<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 13, 1997
REGISTRATION NO. 333-14051
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
CABOT NOBLE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 5311 34-1842570
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
ROBERT M. HAFT
3000 K STREET, N.W.;
3000 K STREET, N.W.; SUITE 105
SUITE 105 WASHINGTON, D.C. 20007
WASHINGTON, D.C. 20007
(330) 746-6641
(330) 746-6641 (NAME, ADDRESS, INCLUDING ZIP CODE,
(ADDRESS, INCLUDING ZIP CODE AND AND TELEPHONE NUMBER, INCLUDING AREA
TELEPHONE NUMBER, INCLUDING AREA CODE CODE, OF AGENT FOR SERVICE)
OF REGISTRANT'S PRINCIPAL EXECUTIVE
OFFICES)
----------------
COPIES TO:
MORRIS F. DEFEO, JR. RANDALL J. ERICKSON THOMAS A. COLE
SWIDLER & BERLIN, GODFREY & KAHN, S.C. SIDLEY & AUSTIN
CHARTERED 780 NORTH WATER STREET ONE FIRST NATIONAL PLAZA
3000 K STREET, N.W.-- MILWAUKEE, WI 53202-3590 CHICAGO, IL 60603
SUITE 300
WASHINGTON, DC 20007
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement.
If the securities being registered on this form are to be offered in
connection with the formation of a holding company and there is compliance
with General Instruction G under the Securities Act of 1933, check the
following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER UNIT PRICE(3) FEE(4)
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<S> <C> <C> <C> <C>
Common Stock........... 120,270,329 $5.22(2) $627,482,387 $190,146
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Warrants............... 1,250,000 $13.50 $16,875,000 $5,114
</TABLE>
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(1) Represents the maximum number of shares of Cabot Noble Common Stock to be
issued in the Combination described in this Registration Statement, based
upon an exchange ratio for shares of ShopKo Stores, Inc. Common Stock
equal to 3.140, the level above which Phar-Mor, Inc. may terminate the
Combination.
(2) Represents the quotient obtained by dividing (i) the proposed maximum
aggregate offering price (determined as described in Note 3 below) by (ii)
the number of shares of Cabot Noble Common Stock registered hereby.
(3) Estimated solely for the purpose of determining the registration fee. In
accordance with Rule 457(f)(1), the proposed maximum aggregate offering
price of the Common Stock is based upon the sum of (a) the product of (i)
$6 3/16 (the average of the high and low prices of Phar-Mor, Inc. Common
Stock on October 7, 1996 on the Nasdaq-NMS) times (ii) 13,407,054 (the sum
of the number of shares of Phar-Mor, Inc. Common Stock outstanding plus
the number of shares of Phar-Mor, Inc. Common Stock underlying the
outstanding Phar-Mor, Inc. Warrants outstanding) and (b) the product of
(i) $16 (the average of the high and low prices of ShopKo Stores, Inc.
Common Stock on October 7, 1996 on the New York Stock Exchange Composite
Tape) times (ii) 34,032,890 (the sum of the number of shares of ShopKo
Stores, Inc. Common Stock outstanding plus the number of shares of ShopKo
Stores, Inc. Common Stock issuable prior to the Effective Date pursuant to
outstanding obligations to issue ShopKo Stores, Inc. Common Stock and upon
the exercise of options to purchase ShopKo Stores, Inc. Common Stock). In
accordance with Rule 457(g), the proposed maximum aggregate offering price
of the Warrants is the product of (a) 1,250,000 (the number of Phar-Mor,
Inc. Warrants outstanding) times (b) $13.50 (the exercise price of the
Phar-Mor, Inc. Warrants). Shopko Stores, Inc. has no Warrants outstanding.
(4) In accordance with Rule 457(b), the total registration fee of $195,260 has
been reduced by $192,916, which was previously paid on October 11, 1996 at
the time of filing under the Securities Exchange Act of 1934, as amended,
of a preliminary copy of this Registration Statement and the proxy
materials included herein. Accordingly, the registration fee payable upon
filing of this Registration Statement is $2,344.
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
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<PAGE>
EXPLANATORY NOTE
This registration statement has two forms of prospectus, one to be used in
connection with a business combination in which shares of common stock of
Cabot Noble will be issued pursuant to the Agreement and Plan of
Reorganization, as amended, by and among Phar-Mor, Inc., ShopKo Stores, Inc.
and Cabot Noble, Inc., in exchange for Shopko Common Stock and Phar-Mor Common
Stock (the "Joint Proxy Statement/Prospectus"), and the other to be used in
connection with potential resales of Cabot Noble Common Stock by certain
shareholders of Phar-Mor, Inc. and ShopKo Stores, Inc. (the "Resale
Prospectus"). Each of the pages included herein for use in the Resale
Prospectus is labeled "[ALTERNATE PAGE FOR RESALE PROSPECTUS]."
<PAGE>
To the Shareholders of
ShopKo Stores, Inc.
Enclosed are a Notice of Special Meeting of Shareholders, a Joint Proxy
Statement/Prospectus and a Proxy for a Special Meeting of Shareholders of
ShopKo Stores, Inc. to be held on , 1997 at a.m., local time, at
.
At the Special Meeting, you will be asked to consider and vote on an
Agreement and Plan of Reorganization (the "Combination Agreement") pursuant to
which ShopKo and Phar-Mor, Inc. will become wholly owned subsidiaries of Cabot
Noble, Inc. The terms of the combination provide that ShopKo shareholders will
receive 2.4 shares of Cabot Noble common stock for each share of ShopKo common
stock, subject to adjustment to the extent that the value of the exchange
consideration falls outside a range of $17.25 to $18.00 per share of ShopKo
common stock, based upon the average market price of Phar-Mor common stock
during the thirty-day period ending , 1997. Phar-Mor shareholders will
receive one share of Cabot Noble common stock for each share of Phar-Mor
common stock, and Phar-Mor warrant holders will receive Cabot Noble warrants
with substantially identical terms. Attachment A illustrates how the exchange
ratio is calculated for ShopKo shareholders.
If the ShopKo exchange ratio is less than 1.895, the ShopKo Board will have
the right to terminate the Combination Agreement unless Phar-Mor agrees that
the ShopKo exchange ratio will be 1.895. Conversely, if the ShopKo exchange
ratio is greater than 3.14, Phar-Mor will have the right to terminate the
Combination Agreement unless ShopKo agrees that the ShopKo exchange ratio will
be 3.14. Approval of the Combination Agreement by the ShopKo and Phar-Mor
shareholders will constitute approval of the combination if the ShopKo
exchange ratio is greater than 3.14 or less than 1.895 and the Combination
Agreement is not terminated, subject to the fiduciary obligations of the
ShopKo and Phar-Mor Boards and other applicable legal requirements. Neither
the ShopKo Board nor the Phar-Mor Board has made a determination at this time
as to whether or not it would exercise its right to terminate the Combination
Agreement if the ShopKo exchange ratio is less than 1.895 or greater than
3.14, respectively. ShopKo and Phar-Mor shareholders can obtain the ShopKo
exchange ratio by calling 1-800- between 8 a.m. and midnight Eastern
Standard Time on any day commencing , 1997 and ending on the day
following the conclusion of the Special Meetings and may change their votes by
following the procedures described under "The Transaction--The ShopKo
Exchange" in the accompanying proxy statement. Shares of Phar-Mor common stock
are traded on the Nasdaq National Stock Market under the symbol "PMOR". The
closing price of Phar-Mor common stock in composite trading on January ,
1997, was $ per share, as reported in The Wall Street Journal. Based on the
average of the daily closing per share sales prices of the Phar-Mor Shares
during the thirty-day period ending , which equaled $ , the ShopKo
exchange ratio would equal 3.0.
Immediately following the share exchanges, Cabot Noble will purchase from
supervalu inc. approximately 90% of the Cabot Noble shares it receives for its
ShopKo shares in the combination, for the equivalent of $16.86 per share of
ShopKo common stock in cash (the "Cabot Noble Buy Back"). Neither ShopKo
shareholders nor Phar-Mor shareholders are being asked to approve the Cabot
Noble Buy Back. However, it is a condition to the completion of the
combination that no condition or circumstance exists which would reasonably be
expected to prevent or delay consummation of the Cabot Noble Buy Back. See
"The Transaction--Background of the Transaction" and "--Cabot Noble Buy Back"
in the accompanying proxy statement.
AFTER CAREFUL CONSIDERATION OF NUMEROUS FACTORS, INCLUDING THE
RECOMMENDATION OF A SPECIAL COMMITTEE OF INDEPENDENT DIRECTORS, THE BOARD OF
DIRECTORS OF SHOPKO HAS UNANIMOUSLY APPROVED THE COMBINATION, AND RECOMMENDS
THAT ALL SHOPKO SHAREHOLDERS VOTE FOR THE APPROVAL AND ADOPTION OF THE
COMBINATION.
Among the factors considered by the ShopKo Board were the following benefits
of the proposed transaction:
. The transaction is expected to result in earnings per share accretion to
the ShopKo shareholders based upon an analysis prepared by ShopKo's
financial advisors.
<PAGE>
. As a result of the Cabot Noble Buy Back, the ShopKo public shareholders
(excluding supervalu) will own a much greater percentage of Cabot Noble
(approximately 75.9%) than they currently own of ShopKo (approximately
54%), based on an assumed ShopKo exchange ratio of 3.0.
. The value to be received by the ShopKo public shareholders is a premium
to both the pre-announcement trading price of the ShopKo common stock
and the value to be received by supervalu in the Cabot Noble Buy Back.
. The Cabot Noble Buy Back substantially reduces the perceived depressive
effect on the market price of ShopKo's common stock of supervalu's
expressed desire to liquidate its 46% equity ownership in ShopKo, which
had created an "overhang" on the market. The approximately $70 million
of excess cash held by Phar-Mor and made available to Cabot Noble
through the combination will fund a substantial portion of the Cabot
Noble Buy Back.
. The ShopKo public shareholders will exchange their investment in a
regional business for an investment in a national and more diversified
business.
. The combination is designed to enable ShopKo to (1) decrease its expense
ratios by eliminating administrative redundancies; (2) increase its
revenues, buying power and gross margins through combined sourcing of
merchandise with Phar-Mor; and (3) reinvest a significant portion of the
synergies resulting from the combination in lower and more competitive
prices for consumable merchandise sold in its stores. As a result of
these benefits, ShopKo should be able to compete more effectively.
. The combination results in the acquisition of an equity interest in the
Phar-Mor business--103 stores (102 of which were selected from Phar-
Mor's 311 pre-bankruptcy stores)--in combination with ShopKo's
administrative management strength and infrastructure. After the
combination, it is also expected that Phar-Mor will sell selected ShopKo
merchandise and optical services using Phar-Mor's current excess floor
space.
All ShopKo shareholders are invited to attend the Special Meeting in person.
The affirmative vote of the holders of a majority of the outstanding shares of
ShopKo common stock will be necessary for approval and adoption of the
Agreement and Plan of Reorganization.
Dissenting ShopKo shareholders who follow certain statutory procedures have
the right under Minnesota law to demand payment in cash for the fair value of
their shares of ShopKo common stock in lieu of Cabot Noble shares. See "The
Special Meetings--Dissenters' Rights" and Annex D in the accompanying proxy
statement for appropriate information.
In order that your shares may be represented at the ShopKo Special Meeting,
you are urged to vote promptly whether or not you plan to attend the Special
Meeting, by either (i) completing, signing, dating and returning the
accompanying proxy card in the enclosed envelope; or (ii) by dialing (1 800
- ) between 8 a.m. and midnight Eastern Standard Time on any day
commencing , 1997 and ending the close of business on , 1997 (or, in
the event that the ShopKo Special Meeting is adjourned, on the day prior to
the date of such adjourned meeting) and telling the operator that you wish to
send a collect datagram to Shopko Stores, Inc., providing the operator with
your six digit identification number which appears in the upper left hand
corner on the back side of your proxy card, informing the operator how you
wish to vote, and giving the operator your name(s), address and number of
shares exactly as such information appears on your proxy card. See "The
Special Meetings--Solicitation of ShopKo Proxies" in the accompanying proxy
statement for further details. If you attend the Special Meeting in person,
you may, if you wish, revoke your Proxy and vote in person on all matters
brought before the Special Meeting even if you have previously returned your
Proxy.
Sincerely,
Michael W. Wright
Chairman of the Board
Dale P. Kramer
President and Chief Executive
Officer
<PAGE>
ATTACHMENT A
The terms of the proposed combination provide that (i) holders of Phar-Mor
common stock will receive one share of Cabot Noble common stock for each share
of Phar-Mor common stock owned as of the effective date of the combination and
(ii) holders of ShopKo common stock will receive 2.4 shares of Cabot Noble
common stock for each share of ShopKo common stock owned as of the effective
date of the combination, subject to adjustment to the extent that the value of
the exchange consideration per share of ShopKo common stock would otherwise
fall outside a range of $17.25 to $18.00 based upon an average market price of
Phar-Mor common stock (the "ShopKo Exchange Ratio"), determined as follows:
. If the "Average Closing Price" multiplied by 2.4 is less than $17.25
(i.e. if the Average Closing Price is less than $7.186), the ShopKo
Exchange Ratio will be increased to the quotient (taken to the third
decimal place) obtained by dividing $17.25 by the Average Closing Price.
. If the "Average Closing Price" multiplied by 2.4 exceeds $18.00 (i.e.,
if the Average Closing Price is greater than $7.50), the ShopKo Exchange
Ratio will be reduced to the quotient (taken to the third decimal place)
obtained by dividing $18.00 by the Average Closing Price.
Average Closing Price: means the average closing price per share
of Phar-Mor common stock for each Nasdaq National Market trading
day from , 1997 through and including , 1997 (the sixth
trading day preceding the scheduled date of the special meeting of
ShopKo shareholders) (the "Pricing Period") as reported for Nasdaq
National Market issues in The Wall Street Journal. Cabot Noble,
ShopKo and Phar-Mor will issue a joint press release following the
termination of the Pricing Period specifying the Average Closing
Price and the resulting ShopKo Exchange Ratio.
<TABLE>
<CAPTION>
PRO FORMA OWNERSHIP OF CABOT NOBLE
------------------------------------
ASSUMED AVERAGE SHOPKO EXCHANGE RATIO AGGREGATE VALUE
CLOSING PRICE (NUMBER OF CABOT NOBLE RECEIVED PER FORMER FORMER PHAR-
OF PHAR-MOR SHARES ISSUED IN EXCHANGE SHOPKO SHARE SHOPKO PUBLIC MOR
SHARES(1) FOR EACH SHOPKO SHARE) EXCHANGED SHAREHOLDERS SUPERVALU SHAREHOLDERS
--------------- ------------------------- --------------- ------------- --------- ------------
<S> <C> <C> <C> <C> <C>
$5.500(2) 3.136(2) $17.250 76.5% 6.5% 17.0%
5.750 3.000 17.250 75.9% 6.4% 17.7%
6.000 2.875 17.250 75.4% 6.4% 18.3%
6.250 2.760 17.250 74.8% 6.3% 18.9%
6.500 2.654 17.250 74.2% 6.3% 19.5%
6.750 2.556 17.250 73.7% 6.2% 20.1%
7.000 2.464 17.250 73.1% 6.2% 20.7%
7.186 2.400 17.250 72.7% 6.1% 21.1%
7.250 2.400 17.400 72.7% 6.1% 21.1%
7.375 2.400 17.700 72.7% 6.1% 21.1%
7.500 2.400 18.000 72.7% 6.1% 21.1%
7.750 2.323 18.000 72.2% 6.1% 21.7%
8.000 2.250 18.000 71.7% 6.1% 22.2%
8.250 2.182 18.000 71.2% 6.0% 22.8%
8.500 2.118 18.000 70.7% 6.0% 23.3%
8.750 2.057 18.000 70.3% 5.9% 23.8%
9.000 2.000 18.000 69.8% 5.9% 24.3%
9.250 1.946 18.000 69.3% 5.9% 24.8%
9.500(3) 1.895(3) 18.000 68.8% 5.8% 25.3%
</TABLE>
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(1) The prices indicated represent hypothetical Average Closing Prices, are
assumed for illustrative purposes only, and will vary with the market
price of the Phar-Mor common stock during the Pricing Period.
(2) If the ShopKo Exchange Ratio is greater than 3.140 (i.e., if the Average
Closing Price is less than $5.493), the Phar-Mor Board would have the
right to terminate the Combination Agreement, unless ShopKo otherwise
agrees that the ShopKo Exchange Ratio shall be set at 3.140.
(3) If the ShopKo Exchange Ratio is less than 1.895 (i.e., if the Average
Closing Price is greater than $9.501), the ShopKo Board would have the
right to terminate the Combination Agreement, unless Phar-Mor otherwise
agrees that the ShopKo Exchange Ratio shall be set at 1.895.
<PAGE>
A toll-free telephone number (1 800 - ) has been established to provide
updated information regarding the ShopKo Exchange Ratio. Commencing , 1997
and ending on the day following the conclusion of both Special Meetings,
shareholders are encouraged to call such number to listen to a recorded
message indicating what the ShopKo Exchange Ratio would be as of the date of
such call, based on the average of the per share closing prices on the Nasdaq
National Stock Market of shares of Phar-Mor common stock (as reported in The
Wall Street Journal) during the thirty-day period ending as of the day prior
to such call or , 1997, as appropriate. Because the Average Closing Price
upon which the actual ShopKo Exchange Ratio will be based cannot be determined
definitively until the close of trading on , 1997, callers to such toll-
free telephone number prior to , 1997 should bear in mind that
fluctuations in the trading price of shares of Phar-Mor common stock during
the thirty-day period ending , 1997, may cause the actual ShopKo Exchange
Ratio to vary from the hypothetical ShopKo Exchange Ratio indicated on such
recorded message prior to , 1997.
<PAGE>
To the Shareholders of
Phar-Mor, Inc.
Enclosed are a Notice of Special Meeting of Shareholders, a Joint Proxy
Statement/ Prospectus and a Proxy for a Special Meeting of Shareholders (the
"Special Meeting") of Phar-Mor, Inc. ("Phar-Mor") to be held on , 1997 at
a.m., local time, at .
At the Special Meeting, you will be asked to consider and vote on an
Agreement and Plan of Reorganization (the "Combination Agreement") pursuant to
which Phar-Mor and ShopKo Stores, Inc. ("ShopKo") will become wholly owned
subsidiaries of Cabot Noble, Inc. The business combination will be
accomplished through share exchanges with Cabot Noble. The terms of the
combination provide that (i) Phar-Mor shareholders will receive one share of
Cabot Noble common stock for each outstanding share of Phar-Mor common stock,
and holders of Phar-Mor warrants to purchase shares of Phar-Mor common stock
will receive Cabot Noble warrants to purchase a like number of shares of Cabot
Noble common stock (the "Phar-Mor Plan") and (ii) ShopKo shareholders will
receive 2.4 shares of Cabot Noble common stock for each share of ShopKo common
stock, subject to adjustment to the extent that the value of the exchange
consideration would otherwise fall outside a range of $17.25 to $18.00 per
share of ShopKo common stock based on the average of the daily closing sales
prices per share of Phar-Mor common stock during the thirty-day period ending
on , 1997 (the "Average Closing Price"), and cash in lieu of any
fractional Cabot Noble Share. Attachment A illustrates how the ShopKo exchange
ratio (the "ShopKo Exchange Ratio") will be determined and provides a toll-
free telephone number that will permit shareholders to obtain updated
information regarding the Average Closing Price and the calculation of the
ShopKo Exchange Ratio.
If the Average Closing Price is less than $5.493 (which would result in a
ShopKo Exchange Ratio greater than 3.140), the Phar-Mor Board would have the
right to terminate the Combination Agreement, unless ShopKo otherwise agrees
that the ShopKo Exchange Ratio shall be set at 3.140 (i.e., based on an
Average Closing Price set at $5.494). If the Average Closing Price is greater
than $9.501 (which would result in a ShopKo Exchange Ratio less than 1.895),
the ShopKo Board would have the right to terminate the Combination Agreement,
unless Phar-Mor otherwise agrees that the ShopKo Exchange Ratio shall be set
at 1.895 (i.e., based on an Average Closing Price set at $9.50). Shares of
Phar-Mor common stock are traded on the Nasdaq National Stock Market under the
symbol "PMOR". The closing price of Phar-Mor common stock in composite trading
on January , 1997, was $ per share, as reported in The Wall Street
Journal. If the Average Closing Price had been calculated on the basis of the
thirty-day period ending , it would have been $ (which would result in a
ShopKo Exchange Ratio of 3.0).
In the event that the Average Closing Price is less than $5.493, Phar-Mor
has not determined whether it will exercise its right to terminate the
Combination Agreement, and ShopKo's Board of Directors has not made any
determination whether, in the event Phar-Mor exercises its right to terminate,
it will agree to set the ShopKo Exchange Ratio at 3.140 pursuant to the
Combination Agreement. Conversely, if the Average Closing Price exceeds
$9.501, ShopKo has not determined whether it will exercise its right to
terminate the Combination Agreement, and Phar-Mor's Board of Directors has not
made any determination whether, in the event ShopKo exercises its right to
terminate, it will agree to set the ShopKo Exchange Ratio at 1.895 pursuant to
the Combination Agreement. Shareholder approval will constitute approval of
the combination if the ShopKo Exchange Ratio is greater than 3.140 or less
than 1.895 and the Combination Agreement is not terminated, subject to the
fiduciary obligations of the ShopKo and Phar-Mor Boards and other applicable
legal requirements.
Immediately following the share exchanges, Cabot Noble will purchase from
supervalu inc. approximately 90% of the Cabot Noble shares it receives for its
ShopKo shares in the combination, for the equivalent of $16.86 per share of
ShopKo common stock in cash (the "Cabot Noble Buy Back"). ShopKo shareholders
and Phar-Mor shareholders are not being asked to approve the Cabot Noble Buy
Back. However, it is a condition to the completion of the combination that no
condition or circumstance exists which would reasonably be expected to prevent
or delay consummation of the Cabot Noble Buy Back. See "The Transaction--
Background of the Transaction," and "--Cabot Noble Buy Back" in the
accompanying proxy statement.
<PAGE>
AFTER CAREFUL CONSIDERATION OF NUMEROUS FACTORS, THE BOARD OF DIRECTORS OF
PHAR-MOR HAS APPROVED THE COMBINATION AND RECOMMENDS THAT ALL PHAR-MOR
SHAREHOLDERS VOTE FOR THE APPROVAL AND ADOPTION OF THE COMBINATION.
As you may be aware, in September 1995, Phar-Mor became a publicly traded
company. The reorganized Phar-Mor chain currently generates over $1 billion in
annual revenues at 102 individually profitable stores and one newly opened
store, with approximately 66% of revenues generated at stores located in Phar-
Mor's core markets of Pennsylvania, Ohio, Virginia and West Virginia.
Over the past year, Phar-Mor's management has implemented a series of
fundamental changes to improve our company's financial performance. Among
other improvements, Phar-Mor has:
. Lowered prices on over 3,000 key items by implementing an everyday low
price strategy similar to Wal-Mart, as well as displaying comparison
pricing on signage throughout its stores and guaranteeing pharmacy
customers the "Lowest Prescription Price or It's Free."
. Implemented a new marketing strategy of "Don't Pay Drugstore Prices"
with increased advertising circulars in standardized formats emphasizing
comparison prices.
. Implemented a new merchandising strategy focusing on the most popular
and profitable items and eliminated over 25,000 unprofitable items.
Phar-Mor added new departments such as discount greeting cards, club
store large pack items, pet items, and Kodak film kiosks.
. Designed and created two new prototype Phar-Mor stores, including
upscale and club store versions with 12 remodels completed and plans to
complete at least an additional 12 remodels in calendar 1997. The new
prototypes reposition signature departments to provide customers an
easy-to-navigate shopping format further enhanced by customer signage.
All of these changes significantly increased customer counts and sales per
customer and, as a result, Phar-Mor was profitable for the fiscal year ended
June 29, 1996.
Despite these fundamental improvements, Phar-Mor's current and future
profitability is constrained by having only 103 stores, which represents a
small revenue and store base relative to our national competitors. In
addition, the complexity of our business and the demands and risks of
rebuilding our business represent additional operational constraints.
It has been our goal to use our strong balance sheet and cash position
(approximately $104 million as of January 2, 1997) to increase our
competitiveness by combining with or acquiring complementary businesses. Such
a combination will offer Phar-Mor greater economies of scale, increased
purchasing power and lower costs of goods sold, geographic and merchandise
diversity and the ability to leverage Phar-Mor's existing fixed costs,
properties and management.
The combination with ShopKo provides us the opportunity to achieve this goal
by joining with a successful and complementary retailer that, over the last
five years, has invested $130 million to remodel and remerchandise its stores
in the face of increasing competition and over $40 million in strategic
upgrades of its systems and technology. In addition, ShopKo has efficient and
flexible administrative facilities which we can use to lower our costs,
increase service levels to our stores and generate increased purchasing power.
ShopKo and key members of its talented management team have a demonstrated
record of success over this period.
Management believes that the combination with ShopKo provides the following
specific benefits to Phar-Mor shareholders:
. It combines Phar-Mor, a regional discount merchandise chain with 103
stores in 18 states, with ShopKo to create a national discount retailer
offering pharmaceutical products and services in the United States with
a total of over 230 stores in 29 states across the nation, and combined
projected revenues of nearly
<PAGE>
$3.3 billion in fiscal year 1997, including ProVantage revenues of
approximately $360 million. See "Certain Forward-Looking Information" in
the accompanying proxy statement.
. It significantly increases the projected earnings per share from Phar-
Mor's current projections without giving effect to the Combination. For
example, earnings per share are projected to increase in each of fiscal
years 1997, 1998 and 1999, versus Phar-Mor on a stand-alone basis, by
$0.93, $0.61 and $0.80, respectively. See "Certain Forward Looking
Information" in the accompanying proxy statement.
. It creates cross-merchandising opportunities which are expected to
increase revenues by exploiting higher margin products, such as optical
products and services, basic apparel, fashion jewelry, and additional
health and beauty care products.
. It is expected to reduce merchandising costs, corporate overhead and
selling, general and administrative expenses by up to $20 million
annually. A significant portion of this reduction is expected to be
achieved by consolidating Phar-Mor's administrative and operating
functions at ShopKo's current headquarters in Green Bay, Wisconsin,
which should significantly increase management efficiency. These
savings, together with the enhanced purchasing power of the combined
companies, will enable Phar-Mor and ShopKo to compete more aggressively
for market share against competitors such as Wal-Mart and Walgreen's, by
passing on greater savings to our customers.
. It enables Phar-Mor to benefit immediately from ShopKo's existing state-
of-the-art information management and data processing systems, without
the need for Phar-Mor to incur the substantial costs, risks and delays
of developing these systems for itself.
. It eliminates the costs, risks and delays associated with downsizing
certain existing Phar-Mor stores by using excess store capacity to sell
higher margin merchandise and services, such as optical services, that
have been highly successful for ShopKo.
. It provides the opportunity for Phar-Mor's shareholders to participate
in the significant growth in prescription benefit management (PBM) and
related services offered by ShopKo's ProVantage subsidiary. ProVantage
has increased revenues from $14 million in fiscal year 1995, to $94
million in fiscal year 1996, and to an estimated $360 million in fiscal
year 1997. ShopKo management believes that ProVantage will generate over
$550 million in sales in fiscal 1998. ShopKo management attributes the
anticipated growth of ProVantage to the development of PBM benefit
programs, successful marketing and internally developed sales in
addition to acquisitions and strategic alliances. Furthermore,
ProVantage has developed a new vision benefit program and health care
decision support services which were recently successfully launched. See
"Certain Forward Looking Information--ShopKo Information Supplied to
Phar-Mor" in the accompanying proxy statement.
Management believes that these benefits will materially improve Phar-Mor's
competitive position and profitability by accelerating the opportunities to
reduce costs, enhance revenues and create new and diverse opportunities for
future growth. Without the benefits which the combination with ShopKo is
expected to yield, Phar-Mor would be compelled to invest substantial capital,
time and other resources to improve its technological and logistical
infrastructure and downsize stores, find other means to further reduce
expenses, and seek other opportunities to increase revenues and profitability.
In light of the intensifying competition among retail merchandise companies
and the growing dominance of the largest chains, including Wal-Mart and
Walgreen's, Phar-Mor would have to implement many of these strategies swiftly
and at great cost, with little certainty that these improvements would
ultimately succeed. Moreover, it is likely that any benefits would only be
realized after a considerable passage of time, while many of Phar-Mor's larger
competitors would continue to challenge Phar-Mor's position in the
marketplace. We believe that the combination with ShopKo provides the
opportunity to create a stronger, more competitive and more profitable company
faster and with less risk than if Phar-Mor were compelled to act unilaterally.
All Phar-Mor shareholders are invited to attend the Special Meeting in
person. The affirmative vote of holders of a majority of the shares of Phar-
Mor common stock represented at the Special Meeting, in person or
<PAGE>
by proxy, will be necessary for adoption of the Agreement and Plan of
Reorganization. Phar-Mor shareholders are not entitled to dissenters' rights
in connection with the combination.
Under Pennsylvania law and Phar-Mor's Bylaws, in the event the Phar-Mor
Special Meeting is adjourned for one or more periods aggregating more than 14
days due to the absence of a quorum, any number of Phar-Mor shareholders
attending the adjourned meeting shall constitute a quorum for purposes of
Phar-Mor shareholder approval of the combination. See "Risk Factors--Reduced
Quorum Requirement" and "The Special Meetings--Phar-Mor Record Date; Quorum;
Vote Required" in the accompanying proxy statement.
In order that your shares may be represented at the Special Meeting, you are
urged to vote promptly whether or not you plan to attend the Special Meeting,
by either (i) completing, signing, dating and returning the accompanying proxy
card in the enclosed envelope; or (ii) by dialing (1 800 - ) between 8
a.m. and midnight Eastern Standard Time on any day commencing , 1997 and
ending on , 1997 (or, in the event that the Phar-Mor Special Meeting is
adjourned, on the day prior to the date of the adjourned meeting) and telling
the operator that you wish to send a collect datagram to Phar-Mor, Inc.,
providing the operator with your six digit identification number which appears
in the upper left hand corner on the back side of your proxy card, informing
the operator how you wish to vote, and giving the operator your name(s),
address and number of shares exactly as such information appears on your proxy
card. See "The Special Meetings--Solicitation of Phar-Mor Proxies" in the
accompanying proxy statement for further details. If you attend the Special
Meeting in person, you may, if you wish, vote in person on all matters brought
before the Special Meeting even if you have previously returned your Proxy.
Sincerely,
Robert M. Haft
Chairman of the Board and Chief
Executive Officer
M. David Schwartz
President and Chief Operating
Officer
Daniel J. O'Leary
Senior Vice President and Chief
Financial Officer
John R. Ficarro
Senior Vice President and General
Counsel
<PAGE>
ATTACHMENT A
The terms of the proposed combination provide that (i) holders of Phar-Mor
common stock will receive one share of Cabot Noble common stock for each share
of Phar-Mor common stock owned as of the effective date of the combination and
(ii) holders of ShopKo common stock will receive 2.4 shares of Cabot Noble
common stock for each share of ShopKo common stock owned as of the effective
date of the combination, subject to adjustment to the extent that the value of
the exchange consideration per share of ShopKo common stock would otherwise
fall outside a range of $17.25 to $18.00 based upon an average market price of
Phar-Mor common stock (the "ShopKo Exchange Ratio"), determined as follows:
. If the "Average Closing Price" multiplied by 2.4 is less than $17.25
(i.e. if the Average Closing Price is less than $7.186), the ShopKo
Exchange Ratio will be increased to the quotient (taken to the third
decimal place) obtained by dividing $17.25 by the Average Closing Price.
. If the "Average Closing Price" multiplied by 2.4 exceeds $18.00 (i.e.,
if the Average Closing Price is greater than $7.50), the ShopKo Exchange
Ratio will be reduced to the quotient (taken to the third decimal place)
obtained by dividing $18.00 by the Average Closing Price.
Average Closing Price: means the average closing price per share
of Phar-Mor common stock for each Nasdaq National Market trading
day from , 1997 through and including , 1997 (the sixth
trading day preceding the scheduled date of the special meeting of
ShopKo shareholders) (the "Pricing Period") as reported for Nasdaq
National Market issues in The Wall Street Journal. Cabot Noble,
ShopKo and Phar-Mor will issue a joint press release following the
termination of the Pricing Period specifying the Average Closing
Price and the resulting ShopKo Exchange Ratio.
<TABLE>
<CAPTION>
PRO FORMA OWNERSHIP OF CABOT NOBLE
------------------------------------
ASSUMED AVERAGE SHOPKO EXCHANGE RATIO AGGREGATE VALUE
CLOSING PRICE (NUMBER OF CABOT NOBLE RECEIVED PER FORMER FORMER
OF PHAR-MOR SHARES ISSUED IN EXCHANGE SHOPKO SHARE SHOPKO PUBLIC PHAR-MOR
SHARES(1) FOR EACH SHOPKO SHARE) EXCHANGED SHAREHOLDERS SUPERVALU SHAREHOLDERS
- --------------- ------------------------- --------------- ------------- --------- ------------
<S> <C> <C> <C> <C> <C>
$5.500(2) 3.136(2) $17.250 76.5% 6.5% 17.0%
5.750 3.000 17.250 75.9% 6.4% 17.7%
6.000 2.875 17.250 75.4% 6.4% 18.3%
6.250 2.760 17.250 74.8% 6.3% 18.9%
6.500 2.654 17.250 74.2% 6.3% 19.5%
6.750 2.556 17.250 73.7% 6.2% 20.1%
7.000 2.464 17.250 73.1% 6.2% 20.7%
7.186 2.400 17.250 72.7% 6.1% 21.1%
7.250 2.400 17.400 72.7% 6.1% 21.1%
7.375 2.400 17.700 72.7% 6.1% 21.1%
7.500 2.400 18.000 72.7% 6.1% 21.1%
7.750 2.323 18.000 72.2% 6.1% 21.7%
8.000 2.250 18.000 71.7% 6.1% 22.2%
8.250 2.182 18.000 71.2% 6.0% 22.8%
8.500 2.118 18.000 70.7% 6.0% 23.3%
8.750 2.057 18.000 70.3% 5.9% 23.8%
9.000 2.000 18.000 69.8% 5.9% 24.3%
9.250 1.946 18.000 69.3% 5.9% 24.8%
9.500(3) 1.895(3) 18.000 68.8% 5.8% 25.3%
</TABLE>
- --------
(1) The prices indicated represent hypothetical Average Closing Prices, are
assumed for illustrative purposes only, and will vary with the market
price of the Phar-Mor common stock during the Pricing Period.
(2) If the ShopKo Exchange Ratio is greater than 3.140 (i.e., if the Average
Closing Price is less than $5.493), the Phar-Mor Board would have the
right to terminate the Combination Agreement, unless ShopKo otherwise
agrees that the ShopKo Exchange Ratio shall be set at 3.140.
(3) If the ShopKo Exchange Ratio which is less than 1.895 (i.e., if the
Average Closing Price is greater than $9.501), the ShopKo Board would
have the right to terminate the Combination Agreement, unless Phar-Mor
otherwise agrees that the ShopKo Exchange Ratio shall be set at 1.895.
<PAGE>
A toll-free telephone number (1 800 - ) has been established to
provide updated information regarding the ShopKo Exchange Ratio. Commencing
, 1997 and ending on the day following the conclusion of the Special
Meetings, shareholders are encouraged to call such number to listen to a
recorded message indicating what the ShopKo Exchange Ratio would be as of the
date of such call, based on the average of the per share closing prices on the
Nasdaq National Stock Market of shares of Phar-Mor common stock (as reported
in The Wall Street Journal) during the thirty-day period ending as of the day
prior to such call or , 1997, as appropriate. Because the Average
Closing Price upon which the actual ShopKo Exchange Ratio will be based cannot
be determined definitively until the close of trading on , 1997, callers
to such toll-free telephone number prior to , 1997 should bear in mind
that fluctuations in the trading price of shares of Phar-Mor common stock
during the thirty-day period ending , 1997, may cause the actual ShopKo
Exchange Ratio to vary from the hypothetical ShopKo Exchange Ratio indicated
on such recorded message prior to , 1997.
<PAGE>
SHOPKO STORES, INC.
700 PILGRIM WAY
P.O. BOX 19060
GREEN BAY, WISCONSIN 54307-9060
(414) 497-2211
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
, 1997
A special meeting of the shareholders of ShopKo Stores, Inc., a Minnesota
corporation ("ShopKo"), will be held at , , and at any
adjournments thereof (the "Special Meeting"), on , , 1997, at
a.m., local time, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt an Agreement
and Plan of Reorganization among Cabot Noble, Inc., a newly formed Delaware
corporation ("Cabot Noble"), ShopKo and Phar-Mor, Inc., a Pennsylvania
corporation ("Phar-Mor"), dated as of September 7, 1996, as amended and
restated (the "Combination Agreement"), and a plan of exchange provided for
therein (collectively, the "ShopKo Plan") pursuant to which each
outstanding share of ShopKo common stock, par value $.01 per share ("ShopKo
Shares") (other than ShopKo Shares as to which dissenters' rights are
perfected), will be exchanged (the "ShopKo Exchange") for 2.4 shares of
Cabot Noble common stock, par value $.01 per share ("Cabot Noble Shares"),
subject to adjustment to the extent that the value of the exchange
consideration would otherwise fall outside a range of $17.25 to $18.00 per
ShopKo Share based on the average of the daily closing per share sales
prices of the Phar-Mor common stock, par value $.01 per share ("Phar-Mor
Shares"), during the thirty-day period ending on February , 1997 (the
"ShopKo Exchange Ratio"), and cash in lieu of any fractional share,
concurrently with consummation of a plan of exchange (the "Phar-Mor Plan")
pursuant to which each outstanding Phar-Mor Share will be exchanged for one
Cabot Noble Share, and each outstanding Phar-Mor warrant to purchase Phar-
Mor Shares will be exchanged for a Cabot Noble warrant (a "Cabot Noble
Warrant") to purchase a like number of Cabot Noble Shares (collectively,
the "Phar-Mor Exchange"), all as described in the Joint Proxy
Statement/Prospectus dated January , 1997, attached to this Notice (the
"Joint Proxy Statement/Prospectus"). The ShopKo Plan and Phar-Mor Plan are
collectively referred to as the "Combination." For a more detailed
explanation of the method by which the Average Closing Price and the ShopKo
Exchange Ratio will be determined, including a toll-free number that
shareholders of ShopKo and Phar-Mor may call to receive information
regarding the Average Closing Price and the ShopKo Exchange Ratio, see "The
Transaction--Terms of the ShopKo Plan" and Annex E to the Joint Proxy
Statement/Prospectus. The Combination Agreement is attached as Annex A to
the Joint Proxy Statement/Prospectus.
Immediately following the consummation of the Combination, Cabot Noble
will purchase 90% of the Cabot Noble Shares issued pursuant to the ShopKo
Exchange to supervalu inc., an approximately 46% shareholder of ShopKo
prior to the Combination, in exchange for cash (the "Cabot Noble Buy Back"
and, together with the Combination, the "Transaction"). The Transaction is
subject to certain conditions, including the approval by the ShopKo
shareholders and the Phar-Mor shareholders of the ShopKo Plan and the Phar-
Mor Plan, respectively, as described in the Joint Proxy
Statement/Prospectus. Approval of the Combination by ShopKo shareholders
constitutes approval of the assumption by Cabot Noble of ShopKo's and Phar-
Mor's respective rights and obligations under their respective employee
benefit plans. ShopKo shareholders and Phar-Mor shareholders are not being
asked to approve the Cabot Noble Buy Back. However, it is a condition to
the completion of the Combination that no condition or circumstance exists
which would reasonably be expected to prevent or delay consummation of the
Cabot Noble Buy Back. See "The Transaction--Background of the Transaction,"
and "--Cabot Noble Buy Back" in the Joint Proxy Statement/Prospectus.
If the ShopKo Exchange Ratio is greater than 3.140, the Phar-Mor Board
would have the right to terminate the Combination Agreement, unless ShopKo
otherwise agrees that the ShopKo Exchange Ratio shall be set at 3.140. If
the ShopKo Exchange Ratio is less than 1.895, the ShopKo Board would have
the
<PAGE>
right to terminate the Combination Agreement, unless Phar-Mor otherwise
agrees that the ShopKo Exchange Ratio shall be set at 1.895. Shareholder
approval will constitute approval of the Combination if the ShopKo Exchange
Ratio is greater than 3.140 or less than 1.895 and the Combination
Agreement is not terminated, subject to the fiduciary obligations of the
Board of Directors of ShopKo and the Phar-Mor and other applicable legal
requirements. Based on the average of the daily closing per share sales
prices of the Phar-Mor Shares during the thirty-day period ending ,
which equaled $ , the ShopKo Exchange Ratio would equal 3.0. The closing
sale price of Phar-Mor Shares quoted on Nasdaq on January , 1997 was $
per share. Assuming a ShopKo Exchange Ratio equal to 3.0, upon completion
of the Transaction, ShopKo shareholders will hold approximately 82.3% of
the Cabot Noble Shares outstanding, with supervalu holding approximately
6.4% and ShopKo public shareholders holding approximately 75.9%, assuming
no exercise of stock options or warrants of either ShopKo or Phar-Mor.
2. To transact such other business as may properly come before the
Special Meeting or adjournments thereof.
Only shareholders of record at the close of business on January , 1997,
will be entitled to notice of and to vote at the Special Meeting.
THE BOARD OF DIRECTORS OF SHOPKO HAS UNANIMOUSLY APPROVED THE COMBINATION
AGREEMENT, INCLUDING THE SHOPKO PLAN, AND HAS DETERMINED THAT THE TRANSACTION
IS FAIR TO, AND IN THE BEST INTERESTS OF, SHOPKO AND THE SHOPKO PUBLIC
SHAREHOLDERS. THE SHOPKO BOARD UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE
FOR APPROVAL AND ADOPTION OF THE SHOPKO PLAN. THE AFFIRMATIVE VOTE OF THE
HOLDERS OF A MAJORITY OF THE OUTSTANDING SHOPKO SHARES IS REQUIRED TO ADOPT
THE SHOPKO PLAN.
Holders of ShopKo Shares that comply with the procedures of Section 302A.473
of the Minnesota Business Corporation Act relating to dissenters' rights (as
described in and attached as Annex D to the Joint Proxy Statement/Prospectus,
together with Section 302A.471 of the Minnesota Business Corporation Act) will
have the right to receive, in lieu of the consideration proposed under the
ShopKo Plan, the "fair value" of their ShopKo Shares in cash as and to the
extent provided in Section 302A.473.
Detailed information regarding the Transaction is contained in the attached
Joint Proxy Statement/Prospectus which you are urged to read carefully.
Whether or not you expect to attend the Special Meeting in person, please
vote, by either (i) completing, signing, dating and returning the accompanying
proxy card in the enclosed postage paid envelope; or (ii) by dialing (1 800
- ) between 8 a.m. and midnight Eastern Standard Time on any day
commencing , 1997 and ending on , 1997 (or, in the event that the
ShopKo Special Meeting is adjourned, on the day prior to the date of the
adjourned meeting) and telling the operator that you wish to send a collect
datagram to Shopko Stores, Inc., providing the operator with your six digit
identification number which appears in the upper left hand corner on the back
side of your proxy card, informing the operator how you wish to vote, and
giving the operator your name(s), address and number of shares exactly as such
information appears on your proxy card. If you later desire to revoke your
proxy, you may do so at any time before the shareholder vote is taken by
giving written notice of your revocation to an officer of ShopKo or by
submitting to an officer of ShopKo a subsequently dated proxy, which may be
done in person at the Special Meeting. See "The Special Meetings--Solicitation
of ShopKo Proxies" in the Joint Proxy Statement/Prospectus for further
details.
By Order of the Board of Directors,
Richard D. Schepp
Secretary
<PAGE>
PHAR-MOR, INC.
20 FEDERAL PLAZA WEST
YOUNGSTOWN, OHIO 44501-0400
(330) 746-6641
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
, 1997
A special meeting of the shareholders of Phar-Mor, Inc., a Pennsylvania
corporation ("Phar-Mor"), will be held at , , and at any
adjournments thereof (the "Special Meeting"), on , , 1997, at
a.m., local time, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt an Agreement
and Plan of Reorganization among Cabot Noble, Inc., a newly formed Delaware
corporation ("Cabot Noble"), ShopKo Stores, Inc., a Minnesota corporation
("ShopKo"), and Phar-Mor dated as of September 7, 1996, as amended and
restated (the "Combination Agreement"), and a plan of exchange provided for
therein (collectively, the "Phar-Mor Plan") pursuant to which each
outstanding share of Phar-Mor common stock, par value $.01 per share
("Phar-Mor Shares"), will be exchanged for one share of Cabot Noble common
stock, par value $.01 per share ("Cabot Noble Shares"), and each
outstanding Phar-Mor warrant to purchase Phar-Mor Shares will be exchanged
for a Cabot Noble warrant (a "Cabot Noble Warrant") to purchase a like
number of Cabot Noble Shares (collectively, the "Phar-Mor Exchange"),
concurrently with consummation of a plan of exchange (the "ShopKo Plan")
pursuant to which each outstanding share of ShopKo common stock, par value
$.01 per share ("ShopKo Shares") (other than ShopKo Shares as to which
dissenters' rights are perfected), will be exchanged (the "ShopKo
Exchange") for 2.4 Cabot Noble Shares, subject to adjustment to the extent
that the value of the exchange consideration would otherwise fall outside a
range of $17.25 to $18.00 per ShopKo Share based on the average of the
daily closing sales prices per share of the Phar-Mor Shares during the
thirty-day period ending on , 1997 (the "ShopKo Exchange Ratio"), and
cash in lieu of any fractional share, all as described in the Joint Proxy
Statement/Prospectus dated January , 1997, attached to this Notice (the
"Joint Proxy Statement/Prospectus"). The Phar-Mor Plan and the Shopko Plan
are collectively referred to as the "Combination." For a more detailed
explanation of the method by which the Average Closing Price and the ShopKo
Exchange Ratio will be determined, including a toll-free number that
shareholders of Phar-Mor and ShopKo may call to receive information
regarding the Average Closing Price and the ShopKo Exchange Ratio, see "The
Transaction--Terms of the Phar-Mor Plan" and Annex E to the Joint Proxy
Statement/Prospectus. The Combination Agreement is attached as Annex A to
the Joint Proxy Statement/Prospectus. Approval of the Combination by
Phar-Mor shareholders constitutes approval of the assumption by Cabot Noble
of ShopKo's and Phar-Mor's respective rights and obligations under their
respective employee benefit plans.
Immediately following the consummation of the Combination, Cabot Noble
will purchase 90% of the Cabot Noble Shares issued pursuant to the ShopKo
Exchange to supervalu inc., an approximately 46% shareholder of ShopKo
prior to the Combination, in exchange for cash (the "Cabot Noble Buy Back"
and, together with the Combination, the "Transaction"). The Transaction is
subject to certain conditions, including the approval by the ShopKo
shareholders and the Phar-Mor shareholders of the ShopKo Plan and the Phar-
Mor Plan, respectively, as described in the Joint Proxy
Statement/Prospectus. Phar-Mor shareholders and ShopKo shareholders are not
being asked to approve the Cabot Noble Buy Back. However, it is a condition
to the completion of the Combination that no condition or circumstance
exists which would reasonably be expected to prevent or delay consummation
of the Cabot Noble Buy Back. See "The Transaction--Background of the
Transaction," and "--Cabot Noble Buy Back" in the Joint Proxy
Statement/Prospectus.
If the ShopKo Exchange Ratio is greater than 3.140, the Phar-Mor Board
would have the right to terminate the Combination Agreement, unless ShopKo
otherwise agrees that the ShopKo Exchange Ratio shall be set at 3.140. If
the ShopKo Exchange Ratio is less than 1.895, the ShopKo Board would have
the right to terminate the Combination Agreement, unless Phar-Mor otherwise
agrees that the ShopKo
<PAGE>
Exchange Ratio shall be set at 1.895. Shareholder approval will constitute
approval of the Combination if the ShopKo Exchange Ratio is greater than
3.140 or less than 1.895 and the Combination Agreement is not terminated,
subject to the fiduciary obligations of the Board of Directors of Phar-Mor
and ShopKo and other applicable legal requirements. Based on the average of
the daily closing per share sales prices of the Phar-Mor Shares during the
thirty-day period ending , which equaled $ , the ShopKo Exchange
Ratio would equal 3.0. The closing sale price of Phar-Mor Shares quoted on
Nasdaq on January , 1997 was $ per share. Assuming a ShopKo Exchange
Ratio equal to 3.0, shareholders of Phar-Mor will hold approximately 17.7%
of the Cabot Noble Shares outstanding upon completion of the Transaction,
with supervalu holding approximately 6.4% and ShopKo public shareholders
holding approximately 75.9%, assuming no exercise of stock options or
warrants of either ShopKo or Phar-Mor.
2. To transact such other business as may properly come before the
Special Meeting or any adjournment thereof.
Only shareholders of record at the close of business on January , 1997,
will be entitled to notice of and to vote at the Special Meeting.
THE BOARD OF DIRECTORS OF PHAR-MOR HAS APPROVED THE COMBINATION AGREEMENT,
INCLUDING THE PHAR-MOR PLAN, AND HAS DETERMINED THAT THE TRANSACTION IS FAIR
TO, AND IN THE BEST INTERESTS OF, PHAR-MOR AND THE PHAR-MOR SHAREHOLDERS. THE
PHAR-MOR BOARD RECOMMENDS THAT SHAREHOLDERS VOTE FOR APPROVAL AND ADOPTION OF
THE PHAR-MOR PLAN. THE AFFIRMATIVE VOTE OF THE HOLDERS OF A MAJORITY OF THE
PHAR-MOR SHARES REPRESENTED AT THE SPECIAL MEETING, IN PERSON OR BY PROXY, AND
ENTITLED TO VOTE THEREAT IS REQUIRED TO ADOPT THE PHAR-MOR PLAN.
Pennsylvania law and Phar-Mor's Bylaws provide that those shareholders
entitled to vote who attend a meeting of shareholders that has been previously
adjourned for one or more periods aggregating more than 14 days because of the
absence of a quorum, although representing less than a majority of the
outstanding Phar-Mor Shares, shall nevertheless constitute a quorum for the
purpose of acting upon any matter set forth in the notice of the meeting if
the notice states that those shareholders who attend the adjourned meeting
shall nevertheless constitute a quorum for the purpose of acting upon the
matter. SHAREHOLDERS ARE HEREBY NOTIFIED THAT, IN THE EVENT THE SCHEDULED
SPECIAL MEETING IS ADJOURNED AS DESCRIBED ABOVE, ANY SHAREHOLDERS WHO ATTEND
THE ADJOURNED SPECIAL MEETING AS DESCRIBED ABOVE, WHETHER OR NOT THEY
REPRESENT LESS THAN A MAJORITY OF THE OUTSTANDING PHAR-MOR SHARES, SHALL
NEVERTHELESS CONSTITUTE A QUORUM FOR THE PURPOSE OF ACTING ON THE MATTERS
IDENTIFIED IN THIS NOTICE. NO FURTHER NOTICE TO PHAR-MOR SHAREHOLDERS IS
REQUIRED IN CONNECTION WITH ANY ADJOURNMENT OF THE SPECIAL MEETING, OTHER THAN
BY ANNOUNCEMENT AT THE MEETING AT WHICH THE ADJOURNMENT IS TAKEN, UNLESS THE
PHAR-MOR BOARD FIXES A NEW RECORD DATE FOR THE ADJOURNED MEETING. IN THE EVENT
THE SPECIAL MEETING IS ADJOURNED, SHAREHOLDERS SHALL HAVE THE RIGHT TO REVOKE
THEIR PROXY OR CHANGE THEIR VOTE AT ANY TIME BEFORE THE FINAL SHAREHOLDER VOTE
IS TAKEN BY GIVING WRITTEN NOTICE OF REVOCATION TO THE SECRETARY OF PHAR-MOR,
BY SUBMITTING A LATER DATED PROXY, BY FOLLOWING THE TELEPHONE PROCEDURE SET
FORTH BELOW OR BY VOTING IN PERSON AT THE ADJOURNED SPECIAL MEETING.
Detailed information regarding the Transaction is contained in the attached
Joint Proxy Statement/Prospectus which you are urged to read carefully.
Holders of Phar-Mor Shares are not entitled to dissenters' rights in
connection with the Transaction.
Whether or not you expect to attend the Special Meeting in person, please
vote, by either (i) completing, signing, dating and returning the accompanying
proxy card in the enclosed postage paid envelope; or (ii) by dialing (1
800 - ) between 8 a.m. and midnight Eastern Standard Time on any day
commencing , 1997 and ending on , 1997 (or, in the event that the
Special Meeting is adjourned, on the day prior to the date of the adjourned
meeting) and telling the operator that you wish to send a collect datagram
<PAGE>
to Phar-Mor, Inc., providing the operator with your six digit identification
number which appears in the upper left hand corner on the back side of your
proxy card, informing the operator how you wish to vote, and giving the
operator your name(s), address and number of shares exactly as such
information appears on your proxy card. If you later desire to revoke your
proxy, you may do so at any time before the shareholder vote is taken by
giving written notice of revocation to the secretary of Phar-Mor, by
submitting a later dated proxy, by following the telephonic procedure set
forth above or by voting in person at the Special Meeting.
By Order of the Board of Directors,
John R. Ficarro
Secretary
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THAT A FINAL PROSPECTUS HAS BEEN +
+DELIVERED. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE +
+SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JANUARY 10, 1997
JOINT PROXY STATEMENT/PROSPECTUS
CABOT NOBLE, INC.
PROSPECTUS
SHOPKO STORES, INC. PHAR-MOR, INC.
PROXY STATEMENT PROXY STATEMENT
For Special Meeting of For Special Meeting of
Shareholders Shareholders
To Be Held , 1997 To Be Held , 1997
This Joint Proxy Statement/Prospectus is being furnished to the shareholders
of ShopKo Stores, Inc. ("ShopKo") and Phar-Mor, Inc. ("Phar-Mor") in connection
with the proposed share exchanges with Cabot Noble, Inc. ("Cabot Noble") as a
result of which (i) ShopKo and Phar-Mor will become wholly owned subsidiaries
of Cabot Noble, (ii) holders of common stock of ShopKo, par value $.01 per
share ("ShopKo Shares") (other than ShopKo Shares as to which dissenters'
rights have been perfected), will receive 2.4 shares of common stock of Cabot
Noble, par value $.01 per share ("Cabot Noble Shares"), in exchange for each
outstanding ShopKo Share, subject to adjustment to the extent that the value of
the exchange consideration received per ShopKo Share would otherwise fall
outside a range of $17.25 to $18.00 (the "ShopKo Exchange Ratio") (based on the
average of the daily closing sales prices per share of the common stock of
Phar-Mor, par value $.01 per share ("Phar-Mor Shares"), during the thirty-day
period ending on February , 1997 (the "Average Closing Price")), and cash in
lieu of any fractional Cabot Noble Share (the "ShopKo Exchange") (See Annex E
hereto) and (iii) holders of Phar-Mor Shares will receive one Cabot Noble Share
in exchange for each outstanding Phar-Mor Share and holders of Phar-Mor
warrants to purchase Phar-Mor Shares ("Phar-Mor Warrants") will receive Cabot
Noble warrants ("Cabot Noble Warrants") to purchase a like number of Cabot
Noble Shares (collectively, the "Phar-Mor Exchange"). The Combination Agreement
(as defined below) and the ShopKo Exchange are collectively referred to as the
"ShopKo Plan," the Combination Agreement and the Phar-Mor Exchange are
collectively referred to as the "Phar-Mor Plan" and the ShopKo Plan and the
Phar-Mor Plan are collectively referred to as the "Combination." If the Average
Closing Price is less than $5.493 (resulting in a ShopKo Exchange Ratio greater
than 3.140), the Board of Directors of Phar-Mor (the "Phar-Mor Board") would
have the right to terminate the Combination Agreement, unless ShopKo otherwise
agrees that the ShopKo Exchange Ratio shall be set at 3.140 (i.e. based on an
Average Closing Price set at $5.494). If the Average Closing Price is greater
than $9.501 (resulting in a ShopKo Exchange Ratio less than 1.895), the Board
of Directors of ShopKo (the "ShopKo Board") would have the right to terminate
the Combination Agreement, unless Phar-Mor otherwise agrees that the ShopKo
Exchange Ratio shall be set at 1.895 (i.e. based on an Average Closing Price
set at $9.50). For a more detailed explanation of the method by which the
ShopKo Exchange Ratio will be determined, including a toll-free telephone
number that shareholders of ShopKo or Phar-Mor may call during the period from
, 1997 through the day following the conclusion of the Special Meetings to
receive updated information regarding the ShopKo Exchange Ratio, see "The
Transaction--Terms of the ShopKo Plan."
Immediately following the consummation of the Combination, Cabot Noble will
purchase 90% of the Cabot Noble Shares issued pursuant to the ShopKo Exchange
to supervalu inc., an approximately 46% shareholder of ShopKo prior to the
Combination ("supervalu"), in exchange for cash in an aggregate amount
equivalent to $16.86 per ShopKo Share (the "Cabot Noble Buy Back" and, together
with the Combination, the "Transaction"). See "The Transaction--Background of
the Transaction" and "--Cabot Noble Buy Back."
[continued on next page]
-----------
THE SECURITIES TO BE ISSUED IN CONNECTION WITH THE COMBINATION HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR BY ANY
STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS JOINT PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------
FOR A DESCRIPTION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING
THE TRANSACTION AND THE RECEIPT OF THE SECURITIES OFFERED HEREBY, SEE "RISK
FACTORS" BEGINNING ON PAGE 17.
-----------
The date of this Joint Proxy Statement/Prospectus, and the approximate date
on which this Joint Proxy Statement/Prospectus is first being mailed to
shareholders, is January , 1997.
<PAGE>
[Map entitled "Overview of the Companies--Pro Forma Geographic Composition"
showing the number of Phar-Mor and ShopKo retail stores in each state as
follows:
<TABLE>
<S> <C> <C>
Alabama (Phar-Mor) 1
California (ShopKo) 1
Colorado (ShopKo and Phar-Mor) 5
Florida (Phar-Mor) 5
Georgia (Phar-Mor) 3
Idaho (ShopKo) 8
Illinois (ShopKo and Phar-Mor) 7
Indiana (Phar-Mor) 3
Iowa (ShopKo and Phar-Mor) 5
Kansas (Phar-Mor) 2
Kentucky (Phar-Mor) 1
Michigan (ShopKo) 4
Minnesota (ShopKo) 13
Missouri (Phar-Mor) 1
Montana (ShopKo) 5
</TABLE>
<TABLE>
<S> <C> <C>
Nebraska (ShopKo) 11
Nevada (ShopKo) 3
North Carolina (Phar-Mor) 9
Ohio (Phar-Mor) 15
Oklahoma (Phar-Mor) 1
Oregon (ShopKo) 4
Pennsylvania (Phar-Mor) 34
South Carolina (Phar-Mor) 4
South Dakota (ShopKo) 6
Utah (ShopKo) 15
Virginia (Phar-Mor) 11
Washington (ShopKo) 10
West Virginia (Phar-Mor) 4
Wisconsin (ShopKo and Phar-Mor) 42
</TABLE>
The map also shows the location of Phar-Mor's distribution center in Ohio;
ShopKo's distribution centers in Wisconsin, Nebraska and Idaho; ProVantage's
regional offices in Utah and Texas; the ProVantage Processing Center in
Wisconsin; and the Cabot Noble headquarters in Wisconsin.
Set forth beneath the map are the following facts about Cabot Noble:
RETAIL OPERATIONS
Over 230 retail stores
29 States
$3.3 Billion in Combined General Merchandise/Health Services Sales
MANAGED HEALTH CARE OPERATIONS
4 million lives under contract
50 States
<PAGE>
[PHOTOS, INCLUDING 4 INTERIOR PHOTOGRAPHS OF SHOPKO STORES
DISPLAYING RETAIL HEALTH SERVICES, SEASONAL AND APPAREL DEPARTMENTS
AND 4 INTERIOR PHOTOGRAPHS DISPLAYING PHAR-MOR REMODELED
MERCHANDISING ASSORTMENTS, AND SHOPPERS, ETC.]
<PAGE>
[Continued from Cover Page]
This Joint Proxy Statement/Prospectus constitutes (i) the Proxy Statement of
ShopKo with respect to the solicitation of proxies by the ShopKo Board for use
at ShopKo's special meeting of shareholders, and at any adjournment thereof
(the "ShopKo Special Meeting"), at which the holders of ShopKo Shares will be
asked to consider and vote upon the Agreement and Plan of Reorganization dated
as of September 7, 1996, as amended, by and among Cabot Noble, Phar-Mor and
ShopKo (the "Combination Agreement") and the ShopKo Exchange (collectively,
the "ShopKo Plan"), (ii) the Proxy Statement of Phar-Mor with respect to the
solicitation of proxies by the Phar-Mor Board for use at Phar-Mor's special
meeting of shareholders, and at any adjournment thereof (the "Phar-Mor Special
Meeting"), at which the holders of Phar-Mor Shares will be asked to consider
and vote upon the Combination Agreement and the Phar-Mor Exchange
(collectively, the "Phar-Mor Plan"), and (iii) the Prospectus of Cabot Noble
with respect to the Cabot Noble Shares and Cabot Noble Warrants to be issued
in the Combination and the Cabot Noble Shares reserved for issuance upon the
exercise of such Cabot Noble Warrants (collectively, the "Securities").
Approval of the Combination by ShopKo shareholders and Phar-Mor shareholders
constitutes approval of the assumption by Cabot Noble of ShopKo's and Phar-
Mor's respective rights and obligations under their respective employee
benefit plans.
Cabot Noble has filed a Registration Statement on Form S-4 of which this
Joint Proxy Statement/Prospectus is a part (herein, together with all
amendments and exhibits thereto, referred to as the "Registration Statement"),
under the Securities Act of 1933, as amended (the "Securities Act"), with the
Securities and Exchange Commission relating to the Cabot Noble Shares and the
Cabot Noble Warrants. All information in the Registration Statement regarding
Cabot Noble has been provided by Cabot Noble, all information in the
Registration Statement regarding ShopKo has been provided by ShopKo and all
information in the Registration Statement regarding Phar-Mor has been provided
by Phar-Mor. The Registration Statement of which this Joint Proxy
Statement/Prospectus is a part also relates to and covers the resale of Cabot
Noble Shares to be received by certain affiliate shareholders of Phar-Mor and
ShopKo pursuant to the Combination (the "Selling Stockholders"). See "Selling
Stockholders."
ShopKo Shares and Phar-Mor Shares which are represented by properly executed
proxies will, unless such proxies have been previously revoked, be voted in
accordance with the instructions indicated in such proxies. If no instructions
are so indicated, such shares will be voted in favor of approval and adoption
of the ShopKo Plan and the Phar-Mor Plan, respectively, and, in the discretion
of the respective proxy holder, such other business as may properly come
before the Special Meetings. Any shareholder of Phar-Mor who has given a proxy
may revoke it at any time prior to its exercise at the Phar-Mor Special
Meeting by filing an instrument revoking it with the secretary of Phar-Mor, by
duly executing a proxy bearing a later date, by following the telephonic
procedure as set forth in "The Special Meetings--Solicitation of Phar-Mor
Proxies" or by appearing at the Phar-Mor Special Meeting and voting in person.
Any shareholder of ShopKo who has given a proxy may revoke it at any time
prior to its exercise at the ShopKo Special Meeting by filing an instrument
revoking it with an officer of ShopKo, or by duly executing and filing with an
officer of ShopKo a proxy bearing a later date, which may be done in person at
the ShopKo Special Meeting. The mere presence at the ShopKo Special Meeting of
a person who has appointed a proxy does not revoke the appointment.
The ShopKo Shares are traded on the New York Stock Exchange (the "NYSE")
under the symbol "SKO." The Phar-Mor Shares are quoted on the Nasdaq National
Stock Market ("Nasdaq-NMS") under the symbol "PMOR." On January , 1997, the
last sale price of the ShopKo Shares and the Phar-Mor Shares was $ and $
per share, respectively. See "Market Price and Dividend Data."
[Cabot Noble has applied for listing of the Cabot Noble Shares for trading
on the NYSE and for quotation of the Cabot Noble Warrants on the Nasdaq Small
Cap Market.]
<PAGE>
AVAILABLE INFORMATION
Cabot Noble has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-4 (herein, together with all
amendments and exhibits thereto, referred to as the "Registration Statement")
under the Securities Act with respect to the Cabot Noble Shares and Cabot
Noble Warrants. This Joint Proxy Statement/Prospectus, which forms a part of
the Registration Statement, does not contain all of the information set forth
in the Registration Statement, certain portions of which have been omitted as
permitted by the rules and regulations of the Commission. Statements contained
in this Joint Proxy Statement/Prospectus as to the contents of any contract or
other document are not necessarily complete, and in each instance reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
reference to such contract or document.
Each of Phar-Mor and ShopKo 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 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. The ShopKo Shares are listed on the NYSE. The Phar-Mor
Shares are listed on the Nasdaq-NMS. Reports, proxy statements and other
information filed by ShopKo may be inspected at the offices of the NYSE at 20
Broad Street, New York, New York 10005, and such information filed by Phar-Mor
may also be inspected at the offices of the Nasdaq-NMS at 1735 K Street, N.W.,
Washington, D.C. 20006. The Commission maintains an Internet web site
(http://www.sec.gov) that contains reports, proxy and information statements
and other information regarding each of Phar-Mor and ShopKo.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission by ShopKo
pursuant to the Exchange Act are incorporated by reference in this Proxy
Statement:
1. ShopKo's Annual Report on Form 10-K for the fiscal year ended February
24, 1996;
2. ShopKo's Quarterly Reports on Form 10-Q for the fiscal quarters ended
June 15, September 7 and November 30, 1996;
3. ShopKo's Current Reports on Form 8-K dated September 7 and October 11,
1996; and
4. ShopKo's Proxy Statement for its Annual Meeting of Shareholders dated
May 10, 1996.
The information relating to ShopKo contained in this Joint Proxy
Statement/Prospectus does not purport to be comprehensive and should be read
together with the information in the documents incorporated by reference
herein.
All documents filed by ShopKo pursuant to Sections 13(a), 13(c), 14 or 15(d)
of the Exchange Act subsequent to the date of this Joint Proxy
Statement/Prospectus and prior to the date of the Special Meetings (as defined
below in "Summary--The Special Meetings") shall be deemed to be incorporated
by reference in this Joint Proxy Statement/Prospectus 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 Joint Proxy
Statement/Prospectus 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 Joint Proxy Statement/Prospectus.
i
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS WITH RESPECT TO THE MATTERS DESCRIBED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS 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 CABOT NOBLE, SHOPKO OR PHAR-MOR. THIS
JOINT PROXY STATEMENT/PROSPECTUS 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 JOINT PROXY STATEMENT/PROSPECTUS SHALL NOT, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF CABOT
NOBLE, SHOPKO OR PHAR-MOR SINCE THE DATE HEREOF OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THIS JOINT PROXY STATEMENT/PROSPECTUS 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 SHOPKO SHARES OR PHAR-MOR SHARES TO WHOM THIS JOINT PROXY
STATEMENT/PROSPECTUS IS DELIVERED, UPON WRITTEN OR ORAL REQUEST, TO RICHARD D.
SCHEPP, CORPORATE SECRETARY, SHOPKO STORES, INC. 700 PILGRIM WAY, P.O. BOX
19060, GREEN BAY, WISCONSIN 54307-9060, TELEPHONE NUMBER (414) 497-2211, OR
JOHN R. FICARRO, CORPORATE SECRETARY, PHAR-MOR, INC., 20 FEDERAL PLAZA WEST,
YOUNGSTOWN, OHIO, 44501-0400, TELEPHONE NUMBER (330) 746-6641. IN ORDER TO
ENSURE DELIVERY OF DOCUMENTS PRIOR TO THE APPLICABLE SPECIAL MEETING, ANY
REQUEST THEREFOR SHOULD BE MADE NOT LATER THAN , 1997.
FORWARD-LOOKING STATEMENTS
The actual results of ShopKo, Phar-Mor and Cabot Noble may differ materially
from those contained in forward-looking statements contained in (i) this Joint
Proxy Statement/Prospectus, including, without limitation, statements made
under "Certain Forward-Looking Information;" (ii) information included or
incorporated by reference in future filings by ShopKo, Phar-Mor, or Cabot
Noble with the Commission, and (iii) information contained in written
material, releases and oral statements issued by, or on behalf of, ShopKo,
Phar-Mor or Cabot Noble. Factors which may cause such a difference to occur
include, but are not limited to: (i) delays in anticipated cost savings, (ii)
higher than anticipated costs in completing the Transaction, (iii) business
disruption related to the Transaction (both before and after completion), (iv)
cost savings that are less than anticipated, (v) higher than expected
financing or refinancing costs, (vi) costs and delays caused by any
litigation, (vii) unanticipated regulatory delays or constraints or changes in
the proposed Transaction required by regulatory authorities, (viii) other
unanticipated occurrences which may delay the consummation of the Transaction,
increase the costs related to the Transaction, or decrease the expected
financial and other benefits of the Transaction, (ix) heightened competition,
including specifically increased price competition from national and regional
discount stores, specialty stores, and prescription benefit management
companies, (x) adverse weather conditions, (xi) changes in the prescription
drug industry regarding pricing, formulary use, or reimbursement practices,
(xii) minimum wage legislation, (xiii) regulatory and litigation matters
affecting health care services, particularly prescription benefit managers,
(xiv) higher than anticipated interest rates, (xv) real estate costs and
construction and development costs, (xvi) inventory imbalances caused by
unanticipated fluctuations in consumer demand, and (xvii) trends in the
economy which affect consumer confidence and consumer demand for retail goods.
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary.................................................................... 1
Risk Factors............................................................... 17
Competition............................................................... 17
Limited Operating History of Reorganized Phar-Mor......................... 17
Combination of Retail Operations; Realization of Synergies................ 17
Leverage.................................................................. 17
Interests of Management................................................... 18
Trading Market for Cabot Noble Shares..................................... 18
Holding Company Structure; Reliance on Subsidiaries for Dividends......... 18
Dividends................................................................. 19
Dilution; Control of Cabot Noble.......................................... 19
Resale of Cabot Noble Shares.............................................. 20
Market Price of Cabot Noble Shares........................................ 20
Dependence on Key Personnel............................................... 20
Reduced Quorum Requirement................................................ 21
No Appraisal Rights for Holders of Phar-Mor Shares; ShopKo Dissenters'
Rights................................................................... 21
Anti-Takeover Provisions.................................................. 21
Litigation and Insurance.................................................. 22
Hamilton Morgan Issues.................................................... 22
Cabot Noble Business Strategy.............................................. 24
General................................................................... 24
Cost Savings From the Combination......................................... 24
Revenue Enhancements from the Combination................................. 25
ProVantage................................................................ 26
Strategic Benefits of the Combination..................................... 27
Comparative Per Share Data................................................. 29
Capitalization............................................................. 30
Market Price and Dividend Data............................................. 31
ShopKo.................................................................... 31
Phar-Mor.................................................................. 31
Cabot Noble............................................................... 32
The Special Meetings....................................................... 33
General................................................................... 33
ShopKo Record Date; Quorum; Vote Required................................. 33
Phar-Mor Record Date; Quorum; Vote Required............................... 33
Dissenters' Rights........................................................ 35
Solicitation of ShopKo Proxies............................................ 37
Solicitation of Phar-Mor Proxies.......................................... 38
Other Matters to be Considered............................................ 39
The Transaction............................................................ 40
Background of the Transaction............................................. 40
Recommendations of ShopKo Board; Reasons for the Transaction.............. 44
ShopKo Fairness Opinion................................................... 46
Recommendations of Phar-Mor Board; Reasons for the Transaction............ 50
Phar-Mor Fairness Opinion................................................. 51
Terms of the ShopKo Plan.................................................. 56
Terms of the Phar-Mor Plan................................................ 57
Voting Agreement.......................................................... 59
Exchange of Certificates.................................................. 59
Fractional Share Interests................................................ 60
Treatment of Options, Warrants and Other Rights........................... 60
Cabot Noble Buy Back...................................................... 61
Financing................................................................. 62
Representations and Warranties............................................ 63
</TABLE>
<TABLE>
<S> <C>
Operations of Phar-Mor, ShopKo and Cabot Noble Prior to the Transaction.. 63
ShopKo Dividends......................................................... 64
No Solicitation; Certain Negotiations.................................... 64
Director and Officer Indemnification and Liability Insurance............. 64
Conditions Precedent to the Transaction.................................. 64
Termination; Break-up Fee................................................ 65
Modification or Waiver................................................... 67
Accounting Treatment..................................................... 67
Certain United States Federal Income Tax Consequences..................... 68
Certain Forward-Looking Information....................................... 70
Cabot Noble Pro Forma Combined Projections............................... 70
ShopKo Information Supplied to Phar-Mor.................................. 72
Phar-Mor Information Supplied to ShopKo.................................. 75
Initial Management Projections; As Adjusted.............................. 77
Cabot Noble
Unaudited Pro Forma Consolidated Financial Statements.................... 78
ShopKo Selected Consolidated Financial Data............................... 85
ShopKo Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 86
General.................................................................. 86
Results of Operations.................................................... 86
Liquidity and Capital Resources.......................................... 90
Inflation................................................................ 91
Phar-Mor Selected Consolidated Financial Data............................. 92
Phar-Mor Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 93
General.................................................................. 93
Recent Developments and Outlook.......................................... 93
Results of Operations.................................................... 93
Financial Condition and Liquidity........................................ 98
Trends, Demands, Commitments, Events or Uncertainties.................... 100
Inflation................................................................ 100
Description of Cabot Noble................................................ 101
General.................................................................. 101
Directors and Executive Officers......................................... 101
Management Compensation.................................................. 102
Employment Contracts..................................................... 103
Director Remuneration.................................................... 103
Stock Incentive Plan..................................................... 104
Director Stock Plan...................................................... 106
Director Phantom Stock Plan.............................................. 107
Pro Forma Beneficial Ownership of Cabot Noble Shares..................... 108
Description of ShopKo..................................................... 110
General.................................................................. 110
Merchandising Philosophy--Management..................................... 110
Merchandising and Services--General Merchandise.......................... 111
Merchandising and Services--Health Services.............................. 111
Marketing and Advertising................................................ 112
Store Layout and Design.................................................. 113
Store Operations and Management.......................................... 113
Purchasing and Distribution.............................................. 114
Management Information Systems........................................... 114
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
Expansion................................................................. 115
Competition............................................................... 116
Seasonality............................................................... 117
Employees................................................................. 117
Government Regulation..................................................... 117
Properties................................................................ 119
Legal Proceedings......................................................... 119
Executive Officers of ShopKo.............................................. 120
Employment Agreements--Executive Officers................................. 122
Indemnification of Officers and Directors................................. 122
Severance Agreements...................................................... 122
Security Ownership of Certain Beneficial Owners and Management............ 124
Description of Phar-Mor.................................................... 125
General................................................................... 125
Operations................................................................ 126
Marketing and Merchandising............................................... 127
Sales..................................................................... 128
Competition............................................................... 129
Capital Expenditures...................................................... 129
Growth.................................................................... 129
Trademarks and Service Marks.............................................. 130
History................................................................... 130
Regulation................................................................ 132
Properties................................................................ 132
Legal Proceedings......................................................... 133
Directors and Executive Officers.......................................... 133
Executive Compensation.................................................... 136
Executive Compensation Plans.............................................. 139
Compensation of Directors................................................. 142
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements............................................................. 142
Compensation Committee Interlocks and Insider Participation............... 145
Security Ownership of Certain Beneficial Owners and Management............ 146
Certain Relationships and Related Transactions............................ 149
Description of Capital Stock of Cabot Noble................................ 152
Common Stock.............................................................. 152
Preferred Stock........................................................... 152
Warrants.................................................................. 152
Transfer Agent and Registrar.............................................. 153
</TABLE>
<TABLE>
<S> <C>
Comparison of Rights of Phar-Mor and ShopKo Shareholders and Cabot Noble
Stockholders............................................................. 154
Classes and Series of Capital Stock....................................... 154
Director and Officer Liability and Indemnification........................ 154
Special Meetings of Shareholders.......................................... 156
Annual Meeting of Shareholders............................................ 157
Dividends and Distributions............................................... 157
Appraisal Rights.......................................................... 158
Shareholder Approval of Mergers........................................... 159
Stock Repurchases......................................................... 160
Removal of Directors...................................................... 160
Charter Amendments........................................................ 161
Shareholder Action without a Meeting...................................... 162
"Anti-Takeover" Laws...................................................... 162
Voluntary Dissolution..................................................... 164
Transactions with Directors............................................... 164
Filling Vacancies on the Board of Directors............................... 165
Number and Qualification of Directors..................................... 165
Preemptive Rights......................................................... 166
Director Action by Written Consent........................................ 166
Voting in the Election of Directors....................................... 167
Certain Transactions...................................................... 167
ShopKo Employment Agreements--Executive Officers......................... 167
Effect of the Transaction on Stock Option and Restricted Stock Awards of
ShopKo.................................................................. 169
CareStream Scrip Card Acquisition by ShopKo.............................. 169
Phar-Mor Option Grants; Employment
Agreements--Executive Officers.......................................... 170
Legal Matters............................................................. 171
Experts................................................................... 171
Index to Financial Statements............................................. F-1
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<C> <S>
Annex A.. Agreement and Plan of Reorganization, as amended
Annex B.. Fairness Opinion of Salomon Brothers Inc
Annex C.. Fairness Opinion of Jefferies & Company, Inc.
Annex D.. Minnesota Dissenters' Rights Statute
Annex E.. Calculation of ShopKo Exchange Ratio
Annex F.. Restated Certificate of Incorporation of Cabot Noble, Inc.
Annex G.. Management Projections; As Adjusted
</TABLE>
iv
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in this
Joint Proxy Statement/Prospectus. Reference is made to, and this summary is
qualified in its entirety by, the more detailed information and financial
statements, including the notes thereto, contained elsewhere in this Joint
Proxy Statement/Prospectus. Unless the context otherwise requires, this Joint
Proxy Statement/Prospectus assumes that (i) all outstanding Phar-Mor Shares and
ShopKo Shares are exchanged in the Combination for Cabot Noble Shares, (ii) no
options or warrants issued by ShopKo or Phar-Mor are exercised prior to the
Effective Date, (iii) the ShopKo Exchange Ratio (as defined below in "--The
ShopKo Exchange") is 3.0 Cabot Noble Shares for each ShopKo Share exchanged
pursuant to the ShopKo Exchange and (iv) the Cabot Noble Buy Back (as defined
below in "--Cabot Noble Buy Back") has been consummated. The assumed ShopKo
Exchange Ratio of 3.0 is based on the average of the daily closing sale prices
of Phar-Mor Shares on the Nasdaq National Stock Market during the thirty-day
period ending . The actual ShopKo Exchange Ratio will be based on the
average of the daily closing sale prices per Phar-Mor Share during the thirty-
day period ending on February , 1997. See "--The ShopKo Exchange" and Annex E
hereto.
THE COMPANIES
CABOT NOBLE:
As used herein "Cabot Noble" refers to Cabot Noble, Inc., a Delaware
corporation, and as the context requires, after the Effective Date (as defined
below in "--Effective Date"), its wholly owned subsidiaries, ShopKo and Phar-
Mor. Until the Combination, Cabot Noble will have minimal assets and will
conduct no business. After the Combination, Cabot Noble will be the holding
company for Phar-Mor and ShopKo, through which Cabot Noble will conduct retail
discount drugstore, general merchandise and managed health care businesses. See
"Cabot Noble Business Strategy" and "Description of Cabot Noble." The principal
executive offices of Cabot Noble will be located at 700 Pilgrim Way, P.O. Box
19060, Green Bay, Wisconsin 54307-9060 (telephone number 414/497-2211).
SHOPKO:
As used herein "ShopKo" refers to ShopKo Stores, Inc., a Minnesota
corporation, and, as the context requires, references to ShopKo include its
subsidiaries. ShopKo will become a wholly owned subsidiary of Cabot Noble upon
completion of the Combination. ShopKo is principally engaged in the business of
providing general merchandise and health services through retail stores and
other managed health care services through its subsidiary, ProVantage, Inc.
("ProVantage"). As of January 2, 1997, ShopKo operated 130 stores in 18 states
located primarily in the Upper Midwest, Pacific Northwest and Western Mountain
regions of the United States. ProVantage's managed health care business is
nationwide. Currently, 46% of the outstanding ShopKo Shares are owned by
supervalu and the balance is widely held by other holders of ShopKo Shares (the
"ShopKo Public Shareholders"). See "Description of ShopKo." The principal
executive offices of ShopKo are located at 700 Pilgrim Way, P.O. Box 19060,
Green Bay, Wisconsin 54307-9060 (telephone number 414/497-2211).
PHAR-MOR:
As used herein "Phar-Mor" refers to Phar-Mor, Inc., a Pennsylvania
corporation, and, as the context requires, references to Phar-Mor include its
subsidiaries. Phar-Mor will become a wholly owned subsidiary of Cabot Noble
upon completion of the Combination. Phar-Mor is principally engaged in the
business of providing discount drugstore products and services through retail
stores. As of January 2, 1997, Phar-Mor operated 103 stores in 22 U.S.
metropolitan markets located primarily in Ohio (15 stores), Pennsylvania (34
stores), and Virginia (11 stores). All but one of these stores were selected
from among the 311 stores operated by Phar-Mor before it emerged from
bankruptcy in September 1995. See "Description of Phar-Mor." The principal
executive offices of Phar-Mor are located at 20 Federal Plaza West, Youngstown,
Ohio 44501-0400 (telephone number 330/746-6641).
1
<PAGE>
THE TRANSACTION
GENERAL
ShopKo is a leading regional retailer of general merchandise and health
services operating 130 stores in 15 states. ShopKo's retail stores offer a wide
variety of hardline and softline goods. A significant majority of ShopKo's
stores include full service pharmacy and optical departments. ShopKo's wholly
owned subsidiary, ProVantage, specializes in prescription benefit management
(PBM), vision benefit management (VBM) and health care decision support
services (DSS). Phar-Mor operates a chain of discount retail drugstores which
sell prescription and over-the-counter drugs, health and beauty care products,
cosmetics, greeting cards, groceries, beer, wine, tobacco, soft drinks and
seasonal and other general merchandise and rent videos. As of January 2, 1997,
Phar-Mor operated 103 stores in 22 metropolitan areas in 18 states. The
Combination will combine these businesses under a common holding company, which
the ShopKo Board and Phar-Mor Board believe will result in a national discount
merchandise and health services provider with reduced operational and
administrative costs, enhanced profitability and a stronger competitive
position.
The Board of Directors of ShopKo (the "ShopKo Board") and the Board of
Directors of Phar-Mor (the "Phar-Mor Board") have approved the Agreement and
Plan of Reorganization dated as of September 7, 1996, as amended, by and among
Cabot Noble, Phar-Mor and ShopKo (the "Combination Agreement") and the share
exchanges contemplated thereby (the "Combination" and, together with the Cabot
Noble Buy Back, the "Transaction"). Upon the consummation of the Transaction,
former ShopKo Public Shareholders will hold approximately 75.9%, supervalu will
own approximately 6.4%, and former shareholders of Phar-Mor will hold
approximately 17.7% of the total outstanding Cabot Noble Shares. The actual
percentages will depend upon the actual ShopKo Exchange Ratio. See Annex E. The
Board of Directors of Cabot Noble (the "Cabot Noble Board") will consist of (i)
the six current directors of Phar-Mor, (ii) an additional independent director
designated by the Phar-Mor Board with the approval of the independent members
of the ShopKo Board, (iii) Dale P. Kramer, the current chief executive officer
of ShopKo, and (iv) two individuals, at least one of whom will be an
independent director, designated by the ShopKo Board with the approval of the
independent members of the Phar-Mor Board. Robert M. Haft, the Chairman and
Chief Executive Officer of Cabot Noble and Phar-Mor, M. David Schwartz, the
President and Chief Operating Officer of Phar-Mor, Daniel J. O'Leary, the Chief
Financial Officer of Phar-Mor, and John R. Ficarro, the Senior Vice President,
General Counsel and Secretary and Phar-Mor, currently comprise the Cabot Noble
Board. Each of Messrs. Schwartz, O'Leary and Ficarro will resign as directors
of Cabot Noble effective as of the Effective Date of the Transaction. After the
Effective Date, Cabot Noble will have a management team drawn from both
companies. See "Description of Cabot Noble--Directors and Executive Officers."
For additional information concerning the business of Cabot Noble, see "Cabot
Noble Business Strategy" and "Description of Cabot Noble."
The Combination will be accomplished through simultaneous share exchanges,
whereby ShopKo and Phar-Mor will become wholly owned subsidiaries of Cabot
Noble and former shareholders of ShopKo and Phar-Mor will receive Cabot Noble
Shares in accordance with the exchange ratios described herein. The ShopKo
Exchange and the Phar-Mor Exchange will each be accounted for as a purchase by
ShopKo of Phar-Mor. The principal terms of the Transaction, including the
ShopKo Exchange, the Phar-Mor Exchange and the Cabot Noble Buy Back, are
summarized below.
SHOPKO'S REASONS FOR THE TRANSACTION
Among the factors considered by the ShopKo Board were the following benefits
of the proposed Transaction:
. The Transaction is expected to result in earnings per share accretion to
ShopKo's shareholders based upon an analysis prepared by ShopKo's
financial advisors. See "Certain Forward-Looking Information."
. As a result of the Cabot Noble Buy Back, the ShopKo Public Shareholders
will own a much greater percentage of Cabot Noble (approximately 75.9%)
than they currently own of ShopKo (approximately 54%).
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. The value to be received by the ShopKo Public Shareholders is a premium
to both the pre-announcement trading price of the ShopKo Shares and the
value to be received by supervalu in the Cabot Noble Buy Back.
. The Cabot Noble Buy Back substantially reduces the perceived depressive
effect on the market price of ShopKo Shares attributable to supervalu's
expressed desire to liquidate its 46% equity ownership in ShopKo, which
had created an "overhang" on the market. The approximately $70 million of
excess cash held by Phar-Mor and made available to Cabot Noble through
the Combination will fund a substantial portion of the Cabot Noble Buy
Back.
. The ShopKo Public Shareholders will exchange their investment in a
regional business for an investment in a national and more diversified
business.
. The Combination is designed to enable ShopKo to (1) decrease its expense
ratios by eliminating administrative redundancies; (2) increase its
revenues, buying power and gross margins through combined sourcing of
merchandise with Phar-Mor; and (3) reinvest a significant portion of the
synergies resulting from the Combination in lower and more competitive
prices for consumable merchandise sold in its stores. As a result of
these benefits, ShopKo should be able to compete more effectively.
. The Combination results in the acquisition of an equity interest in the
Phar-Mor business--103 stores (102 of which were selected from Phar-Mor's
311 pre-bankruptcy stores)--in combination with ShopKo's administrative
management strength and infrastructure. After the Combination, it is also
expected that Phar-Mor will sell selected ShopKo merchandise and optical
services using Phar-Mor's current excess floor space.
PHAR-MOR'S REASONS FOR THE TRANSACTION
Management believes that the Combination with ShopKo provides the following
specific benefits to Phar-Mor shareholders:
. It combines Phar-Mor, a regional discount merchandise chain with 103
stores in 18 states, with ShopKo to create a national discount retailer
offering pharmaceutical products and services in the United States with a
total of over 230 stores in 29 states across the nation, and combined
projected revenues of nearly $3.3 billion in fiscal year 1997, including
ProVantage revenues of approximately $360 million. See "Certain Forward-
Looking Information."
. It significantly increases the projected earnings per share from Phar-
Mor's current projections without giving effect to the Combination. For
example, earnings per share are projected to increase in each of fiscal
years 1997, 1998 and 1999, versus Phar-Mor on a stand-alone basis, by
$0.93, $0.61 and $0.80, respectively. See "Certain Forward-Looking
Information."
. It creates cross-merchandising opportunities which are expected to
increase revenues by exploiting higher margin products, such as optical
products and services, basic apparel and fashion jewelry, and additional
health and beauty care products.
. It is expected to reduce merchandising costs, corporate overhead and
selling, general and administrative expenses by up to $20 million
annually. A significant portion of this reduction is expected to be
achieved by consolidating Phar-Mor's administrative and operating
functions at ShopKo's current headquarters in Green Bay, Wisconsin, which
should significantly increase management efficiency. See "Cabot Noble
Business Strategy" and "Risk Factors--Combination of Retail Operations;
Realization of Synergies." These savings, together with the enhanced
purchasing power of the combined companies, will enable Phar-Mor and
ShopKo to compete more aggressively for market share against competitors
such as Wal-Mart and Walgreen's, by passing on greater savings to
customers.
. It enables Phar-Mor to benefit immediately from ShopKo's existing state-
of-the-art information management and data processing systems, without
the need for Phar-Mor to incur the substantial costs, risks and delays of
developing these systems for itself.
. It eliminates the costs, risks and delays associated with downsizing
certain existing Phar-Mor stores by using excess store capacity to sell
high margin merchandise and services, such as optical services, that have
been highly successful for ShopKo.
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. It provides the opportunity for Phar-Mor's shareholders to participate in
the significant growth in prescription benefit management ("PBM") and
related services offered by ShopKo's ProVantage subsidiary. ProVantage
has increased revenues from $14 million in fiscal year 1995, to $94
million in fiscal year 1996, and to an estimated $360 million in fiscal
year 1997. ShopKo management believes that ProVantage will generate over
$550 million in sales in fiscal year 1998. ShopKo management attributes
the anticipated growth of ProVantage to the development of PBM benefit
programs, successful marketing and internally developed sales in addition
to acquisitions and strategic alliances. Furthermore, ProVantage has
developed a new vision benefit program and health care decision support
services which were recently successfully launched. See "Certain Forward
Looking Information--ShopKo Information Supplied to PharMor."
Phar-Mor's management believes that these benefits will materially improve
Phar-Mor's competitive position and profitability by accelerating the
opportunities to reduce costs, enhance revenues and create new and diverse
opportunities for future growth. Without the benefits which the Combination is
expected to yield, Phar-Mor would be compelled to invest substantial capital,
time and other resources to improve its technological and logistical
infrastructure, downsize stores, find other means to further reduce expenses,
and seek other opportunities to increase revenues and profitability. In light
of the intensifying competition among retail merchandise companies and the
growing dominance of the largest chains, including Wal-Mart and Walgreen's,
Phar-Mor would have to implement many of these strategies in the near term and
at great cost, with little certainty that these strategies would ultimately
succeed. Moreover, it is likely that any benefits would only be realized after
a considerable passage of time, while many of Phar-Mor's larger competitors
would continue to challenge Phar-Mor's position in the marketplace. Phar-Mor's
management believes that the Combination provides the opportunity to create a
stronger, more competitive and more profitable company faster and with less
risk than if Phar-Mor were compelled to act unilaterally.
THE SHOPKO EXCHANGE
Pursuant to the ShopKo Exchange and subject to the terms of the Combination
Agreement, each ShopKo Share outstanding as of the Effective Date (other than
ShopKo Shares as to which dissenters' rights have been perfected), without any
further action on the part of ShopKo's shareholders, will be exchanged for 2.4
Cabot Noble Shares (and cash in lieu of any fractional share), subject to
adjustment to the extent that the value of the exchange consideration received
per ShopKo Share would otherwise fall outside a range of $17.25 to $18.00 (the
"ShopKo Exchange Ratio"), based upon the average closing price per Phar-Mor
Share for each Nasdaq-NMS trading day from January , 1997 through and
including , 1997 (the sixth trading day preceding the scheduled date of the
ShopKo Special Meeting) (the "Pricing Period") as reported for Nasdaq-NMS
national issues in The Wall Street Journal (the "Average Closing Price"). The
ShopKo Exchange is intended to constitute a tax-free exchange such that, among
other things, ShopKo shareholders will not recognize gain or loss upon the
receipt of Cabot Noble Shares in exchange for their ShopKo Shares. See "Certain
United States Federal Income Tax Consequences."
Annex E hereto illustrates how the ShopKo Exchange Ratio will be determined.
If the Average Closing Price is less than $7.186, the ShopKo Exchange Ratio
will equal the ratio which results in each ShopKo Share being exchanged for a
number of Cabot Noble Shares equal to $17.25 divided by the Average Closing
Price, unless Phar-Mor exercises its right to terminate the Combination
Agreement as set forth below. If the Average Closing Price is greater than
$7.50, the ShopKo Exchange Ratio will equal the ratio which results in each
ShopKo Share being exchanged for a number of Cabot Noble Shares equal to $18.00
divided by the Average Closing Price, unless ShopKo exercises its right to
terminate the Combination Agreement as set forth below. If the Average Closing
Price is less than $5.493 (which results in ShopKo Exchange Ratio greater than
3.14), the Phar-Mor Board would have the right to terminate the Combination
Agreement, unless ShopKo otherwise agrees that the ShopKo Exchange Ratio shall
be set at 3.140 (i.e. based on an Average Closing Price set at $5.494). If
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the Average Closing Price is greater than $9.501 (which results in a ShopKo
Exchange Ratio less than 1.895), the ShopKo Board would have the right to
terminate the Combination Agreement, unless Phar-Mor otherwise agrees that the
ShopKo Exchange Ratio shall be set at 1.895 (i.e. based on an Average Closing
Price set at $9.50).
Cabot Noble, ShopKo and Phar-Mor have established the following toll-free
telephone number (1 800 - ) to enable shareholders of ShopKo and Phar-Mor
to receive updated information regarding the calculation of the ShopKo Exchange
Ratio. Commencing , 1997 and ending on the day following the conclusion of
the Special Meetings, shareholders are encouraged to call such number to listen
to a recorded message indicating what the ShopKo Exchange Ratio would be as of
the date of such call, based on the average of the per share closing prices on
the Nasdaq-NMS of Phar-Mor Shares (as reported in The Wall Street Journal)
during the thirty-day period ending as of the day prior to such call or ,
1997, as appropriate. Because the Average Closing Price upon which the actual
ShopKo Exchange Ratio will be based cannot be determined definitively until the
close of trading on , 1997, callers to such toll-free telephone number
prior to , 1997 should bear in mind that fluctuations in the trading price
of Phar-Mor Shares during the thirty-day period ending , 1997, may cause
the actual ShopKo Exchange Ratio to vary from the hypothetical ShopKo Exchange
Ratio indicated on such recorded message prior to , 1997.
The closing price of Phar-Mor Shares in composite trading on January , 1997,
was $[ ] per share, as reported in The Wall Street Journal. If the Average
Closing Price had been calculated on the basis of the 30-day period ending
, it would have been $ (which would result in a ShopKo Exchange Ratio of
3.0). In the event the Average Closing Price is less than $5.493, Phar-Mor has
not determined whether it will exercise its right to terminate the Combination
Agreement, and the ShopKo Board has not made any determination whether, in the
event that Phar-Mor exercises its right to terminate, it will agree to set the
ShopKo Exchange Ratio at 3.140 pursuant to the Combination Agreement.
Conversely, in the event the Average Closing Price exceeds $9.501, ShopKo has
not determined whether it will exercise its right to terminate the Combination
Agreement, and the Phar-Mor Board has not made any determination whether, in
the event that ShopKo exercises its right to terminate, it will agree to set
the ShopKo Exchange Ratio at 1.895 pursuant to the Combination Agreement.
SHAREHOLDER APPROVAL WILL CONSTITUTE APPROVAL OF THE COMBINATION IF THE SHOPKO
EXCHANGE RATIO IS GREATER THAN 3.140 OR LESS THAN 1.895 AND THE COMBINATION
AGREEMENT IS NOT TERMINATED, SUBJECT TO THE FIDUCIARY OBLIGATIONS OF THE SHOPKO
AND PHAR-MOR BOARDS AND OTHER APPLICABLE LEGAL REQUIREMENTS.
THE PHAR-MOR EXCHANGE
Pursuant to the Phar-Mor Exchange and subject to the terms of the Combination
Agreement, each Phar-Mor Share outstanding as of the Effective Date, without
any further action on the part of Phar-Mor's shareholders, will be exchanged
for one Cabot Noble Share and each outstanding Phar-Mor Warrant will be
exchanged for a Cabot Noble Warrant to purchase a like number of Cabot Noble
Shares. Holders of Phar-Mor Shares or Phar-Mor Warrants will not be required to
exchange their Phar-Mor Share certificates or Phar-Mor Warrant certificates, as
the case may be, in connection with the Combination. See "The Transaction--
Terms of the Phar-Mor Plan." The Phar-Mor Exchange is intended to constitute a
tax-free exchange such that, among other things, Phar-Mor shareholders will not
recognize gain or loss upon the receipt of Cabot Noble Shares in exchange for
their Phar-Mor Shares. See "Certain United States Federal Income Tax
Consequences."
Cabot Noble, ShopKo and Phar-Mor have established the following toll-free
telephone number (1 800 - ) to enable shareholders of ShopKo and Phar-Mor
to receive updated information regarding the calculation of the ShopKo Exchange
Ratio. Commencing , 1997 and ending on the day following the conclusion of
the Special Meetings, shareholders are encouraged to call such number to listen
to a recorded message indicating what the ShopKo Exchange Ratio would be as of
the date of such call, based on the average of the per share closing prices on
the Nasdaq-NMS of Phar-Mor Shares (as reported in The Wall Street Journal)
during the thirty-day period ending as of the day prior to such call or ,
1997, as appropriate. Because the
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Average Closing Price upon which the actual ShopKo Exchange Ratio will be based
cannot be determined definitively until the close of trading on , 1997,
callers to such toll-free telephone number prior to , 1997 should bear in
mind that fluctuations in the trading price of Phar-Mor Shares during the
thirty-day period ending , 1997, may cause the actual ShopKo Exchange
Ratio to vary from the hypothetical ShopKo Exchange Ratio indicated on such
recorded message prior to , 1997.
The closing price of Phar-Mor Shares in composite trading on January , 1997,
was $[ ] per share, as reported in The Wall Street Journal. If the Average
Closing Price had been calculated on the basis of the 30-day period ending
, it would have been $ (which would result in a ShopKo Exchange Ratio of
3.0). In the event the Average Closing Price is less than $5.493, Phar-Mor has
not determined whether it will exercise its right to terminate the Combination
Agreement, and the ShopKo Board has not made any determination whether, in the
event that Phar-Mor exercises its right to terminate, it will agree to set the
ShopKo Exchange Ratio at 3.140 pursuant to the Combination Agreement.
Conversely, in the event the Average Closing Price exceeds $9.501, ShopKo has
not determined whether it will exercise its right to terminate the Combination
Agreement, and the Phar-Mor Board has not made any determination whether, in
the event that ShopKo exercises its right to terminate, it will agree to set
the ShopKo Exchange Ratio at 1.895 pursuant to the Combination Agreement.
SHAREHOLDER APPROVAL WILL CONSTITUTE APPROVAL OF THE COMBINATION IF THE SHOPKO
EXCHANGE RATIO IS GREATER THAN 3.140 OR LESS THAN 1.895 AND THE COMBINATION
AGREEMENT IS NOT TERMINATED, SUBJECT TO THE FIDUCIARY OBLIGATIONS OF THE SHOPKO
AND PHAR-MOR BOARDS AND OTHER APPLICABLE LEGAL REQUIREMENTS.
CASH IN LIEU OF FRACTIONAL CABOT NOBLE SHARES
No fractional Cabot Noble Shares will be issued in the Combination. Any
fractional Cabot Noble Shares resulting from the ShopKo Exchange will be
aggregated and, as soon after the Effective Date as practicable, sold on the
principal trading market for the Cabot Noble Shares. The proceeds from such
sale will be distributed pro rata among the shareholders that otherwise would
have received a fractional Cabot Noble Share in the Combination. See "The
Transaction--Fractional Share Interests."
CABOT NOBLE BUY BACK
Immediately following the consummation of the Combination, without any
further action by the shareholders of Cabot Noble, Phar-Mor or ShopKo, Cabot
Noble will purchase from supervalu, currently a 46% shareholder of ShopKo, 90%
of the Cabot Noble Shares received by supervalu in the ShopKo Exchange (the
"Buy Back Shares") for $223,594,526, payable in cash (the "Cabot Noble Buy
Back"). supervalu will have certain shelf and incidental registration rights
with respect to the Cabot Noble Shares that it retains. ShopKo and Phar-Mor
expect to have approximately $220 million in cash available on the Effective
Date to finance the Cabot Noble Buy Back. Cabot Noble intends to finance the
balance of the Cabot Noble Buy Back with proceeds from the "Cabot Noble
Financing," as defined below. See "--Financing." The closing of the Transaction
is conditioned upon Cabot Noble's ability to obtain financing of at least $75
million. See "The Transaction--Financing." ShopKo shareholders and Phar-Mor
shareholders are not being asked to approve the Cabot Noble Buy Back. However,
it is a condition to the completion of the Combination that no condition or
circumstance exists which would reasonably be expected to prevent or delay
consummation of the Cabot Noble Buy Back. See "The Transaction--Background of
the Transaction" and "--Cabot Noble Buy Back." The Cabot Noble Buy Back was
negotiated directly between supervalu and Phar-Mor over a period of several
months. The negotiations concerned price, the form of consideration, the timing
of receipt of consideration, and other related matters. In considering whether
or not to approve the Combination, which contemplates the Cabot Noble Buy Back,
the Boards of ShopKo, Phar-Mor and Cabot Noble were each held to the fiduciary
standards imposed by the states of incorporation of their respective companies.
See "The Transaction--Background of the Transaction." The Boards of ShopKo,
Phar-Mor and Cabot Noble have each approved the Combination, which contemplates
the Cabot Noble Buy Back.
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CONDITIONS OF THE TRANSACTION
The obligations of ShopKo and Phar-Mor to consummate the Combination are
subject to numerous conditions, including, among others: (i) obtaining
requisite approval of the Combination Agreement and the Phar-Mor Exchange
(collectively, the "Phar-Mor Plan") by Phar-Mor shareholders and the
Combination Agreement and the ShopKo Exchange (collectively, the "ShopKo Plan")
by ShopKo shareholders, (ii) the holders of not more than 5% of ShopKo Shares
shall have exercised their right under the Minnesota Business Corporation Act
(the "Minnesota Law") to dissent from the ShopKo Plan and to have their ShopKo
Shares appraised and to receive their fair value in cash rather than Cabot
Noble Shares, (iii) obtaining appropriate consents of lenders, debenture
holders and other third parties, (iv) receipt by Cabot Noble of a commitment or
reasonable assurances that it will obtain a minimum of $75 million in third-
party financing, and (v) receipt of certain solvency and tax opinions. Each of
Phar-Mor and ShopKo is currently attempting to refinance its working capital
facility, but there can be no assurance that such financing will be available
under terms acceptable to Phar-Mor and ShopKo, and in such case certain third-
party approvals necessary to effect the Transaction may not be forthcoming.
Such conditions may be waived under certain circumstances. See "The
Transaction--Conditions Precedent to the Transaction."
FINANCING
Cabot Noble, ShopKo and Phar-Mor have entered into negotiations with an agent
bank to provide up to $250 million of financing in the form of a syndicated
revolving credit facility (the "Cabot Noble Financing"). The Cabot Noble
Financing will be used for working capital and general corporate purposes, and
up to $75 million of such facility may be used to finance a portion of the
purchase price of the Cabot Noble Buy Back. See "The Transaction--Financing."
ShopKo and Phar-Mor expect to have approximately $220 million in cash available
on the Effective Date to finance the Cabot Noble Buy Back.
Currently, Phar-Mor has outstanding 11.72% Senior Notes due 2002 in the
aggregate principal amount of approximately $91.5 million (the "Phar-Mor Senior
Notes"). Although Phar-Mor believes that the Transaction does not entitle
holders of the Phar-Mor Senior Notes to cause Phar-Mor to offer to purchase
such instruments, concurrently with the solicitation of proxies hereby, Phar-
Mor is soliciting waivers from such holders of any right they may have to
compel Phar-Mor to offer to repurchase any Phar-Mor Senior Notes as a result of
any "change in control" resulting from the Transaction. Phar-Mor intends to
complete the solicitation of consents from holders of Phar-Mor Senior Notes
prior to or contemporaneously with the Special Meetings. Receipt of such
waivers is not a condition precedent to the Transaction. If (i) such waivers
are not received, (ii) it is determined that such holders have such a right,
and (iii) such holders exercise such right, Phar-Mor would be required to
repurchase the Phar-Mor Senior Notes at 101% of their principal amount plus
accrued interest to the date of repurchase. Phar-Mor and/or Cabot Noble may
need to obtain additional financing to repurchase the Phar-Mor Senior Notes but
have no current arrangements to obtain such financing. Although there can be no
assurance that either Phar-Mor or Cabot Noble would be able to arrange to
obtain such financing, management of Cabot Noble and Phar-Mor believe that
financing could be arranged by Phar-Mor and/or Cabot Noble to effect any such
repurchase of Phar-Mor Senior Notes, on terms favorable to Cabot Noble and
Phar-Mor, including through the issuance of other notes by Phar-Mor or Cabot
Noble.
EFFECTIVE DATE
The ShopKo Exchange and Phar-Mor Exchange will each become effective at such
time as the separate Articles of Exchange to be filed with the Secretary of
State of the State of Minnesota and the Articles of Exchange to be filed in the
Commonwealth of Pennsylvania Department of State, respectively, shall specify
(the "Effective Date"). Such filings are conditioned upon, among other things,
the approval of the ShopKo Plan and the Phar-Mor Plan by the shareholders of
ShopKo and Phar-Mor, respectively. The Effective Date is expected to occur
promptly after the Special Meetings if all other conditions precedent to the
Transaction are satisfied or waived. See "The Transaction."
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THE SPECIAL MEETINGS
GENERAL
At ShopKo's special meeting of shareholders, and at any adjournment thereof
(the "ShopKo Special Meeting"), holders of ShopKo Shares will be asked to adopt
and approve the ShopKo Plan, and at Phar-Mor's special meeting of shareholders,
and at any adjournment thereof (the "Phar-Mor Special Meeting" and,
collectively with the ShopKo Special Meeting, the "Special Meetings"), holders
of Phar-Mor Shares will be asked to adopt and approve the Phar-Mor Plan, each
as described in the Combination Agreement attached as Annex A hereto.
SHOPKO SPECIAL MEETING AND SHAREHOLDER APPROVAL
A Special Meeting of the shareholders of ShopKo will be held at ,
, on , 1997, at a.m., local time. Only holders of record of
ShopKo Shares at the close of business on , 1997 (the "ShopKo Record
Date") will be entitled to notice of and to vote at the ShopKo Special Meeting.
The presence of the holders of a majority of the ShopKo Shares outstanding as
of the ShopKo Record Date, either in person or by proxy, will constitute a
quorum for the purposes of the ShopKo Special Meeting. See "The Special
Meetings."
The affirmative vote of the holders of at least a majority of the outstanding
ShopKo Shares is required to approve and adopt the ShopKo Plan. At the ShopKo
Record Date, there were ShopKo Shares outstanding, each share entitling
its holder to one vote. As of the date of this Joint Proxy
Statement/Prospectus, supervalu has agreed to vote a number of its ShopKo
Shares equal to approximately 19.9% of the outstanding ShopKo Shares, and has
indicated its intention to vote all of its ShopKo Shares (approximately 46%),
in favor of approval and adoption of the ShopKo Plan. supervalu agreed to vote
19.9% of its outstanding ShopKo Shares in favor of the ShopKo Plan since an
agreement to vote 20% or more of such shares in favor of the ShopKo Plan may
have caused the other parties to the Voting Agreement to be subject to the
Minnesota Control Share Acquisition Act. See "The Transaction--Voting
Agreement." ShopKo directors, officers and other affiliates (other than
supervalu and the ShopKo Profit Sharing and Super Saver Plans) are entitled to
vote in the aggregate approximately 1.6% of the outstanding ShopKo Shares,
including, ShopKo Shares issuable pursuant to currently exercisable stock
options. ShopKo directors and executive officers entitled to vote outstanding
ShopKo Shares have indicated that they intend to vote all of their ShopKo
Shares in favor of the ShopKo Plan.
RECOMMENDATIONS OF SHOPKO BOARD AND FAIRNESS OPINION
The ShopKo Board, upon the recommendation of its special committee, has
approved the ShopKo Plan and the Combination Agreement and believes the
Transaction, including the ShopKo Exchange, to be in the best interests of
ShopKo shareholders and recommends a vote FOR approval and adoption of the
ShopKo Plan. In arriving at its determination, the ShopKo Board considered a
number of factors, including the opinion of Salomon Brothers Inc ("Salomon
Brothers"), the financial advisor to ShopKo, that as of the date of such
opinion the consideration to be received by the ShopKo Public Shareholders
pursuant to the Combination Agreement is fair to such holders from a financial
point of view. The written opinion of Salomon Brothers is reproduced in its
entirety as Annex B hereto and holders of ShopKo Shares are urged to read this
opinion carefully and in its entirety for a description of the procedures
followed, assumptions and qualifications made, and any limitations on the
review undertaken by Salomon Brothers. In arriving at its decision, the ShopKo
Board also considered the recommendation of the special committee of two
disinterested directors, Messrs. Eugster and Tyrell (the "ShopKo Special
Committee"), which the ShopKo Board appointed on July 26, 1996 to review a
possible business combination with Phar-Mor. During the course of the ensuing
negotiations, the financial and legal advisors to ShopKo consulted with and
took direction from the ShopKo Special Committee. The ShopKo Special Committee
has approved the Combination and recommended that the full ShopKo Board approve
the Combination. See "The Transaction--Background of the Transaction;" "--
Recommendations of ShopKo Board; Reasons for the Transaction;" and "--ShopKo
Fairness Opinion."
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PHAR-MOR SPECIAL MEETING AND SHAREHOLDER APPROVAL
A Special Meeting of the shareholders of Phar-Mor will be held at ,
, on , 1997, at a.m., local time. Only holders of record of Phar-
Mor Shares at the close of business on , 1997 (the "Phar-Mor Record Date")
will be entitled to notice of and to vote at the Phar-Mor Special Meeting. See
"The Special Meetings."
The affirmative vote of the holders of at least a majority of the Phar-Mor
Shares present in person or by proxy at the Phar-Mor Special Meeting at which a
quorum is present, and entitled to vote thereat, is required to approve and
adopt the Phar-Mor Plan. At the Phar-Mor Record Date, there were Phar-Mor
Shares outstanding, each entitling its holder to one vote. Except as discussed
below, the presence of the holders of at least a majority of the Phar-Mor
Shares outstanding on the Phar-Mor Record Date, whether present in person or by
properly executed and delivered proxy, will constitute a quorum for the
purposes of the Phar-Mor Special Meeting. Phar-Mor Shareholders are hereby
notified that, in the event the scheduled Phar-Mor Special Meeting is adjourned
for one or more periods aggregating more than 14 days because of the absence of
a quorum, any number of shareholders who attend the adjourned Phar-Mor Special
Meeting as described above, whether or not they represent less than a majority
of the outstanding Phar-Mor Shares, shall nevertheless constitute a quorum for
the purpose of acting on the matters identified in the Phar-Mor Notice of
Special Meeting of Shareholders accompanying this Joint Proxy
Statement/Prospectus. Therefore, the Phar-Mor Plan may be approved by a
majority of a quorum which, in certain circumstances, may constitute less than
a majority of the issued and outstanding Phar-Mor Shares. See "Risk Factors--
Reduced Quorum Requirement" and "The Special Meetings--Phar-Mor Record Date;
Quorum; Vote Required."
Robert Haft has agreed to use reasonable efforts to cause Hamilton Morgan,
L.L.C., a Delaware limited liability company ("Hamilton Morgan"), which as of
January 2, 1997 beneficially owns 4,704,033 (or 38.7%) of the outstanding Phar-
Mor Shares, to vote those shares in favor of approval and adoption of the Phar-
Mor Plan. Under the Amended and Restated Limited Liability Company Agreement of
Hamilton Morgan (the "Hamilton Morgan LLC Agreement"), the Phar-Mor Shares
beneficially owned by Hamilton Morgan may not be voted without the unanimous
consent of the members of Hamilton Morgan. As of January 2, 1997, Robert Haft
and his wife, Mary Z. Haft (the "Haft Members"), as tenants by the entirety,
owned 30.2% of the membership interests in Hamilton Morgan and FoxMeyer Health
Corporation, an affiliate of Phar-Mor ("FoxMeyer Health"), owned 69.8% of such
interests. Robert Haft is President of Hamilton Morgan. FoxMeyer Health has
indicated that it has not reached a conclusion as to its position on the
Transaction. Messrs. Abbey J. Butler and Melvyn J. Estrin, co-chairmen of the
board, co-chief executive officers and principal shareholders of FoxMeyer
Health, are directors of Phar-Mor.
FoxMeyer Health initiated the buy-sell provisions of the Hamilton Morgan LLC
Agreement on December 18, 1996, pursuant to which either FoxMeyer Health or the
Haft Members may acquire all of the membership interests in Hamilton Morgan. On
December 23, 1996, the Haft Members exercised their rights under the Hamilton
Morgan LLC Agreement to seek binding arbitration regarding certain areas of
disagreement between FoxMeyer Health and the Haft Members, including voting
rights with respect to the Phar-Mor Shares beneficially held by Hamilton Morgan
and certain matters relating to FoxMeyer Health's exercise of its buy-sell
rights. Phar-Mor is not able to determine what effect, if any, such matters
will have on the ability of Phar-Mor to consummate the Transaction. See "Risk
Factors--Hamilton Morgan Issues" and "Description of Phar-Mor--Security
Ownership of Certain Beneficial Owners and Management."
Phar-Mor directors, executive officers and affiliates (other than Hamilton
Morgan, FoxMeyer Health and Messrs. Haft, Butler and Estrin) are entitled to
vote in the aggregate approximately 3.6% of the outstanding Phar-Mor Shares.
All such Phar-Mor directors and executive officers have indicated that they
intend to vote their Phar-Mor Shares in favor of the Phar-Mor Plan.
9
<PAGE>
RECOMMENDATIONS OF PHAR-MOR BOARD AND FAIRNESS OPINION
The Phar-Mor Board has approved the Phar-Mor Plan and the Combination
Agreement and believes the Transaction, including the Phar-Mor Exchange, to be
in the best interests of Phar-Mor shareholders and recommends a vote FOR
approval and adoption of the Phar-Mor Plan. In arriving at its determination,
the Phar-Mor Board considered a number of factors, including the opinion of
Jefferies & Company, Inc. ("Jefferies"), the financial advisor to Phar-Mor, as
to the fairness of the consideration to be received by the holders of Phar-Mor
Shares in the Combination from a financial point of view as of the date of such
opinion. The written opinion of Jefferies is reproduced in its entirety as
Annex C hereto and holders of Phar-Mor Shares are urged to read this opinion
carefully and in its entirety for a description of the procedures followed,
assumptions and qualifications made, and any limitations on the review
undertaken by Jefferies. See "The Transaction--Background of the Transaction;"
"--Recommendations of Phar-Mor Board; Reasons for the Transaction;" "--Phar-Mor
Fairness Opinion."
INTERESTS OF MANAGEMENT
In considering the respective recommendations of the ShopKo Board and the
Phar-Mor Board, shareholders of ShopKo and Phar-Mor should be aware that
certain members of ShopKo's and Phar-Mor's management and their respective
Boards have interests in the Transaction that are in addition to the interests
of the shareholders of either ShopKo or Phar-Mor generally. On the Effective
Date, each of Dale P. Kramer, President and Chief Executive Officer of ShopKo,
William J. Podany, Executive Vice President and Chief Operating Officer of
ShopKo, and Jeffrey A. Jones, Senior Vice President and Chief Financial Officer
of ShopKo, will enter into Employment Agreements with ShopKo. In addition, Mr.
Kramer will be appointed to the Cabot Noble Board. Each of these ShopKo
executives also will receive nonqualified stock options pursuant to his
employment agreement. The stock options will permit each such ShopKo executive
to purchase a specified number of Cabot Noble Shares at a per share exercise
price equal to the fair market value of a Cabot Noble Share on the Effective
Date. Mr. Kramer's option is for 175,000 Cabot Noble Shares, and the options of
Messrs. Podany and Jones are each for 112,500 Cabot Noble Shares. On or before
the Effective Date, M. David Schwartz, the President and Chief Operating
Officer of Phar-Mor, and Daniel J. O'Leary, the Senior Vice President and Chief
Financial Officer of Phar-Mor, are expected to enter into two-year extensions
of their existing employment agreements with Phar-Mor. John R. Ficarro, Senior
Vice President, General Counsel and Secretary of Phar-Mor, will enter into a
two-year employment agreement with Phar-Mor. Mr. Ficarro and Warren E. Jeffrey,
Senior Vice President, Store and Pharmacy Operations of Phar-Mor, are
participants in a severance and retention plan providing for payment of 1.5
years of base salary if their loss of employment is due to the Combination or
their election not to relocate to Green Bay. In connection with the
Transaction, the Phar-Mor Board approved the grant of nonqualified options to
purchase up to 100,000 Cabot Noble Shares to each of Messrs. Schwartz and
O'Leary and options to purchase up to 50,000 Cabot Noble Shares to Mr. Ficarro.
Messrs. Schwartz, O'Leary and Ficarro have been guaranteed bonuses equal to
60%, 50% and 35%, respectively, of their respective base salaries for fiscal
year 1997, and Mr. Spear has been guaranteed a $115,000 bonus for fiscal year
1997.
Under Mr. Haft's employment agreement with Phar-Mor, the Combination
constitutes a "change in control" with respect to Phar-Mor, which entitles Mr.
Haft to terminate his employment with Phar-Mor and to consider such a
termination as "Without Cause", thereby giving rise to the right to receive
certain severance payments and other benefits. In addition, the exercise of the
buy-sell provision under the Hamilton Morgan LLC Agreement also entitles Mr.
Haft to terminate his employment and to consider such termination as "Without
Cause," thereby giving rise to such rights. Mr. Haft has indicated that he
anticipates continuing his employment following the Combination and that he
would like to work with the Cabot Noble Board to reach an agreement concerning
his role as Chairman and Chief Executive Officer of Cabot Noble. See "Risk
Factors--Dilution; Control of Cabot Noble," "--Interests of Management" and "--
Hamilton Morgan Issues," "Description of ShopKo--Severance Agreements,"
"Description of Phar-Mor--Security Ownership of Certain Beneficial Owners and
Management" and "--Employment Contracts and Termination of Employment and
Change-in-Control Arrangements" and "Certain Transactions."
10
<PAGE>
OTHER SIGNIFICANT CONSIDERATIONS
TRANSACTION COSTS
Anticipated non-recurring charges to Cabot Noble are estimated at between $31
million and $34 million. This includes transaction costs paid by Phar-Mor of
approximately $4.5 million and $500,000 related to investment banking fees and
legal, accounting and other transaction fees, respectively, and a termination
fee of up to $1 million associated with the intended termination by Phar-Mor of
its headquarters lease in Youngstown, Ohio in connection with the relocation of
Phar-Mor's corporate staff to Green Bay, Wisconsin. The total also includes
non-recurring costs paid by ShopKo of between $26 million and $29 million
related to employment costs, inventory reserves and the write-off of computer
equipment to be upgraded. See "Certain Forward-Looking Information."
DISSENTERS' RIGHTS
Holders of ShopKo Shares who dissent from the ShopKo Plan and follow certain
statutory procedures have the right under the Minnesota Law to demand payment
in cash for the fair value of their ShopKo Shares, calculated as of the day
prior to the Effective Date, in lieu of Cabot Noble Shares. See "The Special
Meetings-- Dissenters' Rights" and Annex D hereto which sets forth the text of
the applicable sections of the Minnesota Law. Holders of Phar-Mor Shares are
not entitled to dissenters' rights in connection with the Transaction.
EFFECT OF THE TRANSACTION; MANAGEMENT AND OPERATIONS OF CABOT NOBLE
Upon consummation of the Combination, ShopKo and Phar-Mor will become wholly
owned subsidiaries of Cabot Noble. The executive officers of ShopKo will remain
unchanged, but each current member of the ShopKo Board will be required to
resign effective as of the Effective Date. The executive officers of Phar-Mor
will remain unchanged and, from and after the Effective Date, Cabot Noble will
have exclusive authority to appoint the Phar-Mor Board and the ShopKo Board.
Certain officers of Phar-Mor and ShopKo will become officers of Cabot Noble at
the Effective Date. As of the Effective Date, the Cabot Noble Board will
consist of the (i) six current members of the Phar-Mor Board, (ii) an
additional independent director designated by the Phar-Mor Board with the
approval of the independent members of the ShopKo Board, (iii) Dale P. Kramer,
the chief executive officer of ShopKo, and (iv) two individuals, at least one
of whom will be an independent director, designated by the ShopKo Board and
approved by the independent members of the Phar-Mor Board. The Cabot Noble
Board will be classified into three classes of approximately equal size.
The Cabot Noble Board has established an advisory group (the "Chairman's
Council") consisting of executive officers of Cabot Noble, Phar-Mor and ShopKo
to provide informal, non-binding advice to the Cabot Noble Board and to the
Chairman of Cabot Noble, Robert M. Haft, and to perform such other functions as
the Cabot Noble Board and/or the Chairman of Cabot Noble shall determine from
time to time. The initial members appointed to the Chairman's Council are Dale
P. Kramer, William J. Podany and Jeffery A. Jones, current members of ShopKo
senior management, and Robert M. Haft, M. David Schwartz, Daniel J. O'Leary,
John R. Ficarro and Michael K. Spear, current members of Phar-Mor senior
management. See "Description of Cabot Noble--Directors and Executive Officers,"
"Description of ShopKo--Executive Officers of ShopKo" and "Description of Phar-
Mor--Directors and Executive Officers."
NYSE LISTING
Cabot Noble has applied for listing of the Cabot Noble Shares for trading on
the NYSE and for quotation of the Cabot Noble Warrants on the Nasdaq Small Cap
Market.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The obligations of ShopKo and Phar-Mor to consummate the Combination are
subject to the receipt by ShopKo and Phar-Mor of opinions of counsel to the
effect that each of the ShopKo Exchange and the Phar-Mor
11
<PAGE>
Exchange will be treated for federal income tax purposes as tax-free transfers
of property to Cabot Noble by the holders of Phar-Mor Shares and ShopKo Shares,
to the extent such holders receive Cabot Noble Shares in the Combination. See
"Certain United States Federal Income Tax Consequences."
TREATMENT OF OPTIONS AND WARRANTS
The Combination Agreement provides that all outstanding options and warrants
to purchase Phar-Mor Shares and ShopKo Shares will be converted at the
Effective Date into options or Cabot Noble Warrants, respectively, to purchase
Cabot Noble Shares, at the same aggregate exercise prices and on the same terms
and conditions as such outstanding options or warrants currently provide. Phar-
Mor currently has outstanding warrants to purchase a total of 1,250,000 Phar-
Mor Shares at an exercise price of $13.50 per share, which warrants will be
converted pursuant to the Phar-Mor Exchange into Cabot Noble Warrants to
purchase the same number of Cabot Noble Shares at the same exercise price per
share. Society National Bank, which serves as warrant agent for the Phar-Mor
warrants, will serve as the warrant agent for the Cabot Noble Warrants. Phar-
Mor currently has outstanding options to purchase a total of 1,358,617 Phar-Mor
Shares at exercise prices ranging from $7.06 to $8.00 per share. ShopKo
currently has outstanding options to purchase a total of 2,650,418 ShopKo
Shares at exercise prices ranging from $10.00 to $16.25 per share. The number
of Cabot Noble Shares issuable upon exercise of the converted options or
warrants will equal the number of shares presently issuable upon exercise of
such outstanding options or warrants multiplied by one, in the case of
converted outstanding Phar-Mor options and warrants, or the ShopKo Exchange
Ratio, in the case of converted outstanding ShopKo options. See "Description of
Cabot Noble--Stock Incentive Plan" and "Description of Capital Stock of Cabot
Noble--Warrants."
TERMINATION; BREAK-UP FEE
The Combination Agreement may be terminated and the Transaction may be
abandoned at any time prior to the Effective Date (notwithstanding any approval
of the ShopKo Plan or the Phar-Mor Plan by the shareholders of either of ShopKo
or Phar-Mor) (i) by mutual written consent of ShopKo and Phar-Mor; (ii) by
either ShopKo or Phar-Mor if the Combination has not been consummated by March
31, 1997; (iii) by Phar-Mor if the ShopKo Exchange Ratio is greater than 3.140,
unless ShopKo otherwise agrees that the ShopKo Exchange Ratio shall be set at
3.140; (iv) by ShopKo if the ShopKo Exchange Ratio is less than 1.895, unless
Phar-Mor otherwise agrees that the ShopKo Exchange Ratio shall be set at 1.895;
or (v) by either Phar-Mor and/or ShopKo upon the occurrence of certain other
conditions. See "The Transaction--Termination; Break-up Fee."
In the event of a termination of the Combination Agreement which does not
result from a material breach thereof by either ShopKo or Phar-Mor, each party
will bear its respective expenses and legal fees except for expenses, fees and
other costs incurred in connection with that portion of the Cabot Noble
Financing required to finance the Cabot Noble Buy Back, which costs shall be
borne 75% by ShopKo and 25% by Phar-Mor.
If the Combination Agreement is terminated because of a material breach
thereof by ShopKo or Phar-Mor, the party in breach shall reimburse the other
party for up to $500,000 of the expenses incurred by the other in connection
with the Transaction. In certain circumstances, including a potential business
combination with a third party, if the Combination Agreement is terminated,
Phar-Mor or ShopKo shall pay to the other a "break-up" fee of $3 million, if
paid by Phar-Mor, or $15 million, if paid by ShopKo, plus an amount equal to up
to $500,000 of expenses incurred in connection with the Transaction. See "The
Transaction--Termination; Break-up Fee."
12
<PAGE>
SELECTED HISTORICAL AND PRO FORMA UNAUDITED CONSOLIDATED FINANCIAL DATA
CABOT NOBLE SELECTED PRO FORMA UNAUDITED CONSOLIDATED FINANCIAL DATA
The following Cabot Noble selected pro forma consolidated financial data
presents the estimated effects of (i) the Combination and (ii) the Cabot Noble
Buy Back. The pro forma balance sheet data assumes that these events occurred
on November 2, 1996 and the pro forma income statement data assumes that these
events occurred on February 4, 1995. The summary pro forma consolidated
financial data should be read in conjunction with the Cabot Noble unaudited pro
forma condensed consolidated financial statements and accompanying notes,
together with the historical financial statements, including notes thereto, and
other financial information of Cabot Noble, ShopKo and Phar-Mor, including the
separate ShopKo and Phar-Mor "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Capitalization", included elsewhere
in this Joint Proxy Statement/Prospectus.
CABOT NOBLE SELECTED PRO FORMA UNAUDITED CONSOLIDATED FINANCIAL DATA
(In millions, except per share data)
<TABLE>
<CAPTION>
THIRTY-
NINE WEEKS
ENDED FIFTY-TWO WEEKS
NOVEMBER ENDED
2, 1996 FEBRUARY 3, 1996
---------- ----------------
<S> <C> <C>
Pro Forma Statement of Operations
Net sales......................................... $2,371.8 $3,019.7
Income from operations............................ 48.4 124.5
Net earnings...................................... 3.6 36.4
Earnings per share................................ 0.05 0.53
Weighted average number of common shares outstand-
ing.............................................. 68,551 68,385
<CAPTION>
AS OF
NOVEMBER
2, 1996
----------
<S> <C> <C>
Pro Forma Balance Sheet
Working capital................................... $ 128.3
Total assets...................................... 1,514.3
Long-term obligations............................. 556.4
Shareholders' equity.............................. 276.0
</TABLE>
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of ShopKo and its
subsidiaries and Phar-Mor and its subsidiaries, respectively, should be read in
conjunction with the consolidated financial statements, including the notes
thereto of ShopKo and Phar-Mor appearing elsewhere herein.
SHOPKO SELECTED CONSOLIDATED FINANCIAL DATA
(In millions, except share data)
<TABLE>
<CAPTION>
YEAR TO DATE FISCAL YEAR ENDED
------------------------ ----------------------------------------------------------------
(40 WEEKS) (40 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS) (53 WEEKS)
NOVEMBER 30, DECEMBER 2, FEBRUARY 24, FEBRUARY 25, FEBRUARY 26, FEBRUARY 27, FEBRUARY 29,
1996 1995 1996 1995 1994 1993 1992
------------ ----------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $1,701 $1,470 $1,968 $1,853 $1,739 $1,683 $1,648
Gross margin............ 391 370 501 488 453 457 452
Income from operations.. 59 56 97 91 74 100 98
Net earnings............ 21 17 38 38 32 50 50
Earnings per share...... .64 .54 1.20 1.18 1.00 1.56 1.55
Cash dividends declared
per share.............. .22 .33 .44 .44 .44 .44 .11
Weighted average number
of common shares
outstanding (000s)..... 32,073 32,005 32,005 32,014 32,001 32,000 32,000(1)
Working capital......... $ 220 $ 204 $ 215 $ 187 $ 119 $ 82 $ 79
Total assets............ 1,241 1,156 1,118 1,110 953 792 706
Long-term debt.......... 415 413 415 414 310 209 11
Shareholders' equity.... 436 404 422 397 374 355 320
</TABLE>
- --------
(1)Represents the total number of ShopKo Shares outstanding upon completion of
the initial public offering in October, 1991.
PHAR-MOR SELECTED CONSOLIDATED FINANCIAL DATA(1)
(In millions, except per share data)
<TABLE>
<CAPTION>
SUCCESSOR PHAR-MOR PREDECESSOR PHAR-MOR
------------------------------------ -----------------------------------------
13 WEEKS 4 WEEKS 43 WEEKS 9 WEEKS 52 WEEKS 53 WEEKS 39 WEEKS
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
SEPTEMBER 28, SEPTEMBER 30, JUNE 29, SEPTEMBER 2, JULY 1, JULY 2, JUNE 26,
1996 1995 1996 1995 1995 1994 1993
------------- ------------- -------- ------------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $264.5 $ 72.9 $874.3 $182.0 $1,412.7 $1,852.2 $1,434.3
Income (loss) from
continuing operations.. (2.2) 0.1 2.5 (10.4) (53.1) (142.8) (82.2)
Income (loss) per share
from continuing
operations............. (.18) .01 .21 (.19) (.98) (2.64) (1.52)
<CAPTION>
AS OF AS OF AS OF AS OF AS OF AS OF AS OF
SEPTEMBER 28, SEPTEMBER 30, JUNE 29, SEPTEMBER 2, JULY 1, JULY 2, JUNE 26,
1996 1995 1996 1995 1995 1994 1993
------------- ------------- -------- ------------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets............ $376.1 $384.8 $363.5 $390.2 $ 531.3 $ 680.1 $ 861.0
Long-term debt & capital
leases................. 147.3 156.0 149.2 151.0 -- -- --
Liabilities subject to
settlement............. -- -- -- -- 1,155.0 1,182.1 1,253.0
</TABLE>
- --------
(1) Phar-Mor emerged from bankruptcy in September 1995. In accordance with
fresh-start reporting, reorganization value was used to record the assets
and liabilities of Phar-Mor at September 2, 1995 (the "Fresh Start Date").
Accordingly, the selected consolidated financial data as of September 28,
1996, September 30, 1995, June 29, 1996 and September 2, 1995 and for the
13 weeks ended September 28, 1996, the 4 weeks ended September 30, 1995,
and the 43 weeks ended June 29, 1996, are not comparable in material
respects to such data for prior periods. Furthermore, Phar-Mor's results of
operations for periods prior to the Fresh Start Date are not necessarily
indicative of results of operations that may be achieved in the future.
14
<PAGE>
COMPARATIVE STOCK PRICES
The following table represents market price per share data for ShopKo and
Phar-Mor on September 6, 1996, the last trading day preceding the public
announcement of the proposed Transaction, and on January , 1997.
<TABLE>
<CAPTION>
HISTORICAL MARKET
VALUE PER SHARE EQUIVALENT MARKET
--------------------- VALUE PER SHOPKO
PHAR-MOR(1) SHOPKO(2) SHARE(3)
----------- --------- -----------------
<S> <C> <C> <C>
September 6, 1996....................... $8.125(4) $16.25 $18.00
January , 1997.........................
</TABLE>
- --------
(1) The market value of the Phar-Mor Shares is the closing sales price per
share quoted on the Nasdaq-NMS on the dates indicated.
(2) The market value of the ShopKo Shares is the closing sales price per share
as reported on the NYSE Composite Tape on the dates indicated.
(3) The equivalent market value per ShopKo Share represents the closing sales
price for Phar-Mor Shares on the dates indicated multiplied by the ShopKo
Exchange Ratio, assuming that the Average Closing Price equals the closing
sales price for Phar-Mor Shares on such dates.
(4) Represents the last sales price per share quoted on the Nasdaq-NMS on
September 5, 1996. No sales of Phar-Mor Shares occurred on the Nasdaq-NMS
on September 6, 1996 (the last trading day immediately preceding the public
announcement of the Transaction).
RECENT DEVELOPMENTS
SHOPKO--DECEMBER SALES
ShopKo consolidated sales for the five weeks ended January 4, 1997, increased
27.1% to $355.4 million from $279.6 million during the same period last year.
Consolidated comparable sales for December increased 26.2%. Consolidated
comparable sales are based upon those facilities (both store and non-store)
which were open for the entire preceding fiscal year. Comparable retail store
sales for December increased 14.8%. ShopKo's business is seasonal with a
substantial amount of its earnings falling in the third and fourth quarters.
CONSOLIDATED SALES SUMMARY (DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
5 WEEKS ENDED PERCENTAGE CHANGE
------------- ------------------
BUSINESS SEGMENTS 1/4/97 1/6/96 TOTAL COMP. STORES
----------------- ------ ------ ----- ------------
<S> <C> <C> <C> <C>
General Merchandise......................... 271.9 232.8 16.8 16.0
Health Services............................. 83.5 46.8 78.4 76.4
----- ----- ---- ----
Consolidated................................ 355.4 279.6 27.1 26.2
</TABLE>
15
<PAGE>
PHAR-MOR--DECEMBER SALES
COMPARABLE STORES SALES. Comparable store sales for the 13 weeks ended
December 28, 1996 increased 2.0% to $289.9 million from $284.3 million for the
same period last year. Comparable store sales are based on those stores (102)
which were open more than one year as of the beginning of the period. The
comparable stores increases (decreases) for the 13 week period, by product
category, were as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF INCREASE
(DECREASE) FOR THE 13 WEEKS
ENDED DECEMBER 28, 1996
COMPARED TO THE SAME
PERIOD LAST YEAR
---------------------------
<S> <C>
Drug Store:
Includes health & beauty care products,
cosmetics, greeting cards, seasonal goods and
other general merchandise..................... (0.8%) (a)
Consumables:
Includes grocery, snacks, beer, wine, tobacco
and soft drinks............................... 8.8%
Pharmacy:
Includes prescription drugs.................... 6.3%
Video, music and video rentals.................. (29.6%) (b)
Total........................................... 2.0%
</TABLE>
--------
(a) The decrease in the "Drug Store" category, compared to the
prior year, is a result of discontinuing approximately
9,700 slower moving items from the category.
(b) The decrease in comparable store sales for the "Video,
Music and Video Rentals" category is a result of Phar-Mor
changing its music business in the prior period from a
music department designed to compete with full assortment
music retailers to one offering limited assortment of
seasonal and promotional music merchandise. During the
comparable period of the prior year, Phar-Mor conducted its
clearance sales to facilitate this change.
TOTAL SALES AND NEW STORE. Total sales increased 2.3% for the thirteen weeks
ended December 28, 1996 compared to the same period last year. Phar-Mor opened
a new store in Oxford Valley, Pennsylvania (a Philadelphia, Pennsylvania
suburb) on December 1, 1996. This is the first new store opened by Phar-Mor
since September of 1992.
<TABLE>
<CAPTION>
FOR THE 13 WEEKS ENDED
---------------------------
(DOLLARS IN MILLIONS)
12/28/96 12/30/95 %INCREASE
-------- -------- ---------
<S> <C> <C> <C>
Comparable Stores................................ $289.9 $284.3 2.0%
New Stores....................................... 1.0 -0- N/M
------ ------ ----
$290.9 $284.3 2.3%
------ ------ ----
</TABLE>
- --------
N/M--Not meaningful
16
<PAGE>
RISK FACTORS
Before voting on the ShopKo Plan or the Phar-Mor Plan, holders of ShopKo
Shares and Phar-Mor Shares should carefully read this entire Joint Proxy
Statement/Prospectus and the Annexes hereto and should give particular
attention to the following considerations.
COMPETITION
The discount retail merchandise business generally, and the discount retail
drugstore business in particular, are highly competitive and subject to excess
capacity. Certain competitors of ShopKo and Phar-Mor are much larger than
Cabot Noble and have substantially greater resources than ShopKo and Phar-Mor.
The competition for customers has intensified in recent years as larger
competitors, such as Wal-Mart, Kmart, Target and Walgreen's, have moved into
ShopKo's and/or Phar-Mor's geographic markets. In addition, recent stores
opened by ShopKo have had less success as a result of competitive pressures
from larger national retail chains and the difficulty in attracting a
sufficient customer base in new market areas. Although ShopKo has performed
well notwithstanding this intensified competition, and management of Cabot
Noble believes that the Transaction will give both ShopKo and Phar-Mor the
ability to compete more effectively in the market for discount merchandise and
prescription sales, there is no assurance that either ShopKo or Phar-Mor will
be able to compete successfully.
The prescription benefit management industry is dynamic, growing and very
competitive. ProVantage competes for health services clients with a number of
prescription benefit management companies including PCS Health Systems, Inc.
(a subsidiary of Eli Lilly and Co.), Merck-Medco Managed Care, Inc. (a
subsidiary of Merck & Co., Inc.), Express Scripts, Inc., Caremark
International, Inc. (a subsidiary of Med Partners, Inc.), TDI, Inc. (a
subsidiary of Thrift Drug Company, Inc.), Value RX (a subsidiary of Value
Health, Inc.), and Diversified Pharmaceutical Services, Inc. (a subsidiary of
SmithKline Beecham), many of which are substantially larger than ProVantage
and each of which has considerable resources.
LIMITED OPERATING HISTORY OF REORGANIZED PHAR-MOR
Phar-Mor emerged from bankruptcy in September 1995 and, therefore, had a
limited history of operations as a reorganized company. Since that time, Phar-
Mor's management has implemented a number of new operational strategies, many
of which only recently have begun to have an impact on Phar-Mor's results of
operations. For the fiscal year ended June 29, 1996, Phar-Mor reported
revenues of approximately $1.1 billion, with pro forma net income of
approximately $3.3 million, or $0.27 per Phar-Mor Share. Phar-Mor incurred a
net loss for the quarter ended June 29, 1996 of $2.7 million or $0.22 per
Phar-Mor Share. For the thirteen weeks ended September 28, 1996, Phar-Mor
reported revenues of $265 million, with a net loss of $2.2 million or $0.18
per Phar-Mor Share. There is no assurance that Phar-Mor will be profitable or
generate earnings.
COMBINATION OF RETAIL OPERATIONS; REALIZATION OF SYNERGIES
The management of ShopKo and Phar-Mor each believes that Cabot Noble will be
able to integrate the geographically and operationally diverse businesses of
ShopKo and Phar-Mor in a beneficial and profitable manner. However, the
operations and management of ShopKo and Phar-Mor are different, and Cabot
Noble may incur costs or encounter other challenges not currently anticipated
which may negatively affect its prospects. In addition, there can be no
assurance that Cabot Noble will realize in whole or in part the anticipated
synergies reflected in the pro forma financial statements or the "Certain
Forward-Looking Information" or "Cabot Noble Business Strategy" sections.
LEVERAGE
Phar-Mor and ShopKo have incurred a significant amount of debt in connection
with the remodeling of Phar-Mor and ShopKo stores, construction of new ShopKo
stores, and operation of their respective businesses. In connection with the
Transaction, Cabot Noble intends to partially fund the purchase price of the
Cabot Noble Buy Back through the Cabot Noble Financing. Such arrangements, and
certain other obligations of Cabot Noble
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and its subsidiaries, as they are expected to exist after consummation of the
Transaction, are described in "The Transaction--Financing." The degree to
which ShopKo and Phar-Mor are leveraged could have adverse effects on Cabot
Noble, including the following: (i) the ability of Cabot Noble to obtain
additional financing may be impaired, (ii) a substantial portion of cash flow
from operations must be dedicated to the payment of the principal of and
interest on debt, (iii) the existing indebtedness of Phar-Mor restricts the
distribution of dividends to shareholders, including Cabot Noble after the
Combination, and (iv) the leverage may make Cabot Noble more vulnerable to
economic downturns and may limit its ability to withstand competitive
pressures and any adverse changes in government regulation. Phar-Mor and
ShopKo are currently attempting to refinance their working capital facilities,
but there can be no assurance that such financing will be available on terms
acceptable to Cabot Noble, Phar-Mor and ShopKo, and in such case the necessary
approvals of the Transaction may not be forthcoming. See "ShopKo Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources," "Phar-Mor Management's Discussion and
Analysis of Financial Condition and Results of Operations--Financial Condition
and Liquidity," and "The Transaction--Financing."
INTERESTS OF MANAGEMENT
In considering the recommendations of the ShopKo Board and the Phar-Mor
Board with respect to the Combination, shareholders of ShopKo and Phar-Mor
should be aware that certain members of ShopKo's and Phar-Mor's management and
their respective Boards, including individuals who are or will be directors
and executive officers of Cabot Noble, have certain interests in the
Transaction in addition to the interests of ShopKo and Phar-Mor shareholders
generally. In addition, certain members of ShopKo's and Phar-Mor's management
and their respective Boards are, or as of the Effective Date will be, the
directors and/or executive officers of Cabot Noble. See "Description of Cabot
Noble--Directors and Executive Officers." For a discussion of certain matters
relating to the employment and compensation of the directors and executive
officers of ShopKo and Phar-Mor who will become officers and/or directors of
Cabot Noble, see "Description of Cabot Noble--Management Compensation,"
"Description of Cabot Noble--Employment Contracts" and "Certain Transactions."
TRADING MARKET FOR CABOT NOBLE SHARES
The Combination Agreement provides that Cabot Noble shall take such actions
as may be required to permit Cabot Noble Shares to be authorized for trading
on the NYSE or, if listing on the NYSE is unattainable, on the Nasdaq-NMS,
immediately after the Effective Date. There is no assurance, however, that
Cabot Noble Shares will be so authorized or traded. The ShopKo Shares are
currently listed and traded on the NYSE, and the Phar-Mor Shares are currently
listed and traded on the Nasdaq-NMS. Accordingly, Cabot Noble expects that
there will be a reasonable trading market in Cabot Noble Shares, but there can
be no assurance that such a market will develop or be sustained. After the
Effective Date, the market price of Cabot Noble Shares could be subject to
significant fluctuations in response to various factors and events, including
the depth and liquidity of the market for Cabot Noble Shares, variations in
Cabot Noble's operating results, litigation, or new statutes or regulations,
or changes in the interpretations of existing statutes and regulations,
affecting the retail discount drugstore, general merchandise and health
services industries.
HOLDING COMPANY STRUCTURE; RELIANCE ON SUBSIDIARIES FOR DIVIDENDS
Cabot Noble will be a holding company, the principal assets of which will be
its subsidiaries, ShopKo and Phar-Mor. As a holding company, Cabot Noble's
internal sources of funds to meet its cash needs, including payment of
expenses, are dividends and other permitted payments from its direct and
indirect subsidiaries, as well as its own credit arrangements. The ability of
Cabot Noble's operating subsidiaries to pay dividends or make other payments
to Cabot Noble is expected to be restricted by the terms of various credit
arrangements entered into by such operating subsidiaries, as well as statutory
and other legal restrictions, and such payments would restrict Cabot Noble's
ability to utilize cash flow from one subsidiary to satisfy working capital
needs of another subsidiary and could otherwise have a material adverse effect
upon Cabot Noble's business, financial condition and results of operations.
See "--Dividends."
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DIVIDENDS
While Cabot Noble may, in the future, determine to pay dividends, it is
expected that, for the foreseeable future, Cabot Noble will retain all future
earnings, if any, for the growth and expansion of its business and not declare
or pay dividends. The declaration and payment of future dividends on Cabot
Noble Shares depends upon the income, financial condition and capital and cash
requirements of Cabot Noble, restrictions on dividends under applicable law
and imposed by existing and future credit facilities and other borrowings,
including the Cabot Noble Financing. Accordingly, there can be no assurance
that dividends on Cabot Noble Shares will be declared or paid in the future
nor any assurances as to amounts or timing of any such dividends. Thus,
holders of the ShopKo Shares will, as a result of the Combination, exchange
their investments in securities that have been paying, or may be able to pay,
cash dividends for an investment in securities with respect to which no
dividends or other distributions are anticipated. ShopKo has agreed not to
declare or pay any cash dividends on the ShopKo Shares following the cash
dividend of $0.11 per ShopKo Share paid on September 15, 1996. At the present
time, covenants governing the existing indebtedness of Phar-Mor restrict the
payment of dividends on Phar-Mor Shares. Following the consummation of the
Transaction, such covenants would continue to restrict Phar-Mor's ability to
pay dividends to Cabot Noble which, in turn, may affect the amount of
dividends which Cabot Noble could pay to its shareholders. See "Description of
Capital Stock of Cabot Noble," "Market Price and Dividend Data" and "The
Transaction--Financing."
DILUTION; CONTROL OF CABOT NOBLE
Immediately following the consummation of the Transaction, Cabot Noble's
officers and directors and their affiliates will beneficially own in the
aggregate approximately 7.4% of the outstanding Cabot Noble Shares, excluding
Cabot Noble Shares subject to options that will be granted upon consummation
of the Transaction as described in "Description of Cabot Noble--Stock
Incentive Plan" and "Description of Cabot Noble--Director Stock Plan."
Pursuant to the employment agreements described below in "Certain
Transactions," Messrs. Kramer, Podany, and Jones will receive nonqualified
stock options which will permit such individuals to purchase a specified
number of Cabot Noble Shares at a per share exercise price equal to the fair
market value of a Cabot Noble Share on the Effective Date. Mr. Kramer's option
is for 175,000 Cabot Noble Shares, and the options of each of Messrs. Podany
and Jones are for 112,500 Cabot Noble Shares. Each of the options will vest in
one-third increments on each of the first, second and third anniversaries of
the option grant, unless the individual is terminated without cause or leaves
ShopKo's employ for Good Reason (as defined in the employment agreements), in
which case the relevant option would vest immediately. Cabot Noble also
intends to grant on the Effective Date non-qualified options to purchase up to
100,000 Cabot Noble Shares to each of Messrs. Schwartz and O'Leary and non-
qualified options to purchase 50,000 Cabot Noble Shares to Mr. Ficarro.
Additionally, Cabot Noble intends to grant options to purchase approximately
1,000,000 Cabot Noble Shares to its executives and managers pursuant to the
Stock Incentive Plan described below (see "Description of Cabot Noble--Stock
Incentive Plan"), in addition to the Cabot Noble options which will be
outstanding at the Effective Date upon conversion of existing ShopKo and Phar-
Mor options. The Cabot Noble options will entitle their holders to acquire a
number of Cabot Noble Shares equal in the aggregate to approximately 12.7% of
the Cabot Noble Shares which will be outstanding following the Cabot Noble Buy
Back. Currently outstanding ShopKo options and Phar-Mor options entitle their
holders to acquire up to 8.2% and 2.4% of the currently outstanding ShopKo
Shares and Phar-Mor Shares, respectively.
Upon consummation of the Transaction, the former ShopKo Public Shareholders
will own approximately 75.9%, supervalu will own approximately 6.4%, and
former Phar-Mor shareholders will own approximately 17.7% of the outstanding
Cabot Noble Shares. See Annex E.
supervalu and Cabot Noble's officers and directors may be able to influence
the outcome of stockholder votes on various matters, including the election of
directors, extraordinary corporate transactions and certain business
combinations.
Upon consummation of the Transaction, Cabot Noble's Restated Certificate of
Incorporation, a copy of which is attached as Annex F (the "Cabot Noble
Certificate") will authorize the issuance of 50,000,000 shares of preferred
stock. The Cabot Noble Board has authority, without shareholder approval, to
issue shares of
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preferred stock in one or more series and to determine the number of shares,
designations, dividend rights, conversion rights, voting power, redemption
rights, liquidation preferences and other terms of each such series. See
"Description of Capital Stock of Cabot Noble."
Any of the above matters may result in substantial dilution of the Cabot
Noble equity attributable to Cabot Noble Shares outstanding at the Effective
Date.
RESALE OF CABOT NOBLE SHARES
All Cabot Noble Shares received by ShopKo and Phar-Mor shareholders in the
Transaction will be freely transferable, except that Cabot Noble Shares
received by ShopKo or Phar-Mor shareholders who are deemed to be "affiliates"
of ShopKo or Phar-Mor prior to the Transaction may be resold by them only in
transactions permitted by the resale provisions and volume limitations of
Securities Act Rule 145 (or Securities Act Rule 144 in the case of such
persons who become affiliates of Cabot Noble) or as otherwise permitted under
the Securities Act. supervalu, Hamilton Morgan, FoxMeyer Health and Robert
Haft will have certain registration rights with respect to their Cabot Noble
Shares. See "The Transaction-- Cabot Noble Buy Back."
MARKET PRICE OF CABOT NOBLE SHARES
No assurance can be given that the aggregate market value of the Cabot Noble
Shares outstanding after consummation of the Transaction will equal or exceed
the aggregate market value of the Phar-Mor Shares plus the aggregate market
value of the ShopKo Shares. Following consummation of the Transaction, the
market price of Cabot Noble Shares may be subject to significant fluctuations
in response to various factors and events, including the depth and liquidity
of the market for Cabot Noble Shares, variations in Cabot Noble's operating
results, litigation, market-wide fluctuations, new statutes or regulations, or
changes in the interpretation of existing statutes and regulations affecting
the retail discount drugstore, general merchandise and health care services
industry.
After consummation of the Transaction, a large number of Cabot Noble Shares
may be offered for sale in a short period of time for various reasons,
including the increased liquidity that the Transaction may afford to the
holders of Cabot Noble Shares and Cabot Noble Warrants. Any initial selling
pressure might tend to depress the market price of the Cabot Noble Shares.
There is no substantial basis for predicting whether or not the Cabot Noble
Shares will trade below book value per share. On January , 1997, the Phar-Mor
Stock closing price on the Nasdaq--NMS was $ per share. On January , 1997,
the ShopKo Share closing price on the NYSE was $ per share.
DEPENDENCE ON KEY PERSONNEL
Cabot Noble will be dependent upon the continued services and management
experience of ShopKo's and Phar-Mor's executive officers, including Robert
Haft, Chairman and Chief Executive Officer of Cabot Noble and Phar-Mor and
Dale Kramer, Chief Executive Officer of ShopKo. Under Mr. Haft's existing
employment agreement with Phar-Mor, the Combination constitutes a "change in
control" with respect to Phar-Mor, which entitles Mr. Haft to terminate his
employment with Phar-Mor and to consider such a termination as "Without
Cause", thereby entitling Mr. Haft to certain severance payments and other
rights. In addition, the exercise of the buy-sell provision under the Hamilton
Morgan LLC Agreement also entitles Mr. Haft to terminate such agreement, to
consider such termination as "without cause" and to receive such severance
compensation and other benefits. Mr. Haft has indicated that he anticipates
continuing his employment following the Combination and that he would like to
work with the Cabot Noble Board to reach an agreement concerning his role as
Chairman and Chief Executive Officer of Cabot Noble. See "Description of Phar-
Mor--Employment Contracts and Termination of Employment and Change-in-Control
Arrangements" and "Certain Transactions--ShopKo Employment Agreements--
Executive Officers." If any of such executive officers leave Cabot Noble,
Cabot Noble's operating results could be affected adversely. Cabot Noble's
success depends on its ability to hire and retain skilled employees,
particularly in administration, purchasing and marketing, and the failure to
do so could adversely affect Cabot Noble's potential for growth.
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REDUCED QUORUM REQUIREMENT
Generally, the presence of the holders of at least a majority of the Phar-
Mor Shares outstanding on the Phar-Mor Record Date, whether present in person
or by properly executed and delivered proxy, will constitute a quorum for the
purposes of the Phar-Mor Special Meeting. However, in certain limited
circumstances, Pennsylvania law (as well as the Phar-Mor Bylaws) provides that
any number of shareholders that attend a meeting will constitute a quorum for
the purposes of shareholder action. Section 1756(b)(2) of the Pennsylvania
Business Corporation Law (the "Pennsylvania Law") provides that those Phar-Mor
shareholders entitled to vote who attend a meeting of shareholders that has
been previously adjourned for one or more periods aggregating more than 14
days because of the absence of a quorum, although representing less than a
majority of the outstanding Phar-Mor Shares, shall nevertheless constitute a
quorum for the purpose of acting upon any matter set forth in the notice of
the meeting if the notice states that those shareholders who attend the
adjourned meeting shall nevertheless constitute a quorum for the purpose of
acting upon the matter. The Phar-Mor shareholders' notice includes such a
statement, in boldface type, notifying the shareholders of the possibility of
such an adjournment and that the Phar-Mor Plan may, therefore, be approved by
a majority of a quorum which constitutes less than a majority of the
outstanding Phar-Mor Shares. No further notice to Phar-Mor shareholders is
required in connection with any adjournment of the Phar-Mor Special Meeting,
other than by announcement at the meeting at which the adjournment is taken,
unless the Phar-Mor Board fixes a new record date for the adjourned meeting.
PHAR-MOR SHAREHOLDERS SHOULD, THEREFORE, BE AWARE THAT IN THE EVENT THE PHAR-
MOR SPECIAL MEETING AS SCHEDULED IS ADJOURNED FOR ONE OR MORE PERIODS
AGGREGATING MORE THAN 14 DAYS BECAUSE OF THE ABSENCE OF A QUORUM, ANY NUMBER
OF SHAREHOLDERS WHO ATTEND THE ADJOURNED PHAR-MOR SPECIAL MEETING AS DESCRIBED
ABOVE, WHETHER OR NOT THEY REPRESENT LESS THAN A MAJORITY OF THE OUTSTANDING
PHAR-MOR SHARES, SHALL NEVERTHELESS CONSTITUTE A QUORUM FOR THE PURPOSE OF
ACTING ON THE MATTERS IDENTIFIED IN THE PHAR-MOR NOTICE OF SPECIAL MEETING OF
SHAREHOLDERS ACCOMPANYING THIS JOINT PROXY STATEMENT/PROSPECTUS. IN OTHER
WORDS, UNDER SUCH CIRCUMSTANCES THERE IS NO MINIMUM NUMBER OF PHAR-MOR
SHAREHOLDERS NECESSARY TO REPRESENT A QUORUM AT THE ADJOURNED PHAR-MOR SPECIAL
MEETING. THEREFORE, THE PHAR-MOR PLAN MAY, PURSUANT TO THE PENNSYLVANIA LAW
AND PHAR-MOR'S BYLAWS, BE APPROVED BY A MAJORITY OF A QUORUM WHICH, IN CERTAIN
CIRCUMSTANCES, MAY CONSTITUTE LESS THAN A MAJORITY OF THE ISSUED AND
OUTSTANDING PHAR-MOR SHARES.
Because typically some percentage of the shares entitled to vote at a
meeting of shareholders do not vote and approval of the Phar-Mor Plan requires
the affirmative vote of a majority of votes cast, Phar-Mor Shares representing
less than a majority of the outstanding voting power will likely be sufficient
to approve the Transaction. See "--Hamilton Morgan Issues" and "Description of
Phar-Mor--Security Ownership of Certain Beneficial Owners and Management."
NO APPRAISAL RIGHTS FOR HOLDERS OF PHAR-MOR SHARES; SHOPKO DISSENTERS' RIGHTS
The holders of Phar-Mor Shares who do not vote for approval and adoption of
the Phar-Mor Plan will have no appraisal, dissenters' or similar rights if the
Combination is approved and the Transaction is consummated. See "The Special
Meetings--Dissenters' Rights." Holders of ShopKo Shares have dissenters'
rights as described in "The Special Meetings--Dissenters' Rights" and Annex D
hereto.
ANTI-TAKEOVER PROVISIONS
The Cabot Noble Certificate and/or the Cabot Noble Bylaws will contain
several procedures and provisions designed to reduce the likelihood of a
change in the management or voting control of Cabot Noble without the consent
of the then incumbent members of the Cabot Noble Board, including the ability
of the Cabot Noble Board to issue classes or series of preferred stock and the
adoption of a stockholder rights plan. In addition, the Cabot Noble
Certificate and/or the Cabot Noble Bylaws (i) provide for a classified Board
of Directors serving staggered three-year terms, (ii) impose restrictions on
who may call a special meeting of stockholders, (iii) include a requirement
that stockholder action may not be taken by written consent and (iv) specify
certain advance notice requirements for stockholder nominations of candidates
for election to the Cabot Noble Board and certain other stockholder proposals.
In addition, the Cabot Noble Board, without further action by the
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stockholders of Cabot Noble, may cause Cabot Noble to issue up to 50,000,000
shares of preferred stock on such terms and with such rights, preferences and
designations as the Cabot Noble Board may determine. These provisions may be
deemed to have an anti-takeover effect and may delay, defer, or prevent a
tender offer or takeover attempt that a stockholder might consider to be in
that stockholder's best interests, including attempts that might result in a
premium over the market price for the shares held by stockholders.
In addition, Cabot Noble is governed by Section 203 of the Delaware General
Corporation Law (the "Delaware Law"), which prohibits business combinations
between Cabot Noble and any interested stockholder of Cabot Noble for a period
of three years following the date on which such stockholder became an owner of
15% or more of the outstanding voting stock of Cabot Noble, unless certain
statutory exceptions are satisfied. Section 203 of the Delaware Law may also
have the effect of discouraging non-negotiated takeover attempts.
For a discussion of documents and provisions with potential anti-takeover
effects, see "Comparison of Rights of Phar-Mor and ShopKo Shareholders and
Cabot Noble Stockholders."
LITIGATION AND INSURANCE
The sale of retail merchandise and provision of health services entails an
inherent risk of liability. Both Phar-Mor and ShopKo are currently subject to
a number of lawsuits, and it is expected that Cabot Noble from time to time
will be subject to similar suits in the ordinary course of business. Phar-Mor,
ShopKo and Cabot Noble each currently maintain insurance intended to cover
such claims, and management of each believes that its respective insurance
programs are adequate. There can be no assurance, however, that claims in
excess of insurance coverage or claims not covered by insurance coverage will
not arise. There can be no assurance that Phar-Mor, ShopKo and Cabot Noble
will be able to obtain insurance coverage in the future on acceptable terms,
if at all. A successful claim against any of them substantially in excess of
its insurance coverage, or for claims which are not covered by such insurance,
could have a material adverse effect on its financial condition and results of
operations. In addition, claims against any of the companies, regardless of
merit or eventual outcome, may have a material adverse effect upon their
reputations and businesses. See "--Hamilton Morgan Issues," "Description of
Phar-Mor--Legal Proceedings" and "Description of ShopKo--Legal Proceedings."
HAMILTON MORGAN ISSUES
As of January 2, 1997, Hamilton Morgan owns directly 3,750,000 Phar-Mor
Shares representing 30.8% of the issued and outstanding Phar-Mor Shares.
Hamilton Morgan has also been granted proxies with respect to an additional
1,158,435 Phar-Mor Shares, pursuant to which Hamilton Morgan has sole voting
power. Pursuant to the terms of the Hamilton Morgan LLC Agreement, all of
Hamilton Morgan's Phar-Mor Shares may be voted only with the unanimous consent
of Hamilton Morgan's members. Accordingly, each of FoxMeyer Health and the
Haft Members have shared voting power with respect to all such Phar-Mor
Shares. FoxMeyer Health has indicated that it has not yet reached a conclusion
as to its position on the Transaction.
In connection with the purchase by Hamilton Morgan of such 3,750,000 Phar-
Mor Shares, FoxMeyer Health entered into a financing agreement with Credit
Lyonnais New York Branch ("Credit Lyonnais") pursuant to which Hamilton Morgan
pledged 2,617,500 Phar-Mor Shares as collateral (the "Credit Lyonnais
Pledge"). In the event of a default under the Credit Lyonnais Pledge, Credit
Lyonnais may acquire such Phar-Mor Shares by foreclosing on its collateral. In
addition, in the event that the foregoing pledge by Hamilton Morgan is void
for any reason, Credit Lyonnais may enforce a lien on FoxMeyer Health's
membership interest in Hamilton Morgan.
Phar-Mor has been informed that on December 23, 1996, the Haft Members
exercised their rights under the Hamilton Morgan LLC Agreement to seek binding
arbitration regarding certain areas of disagreement between the Haft Members
and FoxMeyer Health, including voting rights with respect to the Phar-Mor
Shares beneficially held by Hamilton Morgan and certain matters related to
FoxMeyer Health's exercise of its buy-sell rights, as discussed below.
Pursuant to the Hamilton Morgan LLC Agreement, upon an event of default under
the Credit Lyonnais Pledge and until closing on any disposition of the Phar-
Mor Shares pledged thereunder, if any, the President of Hamilton Morgan shall
have the exclusive power and authority, exercisable in his sole and absolute
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discretion, to exercise all voting rights arising in connection with all of
the Phar-Mor Shares beneficially held by Hamilton Morgan, including
specifically all Phar-Mor Shares pledged to Credit Lyonnais. FoxMeyer Health's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, stated
that it had violated certain covenants under the Credit Lyonnais Pledge, which
violations Credit Lyonnais had temporarily waived. With regard to voting
rights, the Haft Members have asserted that an event of default occurred under
the Credit Lyonnais Pledge, thereby giving Robert Haft, as President of
Hamilton Morgan, sole discretion to exercise all voting rights associated with
the Phar-Mor Shares beneficially held by Hamilton Morgan.
By a letter dated January 3, 1997, FoxMeyer Health has taken the position
that: (i) consummation of the Phar-Mor Exchange will result in a termination
of Hamilton Morgan and (ii) due to certain conflicts of interest which
FoxMeyer Health asserts the Combination creates for Mr. Haft, the Haft Members
should vote the Phar-Mor Shares beneficially owned by Hamilton Morgan as
directed by FoxMeyer Health. The Haft Members disagree with such positions.
Phar-Mor has been informed that on December 18, 1996 FoxMeyer Health
exercised its buy-sell rights under the Hamilton Morgan LLC Agreement.
Pursuant to the Hamilton Morgan LLC Agreement, from and after May 1, 1996,
either FoxMeyer Health, on the one hand, or the Haft Members, on the other
hand, may offer to buy from, and sell to, the other its membership interest in
Hamilton Morgan. Pursuant to the agreement, FoxMeyer Health has offered to
sell its Hamilton Morgan membership interests to the Haft Members, or to
purchase the Haft Members' membership interests in Hamilton Morgan. The buy-
sell price offered by FoxMeyer Health implies a total valuation for Hamilton
Morgan of $33,750,000.
The Haft Members' arbitration request asserts, among other matters, that
FoxMeyer Health's interpretation of the buy-sell is not in accordance with the
Hamilton Morgan LLC Agreement and therefore should be decided by binding
arbitration. Under the terms of the Hamilton Morgan LLC Agreement, the Haft
Members have a period of 90 days to consider the offers. The Haft Members have
requested that the arbitrator toll such 90 day period pending the arbitrator's
resolution of matters relating to the buy-sell offers. Closing under the buy-
sell is contemplated to occur within 30 days after the Haft Members'
acceptance or rejection of the offers. Upon the occurrence of such a sale or
purchase, the purchasing member would obtain sole voting power over the
3,750,000 Phar-Mor Shares held by Hamilton Morgan. However, in the event of
such a sale or purchase, the proxies granted by FoxMeyer Health and the Haft
Members to Hamilton Morgan with respect to the Proxy Shares would terminate,
and sole voting power with respect to such Phar-Mor Shares would revert to the
grantor of the proxy. Phar-Mor is not able to determine what effect, if any,
the events discussed above will have on the ability of Phar-Mor to consummate
the transaction. See "Risk Factors--Reduced Quorum Requirement."
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CABOT NOBLE BUSINESS STRATEGY
The following summary of the business strategy of Cabot Noble was developed
jointly by the current management of Phar-Mor and ShopKo, including the
members of the Chairman's Council. See "Description of Cabot Noble--Directors
and Executive Officers."
GENERAL
The Combination will join ShopKo and Phar-Mor, which currently are regional
discount retail chains, to form a dynamic national discount retailer offering
general merchandise in conjunction with pharmaceutical and health care
products and services with more than 230 stores in 29 states and total
revenues of approximately $3.3 billion in fiscal 1997. There will be
geographic overlap of stores in only one market. See the Store Distribution
Map on the inside front cover page.
To succeed in today's increasingly competitive retail environment ShopKo and
Phar-Mor need to achieve economies of scale and be dominant in a greater range
of value-oriented merchandise. The strategy of relying primarily on the
building of new stores to achieve greater scale is significantly more
expensive and entails more risk than the addition, expansion, refurbishment
and remerchandising of stores with existing customer bases. The Combination
will enable ShopKo and Phar-Mor to leverage costs and expand market share by
capitalizing on their respective strengths.
Management believes:
. the consolidation of Phar-Mor's corporate headquarters with ShopKo's
headquarters in Green Bay, Wisconsin;
. the creation of buying, distribution, merchandising and management
synergies;
. the expansion of retail pharmacy, optical and health care services; and
. the introduction of Shopko's successful retail merchandising to Phar-Mor's
turnaround program
will result in a stronger and more efficient retailer with greater
potential for earnings growth.
Management believes this expanded market share can be achieved without the
need for additional debt. In particular, the management of Cabot Noble has
targeted a maximum net debt-to-total capitalization ratio of 55%.
Management believes that many of the proven strategies implemented by ShopKo
during the last five years can be successfully utilized by Phar-Mor to
similarly enhance its competitive position. Both ShopKo and Phar-Mor stores
include market leading pharmacies, offer a wide array of health and beauty
care products and derive significant revenues from general merchandise sales
of similar items (aggregating annual revenues of $1.2 billion). ShopKo,
however, has differentiated its retail general merchandising by emphasizing a
broader variety of value oriented, upscale lifestyle merchandise in specialty
departments. Phar-Mor, while generally relying more heavily on value pricing,
has in the last year emphasized specialty departments that mirror ShopKo's
strategy. Management believes that the addition by ShopKo and Phar-Mor of
complementary products and services offered by the other will allow Cabot
Noble to further increase revenues and earnings. This strategy, together with
the merchandising of approximately 500,000 square feet of unutilized or
underutilized Phar-Mor store space with higher margin products that are now
sold in ShopKo's stores, should enable ShopKo and Phar-Mor to become more
efficient, grow faster and produce greater earnings on a combined basis than
if they were operated as completely independent retailers.
COST SAVINGS FROM THE COMBINATION
Based on the factors enumerated in "Certain Forward-Looking Information,"
Combination is expected to generate estimated cost savings and merchandising
synergies of approximately $10 million in fiscal 1998 and $20 million annually
thereafter, net of amounts reinvested in lower, more competitive retail prices
on ShopKo
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merchandise. Major areas of cost savings include management information
systems, accounting, headquarters support, store labor, and the relocation of
Phar-Mor's headquarters. These savings are expected to lower overhead costs on
a per store basis, and are expected to enable ShopKo and Phar-Mor to gain
additional market share on a nationwide basis. The savings will be derived
from the following areas:
Consolidation of Headquarters. Phar-Mor's Youngstown, Ohio headquarters will
be closed and moved to ShopKo's headquarters in Green Bay, Wisconsin, where
most of the administrative functions of Cabot Noble will be consolidated.
Several key regional Phar-Mor personnel will relocate to existing offices in
the Phar-Mor distribution center in Youngstown, while other essential Phar-Mor
personnel will relocate to Green Bay. This consolidation of headquarters is
expected to result in cost savings of approximately $8 million annually.
Redundant management will also be eliminated, which management believes will
save an additional $5 million annually.
Purchasing Synergies. The Combination will create substantial additional
buying power for Cabot Noble. Approximately $535 million in revenues annually,
on a combined basis, are derived from pharmacy operations; and approximately
$685 million in revenues annually, on a combined basis, are derived from
general merchandise sales of similar items. Management believes that through
coordinated purchasing efforts, Cabot Noble can save approximately $13 million
annually through lower purchase prices for these items.
Leverage ShopKo's Management Information Systems. During the last several
years ShopKo has invested a total of approximately $40 million in strategic
infrastructure and information systems, and has become an industry leader in
the use of information technology and systems. ShopKo's management information
systems are considered to be on the leading edge of technology for retail
stores. Phar-Mor, if it remained independent, would have to make significant
investments in such systems. The Combination enables Phar-Mor to benefit from
ShopKo's investment immediately, without the risks, costs and delays of
developing its own systems, and enables ShopKo to leverage its systems costs
across a larger number of retail stores, which will operate to the benefit of
both companies.
REVENUE ENHANCEMENTS FROM THE COMBINATION
Growth Opportunities Through Update of Phar-Mor Stores. Generally, stores in
high-traffic areas generate additional new business when modernized in a
customer-friendly manner. Nearly all of ShopKo's 130 stores have been updated
and remodeled during the past five years to reflect ShopKo's merchandise and
marketing strategies, known as its Vision 2000 concept. The benefits of the
store modernization and improved merchandising have resulted in significantly
improved sales and earnings for ShopKo. All but one of Phar-Mor's 103 stores
were "cherry-picked" from the 311 stores that Phar-Mor operated prior to its
bankruptcy filing in 1992, and are located in very desirable, high-traffic
areas. Several new Phar-Mor store prototypes are now operating with
significantly improved results. Many of the remaining Phar-Mor stores need to
be refurbished and updated. It is the current intention of Cabot Noble
management to remodel approximately 78 and replace or relocate approximately
12 Phar-Mor stores over the next four and one-half years. The anticipated cost
of the remodels is approximately $200,000 to $930,000 per store or
approximately $35 million in the aggregate and the anticipated cost of such
replacements and for relocations is approximately $750,000 per store or
approximately $9 million in the aggregate. ShopKo's management will utilize
its experience in successfully rebuilding ShopKo's stores to assist in the
remodeling and creation of new merchandising presentations for the Phar-Mor
stores.
Growth Opportunities Through Cross Merchandising. Phar-Mor stores range from
30,000 to 75,000 square feet. During the process of rebuilding Phar-Mor in the
last two years, Phar-Mor's management has determined that approximately
500,000 square feet of underutilized retail space is available for expanded
merchandising. The Combination provides the opportunity to use such excess
space to merchandise categories that do not overlap with Phar-Mor's present
general merchandise assortment. ShopKo has been highly successful in
remerchandising its own stores with these categories, and believes that it
will be equally successful in assisting Phar-Mor stores in remerchandising its
stores to improve sales, profit margins and operating profits. Management
25
<PAGE>
also believes that it will be able to introduce ShopKo's optical departments,
a proven high earnings performer, into many Phar-Mor stores. The introduction
of optical departments would add approximately $450,000 per store to the
anticipated cost of remodeling the Phar-Mor stores identified in the preceding
paragraph. Similarly, Phar-Mor successfully sells certain categories of
hardline goods and convenience foods, which management believes could be
introduced into many ShopKo stores with equal or improved results, thereby
further leveraging sales, gross margins and operating profits.
Growth Opportunities Through Lower Prices. Management believes that
reinvesting savings generated from the anticipated cost and buying synergies
into lower retail sales prices at ShopKo stores will improve its competitive
position for consumable merchandise categories, provide customers with
enhanced value, and ultimately provide additional earning power to Cabot
Noble.
PROVANTAGE
Growth Opportunities Through ProVantage. As an expansion of its traditional
retail pharmacy services, in fiscal 1994 ShopKo launched its ProVantage health
services division by forming ProVantage Mail Service, a prescription
management and mail service pharmacy that is offered to health care plan
sponsors across the country. The ProVantage mail service pharmacy provides
home delivery of prescriptions to its patients throughout the United States.
ProVantage has developed into a full service prescription benefit management
("PBM") firm, providing custom prescription benefit plan design, a network of
over 40,000 retail pharmacies, program administration and claims and benefit
processing services to insurance companies, third party administrators and
self-funded health care plan sponsors. As health care plan sponsors face
pressure to reduce rising health care costs, they are increasingly directing
plan participants to utilize managed care pharmacy benefit programs developed
and administered by PBM firms. These programs control pharmacy costs by
supervising decisions regarding which drugs are dispensed and whether they are
dispensed by retail or mail service pharmacies. ShopKo believes that
ProVantage is positioned to provide health care plan sponsors with
prescription benefit programs that substantially reduce prescription costs,
ultimately reducing the overall cost of health care.
Another recently launched initiative is ProVantage Vision Benefit Management
Service ("VBM"). In August, 1996, ProVantage completed the acquisition of
United Wisconsin Insurance Company's vision benefit management business. This
acquisition gave ProVantage's VBM an immediate market presence in the vision
benefit management industry. The acquired business provides vision benefit
management services to over 100,000 plan participants and operates through a
provider network of over 900 ophthalmologists and optometrists operating in
over 20 states. This network will eventually be folded into the national
vision benefit network of retail chains and private ophthalmologists and
optometrists that ProVantage is in the process of developing. Through this
network, ProVantage's VBM will also offer to private label its national
network for network participants looking to offer vision benefit management
services to their local-based clients. ProVantage's VBM offers insured as well
as uninsured products, direct services to insurance companies and turnkey
operations for managed care organizations. Insured products are underwritten
by a licensed insurance company.
ProVantage has also installed a technology-driven process that provides
actionable information to decision makers through massive warehousing of
existing data called Decision Support Services ("DSS"). This process will
leverage off of ShopKo's significant technological investment in massively
parallel processing and data base management for its retail business.
ProVantage's DSS initiative will have two focal points. The first will be a
product enhancement for ProVantage's PBM which will facilitate the PBM's roll
out of clinical programs to its clients to lower their overall cost of health
care. This product will work heavily with the prescription data of
ProVantage's customers. The second DSS focal point will be through a stand-
alone company called ProVMed, which will apply these same principles to
enterprise-wide sets of data, including medical data. These applications will
be marketed to a variety of health care plan sponsors, primarily mid-sized
insurance companies and managed care organizations.
26
<PAGE>
ProVantage's operations are subject to extensive federal and state
regulation. See "Description of ShopKo--Government Regulation."
Through internal growth and strategic acquisitions and alliances, ProVantage
has become a significant force in the PBM health care sector. Recent
initiatives have not only increased the number of ProVantage participants, but
have also improved the information systems that allow ProVantage to provide
clinical and other value-added services to its clients.
During the last three years, ProVantage has experienced substantial growth,
with sales revenues increasing from $14 million in fiscal 1995, to $94 million
in fiscal 1996, to an estimated $360 million in fiscal 1997. Management
believes that ProVantage's sales revenues will exceed $550 million in fiscal
1998, which would make ProVantage one of the fastest growing managed health
care businesses in the United States.
ProVantage earns revenues based on transactions processed, and grows through
obtaining new agreements to provide services to new corporate clients and to
new participants under existing plans. Management believes that the retail
health orientation of ShopKo stores has been instrumental in attracting and
retaining ProVantage clients. Management believes that the Combination will
add greater opportunities to expand the ProVantage business.
Growth Opportunities and Value Realization of ProVantage. With the recent
acquisition of the 1.4 million participant Scrip Card plan, ProVantage has a
total of four million participants. ProVantage has the capacity to grow
further, and will continue to seek strategic acquisitions to leverage its
advanced systems and expenses. In addition, ProVantage has added services to
its plan offering, including vision benefit management. Management believes
Cabot Noble will add greater marketing opportunities for the ProVantage
concept. ProVantage is now among the fifteen largest prescription benefit
management companies in the United States.
Management believes the securities markets have not fully recognized the
value of ProVantage as a wholly owned subsidiary of ShopKo. As such,
management will consider strategic alternatives in order to unlock its true
value to shareholders. Management has considered, among other strategic
alternatives, a public offering of ProVantage's common stock. Among the
factors which may influence any decision regarding a public offering of
ProVantage are tax considerations, ProVantage's relative size, profitability,
growth prospects, management resources, the competitive environment, product
assortment, marketing capability, geographic diversification, the market
valuation of similar companies and other business combinations. There can be
no assurance as to if, or when, any such transaction would occur.
STRATEGIC BENEFITS OF THE COMBINATION
Management believes there are a number of significant benefits which can be
realized from the Combination. ShopKo and Phar-Mor each have strengths and
skills that can be capitalized upon to enable each company to become stronger
and more competitive, and to achieve significant earnings enhancements.
Management further believes that neither ShopKo nor Phar-Mor could arrive at
this position on its own. Key reasons for the Combination include:
National Presence. To compete effectively with large national chains,
ShopKo and Phar-Mor need to achieve a larger scale that will enable them to
enhance operations and earnings. Enhanced earnings can be achieved through
a lower cost structure at the selling, general and administrative level by
spreading fixed overhead over a greater number of stores and revenue
enhancements at the store level by leveraging each company's merchandising
strengths. ShopKo operates 130 stores in 15 states and Phar-Mor operates
103 stores in 18 states. ShopKo and Phar-Mor operate in contiguous regions
with virtually no geographic overlap. Cabot Noble currently has no plans to
divest or close overlapping stores.
Ability To Reposition Stores. Over the past five years, ShopKo has
completed a highly successful repositioning of its stores. This success is
highlighted by strong financial results including (1) earnings growth of
20% in the past two years, which places ShopKo among industry leaders, (2)
a 19% growth in
27
<PAGE>
the first three quarters of fiscal 1997 earnings compared to the same
period in fiscal 1996, and (3) substantial same store sales growth during
the 1996 "back to school" and Christmas shopping season. Phar-Mor currently
has over 500,000 feet of under or unutilized space in its existing stores.
ShopKo's management will use its retail expertise to focus upon utilizing
such space to sell higher margin products that have been successfully sold
in ShopKo stores. This strategy will substantially reduce the costs, risks
and delays associated with downsizing existing Phar-Mor stores by using
such excess store capacity to sell higher margin merchandise and other
offerings, such as optical services, available from ShopKo.
Success Through Growth. Both ShopKo and Phar-Mor believe they must grow
to succeed in the increasingly competitive retail environment. ShopKo has
historically grown internally; however, recent stores opened by ShopKo have
had less success as a result of competitive pressures from larger national
retail chains and the difficulty in attracting a sufficient customer base
in new market areas. Management believes that the strategy of acquiring and
refurbishing Phar-Mor stores is a more attractive approach than opening new
stores in untested or overstored markets because this strategy is less
risky and requires lower capital expenditures and less time to achieve
profitability than the development of new stores due to the existing
customer base and established market presence of such stores.
Pharmacy and Optical Retail Health Niche. Cabot Noble expects to fill
approximately 20 million prescriptions annually. In addition, ShopKo
currently dispenses approximately 600,000 eye wear prescriptions per year
in its optical departments. These retail health care sales generate
substantial additional revenues through sales of general merchandise to
customers who visit the stores for their health care needs. In the future,
there will be increasing emphasis on generating large volumes in the retail
health business to offset gross margin pressures on prescription prices
from third-party prescription benefit management companies. Also,
ProVantage will be utilized to further exploit the health care niche of
Cabot Noble.
Extensive Retail Expertise at ShopKo and Phar-Mor. The retail executive
management teams of ShopKo and Phar-Mor will remain in place, but the
planning and administration will be centralized and coordinated to obtain
management efficiencies. Dale P. Kramer, who was named Retailer of the Year
for 1996 by Discount Store News, will remain as President and CEO of
ShopKo, and David Schwartz, who has been instrumental in Phar-Mor's
turnaround, will remain as President of Phar-Mor. Robert M. Haft, an
individual with proven experience and success leading such retail companies
as Crown Books, Trak Auto and Dart Group, will be Chairman of the Board and
CEO of Cabot Noble. In addition, other key members of the ShopKo management
team associated with its repositioning will be available to assist Phar-Mor
with its major remodeling efforts.
28
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth earnings, book value and cash dividends per
share for (i) ShopKo Shares and Phar-Mor Shares on a historical basis, (ii)
Cabot Noble Shares on a pro forma basis assuming the consummation of the
Transaction and (iii) ShopKo Shares and Phar-Mor Shares on a pro forma
equivalent basis assuming consummation of the Transaction and the exchange
ratios outlined in note (c) below. Phar-Mor did not pay any dividends during
the relevant periods. The table should be read in conjunction with the
respective consolidated financial statements of ShopKo and Phar-Mor and the
unaudited pro forma consolidated financial statements of Cabot Noble included
elsewhere in this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
PHAR-MOR SHOPKO
--------------------------------------------------- -----------------------------------
AT OR FOR AT OR FOR AT OR FOR AT OR FOR
THIRTY-NINE TWENTY-TWO THIRTY FORTY AT OR FOR
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED YEAR ENDED
NOVEMBER 2, 1996 FEBRUARY 3, 1996 SEPTEMBER 2, 1995 NOVEMBER 30, 1996 FEBRUARY 24, 1996
---------------- ---------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Historical
Earnings (Loss) Per
Share................. $(0.62) $0.42 $(1.17) $0.64 $1.20
Cash Dividends Per
Share................. N/A N/A N/A 0.22 0.44
Book Value Per Share... 7.17 7.78 7.36 13.60 13.18
<CAPTION>
AT OR FOR
YEAR ENDED
FEBRUARY 3, 1996
----------------
<S> <C>
Pro Forma Phar-Mor(a)
Earnings Per Share..... $0.54
Cash Dividends Per
Share................. N/A
Book Value Per Share... 7.78
<CAPTION>
CABOT NOBLE
PRO FORMA COMBINED
---------------------------------
AT OR FOR
THIRTY-NINE AT OR FOR
WEEKS ENDED YEAR ENDED
NOVEMBER 2, 1996 FEBRUARY 3, 1996
---------------- ----------------
<S> <C> <C>
Cabot Noble Pro Forma
Combined(b)
Earnings Per Share..... $0.05 $0.53
Cash Dividends Per
Share................. N/A N/A
Book Value Per Share... 4.02 3.97
<CAPTION>
PHAR-MOR SHOPKO
--------------------------------- -----------------------------------
AT OR FOR AT OR FOR
THIRTY-NINE AT OR FOR THIRTY-NINE AT OR FOR
WEEKS ENDED YEAR ENDED WEEKS ENDED YEAR ENDED
NOVEMBER 2, 1996 FEBRUARY 3, 1996 NOVEMBER 2, 1996 FEBRUARY 3, 1996
---------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Pro Forma Equivalents(c)
Earnings Per Share..... $ 0.05 $0.53 $0.16 $1.60
Cash Dividends Per
Share................. N/A N/A N/A N/A
Book Value Per Share... 4.02 3.97 12.08 11.92
</TABLE>
- --------
(a) See Phar-Mor Unaudited Pro Forma Consolidated Statement of Operations.
(b) See Cabot Noble Unaudited Pro Forma Consolidated Financial Statements.
(c) Pro forma equivalents represent the unaudited pro forma combined earnings
per share, cash dividends per share and book value per share calculated on
a basis of: (1) 1 to 1 exchange ratio for Phar-Mor and (2) 3.0 to 1 ShopKo
Exchange Ratio for ShopKo.
29
<PAGE>
CAPITALIZATION
The following table sets forth the Capitalization of ShopKo, Phar-Mor and
Cabot Noble as of November 2, 1996 and the pro forma capitalization of Cabot
Noble after giving effect to the Transaction. This table should be read in
conjunction with the Cabot Noble, Inc. Unaudited Pro Forma Consolidated
Financial Statements included elsewhere in this Joint Proxy
Statement/Prospectus and the Cabot Noble, ShopKo and Phar-Mor historical
consolidated financial statements, including the notes thereto.
AS OF NOVEMBER 2, 1996
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
-----------------------
CABOT
SHOPKO PHAR-MOR NOBLE PRO FORMA
-------- -------- ----- ---------
<S> <C> <C> <C> <C>
Existing borrowings (long-term debt and
capital leases net of current portion)... $414,620 $146,740 -- $561,360
Reduction in borrowings................... -- -- (5,002)(a)
-------- -------- ---- --------
Total borrowings.......................... 414,620 146,740 -- 556,358
Total Stockholders' Equity................. 427,530 87,124 -- 275,985(b)
-------- -------- ---- --------
Total Capitalization....................... $842,150 $233,864 -- $832,343
======== ======== ==== ========
</TABLE>
- --------
<TABLE>
<S> <C>
(a) The reduction in borrowings is the result of the elimination of
non-recourse debt associated with the current Phar-Mor corporate
office building and does not include the $140,553 of debt
incurred under the revolving credit facility assumed in the
Cabot Noble Unaudited Pro Forma Consolidated Balance Sheet as
those funds will be used for Working Capital purposes and to
fund seasonal shortages and the facility is not intended to be a
part of the long-term capitalization of Cabot Noble............. (5,002)
---
(b) Pro forma Total Stockholders' Equity is based on the following, as the
Combination is accounted for as an acquisition
of Phar-Mor by ShopKo:
SHOPKO:
ShopKo historical equity as of November 2, 1996................... $ 427,530
Less the effect of the Transaction on ShopKo historical equity... 2,146
---------
$ 429,676
CABOT NOBLE BUY BACK:
Repurchase of 90% of the Cabot Noble Shares issued to supervalu... (223,594)
EXCHANGE OF SHARES:
Exchange of 1 Cabot Noble Share for each of the 12,157,054
outstanding Phar-Mor Shares (based on $5.75 per share)........... 69,903
---------
TOTAL PRO FORMA STOCKHOLDERS' EQUITY............................... $ 275,985
=========
</TABLE>
The exchange of ShopKo Shares for Cabot Noble Shares pursuant to the ShopKo
Exchange does not impact the pro forma stockholders' equity.
30
<PAGE>
MARKET PRICE AND DIVIDEND DATA
SHOPKO
The ShopKo Shares are currently traded on the NYSE under the symbol "SKO."
The following table sets forth the high and low sale prices and the dividends
declared and paid for each period indicated below.
<TABLE>
<CAPTION>
HIGH LOW DIVIDEND
------- ------- --------
<S> <C> <C> <C>
FISCAL YEAR 1995
First Quarter (ended June 18, 1994)............... $12.000 $10.250 $.11
Second Quarter (ended September 10, 1994)......... 10.375 9.750 .11
Third Quarter (ended December 3, 1994)............ 10.625 9.750 .11
Fourth Quarter (ended February 25, 1995).......... 9.750 8.625 .11
FISCAL YEAR 1996
First Quarter (ended June 17, 1995)............... 11.750 8.750 .11
Second Quarter (ended September 9, 1995).......... 14.000 10.250 .11
Third Quarter (ended December 2, 1995)............ 13.250 10.250 .11
Fourth Quarter (ended February 24, 1996).......... 11.750 10.875 .11
FISCAL YEAR 1997
First Quarter (ended June 15, 1996)............... 16.500 11.250 .11
Second Quarter (ended September 7, 1996).......... 16.250 13.500 .11
Third Quarter (ended November 30, 1996)........... 16.250 15.625 (--)
Fourth Quarter (through January , 1997)..........
</TABLE>
On September 6, 1996, the last trading day before ShopKo publicly announced
the execution of the Combination Agreement, the closing sales price per ShopKo
Share reported on the NYSE was $16.25. On , 1997 the closing sales
price of ShopKo Shares was $ per share. Holders of ShopKo Shares are urged
to obtain current quotations for the market price of such stock. As of
, 1997, ShopKo had shareholders of record. The Combination Agreement
prohibits ShopKo from declaring or paying dividends on ShopKo Shares following
the $0.11 per share dividend paid on September 15, 1996.
PHAR-MOR
The Phar-Mor Shares are currently traded on the Nasdaq-NMS under the symbol
"PMOR." Prior to September 11, 1995, there was no established public trading
market for the Phar-Mor Shares or for the Phar-Mor Warrants. From September
11, 1995 through October 31, 1995, the only market activity in the Phar-Mor
Shares of which Phar-Mor was aware was trading on a limited basis, primarily
through inter-dealer quotations. From October 31, 1995 through February 7,
1996, the Phar-Mor Shares were quoted for trading on the Nasdaq SmallCap
Market. Since February 8, 1996, the Phar-Mor Shares have been included for
quotation on the Nasdaq-NMS under the symbol "PMOR."
31
<PAGE>
The following table sets forth, for the periods indicated, the high and low
closing prices for the Phar-Mor Shares and Phar-Mor Warrants. For the period
prior to October 31, 1995 with respect to the Phar-Mor Shares, and for the
period prior to with respect to the Phar-Mor Warrants, such reported
prices reflect inter-dealer quotations without retail mark-up or mark-down and
may not necessarily represent actual transactions. Since its emergence from
bankruptcy in September, 1995, Phar-Mor has not paid any dividends on Phar-Mor
Shares.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
PHAR-MOR SHARES
---------------
FISCAL YEAR 1996
First Quarter(1) (ended September 30, 1995).................. $9.250 $6.812
Second Quarter (ended December 30, 1995)..................... 9.750 6.375
Third Quarter (ended March 30, 1996)......................... 8.250 6.875
Fourth Quarter (ended June 29, 1996)......................... 8.625 7.000
FISCAL YEAR 1997
First Quarter (ended September 28, 1996)..................... 8.375 6.125
Second Quarter (ended December 28, 1996)..................... 6.250 5.250
Third Quarter (through January 8, 1997)...................... 5.688 5.438
PHAR-MOR WARRANTS
-----------------
FISCAL YEAR 1996
First Quarter(1) (ended September 30, 1995).................. $1.375 $0.500
Second Quarter (ended December 30, 1995)..................... 4.000 2.250
Third Quarter (ended March 30, 1996)......................... 3.500 2.250
Fourth Quarter (ended June 29, 1996)......................... 3.875 2.250
FISCAL YEAR 1997
First Quarter (ended September 28, 1996)..................... 3.375 2.250
Second Quarter (ended December 28, 1996)..................... 2.875 1.500
Third Quarter (through January 8, 1997)...................... 1.125 1.125
</TABLE>
--------
(1) Commencing September 11, 1995
On September 5, 1996, the last trading day on which Phar-Mor Shares traded
before Phar-Mor publicly announced the execution of the Combination Agreement,
the closing sales price reported on the Nasdaq-NMS per Phar-Mor Share was
$8.125. On August 27, 1996, the last trading day on which Phar-Mor Warrants
traded before Phar-Mor publicly announced the execution of the Combination
Agreement, the closing sales price reported per Phar-Mor Warrant was $2.375.
On January , 1997 the closing sale price of (i) Phar-Mor Shares was $ per
share and (ii) Phar-Mor Warrants was $ per warrant. Holders of Phar-Mor
Shares and Phar-Mor Warrants are urged to obtain current quotations for the
market prices of such securities. As of January 8, 1997, Phar-Mor had 2,825
shareholders of record and 2,703 warrant holders of record.
CABOT NOBLE
There is currently no market for Cabot Noble Shares. Phar-Mor currently owns
all of the 100 issued and outstanding Cabot Noble Shares which will be
canceled in the Combination. See generally "Risk Factors--Trading Market for
Cabot Noble Shares" and "Description of Capital Stock of Cabot Noble."
Cabot Noble has no operating history. Following the Effective Date,
provisions of the Cabot Noble Financing or other borrowing arrangements which
may be entered into in connection with the Transaction will restrict Cabot
Noble from declaring and paying dividends on Cabot Noble Shares, and existing
indebtedness of Phar-Mor will restrict it from declaring and paying dividends
on the Phar-Mor Shares owned by Cabot Noble. It is expected to be the policy
of Cabot Noble's Board that, for the foreseeable future, Cabot Noble will
retain all future earnings for the growth and expansion of its business and
not declare dividends.
32
<PAGE>
THE SPECIAL MEETINGS
GENERAL
This Joint Proxy Statement/Prospectus is being furnished to ShopKo and Phar-
Mor shareholders in connection with the solicitation of proxies by the ShopKo
Board and the Phar-Mor Board, respectively, for use at the Special Meetings to
consider and vote upon the approval of the ShopKo Plan and the Phar-Mor Plan,
respectively.
Special meetings of the shareholders of ShopKo and Phar-Mor will be held on
and , 1997, respectively. The Phar-Mor special meeting will be
held at , , at a.m., local time (the "Phar-Mor Special Meeting"), and
the ShopKo special meeting will be held at , at a.m., local time (the
"ShopKo Special Meeting").
The ShopKo Board and the Phar-Mor Board have approved the Combination
Agreement. Each board has determined that the Combination is fair to, and in
the best interests of, the respective shareholders of ShopKo and Phar-Mor. The
ShopKo Board and the Phar-Mor Board recommend that the shareholders of ShopKo
and Phar-Mor vote for adoption and approval of the Combination Agreement and
the ShopKo Plan and the Phar-Mor Plan, respectively. The Combination Agreement
and the ShopKo Plan and the Phar-Mor Plan have also been approved by the Cabot
Noble Board.
SHOPKO RECORD DATE; QUORUM; VOTE REQUIRED
Only ShopKo shareholders of record as of the close of business on January ,
1997 (the "ShopKo Record Date") will be entitled to notice of, and to vote at,
the ShopKo Special Meeting. At the ShopKo Record Date, there were outstanding
ShopKo Shares. Each holder of ShopKo Shares outstanding on the ShopKo
Record Date is entitled to one vote for each share so held, exercisable in
person or by properly executed and delivered proxy, at the ShopKo Special
Meeting. The presence of the holders of at least a majority of the ShopKo
Shares outstanding on the ShopKo Record Date, whether present in person or by
properly executed and delivered proxy, will constitute a quorum for the
purposes of the ShopKo Special Meeting.
The affirmative vote of the holders of record of at least a majority of the
outstanding ShopKo Shares is necessary to adopt and approve the ShopKo Plan.
Since approval of the ShopKo Plan requires the affirmative vote of a majority
of all outstanding ShopKo Shares, abstentions, failures to vote and broker
non-votes will have the same effect as a vote against approval of the ShopKo
Plan for purposes of determining whether the requisite majority has been
obtained. supervalu has entered into an agreement with Robert M. Haft,
Chairman of the Board of Phar-Mor, and Cabot Noble pursuant to which supervalu
has agreed to vote a number of supervalu's Shares constituting at least 19.9%
of the outstanding ShopKo Shares in favor of the approval and adoption of the
ShopKo Plan (the "Voting Agreement"). supervalu agreed to vote 19.9% of the
outstanding ShopKo Common Stock in favor of the ShopKo Plan since an agreement
to vote 20% or more of such shares in favor of the ShopKo Plan may have caused
the other parties to the Voting Agreement to be subject to the Minnesota
Control Share Acquisition Act. See "The Transaction--Voting Agreement."
supervalu has expressed its intention to vote its remaining ShopKo Shares
(representing an additional 26% of the outstanding ShopKo Shares), in favor of
the approval and adoption of the ShopKo Plan.
Shareholders of ShopKo will have the right to dissent from the ShopKo
Exchange and, subject to strict compliance with certain provisions of the
Minnesota Law, to receive in lieu of Cabot Noble Shares the "fair value" of
their ShopKo Shares in cash. See "The Special Meetings--Dissenters' Rights"
and Annex D.
PHAR-MOR RECORD DATE; QUORUM; VOTE REQUIRED
The affirmative vote of the holders of record of a majority of the Phar-Mor
Shares present in person or represented by proxy at the Phar-Mor Special
Meeting is required to adopt and approve the Combination Agreement and the
Phar-Mor Plan.
33
<PAGE>
Only Phar-Mor shareholders of record as of the close of business on January
, 1997 (the "Phar-Mor Record Date") will be entitled to notice of, and to
vote at, the Phar-Mor Special Meeting. At the Phar-Mor Record Date, there were
outstanding Phar-Mor Shares. Each holder of Phar-Mor Shares outstanding on
the Phar-Mor Record Date is entitled to one vote for each share so held,
exercisable in person or by properly executed and delivered proxy, at the
Phar-Mor Special Meeting. Except as discussed below, the presence of the
holders of at least a majority of the Phar-Mor Shares outstanding on the Phar-
Mor Record Date, whether present in person or by properly executed and
delivered proxy, will constitute a quorum for the purposes of the Phar-Mor
Special Meeting. In the event the scheduled Phar-Mor Special Meeting is
adjourned for one or more periods aggregating more than 14 days because of the
absence of a quorum, any number of shareholders who attend the adjourned Phar-
Mor Special Meeting, whether or not they represent less than a majority of the
outstanding Phar-Mor Shares, shall nevertheless constitute a quorum for the
purpose of acting upon any matter set forth in the notice of the meeting if
the notice states that those shareholders who attend the adjourned meeting
shall nevertheless constitute a quorum for the purpose of acting upon the
matter. The Phar-Mor shareholders' notice includes such a statement, in
boldface type, notifying the shareholders of the possibility of such an
adjournment and that the Phar-Mor Plan may, therefore, be approved by a
majority of a quorum which constitutes less than a majority of Phar-Mor
Shares. No further notice to Phar-Mor Shareholders is required in connection
with any adjournment of the Phar Mor Special Meeting, other than by
announcement at the meeting at which the adjournment is taken, unless the
Phar-Mor Board fixes a new record date for the adjourned meeting. PHAR-MOR
SHAREHOLDERS SHOULD, THEREFORE, BE AWARE THAT IN THE EVENT THE PHAR-MOR
SPECIAL MEETING AS SCHEDULED IS ADJOURNED FOR ONE OR MORE PERIODS AGGREGATING
MORE THAN 14 DAYS BECAUSE OF THE ABSENCE OF A QUORUM, ANY NUMBER OF
SHAREHOLDERS WHO ATTEND THE ADJOURNED PHAR-MOR SPECIAL MEETING AS DESCRIBED
ABOVE, WHETHER OR NOT THEY REPRESENT LESS THAN A MAJORITY OF THE OUTSTANDING
PHAR-MOR SHARES, SHALL NEVERTHELESS CONSTITUTE A QUORUM FOR THE PURPOSE OF
ACTING ON THE MATTERS IDENTIFIED IN THE PHAR-MOR NOTICE OF SPECIAL MEETING OF
SHAREHOLDERS ACCOMPANYING THIS JOINT PROXY STATEMENT/PROSPECTUS. UNDER SUCH
CIRCUMSTANCES, THERE IS NO MINIMUM NUMBER OF PHAR-MOR SHAREHOLDERS NECESSARY
TO REPRESENT A QUORUM AT THE ADJOURNED PHAR-MOR SPECIAL MEETING. THEREFORE,
THE PHAR-MOR PLAN MAY, PURSUANT TO THE PENNSYLVANIA LAW AND PHAR-MOR'S BYLAWS,
BE APPROVED BY A MAJORITY OF A QUORUM WHICH, IN CERTAIN CIRCUMSTANCES, MAY
CONSTITUTE LESS THAN A MAJORITY OF THE ISSUED AND OUTSTANDING PHAR-MOR SHARES.
In the event the Phar Mor Special Meeting is adjourned, Phar Mor shareholders
shall have the right to revoke their proxy or change their vote at any time
before the final shareholder vote is taken by giving written notice of
revocation to the secretary of Phar-Mor, by submitting a later dated proxy, by
following the telephonic procedure set forth in "--Solicitation of Phar-Mor
Proxies" or by voting in person at the adjourned Phar-Mor Special Meeting.
Robert Haft has agreed to use reasonable efforts to cause Hamilton Morgan,
which beneficially owns 4,704,033 (or 38.7%) of the outstanding Phar-Mor
Shares, to vote those shares in favor of approval and adoption of the Phar-Mor
Plan. Under the Hamilton Morgan LLC Agreement, the Phar-Mor Shares
beneficially owned by Hamilton Morgan may not be voted without the unanimous
consent of the members of Hamilton Morgan. As of January 2, 1997, the Haft
Members, as tenants by the entirety, owned 30.2% of the membership interests
in Hamilton Morgan and FoxMeyer Health owned 69.8% of such interests. Robert
Haft is President of Hamilton Morgan. FoxMeyer Health has indicated that it
has not reached a conclusion as to its position on the Transaction. FoxMeyer
Health initiated the buy-sell provisions of the Hamilton Morgan LLC Agreement
on December 18, 1996, pursuant to which either FoxMeyer Health or the Haft
Members may acquire all of the membership interests in Hamilton Morgan. On
December 23, 1996, the Haft Members exercised their rights under the Hamilton
Morgan LLC Agreement to seek binding arbitration regarding certain areas of
disagreement between FoxMeyer Health and the Haft Members, including voting
rights with respect to the Phar-Mor Shares beneficially held by Hamilton
Morgan and certain matters relating to FoxMeyer Health's exercise of its buy-
sell rights. The Haft Members assert that, pursuant to the provisions of the
Hamilton Morgan LLC Agreement, Robert M. Haft, as President of Hamilton
Morgan, has sole voting power of the Phar-Mor Shares beneficially held by
Hamilton Morgan because an event of default occurred under the bank facility
entered into by FoxMeyer Health in connection with the purchase of certain of
such Phar-Mor Shares. FoxMeyer Health asserts that it has sole voting power
over the Phar-Mor Shares beneficially held by Hamilton Morgan because Robert
Haft has a conflict of
34
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interest in connection with the Transaction. Phar-Mor is not able to determine
what effect, if any, the dispute regarding the FM Phar-Mor Shares will have on
the ability of FoxMeyer Health or any other entity to vote such shares and
what effect, if any, the resolution of such dispute will have on the ability
of Phar-Mor to consummate the Transaction. See "Risk Factors--Hamilton Morgan
Issues" and "Description of Phar-Mor--Security Ownership of Certain Beneficial
Owners and Management."
DISSENTERS' RIGHTS
Phar-Mor. Holders of Phar-Mor Shares are not entitled to dissenters' rights.
ShopKo. Holders of ShopKo Shares are entitled to dissenters' rights;
however, it is a condition to the Combination that holders of no more than 5%
of the outstanding ShopKo Shares shall have exercised such rights. Sections
302A.471 and 302A.473 of the Minnesota Law entitle any ShopKo shareholder who
objects to the ShopKo Plan and who follows the procedures prescribed by
Section 302A.473, in lieu of receiving the consideration proposed under the
ShopKo Plan, to receive cash equal to the "fair value" of such shareholder's
ShopKo Shares. Set forth below is a summary of the procedures relating to the
exercise of such dissenters' rights. This summary does not purport to be a
complete statement of dissenters' rights and is qualified in its entirety by
reference to Sections 302A.471 and 302A.473 of the Minnesota Law, which are
reproduced in full as Annex D hereto and are incorporated herein by reference,
and to any amendments to such provisions as may be adopted after the date
hereof.
ANY SHOPKO SHAREHOLDER CONTEMPLATING THE POSSIBILITY OF DISSENTING FROM THE
SHOPKO PLAN SHOULD CAREFULLY REVIEW THE TEXT OF ANNEX D (PARTICULARLY THE
SPECIFIED PROCEDURAL STEPS REQUIRED TO PERFECT DISSENTERS' RIGHTS, WHICH ARE
COMPLEX) AND SHOULD ALSO CONSULT SUCH SHAREHOLDER'S LEGAL COUNSEL. SUCH RIGHTS
WILL BE LOST IF THE PROCEDURAL REQUIREMENTS OF SECTION 302A.473 OF THE
MINNESOTA LAW ARE NOT FULLY AND PRECISELY SATISFIED.
The Minnesota Law provides dissenters' rights for shareholders of ShopKo who
object to the ShopKo Plan and meet the requisite statutory requirements
contained in the Minnesota Law. Under the Minnesota Law, any ShopKo
shareholder who (i) files with ShopKo written notice of his or her intent to
demand the fair value for his or her ShopKo Shares if the ShopKo Plan is
consummated and becomes effective, which notice is filed with ShopKo before
the vote is taken at the ShopKo Special Meeting, and (ii) does not vote his or
her ShopKo Shares at the ShopKo Special Meeting in favor of the proposal to
approve and adopt the ShopKo Plan, shall be entitled, if the ShopKo Plan is
approved, adopted and consummated, to receive a cash payment of the fair value
of such shareholder's ShopKo Shares upon compliance with the applicable
statutory procedural requirements. A failure by any ShopKo shareholder to vote
against the proposal to approve and adopt the ShopKo Plan will not in and of
itself constitute a waiver of the dissenters' rights of such shareholder under
the Minnesota Law. However, the submission of a proxy which does not direct
how the ShopKo Shares represented thereby are to be voted will constitute a
vote in favor of the ShopKo Plan and a waiver of statutory dissenters' rights.
In addition, a ShopKo shareholder's vote against the proposal to approve and
adopt the ShopKo Plan will not satisfy the notice requirement referred to in
clause (i) above.
Any written notice of a ShopKo shareholder's intent to demand payment of
fair value in cash for such shareholder's ShopKo Shares if the ShopKo Plan is
consummated must be filed with ShopKo at: 700 Pilgrim Way, P.O. Box 19060,
Green Bay, Wisconsin 54307-9060 Attn: Richard D. Schepp, Corporate Secretary,
prior to the vote on the ShopKo Plan at the ShopKo Special Meeting. A
shareholder who votes for the ShopKo Plan will have no dissenters' rights. A
shareholder who does not satisfy each of the requirements of Sections 302A.471
and 302A.473 of the Minnesota Law is not entitled to payment for such
shareholder's ShopKo Shares under the dissenters' rights provisions of the
Minnesota Law and will be bound by the terms of the ShopKo Plan as set forth
in the Combination Agreement.
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After the proposed ShopKo Plan has been approved, ShopKo will send written
notice to all shareholders who have given written notice under the dissenters'
rights provisions and not voted in favor of the ShopKo Plan as described
above. The notice will contain: (i) the address where the demand for payment
and certificates representing ShopKo Shares (the "ShopKo Certificates") must
be sent and the date by which they must be received, (ii) any restrictions on
transfer of uncertificated shares that will apply after the demand for payment
is received, (iii) a form to be used to certify the date on which the
shareholder, or the beneficial owner on whose behalf the shareholder dissents,
acquired the ShopKo Shares (or an interest in them) and to demand payment, and
(iv) a copy of the provisions of the Minnesota Law set forth in Annex D with a
brief description of the procedures to be followed under those provisions. A
ShopKo shareholder who is sent a notice and who wishes to assert dissenters'
rights must demand payment and deposit his or her ShopKo Certificates within
30 days after such notice is given. Under Minnesota law, notice by mail is
given by ShopKo when deposited in the United States mail. A SHAREHOLDER WHO
FAILS TO MAKE DEMAND FOR PAYMENT OR DEPOSIT STOCK CERTIFICATES WITHIN SUCH 30-
DAY PERIOD WILL LOSE THE RIGHT TO RECEIVE FAIR VALUE FOR HIS OR HER SHARES
UNDER THE DISSENTERS' RIGHTS PROVISIONS NOTWITHSTANDING THE EARLIER TIMELY
FILING OF NOTICE OF INTENT TO DEMAND PAYMENT. Prior to the Effective Date, a
ShopKo shareholder exercising dissenters' rights retains all other rights of a
ShopKo shareholder. From and after the Effective Date, dissenting shareholders
will no longer be entitled to any rights of ShopKo shareholders, including,
but not limited to, the right to receive notice of meetings, to vote at any
meetings or to receive dividends, and will only be entitled to dissenters'
rights as provided by the Minnesota Law. If any such holder of ShopKo Shares
shall have failed to perfect or shall have effectively withdrawn or lost such
right, his or her ShopKo Shares shall thereupon be deemed to have been
exchanged for Cabot Noble Shares and cash in lieu of any fractional Cabot
Noble Shares pursuant to the provisions of the ShopKo Plan.
Except as provided below, after the Effective Date or upon receipt of a
valid demand for payment, whichever is later, ShopKo will remit to each
dissenting shareholder who complied with the requirements of the Minnesota Law
the amount ShopKo estimates to be the fair value of such shareholder's ShopKo
Shares, plus interest accrued from a date five days after the Effective Date
to the date of payment calculated at the rate provided in Section 549.09 of
the Minnesota Law (presently 5% through ). The payment also must be
accompanied by certain financial data relating to ShopKo, ShopKo's estimate of
the fair value of the shares and a brief description of the method used to
reach such estimate, and a copy of Sections 302A.471 and 302A.473 of the
Minnesota Law with a brief description of the procedures to be followed in
demanding supplemental payment. If a dissenting shareholder believes that the
amount remitted is less than the fair value of the ShopKo Shares plus
interest, if any, such dissenting shareholder must give written notice to
ShopKo of his or her own estimate of the fair value of the shares, plus
interest, if any, within 30 days after ShopKo mails its remittance, and demand
payment of the difference. Failure to make such demand within such 30-day
period entitles the dissenting shareholder only to the amount remitted. If
ShopKo fails to remit payment within 60 days of the deposit of the ShopKo
Certificates or the imposition of transfer restrictions on uncertificated
shares, it shall return all deposited ShopKo Certificates and cancel all
transfer restrictions; however, ShopKo may again give notice regarding the
procedure to exercise dissenters' rights and require deposit or restrict
transfer at a later time.
ShopKo may withhold such remittance with respect to ShopKo Shares for which
the dissenting shareholder demanding payment was not the registered owner (or
the person on whose behalf such dissenting shareholder acts was not the
beneficial owner) as of the first public announcement date of the ShopKo Plan
(the "Public Announcement Date"). As to each such dissenting shareholder who
has validly demanded payment, following the Effective Date or the receipt of
demand, whichever is later, ShopKo will mail its estimate of the fair value of
such dissenting shareholder's ShopKo Shares and offer to pay this amount with
interest, if any, to the dissenting shareholder upon receipt of such
dissenting shareholder's agreement to accept this amount in full satisfaction.
If such dissenting shareholder believes that ShopKo's offer is for less than
the fair value of the ShopKo Shares, with interest, if any, such dissenting
shareholder must give written notice to ShopKo of his or her own estimate of
the fair value of the ShopKo Shares, with interest, if any, and demand payment
of this amount within 30 days after the mailing of ShopKo's offer. If the
dissenting shareholder fails to give written notice of such estimate to ShopKo
within such 30-day period, such dissenting shareholder will be entitled only
to the amount offered by ShopKo.
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If ShopKo receives a demand from a dissenting shareholder to pay such
difference, it shall, within 60 days after receiving the demand, either pay to
the dissenting shareholder the amount demanded or agreed to by the dissenting
shareholder after discussion with ShopKo or file in a court of competent
jurisdiction in Hennepin County, Minnesota, a petition requesting that the
court determine the fair value of the ShopKo Shares, plus interest, if any.
All dissenting shareholders whose demands are not settled within the
applicable 60-day period will be made parties to the proceeding.
The court may appoint one or more appraisers to receive evidence and make
recommendations to the court as to the amount of the fair value of the shares.
The court shall determine whether the dissenting shareholders have complied
with the requirements of Section 30A.473 of the Minnesota Law and shall
determine the fair value of the shares, taking into account any and all
factors the court finds relevant, computed by any method or combination of
methods that the court, in its discretion, sees fit to use. The fair value of
the shares as determined by the court is binding on all dissenting
shareholders and may be less than, equal to or greater than the market price
of the Cabot Noble Shares to be issued to non-dissenting shareholders for
their ShopKo Shares if the ShopKo Plan is consummated. If the court determines
that the fair value of the shares is in excess of the amount, if any, remitted
by ShopKo, then the court will enter a judgment for cash in favor of the
dissenting shareholders in an amount by which the value determined by the
court, plus interest, exceeds such amount previously remitted. A dissenting
shareholder will not be liable to ShopKo if the amount, if any, remitted to
such shareholder exceeds the fair value of the shares, as determined by the
court, plus interest.
Costs and expenses of the court proceeding shall be determined by the court
and assessed against ShopKo, except that part or all of the costs may be
assessed against any dissenting shareholders whose actions in demanding
supplemental payments are found by the court to be arbitrary, vexatious or not
in good faith.
If the court finds that ShopKo did not substantially comply with the
relevant provisions of Section 302A.473 of the Minnesota Law, the court may
also assess the fees and expenses, if any, of attorneys or experts as the
court deems equitable against ShopKo. Such fees and expenses may also be
assessed against any party if the court finds that such party has acted
arbitrarily, vexatiously or not in good faith in bringing the proceedings, and
may be awarded to a party injured by those actions. The court may award, in
its discretion, fees and expenses of an attorney for the dissenting
shareholders out of the amount awarded to such shareholders, if any.
A shareholder of record may assert dissenters' rights as to fewer than all
of the shares registered in such shareholder's name only if he or she dissents
with respect to all shares beneficially owned by a beneficial shareholder and
notifies ShopKo of the name and address of each person on whose behalf he or
she asserts dissenters' rights. The rights of such a partial dissenting
shareholder are determined as if the shares as to which he or she dissents and
his or her other shares were registered in the names of different
shareholders. Beneficial owners of ShopKo Shares who desire to exercise
dissenters' rights themselves must obtain and submit the registered owner's
written consent at or before the time they file the notice of intent to demand
fair value.
For purposes of Minnesota Law, "fair value" means the value of ShopKo Shares
immediately before the Effective Date.
Under Subdivision 4 of Section 302A.471 of the Minnesota Law, a ShopKo
shareholder has no right, at law or in equity, to set aside the approval and
adoption of the ShopKo Plan or the consummation of the ShopKo Plan except if
such approval, adoption or consummation was fraudulent with respect to such
shareholder or ShopKo.
SOLICITATION OF SHOPKO PROXIES
The accompanying proxy is being solicited by the ShopKo Board for use in
connection with the ShopKo Special Meeting. ShopKo will bear its own expenses
in connection with the ShopKo Special Meeting. In addition to solicitation of
proxies by mail, directors, officers and employees of ShopKo may make
solicitation of proxies for the ShopKo Special Meeting either personally or by
telephone, telegram or other forms of communication. Such directors, officers
and employees will receive no special compensation for any solicitation.
Brokerage
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houses, nominees, fiduciaries and other custodians will be requested to
forward soliciting materials to beneficial owners and will be reimbursed for
their customary charges and expenses.
ShopKo shareholders are requested to complete, date and sign the
accompanying form of proxy and return it to ShopKo in the enclosed postage-
paid envelope. When the accompanying form of proxy is returned properly
executed, the ShopKo Shares represented thereby will be voted at the ShopKo
Special Meeting in accordance with the instructions received therein. If a
proxy is executed and returned without an indication as to how the ShopKo
Shares represented thereby are to be voted, such shares will be voted in favor
of approval and adoption of the ShopKo Plan. Shareholder approval will
constitute approval of the Combination if the ShopKo Exchange Ratio is greater
than 3.140 or less than 1.895 and the Combination Agreement is not terminated,
subject to the fiduciary obligations of the ShopKo and Phar-Mor Boards and
other applicable legal requirements.
Alternatively, until the commencement of the ShopKo Special Meeting, a
registered holder of ShopKo Shares may vote in the following manner:
. The registered holder of ShopKo Shares to be voted should dial (1 800
- ) between 8 a.m. and midnight Eastern Standard Time on any day
commencing , 1997 and ending on , 1997 (or, in the event the
ShopKo Special Meeting is adjourned, on the day prior to the date of the
adjourned meeting) and tell the operator that such holder wishes to send
a collect datagram to Shopko Stores, Inc.
. The operator will need the registered holder's six digit identification
number. The identification number appears in the upper left hand corner
on the back side of the proxy card.
. The operator will have the text of the proxy card. The registered holder
should then inform the operator how such holder wishes to vote on the
items listed on the proxy card.
. Registered holders should give the operator their name(s), address and
number of shares exactly as such information appears on their proxy card.
If a ShopKo shareholder's shares are registered in the name of a broker,
bank, nominee or other institution, only such broker, bank, nominee or other
institution can vote such shares. SHOPKO SHAREHOLDERS SHOULD NOT USE THE
TELEPHONIC PROCEDURES SET FORTH ABOVE TO VOTE ANY SHARES HELD ON THEIR BEHALF
BY SUCH BROKER, BANK, NOMINEE OR OTHER INSTITUTION. Such ShopKo shareholders
desiring to take advantage of the telephonic voting procedure should contact
their account representative and ask him or her to vote such shares.
If a holder of ShopKo Shares needs assistance, such holder should call (414)
497-2211. Banks and brokers may call collect, all others may call toll-free (1
800 - ).
Any ShopKo shareholder giving a proxy pursuant to the solicitation has the
power to revoke it at any time before it is voted at the ShopKo Special
Meeting. A later dated proxy or written notice of revocation given prior to
the vote at the ShopKo Special Meeting to an officer of ShopKo will serve to
revoke such proxy. REGISTERED HOLDERS OF SHOPKO SHARES SHOULD NOT FOLLOW THE
TELEPHONIC PROCEDURE SET FORTH ABOVE TO REVOKE A PREVIOUSLY SUBMITTED PROXY. A
ShopKo shareholder who properly revokes any prior proxies may thereafter vote
in person by ballot at the ShopKo Special Meeting. A shareholder's presence at
such meeting does not alone serve to revoke any proxy previously given.
----------------
SHOPKO SHAREHOLDERS SHOULD NOT SEND ANY
STOCK CERTIFICATES WITH THEIR PROXY CARDS
----------------
SOLICITATION OF PHAR-MOR PROXIES
The accompanying proxy is being solicited by the Phar-Mor Board for use in
connection with the Phar-Mor Special Meeting, including any adjournment
thereof. See "Phar-Mor Record Date; Quorum; Vote Required." Phar-Mor will bear
its own expenses in connection with the Phar-Mor Special Meeting. In addition
to solicitation
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of proxies by mail, directors, officers and employees of Phar-Mor may make
solicitation of proxies for the Phar-Mor Special Meeting either personally or
by telephone, telegram or other forms of communication. Such directors,
officers and employees will receive no special compensation for any
solicitation. Brokerage houses, nominees, fiduciaries and other custodians
will be requested to forward soliciting materials to beneficial owners and
will be reimbursed for their customary charges and expenses.
Phar-Mor shareholders are requested to complete, date and sign the
accompanying form of proxy and return it to Phar-Mor in the enclosed postage-
paid envelope. When the accompanying form of proxy is returned properly
executed, the Phar-Mor Shares represented thereby will be voted at the Phar-
Mor Special Meeting, including any adjournment thereof, in accordance with the
instructions received therein. If a proxy is executed and returned without an
indication as to how the Phar-Mor Shares represented thereby are to be voted,
such shares will be voted in favor of approval and adoption of the Phar-Mor
Plan. Shareholder approval will constitute approval of the Combination if the
ShopKo Exchange Ratio is greater than 3.140 or less than 1.895 and the
Combination Agreement is not terminated, subject to the fiduciary obligations
of the Phar-Mor and ShopKo Boards and other applicable legal requirements.
Alternatively, until the commencement of the Phar-Mor Special Meeting, a
registered holder of Phar-Mor Shares may vote in the following manner:
. The registered holder of Phar-Mor Shares to be voted should dial (1 800
- ) between 8 a.m. and midnight Eastern Standard Time on any day
commencing , 1997 and ending on , 1997 (or, in the event that the
Phar-Mor Special Meeting is adjourned, on the day prior to the date of
the adjourned meeting) and tell the operator that such holder wishes to
send a collect datagram to Phar-Mor, Inc.
. The operator will need the registered holder's six digit identification
number. The identification number appears in the upper left hand corner
on the back side of the proxy card.
. The operator will have the text of the proxy card. The registered holder
should then inform the operator how such holder wishes to vote on the
items listed on the proxy card.
. Registered holders should give the operator their name(s), address and
number of shares exactly as such information appears on their proxy
card.
If a Phar-Mor shareholder's shares are registered in the name of a broker,
bank, nominee or other institution, only such broker, bank, nominee or other
institution can vote such shares. PHAR-MOR SHAREHOLDERS SHOULD NOT USE THE
TELEPHONIC PROCEDURES SET FORTH ABOVE TO VOTE ANY SHARES HELD ON THEIR BEHALF
BY SUCH BROKER, BANK, NOMINEE OR OTHER INSTITUTION. Such Phar-Mor shareholders
desiring to take advantage of the telephonic voting procedure should contact
their account representative and ask him or her to vote such shares.
If a holder of Phar-Mor Shares needs assistance, such holder should call
. Banks and brokers may call collect, all others may call toll-free (1 800
- ).
Any Phar-Mor shareholder giving a proxy pursuant to the solicitation has the
power to revoke it at any time before it is voted at the Phar-Mor Special
Meeting. A later dated proxy or written notice of revocation given prior to
the vote at the Phar-Mor Special Meeting to the Secretary of Phar-Mor will
serve to revoke such proxy. Registered holders of Phar-Mor Shares also may
revoke a previously submitted proxy by following the telephonic procedure set
forth above. A Phar-Mor shareholder who attends the Phar-Mor Special Meeting
in person may vote by ballot at the Phar-Mor Special Meeting, thereby
canceling any proxy previously given. A shareholder's presence at such meeting
does not alone serve to revoke any proxy previously given.
----------------
PHAR-MOR SHAREHOLDERS SHOULD NOT SEND ANY
STOCK CERTIFICATES WITH THEIR PROXY CARDS
----------------
OTHER MATTERS TO BE CONSIDERED
Neither the Phar-Mor Board nor the ShopKo Board is aware of any other matter
which will be brought before either the Phar-Mor Special Meeting or the ShopKo
Special Meeting. If, however, other matters are presented, proxies will be
voted in accordance with the discretion of the holders of such proxies.
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<PAGE>
THE TRANSACTION
The description of the Transaction set forth below does not purport to be
complete and is qualified in its entirety by reference to the Combination
Agreement, a copy of which is attached hereto as Annex A and incorporated by
reference herein.
BACKGROUND OF THE TRANSACTION
ShopKo Background. Over the last several years, ShopKo has determined that
to succeed and remain profitable in the very competitive discount retail
industry, it would be necessary to obtain economies of scale in its retail
business and to grow its health services businesses. This determination was
reemphasized by the recent turmoil in the discount retail industry, including
bankruptcy filings and/or generally poor financial results of a number of
ShopKo's regional competitors. ShopKo believes that by achieving economies of
scale it can achieve greater purchasing power, offer more competitive pricing,
and enhance its financial performance over the long term. ShopKo has also been
cognizant of the fact that supervalu has publicly expressed its intention to
liquidate its investment in ShopKo in order to concentrate on its own core
business. Over the last several years, ShopKo has informally contacted various
retail businesses concerning possible business combinations and none of those
contacts advanced beyond preliminary discussions. The reasons why none of
these contacts proceeded beyond preliminary discussions varied depending upon
the particular circumstances of the party contacted. In large part, the
parties contacted simply were not interested in or receptive to discussions
concerning a business combination with ShopKo. Also during this period, ShopKo
explored the possibility of a secondary offering of supervalu's Shopko Shares
to reduce its ownership in ShopKo, including exploring such possibilities as
recently as the spring and early summer of 1996. A secondary offering was not
pursued after such exploration. The primary reason a secondary offering was
not pursued was that any large secondary offering was expected to have a
significant negative impact on the market for ShopKo Shares.
In the late winter of 1995 and spring of 1996, ShopKo began reviewing
strategic alternatives available to it to maximize shareholder value. In
connection with this review, Salomon Brothers was engaged to present a review
of strategic alternatives to the ShopKo Board at the ShopKo Board meeting on
June 19, 1996.
Phar-Mor Background. Since Phar-Mor's emergence from bankruptcy in September
1995, Phar-Mor has sought to complement its internal growth from its base of
more than 100 stores through a strategic business combination with another
company. Phar-Mor's overall merchandising strategy has been to offer (a) value
to consumers by pricing its products below the prices charged by conventional
drugstores and supermarkets and (b) a broader array of products in each of its
major product categories than is offered by mass merchant discounters. While
Phar-Mor conducted preliminary discussions with several possible acquisition
candidates, no understanding or agreement was reached with respect to any
business combination.
The Phar-Mor Board concluded that Phar-Mor would need to grow to compete
effectively against other discount merchandise chains. Phar-Mor's acquisition
strategy has been designed to identify potential candidates for a business
combination to create a larger and stronger discount retail drug store chain
with a broader geographic market, enhanced purchasing power and a more
powerful presence in the increasingly competitive market for discount
merchandising.
Background of Negotiations. In the spring of 1996, ShopKo was negotiating
with FoxMeyer Health regarding the acquisition by ShopKo of FoxMeyer Health's
Scrip Card business. See "Certain Transactions--CareStream Scrip Card
Acquisition by ShopKo." During these negotiations, FoxMeyer Health
representatives who are also directors of Phar-Mor, Messrs. Butler and Estrin,
had several meetings or communications with members of ShopKo's management and
generally became familiar with ShopKo's business. In May 1996, FoxMeyer Health
representatives discussed ShopKo with Mr. Robert Haft, Chairman and CEO of
Phar-Mor. On May 22, 1996, Mr. Haft called Mr. Michael W. Wright, Chairman and
CEO of supervalu and Chairman of the ShopKo Board and inquired about the
possibility of Phar-Mor acquiring supervalu's interest in ShopKo. The May 22
call was followed by subsequent calls and a letter from Mr. Haft to Mr. Wright
on May 28, 1996 in which Mr. Haft
40
<PAGE>
indicated Phar-Mor's interest in purchasing supervalu's interest in ShopKo.
Subsequent to May 28, 1996, supervalu informed Phar-Mor that if Phar-Mor were
interested in a business combination with ShopKo, Phar-Mor should contact
ShopKo directly.
At the ShopKo Board meeting on June 19, 1996, Salomon Brothers presented its
previously scheduled review of strategic alternatives to the ShopKo Board. The
presentation materials consisted of an executive summary of the strategic
alternatives available to ShopKo, an analysis of ShopKo's competitive position
in the discount retail business, strategic retail acquisition profiles (which
included Phar-Mor), a review of ProVantage strategic alternatives, a share
repurchase analysis, and a supplementary analysis of distressed company
opportunities. The ShopKo Board discussed this material in detail with
representatives of Salomon Brothers regarding the advantages and disadvantages
of various different alternatives. Salomon Brothers recommended to the ShopKo
Board that ShopKo (i) enhance the scale of its discount store business, and
(ii) enhance the scale, service range, and capabilities of ShopKo's health
care businesses. See "Cabot Noble Business Strategy" and "--Recommendation of
the ShopKo Board; Reasons for the Transaction." At the same meeting, the
ShopKo Board was informed of the discussions that had taken place with Phar-
Mor. The ShopKo Board directed management to investigate the Phar-Mor
contacts.
On June 21, 1996, representatives of Phar-Mor, ShopKo and supervalu,
together with Phar-Mor's financial advisor, Jefferies, and ShopKo's financial
advisor, Salomon Brothers, met to discuss a possible business combination
between Phar-Mor and ShopKo. On June 24, 1996, Phar-Mor and ShopKo entered
into reciprocal confidentiality agreements, and on June 27, 1996, Mr. Haft met
with Messrs. Kramer, Podany, and Jones, Shopko's chief executive officer,
chief operating officer, and chief financial officer, respectively, to discuss
strategic and other issues in connection with a possible business combination.
Negotiations and due diligence activities by all parties continued through
July and August.
The Phar-Mor Board met on July 16, 1996, at which time Jefferies, Phar-Mor's
counsel and members of Phar-Mor's management made detailed presentations to
the Phar-Mor Board with respect to a possible business combination with
ShopKo. The presentations included: (i) the status of negotiations among the
parties to date; (ii) potential structure of the proposed transaction; (iii)
estimates of earnings of the combined enterprise; (iv) potential buying and
other administrative synergies; and (v) strategies for negotiating with ShopKo
and supervalu. The Phar-Mor Board authorized Phar-Mor's management to continue
discussions with the appropriate representatives of ShopKo and SUPERVALU.
On July 26, 1996, the ShopKo Board met and, among other things, (i)
established a Special Committee of disinterested directors consisting of
Messrs. Eugster and Tyrell (the "ShopKo Special Committee") to review a
possible business combination with Phar-Mor on behalf of ShopKo, and (ii)
engaged Salomon Brothers to assist ShopKo in connection with a possible
business combination with Phar-Mor. Salomon Brothers made a presentation to
the ShopKo Board. Salomon's presentation materials consisted of an executive
summary of the June 19, 1996 Board presentation, (which included an assessment
of strategic and financial alternatives to the Combination and conclusions
reached at the June meeting), an assessment of ShopKo and Phar-Mor's business
fit, a review of Phar-Mor's stand-alone and pro forma combined financial
statements, a review and analysis of Phar-Mor's proposal, a review of ShopKo
valuation considerations, a ShopKo Management Business Plan update, and a
discussion of a secondary offering alternative.
In July and August 1996, representatives of Phar-Mor, ShopKo and supervalu
conducted detailed discussions concerning the structure of a possible business
combination, the terms of a definitive agreement, and certain related
documents.
Throughout the period of negotiations, the financial and legal advisors to
ShopKo consulted with and took direction from the ShopKo Special Committee.
The ShopKo Special Committee met four times between July 30 and August 8,
1996, to review and discuss the negotiations concerning the possible business
combination. At each meeting of the ShopKo Special Committee, the Committee
members were given an update on the status of negotiations; the Committee
members gave ShopKo's advisors direction on ShopKo's position with respect to
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negotiating the proposed transaction; and the Committee members were otherwise
provided with information necessary for them to make careful and informed
decisions regarding the proposed transaction. The ShopKo Special Committee
members were also updated individually on the status of the negotiations
several times in July and August.
In mid-August, Phar-Mor submitted draft Combination documents to all parties
(the "Combination Documents"), including drafts of the Combination Agreement,
Stock Purchase Agreement and Voting Agreement. On August 26, 1996, the ShopKo
Board met, and Mr. Haft and other Phar-Mor representatives made a presentation
to the ShopKo Board concerning the Phar-Mor proposal and plans for the
combined company. During the presentation, Mr. Haft and the Phar-Mor
representatives discussed issues with respect to the operations, corporate
structure and management of the combined companies, including: the proposed
future operations of ShopKo; the role of Phar-Mor management in the
Combination; anticipated changes in employment agreements and corporate
structure resulting from the Combination; other proposed changes relating to
corporate structure and operations of the combined companies; the direct
synergies expected to be achieved by the Combination; the merchandising
strategies of the combined companies; the allocation of capital resources in
the combined companies; Mr. Haft's business background and proposed future
role in the new corporation; and the growth strategy for Cabot Noble and the
availability of capital to fund this growth. Mr. Haft and the Phar-Mor
representatives also discussed other issues with respect to the Combination,
including: the obstacles to achieving item retail price parity for retail
merchandise with its competitors; Phar-Mor and ShopKo's most recent operating
results; the timing of the Combination; contingencies to closing; significant
shareholders of the companies; and vendor relationships. The presentation
materials included, among other things, recent advertising circulars and
photographs of recently remodeled Phar-Mor stores.
On August 27, 1996, the Phar-Mor Board met to consider the terms of the
Combination Documents and representatives of Jefferies presented an analysis
of the Combination and delivered their oral opinion and written presentation
as to the fairness, from a financial point of view, to the holders of Phar-Mor
Shares of the consideration to be received by such shareholders pursuant to
the transaction contemplated by the Combination Agreement dated September 5,
1996. See "--Phar-Mor Fairness Opinion." Jefferies' presentation materials
included (i) a fairness opinion overview which detailed the objective of the
fairness opinion; (ii) a transaction overview which included a review of the
transaction terms, a list of transaction contingencies, and a pro forma
ownership analysis; (iii) an overview of both ShopKo and Phar-Mor, including a
summary of both companies' historical financial results, historical stock
price performance, current market valuations, business plans, projections,
benefits of the combination, pro forma geographic composition and anticipated
synergies; (iv) a summary of consideration to be paid including components of
the purchase price to be received by ShopKo Public Shareholders and supervalu,
implied financial valuation multiples and a matrix of potential exchange
ratios; (v) a valuation analysis of Phar-Mor, including a comparable company
valuation analysis, discounted cash flow analysis, an earnings per share
comparison analysis and a relative contribution analysis; and (vi) a valuation
analysis of ShopKo, including a comparable company valuation analysis, recent
merger and acquisition transaction multiple analysis, premiums paid analysis,
discounted cash flow analysis and a relative contribution analysis. Other
significant issues discussed and considered by the Phar-Mor Board were: (i)
Cabot Noble Board composition; (ii) a voting agreement with supervalu; (iii)
employment agreements with certain ShopKo senior executives; and (iv) a
litigation indemnification requested by supervalu. At that meeting, the Phar-
Mor Board unanimously approved the Combination, approved and adopted the Phar-
Mor Plan, and directed the officers of Phar-Mor involved in negotiations to
meet with ShopKo and supervalu in an attempt to complete final negotiations on
certain remaining issues.
On August 28, 1996, the ShopKo Board met and reviewed the Combination
Documents in detail, and Salomon Brothers presented its view that the proposed
transaction was fair to ShopKo's public shareholders from a financial point of
view. Salomon's presentation materials consisted of a summary of past analysis
for ShopKo, an executive summary (which included a review of transaction
terms, an overview of proposed transactions, the objective of the fairness
opinion, a summary of the Phar-Mor Business plan, a summary of certain
operating assumptions, and a summary of Phar-Mor projections), transaction
considerations, overviews of ShopKo and
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Phar-Mor, public market valuation analysis, a discounted cash flow analysis,
analysis of premiums in stock-for-stock combinations, and a series of
transaction case analyses. The ShopKo Board also established a special
committee under Section 302A.673 of the Minnesota Law consisting of Mr.
Eugster (the "Section 673 Committee") to review the proposed Combination and
the proposed Voting Agreement. Section 302A.673 of the Minnesota Law prohibits
business combinations between an issuing public corporation and an
"interested" shareholder for a period of four years following the interested
shareholder's share acquisition date unless the business combination or the
acquisition of shares made by the interested shareholder is approved before
the interested shareholder's share acquisition date by a committee formed in
accordance with Section 302A.673(d). Under Section 302A.673(d)(3), only Mr.
Eugster qualified to be on the Section 673 Committee. The Section 673
Committee was formed in order to comply with Section 302A.673 of the Minnesota
Law. The full ShopKo Board then adjourned, and the ShopKo Special Committee
and the Section 673 Committee then met and approved the proposed Combination,
and, in the case of the Section 673 Committee, the proposed Voting Agreement,
and recommended that the full ShopKo Board approve the proposed Combination.
The full ShopKo Board then reconvened and unanimously approved the principal
terms of the proposed Combination, subject to satisfactory resolution of the
remaining issues.
Negotiations on these open issues continued over the succeeding days. On
September 4 and September 5, 1996, the Phar-Mor Board met to consider
modifications to the terms of the Cabot Noble Buy Back suggested by Phar-Mor
and approve the results of final negotiations, including a discussion with
representatives of Jefferies and a determination by Jefferies that the
negotiated changes would not affect its fairness opinion. The Phar-Mor Board
ratified such changes. In the vote on September 5, 1996, all members of the
Phar-Mor Board voted in favor of such modifications, other than Messrs. Butler
and Estrin, the two members of the Phar-Mor Board who are officers and
directors of FoxMeyer Health, who abstained. At each of the meetings, the
structure of various financing methods and Cabot Noble's Board composition
were again discussed and considered as well as the procedure and timing of the
transaction. See "Risk Factors--Hamilton Morgan Issues," and "Description of
Phar-Mor--Security Ownership of Certain Beneficial Owners and Management."
On September 6, 1996, the ShopKo Board, the ShopKo Special Committee, and
the Section 673 Committee met again. At the ShopKo Board meeting the ShopKo
Board reviewed the revised Combination Documents, and Salomon Brothers
reconfirmed its view as to the fairness of the proposed Combination from a
financial point of view to the ShopKo Public Shareholders, which opinion was
delivered in written form on September 7, 1996. Salomon's presentation
materials consisted of a summary of past analysis for ShopKo, an executive
summary (which included a summary of proposed transaction terms, an overview
of transactions, the objective of the fairness opinion, a summary of the Phar-
Mor business plan, a summary of certain operating assumptions, and a summary
of Phar-Mor operating projections), a review of pricing considerations, a
financial summary, a review of transaction considerations, overviews of ShopKo
and Phar-Mor, a public market valuation analysis, a discounted cash flow
analysis, an analysis of premiums in stock-for-stock combinations, and a
series of transaction case analyses. Both the ShopKo Special Committee and the
Section 673 Committee approved the proposed Combination, and in the case of
the Section 673 Committee, the proposed Voting Agreement, and recommended that
the full ShopKo Board approve the proposed Combination. The full ShopKo Board
then unanimously approved and adopted the ShopKo Plan and approved the
proposed Combination.
On Saturday, September 7, 1996, Phar-Mor, ShopKo and Cabot Noble entered
into the Combination Agreement; supervalu and Cabot Noble entered into the
Stock Purchase Agreement; and supervalu, Cabot Noble and Mr. Haft entered into
the Voting Agreement. On Monday, September 9, 1996, Phar-Mor and ShopKo issued
press releases announcing the Combination.
On October 9, 1996, the ShopKo Special Committee, the Section 673 Committee
and the ShopKo Board met to consider certain proposed changes to the terms of
the Combination Agreement, suggested by Phar-Mor, concerning the terms of the
Cabot Noble Buy Back, the composition of the Cabot Noble Board, and other
matters. Salomon Brothers presented an analysis of the effect of such proposed
changes, and reconfirmed its opinion that the proposed Combination is fair
from a financial point of view to the ShopKo Public Shareholders,
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which opinion was delivered in written form on October 9, 1996. The Special
Committee and the Section 673 Committee approved the proposed amendments to
the Combination Agreement and recommended that the full ShopKo Board approve
the proposed amendment to the Combination Agreement, and the ShopKo Board
unanimously approved the proposed amendments. Such proposed amendments were
not submitted to the Phar-Mor Board for its approval because no additional
approval was deemed necessary in light of the approvals previously granted by
the Phar-Mor Board in respect of the Combination during its meetings on August
27, September 4 and September 5.
Since October 9, 1996, Phar-Mor has proposed additional changes to the
Combination Agreement, primarily concerning adjusting the mechanism for
determining ShopKo Exchange Ratio in light of the decline in the market price
of Phar-Mor Shares. Such proposals have not resulted in any changes to the
Combination Agreement.
The ShopKo, Phar-Mor and Cabot Noble Boards considered the Cabot Noble Buy
Back in determining whether to approve the Combination. In approving the
Combination (which contemplates the Cabot Noble Buy Back), the ShopKo Board
was required under the Minnesota Law to act in good faith, in a manner the
directors reasonably believed to be in the best interests of the corporation,
and with the care an ordinarily prudent person in a like position would
exercise under similar circumstances; the Phar-Mor Board was required under
the Pennsylvania Law to act in a manner the directors reasonably believed to
be in the best interests of the corporation, and with such care as a person of
ordinary prudence would use under similar circumstances; and the Cabot Noble
Board was required under the Delaware Law to act in the best interest of the
corporation with undivided and unselfish loyalty, and to use that amount of
care that ordinarily careful and prudent people would use in similar
circumstances in the handling of their own affairs. As described above, the
ShopKo Board established a special committee of independent directors to
review the Combination in light of all significant factors, including the
Cabot Noble Buy Back. Phar-Mor obtained an opinion from Jefferies as to the
fairness of the Combination, including the Cabot Noble Buy Back, to
shareholders from a financial point of view. See "The Transaction--Phar-Mor
Fairness Opinion."
The Cabot Noble Buy Back was negotiated directly between supervalu and Phar-
Mor over a period of several months. The negotiations concerned price, the
form of consideration, the timing of receipt of consideration, and other
related matters. The ShopKo Special Committee was informed on the status of
such negotiations on a regular basis, and considered such information in
evaluating the proposed Combination and directing ShopKo's advisors in
negotiating with Phar-Mor.
RECOMMENDATIONS OF SHOPKO BOARD; REASONS FOR THE TRANSACTION
In approving the Combination, the ShopKo Board considered a number of
factors, including the following:
(1) The financial condition and results of operations of ShopKo and Phar-
Mor;
(2) The projected financial condition, results of operations, prospects
and strategic objectives of ShopKo and Phar-Mor, and the risks of achieving
those prospects and objectives, including, in the case of ShopKo,
increasingly intense competition from larger companies with greater
purchasing power, lower merchandise unit costs and more resources than
ShopKo, and pressure on ShopKo's prices from managed health care
organizations and other purchasers of ShopKo merchandise;
(3) The purchase by Cabot Noble pursuant to the Cabot Noble Buy Back of
90% of the Cabot Noble Shares received by supervalu in the ShopKo Exchange,
which will:
(a) based on the analysis of Salomon Brothers, result in higher
earnings per share for the Cabot Noble Shares received by the ShopKo
Public Shareholders;
(b) cause the ShopKo Public Shareholders to own a much greater
percentage of the Cabot Noble Shares than they currently own of ShopKo
Shares;
(c) remove the potential dominance of Cabot Noble by supervalu; and
(d) eliminate the potential for the market price of Cabot Noble
Shares being depressed by potential or actual sales of large amounts of
stock by a single significant shareholder.
(4) The fact that it would be necessary for ShopKo to incur an
unreasonably large amount of debt to enable it to purchase ShopKo Shares
owned by supervalu, whereas the Phar-Mor cash resources and
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ShopKo cash resources, together with the proceeds of a reasonable amount of
debt, will enable Cabot Noble to purchase, pursuant to the Cabot Noble Buy
Back, 90% of the Cabot Noble Shares received by supervalu in the
Combination;
(5) The fact that supervalu will sell 90% of its Cabot Noble Shares to
Cabot Noble for the equivalent of $16.86 per ShopKo Share in cash, which on
a per share basis will be between 2.3% and 6.3% less than the value of the
Cabot Noble Shares to be received per ShopKo Share by the ShopKo Public
Shareholders, and the fact that $16.86 per ShopKo Share is below the low
end of Salomon Brothers' discounted cash flow analysis range for ShopKo;
(6) The terms and conditions of the Combination Agreement and the course
of negotiations thereon, including terms which permit the ShopKo Board, to
the extent required by their fiduciary duties,
(a) to participate in discussions or negotiations with, and to
furnish information to, any person or entity in connection with any
tender or exchange offer or proposal for a merger, consolidation or
other business combination involving a substantial equity interest in,
or a substantial portion of the assets of, ShopKo, provided that the
ShopKo shareholders' approval and the Phar-Mor shareholders' approval
have not been obtained, and provided further that ShopKo has notified
Phar-Mor orally and in writing of any such inquiries, offers or
proposals (including the terms and conditions of any such inquiry,
offer or proposal and the identity of the party making it) within 24
hours of the receipt thereof and has given Phar-Mor five days' advance
written notice of any agreement to be entered into with or any
information to be supplied to the party making such inquiry, offer or
proposal, although ShopKo is prohibited by the Combination Agreement
from initiating, soliciting or encouraging, or taking any action to
facilitate, any offer or proposal for such a transaction; and
(b) to terminate the Combination Agreement upon five days' written
notice to Phar-Mor, if as a result of a tender offer by a party other
than Phar-Mor or any of its affiliates, or any written offer or
proposal with respect to a merger or sale of a material portion of its
assets, or other business combination by a party other than Phar-Mor or
any of its affiliates, and the ShopKo Board determines to accept such
tender offer or other written offer or proposal, and provided that the
ShopKo Board has received a written opinion by outside counsel that
notwithstanding a binding commitment to consummate the Combination
Agreement the ShopKo Board's fiduciary duties require it to reconsider
such commitment as a result of an offer or proposal and provided
further that prior to termination of the Combination Agreement ShopKo
has negotiated in good faith with Phar-Mor to make such adjustments to
the terms and conditions of the Combination Agreement as would enable
ShopKo to proceed with the Combination Agreement. (The ShopKo Board
noted that the Combination Agreement requires ShopKo to pay to Phar-Mor
up to $15.5 million if the Combination Agreement is terminated under
certain circumstances because of a prospective transaction between
ShopKo and a person or entity other than Phar-Mor.);
(7) The presentation to the ShopKo Board by Mr. Haft of the anticipated
business plan for Cabot Noble, Phar-Mor and ShopKo, described above in "--
Background of the Transaction," including plans to reduce their combined
purchasing, administration and other costs by combining certain functions,
and to increase their combined sales by adding certain ShopKo product lines
and services to Phar-Mor stores, and adding certain Phar-Mor products to
ShopKo stores;
(8) The ShopKo Public Shareholders will exchange their investments in a
regional business for an investment in a national and more diversified
business;
(9) The acquisition by the ShopKo Public Shareholders of an equity
interest in the 102 Phar-Mor stores--selected from Phar-Mor's 311 pre-
bankruptcy stores--in connection with ShopKo's administrative management
strength and infrastructure;
(10) The report to the ShopKo Board by ShopKo executive officers and
legal advisors concerning their due diligence investigation of Phar-Mor;
(11) Mr. Haft's business reputation, experience and track record as a
manager of significant retail businesses;
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(12) The composition of the Cabot Noble Board and the fact that the Cabot
Noble Certificate will mandate that a majority of its directors be
"independent," with "independent" defined as any individual who (a) is not
an affiliate (as defined in Rule 12b-2 of the Exchange Act, and the rules
and regulations thereunder) of Cabot Noble or an associate (as defined in
Exchange Act Rule 12b-2) of such an affiliate (except an individual who is
an affiliate of Cabot Noble solely because such individual is a Director)
or of any corporation, partnership, association or other entity with
respect to which Cabot Noble owns a majority of the common stock or other
equity interests or has the power to vote or direct the voting of a
sufficient number of securities or other governing body ("Subsidiary"), and
(b) is not, and has not been, an officer or employee, or a family member of
any officer, director or employee, of Cabot Noble or any Subsidiary.
(13) The written opinions dated as of September 7, 1996 and October 9,
1996 of Salomon Brothers, that, as of such dates and based on and subject
to the considerations set forth in such opinions, the consideration to be
received by the ShopKo Public Shareholders pursuant to the Combination
Agreement is fair from a financial point of view to such holders;
(14) The availability to the holders of ShopKo Shares of dissenters'
appraisal rights under the Minnesota Law;
(15) The unanimous recommendation of the ShopKo senior executive officers
that the Combination be approved by the ShopKo Board and its shareholders,
recognizing the individual interests of such officers in the Combination;
(16) The unqualified and unanimous recommendation of the ShopKo Special
Committee and the Section 673 Committee that the Combination be approved by
the ShopKo Board;
(17) The expressed desire of supervalu to sell its interest in ShopKo;
(18) The effect of the Combination on the employees, suppliers and
customers of ShopKo and the communities in which its stores are located;
(19) The effect of the Combination on ShopKo's debt holders and the
financial and credit profile of the combined company;
(20) The fact that ShopKo pays dividends on the ShopKo Shares whereas
Cabot Noble is not expected to pay dividends on Cabot Noble Shares in the
foreseeable future;
(21) The familiarity of the ShopKo Board with the business, operations,
prospects and assets (including real estate) of ShopKo. See "Description of
ShopKo--Properties;" and
(22) Consideration of the Combination at eight meetings of the ShopKo
Special Committee and five meetings of the entire ShopKo Board.
The ShopKo Board did not quantify or attempt to assign relative weights to
the specific factors considered in reaching its determination. A copy of the
written opinion of Salomon Brothers, which sets forth the assumptions,
qualifications and procedures on which such opinion is based, is attached
hereto as Annex B, and ShopKo shareholders are urged to read that opinion in
its entirety.
The ShopKo Board generally considered the proposed Combination to be
beneficial to ShopKo's employees, suppliers, and customers since the
Combination is expected to enhance ShopKo's ability to achieve economies of
scale in the very competitive discount retail industry. The ShopKo Board also
considered the fact that the Combination could be completed in accordance with
ShopKo's contractual commitment to debt holders. Such effects were considered
to be positive factors by the ShopKo Board in considering the Combination.
SHOPKO FAIRNESS OPINION
At meetings of the ShopKo Board held on August 28, 1996, September 6, 1996
and October 9, 1996, Salomon Brothers delivered its oral opinion, subsequently
confirmed in writing, that, as of such dates and in connection with the
Transaction, the ShopKo Exchange Ratio is fair to the ShopKo Public
Shareholders from a
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financial point of view. No limitations were imposed by the ShopKo Board upon
Salomon Brothers with respect to the investigation made or the procedures
followed by Salomon Brothers in rendering its opinion.
The full text of the written opinion of Salomon Brothers, dated as of
October 9, 1996, is set forth as Annex B to this Joint Proxy
Statement/Prospectus and sets forth the assumptions made, procedures followed
and matters considered by Salomon Brothers. ShopKo shareholders are urged to
read Salomon Brothers' opinion in its entirety. The summary of the opinion as
set forth in this Joint Proxy Statement/Prospectus is qualified in its
entirety by reference to the full text of such opinion.
In connection with rendering its opinion, Salomon Brothers reviewed certain
publicly available information concerning ShopKo and Phar-Mor, respectively.
Salomon Brothers was not requested to and did not solicit third party
indications of interest in ShopKo. In arriving at its opinion, however,
Salomon Brothers did consider information provided to it by ShopKo as to prior
informal discussions with third parties concerning a possible business
combination. Salomon Brothers also discussed the business operations and
financial condition of ShopKo and Phar-Mor, as well as other matters Salomon
Brothers believed relevant to its inquiry, with certain officers and employees
of ShopKo and Phar-Mor. Salomon Brothers also considered such other
information, financial studies, analyses, forecasts, investigations, and
financial, economic and market criteria that Salomon Brothers deemed relevant.
In its review and analysis and in arriving at its opinion, Salomon Brothers
assumed and relied upon the accuracy and completeness of the financial and
other information (including information relating to the obtaining
of regulatory approvals for the Transaction), and Salomon Brothers did not
assume any responsibility for independent verification of such information.
With respect to the financial forecasts of ShopKo and Phar-Mor, Salomon
Brothers assumed that such forecasts had been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
respective managements of ShopKo or Phar-Mor as to the future financial
performance of ShopKo or Phar-Mor, respectively, and Salomon Brothers
expressed no opinion with respect to such forecasts or the assumptions on
which such forecasts were based. The financial projections utilized by Salomon
Brothers in preparing its opinion differed from the projections utilized by
Jefferies. Salomon Brothers did not make or obtain or assume any
responsibility for making or obtaining any independent evaluations or
appraisals of the assets (including properties and facilities) or liabilities
of ShopKo or Phar-Mor.
Salomon Brothers' opinion is based upon conditions as they existed and could
be evaluated on the date thereof. Salomon Brothers' opinion does not imply any
conclusion as to the likely trading range for Cabot Noble Shares following the
consummation of the Transaction, which may vary depending upon, among other
factors, changes in interest rates, market conditions, general economic
conditions and other factors that generally influence the price of securities.
Salomon Brothers' opinion does not address ShopKo's underlying business
decision to effect the Transaction. Further, Salomon Brothers' opinion is
directed only to the fairness, from a financial point of view, of the ShopKo
Exchange Ratio to the ShopKo Public Shareholders and does not constitute a
recommendation concerning how holders of ShopKo Shares should vote with
respect to the ShopKo Plan. The proposed consideration to be received by
ShopKo shareholders was determined through negotiations between ShopKo and
Phar-Mor. In rendering its opinion, Salomon Brothers assumed that no
restrictions would be imposed by any regulatory authority that would have a
material adverse effect on the contemplated benefits of the Transaction to
Cabot Noble following the consummation of the Transaction.
The following is a summary of the reports and analyses (collectively, the
"Salomon Brothers Report") presented on August 28, 1996, certain of which were
updated on September 6 and 7 and again on October 9, 1996, by Salomon Brothers
to the ShopKo Board in connection with the rendering of Salomon Brothers'
opinion.
(i) Premium Analysis. Salomon Brothers calculated the implied premium to be
received by the ShopKo Public Shareholders (the "ShopKo Premium") based on the
$17.25 to $18.00 consideration range for ShopKo Public Shareholders (the
"Collar") and prices of ShopKo Shares and Phar-Mor Shares over certain recent
periods. The ShopKo Premium, based on the Collar and the closing stock price
for ShopKo Shares as of September 6, 1996, would have ranged from 6-11%.
Further, Salomon Brothers calculated the ShopKo Premium
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as ranging from 14-19% based on the average price of ShopKo Shares during the
30-day period ended September 6, 1996.
(ii) Exchange Ratio Analysis. Salomon Brothers reviewed the historical ratio
(the "Ratio") of the daily closing prices of ShopKo Shares to Phar-Mor Shares
over the period from September 11, 1995, through September 6, 1996. Such
analysis showed that based on stock prices over the thirty calendar days ended
on September 6, 1996, the average, high and low Ratios were 1.86, 2.06 and
1.73, as compared to the ratio of 2.23 (the "Implied Exchange Ratio") shares
of Phar-Mor Shares to each ShopKo Share based on the Collar and the 30-day
average Phar-Mor price for the period ended September 6, 1996.
(iii) Pro Forma Combination Consequences Analysis. Based on management
forecasts for ShopKo and Phar-Mor (the "Base Case"), Salomon Brothers examined
the pro forma combined forecast of results of operations for Cabot Noble for
the years ended February 28, 1998, and 1999 (each such period, a "Fiscal
Year"), Fiscal Years 1998 and 1999 estimated to be the first two complete
Fiscal Years after consummation of the Transaction. Salomon Brothers also
examined the pro forma combined forecast of results of operations under a
scenario based on the projections of ShopKo management and the projections of
Phar-Mor management, with the Phar-Mor projections revised downward to reflect
certain more conservative assumptions and adjustments by ShopKo management
(the "Adjusted Case"). The Adjusted Case anticipates that Phar-Mor would have
lower sales and incur net losses in each of Fiscal Years 1997, 1998 and 1999.
Based on the Base Case, this analysis showed an earnings per share ("EPS")
accretion of 26.5% in Fiscal Year 1998 and 48.0% in Fiscal Year 1999 to the
ShopKo Public Shareholders, assuming that Cabot Noble realizes pre-tax savings
resulting from certain synergies resulting from the combination of the two
companies of $15 million in Fiscal Year 1998 and $20 million in Fiscal Year
1999, net of savings assumed reinvested in more competitive pricing (the "Net
Synergies"). Based on the Adjusted Case, this analysis showed an EPS accretion
to the ShopKo Public Shareholders of 3.7% in Fiscal Year 1998 and 22.3% in
Fiscal Year 1999, assuming Cabot Noble realized the Net Synergies. Management
of ShopKo advised the ShopKo Board that it believed the Adjusted Case to be
conservative.
(iv) Comparable Company Analysis. In arriving at a valuation for ShopKo,
Salomon Brothers performed a valuation analysis for each of ShopKo's two
business segments, the discount retail business and the pharmacy benefit
management business. Salomon Brothers compared the discount retail segment of
ShopKo with the financial and market performance of the following group of
selected publicly traded discount retail companies: Dayton Hudson Corporation;
Kmart Corporation; Wal-Mart Stores, Inc.; Bradlees, Inc.; The Caldor
Corporation; Fred Meyer Inc.; Hills Stores Company; and Venture Stores, Inc.
Salomon Brothers examined certain publicly available financial and operating
data of the comparable companies, in particular; (a) equity market
capitalization; (b) the ratio (the "P/E Ratio") of current stock prices per
share to estimated EPS for (i) the latest twelve months ("LTM"), (ii) the 1997
fiscal years of such companies and (iii) the 1998 fiscal years of such
companies (such estimated earnings for the comparable companies and for
ShopKo, for each such period, as reported on First Call); (c) the ratio of the
equity value plus total debt, preferred stock, minority interests, less cash
(collectively, "Firm Value") to (i) the LTM revenues, (ii) the LTM earnings
before interest, taxes, depreciation and amortization ("EBITDA") and the LTM
earnings before interest and taxes ("EBIT"). All multiples were based on
closing stock prices as of September 6, 1996. This analysis showed: a range of
LTM P/E Ratios from 4.9x-53.1x (with a median of 23.0x) for the comparable
companies, as compared to 13.4x for ShopKo; a range of estimated 1997 P/E
Ratios from 6.3x-26.6x (with a median of 14.0x) for the comparable companies,
as compared to 12.3x for ShopKo; a range of 1998 P/E Ratios from 5.9x-16.7x
(with a median of 13.1x) for the comparable companies, as compared to 10.6x
for ShopKo; the ratios of Firm Value to LTM revenues ranged from .14x-.75x
(with a median of 0.27x) for the comparable companies, as compared to .41x for
ShopKo; the ratios of Firm Value to LTM EBITDA ranged from 4.1x-10.8x (with a
median of 6.0x) for the comparable companies, as compared to 5.4x for ShopKo;
and the ratios of Firm Value to LTM EBIT ranged from 6.8x-46.0x for the
comparable companies, as compared to 8.5x for ShopKo. Further, Salomon
Brothers compared the pharmacy benefit management business of ShopKo with the
financial and market performance of the following group of selected publicly
traded pharmacy benefit management companies: Caremark
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International Inc.; Express Scripts, Inc.; HCIA Inc.; Mednet MPC Corporation;
Systems, Inc.; and Value Health, Inc. Salomon Brothers examined certain
publicly available financial and operating data of the comparable companies,
in particular: (a) equity market capitalization; (b) the P/E Ratio of current
stock prices per share to estimated EPS for (i) the LTM, (ii) the 1996 fiscal
year and (iii) the 1997 fiscal year (such estimated earnings for the
comparable companies and for ShopKo, for each year, as reported on First
Call); (c) the ratio of Firm Value to (i) LTM revenues, (ii) LTM EBITDA and
(iii) LTM EBIT. All multiples were based on closing stock prices as of
September 6, 1996. This analysis showed: a range of LTM P/E Ratios from 24.9x-
75.6x (with a median of 41.8x) for the comparable companies; a range of 1996
P/E Ratios from 8.0x-58.1x (with a median of 20.0x) for the comparable
companies; a range of 1997 P/E Ratios from 8.7x-40.0x (with a median of 15.1x)
for the comparable companies; a range of ratios of Firm Value to LTM revenues
from .4x-9.1x (with a median of .7x) for the comparable companies; a range of
ratios of Firm Value to LTM EBITDA from 4.6-30.0 (with a median of 13.1x) for
the comparable companies; and a range of Firm Value to LTM EBIT from 6.2-53.9
(with a median of 17.7x) for the comparable companies. Based on these
comparisons, Salomon Brothers estimated the valuation of each of the two
business segments of ShopKo and added such results to estimate a valuation for
ShopKo. This analysis showed that ShopKo, as of September 6, 1996, was trading
at a 2.2%-24.2% premium to the sum of the estimated values of its business
segments. Salomon Brothers also showed that, based on the Implied Exchange
Ratio and the Collar, the premium to be received by the ShopKo Public
Shareholders would range from 13.2%-37.6%.
(v) Discounted Cash Flow Analysis. Using a discounted cash flow ("DCF")
methodology, Salomon Brothers valued ShopKo on a stand-alone basis in
accordance with the management forecasts by estimating the present value of
future unlevered free cash flows of ShopKo. Salomon Brothers aggregated (x)
the present value of the unlevered free cash flows for the period ranging from
November 2, 1996 to February 28, 2001 (the "Forecast Period") with (y) the
present value of the range of terminal values described below. The range of
terminal values was generally calculated by applying a range of multiples to
ShopKo's EBITDA for the last twelve months of the Forecast Period. This range
of terminal values represents ShopKo's value beyond the Forecast Period. As
part of the DCF analysis, Salomon Brothers used discount rates ranging from
11.5%-13.5% for ShopKo. This DCF analysis resulted in values ranging from $17
to $20 per ShopKo Share.
(vi) Contribution Analysis. Salomon Brothers reviewed the pro forma
contribution to the revenues, EBITDA, cash flow and net income of Cabot Noble
by ShopKo and Phar-Mor, without consideration to any cost savings related to
the Transaction, for the year ending February 22, 1997, such estimates having
been prepared in accordance with the Adjusted Case. The contribution analysis
showed that ShopKo's estimated percentage contribution to the financial
results of the combined entity were 68.4% of total revenues, 83.9% of EBITDA,
246.4% of free cash flow (which percentage is offset by -146.4% contribution
to cash flow by Phar-Mor). Salomon Brothers noted that, based on the Implied
Exchange Ratio, holders of ShopKo Shares will hold 85.1% of outstanding Cabot
Noble Shares following the consummation of the Share Exchanges and 76.7% of
the Cabot Noble Shares after the consummation of the Cabot Noble Buy Back.
On October 9, 1996, at a meeting of the ShopKo Board, Salomon Brothers
reviewed with the ShopKo Board the proposed changes to the Combination
Agreement and the Cabot Noble Buy Back, and the financial impact of such
changes including, without limitation, the effect on the pro forma ownership
of Cabot Noble, and the effect on pro forma earnings, leverage, and selected
pro forma financial ratios of Cabot Noble.
The preparation of a fairness opinion is not susceptible to partial analysis
or summary descriptions. Salomon Brothers believes that its analysis and the
summary set forth above must be considered as a whole and that selecting
portions of its analyses and the factors considered by it, without considering
all analyses and factors, could create an incomplete view of the processes
underlying the analysis set forth in its opinion and the Salomon Brothers
Report. The ranges of valuations resulting from any particular analysis
described above should not be taken to be the view of Salomon Brothers of the
actual value of ShopKo or Phar-Mor.
In performing its analyses, Salomon Brothers made numerous assumptions with
respect to industry performance, general business, financial, market and
economic conditions and other matters, many of which are
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beyond the control of ShopKo or Phar-Mor. The analyses which Salomon Brothers
performed are not necessarily indicative of actual values or actual future
results, which may be significantly more or less favorable than suggested by
such analyses. Such analyses were prepared solely as part of Salomon Brothers'
analysis of the fairness, from a financial point of view, of the ShopKo
Exchange Ratio to the ShopKo Public Shareholders in connection with the
Combination and the Cabot Noble Buy Back. The analyses do not purport to be
appraisals or to reflect the prices at which a company might actually be sold
or the prices at which any securities may trade at the present time or at any
time in the future.
In the ordinary course of its business, Salomon Brothers actively trades the
equity securities of ShopKo and Phar-Mor for its own account and the accounts
of its customers and, accordingly, may at any time hold a long or short
position in such securities. Pursuant to an engagement letter dated July 26,
1996, ShopKo agreed to pay to Salomon Brothers for its services in connection
with the Transaction an advisory fee of approximately $4,080,000 (less
$250,000 paid by ShopKo to Salomon Brothers in connection with the strategic
review of ShopKo's businesses and alternatives, discussed below), payable upon
consummation of the Transaction. ShopKo also agreed, under certain
circumstances, to reimburse Salomon Brothers for reasonable fees and
disbursements of Salomon Brothers' counsel and for certain out-of-pocket
expenses incurred by Salomon Brothers in connection with the Transaction, and
agreed to indemnify Salomon Brothers and certain related persons against
certain liabilities, including liabilities under the federal securities law,
relating to or arising out of its engagement.
In addition to the advisory fee payable to Salomon Brothers as described
above, ShopKo paid Salomon Brothers a fee of $500,000, for its services in
connection with a strategic review of ShopKo's businesses and alternatives
pursuant to an engagement letter dated June 17, 1996. As noted above, $250,000
of this $500,000 fee will be credited against the advisory fee payable to
Salomon Brothers by ShopKo. ShopKo also agreed to reimburse Salomon Brothers
for certain out-of-pocket expenses incurred by Salomon Brothers in connection
with its services under the engagement letter, and agreed to indemnify Salomon
Brothers and certain related persons against certain liabilities, including
liabilities under the federal securities laws, relating to or arising out of
its engagement.
In accordance with the Phar-Mor bankruptcy, and that certain Settlement
Agreement dated as of July 12, 1995, between Phar-Mor and Salomon Brothers,
Salomon Brothers received a payment of $1,525,000 and an unsecured claim in
the amount of $7,233,096, in respect of Salomon Brothers' right, title and
interest in certain loans, bankruptcy claims and a credit agreement related to
certain furniture, fixtures and equipment utilized by Phar-Mor in certain
stores. Additionally, Phar-Mor executed a ninety-six (96) month promissory
note dated September 11, 1995, in the initial amount of $1,750,000 at an
interest rate of 7% per annum, which promissory note is secured by that
certain Security Agreement of even date. Phar-Mor commenced quarterly payments
under the promissory note on January 1, 1996.
Salomon Brothers is an internationally recognized investment banking firm
that provides financial services in connection with a wide range of business
transactions. As part of its business, Salomon Brothers regularly engages in
the valuation of companies and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and other
purposes. The ShopKo Board retained Salomon Brothers based on Salomon
Brothers' expertise in the valuation of companies as well as its familiarity
with companies in the discount retail industry.
RECOMMENDATIONS OF PHAR-MOR BOARD; REASONS FOR THE TRANSACTION
The Phar-Mor Board has approved the Phar-Mor Plan and the Combination
Agreement and believes the Transaction, including the Phar-Mor Plan, to be in
the best interests of Phar-Mor shareholders and recommends a vote FOR approval
and adoption of the Phar-Mor Plan. In arriving at its determination, the Phar-
Mor Board considered a number of factors, including the opinion of Phar-Mor's
financial advisor, Jefferies, that as of the date of such opinion the
consideration to be received by the holders of Phar-Mor Shares pursuant to the
Combination is fair to such holders from a financial point of view. The
written opinion of Jefferies is reproduced
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in its entirety as Annex C hereto and holders of Phar-Mor Shares are urged to
read this opinion carefully and in its entirety for a description of the
procedures followed, assumptions and qualifications made, and limitation on
the review undertaken by Jefferies. See "--Background of the Transaction" and
"--Phar-Mor Fairness Opinion."
The Phar-Mor Board believes that the Combination provides the following
specific benefits to Phar-Mor shareholders:
. It combines Phar-Mor, a regional discount merchandise chain with 103
stores in 18 states, with ShopKo to create a national discount retailer
offering pharmaceutical products and services in the United States with a
total of over 230 stores in 29 states across the nation, and combined
projected revenues of nearly $3.3 billion in fiscal year 1997, including
ProVantage revenues of approximately $360 million. See "Certain Forward-
Looking Information."
. It significantly increases the projected earnings per share from Phar-
Mor's current projections without giving effect to the Combination. For
example, earnings per share are projected to increase in each of fiscal
years 1997, 1998 and 1999, versus Phar-Mor on a stand-alone basis, by
$0.93, $0.61 and $0.80, respectively. See "Certain Forward-Looking
Information."
. It creates cross-merchandising opportunities which are expected to
increase revenues by exploiting higher margin products that are not
currently sold by both companies, such as optical products and services,
basic apparel and fashion jewelry, and additional health and beauty care
products.
. It is expected to reduces merchandising costs, corporate overhead and
selling, general and administrative expenses by up to $20 million
annually. A significant portion of this reduction is expected to be
achieved by consolidating Phar-Mor's administrative and operating
functions at ShopKo's current headquarters in Green Bay, Wisconsin, which
should significantly increase management efficiency. See "Cabot Noble
Business Strategy" and "Risk Factors--Combination of Retail Operations;
Realization of Synergies." These savings, together with the enhanced
purchasing power of the combined companies, will enable Phar-Mor and
ShopKo to compete more aggressively for market share against competitors
such as Wal-Mart and Walgreen's, by passing on greater savings to
customers.
. It enables Phar-Mor to benefit immediately from ShopKo's existing state-
of-the-art information management and data processing systems, without
the need for Phar-Mor to incur the substantial costs, risks and delays of
developing these systems for itself.
. It eliminates the costs, risks and delays associated with downsizing
certain existing Phar-Mor stores by using excess store capacity to sell
high margin merchandise and services, such as optical services, that have
been highly successful for ShopKo.
. It provides the opportunity for Phar-Mor's shareholders to participate in
the significant growth in PBM and related services offered by ProVantage.
ProVantage has increased revenues from $14 million in fiscal year 1995,
to $94 million in fiscal year 1996, and to an estimated $360 million in
fiscal year 1997. ShopKo management believes that ProVantage will
generate over $550 million in sales in fiscal 1998. ShopKo management
attributes the anticipated growth of ProVantage to the development of PBM
benefit programs, successful marketing and internally developed sales in
addition to acquisitions and strategic alliances. Furthermore, ProVantage
has developed a new vision benefit program and health care decision
support services which were recently successfully launched.
The Phar-Mor Board believes that these benefits will significantly increase
Phar-Mor's competitive position and profitability by reducing costs, enhancing
revenue and creating new and diverse opportunities for future growth. There
can be no assurance that any of the foregoing benefits will be realized.
PHAR-MOR FAIRNESS OPINION
Phar-Mor engaged Jefferies to render an opinion to the Phar-Mor Board as to
the fairness, from a financial point of view, to the Phar-Mor Shareholders of
the consideration to be received by such Phar-Mor Shareholders pursuant to the
transaction as originally contemplated by the Combination Agreement dated
September 5, 1996 prior to the amendments reflected in the First Amendment to
the Combination Agreement and the Amended and Restated Stock Purchase
Agreement (the "Transaction," for purposes of this section only). The Phar-Mor
Board
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selected Jefferies to render such opinion because of Jefferies' reputation as
an internationally recognized investment banking firm. As part of its
investment banking business, Jefferies is regularly engaged in the evaluation
of capital structures, the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings,
competitive biddings, secondary distributions of listed and unlisted
securities, private placements, financial restructurings and other financial
services.
On August 27, 1996, Jefferies delivered its oral presentation to the Phar-
Mor Board and followed this presentation with a written opinion, dated
September 5, 1996, to the Phar-Mor Board (the "Phar-Mor Fairness Opinion"), to
the effect that, as of such date and based upon procedures and subject to the
assumptions set forth in the Phar-Mor Fairness Opinion, the consideration to
be received by the Phar-Mor Shareholders pursuant to the Transaction is fair
to such Phar-Mor Shareholders from a financial point of view. Except as set
forth below, no limitations were imposed by Phar-Mor on the scope of
Jefferies' investigations or procedures to be followed by it in rendering its
opinion. Jefferies was not requested to opine as to, and its opinion did not
address, the underlying business decision of the Phar-Mor Board to proceed
with or to effect the Transaction. Jefferies was not asked by the Phar-Mor
Board to, and did not, update its opinion to reflect the changes to the
Combination Agreement approved by the ShopKo Board on October 9, 1996.
THE FULL TEXT OF THE PHAR-MOR FAIRNESS OPINION, WHICH SETS FORTH THE
ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN,
IS ATTACHED AS ANNEX C TO THIS JOINT PROXY STATEMENT/PROSPECTUS. PHAR-MOR
SHAREHOLDERS ARE URGED TO READ THE PHAR-MOR FAIRNESS OPINION CAREFULLY AND IN
ITS ENTIRETY FOR INFORMATION WITH RESPECT TO PROCEDURES FOLLOWED, ASSUMPTIONS
MADE AND MATTERS CONSIDERED BY JEFFERIES IN ARRIVING AT THE CONCLUSIONS
EXPRESSED THEREIN. THE SUMMARY OF THE PHAR-MOR FAIRNESS OPINION SET FORTH IN
THIS JOINT PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF SUCH OPINION. THE PHAR-MOR FAIRNESS OPINION IS
ADDRESSED ONLY TO THE PHAR-MOR BOARD, IS DIRECTED ONLY TO THE CONSIDERATION TO
BE RECEIVED BY THE PHAR-MOR SHAREHOLDERS IN THE TRANSACTION AND DOES NOT
ADDRESS THE UNDERLYING BUSINESS DECISION TO PROCEED WITH THE TRANSACTION OR
CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER OF PHAR-MOR OR SHOPKO (OR ANY
OTHER PERSON) AS TO HOW SUCH SHAREHOLDER SHOULD VOTE AT EITHER SPECIAL
MEETING.
The Phar-Mor Fairness Opinion notes that: (i) the consummation of the
Transaction is conditioned upon the approval of Phar-Mor's and ShopKo's
shareholders, and Jefferies is not recommending that Phar-Mor, the Phar-Mor
Board, any of its security holders or any other person should take any
specific action in connection with the Transaction; (ii) Jefferies was not
requested to solicit, nor did Jefferies solicit, any third party indications
of interest in acquiring all or any part of Phar-Mor; (iii) such opinion does
not constitute a recommendation of the Transaction over any alternative
transactions which may be available to Phar-Mor, and does not address Phar-
Mor's underlying business decision to effect the Transaction; (iv) Jefferies
did not opine as to the market value of the consideration to be received by
the Phar-Mor Shareholders or the prices at which any of the securities of
Cabot Noble may trade upon and following the consummation of the Transaction;
(v) Jefferies has no obligation to advise any person of any change in any fact
or matter affecting the Phar-Mor Fairness Opinion of which Jefferies becomes
aware after the date of such opinion; and (vi) such opinion is for the sole
use of the Phar-Mor Board, as one element in the Phar-Mor Board's
consideration of the Transaction, and may not be used for any other purpose,
or otherwise referred to, relied upon or circulated, without Jefferies' prior
written consent. The engagement letter between Phar-Mor and Jefferies is made
solely for the benefit of Phar-Mor and the terms of such agreement expressly
provide that no other person shall have any rights under or by virtue of such
agreement. Consequently, Jefferies has taken the position that shareholders
cannot rely upon the opinion of Jefferies to support any claims against
Jefferies arising under applicable state law. The availability of a defense to
a claim against Jefferies, if any, will be resolved by a court of competent
jurisdiction. The resolution of the question of the availability of such a
defense will have no effect on the rights and responsibilities of the Phar-Mor
Board under applicable state law or on the rights and responsibilities of
either Jefferies or the Phar-Mor Board under the federal securities laws.
In connection with the provision of its opinion, Jefferies, among other
things, (i) reviewed the draft of the Combination Agreement dated September 5,
1996 (including the exhibits thereto) and certain financial and other
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information that was publicly available or furnished to Jefferies by Phar-Mor
and ShopKo, including certain internal financial analyses, budgets, reports
and other information prepared by the respective company's management; (ii)
held discussions with various members of senior management of Phar-Mor and
ShopKo concerning each company's historical and current operations, financial
conditions and prospects, as well as the strategic and operating benefits
anticipated from the business combination; and (iii) conducted such other
reviews, analyses and inquiries relating to Phar-Mor and ShopKo as it
considered appropriate.
In Jefferies' review and analysis in rendering the Phar-Mor Fairness
Opinion, Jefferies relied upon, without independent investigation or
verification, the accuracy, completeness and fair presentation of all
financial and other information that was provided to Jefferies by Phar-Mor or
ShopKo, or that was publicly available (including, without limitation, the
information described above and the financial projections prepared by Phar-Mor
and ShopKo regarding the estimated future performance of the respective
companies before and after giving effect to the Transaction). The Phar-Mor
Fairness Opinion is expressly conditioned upon all such information (whether
written or oral) being complete, accurate and fair in all respects. The
financial projections utilized by Jefferies in preparing its opinion differed
from the projections utilized by Salomon Brothers. In making its analysis,
Jefferies did not rely upon the financial statements of Phar-Mor prior to the
Fresh Start Date, nor did it rely on any projections of Phar-Mor prepared
prior to the Fresh Start Date.
With respect to the financial projections provided by Phar-Mor and ShopKo
to, and examined by, Jefferies, Jefferies noted that projecting future results
of any company is inherently subject to vast uncertainty. However, the Phar-
Mor Board informed Jefferies, and Jefferies assumed, that such projections
were reasonably prepared on bases reflecting the best currently available
estimates and good faith judgments of the respective managements of the
companies as to the future performance of each company. In addition, although
Jefferies performed sensitivity analyses thereon in rendering its opinion,
Jefferies assumed that each company will perform in accordance with such
projections for all periods specified therein. Although such projections did
not form the principal basis for Jefferies' opinion, but rather constituted
one of many items that Jefferies employed, changes thereto could affect the
Phar-Mor Fairness Opinion. In addition, Jefferies assumed that the Transaction
will be a tax-free reorganization and will be accounted for under the purchase
method of merger accounting. Jefferies has disclaimed any undertaking or
obligation to advise any person of any change in any fact or matter affecting
its opinion of which it becomes aware after the date of the Phar-Mor Fairness
Opinion.
Jefferies was not requested to, and did not make any independent evaluation
or appraisal of the assets or liabilities of, nor conducted a comprehensive
physical inspection of any of the assets of, Phar-Mor or ShopKo, nor was
Jefferies furnished with any such appraisals.
Jefferies' opinion is based on economic, monetary, political, market and
other conditions existing and which could be evaluated as of the date of the
Phar-Mor Fairness Opinion (including, without limitation, then current market
prices of the Phar-Mor Shares and the ShopKo Shares and the terms of the
Combination Agreement as of such date). The Phar-Mor Fairness Opinion
expressly noted that such conditions, however, are subject to rapid and
unpredictable change and such changes could affect the conclusions expressed
in the Phar-Mor Fairness Opinion. Without limiting the foregoing, the
Jefferies' opinion does not address the fairness of the consideration to be
received by the Phar-Mor shareholders in the event that the actual ShopKo
Exchange Ratio is above 3.140 or below 1.895 and the Phar-Mor and ShopKo
Boards, respectively, decide not to terminate the Combination Agreement.
Jefferies did not make an independent investigation of any legal matters
affecting Phar-Mor or ShopKo, and assumed the correctness of all legal and
accounting advice given to such parties and their respective boards of
directors, including (without limitation) advice as to the accounting and tax
consequences of the Transaction to Phar-Mor, ShopKo and their respective
shareholders.
In rendering the Phar-Mor Fairness Opinion, Jefferies also assumed that: (i)
the terms and provisions contained in the definitive Combination Agreement
(including the exhibits thereto) will not differ from those contained in the
draft of those documents Jefferies reviewed; (ii) the conditions to the
consummation of the Transaction set forth in such agreement will be satisfied
without material expense; (iii) there is not now, and there will not as a
result of the consummation of the transactions contemplated by such agreement
be, any
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default, or event of default, under any indenture, credit agreement or other
material agreement or instrument to which Phar-Mor, ShopKo or any of their
respective subsidiaries or affiliates is a party; and (iv) the amount of
outstanding net indebtedness of ShopKo immediately after the closing of the
Transaction (but prior to the Cabot Noble Buy Back) will be approximately
$343.2 million. In rendering the Phar-Mor Fairness Opinion, Jefferies
considered the effect of the repurchase of all of the ShopKo Shares held by
supervalu and assumed that Phar-Mor either (i) obtained from the holders of
the Phar-Mor Senior Notes the waiver of any right they may have to compel
Phar-Mor to offer to repurchase any Phar-Mor Senior Notes as a result of any
"change in control" resulting from the Transaction or (ii) if such holders
exercise such right, Phar-Mor would be able to obtain additional financing to
repurchase the Phar-Mor Senior Notes on acceptable terms.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant methods of financial analyses and the
application of those methods to particular circumstances and, therefore, such
an opinion is not readily susceptible to summary description. Furthermore, in
arriving at its opinion, Jefferies did not attribute any particular weight to
any analysis or factor considered by it, but rather made qualitative judgments
as to the significance and relevance of each analysis and factor. Accordingly,
Jefferies' analyses must be considered as a whole. Considering any portion of
such analyses and of the factors considered, without considering all analyses
and factors, could create a misleading or incomplete view of the process
underlying the Phar-Mor Fairness Opinion. In its analyses, Jefferies made many
assumptions with respect to industry performance, general business and
economic conditions and other matters, many of which are beyond the control of
the merging companies. Any estimates contained in these analyses are not
necessarily indicative of actual values or predictive of future results or
values, which may be significantly more or less favorable than as set forth
therein and herein. In addition, analyses relating to the value of businesses
do not purport to be appraisals or to reflect the prices at which businesses
actually may be sold.
The following summarizes the material financial and comparative analyses
Jefferies performed in arriving at the conclusions expressed in its opinion.
The following does not purport to be a complete description of the analyses
performed or the matters considered by Jefferies in arriving at its opinion.
Comparable Publicly-Traded Company Analysis. Using public information, as
part of its analysis, Jefferies calculated the implied total enterprise value
of ShopKo based on (i) ShopKo's latest twelve months ("LTM") historical
information (the "Base Case") and (ii) "ShopKo with 100% Synergies," which
assumes that as a result of the Transaction, cost redundancies between Phar-
Mor and ShopKo will be eliminated and that the pro forma combined company
realizes the benefits of its increased purchasing power. These synergies are
generally described herein under "Cabot Noble Business Strategy--Cost Savings
From the Combination" and were identified to Jefferies by officers of Phar-Mor
and ShopKo. Jefferies calculated these values using the multiples of LTM
revenue, EBITDA and EBIT at which eight publicly traded retailers were trading
on August 23, 1996. The eight comparable companies examined were: Dayton-
Hudson Corp., Fred Meyer, Inc., Mac Frugals Bargains * Close-Outs, Inc., Value
City Dept. Stores, Inc., Hill Stores Company, Venture Stores, Inc., Wal-Mart
Stores, Inc. and Kmart Corporation. Jefferies applied the mean multiples of
these eight comparable companies to the analogous LTM June 16, 1996 statistics
for ShopKo. This analysis indicated an implied total enterprise value of
ShopKo of between $853.3 million and $1,256.2 million based on the Base Case
and of between $853.3 million and $1,420.2 million based on ShopKo with 100%
Synergies. By contrast, the consideration to be received by ShopKo in the
Transaction, based on a ShopKo Exchange Ratio of 2.4 Cabot Noble Shares for
each ShopKo Share and a Phar-Mor Share price of $7.375 on August 23, 1996,
equals approximately $914.7 million.
None of the companies used in the above analysis is identical to Phar-Mor,
ShopKo or Cabot Noble. Because of the inherent differences between the
operations of Phar-Mor and ShopKo and the comparable companies, a purely
quantitative comparable company analysis is not particularly meaningful. An
appropriate use of a comparable company analysis in this instance necessarily
involves qualitative judgments concerning, among other things, differences
between the financial and operating characteristics of Phar-Mor and ShopKo and
the selected comparable companies that could affect the public trading values
of Phar-Mor and ShopKo and such companies.
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Comparable Merger and Acquisition Transaction Analysis. Jefferies reviewed
the consideration paid in the following five transactions that Jefferies
believed were the only reasonable comparable transactions completed on or
after August 18, 1995 for which sufficient public data was available as
screened by Securities Data Corporation (target/acquiror): Bruno's,
Inc./Kohlberg Kravis Roberts; Super Rite Corporation/Richfood Holdings, Inc.;
National Convenience Stores, Inc./Diamond Shamrock, Inc.; Younkers,
Inc./Proffitt's, Inc.; and Circle K Corporation/Tosco Corp. Jefferies analyzed
the consideration paid in such transactions as a multiple of the target
companies' sales, EBITDA and EBIT for the LTM prior to the acquisition of the
target. Such analysis yielded mean multiplies of 0.32x LTM sales, 7.1x LTM
EBITDA and 11.7x LTM EBIT. Jefferies compared these multiples with the
respective multiples calculated using the total enterprise value of ShopKo
based on an offer price of $17.70 per share of ShopKo (the ShopKo Exchange
Ratio multiplied by the Phar-Mor closing price on August 23, 1996 of $7.375
(the "Offer Price")). These multiplies were 0.45x LTM sales, 6.0x LTM EBITDA
and 9.5x LTM EBIT. The multiples calculated using the total enterprise value
of Phar-Mor (based on a Phar-Mor closing price on August 23, 1996 of $7.375)
were 0.14x LTM sales, 4.3x LTM EBITDA and 9.7x LTM EBIT.
Because the reasons for and circumstances surrounding each of the
transactions analyzed were diverse and because of the inherent differences
between the operations of Phar-Mor and ShopKo and the companies engaged in the
selected transactions, Jefferies believes that a purely quantitative
comparable transaction analysis is not particularly meaningful. An appropriate
use of a comparable transaction analysis in this instance necessarily involves
complex considerations and qualitative judgments concerning, among other
things, differences between the characteristics of these transactions and the
Transaction that could affect the public trading value of the companies to
which ShopKo is being compared.
Premiums Paid Analysis. Jefferies examined the premiums paid in all
completed acquisition transactions announced on or after January 1, 1996 as
screened by Securities Data Corporation. The premiums paid in these completed
transactions based on the target's stock price 1 day, 1 week and 1 month prior
to the announcement were 29.4%, 33.9% and 42.7%, respectively. In the proposed
Transaction, the assumed Offer Price of $17.70 per original ShopKo Share
represents, based on the ShopKo Shares closing bid prices of $15.125 per share
on August 23, 1996, $14.875 per share on August 16, 1996, and $15.000 per
share on July 23, 1996, an approximate premium of 17.0%, 19.0% and 18.0%,
respectively. Jefferies noted that after taking into account the repurchase of
Cabot Noble Shares from supervalu at $16.86 per original ShopKo Share, the
implied premiums calculated above would be further lowered. Based on the terms
of the Combination Agreement, Phar-Mor shareholders will not receive a premium
upon the exchange of Phar-Mor Shares for Cabot Noble Shares.
Discounted Cash Flow Analysis. Jefferies applied a discounted cash flow
analysis to ShopKo's financial projections for 1997 through 2001. In
conducting its discounted cash flow analysis, Jefferies first calculated the
estimated future streams of cash flows that ShopKo would produce through the
year 2001. In addition, Jefferies applied various growth rates to ShopKo's
2001 projected cash flow for terminal valuation purposes. Finally, Jefferies
discounted such cash flow streams to present values using discount rates
ranging from 9.35% to 11.85%, chosen to reflect different assumptions
regarding the cost of capital using the Capital Asset Pricing Model. Based on
this discounted cash flow analysis and the projections contained in "Adjusted
Projections Used by Jefferies in its Fairness Opinion" in Annex G hereto, the
range of equity values for ShopKo were $537.2 million to $1,085.1 million, or
$16.34 to $33.01 per share. These values imply a range of total enterprise
values of ShopKo of between $880.4 million to $1,428.3 million.
Jefferies applied a discounted cash flow analysis to Phar-Mor's financial
forecasts for 1997 through 2001. In conducting its discounted cash flow
analysis, Jefferies first calculated the estimated future streams of cash
flows that Phar-Mor would produce through the year 2001. In addition,
Jefferies applied various growth rates to Phar-Mor's 2001 projected cash flow
for terminal valuation purposes. Finally, Jefferies discounted such cash flow
streams to present values using discount rates ranging from 17.80% to 22.30%,
chosen to reflect different assumptions regarding the cost of capital based on
Phar-Mor's existing borrowing costs and estimated required equity returns
based on conversations with sophisticated private equity investors. Based on
this discounted cash flow analysis and the projections contained in "Adjusted
Projections Used by Jefferies in its Fairness Opinion"
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in Annex G hereto, the total enterprise value of Phar-Mor was estimated to
range from $132.1 million to $200.1 million.
Earnings Per Share Analysis. Jefferies analyzed the effects of the
Transaction on the earnings per share of the combined company by comparing
Phar-Mor's projected earnings per share on a stand-alone basis to (i) the
projected earnings per share pro forma for the Transaction with $5 million to
$20 million of synergies assumed to be realized (the "100% Combination
Benefits"), and (ii) the projected earnings per share pro forma for the merger
with no synergies ("No Combination Benefits") based on the projections
contained in "Adjusted Projections Used by Jefferies in its Fairness Opinion"
in Annex G hereto. For the purpose of calculating earnings per share,
Jefferies assumed that on a pro forma basis, there were 55.685 million shares
of Cabot Noble outstanding. Based on these analyses, Jefferies observed that
the projected earnings per Cabot Noble Share with 100% Combination Benefits
and No Combination Benefits were accretive to Phar-Mor's shareholders in each
year through 1998 including pro forma 1996. The estimated amount of accretion
to Phar-Mor shareholders based upon the projected earnings per Cabot Noble
Share with 100% Combination Benefits ranges from $0.29 to $0.50 per share over
the projected period.
Contribution Analysis. Jefferies analyzed the relative contribution of each
of Phar-Mor and ShopKo to the pro forma combined company based on the
projections contained in "Adjusted Projections used by Jefferies in its
Fairness Opinion" in Annex G hereto. Based on pro forma fiscal year 1996 data,
Phar-Mor would contribute approximately 34.8% of revenues, 26.9% of gross
margin and 14.3% of EBITDA of the combined company before taking into account
any synergies that may be achieved if the Combination were consummated. Based
on data as of August 23, 1996, Phar-Mor would contribute 15.3% of the market
capitalization of the combined companies. Based on the ShopKo Exchange Ratio,
Phar-Mor would receive approximately 21.8% of the equity of Cabot Noble.
BASED ON THE FOREGOING ANALYSES AND FACTORS JEFFERIES ARRIVED AT ITS
OPINION; HOWEVER, THE SUMMARY SET FORTH ABOVE DOES NOT PROPOSE TO BE A
COMPLETE DESCRIPTION OF THE ANALYSIS PERFORMED AND FACTORS CONSIDERED BY
JEFFERIES IN ARRIVING AT ITS OPINION.
Pursuant to an engagement letter dated August 23, 1996 between Phar-Mor and
Jefferies as compensation for Jefferies' services in connection with its
delivery of an opinion to Phar-Mor with respect to the Transaction, Phar-Mor
has paid Jefferies a fee of $150,000 (without regard to whether Jefferies'
opinion ultimately would be favorable or unfavorable), such fee to be credited
against the Advisory Fee described below, if earned. In addition, in
connection with Jefferies' role as exclusive financial advisor to Phar-Mor,
Phar-Mor will pay to Jefferies an advisory fee of up to $4.44 million (the
"Advisory Fee") upon closing of the Transaction. Phar-Mor has also agreed to
indemnify Jefferies against certain liabilities, including liabilities arising
under the federal securities laws, and to reimburse Jefferies promptly for all
out-of-pocket expenses (including the reasonable fees and expenses of
counsel), such reimbursement to be credited to the Advisory Fee described
above if earned. In the ordinary course of its business, Jefferies may
actively trade the securities of Phar-Mor and ShopKo for its own account and
for the accounts of its customers and, accordingly, may at any time hold a
long or short position in those securities.
On August 2, 1996, ShopKo completed the acquisition of CareStream Scrip Card
from FoxMeyer Health. See "Certain Transactions--CareStream Scrip Card
Acquisition by ShopKo." CareStream Scrip Card is a prescription benefit
management company which is being integrated with ShopKo's ProVantage
subsidiary. Jefferies received a fee of $500,000 from FoxMeyer Health for
acting as its financial advisor in conjunction with the CareStream Scrip Card
acquisition by ShopKo.
TERMS OF THE SHOPKO PLAN
Pursuant to the ShopKo Plan and subject to the terms of the Combination
Agreement, each ShopKo Share outstanding as of the Effective Date (other than
ShopKo Shares as to which dissenters' rights have been perfected), without any
further action on the part of ShopKo's shareholders, will be exchanged for 2.4
Cabot
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Noble Shares (and cash in lieu of any fractional share), subject to adjustment
to the extent that the value of the exchange consideration received per ShopKo
Share would fall outside a range of $17.25 to $18.00. The ShopKo Exchange is
intended to constitute a tax-free exchange such that, among other things,
ShopKo shareholders will not recognize gain or loss upon the receipt of Cabot
Noble Shares in exchange for the ShopKo Shares. See "Certain United States
Federal Income Tax Consequences."
Annex E hereto illustrates how the ShopKo Exchange Ratio will be calculated.
If the Average Closing Price is less than $7.186, the ShopKo Exchange Ratio
will equal the ratio which results in each ShopKo Share being exchanged for a
number of Phar-Mor Shares equal to $17.25 divided by the Average Closing
Price, unless Phar-Mor exercises its right to terminate the Combination
Agreement as set forth below. If the Average Closing Price is greater than
$7.50, the ShopKo Exchange Ratio will equal the ratio which results in each
ShopKo Share being exchanged for a number of Phar-Mor Shares equal to $18.00
divided by the Average Closing Price, unless ShopKo exercises its right to
terminate the Combination Agreement as set forth below. If the Average Closing
Price is less than $5.493 (which would result in a ShopKo Exchange Ratio
greater than 3.14), the Phar-Mor Board would have the right to terminate the
Combination Agreement, unless ShopKo otherwise agrees that the ShopKo Exchange
Ratio shall be set at 3.140 (i.e., based on an Average Closing Price set at
$5.494). If the Average Closing Price is greater than $9.501 (which would
result in a ShopKo Exchange Ratio less than 1.895), the ShopKo Board would
have the right to terminate the Combination Agreement, unless Phar-Mor
otherwise agrees that the ShopKo Exchange Ratio shall be set at 1.895 (i.e.
based on an Average Closing Price set at $9.50).
Cabot Noble, ShopKo and Phar-Mor have established the following toll-free
telephone number (1 800 - ) to enable shareholders of ShopKo and Phar-Mor
to receive updated information regarding the ShopKo Exchange Ratio. Commencing
, 1997 and ending on the day following conclusion of the Special Meetings,
shareholders are encouraged to call such number to listen to a recorded
message indicating what the ShopKo Exchange Ratio would be as of the date of
such call, based on the average of the per share closing prices on the Nasdaq-
NMS of Phar-Mor Shares (as reported in The Wall Street Journal) during the
thirty-day period ending as of the day prior to such call or , 1997, as
appropriate. Because the Average Closing Price upon which the actual ShopKo
Exchange Ratio will be based cannot be determined definitively until the close
of trading on , 1997, callers to such toll-free telephone number prior to
, 1997 should bear in mind that fluctuations in the trading price of Phar-
Mor Shares during the thirty-day period ending , 1997, may cause the
actual ShopKo Exchange Ratio to vary from the hypothetical ShopKo Exchange
Ratio indicated on such recorded message prior to , 1997.
The closing price of Phar-Mor Shares in composite trading on January ,
1997, was $[ ] per share, as reported in The Wall Street Journal. If the
Average Closing Price had been calculated on the basis of the 30-day period
ending , it would have been $ (which would result in a ShopKo Exchange
Ratio of 3.0). In the event the Average Closing Price is less than $5.493,
Phar-Mor has not determined whether it will exercise its right to terminate
the Combination Agreement, and the ShopKo Board has not made any determination
whether, in the event that Phar-Mor exercises its right to terminate, it will
agree to set the ShopKo Exchange Ratio at 3.140 pursuant to the Combination
Agreement. Conversely, in the event the Average Closing Price exceeds $9.501,
ShopKo has not determined whether it will exercise its right to terminate the
Combination Agreement, and the Phar-Mor Board has not made any determination
whether, in the event that ShopKo exercises its right to terminate, it will
agree to set the ShopKo Exchange Ratio at 1.895 pursuant to the Combination
Agreement. Shareholder approval will constitute approval of the Combination if
the ShopKo Exchange Ratio is greater than 3.140 or less than 1.895 and the
Combination Agreement is not terminated, subject to the fiduciary obligations
of the ShopKo and Phar-Mor Boards and other applicable legal requirements.
TERMS OF THE PHAR-MOR PLAN
Pursuant to the Phar-Mor Plan and subject to the terms of the Combination
Agreement, each Phar-Mor Share outstanding as of the Effective Date, without
any further action on the part of Phar-Mor's shareholders, will be exchanged
for one Cabot Noble Share and each outstanding Phar-Mor Warrant will be
exchanged for a Cabot Noble Warrant to purchase a like number of Cabot Noble
Shares. The Phar-Mor Exchange is intended to
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constitute a tax-free exchange such that, among other things, Phar-Mor
shareholders will not recognize gain or loss upon the receipt of Cabot Noble
Shares in exchange for their Phar-Mor Shares. See "Certain United States
Federal Income Tax Consequences."
Annex E hereto illustrates how the ShopKo Exchange Ratio will be calculated.
If the Average Closing Price is less than $7.186, the ShopKo Exchange Ratio
will equal the ratio which results in each ShopKo Share being exchanged for a
number of Phar-Mor Shares equal to $17.25 divided by the Average Closing
Price, unless Phar-Mor exercises its right to terminate the Combination
Agreement as set forth below. If the Average Closing Price is greater than
$7.50, the ShopKo Exchange Ratio will equal the ratio which results in each
ShopKo Share being exchanged for a number of Phar-Mor Shares equal to $18.00
divided by the Average Closing Price, unless ShopKo exercises its right to
terminate the Combination Agreement as set forth below. If the Average Closing
Price is less than $5.493 (which would result in a ShopKo Exchange Ratio
greater than 3.14), the Phar-Mor Board would have the right to terminate the
Combination Agreement, unless ShopKo otherwise agrees that the ShopKo Exchange
Ratio shall be set at 3.140 (i.e., based on an Average Closing Price set at
$5.494). If the Average Closing Price is greater than $9.501 (which would
result in a ShopKo Exchange Ratio less than 1.895), the ShopKo Board would
have the right to terminate the Combination Agreement, unless Phar-Mor
otherwise agrees that the ShopKo Exchange Ratio shall be set at 1.895 (i.e.
based on an Average Closing Price set at $9.50).
Cabot Noble, ShopKo and Phar-Mor have established the following toll-free
telephone number (1 800 - ) to enable shareholders of ShopKo and Phar-Mor
to receive updated information regarding the ShopKo Exchange Ratio. Commencing
, 1997 and ending on the day following the conclusion of the Special
Meetings, shareholders are encouraged to call such number to listen to a
recorded message indicating what the ShopKo Exchange Ratio would be as of the
date of such call, based on the average of the per share closing prices on the
Nasdaq-NMS of Phar-Mor Shares (as reported in The Wall Street Journal) during
the thirty-day period ending as of the day prior to such call or , 1997,
as appropriate. Because the Average Closing Price upon which the actual ShopKo
Exchange Ratio will be based cannot be determined definitively until the close
of trading on , 1997, callers to such toll-free telephone number prior to
, 1997 should bear in mind that fluctuations in the trading price of Phar-
Mor Shares during the thirty-day period ending , 1997, may cause the
actual ShopKo Exchange Ratio to vary from the hypothetical ShopKo Exchange
Ratio indicated on such recorded message prior to , 1997.
The closing price of Phar-Mor Shares in composite trading on January ,
1997, was $[ ] per share, as reported in The Wall Street Journal. If the
Average Closing Price had been calculated on the basis of the 30-day period
ending , it would have been $ (which would result in a ShopKo Exchange
Ratio of ). In the event the Average Closing Price is less than $5.493,
Phar-Mor has not determined whether it will exercise its right to terminate
the Combination Agreement, and the ShopKo Board has not made any determination
whether, in the event that Phar-Mor exercises its right to terminate, it will
agree to set the ShopKo Exchange Ratio at 3.140 pursuant to the Combination
Agreement. Conversely, in the event the Average Closing Price exceeds $9.501,
ShopKo has not determined whether it will exercise its right to terminate the
Combination Agreement, and the Phar-Mor Board has not made any determination
whether, in the event that ShopKo exercises its right to terminate, it will
agree to set the ShopKo Exchange Ratio at 1.895 pursuant to the Combination
Agreement. Shareholder approval will constitute approval of the Combination if
the ShopKo Exchange Ratio is greater than 3.140 or less than 1.895 and the
Combination Agreement is not terminated, subject to the fiduciary obligations
of the Phar-Mor and ShopKo Boards and other applicable legal requirements.
Upon the consummation of the Phar-Mor Plan, holders of Phar-Mor Shares or
Phar-Mor Warrants will automatically become holders of Cabot Noble Shares or
Cabot Noble Warrants, respectively, and their certificates which represent
Phar-Mor Shares or Phar-Mor Warrants will automatically represent the Cabot
Noble Shares or Cabot Noble Warrants, respectively, for which such shares or
warrants were exchanged pursuant to the Phar-Mor Plan. After the Phar-Mor
Exchange, as presently outstanding certificates representing Phar-Mor Shares
or Phar-Mor Warrants are presented for transfer, new certificates bearing the
name of Cabot Noble and the appropriate number of Cabot Noble Shares will be
issued.
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VOTING AGREEMENT
Pursuant to the Voting Agreement by and among supervalu, Cabot Noble and
Robert M. Haft, for himself and as the holder of a voting proxy for Mary Z.
Haft, in their capacity as a member of Hamilton Morgan, supervalu has agreed
to vote or to cause to be voted a number of ShopKo Shares then beneficially
owned by supervalu or its affiliates equal to not less than 19.9% of all the
outstanding ShopKo Shares in favor of approval and adoption of the ShopKo
Plan. supervalu agreed to vote 19.9% of the outstanding ShopKo Shares in favor
of the ShopKo Plan since an agreement to vote 20% or more of such shares in
favor of the ShopKo Plan may have caused the other parties to the Voting
Agreement to be subject to the Minnesota Control Share Acquisition Act.
In addition, pursuant to the Voting Agreement, Mr. Haft has agreed to vote
all Phar-Mor Shares then owned of record by Mr. Haft in favor of approval and
adoption of the Phar-Mor Plan, and to the extent permitted by the terms of the
governing instruments of Hamilton Morgan, to use his reasonable efforts to
cause Hamilton Morgan to vote all of the Phar-Mor Shares then beneficially
owned by it in favor of approval and adoption of the Phar-Mor Plan. Mr. Haft
does not currently own of record any Phar-Mor Shares and Hamilton Morgan
beneficially owns 4,704,033 Phar-Mor Shares, or approximately 38.7% of the
outstanding Phar-Mor Shares. Mr. Haft is the Chairman of the Board and Chief
Executive Officer of Phar-Mor and Cabot Noble.
Under the Hamilton Morgan LLC Agreement, the Phar-Mor Shares beneficially
owned by Hamilton Morgan may not be voted without the unanimous consent of the
members of Hamilton Morgan. As of , 1997, the Haft Members, as tenants by
the entirety, owned 30.2% and FoxMeyer Health owned the remaining 69.8% of the
membership interests in Hamilton Morgan. FoxMeyer Health has indicated that it
has not reached a conclusion as to its position on the Transaction. Messrs.
Butler and Estrin, directors of Phar-Mor, are co-chairmen of the Board, co-
chief executive officers and major shareholders of FoxMeyer Health.
FoxMeyer Health initiated the buy-sell provisions of the Hamilton Morgan LLC
Agreement on December 18, 1996, pursuant to which either FoxMeyer Health or
the Haft Members may acquire all of the membership interests in Hamilton
Morgan. On December 23, 1996, the Haft Members exercised their rights under
the Hamilton Morgan LLC Agreement to seek binding arbitration regarding
certain areas of disagreement between FoxMeyer Health and the Haft Members,
including voting rights with respect to the Phar-Mor Shares beneficially held
by Hamilton Morgan and certain matters relating to FoxMeyer Health's exercise
of its buy sell rights. The Haft Members assert that, pursuant to the
provisions of the Hamilton Morgan LLC Agreement, Robert M. Haft, as President
of Hamilton Morgan, has sole voting power over the Phar-Mor Shares
beneficially held by Hamilton Morgan because an event of default occurred
under the bank facility entered into by FoxMeyer Health in connection with
Hamilton Morgan's purchase of certain of such Phar-Mor Shares. FoxMeyer Health
asserts that it has sole voting power over the Phar-Mor Shares beneficially
held by Hamilton Morgan because Robert Haft has a conflict of interest in
connection with the Transaction. See "Risk Factors--Hamilton Morgan Issues"
and "Description of Phar-Mor--Security Ownership of Certain Beneficial Owners
and Management."
EXCHANGE OF CERTIFICATES
will act as exchange agent (the "Exchange Agent") in connection with
the ShopKo Exchange. Promptly after the Effective Date, the Exchange Agent
will send transmittal forms and instructions to ShopKo shareholders to be used
in forwarding certificates evidencing their ShopKo Shares for surrender and
exchange for (i) certificates representing the number of full shares of Cabot
Noble Shares for which their ShopKo Shares were exchanged in the ShopKo
Exchange and (ii) a cash payment for any fractional Cabot Noble Shares to
which such holders otherwise would be entitled. ShopKo shareholders are
requested not to surrender their certificates for exchange until such
transmittal forms and instructions are received. Such instructions will
include procedures concerning lost certificates. Holders of Phar-Mor Shares
and Phar-Mor Warrants will not be required to exchange their Phar-Mor Share
certificates or Phar-Mor Warrant certificates, as the case may be, in
connection with the Combination. See "--Terms of the Phar-Mor Plan."
Each holder of ShopKo Shares will be entitled, upon surrender to the
Exchange Agent of certificates representing such shares, to receive in
exchange therefor a certificate or certificates representing the number of
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whole Cabot Noble Shares to which such holder is entitled based on the ShopKo
Exchange Ratio, together with any cash payable in lieu of a fractional Cabot
Noble Share. Until so surrendered, the certificates representing ShopKo Shares
will be deemed to represent the number of whole Cabot Noble Shares into which
the ShopKo Shares were exchanged and the right to receive cash in lieu of
fractional Cabot Noble Shares. ShopKo shareholders who are entitled to receive
Cabot Noble Shares in exchange for their ShopKo Shares and/or cash in lieu of
stock for fractional shares will not be entitled to receive payment of any
dividends or other distributions on shares of Cabot Noble Shares for which
their ShopKo Shares have been exchanged until the certificates representing
their ShopKo Shares have been surrendered to the Exchange Agent. Upon
surrender of any certificates which prior to the Combination represented
ShopKo Shares, the holder thereof shall be entitled to receive any dividends
or other distributions (without interest) which previously have become payable
and which have not been paid with respect to the number of Cabot Noble Shares
represented by the certificate issued upon the surrender of certificate
representing ShopKo Shares.
FRACTIONAL SHARE INTERESTS
No certificate or scrip representing fractional Cabot Noble Shares will be
issued pursuant to the Combination. No fractional share interests will entitle
the owner thereof to vote or to any other rights of a stockholder of Cabot
Noble. Each holder of ShopKo Shares who otherwise would be entitled to receive
a fractional Cabot Noble Share in the Combination will receive, upon surrender
for exchange, a cash payment in lieu of the issuance of any fractional Cabot
Noble Share. As soon after the Effective Date as practicable, the Exchange
Agent shall aggregate all fractional interests (the "Excess Shares") and sell
such Excess Shares at then prevailing prices on the principal securities
market on which the Cabot Noble Shares are then trading. The Exchange Agent
shall determine the portion of the gross proceeds from the sale of such Excess
Shares to which each holder of ShopKo Shares shall be entitled, if any, by
multiplying the amount of the aggregate gross proceeds from the sale by a
fraction, the numerator of which is the amount of the fractional Cabot Noble
Share interest to which such holder of ShopKo Shares is entitled and the
denominator of which is the aggregate amount of fractional Cabot Noble Share
interests to which all holders of ShopKo Shares are entitled. Cabot Noble
shall pay all commissions, transfer taxes and other out-of-pocket transaction
costs, including the expenses and compensation, of the Exchange Agent incurred
in connection with such sale of the Excess Shares. If more than one
certificate representing ShopKo Shares shall be surrendered at one time for
the account of the same stockholder of record, the number of full Cabot Noble
Shares for which certificates shall be delivered shall be computed on the
basis of the aggregate number of Cabot Noble Shares represented by the
certificates so surrendered.
TREATMENT OF OPTIONS, WARRANTS AND OTHER RIGHTS
The Combination Agreement provides that each option to purchase Phar-Mor
Shares or ShopKo Shares, and each warrant to purchase Phar-Mor Shares, in each
case outstanding on the Effective Date, shall become (by conversion, exchange,
assumption, substitution, and/or otherwise as determined by mutual agreement
of ShopKo and Phar-Mor) an option (a "Cabot Noble Option") or Cabot Noble
Warrant, as the case may be, to purchase (i) in the case of options or
warrants to purchase Phar-Mor Shares, the same number of Cabot Noble Shares
and (ii) in the case of options to purchase ShopKo Shares, that number of
Cabot Noble Shares determined by multiplying the number of ShopKo Shares
issuable upon the exercise of such option by the ShopKo Exchange Ratio. Each
such Cabot Noble Option and Cabot Noble Warrant shall be exercisable at the
same aggregate exercise price after the Combination as the corresponding
option or warrant was before the Combination and shall have the same exercise
period and other terms and conditions as the corresponding option or warrant.
Notwithstanding the foregoing, no Cabot Noble Option to purchase fractional
Cabot Noble Shares shall be issued in connection with the Combination.
Phar-Mor currently has outstanding warrants to purchase a total of 1,250,000
Phar-Mor Shares at an exercise price of $13.50 per share, which warrants will
be converted pursuant to the Phar-Mor Exchange into Cabot Noble Warrants to
purchase the same number of Cabot Noble Shares at the same exercise price per
share. Society National Bank, which serves as warrant agent for the Phar-Mor
warrants, will serve as the warrant agent for the
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Cabot Noble Warrants. Phar-Mor currently has outstanding options to purchase a
total of 1,358,617 Phar-Mor Shares at exercise prices ranging from $7.06 to
$8.00 per share. ShopKo currently has outstanding options to purchase a total
of 2,650,418 ShopKo Shares at exercise prices ranging from $10.00 to $16.25
per share. The number of Cabot Noble Shares issuable upon exercise of the
converted options or warrants will equal the number of shares presently
issuable upon exercise of such outstanding options or warrants multiplied by
one, in the case of converted outstanding Phar-Mor options and warrants, or
the ShopKo Exchange Ratio, in the case of converted outstanding ShopKo
options. See "Description of Cabot Noble--Stock Incentive Plan" and
"Description of Capital Stock of Cabot Noble--Warrants."
The Combination Agreement also provides that Cabot Noble shall assume all of
the rights and obligations of Phar-Mor and ShopKo pursuant to their respective
employee benefit plans and the options and restricted stock outstanding
thereunder. Approval of the Combination by the shareholders of ShopKo and
Phar-Mor will constitute shareholder approval of the assumption by Cabot Noble
of the rights and obligations of ShopKo and Phar-Mor under their respective
employee benefit plans. Such approval will also constitute shareholder
approval of related amendments to such plans to provide for, among other
things, the conversion at the Effective Date of each outstanding stock option
or warrant into a Cabot Noble Option or Cabot Noble Warrant, respectively.
CABOT NOBLE BUY BACK
Immediately following the consummation of the Combination, without any
further action by the shareholders of Cabot Noble, Phar-Mor or ShopKo, Cabot
Noble will purchase from supervalu the Buy Back Shares for an aggregate price
of $223,594,526, payable in cash. The Cabot Noble Buy Back results in an
effective price of $16.86 for each ShopKo Share exchanged by supervalu for
Cabot Noble Shares and included in the Buy Back Shares.
ShopKo and Phar-Mor expect to have approximately $220 million in cash
available on the Effective Date to finance the Cabot Noble Buy Back. Cabot
Noble intends to finance a portion of the purchase price for the Cabot Noble
Buy Back with a portion of the proceeds from the Cabot Noble Financing. The
consummation of the Combination is conditioned upon Cabot Noble's ability to
obtain financing of at least $75 million. Cabot Noble intends to fund the
balance of the purchase price with the available cash of Phar-Mor and ShopKo.
See "--Financing."
Under the terms of the Stock Purchase Agreement, the obligation of supervalu
to consummate the Cabot Noble Buy Back is subject to certain conditions,
including that the representations and warranties of Cabot Noble contained in
the Stock Purchase Agreement were true and correct when made and will be true
and correct as of the closing of the Cabot Noble Buy Back on the Effective
Date, that Cabot Noble has performed and complied with all of its agreements,
covenants and obligations under the Stock Purchase Agreement and that the
Combination has been consummated pursuant to the Combination Agreement. The
obligation of Cabot Noble to consummate the Cabot Noble Buy Back is also
subject to certain conditions, including that the representations and
warranties of supervalu were true and correct when made and will be true and
correct as of the closing of the Cabot Noble Buy Back on the Effective Date,
that supervalu has complied with all its agreements, covenants and conditions
under the Stock Purchase Agreement, that the Combination be consummated
pursuant to the Combination Agreement and that Cabot Noble has received a
financing commitment or other reasonable assurances from one or more
underwriters, placement agents or other financing sources (on terms and
conditions reasonably acceptable to each of Cabot Noble, Phar-Mor and ShopKo),
that Cabot Noble may obtained financing of at least $75 million, and that all
documents and deliveries necessary to consummate such financing shall be
completed at or before the closing and held in escrow pending the Effective
Date. The Stock Purchase Agreement also provides for supervalu to indemnify
Cabot Noble for claims, losses, damages, costs, expenses and liabilities
suffered by Cabot Noble on account of any misrepresentation, breach of
warranty, or nonfulfillment of any agreement on the part of supervalu, and for
Cabot Noble similarly to indemnify supervalu in connection with any
misrepresentation, breach of warranty or nonfulfillment of any agreement on
the part of Cabot Noble.
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In connection with the Cabot Noble Buy Back, supervalu will be granted
certain shelf and incidental registration rights with respect to the Cabot
Noble Shares which are not being repurchased by Cabot Noble.
The Cabot Noble Buy Back was negotiated directly between supervalu and Phar-
Mor over a period of several months. The negotiations concerned price, the
form of consideration, the timing of receipt of consideration, and other
related matters. The ShopKo, Phar-Mor and Cabot Noble Boards considered the
Cabot Noble Buy Back in determining whether to approve the Combination. In
approving the Combination (which contemplates the Cabot Noble Buy Back), the
ShopKo Board was required under the Minnesota Law to act in good faith, in a
manner the directors reasonably believed to be in the best interests of the
corporation, and with the care an ordinarily prudent person in a like position
would exercise under similar circumstances; the Phar-Mor Board was required
under the Pennsylvania Law to act in a manner the directors reasonably
believed to be in the best interests of the corporation, and with such care as
a person of ordinary prudence would use under similar circumstances; and the
Cabot Noble Board was required under the Delaware Law to act in the best
interest of the corporation with undivided and unselfish loyalty, and to use
that amount of care that ordinarily careful and prudent people would use in
similar circumstances in the handling of their own affairs. As described
above, the ShopKo Board established a special committee of independent
directors to review the Combination in light of all significant factors,
including the Cabot Noble Buy Back. See "The Transaction--Background of the
Transaction." Phar-Mor obtained an opinion from Jefferies as to the fairness
of the Combination, including the Cabot Noble Buy Back, to Phar-Mor
shareholders from a financial point of view. See "The Transaction--Phar-Mor
Fairness Opinion."
FINANCING
Cabot Noble, ShopKo and Phar-Mor have entered into negotiations with an
agent bank to provide up to $250 million of financing in the form of a
syndicated revolving credit facility (the "Cabot Noble Financing"). The Cabot
Noble Financing would be used for working capital and general corporate
purposes, and up to $75 million may be used to finance a portion of the Cabot
Noble Buy Back. It is expected that the Cabot Noble Financing would have a
term of approximately three to five years, and would be secured by
substantially all of the inventory and receivables of Phar-Mor and
substantially all assets of ShopKo other than inventory and real estate. In
addition, certain specified real estate of ShopKo and the capital stock of
subsidiaries of ShopKo would secure a principal amount of borrowings under the
Cabot Noble Financing not in excess of the greater of (x) 15% of ShopKo's
consolidated tangible assets and (y) $160 million.
The Cabot Noble Financing would be reduced by $8.6 million on December 15 of
each year the facility is in place. ShopKo and Cabot Noble may consider
refinancing that portion of the Cabot Noble Financing used to partially
finance the Cabot Noble Buy Back in private or public markets. Borrowings
under the Cabot Noble Financing will bear interest at a rate that varies
depending upon the type of borrowing under such facility and other factors.
Generally, "base rate loans" will bear interest at a rate equal to 1.25% plus
the higher of (x) 1/2 of 1% in excess of the Federal Reserve reported
certificate of deposit rate and (y) the agent bank's announced prime lending
rate as in affect from time to time. The Cabot Noble Financing will restrict
the ability of Cabot Noble, ShopKo, and Phar-Mor to pay dividends, although
the actual terms of such restrictions have not been determined as of the date
hereof. The terms of the Cabot Noble Financing described herein are subject to
change, and there can be no assurance that such financing will in fact be
available or that the facility's actual terms will be substantially similar to
those described herein.
Currently, Phar-Mor has outstanding the Phar-Mor Senior Notes in the
aggregate principal amount of approximately $91.5 million. Although Phar-Mor
believes that the Transaction does not entitle holders of the Phar-Mor Senior
Notes to put such instruments to Phar-Mor, concurrently with the solicitation
of proxies hereby Phar-Mor is soliciting the consent of such holders to waive
any right to compel Phar-Mor to repurchase any Phar-Mor Senior Notes which
such holders may have or may be deemed to have as a result of any "change in
control" resulting from the Transaction. Phar-Mor intends to complete the
solicitation of consents from holders of Phar-Mor Senior Notes prior to or
contemporaneously with the Special Meetings. If (i) such waivers are not
received, (ii) it is determined that such holders have such a right, and (iii)
such holders exercise such right, Phar-
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Mor would be required to repurchase the Phar-Mor Senior Notes at 101% of their
principal amount plus accrued interest to the date of repurchase. Phar-Mor
and/or Cabot Noble may need to obtain additional financing to repurchase the
Phar-Mor Senior Notes but have no current arrangements concerning such
financing. Although there can be no assurance that either Phar-Mor or Cabot
Noble would be able to arrange to obtain such financing, management of Cabot
Noble and Phar-Mor believe that financing could be arranged by Phar-Mor and/or
Cabot Noble to effect any such repurchase of Phar-Mor Senior Notes, on terms
favorable to Cabot Noble and Phar-Mor, including through the issuance of other
notes by Phar-Mor or Cabot Noble.
REPRESENTATIONS AND WARRANTIES
The Combination Agreement contains various representations and warranties of
the parties thereto. These include representations and warranties by each of
Phar-Mor and ShopKo as to (i) organization and good standing, (ii)
capitalization, (iii) approval and adoption of the Phar-Mor Plan and the
ShopKo Plan, respectively, and authorization of the Combination Agreement and
the absence of the need (except as specified) for governmental or third party
consents to the consummation of the Phar-Mor Plan and the ShopKo Plan,
respectively, and compliance with the provisions of the Combination Agreement,
(iv) compliance with applicable law, (v) accuracy of financial statements and
filings with the Commission, (vi) absence of material undisclosed liabilities
and the absence of material adverse changes in the condition (financial or
otherwise), operations or business of Phar-Mor or ShopKo and their
subsidiaries, taken as a whole, (vii) absence of pending or threatened
material litigation, (viii) no brokers or finders other than Jefferies and
Salomon Brothers and (ix) receipt of opinions of financial advisors and
counsel.
OPERATIONS OF PHAR-MOR, SHOPKO AND CABOT NOBLE PRIOR TO THE TRANSACTION
Phar-Mor and ShopKo have agreed to conduct their operations, except as
otherwise provided in the Combination Agreement, according to their ordinary
course of business and in accordance with applicable laws and contracts
pending consummation of the Transaction. In addition, Phar-Mor and ShopKo have
agreed that, among other things, prior to the consummation of the Transaction,
unless the other agrees in writing or as otherwise required or permitted by
the Combination Agreement, they each shall not: (i) except in the ordinary
course of business and consistent with past practice, sell, pledge, dispose of
or encumber any assets (including, without limitation, any indebtedness owned
or any claims held); (ii) whether or not in the ordinary course of business or
consistent with past practice, sell or dispose of any material assets; (iii)
amend its articles of incorporation or by-laws; (iv) split, combine or
reclassify any shares of its capital stock or other equity interests or
declare, set aside or pay any dividend or distribution, payable in cash,
stock, property or otherwise with respect to any of its capital stock or other
equity interests; (v) redeem, purchase or otherwise acquire any of its capital
stock or other equity interests; (vi) adopt a plan of complete or partial
liquidation or resolutions providing for the complete or partial liquidation,
dissolution, merger, consolidation, restructuring, recapitalization or other
reorganization; (vii) prepare or file any tax return or tax report
inconsistent with past practice or, on any such return or report, take any
position, make any election or adopt any method that is inconsistent with
positions taken, elections made or methods used in preparing or filing similar
returns or reports in prior periods; (viii) issue, sell, pledge or dispose of
or authorize, propose or agree to the issuance, sale, pledge or disposition of
any shares of, or any options, warrants or rights of any kind to acquire any
shares of, or any securities convertible into or exchangeable or exercisable
for any shares of, its capital stock or other equity interests of any class or
any other securities in respect of, in lieu of, or in substitution for, shares
of its common stock or other equity interests outstanding on the date of the
Combination Agreement; (ix) acquire (by merger, consolidation or acquisition
of stock or assets) any corporation, partnership or other business
organization or entity or division thereof, or make any investment in any
entity, either by purchase of stock or other securities, contributions to
capital, property transfer or purchase of any property or assets, other than
cash management transactions in the ordinary course of business and consistent
with past practice; (x) except in the ordinary course of business and
consistent with past practice, incur any indebtedness for borrowed money or
issue any debt securities or assume, guarantee, endorse or otherwise as an
accommodation become responsible for, the obligations of any other person, or
make any loans or advances; (xi) authorize, recommend or propose any change in
its capitalization (other than the incurrence of indebtedness otherwise
permitted pursuant to the Combination Agreement);
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(xii) modify or change in any material respect any existing material license,
lease, contract or other document, other than in the ordinary course of
business and consistent with past practice and other than changes to
employment agreements in connection with the Transaction; or (xiii) authorize
or propose any of the foregoing, or enter into or modify any contract,
agreement, commitment or arrangement to do any of the foregoing.
SHOPKO DIVIDENDS
ShopKo has agreed not to declare or pay any dividends on the ShopKo Shares
following the cash dividend of $.11 per ShopKo Share paid on September 15,
1996.
NO SOLICITATION; CERTAIN NEGOTIATIONS
Each of Phar-Mor and ShopKo has agreed that it will not, directly or
indirectly, solicit, initiate or encourage or take any action to facilitate
the making of any proposal or offer from any person relating to any
acquisition, purchase or sale of all or a material amount of its assets or
securities, or any tender or exchange offer, proposal for a merger,
consolidation or other business combination involving a substantial equity
interest in or a substantial portion of its assets, except pursuant to the
Combination Agreement, or to engage in any negotiations regarding, or to
furnish to any other person any confidential information with respect to, any
effort or attempt by any other person to do or seek any of the foregoing.
Until the Phar-Mor Plan and the ShopKo Plan have been approved and adopted by
the Phar-Mor and ShopKo shareholders, respectively, the Phar-Mor Board or the
ShopKo Board to the extent required by its fiduciary obligations under
applicable law (as determined in good faith by such Board based on the advice
of outside counsel), may participate in discussions or negotiations with,
furnish information to, and afford access to its properties, books and records
to any person in connection with any such proposal or offer, but such action
may, in certain circumstances, provide the other party with a right to receive
a "break up" fee. See "--Termination; Break-up Fee." Each of Phar-Mor and
ShopKo is required to notify promptly the other of any such proposal, offer or
inquiry from any person with respect to the foregoing, including a description
of the terms and conditions of any such proposal, offer or inquiry which is
made, and to give the other party five days advance written notice of any
agreement to be entered into with, or any information furnished to, any such
person.
DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY INSURANCE
Pursuant to the terms of the Combination Agreement, Phar-Mor and ShopKo have
each agreed to maintain in effect, for a period of six years after the
expiration of the respective policies currently in force, their respective
directors' and officers' liability insurance policies, and to maintain in
effect the provisions of their respective articles of incorporation relating
to the indemnification of their respective directors and officers.
Additionally, pursuant to the Combination Agreement, Cabot Noble has agreed to
guarantee the foregoing obligations of Phar-Mor and ShopKo.
CONDITIONS PRECEDENT TO THE TRANSACTION
The respective obligations of Phar-Mor and ShopKo to consummate the
Transaction are subject to the satisfaction of certain conditions at or prior
to the Effective Date, including: (i) the Phar-Mor Plan shall have been
approved by the requisite vote of the holders of the Phar-Mor Shares; (ii) the
ShopKo Plan shall have been approved by the requisite vote of the holders of
the ShopKo Shares; (iii) the Registration Statement, of which this Joint Proxy
Statement/Prospectus is a part, shall have become effective; (iv) Cabot
Noble's Shares shall have been listed, or approved for listing upon
notification of issuance, on the NYSE or on the Nasdaq-NMS (v) the absence of
any judgment, decree, injunction, ruling or order of any court, governmental
department, authority, commission, agency or instrumentality outstanding
against Cabot Noble, Phar-Mor or ShopKo which prohibits, restricts or delays
the consummation of the Combination or the Cabot Noble Buy Back or the
satisfaction of any conditions to such consummation or materially limits the
rights of Cabot Noble to control ShopKo or Phar-Mor; (vi) each of ShopKo and
Phar-Mor shall have received written confirmation of the continuation of their
respective existing financing facilities as of the date of closing for the
Combination (the "Closing"), or, in the alternative, a working capital
facility commitment in form and substance reasonably acceptable to Phar-Mor
and
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ShopKo; (vii) the holders of fewer than 5% of the outstanding ShopKo Shares
shall have exercised appraisal rights under the Minnesota Law; (viii) Cabot
Noble shall have received a commitment or reasonable assurances that it will
obtain a minimum of $75 million in third-party financing; (ix) at the
Effective Date, there shall exist no condition or circumstance that would
reasonably be expected to prevent or delay the consummation of the Cabot Noble
Buy Back; and (x) each of Cabot Noble, Phar-Mor, ShopKo and supervalu shall
have received a solvency opinion from a nationally recognized valuation firm.
The obligation of Phar-Mor to consummate the Transaction is subject to the
satisfaction of certain additional conditions at or prior to the Effective
Date, including (i) each of the representations and warranties of ShopKo
contained in the Combination Agreement shall be true and correct in all
material respects as of the date of the Combination Agreement and the
Effective Date with the same effect as though made at the Effective Date,
ShopKo shall have performed all obligations and complied with all covenants
required by the Combination Agreement, and ShopKo shall have delivered to
Phar-Mor a certificate to that effect; (ii) there shall not have occurred any
change in the financial condition, business or prospects of ShopKo and its
subsidiaries, taken as a whole, that is materially adverse to ShopKo and its
subsidiaries taken as a whole; (iii) all permits, authorizations and
regulatory approvals of governmental authorities necessary for the
consummation of the Transaction and any required consent to the Transaction
under any agreement or contract shall have been received; (iv) an opinion of
Phar-Mor's counsel that the Combination will constitute a tax-free exchange
shall have been received; (v) a comfort letter from ShopKo's independent
certified public accountants with regard to certain financial matters shall
have been received; (vi) the ShopKo Exchange shall be consummated
simultaneously with the Phar-Mor Exchange; (vii) each member of the ShopKo
Board shall have submitted a written resignation effective as of the Effective
Date; and (viii) the ShopKo Board shall have terminated the Rights Agreement
dated July 3, 1996, between ShopKo and Norwest Bank Minnesota, National
Association (the "Rights Agreement"). The ShopKo Board has adopted a
resolution terminating the Rights Agreement immediately prior to the Effective
Date.
The obligation of ShopKo to consummate the Transaction is subject to the
satisfaction of certain additional conditions at or prior to the Effective
Date, including (i) each of the representations and warranties of Phar-Mor
contained in the Combination Agreement shall be true and correct in all
material respects as of the date of the Combination Agreement and the
Effective Date with the same effect as though made at the Effective Date,
Phar-Mor and Cabot Noble shall have performed all obligations and complied
with all covenants required by the Combination Agreement, and Phar-Mor shall
have delivered to ShopKo a certificate to that effect; (ii) there shall not
have occurred any change in the financial condition, business or prospects of
Phar-Mor and its subsidiaries, taken as a whole, that is materially adverse to
Phar-Mor and its subsidiaries taken as a whole; (iii) all permits,
authorizations and regulatory approvals of governmental authorities necessary
for the consummation of the Transaction and any required consent to the
Transaction under any agreement or contract shall have been received; (iv) an
opinion of ShopKo's counsel that the Combination will constitute a tax-free
exchange shall have been received; (v) a comfort letter from Phar-Mor's
independent certified public accountants with regard to certain financial
matters shall have been received; and (vi) the Phar-Mor Exchange shall be
consummated simultaneously with the ShopKo Exchange.
TERMINATION; BREAK-UP FEE
The Combination Agreement may be terminated at any time prior to the
Effective Date: (i) by mutual consent of the Phar-Mor Board and the ShopKo
Board; (ii) by the Phar-Mor Board or the ShopKo Board (A) if the Effective
Date shall not have occurred on or before March 31, 1997, (B) if any state or
federal law, order, rule or regulation is adopted or issued, which has the
effect, as supported by the written opinion of outside counsel for such party,
of prohibiting the Combination or the Cabot Noble Buy Back; or (C) if any
court of competent jurisdiction in the United States or any State shall have
issued an order, judgment or decree permanently restraining, enjoining or
otherwise prohibiting the Transaction, and such order, judgment or decree
shall have become final and nonappealable; or (iii) by the Phar-Mor Board or
the ShopKo Board if at the Phar-Mor Special Meeting or the ShopKo Special
Meeting (including any adjournment thereof), the Phar-Mor Plan or the ShopKo
Plan, respectively, shall fail to be approved and adopted by the shareholders
of Phar-Mor and ShopKo, respectively.
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The Phar-Mor Board may also terminate the Combination Agreement (i) prior to
the date originally set forth in this Joint Proxy Statement/Prospectus for the
ShopKo Special Meeting if the ShopKo Exchange Ratio, as adjusted, exceeds
3.140 (i.e., if the Average Closing Price is less than $5.493), unless ShopKo
agrees, by written notice delivered to Phar-Mor within three days after the
end of the Pricing Period, that the ShopKo Exchange Ratio shall be 3.140; (ii)
in the event there has been a material breach of any representation, warranty,
covenant or agreement contained in the Combination Agreement on the part of
ShopKo which has not been cured within ten business days after notice
(provided that Phar-Mor is not also in material breach of the terms of the
Combination Agreement); (iii) if Phar-Mor receives a third party tender offer
or other written offer or proposal with respect to a merger or sale of a
material portion of its assets or other business combination (each, a
"Business Combination") and if (A) the Phar-Mor Board determines in good faith
that its fiduciary obligations under applicable law require that such Business
Combination proposal be accepted and has received written advice from
independent counsel that notwithstanding a binding commitment to consummate an
agreement of the nature of the Combination Agreement entered into in the
proper exercise of its applicable fiduciary duties, such fiduciary duties
would also require the directors to reconsider such commitment as a result of
such Business Combination proposal, (B) prior to any such termination, Phar-
Mor has negotiated in good faith with ShopKo to make such adjustments in the
terms and conditions of the Combination Agreement as would enable Phar-Mor to
proceed with the Transaction, and (C) Phar-Mor has given ShopKo at least five
business days written notice of such termination; and (iv) if the ShopKo Board
(A) shall withdraw or modify in any manner adverse to Phar-Mor its approval of
the Combination Agreement and Transaction or its recommendation to its
shareholders regarding their approval of the ShopKo Plan, (B) shall fail to
reaffirm such approval or recommendation upon the reasonable request of Phar-
Mor, (C) shall approve or recommend any Business Combination proposal for
ShopKo, or (D) shall resolve to take any of the actions specified in clauses
(A), (B) or (C) (collectively "ShopKo Board Actions").
The ShopKo Board may also terminate the Combination Agreement (i) prior to
the date originally set forth in this Joint Proxy Statement/Prospectus for the
ShopKo Special Meeting if the ShopKo Exchange Ratio, as adjusted, is less than
1.895 (i.e., if the Average Closing Price exceeds $9.501), unless Phar-Mor
agrees, by written notice delivered to ShopKo within three days after the end
of the Pricing Period, that the ShopKo Exchange Ratio shall be 1.895; (ii) in
the event there has been a material breach of any representation, warranty,
covenant or agreement contained in the Combination Agreement on the part of
Phar-Mor which has not been cured within ten business days after notice
(provided that ShopKo is not also in material breach of the terms of the
Combination Agreement); (iii) if ShopKo receives an offer or proposal for a
Business Combination and if (A) the ShopKo Board determines in good faith that
its fiduciary obligations under applicable law require that such Business
Combination be accepted and has received written advice from independent
counsel that notwithstanding a binding commitment to consummate an agreement
of the nature of the Combination Agreement entered into in the proper exercise
of its applicable fiduciary duties, such fiduciary duties would also require
the directors to reconsider such commitment as a result of such Business
Combination proposal, (B) prior to any such termination, ShopKo has negotiated
in good faith with Phar-Mor to make such adjustments in the terms and
conditions of the Combination Agreement as would enable ShopKo to proceed with
the Transaction, and (C) ShopKo has given Phar-Mor at least five business days
written notice of such termination; and (iv) if the Phar-Mor Board (A) shall
withdraw or modify in any manner adverse to ShopKo its approval of the
Combination Agreement and Transaction or its recommendation to its
shareholders regarding their approval of the Phar-Mor Plan, (B) shall fail to
reaffirm such approval or recommendation upon the reasonable request of
ShopKo, (C) shall approve or recommend any Business Combination for Phar-Mor,
or (D) shall resolve to take any of the actions specified in clauses (A), (B)
or (C) (collectively "Phar-Mor Board Actions" and, together with ShopKo Board
Actions, "Board Actions").
In the event of the termination of the Combination Agreement, the
Combination Agreement shall become void and (except as discussed below) have
no effect, without any liability on the part of any party or its directors,
officers or shareholders, except with respect to confidentiality obligations,
an agreement not to solicit the other party's employees and payment of
respective expenses.
In the event of a termination of the Combination Agreement which does not
result from a material breach thereof by either ShopKo or Phar-Mor, each party
will bear its respective expenses and legal fees except for
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expenses, fees and other costs incurred in connection with that portion of the
Cabot Noble Financing required to finance the Cabot Noble Buy Back, which
costs shall be borne 75% by ShopKo and 25% by Phar-Mor.
If, however, termination occurs as a result of a party's material breach of
any representation, warranty, covenant or agreement contained in the
Combination Agreement, the breaching party shall pay the non-breaching party
an amount equal to all fees, expenses, financing commitments and other costs
incurred by the non-breaching party in connection with the Transaction, but
not more than $500,000, which remedy would be in addition to, and not in lieu
of, all other remedies which the non-breaching party may have. In addition to
the foregoing, prior to such termination, the breaching party experiences a
"Triggering Event" (as defined below), then the breaching party is also
required to pay the non-breaching party, upon demand and following such
termination, the sum of (i) $3.0 million in cash if required to be paid by
Phar-Mor or (ii) $15.0 million in cash if required to be paid by ShopKo.
A "Triggering Event" means: (i) the acceptance in writing by the breaching
party of any Business Combination proposal; (ii) the recommendation by the
board of directors of the breaching party not to oppose any tender offer for
capital stock of such breaching party by a third party; (iii) a withdrawal or
material modification by the board of directors of the breaching party of its
authorization, approval or recommendation to the shareholders of such party
with respect to the Combination or the failure by such board to approve or
take steps necessary to consummate the Combination; or (iv) the acquisition by
any person, entity or group (as the term is used in Section 13(d)(3) of the
Securities Exchange Act of 1934, as amended), other than supervalu with
respect to ShopKo or Hamilton Morgan with respect to Phar-Mor, of beneficial
ownership with respect to more than twenty percent (20%) of the common stock
of such party.
If a termination of the Combination Agreement occurs by reason of the
acceptance of a Business Combination proposal or by reason of a party's Board
Action, however, the party that accepted such Business Combination proposal or
to which the Board Action relates shall pay to the other party the sum of (i)
$3.0 million in cash if required to be paid by Phar-Mor or (ii) $15.0 million
in cash if required to be paid by ShopKo, plus in each case cash in an amount
equal to all documented expenses and fees incurred by the other, but not more
than $500,000, as liquidated damages. If one party fails to pay promptly to
the other any expense and/or fee due thereunder, the defaulting party shall
pay the costs and expenses (including legal fees and expenses) in connection
with any action, including the filing of any lawsuit or other legal action,
taken to collect payment, together with interest on the amount of any unpaid
fee at the publicly announced prime rate of Citibank, N.A. from the date such
fee was required to be paid.
MODIFICATION OR WAIVER
The Combination Agreement may be amended, modified or superseded at any time
by a written instrument approved by the Phar-Mor Board and the ShopKo Board
and any of the terms, covenants, representations, warranties or conditions of
the Combination Agreement may be waived by the party intended to be benefited
thereby, provided that after adoption of the Phar-Mor Plan and the ShopKo Plan
by the shareholders of Phar-Mor or ShopKo, respectively, no amendment may be
made without the further approval of such approving shareholders except to the
extent permitted by the Minnesota Law or the Pennsylvania Law, as applicable.
ACCOUNTING TREATMENT
The transactions in which Cabot Noble acquires ShopKo and Phar-Mor through
an exchange of shares will be accounted for as a purchase of Phar-Mor by
ShopKo. Under purchase accounting, Cabot Noble will allocate among the Phar-
Mor assets the total cost of acquiring the Phar-Mor shares based upon the fair
value of the assets and liabilities acquired in the Transaction. The excess of
ShopKo's cost over the fair value of the identifiable tangible assets
acquired, if any, would be recorded as intangible assets and amortized on a
straight-line basis over a period not to exceed 20 years. The assets and
liabilities of ShopKo will be reflected in Cabot Noble's financial statements
at their historical cost basis. Earnings of the combined companies subsequent
to the date of the Combination will be reduced by the amortization of
intangible assets. The cost to ShopKo of acquiring the Phar-Mor Shares is
expected to exceed the fair market value of the net assets of Phar-Mor. See
"Cabot Noble Unaudited Pro Forma Consolidated Financial Statements."
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain Federal income tax consequences
applicable to holders of Phar-Mor Shares and ShopKo Shares. This summary is
based upon the provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), applicable treasury regulations thereunder, judicial decisions,
and current administrative rulings, subsequent changes to any of which may
affect the tax consequences described herein.
The following discussion does not address all aspects of Federal income
taxation that may be important to particular taxpayers in light of their
personal investment circumstances or to taxpayers subject to special treatment
under the Federal income tax laws (including dealers in securities, mutual
funds, life insurance companies, foreign persons, tax-exempt entities, and
holders who acquired their Phar-Mor Shares or ShopKo Shares pursuant to the
exercise of employee stock options or otherwise as compensation) and does not
address any aspect of state, local or foreign taxation. The discussion does
not apply to supervalu, 90% of whose Cabot Noble Shares will be purchased by
Cabot Noble pursuant to the Cabot Noble Buy Back. This summary also assumes
that the Phar-Mor Shares and ShopKo Shares will be held as capital assets on
the Effective Date.
Swidler & Berlin, Chartered, counsel for Phar-Mor, has delivered an opinion
to the effect that the Phar-Mor Exchange will be treated for Federal income
tax purposes as a tax-free transfer of property to Cabot Noble by the holders
of Phar-Mor Shares to the extent such holders receive Cabot Noble Shares in
the Combination. Sidley & Austin, special counsel for ShopKo, has delivered an
opinion to the effect that the ShopKo Exchange will be treated for Federal
income tax purposes as a tax-free transfer of property to Cabot Noble by the
holders of ShopKo Shares, to the extent such holders receive Cabot Noble
Shares in the Combination. Those opinions are based upon, among other things,
representation letters provided by Phar-Mor, ShopKo, Cabot Noble and certain
beneficial owners of 5% or more of the Phar-Mor Shares to counsel containing
customary statements relating to control of Cabot Noble immediately after the
Combination by the former holders of Phar-Mor Shares and ShopKo Shares and
certain other technical requirements under Section 351 of the Code.
It is a condition to the obligation of Phar-Mor and ShopKo to consummate the
Combination, that each shall have received confirmation, dated the closing
date, of the opinion of its respective counsel contained in this paragraph.
No rulings have been or will be requested from the Internal Revenue Service
(the "IRS") with respect to any of the matters discussed herein, and the
opinions of counsel described above are not binding on the IRS. There can be
no assurance that future legislation, regulations, administrative rulings or
court decisions will not adversely affect the accuracy of the statements
contained herein.
Tax Consequences of the Phar-Mor Exchange and ShopKo Exchange. A holder of
Phar-Mor Shares or ShopKo Shares who, pursuant to the Phar-Mor Exchange or
ShopKo Exchange, exchanges Phar-Mor Shares or ShopKo Shares for Cabot Noble
Shares will not recognize gain or loss upon such exchange to the extent of the
Cabot Noble Shares received. The aggregate tax basis of the Cabot Noble Shares
received by such holder will be equal to the aggregate tax basis of the Phar-
Mor Shares or ShopKo Shares exchanged by the holder and the holding period of
the Cabot Noble Shares will include the holding period of the Phar-Mor Shares
or ShopKo Shares exchanged by the holder.
Shareholders who receive cash with respect to fractional Cabot Noble Shares
will be treated as having received such fractional Cabot Noble Shares pursuant
to the ShopKo Exchange and then as having sold those fractional shares in the
market for cash. Such shareholders will recognize gain or loss with respect to
such fractional Cabot Noble Shares in an amount equal to the difference
between the tax basis allocated to such fractional Cabot Noble Shares, and the
cash received in respect thereof. Any such gain or loss will be capital gain
or loss and will constitute long-term capital gain or loss if the holding
period of such fractional Cabot Noble Shares (as determined above) exceeds one
year.
Tax Consequences to Holders of ShopKo Shares upon Exercise of Dissenting
Shareholders' Rights. A holder of ShopKo Shares who exercises and perfects
dissenters' rights with respect to all ShopKo Shares owned
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by such holder, and who, after the Combination, does not have actual or
constructive ownership of Cabot Noble Shares, will recognize capital gain or
loss equal to the difference between the amount of cash received (other than
in respect of interest awarded by a court) and such shareholder's tax basis in
his or her ShopKo Shares. Such capital gain or loss will be long-term capital
gain or loss if such ShopKo Shares have a holding period exceeding one year at
the time of the consummation of the Combination. Interest, if any, awarded by
a court to a dissenting shareholder will be includible in such shareholder's
income as ordinary income. In the event that a dissenting shareholder, after
the Combination, owns or has an option to acquire Cabot Noble Shares or is
treated as owning Cabot Noble Shares owned by related parties by virtue of the
constructive ownership rules of the Code, the cash received will be treated in
its entirety as a dividend, rather than stock sale proceeds producing capital
gain or loss, if the effect of the receipt of cash is essentially equivalent
to a dividend. However, the receipt of cash should not be considered
essentially equivalent to a dividend if, taking account of shares owned
actually and constructively, the dissenting shareholder, after the
Combination, has only a minimal percentage of the Cabot Noble Shares,
exercises no control over the affairs of Cabot Noble, and has a percentage
interest in Cabot Noble Shares that is less than the shareholder's percentage
interest in ShopKo Shares prior to the Combination and the exercise of
dissenters' rights.
Reporting Requirements. Each shareholder (other than holders of ShopKo
Shares who exercise and perfect dissenters' rights) will be required to retain
records and file with such holder's U.S. federal income tax return a statement
setting forth certain facts relating to the Combination. It is also expected
that such shareholders will be asked to indicate in the letter of transmittal
their tax basis in the shares surrendered by them pursuant to the Combination.
Tax Consequences to Phar-Mor, ShopKo and Cabot Noble. No income, gain or
loss will be recognized by Phar-Mor, ShopKo or Cabot Noble pursuant to the
Combination.
THIS FEDERAL INCOME TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY AND MAY
NOT APPLY TO ALL HOLDERS OF SHOPKO SHARES OR PHAR-MOR SHARES. SUCH HOLDERS ARE
URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF
THE COMBINATION.
69
<PAGE>
CERTAIN FORWARD-LOOKING INFORMATION
Set forth below are certain forward-looking statements. The actual results
of ShopKo, Phar-Mor and Cabot Noble may differ materially from those contained
in the forward-looking statements. Factors which may cause such differences
are identified under "Forward-Looking Statements."
CABOT NOBLE PRO FORMA COMBINED PROJECTIONS
The Cabot Noble Management Projections were not prepared with a view toward
public disclosure or complying with the American Institute of Certified Public
Accountants Guide for Prospective Financial Statements (the "AICPA Guide"),
nor have they been presented in lieu of pro forma historical financial
information and, accordingly, are not intended to comply with Rule 11-03 of
Regulation S-X. The Cabot Noble Management Projections are based on
information supplied by the management of each of Phar-Mor and ShopKo in
December 1996. The projections have not been examined or compiled by any
certified public accountant and, accordingly, no opinion or any other form of
opinion has been expressed. The "Phar-Mor Management Projections" (as defined
below under "--Phar-Information Supplied to ShopKo"), which were prepared by
Phar-Mor, and the Cabot-Noble Management Projections, to the extent they
incorporate such projections, are currently being reviewed by ShopKo and its
financial advisors. Neither ShopKo nor Phar-Mor makes any representations as
to the accuracy or reasonableness of the other company's projections either on
a stand-alone basis or as incorporated in the Cabot Noble Management
Projections.
The projections set forth below were prepared subsequent to the approval of
the Combination by the ShopKo and Phar-Mor Boards and, accordingly, were not
considered by such Boards in approving the Combination. Please see Annex G
hereto for the projections considered by the ShopKo Board and the Phar-Mor
Board in approving the Combination.
The Cabot Noble Management Projections, while presented with numerical
specificity, were based upon numerous estimates and other assumptions (some of
which are referred to under "Forward-Looking Statements") which are inherently
subject to significant business, economic and competitive uncertainties,
contingencies and risks, all of which are difficult to quantify and many of
which are beyond the control of Cabot Noble, Phar-Mor and ShopKo. Accordingly,
there can be no assurances that the Cabot Noble Management Projections will be
realized, and it is likely that future results will vary from those set forth
below, possibly in material respects. The Cabot Noble Management Projections
included the information set forth below.
CABOT NOBLE, INC. MANAGEMENT PROJECTIONS
PROJECTED CONSOLIDATED STATEMENT OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PROJECTED FISCAL YEAR
ENDING FEBRUARY(A)
-----------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Revenues...................................... 3,396.0 3,686.6 4,026.8
Gross profit.................................. 725.2 761.8 798.2
Selling, general and administrative........... 539.3 545.5 550.9
Adjusted EBITDA............................... 177.2 206.5 236.9
EBIT.......................................... 104.8 130.1 157.5
Interest expense.............................. 44.2 56.8 56.4
Net income.................................... 36.7 44.5 61.3
Earnings per share............................ $0.54(b) $0.65(b) $0.90(b)
</TABLE>
- --------
(a) The projections do not include one-time charges to be incurred by ShopKo
which are estimated to range from $15.8 to $17.6 or $0.23 to $0.26 per
share. The charges will be incurred due to changes that will occur as a
result of the Combination and are associated with the following:
<TABLE>
<S> <C> <C> <C>
Employee related costs....................................... $ 9.5 to $10.0
Inventory reserves........................................... 11.5 to 13.5
Write-off of computer equipment to be upgraded............... 5.0 to 5.5
----- -----
Pre-tax impact............................................... $26.0 to $29.0
===== =====
After-tax impact............................................. $15.8 to $17.6
===== =====
Impact on earnings per share................................. $0.23 to $0.26
===== =====
</TABLE>
70
<PAGE>
(b) Earnings per share have been computed on the basis of 68.4 million
weighted average number of outstanding Cabot Noble Shares. To determine
the equivalent earnings per ShopKo Share and Phar-Mor Share, respectively,
the earnings per share should be multiplied by the applicable exchange
ratio (which, with respect to ShopKo, is subject to adjustment). The
following table sets forth equivalent earnings per ShopKo Share and Phar-
Mor Share based on assumed ShopKo Exchange Ratios of 3.0, 3.14, 2.4 and
1.895 to 1.
<TABLE>
<CAPTION>
EXCHANGE RATIO
-----------------
SHOPKO PHAR-MOR
EQUIVALENT EARNINGS PER SHARE(5) 3.0(1) 1.0
-------------------------------- -------- --------
<S> <C> <C>
1997..................................................... $1.61 $0.54
1998..................................................... $1.95 $0.65
1999..................................................... $2.69 $0.90
<CAPTION>
EXCHANGE RATIO
-----------------
SHOPKO PHAR-MOR
EQUIVALENT EARNINGS PER SHARE(5) 3.14(2) 1.0
-------------------------------- -------- --------
<S> <C> <C>
1997..................................................... $1.62 $0.52
1998..................................................... $1.97 $0.63
1999..................................................... $2.71 $0.86
<CAPTION>
EXCHANGE RATIO
-----------------
SHOPKO PHAR-MOR
EQUIVALENT EARNINGS PER SHARE(5) 2.4(3) 1.0
-------------------------------- -------- --------
<S> <C> <C>
1997..................................................... $1.54 $0.64
1998..................................................... $1.87 $0.78
1999..................................................... $2.57 $1.07
<CAPTION>
EXCHANGE RATIO
-----------------
SHOPKO PHAR-MOR
EQUIVALENT EARNINGS PER SHARE(5) 1.895(4) 1.0
-------------------------------- -------- --------
<S> <C> <C>
1997..................................................... $1.46 $0.77
1998..................................................... $1.77 $0.93
1999..................................................... $2.44 $1.29
</TABLE>
- --------
(1) Based on an Average Closing Price equal to $5.75, the amount which the
Average Closing Price would equal if the Pricing Period had ended on .
(2) Based on an Average Closing Price equal to $5.494. If the Average Closing
Price is less than $5.493, Phar-Mor may terminate the Combination
Agreement, subject to ShopKo's right to fix the ShopKo Exchange Ratio at
3.140 (i.e., based on an Average Closing Price equal to $5.494.).
(3) The initial ShopKo Exchange Ratio designated in the Combination
Agreement.
(4) Based on an Average Closing Price equal to $9.499. If the Average Closing
Price is greater than $9.501. ShopKo may terminate the Combination
Agreement, subject to Phar-Mor's right to fix the ShopKo Exchange Ratio
at 1.895 (i.e., based on an Average Closing Price equal to $9.499).
(5) The projections do not include one-time charges to be incurred by ShopKo
and Phar-Mor outlined in (a) above.
None of Cabot Noble, Phar-Mor or ShopKo currently intend to update or
otherwise publicly revise the Cabot Noble Management Projections presented
herein to reflect circumstances existing or developments occurring after the
preparation of such projections or to reflect the occurrence of unanticipated
events. The Cabot Noble Management Projections have not been independently
verified by Phar-Mor, ShopKo, Salomon Brothers or Jefferies. Inclusion of the
Cabot Noble Management Projections in this Joint Proxy Statement/Prospectus
should not be regarded as a representation by any person that the projected
results will be achieved.
CABOT NOBLE SIGNIFICANT ASSUMPTIONS TO THE PROJECTED CONSOLIDATED STATEMENT
OF OPERATIONS:
BASIS OF PRESENTATION:
The projected consolidated statement of operations has been presented for a
fiscal year ending on the last Saturday in February of each such year
(ShopKo's current fiscal year end). Subsequently, the Phar-Mor Management
Projections presented below have been adjusted to a February fiscal year end.
It is anticipated that after the Combination, Cabot Noble will adopt, as its
fiscal year end, the Saturday closest to January 31 of each year.
71
<PAGE>
ACCOUNTING POLICIES:
The accounting policies used in this projection are consistent with the
current accounting policies of each of ShopKo and Phar-Mor as described in the
"Summary of Significant Accounting Policies " in Note A of Notes to ShopKo's
Consolidated Financial Statements and "Business and Summary of Significant
Accounting Policies" in Note 3 of Notes to Phar-Mor's Consolidated Financial
Statements.
GENERAL:
The Cabot Noble Management Projections present the projected consolidated
results of operations of ShopKo and Phar-Mor as adjusted to reflect the
effects of: (1) the Transaction; and (2) purchase accounting.
The significant adjustments are as follows:
(a) The net pre-tax effect of synergies in purchasing and selling,
general and administrative expenses has been projected to be approximately
$10 million and $20 million in fiscal years 1998 and 1999, respectively.
(b) Amortization of goodwill has been projected to be approximately $1.0
million per year.
(c) Depreciation expense has been reduced by $3.2 million in fiscal years
1998 and 1999 to reflect the write-down to net realizable value of property
and equipment in Phar-Mor's headquarters that will not be used once Phar-
Mor's headquarters is moved to Green Bay, Wisconsin.
(d) Interest expense was adjusted as follows: (1) interest on borrowings
under a new revolving credit facility at an 8% per annum interest rate and
(2) interest expense was increased for the estimated reduction in interest
income on invested funds.
(e) Projected earnings per share are calculated based on the weighted
average number of Cabot Noble Shares outstanding during each year (assumed
to be 68.4 million for each fiscal year presented, based on a ShopKo
Exchange Ratio equal to 3.0). See Annex E for an analysis of the impact on
the ShopKo Exchange Ratio of price fluctuations in the Phar-Mor Shares
prior to closing on the Transaction.
SHOPKO INFORMATION SUPPLIED TO PHAR-MOR
ShopKo does not as a matter of course make public forecasts or projections
presented of its future revenues or results of operations. However, during the
course of negotiations for the Transaction and after the Combination Agreement
was entered into, ShopKo presented certain financial information to
representatives of Phar-Mor. The information presented included the estimates
prepared by ShopKo's management in December 1996 of ShopKo's future financial
performance that are set forth below (assuming the Transaction did not occur)
(the "ShopKo Management Projections").
The ShopKo Management Projections were not prepared with a view toward
public disclosure or complying with the AICPA Guide, nor have they been
presented in lieu of pro forma historical financial information and,
accordingly, are not intended to comply with Rule 11-03 of Regulation S-X. The
projections have not been examined or compiled by any certified public
accountant and, accordingly, no opinion or any other form of opinion has been
expressed.
The ShopKo Management Projections set forth below were prepared by ShopKo
subsequent to the approval of the Combination by the ShopKo and Phar-Mor
Boards and, accordingly, were not considered by such Boards in approving the
Combination. Please see Annex G hereto for the projections considered by the
ShopKo Board and the Phar-Mor Board in approving the Combination.
The ShopKo Management Projections, while presented with numerical
specificity, were based upon numerous estimates and other assumptions (some of
which are referred to under "Forward-Looking Statements") which are inherently
subject to significant business, economic and competitive uncertainties,
contingencies and risks, all of which are difficult to quantify and many of
which are beyond the control of ShopKo. Accordingly, there can be no
assurances that the ShopKo Management Projections will be realized, and it is
likely that future results will vary from those set forth below, possibly in
material respects. The ShopKo Management Projections included the information
set forth below.
72
<PAGE>
SHOPKO MANAGEMENT PROJECTIONS
PROJECTED CONSOLIDATED STATEMENT OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PROJECTED FISCAL YEAR ENDED FEBRUARY(A)
-----------------------------------------
1997(B) 1998 1999
--------------------------- -------------
<S> <C> <C> <C>
Revenues......................... $ 2,315.6 $ 2,555.2 $ 2,845.4
Gross Profit..................... 540.7 556.7 579.3
Selling, general and
administrative.................. 379.2 385.7 395.3
EBITDA........................... 161.5 171.0 184.0
EBIT............................. 101.1 106.7 119.3
Interest expense................. 32.4 31.0 30.6
Net income....................... 41.7 46.0 53.9
Earnings per share............... $ 1.30 $ 1.43 $ 1.68
</TABLE>
- --------
(a) The projections do not include one-time charges to be incurred by ShopKo
which are estimated to range from $15.8 to $17.6 or $0.49 to $0.55 per
share. The charges will be incurred due to changes that will occur as a
result of the Combination and are associated with the following:
<TABLE>
<S> <C> <C> <C>
Employee related costs..................................... $ 9.5 to $10.0
Inventory reserves......................................... 11.5 to 13.5
Write-off of computer equipment to be upgraded............. 5.0 to 5.5
----- -----
Pre-tax impact............................................. $26.0 to $29.0
===== =====
After-tax impact........................................... $15.8 to $17.6
===== =====
Impact on earnings per share............................... $0.49 to $0.55
===== =====
</TABLE>
(b) ShopKo estimates its fiscal year 1997 earnings per share to be between
$1.30 and $1.34. Factors affecting this estimate are: the remaining
business from the filing date to the end of the fiscal year, LIFO and post
holiday physical inventory results.
ShopKo does not intend to update or otherwise publicly revise the
projections herein to reflect circumstances existing or developments occuring
after the preparation of such projections or to reflect the occurrence of
unanticipated events. The ShopKo Management Projections are included in this
Joint Proxy Statement/Prospectus because such projections have been provided
to Phar-Mor in connection with the Transaction. The ShopKo Management
Projections have not been independently verified by Cabot Noble, Phar-Mor,
Jefferies or Salomon Brothers. Inclusion of the ShopKo Management Projections
in this Joint Proxy Statement/Prospectus should not be regarded as a
representation by any person that the projected results will be achieved.
SIGNIFICANT ASSUMPTIONS TO SHOPKO'S PROJECTED CONSOLIDATED STATEMENT OF
OPERATIONS:
ACCOUNTING POLICIES:
The Accounting Policies used in the ShopKo Projected Consolidated Statement
of Operations parallel those used by ShopKo and described in the "Summary of
Significant Accounting Policies" in Note A of ShopKo's Notes to Consolidated
Financial Statements.
SALES:
Retail. ShopKo's management projects that retail sales for fiscal year 1997
will increase by 5.9% over the previous fiscal year. For both fiscal years
1998 and 1999, retail sales are projected to increase by 2.3%. These sales
increases are based on the anticipated continued growth in the retail pharmacy
and optical centers and in the general merchandise area due to ShopKo's
ability to meet customer needs more effectively as their lifestyles change.
ProVantage. ShopKo's management anticipates that ProVantage sales for fiscal
year 1997 will increase by 283.1% over fiscal year 1996. For fiscal years 1998
and 1999, ProVantage sales are expected to increase by 54.2% and 44.3%,
respectively. These anticipated sales increases are attributable to
anticipated growth due to acquisitions, strategic alliances, continued growth
in the managed care pharmacy benefit programs and the new Vision Benefit
Management and the new Decision Support Services recently launched. See
"ShopKo Selected Consolidated Financial Data."
GROSS PROFIT:
Retail. Gross profit percent for fiscal year 1997 is projected to decline by
0.3% as compared to fiscal year 1996. For fiscal years 1998 and 1999 gross
profit percent is projected to decline 0.5% and 0.2%, respectively. These
declines have been planned to maintain or increase customer base in a
continuing competitive environment and are also due to increased margin
pressures in the retail pharmacies as a result of the increased managed care
business. The gross profit percents reflect LIFO charges of $3.9 million for
fiscal 1997 and $5.0 million for fiscal years 1998 and 1999.
73
<PAGE>
ProVantage. Gross profit percent for fiscal year 1997 is projected to
decline by 1.8% from fiscal year 1996. Gross profit percents for fiscal years
1998 and 1999 are projected to remain flat and decline 0.1%, respectively.
These declines are due to a larger percentage of sales coming from the lower
gross margin claims processing activities. See "ShopKo Selected Consolidated
Financial Data."
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
RETAIL.
Payroll and benefits: Store payroll and benefits are projected at 11.1% of
sales for each fiscal year in the three year period. The impact of the minimum
wage increase is assumed to be offset by increases in productivity.
Advertising: Projected advertising expense for each of fiscal years 1997,
1998 and 1999 is projected at 2.5% of sales.
Other Store Expenses: All volume related expenses, net of miscellaneous
income are projected at 0.7% of sales for fiscal years 1997, 1998 and 1999.
Non-volume related expenses are projected to increase 13.0% from fiscal year
1996 to fiscal year 1997, decrease by 3.0% for fiscal year 1998 in comparison
to fiscal year 1997 and increase 1.0% from fiscal year 1998 to fiscal year
1999.
ProVantage. ProVantage selling, general and administrative expenses as a
percent of sales are assumed as follows: 3.1% for fiscal 1997, 3.1% for fiscal
1998 and 2.9% for fiscal 1999. These decreases are attributable to leveraging
of expenses off the increasing sales volume. See "ShopKo Selected Consolidated
Financial Data."
DEPRECIATION AND AMORTIZATION:
Depreciation is based on ShopKo's fixed assets plus subsequent additions.
Amortization is based on ShopKo's capital leases and the goodwill resulting
from ProVantage acquisitions. Depreciation and amortization expense for fiscal
years 1997, 1998 and 1999 is anticipated to be $60.4, $64.3 and $64.7 million,
respectively.
NET INTEREST EXPENSE:
Net interest expense is based on the terms of the long-term debt and
capitalized leases described in Note D--"Long-Term Obligations and Leases" of
ShopKo's Notes to Consolidated Financial Statements, offset by interest income
on short-term investments. For fiscal years 1997, 1998 and 1999, interest
income is forecasted to be $4.0, $5.5 and $5.8 million, respectively.
INCOME TAXES:
Income taxes are estimated at a tax rate of 39.3% for all three fiscal
years. This is based on the statutory federal tax rate of 35.0% and state and
local tax rates, net of federal tax benefits, of 4.3%.
EARNINGS PER SHARE:
Earnings per share are determined by dividing the net income by the weighted
average number of ShopKo Shares outstanding during each year (assumed to be
32.1 million shares for all fiscal years).
SELECTED FINANCIAL INFORMATION:
The following table sets forth the ProVantage financial information included
in the ShopKo Management Projections above:
<TABLE>
<CAPTION>
(IN MILLIONS)
PROJECTED FISCAL YEAR ENDED FEBRUARY
--------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Revenues(1)............................. $ 359.5 $ 554.5 $ 800.3
Gross Profit............................ 24.6 37.8 53.9
Selling, general and administrative..... 11.2 17.3 23.5
EBITDA.................................. $ 13.4 $ 20.5 $ 30.4
</TABLE>
- --------
(1) Revenues include intercompany sales of $36.7, $38.5 and $40.4 million for
fiscal years 1997, 1998 and 1999, respectively. These sales were
eliminated from the ShopKo Management Projections above.
74
<PAGE>
PHAR-MOR INFORMATION SUPPLIED TO SHOPKO
Phar-Mor does not as a matter of course make public forecasts or projections
of its future revenues or results of operations. However, during the course of
negotiations for the Transaction and after the Combination Agreement was
entered into, Phar-Mor presented certain financial information to
representatives of ShopKo. The information presented included the estimates
prepared by Phar-Mor's management in December 1996 of Phar-Mor's future
financial performance that are set forth below (assuming the Transaction did
not occur) (the "Phar-Mor Management Projections").
The Phar-Mor Management Projections were not prepared with a view toward
public disclosure or complying with the AICPA Guide, nor have they been
presented in lieu of pro forma historical financial information and,
accordingly, are not intended to comply with Rule 11-03 of Regulation S-X. The
projections have not been examined or compiled by any certified public
accountant and, accordingly, no opinion or any other form of opinion has been
expressed.
The Phar-Mor Management Projections set forth below were prepared by Phar-
Mor subsequent to the approval of the Combination by the ShopKo and Phar-Mor
Boards and, accordingly, were not considered by such Boards in approving the
Combination. Please see Annex G hereto for the projections considered by the
ShopKo Board and the Phar-Mor Board in approving the Combination. The Phar-Mor
Management Projections are currently being reviewed by ShopKo and its
financial advisors.
The Phar-Mor Management Projections, while presented with numerical
specificity, were based upon numerous estimates and other assumptions (some of
which are referred to under "Forward-Looking Statements") which are inherently
subject to significant business, economic and competitive uncertainties,
contingencies and risks, all of which are difficult to quantify and many of
which are beyond the control of Phar-Mor. Accordingly, there can be no
assurance that the Phar-Mor Management Projections will be realized, and it is
likely that future results will vary from those set forth below, possibly in
material respects. The Phar-Mor Management Projections included the
information set forth below.
PHAR-MOR MANAGEMENT PROJECTIONS
PROJECTED CONSOLIDATED STATEMENT OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PROJECTED FISCAL YEAR ENDING,
-----------------------------------------
JUNE 28, 1997 JUNE 27, 1998 JUNE 26, 1999
------------- ------------- -------------
<S> <C> <C> <C>
Revenues................ $1,096.5 $1,156.4 $1,199.2
Gross profit............ 194.1 213.0 223.2
Selling, general and
administrative......... 167.6 172.9 179.0
Adjusted EBITDA......... 17.1 29.9 33.6
EBIT.................... 4.3 14.2 15.6
Interest expense........ 12.2 13.3 13.6
Net income (loss)....... (4.7) 0.5 1.3
Earnings per share...... $ (0.39) $ .04 $ 0.10
</TABLE>
Phar-Mor does not intend to update or otherwise publicly revise the
projections presented herein to reflect circumstances existing or developments
occurring after the preparation of such projections or to reflect the
occurrence of unanticipated events. The Phar-Mor Management Projections are
included in this Joint Proxy Statement/Prospectus because such projections
have been provided to ShopKo in connection with the Transaction.
SIGNIFICANT ASSUMPTIONS TO PHAR-MOR'S PROJECTED CONSOLIDATED STATEMENT OF
OPERATIONS:
ACCOUNTING POLICIES:
The accounting policies used in the projected consolidated statement of
operations parallel those used by Phar-Mor and described in the "Business and
Summary of Significant Accounting Policies" in Note 3 of Phar-Mor's Notes to
Consolidated Financial Statements.
75
<PAGE>
SALES:
Phar-Mor's management projects that comparable store sales will increase by
3.05%, 3.5% and 3.5% in fiscal years 1997, 1998 and 1999, respectively. The
sales increases are based on Phar-Mor attaining increased market share from
its new marketing program and the remodeling of stores.
Phar-Mor opened a new store on December 1, 1996 and expects to open a second
new store before the end of fiscal 1997. One additional new store has been
projected to open during fiscal 1998.
Projected new stores sales included in the periods presented are:
<TABLE>
<S> <C>
1997........................................................... $ 8.0 million
1998........................................................... $29.7 million
1999........................................................... $33.1 million
</TABLE>
The assumptions below as to gross profit and expenses include the impact of
the new stores for all periods presented.
GROSS PROFIT:
Gross profit margin for fiscal 1997 is projected to decline by 0.01% from
fiscal 1996. This is primarily due to a decline of 0.40% in product margins,
reflecting the impact of the price reductions implemented in January 1996. The
decline in product margins is partially offset by the projected reduction in
warehouse expense from out-sourcing certain products, reduction in the amount
of its promotional coupons and elimination of double coupon promotions.
For fiscal years 1998 and 1999 the gross profit margin is projected to
increase 0.71% and 0.19% as a percentage of sales, respectively. These
increases are primarily due to phasing out the senior citizen discount
program, the elimination of double coupon promotions and reduced occupancy
costs from the rightsizing of stores.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Store payroll and benefits: Store payroll and benefits are projected at
6.61% of sales for fiscal year 1997 and 6.64% of sales for each of fiscal
years 1998 and 1999. The impact of the minimum wage increase is assumed to be
offset by an increase in productivity. Vacation and health insurance expenses
are assumed to increase 3% per year. Store incentive compensation expense has
been increased from $1.0 million in fiscal year 1997 to $2.0 million in fiscal
year 1999.
Advertising: Fiscal 1997 advertising expense has been projected based on
Phar-Mor's continuance of the new advertising program implemented in January
1996. This advertising program primarily consists of weekly circulars in all
markets supplemented by additional circulars during the holiday period.
Consequently, the projected expense for fiscal year 1997 is $27.1 million, or
2.48% of sales, as compared to $25.1 million, or 2.37% of sales, for fiscal
year 1996.
For fiscal years 1998 and 1999, no change in Phar-Mor's advertising program
has been projected. Consequently, advertising costs have been projected on the
basis of a 3% annual increase.
Other store expenses: All volume related expenses, as a group, are projected
at 0.82% of sales for each of fiscal years 1997, 1998 and 1999. As a group,
such expenses represented 0.69% of sales in fiscal year 1996.
All non-volume related expenses are projected to increase by 3% per year.
Electric expense has been projected to be reduced by $1.0 million in fiscal
year 1997 and $2.1 million in fiscal years 1998 and 1999 as a result of
planned savings from the lighting retrofit program. In addition for each store
rightsized, the savings in electric expense is projected to be $24.0 thousand.
Security expense has been projected to increase $0.1 million in fiscal year
1997 and $0.5 million in each of fiscal years 1998 and 1999 to reflect
additional costs associated with the EAS tag system.
76
<PAGE>
Corporate Overhead: Corporate overhead costs are projected to increase by
$0.8 million in fiscal year 1997. This increase is due to director and
shareholders costs incurred in fiscal year 1997 that were not incurred prior
to Phar-Mor's emergence from bankruptcy and higher computer maintenance costs
partially offset by lower wages and benefits from the head count reductions
already implemented and lower occupancy costs. Corporate overhead costs are
projected to be reduced by $1.4 million in fiscal year 1998. This reduction is
primarily due to projected savings from the operating costs associated with
the replacement of the mainframe computer.
DEPRECIATION AND AMORTIZATION:
Depreciation is based on Phar-Mor's fixed assets plus subsequent additions.
Depreciation expense for fiscal years 1997, 1998 and 1999 are projected to be
$12.8 million, $15.7 million and $17.9 million, respectively.
Amortization is based on Phar-Mor's cost of video tapes used in its rental
video tape operations. Amortization expense for fiscal years 1997, 1998 and
1999 is projected to be $9.4 million, $10.1 million and $10.6 million,
respectively.
INTEREST EXPENSE:
Interest expense is projected net of interest income. Gross interest expense
is based on the terms of the long-term debt and capitalized leases described
in Note 9 ("Long-Term Debt") and Note 10 ("Leases") of Phar-Mor's Notes to
Consolidated Financial Statements. Interest income is projected based on
investing excess cash at 5.2% per annum. For fiscal years 1997, 1998 and 1999
the interest income is projected to be $4.8 million, $3.2 million and $2.3
million, respectively.
TAXES:
Income taxes are estimated at a tax rate of 40% for each of the three fiscal
years presented. This is based on a statutory federal tax rate of 35% and
combined state and local tax rates, net of federal tax benefits, of 5%.
EARNINGS PER SHARE:
Projected earnings per share are determined by dividing net income by the
weighed average number of Phar-Mor Shares outstanding during each year
(assumed to be 12.2 million Phar-Mor Shares for all periods).
INITIAL MANAGEMENT PROJECTIONS; AS ADJUSTED
ADJUSTED PROJECTIONS USED BY JEFFERIES IN ITS FAIRNESS OPINION
In the course of preparing the Phar-Mor Fairness Opinion, Jefferies
performed sensitivity analyses on the initial projections provided by ShopKo
and Phar-Mor prior to the execution of the Combination Agreement, which
resulted in the development of pro forma projections for ShopKo, Phar-Mor and
Cabot Noble, utilizing forward looking financial information prepared by
ShopKo in August 1996 (the "Initial ShopKo Management Projections) and by
Phar-Mor in August 1996 (the "Initial Phar-Mor Management Projections" and,
together with the Initial ShopKo Management Projections, the "Initial
Management Projections") and taking into account the Cabot Noble Buy Back. The
adjusted projections used by Jefferies in the course of preparing the Phar-Mor
Fairness Opinion were prepared by Jefferies based on the Initial Management
Projections and on other information provided by the managements of Phar-Mor
and ShopKo, which information was adjusted by Jefferies based in part on
discussions with each company's respective management and ShopKo's financial
advisor, Salomon Brothers. Such projections were based on then current
assumptions about combined operations provided by each of Phar-Mor and ShopKo.
The projections appear in Annex G hereto.
PHAR-MOR PROJECTIONS ADJUSTED BY SHOPKO MANAGEMENT
ShopKo management adjusted the Initial Phar-Mor Management Projections to
reflect more conservative estimates of sales and other assumptions than those
utilized by Phar-Mor management in the Initial Phar-Mor Management
Projections. The Initial Phar-Mor Management Projections, as adjusted by
ShopKo management, were used by Salomon Brothers in the course of preparing
its fairness opinion. Such projections are set forth in Annex G hereto.
77
<PAGE>
CABOT NOBLE, INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
GENERAL
The following Cabot Noble unaudited pro forma consolidated financial
statements present the estimated effects of (i) the Combination and (ii) the
Cabot Noble Buy Back. The pro forma balance sheet data assumes that these
events occurred on November 2, 1996 and the pro forma statement of operations
assumes that these events occurred on February 4, 1995.
The pro forma adjustments are based on available information and certain
assumptions that management believes are reasonable. The unaudited pro forma
consolidated financial statements do not purport to represent what Cabot
Noble's financial position and results of operations would actually have been
if the Transaction had occurred on November 2, 1996 or February 4, 1995 or to
project Cabot Noble's financial position or results of operations for any
future period.
The pro forma consolidated financial statements should be read in
conjunction with the historical financial statements, including notes thereto,
and other financial information of Cabot Noble, ShopKo and Phar-Mor, including
the separate ShopKo and Phar-Mor "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Capitalization" included
elsewhere in this Joint Proxy Statement/Prospectus.
CABOT NOBLE UNAUDITED PRO FORMA STATEMENT OF OPERATIONS (IN THOUSANDS)
The following Cabot Noble unaudited pro forma consolidated statements of
operations present the pro forma consolidated results of the operations of
ShopKo and Phar-Mor (see Phar-Mor unaudited pro forma consolidated statement
of operations) for the fifty-two weeks ended February 3, 1996 and the thirty-
nine weeks ended November 2, 1996, as adjusted to reflect the effects of the
Transaction, and the effects of purchase accounting. This information should
be read in conjunction with the description of the Transaction set forth in
this Joint Proxy Statement/Prospectus.
The pro forma adjustments to the consolidated statements of operations
adjust for the effect of the Transaction as if it had occurred as of February
4, 1995. This includes adjustments to:
(a) adjust for the expected corporate office rent expense reduction and
mainframe computer cost reductions due to the relocation of Phar-Mor's
headquarters to Green Bay;
(b) reduce depreciation expense to reflect the write-down to net
realizable value of property and equipment in Phar-Mor's headquarters that
will not be used once Phar-Mor's headquarters is moved to Green Bay and to
record amortization expense on goodwill of $25,962 recorded as part of
purchase accounting;
(c) adjust interest expense for the estimated reduction in interest
income on invested funds of $4,665 for the fifty-two weeks ended February
3, 1996 and $7,359 for the thirty-nine weeks ended November 2, 1996 as a
result of the Cabot Noble Buy Back and other costs and transaction fees
expected to be incurred in connection with the Transaction and record
interest expense of $13,557 for the fifty-two weeks ended February 3, 1996
and $3,503 for the thirty-nine weeks ended November 2, 1996 on borrowings
under a new revolving credit facility as a result of the Cabot Noble Buy
Back and other costs and transaction fees expected to be incurred in
connection with the Transaction; and
(d) record estimated income tax provision at an effective rate of 40%
based on a statutory federal tax rate of 35% and a combined state and local
tax rate, net of federal tax benefits of 5%.
78
<PAGE>
CABOT NOBLE, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FIFTY-TWO WEEKS ENDED FEBRUARY 3, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PHAR- PRO FORMA PRO FORMA
SHOPKO(1) MOR(2) ADJUSTMENTS CABOT NOBLE
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Sales.......................... $1,961,693 $1,058,047 -- $3,019,740
Less:
Cost of goods sold........... 1,462,344 823,438 -- 2,285,782
Selling, general and
administrative expenses..... 345,534 193,519 $(1,690)(a) 537,363
Depreciation and
amortization................ 56,091 18,190 (2,181)(b) 72,100
---------- ---------- ------- ----------
Income from operations......... 97,724 22,900 3,871 124,495
Interest expense............... 34,199 12,000 18,039 (c) 64,238
---------- ---------- ------- ----------
Income before taxes............ 63,525 10,900 (14,168) 60,257
Income tax provision........... 25,151 4,360 (5,667)(d) 23,844
---------- ---------- ------- ----------
Net income (loss).............. $ 38,374 $ 6,540 $(8,501) $ 36,413
========== ========== ======= ==========
Net income per common share.... $ 1.20 $ 0.54 $ 0.53(3)
========== ========== ==========
Weighted average shares
outstanding................... 32,005 12,156 68,385
========== ========== ==========
</TABLE>
- --------
(1) Represents the fifty-two weeks ended February 24, 1996 as presented in the
consolidated statement of earnings in the ShopKo consolidated financial
statements on page F-12, adjusted to February 3, 1996 by subtracting the
three weeks ended February 24, 1996 and adding the three weeks ended
February 25, 1995.
(2) See the Phar-Mor unaudited pro forma consolidated statement of operations
for the fifty-two weeks ended February 3, 1996 on page 82.
(3) Net income per common share has been computed on the basis of the 68,385
weighted average number of outstanding Cabot Noble Shares. To determine
the equivalent net income per ShopKo Share and Phar-Mor Share,
respectively, the net income per common share should be multiplied by the
applicable exchange ratio (which, with respect to ShopKo, is subject to
adjustment) as indicated below:
<TABLE>
<CAPTION>
EQUIVALENT NET
EXCHANGE INCOME PER
RATIO SHARE
-------- --------------
<S> <C> <C>
ShopKo............................................... 3.0 $1.60
Phar-Mor............................................. 1.0 $0.53
</TABLE>
79
<PAGE>
CABOT NOBLE, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
THIRTY-NINE WEEKS ENDED NOVEMBER 2, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
SHOPKO PHAR-MOR ADJUSTMENTS CABOT NOBLE
---------- -------- ----------- -----------
<S> <C> <C> <C> <C>
Sales................... $1,579,341 $792,436 $ -- $2,371,777
Less:
Cost of goods sold..... 1,212,836 630,415 -- 1,843,251
Selling, general and
administrative
expenses.............. 276,387 148,883 (704)(a) 424,566
Chapter 11 professional
fee accrual
adjustment............ -- (1,532) -- (1,532)
Depreciation and
amortization.......... 44,451 14,346 (1,738)(b) 57,059
---------- -------- ------- ----------
Income from operations.. 45,667 324 2,442 48,433
Interest expense........ 24,165 7,842 10,459 (c) 42,466
---------- -------- ------- ----------
Income (loss) before
taxes.................. 21,502 (7,518) (8,017) 5,967
Income tax provision.... 8,445 -- (6,058)(d) 2,387
---------- -------- ------- ----------
Net income (loss)....... $ 13,057(1) $ (7,518)(1) $(1,959) $ 3,580 (1)(2)
========== ======== ======= ==========
Net income per common
share.................. $ 0.41 $ (0.62) $ 0.05
========== ======== ==========
Weighted average shares
outstanding............ 32,060 12,157 68,551
========== ======== ==========
</TABLE>
- --------
(1) These interim results are not necessarily indicative of the results of the
fiscal year as a whole because the operations of both ShopKo and Phar-Mor
are highly seasonal. A significant part of both ShopKo's and Phar-Mor's
earnings are due to the Christmas selling season.
(2) Net income per common share has been computed on the basis of the 68,551
weighted average number of outstanding Cabot Noble Shares. To determine
the equivalent net income per ShopKo Share and Phar-Mor Share,
respectively, the net income per common share should be multiplied by the
applicable exchange ratio (which, with respect to ShopKo, is subject to
adjustment) as indicated below:
<TABLE>
<CAPTION>
EQUIVALENT NET
EXCHANGE INCOME PER
RATIO SHARE
-------- --------------
<S> <C> <C>
ShopKo............................................... 3.0 $0.16
Phar-Mor............................................. 1.0 $0.05
</TABLE>
80
<PAGE>
PHAR-MOR UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
The following unaudited pro forma consolidated statement of operations
presents consolidated results of operations of Phar-Mor and its subsidiaries
during the pendency of the Phar-Mor bankruptcy ("Predecessor Company") along
with the consolidated results of operations of Phar-Mor and its subsidiaries
after its emergence from bankruptcy ("Successor Company") for the fifty-two
weeks ended February 3, 1996, as adjusted to reflect the implementation of
fresh-start reporting as of February 4, 1995; the elimination of the 41 stores
closed in July 1995; the elimination of the effects of non-recurring
transactions resulting from the bankruptcy plan of reorganization; and certain
payments to creditors pursuant to Phar-Mor's bankruptcy plan of reorganization
as of February 4, 1995. This information should be read in conjunction with
Notes 1 and 2 of Phar-Mor's Notes to Consolidated Financial Statements
included elsewhere in this Joint Proxy Statement/Prospectus.
The pro forma adjustments:
(1) Eliminate the store operating results of the 41 stores closed as of
February 4, 1995. These stores began liquidation sales in May 1995 and were
not included in Predecessor Phar-Mor's results of operations for periods
subsequent to May 6, 1995; and
(2) Adjust for the effect of Phar-Mor's bankruptcy plan of reorganization
as if it had been effective as of February 4, 1995. This includes
adjustments to:
(a) adjust for the rent credit from the amortization of the
"unfavorable lease liability."
(b) reduce historical depreciation and amortization to reflect the
adjustment to property and equipment values in accordance with fresh-
start reporting.
(c) reverse historical interest expense and record interest expense
on debt and record interest expense on the "unfavorable lease
liability" incurred in connection with Phar-Mor's bankruptcy plan of
reorganization.
(d) eliminate the effects of nonrecurring reorganization items,
fresh-start revaluation and gain on debt discharge due to the emergence
from bankruptcy.
(e) record estimated income tax provision at an effective rate of 40%
based on a statutory federal tax rate of 35% and a combined state and
local tax rate, net of federal tax benefits of 5%.
Pro forma net income per Phar-Mor Share is calculated based on a weighted
average number of Phar-Mor Shares outstanding of 12,156,250.
81
<PAGE>
PHAR-MOR, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FIFTY-TWO WEEKS ENDED FEBRUARY 3, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
SUCCESSOR PREDECESSOR PER NOTE PRO FORMA
----------- ------------ ----------------------- -----------
TWENTY-TWO THIRTY WEEKS FIFTY-TWO
WEEKS ENDED ENDED WEEKS ENDED
FEBRUARY 3, SEPTEMBER 2, FEBRUARY 3,
1996 1995 (1) (2) 1996
----------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Sales....................................................... $448,444 $695,006 (85,403) -- $1,058,047
Less:
Cost of goods sold......................................... 349,953 541,016 ($67,531) -- 823,438
Selling, general and administrative expenses............... 80,627 128,130 (14,863) $ (375)(a) 193,519
Depreciation and amortization.............................. 7,447 13,406 (1,178) (1,485)(b) 18,190
-------- -------- ---------- ----------- ----------
Income from operations before interest expense,
reorganization items, fresh-start revaluation, income taxes
and extraordinary item..................................... 10,417 12,454 (1,831) 1,860 22,900
Interest expense............................................ 1,843 19,126 -- (8,969)(c) 12,000
-------- -------- ---------- ----------- ----------
Income (loss) before reorganization items, fresh-start
revaluation, income taxes and extraordinary item........... 8,574 (6,672) (1,831) 10,829 10,900
Reorganization items........................................ -- 64,892 (53,691) (11,201)(d) --
Fresh-start revaluation..................................... -- (8,043) -- 8,043(d) --
-------- -------- ---------- ----------- ----------
Income (loss) before income taxes and extraordinary item.... 8,574 (63,521) 51,860 13,987 10,900
Income tax provision........................................ 3,426 -- -- 934(e) 4,360
-------- -------- ---------- ----------- ----------
Income (loss) before extraordinary item..................... 5,148 (63,521) 51,860 13,053 6,540
Extraordinary item--gain on debt discharge.................. -- 775,073 -- (775,073)(d) --
-------- -------- ---------- ----------- ----------
Net income (loss)........................................... $ 5,148 $711,552 $ 51,860 $ (762,020) $ 6,540
======== ======== ========== =========== ==========
Net income per common share................................. $ 0.54
==========
</TABLE>
82
<PAGE>
CABOT NOBLE UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET (IN THOUSANDS,
EXCEPT FOR PER SHARE DATA)
The following Cabot Noble unaudited pro forma consolidated balance sheet
presents the pro forma consolidated balance sheets of ShopKo and Phar-Mor as
of November 2, 1996, as adjusted to reflect the effects of the Transaction;
the incurrence of the Cabot Noble Financing in connection therewith; and the
effects of purchase accounting. This information should be read in conjunction
with the description of the Transaction set forth in this Joint Proxy
Statement/Prospectus.
The pro forma adjustments adjust for the effect of the Transaction as if it
had occurred on November 2, 1996. This includes adjustments to:
(a) reflect the payment of $223,594 in cash in connection with the Cabot
Noble Buy Back, proceeds from the Cabot Noble Financing and the payment of
$12,500 in professional fees incurred in connection with the Transaction.
(b) record purchase accounting adjustment to establish an inventory
markdown reserve on inventory expected to be liquidated to accommodate new
categories of goods not currently carried by Phar-Mor, but carried by
ShopKo.
(c) record purchase accounting adjustments to write-off the assets,
liabilities and minority interest in the current Phar-Mor corporate office
building which will be abandoned after Phar-Mor's headquarters are combined
with ShopKo's headquarters in Green Bay.
(d) record purchase accounting adjustment to write-down to net realizable
value the property and equipment in Phar-Mor's headquarters that will not
be used once Phar-Mor's headquarters are moved to Green Bay.
(e) record purchase accounting adjustments to establish goodwill of
$25,962 created as a result of the Transaction based on an assumed $5.75
market value per Phar-Mor Share and the elimination of the other assets
associated with the current Phar-Mor corporate office building and the
addition of $4,400 in deferred debt expense incurred in connection with the
Cabot Noble Financing.
(f) record purchase accounting adjustments to establish reserves for
severance pay, employee relocation costs and lease termination costs
associated with the relocation of Phar-Mor's corporate office to Green Bay.
(g) record $140,553 in debt incurred under the Cabot Noble Financing.
(h) record the elimination of the current portion of long-term debt
associated with the current Phar-Mor corporate office building.
(i) record the elimination of the long-term debt associated with the
current Phar-Mor corporate office building.
(j) record the deferred tax effect of certain adjustments made and
expenses incurred in connection with the Transaction.
(k) record the exchange of one Cabot Noble Share for each Phar-Mor Share
and 3.0 Cabot Noble Shares for each ShopKo Share, the Cabot Noble Buy Back
and the effects of purchase accounting.
83
<PAGE>
CABOT NOBLE, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
SHOPKO PHAR-MOR EFFECTS CABOT NOBLE
NOVEMBER 2, NOVEMBER 2, OF THE NOVEMBER 2,
1996 1996 TRANSACTION 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash
equivalents............. $ 19,138 $ 88,004 $(100,142)(a) $ 7,000
Accounts receivable--
net..................... 81,935 25,648 (8) 107,575
Merchandise inventories.. 461,664 178,362 (5,000)(b) 635,026
Other current assets..... 15,792 5,069 (9)(c) 20,852
---------- -------- --------- ----------
Total current assets... 578,529 297,083 (105,159) 770,453
PROPERTY AND EQUIPMENT--
NET....................... 598,208 69,110 (21,867)(d) 645,451
DEFERRED TAX ASSET......... -- 8,217 -- 8,217
OTHER ASSETS............... 56,851 4,781 28,536(e) 90,168
---------- -------- --------- ----------
Total assets........... $1,233,588 $379,191 $ (98,490) $1,514,289
========== ======== ========= ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable......... $ 237,098 $ 72,877 $ (51)(c) $ 309,924
Related party accounts
payable................. -- 8,071 -- 8,071
Accrued expenses......... 130,491 36,555 7,736(f) 174,782
Borrowing under revolving
credit facility......... -- -- 140,553(g) 140,553
Current portion of long-
term debt............... -- 2,055 (376)(h) 1,679
Current portion of
capital lease
obligations............. 1,096 6,019 -- 7,115
---------- -------- --------- ----------
Total current
liabilities........... 368,685 125,577 147,862 642,124
LONG-TERM DEBT............. 399,893 109,502 (5,002)(i) 504,393
CAPITAL LEASE OBLIGATIONS.. 14,727 37,238 -- 51,965
DEFERRED INCOME TAX
LIABILITY................. 22,753 120 (2,146)(j) 20,727
LONG-TERM SELF INSURANCE
RESERVES.................. -- 7,527 -- 7,527
DEFERRED RENT AND
UNFAVORABLE LEASE
LIABILITY--NET............ -- 11,568 -- 11,568
---------- -------- --------- ----------
Total liabilities...... 806,058 291,532 140,714 1,238,304
---------- -------- --------- ----------
COMMITMENTS AND
CONTINGENCIES
Minority interests......... -- 535 (535)(c) --
---------- -------- --------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock.......... -- -- -- --
Common stock............. 321 122 243(k) 686
Additional paid-in
capital................. 244,579 89,385 (130,433)(a) 203,531
Retained earnings........ 182,630 (2,383) (108,479)(k) 71,768
---------- -------- --------- ----------
Total stockholders'
equity.................. 427,530 87,124 (238,669) 275,985
---------- -------- --------- ----------
Total liabilities and
stockholders' equity.... $1,233,588 $379,191 $ (98,490) $1,514,289
========== ======== ========= ==========
</TABLE>
84
<PAGE>
SHOPKO SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of ShopKo and its
subsidiaries is based on, and should be read in conjunction with, ShopKo's
consolidated financial statements, including the notes thereto appearing
elsewhere herein.
SHOPKO STORES, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
(IN MILLIONS, EXCEPT PER SHARE AND SHARE DATA)
<TABLE>
<CAPTION>
YEAR TO DATE FISCAL YEAR ENDED
------------------------ ----------------------------------------------------------------
(40 WEEKS) (40 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS) (53 WEEKS)
NOVEMBER 30, DECEMBER 2, FEBRUARY 24, FEBRUARY 25, FEBRUARY 26, FEBRUARY 27, FEBRUARY 29,
1996 1995 1996 1995 1994(1) 1993 1992
------------ ----------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $1,701 $1,470 $1,968 $1,853 $1,739 $1,683 $1,648
Gross margin............ 391 370 501 488 453 457 452
Income from operations.. 59 56 97 91 74 100 98
Net earnings............ 21 17 38 38 32 50 50
Net earnings per share.. .64 .54 1.20 1.18 1.00 1.56 1.55
Cash dividends declared
per share.............. .22 .33 .44 .44 .44 .44 .11
Weighted average number
of common shares
outstanding (000's).... 32,073 32,005 32,005 32,014 32,001 32,000 32,000(2)
Working capital......... $ 220 $ 204 $ 215 $ 187 $ 119 $ 82 $ 79
Total assets............ 1,241 1,156 1,118 1,110 953 792 706
Long-term debt.......... 415 413 415 414 310 209 11
Shareholders' equity.... 436 404 422 397 374 355 320
</TABLE>
- --------
(1) The effect of adopting Statement of Financial Accounting Standards
("SFAS") No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions," resulted in a decrease in net earnings of $0.6
million ($0.02 per share). Adoption of SFAS No. 109, "Accounting for
Income Taxes," had no effect on reported net earnings or financial
position.
(2) Represents the total number of ShopKo Shares outstanding upon completion
of the initial public offering in October, 1991.
85
<PAGE>
SHOPKO MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The discussion of results of operations that follows is based upon, and
should be read in conjunction with, ShopKo's consolidated financial
statements, including the notes thereto, appearing elsewhere herein. The
discussion of liquidity and capital resources is based upon ShopKo's current
financial position.
RESULTS OF OPERATIONS
Year-to-Date Results
The following table sets forth items from ShopKo's unaudited consolidated
financial statements for the third quarter and first three quarters of fiscal
1997 and 1996 as a percentage of net sales:
<TABLE>
<CAPTION>
THIRD QUARTER YEAR-TO-DATE
-------------- --------------
FISCAL FISCAL FISCAL FISCAL
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues
Net sales..................................... 100.0% 100.0% 100.0% 100.0%
Licensed department rentals & other income.... 0.5 0.7 0.6 0.8
----- ----- ----- -----
100.5 100.7 100.6 100.8
Costs and expenses
Cost of sales................................. 77.8 75.0 77.0 74.8
Selling, general & administrative expenses.... 15.9 18.0 17.4 19.2
Depreciation & amortization expenses.......... 2.4 2.7 2.7 3.0
----- ----- ----- -----
96.1 95.7 97.1 97.0
Income from operations........................ 4.4 5.0 3.5 3.8
Interest expense.............................. 1.4 1.6 1.5 1.8
----- ----- ----- -----
Earnings before income taxes.................. 3.0 3.4 2.0 2.0
Provision for income taxes.................... 1.2 1.3 0.8 0.8
----- ----- ----- -----
Net earnings.................................. 1.8% 2.1% 1.2% 1.2%
===== ===== ===== =====
</TABLE>
Net Sales. The following table presents ShopKo's consolidated net sales for
the third quarter and first three quarters of fiscal 1997 and fiscal 1996 (in
millions):
<TABLE>
<CAPTION>
THIRD QUARTER % INCREASE(DECREASE)
----------------------- -----------------------
FISCAL 1997 FISCAL 1996 TOTAL COMP
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
General Merchandise............. $ 399.4 $ 383.2 4.2% 3.6%
Health Services................. 191.8 107.8 77.9 56.3
-------- -------- ---------- ----------
Consolidated.................... $ 591.2 $ 491.0 20.4% 15.3%
======== ======== ========== ==========
<CAPTION>
YEAR-TO-DATE % INCREASE(DECREASE)
----------------------- -----------------------
FISCAL 1997 FISCAL 1996 TOTAL COMP
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
General Merchandise............. $1,160.2 $1,124.7 3.2% 2.7%
Health Services................. 540.4 345.0 56.7 45.7
-------- -------- ---------- ----------
Consolidated.................... $1,700.6 $1,469.7 15.7% 12.9%
======== ======== ========== ==========
</TABLE>
Consolidated comparable sales in the third quarter and the first three
quarters are based upon those facilities (both store and non-store) which were
open for the entire preceding fiscal year. Retail comparable store sales,
which are based on retail facilities which were open the entire preceding
fiscal year, increased 4.5% in the third quarter and 3.9% in the first three
quarters.
Since the third quarter of last year, ShopKo has opened two new stores (two
in the second quarter of fiscal 1997, one of which is a relocation) and
remodeled seven stores (six in the first quarter of fiscal 1997 and one in
86
<PAGE>
the third quarter of fiscal 1997) under the Vision 2000 format. During the
third quarter, ShopKo opened two Vision Advantage stores which are stand alone
optical centers of approximately 3,000 square feet.
General merchandise sales had a strong performance in the third quarter and
first three quarters, especially in apparel related categories.
The increase in health services sales in the third quarter and the first
three quarters is primarily due to growth in the prescription benefit
management business and increases in the retail pharmacy and optical centers.
Prescription benefit management business sales were $95.1 million this year
compared to $19.5 million last year for the third quarter, an increase of
388.5%. Prescription benefit management business sales for the first three
quarters increased 291.5% to $227.7 million this year versus $58.2 million
last year. Retail pharmacy and optical center sales increased 9.4% and 9.1%
for the third quarter and first three quarters of this year, respectively.
Health services comparable sales for the third quarter and the first three
quarters are based upon sales from healthcare services provided in retail
stores, from the pharmacy mail service sales, and from prescription benefit
management and claims processing activities in facilities which were open the
entire preceding fiscal year.
Gross Margin. The following table sets forth gross margin as a percent of
net sales:
<TABLE>
<CAPTION>
THIRD QUARTER YEAR-TO-DATE
----------------------- -----------------------
FISCAL 1997 FISCAL 1996 FISCAL 1997 FISCAL 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Gross margin percent.......... 22.2% 25.0% 23.0% 25.2%
Gross margin percent prior to
LIFO charge.................. 22.4% 25.2% 23.1% 25.4%
</TABLE>
The gross margin percentage decreased 2.8% and 2.2% for the third quarter
and first three quarters, respectively. Continued growth in the lower gross
margin prescription benefit management business accounted for the majority of
the decreases, approximately 2.2% in the third quarter and 1.8% in the first
three quarters. Other factors affecting the decreases in the gross margin
percentages included the increased impact of managed care business on retail
pharmacies and increased margin pressures in general merchandise. The gross
margin percentages for the third quarter and the first three quarters reflect
LIFO charges of $1.0 million and $2.9 million, respectively. This is compared
to the prior year's LIFO expense of $1.0 million in the third quarter and $2.8
million in the first three quarters.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses as a percent of sales were 15.9% for the third quarter
of fiscal 1997 compared to 18.0% for the same period last year. For the first
three quarters, selling, general and administrative expenses as a percent of
sales were 17.4% compared to 19.2% for the same period last year. The selling,
general and administrative expenses as a percent of sales decreased 2.1% and
1.8% for the third quarter and first three quarters, respectively. Increased
sales related to the prescription benefit management business accounted for
the majority of the decreases, approximately 1.9% in the third quarter and
1.6% in the first three quarters.
Interest Expense. Interest expense for the third quarter was 1.4% of sales
versus 1.6% of sales for the same period last year. Interest expense as a
percent of sales was 1.5% for the first three quarters of fiscal 1997 compared
to 1.8% for the same period last year. This decrease is primarily due to
increased sales and increased investment income.
87
<PAGE>
Fiscal Year Results
The following table sets forth items from ShopKo's Consolidated Statements
of Earnings as a percentage of net sales:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
--------------------------------
FEB. 24, FEB. 25, FEB. 26,
1996 1995 1994
(52 WEEKS) (52 WEEKS) (52 WEEKS)
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Net sales............................... 100.0% 100.0% 100.0%
Licensed department rentals and other
income................................. .7 .7 .7
----- ----- -----
100.7 100.7 100.7
Costs and expenses:
Cost of sales........................... 74.5 73.7 73.9
Selling, general and administrative
expenses............................... 18.4 19.2 19.8
Depreciation and amortization expenses.. 2.9 2.9 2.8
----- ----- -----
95.8 95.8 96.5
Income from operations.................... 4.9 4.9 4.2
Interest expense.......................... 1.7 1.6 1.2
----- ----- -----
Earnings before income taxes.............. 3.2 3.3 3.0
Provision for income taxes................ 1.2 1.3 1.2
----- ----- -----
Net earnings.............................. 2.0% 2.0% 1.8%
===== ===== =====
</TABLE>
Fiscal 1996 Compared to Fiscal 1995
Net sales for fiscal 1996 (52 weeks) increased $115.1 million or 6.2% over
fiscal 1995 (52 weeks). Consolidated comparable sales decreased 0.2% for
fiscal 1996 compared to an increase of 0.7% in fiscal 1995. Changes in
consolidated comparable sales for a fiscal year were based upon those
facilities (both store and non-store) which were open for the entire preceding
fiscal year. In fiscal 1996, comparable sales included pharmacy mail service,
since it was open for the entire preceding fiscal year. On a comparable store
basis, sales decreased 0.5% for fiscal 1996.
ShopKo conducts business in two business segments: general merchandise and
health services. General merchandise is conducted through retail stores.
Health services include professional health care services provided in the
retail stores and prescription benefit management services which are generally
provided through other facilities. Beginning in fiscal 1997, health services
will include vision benefit management services and decision support services
(DSS).
General merchandise sales increased $13.2 million or 0.9% over fiscal 1995.
Management of ShopKo attributes this sales increase to the opening of five new
stores. Comparable store general merchandise sales decreased 2.1%. Management
of ShopKo believes general merchandise sales were negatively impacted by a
difficult retail environment, planned contraction of several departments and
increased competitive entries.
Health services sales increased $101.9 million or 28.1% over fiscal 1995.
Management of ShopKo attributes this increase to growth in prescription
benefit management sales of $74.0 million, increases in comparable sales and
the opening of five new stores. Comparable sales increased 7.4% due to
increased business in ShopKo's retail pharmacy and optical centers. Health
services comparable sales were based upon sales generated from health care
services provided in retail stores which were open for the entire preceding
fiscal year and from the pharmacy mail service sales.
Consolidated gross margins as percentages of sales were 25.5% and 26.3% for
fiscal 1996 and 1995, respectively. The gross margin for fiscal 1996 includes
a LIFO charge of $2.2 million. The gross margin for fiscal 1995 includes a
LIFO credit of $2.0 million and a $5.5 million charge to reduce certain
inventories to
88
<PAGE>
market value. Gross margin, before LIFO expense, was 25.6% in fiscal 1996 as
compared to 26.2% in fiscal 1995. The decrease is primarily due to the impact
of lower gross margin prescription benefit management sales.
Consolidated selling, general and administrative expenses decreased 0.8% of
net sales to 18.4% compared with 19.2% in fiscal 1995. Improvement of 0.6% of
net sales is due to increased sales related to the prescription benefit
management business and improvement of 0.2% of net sales is due to expense
control initiatives in retail operations.
ShopKo's operating earnings (earnings before interest and income taxes)
increased 6.5% to $97.4 million in fiscal 1996 from $91.5 million in fiscal
1995. General merchandise operating earnings (earnings before corporate
expenses, interest and income taxes) increased 8.1% to $73.1 million in fiscal
1996 compared to $67.6 million in fiscal 1995. This increase is primarily due
to increased gross margin rates and expense control initiatives. Health
services operating earnings increased in fiscal 1996 to $36.8 million compared
to $36.5 million in fiscal 1995. This increase is primarily due to expense
control initiatives and growth in prescription benefit management services but
is reduced by lower gross margin rates in the retail pharmacies as a result of
a larger percentage of sales coming from third party managed care business.
Management of ShopKo anticipates continued gross margin pressure due to the
increased managed care business.
Interest expense in fiscal 1996 increased from the prior year by 0.1% of net
sales to 1.7% of net sales. The increase reflects last year's issuance of
long-term debentures.
Fiscal 1995 Compared to Fiscal 1994
Net sales for fiscal 1995 (52 weeks) increased $114.2 million or 6.6% over
fiscal 1994 (52 weeks). ShopKo opened seven new stores and remodeled 32 stores
in fiscal 1995. Consolidated comparable sales increased 0.7% for fiscal 1995
compared to 1.2% in fiscal 1994. Consolidated comparable sales increases for a
fiscal year were based upon those stores which were open for the entire
preceding fiscal year.
General merchandise sales increased $78.1 million or 5.5% over fiscal 1994.
Management of ShopKo attributes this sales increase to the opening of seven
new stores. Comparable store general merchandise sales decreased 0.2%.
Management of ShopKo believes general merchandise sales were negatively
impacted by increased competition, reduced clearance sales this year compared
to last year, the planned contraction of several departments and the
disruption caused by the remodeling of 32 stores during fiscal 1995.
Health services sales increased $36.1 million or 11.0% over fiscal 1994.
Management of ShopKo attributes this increase to increases in comparable
sales, expansion into claims processing activities, growth of the pharmacy
mail service and the opening of seven new stores. Health services comparable
store sales increased 4.5%, which is due to increased business in ShopKo's
retail pharmacy and optical centers. Health services comparable sales
increases for a fiscal year were based upon sales generated from health care
services provided in those retail stores which were open for the entire
preceding fiscal year. Sales from prescription benefit management services,
pharmacy mail service and claims processing activities were not included in
fiscal 1995 or fiscal 1994.
Consolidated gross margins as percentages of sales were 26.3% and 26.1% for
fiscal 1995 and 1994, respectively. The gross margin for fiscal 1995 includes
a LIFO credit of $2.0 million and a $5.5 million charge to reduce certain
inventories to market value. The gross margin for fiscal 1994 includes a LIFO
charge of $3.7 million. Gross margin, before LIFO expense, was 26.2% in fiscal
1995 as compared to 26.3% in fiscal 1994.
Consolidated selling, general and administrative expenses decreased 0.6% of
net sales to 19.2% compared with 19.8% in fiscal 1994. The percentage decrease
is primarily due to expense control initiatives, which were partially offset
by increased costs associated with the operation of seven new stores and 32
store remodels during fiscal 1995.
89
<PAGE>
Depreciation and amortization expenses as percentages of sales were 2.9% and
2.8% for fiscal 1995 and 1994, respectively. The increase is primarily due to
the opening of new stores and the remodeling of existing stores to the VISION
2000 format.
ShopKo's operating earnings (earnings before interest and income taxes)
increased 23.1% to $91.5 million in fiscal 1995 from $74.3 million in fiscal
1994. General merchandise operating earnings (earnings before corporate
expenses, interest and income taxes) increased 14.3% to $67.6 million in
fiscal 1995 compared to $59.2 million in fiscal 1994. This increase is
primarily due to expense control initiatives. Health services operating
earnings increased 22.4% in fiscal 1995 to $36.5 million compared to $29.9
million in fiscal 1994. This increase is primarily due to increased sales and
increased gross margin percentage.
Interest expense in fiscal 1995 increased from the prior year by 0.4% of net
sales to 1.6% of net sales. The increase is primarily due to long-term
borrowing which principally funded new stores, ShopKo's remodeling program and
additional related working capital.
LIQUIDITY AND CAPITAL RESOURCES
ShopKo relies primarily on cash generated from its operations, with its
remaining funding requirements being met from the short-term $125 million
revolving credit facility and, if needed, long-term borrowings. Cash provided
from net earnings before depreciation and amortization was $66.7 million for
the first three quarters of fiscal 1997 compared to $61.2 million for the same
period last year. ShopKo had no borrowings outstanding under its revolving
credit agreement at the end of the first three quarters of fiscal 1997 and
fiscal 1996, respectively.
Effective as of October 4, 1996, ShopKo's Credit Agreement was extended
until October 4, 1997. The amount of borrowing available under the Credit
Agreement was reduced from $175 million to $125 million. The Credit Agreement
will terminate upon the consummation of the Combination and is expected to be
replaced by a new credit agreement. See "The Transaction--Financing."
ShopKo's principal use of cash in the first three quarters of fiscal 1997
was for working capital needs, for the CareStream Scrip Card acquisition
discussed below and for the purchase of property, equipment and systems
technology. During the first three quarters of fiscal 1997, working capital,
excluding cash, increased $49.6 million. This increase resulted principally
from increases in merchandise inventories net of accounts payable and from
increases in receivables offset by increases in accrued liabilities related to
the prescription benefit management business. During the first three quarters
of fiscal 1996, working capital, excluding cash, decreased $18.3 million. This
decrease resulted primarily from decreases in merchandise inventories net of
accounts payable.
ShopKo spent $23.6 million on capital expenditures (excluding acquisitions)
in the first three quarters of fiscal 1997 compared to $33.9 million for the
same period last year. ShopKo spent $53.0 million on capital expenditures in
fiscal 1996, compared to $94.6 million in fiscal 1995 and $133.8 million in
fiscal 1994. The following table sets forth the components of ShopKo's capital
expenditures (in millions):
<TABLE>
<CAPTION>
FORTY
WEEKS ENDED FISCAL YEAR
NOVEMBER 30, ------------------
1996 1996 1995 1994
------------ ----- ----- ------
<S> <C> <C> <C> <C>
New stores.................................... $ 2.8 $14.9 $31.3 $ 82.4
Remodeling and refixturing.................... 4.9 24.7 45.2 29.4
Distribution centers.......................... 1.0 0.7 2.8 0.7
Management information and point-of-sale
equipment and systems........................ 10.4 11.7 14.8 20.1
Other......................................... 4.5 1.0 0.5 1.2
----- ----- ----- ------
Total......................................... $23.6 $53.0 $94.6 $133.8
</TABLE>
In fiscal 1997, ShopKo opened two new stores under the Vision 2000 format
(one of which is a relocation) and two Vision Advantage stores, which are
stand alone optical centers. ShopKo's store expansion and remodel
90
<PAGE>
plans for fiscal 1998 and after are under review, although ShopKo plans to
open two additional Vision Advantage stores in the first quarter of fiscal
1998. ShopKo may consider the acquisition of existing retail stores or
businesses, or health services businesses, or the construction or acquisition
of stores which vary from ShopKo's existing stores. Such plans may be reviewed
and revised from time to time in light of changing conditions. ShopKo's
expansion and capital expenditure plans are under review in light of the
Combination.
With respect to store remodels, ShopKo completed 13 remodels under the
Vision 2000 format during fiscal 1996. The rate of remodeling activity in
fiscal 1996 was substantially reduced compared to fiscal 1995 and is expected
to approximate the future annual level of major remodels based on a seven to
ten year cycle. Remodels usually cost between $0.4 million to $1.5 million per
store. ShopKo completed remodeling of seven stores in the first three quarters
of fiscal 1997. One additional store will be remodeled in fiscal 1997. ShopKo
has scheduled twenty stores for future remodeling over the next several years.
Such remodeling will require an aggregate of approximately $20 to $25 million
of additional capital expenditures. All such store remodels reflect the
fixturing and merchandise assortment associated with the Vision 2000 concept.
As with store expansion plans, remodeling plans are subject to change and
normal delays.
ShopKo's total capital expenditures for fiscal 1997 for new store
construction, remodels, management information systems and other expenditures
(excluding acquisitions) are anticipated to approximate $45-55 million, of
which $40-45 million would relate to the existing retail business and $5-10
million to the health related businesses. Such plans may be reviewed and
revised from time to time in light of changing conditions.
On August 2, 1996, ShopKo completed the acquisition of CareStream Scrip Card
from FoxMeyer Health. CareStream Scrip Card is a prescription benefit
management company which is being integrated with ShopKo's ProVantage
subsidiary. The purchase price was $30.5 million in cash, with a supplemental
cash payment of between $1.5 million and $5.0 million due between six months
and five years after August 2, 1996. The purchase price was funded from
ShopKo's available cash.
On October 4, 1996, ShopKo (i) acquired the remaining 3% of the common stock
of Bravell, Inc. which ShopKo did not acquire in January 1995, (ii)
extinguished all remaining contingent payment obligations to the former
shareholders of Bravell, Inc., and (iii) terminated the former shareholders'
employment agreements. The present value of the extinguished payment
obligations was approximately $12.0 million. The acquisition agreement
provides for the issuance by ShopKo on an installment sale basis of 572,531
ShopKo Shares to the former Bravell, Inc. shareholders. Such ShopKo Shares are
required to be delivered on the first to occur of: (i) one business day prior
to the Effective Date, or (ii) the later of: (x) March 31, 1997, and (y) the
date ShopKo publicly announces its financial results for its fiscal year
ending February 22, 1997. Under certain circumstances, ShopKo has the right to
reacquire ShopKo Shares issued to the former Bravell, Inc. shareholders for
cash based on a 30-day average trading price.
INFLATION
Inflation has not had a significant effect on the results of operations of
ShopKo or its internal and external sources of liquidity.
91
<PAGE>
PHAR-MOR SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of Phar-Mor and its
subsidiaries is based on, and should be read in conjunction with, Phar-Mor's
consolidated financial statements including the notes thereto appearing
elsewhere herein.
PHAR-MOR, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SUCCESSOR
PHAR-MOR PREDECESSOR PHAR-MOR
------------------------------------ ------------------------------------------------
13 WEEKS 4 WEEKS 43 WEEKS 9 WEEKS 52 WEEKS 53 WEEKS 39 WEEKS
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
SEPTEMBER 28, SEPTEMBER 30, JUNE 29, SEPTEMBER 2, JULY 1, JULY 2, JUNE 26,
1996 1995 1996 1995 1995(B) 1994 1993
------------- ------------- -------- ------------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $264.5 $72.9 $874.3 $182.0 $1,412.7 $1,852.2 $1,434.3
Income (loss) from
continuing operations.. (2.2) 0.1 2.5 (10.4)(a) (53.1)(c) (142.8)(d) (82.2)(e)
Income (loss) per share
from continuing
operations............. (.18) .01 .21 (.19) (.98) (2.64) (1.52)
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF AS OF AS OF AS OF AS OF AS OF
SEPTEMBER 28, SEPTEMBER 30, JUNE 29, SEPTEMBER 2, JULY 1, JULY 2, JUNE 26,
1996 1995 1996 1995 1995 1994 1993
------------- ------------- -------- ------------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets............ $376.1 $384.8 $363.5 $390.2 $ 531.3 $ 680.1 $ 861.0
Long-term debt and
capital leases......... 147.3 156.0 149.2 151.0 -- -- --
Liabilities subject to
settlement............. -- -- -- -- 1,155.0 1,182.1 1,253.0
</TABLE>
- --------
Note:
Phar-Mor emerged from bankruptcy in September 1995. In accordance with
fresh-start reporting, reorganization value was used to record the assets
and liabilities of Phar-Mor at September 2, 1995 (the "Fresh Start Date").
Accordingly, the selected consolidated financial data as of September 28,
1996, September 30, 1995, September 2, 1995 and June 29, 1996 and for the 13
weeks ended September 28, 1996, the 4 weeks ended September 30, 1995 and the
43 weeks ended June 29, 1996, is not comparable in material respects to such
data for prior periods. Furthermore, Phar-Mor's results of operations for
periods prior to September 11, 1995, the effective date of Phar-Mor's
bankruptcy plan of reorganization, are not necessarily indicative of results
of operations that may be achieved in the future.
- --------
(a) Excludes an extraordinary gain of $775 million on debt discharged pursuant
to Phar-Mor's bankruptcy; and includes the gain for revaluation of assets
and liabilities under fresh-start reporting of $8 million and reorganization
costs of $16.8 million.
(b) Excludes the results of 25 stores after July 2, 1994 and the results of 41
stores after May 6, 1995, closed as part of Phar-Mor's restructuring prior
to emergence from bankruptcy.
(c) Includes reorganization costs of $51.2 million, including $53.7 million
for costs of downsizing, less $7.6 million gain on sale of assets held for
sale.
(d) Includes reorganization costs of $53.2 million, including $43 million for
costs of downsizing, and $53.2 million to write down property and
equipment to lower of appraised or net book value.
(e) Includes reorganization costs of $16.7 million.
92
<PAGE>
PHAR-MOR MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The discussion of results of operations that follows is based upon, and
should be read in conjunction with, Phar-Mor's consolidated financial
statements including the notes thereto appearing elsewhere herein. The
discussion of liquidity and capital resources is based upon Phar-Mor's current
financial position. The accompanying financial review reflects the significant
impact of the events leading up to and following Phar-Mor's emergence from
bankruptcy. Certain information regarding Phar-Mor's bankruptcy and its
bankruptcy plan of reorganization is set forth in "Description of Phar-Mor--
History."
Upon Phar-Mor's emergence from bankruptcy, Phar-Mor adopted the principles
of fresh-start reporting as of the Fresh Start Date to reflect the impact of
the reorganization. As a result of the application of fresh-start reporting,
the financial condition and results of operations of Phar-Mor for dates and
periods subsequent to the Fresh Start Date shall not necessarily be comparable
to those prior to such date.
RECENT DEVELOPMENTS AND OUTLOOK
Phar-Mor's results of operations and financial condition reflect the impact
of the recapitalization effected pursuant to its bankruptcy plan of
reorganization and the consolidation of operations following August 17, 1992,
Phar-Mor's bankruptcy petition date.
Phar-Mor has significantly restructured its debt obligations. Phar-Mor has
converted approximately $855 million of debt obligations to equity, obtained a
$9.5 million net cash equity infusion, and entered into a $100 million
revolving credit facility (the "Phar-Mor Revolving Credit Facility") See "--
Financial Condition and Liquidity."
In addition, since August 1992, Phar-Mor has put in place a series of
programs that are designed to reduce its expense structure and improve its
operations. These programs resulted in the closing of 209 stores and three
warehouses, the elimination of 75% of corporate level staff and the
implementation of three major information system improvements.
Management believes that the recapitalization and the specific steps taken
to streamline Phar-Mor's business operations since Phar-Mor's bankruptcy have
yielded a significant improvement in Phar-Mor's operating and financial
profile. The restructuring of Phar-Mor's debt obligations has significantly
reduced interest expense and enhanced financial flexibility. As a result of
the consolidation program, Phar-Mor has significantly reduced the fixed cost
elements of cost of sales and selling, general and administrative expenses
partially offset by declines in sales and gross margin dollars.
Although there can be no assurance, management believes that Phar-Mor is now
positioned to enhance future profitability as economic and competitive
conditions improve in its markets. Management also believes that additional
gains may be realized through further reduction of expenses and refinement of
Phar-Mor's business operations.
RESULTS OF OPERATIONS
The following table sets forth the number of retail stores operated between
years:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------
JUNE 29, JULY 1, JULY 2,
1996(A) 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Stores, beginning of period.................... 143 168 168
Closed stores.................................. (41) (25) --
Stores, end of period.......................... 102 143(b) 168
</TABLE>
- --------
(a) Includes the nine weeks ended September 2, 1995 (Predecessor Phar-Mor) and
the forty-three weeks ended June 29, 1996 (Successor Phar-Mor).
(b) Includes 41 stores in the process of closing July 1, 1995.
93
<PAGE>
The historical results of operations exclude the results of the 25 stores
closed in fiscal year 1995 (as part of Phar-Mor's restructuring) after the
date their closing was decided (July 2, 1994) and the results of 41 stores
closed in fiscal year 1996 (also part of Phar-Mor's restructuring) after the
date their closing was decided (May 6, 1995).
Phar-Mor's results of operations for the 43 weeks ended June 29, 1996 are
not comparable to its results of operations for prior periods due to Phar-
Mor's adoption of fresh-start reporting as of the Fresh Start Date. See Note 2
of Phar-Mor's Notes to Consolidated Financial Statements included elsewhere
herein. For the purposes of the following discussion, the following pro forma
results of operations for the 52 weeks ended June 29, 1996 (fiscal year 1996)
and the fifty-two weeks ended July 1, 1995 (fiscal year 1995) will be
compared.
Unaudited Pro Forma Consolidated Statements of Operations
The unaudited pro forma statements of operations present consolidated
results of operations of Phar-Mor and its subsidiaries for the thirteen weeks
ended September 30, 1995 (see Note 6 of Phar-Mor's Notes to Condensed
Consolidated Financial Statements for the Thirteen Weeks Ended September 28,
1996 and the Four Weeks Ended September 30, 1995 and Predecessor Phar-Mor for
the Nine Weeks Ended September 2, 1995), and for fiscal years 1996 and 1995 as
if Phar-Mor's bankruptcy plan of reorganization was effective July 2, 1994 and
includes adjustments to reflect the implementation of fresh-start reporting as
of July 2, 1994; the elimination of the 41 stores closed in July 1995 from the
results of fiscal year 1995; the effects of non-recurring transactions
resulting from Phar-Mor's bankruptcy plan of reorganization; and certain
payments to creditors pursuant to Phar-Mor's bankruptcy plan of reorganization
as of July 2, 1994. See Notes 1 and 2 of Phar-Mor's Notes to Consolidated
Financial Statements included elsewhere herein.
RESULTS FOR THE THIRTEEN WEEKS ENDED SEPTEMBER 28, 1996 COMPARED TO THE PRO
FORMA RESULTS FOR THE THIRTEEN WEEKS ENDED SEPTEMBER 30, 1995 (ALL DOLLAR
AMOUNTS IN THOUSANDS)
To facilitate a meaningful comparison of Phar-Mor's fiscal 1997 and 1996
operating performance, the following discussions of results of operations on a
consolidated basis are presented using Phar-Mor's Unaudited Pro Forma
Consolidated Statement of Operations. Consequently, the information presented
below does not reflect the unaudited pro forma results of operations for the
thirteen weeks ended September 30, 1995 as they are presented in the Condensed
Consolidated Statements of Operations.
Sales for the first quarter of fiscal 1997, which included 102 comparable
stores in both years, increased 3.8% compared to the first quarter of fiscal
1996 primarily due to Phar-Mor's new marketing approach, which was launched
January 14, 1996. The new marketing approach included price reductions on over
3,000 items and the consequent reduction of gross profit margins, and was
implemented in order to increase sales volume. At the same time Phar-Mor
adopted an "everyday low price" strategy on substantially all products and
increased advertising by expanding the size of circulars.
Cost of sales as a percentage of sales was 82.8% in fiscal 1997 compared to
80.8% in fiscal 1996, a 2.0% increase. This increase is primarily due to lower
product margins resulting from Phar-Mor's new everyday low price marketing
plan.
Selling, general and administrative expenses as a percentage of sales was
15.6% in fiscal 1997 compared to 15.4% in fiscal 1996. This increase is
primarily due to increased advertising associated with Phar-Mor's new
marketing plan.
Depreciation and amortization expense was $4,908 in fiscal 1997 compared to
$4,649 in fiscal 1996, an increase of $259. The increase is the result of
depreciation on capital expenditures made since the first quarter of fiscal
1996.
There was net interest expense of $2,939 in fiscal 1997 compared to net
interest expense of $3,525 in fiscal 1996, a $586 decrease. The decrease in
interest expense is primarily due to an increase in interest income in fiscal
1997. The pro forma fiscal 1996 results assumed Phar-Mor would not have earned
any interest income prior to its emergence from bankruptcy in September 1995.
94
<PAGE>
PHAR-MOR, INC.
PRO FORMA RESULTS OF OPERATIONS FOR THE FIFTY-TWO WEEKS ENDED JUNE 29, 1996
AND THE FIFTY-TWO WEEKS ENDED JULY 1, 1995
<TABLE>
<CAPTION>
52 WEEKS ENDED 52 WEEKS ENDED
JUNE 29, 1996 JULY 1, 1995
------------------ ------------------
<S> <C> <C> <C> <C>
Sales............................... $1,056,252 100.00 % $1,107,222 100.00 %
Less:
Cost of goods sold, including
occupancy and distribution costs.. 875,148 82.86 % 900,814 81.36 %
Selling, general and administrative
expenses.......................... 149,458 14.15 % 158,009 14.27 %
Chapter 11 professional fee accrual
adjustment........................ (1,530) (0.15)% -- --
Depreciation and amortization...... 18,319 1.73 % 18,725 1.69 %
---------- ------ ---------- ------
Income from operations before
interest and income taxes.......... 14,857 1.41 % 29,674 2.68 %
Interest expense.................... (17,465) (1.65)% (16,990) (1.53)%
Interest income..................... 8,614 0.81 % -- --
---------- ------ ---------- ------
Income before income taxes.......... 6,006 0.57 % 12,684 1.15 %
Income tax provision................ 2,676 0.25 % 5,074 0.46 %
---------- ------ ---------- ------
Net income.......................... $ 3,330 0.32 % $ 7,610 0.69 %
========== ====== ========== ======
</TABLE>
PRO FORMA RESULTS FOR THE 52 WEEKS ENDED JUNE 29, 1996 (FISCAL YEAR 1996)
COMPARED TO THE PRO FORMA RESULTS FOR THE 52 WEEKS ENDED JULY 1, 1995 (FISCAL
YEAR 1995) (ALL DOLLAR AMOUNTS IN THOUSANDS)
Comparable store sales for fiscal year 1996 were down $50,970 or 4.6% from
fiscal year 1995. This is due to the fact that Phar-Mor has not opened a new
store since September 1992, while competitors have opened a significant number
of new stores in the markets where Phar-Mor operates and the negative impact
of continued penetration of third-party prescription plans and its impact on
Phar-Mor's pharmacy business. Sales improved over the last two quarters of
fiscal year 1996 as a result of Phar-Mor's new marketing approach, which was
launched January 14, 1996. Comparable store sales increased .04% in the fourth
quarter of fiscal year 1996 with June increasing 2.96%. The new marketing
approach included retail price reductions on over 3,000 items and additional
advertising.
Gross profit for fiscal year 1996 was 1.50% of sales lower than fiscal year
1995. Phar-Mor's new marketing approach, which included retail price
reductions on over 3,000 items, resulted in a lower product gross margin.
Inventory shrink and damage expenses were reduced by .42% of sales in fiscal
year 1996 over fiscal year 1995.
Selling, general and administrative expenses for fiscal year 1996 were 0.12%
of sales lower than fiscal year 1995. Increases in advertising expenses to
support the new marketing approach were more than offset by a 16.8% reduction
in corporate overhead costs.
Fiscal year 1996 included $5,479 in interest income on invested cash and
also included $3,135 in interest income received on federal income tax
refunds. The pro forma fiscal year 1995 results assumed Phar-Mor would not
have earned any interest income.
RESULTS FOR THE 43 WEEKS ENDED JUNE 29, 1996
Phar-Mor emerged from bankruptcy on September 11, 1995 operating 102 stores
in 18 states.
On January 14, 1996 Phar-Mor launched a new marketing approach which
included retail price reductions on over 3,000 items and additional
advertising. Sales improved during the six months ended June 29, 1996 as a
result of the new marketing approach. Comparable store sales increased .04% in
the fourth quarter of fiscal 1996 compared with the same period in the prior
year, and increased 2.96% for the fiscal month of June 1996 (the four weeks
ended June 29, 1996) compared to the same period of the prior year.
95
<PAGE>
Sales and gross margins by product type for the forty-three weeks ended June
29, 1996 were as follows:
<TABLE>
<CAPTION>
PERCENTAGE
PERCENTAGE OF TOTAL
OF TOTAL PRODUCT GROSS
SALES MARGIN
---------- -------------
<S> <C> <C>
Drug Store:
Includes health & beauty care products, cosmetics,
greeting cards, seasonal goods and other general
merchandise........................................ 45% 53.2%
Consumables:
Includes grocery, snacks, beer, wine, tobacco and
soft drinks........................................ 27% 14.5%
Pharmacy:
Includes prescription drugs......................... 25% 23.7%
Video, music and video rentals........................ 3% 8.6%
--- -----
Total................................................. 100% 100.0%
</TABLE>
For the 43 weeks ended June 29, 1996 other items included in cost of goods
sold (warehouse and transportation costs, cash discounts, inventory shrink,
promotional discounts and vendor rebates and promotional allowances) totaled
.8% of sales. Gross margin is also reduced by store occupancy costs which were
4.0% of sales for the period.
Selling, general and administrative expenses were 14.1% of sales for the
forty-three weeks ended June 29, 1996. Phar-Mor continued to be effective at
increasing employee productivity and as a result store wages and benefits were
the same percentage of sales as the prior year, despite a 3.8% sales decline
from the same period of the prior year. Increases in advertising expenses to
support Phar-Mor's new marketing approach were more than offset by a 16.4%
reduction in corporate overhead costs.
Phar-Mor earned $8,614 in interest income during the period, $3,135 of which
was interest received on federal income tax refunds.
96
<PAGE>
PHAR-MOR, INC.
RESULTS OF OPERATIONS FOR THE FIFTY-TWO WEEKS ENDED JULY 1, 1995
AND THE FIFTY-THREE WEEKS ENDED JULY 2, 1994
<TABLE>
<CAPTION>
52 WEEKS ENDED 53 WEEKS ENDED
JULY 1, 1995 JULY 2, 1994
------------------ ------------------
<S> <C> <C> <C> <C>
Sales.................................. $1,412,661 100.00% $1,852,244 100.00%
Costs of goods sold, including
occupancy and distribution costs...... 1,156,928 81.90% 1,522,722 82.21%
---------- ----------
Gross profit........................... 255,733 18.10% 329,522 17.79%
Selling, general and administrative
expenses.............................. 199,863 14.15% 276,887 14.95%
Write-down of property to lower of
appraised or net book value........... -- -- 53,211 2.87%
Depreciation and amortization.......... 24,643 1.74% 55,401 2.99%
---------- ----------
Income (loss) from operations before
interest expense, reorganization items
and income taxes...................... 31,227 2.21% (55,977) -3.02%
Interest expense....................... 33,324 2.36% 33,878 1.83%
---------- ----------
Loss before reorganization items and
income taxes.......................... (2,097) -0.15% (89,855) -4.85%
Reorganization items................... 51,158 3.62% 53,239 2.87%
---------- ----------
Loss before income tax benefit......... (53,255) -3.77% (143,094) -7.73%
Income tax benefit..................... (111) -0.01% (331) -0.02%
---------- ----------
Net income (loss)...................... $ (53,144) -3.76% $ (142,763) -7.71%
========== ==========
</TABLE>
RESULTS FOR THE 52 WEEKS ENDED JULY 1, 1995 COMPARED TO 53 WEEKS ENDED JULY
2, 1994 (ALL DOLLAR AMOUNTS IN THOUSANDS)
During the 52 weeks ended July 1, 1995, Phar-Mor closed 25 stores after
conducting going out of business ("GOB") sales. The projected costs of closing
the stores was recorded as of July 2, 1994 (Phar-Mor's previous year end). In
May 1995, Phar-Mor announced the closing of an additional 41 stores and began
GOB sales at such stores. These additional 41 stores were closed in July 1995.
The projected costs of closing these stores was recorded as of May 6, 1995.
Consequently, the actual operating results for the 52 weeks ended July 1, 1995
included below are for 143 stores for the first 44 weeks of the period and 102
continuing stores for the remaining eight weeks of the period. The operating
results for the 53 weeks ended July 2, 1994 included above are for 168 stores.
Net retail sales for the 52 weeks ended July 1, 1995 were $1,412,661, which
was 22.5% less than the comparable 52 week period in 1994 and is primarily due
to the closing of the 41 stores discussed above. Net retail sales for the 102
continuing stores for the comparable period declined by 4.5%. Generally, this
decrease in sales is attributable to (i) the fact that Phar-Mor has not opened
new stores since September 1992, while competitors have opened a significant
number of new stores in those markets where Phar-Mor continues to operate and
(ii) the negative impact of continued penetration of third party prescription
plans and its impact on Phar-Mor's pharmacy business.
The gross profit improvement of 0.31% of sales for the 52 weeks ended July
1, 1995, compared to the 53 weeks ended July 2, 1994, is primarily a result of
Phar-Mor realizing the full benefit of the margin enhancement program
instituted during the 53 weeks ended July 2, 1994.
Selling, general and administrative expenses were 0.80% of sales lower for
the 52 weeks ended July 1, 1995 compared to the 53 weeks ended July 2, 1994.
This is a result of cost reduction programs implemented during the 53 weeks
ended July 2, 1994 and acceleration of the cost reduction activities planned
for fiscal year 1995.
The decrease in depreciation and amortization expense for the 52 weeks ended
July 1, 1995, compared to the 53 weeks ended July 2, 1994, is due primarily to
the write-down of property and equipment that resulted from closing 66 stores
and a $53,211 charge to write-down property and equipment to the lower of
appraised or net book value as of July 2, 1994 based on an independent
appraisal undertaken in 1994. The appraisal included a physical inspection of
property and equipment at Phar-Mor's corporate headquarters, warehouse and
selected
97
<PAGE>
retail store locations. The appraisal was undertaken because Phar-Mor lacked
reliable historical accounting records for property and equipment as a result
of the fraud and because the adverse business conditions concealed by the
fraud dictated an assessment of whether the carrying amount of property and
equipment was overstated. (The adjustment was recorded at July 2, 1994;
consequently, depreciation included in depreciation and amortization for
fiscal 1994 was computed on the unadjusted balances of property and
equipment).
The decrease in interest expense for the 52 weeks ended July 1, 1995,
compared to the 53 weeks ended July 2, 1994, is due primarily to repayment of
approximately $123,000 of principal on prepetition secured debt from the net
proceeds of GOB sales and was partially offset by an increase in interest
rates under Phar-Mor's prepetition revolving credit agreements.
The decrease in reorganization items is due to an increase in interest
income from higher level of funds invested and higher interest rates, gains on
sales of real property in Boardman, Ohio and Jacksonville, Florida,
recognition of a gain in insurance settlement from a claim Phar-Mor asserted
against its insurance carrier seeking reimbursement of monies allegedly
embezzled by certain former officers of Phar-Mor, and partially offset by
increased costs associated with closing of an additional 66 stores.
FINANCIAL CONDITION AND LIQUIDITY (ALL DOLLAR AMOUNTS IN THOUSANDS)
Phar-Mor's cash position as of September 28, 1996 was $96,990. Phar-Mor's
cash position may fluctuate as a result of seasonal merchandise purchases and
timing of payments.
On September 11, 1995, Phar-Mor entered into the Phar-Mor Revolving Credit
Facility with Bank America Business Credit, Inc. ("BABC"), as agent, and other
financial institutions (collectively, the "Lenders"), that established a
credit facility in the maximum amount of $100,000.
Borrowings under the Phar-Mor Revolving Credit Facility may be used for
working capital needs and general corporate purposes. Up to $50,000 of the
Phar-Mor Revolving Credit Facility at any time may be used for standby and
documentary letters of credit. The Phar-Mor Revolving Credit Facility includes
restrictions on, among other things, additional debt, capital expenditures,
investments, dividends and other distributions, mergers and acquisitions, and
contains covenants requiring Phar-Mor to meet a specified quarterly minimum
"EBITDA Coverage Ratio" (i.e., the sum of earnings before interest, taxes,
depreciation and amortization, as defined, divided by interest expense),
calculated on a rolling four quarter basis, and a monthly minimum net worth
test. As of the date hereof, Phar-Mor believes it is in compliance with all
such financial covenants.
Credit availability under the Phar-Mor Revolving Credit Facility at any time
is the lesser of the Aggregate Availability (as defined in the Phar-Mor
Revolving Credit Facility) or $100,000. Availability under the Phar-Mor
Revolving Credit Facility, after subtracting amounts used for outstanding
letters of credit, was $76,829 at June 29, 1996. The Phar-Mor Revolving Credit
Facility establishes a first priority lien and security interest in the
current assets of Phar-Mor, including, among other items, cash, accounts
receivable and inventory.
Advances made under the Phar-Mor Revolving Credit Facility bear interest at
the Bank America reference rate plus 1/2% or London Interbank Offered Rate
("LIBOR") plus the applicable margin (as defined in the Phar-Mor Revolving
Credit Facility), which ranges between 1.50% and 2.00%. Under the terms of the
Phar-Mor Revolving Credit Facility, Phar-Mor is required to pay a commitment
fee of 0.28125% per annum on the unused portion of the Phar-Mor Revolving
Credit Facility, letter of credit fees and certain other fees.
There were no outstanding advances under the Revolving Credit Facility at
any time during the forty-three weeks ended June 29, 1996. As of June 29,
1996, there were letters of credit in the amount of $5,384 outstanding under
the Phar-Mor Revolving Credit Facility. The Phar-Mor Revolving Credit Facility
expires on August 30, 1998.
98
<PAGE>
Pursuant to Phar-Mor's bankruptcy plan of reorganization, Phar-Mor and its
lenders agreed to a restructuring of Phar-Mor's obligations. The resulting new
debts are discussed in Notes 8 and 9 of Phar-Mor's Notes to Consolidated
Financial Statements.
During the thirteen weeks ended September 28, 1996, Phar-Mor's cash position
decreased by $7,275. Net cash provided from operating activities was $1,619.
The major sources of cash from operating activities were depreciation and
amortization of $4,908 and an increase in accounts payable of $20,966 which
were partially offset by a net loss of $2,195, an increase in merchandise
inventories of $15,539 and a decrease in accrued expenses and other current
liabilities of $3,521. Capital expenditures of $3,983 and additions to video
rental tapes of $2,245 were paid for with funds from operations and Phar-Mor's
excess cash position. Net cash used for financing activities of $2,666
consists of principal payments on lease obligations of $1,456 and principal
payments on term debt of $1,210.
Phar-Mor's cash position decreased $3,665 during the 43 weeks ended June 29,
1996 as cash provided by operating activities of $16,014 was offset by $13,829
in cash used for investing activities and $5,850 in cash used for financing
activities.
Phar-Mor generated cash from operations of $16,014 after payments of chapter
11 professional fees of $19,476. Inventories declined $15,534 during the 43
weeks ended June 29, 1996 due to continued emphasis on inventory control and
review of product category profitability. As part of this review Phar-Mor
determined that the music category of goods was not providing an adequate
return on the inventory invested and decided to exit the music category of
goods. The liquidation of this inventory resulted in a $5,713 reduction in
inventory during the 43 weeks ended June 29, 1996.
Phar-Mor increased its cash position by $5,606 from operations and investing
activities during the 9 weeks ended September 2, 1995 and used $121,933 for
bankruptcy reorganization activities including cash distributions pursuant to
its bankruptcy plan of reorganization. Consequently, the net decrease in cash
position during the 9 week period ended September 2, 1995 was $116,327. Other
significant sources and uses of cash during the period were as follows:
. Phar-Mor generated $8,129 from operations after net interest expense
(including adequate protection payments) and professional fees actually
paid that were associated with the bankruptcy proceedings, which totaled
$6,479.
. Phar-Mor invested $649 in property and equipment and $1,874 in rental
video tapes. Phar-Mor generated $11,951 in net proceeds from GOB sales.
. Phar-Mor paid $1,079 of equipment capital lease obligations.
During the 52-week period ended July 1, 1995, Phar-Mor's cash position
increased $29,056. The significant sources and uses of cash for the period
were as follows:
. Phar-Mor generated $84,164 of cash from operations after net interest
expense (including adequate protection payments) and professional fees
actually paid that were associated with the bankruptcy proceedings, which
together totaled $32,592.
. Phar-Mor generated $78,323 from GOB sales and sale of real property in
Boardman, Ohio and Jacksonville, Florida. Of this amount $46,330 was paid
to reduce principal on the Prepetition Revolving Credit Agreement and
senior notes. Phar-Mor also received $3,194 from the sale of leasehold
interests in 13 of the closed stores.
. Phar-Mor invested $9,088 in property and equipment. The investments were
primarily for store right-sizing, merchandising fixtures and financial
systems. Phar-Mor invested $11,925 in video rental tapes.
. Phar-Mor paid $3,744 of equipment capital lease obligations from December
1994 (the date the new leases became effective) through July 1, 1995.
99
<PAGE>
From October 22, 1992 to the effective date of Phar-Mor's bankruptcy plan of
reorganization, Phar-Mor had debtor-in-possession revolving credit facilities.
The maximum amount available under the facilities ranged from $150,000 to
$50,000 during the pendency of the bankruptcy cases. Phar-Mor never borrowed
under the facilities, utilizing the credit availability only for standby
letters of credit of which the maximum amount outstanding during the pendency
of the bankruptcy cases was $9,814.
During the 53 weeks ended July 2, 1994, Phar-Mor's cash position decreased
by $87,242. The significant sources and uses of cash for the period were as
follows:
. Phar-Mor generated $26,331 of cash from operations, after net interest
expense and professional fees associated with the bankruptcy proceedings,
which together totaled $39,400.
. Phar-Mor invested $12,904 in property and equipment. The majority of
funds were invested in computer system development and implementation of
POS scanning system. When fully implemented, these systems are expected
to assist in controlling inventories and shrink at the store level and
increase labor efficiencies. Further, Phar-Mor has invested in store
remodeling to enhance merchandising presentation.
. Phar-Mor invested $13,756 for rental video tape inventory.
. Phar-Mor made principal payments of $76,300 against the Prepetition
Revolving Credit Agreement and Senior Notes, using proceeds from the
store closing sales completed by July 1993.
. Phar-Mor made payments of $12,655 against liabilities required to be
satisfied in the bankruptcy proceedings. Generally, these payments were
for settlements with equipment financiers and amounts due landlords for
rent, common area maintenance, and real estate taxes that accrued between
August 17, 1992 and the date leases on closed stores were rejected.
TRENDS, DEMANDS, COMMITMENTS, EVENTS OR UNCERTAINTIES (ALL DOLLAR AMOUNTS IN
THOUSANDS)
Management believes the availability of the Phar-Mor Revolving Credit
Facility, together with Phar-Mor's current cash position and expected cash
flows from operations for fiscal year 1997 will enable Phar-Mor to fund its
working capital needs and capital expenditures. Achievement of expected cash
flows from operations is dependent upon, among other things, Phar-Mor's
attainment of sales, gross profit and expense levels that are consistent with
its financial projections, and there can be no assurance that Phar-Mor will
achieve its expected cash flows. In connection with the proposed Transaction,
Phar-Mor is seeking the consent of its Lenders under the Phar-Mor Revolving
Credit Facility to continue or to replace the facility. There can be no
assurance that Phar-Mor will obtain the consents necessary to maintain the
facility.
Investment activities for fiscal year 1997 are expected to total $39,486.
The major expenditures are expected to be (i) video rental tapes ($9,399),
(ii) redesigning and remodeling of existing stores ($8,873), (iii) systems and
technology ($7,069), and (iv) new stores ($3,601). Phar-Mor expects to finance
and meet its obligations for these capital expenditures through internally
generated funds and the use of the Phar-Mor's current cash position.
INFLATION
Inflation has not had a significant effect on the results of operations of
Phar-Mor or its internal and external sources of liquidity.
100
<PAGE>
DESCRIPTION OF CABOT NOBLE
GENERAL
Cabot Noble was incorporated in July 1996 as a Delaware corporation for the
purpose of facilitating the Transaction. Cabot Noble has not conducted any
activities other than in connection with its organization and the Transaction.
Upon consummation of the Combination, each of Phar-Mor and ShopKo will be a
wholly owned subsidiary of Cabot Noble. Cabot Noble will have its headquarters
in Green Bay, Wisconsin. Cabot Noble's fiscal year will end on the Saturday
falling closest to January 31 in each calendar year.
Cabot Noble's business initially will be the combined operations of Phar-Mor
and ShopKo, its proposed wholly owned subsidiaries. These operations are more
fully described in "Description of Phar-Mor" and "Description of ShopKo." The
property of Cabot Noble will be the properties of Phar-Mor and ShopKo, as more
fully described in "Description of Phar-Mor--Properties" and "Description of
ShopKo--Properties." Cabot Noble is a newly formed corporation and is not
currently subject to any legal proceedings. For a discussion of legal
proceedings relating to Phar-Mor and ShopKo, see "Description of Phar-Mor--
Legal Proceedings" and "Description of ShopKo--Legal Proceedings." While
management of Cabot Noble believes that the Transaction will create a combined
entity with resources to compete more effectively on a national basis, Cabot
Noble will be subject to the same competitive factors described under
"Description of Phar-Mor--Competition" and "Description of ShopKo--
Competition" and subject to some of the same risks and limitations as Phar-Mor
and ShopKo as detailed in "Risk Factors."
Management of Cabot Noble will review the operations of Phar-Mor and ShopKo
and, upon completion of such review, will develop plans and proposals
regarding the integration or combination of various aspects of the respective
businesses of ShopKo and Phar-Mor.
DIRECTORS AND EXECUTIVE OFFICERS
As of the Effective Date, the following persons will be the directors and/or
executive officers of Cabot Noble:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Robert M. Haft.......... 45 Chairman of the Board, Director and Chief Executive
Officer, Cabot Noble and Phar-Mor
M. David Schwartz....... 51 President and Chief Operating Officer, Phar-Mor
Dale P. Kramer.......... 57 Director, Cabot Noble, President and Chief Executive Officer, ShopKo
William J. Podany....... 50 Executive Vice President and Chief Operating Officer, ShopKo
Daniel J. O'Leary....... 49 Senior Vice President and Chief Financial Officer, Phar-Mor
Jeffrey A. Jones........ 49 Senior Vice President and Chief Financial Officer, ShopKo
John R. Ficarro......... 44 Senior Vice President, General Counsel and Secretary, Phar-Mor
Michael K. Spear........ 51 Senior Vice President--Marketing and Merchandising, Phar-Mor
Abbey J. Butler......... 58 Director
Melvyn J. Estrin........ 52 Director
Linda Haft.............. 46 Director
Malcolm T. Hopkins...... 68 Director
Richard M. McCarthy..... 60 Director
Director
Director
Director
</TABLE>
For information concerning Robert Haft and each of the Phar-Mor executive
officers and directors listed above, see "Description of Phar-Mor--Directors
and Executive Officers." For information concerning each of the ShopKo
executive officers listed above, see "Description of ShopKo--Executive
Officers of ShopKo."
101
<PAGE>
The Cabot Noble Board has established an advisory group, the Chairman's
Council, consisting of executive officers of Cabot Noble, Phar-Mor and ShopKo
to provide informal, non-binding advice to the Cabot Noble Board and to the
Chairman of Cabot Noble, Robert M. Haft, and to perform such other functions
as the Cabot Noble Board and/or the Chairman of Cabot Noble shall determine
from time to time. The initial members appointed to the Chairman's Council are
Dale P. Kramer, William J. Podany and Jeffery A. Jones, current members of
ShopKo senior management, and Robert M. Haft, M. David Schwartz, Daniel P.
O'Leary, John R. Ficarro and Michael K. Spear, current members of Phar-Mor
senior management. The members of the Chairman's Council shall be subject to
the same obligations and duties as executive officers of comparable companies,
and shall have no additional incremental liabilities or other duties as a
result of their positions on the council. The Chairman's Council shall not
serve or act as a committee of the Cabot Noble Board, the Phar-Mor Board or
the ShopKo Board.
The Cabot Noble Certificate provides that the number of directors of Cabot
Noble will be not less than three (3) nor more than sixteen (16), subject to
the rights, if any, of holders of preferred stock to elect additional
directors. It is intended that, from and after the Effective Date, the Cabot
Noble Board will consist of ten directors, including (i) the six current
members of the Phar-Mor Board, (ii) one additional director to be designated
by the Phar-Mor Board in accordance with the provisions of the Combination
Agreement (the "Phar-Mor Designee"), (iii) Dale P. Kramer and (iv) two
additional directors to be designated by the ShopKo Board in accordance with
the provisions of the Combination Agreement (the "ShopKo Designees"). It is
possible, however, that the Cabot Noble Board may initially consist of as few
as seven directors, as there was one vacancy on the Phar-Mor Board, and the
ShopKo Board had not named its designees to the Cabot Noble Board as of
January 8, 1997. ShopKo has agreed in the Combination Agreement to use
reasonable efforts to designate the ShopKo nominees to the Cabot Noble Board
prior to the Effective Date.
Directors are divided into three classes serving staggered three-year terms.
At each annual meeting of Cabot Noble's stockholders, successors to the class
of directors whose term expires at such meeting will be elected to serve for
three-year terms and until their successors are elected and qualified. The
terms of will expire at the 1997 annual meeting of stockholders, the
terms of will expire at the 1998 annual meeting of stockholders, and
the terms of will expire at the 1999 annual meeting of stockholders.
Officers are elected by, and serve at the discretion of, the Cabot Noble
Board.
The Cabot Noble Certificate provides that the Cabot Noble Board shall have a
majority of "independent directors"; provided, however, that the Cabot Noble
Board as initially constituted pursuant to the Combination Agreement does not
need to meet such requirement. Any director elected or appointed to fill a
vacancy in the initial Cabot Noble Board (other than a vacancy attributable to
a director who is, at the time such vacancy is created, the Chief Executive
Officer of Cabot Noble) or a vacancy resulting from an increase in the size of
the Cabot Noble Board shall be an independent director until such time as a
majority of the Cabot Noble Board consists of independent directors. An
"independent director" is defined in the Cabot Noble Certificate as a director
who is not (a) an affiliate of Cabot Noble (except solely because such person
is a director of Cabot Noble), or (b) a present or former officer or employee
or any family member of an officer, director or employee, of Cabot Noble or
its subsidiaries.
MANAGEMENT COMPENSATION
The directors and executive officers of Cabot Noble will receive no
compensation from Cabot Noble prior to the Effective Date. Certain of the
directors and executive officers of Cabot Noble are currently directors and/or
executive officers of Phar-Mor or ShopKo and are entitled to compensation and
certain other employment benefits from Phar-Mor and ShopKo, as set forth more
fully in "Description of Phar-Mor--Employment Contracts and Termination of
Employment and Change-in-Control Agreements" and "Description of ShopKo--
Employment Agreements--Executive Officers". See also "Risk Factors--Interests
of Management" and "Certain Transactions" for a discussion of certain
interests of the directors and executive officers of Phar-Mor and ShopKo in
the Transaction.
102
<PAGE>
The following table sets forth the annual cash compensation Cabot Noble
intends to pay commencing as of the Effective Date to its chief executive
officer, each of its other four most highly compensated executive officers and
to all executive officers as a group, for services to be rendered in all
capacities to Cabot Noble and its subsidiaries.
<TABLE>
<CAPTION>
NAE OF INDIVIDUALM ANTICIPATED
OR NUMBER OF ANNUAL
PRSONS IN GROUPE CAPACITIES IN WHICH TO SERVE COMPENSATION
- ------------------ ------------------------------------------------------------ ------------
<S> <C> <C>
Robert M. Haft.......... Chairman of the Board and Chief Executive Officer (a)
Dale P. Kramer.......... President and Chief Executive Officer, ShopKo $ 750,000(b)
M. David Schwartz....... President and Chief Operating Officer, Phar-Mor 960,000(c)
William J. Podany....... Executive Vice President and Chief Operating Officer, ShopKo 616,000(b)
Jeffrey A. Jones........ Senior Vice President and Chief Financial Officer, ShopKo 455,000(b)
Executive Officers as a
group
(8 persons)............ $3,806,500
</TABLE>
- --------
(a) See "Description of Phar-Mor--Employment Contracts and Termination of
Employment and Change-in-Control Arrangements."
(b) Includes minimum bonus payments of $250,000, $176,000 and $130,000 for
Messrs. Kramer, Podany and Jones, respectively, payable by ShopKo in
fiscal year 1998. See "Certain Transactions--ShopKo Employment
Agreements--Executive Officers."
(c) Includes a guaranteed bonus payment by Phar-Mor of $360,000 for fiscal
year 1997. See "Description of Phar-Mor--Employment Contracts and
Termination of Employment and Change-in-Control Arrangements" and "Certain
Transactions--Phar-Mor Employment Agreements--Executive Officers."
EMPLOYMENT CONTRACTS
Certain of the directors and executive officers of Cabot Noble have entered
into employment contracts with Cabot Noble or the proposed subsidiaries of
Cabot Noble, which will be effective as of the Effective Date. See
"Description of Phar-Mor--Employment Contracts and Termination of Employment
and Change-in-Control Agreements" and "Description of ShopKo--Employment
Agreements--Executive Officers" for a discussion of the relevant employment
contracts of each of these proposed subsidiaries.
DIRECTOR REMUNERATION
Following the completion of the Transaction, each director of Cabot Noble
who is not also an employee of Cabot Noble or any of its subsidiaries will
receive an annual retainer fee of $25,000 and an attendance fee of $1,000
($2,000 in the case of a committee chairman) for each meeting of the Cabot
Noble Board, and of each of the committees of the Cabot Noble Board attended,
other than committee meetings occurring on a date on which a board meeting is
scheduled. All directors also will be reimbursed for travel and other out-of-
pocket expenses incurred by them in attending board or committee meetings.
Pursuant to Cabot Noble's Director Stock Plan described below, directors
(including directors that are employees of Cabot Noble or its subsidiaries)
will receive an annual grant of options to purchase 5,000 Cabot Noble Shares,
and may elect to receive Cabot Noble Shares in lieu of all or a portion of
their annual retainers. Directors may elect to defer payment of all or a
portion of their annual retainers under a non-qualified, unfunded deferred
compensation plan. Deferred amounts will be invested, at the election of the
director, in an interest-bearing account or a stock equivalent account. The
amounts deferred, plus any appreciation thereon, will be paid in cash on the
dates specified by the director. See "--Director Stock Plan."
Pursuant to Cabot Noble's Phantom Stock Plan described below, Cabot Noble
will credit certain non-employee directors annually with that number of Cabot
Noble Shares whose aggregate fair market value on a date as specified under
Cabot Noble's Phantom Stock Option Plan equals the amount of the then current
annual retainer payable to such director, or such other amount as may be
determined by resolution of the Compensation Committee of the Cabot Noble
Board. The award is not in the form of actual Cabot Noble Shares, and no
shares will be set aside for the benefit of such directors under the Cabot
Noble Phantom Stock Plan. The number of shares in each phantom stock account
is subject to adjustment for dilution and otherwise as set forth in Cabot
Noble's Phantom Stock Plan. See "--Director Phantom Stock Plan."
103
<PAGE>
Cabot Noble may, from time to time and in the sole discretion of the Cabot
Noble Board, grant additional options to directors under Cabot Noble's
Director Stock Plan, Stock Incentive Plan and Phantom Stock Plan, each of
which is described below. It is currently intended that all grants under such
plans will be in addition to any annual fees to be paid to directors.
STOCK INCENTIVE PLAN
Cabot Noble has adopted the Cabot Noble, Inc. 1997 Stock Incentive Plan (the
"Stock Incentive Plan") in order to attract, reward and retain key personnel
(including officers, whether or not directors) of Cabot Noble and its
subsidiaries (including Phar-Mor and ShopKo) and certain other closely related
eligible persons who provide substantial services to such entities ("Eligible
Persons") and to provide them with long-term incentives that are linked to the
performance of the Cabot Noble Shares.
The Stock Incentive Plan is administered by the Compensation Committee of
the Cabot Noble Board (the "Administrator"). A maximum of 5,500,000 Cabot
Noble Shares (subject to adjustment) may be issued upon the exercise of awards
granted under the Stock Incentive Plan. As of the Effective Date, a total of
1,000,000 Cabot Noble Shares will be subject to options granted under such
plan.
The Stock Incentive Plan authorizes the issuance of options and (subject to
plan limitations) certain stock appreciation rights ("SARs"). As is customary
in incentive plans of this nature, the number and kind of shares available
under the Stock Incentive Plan, share limits, and shares subject to
outstanding awards are subject to adjustment in the event of certain
reorganizations, recapitalizations, stock splits, stock dividends, spin-offs,
property distributions or other similar extraordinary transactions or events
in respect of Cabot Noble or the Cabot Noble Shares. Cabot Noble Shares
relating to options or SARs that are not exercised or that expire or are
canceled will again become available for grant purposes under the Stock
Incentive Plan to the extent permitted by law and the plan. Awards may be
repriced or otherwise amended after grant, provided that the amendment does
not adversely affect the holder's rights without his or her consent. A maximum
of 300,000 Cabot Noble Shares may be subject to options that during any
twelve-month period are granted to any individual Eligible Person under the
Stock Incentive Plan.
The exercise price under the Stock Incentive Plan generally may not be less
than the fair market value of one Cabot Noble Share on the date of grant or
such greater amount as may be determined by the Administrator. An option may
either be an incentive stock option, as defined in the Code, or a non-
qualified stock option. An incentive stock option may not be granted to a
person who owns more than 10% of the total combined voting power of all
classes of shares of Cabot Noble and its subsidiaries unless the exercise
price is at least 110% of the fair market value of the Cabot Noble Shares
subject to the option and such option by its terms is not exercisable after
expiration of five years from the date such option is granted. The aggregate
fair market value of the Cabot Noble Shares (determined at the time the option
is granted) for which incentive stock options may be first exercisable by an
option holder during any calendar year under the Stock Incentive Plan or any
other plan of Cabot Noble or its subsidiaries may not exceed $100,000. To the
extent the aggregate fair market value of such Cabot Noble Shares at the date
of grant exceeds $100,000, the incentive stock options for those Cabot Noble
Shares are treated as non-qualified stock options. A non-qualified stock
option is not subject to any of these limitations.
Full payment for shares purchased on the exercise of any option must be made
at the time of such exercise in cash, in exchange for a promissory note by the
option holder in favor of Cabot Noble, by notice and third party payment, in
Cabot Noble Shares having a fair market value equal to the option exercise
price (either directly or by attestation), or any combination of cash,
promissory notes, third party payment and shares. In addition, option holders
may be permitted by the Administrator to reduce the number of shares to be
issued by Cabot Noble, deliver already owned Cabot Noble Shares (either
directly or by attestation) or obtain Cabot Noble financed loans in order to
satisfy applicable tax withholding requirements.
Subject to early termination or acceleration provisions (which are
summarized below), an option generally will be exercisable, in whole or in
part, from the date specified in the related award agreement until the
expiration date, all as determined by the Administrator. Earlier expiration
may occur following a termination of service. In no event, however, is an
option under the Stock Incentive Plan exercisable more than ten years after
its date of grant.
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<PAGE>
In its discretion, the Administrator may grant an SAR concurrently with or
following the grant of an option, including in circumstances involving a
Change in Control (as defined in the Stock Incentive Plan) or termination of
service, which SAR may extend to all or a portion of the shares covered by
such Option. An SAR is the right to receive payment of an amount equal to the
excess of the Fair Market Value (as defined in the Stock Incentive Plan) of
Cabot Noble Shares on the date of exercise of the SAR over the exercise price
of the related option. The Administrator, in its discretion, may provide for
payment upon exercise of an SAR to be solely in Cabot Noble Shares (valued at
Fair Market Value at date of exercise), in cash, or in a combination of Cabot
Noble Shares and cash, or leave the election of cash or stock to the
participant, subject to any applicable legal requirements. No SARs were
outstanding as of the Effective Date, although future options may include
provisions authorizing the Administrator, in the future, to permit an offset
of shares issuable (valued at their then fair market value) in lieu of the
payment of the exercise price and/or tax withholding obligation.
The Administrator will have the right to establish, in connection with an
option grant, the effect of a termination of employment on the rights and
benefits under each option granted to an Eligible Person, and the
Administrator may make distinctions based upon the cause of termination.
Upon the occurrence of either (A) a Change in Control Event (as defined in
the Stock Incentive Plan) or (B) under other circumstances (such as a
termination of service), the Administrator, in its discretion, may provide for
acceleration or extension of the exercisability of awards, or provide for
certain other limited benefits, which may include SARs, under some or all
awards and may determine the extent, duration and other conditions of such
additional rights by amendment to outstanding awards or otherwise.
The Cabot Noble Board may terminate or amend the Stock Incentive Plan,
subject to the rights of holders of outstanding options. If an amendment would
(i) materially increase the benefits accruing to Eligible Persons under the
Stock Incentive Plan, (ii) materially increase the aggregate number of shares
that may be issued under the Stock Incentive Plan, or (iii) materially modify
the eligibility requirements for participation under the Stock Incentive Plan,
the amendment, to the extent deemed necessary by the Cabot Noble Board or the
Administrator or then required by applicable law, must be approved by the
shareholders.
No taxable income will be recognized by an option holder upon the grant of a
non-qualified stock option. Upon exercise of a non-qualified stock option, the
option holder will realize ordinary income in an amount measured by the excess
of the Fair Market Value of the shares acquired on the date of exercise over
the exercise price, and Cabot Noble will be entitled to a corresponding
deduction. The option holder's tax basis for the shares acquired will be equal
to their fair market value on the date of exercise. Upon a subsequent sale or
exchange of the shares, the participant will recognize short-term or long-term
capital gain or loss equal to the difference between the amount realized and
the tax basis for the shares sold or exchanged. Cabot Noble will not be
entitled to any further deduction at that time.
No taxable income will be recognized by an option holder upon the grant of
an incentive stock option nor upon its exercise, provided that the exercise
occurs, in general, during employment or within three months after termination
of employment. However, the excess of the Fair Market Value of the shares
acquired by such exercise over their option price is included in determining
the option holder's alternative minimum taxable income subject to the
alternative minimum tax. If shares acquired pursuant to an incentive stock
option are not sold or otherwise disposed of within two years from the date
the option is granted and within one year after the date of exercise, any gain
or loss resulting from disposition of the stock will be treated as long-term
capital gain or loss. If shares acquired upon exercise of an incentive stock
option are disposed of prior to the expiration of such holding periods, the
option holder will recognize ordinary income in the year of such disposition
in an amount equal to the excess of the lesser of the Fair Market Value of the
shares on the date of exercise and the Fair Market Value of the shares on the
date of disposition, over their exercise price. Any remaining gain or loss
will be long or short-term capital gain or loss, depending on how long the
shares were held.
Cabot Noble will not be entitled to any deduction as a result of the grant
or exercise of an incentive stock option, or on a later disposition of the
stock received, except that in the event of a sale of shares received on
exercise in a disqualifying disposition (as described above), Cabot Noble will
be entitled to a deduction equal to the amount of ordinary income recognized
by the option holder.
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<PAGE>
No taxable income will be recognized by a participant upon the grant of an
SAR, and Cabot Noble will not be entitled to a deduction. Upon the exercise of
an SAR, the participant will generally recognize ordinary income in an amount
equal to the cash and/or Fair Market Value of the shares received, and Cabot
Noble will be entitled to a corresponding deduction. If a participant receives
shares of stock, then the amount recognized as ordinary income becomes the
participant's tax basis for determining gain or loss (taxable either as short-
term or long-term capital gain or loss, depending on whether or not the shares
are held for more than one year) on the subsequent sale of such stock. The
holding period for such shares commences as of the date ordinary income is
recognized.
If, as a result of a Change in Control Event, a participant's awards become
immediately exercisable, the additional economic value, if any, attributable
to the acceleration may be deemed a "parachute payment." The additional value
will be deemed a parachute payment if such value, when combined with the value
of other amounts or payments that are deemed to result from the change in
control, equals or exceeds a threshold amount equal to 300% of the
participant's average annual taxable compensation for the five calendar years
preceding the year in which the change in control occurs. In such case, the
excess of the total parachute payments over such participant's average annual
taxable compensation will be subject to a 20% non-deductible excise tax in
addition to any income tax payable. Cabot Noble will not be entitled to a
deduction for the portion of any parachute payment that is subject to the
excise tax and the excess parachute payment will reduce the $1 million limit
under Section 162(m) of the Code described below.
Notwithstanding the foregoing discussion of the deductibility of
compensation under the Stock Incentive Plan by Cabot Noble, Section 162(m) of
the Internal Revenue Code renders non-deductible to a publicly-held company
compensation to certain employees required to be named in its Summary
Compensation Table in excess of $1 million in any year, unless such excess
compensation is performance-based (as defined) or is otherwise exempt from
these limits on deductibility. The applicable conditions of an exemption for
performance-based compensation (which includes options granted at fair market
value) include, among others, certain substantive, objective standards,
shareholder approval and administrative requirements. No assurances can be
given that the applicable law or regulations will not change or that
compensation under the Stock Incentive Plan to such persons will be deductible
by Cabot Noble.
DIRECTOR STOCK PLAN
Cabot Noble has adopted the Cabot Noble, Inc. 1997 Director Stock Plan (the
"Director Stock Plan"). The Cabot Noble Board believes that the ownership of
Cabot Noble Shares by directors supports the maximization of long-term
shareholder value by aligning the interests of directors with those of
shareholders. The Director Stock Plan is designed to facilitate the ownership
of Cabot Noble Shares by directors. The purpose of the Director Stock Plan is
to promote the long-term growth of Cabot Noble by enhancing its ability to
attract and retain highly qualified and capable directors with diverse
backgrounds and experience and by increasing the proprietary interest of
directors in Cabot Noble.
Under the Director Stock Plan, each director will receive an annual grant of
an option to purchase 5,000 Cabot Noble Shares. If a director begins service
on a date other than the date of the annual meeting of Cabot Noble
Shareholders in any year, the number of shares subject to the option shall be
prorated. In the case of the Cabot Noble Board to be appointed upon the
consummation of the Transaction, those Board members who received grants of
Phar-Mor Shares pursuant to the Phar-Mor Director Stock Plan in Phar-Mor's
fiscal year 1996 will not receive any grants under Cabot Noble's Director
Stock Plan as of the Effective Date. The other members of the Cabot Noble
Board will receive a portion of their annual grants prorated to the Effective
Date, pursuant to the terms of the Director Stock Plan.
In addition to the annual grants of options under the Director Stock Plan,
each director may elect to receive Cabot Noble Shares in lieu of all or a
portion of his or her annual retainer. The number of Cabot Noble Shares
issuable in the event of such election will be based upon the fair market
value per Cabot Noble Share (as defined in the Director Stock Plan) on
February 1st in the year of such election, and will be determined by dividing
such fair market value into the amount of the annual retainer that the
director elected to receive in Cabot Noble Shares.
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<PAGE>
A maximum of 250,000 Cabot Noble Shares will be available for the award of
shares and the grant of options under the Director Stock Plan, subject to
adjustment in the event of stock splits, stock dividends or changes in
corporate structure affecting Cabot Noble Shares. To the extent a stock option
granted under the Director Stock Plan expires or terminates unexercised, the
Cabot Noble Shares allocable to the unexercised portion of such option will be
available for awards under the Director Stock Plan. In addition, to the extent
that shares are delivered (actually or by attestation) to pay all or a portion
of an option exercise price, such shares will become available for awards
under the Director Stock Plan.
The exercise price per share of all stock options granted under the Director
Stock Plan will be 100% of the fair market value per Cabot Noble Share (as
defined by the Director Stock Plan) on the grant date. Options granted under
the Director Stock Plan vest and are exercisable immediately, and may be
exercised until the fifth anniversary of the date of grant. Options may be
exercised either by the payment of cash in the amount of the aggregate option
price or by surrendering (or attesting to ownership of) Cabot Noble Shares
owned by the participant for at least six months prior to the date the option
is exercised, or a combination of both, having a combined value equal to the
aggregate option price of the shares subject to the option or portion of the
option being exercised. Any option or portion thereof that is not exercised on
or before the fifth anniversary of the date of grant shall expire.
The federal income tax consequences of options under the Director Stock
Option Plan are the same as those described above for non-qualified options
under the Stock Incentive Plan.
The Director Stock Plan is administered by the Compensation Committee of the
Cabot Noble Board. The Cabot Noble Board may amend or terminate the Director
Stock Plan at any time, but the terms of any option granted under the Director
Stock Plan may not be adversely modified without the participant's consent.
DIRECTOR PHANTOM STOCK PLAN
The Cabot Noble, Inc. 1997 Director Phantom Stock Plan (the "Phantom Stock
Plan") awards certain deferred compensation to any director of Cabot Noble who
is not an employee of Cabot Noble or a subsidiary of Cabot Noble and who has
served as a director of Cabot Noble, ShopKo or Phar-Mor for at least three
years (an "Eligible Director"). Under the Phantom Stock Plan, Cabot Noble will
establish a phantom stock account for each Eligible Director which is credited
annually by that number of Cabot Noble Shares whose aggregate fair market
value on a date as specified under the Phantom Stock Plan equals the amount of
the then current annual retainer payable to such Eligible Director, or such
other amount as may be determined by resolution of the Compensation Committee
of the Cabot Noble Board. The award is not in the form of actual Cabot Noble
Shares, and no Cabot Noble Shares will be set aside for the benefit of
Eligible Directors under the Phantom Stock Plan. The number of shares in each
phantom stock account is subject to adjustment for dilution and otherwise as
set forth in the Phantom Stock Plan. On the Effective Date, all amounts in
Phar-Mor director phantom stock accounts created pursuant to the Phar-Mor
Phantom Stock Plan will be credited to Cabot Noble phantom stock accounts
under the Phantom Stock Plan. No grants will be made pursuant to the Phantom
Stock Plan on the Effective Date. Rather, all Eligible Directors will receive
their first grants thereunder upon the first annual grant date following the
Effective Date as determined pursuant to the Phantom Stock Plan.
Awards made under the Phantom Stock Plan are payable solely in cash upon the
effective date of the first to occur of: (1) the Eligible Director's
resignation from the Cabot Noble Board; (2) the Eligible Director's failure to
be elected or re-elected to the Cabot Noble Board; (3) the retirement of the
Eligible Director from the Board; or (4) death or permanent disability of the
Eligible Director. The amount of the payment will be calculated based upon the
fair market value of the shares of phantom stock recorded in the Eligible
Director's phantom stock account (including all accrued cash dividends) as of
the date of distribution.
No taxable income will be recognized by a director upon the grant of a
phantom stock award, and Cabot Noble will not be entitled to any deduction. A
director will recognize ordinary income upon payment in satisfaction of such
award equal to such payment, and Cabot Noble will be entitled to a
corresponding deduction.
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<PAGE>
PRO FORMA BENEFICIAL OWNERSHIP OF CABOT NOBLE SHARES
Set forth in the following table is certain information with respect to the
beneficial ownership of Cabot Noble upon consummation of the Transaction, and
certain information with respect to the beneficial ownership of Cabot Noble by
(i) each pro forma holder of five percent or more of the outstanding Cabot
Noble Shares, (ii) all individuals who will be directors of Cabot Noble as of
the Effective Date, (iii) the executive officers named in the Summary
Compensation Table under "--Management Compensation;" and (iv) all directors
and executive officers as of the Effective Date as a group. This table assumes
that all Phar-Mor Shares and ShopKo Shares will be exchanged for Cabot Noble
Shares, and that all outstanding options and warrants to acquire Phar-Mor
Shares or ShopKo Shares will convert to Cabot Noble Options or Cabot Noble
Warrants, respectively. A person or entity is considered to "beneficially own"
any shares (i) over which such person or entity exercises sole or shared
voting or investment power or (ii) which such person or entity has the right
to acquire at any time within 60 days (e.g., through the exercise of options
or warrants).
<TABLE>
<CAPTION>
NUMBER OF
PERCENT CABOT NOBLE SHARES
NAME AND ADDRESS OF AMOUNT AND NATURE OF OF WHICH MAY BE ACQUIRED
BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP(2) CLASS WITHIN 60 DAYS(3)
------------------- ----------------------- ------- ---------------------
<S> <C> <C> <C>
Hamilton Morgan,
L.L.C. ................. 4,908,435(4) 7.1% 204,402(5)
3000 K Street, N.W.,
Suite 105
Washington, D.C. 20008
Robert M. Haft........... 4,908,435(6) 7.1% 204,402(5)
20 Federal Plaza West
Youngstown, Ohio 44501
FoxMeyer Health
Corporation............. 4,908,435(6) 7.1% 204,402(5)
55910 N. Central Expwy,
Ste 178
Dallas, Texas 75206
supervalu inc............ 4,419,500(7) 6.4% --
11840 Valley View Road
Eden Prairie, MN 55440
Dale Kramer.............. 1,312,500(7) 1.9% 1,050,000(7)(8)
700 Pilgrim Way
P.O. Box 19060
Green Bay, Wisconsin
54307-9060
William J. Podany........ 562,500(7) * 468,750(7)(8)
700 Pilgrim Way
P.O. Box 19060
Green Bay, Wisconsin
54307-9060
Jeffrey A. Jones......... 300,000(7) * 300,000(7)(8)
700 Pilgrim Way
P.O. Box 19060
Green Bay, Wisconsin
54307-9060
M. David Schwartz........ 176,250 * 170,000(8)
20 Federal Plaza West
Youngstown, Ohio 44501
Abbey J. Butler.......... 4,918,435(9) 7.1% 10,000(10)
55910 N. Central Expwy,
Ste 178
Dallas, Texas 75206
Melvyn J. Estrin......... 4,918,435(9) 7.1% 10,000(10)
55910 N. Central Expwy,
Ste 178
Dallas, Texas 75206
Linda Haft............... 10,000 * 10,000(10)
20 Federal Plaza West
Youngstown, Ohio 44501
</TABLE>
108
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
PERCENT CABOT NOBLE SHARES
NAME AND ADDRESS OF AMOUNT AND NATURE OF OF WHICH MAY BE ACQUIRED
BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP(2) CLASS WITHIN 60 DAYS(3)
------------------- ----------------------- ------- ---------------------
<S> <C> <C> <C>
Malcolm T. Hopkins...... 10,000 * 10,000(10)
20 Federal Plaza West
Youngstown, Ohio 44501
Richard M. McCarthy..... 11,304 * 10,000(10)
20 Federal Plaza West
Youngstown, Ohio 44501
[Director]..............
[Director]..............
[Director]..............
All Directors and
Executive Officers,
including those named
above, as a Group (8
persons)............... 7,528,239(11) 10.6% 2,454,152
</TABLE>
- --------
(*less than 1%)
(1) No director or executive officer is the beneficial owner of other equity
securities of Cabot Noble or any of its subsidiaries.
(2) Unless otherwise indicated, each person or entity has sole investment
power and sole voting power with respect to the Cabot Noble Shares
beneficially owned by such person or entity.
(3) This column lists the number of Cabot Noble Shares which the named person
or entity has the right to acquire within 60 days after 1997
through the exercise of Cabot Noble Options and Cabot Noble Warrants. The
shares shown in this column are included in the Amount and Nature of
Beneficial Ownership column.
(4) Includes 3,750,000 Cabot Noble Shares owned directly by Hamilton Morgan,
and (i) 954,033 Cabot Noble Shares held directly by FoxMeyer Health, (ii)
91,902 Cabot Noble Shares subject to purchase by FoxMeyer Health within
60 days upon exercise of Cabot Noble Warrants and (iii) 112,500 Cabot
Noble Shares subject to purchase by Mr. Haft within 60 days upon exercise
of Cabot Noble Options (all such shares held directly by FoxMeyer Health
and subject to purchase by FoxMeyer Health and Mr. Haft being
collectively referred to herein as the "Proxy Shares"). Hamilton Morgan
has been granted sole voting power over the Proxy Shares as a result of
irrevocable proxies granted to Hamilton Morgan by FoxMeyer Health and Mr.
Haft. See "Description of Phar-Mor--Potential Changes in Control."
Information concerning beneficial ownership of Cabot Noble Shares by
FoxMeyer Health is based on information furnished to Phar-Mor as of
September 27, 1996 by FoxMeyer Health. For further information about
developments potentially affecting the beneficial ownership and/or voting
rights of the Cabot Noble Shares to be held by Hamilton Morgan, FoxMeyer
Health and Messrs., Haft, Butler and Estrin, see "Description of Phar-
Mor--Security Ownership of Certain Beneficial Owners and Management" and
"Risk Factors--Hamilton Morgan Issues."
(5) Includes 91,902 Cabot Noble Shares subject to purchase by FoxMeyer Health
within 60 days upon exercise of Cabot Noble Warrants and 112,500 Cabot
Noble Shares subject to purchase by Mr. Haft within 60 days upon exercise
of Cabot Noble Options awarded to Mr. Haft (of which Cabot Noble Options
to purchase 102,500 Cabot Noble Shares were awarded under the Stock
Incentive Plan). Pursuant to Mr. Haft's employment agreement with Phar-
Mor, if the Transaction is consummated, Mr. Haft would have the right to
terminate his employment and accelerate the vesting of his options. Mr.
Haft has indicated his intention to continue his employment with Phar-Mor
after consummation of the Transaction. See "Description of Phar-Mor--
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements" and note 6 below.
(6) Includes 3,750,000 Cabot Noble Shares held directly by Hamilton Morgan
and the 1,158,435 Proxy Shares with respect to which Hamilton Morgan has
sole voting power. See note 4 above. Pursuant to the terms of the
Hamilton Morgan LLC Agreement, all of such Cabot Noble Shares may be
voted only with the unanimous consent of Hamilton Morgan's members. As of
September 13, 1996, Robert M. Haft and his wife, Mary Z. Haft, as tenants
by the entirety, owned 30.2% of the membership interests in Hamilton
Morgan, Robert Haft is the president of Hamilton Morgan and FoxMeyer
Health owned 69.8% of the membership interests in Hamilton Morgan.
Accordingly, each of FoxMeyer Health and Mr. Haft have shared voting
power with respect to all Cabot Noble Shares beneficially owned by
Hamilton Morgan. The Proxy Shares include options to purchase 51,250
Cabot Noble Shares awarded to Mr. Haft under the Stock Incentive Plan.
For further information about developments potentially affecting the
beneficial ownership and/or voting rights of the Cabot Noble Shares to be
held by Hamilton Morgan, FoxMeyer Health and Messrs. Haft, Butler and
Estrin, see "Description of Phar-Mor--Security Ownership of Certain
Beneficial Owners and Management" and "Risk Factors--Hamilton Morgan
Issues."
(7) Assumes a ShopKo Exchange Ratio of 3.0.
(8) All such Cabot Noble Shares are subject to purchase by the indicated
person within 60 days upon exercise of options subject to the Stock
Incentive Plan.
(9) Messrs. Butler and Estrin are co-chairmen of the board, co-chief
executive officers and major shareholders of FoxMeyer Health. Messrs.
Butler and Estrin disclaim beneficial ownership of the 4,908,435 Cabot
Noble Shares shown as being beneficially owned by FoxMeyer Health and
Hamilton Morgan. See Note 6 above.
(10) All such Cabot Noble Shares are subject to purchase within 60 days by the
indicated person upon exercise of options subject to the Director Stock
Plan.
(11) Includes 4,908,435 Cabot Noble Shares which Mr. Haft is deemed to
beneficially own, as described above in note 6.
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<PAGE>
DESCRIPTION OF SHOPKO
GENERAL
ShopKo was founded in 1961 and was acquired by supervalu in 1971. In October
1991, ShopKo completed the initial public offering of ShopKo Shares. ShopKo's
principal executive offices are located at 700 Pilgrim Way, Green Bay,
Wisconsin 54304, and its telephone number is (414) 497-2211. As used herein,
unless otherwise indicated, "ShopKo" includes ShopKo Stores, Inc. and its
consolidated subsidiaries.
ShopKo is a leading regional retailer engaged in the business of providing
general merchandise and health services through its retail stores. As of
December 31, 1996, ShopKo operated 130 retail stores in 18 Upper Midwest,
Pacific Northwest and Western Mountain states. ShopKo is also engaged in the
business of providing health services through its subsidiary, ProVantage,
which specializes in prescription benefit management, mail service pharmacy,
vision benefit management and health care decision support services. These
businesses are conducted throughout the United States. ShopKo has recently
launched a free-standing optical center strategy, which will begin with four
stores by the end of fiscal 1997.
ShopKo conducts business in two business segments: general merchandise and
health services. General merchandise is the sale of softline and hardline/home
goods in retail stores. Health services include professional pharmacy and
optical services provided in the retail stores and the above-referenced
ProVantage services which are provided through other facilities. Financial
information about these segments is included in Note K of ShopKo's Notes to
Consolidated Financial Statements.
ShopKo's net sales derived from sales of softline goods were approximately
23% in fiscal year 1996 and 22% in fiscal years 1995 and 1994. Net sales
derived from sales of hardline/home goods were approximately 54%, 58% and 59%
in fiscal years 1996, 1995 and 1994, respectively. ShopKo's net sales derived
from health services were approximately 23%, 20% and 19% in fiscal years 1996,
1995 and 1994, respectively. Net sales in the first half of fiscal 1997
derived from sales of softline goods were approximately 25%, net sales from
sales of hardlines/home goods were approximately 43%, and net sales derived
from health services were approximately 32%. The above sales percentages have
been restated to reflect how ShopKo currently manages its merchandise
assortment.
ShopKo's fiscal year ends on the last Saturday of February. For example,
fiscal 1996 was the period from February 26, 1995 to February 24, 1996.
MERCHANDISING PHILOSOPHY--MANAGEMENT
ShopKo is committed to offering quality merchandise and service in its
stores to meet customers' lifestyle requirements for casual apparel, home,
health and family, selling products at prices which communicate value. ShopKo
strives to differentiate itself from its competition.
Continuous improvement and enhancement of the Vision 2000 concept is
accomplished through ShopKo's multidisciplinary Senior Merchandising and
Marketing Team ("SMMT"). Headed by the Chief Operating Officer, the SMMT
consists of ShopKo's senior executives from the areas of merchandising,
logistics and replenishment, advertising, in-store marketing and store
operations. The SMMT seeks to create a performance-driven culture predicated
on fast, friendly customer service. The SMMT has recently completed an
intensive reengineering of the work processes of ShopKo's central organization
and store operations. The reengineered work processes require centralized
decisions with respect to product selection, pricing, space utilization and
marketing to allow store personnel to focus solely on overall customer
satisfaction through inventory in-stock position, creation of a friendly
shopping environment and simplification of the shopping experience to allow
customers to complete their shopping as quickly as they desire.
With respect to general merchandise, ShopKo's goal is to improve performance
by meeting customer needs more quickly and having more of what people expect
as their lifestyle needs change. ShopKo merchandise has
110
<PAGE>
been reorganized into stratified categories that are defined and driven by
customer lifestyles and end usage. This stratification process has allowed
ShopKo to identify and prioritize growth potentials based on the changing
lifestyle needs of its customers. Through an "infrastructural funding
process", ShopKo management allocates store shelf space, inventory commitments
and external advertising space among the various categories of merchandise.
Heavier infrastructure commitments are given to those categories in which
ShopKo has achieved market dominance and other categories believed by ShopKo
management to have the potential to become categories of dominance. Regular
and systematic analysis of category stratification is performed at various
levels as part of ShopKo's business planning process.
MERCHANDISING AND SERVICES--GENERAL MERCHANDISE
ShopKo carries a wide selection of branded and private label "softline"
goods such as women's, men's and children's apparel, shoes, jewelry, health
and beauty aids, cosmetics and accessories and "hardline/home" goods such as
housewares, home textiles, household supplies, home entertainment products,
small appliances, furniture, music/videos, toys, sporting goods, social
occasion products, candy, snack foods, seasonal and everyday basic categories.
ShopKo's stores carry a broad assortment of merchandise, thus providing
customers with a convenient one-stop shopping source for everyday items.
ShopKo's accommodating customer service policies provide customers with a
pleasant shopping experience.
ShopKo believes that it offers leading brand names in its merchandise lines,
concentrating on brands which have wide customer acceptance and provide
quality and value. In addition, ShopKo has well-developed private label
programs. ShopKo subjects its private label merchandise and direct imports to
independent testing and certification for product performance safety and fit.
In addition, ShopKo's in-house quality assurance and technical design team
analyzes and develops the quality of its fashion offerings. This allows ShopKo
to deliver a better and more consistent product, with greater control and
efficiency.
MERCHANDISING AND SERVICES--HEALTH SERVICES
ShopKo provides professional health care services in most of its stores. Of
ShopKo's 130 stores as of September 30, 1996, 129 include pharmacy centers and
127 include optical centers. In addition to generating store traffic and
building customer loyalty, these services contribute significantly to ShopKo's
overall profitability and provide the opportunity for additional growth. Each
store with pharmacy and optical centers employs or contracts with an average
of approximately three licensed pharmacists, one licensed optometrist and six
opticians. ShopKo's optometrists perform in-store eye exams and prescribe
corrective lenses, most of which are fabricated in ShopKo's 10,000 square foot
centralized optical laboratory and in 77 in-store finishing labs. The in-store
finishing labs typically service other stores in the vicinity and provide
customers with same day or next day optical service for single vision lenses.
As an expansion of its traditional retail pharmacy services, in fiscal 1994
ShopKo launched its prescription benefit management ("PBM") division by
forming ProVantage Mail Service, a prescription management and mail service
pharmacy that is offered to health care plan sponsors across the country.
Since that time, ProVantage has developed into a full service PBM, providing
custom prescription benefit plan design, a network of over 40,000 retail
pharmacies, program administration and claims and benefit processing services
to insurance companies, third party administrators and self-funded health care
plan sponsors. In August 1996, ShopKo completed the acquisition of the
CareStream Scrip Card business formerly owned by subsidiaries of FoxMeyer
Health. See "Certain Transactions--CareStream Scrip Card Acquisition by
ShopKo." CareStream Scrip Card is a PBM firm which provides services similar
to those provided by ProVantage. As health care plan sponsors face pressure to
reduce rising health care costs, they are increasingly directing plan
participants to utilize managed care pharmacy benefit programs developed and
administered by PBM firms. These programs control pharmacy costs by
supervising decisions regarding which drugs are dispensed and whether they are
dispensed by retail or mail service pharmacies. ShopKo believes that
ProVantage is positioned to provide health care plan sponsors with
prescription benefit programs that substantially reduce prescription costs,
ultimately reducing the overall cost of health care.
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Another recently launched initiative is ProVantage Vision Benefit Management
Service ("VBM"). VBM has established a network of ophthalomogists,
optometrists and opticians who have agreed to provide health care services at
discounted rates to participants in health care plans sponsored by VBM's
clients. These clients may offer discount, prepaid or integrated
medical/surgical plans to their participants. For those clients who do not
elect to self insure, VBM offers insured plans through an unaffiliated
insurer. In August, 1996, ProVantage completed the acquisition of United
Wisconsin Insurance Company's vision benefit management business. This
acquisition gave VBM an immediate market presence in the vision benefit
management industry. The acquired business provides vision benefit management
services to over 100,000 plan participants, and operates through a provider
network of over 900 ophthalmologists and optometrists operating in over 20
states. This network will eventually be folded into the national vision
benefit network of retail chains and private ophthalmologists and optometrists
that VBM is in the process of developing. VBM will also offer to private label
its national network for network participants looking to offer vision benefit
management services to their local-based clients.
In addition, ShopKo opened two new free-standing optical centers, Vision
Advantage, during the third quarter of fiscal 1997. Two additional Vision
Advantage Stores will open during the first quarter of fiscal 1998. This
format will focus on providing value-priced, high quality eye wear that can be
manufactured in about an hour. Convenience to the customer, price and quality
will be the primary driving points of this business, which will leverage
heavily off of ShopKo's 18 years of retail optical experience.
ProVantage has also installed DSS, a technology-driven process that provides
actionable information to decision makers within the health care industry. DSS
takes large amounts of enterprise-wide data, cleans the date to remove errors
and idiosyncrasies, and stores the data in a warehouse. From this warehouse,
health services executives and line managers can query the data for actionable
information that arrives quickly, without the need for interaction with the
client company's information services department. This information is used for
a variety of purposes, including the identification of physicians and other
health care providers performing outside the norm, or patients that are
candidates for case management. This process will leverage off of ShopKo's
significant technological investment in massively parallel processing and data
base management for its retail business. ProVantage's DSS initiative will have
two focal points. The first will be a product enhancement for utilization by
ProVantage's PBM which will facilitate the PBM's roll out of clinical programs
to its clients to lower their overall cost of health care. This product will
work heavily with the prescription data of ProVantage's customers. The second
DSS focal point will be through a stand-alone company called ProVMed, which
will apply these same principles to enterprise-wide sets of data, including
medical data. These applications will be marketed to and utilized by a variety
of health care plan sponsors, primarily mid-sized insurance companies and
managed care organizations.
MARKETING AND ADVERTISING
ShopKo markets its general merchandise and professional pharmacy and optical
services via weekly newspaper circulars to reach a broad based customer
segment consisting largely of middle income families. These full-color
circulars average 24 pages and feature values in all departments of the stores
and have a circulation of more than 3.5 million. Direct mail vehicles are used
selectively at key promotional periods and have a circulation of more than 5.0
million. All printed advertising materials are designed by ShopKo's in-house
graphic design team and photographed in ShopKo's own photography studio. In
addition to the newspaper circulars, ShopKo uses television and radio
advertising to support the image that ShopKo stores offer quality merchandise
and professional, courteous and expedient service to meet the customer's
lifestyle requirements at prices that communicate real value. ShopKo's
advertising plans are fully integrated with its general merchandise business
plan. All advertising expenditures are allocated on the basis of category
productivity, in accordance with the above-referenced infrastructure funding
process.
ShopKo utilizes an integrated pricing strategy which is a part of its
general merchandise business planning process. ShopKo prices its merchandise
so as to be competitive with its discount retail competitors, utilizing
frequent advertising of a large group of specially priced high demand items to
reinforce its competitive price image and to generate store traffic, rather
than attempting to meet the lowest available price on every item. With
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its Vision 2000 strategy, ShopKo believes it has provided its customers with
better product quality, greater variety, timely fashion and a more attractive
upscale shopping environment at generally competitive prices.
ProVantage focuses its marketing efforts on self-funded medical plan
sponsors, third party administrators and insurance companies. ProVantage
markets its services through its own national sales force and a network of
independent brokers. This national sales team customizes each program to meet
each client's needs and cost containment goals.
STORE LAYOUT AND DESIGN
ShopKo stores are designed for customer convenience and for effective
merchandise presentation. The Vision 2000 format features a fashion stage at
the store entrance to create the upscale image of the store. The stores also
feature full assortments of softlines, hard/home lines and professional
pharmacy and optical departments. A significant majority of ShopKo stores now
feature Vision 2000 merchandising, fixturing and product assortments. The
optical and pharmacy departments are placed near the front of the store with
the remainder of the store being laid out in a "racetrack" configuration which
takes customers between and around departments. ShopKo's current promotionally
priced items are prominently displayed.
ShopKo has substantially remodeled its stores using the Vision 2000 format.
Thus far in fiscal 1997, ShopKo opened two new stores and remodeled six stores
under this format. ShopKo expects to continue to explore and test alternative
store layout and display techniques and merchandise mixes. Depending on the
cost of land acquisition, size of store and site preparation work, ShopKo
expects that a typical new store's cost for land acquisition, site
preparation, building and fixturing will approximate $6.0 to $11.0 million.
Remodels, which generally take place approximately every seven to ten years,
usually cost from $0.4 to $1.5 million per store. A store renovation, where
the square footage is expanded or more extensive remodeling is needed, usually
costs from $1.6 to $3.0 million per store.
ShopKo's average store size is approximately 90,000 square feet with
approximately 84% of the stores greater than 74,000 square feet. ShopKo's
traditional new stores are based on one of three standard prototypes; a 99,000
square foot store, an 88,000 square foot store or a 74,000 square foot store.
The prototype selected depends on the community and the retail competition in
the immediate area. In comparison to old versions, ShopKo's current prototypes
feature a greater portion of store square footage dedicated to selling space
and less space dedicated to the storage of inventory.
STORE OPERATIONS AND MANAGEMENT
ShopKo's policies of promoting store management personnel from within and
providing ongoing management training programs provide ShopKo with a pool of
store management talent available to manage new stores as they are opened.
ShopKo's present store managers have been employed by ShopKo in various
positions on an average of more than 14 years, and its assistant managers on
an average of 8 years.
During fiscal 1996, ShopKo focused on re-engineering its core processes and
implemented a new management structure in its stores. These initiatives
increased management productivity and effectiveness while reducing the number
of managers in each store by eliminating processes which were not focused on
providing excellent customer service. As a result of these initiatives, ShopKo
store managers are completely focused on overall customer satisfaction,
through attention to inventory in-stock position and creation of a friendly,
simplified shopping environment.
ShopKo believes that a strong emphasis on customer satisfaction is a key
element in its strategy to differentiate itself from the competition. For the
past three years, ShopKo has engaged the services of a leading national
research firm to conduct its Customer Satisfaction Monitor program to measure
and quantify customer satisfaction in each store. Results have shown that in
fiscal 1996 more than 80% of the customers surveyed gave ShopKo top ratings
for overall satisfaction. ShopKo then gathers additional information from
customers who give
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ShopKo less than top ratings. This enables management to clearly understand
and address areas of concern and opportunity.
Shopko utilizes a multi-media training program for training its front end
personnel. This program has made the in-store training process more thorough,
consistent and efficient.
ShopKo maintains an extensive loss prevention program. ShopKo believes that
this program, which incorporates a consistently firm stance in dealing with
shoplifting and other forms of theft, has been effective in minimizing its
losses.
PURCHASING AND DISTRIBUTION
ShopKo purchases merchandise from more than 2,400 vendors with its ten
largest vendors accounting for approximately 28% of ShopKo's purchases during
the first half of fiscal 1997. ShopKo believes that most merchandise, other
than branded goods, is available from a variety of sources. ShopKo is working
with its entire supply chain to link its vendors into ShopKo's general
merchandise business planning process to reduce costs and make the
replenishment function more efficient. Approximately 800 vendors were linked
to ShopKo's EDI purchase order systems as of September 30, 1996. Vendors are
now electronically receiving point-of-sale information, allowing them to
respond to changing inventory levels in the stores. ShopKo has also
implemented the use of electronic purchase order acknowledgments issued by
vendors based on the sales information they have received. In addition,
approximately 170 vendors are now electronically transmitting invoices
directly into ShopKo's automated invoice matching system.
ShopKo continues to upgrade its merchandise planning, allocation and control
systems. In addition, SKU level physical inventories continue to significantly
improve perpetual inventory accuracy. ShopKo's management believes these
upgrades and improvements in the physical inventory process will allow ShopKo
to more effectively manage in-stock positions and better manage merchandise
assortment.
Direct imports accounted for approximately 6% of ShopKo's purchases during
the first half of fiscal 1997. ShopKo buys its imported goods, principally in
the Far East, and ships the goods to its distribution centers for distribution
to the stores.
Recent expansions of ShopKo's three distribution centers have enabled ShopKo
to increase the proportion of its merchandise purchased directly from
manufacturers (thus reducing its cost of goods), to reduce direct vendor-to-
store deliveries (thus reducing freight charges and cost of goods through
consolidated volume purchasing) and to increase the pick and pull capabilities
allowing ShopKo to enhance the effectiveness and efficiency of its store
replenishment process. ShopKo anticipates that these cost reductions will help
it remain price competitive. During the first half of fiscal 1997,
approximately 86% of the merchandise sold by ShopKo (excluding optical and
pharmaceutical products) flowed through its distribution centers.
ShopKo's shoe department (other than athletic shoes) is in every store and
is the principal department operated by a third party under license. ShopKo
retains a percentage of the gross proceeds collected as rent.
MANAGEMENT INFORMATION SYSTEMS
ShopKo uses information technology to improve customer service, reduce
operating costs and provide information for management decision support.
ShopKo utilizes modern point-of-sale terminal systems for electronic price
lookup and tracking sales information at store and SKU level. Integrated earth
satellite communications systems are used to provide on-line credit card and
check authorization. Portable radio-frequency terminals are used extensively
in the stores for merchandise receiving, stocking, replenishment, pricing and
label printing. ShopKo also makes extensive use of automated labor scheduling
systems within the stores.
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ShopKo's new pharmacy and optical systems have enhanced business and record
keeping efficiencies and improved ShopKo's ability to pursue third party
contracts. ShopKo's prescription benefit management division operates an
electronic network tying in approximately 40,000 retail pharmacies to process
third-party claims.
ShopKo's warehouse management and financial systems are state-of-the-art
software packages. The warehouse management systems operate in a distributed
processing environment, providing complete warehouse functionality such as
conveyor control and direction of picking and put away processes via portable
radio-frequency terminals. The warehouse management systems communicate back
to the central computers over the earth satellite network to update perpetual
inventory records and accounting systems. The financial systems provide
complete retail general ledger, accounts payable, asset management and payroll
functions.
ShopKo is aggressively moving from a purely mainframe environment to a
networked client/server architecture throughout the corporation. All stores,
distribution centers and corporate offices are now electronically connected
for transaction processing, electronic mail and multi-media training.
ShopKo is in the process of replacing its merchandising applications with
new, open architecture client/server applications running on a massively
parallel processor. Utilizing world-class technology, these new applications
are the result of a large scale retail systems integration strategy. Several
of these new applications were completed within the last year, with the
remainder to be completed during fiscal 1998.
Many of ShopKo's merchandising and health service applications are highly
data intensive. ShopKo has implemented advanced data warehousing and decision
support applications running on the massively parallel computer to provide
timely and actionable information to decision makers within ShopKo, and to our
health services clients over the Internet.
EXPANSION
ShopKo opened five new stores in fiscal 1996, and two new stores in fiscal
1997, one of which was a relocation. ShopKo also opened two Vision Advantage
free-standing optical centers as part of a new retail format. With respect to
expansion plans after fiscal 1997, ShopKo is de-emphasizing the construction
of traditional new stores, and is reviewing alternative store growth options.
With respect to store remodels, ShopKo completed 13 remodels under the VISION
2000 format during fiscal 1996. The rate of remodeling activity in fiscal 1996
was substantially reduced compared to fiscal 1995 and is expected to
approximate the future annual level of major remodels based on a seven to ten
year cycle. Six of the seven store remodel projects planned by ShopKo for
fiscal 1997 have been completed. The seventh remodel will be completed during
the third quarter of fiscal 1997. Store expansion and remodeling plans are
subject to change and normal delays.
ProVantage is intensifying its marketing efforts and anticipates continued
growth in the number of plan participants during fiscal 1997. As of August 1,
1996, ProVantage has over 4 million plan participants under management,
including 1.2 million plan participants from the recent acquisition of
CareStream Scrip Card. This is compared to the 1.6 million plan participants
under management at the end of fiscal 1996 and 0.6 million plan participants
under management at the end of fiscal 1995. Plan participants are persons who
are enrolled in or are entitled to company managed prescription benefits under
a health plan.
Another recently launched initiative is ProVantage Vision Benefit Management
Service ("VBM"). In August, 1996, ProVantage completed the acquisition of
United Wisconsin Insurance Company's vision benefit management business. This
acquisition gave ProVantage's VBM an immediate market presence in the vision
benefit management industry. The acquired business provides vision benefit
management services to over 100,000 plan participants, and operates through a
provider network of over 900 ophthalmologists and optometrists in 20 states.
This network will eventually be folded into the national vision benefit
network of retail chains and private opthamologists and optometrists that
ProVantage's VBM is in the process of developing. Through this network, VBM
offers a variety of flexible products including prepaid vision plans, primary
eye care, integrated medical surgical plans, and discount plans. ProVantage's
VBM will also offer to private label its
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national network to network participants looking to offer vision benefit
management services to their local-based clients. ProVantage's VBM offers
insured as well as uninsured products, direct services to insurance companies
and turnkey operations for managed care organizations.
ShopKo opened two new free-standing optical centers, Vision Advantage,
during the third quarter of fiscal 1997. Two additional Vision Advantage
stores will be opened during the first quarter of fiscal 1998. This format
will focus on providing value-priced, high quality eyewear that can be
manufactured in about an hour. Convenience to the customer, price and quality
will be the primary driving points of this business, which will leverage
heavily off of ShopKo's 18 years of retail optical experience.
Finally, ProVantage has installed DSS, a technology-driven process that
provides actionable information to decision makers within the health care
industry. DSS takes large amounts of enterprise-wide data, cleans the data to
remove errors and idiosyncracies, and stores the data in a warehouse. From
this warehouse, health services executives and line managers can query the
data for actionable information that arrives quickly, without the need for
interaction with the client company's information services department. This
information is used for a variety of purposes, including the identification of
physicians and other health care providers performing outside the norm, or
patients that are candidates for case management. This process will leverage
off of ShopKo's significant technological investment in massively parallel
processing and data base management for its retail business. ProVantage's DSS
initiative will have two focal points. The first will be a product enhancement
for utilization by ProVantage's PBM which will facilitate the PBM's roll out
of clinical programs to its clients to lower their overall cost of health
care. This product will work heavily with the prescription data of
ProVantage's customers. The second DSS focal point will be through a stand-
alone company called ProVMed, which will take these same principles and apply
them to enterprise-wide sets of data, including medical data. These
applications will be marketed to and utilized by a variety of health care plan
sponsors, primarily mid-sized insurance companies and managed care
organizations.
COMPETITION
The discount general merchandise business is very competitive. ShopKo
competes in most of its markets with a variety of national, regional and local
discount stores. In addition, department stores compete in some branded
merchandise lines, discount specialty retail chains compete in some
merchandise lines such as electronics and toys, and drug and optical
operations compete with some of ShopKo's pharmacy and optical centers. ShopKo
believes that the principal competitive factors in its markets include store
location; pricing; breadth and quality of product selection; attractiveness
and cleanliness; responsiveness to changing customer tastes and regional and
local trends; customer service; in-stock availability of merchandise; and
advertising.
ShopKo's principal national general merchandise discount chain competitors
are Wal-Mart, Kmart and Target, each of which is substantially larger than,
and has greater resources than, ShopKo. Kmart stores directly compete with
approximately 92% of ShopKo's stores and Target stores directly compete with
approximately 52% of its stores. In addition, ShopKo estimates that at the end
of fiscal 1996, approximately 80% of its stores were either in direct
competition with or indirectly impacted by the presence of a Wal-Mart store.
ShopKo also competes with regional chains in some markets in the Midwest and
the Pacific Northwest. It appears Wal-Mart intrusions have slowed as the
number of openings in fiscal 1997 will be less than fiscal 1996. However,
ShopKo will experience an increase in Target intrusion as Target has opened
five new units and will open one more unit in ShopKo markets in fiscal 1997,
including three in the Salt Lake City market. Some of the Wal-Marts and
Targets that will be opening in fiscal 1997 in ShopKo's markets will be super
centers, stores containing a wider selection of general merchandise and
grocery items.
Historically, the entry of one of these chains into an area served by one of
ShopKo's stores generally has had an adverse effect on the affected ShopKo
store's sales growth for approximately 12 months. After the 12 month time
period, the ShopKo store generally has resumed a positive growth trend. Such
entry often has resulted in permanently intensified price competition.
ShopKo's efficiency measures and distribution center
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expenditures are important aspects of its efforts to maintain or improve
operating margins and market share in these markets.
The prescription benefit management industry is a dynamic growing
marketplace and very competitive. ShopKo believes that ProVantage's primary
competitive advantages are advanced technologies which allow it to be a low
cost operator able to offer flexibility in plan design and its high quality of
service. ProVantage competes for health care clients with a number of
prescription benefit management companies including PCS Health Systems, Inc.
(a subsidiary of Eli Lilly and Co.), Merck-Medco Managed Care, Inc. (a
subsidiary of Merck & Co., Inc.), Express Scripts, Inc., Caremark
International, Inc., (a subsidiary of MedPartners, Inc.), TDI, Inc. (a
subsidiary of Thrift Drug Company, Inc.), Value Rx (a subsidiary of Value
Health, Inc.) and Diversified Pharmaceutical Services, Inc. (a subsidiary of
SmithKline Beecham), many of which are substantially larger than ProVantage
and each of which has considerable resources.
SEASONALITY
The general merchandise operations of ShopKo are highly seasonal, with the
third and fourth fiscal quarters contributing a significant part of ShopKo's
earnings due to the Christmas selling season. Because ShopKo's fiscal year
ends on the last Saturday in February, the Christmas selling season impacts
both the third and fourth fiscal quarters.
EMPLOYEES
As of September 18, 1996, ShopKo employed approximately 18,650 persons, of
whom approximately 9,150 were full-time employees and 9,500 were part-time
employees. During the Christmas shopping season, ShopKo typically employs
approximately 2,000 additional persons on a temporary basis. None of ShopKo's
employees are covered by collective bargaining agreements.
GOVERNMENT REGULATION
ShopKo's health services business is subject to extensive federal and state
laws and regulations governing, among other things:
Licensure and Regulation of Retail Pharmacies and Optical Centers. There are
extensive federal and state regulations applicable to the practice of pharmacy
and optometry at the retail level. Most states have laws and regulations
governing the operation and licensing of pharmacies and optical centers, and
regulate standards of professional practice by pharmacy and optical service
providers. These regulations are issued by an administrative body in each
state (typically, a pharmacy board or board of optometry), which is empowered
to impose sanctions for non-compliance.
Licensure and Regulation of Mail Service Pharmacy. ShopKo's mail service
pharmacy is duly licensed and in good standing, in accordance with the laws
and regulations of the State of Wisconsin. Additionally, many of the states
into which ShopKo delivers pharmaceuticals have laws and regulations that
require out-of-state mail service pharmacies to register with the board of
pharmacy or similar regulatory body in the state. These states generally
permit the mail service pharmacy to follow the laws of the state within which
the mail service pharmacy is located. ShopKo has registered in every state in
which, to ShopKo's knowledge, such registration is required. In addition,
various pharmacy associations and boards of pharmacy have promoted enactment
of laws and regulations directed at restricting or prohibiting the operation
of out-of-state mail service pharmacies by, among other things, requiring
compliance with all laws of certain states into which the mail service
pharmacy dispenses medications whether or not those laws conflict with the
laws of the state in which the pharmacy is located. To the extent such laws or
regulations are found to be applicable to ShopKo, ShopKo would be required to
comply with them. Other statutes and regulations impact ShopKo's mail service
operations. Federal statutes and regulations govern the labeling, packaging,
advertising and adulteration of prescription drugs and the dispensing of
controlled substances. The Federal Trade Commission requires mail order
sellers of goods
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generally to engage in truthful advertising, to stock a reasonable supply of
the product to be sold, to fill mail orders within thirty days, and to provide
customers with refunds when appropriate. The United States Postal Service has
statutory authority to restrict the transmission of drugs and medicines
through the mail to a degree that could have an adverse effect on ShopKo's
mail service operations. The United States Postal Service has exercised such
statutory authority only with respect to controlled substances. Alternative
means of delivery are available to ShopKo.
Regulation of Prescription Benefit Management Services. Various forms of
government regulation affect or could affect providers of prescription benefit
management services. Among the most prominent forms of such regulation are the
following:
Many states have licensure or registration laws governing certain types
of ancillary health care organizations, including Preferred Provider
Organizations, Third Party Administrators and Utilization Review
Organizations. These laws differ significantly from state to state, and the
application of such laws to the activities of pharmacy benefit managers is
often unclear. ShopKo has registered under such laws in those states in
which ShopKo has concluded such registration is required.
Numerous states have also adopted "any willing provider" legislation,
which requires pharmacy network sponsors to admit for network participation
any retail pharmacy willing to meet a health care plan's price and other
terms. ShopKo has not been materially affected by these statutes because it
administers a network of over 40,000 retail pharmacies and will admit any
qualified, licensed pharmacy that agrees to comply with the terms of its
plans.
"Anti-kickback" statutes at the federal and state level prohibit an
entity from paying or receiving any remuneration to induce the referral of
health care plan beneficiaries or the purchase of items or services for
which payment may be made under such health care plans. Additionally, most
states have consumer protection laws that have been the basis for
investigations and multi-state settlements relating to financial incentives
provided by drug manufacturers to retail pharmacies in connection with drug
switching programs. At the federal level, such regulations pertain to
beneficiaries of Medicare, Medicaid or other federally-funded health care
programs. State regulations typically pertain to beneficiaries of any
health care plan. Under the federal regulations, safe harbors exist for
certain properly reported discounts received from vendors, certain
investment interests, and certain properly disclosed payments made by
vendors to group purchasing organizations. To ShopKo's knowledge, these
anti-kickback laws have not been applied to prohibit PBMs from receiving
amounts from drug manufacturers in connection with drug purchasing and
formulary management programs, to therapeutic substitution programs
conducted by independent PBMs, or to the contractual relationships such as
those ShopKo has with certain of its customers.
Regulation of Vision Benefit Management Services. ShopKo's vision benefit
management services are subject to the same or similar state and federal
regulation as the prescription benefit management services described above.
Applicability of Insurance Laws. ShopKo's prescription drug plans currently
offered or administered by ShopKo are on a fee-for-service basis, and are
therefore not generally subject to state insurance laws. The insured vision
benefit plans administered by ShopKo are written by an unaffiliated licensed
insurer, and ShopKo believes it is in material compliance with all applicable
insurance laws.
Legislative and regulatory initiatives pertaining to such health care
related issues as reimbursement policies, payment practices, therapeutic
substitution programs, and other health care cost containment issues are
frequently introduced at both the state and federal level. ShopKo is unable to
predict accurately whether or when legislation may be enacted or regulations
may be adopted relating to ShopKo's health services operations or what the
effect of such legislation or regulations may be.
ShopKo's management believes ShopKo is in substantial compliance with, or is
in the process of complying with, all existing statutes and regulations
material to the operation of ShopKo's health services business and, to
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date, no state or federal agency has taken enforcement action against ShopKo
for any material non-compliance, and to ShopKo's knowledge, no such
enforcement against ShopKo is presently contemplated.
PROPERTIES
As of September 30, 1996, ShopKo operated 130 retail stores located in 15
Upper Midwest, Western Mountain and Pacific Northwest states. The following
table sets forth the geographic distribution of ShopKo's present stores:
<TABLE>
<CAPTION>
STATE # OF STORES
----- -----------
<S> <C>
California.............. 1
Colorado................ 3
Idaho................... 8
Illinois................ 3
Iowa.................... 3
Michigan................ 4
Minnesota............... 13
Montana................. 5
Nebraska................ 11
</TABLE>
<TABLE>
<CAPTION>
STATE # OF STORES
----- -----------
<S> <C>
Nevada................... 3
Oregon................... 4
South Dakota............. 6
Utah..................... 15
Washington............... 10
Wisconsin................ 41
---
TOTAL................... 130
</TABLE>
Of ShopKo's 130 stores, ShopKo Stores, Inc. owns the land and building
outright with respect to 84 stores, owns the building subject to a ground
lease with respect to four stores and leases the land and building with
respect to 10 stores. ShopKo's wholly owned subsidiary, ShopKo Properties,
Inc., owns the land and building outright with respect to 27 stores, owns the
building subject to a ground lease with respect to three stores, and leases
the land and building with respect to one store. The ground leases expire at
various dates ranging from 2012 through 2038 and the other leases expire at
various dates ranging from 1997 through 2020.
ShopKo's other principal properties are as follows:
<TABLE>
<CAPTION>
SQ. FT OF
LOCATION USE BUILDING SPACE TITLE
-------- --- -------------- ------
<S> <C> <C> <C>
Green Bay, WI........... Corporate Headquarters 228,000 Owned
Wisconsin Rapids, WI.... Information Services Dept. 1,300 Leased
Satellite Office
De Pere, WI............. Distribution Center 265,000 Owned
Boise, ID............... Distribution Center 210,000 Owned
Omaha, NE............... Distribution Center 50,000 Owned
Green Bay, WI........... ProVantage Mail Service 10,000 Leased
Brookfield, WI.......... ProVantage Claims Processing /Admin. 6,900 Leased
Office Facility
Lawrence, WI............ Corporate Headquarters--South 114,300 Owned
Annex
Elm Grove, WI........... ProVantage Claims Processing/ 5,300 Leased
Administrative Office Annex
</TABLE>
LEGAL PROCEEDINGS
ShopKo is involved in various litigation matters arising in the ordinary
course of its business. ShopKo's management believes that none of this
litigation will have a material adverse effect on ShopKo's financial condition
or results of operations.
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EXECUTIVE OFFICERS OF SHOPKO
<TABLE>
<CAPTION>
SERVED IN
CURRENT EMPLOYED
POSITION BY SHOPKO
NAME AGE* POSITION SINCE SINCE
---- ---- -------- --------- ---------
<S> <C> <C> <C> <C>
Dale P. Kramer.......... 57 President, Chief Executive Officer & Director 1991 1971
William J. Podany....... 50 Executive Vice President, Chief Operating 1996 1994
Officer
Michael J. Bettiga...... 42 Senior Vice President, Health Services 1995 1977
Roger J. Chustz......... 46 Senior Vice President, General Merchandise 1993 1993
Manager, Apparel
Gary B. Hammond......... 48 Senior Vice President, Stores 1995 1970
Steven T. Harig......... 42 Senior Vice President, Planning, Replenishment 1993 1989
and Analysis, Distribution
Thomas D. Hendra........ 50 Senior Vice President, General Merchandise 1991 1970
Manager, Hardlines
Michael J. Hopkins...... 46 Senior Vice President, General Merchandise 1995 1995
Manager, Home
Jeffrey A. Jones........ 49 Senior Vice President, Chief Financial Officer 1993 1993
Rodney D. Lawrence...... 39 Senior Vice President, Store Marketing, Store 1996 1996
Planning
David A. Liebergen...... 50 Senior Vice President, Human Resources 1993 1973
L. Terry McDonald....... 53 Senior Vice President, Marketing 1994 1994
James F. Tucker......... 52 Senior Vice President, Chief Information Officer 1995 1994
</TABLE>
- --------
* As of September 30, 1996
There are no family relationships between or among any of the executive
officers of ShopKo.
The term of office of each executive officer is from one annual meeting of
the directors until the next annual meeting of directors or until a successor
for each is selected.
There are no arrangements or understandings between any of the executive
officers of ShopKo and any other person (not an officer or director of ShopKo
acting as such) pursuant to which any of the executive officers were selected
as an officer of ShopKo.
Each of the executive officers of ShopKo has been in the employ of ShopKo
for more than five years, except for William J. Podany, Jeffrey A. Jones,
Roger J. Chustz, Rodney D. Lawrence, Terry McDonald, James F. Tucker and
Michael J. Hopkins.
Mr. Kramer has been a director of ShopKo since August 1991 and President and
Chief Executive Officer of ShopKo since February 1991. Prior thereto, he
served as ShopKo's Executive Vice President from April, 1983 to February 1986
and its Executive Vice President and Chief Operating Officer from February
1986 to February 1991. Mr. Kramer has been employed by ShopKo in various
positions since 1971.
Mr. Podany has been Chief Operating Officer of ShopKo since May 1996 and
Executive Vice President since November, 1994. His areas of responsibility
include merchandising, marketing, logistics and store operations. He has held
senior merchandising executive officer positions with Allied Stores, May
Department Stores and Carter Hawley Hale (renamed Broadway Stores, Inc.) since
1978. From 1992 to 1994, Mr. Podany was Executive Vice President-Merchandising
of Carter Hawley Hale, a federation of four department store chains. From 1987
to 1992, he was Senior Vice President and General Merchandise Manager of
Thalheimer's and Sibley's, both divisions of May Department Stores. Mr. Podany
has held a broad range of other retail merchandising positions since beginning
his career in 1969.
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Mr. Bettiga has been Senior Vice President-Health Services since February
1995. Prior to this promotion, he was Vice President-Health Services, a
position he held since October, 1993. Mr. Bettiga is responsible for all of
ShopKo's pharmacy and optical operations with ShopKo. He also oversees all
Managed Care business and is actively involved in merchandising
responsibilities. Prior to that, he has held the position of Vice President of
Pharmacy as well as various other positions since 1977.
Mr. Chustz has been Senior Vice President, General Merchandise Manager,
Apparel of ShopKo since October 1993. Mr. Chustz also served as Vice
President, General Merchandise Manager, Apparel from March 1993 to October
1993. Mr. Chustz was employed by Maison Blanche in various positions from 1975
through 1992, most recently as Senior Vice President, General Merchandising
Manager. Mr. Chustz also served as President of Brocato immediately prior to
joining ShopKo.
Mr. Hammond currently holds the position of Senior Vice President of Stores.
Prior to this promotion in 1993, Mr. Hammond held the positions of Regional
Vice President, Regional Manager, District Manager and Store Manager. Mr.
Hammond's career began with ShopKo in 1970 in Marquette, Michigan.
Mr. Harig has been Senior Vice President Planning, Replenishment and
Analysis, Distribution & Transportation since October 1993. Prior thereto, he
was Vice President-Inventory, Merchandise Forecasts, Replenishment and EDI of
ShopKo since February 1990 and served as its Vice President-Special Projects
from May 1989 to February 1990. Mr. Harig was employed by Wal-Mart Stores,
Inc. in various positions from 1978 to May 1989, most recently as Vice
President, International Merchandising.
Mr. Hendra has been Senior Vice President, General Merchandise Manager-
Hardlines since March 1991, and served as its Vice President-Hardlines
Merchandising from January 1986 to March 1991. Mr. Hendra has been employed by
ShopKo in various other positions since 1970.
Mr. Hopkins has been Senior Vice President, General Merchandise Manager-Home
since November 1995. From 1992 to 1995, Mr. Hopkins was Senior Vice President
Merchandise Planning and Distribution at Broadway Stores, Inc. (renamed Carter
Hawley Hale). Prior thereto, Mr. Hopkins served as Senior Vice President and
General Merchandise Manager of Home with Broadway Southwest division of Carter
Hawley Hale from 1985 to 1992.
Mr. Jones has been Senior Vice President and Chief Financial Officer of
ShopKo since November 1993. Mr. Jones was Senior Vice President and Chief
Financial Officer for Trans World Music Corporation from 1990 through 1993.
Mr. Jones also held various executive positions at Household Merchandising,
Inc. and Lane Bryant, Inc., a subsidiary of The Limited, Inc.
Mr. Lawrence has been Senior Vice President, Store Marketing and Store
Planning since May 20, 1996. Prior thereto, he was Vice President Store
Planning with Broadway Stores, Inc. from 1994 to 1996. Mr. Lawrence was
Director of Store Planning with Carter Hawley Hale Stores, Inc. in Los Angeles
in 1992 to 1994 and Vice President Visual Merchandising with Broadway
Southwest, Mesa, Arizona in 1989 to 1992.
Mr. Liebergen has been Senior Vice President-Human Resources since October,
1993. Mr. Liebergen served as Secretary of ShopKo from August, 1991 to
October, 1995. Prior to that time, he was Vice President-Human Resources,
Government Affairs, Loss Prevention of ShopKo since 1986 and has been employed
by ShopKo in various other positions since 1973.
Mr. McDonald has been Senior Vice President, Marketing of ShopKo since July
1994. Mr. McDonald was Senior Vice President, Marketing with Payless Shoe
Source from 1988 to 1994 and Senior Vice President Advertising & Sales
Promotion with M. O'Neil Co., from 1986 to 1988. Payless Shoe Source and M.
O'Neil Co. are both divisions of May Department Stores. Mr. McDonald also held
various merchandising and marketing positions with Cain-Sloan Co., an Allied
Stores Division, including Vice President, General Merchandise Manager, Home
and Vice President Advertising and Sales Promotion.
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<PAGE>
Mr. Tucker has been Senior Vice President/Chief Information Officer of
ShopKo since February 1995 and served as Vice President, Management
Information Services from January 1994 to February 1995. Mr. Tucker was Vice
President of Management Information Services with Trans World Music
Corporation from 1991 through 1993. Mr. Tucker was also Vice President of
Management Information Services with Chess King, Division of Melville
Corporation, from 1984 until 1991.
EMPLOYMENT AGREEMENTS--EXECUTIVE OFFICERS
On the Effective Date, ShopKo will enter into employment agreements with
Dale Kramer, William Podany and Jeffrey Jones pursuant to which Mr. Kramer
will serve as President and Chief Executive Officer of ShopKo, Mr. Podany will
serve as Executive Vice President and Chief Operating Officer of ShopKo and
Mr. Jones will serve as Senior Vice President and Chief Financial Officer of
ShopKo. Each of Messrs. Kramer, Podany and Jones (collectively, the "ShopKo
Executives") also will serve as members of the Chairman's Council of Cabot
Noble. The agreement with Mr. Kramer will terminate one day before the third
anniversary of the Effective Date and the agreements with Messrs. Podany and
Jones will terminate one day before the second anniversary of the Effective
Date (respectively, the "Stated Term"), in each case unless earlier terminated
in accordance with the terms of the respective agreements. See "Certain
Transactions--Employment Agreements--Executive Officers."
INDEMNIFICATION OF OFFICERS AND DIRECTORS
ShopKo's Articles provide for the indemnification of directors and officers
of ShopKo to the full extent permitted by the Minnesota Law. ShopKo has
entered into agreements to indemnify its directors, and may enter into
agreements to indemnify certain officers, in addition to the indemnification
provided for in the Bylaws. These agreements will, among other things,
indemnify ShopKo's directors and certain of its officers to the full extent
permitted by the Minnesota Law for any claims, liabilities, damages,
judgments, penalties, fines, settlements, disbursements or expenses (including
attorneys' fees) incurred by such person in any action or proceeding,
including any action by or in the right of ShopKo, on account of services as a
director or officer of ShopKo. ShopKo believes that these provisions and
agreements are necessary to attract and retain qualified persons as directors
and officers.
SEVERANCE AGREEMENTS
ShopKo has entered into change of control severance agreements (the
"Severance Agreements") with certain officers of ShopKo, including those
officers identified in the "Executive Officers of ShopKo" table above. The
Severance Agreements provide that, if, within two years after a "Change of
Control" (as defined below), ShopKo terminates the individual's employment
other than for cause (as defined in the Severance Agreements) or disability,
or the individual terminates the individual's employment for "Good Reason" (as
defined in the Severance Agreements), then the individual will be entitled to
a lump-sum cash payment equal to (1) a multiple of one, two or three times the
individual's annual base salary, plus (2) a multiple of one, two or three
times the individual's average annual bonus for the three fiscal years
immediately preceding the date of termination. The multiple referred to in
this paragraph is three for Mr. Kramer and two for each of the other executive
officers of ShopKo, including Messrs. Podany and Jones. Each individual would
also receive his salary through the date of termination and all other amounts
owed to the individual at the date of termination under ShopKo's benefit
plans. In addition, under such circumstances, the individual will be entitled
to continued health and dental coverage for the individual and the
individual's family for a one, two or three year period after the date of
termination. The Severance Agreements provide that if certain amounts to be
paid thereunder constitute "parachute payments," as defined in Section 280G of
the Code, the severance benefits owed to the individual may be decreased, but
only if the result is to give the individual a larger after-tax benefit than
if the payments are not reduced. The individual is permitted to elect the
payments to be reduced.
A "Change of Control" is defined as occurring if (1) any person or group
acquires 20% or more of ShopKo's outstanding common stock or voting
securities, (2) the incumbent directors cease to constitute at least
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a majority of the ShopKo Board, (3) the shareholders approve a merger,
consolidation, reorganization or sale or other disposition of all or
substantially all of the assets of ShopKo, or (4) the shareholders approve a
complete liquidation or dissolution of ShopKo. The Transaction will constitute
a Change of Control under the Severance Agreements.
Once the employment agreements for Messrs. Kramer, Podany and Jones,
described above at "--Employment Agreements--Executive Officers," are
executed, the severance agreements for these three individuals will be
superseded and of no further effect.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Set forth in the table below is information regarding the beneficial
ownership of ShopKo Shares by (i) each person or entity known by ShopKo to
beneficially own 5% or more of the total number of outstanding ShopKo Shares,
(ii) each director of ShopKo, (iii) ShopKo's Chief Executive Officer and four
most highly compensated executive officers other than the Chief Executive
Officer, and (iv) the directors and executive officers of ShopKo as a group
(18 persons). Except as otherwise noted, information with respect to directors
and executive officers is as of December 31, 1996.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME OF OF BENEFICIAL
BENEFICIAL OWNER OWNERSHIP(1)(2) PERCENT
---------------- ----------------- -------
<S> <C> <C>
SUPERVALU INC.(3)(4)................................................ 14,731,667 45.8%
11840 Valley View Road
Eden Prairie, Minnesota 55244
Jack W. Eugster..................................................... 16,000 *
Jeffrey C. Girard(4)................................................ 1,000 *
Dale P. Kramer(6)................................................... 198,000 *
William J. Tyrrell.................................................. 15,000 *
Michael W. Wright(4)................................................ -- *
William J. Podany(6)................................................ 30,000 *
Roger J. Chustz(6).................................................. 27,000 *
Thomas D. Hendra(6)................................................. 69,060 *
Jeffrey A. Jones(6)................................................. 21,000 *
All directors and executive officers as a group (18 persons)........ 521,240 1.6%
</TABLE>
- --------
*Less than 1%.
(1) Except as otherwise noted, the persons named in the above table have sole
voting and investment power with respect to all shares shown as
beneficially owned by them.
(2) Includes shares which may be acquired within 60 days pursuant to stock
options as follows: Mr. Kramer 168,000 shares, Mr. Hendra 69,000 shares,
Mr. Chustz 27,000 shares, Mr. Eugster 15,000 shares, Mr. Tyrrell 15,000
shares, Mr. Jones 21,000 shares and all directors and executive officers
as a group, 485,280 shares.
(3) These shares are held by a wholly-owned subsidiary of supervalu,
Supermarket Operators of America, Inc.
(4) Messrs. Wright and Girard are executive officers of supervalu and Mr.
Wright is also a director of supervalu.
(5) The number of shares shown with respect to the Company's executive
officers does not reflect funds from their respective Profit Sharing and
401(k) Plans invested in Common Stock through the ShopKo Stock Fund. As of
November 30, 1996, such executive officers' approximate ShopKo Stock Fund
account balances were as follows: Mr. Kramer $259,091, Mr. Podany $10,075,
Mr. Hendra $86,652, Mr. Chustz $24,662 and Mr. Jones $39,649.
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DESCRIPTION OF PHAR-MOR
GENERAL
Phar-Mor operates a chain of discount retail drugstores devoted to the sale
of prescription and over-the-counter drugs, health and beauty care products,
baby products, pet supplies, cosmetics, greeting cards, groceries, beer, wine,
tobacco, soft drinks, video rental and seasonal and other general merchandise.
As of December 31, 1996, Phar-Mor operated 103 stores in 22 metropolitan
markets in 18 states under the name of Phar-Mor(R). Approximately 51% of Phar-
Mor's stores are located in Pennsylvania, Ohio and West Virginia, and
approximately 24% are located in Virginia, North Carolina and South Carolina.
Phar-Mor's principal executive offices are located at 20 Federal Plaza West,
Youngstown, Ohio 44501-0400. Unless otherwise stated, all statistics in
"Description of Phar-Mor" were compiled as of June 29, 1996.
TOTAL CHAIN SALES BY PRODUCT TYPE
(for the 52-week period ended June 29, 1996)
<TABLE>
<S> <C>
DRUGSTORE: 45%
Includes health & beauty care products,
cosmetics, greeting cards, seasonal goods
and other general merchandise
CONSUMABLES: 28%
Includes grocery, snacks, beer, wine,
tobacco and soft drinks
PHARMACY: 24%
Includes prescriptions
VIDEO, MUSIC AND VIDEO RENTALS: 3%
</TABLE>
On September 11, 1995 Phar-Mor became a publicly traded, $1 billion
drugstore chain with 102 individually profitable stores. Phar-Mor's new senior
management team implemented a series of fundamental changes designed to
achieve operating profitability. Phar-Mor:
. Implemented an enhanced advertising and marketing program that included
reducing prices on over 3,000 high volume items in every product
category;
. Increased advertising expenditures and frequency, highlighted by 8 to 24-
page weekly inserts;
. Introduced a program that guaranteed the "lowest prescription price or
it's free;"
. Enhanced the store within a store concept by improving its drugstore and
food store operations, and adding new features such as the "discount book
store", "$0.39 card store", "Pet Place", "Kodak film kiosk", and club-
store "two-ton items";
. Reduced the number of stores and focused on a core group of high volume,
profitable stores with over 60% of stores concentrated in Pennsylvania,
Ohio, Virginia and West Virginia;
. Reduced the number of warehouses and increased out-sourcing of product
distribution;
. Introduced point of sale (POS) scanning in all stores;
. Installed a new pharmacy software system;
. Installed a new warehouse logistics system;
. Reduced the number of corporate personnel by 75%; and
. Reduced the number of stock keeping units (SKUs) by 25,000.
Except for historical information contained herein, the matters concerning
Phar-Mor discussed in this Joint Proxy Statement/Prospectus are forward-
looking statements which involve risks and uncertainties including, but
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<PAGE>
not limited to, economic, competitive, governmental and technological factors
affecting Phar-Mor's operations, markets, products, services and prices and
other factors discussed herein.
OPERATIONS
Typically, Phar-Mor stores are open 95 hours per week; pharmacies are
typically open 77 hours per week. The average store has approximately 50
employees, including a store manager, co-manager, assistant manager and
department managers, pharmacy manager and pharmacists, and office and cashier
supervision. Overall, Phar-Mor had 5,389 employees at June 29, 1996.
Approximately 208 warehouse and distribution center employees in Youngstown
are members of the Teamsters Union under contract which expires March 1, 1998.
Sixty-three employees at Phar-Mor's Niles, Ohio store are members of the
United Food and Commercial Workers Union under contract which expires October
12, 1997.
Phar-Mor is committed to customer service and encourages employees to be
responsive to customer needs and concerns. The remerchandising and remodeling
of stores (discussed below) is designed to further ease and make the
customer's shopping experience pleasurable. The number of open checkout lanes
is closely monitored to facilitate the efficient and comfortable checkout of
customers. These philosophies are regularly communicated and reinforced by
Phar-Mor to its employees.
Thorough education and training in store operations is provided at every
level. Computer-based training, on and off-site training, video training, and
teleconferences are a few of the training methods used. Phar-Mor believes that
such training enables efficiency and understanding within store operations.
The typical trade area for a Phar-Mor store includes approximately 105,000
people in 41,000 households within an area of between five and seven miles. On
average during fiscal 1996, each store served approximately 12,500 customers
per week. Phar-Mor's customers are approximately 52% female, with a median age
of 35.5 years, and a median household income of approximately $33,000.
Approximately 24% of customer households have children 17 years old and under.
Phar-Mor stores accept payment in cash, check, credit cards and payment from
third party providers of prescription services.
Phar-Mor's purchasing, pricing, advertising, merchandising, accounting and
supervisory activities are centrally directed from Phar-Mor's corporate
headquarters. Phar-Mor purchases substantially all of its merchandise either
directly from manufacturers or from wholesalers under various types of
purchase arrangements. FoxMeyer Drug Company, a pharmaceutical distributor and
an affiliate of Phar-Mor, accounted for approximately 24% of Phar-Mor's
purchases and Riser Foods, Inc., a grocery wholesaler, accounted for
approximately 5.4% of Phar-Mor's purchases during fiscal 1996. The purchase of
pharmaceutical products by Phar-Mor from FoxMeyer Drug Company is governed by
a Supply Agreement dated as of August 17, 1992 which expires the later of
August 17, 1996 or once a minimum volume of purchases has been made (the
"FoxMeyer Supply Agreement"). Phar-Mor estimates that it will reach that
purchase volume before August 1997. During fiscal 1996, no other single vendor
accounted for more than 5% of Phar-Mor's purchases. Substantially all of the
products Phar-Mor sells are purchased from approximately 1,200 outside
vendors. Alternative sources of supply are generally available for all
products sold by Phar-Mor.
On August 27, 1996, FoxMeyer Drug Company filed a petition for protection
under Chapter 11 of the United States Bankruptcy Code. On August 29, 1996,
Phar-Mor notified FoxMeyer Drug Company that the supply of products to Phar-
Mor under the FoxMeyer Supply Agreement was insufficient and that,
consequently, FoxMeyer Drug Company had committed a material breach
thereunder. On September 27, 1996, Phar-Mor received a response from FoxMeyer
Drug Company disputing Phar-Mor's notification. Phar-Mor believes that it has,
at this time, overcome all related business interruptions because there are
adequate alternative sources of supply, subject to pricing, readily available
to Phar-Mor. Phar-Mor has not experienced any material disruption to its
business or supply of pharmaceutical products because adequate alternative
sources of supply are readily
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<PAGE>
available to Phar-Mor in anticipation of a potential disruption. See "--
Certain Relationships and Related Transactions."
On October 4, 1996, McKesson Corp. ("McKesson") a supplier of
pharmaceuticals and health care products, announced that it had agreed to
acquire substantially all of the assets of FoxMeyer Drug Company for
approximately $80 million in cash, subject to adjustment. McKesson would also
provide FoxMeyer Drug Company with $30 million in new financing and would
assume FoxMeyer Drug Company's secured debts, resulting in an additional
investment of about $290 million, bringing McKesson's total investment to
approximately $400 million. The acquisition is subject to a number of
conditions, including the approval of the bankruptcy court presiding over the
FoxMeyer Drug Company bankruptcy case.
MARKETING AND MERCHANDISING
Phar-Mor's overall merchandising strategy is to offer (a) value to consumers
by pricing its products below the prices charged by conventional drugstores
and supermarkets and (b) a broader array of products in each of its major
product categories than is offered by mass merchant discounters. Phar-Mor's
product strategy is focused on the traditional drugstore lines of prescription
and over-the-counter drugs, health and beauty care products and cosmetics.
Phar-Mor stores also typically feature other product categories, including
grocery, snacks and beverages, pet food and supplies, beer, wine and liquor
(where permitted by law), tobacco, baby products, general merchandise, video
and music sales and video rentals.
Ninety-five percent of Phar-Mor's advertising is print advertising, through
circulars, newspapers, and point of sale materials. Newspaper advertisements
and circulars appear in major newspapers in each market area. Phar-Mor
presently advertises through 75 newspapers and mailers.
In January 1996, Phar-Mor introduced a new marketing approach that improved
sales during the last two quarters of fiscal 1996 (see table below). This
program included price reductions on over 3,000 items and the consequent
reduction of gross profit margins, and was implemented in order to generate
increased sales volume. Phar-Mor believes that this reduction in gross profit
margins has stabilized and does not represent a continuing material trend. At
the same time, Phar-Mor adopted an "everyday low price" strategy on
substantially all products and increased advertising by expanding the size of
its circulars. Phar-Mor continues to review its prices relative to its
competitors.
Simultaneously, Phar-Mor also introduced a program guaranteeing the "lowest
prescription price or it's free." At the inception of the program in January
1996, same store pharmacy sales for the month of January 1996 were 7% lower
than for the month of January 1995. Same store pharmacy sales improved in the
month of June 1996 versus June 1995 by 4.2%. Overall pharmacy gross margins
decreased approximately 1% in fiscal 1996 versus fiscal 1995, of which
reduction approximately one half resulted from the increase in third party
prescription business.
PHAR-MOR, INC. COMPARABLE SALES (102 STORES)
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------
1996 1995 % VARIANCE
------------ ------------ ----------
<S> <C> <C> <C>
January............................... $ 91,249,149 $ 97,949,728 -6.84%
February.............................. 80,456,860 84,467,595 -4.75%
March................................. 80,584,706 78,488,924 2.67%
April................................. 100,983,873 104,492,861 -3.36%
May................................... 80,432,036 79,205,254 1.55%
June.................................. 83,382,186 80,981,428 2.96%
July.................................. 101,807,749 99,723,677 2.09%
August................................ 84,158,377 82,245,660 2.33%
September............................. 78,586,659 72,876,785 7.83%
October............................... 102,045,049 97,881,478 4.25%
November.............................. 84,559,012 84,167,370 0.47%
December.............................. 103,301,092 102,269,679 1.01%
</TABLE>
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<PAGE>
In January 1996, Phar-Mor retained a national design firm to assist in the
redesign and creation of a new prototypical store. The new prototype
repositioned signature departments to provide the customer an easy-to-navigate
shopping format further enhanced by custom signage.
Phar-Mor has completed remodeling twelve stores. Each store has shown
increased sales and gross profit versus fiscal 1995 since the stores were
remodeled and redesigned. In conjunction with its remodeling and redesigning
of the Boardman, St. Clairsville and Mansfield, Ohio stores and the Anderson,
Indiana store, Phar-Mor has also introduced the "club store" concept as a test
for other locations. In an approximate 10,000 to 15,000 square foot excess
area, each "club store" offers a varied selection of grocery items, including
fresh, frozen, and refrigerated foods. At this time, it is too early to
determine whether or not the success of these programs will result in the
introduction of additional "club stores", but the concept is being well
received by customers and has improved sales in each store. Phar-Mor is
reviewing plans to remodel approximately 12 additional stores in calendar
1997.
SALES
The retail sale of traditional drugstore lines is a highly fragmented
business, consisting of thousands of chain drugstores and independent drug
stores that sell such products, as well as mass merchandisers who sell such
products as part of their overall product lines. In fiscal 1996, revenues from
sales of Phar-Mor's traditional drugstore products (i.e., prescription drugs,
greeting cards, over-the-counter drugs, health and beauty care products and
cosmetics) averaged approximately $5.8 million dollars per store in its 102
stores. In addition to the approximately $591.4 million in traditional
drugstore products revenues in fiscal 1996, Phar-Mor generated approximately
$464.9 million in sales in the last fiscal year from the sale of groceries and
general merchandise.
Set forth below is the percentage of sales by principal category of products
for the 102 continuing stores for the last three fiscal years:
<TABLE>
<CAPTION>
PERIOD ENDED
---------------------------------------
JUNE 29, 1996 JULY 1, 1995 JULY 2, 1994
CATEGORY (52 WEEKS) (52 WEEKS) (53 WEEKS)
-------- ------------- ------------ ------------
<S> <C> <C> <C>
Prescription, Health and Beauty
Care Products, Cosmetics and
Greeting Cards................. 56.0% 55.7% 54.9%
All Other Merchandise........... 44.0% 44.3% 45.1%
</TABLE>
Phar-Mor's business is seasonal to a certain extent. The highest volume of
sales and net income usually occurs in the second fiscal quarter (generally
October, November and December) and the lowest volume occurs during the third
fiscal quarter (generally January, February and March). The following table
summarizes Phar-Mor's sales by quarter during fiscal 1996.
SALES BY QUARTER DURING FISCAL 1996*
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL SALES
-------------
<S> <C>
First Quarter.............................................. 24.1%
Second Quarter............................................. 26.9
Third Quarter.............................................. 23.9
Fourth Quarter............................................. 25.1
-----
100.0%
</TABLE>
--------
* For the 102 stores operating as of June 29, 1996
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<PAGE>
COMPETITION
Phar-Mor's stores compete primarily with conventional drugstores,
supermarkets and mass merchant discounters. Among these competitors, many have
greater financial resources than Phar-Mor. Phar-Mor's strategy for competing
with conventional drugstores is through its broader product selection and
generally lower prices than traditional drugstore lines. Phar-Mor believes it
has these same competitive advantages against most supermarkets for non-
grocery items. Phar-Mor's strategy for competing with supermarkets in grocery
product lines, where Phar-Mor does not have a broader selection, is to carry
an often changing mix of items priced lower than most supermarkets.
Phar-Mor does not attempt to compete against mass merchant discounters
solely on the basis of price. In traditional drugstore lines, particularly
health and beauty care products and greeting cards, Phar-Mor offers broader
product selection than mass merchant discounters. Mass merchant discounters
generally are unwilling to allocate as much display space as Phar-Mor devotes
to these categories. The merchandising changes Phar-Mor has implemented,
including the creation of "signature" departments in dedicated aisle space
with distinguishing signage, such as health and beauty care products,
cosmetics, video rentals and "The Card Shop," "Pet Place," "One Stop Baby
Shop," and "Vitamin Shoppe," are designed in part to distinguish Phar-Mor from
mass merchant discounters and to increase its strength in areas in which, in
Phar-Mor's opinion, such merchants do not excel.
CAPITAL EXPENDITURES
Phar-Mor's most significant capital needs are for seasonal buildup of
inventories, technology improvements and remerchandising and remodeling of
existing stores.
Phar-Mor's capital expenditures totaled $7.0 million in fiscal 1996,
including expenditures totaling $2.4 million for rightsizing and remodeling of
existing stores. Prior to the Transaction, Phar-Mor anticipated spending
approximately $30.1 million for capital expenditures in fiscal 1997. In light
of the Transaction, the amount of capital expenditures for fiscal 1997 is
being reviewed and will likely change; however, Phar-Mor is reviewing plans to
remodel at least 12 additional stores in calendar 1997 in addition to the
approximately two additional stores Phar-Mor plans to open in calendar 1997.
The estimated capital required to remodel these 12 stores is approximately $8
million, and the estimated capital for each new store is typically $750,000,
exclusive of inventory costs of $1.3 million per store.
GROWTH
Phar-Mor opened no new stores in fiscal 1996 and opened one new store on
December 1, 1996. Phar-Mor plans to open approximately two additional new
stores in calendar 1997. Expansion in the near future is expected to be
minimal and in existing or contiguous markets in its core market states of
Pennsylvania and Ohio. A lease for one additional new store in the
Philadelphia market has been executed. Expansion in existing markets improves
Phar-Mor's operating margins by decreasing advertising costs on a per store
basis, permitting more efficient distribution of products to stores and
increasing utilization of existing supervisory and managerial staff.
The aggregate cost of any future expansion is dependent upon the method of
financing new stores. Build to suit (i.e., landlord constructed) leases cost
approximately $750,000 per store for furniture, fixtures, and equipment and
each new store requires approximately $1.3 million in inventory. Company-
funded conversion of existing buildings is another possible method of future
expansion; however the cost of such expansion per store varies significantly
depending upon the age, condition and configuration of such buildings.
Phar-Mor has reduced store occupancy costs through negotiated rent
concessions and store rightsizings. As of June 29, 1996, Phar-Mor's stores
ranged in size from approximately 30,000 to 70,000 square feet, with an
average store size of approximately 51,000 square feet. Since June 1993, Phar-
Mor has rightsized 14 stores, reducing the average size of such stores by
approximately 19,000 square feet and the average annual occupancy costs of
such stores by over $152,000 per store. Phar-Mor believes that approximately
45 additional stores are
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<PAGE>
larger than warranted and have floor plan configurations that make rightsizing
feasible in the future. Phar-Mor plans to reduce the size of such stores to
approximately 40,000 square feet. Phar-Mor also currently intends to remodel
certain rightsized and other stores. As of December 31, 1996, Phar-Mor has
completed remodeling 12 stores, including the "club stores." While the average
cost of remodeling each store was approximately $650,000, Phar-Mor believes
that the cost of remodeling additional stores can be reduced depending upon
size, configuration and geographic location of a store.
In anticipation of the Transaction, Phar-Mor has suspended its rightsizing
program. However, two locations are being remodeled (New Philadelphia, Ohio
and West Palm Beach, Florida) as a result of consummated rightsizing
transactions. Phar-Mor estimates that approximately 45 stores previously
identified as potential downsizing candidates may be remerchandised to include
certain additional complementary merchandise typically sold in ShopKo stores.
Also, a limited number of the stores may accommodate the "club store" concept.
If implemented, these changes in space utilization strategy would allow Phar-
Mor to draw on merchandising expertise from ShopKo, create buying efficiencies
not previously available to Phar-Mor, and offer the opportunity to consolidate
certain related functions.
TRADEMARKS AND SERVICE MARKS
Phar-Mor believes that its registered "Phar-Mor" and "Power Buying"
trademarks are well recognized by its customer base and the public at large in
the markets where such trademarks have been advertised. Phar-Mor believes that
the existing customer and public recognition of its trademarks and related
operational philosophy will be beneficial to its strategic plans to expand
merchandise categories and add new stores. Phar-Mor has also introduced a
number of private label brands of products under various registered trademarks
and trademarks pending registration.
Phar-Mor has also applied for several other trademarks and service marks
which management believes may develop independent recognition and association
with Phar-Mor. Included among these is the service mark "Don't Pay Drugstore
Prices" which has been developed and implemented as part of Phar-Mor's new
merchandising and marketing strategies. However, there can be no assurance
that Phar-Mor will receive a federal registration for such trademarks and
service marks.
HISTORY
Phar-Mor was founded in 1982 as a division of a subsidiary of the Giant
Eagle, Inc. supermarket chain. The initial Phar-Mor concept was built on the
premise that a drugstore offering additional, and at times unexpected,
categories of merchandise could attract customers by featuring low prices made
possible by acquiring inventory at relatively low cost through deal purchases
of overstock, odd lot, discontinued, large unit size or slow-moving
merchandise from manufacturers and distributors. Phar-Mor grew, rapidly
expanding from 12 stores in August 1985 to 311 stores in August of 1992. Store
size also grew dramatically, increasing from an average of approximately
31,000 square feet in fiscal 1986 to approximately 58,500 square feet in 1992.
Phar-Mor's rapid growth was mirrored by apparent extraordinary financial
success.
However, in early August 1992, Phar-Mor publicly disclosed that it had
discovered a scheme by certain senior executives to falsify certain financial
results and divert funds to unrelated enterprises and for personal expenses.
The officers involved, including Phar-Mor's former President and Chief
Operating Officer, former Chief Financial Officer, former Vice President of
Finance and former Controller were promptly dismissed. In an effort to restore
support from its vendors and lenders and to implement a business turnaround
plan, Phar-Mor and its fifteen wholly owned subsidiaries filed petitions for
protection under Chapter 11 of the United States Bankruptcy Code on August 17,
1992 (the "Petition Date"). A new management team, hired by the Phar-Mor
Board, assumed day-to-day management of Phar-Mor.
Upon discovery of the fraud, it became apparent that Phar-Mor's explosive
growth during the preceding several years had been fueled in part by a
systematic scheme to falsify Phar-Mor's financial results and to conceal
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Phar-Mor's true financial condition. The fraud which was perpetrated by the
manipulation of information and override of the system of internal controls by
certain of its senior executives, as well as a lack of systems and surrounding
controls, masked very substantial losses, created in part by low margins, slow
moving merchandise categories, high rentals for the newer and larger stores
and operational inefficiencies. By the time Phar-Mor concluded its
investigation into the size of the fraud, it determined that cumulative
earnings had been overstated by approximately $500 million. Additional charges
to cumulative earnings of approximately $500 million resulted from changes in
accounting policies and restructuring costs which were recorded as of
September 26, 1992. See "Notes to Consolidated Financial Statements."
The new management of Phar-Mor faced the task of reconstructing its
accounting records and strengthening the control systems. New management
developed and implemented a strict internal control regimen, buttressed by
frequent and widely distributed internal management reports, designed
specifically to avoid a situation in which a member of management could
override controls and avoid detection.
In particular, management (i) implemented three major information system
improvements, each of which supports the accurate reporting of inventory and
facilitates stricter accounting controls: point-of-sale ("POS") scanning
equipment, a pharmacy software system and a Distribution Control System
("DCS") warehousing system (these systems provide greater merchandising data,
facilitate pharmacy processing and track and coordinate inventory purchasing
and warehouse volume), (ii) undertook a full review of various existing
systems which included an operations and control enhancement project on the
accounts payable system and a vendor correspondence and relations review and
(iii) enhanced an internal audit department that assembled extensive protocols
to follow in conducting audits of internal controls.
In order to further enhance the control process, new management regularly
generates numerous internal reports which are distributed to a wide variety of
senior, middle and lower level management on a daily, weekly and monthly
basis. In addition, operational and financial planning meetings are now
attended by members of all levels of management.
Phar-Mor emerged from bankruptcy on September 11, 1995 (the "Restructuring
Date") with a new President and Chief Operating Officer, Chief Financial
Officer and Corporate Controller hired after the Petition Date to replace
those responsible for the fraud. Additional new senior managers were hired
subsequent to the Petition Date.
During the pendency of the bankruptcy cases of pre-reorganized Phar-Mor and
its subsidiaries, new management analyzed the performance and prospects of
each store to identify a core group of high volume, profitable and
geographically concentrated stores that would serve as the basis of
reorganized Phar-Mor. Based on this analysis, Phar-Mor closed 209 stores (not
including separate liquor stores which were closed at various times) in five
stages: 54 stores between October 1992 and December 1992, 34 stores between
March 1993 and June 1993, 55 stores in July 1993, 25 stores in October 1994
and 41 stores in July 1995, thereby reducing the number of stores from 311 in
September 1992 to 102 stores as of the Restructuring Date of Phar-Mor's
bankruptcy plan of reorganization (the "Phar-Mor Restructuring").
Phar-Mor also implemented a series of fundamental changes designed to
achieve operating profitability and to position Phar-Mor for future growth.
Following the Petition Date, Phar-Mor reduced the number of warehouses and
increased outsourcing of product distribution; reduced the average size of
several stores by approximately 19,000 square feet; introduced POS scanning in
all stores; installed a new pharmacy software system; installed the DCS
warehouse logistics system; and reduced the number of corporate personnel by
75%.
In connection with the Phar-Mor Restructuring and its emergence from
bankruptcy (as discussed below), Phar-Mor restructured its debt obligations
and converted approximately $855 million of debt into equity. Phar-Mor also
entered into the Phar-Mor Revolving Credit Facility, a three-year, $100
million revolving credit facility. As of June 29, 1996, no borrowings were
outstanding under the Phar-Mor Revolving Credit Facility, other than standby
letters of credit totaling approximately $5.4 million.
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REGULATION
Phar-Mor is subject to the Fair Labor Standards Act, which governs such
matters as minimum wages, overtime, and other working conditions. To the
extent that pay scales for a portion of Phar-Mor's personnel relate to the
federal minimum wage, the scheduled increase in the minimum wage will increase
Phar-Mor's labor costs.
The prescription drug business is subject to the federal Food, Drug and
Cosmetic Act, Drug Abuse Prevention and Control Act and Fair Packaging and
Labeling Act relating to the content and labeling of drug products, comparable
state statutes and state regulation regarding record keeping and licensing
matters with civil and criminal penalties for violations.
PROPERTIES
Phar-Mor operates 103 stores in 18 states. Approximately 51% of Phar-Mor's
stores are located in Pennsylvania, Ohio and West Virginia, and approximately
24% are located in Virginia, North Carolina and South Carolina. The following
is a breakdown by state of the locations of Phar-Mor's stores.
<TABLE>
<S> <C>
Alabama................ 1
Colorado............... 2
Florida................ 5
Georgia................ 3
Illinois............... 4
Indiana................ 3
Iowa................... 2
Kansas................. 2
Kentucky............... 1
</TABLE>
<TABLE>
<S> <C>
Missouri............... 1
North Carolina......... 9
Ohio................... 15
Oklahoma............... 1
Pennsylvania........... 34
South Carolina......... 4
Virginia............... 11
West Virginia.......... 4
Wisconsin.............. 1
</TABLE>
As of December 31, 1996, all of Phar-Mor stores were leased. All store
leases are long term; the original terms of 76 leases and the original terms
with options of four leases expire on or before December 31, 2006. Most stores
are located adjacent to or near shopping centers or are part of strip centers.
The remaining stores are free-standing. Depending on the location of a store,
the sites may vary, with averages by type of location as follows: free-
standing stores are located on sites averaging 2.84 acres; stores located in
strip centers are found on sites averaging 23.7 acres; and stores in malls are
on sites averaging 46.8 acres. A proto-typical store includes 32,000 square
feet of sales space and 8,000 square feet of storage area and ample off-street
parking. The stores are designed in a "supermarket" format familiar to
customers and shopping is done with carts in wide aisles with attractive
displays. Traffic design is intended to enhance the opportunity for impulse
purchases.
Phar-Mor operates a distribution center near Youngstown, Ohio comprised of
two adjoining leased warehouse facilities. Phar-Mor also leases most of the
equipment used in the warehouse facilities. This distribution center delivered
approximately 35% of all merchandise to the stores in fiscal 1996, primarily
using contract carriers. The balance of the products were delivered directly
to the stores by vendors. Phar-Mor has the option to terminate one or more of
these warehouse and/or equipment leases on December 31, 2000 upon payment of
an early termination fee. If all these leases were terminated on that date,
the aggregate early termination fee would be $1.8 million. In addition, Phar-
Mor has a separate option to terminate all of the warehouse leases at any time
after July 1, 1996 for payment of approximately $5.2 million.
Phar-Mor and a wholly owned subsidiary of Phar-Mor are partners in an Ohio
limited partnership, which owns the office building where Phar-Mor occupies
approximately 141,000 square feet of space for its corporate offices in
Youngstown, Ohio. Phar-Mor leases offices comprising approximately 80,000
square feet for its headquarters in such building from such partnership. The
headquarters lease has a five-year term and allows Phar-Mor to renew the lease
for two additional five year terms. Phar-Mor has the right to terminate the
headquarters lease beginning March 1, 1997 and ending March 1, 1998. In
connection with the Transaction and the planned consolidation of Cabot Noble's
corporate headquarters, Phar-Mor intends to exercise this option and
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terminate the lease following the Effective Date. Upon termination, Phar-Mor
will not be liable with respect to any loans secured by the headquarters
property. However, a termination fee of up to $1 million must be paid by Phar-
Mor.
LEGAL PROCEEDINGS
In the normal course of business, Phar-Mor is subject to various claims. In
the opinion of management, any ultimate liability arising from or related to
these claims should not have a material adverse effect on future results of
operations, cash flows or the consolidated financial position of Phar-Mor.
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of Phar-Mor as of the date hereof are
listed below.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert M. Haft.......... 45 Chairman of the Board of Directors and Chief Executive Officer
M. David Schwartz....... 51 President and Chief Operating Officer
Daniel J. O'Leary....... 49 Senior Vice President and Chief Financial Officer
John R. Ficarro......... 44 Senior Vice President, General Counsel and Secretary
Warren E. Jeffery....... 47 Senior Vice President, Store and Pharmacy Operations
Michael K. Spear........ 51 Senior Vice President--Marketing and Merchandising
Abbey J. Butler......... 58 Director
Melvyn J. Estrin........ 52 Director
Linda Haft.............. 46 Director
Malcolm T. Hopkins...... 68 Director
Richard M. McCarthy..... 60 Director
</TABLE>
Each of the foregoing directors has served on the Phar-Mor Board since
September 11, 1995. Robert A. Peiser, formerly a director of Phar-Mor,
resigned from the Phar-Mor Board effective as of September 4, 1996 in
connection with his acceptance of a position with FoxMeyer Health, resulting
in a vacancy on the Phar-Mor Board. Mr. Peiser's resignation did not result
from any disagreement with Phar-Mor on any matter relating to Phar-Mor's
operations, policies or practices. Phar-Mor currently is seeking to fill this
vacancy. Pursuant to the Combination Agreement, any individual selected by the
Phar-Mor Board to fill any vacancy on the Phar-Mor Board shall be selected in
consultation with a nationally recognized executive search firm and shall be
subject to approval by the independent directors of ShopKo.
Robert M. Haft assumed the positions of Chairman and Chief Executive Officer
of Phar-Mor as of September 11, 1995, the effective date of Phar-Mor's
bankruptcy plan of reorganization. He served as President and Chief Executive
Officer at different times with Crown Books, a retail chain of bookstores,
from 1977 to 1993. He also served as President and Vice Chairman at different
times at Trak Auto, a retail auto parts chain, from 1979 to 1993. Mr. Haft
also served at various positions at different times with Dart Group, a
retailing, real estate and financial management company from 1975 to 1993,
including Director, President, and Chief Operations Officer. From 1993 to
1995, Mr. Haft was not employed. Mr. Haft currently serves on the Board of
Directors of the Second Cup, an international retail chain of coffee shops,
and the Advisory Board Companies, a company focused on health care and
financial institutions.
Mr. Haft and other members of the Haft family (including Mr. Haft's sister,
Linda Haft) are or have been involved in certain litigation involving or
related to the Dart Group and affiliated entities and affiliates of Combined
Properties, Inc. ("CPI"). This litigation relates to, among other things,
claims to compensation, options or payments from those entities, claims by
creditors of those entities on loan documents and guarantees, alleged related
party transactions, and the validity of releases executed by Dart Group and
CPI. CPI and certain related entities filed chapter 11 petitions in the United
States Bankruptcy Court for the District of Maryland on May 25, 1995. Until
July 1993, Mr. Haft served as a director (but not an executive officer) of CPI
and one of several general partners of certain of the related entities.
M. David Schwartz has served as President and Chief Operating Officer of
Phar-Mor since February 1993. From 1991 to 1993, he was a Director and the
President and Chief Executive Officer of Smitty's Super Valu,
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Inc., a regional food and general merchandising retailer, and between 1987 and
1991 Mr. Schwartz served as a Director and the President and Chief Operating
Officer of Perry Drug Stores Inc., a regional chain of 200 drug stores. Mr.
Schwartz was Vice President of Drug/General Manager for the Kroger Company
between 1985 and 1987 and, between 1971 and 1985, held positions with
Albertson's Inc. including Senior Vice President of Marketing, Senior Vice
President of Non-Foods Merchandising, Distribution and Procurement, Vice
President of Merchandising, and Non-Foods Merchandise Manager. Mr. Schwartz
attended Arizona State University.
Daniel J. O'Leary has served as Senior Vice President and Chief Financial
Officer of Phar-Mor since December 1992. Prior to that time, he served as a
Director and, at various times, President and Chief Operating Officer,
Executive Vice President, Vice President of Finance and Chief Financial
Officer at Fay's Inc., a multi-concept regional retailer with drug stores and
auto parts stores. From 1969 to 1987, Mr. O'Leary was a member of the
accounting firm of Touche, Ross & Co. (now known as Deloitte & Touche LLP),
holding, at various times, positions including an office Managing Partner,
Audit Partner and Director of Audit Operations. Mr. O'Leary graduated from
Siena College, Loudonville, New York with a B.B.A. in Accounting.
Warren E. Jeffery has served as Senior Vice President of Operations of Phar-
Mor since May 1996. Prior to that, Mr. Jeffery served as Vice President of
Operations, beginning February 1993. From 1992 to 1993, he served as Regional
Director-Store Operations for Revco D.S., Inc., operator of one of the
country's largest retail drug store chains. Mr. Jeffery was employed by Perry
Drug Stores from 1976 until 1992, holding various management positions,
including Vice President of Store Operations from 1988 to 1992. Mr. Jeffery
received a B.S. degree in pharmacy from Ferris State University.
John R. Ficarro has served as Senior Vice President, General Counsel and
Secretary of Phar-Mor since September 1996. Prior to that, Mr. Ficarro served
as Vice President, General Counsel and Secretary of Phar-Mor since February
1995. From 1981 to 1995, Mr. Ficarro was employed by General Host Corporation
where he served as Vice President, General Counsel and Secretary since 1989
and prior to that time served as Counsel to several of its retail businesses.
General Host Corporation currently operates a multi-regional lawn and garden
retail chain under the name Frank's Nursery and Crafts. Prior to 1981, Mr.
Ficarro was engaged in a private law practice in Florida. Mr. Ficarro received
a B.A. from Syracuse University and a J.D. from its College of Law.
Michael K. Spear has served as Senior Vice President of Marketing and
Merchandising of Phar-Mor since July 1996. From 1995 to 1996, Mr. Spear served
as Executive Vice President Merchandising, Marketing, Information Systems at
Fred's, Inc., a regional grocery retailer located in Memphis, Tennessee. Prior
to that, Mr. Spear served in a number of positions with Wal-Mart, the nation's
largest discount retail chain, from 1973 to 1995, beginning as store manager
until his most recent position as Vice President, Divisional Merchandise
Manager Hardlines at Wal-Mart's Sam's Club, a retail warehouse club operation.
Abbey J. Butler is co-Chief Executive Officer, co-Chairman of the Board, and
a major shareholder of FoxMeyer Health. He also served as co-Chairman of the
board of Ben Franklin Retail Stores, Inc., a retail craft company which is an
affiliate of FoxMeyer Health, and as managing partner of Centaur Partners,
L.P., an investment partnership. Mr. Butler has also been the President and
Director of C.B. Equities Corp., a private investment company, since 1982. Mr.
Butler currently serves as a Director and member of the Executive Committee of
FWB Bancorporation. He also serves as a Director of Urohealth Systems, Inc., a
developer, manufacturer and distributor of products for the health care market
and Carson Products, the leading manufacturer and marketer in the U.S. retail
ethnic hair care market. He is a trustee of the American University and a
Director of the Starlight Foundation. Mr. Butler was appointed by President
Bush to serve as a member of the Executive Committee of the National Committee
for the Performing Arts of the John F. Kennedy Center. See "--Certain
Relationships and Related Transactions."
Melvyn J. Estrin is co-Chief Executive Officer, co-Chairman of the Board,
and a major shareholder of FoxMeyer Health. He also serves as co-Chairman of
the Board of Ben Franklin Retail Stores, Inc., a retail craft company. From
1983 to the present, Mr. Estrin served as Chairman of the Board and Chief
Executive Officer of Human Service Group, Inc., a private management and
investment firm, and of University Research Corporation, a consulting firm. He
currently serves as a director of Washington Gas Light Company, and as a
trustee of the
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University of Pennsylvania. Mr. Estrin also serves as a Commissioner on the
President's National Capital Planning Commission. See "--Certain Relationships
and Related Transactions."
Linda Haft served as a Vice President of the Dart Group and Dart Drug Stores
and previously had responsibility for various buying functions, customer
relations, and internal affairs from 1974 to 1993. During 1994, she was
employed in a general administrative capacity by Temps & Company, a temporary
services company. Until 1993, she served as an Administrator of both Crown
Books and the Dart Group Foundation, and was Senior Vice President of Dart
Group Financial in 1993. Ms. Haft was not otherwise employed from 1993 to the
present. Ms. Haft is a trustee of the American University. She received a B.S.
degree from the School of Management from Syracuse University. Ms. Haft is
Robert Haft's sister. Ms. Haft is or has been involved in certain of the
litigation described above under Robert M. Haft's biography. Until July 1993,
Ms. Haft served as a general partner of certain entities affiliated with CPI.
Malcolm T. Hopkins, a private investor and consultant since 1984, was Vice
Chairman, Chief Financial Officer, a member of the Board of Directors, and a
member of the three-man Senior Operating committee of the St. Regis
Corporation until, in 1984, St. Regis was acquired by Champion International.
In addition to his corporate financial and administrative responsibilities at
St. Regis, Mr. Hopkins was the senior officer in charge of strategic planning,
international financial policy, and special government relations. He also had
senior operating responsibility for St. Regis' chemical and insurance
operations. Mr. Hopkins has served on the Board of Directors of the following
companies since the dates indicated: the Columbia Gas System, Inc. (1982),
MAPCO, Inc. (1986), the Metropolitan Series Funds (1985), State Street
Research Portfolios, Inc. (1985), KinderCare Learning Centers, Inc. (1990),
EMCOR Group, Inc. (1994), and U.S. Home Corporation (1993). He received an A.
B. degree from Union College and an L.L.B. degree from Albany Law School.
Richard M. McCarthy has over thirty-years experience in credit and risk
management. From 1962 until his retirement in 1994, Mr. McCarthy held various
credit related positions with Procter & Gamble Distributing Company, including
Manager of Systems Operations (1987), Manager of Credit and Accounts
Receivable (1989), and Manager of Credit and Risk Management (1991 to 1994).
In this last capacity, he was responsible for all of Procter & Gamble's
domestic accounts receivable. Mr. McCarthy was a member of the Board of
Directors of the National Association of Credit Management, the Cincinnati
Association of Credit Management, the National Health & Beauty Aids Credit
Association, and the National Food Manufacturers Credit Association. He holds
a B.S. from Cornell University and served as an officer in the United States
Marine Corps from 1958 to 1961.
The Phar-Mor Board met eight times in fiscal 1996.
On August 27, 1996, FoxMeyer Drug Company filed a petition for protection
under Chapter 11 of the United States Bankruptcy Code. See "--Operations." On
July 26, 1996, Ben Franklin Retail Stores, Inc. filed a petition for
protection under Chapter 11 of the United States Bankruptcy Code. Messrs.
Butler and Estrin are executive officers and directors of FoxMeyer Drug
Company and Ben Franklin Retail Stores, Inc.
Committees of the Phar-Mor Board. The Phar-Mor Board has a standing Audit
Committee and a standing Compensation Committee. The Audit Committee of the
Board provides the Board with an independent review of Phar-Mor's accounting
policies, the adequacy of financial controls and the reliability of financial
information reported to the public. The Audit Committee also conducts
examinations of the affairs of Phar-Mor as required by law or as directed by
the Board, supervises the activities of the internal auditor and reviews the
services provided by the independent auditors. The Audit Committee consists of
Mr. Hopkins (the Committee Chairman) and Mr. McCarthy and met four times in
fiscal 1996.
The Compensation Committee of the Board determines compensation and benefits
for officers, reviews salary and benefits changes for other senior officers,
administers the Phar-Mor, Inc. 1995 Stock Incentive Plan, the Phar-Mor, Inc.
1995 Director Stock Plan, the Phar-Mor, Inc. 1996 Director Phantom Stock Plan
and other employee benefits. The Compensation Committee, which will be
appointed annually, consists of Ms. Haft and Messrs. Butler (the Committee
Chairman), Estrin and Hopkins and met two times in fiscal 1996.
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EXECUTIVE COMPENSATION
Summary Compensation. The following table sets forth information concerning
the compensation of Phar-Mor's Chief Executive Officer, the other four most
highly compensated executive officers of Phar-Mor who served in those
capacities as of June 29, 1996 and two additional officers who would have been
among the four most highly compensated executive officers had they been
executive officers at fiscal year-end (the "Phar-Mor Named Officers").
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-----------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------ ----------- ----------
NAME AND FISCAL OTHER ANNUAL STOCK LTIP ALL OTHER
PRINCIPAL PERSON YEAR SALARY BONUS(1) COMPENSATION(2) OPTIONS (#) PAYOUTS($) COMPENSATION(4)
---------------- ------ -------- -------- --------------- ----------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Antonio C. Alvarez..... 1996 $178,562 $107,942 -- 416,667(3) -- $2,650,000(3)
Former CEO 1995 900,000 540,000 -- -- -- --
Robert M. Haft......... 1996 726,936(5) 270,000 -- 256,250 (8) 66,637
Chairman and CEO -- -- --
M. David Schwartz...... 1996 571,632 215,000 -- 175,000 -- 505,548
President and COO 1995 500,000 200,000 -- -- -- 2,602
Daniel J. O'Leary...... 1996 236,500 85,000 -- 87,500 -- 250,147
Senior Vice President 1995 236,500 106,250 -- -- --
and CFO
Warren E. Jeffery...... 1996 176,265 45,000 -- 50,000 -- 78,540
Senior Vice President, 1995 168,390 80,000 -- -- -- 875
Store and Pharmacy
Operations
John R. Ficarro........ 1996 155,016 50,000 -- 15,000 -- 34,013
Senior Vice 1995 59,622(7) 28,000 -- -- -- --
President(6),
Secretary and General
Counsel
Sankar Krishnan........ 1996 150,000 45,000 -- 25,000 -- 139,226
Vice President and
Controller 1995 150,000 70,000 -- -- -- --
</TABLE>
- --------
(1) Bonuses are shown for the fiscal year earned, but are paid in the
following fiscal year. Mr. Haft will not receive payment of his fiscal
1996 bonus until after January 1, 1997.
(2) No information is provided in the column labeled "Other Annual
Compensation" since the aggregate amount of perquisites and other personal
benefits for the periods indicated is less than the lesser of $50,000 or
10% of the total annual salary and bonus reported for each of the Phar-Mor
Named Officers.
(3) The 416,667 in stock options reported for Mr. Alvarez are not specifically
allocated to him, but rather were issued to Alvarez & Marsal, Inc. ("A&M")
pursuant to a management services agreement between Phar-Mor and A&M.
$2,500,000 of the $2,650,000 reported above in "All Other Compensation"
was a confirmation bonus which was not paid to him but rather was paid to
A&M pursuant to such management services agreement. See "--Certain
Relationships and Related Transactions--Transactions with Alvarez &
Marsal, Inc."
(4) Information provided in the column labeled "All Other Compensation" for
the 1996 Fiscal Year includes the following: (i) the value of insurance
premiums paid by Phar-Mor for the benefit of each of the Phar-Mor Named
Officers as follows: Mr. Haft, $66,637; Mr. Schwartz, $2,040; Mr. O'Leary,
$147; Mr. Jeffery, $2,234; Mr. Ficarro, $4,376; and Mr. Krishnan, $132;
(ii) matching contributions to Phar-Mor's Employee Savings and Retirement
Plan to certain of the Phar-Mor Named Officers as follows: Mr. Schwartz,
$3,508; Mr. Jeffery, $1,306; Mr. Ficarro, $653; and Mr. Krishnan, $1,760;
(iii) moving expenses paid by Phar-Mor for the benefit of certain of the
Phar-Mor Named Officers as follows: Mr. Ficarro, $28,984; and
Mr. Krishnan, $37,334; (iv) confirmation bonuses paid by Phar-Mor to
certain of the Phar-Mor Named Officers as follows: Mr. Schwartz, $500,000;
Mr. O'Leary, $250,000; Mr. Jeffery, $75,000; and Mr. Krishnan, $100,000;
and (v) consulting fees in the amount of $150,000 paid to Mr. Alvarez.
(5) This amount represents Mr. Haft's salary from the date of the commencement
of his employment with Phar-Mor, September 11, 1995 through the end of the
fiscal year.
(6) As of September 1996, Mr. Ficarro has held the position of Senior Vice
President.
(7) This amount represents Mr. Ficarro's salary from the date of the
commencement of his employment with Phar-Mor, February 13, 1995, through
the end of the fiscal year.
(8) Mr. Haft's employment agreement also provides for long-term performance
payouts to Mr. Haft, commencing with the fiscal year ending June 30, 1998,
and each third year thereafter during the term of his employment
agreement, in an amount (subject to the offset referred to in the last
sentence of this paragraph) equal to 3% of any excess of (i) the aggregate
market value of the publicly traded Phar-Mor Shares based on the average
closing price for the thirty (30)-day period ended on the last day of the
subject period (less the sum of (a) the proceeds from the exercise during
such period of any options or warrants plus (b) any cash or property
consideration actually received by Phar-Mor during such period from the
issuance of any shares of its common stock) over (ii) the aggregate market
value of the publicly-traded Phar-Mor Shares based on the average closing
price for the thirty (30)-day period ending on the last day of the
immediately prior subject period (provided that for the first day of the
period ending on June 30, 1998, such average closing price shall be deemed
to be $8.00 per share). One-half of the aggregate annual bonuses paid or
payable in respect of the applicable three-year period will be offset
against the long-term payout amount. No award has been made pursuant to
these long-term performance payout provisions.
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The Combination is not expected to materially impact the individual
compensation of any Phar-Mor Named Officers, except with respect to the
certain option grants and revisions to certain employment agreements and
arrangements. See "Certain Transactions--Phar-Mor Options Granted; Employment
Agreements--Executive Officers." Certain of the Phar-Mor Named Officers may be
compensated for certain reimbursable expenses associated with the proposed
relocation of Phar-Mor's corporate headquarters to Green Bay, Wisconsin.
Option Grants. The table below shows, for each of the Phar-Mor Named
Officers, the number ofPhar-Mor Shares subject to options as of June 29, 1996.
All of the options set forth below were issued under the Phar-Mor, Inc. 1995
Stock Incentive Plan, other than (i) options to purchase 10,000 shares granted
to Mr. Haft (and each of the other directors of Phar-Mor) under the Phar-Mor,
Inc. 1995 Director Stock Plan, and (ii) the options issued to Alvarez &
Marsal, Inc. and shown below as if issued to Mr. Alvarez (the "A&M Options").
See "--Certain Relationships and Related Transactions."
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES
PERCENT OF TOTAL OF STOCK
OPTIONS GRANTED PRICE APPRECIATION
NUMBER OF SECURITIES TO EMPLOYEES AS FOR OPTION TERM (5)
NAME AND UNDERLYING OPTIONS OF JUNE 29, 1996 EXERCISE EXPIRATION ---------------------
POSITION GRANTED (#) (%) (4) PRICE ($/SH) DATE 5% ($) 10% ($)
-------- -------------------- ---------------- ------------ ---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Robert Haft(1)................ 256,250 27.2% $8.00 9/11/2002 $ 835 $ 1,945
Chairman and Chief 10,000 0.5 7.06 10/3/2000 10 22
Executive Officer
Antonio C. Alvarez(1)...... 416,667(2)(3) -- 8.00 9/11/2002 1,357 3,162
Former Chief Executive
Officer
M. David Schwartz(1)....... 175,000 18.6 8.00 9/11/2002 570 1,328
President and Chief
Operating Officer
Daniel J. O'Leary(1)....... 87,500 9.3 8.00 9/11/2002 285 664
Senior Vice President and
Chief Financial Officer
Warren E. Jeffery.......... 45,000 4.8 8.00 9/11/2002 147 342
Senior Vice President, 5,000(6) 0.5 7.56 9/11/2002 15 36
Store and Pharmacy
Operations
John R. Ficarro............ 15,000 1.6 8.00 9/11/2002 49 114
Senior Vice President,
Secretary and General
Counsel
Sankar Krishnan............ 25,000 2.7 8.00 9/11/2002 82 190
Vice President and
Controller
</TABLE>
- --------
(1) The options issued to Mr. Haft (other than options to purchase 10,000
shares granted to Mr. Haft under the Phar-Mor, Inc. 1995 Director Stock
Plan), Schwartz and O'Leary are affected by certain provisions of their
employment agreements as described below. Mr. Haft's options provide for
extended post-termination exercise periods and accelerated vesting on
termination of employment other than for cause. A&M and Mr. Haft also
received certain registration rights in respect of shares issuable upon
exercise of their respective options.
(2) The 416,667 options reported for Mr. Alvarez are not specifically
allocated to him, but rather were issued to A&M pursuant to the Management
Services Agreement.
(3) The options granted to A&M for the services of Mr. Alvarez are on
substantially the same terms as options granted to Messrs. Haft, Schwartz,
O'Leary and Jeffery under the Phar-Mor, Inc. 1995 Stock Incentive Plan,
except that the options granted to A&M were fully vested on issuance, are
subject to fewer restrictions on transfer, provide for non-discretionary
anti-dilutive, reorganization and similar adjustments, and are not subject
to forfeiture or other limits on exercise, other than those imposed by
law.
(4) Based on a total of 941,950 options granted to employees of Phar-Mor,
which amount excludes the 416,667 options reported for Mr. Alvarez, which
options were not specifically allocated to him, but rather were issued to
A&M pursuant to the Management Services Agreement.
(5) Annual growth-rate assumptions are prescribed by the rules of the
Commission and do not reflect actual or projected price appreciation of
the underlying Phar-Mor Shares.
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<PAGE>
(6) Options to purchase 5,000 shares granted to Mr. Jeffery under the Phar-
Mor, Inc. 1995 Stock Incentive Plan vested with respect to 20% of the
underlying shares on each of the date of grant (May 14, 1996) and the
first anniversary of the Restructuring Date, and will vest in additional
increments of 20% of the underlying shares (subject to adjustment) on each
of the succeeding three anniversaries of the Restructuring Date.
Except as otherwise indicated in the foregoing table, the options granted
under the Phar-Mor, Inc. 1995 Stock Incentive Plan vested with respect to 20%
of the underlying shares on each of the Restructuring Date and the first
anniversary of such date, and will vest in additional increments of 20% of the
underlying shares (subject to adjustment) on each of the succeeding three
anniversaries of such date. All options under the Phar-Mor, Inc. 1995 Stock
Incentive Plan (except for those held by Mr. Haft) will be subject to early
termination within periods of up to one year (depending on the cause of a
termination of service) after the effective date of a termination of service
under the Phar-Mor, Inc. 1995 Stock Incentive Plan or (if applicable) the
expiration date under an applicable employment agreement. Except for Mr. Haft,
(i) to the extent then not vested, the options will terminate and (ii) to the
extent then vested, they may be exercised within one year following the death
or disability of the holder of the option, and within six months following any
other termination event, except where a termination by Phar-Mor is for cause,
in which case the options then will terminate. In addition to the options, the
Phar-Mor, Inc. 1995 Stock Incentive Plan authorizes the issuance of options to
purchase an additional 24,083 shares, plus any shares that become available on
the expiration, cancellation or early termination of the options.
The following table sets forth the number of securities underlying
unexercised options:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING
UNEXERCISED OPTIONS AT END OF
FISCAL YEAR 1996
----------------------------------
NAME EXERCISABLE UNEXERCISABLE
---- ------------- / ---------------
<S> <C> <C> <C>
Robert M. Haft............................ 112,500 / 143,750
Antonio C. Alvarez........................ 416,667 / 0
M. David Schwartz......................... 70,000 / 105,000
Daniel J. O'Leary......................... 35,000 / 52,500
Warren E. Jeffery......................... 20,000 / 25,000
John R. Ficarro........................... 6,000 / 9,000
Sankar Krishnan........................... 10,000 / 15,000
</TABLE>
Mr. Haft's employment and option agreements provide for acceleration of
vesting upon a termination by Phar-Mor (other than for cause) and for extended
post-termination exercise periods ranging from six to eighteen months (but in
certain events not less than 4 1/2 years after the Restructuring Date)
depending on the reason for termination.
In the case of the options granted to Mr. Haft, the terms and conditions
pertaining to the grant, exercise and ownership thereof will, in addition to
the terms and conditions of the Phar-Mor, Inc. 1995 Stock Incentive Plan, be
governed by the terms and conditions of his employment and option agreements,
and in the event of any conflict, inconsistency or ambiguity between, or
arising as the result of, the terms and conditions of the Phar-Mor, Inc. 1995
Stock Incentive Plan and such agreements, the terms most favorable to Mr. Haft
will control for all purposes and in all respects.
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<PAGE>
EXECUTIVE COMPENSATION PLANS
Phar-Mor, Inc. 1995 Stock Incentive Plan. The Phar-Mor, Inc. 1995 Stock
Incentive Plan was adopted in order to attract, reward and retain key
personnel (including officers, whether or not directors) of Phar-Mor and its
subsidiaries and certain other closely related eligible persons who provide
substantial services to such entities ("Phar-Mor Eligible Persons") and to
provide them with long-term incentives that are linked to Phar-Mor's stock
performance. Approximately 30 officers and approximately 575 other employees
of Phar-Mor and its subsidiaries are currently eligible to participate under
the Phar-Mor, Inc. 1995 Stock Incentive Plan.
The Phar-Mor, Inc. 1995 Stock Incentive Plan is administered by the
Compensation Committee of the Phar-Mor Board (the "Phar-Mor Administrator"). A
maximum of 913,333 Phar-Mor Shares (subject to adjustment) may be issued upon
the exercise of awards granted under the Phar-Mor, Inc. 1995 Stock Incentive
Plan. As of June 29, 1996, a total of 906,950 Phar-Mor Shares were subject to
options granted under such Plan.
The Phar-Mor, Inc. 1995 Stock Incentive Plan authorizes the issuance of
options and (subject to plan limitations) certain stock appreciation rights
("SARs"). As is customary in incentive plans of this nature, the number and
kind of shares available under the Phar-Mor, Inc. 1995 Stock Incentive Plan,
share limits, and shares subject to outstanding awards are subject to
adjustment in the event of certain reorganizations, recapitalizations, stock
splits, stock dividends, spin-offs, property distributions or other similar
extraordinary transactions or events in respect of Phar-Mor or the Phar-Mor
Shares. Shares relating to options or SARs that are not exercised or that
expire or are canceled will again become available for grant purposes under
the Phar-Mor, Inc. 1995 Stock Incentive Plan to the extent permitted by law
and the plan. Awards may be repriced or otherwise amended after grant,
provided that the amendment does not adversely affect the holder's rights
without his or her consent. A maximum of 277,778 Phar-Mor Shares may be
subject to options that during any twelve month period are granted to any
Phar-Mor Eligible Person under the Phar-Mor, Inc. 1995 Stock Incentive Plan.
The exercise price under the Phar-Mor, Inc. 1995 Stock Incentive Plan of the
options is $8.00 per share and thereafter generally may not be less than the
fair market value of one Phar-Mor Share on the date of grant or such greater
amount as may be determined by the Phar-Mor Administrator. An option may
either be an incentive stock option, as defined in the Internal Revenue Code,
or a non-qualified stock option. All options granted pursuant to the Phar-Mor,
Inc. 1995 Stock Incentive Plan were non-qualified stock options. The aggregate
fair market value of the Phar-Mor Shares (determined at the time the option is
granted) for which incentive stock options may be first exercisable by an
option holder during any calendar year under the Phar-Mor, Inc. 1995 Stock
Incentive Plan or any other plan of Phar-Mor or its subsidiaries may not
exceed $100,000. A non-qualified stock option is not subject to any of these
limitations.
Subject to early termination or acceleration provisions (which are
summarized below), an option generally will be exercisable, in whole or in
part, from the date specified in the related award agreement until the
expiration date, all as determined by the Phar-Mor Administrator. Earlier
expiration may occur following a termination of service. In no event, however,
is an option under the Phar-Mor, Inc. 1995 Stock Incentive Plan exercisable
more than seven years after its date of grant.
Upon the occurrence of either (A) a Change in Control Event (as defined in
the Phar-Mor, Inc. 1995 Stock Incentive Plan to include, but not be limited
to, (i) the approval by the shareholders of Phar-Mor of a dissolution or
liquidation, (ii) certain agreements of merger or consolidation resulting in
Phar-Mor's shareholders, or entities associated or affiliated with them,
holding less than 50% of the voting stock of the surviving entity, (iii) the
sale of substantially all the assets of Phar-Mor as an entirety to a person
that is not an affiliated person of Phar-Mor, (iv) a person or group (other
than Robert M. Haft, Hamilton Morgan or other 25% owners as of the Effective
Date and certain related entities) acquiring beneficial ownership of over 50%
of the voting power, or (v) certain changes in the composition of the Phar-Mor
Board), or (B) under other circumstances (such as a termination of service),
the Phar-Mor Administrator, in its discretion, may provide for acceleration or
extension of the exercisability of awards, or provide for certain other
limited benefits, which may include SARs, under some or all awards and may
determine the extent, duration and other conditions of such additional rights
by amendment
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<PAGE>
to outstanding awards or otherwise. The Phar-Mor Board may terminate or amend
the Phar-Mor, Inc. 1995 Stock Incentive Plan, subject to the rights of holders
of outstanding options. If an amendment would (i) materially increase the
benefits accruing to Phar-Mor Eligible Persons under the Phar-Mor, Inc. 1995
Stock Incentive Plan, (ii) materially increase the aggregate number of shares
that may be issued under the Phar-Mor, Inc. 1995 Stock Incentive Plan, or
(iii) materially modify the eligibility requirements for participation under
the Phar-Mor, Inc. 1995 Stock Incentive Plan, the amendment, to the extent
deemed necessary by the Phar-Mor Board or the Phar-Mor Administrator or then
required by applicable law, must be approved by the shareholders.
401(k) Employee Savings Plan. Employees of Phar-Mor are eligible to
participate in the 401(k) Employee Savings Plan (the "401(k) Plan"). The
401(k) Plan is a tax-qualified profit-sharing plan that provides for pre-tax
deferrals by employees and employer matching and profit-sharing contributions.
In addition, warehouse employees and drivers are eligible to participate in a
separate 401(k) savings plan.
Retirement Plan. Phar-Mor maintains a noncontributory retirement plan (the
"Retirement Plan") that provides benefits, following retirement at age 65 or
older with one or more years of credited service (or age 55 with five or more
years of credited service), to salaried, non-union employees, including
officers of Phar-Mor. The plan provides a monthly pension for life to
supplement personal savings and Social Security benefits. The following table
shows as of June 29, 1996 the estimated annual benefits payable upon
retirement at age 65 under the Retirement Plan by specified compensation and
years of service classifications applicable to officers:
<TABLE>
<CAPTION>
AVERAGE ANNUAL 15 YEARS 20 YEARS 25 YEARS 30 OR MORE
COMPENSATION SERVICE SERVICE SERVICE YEARS SERVICE
-------------- -------- -------- -------- -------------
<S> <C> <C> <C> <C>
$100,000.......................... $14,109 $18,182 $23,515 $28,218
$150,000 or more.................. $21,984 $29,312 $36,640 $43,968
</TABLE>
The amounts shown in the table are based on an assumed continued
applicability of the $150,000 compensation limit for qualified plans under the
Internal Revenue Code. Each year's accrued benefit under the Retirement Plan
is 0.6% of final average annual compensation not in excess of a rolling
average of the last 35-years annual social security wage base, plus 1.05% of
final average annual compensation in excess of such average wage base,
multiplied by years of credited service up to a maximum of 30 years. The
estimated annual retirement benefits, for the individuals named below, were
developed based on 1995 compensation, projected covered compensation, and the
respective dates of birth and projected credited service at normal retirement
age under the Retirement Plan. The credited years of service as of June 29,
1996 for individuals named in the Summary Compensation Table who are eligible
to participate in the Retirement Plan are as follows: Mr. Schwartz--4 years;
Mr. O'Leary--4 years; Mr. Jeffery--4 years; Mr. Ficarro--2 years; and Mr.
Krishnan--4 years. The plan was frozen as of July 1, 1996. Assuming these
individuals remain employed until the vesting period is reached, their
estimated annual retirement benefits under the plan will be: Mr. Schwartz--
$7,516; Mr. O'Leary--$6,965; Mr. Jeffery--$5,585; Mr. Ficarro--$2,934; and Mr.
Krishnan--$4,331.
To the extent permitted by law, the minimum eligibility and vesting
provisions under these and other retirement, health and welfare benefit plans
were waived for Mr. Haft under the terms of his employment agreement.
Other Pension Plans. In addition to the Retirement Plan discussed above,
Phar-Mor maintains two other pension plans for various groups of employees:
(i) the Phar-Mor, Inc. Retirement Plan for Hourly Employees at Niles, Ohio
Store and (ii) Tamco Distributors Company Warehouse and Drivers Pension Plan
(collectively, the "Pension Plans"). The Pension Plans are defined benefit
plans subject to the Employee Retirement Income Security Act of 1974 (as
amended, "ERISA"). For a more detailed discussion of the financial status of
the Pension Plans, see Note 15 to the Consolidated Financial Statements.
Phar-Mor, Inc. 1995 Director Stock Plan. The Phar-Mor Board believes that
the ownership of Phar-Mor Shares by directors supports the maximization of
long-term stockholder value by aligning the interests of directors with those
of stockholders. The Phar-Mor, Inc. 1995 Director Stock Plan (the "Phar-Mor
Director
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<PAGE>
Stock Plan") is designed to facilitate the ownership of Phar-Mor Shares by
directors. The purpose of the Phar-Mor Director Stock Plan is to promote the
long-term growth of Phar-Mor by enhancing its ability to attract and retain
highly qualified and capable directors with diverse backgrounds and experience
and by increasing the proprietary interest of directors in Phar-Mor.
Under the Phar-Mor Director Stock Plan, each director receives an annual
grant of an option to purchase 5,000 Phar-Mor Shares. In addition, each
director may elect to receive Phar-Mor Shares in lieu of all or a portion of
his or her annual retainer. The number of Phar-Mor Shares issuable in the
event of such election will be based upon the fair market value per Phar-Mor
Share (as defined in the Phar-Mor Director Stock Plan) on October 1st in the
year of such election, and will be determined by dividing such fair market
value into the amount of the annual retainer that the director elected to
receive in Phar-Mor Shares.
A maximum of 250,000 Phar-Mor Shares will be available for the award of
shares and the grant of options under the Phar-Mor Director Stock Plan,
subject to adjustment in the event of stock splits, stock dividends or changes
in corporate structure affecting Phar-Mor Shares. To the extent a stock option
granted under the Phar-Mor Director Stock Plan expires or terminates
unexercised, the Phar-Mor Shares allocable to the unexercised portion of such
option will be available for awards under the Phar-Mor Director Stock Plan. In
addition, to the extent that shares are delivered (actually or by attestation)
to pay all or a portion of an option exercise price, such shares will become
available for awards under the Phar-Mor Director Stock Plan. Each director was
granted an option to purchase 5,000 Phar-Mor Shares on October 3, 1995 at an
exercise price of $7.06 per share and will be granted an option to purchase
5,000 Phar-Mor Shares on each October 1st thereafter while the Phar-Mor
Director Stock Plan is in effect. If a director begins service on a date other
than the date of the annual meeting of Phar-Mor stockholders in any year, the
number of shares subject to the option shall be prorated.
The exercise price per share of all stock options granted under the Phar-Mor
Director Stock Plan will be 100% of the fair market value per Phar-Mor Share
(as defined by the Director Stock Plan) on the grant date. Options granted
under the Phar-Mor Director Stock Plan vest and are exercisable immediately,
and may be exercised until the fifth anniversary of the date of grant. Options
may be exercised either by the payment of cash in the amount of the aggregate
option price or by surrendering (or attesting to ownership of) Phar-Mor Shares
owned by the participant for at least six months prior to the date the option
is exercised, or a combination of both, having a combined value equal to the
aggregate option price of the shares subject to the option or portion of the
option being exercised. Any option or portion thereof that is not exercised on
or before the fifth anniversary of the date of grant shall expire.
The Phar-Mor Director Stock Plan is administered by the Compensation
Committee of the Phar-Mor Board. The Phar-Mor Board may amend or terminate the
Phar-Mor Director Stock Plan at any time, but the terms of any option granted
under the Phar-Mor Director Stock Plan may not be adversely modified without
the participant's consent.
Phar-Mor, Inc. 1996 Director Phantom Stock Plan. The Phar-Mor, Inc. 1996
Director Phantom Stock Plan (the "Phar-Mor Phantom Stock Plan") awards certain
deferred compensation to any director of Phar-Mor who is not an employee of
Phar-Mor or a subsidiary of Phar-Mor and who has served as a director for at
least three years (a Phar-Mor "Eligible Director"). Under the Phar-Mor Phantom
Stock Plan, Phar-Mor will establish a phantom stock account for each Phar-Mor
Eligible Director which is credited annually by that number of Phar-Mor Shares
whose aggregate fair market value on a date as specified under the Phar-Mor
Phantom Stock Plan equals the amount of the then current annual retainer
payable to such Phar-Mor Eligible Director, or such other amount as may be
determined by resolution of the Compensation Committee of the Phar-Mor Board.
The award is not in the form of actual Phar-Mor Shares, and no Phar-Mor Shares
will be set aside for the benefit of Phar-Mor Eligible Directors under the
Phar-Mor Phantom Stock Plan. The number of shares in each phantom stock
account is subject to adjustment for dilution and otherwise as set forth in
the Phar-Mor Phantom Stock Plan.
Awards made under the Phar-Mor Phantom Stock Plan are payable solely in cash
upon the effective date of the first to occur of: (1) the Phar-Mor Eligible
Director's resignation from the Phar-Mor Board; (2) the Phar-Mor Eligible
Director's failure to be elected or re-elected to the Phar-Mor Board; (3) the
retirement of the Phar-Mor
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<PAGE>
Eligible Director from the Phar-Mor Board; or (4) death or permanent
disability of the Phar-Mor Eligible Director. The amount of the payment will
be calculated based upon the fair market value of the shares of phantom stock
recorded in the Phar-Mor Eligible Director's Phantom Stock Account (including
all accrued cash dividends) as of the date of distribution.
COMPENSATION OF DIRECTORS
Each director of Phar-Mor (other than Mr. Haft, who has waived such fees for
as long as Mr. Haft is also an officer of Phar-Mor) receives an annual
retainer fee of $25,000 and an attendance fee of $1,000 ($2,000 in the case of
a committee chairman) for each meeting of the Phar-Mor Board, and of each of
the committees of the Phar-Mor Board attended, other than committee meetings
occurring on a date on which a board meeting is scheduled. All directors also
will be reimbursed for travel and other out-of-pocket expenses incurred by
them in attending board or committee meetings.
Pursuant to the Director Stock Plan, directors receive an annual grant of
options to purchase 5,000 Phar-Mor Shares, and may elect to receive Phar-Mor
Shares in lieu of all or a portion of their annual retainer. Directors may
elect to defer payment of all or a portion of their annual retainer under a
non-qualified, unfunded deferred compensation plan. Deferred amounts are
invested, at the election of the director, in an interest-bearing account or a
stock equivalent account. The amounts deferred, plus any appreciation thereon,
are paid in cash on the dates specified by the director.
Pursuant to the Phantom Stock Plan, Phar-Mor credits each Eligible Director
annually, commencing in October 1996, with that number of Phar-Mor Shares
whose aggregate fair market value on a date as specified under the Phantom
Stock Plan equals the amount of the then current annual retainer payable to
such Eligible Director, or such other amount as may be determined by
resolution of the Compensation Committee of the Phar-Mor Board. The award is
not in the form of actual Phar-Mor Shares, and no shares will be set aside for
the benefit of Eligible Directors under the Phantom Stock Plan. The number of
shares in each phantom stock account is subject to adjustment for dilution and
otherwise as set forth in the Phantom Stock Plan.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Phar-Mor has entered into employment agreements with Messrs. Haft, Schwartz
and O'Leary, each of which is described below.
Mr. Robert Haft. The employment agreement with Mr. Haft has a rolling
three-year term commencing on the Restructuring Date that provides for Mr.
Haft to serve as Chief Executive Officer and Chairman of the Phar-Mor
Board. Mr. Haft's initial annual base salary is $900,000, subject to annual
cumulative increases of 8%. The agreement provides for an annual incentive
bonus under a company-sponsored bonus plan (if a bonus plan is approved, or
otherwise as provided under a separate agreement between Phar-Mor and Mr.
Haft), if reasonable performance objectives approved by the Phar-Mor Board
are achieved, with a maximum bonus of 60% and a minimum bonus of 21% of
annual base salary, commencing for fiscal year 1996, and various other
benefits summarized below.
Mr. Haft also was granted options to purchase 256,250 Phar-Mor Shares at
$8.00 per share under the Phar-Mor, Inc. 1995 Stock Incentive Plan. In
connection with the Combination, all such options will be automatically
converted into options to purchase 256,250 Cabot Noble Shares at an
exercise price of $8.00 per share under the Cabot Noble, Inc. 1997 Stock
Incentive Plan. Mr. Haft's employment agreement provides for additional
benefits in the future not less favorable than those provided under options
granted or to be granted to other executives during the term of the
employment agreement.
The employment agreement provides that Mr. Haft serve as Chief Executive
Officer and Chairman of the Phar-Mor Board. Mr. Haft may engage in other
activities or pursue other investments (including activities that may be
competitive with Phar-Mor's business provided that they do not unreasonably
impede the performance of his duties for Phar-Mor and do not violate
applicable legal requirements). The Phar-Mor Board has the authority to
terminate Mr. Haft's employment without compensation under certain
circumstances. The agreement does not require Mr. Haft to provide services
at Phar-Mor's principal
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<PAGE>
locations. Mr. Haft may resign at any time without violating the agreement,
although his resignation without cause and without the Phar-Mor Board's
consent would otherwise be treated like a termination for cause by Phar-
Mor.
Mr. Haft's employment agreement also provides for a long-term performance
payout to Mr. Haft, commencing with the fiscal year ending June 30, 1998
and each third year thereafter during the term of the employment agreement,
in an amount (subject to the offset referred to in the last sentence of
this paragraph) equal to 3% of any excess of (i) the aggregate market value
of the publicly-traded Phar-Mor Shares based on the average closing price
for the thirty (30)-day period ending on the last day of the subject period
(less the sum of (a) the proceeds from the exercise during such period of
any options or warrants plus (b) any cash or property consideration
actually received by Phar-Mor during such period from the issuance of any
shares of its common stock) over (ii) the aggregate market value of the
publicly-traded Phar-Mor Shares based on the average closing price for the
thirty (30)-day period ending on the last day of the immediately prior
subject period (provided that for the first day of the period ending on
June 30, 1998, such average closing price shall be deemed to be $8.00 per
share). One-half of the aggregate annual bonuses paid or payable in respect
of the applicable three-year period will be offset against the long-term
payout amount.
The employment agreement with Mr. Haft further provides for various
employee benefits and perquisites, including but not limited to payment, on
a tax reimbursed, "grossed up" basis, for a $3,000,000 whole life insurance
policy on Mr. Haft's life or, at Mr. Haft's election, a term policy
requiring an equivalent premium; disability insurance adequate to pay Mr.
Haft 60% of base salary until age 70; reimbursement of all medical and
dental costs for Mr. Haft and his family; the use of a company-owned car;
and business expenses at locations other than Phar-Mor's headquarters. The
agreement with Mr. Haft provides that, if it is terminated other than for
cause, he is entitled to the present value of his base salary, discounted
at 5%, for the remaining contract term, annual and long-term incentive
payments payable for the remainder of the term, the accelerated vesting
(and extended post-termination exercise periods) of all outstanding stock
options, continued health and other benefits and (as further discussed
below) tax-reimbursement in respect of any termination payments that
constitute excess parachute payments under Federal income tax laws. Under
Mr. Haft's employment agreement, the Combination constitutes a "change in
control" with respect to Phar-Mor, which entitles Mr. Haft to terminate his
employment with Phar-Mor and to consider such a termination as "Without
Cause," thereby giving rise to the rights described above. In addition, the
exercise of the buy-sell provision under the Hamilton Morgan LLC Agreement
also entitles Mr. Haft to terminate his employment and to consider such
termination as "Without Cause," thereby giving rise to such rights. Mr.
Haft has indicated his intention to continue with the combined companies
after consummation of the Transaction and has stated that he would like to
work out an agreement with the new Cabot Noble Board with respect to the
terms and conditions concerning his role as Chairman and Chief Executive
Officer of Cabot Noble. [The terms and conditions of such agreement are as
follows [To be provided when available.]] See "Certain Transactions--Phar-
Mor Options Granted; Employment Agreements--Executive Officers."
A termination for cause by Phar-Mor, under the agreement, is limited to
death, permanent disability (as defined), acts of moral turpitude
concerning Phar-Mor, voluntary resignation, or the entry of a felony
conviction. For a discussion of certain benefits and other consequences for
Mr. Haft resulting from a change in control of Phar-Mor, see "--Change in
Control Consequences for Mr. Haft," and "Description of Phar-Mor--Security
Ownership of Certain Beneficial Owners and Management."
Mr. Schwartz. The employment agreement with Mr. Schwartz has a term of
two years commencing on September 11, 1995 and provides for Mr. Schwartz to
serve as Phar-Mor's President and Chief Operating Officer. Mr. Schwartz's
annual base salary is $600,000. The agreement provides for an annual
incentive bonus if Phar-Mor achieves certain performance objectives
approved by the Phar-Mor Board, with a target bonus of not less than 60% of
his annual base salary and a maximum of 100% of annual base salary, as
further described below. Mr. Schwartz was granted options to purchase
175,000 Phar-Mor Shares at $8.00 per share under the Phar-Mor, Inc. 1995
Stock Incentive Plan and a confirmation bonus of $450,000 plus 6,250 Phar-
Mor Shares. In connection with the Combination all such options will be
automatically
143
<PAGE>
converted into options to purchase 175,000 Cabot Noble Shares at an
exercise price of $8.00 per share under the Cabot Noble, Inc. 1997 Stock
Incentive Plan.
Mr. O'Leary. The employment agreement with Mr. O'Leary also has a term of
two years from September 11, 1995 and provides for Mr. O'Leary to serve as
a senior officer, initially as Senior Vice President and Chief Financial
Officer of Phar-Mor. Mr. O'Leary's annual base salary is $236,500, subject
to periodic increases consistent with increases granted to other senior
officers (except Mr. Haft) generally. The agreement provides for an annual
incentive bonus if Phar-Mor achieves certain performance objectives
approved by the Phar-Mor Board, with a target bonus of not less than 50% of
annual base salary and a maximum of 100% of annual base salary, as further
described below. Mr. O'Leary was granted options to purchase 87,500 Phar-
Mor Shares at $8.00 per share under the Phar-Mor, Inc. 1995 Stock Incentive
Plan and a confirmation bonus of $200,000 plus 6,250 Phar-Mor Shares. In
connection with the Combination all such options will be automatically
converted into options to purchase 87,500 Cabot Noble Shares at an exercise
price of $8.00 per share under the Cabot Noble, Inc. 1997 Stock Incentive
Plan.
Under Phar-Mor's Corporate Executive Bonus Plan for Fiscal Year 1996 (the
"1996 Bonus Plan"), certain executive officers would be eligible to receive a
cash bonus if Phar-Mor achieved a pre-established level of performance for the
fiscal year. The participating executive would receive at least 60% of his or
her individual targeted percentage bonus ("target bonus") if this performance
were at target, and 35% of the target bonus (e.g., if the target bonus is 50%,
35% of 50%) if Phar-Mor's performance were at entry level; the remaining
amount (up to 40%) was subject to the discretion of the Phar-Mor Board. If
Phar-Mor did not achieve the targeted level of performance, but achieved an
"entry level" or minimum performance threshold for payment of bonuses
established by the Phar-Mor Board, the specific bonus amount between minimum
and target bonus levels would be extrapolated, pro rata, based on the
relationship of actual performance to the entry and target levels of
performance; 60% of such amount would be mandatory and up to 40%
discretionary. The entry level performance was not achieved in fiscal year
1996. However, the Phar-Mor Board elected to pay certain discretionary
bonuses. For the fiscal year ended June 29, 1996, total bonuses of $1,188,539
were paid to 110 employees under the 1996 Bonus Plan.
Mr. Haft's annual cash bonus rights under his employment agreement (which
will be subject to each year's bonus plan, or otherwise provided for under
separate agreement with Phar-Mor) are fixed at a maximum of 60% of base
salary, but are not be subject to the 60/40 discretionary allocation
applicable to other executives. If Phar-Mor's performance reaches the target
performance level, the full 60% target bonus will be payable to him; if Phar-
Mor's performance reaches the entry level performance, a 21% minimum bonus
will be paid, with the actual bonus amount between 21% and 60% to be
determined by the extrapolation methodology described above. Mr. Haft also
received a discretionary bonus for fiscal year 1996 which was included in the
amount above.
The general terms of the options granted to Messrs. Haft, Schwartz and
O'Leary are summarized above. Each of the employment agreements provides for
continued vesting and exerciseability of options during the term as if a
termination of employment did not occur (or, in Mr. Haft's case, acceleration
of vesting) if the employee is terminated without cause or if he terminates
for "good reason" because of certain unilateral material changes to certain
terms of his service or other events (as more fully defined in the
agreements). Mr. Haft's options in such circumstances may be exercised at any
time within 4 1/2 years after the Effective Date.
Loans. Under the terms of Mr. Haft's employment agreement and grant of
options, Phar-Mor will agree to loan Mr. Haft an amount equal to the exercise
price of the options (upon exercise). No loans have been made as of the date
hereof. Such loan or loans will become due on the first to occur of (i) the
fifth anniversary of the date that the loan was made, (ii) to the extent of
net proceeds of sale, after payment of related taxes, five business days after
the sale of the shares so acquired, (iii) 30 days after a termination of his
employment by Phar-Mor for specified cause or his resignation other than for
specified "good reason", or (iv) by way of offset, upon the payment of
settlement amounts to him upon a termination without cause by Phar-Mor. The
loans will bear interest, payable semi-annually, on the outstanding principal
balance at the mid-term applicable federal rate in effect on the date such
loans were made and shall be subject to compliance with applicable laws. The
Phar-Mor, Inc. 1995 Stock Incentive Plan authorizes the Administrator to make
loans to other optionees to pay the exercise price of options, subject to
specified conditions.
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<PAGE>
Severance Plan. The employment agreements for Messrs. Schwartz and O'Leary
provide, in the case of a termination by Phar-Mor without cause or by them
"for good reason", for a severance payment equal to the highest of (1) the
amount available under the Phar-Mor severance policy at the time of
termination, (2) the base salary remaining under the individual's employment
agreement or (3) one year's base salary. Phar-Mor's current severance plan, as
it applies to officers, provides for payment of severance pay equal to salary
at the time of termination for a period of 26 weeks, plus one additional week
for each year of service, up to ten years. Mr. Haft's severance benefits are
described throughout this section and also depend upon the reasons for
termination.
Change in Control Consequences for Mr. Haft. The agreement with Mr. Haft
provides that upon a change in control (as defined) Mr. Haft will have the
right for 90 days to terminate the agreement without cause and realize the
present value of the full (and certain accelerated) benefits under the
agreement for what would otherwise be the remaining term, as in the case of a
termination by Phar-Mor without cause. A change in control under the agreement
may include (among other events) the removal of or failure to elect Mr. Haft
Chairman of the Phar-Mor Board, his involuntary disassociation from Hamilton
Morgan under certain circumstances by reason of the operation of the Hamilton
Morgan LLC Agreement buy-sell provision, certain changes in ownership
involving 50% or more of the voting stock (or voting control) of Phar-Mor, the
sale of all or substantially all of the assets of Phar-Mor, certain
fundamental changes in the nature of its business approved by shareholders,
certain changes affecting a majority of the Phar-Mor Board, or the acquisition
by any person or group (other than existing 25% holders or persons affiliated
with Mr. Haft or FoxMeyer Corporation) of 50% or more control of the assets or
voting stock of Phar-Mor. Such a termination by Mr. Haft would be deemed a
termination without cause by Phar-Mor and entitle him to the rights attendant
thereto, in addition to certain reimbursement for any excise taxes thereon on
a "grossed-up" basis as described below.
Under Mr. Haft's employment agreement, the Combination constitutes a "change
in control" with respect to Phar-Mor, which entitles Mr. Haft to terminate his
employment with Phar-Mor and to consider such a termination as "Without
Cause," thereby giving rise to the rights described above under "--Mr. Robert
Haft." In addition, the exercise of the buy-sell provision under the Hamilton
Morgan LLC Agreement also entitles Mr. Haft to terminate his employment and to
consider such termination as "Without Cause," thereby giving rise to such
rights. Mr. Haft has indicated his intention to continue with the combined
companies after consummation of the Transaction and has stated that he would
like to work out an agreement with the new Cabot Noble Board with respect to
the terms and conditions concerning his role as the Chairman and Chief
Executive Officer of Cabot Noble.
Tax Considerations. Because the compensation of certain executive officers
will or may exceed $1,000,000 in any year, the provisions of Section 162(m) of
the Code may limit the deductibility of such compensation unless an exception
to such limitations is available. Because of uncertainties surrounding the
application and interpretation of such limits, no assurance can be given that
such compensation will be deductible. In addition, the employment agreement
with Mr. Haft provides explicit benefits in the event of a change in control.
To the extent these and other benefits (deemed to result from the change in
control) equal or exceed 300% of his average annual taxable compensation (as
defined in applicable regulations), the full amount of such excess ("parachute
payments") will not be deductible by Phar-Mor and the amount of the parachute
payments will reduce the $1,000,000 limit under Section 162(m).
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Ms. Haft and Messrs. Butler (the Committee Chairman), Estrin and Hopkins
served as members of the Compensation Committee during fiscal year 1996. The
Compensation Committee met twice during Fiscal Year 1996. Ms. Haft and Mr.
Hopkins are independent directors. Messrs. Butler and Estrin are co-Chief
Executive Officers, co-Chairman of the Board, and major shareholders of
FoxMeyer Health and FoxMeyer Corporation. See "--Certain Relationships and
Related Transactions."
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Set forth in the table below is information, as of January 2, 1997, with
respect to the number of Phar-Mor Shares beneficially owned by (i) each person
or entity known by Phar-Mor to own more than five percent of the outstanding
Phar-Mor Shares, (ii) each director of Phar-Mor and (iii) each of the Phar-Mor
Named Officers. A person or entity is considered to "beneficially own" any
shares (i) over which such person or entity exercises sole or shared voting or
investment power or (ii) which such person or entity has the right to acquire
at any time within 60 days (e.g., through the exercise of options or
warrants).
<TABLE>
<CAPTION>
NUMBER OF
PERCENT PHAR-MOR SHARES
NAME AND ADDRESS OF AMOUNT AND NATURE OF OF WHICH MAY BE ACQUIRED
BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP(2) CLASS WITHIN 60 DAYS(3)
------------------- ----------------------- ------- ---------------------
<S> <C> <C> <C>
Hamilton Morgan, L.L.C... 4,908,435(4) 39.7% 204,402(5)
3000 K Street, N.W.,
Suite 105
Washington, D.C. 20008
Lappin Capital
Management, L.P......... 615,300(6) 5.1% --
LBL Group, L.P.
767 Third Avenue, 16th
Floor
New York, NY 10017
Robert M. Haft........... 4,908,435(7) 39.7% 204,402(5)
20 Federal Plaza West
Youngstown, Ohio 44501
FoxMeyer Health
Corporation............. 4,908,435(7) 39.7% 204,402(5)
55910 N. Central Expwy,
Ste 178
Dallas, TX 75206
M. David Schwartz........ 76,250 * 70,000(8)
20 Federal Plaza West
Youngstown, Ohio 44501
Daniel J. O'Leary........ 41,250 * 35,000(8)
20 Federal Plaza West
Youngstown, Ohio 44501
John R. Ficarro.......... 6,000 * 6,000(8)
20 Federal Plaza West
Youngstown, Ohio 44501
Michael K. Spear......... 20,000 * 20,000(8)
20 Federal Plaza West
Youngstown, Ohio 44501
Warren E. Jeffery........ 20,000 * 20,000(8)
20 Federal Plaza West
Youngstown, Ohio 44501
Sankar Krishnan.......... 10,000 * 10,000(8)
20 Federal Plaza West
Youngstown, Ohio 44501
Abbey J. Butler.......... 4,918,435(9) 39.7% 10,000(10)
55910 N. Central Expwy,
Ste 178
Dallas, TX 75206
Melvyn J. Estrin......... 4,918,435(9) 39.7% 10,000(10)
55910 N. Central Expwy,
Ste 178
Dallas, TX 75206
Linda Haft............... 10,000 * 10,000(10)
20 Federal Plaza West
Youngstown, Ohio 44501
Malcolm T. Hopkins....... 10,000 * 10,000(10)
20 Federal Plaza West
Youngstown, Ohio 44501
</TABLE>
146
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
PERCENT PHAR-MOR SHARES
NAME AND ADDRESS OF AMOUNT AND NATURE OF OF WHICH MAY BE ACQUIRED
BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP(2) CLASS WITHIN 60 DAYS(3)
------------------- ----------------------- ------- ---------------------
<S> <C> <C> <C>
Richard M. McCarthy..... 11,304 * 10,000(10)
20 Federal Plaza West
Youngstown, Ohio 44501
Antonio C. Alvarez...... 466,667(11) 3.7% 416,667
885 Third Avenue
New York, NY 10022-4802
All Directors and
Executive Officers,
including those named
above, as a group (11
persons)............... 5,584,906(12) 43.3% 737,123
</TABLE>
- --------
* less than 1%
(1) No director or executive officer is the beneficial owner of the other
equity securities of Phar-Mor or any of its subsidiaries.
(2) Unless otherwise indicated, each person or entity has sole investment
power and sole voting power with respect to the Phar-Mor Shares
beneficially owned by such person or entity.
(3) This column lists the number of Phar-Mor Shares which the named person or
entity has the right to acquire within 60 days after September 13, 1996
through the exercise of stock options and warrants. The Phar-Mor Shares
shown in this column are included in the Amount and Nature of Beneficial
Ownership column.
(4) Includes 3,750,000 Phar-Mor Shares owned directly by Hamilton Morgan, and
(i) 954,033 Phar-Mor Shares held directly by FoxMeyer Health, (ii) 91,902
Phar-Mor Shares subject to purchase by FoxMeyer Health within 60 days
upon exercise of warrants and (iii) 112,500 Phar-Mor Shares subject to
purchase by Mr. Haft within 60 days upon exercise of options (all such
shares held directly by FoxMeyer Health and subject to purchase by
FoxMeyer Health and Mr. Haft being collectively referred to herein as the
"Proxy Shares"). Hamilton Morgan has been granted sole voting power over
the Proxy Shares as a result of irrevocable proxies granted to Hamilton
Morgan by FoxMeyer Health and Mr. Haft. See "--Potential Changes in
Control" below. Information concerning beneficial ownership of Phar-Mor
Shares by FoxMeyer Health is based on information furnished to Phar-Mor
as of September 27, 1996 by FoxMeyer Health. For further information
about developments potentially affecting the beneficial ownership and/or
voting rights of Phar-Mor Shares beneficially owned by Hamilton Morgan,
FoxMeyer Health and Messrs. Haft, Butler and Estrin, see "--Potential
Changes in Control" below and "Risk Factors--Hamilton Morgan Issues."
(5) Includes 91,902 Phar-Mor Shares subject to purchase by FoxMeyer Health
within 60 days upon exercise of warrants and 112,500 Phar-Mor Shares
subject to purchase by Mr. Haft within 60 days upon exercise of options
awarded to Mr. Haft (of which options to purchase 102,500 Phar-Mor Shares
were awarded under the Phar-Mor, Inc. 1995 Stock Incentive Plan).
Pursuant to Mr. Haft's employment agreement with Phar-Mor, if the
Transaction is consummated, Mr. Haft would have the right to terminate
his employment and accelerate the vesting of his options. Mr. Haft has
indicated his intention to continue his employment with Phar-Mor after
consummation of the Transaction. See "Description of Phar-Mor--Employment
Contracts and Termination of Employment and Change-in-Control
Arrangements" and note 7 below.
(6) The information provided is based on reports on Schedule 13D filed by the
designated persons and entities with the Commission through September
1996.
(7) Includes 3,750,000 Phar-Mor Shares held directly by Hamilton Morgan and
the 1,158,435 Proxy Shares with respect to which Hamilton Morgan has sole
voting power. See note 4 above. Pursuant to the terms of the Hamilton
Morgan LLC Agreement, all of such Phar-Mor Shares may be voted only with
the unanimous consent of Hamilton Morgan's members. As of September 13,
1996, Robert M. Haft and his wife, Mary Z. Haft, as tenants by the
entirety, owned 30.2% of the membership interests in Hamilton Morgan,
Robert Haft is the president of Hamilton Morgan and FoxMeyer Health owned
69.8% of the membership interests in Hamilton Morgan. Accordingly, each
of FoxMeyer Health and Mr. Haft have shared voting power with respect to
all Phar-Mor Shares beneficially owned by Hamilton Morgan. The Proxy
Shares include options to purchase 102,500 Phar-Mor Shares awarded to Mr.
Haft under the Phar-Mor, Inc. 1995 Stock Incentive Plan. For further
information about developments potentially affecting the beneficial
ownership and/or voting rights of the Phar-Mor Shares beneficially owned
by Hamilton Morgan, FoxMeyer Health and Messrs. Haft, Butler and Estrin,
see "--Potential Changes in Control" below and "Risk Factors--Hamilton
Morgan Issues."
(8) All such Phar-Mor Shares are subject to purchase by the indicated person
within 60 days upon exercise of options awarded under the Phar-Mor, Inc.
1995 Stock Incentive Plan.
(9) Messrs. Butler and Estrin are co-chairmen of the board, co-chief
executive officers and major shareholders of FoxMeyer Health. Messrs.
Butler and Estrin disclaim beneficial ownership of the 4,908,435 Phar-Mor
Shares shown as being beneficially owned by FoxMeyer Health, FoxMeyer
Drug Company and Hamilton Morgan. See note 7 above.
(10) All such Phar-Mor Shares are subject to purchase within 60 days by the
indicated person upon exercise of options awarded under the Phar-Mor,
Inc. 1995 Director Stock Plan.
(11) Includes options to purchase 416,667 Phar-Mor Shares awarded to A&M
pursuant to the "Management Services Agreement" as defined in "--Certain
Relationships and Related Transactions" below. Mr. Alvarez resigned as an
officer of Phar-Mor as of the Restructuring Date.
(12) Includes 4,908,435 Phar-Mor Shares which Mr. Haft is deemed to
beneficially own, as described above in note 7. Also includes 466,667
Phar-Mor Shares which Mr. Alvarez is deemed to beneficially own, as
described above in note 12.
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<PAGE>
Potential Changes in Control. As of January 2, 1997, Hamilton Morgan owns
directly 3,750,000 Phar-Mor Shares representing 30.8% of the issued and
outstanding Phar-Mor Shares. In connection with the purchase by Hamilton
Morgan of such 3,750,000 Phar-Mor Shares, FoxMeyer Health entered into the
Credit Lyonnais Pledge with Credit Lyonnais pursuant to which Hamilton Morgan
pledged 2,617,500 Phar-Mor Shares as collateral. In the event of a default
under the Credit Lyonnais Pledge, Credit Lyonnais may acquire such Phar-Mor
Shares by foreclosing on its collateral. In addition, in the event that the
foregoing pledge by Hamilton Morgan is void for any reason, Credit Lyonnais
may enforce a lien on FoxMeyer Health's membership interest in Hamilton
Morgan. Hamilton Morgan has also been granted proxies with respect to an
additional 1,158,435 Phar-Mor Shares, pursuant to which Hamilton Morgan has
sole voting power. Pursuant to the terms of the Hamilton Morgan LLC Agreement,
all of Hamilton Morgan's Phar-Mor Shares may be voted only with the unanimous
consent of Hamilton Morgan's members. Accordingly, each of FoxMeyer Health and
the Haft Members have shared voting power with respect to all such Phar-Mor
Shares. See Notes 4 and 7 in the table set forth above under "--Security
Ownership of Certain Beneficial Owners and Management." Messrs. Butler and
Estrin, directors of Phar-Mor, are co-chairmen of the Board, co-chief
executive officers and major shareholders of FoxMeyer Health.
On June 19, 1996, FoxMeyer Corporation, the parent of FoxMeyer Drug Company,
declared and paid a dividend to FoxMeyer Health which included the 954,033
Phar-Mor Shares currently identified as being held directly by FoxMeyer Health
(the "FM Phar-Mor Shares"). See "--Certain Relationships and Related
Transactions." On August 14, 1996, the board of directors of FoxMeyer Health
approved a plan to divest FoxMeyer Drug Company.
On August 27, 1996, FoxMeyer Drug Company and most of its subsidiaries filed
a petition for protection under Chapter 11 of the United States Bankruptcy
Code. On November 8, 1996, FoxMeyer Drug Company sold all of its assets to
McKesson Corp. In late November 1996, the official unsecured creditors
committee of FoxMeyer Drug Company filed a lawsuit alleging that certain
transfers from FoxMeyer Corporation and FoxMeyer Drug Company to FoxMeyer
Health, including the dividend of which the FM Phar-Mor Shares was a part,
were fraudulent. The suit alleges that the transfers were made at a time when
FoxMeyer Corporation and FoxMeyer Drug Company were insolvent or rendered
insolvent by the foregoing transfers and that they knew or should have known
that the alleged transfers would leave them with debts they could not pay.
Phar-Mor is not able to determine what effect, if any, the dispute regarding
the FM Phar-Mor Shares will have on the ability of FoxMeyer Health or any
other entity to vote such shares and what effect, if any, the resolution of
such dispute will have on the vote of the Phar-Mor shareholders at the Phar-
Mor Special Meeting.
Phar-Mor has been informed that on December 23, 1996, the Haft Members
exercised their rights under the Hamilton Morgan LLC Agreement to seek binding
arbitration regarding certain areas of disagreement between the Haft Members
and FoxMeyer Health, including voting rights with respect to the 4,908,435
Phar-Mor Shares beneficially held by Hamilton Morgan and certain matters
related to FoxMeyer Health's exercise of its buy-sell rights, discussed in the
next paragraph. Pursuant to the Hamilton Morgan LLC Agreement, upon an event
of default under the Credit Lyonnais Pledge and until closing on any
disposition of the Phar-Mor Shares pledged thereunder, if any, the President
of Hamilton Morgan shall have the exclusive power and authority, exercisable
in his sole and absolute discretion, to exercise all voting rights arising in
connection with all of the Phar-Mor Shares beneficially held by Hamilton
Morgan, including specifically all Phar-Mor Shares pledged to Credit Lyonnais.
FoxMeyer Health, in its Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996, stated that it had violated certain covenants under the
Credit Lyonnais Pledge, which violations Credit Lyonnais had temporarily
waived. With regard to voting rights, the Haft Members have asserted that an
event of default occurred under the Credit Lyonnais Pledge, thereby giving
Robert Haft, as President of Hamilton Morgan, sole discretion to exercise all
voting rights associated with the Phar-Mor Shares beneficially held by
Hamilton Morgan.
By a letter dated January 3, 1997, FoxMeyer Health has taken the position
that: (1) consummation of the Phar-Mor Exchange will result in a termination
of Hamilton Morgan and (2) due to certain conflicts of interest which FoxMeyer
Health asserts the Combination creates for Mr. Haft, the Haft Members should
vote the Phar-
148
<PAGE>
Mor Shares beneficially owned by Hamilton Morgan as directed by FoxMeyer
Health. The Haft Members disagree with such positions.
Phar-Mor has been informed that on December 18, 1996 FoxMeyer Health
exercised its buy-sell rights under the Hamilton Morgan LLC Agreement.
Pursuant to the Hamilton Morgan LLC Agreement, from and after May 1, 1996,
either FoxMeyer Health, on the one hand, or the Haft Members, on the other
hand, may offer to buy from, and sell to, the other its membership interest in
Hamilton Morgan. Pursuant to the agreement, FoxMeyer Health has offered to
sell its Hamilton Morgan membership interests to the Haft Members, or to
purchase the Haft Members' membership interests in Hamilton Morgan. The buy-
sell price offered by FoxMeyer Health implies a total valuation for Hamilton
Morgan of $33,750,000.
The Haft Members' arbitration request asserts, among other matters, that
FoxMeyer Health's interpretation of the buy-sell is not in accordance with the
Hamilton Morgan LLC Agreement and therefore should be decided by binding
arbitration. Under the terms of the Hamilton Morgan LLC Agreement, the Haft
Members have a period of 90 days to consider the offers. The Haft Members have
requested that the arbitrator toll such 90-day period pending the arbitrator's
resolution of matters relating to the buy-sell offers. Closing under the buy-
sell is contemplated to occur within 30 days after the Haft Members'
acceptance or rejection of the offers. Upon the occurrence of such a sale or
purchase, the purchasing member would obtain sole voting power over the
3,750,000 Phar-Mor Shares held by Hamilton Morgan. However, in the event of
such a sale or purchase, the proxies granted by FoxMeyer Health and the Haft
Members to Hamilton Morgan with respect to the Proxy Shares would terminate,
and sole voting power with respect to such Phar-Mor Shares would revert to the
grantor of the proxy. See "Risk Factors--Reduced Quorum Requirement" and "--
Hamilton Morgan Issues."
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Hamilton Morgan. On the Restructuring Date, pursuant to
the Phar-Mor Restructuring and the Hamilton Purchase Agreement, Hamilton
Morgan purchased 1,250,000 Phar-Mor Shares from Phar-Mor and 2,500,000 Phar-
Mor Shares from Phar-Mor's prepetition senior secured creditors for a price of
$8.00 per share. Messrs. Haft, Butler and Estrin, each of whom was appointed a
director of Phar-Mor in connection with the Phar-Mor Restructuring and
currently serves as a director of Phar-Mor, are affiliated with Hamilton
Morgan. As of January 2, 1997, the Haft Members, Robert M. Haft and his wife
Mary Z. Haft, as tenants by the entirety, owned 30.2% of the membership
interests and FoxMeyer Health owned 69.8% of the membership interests in
Hamilton Morgan, and Robert Haft is the president of Hamilton Morgan. Messrs.
Butler and Estrin are co-chairmen of the Board, co-chief executive officers
and major shareholders of FoxMeyer Health. See "--Security Ownership of
Certain Beneficial Owners and Management."
On the Restructuring Date, pursuant to the Phar-Mor Restructuring, Phar-Mor
paid Hamilton Morgan $1.0 million as reimbursement for Hamilton Morgan's
reasonable expenses, including fees and expenses of legal, accounting and
other outside advisors engaged by or on behalf of Hamilton Morgan, incurred in
connection with its purchase of Phar-Mor Shares and the Phar-Mor
Restructuring.
Transactions with Robert M. Haft. During the Phar-Mor bankruptcy, Hamilton
Morgan negotiated the terms of a purchase agreement with representatives of
Phar-Mor's senior secured lenders pursuant to which Hamilton Morgan agreed to
purchase on the Restructuring Date at least $30 million of Phar-Mor Shares in
reorganized Phar-Mor representing approximately 31% of such Phar-Mor Shares.
Such purchase agreement also provided that Hamilton Morgan's president, Robert
M. Haft, would become Chairman of the Board and Chief Executive Officer of
Phar-Mor and that Phar-Mor would propose a plan of reorganization to
restructure Phar-Mor consistent with the terms of such purchase agreement. On
the Restructuring Date, Robert M. Haft assumed the positions of Chairman of
the Board and Chief Executive Officer of Phar-Mor and Hamilton Morgan
designated four of the seven new directors of reorganized Phar-Mor. In
addition, Phar-Mor entered into an employment agreement and an option
agreement with Mr. Haft.
149
<PAGE>
Transactions with FoxMeyer Drug Company. In connection with the Phar-Mor
bankruptcy, FoxMeyer Drug Company filed a reclamation claim for $21 million.
Phar-Mor responded with a preference action asserting the $25 million in
payments received by FoxMeyer Drug Company during the period when the
pharmaceuticals sought to be reclaimed by FoxMeyer Drug Company had been
delivered to Phar-Mor should have been applied to the current shipment, thus
leaving FoxMeyer Drug Company with no unpaid-for goods, or alternatively that
the payments were preferences under Section 547 of the Bankruptcy Code.
FoxMeyer Drug Company raised an ordinary course of business defense to the
preference action and extensive discovery ensued. On the eve of the trial,
Phar-Mor and FoxMeyer Drug Company reached a settlement (the "FoxMeyer
Settlement").
The Bankruptcy Court approved the FoxMeyer Settlement on May 10, 1995. The
FoxMeyer Settlement provided for the issuance of 843,750 Phar-Mor Shares to
FoxMeyer Drug Company pursuant to the Phar-Mor Restructuring and the release
of all reclamation claims and preference claims. In addition, under the terms
of the settlement, FoxMeyer Drug Company agreed to modify restrictions under
its pharmaceutical supply agreement with Phar-Mor requiring Phar-Mor to
maintain a minimum number of operating stores.
FoxMeyer Drug Company also received 110,283 Phar-Mor Shares and 91,902 Phar-
Mor Warrants on account of its general unsecured claim. FoxMeyer Drug Company
is likely to receive additional Phar-Mor Shares and additional Phar-Mor
Warrants on account of its general unsecured claims in future distributions to
holders of unsecured claims, although Phar-Mor is unable to determine the
amount of any such Phar-Mor Shares or Phar-Mor Warrants at this time. The
Combination will not affect the liability of Phar-Mor to FoxMeyer Drug Company
to make payment of additional shares or warrants. Additional shares and
warrants will be paid to all general unsecured creditors on a pro rata basis
subject to the amount of their general unsecured claims. This will be a de
minimus payment from the pool of shares and warrants remaining from previous
payments to all general unsecured creditors. In the event the Transaction is
consummated, such payment obligations will be payable in the form of Cabot
Noble Shares or Cabot Noble Warrants with terms substantially identical to
those governing the Phar-Mor Warrants.
Following the Petition Date, Phar-Mor entered into a revised, long-term
Supply Agreement with FoxMeyer Drug Company to become Phar-Mor's primary
supplier of prescription medications until the later of August 17, 1997 or the
date on which Phar-Mor's purchases equal an aggregate net minimum of $1.4
billion of products. The Supply Agreement establishes certain minimum supply
requirements, specifies events of default, and limits damages recoverable in
the event of a termination.
Abbey J. Butler and Melvyn J. Estrin, directors of Phar-Mor, are co-chairmen
of the board, co-chief executive officers and major shareholders of FoxMeyer
Corporation and FoxMeyer Health. FoxMeyer Drug Company is a wholly owned
subsidiary of FoxMeyer Corporation, and FoxMeyer Health owns 69.8% of the
membership interest in Hamilton Morgan.
On August 29, 1996, two days after FoxMeyer Drug Company and its
subsidiaries filed their bankruptcy petition, Phar-Mor notified FoxMeyer Drug
Company that the supply of products to Phar-Mor under the FoxMeyer Supply
Agreement was insufficient and that, consequently, FoxMeyer Drug Company had
committed a material breach thereunder. On September 27, 1996, Phar-Mor
received a response from FoxMeyer Drug Company disputing Phar-Mor's
notification. Phar-Mor believes that it has, at this time, overcome all
related business interruptions because there are adequate alternative sources
of supply, subject to pricing, readily available to Phar-Mor. Phar-Mor has not
experienced any material disruption to its business or supply of
pharmaceutical products because adequate alternative sources of supply are
readily available to Phar-Mor. In connection with McKesson Corp.'s purchase of
FoxMeyer Drug Company's assets on November 8, 1996, McKesson Corp. assumed the
FoxMeyer Supply Agreement. See "--Security Ownership of Certain Beneficial
Owners and Management."
Transactions with Alvarez & Marsal, Inc. After the dismissal of Phar-Mor's
executive officers in August 1992 following the discovery of the fraud
perpetrated on Phar-Mor, the Phar-Mor Board retained the crisis management
firm of Alvarez & Marsal, Inc. ("A&M") to assume day-to-day management of
Phar-Mor. Antonio
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C. Alvarez, a founding principal of the firm, originally served as President
and Chief Operating Officer of Phar-Mor until David Schwartz was retained to
fill those positions, at which time Mr. Alvarez assumed the role of Chief
Executive Officer. Joseph A. Bondi, a Managing Director of A&M, served as
Senior Vice President and Chief Administrative Officer of Phar-Mor. In
addition, A&M provided other support personnel while Phar-Mor rebuilt its
financial staff. A&M's services were provided under the Management Services
Agreement pursuant to which Phar-Mor agreed to pay fixed fees, annual cash
bonuses and certain share incentives.
Under its terms as amended by the Phar-Mor Restructuring, the Management
Services Agreement terminated on October 28, 1995. Messrs. Alvarez and Bondi
resigned as officers as of the Restructuring Date. During the 60 day period
after the Restructuring Date, Mr. Alvarez served as a consultant to Phar-Mor.
On the Restructuring Date Messrs. Alvarez and Bondi were paid any accrued but
unpaid salary, their incentive bonuses for Phar-Mor's 1995 fiscal year in the
amount of $680,000, the pro rated amount of their incentive bonuses for the
1996 fiscal year ($135,926) and consulting fees of $150,000 for Mr. Alvarez's
services during the 60 days after the Restructuring Date.
The Management Services Agreement, as amended, also provided for the payment
to A&M of a confirmation bonus of $2.1 million and the issuance to A&M of
50,000 Phar-Mor Shares on the Restructuring Date in lieu of a $2.5 million
cash payment originally provided to be paid A&M on such date under the
Management Services Agreement. In addition to the foregoing, the Phar-Mor
Restructuring also included provisions for the issuance to A&M of options to
purchase 416,667 Phar-Mor Shares, and a related registration rights agreement.
Transactions with Giant Eagle, Inc. Certain holders of more than 5% of the
pre-reorganization common stock of Phar-Mor were parties to transactions with
Phar-Mor which are part of the public record of the Bankruptcy Court
proceedings. Pursuant to the Phar-Mor Restructuring, disputes with respect to
these transactions were settled, including the payment to Giant Eagle of
approximately $1.7 million, and agreements with respect thereto were amended
and/or terminated, including, without limitation, (i) the leases between Phar-
Mor and Giant Eagle and affiliates of Giant Eagle with respect to Phar-Mor's
two warehouses in Austintown, Ohio and equipment located at the warehouses,
and (ii) the lease with respect to Phar-Mor's office headquarters in
Youngstown, Ohio.
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DESCRIPTION OF CAPITAL STOCK OF CABOT NOBLE
The capital stock of Cabot Noble consists of 250 million authorized shares,
of which 200 million shares are designated Common Stock, par value $0.01 per
share, and 50 million shares are designated Preferred Stock, par value $0.01
per share.
COMMON STOCK
As of the date hereof, there are 100 Cabot Noble Shares issued and
outstanding, all of which are currently owned by Phar-Mor. Cabot Noble has no
preemptive, exchange or conversion rights. Holders of Cabot Noble Shares are
entitled to one vote per share on all matters to be voted on by shareholders,
except as may otherwise be provided in Preferred Stock Designations. The
holders of Cabot Noble Shares are entitled to receive such dividends, if any,
as may be declared from time to time by the Cabot Noble Board in its
discretion from funds legally available therefor. Upon liquidation or
dissolution of Cabot Noble and the satisfaction of creditors, the holders of
Cabot Noble Shares are entitled to receive all assets remaining available for
distribution to the shareholders. All of the outstanding Cabot Noble Shares
are fully paid and nonassessable, and the Cabot Noble Shares to be outstanding
upon completion of the Combination will be fully paid and nonassessable.
PREFERRED STOCK
The Cabot Noble Board is authorized, without any further action by the
shareholders of Cabot Noble, to issue the Preferred Stock from time to time in
such series, in such number of shares and with such dividend, redemption,
liquidation, voting, conversion and other rights in preference to Cabot Noble
Shares as the Cabot Noble Board may determine. The issuance of Preferred Stock
could have the effect of diluting the earnings per share and book value of
Cabot Noble Shares, and such additional shares could adversely affect the
voting power of the holders of the Cabot Noble Shares and otherwise could be
used to dilute the stock ownership of persons holding Cabot Noble Shares,
including persons seeking to gain control of Cabot Noble.
WARRANTS
Prior to the Effective Date, Phar-Mor had issued certain warrants to
purchase Phar-Mor Shares pursuant to that certain warrant agreement between
Phar-Mor and Society National Bank dated as of September 11, 1995 (the "Phar-
Mor Warrant Agreement"). In fulfillment of a condition to the Transaction,
Cabot Noble has adopted a warrant agreement between Cabot Noble and Society
National Bank, effective as of the Effective Date (the "Cabot Noble Warrant
Agreement"). Pursuant to the Combination Agreement, on the Effective Date each
warrant issued under the Phar-Mor Warrant Agreement will be converted
automatically into a Cabot Noble Warrant to purchase the same number of Cabot
Noble Shares.
The Cabot Noble Warrant Agreement governs Cabot Noble Warrants to purchase
up to 1,250,000 Cabot Noble Shares. Society National Bank serves as the
warrant agent. The Cabot Noble Warrants will expire at the close of business
on September 10, 2002 or, if such date is not a business day, on the next
succeeding business day. Each Cabot Noble Warrant entitles the holder thereof
to acquire one share (subject to adjustment as described below) of Cabot Noble
Shares at an initial exercise price of $13.50 per Cabot Noble Share (subject
to adjustment as described below) payable in cash or by surrender of Phar-
Mor, Inc. Senior Notes Due 2002 (valued at remaining principal plus accrued
and unpaid interest).
The exercise price and the number of Cabot Noble Shares purchasable upon
exercise of outstanding Cabot Noble Warrants are subject to adjustment upon
the occurrence of certain events, including subdivision and combinations of
Cabot Noble Shares; the payment of a dividend in Cabot Noble Shares or other
distribution of Cabot Noble Shares without consideration; the issuance to all
holders of Cabot Noble Shares of certain rights or warrants entitling them,
under certain conditions, to subscribe for Cabot Noble Shares at less than the
then-current market price (as determined in the manner set forth in the Cabot
Noble Warrant Agreement); and the distribution to all holders of Cabot Noble
Shares of assets (excluding cash dividends) or subscription rights or
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warrants (other than those described above) as set forth in the Cabot Noble
Warrant Agreement. No adjustment will be required upon the occurrence of any
of the foregoing events unless such adjustment would require an increase or
decrease of at least 1% of the exercise price of the Cabot Noble Warrants;
provided that any such adjustment not required to be made will be carried
forward and taken into account in any subsequent adjustment.
In case of reclassifications or changes of outstanding shares or any
consolidation or share exchange with, merger into or sale or conveyance of the
property of Cabot Noble substantially as an entirety to any other corporation,
each Cabot Noble Warrant will thereupon become exercisable only for the number
of shares of stock or other securities or assets to which a holder of the
number of Cabot Noble Shares purchasable upon exercise of such Cabot Noble
Warrant would be entitled.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Cabot Noble Shares is Key Corp.
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COMPARISON OF RIGHTS OF PHAR-MOR AND SHOPKO SHAREHOLDERS
AND CABOT NOBLE STOCKHOLDERS
Phar-Mor is incorporated under the laws of the Commonwealth of Pennsylvania,
ShopKo is incorporated under the laws of the State of Minnesota, and Cabot
Noble is incorporated under the laws of the State of Delaware. Holders of
Phar-Mor Shares, whose rights as shareholders are currently governed by the
Pennsylvania Law and Phar-Mor's restated articles of incorporation (the "Phar-
Mor Articles") and by-laws (the "Phar-Mor Bylaws"), which were amended and
restated as of September 11, 1995 will, upon consummation of the Combination,
become stockholders of Cabot Noble and their rights will be governed by the
Delaware Law and the Cabot Noble Certificate and the Cabot Noble Bylaws.
Likewise, holders of ShopKo Shares, whose rights as shareholders are currently
governed by the Minnesota Law and ShopKo's restated articles of incorporation,
as amended by those certain Articles of Amendment dated September 4, 1991 (the
"ShopKo Articles") and by-laws (the "ShopKo Bylaws") will, upon consummation
of the Combination, become stockholders of Cabot Noble and their rights will
be governed by the Delaware Law and the Cabot Noble Certificate and the Cabot
Noble ByLaws. Below is a summary of certain material differences between: (a)
the charter documents of Cabot Noble and Phar-Mor (and between the Delaware
Law and the Pennsylvania Law); and (b) the charter documents of Cabot Noble
and ShopKo (and between the Delaware Law and the Minnesota Law).
The following summary is qualified in its entirety by reference to the full
text of the Phar-Mor Articles, the Phar-Mor Bylaws, the Shopko Articles, the
Shopko Bylaws, the Cabot Noble Certificate, the Cabot Noble Bylaws, the
Pennsylvania Law, the Minnesota Law and the Delaware Law.
CLASSES AND SERIES OF CAPITAL STOCK
Phar-Mor. The Phar-Mor Articles authorize Phar-Mor to issue 40,000,000 Phar-
Mor Shares, and 10,000,000 shares of Preferred Stock, par value $.01 per share
("Phar-Mor Preferred Shares"). As of , 1997, Phar-Mor Shares and no
Phar-Mor Preferred Shares were issued and outstanding.
ShopKo. The ShopKo Articles authorize ShopKo to issue 75,000,000 ShopKo
Shares and 20,000,000 shares of Preferred Stock, par value $.01 per share
("ShopKo Preferred Shares"). As of January 7, 1997, 32,157,720 ShopKo Shares
and no ShopKo Preferred Shares were issued and outstanding.
Cabot Noble. The Cabot Noble Certificate authorizes Cabot Noble to issue
200,000,000 Cabot Noble Shares, and 50,000,000 shares of Preferred Stock, par
value $.01 per share ("Cabot Noble Preferred Shares"). As of January 2, 1997,
100 Cabot Noble Shares and no Cabot Noble Preferred Shares were issued and
outstanding.
DIRECTOR AND OFFICER LIABILITY AND INDEMNIFICATION
Phar-Mor. The Pennsylvania Law permits a corporation to include in its
bylaws a provision adopted by the vote of its shareholders which eliminates
the personal liability of directors for monetary damages for any action taken
or omitted unless (i) the directors have breached or failed to perform their
duties and (ii) the breach or failure to perform constitutes self-dealing,
willful misconduct or recklessness. However, a corporation may not eliminate
personal liability where the responsibility or liability of a director is
pursuant to any criminal statute or is for the payment of taxes pursuant to
local, state or federal law. The Phar-Mor Bylaws limit director liability to
the fullest extent permitted by the laws of Pennsylvania.
The Pennsylvania Law permits a business corporation, unless otherwise
restricted by its bylaws, to indemnify any person involved in any third party
or derivative action by reason of the person's being or having been a
representative of the corporation, if the person acted in good faith and
reasonably believed that his actions were in, or not opposed to, the best
interests of the corporation and, with respect to any criminal proceeding, had
no reasonable cause to believe that his conduct was unlawful. In general, no
indemnification is allowable in derivative actions where the person has been
adjudged liable to the corporation unless and only to the extent that
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the court finds him entitled to indemnification for expenses incurred. To the
extent that a representative of a business corporation has been successful on
the merits or otherwise in defense of a third party or derivative action,
indemnification for expenses incurred is mandatory. Pennsylvania Law provides
that provisions on indemnification shall not be deemed exclusive of any other
rights to which a person may be entitled under any bylaw, agreement or
otherwise, provided that indemnification shall not be made in the case of
willful misconduct or recklessness. The Phar-Mor Articles provide for the
indemnification, to the fullest extent permitted by applicable law, of each
director and executive officer of Phar-Mor. The Phar-Mor Articles also provide
that Phar-Mor may, in the discretion of the Phar-Mor Board, indemnify any
other person who was or is an "authorized representative" of Phar-Mor, which
term is defined to mean any officer, employee or agent of Phar-Mor, or a
person serving at the request of Phar-Mor as a director, officer, partner,
trustee, employee, fiduciary, agent or representative of another corporation
for profit or not-for-profit, partnership, joint venture, trust or other
entity or enterprise.
ShopKo. The Minnesota Law permits a corporation's articles of incorporation
to limit or eliminate a directors' liability to the corporation or its
shareholders for monetary damages for breach of fiduciary duty except for (a)
any breach of the director's duty of loyalty to the corporation or its
shareholders, (b) acts or omissions not in good faith, (c) acts or omissions
that involve intentional misconduct, (d) acts or omissions that involve a
knowing violation of law, (e) illegal distributions, (f) liability under
Minnesota's securities statute, (g) any transaction from which the director
derived an improper personal benefit, or (h) any act or omission occurring
prior to the date when the provision in the articles of incorporation limiting
or eliminating liability becomes effective. The ShopKo Articles limit director
liability to the fullest extent permitted by the Minnesota Law.
The Minnesota Law requires a corporation to indemnify its directors,
committee members, officers, and employees who are made or threatened to be
made party to a proceeding (including shareholder derivative actions) by
reason of the former or present official capacity of the director, committee
member, officer or employee, against judgments, penalties, fines, settlements
and reasonable expenses if certain specified statutory criteria are satisfied.
The Minnesota Law permits a corporation to prohibit or limit indemnification
or advances by so providing in its articles of incorporation or its bylaws.
The ShopKo Articles are silent on the issue of indemnification and the ShopKo
Bylaws state that ShopKo shall indemnify officers and directors for such
expenses and liabilities, in such manner, under such circumstances, and to the
extent permitted by the Minnesota Law. Advances are also mandatory if certain
conditions are satisfied.
Cabot Noble. The Delaware Law allows a Delaware corporation to include a
provision in its certificate of incorporation limiting or eliminating the
liability of directors for monetary damages for a breach of their duty of
care, provided such directors acted in good faith. However, limitation of
liability for (i) breaches of duty of loyalty, (ii) acts or omissions
involving intentional misconduct or knowing violations of law, (iii) the
payment of unlawful dividends, stock repurchases or redemptions, or (iv) any
transaction in which the director received an improper personal benefit, is
not allowed. Statutory authority is granted to Delaware corporations to
indemnify directors, officers and agents, and mandates indemnification under
limited circumstances. Indemnification against expenses incurred by an
officer, director or agent in connection with a proceeding against such person
for actions in such capacity is mandatory to the extent that a person has been
successful on the merits. Advancement of such expenses (i.e., payment prior to
a determination on the merits) is permissive only and such person must repay
such expenses if it is ultimately determined that he is not entitled to
indemnification.
The Delaware Law also permits a corporation to indemnify a director, officer
or agent for fines, judgments or settlements, as well as expenses in the
context of third-party actions, if such person acted in good faith and in or
not opposed to the best interests of the corporation, or in the case of a
criminal action, had no reasonable cause to believe his conduct was unlawful.
Indemnification in the context of derivative actions is restricted to expenses
only. Further, if an officer, director or agent is adjudged liable to the
corporation, expenses are not allowable, subject to limited exceptions where a
court deems the award of expenses appropriate. Determinations regarding
permissive indemnification are to be made by the majority vote of
disinterested directors (even if less than a quorum), or, if there are no such
directors, or if such directors so direct, by independent legal counsel or
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by the stockholders. Statutory indemnification is not exclusive. Situations
may arise in which a corporation has powers to indemnify which extend beyond
those granted by statute.
The Delaware Law grants express authority to a Delaware corporation to
purchase insurance for director and officer liability. Such insurance may be
purchased for any officer, director or agent, regardless of whether that
individual is otherwise eligible for indemnification by the corporation.
The Delaware Law contains no express statutory provision identifying the
appropriate standard of proof in actions against directors and officers.
Delaware case law indicates that the standard of proof in such actions is a
preponderance of the evidence. Although Delaware has not codified the business
judgment rule, the Delaware courts have developed a "modified" business
judgment rule that places the initial burden on directors and officers in the
context of contests for corporate control or the adoption of defensive
measures.
The Cabot Noble Certificate provides that, to the full extent permitted by
law, a director shall not be personally liable to Cabot Noble or its
stockholders for or with respect to any acts or omissions in the performance
of his or her duties as a director, and provides that any repeal on
modification by the stockholders of the limitation on director liability will
not adversely affect any right or protection existing at the time of such
repeal or modification.
The Cabot Noble Certificate provides that directors and officers will be
indemnified and, at Cabot Noble's option, it may indemnify any other person
who is or was serving or who had agreed to serve at the request of the Cabot
Noble Board or an officer of Cabot Noble as an employee or agent of Cabot
Noble or as a director, officer, employee, or agent of another corporation,
partnership, joint venture, trust, or other entity, whether for profit or not
for profit (including the heirs, executors, administrators and estate of such
person) to the fullest extent permitted by law. The Cabot Noble Certificate
also permits separate indemnification agreements and provides that the
indemnification rights found therein may be greater or different from the
indemnification rights provided for in the Cabot Noble Certificate or under
the Delaware Law. The Cabot Noble Bylaws also provide that Cabot Noble may
purchase and maintain insurance to protect itself and any person entitled to
indemnification against any expenses, judgments, fines, and amounts paid in
settlement or incurred by such person, to the fullest extent permitted by
applicable law as then in effect. In addition, the Cabot Noble Bylaws provide
that Cabot Noble may enter into contracts, create a trust fund, grant a
security interest, or use other means to ensure the payment of such amounts as
may be necessary to effect the indemnification provided for in the Cabot Noble
Bylaws.
SPECIAL MEETINGS OF SHAREHOLDERS
Phar-Mor. Special meetings of the shareholders of Phar-Mor may be called by
the Phar-Mor Board or a qualified shareholder (generally, since January 1,
1980, a holder of 20% or more of the outstanding Phar-Mor Shares). Because
Phar-Mor is a "registered" corporation (i.e., the Phar-Mor Shares are
registered under the Exchange Act), a Phar-Mor shareholder is not entitled to
call a special meeting of shareholders unless such shareholder is an
"interested shareholder" (as defined in Section 2553 of the Pennsylvania Law)
calling a special meeting for the purpose of approving a "business
combination" (as defined in Section 2554 of the Pennsylvania Law) with such
"interested shareholder." An "interested shareholder" is a person who,
together with its affiliates and associates, owns (or owned within the
preceding five-year period) 20% or more of a "registered" corporation's shares
entitled to vote generally in the election of directors ("Voting Shares"); and
a "business combination" includes mergers, consolidations, asset sales, share
exchanges, divisions of a "registered" corporation or any subsidiary thereof
and other transactions resulting in a disproportionate financial benefit to an
"interested shareholder."
ShopKo. The Minnesota Law provides that special meetings of the shareholders
may be called by: (i) the chief executive officer; (ii) the chief financial
officer; (iii) two or more directors; (iv) any person authorized in the
articles of incorporation or the bylaws to do so; or (v) a shareholder or
shareholders holding 10% or more of the voting power of all shares entitled to
vote (except in the case of a special shareholder meeting called to address
any action related to facilitating or effecting a business combination, which
requires a shareholder or
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shareholders holding 25% or more of the voting power of all shares entitled to
vote). The ShopKo Bylaws do not alter the aforementioned requirements.
Cabot Noble. Under the Delaware Law, special stockholder meetings may be
called only by the board of directors or others as may be authorized by the
certificate of incorporation or bylaws. The Cabot Noble Bylaws provide that a
special meeting of stockholders may be called by: (i) the chairman, (ii) the
secretary within 10 calendar days after receipt of the written request of a
majority of the total number of directors that Cabot Noble would have if there
were no vacancies on the Cabot Noble Board, or (ii) upon the receipt by Cabot
Noble of a written request executed by the holders of not less than 33% of the
votes of all outstanding voting stock entitled to vote generally in the
election of directors.
ANNUAL MEETING OF SHAREHOLDERS
Phar-Mor. Under the Pennsylvania Law, if the annual meeting or other regular
meeting of shareholders for election of directors is not called and held
within six months after the designated time, any shareholder may call the
meeting at any time thereafter.
ShopKo. Under the Minnesota Law, if a regular meeting of shareholders has
not been held during the immediately preceding 15 months, a shareholder or
shareholders holding 3% or more of the voting power of all shares entitled to
vote may demand a regular meeting of shareholders by written notice of demand
given to the chief executive officer or the chief financial officer of the
corporation. Within 30 days after receipt of the demand by one of those
officers, the board of directors shall cause a regular meeting of shareholders
to be called and held on notice no later than 90 days after receipt of the
demand, all at the expense of the corporation.
Cabot Noble. Under the Delaware Law, if the annual meeting for the election
of directors is not held on the designated date, the directors are required to
cause such meeting to be held as soon thereafter as may be convenient. If they
fail to do so for a period of 30 days after the designated date, or if no date
has been designated, for a period of 13 months after the organization of the
corporation or after its annual meeting, the Court of Chancery may summarily
order a meeting to be held upon application of any stockholder or director.
However, the Delaware Law does not provide for a stockholder to call such
meeting, otherwise than by application to the Court of Chancery.
DIVIDENDS AND DISTRIBUTIONS
Phar-Mor. Under the Pennsylvania Law, unless otherwise restricted in its
bylaws, the board of directors may authorize and a business corporation may
pay dividends or make other distributions to shareholders. However, a
distribution may not be made if, as a result of such distribution: (i) the
corporation would be unable to pay its debts as they become due in the usual
course of business; or (ii) the total assets of the corporation would be less
than the sum of its total liabilities plus (unless otherwise provided in the
articles) the amount that would be needed, if the corporation were to be
dissolved at the time as of which the distribution is measured, to satisfy the
preferential rights upon dissolution of shareholders whose preferential rights
are superior to those receiving the distribution. Total assets and liabilities
for this purpose are to be determined by the board of directors, which may
base its determination on one or more of the following: book value, or current
value, of the corporation's assets and liabilities, unrealized appreciation
and depreciation of the corporation's assets and liabilities and any other
method that is reasonable in the circumstances. The Phar-Mor Bylaws do not
contain any limitations on such powers.
ShopKo. Under the Minnesota Law, unless otherwise provided in its articles
or bylaws, a corporation may make a distribution only if the corporation is
able to pay its debts in the ordinary course of business after making the
distribution. A distribution may be made to holders of a class or series of
shares only if all amounts payable to holders of shares having a preference
are paid (except for those having waived rights to payment) and if payment of
such distribution does not reduce the remaining net assets of the corporation
below the aggregate preferential amount payable upon liquidation (unless the
distribution is made to shareholders in the order of and
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to the extent of their respective priorities or if the holders of shares who
do not receive distributions give notice to the corporation of their agreement
to waive their rights to that distribution). The ShopKo Articles and Bylaws do
not provide otherwise for the payment of dividends.
Cabot Noble. Under the Delaware Law, subject to any restriction contained in
its certificate of incorporation, the board of directors may declare and the
corporation may pay dividends or other distributions upon the shares of its
capital stock either: (i) out of "surplus"; or (ii) in the event that there is
no surplus, out of the net profits for the fiscal year in which the dividend
is declared and/or the preceding fiscal year, unless net assets (total assets
in excess of total liabilities) are less than the capital of all outstanding
preferred stock. "Surplus" is defined as the excess of the net assets of the
corporation over the amount determined to be the capital of the corporation by
the board of directors (which amount cannot be less than the aggregate par
value of all issued shares of capital stock).
APPRAISAL RIGHTS
Phar-Mor. The Pennsylvania Law provides that shareholders have a right of
appraisal (i.e., the right to dissent and obtain payment of the judicially-
determined "fair value" of their shares) with respect to specified corporate
actions, including: (i) a plan of merger, consolidation, division, share
exchange or conversion; (ii) certain other plans or amendments of the articles
in which disparate treatment is accorded to holders of shares of the same
class or series; and (iii) a sale or transfer of all or substantially all of
the corporation's assets. Appraisal rights are not provided to holders of
shares of any class that is either listed on a national securities exchange or
held of record by more than 2,000 shareholders; however, this exception to the
provision of appraisal rights does not apply in the case of: (x) a plan under
which such shares are not converted solely into shares of the acquiring,
surviving, new or other corporation, or solely into such shares and money in
lieu of fractional shares; (y) shares of a preferred or special class of
stock, unless the articles, the plan or the terms of the transaction entitle
all holders of such class to vote thereon and require for adoption of the plan
the affirmative vote of a majority of the votes cast by all holders of shares
by all holders of such class; or (z) subject to certain exceptions, shares
entitled to dissenters rights because an amendment or a plan contains a
provision for special treatment without requiring for the adoption of the
amendment or plan the requisite statutory class vote.
ShopKo. The Minnesota Law makes dissenters' rights available to dissenting
shareholders in the event of certain actions including: (i) an amendment of
the articles of incorporation that materially and adversely affects the rights
and preferences of the shares of the dissenting shareholder in certain
specified respects; (ii) a sale, lease, transfer or other disposition of all
or substantially all of the assets of the corporation (subject to certain
exceptions, including a disposition for cash on terms requiring that all or
substantially all of the net proceeds of the disposition be distributed pro
rata to the shareholders of the corporation within one year after the
disposition); (iii) a plan of merger to which the corporation is a party
(except that, unless the articles, bylaws, or a resolution approved by the
board of directors otherwise provides, dissenters' rights are not available to
a shareholder of the surviving corporation in a merger if the shares of the
shareholder are not entitled to vote on the merger); (iv) a plan of exchange
to which the corporation is a party as the corporation whose shares will be
acquired by the acquiring corporation, if the shares of the shareholder are
entitled to vote on the plan; and (v) any other corporate action taken
pursuant to a shareholder vote with respect to which the corporation's
articles of incorporation, bylaws or a board resolution directs that
dissenting shareholders may obtain payment for their shares. The ShopKo
Articles and Bylaws do not grant any other dissenters' rights and no ShopKo
Board resolutions have been adopted that grant such rights.
Cabot Noble. The Delaware Law provides for appraisal rights only in the case
of a merger or consolidation and not (unless the certificate of incorporation
provides otherwise) in the case of a sale or transfer of assets or a purchase
of assets for stock, regardless of the number of shares of stock being issued.
The Delaware Law does not provide appraisal rights (unless the certificate of
incorporation provides otherwise) to holders of shares listed on a national
securities exchange or held of record by more than 2,000 stockholders. The
Cabot Noble Certificate and the Cabot Noble Bylaws do not contain any
additional provisions relating to dissenters rights of appraisal.
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SHAREHOLDER APPROVAL OF MERGERS
Phar-Mor. Under the Pennsylvania Law, unless required by the bylaws of the
corporation (the Phar-Mor Bylaws contain no such requirement), shareholder
approval is not required for a plan of merger or consolidation if: (i) the
plan does not alter the status of the corporation as a domestic business
corporation and the shares outstanding prior to the merger or consolidation
will continue as or be converted into identical shares of the surviving or new
corporation; (ii) prior to the adoption of the plan and at all times
thereafter prior to its effective date, another corporation that is a party to
the plan owns 80% or more of the outstanding shares of each class of the
corporation; or (iii) no shares of the corporation have been issued prior to
the adoption of the plan of merger or consideration by Phar-Mor. In cases
where shareholder approval is required, the Pennsylvania Law provides that a
merger or consolidation shall be approved by a majority of the votes cast by
holders of securities entitled to vote thereon. The presence, in person or by
proxy, of the holders of at least a majority of shares entitled to vote is
necessary to constitute a quorum at a meeting of shareholders held for such
purpose.
ShopKo. Under the Minnesota Law, the plan of a merger generally must be
approved by the holders of a majority of the voting power of the shares
entitled to vote of each of the merging corporations, but need not be approved
by the shareholders of any parent corporation, even when the parent
corporation's securities are to be used as consideration for the merger.
Unless otherwise required in a corporation's articles of incorporation, the
Minnesota Law does not require a shareholder vote of the surviving corporation
to approve the plan of merger if (i) the merger agreement does not amend the
existing articles of incorporation; (ii) each share of the surviving
corporation outstanding before the merger is an identical outstanding share
after the merger; (iii) the voting power of the outstanding shares of the
corporation entitled to vote immediately after the merger, plus the voting
power of the shares of the corporation entitled to vote issuable on conversion
of, or on exercise of rights to purchase, securities issued in the
transaction, will not exceed by more than 20 percent, the voting power of the
outstanding shares of the corporation entitled to vote immediately before the
transaction; or (iv) the number of participating shares of the corporation
(outstanding shares of the corporation that entitle their holders to
participate without limitation in the distributions of the corporation)
immediately after the merger, plus the number of participating shares issuable
on conversion of, or on the exercise of rights to purchase, securities issued
in the transaction, will not exceed by more than 20 percent, the number of
participating shares immediately prior to the transaction. Under the Minnesota
Law, a disposition of all or substantially all of a corporation's assets other
than in the usual and regular course of business requires the approval of the
holders of a majority of the voting power of the outstanding shares of the
corporation.
The ShopKo Articles, subject to certain exceptions, require special voting
for certain combinations with a direct or indirect beneficial owner of at
least 5% of the outstanding shares of capital stock of ShopKo entitled to vote
generally in the election of directors (voting as a single class) including:
(i) any merger or consolidation; (ii) any sale, lease, exchange or other
disposition of all or any substantial part of the assets of the corporation;
(iii) the issuance or transfer of any securities of the corporation to another
person or entity in exchange for assets or securities or a combination thereof
with an aggregate market value of $5 million or more; (iv) and the issuance or
transfer of any securities of the corporation to any other person or entity
for cash. In order to approve the aforementioned transactions, the ShopKo
Articles require the affirmative vote of the holders of at least 75% of the
outstanding shares of capital stock entitled to vote generally in the election
of directors (voting as a single class) and at least a majority of the
outstanding shares of capital stock of the corporation not beneficially owned
by the other party to the transaction; however, the provision in ShopKo's
Articles which requires the super-majority vote is inapplicable to the
Combination.
Cabot Noble. Under the Delaware Law, unless required by its certificate of
incorporation (the Cabot Noble Certificate does not contain any such
requirement), no vote of stockholders of a constituent corporation surviving a
merger will be necessary to authorize a merger if: (i) the agreement of merger
does not amend the certificate of incorporation of the constituent
corporation; (ii) each share of stock of the constituent corporation
outstanding prior to the merger is to be an identical outstanding or treasury
share of the surviving corporation after the merger; and (iii) either no
shares of common stock of the surviving corporation and no shares, securities
or obligations convertible into such stock are to be issued or delivered under
the plan of merger, or the authorized
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unissued shares of the treasury of shares of common stock of the surviving
corporation to be issued or delivered under the plan of merger plus those
initially issuable upon conversion of any other shares, securities or
obligations to be issued or delivered under such plan do not exceed 20% of the
shares of common stock of such constituent corporation previously outstanding,
plus certain other conditions. Additionally, under the Delaware Law, a
corporation that is the record holder of at least 90% of the outstanding
shares of each class of the stock of a subsidiary corporation may cause the
subsidiary corporation to merge with the parent corporation, without the need
to obtain the approval of the subsidiary's stockholders or the board of
directors. In cases where stockholder approval is required, the Delaware Law
provides that a merger or consolidation will be adopted upon the vote of a
majority of the outstanding stock of the corporation entitled to vote thereon.
STOCK REPURCHASES
Phar-Mor. Under the Pennsylvania Law, a corporation may acquire its own
shares. A purchase, redemption or other acquisition by a corporation of its
shares is treated as a distribution by the corporation to or for the benefit
of its shareholders and is subject to the limitations described above under
the caption "Dividends and Distributions." If the articles provide that shares
acquired by the corporation shall not be reissued, the authorized shares of
the class shall be reduced by the number of shares acquired. In any other
case, the shares acquired shall be deemed to be issued but not outstanding,
except that, unless otherwise provided by the bylaws, the board of directors
may, by resolution, restore any or all of the previously issued shares of the
corporation owned by it to the status of authorized but unissued shares.
ShopKo. Under the Minnesota Law, a corporation may acquire its own shares. A
purchase, redemption or other acquisition by a corporation of its shares is
treated as a distribution by the corporation to or for the benefit of its
shareholders and is subject to the limitations described above under "--
Dividends and Distributions." In addition, except for redemptions of shares
acquired in a control share acquisition, a corporation may not directly or
indirectly, purchase or agree to purchase any shares entitled to vote from any
entity that beneficially owns more than five percent of the voting power of
the corporation for more than the market value thereof if the shares have been
beneficially owned by the entity for less than two years, unless the purchase
or agreement to purchase is approved at a meeting of shareholders by the
affirmative vote of the holders of a majority of the voting power of all
shares entitled to vote or the corporation makes an offer, of at least equal
value per share, to all holders of shares of the class or series and to all
holders of any class or series into which the securities may be converted.
Cabot Noble. Under the Delaware Law, a corporation may not purchase or
redeem its own shares of capital stock when the capital of the corporation is
impaired or when such purchase or redemption would cause any impairment of the
capital of the corporation. However, a corporation may purchase or redeem out
of capital any of its own preferred shares if such shares will be retired upon
the acquisition thereof and the capital of the corporation will be thereby
reduced.
REMOVAL OF DIRECTORS
Phar-Mor. Under the Pennsylvania Law, unless the bylaws provide otherwise,
directors of a corporation may be removed from office without cause by the
vote of shareholders entitled to elect directors. Notwithstanding the
foregoing, unless otherwise provided in the articles, if a by-law of the
corporation adopted by the shareholders provides for a classified board of
directors, directors may be removed from office only for cause by the vote of
shareholders entitled to vote on the matter. The Phar-Mor Bylaws do not
contain a provision adopted by its shareholders providing for a classified
board of directors, but do provide for the removal of directors by
shareholders only for cause.
ShopKo. Under the Minnesota Law, a director of a corporation that does not
have cumulative voting may be removed with or without cause with the approval
of the holders of the proportion or the number of the voting power of the
shares of classes or series the director represents sufficient to elect him.
In the case of a corporation having cumulative voting, however, if less than
the entire board of directors is to be removed, a director may not be removed
if votes of a proportion of voting power sufficient to elect the director at
an election of the entire
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board of directors under cumulative voting are cast against removal of the
director. The ShopKo Articles do not permit cumulative voting and the ShopKo
Articles and Bylaws provide that any directors, or the entire ShopKo Board,
may be removed from office at any time, with or without cause, upon the
affirmative vote of the holders of not less than 75% of the outstanding shares
of the capital stock of the corporation entitled to vote generally in the
election of directors, voting together as a single class.
Cabot Noble. Under the Delaware Law, directors may be removed with or
without cause, by a majority of the stockholders entitled to vote at an
election of directors, except: (i) unless the certificate of incorporation
otherwise provides, if the board of directors is classified removal may be for
cause only; or (ii) where a corporation has cumulative voting, if less than
the entire board of directors is removed, no director may be removed without
cause if the votes cast against his removal would be sufficient to elect him
if then cumulatively voted at an election of the entire board of directors of
which he is a part. The Cabot Noble Board is classified into three classes
with staggered terms expiring in 1997, 1998 and 1999. Cabot Noble's
stockholders do not have the right to cumulate their votes in the election of
directors and a director may only be removed for cause by the affirmative vote
of the holders of at least 75% of the outstanding voting stock entitled to
vote generally in the election of directors, voting together as a single
class, at an annual or special meeting of the stockholders, the notice of
which states that the removal of a director or directors is among the purposes
of the meeting. Directors are elected by a plurality vote of all of the votes
cast at the annual meeting of stockholders.
The Cabot Noble Bylaws establish an advance notice procedure with regard to
the nomination of candidates for election as directors and with regard to
other matters to be brought by stockholders before an annual meeting of Cabot
Noble's stockholders.
CHARTER AMENDMENTS
Phar-Mor. Under the Pennsylvania Law, amendments to the articles of
incorporation may be proposed either by the board of directors or, unless
otherwise provided in the corporation's articles of incorporation, by petition
of shareholders entitled to cast at least 10% of the votes that all
shareholders are entitled to cast. However, shareholders of a registered
corporation are not entitled by statute to propose an amendment to the
articles. Except for certain amendments which do not require shareholder
approval, and unless a greater vote is required, amendments to the articles
must be approved by the affirmative vote of a majority of the votes cast by
all shareholders entitled to vote thereon. In addition, if any class or series
of shares is entitled to vote as a class, the affirmative vote of a majority
of the votes cast in each such class is also required. The Phar-Mor Articles
explicitly state that the business combination provisions of the Pennsylvania
Law are not applicable to Phar-Mor and require the affirmative vote of a
majority of voting stock voting together as one class to amend, repeal or
adopt any provision inconsistent with the "business combination" provisions
contained in the Phar-Mor Articles.
ShopKo. Under the Minnesota Law, after shares have been issued by the
corporation, a resolution approved by the affirmative vote of a majority of
directors setting forth the proposed amendment, or proposed by shareholders
holding three percent or more of the voting power of the shares entitled to
vote is submitted to a vote at the next meeting of the shareholders. The
proposed amendment is adopted when it receives the affirmative vote of the
holders of the greater of (1) a majority of the voting power of the shares
present and entitled to vote on that item of business, or (2) a majority of
the voting power of the minimum number of shares entitled to vote that would
constitute a quorum at the meeting, except where the articles or law require a
larger proportion or number. In any case where a class or series of shares is
entitled to vote, the matter being voted on must also receive the affirmative
vote of the holders of the same proportion of shares present of that class or
series, or the total outstanding shares of that class or series, unless the
articles require a larger proportion. The ShopKo Articles provide that except
as required by law or by resolution of the ShopKo Board establishing a series
of preferred stock, all matters are voted on without distinction as to classes
or series of stock. However, the ShopKo Articles require a 75% vote of the
outstanding shares of capital stock of ShopKo entitled to vote generally in
the election of directors (voting as one class) (and a majority vote of the
outstanding shares of capital stock of ShopKo entitled to vote generally in
the election of directors (voting as one class), exclusive of all voting stock
beneficially owned by any person who owns 5% or more of the outstanding shares
of capital stock of ShopKo)
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to amend the provisions in the ShopKo Articles requiring super-majority
shareholder votes and a 75% vote of the outstanding shares of capital stock of
ShopKo entitled to vote generally in the election of directors (voting as one
class) to amend provisions in the Articles relating to the classification,
removal and filling of vacancies with respect to directors.
Cabot Noble. Under the Delaware Law, unless its certificate of incorporation
or bylaws otherwise provide, amendments to a corporation's certificate of
incorporation generally require the approval of the holders of a majority of
the outstanding stock entitled to vote thereon, and if such amendments would
affect certain rights of holders of a particular class of stock, the approval
of a majority of the outstanding stock of such class is required. The Cabot
Noble Certificate provides that the affirmative vote of the holders of
outstanding voting stock entitled to vote generally in the election of
directors having at least 75% of the votes of all outstanding voting stock
entitled to vote generally in the election of directors, voting together as a
single class, is required to amend or repeal, or to adopt any provision
inconsistent with Article Fifth (discussing amendments to certain provisions
of the Cabot Noble Bylaws), Article Sixth (discussing who may call special
meetings of stockholders and the business to be conducted at stockholder
meetings) and Article Seventh (discussing number, election and terms of
directors) of the Cabot Noble Certificate.
SHAREHOLDER ACTION WITHOUT A MEETING
Phar-Mor. Under the Pennsylvania Law, unless restricted in the bylaws, any
action which may be taken at a meeting of the shareholders may be taken
without a meeting if, prior to the action, consents of all shareholders
entitled to vote at a meeting for such purpose shall be filed with the
secretary of the corporation. In addition, the bylaws may provide that any
action which may be taken at a meeting of the shareholders may be taken
without a meeting if there is written consent of shareholders who would have
been entitled to cast the minimum number of votes that would be necessary to
authorize the action at a meeting at which all the shareholders were present
and voting. An action may be authorized by less than unanimous written consent
of the shareholders of a registered corporation, if less than unanimous
consent is permitted by its articles. The Phar-Mor Bylaws authorize the
shareholders to act only at a duly organized meeting except when acting by
unanimous consent to remove a director or directors.
ShopKo. The Minnesota Law requires the unanimous written consent of the
shareholders to authorize any action without a meeting. The ShopKo Bylaws
provide that any action which might be taken at a meeting of shareholders may
be taken without a meeting if done in writing and signed by all of the
shareholders entitled to vote on that action.
Cabot Noble. Under the Delaware Law, unless the certificate of incorporation
provides otherwise, any action to be taken by stockholders may be taken
without a meeting, without prior notice and without a vote, if a consent in
writing is signed by the holders of outstanding stock having not less than the
minimum number of votes than would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present.
The Cabot Noble Certificate provides that, subject to the rights of holders of
preferred stock, any action required or permitted to be taken by stockholders
must be effected at a duly called annual or special meeting of the
stockholders and may not be effected by written consent of the stockholders.
"ANTI-TAKEOVER" LAWS
Phar-Mor. The Pennsylvania Law contains certain provisions which (1) require
that following any acquisition by any person or group of 20% of a public
corporation's voting power, the remaining shareholders have the right to
receive payment for their shares from such person or group in an amount equal
to the "fair value" of the shares; and (2) prohibit for five years, subject to
certain exceptions, a "business combination" (which includes a merger or
consolidation of the corporation or a sale, lease or exchange of assets) with
a shareholder or group of shareholders beneficially owning 20% or more of a
public corporation's voting power. The Phar-Mor Articles explicitly state that
the business combination provisions of the Pennsylvania Law are not applicable
to Phar-Mor and require the affirmative vote of a majority of voting stock
voting together as one class
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to amend, repeal or adopt any provision inconsistent with the "business
combination" provisions contained in the Phar-Mor Articles.
The Pennsylvania Law also contains a provision which provides that, in
discharging their duties, the Phar-Mor Board, in considering the best
interests of the corporation, may consider (i) the effects of any action on
shareholders, employees, suppliers, customers and creditors of the
corporation, and upon communities in which offices or other establishments of
the corporation are located, (ii) the short-term or long-term interests of the
corporation including the possibility that the best interests of the
corporation may be served by the continued independence of the corporation,
(iii) the resources, intent and conduct of any person seeking to take control
of the corporation, and (iv) all other pertinent factors. The Pennsylvania Law
also contains provisions to the effect that directors have no greater
obligation to justify their actions, and need not meet any higher burden of
proof, in the context of a potential or proposed acquisition of control than
they do in any other context.
ShopKo. The Minnesota Law requires approval by holders of a majority of the
disinterested shares of any "control share acquisition" of stock of an
"issuing public corporation" in order for the acquiror to vote more than
specified levels of ownership (twenty percent, thirty-three and one-third
percent and fifty percent) of the voting power of the stock of the target
corporation. Among other things, this provision requires the acquiring person
to deliver an information statement and copies of definitive financing
agreements to the corporation, in which event a meeting of the shareholders of
the issuing corporation will be held to consider whether full voting rights
will be accorded to the shares to be acquired. A corporation may opt-out of
the control share acquisition provisions by so providing in its articles of
incorporation or its bylaws approved by its shareholders. The ShopKo Articles
and Bylaws do not opt-out of the coverage of the control share acquisition
provisions.
The Minnesota Law restricts transactions with a shareholder ("interested
shareholder") acquiring ten percent or more of the voting power of the shares
of a publicly held (i.e., subject to the reporting requirements of the
Exchange Act) corporation unless the share acquisition or the transaction has
been approved by a committee consisting of all disinterested directors of the
corporation prior to the acquisition of the ten percent interest. For four
years after the ten percent threshold is reached (absent prior committee
approval), the corporation cannot enter into a merger, sale of substantial
assets, loan, substantial issuance of stock, plan of liquidation or
reincorporation involving the interested shareholder or its affiliates.
Cabot Noble. Section 203 of the Delaware Law restricts the ability of an
"interested stockholder" to merge with or enter into other combinations with a
corporation for a period of three years after becoming an "interested
stockholder." A person is deemed to be an "interested stockholder" upon
acquiring 15% or more of the outstanding voting stock of the target
corporation. However, Section 203 of the Delaware Law does not apply if: (i)
prior to the date the person became an interested stockholder, the board of
directors of the target corporation approves the transaction which results in
the stockholder becoming an interested stockholder; (ii) the stockholder
acquires 85% or more of the corporation's outstanding voting stock in a single
transaction (excluding shares owned by directors who are also officers and
shares owned by certain employee stock plans); or (iii) the combination is
approved by the corporation's board of directors and the holders of two-thirds
of the corporation's voting stock, at an annual or special meeting of the
stockholders and not by written consent, excluding shares owned by the
interested stockholder.
Section 203 applies to Delaware corporations, the stock of which is (i)
listed on a national securities exchange; (ii) authorized for quotation on
Nasdaq; or (iii) held of record by more than 2,000 stockholders. However,
Section 203 does not apply in certain cases, including (i) if the
corporation's original certificate of incorporation contains a provision
expressly electing not to be governed by that Section; (ii) the corporation,
by action of its board of directors, has adopted an amendment to its bylaws,
within 90 days of the effective date of the statute, expressly electing not to
be governed by the statute; (iii) the corporation, by action of a majority of
its stockholders, adopts an amendment to its certificate of incorporation or
bylaws expressly electing not to be governed by the statute; or (iv) the
stockholder becomes an interested stockholder inadvertently and divests itself
of sufficient shares so that the stockholder ceases to be an interested
stockholder, provided that the stockholder
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would not have been an interested stockholder (but for the inadvertent
acquisition) at any time within the three year period immediately prior to a
business combination between the corporation and such stockholder.
A Delaware corporation may elect not to be subject to Section 203 by having
its stockholders approve an amendment to its certificate of incorporation or
bylaws to such effect. Cabot Noble has not made such an election and,
therefore, Section 203 may have an anti-takeover effect with respect to Cabot
Noble.
VOLUNTARY DISSOLUTION
Phar-Mor. The Pennsylvania Law provides that a voluntary dissolution of a
corporation must be proposed by the board of directors adopting a resolution
recommending that the corporation be dissolved voluntarily and submitting the
resolution to the shareholders for their vote. The dissolution must be
approved by the affirmative vote of a majority of the votes cast by all the
shareholders entitled to vote thereon.
ShopKo. The Minnesota Law provides that shareholders holding more than fifty
percent of the total voting power may authorize a corporation's dissolution,
with or without the approval of the corporation's board of directors.
Cabot Noble. The Delaware Law provides that unless the board of directors
approves a proposal to dissolve a corporation, the dissolution must be
consented to in writing by stockholders holding one hundred percent of the
total voting power of the corporation. If the dissolution is initiated by the
board of directors, it need only be approved by a majority of the outstanding
stock of the corporation entitled to vote thereon.
TRANSACTIONS WITH DIRECTORS
Phar-Mor. The Pennsylvania Law provides that no contract or transaction
between a corporation and one or more of its directors, or between a
corporation and any other entity in which one or more of its directors are
directors or officers have a financial interest, is void or voidable if (i)
the material facts as to the relationship or interest and as to the contract
or transaction are disclosed or known to the board of directors, which
authorizes the contract or transaction by the affirmative vote of a majority
of the disinterested directors; (ii) the material facts as to the contract or
transaction are disclosed or known to the shareholders entitled to vote
thereon and the contract or transaction is specifically approved in good faith
by a vote of those shareholders; or (iii) the contract or transaction is fair
as to the corporation as of the time it is authorized, approved or ratified by
the board of directors or the shareholders.
ShopKo. The Minnesota Law provides that no contract or transaction between a
corporation and one or more of its directors, or between a corporation and any
other entity in which one or more of its directors are directors or officers,
or have a material financial interest, is void or voidable if (i) the material
facts as to the director's relationship or interest and as to the contract or
transaction are disclosed or known to the board of directors or committee,
which authorizes the contract or transaction in good faith by the affirmative
vote of a majority of the board or committee (but the interested directors
shall not vote or be counted in determining a quorum); (ii) the material facts
as to the director's relationship or interest and to the contract or
transaction are disclosed or known to the shareholders entitled to vote
thereon, and the contract or transaction is specifically approved in good
faith by (a) the holders of two-thirds of the shares entitled to vote which
are owned by persons other than the interested director or directors, or (b)
the holders of all of the outstanding shares whether or not entitled to vote;
or (iii) the contract or transaction is fair and reasonable as to the
corporation as of the time it is authorized, approved or ratified by the board
of directors, a committee thereof, or the shareholders.
Cabot Noble. The Delaware Law provides that no contract or transaction
between a corporation and one or more of its directors or officers, or between
a corporation and any other entity in which one or more of its directors or
officers are directors or officers, or have a financial interest, is void or
voidable if (i) the material facts as to the director's or officer's
relationship or interest and as to the contract or transaction are disclosed
or known to the board of directors or committee, which authorizes the contract
or transaction in good faith by the
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affirmative vote of a majority of the disinterested directors; (ii) the
material facts as to the director's or officer's relationship or interest and
as to the contract or transaction are disclosed or known to the stockholders
entitled to vote thereon and the contract or transaction is specifically
approved in good faith by the stockholders, even though the disinterested
directors are less than a quorum or (iii) the contract or transaction is fair
as to the corporation as of the time it is authorized, approved or ratified by
the board of directors, a committee thereof, or the stockholders. A
corporation may make loans to, guarantee the obligations of or otherwise
assist its officers or other employees and those of a subsidiary, including
directors who are also officers or employees of the corporation or a
subsidiary, when such action, in the judgment of the directors, may reasonably
be expected to benefit the corporation.
FILLING VACANCIES ON THE BOARD OF DIRECTORS
Phar-Mor. The Pennsylvania Law provides that unless otherwise provided in
the bylaws, vacancies in the board of directors, including those resulting
from an increase in the number of directors, may be filled by a majority vote
of the remaining members of the board though less than a quorum, or by a sole
remaining director. When one or more directors resign from the board effective
at a future date, the directors then in office, including those who have so
resigned, have power by the applicable vote to fill the vacancies, the vote
thereon to take effect when the resignations become effective.
ShopKo. The Minnesota Law provides that unless different rules for filling
vacancies are provided for in the articles of incorporation or bylaws,
vacancies on the board of directors resulting from the death, resignation,
removal or disqualification of a director may be filled by the affirmative
vote of a majority of the remaining directors, even though less than a quorum,
and vacancies resulting from a newly-created directorship may be filled by the
affirmative vote of a majority of the directors serving at the time of the
increase. The shareholders may also elect a new director to fill a vacancy
that is created by the removal of a director by the shareholders. Neither the
ShopKo Articles or Bylaws create different rules for the filling of vacancies
on the ShopKo Board.
Cabot Noble. The Delaware Law provides that vacancies and newly created
directorships may be filled by a majority of the directors then in office,
although less than a quorum, unless otherwise provided in the certificate of
incorporation or bylaws. However if the certificate of incorporation directs
that a particular class is to elect such director, such vacancy may be filled
only by the other directors elected by such class. If, at the time of filling
any vacancy or newly created directorship, the directors then in office
constitute less than a majority of the whole board (as constituted immediately
prior to such increase), the Delaware Court of Chancery may, upon application
of stockholders holding at least ten percent of the total number of shares
outstanding having the right to vote for such directors, order an election to
be held to fill any such vacancies or newly created directorship or to replace
the directors chosen by the directors then in office. The Cabot Noble
Certificate provides that vacancies on the Cabot Noble Board are to be filled
solely by the affirmative vote of a majority of the remaining directors then
in office acting at a duly constituted meeting of the Cabot Noble Board, even
though less than a quorum.
NUMBER AND QUALIFICATION OF DIRECTORS
Phar-Mor. The Pennsylvania Law provides that the minimum number of directors
is one and the only qualifications for directors are that they be natural
persons of full age. Directors need not be residents of the Commonwealth or
shareholders of the corporation. The number of directors is fixed by, or in
the manner provided in, the bylaws. If not so fixed, the number of directors
is the same as stated in the articles of incorporation. If not so stated, the
number of directors is set at three. The Phar-Mor Bylaws set the initial board
of directors at seven directors. Prior to March 11, 1997, any change in the
number of directors is subject to shareholder approval. After that date, the
number of directors on the board is determined by board resolution. The Phar-
Mor Bylaws provide that no one is eligible to serve as a director unless he or
she is a natural person of full age or after the annual shareholder meeting
coincident with or next following his or her attainment of the age of seventy.
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ShopKo. The Minnesota Law provides that the minimum number of directors is
one and the only qualification for directors is that they must be natural
persons. The Minnesota Law permits the number of directors to be fixed by or
in a manner provided in the articles of incorporation or bylaws, and the
number of directors may be increased or decreased at any time by amendment to
or in the manner provided in the articles of incorporation or bylaws. The
ShopKo Bylaws provide for an initial board of five members and permit the
number of directors to be increased or decreased by the board of directors
from time to time or by the affirmative vote of holders of not less than 75%
of the outstanding shares of ShopKo entitled to vote generally in the election
of directors, voting together as a single class.
Cabot Noble. The Delaware Law provides that the minimum number of directors
is one. The number of directors is fixed by or in the manner provided in the
bylaws, unless the certificate of incorporation fixes the number of directors,
in which case a change in the number of directors may only be made by
amendment to the certification of incorporation. The Cabot Noble Bylaws
provide that subject to the maximum and minimum number of directors stated in
the Cabot Noble Certificate (i.e., maximum of sixteen and minimum of three),
the number of directors may be determined by a vote of the majority of the
Cabot Noble Board or by the affirmative vote of the holders of at least 75% of
the votes of all outstanding voting stock entitled to vote generally in the
election of directors, voting together as a single class.
PREEMPTIVE RIGHTS
Phar-Mor. The Pennsylvania Law provides that shareholders have no preemptive
rights unless so stated in the company's articles of incorporation. The Phar-
Mor Articles expressly provide that shareholders do not have preemptive
rights.
ShopKo. Minnesota Law provides that all security holders are entitled to
preemptive rights unless the articles of incorporation or the board, in
creating a class or series of stock, specifically deny or limit preemptive
rights. The ShopKo Articles specifically deny preemptive rights to its
security holders.
Cabot Noble. The Delaware Law provides that security holders of a
corporation only have such preemptive rights as may be provided in the
corporation's certificate of incorporation. The Cabot Noble Certificate does
not provide any preemptive rights to any security holders.
DIRECTOR ACTION BY WRITTEN CONSENT
Phar-Mor. The Pennsylvania Law provides that unless otherwise restricted in
the bylaws, any action required or permitted to be taken at a meeting of
directors may be taken without a meeting if, prior or subsequent to the
action, a consent thereto by all of the directors in office is filed with the
secretary of the corporation. The Phar-Mor Bylaws do not alter this
requirement.
ShopKo. The Minnesota Law provides that any action required or permitted to
be taken by the board of directors may be taken by written action signed by
all of the directors; however, if a company's articles of incorporation so
provide, any action, other than an action requiring shareholder approval, may
be taken by written action signed by the number of directors that would be
required to take the same action at a meeting of the board of directors at
which all directors were present. The ShopKo Bylaws provide that directors or
committees of directors may take action without a meeting if done in writing
and signed by all directors or committee members (unless the ShopKo Articles
provide otherwise and the action need not be approved by the shareholders.)
The ShopKo Articles are silent regarding written action by directors.
Cabot Noble. The Delaware Law provides that unless otherwise restricted by
the certificate of incorporation or bylaws, any action required or permitted
to be taken at any meeting of the board of directors or a committee thereof
may be taken without a meeting if all members of the board or committee
consent in writing and the writing is filed with the corporate minutes. The
Cabot Noble Bylaws provide that any action by directors must be taken at a
duly convened meeting or by unanimous written consent of the directors.
166
<PAGE>
VOTING IN THE ELECTION OF DIRECTORS
In an election of directors for corporations for which cumulative voting is
provided, each share of stock normally having one vote is entitled to a number
of votes equal to the number of directors to be elected. A shareholder may
than cast all such votes for a single candidate or may allocate them among as
many candidates as the shareholder may choose. Without cumulative voting, the
holders of a majority of shares voting in the election of directors would have
the power to elect all the directors to be elected, and no person could be
elected without the support of holders of a majority of the shares.
Phar-Mor. The Pennsylvania Law provides that cumulative voting for the
election of directors is required unless specifically limited or denied in the
articles of incorporation. The Phar-Mor Articles specifically deny cumulative
voting rights to the Phar-Mor shareholders.
ShopKo. The Minnesota Law provides that cumulative voting for the election
of directors is required unless specifically limited or denied in the articles
of incorporation. The ShopKo Articles specifically deny cumulative voting
rights to the ShopKo shareholders.
Cabot Noble. The Delaware Law provides that cumulative voting is not
mandatory and cumulative voting rights must be provided in a corporation's
certificate of incorporation if stockholders are to be entitled to cumulative
voting rights. The Cabot Noble certificate does not provide for cumulative
voting rights. Delaware Law requires that elections of directors be by written
ballot, unless otherwise provided in a corporation's certificate of
incorporation. The Cabot Noble Certificate and the Cabot Noble Bylaws do not
require the election of directors by written ballot unless requested by the
Chairman or the holders of outstanding voting stock entitled to vote generally
in the election of directors having a majority of the votes of all outstanding
voting stock entitled to vote generally in the election of directors present
or represented at a meeting of stockholders.
CERTAIN TRANSACTIONS
SHOPKO EMPLOYMENT AGREEMENTS--EXECUTIVE OFFICERS
On the Effective Date, ShopKo will enter into employment agreements with
Dale Kramer, William Podany and Jeffrey Jones pursuant to which Mr. Kramer
will serve as President and Chief Executive Officer of ShopKo, Mr. Podany will
serve as Executive Vice President and Chief Operating Officer of ShopKo and
Mr. Jones will serve as Senior Vice President and Chief Financial Officer of
ShopKo. Each of Messrs. Kramer, Podany and Jones (collectively, the "ShopKo
Executives") also will serve as members of the Chairman's Council of Cabot
Noble. The agreement with Mr. Kramer will terminate one day before the third
anniversary of the Effective Date and the agreements with Messrs. Podany and
Jones will terminate one day before the second anniversary of the Effective
Date (respectively, the "Stated Term"), in each case unless earlier terminated
in accordance with the terms of the respective agreements.
The annual base salary under such agreements is subject to periodic review,
not less frequently than annually, and may be increased but not decreased from
the initial annual base salaries of $500,000 for Mr. Kramer, $440,000 for Mr.
Podany and $325,000 for Mr. Jones. In addition, each of the agreements
provides for certain bonuses. For ShopKo's fiscal year ending February 22,
1997, each of the ShopKo Executives will receive that bonus to which he is
entitled under ShopKo's fiscal year 1997 Executive Incentive Plan. ShopKo's
Executive Incentive Plan provides for bonuses to the ShopKo Executives in
amounts which are dependent upon ShopKo's earnings. For fiscal year 1997, Mr.
Kramer's bonus will range from 0% to 100% of his annual base salary of
$500,000, Mr. Podany's bonus will range from 0% to 80% of his annual base
salary of $400,000, and Mr. Jones's bonus will range from 0% to 70% of his
annual base salary of $285,000. The agreements provide that for purposes of
calculating the ShopKo Executives' fiscal year 1997 bonuses, ShopKo's earnings
shall be increased by the amount of one-time charges and expenses related to
the Transaction. For the twelve-month period beginning on February 23, 1997,
each of the ShopKo Executives will receive a bonus which will be the greater
of the amount to which he is entitled under the incentive/bonus plan to be
adopted by the Compensation
167
<PAGE>
Committee of the Cabot Noble Board (the "Bonus Plan") or an alternative amount
as specified in each employment agreement, which will be $250,000 for Mr.
Kramer and will not be less than $176,000 for Mr. Podany and $130,000 for Mr.
Jones. Thereafter, bonuses for each will be as determined under the Bonus
Plan.
Each of the ShopKo Executives also will receive nonqualified stock options
pursuant to his employment agreement. The stock options will permit each
ShopKo Executive to purchase a specified number of Cabot Noble Shares at a per
share exercise price equal to the fair market value of a Cabot Noble Share on
the Effective Date. Mr. Kramer's option is for 175,000 Cabot Noble Shares, and
the options of Messrs. Podany and Jones are each for 112,500 Cabot Noble
Shares. Each of the options will vest in thirds on the first anniversary of
the option grant, the second anniversary of the option grant and the third
anniversary of the option grant, respectively, unless the relevant ShopKo
Executive is terminated without cause or leaves ShopKo's employ for Good
Reason (as defined in the employment agreements), in which case the relevant
option would vest immediately.
No later than 30 days after the Stated Term, ShopKo shall pay Mr. Kramer a
lump sum supplemental retirement benefit of $950,000. In addition, ShopKo will
use its best efforts to provide Mr. Kramer and his spouse with group medical
and dental insurance until he attains age 65.
Under each of the employment agreements, in the event the relevant ShopKo
Executive is terminated without cause or leaves ShopKo's employ for Good
Reason, as defined in the relevant employment agreement, he will be entitled
to certain payments from ShopKo. If the employment of Mr. Kramer is terminated
without cause or he leaves ShopKo's employ for Good Reason on or prior to the
first anniversary of the employment agreement, he will be entitled to a
payment of three times the sum of (i) his base salary ("Base Salary") and (ii)
a bonus amount which will be calculated according to the provisions of his
employment agreement, but will not be less than the minimum bonus stated above
(the "Bonus Amount"). If the employment of Mr. Podany or Mr. Jones is
terminated without cause or either such ShopKo Executive terminates for Good
Reason on or prior to the first anniversary of his employment agreement, the
terminated ShopKo Executive will be entitled to a payment equal to two times
the sum of his Base Salary plus his Bonus Amount (as defined in the previous
sentence). If Mr. Kramer's employment is terminated without cause or he leaves
ShopKo's employ for Good Reason after the first anniversary of the agreement
but on or prior to the expiration of its Stated Term, he will be entitled to a
payment equal to (a) the greater of (i) the number of months remaining in his
employment agreement divided by twelve or (ii) 1.5 times (b) the sum of his
Base Salary and Bonus Amount. If the employment of Mr. Podany or Mr. Jones is
terminated without cause or either such ShopKo Executive terminates for Good
Reason after the first anniversary of the agreement but on or prior to the
expiration of its Stated Term, the payment will be 1.5 times the sum of his
Base Salary and Bonus Amount. If the employment of Mr. Podany or Mr. Jones is
terminated without cause or either such ShopKo Executive terminates for Good
Reason, he will be entitled to reimbursement for certain moving expenses
incurred in relocating from Green Bay, Wisconsin, as calculated according to
the provisions of the agreements. The employment agreements provide that if
certain amounts to be paid thereunder constitute "parachute payments," as
defined in Section 280G of the Code, the payments owed to the individual may
be decreased, but only if the result is to give the individual a larger after-
tax benefit than if the payments were not reduced.
If any of the ShopKo Executives are terminated by ShopKo without cause or
leave ShopKo's employ for Good Reason during the Stated Term, it is likely
that a portion of the payments made to them pursuant to the employment
agreements, combined with the parachute value of accelerated options and
restricted stock, would be "excess" parachute payments. Excess parachute
payments are subject to a 20% non-deductible excise tax in addition to any
income tax otherwise payable and, unlike other compensation payments, are not
deductible for tax purposes by the payor company as provided in Section 280G
of the Code. In addition, the amount of the excess parachute payments will
reduce the $1,000,000 limit under Section 162(m) of the Code.
Each of the employment agreements also contains a noncompetition clause
effective throughout the term of the agreement, as well as provisions
preventing the solicitation of employees both during and for one year after
the termination of employment with ShopKo.
168
<PAGE>
According to the provisions of each of the employment agreements, at the
request of ShopKo or the relevant ShopKo Executive, any disputes arising out
of any of the employment agreements or employment relationships shall be
submitted to and settled by binding arbitration, in accordance with the
agreement.
The employment agreements, once executed, will supersede and replace the
existing change of control severance agreements described under "Description
of ShopKo--Severance Agreements."
EFFECT OF THE TRANSACTION ON STOCK OPTION AND RESTRICTED STOCK AWARDS OF
SHOPKO
The Transaction will constitute a change of control pursuant to the
provisions of ShopKo's 1991 and 1995 Stock Option Plans, its 1993 Restricted
Stock Plan and the agreements awarding options or shares to ShopKo employees
thereunder. As a result, grants of options which would not otherwise be vested
as of the Effective Date will become exercisable as a result of the
Transaction. The number of option shares which will vest as a result of the
Transaction will be dependent on when the Effective Date occurs since the
time-vested options normally become exercisable on the anniversary of their
date of grant. Messrs. Kramer and Podany have been awarded 40,000 and 25,000
shares, respectively, of restricted stock by ShopKo which will vest since the
Transaction is a change of control under the relevant plan. However, Mr.
Kramer has waived this provision such that his 40,000 shares of restricted
stock will not vest on the Effective Date. With respect to ShopKo's executive
officers and the non-employee directors, the following table sets forth the
number of ShopKo Shares subject to stock options which will vest on the
Effective Date as a result of the Transaction (assuming an Effective Date of
, 1997, and no performance vesting prior to such date), and the
weighted average exercise price per share of such stock options:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NAME NUMBER OF SHOPKO SHARES EXERCISE PRICE PER SHARE
---- ----------------------- ------------------------
<S> <C> <C>
Jack W. Eugster............ 2,374 $12.64
William J. Tyrell.......... 2,374 12.64
Dale P. Kramer............. 112,000 10.66
William J. Podany.......... 95,000 10.33
Michael J. Bettiga......... 36,240 10.67
Roger J. Chustz............ 52,000 12.00
Gary B. Hammond............ 36,240 10.67
Steven T. Harig............ 36,000 10.67
Thomas D. Hendra........... 36,000 10.67
Michael J. Hopkins......... 30,000 10.63
Jeffrey A. Jones........... 59,000 10.54
Rodney D. Lawrence......... 30,000 16.25
David A. Liebergen......... 37,120 10.68
L. Terry McDonald.......... 45,000 10.42
James F. Tucker............ 39,000 10.72
</TABLE>
The value of the accelerated options and restricted stock are parachute
payments pursuant to Section 280G of the Code. These amounts, combined with
payments made to ShopKo executive officers who are terminated by ShopKo
without cause or who leave ShopKo's employ for Good Reason during the term of
their employment or severance agreements, may be "excess" parachute payments,
the tax deductibility of which may be substantially limited.
CARESTREAM SCRIP CARD ACQUISITION BY SHOPKO
On July 16, 1996, ProVantage Inc. , a wholly owned subsidiary of ShopKo,
entered into an agreement to acquire the CareStream Scrip Card business from
HealthCare Connect, Inc., Health Care Pharmacy Providers, Inc., and Scrip Card
Enterprises, Inc., all of which are wholly owned subsidiaries of FoxMeyer
Health. The acquisition closed on August 2, 1996. The purchase price was $30.5
million in cash at closing and a supplemental
169
<PAGE>
cash payment. The amount of the supplemental cash payment depends on when the
demand for payment ("Exercise Notice") is given by FoxMeyer Health and whether
ProVantage, Inc. is a publicly-held company at the time the Exercise Notice is
given. If ProVantage is not a publicly-held company when the Exercise Notice
is given, then the supplemental cash payment shall be $1,500,000 if the
Exercise Notice is given on or before August 1, 1997, or $2,500,000 if given
thereafter. If ProVantage is a publicly held company when the Exercise Notice
is given, the supplemental cash payment shall be the lesser of $5,000,000 or
an amount equal to the current market value of 1.5% of ProVantage's
outstanding stock (but not less than $1,500,000 if the Exercise Notice is
given on or before August 1, 1997, and not less than $2,500,000 if the
Exercise Notice is given after August 1, 1997).
ProVantage may extinguish FoxMeyer Health's right to the Supplemental Cash
Payment at any time by paying FoxMeyer Health $5,000,000. ProVantage must
extinguish the Supplemental Cash Payment right by paying FoxMeyer Health
$5,000,000 if: (i) ShopKo sells a majority of the stock of ProVantage, Inc. in
a private transaction; or (ii) ShopKo acquires a majority of the equity
interests in, or substantially all of the assets of, another PBM and upon
consummation of such acquisition such PBM is not held directly or indirectly
by ProVantage; or (iii) ProVantage disposes of all or substantially all of any
business or assets (other than in the ordinary course of business) which
generated more than twenty percent (20%) of ProVantage's consolidated sales in
the preceding fiscal year.
In addition, ProVantage agreed to assume from the selling parties all
liabilities arising pursuant to several employment agreements which have since
been terminated, liabilities and obligations arising after August 2, 1996
under various leases, licenses and other service contracts entered into in the
ordinary course of the CareStream Scrip Card business. ProVantage also agreed
to employ all CareStream Scrip Card employees for a period of 90 days.
ProVantage continues to collect certain of FoxMeyer Health's accounts
receivable related to the operation of the CareStream Scrip Card business
prior to August 2, 1996.
Abbey J. Butler and Melvyn J. Estrin are directors of Phar-Mor and co-
chairmen of the board, co-chief executive officers and shareholders of
FoxMeyer Health. FoxMeyer Health is the beneficial owner of approximately
39.4% of the outstanding Phar-Mor Shares. See "Description of Phar-Mor--
Security Ownership of Certain Beneficial Owners and Management."
PHAR-MOR OPTION GRANTS; EMPLOYMENT AGREEMENTS--EXECUTIVE OFFICERS
In connection with the Transaction, the Phar-Mor Board approved the grant of
nonqualified options to purchase up to 100,000 Cabot Noble Shares to each of
Messrs. Schwartz and O'Leary and nonqualified options to purchase up to 50,000
Cabot Noble Shares to Mr. Ficarro. Messrs. Schwartz, O'Leary, Ficarro and have
been guaranteed bonuses equal to 60%, 50% and 35%, respectively, of their
respective base salaries for fiscal year 1997, and Mr. Spear has been
guaranteed a $115,000 bonus for fiscal year 1997.
On December 6, 1996, the Phar-Mor Board authorized a two-year extension of
the current term of each of the employment agreements with Messrs. Schwartz
and O'Leary. Each agreement would otherwise expire on September 11, 1997. The
Phar-Mor Board also authorized a two-year employment agreement with Mr.
Ficarro, whose employment currently is not governed by a formal agreement.
Messrs. Ficarro and Jeffery are participants in a severance and retention plan
providing for payment of 1.5 years of base salary if their loss of employment
is due to the Combination or their election not to relocate to Green Bay. Mr.
Spear would receive one year's base salary under similar circumstances. Other
terms of the employment agreements with Messrs Schwartz, O'Leary and Ficarro
remain to be negotiated.
Under Mr. Haft's employment agreement, the Combination constitutes a "change
in control" with respect to Phar-Mor, which entitles Mr. Haft to terminate his
employment with Phar-Mor and to consider such a termination as "Without
Cause", thereby giving rise to the rights described above. Mr. Haft has
indicated his intention to continue with the combined company's after
consummation of the transaction and has stated that he
170
<PAGE>
would like to work out an agreement with the new Cabot Noble Board with
respect to the terms and conditions concerning his role as Chairman and Chief
Executive Officer of Cabot Noble.
LEGAL MATTERS
Certain legal matters relating to the securities offered hereby will be
passed upon for Cabot Noble and Phar-Mor by Swidler & Berlin, Chartered,
Washington, D.C., and for ShopKo by Godfrey & Kahn, S.C., Milwaukee,
Wisconsin, and by Sidley & Austin, Chicago, Illinois, as special counsel to
ShopKo.
EXPERTS
The Phar-Mor consolidated financial statements as of June 29, 1996,
September 2, 1995 and July 1, 1995, and for the forty-three weeks ended June
29, 1996, the nine weeks ended September 2, 1995, the fifty-two weeks ended
July 1, 1995 and the fifty-three weeks ended July 2, 1994; the ShopKo
consolidated financial statements as of February 24, 1996 and February 25,
1995, and for the three years in the period ended February 24, 1996; and the
Cabot Noble balance sheet as of October 10, 1996 included in or incorporated
by reference in this Joint Proxy Statement/Prospectus and related financial
statement schedules have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports appearing or incorporated by reference
herein.
The independent auditors' report on the consolidated financial statements of
Phar-Mor as of July 1, 1995 and for the nine weeks ended September 2, 1995,
the fifty-two weeks ended July 1, 1995 and the fifty-three weeks ended July 2,
1994, expresses a qualified opinion as reliable accounting records to support
the acquisition cost of property and equipment were not available. Also, the
independent auditors' report includes explanatory paragraphs relating to 1)
the comparability of financial information prior to September 2, 1995 as a
result of the emergence of Phar-Mor from bankruptcy and the creation of a new
entity and 2) Phar-Mor entering into the Transaction with ShopKo.
The reports of such firm have been so included in reliance upon their
authority as experts in accounting and auditing.
171
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Cabot Noble, Inc.
Independent Auditors' Report............................................ F- 2
Balance Sheet as of October 10, 1996.................................... F- 3
Notes to Balance Sheet as of October 10, 1996........................... F- 4
ShopKo Stores, Inc.
Consolidated Balance Sheets as of November 30, 1996, December 2, 1995
and February 24, 1996.................................................. F- 5
Consolidated Statements of Earnings for the 40 weeks ended November 30,
1996 and
December 2, 1995 and for the year ended February 24, 1996 (Unaudited).. F- 6
Consolidated Statements of Cash Flows for the 40 weeks ended November
30, 1996 and December 2, 1995 and for the year ended February 24, 1996
(Unaudited)............................................................ F- 7
Consolidated Statements of Shareholders' Equity for the 40 weeks ended
November 30, 1996 and for the year ended February 24, 1996
(Unaudited)............................................................ F- 8
Notes to Consolidated Financial Statements for the 40 weeks ended
November 30, 1996 and December 2, 1995 and for the year ended February
24, 1996 (Unaudited)................................................... F- 9
Independent Auditors' Report............................................ F-10
Consolidated Balance Sheets as of February 24, 1996 and February 25,
1995................................................................... F-11
Consolidated Statements of Earnings for each of the three years in the
period ended
February 24, 1996...................................................... F-12
Consolidated Statements of Cash Flows for each of the three years in the
period ended February 24, 1996......................................... F-13
Consolidated Statements of Shareholders' Equity for each of the three
years in the period ended February 24, 1996............................ F-14
Notes to Consolidated Financial Statements for the fiscal years ended
February 24, 1996, February 25, 1995 and February 26, 1994............. F-15
Phar-Mor, Inc.
Condensed Consolidated Balance Sheets for Successor Phar-Mor as of
September 28, 1996 and June 29, 1996 (Unaudited)....................... F-26
Condensed Consolidated Statements of Operations of Successor Phar-Mor
for the Thirteen Weeks Ended September 28, 1996 and the Four Weeks
Ended September 30, 1995 and Predecessor Phar-Mor for the Nine Weeks
Ended September 2, 1995 (Unaudited).................................... F-27
Condensed Consolidated Statements of Cash Flows of Successor Phar-Mor
for the Thirteen Weeks Ended September 28, 1996 and the Four Weeks
Ended September 30, 1995 and Predecessor Phar-Mor for the Nine Weeks
Ended September 2, 1995 (Unaudited).................................... F-28
Condensed Consolidated Statements of Changes in Stockholders' Equity
(Deficiency)
for the Thirteen Weeks Ended September 28, 1996 (Unaudited)............ F-29
Notes to Condensed Consolidated Financial Statements for the Thirteen
Weeks Ended
September 28, 1996 and the Four Weeks Ended September 30, 1995 and for
the Nine Weeks Ended September 2, 1995 (Unaudited)..................... F-30
Independent Auditors' Report............................................ F-33
Consolidated Balance Sheets as of June 29, 1996, September 2, 1995 and
July 1, 1995........................................................... F-35
Consolidated Statements of Operations for the Forty-Three Weeks Ended
June 29, 1996, the Nine Weeks Ended September 2, 1995, the Fifty-Two
Weeks Ended July 1, 1995 and the Fifty-Three Weeks Ended July 2, 1994.. F-36
Consolidated Statements of Changes in Stockholders' Equity (Deficiency)
for the Forty-Three Weeks Ended June 29, 1996, the Nine Weeks Ended
September 2, 1995, the Fifty-Two Weeks Ended July 1, 1995 and the
Fifty-Three Weeks Ended July 2, 1994................................... F-37
Consolidated Statements of Cash Flows for the Forty-Three Weeks Ended
June 29, 1996, the Nine Weeks Ended September 2, 1995, The Fifty-Two
Weeks Ended July 1, 1995 and the Fifty-Three Weeks Ended July 2, 1994.. F-38
Notes to Consolidated Financial Statements for the Forty-Three Weeks
Ended June 29, 1996, the Nine Weeks Ended September 2, 1995, The Fifty-
Two Weeks Ended July 1, 1995 and the Fifty-Three Weeks Ended July 2,
1994................................................................... F-39
Schedule II............................................................. F-63
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To Cabot Noble, Inc.:
We have audited the accompanying balance sheet of Cabot Noble, Inc. (a
wholly owned subsidiary of Phar-Mor, Inc.) ("Cabot Noble") as of October 10,
1996. This financial statement is the responsibility of Cabot Noble's
management. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit of the balance sheet provides a
reasonable basis for our opinion.
In our opinion, such balance sheet presents fairly, in all material
respects, the financial position of Cabot Noble as of October 10, 1996 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
October 10, 1996
F-2
<PAGE>
CABOT NOBLE, INC.
BALANCE SHEET
AS OF OCTOBER 10, 1996
<TABLE>
<S> <C>
ASSETS
Current Assets:
Cash................................................................... $ 1
-----
Total assets......................................................... $ 1
=====
LIABILITIES & STOCKHOLDER'S EQUITY
Stockholder's Equity:
Preferred stock, $.01 par value, authorized shares, 50,000,000; none
outstanding........................................................... $ --
Common stock, $.01 par value, authorized shares, 200,000,000; 100
shares issued and outstanding......................................... 1
-----
Total stockholder's equity........................................... $ 1
=====
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-3
<PAGE>
CABOT NOBLE, INC.
NOTES TO BALANCE SHEET
OCTOBER 10, 1996
1. ORGANIZATION
Cabot Noble, Inc. ("Cabot Noble") is a Delaware corporation formed as a
wholly owned subsidiary of Phar-Mor, Inc. for the purpose of facilitating the
proposed transaction (see Note 2).
2. THE PROPOSED TRANSACTION
Phar-Mor, Inc. ("Phar-Mor") entered into an Agreement and Plan of
Reorganization (the "Proposed Transaction") dated September 7, 1996 (as
amended and restated as of October 9, 1996) with ShopKo, Inc. ("ShopKo") to
combine the respective companies under Cabot Noble. Under the terms of the
Proposed Transaction, each issued and outstanding share of Phar-Mor common
stock will be exchanged for one share of Cabot Noble common stock. Each issued
and outstanding share of ShopKo common stock will be exchanged for 2.4 shares
of Cabot Noble common stock, subject to adjustment in the event the value of
the exchange consideration falls outside a range between $17.25 and $18.00 per
share of ShopKo common stock (based on the average daily closing sale prices
of Phar-Mor's common stock over a specified 30 day period multiplied by the
2.4 share exchange ratio).
In connection with the Proposed Transaction, supervalu inc. ("supervalu"),
which currently owns approximately 46% of the issued and outstanding shares of
ShopKo common stock, has entered into an Amended and Restated Stock Purchase
Agreement (the "Stock Purchase Agreement") with Cabot Noble whereby supervalu
has agreed to sell to Cabot Noble 90% of the Cabot Noble shares that supervalu
receives in the Proposed Transaction immediately after the Proposed
Transaction is completed at $16.86 per share of ShopKo common stock held by
supervalu prior to the Proposed Transaction. The Stock Purchase Agreement
provides that supervalu will receive a combination of cash and a short-term
note at closing.
Consummation of the Proposed Transaction is subject to certain conditions,
including (a) receipt of financing of at least $75 million (b) approval by
shareholders of ShopKo and Phar-Mor (c) receipt of necessary regulatory
approvals, and (d) other conditions to closing customary in transactions of
this type.
F-4
<PAGE>
SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THIRD QUARTER AS OF
------------------------
FEBRUARY
NOVEMBER 30, DECEMBER 2, 24,
1996 1995 1996
------------ ----------- ----------
(UNAUDITED) (AUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................ $ 44,058 $ 47,799 $ 89,469
Receivables, less allowance for losses of
$4,460, $2,614 and $3,212,
respectively............................ 94,924 63,804 55,514
Merchandise inventories.................. 434,028 397,147 322,433
Other current assets..................... 15,582 16,216 8,775
---------- ---------- ----------
Total current assets................... 588,592 524,966 476,191
Other assets and deferred charges.......... 56,844 23,224 24,621
Property and equipment at cost:
Land..................................... 108,237 108,505 107,915
Buildings................................ 490,862 477,869 479,124
Equipment................................ 304,311 290,321 286,763
Leasehold improvements................... 49,148 49,034 49,306
Property under construction.............. 988 1,892 10,585
Property under capital leases............ 21,968 17,539 21,968
---------- ---------- ----------
975,514 945,160 955,661
Less accumulated depreciation and amortiza-
tion:
Property and equipment................... 370,989 330,237 331,541
Property under capital leases............ 8,985 6,636 6,972
---------- ---------- ----------
Net property and equipment............. 595,540 608,287 617,148
---------- ---------- ----------
Total assets........................... $1,240,976 $1,156,477 $1,117,960
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable--trade.................. $ 229,074 $ 202,031 $ 144,638
Accrued compensation and related taxes... 26,969 22,109 25,290
Accrued other liabilities................ 81,375 69,440 72,943
Accrued income and other taxes........... 30,538 26,420 16,797
Current portion of long-term
obligations............................. 1,096 755 1,127
---------- ---------- ----------
Total current liabilities.............. 369,052 320,755 260,795
Long-term obligations...................... 414,505 413,086 415,138
Deferred income taxes...................... 21,198 18,555 20,396
Shareholders' equity:
Common stock............................. 321 320 320
Additional paid-in capital............... 244,841 242,843 242,843
Retained earnings........................ 191,059 160,918 178,468
---------- ---------- ----------
Total shareholders' equity............. 436,221 404,081 421,631
---------- ---------- ----------
Total liabilities and shareholders'
equity.............................. $1,240,976 $1,156,477 $1,117,960
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR TO DATE (40 WEEKS) ENDED
-----------------------------------
NOVEMBER 30, DECEMBER 2, % INCREASE
1996 1995 (DECREASE)
------------ ----------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Net sales............................... $1,700,636 $1,469,656 15.7
Licensed department rentals and other
income................................. 9,923 11,211
---------- ----------
1,710,559 1,480,867 15.5
Costs and expenses:
Cost of sales........................... 1,310,013 1,099,882
Selling, general and administrative
expenses............................... 295,512 281,617
Depreciation and amortization expenses.. 46,097 43,857
---------- ----------
1,651,622 1,425,356 15.9
Income from operations.................... 58,937 55,511 6.2
Interest expense.......................... 24,983 27,071
---------- ----------
Earnings before income taxes.............. 33,954 28,440 19.4
Provision for income taxes................ 13,337 11,071
---------- ----------
Net earnings.............................. $ 20,617 $ 17,369 18.7
========== ==========
Net earnings per common share............. $ 0.64 $ 0.54
========== ==========
Weighted average number of common shares
outstanding.............................. 32,073 32,005
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR TO DATE (40 WEEKS) ENDED
---------------------------------
NOVEMBER 30, DECEMBER 2,
1996 1995
--------------- --------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net earnings.............................. $ 20,617 $ 17,369
Adjustments to reconcile net earnings to
net cash provided by operating
activities:
Depreciation and amortization........... 46,097 43,857
Provision for losses on receivables..... 165 124
Gain on sale of property and equipment.. (1,847) (1,637)
Deferred income taxes................... (102) 4,452
Change in assets and liabilities:
Receivables........................... (39,375) (21,861)
Merchandise inventories............... (111,595) 3,476
Other current assets.................. (5,736) (6,080)
Other assets.......................... (3,592) (1,206)
Accounts payable...................... 84,436 52,738
Accrued liabilities................... 27,373 1,544
--------------- --------------
Net cash provided by operating
activities......................... 16,441 92,776
--------------- --------------
Cash flows from investing activities:
Payments for property and equipment....... (23,572) (33,852)
Proceeds from the sale of property and
equipment................................ 2,566 2,421
Business acquisition, net of cash
acquired................................. (30,500)
--------------- --------------
Net cash (used in) investing
activities......................... (51,506) (31,431)
--------------- --------------
Cash flows from financing activities:
Change in short-term debt................. (15,000)
Proceeds from the sale of common stock
under option plans....................... 987
Dividend payment............................ (10,582) (10,563)
Reduction in capital lease obligations...... (751) (581)
--------------- --------------
Net cash (used in) financing
activities......................... (10,346) (26,144)
--------------- --------------
Net (decrease) increase in cash and cash
equivalents................................ (45,411) 35,201
Cash and cash equivalents at beginning of
year....................................... 89,469 12,598
--------------- --------------
Cash and cash equivalents at end of third
quarter.................................... $ 44,058 $ 47,799
=============== ==============
Supplemental cash flow information:
Noncash investing and financial
activities--
Restricted stock issued................... $ 1,012
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN
------------- EXCESS OF RETAINED
SHARES AMOUNT PAR VALUE EARNINGS
------ ------ ---------- --------
<S> <C> <C> <C> <C>
Balances at February 25, 1995............... 32,005 $320 $242,843 $154,112
Net earnings.............................. 38,439
Cash dividend declared on common stock--
$0.44 per share.......................... (14,083)
------ ---- -------- --------
Balances at February 24, 1996............... 32,005 320 242,843 178,468
Sale of common stock under option plans... 80 987
Issuance of restricted stock.............. 65 1 1,011 (1,012)
Restricted stock expense.................. 46
Net earnings.............................. 20,617
Cash dividend declared on common stock--
$0.22 per share.......................... (7,060)
------ ---- -------- --------
Balances at November 30, 1996............... 32,150 $321 $244,841 $191,059
====== ==== ======== ========
</TABLE>
Interim data subject to year end audit.
See notes to consolidated financial statements.
F-8
<PAGE>
SHOPKO STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE 40 WEEKS ENDED NOVEMBER 30, 1996 AND DECEMBER 2, 1995
ACCOUNTING POLICIES:
The 1996 annual report contains a summary of significant accounting policies
in the notes to the consolidated financial statements. The same accounting
policies are followed in the preparation of interim reports.
During the current fiscal year, ShopKo adopted Statements of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." The adoption of SFAS No. 123 will have no effect on net
earnings. ShopKo will continue to measure compensation cost for stock
compensation plans under Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees."
INVENTORIES:
ShopKo uses the LIFO method for substantially all inventories. If the first-
in, first-out (FIFO) method had been used, these inventories would have been
$42.1 million and $39.8 million higher at November 30, 1996 and at December 2,
1995, respectively.
INCOME TAXES:
The $13.3 million provision for income tax expense for the first three
quarters of fiscal 1997 consists of a $13.4 million current expense, offset by
a $0.1 million deferred tax credit. Deferred income taxes reflect the net tax
effect of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income
tax purposes.
NET EARNINGS PER COMMON SHARE:
Net earnings per common share are computed by dividing net earnings by the
weighted average number of common shares outstanding. Outstanding stock
options do not have a significant dilutive effect on earnings per share.
SIGNIFICANT EVENT:
On September 7, 1996, ShopKo and Phar-Mor, Inc. signed an agreement to
combine their two companies under a new holding company. The new company will
be called Cabot Noble, Inc. The combination will be accomplished through share
exchanges, and ShopKo and Phar-Mor will continue as separate operating
subsidiaries of Cabot Noble. The transaction will be accounted for as a
purchase of Phar-Mor by ShopKo. The transaction is subject to a number of
customary closing conditions, including but not limited to financing,
regulatory approvals and shareholder approvals.
STATEMENT OF SHOPKO:
The data presented herein is unaudited, but in the opinion of management,
includes all adjustments (which consist only of normal recurring accruals)
necessary for a fair presentation of the consolidated financial position of
ShopKo and its subsidiaries at November 30, 1996 and December 2, 1995 and the
results of their operations and cash flows for the periods then ended. These
interim results are not necessarily indicative of the results of the fiscal
years as a whole because the operations of ShopKo are highly seasonal. The
third and fourth fiscal quarters contribute a significant part of ShopKo's
earnings due to the Christmas selling season.
F-9
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
ShopKo Stores, Inc.:
We have audited the consolidated balance sheets of ShopKo Stores, Inc. and
Subsidiaries as of February 24, 1996 and February 25, 1995 and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the three years (52 weeks) in the period ended February 24, 1996.
These financial statements are the responsibility of ShopKo's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of ShopKo Stores, Inc. and
Subsidiaries as of February 24, 1996 and February 25, 1995, and the results of
their operations and their cash flows for each of the three years (52 weeks)
in the period ended February 24, 1996 in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Milwaukee, Wisconsin
April 2, 1996
F-10
<PAGE>
SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FEBRUARY 24, FEBRUARY 25,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.......................... $ 89,469 $ 12,598
Receivables, less allowance for losses of $3,212
and $3,590, respectively.......................... 55,514 42,067
Merchandise inventories............................ 322,433 400,623
Other current assets............................... 8,775 13,456
---------- ----------
Total current assets............................. 476,191 468,744
Other assets and deferred charges.................... 24,621 22,943
Property and equipment--net.......................... 617,148 618,064
---------- ----------
Total assets..................................... $1,117,960 $1,109,751
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt.................................... $ -- $ 15,000
Accounts payable--trade............................ 144,638 149,293
Accrued compensation and related taxes............. 25,290 24,612
Accrued other liabilities.......................... 72,943 61,858
Accrued income and other taxes..................... 16,797 29,955
Current portion of long-term obligations........... 1,127 755
---------- ----------
Total current liabilities........................ 260,795 281,473
Long-term obligations................................ 415,138 413,580
Deferred income taxes................................ 20,396 17,423
Shareholders' equity:
Preferred stock; none outstanding Common stock;
Shares outstanding, 32,005 in 1996 and 1995....... 320 320
Additional paid-in capital......................... 242,843 242,843
Retained earnings.................................. 178,468 154,112
---------- ----------
Total shareholders' equity....................... 421,631 397,275
---------- ----------
Total liabilities and shareholders' equity..... $1,117,960 $1,109,751
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-11
<PAGE>
SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
--------------------------------------
FEBRUARY 24, FEBRUARY 25, FEBRUARY 26,
1996 1995 1994
(52 WEEKS) (52 WEEKS) (52 WEEKS)
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Net sales............................. $1,968,016 $1,852,929 $1,738,746
Licensed department rentals and other
income............................... 13,924 12,433 11,509
---------- ---------- ----------
1,981,940 1,865,362 1,750,255
Costs and expenses:
Cost of sales......................... 1,466,733 1,364,913 1,285,232
Selling, general and administrative
expenses............................. 361,402 355,515 343,381
Depreciation and amortization
expenses............................. 56,383 53,474 47,336
---------- ---------- ----------
1,884,518 1,773,902 1,675,949
Income from operations................. 97,422 91,460 74,306
Interest expense....................... 34,282 29,042 21,417
---------- ---------- ----------
Earnings before income taxes........... 63,140 62,418 52,889
Provision for income taxes............. 24,701 24,628 20,767
---------- ---------- ----------
Net earnings........................... $ 38,439 $ 37,790 $ 32,122
========== ========== ==========
Net earnings per common share.......... $ 1.20 $ 1.18 $ 1.00
Weighted average number of common
shares outstanding.................... 32,005 32,014 32,001
</TABLE>
See notes to consolidated financial statements.
F-12
<PAGE>
SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
--------------------------------------
FEBRUARY 24, FEBRUARY 25, FEBRUARY 26,
1996 1995 1994
(52 WEEKS) (52 WEEKS) (52 WEEKS)
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings........................... $ 38,439 $ 37,790 $ 32,122
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization......... 56,383 53,474 47,336
Provision for losses on receivables... 23 287 63
(Gain) loss on the sale of property
and equipment........................ (2,739) 421 (1,410)
Deferred income taxes................. 5,206 (3,764) 5,995
Change in assets and liabilities:
Receivables.......................... (13,470) (5,611) (9,317)
Merchandise inventories.............. 78,190 (71,769) (65,521)
Other current assets................. 2,448 (1,504) (397)
Other assets......................... (2,879) (2,059) (1,025)
Accounts payable..................... (4,655) 2,142 21,369
Accrued liabilities.................. (1,395) 31,486 4,590
-------- --------- ---------
Net cash provided by operating
activities......................... 155,551 40,893 33,805
Cash flows from investing activities:
Payments for property and equipment.... (53,012) (94,600) (133,842)
Proceeds from the sale of property and
equipment............................. 4,171 6,982 4,644
Business acquisitions, net of cash
acquired.............................. (15,885)
-------- --------- ---------
Net cash (used in) investing
activities......................... (48,841) (103,503) (129,198)
Cash flows from financing activities:
Net proceeds from long term
obligations........................... 98,939 98,714
Change in short-term debt.............. (15,000) (11,200) 11,175
Change in common stock................. (135) 185
Dividends paid......................... (14,083) (14,087) (14,080)
Reduction in capital lease
obligations........................... (756) (879) (823)
-------- --------- ---------
Net cash (used in) provided by
financing activities............... (29,839) 72,638 95,171
-------- --------- ---------
Net increase (decrease) in cash and cash
equivalents............................ 76,871 10,028 (222)
Cash and cash equivalents at beginning
of year................................ 12,598 2,570 2,792
-------- --------- ---------
Cash and cash equivalents at end of
year................................... $ 89,469 $ 12,598 $ 2,570
-------- --------- ---------
Supplemental cash flow information:
Noncash investing and financial
activities--Capital lease obligations
incurred.............................. $ 2,573 $ 4,992 $ 1,769
Cash paid during the period for:
Interest............................... $ 34,803 $ 27,734 $ 23,248
Income taxes........................... $ 33,062 $ 12,910 $ 15,467
</TABLE>
See notes to consolidated financial statements.
F-13
<PAGE>
SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
------ ------ ---------- --------
<S> <C> <C> <C> <C>
Balances at February 27, 1993.............. 32,000 $320 $242,793 $112,367
Net earnings............................. 32,122
Issuance of common stock................. 16 185
Cash dividends declared on common stock--
$0.44 per share......................... (14,081)
------ ---- -------- --------
Balances at February 26, 1994.............. 32,016 320 242,978 130,408
Net earnings............................. 37,790
Cancellation of common stock............. (16) (185)
Issuance of common stock................. 5 50
Cash dividends declared on common stock--
$0.44 per share......................... (14,086)
------ ---- -------- --------
Balances at February 25, 1995.............. 32,005 320 242,843 154,112
Net earnings............................. 38,439
Cash dividends declared on common stock--
$0.44 per share......................... (14,083)
------ ---- -------- --------
Balances at February 24, 1996.............. 32,005 $320 $242,843 $178,468
====== ==== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-14
<PAGE>
SHOPKO STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED FEBRUARY 24, 1996, FEBRUARY 25, 1995 AND FEBRUARY
26, 1994
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation:
The consolidated financial statements include the accounts of ShopKo Stores,
Inc. and all its subsidiaries ("ShopKo"). All significant intercompany
accounts and transactions have been eliminated. ShopKo, which is a Minnesota
corporation, was incorporated in 1961. On October 16, 1991, ShopKo sold
17,250,000 common shares or 54% of equity ownership in an initial public
offering. Prior to completion of the offering, ShopKo was a wholly owned
subsidiary of Supermarket Operators of America, Inc., ("SOA") which, in turn,
is wholly owned by supervalu inc. ("supervalu"). As of February 24, 1996, 46%
of ShopKo's common stock was owned by supervalu.
ShopKo is engaged in the business of providing general merchandise and
health services through its retail stores; prescription benefit management
services; pharmacy mail service and claims processing activities. Retail
stores are operated in the Upper Midwest, Mountain and Pacific Northwest
states. All other business is conducted throughout the United States.
Cash and Cash Equivalents:
ShopKo records all highly liquid investments with a maturity of three months
or less as cash equivalents. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," these investments are classified as trading
securities and are reported at fair value.
Receivables:
Receivables consist of amounts collectible from merchandise vendors for
promotional and advertising allowances, from third party pharmacy insurance
carriers and self-funded medical plan sponsors, from pharmaceutical
manufacturers for formulary fees and from store customers for optical, main
store layaway and pharmacy purchases. Substantially all amounts are expected
to be collected within one year.
Merchandise Inventories:
Merchandise inventories are stated at the lower of cost or market. Cost,
which includes certain distribution and transportation costs, is determined
through use of the last-in, first-out (LIFO) method for substantially all
inventories. If the first-in, first-out (FIFO) method had been used to
determine cost of inventories, ShopKo's inventories would have been higher by
approximately $39.2 million at February 24, 1996, $37.0 million at February
25, 1995 and $39.0 million at February 26, 1994.
Property and Equipment:
Property and equipment are carried at cost. The cost of buildings and
equipment is depreciated over the estimated useful lives of the assets.
Buildings and certain equipment (principally computer and retail store
equipment) are depreciated using the straight-line method. Remaining
properties are depreciated on an accelerated basis. Useful lives generally
assigned are: buildings--25 to 50 years; retail store equipment--8 to 10
years; warehouse, transportation and other equipment--3 to 10 years. Costs of
leasehold improvements are amortized over the period of the lease or the
estimated useful life of the asset, whichever is shorter, using the straight-
line method. Property under capital leases is amortized over the related lease
term using the straight-line method. Interest on property under construction
of $0.2, $1.3 and $2.1 million was capitalized in fiscal years 1996, 1995 and
1994, respectively.
F-15
<PAGE>
SHOPKO STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of property and equipment are (in thousands):
<TABLE>
<CAPTION>
FEB. 24, FEB. 25,
1996 1995
-------- --------
<S> <C> <C>
Property and equipment at cost:
Land....................................................... $107,915 $107,532
Buildings.................................................. 479,124 441,665
Equipment.................................................. 286,763 278,391
Leasehold improvements..................................... 49,306 50,581
Property under construction................................ 10,585 23,081
Property under capital leases.............................. 21,968 19,591
-------- --------
955,661 920,841
Less accumulated depreciation and amortization:
Property and equipment..................................... 331,541 294,798
Property under capital leases.............................. 6,972 7,979
-------- --------
Net property and equipment................................... $617,148 $618,064
======== ========
</TABLE>
Impairment of Long Lived Assets:
ShopKo evaluates whether events and circumstances have occurred that
indicate the remaining estimated useful life of long lived assets may warrant
revision or that the remaining balance of an asset may not be recoverable. The
measurement of possible impairment is based on the ability to recover the
balance of assets from expected future operating cash flows on an undiscounted
basis. In the opinion of management, no such impairment existed as of February
24, 1996 or February 25, 1995.
Pre-opening Costs:
Pre-opening costs of retail stores are charged against earnings in the year
of the store openings.
Net Earnings Per Common Share:
Net earnings per common share are computed by dividing net earnings by the
weighted average number of common shares outstanding. Outstanding stock
options do not have a significant dilutive effect on earnings per share.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reporting period. Actual results could differ from those
estimates.
Reclassifications:
Certain reclassifications have been made to fiscal 1994 consolidated
financial statements to conform to those used in fiscal 1996 and fiscal 1995.
F-16
<PAGE>
SHOPKO STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
B. ACQUISITION:
On January 3, 1995, ShopKo completed the acquisition of Bravell, Inc.
("Bravell"). The transaction was accounted for as a purchase, whereby ShopKo
acquired 97% of the outstanding common stock of Bravell for approximately
$17.3 million. ShopKo may be required to make additional payments of up to
$12.3 million, contingent upon future results of Bravell's operations. Bravell
is a pharmacy benefit management firm that provides custom prescription
benefit plan design, program administration and claims and benefit processing
services to insurance companies, third party administrators and self-funded
medical plan sponsors.
The allocation of the purchase price of Bravell was based on fair values at
the date of acquisition. The excess of the purchase price over the fair value
of the net assets acquired ("goodwill") of approximately $16.7 million is
being amortized on a straight-line basis over 22 years. The results of
Bravell's operations since the date of acquisition have been included in the
consolidated statement of earnings.
Bravell records as sales the amounts billed to insurance companies, third
party administrators and self-funded medical plan sponsors and the amounts
billed to pharmaceutical manufacturers for formulary fees. Cost of sales
includes the amounts paid to network pharmacies and the amounts paid to plan
sponsors for shared formulary fees.
C. SHORT-TERM DEBT:
As of February 24, 1996, ShopKo had a $175.0 million revolving credit
agreement with a consortium of banks. The credit agreement is unsecured and
will expire October 4, 1996, subject to an extension for an additional year.
ShopKo pays an annual facility and commitment fee of 1/4 of one percent. As of
February 24, 1996, ShopKo had zero outstanding under this agreement compared
to $15.0 million as of February 25, 1995. The weighted average interest rate
on borrowings under the credit agreement for fiscal 1996 was 6.2%.
ShopKo also issues letters of credit during the ordinary course of business
as required by foreign vendors. As of February 24, 1996 and February 25, 1995,
ShopKo had issued letters of credit for $19.8 million and $13.6 million,
respectively.
D. LONG-TERM OBLIGATIONS AND LEASES
<TABLE>
<CAPTION>
FEBRUARY 24, FEBRUARY 25,
1996 1995
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Senior Unsecured Notes, 9.0% due November 15, 2004,
less unamortized discount of $257 and $287
respectively........................................ $ 99,743 $ 99,713
Senior Unsecured Notes, 8.5% due March 15, 2002, less
unamortized discount of $221 and $258 respectively.. 99,779 99,742
Senior Unsecured Notes, 9.25% due March 15, 2022,
less unamortized discount of $499 and $518
respectively........................................ 99,501 99,482
Senior Unsecured Notes, 6.5% due August 15, 2003,
less unamortized discount of $209 and $236
respectively........................................ 99,791 99,764
Industrial Revenue Bond, 6.4% due May 1, 2008........ 1,000 1,000
Capital lease obligations............................ 16,451 14,634
-------- --------
416,265 414,335
Less current portion................................. 1,127 755
-------- --------
Long-term obligations................................ $415,138 $413,580
======== ========
</TABLE>
F-17
<PAGE>
SHOPKO STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On November 9, 1994, ShopKo issued $100 million 9.0% senior unsecured notes
due November 15, 2004. The notes provide for semi-annual interest payments
payable on May 15 and November 15 of each year. There is no sinking fund
applicable to the notes and the notes are not redeemable prior to maturity.
The net proceeds of $98.9 million, after underwriting and issuance costs, were
used to reduce ShopKo's short-term borrowings and to provide for working
capital needs and other general corporate purposes.
The notes contain certain covenants which, among other things, restrict the
ability of ShopKo to consolidate, merge or convey, transfer or lease its
properties and assets substantially as an entirety, to create liens or to
enter into sale and leaseback transactions.
The underwriting and issuance costs of all the long-term obligations are
being amortized over the terms of the notes using the straight-line method. At
February 24, 1996 and February 25, 1995, $2.9 million and $3.2 million
remained to be amortized over future periods. Amortized expense for these
costs was $0.3, $0.2 and $0.2 million in fiscal years 1996, 1995 and 1994,
respectively.
ShopKo leases certain stores and computer equipment under capital leases.
Many of these leases include renewal options, and occasionally, include
options to purchase.
Amortization of property under capital leases was $1.1, $0.9 and $0.8
million in fiscal years 1996, 1995 and 1994, respectively. Minimum future
obligations under capital leases in effect at February 24, 1996 are as follows
(in thousands):
<TABLE>
<CAPTION>
LEASE
YEAR OBLIGATIONS
---- -----------
<S> <C>
1997........................................................... $ 2,883
1998........................................................... 3,551
1999........................................................... 3,406
2000........................................................... 2,128
2001........................................................... 1,931
Later.......................................................... 20,386
-------
Total minimum future obligations............................. 34,285
Less interest.................................................. 17,834
-------
Present value of minimum future obligations.................... $16,451
=======
</TABLE>
The present values of minimum future obligations shown above are calculated
based on interest rates ranging from 7.4% to 13.4%, with a weighted average of
12.1%, determined to be applicable at the inception of the leases.
Interest expense on the outstanding obligations under capital leases was
$1.7, $1.2 and $1.0 million in fiscal years 1996, 1995 and 1994, respectively.
Contingent rent expense, based primarily on sales performance, for capital
and operating leases was $0.5 million in each of the fiscal years 1996, 1995
and 1994, respectively.
F-18
<PAGE>
SHOPKO STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In addition to its capital leases, ShopKo is obligated under operating
leases, primarily for land and buildings. Minimum future obligations under
operating leases in effect at February 24, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
LEASE
YEAR OBLIGATIONS
---- -----------
<S> <C>
1997........................................................... $ 3,610
1998........................................................... 3,529
1999........................................................... 3,366
2000........................................................... 3,266
2001........................................................... 3,230
Later.......................................................... 50,326
-------
Total minimum obligations.................................... $67,327
=======
</TABLE>
Total minimum rental expense, net of sublease income, related to all
operating leases with terms greater than one year was $3.5, $2.9 and $2.7
million in fiscal years 1996, 1995 and 1994, respectively.
Certain operating leases require payments to be made on an escalating basis.
The accompanying consolidated statements of earnings reflect rent expense on a
straight-line basis over the term of the leases. An obligation of $1.4 million
and $1.1 million, representing pro rata future payments, is reflected in the
accompanying consolidated balance sheets at February 24, 1996 and February 25,
1995, respectively.
E. INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Components of ShopKo's
net deferred tax liability are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Property and equipment..................................... $ 22,556 $ 19,752
LIFO inventory valuation................................... 6,415 5,210
Other...................................................... 2,181 3,462
-------- --------
Total deferred tax liabilities............................. 31,152 28,424
======== ========
Deferred tax assets:
Reserves and allowances.................................... (11,239) (13,070)
Capital leases............................................. (733) (1,380)
-------- --------
Total deferred tax assets.................................. (11,972) (14,450)
-------- --------
Net deferred tax liability.................................. $ 19,180 $ 13,974
======== ========
</TABLE>
F-19
<PAGE>
SHOPKO STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The amounts reflected in the provision for income taxes are based on
applicable federal statutory rates, adjusted for permanent differences between
financial and taxable income. The provision for federal and state income taxes
includes the following (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Current
Federal...................................... $16,163 $24,379 $12,562
State........................................ 3,332 4,488 2,560
General business and other tax credits....... -- (475) (350)
Deferred..................................... 5,206 (3,764) 5,995
------- ------- -------
Total provision............................. $24,701 $24,628 $20,767
======= ======= =======
The effective tax rate varies from the statutory federal income tax rate for
the following reasons:
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Statutory income tax rate..................... 35.0% 35.0% 35.0%
State income taxes, net of federal tax bene-
fits......................................... 4.0 4.1 4.1
Other......................................... 0.1 0.3 0.2
------- ------- -------
Effective income tax rate..................... 39.1% 39.4% 39.3%
======= ======= =======
Provision is made for deferred income taxes and future income tax benefits
applicable to temporary differences between financial and tax reporting. The
sources of these differences and the effects of each are as follows (in
thousands):
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Depreciation.................................. $ 2,804 $ (247) $ 1,398
Inventory valuation reserves.................. 1,339 (2,261) --
LIFO inventory valuation...................... 1,205 (1,370) 5,370
Bad debt and return reserves.................. 241 (806) 22
Other......................................... (383) 920 (795)
------- ------- -------
Total deferred tax expense (benefit).......... $ 5,206 $(3,764) $ 5,995
======= ======= =======
</TABLE>
Other temporary differences between financial and tax reporting include
amortization and interest relating to capital leases and certain provisions
for expenses which are not deducted for tax purposes until paid.
F. PREFERRED AND COMMON STOCK
ShopKo has 20,000,000 shares of $0.01 preferred stock authorized but
unissued.
There are 75,000,000 shares of $0.01 par value common stock authorized with
32,005,000 shares issued and outstanding at both February 24, 1996 and
February 25, 1995, respectively.
ShopKo's Stock Option Plans allow the granting of stock options to various
officers, directors and other employees of ShopKo at prices not less than 100
percent of fair market value, determined by the closing price on the date of
grant. ShopKo has reserved 2,400,000 shares for issuance under the 1991 Stock
Option Plan. The 1995 Stock Option Plan, which is subject to shareholder
approval, allows for the issuance of 1,200,000 shares. The majority of these
options vest at the rate of 40% on the second anniversary of the grant date
and 20%
F-20
<PAGE>
SHOPKO STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
annually thereafter for officers and employees and at the rate of 60% on the
second anniversary of the date of grant and 20% annually thereafter for non-
employee directors. Changes in the options are as follows (shares in
thousands):
<TABLE>
<CAPTION>
PRICE
SHARES RANGE
------ --------------
<S> <C> <C>
Outstanding, February 27, 1993...................... 1,505 $15.00--$16.25
Granted............................................. 627 10.13-- 15.00
Canceled and forfeited.............................. (208) 10.88-- 16.25
----- --------------
Outstanding, February 26, 1994...................... 1,924 10.13-- 16.25
Granted............................................. 250 10.00-- 11.00
Canceled and forfeited.............................. (238) 10.00-- 16.25
----- --------------
Outstanding at February 25, 1995.................... 1,936 10.00-- 16.25
Granted............................................. 576 10.50-- 10.75
Canceled and forfeited.............................. (139) 10.00-- 16.25
----- --------------
Outstanding at February 24, 1996.................... 2,373 10.00-- 16.25
===== ==============
Exercisable at February 24, 1996.................... 1,062 10.13-- 16.25
===== ==============
</TABLE>
In October 1995, SFAS No. 123 "Accounting for Stock-Based Compensation" was
issued. SFAS No. 123 establishes a fair value based method of accounting for
stock-based compensation; however, it allows entities to continue accounting
for employee stock-based compensation under the intrinsic value method
proscribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees." SFAS No. 123 requires certain disclosures,
including pro forma net income and earnings per share as if the fair value
based accounting method had been used for employee stock-based compensation
cost. ShopKo has decided to adopt SFAS No. 123 through disclosure with respect
to employee stock-based compensation; such disclosure requirements are
effective with ShopKo's 1997 fiscal year.
In fiscal 1994, ShopKo adopted a Restricted Stock Plan which provides awards
of up to 200,000 shares of common stock to key employees of ShopKo. Plan
participants are entitled to cash dividends and to vote their respective
shares. Restrictions limit the sale or transfer of the shares during a
restricted period. There are 5,000 shares of restricted stock outstanding for
both February 24, 1996 and February 25, 1995, respectively.
G. EMPLOYEE BENEFITS
Substantially all employees of ShopKo are covered by a defined contribution
profit sharing plan. The plan provides for two types of company contributions;
an amount determined annually by the Board of Directors and an employer
matching contribution equal to one-half of the first 6 percent of compensation
contributed by participating employees. Contributions were $7.7, $6.7 and $5.6
million for fiscal years 1996, 1995 and 1994, respectively.
ShopKo also has change of control severance agreements with certain key
officers. Under these agreements, the officers are entitled to a lump-sum cash
payment equal to a multiple of one, two or three times their annual salary
plus a multiple of one, two or three times their average annual bonus for the
three fiscal years immediately preceding the date of termination, if, within
two years after a "change of control" (as defined in such agreements) ShopKo
terminates the individual's employment without cause.
In fiscal 1994, ShopKo adopted SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." SFAS No. 106 requires ShopKo to
accrue the estimated cost of retiree benefits, other than
F-21
<PAGE>
SHOPKO STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
pensions, during employees' credited service period. The cost of these
benefits, which are principally healthcare, was previously expensed as claims
were incurred. ShopKo elected to immediately recognize the accumulated
postretirement benefit obligation, resulting in a charge to earnings of $0.6
million or $0.02 per share.
The net periodic costs for postretirement benefits include the following (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service cost for benefits accumulated during the year.... $ 98 $ 78 $ 77
Interest cost on accumulated benefit obligation.......... 96 60 60
---- ---- ----
Net periodic postretirement benefit cost................. $194 $138 $137
==== ==== ====
</TABLE>
ShopKo's postretirement healthcare plans currently are not funded. The
accumulated postretirement benefit obligations are as follows (in thousands):
<TABLE>
<CAPTION>
FEB. 24, FEB. 25,
1996 1995
-------- --------
<S> <C> <C>
Retirees................................................. $ 371 $ 347
Active plan participants................................. 1,022 728
------ ------
Total accumulated postretirement obligations............. $1,393 $1,075
====== ======
</TABLE>
The assumed discount rate used in determining the accumulated postretirement
benefit obligation was 7.3% and 7.0% for fiscal years 1996 and 1995,
respectively.
The assumed healthcare cost trend rate used in measuring the accumulated
postretirement benefit obligation was 8.9% for fiscal 1996 decreasing each
successive year until it reaches 5.5% in fiscal 2015 after which it remains
constant. A 1% increase in the healthcare trend rate would have an immaterial
effect on the accumulated postretirement benefit obligation at the end of
fiscal 1996 and fiscal 1995 and on the net periodic cost for the fiscal years.
H. RELATED PARTY TRANSACTIONS
In accordance with service agreements entered into in connection with the
initial public offering, general, administrative and other services were
allocated to ShopKo from supervalu. ShopKo also provided services and
allocated general, administrative and other expenses to two wholly-owned
subsidiaries of supervalu. In such cases, allocations were made using
procedures deemed appropriate to the nature of the services involved.
Management believes the allocations were made on a reasonable basis. Although
these allocations do not necessarily equal the costs which would have been or
may be incurred by ShopKo on a stand-alone basis, management believes that any
variance in costs would not be material. The service agreements between ShopKo
and supervalu expired in early fiscal 1994.
Selling, general and administrative expenses include the following
allocations (in thousands):
<TABLE>
<CAPTION>
1994
----
<S> <C>
From supervalu to ShopKo $ 96
From ShopKo to wholly owned subsidiaries of supervalu................ $323
</TABLE>
Purchases of inventory from supervalu were $1.0, $2.7 and $9.7 million for
the fiscal years 1996, 1995 and 1994, respectively.
F-22
<PAGE>
SHOPKO STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
Also, as a result of the initial public offering, ShopKo and supervalu
entered into certain other agreements of which the following are still in
effect:
A food products supply agreement under which ShopKo has agreed to purchase
from supervalu, through October 16, 1998, all of ShopKo's requirements for
certain products sold in any food store owned or operated by ShopKo and
located within the geographic areas serviced by supervalu.
A registration rights agreement under which SOA (and certain affiliates of
supervalu) has the right to require ShopKo to file up to three registration
statements under the Securities Act.
I. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following disclosure is made in accordance with the requirements of SFAS
No. 107, "Disclosures about Fair Value of Financial Instruments." The
following methods and assumptions were used by ShopKo in estimating its fair
value disclosures for financial instruments.
Short-term debt and long-term obligations: The carrying amounts of ShopKo's
borrowings under its short-term revolving credit agreement approximate their
fair value. The fair values of ShopKo's long-term obligations are estimated
using discounted cash flow analysis based on interest rates that are currently
available to ShopKo for issuance of debt with similar terms and remaining
maturities.
The carrying amounts and fair values of ShopKo's financial instruments at
February 24, 1996 are as follows (amounts in thousands):
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
-------- --------
<S> <C> <C>
Long-term obligations:
Senior Unsecured Notes, due November 15, 2004.......... $99,743 $105,356
Senior Unsecured Notes, due March 15, 2002............. 99,779 107,309
Senior Unsecured Notes, due March 15, 2022............. 99,501 105,922
Senior Unsecured Notes, due August 15, 2003............ 99,791 91,147
Industrial Revenue Bond, due May 1, 2008............... 1,000 1,000
Capital lease obligations.............................. 16,451 18,477
</TABLE>
F-23
<PAGE>
J. UNAUDITED QUARTERLY FINANCIAL INFORMATION
Unaudited quarterly financial information is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR (52 WEEKS) ENDED FEBRUARY 24, 1996
----------------------------------------------------------------
FIRST SECOND THIRD FOURTH YEAR
(16 WKS) (12 WKS) (12 WKS) (12 WKS) (52 WKS)
------------ ------------ ------------- ------------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales............... $ 560,472 $ 418,165 $491,019 $498,360 $1,968,016
Gross margins........... 143,359 103,745 122,670 131,509 501,283
Net earnings............ 5,368 1,869 10,132 21,070 38,439
Net earnings per common
share.................. 0.17 0.06 0.32 0.66 1.20
Weighted average
shares................. 32,005 32,005 32,005 32,005 32,005
Dividends declared per
common share........... 0.11 0.11 0.11 0.11 0.44
Price range per common
share*................. 11 3/4-8 3/4 14-10 1/4 13 1/4-10 1/4 11 3/4-10 7/8 14-8 3/4
<CAPTION>
FISCAL YEAR (52 WEEKS) ENDED FEBRUARY 25, 1995
----------------------------------------------------------------
FIRST SECOND THIRD FOURTH YEAR
(16 WKS) (12 WKS) (12 WKS) (12 WKS) (52 WKS)
------------ ------------ ------------- ------------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales............... $ 514,926 $ 381,297 $470,919 $485,787 $1,852,929
Gross margins........... 135,411 99,910 120,718 131,977 488,016
Net earnings............ 4,980 2,750 11,303 18,757 37,790
Net earnings per common
share.................. 0.16 0.09 0.35 0.59 1.18
Weighted average
shares................. 32,016 32,016 32,016 32,014 32,014
Dividends declared per
common share........... 0.11 0.11 0.11 0.11 0.44
Price range per common
share*................. 12-10 1/4 10 3/8-9 3/4 10 5/8-9 3/4 9 3/4-8 5/8 12-8 5/8
</TABLE>
- --------
* Price range per common share reflects the highest and lowest stock market
prices on the New York Stock Exchange during the quarter.
F-24
<PAGE>
K. BUSINESS SEGMENT INFORMATION
ShopKo conducts business in two business segments: general merchandise and
health services. General merchandise is conducted through retail stores.
Health services include professional healthcare services provided in the
retail stores and prescription benefit management services which are generally
provided through other facilities. Information about ShopKo operations in the
different businesses is as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
NET SALES
General Merchandise....................... $1,503,096 $1,489,919 $1,411,781
Health services........................... 464,920 363,010 326,965
---------- ---------- ----------
Total net sales.......................... $1,968,016 $1,852,929 $1,738,746
---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES
General merchandise....................... $ 73,124 $ 67,638 $ 59,151
Health services........................... 36,805 36,547 29,854
Corporate................................. (12,507) (12,725) (14,699)
Interest expense.......................... (34,282) (29,042) (21,417)
---------- ---------- ----------
Earnings before income taxes............. $ 63,140 $ 62,418 $ 52,889
---------- ---------- ----------
ASSETS
General merchandise....................... $ 884,275 $ 950,719 $ 846,052
Health services........................... 101,130 91,208 58,586
Corporate................................. 132,555 67,824 48,411
---------- ---------- ----------
Total assets............................. $1,117,960 $1,109,751 $ 953,049
---------- ---------- ----------
DEPRECIATION AND AMORTIZATION EXPENSES
General merchandise....................... $ 51,466 $ 49,542 $ 44,375
Health services........................... 4,525 3,439 2,629
Corporate................................. 392 493 332
---------- ---------- ----------
Total depreciation and amortization ex-
penses.................................. $ 56,383 $ 53,474 $ 47,336
---------- ---------- ----------
CAPITAL EXPENDITURES
General merchandise $ 49,268 $ 89,346 $ 120,988
Health services 2,783 4,740 11,398
Corporate 961 514 1,456
---------- ---------- ----------
Total capital expenditures $ 53,012 $ 94,600 $ 133,842
---------- ---------- ----------
</TABLE>
F-25
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
SUCCESSOR SUCCESSOR
PHAR-MOR PHAR-MOR
SEPTEMBER 28, JUNE 29,
1996 1996
------------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ 96,990 $104,265
Accounts receivable--net............................. 22,372 20,834
Merchandise inventories.............................. 168,551 152,904
Prepaid expenses and other current assets............ 5,475 5,572
-------- --------
Total current assets............................... 293,388 283,575
Property and equipment--net............................ 67,775 66,550
Deferred tax asset..................................... 10,845 9,382
Other assets........................................... 4,064 3,956
-------- --------
Total assets....................................... $376,072 $363,463
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................................... $ 67,006 $ 46,010
Related party accounts payable....................... 7,721 7,751
Accrued expenses and other current liabilities....... 33,520 37,291
Reserve for costs of rightsizing program............. 3,029 3,451
Current portion of long-term debt and capital lease
obligations......................................... 8,074 8,922
-------- --------
Total current liabilities.......................... 119,350 103,425
Long-term debt and capital lease obligations........... 147,345 149,163
Long-term self insurance reserves...................... 7,476 7,226
Deferred rent and unfavorable lease liability--net..... 11,528 11,081
-------- --------
Total liabilities.................................. 285,699 270,895
-------- --------
Commitments and contingencies
Minority interests..................................... 535 535
-------- --------
Stockholders' equity:
Preferred stock...................................... -- --
Common stock......................................... 122 122
Additional paid-in capital........................... 89,385 89,385
Retained earnings.................................... 331 2,526
-------- --------
Total stockholders' equity......................... 89,838 92,033
-------- --------
Total liabilities and stockholders' equity......... $376,072 $363,463
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-26
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
SUCCESSOR SUCCESSOR PREDECESSOR
PHAR-MOR PHAR-MOR PHAR-MOR
THIRTEEN FOUR NINE
WEEKS ENDED WEEKS ENDED WEEKS ENDED
SEPTEMBER 28, 1996 SEPTEMBER 30, 1995 SEPTEMBER 2, 1995
------------------ ------------------ -----------------
<S> <C> <C> <C>
Sales................................................................. $ 264,551 $ 72,877 $ 181,968
Less:
Cost of goods sold, including occupancy and distribution costs........ 219,091 58,843 147,124
Selling, general and administrative expenses.......................... 41,272 12,264 27,057
Depreciation and amortization......................................... 4,908 1,221 3,732
---------- ---------- ----------
Income (loss) from operations before interest expense, reorganization
items, fresh-start revaluation, income taxes and extraordinary item.. (720) 549 4,055
Interest expense--net................................................. 2,939 403 5,689
---------- ---------- ----------
Income (loss) before reorganization items, fresh-start revaluation,
income taxes and extraordinary item.................................. (3,659) 146 (1,634)
Reorganization items.................................................. -- -- (16,798)
Fresh-start revaluation............................................... -- -- 8,043
---------- ---------- ----------
Income (loss) before income taxes and extraordinary item.............. (3,659) 146 (10,389)
Income tax provision (benefit)........................................ (1,464) 58 --
---------- ---------- ----------
Income (loss) before extraordinary item............................... (2,195) 88 (10,389)
Extraordinary item--gain on debt discharge............................ -- -- 775,073
---------- ---------- ----------
Net income (loss)..................................................... $ (2,195) $ 88 $ 764,684
========== ========== ==========
Net income (loss) per common share:
Income (loss) before extraordinary item............................. $ (.18) $ .01 $ (.19)
Extraordinary item.................................................. -- -- 14.33
---------- ---------- ----------
Net income (loss)................................................... $ (.18) $ .01 $ 14.14
========== ========== ==========
Weighted average number of common shares outstanding.................. 12,157,054 12,156,250 54,066,463
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-27
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
SUCCESSOR SUCCESSOR PREDECESSOR
PHAR-MOR PHAR-MOR PHAR-MOR
------------- ------------- ------------
THIRTEEN FOUR NINE
WEEKS ENDED WEEKS ENDED WEEKS ENDED
SEPTEMBER 28, SEPTEMBER 30, SEPTEMBER 2,
1996 1995 1995
------------- ------------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).................................................................... $ (2,195) $ 88 $ 764,684
Adjustments to reconcile net income to net cash provided by (used for) operating
activities:
Items not requiring the outlay of cash:
Extraordinary gain on debt discharge................................................ -- -- (775,073)
Fresh-start revaluation............................................................. -- -- (8,043)
Noncash charges included in reorganization items.................................... -- -- 16,500
Depreciation........................................................................ 2,759 808 2,388
Amortization of video rental tapes.................................................. 2,149 413 1,333
Amortization of deferred financing costs............................................ 93 55 73
Deferred income taxes............................................................... (1,464) -- --
Deferred rent....................................................................... 447 (13) (89)
Changes in assets and liabilities:
Accounts receivable................................................................. (1,538) (91) 11,997
Merchandise inventories............................................................. (15,539) (1,663) (6,922)
Prepaid expenses.................................................................... 97 (162) 2,441
Other assets........................................................................ (213) (60) 449
Accounts payable and related party accounts payable................................. 20,966 (3,174) (8,865)
Accrued expenses and other current liabilities...................................... (3,521) (7,660) 6,706
Reserve for costs of rightsizing program............................................ (422) (776) 550
-------- -------- ---------
Net cash provided by (used for) operating activities................................. 1,619 (12,235) 8,129
-------- -------- ---------
INVESTING ACTIVITIES
Additions to rental videotapes...................................................... (2,245) (550) (1,874)
Additions to property and equipment................................................. (3,983) (322) (649)
Purchase of partnership interests................................................... -- (145) --
-------- -------- ---------
Net cash used for investing activities.............................................. (6,228) (1,017) (2,523)
FINANCING ACTIVITIES
Principal payments on long-term debt................................................ (1,210) -- --
Principal payments on capital lease obligations..................................... (1,456) (433) --
-------- -------- ---------
Net cash used for financing activities.............................................. (2,666) (433) --
REORGANIZATION ACTIVITIES
Cash distribution pursuant to the plan of reorganization............................ -- -- (105,381)
Payment of reclamation claims....................................................... -- -- (23,961)
Decrease in all other liabilities subject to settlement under reorganization
proceedings........................................................................ -- -- (2,076)
Proceeds from the sale of new common stock.......................................... -- -- 9,500
Debtor-in-possession financing costs................................................ -- -- (15)
-------- -------- ---------
Net cash used for reorganization activities......................................... -- -- (121,933)
-------- -------- ---------
Decrease in cash and cash equivalents............................................... (7,275) (13,685) (116,327)
Cash and cash equivalents, beginning of period...................................... 104,265 107,930 224,257
-------- -------- ---------
Cash and cash equivalents, end of period............................................ $ 96,990 $ 94,245 $ 107,930
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-28
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DEFICIENCY)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
----------------
PAR ADDITIONAL RETAINED TOTAL
VALUE PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY (DEFICIENCY)
------- ------- ---------- ----------- -------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JULY 1,
1995................... 54,066 $ 5,407 $ 487,477 $(1,257,568) $(764,684)
Net income.............. -- -- -- 764,684 764,684
Cancellation of the
former common equity
under the Plan of
Reorganization......... (54,066) (5,407) (487,477) 492,884 --
Issuance of the new
equity interests in
connection with
emergence from
Chapter 11 Cases....... 12,156 122 89,378 -- 89,500
------- ------- --------- ----------- ---------
BALANCE AT SEPTEMBER 2,
1995................... 12,156 122 89,378 -- 89,500
Net income.............. -- -- -- 2,526 2,526
Shares issued........... 1 -- 7 -- 7
------- ------- --------- ----------- ---------
BALANCE AT JUNE 29,
1996................... 12,157 $ 122 $ 89,385 $ 2,526 $ 92,033
======= ======= ========= =========== =========
Net (loss) (unaudited).. -- -- -- (2,195) (2,195)
BALANCE AT SEPTEMBER 28,
1996 (Unaudited)....... 12,157 $ 122 $ 89,385 $ 331 $ 89,838
======= ======= ========= =========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-29
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. PROPOSED BUSINESS COMBINATION
Phar-Mor, Inc. (together with its subsidiaries, "Phar-Mor") entered into an
Agreement and Plan of Reorganization dated September 7, 1996 (as amended and
restated as of October 9, 1996) with ShopKo, a retailer specializing in
prescription and vision benefit management and health decision support
services, to combine the respective companies under Cabot Noble, Inc. ("Cabot
Noble"), a newly organized Delaware holding company (the "Proposed
Transaction"). Under the terms of the Proposed Transaction, each issued and
outstanding share of Phar-Mor's common stock will be exchanged for one share
of Cabot Noble common stock. Each issued and outstanding share of ShopKo
common stock will be exchanged for 2.4 shares of Cabot Noble common stock,
subject to adjustment in the event the value of the exchange consideration
falls outside a range between $17.25 and $18.00 (based on the average daily
closing sale prices of Phar-Mor's common stock over a specified 30 day
period).
In connection with the Proposed Transaction, Supervalu Inc. ("SuperValu"),
which currently owns approximately 46% of the issued and outstanding shares of
ShopKo common stock, has entered into an Amended and Restated Stock Purchase
Agreement (the "Stock Purchase Agreement") with Cabot Noble whereby SuperValu
has agreed to sell 90% of the Cabot Noble shares it receives in the Proposed
Transaction to Cabot Noble immediately after the Proposed Transaction is
completed at $16.86 per share of ShopKo common stock held by SuperValu prior
to the Proposed Transaction.
Consummation of the Reorganization is subject to certain conditions,
including (a) receipt of financing of at least $75,000, (b) approval by
shareholders of ShopKo and Phar-Mor, (c) receipt of necessary regulatory
approvals, and (d) other conditions to closing customary in transactions of
this type.
Completion of the Proposed Transaction may result in the reduction of
available net operating loss carryforwards.
2. BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information. They do not include all
information and footnotes which would be required by generally accepted
accounting principles for complete financial statements. In the opinion of
management of Phar-Mor, these interim financial statements contain all
adjustments considered necessary for a fair presentation of financial
position, results of operations and cash flows for the periods presented.
Reference should be made to Phar-Mor's Audited financial statements for the
fiscal year ended June 29, 1996 for additional disclosures, including a
summary of Phar-Mor's accounting policies, which have not changed. Operating
results for the thirteen weeks ended September 28, 1996 are not necessarily
indicative of the results that may be expected for the fifty-two weeks ending
June 28, 1997.
3. REORGANIZATION
On August 17, 1992, Phar-Mor filed petitions for relief under Chapter 11 of
the United States Bankruptcy Code ("Chapter 11"). From that time until
September 11, 1995, Phar-Mor operated its business as a debtor-in-possession
subject to the jurisdiction of the United States Bankruptcy Court for the
Northern District of Ohio (the "Bankruptcy Court"). On September 11, 1995 (the
"Effective Date"), Phar-Mor emerged from reorganization proceedings under
Chapter 11 pursuant to the confirmation order entered on August 29, 1995 by
the Bankruptcy Court confirming the Third Amended Joint Plan of Reorganization
dated May 25, 1995 (the "Joint Plan").
F-30
<PAGE>
The consolidated financial statements of Phar-Mor during the bankruptcy
proceedings (the "Predecessor Phar-Mor financial statements") are presented in
accordance with American Institute of Certified Public Accountants Statement
of Position 90-7, "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code" ("SOP 90-7"). Pursuant to guidance provided by SOP 90-7,
Phar-Mor adopted fresh-start reporting as of September 2, 1995, the closest
fiscal month end to the Effective Date. Under fresh-start reporting, a new
reporting entity is deemed to be created and the recorded amounts of assets
and liabilities were adjusted to reflect their estimated fair values at the
Effective Date (hereinafter, the term "Predecessor Phar-Mor" refers to Phar-
Mor prior to September 2, 1995 and "Successor Phar-Mor" refers to Phar-Mor
from and after September 2, 1995). A black line has been drawn to separate the
Successor Phar-Mor financial statements from the Predecessor Phar-Mor
financial statements because the respective financial statements are those of
different reporting entities which have not been prepared on a comparable
basis.
4. RECLASSIFICATIONS
Certain reclassifications have been made to prior year financial statements
to conform with current year presentation.
5. RECENT ACCOUNTING PRONOUNCEMENT
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." This statement is effective beginning in fiscal 1997. The new
standard defines a fair value method of accounting for stock options and
similar equity instruments. Pursuant to the new standard, companies are
encouraged, but not required, to adopt the fair value method of accounting for
employee stock-based transactions. Companies are permitted to continue to
account for such transactions under Accounting Principles Board Opinion
("APBO") No. 25, "Accounting for Stock Issued to Employees," but would be
required to disclose in a note to the financial statements pro forma net
income and earnings per share as if Phar-Mor had applied the new method of
accounting. In the first quarter, Phar-Mor elected not to adopt the fair value
method of accounting for employee stock-based transactions and will continue
to account for such transactions under the provisions of APBO No. 25.
6. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
The following unaudited pro forma statement of operations presents the
results of operations of Predecessor Phar-Mor during the pendency of the
Chapter 11 case for the nine weeks ended September 2, 1995, as adjusted to
reflect the implementation of fresh-start reporting, the elimination of the
effects of nonrecurring transactions resulting from the reorganization and
certain payments to creditors pursuant to the Joint Plan. This information
should be read in conjunction with Phar-Mor's Management's Discussion and
Analysis of Financial Condition and Results of Operations.
F-31
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
THIRTEEN WEEKS ENDED SEPTEMBER 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
------------- ------------
FOUR NINE PRO FORMA
WEEKS WEEKS THIRTEEN
ENDED ENDED PRO FORMA WEEKS ENDED
SEPTEMBER 30, SEPTEMBER 2, ADJUSTMENTS SEPTEMBER 30,
1995 1995 PER NOTE 1995
------------- ------------ ---------------- -------------
(1) (2)
<S> <C> <C> <C> <C> <C>
Sales................... $72,877 $181,968 -- -- $254,845
Less:
Cost of goods sold,
including occupancy
and distribution
costs................ 58,843 147,124 $(101) -- 205,866
Selling, general and
administrative
expenses............. 12,264 27,057 -- -- 39,321
Depreciation and
amortization......... 1,221 3,732 -- $ (304)(a) 4,649
------- -------- ----- --------- --------
Income from operations
before interest
expense, reorganization
items, fresh start
revaluation, income
taxes and extraordinary
item................... 549 4,055 101 304 5,009
Interest expense--net... 403 5,689 164 (2,731)(b) 3,525
------- -------- ----- --------- --------
Income (loss) before
reorganization items,
fresh start
revaluation, income
taxes and extraordinary
item................... 146 (1,634) (63) 3,035 1,484
Reorganization items.... -- (16,798) -- 16,798 (c) --
Fresh start
revaluation............ -- 8,043 -- (8,043)(c) --
------- -------- ----- --------- --------
Income (loss) before
income taxes and
extraordinary item..... 146 (10,389) (63) 11,790 1,484
Income tax provision.... 58 -- -- 536 (d) 594
------- -------- ----- --------- --------
Income (loss) before
extraordinary item..... 88 (10,389) (63) 11,254 890
Extraordinary item--gain
on debt discharge...... -- 775,073 -- (775,073)(c) --
------- -------- ----- --------- --------
Net income.............. $ 88 $764,684 $ (63) $(763,819) $ 890
======= ======== ===== ========= ========
Net income per common
share.................. $ 0.07
========
</TABLE>
The pro forma reporting adjustments:
(1) Adjust for the rent credit and additional interest expense from the
amortization of the "unfavorable lease liability"; and
(2) Adjust for the effect of the Joint Plan as if it had been effective
as of the beginning of the period. This includes adjustments to:
(a) Reduce historical depreciation to reflect the adjustment to
property and equipment values in accordance with fresh-start reporting.
(b) Reverse historical interest expense and record interest expense
on the debt incurred in connection with the Joint Plan.
(c) Eliminate the effects of nonrecurring reorganization items,
fresh-start revaluation and gain on debt discharge due to the emergence
from the Chapter 11 case.
(d) Record estimated income tax provision at an effective rate of 40%
based on a statutory federal tax rate of 35% and a combined state and
local tax rate, net of federal tax benefits, of 5%.
Pro forma earnings per share are calculated based on weighted average shares
of common stock outstanding of 12,156,250.
F-32
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Phar-Mor, Inc.:
We have audited the accompanying consolidated balance sheets of Phar-Mor,
Inc. and subsidiaries ("Phar-Mor") as of June 29, 1996 and September 2, 1995
(Successor Phar-Mor balance sheets) and July 1, 1995 (Predecessor Phar-Mor
balance sheet), and the related consolidated statements of operations, changes
in stockholders' equity (deficiency) and cash flows for the forty-three weeks
ended June 29, 1996 (Successor Phar-Mor operations), the nine weeks ended
September 2, 1995, the fifty-two weeks ended July 1, 1995 and the fifty-three
weeks ended July 2, 1994 (Predecessor Phar-Mor operations). Our audits also
included financial statement schedule II, Valuation and Qualifying Accounts.
These financial statements and financial statement schedule are the
responsibility of Phar-Mor, Inc.'s management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits.
Except as discussed in the following paragraph, we conducted our audits in
accordance with generally accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, in August
1992, the Board of Directors of Phar-Mor disclosed that a fraud and
embezzlement of Phar-Mor's assets, which had been concealed for a period of
years by falsification of the accounting records, had been discovered. As a
result, and as discussed in Notes 1 and 6, reliable accounting records and
sufficient evidential matter to support the acquisition cost of property and
equipment were not available; accordingly, we were not able to complete our
auditing procedures relating to property and equipment and depreciation and
amortization related thereto for the nine weeks ended September 2, 1995 and as
of and for the fifty-two weeks ended July 1, 1995, and for the fifty-three
weeks ended July 2, 1994. As discussed in Note 6, for the fifty-three weeks
ended July 2, 1994 Phar-Mor recorded a $53,211,000 write-down of its property
and equipment based upon an independent appraisal. It is not possible to
determine whether the aggregate amount of property and equipment at July 1,
1995 is greater than the original acquisition cost of such assets less
accumulated depreciation and amortization.
In our opinion, except for the effect of any adjustments that might have
been determined to be necessary had reliable accounting records and sufficient
evidential matter to support the acquisition cost of property and equipment
been available, the consolidated financial statements of Predecessor Phar-Mor
referred to above present fairly, in all material respects, the financial
position of Predecessor Phar-Mor as of July 1, 1995 and the results of its
operations and its cash flows for the nine weeks ended September 2, 1995, the
fifty-two weeks ended July 1, 1995 and the fifty-three weeks ended July 2,
1994 in conformity with generally accepted accounting principles.
In our opinion, the consolidated financial statements of Successor Phar-Mor
referred to above present fairly, in all material respects, the financial
position of Successor Phar-Mor as of June 29, 1996 and September 2, 1995 and
the results of its operations and its cash flows for the forty-three weeks
ended June 29, 1996 in conformity with generally accepted accounting
principles.
In our opinion, the financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, on August
29, 1995, the Bankruptcy Court entered an order confirming the plan of
reorganization which became effective on September 11, 1995. Accordingly, the
accompanying Successor Phar-Mor balance sheet as of September 2, 1995 has been
prepared
F-33
<PAGE>
in conformity with AICPA Statement of Position 90-7, "Financial Reporting for
Entities in Reorganization Under the Bankruptcy Code," for the Successor Phar-
Mor as a new entity with assets, liabilities and a capital structure having
carrying values not comparable with prior periods as described in Note 1.
As discussed in Note 20 to the consolidated financial statements, Phar-Mor
entered into an agreement dated September 7, 1996 (as amended and restated as
of October 9, 1996) with ShopKo Stores, Inc., subject to certain conditions,
to combine the respective companies under Cabot Noble, Inc., a newly organized
holding company.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
August 16, 1996
(October 9, 1996 as to Note 20)
F-34
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
PREDECESSOR
SUCCESSOR PHAR-MOR PHAR-MOR
--------------------- -----------
JUNE 29, SEPTEMBER 2, JULY 1,
1996 1995 1995
-------- ------------ -----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................................. $104,265 $107,930 $ 224,257
Accounts receivable--net.................................................................. 20,834 27,702 43,685
Due from related parties.................................................................. -- -- 4,181
Merchandise inventories................................................................... 152,904 167,177 173,714
Prepaid expenses.......................................................................... 5,184 6,540 8,174
Deferred tax asset........................................................................ 388 1,814 --
-------- -------- -----------
Total current assets.................................................................... 283,575 311,163 454,011
PROPERTY AND EQUIPMENT--NET................................................................ 66,550 65,178 73,822
DEFERRED TAX ASSET......................................................................... 9,382 12,186 181
OTHER ASSETS............................................................................... 3,956 1,680 3,318
-------- -------- -----------
Total assets............................................................................ $363,463 $390,207 $ 531,332
======== ======== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable.......................................................................... $ 46,010 $ 48,942 $ 69,563
Related party accounts payable............................................................ 7,751 9,164 --
Accrued expenses.......................................................................... 33,409 33,874 24,465
Related party accrued expenses............................................................ -- -- 2,383
Accrued bankruptcy professional fees...................................................... 181 19,657 15,215
Reserve for costs of rightsizing program.................................................. 3,451 7,301 6,564
Current portion of self insurance reserves................................................ 3,701 5,030 5,030
Current portion of long-term debt......................................................... 2,903 1,541 --
Current portion of capital lease obligations.............................................. 6,019 5,534 --
-------- -------- -----------
Total current liabilities............................................................... 103,425 131,043 123,220
LIABILITIES SUBJECT TO SETTLEMENT UNDER REORGANIZATION PROCEEDINGS......................... -- -- 1,154,959
LONG-TERM DEBT............................................................................. 109,973 106,982 --
CAPITAL LEASE OBLIGATIONS.................................................................. 39,190 44,065 --
LONG-TERM SELF INSURANCE RESERVES.......................................................... 7,226 8,142 7,011
UNFAVORABLE LEASE LIABILITY--NET........................................................... 10,783 10,475 --
DEFERRED RENT.............................................................................. 298 -- 10,826
-------- -------- -----------
Total liabilities....................................................................... 270,895 300,707 1,296,016
-------- -------- -----------
COMMITMENTS AND CONTINGENCIES
MINORITY INTERESTS......................................................................... 535 -- --
-------- -------- -----------
STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred stock, $.01 par value, authorized shares, 10,000,000, none outstanding.......... -- -- --
Common stock, $.01 par value, authorized shares, 40,000,000; issued and outstanding
shares, 12,157,054 at June 29, 1996 and 12,156,250 at September 2, 1995.................. 122 122 --
Common stock, $.10 par value, authorized shares, 200,000,000; issued and outstanding
shares, 54,066,463....................................................................... -- -- 5,407
Additional paid-in capital................................................................ 89,385 89,378 487,477
Retained earnings (deficit)............................................................... 2,526 -- (1,257,568)
-------- -------- -----------
Total stockholders' equity (deficiency)................................................. 92,033 89,500 (764,684)
-------- -------- -----------
Total liabilities and stockholders' equity (deficiency)............................... $363,463 $390,207 $ 531,332
======== ======== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-35
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SUCCESSOR
PHAR-MOR PREDECESSOR PHAR-MOR
------------- --------------------------------------------
FORTY-THREE NINE WEEKS FIFTY-TWO FIFTY-THREE
WEEKS ENDED ENDED WEEKS ENDED WEEKS ENDED
JUNE 29, 1996 SEPTEMBER 2, 1995 JULY 1, 1995 JULY 2, 1994
------------- ----------------- ------------ ------------
<S> <C> <C> <C> <C>
Sales.............................................................. $ 874,284 $ 181,968 $ 1,412,661 $ 1,852,244
Less:
Cost of goods sold, including occupancy and distribution costs... 726,944 148,305 1,156,928 1,522,722
Selling, general and administrative expenses..................... 123,582 25,876 199,863 276,887
Chapter 11 professional fee accrual adjustment................... (1,530) -- -- --
Write-down of property and equipment to lower of appraised or net
book value...................................................... -- -- -- 53,211
Depreciation and amortization.................................... 14,891 3,732 24,643 55,401
----------- ----------- ----------- -----------
Income (loss) from operations before interest expense, interest
income, reorganization items, fresh-start revaluation, income
taxes and extraordinary item...................................... 10,397 4,055 31,227 (55,977)
Interest expense (excludes contractual interest not accrued on
unsecured prepetition debt of $3,897, $20,595, and $21,639 in the
nine weeks ended September 2, 1995, the fifty-two weeks ended July
1, 1995, and the fifty-three weeks ended July 2,1994,
respectively)..................................................... 14,343 5,689 33,324 33,878
Interest income.................................................... 8,614 -- -- --
----------- ----------- ----------- -----------
Income (loss) before reorganization items, fresh-start revaluation,
income taxes and extraordinary item............................... 4,668 (1,634) (2,097) (89,855)
Reorganization items............................................... -- 16,798 51,158 53,239
Fresh-start revaluation............................................ -- (8,043) -- --
----------- ----------- ----------- -----------
Income (loss) before income taxes and extraordinary item........... 4,668 (10,389) (53,255) (143,094)
Income tax provision (benefit)..................................... 2,142 -- (111) (331)
----------- ----------- ----------- -----------
Income (loss) before extraordinary item............................ 2,526 (10,389) (53,144) (142,763)
Extraordinary item--gain on debt discharge......................... -- 775,073 -- --
----------- ----------- ----------- -----------
Net income (loss).................................................. $ 2,526 $ 764,684 $ (53,144) $ (142,763)
=========== =========== =========== ===========
Net income (loss) per common share:
Income (loss) before extraordinary item.......................... $ .21 $ (.19) $ (.98) $ (2.64)
Extraordinary item............................................... -- 14.33 -- --
----------- ----------- ----------- -----------
Net income (loss)................................................ $ .21 $ 14.14 $ (.98) $ (2.64)
=========== =========== =========== ===========
Weighted average number of common shares outstanding............... 12,156,614 54,066,463 54,066,463 54,066,463
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-36
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
----------------
PAR RETAINED TOTAL
VALUE ADDITIONAL EARNINGS STOCKHOLDERS'
SHARES AMOUNT PAID-IN CAPITAL (DEFICIT) EQUITY (DEFICIENCY)
------- ------- --------------- ----------- -------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JUNE 26,
1993................... 54,066 $ 5,407 $ 487,477 $(1,061,661) $(568,777)
Net loss.............. -- -- -- (142,763) (142,763)
------- ------- --------- ----------- ---------
BALANCE AT JULY 2,
1994................... 54,066 5,407 487,477 (1,204,424) (711,540)
Net loss.............. -- -- -- (53,144) (53,144)
------- ------- --------- ----------- ---------
BALANCE AT JULY 1,
1995................... 54,066 5,407 487,477 (1,257,568) (764,684)
Net income............ -- -- -- 764,684 764,684
Cancellation of the
former common equity
under the Plan of
Reorganization....... (54,066) (5,407) (487,477) 492,884 --
Issuance of the new
equity interests in
connection with
emergence from
Chapter 11 Cases..... 12,156 122 89,378 -- 89,500
------- ------- --------- ----------- ---------
BALANCE AT SEPTEMBER 2,
1995................... 12,156 122 89,378 -- 89,500
Net income............ -- -- -- 2,526 2,526
Shares issued......... 1 -- 7 -- 7
------- ------- --------- ----------- ---------
BALANCE AT JUNE 29,
1996................... 12,157 $ 122 $ 89,385 $ 2,526 $ 92,033
======= ======= ========= =========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-37
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR
PHAR-MOR PREDECESSOR PHAR-MOR
------------- -------------------------------------------
FORTY-THREE NINE FIFTY-TWO FIFTY-THREE
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
JUNE 29, 1996 SEPTEMBER 2, 1995 JULY 1, 1995 JULY 2, 1994
------------- ----------------- ------------ ------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)...... $ 2,526 $ 764,684 $(53,144) $(142,763)
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities:
Items not requiring
the outlay of cash:
Extraordinary gain on
debt discharge....... -- (775,073) -- --
Fresh-start
revaluation.......... -- (8,043) -- --
Write-down of
property and
equipment to lower
of appraised or net
book value........... -- -- -- 53,211
Noncash charges
included in
reorganization
items................ -- 16,500 46,056 42,963
Depreciation.......... 8,802 2,388 15,073 40,961
Amortization of video
rental tapes......... 6,055 1,333 9,423 14,440
Amortization of
deferred financing
costs and goodwill... 363 73 2,139 5,106
Loss on abandonment
of equipment......... -- -- -- 2,111
Deferred income
taxes................ 2,142 -- (111) (331)
Deferred rent and
unfavorable lease
liabilities.......... 606 (89) 1,126 2,836
Changes in assets and
liabilities:
Accounts receivable... 6,905 11,997 (10,335) 10,407
Merchandise
inventories.......... 15,534 (6,922) 164,482 (24,199)
Prepaid expenses...... 1,356 2,441 631 (3,319)
Deferred income
taxes................ 2,088 -- -- --
Other assets.......... (681) 449 136 (205)
Accounts payable and
related party
accounts payable..... (4,370) (8,865) (39,772) 35,481
Accrued expenses and
related party
accrued expenses..... (1,999) 1,133 (18,994) (674)
Accrued bankruptcy
professional fees.... (19,476) 4,442 1,654 1,915
Reserve for costs of
rightsizing
program.............. (2,921) 550 (35,311) (17,558)
Self insurance
reserves............. (916) 1,131 1,111 5,949
-------- --------- -------- ---------
Net cash provided by
operating activi-
ties................ 16,014 8,129 84,164 26,331
-------- --------- -------- ---------
INVESTING ACITIVIES
Additions to rental
videotapes............ (7,316) (1,874) (11,925) (13,756)
Additions to property
and equipment......... (6,368) (649) (9,088) (12,904)
Purchase of partnership
interests............. (145) -- -- --
-------- --------- -------- ---------
Net cash used for in-
vesting activities.. (13,829) (2,523) (21,013) (26,660)
-------- --------- -------- ---------
FINANCING ACTIVITIES
Issuance of common
stock................. 7 -- -- --
Principal payments on
term debt............. (1,467) -- -- --
Principal payments on
capital lease
obligations........... (4,390) -- -- --
-------- --------- -------- ---------
Net cash used for fi-
nancing activities.. (5,850) -- -- --
-------- --------- -------- ---------
REORGANIZATION
ACTIVITIES
Cash distribution
pursuant to the plan
of reorganization..... -- (105,381) -- --
Repayment of revolving
credit loan and
secured notes from
proceeds of going-out-
of-business sales and
sale of assets........ -- -- (46,330) (76,300)
Payment of reclamation
claims................ -- (23,961) -- --
Decrease in all other
liabilities subject to
settlement under
reorganization
proceedings........... -- (2,076) (1,256) (12,655)
Proceeds from the sale
of new common stock... -- 9,500 -- --
Proceeds from sale of
assets held for
disposition........... -- -- 13,663 3,965
Debtor-in-possession
financing costs....... -- (15) (172) (1,923)
-------- --------- -------- ---------
Net cash used for
reorganization
activities............ -- (121,933) (34,095) (86,913)
-------- --------- -------- ---------
(Decrease) increase in
cash and cash
equivalents........... (3,665) (116,327) 29,056 (87,242)
Cash and cash
equivalents, beginning
of period............. 107,930 224,257 195,201 282,443
-------- --------- -------- ---------
Cash and cash
equivalents, end of
period................ $104,265 $ 107,930 $224,257 $ 195,201
======== ========= ======== =========
SUPPLEMENTAL INFORMATION
Interest paid.......... $ 9,067 $ 4,592 $ 27,989 $ 30,621
Income tax refunds..... 2,669 -- 570 228
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-38
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. REORGANIZATION AND BASIS OF PRESENTATION
In early August 1992, Phar-Mor publicly disclosed that it had discovered a
scheme by certain of its senior executives to falsify financial results. The
officers believed to be involved were promptly dismissed and are no longer
employed by Phar-Mor. A new management team, hired by the Board of Directors,
assumed day-to-day management of Phar-Mor. Upon discovery of the fraud, it
became apparent that Phar-Mor's explosive growth during the preceding several
years had been fueled in part by a systematic scheme to falsify Phar-Mor's
financial results and to conceal Phar-Mor's true financial condition. The
fraud which was perpetrated by the manipulation of information and override of
the system of internal controls by certain of its senior executives, as well
as a lack of systems and surrounding controls, masked very substantial losses,
created in part by low margins, slow moving merchandise categories, high
rentals for the newer and larger stores and operational inefficiencies. By the
time Phar-Mor concluded its investigation into the size of the fraud, it
determined that cumulative earnings had been overstated by approximately
$500,000. In response to the fraud, new management developed and executed a
business plan that resulted in closing retail store locations and distribution
centers, improved gross margins, reduced operating costs and invested in
systems designed to strengthen internal controls and improve management
reporting. Additional charges to cumulative earnings of approximately $500,000
resulted from changes in accounting policies and restructuring costs which
were recorded as of September 26, 1992 (See Note 6).
On August 17, 1992, Phar-Mor, Inc. and its subsidiaries (collectively,
"Phar-Mor") filed petitions for relief under Chapter 11 of the United States
Bankruptcy Code ("Chapter 11"). From that time until September 11, 1995 Phar-
Mor operated its business as a debtor-in-possession subject to the
jurisdiction of the United States Bankruptcy Court for the Northern District
of Ohio (the "Bankruptcy Court").
On September 11, 1995 (the "Effective Date"), Phar-Mor emerged from
reorganization proceedings under Chapter 11 pursuant to the confirmation order
entered on August 29, 1995 by the Bankruptcy Court confirming the Third
Amended Joint Plan of Reorganization dated May 25, 1995 ( the "Joint Plan").
Consequently, Phar-Mor has applied the reorganization and fresh-start
reporting adjustments to the consolidated balance sheet as of September 2,
1995, the closest fiscal month end to the Effective Date.
The consolidated financial statements of Phar-Mor during the bankruptcy
proceedings ("Predecessor Phar-Mor financial statements") are presented in
accordance with American Institute of Certified Public Accountants Statement
of Position 90-7, "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code" ("SOP 90-7"). Pursuant to guidance provided by SOP 90-7,
Phar-Mor adopted fresh-start reporting as of September 2, 1995. Under fresh-
start reporting, a new reporting entity is deemed to be created and the
recorded amounts of assets and liabilities are adjusted to reflect their
estimated fair values at the Effective Date (see Note 2). Financial statements
for periods ended on and prior to September 2, 1995, have been designated as
those of Predecessor Phar-Mor. Black lines have been drawn to separate
Successor Phar-Mor consolidated financial statements from Predecessor Phar-Mor
consolidated financial statements to signify that they are different reporting
entities which have not been prepared on a comparable basis.
The Joint Plan provided for, among other things, settlement of all
liabilities subject to settlement under reorganization proceedings in exchange
for cash, new debt, 12,156,250 shares of common stock and 1,250,000 common
stock warrants and an interest in a Limited Liability Company ("LLC") which
was established as part of the Joint Plan (see Notes 9 and 12). Phar-Mor's
cause of action against its former auditor and certain other causes of action
were assigned to such LLC. Predecessor Phar-Mor's creditors and former
shareholders are the beneficiaries of the LLC.
F-39
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The net cash disbursements upon the effectiveness of the Joint Plan were
comprised as follows:
<TABLE>
<S> <C>
Payment to the holders of claims under the prepetition credit
agreement and prepetition senior secured notes................ $ 103,708
Payment to fund litigation of LLC causes of action............. 400
Payment of origination costs for revolving credit facility for
the Successor Phar-Mor........................................ 1,273
---------
105,381
Receipt of net proceeds from the sale of new common stock...... (9,500)
---------
$ 95,881
=========
</TABLE>
The value of cash, notes and securities required to be distributed under the
Joint Plan was less than the value of the allowed claims on and interests in
Predecessor Phar-Mor; accordingly, Predecessor Phar-Mor recorded an
extraordinary gain of $775,073 related to the discharge of prepetition
liabilities in the period ended September 2, 1995. Payments and distributions
associated with the prepetition claims and obligations were made or provided
for in the consolidated balance sheet as of September 2, 1995. The
consolidated financial statements at September 2, 1995, give effect to the
issuance of all common stock, senior notes and tax notes in accordance with
the Joint Plan.
The extraordinary gain recorded by the Predecessor Phar-Mor was determined
as follows:
<TABLE>
<S> <C>
Liabilities subject to settlement under reorganization
proceedings at the Effective Date............................ $1,126,414
Less:
Cash distribution pursuant to the Joint Plan................ (105,381)
Issuance of new debt........................................ (108,523)
New capital lease obligations............................... (49,599)
Assumption of prepetition liabilities....................... (7,838)
Value of new common stock issued to prepetition creditors... (80,000)
----------
Extraordinary item--gain on debt discharge.................. $ 775,073
==========
</TABLE>
In the accompanying Predecessor Phar-Mor consolidated balance sheet,
liabilities subject to resolution in the Chapter 11 Cases are classified as
liabilities subject to settlement under reorganization proceedings, and are
comprised of the following:
<TABLE>
<S> <C>
Secured debt..................................................... $ 375,350
Unsecured debt................................................... 53,695
Capital lease obligations:
Real estate.................................................... 13,528
Equipment...................................................... 122,759
Rejected store leases............................................ 139,295
Accrued interest................................................. 16,218
Accounts payable and accrued liabilities......................... 434,114
----------
$1,154,959
==========
</TABLE>
F-40
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. FRESH-START REPORTING
As indicated in Note 1, Phar-Mor adopted fresh-start reporting as of
September 2, 1995. The Successor Phar-Mor fresh-start reorganization equity
value of $89,500 was determined with the assistance of the financial advisors
employed by Phar-Mor. The financial advisors reviewed financial data of Phar-
Mor, including financial projections through the fiscal year 1999. The
reorganization value of Phar-Mor, net of current liabilities, which was
determined to be in a range of $260,000 to $330,000, was based primarily on
the following methods of valuation: discounted cash flow analysis using
projected five year financial information and a discount rate of 9.8%; market
valuation of certain publicly traded companies whose operating businesses were
believed to be similar to that of Phar-Mor; review of certain acquisitions of
companies whose operating businesses were viewed to be similar to that of
Phar-Mor. In addition to these methods of analysis, certain general economic
and industry information relevant to the business of Phar-Mor was considered.
Based on the analysis outlined above, the financial advisors determined the
equity value of Phar-Mor to be between $90,000 and $160,000. This equity value
represented the reorganization value of $260,000 to $330,000 less $170,000 of
debt assumed to be issued under the Joint Plan. The fresh-start reorganization
equity value of $89,500 correlates to the $90,000 referred to above, less
$1,000 in expenses reimbursed to certain shareholders plus $500 reflecting the
purchase of common stock by present and former members of management as
further described in the Joint Plan.
F-41
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The five year cash flow projections were based on estimates and assumptions
about circumstances and events that had not yet taken place. Such estimates
and assumptions were inherently subject to significant economic and
competitive uncertainties beyond the control of Phar-Mor including, but not
limited to, those with respect to the future course of Phar-Mor's business
activity. Any difference between Phar-Mor's projected and actual results
following its emergence from Chapter 11 will not alter the determination of
the fresh-start reorganization equity value because such value is not
contingent upon Phar-Mor achieving the projected results.
The Predecessor Phar-Mor balance sheet as of September 2, 1995, and
adjustments thereto to give effect to the discharge of prepetition debt and
fresh-start reporting, are as follows:
<TABLE>
<CAPTION>
PREDECESSOR ADOPTION OF SUCCESSOR
PHAR-MOR RESTRUCTURING FRESH-START PHAR-MOR
PRE-CONFIRMATION (SEE NOTE 1) REPORTING REORGANIZED
---------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.......... $ 203,811 $ (95,881) $ -- $107,930
Account receivable--
net................. 27,702 -- -- 27,702
Due from related
parties............. -- -- -- --
Merchandise
inventories......... 167,177 -- -- 167,177
Prepaid expenses..... 6,540 -- -- 6,540
Deferred tax asset... -- -- $ 1,814 1,814
----------- ---------- -------- --------
Total current
assets.............. 405,230 (95,881) 1,814 311,163
Property and
equipment--net........ 69,770 -- (4,592) 65,178
Deferred tax asset..... 180 -- 12,006 12,186
Other assets........... 2,992 3 (1,315) 1,680
----------- ---------- -------- --------
Total assets......... $ 478,172 $ (95,878) $ 7,913 $390,207
=========== ========== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIENCY)
Current liabilities:
Accounts payable...... $ 47,319 $ 1,623 -- $ 48,942
Related party
accounts payable..... 9,164 -- -- 9,164
Accrued expenses...... 27,619 6,255 -- 33,874
Accrued bankruptcy
professional fees.... 19,657 -- -- 19,657
Reserve for costs of
rightsizing
program.............. 7,301 -- -- 7,301
Current portion of
self insurance
reserves............. 5,030 -- -- 5,030
Current portion of
long-term debt....... -- 1,541 -- 1,541
Current portion of
capital lease
obligations.......... -- 5,534 -- 5,534
----------- ---------- -------- --------
Total current
liabilities......... 116,090 14,953 -- 131,043
Liabilities subject to
settlement under
reorganization
proceedings........... 1,126,414 (1,126,414) -- --
Long-term debt......... -- 106,982 -- 106,982
Capital lease
obligations........... -- 44,065 -- 44,065
Long-term self
insurance reserves.... 8,142 -- -- 8,142
Unfavorable lease
liability--net........ -- -- $ 10,475 10,475
Deferred rent.......... 10,642 (37) (10,605) --
----------- ---------- -------- --------
Total liabilities.... 1,261,288 (960,451) (130) 300,707
----------- ---------- -------- --------
Stockholders' equity
(deficiency):
Common stock.......... 5,407 (5,285) -- 122
Additional paid-in
capital.............. 487,477 (398,099) -- 89,378
Retained earnings
(deficit)............ (1,276,000) 1,267,957 8,043 --
----------- ---------- -------- --------
Total stockholders'
equity
(deficiency)........ (783,116) 864,573 8,043 89,500
----------- ---------- -------- --------
Total liabilities and
stockholders' equity
(deficiency)........ $ 478,172 $ (95,878) $ 7,913 $390,207
=========== ========== ======== ========
</TABLE>
F-42
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The significant fresh-start reporting adjustments are summarized as follows:
(1) Revaluation of fixed assets and leasehold interests based, in part,
upon the estimated fair market values of properties and leases. This
revaluation resulted in recording unfavorable lease liabilities for
certain locations. See Notes 3 and 6.
(2) Write-off of lease acquisition costs.
(3) Valuation and recording of a deferred tax asset representing the
estimated net realizable value of net operating loss carry forwards.
(4) Adjustments to the fair market value of other noncurrent assets in
excess of reorganization value in accordance with fresh-start
reporting.
3. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Fiscal Periods Presented--The accompanying consolidated balance
sheets were prepared as of June 29, 1996, September 2, 1995 and July
1, 1995 (see Note 1). The accompanying consolidated statements of
operations, changes in stockholders' equity and cash flows were
prepared for the forty-three weeks ended June 29, 1996, the nine
weeks ended September 2, 1995, the fifty-two weeks ended July 1,
1995 and the fifty-three weeks ended July 2, 1994.
b. Business--Phar-Mor operates a chain of "deep discount" drugstores
primarily located in the midwest and along the east coast of the
continental United States in which it sells merchandise in various
categories.
c. Principles of Consolidation--The consolidated financial statements
include the accounts of Phar-Mor, Inc., its wholly-owned
subsidiaries and its majority-owned partnerships. All intercompany
accounts and transactions have been eliminated.
d. Cash and Cash Equivalents--Phar-Mor considers all short-term
investments with an original maturity of three months or less to be
cash equivalents.
e. Merchandise Inventories--Merchandise inventories are valued at the
lower of first-in, first-out ("FIFO") cost or market.
f. Video Rental Tapes--Videotapes held for rental which are included in
inventories, are recorded at cost and are amortized over their
estimated economic life with no provision for salvage value. With
respect to "hit" titles for which four or more copies per store are
purchased, the fourth and any succeeding copies are amortized over
nine months on a straight-line basis. All other video cassette
purchases up to three copies per store are amortized over thirty-six
months on a straight-line basis.
g. Deferred Debt Expense--Deferred debt expense is included in other
assets and is amortized on a straight-line basis over the term of
the related debt.
h. Goodwill--Goodwill is included in other assets and is amortized on a
straight-line basis over 40 years.
F-43
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
i. Property and Equipment--Phar-Mor's policy is to record property and
equipment (including leasehold improvements) at cost. Depreciation
is recorded on the straight-line method over the estimated useful
lives of the assets. Leasehold improvements are amortized over the
estimated useful lives of the improvements or the lives of the
leases, whichever is shorter.
Because of the fraud and embezzlement referred to in Notes 1 and 6,
which resulted in unreliable and insufficient evidential matter to
support the acquisition cost of property and equipment, as of July 2,
1994, Phar-Mor revalued property and equipment based upon an independent
appraisal. Consequently, Predecessor Phar-Mor property and equipment and
related depreciation and amortization at and for periods subsequent to
July 2, 1994 are based upon such assets valued at the lower of the
appraised value or net book value at July 2, 1994 as adjusted for
additions and disposals since that date (see Note 6).
Property and equipment was revalued at September 2, 1995 in
connection with the adoption of fresh-start reporting (see Note 2).
j. Leased Property Under Capital Leases--Phar-Mor accounts for capital
leases, which transfer substantially all of the benefits and risks
incident to the ownership of property to Phar-Mor, as the
acquisition of an asset and the incurrence of an obligation. Under
this method of accounting the cost of the leased asset is amortized
principally using the straight-line method over its estimated useful
life, and the obligation, including interest thereon, is liquidated
over the life of the lease.
k. Operating Leases and Deferred Rent--Operating leases are accounted
for on the straight-line method over the lease term. Deferred rent
represents the difference between rents paid and the amounts
expensed for operating leases.
l. Unfavorable Lease Liability--The unfavorable lease liability was
recorded as part of fresh-start reporting (see Note 2) and
represents the excess of the present value of the liability related
to lease commitments over the present value of market rate rents as
of the date of the Reorganization for such locations. This liability
will be amortized as a reduction of rent expense over the remaining
lease terms.
m. Reclassifications--Certain amounts in the financial statements have
been reclassified for comparative purposes.
n. Net Income (Loss) Per Common Share--Net income (loss) per common
share is computed by dividing net income (loss) by the weighted
average number of common shares outstanding. Outstanding stock
options and warrants do not have a dilutive effect on net income per
share.
o. Accounting Changes--In March 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standard
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long- Lived Assets to be Disposed Of," which
establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used, and for long-lived assets and
certain identifiable intangibles to be disposed of. This statement
requires adoption no later than fiscal years beginning after
December 15, 1995. Phar-Mor has not yet completed its evaluation of
the effect that implementation of this new standard will have on its
results of operations and financial position.
In October 1995, the Financial Accounting Standards Board issued
SFAS No. 123, "Accounting for Stock-Based Compensation," which requires
adoption no later than fiscal years beginning after December 15, 1995.
The new standard defines a fair value method of accounting for stock
options and similar equity instruments.
F-44
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Under the fair value method, compensation cost is measured at the
grant date based on the fair value of the award and is recognized
over the service period, which is usually the vesting period.
Pursuant to the new standard, companies are encouraged, but not
required, to adopt the fair value method of accounting for employee
stock-based transactions. Companies are also permitted to continue to
account for such transactions under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," but would
be required to disclose in a note to the financial statements pro
forma net income and earnings per share as if the company had applied
the new method of accounting.
The accounting requirements of the new method are effective to all
employee awards granted after the beginning of the fiscal year of
adoption. Phar-Mor has not yet determined if it will elect to change to
the fair value method, nor has it determined the effect the new standard
will have on net income and earnings per share should it elect to make
such a change. Adoption of the new standard will have no effect on Phar-
Mor's cash flows.
p. Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the period. Actual results
could differ from those estimates.
4. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
PREDECESSOR
SUCCESSOR PHAR-MOR PHAR-MOR
--------------------- ------------
JUNE 29, SEPTEMBER 2, JULY 1,
1996 1995 1995
-------- ------------ ------------
<S> <C> <C> <C>
Accounts receivable--vendors............................................................ $15,583 $16,141 $22,530
Receivable from inventory liquidation company........................................... -- -- 12,418
Insurance claim receivable.............................................................. -- 6,650 --
Third-party prescriptions............................................................... 5,151 5,271 5,580
Vendor coupons.......................................................................... 1,719 1,605 1,543
Income tax receivable................................................................... 175 193 193
Other................................................................................... 2,397 2,464 6,338
------- ------- -------
25,025 32,324 48,602
Less allowance for doubtful accounts.................................................... 4,191 4,622 4,917
------- ------- -------
$20,834 $27,702 $43,685
======= ======= =======
</TABLE>
F-45
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. MERCHANDISE INVENTORIES
Merchandise inventories consists of the following:
<TABLE>
<CAPTION>
PREDECESSOR
SUCCESSOR PHAR-MOR PHAR-MOR
--------------------- -----------
JUNE 29, SEPTEMBER 2, JULY 1,
1996 1995 1995
-------- ------------ -----------
<S> <C> <C> <C>
Store inventories........................................................................ $140,522 $153,856 $140,560
Warehouse inventories.................................................................... 25,387 35,237 39,510
Video rental tapes--net.................................................................. 7,059 6,746 6,229
-------- -------- --------
172,968 195,839 186,299
Less reserves for markdowns, shrinkage and vendor rebates................................ 20,064 28,662 12,585
-------- -------- --------
$152,904 $167,177 $173,714
======== ======== ========
</TABLE>
The video rental tape inventory is net of accumulated amortization of $6,055,
$0, and $13,405 at June 29, 1996, September 2, 1995 and July 1, 1995,
respectively.
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
PREDECESSOR
SUCCESSOR PHAR-MOR PHAR-MOR
---------------------- -----------
JUNE 29, SEPTEMBER 2, JULY 1,
1996 1995 1995
-------- ------------ -----------
<S> <C> <C> <C>
Furniture, fixtures and equipment........................................................ $19,596 $15,215 $30,416
Building improvements to leased property................................................. 17,954 11,626 16,748
Land..................................................................................... 166 -- --
Capital leases:
Buildings.............................................................................. 11,235 11,033 11,201
Furniture, fixtures and equipment...................................................... 27,383 27,304 40,880
------- ------- -------
76,334 65,178 99,245
Less accumulated depreciation and amortization........................................... (9,014) -- (15,344)
Less allowance for disposal of property and equipment.................................... (770) -- (10,079)
------- ------- -------
$66,550 $65,178 $73,822
======= ======= =======
</TABLE>
F-46
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Due to the lack of reliable accounting records referred to in Note 1 and
because the adverse business conditions which had been concealed by the fraud
and embezzlement dictated an assessment as to whether the carrying amount of
property and equipment had been overstated, an independent appraisal was
undertaken in 1994. The appraisal included the physical inspection of property
and equipment at the Company's corporate headquarters, warehouse and selected
retail store locations. The appraised value of certain property and equipment
was less than the net book value of the assets. Accordingly, the Company
recorded a charge of $53,211 to write-down property and equipment as of July
2, 1994. The following is a reconciliation of the net book value of property
and equipment and the effects of the write-down:
<TABLE>
<CAPTION>
JULY 2, 1994
------------------------------------------
LOWER OF
HISTORICAL WRITE- APPRAISED OR NET
NET BOOK VALUE DOWN BOOK VALUE
-------------- --------- ----------------
<S> <C> <C> <C>
Furniture, fixtures and equipment.. $ 54,935 $ (31,150) $ 23,785
Building improvements to leased
property.......................... 36,582 (22,061) 14,521
Capital Leases:
Buildings........................ 11,201 -- 11,201
Furniture, fixtures and equip-
ment............................ 40,850 -- 40,850
-------- --------- --------
$143,568 $ (53,211) $ 90,357
</TABLE>
The historical net book value amounts are net of accumulated depreciation
and amortization for each caption. Accumulated depreciation and amortization
is $0 for each caption for the lower of appraised or net book value amounts.
Also, as a result of the fraudulent reporting described in Note 1, the
following types of errors extended to property and equipment:
(1) Journalization of fictitious income via systematic capitalization of non-
existent additions to store property and equipment accounts.
(2) Repair and maintenance and short-term equipment rental items which were
improperly capitalized.
(3) Landlord reimbursements received in prior years for leasehold
improvements, which reimbursements were not credited as a reduction to the
related asset account, and in some cases, could not be traced to the
accounting records at all.
Adjustments were made in the September 26, 1992 balance sheet for the above
known errors. September 26, 1992 was the end of Phar-Mor's first fiscal
quarter of fiscal year 1993, the date closest to the dates on which Phar-Mor
conducted a physical inventory at its stores and distribution centers
following the disclosure of the fraud and the earliest date a consolidated
balance sheet could be prepared by new management.
While it is not possible to say with certainty that it was a conscious part
of the fraudulent reporting scheme, the conditions which prevented new
management from reconstructing the property and equipment records were: 1)
incomplete and unreconcilable detailed fixed asset registers or equivalent
records (i.e., there was inadequate detail maintained regarding the
composition of fixed assets below the general ledger account level); and 2)
inadequate documentation to support the acquisition cost of those assets
(e.g., lack of invoices, contracts or the like).
Despite the expenditure of substantial resources to locate sufficient
underlying documentation to reconstruct those records, Phar-Mor ultimately
concluded that it was not possible to determine that the recorded amounts were
reflective of the original acquisition cost.
F-47
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Accordingly, any adjustment that might have been determined to be necessary
to adjust to original acquisition cost if reliable records could have been
reconstructed would be limited to: 1) the recorded cost of property and
equipment; 2) accumulated depreciation thereon; and 3) the related periodic
depreciation expense. Note that any adjustment to cost or accumulated
depreciation as of September 26, 1992 would have affected those balance sheet
line items and retained deficit, but would not have affected subsequent
statements of operations beyond the impact on depreciation expense.
7. OTHER ASSETS
Other assets consists of the following:
<TABLE>
<CAPTION>
PREDECESSOR
SUCCESSOR PHAR-MOR PHAR-MOR
--------------------- -----------
JUNE 29, SEPTEMBER 2, JULY 1,
1996 1995 1995
-------- ------------ -----------
<S> <C> <C> <C>
Lease purchase costs..................................................................... $ -- $ -- $ 684
Goodwill................................................................................. 1,757 -- --
Deferred debt expense.................................................................... 711 922 1,329
Other.................................................................................... 1,488 758 1,305
------ ------ ------
$3,956 $1,680 $3,318
====== ====== ======
</TABLE>
The lease purchase cost reflected above is net of accumulated amortization
of $340 at July 1, 1995. Lease purchase costs were eliminated at September 2,
1995 as a result of adopting fresh-start reporting (see Note 2).
Deferred debt expense is net of accumulated amortization of $329 and $8,517
at June 29, 1996 and July 1, 1995, respectively. The deferred debt expense at
June 29, 1996 and September 2, 1995 consists of debt origination costs
associated with the new credit facility (see Note 8).
8. REVOLVING CREDIT FACILITIES
SUCCESSOR PHAR-MOR
On September 11, 1995, Phar-Mor entered into a Loan and Security Agreement
(the "Facility") with BankAmerica Business Credit, Inc. ("BABC"), as agent,
and other financial institutions (collectively, the "Lenders"), that
established a credit facility in the maximum amount of $100,000.
Borrowings under the Facility may be used for working capital needs and
general corporate purposes. Up to $50,000 of the Facility at any time may be
used for standby and documentary letters of credit. The Facility includes
restrictions on, among other things, additional debt, capital expenditures,
investments, restricted payments and other distributions, mergers and
acquisitions, and contains covenants requiring Phar-Mor to meet a specified
quarterly minimum EBITDA Coverage Ratio (the sum of earnings before interest,
taxes, depreciation and amortization, as defined, divided by interest
expense), calculated on a rolling four quarter basis, and a monthly minimum
net worth test.
Credit availability under the Facility at any time is the lesser of the
Aggregate Availability (as defined in the Facility) or $100,000. Availability
under the Facility, after subtracting amounts used for outstanding letters of
credit, was $76,829 at June 29, 1996. The Facility establishes a first
priority lien and security interest in the current assets of Phar-Mor,
including, among other items, cash, accounts receivable and inventory.
Advances made under the Facility bear interest at the BankAmerica reference
rate plus 1/2% or London Interbank Offered Rate ("LIBOR") plus the applicable
margin. The applicable margin ranges between 1.50% and 2.00% and is determined
by a formula based on a ratio of (a) Phar-Mor's earnings before interest,
taxes,
F-48
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
depreciation and amortization to (b) interest. Under the terms of the
Facility, Phar-Mor is required to pay a commitment fee of 0.28125% per annum
on the unused portion of the facility, letter of credit fees and certain other
fees.
At the Effective Date there were no outstanding advances or issued letters
of credit under the Facility. Subsequent to the Effective Date, letters of
credit in the amount of $9,814 that were outstanding under the Debtor-in-
Possession credit facilities were canceled and reissued under this Facility.
There were no outstanding advances under the Facility at any time during the
forty-three weeks ended June 29, 1996. At June 29, 1996 there were letters of
credit in the amount of $5,384 outstanding under the Facility.
The Facility expires on August 30, 1998.
PREDECESSOR PHAR-MOR
From October 22, 1992 to the Effective Date, Phar-Mor had Debtor-in-
Possession revolving credit facilities. The maximum amount available under the
facilities ranged from $150,000 to $50,000 during the pendency of the
bankruptcy cases. Phar-Mor never borrowed under the facilities, utilizing the
credit availability only for standby letters of credit of which the maximum
amount outstanding during the pendency of the bankruptcy cases was $9,814.
9. LONG-TERM DEBT
SUCCESSOR PHAR-MOR
Pursuant to the Joint Plan, Phar-Mor and its lenders agreed to a
restructuring of Phar-Mor's obligations. The resulting new debt obligations
are summarized below. The difference between the preconfirmation debt
obligations and the new debt obligations was included in the calculation of
the "Extraordinary items--gain on debt discharge" (see Note 1).
The composition of the new debt obligations included on the consolidated
balance sheet as of June 29, 1996 and September 2, 1995 is as follows:
<TABLE>
<CAPTION>
JUNE 29, SEPTEMBER 2,
1996 1995
-------- ------------
<S> <C> <C>
New senior unsecured notes, interest rate of 11.72%,
due September 2002................................... $ 91,462 $ 91,462
New equipment notes, interest rate of 7%, due in
installments through October 2003.................... 9,536 9,952
New tax notes, interest rates at 5.89% to 8%, due
through September 2001............................... 6,423 7,109
Real estate mortgage notes and bonds payable at rates
ranging from 3% to 9.98% and the prime rate plus 1%.. 5,455 --
-------- --------
Total debt............................................ 112,876 108,523
Less current portion.................................. 2,903 1,541
-------- --------
Total long-term debt.................................. $109,973 $106,982
======== ========
</TABLE>
Holders of the prepetition senior notes and revolving credit facility
received the new senior unsecured notes as part of their distribution under
the Joint Plan.
Phar-Mor must offer to purchase the new senior unsecured notes at a price
equal to 101% of the principal amount upon the occurrence of a change in
control. The new senior notes contain restrictions on, among other things,
incurrence of debt, payment of dividends and repurchases of common stock.
F-49
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Phar-Mor has mortgage notes and bonds payable collateralized by real estate
with an aggregate net book value of $4,600 at June 29, 1996.
Future maturities of long-term debt subsequent to June 29, 1996 are
summarized as follows:
<TABLE>
<S> <C>
1997................................................................ $ 2,903
1998................................................................ 2,535
1999................................................................ 3,821
2000................................................................ 1,432
2001................................................................ 1,140
Thereafter.......................................................... 101,045
--------
$112,876
========
</TABLE>
PREDECESSOR PHAR-MOR LONG-TERM DEBT (see Note 1)
<TABLE>
<CAPTION>
JULY 1, 1995
------------
<S> <C>
Prepetition secured debt:
Revolving credit loan......................................... $206,728
Senior notes.................................................. 97,100
Term loans.................................................... 71,522
--------
Total prepetition secured debt.............................. 375,350
--------
Prepetition unsecured debt:
Senior subordinated notes..................................... 50,000
Subordinated debt with related party.......................... 3,695
--------
Total prepetition unsecured debt............................ 53,695
--------
$429,045
========
</TABLE>
The descriptions of the financing arrangements that follow are based on the
original contractual terms and maturities. However, as a result of the
bankruptcy Phar-Mor was in default of substantially all of its prepetition
financing agreements which caused the amounts due under the agreements to be
accelerated. The amounts outstanding under all of the prepetition financing
arrangements are included in liabilities subject to settlement under
reorganization proceedings as of July 1, 1995 (see Note 1).
Revolving Credit Loan--In March 1992, Phar-Mor entered into a revolving
credit agreement (the "Credit Agreement") with a consortium of banks providing
for borrowing up to $600,000 with interest at LIBOR, plus a margin as defined
in the Credit Agreement, which varied with the fluctuation of the ratio of
consolidated net income to interest expense. At July 1, 1995 the interest rate
was LIBOR plus 1.75% (effective rate of 7.9375%).
Under the Credit Agreement, the banks agreed to make revolving loans to, and
to issue letters of credit for, Phar-Mor in an amount not exceeding at any
time the lesser of the Borrowing Base (as defined in the Credit Agreement) or
$600,000. The aggregate stated amount of letters of credit could not exceed at
any time $7,500. The Credit Agreement was collateralized by substantially all
merchandise inventories, accounts receivable and certain other assets.
Senior Notes--In March 1992, Phar-Mor issued $155,000 senior secured notes
(the "Senior Notes"). The Senior Notes bore interest, payable semi-annually on
the fifteenth day of March and September, at the rate of 9.11% and together
with borrowings under the Credit Agreement, were collateralized by merchandise
inventories and accounts receivable on a pari passu basis. The senior note
agreement provided for equal annual principal payments of $38,750 to commence
in March 1998.
F-50
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Term Loans--Phar-Mor had term loans with various financing institutions,
which were collateralized by furniture, fixtures and equipment. Payments were
due monthly, and included interest at rates ranging from 6.5% to 11.75% per
annum.
Senior Subordinated Notes--The loan agreement relating to the senior
subordinated notes specified that interest only was payable on the notes, on a
semi-annual basis, each March and September, at 12% per annum. The notes were
unsecured, and principal payments were due in equal annual installments
commencing September 30, 1993.
Subordinated Debt with Related Party--In May 1990 Phar-Mor borrowed, on an
unsecured basis, $8,867 from Giant Eagle, Inc. (a former shareholder of Phar-
Mor). The subordinated note agreement specified that principal payments of
approximately $369 were payable over twenty-four months commencing June 1991,
and the note bore interest at the prime rate plus 1% (see Note 11).
10. LEASES
Phar-Mor leases its retail store properties, certain warehouse facilities
and certain equipment under capital and operating leases. Generally, leases
are net leases that require the payment of executory expenses such as real
estate taxes, insurance, maintenance and other operating costs, in addition to
minimum rentals. The initial terms of the leases range from three to twenty-
five years and generally provide for renewal options.
Minimum annual rentals for all capital and operating leases having initial
noncancelable lease terms in excess of one year at June 29, 1996 are as
follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1997..................................................... $ 9,211 $ 32,644
1998..................................................... 9,221 32,751
1999..................................................... 8,841 32,871
2000..................................................... 8,265 33,110
2001..................................................... 5,330 32,059
Thereafter............................................... 19,044 145,953
------- --------
Total minimum lease payments............................... 59,912 $309,388
========
Less amounts representing interest......................... 14,703
-------
Present value of minimum lease payments.................... 45,209
Less current portion....................................... 6,019
-------
Long-term capital lease obligations........................ $39,190
=======
</TABLE>
The operating leases on substantially all store properties, provide for
additional rentals when sales exceed specified levels and contain escalation
clauses. Rent expense for the forty-three weeks ended June 29, 1996, the nine
weeks ended September 2, 1995, the fifty-two weeks ended July 1, 1995 and the
fifty-three weeks ended July 2, 1994 was $26,278, $5,660, $44,385 and $58,645,
respectively, including $103, $36, $253 and $302 of additional rentals.
F-51
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. TRANSACTIONS WITH RELATED PARTIES
SUCCESSOR PHAR-MOR
FoxMeyer Health Corporation ("FoxMeyer"), an affiliate of Phar-Mor's largest
supplier, owns 69.8% of Hamilton Morgan L.L.C. ("Hamilton Morgan") which
beneficially owns approximately 39.4% of Phar-Mor's common stock. Robert Haft,
Phar-Mor's Chairman of the Board of Directors and Chief Executive Officer, is
President of Hamilton Morgan. The two Cochairmen of the Board of Directors of
FoxMeyer are members of the Board of Directors of Phar-Mor. An affiliate of
FoxMeyer supplies Phar-Mor's stores with pharmaceuticals and health and beauty
care products under a long-term contract which expires on the later of August
17, 1997 or the date when Phar-Mor's purchases from FoxMeyer equal an
aggregate net minimum of $1,400,000 of products. On June 29, 1996 and
September 2, 1995, Phar-Mor had liabilities relating to these purchases of
$7,751 and $9,164, respectively. This liability is included in related party
accounts payable in the accompanying consolidated balance sheets. For the
forty-three weeks ended June 29, 1996, Phar-Mor purchased $179,841 of product
under the terms of the contract.
PREDECESSOR PHAR-MOR
As of August 17, 1992, Giant Eagle, Inc. was a 40% shareholder of Phar-Mor.
Acquisition of Subsidiary--In November 1989, Phar-Mor and Giant Eagle, Inc.
formed Tamco Distributor Company ("Tamco"), each owning 50% of the outstanding
common stock. In March 1992, Phar-Mor purchased Tamco's outstanding shares
owned by Giant Eagle, Inc. for $11,000, which was based on 50% of Tamco's net
book value at the date of the transaction. Tamco was merged into Phar-Mor on
the Effective Date of the Joint Plan.
Subordinated Debt--In 1990, Tamco borrowed $8,867 from Giant Eagle, Inc.
Operating Leases--Phar-Mor leased various property and equipment from
related parties. Rental payments for the nine weeks ended September 2, 1995,
the fifty-two weeks ended July 1, 1995 and the fifty-three weeks ended July 2,
1994 were $2,280, $15,558 and $17,300, respectively.
Other--Phar-Mor has rejected certain store leases with a related landlord,
PMI Associates (related through common ownership). The accompanying
consolidated balance sheet at July 1, 1995 reflect costs of rejecting these
leases of $13,450. Phar-Mor loaned funds to PMI Associates for the
construction of store locations. The loan balance receivable at July 1, 1995
of $4,626 is netted in the above reserve.
Phar-Mor had a receivable due from Giant Eagle, Inc. of $4,181 at July 1,
1995 relating principally to the sale of merchandise. The receivable relating
to the sale of merchandise is included in due from related parties in the
accompanying consolidated balance sheet.
On or about August 16, 1994, Phar-Mor and its subsidiaries filed several
complaints against Giant Eagle, Inc., and certain of its affiliates. Giant
Eagle, Inc., in turn, filed three complaints against Phar-Mor. The complaints
set forth various causes of action including, among others, requests for (i)
declaratory judgment that certain agreements constitute secured loans rather
than leases for purposes of Bankruptcy Code section 365, (ii) recovery of
preferences, (iii) damages for breach of contract and (iv) recovery of a
constructive fraudulent conveyance. All of the causes of action set forth in
the complaints were the subject of a Settlement Agreement between Phar-Mor and
its subsidiaries and Giant Eagle and certain of its affiliates. On August 29,
1995, the Bankruptcy Court approved the Settlement Agreement. Except for
certain immaterial unresolved claims, the conditions to the effectiveness of
the Settlement Agreement were satisfied as of November 3, 1995.
F-52
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In addition to the foregoing, Phar-Mor purchased merchandise and services
from various other related parties. During the nine weeks ended September 2,
1995, the fifty-two weeks ended July 1, 1995 and the fifty- three weeks ended
July 2, 1994, the total amounts of these purchases were $51, $508 and $1,099,
respectively. The liabilities relating to these transactions are as follows:
<TABLE>
<CAPTION>
JULY 1, 1995
------------
<S> <C>
Post-petition liabilities....................................... $2,383
Prepetition liabilities......................................... 3,699
</TABLE>
The post-petition liabilities are included in related party accrued expenses
in the accompanying consolidated balance sheets. The prepetition liabilities
are included in liabilities subject to settlement under reorganization
proceedings in the accompanying consolidated balance sheets. The prepetition
liabilities included $1,641 payable to a third-party which was guaranteed by
Giant Eagle, Inc.
12. COMMON STOCK, WARRANTS AND OPTIONS
SUCCESSOR PHAR-MOR
COMMON STOCK
A total of 12,156,250 common shares were issued and outstanding as of the
Effective Date. Pursuant to the Joint Plan, 10,000,000 common shares were
issued to prepetition creditors. Further, pursuant to the Joint Plan,
1,250,000 common shares were issued by Phar-Mor to Hamilton Morgan, 50,000
common shares were issued to Alvarez & Marsal, Inc., and 12,500 common shares
were issued to certain members of existing management in exchange for cash
consideration at $8.00 per share net of $1,000 in expenses incurred by
Hamilton Morgan. Additionally, 843,750 shares were distributed to FoxMeyer as
settlement for a prepetition reclamation claim.
WARRANTS
Pursuant to the Joint Plan, warrants to purchase an aggregate of 1,250,000
common shares were issued as of the Effective Date to certain prepetition
unsecured creditors. Each warrant entitles the holder thereof to acquire one
common share at a price of $13.50, subject to certain adjustments, as defined
in the Joint Plan. The warrants are exercisable at any time until the close of
business on September 10, 2002. As of June 29, 1996, no warrants have been
exercised.
STOCK OPTIONS
Phar-Mor has an incentive stock option plan for officers and key employees.
As of June 29, 1996, options for 6,050 common shares were reserved for future
grant, and options for 906,950 shares were granted and are exercisable upon
vesting. Under the terms of the option plan, all options have a seven-year
term from date of grant. Generally, the options granted vest with respect to
20% of the underlying shares on the grant date, and will vest in additional
increments of 20% of the underlying shares on each of the first four
anniversaries of September 11, 1995. To the extent then vested, the options
are generally exercisable within one year following the death or disability of
the holder of the option, and within six months of any termination event,
except where a termination is for cause, in which case the option will then
terminate. To the extent then not vested, the options generally will terminate
upon the holders death, disability or termination of employment. The
employment agreements of certain executive officers provide for accelerated
vesting of options upon specified termination events.
F-53
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The firm of Alvarez & Marsal, Inc. were granted fully vested stock options
for 416,667 shares of common stock on the Effective Date. The options are
exercisable at $8.00 per share and expire seven years from date of grant.
Phar-Mor has a stock option plan for directors. Each director was granted
options for 5,000 common shares (aggregating 35,000 shares) on October 3, 1995
and will be granted options for 5,000 shares on October 1 in each of the next
four years. The options vest immediately, expire five years after the grant
date and are exercisable at an exercise price equal to the market price on the
grant date. A maximum of 250,000 common shares may be granted under the stock
option plan for directors.
Each director may also elect to receive common stock, in lieu of all or
portions of the director's annual retainer at a price equal to the market
price as of October 1 of the year of the election.
Options outstanding under the plans are as follows:
<TABLE>
<CAPTION>
OPTIONS OPTION PRICE
OUTSTANDING PER SHARE
----------- ------------
<S> <C> <C>
Balance at September 2, 1995........................ 1,225,917 $8.00
Granted............................................. 248,800 $7.06-$8.00
Forfeited........................................... (116,100) $8.00
Exercised........................................... -- --
--------- -----------
Balance at June 29, 1996............................ 1,358,617 $7.06-$8.00
========= ===========
</TABLE>
At June 29, 1996, 620,577 options were exercisable.
PREDECESSOR PHAR-MOR
All common stock in the Predecessor Phar-Mor was canceled under the Joint
Plan and all warrants and stock options issued prior to the Effective Date
were forfeited.
F-54
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. INCOME TAXES
Deferred taxes at June 29, 1996, September 2, 1995 and July 1, 1995, reflect
the net tax effect of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. Deferred tax assets are recognized to the extent that
realization of such benefits is more likely than not. Changes in tax rates or
laws will result in adjustments to the recorded deferred tax assets or
liabilities in the period that the change is enacted.
The components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
PREDECESSOR
SUCCESSOR PHAR-MOR PHAR-MOR
----------------------- -----------
JUNE 29, SEPTEMBER 2, JULY 1,
1996 1995 1995
--------- ------------ -----------
<S> <C> <C> <C>
Deferred Tax Assets:
Operating and restructuring reserves................................................. $ 10,889 $ 20,101 $ 68,314
Net operating losses................................................................. 113,634 326,050 330,583
Deferred exclusivity income.......................................................... -- -- 31,506
Depreciation and amortization........................................................ 18,831 32,881 37,425
Lease escalation accruals............................................................ 4,462 4,162 2,717
Jobs tax credit...................................................................... 4,432 4,432 4,432
Other items.......................................................................... 2,008 3,165 6,131
--------- --------- ---------
154,256 390,791 481,108
Valuation allowance.................................................................. (144,326) (376,791) (480,713)
--------- --------- ---------
Net deferred tax assets.............................................................. $ 9,930 $ 14,000 $ 395
========= ========= =========
Deferred Tax Liabilities:
Other items.......................................................................... $ (160) $ -- $ (395)
--------- --------- ---------
Total deferred tax liabilities....................................................... $ (160) $ -- $ (395)
========= ========= =========
Composition of amounts in Consolidated Balance Sheet:
Deferred tax assets--current......................................................... $ 548 $ 1,814 $ 56
Deferred tax liabilities--current.................................................... (160) -- (237)
--------- --------- ---------
Net deferred tax assets (liabilities)--current...................................... $ 388 $ 1,814 $ (181)
========= ========= =========
Deferred tax assets--noncurrent...................................................... $ 9,382 $ 12,186 $ 339
Deferred tax liabilities--noncurrent................................................. -- -- (158)
--------- --------- ---------
Net deferred tax assets (liabilities)--noncurrent................................... $ 9,382 $ 12,186 $ 181
========= ========= =========
</TABLE>
Deferred tax assets, arising both from future deductible temporary
differences and net operating losses ("NOLs"), have been reduced by a
valuation allowance to an amount more likely than not to be realized through
the future reversal of existing taxable temporary differences. Any future
reversal of the valuation allowance existing at the Effective Date to increase
the net deferred tax asset will be added to additional paid-in capital.
F-55
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
There is no current income tax provision. A reconciliation of the total tax
provision with the amount computed by applying the statutory federal income
tax rate to income (loss) before taxes is as follows:
<TABLE>
<CAPTION>
FORTY-THREE NINE FIFTY-TWO FIFTY-THREE
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
JUNE 29, 1996 SEPTEMBER 2, 1995 JULY 1, 1995 JULY 2, 1994
------------- ----------------- ------------ ------------
<S> <C> <C> <C> <C>
Statutory tax rate...... 35.0% 35.0% (35.0)% (35.0)%
State income taxes, net
of federal benefit..... 5.1 -- -- --
Nontaxable forgiveness
of indebtedness........ -- (29.1) -- --
Depreciation............ -- (0.4) (0.2) 20.5
Restructuring reserves.. -- (5.3) 2.2 (1.9)
Federal tax benefit of
NOLs not recognized.... -- 0.3 36.6 16.5
Reversal of excess
deferred taxes......... -- -- (0.2) (0.2)
Other, net.............. 5.8 (0.5) (3.6) (0.1)
---- ----- ------ ------
Effective tax rate...... 45.9% 0.0% (0.2)% (0.2)%
==== ===== ====== ======
</TABLE>
Phar-Mor has approximately $275,000 of tax basis NOLs available to offset
future taxable income. The amount of such NOLs is net of restrictions enacted
in the Internal Revenue Code of 1986, as amended, dealing specifically with
stock ownership changes and debt cancellations that occurred in connection
with Phar-Mor's emergence from bankruptcy. Additional restrictions imposed by
Internal Revenue Code Section 382(I)(6), and the regulations thereunder, could
further limit Phar-Mor's ability to use its NOLs to offset future income to an
amount approximating $5,100 annually. These NOLs will begin to expire
beginning in 2005.
Phar-Mor also has $4,432 of federal targeted jobs tax credit carryovers,
which will expire beginning in 2001.
The Internal Revenue Service has completed its field examination of Phar-
Mor's federal income tax returns for all years to and including June 1992.
14. EMPLOYEE BENEFIT PLANS
DEFINED BENEFIT PLANS
Phar-Mor provides pension benefits under noncontributory defined benefit
pension plans to its union employees who have met the applicable age and
service requirements specified in the plans.
Benefits are earned on the basis of credited service and average
compensation over a period of years. Vesting occurs after five years of
service as specified under the plans. Phar-Mor makes contributions to the
plans as necessary to satisfy the minimum funding requirement of ERISA.
Phar-Mor provided pension benefits under noncontributory defined benefit
pension plans to its nonunion employees who have met the applicable age and
service requirements specified in the plans. During fiscal 1996 Phar-Mor's
Board of Directors voted to freeze the benefits accruing under its defined
benefit plan that covers nonunion personnel effective June 29, 1996 and to
increase Phar-Mor's matching contribution to the defined contribution plan for
those employees.
F-56
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the funded status of Phar-Mor's defined
benefit pension plans and the amounts recognized in Phar-Mor's consolidated
balance sheets:
<TABLE>
<CAPTION>
PREDECESSOR
SUCCESSOR PHAR-MOR PHAR-MOR
--------------------- -----------
JUNE 29, SEPTEMBER 2, JULY 1,
1996 1995 1995
-------- ------------ -----------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $9,145, $3,714 and $3,714.......................................................... $9,543 $5,177 $5,177
Additional amounts related to future salary increases.................................. 560 3,113 3,113
------ ------ ------
Projected benefit obligation........................................................... 10,103 8,290 8,290
Plan assets, at fair value............................................................... 7,698 7,299 7,299
------ ------ ------
Projected benefit obligation in excess of plan assets.................................... 2,405 991 991
Unrecognized net gain.................................................................... 312 1,278 1,209
Unrecognized prior service costs......................................................... (1) (147) (152)
Unrecognized transition asset............................................................ 6 6 6
------ ------ ------
Accrued pension costs.................................................................... $2,722 $2,128 $2,054
====== ====== ======
</TABLE>
The significant assumptions used in determining the pension obligations are:
<TABLE>
<CAPTION>
PREDECESSOR
SUCCESSOR PHAR-MOR PHAR-MOR
--------------------- -----------
JUNE 29, SEPTEMBER 2, JULY 1,
1996 1995 1995
-------- ------------ -----------
<S> <C> <C> <C>
Discount rate............................ 6.3% 8.0% 8.0%
Expected long-term rate of return on
assets.................................. 8.5% 8.5% 8.5%
Rate of increase in future compensation
levels.................................. 4.0% 4.0% 4.0%
</TABLE>
Assets of the plans consist primarily of investments in stock and bond
pooled funds.
The net pension expense consists of the following:
<TABLE>
<CAPTION>
SUCCESSOR
PHAR-MOR PREDECESSOR PHAR-MOR
------------- -------------------------------------------
FORTY-THREE NINE FIFTY-TWO FIFTY-THREE
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
JUNE 29, 1996 SEPTEMBER 2, 1995 JULY 1, 1995 JULY 2, 1994
------------- ----------------- ------------ ------------
<S> <C> <C> <C> <C>
Service costs.............................................. $ 875 $179 $1,176 $1,479
Interest cost on projected benefit obligation.............. 698 104 636 674
Actual net return on assets................................ (1,746) (97) (860) (177)
Net amortization (deferral)................................ 1,186 2 259 (348)
------- ---- ------ ------
Net pension expense........................................ $ 1,013 $188 $1,211 $1,628
======= ==== ====== ======
</TABLE>
F-57
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DEFINED CONTRIBUTION PLANS
Phar-Mor has defined contribution employee savings plans covering employees
who meet the eligibility requirements as described in the plans. Phar-Mor
contributes to these plans an amount equal to 25% of an employee's
contribution up to a maximum of 4% of the employee's compensation. Phar-Mor
increased its contribution to the nonunion employee savings plan beginning in
fiscal 1997 to 100% of the employees contribution up to 2% of the employees
pay and 20% of the employees contribution in excess of 2% up to 4% of
employees pay. Employee savings plan expense for the forty-three weeks ended
June 29, 1996, the nine weeks ended September 2, 1995, the fifty-two weeks
ended July 1, 1995 and the fifty-three weeks ended July 2, 1994 were $281,
$65, $506 and $557, respectively.
HEALTH AND WELFARE PLANS
Phar-Mor also contributes to a multiemployer union sponsored health and
welfare plan covering truck drivers and warehouse personnel. Total expenses
for the forty-three weeks ended June 29, 1996, the nine weeks ended September
2, 1995, the fifty-two weeks ended July 1, 1995 and the fifty-three weeks
ended July 2, 1994 were $896, $196, $1,558 and $2,377, respectively.
Phar-Mor has no postretirement health and welfare or benefits programs.
15. PREDECESSOR PHAR-MOR INTEREST EXPENSE
Interest expense for the Predecessor Phar-Mor, for which disclosure is
required by SOP 90-7, consists of the following:
<TABLE>
<CAPTION>
PREDECESSOR PHAR-MOR
-------------------------------------------
NINE FIFTY-TWO FIFTY-THREE
WEEKS ENDED WEEKS ENDED WEEKS ENDED
SEPTEMBER 2, 1995 JULY 1, 1995 JULY 2, 1994
----------------- ------------ ------------
<S> <C> <C> <C>
Prepetition credit facility
interest...................... $3,164 $16,377 $13,577
Senior notes................... 1,695 9,417 10,935
Adequate protection term loans
and capitalized equipment
leases........................ 776 5,772 6,602
Amortization of deferred debt
expense....................... 44 1,580 2,223
Loan commitment fees........... 10 160 538
Other.......................... -- 18 3
------ ------- -------
$5,689 $33,324 $33,878
====== ======= =======
</TABLE>
Generally, as a result of the bankruptcy, the contractual terms of
prepetition debt obligations are suspended. Only creditors who are secured by
collateral, the value of which exceeds their prepetition claims, are entitled
to accrue interest on those claims after a bankruptcy filing. Subsequent to
the bankruptcy filing, Phar-Mor continued to accrue interest on the revolving
credit loan and senior notes at the contractual rates. During October 1992,
Phar-Mor entered into agreements with lenders to make adequate protection
payments at rates less than those specified as interest in the respective
agreements. The difference between these amounts is reflected in liabilities
subject to settlement under reorganization proceedings. With respect to the
remainder of the secured debt and capitalized lease obligations, Phar-Mor
accrued only the adequate protection payments it anticipated would be
required. The difference between the interest which would have accrued at the
contractual rates and the adequate protection payments related to the
remaining secured debt and capitalized lease obligations was $2,846, $14,521
and $15,449 for the nine weeks ended September 2, 1995, the fifty-two weeks
ended July 1, 1995 and the fifty-three weeks ended July 2, 1994, respectively.
Phar-Mor did not accrue or pay interest on the unsecured debt
F-58
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
subsequent to the bankruptcy filing. The unaccrued interest on the unsecured
debt was $1,051, $6,074 and $6,190 for the nine weeks ended September 2, 1995,
the fifty-two weeks ended July 1, 1995 and the fifty-three weeks ended July 2,
1994, respectively.
16. REORGANIZATION ITEMS AND RELATED RESERVES
Reorganization items consist of the following:
<TABLE>
<CAPTION>
PREDECESSOR PHAR-MOR
-------------------------------------------
NINE FIFTY-TWO FIFTY-THREE
WEEKS ENDED WEEKS ENDED WEEKS ENDED
SEPTEMBER 2, 1995 JULY 1, 1995 JULY 2, 1994
----------------- ------------ ------------
<S> <C> <C> <C>
Chapter 11 professional fees... $ 9,373 $17,201 $17,638
Amortization of prepetition
exclusivity income............ (283) (2,572) (4,161)
Interest income................ (2,171) (10,174) (6,256)
Amortization of post-petition
credit facility origination
fees.......................... 29 646 3,055
Insurance claim recovery....... (6,650) -- --
Gain on sale of assets held for
sale.......................... -- (7,634) --
Costs of downsizing............ 16,500 53,691 42,963
------- ------- -------
$16,798 $51,158 $53,239
======= ======= =======
</TABLE>
COSTS OF DOWNSIZING
In September 1992, Phar-Mor made a decision to downsize the chain, and in
October 1992 commenced a store closing program. The program involved the
closing of 143 of Phar-Mor's stores that management considered not viable. In
conjunction with the program to downsize the chain, Phar-Mor also consolidated
its distribution centers into one location in Youngstown, Ohio and reduced
corporate overhead. Phar-Mor identified for closure an additional 25 stores in
fiscal 1994 and 41 stores in fiscal 1995. In August 1995 management identified
50 stores which will be reduced in size (rightsized) and provided for the cost
of rightsizing and provided a markdown reserve for the inventories which would
be liquidated in the affected stores.
The consolidated statements of operations reflect reorganization expenses
related to the downsizings as follows:
<TABLE>
<CAPTION>
PREDECESSOR PHAR-MOR
-------------------------------------------
NINE FIFTY-TWO FIFTY-THREE
WEEKS ENDED WEEKS ENDED WEEKS ENDED
SEPTEMBER 2, 1995 JULY 1, 1995 JULY 2, 1994
----------------- ------------ ------------
<S> <C> <C> <C>
Downsizing reserve............. $ 2,500 $25,786 $13,016
Inventory markdown reserve..... 14,000 -- --
Lease rejection reserve........ -- 20,400 18,119
Reserve for abandonment of
property and equipment........ -- 10,550 15,787
Lease-purchase cost write-off.. -- 860 --
Adjustments to deferred rent
liability..................... -- (3,905) (3,959)
------- ------- -------
$16,500 $53,691 $42,963
======= ======= =======
</TABLE>
F-59
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The activity in the reserve for costs of downsizing program is as follows:
<TABLE>
<CAPTION>
SUCCESSOR
PHAR-MOR PREDECESSOR PHAR-MOR
------------- -------------------------------------------
FORTY-THREE NINE FIFTY-TWO FIFTY-THREE
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
JUNE 29, 1996 SEPTEMBER 2, 1995 JULY 1, 1995 JULY 2, 1994
------------- ----------------- ------------ ------------
<S> <C> <C> <C> <C>
Balance, beginning of period.................................... $7,301 $6,564 $16,089 $20,631
Additions to reserve............................................ -- 2,500 25,786 13,016
Losses from going-out-of-business ("GOB") sales................. (1,772) (1,690) (34,502) (12,431)
Store rightsizing costs......................................... (640) -- -- --
Corporate and distribution center costs......................... (1,438) (73) (809) (5,127)
------ ------ ------- -------
Balance, end of period.......................................... $3,451 $7,301 $ 6,564 $16,089
====== ====== ======= =======
</TABLE>
The remainder of the reserve for the costs of downsizing program at June 29,
1996 is considered by management to be a reasonable estimate of the costs to
be incurred related to the downsizing program. To the extent additional stores
or distribution centers are identified for closure at a later date or the
estimates for write-downs or reserves for the current downsizing program
require adjustment, such adjustments will be recognized in future periods.
17. FINANCIAL INSTRUMENTS
Phar-Mor has financial instruments which include cash and cash equivalents
and long-term debt. The carrying values of all instruments at June 29, 1996
approximated their fair market value.
The fair values of the instruments were based upon quoted market prices of
the same or similar instruments or on the rate available to Phar-Mor for
instruments of the same maturities.
18. NONCASH INVESTING AND FINANCING ACTIVITIES
On September 29, 1995 Phar-Mor and one of its subsidiaries purchased all of
the partnership interests in the partnership that owns the building in which
Phar-Mor's headquarters is located for $145. Also, the partnership has a 50%
interest in another partnership which owns a commercial building. In
conjunction with the acquisition, assets and liabilities were assumed as
follows:
<TABLE>
<S> <C>
Fair value of assets acquired:
Accounts receivable.................................................. 37
Land, buildings and leasehold interests.............................. 4,735
Goodwill and other assets............................................ 1,958
Liabilities and minority interest assumed:
Accounts payable..................................................... 25
Accrued expenses..................................................... 205
Mortgage notes and bonds payable..................................... 5,820
Minority interest.................................................... 535
</TABLE>
F-60
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
PREDECESSOR
PHAR-MOR SUCCESSOR PHAR-MOR
----------------- -----------------------------------------------------------------
NINE FOUR THIRTEEN THIRTEEN THIRTEEN
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
FISCAL 1996 SEPTEMBER 2, 1995 SEPTEMBER 30, 1995 DECEMBER 30, 1995 MARCH 30, 1996 JUNE 29, 1996
- ----------- ----------------- ------------------ ----------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Sales................... $ 181,968 $ 72,877 $ 284,318 $ 252,291 $ 264,798
Gross profit............ 33,663 13,261 51,415 42,952 39,712
Income (loss) before
extraordinary item..... (10,389) 88 3,578 1,544 (2,684)
Extraordinary item...... 775,073 -- -- -- --
Net income (loss)....... $ 764,684 $ 88 $ 3,578 $ 1,544 $ (2,684)
Per Share:
Income (loss) before
extraordinary item..... $ (.19) $ .01 $ .29 $ .13 $ (.22)
Extraordinary item...... 14.33 -- -- -- --
Net income (loss)....... $ 14.14 $ .01 $ .29 $ .13 $ (.22)
Weighted average number
of shares outstanding.. 54,066,463 12,156,250 12,156,250 12,156,658 12,157,046
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR PHAR-MOR
------------------------------------------------------------
THIRTEEN THIRTEEN THIRTEEN THIRTEEN
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
FISCAL 1995 OCTOBER 1, 1994 DECEMBER 31, 1994 APRIL 1, 1995 JULY 1, 1995
- ----------- --------------- ----------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Sales.......... $ 363,224 $ 405,616 $ 346,691 $ 297,130
Gross profit... 64,367 75,268 62,715 53,383
Net income
(loss)........ $ (6,586) $ 6,530 $ 1,809 $ (54,897)
Per Share:
Net income
(loss)........ $ (.12) $ .12 $ .03 $ (1.01)
Weighted
average number
of shares
outstanding... 54,066,463 54,066,463 54,066,463 54,066,463
</TABLE>
20. SUBSEQUENT EVENT
Phar-Mor, Inc. entered into an Agreement and Plan of Reorganization (the
"Proposed Transaction") dated September 7, 1996 (as amended and restated as of
October 9, 1996) with ShopKo Stores, Inc. ("ShopKo"), a retailer specializing
in prescription and vision benefit management and health decision support
services, to combine the respective companies under Cabot Noble, Inc. ("Cabot
Noble") a newly organized Delaware holding company. Under the terms of the
Proposed Transaction, each issued and outstanding share of Phar-Mor's common
stock will be exchanged for one share of Cabot Noble common stock. Each issued
and outstanding share of ShopKo common stock will be exchanged for 2.4 shares
of Cabot Noble common stock, subject to adjustment in the event the value of
the exchange consideration falls outside a range between $17.25 and $18.00
(based on the average daily closing sale prices of Phar-Mor's common stock
over a specified 30 day period).
In connection with the Proposed Transaction, supervalu inc. ("supervalu"),
which currently owns approximately 46% of the issued and outstanding shares of
ShopKo common stock, has entered into an Amended and Restated Stock Purchase
Agreement (the "Stock Purchase Agreement") with Cabot Noble whereby supervalu
has agreed to sell to Cabot Noble 90% of the Cabot Noble shares it receives in
the Proposed
F-61
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Transaction to Cabot Noble immediately after the Proposed Transaction is
completed at $16.86 per share for the ShopKo common stock held by supervalu
prior to the transaction. The Stock Purchase Agreement provides that supervalu
will receive a combination of cash and a short-term note at closing.
Consummation of the Reorganization is subject to certain conditions,
including (a) receipt of financing of at least $75,000, (b) approval by
shareholders of ShopKo and Phar-Mor, (c) receipt of necessary regulatory
approvals, and (d) other conditions to closing customary in transactions of
this type.
An ownership change will occur upon the completion of the Proposed
Transaction which may result in the reduction of available NOLs (see Note 13).
F-62
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND DEDUCTIONS- END OF
DESCRIPTION OF PERIOD EXPENSE CHARGE-OFFS PERIOD
----------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL
ACCOUNTS
53 weeks ended July 2,
1994................... $21,891 $ 8,729 $(24,100) $6,520
52 weeks ended July 1,
1995................... 6,520 6,584 (8,187) 4,917
9 weeks ended September
2, 1995................ 4,917 350 (645) 4,622
43 weeks ended June 29,
1996................... 4,622 3,106 (3,537) 4,191
INVENTORY SHRINK RESERVE
53 weeks ended July 2,
1994................... $ -- $28,915 $(24,189) $4,726
52 weeks ended July 1,
1995................... 4,726 24,889 (24,120) 5,495
9 weeks ended September
2, 1995................ 5,495 3,100 (836) 7,759
43 weeks ended June 29,
1996................... 7,759 16,385 (17,675) 6,469
INVENTORY MARKDOWN RESERVE
53 weeks ended July 2,
1994................... $ -- $ -- $ -- $ --
52 weeks ended July 1,
1995................... -- -- -- --
9 weeks ended September
2, 1995................ -- 14,000 -- 14,000
43 weeks ended June 29,
1996................... 14,000 -- (8,639) 5,361
</TABLE>
F-63
<PAGE>
- --------------------------------------------------------------------------------
ANNEX A
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
PHAR-MOR, INC.
SHOPKO STORES, INC.
AND
CABOT NOBLE, INC.
DATED AS OF SEPTEMBER 7, 1996
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE ITHE REORGANIZATION................................................ A-2
1.1EFFECTIVE DATE.................................................... A-2
1.2PHAR-MOR PLAN..................................................... A-2
1.3SHOPKO PLAN....................................................... A-2
1.4EXCHANGE PROVISIONS............................................... A-3
1.5REGISTRATION OF SECURITIES........................................ A-5
1.6EXCHANGE OF PHAR-MOR STOCK CERTIFICATES NOT REQUIRED.............. A-5
1.7BOARD OF DIRECTORS OF PARENT; COMMITTEES.......................... A-5
1.8EXECUTIVE OFFICERS OF PARENT...................................... A-6
1.9REGISTRATION OF PARENT COMMON SHARES.............................. A-6
ARTICLE IIREPRESENTATIONS AND WARRANTIES................................... A-6
2.1REPRESENTATIONS AND WARRANTIES OF SHOPKO.......................... A-6
(a)Organization; Standing and Power................................ A-6
(b)Subsidiaries.................................................... A-6
(c)Capitalization.................................................. A-7
(d)Authority; Recommendation....................................... A-7
(e)Noncontravention................................................ A-7
(f)Government Approval............................................. A-8
(g)Financial Statements............................................ A-8
(h)Undisclosed Liabilities......................................... A-8
(i)Absence of Certain Changes or Events............................ A-8
(j)Compliance with Law............................................. A-9
(k)Brokers......................................................... A-9
(l)Litigation...................................................... A-9
(m)Taxes and Tax Returns........................................... A-9
(n)Real Estate..................................................... A-9
(o)Licenses, Permits and Authorizations............................ A-10
(p)ERISA and Employee Matters...................................... A-10
(q)Environmental Matters........................................... A-11
(r)Employees; Labor Relations...................................... A-12
(s)Intellectual Property........................................... A-12
(t)Opinion of ShopKo Financial Adviser............................. A-13
(u)Registration Rights............................................. A-13
(v)Commission Documents............................................ A-13
(w)Registration Statement.......................................... A-13
2.2REPRESENTATIONS AND WARRANTIES OF PHAR-MOR........................ A-13
(a)Organization; Standing and Power................................ A-13
(b)Subsidiaries.................................................... A-13
(c)Capitalization.................................................. A-14
(d)Authority; Recommendation....................................... A-14
(e)Noncontravention................................................ A-15
(f)Government Approval............................................. A-15
(g)Financial Statements............................................ A-15
(h)Undisclosed Liabilities......................................... A-15
(i)Absence of Certain Changes or Events............................ A-16
(j)Compliance with Law............................................. A-16
(k)Brokers......................................................... A-16
(l)Litigation...................................................... A-16
(m)Taxes and Tax Returns........................................... A-16
</TABLE>
A-i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
(n)Real Estate.................................................... A-16
(o)Licenses, Permits and Authorizations........................... A-17
(p)ERISA and Employee Matters..................................... A-17
(q)Environmental Matters.......................................... A-18
(r)Employees; Labor Relations..................................... A-18
(s)Intellectual Property.......................................... A-19
(t)Opinion of Phar-Mor Financial Adviser.......................... A-19
(u)Registration Rights............................................ A-19
(v)Commission Documents........................................... A-19
(w)Registration Statement......................................... A-19
2.3REPRESENTATIONS AND WARRANTIES OF PARENT......................... A-20
(a)Organization; Standing and Power............................... A-20
(b)Capitalization................................................. A-20
(c)Authority...................................................... A-20
(d)Noncontravention............................................... A-20
(e)Government Approval............................................ A-20
(f)Solvency....................................................... A-21
(g)Assets; Liabilities............................................ A-21
2.4KNOWLEDGE........................................................ A-21
ARTICLE IIICOVENANTS PENDING THE REORGANIZATION........................... A-21
3.1CONDUCT OF BUSINESS BY SHOPKO PENDING THE REORGANIZATION......... A-21
3.2 CONDUCT OF BUSINESS BY PHAR-MOR PENDING THE REORGANIZATION...... A-22
3.3CONDUCT OF BUSINESS BY PARENT PENDING THE REORGANIZATION......... A-23
3.4CONSENTS......................................................... A-23
ARTICLE IVADDITIONAL AGREEMENTS........................................... A-24
4.1PROXY STATEMENT; OTHER FILINGS................................... A-24
4.2SHAREHOLDER APPROVALS............................................ A-24
4.3LEGAL REQUIREMENTS FOR REORGANIZATION............................ A-25
4.4LISTING APPLICATION.............................................. A-25
4.5EMPLOYMENT AGREEMENTS............................................ A-25
4.6INVESTIGATIONS................................................... A-25
4.7CONFIDENTIALITY.................................................. A-26
4.8NO SOLICITATION OF EMPLOYEES..................................... A-26
4.9BEST EFFORTS; ADDITIONAL AGREEMENTS AND PROVISIONS............... A-26
4.10NO SOLICITATIONS................................................ A-27
4.11AFFILIATES...................................................... A-27
4.12PERIODIC REPORTS................................................ A-27
4.13DIRECTORS' AND OFFICERS' INDEMNIFICATION........................ A-27
4.15EXPENSES........................................................ A-28
ARTICLE V CONDITIONS PRECEDENT............................................ A-28
5.1 CONDITIONS TO THE OBLIGATIONS OF EACH PARTY TO EFFECT THE
REORGANIZATION.................................................. A-28
(a)Approval of Holders of Phar-Mor Common Shares................. A-28
(b)Approval of Holders of ShopKo Common Shares................... A-28
(c)Registration Statement........................................ A-28
(d)HSR Act....................................................... A-28
(e)Injunction.................................................... A-28
(f)Exchange Listing.............................................. A-28
(g)Credit Facilities............................................. A-29
(h)Dissenters' Rights............................................ A-29
</TABLE>
A-ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
(i)Parent Buy Back...... A-29
(j)Solvency Opinion..... A-29
5.2ADDITIONAL CONDITIONS
TO THE OBLIGATIONS OF
PHAR-MOR AND PARENT... A-29
(a)Agreements........... A-29
(b)Representations and
Warranties............. A-29
(c)Officer's Certifi-
cate................... A-29
(d)Lack of Adverse
Change................. A-29
(e)Consents from Third
Parties................ A-29
(f)Tax Effect of the Re-
organization........... A-29
(g)Letters from Accoun-
tants.................. A-30
(h)ShopKo Exchange...... A-30
(i)Resignation of ShopKo
Board.................. A-30
(j)Termination of Rights
Agreement.............. A-30
5.3ADDITIONAL CONDITIONS
TO THE OBLIGA-
TIONS OF SHOPKO.. A-30
(a)Agreements........... A-30
(b)Representations and
Warranties............. A-30
(c)Officer's Certifi-
cate................... A-31
(d)Lack of Adverse
Change................. A-31
(e)Consents from Third
Parties................ A-31
(f)Tax Effect of the Re-
organization........... A-31
(g)Letters from Accoun-
tants.................. A-31
(h)Phar-Mor Exchange.... A-31
ARTICLE VITERMINATION, AMENDMENT
AND WAIVER..................... A-31
6.1TERMINATION............ A-31
6.2EFFECT OF TERMINATION.. A-33
6.3AMENDMENT.............. A-34
6.4WAIVER................. A-34
ARTICLE VIIGENERAL PROVISIONS... A-35
7.1NO SURVIVAL OF REPRE-
SENTATIONS AND
WARRANTIES....... A-35
7.2NOTICES................ A-35
7.3ENTIRE AGREEMENT....... A-35
7.4GOVERNING LAW.......... A-36
7.5VALIDITY............... A-36
7.6ASSIGNMENT............. A-36
7.7NO THIRD PARTY BENEFI-
CIARIES.......... A-36
7.8SEVERABILITY........... A-36
7.9INCORPORATION OF EXHIB-
ITS AND SCHED-
ULES............. A-36
7.10INTERPRETATION........ A-36
7.11COUNTERPARTS.......... A-36
</TABLE>
A-iii
<PAGE>
LIST OF ANNEXES, EXHIBITS & SCHEDULES
<TABLE>
<CAPTION>
Annex A Calculation of Exchange Ratio
<S> <C>
Exhibit A Voting Agreement
Exhibit B Form of Revised Certificate of Incorporation of Cabot Noble
Exhibit C Certificate of Incorporation of Cabot Noble, Inc.
Exhibit D By-Laws of Cabot Noble, Inc.
Exhibit E Form Employment Agreement of Kramer
Exhibit F Form Employment Agreement of Podany
Exhibit G Form Employment Agreement of Jones
Exhibit H Stock Purchase Agreement
Schedule 1.2 Phar-Mor Options and Warrants
Schedule 1.3 ShopKo Options and Warrants
Schedule 1.8 Executive Officers of Cabot Noble
Schedule 2.1(b) ShopKo Subsidiaries
Schedule 2.1(c) ShopKo Capitalization
Schedule 2.1(e) ShopKo Exceptions to Noncontravention
Schedule 2.1(h) ShopKo Liabilities
Schedule 2.1(i) ShopKo Changes and Events
Schedule 2.1(l) ShopKo Litigation
Schedule 2.1(m) ShopKo Taxes and Tax Returns
Schedule 2.1(n) ShopKo Real Estate Matters
Schedule 2.1(p) ShopKo ERISA Matters
Schedule 2.1(q) ShopKo Environmental Matters
Schedule 2.1(r) ShopKo Employee Matters
Schedule 2.1(s) ShopKo Intellectual Property
Schedule 2.1(u) ShopKo Registration Rights
Schedule 2.2(b) Phar-Mor Subsidiaries
Schedule 2.2(c) Phar-Mor Capitalization
Schedule 2.2(e) Phar-Mor Exceptions to Noncontravention
Schedule 2.2(g) Phar-Mor Press Release dated August 22, 1996
Schedule 2.2(h) Phar-Mor Liabilities
Schedule 2.2(i) Phar-Mor Changes and Events
Schedule 2.2(l) Phar-Mor Litigation
Schedule 2.2(m) Phar-Mor Taxes and Tax Returns
Schedule 2.2(n) Phar-Mor Real Estate Matters
Schedule 2.2(p) Phar-Mor ERISA Matters
Schedule 2.2(q) Phar-Mor Environmental Matters
Schedule 2.2(r) Phar-Mor Employee Matters
Schedule 2.2(s) Phar-Mor Intellectual Property
Schedule 2.2(u) Phar-Mor Registration Rights
Schedule 2.3(b) Cabot Noble Capitalization
Schedule 3.1 ShopKo Actions Pending Closing
Schedule 3.2 Phar-Mor Actions Pending Closing
Schedule 5.2 Consents From Third Parties
Schedule 5.3 Consents From Third Parties
</TABLE>
A-iv
<PAGE>
DEFINED TERMS
The following terms are defined at the page number below indicated:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Affiliates................................................................. A-27
Agreement.................................................................. A-1
Average Closing Price...................................................... A-3
Business Combination....................................................... A-32
Certificates............................................................... A-3
Claims..................................................................... A-11
Closing.................................................................... A-2
Code....................................................................... A-2
Commission................................................................. A-5
Common Shares Trust........................................................ A-4
Delaware Law............................................................... A-8
Effective Date............................................................. A-2
Environmental Claims....................................................... A-11
Environmental Law.......................................................... A-11
ERISA...................................................................... A-10
Excess Shares.............................................................. A-4
Exchange Agent............................................................. A-3
Exchange Ratio............................................................. A-3
Exchanged Shares........................................................... A-3
Hamilton Morgan............................................................ A-1
Hazardous Material......................................................... A-12
HSR Act.................................................................... A-8
Independent Directors...................................................... A-5
Liabilities................................................................ A-8
Lien....................................................................... A-8
Minnesota Law.............................................................. A-1
NYSE....................................................................... A-25
Other Filings.............................................................. A-24
Parent..................................................................... A-1
Parent Board............................................................... A-1
Parent Buy Back............................................................ A-29
Parent Buy Back Financing.................................................. A-29
Parent Common Shares....................................................... A-1
Parent Material Adverse Effect............................................. A-20
Parent Option.............................................................. A-2
Parent Warrant............................................................. A-2
Pennsylvania Law........................................................... A-1
Person..................................................................... A-7
Phar-Mor................................................................... A-1
Phar-Mor Benefit Plans..................................................... A-17
Phar-Mor Board............................................................. A-1
Phar-Mor Common Shares..................................................... A-1
Phar-Mor Exchange.......................................................... A-1
Phar-Mor Fairness Opinion.................................................. A-1
Phar-Mor Financial Adviser................................................. A-1
Phar-Mor Group............................................................. A-17
Phar-Mor Intellectual Property............................................. A-19
Phar-Mor Material Adverse Effect........................................... A-13
</TABLE>
A-v
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Phar-Mor Option............................................................ A-2
Phar-Mor Pension Plans..................................................... A-17
Phar-Mor Plan.............................................................. A-1
Phar-Mor SEC Reports....................................................... A-15
Phar-Mor Shareholders' Approval............................................ A-24
Phar-Mor Special Meeting................................................... A-24
Phar-Mor Subsidiary........................................................ A-13
Phar-Mor Triggering Event.................................................. A-34
Phar-Mor Warrant........................................................... A-2
Pricing Period............................................................. A-3
Principal Trading Market................................................... A-4
Proxy Statement............................................................ A-24
Registration Statement..................................................... A-6
Release.................................................................... A-12
Reorganization............................................................. A-1
Respective Representatives................................................. A-25
Section 13(d)(3)........................................................... A-34
Securities Act............................................................. A-5
ShopKo..................................................................... A-1
ShopKo Benefit Plans....................................................... A-10
ShopKo Board............................................................... A-1
ShopKo Common Shares....................................................... A-1
ShopKo Dissenting Shares................................................... A-3
ShopKo Exchange............................................................ A-1
ShopKo Fairness Opinion.................................................... A-1
ShopKo Financial Adviser................................................... A-1
ShopKo Group............................................................... A-10
ShopKo Intellectual Property............................................... A-12
ShopKo Material Adverse Effect............................................. A-6
ShopKo Option.............................................................. A-3
ShopKo Pension Plans....................................................... A-10
ShopKo Plan................................................................ A-1
ShopKo SEC Reports......................................................... A-8
ShopKo Shareholders' Approval.............................................. A-24
ShopKo Special Meeting..................................................... A-24
ShopKo Subsidiary.......................................................... A-6
ShopKo Triggering Event.................................................... A-34
Stock Purchase Agreement................................................... A-29
Subsidiary................................................................. A-6
Supermarket................................................................ A-1
Supervalu.................................................................. A-1
Takeover Proposal.......................................................... A-27
Voting Agreement........................................................... A-1
</TABLE>
A-vi
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
Agreement and Plan of Reorganization (this "Agreement"), dated as of
September 7, 1996, by and among Phar-Mor, Inc., a Pennsylvania corporation
("Phar-Mor"), ShopKo Stores, Inc., a Minnesota corporation ("ShopKo"), and
Cabot Noble, Inc., a Delaware corporation ("Parent").
Whereas, the parties hereto desire to consummate a business combination
pursuant to which Phar-Mor and ShopKo will form a new holding company to be
engaged primarily in the business of providing general merchandise and health
service through retail stores;
Whereas, in accordance with Section 1931 of the Pennsylvania Business
Corporation Law ("Pennsylvania Law") the Board of Directors of Phar-Mor (the
"Phar-Mor Board") has adopted a resolution proposing, approving and adopting a
plan of exchange (the "Phar-Mor Plan") pursuant to which outstanding shares of
Phar-Mor Common Stock, par value $.01 per share ("Phar-Mor Common Shares"),
will be exchanged for and converted solely into shares of Parent Common Stock,
par value $.01 per share ("Parent Common Shares"), with the result that Parent
becomes the owner of all outstanding Phar-Mor Common Shares (the "Phar-Mor
Exchange");
Whereas, in accordance with Section 302A.613 of the Minnesota Business
Corporation Act ("Minnesota Law") the Board of Directors of ShopKo (the
"ShopKo Board") has approved a resolution containing a plan of exchange (the
"ShopKo Plan") in which outstanding shares of ShopKo Common Stock, par value
$.01 per share ("ShopKo Common Shares"), will be exchanged solely for Parent
Common Shares (and cash in lieu of fractional ShopKo Common Shares), with the
result that Parent becomes the owner of all outstanding ShopKo Common Shares
(the "ShopKo Exchange" and, together with the Phar-Mor Exchange, the
"Reorganization");
Whereas, Phar-Mor owns all of the issued and outstanding shares of Parent,
and the Board of Directors of Parent (the "Parent Board") and Phar-Mor, as the
sole stockholder of Parent, have adopted resolutions adopting and approving
the Phar-Mor Plan and the ShopKo Plan, and authorizing the issuance of Parent
Common Shares upon conversion and exchange of Phar-Mor Common Shares and
ShopKo Common Shares pursuant to such Plans;
Whereas, the consummation of the Phar-Mor Exchange and the consummation of
the ShopKo Exchange shall be effective simultaneously, or neither shall be
consummated;
Whereas, as a condition precedent to the execution of this Agreement,
Parent, SUPERVALU INC., a Delaware corporation ("Supervalu"), Supermarket
Operators of America, Inc., a Delaware corporation and wholly owned subsidiary
of Supervalu ("Supermarket"), and certain members of Hamilton Morgan, L.L.C.,
a Delaware limited liability company ("Hamilton Morgan"), have entered into
that certain Voting Agreement dated as of the date of this Agreement, a copy
of which is attached hereto as Exhibit A (the "Voting Agreement").
Whereas, the ShopKo Board has engaged Salomon Brothers Inc (the "ShopKo
Financial Adviser") to provide an opinion as to the fairness of the ShopKo
Exchange to ShopKo's public shareholders from a financial point of view (the
"ShopKo Fairness Opinion");
Whereas, the ShopKo Board has approved this Agreement and the ShopKo
Exchange and has resolved to recommend that the holders of ShopKo Common
Shares adopt the ShopKo Plan;
Whereas, the Phar-Mor Board has engaged Jefferies & Company, Inc. (the
"Phar-Mor Financial Adviser") to provide an opinion as to the fairness of the
Phar-Mor Exchange to Phar-Mor's shareholders from a financial point of view
(the "Phar-Mor Fairness Opinion");
Whereas, the Phar-Mor Board has approved this Agreement and the Phar-Mor
Exchange and has resolved to recommend that the holders of Phar-Mor Common
Shares adopt the Phar-Mor Plan; and
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Whereas, for federal income tax purposes, it is intended that the exchange
of Phar-Mor Common Shares and ShopKo Common Shares for Parent Common Shares
pursuant to the Phar-Mor Plan and the ShopKo Plan will qualify as transfers to
a controlled corporation described in Section 351 of the Internal Revenue Code
of 1986, as amended (the "Code").
Now, Therefore, in consideration of the premises and the representations,
warranties and agreements herein contained, the parties hereby agree as
follows:
ARTICLE I
The Reorganization
1.1 EFFECTIVE DATE. The articles of exchange for the ShopKo Exchange to be
filed with the Minnesota secretary of state pursuant to Subdivision 2 of
Section 302A.615 of the Minnesota Law, and the articles of exchange for the
Phar-Mor Exchange to be filed in the Pennsylvania department of state pursuant
to Section 1931(e) of the Pennsylvania Law, shall each specify the same date
as the date after such filings on which each such Exchange shall become
effective (the "Effective Date"). Prior to the filing of such articles of
exchange, a closing (the "Closing") will be held at the offices of Swidler &
Berlin, Chartered, located at 3000 K Street, N.W., Washington, D.C. (or such
other place as the parties may agree) as soon as practicable following the
approval and adoption of the Phar-Mor Plan and the ShopKo Plan by the
shareholders of Phar-Mor and ShopKo, respectively, as provided herein, and the
satisfaction or waiver of the other conditions set forth in Section 5.
1.2 PHAR-MOR PLAN. The terms and conditions of the Phar-Mor Exchange, and
the manner and basis of converting Phar-Mor Common Shares into Parent Common
Shares, are as follows:
(a) Upon satisfaction of the conditions and performance of the
obligations of the parties set forth in this Agreement to be satisfied and
performed on or prior to the Effective Date, at 5:00 p.m. New York City
time on the Effective Date (i) each Phar-Mor Common Share owned by Phar-
Mor, ShopKo and any of their subsidiaries shall be cancelled and cease to
exist; and (ii) each Phar-Mor Common Share (other than Phar-Mor Common
Shares cancelled pursuant to Section 1.2(a)(i)) shall be exchanged for one
fully paid and nonassessable Parent Common Share.
(b) Each holder of a certificate representing Phar-Mor Common Shares
exchanged for Parent Common Shares pursuant to Section 1.2(a)(ii) hereof
shall thereafter be entitled only to the Parent Common Shares for which
such Phar-Mor Common Shares have been exchanged.
(c) After the exchange of Phar-Mor Common Shares for Parent Common Shares
pursuant to Section 1.2(a)(ii), Parent shall be the holder of all issued
and outstanding Phar-Mor Common Shares.
(d) Each option to purchase Phar-Mor Common Shares listed in Schedule 1.2
(a "Phar-Mor Option") and each warrant to purchase Phar-Mor Common Shares
listed in Schedule 1.2 (a "Phar-Mor Warrant"), in each case outstanding on
the Effective Date, shall become (by conversion, exchange, assumption,
substitution, and/or otherwise as determined by mutual agreement of ShopKo
and Phar-Mor) an option (a "Parent Option") or warrant (a "Parent
Warrant"), as the case may be, to purchase the same number of Parent Common
Shares. Each such Parent Option and Parent Warrant shall be exercisable at
the same aggregate exercise price after the Reorganization as the
corresponding Phar-Mor Option or Phar-Mor Warrant was before the
Reorganization and shall have the same exercise period and other terms and
conditions as the corresponding Phar-Mor Option or Phar-Mor Warrant.
Notwithstanding the foregoing, no Parent Option or Parent Warrant to
purchase fractional Parent Common Shares shall be issued in connection with
the Reorganization, unless otherwise provided in writing.
1.3 SHOPKO PLAN.
(a) The names of the corporations participating in the ShopKo Exchange are
ShopKo, Inc., a Minnesota corporation, and Cabot Noble, Inc., a Delaware
corporation.
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(b) The name of the acquiring corporation is Cabot Noble, Inc., a Delaware
corporation.
(c) The terms and conditions of the ShopKo Exchange and the manner and terms
of exchanging ShopKo Common Shares for Parent Common Shares are as follows:
upon satisfaction of the conditions and performance of the obligations of the
parties set forth in this Agreement to be satisfied and performed on or prior
to the Effective Date, at 5:00 p.m. New York City time on the Effective Date:
(i) each ShopKo Common Share owned by ShopKo, Phar-Mor and any of their
subsidiaries shall be cancelled and cease to exist; and
(ii) each ShopKo Common Share (other than ShopKo Common Shares cancelled
pursuant to Section 1.3(c)(i) and ShopKo Dissenting Shares (as defined in
Section 1.3(e)) shall be deemed to be exchanged for 2.4 (the "Exchange
Ratio") fully paid and nonassessable Parent Common Shares, and the Exchange
Ratio shall be adjusted as follows (and as described in the examples set
forth on Annex A hereto): (A) if the average per share closing price of
Phar-Mor Common Shares on the Nasdaq Stock Market for all of the trading
days in the thirty calendar day period ending with the sixth trading day
prior to the date of the ShopKo Special Meeting as originally scheduled in
the Proxy Statement (the "Pricing Period") as reported for Nasdaq National
Market Issues in The Wall Street Journal (the "Average Closing Price"),
multiplied by 2.4 exceeds $18.00, the Exchange Ratio shall be reduced to
the quotient (taken to the third decimal place) obtained by dividing $18.00
by the Average Closing Price; and (B) if the Average Closing Price
multiplied by 2.4 is less than $17.25, the Exchange Ratio shall be
increased to the quotient (taken to the third decimal place) obtained by
dividing $17.25 by the Average Closing Price.
(d) Each holder of ShopKo Common Shares exchanged for Parent Common Shares
pursuant to Section 1.3(c)(ii) shall be entitled only to the Parent Common
Shares for which such ShopKo Common Shares have been exchanged and cash in
lieu of fractional shares in an amount (without commissions, interest or other
fees of any nature) equal to the Average Closing Price multiplied by such
fraction, multiplied by the Exchange Ratio.
(e) Each holder of ShopKo Common Shares who asserts dissenter's rights in
full compliance with the requirements of Sections 302A.471 and 302A.473 of the
Minnesota Law with respect to such shares ("ShopKo Dissenting Shares") shall
have only the right to obtain payment in cash for such ShopKo Dissenting
Shares in accordance with Sections 302A.471 and 302A.473 of the Minnesota Law.
(f) After the exchange of ShopKo Common Shares for Parent Common Shares
pursuant to Section 1.3(c)(ii), Parent shall be the holder of all issued and
outstanding ShopKo Common Shares.
(g) Each option to purchase ShopKo Common Shares listed in Schedule 1.3 (a
"ShopKo Option") outstanding on the Effective Date shall become (by
conversion, exchange, assumption, substitution, and/or otherwise as determined
by mutual agreement of Phar-Mor and ShopKo) a Parent Option to purchase that
number of Parent Common Shares determined by multiplying the number of ShopKo
Common Shares issuable upon exercise of such ShopKo Option by the Exchange
Ratio. Each such Parent Option shall be exercisable at the same aggregate
exercise price after the Reorganization as the corresponding ShopKo Option was
before the Reorganization and shall have the same exercise period and other
terms and conditions as the corresponding ShopKo Option. Notwithstanding the
foregoing, no Parent Options to purchase fractional Parent Common Shares shall
be issued in connection with the Reorganization.
1.4 EXCHANGE PROVISIONS.
(a) As soon as practicable after the Effective Date, Parent shall deposit
with a bank, trust company or other agent selected by ShopKo and Phar-Mor (the
"Exchange Agent") certificates representing Parent Common Shares required to
effect the exchange of ShopKo Common Shares for Parent Common Shares.
(b) As soon as practicable after the Effective Date, the Exchange Agent
shall mail to each holder of record of a certificate or certificates which
immediately prior to the Effective Date represented issued and outstanding
ShopKo Common Shares ("Certificates") that were exchanged (the "Exchanged
Shares") for Parent Common
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Shares pursuant to the ShopKo Exchange, (i) a letter of transmittal, and (ii)
instructions for use in effecting the exchange of Certificates for
certificates representing Parent Common Shares. Upon delivery of a Certificate
to the Exchange Agent for exchange, together with a duly executed letter of
transmittal and such other documents as the Exchange Agent shall require, the
holder of such Certificate shall be entitled to receive in exchange therefor a
certificate representing that number of whole Parent Common Shares and the
amount of cash in lieu of fractional Share interests which such holder has the
right to receive pursuant to this Section 1.4. Until delivered as contemplated
by this Section 1.4, each Certificate shall be deemed at any time after the
Effective Date to represent only the right to receive upon such delivery the
certificate representing Parent Common Shares and cash in lieu of any
fractional Parent Common Shares as contemplated by this Section 1.4.
(c) No dividends or other distributions declared or made after the Effective
Date with respect to Parent Common Shares with a record date after the
Effective Date shall be paid to the holder of any undelivered Certificate with
respect to the Parent Common Shares represented thereby, and no cash payment
in lieu of fractional shares shall be paid to any such holder pursuant to this
Section 1.4, until the holder of record of such Certificate shall have
delivered such Certificate as contemplated in this Section 1.4. Subject to the
effect of unclaimed property, escheat and other applicable laws, following
delivery of any such Certificate there shall be paid to or upon order of the
record holder of the certificates representing whole Parent Common Shares
issued in exchange therefor, without interest, (i) at the time of such
delivery, the amount of any cash payable in lieu of a fractional Parent Common
Share to which such holder is entitled pursuant to this Section 1.4 and the
amount of any dividends or other distributions with a record date after the
Effective Date theretofore paid with respect to such whole Parent Common
Shares and (ii) at the appropriate payment date, the amount of any dividends
or other distributions with a record date after the Effective Date but prior
to delivery and a payment date subsequent to delivery payable with respect to
such whole Parent Common Shares, as the case may be.
(d) No certificates or scrip representing fractional Parent Common Shares
shall be issued upon the delivery for exchange of Certificates, and such
fractional Share interests will not entitle the owner thereof to vote or to
any rights of a stockholder of Parent.
(e) As promptly as practicable following the Effective Date, the Exchange
Agent shall determine the excess of (x) the number of full shares of Parent
Common Shares delivered to the Exchange Agent by Parent pursuant to this
Section 1.4 over (y) the aggregate number of full Parent Common Shares to be
distributed to holders of ShopKo Common Shares pursuant to Section 1.3(c)(ii)
(such excess being herein called the "Excess Shares"). As soon after the
Effective Date as practicable, the Exchange Agent, as agent for the holders of
ShopKo Common Shares shall sell the Excess Shares at then prevailing prices on
the principal securities market on which the Parent Common Shares are then
trading (the "Principal Trading Market"), all in the manner provided in this
Section 1.4.
(f) The sale of the Excess Shares by the Exchange Agent shall be executed on
the Principal Trading Market through one or more member firms of the Principal
Trading Market and shall be executed in round lots to the extent practicable.
Until the net proceeds of such sale or sales have been distributed to the
holders of ShopKo Common Shares, the Exchange Agent shall hold such proceeds
in trust for the holders of ShopKo Common Shares ("Common Shares Trust").
Parent shall pay all commissions, transfer taxes and other out-of-pocket
transaction costs, including the expenses and compensation, of the Exchange
Agent incurred in connection with such sale of the Excess Shares. The Exchange
Agent shall determine the portion of the net proceeds comprising the Common
Shares Trust to which each holder of ShopKo Common Shares shall be entitled,
if any, by multiplying the amount of the aggregate net proceeds comprising the
Common Shares Trust by a fraction the numerator of which is the amount of the
fractional share interest to which such holder of ShopKo Common Shares is
entitled and the denominator of which is the aggregate amount of fractional
share interests to which all holders of ShopKo Common Shares are entitled.
(g) As soon as practicable after the sale of Excess Shares pursuant to
Section 1.4(f) and the determination of the amount of cash, if any, to be paid
to holders of ShopKo Common Shares in lieu of any fractional Share
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interests, the Exchange Agent shall distribute such amounts to holders of
ShopKo Common Shares who have theretofore delivered Certificates for ShopKo
Common Shares for exchange pursuant to this Section 1.4.
(h) From and after the Effective Date, the stock transfer books with respect
to ShopKo Common Shares issued and outstanding prior to the Effective Date
shall be closed and no transfer of any such Shares shall thereafter be made.
If, after the Effective Date, Certificates are presented to Parent, they shall
be cancelled and exchanged for certificates representing the appropriate
number of whole Parent Common Shares and cash in lieu of fractional Parent
Common Shares as provided in this Section 1.4.
(i) Any certificates representing Parent Common Shares deposited with the
Exchange Agent pursuant to this Section 1.4 and not exchanged within one year
after the Effective Date pursuant to this Section 1.4 shall be returned by the
Exchange Agent to Parent, which shall thereafter act as Exchange Agent. All
funds held by the Exchange Agent for payment to the holders of undelivered
Certificates and unclaimed at the end of one year from the Effective Date
shall be remitted to Parent, after which time any holder of undelivered
Certificates shall look as a general creditor only to Parent for payment of
such funds to which such holder may be due, subject to applicable law. The
Parent shall not be liable to any Person for such shares or funds delivered to
a public official pursuant to any applicable abandoned property, escheat or
similar law.
1.5 REGISTRATION OF SECURITIES. Within 10 days after the Effective Date,
Parent shall prepare and file with the Securities and Exchange Commission (the
"Commission") such registration statement(s) under the Securities Act of 1933,
as amended (the "Securities Act"), as shall be required to register the Parent
Common Shares reserved for issuance pursuant to Parent Options. Subsequent to
such filing, Parent shall use its best efforts to cause such registration
statement(s) to become effective and, to the extent required by law, keep such
registration statement(s) current and effective under the Securities Act so
long as any Parent Option remains outstanding.
1.6 EXCHANGE OF PHAR-MOR STOCK CERTIFICATES NOT REQUIRED. Holders of Phar-
Mor Common Shares will automatically become holders of Parent Common Shares
and their certificates which represent Phar-Mor Common Shares will
automatically represent the Parent Common Shares for which such shares were
exchanged in the Phar-Mor Exchange and (a) from and after the Effective Date,
the stock transfer books of Phar-Mor with respect to shares of Phar-Mor Common
Shares outstanding prior to the Effective Date shall be closed and no transfer
of any such shares will thereafter be made, and (b) after the Phar-Mor
Exchange, as presently outstanding certificates of Phar-Mor Common Shares are
presented for transfer, new stock certificates bearing the name of the Parent
and the appropriate number of Parent Common Shares will be issued.
1.7 BOARD OF DIRECTORS OF PARENT; COMMITTEES. The parties hereby agree that
(i) the seven members of the Phar-Mor Board and (ii) three additional
individuals who qualify as "Independent Directors" (as defined in the Form of
Restated Certificate of Incorporation of Parent, a copy of which is attached
hereto as Exhibit B) selected by the ShopKo Board (in consultation with
Heidrick & Struggles, New York, or such other nationally recognized executive
search firm as may be approved by Phar-Mor and ShopKo), and approved by the
members of the Phar-Mor Board who are not also officers or employees of Phar-
Mor or affiliates of Hamilton Morgan, shall serve as members of the Parent
Board from and after the Effective Date, until their respective successors are
duly elected or appointed and qualified in the manner provided in the By-Laws
of Parent, or as otherwise provided by law; provided that the ShopKo Board
shall use reasonable efforts to designate such three nominees for Independent
Director before the Effective Date; and provided further, that to the extent
such three designees of ShopKo are not designated on or before the Effective
Date, the right of ShopKo to appoint such designees as contemplated by this
Section 1.7 shall be enforceable by those Persons who are members of the
ShopKo Board as of the date of this Agreement. Any individual selected by the
Phar-Mor Board to fill any vacancy on the Phar-Mor Board shall be selected in
consultation with Heidrick & Struggles, New York, or such other nationally
recognized executive search firm as may be approved by Phar-Mor and ShopKo,
and shall be an individual that (i) is neither an officer or employee of Phar-
Mor nor an affiliate of Hamilton Morgan, and (ii) is approved by the members
of the ShopKo Board who are not also officers or employees of ShopKo or
Supervalu, directors of Supervalu or otherwise affiliated with Supervalu. The
Parent Board shall be classified into three classes of
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approximately equal size, with two Independent Directors serving in each
class. The Parent Board shall establish a Compensation Committee and Audit
Committee which shall consist of two or more Independent Directors selected by
the Parent Board. The entire Parent Board shall serve as its Nominating
Committee.
1.8 EXECUTIVE OFFICERS OF PARENT. The individuals who shall serve as the
executive officers of Parent from and after the Effective Date shall be as set
forth in Schedule 1.8.
1.9 REGISTRATION OF PARENT COMMON SHARES. The Parent Common Shares to be
issued in the Reorganization will be registered under the Securities Act
pursuant to a registration statement on Form S-4 (the "Registration
Statement") to be filed with the Commission.
ARTICLE II
Representations and Warranties
2.1 REPRESENTATIONS AND WARRANTIES OF SHOPKO. ShopKo represents and warrants
to Phar-Mor as follows (it being understood that all representations and
warranties of ShopKo which concern the businesses and operations acquired by
ShopKo pursuant to that certain Asset Purchase Agreement dated July 16, 1996,
by and among ShopKo, FoxMeyer Health Corporation and others, are made solely
to the knowledge of ShopKo):
(a) Organization; Standing and Power. ShopKo is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Minnesota. ShopKo has all requisite power and authority to own,
lease and operate its properties and to carry on its business as now being
conducted. ShopKo is duly qualified as a foreign corporation to do
business, and is in good standing, in each jurisdiction where the character
of its properties owned or leased or the nature of its activities makes
such qualification necessary, except for failures to be so qualified or in
good standing which would not, in the aggregate, have a material adverse
effect on the business, property, assets, liabilities or condition
(financial or otherwise) of ShopKo and its Subsidiaries taken as a whole
(sometimes referred to in this Section 2.1 as a "ShopKo Material Adverse
Effect"). Copies of the Articles of Incorporation and By-Laws of ShopKo
heretofore delivered to Phar-Mor are accurate and complete as of the date
hereof.
(b) Subsidiaries. Schedule 2.1(b) sets forth for each Subsidiary of
ShopKo (a "ShopKo Subsidiary") (i) its name and jurisdiction of
incorporation or organization, (ii) the number of shares of authorized
capital stock of each class of its capital stock, if any, or other equity
interests, (iii) the number of issued and outstanding shares of each class
of its capital stock or other equity interests, the names of the holders
thereof and the number of shares and other equity interests held by each
such holder, (iv) the number of shares of capital stock or other equity
interests held in its treasury, and (v) its directors and officers. Each
ShopKo Subsidiary is a corporation or other entity duly organized, validly
existing and in good standing under the laws of the state in which it is
incorporated or organized. Each ShopKo Subsidiary has all requisite power
and authority to own, lease and operate its properties and to carry on its
business as now being conducted. Each ShopKo Subsidiary is duly qualified
as a foreign corporation or other entity to do business, and is in good
standing, in each jurisdiction where the character of its properties owned
or leased or the nature of its activities makes such qualification
necessary, except for failures to be so qualified or in good standing which
would not, in the aggregate, have a ShopKo Material Adverse Effect. For the
purposes of this Agreement, "Subsidiary" shall mean any corporation,
partnership, association or other entity with respect to which a specified
Person (or a subsidiary thereof) owns a majority of the common stock or
other equity interests or has the power to vote or direct the voting of a
sufficient number of securities or other equity interest to elect a
majority of its directors or other governing body. Except as set forth in
Schedule 2.1(b), ShopKo has no Subsidiaries and does not own or control,
directly or indirectly, shares of capital stock of any other corporation or
any interest in any partnership, joint venture, or other non-corporate
business entity or enterprise. All of the issued and outstanding capital
stock or other equity interests of each ShopKo Subsidiary have been
offered, issued, and sold by each such Subsidiary in compliance with the
registration requirements of applicable federal and state securities laws.
Except as set forth on Schedule 2.1(b), since
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February 24, 1996, no shares of the capital stock of any ShopKo Subsidiary
have been issued or retired or, in the case of treasury shares, reissued.
(c) Capitalization. As of September 5, 1996, the authorized capital stock
of ShopKo and the validly issued and outstanding, fully paid and
nonassessable shares of the capital stock of ShopKo are as set forth on
Schedule 2.1(c). No ShopKo Common Shares are held in its treasury. Except
as set forth in Schedule 2.1(c): (A) no subscription, warrant, option,
convertible or exchangeable security or other right (contingent or
otherwise) to purchase or acquire any shares of capital stock of ShopKo or
any ShopKo Subsidiary is authorized or outstanding, (B) neither ShopKo nor
any ShopKo Subsidiary has any obligation (contingent or otherwise) to issue
any subscription, warrant, option, convertible or exchangeable security, or
other such right or to issue or distribute to holders of any shares of its
capital stock any evidences of indebtedness or assets of ShopKo or any
ShopKo Subsidiary, (C) neither ShopKo nor any ShopKo Subsidiary has any
obligation (contingent or otherwise) to purchase, redeem, or otherwise
acquire any shares of its capital stock or any interest therein or to pay
any dividend or make any other distribution in respect thereof, (D) ShopKo
owns all shares of capital stock or other equity interests of each ShopKo
Subsidiary free and clear of any Lien, and (E) to ShopKo's knowledge, no
shareholder of ShopKo has granted options or other rights to purchase any
ShopKo Common Shares from such shareholder. Except as provided in this
Agreement or Schedule 2.1(c), no person, partnership, corporation, or other
entity or party ("Person") is entitled to (i) any preemptive or similar
right with respect to the issuance by ShopKo or any ShopKo Subsidiary of
any capital stock or other equity interests or (ii) any rights with respect
to the registration of any capital stock or other equity interests of
ShopKo or any ShopKo Subsidiary under the Securities Act. Except as
contemplated by this Agreement or Schedule 2.1(c), there are no agreements,
arrangements or understandings, written or oral, between ShopKo or any
ShopKo Subsidiary and any holder of its or their capital stock or other
equity interests, or, to the knowledge of ShopKo, among any holders of its
or their capital stock or other equity interests, relating to the
acquisition (including, without limitation, rights of first refusal or
preemptive rights), disposition, or voting of the capital stock or other
equity interests of ShopKo or any ShopKo Subsidiary. All of the issued and
outstanding ShopKo Common Shares have been offered, issued, and sold by
ShopKo in compliance with the registration requirements of applicable
federal and state securities laws. Except upon exercise of ShopKo Options,
since February 24, 1996 no shares of the capital stock of ShopKo have been
issued or retired or, in the case of treasury shares, reissued.
(d) Authority; Recommendation.
(i) ShopKo has the requisite corporate power and authority to enter into
this Agreement and to perform its obligations hereunder. The execution and
delivery of this Agreement by ShopKo and the consummation by ShopKo of the
ShopKo Plan have been duly authorized by the ShopKo Board, and, except for
the approval of the holders of ShopKo Common Shares as set forth in Section
4.2, no other corporate proceedings on the part of ShopKo are necessary to
authorize the execution, delivery and performance of this Agreement and the
ShopKo Plan. This Agreement has been duly executed and delivered by ShopKo
and constitutes a valid and binding obligation of ShopKo, enforceable in
accordance with its terms, except as may be limited by applicable
bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium
and other similar laws of general application that may affect the
enforcement of the rights of creditors and other obligees generally and by
general equitable principles.
(ii) The ShopKo Board has determined the ShopKo Plan to be in the best
interest of the holders of ShopKo Common Shares and recommended that the
holders of such shares approve and adopt the ShopKo Plan.
(e) Noncontravention. Neither the execution and delivery of this
Agreement by, nor the consummation of the ShopKo Plan, nor compliance by
ShopKo with any of the provisions hereof, will (i) violate, conflict with,
or result in a breach of any provisions of, or constitute a default (or an
event which, with notice or lapse of time or both, would constitute a
default) under, or result in the termination or suspension of, or
accelerate the performance required by, or result in a right of termination
or acceleration under, or result in the creation of any Lien upon any of
the properties or assets of ShopKo or any of its Subsidiaries (unless the
context otherwise requires, hereinafter any reference in this Section 2.1
to
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"ShopKo" shall include each ShopKo Subsidiary, whether held directly or
indirectly by ShopKo) under, any of the terms, conditions or provisions of
(x) the Articles of Incorporation or By-Laws of ShopKo, or (y) except as
set forth on Schedule 2.1(e), any note, bond, mortgage, indenture, deed of
trust, license, lease, agreement or instrument or obligation to which
ShopKo is party or which ShopKo or any of its properties or assets may be
subject, or (ii) subject to compliance with the statutes and regulations
referred to in Section 2.1(f) below, to the knowledge of ShopKo, violate
any judgment, ruling, order, writ, injunction, decree, statute, rule,
regulation or other legal requirement applicable to ShopKo or any of its
properties or assets, except, in the case of each of clauses (i)(y) and
(ii) above, for such violations, conflicts, breaches, defaults,
terminations, accelerations or creations of Liens which would not, in the
aggregate, have a ShopKo Material Adverse Effect or affect the ability of
ShopKo to consummate the ShopKo Plan or the ability of Parent to consummate
the Parent Buy Back. "Lien" means any mortgage, pledge, encumbrance,
security interest, charge, or other lien, except (i) statutory liens not
yet delinquent, (ii) liens that do not materially detract from or
materially interfere with the present use of the properties or assets
subject thereto or affected thereby, or otherwise materially impair present
business operations at such properties, (iii) liens for taxes not yet
delinquent, and (iv) liens reflected in the party's financial statements
disclosed pursuant to this Agreement to the other parties hereto.
(f) Government Approval. Other than in connection with or in compliance
with the provisions of the Delaware General Corporation Law ("Delaware
Law"), the Pennsylvania Law and the Minnesota Law, the provisions of the
Securities Act, the provisions of the Exchange Act, and the provisions of
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), no notice to, filing with, or authorization, consent or
approval of, any domestic or foreign public, governmental, quasi-
governmental, or regulatory body, agency or authority is necessary for the
execution and delivery of this Agreement by ShopKo or the consummation of
the ShopKo Plan or compliance by ShopKo with any of the provisions hereof,
except where failures to give such notices, make such filings, or obtain
authorizations, consents or approvals would not, in the aggregate, have a
ShopKo Material Adverse Effect or affect the ability of ShopKo to
consummate the ShopKo Plan or the ability of Parent to consummate the
Parent Buy Back.
(g) Financial Statements. ShopKo has timely filed Quarterly Reports on
Form 10-Q for the fiscal quarters ending prior to the date hereof in 1996
and an Annual Report on Form 10-K for the fiscal year ended February 24,
1996. The financial statements included in or incorporated by reference
into the foregoing public reports (including the related notes and
schedules) have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis during the periods
involved (except as may be indicated in the notes thereto), fairly present
the respective financial position of ShopKo as of the dates thereof and its
respective results of operations and cash flow for the periods then ended
(subject, in the case of interim financial statements, to normal year-end
adjustments and to the extent they may not include footnotes or may be
condensed or summary statements), are correct and complete in all material
respects, and are consistent with the books and records of ShopKo.
(h) Undisclosed Liabilities. Except as set forth on Schedule 2.1(h),
ShopKo has no liabilities or obligations, direct or indirect, whether
accrued, absolute, contingent or otherwise of a nature required to be
disclosed under the Exchange Act or to be reflected in financial statements
(including related notes and schedules) ("Liabilities"), except for (i)
Liabilities set forth in ShopKo's reports on Forms 10-Q, 10-K, 8-K and
proxy statements filed prior to the date hereof and since February 24, 1996
with the Commission (collectively, the "ShopKo SEC Reports") and (ii)
Liabilities that would not, individually or in the aggregate, have a ShopKo
Material Adverse Effect or affect the ability of ShopKo to consummate the
ShopKo Plan or the ability of Parent to consummate the Parent Buy Back.
(i) Absence of Certain Changes or Events. Except as contemplated by this
Agreement or disclosed in the ShopKo SEC Reports or on Schedule 2.1(i),
since February 24, 1996 there has not been (i) any ShopKo Material Adverse
Effect, or any event which would result in a ShopKo Material Adverse
Effect; (ii) any material damage, destruction or loss, whether covered by
insurance or not; (iii) any entry by ShopKo into any commitment or
transaction material to it which is not in the ordinary course of business;
(iv) any change by ShopKo in accounting principles or methods except
insofar as may have been required by a change in generally accepted
accounting principles; (v) any declaration, payment or setting aside for
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payment of any dividends, except for cash dividends paid at such times and
in such amounts as are consistent with ShopKo's past practices; (vi) any
action taken by ShopKo of the type referred to in Section 3.1; or (vii) any
agreement by ShopKo to (A) do any of the things described in the preceding
clauses (i) through (vi) other than as expressly contemplated or provided
for herein or (B) take, whether in writing or otherwise, any action which,
if taken prior to the date of this Agreement, would have made any
representation or warranty in this Section 2.1 untrue or incorrect.
(j) Compliance with Law. ShopKo has not violated or failed to comply with
any statute, law, ordinance, regulation, rule, order or other legal
requirement of any foreign, federal, state or local government, authority
or any other governmental, quasi-governmental or regulatory department or
agency, or any judgment, decree or order of any court, applicable to its
business or operations, except where any such violations or failures to
comply would not, individually or in the aggregate, have a ShopKo Material
Adverse Effect.
(k) Brokers. No broker, finder or investment banker, other than the
ShopKo Financial Adviser (whose fees shall have been described to Phar-Mor
in writing prior to the filing of the Registration Statement) is entitled
to any brokerage, finder's or other fee or commission in connection with
the Reorganization based upon arrangements made by or on behalf of ShopKo.
(l) Litigation. Except as disclosed in the ShopKo SEC Reports or as set
forth on Schedule 2.1(l), (i) there is no claim, action, proceeding or
investigation pending or, to the knowledge of ShopKo, threatened against or
relating to ShopKo before any court or governmental or regulatory authority
or body which, individually or in the aggregate, would have a ShopKo
Material Adverse Effect and (ii) ShopKo is not subject to any outstanding
order, writ, injunction or decree.
(m) Taxes and Tax Returns. Except as set forth on Schedule 2.1(m), ShopKo
has (i) duly and timely filed all United States federal and state income
tax and all other returns and reports required to be filed by it with
respect to any taxes, and each such return and report is complete and
accurate in all material respects; and (ii) paid or made adequate provision
for the payment of all federal and other taxes (including, if any,
interest, penalties or additions to tax in respect thereof) that are due
and owing whether or not shown on any return and whether disputed or not,
except in the case of both (i) and (ii) above for such failures to file,
inaccuracies and failures to pay or provide for as would not, individually
or in the aggregate, have a ShopKo Material Adverse Effect. Any
deficiencies or assessments asserted in writing by the appropriate taxing
authorities have either been paid, settled or fully provided for. There are
no material claims or assessments (not provided for) pending against ShopKo
for any alleged federal or state tax deficiency and no material issue has
been raised in writing by any federal or state taxing authority or
representative thereof.
(n) Real Estate. Schedule 2.1(n) contains an accurate and complete list
of all real property owned or leased in whole or in part by ShopKo and a
list of all indebtedness secured by a Lien. Except as disclosed on Schedule
2.1(n), ShopKo has good and marketable title to all the real property owned
by it as reflected in ShopKo's unaudited consolidated balance sheet as of
June 15, 1996, free and clear of all Liens and a valid leasehold interest
in all real property shown on Schedule 2.1(n) as leased by it. To the
knowledge of ShopKo, all of the buildings, structures and appurtenances
situated on the real property owned or leased in whole or in part by ShopKo
are in good operating condition and in a state of good maintenance and
repair, except for such conditions which would not, individually or in the
aggregate, have a ShopKo Material Adverse Effect, are adequate and suitable
for the purposes for which they are presently being used, and, with respect
to each, ShopKo has adequate rights of ingress and egress for operation of
the business of ShopKo in the ordinary course. To the knowledge of ShopKo,
none of such buildings, structures or appurtenances (or any equipment
therein), nor the operation or maintenance thereof, violates any
restrictive covenant or any provision of federal, state or local law,
ordinance, rule or regulation, or encroaches on any property owned by
others, except for such violations and encroachments which would not,
individually or in the aggregate, have a ShopKo Material Adverse Effect. No
condemnation proceeding is pending or, to the knowledge of ShopKo,
threatened which would materially preclude or impair the use of any such
property by ShopKo for the purposes for which it is currently used.
Schedule 2.1(n) sets forth all contractual use restrictions on all real
property owned or leased by ShopKo.
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(o) Licenses, Permits and Authorizations. ShopKo has all approvals,
authorizations, qualifications, consents, licenses, franchises, orders and
other permits of all governmental, quasi-governmental or regulatory
agencies or authorities, whether federal, state or local, domestic or
foreign, necessary to enable ShopKo to continue to conduct its business as
currently being conducted except where any failure to have any thereof,
individually or in the aggregate, would not have a ShopKo Material Adverse
Effect. Each of the foregoing is in full force and effect and ShopKo is in
material compliance with all of its obligations with respect thereto, and,
to the knowledge of ShopKo no event has occurred which permits, or upon the
giving of notice or the lapse of time or otherwise would permit,
revocation, nonrenewal, modification, suspension or termination of any of
the foregoing.
(p) ERISA and Employee Matters:
(i) Schedule 2.1(p) contains a true and complete list of each
"employee benefit plan," as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and of
all other plans, programs, agreements or arrangements, currently
maintained by ShopKo or any trade or business, whether or not
incorporated, which is part of a controlled group within the meaning of
Section 414(b), (c) or (m) of the Code with ShopKo (collectively, the
"ShopKo Group") or under which any member of the ShopKo Group has any
liability in respect of current or former employees or their dependents
or beneficiaries (collectively, the "ShopKo Benefit Plans"). All of the
ShopKo Benefit Plans which constitute employee "pension plans" as
defined in Section 3(2) of ERISA are referred to herein as the "ShopKo
Pension Plans." Each of the ShopKo Benefit Plans is administered and is
in compliance with the terms thereof and the applicable provisions of
ERISA and the Code, and any applicable qualification requirements of
the Code, except for such violations which would not, individually or
in the aggregate, have a ShopKo Material Adverse Effect. The ShopKo
Group has fulfilled its obligations under the minimum funding standards
of ERISA and the Code with respect to each ShopKo Pension Plan, and the
ShopKo Group has not incurred, and the ShopKo Group does not have any
knowledge of any event or condition which would cause the ShopKo Group
to incur, any liability to the Pension Benefit Guaranty Corporation,
any trustee under Section 4049 of ERISA, or any ShopKo Pension Plan in
connection with the termination of any ShopKo Pension Plan under Title
IV of ERISA. No ShopKo Pension Plan has an accumulated or waived
funding deficiency, or has applied for an extension of any amortization
period within the meaning of Section 412 of the Code and no event or
condition exists which could be deemed a reportable event within the
meaning of Section 4043 of ERISA. Each ShopKo Pension Plan which is
intended to be a qualified plan under Section 401(a) of the Code is so
qualified and has received a favorable determination letter from the
Internal Revenue Service and nothing has occurred since the dates of
such letters to cause them to be no longer effective. The Internal
Revenue Service is not auditing, and has not notified any member of the
ShopKo Group that it intends to audit, any ShopKo Pension Plan. ShopKo
has previously delivered to Phar-Mor with respect to each ShopKo
Benefit Plan, true and correct copies of (A) each ShopKo Benefit Plan
(or, in the case of an oral or informal ShopKo Benefit Plan, a written
description thereof); (B) the most recent annual report, if required
(Form 5500 series); (C) the most recent actuarial valuation report, if
required; and (iv) the most recent Summary Plan Description, as
described in Section 102(a)(1) of ERISA, if applicable.
(ii) The aggregate actuarial present value of accrued benefits (both
vested and unvested) of ShopKo Pension Plans subject to Title IV of
ERISA does not exceed the aggregate fair market value of the assets of
such ShopKo Pension Plans by more than $100,000 based upon the
actuarial assumptions used in funding such plans for the 1995
valuation, which assumptions are reasonable in light of the experience
of such plans.
(iii) Except as set forth on Schedule 2.1(p), there are no pending
claims or lawsuits which have been asserted or instituted (other than
in respect of benefits due in the ordinary course which, in the
aggregate, are not material) against the assets of any of the ShopKo
Benefit Plans or against the ShopKo Group or any fiduciary of the
ShopKo Benefit Plans with respect to the ShopKo Benefit Plans.
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(iv) As of the date hereof, there are no benefits to be provided to
current or future retirees under any "welfare benefit plans" within the
meaning of Section 3(1) of ERISA which are maintained by the ShopKo
Group, except as set forth on Schedule 2.1(p).
(v) The ShopKo Group has not maintained or contributed to, or been
obligated or required to contribute to, a "multiemployer plan," as such
term is defined in Section 3(37) of ERISA, and no withdrawal liability
has been incurred by or asserted against any member of the ShopKo Group
with respect to a withdrawal from any multiemployer pension plan, and
the ShopKo Group does not have any knowledge of any event or condition
which would cause any of the ShopKo Group to incur any such withdrawal
liability.
(vi) Except as set forth in Schedule 2.1(p), no ShopKo Benefit Plan
exists which would result in the payment to any individual of any money
or other property or rights or accelerate or provide any other rights
or benefits to any individual as a result of the transactions
contemplated by this Agreement that would constitute an "excess
parachute payment" within the meaning of section 280G of the Code.
(q) Environmental Matters. Except as set forth on Schedule 2.1(q):
(i) To the knowledge of ShopKo, ShopKo has complied in all material
respects with all applicable Environmental Laws and the requirements of
any permits issued under such Environmental Laws. There are no pending
or, to the knowledge of ShopKo, threatened Environmental Claims against
or affecting ShopKo or any real property owned or operated by ShopKo
that, individually or in the aggregate, would have a ShopKo Material
Adverse Effect. To the knowledge of ShopKo, there are no facts,
circumstances, conditions or occurrences affecting any real property
owned or operated by ShopKo or on any property adjoining or in
proximity to such real property that, to the knowledge of ShopKo, would
(i) form the basis of an Environmental Claim against ShopKo or have a
ShopKo Material Adverse Effect, or (ii) with respect to owned property,
cause such real property to be subject to any material restrictions on
the ownership, occupancy, use or transferability of such real property
under any applicable Environmental Law.
(ii) To the knowledge of ShopKo, Hazardous Materials have not at any
time been generated, used, treated or stored on any real property owned
or operated by ShopKo where such generation, use, treatment or storage
has violated any Environmental Law. Hazardous Materials have not at any
time been Released by ShopKo on or from any such real property where
such Release has violated any applicable Environmental Law. Except as
set forth on Schedule 2.1(q), to the knowledge of ShopKo, there are not
now any underground storage tanks located on any real property owned or
currently operated by ShopKo and no storage tanks have been removed
from any such real property since December 31, 1992.
(iii) Notwithstanding anything to the contrary in this Section
2.1(q), the representations made in this Section 2.1(q) shall only be
untrue if the aggregate effect of all failures and noncompliance of the
types described above would have a ShopKo Material Adverse Effect.
For purposes hereof, the following terms shall have the following
meanings:
"Environmental Claims" means any and all administrative, regulatory
or judicial actions, suits, demands, demand letters, claims, liens,
notices of noncompliance or violation, investigations (other than
internal reports prepared by such party solely in the ordinary course
of its business and not in response to any third party action or
request of any kind) or proceedings relating in any way to any
Environmental Law or any permit issued, or any approval given, under
any such Environmental Law ("Claims"), including, without limitation,
(a) any and all Claims by governmental or regulatory authorities for
enforcement, cleanup, removal, response, remedial or other actions or
damages pursuant to any applicable Environmental Law, and (b) any and
all Claims by any third party seeking damages, contribution,
indemnification, cost recovery, compensation or injunctive relief
resulting from Hazardous Materials arising from alleged injury or
threat of injury to health, safety or the environment.
"Environmental Law" means any federal, state, foreign or local
statute, law, rule, regulation, ordinance and code now in effect and in
each case as amended to the date hereof, and any judicial or
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administrative interpretation thereof, including any binding judicial
or administrative order, consent decree or judgment, relating to the
environment, health, safety or Hazardous Materials, including, without
limitation, the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended; the Resource Conservation and
Recovery Act of 1976, as amended; the Occupational Safety and Health
Act, as amended; the Federal Water Pollution Control Act, as amended,
33 U.S.C. (S) 1251 et seq.; the Toxic Substances Control Act, 15 U.S.C.
(S) 2601 et seq.; the Clean Air Act, 42 U.S.C. (S) 7401 et seq.; the
Safe Drinking Water Act, 42 U.S.C. (S) 3803 et seq.; the Oil Pollution
Act of 1990, PUB. Law 101-380 and any state and local or foreign
counterparts or equivalents.
"Hazardous Material" means (a) any petroleum or petroleum products,
radioactive materials, asbestos, urea formaldehyde foam insulation,
polychlorinated biphenyls and radon gas, (b) any chemicals, materials
or substances defined as or included in the definition of "hazardous
substances," "hazardous waste," "hazardous materials," "extremely
hazardous waste," "restricted hazardous waste," "toxic substances,"
"toxic pollutants," "contaminants," or "pollutants," or words of
similar import, under any applicable Environmental Law, and (c) any
other chemical, material or substance, exposure to which is prohibited,
limited or regulated by any governmental authority.
"Release" means disposing, discharging, injecting, spilling, pumping,
leaking, leaching, dumping, emitting, escaping, emptying, seeping,
placing or purging into or upon any land or water or air, or otherwise
entering into the environment.
(r) Employees; Labor Relations:
(i) Schedule 2.1(r) contains a true and complete list of all ShopKo
contracts, agreements, plans, arrangements, commitments and
understandings (formal and informal) pertaining to terms of employment,
compensation, bonuses, profit sharing, stock purchases, stock
repurchases, stock options, commissions, incentives, loans or loan
guarantees, severance pay or benefits, with any current or former
ShopKo officer or director, or any current ShopKo employees, and true
and complete copies of all such contracts, agreements, plans,
arrangements and understandings have been delivered to Phar-Mor.
Schedule 2.1(r) contains a true and complete list of all labor,
collective bargaining, union and similar agreements under or by which
ShopKo is obligated, and true and complete copies of all such
agreements have been delivered to Phar-Mor. Except as set forth on
Schedule 2.1(r), neither Parent nor ShopKo will have any responsibility
for continuing any Person in the employ of ShopKo from and after the
Effective Date or have any liability for any severance payments to or
similar arrangements with any such Person who shall cease to be an
employee of ShopKo at or prior to the Effective Date.
(ii) ShopKo is not engaged in any unfair labor practice that would
have a ShopKo Material Adverse Effect. There is (i) no unfair labor
practice complaint pending against ShopKo or, to the knowledge of
ShopKo, threatened against ShopKo, before the National Labor Relations
Board or other governmental quasi-governmental or regulatory agency,
body or authority, and no grievance or arbitration proceeding arising
out of or under any collective bargaining agreement is so pending
against ShopKo or, to the knowledge of ShopKo, threatened against
ShopKo, (ii) no strike, labor dispute, slowdown or stoppage pending
against ShopKo or, to the knowledge of ShopKo, threatened against
ShopKo and (iii) to the knowledge of ShopKo, no union representation
question existing with respect to the employees of ShopKo.
(s) Intellectual Property. Schedule 2.1(s) sets forth a correct and
complete list of all material trademarks, service marks, trade names, or
rights with respect to the foregoing, applied for, issued to or owned by
ShopKo or under which ShopKo is licensed or franchised, all of which are
valid, in good standing and, to the knowledge of ShopKo, uncontested,
except as set forth on Schedule 2.1(s). ShopKo owns or has valid licenses
or other rights to use all the material trademarks, service marks, trade
names, or rights with respect to the foregoing (the "ShopKo Intellectual
Property") which are necessary for the present conduct of its business.
Except as set forth on Schedule 2.1(s), no proceedings have been instituted
or are pending or, to the knowledge of ShopKo, threatened that challenge
the validity of its ownership of, or licenses or
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other rights to use, any ShopKo Intellectual Property. Except as set forth
on Schedule 2.1(s), the present employment of the ShopKo Intellectual
Property by ShopKo, if any, does not, to the knowledge of ShopKo, infringe
any rights of any Person. Except as set forth on Section 2.1(s), to the
knowledge of ShopKo, no trademark, service mark, trade name, or other
material currently being sold or employed by any Person infringes any
rights of ShopKo with respect to the ShopKo Intellectual Property.
Notwithstanding anything to the contrary in this Section 2.1(s), the
representations made in this Section 2.1(s) shall only be untrue if the
aggregate effect of all failures and noncompliance of the types described
above would have a ShopKo Material Adverse Effect.
(t) Opinion of ShopKo Financial Adviser. ShopKo has received the written
opinion of the ShopKo Financial Adviser, dated as of the date hereof, that
the ShopKo Plan is fair to ShopKo's public shareholders from a financial
point of view.
(u) Registration Rights. Except as provided in Schedule 2.1(u), ShopKo
has not granted or agreed to grant any registration rights, including
piggyback rights, to any Person.
(v) Commission Documents. ShopKo has delivered to Phar-Mor true, correct,
and complete copies of each of the ShopKo SEC Reports and each exhibit
thereto. As of their respective filing dates, the ShopKo SEC Reports
complied in all material respects with the requirements of the Securities
Act and the Exchange Act, as applicable, and taken together, the ShopKo SEC
Reports contain no untrue statement of a material fact and did not omit to
state a material fact required to be stated therein or necessary to make
the statements made therein, in light of the circumstances in which they
were made, not misleading except to the extent corrected by a subsequently
filed by ShopKo SEC Report.
(w) Registration Statement. None of the information supplied or to be
supplied by ShopKo for inclusion in the Registration Statement to be filed
with the Commission and to be distributed in connection with the Phar-Mor
Special Meeting and the ShopKo Special Meeting to vote upon the
Reorganization, at the time the Registration Statement is declared
effective by order of the Commission, at the time of the Phar-Mor Special
Meeting and the ShopKo Special Meeting will contain an untrue statement of
a material fact or omit to state any material fact necessary in order to
make the statements therein, in light of the circumstances under which they
were made, not misleading. If at any time prior to the Effective Date any
event with respect to ShopKo or its officers and directors shall occur that
is required to be described in the Registration Statement, ShopKo shall
notify Phar-Mor thereof by reference to this section and cooperate with
Phar-Mor in preparing and filing with the Commission and, as required by
law, disseminating to the shareholders of ShopKo and/or Phar-Mor an
amendment or supplement which accurately describes such event or events in
compliance with all provisions of applicable law.
2.2 REPRESENTATIONS AND WARRANTIES OF PHAR-MOR. Phar-Mor represents and
warrants to ShopKo as follows:
(a) Organization; Standing and Power. Phar-Mor is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Pennsylvania. Phar-Mor has all requisite power and authority to
own, lease and operate its properties and to carry on its business as now
being conducted. Phar-Mor is duly qualified as a foreign corporation to do
business, and is in good standing, in each jurisdiction where the character
of its properties owned or leased or the nature of its activities makes
such qualification necessary, except for failures to be so qualified or in
good standing which would not, in the aggregate, have a material adverse
effect on the business, property, assets, liabilities or condition
(financial or otherwise) of Phar-Mor and its Subsidiaries taken as a whole
(sometimes referred to in this Section 2.2 as a "Phar-Mor Material Adverse
Effect"). Copies of the Articles of Incorporation and By-Laws of Phar-Mor
heretofore delivered to ShopKo are accurate and complete as of the date
hereof.
(b) Subsidiaries. Schedule 2.2(b) sets forth for each Subsidiary of Phar-
Mor (a "Phar-Mor Subsidiary") (i) its name and jurisdiction of
incorporation or organization, (ii) the number of shares of authorized
capital stock of each class of its capital stock, if any, or other equity
interests, (iii) the number of issued and outstanding shares of each class
of its capital stock or other equity interests, the names of the holders
thereof and the number of shares and other equity interests held by each
such holder, (iv) the number
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of shares of capital stock or other equity interests held in its treasury,
and (v) its directors and officers. Each Phar-Mor Subsidiary is a
corporation or other entity duly organized, validly existing and in good
standing under the laws of the state in which it is incorporated or
organized. Each Phar-Mor Subsidiary has all requisite power and authority
to own, lease and operate its properties and to carry on its business as
now being conducted. Each Phar-Mor Subsidiary is duly qualified as a
foreign corporation or other entity to do business, and is in good
standing, in each jurisdiction where the character of its properties owned
or leased or the nature of its activities makes such qualification
necessary, except for failures to be so qualified or in good standing which
would not, in the aggregate, have a Phar-Mor Material Adverse Effect.
Except as set forth in Schedule 2.2(b), Phar-Mor has no Subsidiaries and
does not own or control, directly or indirectly, shares of capital stock of
any other corporation or any interest in any partnership, joint venture, or
other non-corporate business entity or enterprise. All of the issued and
outstanding capital stock or other equity interests of each Phar-Mor
Subsidiary has been offered, issued, and sold by each such Subsidiary in
compliance with the registration requirements of applicable federal and
state securities laws. Since March 31, 1996, no shares of the capital stock
of any Phar-Mor Subsidiary have been issued or retired or, in the case of
treasury shares, reissued.
(c) Capitalization. As of September 5, 1996, the authorized capital stock
of Phar-Mor and the validly issued and outstanding, fully paid and
nonassessable shares of the capital stock of Phar-Mor are as set forth on
Schedule 2.2(c). No Phar-Mor Common Shares are held in its treasury. Except
as set forth in Schedule 2.2(c): (A) no subscription, warrant, option,
convertible or exchangeable security or other right (contingent or
otherwise) to purchase or acquire any shares of capital stock of Phar-Mor
or any Phar-Mor Subsidiary is authorized or outstanding, (B) neither Phar-
Mor nor any Phar-Mor Subsidiary has any obligation (contingent or
otherwise) to issue any subscription, warrant, option, convertible or
exchangeable security, or other such right or to issue or distribute to
holders of any shares of its capital stock any evidences of indebtedness or
assets of Phar-Mor or any Phar-Mor Subsidiary, (C) neither Phar-Mor nor any
Phar-Mor Subsidiary has any obligation (contingent or otherwise) to
purchase, redeem, or otherwise acquire any shares of its capital stock or
any interest therein or to pay any dividend or make any other distribution
in respect thereof, (D) Phar-Mor owns all shares of capital stock or other
equity interests of each Phar-Mor Subsidiary free and clear of any Lien,
and (E) to Phar-Mor's knowledge, no shareholder of Phar-Mor has granted
options or other rights to purchase any Phar-Mor Common Shares from such
shareholder. Except as provided in this Agreement or Schedule 2.2(c), no
Person is entitled to (i) any preemptive or similar right with respect to
the issuance by Phar-Mor or any Phar-Mor Subsidiary of any capital stock or
other equity interests or (ii) any rights with respect to the registration
of any capital stock or other equity interests of Phar-Mor or any Phar-Mor
Subsidiary under the Securities Act. Except as contemplated by this
Agreement or Schedule 2.2(c), there are no agreements, arrangements or
understandings, written or oral, between Phar-Mor or any Phar-Mor
Subsidiary and any holder of its or their capital stock or other equity
interests, or, to the knowledge of Phar-Mor, among any holders of its or
their capital stock or other equity interests, relating to the acquisition
(including, without limitation, rights of first refusal or preemptive
rights), disposition, or voting of the capital stock or other equity
interests of Phar-Mor or any Phar-Mor Subsidiary. All of the issued and
outstanding Phar-Mor Common Shares have been offered, issued, and sold by
Phar-Mor in compliance with the registration requirements of applicable
federal and state securities laws. Except upon exercise of Phar-Mor Options
or as set forth on Schedule 2.2(c), since March 31, 1996, no shares of the
capital stock of Phar-Mor have been issued or retired or, in the case of
treasury shares, reissued.
(d) Authority; Recommendation:
(i) Phar-Mor has the requisite corporate power and authority to enter
into this Agreement and to perform its obligations hereunder. The
execution and delivery of this Agreement by Phar-Mor and the
consummation by Phar-Mor of the Phar-Mor Plan have been duly authorized
by the Phar-Mor Board, and, except for the approval of the holders of
Phar-Mor Common Shares as set forth in Section 4.2, no other corporate
proceedings on the part of Phar-Mor are necessary to authorize the
execution, delivery and performance of this Agreement and the Phar-Mor
Plan. This Agreement has been duly executed and delivered by Phar-Mor
and constitutes a valid and binding obligation of Phar-Mor, enforceable
in accordance with its terms, except as may be limited by applicable
bankruptcy, insolvency,
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reorganization, fraudulent conveyance, moratorium and other similar
laws of general application that may affect the enforcement of the
rights of creditors and other obligees generally and by general
equitable principles.
(ii) The Phar-Mor Board has determined the Phar-Mor Plan to be fair
to the holders of Phar-Mor Common Shares and recommended that the
holders of such shares approve and adopt the Phar-Mor Plan.
(e) Noncontravention. Neither the execution and delivery of this
Agreement by, nor the consummation of the Phar-Mor Plan, nor compliance by
Phar-Mor with any of the provisions hereof, will (i) violate, conflict
with, or result in a breach of any provisions of, or constitute a default
(or an event which, with notice or lapse of time or both, would constitute
a default) under, or result in the termination or suspension of, or
accelerate the performance required by, or result in a right of termination
or acceleration under, or result in the creation of any Lien upon any of
the properties or assets of Phar-Mor or any of its Subsidiaries (unless the
context otherwise requires, hereinafter any reference in this Section 2.2
to "Phar-Mor" shall include each Phar-Mor Subsidiary, whether held directly
or indirectly by Phar-Mor) under, any of the terms, conditions or
provisions of (x) the Articles of Incorporation or By-Laws of Phar-Mor, or
(y) except as set forth on Schedule 2.2(e), any note, bond, mortgage,
indenture, deed of trust, license, lease, agreement or instrument or
obligation to which Phar-Mor is party or which Phar-Mor or any of its
properties or assets may be subject, or (ii) subject to compliance with the
statutes and regulations referred to in Section 2.2(f) below, to the
knowledge of Phar-Mor violate any judgment, ruling, order, writ,
injunction, decree, statute, rule, regulation or other legal requirement
applicable to Phar-Mor or any of its respective properties or assets,
except, in the case of each of clauses (i)(y) and (ii) above, for such
violations, conflicts, breaches, defaults, terminations, accelerations or
creations of Liens, which would not, in the aggregate, have a Phar-Mor
Material Adverse Effect or affect the ability of Phar-Mor to consummate the
Phar-Mor Plan or the ability of Parent to consummate the Parent Buy Back.
(f) Government Approval. Other than in connection with or in compliance
with the provisions of the Delaware Law, the Pennsylvania Law and the
Minnesota Law, the provisions of the Securities Act, the provisions of the
Exchange Act, and the provisions of the HSR Act, no notice to, filing with,
or authorization, consent or approval of, any domestic or foreign public,
governmental, quasi-governmental, or regulatory body, agency or authority
is necessary for the execution and delivery of this Agreement by Phar-Mor
or the consummation of any of the transactions contemplated by this
Agreement or compliance by Phar-Mor with any of the provisions hereof,
except where failures to give such notices, make such filings, or obtain
authorizations, consents or approvals would not, in the aggregate, have a
Phar-Mor Material Adverse Effect or affect the ability of Phar-Mor to
consummate the Phar-Mor Plan or the ability of Parent to consummate the
Parent Buy Back.
(g) Financial Statements. Phar-Mor has timely filed Quarterly Reports on
Form 10-Q for the fiscal quarters ending prior to the date hereof in 1996
and has filed a registration statement on Form 10 dated September 11, 1995.
The financial statements included in or incorporated by reference into the
foregoing public reports (including the related notes and schedules) have
been prepared in accordance with generally accepted accounting principles
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto), fairly present the respective financial
position of Phar-Mor as of the dates thereof and its respective results of
operations and cash flow for the periods then ended (subject, in the case
of interim financial statements, to normal year-end adjustments and to the
extent they may not include footnotes or may be condensed or summary
statements), are correct and complete in all material respects, and are
consistent with the books and records of Phar-Mor. Phar-Mor's press release
dated August 22, 1996, a copy of which is reproduced on Schedule 2.2(g),
includes financial data which fairly presents the financial condition and
the results of operations of Phar-Mor as of the dates and for the periods
ended as set forth therein.
(h) Undisclosed Liabilities. Except as set forth on Schedule 2.2(h),
Phar-Mor has no Liabilities except for (i) Liabilities set forth in Phar-
Mor's reports on Forms 10-Q, 10 and 8-K filed prior to the date hereof and
since September 11, 1995 with the Commission (collectively, the "Phar-Mor
SEC Reports")
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and (ii) Liabilities that would not, individually or in the aggregate, have
a Phar-Mor Material Adverse Effect or affect the ability of Phar-Mor to
consummate the Phar-Mor Plan or the ability of Parent to consummate the
Parent Buy Back. Phar-Mor's Plan of Reorganization under Chapter 11 of the
U.S. Bankruptcy Code was approved and declared effective on September 11,
1995. Pursuant to the terms of such Plan of Reorganization, Phar-Mor
implemented fresh-start reporting as of July 2, 1994.
(i) Absence of Certain Changes or Events. Except as contemplated by this
Agreement or disclosed in the Phar-Mor SEC Reports or on Schedule 2.2(i),
since September 11, 1995 there has not been (i) any Phar-Mor Material
Adverse Effect, or any event which would result in a Phar-Mor Material
Adverse Effect; (ii) any material damage, destruction or loss, whether
covered by insurance or not; (iii) any entry by Phar-Mor into any
commitment or transaction material to it which is not in the ordinary
course of business; (iv) any change by Phar-Mor in accounting principles or
methods except insofar as may have been required by a change in generally
accepted accounting principles; (v) any declaration, payment or setting
aside for payment of any dividends; (vi) any action taken by Phar-Mor of
the type referred to in Section 3.2; or (vii) any agreement by Phar-Mor to
(A) do any of the things described in the preceding clauses (i) through
(vi) other than as expressly contemplated or provided for herein or (B)
take, whether in writing or otherwise, any action which, if taken prior to
the date of this Agreement, would have made any representation or warranty
in this Section 2.2 untrue or incorrect.
(j) Compliance with Law. Phar-Mor has not violated or failed to comply
with any statute, law, ordinance, regulation, rule, order or other legal
requirement of any foreign, federal, state or local government, authority
or any other governmental, quasi-governmental or regulatory department or
agency, or any judgment, decree or order of any court, applicable to its
business or operations, except where any such violations or failures to
comply would not, individually or in the aggregate, have a Phar-Mor
Material Adverse Effect.
(k) Brokers. No broker, finder or investment banker, other than the Phar-
Mor Financial Adviser (whose fees shall have been described to ShopKo in
writing prior to the filing of the Registration Statement) is entitled to
any brokerage, finder's or other fee or commission in connection with the
Reorganization based upon arrangements made by or on behalf of Phar-Mor.
(l) Litigation. Except as disclosed in the Phar-Mor SEC Reports or as set
forth on Schedule 2.2(l), (i) there is no claim, action, proceeding or
investigation pending or, to the knowledge of Phar-Mor, threatened against
or relating to Phar-Mor before any court or governmental or regulatory
authority or body which, individually or in the aggregate, would have a
Phar-Mor Material Adverse Effect and (ii) Phar-Mor is not subject to any
outstanding order, writ, injunction or decree.
(m) Taxes and Tax Returns. Except as set forth on Schedule 2.2(m), Phar-
Mor has (i) duly and timely filed all United States federal and state
income tax and all other returns and reports required to be filed by it
with respect to any taxes, and each such return and report is complete and
accurate in all material respects; and (ii) paid or made adequate provision
for the payment of all federal and other taxes (including, if any,
interest, penalties or additions to tax in respect thereof) that are due
and owing whether or not shown on any return and whether disputed or not,
except in the case of both (i) and (ii) above for such failures to file,
inaccuracies and failures to pay or provide for as would not, individually
or in the aggregate, have a Phar-Mor Material Adverse Effect. Any
deficiencies or assessments asserted in writing by the appropriate taxing
authorities have either been paid, settled or fully provided for. There are
no material claims or assessments (not provided for) pending against Phar-
Mor for any alleged federal or state tax deficiency and no material issue
has been raised in writing by any federal or state taxing authority or
representative thereof.
(n) Real Estate. Schedule 2.2(n) contains an accurate and complete list
of all real property owned or leased in whole or in part by Phar-Mor and a
list of all indebtedness secured by a Lien. Except as disclosed on Schedule
2.2(n), Phar-Mor has good and marketable title to all the real property
owned by it as reflected in the unaudited consolidated balance sheet as of
March 31, 1996, free and clear of all Liens and a valid leasehold interest
in all real property shown on Schedule 2.2(n) as leased by it. To the
knowledge of Phar-Mor, all of the buildings, structures and appurtenances
situated on the real property owned or leased in whole or in part by Phar-
Mor are in good operating condition and in a state of good maintenance and
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repair, except for such conditions which would not, individually or in the
aggregate, have a Phar-Mor Material Adverse Effect, are adequate and
suitable for the purposes for which they are presently being used, and,
with respect to each, Phar-Mor has adequate rights of ingress and egress
for operation of the business of Phar-Mor in the ordinary course. To the
knowledge of Phar-Mor, none of such buildings, structures or appurtenances
(or any equipment therein), nor the operation or maintenance thereof,
violates any restrictive covenant or any provision of federal, state or
local law, ordinance, rule or regulation, or encroaches on any property
owned by others, except for such violations and encroachments which would
not, individually or in the aggregate, have a Phar-Mor Material Adverse
Effect. No condemnation proceeding is pending or, to the knowledge of Phar-
Mor, threatened which would materially preclude or impair the use of any
such property by Phar-Mor for the purposes for which it is currently used.
Schedule 2.2(n) sets forth all contractual use restrictions on all real
property owned or leased by Phar-Mor.
(o) Licenses, Permits and Authorizations. Phar-Mor has all approvals,
authorizations, qualifications, consents, licenses, franchises, orders and
other permits of all governmental, quasi-governmental or regulatory
agencies or authorities, whether federal, state or local, domestic or
foreign, necessary to enable Phar-Mor to continue to conduct its business
as currently being conducted, except where any failure to have any thereof,
individually or in the aggregate, would not have a Phar-Mor Material
Adverse Effect. Each of the foregoing is in full force and effect and Phar-
Mor is in material compliance with all of its obligations with respect
thereto, and, to the knowledge of Phar-Mor no event has occurred which
permits, or upon the giving of notice or the lapse of time or otherwise
would permit, revocation, nonrenewal, modification, suspension or
termination of any of the foregoing.
(p) ERISA and Employee Matters:
(i) Schedule 2.2(p) contains a true and complete list of each
"employee benefit plan," as defined in Section 3(3) of ERISA, and of
all other plans, programs, agreements or arrangements, currently
maintained by Phar-Mor or any trade or business, whether or not
incorporated, which is part of a controlled group within the meaning of
Section 414(b), (c) or (m) of the Code with Phar-Mor (collectively, the
"Phar-Mor Group") or under which any member of the Phar-Mor Group has
any liability in respect of current or former employees or their
dependents or beneficiaries (collectively, the "Phar-Mor Benefit
Plans"). All of the Phar-Mor Benefit Plans which constitute employee
"pension plans" as defined in Section 3(2) of ERISA are referred to
herein as the "Phar-Mor Pension Plans." Each of the Phar-Mor Benefit
Plans is administered and is in compliance with the terms thereof and
the applicable provisions of ERISA and the Code, and any applicable
qualification requirements of the Code except for such violations which
would not, individually or in the aggregate, have a Phar-Mor Material
Adverse Effect. The Phar-Mor Group has fulfilled its obligations under
the minimum funding standards of ERISA and the Code with respect to
each Phar-Mor Pension Plan, and the Phar-Mor Group has not incurred,
and the Phar-Mor Group does not have any knowledge of any event or
condition which would cause the Phar-Mor Group to incur, any liability
to the Pension Benefit Guaranty Corporation, any trustee under Section
4049 of ERISA, or any Phar-Mor Pension Plan in connection with the
termination of any Phar-Mor Pension Plan under Title IV of ERISA. No
Phar-Mor Pension Plan has an accumulated or waived funding deficiency,
or has applied for an extension of any amortization period within the
meaning of Section 412 of the Code and no event or condition exists
which could be deemed a reportable event within the meaning of Section
4043 of ERISA. Each Phar-Mor Pension Plan which is intended to be a
qualified plan under Section 401(a) of the Code is so qualified and has
received a favorable determination letter from the Internal Revenue
Service and nothing has occurred since the dates of such letters to
cause them to be no longer effective. The Internal Revenue Service is
not auditing, and has not notified any member of the Phar-Mor Group
that it intends to audit, any Phar-Mor Pension Plan. Phar-Mor has
previously delivered to ShopKo with respect to each Phar-Mor Benefit
Plan, true and correct copies of (A) each Phar-Mor Benefit Plan (or, in
the case of an oral or informal Phar-Mor Benefit Plan, a written
description thereof); (B) the most recent annual report, if required
(Form 5500 series); (C) the most recent actuarial valuation report, if
required; and (iv) the most recent Summary Plan Description, as
described in Section 102(a)(1) of ERISA, if applicable.
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(ii) The aggregate actuarial present value of accrued benefits (both
vested and unvested) of Phar-Mor Pension Plans subject to Title IV of
ERISA does not exceed the aggregate fair market value of the assets of
such Phar-Mor Pension Plans by more than $100,000 based upon the
actuarial assumptions used in funding such plans for the 1995
valuation, which assumptions are reasonable in light of the experience
of such plans.
(iii) Except as set forth on Schedule 2.2(p), there are no pending
claims or lawsuits which have been asserted or instituted (other than
in respect of benefits due in the ordinary course which, in the
aggregate, are not material) against the assets of any of the Phar-Mor
Benefit Plans or against the Phar-Mor Group or any fiduciary of the
Phar-Mor Benefit Plans with respect to the Phar-Mor Benefit Plans.
(iv) As of the date hereof, there are no benefits to be provided to
current or future retirees under any "welfare benefit plans" within the
meaning of Section 3(1) of ERISA which are maintained by the Phar-Mor
Group, except as set forth on Schedule 2.2(p).
(v) The Phar-Mor Group has not maintained or contributed to, or been
obligated or required to contribute to, a "multiemployer plan," as such
term is defined in Section 3(37) of ERISA, and no withdrawal liability
has been incurred by or asserted against any member of the Phar-Mor
Group with respect to a withdrawal from any multiemployer pension plan,
and the Phar-Mor Group does not have any knowledge of any event or
condition which would cause any of the Phar-Mor Group to incur any such
withdrawal liability.
(vi) Except as set forth in Schedule 2.2(p), no Phar-Mor Benefit Plan
exists which would result in the payment to any individual of any money
or other property or rights or accelerate or provide any other rights
or benefits to any individual as a result of the transactions
contemplated by this Agreement that would constitute an "excess
parachute payment" within the meaning of section 280G of the Code.
(q) Environmental Matters. Except as set forth on Schedule 2.2(q):
(i) To the knowledge of Phar-Mor, Phar-Mor has complied in all
material respects with all applicable Environmental Laws and the
requirements of any permits issued under such Environmental Laws. There
are no pending or, to the knowledge of Phar-Mor, threatened
Environmental Claims against or affecting Phar-Mor or any real property
owned or operated by Phar-Mor that, individually or in the aggregate,
would have a Phar-Mor Material Adverse Effect. To the knowledge of
Phar-Mor, there are no facts, circumstances, conditions or occurrences
affecting any real property owned or operated by Phar-Mor or on any
property adjoining or in proximity to such real property that, to the
knowledge of Phar-Mor, would (i) form the basis of an Environmental
Claim against Phar-Mor or have a Phar-Mor Material Adverse Effect, or
(ii) with respect to owned property, cause such real property to be
subject to any material restrictions on the ownership, occupancy, use
or transferability of such real property under any applicable
Environmental Law.
(ii) To the knowledge of Phar-Mor, Hazardous Materials have not at
any time been generated, used, treated or stored on any real property
owned or operated by Phar-Mor where such generation, use, treatment or
storage has violated any Environmental Law. Hazardous Materials have
not at any time been Released by Phar-Mor on or from any such real
property where such Release has violated any applicable Environmental
Law. Except as set forth on Schedule 2.2(q), to the knowledge of
Phar-Mor, there are not now any underground storage tanks located on
any real property owned or currently operated by Phar-Mor and no
storage tanks have been removed from any such real property since
December 31, 1992.
(iii) Notwithstanding anything to the contrary in this Section
2.2(q), the representations made in this Section 2.2(q) shall only be
untrue if the aggregate effect of all failures and noncompliance of the
types described above would have a Phar-Mor Material Adverse Effect.
(r) Employees; Labor Relations:
(i) Schedule 2.2(r) contains a true and complete list of all Phar-Mor
contracts, agreements, plans, arrangements, commitments and
understandings (formal and informal) pertaining to terms of
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employment, compensation, bonuses, profit sharing, stock purchases,
stock repurchases, stock options, commissions, incentives, loans or
loan guarantees, severance pay or benefits, with any current or former
Phar-Mor officer or director, or any current Phar-Mor employees, and
true and complete copies of all such contracts, agreements, plans,
arrangements and understandings have been delivered to Phar-Mor.
Schedule 2.2(r) contains a true and complete list of all labor,
collective bargaining, union and similar agreements under or by which
Phar-Mor is obligated, and true and complete copies of all such
agreements have been delivered to Phar-Mor. Except as set forth on
Schedule 2.2(r), neither Parent nor Phar-Mor will have any
responsibility for continuing any Person in the employ of Phar-Mor from
and after the Effective Date or have any liability for any severance
payments to or similar arrangements with any such Person who shall
cease to be an employee of Phar-Mor at or prior to the Effective Date.
(ii) Phar-Mor is not engaged in any unfair labor practice that would
have a Phar-Mor Material Adverse Effect. There is (i) no unfair labor
practice complaint pending against Phar-Mor or, to the knowledge of
Phar-Mor, threatened against Phar-Mor, before the National Labor
Relations Board or other governmental quasi-governmental or regulatory
agency, body or authority, and no grievance or arbitration proceeding
arising out of or under any collective bargaining agreement is so
pending against Phar-Mor or, to the knowledge of Phar-Mor, threatened
against Phar-Mor, (ii) no strike, labor dispute, slowdown or stoppage
pending against Phar-Mor or, to the knowledge of Phar-Mor, threatened
against Phar-Mor and (iii) to the knowledge of Phar-Mor, no union
representation question existing with respect to the employees of Phar-
Mor.
(s) Intellectual Property. Schedule 2.2(s) sets forth a correct and
complete list of all material trademarks, service marks, trade names, or
rights with respect to the foregoing, applied for, issued to or owned by
Phar-Mor or under which Phar-Mor is licensed or franchised, all of which
are valid, in good standing and, to the knowledge of Phar-Mor, uncontested,
except as set forth on Schedule 2.2(s). Phar-Mor owns or has valid licenses
or other rights to use all the material trademarks, service marks, trade
names, or rights with respect to the foregoing (the "Phar-Mor Intellectual
Property") which are necessary for the present conduct of its business.
Except as set forth on Schedule 2.2(s), no proceedings have been instituted
or are pending or, to the knowledge of Phar- Mor, threatened that challenge
the validity of its ownership of, or licenses or other rights to use, any
Phar-Mor Intellectual Property. Except as set forth on Schedule 2.2(s), the
present employment of the Phar-Mor Intellectual Property by Phar-Mor, if
any, does not, to the knowledge of Phar-Mor, infringe any rights of any
Person. Except as set forth on Section 2.2(s), to the knowledge of Phar-
Mor, no trademark, service mark, trade name, or other material currently
being sold or employed by any Person infringes any rights of Phar-Mor with
respect to the Phar-Mor Intellectual Property. Notwithstanding anything to
the contrary in this Section 2.2(s), the representations made in this
Section 2.2(s) shall only be untrue if the aggregate effect of all failures
and noncompliance of the types described above would have a Phar-Mor
Material Adverse Effect.
(t) Opinion of Phar-Mor Financial Adviser. Phar-Mor has received the
written opinion of the Phar-Mor Financial Adviser, dated as of the date
hereof, that the Phar-Mor Plan is fair to Phar-Mor's shareholders from a
financial point of view.
(u) Registration Rights. Except as provided in Schedule 2.2(u), Phar-Mor
has not granted or agreed to grant any registration rights, including
piggyback rights, to any Person.
(v) Commission Documents. Phar-Mor has delivered to ShopKo true, correct,
and complete copies of each of the Phar-Mor SEC Reports and each exhibit
thereto. As of their respective filing dates, the Phar-Mor SEC Reports
complied in all material respects with the requirements of the Securities
Act and the Exchange Act, as applicable, and taken together, the Phar-Mor
SEC Reports contain no untrue statement of a material fact and did not omit
to state a material fact required to be stated therein or necessary to make
the statements made therein, in light of the circumstances in which they
were made, not misleading except to the extent corrected by a subsequently
filed by Phar-Mor SEC Report.
(w) Registration Statement. None of the information supplied or to be
supplied by Phar-Mor for inclusion in the Registration Statement to be
filed with the Commission and to be distributed in connection
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with the ShopKo Special Meeting and the Phar-Mor Special Meeting to vote
upon the Reorganization, at the time the Registration Statement is declared
effective by order of the Commission, at the time of the ShopKo Special
Meeting and the Phar-Mor Special Meeting, will contain an untrue statement
of a material fact or omit to state any material fact necessary in order to
make the statements therein, in light of the circumstances under which they
were made, not misleading. If at any time prior to the Effective Date any
event with respect to Phar-Mor or its officers and directors shall occur
that is required to be described in the Registration Statement, Phar-Mor
shall notify ShopKo thereof by reference to this section and cooperate with
ShopKo in preparing and filing with the Commission and, as required by law,
disseminating to the shareholders of Phar-Mor and/or ShopKo an amendment or
supplement which accurately describes such event or events in compliance
with all provisions of applicable law.
2.3 REPRESENTATIONS AND WARRANTIES OF PARENT. Parent represents and warrants
to ShopKo as follows:
(a) Organization; Standing and Power. Parent is a corporation duly
organized, validly existing and in good standing under the laws of the
state of Delaware. Parent has all requisite power and authority to own,
lease and operate its properties and to carry on its business to be
conducted following the Reorganization. Parent will at the Effective Date
be duly qualified as a foreign corporation to do business, and be in good
standing, in each jurisdiction where the character of its properties owned
or leased or the nature of its activities will make such qualification
necessary after the Reorganization, except for failures to be so qualified
or in good standing which would not, in the aggregate, have a material
adverse effect on the business, property, assets, liabilities or condition
(financial or otherwise) of Parent (sometimes referred to in this Section
2.3 as a "Parent Material Adverse Effect"). The Certificate of
Incorporation and By-Laws of Parent heretofore delivered to ShopKo, copies
of which are attached hereto as Exhibits C and D, respectively, are
accurate and complete as of the date hereof.
(b) Capitalization. The authorized capital stock of Parent and the
validly issued and outstanding, fully paid and nonassessable shares of the
capital stock of Parent are as set forth on Schedule 2.3(b).
(c) Authority. Parent has the requisite corporate power and authority to
enter into this Agreement, and to perform its obligations hereunder. The
execution and delivery of this Agreement by Parent and the consummation by
Parent of the Reorganization and the Parent Buy Back has been duly
authorized by the Parent Board and the sole stockholder of Parent, and no
other corporate proceedings on the part of Parent are necessary to
authorize the execution, delivery and performance of this Agreement, the
Reorganization and the Parent Buy Back. This Agreement has been duly
executed and delivered by Parent and constitutes a valid and binding
obligation of Parent, enforceable in accordance with its terms, except as
may be limited by applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and other similar laws of general application
that may affect the enforcement of rights of creditors and other obligees
generally and by general equitable principles.
(d) Noncontravention. Neither the execution and delivery of this
Agreement by, nor the consummation of the Reorganization or the Parent Buy
Back, nor compliance by Parent with any of the provisions hereof, will
violate, conflict with, or result in a breach of any provisions of, or
constitute a default (or an event which, with notice or lapse of time or
both, would constitute a default) under, or result in the termination or
suspension of, or accelerate the performance required by, or result in a
right of termination or acceleration under, or result in the creation of
any Lien upon any of the properties or assets of Parent under, any of the
terms, conditions or provisions of the Certificate of Incorporation or By-
Laws of Parent.
(e) Government Approval. Other than in connection with or in compliance
with the provisions of the Delaware Law, the Pennsylvania Law and the
Minnesota Law, the provisions of the Securities Act, the provisions of the
Exchange Act, and the provisions of the HSR Act, no notice to, filing with,
or authorization, consent or approval of, any domestic or foreign public,
governmental, quasi-governmental, or regulatory body, agency or authority
is necessary for the execution and delivery of this Agreement by Parent or
the consummation of any of the transactions contemplated by this Agreement
or compliance by Parent with any of the provisions hereof, except where
failures to give such notices, make such filings, or obtain
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authorizations, consents or approvals would not, in the aggregate, have a
Parent Material Adverse Effect or affect the ability of Parent to
consummate the Reorganization or the Parent Buy Back.
(f) Solvency. Assuming that the representations and warranties of ShopKo
in Section 2.1 and of Phar-Mor in Section 2.2 are true and correct in all
material respects as of the Effective Date, (i) Parent will have sufficient
funds to enable it to make all payments required to consummate the Parent
Buy Back, (ii) the Parent Buy Back will be permissible under Section 173 of
the Delaware Law, (iii) Parent and each of its Subsidiaries will be solvent
on the date of the Parent Buy Back, (iv) Parent will not, nor will any of
its Subsidiaries, become insolvent as a result of the Parent Buy Back, (v)
at the time of the Parent Buy Back, Parent will not be engaged in a
business or transaction, or about to engage in a business or transaction,
for which any property remaining with Parent has an unreasonably small
capital, and (vi) Parent does not, and at the time of the Parent Buy Back
will not, intend to incur, or believe that it would incur, debts that would
be beyond its ability to pay as such debts mature.
(g) Assets; Liabilities. Except for its obligations pursuant to this
Agreement and the Parent Buy Back, Parent has and before the Effective Date
will have, no assets, liabilities, employees or operations. Parent has not
conducted, and before the Effective Date will not conduct, any business.
2.4 KNOWLEDGE. Knowledge which qualifies any representation and warranty of
a party means the actual knowledge of an executive officer (as defined in Rule
3b-7 of the Exchange Act) of such party.
ARTICLE III
Covenants Pending the Reorganization
3.1 CONDUCT OF BUSINESS BY SHOPKO PENDING THE REORGANIZATION. Except as
otherwise expressly contemplated hereby or disclosed on Schedule 3.1, ShopKo
covenants and agrees, with respect to ShopKo and its Subsidiaries (unless the
context otherwise requires, hereinafter any reference in this Section 3.1 to
"ShopKo" shall include each ShopKo Subsidiary, whether held directly or
indirectly by ShopKo), that, prior to the Effective Date, unless Phar-Mor
shall first otherwise expressly agree in writing or as otherwise expressly
contemplated by this Agreement:
(a) ShopKo shall conduct its businesses, or take any action, only in the
ordinary course of business and consistent with past practices, and shall
use its best efforts to maintain and preserve its business organization,
assets, employees and advantageous business relationships, to maintain all
of its properties in useful and good condition, and to continue to be
covered to the fullest extent under the insurance policies carried by
ShopKo, including, without limitation, public liability and property damage
insurance in effect with financially sound and reputable insurance
companies in at least such amounts and against such risks as are currently
covered by such policies;
(b) ShopKo shall comply with (i) all applicable statutes, laws,
ordinances, regulations, rules, orders and other legal requirements of any
foreign, federal, state or local government, authority or any other
governmental department or agency, and any judgments, decrees or orders of
any court, applicable to its business or operations and (ii) all contracts,
commitments and other agreements to which it is a party, except where any
such violations or failures to comply with respect to clauses (i) or (ii)
will not, individually or in the aggregate, result in a ShopKo Material
Adverse Effect.
(c) ShopKo shall not, directly or indirectly, do any of the following:
(i) except in the ordinary course of business and consistent with past
practice, sell, pledge, dispose of or encumber any assets of ShopKo
(including, without limitation, any indebtedness owned or any claims held);
(ii) whether or not in the ordinary course of business or consistent with
past practice, sell or dispose of any material assets of ShopKo; (iii)
amend its articles of incorporation or by-laws or similar organizational
documents; (iv) split, combine or reclassify any shares of its capital
stock or other equity interests or declare, set aside or pay any dividend
or distribution, payable in cash, stock, property or otherwise with respect
to any of its capital stock or other equity interests, except for cash
dividends paid at such times and in such amounts as are consistent
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with ShopKo's past practices (provided, that no cash dividends shall be
declared or paid on the ShopKo Common Shares following the cash dividend to
be paid thereon on September 15, 1996); (v) redeem, purchase or otherwise
acquire any of its capital stock or other equity interests; (vi) adopt a
plan of complete or partial liquidation or resolutions providing for the
complete or partial liquidation, dissolution, merger, consolidation,
restructuring, recapitalization or other reorganization; or (vii) prepare
or file any tax return or tax report inconsistent with past practice or, on
any such return or report, take any position, make any election or adopt
any method that is inconsistent with positions taken, elections made or
methods used in preparing or filing similar returns or reports in prior
periods; or (viii) authorize or propose any of the foregoing, or enter into
any contract, agreement, commitment, understanding or arrangement to do any
of the foregoing;
(d) ShopKo shall not, directly or indirectly, (i) issue, sell, pledge or
dispose of, or authorize, propose or agree to the issuance, sale, pledge or
disposition of, any shares of, or any options, warrants or rights of any
kind to acquire any shares of, or any securities convertible into or
exchangeable or exercisable for any shares of, its capital stock or other
equity interests of any class or any other securities in respect of, in
lieu of, or in substitution for, shares of its common stock or other equity
interests outstanding on the date hereof; (ii) acquire (by merger,
consolidation or acquisition of stock or assets) any corporation,
partnership or other business organization or entity or division thereof,
or make any investment in any entity, either by purchase of stock or other
securities, contributions to capital, property transfer or purchase of any
property or assets, other than cash management transactions in the ordinary
course of business and consistent with past practice; (iii) except in the
ordinary course of business and consistent with past practice, incur any
indebtedness for borrowed money or issue any debt securities or assume,
guarantee, endorse or otherwise as an accommodation become responsible for,
the obligations of any other Person, or make any loans or advances; (iv)
authorize, recommend or propose any change in its capitalization (other
than the incurrence of indebtedness otherwise permitted hereunder); (v)
modify or change in any material respect any existing material license,
lease, contract or other document, other than in the ordinary course of
business and consistent with past practice and other than changes to
employment agreements in connection with the Reorganization; or (vi)
authorize or propose any of the foregoing, or enter into or modify any
contract, agreement, commitment or arrangement to do any of the foregoing;
and
(e) ShopKo shall not take, or agree, in writing or otherwise, to take any
of the foregoing actions or any action which would make any representation
or warranty in Section 2.1 untrue or incorrect in any material respect.
3.2 CONDUCT OF BUSINESS BY PHAR-MOR PENDING THE REORGANIZATION. Except as
otherwise expressly contemplated hereby or disclosed on Schedule 3.2, Phar-Mor
covenants and agrees, with respect to Phar-Mor and its Subsidiaries (unless
the context otherwise requires, hereinafter any reference in this Section 3.2
to "Phar-Mor" shall include each Phar-Mor Subsidiary, whether held directly or
indirectly by Phar-Mor), that, prior to the Effective Date, unless ShopKo
shall first otherwise expressly agree in writing or as otherwise expressly
contemplated by this Agreement:
(a) Phar-Mor shall conduct its businesses, or take any action, only in
the ordinary course of business and consistent with past practices, and
shall use its best efforts to maintain and preserve its business
organization, assets, employees and advantageous business relationships, to
maintain all of its properties in useful and good condition, and to
continue to be covered to the fullest extent under the insurance policies
carried by Phar-Mor, including, without limitation, public liability and
property damage insurance in effect with financially sound and reputable
insurance companies in at least such amounts and against such risks as are
currently covered by such policies;
(b) Phar-Mor shall comply with (i) all applicable statutes, laws,
ordinances, regulations, rules, orders and other legal requirements of any
foreign, federal, state or local government, authority or any other
governmental department or agency, and any judgments, decrees or orders of
any court, applicable to its business or operations and (ii) all contracts,
commitments and other agreements to which it is a party, except where any
such violations or failures to comply with respect to clauses (i) or (ii)
will not, individually or in the aggregate, result in a Phar-Mor Material
Adverse Effect.
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(c) Phar-Mor shall not, directly or indirectly, do any of the following:
(i) except in the ordinary course of business and consistent with past
practice, sell, pledge, dispose of or encumber any assets of Phar-Mor
(including, without limitation, any indebtedness owned or any claims held);
(ii) whether or not in the ordinary course of business or consistent with
past practice, sell or dispose of any material assets of Phar-Mor; (iii)
amend its articles of incorporation or by-laws or similar organizational
documents; (iv) split, combine or reclassify any shares of its capital
stock or other equity interests or declare, set aside or pay any dividend
or distribution, payable in cash, stock, property or otherwise with respect
to any of its capital stock or other equity interests; (v) redeem, purchase
or otherwise acquire any of its capital stock or other equity interests;
(vi) adopt a plan of complete or partial liquidation or resolutions
providing for the complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization;
(vii) prepare or file any tax return or tax report inconsistent with past
practice or, on any such return or report, take any position, make any
election or adopt any method that is inconsistent with positions taken,
elections made or methods used in preparing or filing similar returns or
reports in prior periods; or (viii) authorize or propose any of the
foregoing, or enter into any contract, agreement, commitment, understanding
or arrangement to do any of the foregoing;
(d) Phar-Mor shall not, directly or indirectly, (i) issue, sell, pledge
or dispose of, or authorize, propose or agree to the issuance, sale, pledge
or disposition of, any shares of, or any options, warrants or rights of any
kind to acquire any shares of, or any securities convertible into or
exchangeable or exercisable for any shares of, its capital stock or other
equity interests of any class or any other securities in respect of, in
lieu of, or in substitution for, shares of its common stock or other equity
interests outstanding on the date hereof; (ii) acquire (by merger,
consolidation or acquisition of stock or assets) any corporation,
partnership or other business organization or entity or division thereof,
or make any investment in any entity, either by purchase of stock or other
securities, contributions to capital, property transfer or purchase of any
property or assets, other than cash management transactions in the ordinary
course of business and consistent with past practice; (iii) except in the
ordinary course of business and consistent with past practice, incur any
indebtedness for borrowed money or issue any debt securities or assume,
guarantee, endorse or otherwise as an accommodation become responsible for,
the obligations of any other Person, or make any loans or advances; (iv)
authorize, recommend or propose any change in its capitalization (other
than the incurrence of indebtedness otherwise permitted hereunder); (v)
modify or change in any material respect any existing material license,
lease, contract or other document, other than in the ordinary course of
business and consistent with past practice and other than changes to
employment agreements in connection with the Reorganization; or (vi)
authorize or propose any of the foregoing, or enter into or modify any
contract, agreement, commitment or arrangement to do any of the foregoing;
and
(e) Phar-Mor shall not take, or agree, in writing or otherwise, to take
any of the foregoing actions or any action which would make any
representation or warranty in Section 2.2 untrue or incorrect in any
material respect.
3.3 CONDUCT OF BUSINESS BY PARENT PENDING THE REORGANIZATION. Except as
otherwise expressly contemplated hereby, Parent covenants and agrees that,
before the Effective Date, it shall conduct no business and shall not have any
assets, liabilities, employees or operations.
3.4 CONSENTS. With respect to all leases, licenses, and other contracts and
instruments and rights of any party hereto which require the consent of a
third party in the event of a transaction similar to the Reorganization, such
party shall use its reasonable efforts to obtain, or caused to be obtained,
such consents; provided that no party shall make any payment or deliver value
in excess of $500,000 to obtain such consents without the prior written
consent of the other parties hereto.
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ARTICLE IV
Additional Agreements
4.1 PROXY STATEMENT; OTHER FILINGS.
(a) As promptly as practicable after the date hereof, Parent, Phar-Mor and
ShopKo shall prepare and file with the Commission, and shall use their
respective best efforts to have declared effective or cleared, as the case may
be, by the Commission, a Registration Statement on Form S-4 under the
Securities Act and a joint proxy statement and form of proxy under the
Exchange Act with respect to the Phar-Mor Special Meeting and the ShopKo
Special Meeting. Promptly after such Registration Statement becomes effective
under the Securities Act, Phar-Mor and ShopKo shall mail such proxy statement
and proxy to their respective shareholders. The term "Proxy Statement" shall
mean such joint proxy statement at the time it initially is mailed to holders
of ShopKo Common Shares and Phar-Mor Common Shares and all amendments or
supplements thereto, if any, similarly filed and mailed. As soon as
practicable after the date hereof ShopKo and Phar-Mor shall promptly prepare
and file any other filings required under the Exchange Act or any other
federal or state securities law relating to the Reorganization and the
transactions contemplated herein ("Other Filings"). ShopKo and Phar-Mor shall
use their respective best efforts to obtain and furnish the information
required to be included in the Proxy Statement and any Other Filings and to
respond promptly to any comments made by the Commission or any other
governmental official with respect to the Proxy Statement and any Other Filing
and any preliminary version thereof. The information provided and to be
provided by ShopKo and Phar-Mor, respectively, for use in the Proxy Statement
and any Other Filings shall not, on the date the Proxy Statement is first
mailed to holders of ShopKo Common Shares or Phar-Mor Common Shares or any
Other Filing is filed with the appropriate governmental official and, in the
case of the Proxy Statement, on the dates of the ShopKo Special Meeting or the
Phar-Mor Special Meeting, respectively, contain any statement which, at the
time of and in light of the circumstances under which it is made, is false and
misleading with respect to any material fact, or omit to state any material
fact required to be stated therein or necessary in order to make the
statements therein not false or misleading or necessary to correct any
statement in any earlier communication which has become false or misleading,
and ShopKo and Phar-Mor each agree to correct any such information provided by
it for use in the Proxy Statement or any Other Filings which shall have become
false or misleading. The Proxy Statement shall comply as to form in all
material respects with all applicable requirements of federal and state
securities laws.
(b) Parent shall take such action as may be reasonably required to cause the
Parent Common Shares issuable in the Reorganization to be registered or to
obtain an exemption from registration under applicable state "blue sky" or
securities laws; provided, however, that Parent shall not be required to
register or qualify as a foreign corporation or to take other action which
would subject it to service of process in any jurisdiction where it will not
be, following the Effective Date, so subject.
4.2 SHAREHOLDER APPROVALS.
(a) ShopKo shall, as soon as reasonably practicable after the date hereof,
(i) take all steps necessary duly to call, give notice of, convene and hold a
special meeting of its shareholders ("ShopKo Special Meeting") for the purpose
of securing the approval and adoption of the ShopKo Plan by the holders of a
majority of the issued and outstanding ShopKo Common Shares ("ShopKo
Shareholders' Approval"), (ii) distribute to its shareholders the Proxy
Statement in accordance with applicable federal and state law and with its
articles of incorporation and by-laws, (iii) subject to the fiduciary duties
of the ShopKo Board, recommend to its shareholders the approval of the ShopKo
Plan, and (iv) cooperate and consult with Phar-Mor with respect to each of the
foregoing matters.
(b) Phar-Mor shall, as soon as reasonably practicable after the date hereof,
(i) take all steps necessary to call, give notice of, convene and hold a
special meeting of its shareholders ("Phar-Mor Special Meeting") for the
purpose of securing the approval and adoption of the Phar-Mor Plan by the
holders of a majority of the issued and outstanding Phar-Mor Common Shares
("Phar-Mor Shareholders' Approval"), (ii) distribute to its shareholders the
Proxy Statement in accordance with applicable federal and state law and its
articles of
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incorporation and by-laws, (iii) subject to the fiduciary duties of the Phar-
Mor Board, recommend to its shareholders the approval of the Phar-Mor Plan,
and (iv) cooperate and consult with ShopKo with respect to each of the
foregoing matters.
(c) The ShopKo Special Meeting for the purpose of securing the ShopKo
Shareholders' Approval and the Phar-Mor Special Meeting for the purpose of
securing the Phar-Mor Shareholders' Approval, shall be held on or before such
date or dates as ShopKo and Phar-Mor shall jointly determine.
4.3 LEGAL REQUIREMENTS FOR REORGANIZATION.
(a) ShopKo will take all reasonable actions necessary to comply promptly
with all legal requirements which may be imposed on it with respect to the
Reorganization and will promptly cooperate with and furnish information to
Phar-Mor in connection with any such requirements imposed upon Phar-Mor or any
Phar-Mor Subsidiary in connection with the Reorganization.
(b) Phar-Mor will take all reasonable actions necessary to comply promptly
with all legal requirements which may be imposed on it with respect to the
Reorganization and will promptly cooperate with and furnish information to
ShopKo in connection with any such requirements imposed upon either ShopKo or
any ShopKo Subsidiary in connection with the Reorganization.
(c) ShopKo and Phar-Mor shall each file or cause to be filed with the
Federal Trade Commission and the Department of Justice any notifications
required to be filed under the HSR Act, and the rules and regulations
promulgated thereunder with respect to the Reorganization Plan, and shall use
all commercially reasonable efforts to make such filing promptly and to
respond promptly to any requests for additional information made by either of
such governmental authorities.
4.4 LISTING APPLICATION. Parent shall prepare and submit to the New York
Stock Exchange ("NYSE") a listing application covering Parent Common Shares to
be issued in the Reorganization, and shall use all reasonable efforts to
obtain, prior to the Effective Date, approval for the listing of such Parent
Common Shares upon official notice of issuance; provided, that if such
approval is not obtained, Parent shall promptly prepare and submit to Nasdaq a
listing application covering Parent Common Shares to be issued in the
Reorganization, and shall use all reasonable efforts to obtain, prior to the
Effective Date, approval for the listing of such Parent Common Shares upon
official notice of issuance.
4.5 EMPLOYMENT AGREEMENTS.
(a) Phar-Mor. Subject to the terms and conditions of such agreements and
arrangements, all existing employment agreements and severance arrangements
between Phar-Mor and any of its employees including all related health
benefits, will remain in place and be unaffected by the Reorganization.
(b) ShopKo. All existing employment agreements and severance arrangements
between ShopKo and its any of its employees including all related health
benefits, will remain in place and be unaffected by the Reorganization;
provided, that the existing severance agreements between ShopKo and Dale P.
Kramer, William J. Podany and Jeffrey A. Jones shall, in connection with the
Reorganization, be superseded by employment agreements substantially in the
forms attached hereto as Exhibits E, F and G, respectively.
4.6 INVESTIGATIONS. Subject to currently existing contractual and legal
restrictions applicable to ShopKo (which ShopKo represents and warrants are
not material) or to Phar-Mor (which Phar-Mor represents and warrants are not
material), and upon reasonable notice, each of ShopKo and Phar-Mor shall (and
shall cause each of its Subsidiaries to) afford to officers, employees,
counsel, accountants and other authorized representatives of the other party
("Respective Representatives") access, during normal business hours throughout
the period prior to the Effective Date or until this Agreement is terminated,
to its properties, books and records (including, without limitation, the work
papers of independent accountants) and, during such period, shall (and shall
cause each of its Subsidiaries to) furnish promptly to such Respective
Representatives all
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information concerning its business, properties and personnel as may
reasonably be requested; provided that no investigation pursuant to this
Section shall affect or be deemed to modify any of the respective
representations or warranties made by ShopKo or Phar-Mor.
4.7 CONFIDENTIALITY.
(a) Except for the use of information as required in connection with the
Registration Statement and any other governmental filings required in order to
complete the transactions contemplated herein, all information received by
ShopKo, Phar-Mor, or Parent and their respective representatives pursuant to
the terms of this Agreement (or as part of any due diligence investigation
conducted in connection prior to the execution thereof) shall be kept in
strictest confidence by the receiving party and its representatives. If the
Reorganization shall fail to be consummated, all copies of documents or
extracts thereof containing information and data as to one of the other
parties, including all information prepared by the receiving party or such
receiving party's representatives, shall be turned over to the party
furnishing the same, except that such information prepared by the receiving
party or such receiving party's representatives may be destroyed at the option
of the receiving party, with notice of such destruction (or return) to be
confirmed in writing to the disclosing party. Any information not so destroyed
(or returned) shall remain subject to these confidentiality provisions until
the second anniversary of the Effective Date.
(b) The foregoing confidentiality provisions shall not apply to such
portions of the information received which (i) are or become generally
available to the public through no action by the receiving party or by such
party's representatives or (ii) are or become available to the receiving party
on a nonconfidential basis from a source other than the disclosing party or
its representatives, which the receiving party believes, after reasonable
inquiry, it is not prohibited from disclosing such portions to it by a
contractual, legal or fiduciary obligation, and shall not apply to any
disclosure by Parent of any information disclosed by ShopKo or Phar-Mor, so
long as such disclosure occurs after the Closing.
4.8 NO SOLICITATION OF EMPLOYEES. Except as otherwise contemplated by the
terms of this Agreement, from the date of this Agreement through the Effective
Date and, in the event of a termination of this Agreement prior to Closing,
for a period of twelve months following the date of such termination, no party
hereto shall solicit the services of any then current employee of any other
party hereto without the express written consent of such other party.
4.9 BEST EFFORTS; ADDITIONAL AGREEMENTS AND PROVISIONS. Subject to the terms
and conditions of this Agreement and the fiduciary duties of the Phar-Mor
Board and the ShopKo Board, respectively, under applicable law (as determined
in good faith by such board based on the advice of outside counsel), 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 under applicable laws and regulations to consummate and
make effective the transactions contemplated by this Agreement, including,
without limitation, the financing contemplated in Section 5.1(i). If any time
after the Effective Date any further action is necessary or desirable to carry
out the purposes of this Agreement, the proper officers and directors of each
party to this Agreement shall take all such necessary action. The parties
hereto agree to use their respective reasonable efforts to challenge any
action, including using all reasonable efforts to have any order or injunction
vacated or reversed, brought against any of the parties hereto seeking a
temporary restraining order or preliminary or permanent injunctive relief
which would prohibit, or materially interfere with, the consummation of the
transactions contemplated by this Agreement. Without limiting the foregoing
provisions of this Section 4.9, each of Phar-Mor and ShopKo acknowledge and
agree that, prior to the Effective Date, and subject to the provisions of this
Agreement including, without limitation, the covenants set forth in Article
III hereof, Phar-Mor and ShopKo shall continue to conduct their respective
businesses independently and there will be no transactions between Phar-Mor
and ShopKo without the consent of their respective boards of directors;
provided, that each of the parties hereto shall cooperate, and shall use its
reasonable efforts to cause its respective officers to cooperate, with each
other party hereto so as to satisfy the conditions as to financing hereunder
and to plan an expeditious and orderly integration
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of the businesses and operations of ShopKo and Phar-Mor as soon as practicable
following consummation of the Reorganization.
4.10 NO SOLICITATIONS. Each party hereto shall not, and shall cause its
Subsidiaries and its officers, directors, agents, representatives and
affiliates not to, directly or indirectly: 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, or, in
the event of any unsolicited Takeover Proposal, engage in negotiations or
provide any confidential information or data to any Person relating to any
Takeover Proposal. Each party hereto shall notify the other party orally and
in writing of any inquiries, offers or proposals concerning any Takeover
Proposal (including, without limitation, the terms and conditions of any such
inquiry, offer or proposal and the identity of the Person making it), within
24 hours of the receipt thereof and shall give the other party five days'
advance written notice of any agreement to be entered into with or any
information to be supplied to any Person making such inquiry, offer or
proposal in accordance with the last sentence of this Section 4.10. Each party
hereto shall immediately cease and cause to be terminated all existing
discussions and negotiations, if any, with any parties conducted heretofore
with respect to any Takeover Proposal. As used in this Section 4.10, "Takeover
Proposal" shall mean any tender or exchange offer, proposal for a merger,
consolidation or other business combination involving a substantial equity
interest in or a substantial portion of the assets of ShopKo or Phar-Mor, or
any proposal or offer to acquire in any manner a substantial equity interest
in, or a substantial portion of the assets of, ShopKo or Phar-Mor other than
pursuant to the transactions contemplated by this Agreement. Notwithstanding
anything in this Section 4.10 to the contrary, unless the ShopKo Shareholders'
Approval and the Phar-Mor Shareholders' Approval have been obtained, any party
hereto may, to the extent required by the fiduciary duties of the Board of
Directors of such party under applicable law (as determined in good faith by
the Board of Directors of such party based on the advice of outside counsel),
participate in discussions or negotiations with, furnish information to, and
afford access to the properties, books and records of such party and its
Subsidiaries to any Person in connection with a possible Takeover Proposal
with respect to such party by such Person.
4.11 AFFILIATES. Phar-Mor and ShopKo each will use its best efforts to
obtain and deliver on or prior to the Effective Date written undertakings from
all Persons who, it reasonably believes, are "Affiliates" of Phar-Mor or
ShopKo within the meaning of Rule 145 promulgated by the Commission under the
Securities Act, which undertakings shall, in form and substance reasonably
satisfactory to Swidler & Berlin, Chartered, obligate such "Affiliates" not to
sell or otherwise dispose of any of the Parent Common Shares received by them
pursuant to the Reorganization in violation of the registration requirements
of the Securities Act or the rules and regulations of the Commission
promulgated thereunder. Such undertakings shall provide that such "Affiliates"
agree that for a reasonable period of time following the consummation of the
Reorganization there may be placed upon the certificates representing Parent
Common Shares received by them pursuant to the Reorganization, or any
substitutions therefor, a legend stating in substance that Parent may refuse
to transfer such shares in the absence of an effective registration statement
as to such transfer, or an opinion of counsel reasonably satisfactory to
Swidler & Berlin, Chartered that such registration is not required; provided,
however, Parent agrees to remove such legend at such time as the prohibitions
are no longer in effect.
4.12 PERIODIC REPORTS. Each of Phar-Mor and ShopKo covenants that it will
file with the Commission on a timely basis all periodic reports required to be
filed by it by the federal securities laws and the rules and regulations of
the Commission thereunder from the date of this Agreement through the
Effective Date, and that each such report will not contain any untrue
statement of material fact or omit to state any material fact required to be
stated therein or necessary to make statement therein, in the light of the
circumstances under which they were made, not misleading.
4.13 DIRECTORS' AND OFFICERS' INDEMNIFICATION. It is understood and agreed
that each of Phar-Mor and ShopKo shall continue to keep in full force and
effect (a) the provisions of its respective Articles of Incorporation and
Bylaws regarding indemnification and limitation of liabilities of officers and
directors and (b) for a period of six years after expiration of the respective
policies as currently in force, the existing "directors' and officers'
insurance" coverage maintained by each of Phar-Mor and ShopKo. This Section
4.13 shall survive the
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consummation of the Reorganization. At the consummation of the Reorganization,
and as a condition thereto, Phar-Mor and ShopKo shall each affirm in writing
to each of its respective officers and directors the obligations of Phar-Mor
and ShopKo, respectively, under this Section 4.13. Parent shall guarantee the
obligations of Phar-Mor and ShopKo under this Section 4.13.
4.14 PARENT BUY BACK. Parent covenants and agrees that, immediately upon the
effectiveness of the Reorganization, it shall consummate the Parent Buy Back,
subject to the terms and conditions of the Stock Purchase Agreement. In the
event of termination of this Agreement other than as a result of a material
breach hereof by ShopKo, on the one hand, or Phar-Mor, on the other, all
expenses, fees (including filing fees), financing commitment and other costs
incurred by the parties hereto in connection with the Parent Buy-Back
Financing shall be borne 75% by ShopKo and 25% by Phar-Mor.
4.15 EXPENSES. Except as otherwise provided in Sections 4.14 and 6.2, each
party shall bear its respective expenses and legal fees incurred with respect
to this Agreement and the transactions contemplated hereby.
ARTICLE V
Conditions Precedent
5.1 CONDITIONS TO THE OBLIGATIONS OF EACH PARTY TO EFFECT THE
REORGANIZATION. The respective obligations of each of the parties to effect
the Reorganization shall be subject to the satisfaction or waiver of each of
the following conditions:
(a) Approval of Holders of Phar-Mor Common Shares. The Phar-Mor Plan
shall have been approved and adopted by the required affirmative vote of
the holders of the outstanding Phar-Mor Common Shares in accordance with
Pennsylvania Law and Phar-Mor's Articles of Incorporation and Bylaws voting
at a meeting in which a quorum is present.
(b) Approval of Holders of ShopKo Common Shares. The ShopKo Plan shall
have been approved and adopted by the required affirmative vote of the
holders of the outstanding ShopKo Common Shares in accordance with
Minnesota Law and ShopKo's Articles of Incorporation and Bylaws voting at a
meeting in which a quorum is present.
(c) Registration Statement. The Registration Statement shall have been
declared effective and shall be effective on the Effective Date, and no
stop order suspending effectiveness shall have been issued, no action,
suit, proceeding or investigation by the Commission to suspend the
effectiveness thereof shall have been initiated and be continuing, and all
necessary approvals under state securities laws or the Securities Act or
Exchange Act relating to the issuance or trading of the Parent Common
Shares shall have been received and shall be in full force and effect.
(d) HSR Act. Any waiting period (and any extension thereof) applicable to
the consummation of the Reorganization under the HSR Act shall have expired
or been terminated.
(e) Injunction. On the Effective Date there shall be no judgment, decree,
injunction, ruling or order of any court, governmental department,
authority, commission, agency or instrumentality outstanding against
Parent, Phar-Mor or ShopKo which prohibits, restricts or delays
consummation of the Reorganization or the Parent Buy Back or the
satisfaction of any of the conditions to the consummation of the
Reorganization or the Parent Buy Back, or limits in any material respect
the right of Parent to control, from and after the Effective Date (i)
ShopKo or any material aspect of the business of ShopKo and the ShopKo
Subsidiaries or (ii) Phar-Mor or any material aspect of the business of
Phar-Mor and the Phar-Mor Subsidiaries.
(f) Exchange Listing. The Parent Common Shares required to be issued
hereunder shall have been approved for listing on NYSE or Nasdaq, subject
to official notice of issuance.
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(g) Credit Facilities. Each of ShopKo and Phar-Mor shall have received
written confirmation of the continuation of their respective existing
financing facilities prior to or effective as of Closing, or, in the
alternative, a working capital facility commitment in form and substance
reasonably acceptable to Phar-Mor and ShopKo, to be entered into prior to
or concurrently with the Closing.
(h) Dissenters' Rights. Holders of ShopKo Common Shares holding in excess
of 5% of the ShopKo Common Shares shall not have exercised appraisal rights
under Minnesota Law.
(i) Parent Buy Back. At the Effective Date, there shall exist no
condition or circumstance that would reasonably be expected to prevent or
delay the consummation of the transactions contemplated in that certain
Stock Purchase Agreement among Parent, Supervalu and Supermarket, dated as
of the date of this Agreement, a copy of which is attached hereto as
Exhibit H (the "Stock Purchase Agreement"), pursuant to which, immediately
following the consummation of the Reorganization, Parent will on the
Effective Date acquire all of the Parent Common Shares received by
Supermarket as a result of the Reorganization (the "Parent Buy Back"). All
documentation, payments and deliveries necessary to consummate the Parent
Buy Back pursuant to the terms of the Stock Purchase Agreement shall be
completed at or before Closing and held in escrow pending the Effective
Date. Without limiting the foregoing, at the Effective Date, Parent shall
have received a financing commitment or other reasonable assurances from
one or more underwriters, placement agents or other financing sources (on
terms and conditions reasonably acceptable to each of Parent, Phar-Mor and
ShopKo) that Parent (together with its Subsidiaries from and after the
Effective Date) may obtain financing of at least $100 million (the "Parent
Buy-Back Financing"), and all documents and deliveries necessary to
consummate such financing shall be completed at or before Closing and held
in escrow pending the Effective Date. Notwithstanding any provision to the
contrary, the conditions set forth in this Section 5.1(i) may not be waived
without the prior written consent of Supervalu, which consent may not be
unreasonably withheld or delayed.
(j) Solvency Opinion. Each of Parent, Phar-Mor, Supervalu and ShopKo
shall have received a solvency opinion from a nationally recognized
valuation firm reasonably acceptable to each of Parent, Phar-Mor and
ShopKo, dated the Effective Date, in a form reasonably acceptable to
Parent, Phar-Mor and ShopKo.
5.2 ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF PHAR-MOR AND PARENT. The
obligations of Phar-Mor and Parent to effect the Reorganization are also
subject to the satisfaction or waiver of each of the following conditions, as
determined by the Phar-Mor Board:
(a) Agreements. ShopKo shall have performed in all material respects each
covenant, agreement, obligation and condition to be performed or complied
with by it hereunder on or prior to the Effective Date.
(b) Representations and Warranties. The representations and warranties of
ShopKo set forth in this Agreement shall be true and correct in all
material respects at and as of the Effective Date as if made at and as of
such time, except to the extent that any such representation or warranty is
made as of a specified date, in which case such representation or warranty
shall have been true and correct in all material respects as of such date.
(c) Officer's Certificate. Phar-Mor shall have received a certificate,
dated as of the Effective Date, of the President or a Vice President of
ShopKo to the effect that, to the best of the knowledge, information and
belief of such officer, the conditions specified in paragraphs (a) and (b)
above have been fulfilled.
(d) Lack of Adverse Change. Since the date hereof, there shall have been
no ShopKo Material Adverse Effect.
(e) Consents from Third Parties. All necessary consents set forth on
Schedule 5.2 in connection with the transactions contemplated by this
Agreement shall have been received.
(f) Tax Effect of the Reorganization. Phar-Mor shall have received an
opinion dated as of the Effective Date from Swidler & Berlin, Chartered,
counsel for Phar-Mor, to the effect that the Reorganization will be
treated, for federal income tax purposes, as a tax-free transfer of
property to Parent by the holders
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of Phar-Mor Common Shares, to the extent such holders receive Parent Common
Shares in the Reorganization.
(g) Letters from Accountants. Parent and Phar-Mor shall have received two
letters, one dated as of the date the Proxy Statement is mailed to the
shareholders of ShopKo and the other dated as of the Effective Date, from
Deloitte & Touche confirming that they are independent accountants with
respect to ShopKo and its Subsidiaries, and stating in effect that (i) in
their opinion the financial statements examined by them and included or
incorporated by reference in the Proxy Statement comply as to form in all
material respects with the applicable accounting requirements of the
Securities Act, the Exchange Act and the published rules and regulations
thereunder, and (ii) on the basis of a reading of the latest available
interim financial statements of ShopKo and its Subsidiaries, inquiries of
officials of ShopKo and its Subsidiaries responsible for financial and
accounting matters, and a reading of the minutes of ShopKo and its
Subsidiaries as set forth in the minute books to a specified day not more
than five days prior to the date of delivery of such letter, nothing came
to their attention that caused them to believe that:
(i) any unaudited consolidated condensed financial statements of
ShopKo and its Subsidiaries in the Proxy Statement do not comply as to
form in all material respects with the applicable accounting
requirements of the Securities Act and the published rules and
regulations thereunder and are not in conformity with generally
accepted accounting principles applied on a basis substantially
consistent with that of the most recent ShopKo audited financial
statements included in, or incorporated into, the Proxy Statement;
(ii) any unaudited consolidated financial statements of ShopKo and
its Subsidiaries prepared subsequent to the date of the Proxy Statement
are not prepared on a basis substantially consistent with that of the
most recent ShopKo audited financial statements included in, or
incorporated into, the Proxy Statement; and
(iii) for the period subsequent to the date of the latest available
unaudited consolidated financial statements of ShopKo and its
Subsidiaries and as of a specified date not more than five (5) days
prior to the date of delivery of such letter, there was any change in
capital stock and any increases in consolidated long-term debt or any
decrease in consolidated net assets as compared with amounts shown on
the most recent unaudited ShopKo balance sheet included in, or
incorporated into, the Proxy Statement, except for any change, increase
or decrease which the Proxy Statement discloses has occurred or may
occur;
(h) ShopKo Exchange. The ShopKo Exchange shall be consummated, in
accordance with the provisions hereof (without amendment, variance or
waiver of any provision unless approved in writing by Phar-Mor) as of the
Effective Date, simultaneously with consummation of the Phar-Mor Exchange.
(i) Resignation of ShopKo Board. Each member of the ShopKo Board shall
have submitted a written resignation to ShopKo, with copies to Phar-Mor,
which resignations shall be effective as of the Effective Date.
(j) Termination of Rights Agreement. Effective on or before the Effective
Date, the ShopKo Board shall have terminated the Rights Agreement dated
July 3, 1996, between ShopKo and Norwest Bank Minnesota, National
Association, and evidence of such termination shall be submitted to Phar-
Mor at Closing.
5.3 ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF SHOPKO. The obligations of
ShopKo to effect the Reorganization are also subject to the satisfaction or
waiver of each of the following conditions, as determined by the ShopKo Board:
(a) Agreements. Phar-Mor shall have performed in all material respects
each covenant, agreement, obligation and condition to be performed or
complied with by it hereunder on or prior to the Effective Date.
(b) Representations and Warranties. The representations and warranties of
Phar-Mor set forth in this Agreement shall be true and correct in all
material respects at and as of the Effective Date as if made at and as of
such time, except to the extent that any such representation or warranty is
made as of a specified date,
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in which case such representation or warranty shall have been true and
correct in all material respect as of such date.
(c) Officer's Certificate. ShopKo shall have received a certificate,
dated as of the Effective Date, of the President or a Vice President of
Phar-Mor to the effect that, to the best of the knowledge, information and
belief of such officer, the conditions specified in paragraphs (a) and (b)
above have been fulfilled.
(d) Lack of Adverse Change. Since the date hereof, there shall have been
no Phar-Mor Material Adverse Effect.
(e) Consents from Third Parties. All necessary consents set forth on
Schedule 5.3 in connection with the transactions contemplated by this
Agreement shall have been received.
(f) Tax Effect of the Reorganization. ShopKo shall have received an
opinion dated as of the Effective Date from Sidley & Austin, special
counsel for ShopKo, to the effect that the Reorganization will be treated,
for federal income tax purposes, as a tax-free transfer of property to
Parent by the holders of ShopKo Common Shares, to the extent such holders
receive Parent Common Shares in the Reorganization.
(g) Letters from Accountants. ShopKo shall have received two letters, one
dated as of the date the Proxy Statement is mailed to the shareholders of
Phar-Mor and the other dated as of the Effective Date, from Deloitte &
Touche confirming that they are independent accountants with respect to
Phar-Mor and its Subsidiaries, and stating in effect that (i) in their
opinion the financial statements examined by them and included or
incorporated by reference in the Proxy Statement comply as to form in all
material respects with the applicable accounting requirements of the
Securities Act, the Exchange Act and the published rules and regulations
thereunder, and (ii) on the basis of a reading of the latest available
interim financial statements of Phar-Mor and its Subsidiaries, inquiries of
officials of Phar-Mor and its Subsidiaries responsible for financial and
accounting matters, and a reading of the minutes of Phar-Mor and its
Subsidiaries as set forth in the minute books to a specified day not more
than five days prior to the date of delivery of such letter, nothing came
to their attention that caused them to believe that:
(i) any unaudited consolidated condensed financial statements of
Phar-Mor and its Subsidiaries in the Proxy Statement do not comply as
to form in all material respects with the applicable accounting
requirements of the Securities Act and the published rules and
regulations thereunder and are not in conformity with generally
accepted accounting principles applied on a basis substantially
consistent with that of the most recent Phar-Mor audited financial
statements included in the Proxy Statement;
(ii) any unaudited consolidated financial statements of Phar-Mor and
its Subsidiaries prepared subsequent to the date of the Proxy Statement
are not prepared on a basis substantially consistent with that of the
most recent Phar-Mor audited financial statements included in the Proxy
Statement; and
(iii) for the period subsequent to the date of the latest available
unaudited consolidated financial statements of Phar-Mor and its
Subsidiaries and as of a specified date not more than five (5) days
prior to the date of delivery of such letter, there was any change in
capital stock and any increases in consolidated long-term debt or any
decrease in consolidated net assets as compared with amounts shown on
the most recent Phar-Mor unaudited balance sheet included in the Proxy
Statement, except for any change, increase or decrease which the Proxy
Statement discloses has occurred or may occur;
(h) Phar-Mor Exchange. The Phar-Mor Exchange shall be consummated, in
accordance with the provisions hereof (without amendment, variance or
waiver of any provision unless approved in writing by ShopKo) as of the
Effective Date, simultaneously with consummation of the ShopKo Exchange.
ARTICLE VI
Termination, Amendment and Waiver
6.1 TERMINATION. This Agreement may be terminated at any time prior to the
Effective Date:
(a) by mutual consent of the Phar-Mor Board and the ShopKo Board;
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(b) by the Phar-Mor Board or the ShopKo Board (i) if the Effective Date
shall not have occurred on or before March 31, 1997; (ii) if any state or
federal law, order, rule or regulation is adopted or issued, which has the
effect, as supported by the written opinion of outside counsel for such
party, of prohibiting the Reorganization or the Parent Buy Back or (iii) if
any court of competent jurisdiction in the United States or any State shall
have issued an order, judgment or decree permanently restraining, enjoining
or otherwise prohibiting the Reorganization or the Parent Buy Back, and
such order, judgment or decree shall have become final and nonappealable;
(c) by the Phar-Mor Board or the ShopKo Board if at the Phar-Mor Special
Meeting or the ShopKo Special Meeting (including any adjournment thereof),
the Phar-Mor Plan or the ShopKo Plan, respectively, shall fail to be
approved and adopted by the votes referred to in Section 5.1;
(d) by the Phar-Mor Board prior to the date originally set forth in the
Proxy Statement for the ShopKo Special Meeting if the Exchange Ratio, as
adjusted, shall be greater than 3.140, unless ShopKo agrees, by written
notice delivered to Phar-Mor within three (3) days after the end of the
Pricing Period, that the Exchange Ratio shall be set at 3.140;
(e) by the ShopKo Board prior to the date originally set forth in the
Proxy Statement for the ShopKo Special Meeting if the Exchange Ratio, as
adjusted, shall be less than 1.895, unless Phar-Mor agrees, by written
notice delivered to ShopKo within three (3) days after the end of the
Pricing Period, that the Exchange Ratio shall be set at 1.895;
(f) by the Phar-Mor Board in the event there has been a material breach
of any representation, warranty, covenant or agreement contained in this
Agreement on the part of ShopKo and such breach has not been cured within
ten (10) business days after notice thereof to ShopKo; provided, that Phar-
Mor is not in material breach of the terms of this Agreement; and provided
further, that no cure period shall be required for a breach which by its
nature cannot be cured;
(g) by the ShopKo Board in the event there has been a material breach of
any representation, warranty, covenant or agreement contained in this
Agreement on the part of Phar-Mor and such breach has not been cured within
ten (10) business days after notice thereof to Phar-Mor; provided, that
ShopKo is not in material breach of the terms of this Agreement; and
provided further, that no cure period shall be required for a breach which
by its nature cannot be cured;
(h) by ShopKo, upon five days' prior written notice to Phar-Mor, if, as a
result of a tender offer by a party other than Phar-Mor or any of its
affiliates or any written offer or proposal with respect to a merger or
sale of a material portion of its assets or other business combination
(each, a "Business Combination") by a party other than Phar-Mor or any of
its affiliates, the ShopKo Board determines in good faith that its
fiduciary obligations under applicable law require that such tender offer
or other written offer or proposal be accepted; provided, however, that (i)
the ShopKo Board shall have been advised in writing by outside counsel that
notwithstanding a binding commitment to consummate an agreement of the
nature of this Agreement entered into in the proper exercise of their
applicable fiduciary duties, such fiduciary duties would also require the
directors to reconsider such commitment as a result of such tender offer or
other written offer or proposal; and (ii) prior to any such termination,
ShopKo shall, and shall cause its respective financial and legal advisors
to, negotiate in good faith with Phar-Mor to make such adjustments in the
terms and conditions of this Agreement as would enable ShopKo to proceed
with the transactions contemplated herein; provided, further, that ShopKo
and Phar-Mor acknowledge and affirm that notwithstanding anything in this
Section 6.1(h) to the contrary, the parties hereto intend this Agreement to
be an exclusive agreement and, accordingly, nothing in this Agreement is
intended to constitute a solicitation of an offer or proposal for a
Business Combination, it being acknowledged and agreed that any such offer
or proposal would interfere with the strategic advantages and benefits
which the parties expect to derive from the Reorganization;
(i) by Phar-Mor, upon five days' prior written notice to ShopKo if, as a
result of a tender offer by a party other than ShopKo or any of its
affiliates or any written offer or proposal with respect to a Business
Combination by a party other than ShopKo or any of its affiliates, the
Phar-Mor Board determines in good faith that its fiduciary obligations
under applicable law require that such tender offer or other written offer
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or proposal be accepted; provided, however, that (i) the Phar-Mor Board
shall have been advised in writing by outside counsel that notwithstanding
a binding commitment to consummate an agreement of the nature of this
Agreement entered into in the proper exercise of their applicable fiduciary
duties, such fiduciary duties would also require the directors to
reconsider such commitment as a result of such tender offer or other
written offer or proposal; and (ii) prior to any such termination, Phar-Mor
shall, and shall cause its respective financial and legal advisors to,
negotiate in good faith with ShopKo to make such adjustments in the terms
and conditions of this Agreement as would enable Phar-Mor to proceed with
the transactions contemplated herein; provided, further, that ShopKo and
Phar-Mor acknowledge and affirm that notwithstanding anything in this
Section 6.1(i) to the contrary, the parties hereto intend this Agreement to
be an exclusive agreement and, accordingly, nothing in this Agreement is
intended to constitute a solicitation of an offer or proposal for a
Business Combination, it being acknowledged and agreed that any such offer
or proposal would interfere with the strategic advantages and benefits
which the parties expect to derive from the Reorganization;
(j) by ShopKo, if the Phar-Mor Board (i) shall withdraw or modify in any
manner adverse to ShopKo its approval of this Agreement and the
transactions contemplated hereby or its recommendation to its shareholders
regarding the approval of this Agreement, (ii) shall fail to reaffirm such
approval or recommendation upon the reasonable request of ShopKo, (iii)
shall approve or recommend any acquisition by a third party of Phar-Mor or
a material portion of its assets or any tender offer for the Phar-Mor
Common Shares, or (iv) shall resolve to take any of the actions specified
in clause (i), (ii) or (iii); provided, however, that ShopKo and Phar-Mor
acknowledge and affirm that notwithstanding anything in this Section 6.1(j)
to the contrary, the parties hereto intend this Agreement to be an
exclusive agreement and, accordingly, nothing in this Agreement is intended
to constitute a solicitation of an offer or proposal for a Business
Combination, it being acknowledged and agreed that any such offer or
proposal would interfere with the strategic advantages and benefits which
the parties expect to derive from the Reorganization; and
(k) by Phar-Mor, if the ShopKo Board (i) shall withdraw or modify in any
manner adverse to Phar-Mor its approval of this Agreement and the
transactions contemplated hereby or its recommendation to its shareholders
regarding the approval of this Agreement, (ii) shall fail to reaffirm such
approval or recommendation upon the reasonable request of Phar-Mor, (iii)
shall approve or recommend any acquisition by a third party of ShopKo or a
material portion of its assets or any tender offer for the ShopKo Common
Shares or (iv) shall resolve to take any of the actions specified in clause
(i), (ii) or (iii); provided, however, that ShopKo and Phar-Mor acknowledge
and affirm that notwithstanding anything in this Section 6.1(k) to the
contrary, the parties hereto intend this Agreement to be an exclusive
agreement and, accordingly, nothing in this Agreement is intended to
constitute a solicitation of an offer or proposal for a Business
Combination, it being acknowledged and agreed that any such offer or
proposal would interfere with the strategic advantages and benefits which
the parties expect to derive from the Reorganization.
6.2 EFFECT OF TERMINATION.
(a) In the event of termination of this Agreement as provided in Sections
6.1(a) through 6.1(e), this Agreement shall forthwith become void and there
shall be no liability or obligation on the part of Phar-Mor or ShopKo or their
respective officers or directors; provided, however, that nothing in this
section shall release any party hereto from liability for any breach of this
Agreement.
(b) In the event of termination of this Agreement as a result of a material
breach thereof by ShopKo, on the one hand, or Phar-Mor, on the other, the
breaching party shall reimburse the non-breaching party for all expenses,
fees, financing commitments and other costs incurred by or on behalf of the
non-breaching party in connection with the Reorganization and the Parent Buy-
Back not in excess of $500,000, which remedy shall be in addition to, and not
in lieu of, all other remedies which the non-breaching party may have. In
addition to the foregoing:
(i) if this Agreement is terminated prior to the Effective Date as
provided in Section 6.1(f) and, prior to such termination, a ShopKo
Triggering Event shall have occurred, ShopKo shall pay Phar-Mor a fee of
$15 million payable in cash, plus any expenses identified in Section
6.2(b); and
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(ii) if this Agreement is terminated prior to the Effective Date as
provided in Section 6.1(g) and prior to such termination, a Phar-Mor
Triggering Event shall have occurred, Phar-Mor shall pay ShopKo a fee of $3
million payable in cash, plus any expenses identified in Section 6.2(b).
(iii) If this Agreement is terminated (i) at such time that this
Agreement is terminable pursuant to one of Section 6.1(h) or Section 6.1(i)
but not the other, or (ii) is terminated pursuant to Section 6.1(j) or
Section 6.1(k), then (A) in the event of a termination pursuant to Section
6.1(i) or Section 6.1(j) Phar-Mor shall pay to ShopKo, and (B) in the event
of a termination pursuant to Section 6.1(h) or Section 6.1(k), ShopKo shall
pay to Phar-Mor, promptly (but not later than five business days after such
notice is received pursuant to Section 6.1(h) or Section 6.1(i) or is given
pursuant to Section 6.1(j) or Section 6.1(k)) an amount equal to $15
million in cash if required to be paid by ShopKo and $3 million in cash if
required to be paid by Phar-Mor, plus in each case cash in an amount equal
to all documented out-of-pocket expenses and fees incurred by the other
party (including, without limitation, fees and expenses payable to all
legal, accounting, financial, public relations and other professional
advisors arising out of, in connection with or related to the
Reorganization or the transactions contemplated by this Agreement) not in
excess of $500,000.
A "ShopKo Triggering Event" shall mean: (i) the acceptance in writing by
ShopKo of any Business Combination proposal; (ii) the recommendation by the
ShopKo Board not to oppose any tender offer for capital stock of ShopKo by a
third party; (iii) a withdrawal or material modification by the ShopKo Board
of its authorization, approval or recommendation to the shareholders of ShopKo
with respect to the ShopKo Plan or the failure by the ShopKo Board to approve
or take steps necessary to consummate the Reorganization; or (iv) the
acquisition by any person, entity or group (as the term is used in Section
13(d)(3) of the Exchange Act ("Section 13(d)(3)"), other than Supervalu, of
beneficial ownership with respect to more than twenty percent (20%) of the
ShopKo Common Shares. A "Phar-Mor Triggering Event" shall mean (i) the
acceptance in writing by Phar-Mor of any Business Combination proposal; (ii)
the recommendation of the Phar-Mor Board not to oppose any tender offer for
capital stock of Phar-Mor by a third party; (iii) a withdrawal or material
modification by the Phar-Mor Board of its authorization, approval or
recommendation to the shareholders of Phar-Mor with respect to the Phar-Mor
Plan or the failure by the Phar-Mor Board to approve or take steps necessary
to consummate the Reorganization; or (iv) the acquisition by any person,
entity or group (as the term is used in Section 13(d)(3)), other than Hamilton
Morgan and its affiliates, of beneficial ownership with respect to more than
twenty percent (20%) of the Phar-Mor Common Shares.
(c) The parties agree that the agreements contained in this Section 6.2(b)
are an integral part of the transactions contemplated by this Agreement and
constitute liquidated damages and not a penalty. If one party fails to pay
promptly to the other any expense and/or fee due hereunder, the defaulting
party shall pay the costs and expenses (including legal fees and expenses) in
connection with any action, including the filing of any lawsuit or other legal
action, taken to collect payment, together with interest on the amount of any
unpaid fee at the publicly announced prime rate of Citibank, N.A. from the
date such fee was required to be paid.
(d) Notwithstanding anything herein to the contrary, the aggregate amount
payable by Phar-Mor and its affiliates pursuant to Section 6.2(b) shall not
exceed $3.5 million and the aggregate amount payable by ShopKo and its
affiliates pursuant to Section 6.2(b) shall not exceed $15.5 million.
6.3 AMENDMENT. This Agreement may be amended by an instrument in writing
approved by the Phar-Mor Board and the ShopKo Board and signed on behalf of
each of the parties hereto; provided, however, that after adoption of this
Agreement and the Reorganization by the shareholders of Phar-Mor or ShopKo, no
such amendment may be made without the further approval of such approving
shareholders except to the extent permitted by Minnesota Law or Pennsylvania
Law, as applicable.
6.4 WAIVER. At any time prior to the Effective Date, whether before or after
the Phar-Mor Special Meeting or the ShopKo Special Meeting, Phar-Mor, by
action taken by the Phar-Mor Board, or ShopKo, by action taken by the ShopKo
Board, may (i) extend the time for the performance of any of the obligations
or other acts of any other party hereto or (ii) waive compliance with any of
the agreements of any other party or
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with any conditions to its own obligations. Any agreement on the part of a
party hereto to any such extension or waiver shall be valid only if set forth
in an instrument in writing signed on behalf of such party by a duly
authorized officer.
ARTICLE VII
General Provisions
7.1 NO SURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the
representations and warranties of Phar-Mor or ShopKo contained in Article II
shall survive Closing. This Section 7.1 shall not limit any covenant or
agreement of the parties hereto which by its terms contemplates performance
after the Effective Date.
7.2 NOTICES. All notices and other communications hereunder shall be in
writing (including telex or similar writing) and shall be deemed given if
delivered in person or by messenger, cable, telegram or telex or facsimile
transmission or by a reputable overnight delivery service which provides for
evidence of receipt to the parties at the following addresses or telecopier
numbers (or at such other address, or telecopy number for a party as shall be
specified by like notice):
(a) if to ShopKo, to:
ShopKo Stores, Inc.
700 Pilgrim Way
P.O. Box 19060
Green Bay, WI 54307-9060
Attn: Richard J. Schepp
with a copy to:
Randall J. Erickson, Esq.
Godfrey & Kahn, S.C.
780 North Water Street
Milwaukee, WI 53202-3590
and
Thomas A. Cole, Esq.
Sidley & Austin
One First National Plaza
Chicago, IL 60603
(b) if to Phar-Mor or Parent, to:
Phar-Mor, Inc.
20 Federal Plaza West
Youngstown, OH 44501-0400
Attn: John R. Ficarro, General Counsel
with a copy to:
Morris F. DeFeo, Jr., Esq.
Swidler & Berlin, Chartered
3000 K Street, N.W.
Washington, D.C. 20007-5116
7.3 ENTIRE AGREEMENT. This Agreement (including the Exhibits and Schedules
hereto and the documents and the instruments referred to herein and therein),
constitutes the entire agreement and supersedes all prior and contemporaneous
agreements and understandings, both written and oral, among the parties with
respect to the subject matter hereof.
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7.4 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, without regard to the
principles of conflicts of law of such state, and, to the extent applicable,
Minnesota Law and Pennsylvania Law.
7.5 VALIDITY. The invalidity or unenforceability of any provisions of this
Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, each of which shall remain in full force and
effect.
7.6 ASSIGNMENT. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any party hereto, whether by
operation of law or otherwise, without the express prior written consent of
each of the other parties hereto. 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, heirs, legal representatives and
permitted assigns.
7.7 NO THIRD PARTY BENEFICIARIES. Except for the provisions in Section 4.13
concerning indemnification, which are intended for the benefit only of those
Persons specified therein, Section 1.7 concerning Independent Directors, which
are intended for the benefit of the ShopKo Board and the Phar-Mor Board as
specified in such section, and Section 5.1(i), which, in addition to the
parties hereto, is also intended for the benefit of Supervalu, this Agreement
is not intended to confer upon any Person other than the parties hereto any
rights or remedies hereunder.
7.8 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.
7.9 INCORPORATION OF EXHIBITS AND SCHEDULES. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof as if more fully set forth herein.
7.10 INTERPRETATION. When reference is made in this Agreement to Annexes,
Exhibits or Sections, such reference shall be to an Annex, Exhibit to or
Section of this Agreement unless otherwise indicated. The headings contained
in this Agreement are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement.
7.11 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one 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.
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In Witness Whereof, ShopKo, Phar-Mor and Parent have caused this Agreement
to be signed by their respective officers thereunto duly authorized as of the
date first above written.
ShopKo Stores, Inc.
/s/ Dale P. Kramer
By: _________________________________
Name:Dale P. Kramer
Title: President and Chief
Executive Officer
Phar-Mor, Inc.
/s/ Robert M. Haft
By: _________________________________
Name:Robert M. Haft
Title: Chairman of the Board and
Chief Executive Officer
Cabot Noble, Inc.
/s/ Robert M. Haft
By: _________________________________
Name:Robert M. Haft
Title: Chairman of the Board and
Chief Executive Officer
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FIRST AMENDMENT TO
AGREEMENT AND PLAN OF REORGANIZATION
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN OF REORGANIZATION (this
"Amendment"), is made and entered into as of the 9th day of October 1996, by
and among Phar-Mor, Inc., a Pennsylvania corporation ("Phar-Mor"), ShopKo
Stores, Inc., a Minnesota corporation ("ShopKo"), and Cabot Noble, Inc., a
Delaware corporation ("Parent").
RECITALS
WHEREAS, Phar-Mor, ShopKo and Parent (together, the "Parties") have entered
into an Agreement and Plan of Reorganization dated as of September 7, 1996
(the "Agreement") pursuant to which, among other things, Phar-Mor and ShopKo
have agreed, subject to the satisfaction of certain covenants and conditions,
to a business combination pursuant to which each would become separate wholly
owned subsidiaries of Parent; and
WHEREAS, the Parties wish to amend the Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual promises and
agreements made herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, and intending to be
legally bound hereby, the Parties agree as follows:
I. DEFINITIONS. Unless otherwise defined in this Amendment, all
capitalized terms shall have the meanings given such terms in the
Agreement.
II. AMENDED EXHIBITS. Exhibit B to the Agreement, the Form of Revised
Certificate of Incorporation of Cabot Noble, and Exhibit H to the
Agreement, the Stock Purchase Agreement, are hereby deleted in their
entirety and replaced with Exhibit B and Exhibit H respectively, attached
hereto.
III. AMENDMENT TO ARTICLE I. Article I of the Agreement is hereby amended
by deleting Section 1.7 in its entirety and replacing it with the
following:
1.7 Board of Directors of Parent; Committees. The parties hereby agree
that (i) the current members of the Phar-Mor Board, (ii) Dale P. Kramer,
and (iii) two individuals selected by the ShopKo Board at least one of whom
(A) is not affiliated with ShopKo, Supervalu, Phar-Mor or Hamilton Morgan
(an "Independent Director") and (B) is selected in consultation with
Heidrick & Struggles, New York (or such other nationally recognized
executive search firm as may be approved by Phar-Mor and ShopKo)
(collectively, the "ShopKo Designees"), shall serve as members of the
Parent Board from and after the Effective Date (or from such later date as
ShopKo Designees are appointed pursuant to the provisions hereof), until
their respective successors are duly elected or appointed and qualified in
the manner provided in the By-Laws of Parent, or as otherwise provided by
law; provided that the ShopKo Board shall use reasonable efforts to
designate the ShopKo Designees before the Effective Date; and provided
further, that to the extent such ShopKo Designees are not designated on or
before the Effective Date, the right of ShopKo to appoint such designee as
contemplated by this Section 1.7 shall be enforceable by those Persons who
are members of the ShopKo Board as of the date of this Agreement. The
ShopKo Designees shall be subject to approval by the members of the Phar-
Mor Board who are not also officers or employees of Phar-Mor or affiliates
of Hamilton Morgan. Any individual selected by the Phar-Mor Board to fill
any vacancy on the Phar-Mor Board shall be selected in consultation with
Heidrick & Struggles, New York (or such other nationally recognized
executive search firm as may be approved by Phar-Mor and ShopKo), and shall
be an individual that (i) is neither an officer or employee of Phar-Mor nor
an affiliate of Hamilton Morgan, and (ii) is approved by the members of the
ShopKo Board who are not also officers or employees of ShopKo or Supervalu,
directors of Supervalu or otherwise affiliated with Supervalu. The Parent
Board shall be classified into three classes of approximately equal size,
with an equal number of Independent Directors serving in each class to the
extent possible. The Parent Board shall establish a Compensation Committee
and Audit Committee which shall consist of two or more Independent
Directors selected by the Parent Board. The entire Parent Board shall serve
as its Nominating Committee.
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IV. AMENDMENTS TO ARTICLE IV. Article IV of the Agreement is hereby
amended by deleting Subsection 4.2(b) in its entirety and replacing it with
the following:
(b) Phar-Mor shall, as soon as reasonably practicable after the date
hereof, (i) take all steps necessary to call, give notice of, convene
and hold a special meeting of its shareholders ("Phar-Mor Special
Meeting") for the purpose of securing the approval and adoption of the
Phar-Mor Plan by the holders of a majority of the Phar-Mor Common
Shares represented at the Phar-Mor Special Meeting (or any adjournments
thereof) at which a quorum is present, in person or by proxy, and
entitled to vote ("Phar-Mor Shareholders' Approval"), (ii) distribute
to its shareholders the Proxy Statement in accordance with applicable
federal and state law and its articles of incorporation and by-laws,
(iii) subject to the fiduciary duties of the Phar-Mor Board, recommend
to its shareholders the approval of the Phar-Mor Plan, and (iv)
cooperate and consult with ShopKo with respect to each of the foregoing
matters.
V. AMENDMENT TO ARTICLE V. Article V of the Agreement is hereby amended
by deleting Subsection 5.1(i) in its entirety and replacing it with the
following:
(i) Parent Buy Back. At the Effective Date, there shall exist no
condition of circumstance that would reasonably be expected to prevent
or delay the consummation of the transactions contemplated in that
certain Stock Purchase Agreement among Parent, Supervalu and
Supermarket, dated as of the date of this Agreement, a copy of which is
attached hereto as Exhibit H (the "Stock Purchase Agreement"), pursuant
to which, immediately following the consummation of the Reorganization,
Parent will on the Effective Date acquire 90% of the Parent Common
Shares received by Supermarket as a result of the Reorganization (the
"Parent Buy Back"). All documentation, payments and deliveries
necessary to consummate the Parent Buy Back pursuant to the terms of
the Stock Purchase Agreement shall be completed at or before Closing
and held in escrow pending the Effective Date. Without limiting the
foregoing, at the Effective Date, Parent shall have received a
financing commitment or other reasonable assurances from one or more
underwriters, placement agents, banks or other financing sources, which
may include the credit facilities referred to in Section 5.1(g) (on
terms and conditions reasonably acceptable to each of Parent, Phar-Mor
and ShopKo) that Parent (together with its Subsidiaries from and after
the Effective Date) may obtain financing of at least $75 million (the
"Parent Buy-Back Financing"), and all documents and deliveries
necessary to consummate such financing shall be completed at or before
Closing and held in escrow pending the Effective Date. Notwithstanding
any provisions to the contrary, the conditions set forth in this
Section 5.1(i) may not be waived without the prior written consent of
Supervalu, which consent may not be unreasonably withheld or delayed.
VI. RATIFICATION. Except as expressly amended by this Amendment, the
Agreement shall remain in full force and effect and the Agreement is hereby
ratified and confirmed as of the date first written above.
VII. GOVERNING LAW. This Amendment shall be governed by and construed in
accordance with the laws of the State of Delaware, without regard to the
principles of conflicts of law of such state.
VIII. COUNTERPARTS. This Amendment may be executed in multiple
counterparts, each of which shall be deemed an original, but all of which
taken together shall constitute one and the same instrument.
IX. RESTATEMENT. This Amendment may be incorporated into an amended and
restated version of the Agreement, which Agreement as amended and restated
shall be the Agreement and Plan of Reorganization dated as of September 7,
1997, as amended and restated as of October 9, 1996.
X. CORPORATE AUTHORITY. Each of Parent, ShopKo and Phar-Mor represents
that it has taken all necessary action to authorize the execution, delivery
and performance of this Amendment.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY BLANK]
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IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the
date first above written.
ShopKo Stores, Inc.
/s/ Dale P. Kramer
By: _________________________________
Name:Dale P. Kramer
Title:President and Chief
Executive Officer
Phar-Mor, Inc.
/s/ Robert M. Haft
By: _________________________________
Name:Robert M. Haft
Title: Chairman of the Board and
Chief Executive Officer
Cabot Noble, Inc.
/s/ Robert M. Haft
By: _________________________________
Name:Robert M. Haft
Title: Chairman of the Board and
Chief Executive Officer
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ANNEX B
October 9, 1996
Board of Directors
ShopKo Stores, Inc.
700 Pilgrim Way
Green Bay, WI 54307-9060
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to the holders of Common Stock, par value $.01 per share ("ShopKo Common
Stock"), of ShopKo Stores, Inc. ("ShopKo") other than Supermarket Operators of
America, Inc. ("Supermarket") (such holders, collectively, the "Public
Stockholders"), of the Exchange Ratio (as defined below) to be used in the
proposed transaction (the "Transaction") among Cabot-Noble, Inc. ("Parent"),
ShopKo and Phar-Mor, Inc. ("Phar-Mor"). As part of the Transaction (i) each
issued and outstanding share of ShopKo Common Stock (other than shares owned
by ShopKo, Phar-Mor or any of their subsidiaries) will be deemed to be
exchanged (the "ShopKo Exchange") for 2.4 shares of Common Stock, par value
$.01 per share ("Parent Common Stock"), of Parent, subject to certain
adjustments (the "Exchange Ratio") as set forth in the Agreement and Plan of
Reorganization dated September 7, 1996, to be entered into among Parent,
ShopKo and Phar-Mor, as to be amended in accordance with the October 9, 1996,
draft first amendment to the Agreement and Plan of Reorganization (the
"Agreement"), (ii) each issued and outstanding share of Common Stock, par
value $.01 per share, of Phar-Mor (other than shares owned by ShopKo, Phar-Mor
or any of their subsidiaries) will be exchanged (the "Phar-Mor Exchange", and
together with the ShopKo Exchange, the "Exchanges") for one share of Parent
Common Stock and (iii) immediately following the consummation of the
Exchanges, ninety percent (90%) of the shares of Parent Common Stock held by
Supermarket as a result of the deemed exchange set forth in clause (i) above
will be purchased by Parent in exchange for (a) cash in the amount of
approximately $183.2 million and (b) a promissory note with an aggregate
principal amount of $40.4 million which will mature on January 31, 1997.
In connection with rendering our opinion, we have reviewed certain publicly
available information concerning ShopKo and Phar-Mor and certain other
financial information concerning ShopKo and Phar-Mor, including financial
forecasts, that were provided to us by ShopKo and Phar-Mor, respectively. We
have also received financial forecasts for Phar-Mor which were prepared by
ShopKo management by making adjustments to the forecasts prepared by Phar-Mor
management. We were not requested to and did not solicit third party
indications of interests in ShopKo. However, in arriving at our opinion, we
have considered information provided to us by ShopKo as to efforts made to
solicit indications of interest from third parties. We have discussed the past
and current business operations and financial condition of ShopKo and Phar-Mor
with certain officers and employees of ShopKo and Phar-Mor, respectively. We
have also considered such other information, financial studies, analyses,
investigations and financial, economic and market criteria that we deemed
relevant.
In our review and analysis and in arriving at our opinion, we have assumed
and relied upon the accuracy and completeness of the information reviewed by
us, and we have not assumed any responsibility for independent verification of
such information. With respect to the financial forecasts of ShopKo and Phar-
Mor, we have assumed that they have been reasonably prepared on bases
reflecting the best currently available estimates and judgements of the
respective managements of ShopKo or Phar-Mor as to the future financial
performance of ShopKo or Phar-Mor, respectively, and we express no opinion
with respect to such forecasts or the assumptions on which they are based. We
are also aware that ShopKo has paid regular quarterly dividends in recent
years and that Parent does not intend to pay cash dividends for the
foreseeable future. We have assumed that the synergies that the management of
ShopKo and Phar-Mor have projected will result from the Transaction will be
realized. We have not made or obtained or assumed any responsibility for
making or obtaining any independent evaluations or appraisals of any of the
assets (including properties and facilities) or liabilities of ShopKo or
Phar-Mor.
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Our opinion is necessarily based upon conditions as they exist and can be
evaluated on the date hereof. Our opinion as expressed below does not imply
any conclusion as to the likely trading range for shares of Parent Common
Stock following the consummation of the Transaction, which may vary depending
upon, among other factors, changes in interest rates, dividend rates, market
conditions, general economic conditions and other factors that generally
influence the price of securities. Our opinion does not address ShopKo's
underlying business decision to effect the Transaction. Our opinion is
directed only to the fairness, from a financial point of view, of the Exchange
Ratio to the Public Stockholders and does not constitute a recommendation
concerning how such holders should vote with respect to the Transaction.
We have acted as financial advisor to the Board of Directors of ShopKo in
connection with the Transaction and will receive a fee for our services,
payment of which is contingent upon consummation of the Transaction. In the
ordinary course of business, we may actively trade the securities of ShopKo
and Phar-Mor for our own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
Also, we have previously rendered certain investment banking and financial
advisory services to ShopKo for which we have received customary compensation.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Exchange Ratio is fair to the Public Stockholders from a
financial point of view.
Very truly yours,
Salomon Brothers Inc
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ANNEX C
September 5, 1996
Board of Directors
PHAR-MOR, INC.
20 Federal Plaza West
Youngstown, OH 44503
Re: The proposed transaction pursuant to which (i) shareholders of Phar-
Mor, Inc. a Pennsylvania corporation ("Phar-Mor" or the "Company"), and
shareholders of ShopKo Stores, Inc., a Minnesota corporation
("ShopKo"), will exchange their shares of Phar-Mor Common Stock, par
value $0.01 per share, and ShopKo Common Stock, par value $0.01 per
share, respectively, for shares of the Common Stock, par value $0.01
per share of Cabot-Noble, Inc., a Delaware corporation ("Parent"), (ii)
ShopKo and Phar-Mor will become wholly owned subsidiaries of Parent,
and (iii) immediately following such transactions, Parent will acquire
all of the shares of the Common Stock, par value $0.01 per share,
("Parent Common Shares"), received by SuperValu, Inc., a Delaware
corporation ("SuperValu"), as a result of the exchange of ShopKo Common
Stock for Parent Common Shares (the "Exchange" and, together with the
share exchanges and the other transactions contemplated hereby, the
"Transaction"); all upon the terms and conditions presently set forth
in a draft Agreement and Plan of Reorganization (the "Agreement"),
dated September 5, 1996, by and among Phar-Mor, ShopKo, and Parent.
TO THE MEMBERS OF THE BOARD OF DIRECTORS:
You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, to the holders of the outstanding shares of
common stock, par value $.01 per share (the "Common Stock"), of the Company
(the "Stockholders") of the consideration to be received by such Stockholders
pursuant to the Transaction (the "Consideration"). The terms and conditions of
the Transaction are more fully set forth in the Agreement.
Jefferies & Company, Inc. ("Jefferies"), as part of its investment banking
business, is regularly engaged in the evaluation of capital structures, the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements, financial
restructurings and other financial services. In the ordinary course of our
business, we may trade the securities of Phar-Mor and ShopKo for our own
account and for the accounts of customers and, accordingly, may at any time
hold a long or short position in those securities.
As you are aware, Jefferies will receive a fee for providing this opinion.
In addition to delivering this opinion, Jefferies has acted as exclusive
financial advisor to Phar-Mor in connection with the Transaction and has
actively assisted Phar-Mor in negotiating the terms thereof. Jefferies will
receive an additional fee in connection with the consummation of the
Transaction for acting in such capacity.
In conducting our analysis and arriving at the opinion expressed herein, we
have reviewed the draft of the Agreement, dated September 5, 1996 (including
any Exhibits thereto) and certain financial and other information that was
publicly available or furnished to us by Phar-Mor and ShopKo, including
certain internal financial analyses, budgets, reports and other information
prepared by the respective company's management. We have also held discussions
with various members of senior management of the Company and ShopKo concerning
each company's historical and current operations, financial conditions and
prospects, as well as the strategic and operating benefits anticipated from
the business combination. In addition, we have conducted such other reviews,
analyses and inquiries relating to ShopKo and Phar-Mor as we considered
appropriate in rendering this opinion.
In our review and analysis and in rendering this opinion, we have relied
upon, but have not independently investigated or verified, the accuracy,
completeness and fair presentation of all financial and other information that
was provided to us by Phar-Mor or ShopKo, or that was publicly available to us
(including, without
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limitation, the information described above and the financial projections
prepared by Phar-Mor and ShopKo regarding the estimated future performance of
the respective companies before and after giving effect to the Transaction).
This opinion is expressly conditioned upon such information (whether written
or oral) being complete, accurate and fair in all respects.
With respect to the financial projections provided to and examined by us, we
note that projecting future results of any company is inherently subject to
vast uncertainty. You have informed us, however, and we have assumed with your
permission, that such projections were reasonably prepared on bases reflecting
the best currently available estimates and good faith judgments of the
respective managements of the companies as to the future performance of each
company. In addition, although we have performed sensitivity analyses thereon,
in rendering this opinion we have assumed, with your permission, that each
company will perform in accordance with such projections for all periods
specified therein. Although such projections did not form the principal basis
for our opinion, but rather constituted one of many items that we employed,
changes thereto could affect the opinion rendered herein. We have assumed,
with your permission, that the Transaction will be a tax free reorganization
and will be accounted for under the purchase accounting method.
We have not been requested to, and did not solicit third party indications
of interest in acquiring all or any part of the Company; or make any
independent evaluation or appraisal of the assets or liabilities of, nor
conducted a comprehensive physical inspection of any of the assets of, Phar-
Mor or ShopKo, nor have we been furnished with any such appraisals. Our
opinion is based on economic, monetary, political, market and other conditions
existing and which can be evaluated as of the date of this opinion (including,
without limitation, current market prices of the common stock of the Company
and Shopko); however, such conditions are subject to rapid and unpredictable
change and such changes could affect the conclusions expressed herein. We have
made no independent investigation of any legal matters affecting Phar-Mor or
ShopKo, and we have assumed the correctness of all legal and accounting advice
given to such parties and their respective boards of directors, including
(without limitation) advice as to the accounting and tax consequences of the
Transaction to Phar-Mor, ShopKo and their respective stockholders.
In rendering this opinion we have also assumed, with your permission, that:
(i) the terms and provisions contained in the definitive Agreement (including
the Exhibits thereto) will not differ from those contained in the drafts of
those documents we have heretofore reviewed; (ii) the conditions to the
consummation of the Transaction set forth in the Agreement will be satisfied
without material expense; (iii) there is not now, and there will not as a
result of the consummation of the transactions contemplated by the Agreement
be, any default, or event of default, under any indenture, credit agreement or
other material agreement or instrument to which Phar-Mor, ShopKo or any of
their respective subsidiaries or affiliates is a party; and (iv) the amount of
outstanding net indebtedness of ShopKo immediately after the closing of the
Transaction will be approximately $343.2 million.
Moreover, in rendering the opinion set forth below we note that the
consummation of the Transaction is conditioned upon the approval of Phar-Mor's
and ShopKo's stockholders, and we are not recommending that Phar-Mor, its
Board of Directors, any of its security holders or any other person should
take any specific action in connection with the Transaction. Our opinion does
not constitute a recommendation of the Transaction over any alternative
transactions which may be available to Phar-Mor, and does not address Phar-
Mor's underlying business decision to effect the Transaction. Finally, we are
not opining as to the market value of the Consideration to be received by the
Stockholders or the prices at which any of the securities of Parent may trade
upon and following the consummation of the Transaction.
Based upon and subject to the foregoing, and upon such other matters as we
consider relevant, it is our opinion as investment bankers that, as of the
date hereof, the Consideration to be received by the Stockholders is fair from
a financial point of view.
It is understood and agreed that this opinion is provided solely for the use
of the Board of Directors of Phar-Mor as one element in the Board's
consideration of the Transaction, and may not be used for any other
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purpose, or otherwise referred to, relied upon or circulated, without our
prior written consent. Without limiting the foregoing, this opinion does not
constitute a recommendation to any Stockholder (or any other person) as to how
such person should vote with respect to the Transaction. We expressly disclaim
any undertaking or obligation to advise any person of any change in any fact
or matter affecting our opinion of which we become aware after the date
hereof. This opinion may be reproduced in full in any proxy statement mailed
to holders of Common Stock in connection with the Transaction but may not
otherwise be disclosed publicly in any manner without our prior written
approval.
Sincerely,
Jefferies & Company, Inc.
By: _________________________________
Name: Joseph J. Radecki, Jr.
Title:Executive Vice President
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ANNEX D
EXCERPTED FROM THE MINNESOTA BUSINESS CORPORATION ACT
302A.471 RIGHTS OF DISSENTING SHAREHOLDERS.--Subdivision 1. Actions creating
rights. A shareholder of a corporation may dissent from, and obtain payment
for the fair value of the shareholder's shares in the event of, any of the
following corporate actions:
(a) An amendment to the articles that materially and adversely affects the
rights or preferences of the shares of the dissenting shareholder in that it:
(1) alters or abolishes a preferential right of the shares;
(2) creates, alters, or abolishes a right in respect of the redemption of
the shares, including a provision respecting a sinking fund for the
redemption or repurchase of the shares;
(3) alters or abolishes a preemptive right of the holder of the shares to
acquire shares, securities other than shares, or rights to purchase shares
or securities other than shares;
(4) excludes or limits the right of a shareholder to vote on a matter, or
to cumulate votes, except as the right may be executed or limit through the
authorization or issuance of securities of an existing or new class or
series with similar or different voting rights; except that an amendment to
the articles of an issuing public corporation that provides that section
302A.671 does not apply to a control share acquisition does not give rise
to the right to obtain payment under this section;
(b) A sale, lease, transfer, or other disposition of all or substantially
all of the property and assets of the corporation, but not including a
transaction permitted without shareholder approval in section 301A.661,
subdivision 1, or a disposition in dissolution described in section 302A.725,
subdivision 2, or a disposition pursuant to an order of a court, or a
disposition for cash on terms requiring that all or substantially all of the
net proceeds of disposition be distributed to the shareholders in accordance
with their respective interests within one year after the date of disposition;
(c) A plan of merger, whether under this chapter or under chapter 322B, to
which the corporation is a party, except as provided in subdivision 3;
(d) A plan of exchange, whether under this chapter or under chapter 322B, to
which the corporation is a party as the corporation whose shares will be
acquired by the acquiring corporation, if the shares of shareholder are
entitled to be voted on the plan; or
(e) Any other corporate action taken pursuant to a shareholder vote with
respect to which the articles, the bylaws, or a resolution approved by the
board directs that dissenting shareholders may obtain payment for their
shares.
Subd. 2. Beneficial owners. (a) A shareholder shall not assert dissenters'
rights as to less than all of the shares registered in the name of the
shareholder, unless the shareholder dissents with respect to all the shares
that are beneficially owned by another person but registered in the name of
the shareholder and discloses the name and address of each beneficial owner on
whose behalf the shareholder dissents. In that event, the rights of the
dissenter shall be determined as if the shares as to which the shareholder has
dissented and the other shares were registered in the names of different
shareholders.
(b) A beneficial owner of shares who is not the shareholder may assert
dissenters' rights with respect to shares held on behalf of the beneficial
owner, and shall be treated as a dissenting shareholder under the terms of
this section and section 302A.473, if the beneficial owner submits to the
corporation at the time of or before the assertion of the rights a written
consent of the shareholder.
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Subd. 3. Rights not to apply. Unless the articles, the bylaws, or a
resolution approved by the board otherwise provide, the right to obtain
payment under this section does not apply to a shareholder of the surviving
corporation in a merger, if the shares of the shareholder are not entitled to
be voted on the merger.
Subd. 4. Other rights. The shareholders of a corporation who have a right
under this section to obtain payment for their shares do not have a right at
law or in equity to have a corporate action described in subdivision 1 set
aside or rescinded, except when the corporate action is fraudulent with regard
to the complaining shareholder or the corporation.
302A.473 PROCEDURES FOR ASSERTING DISSENTERS' RIGHTS.--Subdivision 1.
Definitions. (a) For purposes of this section, the terms defined in this
subdivision have the meanings given them.
(b) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action referred to in section 302A.471, subdivision 1 or the
successor by merger of that issuer.
(c) "Fair value of the shares" means the value of the shares of a
corporation immediately before the effective date of the corporate action
referred to in section 302A.471, subdivision 1.
(d) "Interest" means interest commencing five days after the effective date
of the corporate action referred to in section 302A.471, subdivision 1 up to
and including the date of payment, calculated at the rate provided in section
549.09 for interest on verdicts and judgments.
Subd. 2. Notice of action. If a corporation calls a shareholder meeting at
which any action described in section 302A.471, subdivision 1 is to be voted
upon, the notice of the meeting shall inform each shareholder of the right to
dissent and shall include a copy of section 302A.471 and this section and a
brief description of the procedure to be followed under these sections.
Subd. 3. Notice of dissent. If a proposed action must be approved by the
shareholders, a shareholder who wishes to exercise dissenters' rights must
file with the corporation before the vote on the proposed action a written
notice of intent to demand the fair value of the shares owned by the
shareholder and must not vote the shares in favor of the proposed action.
Subd. 4. Notice of procedure; deposit of shares. (a) After the proposed
action has been approved by the board and, if necessary, the shareholders, the
corporation shall send to all shareholders who have complied with subdivision
3 and to all shareholders entitled to dissent if no shareholder vote was
required, a notice that contains:
(1) The address to which a demand for payment and certificates of
certificated shares must be sent in order to obtain payment and the date by
which they must be received;
(2) Any restrictions on transfer of uncertificated shares that will apply
after the demand for payment is received;
(3) A form to be used to certify the date on which the shareholder, or
the beneficial owner on whose behalf the shareholder dissents, acquired the
shares or an interest in them and to demand payment; and
(4) A copy of section 302A.471 and this section and a brief description
of the procedures to be followed under these sections.
(b) In order to receive the fair value of the shares, a dissenting
shareholder must demand payment and deposit certificated shares or comply with
any restrictions on transfer of uncertificated shares within 30 days after the
notice was given, but the dissenter retains all other rights of a shareholder
until the proposed action takes effect.
Subd. 5. Payment; return of shares. (a) After the corporate action takes
effect or after the corporation receives a valid demand for payment, whichever
is later, the corporation shall remit to each dissenting
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shareholder who has complied with subdivisions 3 and 4 the amount the
corporation estimates to be the fair value of the shares, plus interest,
accompanied by:
(1) the corporation's closing balance sheet and statement of income for a
fiscal year ending not more than 16 months before the effective date of the
corporate action, together with the latest available interim financial
statements;
(2) an estimate by the corporation of the fair value of the shares and a
brief description of the method used to reach the estimate; and
(3) a copy of section 302A.471 and this section, and a brief description
of the procedure to be followed in demanding supplemental payment.
(b) the corporation may withhold the remittance described in paragraph (a)
from a person who was not a shareholder on the date the action dissented from
was first announced to the public or who is dissenting on behalf of a person
who was not a beneficial owner on that date. If the dissenter has complied
with subdivisions 3 and 4, the corporation shall forward to the dissenter the
materials described in paragraph (a), a statement of the reason for
withholding the remittance, and an offer to pay to the dissenter the amount
listed in the materials if the dissenter agrees to accept that amount in full
satisfaction.
The dissenter may decline the offer and demand payment under subdivision 6.
Failure to do so entitles the dissenter only to the amount offered. If the
dissenter makes demand, subdivisions 7 and 8 apply.
(c) If the corporation fails to remit payment within 60 days of the deposit
of certificates or the imposition of transfer restriction on uncertificated
shares, it shall return all deposited certificates and cancel all transfer
restrictions. However, the corporation may again give notice under subdivision
4 and require deposit or restrict transfer at a later time.
Subd. 6. Supplemental payment; demand. If a dissenter believes that the
amount remitted under subdivision 5 is less than the fair value of the shares
plus interest, the dissenter may give written notice to the corporation of the
dissenter's own estimate of the fair value of the shares, plus interest,
within 3 days after the corporation mails the remittance under subdivision 5,
and demand payment of the difference. Otherwise, a dissenter is entitled only
to the amount remitted by the corporation.
Subd. 7. Petition; determination. If the corporation receives a demand under
subdivision 6, it shall, within 60 days after receiving the demand, either pay
to the dissenter the amount demanded or agreed to by the dissenter after
discussion with the corporation or file in court a petition requesting that
the court determine the fair value of the shares, plus interest. The petition
shall be filed in the county in which the registered office of the corporation
is located, except that a surviving foreign corporation that receives a demand
relating to the shares of a constituent domestic corporation shall file the
petition in the county in this state in which the last registered office of
the constituent corporation was located. The petition shall name as parties
all dissenters who have demanded payment under subdivision 6 and who have not
reached agreement with the corporation. The corporation shall, after filing
the petition, serve all parties with a summons and copy of the petition under
the rules of civil procedure. Nonresidents of this state may be served by
registered or certified mail or by publication as provided by law. Except as
otherwise provided, the rules of civil procedure apply to this proceeding. The
jurisdiction of the court is plenary and exclusive. The court may appoint
appraisers, with powers and authorities the court deems proper, to receive
evidence on and recommend the amount of the fair value of the shares. The
court shall determine whether the shareholder or shareholders in question have
fully complied with the requirements of this section, and shall determine the
fair value of the shares, taking into account any and all factors the court
finds relevant, computed by any method or combination of methods that the
court, in its discretion, sees fit to use, whether or not used by the
corporation or by a dissenter. The fair value of the shares as determined by
the court is binding on all shareholders, wherever located. A dissenter is
entitled to judgment in cash for the amount by which the fair value of the
shares as determined by the court, plus interest, exceeds the amount, if any,
remitted under subdivision 5, but shall not be liable to the corporation for
the amount, if any, by
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which the amount, if any, remitted to the dissenter under subdivision 5
exceeds the fair value of the shares as determined by the court, plus
interest.
Subd. 8. Costs; fees; expenses. (a) The court shall determine the costs and
expenses of a proceeding under subdivision 7, including the reasonable expense
and compensation of any appraiser's appointed by the court, and shall assess
those costs and expenses against the corporation, except that the court may
assess part or all of those costs and expenses against a dissenter whose
action in demanding payment under subdivision 6 is found to be arbitrary,
vexatious, or not in good faith.
(b) If the court finds that the corporation has failed to comply
substantially with this section, the court may assess all fees and expenses of
any experts or attorneys the court deems equitable. These fees and expenses
may also be assessed against a person who has acted arbitrarily, vexatiously,
or not in good faith in bringing the proceeding, and may be awarded to a party
injured by those actions.
(c) The court may award, in its discretion, fees and expense to an attorney
for the dissenters out of the amount awarded to the dissenters, if any.
D-4
<PAGE>
ANNEX E
The terms of the proposed Combination provide that (i) holders of Phar-Mor
Shares will receive one share of Cabot Noble common stock for each share of
Phar-Mor Shares owned as of the effective date of the Combination and (ii)
holders of ShopKo Shares will receive 2.4 Cabot Noble Shares for each share of
ShopKo Shares owned as of the effective date of the Combination, subject to
adjustment to the extent that the value of the exchange consideration per
ShopKo Share would otherwise fall outside a range of $17.25 to $18.00 based
upon an average market price of Phar-Mor Shares (the "ShopKo Exchange Ratio"),
determined as follows:
. If the "Average Closing Price" multiplied by 2.4 is less than $17.25
(i.e. if the Average Closing Price is less than $7.186), the ShopKo
Exchange Ratio will be increased to the quotient (taken to the third
decimal place) obtained by dividing $17.25 by the Average Closing Price.
. If the "Average Closing Price" multiplied by 2.4 exceeds $18.00 (i.e.,
if the Average Closing Price is greater than $7.50), the ShopKo Exchange
Ratio will be reduced to the quotient (taken to the third decimal place)
obtained by dividing $18.00 by the Average Closing Price.
Average Closing Price: means the average closing price per share
of Phar-Mor common stock for each Nasdaq National Market trading
day from , 1997 through and including , 1997 (the sixth
trading day preceding the scheduled date of the special meeting of
ShopKo shareholders) (the "Pricing Period") as reported for Nasdaq
National Market issues in The Wall Street Journal. Cabot Noble,
ShopKo and Phar-Mor will issue a joint press release following the
termination of the Pricing Period specifying the Average Closing
Price and the resulting ShopKo Exchange Ratio.
<TABLE>
<CAPTION>
PRO FORMA OWNERSHIP OF CABOT NOBLE
------------------------------------
ASSUMED AVERAGE SHOPKO EXCHANGE RATIO AGGREGATE VALUE
CLOSING PRICE (NUMBER OF CABOT NOBLE RECEIVED PER FORMER FORMER
OF PHAR-MOR SHARES ISSUED IN EXCHANGE SHOPKO SHARE SHOPKO PUBLIC PHAR-MOR
SHARES(1) FOR EACH SHOPKO SHARE) EXCHANGED SHAREHOLDERS SUPERVALU SHAREHOLDERS
- --------------- ------------------------- --------------- ------------- --------- ------------
<S> <C> <C> <C> <C> <C>
$5.500 3.136(2) $17.250 76.5% 6.5% 17.0%
5.750 3.000 17.250 75.9% 6.4% 17.7%
6.000 2.875 17.250 75.4% 6.4% 18.3%
6.250 2.760 17.250 74.8% 6.3% 18.9%
6.500 2.654 17.250 74.2% 6.3% 19.5%
6.750 2.556 17.250 73.7% 6.2% 20.1%
7.000 2.464 17.250 73.1% 6.2% 20.7%
7.186 2.400 17.250 72.7% 6.1% 21.1%
7.250 2.400 17.400 72.7% 6.1% 21.1%
7.375 2.400 17.700 72.7% 6.1% 21.1%
7.500 2.400 18.000 72.7% 6.1% 21.1%
7.750 2.323 18.000 72.2% 6.1% 21.7%
8.000 2.250 18.000 71.7% 6.1% 22.2%
8.250 2.182 18.000 71.2% 6.0% 22.8%
8.500 2.118 18.000 70.7% 6.0% 23.3%
8.750 2.057 18.000 70.3% 5.9% 23.8%
9.000 2.000 18.000 69.8% 5.9% 24.3%
9.250 1.946 18.000 69.3% 5.9% 24.8%
9.500 1.895(3) 18.000 68.8% 5.8% 25.3%
</TABLE>
- --------
(1) The prices indicated represent hypothetical Average Closing Prices, are
assumed for illustrative purposes only, and will vary with the market
price of the Phar-Mor Shares during the Pricing Period.
(2) If the ShopKo Exchange Ratio is greater than 3.140 (i.e., if the Average
Closing Price is greater than $5.493), the Phar-Mor Board would have the
right to terminate the Combination Agreement, unless ShopKo otherwise
agrees that the ShopKo Exchange Ratio shall be set at 3.140.
(3) If the ShopKo Exchange Ratio is less than 1.895 (i.e., if the Average
Closing Price is greater than $9.501), the ShopKo Board would have the
right to terminate the Combination Agreement, unless Phar-Mor otherwise
agrees that the ShopKo Exchange Ratio shall be set at 1.895.
E-1
<PAGE>
ANNEX F
RESTATED CERTIFICATE OF INCORPORATION
OF
CABOT NOBLE, INC.
Cabot Noble, Inc., a corporation organized and existing under the laws of
the State of Delaware (the "Company"), hereby certifies that:
1. The name of the Company is Cabot Noble, Inc.
2. The date of filing of the Company's original Certificate of Incorporation
was .
3. The Restated Certificate of Incorporation of the Company (the "Restated
Certificate") attached hereto as Exhibit A was duly adopted in accordance with
the provisions of Section 245 of the General Corporation Law of the State of
Delaware.
4. The Restated Certificate so adopted reads in full as set forth in Exhibit
A attached hereto and is hereby incorporated by reference.
In Witness Whereof, Cabot Noble, Inc. has caused this Restated Certificate
to be signed by Robert M. Haft, its Chief Executive Officer, and attested by
John R. Ficarro, its Secretary this day of 1996, and the undersigned
hereby affirm and acknowledge under penalty of perjury that the filing of this
Restated Certificate is the act and deed of Cabot Noble, Inc.
_____________________________________
ROBERT M. HAFT
CHIEF EXECUTIVE OFFICER
Attest:
_____________________________________
JOHN R. FICARRO
ASSISTANT SECRETARY
F-1
<PAGE>
FORM OF
RESTATED CERTIFICATE OF INCORPORATION
OF
CABOT NOBLE, INC.
First. The name of the corporation is Cabot Noble, Inc. (the "Company").
Second. The address of the Company's registered office in the State of
Delaware is 1209 Orange Street, City of Wilmington, County of New Castle,
Delaware 19801. The name of the Company's registered agent at such address is
The Corporation Trust Company.
Third. The purpose of the Company is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
the State of Delaware ("DGCL").
Fourth. Section 1. Authorized Capital Stock. The Company is authorized to
issue two classes of capital stock, designated Common Stock and Preferred
Stock. The total number of shares of capital stock that the Company is
authorized to issue is 250,000,000 shares, consisting of 200,000,000 shares of
Common Stock, par value $0.01 per share, and 50,000,000 shares of Preferred
Stock, par value $0.01 per share.
Section 2. Preferred Stock. The Preferred Stock may be issued in one or more
series. The Board of Directors of the Company (the "Board") is hereby
authorized to issue the shares of Preferred Stock in each series and to fix
from time to time before issuance the number of shares to be included in any
such series and the designation, relative powers, preferences, and rights and
qualifications, limitations, or restrictions of all shares of such series. The
authority of the Board with respect to each such series will include, without
limiting the generality of the foregoing, the determination of any or all of
the following:
(a) the number of shares of each series and the designation to
distinguish the shares of such series from the shares of all other series;
(b) the voting powers, if any, and whether such voting powers are full or
limited in such series;
(c) the redemption provisions, if any, applicable to such series,
including the redemption price or prices to be paid;
(d) whether dividends, if any, will be cumulative or noncumulative, the
dividend rate of such series, and the dates and preferences of dividends on
such series;
(e) the rights of such series upon the voluntary or involuntary
dissolution of, or upon any distribution of the assets of, the Company;
(f) the provisions, if any, pursuant to which the shares of such series
are convertible into, or exchangeable for, shares of any other class or
classes or of any other series of the same or any other class or classes of
stock, or any other security, of the Company or any other corporation or
other entity, and the price or prices or the rates of exchange applicable
thereto;
(g) the right, if any, to subscribe for or to purchase any securities of
the Company or any other corporation or other entity;
(h) the provisions, if any, of a sinking fund applicable to such series;
and
(i) any other relative, participating, optional, or other special powers,
preferences, rights, qualifications, limitations, or restrictions thereof;
all as may be determined from time to time by the Board and stated in the
resolution or resolutions providing for the issuance of such Preferred Stock
(collectively, a "Preferred Stock Designation").
Section 3. Common Stock. Except as may otherwise be provided in a Preferred
Stock Designation, the holders of Common Stock will be entitled to one vote on
each matter submitted to a vote at a meeting of
F-2
<PAGE>
stockholders for each share of Common Stock held of record by such holder as
of the record date for such meeting.
Fifth. The Board may make, amend, and repeal the By-Laws of the Company. Any
By-Law made by the Board under the powers conferred hereby may be amended or
repealed by the Board (except as specified in any such By-Law so made or
amended) or by the stockholders in the manner provided in the By-Laws of the
Company. Notwithstanding the foregoing and anything contained in this
Certificate of Incorporation to the contrary, By-Laws 1, 3(a), 8, 10, 11, 12,
13, and 39 may not be amended or repealed by the stockholders, and no
provision inconsistent therewith may be adopted by the stockholders, without
the affirmative vote of the holders of Voting Stock (as defined below) having
at least 75% of the votes of all Voting Stock, voting together as a single
class. The Company may in its By-Laws confer powers upon the Board in addition
to the foregoing and in addition to the powers and authorities expressly
conferred upon the Board by applicable law. For the purposes of this Restated
Certificate, "Voting Stock" means stock of the Company of any class or series
entitled to vote generally in the election of Directors. Notwithstanding
anything contained in this Certificate of Incorporation to the contrary, the
affirmative vote of the holders of Voting Stock having at least 75% of the
votes of all Voting Stock, voting together as a single class, is required to
amend or repeal, or to adopt any provisions inconsistent with, this Article
Fifth.
Sixth. Subject to the rights of the holders of any series of Preferred
Stock:
(a) any action required or permitted to be taken by the stockholders of
the Company must be effected at a duly called annual or special meeting of
stockholders of the Company and may not be effected by any consent in
writing of such stockholders; and
(b) special meetings of stockholders of the Company may be called only by
(i) the Chairman of the Board (the "Chairman"), (ii) the Secretary of the
Company (the "Secretary") within 10 calendar days after receipt of the
written request of a majority of the total number of Directors that the
Company would have if there were no vacancies (the "Whole Board"), acting
at a duly constituted meeting of the Board and (iii) as provided in By-Law
3.
At any annual meeting or special meeting of stockholders of the Company, only
such business will be conducted or considered as has been brought before such
meeting in the manner provided in the By-Laws of the Company. Notwithstanding
anything contained in this Certificate of Incorporation to the contrary, the
affirmative vote of the holders of Voting Stock having at least 75% of the
votes of all Voting Stock, voting together as a single class, shall be
required to amend or repeal, or adopt any provision inconsistent with, this
Article Sixth.
Seventh. Section 1. Number, Election, And Terms of Directors. Subject to the
rights, if any, of the holders of any series of Preferred Stock to elect
additional Directors under circumstances specified in a Preferred Stock
Designation, the number of the Directors of the Company will not be less than
three (3) nor more than sixteen (16) and will be fixed from time to time in
the manner described in the By-Laws of the Company. The Directors, other than
those who may be elected by the holders of any series of Preferred Stock, will
be classified with respect to the term for which they severally hold office
into three classes, as nearly equal in number as possible, designated Class I,
Class II, and Class III. A majority of the Directors shall be "Independent
Directors," as defined in Section 5 of this Article Seventh, and each Class of
Directors shall have a number of Independent Directors as nearly equal as
possible; provided, that such requirements shall not apply to the Board as
constituted pursuant to that certain Agreement and Plan of Reorganization
dated as of September 7, 1996, as amended and restated, by and among the
Company, Phar-Mor, Inc. and ShopKo Stores, Inc. (the "Initial Board"); and
provided further that any Director appointed or elected (i) to fill a vacancy
created on the Initial Board (other than a vacancy attributable to a Director
who is also at the time such vacancy is created the Chief Executive Officer of
the Company) or (ii) upon any increase in the size of the Board, shall be an
Independent Director, until such time as a majority of the Directors are
Independent Directors. At any meeting of stockholders at which Directors are
to be elected, the number of Directors elected may not exceed the greatest
number of Directors then in office in any class of Directors. The Directors
first elected to Class I will hold office for a term expiring at the annual
meeting of stockholders to be held in 1997; the Directors first elected to
Class II will hold office for a term expiring at the annual meeting of
stockholders to be held in 1998; and the Directors first elected
F-3
<PAGE>
to Class III will hold office for a term expiring at the annual meeting of
stockholders to be held in 1999, with the members of each class to hold office
until their successors are elected and qualified. At each succeeding annual
meeting of the stockholders of the Company, the successors of the class of
Directors whose terms expire at that meeting will be elected by plurality vote
of all votes cast at such meeting to hold office for a term expiring at the
annual meeting of stockholders held in the third year following the year of
their election. Subject to the rights, if any, of the holders of any series of
Preferred Stock to elect additional Directors under circumstances specified in
a Preferred Stock Designation, Directors may be elected by the stockholders
only at an annual meeting of stockholders. Election of Directors of the
Company need not be by written ballot unless requested by the Chairman or by
the holders of Voting Stock having a majority of the votes of all Voting Stock
present in person or represented by proxy at a meeting of the stockholders at
which Directors are to be elected.
Section 2. Nomination of Director Candidates. Advance notice of stockholder
nominations for the election of Directors must be given in the manner provided
in the By-Laws of the Company.
Section 3. Newly Created Directorships And Vacancies. Subject to the rights,
if any, of the holders of any series of Preferred Stock to elect additional
Directors under circumstances specified in a Preferred Stock Designation,
newly created directorships resulting from any increase in the number of
Directors and any vacancies on the Board resulting from death, resignation,
disqualification, removal, or other cause will be filled solely by the
affirmative vote of a majority of the remaining Directors then in office
acting at a duly constituted meeting of the Board, even though less than a
quorum of the Board, or by a sole remaining Director. Any Director elected in
accordance with the preceding sentence will hold office until the next annual
meeting of stockholders and until such Director's successor has been elected
and qualified. No decrease in the number of Directors constituting the Board
may shorten the term of any incumbent Director.
Section 4. Removal. Subject to the rights, if any, of the holders of any
series of Preferred Stock to elect additional Directors under circumstances
specified in a Preferred Stock Designation, any Director may be removed from
office by the stockholders only for cause and only in the manner provided in
this Section 4. At any annual meeting or special meeting of the stockholders,
the notice of which states that the removal of a Director or Directors is
among the purposes of the meeting, the affirmative vote of the holders of
Voting Stock having at least 75% of the votes of all Voting Stock, voting
together as a single class, may remove such Director or Directors for cause.
Section 5. Independent Director. "Independent Director" shall mean any
individual that (a) is not an affiliate (as defined in Rule 12b-2 of the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder (the "Exchange Act")) of the Company (except an individual who is
an affiliate of the Company solely because such individual is a Director) or
of any corporation, partnership, association or other entity with respect to
which the Company owns a majority of the common stock or other equity
interests or has the power to vote or direct the voting of a sufficient number
of securities or other governing body ("Subsidiary"), and (b) is not an
officer or employee, of the Company or a family member of any officer,
director or employee, or any Subsidiary.
Section 6. Amendment, Repeal, Etc. Notwithstanding anything contained in
this Certificate of Incorporation to the contrary, the affirmative vote of
holders of Voting Stock having at least 75% of the votes of all Voting Stock,
voting together as a single class, is required to amend or repeal, or adopt
any provision inconsistent with, this Article Seventh.
Eighth. To the full extent permitted by the DGCL or any other applicable law
currently or hereafter in effect, no Director of the Company will be
personally liable to the Company or its stockholders for or with respect to
any acts or omissions in the performance of his or her duties as a Director of
the Company. Any repeal or modification of this Article Eighth will not
adversely affect any right or protection of a Director of the Company existing
prior to such repeal or modification.
Ninth. The Company will indemnify each person who is or was or had agreed to
become a Director or officer of the Company and, at the Company's option, may
indemnify any other person who is or was serving or
F-4
<PAGE>
who had agreed to serve at the request of the Board or an officer of the
Company as an employee or agent of the Company or as a director, officer,
employee, or agent of another corporation, partnership, joint venture, trust,
or other entity, whether for profit or not for profit (including the heirs,
executors, administrators, and estate of such person), to the full extent
permitted by the DGCL or any other applicable law as currently or hereafter in
effect. Without limiting the generality or the effect of the foregoing, the
Company may adopt By-Laws, or enter into one or more agreements with any
person, which provide for indemnification greater or different than that
provided in this Article Ninth or the DGCL. Any amendment or repeal of, or
adoption of any provision inconsistent with, this Article Ninth will not
adversely affect any right or protection existing hereunder, or arising out of
facts occurring, prior to such amendment, repeal, or adoption and no such
amendment, repeal, or adoption, will affect the legality, validity, or
enforceability of any contract entered into or right granted prior to the
effective date of such amendment, repeal, or adoption.
F-5
<PAGE>
ANNEX G
MANAGEMENT PROJECTIONS; AS ADJUSTED
(IN MILLIONS, EXCEPT PER SHARE DATA)
ADJUSTED PROJECTIONS USED BY JEFFERIES IN ITS FAIRNESS OPINION
The projections below (the "As Adjusted Projections Used By Jefferies"),
while presented with numerical specificity, were based upon numerous estimates
and other assumptions which are inherently subject to significant business,
economic and competitive uncertainties, contingencies and risks, all of which
are difficult to quantify and many of which are beyond the control of Cabot
Noble, ShopKo and Phar-Mor. Accordingly, there can be no assurance that the As
Adjusted Projections Used By Jefferies will be realized, and it is likely that
future results will vary from those set forth below, possibly in material
respects. The As Adjusted Projections Used By Jefferies include the
information set forth below, and are adjustments, based on discussions with
each company's respective management, for more conservative estimates of sales
and other assumptions made to the Initial Management Projections as part of
the sensitivity analysis performed by Jefferies and considered by Jefferies in
delivering the Phar-Mor Fairness Opinion. Subsequent to the delivery of such
fairness opinion, the managements of ShopKo and Phar-Mor have engaged in
transition and business planning for Cabot Noble. As a result of that
planning, certain of the assumptions about combined operations have
subsequently been modified. Additionally, changes to the terms of the
Transaction effected subsequent to the delivery of the Phar-Mor Fairness
Opinion are not reflected in the As Adjusted Projections Used By Jefferies.
The As Adjusted Projections Used By Jefferies do not include the benefits of
any anticipated synergies from the Combination. Inclusion of the As Adjusted
Projections Used By Jefferies in this Joint Proxy Statement/Prospectus should
not be regarded as a representation by any person that the projected results
reflected in the As Adjusted Projections Used By Jefferies will be achieved.
Neither Phar-Mor, ShopKo, Cabot Noble nor Jefferies intends to update or
otherwise publicly revise the As Adjusted Projections Used By Jefferies to
reflect circumstances existing or developments occurring after the preparation
of such projections or to reflect the occurrence of unanticipated events.
<TABLE>
<CAPTION>
PROJECTED FISCAL YEAR ENDED FEBRUARY
--------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
CABOT NOBLE, INC.
Revenues............................... $ 3,393.8 $ 3,743.5 $ 4,085.7
Gross profit........................... 730.6 752.9 785.4
Selling, general & administrative
expenses.............................. 552.7 567.8 574.6
EBITDA................................. 177.9 185.2 210.8
EBIT................................... 105.2 107.1 129.1
Net interest expense................... 64.0 65.5 64.6
Net income............................. 24.7 25.0 38.7
Earnings per share..................... $ 0.44 $ 0.45 $ 0.70
SHOPKO STORES, INC.
Revenues............................... $ 2,319.9 $ 2,642.8 $ 2,957.5
Gross profit........................... 531.6 556.4 580.3
Selling, general & administrative
expenses.............................. 384.1 401.8 404.6
EBITDA................................. 147.5 154.6 175.7
EBIT................................... 99.2 104.7 125.2
PHAR-MOR, INC.
Revenues............................... $ 1,073.9 $ 1,100.7 $ 1,128.2
Gross profit........................... 199.0 196.5 205.1
Selling, general & administrative
expenses.............................. 168.6 166.0 170.0
EBITDA................................. 30.4 30.6 35.1
EBIT................................... 9.4 5.9 7.5
</TABLE>
G-1
<PAGE>
SIGNIFICANT ASSUMPTIONS UNDERLYING THE AS ADJUSTED PROJECTIONS USED BY
JEFFERIES:
The assumptions and adjustments applicable to the projections contained in
"Certain Forward-Looking Information" apply to the As Adjusted Projections
Used By Jefferies, with the following modifications:
SALES:
Sales for Phar-Mor are based on maintaining a 102-store base rather than
adding new stores as planned by Phar-Mor. In addition, the growth rate for
comparable store sales for Phar-Mor were assumed to be lower than in the
Initial Phar-Mor Management Projections.
Sales for ShopKo were adjusted in 1998 for a more conservative same stores
sales increase for ShopKo's retail business.
GROSS PROFIT:
Gross profit percentage was unadjusted for both Shopko and Phar-Mor, but was
applied to the more conservative sales numbers described above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
The As Adjusted Projections Used By Jefferies assumed a less significant
decline in selling, general and administrative margin than that projected by
Phar-Mor since increases in productivity were assumed to be lower than in the
management projections in "Certain Forward-Looking Information."
NET INTEREST EXPENSE:
Net interest expense is unadjusted, except for the assumption of $100
million in debt assumed to finance the repurchase of the Cabot Noble Shares
received by Supervalu.
INCOME TAXES:
Income taxes are estimated at an effective tax rate of 40% for Cabot Noble,
ShopKo and Phar-Mor for all three fiscal years.
EARNINGS PER SHARE:
Earnings per share are determined by dividing net income by the weighted
average number of common shares outstanding during each year (assumed to be
55.7 million shares for Cabot Noble).
G-2
<PAGE>
PHAR-MOR PROJECTIONS ADJUSTED BY SHOPKO MANAGEMENT
The projections shown below are based on the projections supplied by Phar-
Mor management and adjusted by ShopKo management, and were used by Salomon
Brothers in preparing its fairness opinion. Such adjusted projections (the
"Adjusted Projections") shown below, while presented with numerical
specificity, were based upon numerous estimates and other assumptions which
are inherently subject to significant business, economic and competitive
uncertainties, contingencies and risks, all of which are difficult to quantify
and many of which are beyond the control of Cabot Noble, ShopKo and Phar-Mor.
Accordingly, there can be no assurance that the Adjusted Projections will be
realized, and it is likely that future results will vary from those set forth
below, possibly in material respects. The Adjusted Projections include the
information set forth below, and are adjustments, based on discussions with
ShopKo's management, for more conservative estimates of sales and other
assumptions made in the management projections in "Certain Forward-Looking
Information." Inclusion of the Adjusted Projections in the Joint Proxy
Statement/Prospectus should not be regarded as a representation by any person
that the projected results reflected in the Adjusted Projections will be
achieved. Neither Phar-Mor, ShopKo nor Cabot Noble intends to update or
otherwise publicly revise the Adjusted Projections to reflect circumstances
existing or developments occurring after the preparation of such projections
or to reflect the occurrence of unanticipated events.
SHOPKO PROJECTIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MANAGEMENT PROJECTIONS(A)
--------------------------------------
PROJECTED FISCAL YEAR ENDING FEBRUARY
--------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Revenues................................ $ 2,319.9 $ 2,642.8 $ 2,957.5
Gross profit............................ 531.6 556.4 580.3
Selling, general and administrative..... 373.5 389.2 391.4
EBITDA.................................. 158.1 167.2 188.9
EBIT.................................... 98.6 103.0 123.5
Interest expense........................ 31.7 31.0 30.6
Net income.............................. 40.6 43.7 56.4
Earnings per share...................... $ 1.24 $ 1.34 $ 1.73
</TABLE>
- --------
(a) Based on ShopKo management's projections as presented in "Certain Forward-
Looking Information--ShopKo Information Supplied to Phar-Mor."
G-3
<PAGE>
PHAR-MOR PROJECTIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MANAGEMENT PROJECTIONS(A) AS ADJUSTED PROJECTIONS(B)
--------------------------------------- ---------------------------------------
PROJECTED FISCAL YEAR ENDING PROJECTED FISCAL YEAR ENDING
--------------------------------------- ---------------------------------------
JUNE 28, 1997 JULY 1, 1998 JULY 2, 1999 JUNE 28, 1997 JULY 1, 1998 JULY 2, 1999
------------- ------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $1,105.4 $1,164.6 $1,226.9 $1,082.7 $1,109.7 $137.5
Gross profit............ 196.4 213.5 229.1 191.7 198.8 208.2
Selling, general and
administrative......... 161.4 167.2 173.7 161.6 168.1 170.9
Adjusted EBITDA......... 25.7 36.5 45.2 20.8 21.1 27.0
EBIT.................... 12.7 20.4 26.9 7.8 4.9 8.7
Interest expense........ 12.7 13.3 13.3 12.7 13.3 13.3
Net income.............. 0.0 4.2 8.2 (2.9) (5.0) (2.7)
Earnings per share...... $0.00 $0.35 $0.67 ($0.24) ($0.41) ($0.22)
</TABLE>
- --------
(a) Based on the Initial Phar-Mor Management Projections.
(b) Based on adjustments by ShopKo management to reflect certain more
conservative assumptions and adjustments. These adjustments include:
(i) Comparable store sales growth of 2.5% for the 102 Phar-Mor stores per
year for the fiscal years 1997, 1998 and 1999.
(ii) Gross profit margins are based on the Initial Phar-Mor Management
Projections. However, occupancy costs are kept constant in dollar
terms and lead to a slight reduction in gross profit margins given the
lower level of sales, and hence the higher occupancy costs as a
percentage of sales. As a result, for fiscal years 1997, 1998 and
1999, gross profit margins are adjusted to be lower than Phar-Mor
management projections by 0.06%, 0.41% and 0.37%, respectively.
(iii) For fiscal years 1997, 1998 and 1999, selling, general and
administrative expenses as a percentage of sales are projected to be
higher than the Initial Phar-Mor Management Projections by 0.33%,
0.60% and 0.52%, respectively.
G-4
<PAGE>
CABOT NOBLE PROJECTIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MANAGEMENT PROJECTIONS AS ADJUSTED PROJECTIONS
(A)(C) (B)(C)
-------------------------- --------------------------
PROJECTED FISCAL YEAR PROJECTED FISCAL YEAR
ENDING FEBRUARY ENDING FEBRUARY
-------------------------- --------------------------
1997 1998 1999 1997 1998 1999
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $3,408.9 $3,787.7 $4,163.6 $3,393.8 $3,743.5 $4,085.7
Gross profit............ 722.9 764.2 804.2 719.7 752.9 785.4
Selling, general and ad-
ministrative........... 525.9 539.4 542.9 526.1 540.1 541.4
Adjusted EBITDA......... 188.3 215.2 251.2 184.9 203.2 233.9
EBIT.................... 112.9 132.4 164.8 109.5 120.4 147.4
Interest expense........ 53.9 56.1 51.3 54.1 56.3 52.1
Net income.............. 35.4 45.8 68.1 33.2 38.4 57.1
Earnings per share...... $0.60 $0.78 $1.16 $0.57 $0.65 $0.97
</TABLE>
- --------
(a) Based on the Initial ShopKo Management Projections and the Initial Phar-
Mor Management Projections.
(b) Based on adjustments by ShopKo management to the Initial Phar-Mor
Management Projections to reflect certain more conservative assumptions
and adjustments as described above.
(c) Based on assumptions and adjustments to reflect the effects of 1) the
Transaction; 2) the incurrence of $75.0 million in additional financing;
and 3) purchase accounting.
G-5
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THAT A FINAL PROSPECTUS HAS BEEN +
+DELIVERED. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE +
+SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
[ALTERNATE PAGE FOR RESALE PROSPECTUS]
SUBJECT TO COMPLETION, DATED JANUARY 10, 1997
PROSPECTUS
CABOT NOBLE, INC.
This Prospectus relates to the offer and sale of up to * shares of common
stock of Cabot Noble, Inc. ("Cabot Noble"), par value $.01 per share ("Cabot
Noble Shares"), by or for the account of certain stockholders of Cabot Noble
(the "Selling Stockholders") identified in the table immediately below and in
"Selling Stockholders." The Selling Stockholders received the Cabot Noble
Shares, or Cabot Noble Warrants to purchase the Cabot Noble Shares, covered by
this Prospectus in connection with the business combination among Cabot Noble,
Phar-Mor, Inc. ("Phar-Mor") and ShopKo Stores, Inc. ("ShopKo"), which was
consummated on *, pursuant to which (i) ShopKo and Phar-Mor became separate
wholly owned subsidiaries of Cabot Noble, (ii) holders of common stock of
ShopKo, par value $.01 per share ("ShopKo Shares") received Cabot Noble Shares
in exchange for each outstanding ShopKo Share, and cash in lieu of any
fractional Cabot Noble Share (the "ShopKo Exchange") and (iii) holders of
common stock of Phar-Mor, par value $.01 per share ("Phar-Mor Shares"),
received Cabot Noble Shares in exchange for each outstanding Phar-Mor Share and
holders of Phar-Mor warrants to purchase Phar-Mor Shares ("Phar-Mor Warrants")
will receive Cabot Noble warrants ("Cabot Noble Warrants") to purchase a like
number of Cabot Noble Shares (collectively, the "Phar-Mor Exchange"). The
Combination Agreement (as defined below) and the ShopKo Exchange are
collectively referred to as the "ShopKo Plan," the Combination Agreement and
the Phar-Mor Exchange are collectively referred to as the "Phar-Mor Plan" and
the ShopKo Plan and the Phar-Mor Plan are collectively referred to as the
"Combination." Immediately following the consummation of the Combination, Cabot
Noble purchased approximately 90% of the Cabot Noble Shares issued pursuant to
the ShopKo Exchange to Supermarket Operators of America, a wholly owned
subsidiary of supervalu inc. ("supervalu") and a Selling Stockholder (the
"Cabot Noble Buy Back" and, together with the Combination, the "Transaction").
Cabot Noble will not receive any of the proceeds from the sale of Cabot Noble
Shares by the Selling Stockholders.
-----------
THE SECURITIES TO BE ISSUED IN CONNECTION WITH THE COMBINATION HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR BY ANY
STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS JOINT PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
-----------
FOR A DESCRIPTION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING
THE TRANSACTION AND
THE RECEIPT OF CABOT NOBLE SHARES OFFERED HEREBY, SEE "RISK FACTORS" BEGINNING
ON PAGE 17.
-----------
The Cabot Noble Shares may be offered from time to time in negotiated
transactions or otherwise at market prices prevailing at the time of each sale,
subject to the right to reject any order in whole or part.
INFORMATION WITH RESPECT TO SELLING STOCKHOLDER(S)
<TABLE>
<CAPTION>
NUMBER OF CABOT NOBLE NUMBER OF PERCENT OF CABOT NOBLE
SHARES [BENEFICIALLY] CABOT NOBLE SHARES SHARES TO BE [BENEFICIALLY]
SELLING STOCKHOLDER(S) OWNED PRIOR TO OFFERING OFFERED OWNED AFTER OFFERING
---------------------- ----------------------- ------------------ ---------------------------
<S> <C> <C> <C>
Hamilton Morgan,
L.L.C.................. 3,750,000
Supermarket Operators of
America, Inc........... *
FoxMeyer Health
Corporation............ 1,045,935
Robert M. Haft.......... 112,500
</TABLE>
- -----
* To be completed upon consummation of the Transaction.
The date of this Prospectus is , 1997.
<PAGE>
[ALTERNATE PAGE FOR RESALE PROSPECTUS]
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary.................................................................... 1
Risk Factors............................................................... 17
Competition............................................................... 17
Limited Operating History of Reorganized Phar-Mor......................... 17
Combination of Retail Operations; Realization of Synergies................ 17
Leverage.................................................................. 17
Interests of Management................................................... 18
Trading Market for Cabot Noble Shares..................................... 18
Holding Company Structure; Reliance on Subsidiaries for Dividends......... 18
Dividends................................................................. 19
Dilution; Control of Cabot Noble.......................................... 19
Resale of Cabot Noble Shares.............................................. 20
Market Price of Cabot Noble Shares........................................ 20
Dependence on Key Personnel............................................... 20
Reduced Quorum Requirement................................................ 21
No Appraisal Rights for Holders of Phar-Mor Shares; ShopKo Dissenters'
Rights................................................................... 21
Anti-Takeover Provisions.................................................. 21
Litigation and Insurance.................................................. 22
Hamilton Morgan Issues.................................................... 22
Cabot Noble Business Strategy.............................................. 24
General................................................................... 24
Cost Savings From the Combination......................................... 24
Revenue Enhancements from the Combination................................. 25
ProVantage................................................................ 26
Strategic Benefits of the Combination..................................... 27
Comparative Per Share Data................................................. 29
Capitalization............................................................. 30
Market Price and Dividend Data............................................. 31
ShopKo.................................................................... 31
Phar-Mor.................................................................. 31
Cabot Noble............................................................... 32
The Special Meetings....................................................... 33
General................................................................... 33
ShopKo Record Date; Quorum; Vote Required................................. 33
Phar-Mor Record Date; Quorum; Vote Required............................... 33
Dissenters' Rights........................................................ 35
Solicitation of ShopKo Proxies............................................ 37
Solicitation of Phar-Mor Proxies.......................................... 38
Other Matters to be Considered............................................ 39
The Transaction............................................................ 40
Background of the Transaction............................................. 40
Recommendations of ShopKo Board; Reasons for the Transaction.............. 44
ShopKo Fairness Opinion................................................... 46
Recommendations of Phar-Mor Board; Reasons for the Transaction............ 50
Phar-Mor Fairness Opinion................................................. 51
Terms of the ShopKo Plan.................................................. 56
Terms of the Phar-Mor Plan................................................ 57
Voting Agreement.......................................................... 59
Exchange of Certificates.................................................. 59
Fractional Share Interests................................................ 60
Treatment of Options, Warrants and Other Rights........................... 60
Cabot Noble Buy Back...................................................... 61
Financing................................................................. 62
Representations and Warranties............................................ 63
</TABLE>
<TABLE>
<S> <C>
Operations of Phar-Mor, ShopKo and Cabot Noble Prior to the Transaction.. 63
ShopKo Dividends......................................................... 64
No Solicitation; Certain Negotiations.................................... 64
Director and Officer Indemnification and Liability Insurance............. 64
Conditions Precedent to the Transaction.................................. 64
Termination; Break-up Fee................................................ 65
Modification or Waiver................................................... 67
Accounting Treatment..................................................... 67
Certain United States Federal Income Tax Consequences..................... 68
Certain Forward-Looking Information....................................... 70
Cabot Noble Pro Forma Combined Projections............................... 70
ShopKo Information Supplied to Phar-Mor.................................. 72
Phar-Mor Information Supplied to ShopKo.................................. 75
Initial Management Projections; As Adjusted.............................. 77
Cabot Noble
Unaudited Pro Forma Consolidated Financial Statements.................... 78
ShopKo Selected Consolidated Financial Data............................... 85
ShopKo Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 86
General.................................................................. 86
Results of Operations.................................................... 86
Liquidity and Capital Resources.......................................... 90
Inflation................................................................ 91
Phar-Mor Selected Consolidated Financial Data............................. 92
Phar-Mor Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 93
General.................................................................. 93
Recent Developments and Outlook.......................................... 93
Results of Operations.................................................... 93
Financial Condition and Liquidity........................................ 98
Trends, Demands, Commitments, Events or Uncertainties.................... 100
Inflation................................................................ 100
Description of Cabot Noble................................................ 101
General.................................................................. 101
Directors and Executive Officers......................................... 101
Management Compensation.................................................. 102
Employment Contracts..................................................... 103
Director Remuneration.................................................... 103
Stock Incentive Plan..................................................... 104
Director Stock Plan...................................................... 106
Director Phantom Stock Plan.............................................. 107
Pro Forma Beneficial Ownership of Cabot Noble Shares..................... 108
Description of ShopKo..................................................... 110
General.................................................................. 110
Merchandising Philosophy--Management..................................... 110
Merchandising and Services--General Merchandise.......................... 111
Merchandising and Services--Health Services.............................. 111
Marketing and Advertising................................................ 112
Store Layout and Design.................................................. 113
Store Operations and Management.......................................... 113
Purchasing and Distribution.............................................. 114
Management Information Systems........................................... 114
</TABLE>
iii
<PAGE>
[ALTERNATE PAGE FOR RESALE PROSPECTUS]
<TABLE>
<S> <C>
Expansion................................................................. 115
Competition............................................................... 116
Seasonality............................................................... 117
Employees................................................................. 117
Government Regulation..................................................... 117
Properties................................................................ 119
Legal Proceedings......................................................... 119
Executive Officers of ShopKo.............................................. 120
Employment Agreements--Executive Officers................................. 122
Indemnification of Officers and Directors................................. 122
Severance Agreements...................................................... 122
Security Ownership of Certain Beneficial Owners and Management............ 124
Description of Phar-Mor.................................................... 125
General................................................................... 125
Operations................................................................ 126
Marketing and Merchandising............................................... 127
Sales..................................................................... 128
Competition............................................................... 129
Capital Expenditures...................................................... 129
Growth.................................................................... 129
Trademarks and Service Marks.............................................. 130
History................................................................... 130
Regulation................................................................ 132
Properties................................................................ 132
Legal Proceedings......................................................... 133
Directors and Executive Officers.......................................... 133
Executive Compensation.................................................... 136
Executive Compensation Plans.............................................. 139
Compensation of Directors................................................. 142
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements............................................................. 142
Compensation Committee Interlocks and Insider Participation............... 145
Security Ownership of Certain Beneficial Owners and Management............ 146
Certain Relationships and Related Transactions............................ 149
Description of Capital Stock of Cabot Noble................................ 152
Common Stock.............................................................. 152
Preferred Stock........................................................... 152
Warrants.................................................................. 152
Transfer Agent and Registrar.............................................. 153
</TABLE>
<TABLE>
<S> <C>
Comparison of Rights of Phar-Mor and ShopKo Shareholders and Cabot Noble
Stockholders............................................................. 154
Classes and Series of Capital Stock....................................... 154
Director and Officer Liability and Indemnification........................ 154
Special Meetings of Shareholders.......................................... 156
Annual Meeting of Shareholders............................................ 157
Dividends and Distributions............................................... 157
Appraisal Rights.......................................................... 158
Shareholder Approval of Mergers........................................... 159
Stock Repurchases......................................................... 160
Removal of Directors...................................................... 160
Charter Amendments........................................................ 161
Shareholder Action without a Meeting...................................... 162
"Anti-Takeover" Laws...................................................... 162
Voluntary Dissolution..................................................... 164
Transactions with Directors............................................... 164
Filling Vacancies on the Board of Directors............................... 165
Number and Qualification of Directors..................................... 165
Preemptive Rights......................................................... 166
Director Action by Written Consent........................................ 166
Voting in the Election of Directors....................................... 167
Certain Transactions...................................................... 167
ShopKo Employment Agreements--Executive Officers......................... 167
Effect of the Transaction on Stock Option and Restricted Stock Awards of
ShopKo.................................................................. 169
CareStream Scrip Card Acquisition by ShopKo.............................. 169
Phar-Mor Option Grants; Employment
Agreements--Executive Officers.......................................... 170
Selling Stockholders...................................................... 171
Legal Matters............................................................. 171
Experts................................................................... 172
Index to Financial Statements............................................. F-1
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<C> <S>
Annex A.. Agreement and Plan of Reorganization, as amended
Annex B.. Fairness Opinion of Salomon Brothers Inc
Annex C.. Fairness Opinion of Jefferies & Company, Inc.
Annex D.. Minnesota Dissenters' Rights Statute
Annex E.. Calculation of ShopKo Exchange Ratio
Annex F.. Restated Certificate of Incorporation of Cabot Noble, Inc.
Annex G.. Management Projections; As Adjusted
</TABLE>
iv
<PAGE>
[ALTERNATE PAGE FOR RESALE PROSPECTUS]
would like to work out an agreement with the new Cabot Noble Board with
respect to the terms and conditions concerning his role as Chairman and Chief
Executive Officer of Cabot Noble.
SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
Selling Stockholders. The shares set forth therein are being included in the
Registration Statement of which this Prospectus forms a part pursuant to
registration commitments afforded to the Selling Stockholders by contractual
obligations. Cabot Noble will not receive any proceeds from the sale of Cabot
Noble Shares by the Selling Stockholders. Proceeds from the exercise of Cabot
Noble Warrants, if any, will be added to Cabot Noble's working capital.
<TABLE>
<CAPTION>
NUMBER OF CABOT NOBLE NUMBER OF PERCENT OF CABOT
SHARES [BENEFICIALLY] CABOT NOBLE SHARES SHARES TO BE [BENEFICIALLY]
SELLING STOCKHOLDER(S) OWNED PRIOR TO OFFERING OFFERED OWNED AFTER OFFER
---------------------- ----------------------- ------------------ ---------------------------
<S> <C> <C> <C>
Hamilton Morgan,
L.L.C.................. 3,750,000
Supermarket Operators of
America, Inc........... *
FoxMeyer Health Corpora-
tion................... 1,045,935
Robert M. Haft.......... 112,500
</TABLE>
PLAN OF DISTRIBUTION
Cabot Noble Shares issued to the Phar-Mor Shareholders and the ShopKo
Shareholders under this Prospectus will be freely transferable under the
Securities Act, except for shares issued to any person who may be deemed to be
an "underwriter" within the meaning of Section 2(11) of the Securities Act and
Rule 145(c) thereunder. Generally, these are persons, including the Selling
Stockholders, who are deemed to control, be controlled by, or under common
control with the entities or assets being acquired by Cabot Noble. Cabot Noble
Shares issued in connection with the Combination to persons who constitute
"underwriters" within the meaning of Section 2(11) and Rule 145(c) may not be
publicly reoffered or resold by such person except pursuant to an effective
registration statement under the Securities Act covering such shares or, in
certain circumstances, pursuant to Rule 145(d) or any other applicable
exemption under the Securities Act.
The Cabot Noble Shares being offered for sale by the Selling Stockholders
may be offered from time to time at market prices prevailing at the time of
sale or at negotiated prices, and without payment of any underwriting
discounts or commissions except for usual and customary selling commissions
paid to brokers or dealers. This Prospectus may be used from time to time by
each Selling Stockholder to offer the Cabot Noble Shares registered hereby for
sale in transactions in which he, she or it may be deemed to be an underwriter
within the meaning of the Securities Act. Brokers, dealers and agents
participating in the distribution of the Cabot Noble Shares offered by Selling
Stockholders may be deemed to be underwriters, and any discounts and
commissions received by them and any profit realized by them on resale of such
shares may be deemed to be underwriting discounts and commissions under the
Securities Act.
LEGAL MATTERS
Certain legal matters relating to the securities offered hereby will be
passed upon for Cabot Noble and Phar-Mor by Swidler & Berlin, Chartered,
Washington, D.C., and for ShopKo by Godfrey & Kahn, S.C., Milwaukee,
Wisconsin, and by Sidley & Austin, Chicago, Illinois, as special counsel to
ShopKo.
171
<PAGE>
[ALTERNATE PAGE FOR RESALE PROSPECTUS]
EXPERTS
The Phar-Mor consolidated financial statements as of June 29, 1996,
September 2, 1995 and July 1, 1995, and for the forty-three weeks ended June
29, 1996, the nine weeks ended September 2, 1995, the fifty-two weeks ended
July 1, 1995 and the fifty-three weeks ended July 2, 1994; the ShopKo
consolidated financial statements as of February 24, 1996 and February 25,
1995, and for the three years in the period ended February 24, 1996; and the
Cabot Noble balance sheet as of October 10, 1996 included in or incorporated
by reference in this Joint Proxy Statement/Prospectus and related financial
statement schedules have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports appearing or incorporated by reference
herein.
The independent auditors' report on the consolidated financial statements of
Phar-Mor as of July 1, 1995 and for the nine weeks ended September 2, 1995,
the fifty-two weeks ended July 1, 1995 and the fifty-three weeks ended July 2,
1994, expresses a qualified opinion as reliable accounting records to support
the acquisition cost of property and equipment were not available. Also, the
independent auditors' report includes explanatory paragraphs relating to 1)
the comparability of financial information prior to September 2, 1995 as a
result of the emergence of Phar-Mor from bankruptcy and the creation of a new
entity and 2) Phar-Mor entering into the Transaction with ShopKo.
The reports of such firm have been so included in reliance upon their
authority as experts in accounting and auditing.
172
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware Law empowers a Delaware corporation to indemnify
any persons who are, or are threatened to be made, parties to any threatened,
pending or completed legal action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of such corporation), by reason of the fact that such person was an
officer or director of such corporation, or is or was serving at the request
of such corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided that such officer or director acted in good faith and in
a manner he reasonably believed to be in or not opposed to the corporation's
best interests and, for criminal proceedings, had no reasonable cause to
believe his conduct was illegal. A Delaware corporation may indemnify officers
and directors in an action by or in the right of the corporation under the
same conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable to the
corporation in the performance of his duty. Where an officer or director is
successful on the merits or otherwise in the defense of any action referred to
above, the corporation must indemnify him against the expenses which such
officer or director actually and reasonably incurred.
In accordance with the Delaware Law, the Cabot Noble Certificate (filed as
Exhibit 3.1 to this Registration Statement) contains a provision limiting the
personal liability of the directors of Cabot Noble for violations of their
fiduciary duty to the full extent permitted by the Delaware Law.
Article Ninth of the Cabot Noble Certificate provides for the
indemnification of officers and directors of Cabot Noble and, at Cabot Noble's
option, permits indemnification for certain other persons acting on behalf of
Cabot Noble. Article Ninth also permits Cabot Noble to provide greater or
different indemnification than is specified in the Delaware Law and permits
Cabot Noble to enter into separate indemnification agreements.
The Cabot Noble By-laws (filed as Exhibit 3.2 to this Registration
Statement) further detail these indemnification rights. By-law 33 reiterates
the provisions of the Cabot Noble Certificate and identifies the right to
indemnification as a contract right including the right to receive advancement
of certain expenses and details certain indemnification procedures.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
2.1.1 Agreement and Plan of Reorganization by and among Phar-Mor,
Inc., a Pennsylvania corporation, ShopKo Stores, Inc., a
Minnesota corporation and Cabot Noble, Inc., a Delaware
corporation, dated as of September 7, 1996(18)
2.1.2 First Amendment to Agreement and Plan of Reorganization, by and
among Phar-Mor, Inc., ShopKo Stores, Inc., and Cabot Noble,
Inc., dated as of October 9, 1996(21)
2.2 Third Amended Joint Plan of Reorganization of Phar-Mor, Inc. and
certain affiliated entities dated May 25, 1995, as modified(2)
2.3 Disclosure Statement in Support of Plan of Reorganization of
Phar-Mor, Inc.(3)
2.4 Exhibits to Third Amended Plan of Reorganization of Phar-Mor,
Inc.(3)
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
3.1 Form of Restated Certificate of Incorporation of Cabot Noble,
Inc.(21)
3.2 Form of By-laws of Cabot Noble, Inc.
3.3 Amended and Restated Articles of Incorporation of Phar-Mor,
Inc.(2)
3.4 By-laws of Phar-Mor, Inc.(2)
3.5 Restated Articles of Incorporation of ShopKo Stores, Inc.(4)
3.6 By-laws of ShopKo Stores, Inc., as amended(4)
4.1 Restated Certificate of Incorporation of Cabot Noble, Inc. (see
Exhibit 3.1)
4.2 Amended and Restated By-laws of Cabot Noble, Inc. (see Exhibit
3.2)
4.3 Form of Cabot Noble, Inc. Common Stock Certificate(1)
4.4 Form of Warrant Agreement between Cabot Noble, Inc. and Society
National Bank
4.5 Indenture dated September 11, 1995 between Phar-Mor and IBJ
Schroder Bank & Trust Company(2)
4.6 Indenture dated as of March 12, 1992 between ShopKo Stores, Inc.
and First Trust National Association, as trustee, with respect
to ShopKo Stores, Inc. senior notes due March 15, 2002(5)
4.7 Indenture dated as of March 12, 1992 between ShopKo Stores, Inc.
and First Trust National Association, as trustee, with respect
to ShopKo Stores, Inc. senior notes due March 15, 2022(5)
4.8 Indenture dated as of July 15, 1993 between ShopKo Stores, Inc.
and First Trust National Association, as trustee(6)
4.9 Form of Rights Agreement between ShopKo Stores, Inc. and Norwest
Bank Minnesota, National Association (including form of
preferred stock designation)(7)
4.10 Credit Agreement dated as of October 4, 1993, among ShopKo
Stores, Inc., the banks listed therein and Morgan Guaranty Trust
Company of New York, as agent(8)
5 Legal Opinion of Swidler & Berlin, Chartered, Counsel to
Registrant(1)
8.1 Tax Opinion of Swidler & Berlin, Chartered, Counsel to
Registrant(1)
8.2 Tax Opinion of Sidley & Austin, Counsel to ShopKo Stores, Inc.(1)
9.1 Amended and Restated Limited Liability Company Agreement of
Hamilton Morgan dated May 5, 1995, among Robert M. Haft, Mary Z.
Haft and FoxMeyer Health Corporation(2)
9.2 Joint Irrevocable Proxy dated May 5, 1995 by and among Robert M.
Haft, FoxMeyer Health Corporation, FoxMeyer Corporation and
Hamilton Morgan L.L.C. (f/k/a Robert Haft Group/Phar-Mor
L.L.C.)(2)
10.1 Form of Cabot Noble, Inc. 1997 Stock Incentive Plan
10.2 Form of Cabot Noble, Inc. 1997 Director Phantom Stock Plan
10.3 Form of Cabot Noble, Inc. 1997 Director Stock Plan
10.4 Cabot Noble, Inc. Registration Rights Agreement with Hamilton
Morgan L.L.C. and FoxMeyer Health Corporation(1)
10.5 Form of Cabot Noble, Inc. Registration Rights Agreement with
Robert M. Haft
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.6 New Security Agreements and New Equipment Notes entered into and
issued by Phar-Mor with the CIT Group/Equipment Financing, Inc.,
Ford Equipment Leasing Corp./General Electrical Capital Corporation,
NBD Bank Evanston, N.A., Heleasco Twenty-Three, Inc., HCFS Business
Equipment Corp., Romulus Holdings, Inc. and FINOVA
Capital/Corporation(2)
10.7 Loan and Security Agreement, dated September 11, 1995, by and among
the financial institutions listed on the signature pages therein,
BankAmerica Business Credit, Inc., as agent, and Phar-Mor, Inc.,
Phar-Mor of Florida, Inc., Phar-Mor of Ohio, Inc., Phar-Mor of
Virginia, Inc. and Phar-Mor of Wisconsin, Inc.(2)
10.7.1 Exhibits to Loan and Security Agreement (Exhibit 10.7)(3)
10.8 Employment Agreement between Phar-Mor, Inc. and David Schwartz,
dated September 11, 1995(2)
10.9 Employment Agreement between Phar-Mor, Inc. and David J. O'Leary,
dated September 11, 1995(2)
10.10 Employment Agreement between Phar-Mor, Inc. and Robert M. Haft,
dated September 11, 1995(9)
10.11 Third Amendment to Management Services Agreement dated as of
September 11, 1995 among Phar-Mor, Inc. and certain affiliated
entities, Alvarez & Marshal, Inc., Antonio C. Alvarez and Joseph A.
Bondi(2)
10.12 Form of Indemnification Agreement of Phar-Mor, Inc. dated as of
September 11, 1995(2)
10.13 Supply Agreement dated as of August 17, 1992 between Phar-Mor, Inc.
and FoxMeyer Drug Company. (Phar-Mor, Inc. requested confidential
treatment of certain portions of this Exhibit 10.13 when it was
originally filed, which portions have been so omitted and filed
separately with the Securities and Exchange Commission.)(10)
10.14 Settlement Agreement dated as of July 12, 1995 between Phar-Mor,
Inc. and certain affiliated entities and Salomon Brothers Inc.
10.15 Settlement Agreement dated as of April 14, 1995 between Phar-Mor,
Inc. and certain affiliated entities and FoxMeyer Drug Company
10.16 ShopKo Stores, Inc. 1991 Stock Option Plan(4)
10.16.1 Amendment to Section 11 of ShopKo Stores, Inc. 1991 Stock Option
Plan(11)
10.16.2 Form of Stock Option Agreement and First Amendment thereto between
ShopKo Stores, Inc. and certain Officers and Employees of ShopKo
Stores, Inc. pursuant to the ShopKo Stores, Inc. 1991 Stock Option
Plan(12)
10.16.3 Alternative Form of Stock Option Agreement between ShopKo Stores,
Inc. and certain Officers and Employees of ShopKo Stores, Inc.
pursuant to the ShopKo Stores, Inc. 1991 Stock Option Plan(12)
10.17 ShopKo Stores, Inc. 1995 Stock Option Plan(13)
10.18 ShopKo Stores, Inc. Profit Sharing and Super Saver Plan Trust
Agreement (1989 Restatement), as amended(4)
10.18.1 First and second amendments to ShopKo Stores, Inc. Profit Sharing
and Super Saver Plan Trust Agreement(14)
10.19 Form of Change of Control Severance Agreement between ShopKo Stores,
Inc. and Certain Officers and Employees of ShopKo Stores, Inc.(12)
10.20 Registration Rights Agreement dated as of October 8, 1991 between
ShopKo Stores, Inc. and Supermarket Operators of America, Inc.(15)
10.21 Supply Agreement (Food Products) dated as of October 8, 1991 between
ShopKo Stores, Inc. and supervalu inc.(15)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.22 Indemnification, Tax Matters and Guarantee Fee Agreement dated
as of October 8, 1991 between ShopKo Stores, Inc. and supervalu
inc.(15)
10.23 Insurance Matters Agreement dated as of October 8, 1991 between
ShopKo Stores, Inc. and supervalu inc.(15)
10.24 Form of Indemnification Agreement between ShopKo Stores, Inc.
and directors and certain officers of ShopKo Stores, Inc.(4)
10.25 ShopKo Stores, Inc. Senior Officers Deferred Compensation Plan(5)
10.26 ShopKo Stores, Inc. Directors Deferred Compensation Plan(15)
10.27 ShopKo Stores, Inc. Executive Incentive Plan(16)
10.28 ShopKo Stores, Inc. 1993 Restricted Stock Plan, as amended(17)
10.29 Voting Agreement dated as of September 7, 1996 by and among
supervalu inc., Supermarket Operators of America, Inc., Cabot
Noble, Inc. and Robert M. Haft(18)
10.30 Stock Purchase Agreement dated as of September 7, 1996 by and
between Cabot Noble, Inc., supervalu inc., and Supermarket
Operators of America, Inc., as amended and restated as of
October 9, 1996(18)
10.31 Amendment No. 1 to Credit Agreement dated as of October 4, 1996
among ShopKo Stores, Inc. and the Banks named therein(19)
10.32 Form of Employment Agreement between ShopKo Stores, Inc. and
Dale Kramer(18)
10.33 Form of Employment Agreement between ShopKo Stores, Inc. and
William Podany(18)
10.34 Form of Employment Agreement between ShopKo Stores, Inc. and
Jeffrey Jones(18)
10.35 Form of Registration Rights Agreement between Cabot Noble, Inc.
and Supermarket Operators of America, Inc.
13.1 ShopKo Stores, Inc.'s Form 10-K Annual Report for the 52 weeks
ended February 24, 1996 (Commission File No. 1-10876)(16)
13.2 ShopKo Stores, Inc.'s Form 10-Q for the 16 weeks ended June 15,
1996 (Commission File No. 1-10876)(20)
13.3 ShopKo Stores, Inc.'s Form 10-Q for 12 weeks ended September 7,
1996 (Commission File No. 1-10876)(19)
21 Subsidiaries of the Registrant(1)
23.1 Consent of Swidler & Berlin, Chartered (included in their
opinions filed as Exhibit 5 and Exhibit 8.1)
23.2 Consent of Sidley & Austin (included in their opinion filed as
Exhibit 8.2)
23.3 Consent of Deloitte & Touche LLP, Independent Auditor for Phar-
Mor, Inc.
23.4 Consent of Deloitte & Touche LLP, Independent Auditor for ShopKo
Stores, Inc.
23.5 Consent of Deloitte & Touche LLP, Independent Auditor for Cabot
Noble, Inc.
24 Power of Attorney (see signature page)
</TABLE>
- --------
(1) To be filed by amendment.
(2) Incorporated herein by reference from Phar-Mor, Inc.'s Form 10, filed on
October 23, 1995.
(3) Incorporated herein by reference from Amendment No. 1 to Phar-Mor, Inc.'s
Form 10, filed on December 15, 1995.
(4) Incorporated herein by reference from ShopKo Stores, Inc.'s Registration
Statement on Form S-1, (Reg. No. 33-42283).
(5) Incorporated herein by reference from ShopKo Stores, Inc.'s Form 10-K,
Annual Report for the 53 weeks ended February 29, 1992.
(6) Incorporated herein by reference from ShopKo Stores, Inc.'s Form 10-K,
Annual Report for the 52 weeks ended February 26, 1994.
II-4
<PAGE>
(7) Incorporated herein by reference from ShopKo Stores, Inc.'s Form 10-Q,
Quarterly Report for the 16 weeks ended June 20, 1992.
(8) Incorporated herein by reference from ShopKo Stores, Inc.'s Form 10-Q,
Quarterly Report for the 12 weeks ended September 11, 1993.
(9) Incorporated herein by reference from Phar-Mor, Inc.'s Form 10-K, Annual
Report for the fiscal year ended June 29, 1996.
(10) Incorporated herein by reference from Amendment No. 2 to Phar-Mor, Inc.'s
Form 10, filed on February 1, 1996.
(11) Incorporated herein by reference from ShopKo Stores, Inc.'s definitive
Proxy Statement dated May 9, 1995 filed in connection with ShopKo Stores,
Inc.'s 1995 Annual Meeting of Shareholders.
(12) Incorporated herein by reference from ShopKo Stores, Inc.'s Form 10-K,
Annual Report for the 52 weeks ended February 25, 1995.
(13) Incorporated herein by reference from ShopKo Stores, Inc.'s Form 10-Q,
Quarterly Report for the 12 weeks ended December 2, 1995.
(14) Incorporated herein by reference from ShopKo Stores, Inc.'s Form 10-K,
Annual Report for the 52 weeks ended February 27, 1993.
(15) Incorporated herein by reference from ShopKo Stores, Inc.'s Registration
Statement on Form S-1 (Reg. No. 33-45833).
(16) Incorporated herein by reference from ShopKo Stores, Inc.'s Form 10-K,
Annual Report for the 52 weeks ended February 24, 1996.
(17) Incorporated herein by reference from ShopKo Stores, Inc.'s definitive
Proxy Statement dated May 19, 1994 filed in connection with ShopKo
Stores, Inc.'s 1994 Annual Meeting of Shareholders.
(18) Incorporated herein by reference from ShopKo Stores, Inc.'s Form 8-K
filed on September 7, 1996.
(19) Incorporated herein by reference from ShopKo Stores, Inc.'s Form 10-Q,
Quarterly Report for the 12 weeks ended September 7, 1996.
(20) Incorporated herein by reference from ShopKo Stores, Inc.'s Form 10-Q,
Quarterly Report for the 16 weeks ended June 15, 1996.
(21) Incorporated herein by reference from ShopKo Stores, Inc.'s Form 8-K
filed on October 15, 1996.
(b) Financial Statement Schedules.
None.
(c) Reports, Opinions or Appraisals.
All included in Annexes B and C of the Joint Proxy Statement/Prospectus.
UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective Registration Statement; and
II-5
<PAGE>
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(c) The undersigned Registrant hereby undertakes to deliver or cause to be
delivered with the Joint Proxy Statement/Prospectus, to each person to whom
the Joint Proxy Statement/Prospectus is sent or given, the latest annual
report to security holders that is incorporated by reference in the Joint
Proxy Statement/Prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the Joint Proxy
Statement/Prospectus, to deliver, or cause to be delivered to each person to
whom the Joint Proxy Statement/Prospectus is sent or given, the latest
quarterly report that is specifically incorporated by reference in the Joint
Proxy Statement/Prospectus to provide such interim financial information.
(d) The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
(e) The undersigned Registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable Form.
(f) The undersigned Registrant undertakes that every prospectus: (i) that is
filed pursuant to the paragraph immediately preceding, or (ii) that purports
to meet the requirements of Section 10(a)(3) of the Securities Act of 1933 and
is used in connection with an offering of securities subject to Rule 415, will
be filed as a part of an amendment to the Registration Statement and will not
be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(g) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is
II-6
<PAGE>
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
(h) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Joint Proxy
Statement/Prospectus pursuant to Item 4, 10(b), 11, or 13 of this Form, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of
the Registration Statement through the date of responding to the request.
(i) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement or Amendment thereto to be signed on its
behalf by the undersigned, thereunto duly authorized in the city of
Youngstown, state of Ohio on this 10th day of January 1997.
Cabot Noble, Inc.
/s/ M. David Schwartz
By:__________________________________
M. David Schwartz, President,Chief
Operating Officer, Director
II-8
<PAGE>
POWER OF ATTORNEY
Each person whose signature to the Registration Statement or Amendment
thereto appears below hereby constitutes and appoints Robert M. Haft as his
true and lawful attorney-in-fact and agent with full power of substitution and
resubstitution for such person and in such person's name, place and stead, in
any and all capacities, to sign the Registration Statement on Form S-4 of
Cabot Noble, Inc. and any or all amendments (including post-effective
amendments) to the Registration Statement, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as such person might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent or his
substitute may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated as of the dates listed below.
<TABLE>
<S> <C> <C>
/s/ Robert M. Haft Chairman of the
- ------------------------------------- Board, Chief January 10, 1997
ROBERT M. HAFT Executive Officer
(Principal
Executive Officer)
/s/ M. David Schwartz President, Chief January 10, 1997
- ------------------------------------- Operating Officer,
Director
M. DAVID SCHWARTZ
/s/ John R. Ficarro Senior Vice
- ------------------------------------- President, January 10, 1997
JOHN R. FICARRO Secretary, Director
/s/ Daniel J. O'Leary Senior Vice
- ------------------------------------- President, Chief January 10, 1997
DANIEL J. O'LEARY Financial Officer
(Principal
Financial and
Accounting
Officer), Director
</TABLE>
II-9
<PAGE>
CABOT NOBLE, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
2.1.1 Agreement and Plan of Reorganization by and among Phar-Mor,
Inc., a Pennsylvania corporation, ShopKo Stores, Inc., a
Minnesota corporation and Cabot Noble, Inc., a Delaware
corporation, dated as of September 7, 1996(18)
2.1.2 First Amendment to Agreement and Plan of Reorganization, by and
among Phar-Mor, Inc., ShopKo Stores, Inc., and Cabot Noble,
Inc., dated as of October 9, 1996(21)
2.2 Third Amended Joint Plan of Reorganization of Phar-Mor, Inc. and
certain affiliated entities dated May 25, 1995, as modified(2)
2.3 Disclosure Statement in Support of Plan of Reorganization of
Phar-Mor, Inc.(3)
2.4 Exhibits to Third Amended Plan of Reorganization of Phar-Mor,
Inc.(3)
3.1 Form of Restated Certificate of Incorporation of Cabot Noble,
Inc.(21)
3.2 Form of By-laws of Cabot Noble, Inc.
3.3 Amended and Restated Articles of Incorporation of Phar-Mor,
Inc.(2)
3.4 By-laws of Phar-Mor, Inc.(2)
3.5 Restated Articles of Incorporation of ShopKo Stores, Inc.(4)
3.6 By-laws of ShopKo Stores, Inc., as amended(4)
4.1 Restated Certificate of Incorporation of Cabot Noble, Inc. (see
Exhibit 3.1)
4.2 Amended and Restated By-laws of Cabot Noble, Inc. (see Exhibit
3.2)
4.3 Form of Cabot Noble, Inc. Common Stock Certificate(1)
4.4 Form of Warrant Agreement between Cabot Noble, Inc. and Society
National Bank
4.5 Indenture dated September 11, 1995 between Phar-Mor and IBJ
Schroder Bank & Trust Company(2)
4.6 Indenture dated as of March 12, 1992 between ShopKo Stores, Inc.
and First Trust National Association, as trustee, with respect
to ShopKo Stores, Inc. senior notes due March 15, 2002(5)
4.7 Indenture dated as of March 12, 1992 between ShopKo Stores, Inc.
and First Trust National Association, as trustee, with respect
to ShopKo Stores, Inc. senior notes due March 15, 2022(5)
4.8 Indenture dated as of July 15, 1993 between ShopKo Stores, Inc.
and First Trust National Association, as trustee(6)
4.9 Form of Rights Agreement between ShopKo Stores, Inc. and Norwest
Bank Minnesota, National Association (including form of
preferred stock designation)(7)
4.10 Credit Agreement dated as of October 4, 1993, among ShopKo
Stores, Inc., the banks listed therein and Morgan Guaranty Trust
Company of New York, as agent(8)
5 Legal Opinion of Swidler & Berlin, Chartered, Counsel to
Registrant(1)
8.1 Tax Opinion of Swidler & Berlin, Chartered, Counsel to
Registrant(1)
8.2 Tax Opinion of Sidley & Austin, Counsel to ShopKo Stores, Inc.(1)
9.1 Amended and Restated Limited Liability Company Agreement of
Hamilton Morgan dated May 5, 1995, among Robert M. Haft, Mary Z.
Haft and FoxMeyer Health Corporation(2)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
9.2 Joint Irrevocable Proxy dated May 5, 1995 by and among Robert M.
Haft, FoxMeyer Health Corporation, FoxMeyer Corporation and
Hamilton Morgan L.L.C. (f/k/a Robert Haft Group/Phar-Mor
L.L.C.)(2)
10.1 Form of Cabot Noble, Inc. 1997 Stock Incentive Plan
10.2 Form of Cabot Noble, Inc. 1997 Director Phantom Stock Plan
10.3 Form of Cabot Noble, Inc. 1997 Director Stock Plan
10.4 Cabot Noble, Inc. Registration Rights Agreement with Hamilton
Morgan L.L.C. and FoxMeyer Health Corporation(1)
10.5 Form of Cabot Noble, Inc. Registration Rights Agreement with
Robert M. Haft
10.6 New Security Agreements and New Equipment Notes entered into and
issued by Phar-Mor with the CIT Group/Equipment Financing, Inc.,
Ford Equipment Leasing Corp./General Electrical Capital
Corporation, NBD Bank Evanston, N.A., Heleasco Twenty-Three,
Inc., HCFS Business Equipment Corp., Romulus Holdings, Inc. and
FINOVA Capital/Corporation(2)
10.7 Loan and Security Agreement, dated September 11, 1995, by and
among the financial institutions listed on the signature pages
therein, BankAmerica Business Credit, Inc., as agent, and Phar-
Mor, Inc., Phar-Mor of Florida, Inc., Phar-Mor of Ohio, Inc.,
Phar-Mor of Virginia, Inc. and Phar-Mor of Wisconsin, Inc.(2)
10.7.1 Exhibits to Loan and Security Agreement (Exhibit 10.7)(3)
10.8 Employment Agreement between Phar-Mor, Inc. and David Schwartz,
dated September 11, 1995(2)
10.9 Employment Agreement between Phar-Mor, Inc. and David J.
O'Leary, dated September 11, 1995(2)
10.10 Employment Agreement between Phar-Mor, Inc. and Robert M. Haft,
dated September 11, 1995(9)
10.11 Third Amendment to Management Services Agreement dated as of
September 11, 1995 among Phar-Mor, Inc. and certain affiliated
entities, Alvarez & Marshal, Inc., Antonio C. Alvarez and Joseph
A. Bondi(2)
10.12 Form of Indemnification Agreement of Phar-Mor, Inc. dated as of
September 11, 1995(2)
10.13 Supply Agreement dated as of August 17, 1992 between Phar-Mor,
Inc. and FoxMeyer Drug Company. (Phar-Mor, Inc. requested
confidential treatment of certain portions of this Exhibit 10.13
when it was originally filed, which portions have been so
omitted and filed separately with the Securities and Exchange
Commission.)(10)
10.14 Settlement Agreement dated as of July 12, 1995 between Phar-Mor,
Inc. and certain affiliated entities and Salomon Brothers Inc.
10.15 Settlement Agreement dated as of April 14, 1995 between Phar-
Mor, Inc. and certain affiliated entities and FoxMeyer Drug
Company
10.16 ShopKo Stores, Inc. 1991 Stock Option Plan(4)
10.16.1 Amendment to Section 11 of ShopKo Stores, Inc. 1991 Stock Option
Plan(11)
10.16.2 Form of Stock Option Agreement and First Amendment thereto
between ShopKo Stores, Inc. and certain Officers and Employees
of ShopKo Stores, Inc. pursuant to the ShopKo Stores, Inc. 1991
Stock Option Plan(12)
10.16.3 Alternative Form of Stock Option Agreement between ShopKo
Stores, Inc. and certain Officers and Employees of ShopKo
Stores, Inc. pursuant to the ShopKo Stores, Inc. 1991 Stock
Option Plan(12)
10.17 ShopKo Stores, Inc. 1995 Stock Option Plan(13)
10.18 ShopKo Stores, Inc. Profit Sharing and Super Saver Plan Trust
Agreement (1989 Restatement), as amended(4)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.18.1 First and second amendments to ShopKo Stores, Inc. Profit
Sharing and Super Saver Plan Trust Agreement(14)
10.19 Form of Change of Control Severance Agreement between ShopKo
Stores, Inc. and Certain Officers and Employees of ShopKo
Stores, Inc.(12)
10.20 Registration Rights Agreement dated as of October 8, 1991
between ShopKo Stores, Inc. and Supermarket Operators of
America, Inc.(15)
10.21 Supply Agreement (Food Products) dated as of October 8, 1991
between ShopKo Stores, Inc. and supervalu inc.(15)
10.22 Indemnification, Tax Matters and Guarantee Fee Agreement dated
as of October 8, 1991 between ShopKo Stores, Inc. and supervalu
inc.(15)
10.23 Insurance Matters Agreement dated as of October 8, 1991 between
ShopKo Stores, Inc. and supervalu inc.(15)
10.24 Form of Indemnification Agreement between ShopKo Stores, Inc.
and directors and certain officers of ShopKo Stores, Inc.(4)
10.25 ShopKo Stores, Inc. Senior Officers Deferred Compensation Plan(5)
10.26 ShopKo Stores, Inc. Directors Deferred Compensation Plan(15)
10.27 ShopKo Stores, Inc. Executive Incentive Plan(16)
10.28 ShopKo Stores, Inc. 1993 Restricted Stock Plan, as amended(17)
10.29 Voting Agreement dated as of September 7, 1996 by and among
supervalu inc., Supermarket Operators of America, Inc., Cabot
Noble, Inc. and Robert M. Haft(18)
10.30 Stock Purchase Agreement dated as of September 7, 1996 by and
between Cabot Noble, Inc., supervalu inc., and Supermarket
Operators of America, Inc., as amended and restated as of
October 9, 1996(18)
10.31 Amendment No. 1 to Credit Agreement dated as of October 4, 1996
among ShopKo Stores, Inc. and the Banks named therein(19)
10.32 Form of Employment Agreement between ShopKo Stores, Inc. and
Dale Kramer(18)
10.33 Form of Employment Agreement between ShopKo Stores, Inc. and
William Podany(18)
10.34 Form of Employment Agreement between ShopKo Stores, Inc. and
Jeffrey Jones(18)
10.35 Form of Registration Rights Agreement between Cabot Noble, Inc.
and Supermarket Operators of America, Inc.
13.1 ShopKo Stores, Inc.'s Form 10-K Annual Report for the 52 weeks
ended February 24, 1996 (Commission File No. 1-10876)(16)
13.2 ShopKo Stores, Inc.'s Form 10-Q for the 16 weeks ended June 15,
1996 (Commission File No. 1-10876)(20)
13.3 ShopKo Stores, Inc.'s Form 10-Q for 12 weeks ended September 7,
1996 (Commission File No. 1-10876)(19)
21 Subsidiaries of the Registrant(1)
23.1 Consent of Swidler & Berlin, Chartered (included in their
opinions filed as Exhibit 5 and Exhibit 8.1)
23.2 Consent of Sidley & Austin (included in their opinion filed as
Exhibit 8.2)
23.3 Consent of Deloitte & Touche LLP, Independent Auditor for Phar-
Mor, Inc.
23.4 Consent of Deloitte & Touche LLP, Independent Auditor for ShopKo
Stores, Inc.
23.5 Consent of Deloitte & Touche LLP, Independent Auditor for Cabot
Noble, Inc.
24 Power of Attorney (see signature page)
</TABLE>
<PAGE>
- --------
(1) To be filed by amendment.
(2) Incorporated herein by reference from Phar-Mor, Inc.'s Form 10, filed on
October 23, 1995.
(3) Incorporated herein by reference from Amendment No. 1 to Phar-Mor, Inc.'s
Form 10, filed on December 15, 1995.
(4) Incorporated herein by reference from ShopKo Stores, Inc.'s Registration
Statement on Form S-1, (Reg. No. 33-42283).
(5) Incorporated herein by reference from ShopKo Stores, Inc.'s Form 10-K,
Annual Report for the 53 weeks ended February 29, 1992.
(6) Incorporated herein by reference from ShopKo Stores, Inc.'s Form 10-K,
Annual Report for the 52 weeks ended February 26, 1994.
(7) Incorporated herein by reference from ShopKo Stores, Inc.'s Form 10-Q,
Quarterly Report for the 16 weeks ended June 20, 1992.
(8) Incorporated herein by reference from ShopKo Stores, Inc.'s Form 10-Q,
Quarterly Report for the 12 weeks ended September 11, 1993.
(9) Incorporated herein by reference from Phar-Mor, Inc.'s Form 10-K, Annual
Report for the fiscal year ended June 29, 1996.
(10) Incorporated herein by reference from Amendment No. 2 to Phar-Mor, Inc.'s
Form 10, filed on February 1, 1996.
(11) Incorporated herein by reference from ShopKo Stores, Inc.'s definitive
Proxy Statement dated May 9, 1995 filed in connection with ShopKo Stores,
Inc.'s 1995 Annual Meeting of Shareholders.
(12) Incorporated herein by reference from ShopKo Stores, Inc.'s Form 10-K,
Annual Report for the 52 weeks ended February 25, 1995.
(13) Incorporated herein by reference from ShopKo Stores, Inc.'s Form 10-Q,
Quarterly Report for the 12 weeks ended December 2, 1995.
(14) Incorporated herein by reference from ShopKo Stores, Inc.'s Form 10-K,
Annual Report for the 52 weeks ended February 27, 1993.
(15) Incorporated herein by reference from ShopKo Stores, Inc.'s Registration
Statement on Form S-1 (Reg. No. 33-45833).
(16) Incorporated herein by reference from ShopKo Stores, Inc.'s Form 10-K,
Annual Report for the 52 weeks ended February 24, 1996.
(17) Incorporated herein by reference from ShopKo Stores, Inc.'s definitive
Proxy Statement dated May 19, 1994 filed in connection with ShopKo
Stores, Inc.'s 1994 Annual Meeting of Shareholders.
(18) Incorporated herein by reference from ShopKo Stores, Inc.'s Form 8-K
filed on September 7, 1996.
(19) Incorporated herein by reference from ShopKo Stores, Inc.'s Form 10-Q,
Quarterly Report for the 12 weeks ended September 7, 1996.
(20) Incorporated herein by reference from ShopKo Stores, Inc.'s Form 10-Q,
Quarterly Report for the 16 weeks ended June 15, 1996.
(21) Incorporated herein by reference from ShopKo Stores, Inc.'s Form 8-K
filed on October 15, 1996.
<PAGE>
EXHIBIT 3.2
BY-LAWS OF
CABOT-NOBLE, INC.
A Delaware Corporation
ARTICLE I
Offices
Section 1.1. The registered office of Cabot-Noble, Inc. (the
"Corporation") within the State of Delaware shall be located at 1209 Orange
Street, City of Wilmington, County of New Castle, Delaware 19801. The name of
the Corporation's registered agent at such address is The Corporation Trust
Company.
Section 1.2. Other Offices. The Corporation may also have offices and
-------------
places of business at such other places within or without the State of Delaware
as the Board of Directors may from time to time determine or the business of
the Corporation may require.
ARTICLE II
Meetings of Stockholders
Section 2.1. Place. All meetings of stockholders of the Corporation
-----
shall be held at such place within or without the State of Delaware as shall be
stated in the notice of the meeting.
Section 2.2. Annual Meeting. Annual meetings of stockholders, commencing
--------------
with the year 1997, shall be held on a date specified by the Board of Directors,
at which the stockholders shall elect directors and transact such other business
as may properly be brought before the meeting.
Section 2.3. Special Meetings. Special meetings of the stockholders of
----------------
the Corporation, for any purpose or purposes, unless otherwise prescribed by
statute or by the Corporation's Certificate of Incorporation (the "Certificate
of Incorporation"), may be called only by the Chairman of the Board, the
President, or the Board of Directors.
Section 2.4. Notice of Meetings. Written notice of each meeting of
------------------
stockholders of the Corporation stating the place, date and hour thereof, and in
the case of a special meeting of stockholders, specifying the purpose or
purposes thereof, and the person or persons by whom or at whose direction such
meeting has been called, shall be given to each stockholder entitled to vote
thereat, at his address as it appears on the records of the Corporation, not
less than ten (10) nor more than sixty (60) days prior to the meeting.
Section 2.5. List of Stockholders. At least 10 days (but not more than
--------------------
90 days) before
1
<PAGE>
any meeting of stockholders, the officer or transfer agent in charge of the
stock transfer books of the Corporation shall prepare and make a complete
alphabetical list of the stockholders entitled to vote at such meeting, which
list shows the address of each stockholder and the number of shares registered
in the name of each stockholder. The list so prepared shall be maintained at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held, and shall be open to inspection by any
stockholder, for any purpose germane to the meeting, during ordinary business
hours during a period of no less than 10 days prior to the meeting. The list
also shall be produced and kept open at the meeting (during the entire duration
thereof) and, except as otherwise provided by law, may be inspected by any
stockholder or proxy of a stockholder who is present in person at such meeting.
Section 2.6. Presiding Officers. Meetings of stockholders shall be
------------------
presided over by the Chairman of the Board, if any, or, if the Chairman is not
present, by a Vice Chairman, or if a Vice Chairman is not present, by the Chief
Executive Officer, or if the Chief Executive Officer is not present, by the
President, or, if the President is not present, by a Vice President, or, if a
Vice President is not present, by such person who is chosen by the Board of
Directors, or, if none, by a chairperson to be chosen at the meeting by
stockholders present in person or by proxy who own a majority of the shares of
the Corporation entitled to vote and represented at such meeting. The Secretary
of meetings shall be Secretary of the Corporation, or, if the Secretary is not
present, an Assistant Secretary, or, if any Assistant Secretary is not present,
such person as may be chosen by the Board of Directors, or, if none, by such
person who is chosen by the chairperson at the meeting.
Section 2.7. Quorum. At each meeting of the stockholders of the
------
Corporation, the holders of a majority of shares of the Corporation entitled to
vote thereat, present in person or by proxy, shall constitute a quorum, except
as may be otherwise provided by the Certificate of Incorporation of these
By-Laws. If, however, a quorum shall not be present on the date specified in
the original notice of meeting, the stockholders entitled to vote thereat,
present in person or by proxy, shall have power to adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
shall be present. At any such adjourned meeting, at which a quorum shall be
present, the stockholders, present in person or by proxy, may transact any
business which might have been transacted had a quorum been present on the date
specified in the original notice of meeting.
Section 2.8. Voting. At any meeting of the stockholders of the
------
Corporation, each stockholder having the right to vote shall be entitled to vote
in person or by proxy appointed by an instrument in writing subscribed by such
stockholder. Except as may be otherwise provided by the Certificate of
Incorporation, each holder of record of Common Stock shall be entitled to one
vote for every share of such stock standing in his name on the books of the
Corporation. All elections of directors by stockholders, and, except as
otherwise provided by statute, the Certificate of Incorporation or these
By-Laws, all other matters submitted to a vote of stockholders, shall be decided
by the vote of the holders of a majority of the stock entitled to vote
2
<PAGE>
thereon and represented in person or by proxy at such meeting.
Section 2.9. Proxies. Each proxy shall be executed in writing by the
-------
stockholder or by his duly authorized attorney. No proxy shall be valid after
the expiration of eleven (11) months from the date of its execution unless it
shall have specified therein a longer duration. Each proxy shall be revocable at
the pleasure of the person executing it or of his personal representative,
unless specifically irrevocable by its terms and only in those cases where an
irrevocable proxy is permissible under applicable law.
Section 2.10. Consents. Any action which, pursuant to this Certificate
--------
of Incorporation, the Corporation's By-Laws, the GCL or otherwise, is required
to be taken at an annual or special meeting of the Corporation's stockholders
may not be taken by written consent of the stockholders in lieu of a meeting.
Section 2.11. Stockholder Proposals. At any annual or special meeting
---------------------
of stockholders, only such business shall be conducted as shall have been
properly brought before a meeting. Business must be (a) specified in the notice
of meeting (or any supplement thereto), (b) brought before the meeting by or at
the direction of the Board of Directors, or (c) properly brought before an
annual meeting by a stockholder, and if and only if the notice of a special
meeting provides for business to be brought before the special meeting by
stockholders, properly brought before the special meeting by stockholder. For
business to be properly brought before a meeting by a stockholder, the
stockholder must have given timely notice thereof in writing to the Secretary of
the Corporation. To be timely, a stockholder's notice must be delivered to or
mailed and received at the principal executive offices of the Corporation not
less than 60 days prior to the meeting; provided, however, that if less than 70
days' notice or prior public disclosure of the date of the meeting is given or
made to stockholders, notice by the stockholder to be timely must be so received
not later than the close of business on the tenth day following the day on which
such notice of the date of the meeting was mailed or such public notice of the
date of the meeting was mailed or such public disclosure was made. Furthermore,
stockholders are not permitted to nominate individuals to serve as directors
unless notice of such nomination is given to the Corporation in accordance with
Section 3.4 of these By-Laws. A stockholder's notice to the Secretary shall set
forth as to each matter the stockholder proposes to bring before the meeting (a)
a brief description of the business desired to be brought before the meeting and
the reasons for conducting such business at the meeting, (b) the name and
address, as they appear on the Corporation's books, of the stockholder proposing
such business, (c) the class and number of shares of the Corporation which are
beneficially owned by the stockholder and (d) any material interest of the
stockholder in such business. Notwithstanding anything in the By-Laws to the
contrary, no business shall be conducted at any meeting of stockholders except
in accordance with the procedures set forth in this Section 2.11. The chairman
of the meeting shall, if the facts warrant, determine and declare to the meeting
that business was not properly brought before the meeting and in accordance with
the provisions of this Section, and if he should so determine, he shall so
declare that any such business not properly brought before the meeting shall not
be transacted. Notwithstanding anything in the By-Laws to the contrary, the
3
<PAGE>
Corporation shall be under no obligation to submit for action any stockholder
proposal at any meeting of stockholders which proposal the Corporation would
otherwise be permitted to omit in accordance with Rule 14a-8 under the Exchange
Act.
ARTICLE III
Directors
Section 3.1. Board of Directors. The property and business of the
------------------
Corporation shall be managed by its Board of Directors, which may exercise all
such powers of the Corporation and do all such lawful acts and things as are
not, by statute or by the Certificate of Incorporation or by these By-Laws,
directed or required to be exercised or done by the stockholders. Directors
need not be stockholders.
Section 3.2. Number. The number of directors of the Corporation
------
(exclusive of directors that may be elected by the holders of any one or more
series of the Preferred Stock voting separately as a class or classes) that
shall constitute the entire Board of Directors (the "Entire Board of Directors")
shall be not less than three (3) or more than twelve (12), such number to be
determined from time to time by resolution adopted by the affirmative vote of a
majority of the Entire Board of Directors.
Section 3.3. Election. Directors shall be elected at the annual meeting
--------
of stockholders, or as otherwise provided in the Certificate of Incorporation or
in these By-Laws.
Section 3.4. Nomination of Director Candidates. Subject to the rights of
---------------------------------
holders of any class or series of Preferred Shares then outstanding, nominations
for the election of directors may be made by (a) the Board or a proxy committee
appointed by the Board or (b) any stockholder entitled to vote in the election
of directors generally. However, any stockholder entitled to vote in the
election of directors generally may nominate one or more persons for election as
directors at a meeting only if timely notice of such stockholder's intent to
make such nomination or nominations has been given in writing to the Secretary
of the Corporation. To be timely, a stockholder's notice must be delivered to
or mailed and received at the principal executive offices of the Corporation not
fewer than 60 days prior to the meeting; provided, however, that if less than
70 days' notice or prior public disclosure of the date of the meeting is given
or made to stockholders, notice by the stockholder to be timely must be so
received not later than the close of business on the tenth day following the day
on which such notice of the date of the meeting was mailed or such public
disclosure was made. Each such notice shall set forth (a) the name and address
of the stockholder who intends to make the nomination and of the person or
persons to be nominated, (b) a representation that the stockholder is a holder
of record of shares of the Corporation entitled to vote for the election of
directors on the date of such notice and intends to appear in person or by proxy
at the meeting to nominate the person or persons specified in the notice, (c) a
description of all arrangements or understandings between the stockholder and
each nominee and any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by the
stockholder, (d)
4
<PAGE>
such other information regarding each nominee proposed by such stockholder as
would be required to be included in a proxy statement filed pursuant to the
proxy rules of the Securities and Exchange Commission, had the nominee been
nominated, or intended to be nominated, by the Board of Directors and (c) the
consent of each nominee to serve as a director of the Corporation if so elected.
If a person is validly designated as a nominee in accordance with this
Section 3.4 and shall thereafter become unable or unwilling to stand for
election to the Board of Directors, the Board of Directors or the stockholder
who proposed such nominee, as the case may be, may designate a substitute
nominee upon delivery, not fewer than 20 days prior to the date of the meeting
for the election of such nominee, of a written notice to the Secretary setting
forth such information regarding such substitute nominee as would have been
required to be delivered to the Secretary pursuant to this Section 3.4 had such
substitute nominee been initially proposed as a nominee. Such notice shall
include a signed consent to serve as a director of the Corporation, if elected,
of each such substitute nominee.
If the chairman of the meeting for the election of directors determines
that a nomination of any candidate for election as a director at such meeting
was not made in accordance with the applicable provisions of this Section 3.4,
such nomination shall be void.
ARTICLE IV
Meeting of the Board
Section 4.1. Time and Place. Meetings of the Board of Directors may
--------------
be held either within or without the State of Delaware. Regular meetings of the
Board of Directors may be held without notice at such time and place as shall
from time to time be determined by the Board. Each special meeting of the Board
of Directors shall be held at such time and place as shall be stated in the
notice of the meeting.
Section 4.2. First Meeting. The first meeting of each newly elected
-------------
Board of Directors shall be held within ten (10) days following each annual
meeting of the stockholders, at such time and place either within or without the
State of Delaware, as shall be announced at the annual meeting of stockholders,
and no notice of such meeting shall be necessary to the newly elected directors
in order legally to constitute the meeting, provided a quorum shall be present.
Section 4.3. Special Meetings. Special meetings of the Board of
----------------
Directors may be called by the Chairman of the Board, the Chief Executive
Officer or the President, or at the written request of any two (2) directors.
Written notice of each special meeting of directors, stating the time and place
thereof, shall be served upon each director, personally (including by overnight
courier), by mail or by facsimile, at least two (2) days before such meeting.
Section 4.4. Quorum and Voting. At all meetings of the Board of
-----------------
Directors a majority of the Entire Board of Directors shall be necessary and
sufficient to constitute a quorum
5
<PAGE>
for the transaction of business and the act of a majority of the directors
present at any meeting at which a quorum is present shall be the act of the
Board of Directors, except as may be otherwise specifically provided by
statute, by the Certificate of Incorporation or by these By-Laws. If a quorum
shall not be present at any meeting of the Board of Directors, the directors
present thereat may adjourn the meeting from time to time, without further
notice other than announcement at the meeting, until a quorum shall be present.
Section 4.5. Telephone Conference Meetings. Meetings of the directors
-----------------------------
may be held by means of a telephone or similar communications equipment, by
which all persons participating in the meeting can hear each other at the same
time and participation by such means shall constitute presence in person at a
meeting.
Section 4.6. Consents. Any action allowed or required to be taken at a
--------
meeting of the Board of Directors or by any committee thereof, may be taken
without meeting if a consent in writing, setting forth the action so taken, is
signed before or after such action by all of the directors, or all or the
members of the committee, as the case may be.
ARTICLE V
Committees of Directors
Section 5.1. Designation; Powers. The Board of Directors may, by
-------------------
resolution or resolutions adopted by a majority of the Entire Board of
Directors, designate from among its members an Executive Committee, Audit
Committee, Compensation Committee or other Committees, each consisting of two
(2) or more directors, and each of which, to the extent provided in any such
resolution, shall have all the authority of the Board, except as provided by
law, the Certificate of Incorporation or these By-Laws. The Board of Directors
may designate one or more directors as alternate members of any such Committee
who may replace any absent member or members at any meeting of such Committee.
Section 5.2. Tenure and Reports. Each such Committee shall serve at
------------------
the pleasure of the Board of Directors. It shall keep minutes of its meetings
and report the same to the Board.
ARTICLE VI
Notices
Section 6.1. Delivery of Notices. Notices to directors and
-------------------
stockholders shall be in writing and may be delivered personally (which shall
include delivery by overnight courier service) or by mail. Notice by mail shall
be deemed to be given at the time when the same shall be deposited in the post
office or a letter box, in a postpaid, scaled wrapper, and shall be addressed
to directors or stockholders at their addresses appearing on the books of the
Corporation. Notice to directors may also be given by telecopy.
Section 6.2. Waiver of Notice. Whenever any notice is required to be
----------------
given by law,
6
<PAGE>
the Certificate of Incorporation or these By-Laws, a waiver thereof in writing,
signed by the persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent thereto. Any stockholder attending a
meeting of stockholders in person or by proxy, or any director attending a
meeting of the Board of Director or any committee thereof, without protesting
such lack of notice prior to the meeting or at its commencement, shall be deemed
conclusively to have waived notice of such meeting. Any director signing a
unanimous written consent pursuant to Section 4.6 hereof shall be deemed
conclusively to have waived notice of the action taken by such consent.
ARTICLE VII
Officers
Section 7.1. Officers. The officers of the Corporation shall be a
--------
Chairman of the Board, one or more Vice Chairmen, a Chief Executive Officer, a
President, a Chief Operating Officer, one or more Vice Presidents, a Chief
Financial Officer and Treasurer, a Controller and a Secretary, each of whom
shall be elected annually by the directors at their annual meeting, and shall
hold office at the pleasure of the Board of Directors. The same individual may
simultaneously hold more than one office in the Corporation.
Section 7.2. Additional Officers. The Board of Directors may appoint
-------------------
such other officers and agents, including, without limitation, Assistant Vice
Presidents, Assistant Secretaries, Assistant Treasurers and Assistant
Controllers with such powers and duties as it shall deem necessary or
appropriate. All such officers or agents shall hold office at the pleasure of
the Board of Directors.
Section 7.3. Authorities and Duties. All officers, as between
----------------------
themselves and the Corporation, shall have such authority and perform such
duties in the management of the Corporation as may be provided in these By-Laws,
or, to the extent not so provided, as may be prescribed by the Board of
Directors.
Section 7.4. Salaries. The salaries or other compensation of all
--------
officers of the Corporation shall be fixed by the Board of Directors. The
salaries or other compensation of all other employees and agents of the
Corporation may be fixed by the Board of Directors or to one or more officers or
employees authority to employ and to fix the salaries or other compensation of
any such employees or agents.
Section 7.5. The Chairman of the Board. The Chairman of the Board
-------------------------
shall preside at all meetings of the stockholders and all meetings of the
Board of Directors and shall have such powers and perform such duties as may
from time to time be assigned to him by the Board of Directors.
Section 7.6. The Vice Chairman. In the absence of the Chairman of the
-----------------
Board, the
7
<PAGE>
Vice Chairman (and if there is more than one Vice Chairman, the Vice Chairmen in
order of their seniority or as otherwise determined by the Board) shall preside
at all meetings of the stockholders and all meetings of the Board of Directors
and shall have such powers and perform such duties as may from time to time be
assigned to him by the Board of Directors.
SECTION 7.7. The Chief Executive Officer. In the absence of the
---------------------------
Chairman of the Board and any Vice Chairman, the Chief Executive Officer shall
preside at all meetings of the stockholders and all meetings of the Board of
Directors. The Chief Executive Officer shall be the principal executive officer
of the Corporation and shall have such powers and perform such duties as may
from time to time be assigned to him by the Board of Directors.
SECTION 7.8. The President. In the absence of the Chairman of the
-------------
Board, any Vice Chairman and the Chief Executive Officer, the President shall
preside at all meetings of the stockholders and all meetings of the Board of
Directors and shall have such powers and perform such duties as may from time to
time be assigned to him by the Board of Directors.
SECTION 7.9. The Chief Operating Officer. The Chief Operating Officer
---------------------------
shall be responsible for management of the operations of the Corporation in
accordance with the directions of the Board, the Chief Executive Officer and the
President. The Chief Operating Officer shall report to the President.
SECTION 7.10. The Vice Presidents. The Vice Presidents in the order of
-------------------
their seniority, as indicated by their titles (Executive, Senior, etc.) or as
otherwise determined by the Board of Directors, shall, in the absence of the
Chairman of the Board, any Vice Chairman, the Chief Executive Officer and the
President, perform the duties and exercise the powers of the Chairman of the
Board, the Vice Chairman, the Chief Executive Officer and the President, shall
perform such other duties as the Board of Directors shall prescribe and shall
generally assist the Chairman of the Board, the Vice Chairmen, the Chief
Executive Officer and the President.
SECTION 7.11. The Secretary. The Secretary shall attend meetings of the
-------------
Board of Directors and stockholders and record all votes and the minutes of all
proceedings in a book to be kept for that purpose and shall perform like duties
for the standing committees of the Board of Directors when required. He shall
give, or cause to be given, notice of meetings of the stockholders and special
meetings of the Board of Directors, and shall perform such other duties as may
be prescribed by the Board of Directors, the Chairman of the Board, the Vice
Chairmen, the Chief Executive Officer and the President, under whose collective
supervision he shall be. He shall keep in safe custody the seal of the
Corporation and, when authorized by the Board of Directors, affix the same to
any instrument requiring it and, when so affixed, it shall be attested by his
signature or by the signature of the Treasurer or an Assistant Secretary or
Treasurer. He shall keep in safe custody the certificate books and stock books
and such other books and papers as the Board of Directors may direct and shall
perform all other duties incident to the office of Secretary.
8
<PAGE>
Section 7.12. Assistant Secretaries. The Assistant Secretaries shall, in
---------------------
the absence or disability of the Secretary, perform the duties and exercise the
powers of the Secretary and shall perform such other duties as the Board of
Directors shall prescribe.
Section 7.13. The Chief Financial Officer and Treasurer. The Chief
-----------------------------------------
Financial Officer and Treasurer shall have the care and custody of the
corporate funds, and other valuable effects, including securities, and shall
keep full and accurate accounts of receipts and disbursements in books belonging
to the Corporation and shall deposit all monies and other valuable effects in
the name and to the credit of the Corporation and shall deposit all monies and
other valuable effects in the name and to the credit of the Corporation in such
depositories as may be designated by the Board of Directors. The Chief Financial
Officer and Treasurer shall disburse the funds of the Corporation as may be
ordered by the Board, taking proper vouchers for such disbursements, and shall
render to the Chairman of the Board, the Vice Chairmen, the Chief Executive
Officer, the President and the Board of Directors, at the regular meetings of
the Board, or whenever they may require it, an account of all his transactions
as Chief Financial Officer and Treasurer and of the financial condition of the
Corporation. If required by the Board of Directors, the Chief Financial Officer
and Treasurer shall give the Corporation a bond for such term, in such sum and
with such surety or sureties as shall be satisfactory to the Board for the
faithful performance of the duties of his office and for the restoration to the
Corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the Corporation.
Section 7.14. Assistant Treasurers. The Assistant Treasurer shall, in
--------------------
the absence or disability of the Treasurer, perform the duties and exercise the
powers of the Treasurer and shall perform such other duties as the Board of
Directors may prescribe.
Section 7.15. Execution of Instruments. Each of the Chairman of the
------------------------
Board, the Vice Chairman, the Chief Executive Officer, the President, the Chief
Operating Officer, the Chief Financial Officer and the Executive Vice Presidents
shall have the power to sign on behalf of the Corporation bonds, notes, deeds,
mortgages, guarantees and any and all contracts, agreements and instruments of a
contractual nature pertaining to matters which arise in the normal conduct and
ordinary course of the business of the Corporation, except in cases in which the
signing and execution thereof shall have been expressly delegated by the Board
of Directors of the Corporation to some other officer or agent of the
Corporation.
ARTICLE VIII
Certificates of Stock
Section 8.1. Form. The certificates of stock of the Corporation shall
----
be in such form as shall be determined by the Board of Directors and shall be
numbered consecutively and entered in the books of the Corporation as they are
issued. Each certificate shall exhibit the registered holder's name and the
number and class of shares, and shall be signed by the Chairman of the Board,
any Vice Chairman, the Chief Executive Officer, the President, any
9
<PAGE>
Executive Vice President, Senior Vice President, or Vice President and by the
Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary,
and shall bear the seal of the Corporation or an engraved or printed facsimile
thereof. Where any such certificate is signed by a transfer agent or by a
registrar, the signature of the Chairman of the Board, any Vice Chairman, the
Chief Executive Officer, the President, Executive Vice President, Senior Vice
President, Vice President, Treasurer, Assistant Treasurer, Secretary or
Assistant Secretary may be a facsimile. In case any officer, transfer agent or
registrar, who has signed, or whose facsimile signature or signatures have been
used on, any such certificate or certificates, shall cease to be such officer,
transfer agent or registrar of the Corporation, whether because of death,
resignation or otherwise, before such certificate or certificates have been
delivered by the Corporation, such certificate or certificates may nevertheless
be issued and delivered as though the person or persons who signed such
certificate or certificates or whose facsimile signature or signatures have been
used thereon had not ceased to be such officer, transfer agent or registrar of
the Corporation.
Section 8.2. Registered Stockholders. The Corporation shall be entitled
-----------------------
to (1) recognize the exclusive right of a person registered on its books as the
owner of shares as entitled to receive dividends and notices of meetings of
stockholders and to vote as such owner; and (2) hold liable for calls and
assessments a person registered on its books as the owner of shares; and the
Corporation shall not be bound to recognize any equitable or other claim to or
interest in such shares on the part of any other person, whether or not it shall
have express or other notice thereof, except as otherwise required by law.
Section 8.3. Lost Certificates. The Board of Directors may direct a new
-----------------
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed, and upon such
other terms as the Board of Directors may prescribe; and the Board of Directors
may, in its discretion and as a condition precedent to the issuance of a new
certificate of certificates, require the owner of such lost, stolen or destroyed
certificate or certificates, or his legal representative, to give the
Corporation a bond in such sum and with such surety or sureties as it may direct
as indemnity against any claim that may be made against the Corporation with
respect to the certificate alleged to have been lost, stolen or destroyed.
Section 8.4. Record Date.
-----------
(a) For the purpose of determining the stockholders entitled to notice
of or to vote at any meeting of stockholders or any adjournment thereof, or to
express consent to or dissent from any proposal without a meeting, or for the
purpose of determining stockholders entitled to receive payment of any dividend
or the allotment of any rights, or for the purpose of payment of any dividend or
the allotment of any rights, or for the purpose of any other action, the Board
may fix, in advance, a date as the record date for any such determination of
stockholders. Such date shall not be more than sixty (60) nor less than ten (10)
days before the date of such meeting, nor more than sixty (60) days prior to any
other action.
10
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(b) If no record date is fixed:
(1) The record date for the determination of stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given,
or, if no notice is given, the day on which the meeting is held.
(2) The record date for determining stockholders for any
purpose other than that specified in subparagraph (1) shall be at the close of
business on the day on which the resolution of the Board relating thereto is
adopted.
(c) When a determination of stockholders of record entitled to
notice of or to vote at any meeting of stockholders has been made as provided in
this section, such determination shall apply to any adjournment thereof, unless
the Board fixes a new record date under this section for the adjourned meeting.
Section 8.5. Fractional Shares. The Corporation may (1) issue
-----------------
fractions of a share, (2) arrange for the disposition of fractional interests by
those entitled thereto, (3) pay in cash the fair value of fractions of a share
as of the time when those entitled to receive such fractions are determined, or
(4) issue scrip in registered or bearer form which shall entitle the holder to
receive a certificate for a full share upon the surrender of such scrip
aggregating a full share. A certificate for a fractional share shall, but scrip
shall not, unless otherwise provided therein, entitle the holder to exercise
voting rights, to receive dividends thereon, and to participate in any of the
assets of the Corporation in the event of liquidation. The Board of Directors
may cause scrip to be issued subject to the condition that it shall become void
if not exchanged for certificates representing full shares before a specified
date, or subject to the condition that the shares for which scrip is
exchangeable for may be sold by the Corporation and the proceeds thereof
distributed to the holders of scrip, or subject to any other conditions which
the Board of Directors may deem advisable.
ARTICLE IX
General Provisions
Section 9.1. Dividends. Subject to applicable law and the Certificate
---------
of Incorporation, the Board of Directors shall have full power to determine
whether any, and if any, what part of any, funds legally available for the
payment of dividends shall be declared in dividends and paid to stockholders;
the division of the whole or any part of such funds of the Corporation shall
rest wholly within the lawful discretion of the Board of Directors, and it
shall not be required at any time, against such discretion, to divide or pay any
part of such funds among or to the stockholders as dividends or otherwise; and
the Board of Directors may fix a sum which may be set aside or reserved over and
above the paid in capital of the Corporation as working capital for the
Corporation or as a reserve for any proper purpose, and from time to time may
increase, diminish, and vary the same in its absolute judgment and discretion.
11
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Section 9.2. Fiscal Year. The fiscal year of the Corporation shall be
-----------
determined by the Board of Directors.
Section 9.3. Seal. The corporate seal shall have inscribed thereon the
----
name of the Corporation, the year of its organization and the words "Corporate
Seal, Delaware". The seal may be used by causing it or a facsimile thereof to
be impressed, affixed or in any manner reproduced.
Section 9.4. Instruments for the Payment of Money. All checks or other
------------------------------------
instruments for the payment of money and notes of the Corporation shall be
signed by such officer or officers or such other person or persons as the Board
of Directors may from time to time designate.
ARTICLE X
Amendments
Section 10.1. Power to Amend. The Board of Directors is authorized to
--------------
adopt, repeal, alter, amend or rescind these By-Laws by the affirmative vote of
at least a majority of the Entire Board of Directors. The stockholders may
adopt, repeal, alter, amend or rescind the By-Laws of the Corporation by the
vote of at least 66 2/3% of the votes held by holders of shares of Voting Stock
(as defined in the Certificate of Incorporation).
12
<PAGE>
Exhibit 4.4
CABOT NOBLE, INC.
And
SOCIETY NATIONAL BANK,
WARRANT AGENT
WARRANT AGREEMENT
Dated as of ________ ___, 1997
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
SECTION 1. Appointment of Warrant Agent.................................. 1
----------------------------
SECTION 2. Warrant Certificates.......................................... 1
--------------------
SECTION 3. Execution and Countersignature of Warrant Certificates........ 2
------------------------------------------------------
SECTION 4................................................................... 2
(a) Distributions of Warrant Certificates......................... 2
-------------------------------------
(b) Exchange of Phar-Mor Warrants Not Required.................... 3
------------------------------------------
SECTION 5. Registration; Transfer and Exchanges.......................... 3
------------------------------------
SECTION 6. Duration and Exercise of Warrants............................. 4
---------------------------------
SECTION 7. Payment of Taxes.............................................. 5
----------------
SECTION 8. Mutilated or Missing Warrant Certificates..................... 6
-----------------------------------------
SECTION 9. Reservation of Shares......................................... 6
---------------------
SECTION 10. Obtaining of Governmental Approvals and
---------------------------------------
Stock Exchange Listings....................................... 6
-----------------------
SECTION 11. Adjustment of Exercise Price, Number of Shares
----------------------------------------------
Purchasable and Number of Warrants............................ 7
----------------------------------
SECTION 12. Fractional Warrants and Fractional Shares..................... 11
-----------------------------------------
SECTION 13. Notice to Warrant holders..................................... 11
-------------------------
SECTION 14. Merger, Consolidation or Change of Name of
------------------------------------------
Warrant Agent................................................. 13
-------------
SECTION 15. Warrant Agent................................................. 13
-------------
SECTION 16. Resignation or Other Change of Warrant Agent.................. 15
--------------------------------------------
SECTION 17. Issuance of New Warrant Certificates.......................... 16
------------------------------------
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C>
SECTION 18. Notices to the Company and Warrant Agent...................... 16
----------------------------------------
SECTION 19. Identity of Transfer Agent.................................... 17
--------------------------
SECTION 20. Supplements and Amendments.................................... 17
--------------------------
SECTION 21. Successors.................................................... 17
----------
SECTION 22. Termination................................................... 17
-----------
SECTION 23. Miscellaneous................................................. 18
-------------
SECTION 24. Governing Law................................................. 18
-------------
SECTION 25. Benefits of this Warrant Agreement............................ 18
----------------------------------
SECTION 26. Counterparts.................................................. 18
------------
SECTION 27. Headings...................................................... 19
--------
</TABLE>
ii
<PAGE>
WARRANT AGREEMENT
WARRANT AGREEMENT dated as of ________ __, 1996 (the "Effective
Date"), between Cabot Noble, Inc., a Delaware corporation (the "Company"), and
Society National Bank, a national banking association (the "Warrant Agent").
WHEREAS, pursuant to the Agreement and Plan of Reorganization dated as
of September 7, 1996, among the Company, Phar-Mor, Inc. ("Phar-Mor") and ShopKo
Stores, Inc. ("ShopKo") (the "Agreement"), Phar-Mor and Shopko will become
wholly-owned subsidiaries of the Company (the "Reorganization"); and
WHEREAS, prior to the effective date of the Agreement, certain
warrants to purchase shares of Phar-Mor common stock were outstanding pursuant
to that certain warrant agreement between Phar-Mor and the Warrant Agent dated
as of September 11, 1995 (the "Phar-Mor Warrant Agreement"); and
WHEREAS, pursuant to the Agreement, such warrants outstanding under
the Phar-Mor Warrant Agreement will be converted into warrants governed by this
Warrant Agreement (the "Warrants"), each such Warrant entitling the holder
thereof to purchase one share of Common Stock, $.01 par value per share, of the
Company (as used hereinafter the term "Shares" refers to Shares of such Common
Stock and of any stock of any other class into which such Shares may hereafter
be changed);
WHEREAS, pursuant to the Phar-Mor Warrant Agreement, as amended by the
First Amendment to Warrant Agreement dated as of __________ __, 1996, the
execution and delivery of this Warrant Agreement is a condition to the
Reorganization; and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing so to act, in connection with the
issuance of certificates evidencing the Warrants (the "Warrant Certificates")
and other matters as provided herein.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereto agree as follows:
SECTION 1. Appointment of Warrant Agent. The Company hereby
----------------------------
appoints the Warrant Agent to act as agent for the Company in accordance with
the instructions set forth hereinafter in this Warrant Agreement, and the
Warrant Agent hereby accepts such appointment.
SECTION 2. Warrant Certificates. The Warrant Certificates (and
--------------------
the Forms of Exercise and Assignment to be set forth on the reverse thereof)
shall be substantially in the form set forth in Exhibit A attached hereto, and
---------
may have such letters, numbers or other marks of identification and such legends
printed, lithographed or engraved thereon as the Company may deem appropriate
and as are not inconsistent with the provisions of this Warrant Agreement, or as
may be
<PAGE>
required to comply with any rule or regulation of any stock exchange on which
the Warrants may be listed, or to conform to usage.
Subject to the provisions of Section 11, the Warrant Certificates
shall set forth the Expiration Date (as defined in Section 6) and the Exercise
Price (as defined in Section 6).
SECTION 3. Execution and Countersignature of Warrant Certificates.
------------------------------------------------------
The Warrant Certificates shall be executed on behalf of the Company by its
Chairman of the Board, Vice Chairman of the Board, Chief Executive Officer,
President or one of its Executive Vice Presidents or Senior Vice Presidents,
under its corporate seal reproduced thereon, and attested by its Secretary or
one of its Assistant Secretaries. The signature of any of these officers on any
Warrant Certificate may be manual or facsimile. Warrant Certificates bearing the
manual or facsimile signatures of individuals who were at any time the proper
officers of the Company shall bind the Company notwithstanding that such
individuals, or any of them, ceased to be such officers prior to the
countersignature and delivery of such Warrant Certificate or were not such
officers at the date of this Warrant Agreement.
Each Warrant Certificate shall be countersigned by the manual or
facsimile signature of an authorized officer of the Warrant Agent and shall not
be valid for any purpose unless so countersigned. The Warrant Agent is hereby
authorized to countersign Warrant Certificates for issuance pursuant to any
provision of this Warrant Agreement.
Each Warrant Certificate shall be dated the date of its
countersignature by the Warrant Agent.
SECTION 4.
(a) Distributions of Warrant Certificates. Warrant
-------------------------------------
Certificates, evidencing not in excess of 1,250,000 Warrants (subject to
adjustment as provided in Section 11, from time to time on or after the date
hereof), shall be executed by the Company and delivered to the Warrant Agent for
authentication, on the date hereof and from time to time, as applicable,
together with instructions for the distribution of the Warrants contained in
written orders of the Company delivered to the Warrant Agent on the date hereof
and from time to time, as applicable, and signed by any officer listed in
Section 3, and the Warrant Agent shall thereupon authenticate and deliver said
Warrant Certificates in accordance with such instructions without further action
by the Company hereunder.
(b) Exchange of Phar-Mor Warrants Not Required. Holders of
------------------------------------------
warrant certificates issued under the Phar-Mor Warrant Agreement will
automatically become holders of Cabot Noble warrants hereunder, and all rights
to purchase the common stock of Phar-Mor pursuant to such Phar-Mor warrants will
automatically become rights to purchase the common stock of Cabot Noble. The
warrant certificates representing the Phar-Mor warrants will automatically
represent the Warrants for which such Phar-Mor Warrants were exchanged in the
Reorganization, and after the
2
<PAGE>
Effective Date and the Reorganization, as Phar-Mor Warrants are presented for
transfer, new Warrants hereunder will be issued.
SECTION 5. Registration; Transfer and Exchanges. The Company
------------------------------------
shall maintain an office or agency at which there shall be maintained a register
(the "Warrant Register") for the registration of the Warrant Certificates and
their transfer from time to time. Such office or agency shall initially be the
principal corporate trust office of the Warrant Agent at 127 Public Square,
Cleveland, Ohio 44114.
The Company and the Warrant Agent may deem and treat the
registered holder of each Warrant Certificate as the absolute owner thereof
(notwithstanding any notation of ownership or other writing thereon made by
anyone), for the purpose of any exercise thereof, any distribution to the holder
thereof, and for all other purposes, and neither the Company nor the Warrant
Agent shall be affected by any notice to the contrary.
Each Warrant Certificate shall be transferable, in whole or in
part, on the Warrant Register, upon surrender of the Warrant Certificate at the
office or agency maintained by the Company, together with a written assignment
of the Warrant Certificate, on the Form of Assignment set forth on the reverse
thereof or in other form satisfactory to the Warrant Agent, duly executed by the
registered holder thereof or his duly appointed legal representative, and
together with funds to pay any transfer taxes payable in connection with such
transfer. Upon such surrender and payment, a new Warrant Certificate, in the
name of the assignee and in the denomination or denominations specified in such
instrument of assignment, shall be issued by the Company, delivered by the
Company to the Warrant Agent for authentication and delivered by the Warrant
Agent to the assignee. The new Warrant Certificate shall be deemed issued on the
date the old Warrant Certificate is surrendered (together with a duly executed
Form of Assignment) and all applicable transfer taxes are paid and the
transferee shall be deemed the registered holder as of such date. If less than
all of the Warrants evidenced by the Warrant Certificate are being transferred,
a new Warrant Certificate or Certificates shall be issued to the holder of such
Certificate for the portion of the Warrants evidenced by the Warrant Certificate
not being transferred. The Warrant Certificate surrendered shall be canceled by
the Warrant Agent.
A Warrant Certificate may be divided or combined with other
Warrant Certificates upon surrender thereof at the office or agency maintained
by the Company, together with a written notice specifying the names and
denominations in which new Warrant Certificates are to be issued, signed by the
registered holder thereof or his duly appointed legal representative, and
together with the funds to pay any transfer taxes payable in connection with
such transfer. Upon such surrender and payment, a new Warrant Certificate or
Certificates shall be issued and delivered in accordance with such notice. The
Warrant Certificate surrendered shall be canceled by the Warrant Agent.
As provided in Section 12(a) hereof, the Company is not required
to issue Warrant Certificates which evidence fractional Warrants and no
consideration will be paid in lieu of fractional Warrants.
3
<PAGE>
The Company shall make no service or other charge in connection
with any such transfer or exchange of Warrant Certificates, except for any
transfer taxes payable in connection therewith.
Warrant Certificates canceled by the Warrant Agent pursuant to
any provisions of this Warrant Agreement shall not be reissued and shall be
destroyed by the Warrant Agent unless the Company directs their return to the
Company. The Warrant Agent shall furnish to the Company written confirmation of
the destruction of the Warrant Certificates so canceled.
SECTION 6. Duration and Exercise of Warrants. The Warrants shall
---------------------------------
expire at the close of business on September 10, 2002, provided, that if such
date falls on a day on which commercial banks are authorized or required to
close in Cleveland, Ohio (each other day being referred to as a "Business Day"),
then the Warrants shall expire at the close of business on the next succeeding
Business Day (such date of expiration being herein referred to as the
"Expiration Date"). Each Warrant after the issuance thereof may be exercised on
any Business Day on or prior to the close of business on the Expiration Date.
After the close of business on the Expiration Date, unexercised Warrants will
become wholly void and of no value.
Subject to the provisions of this Warrant Agreement, the holder
of each Warrant shall have the right to purchase from the Company (and the
Company shall issue and sell to such holder) one fully paid and nonassessable
Share at the exercise price (the "Exercise Price") at the time in effect
hereunder, upon surrender to the office or agency maintained by the Company, of
the Warrant Certificate evidencing such Warrant, with the Form of Exercise on
the reverse thereof duly filled in and signed, and upon payment of the Exercise
Price (i) in lawful money of the United States of America by wire transfer of
immediately available funds or by certified or official bank check payable to
the order of the Company and/or (ii) by surrender of Phar-Mor, Inc. Senior Notes
Due 2002 (the "Senior Notes") with an aggregate principal amount and interest
accrued but unpaid thereon to the date of delivery being credited to the
Exercise Price, duly endorsed in blank for transfer. The Exercise Price shall
initially be $13.50 per Warrant. The Exercise Price and the number of Shares
purchasable upon exercise of a Warrant shall be subject to adjustment as
provided in Section 11. No adjustment shall be made for any cash dividends on
Shares issuable on the exercise of a Warrant.
Subject to Section 7, upon such surrender of a Warrant
Certificate and payment of the Exercise Price at the time in effect hereunder,
the Company shall issue and deliver to the Warrant Agent and the Warrant Agent
shall deliver to or upon the written order of the registered holder of such
Warrant Certificate and in such name or names as such registered holder may
designate, a certificate for the Share or Shares issuable upon the exercise of
the Warrant or Warrants evidenced by such Warrant Certificate. Such certificate
shall be deemed to have been issued and any person so designated to be named
therein shall be deemed to have become the holder of record of such Share or
Shares as of the date of the surrender of such Warrant Certificate and payment
of the Exercise Price.
4
<PAGE>
The Warrants evidenced by a Warrant Certificate shall be
exercisable, at the election of the registered holder thereof, either as an
entirety or from time to time in part, for the number of Warrants evidenced by
the Warrant Certificate. In the event that less than all of the Warrants
evidenced by a Warrant Certificate are surrendered for exercise prior to the
Expiration Date, a new Warrant Certificate or Certificates shall be issued for
the remaining number of Warrants evidenced by the Warrant Certificate so
surrendered. All Warrant Certificates surrendered upon exercise of Warrants
shall be canceled by the Warrant Agent.
As provided in Section 12(b), the Company shall not be required
to issue fractions of Shares or to distribute Share certificates which evidence
fractional Shares upon the exercise of the Warrants and the Company will pay
cash equal to the applicable percentage of the market price of a Share in lieu
thereof.
The Warrant Agent shall deposit to the account of the Company all
monies and deliver to the Company all Senior Notes received by the Warrant
Agent in payment of the Exercise Price of any Warrant; provided that the Warrant
--------
Agent shall have no obligation to invest any such monies (and shall not be
liable for any earnings thereon) except in accordance with the written
instructions of the Company. Promptly after the exercise of any Warrant, the
Warrant Agent shall account to the Company with respect to such exercise of
Warrants.
SECTION 7. Payment of Taxes. The Company shall pay all
----------------
documentary stamp taxes, if any, attributable to the issuance of Warrants and
issuance of Shares or other securities upon the exercise of any Warrant,
provided, however, that the Company shall not be required to pay any tax or
taxes which may be payable in respect of any transfer involved in the issue of
any certificates for Shares in a name other than that of the registered holder
of a Warrant Certificate surrendered upon the exercise of a Warrant and the
Company shall not be required to issue or deliver such certificates unless or
until the persons requesting the issuance thereof shall have paid to the Company
the amount of such tax or shall have established to the satisfaction of the
Company that such tax has been paid.
SECTION 8. Mutilated or Missing Warrant Certificates. In case any
-----------------------------------------
of the Warrant Certificates shall be mutilated, lost, stolen or destroyed, the
Company shall issue, and the Warrant Agent shall countersign, in exchange and
substitution therefor, upon surrender and cancellation of the mutilated Warrant
Certificate or in lieu of and in substitution for the lost, stolen or destroyed
Warrant Certificate, a new Warrant Certificate of like tenor and representing an
equivalent number of Warrants, but only upon receipt of evidence satisfactory to
the Company and the Warrant Agent of such loss, theft or destruction of such
Warrant Certificates and indemnity, if requested, also satisfactory to them.
Applicants for such substitute Warrant Certificates shall also comply with such
other reasonable regulations and pay such other reasonable charges as the
Company or the Warrant Agent may prescribe.
SECTION 9. Reservation of Shares. The Company will at all times
---------------------
reserve and keep available, free from preemptive rights, out of the aggregate of
its authorized but unissued Shares or
5
<PAGE>
its authorized and issued Shares held in its Treasury, for the purpose of
enabling it to satisfy any obligation to issue Shares upon exercise of Warrants,
the full number of Shares deliverable upon the exercise of all outstanding
Warrants, including pursuant to any adjustment thereto in accordance with
Section 11.
Before taking any action which would cause an adjustment pursuant
to Section 11 reducing the Exercise Price below the then par value (if any) of
the Shares issuable upon exercise of the Warrants, the Company will take any
corporate action which may, in the opinion of its counsel (which may be counsel
employed by the Company), be necessary in order that the Company may validly and
legally issue fully paid and nonassessable Shares at the Exercise Price as so
adjusted.
The Company covenants that all Shares which may be issued upon
the exercise of Warrants will, upon issuance, be duly issued, fully paid and
nonassessable and free from all taxes, liens, charges and security interests
with respect to the issue thereof.
The Warrant Agent is authorized to requisition from time to time
from a transfer agent for the Shares (including the Company if then acting as a
transfer agent) stock certificates required to honor exercises of outstanding
Warrants. The Company hereby authorizes its present and any future such transfer
agent to comply with all such requests. The Company shall supply such transfer
agent with duly executed stock certificates for such purpose.
SECTION 10. Obtaining of Governmental Approvals and Stock Exchange
------------------------------------------------------
Listings. The Company will in good faith, and as expeditiously as possible, use
- --------
its best efforts to obtain and keep effective any and all permits, consents and
approvals of governmental agencies and authorities, and to make any and all
filings under Federal and State securities laws, necessary in connection with
the issuance, distribution and transfer of Warrant Certificates, the exercise of
the Warrants, and the issuance, sale, transfer and delivery of Shares upon
exercise of Warrants, except that the foregoing provisions of this sentence
shall not be deemed to require registration of the Warrants or the Shares
issuable on exercise of the Warrants under the Securities Act of 1933, as
amended, or similar state securities laws. The Company will use its best
efforts to have the Shares which are issuable upon the exercise of the Warrants
(a) listed on the principal national securities exchange, if any, on which the
Shares are then listed, or (b) quoted in The Nasdaq Stock Market, Inc., if the
then outstanding Shares are listed or quoted thereon, or (c) if neither (a) nor
(b) is applicable, listed on any exchange on which the Shares are then listed.
SECTION 11. Adjustment of Exercise Price, Number of Shares
----------------------------------------------
Purchasable and Number of Warrants. The Exercise Price and the number of Shares
- ----------------------------------
purchasable upon the exercise of each Warrant are subject to adjustment from
time to time as provided in this Section 11.
(a) If the Company shall subdivide its outstanding Shares into
a greater number of shares or pay a dividend in Shares or make any other
distribution of Shares without consideration, the Exercise Price in effect
immediately prior to such change shall be proportionately reduced and,
conversely, in case the outstanding Shares shall be combined into a smaller
number of Shares, the
6
<PAGE>
Exercise Price in effect immediately prior to such combination shall be
proportionately increased, and the number of Shares purchasable by the holder of
each Warrant shall be adjusted accordingly so that the aggregate purchase price
on exercise of such Warrant remains the same.
(b) If the Company shall issue rights or warrants to all
holders of Shares entitling them (for a period not exceeding 45 days from the
date of such issuance) to subscribe for or purchase Shares at a price per Share
less than the current market price per Share (as determined pursuant to
subsection (d) below) of the Shares on the record date mentioned below, the
Exercise Price shall be adjusted to a price, computed to the nearest cent, so
that the same shall equal the price determined by multiplying:
(1) the Exercise Price in effect immediately prior to the
date of issuance of such rights or warrants by a fraction, of which
(2) the numerator shall be (A) the number of Shares
outstanding on the date of issuance of such rights or warrants,
immediately prior to such issuance, plus (B) the number of Shares
----
which the aggregate offering price of the total number of Shares so
offered for subscription or purchase would purchase at such current
market price (determined by multiplying such total number of Shares by
the exercise price of such rights or warrants and dividing the product
so obtained by such current market price), and of which
(3) the denominator shall be (A) the number of Shares
outstanding on the date of issuance of such rights or warrants
immediately prior to such issuance, plus (B) the number of additional
----
Shares which are so offered for subscription or purchase.
Except as provided in subsection (e) below, such adjustment shall become
effective immediately after the record date for the determination of holders
entitled to receive such rights or warrants. In addition, the number of Shares
purchasable by the holder of each Warrant shall be adjusted accordingly so that
the aggregate purchase price on exercise of such Warrant remains the same.
(c) (i) If the Company shall distribute to substantially all
holders of Shares, evidences of indebtedness, equity securities (other than
Shares) or other assets (other than cash dividends) or shall distribute to all
or substantially all holders of Shares, rights or warrants to subscribe to
securities (other than those referred to in subsection 11(b) above) (all such
evidences of indebtedness, equity securities and other assets, rights and
warrants being referred to herein as "Distributed Assets"), then in each such
case the Exercise Price shall be adjusted so that the same shall be equal to the
price determined by multiplying the Exercise Price in effect immediately prior
to the date of such distribution by a fraction of which the numerator shall be
the current market price per Share (determined as provided in subsection 11(d)
below) on the record date mentioned below less the then fair market value (as
determined by the Board of Directors of the Company or any committee thereof
duly authorized to act, whose determination shall, if made in good faith, be
conclusive evidence of such fair market value) of the portion of the Distributed
Assets applicable to one Share,
7
<PAGE>
and of which the denominator shall be such current market price per Share. No
adjustment shall be made pursuant to this paragraph (c)(i) unless, on the record
date for such distribution, the current market price per Share exceeds the fair
market value of the Distributed Assets applicable to each outstanding Share.
(ii) In the event, and each time, that the Company
distributes Distributed Assets to substantially all holders of its
Shares and the current market price per Share on the record date for
such distribution is less than or equal to the fair market value of
the Distributed Assets applicable to each Share on such date, then the
number of Shares purchasable upon exercise of the Warrant shall be
adjusted by multiplying the number of Shares purchasable upon exercise
of the Warrant immediately prior to such distribution by a fraction,
the numerator of which is the sum of (A) the current market price per
Share (determined as provided in subsection 11(d) below) on the record
date and (B) the fair market value (as determined by the Board of
Directors of the Company or any committee thereof duly authorized to
act, whose determination shall, if made in good faith, be conclusive
evidence of such fair market value) of the Distributed Assets
applicable to one Share and the denominator of which is the current
market price per Share (determined as provided in subsection 11(d)
below) on the record date. Except as provided in subsection 11(e)
below, such adjustment shall become effective immediately after the
record date for the determination of holders entitled to receive such
distribution.
(d) For the purpose of any computation under subsections
(b) and (c) above, the current market price per Share on any date shall be
deemed to be the average of the closing prices for the 30 consecutive Trading
Days (as hereinafter defined) commencing 45 days before the date in question,
and, if not publicly traded, the fair market value determined in good faith by
the Board of Directors of the Company.
(e) In any case in which this Section 11 shall require that an
adjustment be made immediately following a record date, the Company may elect to
defer the effectiveness of such adjustment (but in no event until a date later
than the effective time of the event giving rise to such adjustment), in which
case the Company shall, with respect to any Warrant exercised after such record
date and before such adjustment shall have become effective (i) defer issuing to
the holder of the Warrant Certificate evidencing such Warrant the number of
Shares and other capital stock of the Company issuable upon such exercise in
excess of the number of Shares and other capital stock of the Company issuable
thereupon only on the basis of the Exercise Price prior to adjustment, and (ii)
not later than five business days after such adjustment shall have become
effective issue to such holder the additional Shares and other capital stock of
the Company issuable on such exercise; provided that such additional Shares
--------
shall be deemed to have been issued and any person so designated to be named
therein shall be deemed to have become the holder of record of such additional
Shares as of the date of the surrender of the applicable Warrant Certificate and
payment of the Exercise Price.
8
<PAGE>
(f) No adjustment in the Exercise Price shall be required
unless such adjustment would require an increase or decease of at least 1% of
the Exercise Price per Share; provided that any adjustments which by reason of
--------
this subsection 11(f) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations under this
Section 11 shall be made to the nearest cent or to the nearest one-hundredth of
a Share, as the case may be.
(g) For purposes of subsection (d) above, the closing price for
each day shall be (i) if the Shares are listed or admitted to trading on any
securities exchange, the closing price, regular way, on such day on the
principal national exchange on which the Shares are so listed, or if no sale
takes place on such day, the average of the closing bid and asked prices on such
day, (ii) if the Shares are not then listed or admitted to trading on any
securities exchange, the last reported sale price on such day, or if no sale
takes place on such day, the average of the closing bid and asked prices on such
day, as reported by a reputable quotation source designated by the Company, and
(iii) if the Shares are not then listed or admitted to trading on any securities
exchange and no such reported closing sale price or closing bid and asked prices
are available, the average of the reported high bid and low asked prices on such
day, as reported by a reputable quotation service, or The Wall Street Journal,
-----------------------
Eastern Edition, or if such newspaper is no longer published then in a newspaper
of general circulation in the Borough of Manhattan, City and State of New York,
customarily published on each business day, designated by the Company or, if
there shall be no bid and asked prices on such day, the average of the high bid
and low asked prices, as so reported, on the most recent day (not more than 30
days prior to the date in question) for which prices have been so reported. If
none of the above conditions are met, the closing price of the Shares on any
day, or the average of such closing prices for any period, shall be the fair
market value per share of the Shares as determined by a member firm of the New
York Stock Exchange, Inc. selected by the Company.
As used herein, the term "Trading Days" with respect to the
Shares means (1) if the Shares are listed or admitted for trading on any
national securities exchange, days on which such national securities exchange is
open for business, or (2) if the Shares are quoted on the electronic inter-
dealer quotation system operated by the Nasdaq Stock Market, Inc., a subsidiary
of the National Association of Securities Dealers, Inc., or any similar system
of automated dissemination of quotations of securities prices, days on which
trades may be made on such system.
(h) Anything in this Section 11 to the contrary
notwithstanding, the Company shall be entitled to make such reductions in the
Exercise Price or increases in the number of Shares purchasable upon exercise of
each Warrant, in addition to those required by this Section, as it in its
discretion shall reasonably determine to be advisable in order that any stock
dividend, subdivision of shares, distribution of rights or warrants to purchase
stock or securities, or distribution of other assets (other than cash dividends)
hereafter made by the Company to its stockholders shall not be taxable.
(i) If any of the following shall occur, namely (i) any
reclassification or change of outstanding Shares (other than a change in par
value, or from par value to no par value,
9
<PAGE>
or from no par value to par value, or as a result of a subdivision or
combination), (ii) any consolidation, share exchange or merger to which the
Company is a party as a result of which the holders of Shares shall be entitled
to receive stock, other securities or other assets with respect to or in
exchange for Shares, or (iii) sale or conveyance of all or substantially all of
the property or business of the Company as an entirety, then the Company, or
such successor or purchasing corporation, as the case may be, shall, as a
condition precedent to such reclassification, change, consolidation, share
exchange, merger, sale or conveyance, execute an agreement providing that any
holder of a Warrant then outstanding shall have the right thereafter and until
the expiration of such Warrant to exercise such Warrant for the kind and amount
of shares of stock and other securities and property receivable upon such
reclassification, change, consolidation, share exchange, merger, sale or
conveyance by a holder of the number of Shares issuable upon exercise of such
Warrant immediately prior to such reclassification, change, consolidation, share
exchange, merger, sale or conveyance. Such agreement shall provide for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 11. If, in the case of any such
consolidation, share exchange, merger, sale or conveyance, the stock or other
securities and property receivable thereupon by a holder of Shares includes
shares of stock or other securities and property of a corporation other than the
successor or purchasing corporation, as the case may be, in such consolidation,
share exchange, merger, sale or conveyance, then such agreement shall also be
executed by such other corporation and shall contain such additional provisions
to protect the interests of the holders of the Warrants as the Board of
Directors of the Company shall reasonably consider necessary by reason of the
foregoing. The provisions of this Section shall bind the holder of the Warrant
and shall similarly apply to successive consolidations, share exchanges,
mergers, sales or conveyances.
(j) Irrespective of any adjustments in the Exercise Price or
the number or kind of shares or other securities or property purchasable upon
the exercise of the Warrants, Warrant Certificates theretofore or thereafter
issued may continue to express the same Exercise Price per share and number and
kind of shares as are stated on the Warrant Certificates initially issuable
pursuant to this Warrant Agreement.
SECTION 12. Fractional Warrants and Fractional Shares. (a) The
-----------------------------------------
Company shall not be required to issue Warrant Certificates which evidence
fractional Warrants. No consideration shall be paid in lieu of fractional
Warrants.
(b) The Company shall not be required to issue fractions of
Shares or to distribute Share certificates which evidence fractional Shares upon
the exercise of the Warrants. If fractional Shares are not issued, the Company
will pay cash equal to the applicable percentage of the market price of a Share
in lieu thereof.
SECTION 13. Notice to Warrant holders. (a) Within 20 days after
-------------------------
any adjustment of the Exercise Price or the number of Shares the holders of
Warrants shall be entitled to purchase upon exercise thereof pursuant to Section
11, the Company shall (i) cause to be filed with the Warrant
10
<PAGE>
Agent a certificate of a firm of independent public accountants of recognized
standing selected by the Board of Directors of the Company (who may be the
regular auditors of the Company) setting forth the Exercise Price after such
adjustment, and the adjusted number of Shares (or fraction thereof) purchasable
upon exercise of a Warrant and setting forth in reasonable detail the method of
calculation and the facts upon which the calculations are based, and (ii) cause
notice of such adjustment to be mailed by first class mail, postage prepaid, to
each registered holder of a Warrant Certificate at his address appearing on the
Warrant Register. Where appropriate, such notice may be mailed in advance and
included as a part of any notice required to be mailed under any other provision
of this Section 13.
(b) In case:
(i) the Company shall declare a dividend (or any other
distribution) payable to the holders of Shares otherwise than in cash;
or
(ii) the Company shall authorize the granting to the
holders of Shares of rights to subscribe for or purchase any shares of
any class or of any other rights; or
(iii) the Company shall authorize any reclassification or
change of the Shares (other than a subdivision or combination of its
outstanding Shares), or any consolidation, merger or share exchange to
which the Company is a party and for which approval of any
shareholders of the Company is required, or the sale or conveyance of
all or substantially all the property or business of the Company; or
(iv) of the voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then the Company shall cause to be filed with the Warrant Agent and shall cause
to be mailed to each of the registered holders of the Warrant Certificates at
his address appearing on the Warrant Register, at least 20 days prior to the
applicable record date or effective date as hereinafter specified, by first
class mail, postage prepaid, a written notice stating (1) the date as of which
the holders of record of Shares to be entitled to receive any such rights,
warrants or distribution are to be determined, or (2) the date on which any such
consolidation, merger, share exchange, conveyance, transfer, dissolution,
liquidation or winding up is expected to become effective, and the date as of
which it is expected that holders of record of Shares shall be entitled to
exchange their Shares for securities or other property, if any, deliverable upon
such reclassification, consolidation, merger, share exchange, conveyance,
transfer, dissolution, liquidation or winding up. If any action referred to in
this Section 13(b) requires the approval of holders of Shares, the Company shall
cause notice of the proposed action and the record date for the determination of
holders of Shares entitled to vote on such matter to be mailed to each of the
registered holders of the Warrant Certificates at his address appearing on the
Warrant Register, at least 20 days prior to such record date, by first class
mail, postage prepaid. The failure to give any notice required by this Section
13(b) or any defect therein shall not affect the legality of any such
reclassification, consolidation, merger, share exchange, conveyance, transfer,
11
<PAGE>
dissolution, liquidation or winding up, or the vote upon any action; however,
the failure to give any notice will extend the period during which the Warrants
may be exercised by a like number of days and during which the holder shall be
entitled to receive such securities or other property, as the case may be, upon
exercise of their Warrants.
Nothing contained in this Warrant Agreement or in any of the
Warrant Certificates shall be construed as conferring upon the holders thereof
the right to vote or receive dividends or to be deemed for any purpose the
holder of Shares or of any other securities of the Company which may at any time
be issuable on the exercise of the Warrant Certificates or be construed to
confer upon the holders thereof, as such, any of the rights of a shareholder of
the Company or any right to vote upon any matter submitted to shareholders at
any meeting thereof, or to give or withhold consent to any corporate action
(whether upon any recapitalization, issue of stock, reclassification of stock,
change of par value, consolidation, merger, share exchange, conveyance or
otherwise) or, except as provided herein, to receive notice of meetings, or to
receive dividends or subscription rights or otherwise, until the Warrant or
Warrants evidenced by the Warrant certificates shall have been exercised as
provided herein.
SECTION 14. Merger, Consolidation or Change of Name of Warrant
--------------------------------------------------
Agent. Any corporation into which the Warrant Agent may be merged or converted
- -----
or with which it may be consolidated, or any corporation resulting from any
merger, conversion or consolidation to which the Warrant Agent shall be a party,
or any corporation succeeding to the corporate trust business of the Warrant
Agent, shall be the successor to the Warrant Agent hereunder without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, provided that such corporation would be eligible for appointment
as a successor Warrant Agent under the provisions of Section 16. In case at the
time such successor to the Warrant Agent shall succeed to the agency created by
this Warrant Agreement, and in case at any time any of the Warrant Certificates
shall have been countersigned but not delivered, any such successor to the
Warrant Agent may adopt the countersignature of the original Warrant Agent; and
in case at that time any of the Warrant Certificates shall not have been
countersigned, any successor to the Warrant Agent may countersign such Warrant
Certificates either in the name of the predecessor Warrant Agent or in the name
of the successor Warrant Agent; and in all such cases such Warrant Certificates
shall have the full force provided in the Warrant Certificates and in this
Warrant Agreement.
SECTION 15. Warrant Agent. The Warrant Agent undertakes the
-------------
duties and obligations imposed on it by this Warrant Agreement, upon the
following terms and conditions, by all of which the Company and the holders of
Warrants, by their acceptance thereof, shall be, bound:
(a) The statements contained herein and in the Warrant
Certificates shall be taken as statements of the Company, and the Warrant Agent
assumes no responsibility for the correctness of any of the same except such as
describe the Warrant Agent or action taken or to be taken by it. The Warrant
Agent assumes no responsibility with respect to the distribution of the Warrant
Certificates or the Shares except as herein provided.
12
<PAGE>
(b) The Warrant Agent shall not be responsible for any failure
of the Company to comply with any of the covenants contained in this Warrant
Agreement or in the Warrant.
(c) The Warrant Agent may consult at any time with counsel to
it (who may be counsel for the Company) and the Warrant Agent shall incur no
liability or responsibility to the Company or to any holder of any Warrant
Certificate in respect of any action taken, suffered or omitted by it hereunder
in good faith and in accordance with the opinion or the advice of such counsel,
provided that the Warrant Agent shall have exercised reasonable care in the
selection and continued employment of such counsel.
(d) Whenever in the performance of its duties under this
Warrant Agreement the Warrant Agent shall deem it necessary or desirable that
any fact or matter be proved or established by the Company prior to taking or
suffering any action hereunder, such fact or matter (unless other evidence in
respect thereof be herein specifically prescribed) may be deemed to be
conclusively proved and established by a certificate signed by the Chairman of
the Board, the Vice Chairman of the Board, the Chief Executive Officer, the
President, an Executive Vice President or Senior Vice President or the Treasurer
of the Company and delivered to the Warrant Agent; and such certificate shall be
full authorization to the Warrant Agent for any action taken or suffered in good
faith by it under the provisions of this Warrant Agreement in reliance upon such
certificate.
(e) The Warrant Agent shall incur no liability or
responsibility to the Company or to any holder of any Warrant Certificate for
any action taken in reliance on any Warrant Certificate, certificate of shares,
notice, resolution, waiver, consent, order, certificate, or other paper,
document or instrument believed by it to be genuine and to have been signed,
sent or presented by the proper party or parties.
(f) The Company agrees to pay to the Warrant Agent reasonable
compensation for all services rendered by the Warrant Agent in the execution of
this Warrant Agreement, to reimburse the Warrant Agent for all expenses, taxes
and governmental charges and other charges of any kind and nature incurred by
the Warrant Agent in the execution of this Warrant Agreement and the performance
of its duties set forth hereunder and to indemnify the Warrant Agent and hold it
harmless against any and all liabilities, including, without limitation,
judgments, costs and counsel fees, for anything done or omitted by the Warrant
Agent in the execution of this Warrant Agreement and the performance of its
duties set forth hereunder except as a result of its negligence or bad faith.
(g) The Warrant Agent shall be under no obligation to institute
any action, suit or legal proceeding or to take any other action likely to
involve cost or expense unless the Company shall furnish the Warrant Agent with
reasonable security and indemnity for any costs and expenses which may be
incurred, but this provision shall not affect the power of the Warrant Agent to
take such action as it may consider proper, whether with or without any such
security or indemnity. All rights of action of any Holder under this Warrant
Agreement or under any of the Warrants may be enforced by the Warrant Agent
without the possession of the Warrant Certificate or the production thereof at
any trial or proceeding relative thereto, and any such actions, suits or
proceedings
13
<PAGE>
instituted by the Warrant Agent shall be brought in its name as Warrant Agent,
and any recovery of judgment shall be for the ratable benefit of the registered
holders of the Warrants, as their respective rights or interests may appear;
provided that the provisions of this paragraph (g) shall impose no obligation on
the Warrant Agent to enforce any such right of action or limit or otherwise
affect the right of the Warrant Agent to enforce any and all rights of action of
the Warrant Agent under this Warrant Agreement or any of the Warrants in its
name and for its benefit.
(h) Except as otherwise required by law, the Warrant Agent, and
any stockholder, director, officer or employee of the Warrant Agent, may buy,
sell, or deal in any of the Warrants or other securities of the Company or
become pecuniarily interested in any transaction in which the Company may be
interested, or contract with or lend money to the Company or otherwise act as
fully and freely as thought they were not the Warrant Agent under this Warrant
Agreement, or a stockholder, director, officer or employee of the Warrant Agent,
as the case may be. Nothing herein shall preclude the Warrant Agent from acting
in any other capacity for the Company or for any other legal entity.
(i) Except as set forth in subsection (g) above, the Warrant
Agent shall act hereunder solely as agent for the Company, and its duties shall
be determined solely by the provisions hereof. The Warrant Agent shall not be
liable for anything which it may do or refrain from doing in connection with
this Warrant Agreement except for its own negligence or bad faith.
(j) The Warrant Agent is hereby authorized and directed to
accept instructions with respect to the performance of its duties hereunder from
the Chairman of the Board, Vice Chairman of the Board, Chief Executive Officer,
President, an Executive Vice President or Senior Vice President or the Treasurer
of the Company, and to apply to such officers for advice or instructions in
connection with the Warrant Agent's duties, and it shall not be liable for any
action taken or suffered or omitted by it in good faith in accordance with
instructions of any such officer.
SECTION 16. Resignation or Other Change of Warrant Agent. The
--------------------------------------------
Warrant Agent may resign and be discharged from its duties under this Warrant
Agreement by giving the Company 60 days' notice in writing. The Warrant Agent
may be removed by like notice to the Warrant Agent and the registered holders of
the Warrant Certificates from the Company, such notice to specify the date when
removal shall become effective. If the Warrant Agent shall become incapable of
acting as Warrant Agent, the Company shall appoint a successor to the Warrant
Agent. If the Company shall fail to make such appointment within a period of 60
days after it has been notified in writing of such incapacity or resignation by
the Warrant Agent or by the registered holder of a Warrant Certificate, then the
registered holder of any Warrant Certificate or the Warrant Agent may apply to
any court of competent jurisdiction for the appointment of a successor to the
Warrant Agent. Pending appointment of a successor to the Warrant Agent, either
by the Company or by such a court, the duties of the Warrant Agent shall be
carried out by the Company. Any successor Warrant Agent, whether appointed by
the Company or by such a court, shall be a bank or trust company, in good
standing, incorporated under the laws of the United States of America or any of
the states thereof, and having an office in the Borough of Manhattan, the City
and State of New York, and must have
14
<PAGE>
at the time of its appointment as Warrant Agent a combined capital and surplus
of at least $50,000,000. After appointment, the successor Warrant Agent shall
be vested with the same powers, rights, duties and responsibilities as if it had
been originally named as Warrant Agent without further act or deed; but the
former Warrant Agent shall deliver and transfer to the successor Warrant Agent
all records at the time held by it hereunder and execute and deliver any further
assurance, conveyance, act or deed necessary for the purpose. The Company shall
cause notice of the appointment of any successor Warrant Agent to be mailed by
first class mail, postage prepaid, to each registered holder of a Warrant
Certificate at his address appearing on the Warrant Register. Failure to give
any notice provided for in this Section 16, or any defect therein, shall not,
however, affect the legality or validity of the appointment of a successor
Warrant Agent.
SECTION 17. Issuance of New Warrant Certificates. Notwithstanding
------------------------------------
any of the provisions of this Warrant Agreement or of the Warrants to the
contrary, the Company (a) may, at its option, issue new Warrant Certificates
evidencing Warrants in such form as may be approved by its Board of Directors to
reflect any adjustment or change in the Exercise Price per Share and the number
or kind or class of shares of stock or other securities or property purchasable
under the Warrant Certificates made in accordance with the provisions of this
Warrant Agreement, and (b) shall, upon request from holder of Warrants, issue
new Warrant Certificates to such holder reflecting such adjustments or changes.
SECTION 18. Notices to the Company and Warrant Agent. Any notice
----------------------------------------
pursuant to this Warrant Agreement to be given by the Warrant Agent or by the
registered holder of any Warrant Certificate to the Company shall be
sufficiently given if sent by first class mail with postage prepaid, or
personally delivered, addressed to the Company as follows:
Cabot Noble, Inc.
c/o Phar-Mor, Inc.
20 Federal Plaza West
Youngstown, OH 44501-0400
Attn: John Ficarro, Esq., General Counsel
with a copy to
Morris F. DeFeo, Esquire
Swidler & Berlin, Chartered
3000 K Street, N.W.
Washington, D.C. 20007
(or to such other address as the Company may have furnished in writing to the
Warrant Agent for this purpose).
15
<PAGE>
Any notice pursuant to this Warrant Agreement to be given by the
Company or by any registered holder of any Warrant Certificate to the Warrant
Agent shall be sufficiently given if sent by first class mail, postage prepaid,
addressed to the Warrant Agent as follows:
Society National Bank
c/o KeyCorp Shareholder Services, Inc.
127 Public Square, 15th Floor
Cleveland, Ohio 44114
Attn: Kathy Gallagher
(or to such other address as the Warrant Agent may have furnished in writing to
the Company for this purpose).
SECTION 19. Identity of Transfer Agent. Forthwith upon the
--------------------------
appointment of any subsequent transfer agent for the Shares, or any other shares
of the Company's capital stock issuable upon the exercise of the Warrants, the
Company will file with the Warrant Agent a statement setting forth the name and
address of such subsequent transfer agent.
SECTION 20. Supplements and Amendments. The Company and the
--------------------------
Warrant Agent may from time to time supplement or amend this Warrant Agreement
without the approval of any holders of Warrant Certificates in order to cure any
ambiguity, to correct or supplement any provision contained herein which may be
defective or inconsistent with any provisions herein, or to make any other
provisions in regard to matters or questions arising hereunder which the Company
and the Warrant Agent may deem necessary or desirable and which shall not
adversely affect the interests of any holder of Warrant Certificates.
SECTION 21. Successors. All the covenants and provisions of this
----------
Warrant Agreement by or for the benefit of the Company or the Warrant Agent
shall bind and inure to the benefit of their respective successors and assigns
hereunder.
SECTION 22. Termination. This Warrant Agreement shall terminate
-----------
at the close of business on the Expiration Date. Notwithstanding the foregoing,
this Warrant Agreement will terminate on any earlier date when all Warrants have
been exercised. The provisions of Section 15 shall survive such termination.
SECTION 23. Miscellaneous.
-------------
(a) The Warrant Agent shall have no duties or obligations other
than those specifically set forth herein, or as may be subsequently agreed to in
writing by the Company and the Warrant Agent.
16
<PAGE>
(b) The Company represents to the Warrant Agent that it has,
and from time to time as it determines necessary or appropriate shall, solicit
the advice of its counsel, which may be in-house counsel, regarding compliance
with all applicable state and federal securities laws in connection with the
transactions contemplated by this Warrant Agreement and that it will act in
accordance with such advice.
(c) The Warrant Agent shall not be obligated to make payment
with respect to any Warrant Certificates presented unless it shall have been
provided with the necessary funds to pay in full all amounts payable with
respect thereto.
(d) The Warrant Agent may execute and exercise any of the
rights or powers hereby vested in it or perform any duty hereunder either itself
or by or through its attorneys, agents or employees.
SECTION 24. Governing Law.
-------------
THIS WARRANT AGREEMENT AND EACH WARRANT CERTIFICATE ISSUED HEREUNDER
SHALL BE DEEMED TO BE A CONTRACT MADE UNDER THE LAWS OF THE STATE OF DELAWARE
AND FOR ALL PURPOSES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF SUCH STATE APPLICABLE TO CONTRACTS TO BE MADE AND PERFORMED ENTIRELY
WITHIN SUCH STATE.
SECTION 25. Benefits of this Warrant Agreement. Nothing in this
----------------------------------
Warrant Agreement shall be construed to give to any person, corporation or other
entity, other than the Company, the Warrant Agent and the registered holders of
the Warrant Certificates any legal or equitable right, remedy or claim under
this Warrant Agreement; and this Warrant Agreement shall be for the sole and
exclusive benefit of the Company, the Warrant Agent and the registered holders
of the Warrant Certificates.
SECTION 26. Counterparts. This Warrant Agreement may be executed
------------
in any number of counterparts and each of such counterparts shall for all
purposes be deemed to be an original, and all such counterparts shall together
constitute but one and the same instrument.
SECTION 27. Headings. The headings used in this Warrant Agreement
-------
are inserted for convenience only and neither constitute a portion of this
Warrant Agreement nor in any manner affect the construction of the provisions of
this Warrant Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Warrant
Agreement to be duly executed, as of the day and year first above written.
CABOT NOBLE, INC.
17
<PAGE>
By:
------------------------------------
Name:
----------------------------------
Its:
-----------------------------------
Attest:
By:
------------------------------------
SOCIETY NATIONAL BANK
By:
----------------------------------
Kathy M. Gallagher
Assistant Vice President
Attest:
By:
-----------------------------
Debra Kindred
Assistant Vice President
18
<PAGE>
Exhibit 10.1
CABOT NOBLE, INC.
1997 STOCK INCENTIVE PLAN
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
<S> <C> <C>
I THE PLAN......................................................1
1.1 Purpose.......................................................1
-------
1.2 Administration and Authorization; Power and Procedure.........1
-----------------------------------------------------
(a) Committee...............................................1
---------
(b) Awards; Interpretation; Powers of Committee.............1
-------------------------------------------
(c) Binding Determinations..................................2
----------------------
(d) Reliance on Experts.....................................2
-------------------
(e) Delegation..............................................2
----------
1.3 Participation.................................................2
-------------
1.4 Shares Available for Awards; Share Limits.....................3
-----------------------------------------
(a) Shares Available........................................3
----------------
(b) Share Limits............................................3
------------
(c) Calculation of Available Shares and Replenishment.......3
-------------------------------------------------
1.5 Grant of Awards...............................................3
---------------
1.6 Award Period..................................................4
------------
1.7 Limitations on Exercise of Awards.............................4
---------------------------------
(a) Provisions for Exercise.................................4
-----------------------
(b) Procedure...............................................4
---------
(c) Fractional Shares/Minimum Issue.........................4
-------------------------------
1.8 Acceptance of Notes to Finance Exercise.......................4
---------------------------------------
1.9 No Transferability............................................5
------------------
(a) Limit on Exercise.......................................5
-----------------
(b) Limit on Transfer.......................................5
-----------------
(c) Designation of Beneficiary..............................5
--------------------------
(d) Exceptions..............................................5
----------
II OPTIONS.......................................................6
2.1 Grants..................................................6
------
2.2 Option Price............................................6
------------
(a) Pricing Limits....................................6
--------------
(b) Payment Provisions................................6
------------------
2.3 Limitations on Grant and Terms of
---------------------------------
Incentive Stock Options.................6
-----------------------
(a) 100,000 Limit.....................................6
-------------
(b) Other Code Limits.................................7
-----------------
2.4 Option Repricing/Cancellation and
---------------------------------
Regrant/Waiver of Restrictions..........7
------------------------------
III STOCK APPRECIATION RIGHTS...............................7
3.2.....................................................7
Exercise of Stock Appreciation Rights...................7
-------------------------------------
(a) Exercisability............................7
--------------
(b) Effect on Available Shares................8
------------------------
i
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
3.3 Payment...................................................8
-------
(a) Amount..............................................8
------
(b) Form of Payment.....................................8
---------------
3.4 Limited Stock Appreciation Rights.........................8
---------------------------------
IV OTHER PROVISIONS...............................................9
4.1 Rights of Eligible Employees, Participants
------------------------------------------
and Beneficiaries.............9
-----------------
(a) Employment Status...................................9
-----------------
(b) No Employment Contract..............................9
----------------------
(c) Plan Not Funded.....................................9
---------------
4.2 Adjustments; Acceleration.................................9
-------------------------
(a) Adjustments.........................................9
-----------
(b) Acceleration of Awards Upon Change in Control......10
---------------------------------------------
(c) Termination of Awards on Dissolution...............10
------------------------------------
4.3 Effect of Termination on Employment......................10
-----------------------------------
4.4 Compliance with Laws.....................................11
--------------------
4.5 Tax Withholding..........................................11
---------------
4.6 Plan Amendment, Termination and Suspension...............11
------------------------------------------
(a) Board Authorization................................11
-------------------
(b) Shareholder Approval...............................12
--------------------
(c) Amendments to Awards...............................12
--------------------
(d) Limitations on Amendments to Plan and Awards.......12
--------------------------------------------
4.7 Privileges of Stock Ownership............................12
-----------------------------
4.8 Effective Date of the Plan...............................12
--------------------------
4.9 Term of the Plan.........................................12
----------------
4.10 Governing Law/Construction/Severability..................13
---------------------------------------
(a) Choice of Law......................................13
-------------
(b) Severability.......................................13
------------
4.11 Captions...........................................13
--------
4.12 Effect of Change of Subsidiary Status....................13
-------------------------------------
4.13 Non-Exclusivity of Plan..................................13
-----------------------
4.14 Conflict.................................................13
--------
V DEFINITIONS...................................................13
5.1 Definitions..............................................13
-----------
</TABLE>
ii
<PAGE>
CABOT NOBLE, INC.
-----------------
1997 STOCK INCENTIVE PLAN
-------------------------
I THE PLAN
1.1 Purpose.
-------
The purpose of this Plan is to promote the success of Cabot Noble, Inc.
(the "Company") by providing an additional means through the grant of Awards to
attract, reward and retain key personnel (including executive officers, whether
or not directors), of the Company and certain other closely related eligible
persons with awards and incentives for high levels of individual performance and
improved financial performance of the Company. Capitalized terms are defined in
Article V.
1.2 Administration and Authorization; Power and Procedure.
-----------------------------------------------------
(a) Committee. This Plan shall be administered by, and all Awards to
---------
Eligible Employees granted hereunder shall be authorized by, the Committee.
Action of the Committee with respect to the administration of this Plan shall be
taken pursuant to a majority vote or by written consent of its members.
(b) Awards; Interpretation; Powers of Committee. Subject to the
-------------------------------------------
express provisions of this Plan, the Committee shall have the authority:
(i) to determine from among those persons eligible the
particular Eligible Employees who will receive any Awards;
(ii) to grant Awards to Eligible Employees, determine the price
at which securities will be offered and the amount of
securities to be offered to any of such persons, and
determine the other specific terms and conditions of such
Awards consistent with the express limits of this Plan, and
establish the installments (if any) in which such Awards
shall become exercisable, or determine that no delayed
exercisability is required, and establish the events of
termination of such Awards;
(iii) to approve the forms of Award Agreements (which need not be
identical either as to type of Award or among Participants);
(iv) to construe and interpret this Plan and any agreements
defining the rights and obligations of the Company and
Participants under this
1
<PAGE>
Plan, further define the terms used in this Plan, and
prescribe, amend and rescind rules and regulations relating
to the administration of this Plan;
(v) to cancel, modify or waive the Corporation's rights with
respect to, or modify, discontinue, suspend or terminate any
or all outstanding Awards held by Participants, subject to
any required consent under Section 4.6;
(vi) to accelerate or extend the exercisability or extend the
term of any or all such outstanding Awards within the
maximum ten-year term of Awards under Section 1.6; and
(vii) to make all other determinations and take such other action
as contemplated by this Plan or as may be necessary or
advisable for the administration of this Plan and the
effectuation of its purposes.
(c) Binding Determinations. Any action taken by, or inaction of, the
----------------------
Corporation, any Subsidiary, the Board or the Committee relating or pursuant to
this Plan shall be within the absolute discretion of that entity or body and
shall be conclusive and binding upon all persons. No member of the Board or
Committee, or officer of the Corporation or any Subsidiary, shall be liable for
any such action or inaction of the entity or body, of another person or, except
in circumstances involving bad faith, of himself or herself. Subject only to
compliance with the express provisions hereof, the Board and Committee may act
in their absolute discretion in matters within their authority related to this
Plan.
(d) Reliance on Experts. In making any determination or in taking or
-------------------
not taking any action under this Plan, the Committee or the Board, as the case
may be, may obtain and may rely upon the advice of experts, including
professional advisors to the Corporation. No director, officer or agent of the
Company shall be liable for any such action or determination taken or made or
omitted in good faith.
(e) Delegation. The Committee may delegate ministerial, non-
----------
discretionary functions to individuals who are officers or employees of the
Company.
1.3 Participation.
-------------
Awards may be granted only to such persons as are determined to be
Eligible Employees. An Eligible Employee who has been granted an Award may, if
otherwise eligible, be granted additional Awards if the Committee shall so
determine. Non-Employee Directors shall not be eligible to receive any Awards
under this Plan.
2
<PAGE>
1.4 Shares Available for Awards; Share Limits.
-----------------------------------------
(a) Shares Available. Subject to the provisions of Section 4.2, the
----------------
capital stock that may be delivered under this Plan shall be shares of the
Corporation's authorized but unissued Common Stock and any shares of its Common
Stock held as treasury shares. The shares may be delivered for any lawful
consideration.
(b) Share Limits. The maximum number of shares of Common Stock that
------------
may be delivered pursuant to Awards granted under this Plan shall not exceed
5,500,000 shares. The maximum number of shares of Common Stock subject to those
Options that are granted during any calendar year to any individual under this
Plan shall not exceed 300,000 shares. Each of the foregoing numerical limits
shall be subject to adjustment as contemplated by this Section 1.4 and Section
4.2
(c) Calculation of Available Shares and Replenishment. Shares subject
-------------------------------------------------
to outstanding Awards shall be reserved for issuance. If any Option or other
right to acquire shares of Common Stock under an Award shall expire or be
canceled or terminated without having been exercised in full, or any Common
Stock subject to an Award shall not vest or be delivered, the unpurchased,
unvested or undelivered shares subject thereto shall again be available for the
purposes of the Plan. If a Stock Appreciation Right or similar right is
exercised, the number of shares of Common Stock to which such exercise or
payment relates under the applicable Award shall be charged against the maximum
amount of Common Stock that may be delivered pursuant to Awards under this Plan
and, if applicable, such Award. If the Corporation withholds shares of Common
Stock pursuant to Section 4.5, the number of shares that would have been
deliverable with respect to an award but that are withheld pursuant to the
provisions of Section 4.5 may in effect not be issued, but the aggregate number
of shares issuable with respect to the applicable Award and under the Plan shall
be reduced by the number of shares withheld and such shares shall not be
available for additional Awards under this Plan.
1.5 Grant of Awards.
---------------
Subject to the express provisions of this Plan, the Committee shall
determine the number of shares of Common Stock subject to each Award, and the
price to be paid for such shares. Each Award shall be evidenced by an Award
Agreement signed by the Corporation and, if required by the Committee, by the
Participant.
3
<PAGE>
1.6 Award Period.
------------
Each Award and all executory rights and obligations under the related
Award Agreement shall expire on such date (if any) as shall be determined by the
Committee, but not later than ten (10) years after the Award Date.
1.7 Limitations on Exercise of Awards.
---------------------------------
(a) Procedure. Any exercisable Award shall be deemed to be exercised
---------
when the Secretary of the Corporation receives written notice of such exercise
from the Participant, together with any required payment made in accordance with
Section 2.2(a).
(b) Fractional Shares/Minimum Issue. Fractional shares shall not be
-------------------------------
issued, but fractional share interests may be accumulated. The Committee,
however, may determine that cash, other securities, or other property will be
paid or transferred in lieu of any fractional share interests. No fewer than 50
shares may be purchased on exercise of any Award at one time unless the number
purchased is the total number at the time available for purchase under the
Award.
1.8 Acceptance of Notes to Finance Exercise.
---------------------------------------
The Corporation may, with the Committee's approval at or prior to the
time of exercise of any Award, accept one or more notes from any Participant in
connection with the exercise or receipt of any outstanding Award; provided that
any such note shall be subject to the following terms and conditions:
(a) The principal of the note shall not exceed the amount required to
be paid to the Corporation upon the exercise or receipt of one or more Awards
under the Plan and the note shall be delivered directly to the Corporation in
consideration of such exercise or receipt.
(b) The initial term of the note shall be determined by the Committee;
provided that the term of the note, including extensions, shall not exceed a
period of five (5) years.
4
<PAGE>
(c) The note shall provide for full recourse to the Participant and
shall bear interest at a rate determined by the Committee but not less than the
applicable imputed interest rate specified by the Code.
(d) If the employment of the Participant terminates, the unpaid
principal balance of the note shall become due and payable within thirty (30)
days after such termination; provided, however, that if a sale of shares would
cause such Participant to incur liability under Section 16(b) of the Exchange
Act, the unpaid balance shall become due and payable on the 10th business day
after the first day on which a sale of such shares could have been made without
incurring such liability, assuming for these purposes that there are no other
transactions by the Participant subsequent to such termination.
(e) If required by the Committee or by applicable law, the note shall
be secured by a pledge of any shares or rights financed thereby in compliance
with applicable law.
(f) The terms, repayment provisions and collateral release provisions
of the note and the pledge securing the note shall conform with applicable rules
and regulations of the Federal Reserve Board as then in effect.
1.9 No Transferability.
------------------
(a) Limit on Exercise. The Committee may permit Options or SARs to be
-----------------
exercised by and paid to certain persons or entities related to the Participant
who are transferees of the Participant without consideration, but only pursuant
to such conditions and procedures as the Committee may expressly establish.
(b) Limit on Transfer. No Award shall be transferrable by the
-----------------
Participant or shall be subject in any manner to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance or charge (other than to the
Corporation), except (i) by will or the laws of descent and distribution or
pursuant to a QDRO, (ii) pursuant to another exception to transfer restrictions
expressly permitted by the Committee and set forth in the Award Agreement (or an
---
amendment thereto), and (iii) in the case of Incentive Stock Options, as
permitted by the Code. Any attempted transfer in violation of these provisions
shall be void and the Corporation shall disregard any attempt at transfer,
assignment or other alienation prohibited hereby.
(c) Designation of Beneficiary. The designation of a Beneficiary
--------------------------
hereunder shall not constitute a transfer for these purposes.
(d) Exceptions. The restrictions on exercise and transfer above shall
----------
not be deemed to prohibit the authorization by the Committee of "cashless
exercise" procedures with unaffiliated third parties who provide financing for
the purpose of (or who otherwise facilitate) exercise of Options consistent with
any applicable legal restrictions (including Rule 16b-3), nor, to the extent
permitted by the Committee, transfers for estate and financial planning
purposes, or
5
<PAGE>
transfers to such other persons or in such other circumstances as the Committee
may in the Award Agreement or other writing expressly permit.
II OPTIONS
2.1 Grants.
------
One or more Options may be granted under this Article to any Eligible
Employee. Each Option granted may be either an Option intended to be an
Incentive Stock Option, or not so intended, and such intent shall be indicated
in the applicable Award Agreement.
2.2 Option Price.
------------
(a) Pricing Limits. The purchase price per share of each
--------------
Option shall be determined by the Committee at the time of the grant of the
Option, but shall not be less than 100% (110% in the case of an Incentive Stock
Option to a Participant who owns or is deemed to own under Section 424(d) of the
Code more than 10% of the total combined voting power of all classes of stock of
the Corporation and such Option by its terms is not exercisable after expiration
of five years from its Award Date) of the Fair Market Value of the Common Stock
on the date of grant (or, in the case of an amendment, the date of the
amendment).
(b) Payment Provisions. The purchase price of any shares purchased on
------------------
exercise of an Option granted under this Article shall be paid in full at the
time of each purchase in one or a combination of the following methods: (i) in
cash or by electronic funds transfer; (ii) by check payable to the order of the
Corporation; (iii) if authorized by the Committee or specified in the applicable
Award Agreement, by a promissory note of the Participant consistent with the
requirements of Section 1.8; (iv) by notice and third party payment in such
manner as may be authorized by the Committee; or (v) by the delivery (either
actually or by attestation) of shares of Common Stock of the Corporation already
owned by the Participant. Shares of Common Stock used to satisfy the exercise
price of an Option (directly or by attestation) shall be valued at their Fair
Market Value on the date of exercise.
2.3 Limitations on Grant and Terms of Incentive Stock Options.
---------------------------------------------------------
(a) $100,000 Limit. To the extent that the aggregate " fair market
--------------
value" of stock with respect to which Incentive Stock Options first become
exercisable by a Participant in any calendar year exceeds $100,000, taking into
account both Common Stock subject to Incentive Stock Options under this Plan and
stock subject to incentive stock options under all other plans of the Company or
any parent corporation, such options shall be treated as nonqualified stock
options. For this purpose, the "fair market value" of the stock subject to
6
<PAGE>
options shall be determined as of the date the options were awarded. In
reducing the number of options treated as incentive stock options to meet the
$100,000 limit, the most recently granted options shall be reduced first. To
the extent a reduction of simultaneously granted options is necessary to meet
the $100,000 limit, the Committee may, in the manner and to the extent permitted
by law, designate which shares of Common Stock are to be treated a shares
acquired pursuant to the exercise of an Incentive Stock Option.
(b) Other Code Limits. There shall be imposed in any Award Agreement
-----------------
relating to Incentive Stock Options such terms and conditions as from time to
time are required in order that the Option be an "incentive stock option" as
that term is defined in Section 422 of the Code.
2.4 Option Repricing/Cancellation and Regrant/Waiver of Restrictions.
----------------------------------------------------------------
Subject to Section 1.4 and Section 4.6 and the specific limitations on
Awards contained in this Plan, the Committee from time to time may authorize,
generally or in specific cases only, for the benefit of any Eligible Employee,
any adjustment in the exercise or purchase price, the number of shares subject
to, the restrictions upon or the term of, an Award granted under this Article by
cancellation of an outstanding Award and a subsequent regranting of an Award, by
amendment, by substitution of an outstanding Award, by waiver or by other
legally valid means. Such amendment or other action may result among other
changes in an exercise or purchase price which is higher or lower than the
exercise or purchase price of the original or prior Award, provide for a greater
or lesser number of shares subject to the Award, or provide for a longer or
shorter vesting or exercise period, provided that in no event shall any such
change reduce the exercise or base price of an outstanding Option or Stock
Appreciation Right to a price below the Fair Market Value on the effective date
of the change.
III STOCK APPRECIATION RIGHTS
3.1 Grants.
------
In its discretion, the Committee may grant to any Eligible Employee
Stock Appreciation Rights either concurrently with the grant of another Award or
in respect of an outstanding Award, in whole or in part. Any Stock Appreciation
Right granted in connection with an Incentive Stock Option shall contain such
terms as may be required to comply with the provisions of Section 422 of the
Code and the regulations promulgated thereunder, unless the holder thereof
otherwise agrees.
3.2 Exercise of Stock Appreciation Rights.
-------------------------------------
(a) Exercisability. Unless the Award Agreement or the Committee
--------------
otherwise provides, a Stock Appreciation Right shall be exercisable only at such
time or times, and to the extent, that the related Award shall be exercisable.
7
<PAGE>
(b) Effect on Available Shares. To the extent that a Stock
--------------------------
Appreciation Right is exercised for stock or for cash, the number of underlying
shares of Common Stock with respect to which the Stock Appreciation Right is
exercised shall be charged against the maximum number of shares of Common Stock
that may be delivered pursuant to Awards under this Plan. The number of shares
subject to the Stock Appreciation Right and the related Option of the
Participant shall also be reduced by the same number of shares.
3.3 Payment.
-------
(a) Amount. Unless the Committee otherwise provides, upon exercise of
------
a Stock Appreciation Right and attendant surrender of an exercisable portion of
any related Award, the Participant shall be entitled to receive payment of an
amount determined by multiplying
(i) the difference obtained by subtracting the exercise price per
share of Common Stock under the related Award from the Fair
Market Value of a share of Common Stock on the date of
exercise of the Stock Appreciation Right; by
(ii) the number of shares with respect to which the Stock
Appreciation Right shall have been exercised.
(b) Form of Payment. The Committee, in its sole discretion, shall
---------------
determine the form in which payment shall be made of the amount determined under
paragraph (a) above, either solely in cash, solely in shares of Common Stock
(valued at Fair Market Value on the date of exercise of the Stock Appreciation
Right), or partly in such shares and partly in cash, provided that the Committee
shall have determined that such exercise and form of payment are consistent with
applicable law and outstanding contractual commitments of the Company. If the
Committee permits the Participant to elect to receive cash or shares (or a
combination thereof) on such exercise, any such election shall be subject to
such conditions as the Committee may impose.
3.4 Limited Stock Appreciation Rights.
---------------------------------
The Committee may grant to any Eligible Employee Stock Appreciation
Rights exercisable only upon or in respect of a change in control or any other
specified event ("Limited SARs") and such Limited SARs may relate to or operate
in tandem or combination with or substitution for Options or other SARs (or any
combination thereof), and may be payable in cash or shares based on the spread
between the exercise price of the SAR and a price based upon the Fair Market
Value of the shares during a specified period (or at a specified time) within
the period commencing not more than six months and 10 days before and ending not
more than six months and 10 days after such event.
8
<PAGE>
IV OTHER PROVISIONS
4.1 Rights of Eligible Employees, Participants and Beneficiaries.
------------------------------------------------------------
(a) Employment Status. Status as an Eligible Employee shall not be
-----------------
construed as a commitment that any Award will be made under this Plan to an
Eligible Employee or to Eligible Employees generally.
(b) No Employment Contract. Nothing contained in this Plan (or in any
----------------------
other documents related to this Plan or to any Award) shall confer upon any
Eligible Employee any right to continue in the employ or other service of the
Company or constitute any contract or agreement of employment or other service,
nor shall it interfere in any way with the right of the Company to change such
person's compensation or other benefits or to terminate the employment of such
person, with or without cause, but nothing contained in this Plan or any
document related hereto shall adversely affect the independent contractual right
of such person without his or her consent thereto.
(c) Plan Not Funded. Awards payable under this Plan shall be payable
---------------
in shares of the Corporation (unless determined otherwise pursuant to Section
3.3(b)) and, (except as provided in Section 1.4(c)) no special or separate
reserve, fund or deposit shall be made to assure payment of such Awards. No
Participant, Beneficiary or other person shall have any right, title or interest
in any fund or in any specific asset (including shares of Common Stock, except
as expressly otherwise provided) of the Company by reason of any Award
hereunder. Neither the provisions of this Plan (or of any related documents),
nor the creation or adoption of this Plan, nor any action taken pursuant to the
provisions of this Plan shall create, or be construed to create, a trust of any
kind or a fiduciary relationship between the Company and any Participant,
Beneficiary or other person. To the extent that a Participant, Beneficiary or
other person acquires a right to receive payment pursuant to any Award
hereunder, such right shall be no greater than the right of any unsecured
general creditor of the Company.
4.2 Adjustments; Acceleration
-------------------------
(a) Adjustments. If there shall occur any extraordinary dividend or
-----------
other extraordinary distribution in respect of the Common Stock (whether in the
form of cash, Common Stock, other securities or other property), or any
recapitalization, stock split (including a stock split in the form of a stock
dividend), reverse stock split, reorganization, merger, combination,
consolidation, split-up, spin-off, repurchase, or exchange of Common Stock or
other securities of the Corporation, or there shall occur any other fundamental
change or event in respect of the Common Stock or a sale of substantially all
the assets of the Corporation as an entirety, then the Committee shall, in such
manner and to such extent (if any) as it in good faith deems appropriate and
equitable (1) proportionately adjust any or all of (a) the number and type of
shares of Common Stock (or other securities) which thereafter may be made the
subject of Awards (including the specific maximums and numbers of shares set
forth elsewhere in this Plan),
9
<PAGE>
(b) the number, amount and type of shares of Common Stock (or other securities
or property) subject to any or all outstanding Awards, (c) the grant, exercise
or base price of any or all outstanding Awards, (d) the securities or property
deliverable upon exercise of any outstanding Awards; or (2) in the case of an
extraordinary dividend or other distribution, merger, reorganization,
consolidation, combination, sale of assets, split up, exchange, or spin-off,
make other provision for a cash payment or for the substitution or exchange of
any or all outstanding Awards or securities deliverable to the holder of any or
all outstanding Awards based upon the distribution or consideration payable to
holders of the Common Stock of the Corporation upon or in respect of such event;
provided, however, in each case, that with respect to Incentive Stock Options,
no such adjustment shall be made which would cause the Plan to violate Section
424 of the Code or any successor provisions thereto, without the written consent
of the holders of Incentive Stock Options who are materially adversely affected
thereby.
(b) Acceleration of Awards Upon Change in Control. Notwithstanding
---------------------------------------------
anything contained in the Plan or an Award Agreement to the contrary, upon the
occurrence of a Change in Control Event, Awards granted hereunder shall become
immediately exercisable as regards the full number of shares of Common Stock
governed by the Award.
(c) Termination of Awards on Dissolution. If any Option or other
------------------------------------
right to acquire Common Stock under this Plan is not exercised prior to a
dissolution of the Corporation, and no express provision has been made in the
Award Agreement or otherwise for the survival, substitution, exchange or other
settlement of such Option or right, such Option or right shall thereupon
terminate. Unless other provision is made for the payment of the fair value
thereof, under a reorganization event of the type described in Section 4.2(a)
that the Corporation does not legally survive, the Awards shall be converted
into or otherwise substituted for a right to receive, on exercise, the
consideration distributed or payable upon such reorganization event in respect
of the number of shares of Common Stock as to which the Option is exercised.
4.3 Effect of Termination of Employment.
-----------------------------------
In determining the effect of a termination on the rights and benefits
of an Award, the Committee may make distinctions based upon the cause of
termination. Unless the Committee otherwise determines the effect a termination
of employment on the rights and benefits under an Award, and in the case of
Incentive Stock Options, subject to the applicable Code limits:
(a) upon a Participant's retirement, death or Total Disability, an
Award shall become and shall remain fully exercisable for one year after the
date thereof or until the expiration of the stated term of the Award, whichever
occurs first;
10
<PAGE>
(b) upon the termination by the Company of the Participant's
employment for cause (other than a termination for cause within two (2) years
following a Change in Control Event), as determined by the Committee in its sole
discretion, the Award shall terminate; and
(c) upon a termination of a Participant's employment or services for
any reason other than the reasons set forth in clauses (a) and (b), any portion
of an Award that is not yet exercisable shall terminate and any portion of such
Award that is then exercisable shall remain fully exercisable for three (3)
months after the date of termination or until the expiration of the stated term
of the Award, whichever occurs first.
4.4 Compliance with Laws.
--------------------
This Plan, the granting and vesting of Awards under this Plan and the
issuance and delivery of shares of Common Stock and/or the payment of money
under this Plan or under Awards granted hereunder are subject to compliance with
all applicable federal and state laws, rules and regulations (including but not
limited to state and federal securities law and federal margin requirements) and
to such approvals by any listing, regulatory or governmental authority as may,
in the opinion of counsel for the Corporation, be necessary or advisable in
connection therewith. Any securities delivered under this Plan shall be subject
to such restrictions, and the person acquiring such securities shall, if
requested by the Corporation, provide such assurances and representations to the
Corporation as the Corporation may reasonably deem necessary to assure
compliance with all applicable legal requirements.
4.5 Tax Withholding.
---------------
Upon the exercise of any Award or upon the disposition of shares of
Common Stock acquired pursuant to the exercise of an Incentive Stock Option
prior to satisfaction of the holding period requirements of Section 422 of the
Code, the Company shall have the right at its option to (i) require the
Participant (or Personal Representative or Beneficiary, as the case may be) to
pay or provide for payment of the amount of any taxes which the Company may be
required to withhold with respect to such transaction, or (ii) deduct from any
amount payable in cash the amount of any taxes which the Company may be required
to withhold with respect to such cash amount. In any case where a tax is
required to be withheld in connection with the delivery of shares of Common
Stock under this Plan, the Committee may grant (either at the time of the Award
or thereafter) to the Participant the right to elect, pursuant to such rules and
subject to such conditions as the Committee may establish, to have the
Corporation reduce the number of shares to be delivered by (or otherwise
reacquire) the appropriate number of shares valued at their then Fair Market
Value, to satisfy such withholding obligation.
4.6 Plan Amendment, Termination and Suspension.
------------------------------------------
(a) Board Authorization. Subject to the provisions of this Section
-------------------
4.6, the Board may, at any time, terminate or, from time to time, amend, modify
or suspend this Plan, in
11
<PAGE>
whole or in part. No Awards may be granted during any suspension of this Plan
or after termination of this Plan, but the Committee shall retain jurisdiction
as to Awards then outstanding in accordance with the terms of this Plan.
(b) Shareholder Approval. Any amendment to this Plan shall be
--------------------
submitted to the Company's shareholders for approval if required by Section
162(m) of the Code or other applicable law or if otherwise deemed necessary or
advisable by the Board.
(c) Amendments to Awards. Without limiting any other express
--------------------
authority of the Committee under but subject to the express limits of this Plan,
the Committee by agreement or resolution may waive conditions of or limitations
on Awards to Participants that the Committee in the prior exercise of its
discretion has imposed, without the consent of a Participant, and may make other
changes to the terms and conditions of Awards that do not affect in any manner
adverse to the Participant, his or her rights and benefits under an Award.
(d) Limitations on Amendments to Plan and Awards. No amendment,
--------------------------------------------
suspension or termination of the Plan or change of or affecting any outstanding
Award shall, without written consent of the Participant, affect in any manner
materially adverse to the Participant any rights or benefits of the Participant
or obligations of the Corporation under any Award granted under this Plan prior
to the effective date of such change. Changes contemplated by Section 4.2 shall
not be deemed to constitute changes or amendments for purposes of this Section
4.6
4.7 Privileges of Stock Ownership.
-----------------------------
Except as otherwise expressly authorized by the Committee or this
Plan, a Participant shall not be entitled to any privilege of stock ownership as
to any shares of Common Stock not actually delivered to and held of record by
him or her. No adjustment will be made for dividends or other rights as a
shareholder for which a record date is prior to such date of delivery.
4.8 Effective Date of the Plan.
--------------------------
To the extent required by applicable law, the Plan shall be submitted
to the stockholders of the Corporation for approval. The effective date shall
be the Effective Date as defined in the Agreement.
4.9 Term of the Plan.
----------------
No Award shall be granted more than ten (10) years after the
Effective Date of this Plan (the "termination date"). Unless otherwise expressly
provided in this Plan or in an applicable Award Agreement, any Award theretofore
granted may extend beyond such date, and all authority of the Committee with
respect to Awards hereunder shall continue during any suspension of this Plan
and in respect of outstanding Awards on such termination date.
12
<PAGE>
4.10 Governing Law/Construction/Severability.
---------------------------------------
(a) Choice of Law. This Plan, the Awards, all documents evidencing
-------------
Awards and all other related documents shall be governed by, and construed in
accordance with, the laws of the state of incorporation of the Corporation.
(b) Severability. If any provision shall be held by a court of
------------
competent jurisdiction to be invalid and unenforceable, the remaining provisions
of this Plan shall continue in effect.
4.11 Captions.
--------
Captions and headings are given to the sections and subsections of
this Plan solely as a convenience to facilitate reference. Such headings shall
not be deemed in any way material or relevant to the construction or
interpretation of the Plan or any provision thereof.
4.12 Effect of Change of Subsidiary Status.
-------------------------------------
For purposes of this Plan and any Award hereunder, if an entity
ceases to be a Subsidiary, a termination of employment shall be deemed to have
occurred with respect to each employee of such Subsidiary who does not continue
as an employee of another entity within the Company.
4.13 Non-Exclusivity of Plan.
-----------------------
Nothing in this Plan shall limit or be deemed to limit the authority
of the Board or the Committee to grant awards or authorize any other
compensation, with or without reference to the Common Stock, under any other
plan or authority.
13
<PAGE>
V DEFINITIONS
5.1 Definitions.
-----------
(a) "Agreement" shall mean that certain Agreement and Plan of
---------
Reorganization among the Corporation, Phar-Mor, Inc. and Shopko, Inc. dated as
of September 7, 1996, as amended.
(b) "Award" shall mean an award of any Option or Stock Appreciation
-----
Right authorized by and granted under this Plan.
(c) "Award Agreement" shall mean any writing setting forth the terms
---------------
of an Award that has been authorized by the Committee.
(d) "Award Date" shall mean the date upon which the Committee took the
----------
action granting an Award or such later date as the Committee designates as the
Award Date at the time of the Award.
(e) "Award Period" shall mean the period beginning on an Award Date and
------------
ending on the expiration date of such Award.
(f) "Beneficiary" shall mean the person, persons, trust or trusts
-----------
designated by a Participant or in the absence of a designation entitled by will
or the laws of descent and distribution to receive the benefits specified in the
Award Agreement and under this Plan in the event of a Participant's death, and
shall mean the Participant's executor or administrator if no other Beneficiary
is identified and able to act under the circumstances.
(g) "Board" shall mean the Board of Directors of the Corporation.
-----
(h) "Change in Control Event" shall mean any of the following:
-----------------------
(i) the acquisition by an individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act), other
than Robert Haft, Hamilton Morgan, LLC or any affiliate of the foregoing
persons, (a "Person") of beneficial ownership (within the meaning of
Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either
(i) the then outstanding shares of Common Stock of the Corporation (the
"Outstanding Corporation Common Stock") or (ii) the combined voting
power of the then outstanding voting securities of the Corporation
entitled to vote generally in the election of directors (the
"Outstanding Corporation Voting Securities"); provided, however, that
for purposes of this subsection (a), the following acquisitions shall
not constitute a Change of Control Event; (i) any acquisition directly
from the Corporation, (ii) any acquisition by the Corporation, (iii) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Corporation or any corporation controlled by the
Corporation, or (iv) any acquisition by any corporation pursuant to a
transaction which complies with clauses (i), (ii) and (iii) of
subsection (iii) of this Section 5.1(h); or
(ii) individuals who, as of the date hereof, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; provided, however, that any individual
becoming a director subsequent to the date hereof whose election, or
nomination for election by the Corporation's shareholders, was approved
by a vote of at least a majority of the directors then constituting the
Incumbent Board shall be considered as though such individual were a
member of the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a result of an
actual or threatened election contest with respect to the election or
removal of directors or other actual or threatened solicitation of
proxies or consents by or on behalf of a person other than the Board; or
(iii) consummation of a reorganization, merger or consolidation
or sale or other disposition of all or substantially all of the assets
of the Corporation for which approval of the shareholders of the
Corporation is required (a "Business Combination"), in each case,
unless, immediately following such Business Combination, (i) all or
substantially all of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding Corporation Common
Stock and Outstanding Corporation Voting Securities immediately prior to
such Business Combination beneficially own, directly or indirectly, more
than 60% of, respectively, the then outstanding shares of common stock
and the combined voting power of the then outstanding voting securities
entitled to vote generally in the election of directors, as the case may
be, of the corporation resulting from such Business Combination
(including, without limitation, a corporation which as a result of such
transaction owns the Corporation or all or substantially all of the
Corporation's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business Combination of the Outstanding
Corporation Common Stock and Outstanding Corporation Voting Securities,
as the case may be, (ii) no Person (excluding any employee benefit plan
(or related trust) of the Corporation or such corporation resulting from
such Business Combination) beneficially owns, directly or indirectly,
20% or more of, respectively, the then outstanding common stock of the
corporation resulting from such Business Combination or the combined
voting power of the then outstanding voting securities of such
corporation except to the extent that such ownership existed prior to
the Business Combination, and (iii) at least a majority of the members
of the Board of Directors of the corporation resulting from such
Business Combination were members of the Incumbent Board at the time of
the execution of the initial agreement, or of the action of the Board,
providing for such Business Combination or
(iv) approval by the shareholders of the Corporation of a
complete liquidation or dissolution of the Corporation.
14
<PAGE>
(i) "Code" shall mean the Internal Revenue Code of 1986, as amended from
----
time to time.
(j) "Commission" shall mean the Securities and Exchange Commission.
----------
(k) "Committee" shall mean a committee appointed by the Board to
---------
administer this Plan, which committee shall be comprised only of two or more
directors or such
15
<PAGE>
greater number of directors as may be required under applicable law, each of
whom shall be Disinterested.
(l) "Common Stock" shall mean the Common Stock of the Corporation and
------------
such other securities or property as may become the subject of Awards, or become
subject to Awards, pursuant to an adjustment made under Section 4.2 of this
Plan.
(m) "Company" shall mean, collectively, the Corporation and its
-------
Subsidiaries.
(n) "Corporation" shall mean Cabot Noble, Inc., a Delaware
-----------
corporation, and any successor, on and after the Effective Date.
(o) "Disinterested" shall mean disinterested within the meaning of any
-------------
applicable regulatory requirements, including Rule 16b-3 and "outside director"
within the meaning of the regulations promulgated under Rule 162(m) of the Code.
(p) "Effective Date" shall mean the Effective Date as that term is
---------------
defined in the Agreement.
(q) "Eligible Employee" shall mean an officer (whether or not a
-----------------
director) or key executive, administrative, managerial, production, marketing or
sales employee of the Company or any Other Eligible Person.
(r) "ERISA" shall mean the Employee Retirement Income Security Act of
-----
1974, as amended.
(s) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended from time to time.
(t) "Fair Market Value" on any applicable determination date shall
-----------------
mean (i) if the stock is listed or admitted to trade on a securities exchange,
the closing price of the stock, regular way, on such day, on the principal
securities exchange on which the stock is so listed or admitted to trade, or, if
there is no such reported sale on such date, the average closing bid and asked
prices on such day, or (if none) then the closing price of the stock or (if
none) such average, as reported on the next preceding date on which there was
such reported activity in such shares (such determination or earlier date being
hereinafter referred to as the "applicable trading date"); (ii) if the stock is
-----------------------
not listed or admitted to trade on a securities exchange, the last reported
sales price for the stock or (if none) the average of the last reported bid and
asked prices on the applicable trading date, as reported by the principal
reputable quotation system available to the Committee; (iii) if the stock is not
listed or admitted to trade on a securities exchange and no such reported
closing sale price or closing bid and asked prices are available, the average of
the reported high bid and low asked price for the stock on the applicable
trading date, as reported by a reputable quotation source designated by the
Committee; or (iv) if the stock is not listed or admitted to trade on a
securities exchange, trading is not so reported, and bid and asked prices are
16
<PAGE>
not available on a reasonably current basis, the value as established by the
Committee in good faith at such time for purposes of this Plan.
(u) "Incentive Stock Option" shall mean an Option which is designated
----------------------
as an incentive stock option within the meaning of Section 422 of the Code, the
award of which contains such provisions as are necessary to comply with that
section and is subject to or follows the stock holder approval required thereby.
(v) "Nonqualified Stock Option" shall mean an Option that is
-------------------------
designated as a Nonqualified Stock Option and shall include any Option intended
as an Incentive Stock Option that fails to meet the applicable legal
requirements thereof. Any Option granted hereunder that is not designated as an
Incentive Stock Option shall be deemed to be designated a Nonqualified Stock
Option under this Plan.
(w) "Non-Employee Director" shall mean a member of the Board of
---------------------
Directors of the Corporation who is not an officer or employee of the Company.
(x) "Option" shall mean an option to purchase Common Stock under this
------
Plan. The Committee shall designate any Option granted to an Eligible Employee
as a Nonqualified Stock Option or an Incentive Stock Option.
(y) "Other Eligible Person" shall mean any other person (including a
---------------------
significant agent or consultant) who performs substantial services for the
Company of a nature similar to those performed by key employees, selected to
participate in this Plan by the Committee from time to time; provided that in no
event shall a Non-Employee Director be selected as an Other Eligible Person.
(z) "Participant" shall mean an Eligible Employee who has been
-----------
granted an Award under this Plan.
(aa) "Personal Representative" shall mean the person or persons who,
-----------------------
upon the disability or incompetence of a Participant, shall have acquired on
behalf of the Participant, by legal proceeding or otherwise, the power to
exercise the rights or receive benefits under this Plan and who shall have
become the legal representative of the Participant.
(bb) "Plan" shall mean this 1997 Stock Incentive Plan, as amended from
----
time to time.
17
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(cc) "QDRO" shall mean a qualified domestic relations order as defined
----
in Section 414(p) of the Code or Title I, Section 206(d)(3) of ERISA (to the
same extent as if this Plan were subject thereto), or the applicable rules
thereunder.
(dd) "Rule 16b-3" shall mean Rule 16b-3 as promulgated by the
----------
Commission pursuant to the Exchange Act, as amended from time to time.
(ee) "Section 16 Person" shall mean a person subject to Section 16(a)
-----------------
of the Exchange Act.
(ff) "Securities Act" shall mean the Securities Act of 1933, as
--------------
amended from time to time.
(gg) "Stock Appreciation Right" or "SAR" shall mean a right to receive
------------------------ ---
a number of shares of Common Stock or an amount of cash, or a combination of
shares and cash, the aggregate amount or value of which is determined by
reference to a change in the Fair Market Value of the Common Stock, that is
authorized under this Plan.
(hh) "Subsidiary" shall mean any corporation or other entity a
----------
majority of whose outstanding voting stock or voting power is beneficially owned
directly or indirectly by the Corporation.
(ii) "Total Disability" shall mean a "permanent and total disability"
----------------
within the meaning of Section 22(e)(3) of the Code and such other disabilities,
infirmities, afflictions or conditions as the Committee by rule may include.
18
<PAGE>
Exhibit 10.2
CABOT NOBLE, INC.
1997 DIRECTOR PHANTOM STOCK PLAN
ARTICLE I -- Purpose of the Plan
The purpose of the Cabot Noble, Inc. 1997 Director Phantom Stock Plan (the
"Plan") is to attract and retain the services of experienced and knowledgeable
directors of Cabot Noble, Inc. (the "Corporation") for the benefit of the
Corporation and its shareholders and to provide such directors an economic
interest in the Corporation's Common Stock ("Shares"), thereby creating a long-
term mutuality of interest between such directors and shareholders.
ARTICLE II -- Definitions
Unless the context clearly indicates otherwise, the following terms shall
have the following meanings:
2.1 "Agreement" means that certain Agreement and Plan of Reorganization
among the Corporation, Phar-Mor, Inc. and ShopKo Stores, Inc. dated as of
September 7, 1996.
2.2 "Annual Retainer" means the annual cash retainer fee payable by the
Corporation to a Director for services as a director of the Corporation, as such
amount may be changed from time to time.
2.3 "Award" means an award of Phantom Stock granted to an Eligible
Director under the Plan.
2.4 "Board" means the Board of Directors of Cabot Noble, Inc.
2.5 "Corporation" means Cabot Noble, Inc.
2.6 "Director" means a member of the Board of Directors of the
Corporation.
2.7 "Eligible Director" means a Director that has met the eligibility
requirements set forth in Article IV.
2.8 "ERISA" means the Employment Retirement Income Security Act.
2.9 "Exchange" means the principal national securities exchange or trading
market on which the Shares are listed or admitted to trading.
2.10 "Fair Market Value" means, with respect to any date, the average
between the highest and lowest sale prices per Share on the Exchange on such
date, provided that if there shall be no sale of Shares reported on such date,
the Fair Market Value of a Share on such date shall be
<PAGE>
deemed to be equal to the average between the highest and lowest sale prices per
Share on the Exchange for the last preceding date on which sales of Shares were
reported.
2.11 "Phantom Stock" means any shares granted pursuant to Article V.
2.12 "Phantom Stock Account" means the account used to record the various
Awards made pursuant to the Plan.
2.13 "Plan" means the Cabot Noble, Inc. 1997 Director Phantom Stock Plan,
as amended and restated from time to time.
2.14 "Shares" means shares of Common Stock of the Corporation, par value
$.01 per share.
ARTICLE III -- Administration of the Plan
3.1 Administrator of the Plan. The Plan shall be administered by the
Compensation Committee (the "Committee") of the Board.
3.2 Powers of the Committee. Subject to the express provisions of the
Plan, the Committee shall have plenary authority to interpret the Plan, to
prescribe, amend and rescind rules and regulations relating to it, to determine
the terms and provisions relating to it, to determine the terms and provisions
of the Awards made pursuant to the Plan and to make all other determinations of
the matters referred to in this Article III.
3.3 Effect of Committee Determinations. No member of the Committee or
the Board shall be liable for any action taken in the administration of the
Plan, unless such action involves willful misconduct by such member, and each
member of the Committee shall be indemnified and held harmless by the
Corporation for all actions taken in the proper administration of the Plan. Any
decision or action taken by the Committee or the Board with respect to an Award
or the administration or interpretation of the Plan shall be conclusive and
binding upon all persons.
ARTICLE IV -- Eligibility
Directors of the Corporation who are not employees of the Corporation or a
subsidiary thereof shall be eligible to participate in the Plan in accordance
with Article V provided they have served as a Director of the Corporation,
Shopko, Inc. and/or Phar-Mor, Inc. for at least three (3) full years.
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<PAGE>
ARTICLE V -- Date of Grant and Amount of Award
5.1 Amount of Award. The Award of Phantom Stock attributable to each
Eligible Director shall be the amount represented by that number of Shares as of
the first business day of February of each year whose aggregate Fair Market
Value equals the amount of the then current Annual Retainer payable to such
Eligible Director or such greater or lesser amount as the Committee shall
determine from time to time by resolution. The Award shall be credited to the
Eligible Director's Phantom Stock Account on the first business day of February
of each year or the last preceding date on which trading occurred if there was
no trading on that date. Although the amount of the Award is determined with
reference to the Fair Market Value of Shares, the Award will not be in the form
of actual Shares and no Shares of the Corporation will be earmarked or otherwise
set aside for the benefit of an Eligible Director under the terms of the Plan.
5.2 Time of Grant. The amount recorded in each Eligible Director's
Phantom Stock Account shall be paid to such Eligible Director solely in cash
upon the effective date of the first to occur of the following events: (1) the
Eligible Director's resignation from the Board, (2) the Eligible Director's
failure to be elected or re-elected to the Board by the Corporation's
shareholders, (3) the retirement of the Eligible Director from the Board or (4)
the death or permanent disability of the Eligible Director. Payment shall be
calculated based upon the Fair Market Value of the Phantom Stock recorded in the
Eligible Director's Phantom Stock Account (including all accrued cash dividends)
as of the date of distribution.
5.3 Restrictions. Neither the Phantom Stock Account nor any interest
therein shall be transferable by the Eligible Director during his lifetime until
after the date of distribution. In the event of the death of an Eligible
Director, the proceeds of the Phantom Stock Account shall be paid to the
designated beneficiary of such Eligible Director, or if no beneficiary is
designated, to his or her surviving spouse. If no beneficiary is designated and
the Eligible Director dies without a surviving spouse, the proceeds of the
Phantom Stock Account shall be paid to such Eligible Director's estate.
ARTICLE VI -- No Rights as Shareholders
An Eligible Director shall have no rights as a shareholder with respect to
shares of Phantom Stock granted hereunder. Nothing in the Plan shall confer on
an individual any right to continue as a Director of the Corporation or
interfere in any way with the right of the Corporation to terminate the Plan
participant's services as a Director at any time.
ARTICLE VII -- Valuation of Phantom Stock
The number of shares of Phantom Stock to be credited to an Eligible
Director's account shall be determined based upon the composite price of Shares
on the Exchange on the first day of February of each year (or the last preceding
date on which trading occurred if there was no trading on such date). In the
event that Shares are no longer traded on any national securities exchange or
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<PAGE>
other established trading market on the date of any such payment, then the
Committee shall establish the price of Shares at the fair market value
determined under Treasury Regulation Section 20.2031-2.
ARTICLE VIII - Adjustment Provisions
8.1 Dilution in Value of Shares. If the Corporation shall at any time
change the number of issued Shares without new consideration to the Corporation
(such as by stock dividend, stock split, recapitalization, reorganization,
exchange of shares, liquidation, combination or other change in corporate
structure affecting the Shares) or make a distribution of cash or property which
has a substantial impact on the value of issued Shares, the total number of
shares of Phantom Stock held pursuant to the Plan shall be appropriately
adjusted so that the value of each such share of Phantom Stock shall not be
changed.
8.2 Transactions Where the Corporation is the Survivor. Notwithstanding
any other provision of the Plan, and without affecting the number of shares of
Phantom Stock held pursuant to the Plan, the Committee shall authorize
continuance of outstanding Phantom Stock or provide for other equitable
adjustments after changes in the Shares resulting from any merger,
consolidation, sale of assets, acquisition of property or stock,
recapitalization, reorganization or similar occurrence in which the Corporation
is the continuing or surviving corporation, upon such terms and conditions as it
may deem necessary to preserve Directors' rights under the Plan.
8.3 Acquisition of the Corporation. In the case of any sale of assets,
merger, consolidation or combination of the Corporation with or into another
corporation, other than a transaction in which the Corporation is the continuing
or surviving corporation (an "Acquisition"), any Director granted Phantom Stock
shall have the right (subject to the provisions of the Plan) thereafter to
receive the Acquisition Consideration (as defined below) receivable upon the
Acquisition by a holder of the number of Shares equal to the number of shares of
Phantom Stock granted to the Director. The term "Acquisition Consideration"
shall mean the kind and amount of shares of the surviving or new corporation,
cash, securities, evidence of indebtedness, other property or any combination
thereof receivable in respect of one Share of the Corporation upon consummation
of an Acquisition.
ARTICLE IX -- Amendment and Termination
The Plan may be terminated, modified or amended by the Board, provided that
no amendment shall become effective without the approval of the Corporation's
shareholders. In addition, except as provided in Article VIII hereof, the Board
shall not have the power to decrease or otherwise diminish the value or number
of shares of Phantom Stock deemed held in an Eligible Director's Phantom Stock
Account once such Phantom Stock has been credited to that account.
-4-
<PAGE>
ARTICLE X -- Limitations on Liability
The Plan is an unfunded plan of deferred compensation. Neither the
establishment of the Plan nor any modification thereof, nor the creation of any
account under the Plan, nor the payment of any benefits, shall be construed as
giving to any participant or other person any legal or equitable right against
the Corporation (or any person connected therewith), except as provided by law
or expressly by any Plan provision. Nothing contained in the Plan, and no
action taken pursuant to its provisions, shall create or be construed to create
a fiduciary relationship between the Corporation (or any person connected
therewith) and any participant or other person. In no event shall the
Corporation (or any person connected therewith) be liable to any person for the
failure of any participant or other person to be entitled to any particular tax
consequences with respect to the Plan or any contribution thereto or
distribution therefrom.
ARTICLE XI -- Construction
The Plan is intended to be exempt from ERISA and, if any provision of the
Plan is subject to more than one interpretation or construction, such ambiguity
shall be resolved in favor of that interpretation or construction which is
consistent with the Plan being so exempted. In case any provision of the Plan
shall be held to be illegal or void, such illegality or invalidity shall not
affect the remaining provisions of the Plan, but shall be fully severable, and
the Plan shall be construed and enforced as if said illegal or invalid
provisions had never been inserted herein. For all purposes of the Plan, where
the context admits, words in the masculine gender shall include the feminine and
neuter genders, the singular shall include the plural, and the plural shall
include the singular. Headings of Articles are inserted only for convenience of
reference and are not to be considered in the construction of the Plan.
ARTICLE XII -- Spendthrift Provision
12.1 Encumbrance of the Phantom Stock. No amount payable under the Plan
will, except as otherwise specifically provided by law, be subject in any manner
to anticipation, alienation, attachment, garnishment, sale, transfer, assignment
(either at law or in equity), levy, execution, pledge, encumbrance, charge or
any other legal or equitable process, and any attempt to do so will be void; nor
will any benefit be in any manner liable for or subject to the debts, contracts,
liabilities, engagements or torts of the person entitled thereto. The foregoing
shall not preclude any arrangement for: (i) the withholding of taxes from Plan
benefit payments, (ii) the recovery by the Plan of overpayments of benefits
previously made to a participant, or (iii) the direct deposit of benefit
payments to an account in a banking institution (if not part of an arrangement
constituting an assignment or alienation).
12.2 Right of Declaratory Judgement. In the event that any participant's
benefits are garnished or attached by order of any court, the Corporation may
bring action for a declaratory judgment in a court of competent jurisdiction to
determine the proper recipient of the benefits to be paid by the Plan. During
the pendency of said action, any benefits that become payable shall be paid
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<PAGE>
into the court as they become payable, to be distributed by the court to the
recipient it deems proper at the close of said action.
ARTICLE XIII -- Governing Law
Except to the extent preempted by the laws of the United States of America, the
laws of the state of Delaware shall govern, control and determine all questions
arising with respect to the Plan and the interpretation and validity of its
respective provisions.
ARTICLE XIV - Effective Date
The Plan shall become effective as of the Effective Date as defined in the
Agreement.
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<PAGE>
Exhibit 10.3
CABOT NOBLE, INC.
1997 DIRECTOR STOCK PLAN
ARTICLE I - Purpose of the Plan
The purpose of the Cabot Noble, Inc. 1997 Director Stock Plan is to promote
the long-term growth of Cabot Noble, Inc. (hereinafter sometimes referred to as
the "Corporation") by increasing the proprietary interest of Directors in Cabot
Noble, Inc. and to attract and retain highly qualified and capable Directors.
ARTICLE II - Definitions
Unless the context clearly indicates otherwise, the following terms shall
have the following meanings:
2.1 "Agreement" means that certain Agreement and Plan of Reorganization
among the Corporation, Phar-Mor, Inc. and ShopKo Stores, Inc. dated as of
September 7, 1996.
2.2 "Annual Retainer" means the annual cash retainer fee payable by the
Corporation to a Director for services as a director of the Corporation, as such
amount may be changed from time to time.
2.3 "Award" means an award granted to a Director under the Plan in the
form of Options or Shares, or any combination thereof.
2.4 "Board" means the Board of Directors of Cabot Noble, Inc.
2.5 "Corporation" means Cabot Noble, Inc.
2.6 "Director" means a director of the Corporation.
2.7 "Exchange" means the principal national securities exchange or trading
market on which the Shares are listed or admitted to trading.
2.8 "Fair Market Value" means, with respect to any date, the average
between the highest and lowest sale prices per Share on the Exchange on such
date, provided that if there shall be no sale of Shares reported on such date,
the Fair Market Value of a Share on such date shall be deemed to be equal to the
average between the highest and lowest sale prices per Share on the Exchange for
the last preceding date on which sales of Shares were reported.
<PAGE>
2.9 "Option" means an option to purchase Shares awarded under Article VIII
or IX which does not meet the requirements of Section 422 of the Internal
Revenue Code of 1986, as amended, or any successor law.
2.10 "Option Grant Date" means the date upon which an Option is granted
to a Director.
2.11 "Optionee" means a Director of the Corporation to whom an Option has
been granted or, in the event of such Director's death prior to the expiration
of an Option, such Director's executor, administrator, beneficiary or similar
person, or, in the event of a transfer permitted by Article VII hereof, such
permitted transferee.
2.12 "Plan" means the Cabot Noble, Inc. 1997 Director Stock Plan, as
amended and restated from time to time.
2.13 "Shares" means shares of the Common Stock, par value $.01 per share,
of the Corporation.
2.14 "Stock Award Date" means the date on which Shares are awarded to a
Director.
2.15 "Stock Option Agreement" means a written agreement between a Director
and the Corporation evidencing an Option.
ARTICLE III - Administration of the Plan
3.1 Administrator of the Plan. The Plan shall be administered by the
Compensation Committee of the Board (the "Committee").
3.2 Authority of the Committee. The Committee shall have full power and
authority to: (i) interpret and construe the Plan and adopt such rules and
regulations as it shall deem necessary and advisable to implement and administer
the Plan, and (ii) designate persons other than members of the Committee to
carry out its responsibilities, subject to such limitations, restrictions and
conditions as it may prescribe, such determinations to be made in accordance
with the Committee's best business judgment as to the best interests of the
Corporation and its stockholders and in accordance with the purposes of the
Plan. The Committee may delegate administrative duties under the Plan to one or
more agents as it shall deem necessary or advisable.
3.3 Determinations of the Committee. A majority of the Committee shall
constitute a quorum at any meeting of the Committee, and all determinations of
the Committee shall be made by a majority of its members. Any determination of
the Committee under the Plan may be made without notice or a meeting of the
Committee by a written consent signed by all members of the Committee.
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<PAGE>
3.4 Effect of Committee Determinations. No member of the Committee or the
Board shall be liable for any action taken in the administration of the Plan,
unless such action involves willful misconduct by such member, and each member
of the Committee shall be indemnified and held harmless by the Corporation for
all actions taken in the proper administration of the Plan. Any decision or
action taken by the Committee or the Board with respect to an Award or the
administration or interpretation of the Plan shall be conclusive and binding
upon all persons.
ARTICLE IV - Awards under the Plan
Awards in the form of Options shall be granted to Directors in accordance
with Article VIII. Deferred Contingent Shares may be granted to Directors in
accordance with Article IX. Each Option granted under the Plan shall be
evidenced by a Stock Option Agreement.
ARTICLE V - Eligibility
Directors of the Corporation shall be eligible to participate in the Plan
in accordance with Articles VIII and IX.
ARTICLE VI - Shares Subject to the Plan
Subject to adjustment as provided in Article XII, the aggregate number of
Shares which may be issued upon the award of Shares and the exercise of Options
shall not exceed 250,000 Shares. To the extent that Shares subject to an
outstanding Option are not issued or delivered by reason of the expiration,
termination, cancellation or forfeiture of such Option or by reason of the
delivery of Shares (either actually or by attestation) to pay all or a portion
of the exercise price of such Option, then such Shares shall again be available
under the Plan.
ARTICLE VII - Non-Transferability of Options
No Options granted under the Plan shall be transferable by a Director
during his or her lifetime and may not be assigned, exchanged, pledged,
transferred or otherwise encumbered or disposed of except by court order, will
or by the laws of descent and distribution. Notwithstanding the foregoing, in
the event Options may be transferable without failing to comply with Rule 16b-3
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), then
each Option shall be transferable to the extent set forth in the related Stock
Option Agreement, as determined by the Committee (provided that all Options
granted under Article VIII with the same Option Grant Date shall have identical
provisions relating to the transferability of such Options). In the event that
any Option is thereafter transferred as permitted by the preceding sentence, the
permitted transferee thereof shall be deemed the Optionee hereunder. Options
shall be exercisable during the Optionee's lifetime only by the Optionee or by
the Optionee's guardian, legal representative or similar person.
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<PAGE>
ARTICLE VIII - Options
Each Director shall be granted Options, subject to the following terms
and conditions:
8.1 Time of Grant. On the first business day of February of each
year (or, if later, on the date on which a person is first elected or begins to
serve as a Director), each person who is a Director shall be granted an Option
to purchase 5,000 Shares (which number shall be pro-rated if such Director is
first elected or begins to serve as a Director on a date other than the date of
an annual meeting of stockholders).
8.2 Purchase Price. The purchase price per Share under each Option
granted pursuant to this Article shall be 100% of the Fair Market Value per
Share on the Option Grant Date.
8.3 Exercise of Options. Each Option shall be fully exercisable on
and after the Option Grant Date. In no event shall the period of time over
which the Option may be exercised exceed five years from the Option Grant Date.
An Option, or portion thereof, may be exercised in whole or in part only with
respect to whole Shares.
Shares shall be issued to the Optionee pursuant to the exercise of an
Option only upon receipt by the Corporation from the Optionee of payment in full
either in cash or by surrendering (or attesting to the ownership of) Shares
together with proof acceptable to the Committee that such Shares have been owned
by the Optionee for at least six (6) months prior to the date of exercise of the
Option, or a combination of cash and Shares, in an amount or having a combined
value equal to the aggregate purchase price for the Shares subject to the Option
or portion thereof being exercised. The Shares issued to an Optionee for the
portion of any Option exercised by attesting to the ownership of Shares shall
not exceed the number of Shares issuable as a result of such exercise
(determined as though payment in full therefor were being made in cash) less the
number of Shares for which attestation of ownership is submitted. The value of
owned Shares submitted (directly or by attestation) in full or partial payment
for the Shares purchased upon exercise of an Option shall be equal to the
aggregate Fair Market Value of such owned Shares on the date of the exercise of
such Option.
ARTICLE IX - Election to Receive Contingent Deferred Shares
9.1 Election Procedures. On the first business day of February of
each year, Shares shall be identified pursuant to this Article as being for the
contingent benefit of each Director who, at least six (6) months prior thereto,
files with the Committee or its designee a written election to receive a
contingent deferred right to such Shares in lieu of all or a portion of such
Director's Annual Retainer. In the event a Director does not file a written
election in accordance with the preceding sentence by reason of becoming a
Director after the date which is six (6) months prior to the first business day
of February in any year, Shares shall be identified as being for the contingent
benefit
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<PAGE>
of such director as of the first business day (the "Effective Date") which is at
least six (6) months after the date such Director files with the Committee or
its designee a written election to receive Shares in lieu of all or a portion of
such Director's Annual Retainer; provided, however, that such an election may
apply only to the portion of such Director's Annual Retainer determined by
multiplying such Director's Annual Retainer by a fraction, the numerator of
which is the number of days from and including the Effective Date to and
including the last day of the period for which such Annual Retainer would
otherwise be payable, and the denominator of which is 365 or 366, as the case
may be. An election pursuant to the first sentence of this Section 9.1 may be
revoked or changed only on or prior to the date which is six (6) months prior to
the first business day of the following February. An election pursuant to the
second sentence of this Section 9.1 shall be irrevocable. Any elections made by
any Director under the Phar-Mor, Inc. 1996 Director Stock Plan with respect to
shares of common stock, par value $.01 per share, of Phar-Mor, Inc. identified
pursuant to section 9.1 thereof in October 1996 shall be deemed to relate to
Shares of the Corporation pursuant hereto.
9.2 Term of Deferral. Receipt of Shares subject to a Director
election made pursuant to Section 9.1 shall be deferred until such Director's
retirement, resignation, disability, death, or termination (other than
termination resulting in forfeiture as described in Section 9.8) , or in the
event of emergency or necessity, as hereinafter provided.
9.3 Accounting. The Committee shall cause records to be kept in the
name of each Director electing to participate pursuant to Section 9.1 which
shall reflect the number of contingent Shares deferred by that Director.
9.4 Contingency. Until and except to the extent that deferred Shares
hereunder are distributed to or vested in the Directors or beneficiaries from
time to time in accordance with orders of the Committee, the interest of each
Director and beneficiary therein is contingent only and is subject to forfeiture
as provided in Section 9.8. Title to and beneficial ownership of the Shares,
which the Corporation will identify as subject to its contingent obligation
hereunder, shall at all times remain in the Corporation; and no Director or
beneficiary shall under any circumstances acquire any property interest in any
specific assets of the Corporation.
9.5 Method of Payment.
(a) In order to meet its contingent Share obligation hereunder, the
Corporation shall each year set aside Shares in an amount equal to the total
amounts deferred for such year under this Article IX.
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<PAGE>
(b) In the event of vesting, or upon the retirement, resignation,
disability, death or termination (other than termination resulting in forfeiture
as described in Section 9.8) of a Director, the number of contingent deferred
Shares payable to such Director or his beneficiary shall be determined as of
that date. If the Committee, in the exercise of its discretion provided in
Section 9.6, determines to make installment distributions of such amount, the
Corporation shall continue to set aside Shares in an amount equal to the unpaid
balance of such obligation to pay Shares.
9.6 Method of Distribution. The Committee shall from time to time
determine the time and manner of making distributions of contingent deferred
Shares in case of the retirement, resignation, disability, or death of a
Director or in the event of an emergency or necessity affecting the personal or
family affairs of any Director or beneficiary of a deceased Director by such
methods as it shall find appropriate for providing incentive to Directors for
their continued service on behalf of the Corporation. Commencement of
distribution in each case may be deferred by the Committee, but (subject to
Section 9.8) not beyond one year after the retirement, disability or death of
the Director or, in the case of a Director who shall have resigned, not beyond
one year after such director reaches the age of 65 or incurs a disability or
dies. In the case of a Director's death before distribution is completed, the
balance may be distributed in a lump sum or on an installment basis as the
Committee may determine.
9.7 Designation of Beneficiaries. Each Director shall have the
right to designate beneficiaries who are to succeed to such Director's
contingent right to receive future payments hereunder in the event of death. In
case of the failure of a Director to make a designation or the death of a
designated beneficiary without the Director having designated a successor,
distribution shall be made to the Director's estate. No designation of
beneficiaries shall be valid unless it is in writing, signed by the Director,
dated, and filed with the Committee. Beneficiaries may be changed without the
consent of any prior beneficiaries.
9.8 Possible Forfeiture of Shares.
(a) The contingent right of a Director or beneficiary to receive
deferred Shares hereunder shall be forfeited upon the occurrence of any one or
more of the following events:
(1) If the Director is discharged for cause by the
Corporation or a subsidiary thereof; or
(2) If the Director shall enter into a business or employment
which the Committee determines to be (i) detrimentally competitive with the
business of the Corporation or a subsidiary, and (ii) substantially injurious to
the Corporation's financial interests;
(b) The Committee may at any time and from time to time order all or
any part of the value of the contingent right of a Director or beneficiary to
receive future Shares to be vested and no longer
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<PAGE>
subject to forfeiture, and may order payment of the amounts so vested on dates
specified in such orders, if it finds such action appropriate in the
circumstances.
9.9 Number of Shares. The number of Shares identified pursuant to
this Article shall be the number of whole Shares equal to (i) the portion of the
Annual Retainer which the Director has elected pursuant to Section 9.1 to be
payable in Shares, divided by (ii) the Fair Market Value per Share on the date
Shares are identified as contingent deferred Shares of the Director (which will
occur either on the first business day in February of the year of election or on
the Effective Date, whichever is applicable). Any fraction of a Share shall be
disregarded and the remaining amount of such Annual Retainer shall be paid to
the Director in cash and shall not be deferred pursuant to this Article.
9.10 Characterization of the Relationships Created by this Article.
Nothing contained herein shall be deemed to create a trust of any kind or create
any fiduciary relationship. Shares identified hereunder shall continue for all
purposes to be treasury stock held by the Corporation, and no person other than
the Corporation shall, by virtue of the provisions of this Article IX, have any
interest in such Shares. To the extent that any person acquires a right to
receive Shares from the Corporation under this Article IX, such right shall be
no greater than the right of any unsecured general creditor of the Corporation.
ARTICLE X - Amendment and Termination
The Board may amend the Plan from time to time or terminate the Plan
at any time; provided, however, that no action authorized by this Article shall
adversely change the terms and conditions of an outstanding Option without the
Optionee's consent.
ARTICLE XI - Adjustment Provisions
11.1 Adjustments Under the Plan. If the Corporation shall at any
time change the number of issued Shares without new consideration to the
Corporation (such as by stock dividend, stock split, recapitalization,
reorganization, exchange of shares, liquidation, combination or other change in
corporate structure affecting the Shares) or make a distribution of cash or
property which has a substantial impact on the value of issued Shares, the total
number of Shares reserved for issuance under the Plan shall be appropriately
adjusted and the number of Shares covered by each outstanding Option and the
purchase price per Share under each outstanding Option and the number of shares
underlying Options to be issued annually pursuant to Section 8.1 shall be
adjusted so that the aggregate consideration payable to the Corporation and the
value of each such Option shall not be changed.
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11.2 Corporation as Surviving Entity. Notwithstanding any other
provision of the Plan, and without affecting the number of Shares reserved or
available hereunder, the Committee shall authorize the issuance, continuance or
assumption of outstanding Options or provide for other equitable adjustments
after changes in the Shares resulting from any merger, consolidation, sale of
assets, acquisition of property or stock, recapitalization, reorganization or
similar occurrence in which the Corporation is the continuing or surviving
corporation, upon such terms and conditions as it may deem necessary to preserve
Optionees' rights under the Plan.
11.3 Corporation Not Surviving Entity. In the case of any sale of
assets, merger, consolidation or combination of the Corporation with or into
another corporation other than a transaction in which the Corporation is the
continuing or surviving corporation and which does not result in the outstanding
Shares being converted into or exchanged for different securities, cash or other
property, or any combination thereof (an "Acquisition"), any Optionee who holds
an outstanding Option shall have the right (subject to the provisions of the
Plan and any limitation applicable to the Option) thereafter and during the
terms of the Option, to receive upon exercise thereof the Acquisition
Consideration (as defined below) receivable upon the Acquisition by a holder of
the number of Shares which would have been obtained upon exercise of the Option
or portion thereof, as the case may be, immediately prior to the Acquisition.
The term "Acquisition Consideration" shall mean the kind and amount of shares of
the surviving or new corporation, cash, securities, evidence of indebtedness,
other property or any combination thereof receivable in respect of one Share of
the Corporation upon consummation of an Acquisition.
ARTICLE XII - Governing Law
Except to the extent preempted by the laws of the United States of
America, the laws of the state of Delaware shall govern, control and determine
all question arising with respect to the Plan and the interpretation and
validity of its respective provisions
ARTICLE XIII - Effective Date
To the extent required by applicable law, the Plan shall be submitted
to the stockholders of the Corporation for approval. The effective date of the
Plan shall be the Effective Date as defined in the Agreement.
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Exhibit 10.5
REGISTRATION RIGHTS
AGREEMENT
This Registration Rights Agreement (this "Agreement") is made and entered
into as of ___________ __, 1996 by Cabot Noble, Inc. a Delaware corporation (the
"Company"), and Robert M. Haft ("Haft")
WHEREAS, Haft and Phar-Mor, Inc., a Pennsylvania corporation
("Phar-Mor") had entered into that certain Registration Rights Agreement dated
as of September 11, 1995 concerning certain shares of common stock of Par-Mor
issued or issuable to Haft through the exercise of certain options or
otherwise;
WHEREAS, the Company, Phar-Mor and ShopKo Stores, Inc., a Minnesota
corporation ("ShopKo") have entered into a certain Agreement and Plan of
Reorganization, dated as of September 7, 1996, as amended and restated as of
October 9, 1996 (the "Reorganization Agreement"), pursuant to which the existing
shareholders of ShopKo and Phar-Mor shall exchange their shares of ShopKo common
stock and Phar-Mor common stock, respectively, for shares of the Company's
Common Stock (the "Reorganization"); and
WHEREAS, the execution and delivery of this Agreement is a condition
precedent to the Reorganization Agreement.
NOW, THEREFORE, in consideration of the premises and the representations,
warranties and agreements herein contained, the parties hereby agree as follows:
SECTION 1. Definitions.
The terms set forth below are used herein as so defined:
"Commission" means the Securities and Exchange Commission, or any other
federal agency at the time administering the Exchange Act or the Securities Act.
"Common Stock" means the common stock, par value $0.01 per share, of the
Company.
"Company" means Cabot Noble, Inc., a Delaware corporation.
"Demand Registration" means a registration requested pursuant to the
terms of Section 3 hereof.
"Effective Date" means the date the Reorganization becomes effective, as
set forth in the Reorganization Agreement.
<PAGE>
"Eligible Transferee" means any successor or permitted transferee, in a
single transaction, of at least 33 1/3% of the Registrable Shares and (if
unexercised, but only to the extent (if any) that transfer may be permitted
under the terms of the Option) the Option held by a Holder (including a Holder
that is itself an Eligible Transferee) on the date of such transfer.
"Exchange Act" means the Securities Exchange of 1934, or any successor
federal statute, and the rules and regulations of the Commission thereunder, all
as the same shall be in effect from time to time.
"Expiration Date" means the date one year after the first to occur of
the expiration of the Option or the complete exercise of the Option.
"Form S-4" means the Registration Statement on Form S-4 filed by the
Company with the Commission that includes the joint proxy statement/prospectus
to be distributed to shareholders of Phar-Mor and Shopko in connection with the
Reorganization.
"Holder" means Haft or the Eligible Transferees.
"Indemnified Person" has the meaning assigned to that term in Section
9(a) hereof.
"Inspectors" has the meaning assigned to that term in Section 7(e)
hereof.
"Option" means the option to purchase 256,250 Shares of Common Stock
received by Haft pursuant to the terms of the Reorganization Agreement.
"Participating Holder" means any Holder that has Registrable Shares
registered for sale pursuant to a Registration Statement.
"Person" means any individual, partnership, joint venture, corporation,
trust, unincorporated organization, or other entity.
"Records" has the meaning assigned to that term in Section 7(e) hereof.
"Registrable Shares" mans the shares of Common Stock issued or issuable
upon exercise of the Option (to the extent exercisable at the time of
determination or within sixty (60) days thereafter) and held by the Holder from
time to time. A share of Common Stock will cease to be a Registrable Share when
(a) a registration statement covering a Registrable Share has been declared
effective by the Commission and such share has been disposed of by a Holder
pursuant to such effective registration statement, (b) the Registrable Share or
the Option (in respect thereof) is transferred to a Person other than an
Eligible Transferee, (c) such share (after initial issuance) or the Option (in
respect thereof) is held by the Company or one of its subsidiaries or otherwise
ceases to be outstanding, or (d) the share of Common Stock may be traded without
restriction pursuant to paragraph (k) or Rule 144, if applicable.
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"Registration Expenses" has the meaning assigned that term in Section 8
hereof.
"Registration Statement" means any registration statement or comparable
document under the Securities Act through which a public sale or disposition of
the Registrable Shares may be registered, including the prospectus, amendments
and supplements to such registration statement, all exhibits, and all material
incorporated by reference or deemed to be incorporated by reference in such
Registration Statement.
"Requesting Holders" has the meaning assigned to that term in Section 3(a)
of this Agreement.
"Requisite Holders" means Holders holding at least 25% of the total number
of Registrable Shares.
"Rule 144" means Rule 144 under the Securities Act, as such Rule may be
amended from time to time, or any similar rule (other than Rule 144A) or
regulation hereafter adopted by the Commission providing for offers and sales of
securities made in compliance therewith resulting in offers and sales by
subsequent holders that are not affiliates of an issuer of such securities being
free of the registration and prospectus delivery requirements of the Securities
Act.
"Securities Act" means the Securities Act of 1933, as amended, or any
successor federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect from time to time.
"Selling Holder" means a Holder who is selling Registrable Shares pursuant
to a Registration Statement under this Agreement.
"Shelf Expiration Date" means the date which is the second anniversary of
the Effective Date.
"Shelf Registration" has the meaning assigned to that term is Section 2(a)
of this Agreement.
Section 2. Shelf Registration.
(a) The Company shall cause the Form S-4, at the time it is declared
effective, to contain a form of prospectus that can be used by the Holders to
effect sales of Registrable Shares on a delayed basis after the Effective Date
and shall use its reasonable best efforts to cause, except as otherwise provided
for herein, such Form S-4, or as it may be subsequently amended to be a
Registration Statement on Form S-3 (the "Shelf Registration"), to be available
for resales of Registrable Shares for a period expiring on the date which is the
second anniversary of the Effective Date (the "Shelf Expiration Date"). This
Agreement shall constitute the consent of each Holder to the inclusion of such
Holder's Registrable Shares in the Shelf Registration upon its effectiveness,
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except with respect to those Registrable Shares the Holder of which notifies the
Company in writing no later than thirty (30) days following the Effective Date
that it does not want to be included in the Shelf Registration.
(b) The Company agrees that, if necessary, the Company will promptly
supplement or make amendments to the Shelf Registration, if required by the
registration form utilized by the Company for such Shelf Registration or by the
instructions applicable to such registration form or by the Securities Act or
the rules and regulations thereunder or as reasonably requested by a
Participating Holder in connection with any material change in the information
provided by such Participating Holder and the Company agrees to furnish to the
Participating Holders, on request, copies of any supplements or amendments. The
Company will pay all Registration Expenses in connection with such Shelf
Registration or any supplements or amendments thereto, whether or not it becomes
effective. The Shelf Registration may include securities other than Registrable
Shares.
(c) In connection with any underwritten offering of Registrable Shares
under the Shelf Registration, the Company shall have the right, with the consent
of the Holders of a majority in interest of the Registrable Shares to be offered
pursuant to such distribution (which consent shall not be unreasonably
withheld), to designate an investment banker to act as managing underwriter with
respect to such offering.
Section 3. Demand Registration Rights.
(a) From and after the date which is 180 days from the Shelf Expiration
Date, Requisite Holders may by written notice to the Company request that the
Company register all or a portion of the Registrable Shares held by such Holders
under the Securities Act and, subject to the provisions of this Agreement, the
Company shall use its best efforts to effect such registration promptly;
provided, however, that the Company shall have no obligation under this Section
3(a) if the sale of the shares by the Holders is then covered under any other
Registration Statement that includes such shares on a continuing or other basis,
including a Shelf Registration filed pursuant to Section 2 hereof.
Each notice to the Company shall set forth (i) the names of the
Requisite Holders requesting registration ("Requesting Holders") and the number
of shares to be sold by each and (ii) the proposed manner of sale. Within ten
(10) days after receipt of notice from the Requisite Holders, the Company shall
notify any Holder who is not a party to the written notice served on the Company
and offer to them the opportunity to include their shares in such registration.
Each such Holder shall have 20 days following delivery of such notice to elect,
by notice to the Company, to have such Holder's Registrable Shares included in
such registration. The Company shall have no obligation to effect any Demand
Registration under this Section 3 unless the number of Registrable Shares in
such Demand Registration shall be equal to at least 250,000 shares or, if
lesser, the remaining Registrable Shares (including shares subject to the
Option) but not less than 125,000, each of such numbers to be subject to
adjustment as contemplated by Section 8 of the option (the "Anti-Dilutive
Adjustments"). The maximum number of such demands under this Section 3 shall be
two (2);
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provided, however, that no such demand may be made after the Expiration Date. A
Registration Statement will not count as a Demand Registration hereunder unless
it is declared effective by the Commission and remains effective for at least
ninety (90) days or such shorter period which shall terminate when all of the
Registrable Shares covered by such Demand Registration have been sold pursuant
to such Demand Registration; provided, however, that in the event a Registration
Statement is withdrawn at the request of the Requesting Holders (other than a
withdrawal pursuant to Section 3(c) of this Agreement), such Requesting Holders
will forfeit the demand registration rights granted pursuant to this Section 3.
These rights are in addition to, and shall not limit, the registration rights of
the Holders of Registrable Shares granted pursuant to Section 2 or 5 hereunder.
(b) If the managing underwriter of an underwritten offering under this
Section 3 advises the Company in writing that in its opinion the number of
shares requested to be included in such registration (including, without
limitation, shares to be included in such registration pursuant to incidental
or "piggyback" rights heretofore or hereafter granted by the Company) exceeds
the number which can be sold in such offering, the Company will include in such
registration only the number of shares which in the opinion of such underwriter
can be sold. If the number of shares which can be sold is less than the number
of shares proposed to be registered, the amount to be so registered shall be
allocated, (i) first, pro rata among the Holders of Registrable Shares desiring
to participate in such registration on the basis of the number of such Registra-
ble Shares initially proposed to be registered by such Holders and (ii) second,
among other holders of shares of the Company's Common Stock requested to be
included in such registration, in such proportions as the Company shall
determine.
(c) The Company shall not be obligated to effect any Demand Registration
within three (3) months after the effective date of a previous registration for
an underwritten offering under which the Holders had piggyback rights pursuant
to Section 5 hereof (irrespective of whether such rights were exercised). The
Company may (i) postpone for up to 120 days the filing or the effectiveness of
a Registration Statement for a Demand Registration if, based on the good faith
judgement of the Company's Board of Directors, such registration and offering
would materially interfere with any material financing, acquisition, corporate
reorganization, security offering or other material transaction, or such post-
ponement or withdrawal is necessary in order to avoid premature disclosure of
a matter the Board has determined would not be in the best interest of the
Company to be disclosed at such time or (ii) postpone the filing of a Demand
Registration for a period of not more than 120 days in the event the Company
shall be required to prepare audited financial statements as of a date other
than its fiscal year end (unless the Holders requesting such registration agree
to pay the expenses of such an audit); provided, however, that in no event shall
the Company withdraw a Registration Statement under clause (i) after such
Registration Statement has been declared effective; and provided, further, that
in any of the events described in clause (i) or (ii) above, the Holders
initiating the request for such Demand Registration shall be entitled to
withdraw such request (without expense to such Holders) and, if such request is
withdrawn, such Demand Registration shall not count as a permitted Demand
Registration. The Company shall provide prompt written notice to the Requesting
Holders of (x) any postponement or withdrawal of the filing or effectiveness of
a Registration Statement pursuant to this paragraph (c), (y) the Company's
decision to file or seek
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<PAGE>
effectiveness of such Registration Statement following such withdrawal or
postponement and (z) the effectiveness of such Registration Statement.
(d) If any of the Registrable Shares covered by a Demand Registration
are to be sold in an underwritten offering, the Company shall have the right to
select the managing underwriter(s) to administer the offering, subject to the
approval of the Holders of a majority in interest of the Registrable Shares
initiating the request for registration, which approval shall not be
unreasonably withheld.
(e) Notwithstanding anything to the contrary contained in this Section
3, if the Company has effected a Shelf Registration in accordance with the
provisions of Section 2 of this Agreement, for so long as such Shelf
Registration remains effective, the Company shall have no obligation to effect a
Demand Registration pursuant to this Section 3 so long as such Shelf
Registration permits an underwritten sale by the Holders of the Registrable
Shares.
Section 4. Suspension of Effectiveness.
Nothing herein, including the Company's obligations under Sections 2(a)
and 3(a), shall restrict its ability to suspend the effectiveness of the Shelf
Registration or any Demand Registration, at any time, for such reasonable period
of time (not, in any instance, to exceed 45 days (a "Blackout Period")) which
the Company's Board of Directors determines is necessary to prevent the
premature disclosure of any events or information having a material effect on
the Company; provided that the Company may invoke a Blackout Period only two
(2) times in each twelve (12)-month period beginning on the Effective Date or
any anniversary thereof. In addition, the Company shall not be required to keep
the Shelf Registration or any Demand Registration, effective, or may, without
suspending such effectiveness, instruct the holders of Registrable Shares
included in the Shelf Registration or any Demand Registration, not to sell such
shares, during any period during which the Company is instructed, directed,
ordered or otherwise requested by any governmental agency or self-regulatory
organization to stop or suspend such trading or sales.
Section 5. Incidental Registration Rights.
(a) If the Company, at any time prior to the Expiration Date, proposes
to register any Common Stock under the Securities Act (other than pursuant to
Sections 2 or 3 of this Agreement or pursuant to a registration statement on a
form exclusively for the sale or distribution of securities by the Company to
employees of the Company or its subsidiaries or for use exclusively in
connection with a business combination) whether or not for sale for its own
account, and the registration form to be used may be used for the registration
of Registrable Shares, it will give prompt written notice to all Holders of the
Company's intention to effect such a registration and include in such
registration all Registrable Shares with respect to which the Company has
received written notice for inclusion therein within 20 days after the date of
the Company's notice; provided that:
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<PAGE>
(i) if, at any time after giving written notice of its intention to
register any shares and, prior to the effective date of the Registration
Statement filed in connection with such registration, the Company shall
determine for any reason not to register such shares, the Company may,
at its election, give written notice of such determination to each
Holder requesting inclusion therein, and, thereupon, the Company shall
be relieved of its obligation to register any Registrable Shares in
connection with such registration (but not of its obligation to pay the
Registration Expenses in connection therewith); and
(ii) if such registration shall be in connection with an
underwritten public offering and the managing underwriter shall advise
the Company in writing that in its opinion the number of shares
requested to be included in such registration exceeds the number of such
securities which can be sold in such offering or would have an adverse
impact on the price of such securities, the Company shall include in
such registration (A) first, the securities the Company proposes to sell
and, if such registration includes an underwritten secondary
registration on behalf of holders of the Company's securities exercising
demand registration rights, the securities requested to be included
therein by such holders requesting such registration, in such
proportions as the Company shall determine, and (B) second, the number
(if any) of other securities of the Company (including, without
limitation, Registrable Shares) requested to be included pursuant to any
incidental registration rights which in the opinion of such underwriter
can be sold (and if, in the opinion of such underwriter, some but not
all of such securities may be so included, all holders of Common Stock
requested to be included therein shall share pro rata in the number of
shares of Common Stock included in such underwritten public offering on
the basis of the number of shares of Common Stock requested to be
included therein).
(iii) with respect to any unissued shares to be included therein, the
Holder delivers a commitment to timely exercise the Option prior to the
effective date of the registration for inclusion therein of such shares,
if the Registration Statement does not otherwise contemplate a
continuing or "shelf" registration of shares issuable under the Option;
and
(iv) the number of shares to be sold by the Holders is not less than
50,000 (subject to Anti-Dilutive Adjustments).
(b) If any Registration pursuant to this Section 5 is an underwritten
primary offering, the Company shall have the right to select the managing
underwriter to administer such offering.
Section 6. Holdback Agreement.
(a) In the event of an underwritten public distribution of Common Stock
under a Registration Statement, whether or not Registrable Shares are included,
each Holder agrees not to effect any public sale or distribution of Common Stock
(except as part of such underwritten public distribution), including a sale
pursuant to Rule 144 or Rule 144A under the Securities Act, during a period
designated by the Company in a written notice duly given to the Holders in
accordance with
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Section 11(b), which period shall commence approximately 14 days prior to the
effective date of any such post-effective amendment to the Shelf Registration or
filing of such prospectus supplement, as the case may be, or the commencement of
such underwritten public distribution of Common Stock under a Registration
Statement and shall continue for up to 104 consecutive days.
(b) The foregoing provisions shall not apply to any Holder to the
extent such Holder is prohibited by applicable law from agreeing to withhold
from sale.
Section 7. Registration Procedures.
Except as otherwise expressly provided herein, in connection with any
registration of Registrable Shares pursuant to this Agreement, the Company
shall, as expeditiously as possible, at its own expense:
(a) prepare and file with the Commission a Registration Statement on
the appropriate form with respect to such Registrable Shares and use its best
efforts to cause such Registration Statement to become effective as soon as
practicable thereafter; and before filing a Registration Statement or prospectus
or any amendments or supplements thereto, furnish to each Selling Holder, copies
of such Registration Statement and such other documents as proposed to be filed
(including copies of any document to be incorporated by reference therein), and
thereafter furnish to such Selling Holder such number of copies of such
Registration Statement, each amendment and supplement thereto (including copies
of any document to be incorporated by reference therein), in each case at the
written request of the Selling Holder, including all exhibits thereto, the
prospectus included in such registration statement (including each preliminary
prospectus), and, promptly after the effectiveness of a Registration Statement,
the definitive final prospectus filed with the Commission, and such other
documents as such Selling Holder may reasonably request in order to facilitate
the disposition of the Registrable Shares owned by such Selling Holder;
(b) use its best efforts to register or qualify such Registrable
Shares under such other securities or blue sky laws of such jurisdictions
within the United States as any Selling Holder reasonably (in light of such
Selling Holder's intended plan of distribution) requests; provided that the
Company will not be required to (i) qualify generally to do business in any
jurisdiction where it would not otherwise be required to qualify but for this
Section 7(b), (ii) subject itself to taxation in any such jurisdiction or (iii)
consent to general service of process in any such jurisdiction;
(c) notify each Selling Holder of such Registrable Shares, at any
time when a prospectus relating thereto is required to be delivered under the
Securities Act, of the occurrence of any event as a result of which the
prospectus included in such Registration Statement (including any document to be
incorporated by reference therein) contains an untrue statement of a material
fact or omits any fact necessary to make the statements therein not misleading
and, at the request of any such Selling Holder, the Company shall as promptly as
practicable, prepare a supplement or amendment to such prospectus (and, in the
case of any post-effective amendment, use its reasonable best efforts to have
such amendment declared effective by the Commission) so that, as thereafter
delivered to the
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purchasers of such Registrable Shares, such prospectus will not contain an
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not misleading
and promptly make available to each Selling Holder any such supplement or
amendment;
(d) in connection with an underwritten public offering, enter into
customary agreements (including, if requested, an underwriting agreement),
reasonable satisfactory in form and substance to the Company, and take such
other actions in connection therewith as the Holders of at least a majority in
interest of the Registrable Shares being sold or the underwriter shall
reasonably request in order to consummate the disposition of such Registrable
Shares;
(e) make available for inspection during business hours on reasonable
advance notice by any Selling Holder of such Registrable Shares, any underwriter
participating in any disposition pursuant to a Registration Statement, and any
attorney, accountant or other professional retained by any such Selling Holder
or underwriter (collectively, the "Inspectors"), all financial and other
records, pertinent corporate documents and properties of the Company
(collectively, the "Records") as shall be reasonably necessary to enable them to
exercise their due diligence responsibility, and cause the Company's officers,
directors and employees to supply all information reasonably requested by any
such Inspector in connection with such Registration Statement. Records which the
Company determines, in good faith, to be confidential and which it notifies the
Inspectors are confidential shall not be disclosed by the Inspectors unless (i)
the disclosure of such Records is necessary to avoid or correct a material
misstatement or omission in the Registration Statement or (ii) the release of
such Records is ordered pursuant to a subpoena or other order from a court of
competent jurisdiction. Each Selling Holder of such Registrable Shares further
agrees that it will, upon learning that disclosure of such Records is sought in
a court of competent jurisdiction, give written notice to the Company, and allow
the Company, at the Company's expense, to undertake appropriate action to
prevent disclosure of the Records it deemed confidential. Each Selling Holder of
such Registrable Shares further agrees that information obtained by it as a
result of such inspections which is deemed confidential by the Company shall not
be used by it, and it shall cause each of its Inspectors not to use such
confidential information, as the basis for any market transactions in securities
of the Company or for any purpose other than any due diligence review with
respect to decisions regarding such Selling Holder's investment in the
Registrable Shares, unless and until such information is made generally
available to the public;
(f) in the event such sale is pursuant to an underwritten offering, use
its best efforts to obtain (i) a comfort letter or comfort letters from the
Company's independent public accountants in customary form and covering such
financial and accounting matters of the type customarily covered by comfort
letters as the Selling Holders of a majority in interest of the Registrable
Shares being sold or the managing underwriter reasonably request, and (ii) an
opinion or opinions from counsel for the Company, addressed to the underwriters,
covering the matters customarily covered in opinions given by counsel in similar
transactions; and
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(g) notify the Selling Holders and the managing underwriters, if any,
promptly, and (if requested by any such Person) confirm such advice in writing,
(i) when the Registration Statement, the prospectus or any prospectus supplement
or post-effective amendment has been filed, and, with respect to the
Registration Statement or any post-effective amendment, when the same has become
effective, (ii) of the issuance by the Commission of any stop order suspending
the effectiveness of a Registration Statement or of any order preventing or
suspending the use of any preliminary prospectus or the initiation of any
proceedings for that purpose and the Company shall promptly use its best efforts
to prevent the issuance of any stop order or to obtain its withdrawal if such
stop order should be issued and (iii) of the receipt by the Company of any
notification with respect to the suspension of the qualification or exemption
from qualification of a Registration Statement or any of the Registrable Shares
for offer or sale in any jurisdiction, or the initiation or threatening of any
proceeding for such purpose.
The Company may require each Selling Holder of Registrable Shares as to
which any registration is being effected to furnish to the Company such
information regarding the Selling Holder and the distribution of such
Registrable Shares as the Company may from time to time reasonably request in
writing and such other information as may be legally required in connection with
such registration. Each Selling Holder agrees, by its acquisition of
Registrable Shares and its acceptance of the benefits provided to it hereunder,
to furnish promptly to the Company all information required to be disclosed in
order to make the information previously furnished to the Company by such
Selling Holder not materially misleading.
Each Holder agrees that upon receipt of any notice from the Company of the
happening of any event of the kind described in Sections 7(c), (g)(ii) or
(g)(iii) hereof, such Holder will forthwith discontinue disposition of
Registrable Shares pursuant to the Registration Statement covering such
Registrable Shares until such Holder's receipt of the copies of the supplemented
or amended prospectus contemplated by Section 7(c) hereof, or until it is
advised in writing by the Company that the use of the prospectus may be resumed,
and, if so directed by the Company, such Holder will deliver to the Company (at
the Company's expense) all copies, other than permanent file copies then in such
Holder's possession, of the prospectus covering such Registrable Shares current
at the time of receipt of such notice. In the event the Company shall give any
such notice, the Company shall extend the period during which such Registration
Statement shall be maintained effective by the number of days during the period
from and including the date of the giving of such notice pursuant to Section
7(c) hereof to and including the date when each Holder of Registrable Shares
covered by such Registration Statement shall have received the copies of the
supplemented or amended prospectus contemplated by Section 7(c) hereof.
Section 8. Registration Expenses.
All expenses incident to the Company's performance of or compliance with
this Agreement, including, without limitation, all registration and filing fees,
fees and expenses of compliance with securities or "blue sky" laws (including
reasonable fees and disbursements of counsel of the Company and counsel for the
underwriters in connection with "blue sky" qualifications of the
10
<PAGE>
Registrable Shares) and listing on any national securities exchange or exchanges
which listing may be sought, with filings required to be made with the National
Association of Securities Dealers, Inc., printing expenses, messenger and
delivery expenses, fees and expenses of counsel for the Company and its
independent certified public accountants (including the expenses of any special
audit or "cold comfort" letters required by or incident to such performance),
securities acts liability insurance (if the Company elects to obtain such
insurance), the fees and expenses of any special experts retained by the Company
in connection with such registration, and fees and expenses of other persons
retained by the Company (all such expenses being herein called "Registration
Expenses") will be borne by the Company whether or not any registration
statement becomes effective; provided that in no event shall Registration
Expenses include any (i) underwriting discounts, commissions, or fees
attributable to the sale of the Registrable Shares, (ii) fees and expenses of
any counsel, accountants, or other persons retained or employed by the Holders
or underwriters (other than the reasonable fees and expenses (of which the
Company shall only be obligated to pay up to an aggregate maximum of $15,000) of
one counsel for Participating Holders of Registrable Shares included in the
Registration Statement, which counsel shall be selected by a majority in
interest of the Participating Holders included in the Registration Statement),
or (iii) transfer taxes, if any.
Section 9. Indemnification; Contribution
(a) Indemnification by Company. The Company agrees to indemnify and
hold harmless each Selling Holder of Registrable Shares, its officers,
directors, partners and agents and each Person, if any, who controls such
Selling Holder within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act (each such person being sometimes hereinafter
referred to as an "Indemnified Person") from and against any and all losses,
claims, damages, liabilities and judgments (including, the reasonable legal
expenses incurred in connection with any action, suit or proceeding) arising out
of or based upon (i) any untrue statement or alleged untrue statement of a
material fact contained in any Registration Statement or prospectus or in any
amendment or supplement thereto or in any preliminary prospectus relating to a
registration hereunder or arising out of or based upon any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein in light of the circumstances under
which they were made, not misleading, or (ii) any violation by the Company of
any federal state or common law rule or regulation applicable to the Company and
relating to action or inaction required by the Company in connection with any
such registration; provided, however, that the Company shall not be liable for
any losses, claims, damages, liabilities or judgments arise out of, or are based
upon, any such untrue statement or omission or allegation thereof based upon
information furnished in writing to the Company by such Selling Holder expressly
for use therein, or by any Holder's failure to deliver a copy of the
Registration Statement or prospectus or any amendment or supplement thereto
after being furnished with a sufficient number of copies thereof by the Company.
(b) Conduct of Indemnification Proceedings. If any action or
proceeding (including any governmental investigation) shall be brought or
asserted against any Indemnified Person in respect of which indemnity may be
sought from the Company, such Indemnified Person shall
11
<PAGE>
promptly notify the Company in writing, and the Company shall assume the defense
thereof, including the employment of counsel reasonably satisfactory to such
Indemnified Person and the payment of all reasonable expenses. Such Indemnified
Person shall have the right to employ separate counsel in any such action and to
participate in the defense thereof, but the fees and expenses of such counsel
shall be at the expense of such Indemnified Person unless (i) the Company has
agreed to pay such fees and expenses or (ii) the named parties to any such
action or proceeding (including any impleaded parties) include both such
Indemnified Person and the Company, and such Indemnified Person shall have been
advised in writing by the counsel employed by the Company in accordance with the
provisions of this Section 9(b) that there may exist a conflict of interest
between such Indemnified Person and the Company with respect to such claim (in
which case, if such Indemnified Person notifies the Company in writing that it
elects to employ separate counsel at the expense of the Company, the Company
shall not have the right to assume the defense of such action or proceeding on
behalf of such Indemnified Person, it being understood, however, that the
Company shall not, in connection with any one such action or proceeding or
separate but substantially similar or related actions or proceedings in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the reasonable fees and expenses of more than one separate firm of
attorneys at any time for such Indemnified Person and any other Indemnified
Persons, which firm shall be designated in writing by a majority of such
Indemnified Persons). The Company shall not be liable for any settlement of any
such action or proceeding effected without the Company's written consent, but if
settled with its written consent, or if there be a final, unappealable judgment
for the plaintiff in any such action or proceeding, the Company agrees to
indemnify and hold harmless such Indemnified Persons from and against any loss
or liability (to the extent stated above) by reason of such settlement or
judgment.
(c) Indemnification by Holders of Registrable Shares. Each Selling
Holder agrees severally and not jointly to indemnify and hold harmless the
Company, its directors, officers and agents and each Person, if any, who
controls the Company within the meaning of either Section 15 of the Securities
Act or Section 20 of the Exchange Act to the same extent as the foregoing
indemnity from the Company to such Selling Holder, but only with respect to
information furnished in writing by such Selling Holder expressly for use in any
Registration Statement or prospectus or any amendment or supplement thereto, or
any preliminary prospectus. In case any action or proceeding shall be brought
against the Company or its directors, officers or agents or any such controlling
person, in respect of which indemnity may be sought against such Selling Holder,
such Selling Holder shall have the rights and duties given to the Company, and
the Company or its directors, officers or agents or such controlling person
shall have the rights and duties given to such Selling Holder by the preceding
Section 9(b).
(d) Contribution. If the indemnification provided for in this Section
9 is unavailable to or unenforceable by the Company or the Indemnified Persons
in respect of any losses, claims, damages, liabilities or judgments referred to
herein, then each such indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, liabilities and
judgments in such proportions as is appropriate to reflect the relative fault of
the Company and the Indemnified Persons
12
<PAGE>
in connection with the actions or inactions which resulted in such losses,
claims, damages, liabilities and judgments, as well as any other relevant
equitable considerations (including the relative fault and indemnification or
contribution obligations of other relevant parties). The relative fault of the
indemnifying party on the one hand and of the indemnified person on the other
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the indemnifying
party or by the indemnified party, and by such party's relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Company and the Indemnified Persons agree that it would not be just
and equitable if contribution pursuant to this Section 9(d) were determined by
pro rata allocation or by any other method of allocation which does not take
account of the equitable considerations referred to in the immediately preceding
paragraph. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation.
Section 10. Participation in Underwritten Registrations.
No Person may participate in any underwritten registration hereunder
unless such Person (a) agrees to sell such Person's securities on the basis
provided in any underwriting arrangements approved by the persons entitled
hereunder to approve such arrangements, (b) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents reasonably required under the terms of such underwriting
arrangements and (c) agrees to pay such Person's pro rata portion of all
underwriting discounts, commissions and fees.
Section 11. Miscellaneous.
(a) Amendments and Waivers. The provisions of this Agreement may not be
amended, modified or supplemented, and waivers or consents to departures from
the provisions hereof may not be given unless the Company has obtained the
written consent of Holders of at least a majority of the Registrable Shares.
Notwithstanding the foregoing, (i) if a waiver or consent to departure from the
provisions hereof does not adversely affect the rights of all of the Holders,
the Company shall not be required to obtain the consent of any such Holder not
adversely affected thereby, and (ii) if such waiver or consent to departure
relates exclusively to the rights of Holders whose Registrable Shares are being
sold pursuant to a Registration Statement and does not directly or indirectly
affect the rights of other Holders, such waiver or consent to departure may be
given by Holders of a least a majority in interest of the Registrable Shares
being sold by such Holders pursuant to such Registration Statement; provided
that the provisions of this sentence may not be amended, modified or
supplemented except in accordance with the provisions of the immediately
preceding sentence.
(b) Notices. All notices and other communications provided for or
permitted hereunder shall be in writing and shall be delivered personally or by
first-class mail, telecopier or overnight courier:
13
<PAGE>
(i) if to a Holder of Registrable Shares, at the most
current address set forth on the books of the Company, and
(ii) if to the Company, initially at Cabot Noble, Inc., 3000
K Street, N.W., Suite 105 Washington, D.C. 20007-5116, Attention:
General Counsel, and thereafter at such other address, notice of which
is given in accordance with the provisions of this Section 11(b), with a
copy to Morris F. DeFeo, Jr., Esq., Swindler & Berlin, Chartered, 3000 K
Street, N.W., Washington, D.C. 20007-5116.
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personal delivered; five business days
after being deposited in the mail (postage prepaid), if mailed; upon receipt of
a telecopy confirmation sheet, if telecopied; and on the day delivered if sent
by an air courier guaranteeing overnight delivery.
(c) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors and, to the extent set forth
herein, the assigns of each of the parties, including without limitation and
without the need for an express assignment, Eligible Transferees.
(d) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(e) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(f) Governing Law. This Agreement shall be governed by and
construed under and interpreted in accordance with the internal laws of the
state of Delaware, without regard to conflicts of law principles.
(g) Severability. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall not invalidate the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable any such provision in
any other jurisdiction.
(h) Entire Agreement. This Agreement is intended by the parties as
a final expression of their agreement and is intended to be a complete and
exclusive statement of the agreement and understanding of the parties hereto in
respect of the subject matter contained herein. There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein with respect to the registration rights granted by the Company with
respect to the Registrable Shares. This Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matter.
14
<PAGE>
(i) Effectiveness. This Agreement shall become effective on the Effective
Date.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
15
<PAGE>
IN WITNESS WHEREOF, the Company and the Holders have executed this
Agreement as of the date first written above.
COMPANY:
CABOT NOBLE, INC.
By:
----------------------------
NAME:
TITLE:
HOLDER:
-------------------------------
ROBERT M. HAFT
16
<PAGE>
EXHIBIT 10.14
SETTLEMENT AGREEMENT
This SETTLEMENT AGREEMENT (the "Settlement Agreement") is entered into as
of July __, 1995 by and between PHAR-MOR, INC. together with its fifteen
affiliated debtor entities (collectively, the "Debtors") and Salomon Brothers
Inc. ("Salomon").
RECITALS
A. Debtors and Salomon are parties to, or assignees of rights under, those
certain loan and security agreements set forth on Schedule A hereto (the "Loan
Agreements") regarding certain prepetition loans to the Debtors secured by
security interests in certain of the Debtors' furniture, fixtures and equipment
("FF&E"). On the petition date, the aggregate principal and accrued and unpaid
interest on the loans was $10,342,223.
B. Pursuant to United States Bankruptcy Code (S)506(a), an allowed claim
arising from Debtors' obligations under the Loan Agreements constitutes a
secured claim to the extent of the value of the FF&E collateral (a "Secured
Claim") and a general unsecured claim to the extent the allowed claim exceeds
the value of the FF&E collateral.
<PAGE>
C. Salomon, as assignee of the Dollar Savings and Trust Company, also
asserts an allowed administrative priority expense in the amount of
$5,402,952.33 as more fully set forth in that certain Order Approving Agreement
Concerning Use Of Funds, dated August 28, 1992 (the "Prior Order"), and Motion
of Salomon Brothers Inc, as Assignee of The Dollar Savings and Trust Company,
for payment of Allowed Administrative Priority Expense, filed with the Court on
February 23, 1995.
D. The Debtors and Salomon have not heretofore agreed on (i) the value of,
or the correct valuation methodology for, the FF&E collateral, (ii) the
appropriate treatment of the resulting Secured Claim, or (iii) Salomon's
entitlement to an administrative priority expense and, in the absence of an
agreement between the parties, such valuation and treatment issues and the
administrative priority expense issue are likely to be the subject of dispute
and extensive, costly and time consuming litigation.
E. On May 25, 1995, the Debtors filed their Trust Amended Joint Plan of
Reorganization dated May 25, 1995 (as it may be amended or modified, the
"Debtors' Plan") with the United States Bankruptcy Court for the Northern
District of Ohio (the "Bankruptcy Court").
2
<PAGE>
F. The Debtors and Salomon wish to resolve the value and treatment of
Holders' Secured Claim and administrative priority expense claim for purposes of
the Debtors' Plan.
AGREEMENT
In consideration of the foregoing, and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
Debtors and Salomon hereby agree as follows.
1. The Debtors and Salomon agree that:
(a) Salomon shall have an allowed Secured Claim, the amount and
treatment of which shall be as set forth on Schedule B hereof, as the same may
be amended pursuant to paragraph 4 hereof, or otherwise, with the mutual written
consent of the Debtors and Salomon (the "Agreed Plan Treatment");
(b) the Debtors' Plan shall reflect such Agreed Plan Treatment for
Salomon's Secured Claim;
(c) Salomon shall have an (i) authorized and allowed entitlement to the
payment of an administrative expense under 11 U.S.C. (S)503(b) in the amount of
$1,525,000.00 payable in cash upon the effective date of this Settlement
Agreement and (ii) and allowed unsecured claim in the amount of $7,233,096;
3
<PAGE>
(d) The Debtors and Salomon hereby fully release and discharge each other,
their successors and assigns, from all rights, claims and actions which either
party now or may hereafter have against the other party arising from or
relating to the FF&E collateral, the Loan Agreements, the Secured Claim, the
Prior Order and any action taken by either of them with respect to the foregoing
(including, without limitation, any adequate protection or other payments paid
to Salomon or Dollar in connection therewith, and including, without limitation,
any rights, claims and actions arising under Sections 544 through 551 of the
Bankruptcy Code or any state fraudulent conveyance law of similar import arising
with respect to the Loan Agreement, Secured Claim, the Prior Order or the FF&E
Collateral); provided, however, that the Debtors and Salomon retain all rights
under the Settlement Agreement; and
(e) this Settlement Agreement shall become effective upon entry of an
order of the Court approving this Settlement (the "Approval Order"). Without
affecting the generality of the foregoing, the Debtors shall file, within two
(2) business days of the execution of the Settlement Agreement, an application
to the court for the Approval Order.
2. The Debtors shall use their best efforts to obtain confirmation of the
Debtors' Plan, including the Agreed Plan Treatment for Salomon's Secured Claim.
4
<PAGE>
3. Upon entry of the Approval Order, Salomon's receipt of its
administrative expense in the amount of $1,525,000.00 in accordance with
paragraph 1(c), and so long as the Debtors' Plan incorporates the Agreed Plan
Treatment (unless Salomon consents in writing to different treatment), Salomon
agrees that it will not object to confirmation of the Debtors' Plan (it being
understood that prior to the occurrence of the foregoing events Salomon reserves
its right to vote against the Plan in order to preserve its rights and any such
vote by Salomon shall not be deemed to be a breach by Salomon of this Settlement
Agreement for any purpose provided Salomon cooperates with the Debtors to change
any such vote to a favorable vote upon the occurrence of the foregoing events
pursuant to Bankruptcy Rule 3018).
4. In the event that another party holding a prepetition debt instrument
with a petition date balance in excess of $1 million secured by store furniture,
fixtures and equipment of one or more of the Debtors (an "Equipment Lender")
enters into an agreement with the Debtors pursuant to which their Secured Claim
would under the Debtors' Plan be valued or treated materially differently from
Salomon's Agreed Plan Treatment hereunder, the Debtors shall offer substantially
the same valuation and treatment to Holder for Holder's Secured Claim.
Notwithstanding the foregiong, the Debtors shall not be required to offer Holder
valuation and treatment substantially similar to that accorded an Equipment
Lender pursuant to (a) a negotiated
5
<PAGE>
agreement or settlement reached following the earlier of (x) the commencement of
depositions or the service of responses to discovery requests by the Debtors or
such Equipment Lender in connection with any contested motion or adversary
proceeding (including without limitation a plan of reorganization confirmation
hearing) relating to the valuation or treatment of such Equipment Lender's
Secured Claim, or (y) the introduction of evidence by the Debtors or such
Equipment Lender at an evidentiary hearing or trial on the same issues, or (b)
litigation resulting in a judgement or order on the merits (i.e., not resulting
----
in a negotiated settlement or agreement).
5. The Debtors' agreements and obligations under this Settlement Agreement
shall terminate immediately upon any breach by Salomon of its agreements and
obligations herein. Salomon's agreements and obligations under this Settlement
Agreement shall terminate immediately upon any breach by the Debtors of their
agreements and obligations herein. If (a) the Approval Order shall not have
been entered on or prior to August 15, 1995 or (b) the Debtors' Plan is not
confirmed by one year from the date hereof, then either party may, by written
notice to the other party, terminated this Settlement Agreement, in which case
the Settlement Agreement shall become null and void.
6. Until and unless this Settlement Agreement is terminated pursuant to
Paragraph 5 hereof, any transferee of all or any portion of Salomon's rights
under the Loan Agreements or
6
<PAGE>
the Prior Order (collectively, "Salomon's Claim"), and any person who acquires
any participation or other direct or indirect interest in or control or
authority over the voting or disposition of any portion of Salomon's Claim,
shall continue to be bound by the terms of this Settlement Agreement. Salomon
agrees not to transfer, assign, participate or pledge any interest in or control
or authority over all or any part of Salomon's Claim, in any manner, without the
express written assumption by such transferee of Salomon's agreements and
obligations hereunder.
7. Nothing contained in this Settlement Agreement is intended or shall be
deemed to be the solicitation of an acceptance or rejection of the Debtors'
plan.
8. Notices given under this Settlement Agreement shall be to the parties
at the addresses set forth on the signature page(s) hereof.
9. This Settlement Agreement may be executed by one or more of the parties
hereto in any number of counter-parts, each of which shall be deemed to be an
original, but all such counter-parts shall together constitute one and the same
instrument. No modification, amendment or waiver of any provision of this
Settlement Agreement shall be effective unless the same shall be in writing and
signed by the parties hereto. This Settlement Agreement shall be binding upon
and inure to the
7
<PAGE>
benefit of the parties hereto and their respective successors and assigns.
10. This Settlement Agreement is entered as a settlement of disputes
among the parties hereto. Nothing herein shall be deemed an admission of any
sort. If the transactions contemplated herein are not consummated, if the order
approving this Settlement is vacated, reversed or modified in any way not
acceptable to the parties hereto on appeal, or if this Settlement Agreement is
terminated for any reason, the parties hereto fully reserve any and all rights
and the releases granted herein shall be deemed null and void. Any payments, if
any, made to Salomon pursuant to paragraph 1(c) of this Settlement Agreement
shall thereupon be returned to the Debtors, without offset, counterclaim or
reduction (with interest accruing thereon at the legal rate from the date of
payment). Pursuant to Federal Rule of Evidence 408 and any applicable state rule
of evidence, this Settlement Agreement shall not be admitted into evidence in
any proceeding other than a proceeding to enforce its terms.
11. This Settlement Agreement shall be governed by the laws of the State
of New York, without regard to principles of conflict of laws.
8
<PAGE>
IN WITNESS WHEREOF, each of the parties below have executed a
counter-part of this Agreement, the terms of which shall be effective upon
execution by each of the undersigned.
"Debtors" PHAR-MOR, INC.,
on behalf of itself and all of
its affiliated debtors
By /s/ Joseph A. Bondi
---------------------------
Joseph A. Bondi
Senior Vice President of
Administration
Phar-Mor, Inc.
20 Federal Plaza West
Youngstown, Ohio 44501-0400
Phone: (216) 740-2901
Fax: (216) 740-2985
"Salomon" SALOMON BROTHERS INC
By /s/ Robert Kleinart
----------------------------
Robert Kleinart
Salomon Brothers Inc.
7 World Trade Center
40th Floor
New York, New York 10048
Phone: (212) 783-3586
Fax: (212) 783-4080
9
<PAGE>
SCHEDULE A
----------
LOAN AGREEMENTS
---------------
<TABLE>
<CAPTION>
Date of Promissory Note Original
Loan No. & Security Agreement Principal Amount
- -------- ------------------------ ----------------
<S> <C> <C>
50907 August 21, 1987 $3,574,085.18
60201 October 28, 1987 $2,903,982.93
60448 December 28, 1987 $2,521,931.89
60718 March 17, 1988 $2,002,617.34
61014 June 24, 1988 $1,250,000.00
61441 December 22, 1988 $1,250,000.00
62535 June 12, 1990 $4,000,000.00
</TABLE>
10
<PAGE>
SCHEDULE B
----------
PHAR-MOR FF&E TERM DEBT
RESTRUCTURING TERMSHEET
JUNE 30, 1995
The following is a summary outline of certain material terms of the New
Equipment Notes to be issued to Salomon Brothers under Phar-Mor's Third Amended
Joint Plan of Reorganization, dated May 25, 1995 (the "Plan"), to holders of
claims secured by furniture, fixtures and equipment ("FF&E Collateral").
Issuer: Reorganized Phar-Mor, Inc.
Payee: Salomon Brothers
Principal: $1,750,000.00 (Subject to reduction (i) to the
extent of any adequate protection payments made
after September 1, 1995 in excess of $50,000 in
the aggregate and (ii) for any FF&E Collateral
made available to Payee from any store
determined to be closed after the date hereof
and prior to the Plan Effective Date in an
amount equal to the amounts allocated to such
FF&E on the attached schedule)
Interest: 7% per annum
Maturity: 8 years from Plan Effective Date
Payments: Interest in arrears payable semi annually until
the third anniversary of the Plan Effective
Date, thereafter interest and one sixteenth
(6.25%) of principal will be payable semi
annually in arrears with any unpaid principal
and accrued and unpaid interest payable at
Maturity
Prepayments: Optional
--------
At Phar-Mor's option at any time at 100% of the
principal amount outstanding plus accrued
interest to the date of payment
Mandatory
---------
100% of the outstanding principal amount
attributable to the FF&E Collateral in any store
Reorganized Phar-Mor after the Plan Effective
Date determines to close
1
<PAGE>
if a least 2/3 of such FF&E Collateral has not been relocated
to other Phar-Mor stores within 6 months following the
closing, plus accrued interest to the date of payment.
Other Terms: As set forth in the Plan concerning Classes 3a-3l
2
<PAGE>
EXHIBIT 10.15
STIPULATION AND SETTLEMENT AGREEMENT
BETWEEN PHAR-MOR, INC. AND ITS AFFILIATED
DEBTORS AND FOXMEYER DRUG COMPANY
Phar-Mor, Inc., Tamco Distributors Company, Phar-Mor of California,
Inc., Phar-Mor of Delaware, Inc., Phar-Mor of Florida, Inc., Phar-Mor of
Michigan, Inc., Phar-Mor of Milwaukee, Inc., Phar-Mor of Nevada, Inc., Phar-Mor
of Ohio, Inc., Phar-Mor of Texas, Inc., Phar-Mor of Virginia, Inc., Phar-Mor of
Wisconsin, Inc., Phar-Mor Real Estate, Inc., PM Investments, Inc., PM Real
Estate Holdings, Inc., and Wisconsin Beverage Company, Inc. (collectively, as
debtors and debtors-in-possession, "Phar-Mor"), on the one hand, and FoxMeyer
Drug Company ("FoxMeyer"), on the other, hereby enter into this Stipulation and
Settlement Agreement as of April 14, 1995 (the "Stipulation"), subject to
approval by the United States Bankruptcy Court for the Northern District of Ohio
(the "Court"). This Stipulation is intended,inter alia, to resolve all
- ----- ----
outstanding disputes between the parties concerning the following: (i)
FoxMeyer's asserted reclamation claim and all other potential claims related to
reclaimed goods shipped by FoxMeyer to Phar-Mor; (ii) all potential preference
claims and counter-claims that have been or could have been asserted by Phar-Mor
against FoxMeyer; (iii) all subordination claims by FoxMeyer against Phar-Mor or
Phar-Mor's Secured Lenders (as defined below); and (iv) any other claims for
priority related to pre-petition shipments of goods to Phar-Mor. Further, this
Stipulation shall serve as a binding amendment to that certain pharmaceutical
supply agreement between Phar-Mor and FoxMeyer dated as of August 17, 1992, as
amended (the "Supply Agreement"), which is hereby modified to amend Section
6.B(iv) thereof and to permit Phar-Mor to reduce the number of retail stores it
will operate without penalty.
RECITALS
--------
WHEREAS, on August 17, 1992, Phar-Mor filed for Chapter 11 bankruptcy
protection in the Northern District of Ohio and has remained in possession of
its estate under Bankruptcy Code Section 1107, with authority to operate its
business under Bankruptcy Code Section 1108;
WHEREAS, prior to filing its bankruptcy petition, Phar-Mor purchased
prescription drugs, over-the-counter drugs and health and beauty aids from
FoxMeyer;
WHEREAS, FoxMeyer asserts that during the period August 4, 1992 through
August 14, 1992, inclusive (the "Reclamation Period"), it delivered
$21,062,609.56 worth of pharmaceutical and other goods (the "Reclaimed Goods")
to Phar-Mor;
WHEREAS, Phar-Mor and FoxMeyer entered into the post-petition Supply
Agreement dated as of August 17, 1992 for shipment of pharmaceutical and other
goods, which agreement is incorporated by reference as if fully set forth
herein;
1
<PAGE>
WHEREAS, Section 6.B.(iv) of the current Supply Agreement provides that
Phar-Mor must continue to operate a specified number of retail pharmacy stores
or be in breach of the Supply Agreement,
WHEREAS, on or about March 24, 1994, FoxMeyer moved for an
administrative reclamation claim under Bankruptcy Code Section 546(c) equal to
the alleged value of the Reclaimed Goods (the "Reclamation Claim"), which is
currently pending before the Court;
WHEREAS, on or about April 25, 1994, Phar-Mor objected to the
Reclamation Claim and filed a preference counter-claim seeking recovery of
$24,526,415.76 in payments made to FoxMeyer beteween August 5, 1992 and
August 14, 1992 inclusive, which preference claim is presently pending before
the Court as Adversary Proceeding Number 94-4035;
WHEREAS, on or about August 15, 1994, Phar-Mor filed an omnibus
preference complaint against parties, including FoxMeyer, for recovery of other
alleged preferences, which adversary proceeding is presently pending before the
Court as Adversary Proceeding Number 94-4067 and is stayed by order of the
Court;
WHEREAS, on or about August 22, 1994, FoxMeyer Drug Company filed a
subordination complaint against Phar-Mor and Phar-Mor's secured bank group
(together with Phar-Mor's secured noteholders and their respective predecessors,
successors and assigns, the "Secured Lenders"), which subordination action is
presently pending before the Court as Adversary Proceeding Number 94-4081;
WHEREAS, the parties wish to settle certain pending or potential
disputes and amend the Supply Agreement;
THE PARTIES HEREBY AGREE AS FOLLOWS:
A. ISSUANCE OF STOCK TO FOXMEYER.
-----------------------------
1. Under Phar-Mor's Second Amended Joint Plan of Reorganization as
amended which does not provide for a material equity investment by a third party
(the "Stand Alone Plan") or any plan of reorganization supported by Robert Haft
(the "Haft Plan") (the Stand Alone Plan and the Haft Plan, collectively the
"Plan"), whichever is confirmed by the Court, Phar-Mor will issue to FoxMeyer in
consideration of FoxMeyer's Reclamation Claim, shares of common stock in
reorganized Phar-Mor (the "Equity Interest") representing not less than 6.94% of
all common shares initially issued under the Plan. Based upon a total number of
common shares to be initially issued under the Haft Plan of 24,312,500 of and
21,687,500 under the Stand Alone Plan, the Equity Interest will comprise
1,687,500 common shares under either Plan. If the total number of shares
initially issued under the Plan is greater or lesser than anticipated, the
number of shares comprising the Equity Interest will be adjusted accordingly.
2
<PAGE>
2. In the event that a plan of reorganization, other than the Plan, is
proposed by Phar-Mor or any other party, the parties hereto agree to use their
best efforts to agree upon a settlement of the Reclamation Claim consistent
with the economic terms of this Stipulation.
B. WAIVER AND RELEASE OF PREFERENCE CLAIMS UPON THE EFFECTIVE DATE.
---------------------------------------------------------------
Upon the Effective Date, the following shall occur:
1. Phar-mor will dismiss with prejudice any pending adversary
proceeding against Foxmeyer seeking to recover preferential transfers, including
without limitation, Adversary Proceedings 94-4035 and 94-4067.
2. Phar-Mor further waives, releases and agrees not to assert any
preference claim it may have against FoxMeyer, whether such claim is known or
unknown.
3. Nothing in this Stipulation shall be deemed a waiver of any claim
Phar-Mor may have against any party other than FoxMeyer.
C. WAIVER AND RELEASE OF RECLAMATION CLAIMS AND RIGHTS RELATED TO THE
------------------------------------------------------------------
RECLAIMED GOODS UPON THE EFFECTIVE DATE.
---------------------------------------
Upon the Effective Date, the following shall occur:
1. Foxmeyer waives, releases and agrees not to assert any reclamation
or similar action against Phar-Mor related to the pre-petition shipment of goods
(including, without limitation, the Reclaimed Goods), whether such claim is
known or unknown, filed or unfiled, contingent or non-contingent, liquidated or
unliquidated, disputed or undisputed. FoxMeyer waives any right to
administrative priority concerning the Reclaimed Goods or any other reclamation
claim it may have otherwise had in Phar-Mor's bankruptcy case. Except for the
Equity Interest and the benefits of the other express provisions of this
Stipulation, FoxMeyer will neither seek nor obtain any other consideration on
account of the Reclamation Claim.
2. FoxMeyer will dismiss with prejudice any pending contested matter
concerning its Reclamation Claim against Phar-Mor.
3. FoxMeyer will dismiss with prejudice any pending adversary
proceeding against Phar-Mor and its Secured Lenders, including without
limitation, Adversary Proceeding Number 94-4081. FoxMeyer further releases the
Secured Lenders from any and all liabilities related to Phar-Mor or its
bankruptcy case, whether such liabilities are known or unknown, filed or
unfiled, contingent
3
<PAGE>
or non-contingent, liquidated or unliquidated, disputed or undisputed.
4. FoxMeyer waives and releases all pre-petition claims and
pre-petition causes of action against Phar-Mor, whether such claims are known or
unknown, except for: (i) the rights under this Stipulation; and (ii) any
general unsecured claim it may have against Phar-Mor for any goods, services or
extensions of credit provided to Phar-Mor reduced by the value of the Equity
Interest (the "Unsecured Claim"). Phar-Mor retains all defenses to the
Unsecured Claim, none of which shall be deemed waived or altered by this
Stipulation.
D. AMENDMENT TO SUPPLY AGREEMENT:
-----------------------------
1. Upon entry of an order of the Court approving the
Stipulation, the Supply Agreement will be deemed and shall be amended to delete
any provision that limits or affects the right of Phar-Mor to reduce the number
of its operating retail stores below one hundred and thirty (130) in number or
would otherwise provide for a breach of the Supply Agreement as a result of such
reduction. Section 6.B.(iv) of the Supply Agreement is hereby amended to allow
Phar-Mor to reduce the number of its operating retail stores to one-hundred
(100) in number (or such lower number as the parties may agree) without default
or penalty.
E. GENERAL PROVISIONS:
------------------
1. Recitals. The recitals and introductory provisions of this
--------
Stipulation are hereby incorporated by reference and form part of the terms of
the agreement.
2. Entire Agreement. This Stipulation and the exhibits hereto
----------------
constitute the entire agreement between the parties. All prior or
contemporaneous discussions, negotiations or agreements related to this
Stipulation are hereby merged into this agreement.
3. Written Modification. This Stipulation may only be modified
--------------------
through a written instrument signed by both parties and approved by the Court.
4. Effective Date. Paragraph D of this Stipulation shall
--------------
become effective immediately upon the entry of an order by the Court approving
the Stipulation. The remaining provisions (including Paragraphs A, B and C)
shall only become effective upon the occurrence of both the following: (i)
entry of a final order by the Court approving this Stipulation and (ii) the
effective date of the Plan or resolution pursuant to Paragraph A.2.
5. Termination. Except for Paragraphs D and E.6, this
-----------
Agreement shall terminate and be of no further force and effect if the Plan (or
a plan of reorganization that meets the requirements of Paragraph A.2) is not
confirmed on or before December 30, 1995.
4
<PAGE>
6. Status Quo Provisions. In the event and to the extent that an Effective
------ --- ----------
Date does not occur, nothing herein shall be deemed an admission or waiver of
any kind and the parties shall revert to their respective positions as they
existed prior to the negotiation of this Stipulation concerning matters as to
which no Effective Date has occurred. Without limiting the generality of the
foregoing, if no Effective Date occurs concerning Paragraphs A, B and C, the
parties will retain all substantive and procedural rights against each other
related to the Reclamation Claim and Phar-Mor's preference claims, and may
pursue all claims before the Court as filed and without the need to refile any
new complaint or contested matter. The parties recognize that Section D hereof
may become effective even if the remaining provisions of this Stipulation do
not. The parties agree to and do hereby toll any applicable statute of
limitations to the extent necessary to make this Paragraph E.6 effective. This
Stipulation shall not be admitted into evidence in any proceeding other than one
to enforce its terms.
7. Integrated Settlement. Each of the provisions of this Stipulation are
---------- ----------
integral to the agreement and represent consideration for the other provisions
herein. This Stipulation shall not become effective if any of its material
provisions fail to obtain Court approval, unless the provision is expressly
waived in writing by the beneficiary of such provision.
8. Costs. The parties shall bear their own fees and costs in all pending
-----
litigation among them.
9. Definitions. All undefined terms shall have the meanings ascribed to
-----------
them under the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure.
10. Choice of law and jurisdiction. This Stipulation shall be governed by
------ -- --- --- ------------
the law of Ohio, without regard to principles of choice of law.
11. Successors, Predecessors and Assigns. Upon an Effective Date, this
----------- ------------ --- -------
Stipulation binds and inures to the benefit of Phar-Mor and FoxMeyer, as well as
their respective parents, predecessors, successors, and assigns. Phar-Mor enters
this Stipulation in its capacities as both debtor and debtor-in-possession.
12. Authority. Subject to any approval that may be required from the Court,
---------
the undersigned represent and warrant that they have all requisite authority to
execute this Stipulation.
13. Best Efforts. The parties agree to use their best efforts to (i) obtain
---- -------
Court approval of this Stipulation, (ii) implement the terms of this Stipulation
(including, without limitation, the issuance of the Equity Interest), and (iii)
obtain confirmation of the Plan. FoxMeyer further agrees that it will not object
to or take any other action that could reasonably be expected to impede
confirmation of the Plan.
5
<PAGE>
14. Counterparts. This Stipulation may be signed in separate
------------
counterparts, each one of which shall be deemed part of the original document.
---------------------------------------
FoxMeyer Drug Company
By: [SIGNATURE APPEARS HERE]
------------------------------------
Its: Senior Vice President
-----------------------------------
---------------------------------------
Phar-Mor, Inc. and its affiliated
debtors
By: [SIGNATURE APPEARS HERE]
------------------------------------
Its: Sr. V.P. - Admin.
-----------------------------------
6
<PAGE>
Exhibit 10.35
Registration Rights
Agreement
This Registration Rights Agreement (this "Agreement") is made and
entered into as of ________, 1997 by Cabot Noble, Inc. a Delaware corporation
(the "Company"), and the Persons (as defined herein) listed on the signature
pages hereto who execute this Agreement and for the benefit of any Eligible
Transferees (as defined herein).
WHEREAS, the Company, ShopKo Stores, Inc., a Minnesota corporation
("ShopKo"), and Phar-Mor, Inc., a Pennsylvania corporation ("Phar-Mor") have
entered into that certain Agreement and Plan of Reorganization, dated as of
September 7, 1996, as amended and restated as of October 9, 1996 (the
"Reorganization Agreement"), pursuant to which the existing shareholders of
ShopKo and Phar-Mor shall exchange their shares of ShopKo common stock and Phar-
Mor common stock, respectively, for shares of the Company's Common Stock (the
"Reorganization");
WHEREAS, the Company, SUPERVALU INC., a Delaware corporation
("SuperValu"), and Supermarket Operators of America, Inc., a Delaware
corporation and wholly owned subsidiary of SuperValu ("SOA"), have entered into
that certain Stock Purchase Agreement dated as of September 7, 1996, as amended
and restated as of October 9, 1996 (the "Stock Purchase Agreement"); and
WHEREAS, the execution and delivery of this Agreement is a condition
precedent to the closing under the Stock Purchase Agreement.
NOW, THEREFORE, in consideration of the premises and the
representations, warranties and agreements herein contained, the parties hereby
agree as follows:
Section 1. Definitions.
The terms set forth below are used herein as so defined:
"Commission" means the Securities and Exchange Commission, or any other
federal agency at the time administering the Exchange Act or the Securities Act.
"Company" means Cabot Noble, Inc., a Delaware corporation.
"Effective Date" means the date the Reorganization becomes effective, as
set forth in the Reorganization Agreement.
<PAGE>
"Eligible Transferee" means (a) any transferee, in a single transaction
of all, but not less than all, of the Registrable Shares held by a Holder
(including Holders that are themselves Eligible Transferees) on the date of such
transfer, and (b) SuperValu or any subsidiary of SuperValu.
"Exchange Act" means the Securities Exchange Act of 1934, or any
successor federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect from time to time.
"Expiration Date" means the second anniversary of the Effective Date.
"Form S-4" means the Registration Statement on Form S-4 filed by the
Company with the Commission that includes the joint proxy statement/prospectus
to be distributed to shareholders of Phar-Mor and Shopko in connection with the
Reorganization.
"Holders" means the holders of Registrable Shares named on the signature
pages of this Agreement and the Eligible Transferees.
"Indemnified Person" has the meaning assigned to that term in Section
9(a) hereof.
"Inspectors" has the meaning assigned to that term in Section 7(e)
hereof.
"Common Stock" means the common stock, par value $0.01 per share, of the
Company.
"Participating Holder" means any Holder that has Registrable Shares
registered for sale pursuant to a Registration Statement.
"Person" means any individual, partnership, joint venture, corporation,
trust, unincorporated organization, or other entity.
"Records" has the meaning assigned to that term in Section 7(e) hereof.
"Registrable Shares" means the shares of the Company's Common Stock
issued pursuant to the Reorganization to the Holders party hereto and held by
the Holder from time to time. A share of Common Stock will cease to be a
Registrable Share when (a) a Registration Statement covering a Registrable Share
has been declared effective by the Commission and such share has been disposed
of by the Holder pursuant to such effective Registration Statement, (b) such
share is transferred to a Person other than an Eligible Transferee, (c) such
share is held by the Company or one of its subsidiaries or otherwise ceases to
be outstanding, or (d) such share may be traded without restriction pursuant to
paragraph (k) of Rule 144, if applicable.
"Registration Expenses" has the meaning assigned that term in Section 8
hereof.
2
<PAGE>
"Registration Statement" means any registration statement or comparable
document under the Securities Act through which a public sale or disposition of
the Registrable Shares may be registered, including the prospectus, amendments
and supplements to such registration statement, all exhibits, and all material
incorporated by reference or deemed to be incorporated by reference in such
Registration Statement.
"Rule 144" means Rule 144 under the Securities Act, as such Rule may be
amended from time to time, or any similar rule (other than Rule 144A) or
regulation hereafter adopted by the Commission providing for offers and sales of
securities made in compliance therewith resulting in offers and sales by
subsequent holders that are not affiliates of an issuer of such securities being
free of the registration and prospectus delivery requirements of the Securities
Act.
"Securities Act" means the Securities Act of 1933, as amended, or any
successor federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect from time to time.
"Selling Holder" means a Holder who is selling Registrable Shares
pursuant to a Registration Statement under this Agreement.
"Shelf Registration" has the meaning assigned to that term in Section
2(a) of this Agreement.
Section 2. Shelf Registration.
(a) The Company shall cause the Form S-4, at the time it is declared
effective, to contain a form of prospectus that can be used by the Holders to
effect sales of Registrable Shares on a delayed basis after the Effective Date
and shall use its reasonable best efforts to cause, except as otherwise provided
for herein, such Form S-4, or as it may be subsequently amended to be a
Registration Statement on Form S-3 (the "Shelf Registration"), to be available
for resales of Registrable Shares for a period expiring on the Expiration Date.
This Agreement shall constitute the consent of each Holder to the inclusion of
such Holder's Registrable Shares in the Shelf Registration upon its
effectiveness, except with respect to those Registrable Shares the Holder of
which notifies the Company in writing no later than thirty (30) days following
the Effective Date that it does not want to be included in the Shelf
Registration.
(b) The Company agrees that, if necessary, the Company will promptly
supplement or make amendments to the Shelf Registration, if required by the
registration form utilized by the Company for such Shelf Registration or by the
instructions applicable to such registration form or by the Securities Act or
the rules and regulations thereunder or as reasonably requested by a
Participating Holder in connection with any material change in the information
provided by such Participating Holder and the Company agrees to furnish to the
Participating Holders, on request,
3
<PAGE>
copies of any supplements or amendments. The Company will pay all Registration
Expenses in connection with such Shelf Registration or any supplements or
amendments thereto, whether or not it becomes effective. The Shelf Registration
may include securities other than Registrable Shares.
(c) In connection with any underwritten offering of Registrable Shares
under the Shelf Registration, the Company shall have the right, with the consent
of the Holders of a majority in interest of the Registrable Shares to be offered
pursuant to such distribution (which consent shall not be unreasonably
withheld), to designate an investment banker to act as managing underwriter with
respect to such offering.
Section 3. [Intentionally Omitted.]
Section 4. Suspension of Effectiveness.
Nothing herein, including the Company's obligation under Section 2,
shall restrict its ability to suspend the effectiveness of the Shelf
Registration at any time, for such reasonable period of time (not, in any
instance, to exceed 45 days ( a "Blackout Period")) which the Company's Board of
Directors determines is necessary to prevent the premature disclosure of any
events or information having a material effect on the Company; provided that the
Company may invoke a Blackout Period only two (2) times in each twelve (12)-
month period beginning on the Effective Date or any anniversary thereof. In
addition, the Company shall not be required to keep the Shelf Registration
effective, or may, without suspending such effectiveness, instruct the holders
of Registrable Shares included in the Shelf Registration not to sell such
shares, during any period during which the Company is instructed, directed,
ordered or otherwise requested by any governmental agency or self-regulatory
organization to stop or suspend such trading or sales.
Section 5. Incidental Registration Rights.
(a) If the Company, at any time prior to the Expiration Date, proposes
to register any Common Stock under the Securities Act (other than pursuant to
Section 2 of this Agreement or pursuant to a registration statement on a form
exclusively for the sale or distribution of securities by the Company to
employees of the Company or its subsidiaries or for use exclusively in
connection with a business combination) whether or not for sale for its own
account, and the registration form to be used may be used for the registration
of Registrable Shares, it will give prompt written notice to all Holders of the
Company's intention to effect such a registration and include in such
registration all Registrable Shares with respect to which the Company has
received written notice for inclusion therein within 20 days after the date of
the Company's notice; provided that:
(i) if, at any time after giving written notice of its intention
to register any shares and, prior to the effective date of
the Registration Statement filed in connection with such
registration, the Company shall determine for any
4
<PAGE>
reason not to register such shares, the Company may, at its
election, give written notice of such determination to each
Holder requesting inclusion therein, and, thereupon, the
Company shall be relieved of its obligation to register any
Registrable Shares in connection with such registration (but
not of its obligation to pay the Registration Expenses in
connection therewith);
(ii) if such registration shall be in connection with an
underwritten public offering and the managing underwriter
shall advise the Company in writing that in its opinion the
number of shares requested to be included in such
registration exceeds the number of such securities which can
be sold in such offering or would have an adverse impact on
the price of such securities, the Company shall include in
such registration (A) first, the securities the Company
proposes to sell and, if such registration includes an
underwritten secondary registration on behalf of holders of
the Company's securities exercising demand registration
rights, the securities requested to be included therein by
such holders requesting such registration, in such
proportions as the Company shall determine, and (B) second,
the number (if any) of other securities of the Company
(including, without limitation, Registrable Shares) requested
to be included pursuant to any incidental registration rights
which in the opinion of such underwriter can be sold (and if,
in the opinion of such underwriter, some but not all of such
securities may be so included, all holders of Common Stock
requested to be included therein shall share pro rata in the
number of shares of Common Stock included in such
underwritten public offering on the basis of the number of
shares of Common Stock requested to be included therein); and
(iii) the number of shares requested to be sold by the Holders is
not less than two percent (2%) of the outstanding shares of
Common Stock or the total number of Registrable Shares, if
less.
(b) If any Registration pursuant to this Section 5 is an underwritten
primary offering, the Company shall have the right to select the managing
underwriter to administer such offering.
Section 6. Holdback Agreement.
(a) In the event of an underwritten public distribution of Common Stock
under a Registration Statement, whether or not Registrable Shares are included,
each Holder agrees not to effect any public sale or distribution of Common Stock
(except as part of such underwritten public distribution), including a sale
pursuant to Rule 144 or Rule 144A under the Securities Act, during a period
designated by the Company in a written notice duly given to the Holders in
accordance with Section 11(b), which period shall commence approximately 14 days
prior to the effective date of any
5
<PAGE>
such post-effective amendment to the Shelf Registration or filing of such
prospectus supplement, as the case may be, or the commencement of such
underwritten public distribution of Common Stock under a Registration Statement
and shall continue for up to 104 consecutive days.
(b) The foregoing provisions shall not apply to any Holder to the
extent such Holder is prohibited by applicable law from agreeing to withhold
from sale.
Section 7. Registration Procedures.
Except as otherwise expressly provided herein, in connection with any
registration of Registrable Shares pursuant to this Agreement, the Company
shall, as expeditiously as possible, at its own expense:
(a) prepare and file with the Commission a Registration Statement on
the appropriate form with respect to such Registrable Shares and use its best
efforts to cause such Registration Statement to become effective as soon as
practicable thereafter; and before filing a Registration Statement or prospectus
or any amendments or supplements thereto, furnish to each Selling Holder, copies
of such Registration Statement and such other documents as proposed to be filed
(including copies of any document to be incorporated by reference therein), and
thereafter furnish to such Selling Holder such number of copies of such
Registration Statement, each amendment and supplement thereto (including copies
of any document to be incorporated by reference therein), in each case at the
written request of the Selling Holder, including all exhibits thereto, the
prospectus included in such registration statement (including each preliminary
prospectus), and, promptly after the effectiveness of a Registration Statement,
the definitive final prospectus filed with the Commission, and such other
documents as such Selling Holder may reasonably request in order to facilitate
the disposition of the Registrable Shares owned by such Selling Holder;
(b) use its best efforts to register or qualify such Registrable Shares
under such other securities or blue sky laws of such jurisdictions within the
United States as any Selling Holder reasonably (in light of such Selling
Holder's intended plan of distribution) requests; provided that the Company will
not be required to (i) qualify generally to do business in any jurisdiction
where it would not otherwise be required to qualify but for this Section 7(b),
(ii) subject itself to taxation in any such jurisdiction or (iii) consent to
general service of process in any such jurisdiction;
(c) notify each Selling Holder of such Registrable Shares, at any time
when a prospectus relating thereto is required to be delivered under the
Securities Act, of the occurrence of any event as a result of which the
prospectus included in such Registration Statement (including any document to be
incorporated by reference therein) contains an untrue statement of a material
fact or omits any fact necessary to make the statements therein not misleading
and, at the request of any such Selling Holder, the Company shall as promptly as
practicable, prepare a supplement or amendment to such prospectus (and, in the
case of any post-effective amendment, use its reasonable best efforts to have
6
<PAGE>
such amendment declared effective by the Commission) so that, as thereafter
delivered to the purchasers of such Registrable Shares, such prospectus will not
contain an untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading and promptly make available to each Selling Holder any such
supplement or amendment;
(d) in connection with an underwritten public offering, enter into
customary agreements (including, if requested, an underwriting agreement),
reasonably satisfactory in form and substance to the Company, and take such
other actions in connection therewith as the Holders of at least a majority in
interest of the Registrable Shares being sold or the underwriter shall
reasonably request in order to consummate the disposition of such Registrable
Shares;
(e) make available for inspection during business hours on reasonable
advance notice by any Selling Holder of such Registrable Shares, any underwriter
participating in any disposition pursuant to a Registration Statement, and any
attorney, accountant or other professional retained by any such Selling Holder
or underwriter (collectively, the "Inspectors"), all financial and other
records, pertinent corporate documents and properties of the Company
(collectively, the "Records") as shall be reasonably necessary to enable them to
exercise their due diligence responsibility, and cause the Company's officers,
directors and employees to supply all information reasonably requested by any
such Inspector in connection with such Registration Statement. Records which the
Company determines, in good faith, to be confidential and which it notifies the
Inspectors are confidential shall not be disclosed by the Inspectors unless (i)
the disclosure of such Records is necessary to avoid or correct a material
misstatement or omission in the Registration Statement or (ii) the release of
such Records is ordered pursuant to a subpoena or other order from a court of
competent jurisdiction. Each Selling Holder of such Registrable Shares further
agrees that it will, upon learning that disclosure of such Records is sought in
a court of competent jurisdiction, give written notice to the Company, and allow
the Company, at the Company's expense, to undertake appropriate action to
prevent disclosure of the Records it deemed confidential. Each Selling Holder of
such Registrable Shares further agrees that information obtained by it as a
result of such inspections which is deemed confidential by the Company shall not
be used by it, and it shall cause each of its Inspectors not to use such
confidential information, as the basis for any market transactions in securities
of the Company or for any purpose other than any due diligence review with
respect to decisions regarding such Selling Holder's investment in the
Registrable Shares, unless and until such information is made generally
available to the public;
(f) in the event such sale is pursuant to an underwritten offering, use
its best efforts to obtain (i) a comfort letter or comfort letters from the
Company's independent public accountants in customary form and covering such
financial and accounting matters of the type customarily covered by comfort
letters as the Selling Holders of a majority in interest of the Registrable
Shares being sold or the managing underwriter reasonably request, and (ii) an
opinion or opinions from counsel for the
7
<PAGE>
Company, addressed to the underwriters, covering the matters customarily covered
in opinions given by counsel in similar transactions; and
(g) notify the Selling Holders and the managing underwriters, if any,
promptly, and (if requested by any such Person) confirm such advice in writing,
(i) when the Registration Statement, the prospectus or any prospectus supplement
or post-effective amendment has been filed, and, with respect to the
Registration Statement or any post-effective amendment, when the same has become
effective, (ii) of the issuance by the Commission of any stop order suspending
the effectiveness of a Registration Statement or of any order preventing or
suspending the use of any preliminary prospectus or the initiation of any
proceedings for that purpose and the Company shall promptly use its best efforts
to prevent the issuance of any stop order or to obtain its withdrawal if such
stop order should be issued and (iii) of the receipt by the Company of any
notification with respect to the suspension of the qualification or exemption
from qualification of a Registration Statement or any of the Registrable Shares
for offer or sale in any jurisdiction, or the initiation or threatening of any
proceeding for such purpose.
The Company may require each Selling Holder of Registrable Shares as to
which any registration is being effected to furnish to the Company such
information regarding the Selling Holder and the distribution of such
Registrable Shares as the Company may from time to time reasonably request in
writing and such other information as may be legally required in connection with
such registration. Each Selling Holder agrees, by its acquisition of Registrable
Shares and its acceptance of the benefits provided to it hereunder, to furnish
promptly to the Company all information required to be disclosed in order to
make the information previously furnished to the Company by such Selling Holder
not materially misleading.
Each Holder agrees that upon receipt of any notice from the Company of
the happening of any event of the kind described in Sections 7(c), (g)(ii) or
(g)(iii) hereof, such Holder will forthwith discontinue disposition of
Registrable Shares pursuant to the Registration Statement covering such
Registrable Shares until such Holder's receipt of the copies of the supplemented
or amended prospectus contemplated by Section 7(c) hereof, or until it is
advised in writing by the Company that the use of the prospectus may be resumed,
and, if so directed by the Company, such Holder will deliver to the Company (at
the Company's expense) all copies, other than permanent file copies then in such
Holder's possession, of the prospectus covering such Registrable Shares current
at the time of receipt of such notice. In the event the Company shall give any
such notice, the Company shall extend the period during which such Registration
Statement shall be maintained effective by the number of days during the period
from and including the date of the giving of such notice pursuant to Section
7(c) hereof to and including the date when each Holder of Registrable Shares
covered by such Registration Statement shall have received the copies of the
supplemented or amended prospectus contemplated by Section 7(c) hereof
8
<PAGE>
Section 8. Registration Expenses.
All expenses incident to the Company's performance of or compliance with
this Agreement, including, without limitation, all registration and filing fees,
fees and expenses of compliance with securities or "blue sky" laws (including
reasonable fees and disbursements of counsel of the Company and counsel for the
underwriters in connection with "blue sky" qualifications of the Registrable
Shares) and listing on any national securities exchange or exchanges which
listing may be sought, with filings required to be made with the National
Association of Securities Dealers, Inc., printing expenses, messenger and
delivery expenses, fees and expenses of counsel for the Company and its
independent certified public accountants (including the expenses of any special
audit or "cold comfort" letters required by or incident to such performance),
securities acts liability insurance (if the Company elects to obtain such
insurance), the fees and expenses of any special experts retained by the Company
in connection with such registration, and fees and expenses of other persons
retained by the Company (all such expenses being herein called "Registration
Expenses") will be borne by the Company whether or not any registration
statement becomes effective; provided that in no event shall Registration
Expenses include any (i) underwriting discounts, commissions, or fees
attributable to the sale of the Registrable Shares, (ii) fees and expenses of
any counsel, accountants, or other persons retained or employed by the Holders
or underwriters (other than the reasonable fees and expenses (of which the
Company shall only be obligated to pay up to an aggregate maximum of $15,000) of
one counsel for Participating Holders of Registrable Shares included in the
Registration Statement, which counsel shall be selected by a majority in
interest of the Participating Holders included in the Registration Statement),
or (iii) transfer taxes, if any.
Section 9. Indemnification; Contribution
(a) Indemnification by Company. The Company agrees to indemnify and
hold harmless each Selling Holder of Registrable Shares, its officers,
directors, partners and agents and each Person, if any, who controls such
Selling Holder within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act (each such person being sometimes hereinafter
referred to as an "Indemnified Person") from and against any and all losses,
claims, damages, liabilities and judgments (including, the reasonable legal
expenses incurred in connection with any action, suit or proceeding) arising out
of or based upon (i) any untrue statement or alleged untrue statement of a
material fact contained in any Registration Statement or prospectus or in any
amendment or supplement thereto or in any preliminary prospectus relating to a
registration hereunder or arising out of or based upon any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein in light of the circumstances under
which they were made, not misleading, or (ii) any violation by the Company of
any federal state or common law rule or regulation applicable to the Company and
relating to action or inaction required by the Company in connection with any
such registration; provided, however, that the Company shall not be liable for
any losses, claims, damages, liabilities or judgments arise out of, or are based
upon, any such untrue statement or omission or allegation
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thereof based upon information furnished in writing to the Company by such
Selling Holder expressly for use therein, or by any Holder's failure to deliver
a copy of the Registration Statement or prospectus or any amendment or
supplement thereto after being furnished with a sufficient number of copies
thereof by the Company.
(b) Conduct of Indemnification Proceedings. If any action or proceeding
(including any governmental investigation) shall be brought or asserted against
any Indemnified Person in respect of which indemnity may be sought from the
Company, such Indemnified Person shall promptly notify the Company in writing,
and the Company shall assume the defense thereof, including the employment of
counsel reasonably satisfactory to such Indemnified Person and the payment of
all reasonable expenses. Such Indemnified Person shall have the right to employ
separate counsel in any such action and to participate in the defense thereof,
but the fees and expenses of such counsel shall be at the expense of such
Indemnified Person unless (i) the Company has agreed to pay such fees and
expenses or (ii) the named parties to any such action or proceeding (including
any impleaded parties) include both such Indemnified Person and the Company, and
such Indemnified Person shall have been advised in writing by the counsel
employed by the Company in accordance with the provisions of this Section 9(b)
that there may exist a conflict of interest between such Indemnified Person and
the Company with respect to such claim (in which case, if such Indemnified
Person notifies the Company in writing that it elects to employ separate counsel
at the expense of the Company, the Company shall not have the right to assume
the defense of such action or proceeding on behalf of such Indemnified Person,
it being understood, however, that the Company shall not, in connection with any
one such action or proceeding or separate but substantially similar or related
actions or proceedings in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and expenses of
more than one separate firm of attorneys at any time for such Indemnified Person
and any other Indemnified Persons, which firm shall be designated in writing by
a majority of such Indemnified Persons). The Company shall not be liable for any
settlement of any such action or proceeding effected without the Company's
written consent, but if settled with its written consent, or if there be a
final, unappealable judgment for the plaintiff in any such action or proceeding,
the Company agrees to indemnify and hold harmless such Indemnified Persons from
and against any loss or liability (to the extent stated above) by reason of such
settlement or judgment.
(c) Indemnification by Holders of Registrable Shares. Each Selling
Holder agrees severally and not jointly to indemnify and hold harmless the
Company, its directors, officers and agents and each Person, if any, who
controls the Company within the meaning of either Section 15 of the Securities
Act or Section 20 of the Exchange Act to the same extent as the foregoing
indemnity from the Company to such Selling Holder, but only with respect to
information furnished in writing by such Selling Holder expressly for use in any
Registration Statement or prospectus or any amendment or supplement thereto, or
any preliminary prospectus. In case any action or proceeding shall be brought
against the Company or its directors, officers or agents or any such controlling
person, in respect of which indemnity may be sought against such Selling Holder,
such
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Selling Holder shall have the rights and duties given to the Company, and the
Company or its directors, officers or agents or such controlling person shall
have the rights and duties given to such Selling Holder by the preceding Section
9(b).
(d) Contribution. If the indemnification provided for in this Section 9
is unavailable to or unenforceable by the Company or the Indemnified Persons in
respect of any losses, claims, damages, liabilities or judgments referred to
herein, then each such indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, liabilities and
judgments in such proportions as is appropriate to reflect the relative fault of
the Company and the Indemnified Persons in connection with the actions or
inactions which resulted in such losses, claims, damages, liabilities and
judgments, as well as any other relevant equitable considerations (including the
relative fault and indemnification or contribution obligations of other relevant
parties). The relative fault of the indemnifying party on the one hand and of
the indemnified person on the other shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the indemnifying party or by the indemnified party, and
by such party's relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The Company and the Indemnified Persons agree that it would not be just
and equitable if contribution pursuant to this Section 9(d) were determined by
pro rata allocation or by any other method of allocation which does not take
account of the equitable considerations referred to in the immediately preceding
paragraph. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation.
Section 10. Participation in Underwritten Registrations.
No Person may participate in any underwritten registration hereunder
unless such Person (a) agrees to sell such Person's securities on the basis
provided in any underwriting arrangements approved by the persons entitled
hereunder to approve such arrangements, (b) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents reasonably required under the terms of such underwriting
arrangements and (c) agrees to pay such Person's pro rata portion of all
underwriting discounts, commissions and fees.
Section 11. Miscellaneous.
(a) Amendments and Waivers. The provisions of this Agreement may not be
amended, modified or supplemented, and waivers or consents to departures from
the provisions hereof may not be given unless the Company has obtained the
written consent of Holders of at least a majority of the Registrable Shares.
Notwithstanding the foregoing, (i) if a waiver or consent to departure from
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the provisions hereof does not adversely affect the rights of all of the
Holders, the Company shall not be required to obtain the consent of any such
Holder not adversely affected thereby, and (ii) if such waiver or consent to
departure relates exclusively to the rights of Holders whose Registrable Shares
are being sold pursuant to a Registration Statement and does not directly or
indirectly affect the rights of other Holders, such waiver or consent to
departure may be given by Holders of a least a majority in interest of the
Registrable Shares being sold by such Holders pursuant to such Registration
Statement; provided that the provisions of this sentence may not be amended,
modified or supplemented except in accordance with the provisions of the
immediately preceding sentence.
(b) Notices. All notices and other communications provided for or
permitted hereunder shall be in writing and shall be delivered personally or by
first-class mail, telecopier or overnight courier:
(i) if to a Holder of Registrable Shares, at the most current
address set forth on the books of the Company, and
(ii) if to the Company, initially at Cabot Noble, Inc., Suite 105,
3000 K Street, N.W., Washington, D.C. 20007-5116, Attention:
General Counsel, and thereafter at such other address, notice
of which is given in accordance with the provisions of this
Section 11(b), with a copy to Morris F. DeFeo, Jr. , Esq. ,
Swidler & Berlin, Chartered, 3000 K Street, N.W., Washington,
D.C. 20007-5116.
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five business
days after being deposited in the mail (postage prepaid), if mailed; upon
receipt of a telecopy confirmation sheet, if telecopied; and on the day
delivered if sent by an air courier guaranteeing overnight delivery.
(c) Successors and Assigns. This Agreement shall inure to the benefit
of and be binding upon the successors and, to the extent set forth herein, the
assigns of each of the parties, including without limitation and without the
need for an express assignment, Eligible Transferees.
(d) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(e) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof
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(f) Governing Law. This Agreement shall be governed by and construed
under and interpreted in accordance with the internal laws of the state of
Delaware, without regard to conflicts of law principles.
(g) Consent to Jurisdiction Service of Process. All judicial
proceedings brought against any party hereto arising out of or relating to this
Agreement shall be brought in any state or Federal Court of competent
jurisdiction in the State of Delaware, and by execution and delivery of this
Agreement each party hereto accepts for itself and in connection with its
properties, generally and unconditionally, the exclusive jurisdiction of the
aforesaid courts and waives any defense of forum non conveniens and irrevocably
agrees to be bound by any judgment rendered thereby in connection with this
Agreement. Each party hereto hereby agrees that service of all process in any
such proceeding in any such court may be made by registered or certified mail,
return receipt requested, to the applicable address provided in Section 11(b),
such service being hereby acknowledged by each party hereto to be sufficient for
personal jurisdiction in any action against such party in any such court and to
be otherwise effective and binding service in every respect.
(h) Severability. Any provision of this Agreement which is prohibited
or unenforceable in any jurisdiction shall not invalidate the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable any such provision in
any other jurisdiction.
(i) Entire Agreement. This Agreement is intended by the parties as a
final expression of their agreement and is intended to be a complete and
exclusive statement of the agreement and understanding of the parties hereto in
respect of the subject matter contained herein. There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein with respect to the registration rights granted by the Company with
respect to the Registrable Shares. This Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matter.
(j) Effectiveness. This Agreement shall become effective on the
Effective Date.
[The remainder of this page is intentionally blank]
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IN WITNESS WHEREOF, the Company and the Holders have executed this
Agreement as of the date first written above.
Company:
Cabot Noble, inc.
By: _________________________
Name: Robert M. Haft
Title: Chairman of the Board and Chief
Executive Officer
Holders:
Supermarket Operators of America, Inc.
By: _________________________
Name: Jeffrey C. Girard
Title: President
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EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Pre-Effective Amendment No. 1 to Registration
Statement No. 333-14051 on Form S-4 of Cabot Noble, Inc. of our report on the
consolidated financial statements of Phar-Mor, Inc. and subsidiaries ("Phar-
Mor") dated August 16, 1996 (October 9, 1996 as to Note 20), appearing in the
Joint Proxy Statement/Prospectus, which is part of this Registration
Statement. Our report expresses an unqualified opinion on the consolidated
balance sheets of Phar-Mor as of June 29, 1996 and September 2, 1995 and the
related consolidated statements of operations, changes in stockholders' equity
(deficiency) and cash flows for the forty-three weeks ended June 29, 1996. Our
report expresses a qualified opinion on the consolidated balance sheet of
Phar-Mor as of July 1, 1995 and the related statements of operations, changes
in stockholders' equity (deficiency) and cash flows for the nine weeks ended
September 2, 1995, the fifty-two weeks ended July 1, 1995 and the fifty-three
weeks ended July 2, 1994 as reliable accounting records and sufficient
evidential matter to support the acquisition cost of property and equipment
were not available. Also, our report includes explanatory paragraphs relating
to 1) the comparability of financial information prior to September 2, 1995 as
a result of Phar-Mor's emergence from bankruptcy and the creation of a new
entity and 2) Phar-Mor entering into an agreement with ShopKo Stores, Inc.,
subject to certain conditions, to combine the respective companies under Cabot
Noble, Inc.
We also consent to the reference to us under the heading "Experts" in such
Joint Proxy Statement/Prospectus.
Deloitte & Touche llp
Pittsburgh, Pennsylvania
January 10, 1997
<PAGE>
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Pre-Effective Amendment
No. 1 to Registration Statement No. 333-14051 on Form S-4 of Cabot Noble, Inc.
of our report dated April 2, 1996, appearing in and incorporated by reference
in the Annual Report on Form 10-K of ShopKo Stores, Inc. for the year ended
February 24, 1996 and to the reference to us under the heading "Experts" in
the Joint Proxy Statement/Prospectus, which is part of this Registration
Statement.
Deloitte & Touche llp
Milwaukee, Wisconsin
January 10, 1997
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EXHIBIT 23.5
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Pre-Effective Amendment No. 1 to Registration
Statement No. 333-14051 on From S-4 of Cabot Noble, Inc. of our report dated
October 10, 1996, appearing in the Joint Proxy Statement/Prospectus, which is
part of this Registration Statement, and to the reference to us under the
heading "Experts" in such Joint Proxy Statement/Prospectus.
Deloitte & Touche llp
Pittsburgh, Pennsylvania
January 10, 1997