration
statement to be filed hereunder. The Company will use its best efforts to
cause such registration statement first to become effective and then to
remain effective for such period not in excess of 180 days from the day
such registration statement first becomes effective or such shorter time as
may be reasonably necessary to effect such sales or other dispositions.
Parent shall have the right to demand one such registration. The Company
shall bear the costs of such registration (including, but not limited to,
the
E-4
<PAGE>
Company's attorneys' fees, printing costs and filing fees, except for
underwriting discounts or commissions, brokers' fees and the fees and
disbursements of Parent's counsel related thereto). If requested by Parent,
in connection with such registration, the Company will become a party to
any underwriting agreement relating to the sale of such shares, but only to
the extent of obligating itself in respect of representations, warranties,
indemnities, and other agreements customarily included in such underwriting
agreements. Upon receiving any request from the Company or assignee thereof
under this Section 8, the Company agrees to send a copy thereof to Parent
and to any assignee thereof known to the Company, in each case by promptly
mailing the same, postage prepaid, to the address of record of the person
entitled to receive such copies.
9. Termination. Except as otherwise provided herein, the covenants
and agreements contained herein with respect to the Option Shares shall
terminate upon the earlier of (i) the consummation of the Merger and (ii)
the expiration of the Option Period.
10. Miscellaneous.
a. Entire Agreement. Except as otherwise expressly provided
herein, this Agreement contains the entire agreement between the parties
with respect to the transactions contemplated hereunder and supersedes
all prior arrangements or understandings with respect thereto, written
or oral. The terms and conditions of this Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective
successors and assigns. Nothing in this Agreement, expressed or implied,
is intended to confer upon any party, other than the parties hereto, and
their respective successors and assigns, any rights, remedies,
obligations or liabilities under or by reason of this Agreement, except
as expressly provided herein.
b. Assignment. This Agreement shall not be assigned by operation
of law or otherwise without the prior written consent of the other
party, provided that Parent may assign, in its sole discretion, its
rights and obligations hereunder to any direct or indirect wholly owned
subsidiary of Parent, but no such assignment shall relieve Parent of its
obligations hereunder if such assignee does not perform such
obligations.
c. Amendments, Waivers, Etc. This Agreement may not be amended,
changed, supplemented, waived or otherwise modified or terminated,
except upon the execution and delivery of a written agreement executed
by the parties hereto.
d. Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and
shall be deemed to have been duly received if given) by hand delivery or
telecopy (with a confirmation copy sent for next day delivery via
courier service, such as Federal Express), or by any courier service,
such as Federal Express, providing proof of delivery. All communications
hereunder shall be delivered to the respective parties at the following
addresses:
If to the Company: Revco D.S., Inc.
1925 Enterprise Parkway
Twinsburg, Ohio 44087
Attention.: Chief Executive Officer
Telephone No.: (216) 425-9811
Telecopy No.: (216) 487-1679
copy to: Michael K.L. Wager, Esq.
Benesch, Friedlander,
Coplan & Aronoff
2300 BP America Building
200 Public Square
Cleveland, Ohio 44114
Telephone No.: 216-363-4500
Telecopy No.: 216-363-4588
E-5
<PAGE>
If to Parent Rite Aid Corporation
or Sub: 30 Hunter Lane
Camp Hill, Pennsylvania 17011
Attention.: Chief Executive Officer
Telephone No.: (717) 761-2633
Telecopy No.: (717) 975-5905
copy to: Nancy A. Lieberman, Esq.
Skadden, Arps, Slate,
Meagher & Flom
919 Third Avenue
New York, New York 10022
Telephone No.: (212) 735-3000
Telecopy No.: (212) 735-2000
or to such other address as the person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above.
e. Severability. Whenever possible, each provision or portion of
any provision of this Agreement will be interpreted in such manner as to
be effective and valid under applicable law but if any provision or
portion of any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule
in any jurisdiction, such invalidity, illegality or unenforceability
will not affect any other provision or portion of any provision in such
jurisdiction, and this Agreement will be reformed, construed and
enforced in such jurisdiction as if such invalid, illegal or
unenforceable provision or portion of any provision had never been
contained herein.
f. Specific Performance. Each of the parties hereto recognizes and
acknowledges that a breach by it of any covenants or agreements
contained in this Agreement will cause the other party to sustain
damages for which it would not have an adequate remedy at law for money
damages, and therefore each of the parties hereto agrees that in the
event of any such breach the aggrieved party shall be entitled to the
remedy of specific performance of such covenants and agreements and
injunctive and other equitable relief in addition to any other remedy to
which it may be entitled, at law or in equity.
g. Remedies Cumulative. All rights, powers and remedies provided
under this Agreement or otherwise available in respect hereof at law or
in equity shall be cumulative and not alternative, and the exercise of
any thereof by any party shall not preclude the simultaneous or later
exercise of any other such right, power or remedy by such party.
h. No Waiver. The failure of any party hereto to exercise any
right, power or remedy provided under this Agreement or otherwise
available in respect hereof at law or in equity, or to insist upon
compliance by any other party hereto with its obligations hereunder, and
any custom or practice of the parties at variance with the terms hereof,
shall not constitute a waiver by such party of its right to exercise any
such or other right, power or remedy or to demand such compliance.
i. No Third Party Beneficiaries. This Agreement is not intended to
be for the benefit of, and shall not be enforceable by, any person or
entity who or which is not a party hereto.
j. Governing Law. This Agreement shall be governed and construed
in accordance with the laws of the State of Delaware, without giving
effect to the principles of conflicts of law thereof.
k. Jurisdiction. Each party hereby irrevocably submits to the
exclusive jurisdiction of the Court of Chancery in the State of Delaware
in any action, suit or proceeding arising in connection with this
Agreement, and agrees that any such action, suit or proceeding shall be
brought only in such court (and waives any objection based on forum non
conveniens or any other objection to venue therein); provided, however,
that such consent to jurisdiction is solely for the purpose referred to
in this paragraph (l) and shall not be deemed to be a general submission
to the jurisdiction of said Court or in the State of Delaware other than
for such purposes. Each party hereto hereby waives any right to a trial
by jury in connection with any such action, suit or proceeding.
E-6
<PAGE>
l. Descriptive Headings. The descriptive headings used herein are
inserted for convenience of reference only and are not intended to be
part of or to affect the meaning or interpretation of this Agreement.
m. Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed to be an original, but all of which, taken
together, shall constitute one and the same Agreement.
IN WITNESS WHEREOF, Parent, Sub and the Company have caused this Agreement
to be duly executed as of the day and year first above written.
RITE AID CORPORATION
By: /s/ MARTIN L. GRASS
----------------------------------
Martin L. Grass
Chairman of the Board
and Chief Executive Officer
OCEAN ACQUISITION CORPORATION
By: /s/ MARTIN L. GRASS
----------------------------------
Martin L. Grass
President
REVCO D.S., INC.
By: /s/ D. DWAYNE HOVEN
----------------------------------
D. Dwayne Hoven
President and Chief Executive
Officer
E-7
<PAGE>
PROXY PROXY
RITE AID CORPORATION
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of Rite Aid Corporation, a Delaware corporation (the
'Company'), hereby appoints Martin L. Grass and Franklin C. Brown, and each of
them, the true and lawful attorneys-in-fact and proxies of the undersigned, with
full power of substitution, to vote all shares of common stock, par value $1.00
per share, of the Company which the undersigned would be entitled to vote if
personally present at the Special Meeting of Stockholders of the Company to be
held on Thursday, March 28, 1996, and at any and all adjournments or
postponements thereof (the 'Special Meeting').
THE PROXIES ARE HEREBY AUTHORIZED TO VOTE IN THEIR DISCRETION UPON ALL OTHER
MATTERS WHICH MAY PROPERLY COME BEFORE THE SPECIAL MEETING. THIS PROXY WILL BE
VOTED AS DIRECTED, BUT IF NO DIRECTION IS INDICATED, IT WILL BE VOTED FOR THE
APPROVAL OF THE SHARE ISSUANCE AND IN THE DISCRETION OF THE PROXIES
ON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE SPECIAL MEETING.
(To be Dated and Signed on Reverse Side)
<PAGE>
RITE AID CORPORATION
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY
[ ]
<TABLE>
<S> <C>
THE BOARD OF DIRECTORS OF RITE AID RECOMMENDS THAT YOU VOTE For Against Abstain
FOR THE PROPOSAL LISTED ON THIS PROXY CARD
APPROVAL OF THE ISSUANCE OF UP TO A MAXIMUM OF 42,865,712 SHARES OF RITE AID
COMMON STOCK, PAR VALUE $1.00 (THE 'SHARE ISSUANCE').
</TABLE>
----------------------------
Signature
----------------------------
Signature if held jointly
----------------------------
Date
Note: Please sign exactly as
your name appears on this
proxy. Joint owners should
each sign personally. If
signer is an attorney,
executor, administrator,
trustee or guardian, please
include your full title.
Corporate proxies should be
signed by an authorized
officer.
PLEASE SIGN, DATE AND RETURN THIS CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
